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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended Commission file
December 31, 1998 number 1-5805
The Chase Manhattan Corporation
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-2624428
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
270 Park Avenue, New York, N.Y. 10017
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 270-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
-------------------
Common Stock
9.76% Cumulative Preferred Stock (Stated Value--$25)
10.84% Cumulative Preferred Stock (Stated Value--$25)
10.96% Cumulative Preferred Stock (Stated Value--$25)
Adjustable Rate Cumulative Preferred Stock, Series L (Stated Value--$100)
Adjustable Rate Cumulative Preferred Stock, Series N (Stated Value--$25)
7 3/4% Subordinated Notes Due 1999
8% Subordinated Notes Due 1999
7.50% Subordinated Notes Due 2003
Floating Rate Subordinated Notes Due 2003
Floating Rate Subordinated Notes Due August 1, 2003
7 7/8% Subordinated Notes Due 2004
8% Subordinated Notes Due 2004
6.50% Subordinated Notes Due 2005
8% Subordinated Notes Due 2005
6.25% Subordinated Notes Due 2006
6 1/8% Subordinated Notes Due 2008
6.75% Subordinated Notes Due 2008
6.50% Subordinated Notes Due 2009
Guarantee of 7.34% Capital Securities, Series D, of Chase Capital IV
Guarantee of 7.03% Capital Securities, Series E, of Chase Capital V
All such securities are listed on the New York Stock Exchange.
Securities registered pursuant to Section 12(g) of the Act: None
Number of Shares of Common Stock outstanding on February 28, 1999: 844,212,018
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of The Chase Manhattan Corporation Common Stock
held by non-affiliates of The Chase Manhattan Corporation on February 28, 1999
was $67,155,000,000.
Document incorporated by reference Part of Form 10-K into
in this Form 10-K which incorporated
----------------------------- -------------------
Proxy statement for the annual meeting of stockholders
to be held May 18, 1999 (other than information included Part III
in the proxy statement pursuant to Rule 402 (i), (k)
and (l) of Regulation S-K)
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FORM 10-K INDEX
Part I Page
Item 1 Business ..........................................................1
Overview ..........................................................1
Lines-of-Business .................................................1
Competition .......................................................1
Supervision and Regulation ........................................1
Important Factors That May Affect Future Results ..................4
Foreign Operations ................................................6
Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differentials ......................77
Securities Portfolio .............................................83
Loan Portfolio .....................................31-34, 55, 84-86
Summary of Loan Loss Experience ..........................35, 56, 87
Deposits .........................................................88
Return on Equity and Assets ..................................75, 78
Short-Term and Other Borrowed Funds ..............................89
Item 2 Properties ........................................................6
Item 3 Legal Proceedings .................................................6
Item 4 Submission of Matters to a Vote of Security Holders ...............6
Executive Officers of the Registrant ..............................7
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters ...........................................8
Item 6 Selected Financial Data ...........................................8
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations ...........................8
Item 7A Quantitative and Qualitative Disclosures about Market Risk ........8
Item 8 Financial Statements and Supplementary Data .......................8
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ......................................8
Part III
Item 10 Directors and Executive Officers of Chase .........................8
Item 11 Executive Compensation ............................................8
Item 12 Security Ownership of Certain Beneficial Owners and Management ....8
Item 13 Certain Relationships and Related Transactions ....................8
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K ...9
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ITEM 1: BUSINESS
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OVERVIEW
The Chase Manhattan Corporation ("Chase") is a bank holding company organized
under the laws of the State of Delaware in 1968 and registered under the Bank
Holding Company Act of 1956, as amended (the "BHCA").
Chase conducts its domestic and international financial services
businesses through various bank and non-bank subsidiaries. The principal bank
subsidiaries of Chase are: The Chase Manhattan Bank ("Chase Bank"), a New York
banking corporation headquartered in New York City; Chase Bank of Texas,
National Association ("Chase Texas"), a national bank headquartered in Houston,
Texas; and Chase Manhattan Bank USA, National Association ("Chase USA"), a
national bank headquartered in Wilmington, Delaware. The principal non-bank
subsidiary of Chase is Chase Securities Inc. ("CSI"), Chase's "Section 20"
subsidiary, which is engaged in securities underwriting and dealing activities.
On March 31, 1996, The Chase Manhattan Corporation ("heritage Chase")
merged (the "Merger") with and into Chemical Banking Corporation ("Chemical"),
which changed its name to The Chase Manhattan Corporation. The Merger was
accounted for as a pooling of interests. At December 31, 1998, Chase was the
third largest bank holding company in the United States in terms of total assets
and Chase Bank was the second largest bank in the United States in terms of
total assets.
The bank and non-bank subsidiaries of Chase operate nationally as well as
through overseas branches, representative offices and affiliated banks.
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.
LINES-OF-BUSINESS
Chase's activities are internally organized, for management reporting purposes,
into three major business franchises (Global Bank, National Consumer Services
and Chase Technology Solutions, which includes Global Services). A description
of Chase's business franchises and the products and services they provide to
their respective client bases are discussed in the "Lines of Business Results"
section of Management's Discussion and Analysis ("MD&A") beginning on page 19
and Note Twenty-Three on page 70.
COMPETITION
Chase and its subsidiaries and affiliates operate in a highly competitive
environment. Chase's bank subsidiaries compete with other domestic and foreign
banks, thrift institutions, credit unions, and mutual funds for deposits and
other sources of funds. In addition, Chase and its bank and non-bank
subsidiaries face increased competition with respect to the diverse financial
services and products they offer. Competitors include finance companies,
brokerage firms, investment banking companies, merchant banks, insurance
companies, credit card companies, mortgage banking companies, leasing companies,
and a variety of other financial services and advisory companies. Many of these
competitors are not subject to the same regulatory restrictions as are domestic
bank holding companies and banks, such as Chase and its bank subsidiaries.
SUPERVISION AND REGULATION
General: Chase is subject to regulation as a bank holding company under the
BHCA. As such, Chase is required to file reports and other information with the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board").
Chase is also subject to the examination powers of the Federal Reserve Board.
Under the BHCA, Chase may not engage in any business other than managing
and controlling banks or furnishing certain specified services to subsidiaries,
and may not acquire voting control of non-banking corporations, except those
corporations engaged in businesses or furnishing services which the Federal
Reserve Board deems to be so closely related to banking as "to be a proper
incident thereto." Further, Chase is prohibited, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any corporation that is engaged in activities that are not closely
related to banking, and, without the prior approval of the Federal Reserve
Board, may not acquire direct or indirect ownership or control of more than 5%
of the voting shares of any domestic bank or other company whose activities are
deemed to be closely related to banking.
Dividend Restrictions: Federal law imposes limitations on the payment of
dividends by the subsidiaries of Chase that are state member banks of the
Federal Reserve System (a "state member bank") or national banks. Non-bank
subsidiaries of Chase are not subject to such limitations. The amount of
dividends that may be paid by a state member bank, such as Chase Bank, or by a
national bank, such as Chase USA or Chase Texas, is limited to the lesser of the
amounts calculated under a "recent earnings" test and an "undivided profits"
test. Under the recent earnings test, a dividend may not be paid if the total of
all dividends declared by a bank in any calendar year is in excess of the
current year's net income combined with the retained net income of the two
preceding years unless the bank obtains the approval of its appropriate Federal
banking regulator (which, in the case of a state member bank, is the Federal
Reserve Board and, in the case of a national bank, is the Office of the
Comptroller of the Currency (the "Comptroller of the Currency"). Under the
undivided profits test, a dividend may not be paid in excess of a bank's
"undivided profits." See Note Seventeen on page 64 for the amount of dividends
that Chase's principal bank subsidiaries could pay, during 1999, to their
respective bank holding companies without the approval of their relevant banking
regulators.
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PART I
In addition to the dividend restrictions described above, the Federal
Reserve Board, the Comptroller of the Currency and the Federal Deposit Insurance
Corporation ("FDIC") have authority to prohibit or to limit the payment of
dividends by the banking organizations they supervise, including Chase and its
bank and bank holding company subsidiaries, if, in the banking regulator's
opinion, payment of a dividend would constitute an unsafe or unsound practice in
light of the financial condition of the banking organization.
Capital Requirements: The Federal banking regulators have also adopted
risk-based capital and leverage guidelines that require that Chase's
capital-to-assets ratios meet certain minimum standards.
The risk-based capital ratio is determined by allocating assets and
specified off-balance sheet financial instruments into four weighted categories,
with higher levels of capital being required for the categories perceived as
representing greater risk. Under the guidelines, capital is divided into two
tiers, Tier 1 Capital and Tier 2 Capital. For a further discussion of Tier 1
Capital and Tier 2 Capital, see Note Eighteen on page 64. The amount of Tier 2
Capital may not exceed the amount of Tier 1 Capital. Total Capital is the sum of
Tier 1 Capital and Tier 2 Capital.
Banking organizations are required to maintain a Total Risk-Based Capital
ratio (Total Capital to risk-weighted assets) of 8%, and a Tier 1 Capital ratio
of 4%.
The risk-based capital requirements explicitly identify concentration of
credit risk and certain risks arising from non-traditional activities, and the
management of those risks, as important factors to consider in assessing an
institution's overall capital adequacy. In addition, the risk-based capital
rules incorporate a measure for market risk in foreign exchange and commodity
activities and in the trading of debt and equity instruments. The market
risk-based capital rules require banking organizations with large trading
activities (such as Chase) to maintain capital for market risk in an amount
calculated by using the banking organizations' own internal value-at-risk models
(subject to parameters set by the regulators).
In November 1997, the Federal banking agencies published for comment
regulations to amend the risk-based capital requirements with respect to
recourse arrangements and securitization transactions. In general, the proposal
would amend the risk-based capital standards in order to treat recourse
obligations and direct credit substitutes (such as letters of credit and spread
accounts) consistently for risk-based capital purposes. The proposed amendments
also set forth a multi-level approach to assessing capital requirements in
certain asset securitizations.
The Federal banking regulators have also established minimum leverage
ratio guidelines. The leverage ratio is defined as Tier 1 Capital divided by
average total assets (net of allowance for credit losses, goodwill and certain
intangible assets). The minimum leverage ratio is 3% for strong bank holding
companies (i.e., those rated composite 1 under the BOPEC rating system) and for
bank holding companies that have implemented the Federal Reserve Board's
risk-based capital measure for market risk. Other bank holding companies must
have a minimum leverage ratio of 4%. Bank holding companies may be expected to
maintain ratios well above the minimum levels depending upon their particular
condition, risk profile and growth plans.
FDICIA: The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") revised certain provisions of the Federal Deposit Insurance Act, as
well as certain other Federal banking statutes. In general, FDICIA provides for
expanded regulation of depository institutions and their affiliates, including
parent holding companies, by their Federal banking regulators, and requires the
relevant Federal banking regulator to take "prompt corrective action" with
respect to a depository institution if that institution does not meet certain
capital adequacy standards.
Pursuant to FDICIA, the Federal Reserve Board, the FDIC and the
Comptroller of the Currency adopted regulations setting forth a five-tier scheme
for measuring the capital adequacy of the depository institutions they
supervise. Under the regulations (commonly referred to as the "prompt corrective
action" rules), an institution would be placed in one of the following capital
categories when these ratios fall within the prescribed ranges:
<TABLE>
<CAPTION>
Ratios
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Total Tier 1 Tier 1
Capital Capital Leverage
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At Least
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<S> <C> <C> <C>
Well Capitalized 10% 6% 5%
Adequately Capitalized 8% 4% 4%(a)
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Less Than
-------------------------------------------
Undercapitalized 8% 4% 4%(a)
Significantly Undercapitalized 6% 3% 3%
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Critically Undercapitalized Tangible equity to total assets of 2% or less
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</TABLE>
(a) May be 3% in some cases.
An institution may be treated as being in a capital category lower than
that indicated based on other supervisory criteria.
Supervisory actions by the appropriate Federal banking regulator will
generally depend upon an institution's classification within the five
categories. The regulations apply only to banks and not to bank holding
companies, such as Chase; however, the Federal Reserve Board is authorized to
take appropriate action at the holding company level based on the
undercapitalized status of the holding company's subsidiary banking
institutions. In certain instances relating to an undercapitalized banking
institution, the bank holding company would be required to guarantee the
performance of the undercapitalized subsidiary and may be liable for civil money
damages for failure to fulfill its commitments on that guarantee.
2
<PAGE> 5
PART I
Under FDICIA only a "well capitalized" depository institution may, without
prior regulatory approval, accept brokered deposits (e.g. deposits solicited by
a bank's affiliates on its behalf), offer interest rates on deposits
significantly higher than the prevailing rate in its market or "pass through"
deposit insurance coverage to the participants of certain employee benefit
plans.
As of December 31, 1998, each of Chase's banking subsidiaries was "well
capitalized".
FDIC Insurance Assessments: FDICIA also required the FDIC to establish a
risk-based assessment system for FDIC deposit insurance. Under the FDIC's
risk-based insurance premium assessment system, each depository institution is
assigned to one of nine risk classifications based upon certain capital and
supervisory measures and, depending upon its classification, is assessed
insurance premiums on its deposits.
Depository institutions insured by the Bank Insurance Fund ("BIF") are
required to pay premiums ranging from 0 basis points to 27 basis points of
domestic deposits. Each of Chase's banks, including Chase Bank, Chase USA and
Chase Texas, currently qualifies for the 0 basis point assessment. All
depository institutions must also pay an annual assessment so that the Financing
Corporation ("FICO") may pay interest on bonds it issued in connection with the
resolution of savings association insolvencies occurring prior to 1991. The FICO
assessment is 1.2 basis points of domestic deposits in the case of BIF-insured
institutions such as Chase Bank, Chase USA and Chase Texas. The rate schedules
are subject to future adjustments by the FDIC. In addition, the FDIC has
authority to impose special assessments from time to time, subject to certain
limitations specified in the Deposit Insurance Funds Act.
Powers of the FDIC Upon Insolvency of an Insured Depository Institution: An
FDIC-insured depository institution (such as Chase's bank subsidiaries) can be
held liable for any loss incurred or expected to be incurred by the FDIC in
connection with another FDIC-insured institution under common control with such
institution being in "default" or "in danger of default" (commonly referred to
as "cross-guarantee" liability). "Default" is generally defined as the
appointment of a conservator or receiver and "in danger of default" is defined
as certain conditions indicating that a default is likely to occur absent
regulatory assistance. An FDIC cross-guarantee claim against a depository
institution is generally superior in right of payment to claims of the holding
company and its affiliates against such depository institution.
If the FDIC is appointed the conservator or receiver of an insured
depository institution upon its insolvency or in certain other events, the FDIC
has the power: (i) to transfer any of the depository institution's assets and
liabilities to a new obligor without the approval of the depository
institution's creditors; (ii) to enforce the terms of the depository
institution's contracts pursuant to their terms; or (iii) to repudiate or
disaffirm any contract or lease to which the depository institution is a party,
the performance of which is determined by the FDIC to be burdensome and the
disaffirmance or repudiation of which is determined by the FDIC to promote the
orderly administration of the depository institution. The above provisions would
be applicable to obligations and liabilities of those of Chase's subsidiaries
that are insured depository institutions, such as Chase Bank, Chase USA and
Chase Texas, including, without limitation, obligations under senior or
subordinated debt issued by those banks to investors (referred to below as
"public noteholders") in the public markets.
In its resolution of the problems of an insured depository institution in
default or in danger of default, the FDIC is not permitted to take any action
that would have the effect of increasing the losses to a deposit insurance fund
by protecting depositors for more than the insured portion of their deposits or
by protecting creditors of the insured depository institution (including public
noteholders), other than depositors. In addition, the FDIC is authorized to
settle all uninsured and unsecured claims in the insolvency of an insured
institution by making a final settlement payment after the declaration of
insolvency based upon a percentage determined by the FDIC reflecting an average
of the FDIC's receivership recovery experience, regardless of the assets of the
insolvent institution actually available for distribution to creditors. Such a
payment would constitute full payment and disposition of the FDIC's obligations
to claimants.
Under federal law, the claims of a receiver of an insured depository
institution for administrative expenses and the claims of holders of domestic
deposit liabilities (including the FDIC, as subrogee of the depositors) have
priority over the claims of other unsecured creditors of the institution,
including public noteholders, in the event of the liquidation or other
resolution of the institution.
As a result of the provisions described above, whether or not the FDIC
ever sought to repudiate any obligations held by public noteholders of any
subsidiary of Chase that is an insured depository institution, such as Chase
Bank, Chase USA or Chase Texas, the public noteholders would be treated
differently from, and could receive, if anything, substantially less than, the
depositors of the depository institution.
Other Supervision and Regulation: Under Federal Reserve Board policy, Chase is
expected to act as a source of financial strength to its bank subsidiaries and
to commit resources to support the bank subsidiaries in circumstances where it
might not do so absent such policy. Any loans by a bank holding company to any
of its subsidiary banks are subordinate in right of payment to deposits and to
certain other indebtedness of the subsidiary banks. In the event of a bank
holding company's bankruptcy, any commitment by the bank holding company to a
Federal bank regulatory agency to maintain the capital of a subsidiary bank at a
certain level will be assumed by the bankruptcy trustee and entitled to a
priority of payment.
The bank subsidiaries of Chase are subject to certain restrictions imposed
by Federal law on extensions of credit to, and certain other transactions with,
Chase and certain other affiliates and on investments in stock or securities of
Chase and those affiliates. These restrictions prevent Chase and other
affiliates from borrowing from a bank subsidiary unless the loans are secured in
specified amounts.
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PART I
Chase's bank and non-bank subsidiaries are subject to direct supervision
and regulation by various other Federal and state authorities. Chase Bank, as a
New York State-chartered bank and state member bank, is subject to supervision
and regulation by the New York State Banking Department as well as by the
Federal Reserve Board and the FDIC. Chase's national bank subsidiaries, such as
Chase USA and Chase Texas, are subject to substantially similar supervision and
regulation by the Comptroller of the Currency. Supervision and regulation by
each of the foregoing regulatory agencies generally include comprehensive annual
reviews of all major aspects of the relevant bank's business and condition, as
well as the imposition of periodic reporting requirements and limitations on
investments and other powers. The operations of The Vista Funds, the mutual
funds advised by Chase, including the means by which they may be distributed in
the United States, are subject to regulation by the Securities and Exchange
Commission ("SEC") and the Federal Reserve Board. The types of activities in
which the foreign branches of Chase Bank and the international subsidiaries of
Chase may engage are subject to various restrictions imposed by the Federal
Reserve Board. Those foreign branches and international subsidiaries are also
subject to the laws and banking authorities of the countries in which they
operate.
Chase also conducts securities underwriting, dealing and brokerage
activities through various broker-dealer subsidiaries, all of which are subject
to the regulations of the SEC and the National Association of Securities
Dealers, Inc. CSI, Chase's "Section 20" subsidiary, is also subject to the
supervision and regulation of the Federal Reserve Board. In 1997, The Federal
Reserve Board eliminated many of the "firewalls" that had been imposed upon
Section 20 subsidiaries, incorporating the remaining firewalls in a statement of
operating standards, and increased the amount of a Section 20 subsidiary's gross
revenues that may be derived from underwriting and dealing in "ineligible"
securities (i.e., securities in which a national bank may not underwrite or
deal) from 10% to 25%. The effect of these regulatory actions has been to enable
CSI to operate more efficiently and expand its underwriting and dealing
capabilities.
The activities of Chase Bank, Chase USA and Chase Texas as consumer
lenders are also subject to regulation under various Federal laws including the
Truth-in-Lending, the Equal Credit Opportunity, the Fair Credit Reporting, the
Fair Debt Collection Practice and the Electronic Funds Transfer Acts, as well as
various state laws. These statutes impose requirements on the making,
enforcement and collection of consumer loans and on the types of disclosures
that need to be made in connection with such loans.
IMPORTANT FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, Chase has made and will make forward-looking statements.
These statements can be identified by the fact that they do not relate strictly
to historical or current facts. Forward-looking statements often use words such
as "anticipate," "expect," "estimate," "intend," "plan," "goal," "believe" or
other words of similar meaning. Forward-looking statements give Chase's current
expectations or forecasts of future events, circumstances or results. Chase's
disclosure in this report, including in the MD&A section, contains
forward-looking statements. Chase may also make forward-looking statements in
its other documents filed with the SEC and in other written materials. In
addition, Chase's senior management may make forward-looking statements orally
to analysts, investors, representatives of the media and others.
Any forward-looking statements made by or on behalf of Chase speak only as
of the date they are made. Chase does not undertake to update forward-looking
statements to reflect the impact of circumstances or events that arise after the
date the forward-looking statement was made. The reader should, however, consult
any further disclosures of a forward-looking nature Chase may make in its Annual
Reports on Form 10-K, its Quarterly Reports on Form 10-Q, and its Current
Reports on Form 8-K.
All forward-looking statements, by their nature, are subject to risks and
uncertainties. Chase's actual future results may differ materially from those
set forth in Chase's forward-looking statements. Factors that might cause
Chase's future financial performance to vary from that described in its
forward-looking statements include the credit, market, operational, liquidity,
interest rate and other risks discussed in the MD&A section of this report and
in our other periodic reports filed with the SEC. In addition, the following
discussion sets forth certain risks and uncertainties that Chase believes could
cause its actual future results to differ materially from expected results.
However, other factors besides those listed below or discussed in Chase's
reports to the SEC could also adversely affect Chase's results and the reader
should not consider any such list of factors to be a complete set of all
potential risks or uncertainties. This discussion is provided as permitted by
the Private Securities Litigation Reform Act of 1995.
Business Conditions and General Economy. Chase is a leading provider of services
in the global markets, global services, investment banking, private banking and
national consumer businesses. The profitability of these businesses could be
adversely affected by a worsening of general economic conditions in the United
States or abroad, particularly by a higher domestic interest rate environment,
as well as by foreign and domestic trading market conditions. Such factors could
also adversely affect the credit quality of Chase's on-balance sheet and
off-balance sheet assets. An economic downturn or significantly higher interest
rates could increase the risk that a greater number of Chase's customers would
become delinquent on their loans or other obligations to Chase, or would refrain
from securing additional debt. Further, a higher rate of delinquencies by
customers or counterparties would result in a higher level of charge-offs and a
higher level of provision for Chase, which could adversely affect Chase's
income. See also "Factors Affecting Allowance for Credit Losses" below. In
addition, a higher level of domestic interest rates could affect the amount of
assets under management by Chase (for example, by affecting the flows of moneys
to or from the mutual funds managed by Chase), impact the willingness of
financial investors to participate in loan syndications and underwritings
managed by Chase, adversely impact Chase's loan and deposit spreads and affect
its domestic trading revenues.
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<PAGE> 7
PART I
Competition. Chase operates in a highly competitive environment and expects that
competitive conditions will continue to intensify in the future. Technological
advances, for example, have made it possible for non-depository institutions to
offer customers automatic transfer systems and other automated payment systems
services that have been traditional banking products. In addition, investment
banks and insurance companies are competing in an increasing number of
traditional banking businesses, including syndicated lending and consumer
banking. Chase also expects competition to increase as a result of increased
merger activity involving the financial services industry. Chase expects these
mergers will produce larger, better capitalized companies offering a wide array
of financial services and products. Chase believes these consolidation pressures
may increase if legislation similar to H.R. 10, discussed below, is enacted into
law. (See "Legislation" below.)
Foreign Operations; Trading in Foreign Securities. Chase does business
throughout the world, including in developing regions of the world commonly
known as emerging markets. Chase's businesses and revenues derived from foreign
operations are subject to risk of loss from unfavorable political and diplomatic
developments, currency fluctuations, social instability, changes in governmental
policies or policies of central banks, expropriation, nationalization,
confiscation of assets and changes in legislation relating to foreign ownership.
Chase also invests in the securities of corporations located in foreign
jurisdictions, including emerging markets. Revenues from the trading of foreign
securities may also be subject to negative fluctuations as a result of the above
factors. The impact of these fluctuations could be accentuated because,
generally, foreign trading markets, particularly in emerging markets countries,
are smaller, less liquid and more volatile than U.S. trading markets.
Government Monetary Policies and Economic Controls. Chase's businesses and
earnings are affected by general economic conditions, both domestic and
international. Chase's businesses and earnings are also affected by the fiscal
or other policies that are adopted by various regulatory authorities of the
United States, foreign governments, and international agencies. For example,
policies and regulations of the Federal Reserve Board influence, directly and
indirectly, the rate of interest paid by commercial banks on their
interest-bearing deposits and may also impact the value of financial instruments
held by Chase. These actions of the Federal Reserve Board also determine to a
significant degree the cost to Chase of funds for lending and investing. The
nature and impact of future changes in economic and market conditions and fiscal
policies are not predictable and are beyond Chase's control. In addition, these
policies and conditions can impact Chase's customers and counterparties, both in
the U.S. and abroad, which may increase the risk that such customers or
counterparties default on their obligations to Chase.
Legislation. During 1998, H.R. 10, the "financial modernization bill," was
passed by the House of Representatives and by the Senate Banking Committee. The
bill, as approved by the House, would have permitted affiliation among banking,
securities and insurance firms through a holding company structure, but would
not allow wide-ranging affiliation between depository institutions and
commercial entities. The Senate Banking Committee approved a modified version of
H.R. 10. H.R. 10, however, did not pass the Senate before the closing of the
1998 congressional session. A modified version of H.R. 10 was introduced on the
first day of the 1999 congressional session. If enacted during the 1999
congressional session, this legislation could substantially change the
competitive environment in which Chase and its subsidiaries operate. Chase
cannot predict at this time whether H.R. 10 or similar legislation will be
enacted by Congress or the extent to which Chase and its subsidiaries may be
affected by any such legislation.
Factors Influencing Year 2000 Readiness. Chase's estimates as to the cost to
prepare for the Year 2000 are based on numerous assumptions regarding future
events including, among others, the nature and amount of testing that may be
required, expectations regarding third party modification plans and continued
availability of trained personnel. Chase's operations or financial results could
be materially adversely affected if vendors, service providers, customers or
securities exchanges are unable to successfully implement their Year 2000 plans
and continue their operations; if Chase is unsuccessful in identifying or fixing
all Year 2000 problems in its critical operations; or if Chase is unable to
retain the staff or third party consultants necessary to implement its Year 2000
plans at currently projected costs and timetables.
Factors Affecting Revenues. Chase's management categorizes the revenue
components of Chase's operating income statement as either market-sensitive
revenues or less market-sensitive revenues. Market-sensitive revenues are
affected by many factors, including Chase's credit standing and its success in
proprietary positioning, volatility in interest rates and in equity and debt
markets, and the economic, political and business factors described above.
Chases anticipates that its market-sensitive revenues will experience volatility
from time to time as a result of these factors. Management also expects that
less market-sensitive revenues will experience fluctuations from time-to-time
and, accordingly, the annual growth rate of its less market-sensitive revenues
may not continue to accelerate each and every year at the pace achieved during
the past three years.
5
<PAGE> 8
PART I
Factors Affecting Allowance for Credit Losses. Chase's allowance for credit
losses provides for risks of losses inherent in the credit extension process for
loans, derivative and foreign exchange contracts and lending-related
commitments. Estimating potential future losses is inherently uncertain and
depends on many factors, including general macroeconomic and political
conditions, rating migration, structural changes within industries that alter
competitive positions, event risk, unexpected correlations within the portfolio,
and other external factors such as legal and regulatory requirements.
FOREIGN OPERATIONS
For geographic distributions of average assets, total revenue, total expense,
income before income tax expense and net income, see Note Twenty-Four on page
72. For a discussion of foreign loans, see Note Four on page 55 and see the
sections entitled "Commercial Loan Portfolio" and "Cross-Border Exposure" in the
MD&A, on page 33, and "Cross-Border Outstandings," on page 85.
- --------------------------------------------------------------------------------
ITEM 2: PROPERTIES
- --------------------------------------------------------------------------------
The headquarters of Chase is located in New York City at 270 Park Avenue, which
is a 50-story bank and office building owned by Chase. This location contains
approximately 1.3 million square feet of commercial office and retail space.
Chase also owns and occupies a 60-story building at One Chase Manhattan
Plaza in New York City. This location has approximately 2 million square feet of
commercial office and retail space, of which approximately 800,000 square feet
is leased to outside tenants.
Chase also owns and occupies a 22-story bank and office building at 4 New
York Plaza, New York City, with 900,000 square feet of commercial office and
retail space. In addition, Chase owns a 50-story building known as One New York
Plaza in New York City which is leased to outside tenants. Chase has entered
into a contract to sell One New York Plaza; the sale is expected to close in the
second quarter of 1999.
Chase built in 1992 and fully occupies a two-building complex known as
Chase MetroTech Center in downtown Brooklyn, New York. This facility contains
approximately 1.75 million square feet and houses, among other things,
operations and product support functions.
Chase and its subsidiaries also own and occupy administrative and
operational facilities in Hicksville, New York; Tampa, Florida; Tempe, Arizona;
and in Houston, Arlington, and El Paso, Texas.
Chase occupies, in the aggregate, approximately 850,000 square feet of
space in the United Kingdom. The most significant components of leased space in
London are 250,000 square feet at 125 London Wall and 164,000 square feet at
Thomas More Square. Chase also owns and occupies a 300,000 square foot
operations center in Bournemouth.
In addition, Chase and its subsidiaries occupy branch offices and other
administrative and operational facilities throughout the United States and in
foreign countries under various types of ownership and leasehold agreements.
The majority of the properties occupied by Chase are used across all of
Chase's business segments and for corporate activities.
- --------------------------------------------------------------------------------
ITEM 3: LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
Due to the nature of their businesses, Chase and its subsidiaries are subject to
various threatened or filed legal actions from time to time. Some of these
actions allege damages, or seek penalties or other relief, in very large
amounts. On December 4, 1997, a judgment was entered on a jury verdict against
The Chase Manhattan Bank in a lawsuit filed in the United States District Court
for the Western District of Texas, 50-Off Stores, Inc. v. Banque Paribas
(Suisse), S.A., et al. The plaintiff sought damages for an alleged conversion by
the Bank of shares of common stock issued by the plaintiff that had been held in
a custody account of the Bank for its customer, Banque Paribas (Suisse) S.A. The
judgment awarded the plaintiff $10.6 million in compensatory and $138 million in
punitive damages. Chase has filed an appeal with the Fifth Circuit Court of
Appeals. The amount of any ultimate exposure in this litigation cannot be
determined with certainty at this time. Chase does not expect the final outcome
of any of its lawsuits, including the suit described above, to have a material
adverse effect on its consolidated financial condition.
- --------------------------------------------------------------------------------
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
None.
6
<PAGE> 9
PART I
- --------------------------------------------------------------------------------
EXECUTIVE OFFICERS OF THE REGISTRANT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Age Positions and offices held
Name (at December 31, 1998) with Chase and Chase Bank
- --------------------------------------------------------------------------------
<S> <C> <C>
Walter V. Shipley 63 Chairman and Chief Executive
Officer of Chase and Chase
Bank, 1983-1992 and 1994 to the
present. From 1992 until
December 31, 1993, he had been
President of Chase and Chase
Bank. He has been a Director of
Chase and Chase Bank since
1982.
Thomas G. Labrecque 60 President and Chief Operating
Officer of Chase and Chase Bank
since 1996, having served since
1990 as Chairman of the Board
and Chief Executive Officer of
heritage Chase. He had been a
Director of heritage Chase
since 1980 and became a
Director of Chase and Chase
Bank in 1996.
William B. Harrison Jr. 55 Vice Chairman of the Board of
Chase and Chase Bank, and
responsible for Chase's Global
Bank businesses. He has been a
Director of Chase since 1991
and of Chase Bank since 1990.
Donald L. Boudreau 58 Vice Chairman of Chase and
Chase Bank. He became
responsible for National
Consumer Services in December
1997 and before that had been
responsible for Chase's
consumer credit businesses.
Prior to the Merger, he was
Vice Chairman and a Director of
heritage Chase.
Marc J. Shapiro 51 Vice Chairman of Chase and
Chase Bank, responsible for
finance and risk management.
Prior to July 1997, he was
Chairman and Chief Executive
Officer of Chase Bank of Texas,
National Association (formerly
Texas Commerce Bank, National
Association).
Joseph G. Sponholz 54 Vice Chairman of Chase and
Chase Bank, responsible for
Chase Technology Solutions.
Prior to December 1997, he had
been Executive Vice President
and Chief Administrative
Officer of Chase.
John J. Farrell 46 Director Human Resources of
Chase and Chase Bank. Prior to
the Merger, he held the same
position at heritage Chase
since 1993.
Frederick W. Hill 48 Director Corporate Marketing
and Communications of Chase and
Chase Bank since September
1997. Before joining Chase, he
had been senior vice president,
communications and community
relations, for McDonnell
Douglas Corporation since 1995,
prior to which he headed the
communications function for
Westinghouse Electric
Corporation.
William H. McDavid 52 General Counsel of Chase and
Chase Bank since 1988.
</TABLE>
Unless otherwise noted, all of Chase's above-named executive officers have
continuously held senior-level positions with Chase or its predecessor
institutions, Chemical and heritage Chase, during the five fiscal years ended
December 31, 1998. There are no family relationships among the foregoing
executive officers.
7
<PAGE> 10
PART II
- --------------------------------------------------------------------------------
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
The outstanding shares of Chase's common stock are listed on the New York Stock
Exchange and the London Stock Exchange Limited. For the quarterly high and low
prices of Chase's common stock on the New York Stock Exchange for the last two
years, see the section entitled "Supplementary Data-Quarterly Financial
Information (Unaudited)" on page 74. Chase declared quarterly cash dividends on
its common stock in the amount of $.36 per share for each quarter of 1998 and
$.31 per share for each quarter of 1997. At February 28, 1999, there were 82,635
holders of record of Chase's common stock.
During the fourth quarter of 1998, shares of common stock of Chase were
issued in transactions exempt from registration under Section 4(2) of the
Securities Act of 1933. Such shares of common stock were issued to retired
directors who had deferred receipt of common stock pursuant to the Deferred
Compensation Plan for Non-Employee Directors as well as to serving directors.
These issuances amounted to 314 shares on October 1, 1998, and 4,830 shares
on December 1, 1998.
- --------------------------------------------------------------------------------
ITEM 6: SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
For five-year selected financial data, see "Selected Financial Data (Unaudited)"
on page 75.
- --------------------------------------------------------------------------------
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
Management's discussion and analysis of financial condition and results of
operations, entitled "Management's Discussion and Analysis", appears on pages 18
through 43.
- --------------------------------------------------------------------------------
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
For information related to market risk, see the Market Risk Management section
on pages 36 through 39, Note One on page 49 and Note Nineteen on page 65.
- --------------------------------------------------------------------------------
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
The consolidated financial statements, together with the notes thereto and the
report of PricewaterhouseCoopers LLP dated January 19, 1999 thereon, appear on
pages 44 through 74.
Supplementary financial data for each full quarter within the two years
ended December 31, 1998 is included on page 74 in the table entitled
"Supplementary Data-Quarterly Financial Information (Unaudited)". Also included
is a "Glossary of Terms" on page 76.
- --------------------------------------------------------------------------------
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
None.
- --------------------------------------------------------------------------------
PART III
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF CHASE
- --------------------------------------------------------------------------------
See Item 13 below.
- --------------------------------------------------------------------------------
ITEM 11: EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
See Item 13 below.
- --------------------------------------------------------------------------------
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
See Item 13 below.
- --------------------------------------------------------------------------------
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
Information related to Chase's Executive Officers is included on page 7.
Pursuant to Instruction G (3) to Form 10-K, the remainder of the information to
be provided in Items 10, 11, 12 and 13 of Form 10-K (other than information
pursuant to Rule 402 (i), (k) and (l) of Regulation S-K) are incorporated by
reference to Chase's definitive proxy statement for the annual meeting of
stockholders, to be held May 18, 1999, which proxy statement will be filed with
the Securities and Exchange Commission pursuant to Regulation 14A within 120
days of the close of Chase's 1998 fiscal year.
8
<PAGE> 11
PART IV
- --------------------------------------------------------------------------------
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) EXHIBITS, FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
1. Financial Statements
The consolidated financial statements, the notes thereto and the report
thereon listed in Item 8 are set forth commencing on page 44.
2. Financial Statement Schedules
None.
3. Exhibits
3.1 Restated Certificate of Incorporation of The Chase Manhattan Corporation
(incorporated by reference to Exhibit 4.1 to the Registration Statement
on Form S-8 (File No. 333-07941) of The Chase Manhattan Corporation).
3.2 Certificate of Amendment of Restated Certificate of Incorporation of The
Chase Manhattan Corporation (incorporated by reference to Exhibit 3.2 to
the Registration Statement on Form S-3 (File No. 333-56573) of The Chase
Manhattan Corporation).
3.3 Certificate of Designations of Fixed/Adjustable Rate, Noncumulative
Preferred Stock of The Chase Manhattan Corporation (incorporated by
reference to Exhibit 3.3 to the Registration Statement on Form S-3 (File
No. 333-56573) of The Chase Manhattan Corporation).
3.4 By-laws, as amended as of March 17, 1998, of The Chase Manhattan
Corporation (incorporated by reference to Exhibit 3.2 to the Annual
Report on Form 10-K, dated December 31, 1997, of The Chase Manhattan
Corporation, File No. 1-5805).
4.1 Indenture, dated as of December 1, 1989, between Chemical Banking
Corporation and The Chase Manhattan Bank (National Association), as
succeeded to by Bankers Trust Company, as Trustee (incorporated by
reference to Exhibit 4.9 to the Registration Statement on Form S-3 (File
No. 33-32409) of Chemical Banking Corporation).
4.2(a) Indenture, dated as of April 1, 1987, as amended and restated as of
December 15, 1992, between Chemical Banking Corporation and Morgan
Guaranty Trust Company of New York, as succeeded to by U.S. Bank Trust
National Association (formerly known as First Trust of New York, National
Association), as Trustee (incorporated by reference to Exhibit 4.1 to the
Current Report on Form 8-K, dated December 22, 1992, of Chemical Banking
Corporation, File No. 1-5805).
4.2(b) Second Supplemental Indenture, dated as of October 8, 1996, between The
Chase Manhattan Corporation and U.S. Bank Trust National Association
(formerly known as First Trust of New York, National Association), as
Trustee, to the Indenture, dated as of April 1, 1987, as amended and
restated as of December 15, 1992 (incorporated by reference to Exhibit
4.5 to the Registration Statement on Form S-3 (File No. 333-14959) of The
Chase Manhattan Corporation).
4.3(a) Indenture, dated as of June 1, 1985, between Manufacturers Hanover
Corporation and IBJ Schroder Bank and Trust Company, as Trustee, relating
to the 8 1/2% Subordinated Capital Notes Due February 15, 1999
(incorporated by reference to Exhibit 4(b) to the Current Report on Form
8-K, dated February 27, 1987, of Manufacturers Hanover Corporation, File
No. 1-5923-1) .
4.3(b) First Supplemental Indenture, dated as of December 31, 1991, among
Chemical Banking Corporation, Manufacturers Hanover Corporation and IBJ
Schroder Bank and Trust Company, as Trustee, to the Indenture, dated June
1, 1985 (incorporated by reference to Exhibit 4.18(b) to the Annual
Report on Form 10-K, dated December 31, 1991, of Chemical Banking
Corporation, File No. 1-5805).
4.3(c) Second Supplemental Indenture, dated as of October 8, 1996, between The
Chase Manhattan Corporation and IBJ Schroder Bank and Trust Company, as
Trustee, to the Indenture, dated June 1, 1985 (incorporated by reference
to Exhibit 4.12 to the Registration Statement on Form S-3 (File No.
333-14959) of The Chase Manhattan Corporation).
4.4(a) Indenture, dated as of July 1, 1986, between The Chase Manhattan
Corporation and Bankers Trust Company, as Trustee (incorporated by
reference to Exhibit (4)(a) to the Registration Statement on Form S-3
(File No. 33-7299) of The Chase Manhattan Corporation).
9
<PAGE> 12
PART IV
4.4(b) First Supplemental Indenture, dated as of November 1, 1990, between The
Chase Manhattan Corporation and Bankers Trust Company, as Trustee, to the
Indenture, dated as of July 1, 1986 (incorporated by reference to Exhibit
(4)(b) to the Registration Statement on Form S-3 (File No. 33-40485) of
The Chase Manhattan Corporation).
4.4(c) Second Supplemental Indenture, dated as of May 1, 1991, between The Chase
Manhattan Corporation and Bankers Trust Company, as Trustee, to the
Indenture, dated as of July 1, 1986 (incorporated by reference to Exhibit
(4)(c) to the Registration Statement on Form S-3 (File No. 33-42367) of
The Chase Manhattan Corporation).
4.4(d) Third Supplemental Indenture, dated as of March 29, 1996, among Chemical
Banking Corporation, The Chase Manhattan Corporation and Bankers Trust
Company, as Trustee, to the Indenture, dated as of July 1, 1986
(incorporated by reference to Exhibit 4.18 to the Registration Statement
on Form S-3 (File No. 333-14959) of The Chase Manhattan Corporation).
4.5(a) Amended and Restated Indenture, dated as of September 1, 1993, between
The Chase Manhattan Corporation and Chemical Bank, as Trustee
(incorporated by reference to Exhibit (4)(cc) to the Current Report on
Form 8-K, dated August 19, 1993, of The Chase Manhattan Corporation, File
No. 1-5945).
4.5(b) First Supplemental Indenture, dated as of March 29, 1996, among Chemical
Banking Corporation, The Chase Manhattan Corporation, Chemical Bank, as
resigning Trustee, and U.S. Bank Trust National Association (formerly
known as First Trust of New York, National Association), as successor
Trustee, to the Amended and Restated Indenture, dated as of September 1,
1993 (incorporated by reference to Exhibit 4.22 to the Registration
Statement on Form S-3 (File No. 333-14959) of The Chase Manhattan
Corporation).
4.5(c) Second Supplemental Indenture, dated as of October 8, 1996, between The
Chase Manhattan Corporation and U.S. Bank Trust National Association
(formerly known as First Trust of New York, National Association), as
Trustee, to the Amended and Restated Indenture, dated as of September 1,
1993 (incorporated by reference to Exhibit 4.23 to the Registration
Statement on Form S-3 (File No. 333-14959) of The Chase Manhattan
Corporation).
4.6(a) Indenture, dated as of May 15, 1993, between Margaretten Financial
Corporation and The Bank of New York, as Trustee, relating to the 6 3/4%
Guaranteed Notes due June 15, 2000 (incorporated by reference to Exhibit
4(a) to the Registration Statement on Form S-3 (No. 33-60262) of
Margaretten Financial Corporation).
4.6(b) Supplemental Indenture, dated as of July 22, 1994, to the Indenture,
dated as of May 15, 1993, among Margaretten Financial Corporation,
Chemical Banking Corporation and The Bank of New York, as Trustee, and
Guarantee, dated as of July 22, 1994, by Chemical Banking Corporation
(incorporated by reference to Exhibit 4.34 to the Current Report on Form
8-K, dated September 28, 1994, of Chemical Banking Corporation, File No.
1-5805).
4.7 Junior Subordinated Indenture, dated as of December 1, 1996, between The
Chase Manhattan Corporation and The Bank of New York, as Debenture
Trustee (incorporated by reference to Exhibit 4.24 to the Registration
Statement on Form S-3 (File No. 333-19719) of The Chase Manhattan
Corporation).
4.8 Guarantee Agreement, dated as of January 24, 1997, between The Chase
Manhattan Corporation and The Bank of New York, as Trustee, with respect
to the Global Floating Rate Capital Securities, Series B, of Chase
Capital II (incorporated by reference to Exhibit 4.8 to the Annual Report
on Form 10-K, dated December 31, 1997, of The Chase Manhattan
Corporation, File No. 1-5805).
4.9 Amended and Restated Trust Agreement, dated as of January 24, 1997, among
The Chase Manhattan Corporation, The Bank of New York, as Property
Trustee, The Bank of New York (Delaware), as Delaware Trustee, and the
Administrative Trustees named therein, with respect to Chase Capital II
(incorporated by reference to Exhibit 4.9 to the Annual Report on Form
10-K, dated December 31, 1997, of The Chase Manhattan Corporation, File
No. 1-5805).
10.1 Deferred Compensation Plan for Non-Employee Directors of The Chase
Manhattan Corporation and The Chase Manhattan Bank, as amended and
restated effective December 1996 (incorporated by reference to Exhibit
10.1 to the Annual Report on Form 10-K, dated December 31, 1996, of The
Chase Manhattan Corporation, File No. 1-5805).
10.2 Post-Retirement Compensation Plan for Non-Employee Directors, as amended
and restated as of May 21, 1996 (incorporated by reference to Exhibit
10.2 to the Annual Report on Form 10-K, dated December 31, 1996, of The
Chase Manhattan Corporation, File No. 1-5805).
10
<PAGE> 13
10.3 Deferred Compensation Plan of Chemical Banking Corporation and
Participating Companies, as amended through January 1, 1993 (incorporated
by reference to Exhibit 10.5 to the Annual Report on Form 10-K, dated
December 31, 1994, of Chemical Banking Corporation, File No. 1-5805).
10.4 The Chase Manhattan Corporation 1996 Long-Term Incentive Plan
(incorporated by reference to the Schedule 14A, filed on April 17, 1996,
of The Chase Manhattan Corporation, File No. 1-5805).
10.5 The Chase Manhattan 1994 Long-Term Incentive Plan (incorporated herein by
reference to Exhibit 10O to The Chase Manhattan Corporation's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994, File No.
1-5945).
10.6 Amendment to The Chase Manhattan 1994 Long-Term Incentive Plan
(incorporated herein by reference to Exhibit 10S to The Chase Manhattan
Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 1-5945).
10.7 Chemical Banking Corporation Long-Term Stock Incentive Plan, as amended
and restated as of May 19, 1992 (incorporated by reference to Exhibit
10.7 to the Annual Report on Form 10-K, dated December 31, 1992, of
Chemical Banking Corporation, File No. 1-5805).
10.8 The Chase Manhattan 1987 Long-Term Incentive Plan, as amended
(incorporated by reference to Exhibit 10A to The Chase Manhattan
Corporation's Annual Report on Form 10-K for the year ended December 31,
1990, File No. 1-5945).
10.9 Amendment to The Chase Manhattan 1987/82 Long-Term Incentive Plan
(incorporated by reference to Exhibit 10T to the Quarterly Report on Form
10-Q, for the quarter ended September 30, 1995, of The Chase Manhattan
Corporation, File No. 1-5945)
10.10 Long Term Incentive Program of Manufacturers Hanover Corporation
(incorporated by reference to Exhibit 10.10 to the Annual Report on Form
10-K, dated December 31, 1997, of The Chase Manhattan Corporation, File
No. 1-5805).
10.11 Key Executive Performance Plan of Chemical Banking Corporation
(incorporated by reference to Exhibit 10.4 to the Annual Report on Form
10-K, dated December 31, 1994, of Chemical Banking Corporation, File No.
1-5805).
10.12 The Chase Manhattan Annual Incentive Arrangement for Certain Executive
Officers (incorporated by reference to Exhibit 10W to the Quarterly
Report on Form 10-Q, for the quarter ended September 30, 1995, of The
Chase Manhattan Corporation, File No. 1-5945)
10.13 Forms of severance agreements as entered into by The Chase Manhattan
Corporation and certain of its executive officers (incorporated by
reference to Exhibit 10.13 to the Annual Report on Form 10-K, dated
December 31, 1997, of The Chase Manhattan Corporation, File No. 1-5805).
10.14 Form of termination agreement as entered into by The Chase Manhattan
Corporation and Donald L. Boudreau (incorporated by reference to the
Annual Report on Form 10-K, dated December 31, 1994, of The Chase
Manhattan Corporation, File No. 1-5945).
10.15 Form of amendment to the termination agreement as entered into by The
Chase Manhattan Corporation and Donald L. Boudreau (incorporated by
reference to the Quarterly Report on Form 10-Q, dated September 30, 1995,
of The Chase Manhattan Corporation, File No. 1-5945).
10.16 Permanent Life Insurance Options Plan (incorporated by reference to
Exhibit 10.11 to the Annual Report on Form 10-K, dated December 31, 1992,
of Chemical Banking Corporation, File No. 1 -5805).
10.17 Executive Retirement Plan of Chemical Banking Corporation and Certain
Subsidiaries (incorporated by reference to Exhibit 10.8 to the Annual
Report on Form 10-K, dated December 31, 1995, of Chemical Banking
Corporation, File No. 1-5805).
10.18 Supplemental Retirement Plan of Chemical Bank and Certain Affiliated
Companies, restated effective January 1, 1993 and as amended through
January 1, 1995 (incorporated by reference to Exhibit 10.9 to the Annual
Report on Form 10-K, dated December 31, 1995, of Chemical Banking
Corporation, File No. 1-5805).
11
<PAGE> 14
PART IV
10.19 Supplemental Retirement Plan of The Chase Manhattan Bank, as amended
(incorporated by reference to Exhibit 10G of The Chase Manhattan
Corporation's Annual Report on Form 10-K for the year ended December 31,
1989, File No. 1-5945).
10.20 Further Amendment to the Supplemental Retirement Plan of The Chase
Manhattan Bank (incorporated by reference to Exhibit 10G of The Chase
Manhattan Corporation's Annual Report on Form 10-K for the year ended
December 31, 1990, File No. 1-5945)
10.21 Amendment to Supplemental Retirement Plan of The Chase Manhattan Bank
(incorporated herein by reference to Exhibit 10Z to The Chase Manhattan
Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 1-5945).
10.22 Supplemental Benefit Plan of The Chase Manhattan Bank, as amended
(incorporated by reference to Exhibit 10H of The Chase Manhattan
Corporation's Annual Report on Form 10-K for the year ended December 31,
1990, File No. 1-5945).
10.23 Amendment to Supplemental Benefit Plan of The Chase Manhattan Bank
(incorporated herein by reference to Exhibit 10AA to The Chase Manhattan
Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 1-5945).
10.24 TRA86 Supplemental Benefit Plan of The Chase Manhattan Bank, as amended
(incorporated by reference to Exhibit 10I of The Chase Manhattan
Corporation's Annual Report on Form 10-K for the year ended December 31,
1990, File No. 1-5945).
10.25 Amendment to TRA86 Supplemental Benefit Plan of The Chase Manhattan Bank
(incorporated herein by reference to Exhibit 10BB to The Chase Manhattan
Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 1-5945).
11.1 Computation of earnings per common share.
12.1 Computation of ratio of earnings to fixed charges.
12.2 Computation of ratio of earnings to fixed charges and preferred stock
dividend requirements.
21.1 List of Subsidiaries of The Chase Manhattan Corporation.
22.1 Annual Report on Form 11-K of the 401(k) Savings Plan of The Chase
Manhattan Bank (to be filed by amendment pursuant to Rule 15d-21 under
the Securities Exchange Act of 1934).
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule.
The Chase Manhattan Corporation hereby agrees to furnish to the
Commission, upon request, copies of instruments defining the rights of holders
for the outstanding nonregistered long-term debt of The Chase Manhattan
Corporation and its subsidiaries. These instruments have not been filed as
exhibits hereto by reason that the total amount of each issue of such securities
does not exceed 10% of the total assets of The Chase Manhattan Corporation and
its subsidiaries on a consolidated basis. In addition, The Chase Manhattan
Corporation hereby agrees to file with the Commission, upon request, the
Guarantees and the Amended and Restated Trust Agreements for each Delaware
business trust subsidiary that has issued Capital Securities. The provisions of
such agreements differ from the documents constituting Exhibits 4.8 and 4.9 to
this report only with respect to the pricing terms of each series of Capital
Securities; these pricing terms are disclosed in Footnote Six of the Notes to
Consolidated Financial Statements on page 56.
(b) REPORTS ON FORM 8-K
o A Current Report on Form 8-K dated October 20, 1998 was filed on
October 23, 1998 setting forth The Chase Manhattan Corporation's
financial results for the third quarter of 1998.
o A Current Report on Form 8-K dated November 17, 1998 was filed on
November 18, 1998 announcing the authorization by the Board of
Directors of The Chase Manhattan Corporation of Chase's repurchase
of net $3 billion of its common stock.
o A Current Report on Form 8-K dated December 16, 1998 was filed on
December 16, 1998 announcing certain expectations regarding 1998
fourth-quarter earnings.
12
<PAGE> 15
Pages 13-16 Not Used
<PAGE> 16
Financial Section
Table of Contents
Management's Discussion and Analysis:
18 Overview
19 Management Performance Measurements
19 Lines of Business Results
Global Bank
National Consumer Services
Chase Technology Solutions
Corporate
23 Results of Operations
Market-Sensitive Revenue
Less Market-Sensitive Revenue
Noninterest Expense
Credit Costs
Income Taxes
29 Risk Management
29 Credit Risk Management
Credit-Related Portfolio
Consumer Loan Portfolio
Commercial Loan Portfolio
Cross-Border Exposure
Derivative and Foreign Exchange Contracts
Allowance for Credit Losses
36 Market Risk Management
40 Liquidity Risk Management
Liquidity
Capital
41 Operating Risk Management
EMU
Year 2000
43 Accounting and Reporting Developments
43 Comparison between 1997 and 1996
Audited Financial Statements:
44 Management's Report on Responsibility for
Financial Reporting
44 Report of Independent Accountants
45 Consolidated Financial Statements
49 Notes to Consolidated Financial Statements
Supplementary Data:
74 Quarterly Financial Information
75 Selected Financial Data
76 Glossary of Terms
17
<PAGE> 17
Management's Discussion and Analysis
The Chase Manhattan Corporation
- --------------------------------------------------------------------------------
OVERVIEW
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the year ended December 31, Over/(Under)
(in millions, except per share and ratio data) 1998 1997 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Basis(a)
Operating Revenue $19,824 $17,699 12%
Operating Earnings 4,016 3,849 4
Diluted Earnings Per Share 4.51 4.17 8
Return on Average Common Equity 18.4% 19.5% (110)bp
Efficiency Ratio 54 55 (100)bp
Shareholder Value Added $ 1,406 $ 1,393 1%
- --------------------------------------------------------------------------------
Reported Basis
Net Income $ 3,782 $ 3,708 2%
Diluted Net Income Per Share 4.24 4.01 6
Return on Average Common Equity 17.3% 18.7% (140)bp
- --------------------------------------------------------------------------------
</TABLE>
(a) Operating basis excludes the impact of credit card securitizations,
restructuring costs and special items. See page 19 for further discussion.
bp- Denotes basis points; 100 bp equals 1%.
Diluted operating earnings per share for full year 1998 increased to $4.51 from
$4.17 in 1997. Operating earnings rose to $4.02 billion from $3.85 billion in
1997. Reported net income for the full year was $3.78 billion, compared with
$3.71 billion in 1997.
Operating highlights for 1998 included:
o Revenues rose 12%, with all three franchises showing double-digit growth.
o Diluted earnings per share increased 8%.
o Chase's Tier 1 Capital ratio rose to 8.3% from 7.9% last year.
o Shareholder Value Added of $1.4 billion.
Chase's record performance was achieved during one of the most challenging
periods for the financial services industry in recent years. Driving these
results were the strength and diversity of Chase's business franchises and a
disciplined approach to risk, capital and expense management.
Franchise Strength and Diversity: Chase's leadership positions and product range
are key to sustaining consistent growth trends. Despite unusually volatile
financial markets in 1998, most Chase businesses experienced double-digit
revenue growth for the year. Chase's National Consumer Services and Global
Services businesses, which tend to be less market sensitive, grew 12% and 14%,
respectively, while the Global Bank's revenue increased 10%, reflecting Chase's
product diversity even within its lines of business. For example, Global Markets
revenues increased 16% as strong foreign exchange results offset weakness in
emerging markets. Similarly, Global Investment Banking revenues grew 24%, as
loan syndication volume rose sharply even as high yield trading income decreased
amid market concerns.
Financial Discipline: In managing costs, Chase keeps to the principles of
spending to support revenue growth, pacing investments appropriately and looking
to productivity initiatives to fund investments. This approach to expense
management led to the plan, announced in March 1998, to save $460 million per
year by streamlining and redesigning business support functions and selectively
redeploying savings to growth opportunities. Over the past year, Chase's
efficiency ratio continued to improve, reaching 54% for 1998 compared with 55%
last year.
In early 1998, Chase implemented Shareholder Value Added ("SVA") as
Chase's primary measure for financial performance. SVA rewards financial
discipline in capital management, expense management and risk management. The
adoption of SVA contributed to the reduction in the growth rate in risk-weighted
assets from 15% in 1997 to 1% in 1998. Since equity capital increased 10% from
year-end 1997 levels, Chase's Tier 1 Capital ratio increased from 7.9% in 1997
to 8.3% in 1998, ending the year above Chase's stated target of 8% to 8.25%.
In November, Chase announced a $3 billion net share buyback program that
began in January 1999. Capital generated in excess of the target Tier 1 Capital
ratio will be used to purchase Chase's common stock or for future reinvestment
and acquisition opportunities.
Risk Management: Chase's risk management practice helped differentiate 1998
financial performance. Risk management is an evolving practice, fully integrated
into Chase's financial measurements through SVA. Lessons learned in Chase's
trading businesses in late 1997 impacted Chase's approach to market risk
management in 1998, encouraging an emphasis on stress testing that helped Chase
achieve record trading revenues during 1998's challenging environment. Chase's
credit risk management focused on reducing cross-border exposure. Compared with
year-end 1997 levels, Chase's exposures to emerging markets in Latin America and
Asia, excluding Japan, Australia and New Zealand, declined 34%.
[Graph 1 - See Appendix I]
18
<PAGE> 18
This Management's Discussion and Analysis contains certain forward-looking
statements, including without limitation, statements related to credit, market
and operating risk. These forward-looking statements are subject to risks and
uncertainties and Chase's actual results may differ materially from those
included in these statements. Reference is made to Chase's reports filed with
the Securities and Exchange Commission for a discussion of factors that may
cause such differences to occur. See Glossary of Terms on page 76 for a
definition of certain terms used in this annual report.
- --------------------------------------------------------------------------------
MANAGEMENT PERFORMANCE MEASUREMENTS
- --------------------------------------------------------------------------------
Described below are the concepts and basis of presentation that management uses
to measure and evaluate business unit profitability.
Shareholder Value Added: Chase defines SVA as cash operating earnings (operating
earnings excluding the impact of amortization of goodwill and certain
intangibles) minus preferred dividends and an explicit charge for capital. The
capital charge is the return required by shareholders for the use of their
capital multiplied by the amount of economic risk-based capital attributed to
each business unit. Chase currently assesses its cost of equity capital at 13%.
The concept of SVA measures the incremental return generated by Chase
businesses above that required by Chase's shareholders. If new capital can be
employed over time at a return in excess of 13%, or if activities or assets that
do not return 13% on capital can be eliminated, SVA will increase. SVA
explicitly highlights the trade-offs for employing capital in the business units
versus returning capital to shareholders. Management measures business units on
their contribution to long-term growth in SVA.
Operating Basis: Management evaluates Chase's financial performance on an
operating basis as well as on the basis reported under generally accepted
accounting principles. Results on an operating basis exclude the impact of
special items, restructuring costs and credit card securitizations. Special
items are viewed by management as those revenue and expense transactions that
are not part of Chase's normal day-to-day business operations or are unusual in
nature thereby impacting management's analysis of trends. For example, special
items include gains or losses on disposition of significant non-strategic
assets, significant prior years' interest related to current year's tax refunds,
or infrequent charges such as accelerated vesting of employee stock-based
incentive awards.
In a credit card securitization, Chase takes a portion of its receivables
and packages them into securities. Securitizations change Chase's status from
that of a lender to that of a servicer. The securitization of credit card
receivables does not significantly affect Chase's reported net income; however,
it affects the manner in which amounts are classified in the Consolidated
Statement of Income. When measuring "operating performance" management excludes
the impact of credit card securitizations.
In discussing Chase's operating results, management uses the term
"operating" when describing an amount that affects the income statement and the
term "managed" when describing an amount that affects the balance sheet.
- --------------------------------------------------------------------------------
LINES OF BUSINESS RESULTS
- --------------------------------------------------------------------------------
Chase's businesses are organized into three major franchises:
o Global Bank,
o National Consumer Services ("NCS"), and
o Chase Technology Solutions ("CTS"), which includes Global Services.
Chase allocates equity to its business units utilizing an economic
risk-based capital methodology. This methodology quantifies credit, market and
operating risks within each business unit and allocates capital accordingly.
Chase's allocated capital at the line of business level also incorporates a
"leverage capital tax" on managed assets and some off-balance sheet instruments.
This tax recognizes the need for Chase to maintain certain capital ratios to
meet bank regulatory definitions of "well-capitalized." Also, businesses have
been allocated capital equal to one hundred percent of any goodwill and certain
intangibles generated through acquisitions.
Lines of business results are subject to restatement as appropriate
whenever there are refinements in management reporting policies or changes to
the management organization. During 1998, refinements have been made to the
methodology for the allocation of capital to the various lines of business.
Prior periods have been restated to reflect these changes.
The table below provides summary financial information on an operating
basis for the three major franchises. The discussion that follows the table
focuses on business unit performance within these franchises. See Note
Twenty-Three for further disclosure of Chase's business segments.
<TABLE>
<CAPTION>
LINES OF BUSINESS RESULTS
Global Bank National Consumer Services
Year Ended December 31, -------------------------------------- ----------------------------------------
(in millions, except ratios) 1998 Over/(Under) 1997 1998 Over/(Under) 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenue $ 9,298 $ 826 10% $ 8,203 $ 862 12%
Cash Operating Earnings 2,855 283 11 1,265 137 12
Average Common Equity 13,924 935 7 6,381 1,121 21
Average Managed Assets 267,227 6,418 2 106,703 11,439 12
Shareholder Value Added 985 215 28 409 9 2
Cash Return on Common Equity 20.1% -- 110bp 19.4% -- (120)bp
Cash Efficiency Ratio 47 -- -- 49 -- (200)
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Global Services Total(a)
Year Ended December 31, -------------------------------------- ----------------------------------------
(in millions, except ratios) 1998 (Under)/Over 1997 1998 (Under)/Over 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenue $ 2,667 $ 326 14% $ 19,824 $ 2,125 12%
Cash Operating Earnings 496 73 17 4,277 256 6
Average Common Equity 1,879 192 11 21,328 2,500 13
Average Managed Assets 10,386 983 10 391,222 20,323 5
Shareholder Value Added 243 55 29 1,406 13 1
Cash Return on Common Equity 26.0% -- 180bp 19.6% -- (80)bp
Cash Efficiency Ratio 70 -- (100) 53 -- (100)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Total column includes Corporate results. See description of Corporate
results on page 23.
bp- Denotes basis points; 100 bp equals 1%.
19
<PAGE> 19
Management's Discussion and Analysis
The Chase Manhattan Corporation
GLOBAL BANK
Global Bank combines the strengths of a leading commercial bank and a leading
investment bank to meet the needs of corporations, institutions, governments and
wealthy individuals around the world. With operations in approximately 50
countries, including major operations in all key international financial
centers, Global Bank integrates a broad range of leading product capabilities,
industry knowledge and geographic reach to produce superior customer solutions.
Global Bank operating revenues in 1998 rose $826 million, or 10%, due to
higher investment banking fees, strong growth in most global markets activities
and private equity gains, despite unusually high volatility in financial markets
during the second half of 1998. Cash operating earnings and SVA for 1998
increased $283 million and $215 million, respectively.
The following table sets forth certain key financial performance measures
of the businesses within Global Bank.
[Graph 2 - See Appendix I]
<TABLE>
<CAPTION>
1998 Over/(Under) 1997
---------------------------------- --------------------------------------
Cash Cash Cash Cash
Year Ended December 31, 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 $3,621 $1,231 47% 16% 21% (100)bp
Global Investment Banking 1,258 321 57 24 19 200
Corporate Lending 1,421 503 26 5 5 --
Chase Capital Partners 826 449 13 10 9 --
Global Private Bank 673 143 63 6 4 --
Middle Markets 785 174 55 (4) (13) 500
Chase Texas (consolidated) 1,577 433 54 16 25 (400)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
bp- Denotes basis points; 100 bp equals 1%.
Global Markets: Global Markets' activities are diverse, by product and
geography, and encompass the trading and sale of foreign exchange, derivatives,
fixed income securities and commodities. Chase operates 24 hours a day covering
the major international cross-border financial markets, as well as many local
markets, and is a recognized world leader in such key activities as foreign
exchange, interest rate derivatives and emerging markets debt. Also included
within Global Markets are Chase's domestic and international treasury units,
which have the primary responsibility for managing Chase's interest rate risk
exposures and investment securities activities. Treasury results are managed on
a total return basis with one of the primary objectives being the creation of
economic value over time. Total return combines 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.
Trading-related revenue for 1998 was $2.2 billion, an increase of 12% from
1997, despite difficult market conditions that spread from emerging markets to
many developed markets. Results reflect strong performance across traditional
products, including foreign exchange, and newer businesses, such as credit and
equity derivatives, and high-grade bonds. Securities gains realized during 1998
were $609 million, representing a portion of the increased value in Chase's
available-for-sale ("AFS") investment portfolio, which is managed as part of
Chase's overall market risk management process. In 1998, the total return
(pretax before expenses) from interest rate risk management activities amounted
to $523 million, compared with $502 million in 1997.
20
<PAGE> 20
[Graph 3 - See Appendix I]
Global Investment Banking: Global Investment Banking ("GIB") advises
corporations, financial institutions, financial sponsors and governments by
providing integrated one-stop financial solutions and industry expertise to
clients globally. Chase's corporate finance client base is extensive and is
managed through global client industry groups that include chemicals, financial
institutions, healthcare, insurance, media and telecommunications,
multinationals, natural resources, oil and gas, power and environmental, real
estate, sports advisory and finance, 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 is the largest lead manager of U.S.
corporate debt, with a major presence in both public and private debt markets,
and has built a strong presence in the advisory arena by leveraging debt market
leadership with an integrated approach to clients' financial solutions.
GIB operating revenues in 1998 increased by $247 million, or 24%, to
$1,258 million when compared with 1997, reflecting strong growth in loan
syndications, merger and acquisition advisory services and high yield securities
underwriting, offset by lower revenue from high yield debt trading.
Corporate Lending: Corporate Lending provides credit and lending services to
clients globally within a strategy that emphasizes origination for distribution.
An active portfolio management effort is an integral part of corporate lending
activities and is focused on managing concentrations by product, borrower, risk
grade, industry and geography. The introduction of the use of SVA for product
and customer decisions resulted in higher spreads on retained assets and the
disposition of less attractive loans. Management expects to continue to manage
commercial loans for shareholder value rather than revenue growth. Revenues and
cash operating earnings each increased 5% for 1998 when compared with 1997.
Chase Capital Partners: Chase Capital Partners ("CCP") is one of the largest
global private equity organizations with approximately $7.2 billion under
management, including $4.3 billion in direct equity and equity-related
investments and $1.3 billion in fund investments. CCP provides equity and
mezzanine financing for a wide variety of investment opportunities in the United
States and, to a lesser extent, abroad. During 1998, CCP's direct investments
totaled approximately $1.7 billion in 120 venture capital, management buyout,
recapitalization, growth equity and mezzanine transactions, compared with
approximately $0.9 billion in over 100 direct investments during 1997. For 1998,
cash operating earnings rose $38 million, or 9%, to $449 million reflecting
CCP's accelerated pace of investment activities over the last several years.
Global Private Bank: The Global Private Bank serves a global client base of high
net worth individuals and families, offering a full range of private banking
services as well as access to the broad product capabilities of the Global Bank.
Services include a full range of integrated private banking capabilities,
investment management, global capital market products and services, risk
management, alternative investments such as private equity funds, trust and
estate planning, global custody, mutual funds, credit and banking, and
philanthropic advisory services. Earnings for 1998 were driven by a 6% growth in
revenues, reflecting strong growth in fee income, primarily related to
double-digit growth in private client trust and investment management
activities, a more than doubling of alternative investment revenues and
double-digit growth in banking services fees. Lower levels of growth in Asia and
selected European markets offset these strong growth trends.
Middle Markets: 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 the
market leader in the New York metropolitan tri-state area where it has
relationships with 48% of middle market companies and is lead bank for 21% of
these companies. Cash operating earnings decreased $27 million in 1998 when
compared with 1997 reflecting lower spreads and an increase in expenses.
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 in key Texas markets through its 124
locations. Additionally, Chase Texas is the largest bank for personal and
corporate trust services in the southwest. Operating revenues increased 16% for
1998 when compared with 1997, reflecting increased corporate finance fees,
higher loan and deposit volumes, and securities gains. The above discussion
reflects the consolidated results for Chase Texas. The lines of business results
for the global bank portion of Chase Texas are reported in the Global Bank lines
of business results. The consumer- and global services-related results for Chase
Texas are reported as part of NCS and CTS lines of business results,
respectively.
21
<PAGE> 21
Management's Discussion and Analysis
The Chase Manhattan Corporation
NATIONAL CONSUMER SERVICES
National Consumer Services serves more than 30 million customers nationwide
offering a wide variety of financial products and services through a diverse
array of channels. Characterized by significant scale, and operating under the
strong Chase brand, NCS combines nationwide presence with a leading consumer and
small business banking franchise in the New York metropolitan tri-state region
and key Texas markets. NCS's strategy is driven by information technology, which
provides insights into customer behavior, requirements and preferences, and
enables the franchise to develop financial solutions that best meet customer
needs.
Cash operating earnings for 1998 increased $137 million or 12% over 1997.
Revenue growth of 12% contributed to the increase in cash operating earnings and
reflects higher revenues and volumes across all of NCS's businesses. SVA was
relatively flat compared with 1997, despite a strong improvement in the fourth
quarter, due to an increased capital allocation to NCS as a result of acquired
portfolios.
The following table sets forth certain key financial performance measures
of the businesses within NCS.
<TABLE>
<CAPTION>
1998 Over/(Under) 1997
---------------------------------- -------------------------------------
Cash Cash Cash Cash
Year Ended December 31, Operating Operating Efficiency Operating Operating Efficiency
(in millions, except ratios) Revenues Earnings Ratio Revenues Earnings Ratio
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Chase Cardmember Services $3,913 $ 461 34% 17% 21% (300)bp
Regional Consumer Banking 2,337 382 70 3 4 --
Chase Home Finance 1,029 264 52 11 16 --
Diversified Consumer Services 846 144 53 17 21 --
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
bp- Denotes basis points; 100 bp equals 1%.
Chase Cardmember Services: Chase Cardmember Services ("CCS") ranks as the
fourth-largest bank card issuer in the United States with $32 billion of managed
receivables at the end of 1998. CCS also includes the results of Chase's
international consumer business, which includes Chase Manhattan Card Company
Limited, the third-largest credit card issuer in Hong Kong (which became wholly
owned in 1998), as well as consumer banking activities in Hong Kong, Panama and
the Eastern Caribbean. CCS's operating revenues for 1998 were $3,913 million, a
$580 million or 17% increase from 1997, reflecting acquired portfolios, pricing
initiatives, increased co-branded activities and higher levels of consumer card
usage. Cash operating earnings were $461 million in 1998, an increase of 21%,
reflecting revenue growth and a significant improvement in efficiency, partially
offset by increased charge-offs related to a credit card portfolio acquired in
late 1997 as well as higher investment spending.
Regional Consumer Banking: 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 their choice of distribution channels, including the
largest branch and proprietary ATM networks in the New York metropolitan region,
plus state-of-the-art telephone, PC and Internet services. For 1998, cash
operating earnings were 4% higher when compared with 1997, reflecting growth in
deposits and increased small business lending, offset in part by the cost of
technology-related investments, particularly within Chase Texas' retail
businesses.
Chase Home Finance: Chase Home Finance serves more than 2 million customers
nationwide and is the third-largest originator and servicer of residential
mortgage loans in the U.S. It is also a leading provider of home-equity secured
lending and manufactured housing financing. During 1998, Chase Home Finance
operated at peak origination levels, generating $85 billion in residential
first-mortgage loans, home-equity and manufactured housing financing, an
increase of 98% compared with 1997 activity. Chase's servicing portfolio
increased 21% and totaled $213 billion at December 31, 1998. Cash operating
earnings increased 16% in 1998, when compared with 1997. Operating revenues rose
11% in 1998 due to record origination volume and a strong housing market in the
U.S. Offsetting revenues somewhat was a higher level of amortization of mortgage
servicing rights, as low interest rates encouraged higher mortgage prepayments.
[Graph 4 - See Appendix I]
22
<PAGE> 22
Diversified Consumer Services: Diversified Consumer Services ("DCS") is the
largest bank originator of auto loans and leases in the United States and a
leading provider of student loans and unsecured consumer lending. In addition to
its financing activities, DCS offers brokerage services and investment products
nationwide and is one of the most diversified bank insurance providers in the
U.S. During 1998, auto finance originations were strong, increasing 16%, when
compared with 1997 levels, to $12.5 billion. At December 31, 1998, Chase Auto
Finance had $22.5 billion in managed loans and $16.5 billion in balance sheet
receivables. Cash operating earnings for DCS rose 21% in 1998, driven by the
strong growth in auto finance and by higher revenues in Chase's investment and
insurance businesses.
CHASE TECHNOLOGY SOLUTIONS
Chase Technology Solutions is composed of Chase's Global Services businesses,
Information Technology and Operations, and Electronic Commerce initiatives.
Global Services is a leading provider of information and transaction services
globally and includes custody and other investor services, treasury and cash
management, trade finance, debt, agency 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 $5.0 trillion in assets and
serviced over $3.0 trillion in outstanding debt at December 31, 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. During 1998,
Global Services made several strategic acquisitions of large custody and
fiduciary services businesses, which will leverage Chase's scale in a
consolidating market.
For 1998, cash operating earnings increased $73 million or 17% from the
same 1997 period. SVA for Global Services increased $55 million in 1998. Revenue
growth was strong across all three businesses within Global Services (Chase
Treasury Solutions, Global Investor Services and Capital Markets Fiduciary
Services), rising 14% overall, due in part to higher operating volumes from
portfolio acquisitions. Earnings also benefited from continued productivity
gains, tempered by technology investments related to preparations for Year 2000
and European Monetary Union ("EMU") initiatives.
CORPORATE
Corporate includes Chase's Global Asset Management and Mutual Funds business,
which provides investment management for institutional investors globally and
manages the Chase Global Mutual Funds. Total assets under management amounted to
$190 billion at December 31, 1998.
Corporate also includes the effects remaining at the Corporate level after
the implementation of management accounting policies, including residual credit
provision and tax expense. For 1998, Corporate had a cash operating loss
(including the non-Global Services portion of CTS) of $339 million reflecting
funding charges on unallocated balance sheet items and residual provision for
loan losses. This compares to a lower cash operating loss of $102 million in
1997 reflecting an overallocation of the credit provision to the business
franchises.
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following section provides a discussion of Chase's results of operations as
reported under generally accepted accounting principles as well as on an
operating basis that is used by management in measuring Chase's financial
performance.
To further facilitate its analysis of Chase's financial results,
management categorizes revenue components as market-sensitive revenues or as
less market-sensitive revenues. Market-sensitive revenues include trading
revenues (including trading-related net interest income), investment banking
fees, securities gains and private equity gains. The remaining revenue
components of the income statement are categorized as less market-sensitive
revenue.
The following table provides a reconciliation between Chase's results as
reported in its Consolidated Financial Statements and as presented on an
operating basis.
23
<PAGE> 23
Management's Discussion and Analysis
The Chase Manhattan Corporation
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------------
Year Ended December 31, Reported Credit Credit Special Operating
(in millions, except per share data) Results(a) Costs(b) Card(c) Items(d) Basis
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
Market-Sensitive Revenue:
Investment Banking Fees $ 1,502 $ -- $ -- $ -- $ 1,502
Trading-Related Revenue(e) 2,160 -- -- -- 2,160
Provision for Risk Mgmt. Inst.(f) (211) 211 -- -- --
Securities Gains 609 -- -- -- 609
Private Equity Gains 967 -- -- -- 967
- -----------------------------------------------------------------------------------------------------------------------
Market-Sensitive Revenue 5,027 211 -- -- 5,238
- -----------------------------------------------------------------------------------------------------------------------
Less Market-Sensitive Revenue:
Net Interest Income 7,855 -- 1,460 (191)(g) 9,124
Trust, Custody and Inv. Mgmt. Fees 1,543 -- -- -- 1,543
Credit Card Revenue 1,474 -- (299) -- 1,175
Fees for Other Financial Services 2,093 -- -- -- 2,093
Other Revenue 664 -- (13) -- 651
- -----------------------------------------------------------------------------------------------------------------------
Less Market-Sensitive Revenue 13,629 -- 1,148 (191) 14,586
- -----------------------------------------------------------------------------------------------------------------------
Total Revenue 18,656 211 1,148 (191) 19,824
- -----------------------------------------------------------------------------------------------------------------------
Noninterest Expense 10,854 (5) -- (37)(i) 10,812
- -----------------------------------------------------------------------------------------------------------------------
Operating Margin 7,802 216 1,148 (154) 9,012
Credit Costs 1,343 216 1,148 -- 2,707
- -----------------------------------------------------------------------------------------------------------------------
Income Before Restructuring Costs 6,459 -- -- (154) 6,305
Restructuring Costs 529 -- -- (529) --
- -----------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense 5,930 -- -- 375 6,305
Tax Expense 2,148 -- -- 141 2,289
- -----------------------------------------------------------------------------------------------------------------------
Net Income $ 3,782 $ -- $ -- $ 234 $ 4,016
- -----------------------------------------------------------------------------------------------------------------------
Net Income Per Common Share:
Basic $ 4.35 $ 4.63
Diluted 4.24 4.51
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
1997
----------------------------------------------------------------------
Year Ended December 31, Reported Credit Credit Special Operating
(in millions, except per share data) Results(a) Costs(b) Card(c) Items(d) Basis
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
Market-Sensitive Revenue:
Investment Banking Fees $ 1,136 $ -- $ -- $ -- $ 1,136
Trading-Related Revenue(e) 1,936 -- -- -- 1,936
Provision for Risk Mgmt. Inst.(f) -- -- -- -- --
Securities Gains 312 -- -- -- 312
Private Equity Gains 831 -- -- -- 831
- ----------------------------------------------------------------------------------------------------------------
Market-Sensitive Revenue 4,215 -- -- -- 4,215
- ----------------------------------------------------------------------------------------------------------------
Less Market-Sensitive Revenue:
Net Interest Income 7,640 -- 1,253 -- 8,893
Trust, Custody and Inv. Mgmt. Fees 1,307 -- -- -- 1,307
Credit Card Revenue 1,088 -- (233) -- 855
Fees for Other Financial Services 1,983 -- -- -- 1,983
Other Revenue 575 -- (27) (102)(h) 446
- ----------------------------------------------------------------------------------------------------------------
Less Market-Sensitive Revenue 12,593 -- 993 (102) 13,484
- ----------------------------------------------------------------------------------------------------------------
Total Revenue 16,808 -- 993 (102) 17,699
- ----------------------------------------------------------------------------------------------------------------
Noninterest Expense 9,902 (12) -- (135)(i) 9,755
- ----------------------------------------------------------------------------------------------------------------
Operating Margin 6,906 12 993 33 7,944
Credit Costs 804 12 993 -- 1,809
- ----------------------------------------------------------------------------------------------------------------
Income Before Restructuring Costs 6,102 -- -- 33 6,135
Restructuring Costs 192 -- -- (192) --
- ----------------------------------------------------------------------------------------------------------------
Income Before Income Tax Expense 5,910 -- -- 225 6,135
Tax Expense 2,202 -- -- 84 2,286
- ----------------------------------------------------------------------------------------------------------------
Net Income $ 3,708 $ -- $ -- $ 141 $ 3,849
- ----------------------------------------------------------------------------------------------------------------
Net Income Per Common Share:
Basic $ 4.15 $ 4.32
Diluted 4.01 4.17
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents results as reported in Chase's financial statements, except
that revenues are categorized between market-sensitive and less
market-sensitive revenues and restructuring costs have been separately
displayed.
(b) Credit Costs reclasses - For purposes of operating basis presentation, the
provision for risk management instrument credit losses is reclassified
from noninterest revenue to credit costs and foreclosed property expense
is reclassified from noninterest expense to credit costs.
(c) This column excludes the impact of credit card securitizations. For
securitized receivables, amounts that would previously have been reported
as net interest income and as provision for loan losses are instead
reported as components of noninterest revenue (credit card revenue and
other revenue).
(d) Includes restructuring costs and special items.
(e) Includes trading-related net interest income, which is reported in the net
interest income caption in the Consolidated Statement of Income.
(f) Denotes Provision for Risk Management Instrument Credit Losses.
(g) Interest income resulting from the refund of prior years' taxes.
(h) Includes $58 million gain on the sale of Chase's remaining interest in CIT
Group Holdings, Inc. ("CIT") and $44 million gain on the sale of a
partially-owned foreign investment.
(i) Costs incurred for the accelerated vesting of stock-based incentive
awards.
MARKET-SENSITIVE REVENUE
Chase defines market-sensitive revenues as investment banking fees,
trading-related revenue (including trading-related net interest income),
securities gains and private equity gains. These revenues are, in management's
view, typically more sensitive to changes in general market conditions than
those revenue components management considers as less market-sensitive revenue.
While components of market-sensitive revenues experience volatility
(particularly on a quarter-to-quarter basis), over the past ten years total
market-sensitive revenue has increased at a compound annual growth rate ("CAGR")
of 14% and has exhibited limited annual volatility around the regression
trendline.
[Graph 5 - See Appendix I]
24
<PAGE> 24
For 1998, market-sensitive revenues increased 24% over 1997, reflecting
double-digit increases across all categories despite difficult market conditions
in the 1998 third quarter. A discussion of the components within
market-sensitive revenue is presented below.
Investment Banking Fees
Investment banking fees for the year rose 32% to $1.50 billion in 1998. These
results reflect growth in loan syndications, merger and acquisition advisory
services and high grade and high yield underwriting fees. During 1998, Chase
acted as book manager for approximately $336 billion of U.S. corporate debt
(including $271 billion of syndicated credit facilities and $65 billion of
corporate debt securities), and advised on merger and acquisition transactions
totaling $179 billion in transaction volume, reflecting Chase's large client
base and strong distribution network.
Trading-Related Revenue
Trading-related revenue, which includes trading-related net interest income,
increased $224 million or 12% from 1997, primarily the result of strong
performance across traditional products, particularly foreign exchange.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Trading Revenue - Reported $1,449 $1,323
Net Interest Income Impact(a) 711 613
- --------------------------------------------------------------------------------
Total Trading-Related Revenue $2,160 $1,936
- --------------------------------------------------------------------------------
Product Diversification:
Interest Rate Contracts(b) $ 695 $ 704
Foreign Exchange Contracts(b) 963 790
Debt Instruments, Equities and Commodities(b) 502 442
- --------------------------------------------------------------------------------
Total Trading-Related Revenue $2,160 $1,936
- --------------------------------------------------------------------------------
</TABLE>
(a) Trading-related net interest income includes interest recognized on
interest-earning and interest-bearing trading-related positions as well as
management allocations reflecting the funding cost or benefit associated
with trading positions. This amount is included in net interest income on
the Consolidated Statement of Income.
(b) For the classes of financial instruments included, see Note Two.
The growth in foreign exchange revenue reflected strong results across a
broad spectrum of currencies, with particular emphasis on the Asian markets
where volatility was high. The slight decrease in revenue from interest rate
contracts was mainly due to weaker results in the U.S., especially in several
structured products. Debt instruments and other revenue benefited from growth in
newer businesses, such as credit and equity derivatives, and high grade bonds,
offset by continued weakness in emerging markets activities.
Securities Gains
Securities gains realized in 1998 were $609 million, increasing $297 million
from last year. These gains were largely from sales of U.S. Government and
agency securities which benefited, particularly during the third quarter of
1998, from the move by investors into safer investments, such as U.S.
Treasuries, amid adverse market conditions. Unrealized gains in Chase's
available-for-sale securities portfolio were approximately $600 million, before
taxes, at December 31, 1998, an increase from approximately $150 million, before
taxes, at mid-year 1998.
Private Equity Gains
Private equity gains include income from a wide variety of investments in the
United States and, to a lesser extent, abroad. The equity investment portfolio
rebounded sharply during the fourth quarter of 1998 from the adverse market
conditions that slowed the pace of revenues in the 1998 third quarter. Full year
revenues of $967 million increased 16% over 1997, also reflecting favorable
conditions in the first half of 1998 and the benefit of Chase's accelerated pace
of investment activities over the last several years.
LESS MARKET-SENSITIVE REVENUE
The less market-sensitive revenue captions are generally subject to less market
volatility than market-sensitive revenues. However, certain components within
less market-sensitive revenue are subject to market volatility, particularly
assets that are held-for-sale and are accounted for on either a mark-to-market
basis or lower-of-cost-or-market basis.
Over the past 10 years, less market-sensitive revenues have increased at a
CAGR of 3%; however, Chase has experienced an acceleration of this growth rate,
as evidenced by annual growth of 6% in 1996, 6% in 1997 and 8% in 1998. The
increase from 1997 is primarily the result of higher trust, custody and
investment management fees and credit card revenue.
A discussion of the components within less market-sensitive revenue is
presented below.
Net Interest Income
Reported net interest income was $8.57 billion in 1998, an increase of 4% from
1997. The improvement from 1997 reflects $191 million of interest income
resulting from the refund of prior years' taxes, partially offset by ongoing
credit card securitizations (which removed higher-yielding credit card loans
from the balance sheet) and the impact of generally narrower loan spreads.
Included within the results reported in Chase's financial statements is
trading-related net interest income of $711 million, up 16% from the prior year.
For purposes of internal analysis, management combines trading-related net
interest income with trading revenue, as discussed under the Trading-Related
Revenue caption in the Market-Sensitive Revenue section.
The following table provides a reconciliation between reported net
interest income as presented on the Consolidated Statement of Income and
operating net interest income, which excludes trading-related net interest
income, the impact of credit card securitizations and special items.
25
<PAGE> 25
Management's Discussion and Analysis
The Chase Manhattan Corporation
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Interest Income (in millions)
Reported Net Interest Income $8,566 $8,253 4%
Less Trading-Related Net Interest Income (711) (613)
--------- ---------
Subtotal 7,855 7,640 3
Add Impact of Credit Card Securitizations 1,460 1,253
Less Interest on Tax Refunds (191) --
- --------------------------------------------------------------------------------
Operating Net Interest Income $9,124 $8,893 3%
- --------------------------------------------------------------------------------
Average Interest-Earning Assets (in billions)
Reported $296.8 $286.6 4%
Add Credit Card Securitizations 18.0 14.6
Less Trading-Related Assets (61.4) (76.1)
- --------------------------------------------------------------------------------
Managed $253.4 $225.1 13%
- --------------------------------------------------------------------------------
Net Yield on Interest-Earning Assets(a)
Reported 2.89% 2.89% -- bp
Add Impact of Securitizations 0.30 0.27 3
Impact of Trading-Related NII 0.48 0.80 (32)
Less Impact of Tax Refunds (0.06) -- (6)
- --------------------------------------------------------------------------------
Managed 3.61% 3.96% (35)bp
- --------------------------------------------------------------------------------
</TABLE>
(a) Disclosed on a taxable equivalent basis
bp- Denotes basis points; 100 bp equals 1%.
Operating net interest income was $9.12 billion in 1998, an increase of 3%
from 1997. The increase was primarily due to higher volumes of domestic consumer
loans (particularly credit cards and residential mortgages), and domestic
commercial loans, partially offset by the impact of generally narrower spreads
on loans. The net yield on a managed basis was 3.61%, a decrease of 35 basis
points in comparison with 1997, due to generally narrower spreads on loans.
Average managed interest-earning assets increased by 13% in 1998. The
increase reflected growth in consumer assets tempered by a moderation in
commercial asset growth resulting from the implementation of SVA. The growth in
interest-earning assets in 1998 was funded by higher deposit levels, a
reflection of liquidity within the consumer sector.
Trust, Custody and Investment Management Fees
Trust, custody and investment management fees rose 18% to $1.54 billion in 1998.
These favorable results were largely attributable to growth in assets under
custody, expanded securities lending activity, a higher level of institutional
and private banking assets under management and portfolio acquisitions.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Trust, Custody and Investment Management Fees:
Institutional(a) $ 839 $ 679
Personal(b) 456 419
Mutual Fund Fees(c) 145 104
Other Trust Fees 103 105
- --------------------------------------------------------------------------------
Total Trust, Custody and Investment Management Fees $1,543 $1,307
- --------------------------------------------------------------------------------
</TABLE>
(a) Represents fees for trustee, agency, registrar, securities lending and
broker clearing, safekeeping and maintenance of securities.
(b) Represents fees for trustee, estate, custody, advisory and investment
management services.
(c) Represents investment management, administrative, custody, and other fees
in connection with Chase's proprietary global mutual funds.
Credit Card Revenue
Credit card revenue on a reported basis increased 35% for 1998 due to continued
growth in credit card receivables (as a result of acquired portfolios and
increased co-branded activities) and the implementation of new pricing
initiatives. The increase in revenue for 1998 was partially reduced by a rise in
net charge-offs on the securitized portfolio, which decreased the excess
servicing fees Chase received from securitizations.
The following table provides a reconciliation between reported credit card
revenue as presented on the Consolidated Statement of Income and operating
credit card revenue, which excludes the impact of credit card securitizations.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Reported Credit Card Revenue $ 1,474 $ 1,088
Less Impact of Credit Card Securitizations (299) (233)
- --------------------------------------------------------------------------------
Operating Credit Card Revenue $ 1,175 $ 855
- --------------------------------------------------------------------------------
</TABLE>
For a further discussion of the credit card portfolio, see page 32.
Fees for Other Financial Services
Fees for other financial services increased to $2.09 billion in 1998. The
following table provides the significant components of fees for other financial
services.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Fees for Other Financial Services:
Service Charges on Deposit Accounts $ 368 $ 376
Fees in Lieu of Compensating Balances 344 314
Commissions on Letters of Credit and Acceptances 301 307
Mortgage Servicing Fees 192 231
Insurance Fees(a) 145 91
Brokerage and Investment Services 142 128
Loan Commitment Fees 136 120
Other Fees 465 416
- --------------------------------------------------------------------------------
Total Fees for Other Financial Services $2,093 $1,983
- --------------------------------------------------------------------------------
</TABLE>
(a) Insurance amount excludes certain insurance fees related to credit cards
and mortgage products, which are included in those revenue captions.
26
<PAGE> 26
Fees in lieu of compensating balances increased by $30 million in 1998.
Customers often pay for cash management or other services by maintaining
noninterest-bearing deposits. However, as interest rates decline, the required
compensating balance for a given level of service will rise. As a result, during
the lower interest rate environment of 1998, a greater volume of customers paid
a fee in lieu of maintaining a compensating balance.
Mortgage servicing fees declined for 1998 largely due to an increase in
the amortization of mortgage serving rights reflecting prepayments amid a lower
interest rate environment. This decline was partially offset by higher servicing
fees as a result of the larger servicing balance in 1998. Lower interest rates
also benefited mortgage originations and sales revenues, which are reported in
other revenues, as discussed below.
The higher level of loan commitment fees largely reflected increased
activity in Chase's acquisition financing business.
Higher fees related to loans serviced (notably auto loans) contributed to
the increase in other fees.
Other Revenue
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Other Revenue:
Residential Mortgage Origination/Sales Activities $356 $130
All Other Revenue 295 316
- --------------------------------------------------------------------------------
Operating Other Revenue 651 446
- --------------------------------------------------------------------------------
Gains on Sales of Partially-Owned Investments -- 102
Other Revenue - Credit Card Securitizations 13 27
- --------------------------------------------------------------------------------
Reported Other Revenue $664 $575
- --------------------------------------------------------------------------------
</TABLE>
Other revenue on a reported basis, which includes gains and losses from
the sale of nonstrategic assets and from securitizations, rose $89 million in
1998 from the prior year. The 1997 results included a $58 million gain on the
sale of Chase's remaining 20% investment in CIT and a $44 million gain on the
sale of a partially-owned foreign investment.
Other revenue on an operating basis was $651 million in 1998, an increase
of 46% from last year. Higher residential mortgage origination and portfolio
sales revenue, reflecting the favorable lower interest rate environment during
1998, accounted for the increase.
NONINTEREST EXPENSE
Total reported noninterest expense was $11.38 billion in 1998, an increase from
$10.09 billion last year. Excluding the impact of restructuring costs, special
items and foreclosed property expense, operating noninterest expense was $10.81
billion in 1998, an increase of 11% from the prior year. The growth in expenses
included costs associated with portfolio acquisitions, investment spending on
new product offerings, Year 2000, EMU and other technology spending, and higher
incentive costs, partially offset by the impact of the capitalization of certain
software costs. See Note One for a further discussion.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions, except ratios) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Salaries $ 4,988 $ 4,463
Employee Benefits 854 839
Occupancy Expense 798 767
Equipment Expense 890 792
Other Expense 3,282 2,894
- --------------------------------------------------------------------------------
Operating Noninterest Expense 10,812 9,755
Restructuring Costs 529 192
Accelerated Vesting of Stock-Based Incentive Awards
(included in Salaries on Income Statement) 37 135
Foreclosed Property Expense(a) 5 12
- --------------------------------------------------------------------------------
Reported Noninterest Expense $11,383 $10,094
- --------------------------------------------------------------------------------
Efficiency Ratio(b) 57.7% 58.1%
Operating Efficiency Ratio(b)(c) 54.3 54.9
- --------------------------------------------------------------------------------
</TABLE>
(a) Presented within Other Expense on the Consolidated Statement of Income.
For purposes of reviewing the results on an operating basis, these
expenses are reflected in Credit Costs.
(b) Excludes restructuring costs, foreclosed property expense, provision for
risk management instrument credit losses, costs associated with a real
estate investment trust ("REIT") subsidiary and special items.
(c) Excludes the impact of credit card securitizations.
[Graph 6 - See Appendix I]
Salaries and Employee Benefits
The increase in salaries and employee benefits on an operating basis for 1998
was due to higher incentive costs, mainly driven by a change in the mix of
Chase's revenue sources and a change in stock compensation (granting higher
levels of restricted stock and fewer employee stock options). Also contributing
was the net addition of 3,650 full-time equivalent employees. The increased head
count reflects the impact of investments in selected growth businesses,
particularly in the mortgage and credit card businesses within National Consumer
Services and the custody and fiduciary services businesses within Global
Services. These increases were offset by 1,847 staff reductions related to
initiatives to streamline support functions and realign certain business
activities.
27
<PAGE> 27
Management's Discussion and Analysis
The Chase Manhattan Corporation
The following table presents Chase's full-time equivalent employees for
the dates indicated.
<TABLE>
<CAPTION>
At December 31, 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Domestic 61,472 58,580
Foreign 11,211 10,453
- --------------------------------------------------------------------------------
Total Full-Time Equivalent Employees 72,683 69,033
- --------------------------------------------------------------------------------
</TABLE>
Occupancy and Equipment Expense
Occupancy expense remained relatively stable during 1998 compared with 1997. The
higher level of equipment expense during 1998 was due to an increase in
depreciation expense from recently capitalized equipment across all business
units. Also impacting equipment expense in 1998 was increased software expense
related to Year 2000 and EMU efforts. For a further discussion of Year 2000 and
EMU efforts, see the Operating Risk Management Section on page 41.
Other Expense
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Other Expense:
Professional Services $ 668 $ 575
Marketing Expense 419 415
Telecommunications 349 307
Travel and Entertainment 243 220
Amortization of Intangibles 261 172
Minority Interest(a) 50 74
All Other 1,292 1,131
- --------------------------------------------------------------------------------
Operating Other Expense $3,282 $2,894
- --------------------------------------------------------------------------------
</TABLE>
(a) Includes REIT minority interest expense of $44 million in each of 1998 and
1997.
Other expense for 1998 increased by $388 million when compared with 1997.
Professional services costs during 1998 reflected higher levels of contract
computer professionals associated with Year 2000 and EMU efforts. The $42
million increase in telecommunications costs during 1998 covers both
installation and usage and reflects the growth in business volume at all of
Chase's major business franchises. Portfolio acquisitions in late 1997 and 1998
contributed to the increase in amortization of intangibles expense and to higher
all other expense, which reflects increased servicing costs for these assets.
These increases were partially offset by a decline in minority interest expense
due to a foreign investment becoming a wholly-owned subsidiary in early 1998.
Restructuring Costs
During the 1998 first quarter, Chase incurred a 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 planned 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). At December 31, 1998, the reserve balance was $359 million and 1,847
positions had been eliminated. Chase expects that the remaining reserve related
to staff reductions will be largely used during the next 12 months.
It is anticipated that the annual savings from the charge should amount to
approximately $460 million. Depending on its view of revenue opportunities,
Chase may or may not reinvest all or a part of these expense savings in its
revenue-generating activities.
Residual merger-related expenses of $19 million and $192 million were
incurred in 1998 and 1997, respectively, relating to the merger of The Chase
Manhattan Corporation and Chemical Banking Corporation. Cumulative-to-date
merger-related expenses 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 will be taken by Chase.
CREDIT COSTS
Credit costs include provisions for loan losses and for risk management
instrument credit losses, foreclosed property expense and credit costs
associated with credit card securitizations. Chase's provision for credit
losses, which in 1998 equaled net charge-offs, was $1.55 billion.
The following table shows the components of credit costs.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Provision for Loan Losses $1,343 $ 804
Provision for Risk Management Instrument Credit Losses(a) 211 --
- --------------------------------------------------------------------------------
Total Provision for Credit Losses 1,554 804
Foreclosed Property Expense(b) 5 12
Credit Costs Associated with Credit Card Securitizations 1,148 993
- --------------------------------------------------------------------------------
Operating Credit Costs $2,707 $1,809
- --------------------------------------------------------------------------------
</TABLE>
(a) Included in Noninterest Revenue on the Consolidated Statement of Income.
(b) Included in Other Expense on the Consolidated Statement of Income.
Credit costs in 1998 were $2.71 billion, an increase of $898 million from
the 1997 level, primarily due to higher credit losses in the commercial
portfolio, particularly for exposures related to Asia and Russia, and the credit
card portfolio.
For a discussion of Chase's net charge-offs, see Credit-Related Portfolio
on page 31.
INCOME TAXES
Chase recognized income tax expense of $2.15 billion in 1998, compared with
$2.20 billion in 1997. Chase's effective tax rate was 36.2% for 1998, compared
with 37.3% for 1997.
28
<PAGE> 28
- --------------------------------------------------------------------------------
RISK MANAGEMENT
- --------------------------------------------------------------------------------
Chase is in the business of managing risk to create shareholder value. The major
risks to which Chase is exposed are credit, market, liquidity and operating
risk.
Chase's risk management is guided by several fundamental risk management
principles, including:
o Formal definition of risk management governance;
o Risk oversight independent of business units;
o Continual evaluation of risk appetite, communicated through risk limits;
o Diversification;
o Utilization of sophisticated risk management systems, including
value-at-risk analysis and portfolio stress testing; and
o Performance measurement (SVA) that allocates risk-adjusted capital for all
forms of risk.
Risk management and oversight begins with the Board of Directors and,
specifically, with the Risk Policy Committee of the Board, which approves a
general risk management mandate to govern these activities. The Risk Policy
Committee delegates the formulation of policy and day-to-day risk oversight and
management to Chase's Executive Committee and the three corporate risk
committees: the Credit Risk Committee, the Market Risk Committee and the
Capital Committee. The Executive Committee provides guidance regarding
strategies and corporate risk appetite and is responsible for an integrated view
of Chase's risk exposures including the interdependencies among its various
risks. The corporate risk committees have decision-making authority for their
respective areas of responsibility, with major policy decisions and risk
exposures subject to review by the Executive Committee. For an overview of
Chase's governance structure for risk management, see the chart below. Chase's
adoption of SVA which incorporates a risk-adjusted capital methodology, as its
primary performance measure, has strengthened its risk management discipline and
resulted in slower asset growth and a lower risk profile.
- --------------------------------------------------------------------------------
CREDIT RISK MANAGEMENT
- --------------------------------------------------------------------------------
Credit risk is the risk of loss due to default, which is defined as the failure
of a borrower or counterparty to fulfill its contractual obligations. In both
its consumer and commercial businesses, Chase seeks opportunities to take credit
risk prudently and manage it effectively in order to create value for its
shareholders. Credit risk is managed at both the transaction and portfolio
levels. It is a highly disciplined process, structured to preserve the
independence and integrity of risk assessment, but also integrated into business
management processes.
Chase's approach to managing credit risk begins with a comprehensive risk
measurement framework which is used as a basis for estimating the loss
characteristics, on average and over a cycle, of the various segments of its
portfolio. These estimates drive credit cost allocations to business units and
impact measurements of business unit performance.
Chase's day-to-day management of loans and other credit risk assets is
guided by policies and procedures established by the Chief Credit Officer, who
reports to Chase's Vice Chairman for Finance and Risk Management. These policies
are communicated throughout the organization and are an essential part of the
business culture. At both the business unit and corporate level, disciplined
processes are in place to seek to ensure that risks are accu-
--------------------------
Risk Policy Committee
of Board of Directors
--------------------------
o Oversees Risk Management
--------------------------
Executive Committee
--------------------------
o Strategic Guidance
o Integrated View
- ---------------------
Credit Risk Committee
- ---------------------
o Establishes policies for credit risk management and limits for country,
product, industry and single obligor exposures.
o Responsible for the methodology, models and assumptions to measure credit
risk.
o Oversees Chase's credit portfolio optimization strategies, risk profile
trends, critical problem portfolio and allowance for credit losses.
- ---------------------
Market Risk Committee
- ---------------------
o Establishes the policies and risk limits for all trading and balance sheet
related market risk and for investment securities activities.
o Responsible for the methodology, models and assumptions used to measure market
and interest rate risk.
o Monitors and reviews current positions to ensure compliance with
established limits.
- -----------------
Capital Committee
- -----------------
o Establishes Chase's corporate capital and liquidity policies.
o Approves policies and methodologies for internal capital allocation, SVA
and transfer pricing.
o Monitors and reviews policy execution and strategies.
29
<PAGE> 29
Management's Discussion and Analysis
The Chase Manhattan Corporation
rately assessed and properly monitored. Potential concentration risks for the
portfolio as a whole, as well as by product, industry, single obligor, risk
grade, and geography, are regularly assessed at the corporate level with a view
to improving overall portfolio diversification. Finally, the risk management
system is supported by a comprehensive management information infrastructure
which tracks and updates exposures on a daily basis.
Credit risk management must maintain a measure of independence from other
business objectives to preserve the integrity of the risk management process.
Two aspects of Chase's credit risk management processes are crucial to
maintaining this independence. First, the Chief Credit Officer of Chase has sole
responsibility for the credit risk measurement framework and therefore the costs
charged to business units for credit risk. He is also responsible for Chase's
credit policies and procedures, the determination of individual lending
authorities, the management of problem assets, and the monitoring of the
aggregate portfolio risk profile, including the assessment of potential
concentration risks. Second, there is an independent credit risk management
function within the major business franchises of Global Bank, Global Services
and National Consumer Services reporting jointly to the Chief Credit Officer and
the respective senior business executives. Within the franchises, credit risk
management units function at product, industry, country and regional levels,
reporting jointly to business executives at these levels and to credit
executives in the franchises' credit risk management functions. These units
approve significant new transactions and product offerings, have the final
authority over risk ratings for commercial exposures and credit risk assessment
for consumer products, and monitor the risk profile of the business unit's
portfolio. The presence of these credit units in the businesses is intended to
ensure that accurate risk assessment is a significant factor in the decision
making processes of these areas.
Risk Measurement: Chase's risk management discipline begins with a measurement
of the default risk associated with all credit exposures, either on or off the
balance sheet. These exposures include loans, receivables associated with
derivative and foreign exchange contracts, and lending-related commitments
(e.g., letters of credit and undrawn commitments to extend credit).
The risk measurement techniques are designed to estimate the losses which
should be expected from each segment of the credit risk portfolio and, most
importantly, the potential volatility of loss rates around the average or
expected level. Credit losses per se are not an indication of risk. If losses
were entirely predictable, the expected loss rate could be factored into product
prices and covered as a normal and recurring cost of doing business. It is the
volatility or uncertainty of loss rates around expected levels which creates
risk and is the primary concern of credit risk management.
The risk measurement framework is applied to both consumer and commercial
exposures. However, the resulting risk profiles are markedly different. Broadly
speaking, losses on consumer exposures are more predictable, less volatile and
less cyclical than losses on commercial exposures. For the latter, the loss
volatility can be dramatic over the course of an economic cycle.
The Cost of Credit Risk - Loss Provisions and Capital Allocation: Chase uses its
estimates of expected loss and loss volatility, respectively, to set
risk-adjusted loss provisions and to allocate credit risk capital by portfolio
segment. Within the consumer businesses, expected loss and capital factors are
applied to the major product categories (e.g. mortgage loans, credit cards, auto
loans) and segments within those categories. The commercial portfolio is
segmented by risk rating (on a 25 risk grade scale) and maturity and expected
loss and capital factors are applied to each segment of the resulting matrix.
Off-balance sheet exposures are converted to loan equivalent amounts, based on
their probability of being drawn, before applying the expected loss and capital
factors.
For business units with significant credit risk, credit risk capital is a
major determinant of their total capital allocation. To produce positive SVA,
business units must earn sufficient returns to cover both their allocated loss
provision and the cost of capital. This system is intended to ensure that
business managers are appropriately sensitized to the importance of credit risk
management in evaluating their unit's performance.
Credit Risk Management for Consumer Assets: The consumer credit risk management
process utilizes sophisticated portfolio modeling, credit scoring and decision
support tools to project credit quality performance and to establish credit
underwriting standards. Risk
[Graph 7 - See Appendix I]
30
<PAGE> 30
parameters are established in the early stages of the development of a consumer
credit product, and the cost of credit risk is an integral part of the product's
profit dynamics. Consumer portfolios are continuously monitored to identify
deviations from expected performance and to identify shifts in consumers'
patterns of behavior. Chase has an active program to securitize its consumer
assets, which helps to fund consumer asset growth and manages product
concentrations.
Credit Risk Management for Commercial Assets: Credit risk management begins with
the client selection process. Chase's global industry approach helps Chase to be
continuously aware of an industry's developing risk profile so that exposures to
particular industries, segments of industries, or obligors can be identified and
minimized where risk is increasing. In overseas regions, client selection is
especially important and Chase's strategy is to focus on the largest, leading
firms, particularly in developing markets.
Concentration management is key to managing commercial credit risk. Chase
aggressively manages concentrations by obligor, risk grade, industry, product
and geographic location. Chase's strategy of origination for distribution and
its lead position in the loan syndication market support these concentration
risk management objectives. In addition, the discipline of distributing loans to
independent investors provides an external validation of Chase's judgement with
respect to credit profiles, structures and pricing.
CREDIT-RELATED PORTFOLIO
The following table presents credit-related information for the dates indicated.
The discussion that follows includes the impact of loans and derivatives.
<TABLE>
<CAPTION>
As of or for the year ended Credit-Related Nonperforming Past Due 90 Days and Average Annual
December 31, Assets Assets Net Charge-offs Over and Accruing Net Charge-off Rate
- ------------ ------------------ ------------- ------------------ ----------------- -------------------
(in millions, except ratios) 1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSUMER LOANS
Domestic Consumer:
1-4 Family Residential Mortgages $ 41,831 $ 38,680 $ 313 $ 340 $ 31 $ 32 $ 3 $ 2 .08% .08%
Credit Card - Reported 14,229 15,631 -- -- 762 543 302 256 5.74 4.45
Credit Card Securitizations(a) 18,033 16,852 -- -- 1,148 976 379 377 6.36 6.67
- ------------------------------------------------------------------------------------------------------------------------------------
Credit Card - Managed 32,262 32,483 -- -- 1,910 1,519 681 633 6.10 5.66
Auto Financings 16,456 13,243 50 31 77 61 20 20 .54 .48
Other Consumer(b) 8,375 8,543 6 7 167 171 97 142 1.90 1.89
- ------------------------------------------------------------------------------------------------------------------------------------
Total Domestic Consumer 98,924 92,949 369 378 2,185 1,783 801 797 2.29 2.06
Foreign Consumer 3,807 3,976 23 21 25 14 10 7 .65 .39
- ------------------------------------------------------------------------------------------------------------------------------------
Total Consumer Loans 102,731 96,925 392 399 2,210 1,797 811 804 2.22 2.00
- ------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL LOANS
Domestic Commercial:
Commercial and Industrial 43,123 37,931 331 258 (66) 23 42 18 NM .06
Commercial Real Estate 3,984 5,030 41 75 (14) (37) 1 14 NM NM
Financial Institutions 6,583 6,652 1 1 (2) (1) -- -- NM NM
- ------------------------------------------------------------------------------------------------------------------------------------
Total Domestic Commercial Loans 53,690 49,613 373 334 (82) (15) 43 32 NM NM
Foreign Commercial:
Commercial and Industrial 24,664 27,628 603 164 408 9 7 -- 1.60 .04
Commercial Real Estate 367 713 -- -- -- -- -- -- NM NM
Financial Institutions 4,537 6,989 22 10 24 (8) 24 -- .43 NM
Foreign Governments 4,798 3,438 50 1 6 (3) -- -- .13 NM
- ------------------------------------------------------------------------------------------------------------------------------------
Total Foreign Commercial Loans 34,366 38,768 675 175 438 (2) 31 -- 1.20 NM
DERIVATIVE AND FX CONTRACTS
Commercial and Industrial 12,488 13,182 13 -- 45 -- -- -- .33 NM
Financial Institutions 19,414 23,107 37 -- 91 -- -- 1 .43 NM
Foreign Governments 1,353 2,187 -- -- -- -- -- -- NM NM
- ------------------------------------------------------------------------------------------------------------------------------------
Total Derivative and FX Contracts 33,255 38,476 50 -- 136 -- -- 1 .37 NM
- ------------------------------------------------------------------------------------------------------------------------------------
Total Commercial Credit-Related 121,311 126,857 1,098 509 492 (17) 74 33 .40 NM
- ------------------------------------------------------------------------------------------------------------------------------------
Total Managed Credit-Related $224,042 $223,782 $1,490 $ 908 $ 2,702 $ 1,780 $885 $837 1.21% .85%
- ------------------------------------------------------------------------------------------------------------------------------------
Assets Acquired as
Loan Satisfactions 116 110
- ------------------------------------------------------------------------------------------------------------------------------------
Total Nonperforming Assets $ 1,606 $1,018
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents the portion of Chase's credit card receivables that have been
securitized. For further discussion of credit card securitizations, see
pages 19 and 76.
(b) Consists of installment loans (direct and indirect types of consumer
finance), student loans and unsecured revolving lines of credit. There are
essentially no credit losses in the student loan portfolio due to the
existence of Federal and State government agency guarantees. At December
31, 1998 and 1997, student loans that were past due 90 days and over and
still accruing were approximately $40 million and $43 million,
respectively.
NM- Not meaningful
31
<PAGE> 31
Management's Discussion and Analysis
The Chase Manhattan Corporation
Chase's managed credit assets totaled $224 billion at December 31, 1998,
which was relatively stable compared with year-end 1997. Chase's portfolio is
balanced between commercial and consumer assets, with consumer assets comprising
46% of Chase's year-end managed credit-related portfolio. Over the past
decade, the consumer portfolio has been increasing as a percentage of total
credit-related assets and management expects this trend to continue.
Chase's nonperforming assets at year-end 1998 increased $588 million from
the 1997 year-end level. The change reflects an increase in nonperforming Asian
and Russian assets. Total nonperforming assets in Asia increased by $419 million
from 1997 year-end to $501 million at December 31, 1998. Total nonperforming
assets in Russia were $51 million at December 31, 1998, versus none at the end
of the prior year.
Total net charge-offs on a retained basis increased by $750 million during
1998. Total net charge-offs on a managed basis were $2,702 million in 1998,
compared with $1,780 million in 1997. The increases in net charge-offs on both a
managed and retained basis are due to increased foreign commercial charge-offs,
primarily as a result of conditions in Asia and Russia, and the generally lower
credit quality of an acquired credit card portfolio, a factor which was
generally anticipated at the time of its acquisition. Asian commercial net
charge-offs were $339 million in 1998, compared with $37 million in 1997.
Russian-related commercial net charge-offs were $224 million in 1998. Of this
amount, $117 million were net charge-offs on resale agreements. There were no
Russian-related commercial net charge-offs in 1997.
Management expects that credit costs in 1999, on a managed basis, will be
of a similar magnitude to the total of such costs incurred in 1998. For the
consumer portfolio, management expects net charge-off rates will be
approximately the same as in 1998; however, reported net charge-offs will vary
depending on the level of credit card securitizations completed during the year.
The net charge-off rate for the commercial portfolio was 40 bp in 1998. The
commercial charge-off rate varies more than the consumer rate, and over time
Chase expects commercial annual net charge-offs to be in a range of 30-50 bp.
CONSUMER LOAN PORTFOLIO
Chase's consumer portfolio is diversified by many different products, including
mortgages, credit cards and auto loans. The portfolio is primarily domestic and
is geographically well-diversified.
Consumer Loans by Geographic Region
<TABLE>
<CAPTION>
Residential Managed Credit Auto
Mortgage Loans Card Loans Financings
--------------------- --------------------- ---------------------
December 31, (in millions) 1998 1997 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
New York City $ 5,889 $ 5,980 $ 2,096 $ 2,222 $ 1,421 $ 1,234
New York (Excluding New York City) 1,955 1,446 2,204 2,239 805 748
Remaining Northeast 6,072 5,944 5,969 5,892 3,705 3,059
- ------------------------------------------------------------------------------------------------------------------------------------
Total Northeast 13,916 13,370 10,269 10,353 5,931 5,041
Southeast 5,208 4,983 5,807 5,597 2,571 1,832
Midwest 3,434 2,236 5,918 6,281 1,648 1,293
Texas 3,311 3,257 2,588 2,293 2,961 2,408
Southwest (Excluding Texas) 1,174 1,071 1,484 1,517 827 699
California 11,029 8,998 4,297 4,502 2,081 1,679
West (Excluding California) 3,759 4,765 1,899 1,940 437 291
Foreign 1,467 1,472 718 615 1 15
- ------------------------------------------------------------------------------------------------------------------------------------
Total $43,298 $40,152 $32,980 $33,098 $16,457 $13,258
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Residential Mortgage Loans: 1-4 family residential mortgage loans at December
31, 1998 increased 8% when compared with the 1997 year-end, reflecting increased
origination activity due to lower interest rates. This portfolio's asset quality
continues to be strong. The 1998 domestic loss rate remained at .08 %.
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 increase in average managed credit card receivables was largely the
result of a portfolio acquired in late 1997, totaling approximately $4.0 billion
in outstandings. The increase in the average net charge-off rate for 1998 is due
to the generally anticipated lower credit quality of this portfolio.
32
<PAGE> 32
Auto Financings: This portfolio consists of auto loans and leases with leases
representing approximately 43% of the total portfolio at December 31, 1998,
compared with 49% at year-end 1997. Auto financings increased 24% from 1997
reflecting strong consumer demand due to favorable pricing programs. The 1998
charge-off rate of .54% is indicative of this portfolio's selective approach to
asset origination. The increase in loss rate compared with 1997 is a result of a
discontinued program. The residual value of the auto lease segment of the
portfolio is periodically reviewed and adjusted to reflect current market
conditions and vehicle disposition experience.
Other Consumer Loans: Other consumer loans consist primarily of unsecured
revolving lines of credit, manufactured housing financing and student loans. The
domestic portfolio decrease of $168 million or 2% from the prior year resulted
from declines in student loans and revolving lines of credit. The credit profile
of these domestic businesses varies and on average generated a 1.90% loss rate
in 1998 with $167 million in net charge-offs.
COMMERCIAL LOAN PORTFOLIO
Chase's commercial portfolio is comprised of loans made principally to
corporations, financial institutions, and governmental entities.
Commercial and Industrial: The commercial and industrial portfolio consists
primarily of loans made to large corporate and middle market customers. Domestic
commercial and industrial loans had net recoveries of $66 million in 1998,
compared with net charge-offs of $23 million in 1997, reflecting a continuation
of the strong credit quality experienced over the past several years.
The foreign commercial and industrial portfolio totaled $24.7 billion at
year-end 1998, a decrease of $3.0 billion from 1997, as Chase continued to
reduce its exposure to emerging markets in Asia and Latin America. Nonperforming
loan levels at December 31, 1998, as well as net charge-off levels for 1998,
increased in comparison with the prior year, due to the financial conditions in
Asia and Russia.
Commercial Real Estate: The commercial real estate portfolio represents loans
secured primarily by real property, other than loans secured by mortgages on 1-4
family residential properties (which are included in the consumer loan
portfolio). Chase carefully monitors by specific limits its exposure to
commercial real estate. Commercial real estate loans decreased $1.4 billion from
1997, principally as a result of securitizations, sales, and repayments.
Financial Institutions: The financial institutions portfolio includes loans to
commercial banks and companies whose businesses primarily involve lending,
financing, investing, underwriting or insurance. Loans to financial institutions
were down $2.5 billion in 1998 from 1997 levels, primarily in the foreign
portion of the portfolio. The portfolio experienced net charge-offs of $22
million in 1998, compared with a net recovery of $9 million in 1997.
Foreign Governments: This portfolio consists of loans to governments in foreign
countries, and their ministries, departments and agencies. Foreign government
loans were $4.8 billion at December 31, 1998, a $1.4 billion increase from
year-end 1997. Net charge-offs for the portfolio were $6 million in 1998,
compared with net recoveries of $3 million in 1997.
CROSS-BORDER EXPOSURE
Chase has an extensive country risk process to aid in managing its exposures. As
part of this process, Chase includes both its credit-related lending and trading
exposures in assessing its cross-border risk. Total cross-border assets are 24%
of Chase's total managed assets. Chase's exposure in Latin America and Asia
totals 8% of total managed assets. Chase has reduced Latin American exposure by
25% this year and has reduced Asian exposure by 33%. These reductions were made
in response to the increased risk in these markets. Management believes Chase's
level of cross-border exposure is appropriate given its cross-border business
mix. Chase remains committed to these markets. The following table presents
Chase's cross-border exposure to Latin American and Asian countries.
Cross-border disclosure is based on the Federal Financial Institutions
Examination Council ("FFIEC") guidelines governing the determination of
cross-border risk. Prior periods disclosed within the table have been restated
to conform with these guidelines.
In addition, at December 31, 1998 Chase had approximately $96 million in
lending and trading-related exposure to Russia. Chase also had approximately $87
million in resale agreements collateralized by non-ruble denominated Russian
debt at December 31, 1998.
33
<PAGE> 33
Management's Discussion and Analysis
The Chase Manhattan Corporation
<TABLE>
<CAPTION>
Selected Country Exposure 1998 1997
----------------------------------------------------------------------------------- ------------
Net Local Total Total
Lending- Trading- Country Foreign Exchange Resale Cross-Border Cross-Border
December 31, (in billions) Related(a) Related(b) Assets(c) and Derivatives(d) Agreements(e) Exposure Exposure
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
LATIN AMERICA
Brazil $ 1.6 $ 0.1 $0.5 $ 0.1 $ 0.9 $ 3.2 $ 4.8
Argentina 2.0 0.1 0.1 0.1 0.5 2.8 3.2
Mexico 1.3 0.1 0.1 0.3 0.4 2.2 2.9
Chile 0.8 -- 0.1 -- -- 0.9 1.5
Colombia 0.8 -- -- -- -- 0.8 0.8
Venezuela 0.3 0.1 -- -- -- 0.4 1.0
All Other Latin America(f) 0.9 -- -- 0.1 -- 1.0 0.8
- ------------------------------------------------------------------------------------------------------------------------------------
Total Latin America $ 7.7 $ 0.4 $0.8 $ 0.6 $ 1.8 $11.3 $ 15.0
- ------------------------------------------------------------------------------------------------------------------------------------
ASIA
Korea $ 1.0 $ 0.1 $0.9 $ 0.4 $ -- $ 2.4 $ 5.3
Indonesia 1.0 -- -- 0.2 -- 1.2 2.2
Thailand -- -- 0.7 0.2 -- 0.9 1.4
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal 2.0 0.1 1.6 0.8 -- 4.5 8.9
- ------------------------------------------------------------------------------------------------------------------------------------
Hong Kong 0.6 -- -- 0.2 -- 0.8 1.1
Singapore 0.7 -- -- 0.1 -- 0.8 1.6
Philippines 0.3 -- 0.3 -- -- 0.6 0.9
Malaysia 0.1 -- 0.4 0.1 -- 0.6 0.9
China 0.5 -- -- 0.1 -- 0.6 0.7
All Other Asia 0.4 -- -- 0.1 -- 0.5 0.6
- ------------------------------------------------------------------------------------------------------------------------------------
Total Asia excluding Japan,
Australia and New Zealand $ 4.6 $ 0.1 $2.3 $ 1.4 $ -- $ 8.4 $ 14.7
- ------------------------------------------------------------------------------------------------------------------------------------
Japan $ 2.6 $ 1.4 $0.1 $ 1.1 $ 1.7 $ 6.9 $ 8.8
Australia 0.4 -- 0.7 0.8 -- 1.9 2.8
New Zealand 0.6 -- -- -- -- 0.6 0.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total Japan, Australia and
New Zealand $ 3.6 $ 1.4 $0.8 $ 1.9 $ 1.7 $ 9.4 $ 11.9
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes loans and accrued interest, interest-bearing deposits with banks,
acceptances, other monetary assets, issued letters of credit and undrawn
commitments to extend credit.
(b) Includes cross-border trading debt and equity instruments.
(c) Represents local country assets less local country liabilities. At
December 31, 1998, the amounts of local country assets that have been
netted against local country liabilities in accordance with the FFIEC
definition of cross border exposure were $5.5 billion for Hong Kong, $3.0
billion for Japan, $1.5 billion for Australia, $0.6 billion for Brazil and
$1.7 billion for the other countries presented above, none of which exceed
$0.3 billion.
(d) Represents mark-to-market exposure of foreign exchange and derivative
contracts. The amounts are presented after taking into account the effect
of legally enforceable master netting agreements.
(e) Approximately $1.1 billion (or 60%) of the exposure to Latin America and
approximately $1.3 billion (or 75%) of the exposure to Japan represents
resale agreements with investment grade counterparties from G-7 (Group of
7) countries. G-7 countries are the United States, United Kingdom,
Germany, Japan, Italy, France, and Canada.
(f) Excludes Bermuda and Cayman Islands.
DERIVATIVE AND FOREIGN EXCHANGE CONTRACTS
In the normal course of its business, Chase utilizes various derivative and
foreign exchange financial instruments to meet the financial needs of its
customers, to generate revenues through its trading activities, and to manage
its exposure to fluctuations in interest and currency rates.
Chase uses the same credit procedures when entering into derivative and
foreign exchange transactions as it does for traditional lending products.
Chase believes the best measure of credit risk is the mark-to-market
exposure amount of the derivative or foreign exchange contract. This is also
referred to as repayment risk or the replacement cost.
While notional principal is the most commonly used volume measure in the
derivative and foreign exchange markets, it is not a useful measure of credit or
market risk. The notional principal typically does not change hands, but is
simply a quantity upon which interest and other payments are calculated. The
notional principal amounts of Chase's derivative and foreign exchange products
greatly exceed the possible credit and market loss that could arise from such
transactions.
34
<PAGE> 34
Mark-to-market exposure is a measure, at a point in time, of the value of
a derivative or foreign exchange contract in the open market. When the
mark-to-market is positive, it indicates the counterparty owes Chase and,
therefore, creates a repayment risk for Chase. When the mark-to-market is
negative, Chase owes the counterparty. In this situation, Chase does not have
repayment risk.
When Chase has more than one transaction outstanding with a counterparty,
and there exists a legally enforceable master netting agreement with the
counterparty, the "net" mark-to-market exposure represents the netting of the
positive and negative exposures with the same counterparty. Net mark-to-market
is, in Chase's view, the best measure of credit risk, when there is a legally
enforceable master netting agreement between Chase and the counterparty.
Chase's primary counterparties in derivatives and foreign exchange are
investment grade financial institutions, most of whom are dealers in these
products. A breakdown of Chase's net mark-to-market exposures by customer type
and credit rating is presented in the following table.
<TABLE>
<CAPTION>
Investment Non-Investment
At December 31, 1998 Grade Grade Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial Institutions 65% 6% 71%
Non- Financial Institutions 19 10 29
- --------------------------------------------------------------------------------
Total 84% 16% 100%
- --------------------------------------------------------------------------------
</TABLE>
Many of Chase's derivative and foreign exchange contracts are short-term,
which also mitigates credit risk as transactions settle quickly. The table below
provides the remaining maturities of derivative and foreign exchange contracts
outstanding at December 31, 1998 and 1997. Percentages are based upon remaining
contract life of mark-to-market exposure amounts. The lengthening of the
maturity profile during 1998 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>
1998 1997
------------------------------------------------- -------------------------------------------------
Interest Foreign Equity, Interest Foreign Equity,
Rate Exchange Commodity and Rate Exchange Commodity and
At December 31, Contracts Contracts Other Contracts Total Contracts Contracts Other Contracts Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Less than 1 year 15% 93% 38% 37% 27% 95% 51% 54%
1 to 5 years 48 5 59 37 47 5 48 32
Over 5 years 37 2 3 26 26 -- 1 14
- --------------------------------------------------------------------------------------------------------------------------------
Total 100% 100% 100% 100% 100% 100% 100% 100%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Chase does not deal, to any significant extent, in derivatives which
dealers of derivatives (such as other banks and financial institutions) consider
to be leveraged. As a result, the mark-to-market exposure of such derivatives
was not material at December 31, 1998.
Chase's net charge-offs arising from derivative and foreign exchange
transactions were $136 million in 1998. There were no net charge-offs on these
types of transactions during 1997. At December 31, 1998, nonperforming
derivative contracts were $50 million, compared with none in 1997. The increases
in both net charge-offs and nonperforming derivative contracts were due to
severe economic conditions impacting Chase's Asian- and Russian-related
counterparties.
ALLOWANCE FOR CREDIT LOSSES
Chase deems its allowance for credit losses at December 31, 1998 to be adequate
(i.e., sufficient to absorb losses that may currently exist for all credit
activities, but are not yet identifiable). Estimating losses is inherently
uncertain and depends on many factors, including general macroeconomic and
political conditions, rating migration, structural changes within industries
that 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.
Allowance For Credit Losses
<TABLE>
<CAPTION>
At December 31, (in millions, except ratios) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Allowance for Credit Losses:
Loans $3,552 $3,624
Risk Management Instruments 150(a) 75
Lending-Related Commitments 170 170
- --------------------------------------------------------------------------------
Aggregate Allowance $3,872 $3,869
- --------------------------------------------------------------------------------
Allowance for Loan Losses to:
Nonperforming Loans 247% 399%
Loans at Period-End 2.06 2.15
Average Loans 2.10 2.27
- --------------------------------------------------------------------------------
Aggregate Allowance for Loan Losses and
Risk Management Instrument Credit Losses to:
Nonperforming Credit-Related Assets 248% 407%
Credit-Related Assets at Period-End 1.80 1.79
Average Credit-Related Assets 1.80 1.90
- --------------------------------------------------------------------------------
</TABLE>
(a) During the third quarter of 1998, as part of the trading valuation
process, the allowance for risk management instrument credit losses was
increased by $75 million, through the provision for risk management
instrument credit losses, in response to the adverse market conditions in
Asia and Russia. The provision for risk management instrument credit
losses was $211 million for 1998.
35
<PAGE> 35
Management's Discussion and Analysis
The Chase Manhattan Corporation
- --------------------------------------------------------------------------------
MARKET RISK MANAGEMENT
- --------------------------------------------------------------------------------
Market risk is the exposure to an adverse change in the value of financial
instruments caused by a change in market prices or rates, including changes in
interest rates, foreign exchange rates, securities prices and commodity prices.
Under the direction of the Vice Chairman for Finance and Risk Management,
Chase's Market Risk Management Group functions independently from the business
units in identifying, assessing and controlling market risk. The Market Risk
Management Group consists of nearly 60 professionals located globally in New
York, London, Hong Kong and Brazil. The Group's primary responsibilities include
the measurement, monitoring, assessment and control of global market risk
throughout Chase. These include setting and overseeing risk limits; approving
unique, non-standard transactions; evaluating and approving new products;
developing risk measurement and capital allocation methodologies; reporting risk
at the actual exposure level; conducting assessments of the accuracy of risk
measures and portfolio stress tests and managing on-site reviews of business
units taking market risk.
Chase has developed a comprehensive market risk function that incorporates
best practices in risk management techniques with disciplined risk management
executions. Chase's limit structure extends to desk-level activities and
includes a listing of authorized instruments, maximum tenors, corporate
sign-offs, statistical and non-statistical limits and loss advisories. The limit
structure helps ensure alignment of corporate risk appetite with trading and
investment risk-taking activities.
For several years, Chase has been utilizing value-at-risk ("VAR") as one
measure of market risk. VAR is a measure of potential loss to risk positions
from adverse market moves. However, Chase believes that the key to enhancing the
stability of revenues from risk activities is measuring, controlling and
managing exposure to extreme stress events. As a result, stress testing is
weighted equally with VAR as a risk measurement tool and as a tactical tool for
managing risk. This dual approach is designed to ensure a risk profile that is
diverse, disciplined and flexible enough to capture revenue-generating
opportunities during times of normal market moves, but that is also prepared for
periods of market turmoil.
Risk Measurement: Chase's two principal risk measurement tools are VAR and
stress testing. VAR measures market risk in an everyday market environment,
while stress testing measures market risk in an abnormal market environment.
The VAR, a dollar amount, is a forward looking estimate of the potential
for loss. The VAR looks forward one trading day, and is calculated as the loss
level expected to be exceeded with a 1 in 100 chance. The VAR methodology used
at Chase is called historical simulation. Historical simulation assumes that
actual observed historical changes in market indices such as interest rates,
exchange rates and commodity prices reflect the future possible changes in those
same rates and prices. In its daily VAR calculations, Chase uses the most recent
264 trading days' historical changes in market prices and rates in its
historical simulation. Chase's historical simulation provides different views of
market risk in end-of-day positions, by aggregating positions by business,
geography, currency or type of risk.
Statistical models of risk measurement, such as VAR, allow an objective,
independent assessment of how much risk is actually being taken. Chase's
historic simulation methodology permits consistent and comparable measurement of
risk across instruments and portfolios, irrespective of the level of
aggregation. Historical simulation also makes it easy to examine the VAR for any
desired segment of the total portfolio and to examine that segment's
contribution to total risk. The VAR calculations are performed for all material
trading portfolios and market risk-related asset/liability management ("ALM")
portfolios. Results are reported at various levels of detail by business unit
and in the aggregate.
Chase believes its use of an historical simulation methodology for its VAR
calculations is not as dependent on assumptions about the distribution of
portfolio losses as are other VAR methodologies, that are parameter-based.
Nevertheless, all statistical models have a degree of uncertainty associated
with the assumptions employed. The Chase VAR methodology assumes that the
relationships among market rates and prices that have been observed over the
last year are valid for estimating risk over the next trading day. In addition,
Chase's VAR estimate, like all other VAR methodologies, is dependent on the
quality of available market data. Recognizing these shortcomings, Chase uses
diagnostic information to continually evaluate the reasonableness of its VAR
model. This information includes the calculation of statistical confidence
intervals around the daily VAR estimate and the use of daily "backtesting" of
VAR against actual financial results.
The VAR for Chase's trading and market risk-related ALM portfolios were as
follows.
<TABLE>
<CAPTION>
Marked-to-Market Trading Portfolio Market Risk-Related ALM Activities
---------------------------------------------- ---------------------------------------------
At December 31, At December 31,
Year Ended December 31, 1998 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 $ 22.8 $ 15.4 $ 36.8 $ 20.1 $ 55.5 $ 37.3 $ 94.0 $ 79.7
Foreign Exchange VAR 8.6 2.2 21.6 2.3
Commodities VAR 3.6 2.3 5.0 2.6
Equities VAR 3.8 1.9 9.4 4.6
Less: Portfolio Diversification (13.1) NM NM (8.9)
- ------------------------------------------------------------------------------------------------------------------------------------
Total VAR $ 25.7 $ 15.6 $ 44.9 $ 20.7 $ 55.5 $ 37.3 $ 94.0 $ 79.7
- ------------------------------------------------------------------------------------------------------------------------------------
</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.
36
<PAGE> 36
Marked-to-Market Trading Portfolio and Market Risk-Related ALM Activities
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997
(in millions) Average VAR Average VAR
- --------------------------------------------------------------------------------
<S> <C> <C>
Marked-to-Market Trading Portfolio $ 25.7 $ 23.0
Market Risk-Related ALM Activities 55.5 45.5
Less: Portfolio Diversification (17.3) (17.5)
- --------------------------------------------------------------------------------
Aggregate Average VAR $ 63.9 $ 51.0
- --------------------------------------------------------------------------------
At December 31, 1998 1997
(in millions) VAR VAR
- --------------------------------------------------------------------------------
Marked-to-Market Trading Portfolio $ 20.7 $ 28.5
Market Risk-Related ALM Activities 79.7 49.2
Less: Portfolio Diversification (17.9) (14.0)
- --------------------------------------------------------------------------------
Aggregate VAR $ 82.5 $ 63.7
- --------------------------------------------------------------------------------
</TABLE>
Chase's average aggregate VAR (VAR for combined trading and market
risk-related ALM activities) for the year ended December 31, 1998 was $63.9
million and at December 31, 1998 was $82.5 million. Chase's aggregate average
and period-end VARs are less than the sum of the respective trading and ALM VARs
shown in the above table (by $17.3 million and $17.9 million, respectively) due
to risk offsets, resulting from portfolio diversifications that occur across the
trading and ALM portfolios.
Chase conducts daily VAR "backtesting" for both regulatory compliance with
the Basle Committee on Banking Supervision market risk capital rules and for
internal evaluation of VAR against trading revenues. During 1998, a daily
trading loss exceeded that day's trading VAR on 2 days. This compares to an
expected number of approximately 3 days. Considering the unsettled markets of
1998, Chase believes its VAR model performed at a very high level of accuracy
during 1998.
Whereas VAR captures Chase's exposure to unlikely events in normal
markets, stress testing discloses the risk of unlikely but plausible events in
abnormal markets. Portfolio stress testing is integral to the market risk
management process--co-equal with, and complementary to, VAR as a risk
measurement and control tool. Chase's corporate stress tests are built around
changes in market rates and prices that result from pre-specified economic
scenarios, including both actual historical and hypothetical market events. As
with VAR, stress test calculations are performed for all material trading and
investment portfolios and market risk-related ALM portfolios.
Stress test scenarios are chosen so they test "conventional wisdom" and
focus on risks relevant to the positions taken in Chase's portfolios. A key to
the success of stress testing at Chase is continuous review and updating of the
stress scenarios. This is a dynamic process that is responsive to changes in
positions and economic events, and looks to prior stress tests to identify areas
where scenario refinements can be made. Corporate stress tests are performed
approximately monthly on randomly selected dates. As of December 31, 1998,
Chase's corporate stress tests consisted of seven historical and hypothetical
scenarios. These historical scenarios included the 1994 bond market sell-off,
the 1994 Mexican Peso crisis and the 1997 Asian markets crisis.
Stress testing results are used at all levels of Chase, from the trading
desk to the Board of Directors, to monitor and control market risk. Among the
controls instituted at Chase are a review of the trading portfolio if potential
stress test losses exceed Board of Directors-approved advisory limits and the
incorporation of stress test exposures into Chase's internal capital allocation
methodology. The result of these measures is an approach to risk taking that
focuses on identifying and managing potential exposure to stress events in ways
that do not sacrifice the profitability of day-to-day activities.
Evaluation of Risk Appetite: Chase utilizes a comprehensive limit structure as
part of its market risk management process. In addition to establishing VAR
limits on market risk activities at the aggregate and business unit levels,
Chase maintains nonstatistical risk limits to mitigate risk in those instances
where statistical assumptions break down. Nonstatistical measures include net
open posi-
[Graph 8 - See Appendix I]
37
<PAGE> 37
Management's Discussion and Analysis
The Chase Manhattan Corporation
tions, basis point values, position concentrations and position turnover.
Criteria for risk limits include, among other factors, relevant market analysis,
market liquidity, prior track record, business strategy and management
experience and depth. Risk limits are reviewed regularly to maintain consistency
with trading strategies and material developments in market conditions, and are
updated at least twice a year. Chase also uses stop-loss advisories to inform
senior management when losses of a certain threshold are sustained from a
trading activity. Chase believes the use of nonstatistical measures and
stop-loss advisories in tandem with VAR limits reduces the likelihood that
potential trading losses will reach the daily VAR limit.
Histogram: The preceding chart contains a histogram of Chase's daily market
risk-related revenue for 1998 and 1997. Market risk-related revenue is defined
as the daily change in value in mark-to-market trading portfolios plus any
trading-related net interest income or other revenue. Trading-related net
interest income includes interest recognized on interest-earning and
interest-bearing trading-related positions as well as management allocations
reflecting the funding cost or benefit associated with trading positions.
In 1998, Chase posted positive daily market risk-related revenue for 222
out of 259 days, with 49 days exceeding positive $20 million. In 1997, Chase
posted positive daily market risk-related revenue for 229 out of 259 days, with
37 days exceeding positive $20 million. The increase in days exceeding positive
$20 million reflected continued efforts to build key trading activities.
In 1998, Chase incurred 6 daily trading losses in excess of negative $20
million, which was in line with stress test predictions. Five of these six days
of losses occurred in late August and September and resulted from the adverse
global market conditions which occurred in the 1998 third quarter.
Asset/Liability Management: Chase is also exposed to market risk as the revenues
it derives from its asset-liability activities are sensitive to changes in
market prices or rates. Interest rate risk is the most significant type of
market risk exposure arising from Chase's asset-liability activities. Interest
rate risk involves the potential decline in the economic value of Chase (the
value of Chase's assets or liabilities) due to adverse changes in rates that
impact revenues such as net interest income, securities gains/losses and other
interest sensitive income/expense items. Interest rate risk arises from a
variety of factors, including differences in timing between the maturity or the
repricing of Chase's assets, liabilities and derivatives. For example, Chase's
net interest income, as well as its economic value, is affected by changes in
the level of market interest rates as the repricing characteristics of loans and
other interest-earning assets do not necessarily match those of deposits or
other borrowings. Chase is also exposed to basis risk, which is the difference
in pricing characteristics of two instruments. For example, basis risk arises
when prime-based lending is financed with Libor-based liabilities.
A key element of Chase's ALM process is that it allows the assumption of
market risk by a limited number of authorized business units with close contacts
to the markets. Interest rate risk is generally managed with consideration for
both total return and reported earnings. The interest rate risk profile of
Chase's assets, liabilities and derivatives exposures is modified based on an
ongoing assessment of fundamental trends in interest rates, economic
developments and technical analysis.
Beginning in 1999, oversight of Chase's ALM and market risk management
functions have converged under the Market Risk Committee. That committee is now
responsible for establishing the interest rate risk appetite for Chase's trading
activities as well as for its non-trading activities. These latter
responsibilities were formerly with the Asset and Liability Committee, which was
eliminated at year-end. The Market Risk Committee is supported by a
comprehensive risk management process that identifies, measures, manages and
monitors market risk undertaken by asset-liability activities.
The ALM and market risk management processes at Chase have been
functionally converging. Chase plans to extend these procedures (VAR and stress
test measurements), control disciplines and measurement practices to all its
asset-liability activities.
Measuring Interest Rate Sensitivity: Chase, as part of its ALM process, employs
a variety of cash (primarily securities) and derivative instruments in managing
its exposure to fluctuations in market interest rates. In managing exposure,
Chase uses net gap exposure and earnings simulation models to quantify its
earnings at risk (the risk to earnings from adverse movements in interest
rates).
An example of aggregate net gap analysis is presented below. Assets,
liabilities and derivative instruments are placed in gap intervals based on
their repricing dates. Assets and liabilities for which no specific contractual
repricing or maturity dates exist, or whose contractual maturities do not
reflect their expected maturities, are placed in gap intervals based on
management's judgment and statistical analysis, as applicable, concerning their
most likely repricing behaviors. Derivative instruments used in interest rate
sensitivity management are also included in the applicable gap intervals.
Interest Rate Sensitivity Table
<TABLE>
<CAPTION>
At December 31, 1998 (in millions) 1-3 Months 4-6 Months 7-12 Months 1-5 Years Over 5 Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet $(37,879) $ 480 $ 6,800 $ 43,395 $(12,796) $ --
Derivative Instruments Affecting
Interest Rate Sensitivity(a) (4,922) 803 (2,788) 2,542 4,365 --
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity Gap (42,801) 1,283 4,012 45,937 (8,431) --
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative Interest Rate Sensitivity Gap $(42,801) $(41,518) $(37,506) $ 8,431 $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------------------
% of Total Assets (12)% (11)% (10)% 2% --% --%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents net repricing effect of derivative positions, which include
interest rate swaps, futures, forward rate agreements and options, that
are used as part of Chase's overall ALM .
38
<PAGE> 38
A net gap for each time period is calculated by subtracting the
liabilities repricing in that interval from the assets repricing. A negative gap
(more liabilities repricing than assets) will benefit earnings in a declining
interest rate environment and will detract from earnings in a rising interest
rate environment.
At December 31, 1998, Chase had $37.5 billion more liabilities than assets
repricing within one year (including net repricing effects of derivative
instruments), amounting to 10% of total assets.
The cumulative interest rate sensitivity gaps include exposure to U.S.
dollar interest rates as well as exposure to non-U.S. dollar rates in currency
markets in which Chase does business. Since U.S. dollar interest rates and
non-U.S. dollar interest rates may not move in tandem, the overall cumulative
gaps may tend to differ from the actual exposures of Chase.
Gap analysis is the simplest representation of Chase's interest rate
sensitivity. However, it cannot reveal the impact of factors such as
administered rates (e.g., the prime lending rate), pricing strategies on
consumer and business deposits, changes in balance sheet mix, or the effects of
various options embedded in balance sheet instruments. Accordingly, Chase
conducts simulations of earnings at risk under a variety of market interest rate
scenarios that include all assets, liabilities and ALM derivative instruments.
Earnings simulations consider forecasted balance sheet changes (such as asset
sales, securitizations, prepayments and reinvestments), and forecasted changes
in interest rate spreads and interest-sensitive fee income to provide an
estimate of earnings at risk for given changes in interest rates.
Various interest rate scenarios are employed to quantify earnings
sensitivities. Chase's primary exposure is to fluctuations in U.S. dollar
interest rates. At December 31, 1998, U.S. dollar-denominated exposures were
subjected to an immediate interest rate shock of 100bp. Interest rate shocks for
major non-U.S. dollar currencies are adjusted to reflect their historical
volatility relative to the U.S. dollar rate volatility. These non-U.S. dollar
rate shocks ranged in magnitude from approximately 100bp to 1500bp.
At December 31, 1998, based on Chase's simulation models and applying
immediate increases to various market interest rates, earnings at risk over the
next twelve months are estimated to be approximately 3% of projected 1999 net
income. During 1998, Chase's earnings at risk to an immediate rise in interest
rates (based on the previously mentioned rate shocks) averaged less than 4% of
net income. The hypothetical rate shocks are used to calculate 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.
All the measurements of risk used by Chase are based upon its business mix
and interest rate exposures at a particular point in time. The exposures change
continuously as a result of Chase's ongoing businesses and its risk management
initiatives. While management believes these measures provide a meaningful
representation of Chase's interest rate sensitivity, they do not take into
account all business developments that have an effect on net income or fair
value, such as changes in credit quality or the size and composition of the
balance sheet.
Foreign currency exposures arising from nontrading activities conducted in
Chase's overseas units and net investments in overseas entities are managed
through the use of foreign exchange forward contracts. Foreign currency
exposures are matched on a currency-by-currency basis to hedge the impact of
foreign exchange rate changes. At December 31, 1998, Chase's earnings
sensitivity to changes in foreign currency rates was immaterial.
Impact of ALM Derivative Activity: The following table reflects the deferred
gains and losses on closed derivative contracts and unrecognized gains and
losses on open derivative contracts utilized in Chase's ALM activities.
<TABLE>
<CAPTION>
December 31, (in millions) 1998 1997 Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ALM Derivative Contracts:
Net Deferred Gains $ 402 $ -- $ 402
Net Unrecognized Gains (Losses) 110 (392) 502
- --------------------------------------------------------------------------------
Net ALM Derivative Gains (Losses) $ 512 $(392) $ 904
- --------------------------------------------------------------------------------
</TABLE>
Net deferred gains and losses on closed contracts relate to futures,
forwards and swaps used in connection with available-for-sale securities, loans,
deposits and debt. The net unrecognized gains and losses relating to ALM
activities are largely the result of interest rate swaps, options, forward and
futures contracts primarily used in connection with loans, deposits and debt.
For a further discussion of unrecognized gains/losses on open derivative
contracts, see Note Twenty-Two.
The deferred gains and losses at December 31, 1998 are expected to be
amortized as yield adjustments in net interest income or recognized in
noninterest revenue over the periods reflected in the following table. Premiums
relating to open ALM option contracts are included on the balance sheet and are
amortized as a reduction to net interest income or noninterest revenue over the
following periods.
Amortization of Net Deferred Gains on Closed ALM Contracts and of Premiums on
Open ALM Options Contracts
<TABLE>
<CAPTION>
Net Deferred Option
Year Ended December 31, (in millions) Gains Premiums
- ------------------------------------------------------------------------
<S> <C> <C>
1999 $ 68 $ 35
2000 70 39
2001 47 18
2002 47 15
2003 and After 170 14
- ------------------------------------------------------------------------
Total $402 $121
- ------------------------------------------------------------------------
</TABLE>
39
<PAGE> 39
Management's Discussion and Analysis
The Chase Manhattan Corporation
- --------------------------------------------------------------------------------
LIQUIDITY RISK MANAGEMENT
- --------------------------------------------------------------------------------
LIQUIDITY
Liquidity management addresses Chase's ability to meet deposit withdrawals
either on demand or at contractual maturity, to repay borrowings as they mature,
and to make new loans and investments as they arise. Liquidity is managed on a
daily basis, both at the parent company and subsidiary levels, and incorporates
known and unanticipated cash needs. Liquidity management provides the proper mix
of core and non-core deposits and capital to ensure that asset generation is not
disrupted. In managing liquidity, Chase takes into account the various legal
limitations on the extent to which its subsidiary banks may pay dividends to
their parent companies or finance or otherwise supply funds to certain of their
affiliates.
A major source of liquidity for the bank subsidiaries of Chase derives
from their ability to generate core deposits. Core deposits include all deposits
except noninterest-bearing time deposits, foreign deposits and certificates of
deposit of $100,000 or more.
Chase generates substantial deposits from its global services businesses.
Chase is also active in generating low-cost wholesale deposits (including
foreign deposits and purchases of Federal funds) and large-denomination
certificates of deposit.
Chase is an active participant in the capital markets and issues
commercial paper, medium-term notes, long-term debt, capital notes of
subsidiaries, and preferred and common stock.
Chase holds marketable securities and other short-term investments that
can readily be converted to cash. In addition, as part of Chase's ongoing
capital management process, loan syndication networks and securitization
programs are utilized to facilitate the timely disposition of assets when deemed
desirable. Moreover, contingency plans exist and could be implemented on a
timely basis to minimize the risks associated with dramatic changes in market
conditions should the need arise.
During the difficult market conditions of the latter half of 1998, Chase
maintained its ability to access global capital and funding markets, and in
certain markets experienced liquidity flow increases.
CAPITAL
Chase's level of capital at December 31, 1998 remained strong, with capital
ratios well in excess of regulatory guidelines. At December 31, 1998, Tier 1 and
Total Capital ratios were 8.3% and 12.0%, respectively, and the Tier 1 Leverage
ratio was 6.4%.
Management intends to continue Chase's disciplined approach to asset
growth and maintain Chase's Tier 1 capital ratio within its target range of 8%
to 8.25%. Capital generated in excess of this target ratio will be used to
purchase Chase's common stock or for future reinvestment and acquisition
opportunities.
The following chart shows the sources and uses of Chase's capital for 1998
and 1997.
<TABLE>
<CAPTION>
Year Ended December 31, (in billions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Sources and Uses of Free Cash Flow
Operating Earnings $ 4.0 $ 3.9
Less: Special Charges (0.2) (0.1)
Less: Dividends (1.3) (1.2)
Less: Capital to Support Internal Growth (0.4) (2.6)
- --------------------------------------------------------------------------------
Free Cash Flow $ 2.1 $ --
- --------------------------------------------------------------------------------
Uses of Free Cash Flow:
Increases (Decreases) in Capital Ratios $1.2 $(1.6)
Acquisitions 1.0 0.4
Net Repurchases (0.1) 1.2
- --------------------------------------------------------------------------------
Total Uses of Free Cash Flow $ 2.1 $ --
- --------------------------------------------------------------------------------
</TABLE>
During 1998, Chase had been purchasing its common stock under an
authorization announced in October 1996. From inception through December 31,
1998 (the date the authorization expired), Chase repurchased 83.3 million common
shares ($4.3 billion) and reissued from treasury approximately 49.9 million
common shares ($2.3 billion) under its benefit plans, resulting in a net
repurchase of 33.4 million common shares ($2.0 billion).
In November 1998, Chase authorized a new repurchase program, effective
January 4, 1999. Under the new authorization, Chase may repurchase up to $3
billion of its common stock in the open market or through negotiated
transactions, in addition to any amounts necessary to provide for issuances
under Chase's dividend reinvestment plan and its various stock-based employee
benefit plans.
In the first quarter of 1998, Chase raised the cash dividend on its common
stock to $.36 per share, from $.31 per share. Chase has, over the past several
years, been paying a common stock dividend that has generally been equal to
approximately 25% to 35% of its operating earnings less preferred stock
dividends. Chase's future dividend policies will be determined by its Board of
Directors, taking into consideration Chase's earnings and financial condition
and applicable governmental regulations and policies.
[Graph 9 - See Appendix I]
40
<PAGE> 40
<TABLE>
<CAPTION>
December 31, (in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Tier 1 Capital:
Common Stockholders' Equity $22,435 $19,907
Nonredeemable Preferred Stock 1,028 1,740
Minority Interest(a) 2,806 2,440
Less: Goodwill 2,030 1,310
Nonqualifying Intangible Assets 123 183
- --------------------------------------------------------------------------------
Tier 1 Capital $24,116 $22,594
- --------------------------------------------------------------------------------
Tier 2 Capital:
Long-Term Debt and Other Instruments
Qualifying as Tier 2 7,093 7,128
Qualifying Allowance for Credit Losses 3,620 3,581
- --------------------------------------------------------------------------------
Tier 2 Capital 10,713 10,709
- --------------------------------------------------------------------------------
Total Qualifying Capital $34,829 $33,303
- --------------------------------------------------------------------------------
</TABLE>
(a) Minority interest includes the Guaranteed Preferred Beneficial Interests
in Corporation's Junior Subordinated Deferrable Interest Debentures and
the Preferred Stock of the REIT Subsidiary. For a further discussion, see
Notes Six and Seven.
During 1998, the total capitalization of Chase (the sum of Tier 1 and Tier
2 Capital) increased by $1.5 billion to $34.8 billion. The increase was
primarily due to the retention of earnings generated during 1998 (net income
less common and preferred dividends), the issuance of $448 million of capital
securities (net of discount) by Chase subsidiaries and the issuance of $200
million of preferred stock. Partially offsetting these amounts was the impact of
increased goodwill from acquisitions and the redemption of $912 million of
preferred stock bearing higher dividend rates. An additional $528 million of
Chase's preferred stock becomes redeemable in 1999. See Notes Six through Eight.
[Graph 10 - See Appendix I]
- --------------------------------------------------------------------------------
OPERATING RISK MANAGEMENT
- --------------------------------------------------------------------------------
Chase, like all large corporations, is exposed to many types of operating risk,
including the risk of fraud by employees or outsiders, unauthorized transactions
by employees, and errors relating to computer and telecommunications systems.
Chase maintains a system of controls that is designed to keep operating risk at
appropriate levels in view of the financial strength of Chase, the
characteristics of the businesses and markets in which Chase operates,
competitive circumstances and regulatory considerations. However, from time to
time in the past, Chase has suffered losses from operating risk and there can be
no assurance that Chase will not suffer such losses in the future.
EMU
On January 1, 1999, the "euro" was introduced. On that day, the exchange ratios
of the currencies of eleven countries participating in the first phase of the
European Economic and Monetary Union were fixed. The euro became a currency in
its own right; and the currencies of the participating countries, while existing
for a three-year transition period, continue only as fixed denominations of the
euro. As a result of its remediation and testing efforts as well as its
extensive coordination with its customers, counterparties, agent banks and
regulatory agencies, Chase successfully converted to the euro on January 1,
1999. Since that date, Chase has been conducting its foreign exchange, custody,
cash management and funds transfer services as well as all its risk management
and internal accounting functions, for those currencies that constitute it,
entirely in the euro, without having experienced any material interruptions in
its business. At the same time, Chase has retained the flexibility to service
its clients who wish to continue to transact business in national currency
units. The costs to prepare for the euro amounted to approximately $70 million
in 1998; these costs were expensed as incurred.
YEAR 2000
Overview. Chase recognized in mid-1995 the need to create a coordinated approach
to managing the Year 2000 problem. It established a Chase-wide program to
provide strong, comprehensive management of the issue. A Year 2000 Enterprise
Program Office, together with 34 business area project offices, coordinates,
manages and monitors all aspects of the Year 2000 effort on a global basis, both
technical- and business-related. The Program Office reports directly to the
Executive Committee of Chase and is responsible for Chase's Year 2000
remediation efforts. In addition, a Year 2000 Core Team, consisting of senior
managers from internal audit, technology risk and control, financial management
and control, the technology infrastructure division, legal and the Year 2000
Enterprise Program Office, provides independent oversight of the process. The
Core Team, which also reports directly to the Executive Committee of Chase, is
charged with identifying major risks and ensuring necessary management attention
for timely resolution of project issues. The Core Team reviews progress on a
monthly basis and during 1998 conducted formal quarterly reviews of all project
office progress. During 1999, the Core Team will conduct reviews more frequently
with an emphasis on the resolution of outstanding items.
Chase's Year 2000 Program continues to evolve. Commencing January 1, 1999,
Chase established a Year 2000 Business Risk Council, comprised of approximately
20 senior business leaders. The Business Risk Council is an interdisciplinary
forum that brings together business line managers, risk managers, and
representatives of key staff functions for identifying potential business risks
related to Year 2000, and coordinating planning and readiness efforts. These
include refinements to business contingency
41
<PAGE> 41
Management's Discussion and Analysis
The Chase Manhattan Corporation
plans for Year 2000, and the establishment of a Year 2000 command center
structure and rapid response teams.
Current Status. Chase's Year 2000 Program has been, and continues to be, tracked
against a well-defined set of milestones. The scope of Chase's Year 2000 Program
involves approximately 180,000 technical infrastructure components (e.g., LAN
servers and data center equipment); approximately 3,900 business software
applications (of which approximately 1,000 are provided by third-party vendors);
1,400 locations worldwide, at which up to 21 building systems at each location
are being reviewed; and over 77,000 desktops.
Significant progress occurred during 1998 and Chase met all regulatory
milestones. The following table sets forth the progress achieved by Chase during
1998 in its Year 2000 efforts and projected milestones for 1999.
<TABLE>
<CAPTION>
% Remediated
------------
Completed in 1998 Projected for 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Type of System 3/31 6/30 9/30 12/31 3/31 6/30
- --------------------------------------------------------------------------------
Technical Infrastructure 81% 97% 98% 99% 100%(a) 100%(a)
- --------------------------------------------------------------------------------
Business Software
Applications(b) 17% 32% 61% 93% 98% 100%(a)
- --------------------------------------------------------------------------------
Facility Systems 63% 80% 85% 85% 92% 100%(a)
- --------------------------------------------------------------------------------
Desktop Systems 15% 37% 53% 64% 69% 100%(a)
- --------------------------------------------------------------------------------
</TABLE>
(a) While activities are scheduled to be completed by the dates indicated,
efforts will continue around external testing and certification throughout
the year.
(b) For Business Software Applications, of the 93% of the systems remediated,
83% have also been tested to be Year 2000 compliant at December 31, 1998.
For the remaining types of systems, the percent remediated also indicates
the percent tested to be Year 2000 compliant.
In 1999, attention will continue to be focused on completing the
remediation of all business software applications, as well as ensuring that
those software application systems that have been remediated, tested and
certified as Year 2000-compliant remain compliant. This entails continued
re-certification of systems throughout the remainder of 1999. In addition, Chase
is increasing its tracking and risk management of third party providers.
A major focus of 1999 will be continued customer and "street" (i.e.,
industry-wide) testing. These activities commenced during the third quarter of
1998 and, by the end of 1998, Chase had participated in street tests with over
50 agencies and organizations, including Depository Trust Company (DTC), New
York ACH, The Federal Reserve Bank of New York, CHIPS, Government Securities
Clearing Corporation, Society for Worldwide Interbank Financial
Telecommunication (SWIFT), Cedel, Euroclear and Central Depository of Taiwan.
Street testing has already been scheduled with 30 world-wide organizations
during 1999 including, among others, Cedel, Euroclear, SWIFT, DTC, Mortgage
Bankers Association, Mortgage Backed Securities Clearing Corporation, National
Securities Clearing Corporation, MasterCard and Visa. In addition, Chase will
participate in Securities Industry Association testing in March and April and
the Global Payments test in June 1999. Chase expects to participate in industry
tests as they are scheduled throughout 1999. Testing with third parties is
critical, since a failure of a major external interface could have a material
adverse effect on Chase's operations.
As part of its focus on business-unit and overall corporate risk, Chase
continues to make progress on its major customer and business-partner due
diligence. By September 30, 1998, Chase had completed the evaluation of its
major credit customers, assessed their Year 2000 efforts and incorporated any
Year 2000 customer risks into its credit risk analysis processes. Chase has
completed an initial evaluation of potential Year 2000 impacts upon its funding
capability in order to incorporate any such risks into its capital and liquidity
planning. Fiduciary risk management procedures include, among other Year 2000
related activities, assessment of the risks that may be posed to the values of
assets under discretionary management as a result of Year 2000 problems faced by
the issuers of securities held in clients' accounts and an evaluation of Year
2000 readiness of counterparties. Chase's outside service providers (such as
correspondents, sub-custodians and investment advisors) have been contacted to
determine their Year 2000 readiness. Monitoring of their progress is ongoing.
The results are being incorporated into Chase's risk management processes and
contingency planning.
Costs. At December 31, 1998, Chase's estimate to remediate its Year 2000 issues
remains at approximately $363 million. This included costs incurred during 1997
and 1998 as well as costs expected to be incurred during 1999. Chase's Year 2000
costs were $186 million during 1998 and are currently estimated at $127 million
for 1999. These costs include the costs of remediation, testing, third party
assessment, and contingency planning, but do not include approximately $33
million of depreciation costs for Year 2000-compliant equipment to be expensed
beyond December 31, 1999.
Risk Management and Contingency Planning. In its normal course of business,
Chase manages many types of risk. Chase recognizes that the risks presented by
Year 2000 are unique given the pervasive nature of the problem and the higher
likelihood that Year 2000 risk may present itself in multiple, simultaneous
impacts. Because of this, Chase has adjusted and will continue to adjust its
risk management processes and contingency plans to take the most probable
anticipated effects into account. Chase believes Year 2000 disruptions, if they
occur, may manifest themselves to financial institutions in three distinct waves
- -- liquidity problems, as evidenced by a "flight to quality" or preference for
cash; operational problems, which may trigger disruptions in the financial
markets; and credit problems, as individuals, companies or countries experience
financial losses as a result of liquidity or operational issues. In this regard,
Chase has begun its event planning for the Year 2000 with the goal of preventing
or mitigating these potential disruptions. In addition, Chase will incorporate
into its Year 2000 readiness plans its experience from its EMU conversion.
Chase's Year 2000 event planning includes creation of command centers;
performance of dress rehearsals and simulation modeling for various possible
business and operational risks; establishment of special rapid response
technology teams; scheduling of availability of key personnel; additional
training and testing activities; and establishment of rapid decision processes.
42
<PAGE> 42
- --------------------------------------------------------------------------------
ACCOUNTING AND REPORTING DEVELOPMENTS
- --------------------------------------------------------------------------------
Derivatives
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 on the balance sheet. The change in a derivative's fair
value is generally to be 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 would 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
(calendar year 2000), 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 currently assessing the impact of the
adoption of SFAS 133 on its hedging activities and its effect on its financial
condition and operating performance.
- --------------------------------------------------------------------------------
COMPARISON BETWEEN 1997 AND 1996
- --------------------------------------------------------------------------------
Results of Operations
Chase's operating earnings were $3.85 billion in 1997, an increase of 9% from
1996. Earnings per share, on a diluted basis, increased 15% when compared with
the prior year.
Reported net income was $3.71 billion in 1997, compared with $2.46 billion
in 1996. Diluted net income per share was $4.01 in 1997 compared with $2.47 in
1996.
Operating revenues in 1997 rose 8% to $17.70 billion, reflecting a 14%
increase in market-sensitive revenues and a 6% increase in less market-sensitive
revenues. Market-sensitive revenue growth in 1997 included double-digit
increases over 1996 in investment banking fees, securities gains and private
equity gains, reflecting a favorable market environment for these products.
Trading-related revenue in 1997 rose 4% from the 1996 level, despite the
difficult market conditions that existed in the 1997 fourth quarter.
The increase in less market-sensitive revenues from 1996 reflected higher
trust and investment management fees and credit card revenue. Operating net
interest income was $8.89 billion in 1997, a 2% increase from the previous year.
The increase was primarily due to higher volumes of consumer-related loans
(particularly credit cards and auto financing).
Operating expense was $9.76 billion in 1997, an increase of 5% from the
prior year. The increase in 1997 was primarily due to higher incentive costs,
equipment expense and expenses related to marketing for the co-branded Wal-Mart
MasterCard, PC Banking and Better Banking products and services.
Residual merger-related expenses of $192 million and $164 million were
incurred during 1997 and 1996, respectively, relating to the merger of The Chase
Manhattan Corporation and Chemical Banking Corporation. At the March 31, 1996
merger date, a $1.65 billion restructuring charge had been incurred.
Credit costs on an operating basis during 1997 were $1.81 billion, a $358
million increase from the 1996 level. The increase was the result of continued
strong growth in credit card outstandings due, in large part, to increased card
utilization and improvement in activation and retention programs. Provision for
loan losses, which in 1997 equaled net charge-offs, decreased by $93 million or
10% from the 1996 level. The decreases in both the provision and net charge-offs
were the result of net recoveries in the commercial loan portfolio as well as a
lower level of consumer net charge-offs on a retained basis.
Income tax expense in 1997 was $2.20 billion, compared with $1.35 billion
in 1996. The 1996 amount included tax benefits related to restructuring costs as
well as aggregate tax benefits and refunds of $132 million. The effective tax
rate was 37.3% for 1997, compared with 38.0% (excluding the aforementioned tax
benefits and refunds) for 1996.
Lines of Business Results
Global Bank's operating revenue in 1997 rose $484 million, or 6% over 1996, due
mainly to increases in fee revenue, trading-related revenue and higher
securities gains. Cash operating earnings and SVA for 1997 increased $225
million and $210 million, respectively, over 1996.
National Consumer Services operating revenue in 1997 rose $678 million, or
10% over 1996, due mainly to higher revenue driven by higher loan volume in
credit cards and mortgage banking products. Cash operating earnings and SVA for
1997 increased $84 million and $56 million, respectively, over 1996, due to
higher revenue and the benefit of merger-related savings. Partially offsetting
these increases were higher credit costs for credit cards, auto loans and
unsecured revolving lines of credit and higher expenses related to marketing
initiatives and new product offerings.
Global Services operating revenue in 1997 rose $217 million, or 10% over
1996, due to strong revenue growth, reflecting an increase in assets under
custody and new business initiatives. Cash operating earnings and SVA for 1997
increased $104 million and $110 million, respectively, over 1996, due to higher
revenue as well as continued productivity gains.
43
<PAGE> 43
Management's Report on Responsibility for Financial Reporting
and Report of Independent Accountants
To Our Stockholders
The management of Chase has the responsibility for preparing the accompanying
consolidated financial statements and for their integrity and objectivity. The
statements were prepared in accordance with generally accepted accounting
principles. The consolidated financial statements include amounts that are based
on management's best estimates and judgements. Management also prepared the
other information in the annual report and is responsible for its accuracy and
consistency with the consolidated financial statements.
Management maintains a comprehensive system of internal control to assure
the proper authorization of transactions, the safeguarding of assets, and the
reliability of the financial records. The system of internal control provides
for appropriate division of responsibility and is documented by written policies
and procedures that are communicated to employees. Chase maintains a strong
internal auditing program that independently assesses the effectiveness of the
system of internal control and recommends any possible improvements. Management
believes that as of December 31, 1998, Chase maintains an effective system of
internal control.
The Audit Committee of the Board of Directors reviews the systems of
internal control and financial reporting. The Committee meets and consults
regularly with management, the internal auditors and the independent accountants
to review the scope and results of their work.
The accounting firm of PricewaterhouseCoopers LLP has performed an
independent audit of Chase's financial statements. Management has made available
to PricewaterhouseCoopers LLP all of Chase's financial records and related data,
as well as the minutes of stockholders' and directors' meetings. Furthermore,
management believes that all representations made to PricewaterhouseCoopers LLP
during its audit were valid and appropriate. The firm's report appears below.
/s/ Walter V. Shipley
Walter V. Shipley
Chairman and Chief Executive Officer
/s/ Thomas G. Labrecque
Thomas G. Labrecque
President and Chief Operating Officer
/s/ Marc J. Shapiro
Marc J. Shapiro
Vice Chairman
Finance and Risk Management
/s/ Dina Dublon
Dina Dublon
Executive Vice President and Chief Financial Officer
January 19, 1999
[LOGO] PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP o 1177 Avenue of the Americas o New York, NY 10036
To the Board of Directors and Stockholders of The Chase Manhattan Corporation:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
The Chase Manhattan Corporation and its subsidiaries at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Corporation's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
January 19, 1999
44
<PAGE> 44
Consolidated Balance Sheet
The Chase Manhattan Corporation
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
December 31, (in millions, except share data) 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 17,068 $ 15,704
Deposits with Banks 7,212 2,886
Federal Funds Sold and Securities Purchased Under Resale Agreements 18,487 30,928
Trading Assets:
Debt and Equity Instruments 24,844 34,641
Risk Management Instruments (Net of Allowance for Credit Losses of $150
in 1998 and $75 in 1997) 32,848 37,752
Securities:
Available-for-Sale 62,803 49,755
Held-to-Maturity (Market Value: $1,703 in 1998 and $2,995 in 1997) 1,687 2,983
Loans (Net of Allowance for Loan Losses of $3,552 in 1998 and $3,624 in 1997) 169,202 164,830
Premises and Equipment 4,055 3,780
Due from Customers on Acceptances 1,223 1,719
Accrued Interest Receivable 2,316 3,359
Other Assets 24,130 17,184
- -----------------------------------------------------------------------------------------------------------
Total Assets $ 365,875 $ 365,521
- -----------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Domestic:
Noninterest-Bearing $ 47,541 $ 46,603
Interest-Bearing 85,886 71,576
Foreign:
Noninterest-Bearing 4,082 3,205
Interest-Bearing 74,928 72,304
--------- ---------
Total Deposits 212,437 193,688
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 41,632 56,126
Commercial Paper 7,788 4,744
Other Borrowed Funds 7,239 6,861
Acceptances Outstanding 1,223 1,719
Trading Liabilities 38,502 52,438
Accounts Payable, Accrued Expenses and Other Liabilities, Including the
Allowance for Credit Losses of $170 in 1998 and 1997 14,291 12,526
Long-Term Debt 16,187 13,387
Guaranteed Preferred Beneficial Interests in Corporation's Junior
Subordinated Deferrable Interest Debentures 2,188 1,740
- -----------------------------------------------------------------------------------------------------------
Total Liabilities 341,487 343,229
- -----------------------------------------------------------------------------------------------------------
Commitments and Contingencies (See Note Twenty-Six)
PREFERRED STOCK OF SUBSIDIARY 550 550
STOCKHOLDERS' EQUITY
Preferred Stock 1,028 1,740
Common Stock (Authorized 1,500,000,000 Shares,
Issued 881,688,611 Shares in 1998 and 881,506,592 Shares in 1997) 882 441
Capital Surplus 9,836 10,360
Retained Earnings 13,544 11,086
Accumulated Other Comprehensive Income 392 112
Treasury Stock, at Cost (33,703,249 Shares in 1998 and 39,577,640 Shares in 1997) (1,844) (1,997)
- -----------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 23,838 21,742
- -----------------------------------------------------------------------------------------------------------
Total Liabilities, Preferred Stock of Subsidiary and Stockholders' Equity $ 365,875 $ 365,521
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
45
<PAGE> 45
Consolidated Statement of Income
The Chase Manhattan Corporation
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Year ended December 31, (in millions, except per share data) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Loans $ 13,389 $ 12,921 $ 12,468
Securities 3,616 3,028 2,862
Trading Assets 2,431 2,770 1,898
Federal Funds Sold and Securities Purchased Under Resale Agreements 2,211 2,607 2,135
Deposits with Banks 642 525 537
- -----------------------------------------------------------------------------------------------------
Total Interest Income 22,289 21,851 19,900
- -----------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 6,840 6,561 6,038
Short-Term and Other Borrowings 5,612 5,903 4,630
Long-Term Debt 1,271 1,134 901
- -----------------------------------------------------------------------------------------------------
Total Interest Expense 13,723 13,598 11,569
- -----------------------------------------------------------------------------------------------------
Net Interest Income 8,566 8,253 8,331
Provision for Loan Losses 1,343 804 897
- -----------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 7,223 7,449 7,434
- -----------------------------------------------------------------------------------------------------
NONINTEREST REVENUE
Investment Banking Fees 1,502 1,136 950
Trust, Custody and Investment Management Fees 1,543 1,307 1,176
Credit Card Revenue 1,474 1,088 954
Fees for Other Financial Services 2,093 1,983 1,923
Trading Revenue 1,449 1,323 1,371
Provision for Risk Management Instrument Credit Losses (211) -- --
Securities Gains 609 312 135
Private Equity Gains 967 831 749
Other Revenue 664 575 286
- -----------------------------------------------------------------------------------------------------
Total Noninterest Revenue 10,090 8,555 7,544
- -----------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries 5,025 4,598 4,232
Employee Benefits 854 839 926
Occupancy Expense 798 767 824
Equipment Expense 890 792 724
Restructuring Costs 529 192 1,814
Other Expense 3,287 2,906 2,647
- -----------------------------------------------------------------------------------------------------
Total Noninterest Expense 11,383 10,094 11,167
- -----------------------------------------------------------------------------------------------------
Income Before Income Tax Expense 5,930 5,910 3,811
Income Tax Expense 2,148 2,202 1,350
- -----------------------------------------------------------------------------------------------------
NET INCOME $ 3,782 $ 3,708 $ 2,461
- -----------------------------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 3,684 $ 3,526 $ 2,242
- -----------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE:
Basic $ 4.35 $ 4.15 $ 2.57
Diluted 4.24 4.01 2.47
- -----------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
46
<PAGE> 46
Consolidated Statement of Changes in Stockholders' Equity
The Chase Manhattan Corporation
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Year ended December 31, (in millions) 1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCK
Balance at Beginning of Year $ 1,740 $ 2,650 $ 2,650
Issuance of Stock 200 -- --
Redemption of Stock (912) (910) --
- -------------------------------------------------------------------------------------------
Balance at End of Year 1,028 1,740 2,650
- -------------------------------------------------------------------------------------------
COMMON STOCK
Balance at Beginning of Year 441 441 458
Issuance of Common Stock for a Two-for-One Stock Split 441 -- --
Retirement of Treasury Stock -- -- (20)
Issuance of Stock -- -- 3
- -------------------------------------------------------------------------------------------
Balance at End of Year 882 441 441
- -------------------------------------------------------------------------------------------
CAPITAL SURPLUS
Balance at Beginning of Year 10,360 10,459 11,075
Issuance of Common Stock for a Two-for-One Stock Split (441) -- --
Retirement of Treasury Stock -- -- (433)
New Issuances of Stock -- -- 42
Shares Issued and Commitments to Issue Common Stock for
Employee Stock-Based Awards and Related Tax Effects (83) (99) (225)
- -------------------------------------------------------------------------------------------
Balance at End of Year 9,836 10,360 10,459
- -------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at Beginning of Year 11,086 8,610 7,986
Net Income 3,782 3,708 2,461
Retirement of Treasury Stock -- -- (557)
Cash Dividends Declared:
Preferred Stock (98) (182) (219)
Common Stock (1,226) (1,050) (1,061)(a)
- -------------------------------------------------------------------------------------------
Balance at End of Year 13,544 11,086 8,610
- -------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at Beginning of Year 112 (271) (226)
Other Comprehensive Income 280 383 (45)
- -------------------------------------------------------------------------------------------
Balance at End of Year 392 112 (271)
- -------------------------------------------------------------------------------------------
TREASURY STOCK, AT COST
Balance at Beginning of Year (1,997) (895) (1,107)
Purchase of Treasury Stock (1,091) (2,169) (2,037)
Reissuance of Treasury Stock 1,244 1,067 1,239
Retirement of Treasury Stock -- -- 1,010
- -------------------------------------------------------------------------------------------
Balance at End of Year (1,844) (1,997) (895)
- -------------------------------------------------------------------------------------------
Total Stockholders' Equity $ 23,838 $ 21,742 $ 20,994
- -------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME:
Net Income $ 3,782 $ 3,708 $ 2,461
Other Comprehensive Income (Loss) 280 383 (45)
- -------------------------------------------------------------------------------------------
Comprehensive Income $ 4,062 $ 4,091 $ 2,416
- -------------------------------------------------------------------------------------------
</TABLE>
(a) Includes fourth quarter 1995 common stock dividends of $80 million
declared and paid by heritage Chase in the 1996 first quarter.
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
47
<PAGE> 47
Consolidated Statement of Cash Flows
The Chase Manhattan Corporation
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Year ended December 31, (in millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 3,782 $ 3,708 $ 2,461
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Provision for Loan Losses 1,343 804 897
Provision for Risk Management Instrument Credit Losses 211 -- --
Restructuring Costs 529 192 1,814
Depreciation and Amortization 1,170 951 869
Net Change In:
Trading-Related Assets 14,785 (11,437) (9,245)
Accrued Interest Receivable 1,043 (339) (479)
Other Assets (5,030) (2,264) 1,167
Trading-Related Liabilities (14,445) 14,708 3,826
Accrued Interest Payable (714) 123 395
Other Liabilities 1,591 (627) (1,743)
Other, Net (673) (358) (945)
- ---------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Operating Activities 3,592 5,461 (983)
- ---------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net Change In:
Deposits with Banks (4,326) 5,458 124
Federal Funds Sold and Securities Purchased Under Resale Agreements 8,626 (5,673) (12,929)
Loans Due to Sales and Securitizations 45,400 26,967 37,428
Other Loans, Net (52,052) (37,445) (42,935)
Other, Net (801) 64 (905)
Proceeds from the Maturity of Held-to-Maturity Securities 1,382 959 1,057
Purchases of Held-to-Maturity Securities (91) (130) (277)
Proceeds from the Maturity of Available-for-Sale Securities 27,035 10,250 8,513
Proceeds from the Sale of Available-for-Sale Securities 162,870 95,045 44,194
Purchases of Available-for-Sale Securities (201,622) (109,849) (60,380)
Cash Used in Acquisitions (981) (5,153) --
Proceeds from Divestitures of Nonstrategic Businesses -- 847 --
- ---------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (14,560) (18,660) (26,110)
- ---------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net Change In:
Noninterest-Bearing Domestic Demand Deposits 938 3,914 5,743
Domestic Time and Savings Deposits 14,310 4,509 4,160
Foreign Deposits 3,501 4,500 (471)
Federal Funds Purchased and Securities Sold Under Repurchase Agreements (10,679) 5,969 18,029
Other Borrowed Funds 3,422 (2,126) (199)
Other, Net (352) (556) 361
Proceeds from the Issuance of Long-Term Debt and Capital Securities 5,182 3,945 1,891
Repayments of Long-Term Debt (1,949) (2,134) (1,453)
Proceeds from the Issuance of Stock 1,232 967 1,082
Proceeds from the Issuance of Preferred Stock of Subsidiary -- -- 550
Redemption of Preferred Stock (912) (910) --
Treasury Stock Purchased (1,091) (2,585) (1,611)
Cash Dividends Paid (1,278) (1,212) (1,188)
- ---------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 12,324 14,281 26,894
- ---------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Due from Banks 8 17 10
Net Increase (Decrease) in Cash and Due from Banks 1,364 1,099 (189)
Cash and Due from Banks at the Beginning of the Year 15,704 14,605 14,794
- ---------------------------------------------------------------------------------------------------------------
Cash and Due from Banks at the End of the Year $ 17,068 $ 15,704 $ 14,605
Cash Interest Paid $ 13,009 $ 13,475 $ 11,174
Taxes Paid $ 1,405 $ 1,144 $ 1,650
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
48
<PAGE> 48
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
The Chase Manhattan Corporation ("Chase") is a bank holding company organized
under the laws of the State of Delaware and registered under the Bank Holding
Company Act.
Chase conducts its worldwide financial services businesses through various
bank and nonbank subsidiaries. The principal bank subsidiaries of Chase are The
Chase Manhattan Bank ("Chase Bank"), a New York State bank headquartered in New
York City; Chase Bank of Texas, National Association ("Chase Texas"), a national
bank headquartered in Houston, Texas; and Chase Manhattan Bank USA, National
Association ("Chase USA"), a national bank headquartered in Wilmington,
Delaware. The principal nonbank subsidiary of Chase is Chase Securities Inc.,
Chase's "Section 20" subsidiary, which is engaged in securities underwriting and
dealing activities. For a discussion of Chase's business segment information,
see Note Twenty-Three.
On March 31, 1996, The Chase Manhattan Corporation ("heritage Chase")
merged (the "Merger") with and into Chemical Banking Corporation ("Chemical").
Upon consummation of the merger, Chemical changed its name to "The Chase
Manhattan Corporation."
The accounting and financial reporting policies of Chase and its
subsidiaries conform to generally accepted accounting principles ("GAAP") and
prevailing industry practices. Additionally, where applicable, the policies
conform to the accounting and reporting guidelines prescribed by bank regulatory
authorities. Financial statements prepared in conformity with GAAP require
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expense and disclosure of contingent assets and
liabilities.
Certain amounts in prior periods have been reclassified to conform to the
current presentation. The following is a description of significant accounting
policies.
Basis of Presentation
The consolidated financial statements include the accounts of Chase and its
majority-owned subsidiaries, after eliminating intercompany balances and
transactions. Equity investments of 20%-50% ownership interest are generally
accounted for in accordance with the equity method of accounting and are
reported in Other Assets. Chase's proportional share of earnings (losses) of
these companies is included in Other Revenue.
Assets held in an agency or fiduciary capacity by Chase are not assets of
Chase and, accordingly, are not included in the Consolidated Balance Sheet.
Trading Activities
Chase trades debt and equity instruments and risk management instruments, as
discussed below. These instruments are carried at their estimated fair value.
Quoted market prices, when available, are used to determine the fair value of
trading instruments. If quoted market prices are not available, then fair values
are estimated by using pricing models, quoted prices of instruments with similar
characteristics, or discounted cash flows.
Realized and unrealized gains (losses) on these instruments are recognized
in Trading Revenue. Interest earned on debt and dividends earned on equity
instruments are reported as interest income.
Debt and Equity Instruments; Securities Sold, Not Yet Purchased; and Structured
Notes: Debt and equity instruments, which include securities, loans, and other
credit instruments held for trading purposes, are reported as Trading Assets.
Obligations to deliver securities sold but not yet purchased and structured
notes issued by Chase are reported as Trading Liabilities. Interest payable on
securities sold but not yet purchased and on structured notes is reported as
interest expense.
Risk Management Instruments: Chase deals in interest rate, foreign exchange,
equity, commodity, and other contracts to generate trading revenues. These
contracts include futures, forwards, forward rate agreements, swaps, and options
(including interest rate caps and floors). The estimated fair values of these
contracts are reported on a gross basis as Trading Assets-Risk Management
Instruments for contracts having a positive fair value and Trading Liabilities
for contracts having a negative fair value. Contracts executed with the same
counterparty under legally enforceable master netting agreements are presented
on a net basis.
Derivatives Used in Asset/Liability Management Activities
As part of its asset/liability management ("ALM") activities, Chase uses
interest rate swaps, futures, forward rate agreements, and option contracts
(including interest rate caps and floors) to hedge exposures or to modify the
interest rate characteristics of related balance sheet items. Derivative
contracts used for ALM activities have a high correlation with the balance sheet
item being hedged. This high level correlation is requiredboth at inception and
throughout the hedge period. These derivative contracts are linked to specific
assets or liabilities or groups of similar assets or liabilities. A risk
reduction criterion is also required for futures contracts.
The derivative contracts that meet the above criteria are accounted for
under the accrual method or available-for-sale fair value method, as discussed
below. Derivative contracts that subsequently fail to meet the criteria are
redesignated as trading activities.
Accrual Method: Under the accrual method, interest income or expense on
derivative contracts is accrued and there is no recognition of unrealized gains
and losses on the derivatives on the balance sheet. Premiums on option contracts
are amortized over the contract life to interest income, interest expense, or
noninterest revenue.
Available-for-Sale Fair Value Method: Derivatives linked to available-for-sale
securities are carried at fair value. The accrual of interest income or interest
expense on these derivatives is reported in Interest Income on Securities.
Changes in the market values of these derivatives, exclusive of net interest
accruals, are reported, net of applicable taxes, in the Accumulated Other
Comprehensive Income caption in Stockholders' Equity. This policy is consistent
with the reporting of unrealized gains and losses on the related
available-for-sale securities.
49
<PAGE> 49
Notes to Consolidated Financial Statements
For both of the above accounting methods, realized gains and losses from
the settlement or termination of derivative contracts are deferred as
adjustments to the carrying values of the related balance sheet items. The
realized gains and losses are amortized to interest income, interest expense, or
noninterest revenue over the appropriate risk management periods (generally the
remaining life of the derivative at the date of its termination or the remaining
life of the linked asset or liability). Amortization commences when the contract
is settled or terminated. If the related assets or liabilities are sold or
otherwise disposed of, then the deferred gains and losses on the derivative
contracts are recognized as a part of the gain or loss on disposition of the
related assets or liabilities.
Resale and Repurchase Agreements
Chase enters into short-term purchases of securities under agreements to resell
("resale agreements") and sales of securities under agreements to repurchase
("repurchase agreements") of substantially identical securities. Prior to 1998,
resale agreements and repurchase agreements were accounted for as secured
lending and secured borrowing transactions, respectively. 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 the new standards, resale
agreements and repurchase agreements are accounted for as secured lending and
secured borrowing transactions, respectively, when certain criteria are met. If
the criteria are not met, then Chase accounts for its resale agreements as
purchases of securities with related off-balance sheet forward commitments to
resell and accounts for its repurchase agreements as sales of securities with
related off-balance sheet forward commitments to repurchase. For resale
agreements accounted for as secured lending transactions where Chase, as the
secured party, has taken control of the securities received as collateral, Chase
recognizes the securities in trading assets and records an obligation to return
those securities in trading liabilities. For repurchase agreements accounted for
as secured borrowing transactions where the secured party has taken control of
securities pledged by Chase as collateral, Chase reclassifies the securities
pledged as a receivable. The impact of adopting SFAS 127 on Chase's earnings,
liquidity, and capital resources was not material.
The amounts advanced under resale agreements accounted for as secured
lending transactions and the amounts borrowed under repurchase agreements
accounted for as secured borrowing transactions are carried on the balance sheet
at the amount advanced or borrowed plus accrued interest. Interest earned on
resale agreements and interest incurred on repurchase agreements are reported as
interest income and interest expense, respectively. Chase offsets resale and
repurchase agreements executed with the same counterparty under legally
enforceable netting agreements that meet the applicable netting criteria. Chase
takes possession of securities purchased under resale agreements. Chase monitors
the market value of these securities and adjusts the level of collateral for
resale and repurchase agreements, as appropriate. During 1998, the maximum
month-end balances of outstanding resale and repurchase agreements, were $34.3
billion and $58.3 billion, respectively. The daily average amounts of
outstanding resale and repurchase agreements were $31.7 billion and $46.7
billion, respectively.
Securities
Securities are classified as available-for-sale when, in management's judgement,
they may be sold in response to or in anticipation of changes in market
conditions. Available-for-sale securities and the related hedge are carried on
the balance sheet at fair value. Unrealized gains and losses on these securities
are reported, net of applicable taxes, in the Accumulated Other Comprehensive
Income caption in Stockholders' Equity. Securities that Chase has the positive
intent and ability to hold to maturity are classified as held-to-maturity and
are carried at amortized cost on the balance sheet.
Interest and dividend income on securities, including amortization of
premiums and accretion of discounts, are reported in Interest Income on
Securities. Interest income is recognized using the interest method. The
specific identification method is used to determine realized gains and losses on
sales of securities, which are reported in Securities Gains. The carrying value
of individual securities is reduced through writedowns against Securities Gains
to reflect other-than-temporary impairments in value.
Chase anticipates prepayment of principal in the calculation of the
effective yield for mortgage-backed securities ("MBSs") and collateralized
mortgage obligations ("CMOs"). The prepayment of MBSs and CMOs is actively
monitored through Chase's portfolio management function. Chase typically invests
in MBSs and CMOs with stable cash flows, thereby limiting the impact of interest
rate fluctuations on the portfolio. Management regularly performs simulation
testing regarding the impact that market conditions would have on its MBS and
CMO portfolios. MBSs and CMOs that management believes have high prepayment risk
are included in the available-for-sale portfolio and are reported at fair value.
Loans
Loans are generally reported at the principal amount outstanding, net of the
allowance for loan losses, unearned income and any net deferred loan fees
(nonrefundable yield-related loan fees, net of related direct origination
costs). Loans held for sale are carried at the lower of aggregate cost or fair
value. Certain loans meeting the accounting definition of a security under SFAS
115 are classified as loans and measured at fair value. Interest income is
recognized using the interest method or on a basis approximating a level rate of
return over the term of the loan.
Chase sells or securitizes certain commercial and consumer loans. Some
loans are sold with recourse to Chase for which appropriate reserves are
provided. Gains and losses are reported in Other Revenue.
Nonaccrual loans are those loans on which the accrual of interest is
discontinued. Loans other than certain consumer loans discussed below are placed
on nonaccrual status immediately if, in the opinion of management, full payment
of principal or interest is in doubt, or when principal or interest is past due
90 days or more and collateral,
50
<PAGE> 50
if any, is insufficient to cover principal and interest. Interest accrued but
not collected at the date a loan is placed on nonaccrual status is reversed
against interest income. In addition, the amortization of net deferred loan fees
is suspended when a loan is placed on nonaccrual status. Interest income on
nonaccrual loans is recognized only to the extent received in cash. However,
where there is doubt regarding the ultimate collectibility of the loan
principal, all cash receipts are thereafter applied to reduce the carrying value
of the loan. Loans are restored to accrual status only when interest and
principal payments are brought current and future payments are reasonably
assured.
Consumer loans are generally charged to the allowance for loan losses upon
reaching specified stages of delinquency. This policy excludes residential
mortgage products and auto financings which are accounted for in accordance with
the nonaccrual loan policy discussed above. Credit card loans, for example, are
charged off at the earlier of 180 days past due or 75 days after notification of
the filing of bankruptcy. Other consumer products are generally charged-off at
120 days past due. Accrued interest is reversed against interest income when the
consumer loan is charged-off.
Chase accounts for and discloses nonaccrual commercial loans as impaired
loans. Impaired loans are carried at the present value of the future cash flows
discounted at the loan's effective interest rate or, as a practical expedient,
at the loan's observable market price or at the fair value of the collateral if
the loan is collateral dependent. Chase recognizes interest income on impaired
loans as discussed above for nonaccrual loans. Chase excludes from impaired
loans its small-balance homogeneous consumer loans, loans carried at fair value
or the lower of cost or fair value, debt securities, and leases.
A collateralized loan is considered an in-substance foreclosure and is
reclassified to Assets Acquired as Loan Satisfactions only when Chase has taken
physical possession of the collateral, regardless of whether formal foreclosure
proceedings have taken place.
Allowance for Credit Losses
The allowance for credit losses provides for risks of losses inherent in the
credit extension process for loans, risk management instruments and
lending-related commitments. These commitments include letters of credit,
guarantees and undrawn commitments to extend credit. The allowance is a general
allowance and is periodically reviewed and analyzed. The analyses include
consideration of the risk rating of individual credits, the size and diversity
of the portfolio, economic and political conditions, prior loss experience, and
results of periodic credit reviews of the portfolio. The allowance for credit
losses is increased by provisions for credit losses charged against income and
is reduced by charge-offs, net of recoveries. Charge-offs are recorded when, in
the judgement of management, an extension of credit is deemed uncollectible, in
whole or in part.
Chase allocates the allowance for credit losses into these components:
<TABLE>
<CAPTION>
Reported in:
Allowance for credit -------------------------------------------------
losses on: Balance Sheet Income Statement
- --------------------------------------------------------------------------------
<S> <C> <C>
Loans Allowance for Loan Provision for Loan
Losses Losses
- --------------------------------------------------------------------------------
Risk Management Instruments Trading Assets- Provision for Risk
Risk Management Management Instrument
Instruments Credit Losses
- --------------------------------------------------------------------------------
Lending-Related Commitments Other Liabilities Fee Revenue
- --------------------------------------------------------------------------------
</TABLE>
Premises and Equipment
Premises and equipment, including leasehold improvements, are carried at cost
less accumulated depreciation and amortization. Capital leases are included in
premises and equipment at the capitalized amount less accumulated amortization.
Depreciation and amortization of premises are included in Occupancy Expense,
while depreciation of equipment is included in Equipment Expense. Depreciation
and amortization are computed using the straight-line method over the estimated
useful life of the owned asset and, for leasehold improvements, over the lesser
of the remaining term of the leased facility or the estimated economic life of
the improvement. Maintenance and repairs are charged to expense as incurred,
while major improvements are capitalized.
Chase early adopted AICPA SOP 98-1 effective January 1, 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 $123
million of such costs in 1998.
Other Assets
Private Equity Investments: Private equity investments include direct equity and
equity-related investments and fund investments. Marketable holdings are
marked-to-market at the public market value less a liquidity discount.
Nonmarketable holdings are carried at cost, with the exception of holdings in
which a subsequent investment by an unaffiliated party indicates a valuation in
excess of cost (in which case an unrealized gain is recorded based on such
valuation) and holdings for which evidence of an other-than-temporary decline in
value exists (in which case an impairment loss is recorded). Income from these
investments is reported in Private Equity Gains.
51
<PAGE> 51
Notes to Consolidated Financial Statements
Assets Acquired as Loan Satisfactions: Assets acquired in full or partial
satisfaction of loans, primarily consisting of real estate, are reported at the
lower of cost or fair value (less costs to sell for real estate). Writedowns at
the date of transfer (to Assets Acquired as Loan Satisfactions) are charged to
the allowance for loan losses, and subsequently are charged to Foreclosed
Property Expense. For real estate, operating expenses (net of related revenues)
and gains and losses on sales are reported in Foreclosed Property Expense.
Assets Held for Accelerated Disposition: These assets consist primarily of real
estate loans and real estate assets acquired as loan satisfactions. At the date
of transfer to the accelerated disposition portfolio, these assets are recorded
at their initial estimated disposition value less costs to sell. Subsequently,
assets held for accelerated disposition are carried at the lower of cost or
current estimated disposition value. Cash interest received from these assets is
recognized either in income or applied to reduce the carrying value of loans,
depending on management's judgement of collectibility. Any adjustments to the
carrying value of these assets or realized gains and losses on the sale of these
assets are reported in Other Revenue.
Intangibles: Goodwill and other acquired intangibles, such as core deposits and
credit card relationships, are amortized over the estimated periods to be
benefited, generally ranging from 10 to 25 years. An impairment review is
performed periodically on these assets.
Mortgage Servicing Rights: Capitalized mortgage servicing assets consist of
purchased and originated servicing rights. These rights are amortized into Fees
for Other Financial Services in proportion to, and over the period of, the
estimated future net servicing income stream of the underlying mortgage loans.
Mortgage servicing rights are assessed for impairment based on the fair value of
the right and any related derivative contracts. Impairment is evaluated by
stratifying the mortgage servicing rights by interest rate bands. Fair value is
determined considering market prices for similar assets or based on discounted
cash flows using market-based prepayment estimates for similar coupons as well
as incremental direct and indirect costs.
Fee-Based Revenue
Investment banking fees primarily include fees received for managing and
syndicating loan arrangements; providing financial advisory services in
connection with leveraged buyouts, recapitalizations, and mergers and
acquisitions; arranging private placements; and underwriting debt and equity
securities. Investment banking fees are recognized when the services to which
they relate have been provided. In addition, recognition of syndication fees is
subject to satisfying certain syndication tests.
Trust, custody, and investment management fees primarily include fees
received in connection with personal, corporate, and employee benefit trust and
investment management activities. Fees for other financial services primarily
include fees from deposit accounts, mortgage servicing, loan commitments,
standby letters of credit, compensating balances, insurance products, brokerage
services and other financial service-related products. All of these fees are
generally recognized over the period that the related service is provided.
Credit card revenues primarily include fees received in connection with
credit card activities such as annual, late payment, cash advance, and
interchange fees, as well as servicing fees earned in connection with
securitization activities. Credit card revenues are generally recognized as
billed, except for annual fees, which are recognized over a twelve-month period.
Income Taxes
Chase recognizes both the current and deferred tax consequences of all
transactions that have been recognized in the financial statements. The deferred
tax liability (asset) is determined based on applicable tax rates which will be
in effect when the underlying items of income and expense are expected to be
reported to the taxing authorities. Net deferred tax assets, whose realization
is dependent on taxable earnings of future years, are recognized when a
"more-likely-than-not" criterion is met. Annual deferred tax expense (benefit)
is equal to the change in the deferred tax liability (asset) account from the
beginning to the end of the year. A current tax liability (asset) is recognized
for the estimated taxes payable or refundable for the current year.
Foreign Currency Translation
Assets and liabilities denominated in foreign currencies are translated to U.S.
dollars using applicable rates of exchange. Gains and losses on foreign currency
translation from operations for which the functional currency is other than the
U.S. dollar, together with related hedges and tax effects, are reported in Other
Comprehensive Income within Stockholders' Equity. For foreign operations for
which the U.S. dollar is the functional currency, gains and losses resulting
from converting foreign currency assets, liabilities and related hedges to the
U.S. dollar are reported in the income statement.
Statement of Cash Flows
Cash and cash equivalents reported in the Consolidated Statement of Cash Flows
represent the amounts included in the balance sheet caption Cash and Due from
Banks. Cash flows from loans and deposits are reported on a net basis.
52
<PAGE> 52
- --------------------------------------------------------------------------------
2 -- TRADING ACTIVITIES
- --------------------------------------------------------------------------------
Trading Revenue
The following table sets forth the components of total trading-related revenue.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Trading Revenue $1,449(e) $1,323 $1,371
Net Interest Income Impact(a) 711 613 486
- --------------------------------------------------------------------------------
Total Trading-Related Revenue $2,160 $1,936 $1,857
- --------------------------------------------------------------------------------
Product Diversification:
Interest Rate Contracts(b) $ 695 $ 704 $ 515
Foreign Exchange Contracts(c) 963 790 432
Debt Instruments, Equities and
Commodities(d) 502 442 910
- --------------------------------------------------------------------------------
Total Trading-Related Revenue $2,160(e) $1,936 $1,857
- --------------------------------------------------------------------------------
</TABLE>
(a) Trading-related net interest income includes interest recognized on
interest-earning and interest-bearing trading-related positions as well as
management allocations reflecting the funding cost or benefit associated
with trading positions. This amount is included in net interest income on
the Consolidated Statement of Income.
(b) Includes interest rate swaps, cross-currency interest rate swaps, foreign
exchange forward contracts, interest rate futures and options, forward
rate agreements and related hedges.
(c) Includes foreign exchange spot and option contracts.
(d) Includes U.S. and foreign government and government agency securities,
corporate debt instruments, emerging markets debt instruments,
debt-related derivatives, equity securities, equity derivatives and
commodity derivatives.
(e) Excludes the provision for risk management instrument credit losses of
$211 million in 1998. There were no provisions in prior years.
Trading Assets and Liabilities
The following table presents trading assets and trading liabilities for the
dates indicated.
<TABLE>
<CAPTION>
December 31, (in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Trading Assets
Debt and Equity Instruments:
U.S. Government, Federal Agencies and
Municipal Securities $ 5,881 $ 8,329
Certificates of Deposit, Bankers' Acceptances
and Commercial Paper 3,375 3,117
Debt Securities Issued by Foreign Governments 9,774 11,063
Debt Securities Issued by Foreign Financial Institutions 229 5,399
Corporate Securities 1,598 1,833
Other 3,987 4,900
- --------------------------------------------------------------------------------
Total Trading Assets-Debt and Equity Instruments $24,844 $34,641
- --------------------------------------------------------------------------------
Risk Management Instruments:
Interest Rate Contracts $12,707 $15,980
Foreign Exchange Contracts 16,013 20,225
Debt, Equity, Commodity and Other Contracts 4,278 1,622
Allowance for Risk Management
Instrument Credit Losses (150) (75)
- --------------------------------------------------------------------------------
Total Trading Assets-Risk Management Instruments $32,848 $37,752
- --------------------------------------------------------------------------------
Trading Liabilities
Risk Management Instruments:
Interest Rate Contracts $13,298 $17,668
Foreign Exchange Contracts 16,592 20,475
Debt, Equity, Commodity and Other Contracts 2,790 1,558
- --------------------------------------------------------------------------------
Trading Liabilities-Risk Management Instruments $32,680 $39,701
Securities Sold, Not Yet Purchased 4,608 9,818
Structured Notes 1,214 2,919
- --------------------------------------------------------------------------------
Total Trading Liabilities $38,502 $52,438
- --------------------------------------------------------------------------------
</TABLE>
Average trading assets and liabilities were as follows for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Trading Assets-Debt and Equity Instruments $30,021 $35,660
- --------------------------------------------------------------------------------
Trading Assets-Risk Management Instruments $36,127 $34,426
- --------------------------------------------------------------------------------
Trading Liabilities-Risk Management Instruments $37,200 $35,309
Securities Sold, Not Yet Purchased 6,604 10,719
Structured Notes 2,855 2,378
- --------------------------------------------------------------------------------
Total Trading Liabilities $46,659 $48,406
- --------------------------------------------------------------------------------
</TABLE>
53
<PAGE> 53
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3 -- SECURITIES
- --------------------------------------------------------------------------------
See Note One for a discussion of the accounting policies relating to securities.
Net gains from available-for-sale securities sold in 1998, 1997 and 1996
amounted to $609 million (gross gains of $949 million and gross losses of $340
million), $312 million (gross gains of $496 million and gross losses of $184
million), and $135 million (gross gains of $281 million and gross losses of $146
million), respectively. There were no sales of held-to-maturity securities
during the three years ended December 31, 1998.
The amortized cost and estimated fair value of securities, including the
impact of related derivatives, were as follows for the dates indicated:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------ ------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
December 31, (in millions) Cost Gains Losses Value Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-Sale Securities:
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-Backed Securities $42,916 $ 94 $ 16 $42,994 $27,849 $ 97 $ 3 $27,943
Collateralized Mortgage Obligations 260 -- -- 260 2,013 5 -- 2,018
U.S. Treasuries 8,844 285 13 9,116 11,492 18 49 11,461
Obligations of State and Political
Subdivisions 226 1 -- 227 274 2 -- 276
Debt Securities Issued by Foreign
Governments 8,176 108 58 8,226 6,153 47 62 6,138
Corporate Debt Securities 261 6 12 255 606 17 1 622
Equity Securities 832 233 7 1,058 876 197 58 1,015
Other, primarily Asset-Backed Securities(a) 628 44 5 667 308 3 29 282
- -----------------------------------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities $62,143 $771 $111 $62,803 $49,571 $386 $202 $49,755
- -----------------------------------------------------------------------------------------------------------------------------------
Held-to-Maturity Securities:
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-Backed Securities $ 898 $ 16 $ -- $ 914 $ 1,256 $ 12 $ 1 $ 1,267
Collateralized Mortgage Obligations 720 1 1 720 1,660 4 3 1,661
U.S. Treasuries 65 -- -- 65 52 -- -- 52
Other, primarily Asset-Backed Securities(a) 4 -- -- 4 15 -- -- 15
- -----------------------------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities $ 1,687 $ 17 $ 1 $ 1,703 $ 2,983 $ 16 $ 4 $ 2,995
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes CMOs of private issuers, which generally have underlying
collateral consisting of obligations of U.S. Government and Federal
agencies and corporations. See Note One for further discussion.
The amortized cost, estimated fair value, and average yield at December
31, 1998 of Chase's available-for-sale and held-to-maturity securities by
contractual maturity range are presented in the following table.
<TABLE>
<CAPTION>
Available-for-Sale Securities Held-to-Maturity Securities
-------------------------------------- --------------------------------------
Maturity Schedule of Securities Amortized Fair Average Amortized Fair Average
December 31, 1998 (in millions) Cost Value Yield(a) Cost Value Yield(a)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Due in One Year or Less $ 2,789 $ 2,838 4.32% $ 88 $ 88 5.67%
Due After One Year Through Five Years 9,595 9,711 6.13 169 171 7.77
Due After Five Years Through Ten Years 5,472 5,644 5.51 135 135 6.70
Due After Ten Years(b) 44,287 44,610 6.21 1,295 1,309 6.47
- -------------------------------------------------------------------------------------------------------------------------
Total Securities $62,143 $62,803 6.05% $ 1,687 $ 1,703 6.57%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The average yield is based on amortized cost balances at year-end. Yields
are derived by dividing interest income (including the effect of related
derivatives on available-for-sale securities) and the amortization of
premiums and accretion of discounts by total amortized cost.
Taxable-equivalent yields are used where applicable.
(b) Securities with no stated maturity are included with securities with a
contractual maturity of ten years or more. Substantially all of Chase's
MBSs and CMOs are due in ten years or more based on contractual maturity.
The estimated duration, which reflects anticipated future prepayments
based on a consensus of dealers in the market, is approximately 3 years
for MBSs, and less than 1 year for CMOs.
54
<PAGE> 54
- --------------------------------------------------------------------------------
4 -- LOANS
- --------------------------------------------------------------------------------
The composition of the loan portfolio at each of the dates indicated was as
follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------- --------------------------------
December 31, (in millions) Domestic Foreign Total Domestic Foreign Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Consumer:
1-4 Family Residential Mortgages $ 41,831 $ 1,467 $ 43,298 $ 38,680 $ 1,472 $ 40,152
Credit Card 14,229 718 14,947 15,631 615 16,246
Auto Financings 16,456 1 16,457 13,243 15 13,258
Other Consumer 8,375 1,621 9,996 8,543 1,874 10,417
- --------------------------------------------------------------------------------------------------------
Total Consumer 80,891 3,807 84,698 76,097 3,976 80,073
- --------------------------------------------------------------------------------------------------------
Commercial:
Commercial and Industrial 43,123 24,664 67,787 37,931 27,628 65,559
Commercial Real Estate:
Commercial Mortgage 3,029 337 3,366 4,084 663 4,747
Construction 955 30 985 946 50 996
Financial Institutions 6,583 4,537 11,120 6,652 6,989 13,641
Foreign Governments -- 4,798 4,798 -- 3,438 3,438
- --------------------------------------------------------------------------------------------------------
Total Commercial 53,690 34,366 88,056 49,613 38,768 88,381
- --------------------------------------------------------------------------------------------------------
Total Loans(a) $134,581 $ 38,173 $172,754 $125,710 $ 42,744 $168,454
- --------------------------------------------------------------------------------------------------------
</TABLE>
(a) Loans are presented net of unearned income of $1,667 million and $1,612
million at December 31, 1998 and 1997, respectively.
Bonds issued to Chase by foreign governments (such as Mexico, Venezuela
and Brazil) as part of a debt renegotiation (i.e., "Brady Bonds") are classified
as loans, but are subject to the provisions of SFAS 115. The amortized cost and
estimated fair value of loans measured in accordance with SFAS 115 (which are
all available-for-sale), including the impact of related derivatives, were as
follows:
<TABLE>
<CAPTION>
December 31, (in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Amortized Cost $ 623 $ 1,005
Gross Unrealized Gains 47 89
Gross Unrealized Losses (101) (112)
- --------------------------------------------------------------------------------
Fair Value $ 569 $ 982
- --------------------------------------------------------------------------------
</TABLE>
The gains and losses on the disposition of the above-mentioned loans were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross Realized Gains $ 44 $ 121 $ 155
Gross Realized Losses (46) (121) (235)
- --------------------------------------------------------------------------------
Net Losses $ (2) $ -- $ (80)
- --------------------------------------------------------------------------------
Cash Proceeds from Sales $ 344 $ 897 $ 952
- --------------------------------------------------------------------------------
</TABLE>
Impaired Loans
The following table sets forth information about Chase's impaired loans. Chase
uses the discounted cash flow method as its primary method for valuing its
impaired loans.
<TABLE>
<CAPTION>
December 31, (in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Impaired Loans with an Allowance $1,020 $ 483
Impaired Loans without an Allowance(a) 25 24
- --------------------------------------------------------------------------------
Total Impaired Loans $1,045 $ 507
- --------------------------------------------------------------------------------
Allowance for Impaired Loans under SFAS 114(b) $ 314 $ 174
Average Balance of Impaired Loans During the Year $ 820 $ 628
Interest Income Recognized on Impaired Loans
During the Year $ 10 $ 8
- --------------------------------------------------------------------------------
</TABLE>
(a) When the discounted cash flows, collateral value or market price equals or
exceeds the carrying value of the loan, then the loan does not require an
allowance under SFAS 114.
(b) The allowance for impaired loans under SFAS 114 is included in Chase's
allowance for loan losses.
55
<PAGE> 55
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
5 -- ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------
The table below summarizes the changes in the allowance for loan losses.
<TABLE>
<CAPTION>
Year Ended December 31,
(in millions) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance at January 1 $ 3,624 $ 3,549 $ 3,784
Provision for Loan Losses 1,343 804 897
Charge-Offs (1,791) (1,096) (1,187)
Recoveries 373 292 290
------- ------- -------
Net Charge-Offs (1,418) (804) (897)
Charge Related to Conforming Credit Card Charge-Off Policies -- -- (102)(a)
Transfer to Trading Assets-Risk Management Instruments -- -- (75)
Transfer to Other Liabilities -- (100) (70)
Allowance Related to Purchased Portfolios and Subsidiaries 5 172(b) 13
Foreign Exchange Translation Adjustment (2) 3 (1)
- --------------------------------------------------------------------------------------------------------
Allowance at December 31 $ 3,552 $ 3,624 $ 3,549
- --------------------------------------------------------------------------------------------------------
</TABLE>
(a) During 1996, Chase incurred a charge of $102 million as a result of
conforming the credit card charge-off policies of the heritage Chase and
Chemical.
(b) Includes approximately $160 million related to the purchase of a credit
card portfolio.
- --------------------------------------------------------------------------------
6 -- LONG-TERM DEBT
- --------------------------------------------------------------------------------
The following table is a summary of long-term debt (net of unamortized original
issue debt discount).
<TABLE>
<CAPTION>
By remaining maturity at December 31,(a) Under After 1998 1997
(in millions) 1 year 1-5 years 5 years Total Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Parent Company:
Senior Debt: Fixed Rate $ -- $ 709 $ 115 $ 824 $ 1,090
Variable Rate 623 3,853 49 4,525 2,054
Modified Interest Rates(b) 5.16 - 5.85% 5.20 - 9.78% 5.06 - 5.49% 5.06 - 9.78% 2.82 - 10.44%
Subordinated Debt: Fixed Rate 1,400 1,365 4,387 7,152 6,363
Variable Rate -- 692 298 990 1,014
Modified Interest Rates(b) 7.58 - 10.38% 5.22 - 10.13% 5.27 - 8.00% 5.22 - 10.38% 5.69 - 10.38%
- ----------------------------------------------------------------------------------------------------------------------------------
Subtotal $2,023 $6,619 $4,849 $13,491 $10,521
- ----------------------------------------------------------------------------------------------------------------------------------
Subsidiaries:
Senior Debt: Fixed Rate $ 340 $ 311 $ 128 $ 779 $ 751
Variable Rate - 700 - 700 749
Modified Interest Rates(b) 5.66-10.01% 5.86 - 9.77% 4.00-10.60% 4.00-10.60% 4.00 - 10.60%
Subordinated Debt: Fixed Rate -- 318 649 967 966
Variable Rate -- 250 - 250 400
Modified Interest Rates(b) --% 3.24 - 7.25% 5.12 - 5.81% 3.24 - 7.25% 3.24 - 7.25%
- ----------------------------------------------------------------------------------------------------------------------------------
Subtotal $ 340 $1,579 $ 777 $ 2,696 $ 2,866
- ----------------------------------------------------------------------------------------------------------------------------------
Total Long-Term Debt $2,363 $8,198 $5,626 $16,187(c) $13,387
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Remaining maturity is based on contractual maturity of the debt.
(b) The interest rates shown have been adjusted to reflect the effect of ALM
derivative contracts, primarily interest rate swaps, used to convert
Chase's fixed-rate debt to variable rates. The interest rates shown are
those in effect at year-end.
(c) At December 31, 1998, long-term debt aggregating $3.7 billion was
redeemable at the option of Chase, in whole or in part, prior to maturity,
based on the terms specified in their respective notes. The aggregate
principal amount of debt that matures in each of the five years subsequent
to 1998 are $2,363 million in 1999, $3,651 million in 2000, $1,356 million
in 2001, $1,912 million in 2002 and $1,279 million in 2003.
Chase issues long-term debt denominated in various currencies, although
predominately in U.S. dollars, with both fixed and variable interest rates.
Fixed-rate debt outstanding at December 31, 1998 mature at various dates
through 2048 and carry contractual interest rates ranging from 4.00% to 11.83%.
The consolidated weighted-aver-
56
<PAGE> 56
age interest rates on fixed-rate debt at December 31, 1998 and 1997 were 7.43%
and 7.56%, respectively. Variable-rate debt outstanding, with
contractually-determined interest rates ranging from 4.40% to 6.15% at December
31, 1998, mature at various dates through 2028. The consolidated
weighted-average contractual interest rates on variable-rate debt at December
31, 1998 and 1997 were 5.42% and 5.94%, respectively.
Included in long-term debt are equity commitment notes and equity contract
notes totaling $875 million at December 31, 1998. At December 31, 1998, Chase
had designated proceeds from the sale of capital securities, as defined in
regulations by the Board of Governors of the Federal Reserve System ("Federal
Reserve Board"), in an amount sufficient to satisfy fully the requirements of
its equity commitment and equity contract notes.
Chase has guaranteed several long-term debt issues of its subsidiaries.
Guaranteed debt totaled $375 million at December 31, 1998.
Guaranteed Preferred Beneficial Interests in Corporation's Junior Subordinated
Deferrable Interest Debentures
At December 31, 1998, six separate wholly-owned Delaware statutory business
trusts established by Chase had issued an aggregate $2,188 million in capital
securities, net of discount. The capital securities qualify as Tier 1 Capital of
Chase. The proceeds from each issuance were invested in a corresponding series
of junior subordinated deferrable interest debentures of Chase. The sole asset
of each statutory business trust is the debentures. Chase has fully and
unconditionally guaranteed each of the business trust's obligations under each
trust's capital securities. Each trust's capital securities are subject to
mandatory redemption, in whole or in part, upon repayment of the debentures at
their stated maturity or earlier redemption.
The following is a summary of Chase's outstanding capital securities, net
of discount, issued by each trust and the junior subordinated deferrable
interest debentures issued by Chase to each trust as of December 31, 1998.
<TABLE>
<CAPTION>
($ in millions) Amount of Capital
Securities, Net Principal Amount of Stated Maturity of Interest Rate of Interest
of Discount Issued Chase Debentures, Capital Securities Capital Securities Payment/Distribution
Name of Trust by Trust(a) Held by Trust(b) and Debentures and Debentures Dates
- ------------------------------------------------------------------------------------------------------------------------------------
<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
Chase Capital VI 248 258 8/1/2028 LIBOR + .625% Quarterly - commencing 11/1/98
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 2,188 $ 2,269
- ------------------------------------------------------------------------------------------------------------------------------------
</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 principal amount of Chase debentures held as assets by each
trust. These amounts represent intercompany transactions and are
eliminated in Chase's consolidated financial statements.
- --------------------------------------------------------------------------------
7 -- PREFERRED STOCK OF SUBSIDIARY
- --------------------------------------------------------------------------------
In September 1996, Chase Preferred Capital Corporation ("Chase Preferred
Capital"), a wholly-owned subsidiary of Chase Bank, publicly issued 22 million
shares of 8.10% Cumulative Preferred Stock, Series A ("Series A Preferred
Shares"), with a liquidation preference of $25 per share. Chase Preferred
Capital is a real estate investment trust ("REIT") established for the purpose
of acquiring, holding and managing real estate mortgage assets. Dividends on the
Series A Preferred Shares are cumulative and are payable quarterly. The
dividends are recorded as minority interest expense by Chase.
The Series A Preferred Shares are generally not redeemable prior to
September 18, 2001. On or after that date, the Series A Preferred Shares may be
redeemed for cash at the option of Chase Preferred Capital, in whole or in part,
at a redemption price of $25 per share, plus any accrued and unpaid dividends.
The Series A Preferred Shares are treated as Tier 1 Capital of Chase. The Series
A Preferred Shares are not subject to any sinking fund or mandatory redemption
and are not convertible into any other securities of Chase Preferred Capital or
Chase or any of its subsidiaries.
- --------------------------------------------------------------------------------
8 -- PREFERRED STOCK
- --------------------------------------------------------------------------------
Chase is authorized to issue 200 million shares of preferred stock, in one or
more series, with a par value of $1 per share. Outstanding shares of preferred
stock at December 31, 1998 and 1997 were 31.1 million and 45.6 million,
respectively.
As shown in the summary table that follows, during 1998 Chase issued $200
million of Fixed/Adjustable Rate, Noncumulative preferred stock. Also during
1998, Chase redeemed five series of preferred stock, three at redemption prices
of $100 per share and two at redemption prices of $25 per share, together in
each case with any accrued but unpaid dividends.
Dividends on shares of each outstanding series of preferred stock are
payable quarterly. All the preferred stock outstanding have preference over
Chase's common stock for the payment of dividends and the distribution of assets
in the event of a liquidation or dissolution of Chase.
57
<PAGE> 57
Notes to Consolidated Financial Statements
The following is a summary of Chase's preferred stocks outstanding:
<TABLE>
<CAPTION>
Rate in
Stated Value Outstanding at December 31, Earliest Effect at
and Redemption Shares --------------------------- Redemption December 31,
Price Per Share(a) (in millions) 1998 (in millions) 1997 Date 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Adjustable Rate, Series L Cumulative $100.00 2.0 $ 200 $ 200 6/30/1999 4.500%(c)
Adjustable Rate, Series N Cumulative 25.00 9.1 228 228 6/30/1999 4.505(c)
9.76% Cumulative 25.00 4.0 100 100 9/30/1999 9.760
10.96% Cumulative 25.00 4.0 100 100 6/30/2000 10.960
10.84% Cumulative 25.00 8.0 200 200 6/30/2001 10.840
Fixed/Adjustable Rate, Noncumulative 50.00 4.0 200 -- 6/30/2003 4.960(c)
7.92% Cumulative 100.00 2.0(b) -- 200 -- --
8.40% Cumulative 25.00 6.9 -- 172 -- --
7.58% Cumulative 100.00 2.0(b) -- 200 -- --
7.50% Cumulative 100.00 2.0(b) -- 200 -- --
10.50% Cumulative 25.00 5.6 -- 140 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total Preferred Stock $1,028 $1,740
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Redemption price includes amount shown in the table plus any accrued but
unpaid dividends.
(b) Shares of each of these series are represented by 8.0 million depositary
shares, each representing .25 of a share.
(c) Floating rates are based on certain U.S. Treasury rates. The minimum and
maximum rates for Series L and Series N are 4.50% and 10.50%,
respectively. The fixed/adjustable rate preferred stock remains fixed at
4.96% through June 30, 2003; thereafter, the minimum and maximum rates are
5.46% and 11.46%, respectively.
- --------------------------------------------------------------------------------
9 -- COMMON STOCK
- --------------------------------------------------------------------------------
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. 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. The stock split did not cause any changes in the $1 par value
per share of the common stock or in total stockholders' equity. All references
to the number of common shares and to per common share amounts have been
restated to reflect the effects of the stock split.
Chase is authorized to issue 1.5 billion shares of common stock, with a $1
par value per share. The number of shares of common stock issued and
outstanding, were as follows:
<TABLE>
<CAPTION>
December 31, (in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Issued 881.7 881.5 881.5
Held in Treasury (33.7) (39.6) (19.9)
- --------------------------------------------------------------------------------
Outstanding 848.0 841.9 861.6
- --------------------------------------------------------------------------------
</TABLE>
In November 1998, Chase authorized the repurchase of up to $3 billion of
common stock in the open market or through negotiated transactions. This amount
is in addition to any amounts necessary to provide for issuances under Chase's
dividend reinvestment plan and its various stock-based director and employee
benefit plans. The new authorization became effective January 4, 1999.
During 1998, Chase repurchased approximately 18.0 million shares of
outstanding common stock under a stock repurchase plan which began in October
1996 and expired on December 31, 1998. During 1998, approximately 24.1 million
shares were issued, primarily from treasury, under various employee stock option
and other plans.
During 1996, 6.3 million shares were issued from treasury upon the
exercise of warrants issued in 1993 by Chase. The warrants expired June 30,
1996.
As of December 31, 1998, approximately 139.0 million unissued shares of
common stock were reserved for issuance under various employee incentive, option
and stock purchase plans and under Chase's Dividend Reinvestment Plan.
Common shares issued (newly issued, or distributed from treasury) during
1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Employee Benefit and
Compensation Plans(a) 23.8 22.2 38.7
Dividend Reinvestment and
Stock Purchase Plans .3 .3 .3
Stock Warrants -- -- 6.3
- --------------------------------------------------------------------------------
Total Shares Newly Issued or
Distributed from Treasury(b) 24.1 22.5 45.3
- --------------------------------------------------------------------------------
</TABLE>
(a) See Note Sixteen for a discussion of Chase's employee stock option plans.
(b) Shares distributed from treasury were 23.9 million in 1998, 22.5 million
in 1997 and 40.1 million in 1996.
58
<PAGE> 58
- --------------------------------------------------------------------------------
10 -- EARNINGS PER SHARE
- --------------------------------------------------------------------------------
Basic and diluted earnings per share ("EPS") were as follows for the dates
indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
(in millions, except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Earnings Per Share:
Net Income $3,782 $3,708 $2,461
Less: Preferred Stock Dividends 98 182 219
- --------------------------------------------------------------------------------
Net Income Applicable to Common Stock $3,684 $3,526 $2,242
Weighted-Average Basic Shares Outstanding 846.1 849.2 873.6
- --------------------------------------------------------------------------------
Net Income Per Share $ 4.35 $ 4.15 $ 2.57
- --------------------------------------------------------------------------------
Diluted Earnings Per Share:
Net Income Applicable to Common Stock $3,684 $3,526 $2,242
- --------------------------------------------------------------------------------
Weighted-Average Basic Shares Outstanding 846.1 849.2 873.6
Add: Broad-Based Options 6.5 11.4 11.4
Options to Key Employees 16.7 17.8 19.2
Warrants -- -- 2.6
- --------------------------------------------------------------------------------
Total Additional Shares 23.2 29.2 33.2
- --------------------------------------------------------------------------------
Weighted-Average Diluted Shares Outstanding 869.3 878.4 906.8
- --------------------------------------------------------------------------------
Net Income Per Share $ 4.24 $ 4.01 $ 2.47
- --------------------------------------------------------------------------------
</TABLE>
Basic EPS is computed by dividing net income applicable 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 convertible securities or other
contracts to issue common stock were converted or exercised into common stock.
Also, for purposes of diluted EPS, net income available for common stock is
adjusted, if applicable, for any convertible preferred stock dividends,
convertible debt interest or any other changes in income that could result from
the assumed conversion of securities and other contracts.
- --------------------------------------------------------------------------------
11 -- FEES FOR OTHER FINANCIAL SERVICES
- --------------------------------------------------------------------------------
Details of fees for other financial services were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service Charges on Deposit Accounts $ 368 $ 376 $ 394
Fees in Lieu of Compensating Balances 344 314 295
Commissions on Letters of Credit and Acceptances 301 307 330
Mortgage Servicing Fees 192 231 204
Insurance Fees(a) 145 91 43
Brokerage and Investment Services 142 128 115
Loan Commitment Fees 136 120 120
Other Fees 465 416 422
- --------------------------------------------------------------------------------
Total Fees for Other Financial Services $2,093 $1,983 $1,923
- --------------------------------------------------------------------------------
</TABLE>
(a) Insurance amount excludes certain insurance fees related to credit cards
and mortgage products, which are included in those revenue captions.
- --------------------------------------------------------------------------------
12 -- RESTRUCTURING COSTS AND OTHER EXPENSE
- --------------------------------------------------------------------------------
Restructuring Costs: The 1998 results included a pre-tax charge of $510 million
taken in connection with initiatives to streamline support functions and realign
certain business activities. These costs relate to planned staff reductions of
approximately 4,500 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 December 31, 1998, the reserve balance was $359 million of which
$232 million related to staff reductions, $107 million related to dispositions
of certain premises and equipment and $20 million related to other expenses.
Chase expects that the remaining reserve related to staff reductions will be
largely used during the next 12 months.
In connection with the merger of heritage Chase and Chemical, a $1.65
billion restructuring charge was recorded on the March 31, 1996 merger date.
Merger-related expenses that did not qualify for immediate recognition were
recognized as incurred and primarily related to technology and systems
integration costs. These residual merger-related expenses were $19 million in
1998, $192 million in 1997 and $164 million in 1996 and are reflected in the
Restructuring Costs caption of the income statement. No further merger-related
expenses are expected to be taken.
Other Expense: Details of other expense were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Professional Services $ 668 $ 575 $ 530
Marketing Expense 419 415 346
Telecommunications 349 307 326
Travel and Entertainment 243 220 213
Amortization of Intangibles 261 172 169
Minority Interest(a) 50 74 54
Foreclosed Property Expense 5 12 (16)
All Other 1,292 1,131 1,025
- --------------------------------------------------------------------------------
Total Other Expense $ 3,287 $ 2,906 $ 2,647
- --------------------------------------------------------------------------------
</TABLE>
(a) Includes REIT minority interest expense of $44 million in each of 1998 and
1997, and $13 million in 1996.
- --------------------------------------------------------------------------------
13 -- COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
In 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.
The following table presents the components of other comprehensive income
and the amount of income tax expense or benefit allocated to each component.
59
<PAGE> 59
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
Tax Tax Tax
Before (Expense) Before (Expense) Before (Expense)
For the Year Ended December 31, Tax or Net of Tax Tax or Net of Tax Tax or Net of Tax
(in millions) Amount Benefit Amount Amount Benefit Amount Amount Benefit Amount
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Unrealized Gains (losses) on
Securities Available-for-Sale:
Balance at Beginning of Year $ 95 $(288) $(237)
Net unrealized holding gains
(losses) arising during the period $ 590 $(219) 371 $ 750 $(325) 425 $(215) $ 66 (149)
Reclassification adjustment for
(gains) losses included in net
income(a) (145) 54 (91) (74) 32 (42) 141 (43) 98
- -----------------------------------------------------------------------------------------------------------------------------------
Change During Period 445 (165) 280 676 (293) 383 (74) 23 (51)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at End of Year(b) $ 375 $ 95 $(288)
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated Translation Adjustment:
Balance at Beginning of Year $ 17 $ 17 $ 11
Net translation gains (losses)
arising during the period -- -- -- -- -- -- $ 12 $ (3) 9
Reclassification adjustment for
(gains) losses included in net
income(a) -- -- -- -- -- -- (4) 1 (3)
- -----------------------------------------------------------------------------------------------------------------------------------
Change During Period -- -- -- -- -- -- 8 (2) 6
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at End of Year $ 17 $ 17 $ 17
- -----------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income
(Loss) for the Period $ 445 $(165) $ 280 $ 676 $(293) $ 383 $ (66) $ 21 $ (45)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents amounts recognized in net income during the period that had
previously been displayed as part of other comprehensive income.
(b) Represents the after-tax difference between the fair value and amortized
cost of available-for-sale securities portfolio, including securities
classified as loans, which are subject to the provisions of SFAS 115. See
Notes Three and Four.
- --------------------------------------------------------------------------------
14 -- INCOME TAXES
- --------------------------------------------------------------------------------
Deferred income tax expense (benefit) results from differences between amounts
of assets and liabilities as measured for financial reporting and income tax
return purposes. The significant components of Federal deferred tax assets and
liabilities are reflected in the following table.
<TABLE>
<CAPTION>
December 31, (in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Federal Deferred Tax Assets:
Reserves for Credit Losses $ 970 $ 980
Reserves Other Than Credit Losses 720 759
Interest and Fee Accrual Differences 19 42
Foreign Operations 447 566
Employee Benefits 562 394
Other 92 83
- --------------------------------------------------------------------------------
Gross Federal Deferred Tax Assets $ 2,810 $2,824
- --------------------------------------------------------------------------------
Federal Deferred Tax Liabilities:
Leasing Transactions $ 1,895 $1,633
Fair Value Adjustments 286 141
Depreciation and Amortization 480 270
Other 123 139
- --------------------------------------------------------------------------------
Gross Federal Deferred Tax Liabilities $ 2,784 $2,183
- --------------------------------------------------------------------------------
Deferred Federal Tax Asset Valuation Reserve $ 40 $ 90
- --------------------------------------------------------------------------------
Net Federal Deferred Tax Asset (Liability) After
Valuation Reserve $ (14) $ 551
- --------------------------------------------------------------------------------
</TABLE>
A Federal deferred tax asset and valuation reserve have been recorded in
accordance with SFAS 109, relating primarily to tax benefits associated with
foreign operations. While these tax benefits are subject to tax law limitations
on their realization, Chase has realized a portion thereby reducing the required
valuation reserve at December 31, 1998 to $40 million.
Deferred foreign tax liabilities were $164 million as of December 31,
1998. Chase expects that, when paid, these foreign taxes will be creditable on
its Federal income tax return.
Deferred State and Local tax liabilities approximated $170 million as of
December 31, 1998. The New York State and City valuation reserve of $148 million
was released to income during the first quarter of 1996.
The components of income tax expense included in the Consolidated
Statement of Income were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current Income Tax Expense:
Federal $ 723 $ 813 $ 1,022
Foreign 712 614 541
State and Local 282 226 169
- --------------------------------------------------------------------------------
Total Current Expense 1,717 1,653 1,732
- --------------------------------------------------------------------------------
Deferred Income Tax Expense (Benefit):
Federal 446 483 (99)
Foreign (17) (39) (101)
State and Local 2 105 (182)
- --------------------------------------------------------------------------------
Total Deferred Expense (Benefit) 431 549 (382)
- --------------------------------------------------------------------------------
Total Income Tax Expense $ 2,148 $ 2,202 $ 1,350
- --------------------------------------------------------------------------------
</TABLE>
60
<PAGE> 60
The preceding table does not reflect the tax effects of unrealized gains
and losses on available-for-sale securities and certain tax benefits associated
with Chase's employee stock plans. The tax effect of these items are recorded
directly in stockholders' equity. Stockholders' equity increased by $58 million
and $254 million, respectively, in 1998 and 1996 and decreased by $35 million in
1997 as a result of these tax effects.
Federal income taxes have not been provided on the undistributed earnings
of certain foreign subsidiaries, to the extent such earnings have been
reinvested abroad for an indefinite period of time. For 1998, such earnings
approximate $266 million on a pre-tax basis. At December 31, 1998, the
cumulative amount of undistributed earnings was approximately $764 million. It
is not practicable at this time to determine the income tax liability that would
result upon repatriation of these earnings.
The tax expense applicable to securities gains and losses for the years
1998, 1997 and 1996 was $219 million, $116 million and $51 million,
respectively.
A reconciliation of the income tax expense computed at the applicable
statutory U.S. income tax rate to the actual income tax expense for the past
three years is shown in the following table.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory U.S. Federal Tax Expense $ 2,075 $ 2,068 $ 1,334
Increase (Decrease) in Tax Expense
Resulting From:
State and Local Income Taxes, Net of
Federal Income Tax Benefit 185 215 (8)
Foreign Subsidiary Earnings (70) (45) (23)
Other-Net (42) (36) 47
- --------------------------------------------------------------------------------
Total Income Tax Expense $ 2,148 $ 2,202 $ 1,350
- --------------------------------------------------------------------------------
</TABLE>
The following table presents the domestic and foreign components of income
before income tax expense.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $ 4,315 $ 4,087 $ 2,458
Foreign(a) 1,615 1,823 1,353
- --------------------------------------------------------------------------------
Income Before Income Tax Expense $ 5,930 $ 5,910 $ 3,811
- --------------------------------------------------------------------------------
</TABLE>
(a) For purposes of this table, foreign income is defined as income generated
from operations located outside the United States.
- --------------------------------------------------------------------------------
15 -- POSTRETIREMENT EMPLOYEE BENEFITS PLANS
- --------------------------------------------------------------------------------
Pension Plans
The accompanying table presents the funded status and actuarial assumptions for
Chase's noncontributory domestic defined benefit pension plan (the "domestic
pension plan"). The domestic pension plan employs a cash balance defined benefit
formula that provides for benefits based on salary and service. The 1998
unrecognized amount primarily resulted from returns higher than expected on plan
assets.
DOMESTIC PENSION PLAN
<TABLE>
<CAPTION>
As of or for the Year Ended December 31, (in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Benefit Obligation $(2,473) $(2,282)
Plan Assets at Fair Value 2,880 2,732
- --------------------------------------------------------------------------------
Plan Assets in Excess of Benefit Obligation 407 450
Unrecognized Amounts (275) (239)
- --------------------------------------------------------------------------------
Prepaid Pension Cost Reported in Other Assets $ 132 $ 211
- --------------------------------------------------------------------------------
Employer Contributions to Trust $ 0 $ 0
Benefits Paid Out of the Trust 174 167
Weighted-Average Annualized Actuarial Assumptions
as of December 31:
Discount Rate 6.75% 7.00%
Assumed Rate of Long-Term Return
on Plan Assets 8.50% 8.50%
Rate of Increase in Future Compensation 5.00% 5.00%
- --------------------------------------------------------------------------------
</TABLE>
The periodic domestic pension plan expense (reported in Employee Benefits
expense) totaled $79 million in each of 1998 and 1997 and $98 million in 1996.
The decrease in expense from 1996 to 1997 primarily reflects lower service costs
as a result of plan amendments as of January 1, 1997, and actuarial gains.
Chase also has a number of other defined benefit pension plans -- domestic
plans not subject to Title IV of the Employee Retirement Income Security Act and
several foreign pension plans. Employee Benefits expense related to these plans
totaled $28 million in 1998, $26 million in 1997 and $47 million in 1996. At
December 31, 1998 and 1997, Chase's liability included in Accrued Expenses
related to plans that Chase elected not to prefund fully totaled $201 million
and $167 million, respectively.
Employee Benefits expense related to defined contribution plans totaled
$135 million in 1998, $127 million in 1997 and $95 million in 1996. Chase
increased its match on the domestic 401(k) Savings Plan to 5%, from 4%,
effective January 1, 1997.
During 1996, Chase also recognized a pre-tax $40 million charge as a
result of conforming retirement benefits provided to foreign employees.
Postretirement Medical and Life Insurance
Chase provides postretirement medical and life insurance benefits to qualifying
domestic and foreign employees. These benefits vary with length of service and
date of hire and, commencing in 1997, provide for limits on Chase's share of
covered medical benefits. The medical benefits are contributory and the life
insurance benefits are noncontributory.
POSTRETIREMENT MEDICAL AND LIFE INSURANCE LIABILITY
<TABLE>
<CAPTION>
As of or for the Year Ended December 31, (in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Benefit Obligation $(767) $(799)
Unrecognized Amounts (86) (31)
- --------------------------------------------------------------------------------
Accrued Postretirement Medical and Life Insurance
Cost Reported in Accrued Expenses $(853) $(830)
- --------------------------------------------------------------------------------
Benefits Paid(a) $ 42 $ 43
- --------------------------------------------------------------------------------
</TABLE>
(a) Net of $7 million and $9 million of retiree contributions, in 1998 and
1997, respectively.
61
<PAGE> 61
Notes to Consolidated Financial Statements
The periodic postretirement medical and life insurance expense (reported
in Employee Benefits expense) totaled $65 million in 1998, $68 million in 1997
and $67 million in 1996.
The discount rates and rates of increase for future compensation used to
determine the actuarial values for postretirement medical and life insurance
benefits are generally consistent with those used for the domestic pension plan.
At December 31, 1998, the assumed weighted-average medical benefits cost trend
rate used to measure the expected cost of benefits covered was 7.6% for 1999,
declining gradually over six years to a floor of 4.8%. The effect of a 1% change
in the assumed medical cost trend rate would result in a corresponding change in
the December 31, 1998 benefit obligation and 1998 periodic expense by up to
5.4%.
- --------------------------------------------------------------------------------
16 -- EMPLOYEE STOCK-BASED INCENTIVES
- --------------------------------------------------------------------------------
Key Employee Stock-Based Awards
Chase has a long-term stock-based incentive plan (the "LTIP") that provides for
grants of common stock-based awards, including stock options, restricted stock,
and restricted stock units ("RSUs") to certain key employees. Awards also were
granted under the prior Chase and Chemical plans. In addition, a portion of
incentive compensation exceeding specified levels is paid in restricted stock or
RSUs (the "deferred equity plan").
Under the LTIP and prior plans, stock options have been granted with
exercise prices equal to Chase's common stock price on the grant date.
Generally, options cannot be exercised until at least one year after the grant
date, and become exercisable over various periods as determined at the time of
the grant. Options generally expire ten years after the grant date.
The accompanying table presents a summary of key employee option activity
during the last three years.
KEY EMPLOYEE STOCK OPTIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
----------------------------- ---------------------------- ----------------------------
(Amounts in thousands, Number of Weighted-Average Number of Weighted-Average Number of Weighted-Average
except per share amounts) Options Exercise Price Options Exercise Price Options Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options Outstanding, January 1 44,076 $ 28.14 43,202 $ 20.75 43,672 $ 17.92
Granted 11,486 54.92 11,952 46.19 10,654 29.16
Exercised (8,493) 22.70 (10,458) 20.22 (10,264) 17.12
Cancelled (265) 47.25 (620) 33.75 (860) 24.35
- -----------------------------------------------------------------------------------------------------------------------------------
Options Outstanding, December 31 46,804(a) $ 34.57 44,076 $ 28.14 43,202 $ 20.75
- -----------------------------------------------------------------------------------------------------------------------------------
Options Exercisable, December 31 27,271 $ 25.15 27,264 $ 21.30 25,990 $ 17.46
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Of the total options outstanding at December 31, 1998, 10,428,000 options
(all were exercisable) had exercise prices ranging from $5 to $20, or
$15.63 on average, and a weighted-average remaining contractual life of
4.2 years; 14,276,000 options (12,419,000 were exercisable) had exercise
prices ranging from $20.01 to $40, or $23.68 on average, and a remaining
life of 6.4 years; 22,100,000 options (4,424,000 exercisable) had exercise
prices ranging from $40.01 to $76.28, or $50.55 on average, and a
remaining life of 8.6 years.
Restricted stock and RSUs are granted at no cost to the recipient.
Restricted stock and RSUs are subject to forfeiture until certain restrictions
have lapsed, including continued employment for a specified period. The
recipient of a share of restricted stock is entitled to voting rights and
dividends on the common stock. An RSU entitles the recipient to receive a share
of common stock after the applicable restrictions lapse; the recipient is
entitled to receive cash payments equivalent to dividends on the underlying
common stock during the period the RSU is outstanding.
During 1998, 7.8 million of LTIP awards (all payable solely in stock) were
granted. For all 1998 LTIP awards, vesting for restricted shares and RSUs is
conditioned on continued employment. Of the total 7.8 million LTIP awards
granted, vesting of 1.2 million of such awards is also conditioned upon Chase's
stock price reaching and sustaining target prices (the "targets") during the
service period; the awards are forfeited in their entirety if the targets are
not achieved ("forfeitable awards"). The target price for half the 1998
forfeitable awards exceeded the stock price on the grant date by 42% and for the
other half (which is subject to a minimum vesting period) by 56%. There were
583,000 of forfeitable awards that vested in 1998 as a result of the targets
having been achieved. Under the LTIP, in 1997 and 1996, 710,000 and 4.9 million
awards (all payable solely in stock), respectively, were granted. For all of the
1997 awards and half of the 1996 awards, vesting was conditioned solely on
continued employment; the other half of the 1996 awards consisted of forfeitable
awards. In addition, vesting for 1996 awards accelerated if targets were met.
All 1996 grants vested in 1997 as a result of the targets having been achieved.
Under the deferred equity plan, additional restricted stock and RSUs are
outstanding for which vesting is conditioned solely on continued employment.
During 1998, 1997, and 1996, respectively, 520,000, 522,000, and 325,000 of such
awards were granted.
Broad-Based Employee Stock Options
In December 1996, Chase adopted its Value Sharing Plan, under which 19.4 million
options to purchase common stock were granted to substantially all full-time
(300 options each) and part-time (150 options each) employees. The exercise
price was equal to the stock price on the grant date. The options were to become
exercisable after six years, or earlier if Chase's stock price reached and
sustained target prices for a minimum period. A second installment of 20.4
million
62
<PAGE> 62
options with similar terms was granted in December 1997 to eligible active
employees on the grant date. The 1996 and 1997 awards became exercisable in 1997
and 1998, respectively, as a result of the targets having been achieved. A third
and last installment of 21.6 million options with similar terms was granted in
December 1998. All outstanding options expire ten years after their respective
grant dates. The following table presents the activity in the broad-based
employee stock option plans during the past three years.
BROAD-BASED EMPLOYEE STOCK OPTIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
------------------------------ ---------------------------- ----------------------------
(Amounts in thousands, Number of Weighted-Average Number of Weighted-Average Number of Weighted-Average
except per share amounts) Options Exercise Price Options Exercise Price Options Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options Outstanding, January 1 42,808 $ 43.57 33,756 $ 32.54 37,072 $ 17.70
Granted 21,559 59.94 20,444 55.85 19,352 43.19
Exercised (8,168) 43.92 (10,082) 32.71 (22,368) 17.30
Cancelled (3,659) 44.68 (1,310) 41.66 (300) 22.97
- ----------------------------------------------------------------------------------------------------------------------------------
Options Outstanding, December 31 52,540(a) $ 49.65 42,808 $ 43.57 33,756 $ 32.54
- ----------------------------------------------------------------------------------------------------------------------------------
Options Exercisable, December 31 31,057 $ 42.53 22,364 $ 32.35 14,474 $ 18.35
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Of the total options outstanding at December 31, 1998, all options were
exercisable except for the 1998 grant under the Value Sharing Plan. The
exercise prices for the options outstanding were: $17.07 on average
($15.39 to $22.66) for the 2,794,000 options granted under the prior
Chase plan; $20.25 for the 5,396,000 options granted under the prior
Chemical plan; and $43.19 for the 8,931,000 options granted in 1996,
$55.85 for the 13,936,000 options granted in 1997, and $59.94 for the
21,483,000 options granted in 1998 under the Value Sharing Plan. The
average remaining contractual life was 8.6 years for all options
outstanding, and 7.7 years for exercisable options outstanding.
Comparison of the Fair- and Intrinsic-Value-Based Measurement Methods
Chase accounts for its employee stock-based compensation plans under the
intrinsic-value-based method in accordance with SFAS 123. There is no expense
recognized for stock options, as they have no intrinsic value on the grant date.
Forfeitable restricted stock and RSUs are expensed based upon the target prices.
The expense for restricted stock and RSUs other than forfeitable awards is
measured by the grant-date stock price. Pre-tax stock compensation expense
recognized in reported earnings totaled $253 million in 1998, $228 million in
1997, and $65 million in 1996. The increase from 1996 to 1997 primarily resulted
from increases in Chase's stock price, which increased the value and triggered
the vesting of some awards. In 1998 and 1997 there was $37 million and $135
million, respectively, of costs incurred for the accelerated vesting of
stock-based incentive awards.
If Chase had adopted the fair-value-based method pursuant to SFAS 123,
options would be valued using a Black-Scholes model. Forfeitable restricted
stock and RSUs would be valued at the grant-date stock price, after deducting
the value assigned to the probability that the stock price would not reach the
target. The expense would be the same as under the intrinsic-value-based method
for restricted stock and RSUs other than forfeitable awards, and for any awards
for which cash payments may be received in lieu of stock. The pro forma net
income and basic and diluted earnings per share impact, if the fair-value-based
method were adopted, would have been up to 5.7% lower than reported 1998
amounts, 2.5% lower than reported 1997 amounts, and 1.5% lower than reported
1996 amounts. The impact of stock compensation on pro forma expense increased in
1998 and 1997, as compared with the respective prior years, primarily due to the
impact of the vesting of options granted in December 1997 and 1996 under the
Value Sharing Plan and the higher fair value of options as compared with the
prior years. The 1997 and 1996 Value Sharing Plan options vested when the
targets were achieved in 1998 and 1997, respectively, and therefore all
remaining pro forma expense would have been recognized. The fair value of 1998
and 1997 grants increased over the respective prior years as a result of updated
valuation assumptions, based on factors such as the increase in the stock price.
The following table presents the weighted-average grant-date fair value
for equity awards and the assumptions used to value the options using a
Black-Scholes model for equity awards granted during the past three years.
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted-Average Grant-Date Fair Value:(a)
Options Granted to:
Key Employees $14.69 $13.29 $ 6.96
All Other Employees 18.50 14.57 8.33
All Restricted Stock and
RSUs Payable in Stock 50.01 47.87 23.08
Weighted-Average Annualized Option
Valuation Assumptions:
Risk-Free Interest Rate 4.81% 5.96% 5.99%
Expected Dividend Yield(b) 2.66 2.29 3.50
Expected Common Stock Price Volatility 31 23 22
Assumed Weighted-Average Expected
Life of Options (in Years):
Key Employee Stock Options 6.8 6.3 7.2
Broad-Based Employee Stock Options 6.0 6.0 5.1
- --------------------------------------------------------------------------------
</TABLE>
(a) Under the fair-value-based method, the grant-date fair value for an option
equals the sum of the annual probability of exercise or vested
termination, multiplied by the dividend-adjusted Black-Scholes-derived
value of an option terminating in that year.
(b) The expected dividend yield is based primarily on historical data at the
grant dates.
63
<PAGE> 63
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
17 -- RESTRICTIONS ON CASH AND INTERCOMPANY FUNDS TRANSFERS
- --------------------------------------------------------------------------------
The Federal Reserve Board requires depository institutions to maintain cash
reserves with a Federal Reserve Bank. The average amount of reserve balances
deposited by Chase's bank subsidiaries with various Federal Reserve Banks was
approximately $0.7 billion during both 1998 and 1997.
Restrictions imposed by Federal law prohibit Chase and certain other
affiliates from borrowing from banking subsidiaries unless the loans are secured
in specified amounts. Such secured loans to Chase or to other affiliates
generally are limited to 10% of the banking subsidiary's total capital, as
determined by the risk-based capital guidelines; the aggregate amount of all
such loans is limited to 20% of the banking subsidiary's total capital, as
determined by the risk-based capital guidelines. Chase and its affiliates were
well within these limits throughout the year.
The principal sources of Chase's income (on a parent company-only basis)
are dividends and interest from Chase Bank and the other banking and nonbanking
subsidiaries of Chase. In addition to dividend restrictions set forth in
statutes and regulations, the Federal Reserve Board, the Office of the
Comptroller of the Currency ("OCC") and the Federal Deposit Insurance
Corporation ("FDIC") have authority under the Financial Institutions Supervisory
Act to prohibit or to limit the payment of dividends by the banking
organizations they supervise, including Chase and its subsidiaries that are
banks or bank holding companies, if, in the banking regulator's opinion, payment
of a dividend would constitute an unsafe or unsound practice in light of the
financial condition of the banking organization.
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 $2.6 billion at December 31, 1998.
- --------------------------------------------------------------------------------
18 -- CAPITAL
- --------------------------------------------------------------------------------
There are two categories of risk-based capital: core capital (referred to as
Tier 1 Capital) and supplementary capital (referred to as Tier 2 Capital). Tier
1 Capital includes common stockholders' equity, qualifying preferred stock,
minority interest, less goodwill and other adjustments. Tier 2 Capital consists
of preferred stock not qualifying as Tier 1, long-term debt and other
instruments qualifying as Tier 2, and the aggregate allowance for credit losses
up to a certain percentage of risk-weighted assets. Under the risk-based capital
guidelines of the Federal Reserve Board, Chase is required to maintain minimum
ratios of Tier 1 and Total (Tier 1 plus Tier 2) Capital to risk-weighted assets.
Failure to meet these minimum requirements could result in actions taken by the
regulators. Bank subsidiaries are also subject to these capital requirements by
their respective primary regulators. Management believes that as of December 31,
1998, Chase met all capital requirements to which it is subject and is not aware
of any subsequent events that would alter this classification.
The following table presents the risk-based capital ratios for Chase and
its significant banking subsidiaries.
<TABLE>
<CAPTION>
Ratios
Risk- Adjusted ----------------------------------------------
Tier 1 Total Weighted Average Tier 1 Total Tier 1
December 31, 1998 (in millions) Capital(b)(c) Capital(c) Assets(d) Assets Capital(c)(e) Capital(c)(e) Leverage(c)(f)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Chase(a) $ 24,116 $ 34,829 $289,367 $375,886 8.33% 12.04% 6.42%
- ----------------------------------------------------------------------------------------------------------------------------------
Chase Bank 17,965 26,161 231,026 303,839 7.78% 11.32% 5.91%
- ----------------------------------------------------------------------------------------------------------------------------------
Chase USA 2,964 4,117 32,677 31,873 9.07% 12.60% 9.30%
- ----------------------------------------------------------------------------------------------------------------------------------
Chase Texas 1,401 2,050 19,740 23,607 7.10% 10.39% 5.93%
- ----------------------------------------------------------------------------------------------------------------------------------
Well Capitalized Ratios(g) 6.00% 10.00% 5.00%(h)
- ----------------------------------------------------------------------------------------------------------------------------------
Minimum Capital Ratios(g) 4.00% 8.00% 3.00%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Assets and capital amounts for Chase's banking subsidiaries reflect
intercompany transactions, whereas the respective amounts for Chase
reflect the elimination of intercompany transactions.
(b) In accordance with Federal Reserve Board risk-based capital guidelines,
minority interest for Chase includes preferred stock instruments issued by
subsidiaries of Chase. For a further discussion, see Notes Six and Seven.
(c) The provisions of SFAS 115 do not apply to the calculations of the Tier 1
Capital and Tier 1 Leverage ratios. Effective September 30, 1998, the
risk-based capital guidelines were changed to permit the inclusion of 45%
of the pre-tax unrealized gain on certain equity securities in the
calculation of Tier 2 Capital. This change in the risk-based guidelines
had an immaterial impact on Chase's 1998 Tier 2 and Total Capital ratios.
(d) Includes off-balance sheet risk-weighted assets in the amounts of $95,059
million, $86,409 million, $3,815 million and $4,015 million, respectively,
at December 31, 1998.
(e) 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.
(f) Tier 1 Capital divided by adjusted average assets (net of allowance for
credit losses, goodwill and certain intangible assets).
(g) As defined by the regulations issued by the Federal Reserve Board, the
FDIC and the OCC.
(h) Represents requirements for bank subsidiaries pursuant to regulations
issued under The Federal Deposit Insurance Corporation Improvement Act.
There is no Tier 1 Leverage component in the definition of a well
capitalized bank holding company.
64
<PAGE> 64
- --------------------------------------------------------------------------------
19 -- DERIVATIVE AND FOREIGN EXCHANGE CONTRACTS
- --------------------------------------------------------------------------------
Chase utilizes derivative and foreign exchange financial instruments for both
trading and non-trading activities, such as ALM. A discussion of the credit and
market risks involved with these instruments is included in the first six
paragraphs of the Derivative and Foreign Exchange Contracts section of the
Management's Discussion and Analysis ("MD&A") on pages 34-35, and paragraphs one
through four of the Market Risk Management section of the MD&A on page 36.
Derivative and Foreign Exchange Instruments Used for Trading Purposes: The
credit risk associated with Chase's trading activities is recorded on the
balance sheet. The effects of any market risk (gains or losses) on Chase's
trading activities have been reflected in trading revenue, as the trading
instruments are marked-to-market daily. See Note One.
Derivative and Foreign Exchange Instruments Used for ALM Activities: A
discussion of Chase's objectives and strategies for using these instruments for
ALM activities is included in the first four paragraphs of the Asset/Liability
Management discussion of the MD&A on page 38.
Chase believes the best measure of credit risk is the mark-to-market
exposure amount of the derivative or foreign exchange contract. This is also
referred to as repayment risk or the replacement cost.
While notional principal is the most commonly used volume measure in the
derivative and foreign exchange markets, it is not a useful measure of credit or
market risk. The notional principal typically does not change hands, but is
simply a quantity upon which interest and other payments are calculated. The
notional principal amounts of Chase's derivative and foreign exchange products
greatly exceed the possible credit and market loss that could arise from such
transactions.
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(a) Credit Exposure
---------------------- ----------------------
December 31, (in billions) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Rate Contracts
Interest Rate Swaps
Trading $4,882.4 $3,206.0 $ 10.8 $ 14.0
ALM 97.8 98.2 0.3 0.6
Futures, Forwards and Forward Rate Agreements
Trading 2,090.0 1,643.7 0.4 0.3
ALM 74.6 42.6 -- --
Purchased Options
Trading 443.8 316.1 1.5 1.7
ALM 52.6 13.1 -- --
Written Options
Trading 503.2 395.7 -- --
ALM 27.5 0.2 -- --
- -----------------------------------------------------------------------------------------------------------
Total Interest Rate Contracts $8,171.9 $5,715.6 $ 13.0 $ 16.6
- -----------------------------------------------------------------------------------------------------------
Foreign Exchange Contracts
Spot, Forward and Futures Contracts
Trading $1,532.6 $1,521.7 $ 11.0 $ 14.4
ALM 54.0 72.6 -- --
Other Foreign Exchange Contracts(b)
Trading 449.8 358.7 5.0 5.8
ALM 4.2 5.2 -- --
- -----------------------------------------------------------------------------------------------------------
Total Foreign Exchange Contracts $2,040.6 $1,958.2 $ 16.0 $ 20.2
- -----------------------------------------------------------------------------------------------------------
Debt, Equity, Commodity and Other Contracts
Trading $ 140.5 $ 64.4 $ 4.3 $ 1.6
- -----------------------------------------------------------------------------------------------------------
Total Debt, Equity, Commodity and Other Contracts $ 140.5 $ 64.4 $ 4.3 $ 1.6
- -----------------------------------------------------------------------------------------------------------
Total Credit Exposure Recorded on the Balance Sheet $ 33.3 $ 38.4
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(a) The notional amounts of exchange-traded interest rate contracts, foreign
exchange contracts, and equity, commodity and other contracts were $699.3
billion, $3.3 billion and $3.9 billion, respectively, at December 31,
1998, compared with $691.2 billion, $22.8 billion and $6.1 billion,
respectively, at December 31, 1997. The credit risk for these contracts
was minimal as exchange-traded contracts principally settle daily in cash.
(b) Includes notional amounts of purchased options, written options and
cross-currency interest rate swaps of $137.0 billion, $ 137.9 billion and
$179.1 billion, respectively, at December 31, 1998, compared with $123.9
billion, $126.6 billion and $113.4 billion, respectively, at December 31,
1997.
65
<PAGE> 65
Notes to Consolidated Financial Statements
Classes of Derivative and Foreign Exchange Instruments: The following
instruments are used by Chase for purposes of both trading and ALM activities.
Derivative and foreign exchange instruments may be broadly categorized as
exchange-traded or over-the-counter ("OTC"). Exchange-traded instruments are
executed through a recognized exchange as standardized contracts, and are
primarily futures and options. OTC contracts are executed between two
counterparties who negotiate specific agreement terms, including the underlying
instrument, notional amount, exercise price and maturity. In this context the
underlying instrument may include interest rates, foreign exchange rates,
commodities, debt or equity instruments.
Interest rate swaps are contracts in which a series of interest rate flows
in a single currency are exchanged over a prescribed period. Interest rate swaps
are the most common type of derivative contract that Chase utilizes for both
assets and liabilities. An example of a situation in which Chase would utilize
an interest rate swap would be to convert its fixed-rate debt to a variable
rate. By entering into the swap, the principal amount of the debt would remain
unchanged but the interest streams would change. Cross-currency interest rate
swaps are contracts that generally involve the exchange of both interest and
principal amounts in two different currencies.
Interest rate futures and forwards are contracts for the delayed delivery
of securities or money market instruments. The selling party agrees to deliver
on a specified future date, a specified instrument, at a specified price or
yield.
Forward rate agreements are contracts to exchange payments on a specified
future date, based on a market change in interest rates from trade date to
contract settlement date.
Interest rate options, including caps and floors, are contracts to modify
interest rate risk in exchange for the payment of a premium when the contract is
initiated. As a writer of interest rate options, Chase receives a premium in
exchange for bearing the risk of unfavorable changes in interest rates.
Conversely, as a purchaser of an option, Chase pays a premium for the right, but
not the obligation, to buy or sell a financial instrument or currency at
predetermined terms in the future. Foreign currency options are similar to
interest rate options, except that they are based on foreign exchange rates.
Chase's use of written options as part of its ALM activities is permitted
only in those circumstances where they are specifically linked to purchased
options. All unmatched written options are included in the trading portfolio at
fair value.
Foreign exchange contracts are used for the future receipt or delivery of
foreign currency at previously agreed-upon terms.
Debt, equity, commodity and other contracts include swaps and options and
are similar to interest rate contracts, except that the underlying instrument is
debt, equity or commodity-related. Credit derivatives are considered
debt-related and are included in this category of derivatives.
These instruments are all subject to market risk, representing potential
loss due to adverse movements in the underlying instrument. Credit risk arises
primarily from OTC contracts, since exchange-traded contracts are generally
settled daily.
Market risk is reduced by entering into offsetting positions using other
financial instruments.
Credit risk is reduced significantly by entering into legally enforceable
master netting agreements. To further reduce exposure, management may deem it
necessary to obtain collateral. The amount and nature of the collateral obtained
is based on management's credit evaluation of the customer. Collateral held
varies, but may include cash, securities, accounts receivable, inventory,
property, plant and equipment and real estate.
- --------------------------------------------------------------------------------
20 -- OFF-BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
In addition to derivative and foreign exchange instruments, Chase also utilizes
lending-related financial instruments in order to meet the financing needs of
its customers. Chase issues commitments to extend credit, standby and other
letters of credit and guarantees, and also provides securities-lending services.
For lending-related financial instruments, the contractual amount of the
financial instrument represents the maximum potential credit risk if the
counterparty does not perform according to the terms of the contract. A large
majority of these commitments expire without being drawn upon. As a result,
total contractual amounts are not representative of Chase's actual future credit
exposure or liquidity requirements for these commitments.
To provide for risks of losses inherent in the credit extension process,
Chase allocates $170 million of its allowance for credit losses to
lending-related commitments, which is reported in Other Liabilities. See Note
One.
The following table summarizes the contract amounts relating to Chase's
lending-related financial instruments at December 31, 1998 and 1997.
OFF-BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
December 31, (in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Credit Card Lines $ 80,763 $ 75,659
Other Unfunded Commitments to Extend Credit 144,519 123,569
Standby Letters of Credit and Guarantees (Net of
Risk Participations of $6,666 and $6,309) 32,277 33,164
Other Letters of Credit 3,740 4,665
Customers' Securities Lent 58,592 52,123
- --------------------------------------------------------------------------------
</TABLE>
66
<PAGE> 66
Unfunded commitments to extend credit are agreements to lend to a customer who
has complied with predetermined contractual conditions. Commitments generally
have fixed expiration dates.
Standby letters of credit and guarantees are conditional commitments
issued by Chase generally to guarantee the performance of a customer to a third
party in borrowing arrangements, such as commercial paper, bond financing,
construction and similar transactions. The credit risk involved in issuing
standby letters of credit is essentially the same as that involved in extending
loan facilities to customers and may be reduced by participations to third
parties. Chase holds collateral to support those standby letters of credit and
guarantees when deemed necessary.
Customers' securities lent are customers' securities held by Chase, as
custodian, which are lent to third parties. Chase obtains collateral, with a
market value exceeding 100% of the contract amount, for customers' securities
lent, which is used to indemnify customers against possible losses resulting
from third-party defaults.
- --------------------------------------------------------------------------------
21 -- CREDIT RISK CONCENTRATIONS
- --------------------------------------------------------------------------------
Concentrations of credit risk arise when a number of customers are engaged in
similar business activities, or activities in the same geographic region, or
have similar economic features that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic
conditions.
Chase regularly monitors various segments of its credit risk portfolio to
assess potential concentration risks and to obtain collateral when deemed
necessary.
Chase's exposures within these major segments are diversified and these
diversification factors reduce concentration risk. For geographic and other
concentrations, reference is made to the following tables in the MD&A:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
Residential Mortgage Loans by Geographic Region Table on Page 32
- --------------------------------------------------------------------------------
Managed Credit Card Loans by Geographic Region Table on Page 32
- --------------------------------------------------------------------------------
Auto Financings by Geographic Region Table on Page 32
- --------------------------------------------------------------------------------
Cross-Border Exposure Table on Page 34
- --------------------------------------------------------------------------------
Derivative and Foreign Exchange Contracts Table on Page 35
- --------------------------------------------------------------------------------
</TABLE>
The table below indicates major product and industry segments including
both on-balance sheet (principally loans) and off-balance sheet (principally
commitments to extend credit) exposures.
<TABLE>
<CAPTION>
1998 Distributions 1997 Distributions
---------------------------------------- ----------------------------------------
Credit On-Balance Off-Balance Credit On-Balance Off-Balance
December 31, (in billions) Exposure Sheet Sheet Exposure Sheet Sheet
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Credit Cards $ 95.7 $ 14.9 $ 80.8 $ 91.9 $ 16.2 $ 75.7
Residential Mortgages 45.2 43.3 1.9 42.0 40.2 1.8
Depository Institutions 51.5 33.9 17.6 53.5 36.3 17.2
Auto Financings 16.8 16.5 0.3 13.6 13.3 0.3
Commercial Real Estate 7.0 4.4 2.6 9.0 5.7 3.3
- --------------------------------------------------------------------------------------------------------------------------
Total $ 216.2 $ 113.0 $ 103.2 $ 210.0 $ 111.7 $ 98.3
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
67
<PAGE> 67
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
22 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
The fair value of a financial instrument is the current amount that would be
exchanged between willing parties (other than in a forced sale or liquidation),
and is best evidenced by a quoted market price, if one exists.
Quoted market prices are not available for a significant portion of
Chase's financial instruments. As a result, the fair values presented are
estimates derived using present value or other valuation techniques and may not
be indicative of net realizable value. In addition, the calculation of estimated
fair value is based on market conditions at a specific point in time and may not
be reflective of future fair values.
Certain financial instruments and all nonfinancial instruments are
excluded from the scope of SFAS 107. Accordingly, the fair value disclosures
required by SFAS 107 provide only a partial estimate of the fair value of Chase.
For example, the values associated with the various ongoing businesses that
Chase operates are excluded. Chase has developed long-term relationships with
its customers through its deposit base and its credit card accounts, commonly
referred to as core deposit intangibles and credit card relationships. In the
opinion of management, these items in the aggregate add significant value to
Chase, but their fair value is not disclosed in this Note.
Fair values among financial institutions are not comparable due to the
wide range of permitted valuation techniques and numerous estimates that must be
made. This lack of objective valuation standard introduces a great degree of
subjectivity to these derived or estimated fair values. Therefore, readers are
cautioned in using this information for purposes of evaluating the financial
condition of Chase compared with other financial institutions.
The following summary presents the methodologies and assumptions used to
estimate the fair value of Chase's financial instruments required under the
guidelines of SFAS 107.
Financial Assets
Assets for Which Fair Value Approximates Carrying Value: The fair values of
certain financial assets carried at cost, including cash and due from banks,
deposits with banks, Federal funds sold and securities purchased under resale
agreements, due from customers on acceptances, short-term receivables and
accrued interest receivable, are considered to approximate their respective
carrying values due to their short-term nature and generally negligible credit
losses.
Trading Assets: Chase carries trading assets, which include debt and equity
instruments as well as the positive fair value on derivative and foreign
exchange instruments, at estimated fair value.
Securities: Held-to-maturity securities are carried at amortized cost.
Available-for-sale securities and related derivative contracts are carried at
fair value. The fair value of actively-traded securities is determined by the
secondary market, while the fair value for nonactively-traded securities is
based on independent broker quotations.
Loans: Loans are valued using methodologies suitable for each type of loan.
The fair value of Chase's commercial loan portfolio is estimated by
assessing the two main risk components of the portfolio: credit and interest.
The estimated cash flows are adjusted to reflect the inherent credit risk and
then discounted, using rates appropriate for each maturity that incorporate the
effects of interest rate changes. Generally, emerging market loans are valued
based on secondary market prices.
For consumer installment loans (including auto financings) and residential
mortgages for which market rates for comparable loans are readily available, the
fair values are estimated by discounting cash flows, adjusted for prepayments.
The discount rates used for consumer installment loans are current rates offered
by commercial banks and thrifts. For residential mortgages, secondary market
yields for comparable MBSs, adjusted for risk, are used. The fair value of
credit card receivables is estimated by discounting expected cash flows. The
discount rates used for credit card receivables incorporate the effects of
interest rate changes only, since the estimated cash flows are adjusted for
credit risk.
Other Assets: This caption consists primarily of equity investments, including
private equity investments. The fair value of these investments is determined on
an individual basis. The valuation methodologies include market values of
publicly-traded securities, cash flow analyses and reference to values of
comparable private companies.
Financial Liabilities
Liabilities for Which Fair Value Approximates Carrying Value: SFAS 107 requires
that the fair value disclosed for deposit liabilities with no stated maturity
(i.e., demand, savings and certain money market deposits) be equal to the
carrying value. SFAS 107 does not allow for the recognition of the inherent
funding value of these instruments.
The fair value of foreign deposits, Federal funds purchased and securities
sold under repurchase agreements, commercial paper, other borrowed funds,
acceptances outstanding, accounts payable and accrued liabilities are considered
to approximate their respective carrying values due to their short-term nature.
68
<PAGE> 68
Domestic Time Deposits: The fair value of time deposits is estimated by
discounting cash flows based on contractual maturities at the interest rates for
raising funds of similar maturity.
Trading Liabilities: Chase carries trading liabilities, which include securities
sold, not yet purchased, structured notes as well as derivative and foreign
exchange contracts, at estimated fair value.
Long-Term Debt-Related Instruments: The valuation of long-term debt, including
the guaranteed preferred beneficial interests in Chase's junior subordinated
deferrable interest debentures, takes into account several factors, including
current market interest rates and Chase's credit rating. Quotes are gathered
from various investment banking firms for indicative yields for Chase's
securities over a range of maturities.
Chase has reviewed the unfunded portion of commitments to extend credit as
well as standby and other letters of credit and has determined that the fair
value of such financial instruments is not material.
The following table presents the carrying value and estimated fair value
of financial assets and liabilities valued under SFAS 107 and certain derivative
contracts used for ALM activities related to these financial assets and
liabilities.
<TABLE>
<CAPTION>
Financial Assets/
Financial Liabilities Derivative Contracts Used for ALM Activities
------------------------------- -----------------------------------------------------
Estimated Gross Gross Estimated
Carrying Fair Carrying Unrecognized Unrecognized Fair
December 31, 1998 (in millions) Value(a)(b) Value(a)(b) Value(c) Gains Losses Value(e)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Financial Assets:
Assets for Which Fair Value Approximates
Carrying Value $ 59,251 $ 59,251 $ 41 $ 70 $(159) $ (48)
Trading Assets 57,692 57,692 -- -- -- --
Securities Available-for-Sale 62,803 62,803 (151) -- -- (151)
Securities Held-to-Maturity 1,687 1,703 -- -- -- --
Loans, Net of Allowance for Loan Losses 169,202 171,063 90 335 (678) (253)
Other Assets(d) 5,103 6,047 118 283 (74) 327
- ------------------------------------------------------------------------------------------------------------------------------------
Total Financial Assets $355,738 $358,559 $ 98 $688 $(911) $(125)
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Liabilities:
Liabilities for Which Fair Value Approximates
Carrying Value $247,833 $247,833 $ 106 $159 $(413) $(148)
Domestic Time Deposits 35,933 35,746 260 308 (112) 456
Trading Liabilities 38,502 38,502 -- -- -- --
Long-Term Debt-Related Instruments 18,375 18,438 68 430 (31) 467
- ------------------------------------------------------------------------------------------------------------------------------------
Total Financial Liabilities $340,643 $340,519 $ 434 $897 $(556) $ 775
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1997 (in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Assets:
Assets for Which Fair Value Approximates
Carrying Value $ 63,969 $ 63,969 $ 54 $ 45 $ (17) $ 82
Trading Assets 72,393 72,393 -- -- -- --
Securities Available-for-Sale 49,755 49,755 (51) -- -- (51)
Securities Held-to-Maturity 2,983 2,995 -- -- -- --
Loans, Net of Allowance for Loan Losses 164,830 167,122 183 130 (485) (172)
Other Assets(d) 3,147 3,741 155 197 (66) 286
- ------------------------------------------------------------------------------------------------------------------------------------
Total Financial Assets $357,077 $359,975 $ 341 $372 $(568) $ 145
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Liabilities:
Liabilities for Which Fair Value Approximates
Carrying Value $250,433 $250,433 $ 58 $ 97 $(381) $(226)
Domestic Time Deposits 24,503 23,569 242 150 (226) 166
Trading Liabilities 52,438 52,438 -- -- -- --
Long-Term Debt-Related Instruments 15,127 15,260 45 200 (33) 212
- ------------------------------------------------------------------------------------------------------------------------------------
Total Financial Liabilities $342,501 $341,700 $ 345 $447 $(640) $ 152
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes the carrying value and estimated fair value of derivative
contracts used for ALM activities.
(b) The carrying value and estimated fair value of daily margin settlements on
open futures contracts are primarily included in Other Assets on the
balance sheet, except when used in connection with available-for-sale
securities, which are carried at fair value and are included in
Securities Available-for-Sale on the balance sheet. Chase uses futures
contracts in its ALM activities to modify the interest rate
characteristics of balance sheet instruments such as available-for-sale
securities, loans and deposits. Unrecognized net losses from daily margin
settlements on open futures contracts were $8 million at December 31, 1998
and $3 million at December 31, 1997.
(c) The carrying value of derivatives used for ALM activities is recorded as
receivables and payables and is primarily included in Other Assets on the
balance sheet, except for derivatives used in connection with
available-for-sale securities, which are carried at fair value and are
included in Securities: Available-for-Sale on the balance sheet.
(d) At December 31, 1998, deferred gains and losses associated with
anticipatory ALM transactions were insignificant.
(e) Derivative contracts used for ALM activities were valued using market
prices or pricing models consistent with methods used by Chase in valuing
similar instruments used for trading purposes.
69
<PAGE> 69
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
23 -- SEGMENT INFORMATION
- --------------------------------------------------------------------------------
Effective December 31, 1998, Chase adopted SFAS 131 which defines the criteria
by which management determines the number and nature of its "operating segments"
and sets forth the financial information that is required to be disclosed about
these operating segments.
Chase's businesses are organized into three major franchises (segments):
Global Bank, National Consumer Services ("NCS") and Chase Technology Solutions
("CTS"), which includes Global Services. These franchises are based on the
nature of the products and services provided, the type or class of customer, and
Chase's management organization.
Chase uses SVA, Operating Earnings and Cash Operating Earnings as its
measures of franchise profitability. For a discussion of these measurements, see
Management Performance Measurements in the MD&A on page 19 and the Glossary of
Terms on page 76.
The accounting policies of the segments are principally the same as those
described in Note One. Operating revenues and expenses directly associated with
each respective franchise are included in determining their operating earnings.
Guidelines exist for assigning those remaining expenses that are not directly
incurred by the franchises, such as overhead and taxes. In addition, management
has developed a risk-adjusted capital methodology that quantifies different
types of risk -- credit, market and operating -- within the various businesses
and assigns capital
SEGMENT RESULTS AND RECONCILIATION (Table continued on next page)
<TABLE>
<CAPTION>
Global National Global Services
Year Ended December 31, Bank Consumer Services (Within CTS)
------------------------------- ------------------------------ --------------------------
(in millions, except ratios) 1998 1997 1996 1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Net Interest Income $ 2,914 $ 3,160 $ 3,205 $ 5,528 $ 5,266 $ 4,931 $ 1,135 $1,031 $ 961
Operating Noninterest Revenue 6,456 5,285 4,977 2,654 2,062 1,730 1,458 1,247 1,131
Equity-Related Income(b) 1 26 1 34 22 13 -- 5 5
Intersegment Revenue(c) (73) 1 (195) (13) (9) (11) 74 58 27
- ------------------------------------------------------------------------------------------------------------------------------------
Total Revenue 9,298 8,472 7,988 8,203 7,341 6,663 2,667 2,341 2,124
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest Expense 4,242 3,787 3,624 3,859 3,604 3,507 1,830 1,628 1,585
Non-Cash Expense(d) 208 215 251 318 242 234 85 58 50
- ------------------------------------------------------------------------------------------------------------------------------------
Total Expense 4,450 4,002 3,875 4,177 3,846 3,741 1,915 1,686 1,635
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Margin 4,848 4,470 4,113 4,026 3,495 2,922 752 655 489
Credit Costs 345 390 379 2,230 1,817 1,363 2 2 1
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Earnings (Loss)
Before Taxes 4,503 4,080 3,734 1,796 1,678 1,559 750 653 488
Income Taxes (Benefit) 1,690 1,541 1,423 694 648 609 284 245 182
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Earnings (Loss) $ 2,813 $ 2,539 $ 2,311 $ 1,102 $ 1,030 $ 950 $ 466 $ 408 $ 306
Restructuring Costs and
Special Items -- -- -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income -- -- -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Operating Earnings (Loss) $ 2,855 $ 2,572 $ 2,347 $ 1,265 $ 1,128 $ 1,044 $ 496 $ 423 $ 319
- ------------------------------------------------------------------------------------------------------------------------------------
Average Common Equity $ 13,924 $ 12,989 $ 12,674 $ 6,381 $ 5,260 $ 4,973 $ 1,879 $1,687 $1,707
Average Managed Assets(e) $267,227 $260,809 $236,903 $106,703 $95,264 $86,064 $10,386 $9,403 $7,564
Shareholder Value Added $ 985 $ 770 $ 560 $ 409 $ 400 $ 344 $ 243 $ 188 $ 78
Cash Return on Common Equity 20.1% 19.0% 17.4% 19.4% 20.6% 19.9% 26.0% 24.2% 17.6%
Cash Efficiency Ratio 47% 47% 48% 49% 51% 55% 70% 71% 76%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Corporate/Reconciling Items includes the non-global services portion of
Chase Technology Solutions, Global Asset Management and Mutual Funds
business, corporate staff areas and the net effect of management
accounting policies.
(b) Equity-related income includes all equity income of investees accounted
for by the equity method.
(c) Intersegment revenue includes intercompany revenue and revenue sharing
agreements, net of intersegment expenses. Transactions between business
segments are primarily conducted at fair value.
(d) Non-cash expense represents all depreciation and amortization expense
included in Noninterest Expense.
(e) Excludes the impact of credit card securitizations. The impact of
securitizations on total average assets was $18,011 million in 1998,
$14,553 million in 1997 and $10,634 million in 1996.
NM - Not Meaningful
70
<PAGE> 70
accordingly. The provision for loan losses is allocated to the segments
utilizing a credit risk methodology applied consistently across Chase and a risk
grading system appropriate for a segment's portfolio.
The Corporate/Reconciling Items column reflects revenues and expenses
excluded from the determination of the franchises' operating earnings. This
column includes the effects remaining at the Corporate level after the
implementation of management accounting policies, including residual provision
for loan losses and income tax expenses (the difference between the amounts
allocated to business units and Chase's consolidated provision for loan losses
and income tax expense). Also included are the results of certain operations,
such as Chase's Global Asset Management and Mutual Funds business and the
non-global services portion of Chase Technology Solutions. A summary of the
segment results and reconciliation is shown in the following table.
For a further discussion concerning Chase's business franchises
(segments), including a description of products, services and method of
distribution, see Lines of Business Results in the MD&A on page 19.
Additionally, financial information relating to Chase's operations by geographic
area is in the following note (Note Twenty-Four).
SEGMENT RESULTS AND RECONCILIATION (continuation of table)
<TABLE>
<CAPTION>
Year Ended December 31, Corporate/Reconciling Items(a) Total
------------------------------ -------------------------------------
(in millions, except ratios) 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating Net Interest Income $ (453) $ (564) $ (392) $ 9,124 $ 8,893 $ 8,705
Operating Noninterest Revenue 99 120 (149) 10,667 8,714 7,689
Equity-Related Income(b) (2) 39 38 33 92 57
Intersegment Revenue(c) 12 (50) 179 -- -- --
- ---------------------------------------------------------------------------------------------------------------
Total Revenue (344) (455) (324) 19,824 17,699 16,451
- ---------------------------------------------------------------------------------------------------------------
Noninterest Expense 23 -- (121) 9,954 9,019 8,595
Non-Cash Expense(d) 247 221 199 858 736 734
- ---------------------------------------------------------------------------------------------------------------
Total Expense 270 221 78 10,812 9,755 9,329
- ---------------------------------------------------------------------------------------------------------------
Operating Margin (614) (676) (402) 9,012 7,944 7,122
Credit Costs 130 (400) (292) 2,707 1,809 1,451
- ---------------------------------------------------------------------------------------------------------------
Operating Earnings (Loss) Before Taxes (744) (276) (110) 6,305 6,135 5,671
Income Taxes (Benefit) (379) (148) (59) 2,289 2,286 2,155
- ---------------------------------------------------------------------------------------------------------------
Operating Earnings (Loss) $ (365) $ (128) $ (51) $ 4,016 $ 3,849 $ 3,516
Restructuring Costs and Special Items -- -- -- (234) (141) (1,055)
- ---------------------------------------------------------------------------------------------------------------
Net Income -- -- -- $ 3,782 $ 3,708 $ 2,461
- ---------------------------------------------------------------------------------------------------------------
Cash Operating Earnings (Loss) $ (339) $ (102) $ (25) $ 4,277 $ 4,021 $ 3,685
- ---------------------------------------------------------------------------------------------------------------
Average Common Equity $ (856) $(1,108) $(1,389) $ 21,328 $ 18,828 $ 17,965
Average Managed Assets(e) $ 6,906 $ 5,423 $ 1,343 $ 391,222 $ 370,899 $ 331,874
Shareholder Value Added $ (231) $ 35 $ 149 $ 1,406 $ 1,393 $ 1,131
Cash Return on Common Equity NM NM NM 19.6% 20.4% 19.3%
Cash Efficiency Ratio NM NM NM 53% 54% 56%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
71
<PAGE> 71
Notes to Consolidated Financial Statements
The tables below present reconciliations of the combined segment
information included in the preceding table to Chase's reported revenues and net
income as included in the Consolidated Statement of Income.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Segments' Operating Revenues $ 20,168 $ 18,154 $ 16,775
Corporate/Reconciling items (344) (455) (324)
- --------------------------------------------------------------------------------
Consolidated Operating Revenues 19,824 17,699 16,451
Impact of securitizations (1,148) (993) (570)
Provision for risk management
instrument credit losses (211) -- --
Special items 191 102 (6)
- --------------------------------------------------------------------------------
Consolidated Revenue $ 18,656 $ 16,808 $ 15,875
- --------------------------------------------------------------------------------
Year Ended December 31, (in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Segments' Cash Operating Earnings $ 4,616 $ 4,123 $ 3,710
Corporate/Reconciling items (339) (102) (25)
- --------------------------------------------------------------------------------
Consolidated Cash Operating Earnings 4,277 4,021 3,685
Amortization of goodwill
and certain intangibles (261) (172) (169)
- --------------------------------------------------------------------------------
Consolidated Operating Earnings 4,016 3,849 3,516
Special items and restructuring costs (234) (141) (1,055)
- --------------------------------------------------------------------------------
Consolidated Net Income $ 3,782 $ 3,708 $ 2,461
- --------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
24 -- INTERNATIONAL OPERATIONS
- --------------------------------------------------------------------------------
The following table presents average assets and income statement information
relating to the international and domestic operations of Chase by major
geographic areas, based on the domicile of the customer. Chase defines
international activities as business transactions that involve customers
residing outside of the United States. However, a definitive separation of
Chase's domestic and foreign businesses cannot be performed because many of
Chase's domestic operations service international business.
As these operations are highly integrated, estimates and subjective
assumptions have been made to apportion revenue and expense between domestic
and international operations. The estimates and assumptions used to apportion
revenue and expense are consistent with the allocations used for Chase's segment
reporting in Note Twenty-Three. There are no individual foreign countries where
Chase derives over 10% of its total consolidated revenue.
<TABLE>
<CAPTION>
Income
Average Before Net
For the Year Ended December 31, (in millions) Assets Revenue(a) Expense(b) Income Taxes Income
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Europe/Middle East and Africa $ 69,953 $ 1,984 $ 1,298 $ 686 $ 489
Asia and Pacific 28,167 1,250 866 384 257
Latin America and the Caribbean 12,500 706 317 389 252
Other(c) 1,340 31 14 17 9
- -----------------------------------------------------------------------------------------------------------------------------------
Total International 111,960 3,971 2,495 1,476 1,007
Total Domestic 261,251 14,685 10,231 4,454 2,775
- -----------------------------------------------------------------------------------------------------------------------------------
Total Corporation 373,211 $ 18,656 $ 12,726 $ 5,930 $ 3,782
- -----------------------------------------------------------------------------------------------------------------------------------
1997
Europe/Middle East and Africa $ 67,011 $ 2,146 $ 1,137 $ 1,009 $ 668
Asia and Pacific 21,910 1,354 793 561 359
Latin America and the Caribbean 14,552 442 344 98 66
Other(c) 1,214 31 17 14 8
- -----------------------------------------------------------------------------------------------------------------------------------
Total International 104,687 3,973 2,291 1,682 1,101
Total Domestic 251,659 12,835 8,607 4,228 2,607
- -----------------------------------------------------------------------------------------------------------------------------------
Total Corporation 356,346 $ 16,808 $ 10,898 $ 5,910 $ 3,708
- -----------------------------------------------------------------------------------------------------------------------------------
1996
Europe/Middle East and Africa $ 74,993 $ 2,245 $ 1,310 $ 935 $ 605
Asia and Pacific 28,634 1,058 827 231 141
Latin America and the Caribbean 17,222 515 359 156 92
Other(c) 1,308 30 14 16 10
- -----------------------------------------------------------------------------------------------------------------------------------
Total International 122,157 3,848 2,510 1,338 848
Total Domestic 199,083 12,027 9,554 2,473 1,613
- -----------------------------------------------------------------------------------------------------------------------------------
Total Corporation 321,240 $ 15,875 $ 12,064 $ 3,811 $ 2,461
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Revenue is comprised of Net Interest Income and Noninterest Revenue. Chase
has no single customer that represents more than 10% of its revenues.
(b) Expense is comprised of Noninterest Expense and Provision for Loan Losses.
(c) No geographic region included in Other exceeds 10% of the total for Chase.
72
<PAGE> 72
- --------------------------------------------------------------------------------
25 -- PARENT COMPANY
- --------------------------------------------------------------------------------
PARENT COMPANY - BALANCE SHEET
<TABLE>
<CAPTION>
December 31, (in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash with Banks $ 628 $ 323
Deposits with Banking Subsidiaries 5,294 1,811
Securities Purchased Under Resale Agreements 2,498 1,915
Short-Term Advances to Subsidiaries 5,460 3,868
Long-Term Advances to Subsidiaries 5,085 5,242
Investment (at Equity) in Subsidiaries 28,513 25,774
Other Assets 919 791
- --------------------------------------------------------------------------------
Total Assets $48,397 $39,724
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Other Borrowed Funds, primarily Commercial Paper $ 7,904 $ 4,812
Other Liabilities 769 715
Long-Term Debt(a) 15,886 12,455
- --------------------------------------------------------------------------------
Total Liabilities 24,559 17,982
Stockholders' Equity 23,838 21,742
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $48,397 $39,724
- --------------------------------------------------------------------------------
</TABLE>
(a) Includes long-term debt, net of discount, with subsidiaries of $2,395
million and $1,934 million at December 31, 1998 and 1997, respectively. At
December 31, 1998, aggregate principal amount of all debt that matures in
the years 1999 through 2003 were $2,023 million, $3,288 million, $1,330
million, $1,083 million and $1,057 million, respectively.
PARENT COMPANY - STATEMENT OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from Subsidiaries $2,283 $2,401 $2,000(a)
Interest from Subsidiaries 889 797 815
All Other Income 7 21 13
- --------------------------------------------------------------------------------
Total Income 3,179 3,219 2,828
- --------------------------------------------------------------------------------
Expense
Interest on:
Other Borrowed Funds, primarily
Commercial Paper 278 247 293
Long-Term Debt 945 849 742
All Other Expense 45 49 97
- --------------------------------------------------------------------------------
Total Expense 1,268 1,145 1,132
- --------------------------------------------------------------------------------
Income Before Income Tax Benefit
and Equity in Undistributed Net Income
of Subsidiaries 1,911 2,074 1,696
Income Tax Benefit 131 120 117
Equity in Undistributed Net Income
of Subsidiaries 1,740 1,514 648
- --------------------------------------------------------------------------------
Net Income $3,782 $3,708 $2,461
- --------------------------------------------------------------------------------
</TABLE>
(a) Includes a noncash dividend of $657 million.
PARENT COMPANY - STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net Income $ 3,782 $ 3,708 $ 2,461
Less--Net Income of Subsidiaries 4,023 3,915 2,648
------- ------- -------
Parent Company Net Loss (241) (207) (187)
Add--Dividends from Subsidiaries 2,283 2,401 1,343
Other, Net 29 (72) 140
- ---------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 2,071 2,122 1,296
- ---------------------------------------------------------------------------------------------------
Investing Activities
Net Change In:
Deposits with Banking Subsidiaries (3,483) 2,325 2,084
Advances to Subsidiaries (1,435) (1,944) (31)
Investment (at Equity) in Subsidiaries (723) 724 8
Securities Purchased Under Resale Agreements (583) (437) (963)
Proceeds from the Maturity/Sale of Available-for-Sale Securities -- 35 150
Other, Net (3) (92) (34)
- ---------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Investing Activities (6,227) 611 1,214
- ---------------------------------------------------------------------------------------------------
Financing Activities
Net Change in Other Borrowed Funds 3,092 37 (1,630)
Net Proceeds from the Issuance of Long-Term Debt 3,418 1,281 513
Proceeds from the Issuance of Stock 1,232 967 1,082
Redemption of Preferred Stock (912) (910) --
Treasury Stock Purchased (1,091) (2,585) (1,611)
Cash Dividends Paid (1,278) (1,212) (1,188)
- ---------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities 4,461 (2,422) (2,834)
- ---------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash with Banks 305 311 (324)
Cash with Banks at the Beginning of the Year 323 12 336
- ---------------------------------------------------------------------------------------------------
Cash with Banks at the End of the Year $ 628 $ 323 $ 12
- ---------------------------------------------------------------------------------------------------
Cash Interest Paid $ 1,242 $ 1,118 $ 1,041
Taxes Paid $ 1,072 $ 709 $ 1,297
- ---------------------------------------------------------------------------------------------------
</TABLE>
73
<PAGE> 73
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
26 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
At December 31, 1998, Chase and its subsidiaries were obligated under a number
of noncancelable operating leases for premises and equipment used primarily for
banking purposes. Certain leases contain rent escalation clauses for real estate
taxes and other operating expenses and renewal option clauses calling for
increased rents. No lease agreement imposes any restrictions on Chase's ability
to pay dividends, engage in debt or equity financing transactions, or enter into
further lease agreements. Future minimum rental payments required under
operating leases with initial and remaining noncancelable lease terms in excess
of one year as of December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, (in millions)
- --------------------------------------------------------------------------------
<S> <C>
1999 $ 400
2000 335
2001 279
2002 230
2003 187
After 810
- --------------------------------------------------------------------------------
Total Minimum Payments Required $ 2,241
- --------------------------------------------------------------------------------
Less: Sublease Rentals Under Noncancelable Subleases $ (184)
- --------------------------------------------------------------------------------
Net Minimum Payment Required $ 2,057
- --------------------------------------------------------------------------------
</TABLE>
Total rental expense was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Year Ended December 31, (in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Gross Rentals $ 511 $ 498 $ 526
Sublease Rentals (164) (170) (177)
- --------------------------------------------------------------------------------
Net Rent Expense $ 347 $ 328 $ 349
- --------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, assets amounting to $46 billion were pledged to
secure public deposits and for other purposes. The significant components of the
pledged assets at December 31, 1998 were as follows: $27 billion were
securities, $16 billion were loans, and the remaining $3 billion were primarily
trading assets.
Chase and its subsidiaries are defendants in a number of legal
proceedings. After reviewing with counsel all such actions and proceedings
pending against or involving Chase and its subsidiaries, management does not
expect the aggregate liability or loss, if any, resulting therefrom to have a
material adverse effect on the consolidated financial condition of Chase.
Chase may guarantee the obligations of its subsidiaries. These guarantees
rank on a parity with all other unsecured and unsubordinated indebtedness of
Chase. See Note Six for a discussion of Chase's guarantees of long-term debt
issues for its subsidiaries.
SUPPLEMENTARY DATA-QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
--------------------------------------- ---------------------------------------
(in millions, except per share data) 4th 3rd 2nd 1st 4th 3rd 2nd 1st
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As Reported Basis
Revenue $5,060 $4,218 $4,755 $4,623 $4,090 $4,415 $4,153 $4,150
Noninterest Expense (excluding
Restructuring Costs) 2,873 2,647 2,714 2,620 2,476 2,596 2,413 2,417
Restructuring Costs -- -- 8 521 20 71 71 30
Provision for Loan Losses 411 272 328 332 205 190 189 220
Net Income $1,146 $ 837 $1,074 $ 725 $ 874 $ 982 $ 925 $ 927
Net Income Per Common Share:
Basic $ 1.34 $ 0.96 $ 1.24 $ 0.82 $ 1.00 $ 1.11 $ 1.03 $ 1.01
Diluted 1.31 0.94 1.20 0.80 0.97 1.08 1.00 0.99
- ----------------------------------------------------------------------------------------------------------------------------
Operating Basis(a)
Operating Revenue $5,350 $4,508 $5,051 $4,915 $4,295 $4,664 $4,420 $4,320
Operating Noninterest Expense 2,870 2,614 2,712 2,616 2,473 2,505 2,413 2,364
Credit Costs(b) 704 749 626 628 471 445 456 437
Operating Earnings $1,146 $ 738 $1,079 $1,053 $ 850 $1,081 $ 969 $ 949
Operating Earnings Per Common Share:
Basic $ 1.34 $ 0.84 $ 1.24 $ 1.21 $ 0.97 $ 1.23 $ 1.08 $ 1.04
Diluted 1.31 0.82 1.21 1.17 0.94 1.19 1.06 1.01
- ----------------------------------------------------------------------------------------------------------------------------
Share Price: (c)
High $72.56 $77.56 $76.50 $69.56 $63.28 $60.25 $52.19 $55.25
Low 35.56 40.06 64.19 49.28 51.25 46.81 42.31 42.81
Close 71.00 43.13 75.50 67.44 54.75 59.00 48.53 46.94
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes the impact of credit card securitizations, restructuring costs
and special items. For a listing of special items, see Glossary of Terms
on page 76.
(b) Includes provision for loan losses, provision for risk management
instrument credit losses, foreclosed property expense and credit costs
related to the securitized credit card portfolio.
(c) Chase's common stock is listed and traded on the New York Stock Exchange
and the London Stock Exchange Limited. The high, low and closing prices of
Chase's common stock are from the New York Stock Exchange Composite
Transaction Tape. Share-related data for all prior periods have been
restated to reflect a two-for-one common stock split, effective as of
close of business May 20, 1998.
74
<PAGE> 74
Supplementary Data
SELECTED FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(in millions, except per share and ratio data)
- -------------------------------------------------------------------------------------------------------------------------
As of or for the year ended December 31, 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AS REPORTED BASIS
Revenue $ 18,656 $ 16,808 $ 15,875 $ 14,960 $ 15,013
Noninterest Expense (excluding Restructuring Costs) 10,854 9,902 9,353 9,375 9,537
Restructuring Costs 529 192 1,814 15 465
Provision for Loan Losses 1,343 804 897 758 1,050
Net Income(a) $ 3,782 $ 3,708 $ 2,461 $ 2,959 $ 2,486
- -------------------------------------------------------------------------------------------------------------------------
Net Income Per Common Share:(b)
Basic $ 4.35 $ 4.15 $ 2.57 $ 3.16 $ 2.53
Diluted 4.24 4.01 2.47 3.02 2.49
Cash Dividends Declared 1.44 1.24 1.12 0.97 0.82
Book Value at December 31, 26.90 23.76 21.29 20.90 18.69
Share Price at December 31, 71.00 54.75 44.69 29.38 17.94
- -------------------------------------------------------------------------------------------------------------------------
Performance Ratios
Return on Average Assets 1.01% 1.04% .77% .96% .87%
Return on Average Common Equity 17.27 18.73 12.48 16.15 13.86
Common Dividend Payout Ratio 33 30 44 29 30
- -------------------------------------------------------------------------------------------------------------------------
Selected Balance Sheet Items
Loans $172,754 $168,454 $155,092 $150,207 $142,231
Total Assets 365,875 365,521 336,099 303,989 285,383
Deposits 212,437 193,688 180,921 171,534 166,462
Long-Term Debt 16,187 13,387 12,714 12,825 13,061
Total Stockholders' Equity 23,838 21,742 20,994 20,836 18,873
- -------------------------------------------------------------------------------------------------------------------------
OPERATING BASIS(c)
Operating Revenue $ 19,824 $ 17,699 $ 16,451 $ 15,048 $ 14,943
Operating Noninterest Expense 10,812 9,755 9,329 9,450 9,487
Credit Costs(d) 2,707 1,809 1,451 853 1,261
Operating Earnings $ 4,016 $ 3,849 $ 3,516 $ 2,903 $ 2,559
- -------------------------------------------------------------------------------------------------------------------------
Operating Earnings Per Common Share:(b)
Basic $ 4.63 $ 4.32 $ 3.77 $ 3.10 $ 2.61
Diluted 4.51 4.17 3.64 2.96 2.57
- -------------------------------------------------------------------------------------------------------------------------
Operating Performance Ratios
Return on Average Managed Assets 1.03% 1.04% 1.06% .93% .88%
Return on Average Common Equity 18.37 19.48 18.35 15.82 14.32
Common Dividend Payout Ratio 31 29 30 29 29
Efficiency Ratio(e) 54 55 57 63 63
Shareholder Value Added (SVA) $1,406 $1,393 $1,131 $ 659 $ 403
- -------------------------------------------------------------------------------------------------------------------------
Selected Balance Sheet Items
Managed Loans $190,787 $185,306 $168,089 $156,758 $144,920
Total Managed Assets 383,908 382,373 349,096 310,540 288,072
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) 1995 includes an accounting change related to the adoption of SFAS 106 for
the accounting for other postretirement benefits relating to foreign
plans. Excluding the accounting change, net income, basic and diluted net
income per common share were $2,970 million, $3.18 and $3.04,
respectively.
(b) Share-related data for all prior periods have been restated to reflect a
two-for-one common stock split, effective as of close of business May 20,
1998.
(c) Excludes the impact of credit card securitizations, restructuring costs
and special items. For a listing of special items, see Glossary of Terms
on page 76.
(d) Includes provision for loan losses, provision for risk management
instrument credit losses, foreclosed property expense and credit costs
related to the securitized credit card portfolio.
(e) Excludes costs associated with the REIT.
75
<PAGE> 75
Glossary of Terms
The page numbers included after each definition below represent the pages in the
MD&A and Notes to Consolidated Financial Statements where the term is primarily
used.
ACH: "Automated Clearing House," a firm set up and used by member financial
institutions to combine, sort and distribute payment orders. (Page 23)
AICPA: "American Institute of Certified Public Accountants." (Page 51)
Asset/Liability Management ("ALM"): The management of the sensitivity of Chase's
income to changes in market interest rates. (Pages 38 and 49)
CAGR: "Compound Annual Growth Rate." (Pages 18, 24 and 25)
Cash Operating Earnings: Operating earnings excluding the impact of amortization
of goodwill and certain intangibles. (Page 19)
CHIPS: "Clearing House Interbank Payments System", a money transfer system that
enables banks to make transfers through a central clearinghouse mechanism. (Page
23)
Credit Risk: The risk of loss due to the failure of a borrower or counterparty
to fulfill its contractual obligations. (Page 29)
Efficiency Ratio: Noninterest expense as a percentage of the total of net
interest income and noninterest revenue (excluding restructuring costs,
foreclosed property expense, provision for risk management instrument credit
losses, special items and costs associated with the REIT). (Pages 18, 27 and 75)
FASB: Financial Accounting Standards Board. (Page 43)
Federal Deposit Insurance Corporation Improvement Act: Under the act, each
Federal banking regulator was required to revise its risk-based capital
standards to ensure that those standards took adequate account of interest rate
risk, concentration of credit risk and the risk of nontraditional activities.
(Page 64)
FedWire: A computerized money transfer system linking Federal Reserve System
banks, branches and member banks. (Page 23)
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. (Pages 19 and 32)
Market Risk: The risk of loss resulting from an adverse change in the value of
financial instruments caused by a change in market prices or rates. (Page 36)
Net Yield on Interest-Earning Assets: The average rate for interest-earning
assets less the average rate paid for all sources of funds. (Page 26)
Operating Basis or Operating Earnings: Reported results excluding the impact of
credit card securitizations, restructuring costs and special items. (Pages 18,
19 and 24)
Operating Risk: Risk of loss due to fraud by employees or outsiders,
unauthorized transactions by employees, and errors relating to computer and
telecommunications systems. (Page 41)
REIT: "Real Estate Investment Trust." (Pages 27 and 75)
SFAS: Statement of Financial Accounting Standards.
SFAS 106: "Employers' Accounting for Postretirement Benefits Other Than
Pensions." (Page 75)
SFAS 107: "Disclosures about Fair Value of Financial Instruments." (Page 68)
SFAS 109: "Accounting for Income Taxes." (Page 60)
SFAS 114: "Accounting by Creditors for Impairment of a Loan." (Page 55)
SFAS 115: "Accounting for Certain Investments in Debt and Equity Securities."
(Page 55)
SFAS 123: "Accounting for Stock-Based Compensation." (Page 63)
SFAS 125: "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." (Page 50)
SFAS 127: "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125." (Page 50)
SFAS 130: "Reporting Comprehensive Income." (Page 59)
SFAS 131: "Disclosure about Segments of an Enterprise and Related Information."
(Page 70)
SFAS 133: "Accounting for Derivative Instruments and Hedging Activities." (Page
43)
Shareholder Value Added ("SVA"): Represents operating earnings excluding the
impact of amortization of goodwill and certain intangibles (i.e., cash operating
earnings), minus preferred dividends and an explicit charge for capital. (Pages
18 and 19)
SOP 98-1: Statement of Position for "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." (Page 51)
Special Items: In 1998, included interest income from prior years' tax refunds
and costs incurred for accelerated vesting of stock-based incentive awards. In
1997, included gains on the sales of Chase's remaining interest in CIT and a
partially-owned foreign investment, as well as costs incurred for accelerated
vesting of stock-based incentive awards. 1996 included aggregate tax benefits
and refunds, the loss on the sale of a building in Japan and costs incurred in
combining Chase's foreign retirement plans. 1995 included the impact of an
accounting change, gains on the sales of Chase's investment in Far East Bank and
Trust Company, Chemical New Jersey Holdings, Inc. and the loss on the sale of
half of Chase's 40% interest in CIT. 1994 included gains on sales of assets held
for accelerated disposition and emerging markets past-due interest bonds. (Pages
19, 24 and 75)
Stress Testing: A risk management tool used to measure market risk in an extreme
market environment. (Page 36)
Value at Risk ("VAR"): The potential overnight loss from adverse market
movements. (Page 36)
Year 2000: The problem of many existing computer programs not being able to
recognize properly a year beginning with "20" instead of "19", as these programs
only use the last two digits to refer to a year. (Page 41)
76
<PAGE> 76
================================================================================
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS'
EQUITY; INTEREST RATES AND INTEREST DIFFERENTIALS
A summary of Chase's consolidated average balances, interest rates and interest
differentials on a taxable-equivalent basis for the years 1996 through 1998 is
provided on pages 78 and 79. Income computed on a taxable-equivalent basis is
the income reported in the Consolidated Statement of Income adjusted to make
income and earning yields on assets exempt from income taxes (primarily Federal
taxes) comparable to other taxable income. The incremental tax rate used for
calculating the taxable equivalent adjustment was approximately 42% in each of
the years 1996 through 1998. A substantial portion of Chase's securities are
taxable.
Within the Consolidated Average Balance Sheet, Interest and Rates summary,
the principal amounts of nonaccrual and renegotiated loans have been included in
the average loan balances used to determine the average interest rate earned on
loans. For additional information on nonaccrual loans, including interest
accrued, see Note One on page 49.
A summary of interest rates and interest differentials segregated between
domestic and foreign operations for the years 1996 through 1998 is presented on
pages 80 and 81. The segregation between domestic and foreign components is
based on the location of the office recording the transaction. A portion of
Chase's international operations are funded by domestic sources (intra-company
funding). Generally, the source of such domestic funds is the Parent Company
which, in order to optimize Chase's overall liquidity, deposits its excess
short-term funds with Chase Bank's Nassau Branch to hold until such funds are
needed. Intra-company funding is very short-term in nature and Chase believes
such funds are not subject to cross-border risk.
Domestic net interest income was $6,922 million in 1998, a decrease of $30
million from the prior year. The decrease in 1998 was primarily attributable to
ongoing credit card securitizations (which removed higher yielding credit card
loans from the balance sheet), and the impact of narrower spreads, partially
offset by interest on prior years' tax refunds. For further discussion, see the
section entitled "Net Interest Income" in the MD&A on page 25.
Net interest income from foreign operations was $1,668 million for 1998,
compared with $1,327 million in 1997. The increase reflected higher net yields
on interest-earning assets.
The table on page 82 presents an analysis of the effect on net interest
income of volume and rate changes for the periods 1998 versus 1997 and 1997
versus 1996. In this analysis, the change due to the volume/rate variance has
been allocated to volume.
77
<PAGE> 77
Consolidated Average Balance Sheet, Interest and Rates
<TABLE>
<CAPTION>
1998
Year Ended December 31, -------------------------------------
(Taxable-Equivalent Interest and Rates; in millions, except rates) Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Deposits with Banks $ 5,934 $ 642 10.82%
Federal Funds Sold and Securities Purchased
Under Resale Agreements 32,955 2,211 6.71
Trading Assets-Debt and Equity Instruments 30,021 2,431 8.10
Securities:
Available-for-Sale 56,137 3,486 6.21(a)
Held-to-Maturity 2,347 149 6.35
Loans 169,386 13,394(b) 7.91
- ---------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets 296,780 22,313 7.52%
- ---------------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses (3,544)
Cash and Due from Banks 14,305
Trading Assets-Risk Management Instruments, Net of Allowance for Credit Losses 36,127
All Other Assets 29,543
- ---------------------------------------------------------------------------------------------------------------------
Total Assets $ 373,211
- ---------------------------------------------------------------------------------------------------------------------
Liabilities
Interest-Bearing Deposits $ 153,545 6,840(c) 4.45%(c)
Federal Funds Purchased and Securities Sold
Under Repurchase Agreements 61,237 3,403 5.56
Commercial Paper 5,046 259 5.13
Other Borrowings(d) 15,607 1,950 12.49
Long-Term Debt 16,478 1,271 7.71
- ---------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 251,913 13,723 5.45
- ---------------------------------------------------------------------------------------------------------------------
Noninterest Bearing Deposits 46,169
Trading Liabilities-Risk Management Instruments 37,200
All Other Liabilities, Including the Allowance for Credit Losses 14,771
- ---------------------------------------------------------------------------------------------------------------------
Total Liabilities 350,053
- ---------------------------------------------------------------------------------------------------------------------
Preferred Stock of Subsidiary 550
Stockholders' Equity
Preferred Stock 1,280
Common Stockholders' Equity 21,328
- ---------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 22,608(e)
- ---------------------------------------------------------------------------------------------------------------------
Total Liabilities, Preferred Stock of Subsidiary and Stockholders' Equity $ 373,211
- ---------------------------------------------------------------------------------------------------------------------
Interest Rate Spread 2.07%
- ---------------------------------------------------------------------------------------------------------------------
Net Interest Income and Net Yield on
Interest-Earning Assets $ 8,590(c) 2.89%(c)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The annualized rate for available-for-sale securities based on amortized
cost was 6.26% in 1998, 6.64% in 1997 and 6.48% in 1996.
(b) Fees and commissions on loans included in loan interest amounted to $141
million in 1998, $149 million in 1997 and $177 million in 1996.
(c) Includes $191 million of interest income resulting from the refund of
prior years' taxes. Excluding this amount, the net yield on
interest-earning assets would be 2.83%.
(d) Includes securities sold but not yet purchased and structured notes.
(e) The ratio of average stockholders' equity to average assets was 6.1% for
1998, 5.9% for 1997, and 6.4% for 1996. The return on average
stockholders' equity was 16.7% for 1998, 17.6% for 1997, and 11.9% for
1996.
78
<PAGE> 78
<TABLE>
<CAPTION>
1997 1996
------------------------------------- -------------------------------------
Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 5,105 $ 525 10.28% $ 6,479 $ 537 8.29%
39,836 2,607 6.54 31,165 2,135 6.85
35,660 2,771 7.77 29,595 1,897 6.41
42,610 2,817 6.61(a) 39,538 2,580 6.53(a)
3,432 228 6.65 4,174 302 7.24
159,932 12,929(b) 8.08 149,996 12,482(b) 8.32
- ---------------------------------------------------------------------------------------
286,575 21,877 7.63% 260,947 19,933 7.64%
- ---------------------------------------------------------------------------------------
(3,435) (3,684)
13,678 12,070
34,426 26,684
25,102 25,223
- ---------------------------------------------------------------------------------------
$356,346 $321,240
- ---------------------------------------------------------------------------------------
$137,095 6,561 4.79% $130,022 6,038 4.64%
66,789 3,643 5.45 54,655 2,883 5.28
4,283 228 5.33 5,199 274 5.27
20,663 2,032 9.83 16,695 1,473 8.82
14,315 1,134 7.92 12,811 901 7.03
- ---------------------------------------------------------------------------------------
243,145 13,598 5.59 219,382 11,569 5.27
- ---------------------------------------------------------------------------------------
42,067 39,562
35,309 27,421
14,235 14,102
- ---------------------------------------------------------------------------------------
334,756 300,467
- ---------------------------------------------------------------------------------------
550 158
2,212 2,650
18,828 17,965
- ---------------------------------------------------------------------------------------
21,040(e) 20,615(e)
$356,346 $321,240
- ---------------------------------------------------------------------------------------
2.04% 2.37%
- ---------------------------------------------------------------------------------------
$ 8,279 2.89% $ 8,364 3.21%
- ---------------------------------------------------------------------------------------
</TABLE>
79
<PAGE> 79
Interest Rates and Interest Differential Analysis of
Net Interest Income - Domestic and Foreign
<TABLE>
<CAPTION>
1998
------------------------------------
Year Ended December 31, Average Average
(Taxable-Equivalent Interest and Rates; in millions, except rates) Balance Interest Rate
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-Earning Assets:
Deposits with Banks, primarily Foreign $ 5,934 $ 642 10.82%
Federal Funds Sold and Securities Purchased
Under Resale Agreements:
Domestic 15,304 947 6.19
Foreign 17,651 1,264 7.16
Securities and Trading Assets:
Domestic 67,516 4,513 6.68
Foreign 20,989 1,553 7.40
Loans:
Domestic 129,098 9,944 7.70
Foreign 40,288 3,450 8.56
- ------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets 296,780 22,313 7.52
- ------------------------------------------------------------------------------------------------------
Interest-Bearing Liabilities:
Interest-Bearing Deposits:
Domestic 77,189 2,835(a) 3.67(a)
Foreign 76,356 4,005 5.25
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements:
Domestic 46,679 2,525 5.41
Foreign 14,558 878 6.03
Other Borrowed Funds:
Domestic 13,971 1,242 8.88
Foreign 6,682 967 14.48
Long-Term Debt, primarily Domestic 16,478 1,271 7.71
Intra-Company Funding:
Domestic 16,513 811 --
Foreign (16,513) (811) --
-------- -------
Total Interest-Bearing Liabilities 251,913 13,723 5.45
Noninterest-Bearing Liabilities:
Domestic 41,563
Foreign 3,304
- ------------------------------------------------------------------------------------------------------
Total Investable Funds $296,780 $13,723 4.63%
- ------------------------------------------------------------------------------------------------------
Net Interest Income and Net Yield $ 8,590(a) 2.89%(a)
Domestic 6,922(a) 3.27%(a)
Foreign 1,668 1.97%
- ------------------------------------------------------------------------------------------------------
Percentage of Total Assets and Liabilities Attributable
to Foreign Operations:
Assets 35.0%
Liabilities 34.4%
- ------------------------------------------------------------------------------------------------------
</TABLE>
(a) See note (c) on page 78. Excluding the tax refund, the domestic net
yield on interest-earning assets would be 3.18%.
80
<PAGE> 80
<TABLE>
<CAPTION>
1997 1996
------------------------------------- -------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 5,105 $ 525 10.28% $ 6,479 $ 537 8.29%
22,130 1,330 6.01 21,526 1,137 5.28
17,706 1,277 7.21 9,639 998 10.35
55,921 3,771 6.74 51,896 3,315 6.39
25,781 2,045 7.93 21,411 1,464 6.84
120,279 10,242 8.52 113,554 9,693 8.54
39,653 2,687 6.78 36,442 2,789 7.65
- ---------------------------------------------------------------------------------------
286,575 21,877 7.63 260,947 19,933 7.64
- ---------------------------------------------------------------------------------------
68,383 2,894 4.23 64,153 2,486 3.88
68,712 3,667 5.34 65,869 3,552 5.39
50,981 2,782 5.46 45,607 2,209 4.84
15,808 861 5.44 9,048 674 7.45
15,372 1,294 8.43 15,209 1,118 7.35
9,574 966 10.07 6,685 629 9.41
14,315 1,134 7.92 12,811 901 7.03
9,946 472 -- 13,003 654 --
(9,946) (472) -- (13,003) (654) --
-------- ------- -------- -------
243,145 13,598 5.59 219,382 11,569 5.27
39,985 36,867
3,445 4,698
- ---------------------------------------------------------------------------------------
$286,575 $13,598 4.74% $260,947 $11,569 4.43%
- ---------------------------------------------------------------------------------------
$ 8,279 2.89% $ 8,364 3.21%
6,952 3.50% 6,830 3.65%
1,327 1.51% 1,534 2.08%
- ---------------------------------------------------------------------------------------
34.3% 34.0%
33.8% 33.7%
- ---------------------------------------------------------------------------------------
</TABLE>
81
<PAGE> 81
Change in Net Interest Income, Volume and Rate Analysis
<TABLE>
<CAPTION>
1998 VERSUS 1997 1997 VERSUS 1996
-------------------------------------------- ---------------------------------------------
Increase (decrease) due to change in: Increase (decrease) due to change in:
(On a Taxable-Equivalent Basis; ------------------------------------- Net ------------------------------------- Net
in millions) Volume Rate Change Volume Rate Change
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Deposits with Banks, primarily Foreign $ 89 $ 28 $ 117 $ (141) $ 129 $ (12)
Federal Funds Sold and Securities
Purchased Under Resale Agreements:
Domestic (423) 40 (383) 36 157 193
Foreign (4) (9) (13) 582 (303) 279
Securities and Trading Assets:
Domestic 776 (34) 742 274 182 456
Foreign (355) (137) (492) 348 233 581
Loans:
Domestic 688 (986) (298) 572 (23) 549
Foreign 57 706 763 215 (317) (102)
- --------------------------------------------------------------------------------------------------------------------------------
Change in Interest Income 828 (392) 436 1,886 58 1,944
- --------------------------------------------------------------------------------------------------------------------------------
Interest-Bearing Liabilities
Interest-Bearing Deposits:
Domestic 323 (382) (59) 179 229 408
Foreign 401 (63) 338 152 (37) 115
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements:
Domestic (232) (25) (257) 290 283 573
Foreign (76) 93 17 369 (182) 187
Other Borrowed Funds:
Domestic (121) 69 (52) 12 164 176
Foreign (421) 422 1 293 44 337
Long-Term Debt, primarily Domestic 167 (30) 137 119 114 233
Intra Company Funding:
Domestic 323 16 339 (146) (36) (182)
Foreign (323) (16) (339) 146 36 182
- --------------------------------------------------------------------------------------------------------------------------------
Change in Interest Expense 41 84 125 1,414 615 2,029
- --------------------------------------------------------------------------------------------------------------------------------
Change in Net Interest Income $ 787 $ (476) $ 311 $ 472 $ (557) $ (85)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
82
<PAGE> 82
================================================================================
SECURITIES PORTFOLIO
The amortized cost, estimated fair value and average yield (including the impact
of related derivatives) of Chase's securities by contractual maturity range and
type of security are presented in the table which follows:
<TABLE>
<CAPTION>
Maturity Schedule of Available-for-Sale
Securities December 31, 1998 Due in 1 Due After 1 Due After 5 Due After
(in millions, rates on a taxable-equivalent basis) Year or less Through 5 Years Through 10 Years 10 Years(a) Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Government and Federal Agency/Corporation
Obligations:
Amortized Cost $ 620 $3,436 $4,802 $43,162 $52,020
Fair Value 648 3,513 4,968 43,241 52,370
Average Yield(b) 4.96% 5.13% 5.38% 6.28% 6.10%
- ----------------------------------------------------------------------------------------------------------------------------
Obligations of State and Political Subdivisions:
Amortized Cost $ 191 $ 8 $ 5 $ 22 $ 226
Fair Value 191 8 5 23 227
Average Yield(b) 4.08% 5.44% 5.54% 5.18% 4.27%
- ----------------------------------------------------------------------------------------------------------------------------
Other:(c)
Amortized Cost $1,978 $6,151 $ 665 $ 1,103 $ 9,897
Fair Value 1,999 6,190 671 1,346 10,206
Average Yield(b) 4.14% 6.69% 6.44% 3.64% 5.83%
- ----------------------------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities:(d)
Amortized Cost $2,789 $9,595 $5,472 $44,287 $62,143
Fair Value 2,838 9,711 5,644 44,610 62,803
Average Yield(b) 4.32% 6.13% 5.51% 6.21% 6.05%
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Maturity Schedule of Held-to-Maturity
Securities December 31, 1998 Due in 1 Due After 1 Due After 5 Due After
(in millions, rates on a taxable-equivalent basis) Year or less Through 5 Years Through 10 Years 10 Years(a) Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Government and Federal Agency/Corporation
Obligations:
Amortized Cost $ 88 $ 169 $ 135 $ 1,291 $ 1,683
Fair Value 88 171 135 1,305 1,699
Average Yield(b) 5.67% 7.77% 6.70% 6.47% 6.57%
- ----------------------------------------------------------------------------------------------------------------------------
Other:(c)
Amortized Cost $ -- $ -- $ -- $ 4 $ 4
Fair Value -- -- -- 4 4
Average Yield(b) --% --% --% 6.50% 6.50%
- ----------------------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities:(d)
Amortized Cost $ 88 $ 169 $ 135 $ 1,295 $ 1,687
Fair Value 88 171 135 1,309 1,703
Average Yield(b) 5.67% 7.77% 6.70% 6.47% 6.57%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Securities with no stated maturity are included with securities with a
contractual maturity of ten years or more. Substantially all of Chase's
mortgaged-backed securities ("MBSs") and collateralized mortgage
obligations ("CMOs") are due in ten years or more based on contractual
maturity. The estimated duration, which reflects anticipated future
prepayments based on a consensus of dealers in the market, is
approximately 3 years for MBSs, and less than 1 year for CMOs.
(b) The average yield is based on amortized cost balances at the end of the
year. Yields are derived by dividing interest income, adjusted for the
effect of related derivatives on available-for-sale securities and the
amortization of premiums and accretion of discounts, by total amortized
cost. Taxable-equivalent yields are used, where applicable.
(c) Includes investments in debt securities issued by foreign governments,
corporate debt securities, CMOs of private issuers, other debt and equity
securities.
(d) For the amortized cost of the above categories of securities at December
31, 1997, see Note Three on page 54. At December 31, 1996, the amortized
cost of U.S. Treasury and Federal Agencies, Obligations of State and
Political Subdivisions, and Other available-for-sale securities was
$35,504 million, $325 million, and $9,101 million, respectively. At
December 31, 1996, the amortized cost of U.S. Treasury and Federal
Agencies and Other held-to-maturity securities was $3,732 million and $123
million, respectively. For held-to-maturity securities, there were no
Obligations of State and Political Subdivisions at December 31, 1996.
Of the securities held in Chase's securities portfolios, securities issued
by the Federal Republic of Germany exceeded 10% of Chase's total stockholders'
equity at December 31, 1998, and had at that date a fair value of $3,037 million
and an amortized cost of $2,986 million. The U.S. Government and certain of its
agencies were the only other issuers whose securities exceeded 10% of Chase's
total stockholders' equity at December 31, 1998.
For a further discussion of Chase's securities portfolios, see Note Three
on page 54.
83
<PAGE> 83
================================================================================
LOAN PORTFOLIO
The table below sets forth the amount of loans outstanding by type:
<TABLE>
<CAPTION>
December 31, (in millions) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic Loans:
Commercial and Industrial $ 43,123 $ 37,931 $ 34,742 $ 32,276 $ 30,492
Financial Institutions 6,583 6,652 5,540 5,714 5,237
Commercial Real Estate - Commercial Mortgage 3,029 4,084 5,040 5,512 6,123
Commercial Real Estate - Construction 955 946 894 1,148 1,580
Consumer 80,891 76,097 69,084 69,431 63,632
- -------------------------------------------------------------------------------------------------
Total Domestic Loans 134,581 125,710 115,300 114,081 107,064
- -------------------------------------------------------------------------------------------------
Foreign Loans:
Commercial and Industrial 25,031 28,341 23,909 21,650 19,153
Foreign Governments and Official Institutions 4,798 3,438 6,140 6,043 7,794
Financial Institutions 4,537 6,989 6,457 5,398 5,555
Consumer 3,807 3,976 3,286 3,035 2,665
- -------------------------------------------------------------------------------------------------
Total Foreign Loans 38,173 42,744 39,792 36,126 35,167
- -------------------------------------------------------------------------------------------------
Total Loans(a) $172,754 $168,454 $155,092 $150,207 $142,231
- -------------------------------------------------------------------------------------------------
</TABLE>
(a) Loans are presented net of unearned income of $1,667 million, $1,612
million, $1,373 million, $1,073 million and $895 million at December 31,
1998, 1997, 1996, 1995 and 1994, respectively.
For a discussion of Chase's loan outstandings, see "Credit-Related Portfolio" on
page 31.
Maturities and Sensitivity to Changes in Interest Rates
The following table shows commercial loan maturity and floating/fixed
distribution based upon the stated terms of the loan agreements at December 31,
1998. The table below does not include the impact of derivative instruments.
<TABLE>
<CAPTION>
Within 1-5 After 5
December 31, 1998 (in millions) 1 Year(a) Years Years Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Domestic:
Commercial and Industrial $13,693 $24,053 $5,377 $43,123
Financial Institutions 5,344 1,173 66 6,583
Commercial Real Estate 772 2,740 472 3,984
Foreign(b) 29,419 2,957 1,990 34,366
- --------------------------------------------------------------------------------
Total Commercial Loans $49,228 $30,923 $7,905 $88,056
- --------------------------------------------------------------------------------
Loans at Fixed Interest Rates $ 1,644 $ 900
Loans at Variable Interest Rates 29,279 7,005
- --------------------------------------------------------------------------------
Total Commercial Loans $30,923 $7,905
- --------------------------------------------------------------------------------
</TABLE>
(a) Includes demand loans, overdrafts and loans having no stated schedule of
repayments and no stated maturity.
(b) Substantially all foreign loans that meet the accounting definition of a
security pursuant to SFAS 115 mature in over 5 years.
84
<PAGE> 84
Cross-Border Outstandings
Cross-border disclosure is based upon the Federal Financial Institutions
Examination Council ("FFIEC") guidelines governing the determination of
cross-border risk. The following table lists all countries in which Chase's
cross-border outstandings exceed .75% of consolidated assets as of any of the
dates specified. This includes certain exposures that are not required under the
disclosure requirements of the SEC. The most significant differences between the
FFIEC and SEC methodologies relate to the treatment of local country exposure
and foreign exchange and derivatives.
For a further discussion of Chase's cross-border exposure, see pages
33-34.
Cross-Border Outstandings Exceeding .75 Percent of Total Assets
<TABLE>
<CAPTION>
Net Local Total Total
Country Cross-Border Cross-Border
(in millions) At December 31, Public Banks Other Assets Outstandings(a) Commitments(b) Exposure
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Germany 1998 $4,913 $7,180 $1,084 $3,615 $16,792 $1,627 $ 18,419
1997 4,459 3,609 438 1,210 9,716 1,203 10,919
1996 3,777 2,857 561 1,116 8,311 2,040 10,351
- ---------------------------------------------------------------------------------------------------------------------------
Italy 1998 5,933 1,403 316 377 8,029 608 8,637
1997 1,304 1,737 387 -- 3,428 706 4,134
1996 3,582 7,080 215 536 11,413 963 12,376
- ---------------------------------------------------------------------------------------------------------------------------
United Kingdom 1998 1,401 1,414 2,849 -- 5,664 1,855 7,519
1997 1,180 1,942 6,094 1,548 10,764 1,460 12,224
1996 1,095 3,007 5,872 -- 9,974 2,767 12,741
- ---------------------------------------------------------------------------------------------------------------------------
Japan 1998 3,298 997 542 74 4,911 1,993 6,904
1997 935 4,524 1,052 -- 6,511 2,303 8,814
1996 1,312 5,771 2,494 1,402 10,979 2,502 13,481
- ---------------------------------------------------------------------------------------------------------------------------
Canada 1998 872 988 737 534 3,131 1,550 4,681
1997 1,446 1,106 736 214 3,502 937 4,439
1996 1,501 691 1,040 163 3,395 1,328 4,723
- ---------------------------------------------------------------------------------------------------------------------------
France 1998 830 2,101 428 179 3,538 1,166 4,704
1997 605 1,871 345 38 2,859 1,240 4,099
1996 284 2,314 564 21 3,183 1,839 5,022
- ---------------------------------------------------------------------------------------------------------------------------
Brazil 1998 914 363 1,324 518 3,119 74 3,193
1997 1,766 408 1,536 862 4,572 195 4,767
1996 1,637 322 1,768 2,069 5,796 195 5,991
- ---------------------------------------------------------------------------------------------------------------------------
Korea 1998 97 426 857 937 2,317 76 2,393
1997 478 1,787 1,653 1,189 5,107 184 5,291
1996 87 1,423 1,552 554 3,616 421 4,037
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Outstandings include loans and accrued interest, interest-bearing deposits
with banks, acceptances, other monetary assets, cross-border trading debt
and equity instruments, foreign exchange and derivative contracts, and
local country assets, net of local country liabilities.
(b) Commitments include outstanding letters of credit and undrawn commitments
to extend credit.
Chase's balances tend to fluctuate greatly and the amount of outstandings
at year-end tends to be a function of timing, rather than representing a
consistent trend.
85
<PAGE> 85
Risk Elements
The following table sets forth the nonperforming assets and contractually
past-due loans at the dates indicated:
<TABLE>
<CAPTION>
December 31, (in millions) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic Nonperforming Loans:
Nonaccruing Loans $ 742 $ 712 $ 848 $1,115 $1,091
Renegotiated Loans -- -- 38 35 37
------ ------ ------ ------ ------
Total Domestic Nonperforming Loans 742 712 886 1,150 1,128
------ ------ ------ ------ ------
Foreign Nonperforming Loans:
Nonaccruing Loans 698 195 132 339 457
Renegotiated Loans -- 1 3 4 4
------ ------ ------ ------ ------
Total Foreign Nonperforming Loans 698 196 135 343 461
------ ------ ------ ------ ------
Total Nonperforming Loans 1,440 908 1,021 1,493 1,589
------ ------ ------ ------ ------
Derivative and Foreign Exchange Contracts 50 -- -- -- --
Assets Acquired as Loan Satisfactions (primarily Real Estate) 116 110 130 171 537
- ---------------------------------------------------------------------------------------------------------
Total Nonperforming Assets $1,606 $1,018 $1,151 $1,664 $2,126
- ---------------------------------------------------------------------------------------------------------
Contractually Past-Due Loans(a)
Domestic:
Consumer $ 422 $ 420 $ 395 $ 528 $ 485
Commercial 43 32 27 92 64
------ ------ ------ ------ ------
Total Domestic 465 452 422 620 549
Foreign 41 7 12 44 181
- ---------------------------------------------------------------------------------------------------------
Total $ 506 $ 459 $ 434 $ 664 $ 730
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(a) Accruing loans past-due 90 days or more as to principal and interest,
which are not characterized as nonperforming loans.
For a discussion of nonaccrual loan and past due loan policies, see Note
One on page 49. Renegotiated loans are those for which concessions, such as the
reduction of interest rates or the deferral of interest or principal payments,
have been granted due to a deterioration in the borrowers' financial condition.
Interest on renegotiated loans is accrued at the renegotiated rates. Certain
renegotiated loan agreements call for additional interest to be paid on a
deferred or contingent basis. Such interest is recognized in income only as
collected.
Impact of Nonperforming Loans on Interest Income
The following table presents the amount of interest income recorded by Chase on
its nonperforming loans and the amount of interest income on the carrying value
of these loans that would have been recorded if these loans had been current in
accordance with their original terms (i.e., interest at original rates). The
increase in 1998, when compared with 1997, in total negative impact on interest
income reflects a higher level of interest that was not recognized in income due
to the increased level of foreign nonperforming loans.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic:
Gross Amount of Interest That Would Have Been Recorded at the Original Rate $ 66 $ 63 $ 81
Interest That Was Recognized in Income (9) (9) (25)
----- ---- ----
Negative Impact-Domestic 57 54 56
----- ---- ----
Foreign:
Gross Amount of Interest That Would Have Been Recorded at the Original Rate 55 17 11
Interest That Was Recognized in Income (4) (2) (7)
----- ---- ----
Negative Impact-Foreign 51 15 4
- ---------------------------------------------------------------------------------------------------
Total Negative Impact on Interest Income $ 108 $ 69 $ 60
- ---------------------------------------------------------------------------------------------------
</TABLE>
86
<PAGE> 86
================================================================================
SUMMARY OF LOAN LOSS EXPERIENCE
For a further discussion, see Note One on page 49 and Note Five on page 56.
Allowance for Loan Losses
The table below summarizes the changes in the allowance for loan losses during
the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year $ 3,624 $ 3,549 $ 3,784 $ 3,894 $ 4,445
Provision for Loan Losses 1,343 804 897 758 1,050
Charge-Offs
Domestic:
Commercial and Industrial (99) (114) (181) (169) (252)
Financial Institutions -- -- -- -- (19)
Consumer (1,158) (913) (921) (967) (871)
Commercial Real Estate (6) (5) (47) (84) (386)
Foreign (528) (64) (38) (58) (442)(a)
- ------------------------------------------------------------------------------------------------------------------------
Total Charge-Offs (1,791) (1,096) (1,187) (1,278) (1,970)
- ------------------------------------------------------------------------------------------------------------------------
Recoveries
Domestic:
Commercial and Industrial 165 91 95 173 165
Financial Institutions 2 1 -- 12 7
Consumer 121 106 97 108 106
Commercial Real Estate 20 42 33 53 96
Foreign 65 52 65 92 132
- ------------------------------------------------------------------------------------------------------------------------
Total Recoveries 373 292 290 438 506
- ------------------------------------------------------------------------------------------------------------------------
Net Charge-Offs (1,418) (804) (897) (840) (1,464)
Charge Related to Conforming Credit Card Charge-off Policies -- -- (102) -- --
Charge for Assets Transferred to Held-for-Accelerated Disposition -- -- -- -- (148)
Transfer to Trading Assets-Risk Management Instruments -- -- (75)(b) -- --
Transfer to Other Liabilities -- (100)(c) (70)(c) -- --
Allowance Related to Purchased (Disposed) Portfolios
and Subsidiaries (d) 5 172 13 (31) 4
Foreign Exchange Translation Adjustment (2) 3 (1) 3 7
- ------------------------------------------------------------------------------------------------------------------------
Balance at End of Year $ 3,552 $ 3,624 $ 3,549 $ 3,784 $ 3,894
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $291 million related to management's final valuation of the
emerging markets portfolio.
(b) Relates to the transfer to the allowance for credit losses on risk
management instruments.
(c) Relates to the transfer to the allowance for credit losses on
lending-related commitments.
(d) Includes approximately $160 million related to the purchase of a credit
card portfolio in 1997 and $28 million related to the sale of banking
operations in southern and central New Jersey in 1995.
Loan Loss Analysis
<TABLE>
<CAPTION>
Year Ended December 31, (in millions, except ratios) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances
Loans-Average $169,386 $159,932 $149,996 $146,528 $136,713
Loans-Year End 172,754 168,454 155,092 150,207 142,231
Net Charge-Offs 1,418 804 999(a) 840 1,612(b)
Allowance for Loan Losses:(c)
Domestic 2,489 2,767 2,898 3,217 3,240
Foreign 1,063 857 651 567 654
- ------------------------------------------------------------------------------------------------------------
Total Allowance for Loan Losses 3,552 3,624 3,549 3,784 3,894
- ------------------------------------------------------------------------------------------------------------
Nonperforming Loans 1,440 908 1,021 1,493 1,589
Ratios
Net Charge-Offs to:
Loans-Average .84% .50% .67% .57% 1.18%
Allowance for Loan Losses 39.92 22.19 28.15 22.20 41.40
Allowance for Loan Losses to:
Loans-Year End 2.06 2.15 2.29 2.52 2.74
Nonperforming Loans 246.67 399.12 347.60 253.45 245.06
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes a charge of $102 million related to conforming credit card
charge-off policies.
(b) Includes a charge of $148 million for assets transferred to
held-for-accelerated disposition.
(c) The allowance for loan losses is a general allowance. For purposes of this
table, management has allocated the entire allowance for loan losses
between the domestic and foreign portfolios. Prior years' balances have
been revised to reflect the current presentation.
87
<PAGE> 87
================================================================================
DEPOSITS
The following data provides a summary of Chase's average deposits and average
interest rates for the years indicated:
<TABLE>
<CAPTION>
Average Balances Average Interest Rates
(in millions, except interest rates) 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
Domestic:
<S> <C> <C> <C> <C> <C> <C>
Noninterest-Bearing Demand $ 25,041 $ 23,483 $ 27,284 --% --% --%
Interest-Bearing Demand 3,300 3,563 3,375 1.51 1.78 2.05
Savings 53,960 50,198 43,986 2.56 2.75 2.89
Time 37,646 29,529 25,349 3.73 4.91 4.52
- ---------------------------------------------------------------------------------------------------------
Total Domestic Deposits 119,947 106,773 99,994 2.36 2.71 2.49
- ---------------------------------------------------------------------------------------------------------
Foreign:
Noninterest-Bearing Demand 3,088 3,363 2,918 -- -- --
Interest-Bearing Demand 31,350 25,480 19,551 4.93 4.44 4.50
Savings 839 824 862 3.76 3.60 3.39
Time 44,490 42,722 46,259 5.46 5.87 5.72
- ---------------------------------------------------------------------------------------------------------
Total Foreign Deposits(a) 79,767 72,389 69,590 5.02 5.07 5.10
- ---------------------------------------------------------------------------------------------------------
Total Deposits $199,714 $179,162 $169,584 3.42% 3.66% 3.56%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(a) The majority of foreign deposits were in denominations of $100,000 or
more.
The following table presents the maturities for domestic time certificates of
deposit in denominations of $100,000 or more at December 31, 1998:
<TABLE>
<CAPTION>
Domestic Time
Certificates of Deposit
By remaining maturity at December 31, 1998 (in millions) ($100,000 or More)
- -------------------------------------------------------------------------------------
<S> <C>
Three Months or Less $ 12,414
Over Three Months but within Six Months 3,907
Over Six Months but within Twelve Months 1,744
Over Twelve Months 275
- -------------------------------------------------------------------------------------
Total $ 18,340
- -------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, other domestic time deposits in denominations of $100,000
or more totaled $18,927 million, substantially all of which mature in three
months or less.
88
<PAGE> 88
================================================================================
SHORT-TERM AND OTHER BORROWED FUNDS
The following data provides a summary of Chase's short-term and other borrowed
funds and weighted-average rates on these funds:
<TABLE>
<CAPTION>
(in millions, except rates) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased and securities
sold under repurchase agreements:
Balance at year-end $41,632 $56,126 $53,868
Average daily balance during the year 61,237 66,789 54,655
Maximum month-end balance 70,062 80,633 67,750
Weighted-average rate at December 31 5.91% 5.90% 5.45%
Weighted-average rate during the year 5.56% 5.45% 5.28%
- --------------------------------------------------------------------------------
Commercial paper:
Balance at year-end $ 7,788 $ 4,744 $ 4,500
Average daily balance during the year 5,046 4,283 5,199
Maximum month-end balance 8,217 4,951 5,991
Weighted-average rate at December 31 4.78% 5.64% 5.07%
Weighted-average rate during the year 5.13% 5.33% 5.27%
- --------------------------------------------------------------------------------
Other Borrowed Funds-Other borrowings:(a)
Balance at year-end $ 7,239 $ 6,861 $ 9,231
Average daily balance during the year 6,148 7,566 8,535
Maximum month-end balance 8,175 8,958 12,509
Weighted-average rate at December 31(b) 12.23% 9.38% 9.97%
Weighted-average rate during the year(b) 12.49% 9.83% 8.82%
- --------------------------------------------------------------------------------
</TABLE>
(a) Excludes securities sold but not yet purchased and structured notes.
(b) The weighted-average interest rates reflect the impact of local interest
rates prevailing in certain Latin American countries with highly
inflationary economies.
Federal funds purchased represents overnight funds. Securities sold under
repurchase agreements generally mature between one day and three months.
Commercial paper is generally issued in amounts not less than $100,000 and with
maturities of 270 days or less. Other borrowings consist of demand notes, term
Federal funds purchased and various other borrowings that generally have
maturities of one year or less.
At December 31, 1998, Chase had unused lines of credit available for
general corporate purposes, including the payment of commercial paper
borrowings, amounting to $1.0 billion.
89
<PAGE> 89
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
behalf of the undersigned, thereunto duly authorized.
THE CHASE MANHATTAN CORPORATION
(Registrant)
By /s/ WALTER V. SHIPLEY
-------------------------------------
(Walter V. Shipley,
Chairman and Chief Executive Officer)
Date: March 10, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacity and on the date indicated. Chase does not
exercise the power of attorney to sign on behalf of any Director.
Capacity Date
-------- ----
/s/ WALTER V. SHIPLEY Director, Chairman and Chief
- --------------------------- Executive Officer (Principal
(Walter V. Shipley) Executive Officer)
/s/ THOMAS G. LABRECQUE Director, President and Chief
- --------------------------- Operating Officer
(Thomas G. Labrecque)
/s/ WILLIAM B. HARRISON JR. Director and Vice Chairman
- --------------------------- of the Board
(William B. Harrison Jr.)
/s/ HANS W. BECHERER Director
- ---------------------------
(Hans W. Becherer)
/s/ FRANK A. BENNACK JR. Director March 10, 1999
- ---------------------------
(Frank A. Bennack Jr.)
/s/ SUSAN V. BERRESFORD Director
- ---------------------------
(Susan V. Berresford)
/s/ M. ANTHONY BURNS Director
- ---------------------------
(M. Anthony Burns)
/s/ H. LAURANCE FULLER Director
- ---------------------------
(H. Laurance Fuller)
/s/ MELVIN R. GOODES Director
- ---------------------------
(Melvin R. Goodes)
90
<PAGE> 90
Capacity Date
-------- ----
/s/ WILLIAM H. GRAY, III Director
- ---------------------------
(William H. Gray, III)
/s/ GEORGE V. GRUNE Director
- ---------------------------
(George V. Grune)
/s/ HAROLD S. HOOK Director
- ---------------------------
(Harold S. Hook)
/s/ HELENE L. KAPLAN Director
- ---------------------------
(Helene L. Kaplan)
/s/ HENRY B. SCHACHT Director
- ---------------------------
(Henry B. Schacht)
March 10, 1999
/s/ ANDREW C. SIGLER Director
- ---------------------------
(Andrew C. Sigler)
/s/ JOHN R. STAFFORD Director
- ---------------------------
(John R. Stafford)
/s/ MARINA v.N. WHITMAN Director
- ---------------------------
(Marina v.N. Whitman)
/s/ MARC J. SHAPIRO Vice Chairman
- --------------------------- Finance and Risk Management
(Marc J. Shapiro) (Principal Financial Officer)
/s/ JOSEPH L. SCLAFANI Executive Vice President and
- --------------------------- Controller
(Joseph L. Sclafani) (Principal Accounting Officer)
91
<PAGE> 91
APPENDIX 1
NARRATIVE DESCRIPTION OF GRAPHIC IMAGE MATERIAL
Pursuant to Item 304 of Regulation S-T, the following is a description of the
graphic image material included in the foregoing Management's Discussion and
Analysis of Financial Condition.
<TABLE>
<CAPTION>
GRAPHIC NUMBER PAGE DESCRIPTION
- -------------- ---- -----------
<S> <C> <C>
1 18 Bar graph entitled "Chase's Common Share Price Through the 1990's" presenting the following
information at December 31,
1990 1991 1992 1993 1994
---- ---- ---- ---- ----
9-Year Compound Annual $ 5 $ 11 $ 19 $ 20 $ 18
Growth Rate ("CAGR")
=19%
1995 1996 1997 1998
---- ---- ---- ----
$ 29 $ 45 $ 55 $ 71
2 20 Pie Chart entitled "Operating Revenues by Business Franchise 1998" presenting the
following information:
Global Bank 46%
National Consumer Services 41%
Global Services 13%
3 21 Pie Chart entitled "Global Bank Operating Revenues by Key Businesses 1998" presenting
the following information:
Global Markets 36%
Global Investment Banking 12%
Corporate Lending 14%
Chase Capital Partners 8%
Global Private Bank 7%
Middle Markets 8%
Chase Texas
(consolidated) 15%
</TABLE>
<PAGE> 92
<TABLE>
<CAPTION>
GRAPHIC NUMBER PAGE DESCRIPTION
- -------------- ---- -----------
<S> <C> <C>
4 22 Pie Chart entitled "National Consumer Services Operating Revenues by Key Businesses 1998"
presenting the following information:
Chase Cardmember Services 48%
Regional Consumer Banking 29%
Chase Home Finance 13%
Diversified Consumer Services 10%
5 24 Line graph entitled "Market-Sensitive Revenue" in millions, presenting the following information:
1989 1990 1991 1992 1993
---- ---- ---- ---- ----
Logarithmic Regression $1,459 $1,668 $1,907 $2,181 $2,495
1989 - 1998
CAGR = 14%
Market-Sensitive Revenue 1,508 1,373 1,660 2,209 3,122
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Logarithmic Regression $2,853 $3,263 $3,731 $4,267 $4,879
1989 - 1998
CAGR = 14%
Market-Sensitive Revenue 2,574 2,996 3,691 4,215 5,238
6 27 Line graph entitled "Operating Efficiency Ratio" presenting the following information:
Improvement since 1994 = 900 Basis Points
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Operating -
Efficiency Ratio 63% 63% 57% 55% 54%
</TABLE>
<PAGE> 93
<TABLE>
<CAPTION>
GRAPHIC NUMBER PAGE DESCRIPTION
- -------------- ---- -----------
<S> <C> <C>
7 30 Pie chart entitled "Diversification of Managed Credit-Related Portfolio at December 31, 1998"
presenting the following information:
CONSUMER
Domestic Residential Mortgages 19%
Domestic Managed Credit Cards 14%
Domestic Auto Financings 7%
Domestic Other Consumer 4%
Foreign Consumer 2%
COMMERCIAL
Domestic Commercial and Industrial 19%
Derivative and FX Contracts 15%
Foreign Commercial and Industrial 11%
Domestic Financial Institutions 3%
Foreign Governments 2%
Domestic Commercial Real Estate 2%
Foreign Financial Institutions 2%
8 37 Bar graph entitled "Histogram of Daily Market Risk-Related Revenue for 1998 and 1997"
presenting the following information:
Millions of dollars 0 - 5 5 - 10 10 - 15 15 - 20 20 - 25 25 - 30 30 and Over
----- ------ ------- ------- ------- ------- -----------
1998
Number of trading days ----
market risk-related 35 46 52 40 20 12 17
revenue was within the 1997
above prescribed positive ----
dollar range 37 55 60 40 24 8 5
Millions of dollars 0-(5) (5)-(10) (10)-(15) (15)-(20) (20)-(25) (25)-(30) (30) and Over
----- ------ ------- ------- ------- ------- -----------
1998
Number of trading days ----
market risk-related 15 9 4 3 1 3 2
revenue was within the 1997
above prescribed negative ----
dollar range 13 7 5 1 0 2 2
</TABLE>
<PAGE> 94
<TABLE>
<CAPTION>
GRAPHIC NUMBER PAGE DESCRIPTION
- -------------- ---- -----------
<S> <C> <C>
9 40 Bar graph entitled "Risk-Based Capital Ratios at December 31, in billions, except ratios"
presenting the following information:
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Total
Capital Ratio 12.2% 12.3% 11.8% 11.6% 12.0%
Tier 1
Capital Ratio 8.1% 8.2% 8.2% 7.9% 8.3%
Tier 1 Leverage Ratio 6.6% 6.7% 6.8% 6.0% 6.4%
Qualifying Capital $26.3 $28.3 $29.4 $33.3 $34.8
During 1997, Chase adopted the Federal Reserve Board's guidelines for calculating market risk-adjusted
capital. Prior period ratios have not been restated.
10 41 Bar graph entitled "Market Capitalization at December 31, in billions" presenting the following
information: 5 Year CAGR = 28%
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Market Capitalization $15.4 $25.6 $38.5 $46.1 $60.2
</TABLE>
<PAGE> 95
Exhibit Index
-------------
Item No. Description
3.1 Restated Certificate of Incorporation of The Chase Manhattan Corporation
(incorporated by reference to Exhibit 4.1 to the Registration Statement
on Form S-8 (File No. 333-07941) of The Chase Manhattan Corporation).
3.2 Certificate of Amendment of Restated Certificate of Incorporation of The
Chase Manhattan Corporation (incorporated by reference to Exhibit 3.2 to
the Registration Statement on Form S-3 (File No. 333-56573) of The Chase
Manhattan Corporation).
3.3 Certificate of Designations of Fixed/Adjustable Rate Noncumulative
Preferred Stock of The Chase Manhattan Corporation (incorporated by
reference to Exhibit 3.3 to the Registration Statement on Form S-3 (File
No. 333-56573) of The Chase Manhattan Corporation).
3.4 By-laws, as amended as of March 17, 1998, of The Chase Manhattan
Corporation (incorporated by reference to Exhibit 3.2 to the Annual
Report on Form 10-K, dated December 31, 1997, of The Chase Manhattan
Corporation, File No. 1-5805).
4.1 Indenture, dated as of December 1, 1989, between Chemical Banking
Corporation and The Chase Manhattan Bank (National Association), as
succeeded to by Bankers Trust Company, as Trustee (incorporated by
reference to Exhibit 4.9 to the Registration Statement on Form S-3 (File
No. 33-32409) of Chemical Banking Corporation).
4.2(a) Indenture, dated as of April 1, 1987, as amended and restated as of
December 15, 1992, between Chemical Banking Corporation and Morgan
Guaranty Trust Company of New York, as succeeded to by U.S. Bank Trust
National Association (formerly known as First Trust of New York, National
Association), as Trustee (incorporated by reference to Exhibit 4.1 to the
Current Report on Form 8-K, dated December 22, 1992, of Chemical Banking
Corporation, File No. 1-5805).
4.2(b) Second Supplemental Indenture, dated as of October 8, 1996, between The
Chase Manhattan Corporation and U.S. Bank Trust National Association
(formerly known as First Trust of New York, National Association), as
Trustee, to the Indenture, dated as of April 1, 1987, as amended and
restated as of December 15, 1992 (incorporated by reference to Exhibit
4.5 to the Registration Statement on Form S-3 (File No. 333-14959) of The
Chase Manhattan Corporation).
4.3(a) Indenture, dated as of June 1, 1985, between Manufacturers Hanover
Corporation and IBJ Schroder Bank and Trust Company, as Trustee, relating
to the 8 1/2% Subordinated Capital Notes Due February 15, 1999
(incorporated by reference to Exhibit 4(b) to the Current Report on Form
8-K, dated February 27, 1987, of Manufacturers Hanover Corporation, File
No. 1-5923-1) .
4.3(b) First Supplemental Indenture, dated as of December 31, 1991, among
Chemical Banking Corporation, Manufacturers Hanover Corporation and IBJ
Schroder Bank and Trust Company, as Trustee, to the Indenture, dated June
1, 1985 (incorporated by reference to Exhibit 4.18(b) to the Annual
Report on Form 10-K, dated December 31, 1991, of Chemical Banking
Corporation, File No. 1-5805).
4.3(c) Second Supplemental Indenture, dated as of October 8, 1996, between The
Chase Manhattan Corporation and IBJ Schroder Bank and Trust Company, as
Trustee, to the Indenture, dated June 1, 1985 (incorporated by reference
to Exhibit 4.12 to the Registration Statement on Form S-3 (File No.
333-14959) of The Chase Manhattan Corporation).
4.4(a) Indenture, dated as of July 1, 1986, between The Chase Manhattan
Corporation and Bankers Trust Company, as Trustee (incorporated by
reference to Exhibit (4)(a) to the Registration Statement on Form S-3
(File No. 33-7299) of The Chase Manhattan Corporation).
<PAGE> 96
Exhibit Index
-------------
Item No. Description
4.4(b) First Supplemental Indenture, dated as of November 1, 1990, between The
Chase Manhattan Corporation and Bankers Trust Company, as Trustee, to the
Indenture, dated as of July 1, 1986 (incorporated by reference to Exhibit
(4)(b) to the Registration Statement on Form S-3 (File No. 33-40485) of
The Chase Manhattan Corporation).
4.4(c) Second Supplemental Indenture, dated as of May 1, 1991, between The Chase
Manhattan Corporation and Bankers Trust Company, as Trustee, to the
Indenture, dated as of July 1, 1986 (incorporated by reference to Exhibit
(4)(c) to the Registration Statement on Form S-3 (File No. 33-42367) of
The Chase Manhattan Corporation).
4.4(d) Third Supplemental Indenture, dated as of March 29, 1996, among Chemical
Banking Corporation, The Chase Manhattan Corporation and Bankers Trust
Company, as Trustee, to the Indenture, dated as of July 1, 1986
(incorporated by reference to Exhibit 4.18 to the Registration Statement
on Form S-3 (File No. 333-14959) of The Chase Manhattan Corporation).
4.5(a) Amended and Restated Indenture, dated as of September 1, 1993, between
The Chase Manhattan Corporation and Chemical Bank, as Trustee
(incorporated by reference to Exhibit (4)(cc) to the Current Report on
Form 8-K, dated August 19, 1993, of The Chase Manhattan Corporation, File
No. 1-5945).
4.5(b) First Supplemental Indenture, dated as of March 29, 1996, among Chemical
Banking Corporation, The Chase Manhattan Corporation, Chemical Bank, as
resigning Trustee, and U.S. Bank Trust National Association (formerly
known as First Trust of New York, National Association), as successor
Trustee, to the Amended and Restated Indenture, dated as of September 1,
1993 (incorporated by reference to Exhibit 4.22 to the Registration
Statement on Form S-3 (File No. 333-14959) of The Chase Manhattan
Corporation).
4.5(c) Second Supplemental Indenture, dated as of October 8, 1996, between The
Chase Manhattan Corporation and U.S. Bank Trust National Association
(formerly known as First Trust of New York, National Association), as
Trustee, to the Amended and Restated Indenture, dated as of September 1,
1993 (incorporated by reference to Exhibit 4.23 to the Registration
Statement on Form S-3 (File No. 333-14959) of The Chase Manhattan
Corporation).
4.6(a) Indenture, dated as of May 15, 1993, between Margaretten Financial
Corporation and The Bank of New York, as Trustee, relating to the 6 3/4%
Guaranteed Notes due June 15, 2000 (incorporated by reference to Exhibit
4(a) to the Registration Statement on Form S-3 (No. 33-60262) of
Margaretten Financial Corporation).
4.6(b) Supplemental Indenture, dated as of July 22, 1994, to the Indenture,
dated as of May 15, 1993, among Margaretten Financial Corporation,
Chemical Banking Corporation and The Bank of New York, as Trustee, and
Guarantee, dated as of July 22, 1994, by Chemical Banking Corporation
(incorporated by reference to Exhibit 4.34 to the Current Report on Form
8-K, dated September 28, 1994, of Chemical Banking Corporation, File No.
1-5805).
4.7 Junior Subordinated Indenture, dated as of December 1, 1996, between The
Chase Manhattan Corporation and The Bank of New York, as Debenture
Trustee (incorporated by reference to Exhibit 4.24 to the Registration
Statement on Form S-3 (File No. 333-19719) of The Chase Manhattan
Corporation).
4.8 Guarantee Agreement, dated as of January 24, 1997, between The Chase
Manhattan Corporation and The Bank of New York, as Trustee, with respect
to the Global Floating Rate Capital Securities, Series B, of Chase
Capital II (incorporated by reference to Exhibit 4.8 to the Annual Report
on Form 10-K, dated December 31, 1997, of The Chase Manhattan
Corporation, File No. 1-5805).
4.9 Amended and Restated Trust Agreement, dated as of January 24, 1997, among
The Chase Manhattan Corporation, The Bank of New York, as Property
Trustee, The Bank of New York (Delaware), as Delaware Trustee, and the
Administrative Trustees named therein, with respect to Chase Capital II
(incorporated by reference to Exhibit 4.9 to the Annual Report on Form
10-K, dated December 31, 1997, of The Chase Manhattan Corporation, File
No. 1-5805).
10.1 Deferred Compensation Plan for Non-Employee Directors of The Chase
Manhattan Corporation and The Chase Manhattan Bank, as amended and
restated effective December 1996 (incorporated by reference to Exhibit
10.1 to the Annual Report on Form 10-K, dated December 31, 1996, of The
Chase Manhattan Corporation, File No. 1-5805).
10.2 Post-Retirement Compensation Plan for Non-Employee Directors, as amended
and restated as of May 21, 1996 (incorporated by reference to Exhibit
10.2 to the Annual Report on Form 10-K, dated December 31, 1996, of The
Chase Manhattan Corporation, File No. 1-5805).
<PAGE> 97
Exhibit Index
-------------
Item No. Description
10.3 Deferred Compensation Plan of Chemical Banking Corporation and
Participating Companies, as amended through January 1, 1993 (incorporated
by reference to Exhibit 10.5 to the Annual Report on Form 10-K, dated
December 31, 1994, of Chemical Banking Corporation, File No. 1-5805).
10.4 The Chase Manhattan Corporation 1996 Long-Term Incentive Plan
(incorporated by reference to the Schedule 14A, filed on April 17, 1996,
of The Chase Manhattan Corporation, File No. 1-5805).
10.5 The Chase Manhattan 1994 Long-Term Incentive Plan (incorporated herein by
reference to Exhibit 10O to The Chase Manhattan Corporation's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994, File No.
1-5945).
10.6 Amendment to The Chase Manhattan 1994 Long-Term Incentive Plan
(incorporated herein by reference to Exhibit 10S to The Chase Manhattan
Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 1-5945).
10.7 Chemical Banking Corporation Long-Term Stock Incentive Plan, as amended
and restated as of May 19, 1992 (incorporated by reference to Exhibit
10.7 to the Annual Report on Form 10-K, dated December 31, 1992, of
Chemical Banking Corporation, File No. 1-5805).
10.8 The Chase Manhattan 1987 Long-Term Incentive Plan, as amended
(incorporated by reference to Exhibit 10A to The Chase Manhattan
Corporation's Annual Report on Form 10-K for the year ended December 31,
1990, File No. 1-5945).
10.9 Amendment to The Chase Manhattan 1987/82 Long-Term Incentive Plan
(incorporated by reference to Exhibit 10T to the Quarterly Report on Form
10-Q, for the quarter ended September 30, 1995, of The Chase Manhattan
Corporation, File No. 1-5945)
10.10 Long Term Incentive Program of Manufacturers Hanover Corporation
(incorporated by reference to Exhibit 10.10 to the Annual Report on Form
10-K, dated December 31, 1997, of The Chase Manhattan Corporation, File
No. 1-5805).
10.11 Key Executive Performance Plan of Chemical Banking Corporation
(incorporated by reference to Exhibit 10.4 to the Annual Report on Form
10-K, dated December 31, 1994, of Chemical Banking Corporation, File No.
1-5805).
10.12 The Chase Manhattan Annual Incentive Arrangement for Certain Executive
Officers (incorporated by reference to Exhibit 10W to the Quarterly
Report on Form 10-Q, for the quarter ended September 30, 1995, of The
Chase Manhattan Corporation, File No. 1-5945)
10.13 Forms of severance agreements as entered into by The Chase Manhattan
Corporation and certain of its executive officers (incorporated by
reference to Exhibit 10.13 to the Annual Report on Form 10-K, dated
December 31, 1997, of The Chase Manhattan Corporation, File No. 1-5805).
10.14 Form of termination agreement as entered into by The Chase Manhattan
Corporation and Donald L. Boudreau (incorporated by reference to the
Annual Report on Form 10-K, dated December 31, 1994, of The Chase
Manhattan Corporation, File No. 1-5945).
10.15 Form of amendment to the termination agreement as entered into by The
Chase Manhattan Corporation and Donald L. Boudreau (incorporated by
reference to the Quarterly Report on Form 10-Q, dated September 30, 1995,
of The Chase Manhattan Corporation, File No. 1-5945).
10.16 Permanent Life Insurance Options Plan (incorporated by reference to
Exhibit 10.11 to the Annual Report on Form 10-K, dated December 31, 1992,
of Chemical Banking Corporation, File No. 1 -5805).
10.17 Executive Retirement Plan of Chemical Banking Corporation and Certain
Subsidiaries (incorporated by reference to Exhibit 10.8 to the Annual
Report on Form 10-K, dated December 31, 1995, of Chemical Banking
Corporation, File No. 1-5805).
10.18 Supplemental Retirement Plan of Chemical Bank and Certain Affiliated
Companies, restated effective January 1, 1993 and as amended through
January 1, 1995 (incorporated by reference to Exhibit 10.9 to the Annual
Report on Form 10-K, dated December 31, 1995, of Chemical Banking
Corporation, File No. 1-5805).
<PAGE> 98
Exhibit Index
-------------
Item No. Description
10.19 Supplemental Retirement Plan of The Chase Manhattan Bank, as amended
(incorporated by reference to Exhibit 10G of The Chase Manhattan
Corporation's Annual Report on Form 10-K for the year ended December 31,
1989, File No. 1-5945).
10.20 Further Amendment to the Supplemental Retirement Plan of The Chase
Manhattan Bank (incorporated by reference to Exhibit 10G of The Chase
Manhattan Corporation's Annual Report on Form 10-K for the year ended
December 31, 1990, File No. 1-5945)
10.21 Amendment to Supplemental Retirement Plan of The Chase Manhattan Bank
(incorporated herein by reference to Exhibit 10Z to The Chase Manhattan
Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 1-5945).
10.22 Supplemental Benefit Plan of The Chase Manhattan Bank, as amended
(incorporated by reference to Exhibit 10H of The Chase Manhattan
Corporation's Annual Report on Form 10-K for the year ended December 31,
1990, File No. 1-5945).
10.23 Amendment to Supplemental Benefit Plan of The Chase Manhattan Bank
(incorporated herein by reference to Exhibit 10AA to The Chase Manhattan
Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 1-5945).
10.24 TRA86 Supplemental Benefit Plan of The Chase Manhattan Bank, as amended
(incorporated by reference to Exhibit 10I of The Chase Manhattan
Corporation's Annual Report on Form 10-K for the year ended December 31,
1990, File No. 1-5945).
10.25 Amendment to TRA86 Supplemental Benefit Plan of The Chase Manhattan Bank
(incorporated herein by reference to Exhibit 10BB to The Chase Manhattan
Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 1-5945).
11.1 Computation of earnings per common share.
12.1 Computation of ratio of earnings to fixed charges.
12.2 Computation of ratio of earnings to fixed charges and preferred stock
dividend requirements.
21.1 List of Subsidiaries of The Chase Manhattan Corporation.
22.1 Annual Report on Form 11-K of the 401(k) Savings Plan of The Chase
Manhattan Bank (to be filed by amendment pursuant to Rule 15d-21 under
the Securities Exchange Act of 1934).
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule.
<PAGE> 1
EXHIBIT 11.1
The Chase Manhattan Corporation
and Subsidiaries
Computation of Earnings Per Common Share
For a discussion of the computation of basic and diluted earnings per common
share, see Note Ten on page 59.
<TABLE>
<CAPTION>
Year Ended December 31, (in millions, except per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Earnings Per Share
Earnings:
Net Income $3,782 $3,708 $2,461
Less: Preferred Stock Dividends 98 182 219
- ------------------------------------------------------------------------------------------------------
Net Income Applicable to Common Stock $3,684 $3,526 $2,242
- ------------------------------------------------------------------------------------------------------
Shares:(a)
Basic Average Common Shares Outstanding 846.1 849.2 873.6
- ------------------------------------------------------------------------------------------------------
Net Income Per Share $ 4.35 $ 4.15 $ 2.57
- ------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share
Earnings:
Net Income Applicable to Common Stock $3,684 $3,526 $2,242
- ------------------------------------------------------------------------------------------------------
Shares:(a)
Basic Average Common Shares Outstanding 846.1 849.2 873.6
Additional Shares Issuable Upon Exercise of Stock Options for
Dilutive Effect and Conversion of Preferred Stock 23.2 29.2 33.2
- ------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding Assuming Dilution 869.3 878.4 906.8
- ------------------------------------------------------------------------------------------------------
Net Income Per Share: $ 4.24 $ 4.01 $ 2.47
- ------------------------------------------------------------------------------------------------------
</TABLE>
(a) Share-related data for all periods have been restated to reflect a 2-for-1
common stock split, effective as of close of business on May 20, 1998.
<PAGE> 1
Exhibit 12.1
The Chase Manhattan Corporation
and Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Year Ended December 31, (in millions, except ratios) 1998
- -------------------------------------------------------------------------------------------
<S> <C>
Excluding Interest on Deposits
Income before income taxes $ 5,930
--------
Fixed charges:
Interest expense 6,883
One third of rents, net of income from subleases(a) 116
--------
Total fixed charges 6,999
--------
Less: Equity in undistributed income of affiliates (33)
--------
Earnings before taxes and fixed charges, excluding capitalized interest $ 12,896
--------
Fixed charges, as above $ 6,999
--------
Ratio of earnings to fixed charges 1.84
--------
Including Interest on Deposits
Fixed charges, as above $ 6,999
Add: Interest on deposits 6,840
--------
Total fixed charges and interest on deposits $ 13,839
--------
Earnings before taxes and fixed charges, excluding capitalized interest, as above $ 12,896
Add: Interest on deposits 6,840
--------
Total earnings before taxes, fixed charges and interest on deposits $ 19,736
--------
Ratio of earnings to fixed charges 1.43
--------
- -------------------------------------------------------------------------------------------
</TABLE>
(a) The proportion deemed representative of the interest factor.
<PAGE> 1
EXHIBIT 12.2
The Chase Manhattan Corporation
and Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividend Requirements
<TABLE>
<CAPTION>
Year Ended December 31, (in millions, except ratios) 1998
- -------------------------------------------------------------------------------------------
<S> <C>
Excluding Interest on Deposits
Income before income taxes $ 5,930
--------
Fixed charges:
Interest expense 6,883
One third of rents, net of income from subleases(a) 116
--------
Total fixed charges 6,999
--------
Less: Equity in undistributed income of affiliates (33)
--------
Earnings before taxes and fixed charges, excluding capitalized interest $ 12,896
--------
Fixed charges, as above $ 6,999
--------
Preferred stock dividends 98
--------
Fixed charges including preferred stock dividends $ 7,097
--------
Ratio of earnings to fixed charges and preferred stock dividend requirements 1.82
--------
Including Interest on Deposits
Fixed charges including preferred stock dividends, as above $ 7,097
Add: Interest on deposits 6,840
--------
Total fixed charges including preferred stock dividends and interest on deposits $ 13,937
--------
Earnings before taxes and fixed charges, excluding capitalized interest, as above $ 12,896
Add: Interest on deposits 6,840
--------
Total earnings before taxes, fixed charges and interest on deposits $ 19,736
--------
Ratio of earnings to fixed charges and preferred stock dividend requirements 1.42
--------
- -------------------------------------------------------------------------------------------
</TABLE>
(a) The proportion deemed representative of the interest factor.
<PAGE> 1
EXHIBIT 21.1
The Chase Manhattan Corporation
List of Subsidiaries
Chase has the following subsidiaries:
<TABLE>
<CAPTION>
Percentage of voting
Organized under securities owned by
Name the laws of immediate parent
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
The Chase Manhattan Bank New York 100%
CB Capital Investors, Inc. Delaware 100
CB Capital Investors, L.P. Delaware 80
Chase & M.D. Sass Partners New York 64
Chase Access Services Corporation Delaware 100
Chase Asset Management, Inc. Delaware 100
Chase Bank International United States 100
Chase Commercial Mortgage Securities Corp. New York 100
Chase Community Development, Inc. Delaware 100
Chase Equipment Leasing Inc. New York 100
Chase Investment Services Corp. Delaware 100
Chase Manhattan Automotive Finance Corporation Delaware 100
Chase Manhattan Capital Corporation New York 100
Chase Manhattan Capital, L.P. Delaware 80
Chase Manhattan International Inc. United States 100
Chase Manhattan International Finance Ltd. United States 100
Banco Chase Manhattan, S.A. Brazil 100
Bancroft Holdings B.V. The Netherlands 100
CMBAL Limited Australia 100
Chase Securities Australia Limited Australia 100
Chase Investment Bank (Panama), S.A. Panama 100
Chase Japan Ltd. Delaware 100
Chase Manhattan Asia Limited Hong Kong 100
Chase Manhattan Bank (Ireland) plc Ireland 100
Chase Manhattan Bank (M) Berhad Malaysia 100
Chase Manhattan Bank A.G. Germany 100
Chase Manhattan Bank CMB S.A. Spain 100
Chase Manhattan Bank France France 100
Chase Manhattan Bank Luxembourg, S.A. Luxembourg 100
Chase Manhattan Bank Mexico, S.A. Mexico 100
Chase Manhattan Card Company Ltd. Hong Kong 100
Chase Manhattan (SEA) Limited Singapore 100
Chase Manhattan Securities S.A. Spain 100
Chase Manhattan Securities (C.I.) Limited Channel Islands 100
Chase Manhattan International Bank, Inc. Puerto Rico 100
Chase Manhattan (Thailand) Ltd. Thailand 100
Chase Manhattan Trading, S.A. Argentina 100
Chase Manhattan Trust Cayman Ltd. Cayman Islands 100
Chase Manhattan Trust Company (Hong Kong) Ltd. Hong Kong 100
Chase Manhattan (U.K.) Holdings Limited United Kingdom 100
Chase Export Finance Limited United Kingdom 100
Chase Asset Management (London) Limited United Kingdom 100
Chase Manhattan plc United Kingdom 100
Chase Manhattan International Ltd. United Kingdom 100
Goldway Ltd. United Kingdom 100
Chase Trust Bank Japan 100
Chemical Asia Limited Hong Kong 100
</TABLE>
<PAGE> 2
List of Subsidiaries
(continued)
<TABLE>
<CAPTION>
Percentage of voting
Organized under securities owned by
Name the laws of immediate parent
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Norchem Holdings e Negocios, S.A. Brazil 49%
Norchem Leasing S.A. Arrendamento Mercantil Brazil 50
The Chase Manhattan Bank of Canada Canada 100
The Chase Manhattan Private Bank & Trust
Company (Bahamas) Limited Bahamas 100
The Chase Manhattan Private Bank (Switzerland), S.A. Switzerland 100
The Saudi Investment Bank Saudi Arabia 7.5
Chase Manhattan Mortgage Holdings, Inc. Delaware 100
Chase Mortgage Services, Inc. Delaware 100
Chase Manhattan Overseas Corporation New York 100
Chase Merchant Ventures, Inc. Delaware 100
Chase Merchant Services LLC Delaware 50
Chem Network Processing Services, Inc. New Jersey 100
Chase Manhattan Acceptance Corporation Delaware 100
Chase Mortgage Company Ohio 100
Chase Preferred Capital Corporation Delaware 100
Harvest Opportunity Holdings Corp. New York 100
Manufacturers Hanover Leasing International Corp. Delaware 100
MH Financial Management Systems, Inc. Delaware 100
Other Subsidiaries of Chase
Brown & Company Securities Corporation Massachusetts 100
Capital Markets Transactions, Inc. Delaware 100
CBC - USA Inc. Delaware 100
CCC Holding Inc. Delaware 100
Chase Commercial Corporation New Jersey 100
Chase Business Credit Corp. Delaware 100
Chase Capital I Delaware 100
Chase Capital II Delaware 100
Chase Capital III Delaware 100
Chase Capital IV Delaware 100
Chase Capital V Delaware 100
Chase Capital VI Delaware 100
Chase Capital Corporation Delaware 100
Chase Capital Financing Ltd. United Kingdom 100
Chase (Jersey) Ltd. United Kingdom 100
Chase Finance (Jersey) Ltd. United Kingdom 100
Chase Cardholder Services, Inc. Delaware 100
Chase Equity Holdings, Inc. Delaware 100
CMC Holding (Delaware) Inc. Delaware 100
A.S. Holding Corporation Delaware 100
Chase Manhattan Bank Delaware Delaware 100
Chase Agency Services, Inc. Delaware 100
Chase Insurance Agency, Inc. Delaware 100
CSL Leasing Inc. Delaware 100
Chase Data Services Corporation Delaware 100
Western Hemisphere Life Insurance Company Delaware 100
Chase Manhattan Bank U.S.A., National Association United States 100
Chase BankCard Services, Inc. Delaware 100
Margaretten Financial Corporation Delaware 100
Chase Manhattan Mortgage Corporation New Jersey 100
</TABLE>
96
<PAGE> 3
List of Subsidiaries
(continued)
<TABLE>
<CAPTION>
Percentage of voting
Organized under securities owned by
Name the laws of immediate parent
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Chase Manhattan Trust Company, National Association United States 100%
Chase Bank of Texas, National Association United States 100
Chase Bank of Texas - San Angelo, N.A. United States 100
Chase Funding Inc. New York 100
Chase Futures & Options, Inc. Delaware 100
Chase Holding Delaware Inc. Delaware 100
Chase Manhattan Bank and Trust Company, National Association United States 100
Chase Manhattan Private Bank, N.A. United States 100
Chase Home Mortgage Corporation of the Southeast Florida 100
Chase International Capital Finance Limited United Kingdom 100
Chase Manhattan Realty Leasing Corporation New York 100
Chase Securities Inc. Delaware 100
Chase Shareholder Services of California, Inc. Delaware 100
Chase Shareholder Services Partner, Inc. Delaware 100
ChaseMellon Shareholder Services L.L.C. Delaware 50
Chase Trade, Inc. Delaware 100
Chatham Ventures, Inc. New York 100
Chemical Equity Incorporated New York 100
Chemical Investments, Inc. Delaware 100
Chemical New York, N.V. Netherland Antilles 100
Clintstone Properties Inc. New York 100
CMRCC, Inc. New York 100
CMC-OCI, Inc. Delaware 100
Hatherley Insurance Ltd. Bermuda 100
Offshore Equities, Inc. New York 100
Special Situation Fund Advisors, Inc. New York 100
Support Development Corporation Delaware 100
</TABLE>
The names of certain other direct and indirect subsidiaries of Chase have been
omitted from the list above because such unnamed subsidiaries considered in the
aggregate as a single subsidiary would not constitute a significant subsidiary.
<PAGE> 1
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (Nos. 2-98344,
33-13062, 33-15230, 33-15266, 33-20950, 33-40485, 33-45228, 33-45266, 33-47105,
33-49965, 33-55295, 33-57104, 33-58144, 33-60262, 33-64261, 333-14959,
333-14959-01, 333-14959-02, 333-14959-03, 333-16773, 333-19719, 333-22437,
333-37567, 333-37567-01, 333-37567-02, 333-37567-03, 333-36587, 333-36587-01,
333-36587-02, 333-36587-03, 333-42807, 333-56573 and 333-70639) and in the
Registration Statements on Form S-8 (Nos. 33-01776, 33-13457, 33-33220,
33-40272, 33-40675, 33-45017, 33-45018, 33-49909, 33-49911, 33-49913, 33-54547,
33-62453, 33-63833, 333-07941, 333-15281, 333-22451 and 333-73119) of The Chase
Manhattan Corporation or affiliates of our report dated January 19, 1999
appearing on page 44 of this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
New York, New York
March 11, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains selected summary financial information extracted from the
Consolidated Balance Sheet at December 31, 1998 and Consolidated Statement of
Income for the 12 months ended December 31, 1998 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 17,068
<INT-BEARING-DEPOSITS> 7,212
<FED-FUNDS-SOLD> 18,487
<TRADING-ASSETS> 57,692
<INVESTMENTS-HELD-FOR-SALE> 62,803
<INVESTMENTS-CARRYING> 1,687
<INVESTMENTS-MARKET> 1,703
<LOANS> 172,754
<ALLOWANCE> 3,552
<TOTAL-ASSETS> 365,875
<DEPOSITS> 212,437
<SHORT-TERM> 56,659
<LIABILITIES-OTHER> 52,793
<LONG-TERM> 16,187
0
1,028
<COMMON> 882
<OTHER-SE> 21,928
<TOTAL-LIABILITIES-AND-EQUITY> 365,875
<INTEREST-LOAN> 13,389
<INTEREST-INVEST> 3,616
<INTEREST-OTHER> 2,853
<INTEREST-TOTAL> 22,289
<INTEREST-DEPOSIT> 6,840
<INTEREST-EXPENSE> 13,723
<INTEREST-INCOME-NET> 8,566
<LOAN-LOSSES> 1,343
<SECURITIES-GAINS> 609
<EXPENSE-OTHER> 11,383
<INCOME-PRETAX> 5,930
<INCOME-PRE-EXTRAORDINARY> 3,782
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,782
<EPS-PRIMARY> 4.35<F1>
<EPS-DILUTED> 4.24<F1>
<YIELD-ACTUAL> 2.89
<LOANS-NON> 1,440
<LOANS-PAST> 506
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,624
<CHARGE-OFFS> 1,791
<RECOVERIES> 373
<ALLOWANCE-CLOSE> 3,552
<ALLOWANCE-DOMESTIC> 2,489
<ALLOWANCE-FOREIGN> 1,063
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>On May 19, 1998, Stockholders of Chase approved a two-for-one common stock
split, effective as of close of business May 20, 1998.
</FN>
</TABLE>
