<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2000 COMMISSION FILE NUMBER 1-5805
------------- ------
THE CHASE MANHATTAN CORPORATION
-------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-2624428
------------------------------- ------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
270 PARK AVENUE, NEW YORK, NEW YORK 10017
--------------------------------------- ---------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (212) 270-6000
--------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
--- ---
COMMON STOCK, $1 PAR VALUE 1,242,672,549
------------------------------------------------------------------------------
NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK
ON JULY 31, 2000.
<PAGE> 2
================================================================================
FORM 10-Q INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
------------------------------ ----
<S> <C> <C>
Item 1 Financial Statements - The Chase Manhattan Corporation:
Consolidated Balance Sheet at June 30, 2000 and
December 31, 1999 3
Consolidated Statement of Income for three and six months
ended June 30, 2000 and June 30, 1999 4
Consolidated Statement of Changes in Stockholders' Equity for the
six months ended June 30, 2000 and June 30, 1999 5
Consolidated Statement of Cash Flows for the six months
ended June 30, 2000 and June 30, 1999 6
Notes to Consolidated Financial Statements 7-11
Item 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations 12-42
Glossary of Terms 43
PART II - OTHER INFORMATION
---------------------------
Item 1 Legal Proceedings 44
Item 2 Sales of Unregistered Common Stock 44
Item 4 Submission of Matters to a Vote of Security Holders 45-46
Item 6 Exhibits and Reports on Form 8-K 47
</TABLE>
================================================================================
- 2 -
<PAGE> 3
PART I
Item 1
THE CHASE MANHATTAN CORPORATION
CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, December 31,
2000 1999
------------ --------------
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 18,361 $ 16,229
Deposits with Banks 3,646 28,076
Federal Funds Sold and Securities Purchased under Resale Agreements 27,733 23,823
Trading Assets: Debt and Equity Instruments 30,454 30,191
Risk Management Instruments 29,613 33,078
Securities:
Available-for-Sale 64,411 60,625
Held-to-Maturity (Market Value: $704 in 2000 and $876 in 1999) 719 888
Loans (Net of Allowance for Loan Losses of $3,459 in 2000
and $3,457 in 1999) 176,713 172,702
Premises and Equipment 4,546 4,439
Due from Customers on Acceptances 685 622
Accrued Interest Receivable 2,399 2,505
Other Assets 36,765 32,927
------------ -----------
TOTAL ASSETS $ 396,045 $ 406,105
============ ===========
LIABILITIES
Deposits:
Domestic: Noninterest-Bearing $ 49,583 $ 49,468
Interest-Bearing 79,019 80,132
Foreign: Noninterest-Bearing 5,683 6,061
Interest-Bearing 90,120 106,084
------------ -----------
Total Deposits 224,405 241,745
Federal Funds Purchased and Securities Sold under
Repurchase Agreements 57,637 50,148
Commercial Paper 5,202 8,509
Other Borrowed Funds 5,415 5,145
Acceptances Outstanding 685 622
Trading Liabilities 36,713 38,573
Accounts Payable, Accrued Expenses and Other Liabilities, Including
the Allowance for Credit Losses of $170 in 2000 and $170 in 1999 16,500 17,056
Long-Term Debt 21,515 17,602
Guaranteed Preferred Beneficial Interests in Corporation's
Junior Subordinated Deferrable Interest Debentures 2,539 2,538
------------ -----------
TOTAL LIABILITIES 370,611 381,938
------------ -----------
COMMITMENTS AND CONTINGENCIES (SEE NOTE 12)
PREFERRED STOCK OF SUBSIDIARY 550 550
------------ -----------
STOCKHOLDERS' EQUITY
Preferred Stock 828 928
Common Stock (Authorized 4,500,000,000 Shares, Issued 1,322,758,290
Shares in 2000 and 1,322,811,932 in 1999) 1,323 882
Capital Surplus 9,065 9,714
Retained Earnings 19,170 17,547
Accumulated Other Comprehensive Loss (1,320) (1,454)
Treasury Stock, at Cost (84,532,874 Shares in 2000
and 82,055,832 Shares in 1999) (4,182) (4,000)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 24,884 23,617
------------ -----------
TOTAL LIABILITIES, PREFERRED STOCK OF SUBSIDIARY
AND STOCKHOLDERS' EQUITY $ 396,045 $ 406,105
============ ===========
</TABLE>
The Notes to Consolidated Financial Statements are an
integral part of these Statements.
-3-
<PAGE> 4
PART I
Item 1 (continued)
THE CHASE MANHATTAN CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
-------------------------- ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 3,631 $ 3,165 $ 7,111 $ 6,374
Securities 952 747 1,885 1,582
Trading Assets 479 411 895 829
Federal Funds Sold and Securities Purchased
under Resale Agreements 451 389 897 770
Deposits with Banks 101 161 235 345
---------- --------- --------- ---------
Total Interest Income 5,614 4,873 11,023 9,900
---------- --------- --------- ---------
INTEREST EXPENSE
Deposits 2,086 1,558 4,051 3,156
Short-Term and Other Borrowings 1,216 851 2,345 1,765
Long-Term Debt 397 319 751 630
---------- --------- --------- ---------
Total Interest Expense 3,699 2,728 7,147 5,551
---------- --------- --------- ---------
NET INTEREST INCOME 1,915 2,145 3,876 4,349
Provision for Loan Losses 332 388 674 769
---------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,583 1,757 3,202 3,580
---------- --------- --------- ---------
NONINTEREST REVENUE
Investment Banking Fees 639 585 1,287 902
Trust, Custody and Investment Management Fees 545 461 1,054 875
Credit Card Revenue 443 438 840 817
Fees for Other Financial Services 695 587 1,426 1,140
Trading Revenue 824 526 1,845 1,144
Securities Gains 57 5 71 161
Private Equity Gains 298 513 798 838
Other Revenue -- 356 144 534
---------- --------- --------- ---------
Total Noninterest Revenue 3,501 3,471 7,465 6,411
---------- --------- --------- ---------
NONINTEREST EXPENSE
Salaries 1,614 1,416 3,367 2,800
Employee Benefits 252 238 539 493
Occupancy Expense 216 206 442 424
Equipment Expense 274 239 559 482
Restructuring Costs 50 -- 50 --
Other Expense 1,001 969 1,940 1,814
---------- --------- --------- ---------
Total Noninterest Expense 3,407 3,068 6,897 6,013
---------- --------- --------- ---------
INCOME BEFORE INCOME TAX EXPENSE 1,677 2,160 3,770 3,978
Income Tax Expense 586 767 1,319 1,412
---------- --------- --------- ---------
NET INCOME $ 1,091 $ 1,393 $ 2,451 $ 2,566
========== ========= ========= =========
NET INCOME APPLICABLE TO COMMON STOCK $ 1,074 $ 1,375 $ 2,418 $ 2,530
========== ========= ========= =========
NET INCOME PER COMMON SHARE
Basic $ 0.88 $ 1.10 $ 1.98 $ 2.01
========== ========= ========= =========
Diluted $ 0.85 $ 1.06 $ 1.92 $ 1.95
========== ========= ========= =========
</TABLE>
The Notes to Consolidated Financial Statements are an
integral part of these Statements.
-4-
<PAGE> 5
PART I
Item 1 (continued)
THE CHASE MANHATTAN CORPORATION
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30,
(IN MILLIONS)
<TABLE>
<CAPTION>
2000 1999
--------- ----------
<S> <C> <C>
PREFERRED STOCK
Balance at Beginning of Year $ 928 $ 1,028
Redemption of Stock (100) --
----------- ----------
Balance at End of Period 828 1,028
----------- ----------
COMMON STOCK
Balance at Beginning of Year 882 882
Issuance of Common Stock for a Three-for-Two Stock Split 441 --
----------- ----------
Balance at End of Period 1,323 882
----------- ----------
CAPITAL SURPLUS
Balance at Beginning of Year 9,714 9,836
Issuance of Common Stock for a Three-for-Two-Stock Split (441) --
Shares Issued and Commitments to Issue Common Stock
for Employee Stock-Based Awards and Related Tax Effects (208) (208)
----------- ----------
Balance at End of Period 9,065 9,628
----------- ----------
RETAINED EARNINGS
Balance at Beginning of Year 17,547 13,544
Net Income 2,451 2,566
Cash Dividends Declared: Preferred Stock (33) (36)
Common Stock (795) (693)
----------- ----------
Balance at End of Period 19,170 15,381
----------- ----------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at Beginning of Year (1,454) 392
Other Comprehensive Income (Loss) 134 (1,114)
----------- -----------
Balance at End of Period (1,320) (722)
----------- -----------
TREASURY STOCK, AT COST
Balance at Beginning of Year (4,000) (1,844)
Purchase of Treasury Stock (1,072) (3,057)
Reissuance of Treasury Stock 890 1,412
----------- ----------
Balance at End of Period (4,182) (3,489)
------------ ----------
TOTAL STOCKHOLDERS' EQUITY $ 24,884 $ 22,708
=========== ==========
COMPREHENSIVE INCOME
Net Income $ 2,451 $ 2,566
Other Comprehensive Income (Loss) 134 (1,114)
----------- ----------
Comprehensive Income $ 2,585 $ 1,452
=========== ==========
</TABLE>
The Notes to Consolidated Financial Statements are an
integral part of these Statements.
-5-
<PAGE> 6
PART I
Item 1 (continued)
THE CHASE MANHATTAN CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
(IN MILLIONS)
<TABLE>
<CAPTION>
2000 1999
----------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
--------------------
Net Income $ 2,451 $ 2,566
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Provision for Loan Losses 674 769
Restructuring Costs 50 --
Depreciation and Amortization 775 692
Net Change in:
Trading-Related Assets 3,045 6,592
Accrued Interest Receivable 106 213
Private Equity Investments (2,004) (1,057)
Other Assets (2,098) (2,502)
Trading-Related Liabilities (3,122) (1,340)
Accrued Interest Payable (1,240) (285)
Other Liabilities 2,204 774
Other, Net 53 (63)
----------- ----------
Net Cash Provided by Operating Activities 894 6,359
----------- ---------
INVESTING ACTIVITIES
--------------------
Net Change in:
Deposits with Banks 24,430 1,361
Federal Funds Sold and Securities Purchased under Resale Agreements (10,166) (15,066)
Loans Due to Sales and Securitizations 12,468 23,528
Other Loans, Net (17,725) (27,250)
Other, Net (99) (46)
Proceeds from the Maturity of Held-to-Maturity Securities 236 595
Purchases of Held-to-Maturity Securities (66) --
Proceeds from the Maturity of Available-for-Sale Securities 4,769 4,937
Proceeds from the Sale of Available-for-Sale Securities 31,858 59,120
Purchases of Available-for-Sale Securities (40,571) (51,517)
Proceeds from Sales of Nonstrategic Assets -- 182
Cash Used in Acquisitions -- (52)
----------- ----------
Net Cash Provided (Used) by Investing Activities 5,134 (4,208)
----------- ---------
FINANCING ACTIVITIES
--------------------
Net Change in:
Noninterest-Bearing Domestic Demand Deposits 115 2,333
Domestic Time and Savings Deposits (1,113) (4,818)
Foreign Deposits (16,342) (450)
Federal Funds Purchased and Securities Sold under Repurchase Agreements 13,745 4,768
Other Borrowed Funds (3,037) (3,367)
Other, Net 73 (340)
Proceeds from the Issuance of Long-Term Debt and Capital Securities 5,580 3,260
Maturity and Redemption of Long-Term Debt (1,676) (2,035)
Proceeds from the Issuance of Stock 682 1,204
Redemption of Preferred Stock (100) --
Treasury Stock Purchased (1,072) (3,057)
Cash Dividends Paid (766) (688)
------------ ----------
Net Cash (Used) by Financing Activities (3,911) (3,190)
----------- ---------
Effect of Exchange Rate Changes on Cash and Due from Banks 15 8
----------- ---------
Net Increase (Decrease) in Cash and Due from Banks 2,132 (1,031)
Cash and Due from Banks at January 1, 16,229 17,068
----------- ---------
Cash and Due from Banks at June 30, $ 18,361 $ 16,037
=========== =========
Cash Interest Paid $ 5,907 $ 5,836
----------- ---------
Income Taxes Paid $ 1,195 $ 290
----------- ---------
</TABLE>
The Notes to Consolidated Financial Statements are an
integral part of these Statements.
-6-
<PAGE> 7
PART 1
Item 1 (continued)
-------------------------------------------------------------------------------
See Glossary of Terms on page 43 for definition of terms used throughout the
Notes to Consolidated Financial Statements.
-------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accounting and financial reporting policies of The Chase Manhattan
Corporation ("Chase") conform to generally accepted accounting principles
("GAAP") and prevailing industry practices for interim reporting. Additionally,
where applicable, the policies conform to the accounting and reporting
guidelines prescribed by bank regulatory authorities. The unaudited
consolidated 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. In the opinion of management, all necessary
adjustments have been included for a fair presentation of this interim
financial information. These unaudited financial statements should be read in
conjunction with the audited financial statements included in Chase's 1999
Annual Report.
NOTE 2 - STOCK SPLIT
On May 16, 2000, the stockholders approved a three-for-two stock split of
Chase's common stock. The additional shares issued as a result of the split
were distributed on June 9, 2000 to stockholders of record at the close of
business on May 17, 2000. The split became effective as of the opening of
business on June 12, 2000. A total of 440,883,668 shares of common stock were
issued in connection with the split, including 28,422,065 shares held in
treasury. As a result of the stock split, $441 million was reclassified from
capital surplus to common stock and, as a result, the stock split did not cause
any changes in the $1.00 par value per share for the common stock or in total
stockholders' equity. All references to the number of common shares and per
common share amounts have been restated to reflect the effects of the stock
split.
NOTE 3 - SECURITIES
For a discussion of the accounting policies relating to securities, see Note 1
of Chase's 1999 Annual Report.
Net gains from available-for-sale ("AFS") securities sold in the second quarter
of 2000 amounted to $57 million (gross gains of $100 million and gross losses
of $43 million) and for the first six months of 2000 amounted to $71 million
(gross gains of $139 million and gross losses of $68 million). Net gains on
sales of these types of securities for the same periods of 1999 amounted to $5
million (gross gains of $73 million and gross losses of $68 million), and $161
million (gross gains of $284 million and gross losses of $123 million),
respectively. There were no sales of held-to-maturity securities in the periods
presented. The amortized cost and estimated fair value of securities,
including the impact of related derivatives, were as follows for the dates
indicated:
==============================================================================
<TABLE>
<CAPTION>
JUNE 30, 2000 December 31, 1999
-------------------------------- ------------------------------
(in millions) AMORTIZED FAIR Amortized FAIR
AVAILABLE-FOR-SALE SECURITIES: COST VALUE (a) Cost Value (a)
------------- -------- ------------ -------
<S> <C> <C> <C> <C>
U.S. Government and Federal
Agency/Corporation Obligations:
Mortgage-Backed Securities $ 28,167 $ 26,477 $ 27,938 $ 26,326
CMOs and U.S. Treasuries 27,749 26,943 23,652 22,684
Debt Securities Issued by Foreign Governments 9,093 8,991 9,469 9,364
Corporate Debt Securities and Equity Securities 1,382 1,614 1,162 1,334
Other, primarily Asset-Backed Securities (b) 358 386 899 917
------------ ---------- ----------- -----------
Total Available-for-Sale Securities $ 66,749 $ 64,411 $ 63,120 $ 60,625
============ ========== =========== ===========
HELD-TO-MATURITY SECURITIES (c) $ 719 $ 704 $ 888 $ 876
============ ========== =========== ===========
</TABLE>
==============================================================================
(a) Gross unrealized gains and losses on available-for-sale securities were
$416 million and $2,754 million, respectively, at June 30, 2000 and $231
million and $2,726 million, respectively, at December 31, 1999. Gross
unrealized gains and losses on held-to-maturity securities were $1 million
and $16 million, respectively, at June 30, 2000. Gross unrealized gains
and losses were $1 million and $13 million, respectively, at December 31,
1999.
(b) Includes collateralized mortgage obligations ("CMO") of private issuers,
which generally have underlying collateral consisting of obligations of
U.S. Government and Federal agencies and corporations.
(c) Primarily U.S. Government and Federal Agency and Corporation Obligations.
==============================================================================
-7-
<PAGE> 8
PART 1
Item 1 (continued)
NOTE 4 - RESTRUCTURING COSTS
In the 1999 fourth quarter, Chase incurred a $175 million restructuring charge
relating to planned consolidation actions in certain businesses and to planned
staff reductions and dispositions of premises and equipment, including the
relocation of several businesses to Florida, Texas, and Massachusetts. For a
discussion of Chase's restructuring costs, refer to Note 12 and page 28 of
Chase's 1999 Annual Report. The following table shows activity during the
first half of 2000.
<TABLE>
<CAPTION>
=================================================================================================================================
(in millions) Costs Applied against
Restructuring Liability the Liability in the RESTRUCTURING LIABILITY
at December 31, 1999 First Half of 2000 AT JUNE 30, 2000
-------------------- ------------------ ----------------
<S> <C> <C> <C>
Severance Costs $ 125 $ (50) $ 75
Disposition of Premises/Equipment 50 (5) 45
------------ -------------- ------------
Total $ 175 $ (55) $ 120
============ ============== ============
=================================================================================================================================
</TABLE>
In addition to the above restructuring charge, Chase incurred $50 million of
restructuring costs during the 2000 second quarter relating to relocation
initiatives ($15 million) and other business initiatives ($35 million), such as
the consolidation of operations. These restructuring costs were not accruable
under existing accounting pronouncements and therefore were not included in the
$175 million restructuring charge. Refer to page 23 for further information
regarding restructuring costs.
NOTE 5 - 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.
<TABLE>
<CAPTION>
==================================================================================================================================
Six months ended June 30,
(in millions)
2000 1999
----------------------------------------------------- ------------------------------------------------
NET UNREALIZED ACCUMULATED Net Unrealized Accumulated
ACCUMULATED GAIN(LOSS) ON OTHER Accumulated Gain(Loss) on Other
TRANSLATION SECURITIES COMPREHENSIVE Translation Securities Comprehensive
ADJUSTMENT AVAILABLE-FOR-SALE INCOME Adjustment Available-for-Sale Income
---------- ------------------ ------ ---------- ------------------ ------
<S> <C> <C> <C> <C> <C> <C>
Beginning Balance $ 17 $ (1,471) $ (1,454) $ 17 $ 375 $ 392
Change during Period -- 134 134 -- (1,114) (1,114)
--------- ----------- ---------- --------- ---------- ----------
Ending Balance $ 17 $ (1,337) (a) $ (1,320) $ 17 $ (739) (a) $ (722)
========= ============ =========== ========= ========= ==========
=================================================================================================================================
</TABLE>
(a) Represents the after-tax difference between the fair value and amortized
cost of the available-for-sale securities portfolio, including securities
classified as loans, which are subject to the provisions of SFAS 115.
==============================================================================
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
For a discussion of Chase's fair value methodologies, see Note 22 of the 1999
Annual Report. The following table presents the financial assets and
liabilities valued under SFAS 107.
<TABLE>
<CAPTION>
=================================================================================================================================
JUNE 30, 2000 December 31, 1999
---------------------------------------------- ------------------------------------------
CARRYING ESTIMATED APPRECIATION/ Carrying Estimated Appreciation/
(in millions) VALUE FAIR VALUE (DEPRECIATION) Value Fair Value (Depreciation)
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Financial Assets $ 382,022 $ 383,789 $ 1,767 $ 387,414 $ 389,469 $ 2,055
============ ============ =========== ===========
Total Financial Liabilities $ 369,749 $ 369,521 228 $ 381,078 $ 380,599 479
============ ============ ---------- =========== =========== ------------
Estimated Fair Value in Excess
of Carrying Value $ 1,995 $ 2,534
========== ============
=================================================================================================================================
</TABLE>
Derivative contracts used in connection with Chase's asset/liability ("A/L")
activities had an unrecognized net loss of $935 million and $877 million at
June 30, 2000 and December 31, 1999, respectively, both of which are included
in the table above.
-8-
<PAGE> 9
PART 1
Item 1 (continued)
NOTE 7 - CAPITAL
For a discussion of the calculation of risk-based capital ratios, see Note 18
of Chase's 1999 Annual Report.
The following table presents the risk-based capital ratios for Chase and its
significant banking subsidiaries. At June 30, 2000, Chase and each of its
depository institutions, including those listed in the table below, were "well
capitalized" as defined by banking regulators.
<TABLE>
<CAPTION>
===============================================================================================================================
JUNE 30, 2000 The Chase Chase
(in millions, except ratios) Chase (a) Manhattan Bank Texas (e) Chase USA
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 Capital (d) $ 26,662 $ 19,494 $ 1,738 $ 2,771
Total Capital 38,017 27,062 2,409 3,871
Risk-Weighted Assets (b) 306,868 242,165 18,680 28,566
Adjusted Average Assets 394,742 313,950 23,599 31,182
Tier 1 Capital Ratio (b)(d) 8.69% 8.05% 9.30% 9.70%
Total Capital Ratio (b)(d) 12.39% 11.18% 12.90% 13.55%
Tier 1 Leverage Ratio (c)(d) 6.75% 6.21% 7.36% 8.89%
===============================================================================================================================
</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) Tier 1 Capital or Total Capital, as applicable, divided by risk-weighted
assets. Risk-weighted assets include off-balance sheet risk-weighted
assets in the amounts of $94,387 million, $85,628 million, $4,029 million
and $2,067 million, respectively.
(c) Tier 1 Capital divided by adjusted average assets (net of allowance for
loan losses, goodwill and certain intangible assets).
(d) The provisions of SFAS 115 do not apply to the calculation of the Tier 1
Capital and Tier 1 leverage ratios.
(e) On August 1, 2000, Chase Bank of Texas, National Association ("Chase
Texas") merged into The Chase Manhattan Bank.
===============================================================================
Cash dividends declared increased in the first half of 2000 to $0.64 per share
($0.32 per share in the 2000 second quarter) compared with $0.54 per share for
the 1999 first half ($0.27 per share in 1999 second quarter).
NOTE 8 - DERIVATIVE AND FOREIGN EXCHANGE CONTRACTS
Chase utilizes derivative and foreign exchange financial instruments for both
trading and A/L activities. For a discussion of the financial instruments used
and the credit and market risks involved, see the Management's Discussion and
Analysis ("MD&A") on pages 42 and 45, and Note 19 of Chase's 1999 Annual
Report.
The following table summarizes the aggregate notional amounts of derivative and
foreign exchange contracts as well as the credit exposure related to these
instruments (after taking into account the effects of legally enforceable
master netting agreements).
<TABLE>
<CAPTION>
=================================================================================================================================
NOTIONAL AMOUNTS (a) CREDIT EXPOSURE
JUNE 30, December 31, JUNE 30, December 31,
(in billions) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Rate Contracts $ 12,421.2 $ 11,126.9 $ 10.4 $ 10.3
Foreign Exchange Contracts 1,768.0 1,652.1 10.6 15.8
Debt, Equity, Commodity and Other Contracts 197.3 157.6 8.8 7.4
---------- ----------
Total Credit Exposure Recorded on the Balance Sheet $ 29.8 $ 33.5
========== ==========
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The notional amounts of exchange-traded interest rate contracts, foreign
exchange contracts, and debt, equity, commodity and other contracts were
$1,257.2 billion, $2.0 billion and $15.4 billion, respectively, at June
30, 2000, compared with $1,075.4 billion, $3.0 billion and $13.0 billion,
respectively, at December 31,1999. The credit risk for these contracts
was minimal as exchange-traded contracts principally settle daily in cash.
===============================================================================
-9-
<PAGE> 10
PART 1
Item 1 (continued)
NOTE 9 - SEGMENT INFORMATION
Chase is organized into four major businesses: Global Bank, Chase Capital
Partners, National Consumer Services ("NCS") and Global Services. Prior periods
have been restated to reflect refinements in management reporting policies or
changes to the management organization. For example, commencing with the second
quarter of 2000, results for Chase Capital Partners ("CCP") are disclosed
separately from the remainder of the Global Bank. In addition, the private
equity business of Chase H&Q has been moved to CCP from Global Investment
Banking. These businesses are segmented based on the products and services
provided, or the type of customer serviced, and reflect the manner in which
financial information is evaluated by Chase's management.
Chase uses Shareholder Value Added ("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 20 and Note 23 of the 1999 Annual Report. The following table
provides Chase's segment results.
<TABLE>
<CAPTION>
=================================================================================================================================
(in millions) CHASE NATIONAL CORPORATE/
GLOBAL CAPITAL CONSUMER GLOBAL RECONCILING
BANK (a) PARTNERS SERVICES SERVICES ITEMS (b) TOTAL
-------- -------- -------- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
SECOND QUARTER 2000
Operating Revenue (c) $ 2,257 $ 249 $ 2,507 $ 877 $ (91) $ 5,799
Intersegment Revenue (c) (67) 14 8 47 (2) --
Operating Earnings 540 128 406 147 (6) 1,215
Cash Operating Earnings (d) 559 130 443 163 4 1,299
Average Managed Assets 240,129 11,780 144,259 15,737 3,917 415,822
SVA 246 (78) 175 75 124 542
SECOND QUARTER 1999
Operating Revenue (c) $ 2,040 $ 503 $ 2,473 $ 771 $ (91) $ 5,696
Intersegment Revenue (c) (41) 32 5 20 (16) --
Operating Earnings 559 297 374 120 1 1,351
Cash Operating Earnings (d) 571 297 416 136 7 1,427
Average Managed Assets 219,480 7,608 128,914 16,504 6,230 378,736
SVA 258 171 162 41 64 696
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(in millions) CHASE NATIONAL CORPORATE/
GLOBAL CAPITAL CONSUMER GLOBAL RECONCILING
BANK (a) PARTNERS SERVICES SERVICES ITEMS (b) TOTAL
-------- -------- -------- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS 2000
Operating Revenue (c) $ 4,833 $ 698 $ 4,899 $ 1,726 $ (178) $ 11,978
Intersegment Revenue (c) (133) 37 9 98 (11) --
Operating Earnings 1,235 367 721 281 (29) 2,575
Cash Operating Earnings (d) 1,272 370 795 313 (6) 2,744
Average Managed Assets 238,854 11,601 142,766 15,744 3,630 412,595
SVA 642 (35) 260 135 241 1,243
SIX MONTHS 1999
Operating Revenue (c) $ 4,133 $ 808 $ 4,875 $ 1,495 $ (202) $ 11,109
Intersegment Revenue (c) (77) 46 8 39 (16) --
Operating Earnings 1,166 469 727 213 (51) 2,524
Cash Operating Earnings (d) 1,188 469 810 244 (38) 2,673
Average Managed Assets 222,944 7,467 127,373 16,726 7,299 381,809
SVA 556 226 307 53 55 1,197
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excluding Chase Capital Partners.
(b) Corporate/Reconciling Items include Support Units, Corporate and the net
effect of management accounting policies.
(c) Operating Revenue includes Intersegment Revenue, which includes revenue and
revenue sharing agreements between segments, net of intersegment expenses.
Transactions between business segments primarily are conducted at fair
value.
(d) Cash Operating Earnings excludes the impact of credit card securitizations,
restructuring costs, special items, and amortization of goodwill and
certain other intangibles.
===============================================================================
-10-
<PAGE> 11
PART 1
Item 1 (continued)
The table below presents a reconciliation of the combined segment information
to Chase's consolidated net income as included in the Consolidated Statement of
Income. For a further discussion concerning Chase's business franchise
(segment) results, see Lines of Business Results in the MD&A on pages 24-29.
<TABLE>
<CAPTION>
=================================================================================================================================
SECOND QUARTER SIX MONTHS
----------------------------- -----------------------------
2000 1999 2000 1999
------------- ---------- ----------- -----------
(in millions)
<S> <C> <C> <C> <C>
SEGMENTS' CASH OPERATING EARNINGS $ 1,295 $ 1,420 $ 2,750 $ 2,711
Corporate/Reconciling Items 4 7 (6) (38)
---------- --------- ----------- --------
CONSOLIDATED CASH OPERATING EARNINGS 1,299 1,427 2,744 2,673
Amortization of Goodwill and Certain Intangibles (84) (76) (169) (149)
----------- ---------- ----------- --------
CONSOLIDATED OPERATING EARNINGS 1,215 1,351 2,575 2,524
Special Items and Restructuring Costs (124) 42 (124) 42
----------- --------- ----------- --------
CONSOLIDATED NET INCOME $ 1,091 $ 1,393 $ 2,451 $ 2,566
========== ========= ========== ========
=================================================================================================================================
</TABLE>
NOTE 10 - EARNINGS PER SHARE
For a discussion of Chase's current earnings per share policy, see Note 10 of
the 1999 Annual Report. For the calculation of basic and diluted EPS for the
second quarter and six months ended June 30, 2000 and 1999, see Exhibit 11 on
page 50.
NOTE 11 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S JUNIOR
SUBORDINATED DEFERRABLE INTEREST DEBENTURES
There have been no changes related to the statutory business trusts during the
first six months of 2000. For a discussion of these business trusts, see page
69 of Chase's 1999 Annual Report.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
For a discussion of legal proceedings, see Part II, Item 1 of this Form 10-Q.
-11-
<PAGE> 12
PART I
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
OVERVIEW
---------------------------------------------------------------------------------------------------------------------------------
Second Quarter For Six Months Ended June 30,
------------------------------------------- ---------------------------------------
(in millions, except per share Over(Under) Over(Under)
and ratio data) 2000 1999 1999 2000 1999 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
OPERATING BASIS (a)
Revenue $ 5,799 $ 5,696 2% $ 11,978 $ 11,109 8%
Earnings 1,215 1,351 (10) 2,575 2,524 2
Diluted Earnings per Share 0.95 1.03 (8) 2.01 1.91 5
Shareholder Value Added 542 696 (22) 1,243 1,197 4
Overhead Ratio 58% 52% 600 bp 57% 53% 400 bp
Cash Earnings $ 1,299 $ 1,427 (9)% $ 2,744 $ 2,673 3%
Diluted Cash Earnings per Share 1.02 1.09 (6) 2.15 2.03 6
Cash Return on Average
Common Equity 23% 26% (300) bp 24% 24% -- bp
---------------------------------------------------------------------------------------------------------------------------------
REPORTED BASIS
Net Income $ 1,091 $ 1,393 (22)% $ 2,451 $ 2,566 (4)%
Diluted Earnings Per Share 0.85 1.06 (20) 1.92 1.95 (2)
Return on Average Common Equity 19% 25% (600) bp 21% 23% (200) bp
=================================================================================================================================
</TABLE>
(a) Operating basis excludes the impact of credit card securitizations,
restructuring costs and special items. For a further discussion, see
Glossary of Terms on page 43.
bp Denotes basis points; 100 bp equals 1%.
===============================================================================
Chase's diluted operating earnings for the second quarter of 2000 were $0.95
per share, a decline of 8% from $1.03 per share for the same 1999 period. For
the first six months of 2000, diluted operating earnings per share rose 5% to
$2.01 from $1.91 for the first six months of 1999. Operating earnings in the
2000 second quarter were $1.22 billion, compared with $1.35 billion in the same
1999 quarter. For the first six months of 2000, operating earnings rose to
$2.58 billion from $2.52 billion in 1999.
Reported net income per share, which includes special items, was $0.85 and
$1.92 for the second quarter and first half of 2000, respectively, compared
with $1.06 and $1.95 for the 1999 second quarter and first half, respectively.
Reported net income in the 2000 second quarter was $1.09 billion compared with
$1.39 billion in the 1999 second quarter; net income for the first half of 2000
was $2.45 billion and was $2.57 billion for the same period of 1999.
The second quarter and first six months of 2000 include a $141 million loss
resulting from the economic hedge of the purchase price of Robert Fleming
Holdings Limited ("Flemings") prior to its acquisition and $50 million of
restructuring costs associated with previously announced relocation
initiatives. For a further discussion of the Flemings acquisition, see Other
Events on page 38. The results for the second quarter and first six months of
1999 included $166 million in gains from sales of nonstrategic assets (of which
$95 million was from the sale of a building and $71 million was from the sale
of branches in Texas) and a special contribution to The Chase Manhattan
Foundation of $100 million.
Shareholders approved a three-for-two stock split at Chase's annual meeting on
May 16, 2000. The record date for the split was May 17, 2000 and the
additional shares of common stock issued as a result of the split were
distributed on June 9, 2000. All per share results have been restated to
reflect the three-for-two stock split.
The 2000 second quarter results demonstrated the resiliency and strong
competitive position of Chase's businesses. Despite the market decline in the
prices of NASDAQ-traded securities during the early part of the second quarter,
which produced lower gains at Chase Capital Partners ("CCP"), Chase's private
equity business, Chase had a cash operating return on average common equity in
the 2000 second quarter of 23%. Chase intends to continue to reposition and
strengthen its franchises for revenue growth, while also continuing to be
focused on financial and credit discipline.
-12-
<PAGE> 13
PART I
Item 2 (continued)
FINANCIAL AND CREDIT DISCIPLINE: Chase seeks to manage its businesses with
financial discipline, with attention to risk, capital and expense management.
Credit costs decreased 9% in both the second quarter and first six months of
2000, when compared with the same 1999 periods. Nonperforming assets at June
30, 2000 were $1.90 billion, remaining low as a percentage of total assets. The
level of nonperforming assets at year-end 2000 is expected to be approximately
at the same level as year-end 1999. Credit card charge-offs have continued to
decline, while commercial credit costs remained stable.
Chase's Tier One Capital ratio was 8.7% at June 30, 2000, compared with 8.4% a
year ago. In anticipation of the acquisition of Flemings, Chase did not
repurchase any shares of common stock during the 2000 second quarter.
Total operating revenue growth was 2% for the 2000 second quarter and 8% for
the first half of 2000, primarily due to higher investment banking fees and
trading revenues, offset by lower private equity gains. Operating expenses
increased 13% and 16%, respectively, in the second quarter and first half of
2000, as a result of higher incentive expenses to support the investment
banking and trading businesses and a competitive recruiting environment in
these businesses.
DIVERSITY OF FRANCHISE: The Global Bank (excluding CCP) had operating revenue
growth of 11% for the 2000 second quarter and 17% for the first half, primarily
as a result of significant growth in its merger and acquisition ("M&A")
advisory and trading businesses. During the second quarter and first half of
2000, CCP had private equity gains of $298 million and $798 million,
respectively. These results were driven by realized gains and initial public
offerings of investments in the portfolio.
Global Services' operating earnings increased 23% and 32%, respectively, in the
2000 second quarter and first half, over the prior year's periods, reflecting
strong growth in Chase's securities processing businesses and good expense
management.
NCS had operating revenues of $2.5 billion in the 2000 second quarter and $4.9
billion for the 2000 first half. These results were relatively flat when
compared with the same periods of 1999. Improved results from NCS' regional
banking and middle market banking businesses were not enough to offset
pressures on credit card margins and mortgage production activities due to
rising interest rates.
INVESTING FOR GROWTH: One of Chase's strategic priorities is investing for
growth - a willingness to build those businesses where it has leadership
positions. Recent examples have been Chase's acquisition of Hambrecht & Quist
("H&Q"), which was acquired on December 9, 1999 and the mortgage business of
Mellon Bank N.A., which was acquired on September 30, 1999. The Beacon Group,
LLC ("Beacon"), a privately-held investment banking firm, was acquired on July
6, 2000 and the acquisition of Flemings was completed on August 1, 2000. These
acquisitions are intended to continue to strengthen Chase's ability to benefit
from the growth occurring in the global securities markets. See Other Events
on page 38 for a further discussion on Flemings and Beacon. At the same time,
Chase continues to assess its strategic options, evaluating businesses and
their competitive positions. These initiatives include assessing how the
internet can strengthen Chase's businesses, the relocations of businesses to
improve efficiencies and the exiting of nonstrategic businesses, such as
Chase's consumer operations in Panama and Hong Kong. These actions are all
intended to position Chase for higher growth in the future.
This Management's Discussion and Analysis contains certain forward-looking
statements. Those forward-looking statements are subject to risks and
uncertainties, and Chase's actual results may differ from those statements. See
Chase's reports filed with the Securities and Exchange Commission, in
particular the 1999 Annual Report, for a discussion of factors that may cause
such differences to occur. See Glossary of Terms on page 43 for a definition
of terms used throughout this Form 10-Q.
-13-
<PAGE> 14
PART I
Item 2 (continued)
-------------------------------------------------------------------------------
RESULTS OF OPERATIONS
-------------------------------------------------------------------------------
The following section reviews Chase's results as reported in its financial
statements as well as on an operating basis. Management categorizes its
revenue components as either market-sensitive or less market-sensitive. For a
further discussion of management's performance measurements, see page 20 of
Chase's 1999 Annual Report.
The table below provides a reconciliation between Chase's reported financial
statements and as presented on an operating basis.
===============================================================================
<TABLE>
<CAPTION>
==================================================================================================================================
(in millions, except per share data)
SECOND QUARTER 2000 Second Quarter 1999
------------------------------------------------ -------------------------------------------------
REPORTED CREDIT SPECIAL OPERATING Reported Credit Special Operating
RESULTS CARD ITEMS BASIS Results Card Items Basis
Revenue: (a) (b) (c) (a) (b) (c)
---------- --------- ------- --------- ------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market-Sensitive $ 1,835 $ -- $ -- $ 1,835 $ 1,836 $ -- $ -- $ 1,836
Less Market-Sensitive 3,581 242 141 3,964 3,780 246 (166) 3,860
--------- -------- ------- --------- -------- ------- -------- --------
Total Revenue 5,416 242 141 5,799 5,616 246 (166) 5,696
Noninterest Expense 3,357 -- -- 3,357 3,068 -- (100) 2,968
--------- -------- ------- --------- -------- ------- -------- --------
Operating Margin 2,059 242 141 2,442 2,548 246 (66) 2,728
Credit Costs 332 242 -- 574 388 246 -- 634
--------- -------- ------- --------- -------- ------- ------- --------
Income Before
Restructuring Costs 1,727 -- 141 1,868 2,160 -- (66) 2,094
Restructuring Costs 50 -- (50) -- -- -- -- --
--------- -------- -------- --------- -------- ------- ------- --------
Income Before Taxes 1,677 -- 191 1,868 2,160 -- (66) 2,094
Tax Expense 586 -- 67 653 767 -- (24) 743
--------- -------- ------- --------- -------- ------- -------- --------
Net Income $ 1,091 $ -- $ 124 $ 1,215 $ 1,393 $ -- $ (42) $ 1,351
========= ======== ======= ========= ======== ======= ======== ========
NET INCOME PER COMMON SHARE
---------------------------
Basic $ 0.88 $ 0.98 $ 1.10 $ 1.07
Diluted $ 0.85 $ 0.95 $ 1.06 $ 1.03
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS 2000 Six Months 1999
------------------------------------------------ -------------------------------------------------
Revenue:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market-Sensitive $ 4,042 $ -- $ -- $ 4,042 $ 3,471 $ -- $ -- $ 3,471
Less Market-Sensitive 7,299 496 141 7,936 7,289 515 (166) 7,638
---------- -------- ------- ---------- -------- ------- -------- ---------
Total Revenue 11,341 496 141 11,978 10,760 515 (166) 11,109
Noninterest Expense 6,847 -- -- 6,847 6,013 -- (100) 5,913
---------- -------- ------- ---------- -------- ------- -------- ---------
Operating Margin 4,494 496 141 5,131 4,747 515 (66) 5,196
Credit Costs 674 496 -- 1,170 769 515 -- 1,284
---------- -------- ------- ---------- -------- ------- ------- ---------
Income Before
Restructuring Costs 3,820 -- 141 3,961 3,978 -- (66) 3,912
Restructuring Costs 50 -- (50) -- -- -- -- --
---------- -------- -------- --------- -------- ------- ------- ---------
Income Before Taxes 3,770 -- 191 3,961 3,978 -- (66) 3,912
Tax Expense 1,319 -- 67 1,386 1,412 -- (24) 1,388
---------- -------- ------- ---------- -------- ------- -------- ---------
Net Income $ 2,451 $ -- $ 124 $ 2,575 $ 2,566 $ -- $ (42) $ 2,524
========== ======== ======= ========== ======== ======= ======== =========
NET INCOME PER COMMON SHARE
---------------------------
Basic $ 1.98 $ 2.08 $ 2.01 $ 1.98
Diluted $ 1.92 $ 2.01 $ 1.95 $ 1.91
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents the amounts that are reported in Chase's financial statements.
The only exception is that revenues are categorized between
market-sensitive and less market-sensitive revenues.
(b) This column excludes the impact of credit card securitizations. For
securitized receivables, amounts that previously would have been reported
as net interest income and as provision for loan losses instead are
reported as components of noninterest revenue.
(c) Includes restructuring costs and special items. For a description of
special items, see Glossary of Terms on page 43.
===============================================================================
-14-
<PAGE> 15
PART I
Item 2 (continued)
MARKET-SENSITIVE REVENUES
Market-sensitive revenues are primarily derived from the sales of the products
and services of Chase's extensive Global Bank and CCP franchises. These
revenues are typically more sensitive to global market factors than those
produced by other Chase businesses. These factors include movements in
short-term interest rates, which in turn affects the level of liquidity in the
markets, the prices of tradable securities and commodities, and the near-term
profitability of companies.
In the second quarter of 2000, total market-sensitive revenues were relatively
flat from the same period last year and approximately $5 million above the
long-term trendline of market-sensitive revenues. For the first six months of
2000, market-sensitive revenues were 16% above the 1999 same-period level. For
a further discussion of Chase's market-sensitive revenues, including a
discussion of Chase's trendline for its market-sensitive revenues, see pages
21-23 of the 1999 Annual Report.
===============================================================================
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
-------------------------- ---------------------------
(in millions) 2000 1999 2000 1999
----------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Investment Banking Fees $ 639 $ 585 $ 1,287 $ 902
Trading-Related Revenue 841 733 1,886 1,570
Securities Gains 57 5 71 161
Private Equity Gains 298 513 798 838
--------- --------- ---------- ---------
Total Market-Sensitive Revenue $ 1,835 $ 1,836 $ 4,042 $ 3,471
========= ========= ========== =========
</TABLE>
===============================================================================
INVESTMENT BANKING FEES
Investment banking continued to produce strong results, with fees in the second
quarter and first half of 2000 increasing 9% and 43%, respectively, from
1999. These increases were driven by record merger and acquisition advisory
fees and equity underwriting fees, partially offset by a decline from last
year's record loan syndication and corporate bond underwriting fees. Results
in the second quarter of 2000 were driven by the large number of merger and
acquisition and equity underwriting deals, in contrast to the second quarter of
1999, that was characterized by a few large loan syndication deals.
Since the beginning of this year, the merger and acquisition practice has been
strong and is anticipated to grow, particularly in the European and Asian
markets. Chase, in recognition of these business developments, has been
deploying resources in these regions. The acquisition of Hambrecht & Quist in
late 1999 enabled Chase to enter and actively participate in the New Economy
equities underwriting business, a rapidly growing sector. The strong results
of the first six months of 2000 were somewhat offset by lower debt
underwriting fees, particularly in high-yield debt underwriting, which declined
from last year's levels and that of the first quarter of this year because of
the rise in interest rates and the lack of certainty in the direction of
interest rates.
-15-
<PAGE> 16
PART I
Item 2 (continued)
TRADING-RELATED REVENUE
Total trading revenues, including related net interest income, rose 15% to $841
million for the 2000 second quarter and rose 20% to $1.89 billion for the first
half of 2000. The results reflected gains in most business products, including
foreign exchange ("FX"), equities and commodities.
<TABLE>
<CAPTION>
===============================================================================================================================
SECOND QUARTER SIX MONTHS
(in millions) 2000 1999 2000 1999
----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Trading Revenue (a) $ 824 $ 526 $ 1,845 $ 1,144
Net Interest Income Impact (b) 17 207 41 426
--------- -------- ---------- ---------
Total Trading-Related Revenue $ 841 $ 733 $ 1,886 $ 1,570
========= ======== ========== =========
Product Diversification:
Interest Rate Contracts (c) $ 231 $ 260 $ 537 $ 582
Foreign Exchange Revenue (d) 258 218 537 417
Equities and Commodities (e) 182 91 407 174
Debt Instruments and Other (f) 170 164 405 397
--------- -------- ---------- ---------
Total Trading-Related Revenue $ 841 $ 733 $ 1,886 $ 1,570
========= ======== ========== =========
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Charge-offs for risk management instruments are included in trading
revenue.
(b) 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.
(c) Includes interest rate swaps, cross-currency interest rate swaps,
foreign exchange forward contracts, interest rate futures and options,
forward rate agreements and related hedges.
(d) Includes foreign exchange spot and option contracts.
(e) Includes equity securities, equity derivatives, commodities and
commodity derivatives.
(f) Includes U.S. and foreign government agency securities, corporate debt
instruments, emerging markets debt instruments, debt-related derivatives
and credit derivatives.
===============================================================================
Revenue from interest rate contracts decreased slightly in the second quarter
and first half of 2000, when compared with the prior-year's respective periods,
as a result of the anticipated gradual increase in domestic interest rates in
2000, generating less volatility and fewer opportunities to realize gains.
Foreign exchange revenue in the second quarter 2000 increased by $40 million,
and for the first six months increased by $120 million, due to increased
volatility in foreign markets and client activity. Equities and commodities
revenue increased 100% in the 2000 second quarter and 134% for the first six
months, in large part as a result of equity trading at Chase H&Q and an
increased volume of commodity derivative transactions. The debt instruments
and other category recorded strong revenue for the second quarter and first six
months of 2000 as a result of market-making and client activities in emerging
markets and the U.S. fixed income market.
SECURITIES GAINS
Securities investments primarily include liquid securities held in connection
with Chase's treasury activities. Chase's domestic and international treasury
units manage Chase's asset and liability interest rate risk. Securities gains
realized in the second quarter of 2000 were $57 million, compared with $5
million in the same period in the prior year. The higher gains were realized
in connection with Chase's asset/liability activities during the volatile
interest rate environment of the second quarter of 2000. Securities gains in
the first half of 2000 were $71 million, a 56% decrease over the same 1999
period. The decline was due to the continuing increase in market interest
rates since the middle of last year, reducing the value of the securities in
the portfolio.
-16-
<PAGE> 17
PART I
Item 2 (continued)
PRIVATE EQUITY GAINS
Private equity gains largely result from the business of CCP, one of the
world's largest and most diversified private equity investment firms. The
declines in private equity gains from the respective 1999 periods were the
result of lower stock prices for NASDAQ-traded securities during the early part
of the 2000 second quarter, causing a reduction in the market value of these
investments, in particular investments that had gone public since the second
quarter of 1999.
Net gains include cash realized from the sale of both publicly-held and
privately-held securities in the portfolio and unrealized changes in the market
value of securities, including appreciation as a result of initial public
offerings.
===============================================================================
<TABLE>
<CAPTION>
(in millions) SECOND QUARTER SIX MONTHS
----------------------------------- --------------------------------
2000 1999 2000 1999
------------ ----------- ----------- ---------
<S> <C> <C> <C> <C>
TOTAL INVESTMENTS
Realized Gains (Cash) $ 350 $ 207 $ 691 $ 633
Unrealized Gains (Losses) (52) 306 107 205
----------- --------- ---------- --------
Total Gains $ 298 $ 513 $ 798 $ 838
========== ========= ========== ========
</TABLE>
===============================================================================
The level of investments continues to grow. Direct equity investments were
$1.7 billion for the first six months of 2000, compared with approximately $800
million for the same 1999 period. The growth of direct equity investments is
attributable to new opportunities in several industry groups (and during the
first quarter of 2000 an equity market receptive to technology and
telecommunications stocks).
The carrying values of the investments recorded on Chase's financial statements
are net of the interests of investors other than Chase (i.e., participations by
third-party investors), and reflect liquidity discounts applied by Chase on
these securities. In addition, approximately 75% of the carrying value of the
portfolio consists of privately-held securities generally carried at cost,
which in management's judgment, approximates fair value. The volatility in the
early part of the second quarter of 2000 in the prices of NASDAQ-listed
securities had no impact on the carrying value of this portion of the
portfolio.
Chase believes that CCP's equity-related investments will continue to create
value for the Corporation, making substantial contributions to its earnings
over time. However, given the volatile nature of the public equities market,
and that of the NASDAQ market in particular, Chase's reported private equity
results may include significant unrealized valuation adjustments, both
favorable and unfavorable, in any given quarter.
The table below shows the direct and fund investment components of Chase's
portfolio, totaling $10.9 billion at June 30, 2000.
CHASE CAPITAL PARTNERS INVESTMENT PORTFOLIO
===============================================================================
<TABLE>
<CAPTION>
(in millions) JUNE 30, 2000 December 31, 1999
--------------------------------- ------------------------------
CARRYING Carrying
VALUE COST Value Cost
----------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Total Public Securities (209 companies) $ 2,778 $ 789 $ 2,735 $ 741
Total Private Direct Investments (867 companies) 5,764 5,736 4,275 4,406
Total Private Fund Investments (373 funds) 2,353 2,337 1,881 1,899
----------- --------- ---------- ---------
Total Investment Portfolio $ 10,895 $ 8,862 $ 8,891 $ 7,046
=========== ========= ========== =========
</TABLE>
===============================================================================
In addition, CCP manages $9.0 billion of leveraged loan/high-yield funds and
investments in other equity and asset funds, bringing total funds under
management to $19.9 billion. For a further discussion of CCP's business, visit
the CCP web site at: www.chasecapital.com.
-17-
<PAGE> 18
PART I
Item 2 (continued)
LESS MARKET-SENSITIVE REVENUE
Less market-sensitive revenues derive largely from Chase's extensive domestic
consumer banking business, global services and global private banking
franchises and from credit products provided to large corporate and middle-
market clients. These revenues generally experience less market volatility
than those global banking and CCP revenues which are characterized as
market-sensitive.
Less market-sensitive revenues increased by 3% in the 2000 second quarter and
by 4% in the first half of 2000, reflecting increases in trust, custody and
investment management fees and fees for other financial services. These
increases were partially offset by a decrease in other revenue. Net interest
income ("NII") and credit card revenue remained relatively flat. For a further
discussion of less market-sensitive revenues, see pages 24-26 of Chase's 1999
Annual Report.
===============================================================================
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
---------------------------------- -----------------------------------
(in millions) 2000 1999 Change 2000 1999 Change
---------- ---------- ------ ----------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Net Interest Income (excluding
Trading-Related NII) $ 2,247 $ 2,279 (1)% $ 4,512 $ 4,591 (2)%
Less Market-Sensitive Fee Revenue:
Trust, Custody and Investment
Management Fees 545 461 18% 1,054 875 20%
Credit Card Revenue (a) 339 348 (3)% 667 676 (1)%
Fees for Other Financial Services 695 587 18% 1,426 1,140 25%
---------- -------- ---------- ---------
Total Less Market-Sensitive Fee Revenue 1,579 1,396 13% 3,147 2,691 17%
Other Revenue (a) 138 185 (25)% 277 356 (22)%
---------- -------- ---------- ---------
Total Less Market-Sensitive Revenue $ 3,964 $ 3,860 3% $ 7,936 $ 7,638 4%
========== ======== ========== =========
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Presented on an operating basis.
===============================================================================
NET INTEREST INCOME
Less market-sensitive NII on an operating basis adjusts reported NII to reflect
the impact of credit card securitizations and the trading-related NII that is
considered part of market-sensitive revenue. The following table reconciles
reported NII and less market-sensitive operating NII.
===============================================================================
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
------------------------------------ ----------------------------------
NET INTEREST INCOME
(in millions) 2000 1999 Change 2000 1999 Change
------------ ----------- ------ ------------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Reported NII $ 1,915 $ 2,145 (11)% $ 3,876 $ 4,349 (11)%
Add Impact of Credit Card Securitizations 349 341 677 668
Less Trading-Related NII (17) (207) (41) (426)
----------- ---------- ----------- --------
Operating NII $ 2,247 $ 2,279 (1)% $ 4,512 $ 4,591 (2)%
========== ========== ========== ========
AVERAGE INTEREST-EARNING ASSETS
(in billions)
Reported $ 311.6 $ 289.0 8% $ 308.5 $ 289.9 6%
Add Credit Card Securitizations 19.7 17.7 19.0 17.8
Less Trading-Related Assets (59.0) (51.5) (56.1) (50.2)
----------- ---------- ----------- ---------
Managed $ 272.3 $ 255.2 7% $ 271.4 $ 257.5 5%
========== ========= ========== ========
NET YIELD ON INTEREST-EARNING ASSETS (a)
Reported 2.48% 2.98% (50) bp 2.54% 3.03% (49) bp
Add Impact of Securitizations .28 .28 -- .27 .26 1
Impact of Trading-Related NII .55 .33 22 .54 .31 23
---------- --------- --------- --------
Managed 3.31% 3.59% (28) bp 3.35% 3.60% (25) bp
========== ========= ========= ========
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Disclosed on a taxable equivalent basis.
bp Denotes basis points; 100 bp equals 1%.
===============================================================================
-18-
<PAGE> 19
PART I
Item 2 (continued)
For the second quarter and first six months of 2000, reported NII declined 11%
when compared with each of the same periods in 1999, while operating NII
declined only slightly in each period of 2000. Reported NII during 2000 has
been adversely affected by a decline in trading-related NII as earning assets
held to support Chase's trading businesses yielded minimal net interest income
(see Trading-Related Revenue on page 16). Also affecting both reported and
operating NII in the first six months of 2000 was a $100 million decrease in
the estimated auto lease residual value, which was accounted for as a reduction
in net interest income in the first quarter of 2000. This adjustment in the
estimated auto lease residual value addressed exposure to potential losses on
maturing leases as a result of a decline in the market value of autos returned
by lessees at lease termination.
Managed average interest-earning assets increased 7% and 5%, respectively, from
the 1999 second quarter and first six months. Contributing to the increases in
both periods were higher amounts of liquid assets, domestic consumer loans
(primarily residential mortgages) and domestic commercial loans. Partially
offsetting these increases was a decline in the average foreign commercial loan
portfolio, as Chase reduced its exposure to emerging markets throughout 1999.
The net yield on a managed basis decreased 28 basis points in the 2000 second
quarter and 25 basis points in the 2000 first six months. The rising interest
rate environment that began in the second half of 1999 resulted in generally
narrower spreads, particularly in the consumer sector (notably credit cards).
Additionally, as a result of decreases in the volume of interest-free funds
(noninterest-bearing funds which support interest-earning assets),
interest-free funds contributed 4 basis points less to the net yield in the
second quarter of 2000 than in the second quarter of 1999, and contributed 8
basis points less in the first half of 2000 than in the first half of 1999.
TRUST, CUSTODY AND INVESTMENT MANAGEMENT FEES
Trust, custody and investment management fees rose to a record level of $545
million in the second quarter of 2000, which was 7% above the 2000 first
quarter (the previous record high) and 18% above the prior year's quarter. The
two consecutive quarters have resulted in a 20% increase in fees from the 1999
first six months, resulting in record levels for these businesses. These
results were attributable to growth in the values of assets under custody and
investment management and an increase in flows of investments to foreign
markets (where the safekeeping of securities is most profitable).
===============================================================================
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
--------------------------- ---------------------------
(in millions) 2000 1999 2000 1999
----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
TRUST, CUSTODY AND INVESTMENT MANAGEMENT FEES
Institutional (a) $ 345 $ 281 $ 653 $ 531
Personal (b) 147 127 288 247
Mutual Funds (c) 39 37 79 71
Other Trust Fees 14 16 34 26
--------- ------- ---------- ---------
Total $ 545 $ 461 $ 1,054 $ 875
========= ======= ========== =========
</TABLE>
===============================================================================
(a) Represents fees for trustee, agency, registrar, securities-lending and
broker clearing, custody 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.
===============================================================================
The following table shows the growth in Chase's assets under custody and under
management.
===============================================================================
<TABLE>
<CAPTION>
ASSETS UNDER ADMINISTRATION/CUSTODY ASSETS UNDER MANAGEMENT
----------------------------------- -----------------------
June 30, (in billions) 2000 1999 2000 1999
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Institutional $ 5,660 $ 4,882 $ 133 $ 107
Personal 115 111 55 51
Mutual Funds 50 43 62 55
---------- ---------- --------- ---------
Total $ 5,825 $ 5,036 $ 250 $ 213
========== ========== ========= =========
</TABLE>
===============================================================================
-19-
<PAGE> 20
PART I
Item 2 (continued)
CREDIT CARD REVENUE
Credit card revenues include interchange income; late, cash advance, annual and
overlimit fees; and servicing fees associated with the securitization of credit
cards. Credit card revenue on an operating basis declined slightly from both
the second quarter and first half of 1999. The declines were driven by lower
late fees as a result of a reduction in customer delinquencies as demonstrated
by a more than 70 bp improvement in the managed net charge-off ratios for both
periods. The decrease in late fees was partially offset by an increase in
interchange income (transaction processing fees) associated with higher
customer purchase volumes.
The following table reconciles Chase's reported credit card revenue and
operating credit card revenue, which excludes the impact of credit card
securitizations.
===============================================================================
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
--------------------------- ----------------------------
(in millions) 2000 1999 2000 1999
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Reported Credit Card Revenue $ 443 $ 438 $ 840 $ 817
Less Impact of Credit Card Securitizations (104) (90) (173) (141)
---------- ------- ---------- ---------
Operating Credit Card Revenue $ 339 $ 348 $ 667 $ 676
========= ======= ========= =========
</TABLE>
===============================================================================
FEES FOR OTHER FINANCIAL SERVICES
Fees for other financial services in the second quarter of 2000 increased 18%,
when compared with the same period in the prior year. In the first six months
of 2000, the fees grew by 25% relative to 1999. The table below provides the
significant components of fees for other financial services.
===============================================================================
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
--------------------------- ----------------------------
(in millions) 2000 1999 2000 1999
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Mortgage Servicing Fees $ 131 $ 77 $ 281 $ 142
Service Charges on Deposit Accounts 103 96 202 185
Fees in Lieu of Compensating Balances 88 94 175 181
Brokerage and Investment Services 76 50 183 93
Commissions on Letters of Credit and Acceptances 61 69 128 138
Insurance Fees 47 41 96 80
Loan Commitment Fees 38 36 72 67
Other Fees 151 124 289 254
--------- ------- ---------- ---------
Total $ 695 $ 587 $ 1,426 $ 1,140
========= ======= ========== =========
</TABLE>
===============================================================================
MORTGAGE SERVICING FEES in the 2000 second quarter and first six months
increased by 70% and 98%, respectively, from the same periods in 1999. The
increases were due to a larger servicing portfolio and a lower amortization
rate on mortgage servicing rights. The servicing portfolio increased 36% from
last year's second quarter as a result of the acquisition of the Mellon Bank
Corporation mortgage servicing business at the end of the third quarter of
1999, coupled with lower loan prepayments in the core portfolio. Starting in
the latter part of the second quarter of 1999, mortgage interest rates began to
rise, which has had the effect of reducing the prepayment rates on mortgage
loans which, in turn, has lowered the amortization rate of mortgage servicing
rights.
-20-
<PAGE> 21
PART I
Item 2 (continued)
SERVICE CHARGES ON DEPOSITS increased 7% during the second quarter of 2000 and
9% during the first half of 2000, reflecting the benefits of selected pricing
initiatives.
BROKERAGE AND INVESTMENT SERVICES rose 52% from the 1999 second quarter and 97%
from the first half of 1999. The increase was due to significant increases in
both daily trading volume and the number of new customers at Brown & Company,
coupled with the acquisition of H&Q in the fourth quarter of 1999. The trading
volume at Brown & Co. in the second quarter of 2000 was up to 46,000 trades per
day compared with 33,000 trades per day in the same quarter of 1999.
INSURANCE FEES include fees from credit-related products (such as insuring the
payment of credit card and auto loans in the event of loss of life, disability
and other catastrophic events) as well as from non-credit-related products
(such as life, health and property insurance, and annuities). In the 2000
second quarter, insurance fees were 15% higher than the 1999 second quarter and
20% higher than the 1999 first six months, primarily due to higher annuity
sales and new business relating to life and health insurance.
OTHER FEES in 2000 increased 22% from the 1999 second quarter and 14% from the
first half of 1999, reflecting higher interchange fees related to a larger
volume of debit card transactions and a general increase in the other
fee-generating activities at several businesses.
OTHER REVENUE
===============================================================================
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
-------------------------- ------------------------
(in millions) 2000 1999 2000 1999
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Residential Mortgage Origination/Sales Activities $ 41 $ 88 $ 85 $ 180
All Other Revenue 97 97 192 176
--------- -------- ------- --------
Operating Other Revenue 138 185 277 356
Loss on Economic Hedge of the Flemings Purchase Price (141) -- (141) --
Gains on Sales of Nonstrategic Assets -- 166 -- 166
Other Revenue - Credit Card Securitizations 3 5 8 12
--------- -------- ------- --------
Reported Other Revenue $ -- $ 356 $ 144 $ 534
========= ======== ======= ========
</TABLE>
===============================================================================
RESIDENTIAL MORTGAGE ACTIVITIES (which include origination and sales of loans
and selective dispositions of mortgage servicing rights) in both the second
quarter and first six months of 2000 declined 53%, reflecting the impact of the
rising interest rate environment in 2000 that unfavorably affected origination
volume and gains on loan sales.
ALL OTHER REVENUE remained flat in the second quarter of this year compared with
the same period in 1999, but was $16 million higher than the first six months of
1999, reflecting the increase in revenues from auto operating leases. The
increase for the first half of 2000 was partially offset by a decrease in
revenue from the Octagon Investment Fund (which was established in early 1998
and was substantially sold to investors in late 1999) and lower gains from the
sale of student loans in 2000.
The second quarter and six month results include a $141 million loss resulting
from the economic hedge of the purchase price of Flemings prior to its
acquisition (the offsetting appreciation in the dollar versus pound sterling
exchange rate will be reflected as a reduction in the purchase price and
corresponding goodwill). Results for the 1999 second quarter and first six
months included $166 million in gains from sales of nonstrategic assets, of
which $95 million was from the sale of a building and $71 million was from the
sale of branches in Texas.
-21-
<PAGE> 22
Part I
Item 2 (continued)
NONINTEREST EXPENSE
Total operating noninterest expenses increased 13% in the second quarter of
2000 and 16% in the first half of 2000, when compared with the same periods in
1999. These increases reflected higher incentives related to market-sensitive
revenues in the Global Bank, including the acquisition of H&Q in late 1999. The
management of operating noninterest expense to support revenue growth is an
important objective of Chase's management.
Reported noninterest expense for 2000 included $50 million of nonaccruable
restructuring costs associated with previously announced relocation programs,
while in 1999 it included a special contribution to The Chase Manhattan
Foundation.
===============================================================================
<TABLE>
<CAPTION>
(in millions, except ratios) SECOND QUARTER SIX MONTHS
----------------------------- ---------------------------
2000 1999 2000 1999
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Salaries $ 1,614 $ 1,416 $ 3,367 $ 2,800
Employee Benefits 252 238 539 493
Occupancy Expense 216 206 442 424
Equipment Expense 274 239 559 482
Other Expense 1,001 869 1,940 1,714
---------- --------- ---------- ---------
Operating Noninterest Expense 3,357 2,968 6,847 5,913
Restructuring Costs 50 -- 50 --
Special Contribution to the Foundation - 100 - 100
---------- --------- ---------- ---------
Reported Noninterest Expense $ 3,407 $ 3,068 $ 6,897 $ 6,013
========== ========= ========== =========
Operating Overhead Ratio (a) 58% 52% 57% 53%
Cash Operating Overhead Ratio (a) (b) 56% 51% 56% 52%
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes costs associated with REIT and the impact of credit card
securitizations.
(b) Excludes the impact of amortization of goodwill and certain other
intangibles.
===============================================================================
SALARIES AND EMPLOYEE BENEFITS
The increases in salaries and employee benefits from the second quarter and
first half of 1999 were due to higher incentives, primarily driven by growth in
investment banking and trading revenues and the net addition of over 700
full-time equivalent employees. The higher headcount was attributable to the
acquisition of H&Q and a mortgage servicing business, partly offset by the
impact of staff reductions related to initiatives to streamline support
functions and realign business activities in selected areas.
===============================================================================
<TABLE>
<CAPTION>
FULL-TIME EQUIVALENT EMPLOYEES JUNE 30, June 30,
2000 1999
------------ ------------
<S> <C> <C>
Domestic Offices 62,273 62,300
Foreign Offices 11,834 11,105
-------- -------
Total Full-Time Equivalent Employees 74,107 73,405
======== =======
</TABLE>
===============================================================================
OCCUPANCY AND EQUIPMENT EXPENSE
Occupancy expense increased over both 1999 periods primarily due to increased
leasing costs related to existing domestic and overseas office spaces, coupled
with business expansions and acquisitions in the second half of 1999. Equipment
expense rose in both 2000 periods as a result of greater depreciation expense
relating to the capitalization of more advanced hardware systems, as well as
higher costs for additional software to support ongoing internet business
projects throughout various business areas of Chase.
OTHER EXPENSE
Operating other expense (excluding the special contribution to The Chase
Manhattan Foundation) rose 15% from the second quarter of 1999 and 13% from the
first half of 1999. The following table presents the components of other
expense:
-22-
<PAGE> 23
Part I
Item 2 (continued)
===============================================================================
<TABLE>
<CAPTION>
(in millions) SECOND QUARTER SIX MONTHS
----------------------------- ---------------------------
2000 1999 2000 1999
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Professional Services $ 186 $ 178 $ 357 $ 340
Marketing Expense 121 114 221 228
Telecommunications 99 97 204 188
Amortization of Intangibles 84 76 169 149
Travel and Entertainment 81 59 143 109
Minority Interest (a) 18 12 30 25
Foreclosed Property Expense (3) 3 (3) 8
Special Contribution to the Foundation -- 100 -- 100
All Other 415 330 819 667
---------- --------- ---------- ---------
Total $ 1,001 $ 969 $ 1,940 $ 1,814
========== ========= ========== =========
</TABLE>
===============================================================================
(a) Includes REIT minority interest expense of $11 million in each quarter and
$22 million in each six months.
===============================================================================
The increase in PROFESSIONAL SERVICES for the second quarter and first half of
2000 reflected higher management and systems consultant costs associated with
the development of Chase's internet initiatives and the impact of the H&Q
acquisition. The spending on internet projects was partly offset by reduced
expenditures related to completed Y2K efforts. MARKETING expense increased in
the 2000 second quarter but decreased in the first half of 2000, when compared
to the same 1999 periods, as a result of the timing differences of various
media campaigns. TELECOMMUNICATIONS rose due to higher market data usage
stemming from growth in business volume at Chase's Global Bank franchises and
the addition of Chase H&Q. AMORTIZATION OF INTANGIBLES increased in connection
with the acquisitions in 1999, in particular, H&Q. TRAVEL AND ENTERTAINMENT
increased mainly as a result of higher expenses at both domestic and overseas
units and the impact of Chase H&Q. ALL OTHER EXPENSE rose reflecting the
impact of Chase H&Q and higher employee-related expenditures, such as domestic
relocation and executive search/recruitment expenses.
RESTRUCTURING COSTS
In the 1999 fourth quarter, Chase began a process of long-term strategic
restructuring initiatives, such as the announced relocation of operations to
lower cost locations, and other business initiatives, such as the consolidation
of operations. Chase incurred a $175 million restructuring charge in connection
with these initiatives. For a further discussion of Chase's restructuring
costs, refer to Note 12 and page 28 of Chase's 1999 Annual Report and Note 4 of
this Form 10-Q.
Chase is continuing to focus on its future expense management and additional
relocation initiatives and business initiatives are expected to be announced
during the remainder of 2000 and into 2001.
CREDIT COSTS
Credit costs include credit losses related to Chase's securitized credit card
loans. The following table shows the components of credit costs:
===============================================================================
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
--------------------------- ----------------------------
(in millions) 2000 1999 2000 1999
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Provision for Loan Losses $ 332 $ 388 $ 674 $ 769
Credit Costs Associated with Credit Card Securitizations 242 246 496 515
-------- --------- ---------- ---------
Operating Credit Costs $ 574 $ 634 $ 1,170 $ 1,284
======== ========= ========== =========
</TABLE>
===============================================================================
Credit costs in the second quarter and first half of 2000 decreased $60 million
and $114 million, respectively, from the 1999 levels, primarily due to lower
credit losses in the consumer portfolio, primarily credit cards.
INCOME TAXES
Chase recognized income tax expense of $586 million in the second quarter of
2000, compared with $767 million in the second quarter of 1999. For the first
half of 2000, Chase recorded income tax expense of $1.3 billion compared with
$1.4 billion for the first half of 1999. The effective tax rates were 34.9% in
the 2000 second quarter and 35.0% for the 2000 first six months, compared with
35.5% in both 1999 periods. The continued improvement in the effective tax
rate was the result of tax planning initiatives.
-23-
<PAGE> 24
Part I
Item 2 (continued)
-------------------------------------------------------------------------------
LINES OF BUSINESS RESULTS
-------------------------------------------------------------------------------
The table below provides summary financial information on an operating basis
for Chase's four major business franchises. Prior periods have been restated
to reflect refinements in management reporting policies or changes to the
management organization. For example, commencing with the second quarter of
2000, results for Chase Capital Partners ("CCP") are disclosed separately from
the remainder of the Global Bank. In addition, the private equity business of
Chase H&Q has been moved to CCP from Global Investment Banking.
For a description of the basis of presentation that management uses to measure
and evaluate business unit profitability, see page 20 of the 1999 Annual
Report.
===============================================================================
<TABLE>
<CAPTION>
GLOBAL BANK (a) CHASE CAPITAL PARTNERS
---------------------------------------- ---------------------------------------------
SECOND QUARTER 2000 Over/(Under) 1999 2000 Over/(Under) 1999
-----------------------------------------------------------------------------------------------------------------------------------
(in millions, except ratios)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenue $ 2,257 $ 217 11% $ 249 $ (254) (50)%
Operating Earnings 540 (19) (3) 128 (169) (57)
Cash Operating Earnings (b) 559 (12) (2) 130 (167) (56)
Average Common Equity 9,485 66 1 6,297 2,492 65
Average Managed Assets 240,129 20,649 9 11,780 4,172 55
Shareholder Value Added 246 (12) (5) (78) (249) NM
Cash Return on Common Equity 23.4% (60) bp 8.0% (2,300) bp
Cash Overhead Ratio 58 700 20 1,200
NATIONAL CONSUMER SERVICES GLOBAL SERVICES
------------------------------------------- --------------------------------------------
2000 Over/(Under) 1999 2000 Over/(Under) 1999
------------------------------------------------------------------------------------------
Operating Revenue $ 2,507 $ 34 1% $ 877 $ 106 14%
Operating Earnings 406 32 9 147 27 23
Cash Operating Earnings (b) 443 27 6 163 27 20
Average Common Equity 8,117 483 6 2,677 (176) (6)
Average Managed Assets 144,259 15,345 12 15,737 (767) (5)
Shareholder Value Added 175 13 8 75 34 83
Cash Return on Common Equity 21.7% 20 bp 24.2% 540 bp
Cash Overhead Ratio 51 100 71 (100)
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
GLOBAL BANK (a) CHASE CAPITAL PARTNERS
-------------------------------------------- ------------------------------------------
SIX MONTHS 2000 Over/(Under) 1999 2000 Over/(Under) 1999
-----------------------------------------------------------------------------------------------------------------------------------
(in millions, except ratios)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenue $ 4,833 $ 700 17% $ 698 $ (110) (14)%
Operating Earnings 1,235 69 6 367 (102) (22)
Cash Operating Earnings (b) 1,272 84 7 370 (99) (21)
Average Common Equity 9,564 (12) -- 6,154 2,473 67
Average Managed Assets 238,854 15,910 7 11,601 4,134 55
Shareholder Value Added 642 86 15 (35) (261) NM
Cash Return on Common Equity 26.5% 180 bp 11.9% (1,350) bp
Cash Overhead Ratio 56 600 18 900
NATIONAL CONSUMER SERVICES GLOBAL SERVICES
---------------------------------------- ---------------------------------------------
2000 Over/(Under) 1999 2000 Over/(Under) 1999
------------------------------------------------------------------------------------------
Operating Revenue $ 4,899 $ 24 --% $ 1,726 $ 231 15%
Operating Earnings 721 (6) (1) 281 68 32
Cash Operating Earnings (b) 795 (15) (2) 313 69 28
Average Common Equity 8,114 498 7 2,701 (196) (7)
Average Managed Assets 142,766 15,393 12 15,744 (982) (6)
Shareholder Value Added 260 (47) (15) 135 82 155
Cash Return on Common Equity 19.4% (170) bp 23.0% 630 bp
Cash Overhead Ratio 53 300 72 (200)
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Excludes Chase Capital Partners.
(b) Cash Operating Earnings represent operating earnings excluding the
amortization of goodwill and certain other intangibles.
bp - Denotes basis points; 100bp equals 1%.
===============================================================================
-24-
<PAGE> 25
Part I
Item 2 (continued)
GLOBAL BANK (EXCLUDING CHASE CAPITAL PARTNERS)
Global Bank combines the strengths of a leading commercial bank and a leading
investment bank to meet the needs of corporations, institutional investors,
financial institutions, governments, entrepreneurs and private clients around
the world. The Global Bank integrates a broad range of leading product
capabilities, industry knowledge and geographic reach to produce superior
customer solutions. Through its presence in more than 45 countries, the Global
Bank serves an extensive array of clients, from large corporations with
long-standing global relationships to a growing franchise of clients in the
fastest growing sectors of the New Economy.
Operating revenues in the Global Bank in the second quarter of 2000 increased
11% from the second quarter of 1999. Cash operating earnings and Shareholder
Value Added declined 2% and 5%, respectively, from the second quarter of 1999,
reflecting increased cash expenses. Cash expenses of $1.32 billion in the
second quarter of 2000 increased 26% from the second quarter of last year, but
were $60 million lower than in the first quarter of 2000. The principal
reasons for the increase were higher incentives related to the growth in
market-sensitive revenues and the acquisition of H&Q. In the first half of
2000, operating revenues, cash operating earnings, and Shareholder Value Added
increased 17%, 7% and 15%, respectively, reflecting strong investment and
private banking results. For a further discussion of Global Bank's products,
see the Revenue discussion beginning on page 15.
The following table sets forth certain key financial performance measures of
the businesses within the Global Bank.
===============================================================================
<TABLE>
<CAPTION>
(in millions, except ratios)
SECOND QUARTER 2000 Over/(Under) 1999
--------------------------------------------- ---------------------------------------------
CASH CASH Cash Cash
OPERATING OPERATING OVERHEAD Operating Operating Overhead
REVENUES EARNINGS RATIO Revenues Earnings Ratio
-------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Global Markets $ 996 $ 294 55% (1)% (10)% 600 bp
Global Investment Banking 650 121 68 37 5 1,000
Corporate Lending and
Portfolio Management 363 125 29 (3) (3) 100
Global Private Bank 285 56 66 33 44 (200)
Other Global Bank (a) (37) (37) NM NM NM NM
----------- -----------
Total $ 2,257 $ 559 58% 11% (2)% 700 bp
========== ==========
SIX MONTHS
Global Markets $ 2,233 $ 714 51% (3)% (11)% 700 bp
Global Investment Banking 1,312 243 68 86 106 (300)
Corporate Lending and
Portfolio Management 733 257 29 (3) (3) 200
Global Private Bank 614 132 64 46 67 (300)
Other Global Bank (a) (59) (74) NM NM NM NM
----------- -----------
Total $ 4,833 $ 1,272 56% 17% 7% 600 bp
========== ==========
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Other Global Bank includes Chase's Global Asset Management and Mutual
Funds businesses and discontinued operations.
NM Not meaningful.
bp Denotes basis points; 100 bp equals 1%.
===============================================================================
For a discussion of the profiles for each business within the Global Bank, see
page 31 of Chase's 1999 Annual Report. The following discussion focuses on the
financial highlights of each business for the second quarter and first six
months of 2000.
-25-
<PAGE> 26
Part I
Item 2 (continued)
GLOBAL MARKETS
Operating revenues for Global Markets, although slightly lower than in the
second quarter and first six months of 1999, remained strong during 2000. Total
trading revenues, including related net interest income, rose 15% to $841
million in the 2000 second quarter and rose 20% to $1.9 billion for the first
half of 2000, driven by foreign exchange and equity and commodities trading.
Cash operating earnings decreased 10% in the 2000 second quarter, and declined
11% for the first six months of 2000, due to higher incentives and other
expenses.
Chase's treasury businesses are managed through a "total return" discipline,
which measures economic value-added by capturing both realized income
(securities gains and net interest income) and unrealized gains or losses on
assets and liabilities. The total return (pre-tax before expenses) from the
interest rate risk management activities of the treasury units amounted to $300
million for the second quarter 2000 and $526 million for the first half of
2000, compared with $(11) million and $240 million, respectively, for the same
periods in 1999.
GLOBAL INVESTMENT BANKING
Revenues and cash operating earnings for the Global Investment Bank increased
37% and 5%, respectively, in the 2000 second quarter when compared with the
1999 second quarter. When combined with the particularly strong 2000 first
quarter, revenues and cash operating earnings rose 86% and 106%, respectively,
in the first half of 2000. These results were driven by record merger and
acquisition advisory fees and equity underwriting fees, partially offset by a
decline from last year's particularly strong loan syndication and corporate
bond underwriting fees.
CORPORATE LENDING AND PORTFOLIO MANAGEMENT
Corporate Lending and Portfolio Management revenues and cash operating earnings
each declined in the second quarter and first six months of 2000, when compared
with the same periods in 1999, as a result of the effect of lower average loan
levels (due to securitizations), partially offset by higher lending-related
fees.
GLOBAL PRIVATE BANK
Global Private Bank revenues increased to $285 million in the second quarter of
2000, a 33% increase from the same period a year ago. For the first half of
2000, revenues increased 46% and cash operating earnings increased 67% from the
same prior-year period. The revenue increases for both periods were due to
broad-based growth globally and the inclusion of revenues from the Executive
Financial Services Division at Chase H&Q. As of June 30, 2000, the Global
Private Bank had over $170 billion in client assets under management.
CHASE CAPITAL PARTNERS
Chase Capital Partners is one of the world's largest and most diversified
private equity investment firms with approximately $10.9 billion in direct and
fund investments. In addition, CCP manages $9 billion of leveraged
loan/high-yield funds and investments in other equity and asset funds, bringing
total funds under management to $19.9 billion.
===============================================================================
<TABLE>
<CAPTION>
CHASE CAPITAL PARTNERS 2000 Over/(Under) 1999
--------------------------------------------- ---------------------------------------------
(in millions, except ratios) CASH CASH Cash Cash
OPERATING OPERATING OVERHEAD Operating Operating Overhead
REVENUES EARNINGS RATIO Revenues Earnings Ratio
-------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Second Quarter $ 249 $ 130 20% (50)% (56)% 1,200 bp
Six Months 698 370 18 (14) (21) 900
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
bp Denotes basis points; 100 bp equals 1%.
===============================================================================
Operating revenues and cash operating earnings decreased 50% and 56%,
respectively, in the 2000 second quarter as a result of the lower stock prices
for NASDAQ-traded securities during the early part of the quarter, which
principally affected the publicly-held securities within CCP's investment
portfolio (approximately 25% of the total portfolio). Revenues and cash
operating earnings declined 14% and 21%, respectively, in the first six months
of 2000, principally due to the market declines of the 2000 second quarter,
partially offset by cash gains from the sales of securities.
-26-
<PAGE> 27
Part I
Item 2 (continued)
NATIONAL CONSUMER SERVICES
National Consumer Services serves over 30 million customers nationwide offering
a wide variety of financial products and services through a diverse array of
distribution channels. NCS is focused on delivering financial solutions to
consumers, as well as middle market and small businesses, across the U.S.
Financial solutions are delivered through distribution channels that include
branch and ATM networks, internet banking, telephone and direct mail.
Operating revenues for National Consumer Services increased to $2.5 billion, an
increase of 1% over the second quarter of 1999. Cash operating earnings of
$443 million increased by 6% for the second quarter of 2000. This increase was
driven by regional banking, the retail investment businesses, and middle market
banking, partially offset by continuing weak origination volumes and pressures
on credit card margins due to rising interest rates. Operating revenues for
the first six months of 2000 were flat when compared with the first six months
of 1999; cash operating earnings were 2% lower than the same period in 1999.
The first quarter of 2000 included a $100 million decrease in auto lease
residual values, which was accounted for as a reduction in net interest income.
Results for NCS over the remainder of 2000 are expected to reflect the benefits
of expense management, good credit quality and moderating revenue growth.
Management expects that results for NCS in the second half of this year will be
similar to the first half.
The following table sets forth certain key financial performance measures of
the businesses within NCS.
===============================================================================
<TABLE>
<CAPTION>
SECOND QUARTER 2000 Over/(Under) 1999
--------------------------------------------- ---------------------------------------------
(in millions, except ratios) CASH CASH Cash Cash
OPERATING OPERATING OVERHEAD Operating Operating Overhead
REVENUES EARNINGS RATIO Revenues Earnings Ratio
-------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Chase Cardmember Services $ 941 $ 133 36% (6)% 3% 200 bp
Regional Banking Group 647 123 65 11 26 (500)
Chase Home Finance 318 74 60 8 -- 400
Diversified Consumer Services 281 40 60 (1) (2) 300
Middle Markets 270 63 55 4 11 (100)
Other NCS 50 10 NM NM NM NM
---------- --------
Total $ 2,507 $ 443 51% 1% 6% 100 bp
========== ========
----------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS 2000 Over/(Under) 1999
--------------------------------------------- ---------------------------------------------
(in millions, except ratios) CASH CASH Cash Cash
OPERATING OPERATING OVERHEAD Operating Operating Overhead
REVENUES EARNINGS RATIO Revenues Earnings Ratio
-------- -------- ----- -------- -------- -----
Chase Cardmember Services $ 1,883 $ 238 36% (5)% (2)% 200 bp
Regional Banking Group 1,268 240 66 10 25 (400)
Chase Home Finance 642 143 61 12 2 400
Diversified Consumer Services 479 28 69 (12) (63) 1,200
Middle Markets 538 126 55 7 19 (300)
Other NCS 89 20 NM NM NM NM
---------- --------
Total $ 4,899 $ 795 53% -- % (2)% 300 bp
========== ========
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NM Not meaningful.
bp Denotes basis points; 100 bp equals 1%.
===============================================================================
For a discussion of the profiles for each business within NCS, see page 33 of
Chase's 1999 Annual Report. The following discussion focuses on the 2000 second
quarter and first six months financial highlights of each business.
-27-
<PAGE> 28
PART I
Item 2 (continued)
CHASE CARDMEMBER SERVICES
Cash operating earnings for Chase Cardmember Services for the second quarter of
2000 were up 3% when compared with the second quarter of 1999, reflecting
significantly improved credit quality. Expenses were down in the second quarter
despite higher technology and e-commerce investments. Operating revenues
declined in the second quarter and first half of 2000, reflecting reduced net
interest spreads due to rising interest rates and a lower level of late and
overlimit fees, partly offset by higher consumer purchase volumes.
REGIONAL BANKING GROUP
Regional Banking Group revenues rose 11% from the second quarter of 1999 and
cash operating earnings grew by 26%, with similar increases in revenues and
cash operating earnings from the first six months of 1999, reflecting higher
deposit levels in the small business sector, the benefit from higher interest
rates, growth in fees and disciplined expense management.
CHASE HOME FINANCE
Chase Home Finance revenues increased to $318 million, an 8% increase from
second quarter of 1999, and rose to $642 million, a 12% increase from the first
six months of 1999. Cash operating earnings were flat compared with the 1999
second quarter, and increased 2% when compared with the first six months of
1999. Growth in servicing fee income for both 2000 periods was partially offset
by declines in mortgage production activities due to the rising interest rate
environment. Origination volume declined in the first half of 2000, when
compared with the 1999 level, as a result of the rising interest rate
environment. Originations (residential, home equity and manufactured housing)
for the quarter were $18.2 billion and included originations from the retail,
wholesale and correspondent (traditional and negotiated) channels.
DIVERSIFIED CONSUMER SERVICES
Revenues from Diversified Consumer Services were $281 million in the second
quarter of 2000, a 1% decrease from the same quarter in 1999. Continued growth
in the investment businesses were partially offset by the effect of higher
interest rates and weak auto lease origination activity. Additionally, as a
result of a $100 million decrease in the estimated auto lease residual value in
the 2000 first quarter, operating revenues and cash operating earnings declined
12% and 63%, respectively, in the first six months of 2000. Revenues from the
advice-based investment business rose to $129 million for the first six months
of 2000, an 11% increase when compared with the same period last year.
MIDDLE MARKETS
Middle Market revenues were $270 million, an increase of 4% from the second
quarter of 1999, and were $538 million, an increase of 7% from the first six
months of 1999. Cash operating earnings increased 11% over the prior-year
quarter and 19% over the prior-year six months. These results reflect
disciplined expense management, continued strength in new business and
financing activities during 2000, and higher deposit volumes and spreads.
-28-
<PAGE> 29
PART I
Item 2 (continued)
GLOBAL SERVICES
Global Services is a recognized leader in information and transaction
processing services, moving trillions of dollars daily in securities and cash
for its wholesale customers. For a discussion of the profiles for each business
within Global Services, see page 34 of Chase's 1999 Annual Report.
<TABLE>
<CAPTION>
==================================================================================================================================
GLOBAL SERVICES 2000 Over/(Under) 1999
(in millions, except ratios) --------------------------------------------- ---------------------------------------------
CASH CASH Cash Cash
OPERATING OPERATING OVERHEAD Operating Operating Overhead
REVENUES EARNINGS RATIO Revenues Earnings Ratio
-------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Second Quarter $ 877 $ 163 71% 14% 20% (100) bp
Six Months 1,726 313 72 15 28 (200)
----------------------------------------------------------------------------------------------------------------------------------
bp Denotes basis points; 100 bp equals 1%.
==================================================================================================================================
</TABLE>
In the second quarter of 2000, Global Services' operating revenues increased
14% over the prior-year quarter to $877 million, reflecting increased activity
in all of its businesses. Cash operating earnings for Global Services for the
second quarter of 2000 increased 20% when compared with the 1999 second
quarter. Shareholder Value added increased to $75 million, an 83% increase over
the prior year quarter. In the first half of 2000, operating revenues, cash
operating earnings and Shareholder Value Added increased 15%, 28% and 155%,
respectively.
Global Investor Services, Chase's custody business, experienced an 18% and 23%
rise in operating revenues in the second quarter and first six months of 2000,
respectively, when compared with the same periods a year ago. During the 2000
second quarter, total assets under custody grew 16%, with cross-border assets
under custody increasing 29%, when compared with the 1999 second quarter.
Operating revenues at Capital Markets Fiduciary Services, Chase's institutional
trust business, increased 14% from the 1999 second quarter and 21% from the
1999 first six months, reflecting continued growth through expansion into new
markets and the benefit of servicing structured issues (asset-and
mortgage-backed securities transactions) in the U.S. as well as Europe.
Operating revenues at Chase Treasury Solutions, Chase's cash management and
payments business, increased 8% in the 2000 second quarter and increased 5% in
the 2000 first half, when compared with the prior-year periods, benefiting from
rising rates and the resulting impact on balances maintained by customers.
SUPPORT UNITS AND CORPORATE
Support Units include Chase.com, Chase Business Services and Technology
Solutions. For a further discussion of the business profile of these support
units, see page 35 of Chase's 1999 Annual Report.
Corporate includes the effects remaining at the corporate level after the
implementation of management accounting policies. For the second quarter of
2000 and 1999, Corporate and the other support units had cash operating
earnings of $4 million and $7 million, respectively. For the first six months
of 2000 and 1999, there was a cash operating loss of $6 million and $38
million, respectively, for these units. Chase utilizes an internal expense
allocation process that aligns the cost of each of its operational and staff
support services with the respective revenue-generating business. This allows
Chase to evaluate the performance of each of its businesses on a fully
allocated basis.
-29-
<PAGE> 30
PART I
Item 2 (continued)
-----------------------------------------------------------------------------
CREDIT RISK MANAGEMENT
-----------------------------------------------------------------------------
The following discussion of Chase's credit risk management focuses primarily on
developments since December 31, 1999 and should be read in conjunction with
pages 37-44 and 62-64 of Chase's 1999 Annual Report.
The following table presents Chase's credit-related information for the dates
indicated.
=============================================================================
<TABLE>
<CAPTION>
PAST DUE 90 DAYS & OVER
CREDIT-RELATED ASSETS NONPERFORMING ASSETS AND ACCRUING
---------------------------- ----------------------------- -------------------------
(in millions) JUNE 30, Dec 31, JUNE 30, Dec 31, JUNE 30, Dec 31,
CONSUMER LOANS: 2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Domestic Consumer:
1-4 Family Residential Mortgages $ 47,557 $ 44,262 $ 269 $ 286 $ -- $ --
Credit Card - Reported 12,095 15,633 33 (b) 40 (b) 216 280
Credit Card Securitizations (a) 19,861 17,939 -- -- 324 348
------------ ----------- --------- -------- -------- ---
Credit Card - Managed 31,956 33,572 33 40 540 628
Auto Financings 18,788 18,442 70 83 1 2
Other Consumer 6,399 6,902 4 7 51 65
------------ ----------- --------- -------- -------- --------
Total Domestic Consumer 104,700 103,178 376 416 592 695
Foreign Consumer 2,928 2,800 25 22 10 15
------------ ----------- --------- -------- -------- --------
TOTAL CONSUMER LOANS 107,628 105,978 401 438 602 710
------------ ----------- --------- -------- -------- --------
COMMERCIAL LOANS:
Domestic Commercial:
Commercial and Industrial 50,135 48,097 499 380 69 23
Commercial Real Estate 3,070 3,636 42 51 13 5
Financial Institutions 6,689 4,211 11 12 -- --
------------ ----------- --------- -------- -------- --------
Total Domestic Commercial 59,894 55,944 552 443 82 28
Foreign Commercial:
Commercial and Industrial 26,323 25,179 747 642 -- 4
Commercial Real Estate 233 125 -- -- -- --
Financial Institutions 3,275 3,598 18 96 20 20
Foreign Governments 2,680 3,274 34 41 -- --
------------ ----------- --------- -------- -------- --------
Total Foreign Commercial 32,511 32,176 799 779 20 24
------------ ----------- --------- -------- -------- --------
TOTAL COMMERCIAL LOANS 92,405 88,120 1,351 1,222 102 52
Derivative and FX Contracts (c) 29,915 33,611 53 34 -- 1
------------ ----------- --------- -------- -------- --------
TOTAL COMMERCIAL CREDIT-RELATED 122,320 121,731 1,404 1,256 102 53
------------ ----------- --------- -------- -------- --------
TOTAL MANAGED CREDIT-RELATED $ 229,948 $ 227,709 $ 1,805 $ 1,694 $ 704 $ 763
============ =========== --------- -------- ======== ========
Assets Acquired as Loan Satisfactions 94 102
--------- --------
TOTAL NONPERFORMING ASSETS $ 1,899 $ 1,796
========= ========
<CAPTION>
==================================================================================================================================
NET CHARGE-OFFS
------------------------------------------------------------------------------
(in millions, except ratios) Second Quarter Six Months
---------------------------------- ----------------------------------
CONSUMER LOANS: 2000 1999 2000 1999
------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
Domestic Consumer:
1-4 Family Residential Mortgages $ 10 $ 9 $ 19 $ 10
Credit Card - Reported 166 218 354 434
Credit Card Securitizations (a) 242 246 496 515
-------- -------- --------- ---------
Credit Card-Managed 408 464 850 949
Auto Financings 22 19 43 38
Other Consumer 32 47 75 95
-------- -------- --------- ---------
Total Domestic Consumer 472 539 987 1,092
Foreign Consumer 10 9 19 18
-------- -------- --------- ---------
TOTAL CONSUMER LOANS 482 548 1,006 1,110
-------- -------- --------- ---------
COMMERCIAL LOANS:
Domestic Commercial:
Commercial and Industrial 64 29 100 49
Commercial Real Estate (1) (2) (3) (11)
Financial Institutions 11 3 19 28
-------- -------- --------- ---------
Total Domestic Commercial 74 30 116 66
Foreign Commercial:
Commercial and Industrial 21 58 48 110
Commercial Real Estate -- -- -- --
Financial Institutions (3) (1) (1) (2)
Foreign Governments -- (1) 1 (1)
-------- -------- --------- ---------
Total Foreign Commercial 18 56 48 107
TOTAL COMMERCIAL LOANS 92 86 164 173
-------- -------- --------- ---------
TOTAL MANAGED LOANS $ 574 $ 634 $ 1,170 $ 1,283
======== ======== ========= =========
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents the portion of Chase's credit card receivables that have been
securitized.
(b) Includes currently performing loans placed on a cash basis because of
concerns as to collectibility.
(c) Charge-offs for risk management instruments are included in trading
revenue.
===============================================================================
-30-
<PAGE> 31
PART I
Item 2 (continued)
Chase's managed credit-related assets of $230 billion at June 30, 2000
increased 1%, compared with year-end 1999. Consumer managed credit-related
assets increased $1.7 billion, largely in the 1-4 family residential mortgage
portfolio, and commercial loans rose $4.3 billion, notably in the domestic
commercial and industrial loan portfolio, while derivative and foreign exchange
instruments declined $3.7 billion. Chase's credit-related portfolio is balanced
between commercial and consumer assets, with consumer assets comprising
approximately 47% of Chase's managed credit-related portfolio. The credit
quality of Chase's commercial credit-related assets, including derivative and
foreign exchange instruments, remains strong. The portion of the commercial
portfolio considered investment grade was 55% at June 30, 2000.
Management currently believes that Chase's nonperforming assets at December 31,
2000 will be approximately at the same level as December 31, 1999, although the
amount of nonperforming assets may modestly increase or decrease in any given
quarter over the remainder of the year.
Net charge-offs in the managed portfolio were $574 million in the second
quarter of 2000, a decline of $60 million from the second quarter of 1999,
reflecting decreases in net charge-offs in the managed credit card portfolio.
Management expects that credit costs in 2000, on a managed basis, will remain
relatively stable over the remainder of the year and will be of a similar
magnitude to total credit costs incurred in 1999. For the consumer portfolio,
management expects net charge-off rates in 2000 will be lower than in 1999;
however, reported net charge-offs will vary depending on the level of credit
card securitizations completed during the year. The commercial charge-off rate
varies more than the consumer charge-off rate, and over time Chase expects
annual commercial net charge-offs to be in a range of 40-60 bp. Management
expects the commercial charge-off rate for the remainder of 2000 to remain
relatively stable with the level for the first six months of 2000.
AVERAGE ANNUAL NET CHARGE-OFF RATES
<TABLE>
<CAPTION>
===============================================================================================================================
SECOND QUARTER SIX MONTHS
-------------------------- -----------------------
2000 1999 2000 1999
----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
CONSUMER LOANS:
1-4 Family Residential Mortgages .09% .08% .08% .05%
Credit Card-Managed (a) 5.09 5.80 5.25 5.95
Auto Financings .47 .42 .46 .43
Other Consumer (b) 1.71 2.01 1.88 1.95
Total Consumer Loans 1.81 2.13 1.89 2.16
COMMERCIAL LOANS:
Total Commercial Loans .40 .39 .36 .39
Total Managed Loans 1.16 1.33 1.19 1.34
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes domestic and foreign consumer and commercial credit card
activity.
(b) Includes foreign loans.
==============================================================================
CONSUMER LOANS
Chase's consumer portfolio is primarily domestic and is geographically
well-diversified. Chase's managed consumer portfolio totaled $108 billion at
June 30, 2000, an increase of $1.7 billion since year-end. Consumer net
charge-offs, on a managed basis, were $482 million and $1,006 million for the
second quarter and first six months of 2000, compared with $548 million and
$1,110 million for the same periods of 1999, primarily reflecting a decline in
credit card net charge-offs. Management anticipates credit quality in the
consumer portfolio to remain stable, or to improve slightly, over the remainder
of the year.
RESIDENTIAL MORTGAGE LOANS: Residential mortgage loans were $47.6 billion at
June 30, 2000, a $3.3 billion increase from year-end balances, while the level
of nonperforming residential mortgage loans decreased 6%. The loss rates of
.09% for the 2000 second quarter and .08% for the first six months of 2000
reflect the continued strong credit quality of this portfolio.
-31-
<PAGE> 32
PART I
Item 2 (continued)
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 amounts discussed below
include domestic and international consumer and commercial credit card activity
(for reporting purposes, commercial credit cards are reported within the
commercial loan category).
Average managed credit card receivables of $32.6 billion for the second quarter
of 2000 were relatively flat when compared with the same period of 1999. During
the 2000 second quarter, net charge-offs as a percentage of average credit card
receivables decreased to 5.09%, compared with 5.80% in the prior-year period.
Loans over 90 days past due dropped to 1.68% of the portfolio at June 30, 2000,
compared with 1.80% at June 30, 1999. Management anticipates that the managed
credit card net charge-off ratio for the full-year 2000 will be lower than
full-year 1999.
AUTO FINANCINGS: Auto financings outstanding remained stable at June 30, 2000
when compared with year-end 1999. The charge-off rate of .47% for the 2000
second quarter is indicative of this portfolio's selective approach to asset
origination. Total originations were $5.1 billion for the first six months of
2000, compared with $6.7 billion for the same 1999 period.
OTHER CONSUMER LOANS: The level of other domestic consumer loans of $6.4
billion at June 30, 2000 represents a decrease of $0.5 billion from year-end
levels. Net charge-offs related to the portfolio decreased in both the second
quarter and first six months of 2000. The decrease in net charge-offs reflects
the sale in late 1999 of an underperforming segment of a secured portfolio.
COMMERCIAL LOANS
Loan outstandings for Chase's commercial portfolio increased $4.3 billion since
year-end. Commercial net charge-offs in the second quarter of 2000 were $92
million, compared with $86 million in the second quarter of 1999. For the first
half of 2000, commercial net charge-offs were $164 million, compared with $173
million for the same 1999 period.
COMMERCIAL AND INDUSTRIAL: The domestic commercial and industrial portfolio
increased $2.0 billion from 1999 year-end, reflecting general business
activity. Net charge-offs in the 2000 second quarter amounted to $64 million,
or 53 bp on an annual basis. The foreign commercial and industrial portfolio
totaled $26.3 billion at June 30, 2000, an increase of 5% from the 1999
year-end level. Nonperforming foreign commercial and industrial loans were $747
million, an increase of $105 million from year-end 1999. Foreign net charge-off
levels for the second quarter of 2000 decreased to $21 million, or by 64%, from
the same period in 1999.
COMMERCIAL REAL ESTATE: Commercial real estate loans decreased $0.5 billion
from 1999 year-end levels principally as a result of securitizations, sales and
repayments.
FINANCIAL INSTITUTIONS: Loans to financial institutions increased $2.2 billion
during 2000 when compared with year-end, primarily in the domestic portion of
the portfolio. Nonperforming financial institution loans decreased 73% to $29
million, primarily due to one counterparty in the foreign portfolio returning
to performing status.
FOREIGN GOVERNMENTS: Foreign government loans were $2.7 billion at June 30,
2000, a $0.6 billion decrease from year-end levels. Nonperforming foreign
government loans decreased to $34 million, or by 17%, from 1999 year-end
levels.
DERIVATIVE AND FOREIGN EXCHANGE CONTRACTS
For a discussion of the derivative and foreign exchange contracts utilized in
connection with Chase's trading and A/L activities, see page 42 and Notes 1 and
19 of Chase's 1999 Annual Report. The following table provides the remaining
maturities of derivative and foreign exchange contracts outstanding at June 30,
2000 and December 31, 1999.
<TABLE>
<CAPTION>
=================================================================================================================================
AT JUNE 30, 2000 At December 31, 1999
----------------------------------------------------- ---------------------------------------------------
INTEREST FOREIGN EQUITY, Interest Foreign Equity,
RATE EXCHANGE COMMODITY AND Rate Exchange Commodity and
CONTRACTS CONTRACTS OTHER CONTRACTS TOTAL Contracts Contracts Other Contracts Total
--------- --------- --------------- ----- --------- --------- --------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Less Than 1 Year 15% 85% 33% 28% 15% 90% 27% 34%
1 to 5 Years 45 12 64 41 46 8 69 38
Over 5 Years 40 3 3 31 39 2 4 28
---- ---- ---- ---- ---- ---- ---- ----
Total 100% 100% 100% 100% 100% 100% 100% 100%
=== === === === === === === ===
=================================================================================================================================
</TABLE>
-32-
<PAGE> 33
PART I
Item 2 (continued)
CROSS-BORDER EXPOSURE
The following table presents Chase's exposure to emerging Latin America and
Asia. Cross-border disclosure is based on the Federal Financial Institutions
Examination Council ("FFIEC") guidelines governing the determination of
cross-border risk. For a further discussion of Chase's country exposure, see
page 43 of Chase's 1999 Annual Report.
<TABLE>
<CAPTION>
==================================================================================================================================
SELECTED COUNTRY EXPOSURE (a)
AT JUNE 30, 2000 At Dec 31, 1999
------------------------------------------------------------------------------ -----------------------
GROSS NET COUNTRY-RELATED Country-
LENDING- TRADING- LOCAL LESS CROSS-BORDER RESALE Net Related
(in billions) RELATED RELATED COUNTRY LOCAL EXPOSURE AGREEMENTS Cross-Border Resale
(b) (c) ASSETS FUNDING (a) (a) Exposure Agreements
--------- --------- ------ ------- ------------ ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL LATIN AMERICA (d) $ 5.2 $ 2.0 $ 2.4 $ 2.3 $ 7.3 $ 2.0 $ 8.8 $ 2.1
====== ====== ======= ======= ======= ====== ======= ======
EMERGING ASIA
International Monetary
Fund ("IMF") Countries:
South Korea $ 0.4 $ 0.2 $ 1.1 $ 0.8 $ 0.9 $ -- $ 1.4 $ --
Indonesia 0.6 0.1 0.1 0.1 0.7 -- 0.9 --
Thailand 0.2 -- 0.7 0.2 0.7 -- 0.7 --
------ ------ ------- ------- ------- ------ ------- ------
Subtotal 1.2 0.3 1.9 1.1 2.3 -- 3.0 --
Other Emerging Asia 3.0 0.5 6.4 5.4 4.5 -- 3.4 --
------ ------ ------- ------- ------- ------ ------- ------
TOTAL EMERGING ASIA (e) $ 4.2 $ 0.8 $ 8.3 $ 6.5 $ 6.8 $ -- $ 6.4 $ --
======= ====== ======= ======= ======= ====== ======= =======
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Cross-border disclosure is based on FFIEC guidelines governing the
determination of cross-border risk. Under FFIEC guidelines, resale
agreements are reported by the country of the issuer of the underlying
security. Chase, however, does not consider the cross-border risk of
resale agreements to depend upon the country of the issuer of the
underlying security and, as a result, has presented these amounts
separately in the above table.
(b) Includes loans and accrued interest receivable, interest-bearing deposits
with banks, acceptances, other monetary assets, issued letters of credit
and undrawn commitments to extend credit.
(c) Includes cross-border trading debt and equity instruments and the
mark-to-market exposure of foreign exchange and derivative contracts. The
amounts associated with foreign exchange and derivative contracts are
presented after taking into account the impact of legally enforceable
master netting agreements.
(d) Excludes Bermuda and Cayman Islands.
(e) Excludes Japan, Australia and New Zealand.
===============================================================================
ALLOWANCE FOR CREDIT LOSSES
Loans: Chase's allowance for loan losses is intended to cover probable credit
losses as of June 30, 2000 for which either the asset is not specifically
identified or the size of the loss has not been fully determined. Within the
allowance, there are both specific and expected loss components as well as a
residual component. For a further discussion of the specific, expected and
residual components of the allowance for loan losses, see page 44 of Chase's
1999 Annual Report. The allowance for loan losses remained at $3.5 billion at
June 30, 2000, consistent with the level at 1999 year-end. Based upon
management's current expectations regarding credit quality over the remainder
of the year, it does not anticipate the need to increase Chase's allowance for
loan losses over the next two quarters.
Lending-Related Commitments: Chase also has an allowance for its
lending-related commitments, using a methodology similar to that for the loan
portfolio.
-33-
<PAGE> 34
Part 1
Item 2 (continued)
The following table represents Chase's allowance for credit losses at June 30,
2000 and 1999.
<TABLE>
<CAPTION>
==================================================================================================================================
JUNE 30,
----------------------------------
(in millions, except ratios) 2000 1999
------------ -----------
<S> <C> <C>
Allowance for Loan Losses $ 3,459 $ 3,554
----------------------------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses to:
Nonperforming Loans 197% 238%
Loans at Period-End 1.92 2.03
Average Loans (Six Month Average) 1.94 2.05
----------------------------------------------------------------------------------------------------------------------------------
Allowance for Credit Losses on Lending-Related Commitments $ 170 $ 170
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Chase deems its allowances to be adequate (i.e., sufficient to absorb losses
that may currently exist but are not yet identifiable).
-------------------------------------------------------------------------------
MARKET RISK MANAGEMENT
--------------------------------------------------------------------------------
The following discussion of Chase's market risk management focuses primarily on
developments since December 31, 1999 and should be read in conjunction with
pages 45-50 and Notes 1 and 19 of Chase's 1999 Annual Report.
VAR AGGREGATE EXPOSURE
Value-at-risk ("VAR") is a measure of the dollar amount of potential loss from
adverse market moves in an everyday market environment. The VAR looks forward
one trading day and is the loss expected to be exceeded with a 1 in 100 chance.
The table that follows represents Chase's average and period-end VARs for its
trading portfolios and its A/L activities. During the 12-month period ended June
30, 2000, no daily trading loss exceeded that day's trading VAR. This compares
with a statistically expected number of actual losses that exceed the VAR of
approximately three days.
<TABLE>
<CAPTION>
==================================================================================================================================
AGGREGATE PORTFOLIO
-------------------
TWELVE MONTHS ENDED JUNE 30, 2000
---------------------------------
AVERAGE MINIMUM MAXIMUM AT JUNE 30, At June 30,
(in millions) VAR VAR VAR 2000 1999
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trading Portfolio $ 26.3 $ 20.3 $ 41.8 $ 27.4 $ 23.8
Market Risk-Related
A/L Activities 74.9 60.4 99.8 67.8 80.9
Less: Portfolio Diversification (20.2) NM NM (17.0) (20.7)
-------- -------- --------- -------- ----------
Total VAR $ 81.0 $ 67.6 $ 106.3 $ 78.2 $ 84.0
======= ======== ========= ======= =========
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NM: Because the minimum and maximum VAR may occur on different days for
different risk components, it is not meaningful to compute a portfolio
diversification effect. In addition, Chase's average and period-end VAR
is less than the sum of the VARs of its market risk components due to
risk offsets resulting from portfolio diversification.
===============================================================================
TRADING ACTIVITIES
Chase is exposed to interest rate, foreign exchange, equity and commodity
market risks in its trading portfolios. No single risk statistic can reflect
all aspects of market risk; in addition, market exposures change continuously
through daily trading activities.
Value-at-Risk: See the VAR Aggregate Exposure section above for Chase's average
and period-end VARs for its total trading portfolio.
-34-
<PAGE> 35
PART I
Item 2 (continued)
Histogram: The following histogram illustrates Chase's daily market
risk-related revenue, which is defined as the daily change in value of the
mark-to-market trading portfolios plus any trading-related net interest income
or other revenue. Based on actual trading results for the 12 months ended June
30, 2000, Chase posted positive daily market risk-related revenue for 253 out
of 262 business trading days, with 88 business days exceeding positive $20
million. Chase incurred no daily trading losses in excess of negative $15
million over the past 12 months.
[ Graphic of Daily Market Risk-Related Revenue - See Appendix I ]
Stress Testing: Whereas VAR captures Chase's exposure to unlikely events in
normal markets, stress testing discloses the risk under plausible events in
abnormal markets. Portfolio stress testing is integral to the market risk
management process and is co-equal with, and complementary to, VAR as a risk
measurement and control tool. Giving equal weight to each produces a risk
profile that is diverse, disciplined and flexible enough to capture revenue
generating opportunities during times of normal market moves but that also is
prepared for periods of market turmoil.
Corporate stress tests are performed monthly on randomly selected dates. As of
June 30, 2000, Chase's corporate stress tests consisted of five historical and
four hypothetical scenarios. The historical scenarios included the 1994 bond
market sell-off and the 1998 Russian crisis. The hypothetical scenarios
included examinations of potential market crises originating in the United
States, Japan and the Euro bloc.
The following table represents the potential stress test loss (pre-tax) in
Chase's trading portfolio predicted by Chase's stress test scenarios.
<TABLE>
<CAPTION>
=================================================================================================================================
Largest Monthly Stress Test - Pre-Tax
TWELVE MONTHS ENDED JUNE June
JUNE 30, 2000 2000 1999
-------------------------------------- ----------- -----------
(in millions) AVERAGE MINIMUM MAXIMUM
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Stress Test Loss - Pre-Tax $ (213) $ (112) $ (397) $ (222) $ (177)
=================================================================================================================================
</TABLE>
-35-
<PAGE> 36
PART I
Item 2 (continued)
INVESTMENT PORTFOLIO AND ASSET/LIABILITY ACTIVITIES
Chase also has market risk exposure in its investment portfolios and A/L
activities. Market risk measurements for Chase's investment portfolio and A/L
activities do not take into account all factors that have an effect on these
activities, such as changes in credit quality.
Net Interest Income Sensitivity: At June 30, 2000, Chase's NII sensitivity over
the next 12 months to an immediate 100 basis point shock in interest rates was
estimated to be approximately 3.7% of projected net income for full year 2000.
At June 30, 1999, Chase's exposure under the same scenario was approximately
2.6% of projected 1999 net income.
Net Interest Income Stress Test: Chase's NII stress testing uses historical and
hypothetical scenarios. The historical scenario is a replay of the rate and
spread changes that occurred in 1994 (bond market sell-off), while the various
hypothetical scenarios examine the impact of alternative patterns in the U.S.
dollar yield curve and in U.S. dollar spreads. At June 30, 2000, Chase's
largest potential NII stress test loss was estimated to be approximately 12.4%
of projected net income for full year 2000. At year-end 1999, Chase's exposure
was estimated to be approximately 8% of projected net income for full year
2000.
Value-at-Risk: See the VAR Aggregate Exposure section on page 34 for Chase's
average and period-end VARs for its investment portfolio and market
risk-related A/L activities.
Nonstatistical Risk Measures: The table that follows shows that Chase had a
directional basis point value ("BPV") of ($4.0) million (pre-tax), indicating
that the market value of Chase's A/L positions would have declined by
approximately $4.0 million for every one basis point increase in interest rates
along the interest rate yield curve. This compares with a directional BPV of
($5.0) million at June 30, 1999. The following table also shows that the
economic value of Chase's investment portfolio and A/L activities would have
declined by $11.3 million (pre-tax) for every one basis point widening of
interest spreads, the same as at June 30, 1999.
<TABLE>
<CAPTION>
==================================================================================================================================
MARKET RISK-RELATED A/L ACTIVITIES
----------------------------------
TWELVE-MONTH PERIOD ENDED JUNE 30, 2000
---------------------------------------
AT JUNE 30, At June 30,
(in millions) AVERAGE MINIMUM MAXIMUM 2000 1999
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Directional Risk $ (4.2) $ (1.6) $ (6.8) $ (4.0) $ (5.0)
Basis Risk (10.4) (8.0) (13.2) (11.3) (11.3)
==================================================================================================================================
</TABLE>
Economic Value Stress Testing. Chase utilizes several historical and
hypothetical scenarios when performing its economic value stress tests. As of
June 30, 2000, under the "1994 bond market sell-off" scenario, the potential
impact on the economic value of Chase's investment portfolio and A/L activities
would have been equivalent to less than 2% of Chase's market capitalization.
IMPACT OF A/L DERIVATIVE ACTIVITY
---------------------------------
The following table reflects the deferred gains/losses on closed derivative
contracts and unrecognized gains/losses on open derivative contracts utilized in
Chase's A/L activities at June 30, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
=================================================================================================================================
JUNE 30, December 31,
(in millions) 2000 1999 Change
------------ --------------- ------
<S> <C> <C> <C>
A/L Derivative Contracts:
Net Deferred Gains $ 209 $ 205 $ 4
Net Unrecognized Losses (a) (935) (877) (58)
----------- --------- --------
Net A/L Derivative Losses $ (726) $ (672) $ (54)
=========== ========== ========
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) These net unrecognized losses do not include the net favorable impact
from the assets/liabilities being hedged by these derivative contracts.
===============================================================================
-36-
<PAGE> 37
PART I
Item 2 (continued)
------------------------------------------------------------------------------
CAPITAL AND LIQUIDITY RISK MANAGEMENT
------------------------------------------------------------------------------
The following capital and liquidity discussion should be read in conjunction
with the Capital and Liquidity Risk Management section on pages 51-53 and Note
18 of Chase's 1999 Annual Report.
CAPITAL
Chase's capital levels at June 30, 2000 remained strong, with capital ratios
well in excess of regulatory guidelines. At June 30, 2000, the Tier 1 and Total
Capital ratios were 8.7% and 12.4%, respectively, and the Tier 1 leverage ratio
was 6.8%. Management's long-term target range for the Tier 1 Capital ratio is
8% to 8.25%; however, this target may not always be maintained on a
quarter-to-quarter basis in light of changing economic conditions and business
needs.
The following table shows the sources and uses of Chase's Tier 1 Capital.
<TABLE>
<CAPTION>
=================================================================================================================================
2ND QUARTER SIX MONTHS FULL YEAR
(in billions) 2000 2000 1999 1998
-------------- ---------------- --------------------
<S> <C> <C> <C> <C>
SOURCES OF FREE TIER 1 CAPITAL
Cash Operating Earnings Less Dividends $ 0.9 $ 1.9 $ 4.3 $ 2.9
Preferred Stock and Equivalents/Special Items (0.3) (0.4) 0.2 (0.7)
Capital for Internal Asset Growth (0.8) (0.6) (1.0) (0.3)
------- --------- ------ ------
Total Sources of Free Cash Flow` $ (0.2) $ 0.9 $ 3.5 $ 1.9
======== ========= ====== ======
USES OF FREE TIER 1 CAPITAL
Increases in Capital Ratios $ 0.1 $ 0.5 $ 0.1 $ 1.2
Acquisitions -- -- 1.1 0.8
Repurchases Net of Stock Issuances for Employee Plans (0.3) 0.4 2.3 (0.1)
------- -------- ------ ------
Total Uses of Free Cash Flow $ (0.2) $ 0.9 $ 3.5 $ 1.9
======= ======== ====== ======
=================================================================================================================================
</TABLE>
During the first half of 2000, $0.9 billion of free cash flow was generated,
which was primarily earmarked to support the acquisition of Flemings in August
2000.
Chase shareholders approved a three-for-two stock split at Chase's annual
meeting on May 16, 2000. The record date for the split was May 17, 2000 and the
additional shares of common stock issued as a result of the split were
distributed on June 9, 2000.
Chase's dividend policy is to pay common stock dividends equal to approximately
25% to 35% of Chase's operating earnings, less preferred stock dividends.
Chase's future dividend policies will be determined by its Board of Directors
after taking into consideration Chase's earnings and financial condition and
applicable government regulations and policies.
Under its equity repurchase program, which became effective January 19, 2000,
Chase may repurchase up to $5 billion of its common stock in the open market or
through negotiated transactions, in addition to any amounts that may need to be
purchased to provide for issuances under Chase's dividend reinvestment plan and
its various stock-based employee benefit plans. There were no repurchases of
Chase common stock during the 2000 second quarter. Stock repurchases are
planned to resume after the Flemings acquisition is completed and Chase's Tier
1 Capital ratio returns to management's target range of 8% to 8.25%, which is
anticipated to occur by year-end 2000.
At June 30, 2000, the total capitalization of Chase (the sum of Tier 1 and Tier
2 Capital) was $38.0 billion, an increase of $1.5 billion from December 31,
1999. This increase reflects retained earnings (net income less common and
preferred dividends) generated during the period, partially offset by common
stock repurchases in the first quarter of 2000, and the redemption of $100
million of preferred stock.
LIQUIDITY
While capital is held to absorb losses over time, liquidity is managed to meet
Chase's known and unanticipated cash funding needs. Chase must maintain
sufficient liquidity for operations, to meet payment demands on borrowings and
to make new loans and investments as opportunities arise. During the first six
months of 2000, Chase issued $5.6 billion of long-term debt, while $1.7 billion
of long-term debt matured. Additionally, in the second quarter of 2000, $100
million of 10.96% cumulative preferred stock was redeemed.
-37-
<PAGE> 38
PART I
Item 2 (continued)
------------------------------------------------------------------------------
OPERATING RISK MANAGEMENT
------------------------------------------------------------------------------
The following discussion of Chase's operating risk management focuses primarily
on developments since December 31, 1999 and should be read in conjunction with
the Operating Risk Management section on page 54 of the 1999 Annual Report.
Chase 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. In early 2000, Chase
established two additional risk-management committees, each of which reports to
Chase's Executive Committee: the Operating Risk Committee, which is currently
reviewing the design of the control function within Chase, and the Fiduciary
Risk Committee, which is responsible for approving Chase's policies for
fiduciary risk.
Chase maintains systems of controls that it believes are reasonably designed to
provide management and the Board of Directors with timely and accurate
information about the operations of Chase. These systems have been designed to
keep operating risk at appropriate levels in view of Chase's financial
strength, the characteristics of its businesses and the markets in which it
operates, and the competitive and regulatory environment to which it is
subject. However, Chase has suffered losses from operating risk from time to
time, and there can be no assurance that Chase will not suffer such losses in
the future.
Chase continues its reconciliation project relating to the deficiencies
identified in the computerized recordkeeping systems of the bond paying agency
function within Chase's Capital Markets Fiduciary Services Group. In connection
with this project, Chase incurred some immaterial costs during the first half
of 2000. Management does not anticipate that Chase will incur any additional
material costs related to this project. The Securities and Exchange Commission
is investigating the question of whether, in connection with this matter, there
have been violations of its transfer agency recordkeeping or reporting
regulations and whether Chase's disclosure regarding these issues have been
adequate and timely.
-------------------------------------------------------------------------------
SUPERVISION AND REGULATION
-------------------------------------------------------------------------------
The following discussion should be read in conjunction with the Supervision and
Regulation section on pages 1-4 of Chase's 1999 Annual Report.
DIVIDENDS
Chase's bank subsidiaries could, without the approval of their relevant banking
regulators, pay dividends to their respective bank holding companies in amounts
up to the limitations imposed upon such banks by regulatory restrictions. These
dividend limitations, in the aggregate, totaled approximately $3.0 billion at
June 30, 2000.
-------------------------------------------------------------------------------
ACCOUNTING DEVELOPMENTS
-------------------------------------------------------------------------------
For a discussion of accounting developments related to derivatives and the
allowance for loan losses, see the Accounting and Reporting Development section
on page 55 of the 1999 Annual Report.
-------------------------------------------------------------------------------
OTHER EVENTS
-------------------------------------------------------------------------------
On August 1, 2000 Chase acquired Flemings. The consideration issued to Flemings'
shareholders consisted of 2.6 billion pound sterling and 65.3 million shares of
Chase common stock. Chase and Flemings also have a retention arrangement for key
employees in an aggregate amount of approximately $240 million (after-tax),
which will be expensed over the two years following the acquisition. Flemings is
a global asset management and investment banking firm based in London. The
transaction was accounted for under the purchase method.
Chase acquired The Beacon Group, LLC, a privately-held investment banking firm,
on July 6, 2000. The acquisition was accounted for under the purchase method.
-38-
<PAGE> 39
Part 1
Item 2 (continued)
<TABLE>
<CAPTION>
=================================================================================================================================
THE CHASE MANHATTAN CORPORATION
FINANCIAL HIGHLIGHTS
(IN MILLIONS, EXCEPT PER SHARE DATA AND RATIOS)
SECOND QUARTER SIX MONTHS
--------------------------------------- ------------------------------------
Over/(Under) Over/(Under)
2000 1999 2qtr99 2000 1999 1999
---- ---- ------ ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
AS REPORTED BASIS
Revenue $ 5,416 $ 5,616 (4)% $ 11,341 $ 10,760 5%
Noninterest Expense
(excluding Restructuring Costs) 3,357 3,068 9 6,847 6,013 14
Restructuring Costs 50 -- NM 50 -- NM
Provision for Loan Losses 332 388 (14) 674 769 (12)
Net Income 1,091 1,393 (22) 2,451 2,566 (4)
Net Income per Common Share:
Basic 0.88 1.10 (20) 1.98 2.01 (1)
Diluted 0.85 1.06 (20) 1.92 1.95 (2)
Cash Dividends Declared 0.32 0.27 19 0.64 0.54 19
Book Value at Period End 19.43 17.36 12
Share Price at Period End 46.06 57.67 (20)
Performance Ratios:
------------------
Return on Average Common Equity (a) 19% 25% (600) bp 21% 23% (200) bp
Return on Average Assets (a) 1.11 1.55 (44) 1.25 1.42 (17)
----------------------------------------------------------------------------------------------------------------------------------
OPERATING BASIS (b)
Revenue $ 5,799 $ 5,696 2% $ 11,978 $ 11,109 8%
Noninterest Expense 3,357 2,968 13 6,847 5,913 16
Credit Costs (c) 574 634 (9) 1,170 1,284 (9)
Earnings 1,215 1,351 (10) 2,575 2,524 2
Earnings per Common Share:
Basic 0.98 1.07 (8) 2.08 1.98 5
Diluted 0.95 1.03 (8) 2.01 1.91 5
Performance Ratios:
------------------
Return on Average Common Equity (a) 21.0% 24.3% (330) bp 22.5% 22.5% -- bp
Return on Average Managed Assets (a) 1.18 1.43 (25) 1.26 1.33 (7)
Common Dividend Payout Ratio 33 26 700 31 28 300
Overhead Ratio 58 52 600 57 53 400
Cash Basis:
----------
Cash Earnings (d) $ 1,299 $ 1,427 (9)% $ 2,744 $ 2,673 3%
Diluted Cash Earnings per Common Share 1.02 1.09 (6) 2.15 2.03 6
Shareholder Value Added 542 696 (22) 1,243 1,197 4
Cash Return on Average Common Equity (a) 23% 26% (300) bp 24% 24% -- bp
Selected Balance Sheet Items at Period End: (e)
------------------------------------------
Managed Loans $ 200,033 $ 191,985 4%
Total Managed Assets 415,906 373,812 11
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Based on annualized amounts.
(b) Excludes the impact of credit card securitizations, restructuring costs
and special items.
(c) Includes provision for loan losses and credit costs related to the
securitized credit card portfolio.
(d) Cash Operating Earnings represent operating earnings excluding the
amortization of goodwill and certain other intangibles.
(e) Excludes the impact of credit card securitizations.
bp Denotes basis points; 100 bp equals 1%.
NM Not meaningful.
===============================================================================
-39-
<PAGE> 40
PART I
Item 2 (continued)
THE CHASE MANHATTAN CORPORATION
AVERAGE CONSOLIDATED BALANCE SHEET, INTEREST AND RATES
(TAXABLE-EQUIVALENT INTEREST AND RATES; IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED Three Months Ended
JUNE 30, 2000 June 30, 1999
----------------------------------------- ----------------------------------------
AVERAGE RATE Average Rate
BALANCE INTEREST (ANNUALIZED) Balance Interest (Annualized)
------- -------- ------------ ------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Deposits with Banks $ 4,598 $ 101 8.85% $ 6,103 $ 161 10.55%
Federal Funds Sold and
Securities Purchased under
Resale Agreements 33,849 451 5.36% 32,145 389 4.87%
Trading Assets - Debt and Equity
Instruments 30,822 478 6.24% 24,920 411 6.61%
Securities:
Available-for-Sale 62,512 946 6.09% (b) 51,571 731 5.69% (b)
Held-to-Maturity 781 13 6.57% 1,196 18 6.30%
Loans 179,020 3,634 8.16% 173,067 3,168 7.34%
----------- ------- ----------- --------
Total Interest-Earning Assets 311,582 5,623 7.26% 289,002 4,878 6.77%
Allowance for Loan Losses (3,413) (3,493)
Cash and Due from Banks 15,204 14,293
Trading Assets - Risk
Management Instruments 30,600 27,043
Other Assets 42,111 34,212
----------- -----------
Total Assets $ 396,084 $ 361,057
=========== ===========
LIABILITIES
Domestic Retail Deposits $ 62,774 594 3.80% $ 61,732 530 3.44%
Domestic Negotiable
Certificates of Deposit
and Other Deposits 16,271 264 6.54% 19,278 169 3.52%
Deposits in Foreign Offices 91,646 1,228 5.40% 77,646 859 4.44%
----------- ------- ----------- --------
Total Time and Savings
Deposits 170,691 2,086 4.92% 158,656 1,558 3.94%
----------- ------- ----------- --------
Short-Term and Other Borrowings:
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 62,870 871 5.57% 50,564 548 4.35%
Commercial Paper 5,271 81 6.20% 4,980 57 4.58%
Other Borrowings (c) 16,850 264 6.28% 15,189 246 6.49%
----------- ------- ----------- --------
Total Short-Term and
Other Borrowings 84,991 1,216 5.75% 70,733 851 4.82%
Long-Term Debt 23,109 397 6.90% 19,783 319 6.46%
----------- ------- ----------- --------
Total Interest-Bearing Liabilities 278,791 3,699 5.34% 249,172 2,728 4.39%
----------- ------- ----------- --------
Noninterest-Bearing Deposits 50,780 47,652
Trading Liabilities - Risk
Management Instruments 26,240 26,791
Other Liabilities 15,889 13,878
----------- -----------
Total Liabilities 371,700 337,493
----------- -----------
PREFERRED STOCK OF SUBSIDIARY 550 550
----------- -----------
STOCKHOLDERS' EQUITY
Preferred Stock 926 1,028
Common Stockholders' Equity 22,908 21,986
----------- -----------
Total Stockholders' Equity 23,834 23,014
----------- -----------
Total Liabilities, Preferred Stock of
Subsidiary and Stockholders' Equity $ 396,084 $ 361,057
=========== ===========
INTEREST RATE SPREAD 1.92% 2.38%
====
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $ 1,924 (a) 2.48% $ 2,150 (a) 2.98%
======== ==== ======== -----
</TABLE>
-------------------------------------------------------------------------------
(a) Reflects a pro forma adjustment to the net interest income amount
included in the Consolidated Statement of Income to permit comparisons of
yields on tax-exempt and taxable assets.
(b) For the three months ended June 30, 2000 and June 30, 1999, the
annualized rate for available-for-sale securities based on historical
cost was 5.84% and 5.61%, respectively.
(c) Includes securities sold but not yet purchased and structured notes.
-------------------------------------------------------------------------------
-40-
<PAGE> 41
Part 1
Item 2 (continued)
THE CHASE MANHATTAN CORPORATION
AVERAGE CONSOLIDATED BALANCE SHEET, INTEREST AND RATES
(TAXABLE-EQUIVALENT INTEREST AND RATES; IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED Six Months Ended
JUNE 30, 2000 June 30, 1999
----------------------------------------- ----------------------------------------
AVERAGE RATE Average Rate
BALANCE INTEREST (ANNUALIZED) Balance Interest (Annualized)
------- -------- ----------- ------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Deposits with Banks $ 5,633 $ 235 8.40% $ 6,527 $ 345 10.65%
Federal Funds Sold and
Securities Purchased under
Resale Agreements 32,539 897 5.54% 29,635 770 5.24%
Trading Assets - Debt and Equity
Instruments 29,576 895 6.08% 24,824 829 6.74%
Securities:
Available-for-Sale 61,909 1,871 6.08% (b) 54,592 1,547 5.72% (b)
Held-to-Maturity 827 27 6.49% 1,339 41 6.24%
Loans 178,029 7,114 8.04% 172,993 6,377 7.43%
----------- ------- ----------- --------
Total Interest-Earning Assets 308,513 11,039 7.20% 289,910 9,909 6.89%
Allowance for Loan Losses (3,414) (3,491)
Cash and Due from Banks 15,338 15,106
Trading Assets - Risk
Management Instruments 30,993 28,244
Other Assets 42,182 34,208
----------- -----------
Total Assets $ 393,612 $ 363,977
=========== ===========
LIABILITIES
Domestic Retail Deposits $ 62,787 1,140 3.65% $ 61,478 1,040 3.41%
Domestic Negotiable
Certificates of Deposit
and Other Deposits 16,325 526 6.48% 20,851 370 3.58%
Deposits in Foreign Offices 92,681 2,385 5.18% 78,475 1,746 4.49%
----------- ------- ----------- --------
Total Time and Savings
Deposits 171,793 4,051 4.74% 160,804 3,156 3.96%
----------- ------- ----------- --------
Short-Term and Other Borrowings:
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements 59,837 1,629 5.47% 50,753 1,117 4.44%
Commercial Paper 5,989 176 5.90% 5,121 117 4.62%
Other Borrowings (c) 17,428 540 6.23% 14,276 531 7.49%
----------- ------- ----------- --------
Total Short-Term and
Other Borrowings 83,254 2,345 5.66% 70,150 1,765 5.07%
Long-Term Debt 21,956 751 6.88% 19,237 630 6.60%
----------- ------- ----------- --------
Total Interest-Bearing Liabilities 277,003 7,147 5.19% 250,191 5,551 4.47%
----------- ------- ----------- --------
Noninterest-Bearing Deposits 50,828 47,815
Trading Liabilities - Risk
Management Instruments 25,697 27,982
Other Liabilities 15,894 14,074
----------- -----------
Total Liabilities 369,422 340,062
----------- -----------
PREFERRED STOCK OF SUBSIDIARY 550 550
----------- -----------
STOCKHOLDERS' EQUITY
Preferred Stock 927 1,028
Common Stockholders' Equity 22,713 22,337
----------- -----------
Total Stockholders' Equity 23,640 23,365
----------- -----------
Total Liabilities, Preferred Stock of
Subsidiary and Stockholders' Equity $ 393,612 $ 363,977
=========== ===========
INTEREST RATE SPREAD 2.01% 2.42%
====
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $ 3,892(a) 2.54% $ 4,358 (a) 3.03%
======= ======== ====
</TABLE>
-------------------------------------------------------------------------------
(a) Reflects a pro forma adjustment to the net interest income amount included
in the Consolidated Statement of Income to permit comparisons of yields on
tax-exempt and taxable assets.
(b) For the six months ended June 30, 2000 and June 30, 1999, the annualized
rate for available-for-sale securities based on historical cost was 5.83%
and 5.69%, respectively.
(c) Includes securities sold but not yet purchased and structured notes.
-------------------------------------------------------------------------------
-41-
<PAGE> 42
PART I
Item 2 (continued)
THE CHASE MANHATTAN CORPORATION
QUARTERLY FINANCIAL INFORMATION
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
2000 1999
------------------------------- --------------------------------------------
SECOND FIRST Fourth Third Second First
QUARTER QUARTER Quarter Quarter Quarter Quarter
-------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 3,631 $ 3,480 $ 3,451 $ 3,288 $ 3,165 $ 3,209
Securities 952 933 872 762 747 835
Trading Assets 479 416 477 399 411 418
Federal Funds Sold and Securities
Purchased under Resale Agreements 451 446 329 352 389 381
Deposits with Banks 101 134 212 195 161 184
-------- -------- --------- --------- --------- ---------
Total Interest Income 5,614 5,409 5,341 4,996 4,873 5,027
-------- -------- --------- --------- --------- ---------
INTEREST EXPENSE
Deposits 2,086 1,965 1,786 1,650 1,558 1,598
Short-Term and Other Borrowings 1,216 1,129 1,018 870 851 914
Long-Term Debt 397 354 312 306 319 311
-------- -------- --------- --------- --------- ---------
Total Interest Expense 3,699 3,448 3,116 2,826 2,728 2,823
-------- -------- --------- --------- --------- ---------
NET INTEREST INCOME 1,915 1,961 2,225 2,170 2,145 2,204
Provision for Loan Losses 332 342 454 398 388 381
-------- -------- --------- --------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,583 1,619 1,771 1,772 1,757 1,823
-------- -------- --------- --------- --------- ---------
NONINTEREST REVENUE
Investment Banking Fees 639 648 499 486 585 317
Trust, Custody and Investment
Management Fees 545 509 469 457 461 414
Credit Card Revenue 443 397 440 441 438 379
Fees for Other Financial Services 695 731 719 637 587 553
Trading Revenue 824 1,021 531 462 526 618
Securities Gains (Losses) 57 14 (59) (1) 5 156
Private Equity Gains 298 500 1,307 377 513 325
Other Revenue -- 144 135 162 356 178
-------- -------- --------- --------- --------- ---------
Total Noninterest Revenue 3,501 3,964 4,041 3,021 3,471 2,940
-------- -------- --------- --------- --------- ---------
NONINTEREST EXPENSE
Salaries 1,614 1,753 1,461 1,417 1,416 1,384
Employee Benefits 252 287 233 238 238 255
Occupancy Expense 216 226 224 218 206 218
Equipment Expense 274 285 278 255 239 243
Restructuring Costs 50 -- 48 -- -- --
Other Expense 1,001 939 983 853 969 845
-------- -------- --------- --------- --------- ---------
Total Noninterest Expense 3,407 3,490 3,227 2,981 3,068 2,945
-------- -------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAX EXPENSE 1,677 2,093 2,585 1,812 2,160 1,818
Income Tax Expense 586 733 892 625 767 645
-------- -------- --------- --------- --------- ---------
NET INCOME 1,091 $ 1,360 $ 1,693 $ 1,187 $ 1,393 $ 1,173
-------- ======== ========= ========= ========= =========
NET INCOME APPLICABLE TO
COMMON STOCK $ 1,074 $ 1,344 $ 1,677 $ 1,168 $ 1,375 $ 1,155
======== ======== ========= ========= ========= =========
NET INCOME PER COMMON SHARE
Basic $ 0.88 $ 1.10 $ 1.37 $ 0.95 $ 1.10 $ 0.91
======= ======== ========= ======== ======== =========
Diluted $ 0.85 $ 1.06 $ 1.32 $ 0.92 $ 1.06 $ 0.88
======= ======== ========= ======== ======== =========
</TABLE>
-42-
<PAGE> 43
Part 1
Item 2 (continued)
-------------------------------------------------------------------------------
GLOSSARY OF TERMS
-------------------------------------------------------------------------------
The page numbers included after each definition represent the pages in this
Form 10-Q where the term primarily is used.
1999 Annual Report: Annual Report on Form 10-K for the year ended December 31,
1999. (Pages 7-10, 13-15, 18, 24-25, 27, 29-30, 33-34, 37-38, 44, 50)
Asset/Liability ("A/L") Activities: The management of the sensitivity of
Chase's net interest income to changes in market interest rates. (Pages 8, 34,
36)
BPV: Basis Point Value. This measurement quantifies the change in the market
value of Chase's assets and liabilities (that are not part of its trading
activities), that would result from a one basis point change in interest
rates. (Page 36)
Cash Operating Earnings: Operating earnings excluding the impact of
amortization of goodwill and certain other intangibles. (Pages 10, 24-27)
Chase USA: Chase Manhattan Bank USA, National Association. (Page 9)
Derivative and Foreign Exchange ("FX") Contracts: Interest rate swaps, forward
rate agreements, futures, forwards, options, debt, equity, commodity and other
contracts used for asset/liability or trading purposes. The instruments
represent contracts with counterparties where payments are made to or from the
counterparty based upon specific interest rates, currency levels, other market
rates or on terms predetermined by the contract. (Pages 9, 32)
Managed Credit Card Receivables or Managed Basis: Consistent with industry
practice, Chase uses this terminology to define its credit card receivables on
the balance sheet plus securitized credit card receivables. (Page 30)
Net Yield on Interest-Earning Assets: The average rate for interest-earning
assets less the average rate paid for all sources of funds. (Page 18)
New Economy: Represents the industry sectors and companies (e.g.,
media/telecommunications, technology/information services, life sciences) and
the technologists and entrepreneurs who are at the forefront of future
innovations (e.g., microprocessors, internet). (Page 15)
Operating Basis or Operating Earnings: Reported results excluding the impact
of credit card securitizations, restructuring costs and special items. (Pages
10-12, 24-28)
Overhead Ratio: Noninterest expense as a percentage of the total of net
interest income and noninterest revenue (excluding restructuring costs, special
items and costs associated with the REIT). (Pages 11, 22, 24)
REIT: A real estate investment trust subsidiary of Chase. (Page 22)
SFAS: Statement of Financial Accounting Standards.
SFAS 107: "Disclosures about Fair Value of Financial Instruments." (Page 8)
SFAS 115: "Accounting for Certain Investments in Debt and Equity Securities."
(Pages 7, 9)
Shareholder Value Added ("SVA"): Represents operating earnings excluding the
amortization of goodwill and certain other intangibles (i.e., cash operating
earnings) minus preferred dividends and an explicit charge for capital. (Pages
10, 12, 24)
Special Items: The 2000 second quarter and six months include a loss resulting
from the economic hedge of the purchase price of Fleming prior to its
acquisition. The 1999 second quarter and six months included gains from sales
of nonstrategic assets and a special contribution to The Chase Manhattan
Foundation. (Page 11)
Stress Testing: A risk management tool used to measure market risk in an
extreme market environment. (Page 35)
Value-at-Risk ("VAR"): A risk measurement tool used to measure the potential
overnight loss from adverse market movements. (Pages 34-36)
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<PAGE> 44
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
The following updates the legal proceedings discussion in Chase's
1999 Annual Report on page 8.
In June 1999, Sumitomo Corporation filed a lawsuit against The
Chase Manhattan Bank ("Bank") in the United States District Court
for the Southern District of New York. The complaint alleges that
during the period from 1994 to 1996, the Bank assisted a Sumitomo
employee in making copper trades by funding unauthorized loans to
the Sumitomo employee. The complaint alleges that the Bank knew
the employee did not have authority to enter into the transactions
on behalf of Sumitomo. The complaint asserts claims under the
Racketeer Influenced and Corrupt Practices Act ("RICO") and New
York common law and alleges damages of $532 million (subject to
trebling under RICO), plus punitive damages.
Chase Securities Inc. ("CSI") has been named as a defendant or
third-party defendant in twelve actions that were filed in either
the United States District Court for the Northern District of
Oklahoma or in Oklahoma state court beginning in October 1999
arising out of the failure of Commercial Financial Service, Inc.
("CFS"). Plaintiffs in these actions are institutional investors
who purchased over $1.6 billion in original face amount of
asset-backed securities issued by CFS. The securities were backed
by delinquent credit card receivables. In addition to CSI, the
defendants in various of the actions are the founders and key
executives of CFS, as well as its auditors, its outside counsel
and the rating agencies that rated the securities. CSI is alleged
to have been the investment banker to CFS and to have acted as an
initial purchaser and as placement agent in connection with the
issuance of certain of the securities. Plaintiffs allege that
defendants either knew or were reckless in not knowing that the
securities were sold to plaintiffs on the basis of misleading
misrepresentations and omissions of material facts. The complaints
against CSI assert claims under the Securities Exchange Act of
1934, the Oklahoma Securities Act, and under common law theories
of fraud and negligent misrepresentation. In the actions against
CSI, damages in the amount of approximately $1.2 billion allegedly
suffered as a result of defendants' misrepresentations and
omissions, plus punitive damages, are being claimed.
In addition to the matters described above, Chase and its
subsidiaries have been named from time to time as defendants in
various legal actions and proceedings arising in connection with
their respective businesses and have been involved from time to
time in investigations and proceedings by governmental agencies.
In view of the inherent difficulty of predicting the outcome of
such matters, Chase cannot state what the eventual outcome of
pending matters will be. Chase is contesting the allegation made
in each pending matter and believes, based on current knowledge
and after consultation with counsel, that the outcome of such
matters will not have a material adverse effect on the
consolidated financial condition of Chase, but may be material to
Chase's operating results for any particular period, depending on
the level of Chase's income for such period.
Item 2 Sales of Unregistered Common Stock
During the second quarter of 2000, shares of common stock of Chase
were issued in transactions exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) thereof. Shares of
common stock were issued to retired directors who had deferred
receipt of such common stock pursuant to the Deferred Compensation
Plan for Non-Employee Directors as follows: April 3, 2000 - 323
shares.
-44-
<PAGE> 45
PART II - OTHER INFORMATION continued
Item 4. Submission of Matters to a Vote of Security Holders
The following is a summary of matters submitted to vote at the
Annual Meeting of Stockholders of the Corporation. The Annual
Meeting of Stockholders was held on May 16, 2000. Shares below do
not give effect to the three-for-two stock split. A total of
698,761,993 shares, or 85.0% of the 821,907,970 shares entitled to
vote at the Annual Meeting, were represented at the meeting.
(A) Election of Directors
The following fourteen (14) directors were elected to hold office
until the 2001 Annual Meeting or until their successors are
elected and have qualified.
<TABLE>
<CAPTION>
Votes Received Votes Withheld
-------------- --------------
<S> <C> <C>
Hans W. Becherer 694,162,957 4,599,036
Frank A. Bennack Jr. 694,103,943 4,658,050
Susan V. Berresford 694,139,478 4,622,515
M. Anthony Burns 694,230,402 4,531,591
H. Laurance Fuller 694,217,831 4,544,162
Melvin R. Goodes 694,123,310 4,638,683
William H. Gray III 693,471,227 5,290,766
William B. Harrison Jr. 694,101,383 4,660,610
Harold S. Hook 694,019,991 4,742,002
Helene L. Kaplan 681,926,953 16,835,040
Henry B. Schacht 681,803,330 16,958,663
Andrew C. Sigler 693,710,730 5,051,263
John R. Stafford 692,104,812 6,657,181
Marina v.N. Whitman 694,051,085 4,710,908
</TABLE>
(B) (1) Ratifying Independent Accountants
A proposal to ratify PricewaterhouseCoopers LLP as
independent accountants was approved by 99.82% of the votes
cast. The proposal received a "for" vote of 694,755,346 and
an "against" vote of 1,273,716. The number of votes
abstaining was 2,732,931. There were no broker non-votes.
(2) Amendments to the Restated Certificate of Incorporation
A proposal to approve amendments to the Restated
Certificate of Incorporation to increase the number of
authorized shares of common stock and effect the 3-for-2
stock split was approved by 95.45% of the votes cast. The
proposal received a "for" vote of 664,708,615 and an
"against" vote of 31,663,168. The number of votes
abstaining was 2,390,210. There were no broker non-votes.
(3) Amendments to the 1996 Long-Term Incentive Plan
A proposal to approve amendments to the 1996 Long-Term
Incentive Plan was approved by 68.47% of the votes cast.
The proposal received a "for" vote of 409,781,256 and an
"against" vote of 188,682,359. The number of votes
abstaining was 5,070,992. There were 95,227,386 broker
non-votes.
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<PAGE> 46
PART II - OTHER INFORMATION continued
(4) Stockholder Proposal Re: Political Contributions
A proposal by Evelyn Y. Davis requiring that management
publish annual reports of political contributions made by
Chase was rejected by 96.32% of the votes cast. The vote
"for" was 20,924,284 and the vote "against" was
548,914,715. The number of votes abstaining was 33,577,165
and there were 95,345,829 broker non-votes.
(5) Stockholder Proposal Re: Loans to HIPC Countries
A proposal by the Sisters of Charity of St. Elizabeth and
other church groups that the Board of Directors develop a
policy for the cancellation of loans to Heavily Indebted
Poor Countries (HIPCs) was rejected by 97.96% of the votes
cast. The vote "for" was 11,473,256 and the vote "against"
was 550,515,104. The number of votes abstaining was
41,431,199 and there were 95,342,434 broker non-votes.
(6) Stockholder Proposal Re: Reports on Underwriting
Criteria
A proposal submitted by Trillium Asset Management, on
behalf of Greg and Maria-Jobin Leeds, that the Board of
Directors issue a report on underwriting criteria relating
to a transaction's impact on the environment, human rights
and risk to the company's reputation was rejected by 93.62%
of the votes cast. The vote "for" was 35,800,820 and the
vote "against" was 525,747,994. The number of votes
abstaining was 41,870,170 and there were 95,343,009 broker
non-votes.
(7) Stockholder Proposal Re: Director Nomination
Procedures
A proposal by Richard A. Dee requesting that the Board of
Directors adopt a policy requiring the Governance Committee
to nominate two candidates for each directorship to be
filled upon voting at the annual meetings was rejected by
96.78% of the votes cast. The vote "for" was 18,244,691 and
the vote "against" was 548,540,635. The number of votes
abstaining was 36,725,298 and there were 95,251,369 broker
non-votes.
(8) Stockholder Proposal Re: Confidential Voting
A proposal by Mark Seidenberg that the Board of Directors
take the necessary steps to ensure that all proxies,
ballots and voting tabulations be kept permanently
confidential was approved by 93.81% of the votes cast. The
vote "for" was 651,197,419 and the vote "against" was
42,966,235. The number of votes abstaining was 4,540,334
and there were 58,005 broker non-votes.
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<PAGE> 47
Item 6 Exhibits and Reports on Form 8-K
(A) Exhibits:
11 - Computation of earnings per common share
12(a) - Computation of ratio of earnings to fixed
charges
12(b) - Computation of ratio of earnings to fixed
charges and preferred stock dividend
requirements
(B) Reports on Form 8-K:
Chase filed five reports on Form 8-K during the quarter
ended June 30, 2000, as follows:
Form 8-K dated April 11, 2000: Chase announced an offer to
acquire Robert Fleming Holdings Limited for 2,573 million
pound sterling cash and $3,622 million in Chase common
stock.
Form 8-K dated April 19, 2000: Chase announced the results
of operations for the first quarter of 2000.
Form 8-K dated May 16, 2000: Chase announced that its
shareholders approved a three-for-two stock split and an
increase in authorized shares from 1.5 billion to 4.5
billion shares.
Form 8-K dated June 12, 2000: In connection with the
3-for-2 stock split approved by shareholders on May 16,
2000, Chase announced that the additional shares issued as
a result of the split were distributed on June 9, 2000, and
filed financial data restated for the 3-for-2 stock split.
Form 8-K dated June 19, 2000: Chase disclosed its
management's views on certain credit-related issues,
including net charge-offs and nonperforming assets.
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<PAGE> 48
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE CHASE MANHATTAN CORPORATION
--------------------------------------
(Registrant)
Date August 14, 2000 By /s/ Joseph L. Sclafani
--------------- ------------------------------------------
Joseph L. Sclafani
Executive Vice President and Controller
[Principal Accounting Officer]
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<PAGE> 49
APPENDIX 1
NARRATIVE DESCRIPTION OF GRAPHIC IMAGE MATERIAL
Pursuant to Item 304 of Regulation S-T, the following is a description of the
graphic image material included in the foregoing Management's Discussion and
Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
GRAPHIC
NUMBER PAGE DESCRIPTION
------ ---- -----------
<S> <C> <C>
1 35 Bar Graph entitled "Histogram of Daily Market Risk-Related Revenue for the twelve months
ended June 30, 2000" presenting the following information:
Millions of Dollars 0 - 5 5 - 10 10 - 15 15 - 20 20 - 25 25 - 30
------------------- ----- ------ ------- ------- ------- -------
Number of trading
days revenue was
within the above
prescribed positive
range 28 42 51 44 40 21
30 - 35 Over 35
------- -------
13 14
Millions of Dollars 0 - (5) (5) - (10) (10) - (15) (15) - (20) Over (20)
------------------- ------- --------- ---------- ---------- ----------
Number of trading
days revenue was
within the above
prescribed negative
range 7 1 1 0 0
</TABLE>
<PAGE> 50
INDEX TO EXHIBITS
SEQUENTIALLY NUMBERED
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBITS PAGE AT WHICH LOCATED
---------- -------- ---------------------
<S> <C> <C>
11 Computation of earnings 50
per common share
12(a) Computation of ratio of 51
earnings to fixed charges
12(b) Computation of ratio of 52
earnings to fixed charges
and preferred stock dividend
requirements
27 Financial Data Schedule 53
</TABLE>
-49-
