<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 SEPTEMBER 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 1,310,361,699
NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON
STOCK ON OCTOBER 31, 2000.
<PAGE> 2
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
----
<S> <C>
Item 1 Financial Statements - The Chase Manhattan Corporation:
Consolidated Balance Sheet at September 30, 2000 and
December 31, 1999 3
Consolidated Statement of Income for three months and nine
months ended September 30, 2000 and September 30, 1999 4
Consolidated Statement of Changes in Stockholders' Equity for
the nine months ended September 30, 2000 and September 30,
1999 5
Consolidated Statement of Cash Flows for the nine months
ended September 30, 2000 and September 30, 1999 6
Notes to Consolidated Financial Statements 7-11
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 12-44
Glossary of Terms 45
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 46
Item 2 Sales of Unregistered Common Stock 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>
SEPTEMBER 30, December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 19,403 $ 16,229
Deposits with Banks 3,513 28,076
Federal Funds Sold and Securities Purchased under Resale Agreements 27,175 23,823
Trading Assets: Debt and Equity Instruments 36,113 30,191
Risk Management Instruments 31,479 33,078
Securities:
Available-for-Sale 65,600 60,625
Held-to-Maturity (Market Value: $625 in 2000 and $876 in 1999 632 888
Loans (Net of Allowance for Loan Losses of $3,491 in 2000
and $3,457 in 1999) 187,767 172,702
Premises and Equipment 4,777 4,439
Due from Customers on Acceptances 491 622
Accrued Interest Receivable 2,806 2,505
Other Assets 46,060 32,927
--------- ---------
TOTAL ASSETS $ 425,816 $ 406,105
========= =========
LIABILITIES
Deposits:
Domestic: Noninterest-Bearing $ 47,067 $ 49,468
Interest-Bearing 81,003 80,132
Foreign: Noninterest-Bearing 6,054 6,061
Interest-Bearing 95,477 106,084
--------- ---------
Total Deposits 229,601 241,745
Federal Funds Purchased and Securities Sold under
Repurchase Agreements 61,943 50,148
Commercial Paper 7,338 8,509
Other Borrowed Funds 7,252 5,145
Acceptances Outstanding 491 622
Trading Liabilities 40,688 38,573
Accounts Payable, Accrued Expenses and Other Liabilities, Including
the Allowance for Credit Losses of $170 in 2000 and $170 in 1999 21,567 17,056
Long-Term Debt 24,157 17,602
Guaranteed Preferred Beneficial Interests in Corporation's
Junior Subordinated Deferrable Interest Debentures 2,789 2,538
--------- ---------
TOTAL LIABILITIES 395,826 381,938
--------- ---------
COMMITMENTS AND CONTINGENCIES (See Note 13)
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 Shares in 1999) 1,323 882
Capital Surplus 9,300 9,714
Retained Earnings 19,626 17,547
Accumulated Other Comprehensive Loss (1,005) (1,454)
Treasury Stock, at Cost (12,774,915 Shares in 2000
and 82,055,832 Shares in 1999) (632) (4,000)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 29,440 23,617
--------- ---------
TOTAL LIABILITIES, PREFERRED STOCK OF SUBSIDIARY
AND STOCKHOLDERS' EQUITY $ 425,816 $ 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>
THIRD QUARTER NINE MONTHS
------------- -----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 3,997 $ 3,288 $11,108 $ 9,662
Securities 994 762 2,879 2,344
Trading Assets 530 399 1,425 1,228
Federal Funds Sold and Securities Purchased
under Resale Agreements 452 352 1,349 1,122
Deposits with Banks 96 195 331 540
------- ------- ------- -------
Total Interest Income 6,069 4,996 17,092 14,896
------- ------- ------- -------
INTEREST EXPENSE
Deposits 2,251 1,650 6,302 4,806
Short-Term and Other Borrowings 1,333 870 3,678 2,635
Long-Term Debt 492 306 1,243 936
------- ------- ------- -------
Total Interest Expense 4,076 2,826 11,223 8,377
------- ------- ------- -------
NET INTEREST INCOME 1,993 2,170 5,869 6,519
Provision for Loan Losses 305 398 979 1,167
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,688 1,772 4,890 5,352
------- ------- ------- -------
NONINTEREST REVENUE
Investment Banking Fees 613 486 1,900 1,388
Trust, Custody and Investment Management Fees 664 457 1,718 1,332
Credit Card Revenue 471 441 1,311 1,258
Fees for Other Financial Services 775 637 2,201 1,777
Trading Revenue 603 462 2,448 1,606
Securities Gains (Losses) 96 (1) 167 160
Private Equity Gains (Losses) (25) 377 773 1,215
Other Revenue 210 162 354 696
------- ------- ------- -------
Total Noninterest Revenue 3,407 3,021 10,872 9,432
------- ------- ------- -------
NONINTEREST EXPENSE
Salaries 1,761 1,417 5,128 4,217
Employee Benefits 256 238 795 731
Occupancy Expense 247 218 689 642
Equipment Expense 297 255 856 737
Restructuring Costs 79 -- 129 --
Other Expense 1,095 853 3,035 2,667
------- ------- ------- -------
Total Noninterest Expense 3,735 2,981 10,632 8,994
------- ------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE 1,360 1,812 5,130 5,790
Income Tax Expense 476 625 1,795 2,037
------- ------- ------- -------
NET INCOME $ 884 $ 1,187 $ 3,335 $ 3,753
======= ======= ======= =======
NET INCOME APPLICABLE TO COMMON STOCK $ 871 $ 1,168 $ 3,289 $ 3,698
======= ======= ======= =======
NET INCOME PER COMMON SHARE
Basic $ 0.69 $ 0.95 $ 2.66 $ 2.96
======= ======= ======= =======
Diluted $ 0.66 $ 0.92 $ 2.57 $ 2.86
======= ======= ======= =======
</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
NINE MONTHS ENDED SEPTEMBER 30,
(IN MILLIONS)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
PREFERRED STOCK
Balance at Beginning of Year $ 928 $ 1,028
Redemption of Stock (100) (100)
-------- --------
Balance at End of Period 828 928
-------- --------
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) --
Issuance of Common Stock for (Purchase Accounting) Acquisitions (a) 136 --
Shares Issued and Commitments to Issue Common Stock
for Employee Stock-Based Awards and Related Tax Effects (109) (201)
-------- --------
Balance at End of Period 9,300 9,635
-------- --------
RETAINED EARNINGS
Balance at Beginning of Year 17,547 13,544
Net Income 3,335 3,753
Cash Dividends Declared: Preferred Stock (46) (55)
Common Stock (1,210) (1,032)
-------- --------
Balance at End of Period 19,626 16,210
-------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at Beginning of Year (1,454) 392
Other Comprehensive Income (Loss) 449 (1,430)
-------- --------
Balance at End of Period (1,005) (1,038)
-------- --------
TREASURY STOCK, AT COST
Balance at Beginning of Year (4,000) (1,844)
Purchase of Treasury Stock (1,072) (4,172)
Reissuance of Treasury Stock 1,025 1,740
Reissuance of Treasury Stock for (Purchase Accounting) Acquisitions (a) 3,415 --
-------- --------
Balance at End of Period (632) (4,276)
-------- --------
TOTAL STOCKHOLDERS' EQUITY $ 29,440 $ 22,341
======== ========
COMPREHENSIVE INCOME
Net Income $ 3,335 $ 3,753
Other Comprehensive Income (Loss) 449 (1,430)
-------- --------
Comprehensive Income $ 3,784 $ 2,323
======== ========
</TABLE>
(a) In the 2000 third quarter, Chase acquired Robert Fleming Holdings Limited
and The Beacon Group, LLC. These transactions were accounted for under the
purchase method.
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
NINE MONTHS ENDED SEPTEMBER 30,
(IN MILLIONS)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 3,335 $ 3,753
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Provision for Loan Losses 979 1,167
Restructuring Costs 129 --
Depreciation and Amortization 1,220 1,028
Net Change in:
Trading-Related Assets (4,223) 1,519
Accrued Interest Receivable (301) 49
Private Equity Investments (1,625) (1,847)
Other Assets (10,330) (3,023)
Trading-Related Liabilities 2,115 (1,338)
Accrued Interest Payable 35 (1,848)
Other Liabilities 5,003 1,139
Other, Net (90) (50)
-------- --------
Net Cash Provided (Used) by Operating Activities (3,753) 549
-------- --------
INVESTING ACTIVITIES
Net Change in:
Deposits with Banks 24,563 1,356
Federal Funds Sold and Securities Purchased under Resale Agreements 4,171 (11,233)
Loans Due to Sales and Securitizations 19,551 35,621
Other Loans, Net (35,629) (37,638)
Other, Net 426 (592)
Proceeds from the Maturity of Held-to-Maturity Securities 372 712
Purchases of Held-to-Maturity Securities (67) --
Proceeds from the Maturity of Available-for-Sale Securities 5,883 7,119
Proceeds from the Sale of Available-for-Sale Securities 52,452 74,575
Purchases of Available-for-Sale Securities (63,679) (75,313)
Proceeds from Sales of Nonstrategic Assets -- 182
Cash Used in Acquisitions (3,062) (1,252)
-------- --------
Net Cash Provided (Used) by Investing Activities 4,981 (6,463)
-------- --------
FINANCING ACTIVITIES
Net Change in:
Noninterest-Bearing Domestic Demand Deposits (2,401) 2,181
Domestic Time and Savings Deposits 871 (6,893)
Foreign Deposits (10,614) 11,898
Federal Funds Purchased and Securities Sold under Repurchase Agreements 4,272 3,599
Other Borrowed Funds 936 (1,985)
Other, Net (109) (478)
Proceeds from the Issuance of Long-Term Debt and Capital Securities 8,460 3,430
Maturity and Redemption of Long-Term Debt (1,676) (2,640)
Proceeds from the Issuance of Stock 4,467 1,539
Redemption of Preferred Stock (100) (100)
Treasury Stock Purchased (1,072) (4,172)
Cash Dividends Paid (1,177) (1,048)
-------- --------
Net Cash Provided by Financing Activities 1,857 5,331
-------- --------
Effect of Exchange Rate Changes on Cash and Due from Banks 89 5
-------- --------
Net Increase (Decrease) in Cash and Due from Banks 3,174 (578)
Cash and Due from Banks at January 1, 16,229 17,068
-------- --------
Cash and Due from Banks at September 30, $ 19,403 $ 16,490
======== ========
Cash Interest Paid $ 11,258 $ 10,225
======== ========
Income Taxes Paid $ 1,862 $ 459
======== ========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
-6-
<PAGE> 7
Part I
Item 1 (continued)
See Glossary of Terms on page 45 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 - AGREEMENT TO MERGE WITH J.P. MORGAN & CO. INCORPORATED
On September 13, 2000, Chase and J.P. Morgan & Co. Incorporated ("J.P. Morgan")
agreed to merge. The merger agreement between Chase and J.P. Morgan, which has
been approved by the boards of directors of both companies, provides that 3.7
shares of Chase common stock will be exchanged for each share of J.P. Morgan
common stock. Each series of preferred stock of J.P. Morgan will be exchanged
for a similar series of preferred stock of Chase, the surviving corporation of
the merger. The transaction is expected to be accounted for as a pooling of
interests and to be tax free to J.P. Morgan and Chase stockholders and is
subject to approval by stockholders of both companies as well as by the U.S.
Federal and state and foreign regulatory authorities. The merger is expected to
be consummated by the first quarter of 2001 but Chase is preparing to close by
year-end if it has received the required stockholder and regulatory approvals to
do so.
Reference is made to the Registration Statement on Form S-4 which Chase filed
with the Securities and Exchange Commission on October 5, 2000, as amended on
November 13, 2000, for more information concerning the merger.
NOTE 3 - 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 4 - GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S JUNIOR
SUBORDINATED DEFERRABLE INTEREST DEBENTURES
For a discussion of these business trusts, see page 69 of Chase's 1999 Annual
Report. At September 30, 2000, eight separate wholly-owned Delaware statutory
business trusts established by Chase had issued an aggregate $2,789 million in
capital securities, net of discount. During the 2000 third quarter, Chase
Capital VIII Trust issued $250 million of capital securities having a stated
maturity of July 15, 2030 and bearing an interest rate of 8.25%, payable
quarterly commencing on October 31, 2000. There were no other issuances or
redemptions of capital securities during 2000.
-7-
<PAGE> 8
Part I
Item 1 (continued)
NOTE 5 - 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
nine months of 2000.
<TABLE>
<CAPTION>
(in millions) Costs Applied against
Restructuring Liability the Liability in the First RESTRUCTURING LIABILITY
at December 31, 1999 Nine Months of 2000 AT SEPTEMBER 30, 2000
-------------------- ------------------- ---------------------
<S> <C> <C> <C>
Severance Costs $125 $ 54 $ 71
Disposition of Premises/Equipment 50 14 36
---- ---- ----
Total $175 $ 68 $107
==== ==== ====
</TABLE>
In addition to the above restructuring charge, Chase incurred $79 million of
restructuring costs during the 2000 third quarter relating to relocation
initiatives ($54 million) and other business initiatives ($25 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 6 - 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.
Nine months ended September 30,
(in millions)
<TABLE>
<CAPTION>
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 4 445 449 -- (1,430) (1,430)
------- ------- ------- ------- ------- -------
Ending Balance $ 21 $(1,026)(a) $(1,005) $ 17 $(1,055)(a) $(1,038)
======= ======= ======= ======= ======= =======
</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 7 - 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>
SEPTEMBER 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 $420,869 $422,606 $ 1,737 $387,414 $389,469 $ 2,055
Total Financial Liabilities $394,969 $394,855 114 $381,078 $380,599 479
Estimated Fair Value in Excess -------- --------
of Carrying Value $ 1,851 $ 2,534
======== ========
</TABLE>
Derivative contracts used in connection with Chase's asset/liability ("A/L")
activities had an unrecognized net loss of $743 million and $877 million at
September 30, 2000 and December 31, 1999, respectively, both of which are
included in the table above.
-8-
<PAGE> 9
Part I
Item 1 (continued)
NOTE 8 - 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 securities sold in the third quarter of 2000
amounted to $96 million (gross gains of $120 million and gross losses of $24
million) and for the first nine months of 2000 amounted to $167 million (gross
gains of $259 million and gross losses of $92 million). Net gains (losses) for
the same periods of 1999 amounted to $(1) million (gross gains of $88 million
and gross losses of $89 million) and $160 million (gross gains of $372 million
and gross losses of $212 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>
(in millions) SEPTEMBER 30, 2000 December 31, 1999
------------------ -----------------
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 $30,661 $29,467 $27,938 $26,326
CMOs and U.S. Treasuries 24,849 24,057 23,652 22,684
Debt Securities Issued by Foreign Governments 9,025 8,937 9,469 9,364
Corporate Debt Securities and Equity Securities 1,970 2,227 1,162 1,334
Other, Primarily Asset-Backed Securities (b) 879 912 899 917
------- ------- ------- -------
Total Available-for-Sale Securities $67,384 $65,600 $63,120 $60,625
======= ======= ======= =======
HELD-TO-MATURITY SECURITIES (c) $ 632 $ 625 $ 888 $ 876
======= ======= ======= =======
</TABLE>
(a) Gross unrealized gains and losses on available-for-sale securities were $435
million and $2,219 million, respectively, at September 30, 2000 and $231
million and $2,726 million, respectively, at December 31, 1999. Gross
unrealized losses on held-to-maturity securities were $7 million at
September 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.
NOTE 9 - DERIVATIVE AND FOREIGN EXCHANGE CONTRACTS
Chase utilizes derivative and foreign exchange ("FX") financial instruments for
both trading and A/L activities. For a discussion of these financial instruments
and the credit and market risks involved, see 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
SEPTEMBER 30, December 31, SEPTEMBER 30, December 31,
(in billions) 2000 1999 2000 1999
------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Rate Contracts $12,469.7 $11,126.9 $ 9.8 $ 10.3
Foreign Exchange Contracts 1,751.9 1,652.1 12.4 15.8
Debt, Equity, Commodity and Other Contracts 221.1 157.6 9.7 7.4
--------- ---------
Total Credit Exposure Recorded on the Balance Sheet $ 31.9 $ 33.5
========= =========
</TABLE>
(a) The notional amounts of exchange-traded interest rate contracts, foreign
exchange contracts, and debt, equity, commodity and other contracts were
$984.0 billion, $0.7 billion and $24.3 billion, respectively, at September
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 I
Item 1 (continued)
NOTE 10 - SEGMENT INFORMATION
Chase is organized into five major businesses: Investment Bank, Chase Capital
Partners ("CCP"), Global Services, Wealth Management and National Consumer
Services ("NCS"). Prior periods have been restated to reflect changes to the
management organization or refinements in management reporting policies. For
example, commencing with the second quarter of 2000, results for CCP were
disclosed separately from the remainder of the Global Bank, and the private
equity business of Chase H&Q was moved to CCP from Global Investment Banking.
Additionally, beginning with the third quarter of 2000, the remainder of the
Global Bank has been reorganized into the Investment Bank (Global Markets,
Investment Banking and Corporate Lending) and Wealth Management (Global Private
Bank and Asset Management).
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 currently 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
INVESTMENT CAPITAL GLOBAL WEALTH CONSUMER RECONCILING
BANK PARTNERS SERVICES MANAGEMENT SERVICES ITEMS (a) TOTAL
---- -------- -------- ---------- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
THIRD QUARTER 2000
Operating Revenue (b) $ 1,870 $ (88) $ 875 $ 470 $ 2,587 $ (124) $ 5,590
Intersegment Revenue (b) (34) (2) 36 11 5 (16) --
Operating Earnings 349 (112) 167 53 455 (7) 905
Cash Operating Earnings (c) 384 (106) 183 95 492 6 1,054
Average Managed Assets 230,598 12,377 16,230 21,845 148,165 3,638 432,853
SVA 46 (320) 93 (23) 227 158 181
THIRD QUARTER 1999
Operating Revenue (b) $ 1,619 $ 319 $ 800 $ 267 $ 2,514 $ (90) $ 5,429
Intersegment Revenue (b) (61) 39 30 8 5 (21) --
Operating Earnings 409 176 133 44 399 26 1,187
Cash Operating Earnings (c) 420 176 148 44 435 34 1,257
Average Managed Assets 209,771 8,566 16,442 13,398 131,046 2,871 382,094
SVA 139 32 51 15 175 127 539
</TABLE>
<TABLE>
<CAPTION>
(in millions) CHASE NATIONAL CORPORATE
INVESTMENT CAPITAL GLOBAL WEALTH CONSUMER RECONCILING
BANK PARTNERS SERVICES MANAGEMENT SERVICES ITEMS (a) TOTAL
---- -------- -------- ---------- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
NINE MONTHS 2000
Operating Revenue (b) $ 5,989 $ 611 $ 2,604 $ 1,168 $ 7,487 $ (291) $ 17,568
Intersegment Revenue (b) (185) 36 135 27 15 (28) --
Operating Earnings 1,464 254 447 180 1,176 (41) 3,480
Cash Operating Earnings (c) 1,531 265 495 225 1,287 (5) 3,798
Average Managed Assets 225,976 11,862 15,912 17,465 144,650 3,532 419,397
SVA 628 (354) 227 44 487 392 1,424
NINE MONTHS 1999
Operating Revenue (b) $ 5,240 $ 1,128 $ 2,300 $ 767 $ 7,383 $ (280) $ 16,538
Intersegment Revenue (b) (147) 85 70 16 8 (32) --
Operating Earnings 1,506 646 347 113 1,125 (26) 3,711
Cash Operating Earnings (c) 1,539 646 393 114 1,245 (7) 3,930
Average Managed Assets 210,223 7,838 16,633 12,814 128,681 5,715 381,904
SVA 681 258 104 30 482 181 1,736
</TABLE>
(a) Corporate/Reconciling Items include Support Units, Corporate and the net
effect of management accounting policies.
(b) 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.
(c) Cash Operating Earnings exclude the impact of credit card securitizations,
restructuring costs, special items, and amortization of goodwill and
certain other intangibles.
-10-
<PAGE> 11
Part I
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>
THIRD QUARTER NINE MONTHS
------------- -----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
SEGMENTS' Cash Operating Earnings $ 1,048 $ 1,223 $ 3,803 $ 3,937
Corporate/Reconciling Items 6 34 (5) (7)
------- ------- ------- -------
CONSOLIDATED CASH OPERATING EARNINGS 1,054 1,257 3,798 3,930
Amortization of Goodwill and Certain Intangibles (149) (70) (318) (219)
------- ------- ------- -------
CONSOLIDATED OPERATING EARNINGS 905 1,187 3,480 3,711
Special Items and Restructuring Costs (21) -- (145) 42
------- ------- ------- -------
CONSOLIDATED NET INCOME $ 884 $ 1,187 $ 3,335 $ 3,753
======= ======= ======= =======
</TABLE>
NOTE 11 - 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 September 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>
SEPTEMBER 30, 2000 The Chase
(in millions, except ratios) Chase (a) Manhattan Bank (e) Chase USA
--------- ------------------ ---------
<S> <C> <C> <C> <C>
Tier 1 Capital (d) $ 25,490 $ 21,208 $ 2,793
Total Capital 37,243 29,112 3,942
Risk-Weighted Assets (b) 321,863 260,813 32,831
Adjusted Average Assets 406,501 329,276 32,210
Tier 1 Capital Ratio (b)(d) 7.92% 8.13% 8.51%
Total Capital Ratio (b)(d) 11.57% 11.16% 12.01%
Tier 1 Leverage Ratio (c)(d) 6.27% 6.44% 8.67%
</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 $94,279 million, $89,088 million and $2,109 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 for the first nine months of 2000 were $0.96 per share
($0.32 per share in the 2000 third quarter) compared with $0.81 per share for
the first nine months of 1999 ($0.27 per share in 1999 third quarter).
NOTE 12 - EARNINGS PER SHARE
For a discussion of Chase's current earnings per share ("EPS") policy, see Note
10 of the 1999 Annual Report. For the calculation of basic and diluted EPS for
the third quarter and nine months ended September 30, 2000 and 1999, see Exhibit
11 on page 50.
NOTE 13 - 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
OVERVIEW
<TABLE>
<CAPTION>
THIRD QUARTER FOR NINE MONTHS ENDED SEPTEMBER 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 $ 5,590 $ 5,429 3% $17,568 $16,538 6%
Earnings 905 1,187 (24) 3,480 3,711 (6)
Diluted Earnings per Share 0.68 0.92 (26) 2.68 2.83 (5)
Overhead Ratio 65% 55% 1,000 bp 60% 54% 600 bp
Cash Earnings $ 1,054 $ 1,257 (16)% $ 3,798 $ 3,930 (3)%
Cash Diluted Earnings per Share 0.79 0.97 (19) 2.93 3.00 (2)
Shareholder Value Added 181 539 (66) 1,424 1,736 (18)
Cash Return on Average
Common Equity 16% 23% (700) bp 21% 24% (300) bp
Cash Overhead Ratio 63 53 1,000 58 52 600
OPERATING BASIS
(EXCLUDING CHASE CAPITAL PARTNERS)
Earnings $ 1,017 $ 1,011 1% $ 3,226 $ 3,066 5%
Diluted Earnings per Share 0.77 0.78 (1) 2.49 2.34 6
Cash Earnings 1,160 1,081 7 3,533 3,285 8
Diluted Cash Earnings per Share 0.88 0.84 5 2.73 2.51 9
REPORTED BASIS
Revenue $ 5,400 $ 5,191 4% $16,741 $15,951 5%
Net Income 884 1,187 (26) 3,335 3,753 (11)
Diluted Earnings per Share 0.66 0.92 (28) 2.57 2.86 (10)
Return on Average Common Equity 13% 22% (900) bp 18% 23% (500) bp
Tier 1 Capital 7.9 8.2 (30)
Total Capital 11.6 11.8 (20)
Tier 1 Leverage 6.3 6.7 (40)
</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 45.
bp - Denotes basis points; 100 bp equals 1%.
Financial Results: Chase's diluted operating earnings for the third quarter of
2000 were $0.68 per share, a decline of 26% from $0.92 per share for the same
period in 1999. For the first nine months of 2000, diluted operating earnings
per share decreased 5% to $2.68, when compared with $2.83 for the first nine
months of 1999. Operating earnings in the 2000 third quarter were $905 million,
compared with $1.19 billion in the same quarter of 1999. For the first nine
months of 2000, operating earnings were $3.48 billion, compared with $3.71
billion for the first nine months of 1999.
On a reported basis, which includes special items, diluted net income per share
was $0.66 and $2.57 for the third quarter and first nine months of 2000,
respectively, compared with $0.92 and $2.86 for the third quarter and first nine
months of 1999, respectively. Reported net income in the 2000 third quarter was
$884 million, compared with $1.19 billion in the 1999 third quarter; net income
was $3.34 billion and $3.75 billion for the first nine months of 2000 and 1999,
respectively.
Earnings for the third quarter of 2000 were lower than last year's third quarter
results, primarily because of lower income in Chase Capital Partners and to a
lesser extent in the Investment Bank. A summary of Chase's business results
follows:
- In CHASE CAPITAL PARTNERS, unrealized write-downs, primarily due to
price declines in publicly-held securities, more than offset record
realized (cash) gains of $538 million on sales of investments.
-12-
<PAGE> 13
Part I
Item 2 (continued)
- In the INVESTMENT BANK, trading revenues and corporate finance fees were
up from the third quarter of 1999 but down from the second quarter of
2000, due to lower market volatility and trading volumes and a slowdown
in leveraged finance. The cash expense growth rate of 47%, from the 1999
third quarter, was high because of the buildup of the investment banking
platform, including the expense impact of recent acquisitions.
- Chase's GLOBAL SERVICES, NATIONAL CONSUMER SERVICES and WEALTH
MANAGEMENT businesses each achieved record results, underscoring the
value of a diverse business mix.
Chase's lower third quarter results were not, however, related to credit or
market risk management issues. Credit costs decreased by 15% and 11% for the
third quarter and first nine months of 2000, respectively, when compared with
the comparable periods of 1999. Nonperforming assets at September 30, 2000 were
$1.82 billion, compared with $1.90 billion at June 30, 2000 and $2.02 billion at
September 30, 1999. On a managed basis, including securitizations, credit costs
were $541 million in the third quarter of 2000, a decline from $574 million in
the second quarter of 2000 and from $636 million in the third quarter of 1999.
In relation to market risk, Chase did not experience any days in the third
quarter of 2000 in which it suffered a trading loss.
Management is taking initiatives to position Chase for higher growth in the
future, particularly in the Investment Bank. As a result, operating expenses
increased 23% and 18% for the third quarter and first nine months of 2000,
respectively, when compared with the comparable periods of 1999. However,
Chase's management is committed to return to more disciplined investment
spending, particularly in the Investment Bank.
During the third quarter, Chase announced it had agreed to sell its Hong Kong
based retail banking business and its 50% interest in ChaseMellon Shareholder
Services. These divestitures continue Chase's long-term initiative of
disciplined divestitures of non-strategic businesses.
Merger Update: On September 13, 2000, The Chase Manhattan Corporation and J.P.
Morgan & Co. Incorporated agreed to merge. The merged firm will be named J.P.
Morgan Chase & Co. The merger is expected to be consummated by the first quarter
of 2001, although Chase and J.P. Morgan are prepared to close by year-end 2000
if they both receive the required stockholder and regulatory approvals to do so.
Since the merger was announced, integration efforts have been proceeding
swiftly:
- Over 35 senior positions were named upon the announcement of the merger;
an additional 250 key positions have been subsequently announced.
- All major U.S. and foreign regulatory and antitrust applications have
been filed; the joint proxy statement was filed with the Securities and
Exchange Commission ("SEC") on October 5. On November 3, 2000, the
United States Department of Justice ("DOJ") and the United States
Federal Trade Commission informed Chase they had granted early
termination of the waiting period under the Hart-Scott-Rodino Act and
the DOJ also informed Chase it had closed and concluded its review of
the proposed merger of Chase and J.P. Morgan.
- Clients are reacting favorably to the proposed merger by inviting Chase
and J.P. Morgan to make joint pitches for business; the two firms have
won a number of joint investment banking mandates as a result.
- The framework for managing the integration is in place, with established
uniform tracking tools designed to measure synergies and the tracking of
systems and real estate inventories fully under way.
- Management of Chase believes the amounts of the proposed cost saves and
synergies originally projected to be realized in connection with the
merger ($1.9 billion) are conservative. Based upon merger integration
efforts to date, Chase's management currently believes those initial
estimates are conservative but has not arrived at or announced revised
estimates. It is anticipated that the merger will result in pre-tax
costs of approximately $2.8 billion ($1.8 billion after-tax). The
anticipated restructuring costs are expected to reflect severance
expenses incurred in connection with anticipated staff reductions, costs
incurred in connection with planned office eliminations and other
merger-related expenses, including costs to eliminate redundant back
office and other operations of Chase and J.P. Morgan.
This Management's Discussion and Analysis contains statements that are
forward-looking within the meaning of the Private Securities Litigation Reform
Act of 1995. Such statements are based upon the current beliefs and
-13-
<PAGE> 14
Part I
Item 2 (continued)
expectations of Chase's management and are subject to significant risks and
uncertainties. Actual results may differ from those set forth in the
forward-looking statements. Factors that could cause Chase's results to differ
materially from those described in the forward-looking statements can be found
in the 1999 Annual Report on Form 10-K of Chase and in the registration
statement on Form S-4 filed by Chase on October 5, 2000, as amended on November
13, 2000, with the SEC.
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.
(in millions, except per share data)
<TABLE>
<CAPTION>
THIRD QUARTER 2000 Third Quarter 1999
-------------------------------------------- --------------------------------------------
REPORTED CREDIT SPECIAL OPERATING Reported Credit Special Operating
RESULTS CARD ITEMS BASIS Results Card Items Basis
(a) (b) (c) (a) (b) (c)
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Market-Sensitive $ 1,364 $ -- $ -- $ 1,364 $ 1,541 $ -- $ -- $ 1,541
Less Market-Sensitive 4,036 236 (46) 4,226 3,650 238 -- 3,888
------- ------- ------- ------- ------- ------- ------- -------
Total Revenue 5,400 236 (46) 5,590 5,191 238 -- 5,429
Noninterest Expense 3,656 -- -- 3,656 2,981 -- -- 2,981
------- ------- ------- ------- ------- ------- ------- -------
Operating Margin 1,744 236 (46) 1,934 2,210 238 -- 2,448
Credit Costs 305 236 -- 541 398 238 -- 636
------- ------- ------- ------- ------- ------- ------- -------
Income before
Restructuring Costs 1,439 -- (46) 1,393 1,812 -- -- 1,812
Restructuring Costs 79 -- (79) -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Income before Taxes 1,360 -- 33 1,393 1,812 -- -- 1,812
Tax Expense 476 -- 12 488 625 -- -- 625
------- ------- ------- ------- ------- ------- ------- -------
Net Income $ 884 $ -- $ 21 $ 905 $ 1,187 $ -- $ -- $ 1,187
======= ======= ======= ======= ======= ======= ======= =======
NET INCOME PER COMMON SHARE
Basic $ 0.69 $ 0.70 $ 0.95 $ 0.95
Diluted $ 0.66 $ 0.68 $ 0.92 $ 0.92
----------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS 2000 Nine Months 1999
-------------------------------------------- --------------------------------------------
Revenue:
Market-Sensitive $ 5,406 $ -- $ -- $ 5,406 $ 5,012 $ -- $ -- $ 5,012
Less Market-Sensitive 11,335 732 95 12,162 10,939 753 (166) 11,526
------- ------- ------- ------- ------- ------- ------- -------
Total Revenue 16,741 732 95 17,568 15,951 753 (166) 16,538
Noninterest Expense 10,503 -- -- 10,503 8,994 -- (100) 8,894
------- ------- ------- ------- ------- ------- ------- -------
Operating Margin 6,238 732 95 7,065 6,957 753 (66) 7,644
Credit Costs 979 732 -- 1,711 1,167 753 -- 1,920
------- ------- ------- ------- ------- ------- ------- -------
Income before
Restructuring Costs 5,259 -- 95 5,354 5,790 -- (66) 5,724
Restructuring Costs 129 -- (129) -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Income before Taxes 5,130 -- 224 5,354 5,790 -- (66) 5,724
Tax Expense 1,795 -- 79 1,874 2,037 -- (24) 2,013
------- ------- ------- ------- ------- ------- ------- -------
Net Income $ 3,335 $ -- $ 145 $ 3,480 $ 3,753 $ -- $ (42) $ 3,711
======= ======= ======= ======= ======= ======= ======= =======
NET INCOME PER COMMON SHARE
Basic $ 2.66 $ 2.78 $ 2.96 $ 2.93
Diluted $ 2.57 $ 2.68 $ 2.86 $ 2.83
</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 45.
-14-
<PAGE> 15
Part I
Item 2 (continued)
MARKET-SENSITIVE REVENUES
Market-sensitive revenues primarily are derived from the business activities of
Chase's Investment Bank and Chase Capital Partners ("CCP") franchises. The
revenues from these businesses typically are more sensitive to global market
factors than those produced by the other Chase franchises. Factors that affect
market-sensitive revenues include movements in short-term interest rates, which
in turn affect the level of liquidity in the markets, the prices of tradable
securities and commodities, and the near-term profitability of companies.
In the third quarter of 2000, total market-sensitive revenues were 11% lower
than the same period last year. The decline primarily reflects unrealized
mark-to-market write-downs of certain publicly held equity investments at CCP.
For the nine months of 2000, market-sensitive revenues were 8% above the 1999
year-to-date level. Excluding the results of CCP, market-sensitive revenues
would have been up 22% for the first nine months of 2000, due to the continued
strength of investment banking and, to a lesser extent, trading-related revenue.
For a further discussion of Chase's market-sensitive revenues, see pages 21-23
of the 1999 Annual Report.
<TABLE>
<CAPTION>
(in millions) THIRD QUARTER NINE MONTHS
------------- -----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Investment Banking Fees $ 613 $ 486 $ 1,900 $ 1,388
Trading-Related Revenue 680 679 2,566 2,249
Securities Gains (Losses) 96 (1) 167 160
Private Equity Gains (Losses) (25) 377 773 1,215
------- ------- ------- -------
Total Market-Sensitive Revenue $ 1,364 $ 1,541 $ 5,406 $ 5,012
======= ======= ======= =======
</TABLE>
INVESTMENT BANKING FEES
Investment banking remained relatively strong, with fees in the third quarter
and nine months of 2000 increasing 26% and 37%, respectively, from their
comparable periods in 1999. These increases were driven by additions to Chase's
product platform (i.e., equity underwriting) and growth in existing products,
(i.e., merger and acquisition advisory). These were partially offset by reduced
industry-wide activities in high-yield securities and complex syndicated loans.
Recent acquisitions of investment banking firms are expected to position Chase
to better participate in the higher fee-generating activities (e.g., mergers and
acquisitions and equity underwriting) of investment banking. The Chase H&Q
acquisition improved Chase's product offerings to fast-growing New Economy
companies. Chase Flemings, with its broad network in Europe and Asia, is
expected to supplement Chase's investment banking practice in the United States.
Likewise, the acquisition of The Beacon Group, LLC increased opportunities for
merger and acquisition advisory deals.
-15-
<PAGE> 16
Part I
Item 2 (continued)
TRADING-RELATED REVENUE
Total trading revenues, including related net interest income, for the 2000
third quarter were flat, compared with the same period last year but rose 14% to
$2.57 billion for the first nine months of 2000, when compared with same 1999
period. The results reflected gains in most business products, in particular
equities and commodities, and foreign exchange.
<TABLE>
<CAPTION>
(in millions) THIRD QUARTER NINE MONTHS
------------- -----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Trading Revenue (a) $ 603 $ 462 $2,448 $1,606
Net Interest Income Impact (b) 77 217 118 643
------ ------ ------ ------
Total Trading-Related Revenue $ 680 $ 679 $2,566 $2,249
====== ====== ====== ======
Product Diversification:
Interest Rate Contracts (c) $ 117 $ 223 $ 654 $ 805
Foreign Exchange Revenue (d) 207 199 744 616
Equities and Commodities (e) 167 129 574 303
Debt Instruments and Other (f) 189 128 594 525
------ ------ ------ ------
Total Trading-Related Revenue $ 680 $ 679 $2,566 $2,249
====== ====== ====== ======
</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 48% and 19%,
respectively, in the third quarter and first nine months of 2000, when
compared with the prior year's respective periods as a result of the
gradual increase in domestic interest rates in 2000. The environment
reduced interest rate volatility, which is a key factor in determining
business volume for interest rate contracts.
- Foreign exchange revenue in the third quarter of 2000 increased slightly
and for the nine months increased by $128 million, due to substantial
fluctuations in foreign currency values in the first half of 2000 and
increased client activity.
- Equities and commodities revenue increased 29% in the 2000 third quarter
and 89% for the first nine months, in large part as a result of equity
trading at Chase H&Q and Chase Flemings.
- The debt instruments and other category recorded strong revenue for the
third quarter and nine months of 2000 primarily as a result of gains in
the U.S. fixed income market.
SECURITIES GAINS
Chase's investment securities primarily are 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 third quarter of 2000 were $96 million, compared with a loss of
$1 million in the same 1999 period. For the nine months of 2000, gains were $167
million, $7 million more than last year's year-to-date period.
-16-
<PAGE> 17
Part I
Item 2 (continued)
PRIVATE EQUITY GAINS
Private equity gains in the third quarter of 2000 were negative $25 million,
compared with gains of $377 million in the same 1999 quarter and $298 million in
the second quarter of 2000. Gains included cash realized from the sale of both
private and public securities that were held in the portfolio and the unrealized
change in the value of investments held in the portfolio, primarily publicly
traded securities. Realized (cash) gains on the sale of securities in the third
quarter of 2000 were $538 million, more than double the amount of cash gains
realized in the third quarter of 1999. These gains were more than offset by
declines in the carrying values of investments (primarily in telecommunications)
in the publicly held portion of the portfolio. Despite these declines, the
current carrying value of the investments in the publicly traded portfolio is
approximately 2.6 times their original cost.
<TABLE>
<CAPTION>
(in millions) THIRD QUARTER NINE MONTHS
------------- -----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
TOTAL INVESTMENTS
Realized Gains (Cash) $ 538 $ 250 $ 1,229 $ 883
Unrealized Gains (Losses) (563) 127 (456) 332
------- ------- ------- -------
Private Equity Gains (Losses) $ (25) $ 377 $ 773 $ 1,215
======= ======= ======= =======
</TABLE>
Approximately 80 percent of the carrying value of the Chase Capital Partners'
portfolio consist of privately-held securities, generally carried at cost,
which, in management's judgment, approximates fair value. The balance of the
portfolio, which is publicly-held, is marked-to-market at the quoted public
value, less liquidity discounts and price averaging methodologies in certain
circumstances to take into account the fact that CCP cannot immediately realize
the publicly-quoted values due to the regulatory, corporate and contractual
sales restrictions generally imposed on its holdings.
Chase believes that CCP's equity-related investments will continue to create
value for Chase, making substantial contributions to its earnings over time.
Since its inception in 1984, the compound annual cash return on CCP's
investments has been 43%. 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, at any given quarter. Chase has not and is not
considering exiting the business and does not intend to spin off CCP as a
separate entity. CCP is a business with a strong track record of providing
returns to shareholders over a long period of time, more than compensating for
any additional volatility it may contribute to Chase's earnings. The table below
shows the direct and fund investment components of Chase's portfolio, totaling
$10.5 billion at September 30, 2000.
CHASE CAPITAL PARTNERS INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
(in millions) SEPTEMBER 30, 2000 June 30, 2000
------------------ -------------
CARRYING Carrying
VALUE COST Value Cost
----- ---- ----- ----
<S> <C> <C> <C> <C>
Total Public Securities (191 companies) $ 2,103 $ 801 $ 2,778 $ 789
Total Private Direct Investments (822 companies) 5,957 5,879 5,764 5,736
Total Private Fund Investments (381 funds) 2,456 2,469 2,353 2,337
------- ------- ------- -------
Total Investment Portfolio $10,516 $ 9,149 $10,895 $ 8,862
======= ======= ======= =======
</TABLE>
CCP also manages $11.4 billion of leveraged loan/high-yield funds and
investments in other equity and asset funds, bringing total funds under
management to $21.9 billion.
The level of investment by CCP continues to grow. Direct equity investments were
$2.1 billion for the first nine months of 2000, compared with investments of
approximately $1.5 billion during the comparable 1999 period. The growth of
direct equity investments was attributable to new opportunities in several
industry groups.
The carrying values of investments recorded on Chase's financial statements are
net of interests of investors other than Chase. Certain of those investors are
management of Chase pursuant to co-investment limited partnerships.
Additionally, CCP is in the process of offering to unaffiliated third parties
approximately $1.5 billion in interests in CCP fund investments through separate
investment vehicles and CCP intends to offer approximately $5 billion in limited
partnership interests in a new investment fund that will co-invest with CCP in
its direct investments. The securities being offered by CCP will not be
registered under the Securities Act of 1933 pursuant to registration exemptions
therefrom. These offerings, as well as other offerings CCP may make in the
future, will have the effect of reducing Chase's proportional ownership share of
investments made and to be made by CCP. 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 National Consumer
Services, Global Services and Wealth Management franchises, as well as from
credit products and brokerage services provided to large corporate and
institutional clients. These revenues generally experience less market
volatility than those Investment Bank and CCP revenues, which are characterized
as market-sensitive.
Less market-sensitive revenues increased by 9% in the 2000 third quarter and by
6% in the first nine months of 2000, reflecting increases in trust, custody and
investment management fees and fees for other financial services. For a further
discussion of less market-sensitive revenues, see pages 24-26 of Chase's 1999
Annual Report.
<TABLE>
<CAPTION>
THIRD QUARTER NINE MONTHS
---------------------------------- -----------------------------------
(in millions) 2000 1999 Change 2000 1999 Change
---------- ---------- ------ ----------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Net Interest Income (excluding
Trading-Related Net Interest Income) $ 2,269 $ 2,285 (1)% $ 6,781 $ 6,876 (1)%
Less Market-Sensitive Fee Revenue:
Trust, Custody and Investment
Management Fees 664 457 45 1,718 1,332 29
Credit Card Revenue (a) 358 355 1 1,025 1,031 (1)
Fees for Other Financial Services 775 637 22 2,201 1,777 24
---------- -------- ----------- ----------
Total Less Market-Sensitive Fee Revenue 1,797 1,449 24 4,944 4,140 19
Other Revenue (a) 160 154 4 437 510 (14)
---------- -------- ----------- ----------
Total Less Market-Sensitive Revenue $ 4,226 $ 3,888 9% $ 12,162 $ 11,526 6%
========== ======== =========== ==========
</TABLE>
(a) Presented on an operating basis.
NET INTEREST INCOME
Less market-sensitive net interest income ("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>
THIRD QUARTER NINE MONTHS
------------------------------------ ----------------------------------
NET INTEREST INCOME
(in millions) 2000 1999 Change 2000 1999 Change
------------ ----------- ------ ------------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Reported NII $ 1,993 $ 2,170 (8)% $ 5,869 $ 6,519 (10)%
Add Impact of Credit Card Securitizations 353 332 1,030 1,000
Less Trading-Related NII (77) (217) (118) (643)
---------- ---------- ----------- --------
Operating NII $ 2,269 $ 2,285 (1)% $ 6,781 $ 6,876 (1)%
========== ========== =========== ========
AVERAGE INTEREST-EARNING ASSETS
(in billions)
Reported $ 322.0 $ 290.2 11% $ 313.0 $ 290.0 8%
Add Credit Card Securitizations 19.0 17.2 19.0 17.6
Less Trading-Related Assets (59.4) (53.4) (57.2) (51.3)
---------- --------- ----------- --------
Managed $ 281.6 $ 254.0 11% $ 274.8 $ 256.3 7%
========== ========= =========== ========
NET YIELD ON INTEREST-EARNING ASSETS (a)
Reported 2.47% 2.97% (50) bp 2.51% 3.01% (50) bp
Add Impact of Securitizations .28 .27 1 .27 .26 1
Impact of Trading-Related NII .47 .34 13 .53 .32 21
---------- --------- --------- --------
Managed 3.22% 3.58% (36) bp 3.31% 3.59% (28) 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 third quarter and the first nine months of 2000, reported NII declined
8% and 10%, respectively, when compared with each of the same periods in 1999.
Operating NII declined only slightly, 1%, 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). Reported and operating
NII in 2000 were favorably impacted by higher average interest-earning assets,
offset by spread compressions due to the rising interest rate environment and
competitive pricing (notably in credit cards). Also affecting both reported and
operating NII in the nine 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 11% and 7%, respectively, from
the 1999 third quarter and first nine months. Contributing to the increases in
both periods were higher amounts of liquid assets and commercial loans, due, in
part, to the acquisitions of Flemings and Chase H&Q. There also was an increase
in domestic consumer loans (notably in residential mortgages, reflecting growth
in higher-margin products such as home equity lending and new adjustable rate
mortgages, which are more frequently retained in the portfolio). Partially
offsetting these increases was a decline in the average emerging market
commercial loan portfolio, as Chase reduced this exposure throughout 1999.
The net yield on a managed basis decreased 36 basis points in the 2000 third
quarter and 28 basis points in the first nine months of 2000. The rising
interest rate environment which began in the second half of 1999 and competitive
pricing resulted in generally narrower spreads.
TRUST, CUSTODY AND INVESTMENT MANAGEMENT FEES
Trust, custody and investment management fees rose to a record level of $664
million in the third quarter of 2000, 22% above the 2000 second quarter (the
previous record high) and 45% above the prior year's quarter. The three
consecutive record quarters of 2000 have resulted in a 29% increase in fees from
the 1999 first nine months, resulting in record levels for these businesses.
These results were attributable to growth in the value of funds under investment
management and securities under custody, increase in flows of investments to
foreign markets (where the safekeeping of securities is most profitable), and
the impact of newly acquired businesses, notably Flemings.
<TABLE>
<CAPTION>
(in millions) THIRD QUARTER NINE MONTHS
-------------------------- ---------------------------
2000 1999 2000 1999
----------- --------- ---------- ---------
<S> <C> <C> <C> <C>
TRUST, CUSTODY AND INVESTMENT MANAGEMENT FEES
Institutional (a) $ 330 $ 275 $ 984 $ 805
Personal (b) 137 127 427 373
Mutual Funds (c) 109 39 189 111
Other Trust Fees 88 16 118 43
--------- ------- ---------- ---------
Total $ 664 $ 457 $ 1,718 $ 1,332
========= ======= ========== =========
</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>
(in billions) ASSETS UNDER ADMINISTRATION/CUSTODY ASSETS UNDER MANAGEMENT
----------------------------------- ----------------------------
September 30, 2000 1999 2000 1999
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Institutional $ 5,679 $ 4,904 $ 169 $ 105
Personal 114 107 62 49
Mutual Funds 53 45 101 57
---------- ---------- --------- ---------
Total $ 5,846 $ 5,056 $ 332 (a) $ 211
========== ========== ========= =========
</TABLE>
(a) Reflects approximately $88 billion in assets under management from Flemings.
-19-
<PAGE> 20
Part I
Item 2 (continued)
CREDIT CARD REVENUE
Credit card revenue includes 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 remained relatively stable from
both the third quarter and nine months of 1999 but was up $19 million from the
second quarter of 2000 as a result of the seasonal increase in fees during the
vacation and back-to-school periods. The declines in late fees in 2000, when
compared with their corresponding periods in 1999, reflect a reduction in
customer delinquencies as demonstrated by a more than 50 bp improvement in the
managed net charge-off ratios for both periods. These were 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>
(in millions) THIRD QUARTER NINE MONTHS
------------------------- ----------------------------
2000 1999 2000 1999
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Reported Credit Card Revenue $ 471 $ 441 $ 1,311 $ 1,258
Less Impact of Credit Card Securitizations (113) (86) (286) (227)
--------- ------- --------- ---------
Operating Credit Card Revenue $ 358 $ 355 $ 1,025 $ 1,031
========= ======= ========= =========
</TABLE>
FEES FOR OTHER FINANCIAL SERVICES
Fees for other financial services in the third quarter of 2000 increased 22%,
when compared with the same period in the prior year. In the first nine months
of 2000, the fees grew by 24% relative to 1999. The table below provides the
significant components of fees for other financial services.
<TABLE>
<CAPTION>
(in millions) THIRD QUARTER NINE MONTHS
---------------------- -----------------------
2000 1999 2000 1999
--------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Brokerage and Investment Services $ 150 $ 43 $ 333 $ 136
Mortgage Servicing Fees 140 96 421 238
Service Charges on Deposit Accounts 103 104 305 289
Fees in Lieu of Compensating Balances 81 106 256 287
Insurance Fees 58 44 154 124
Commissions on Letters of Credit and Acceptances 51 69 179 207
Loan Commitment Fees 36 44 108 111
Other Fees 156 131 445 385
--------- ------- ---------- ---------
Total $ 775 $ 637 $ 2,201 $ 1,777
========= ======= ========== =========
</TABLE>
BROKERAGE AND INVESTMENT SERVICES rose 249% from the 1999 third quarter and 145%
from the nine months of 1999. The increases were mainly due to the acquisitions
of Flemings in August 2000 and H&Q in December 1999, significantly
increasing the volume of Chase's brokerage activities and investment service
fees associated with the sale of mutual funds to clients. In addition, both the
daily trading volume and the number of new customers at Brown & Co. increased.
Trading volume at Brown & Co. in the third quarter of 2000 was up to 41,000
trades per day, compared with 32,000 trades per day in the same quarter of 1999.
MORTGAGE SERVICING FEES in the 2000 third quarter and nine months increased by
46% and 77%, respectively, from the same periods in 1999. The increases were due
to a larger average servicing portfolio, resulting from the Mellon Bank
Corporation mortgage business acquisition, and a lower amortization rate on
mortgage servicing rights. Mortgage interest rates were higher in 2000,
reducing the prepayment rates on mortgage loans, which, in turn, lowered the
amortization expense (contra revenue) linked to the mortgage servicing rights.
The average servicing portfolio increased 28% from last year's third quarter as
a result of continued strong replenishment through originations and
acquisitions, and a lower level of loan prepayments in the core portfolio.
-20-
<PAGE> 21
Part I
Item 2 (continued)
FEES IN LIEU OF COMPENSATING BALANCES decreased 24% from the 1999 third quarter
and 11% from the first nine months of 1999, partly attributable to a greater
number of customers who maintain the required deposit account balances to
compensate for utilization of certain bank services.
INSURANCE FEES include fees from credit-related products (such as insuring the
payment of credit card, mortgage 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). Insurance
fees in 2000 were 32% higher than the 1999 third quarter and 24% higher than the
1999 first nine months, primarily due to new business related to life, health
and mortgage insurance, plus the inclusion of Chase Flemings.
OTHER FEES in 2000 increased 19% from the 1999 third quarter and 16% from the
nine months 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>
(in millions) THIRD QUARTER NINE MONTHS
------------- -----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Residential Mortgage Origination/Sales Activities $ 50 $ 95 $ 135 $ 275
All Other Revenue 110 59 302 235
---- ---- ---- ----
Operating Other Revenue 160 154 437 510
Loss on Economic Hedge of the Flemings Purchase Price (35) -- (176) --
Gains on Sales of Nonstrategic Assets 81 -- 81 166
Other Revenue - Credit Card Securitizations 4 8 12 20
---- ---- ---- ----
Reported Other Revenue $ 210 $ 162 $ 354 $ 696
===== ===== ===== =====
</TABLE>
RESIDENTIAL MORTGAGE ACTIVITIES (which include origination and sales of loans
and selective dispositions of mortgage servicing rights) in both the third
quarter and first nine months of 2000 declined 47% and 51%, respectively,
reflecting lower origination and loan sale volume as well as gains from sales
of mortgage servicing rights in the 1999 third quarter.
ALL OTHER REVENUE was 86% higher in the third quarter of this year, compared
with the same period in 1999 and 29% higher than the first nine months of 1999,
reflecting an increase in revenues from auto operating leases (due to lease
volume increases in 2000), higher joint venture equity income and general asset
sales. These were partly offset by a gain in the 1999 third quarter on the sale
of upstate New York branches.
Special items not included in operating results for the 2000 third quarter and
nine month periods include losses of $35 million and $176 million, respectively,
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 was reflected as a reduction in the purchase price and
corresponding goodwill). Results for the 2000 third quarter and nine months
reflect a gain of $81 million on the sale of the Panama branch while items for
the nine months in 1999 included $166 million of gains on 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 23% in the third quarter of 2000
and 18% in the nine months of 2000, when compared with the same periods in 1999.
These increases reflected higher investments in resources to build up the
platform of the Investment Bank, including through the acquisitions of Flemings
and Beacon in the third quarter of 2000 and H&Q in late 1999.
Reported noninterest expense for 2000 included $129 million ($79 million in the
2000 third quarter) of nonaccruable restructuring costs associated with
previously announced relocation programs. Reported noninterest expense for 1999
included a special contribution to The Chase Manhattan Foundation.
<TABLE>
<CAPTION>
(in millions, except ratios) THIRD QUARTER NINE MONTHS
------------- -----------
2000 1999 2000 1999
---- ---- ---- ----
-------
<S> <C> <C> <C> <C>
Salaries $ 1,761 $ 1,417 $ 5,128 $ 4,217
Employee Benefits 256 238 795 731
Occupancy Expense 247 218 689 642
Equipment Expense 297 255 856 737
Other Expense 1,095 853 3,035 2,567
------- ------- ------- -------
Operating Noninterest Expense 3,656 2,981 10,503 8,894
------- ------- ------- -------
Restructuring Costs 79 -- 129 --
Special Contribution to the Foundation -- -- -- 100
------- ------- ------- -------
Reported Noninterest Expense $ 3,735 $ 2,981 $10,632 $ 8,994
======= ======= ======= =======
Operating Overhead Ratio (a) 65% 55% 60% 54%
Cash Operating Overhead Ratio (a) (b) 63% 53% 58% 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 third quarter and nine
months of 1999 were due to a more competitive recruiting environment for talent
as well as higher incentives, partly driven by growth in investment banking
revenue and retention bonus accruals for key personnel of the recently acquired
firms. The higher headcount as shown below reflects the additions from Chase
Flemings (more than 7,000) and Chase H&Q (approximately 1,000).
<TABLE>
<CAPTION>
FULL-TIME EQUIVALENT EMPLOYEES SEPTEMBER 30, September 30,
------------- -------------
2000 1999
<S> <C> <C>
Domestic Offices 62,310 61,665
Foreign Offices 19,430 11,353
------ ------
Total Full-Time Equivalent Employees 81,740 73,018
====== ======
</TABLE>
OCCUPANCY AND EQUIPMENT EXPENSE
Occupancy expense increased over both 1999 periods, primarily due to the
additional leasing costs of office spaces occupied by Chase Flemings and Chase
H&Q. Equipment expense also rose in both periods of 2000 as a result of higher
depreciation expense related to the capitalization of more advanced hardware
systems and software applications as well as higher software investments to
support the ongoing internet projects throughout the various business franchises
of Chase. Also contributing to the increase were the additional expenses at
Chase Flemings and Chase H&Q.
OTHER EXPENSE
Operating other expense (excluding the special contribution to The Chase
Manhattan Foundation) rose 28% from the third quarter of 1999 and 18% from the
nine months of 1999. The following table presents the components of other
expense.
-22-
<PAGE> 23
Part I
Item 2 (continued)
<TABLE>
<CAPTION>
(in millions) THIRD QUARTER NINE MONTHS
------------- -----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Professional Services $ 212 $ 170 $ 569 $ 510
Marketing Expense 146 128 367 356
Telecommunications 112 96 316 284
Amortization of Intangibles 149 70 318 219
Travel and Entertainment 86 54 229 163
Minority Interest (a) 12 12 42 37
Foreclosed Property Expense 1 6 (2) 14
All Other 377 317 1,196 984
------- ------- ------- -------
Total Operating Other Expense $ 1,095 $ 853 $ 3,035 $ 2,567
======= ======= ======= =======
</TABLE>
(a) Includes REIT minority interest expense of $11 million in each quarter and
$33 million in each nine months.
The increases in PROFESSIONAL SERVICES for the third quarter and nine months of
2000 were attributable to the additions from the recently acquired firms as well
as expenditures for the Chase.com initiatives and projects to improve the
process of safekeeping securities. The spending on the above-mentioned projects
was partly offset by reduced expenditures related to completed Y2K efforts.
MARKETING EXPENSE increased in both periods of 2000 mainly as a result of Chase
Flemings and higher expenses for the credit card campaigns. TELECOMMUNICATIONS
rose due to higher market data usage stemming from growth in business volume at
Chase's Investment Bank and the additions from the recent acquisitions.
AMORTIZATION OF INTANGIBLES was higher in connection with the acquisitions of
Flemings, Beacon and Chase H&Q. TRAVEL AND ENTERTAINMENT increased as a result
of a rise in business-related air travel at the Investment Bank as well as the
additions from Chase Flemings and Chase H&Q. ALL OTHER expense rose due to
higher employee-related expenses across the corporation and the impact of Chase
Flemings and Chase H&Q.
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, for example 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 5 of this Form 10-Q.
Chase is continuing to focus on its future expense management. Further business
realignments and relocation initiatives will be announced in conjunction with
the J.P. Morgan merger integration.
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>
(in millions) THIRD QUARTER NINE MONTHS
------------- -----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Provision for Loan Losses $ 305 $ 398 $ 979 $1,167
Credit Costs Associated with Credit Card Securitizations 236 238 732 753
------ ------ ------ ------
Operating Credit Costs $ 541 $ 636 $1,711 $1,920
====== ====== ====== ======
</TABLE>
Credit costs in the third quarter and nine months of 2000 decreased $95 million
and $209 million, respectively, from the 1999 levels, primarily due to the
impact of lower credit losses in the consumer portfolio, mainly credit cards,
and the foreign commercial portfolio. See page 33 for the discussion of the
allowance for credit losses.
INCOME TAXES
Chase recognized income tax expense of $476 million in the third quarter of
2000, compared with $625 million in the third quarter of 1999. For the first
nine months of 2000, Chase recorded income tax expense of $1.8 billion, compared
with $2.0 billion for the nine months of 1999. The effective tax rates were
35.0% in both the 2000 third quarter and first nine months, compared with 34.5%
in the 1999 third quarter and 35.2% for the 1999 nine months.
-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 five major business franchises. Prior periods have been restated to
reflect changes to the management organization or refinements in management
reporting policies. For example, commencing with the second quarter of 2000,
results for Chase Capital Partners were disclosed separately from the remainder
of the Global Bank, and the private equity business of Chase H&Q was moved to
CCP from Global Investment Banking. Additionally, beginning with the third
quarter of 2000, the remainder of the Global Bank has been reorganized into the
Investment Bank (Global Markets, Investment Banking and Corporate Lending) and
Wealth Management (Global Private Bank and Asset Management).
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>
INVESTMENT BANK CHASE CAPITAL PARTNERS GLOBAL SERVICES
------------------------------- ------------------------------ --------------------------
THIRD QUARTER 2000 Over/(Under) 1999 2000 Over/(Under) 1999 2000 Over/(Under) 1999
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(in millions,
except ratios)
Operating Revenue $ 1,870 $ 251 16% $ (88) $ (407) NM $ 875 $ 75 9%
Operating Earnings 349 (60) (15) (112) (288) NM 167 34 26
Cash Operating
Earnings (b) 384 (36) (9) (106) (282) NM 183 35 24
Average Common Equity 10,204 1,840 22 6,472 2,177 51% 2,706 (199) (7)
Average Managed Assets 230,598 20,827 10 12,377 3,811 44 16,230 (212) (1)
Shareholder Value Added 46 (93) (67) (320) (352) NM 93 42 82
Cash Return on
Common Equity 14.8% (480) bp NM NM 26.7% 680 bp
Cash Overhead Ratio 67 1,400 NM NM 67 (400)
</TABLE>
<TABLE>
<CAPTION>
WEALTH MANAGEMENT NATIONAL CONSUMER SERVICES TOTAL (a)
------------------------------ ------------------------------- ---------------------------
2000 Over/(Under) 1999 2000 Over/(Under) 1999 2000 Over/(Under) 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Revenue $ 470 $ 203 76% $ 2,587 $ 73 3% $ 5,590 $ 161 3%
Operating Earnings 53 9 20 455 56 14 905 (282) (24)
Cash Operating
Earnings (b) 95 51 116 492 57 13 1,054 (203) (16)
Average Common Equity 3,582 2,720 316 8,033 298 4 26,290 4,962 23
Average Managed Assets 21,845 8,447 63 148,165 17,119 13 432,853 50,759 13
Shareholder Value Added (23) (38) NM 227 52 30 181 (358) (66)
Cash Return on
Common Equity 10.4% (950)bp 24.2% 220bp 15.8% (720)bp
Cash Overhead Ratio 72 -- 50 (100) 63 1,000
</TABLE>
<TABLE>
<CAPTION>
INVESTMENT BANK CHASE CAPITAL PARTNERS GLOBAL SERVICES
------------------------------- ------------------------------ --------------------------
NINE MONTHS 2000 Over/(Under) 1999 2000 Over/(Under) 1999 2000 Over/(Under) 1999
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(in millions,
except ratios)
Operating Revenue $ 5,989 $ 749 14% $ 611 $ (517) (46) $ 2,604 $ 304 13%
Operating Earnings 1,464 (42) (3) 254 (392) (61) 447 100 29
Cash Operating
Earnings (b) 1,531 (8) (1) 265 (381) (59) 495 102 26
Average Common Equity 9,127 517 6 6,261 2,373 61 2,703 (197) (7)
Average Managed Assets 225,976 15,753 7 11,862 4,024 51 15,912 (721) (4)
Shareholder Value Added 628 (53) (8) (354) (612) NM 227 123 118
Cash Return on
Common Equity 22.2% (140) bp 5.4% (1,650)bp 24.2% 640bp
Cash Overhead Ratio 58 1,000 34 2,300 70 (300)
</TABLE>
<TABLE>
<CAPTION>
WEALTH MANAGEMENT NATIONAL CONSUMER SERVICES TOTAL (a)
------------------------------ ------------------------------- ---------------------------
2000 Over/(Under) 1999 2000 Over/(Under) 1999 2000 Over/(Under) 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Revenue $ 1,168 $ 401 52% $ 7,487 $ 104 1% $17,568 $ 1,030 6%
Operating Earnings 180 67 59 1,176 51 5 3,480 (231) (6)
Cash Operating
Earnings (b) 225 111 97 1,287 42 3 3,798 (132) (3)
Average Common Equity 1,834 986 116 8,084 427 6 23,913 1,916 9
Average Managed Assets 17,465 4,651 36 144,650 15,969 12 419,397 37,493 10
Shareholder Value Added 44 14 47 487 5 1 1,424 (312) (18)
Cash Return on
Common Equity 16.2% (150)bp 21.0% (40)bp 21.0% (260)bp
Cash Overhead Ratio 70 (400) 52 200 58 600
</TABLE>
(a) Total column includes Support Units, Corporate and the net effect of
management accounting policies.
(b) Cash Operating Earnings represent operating earnings excluding the
amortization of goodwill and certain other intangibles.
bp - Denotes basis points; 100 bp equals 1%.
NM - Not meaningful.
-24-
<PAGE> 25
Part I
Item 2 (continued)
INVESTMENT BANK
Investment Bank combines the strengths of a leading commercial bank and a
leading investment bank to meet the needs of corporations, institutional
investors, financial institutions and governments around the world. The
Investment 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 50 countries, the Investment Bank serves an
extensive array of clients, from large corporations with long-standing
investment relationships to a growing franchise of clients in the fastest
growing sectors of the New Economy.
In the Investment Bank, cash expense growth for the 2000 third quarter exceeded
operating revenue growth, resulting in a decline in cash operating earnings of
9%, when compared with the third quarter of 1999. Cash expenses of $1.26 billion
in the third quarter of 2000 were up 47% from the 1999 third quarter and
increased from $1.06 billion in the second quarter of 2000. The increases were
driven by acquisitions and spending to build up the investment banking platform.
Management is committed to achieving a better balance of expense-to-revenue
growth in the Investment Bank. Shareholder Value Added declined 67% from the
third quarter of 1999, reflecting both the decrease in cash operating earnings
and the higher capital allocated to the Investment Bank to support acquisitions
(Flemings, Beacon and H&Q). For the first nine months of 2000, operating
revenues increased 14%, while cash expense growth was 36%, resulting in a
decline in cash operating earnings of 1%. Shareholder Value Added for the first
nine months of 2000 declined 8% reflecting the higher capital allocation. For a
further discussion of the Investment Bank's products, see the Revenue section
beginning on page 15.
The following table sets forth certain key financial performance measures of the
businesses within the Investment Bank.
<TABLE>
<CAPTION>
(in millions, except ratios)
THIRD 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 $ 880 $ 170 73% (4)% (35)% 1,700 bp
Global Investment Banking 623 74 80 54 (15) 1,600
Corporate Lending and
Portfolio Management 389 143 26 1 4 (200)
Other Investment Bank (22) (3) NM NM NM NM
------- -------
Total $ 1,870 $ 384 67% 16% (9)% 1,400 bp
======= =======
NINE MONTHS
Global Markets $ 3,100 $ 880 57% (3)% (17)% 900 bp
Global Investment Banking 1,938 317 72 75 55 400
Corporate Lending and
Portfolio Management 1,115 397 28 (2) (1) 100
Other Investment Bank (164) (63) NM NM NM NM
------- -------
Total $ 5,989 $ 1,531 58% 14% (1)% 1,000 bp
======= =======
</TABLE>
bp - Denotes basis points; 100 bp equals 1%.
NM - Not meaningful.
For a discussion of the profiles for each business within the Investment Bank,
see page 31 of Chase's 1999 Annual Report. The following discussion focuses on
the financial highlights of each business for the third quarter and first nine
months of 2000.
-25-
<PAGE> 26
Part I
Item 2 (continued)
GLOBAL MARKETS
Operating revenues for Global Markets remained strong during 2000, although
slightly lower than in the third quarter and the first nine months of 1999.
Total trading revenues, including related net interest income, were $680 million
in the third quarter of 2000, compared with $679 million in the third quarter of
1999. Gains in debt, equity and foreign exchange trading were offset by a
decline in interest rate derivatives, due to slower trading activity and an
overall decline in market volatility, which adversely affected the flows and
spreads of that business. Total trading revenues rose 14% to $2.6 billion for
the first nine months of 2000, driven by foreign exchange and equity and
commodities trading. Cash operating earnings decreased 35% in the 2000 third
quarter and declined 17% for the first nine months of 2000, due to higher
incentives and increased investment in the Global Markets business.
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 $125
million for the third quarter 2000 and $651 million for the nine months of 2000,
compared with $(13) million and $227 million, respectively, for the same periods
in 1999.
GLOBAL INVESTMENT BANK
Revenues for the Global Investment Bank increased 54% from the 1999 third
quarter. However, as a result of significantly higher cash expenses, cash
operating earnings declined 15% in the 2000 third quarter, when compared with
the 1999 third quarter. As a result of the strong results of the first half of
2000, revenues and cash operating earnings rose 75% and 55%, respectively, in
the first nine months of 2000 when compared with the first nine months of 1999.
The revenue increases were driven by record merger and acquisition advisory fees
and equity underwriting fees. They were partially offset by lower loan
syndication and high yield securities underwriting fees resulting from a
slowdown in the leveraged finance markets. Cash operating earnings were
adversely affected in each period of 2000 by higher expenses driven by
acquisitions and spending to build up the investment banking platform.
CORPORATE LENDING AND PORTFOLIO MANAGEMENT
Corporate Lending and Portfolio Management revenues and cash operating earnings
each remained relatively stable in the third quarter and nine months of 2000,
when compared with the same periods in 1999. The effect of lower average loan
levels (due to loan sales and securitizations) were offset by higher
lending-related fees.
CHASE CAPITAL PARTNERS
Chase Capital Partners is one of the world's largest and most diversified
private equity investment firms with approximately $10.5 billion in direct and
fund investments. In addition, CCP manages approximately $11.4 billion of
leveraged loan/high-yield funds and investments in other equity and asset funds,
bringing total funds under management to approximately $21.9 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>
Third Quarter $ (88) $ (106) NM NM NM NM
Nine Months 611 265 34% (46)% (59)% 2,300 bp
</TABLE>
bp - Denotes basis points; 100 bp equals 1%.
NM - Not meaningful.
Operating revenues, cash operating earnings and SVA each were in a negative
position in the 2000 third quarter, primarily a result of unrealized write-downs
of the carrying values of publicly-held securities in the portfolio (primarily
telecommunication securities). Publicly-held securities comprise approximately
20% of the total portfolio at September 30, 2000. Revenues and cash operating
earnings declined 46% and 59%, respectively, in the first nine months of 2000,
principally due to the market declines during the 2000 third quarter, partially
offset by cash gains from the sales of securities. For a further discussion of
CCP's revenues and investment portfolio, see page 17.
-26-
<PAGE> 27
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>
Third quarter $ 875 $ 183 67% 9% 24% (400) bp
Nine months 2,604 495 70 13 26 (300)
</TABLE>
bp - Denotes basis points; 100 bp equals 1%.
In the third quarter of 2000, Global Services' operating revenues increased 9%
over the prior-year quarter to $875 million, reflecting increased activity in
its securities businesses. Cash operating earnings for Global Services for the
third quarter of 2000 increased 24%, when compared with the 1999 third quarter.
Shareholder Value Added increased to $93 million, an 82% increase over the prior
year quarter. For the nine months of 2000, operating revenues, cash operating
earnings and Shareholder Value Added increased 13%, 26% and 118%, respectively.
- Global Investor Services, Chase's custody business, experienced a
14% and 20% rise in operating revenues in the third quarter and
first nine months of 2000, respectively, when compared with the same
periods a year ago. These increases reflect net asset growth and
higher transaction volume. During the 2000 third quarter, total
assets under custody grew 16%, while the higher margin cross-border
assets under custody increased 20%, when compared with the 1999
third quarter.
- Operating revenues at Capital Markets Fiduciary Services, Chase's
institutional trust business, increased 20% from both the 1999 third
quarter and 1999 first nine months results, reflecting continued
growth through expansion into new markets and growth in structured
and collateral management products, particularly in Texas and the
U.K.
- Operating revenues at Chase Treasury Solutions, Chase's cash
management and payments business, increased 2% in the 2000 third
quarter and increased 4% in the first nine months of 2000, when
compared with the prior-year periods, reflecting higher revenues from
all products, rising interest rates, and increased balances
maintained by customers, partially offset by the repositioning of the
trade finance business. Operating leverage continues to improve
through aggressive expense control, contributing to a significant
improvement in SVA.
Management anticipates that Global Services will realize double-digit income
growth over the remainder of the year, as a result of improved efficiencies and
growth in market share in a consolidating industry.
WEALTH MANAGEMENT
Chase's Wealth Management businesses include private banking and asset
management. Operating revenues and cash operating earnings were up 76% and 116%,
respectively, from the 1999 third quarter, and increased 52% and 97%,
respectively, from the first nine months of 1999. Flemings results are included
for two months, contributing to the revenue increases; however, expenses will
also be higher this year and next year as a result of the amortization of the
cost of retention bonuses entered into in connection with the Flemings
acquisition. SVA was negative in the 2000 third quarter, reflecting the higher
capital allocation for Flemings.
<TABLE>
<CAPTION>
WEALTH MANAGEMENT 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>
Third quarter $ 470 $ 95 72% 76% 116% -- bp
Nine months 1,168 225 70 52 97 (400)
</TABLE>
bp - Denotes basis points; 100 bp equals 1%.
- Revenues from the Global Private Bank increased to $305 million, up
36% from the third quarter of 1999. These results reflect broad-based
global growth. Cash operating earnings grew 16%, compared with the
prior-year quarter. As of September 30, 2000, the Global Private Bank
had more than $180 billion in client assets (of which approximately
$62 billion were assets under management).
-27-
<PAGE> 28
Part I
Item 2 (continued)
- Revenues from Asset Management increased to $165 million, compared
with $43 million in the third quarter of 1999. These results include
revenues from Flemings. As of September 30, 2000, assets under
management were $182 billion.
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
internet banking, branch and ATM networks, telephone and direct mail.
Operating revenues for National Consumer Services increased to $2.6 billion, an
increase of 3% over the third quarter of 1999. Cash operating earnings of $492
million increased by 13% for the third quarter of 2000. All five businesses
within NCS reported double-digit cash operating earnings growth.
NCS' operating revenues for the first nine months of 2000 were relatively flat,
when compared with the nine months of 1999; cash operating earnings were 3%
higher than the same period in 1999, reflecting the benefits of expense
management and good credit quality. 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.
The following table sets forth certain key financial performance measures of the
businesses within NCS.
<TABLE>
<CAPTION>
THIRD 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 $ 943 $ 141 36% -- 14% 200 bp
Regional Banking Group 771 139 64 7% 36 (600)
Chase Home Finance 354 94 56 13 21 --
Diversified Consumer Services 160 36 49 5 24 (700)
Middle Markets 274 70 52 4 13 (200)
Other NCS 85 12 NM NM NM NM
---------- --------
Total $ 2,587 $ 492 50% 3% 13% (100) bp
========== ========
</TABLE>
<TABLE>
<CAPTION>
NINE 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
-------- -------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Chase Cardmember Services $ 2,719 $ 348 35% (4)% 1% 200 bp
Regional Banking Group 2,277 390 65 8 29 (400)
Chase Home Finance 997 239 59 13 10 200
Diversified Consumer Services 404 53 62 (11) (44) 1,000
Middle Markets 811 196 53 6 15 (300)
Other NCS 279 61 NM NM NM NM
---------- ----------
Total $ 7,487 $ 1,287 52% 1% 3% 200 bp
========== ==========
</TABLE>
bp - Denotes basis points; 100 bp equals 1%.
NM - Not meaningful.
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 third
quarter and nine months financial highlights of each business.
-28-
<PAGE> 29
CHASE CARDMEMBER SERVICES
Cash operating earnings for Chase Cardmember Services for the third
quarter of 2000 were up 14%, when compared with the third quarter of 1999,
reflecting significantly improved credit quality. Operating revenues essentially
were flat from the prior year quarter as higher consumer purchase volume and
higher fee-based revenues offset the impact of higher interest rates and a lower
level of late fees. Expenses were up, reflecting the impact of higher marketing
spending. New account acquisitions were significantly higher in the third
quarter of 2000, and credit card outstandings were more than $1 billion higher
than in the second quarter of this year.
REGIONAL BANKING GROUP
Regional Banking Group revenues rose 7% from the third quarter of 1999, and cash
operating earnings grew by 36%, with similar increases in revenues and cash
operating earnings from the nine months of 1999. These increases reflected
higher deposit levels in consumer banking and the small business sector, the
benefit from higher interest rates, growth in fees (banking, debit card and
brokerage) and disciplined expense management.
CHASE HOME FINANCE
Chase Home Finance revenues increased 13% for both the third quarter and first
nine months of 2000. Cash operating earnings rose 21%, when compared with the
1999 third quarter and increased 10%, when compared with the first nine months
of 1999. Growth in servicing fee income for both 2000 periods and gains on
securities used to hedge mortgage servicing rights were partially offset by
declines in residential mortgage warehouse activity. Origination volume declined
in the first nine months 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 third quarter and first nine months of 2000
were $20.5 billion and $53.9 billion, respectively, and included originations
from the retail, wholesale and correspondent (traditional and negotiated)
channels.
DIVERSIFIED CONSUMER SERVICES
Diversified Consumer Services cash operating earnings were up 24%, and revenues
increased 5% from the same 1999 quarter. Income growth was positively affected
by a change in internal cost allocation as well as improving auto origination
volumes and growth in the discount brokerage business, and was negatively
affected by the impact of higher interest rates. 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 11% and 44%,
respectively, in the first nine months of 2000, when compared with the first
nine months of 1999. Revenues from the discount brokerage business rose to $171
million for the first nine months of 2000, a 42% increase, when compared with
the same period last year.
MIDDLE MARKETS
Middle Markets revenues were $274 million, an increase of 4% from the third
quarter of 1999, and were $811 million, an increase of 6% from the nine months
of 1999. Cash operating earnings increased 13% over the prior-year quarter and
15% over the prior-year first nine months. These results reflect disciplined
expense management, continued strength in new business and financing activities
during 2000, and higher deposit volumes and spreads.
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 third quarters of 2000
and 1999, Support Units and Corporate had cash operating earnings of $6 million
and $34 million, respectively. For the first nine months of 2000 and 1999, there
was a cash operating loss of $(5) million and $(7) 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
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) SEPTEMBER 30, Dec 31, SEPTEMBER 30, Dec 31, SEPTEMBER 30, Dec 31,
CONSUMER LOANS: 2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
Domestic Consumer:
<S> <C> <C> <C> <C> <C> <C>
1-4 Family Residential Mortgages $ 48,858 $ 44,262 $ 273 $ 286 $ 1 $ --
Credit Card - Reported 14,981 15,633 30(b) 40(b) 266 280
Credit Card Securitizations (a) 18,022 17,939 -- -- 329 348
-------- -------- -------- -------- ------- -------
Credit Card - Managed 33,003 33,572 30 40 595 628
Auto Financings 19,921 18,442 80 83 1 2
Other Consumer 6,931 6,902 4 7 56 65
-------- -------- -------- -------- ------- -------
Total Domestic Consumer 108,713 103,178 387 416 653 695
Foreign Consumer 2,551 2,800 9 22 8 15
-------- -------- -------- -------- ------- -------
TOTAL CONSUMER LOANS 111,264 105,978 396 438 661 710
-------- -------- -------- -------- ------- -------
COMMERCIAL LOANS:
Domestic Commercial:
Commercial and Industrial 49,248 48,097 571 380 41 23
Commercial Real Estate 3,151 3,636 64 51 -- 5
Financial Institutions 6,420 4,211 10 12 -- --
-------- -------- -------- -------- ------- -------
Total Domestic Commercial 58,819 55,944 645 443 41 28
Foreign Commercial:
Commercial and Industrial 30,930 25,179 586 642 1 4
Commercial Real Estate 94 125 -- -- -- --
Financial Institutions 5,691 3,598 20 96 -- 20
Foreign Governments 2,482 3,274 36 41 -- --
-------- -------- -------- -------- ------- -------
Total Foreign Commercial 39,197 32,176 642 779 1 24
-------- -------- -------- -------- ------- -------
TOTAL COMMERCIAL LOANS 98,016 88,120 1,287 1,222 42 52
Derivative and FX Contracts (c) 31,926 33,611 52 34 -- 1
-------- -------- -------- -------- ------- -------
TOTAL COMMERCIAL CREDIT-RELATED 129,942 121,731 1,339 1,256 42 53
-------- -------- -------- -------- ------- -------
TOTAL MANAGED CREDIT-RELATED $241,206 $227,709 $1,735 $1,694 $ 703 $ 763
======== ======== ======== ======== ======= =======
Assets Acquired as Loan Satisfactions 81 102
-------- --------
TOTAL NONPERFORMING ASSETS $1,816 $1,796
======== ========
</TABLE>
<TABLE>
<CAPTION>
NET CHARGE-OFFS
---------------
(in millions, except ratios) THIRD QUARTER NINE MONTHS
------------- -----------
CONSUMER LOANS: 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Domestic Consumer:
1-4 Family Residential Mortgages $ 7 $ 9 $ 26 $ 19
Credit Card - Reported 167 207 521 641
Credit Card Securitizations (a) 236 238 732 753
-------- -------- -------- --------
Credit Card - Managed 403 445 1,253 1,394
Auto Financings 20 19 63 57
Other Consumer 38 49 113 144
-------- -------- -------- --------
Total Domestic Consumer 468 522 1,455 1,614
Foreign Consumer 8 9 27 27
-------- -------- -------- --------
TOTAL CONSUMER LOANS 476 531 1,482 1,641
-------- -------- -------- --------
COMMERCIAL LOANS:
Domestic Commercial:
Commercial and Industrial 64 57 164 106
Commercial Real Estate (3) (2) (6) (13)
Financial Institutions 1 11 20 39
-------- -------- -------- --------
Total Domestic Commercial 62 66 178 132
Foreign Commercial:
Commercial and Industrial 4 29 52 139
Commercial Real Estate -- -- -- --
Financial Institutions -- 7 (1) 5
Foreign Governments (1) -- -- (1)
-------- -------- -------- --------
Total Foreign Commercial 3 36 51 143
-------- -------- -------- --------
TOTAL COMMERCIAL LOANS 65 102 229 275
-------- -------- -------- --------
TOTAL MANAGED LOANS $ 541 $ 633 $ 1,711 $ 1,916
======= ======= ======= =======
</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 $241 billion at September 30, 2000
increased 6%, compared with year-end 1999. Commercial loans rose $9.9 billion,
notably in the foreign commercial loan portfolio (primarily as a result of the
acquisition of Flemings). Consumer managed credit-related assets increased $5.3
billion, largely in the 1-4 family residential mortgage portfolio, while
derivative and foreign exchange instruments declined $1.7 billion. Chase's
credit-related portfolio is balanced between commercial and consumer assets,
with consumer assets comprising approximately 46% 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 September 30, 2000, up from 54% at December 31, 1999.
Management currently believes that Chase's nonperforming assets at December 31,
2000 will be approximately at the same level as December 31, 1999.
Net charge-offs in the managed portfolio were $541 million in the third quarter
of 2000, a decline of $92 million from the third quarter of 1999, reflecting
decreases in net charge-offs in the managed credit card portfolio. The Federal
Financial Institutions Examination Council ("FFIEC") has adopted a policy
statement on the classification of consumer loans. The revised policy
establishes uniform guidelines for the charge-off of consumer loans to
delinquent, bankrupt, deceased and fraudulent borrowers. Chase intends to
implement this policy during the fourth quarter of 2000; as a result, Chase
anticipates that there will be a temporary increase in its consumer net
charge-offs for the fourth quarter of 2000. Absent the effects of the adoption
of this policy, management expects that credit costs, on a managed basis, will
remain relatively stable over the remainder of 2000 and that total credit costs
for 2000 will be lower than in 1999. Over time, Chase expects annual commercial
net charge-offs to be in a range of 40-60 bp of loans. For full-year 2000,
management expects commercial net charge-offs will be near the lower end of that
range.
AVERAGE ANNUAL NET CHARGE-OFF RATES
<TABLE>
<CAPTION>
THIRD QUARTER NINE MONTHS
------------- -----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
CONSUMER LOANS
1-4 Family Residential Mortgages .06% .08% .07% .06%
Credit Card - Managed (a) 4.97 5.53 5.16 5.81
Auto Financings .41 .41 .44 .42
Other Consumer (b) 1.84 2.25 1.78 2.05
Total Consumer Loans 1.73 2.07 1.84 2.13
COMMERCIAL LOANS
Total Commercial Loans .27 .46 .33 .42
Total Managed Loans 1.05 1.33 1.14 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 $111 billion at
September 30, 2000, an increase of $5.3 billion since year-end. Consumer net
charge-offs, on a managed basis, were $476 million and $1,482 million for the
third quarter and first nine months of 2000, respectively, compared with $531
million and $1,641 million, respectively, 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 over the
remainder of the year, although there will be a temporary increase in consumer
net charge-offs for the fourth quarter of 2000 as a result of the adoption of
the FFIEC policy noted above.
RESIDENTIAL MORTGAGE LOANS: Residential mortgage loans were $48.9 billion at
September 30, 2000, a $4.6 billion increase from year-end balances, while the
level of nonperforming residential mortgage loans decreased 5%. The loss rates
of .06% for the third quarter of 2000 and .07% for the first nine months of 2000
reflect the continued strong credit quality of this portfolio. Residential
mortgage loans have increased since year-end due to a higher level of new
adjustable rate mortgages (which are more frequently retained in the portfolio),
representing a greater proportion of total new originations (as borrowers more
frequently select adjustable rate mortgages in an increasing interest rate
environment).
-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 $32.9 billion for the third quarter
of 2000 were relatively flat, when compared with the same period of 1999. During
the 2000 third quarter, net charge-offs as a percentage of average credit card
receivables decreased to 4.97%, compared with 5.53% in the prior-year period.
Loans over 90 days past due dropped to 1.80% of the portfolio at September 30,
2000, compared with 1.87% at December 31, 1999. Management anticipates that the
managed credit card net charge-off ratio for the full-year 2000 will be lower
than full-year 1999 notwithstanding the anticipated increase from adoption of
the FFIEC policy noted above.
AUTO FINANCINGS: Auto financings outstanding increased 8% at September 30, 2000,
when compared with year-end 1999. The charge-off rate of .41% for the 2000 third
quarter is indicative of this portfolio's selective approach to asset
origination. Total originations were $8.7 billion for the nine months of 2000,
compared with $9.2 billion for the same 1999 period.
OTHER CONSUMER LOANS: The level of other domestic consumer loans of $6.9 billion
at September 30, 2000 remained comparable with year-end levels. Net charge-offs
related to the portfolio decreased in both the third quarter and first nine
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 $9.9 billion since
year-end, primarily due to the acquisition of Flemings, which contributed
approximately $6.7 billion in commercial loans. Commercial net charge-offs in
the third quarter of 2000 were $65 million, compared with $102 million in the
third quarter of 1999. For the first nine months of 2000, commercial net
charge-offs were $229 million, compared with $275 million for the same 1999
period.
COMMERCIAL AND INDUSTRIAL: The domestic commercial and industrial portfolio
increased $1.2 billion from 1999 year-end, reflecting general business activity.
Net charge-offs in the 2000 third quarter amounted to $64 million, compared with
$57 million in the 1999 third quarter. Nonperforming domestic commercial and
industrial loans were $571 million, an increase of $191 million from the 1999
year-end as a result of loans with several borrowers in different industries
becoming nonperforming during the year. The foreign commercial and industrial
portfolio totaled $30.9 billion at September 30, 2000, an increase of 23% from
the 1999 year-end level, primarily as a result of the acquisition of Flemings.
Nonperforming foreign commercial and industrial loans were $586 million, a
decrease of $56 million from year-end 1999. Net charge-offs in the foreign
commercial and industrial loan portfolio for the third quarter of 2000 decreased
to $4 million, or by 86%, 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 $4.3 billion
during 2000, when compared with year-end, primarily in the domestic portion of
the portfolio. Nonperforming financial institution loans decreased 72% to $30
million, primarily due to one counterparty in the foreign portfolio returning to
performing status.
FOREIGN GOVERNMENTS: Foreign government loans were $2.5 billion at September 30,
2000, a $0.8 billion decrease from year-end levels. Nonperforming foreign
government loans decreased to $36 million, or by 12%, 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 September
30, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
AT SEPTEMBER 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 16% 86% 30% 32% 15% 90% 27% 34%
1 to 5 Years 46 12 67 41 46 8 69 38
Over 5 Years 38 2 3 27 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 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.
SELECTED COUNTRY EXPOSURE (a)
<TABLE>
<CAPTION>
AT SEPTEMBER 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) $ 6.0 $ 2.1 $ 1.6 $ 1.1 $ 8.6 $ 2.1 $ 8.8 $ 2.1
====== ====== ====== ====== ======= ====== ====== ======
EMERGING ASIA
International Monetary
Fund ("IMF") Countries:
South Korea $ 0.4 $ 0.2 $ 1.3 $ 1.3 $ 0.6 $ -- $ 1.4 $ --
Indonesia 0.6 0.1 0.1 0.1 0.7 -- 0.9 --
Thailand 0.1 0.1 0.7 0.3 0.6 -- 0.7 --
------ ------ ------ ------ ------ ------ ------ ------
Subtotal 1.1 0.4 2.1 1.7 1.9 -- 3.0 --
Other Emerging Asia 4.8 0.7 6.5 5.7 6.3 -- 3.4 --
------ ------ ------ ------ ------ ------ ------ ------
TOTAL EMERGING ASIA (e) $ 5.9 $ 1.1 $ 8.6 $ 7.4 $8.2 (f) $ -- $ 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.
(f) The increase in the net cross-border exposure since year-end is due to
the acquisition of Flemings.
ALLOWANCE FOR CREDIT LOSSES
Loans: Chase's allowance for loan losses is intended to cover probable credit
losses as of September 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
portfolio segment and a residual component. For a further discussion of the
specific, expected, portfolio segment and residual components of the allowance
for loan losses, see page 44 of Chase's 1999 Annual Report.
September 30, 2000 versus September 30, 1999: The provision for loan losses
decreased $93 million or 23% when compared to the third quarter of 1999. The
decrease in provision is attributable to the decreases in net charge-offs for
both the consumer and commercial portfolios when compared to the second quarter
of 2000 and third quarter of 1999. Net charge-offs for the overall loan
portfolio decreased 23% during the third quarter of 2000 when compared to the
same period in 1999.
The provision for loan losses decreased $188 million during the first nine
months of 2000. The decrease in provision is principally due to decreases in
consumer and foreign commercial and industrial loan net charge-offs, partially
offset by increases in domestic commercial and industrial loan charge-offs.
Consumer net charge-offs decreased 16% during the first nine months of 2000 and
nonperforming loans decreased 10% from December 31, 1999.
Foreign commercial and industrial loans net charge-offs decreased 63% during the
first nine months of 2000 and nonperforming loans decreased 9% from December 31,
1999. However, domestic commercial and industrial net charge-offs and
nonperforming loans increased 55% and 50%, respectively, during the same
periods. The net effect of the above resulted in the allowance for loan losses
remaining essentially consistent with the December 31, 1999 amount.
-33-
<PAGE> 34
Part I
Item 2 (continued)
<TABLE>
<CAPTION>
ALLOWANCE COMPONENTS
(in millions) AT SEPTEMBER 30, 2000 At December 31, 1999 At December 31, 1998
--------------------- -------------------- --------------------
<S> <C> <C> <C>
Specific Loss $ 543 $ 511 $ 396
Expected Loss:
Consumer 1,480 1,657 1,469
Commercial 608 674 806
------ ------ ------
Total Expected Loss 2,088 2,331 2,275
------ ------ ------
Portfolio Segment 200 -- 214
Residual Component 660 615 667
------ ------ ------
Total $3,491 $3,457 $3,552
====== ====== ======
</TABLE>
September 30, 2000 versus December 31, 1999: The specific loss component
increased 6% from year-end 1999 due to an increase in loans deemed by Chase to
be criticized. In addition during 2000, Chase established a portfolio segment
component of $200 million to cover increased risks in the noninvestment grade
segment of its commercial loan portfolio. The expected loss component decreased
10% from year-end principally due to improvement in consumer credit loan quality
during the first nine months of 2000. The residual component at September 30,
2000 was 19% compared with 18% at 1999 year-end.
December 31, 1999 versus December 31, 1998: The specific loss component
increased 29% principally due to the deteriorating creditworthiness of one large
customer in Asia. The expected loss component increased 2% due to higher
outstanding balances in the consumer loans portfolio offset by improvement in
the commercial loan portfolio. A portfolio segment component was established in
1998 to address the heightened risk profile with respect to emerging markets
cross border exposures. This component was released in 1999 due to the
realization of certain Asian charge-offs and the recovery of the emerging
markets. The residual component at December 31, 1999 was 18% compared with 19%
at December 31, 1998.
Lending-Related Commitments: Chase also has an allowance for its lending-related
commitments, using a methodology similar to that for the loan portfolio. This
allowance, which is reported in Other Liabilities, was $170 million at each of
September 30, 2000, December 31, 1999 and December 31, 1998.
-34-
<PAGE> 35
Part I
Item 2 (continued)
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
September 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.
AGGREGATE PORTFOLIO
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED SEPTEMBER 30, 2000
--------------------------------------
AVERAGE MINIMUM MAXIMUM AT SEPTEMBER 30, At September 30,
(in millions) VAR VAR VAR 2000 1999
----------- ----------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Trading Portfolio $ 24.9 $ 20.2 $ 30.9 $ 24.4 $ 26.6
Market Risk-Related
A/L Activities 70.8 60.4 99.8 68.6 86.4
Less: Portfolio Diversification (19.0) NM NM (20.9) (22.5)
------ ------ ------ ------ ------
Total VAR $ 76.7 $ 67.6 $106.3 $ 72.1 $ 90.5
====== ====== ====== ====== ======
</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.
-35-
<PAGE> 36
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 September 30,
2000, Chase posted positive daily market risk-related revenue for 254 out of 261
business trading days, with 90 business days exceeding positive $20 million.
Chase incurred no daily trading losses in excess of negative $10 million over
the past 12 months. In addition, there were no days in the third quarter of 2000
in which Chase incurred a trading loss.
[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, in Chase management's view, 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
September 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.
Largest Monthly Stress Test - Pre-Tax
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED SEPTEMBER September
SEPTEMBER 30, 2000 2000 1999
---------------------------------------- ----------- ----------
(in millions) AVERAGE MINIMUM MAXIMUM
------- ------- -------
<S> <C> <C> <C> <C> <C>
Stress Test Loss - Pre-Tax $(235) $(132) $(397) $(213) $(112)
</TABLE>
-36-
<PAGE> 37
Part I
Item 2 (continued)
INVESTMENT PORTFOLIO AND ASSET/LIABILITY ACTIVITIES
Chase also has market risk exposure in its investment portfolio 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 September 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 4.6% of projected net income for full-year
2000. At September 30, 1999, Chase's exposure under the same scenario was
approximately 2.9% of projected 1999 net income. The increase in NII sensitivity
at September 30, 2000 was primarily due to larger balance sheet positions.
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 the 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 September 30, 2000, Chase's
largest potential NII stress test loss was estimated to be approximately 5.9% of
projected net income for full-year 2000. NII sensitivity and NII stress test
scenarios were expanded in the 2000 third quarter to include sensitivity of
mortgage servicing revenues. Also, impacting NII stress test scenarios were
revisions in Chase's stress test methodology during the 2000 third quarter. The
potential NII stress test loss has increased during 2000 primarily due to larger
balance sheet positions.
Value-at-Risk: See the VAR Aggregate Exposure section on page 35 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 $(5.7) million (pre-tax) at September
30, 2000, indicating that the market value of Chase's A/L positions would have
declined by approximately $5.7 million for every one basis point increase in
interest rates along the interest rate yield curve. This compares with a
directional BPV of $(4.1) million at September 30, 1999. The following table
also shows that the economic value of Chase's investment portfolio and A/L
activities would have declined by $14.2 million (pre-tax) for every one basis
point widening of interest spreads. This compares with a decline of $10.4
million (pre-tax) at September 30, 1999.
MARKET RISK-RELATED A/L ACTIVITIES
<TABLE>
<CAPTION>
TWELVE-MONTH PERIOD ENDED SEPTEMBER 30, 2000
--------------------------------------------
AT SEPTEMBER 30, At September 30,
(in millions) AVERAGE MINIMUM MAXIMUM 2000 1999
------------- ------- ------- ------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Directional Risk $ (4.4) $ (1.6) $ (6.4) $ (5.7) $ (4.1)
Basis Risk (11.1) (8.0) (14.2) (14.2) (10.4)
</TABLE>
Economic Value Stress Testing. Chase utilizes several historical and
hypothetical scenarios when performing its economic value stress tests. As of
September 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 September 30, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
(in millions) SEPTEMBER 30, December 31,
2000 1999 Change
------------- ------------ ------------
<S> <C> <C> <C>
A/L Derivative Contracts:
Net Deferred Gains (Losses) $(190) $ 205 $(395)
Net Unrecognized Losses (a) (743) (877) 134
----- ----- -----
Net A/L Derivative Losses $(933) $(672) $(261)
===== ===== =====
</TABLE>
(a) These net unrecognized losses do not include the net favorable impact
from the assets/liabilities being hedged by these derivative contracts.
-37-
<PAGE> 38
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 September 30, 2000 remained strong, with capital
ratios well in excess of regulatory guidelines. At September 30, 2000, the Tier
1 and Total Capital ratios were 7.9% and 11.6%, respectively, and the Tier 1
leverage ratio was 6.3%. These ratios were lower than at September 30, 1999 and
lower than at June 30, 2000, primarily as a result of the acquisition of
Flemings. Management's long-term target range for the Tier 1 Capital ratio is 8%
to 8.25%; however, as was the case with the third quarter of 2000, this target
may not always be maintained on a quarter-to-quarter basis in light of changing
economic conditions and in response to changing business requirements.
Management anticipates that Chase's Tier 1 Capital ratio will return to
management's target range of 8% to 8.25%, by year-end 2000.
The following table shows the sources and uses of Chase's Tier 1 Capital.
<TABLE>
<CAPTION>
THIRD QUARTER NINE 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 $ 0.6 $ 2.5 $ 4.3 $ 2.9
Preferred Stock and Equivalents/Special Items 0.1 (0.3) 0.2 (0.7)
Capital for Internal Asset Growth -- (0.6) (1.0) (0.3)
------- ------- ------- -------
Total Sources of Free Cash Flow $ 0.7 $ 1.6 $ 3.5 $ 1.9
=======
USES OF FREE TIER 1 CAPITAL
Increases (Decreases) in Capital Ratios $ (2.4) $ (1.9) $ 0.1 $ 1.2
Acquisitions 6.9 6.9 1.1 0.8
Repurchases Net of Stock Issuances for Employee Plans (3.8) (3.4) 2.3 (0.1)
------- ------- ------- -------
Total Uses of Free Cash Flow $ 0.7 $ 1.6 $ 3.5 $ 1.9
======= ======= ======= =======
</TABLE>
During the nine months of 2000, free cash flow that was generated was primarily
earmarked to support the acquisition of Flemings.
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.
Chase formally terminated its equity repurchase program on October 17, 2000 in
connection with its proposed merger with J.P. Morgan, which is intended to be
accounted for as a pooling of interests. Prior to the formal termination of the
program, Chase had not repurchased any of its shares of common stock since the
end of the first quarter of 2000.
At September 30, 2000, the total capitalization of Chase (the sum of Tier 1 and
Tier 2 Capital) was $37.2 billion, an increase of $0.7 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 in the 2000 second quarter.
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 nine
months of 2000, Chase issued approximately $8 billion of long-term debt and
capital securities of subsidiaries, including $1.2 billion of notes in
connection with the purchase of Flemings. During the same period of 2000, $1.7
billion of long-term debt matured.
-38-
<PAGE> 39
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 currently is
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 nine
months of 2000. Management does not anticipate that Chase will incur any
additional material costs related to this project. The Securities and Exchange
Commission ("SEC") 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. Chase is in discussions with the staff of the SEC to
resolve these issues on a mutually acceptable basis.
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
September 30, 2000.
OTHER EVENTS
On October 16, 2000, Chase agreed to sell its interest in ChaseMellon
Shareholder Services, currently a 50-50 joint venture between Chase and Mellon
Financial Corporation. The transaction is expected to be completed during the
fourth quarter of this year.
On September 1, 2000, Chase announced it had agreed to sell its Hong Kong-based
retail banking business, including Chase Manhattan Card Company Limited, to
Standard Chartered PLC for approximately $1.3 billion in cash. The sale closed
on November 1, 2000.
On August 1, 2000 Chase acquired Robert Fleming Holdings Limited. The
consideration issued to Flemings' shareholders consisted of pound sterling 2.6
billion in cash, or at the option of the Flemings shareholders, notes, 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 generally expensed over the two years
following the acquisition. 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.
-39-
<PAGE> 40
Part I
Item 2 (continued)
ACCOUNTING DEVELOPMENTS
The following discussion of Chase's Accounting Developments focuses primarily on
developments since December 31, 1999 and should be read in conjunction with the
Accounting and Reporting Development section on page 55 of the 1999 Annual
Report.
SFAS 133
For a further discussion of SFAS 133, see page 55 of the 1999 Annual Report.
SFAS 133 requires that an entity measure all derivatives at fair value and
recognize those derivatives as either assets or liabilities on the balance
sheet. In addition, under SFAS 133, the change in a derivative's fair value is
generally to be recognized in current period earnings. Chase, although not
required to adopt SFAS 133 until calendar year 2001, already recognizes the
derivatives used in its trading activities on its balance sheet at fair value,
with changes in the fair values of such derivatives included in earnings. This
represents the substantial majority of the derivatives utilized by Chase.
If Chase had adopted SFAS 133 at September 30, 2000 with respect to those other
derivatives used by Chase as hedges of its assets, liabilities and commitments,
the adoption would not have had a material impact on Chase's results of
operations or financial position. However, there is no assurance that when Chase
formally adopts SFAS 133 at the beginning of calendar year 2001, the adjustment
required to be made at that time would not have a material impact on Chase's
results of operations or financial position. The estimated September 30
adjustment may be affected by changes during the fourth quarter in the interest
rate environment and by management's actions in response to such changes.
Further, events in the global markets, such as those that have occurred in past
years in Asia and Russia, can create imbalances in the market, resulting in
temporary volatility in hedge performance. Additionally, the Financial
Accounting Standards Board ("FASB") and the Derivative Implementation Group
continue to address SFAS 133 implementation issues, and their conclusions may
require changes in Chase's interpretations of the standard, such as the
accounting of hedges for mortgage servicing rights, and loan commitments, among
other issues.
SFAS 140
In September 2000, the FASB issued SFAS 140, which revises the standards set
forth in SFAS 125 for the accounting of securitizations and other transfers of
financial assets and collateral. Statement 140 modifies the criteria for
determining whether the transferor has relinquished control of assets and
therefore whether the transfer may be accounted for as a sale. SFAS 140 requires
new disclosures about securitization activities and incremental disclosures
about collateral in addition to maintaining the existing disclosure requirements
of SFAS 125.
As issued, the disclosure provisions of SFAS 140 are effective for the 2000
fiscal year-end (December 31, 2000), and the provisions of SFAS 140 relating to
the transfer of financial assets and the extinguishment of liabilities are
effective for transfers after March 31, 2001. Chase currently is assessing the
impact of the adoption of SFAS 140, but management believes that the adoption of
SFAS 140 will not significantly affect Chase's earnings, liquidity or capital
resources.
-40-
<PAGE> 41
Part I
Item 2 (continued)
THE CHASE MANHATTAN CORPORATION
FINANCIAL HIGHLIGHTS
(IN MILLIONS, EXCEPT PER SHARE DATA AND RATIOS)
<TABLE>
<CAPTION>
THIRD QUARTER NINE MONTHS
----------------------------------- -----------------------------------
Over/(Under) Over/(Under)
2000 1999 3Qtr99 2000 1999 1999
---- ---- ------ ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
AS REPORTED BASIS
Revenue $5,400 $5,191 4% $16,741 $15,951 5%
Noninterest Expense
(Excluding Restructuring Costs) 3,656 2,981 23 10,503 8,994 17
Restructuring Costs 79 -- NM 129 -- NM
Provision for Loan Losses 305 398 (23) 979 1,167 (16)
Net Income 884 1,187 (26) 3,335 3,753 (11)
Net Income per Common Share:
Basic 0.69 0.95 (27) 2.66 2.96 (10)
Diluted 0.66 0.92 (28) 2.57 2.86 (10)
Cash Dividends Declared 0.32 0.27 19 0.96 0.81 19
Book Value at Period End 21.84 17.34 26
Share Price at Period End 46.19 50.25 (8)
Performance Ratios:
Return on Average Common Equity (a) 13% 22% (900) bp 18% 23% (500) bp
Return on Average Assets (a) 0.85 1.29 (44) 1.11 1.38 (27)
OPERATING BASIS (b)
Revenue $5,590 $5,429 3% $17,568 $16,538 6%
Noninterest Expense 3,656 2,981 23 10,503 8,894 18
Credit Costs (c) 541 636 (15) 1,711 1,920 (11)
Earnings 905 1,187 (24) 3,480 3,711 (6)
Earnings per Common Share:
Basic 0.70 0.95 (26) 2.78 2.93 (5)
Diluted 0.68 0.92 (26) 2.68 2.83 (5)
Performance Ratios:
Return on Average Common Equity (a) 14% 22% (800) bp 19% 22% (300) bp
Return on Average Managed Assets (a) 0.83 1.23 (40) 1.11 1.30 (19)
Common Dividend Payout Ratio 47 29 1,800 35 28 700
Overhead Ratio 65 55 1,000 60 54 600
Cash Basis:
Cash Earnings (d) $1,054 $1,257 (16)% $3,798 $3,930 (3)%
Diluted Cash Earnings per Common Share 0.79 0.97 (19) 2.93 3.00 (2)
Shareholder Value Added 181 539 (66) 1,424 1,736 (18)
Cash Return on Average Common Equity (a) 16% 23% (700) bp 21% 24% (300) bp
Selected Balance Sheet Items at Period End: (e)
Managed Loans $209,280 $191,486 9%
Total Managed Assets 443,838 389,072 14
</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.
-41-
<PAGE> 42
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
SEPTEMBER 30, 2000 September 30, 1999
---------------------------------------- -------------------------------------
AVERAGE RATE Average Rate
BALANCE INTEREST (ANNUALIZED) Balance Interest (Annualized)
------- -------- ------------ ------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Deposits with Banks $ 4,059 $ 96 9.35% $5,134 $ 195 15.09%
Federal Funds Sold and
Securities Purchased under
Resale Agreements 31,737 452 5.66% 32,281 352 4.32%
Trading Assets - Debt and Equity
Instruments 34,206 530 6.17% 26,568 399 5.95%
Securities:
Available-for-Sale 64,069 989 6.14% (b) 51,977 750 5.72% (b)
Held-to-Maturity 671 11 6.66% 1,039 17 6.39%
Loans 187,210 3,997 8.50% 173,246 3,289 7.53%
--------- --------- --------- ---------
Total Interest-Earning Assets 321,952 6,075 7.51% 290,245 5,002 6.84%
Allowance for Loan Losses (3,416) (3,484)
Cash and Due from Banks 15,656 13,799
Trading Assets - Risk
Management Instruments 29,743 28,938
Other Assets 49,925 35,347
--------- ---------
Total Assets $ 413,860 $ 364,845
========= =========
LIABILITIES
Domestic Retail Deposits $ 62,427 614 3.92% $ 61,438 573 3.70%
Domestic Negotiable
Certificates of Deposit
and Other Deposits 18,530 321 6.88% 17,032 156 3.62%
Deposits in Foreign Offices 92,983 1,316 5.62% 82,350 921 4.43%
--------- --------- --------- ---------
Total Time and Savings
Deposits 173,940 2,251 5.15% 160,820 1,650 4.07%
--------- --------- --------- ---------
Short-Term and Other Borrowings:
Federal Funds Purchased and
Securities Sold under
Repurchase Agreements 64,346 964 5.96% 49,290 543 4.37%
Commercial Paper 6,105 100 6.53% 5,032 61 4.84%
Other Borrowings (c) 18,073 269 5.93% 16,786 266 6.28%
--------- --------- --------- ---------
Total Short-Term and
Other Borrowings 88,524 1,333 5.99% 71,108 870 4.85%
Long-Term Debt 25,399 492 7.71% 19,291 306 6.30%
--------- --------- --------- ---------
Total Interest-Bearing Liabilities 287,863 4,076 5.63% 251,219 2,826 4.46%
--------- --------- --------- ---------
Noninterest-Bearing Deposits 50,731 48,636
Trading Liabilities - Risk
Management Instruments 24,943 27,640
Other Liabilities 22,655 14,446
--------- ---------
Total Liabilities 386,192 341,941
--------- ---------
PREFERRED STOCK OF SUBSIDIARY 550 550
--------- ---------
STOCKHOLDERS' EQUITY
Preferred Stock 828 1,026
Common Stockholders' Equity 26,290 21,328
--------- ---------
Total Stockholders' Equity 27,118 22,354
--------- ---------
Total Liabilities, Preferred Stock of
Subsidiary and Stockholders' Equity $ 413,860 $364,845
========= =========
INTEREST RATE SPREAD 1.88% 2.38%
========= =========
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $ 1,999 (a) 2.47% $ 2,176 (a) 2.97%
========= ========= ========= =========
</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 September 30, 2000 and September 30, 1999,
the annualized rate for available-for-sale securities based on
historical cost was 5.95% and 5.53%, respectively.
(c) Includes securities sold but not yet purchased and structured notes.
-42-
<PAGE> 43
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>
NINE MONTHS ENDED Nine Months Ended
SEPTEMBER 30, 2000 September 30, 1999
-------------------------------------- -------------------------------------
AVERAGE RATE Average Rate
BALANCE INTEREST (ANNUALIZED) Balance Interest (Annualized)
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Deposits with Banks $ 5,105 $ 331 8.65% $ 6,058 $ 540 11.92%
Federal Funds Sold and
Securities Purchased under
Resale Agreements 32,269 1,349 5.58% 30,527 1,122 4.91%
Trading Assets - Debt and Equity
Instruments 31,131 1,425 6.12% 25,412 1,228 6.46%
Securities:
Available-for-Sale 62,634 2,860 6.10% (b) 53,710 2,297 5.72% (b)
Held-to-Maturity 775 38 6.54% 1,238 58 6.28%
Loans 181,111 11,111 8.20% 173,078 9,666 7.47%
--------- --------- --------- ---------
Total Interest-Earning Assets 313,025 17,114 7.30% 290,023 14,911 6.87%
Allowance for Loan Losses (3,415) (3,489)
Cash and Due from Banks 15,445 14,666
Trading Assets - Risk
Management Instruments 30,573 28,478
Other Assets 44,782 34,591
--------- ---------
Total Assets $400,410 $364,269
========= =========
LIABILITIES
Domestic Retail Deposits $62,667 1,754 3.74% $61,463 1,614 3.51%
Domestic Negotiable
Certificates of Deposit
and Other Deposits 17,065 847 6.63% 19,564 525 3.59%
Deposits in Foreign Offices 92,782 3,701 5.33% 79,782 2,667 4.47%
--------- --------- --------- ---------
Total Time and Savings
Deposits 172,514 6,302 4.88% 160,809 4,806 4.00%
--------- --------- --------- ---------
Short-Term and Other Borrowings:
Federal Funds Purchased and
Securities Sold under
Repurchase Agreements 61,351 2,593 5.65% 50,260 1,660 4.42%
Commercial Paper 6,028 276 6.12% 5,091 179 4.69%
Other Borrowings (c) 17,644 809 6.13% 15,123 796 7.04%
--------- --------- --------- ---------
Total Short-Term and
Other Borrowings 85,023 3,678 5.78% 70,474 2,635 5.00%
Long-Term Debt 23,112 1,243 7.18% 19,255 936 6.50%
--------- --------- --------- ---------
Total Interest-Bearing Liabilities 280,649 11,223 5.34% 250,538 8,377 4.47%
--------- --------- --------- ---------
Noninterest-Bearing Deposits 50,796 48,091
Trading Liabilities - Risk
Management Instruments 25,444 27,867
Other Liabilities 18,164 14,199
--------- ---------
Total Liabilities 375,053 340,695
--------- ---------
PREFERRED STOCK OF SUBSIDIARY 550 550
--------- ---------
STOCKHOLDERS' EQUITY
Preferred Stock 894 1,027
Common Stockholders' Equity 23,913 21,997
--------- ---------
Total Stockholders' Equity 24,807 23,024
--------- ---------
Total Liabilities, Preferred Stock of
Subsidiary and Stockholders' Equity $400,410 $364,269
========= =========
INTEREST RATE SPREAD 1.96% 2.40%
======= =======
NET INTEREST INCOME AND NET
YIELD ON INTEREST-EARNING
ASSETS $ 5,891 (a) 2.51% $ 6,534 (a) 3.01%
======== ======= ========= =======
</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 nine months ended September 30, 2000 and September 30, 1999,
the annualized rate for available-for-sale securities based on
historical cost was 5.87% and 5.63%, respectively.
(c) Includes securities sold but not yet purchased and structured notes.
-43-
<PAGE> 44
Part I
Item 2 (continued)
THE CHASE MANHATTAN CORPORATION
QUARTERLY FINANCIAL INFORMATION
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
2000 1999
------------------------------------ ------------------------------------------------
THIRD SECOND FIRST Fourth Third Second First
QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 3,997 $ 3,631 $ 3,480 $ 3,451 $ 3,288 $ 3,165 $ 3,209
Securities 994 952 933 872 762 747 835
Trading Assets 530 479 416 477 399 411 418
Federal Funds Sold and Securities
Purchased under Resale Agreements 452 451 446 329 352 389 381
Deposits with Banks 96 101 134 212 195 161 184
------- ------- ------- ------- ------- ------- -------
Total Interest Income 6,069 5,614 5,409 5,341 4,996 4,873 5,027
------- ------- ------- ------- ------- ------- -------
INTEREST EXPENSE
Deposits 2,251 2,086 1,965 1,786 1,650 1,558 1,598
Short-Term and Other Borrowings 1,333 1,216 1,129 1,018 870 851 914
Long-Term Debt 492 397 354 312 306 319 311
------- ------- ------- ------- ------- ------- -------
Total Interest Expense 4,076 3,699 3,448 3,116 2,826 2,728 2,823
------- ------- ------- ------- ------- ------- -------
NET INTEREST INCOME 1,993 1,915 1,961 2,225 2,170 2,145 2,204
Provision for Loan Losses 305 332 342 454 398 388 381
------- ------- ------- ------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,688 1,583 1,619 1,771 1,772 1,757 1,823
------- ------- ------- ------- ------- ------- -------
NONINTEREST REVENUE
Investment Banking Fees 613 639 648 499 486 585 317
Trust, Custody and Investment
Management Fees 664 545 509 469 457 461 414
Credit Card Revenue 471 443 397 440 441 438 379
Fees for Other Financial Services 775 695 731 719 637 587 553
Trading Revenue 603 824 1,021 531 462 526 618
Securities Gains (Losses) 96 57 14 (59) (1) 5 156
Private Equity Gains (Losses) (25) 298 500 1,307 377 513 325
Other Revenue 210 -- 144 135 162 356 178
------- ------- ------- ------- ------- ------- -------
Total Noninterest Revenue 3,407 3,501 3,964 4,041 3,021 3,471 2,940
------- ------- ------- ------- ------- ------- -------
NONINTEREST EXPENSE
Salaries 1,761 1,614 1,753 1,461 1,417 1,416 1,384
Employee Benefits 256 252 287 233 238 238 255
Occupancy Expense 247 216 226 224 218 206 218
Equipment Expense 297 274 285 278 255 239 243
Restructuring Costs 79 50 -- 48 -- -- --
Other Expense 1,095 1,001 939 983 853 969 845
------- ------- ------- ------- ------- ------- -------
Total Noninterest Expense 3,735 3,407 3,490 3,227 2,981 3,068 2,945
------- ------- ------- ------- ------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE 1,360 1,677 2,093 2,585 1,812 2,160 1,818
Income Tax Expense 476 586 733 892 625 767 645
------- ------- ------- ------- ------- ------- -------
NET INCOME $ 884 $ 1,091 $ 1,360 $ 1,693 $ 1,187 $ 1,393 $ 1,173
======= ======= ======= ======= ======= ======= =======
NET INCOME APPLICABLE TO
COMMON STOCK $ 871 $ 1,074 $ 1,344 $ 1,677 $ 1,168 $ 1,375 $ 1,155
======= ======= ======= ======= ======= ======= =======
NET INCOME PER COMMON SHARE
Basic $ 0.69 $ 0.88 $ 1.10 $ 1.37 $ 0.95 $ 1.10 $ 0.91
======= ======= ======= ======= ======= ======= =======
Diluted $ 0.66 $ 0.85 $ 1.06 $ 1.32 $ 0.92 $ 1.06 $ 0.88
======= ======= ======= ======= ======= ======= =======
</TABLE>
-44-
<PAGE> 45
Part I
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 7-11, 14-15, 18, 23-25, 27-30, 32-33, 35, 38-40, 46, 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, 35, 37)
Basis Point Value ("BPV"): 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 37)
Cash Operating Earnings: Operating earnings excluding the impact of amortization
of goodwill and certain other intangibles. (Pages 10, 24-29)
Chase USA: Chase Manhattan Bank USA, National Association. (Page 11)
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 12, 22, 24)
REIT: A real estate investment trust subsidiary of Chase. (Pages 22-23)
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 8, 11)
SFAS 125: "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." (Page 40)
SFAS 133: "Accounting for Derivative Instruments and Hedging Activities." (Page
40)
SFAS 140: "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - a replacement of FASB Statement No. 125." (Page
40)
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 third quarter results included an $81 million gain (the
same for the nine months) from the sale of a business in Panama, a $35 million
loss ($176 million loss in the nine months) resulting from the economic hedge of
the purchase price of Flemings prior to its acquisition, and $79 million ($129
million for the nine months) of restructuring costs associated with previously
announced relocation initiatives. There were no special items in the third
quarter of 1999. The results for the nine 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. (Pages
11, 14, 21)
Stress Testing: A risk management tool used to measure market risk in an extreme
market environment. (Page 36)
Value-at-Risk ("VAR"): A risk measurement tool used to measure the potential
overnight loss from adverse market movements. (Pages 35-37)
-45-
<PAGE> 46
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 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 $1.45 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 third 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: July 3, 2000 - 488
shares.
-46-
<PAGE> 47
PART II - OTHER INFORMATION (continued)
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
27 - Financial Data Schedule
(B) Reports on Form 8-K:
Chase filed three reports on Form 8-K during the quarter ended
September 30, 2000, as follows:
Form 8-K dated July 19, 2000: Chase announced the results of operations
for the second quarter of 2000.
Form 8-K dated August 1, 2000: Chase declared offer unconditional for
Robert Fleming Holdings Limited.
Form 8-K dated September 12, 2000: Chase announced intent of merger
with J.P. Morgan to form J.P. Morgan Chase & Co.
-47-
<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 November 14, 2000 By /s/ Joseph L. Sclafani
----------------------------
Joseph L. Sclafani
Executive Vice President and Controller
[Principal Accounting Officer]
-48-
<PAGE> 49
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-
<PAGE> 50
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> <C> <C> <C> <C>
1 36 Bar Graph entitled "Histogram of Daily Market
Risk-Related Revenue for the twelve months ended
September 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 21 43 57 43 40 22
<CAPTION>
<S> <C> <C> <C> <C> <C>
30 - 35 Over 35
------- -------
10 18
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 6 1 0 0 0
</TABLE>
