-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AFhO0eEiXseevLOXS7kwCwR5ZFj7cBaL1ftJWJ9tT+8xu2lQkTj4yMStvkCq4ikI w/vS8BTKFHNh0PalV7bo7A== 0000950123-99-002057.txt : 19990312 0000950123-99-002057.hdr.sgml : 19990312 ACCESSION NUMBER: 0000950123-99-002057 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990311 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHASE MANHATTAN CORP /DE/ CENTRAL INDEX KEY: 0000019617 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 132624428 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-05805 FILM NUMBER: 99563063 BUSINESS ADDRESS: STREET 1: 270 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2122706000 MAIL ADDRESS: STREET 1: 270 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10017 FORMER COMPANY: FORMER CONFORMED NAME: CHEMICAL BANKING CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: CHEMICAL NEW YORK CORP DATE OF NAME CHANGE: 19880508 10-K405 1 CHASE MANHATTAN CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the fiscal year ended Commission file December 31, 1998 number 1-5805 The Chase Manhattan Corporation (Exact Name of Registrant as Specified in Its Charter) Delaware 13-2624428 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 270 Park Avenue, New York, N.Y. 10017 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (212) 270-6000 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class ------------------- Common Stock 9.76% Cumulative Preferred Stock (Stated Value--$25) 10.84% Cumulative Preferred Stock (Stated Value--$25) 10.96% Cumulative Preferred Stock (Stated Value--$25) Adjustable Rate Cumulative Preferred Stock, Series L (Stated Value--$100) Adjustable Rate Cumulative Preferred Stock, Series N (Stated Value--$25) 7 3/4% Subordinated Notes Due 1999 8% Subordinated Notes Due 1999 7.50% Subordinated Notes Due 2003 Floating Rate Subordinated Notes Due 2003 Floating Rate Subordinated Notes Due August 1, 2003 7 7/8% Subordinated Notes Due 2004 8% Subordinated Notes Due 2004 6.50% Subordinated Notes Due 2005 8% Subordinated Notes Due 2005 6.25% Subordinated Notes Due 2006 6 1/8% Subordinated Notes Due 2008 6.75% Subordinated Notes Due 2008 6.50% Subordinated Notes Due 2009 Guarantee of 7.34% Capital Securities, Series D, of Chase Capital IV Guarantee of 7.03% Capital Securities, Series E, of Chase Capital V All such securities are listed on the New York Stock Exchange. Securities registered pursuant to Section 12(g) of the Act: None Number of Shares of Common Stock outstanding on February 28, 1999: 844,212,018 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| The aggregate market value of The Chase Manhattan Corporation Common Stock held by non-affiliates of The Chase Manhattan Corporation on February 28, 1999 was $67,155,000,000. Document incorporated by reference Part of Form 10-K into in this Form 10-K which incorporated ----------------------------- ------------------- Proxy statement for the annual meeting of stockholders to be held May 18, 1999 (other than information included Part III in the proxy statement pursuant to Rule 402 (i), (k) and (l) of Regulation S-K) 2 FORM 10-K INDEX Part I Page Item 1 Business ..........................................................1 Overview ..........................................................1 Lines-of-Business .................................................1 Competition .......................................................1 Supervision and Regulation ........................................1 Important Factors That May Affect Future Results ..................4 Foreign Operations ................................................6 Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differentials ......................77 Securities Portfolio .............................................83 Loan Portfolio .....................................31-34, 55, 84-86 Summary of Loan Loss Experience ..........................35, 56, 87 Deposits .........................................................88 Return on Equity and Assets ..................................75, 78 Short-Term and Other Borrowed Funds ..............................89 Item 2 Properties ........................................................6 Item 3 Legal Proceedings .................................................6 Item 4 Submission of Matters to a Vote of Security Holders ...............6 Executive Officers of the Registrant ..............................7 Part II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters ...........................................8 Item 6 Selected Financial Data ...........................................8 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ...........................8 Item 7A Quantitative and Qualitative Disclosures about Market Risk ........8 Item 8 Financial Statements and Supplementary Data .......................8 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ......................................8 Part III Item 10 Directors and Executive Officers of Chase .........................8 Item 11 Executive Compensation ............................................8 Item 12 Security Ownership of Certain Beneficial Owners and Management ....8 Item 13 Certain Relationships and Related Transactions ....................8 Part IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K ...9 3 - -------------------------------------------------------------------------------- ITEM 1: BUSINESS - -------------------------------------------------------------------------------- OVERVIEW The Chase Manhattan Corporation ("Chase") is a bank holding company organized under the laws of the State of Delaware in 1968 and registered under the Bank Holding Company Act of 1956, as amended (the "BHCA"). Chase conducts its domestic and international financial services businesses through various bank and non-bank subsidiaries. The principal bank subsidiaries of Chase are: The Chase Manhattan Bank ("Chase Bank"), a New York banking corporation headquartered in New York City; Chase Bank of Texas, National Association ("Chase Texas"), a national bank headquartered in Houston, Texas; and Chase Manhattan Bank USA, National Association ("Chase USA"), a national bank headquartered in Wilmington, Delaware. The principal non-bank subsidiary of Chase is Chase Securities Inc. ("CSI"), Chase's "Section 20" subsidiary, which is engaged in securities underwriting and dealing activities. On March 31, 1996, The Chase Manhattan Corporation ("heritage Chase") merged (the "Merger") with and into Chemical Banking Corporation ("Chemical"), which changed its name to The Chase Manhattan Corporation. The Merger was accounted for as a pooling of interests. At December 31, 1998, Chase was the third largest bank holding company in the United States in terms of total assets and Chase Bank was the second largest bank in the United States in terms of total assets. The bank and non-bank subsidiaries of Chase operate nationally as well as through overseas branches, representative offices and affiliated banks. Chase's financial performance goals over the next several years include an average return on common equity of 18% or higher, growth in operating revenues accelerating to 10% per year and double-digit growth in operating earnings per share. LINES-OF-BUSINESS Chase's activities are internally organized, for management reporting purposes, into three major business franchises (Global Bank, National Consumer Services and Chase Technology Solutions, which includes Global Services). A description of Chase's business franchises and the products and services they provide to their respective client bases are discussed in the "Lines of Business Results" section of Management's Discussion and Analysis ("MD&A") beginning on page 19 and Note Twenty-Three on page 70. COMPETITION Chase and its subsidiaries and affiliates operate in a highly competitive environment. Chase's bank subsidiaries compete with other domestic and foreign banks, thrift institutions, credit unions, and mutual funds for deposits and other sources of funds. In addition, Chase and its bank and non-bank subsidiaries face increased competition with respect to the diverse financial services and products they offer. Competitors include finance companies, brokerage firms, investment banking companies, merchant banks, insurance companies, credit card companies, mortgage banking companies, leasing companies, and a variety of other financial services and advisory companies. Many of these competitors are not subject to the same regulatory restrictions as are domestic bank holding companies and banks, such as Chase and its bank subsidiaries. SUPERVISION AND REGULATION General: Chase is subject to regulation as a bank holding company under the BHCA. As such, Chase is required to file reports and other information with the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). Chase is also subject to the examination powers of the Federal Reserve Board. Under the BHCA, Chase may not engage in any business other than managing and controlling banks or furnishing certain specified services to subsidiaries, and may not acquire voting control of non-banking corporations, except those corporations engaged in businesses or furnishing services which the Federal Reserve Board deems to be so closely related to banking as "to be a proper incident thereto." Further, Chase is prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any corporation that is engaged in activities that are not closely related to banking, and, without the prior approval of the Federal Reserve Board, may not acquire direct or indirect ownership or control of more than 5% of the voting shares of any domestic bank or other company whose activities are deemed to be closely related to banking. Dividend Restrictions: Federal law imposes limitations on the payment of dividends by the subsidiaries of Chase that are state member banks of the Federal Reserve System (a "state member bank") or national banks. Non-bank subsidiaries of Chase are not subject to such limitations. The amount of dividends that may be paid by a state member bank, such as Chase Bank, or by a national bank, such as Chase USA or Chase Texas, is limited to the lesser of the amounts calculated under a "recent earnings" test and an "undivided profits" test. Under the recent earnings test, a dividend may not be paid if the total of all dividends declared by a bank in any calendar year is in excess of the current year's net income combined with the retained net income of the two preceding years unless the bank obtains the approval of its appropriate Federal banking regulator (which, in the case of a state member bank, is the Federal Reserve Board and, in the case of a national bank, is the Office of the Comptroller of the Currency (the "Comptroller of the Currency"). Under the undivided profits test, a dividend may not be paid in excess of a bank's "undivided profits." See Note Seventeen on page 64 for the amount of dividends that Chase's principal bank subsidiaries could pay, during 1999, to their respective bank holding companies without the approval of their relevant banking regulators. 1 4 PART I In addition to the dividend restrictions described above, the Federal Reserve Board, the Comptroller of the Currency and the Federal Deposit Insurance Corporation ("FDIC") have authority to prohibit or to limit the payment of dividends by the banking organizations they supervise, including Chase and its bank and bank holding company subsidiaries, if, in the banking regulator's opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the banking organization. Capital Requirements: The Federal banking regulators have also adopted risk-based capital and leverage guidelines that require that Chase's capital-to-assets ratios meet certain minimum standards. The risk-based capital ratio is determined by allocating assets and specified off-balance sheet financial instruments into four weighted categories, with higher levels of capital being required for the categories perceived as representing greater risk. Under the guidelines, capital is divided into two tiers, Tier 1 Capital and Tier 2 Capital. For a further discussion of Tier 1 Capital and Tier 2 Capital, see Note Eighteen on page 64. The amount of Tier 2 Capital may not exceed the amount of Tier 1 Capital. Total Capital is the sum of Tier 1 Capital and Tier 2 Capital. Banking organizations are required to maintain a Total Risk-Based Capital ratio (Total Capital to risk-weighted assets) of 8%, and a Tier 1 Capital ratio of 4%. The risk-based capital requirements explicitly identify concentration of credit risk and certain risks arising from non-traditional activities, and the management of those risks, as important factors to consider in assessing an institution's overall capital adequacy. In addition, the risk-based capital rules incorporate a measure for market risk in foreign exchange and commodity activities and in the trading of debt and equity instruments. The market risk-based capital rules require banking organizations with large trading activities (such as Chase) to maintain capital for market risk in an amount calculated by using the banking organizations' own internal value-at-risk models (subject to parameters set by the regulators). In November 1997, the Federal banking agencies published for comment regulations to amend the risk-based capital requirements with respect to recourse arrangements and securitization transactions. In general, the proposal would amend the risk-based capital standards in order to treat recourse obligations and direct credit substitutes (such as letters of credit and spread accounts) consistently for risk-based capital purposes. The proposed amendments also set forth a multi-level approach to assessing capital requirements in certain asset securitizations. The Federal banking regulators have also established minimum leverage ratio guidelines. The leverage ratio is defined as Tier 1 Capital divided by average total assets (net of allowance for credit losses, goodwill and certain intangible assets). The minimum leverage ratio is 3% for strong bank holding companies (i.e., those rated composite 1 under the BOPEC rating system) and for bank holding companies that have implemented the Federal Reserve Board's risk-based capital measure for market risk. Other bank holding companies must have a minimum leverage ratio of 4%. Bank holding companies may be expected to maintain ratios well above the minimum levels depending upon their particular condition, risk profile and growth plans. FDICIA: The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") revised certain provisions of the Federal Deposit Insurance Act, as well as certain other Federal banking statutes. In general, FDICIA provides for expanded regulation of depository institutions and their affiliates, including parent holding companies, by their Federal banking regulators, and requires the relevant Federal banking regulator to take "prompt corrective action" with respect to a depository institution if that institution does not meet certain capital adequacy standards. Pursuant to FDICIA, the Federal Reserve Board, the FDIC and the Comptroller of the Currency adopted regulations setting forth a five-tier scheme for measuring the capital adequacy of the depository institutions they supervise. Under the regulations (commonly referred to as the "prompt corrective action" rules), an institution would be placed in one of the following capital categories when these ratios fall within the prescribed ranges:
Ratios ------------------------------------------- Total Tier 1 Tier 1 Capital Capital Leverage - -------------------------------------------------------------------------------- At Least ------------------------------------------- Well Capitalized 10% 6% 5% Adequately Capitalized 8% 4% 4%(a) - -------------------------------------------------------------------------------- Less Than ------------------------------------------- Undercapitalized 8% 4% 4%(a) Significantly Undercapitalized 6% 3% 3% - -------------------------------------------------------------------------------- Critically Undercapitalized Tangible equity to total assets of 2% or less - --------------------------------------------------------------------------------
(a) May be 3% in some cases. An institution may be treated as being in a capital category lower than that indicated based on other supervisory criteria. Supervisory actions by the appropriate Federal banking regulator will generally depend upon an institution's classification within the five categories. The regulations apply only to banks and not to bank holding companies, such as Chase; however, the Federal Reserve Board is authorized to take appropriate action at the holding company level based on the undercapitalized status of the holding company's subsidiary banking institutions. In certain instances relating to an undercapitalized banking institution, the bank holding company would be required to guarantee the performance of the undercapitalized subsidiary and may be liable for civil money damages for failure to fulfill its commitments on that guarantee. 2 5 PART I Under FDICIA only a "well capitalized" depository institution may, without prior regulatory approval, accept brokered deposits (e.g. deposits solicited by a bank's affiliates on its behalf), offer interest rates on deposits significantly higher than the prevailing rate in its market or "pass through" deposit insurance coverage to the participants of certain employee benefit plans. As of December 31, 1998, each of Chase's banking subsidiaries was "well capitalized". FDIC Insurance Assessments: FDICIA also required the FDIC to establish a risk-based assessment system for FDIC deposit insurance. Under the FDIC's risk-based insurance premium assessment system, each depository institution is assigned to one of nine risk classifications based upon certain capital and supervisory measures and, depending upon its classification, is assessed insurance premiums on its deposits. Depository institutions insured by the Bank Insurance Fund ("BIF") are required to pay premiums ranging from 0 basis points to 27 basis points of domestic deposits. Each of Chase's banks, including Chase Bank, Chase USA and Chase Texas, currently qualifies for the 0 basis point assessment. All depository institutions must also pay an annual assessment so that the Financing Corporation ("FICO") may pay interest on bonds it issued in connection with the resolution of savings association insolvencies occurring prior to 1991. The FICO assessment is 1.2 basis points of domestic deposits in the case of BIF-insured institutions such as Chase Bank, Chase USA and Chase Texas. The rate schedules are subject to future adjustments by the FDIC. In addition, the FDIC has authority to impose special assessments from time to time, subject to certain limitations specified in the Deposit Insurance Funds Act. Powers of the FDIC Upon Insolvency of an Insured Depository Institution: An FDIC-insured depository institution (such as Chase's bank subsidiaries) can be held liable for any loss incurred or expected to be incurred by the FDIC in connection with another FDIC-insured institution under common control with such institution being in "default" or "in danger of default" (commonly referred to as "cross-guarantee" liability). "Default" is generally defined as the appointment of a conservator or receiver and "in danger of default" is defined as certain conditions indicating that a default is likely to occur absent regulatory assistance. An FDIC cross-guarantee claim against a depository institution is generally superior in right of payment to claims of the holding company and its affiliates against such depository institution. If the FDIC is appointed the conservator or receiver of an insured depository institution upon its insolvency or in certain other events, the FDIC has the power: (i) to transfer any of the depository institution's assets and liabilities to a new obligor without the approval of the depository institution's creditors; (ii) to enforce the terms of the depository institution's contracts pursuant to their terms; or (iii) to repudiate or disaffirm any contract or lease to which the depository institution is a party, the performance of which is determined by the FDIC to be burdensome and the disaffirmance or repudiation of which is determined by the FDIC to promote the orderly administration of the depository institution. The above provisions would be applicable to obligations and liabilities of those of Chase's subsidiaries that are insured depository institutions, such as Chase Bank, Chase USA and Chase Texas, including, without limitation, obligations under senior or subordinated debt issued by those banks to investors (referred to below as "public noteholders") in the public markets. In its resolution of the problems of an insured depository institution in default or in danger of default, the FDIC is not permitted to take any action that would have the effect of increasing the losses to a deposit insurance fund by protecting depositors for more than the insured portion of their deposits or by protecting creditors of the insured depository institution (including public noteholders), other than depositors. In addition, the FDIC is authorized to settle all uninsured and unsecured claims in the insolvency of an insured institution by making a final settlement payment after the declaration of insolvency based upon a percentage determined by the FDIC reflecting an average of the FDIC's receivership recovery experience, regardless of the assets of the insolvent institution actually available for distribution to creditors. Such a payment would constitute full payment and disposition of the FDIC's obligations to claimants. Under federal law, the claims of a receiver of an insured depository institution for administrative expenses and the claims of holders of domestic deposit liabilities (including the FDIC, as subrogee of the depositors) have priority over the claims of other unsecured creditors of the institution, including public noteholders, in the event of the liquidation or other resolution of the institution. As a result of the provisions described above, whether or not the FDIC ever sought to repudiate any obligations held by public noteholders of any subsidiary of Chase that is an insured depository institution, such as Chase Bank, Chase USA or Chase Texas, the public noteholders would be treated differently from, and could receive, if anything, substantially less than, the depositors of the depository institution. Other Supervision and Regulation: Under Federal Reserve Board policy, Chase is expected to act as a source of financial strength to its bank subsidiaries and to commit resources to support the bank subsidiaries in circumstances where it might not do so absent such policy. Any loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of the subsidiary banks. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a Federal bank regulatory agency to maintain the capital of a subsidiary bank at a certain level will be assumed by the bankruptcy trustee and entitled to a priority of payment. The bank subsidiaries of Chase are subject to certain restrictions imposed by Federal law on extensions of credit to, and certain other transactions with, Chase and certain other affiliates and on investments in stock or securities of Chase and those affiliates. These restrictions prevent Chase and other affiliates from borrowing from a bank subsidiary unless the loans are secured in specified amounts. 3 6 PART I Chase's bank and non-bank subsidiaries are subject to direct supervision and regulation by various other Federal and state authorities. Chase Bank, as a New York State-chartered bank and state member bank, is subject to supervision and regulation by the New York State Banking Department as well as by the Federal Reserve Board and the FDIC. Chase's national bank subsidiaries, such as Chase USA and Chase Texas, are subject to substantially similar supervision and regulation by the Comptroller of the Currency. Supervision and regulation by each of the foregoing regulatory agencies generally include comprehensive annual reviews of all major aspects of the relevant bank's business and condition, as well as the imposition of periodic reporting requirements and limitations on investments and other powers. The operations of The Vista Funds, the mutual funds advised by Chase, including the means by which they may be distributed in the United States, are subject to regulation by the Securities and Exchange Commission ("SEC") and the Federal Reserve Board. The types of activities in which the foreign branches of Chase Bank and the international subsidiaries of Chase may engage are subject to various restrictions imposed by the Federal Reserve Board. Those foreign branches and international subsidiaries are also subject to the laws and banking authorities of the countries in which they operate. Chase also conducts securities underwriting, dealing and brokerage activities through various broker-dealer subsidiaries, all of which are subject to the regulations of the SEC and the National Association of Securities Dealers, Inc. CSI, Chase's "Section 20" subsidiary, is also subject to the supervision and regulation of the Federal Reserve Board. In 1997, The Federal Reserve Board eliminated many of the "firewalls" that had been imposed upon Section 20 subsidiaries, incorporating the remaining firewalls in a statement of operating standards, and increased the amount of a Section 20 subsidiary's gross revenues that may be derived from underwriting and dealing in "ineligible" securities (i.e., securities in which a national bank may not underwrite or deal) from 10% to 25%. The effect of these regulatory actions has been to enable CSI to operate more efficiently and expand its underwriting and dealing capabilities. The activities of Chase Bank, Chase USA and Chase Texas as consumer lenders are also subject to regulation under various Federal laws including the Truth-in-Lending, the Equal Credit Opportunity, the Fair Credit Reporting, the Fair Debt Collection Practice and the Electronic Funds Transfer Acts, as well as various state laws. These statutes impose requirements on the making, enforcement and collection of consumer loans and on the types of disclosures that need to be made in connection with such loans. IMPORTANT FACTORS THAT MAY AFFECT FUTURE RESULTS From time to time, Chase has made and will make forward-looking statements. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often use words such as "anticipate," "expect," "estimate," "intend," "plan," "goal," "believe" or other words of similar meaning. Forward-looking statements give Chase's current expectations or forecasts of future events, circumstances or results. Chase's disclosure in this report, including in the MD&A section, contains forward-looking statements. Chase may also make forward-looking statements in its other documents filed with the SEC and in other written materials. In addition, Chase's senior management may make forward-looking statements orally to analysts, investors, representatives of the media and others. Any forward-looking statements made by or on behalf of Chase speak only as of the date they are made. Chase does not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made. The reader should, however, consult any further disclosures of a forward-looking nature Chase may make in its Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q, and its Current Reports on Form 8-K. All forward-looking statements, by their nature, are subject to risks and uncertainties. Chase's actual future results may differ materially from those set forth in Chase's forward-looking statements. Factors that might cause Chase's future financial performance to vary from that described in its forward-looking statements include the credit, market, operational, liquidity, interest rate and other risks discussed in the MD&A section of this report and in our other periodic reports filed with the SEC. In addition, the following discussion sets forth certain risks and uncertainties that Chase believes could cause its actual future results to differ materially from expected results. However, other factors besides those listed below or discussed in Chase's reports to the SEC could also adversely affect Chase's results and the reader should not consider any such list of factors to be a complete set of all potential risks or uncertainties. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995. Business Conditions and General Economy. Chase is a leading provider of services in the global markets, global services, investment banking, private banking and national consumer businesses. The profitability of these businesses could be adversely affected by a worsening of general economic conditions in the United States or abroad, particularly by a higher domestic interest rate environment, as well as by foreign and domestic trading market conditions. Such factors could also adversely affect the credit quality of Chase's on-balance sheet and off-balance sheet assets. An economic downturn or significantly higher interest rates could increase the risk that a greater number of Chase's customers would become delinquent on their loans or other obligations to Chase, or would refrain from securing additional debt. Further, a higher rate of delinquencies by customers or counterparties would result in a higher level of charge-offs and a higher level of provision for Chase, which could adversely affect Chase's income. See also "Factors Affecting Allowance for Credit Losses" below. In addition, a higher level of domestic interest rates could affect the amount of assets under management by Chase (for example, by affecting the flows of moneys to or from the mutual funds managed by Chase), impact the willingness of financial investors to participate in loan syndications and underwritings managed by Chase, adversely impact Chase's loan and deposit spreads and affect its domestic trading revenues. 4 7 PART I Competition. Chase operates in a highly competitive environment and expects that competitive conditions will continue to intensify in the future. Technological advances, for example, have made it possible for non-depository institutions to offer customers automatic transfer systems and other automated payment systems services that have been traditional banking products. In addition, investment banks and insurance companies are competing in an increasing number of traditional banking businesses, including syndicated lending and consumer banking. Chase also expects competition to increase as a result of increased merger activity involving the financial services industry. Chase expects these mergers will produce larger, better capitalized companies offering a wide array of financial services and products. Chase believes these consolidation pressures may increase if legislation similar to H.R. 10, discussed below, is enacted into law. (See "Legislation" below.) Foreign Operations; Trading in Foreign Securities. Chase does business throughout the world, including in developing regions of the world commonly known as emerging markets. Chase's businesses and revenues derived from foreign operations are subject to risk of loss from unfavorable political and diplomatic developments, currency fluctuations, social instability, changes in governmental policies or policies of central banks, expropriation, nationalization, confiscation of assets and changes in legislation relating to foreign ownership. Chase also invests in the securities of corporations located in foreign jurisdictions, including emerging markets. Revenues from the trading of foreign securities may also be subject to negative fluctuations as a result of the above factors. The impact of these fluctuations could be accentuated because, generally, foreign trading markets, particularly in emerging markets countries, are smaller, less liquid and more volatile than U.S. trading markets. Government Monetary Policies and Economic Controls. Chase's businesses and earnings are affected by general economic conditions, both domestic and international. Chase's businesses and earnings are also affected by the fiscal or other policies that are adopted by various regulatory authorities of the United States, foreign governments, and international agencies. For example, policies and regulations of the Federal Reserve Board influence, directly and indirectly, the rate of interest paid by commercial banks on their interest-bearing deposits and may also impact the value of financial instruments held by Chase. These actions of the Federal Reserve Board also determine to a significant degree the cost to Chase of funds for lending and investing. The nature and impact of future changes in economic and market conditions and fiscal policies are not predictable and are beyond Chase's control. In addition, these policies and conditions can impact Chase's customers and counterparties, both in the U.S. and abroad, which may increase the risk that such customers or counterparties default on their obligations to Chase. Legislation. During 1998, H.R. 10, the "financial modernization bill," was passed by the House of Representatives and by the Senate Banking Committee. The bill, as approved by the House, would have permitted affiliation among banking, securities and insurance firms through a holding company structure, but would not allow wide-ranging affiliation between depository institutions and commercial entities. The Senate Banking Committee approved a modified version of H.R. 10. H.R. 10, however, did not pass the Senate before the closing of the 1998 congressional session. A modified version of H.R. 10 was introduced on the first day of the 1999 congressional session. If enacted during the 1999 congressional session, this legislation could substantially change the competitive environment in which Chase and its subsidiaries operate. Chase cannot predict at this time whether H.R. 10 or similar legislation will be enacted by Congress or the extent to which Chase and its subsidiaries may be affected by any such legislation. Factors Influencing Year 2000 Readiness. Chase's estimates as to the cost to prepare for the Year 2000 are based on numerous assumptions regarding future events including, among others, the nature and amount of testing that may be required, expectations regarding third party modification plans and continued availability of trained personnel. Chase's operations or financial results could be materially adversely affected if vendors, service providers, customers or securities exchanges are unable to successfully implement their Year 2000 plans and continue their operations; if Chase is unsuccessful in identifying or fixing all Year 2000 problems in its critical operations; or if Chase is unable to retain the staff or third party consultants necessary to implement its Year 2000 plans at currently projected costs and timetables. Factors Affecting Revenues. Chase's management categorizes the revenue components of Chase's operating income statement as either market-sensitive revenues or less market-sensitive revenues. Market-sensitive revenues are affected by many factors, including Chase's credit standing and its success in proprietary positioning, volatility in interest rates and in equity and debt markets, and the economic, political and business factors described above. Chases anticipates that its market-sensitive revenues will experience volatility from time to time as a result of these factors. Management also expects that less market-sensitive revenues will experience fluctuations from time-to-time and, accordingly, the annual growth rate of its less market-sensitive revenues may not continue to accelerate each and every year at the pace achieved during the past three years. 5 8 PART I Factors Affecting Allowance for Credit Losses. Chase's allowance for credit losses provides for risks of losses inherent in the credit extension process for loans, derivative and foreign exchange contracts and lending-related commitments. Estimating potential future losses is inherently uncertain and depends on many factors, including general macroeconomic and political conditions, rating migration, structural changes within industries that alter competitive positions, event risk, unexpected correlations within the portfolio, and other external factors such as legal and regulatory requirements. FOREIGN OPERATIONS For geographic distributions of average assets, total revenue, total expense, income before income tax expense and net income, see Note Twenty-Four on page 72. For a discussion of foreign loans, see Note Four on page 55 and see the sections entitled "Commercial Loan Portfolio" and "Cross-Border Exposure" in the MD&A, on page 33, and "Cross-Border Outstandings," on page 85. - -------------------------------------------------------------------------------- ITEM 2: PROPERTIES - -------------------------------------------------------------------------------- The headquarters of Chase is located in New York City at 270 Park Avenue, which is a 50-story bank and office building owned by Chase. This location contains approximately 1.3 million square feet of commercial office and retail space. Chase also owns and occupies a 60-story building at One Chase Manhattan Plaza in New York City. This location has approximately 2 million square feet of commercial office and retail space, of which approximately 800,000 square feet is leased to outside tenants. Chase also owns and occupies a 22-story bank and office building at 4 New York Plaza, New York City, with 900,000 square feet of commercial office and retail space. In addition, Chase owns a 50-story building known as One New York Plaza in New York City which is leased to outside tenants. Chase has entered into a contract to sell One New York Plaza; the sale is expected to close in the second quarter of 1999. Chase built in 1992 and fully occupies a two-building complex known as Chase MetroTech Center in downtown Brooklyn, New York. This facility contains approximately 1.75 million square feet and houses, among other things, operations and product support functions. Chase and its subsidiaries also own and occupy administrative and operational facilities in Hicksville, New York; Tampa, Florida; Tempe, Arizona; and in Houston, Arlington, and El Paso, Texas. Chase occupies, in the aggregate, approximately 850,000 square feet of space in the United Kingdom. The most significant components of leased space in London are 250,000 square feet at 125 London Wall and 164,000 square feet at Thomas More Square. Chase also owns and occupies a 300,000 square foot operations center in Bournemouth. In addition, Chase and its subsidiaries occupy branch offices and other administrative and operational facilities throughout the United States and in foreign countries under various types of ownership and leasehold agreements. The majority of the properties occupied by Chase are used across all of Chase's business segments and for corporate activities. - -------------------------------------------------------------------------------- ITEM 3: LEGAL PROCEEDINGS - -------------------------------------------------------------------------------- Due to the nature of their businesses, Chase and its subsidiaries are subject to various threatened or filed legal actions from time to time. Some of these actions allege damages, or seek penalties or other relief, in very large amounts. On December 4, 1997, a judgment was entered on a jury verdict against The Chase Manhattan Bank in a lawsuit filed in the United States District Court for the Western District of Texas, 50-Off Stores, Inc. v. Banque Paribas (Suisse), S.A., et al. The plaintiff sought damages for an alleged conversion by the Bank of shares of common stock issued by the plaintiff that had been held in a custody account of the Bank for its customer, Banque Paribas (Suisse) S.A. The judgment awarded the plaintiff $10.6 million in compensatory and $138 million in punitive damages. Chase has filed an appeal with the Fifth Circuit Court of Appeals. The amount of any ultimate exposure in this litigation cannot be determined with certainty at this time. Chase does not expect the final outcome of any of its lawsuits, including the suit described above, to have a material adverse effect on its consolidated financial condition. - -------------------------------------------------------------------------------- ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - -------------------------------------------------------------------------------- None. 6 9 PART I - -------------------------------------------------------------------------------- EXECUTIVE OFFICERS OF THE REGISTRANT - --------------------------------------------------------------------------------
Age Positions and offices held Name (at December 31, 1998) with Chase and Chase Bank - -------------------------------------------------------------------------------- Walter V. Shipley 63 Chairman and Chief Executive Officer of Chase and Chase Bank, 1983-1992 and 1994 to the present. From 1992 until December 31, 1993, he had been President of Chase and Chase Bank. He has been a Director of Chase and Chase Bank since 1982. Thomas G. Labrecque 60 President and Chief Operating Officer of Chase and Chase Bank since 1996, having served since 1990 as Chairman of the Board and Chief Executive Officer of heritage Chase. He had been a Director of heritage Chase since 1980 and became a Director of Chase and Chase Bank in 1996. William B. Harrison Jr. 55 Vice Chairman of the Board of Chase and Chase Bank, and responsible for Chase's Global Bank businesses. He has been a Director of Chase since 1991 and of Chase Bank since 1990. Donald L. Boudreau 58 Vice Chairman of Chase and Chase Bank. He became responsible for National Consumer Services in December 1997 and before that had been responsible for Chase's consumer credit businesses. Prior to the Merger, he was Vice Chairman and a Director of heritage Chase. Marc J. Shapiro 51 Vice Chairman of Chase and Chase Bank, responsible for finance and risk management. Prior to July 1997, he was Chairman and Chief Executive Officer of Chase Bank of Texas, National Association (formerly Texas Commerce Bank, National Association). Joseph G. Sponholz 54 Vice Chairman of Chase and Chase Bank, responsible for Chase Technology Solutions. Prior to December 1997, he had been Executive Vice President and Chief Administrative Officer of Chase. John J. Farrell 46 Director Human Resources of Chase and Chase Bank. Prior to the Merger, he held the same position at heritage Chase since 1993. Frederick W. Hill 48 Director Corporate Marketing and Communications of Chase and Chase Bank since September 1997. Before joining Chase, he had been senior vice president, communications and community relations, for McDonnell Douglas Corporation since 1995, prior to which he headed the communications function for Westinghouse Electric Corporation. William H. McDavid 52 General Counsel of Chase and Chase Bank since 1988.
Unless otherwise noted, all of Chase's above-named executive officers have continuously held senior-level positions with Chase or its predecessor institutions, Chemical and heritage Chase, during the five fiscal years ended December 31, 1998. There are no family relationships among the foregoing executive officers. 7 10 PART II - -------------------------------------------------------------------------------- ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - -------------------------------------------------------------------------------- The outstanding shares of Chase's common stock are listed on the New York Stock Exchange and the London Stock Exchange Limited. For the quarterly high and low prices of Chase's common stock on the New York Stock Exchange for the last two years, see the section entitled "Supplementary Data-Quarterly Financial Information (Unaudited)" on page 74. Chase declared quarterly cash dividends on its common stock in the amount of $.36 per share for each quarter of 1998 and $.31 per share for each quarter of 1997. At February 28, 1999, there were 82,635 holders of record of Chase's common stock. During the fourth quarter of 1998, shares of common stock of Chase were issued in transactions exempt from registration under Section 4(2) of the Securities Act of 1933. Such shares of common stock were issued to retired directors who had deferred receipt of common stock pursuant to the Deferred Compensation Plan for Non-Employee Directors as well as to serving directors. These issuances amounted to 314 shares on October 1, 1998, and 4,830 shares on December 1, 1998. - -------------------------------------------------------------------------------- ITEM 6: SELECTED FINANCIAL DATA - -------------------------------------------------------------------------------- For five-year selected financial data, see "Selected Financial Data (Unaudited)" on page 75. - -------------------------------------------------------------------------------- ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Management's discussion and analysis of financial condition and results of operations, entitled "Management's Discussion and Analysis", appears on pages 18 through 43. - -------------------------------------------------------------------------------- ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------------------- For information related to market risk, see the Market Risk Management section on pages 36 through 39, Note One on page 49 and Note Nineteen on page 65. - -------------------------------------------------------------------------------- ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - -------------------------------------------------------------------------------- The consolidated financial statements, together with the notes thereto and the report of PricewaterhouseCoopers LLP dated January 19, 1999 thereon, appear on pages 44 through 74. Supplementary financial data for each full quarter within the two years ended December 31, 1998 is included on page 74 in the table entitled "Supplementary Data-Quarterly Financial Information (Unaudited)". Also included is a "Glossary of Terms" on page 76. - -------------------------------------------------------------------------------- ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - -------------------------------------------------------------------------------- None. - -------------------------------------------------------------------------------- PART III - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF CHASE - -------------------------------------------------------------------------------- See Item 13 below. - -------------------------------------------------------------------------------- ITEM 11: EXECUTIVE COMPENSATION - -------------------------------------------------------------------------------- See Item 13 below. - -------------------------------------------------------------------------------- ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - -------------------------------------------------------------------------------- See Item 13 below. - -------------------------------------------------------------------------------- ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------------------------------- Information related to Chase's Executive Officers is included on page 7. Pursuant to Instruction G (3) to Form 10-K, the remainder of the information to be provided in Items 10, 11, 12 and 13 of Form 10-K (other than information pursuant to Rule 402 (i), (k) and (l) of Regulation S-K) are incorporated by reference to Chase's definitive proxy statement for the annual meeting of stockholders, to be held May 18, 1999, which proxy statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the close of Chase's 1998 fiscal year. 8 11 PART IV - -------------------------------------------------------------------------------- ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------------- (a) EXHIBITS, FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES 1. Financial Statements The consolidated financial statements, the notes thereto and the report thereon listed in Item 8 are set forth commencing on page 44. 2. Financial Statement Schedules None. 3. Exhibits 3.1 Restated Certificate of Incorporation of The Chase Manhattan Corporation (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-8 (File No. 333-07941) of The Chase Manhattan Corporation). 3.2 Certificate of Amendment of Restated Certificate of Incorporation of The Chase Manhattan Corporation (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-3 (File No. 333-56573) of The Chase Manhattan Corporation). 3.3 Certificate of Designations of Fixed/Adjustable Rate, Noncumulative Preferred Stock of The Chase Manhattan Corporation (incorporated by reference to Exhibit 3.3 to the Registration Statement on Form S-3 (File No. 333-56573) of The Chase Manhattan Corporation). 3.4 By-laws, as amended as of March 17, 1998, of The Chase Manhattan Corporation (incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K, dated December 31, 1997, of The Chase Manhattan Corporation, File No. 1-5805). 4.1 Indenture, dated as of December 1, 1989, between Chemical Banking Corporation and The Chase Manhattan Bank (National Association), as succeeded to by Bankers Trust Company, as Trustee (incorporated by reference to Exhibit 4.9 to the Registration Statement on Form S-3 (File No. 33-32409) of Chemical Banking Corporation). 4.2(a) Indenture, dated as of April 1, 1987, as amended and restated as of December 15, 1992, between Chemical Banking Corporation and Morgan Guaranty Trust Company of New York, as succeeded to by U.S. Bank Trust National Association (formerly known as First Trust of New York, National Association), as Trustee (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, dated December 22, 1992, of Chemical Banking Corporation, File No. 1-5805). 4.2(b) Second Supplemental Indenture, dated as of October 8, 1996, between The Chase Manhattan Corporation and U.S. Bank Trust National Association (formerly known as First Trust of New York, National Association), as Trustee, to the Indenture, dated as of April 1, 1987, as amended and restated as of December 15, 1992 (incorporated by reference to Exhibit 4.5 to the Registration Statement on Form S-3 (File No. 333-14959) of The Chase Manhattan Corporation). 4.3(a) Indenture, dated as of June 1, 1985, between Manufacturers Hanover Corporation and IBJ Schroder Bank and Trust Company, as Trustee, relating to the 8 1/2% Subordinated Capital Notes Due February 15, 1999 (incorporated by reference to Exhibit 4(b) to the Current Report on Form 8-K, dated February 27, 1987, of Manufacturers Hanover Corporation, File No. 1-5923-1) . 4.3(b) First Supplemental Indenture, dated as of December 31, 1991, among Chemical Banking Corporation, Manufacturers Hanover Corporation and IBJ Schroder Bank and Trust Company, as Trustee, to the Indenture, dated June 1, 1985 (incorporated by reference to Exhibit 4.18(b) to the Annual Report on Form 10-K, dated December 31, 1991, of Chemical Banking Corporation, File No. 1-5805). 4.3(c) Second Supplemental Indenture, dated as of October 8, 1996, between The Chase Manhattan Corporation and IBJ Schroder Bank and Trust Company, as Trustee, to the Indenture, dated June 1, 1985 (incorporated by reference to Exhibit 4.12 to the Registration Statement on Form S-3 (File No. 333-14959) of The Chase Manhattan Corporation). 4.4(a) Indenture, dated as of July 1, 1986, between The Chase Manhattan Corporation and Bankers Trust Company, as Trustee (incorporated by reference to Exhibit (4)(a) to the Registration Statement on Form S-3 (File No. 33-7299) of The Chase Manhattan Corporation). 9 12 PART IV 4.4(b) First Supplemental Indenture, dated as of November 1, 1990, between The Chase Manhattan Corporation and Bankers Trust Company, as Trustee, to the Indenture, dated as of July 1, 1986 (incorporated by reference to Exhibit (4)(b) to the Registration Statement on Form S-3 (File No. 33-40485) of The Chase Manhattan Corporation). 4.4(c) Second Supplemental Indenture, dated as of May 1, 1991, between The Chase Manhattan Corporation and Bankers Trust Company, as Trustee, to the Indenture, dated as of July 1, 1986 (incorporated by reference to Exhibit (4)(c) to the Registration Statement on Form S-3 (File No. 33-42367) of The Chase Manhattan Corporation). 4.4(d) Third Supplemental Indenture, dated as of March 29, 1996, among Chemical Banking Corporation, The Chase Manhattan Corporation and Bankers Trust Company, as Trustee, to the Indenture, dated as of July 1, 1986 (incorporated by reference to Exhibit 4.18 to the Registration Statement on Form S-3 (File No. 333-14959) of The Chase Manhattan Corporation). 4.5(a) Amended and Restated Indenture, dated as of September 1, 1993, between The Chase Manhattan Corporation and Chemical Bank, as Trustee (incorporated by reference to Exhibit (4)(cc) to the Current Report on Form 8-K, dated August 19, 1993, of The Chase Manhattan Corporation, File No. 1-5945). 4.5(b) First Supplemental Indenture, dated as of March 29, 1996, among Chemical Banking Corporation, The Chase Manhattan Corporation, Chemical Bank, as resigning Trustee, and U.S. Bank Trust National Association (formerly known as First Trust of New York, National Association), as successor Trustee, to the Amended and Restated Indenture, dated as of September 1, 1993 (incorporated by reference to Exhibit 4.22 to the Registration Statement on Form S-3 (File No. 333-14959) of The Chase Manhattan Corporation). 4.5(c) Second Supplemental Indenture, dated as of October 8, 1996, between The Chase Manhattan Corporation and U.S. Bank Trust National Association (formerly known as First Trust of New York, National Association), as Trustee, to the Amended and Restated Indenture, dated as of September 1, 1993 (incorporated by reference to Exhibit 4.23 to the Registration Statement on Form S-3 (File No. 333-14959) of The Chase Manhattan Corporation). 4.6(a) Indenture, dated as of May 15, 1993, between Margaretten Financial Corporation and The Bank of New York, as Trustee, relating to the 6 3/4% Guaranteed Notes due June 15, 2000 (incorporated by reference to Exhibit 4(a) to the Registration Statement on Form S-3 (No. 33-60262) of Margaretten Financial Corporation). 4.6(b) Supplemental Indenture, dated as of July 22, 1994, to the Indenture, dated as of May 15, 1993, among Margaretten Financial Corporation, Chemical Banking Corporation and The Bank of New York, as Trustee, and Guarantee, dated as of July 22, 1994, by Chemical Banking Corporation (incorporated by reference to Exhibit 4.34 to the Current Report on Form 8-K, dated September 28, 1994, of Chemical Banking Corporation, File No. 1-5805). 4.7 Junior Subordinated Indenture, dated as of December 1, 1996, between The Chase Manhattan Corporation and The Bank of New York, as Debenture Trustee (incorporated by reference to Exhibit 4.24 to the Registration Statement on Form S-3 (File No. 333-19719) of The Chase Manhattan Corporation). 4.8 Guarantee Agreement, dated as of January 24, 1997, between The Chase Manhattan Corporation and The Bank of New York, as Trustee, with respect to the Global Floating Rate Capital Securities, Series B, of Chase Capital II (incorporated by reference to Exhibit 4.8 to the Annual Report on Form 10-K, dated December 31, 1997, of The Chase Manhattan Corporation, File No. 1-5805). 4.9 Amended and Restated Trust Agreement, dated as of January 24, 1997, among The Chase Manhattan Corporation, The Bank of New York, as Property Trustee, The Bank of New York (Delaware), as Delaware Trustee, and the Administrative Trustees named therein, with respect to Chase Capital II (incorporated by reference to Exhibit 4.9 to the Annual Report on Form 10-K, dated December 31, 1997, of The Chase Manhattan Corporation, File No. 1-5805). 10.1 Deferred Compensation Plan for Non-Employee Directors of The Chase Manhattan Corporation and The Chase Manhattan Bank, as amended and restated effective December 1996 (incorporated by reference to Exhibit 10.1 to the Annual Report on Form 10-K, dated December 31, 1996, of The Chase Manhattan Corporation, File No. 1-5805). 10.2 Post-Retirement Compensation Plan for Non-Employee Directors, as amended and restated as of May 21, 1996 (incorporated by reference to Exhibit 10.2 to the Annual Report on Form 10-K, dated December 31, 1996, of The Chase Manhattan Corporation, File No. 1-5805). 10 13 10.3 Deferred Compensation Plan of Chemical Banking Corporation and Participating Companies, as amended through January 1, 1993 (incorporated by reference to Exhibit 10.5 to the Annual Report on Form 10-K, dated December 31, 1994, of Chemical Banking Corporation, File No. 1-5805). 10.4 The Chase Manhattan Corporation 1996 Long-Term Incentive Plan (incorporated by reference to the Schedule 14A, filed on April 17, 1996, of The Chase Manhattan Corporation, File No. 1-5805). 10.5 The Chase Manhattan 1994 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10O to The Chase Manhattan Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, File No. 1-5945). 10.6 Amendment to The Chase Manhattan 1994 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10S to The Chase Manhattan Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, File No. 1-5945). 10.7 Chemical Banking Corporation Long-Term Stock Incentive Plan, as amended and restated as of May 19, 1992 (incorporated by reference to Exhibit 10.7 to the Annual Report on Form 10-K, dated December 31, 1992, of Chemical Banking Corporation, File No. 1-5805). 10.8 The Chase Manhattan 1987 Long-Term Incentive Plan, as amended (incorporated by reference to Exhibit 10A to The Chase Manhattan Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-5945). 10.9 Amendment to The Chase Manhattan 1987/82 Long-Term Incentive Plan (incorporated by reference to Exhibit 10T to the Quarterly Report on Form 10-Q, for the quarter ended September 30, 1995, of The Chase Manhattan Corporation, File No. 1-5945) 10.10 Long Term Incentive Program of Manufacturers Hanover Corporation (incorporated by reference to Exhibit 10.10 to the Annual Report on Form 10-K, dated December 31, 1997, of The Chase Manhattan Corporation, File No. 1-5805). 10.11 Key Executive Performance Plan of Chemical Banking Corporation (incorporated by reference to Exhibit 10.4 to the Annual Report on Form 10-K, dated December 31, 1994, of Chemical Banking Corporation, File No. 1-5805). 10.12 The Chase Manhattan Annual Incentive Arrangement for Certain Executive Officers (incorporated by reference to Exhibit 10W to the Quarterly Report on Form 10-Q, for the quarter ended September 30, 1995, of The Chase Manhattan Corporation, File No. 1-5945) 10.13 Forms of severance agreements as entered into by The Chase Manhattan Corporation and certain of its executive officers (incorporated by reference to Exhibit 10.13 to the Annual Report on Form 10-K, dated December 31, 1997, of The Chase Manhattan Corporation, File No. 1-5805). 10.14 Form of termination agreement as entered into by The Chase Manhattan Corporation and Donald L. Boudreau (incorporated by reference to the Annual Report on Form 10-K, dated December 31, 1994, of The Chase Manhattan Corporation, File No. 1-5945). 10.15 Form of amendment to the termination agreement as entered into by The Chase Manhattan Corporation and Donald L. Boudreau (incorporated by reference to the Quarterly Report on Form 10-Q, dated September 30, 1995, of The Chase Manhattan Corporation, File No. 1-5945). 10.16 Permanent Life Insurance Options Plan (incorporated by reference to Exhibit 10.11 to the Annual Report on Form 10-K, dated December 31, 1992, of Chemical Banking Corporation, File No. 1 -5805). 10.17 Executive Retirement Plan of Chemical Banking Corporation and Certain Subsidiaries (incorporated by reference to Exhibit 10.8 to the Annual Report on Form 10-K, dated December 31, 1995, of Chemical Banking Corporation, File No. 1-5805). 10.18 Supplemental Retirement Plan of Chemical Bank and Certain Affiliated Companies, restated effective January 1, 1993 and as amended through January 1, 1995 (incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K, dated December 31, 1995, of Chemical Banking Corporation, File No. 1-5805). 11 14 PART IV 10.19 Supplemental Retirement Plan of The Chase Manhattan Bank, as amended (incorporated by reference to Exhibit 10G of The Chase Manhattan Corporation's Annual Report on Form 10-K for the year ended December 31, 1989, File No. 1-5945). 10.20 Further Amendment to the Supplemental Retirement Plan of The Chase Manhattan Bank (incorporated by reference to Exhibit 10G of The Chase Manhattan Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-5945) 10.21 Amendment to Supplemental Retirement Plan of The Chase Manhattan Bank (incorporated herein by reference to Exhibit 10Z to The Chase Manhattan Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, File No. 1-5945). 10.22 Supplemental Benefit Plan of The Chase Manhattan Bank, as amended (incorporated by reference to Exhibit 10H of The Chase Manhattan Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-5945). 10.23 Amendment to Supplemental Benefit Plan of The Chase Manhattan Bank (incorporated herein by reference to Exhibit 10AA to The Chase Manhattan Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, File No. 1-5945). 10.24 TRA86 Supplemental Benefit Plan of The Chase Manhattan Bank, as amended (incorporated by reference to Exhibit 10I of The Chase Manhattan Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-5945). 10.25 Amendment to TRA86 Supplemental Benefit Plan of The Chase Manhattan Bank (incorporated herein by reference to Exhibit 10BB to The Chase Manhattan Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, File No. 1-5945). 11.1 Computation of earnings per common share. 12.1 Computation of ratio of earnings to fixed charges. 12.2 Computation of ratio of earnings to fixed charges and preferred stock dividend requirements. 21.1 List of Subsidiaries of The Chase Manhattan Corporation. 22.1 Annual Report on Form 11-K of the 401(k) Savings Plan of The Chase Manhattan Bank (to be filed by amendment pursuant to Rule 15d-21 under the Securities Exchange Act of 1934). 23.1 Consent of Independent Accountants. 27.1 Financial Data Schedule. The Chase Manhattan Corporation hereby agrees to furnish to the Commission, upon request, copies of instruments defining the rights of holders for the outstanding nonregistered long-term debt of The Chase Manhattan Corporation and its subsidiaries. These instruments have not been filed as exhibits hereto by reason that the total amount of each issue of such securities does not exceed 10% of the total assets of The Chase Manhattan Corporation and its subsidiaries on a consolidated basis. In addition, The Chase Manhattan Corporation hereby agrees to file with the Commission, upon request, the Guarantees and the Amended and Restated Trust Agreements for each Delaware business trust subsidiary that has issued Capital Securities. The provisions of such agreements differ from the documents constituting Exhibits 4.8 and 4.9 to this report only with respect to the pricing terms of each series of Capital Securities; these pricing terms are disclosed in Footnote Six of the Notes to Consolidated Financial Statements on page 56. (b) REPORTS ON FORM 8-K o A Current Report on Form 8-K dated October 20, 1998 was filed on October 23, 1998 setting forth The Chase Manhattan Corporation's financial results for the third quarter of 1998. o A Current Report on Form 8-K dated November 17, 1998 was filed on November 18, 1998 announcing the authorization by the Board of Directors of The Chase Manhattan Corporation of Chase's repurchase of net $3 billion of its common stock. o A Current Report on Form 8-K dated December 16, 1998 was filed on December 16, 1998 announcing certain expectations regarding 1998 fourth-quarter earnings. 12 15 Pages 13-16 Not Used 16 Financial Section Table of Contents Management's Discussion and Analysis: 18 Overview 19 Management Performance Measurements 19 Lines of Business Results Global Bank National Consumer Services Chase Technology Solutions Corporate 23 Results of Operations Market-Sensitive Revenue Less Market-Sensitive Revenue Noninterest Expense Credit Costs Income Taxes 29 Risk Management 29 Credit Risk Management Credit-Related Portfolio Consumer Loan Portfolio Commercial Loan Portfolio Cross-Border Exposure Derivative and Foreign Exchange Contracts Allowance for Credit Losses 36 Market Risk Management 40 Liquidity Risk Management Liquidity Capital 41 Operating Risk Management EMU Year 2000 43 Accounting and Reporting Developments 43 Comparison between 1997 and 1996 Audited Financial Statements: 44 Management's Report on Responsibility for Financial Reporting 44 Report of Independent Accountants 45 Consolidated Financial Statements 49 Notes to Consolidated Financial Statements Supplementary Data: 74 Quarterly Financial Information 75 Selected Financial Data 76 Glossary of Terms 17 17 Management's Discussion and Analysis The Chase Manhattan Corporation - -------------------------------------------------------------------------------- OVERVIEW - --------------------------------------------------------------------------------
For the year ended December 31, Over/(Under) (in millions, except per share and ratio data) 1998 1997 1997 - -------------------------------------------------------------------------------- Operating Basis(a) Operating Revenue $19,824 $17,699 12% Operating Earnings 4,016 3,849 4 Diluted Earnings Per Share 4.51 4.17 8 Return on Average Common Equity 18.4% 19.5% (110)bp Efficiency Ratio 54 55 (100)bp Shareholder Value Added $ 1,406 $ 1,393 1% - -------------------------------------------------------------------------------- Reported Basis Net Income $ 3,782 $ 3,708 2% Diluted Net Income Per Share 4.24 4.01 6 Return on Average Common Equity 17.3% 18.7% (140)bp - --------------------------------------------------------------------------------
(a) Operating basis excludes the impact of credit card securitizations, restructuring costs and special items. See page 19 for further discussion. bp- Denotes basis points; 100 bp equals 1%. Diluted operating earnings per share for full year 1998 increased to $4.51 from $4.17 in 1997. Operating earnings rose to $4.02 billion from $3.85 billion in 1997. Reported net income for the full year was $3.78 billion, compared with $3.71 billion in 1997. Operating highlights for 1998 included: o Revenues rose 12%, with all three franchises showing double-digit growth. o Diluted earnings per share increased 8%. o Chase's Tier 1 Capital ratio rose to 8.3% from 7.9% last year. o Shareholder Value Added of $1.4 billion. Chase's record performance was achieved during one of the most challenging periods for the financial services industry in recent years. Driving these results were the strength and diversity of Chase's business franchises and a disciplined approach to risk, capital and expense management. Franchise Strength and Diversity: Chase's leadership positions and product range are key to sustaining consistent growth trends. Despite unusually volatile financial markets in 1998, most Chase businesses experienced double-digit revenue growth for the year. Chase's National Consumer Services and Global Services businesses, which tend to be less market sensitive, grew 12% and 14%, respectively, while the Global Bank's revenue increased 10%, reflecting Chase's product diversity even within its lines of business. For example, Global Markets revenues increased 16% as strong foreign exchange results offset weakness in emerging markets. Similarly, Global Investment Banking revenues grew 24%, as loan syndication volume rose sharply even as high yield trading income decreased amid market concerns. Financial Discipline: In managing costs, Chase keeps to the principles of spending to support revenue growth, pacing investments appropriately and looking to productivity initiatives to fund investments. This approach to expense management led to the plan, announced in March 1998, to save $460 million per year by streamlining and redesigning business support functions and selectively redeploying savings to growth opportunities. Over the past year, Chase's efficiency ratio continued to improve, reaching 54% for 1998 compared with 55% last year. In early 1998, Chase implemented Shareholder Value Added ("SVA") as Chase's primary measure for financial performance. SVA rewards financial discipline in capital management, expense management and risk management. The adoption of SVA contributed to the reduction in the growth rate in risk-weighted assets from 15% in 1997 to 1% in 1998. Since equity capital increased 10% from year-end 1997 levels, Chase's Tier 1 Capital ratio increased from 7.9% in 1997 to 8.3% in 1998, ending the year above Chase's stated target of 8% to 8.25%. In November, Chase announced a $3 billion net share buyback program that began in January 1999. Capital generated in excess of the target Tier 1 Capital ratio will be used to purchase Chase's common stock or for future reinvestment and acquisition opportunities. Risk Management: Chase's risk management practice helped differentiate 1998 financial performance. Risk management is an evolving practice, fully integrated into Chase's financial measurements through SVA. Lessons learned in Chase's trading businesses in late 1997 impacted Chase's approach to market risk management in 1998, encouraging an emphasis on stress testing that helped Chase achieve record trading revenues during 1998's challenging environment. Chase's credit risk management focused on reducing cross-border exposure. Compared with year-end 1997 levels, Chase's exposures to emerging markets in Latin America and Asia, excluding Japan, Australia and New Zealand, declined 34%. [Graph 1 - See Appendix I] 18 18 This Management's Discussion and Analysis contains certain forward-looking statements, including without limitation, statements related to credit, market and operating risk. These forward-looking statements are subject to risks and uncertainties and Chase's actual results may differ materially from those included in these statements. Reference is made to Chase's reports filed with the Securities and Exchange Commission for a discussion of factors that may cause such differences to occur. See Glossary of Terms on page 76 for a definition of certain terms used in this annual report. - -------------------------------------------------------------------------------- MANAGEMENT PERFORMANCE MEASUREMENTS - -------------------------------------------------------------------------------- Described below are the concepts and basis of presentation that management uses to measure and evaluate business unit profitability. Shareholder Value Added: Chase defines SVA as cash operating earnings (operating earnings excluding the impact of amortization of goodwill and certain intangibles) minus preferred dividends and an explicit charge for capital. The capital charge is the return required by shareholders for the use of their capital multiplied by the amount of economic risk-based capital attributed to each business unit. Chase currently assesses its cost of equity capital at 13%. The concept of SVA measures the incremental return generated by Chase businesses above that required by Chase's shareholders. If new capital can be employed over time at a return in excess of 13%, or if activities or assets that do not return 13% on capital can be eliminated, SVA will increase. SVA explicitly highlights the trade-offs for employing capital in the business units versus returning capital to shareholders. Management measures business units on their contribution to long-term growth in SVA. Operating Basis: Management evaluates Chase's financial performance on an operating basis as well as on the basis reported under generally accepted accounting principles. Results on an operating basis exclude the impact of special items, restructuring costs and credit card securitizations. Special items are viewed by management as those revenue and expense transactions that are not part of Chase's normal day-to-day business operations or are unusual in nature thereby impacting management's analysis of trends. For example, special items include gains or losses on disposition of significant non-strategic assets, significant prior years' interest related to current year's tax refunds, or infrequent charges such as accelerated vesting of employee stock-based incentive awards. In a credit card securitization, Chase takes a portion of its receivables and packages them into securities. Securitizations change Chase's status from that of a lender to that of a servicer. The securitization of credit card receivables does not significantly affect Chase's reported net income; however, it affects the manner in which amounts are classified in the Consolidated Statement of Income. When measuring "operating performance" management excludes the impact of credit card securitizations. In discussing Chase's operating results, management uses the term "operating" when describing an amount that affects the income statement and the term "managed" when describing an amount that affects the balance sheet. - -------------------------------------------------------------------------------- LINES OF BUSINESS RESULTS - -------------------------------------------------------------------------------- Chase's businesses are organized into three major franchises: o Global Bank, o National Consumer Services ("NCS"), and o Chase Technology Solutions ("CTS"), which includes Global Services. Chase allocates equity to its business units utilizing an economic risk-based capital methodology. This methodology quantifies credit, market and operating risks within each business unit and allocates capital accordingly. Chase's allocated capital at the line of business level also incorporates a "leverage capital tax" on managed assets and some off-balance sheet instruments. This tax recognizes the need for Chase to maintain certain capital ratios to meet bank regulatory definitions of "well-capitalized." Also, businesses have been allocated capital equal to one hundred percent of any goodwill and certain intangibles generated through acquisitions. Lines of business results are subject to restatement as appropriate whenever there are refinements in management reporting policies or changes to the management organization. During 1998, refinements have been made to the methodology for the allocation of capital to the various lines of business. Prior periods have been restated to reflect these changes. The table below provides summary financial information on an operating basis for the three major franchises. The discussion that follows the table focuses on business unit performance within these franchises. See Note Twenty-Three for further disclosure of Chase's business segments.
LINES OF BUSINESS RESULTS Global Bank National Consumer Services Year Ended December 31, -------------------------------------- ---------------------------------------- (in millions, except ratios) 1998 Over/(Under) 1997 1998 Over/(Under) 1997 - ---------------------------------------------------------------------------------------------------------------------- Operating Revenue $ 9,298 $ 826 10% $ 8,203 $ 862 12% Cash Operating Earnings 2,855 283 11 1,265 137 12 Average Common Equity 13,924 935 7 6,381 1,121 21 Average Managed Assets 267,227 6,418 2 106,703 11,439 12 Shareholder Value Added 985 215 28 409 9 2 Cash Return on Common Equity 20.1% -- 110bp 19.4% -- (120)bp Cash Efficiency Ratio 47 -- -- 49 -- (200) - ---------------------------------------------------------------------------------------------------------------------- Global Services Total(a) Year Ended December 31, -------------------------------------- ---------------------------------------- (in millions, except ratios) 1998 (Under)/Over 1997 1998 (Under)/Over 1997 - ---------------------------------------------------------------------------------------------------------------------- Operating Revenue $ 2,667 $ 326 14% $ 19,824 $ 2,125 12% Cash Operating Earnings 496 73 17 4,277 256 6 Average Common Equity 1,879 192 11 21,328 2,500 13 Average Managed Assets 10,386 983 10 391,222 20,323 5 Shareholder Value Added 243 55 29 1,406 13 1 Cash Return on Common Equity 26.0% -- 180bp 19.6% -- (80)bp Cash Efficiency Ratio 70 -- (100) 53 -- (100) - ----------------------------------------------------------------------------------------------------------------------
(a) Total column includes Corporate results. See description of Corporate results on page 23. bp- Denotes basis points; 100 bp equals 1%. 19 19 Management's Discussion and Analysis The Chase Manhattan Corporation GLOBAL BANK Global Bank combines the strengths of a leading commercial bank and a leading investment bank to meet the needs of corporations, institutions, governments and wealthy individuals around the world. With operations in approximately 50 countries, including major operations in all key international financial centers, Global Bank integrates a broad range of leading product capabilities, industry knowledge and geographic reach to produce superior customer solutions. Global Bank operating revenues in 1998 rose $826 million, or 10%, due to higher investment banking fees, strong growth in most global markets activities and private equity gains, despite unusually high volatility in financial markets during the second half of 1998. Cash operating earnings and SVA for 1998 increased $283 million and $215 million, respectively. The following table sets forth certain key financial performance measures of the businesses within Global Bank. [Graph 2 - See Appendix I]
1998 Over/(Under) 1997 ---------------------------------- -------------------------------------- Cash Cash Cash Cash Year Ended December 31, Operating Operating Efficiency Operating Operating Efficiency (in millions, except ratios) Revenues Earnings Ratio Revenues Earnings Ratio - --------------------------------------------------------------------------------------------------------------------- Global Markets $3,621 $1,231 47% 16% 21% (100)bp Global Investment Banking 1,258 321 57 24 19 200 Corporate Lending 1,421 503 26 5 5 -- Chase Capital Partners 826 449 13 10 9 -- Global Private Bank 673 143 63 6 4 -- Middle Markets 785 174 55 (4) (13) 500 Chase Texas (consolidated) 1,577 433 54 16 25 (400) - ---------------------------------------------------------------------------------------------------------------------
bp- Denotes basis points; 100 bp equals 1%. Global Markets: Global Markets' activities are diverse, by product and geography, and encompass the trading and sale of foreign exchange, derivatives, fixed income securities and commodities. Chase operates 24 hours a day covering the major international cross-border financial markets, as well as many local markets, and is a recognized world leader in such key activities as foreign exchange, interest rate derivatives and emerging markets debt. Also included within Global Markets are Chase's domestic and international treasury units, which have the primary responsibility for managing Chase's interest rate risk exposures and investment securities activities. Treasury results are managed on a total return basis with one of the primary objectives being the creation of economic value over time. Total return combines reported revenues (net interest income and securities gains/losses) and the change in the net unrealized appreciation/depreciation of all financial instruments and underlying balance sheet items. Trading-related revenue for 1998 was $2.2 billion, an increase of 12% from 1997, despite difficult market conditions that spread from emerging markets to many developed markets. Results reflect strong performance across traditional products, including foreign exchange, and newer businesses, such as credit and equity derivatives, and high-grade bonds. Securities gains realized during 1998 were $609 million, representing a portion of the increased value in Chase's available-for-sale ("AFS") investment portfolio, which is managed as part of Chase's overall market risk management process. In 1998, the total return (pretax before expenses) from interest rate risk management activities amounted to $523 million, compared with $502 million in 1997. 20 20 [Graph 3 - See Appendix I] Global Investment Banking: Global Investment Banking ("GIB") advises corporations, financial institutions, financial sponsors and governments by providing integrated one-stop financial solutions and industry expertise to clients globally. Chase's corporate finance client base is extensive and is managed through global client industry groups that include chemicals, financial institutions, healthcare, insurance, media and telecommunications, multinationals, natural resources, oil and gas, power and environmental, real estate, sports advisory and finance, transportation and broker/dealers. The product offerings encompass syndicated finance, high yield securities, mergers and acquisitions advisory, project finance, real estate advisory and placement, restructuring and private placements. Chase is the largest lead manager of U.S. corporate debt, with a major presence in both public and private debt markets, and has built a strong presence in the advisory arena by leveraging debt market leadership with an integrated approach to clients' financial solutions. GIB operating revenues in 1998 increased by $247 million, or 24%, to $1,258 million when compared with 1997, reflecting strong growth in loan syndications, merger and acquisition advisory services and high yield securities underwriting, offset by lower revenue from high yield debt trading. Corporate Lending: Corporate Lending provides credit and lending services to clients globally within a strategy that emphasizes origination for distribution. An active portfolio management effort is an integral part of corporate lending activities and is focused on managing concentrations by product, borrower, risk grade, industry and geography. The introduction of the use of SVA for product and customer decisions resulted in higher spreads on retained assets and the disposition of less attractive loans. Management expects to continue to manage commercial loans for shareholder value rather than revenue growth. Revenues and cash operating earnings each increased 5% for 1998 when compared with 1997. Chase Capital Partners: Chase Capital Partners ("CCP") is one of the largest global private equity organizations with approximately $7.2 billion under management, including $4.3 billion in direct equity and equity-related investments and $1.3 billion in fund investments. CCP provides equity and mezzanine financing for a wide variety of investment opportunities in the United States and, to a lesser extent, abroad. During 1998, CCP's direct investments totaled approximately $1.7 billion in 120 venture capital, management buyout, recapitalization, growth equity and mezzanine transactions, compared with approximately $0.9 billion in over 100 direct investments during 1997. For 1998, cash operating earnings rose $38 million, or 9%, to $449 million reflecting CCP's accelerated pace of investment activities over the last several years. Global Private Bank: The Global Private Bank serves a global client base of high net worth individuals and families, offering a full range of private banking services as well as access to the broad product capabilities of the Global Bank. Services include a full range of integrated private banking capabilities, investment management, global capital market products and services, risk management, alternative investments such as private equity funds, trust and estate planning, global custody, mutual funds, credit and banking, and philanthropic advisory services. Earnings for 1998 were driven by a 6% growth in revenues, reflecting strong growth in fee income, primarily related to double-digit growth in private client trust and investment management activities, a more than doubling of alternative investment revenues and double-digit growth in banking services fees. Lower levels of growth in Asia and selected European markets offset these strong growth trends. Middle Markets: Chase is the premier provider of financial services to middle-market companies (companies with sales ranging from $10 million to $500 million) regionally, with a national focus in selected industries. It is the market leader in the New York metropolitan tri-state area where it has relationships with 48% of middle market companies and is lead bank for 21% of these companies. Cash operating earnings decreased $27 million in 1998 when compared with 1997 reflecting lower spreads and an increase in expenses. Chase Texas: Chase Texas is the primary bank for more large corporations and middle market companies than any other bank in Texas. Chase Texas also maintains a strong consumer banking presence in key Texas markets through its 124 locations. Additionally, Chase Texas is the largest bank for personal and corporate trust services in the southwest. Operating revenues increased 16% for 1998 when compared with 1997, reflecting increased corporate finance fees, higher loan and deposit volumes, and securities gains. The above discussion reflects the consolidated results for Chase Texas. The lines of business results for the global bank portion of Chase Texas are reported in the Global Bank lines of business results. The consumer- and global services-related results for Chase Texas are reported as part of NCS and CTS lines of business results, respectively. 21 21 Management's Discussion and Analysis The Chase Manhattan Corporation NATIONAL CONSUMER SERVICES National Consumer Services serves more than 30 million customers nationwide offering a wide variety of financial products and services through a diverse array of channels. Characterized by significant scale, and operating under the strong Chase brand, NCS combines nationwide presence with a leading consumer and small business banking franchise in the New York metropolitan tri-state region and key Texas markets. NCS's strategy is driven by information technology, which provides insights into customer behavior, requirements and preferences, and enables the franchise to develop financial solutions that best meet customer needs. Cash operating earnings for 1998 increased $137 million or 12% over 1997. Revenue growth of 12% contributed to the increase in cash operating earnings and reflects higher revenues and volumes across all of NCS's businesses. SVA was relatively flat compared with 1997, despite a strong improvement in the fourth quarter, due to an increased capital allocation to NCS as a result of acquired portfolios. The following table sets forth certain key financial performance measures of the businesses within NCS.
1998 Over/(Under) 1997 ---------------------------------- ------------------------------------- Cash Cash Cash Cash Year Ended December 31, Operating Operating Efficiency Operating Operating Efficiency (in millions, except ratios) Revenues Earnings Ratio Revenues Earnings Ratio - -------------------------------------------------------------------------------------------------------------------- Chase Cardmember Services $3,913 $ 461 34% 17% 21% (300)bp Regional Consumer Banking 2,337 382 70 3 4 -- Chase Home Finance 1,029 264 52 11 16 -- Diversified Consumer Services 846 144 53 17 21 -- - --------------------------------------------------------------------------------------------------------------------
bp- Denotes basis points; 100 bp equals 1%. Chase Cardmember Services: Chase Cardmember Services ("CCS") ranks as the fourth-largest bank card issuer in the United States with $32 billion of managed receivables at the end of 1998. CCS also includes the results of Chase's international consumer business, which includes Chase Manhattan Card Company Limited, the third-largest credit card issuer in Hong Kong (which became wholly owned in 1998), as well as consumer banking activities in Hong Kong, Panama and the Eastern Caribbean. CCS's operating revenues for 1998 were $3,913 million, a $580 million or 17% increase from 1997, reflecting acquired portfolios, pricing initiatives, increased co-branded activities and higher levels of consumer card usage. Cash operating earnings were $461 million in 1998, an increase of 21%, reflecting revenue growth and a significant improvement in efficiency, partially offset by increased charge-offs related to a credit card portfolio acquired in late 1997 as well as higher investment spending. Regional Consumer Banking: Regional Consumer Banking has a leading share of primary bank relationships among consumers and small businesses in the New York metropolitan tri-state area. It is also a leading retail institution in key Texas markets. Regional Consumer Banking offers customers convenient access to financial services through their choice of distribution channels, including the largest branch and proprietary ATM networks in the New York metropolitan region, plus state-of-the-art telephone, PC and Internet services. For 1998, cash operating earnings were 4% higher when compared with 1997, reflecting growth in deposits and increased small business lending, offset in part by the cost of technology-related investments, particularly within Chase Texas' retail businesses. Chase Home Finance: Chase Home Finance serves more than 2 million customers nationwide and is the third-largest originator and servicer of residential mortgage loans in the U.S. It is also a leading provider of home-equity secured lending and manufactured housing financing. During 1998, Chase Home Finance operated at peak origination levels, generating $85 billion in residential first-mortgage loans, home-equity and manufactured housing financing, an increase of 98% compared with 1997 activity. Chase's servicing portfolio increased 21% and totaled $213 billion at December 31, 1998. Cash operating earnings increased 16% in 1998, when compared with 1997. Operating revenues rose 11% in 1998 due to record origination volume and a strong housing market in the U.S. Offsetting revenues somewhat was a higher level of amortization of mortgage servicing rights, as low interest rates encouraged higher mortgage prepayments. [Graph 4 - See Appendix I] 22 22 Diversified Consumer Services: Diversified Consumer Services ("DCS") is the largest bank originator of auto loans and leases in the United States and a leading provider of student loans and unsecured consumer lending. In addition to its financing activities, DCS offers brokerage services and investment products nationwide and is one of the most diversified bank insurance providers in the U.S. During 1998, auto finance originations were strong, increasing 16%, when compared with 1997 levels, to $12.5 billion. At December 31, 1998, Chase Auto Finance had $22.5 billion in managed loans and $16.5 billion in balance sheet receivables. Cash operating earnings for DCS rose 21% in 1998, driven by the strong growth in auto finance and by higher revenues in Chase's investment and insurance businesses. CHASE TECHNOLOGY SOLUTIONS Chase Technology Solutions is composed of Chase's Global Services businesses, Information Technology and Operations, and Electronic Commerce initiatives. Global Services is a leading provider of information and transaction services globally and includes custody and other investor services, treasury and cash management, trade finance, debt, agency and other fiduciary services. As the world's largest provider of global custody and a leader in trust and agency services, Global Services was custodian for over $5.0 trillion in assets and serviced over $3.0 trillion in outstanding debt at December 31, 1998. Global Services also operates the largest U.S. dollar funds transfer business in the world and is a market leader in FedWire, ACH and CHIPS volume. During 1998, Global Services made several strategic acquisitions of large custody and fiduciary services businesses, which will leverage Chase's scale in a consolidating market. For 1998, cash operating earnings increased $73 million or 17% from the same 1997 period. SVA for Global Services increased $55 million in 1998. Revenue growth was strong across all three businesses within Global Services (Chase Treasury Solutions, Global Investor Services and Capital Markets Fiduciary Services), rising 14% overall, due in part to higher operating volumes from portfolio acquisitions. Earnings also benefited from continued productivity gains, tempered by technology investments related to preparations for Year 2000 and European Monetary Union ("EMU") initiatives. CORPORATE Corporate includes Chase's Global Asset Management and Mutual Funds business, which provides investment management for institutional investors globally and manages the Chase Global Mutual Funds. Total assets under management amounted to $190 billion at December 31, 1998. Corporate also includes the effects remaining at the Corporate level after the implementation of management accounting policies, including residual credit provision and tax expense. For 1998, Corporate had a cash operating loss (including the non-Global Services portion of CTS) of $339 million reflecting funding charges on unallocated balance sheet items and residual provision for loan losses. This compares to a lower cash operating loss of $102 million in 1997 reflecting an overallocation of the credit provision to the business franchises. - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- The following section provides a discussion of Chase's results of operations as reported under generally accepted accounting principles as well as on an operating basis that is used by management in measuring Chase's financial performance. To further facilitate its analysis of Chase's financial results, management categorizes revenue components as market-sensitive revenues or as less market-sensitive revenues. Market-sensitive revenues include trading revenues (including trading-related net interest income), investment banking fees, securities gains and private equity gains. The remaining revenue components of the income statement are categorized as less market-sensitive revenue. The following table provides a reconciliation between Chase's results as reported in its Consolidated Financial Statements and as presented on an operating basis. 23 23 Management's Discussion and Analysis The Chase Manhattan Corporation
1998 ----------------------------------------------------------------------- Year Ended December 31, Reported Credit Credit Special Operating (in millions, except per share data) Results(a) Costs(b) Card(c) Items(d) Basis - ----------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT Market-Sensitive Revenue: Investment Banking Fees $ 1,502 $ -- $ -- $ -- $ 1,502 Trading-Related Revenue(e) 2,160 -- -- -- 2,160 Provision for Risk Mgmt. Inst.(f) (211) 211 -- -- -- Securities Gains 609 -- -- -- 609 Private Equity Gains 967 -- -- -- 967 - ----------------------------------------------------------------------------------------------------------------------- Market-Sensitive Revenue 5,027 211 -- -- 5,238 - ----------------------------------------------------------------------------------------------------------------------- Less Market-Sensitive Revenue: Net Interest Income 7,855 -- 1,460 (191)(g) 9,124 Trust, Custody and Inv. Mgmt. Fees 1,543 -- -- -- 1,543 Credit Card Revenue 1,474 -- (299) -- 1,175 Fees for Other Financial Services 2,093 -- -- -- 2,093 Other Revenue 664 -- (13) -- 651 - ----------------------------------------------------------------------------------------------------------------------- Less Market-Sensitive Revenue 13,629 -- 1,148 (191) 14,586 - ----------------------------------------------------------------------------------------------------------------------- Total Revenue 18,656 211 1,148 (191) 19,824 - ----------------------------------------------------------------------------------------------------------------------- Noninterest Expense 10,854 (5) -- (37)(i) 10,812 - ----------------------------------------------------------------------------------------------------------------------- Operating Margin 7,802 216 1,148 (154) 9,012 Credit Costs 1,343 216 1,148 -- 2,707 - ----------------------------------------------------------------------------------------------------------------------- Income Before Restructuring Costs 6,459 -- -- (154) 6,305 Restructuring Costs 529 -- -- (529) -- - ----------------------------------------------------------------------------------------------------------------------- Income Before Income Tax Expense 5,930 -- -- 375 6,305 Tax Expense 2,148 -- -- 141 2,289 - ----------------------------------------------------------------------------------------------------------------------- Net Income $ 3,782 $ -- $ -- $ 234 $ 4,016 - ----------------------------------------------------------------------------------------------------------------------- Net Income Per Common Share: Basic $ 4.35 $ 4.63 Diluted 4.24 4.51 - ----------------------------------------------------------------------------------------------------------------------- 1997 ---------------------------------------------------------------------- Year Ended December 31, Reported Credit Credit Special Operating (in millions, except per share data) Results(a) Costs(b) Card(c) Items(d) Basis - ---------------------------------------------------------------------------------------------------------------- INCOME STATEMENT Market-Sensitive Revenue: Investment Banking Fees $ 1,136 $ -- $ -- $ -- $ 1,136 Trading-Related Revenue(e) 1,936 -- -- -- 1,936 Provision for Risk Mgmt. Inst.(f) -- -- -- -- -- Securities Gains 312 -- -- -- 312 Private Equity Gains 831 -- -- -- 831 - ---------------------------------------------------------------------------------------------------------------- Market-Sensitive Revenue 4,215 -- -- -- 4,215 - ---------------------------------------------------------------------------------------------------------------- Less Market-Sensitive Revenue: Net Interest Income 7,640 -- 1,253 -- 8,893 Trust, Custody and Inv. Mgmt. Fees 1,307 -- -- -- 1,307 Credit Card Revenue 1,088 -- (233) -- 855 Fees for Other Financial Services 1,983 -- -- -- 1,983 Other Revenue 575 -- (27) (102)(h) 446 - ---------------------------------------------------------------------------------------------------------------- Less Market-Sensitive Revenue 12,593 -- 993 (102) 13,484 - ---------------------------------------------------------------------------------------------------------------- Total Revenue 16,808 -- 993 (102) 17,699 - ---------------------------------------------------------------------------------------------------------------- Noninterest Expense 9,902 (12) -- (135)(i) 9,755 - ---------------------------------------------------------------------------------------------------------------- Operating Margin 6,906 12 993 33 7,944 Credit Costs 804 12 993 -- 1,809 - ---------------------------------------------------------------------------------------------------------------- Income Before Restructuring Costs 6,102 -- -- 33 6,135 Restructuring Costs 192 -- -- (192) -- - ---------------------------------------------------------------------------------------------------------------- Income Before Income Tax Expense 5,910 -- -- 225 6,135 Tax Expense 2,202 -- -- 84 2,286 - ---------------------------------------------------------------------------------------------------------------- Net Income $ 3,708 $ -- $ -- $ 141 $ 3,849 - ---------------------------------------------------------------------------------------------------------------- Net Income Per Common Share: Basic $ 4.15 $ 4.32 Diluted 4.01 4.17 - ----------------------------------------------------------------------------------------------------------------
(a) Represents results as reported in Chase's financial statements, except that revenues are categorized between market-sensitive and less market-sensitive revenues and restructuring costs have been separately displayed. (b) Credit Costs reclasses - For purposes of operating basis presentation, the provision for risk management instrument credit losses is reclassified from noninterest revenue to credit costs and foreclosed property expense is reclassified from noninterest expense to credit costs. (c) This column excludes the impact of credit card securitizations. For securitized receivables, amounts that would previously have been reported as net interest income and as provision for loan losses are instead reported as components of noninterest revenue (credit card revenue and other revenue). (d) Includes restructuring costs and special items. (e) Includes trading-related net interest income, which is reported in the net interest income caption in the Consolidated Statement of Income. (f) Denotes Provision for Risk Management Instrument Credit Losses. (g) Interest income resulting from the refund of prior years' taxes. (h) Includes $58 million gain on the sale of Chase's remaining interest in CIT Group Holdings, Inc. ("CIT") and $44 million gain on the sale of a partially-owned foreign investment. (i) Costs incurred for the accelerated vesting of stock-based incentive awards. MARKET-SENSITIVE REVENUE Chase defines market-sensitive revenues as investment banking fees, trading-related revenue (including trading-related net interest income), securities gains and private equity gains. These revenues are, in management's view, typically more sensitive to changes in general market conditions than those revenue components management considers as less market-sensitive revenue. While components of market-sensitive revenues experience volatility (particularly on a quarter-to-quarter basis), over the past ten years total market-sensitive revenue has increased at a compound annual growth rate ("CAGR") of 14% and has exhibited limited annual volatility around the regression trendline. [Graph 5 - See Appendix I] 24 24 For 1998, market-sensitive revenues increased 24% over 1997, reflecting double-digit increases across all categories despite difficult market conditions in the 1998 third quarter. A discussion of the components within market-sensitive revenue is presented below. Investment Banking Fees Investment banking fees for the year rose 32% to $1.50 billion in 1998. These results reflect growth in loan syndications, merger and acquisition advisory services and high grade and high yield underwriting fees. During 1998, Chase acted as book manager for approximately $336 billion of U.S. corporate debt (including $271 billion of syndicated credit facilities and $65 billion of corporate debt securities), and advised on merger and acquisition transactions totaling $179 billion in transaction volume, reflecting Chase's large client base and strong distribution network. Trading-Related Revenue Trading-related revenue, which includes trading-related net interest income, increased $224 million or 12% from 1997, primarily the result of strong performance across traditional products, particularly foreign exchange.
Year Ended December 31, (in millions) 1998 1997 - -------------------------------------------------------------------------------- Trading Revenue - Reported $1,449 $1,323 Net Interest Income Impact(a) 711 613 - -------------------------------------------------------------------------------- Total Trading-Related Revenue $2,160 $1,936 - -------------------------------------------------------------------------------- Product Diversification: Interest Rate Contracts(b) $ 695 $ 704 Foreign Exchange Contracts(b) 963 790 Debt Instruments, Equities and Commodities(b) 502 442 - -------------------------------------------------------------------------------- Total Trading-Related Revenue $2,160 $1,936 - --------------------------------------------------------------------------------
(a) Trading-related net interest income includes interest recognized on interest-earning and interest-bearing trading-related positions as well as management allocations reflecting the funding cost or benefit associated with trading positions. This amount is included in net interest income on the Consolidated Statement of Income. (b) For the classes of financial instruments included, see Note Two. The growth in foreign exchange revenue reflected strong results across a broad spectrum of currencies, with particular emphasis on the Asian markets where volatility was high. The slight decrease in revenue from interest rate contracts was mainly due to weaker results in the U.S., especially in several structured products. Debt instruments and other revenue benefited from growth in newer businesses, such as credit and equity derivatives, and high grade bonds, offset by continued weakness in emerging markets activities. Securities Gains Securities gains realized in 1998 were $609 million, increasing $297 million from last year. These gains were largely from sales of U.S. Government and agency securities which benefited, particularly during the third quarter of 1998, from the move by investors into safer investments, such as U.S. Treasuries, amid adverse market conditions. Unrealized gains in Chase's available-for-sale securities portfolio were approximately $600 million, before taxes, at December 31, 1998, an increase from approximately $150 million, before taxes, at mid-year 1998. Private Equity Gains Private equity gains include income from a wide variety of investments in the United States and, to a lesser extent, abroad. The equity investment portfolio rebounded sharply during the fourth quarter of 1998 from the adverse market conditions that slowed the pace of revenues in the 1998 third quarter. Full year revenues of $967 million increased 16% over 1997, also reflecting favorable conditions in the first half of 1998 and the benefit of Chase's accelerated pace of investment activities over the last several years. LESS MARKET-SENSITIVE REVENUE The less market-sensitive revenue captions are generally subject to less market volatility than market-sensitive revenues. However, certain components within less market-sensitive revenue are subject to market volatility, particularly assets that are held-for-sale and are accounted for on either a mark-to-market basis or lower-of-cost-or-market basis. Over the past 10 years, less market-sensitive revenues have increased at a CAGR of 3%; however, Chase has experienced an acceleration of this growth rate, as evidenced by annual growth of 6% in 1996, 6% in 1997 and 8% in 1998. The increase from 1997 is primarily the result of higher trust, custody and investment management fees and credit card revenue. A discussion of the components within less market-sensitive revenue is presented below. Net Interest Income Reported net interest income was $8.57 billion in 1998, an increase of 4% from 1997. The improvement from 1997 reflects $191 million of interest income resulting from the refund of prior years' taxes, partially offset by ongoing credit card securitizations (which removed higher-yielding credit card loans from the balance sheet) and the impact of generally narrower loan spreads. Included within the results reported in Chase's financial statements is trading-related net interest income of $711 million, up 16% from the prior year. For purposes of internal analysis, management combines trading-related net interest income with trading revenue, as discussed under the Trading-Related Revenue caption in the Market-Sensitive Revenue section. The following table provides a reconciliation between reported net interest income as presented on the Consolidated Statement of Income and operating net interest income, which excludes trading-related net interest income, the impact of credit card securitizations and special items. 25 25 Management's Discussion and Analysis The Chase Manhattan Corporation
Year Ended December 31, 1998 1997 Change - -------------------------------------------------------------------------------- Net Interest Income (in millions) Reported Net Interest Income $8,566 $8,253 4% Less Trading-Related Net Interest Income (711) (613) --------- --------- Subtotal 7,855 7,640 3 Add Impact of Credit Card Securitizations 1,460 1,253 Less Interest on Tax Refunds (191) -- - -------------------------------------------------------------------------------- Operating Net Interest Income $9,124 $8,893 3% - -------------------------------------------------------------------------------- Average Interest-Earning Assets (in billions) Reported $296.8 $286.6 4% Add Credit Card Securitizations 18.0 14.6 Less Trading-Related Assets (61.4) (76.1) - -------------------------------------------------------------------------------- Managed $253.4 $225.1 13% - -------------------------------------------------------------------------------- Net Yield on Interest-Earning Assets(a) Reported 2.89% 2.89% -- bp Add Impact of Securitizations 0.30 0.27 3 Impact of Trading-Related NII 0.48 0.80 (32) Less Impact of Tax Refunds (0.06) -- (6) - -------------------------------------------------------------------------------- Managed 3.61% 3.96% (35)bp - --------------------------------------------------------------------------------
(a) Disclosed on a taxable equivalent basis bp- Denotes basis points; 100 bp equals 1%. Operating net interest income was $9.12 billion in 1998, an increase of 3% from 1997. The increase was primarily due to higher volumes of domestic consumer loans (particularly credit cards and residential mortgages), and domestic commercial loans, partially offset by the impact of generally narrower spreads on loans. The net yield on a managed basis was 3.61%, a decrease of 35 basis points in comparison with 1997, due to generally narrower spreads on loans. Average managed interest-earning assets increased by 13% in 1998. The increase reflected growth in consumer assets tempered by a moderation in commercial asset growth resulting from the implementation of SVA. The growth in interest-earning assets in 1998 was funded by higher deposit levels, a reflection of liquidity within the consumer sector. Trust, Custody and Investment Management Fees Trust, custody and investment management fees rose 18% to $1.54 billion in 1998. These favorable results were largely attributable to growth in assets under custody, expanded securities lending activity, a higher level of institutional and private banking assets under management and portfolio acquisitions.
Year Ended December 31, (in millions) 1998 1997 - -------------------------------------------------------------------------------- Trust, Custody and Investment Management Fees: Institutional(a) $ 839 $ 679 Personal(b) 456 419 Mutual Fund Fees(c) 145 104 Other Trust Fees 103 105 - -------------------------------------------------------------------------------- Total Trust, Custody and Investment Management Fees $1,543 $1,307 - --------------------------------------------------------------------------------
(a) Represents fees for trustee, agency, registrar, securities lending and broker clearing, safekeeping and maintenance of securities. (b) Represents fees for trustee, estate, custody, advisory and investment management services. (c) Represents investment management, administrative, custody, and other fees in connection with Chase's proprietary global mutual funds. Credit Card Revenue Credit card revenue on a reported basis increased 35% for 1998 due to continued growth in credit card receivables (as a result of acquired portfolios and increased co-branded activities) and the implementation of new pricing initiatives. The increase in revenue for 1998 was partially reduced by a rise in net charge-offs on the securitized portfolio, which decreased the excess servicing fees Chase received from securitizations. The following table provides a reconciliation between reported credit card revenue as presented on the Consolidated Statement of Income and operating credit card revenue, which excludes the impact of credit card securitizations.
Year Ended December 31, (in millions) 1998 1997 - -------------------------------------------------------------------------------- Reported Credit Card Revenue $ 1,474 $ 1,088 Less Impact of Credit Card Securitizations (299) (233) - -------------------------------------------------------------------------------- Operating Credit Card Revenue $ 1,175 $ 855 - --------------------------------------------------------------------------------
For a further discussion of the credit card portfolio, see page 32. Fees for Other Financial Services Fees for other financial services increased to $2.09 billion in 1998. The following table provides the significant components of fees for other financial services.
Year Ended December 31, (in millions) 1998 1997 - -------------------------------------------------------------------------------- Fees for Other Financial Services: Service Charges on Deposit Accounts $ 368 $ 376 Fees in Lieu of Compensating Balances 344 314 Commissions on Letters of Credit and Acceptances 301 307 Mortgage Servicing Fees 192 231 Insurance Fees(a) 145 91 Brokerage and Investment Services 142 128 Loan Commitment Fees 136 120 Other Fees 465 416 - -------------------------------------------------------------------------------- Total Fees for Other Financial Services $2,093 $1,983 - --------------------------------------------------------------------------------
(a) Insurance amount excludes certain insurance fees related to credit cards and mortgage products, which are included in those revenue captions. 26 26 Fees in lieu of compensating balances increased by $30 million in 1998. Customers often pay for cash management or other services by maintaining noninterest-bearing deposits. However, as interest rates decline, the required compensating balance for a given level of service will rise. As a result, during the lower interest rate environment of 1998, a greater volume of customers paid a fee in lieu of maintaining a compensating balance. Mortgage servicing fees declined for 1998 largely due to an increase in the amortization of mortgage serving rights reflecting prepayments amid a lower interest rate environment. This decline was partially offset by higher servicing fees as a result of the larger servicing balance in 1998. Lower interest rates also benefited mortgage originations and sales revenues, which are reported in other revenues, as discussed below. The higher level of loan commitment fees largely reflected increased activity in Chase's acquisition financing business. Higher fees related to loans serviced (notably auto loans) contributed to the increase in other fees. Other Revenue
Year Ended December 31, (in millions) 1998 1997 - -------------------------------------------------------------------------------- Other Revenue: Residential Mortgage Origination/Sales Activities $356 $130 All Other Revenue 295 316 - -------------------------------------------------------------------------------- Operating Other Revenue 651 446 - -------------------------------------------------------------------------------- Gains on Sales of Partially-Owned Investments -- 102 Other Revenue - Credit Card Securitizations 13 27 - -------------------------------------------------------------------------------- Reported Other Revenue $664 $575 - --------------------------------------------------------------------------------
Other revenue on a reported basis, which includes gains and losses from the sale of nonstrategic assets and from securitizations, rose $89 million in 1998 from the prior year. The 1997 results included a $58 million gain on the sale of Chase's remaining 20% investment in CIT and a $44 million gain on the sale of a partially-owned foreign investment. Other revenue on an operating basis was $651 million in 1998, an increase of 46% from last year. Higher residential mortgage origination and portfolio sales revenue, reflecting the favorable lower interest rate environment during 1998, accounted for the increase. NONINTEREST EXPENSE Total reported noninterest expense was $11.38 billion in 1998, an increase from $10.09 billion last year. Excluding the impact of restructuring costs, special items and foreclosed property expense, operating noninterest expense was $10.81 billion in 1998, an increase of 11% from the prior year. The growth in expenses included costs associated with portfolio acquisitions, investment spending on new product offerings, Year 2000, EMU and other technology spending, and higher incentive costs, partially offset by the impact of the capitalization of certain software costs. See Note One for a further discussion.
Year Ended December 31, (in millions, except ratios) 1998 1997 - -------------------------------------------------------------------------------- Salaries $ 4,988 $ 4,463 Employee Benefits 854 839 Occupancy Expense 798 767 Equipment Expense 890 792 Other Expense 3,282 2,894 - -------------------------------------------------------------------------------- Operating Noninterest Expense 10,812 9,755 Restructuring Costs 529 192 Accelerated Vesting of Stock-Based Incentive Awards (included in Salaries on Income Statement) 37 135 Foreclosed Property Expense(a) 5 12 - -------------------------------------------------------------------------------- Reported Noninterest Expense $11,383 $10,094 - -------------------------------------------------------------------------------- Efficiency Ratio(b) 57.7% 58.1% Operating Efficiency Ratio(b)(c) 54.3 54.9 - --------------------------------------------------------------------------------
(a) Presented within Other Expense on the Consolidated Statement of Income. For purposes of reviewing the results on an operating basis, these expenses are reflected in Credit Costs. (b) Excludes restructuring costs, foreclosed property expense, provision for risk management instrument credit losses, costs associated with a real estate investment trust ("REIT") subsidiary and special items. (c) Excludes the impact of credit card securitizations. [Graph 6 - See Appendix I] Salaries and Employee Benefits The increase in salaries and employee benefits on an operating basis for 1998 was due to higher incentive costs, mainly driven by a change in the mix of Chase's revenue sources and a change in stock compensation (granting higher levels of restricted stock and fewer employee stock options). Also contributing was the net addition of 3,650 full-time equivalent employees. The increased head count reflects the impact of investments in selected growth businesses, particularly in the mortgage and credit card businesses within National Consumer Services and the custody and fiduciary services businesses within Global Services. These increases were offset by 1,847 staff reductions related to initiatives to streamline support functions and realign certain business activities. 27 27 Management's Discussion and Analysis The Chase Manhattan Corporation The following table presents Chase's full-time equivalent employees for the dates indicated.
At December 31, 1998 1997 - -------------------------------------------------------------------------------- Domestic 61,472 58,580 Foreign 11,211 10,453 - -------------------------------------------------------------------------------- Total Full-Time Equivalent Employees 72,683 69,033 - --------------------------------------------------------------------------------
Occupancy and Equipment Expense Occupancy expense remained relatively stable during 1998 compared with 1997. The higher level of equipment expense during 1998 was due to an increase in depreciation expense from recently capitalized equipment across all business units. Also impacting equipment expense in 1998 was increased software expense related to Year 2000 and EMU efforts. For a further discussion of Year 2000 and EMU efforts, see the Operating Risk Management Section on page 41. Other Expense
Year Ended December 31, (in millions) 1998 1997 - -------------------------------------------------------------------------------- Other Expense: Professional Services $ 668 $ 575 Marketing Expense 419 415 Telecommunications 349 307 Travel and Entertainment 243 220 Amortization of Intangibles 261 172 Minority Interest(a) 50 74 All Other 1,292 1,131 - -------------------------------------------------------------------------------- Operating Other Expense $3,282 $2,894 - --------------------------------------------------------------------------------
(a) Includes REIT minority interest expense of $44 million in each of 1998 and 1997. Other expense for 1998 increased by $388 million when compared with 1997. Professional services costs during 1998 reflected higher levels of contract computer professionals associated with Year 2000 and EMU efforts. The $42 million increase in telecommunications costs during 1998 covers both installation and usage and reflects the growth in business volume at all of Chase's major business franchises. Portfolio acquisitions in late 1997 and 1998 contributed to the increase in amortization of intangibles expense and to higher all other expense, which reflects increased servicing costs for these assets. These increases were partially offset by a decline in minority interest expense due to a foreign investment becoming a wholly-owned subsidiary in early 1998. Restructuring Costs During the 1998 first quarter, Chase incurred a pre-tax charge of $510 million in connection with initiatives to streamline support functions and realign certain business activities. The majority of these costs relate to planned staff reductions of approximately 4,500 existing positions (approximately $338 million), costs in connection with planned dispositions of certain premises and equipment (approximately $144 million) and other expenses (approximately $28 million). At December 31, 1998, the reserve balance was $359 million and 1,847 positions had been eliminated. Chase expects that the remaining reserve related to staff reductions will be largely used during the next 12 months. It is anticipated that the annual savings from the charge should amount to approximately $460 million. Depending on its view of revenue opportunities, Chase may or may not reinvest all or a part of these expense savings in its revenue-generating activities. Residual merger-related expenses of $19 million and $192 million were incurred in 1998 and 1997, respectively, relating to the merger of The Chase Manhattan Corporation and Chemical Banking Corporation. Cumulative-to-date merger-related expenses amounted to $375 million, in addition to the $1.65 billion restructuring charge taken at the March 31, 1996 merger date. No further residual merger-related expenses will be taken by Chase. CREDIT COSTS Credit costs include provisions for loan losses and for risk management instrument credit losses, foreclosed property expense and credit costs associated with credit card securitizations. Chase's provision for credit losses, which in 1998 equaled net charge-offs, was $1.55 billion. The following table shows the components of credit costs.
Year Ended December 31, (in millions) 1998 1997 - -------------------------------------------------------------------------------- Provision for Loan Losses $1,343 $ 804 Provision for Risk Management Instrument Credit Losses(a) 211 -- - -------------------------------------------------------------------------------- Total Provision for Credit Losses 1,554 804 Foreclosed Property Expense(b) 5 12 Credit Costs Associated with Credit Card Securitizations 1,148 993 - -------------------------------------------------------------------------------- Operating Credit Costs $2,707 $1,809 - --------------------------------------------------------------------------------
(a) Included in Noninterest Revenue on the Consolidated Statement of Income. (b) Included in Other Expense on the Consolidated Statement of Income. Credit costs in 1998 were $2.71 billion, an increase of $898 million from the 1997 level, primarily due to higher credit losses in the commercial portfolio, particularly for exposures related to Asia and Russia, and the credit card portfolio. For a discussion of Chase's net charge-offs, see Credit-Related Portfolio on page 31. INCOME TAXES Chase recognized income tax expense of $2.15 billion in 1998, compared with $2.20 billion in 1997. Chase's effective tax rate was 36.2% for 1998, compared with 37.3% for 1997. 28 28 - -------------------------------------------------------------------------------- RISK MANAGEMENT - -------------------------------------------------------------------------------- Chase is in the business of managing risk to create shareholder value. The major risks to which Chase is exposed are credit, market, liquidity and operating risk. Chase's risk management is guided by several fundamental risk management principles, including: o Formal definition of risk management governance; o Risk oversight independent of business units; o Continual evaluation of risk appetite, communicated through risk limits; o Diversification; o Utilization of sophisticated risk management systems, including value-at-risk analysis and portfolio stress testing; and o Performance measurement (SVA) that allocates risk-adjusted capital for all forms of risk. Risk management and oversight begins with the Board of Directors and, specifically, with the Risk Policy Committee of the Board, which approves a general risk management mandate to govern these activities. The Risk Policy Committee delegates the formulation of policy and day-to-day risk oversight and management to Chase's Executive Committee and the three corporate risk committees: the Credit Risk Committee, the Market Risk Committee and the Capital Committee. The Executive Committee provides guidance regarding strategies and corporate risk appetite and is responsible for an integrated view of Chase's risk exposures including the interdependencies among its various risks. The corporate risk committees have decision-making authority for their respective areas of responsibility, with major policy decisions and risk exposures subject to review by the Executive Committee. For an overview of Chase's governance structure for risk management, see the chart below. Chase's adoption of SVA which incorporates a risk-adjusted capital methodology, as its primary performance measure, has strengthened its risk management discipline and resulted in slower asset growth and a lower risk profile. - -------------------------------------------------------------------------------- CREDIT RISK MANAGEMENT - -------------------------------------------------------------------------------- Credit risk is the risk of loss due to default, which is defined as the failure of a borrower or counterparty to fulfill its contractual obligations. In both its consumer and commercial businesses, Chase seeks opportunities to take credit risk prudently and manage it effectively in order to create value for its shareholders. Credit risk is managed at both the transaction and portfolio levels. It is a highly disciplined process, structured to preserve the independence and integrity of risk assessment, but also integrated into business management processes. Chase's approach to managing credit risk begins with a comprehensive risk measurement framework which is used as a basis for estimating the loss characteristics, on average and over a cycle, of the various segments of its portfolio. These estimates drive credit cost allocations to business units and impact measurements of business unit performance. Chase's day-to-day management of loans and other credit risk assets is guided by policies and procedures established by the Chief Credit Officer, who reports to Chase's Vice Chairman for Finance and Risk Management. These policies are communicated throughout the organization and are an essential part of the business culture. At both the business unit and corporate level, disciplined processes are in place to seek to ensure that risks are accu- -------------------------- Risk Policy Committee of Board of Directors -------------------------- o Oversees Risk Management -------------------------- Executive Committee -------------------------- o Strategic Guidance o Integrated View - --------------------- Credit Risk Committee - --------------------- o Establishes policies for credit risk management and limits for country, product, industry and single obligor exposures. o Responsible for the methodology, models and assumptions to measure credit risk. o Oversees Chase's credit portfolio optimization strategies, risk profile trends, critical problem portfolio and allowance for credit losses. - --------------------- Market Risk Committee - --------------------- o Establishes the policies and risk limits for all trading and balance sheet related market risk and for investment securities activities. o Responsible for the methodology, models and assumptions used to measure market and interest rate risk. o Monitors and reviews current positions to ensure compliance with established limits. - ----------------- Capital Committee - ----------------- o Establishes Chase's corporate capital and liquidity policies. o Approves policies and methodologies for internal capital allocation, SVA and transfer pricing. o Monitors and reviews policy execution and strategies. 29 29 Management's Discussion and Analysis The Chase Manhattan Corporation rately assessed and properly monitored. Potential concentration risks for the portfolio as a whole, as well as by product, industry, single obligor, risk grade, and geography, are regularly assessed at the corporate level with a view to improving overall portfolio diversification. Finally, the risk management system is supported by a comprehensive management information infrastructure which tracks and updates exposures on a daily basis. Credit risk management must maintain a measure of independence from other business objectives to preserve the integrity of the risk management process. Two aspects of Chase's credit risk management processes are crucial to maintaining this independence. First, the Chief Credit Officer of Chase has sole responsibility for the credit risk measurement framework and therefore the costs charged to business units for credit risk. He is also responsible for Chase's credit policies and procedures, the determination of individual lending authorities, the management of problem assets, and the monitoring of the aggregate portfolio risk profile, including the assessment of potential concentration risks. Second, there is an independent credit risk management function within the major business franchises of Global Bank, Global Services and National Consumer Services reporting jointly to the Chief Credit Officer and the respective senior business executives. Within the franchises, credit risk management units function at product, industry, country and regional levels, reporting jointly to business executives at these levels and to credit executives in the franchises' credit risk management functions. These units approve significant new transactions and product offerings, have the final authority over risk ratings for commercial exposures and credit risk assessment for consumer products, and monitor the risk profile of the business unit's portfolio. The presence of these credit units in the businesses is intended to ensure that accurate risk assessment is a significant factor in the decision making processes of these areas. Risk Measurement: Chase's risk management discipline begins with a measurement of the default risk associated with all credit exposures, either on or off the balance sheet. These exposures include loans, receivables associated with derivative and foreign exchange contracts, and lending-related commitments (e.g., letters of credit and undrawn commitments to extend credit). The risk measurement techniques are designed to estimate the losses which should be expected from each segment of the credit risk portfolio and, most importantly, the potential volatility of loss rates around the average or expected level. Credit losses per se are not an indication of risk. If losses were entirely predictable, the expected loss rate could be factored into product prices and covered as a normal and recurring cost of doing business. It is the volatility or uncertainty of loss rates around expected levels which creates risk and is the primary concern of credit risk management. The risk measurement framework is applied to both consumer and commercial exposures. However, the resulting risk profiles are markedly different. Broadly speaking, losses on consumer exposures are more predictable, less volatile and less cyclical than losses on commercial exposures. For the latter, the loss volatility can be dramatic over the course of an economic cycle. The Cost of Credit Risk - Loss Provisions and Capital Allocation: Chase uses its estimates of expected loss and loss volatility, respectively, to set risk-adjusted loss provisions and to allocate credit risk capital by portfolio segment. Within the consumer businesses, expected loss and capital factors are applied to the major product categories (e.g. mortgage loans, credit cards, auto loans) and segments within those categories. The commercial portfolio is segmented by risk rating (on a 25 risk grade scale) and maturity and expected loss and capital factors are applied to each segment of the resulting matrix. Off-balance sheet exposures are converted to loan equivalent amounts, based on their probability of being drawn, before applying the expected loss and capital factors. For business units with significant credit risk, credit risk capital is a major determinant of their total capital allocation. To produce positive SVA, business units must earn sufficient returns to cover both their allocated loss provision and the cost of capital. This system is intended to ensure that business managers are appropriately sensitized to the importance of credit risk management in evaluating their unit's performance. Credit Risk Management for Consumer Assets: The consumer credit risk management process utilizes sophisticated portfolio modeling, credit scoring and decision support tools to project credit quality performance and to establish credit underwriting standards. Risk [Graph 7 - See Appendix I] 30 30 parameters are established in the early stages of the development of a consumer credit product, and the cost of credit risk is an integral part of the product's profit dynamics. Consumer portfolios are continuously monitored to identify deviations from expected performance and to identify shifts in consumers' patterns of behavior. Chase has an active program to securitize its consumer assets, which helps to fund consumer asset growth and manages product concentrations. Credit Risk Management for Commercial Assets: Credit risk management begins with the client selection process. Chase's global industry approach helps Chase to be continuously aware of an industry's developing risk profile so that exposures to particular industries, segments of industries, or obligors can be identified and minimized where risk is increasing. In overseas regions, client selection is especially important and Chase's strategy is to focus on the largest, leading firms, particularly in developing markets. Concentration management is key to managing commercial credit risk. Chase aggressively manages concentrations by obligor, risk grade, industry, product and geographic location. Chase's strategy of origination for distribution and its lead position in the loan syndication market support these concentration risk management objectives. In addition, the discipline of distributing loans to independent investors provides an external validation of Chase's judgement with respect to credit profiles, structures and pricing. CREDIT-RELATED PORTFOLIO The following table presents credit-related information for the dates indicated. The discussion that follows includes the impact of loans and derivatives.
As of or for the year ended Credit-Related Nonperforming Past Due 90 Days and Average Annual December 31, Assets Assets Net Charge-offs Over and Accruing Net Charge-off Rate - ------------ ------------------ ------------- ------------------ ----------------- ------------------- (in millions, except ratios) 1998 1997 1998 1997 1998 1997 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ CONSUMER LOANS Domestic Consumer: 1-4 Family Residential Mortgages $ 41,831 $ 38,680 $ 313 $ 340 $ 31 $ 32 $ 3 $ 2 .08% .08% Credit Card - Reported 14,229 15,631 -- -- 762 543 302 256 5.74 4.45 Credit Card Securitizations(a) 18,033 16,852 -- -- 1,148 976 379 377 6.36 6.67 - ------------------------------------------------------------------------------------------------------------------------------------ Credit Card - Managed 32,262 32,483 -- -- 1,910 1,519 681 633 6.10 5.66 Auto Financings 16,456 13,243 50 31 77 61 20 20 .54 .48 Other Consumer(b) 8,375 8,543 6 7 167 171 97 142 1.90 1.89 - ------------------------------------------------------------------------------------------------------------------------------------ Total Domestic Consumer 98,924 92,949 369 378 2,185 1,783 801 797 2.29 2.06 Foreign Consumer 3,807 3,976 23 21 25 14 10 7 .65 .39 - ------------------------------------------------------------------------------------------------------------------------------------ Total Consumer Loans 102,731 96,925 392 399 2,210 1,797 811 804 2.22 2.00 - ------------------------------------------------------------------------------------------------------------------------------------ COMMERCIAL LOANS Domestic Commercial: Commercial and Industrial 43,123 37,931 331 258 (66) 23 42 18 NM .06 Commercial Real Estate 3,984 5,030 41 75 (14) (37) 1 14 NM NM Financial Institutions 6,583 6,652 1 1 (2) (1) -- -- NM NM - ------------------------------------------------------------------------------------------------------------------------------------ Total Domestic Commercial Loans 53,690 49,613 373 334 (82) (15) 43 32 NM NM Foreign Commercial: Commercial and Industrial 24,664 27,628 603 164 408 9 7 -- 1.60 .04 Commercial Real Estate 367 713 -- -- -- -- -- -- NM NM Financial Institutions 4,537 6,989 22 10 24 (8) 24 -- .43 NM Foreign Governments 4,798 3,438 50 1 6 (3) -- -- .13 NM - ------------------------------------------------------------------------------------------------------------------------------------ Total Foreign Commercial Loans 34,366 38,768 675 175 438 (2) 31 -- 1.20 NM DERIVATIVE AND FX CONTRACTS Commercial and Industrial 12,488 13,182 13 -- 45 -- -- -- .33 NM Financial Institutions 19,414 23,107 37 -- 91 -- -- 1 .43 NM Foreign Governments 1,353 2,187 -- -- -- -- -- -- NM NM - ------------------------------------------------------------------------------------------------------------------------------------ Total Derivative and FX Contracts 33,255 38,476 50 -- 136 -- -- 1 .37 NM - ------------------------------------------------------------------------------------------------------------------------------------ Total Commercial Credit-Related 121,311 126,857 1,098 509 492 (17) 74 33 .40 NM - ------------------------------------------------------------------------------------------------------------------------------------ Total Managed Credit-Related $224,042 $223,782 $1,490 $ 908 $ 2,702 $ 1,780 $885 $837 1.21% .85% - ------------------------------------------------------------------------------------------------------------------------------------ Assets Acquired as Loan Satisfactions 116 110 - ------------------------------------------------------------------------------------------------------------------------------------ Total Nonperforming Assets $ 1,606 $1,018 - ------------------------------------------------------------------------------------------------------------------------------------
(a) Represents the portion of Chase's credit card receivables that have been securitized. For further discussion of credit card securitizations, see pages 19 and 76. (b) Consists of installment loans (direct and indirect types of consumer finance), student loans and unsecured revolving lines of credit. There are essentially no credit losses in the student loan portfolio due to the existence of Federal and State government agency guarantees. At December 31, 1998 and 1997, student loans that were past due 90 days and over and still accruing were approximately $40 million and $43 million, respectively. NM- Not meaningful 31 31 Management's Discussion and Analysis The Chase Manhattan Corporation Chase's managed credit assets totaled $224 billion at December 31, 1998, which was relatively stable compared with year-end 1997. Chase's portfolio is balanced between commercial and consumer assets, with consumer assets comprising 46% of Chase's year-end managed credit-related portfolio. Over the past decade, the consumer portfolio has been increasing as a percentage of total credit-related assets and management expects this trend to continue. Chase's nonperforming assets at year-end 1998 increased $588 million from the 1997 year-end level. The change reflects an increase in nonperforming Asian and Russian assets. Total nonperforming assets in Asia increased by $419 million from 1997 year-end to $501 million at December 31, 1998. Total nonperforming assets in Russia were $51 million at December 31, 1998, versus none at the end of the prior year. Total net charge-offs on a retained basis increased by $750 million during 1998. Total net charge-offs on a managed basis were $2,702 million in 1998, compared with $1,780 million in 1997. The increases in net charge-offs on both a managed and retained basis are due to increased foreign commercial charge-offs, primarily as a result of conditions in Asia and Russia, and the generally lower credit quality of an acquired credit card portfolio, a factor which was generally anticipated at the time of its acquisition. Asian commercial net charge-offs were $339 million in 1998, compared with $37 million in 1997. Russian-related commercial net charge-offs were $224 million in 1998. Of this amount, $117 million were net charge-offs on resale agreements. There were no Russian-related commercial net charge-offs in 1997. Management expects that credit costs in 1999, on a managed basis, will be of a similar magnitude to the total of such costs incurred in 1998. For the consumer portfolio, management expects net charge-off rates will be approximately the same as in 1998; however, reported net charge-offs will vary depending on the level of credit card securitizations completed during the year. The net charge-off rate for the commercial portfolio was 40 bp in 1998. The commercial charge-off rate varies more than the consumer rate, and over time Chase expects commercial annual net charge-offs to be in a range of 30-50 bp. CONSUMER LOAN PORTFOLIO Chase's consumer portfolio is diversified by many different products, including mortgages, credit cards and auto loans. The portfolio is primarily domestic and is geographically well-diversified. Consumer Loans by Geographic Region
Residential Managed Credit Auto Mortgage Loans Card Loans Financings --------------------- --------------------- --------------------- December 31, (in millions) 1998 1997 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ New York City $ 5,889 $ 5,980 $ 2,096 $ 2,222 $ 1,421 $ 1,234 New York (Excluding New York City) 1,955 1,446 2,204 2,239 805 748 Remaining Northeast 6,072 5,944 5,969 5,892 3,705 3,059 - ------------------------------------------------------------------------------------------------------------------------------------ Total Northeast 13,916 13,370 10,269 10,353 5,931 5,041 Southeast 5,208 4,983 5,807 5,597 2,571 1,832 Midwest 3,434 2,236 5,918 6,281 1,648 1,293 Texas 3,311 3,257 2,588 2,293 2,961 2,408 Southwest (Excluding Texas) 1,174 1,071 1,484 1,517 827 699 California 11,029 8,998 4,297 4,502 2,081 1,679 West (Excluding California) 3,759 4,765 1,899 1,940 437 291 Foreign 1,467 1,472 718 615 1 15 - ------------------------------------------------------------------------------------------------------------------------------------ Total $43,298 $40,152 $32,980 $33,098 $16,457 $13,258 - ------------------------------------------------------------------------------------------------------------------------------------
Residential Mortgage Loans: 1-4 family residential mortgage loans at December 31, 1998 increased 8% when compared with the 1997 year-end, reflecting increased origination activity due to lower interest rates. This portfolio's asset quality continues to be strong. The 1998 domestic loss rate remained at .08 %. Credit Card Loans: Chase analyzes its credit card portfolio on a "managed basis," which includes credit card receivables on the balance sheet, as well as credit card receivables that have been securitized. The increase in average managed credit card receivables was largely the result of a portfolio acquired in late 1997, totaling approximately $4.0 billion in outstandings. The increase in the average net charge-off rate for 1998 is due to the generally anticipated lower credit quality of this portfolio. 32 32 Auto Financings: This portfolio consists of auto loans and leases with leases representing approximately 43% of the total portfolio at December 31, 1998, compared with 49% at year-end 1997. Auto financings increased 24% from 1997 reflecting strong consumer demand due to favorable pricing programs. The 1998 charge-off rate of .54% is indicative of this portfolio's selective approach to asset origination. The increase in loss rate compared with 1997 is a result of a discontinued program. The residual value of the auto lease segment of the portfolio is periodically reviewed and adjusted to reflect current market conditions and vehicle disposition experience. Other Consumer Loans: Other consumer loans consist primarily of unsecured revolving lines of credit, manufactured housing financing and student loans. The domestic portfolio decrease of $168 million or 2% from the prior year resulted from declines in student loans and revolving lines of credit. The credit profile of these domestic businesses varies and on average generated a 1.90% loss rate in 1998 with $167 million in net charge-offs. COMMERCIAL LOAN PORTFOLIO Chase's commercial portfolio is comprised of loans made principally to corporations, financial institutions, and governmental entities. Commercial and Industrial: The commercial and industrial portfolio consists primarily of loans made to large corporate and middle market customers. Domestic commercial and industrial loans had net recoveries of $66 million in 1998, compared with net charge-offs of $23 million in 1997, reflecting a continuation of the strong credit quality experienced over the past several years. The foreign commercial and industrial portfolio totaled $24.7 billion at year-end 1998, a decrease of $3.0 billion from 1997, as Chase continued to reduce its exposure to emerging markets in Asia and Latin America. Nonperforming loan levels at December 31, 1998, as well as net charge-off levels for 1998, increased in comparison with the prior year, due to the financial conditions in Asia and Russia. Commercial Real Estate: The commercial real estate portfolio represents loans secured primarily by real property, other than loans secured by mortgages on 1-4 family residential properties (which are included in the consumer loan portfolio). Chase carefully monitors by specific limits its exposure to commercial real estate. Commercial real estate loans decreased $1.4 billion from 1997, principally as a result of securitizations, sales, and repayments. Financial Institutions: The financial institutions portfolio includes loans to commercial banks and companies whose businesses primarily involve lending, financing, investing, underwriting or insurance. Loans to financial institutions were down $2.5 billion in 1998 from 1997 levels, primarily in the foreign portion of the portfolio. The portfolio experienced net charge-offs of $22 million in 1998, compared with a net recovery of $9 million in 1997. Foreign Governments: This portfolio consists of loans to governments in foreign countries, and their ministries, departments and agencies. Foreign government loans were $4.8 billion at December 31, 1998, a $1.4 billion increase from year-end 1997. Net charge-offs for the portfolio were $6 million in 1998, compared with net recoveries of $3 million in 1997. CROSS-BORDER EXPOSURE Chase has an extensive country risk process to aid in managing its exposures. As part of this process, Chase includes both its credit-related lending and trading exposures in assessing its cross-border risk. Total cross-border assets are 24% of Chase's total managed assets. Chase's exposure in Latin America and Asia totals 8% of total managed assets. Chase has reduced Latin American exposure by 25% this year and has reduced Asian exposure by 33%. These reductions were made in response to the increased risk in these markets. Management believes Chase's level of cross-border exposure is appropriate given its cross-border business mix. Chase remains committed to these markets. The following table presents Chase's cross-border exposure to Latin American and Asian countries. Cross-border disclosure is based on the Federal Financial Institutions Examination Council ("FFIEC") guidelines governing the determination of cross-border risk. Prior periods disclosed within the table have been restated to conform with these guidelines. In addition, at December 31, 1998 Chase had approximately $96 million in lending and trading-related exposure to Russia. Chase also had approximately $87 million in resale agreements collateralized by non-ruble denominated Russian debt at December 31, 1998. 33 33 Management's Discussion and Analysis The Chase Manhattan Corporation
Selected Country Exposure 1998 1997 ----------------------------------------------------------------------------------- ------------ Net Local Total Total Lending- Trading- Country Foreign Exchange Resale Cross-Border Cross-Border December 31, (in billions) Related(a) Related(b) Assets(c) and Derivatives(d) Agreements(e) Exposure Exposure - ------------------------------------------------------------------------------------------------------------------------------------ LATIN AMERICA Brazil $ 1.6 $ 0.1 $0.5 $ 0.1 $ 0.9 $ 3.2 $ 4.8 Argentina 2.0 0.1 0.1 0.1 0.5 2.8 3.2 Mexico 1.3 0.1 0.1 0.3 0.4 2.2 2.9 Chile 0.8 -- 0.1 -- -- 0.9 1.5 Colombia 0.8 -- -- -- -- 0.8 0.8 Venezuela 0.3 0.1 -- -- -- 0.4 1.0 All Other Latin America(f) 0.9 -- -- 0.1 -- 1.0 0.8 - ------------------------------------------------------------------------------------------------------------------------------------ Total Latin America $ 7.7 $ 0.4 $0.8 $ 0.6 $ 1.8 $11.3 $ 15.0 - ------------------------------------------------------------------------------------------------------------------------------------ ASIA Korea $ 1.0 $ 0.1 $0.9 $ 0.4 $ -- $ 2.4 $ 5.3 Indonesia 1.0 -- -- 0.2 -- 1.2 2.2 Thailand -- -- 0.7 0.2 -- 0.9 1.4 - ------------------------------------------------------------------------------------------------------------------------------------ Subtotal 2.0 0.1 1.6 0.8 -- 4.5 8.9 - ------------------------------------------------------------------------------------------------------------------------------------ Hong Kong 0.6 -- -- 0.2 -- 0.8 1.1 Singapore 0.7 -- -- 0.1 -- 0.8 1.6 Philippines 0.3 -- 0.3 -- -- 0.6 0.9 Malaysia 0.1 -- 0.4 0.1 -- 0.6 0.9 China 0.5 -- -- 0.1 -- 0.6 0.7 All Other Asia 0.4 -- -- 0.1 -- 0.5 0.6 - ------------------------------------------------------------------------------------------------------------------------------------ Total Asia excluding Japan, Australia and New Zealand $ 4.6 $ 0.1 $2.3 $ 1.4 $ -- $ 8.4 $ 14.7 - ------------------------------------------------------------------------------------------------------------------------------------ Japan $ 2.6 $ 1.4 $0.1 $ 1.1 $ 1.7 $ 6.9 $ 8.8 Australia 0.4 -- 0.7 0.8 -- 1.9 2.8 New Zealand 0.6 -- -- -- -- 0.6 0.3 - ------------------------------------------------------------------------------------------------------------------------------------ Total Japan, Australia and New Zealand $ 3.6 $ 1.4 $0.8 $ 1.9 $ 1.7 $ 9.4 $ 11.9 - ------------------------------------------------------------------------------------------------------------------------------------
(a) Includes loans and accrued interest, interest-bearing deposits with banks, acceptances, other monetary assets, issued letters of credit and undrawn commitments to extend credit. (b) Includes cross-border trading debt and equity instruments. (c) Represents local country assets less local country liabilities. At December 31, 1998, the amounts of local country assets that have been netted against local country liabilities in accordance with the FFIEC definition of cross border exposure were $5.5 billion for Hong Kong, $3.0 billion for Japan, $1.5 billion for Australia, $0.6 billion for Brazil and $1.7 billion for the other countries presented above, none of which exceed $0.3 billion. (d) Represents mark-to-market exposure of foreign exchange and derivative contracts. The amounts are presented after taking into account the effect of legally enforceable master netting agreements. (e) Approximately $1.1 billion (or 60%) of the exposure to Latin America and approximately $1.3 billion (or 75%) of the exposure to Japan represents resale agreements with investment grade counterparties from G-7 (Group of 7) countries. G-7 countries are the United States, United Kingdom, Germany, Japan, Italy, France, and Canada. (f) Excludes Bermuda and Cayman Islands. DERIVATIVE AND FOREIGN EXCHANGE CONTRACTS In the normal course of its business, Chase utilizes various derivative and foreign exchange financial instruments to meet the financial needs of its customers, to generate revenues through its trading activities, and to manage its exposure to fluctuations in interest and currency rates. Chase uses the same credit procedures when entering into derivative and foreign exchange transactions as it does for traditional lending products. Chase believes the best measure of credit risk is the mark-to-market exposure amount of the derivative or foreign exchange contract. This is also referred to as repayment risk or the replacement cost. While notional principal is the most commonly used volume measure in the derivative and foreign exchange markets, it is not a useful measure of credit or market risk. The notional principal typically does not change hands, but is simply a quantity upon which interest and other payments are calculated. The notional principal amounts of Chase's derivative and foreign exchange products greatly exceed the possible credit and market loss that could arise from such transactions. 34 34 Mark-to-market exposure is a measure, at a point in time, of the value of a derivative or foreign exchange contract in the open market. When the mark-to-market is positive, it indicates the counterparty owes Chase and, therefore, creates a repayment risk for Chase. When the mark-to-market is negative, Chase owes the counterparty. In this situation, Chase does not have repayment risk. When Chase has more than one transaction outstanding with a counterparty, and there exists a legally enforceable master netting agreement with the counterparty, the "net" mark-to-market exposure represents the netting of the positive and negative exposures with the same counterparty. Net mark-to-market is, in Chase's view, the best measure of credit risk, when there is a legally enforceable master netting agreement between Chase and the counterparty. Chase's primary counterparties in derivatives and foreign exchange are investment grade financial institutions, most of whom are dealers in these products. A breakdown of Chase's net mark-to-market exposures by customer type and credit rating is presented in the following table.
Investment Non-Investment At December 31, 1998 Grade Grade Total - -------------------------------------------------------------------------------- Financial Institutions 65% 6% 71% Non- Financial Institutions 19 10 29 - -------------------------------------------------------------------------------- Total 84% 16% 100% - --------------------------------------------------------------------------------
Many of Chase's derivative and foreign exchange contracts are short-term, which also mitigates credit risk as transactions settle quickly. The table below provides the remaining maturities of derivative and foreign exchange contracts outstanding at December 31, 1998 and 1997. Percentages are based upon remaining contract life of mark-to-market exposure amounts. The lengthening of the maturity profile during 1998 is the result of the improved creditworthiness of Chase over the last several years (as evidenced by credit rating upgrades) and the maturation of the derivatives market where longer maturities are becoming more commonplace.
1998 1997 ------------------------------------------------- ------------------------------------------------- Interest Foreign Equity, Interest Foreign Equity, Rate Exchange Commodity and Rate Exchange Commodity and At December 31, Contracts Contracts Other Contracts Total Contracts Contracts Other Contracts Total - -------------------------------------------------------------------------------------------------------------------------------- Less than 1 year 15% 93% 38% 37% 27% 95% 51% 54% 1 to 5 years 48 5 59 37 47 5 48 32 Over 5 years 37 2 3 26 26 -- 1 14 - -------------------------------------------------------------------------------------------------------------------------------- Total 100% 100% 100% 100% 100% 100% 100% 100% - --------------------------------------------------------------------------------------------------------------------------------
Chase does not deal, to any significant extent, in derivatives which dealers of derivatives (such as other banks and financial institutions) consider to be leveraged. As a result, the mark-to-market exposure of such derivatives was not material at December 31, 1998. Chase's net charge-offs arising from derivative and foreign exchange transactions were $136 million in 1998. There were no net charge-offs on these types of transactions during 1997. At December 31, 1998, nonperforming derivative contracts were $50 million, compared with none in 1997. The increases in both net charge-offs and nonperforming derivative contracts were due to severe economic conditions impacting Chase's Asian- and Russian-related counterparties. ALLOWANCE FOR CREDIT LOSSES Chase deems its allowance for credit losses at December 31, 1998 to be adequate (i.e., sufficient to absorb losses that may currently exist for all credit activities, but are not yet identifiable). Estimating losses is inherently uncertain and depends on many factors, including general macroeconomic and political conditions, rating migration, structural changes within industries that alter competitive positions, event risk, unexpected correlations within the portfolio, and other external factors such as legal and regulatory requirements. Chase periodically reviews such factors and reassesses the adequacy of the allowance for credit losses. Allowance For Credit Losses
At December 31, (in millions, except ratios) 1998 1997 - -------------------------------------------------------------------------------- Allowance for Credit Losses: Loans $3,552 $3,624 Risk Management Instruments 150(a) 75 Lending-Related Commitments 170 170 - -------------------------------------------------------------------------------- Aggregate Allowance $3,872 $3,869 - -------------------------------------------------------------------------------- Allowance for Loan Losses to: Nonperforming Loans 247% 399% Loans at Period-End 2.06 2.15 Average Loans 2.10 2.27 - -------------------------------------------------------------------------------- Aggregate Allowance for Loan Losses and Risk Management Instrument Credit Losses to: Nonperforming Credit-Related Assets 248% 407% Credit-Related Assets at Period-End 1.80 1.79 Average Credit-Related Assets 1.80 1.90 - --------------------------------------------------------------------------------
(a) During the third quarter of 1998, as part of the trading valuation process, the allowance for risk management instrument credit losses was increased by $75 million, through the provision for risk management instrument credit losses, in response to the adverse market conditions in Asia and Russia. The provision for risk management instrument credit losses was $211 million for 1998. 35 35 Management's Discussion and Analysis The Chase Manhattan Corporation - -------------------------------------------------------------------------------- MARKET RISK MANAGEMENT - -------------------------------------------------------------------------------- Market risk is the exposure to an adverse change in the value of financial instruments caused by a change in market prices or rates, including changes in interest rates, foreign exchange rates, securities prices and commodity prices. Under the direction of the Vice Chairman for Finance and Risk Management, Chase's Market Risk Management Group functions independently from the business units in identifying, assessing and controlling market risk. The Market Risk Management Group consists of nearly 60 professionals located globally in New York, London, Hong Kong and Brazil. The Group's primary responsibilities include the measurement, monitoring, assessment and control of global market risk throughout Chase. These include setting and overseeing risk limits; approving unique, non-standard transactions; evaluating and approving new products; developing risk measurement and capital allocation methodologies; reporting risk at the actual exposure level; conducting assessments of the accuracy of risk measures and portfolio stress tests and managing on-site reviews of business units taking market risk. Chase has developed a comprehensive market risk function that incorporates best practices in risk management techniques with disciplined risk management executions. Chase's limit structure extends to desk-level activities and includes a listing of authorized instruments, maximum tenors, corporate sign-offs, statistical and non-statistical limits and loss advisories. The limit structure helps ensure alignment of corporate risk appetite with trading and investment risk-taking activities. For several years, Chase has been utilizing value-at-risk ("VAR") as one measure of market risk. VAR is a measure of potential loss to risk positions from adverse market moves. However, Chase believes that the key to enhancing the stability of revenues from risk activities is measuring, controlling and managing exposure to extreme stress events. As a result, stress testing is weighted equally with VAR as a risk measurement tool and as a tactical tool for managing risk. This dual approach is designed to ensure a risk profile that is diverse, disciplined and flexible enough to capture revenue-generating opportunities during times of normal market moves, but that is also prepared for periods of market turmoil. Risk Measurement: Chase's two principal risk measurement tools are VAR and stress testing. VAR measures market risk in an everyday market environment, while stress testing measures market risk in an abnormal market environment. The VAR, a dollar amount, is a forward looking estimate of the potential for loss. The VAR looks forward one trading day, and is calculated as the loss level expected to be exceeded with a 1 in 100 chance. The VAR methodology used at Chase is called historical simulation. Historical simulation assumes that actual observed historical changes in market indices such as interest rates, exchange rates and commodity prices reflect the future possible changes in those same rates and prices. In its daily VAR calculations, Chase uses the most recent 264 trading days' historical changes in market prices and rates in its historical simulation. Chase's historical simulation provides different views of market risk in end-of-day positions, by aggregating positions by business, geography, currency or type of risk. Statistical models of risk measurement, such as VAR, allow an objective, independent assessment of how much risk is actually being taken. Chase's historic simulation methodology permits consistent and comparable measurement of risk across instruments and portfolios, irrespective of the level of aggregation. Historical simulation also makes it easy to examine the VAR for any desired segment of the total portfolio and to examine that segment's contribution to total risk. The VAR calculations are performed for all material trading portfolios and market risk-related asset/liability management ("ALM") portfolios. Results are reported at various levels of detail by business unit and in the aggregate. Chase believes its use of an historical simulation methodology for its VAR calculations is not as dependent on assumptions about the distribution of portfolio losses as are other VAR methodologies, that are parameter-based. Nevertheless, all statistical models have a degree of uncertainty associated with the assumptions employed. The Chase VAR methodology assumes that the relationships among market rates and prices that have been observed over the last year are valid for estimating risk over the next trading day. In addition, Chase's VAR estimate, like all other VAR methodologies, is dependent on the quality of available market data. Recognizing these shortcomings, Chase uses diagnostic information to continually evaluate the reasonableness of its VAR model. This information includes the calculation of statistical confidence intervals around the daily VAR estimate and the use of daily "backtesting" of VAR against actual financial results. The VAR for Chase's trading and market risk-related ALM portfolios were as follows.
Marked-to-Market Trading Portfolio Market Risk-Related ALM Activities ---------------------------------------------- --------------------------------------------- At December 31, At December 31, Year Ended December 31, 1998 Average Minimum Maximum 1998 Average Minimum Maximum 1998 (in millions) VAR VAR VAR VAR VAR VAR VAR VAR - ------------------------------------------------------------------------------------------------------------------------------------ Interest Rate VAR $ 22.8 $ 15.4 $ 36.8 $ 20.1 $ 55.5 $ 37.3 $ 94.0 $ 79.7 Foreign Exchange VAR 8.6 2.2 21.6 2.3 Commodities VAR 3.6 2.3 5.0 2.6 Equities VAR 3.8 1.9 9.4 4.6 Less: Portfolio Diversification (13.1) NM NM (8.9) - ------------------------------------------------------------------------------------------------------------------------------------ Total VAR $ 25.7 $ 15.6 $ 44.9 $ 20.7 $ 55.5 $ 37.3 $ 94.0 $ 79.7 - ------------------------------------------------------------------------------------------------------------------------------------
NM- Because the minimum and maximum may occur on different days for different risk components, it is not meaningful to compute a portfolio diversification effect. 36 36 Marked-to-Market Trading Portfolio and Market Risk-Related ALM Activities
Year Ended December 31, 1998 1997 (in millions) Average VAR Average VAR - -------------------------------------------------------------------------------- Marked-to-Market Trading Portfolio $ 25.7 $ 23.0 Market Risk-Related ALM Activities 55.5 45.5 Less: Portfolio Diversification (17.3) (17.5) - -------------------------------------------------------------------------------- Aggregate Average VAR $ 63.9 $ 51.0 - -------------------------------------------------------------------------------- At December 31, 1998 1997 (in millions) VAR VAR - -------------------------------------------------------------------------------- Marked-to-Market Trading Portfolio $ 20.7 $ 28.5 Market Risk-Related ALM Activities 79.7 49.2 Less: Portfolio Diversification (17.9) (14.0) - -------------------------------------------------------------------------------- Aggregate VAR $ 82.5 $ 63.7 - --------------------------------------------------------------------------------
Chase's average aggregate VAR (VAR for combined trading and market risk-related ALM activities) for the year ended December 31, 1998 was $63.9 million and at December 31, 1998 was $82.5 million. Chase's aggregate average and period-end VARs are less than the sum of the respective trading and ALM VARs shown in the above table (by $17.3 million and $17.9 million, respectively) due to risk offsets, resulting from portfolio diversifications that occur across the trading and ALM portfolios. Chase conducts daily VAR "backtesting" for both regulatory compliance with the Basle Committee on Banking Supervision market risk capital rules and for internal evaluation of VAR against trading revenues. During 1998, a daily trading loss exceeded that day's trading VAR on 2 days. This compares to an expected number of approximately 3 days. Considering the unsettled markets of 1998, Chase believes its VAR model performed at a very high level of accuracy during 1998. Whereas VAR captures Chase's exposure to unlikely events in normal markets, stress testing discloses the risk of unlikely but plausible events in abnormal markets. Portfolio stress testing is integral to the market risk management process--co-equal with, and complementary to, VAR as a risk measurement and control tool. Chase's corporate stress tests are built around changes in market rates and prices that result from pre-specified economic scenarios, including both actual historical and hypothetical market events. As with VAR, stress test calculations are performed for all material trading and investment portfolios and market risk-related ALM portfolios. Stress test scenarios are chosen so they test "conventional wisdom" and focus on risks relevant to the positions taken in Chase's portfolios. A key to the success of stress testing at Chase is continuous review and updating of the stress scenarios. This is a dynamic process that is responsive to changes in positions and economic events, and looks to prior stress tests to identify areas where scenario refinements can be made. Corporate stress tests are performed approximately monthly on randomly selected dates. As of December 31, 1998, Chase's corporate stress tests consisted of seven historical and hypothetical scenarios. These historical scenarios included the 1994 bond market sell-off, the 1994 Mexican Peso crisis and the 1997 Asian markets crisis. Stress testing results are used at all levels of Chase, from the trading desk to the Board of Directors, to monitor and control market risk. Among the controls instituted at Chase are a review of the trading portfolio if potential stress test losses exceed Board of Directors-approved advisory limits and the incorporation of stress test exposures into Chase's internal capital allocation methodology. The result of these measures is an approach to risk taking that focuses on identifying and managing potential exposure to stress events in ways that do not sacrifice the profitability of day-to-day activities. Evaluation of Risk Appetite: Chase utilizes a comprehensive limit structure as part of its market risk management process. In addition to establishing VAR limits on market risk activities at the aggregate and business unit levels, Chase maintains nonstatistical risk limits to mitigate risk in those instances where statistical assumptions break down. Nonstatistical measures include net open posi- [Graph 8 - See Appendix I] 37 37 Management's Discussion and Analysis The Chase Manhattan Corporation tions, basis point values, position concentrations and position turnover. Criteria for risk limits include, among other factors, relevant market analysis, market liquidity, prior track record, business strategy and management experience and depth. Risk limits are reviewed regularly to maintain consistency with trading strategies and material developments in market conditions, and are updated at least twice a year. Chase also uses stop-loss advisories to inform senior management when losses of a certain threshold are sustained from a trading activity. Chase believes the use of nonstatistical measures and stop-loss advisories in tandem with VAR limits reduces the likelihood that potential trading losses will reach the daily VAR limit. Histogram: The preceding chart contains a histogram of Chase's daily market risk-related revenue for 1998 and 1997. Market risk-related revenue is defined as the daily change in value in mark-to-market trading portfolios plus any trading-related net interest income or other revenue. Trading-related net interest income includes interest recognized on interest-earning and interest-bearing trading-related positions as well as management allocations reflecting the funding cost or benefit associated with trading positions. In 1998, Chase posted positive daily market risk-related revenue for 222 out of 259 days, with 49 days exceeding positive $20 million. In 1997, Chase posted positive daily market risk-related revenue for 229 out of 259 days, with 37 days exceeding positive $20 million. The increase in days exceeding positive $20 million reflected continued efforts to build key trading activities. In 1998, Chase incurred 6 daily trading losses in excess of negative $20 million, which was in line with stress test predictions. Five of these six days of losses occurred in late August and September and resulted from the adverse global market conditions which occurred in the 1998 third quarter. Asset/Liability Management: Chase is also exposed to market risk as the revenues it derives from its asset-liability activities are sensitive to changes in market prices or rates. Interest rate risk is the most significant type of market risk exposure arising from Chase's asset-liability activities. Interest rate risk involves the potential decline in the economic value of Chase (the value of Chase's assets or liabilities) due to adverse changes in rates that impact revenues such as net interest income, securities gains/losses and other interest sensitive income/expense items. Interest rate risk arises from a variety of factors, including differences in timing between the maturity or the repricing of Chase's assets, liabilities and derivatives. For example, Chase's net interest income, as well as its economic value, is affected by changes in the level of market interest rates as the repricing characteristics of loans and other interest-earning assets do not necessarily match those of deposits or other borrowings. Chase is also exposed to basis risk, which is the difference in pricing characteristics of two instruments. For example, basis risk arises when prime-based lending is financed with Libor-based liabilities. A key element of Chase's ALM process is that it allows the assumption of market risk by a limited number of authorized business units with close contacts to the markets. Interest rate risk is generally managed with consideration for both total return and reported earnings. The interest rate risk profile of Chase's assets, liabilities and derivatives exposures is modified based on an ongoing assessment of fundamental trends in interest rates, economic developments and technical analysis. Beginning in 1999, oversight of Chase's ALM and market risk management functions have converged under the Market Risk Committee. That committee is now responsible for establishing the interest rate risk appetite for Chase's trading activities as well as for its non-trading activities. These latter responsibilities were formerly with the Asset and Liability Committee, which was eliminated at year-end. The Market Risk Committee is supported by a comprehensive risk management process that identifies, measures, manages and monitors market risk undertaken by asset-liability activities. The ALM and market risk management processes at Chase have been functionally converging. Chase plans to extend these procedures (VAR and stress test measurements), control disciplines and measurement practices to all its asset-liability activities. Measuring Interest Rate Sensitivity: Chase, as part of its ALM process, employs a variety of cash (primarily securities) and derivative instruments in managing its exposure to fluctuations in market interest rates. In managing exposure, Chase uses net gap exposure and earnings simulation models to quantify its earnings at risk (the risk to earnings from adverse movements in interest rates). An example of aggregate net gap analysis is presented below. Assets, liabilities and derivative instruments are placed in gap intervals based on their repricing dates. Assets and liabilities for which no specific contractual repricing or maturity dates exist, or whose contractual maturities do not reflect their expected maturities, are placed in gap intervals based on management's judgment and statistical analysis, as applicable, concerning their most likely repricing behaviors. Derivative instruments used in interest rate sensitivity management are also included in the applicable gap intervals. Interest Rate Sensitivity Table
At December 31, 1998 (in millions) 1-3 Months 4-6 Months 7-12 Months 1-5 Years Over 5 Years Total - ------------------------------------------------------------------------------------------------------------------------------------ Balance Sheet $(37,879) $ 480 $ 6,800 $ 43,395 $(12,796) $ -- Derivative Instruments Affecting Interest Rate Sensitivity(a) (4,922) 803 (2,788) 2,542 4,365 -- - ------------------------------------------------------------------------------------------------------------------------------------ Interest Rate Sensitivity Gap (42,801) 1,283 4,012 45,937 (8,431) -- - ------------------------------------------------------------------------------------------------------------------------------------ Cumulative Interest Rate Sensitivity Gap $(42,801) $(41,518) $(37,506) $ 8,431 $ -- $ -- - ------------------------------------------------------------------------------------------------------------------------------------ % of Total Assets (12)% (11)% (10)% 2% --% --% - ------------------------------------------------------------------------------------------------------------------------------------
(a) Represents net repricing effect of derivative positions, which include interest rate swaps, futures, forward rate agreements and options, that are used as part of Chase's overall ALM . 38 38 A net gap for each time period is calculated by subtracting the liabilities repricing in that interval from the assets repricing. A negative gap (more liabilities repricing than assets) will benefit earnings in a declining interest rate environment and will detract from earnings in a rising interest rate environment. At December 31, 1998, Chase had $37.5 billion more liabilities than assets repricing within one year (including net repricing effects of derivative instruments), amounting to 10% of total assets. The cumulative interest rate sensitivity gaps include exposure to U.S. dollar interest rates as well as exposure to non-U.S. dollar rates in currency markets in which Chase does business. Since U.S. dollar interest rates and non-U.S. dollar interest rates may not move in tandem, the overall cumulative gaps may tend to differ from the actual exposures of Chase. Gap analysis is the simplest representation of Chase's interest rate sensitivity. However, it cannot reveal the impact of factors such as administered rates (e.g., the prime lending rate), pricing strategies on consumer and business deposits, changes in balance sheet mix, or the effects of various options embedded in balance sheet instruments. Accordingly, Chase conducts simulations of earnings at risk under a variety of market interest rate scenarios that include all assets, liabilities and ALM derivative instruments. Earnings simulations consider forecasted balance sheet changes (such as asset sales, securitizations, prepayments and reinvestments), and forecasted changes in interest rate spreads and interest-sensitive fee income to provide an estimate of earnings at risk for given changes in interest rates. Various interest rate scenarios are employed to quantify earnings sensitivities. Chase's primary exposure is to fluctuations in U.S. dollar interest rates. At December 31, 1998, U.S. dollar-denominated exposures were subjected to an immediate interest rate shock of 100bp. Interest rate shocks for major non-U.S. dollar currencies are adjusted to reflect their historical volatility relative to the U.S. dollar rate volatility. These non-U.S. dollar rate shocks ranged in magnitude from approximately 100bp to 1500bp. At December 31, 1998, based on Chase's simulation models and applying immediate increases to various market interest rates, earnings at risk over the next twelve months are estimated to be approximately 3% of projected 1999 net income. During 1998, Chase's earnings at risk to an immediate rise in interest rates (based on the previously mentioned rate shocks) averaged less than 4% of net income. The hypothetical rate shocks are used to calculate risk that Chase believes to be reasonably possible of occurring in the near-term, but these scenarios do not necessarily represent management's current view of future market developments. All the measurements of risk used by Chase are based upon its business mix and interest rate exposures at a particular point in time. The exposures change continuously as a result of Chase's ongoing businesses and its risk management initiatives. While management believes these measures provide a meaningful representation of Chase's interest rate sensitivity, they do not take into account all business developments that have an effect on net income or fair value, such as changes in credit quality or the size and composition of the balance sheet. Foreign currency exposures arising from nontrading activities conducted in Chase's overseas units and net investments in overseas entities are managed through the use of foreign exchange forward contracts. Foreign currency exposures are matched on a currency-by-currency basis to hedge the impact of foreign exchange rate changes. At December 31, 1998, Chase's earnings sensitivity to changes in foreign currency rates was immaterial. Impact of ALM Derivative Activity: The following table reflects the deferred gains and losses on closed derivative contracts and unrecognized gains and losses on open derivative contracts utilized in Chase's ALM activities.
December 31, (in millions) 1998 1997 Change - -------------------------------------------------------------------------------- ALM Derivative Contracts: Net Deferred Gains $ 402 $ -- $ 402 Net Unrecognized Gains (Losses) 110 (392) 502 - -------------------------------------------------------------------------------- Net ALM Derivative Gains (Losses) $ 512 $(392) $ 904 - --------------------------------------------------------------------------------
Net deferred gains and losses on closed contracts relate to futures, forwards and swaps used in connection with available-for-sale securities, loans, deposits and debt. The net unrecognized gains and losses relating to ALM activities are largely the result of interest rate swaps, options, forward and futures contracts primarily used in connection with loans, deposits and debt. For a further discussion of unrecognized gains/losses on open derivative contracts, see Note Twenty-Two. The deferred gains and losses at December 31, 1998 are expected to be amortized as yield adjustments in net interest income or recognized in noninterest revenue over the periods reflected in the following table. Premiums relating to open ALM option contracts are included on the balance sheet and are amortized as a reduction to net interest income or noninterest revenue over the following periods. Amortization of Net Deferred Gains on Closed ALM Contracts and of Premiums on Open ALM Options Contracts
Net Deferred Option Year Ended December 31, (in millions) Gains Premiums - ------------------------------------------------------------------------ 1999 $ 68 $ 35 2000 70 39 2001 47 18 2002 47 15 2003 and After 170 14 - ------------------------------------------------------------------------ Total $402 $121 - ------------------------------------------------------------------------
39 39 Management's Discussion and Analysis The Chase Manhattan Corporation - -------------------------------------------------------------------------------- LIQUIDITY RISK MANAGEMENT - -------------------------------------------------------------------------------- LIQUIDITY Liquidity management addresses Chase's ability to meet deposit withdrawals either on demand or at contractual maturity, to repay borrowings as they mature, and to make new loans and investments as they arise. Liquidity is managed on a daily basis, both at the parent company and subsidiary levels, and incorporates known and unanticipated cash needs. Liquidity management provides the proper mix of core and non-core deposits and capital to ensure that asset generation is not disrupted. In managing liquidity, Chase takes into account the various legal limitations on the extent to which its subsidiary banks may pay dividends to their parent companies or finance or otherwise supply funds to certain of their affiliates. A major source of liquidity for the bank subsidiaries of Chase derives from their ability to generate core deposits. Core deposits include all deposits except noninterest-bearing time deposits, foreign deposits and certificates of deposit of $100,000 or more. Chase generates substantial deposits from its global services businesses. Chase is also active in generating low-cost wholesale deposits (including foreign deposits and purchases of Federal funds) and large-denomination certificates of deposit. Chase is an active participant in the capital markets and issues commercial paper, medium-term notes, long-term debt, capital notes of subsidiaries, and preferred and common stock. Chase holds marketable securities and other short-term investments that can readily be converted to cash. In addition, as part of Chase's ongoing capital management process, loan syndication networks and securitization programs are utilized to facilitate the timely disposition of assets when deemed desirable. Moreover, contingency plans exist and could be implemented on a timely basis to minimize the risks associated with dramatic changes in market conditions should the need arise. During the difficult market conditions of the latter half of 1998, Chase maintained its ability to access global capital and funding markets, and in certain markets experienced liquidity flow increases. CAPITAL Chase's level of capital at December 31, 1998 remained strong, with capital ratios well in excess of regulatory guidelines. At December 31, 1998, Tier 1 and Total Capital ratios were 8.3% and 12.0%, respectively, and the Tier 1 Leverage ratio was 6.4%. Management intends to continue Chase's disciplined approach to asset growth and maintain Chase's Tier 1 capital ratio within its target range of 8% to 8.25%. Capital generated in excess of this target ratio will be used to purchase Chase's common stock or for future reinvestment and acquisition opportunities. The following chart shows the sources and uses of Chase's capital for 1998 and 1997.
Year Ended December 31, (in billions) 1998 1997 - -------------------------------------------------------------------------------- Sources and Uses of Free Cash Flow Operating Earnings $ 4.0 $ 3.9 Less: Special Charges (0.2) (0.1) Less: Dividends (1.3) (1.2) Less: Capital to Support Internal Growth (0.4) (2.6) - -------------------------------------------------------------------------------- Free Cash Flow $ 2.1 $ -- - -------------------------------------------------------------------------------- Uses of Free Cash Flow: Increases (Decreases) in Capital Ratios $1.2 $(1.6) Acquisitions 1.0 0.4 Net Repurchases (0.1) 1.2 - -------------------------------------------------------------------------------- Total Uses of Free Cash Flow $ 2.1 $ -- - --------------------------------------------------------------------------------
During 1998, Chase had been purchasing its common stock under an authorization announced in October 1996. From inception through December 31, 1998 (the date the authorization expired), Chase repurchased 83.3 million common shares ($4.3 billion) and reissued from treasury approximately 49.9 million common shares ($2.3 billion) under its benefit plans, resulting in a net repurchase of 33.4 million common shares ($2.0 billion). In November 1998, Chase authorized a new repurchase program, effective January 4, 1999. Under the new authorization, Chase may repurchase up to $3 billion of its common stock in the open market or through negotiated transactions, in addition to any amounts necessary to provide for issuances under Chase's dividend reinvestment plan and its various stock-based employee benefit plans. In the first quarter of 1998, Chase raised the cash dividend on its common stock to $.36 per share, from $.31 per share. Chase has, over the past several years, been paying a common stock dividend that has generally been equal to approximately 25% to 35% of its operating earnings less preferred stock dividends. Chase's future dividend policies will be determined by its Board of Directors, taking into consideration Chase's earnings and financial condition and applicable governmental regulations and policies. [Graph 9 - See Appendix I] 40 40
December 31, (in millions) 1998 1997 - -------------------------------------------------------------------------------- Tier 1 Capital: Common Stockholders' Equity $22,435 $19,907 Nonredeemable Preferred Stock 1,028 1,740 Minority Interest(a) 2,806 2,440 Less: Goodwill 2,030 1,310 Nonqualifying Intangible Assets 123 183 - -------------------------------------------------------------------------------- Tier 1 Capital $24,116 $22,594 - -------------------------------------------------------------------------------- Tier 2 Capital: Long-Term Debt and Other Instruments Qualifying as Tier 2 7,093 7,128 Qualifying Allowance for Credit Losses 3,620 3,581 - -------------------------------------------------------------------------------- Tier 2 Capital 10,713 10,709 - -------------------------------------------------------------------------------- Total Qualifying Capital $34,829 $33,303 - --------------------------------------------------------------------------------
(a) Minority interest includes the Guaranteed Preferred Beneficial Interests in Corporation's Junior Subordinated Deferrable Interest Debentures and the Preferred Stock of the REIT Subsidiary. For a further discussion, see Notes Six and Seven. During 1998, the total capitalization of Chase (the sum of Tier 1 and Tier 2 Capital) increased by $1.5 billion to $34.8 billion. The increase was primarily due to the retention of earnings generated during 1998 (net income less common and preferred dividends), the issuance of $448 million of capital securities (net of discount) by Chase subsidiaries and the issuance of $200 million of preferred stock. Partially offsetting these amounts was the impact of increased goodwill from acquisitions and the redemption of $912 million of preferred stock bearing higher dividend rates. An additional $528 million of Chase's preferred stock becomes redeemable in 1999. See Notes Six through Eight. [Graph 10 - See Appendix I] - -------------------------------------------------------------------------------- OPERATING RISK MANAGEMENT - -------------------------------------------------------------------------------- Chase, like all large corporations, is exposed to many types of operating risk, including the risk of fraud by employees or outsiders, unauthorized transactions by employees, and errors relating to computer and telecommunications systems. Chase maintains a system of controls that is designed to keep operating risk at appropriate levels in view of the financial strength of Chase, the characteristics of the businesses and markets in which Chase operates, competitive circumstances and regulatory considerations. However, from time to time in the past, Chase has suffered losses from operating risk and there can be no assurance that Chase will not suffer such losses in the future. EMU On January 1, 1999, the "euro" was introduced. On that day, the exchange ratios of the currencies of eleven countries participating in the first phase of the European Economic and Monetary Union were fixed. The euro became a currency in its own right; and the currencies of the participating countries, while existing for a three-year transition period, continue only as fixed denominations of the euro. As a result of its remediation and testing efforts as well as its extensive coordination with its customers, counterparties, agent banks and regulatory agencies, Chase successfully converted to the euro on January 1, 1999. Since that date, Chase has been conducting its foreign exchange, custody, cash management and funds transfer services as well as all its risk management and internal accounting functions, for those currencies that constitute it, entirely in the euro, without having experienced any material interruptions in its business. At the same time, Chase has retained the flexibility to service its clients who wish to continue to transact business in national currency units. The costs to prepare for the euro amounted to approximately $70 million in 1998; these costs were expensed as incurred. YEAR 2000 Overview. Chase recognized in mid-1995 the need to create a coordinated approach to managing the Year 2000 problem. It established a Chase-wide program to provide strong, comprehensive management of the issue. A Year 2000 Enterprise Program Office, together with 34 business area project offices, coordinates, manages and monitors all aspects of the Year 2000 effort on a global basis, both technical- and business-related. The Program Office reports directly to the Executive Committee of Chase and is responsible for Chase's Year 2000 remediation efforts. In addition, a Year 2000 Core Team, consisting of senior managers from internal audit, technology risk and control, financial management and control, the technology infrastructure division, legal and the Year 2000 Enterprise Program Office, provides independent oversight of the process. The Core Team, which also reports directly to the Executive Committee of Chase, is charged with identifying major risks and ensuring necessary management attention for timely resolution of project issues. The Core Team reviews progress on a monthly basis and during 1998 conducted formal quarterly reviews of all project office progress. During 1999, the Core Team will conduct reviews more frequently with an emphasis on the resolution of outstanding items. Chase's Year 2000 Program continues to evolve. Commencing January 1, 1999, Chase established a Year 2000 Business Risk Council, comprised of approximately 20 senior business leaders. The Business Risk Council is an interdisciplinary forum that brings together business line managers, risk managers, and representatives of key staff functions for identifying potential business risks related to Year 2000, and coordinating planning and readiness efforts. These include refinements to business contingency 41 41 Management's Discussion and Analysis The Chase Manhattan Corporation plans for Year 2000, and the establishment of a Year 2000 command center structure and rapid response teams. Current Status. Chase's Year 2000 Program has been, and continues to be, tracked against a well-defined set of milestones. The scope of Chase's Year 2000 Program involves approximately 180,000 technical infrastructure components (e.g., LAN servers and data center equipment); approximately 3,900 business software applications (of which approximately 1,000 are provided by third-party vendors); 1,400 locations worldwide, at which up to 21 building systems at each location are being reviewed; and over 77,000 desktops. Significant progress occurred during 1998 and Chase met all regulatory milestones. The following table sets forth the progress achieved by Chase during 1998 in its Year 2000 efforts and projected milestones for 1999.
% Remediated ------------ Completed in 1998 Projected for 1999 - -------------------------------------------------------------------------------- Type of System 3/31 6/30 9/30 12/31 3/31 6/30 - -------------------------------------------------------------------------------- Technical Infrastructure 81% 97% 98% 99% 100%(a) 100%(a) - -------------------------------------------------------------------------------- Business Software Applications(b) 17% 32% 61% 93% 98% 100%(a) - -------------------------------------------------------------------------------- Facility Systems 63% 80% 85% 85% 92% 100%(a) - -------------------------------------------------------------------------------- Desktop Systems 15% 37% 53% 64% 69% 100%(a) - --------------------------------------------------------------------------------
(a) While activities are scheduled to be completed by the dates indicated, efforts will continue around external testing and certification throughout the year. (b) For Business Software Applications, of the 93% of the systems remediated, 83% have also been tested to be Year 2000 compliant at December 31, 1998. For the remaining types of systems, the percent remediated also indicates the percent tested to be Year 2000 compliant. In 1999, attention will continue to be focused on completing the remediation of all business software applications, as well as ensuring that those software application systems that have been remediated, tested and certified as Year 2000-compliant remain compliant. This entails continued re-certification of systems throughout the remainder of 1999. In addition, Chase is increasing its tracking and risk management of third party providers. A major focus of 1999 will be continued customer and "street" (i.e., industry-wide) testing. These activities commenced during the third quarter of 1998 and, by the end of 1998, Chase had participated in street tests with over 50 agencies and organizations, including Depository Trust Company (DTC), New York ACH, The Federal Reserve Bank of New York, CHIPS, Government Securities Clearing Corporation, Society for Worldwide Interbank Financial Telecommunication (SWIFT), Cedel, Euroclear and Central Depository of Taiwan. Street testing has already been scheduled with 30 world-wide organizations during 1999 including, among others, Cedel, Euroclear, SWIFT, DTC, Mortgage Bankers Association, Mortgage Backed Securities Clearing Corporation, National Securities Clearing Corporation, MasterCard and Visa. In addition, Chase will participate in Securities Industry Association testing in March and April and the Global Payments test in June 1999. Chase expects to participate in industry tests as they are scheduled throughout 1999. Testing with third parties is critical, since a failure of a major external interface could have a material adverse effect on Chase's operations. As part of its focus on business-unit and overall corporate risk, Chase continues to make progress on its major customer and business-partner due diligence. By September 30, 1998, Chase had completed the evaluation of its major credit customers, assessed their Year 2000 efforts and incorporated any Year 2000 customer risks into its credit risk analysis processes. Chase has completed an initial evaluation of potential Year 2000 impacts upon its funding capability in order to incorporate any such risks into its capital and liquidity planning. Fiduciary risk management procedures include, among other Year 2000 related activities, assessment of the risks that may be posed to the values of assets under discretionary management as a result of Year 2000 problems faced by the issuers of securities held in clients' accounts and an evaluation of Year 2000 readiness of counterparties. Chase's outside service providers (such as correspondents, sub-custodians and investment advisors) have been contacted to determine their Year 2000 readiness. Monitoring of their progress is ongoing. The results are being incorporated into Chase's risk management processes and contingency planning. Costs. At December 31, 1998, Chase's estimate to remediate its Year 2000 issues remains at approximately $363 million. This included costs incurred during 1997 and 1998 as well as costs expected to be incurred during 1999. Chase's Year 2000 costs were $186 million during 1998 and are currently estimated at $127 million for 1999. These costs include the costs of remediation, testing, third party assessment, and contingency planning, but do not include approximately $33 million of depreciation costs for Year 2000-compliant equipment to be expensed beyond December 31, 1999. Risk Management and Contingency Planning. In its normal course of business, Chase manages many types of risk. Chase recognizes that the risks presented by Year 2000 are unique given the pervasive nature of the problem and the higher likelihood that Year 2000 risk may present itself in multiple, simultaneous impacts. Because of this, Chase has adjusted and will continue to adjust its risk management processes and contingency plans to take the most probable anticipated effects into account. Chase believes Year 2000 disruptions, if they occur, may manifest themselves to financial institutions in three distinct waves - -- liquidity problems, as evidenced by a "flight to quality" or preference for cash; operational problems, which may trigger disruptions in the financial markets; and credit problems, as individuals, companies or countries experience financial losses as a result of liquidity or operational issues. In this regard, Chase has begun its event planning for the Year 2000 with the goal of preventing or mitigating these potential disruptions. In addition, Chase will incorporate into its Year 2000 readiness plans its experience from its EMU conversion. Chase's Year 2000 event planning includes creation of command centers; performance of dress rehearsals and simulation modeling for various possible business and operational risks; establishment of special rapid response technology teams; scheduling of availability of key personnel; additional training and testing activities; and establishment of rapid decision processes. 42 42 - -------------------------------------------------------------------------------- ACCOUNTING AND REPORTING DEVELOPMENTS - -------------------------------------------------------------------------------- Derivatives In June 1998, the FASB issued SFAS 133, which establishes accounting and reporting standards for all derivative instruments, including certain derivative instruments embedded in other financial instruments (collectively referred to as derivatives), and for hedging activities. SFAS 133 requires that an entity measure all derivatives at fair value and recognize those derivatives as either assets or liabilities on the balance sheet. The change in a derivative's fair value is generally to be recognized in current period earnings. However, if certain conditions are met, a derivative may be specifically designated as a hedge of an exposure to changes in fair value, variability of cash flows, or certain foreign currency exposures. Based on the hedge designation, special hedge accounting rules would allow the derivative's change in value to be recognized either in current period earnings, together with the offsetting change in value of the risk being hedged, or, to the extent the hedge is effective, in comprehensive income and subsequently reclassified into earnings when the hedged item affects earnings. SFAS 133 is effective for all fiscal years beginning after June 15, 1999 (calendar year 2000), with early adoption permitted. Chase already recognizes the derivatives used in its trading activities on its balance sheet at fair value, with changes in the fair values of such derivatives included in earnings. This represents the substantial majority of the derivatives utilized by Chase. With respect to those other derivatives used as hedges of its assets, liabilities and commitments, Chase is currently assessing the impact of the adoption of SFAS 133 on its hedging activities and its effect on its financial condition and operating performance. - -------------------------------------------------------------------------------- COMPARISON BETWEEN 1997 AND 1996 - -------------------------------------------------------------------------------- Results of Operations Chase's operating earnings were $3.85 billion in 1997, an increase of 9% from 1996. Earnings per share, on a diluted basis, increased 15% when compared with the prior year. Reported net income was $3.71 billion in 1997, compared with $2.46 billion in 1996. Diluted net income per share was $4.01 in 1997 compared with $2.47 in 1996. Operating revenues in 1997 rose 8% to $17.70 billion, reflecting a 14% increase in market-sensitive revenues and a 6% increase in less market-sensitive revenues. Market-sensitive revenue growth in 1997 included double-digit increases over 1996 in investment banking fees, securities gains and private equity gains, reflecting a favorable market environment for these products. Trading-related revenue in 1997 rose 4% from the 1996 level, despite the difficult market conditions that existed in the 1997 fourth quarter. The increase in less market-sensitive revenues from 1996 reflected higher trust and investment management fees and credit card revenue. Operating net interest income was $8.89 billion in 1997, a 2% increase from the previous year. The increase was primarily due to higher volumes of consumer-related loans (particularly credit cards and auto financing). Operating expense was $9.76 billion in 1997, an increase of 5% from the prior year. The increase in 1997 was primarily due to higher incentive costs, equipment expense and expenses related to marketing for the co-branded Wal-Mart MasterCard, PC Banking and Better Banking products and services. Residual merger-related expenses of $192 million and $164 million were incurred during 1997 and 1996, respectively, relating to the merger of The Chase Manhattan Corporation and Chemical Banking Corporation. At the March 31, 1996 merger date, a $1.65 billion restructuring charge had been incurred. Credit costs on an operating basis during 1997 were $1.81 billion, a $358 million increase from the 1996 level. The increase was the result of continued strong growth in credit card outstandings due, in large part, to increased card utilization and improvement in activation and retention programs. Provision for loan losses, which in 1997 equaled net charge-offs, decreased by $93 million or 10% from the 1996 level. The decreases in both the provision and net charge-offs were the result of net recoveries in the commercial loan portfolio as well as a lower level of consumer net charge-offs on a retained basis. Income tax expense in 1997 was $2.20 billion, compared with $1.35 billion in 1996. The 1996 amount included tax benefits related to restructuring costs as well as aggregate tax benefits and refunds of $132 million. The effective tax rate was 37.3% for 1997, compared with 38.0% (excluding the aforementioned tax benefits and refunds) for 1996. Lines of Business Results Global Bank's operating revenue in 1997 rose $484 million, or 6% over 1996, due mainly to increases in fee revenue, trading-related revenue and higher securities gains. Cash operating earnings and SVA for 1997 increased $225 million and $210 million, respectively, over 1996. National Consumer Services operating revenue in 1997 rose $678 million, or 10% over 1996, due mainly to higher revenue driven by higher loan volume in credit cards and mortgage banking products. Cash operating earnings and SVA for 1997 increased $84 million and $56 million, respectively, over 1996, due to higher revenue and the benefit of merger-related savings. Partially offsetting these increases were higher credit costs for credit cards, auto loans and unsecured revolving lines of credit and higher expenses related to marketing initiatives and new product offerings. Global Services operating revenue in 1997 rose $217 million, or 10% over 1996, due to strong revenue growth, reflecting an increase in assets under custody and new business initiatives. Cash operating earnings and SVA for 1997 increased $104 million and $110 million, respectively, over 1996, due to higher revenue as well as continued productivity gains. 43 43 Management's Report on Responsibility for Financial Reporting and Report of Independent Accountants To Our Stockholders The management of Chase has the responsibility for preparing the accompanying consolidated financial statements and for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles. The consolidated financial statements include amounts that are based on management's best estimates and judgements. Management also prepared the other information in the annual report and is responsible for its accuracy and consistency with the consolidated financial statements. Management maintains a comprehensive system of internal control to assure the proper authorization of transactions, the safeguarding of assets, and the reliability of the financial records. The system of internal control provides for appropriate division of responsibility and is documented by written policies and procedures that are communicated to employees. Chase maintains a strong internal auditing program that independently assesses the effectiveness of the system of internal control and recommends any possible improvements. Management believes that as of December 31, 1998, Chase maintains an effective system of internal control. The Audit Committee of the Board of Directors reviews the systems of internal control and financial reporting. The Committee meets and consults regularly with management, the internal auditors and the independent accountants to review the scope and results of their work. The accounting firm of PricewaterhouseCoopers LLP has performed an independent audit of Chase's financial statements. Management has made available to PricewaterhouseCoopers LLP all of Chase's financial records and related data, as well as the minutes of stockholders' and directors' meetings. Furthermore, management believes that all representations made to PricewaterhouseCoopers LLP during its audit were valid and appropriate. The firm's report appears below. /s/ Walter V. Shipley Walter V. Shipley Chairman and Chief Executive Officer /s/ Thomas G. Labrecque Thomas G. Labrecque President and Chief Operating Officer /s/ Marc J. Shapiro Marc J. Shapiro Vice Chairman Finance and Risk Management /s/ Dina Dublon Dina Dublon Executive Vice President and Chief Financial Officer January 19, 1999 [LOGO] PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP o 1177 Avenue of the Americas o New York, NY 10036 To the Board of Directors and Stockholders of The Chase Manhattan Corporation: In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of The Chase Manhattan Corporation and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Corporation's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP January 19, 1999 44 44 Consolidated Balance Sheet The Chase Manhattan Corporation
- ----------------------------------------------------------------------------------------------------------- December 31, (in millions, except share data) 1998 1997 - ----------------------------------------------------------------------------------------------------------- ASSETS Cash and Due from Banks $ 17,068 $ 15,704 Deposits with Banks 7,212 2,886 Federal Funds Sold and Securities Purchased Under Resale Agreements 18,487 30,928 Trading Assets: Debt and Equity Instruments 24,844 34,641 Risk Management Instruments (Net of Allowance for Credit Losses of $150 in 1998 and $75 in 1997) 32,848 37,752 Securities: Available-for-Sale 62,803 49,755 Held-to-Maturity (Market Value: $1,703 in 1998 and $2,995 in 1997) 1,687 2,983 Loans (Net of Allowance for Loan Losses of $3,552 in 1998 and $3,624 in 1997) 169,202 164,830 Premises and Equipment 4,055 3,780 Due from Customers on Acceptances 1,223 1,719 Accrued Interest Receivable 2,316 3,359 Other Assets 24,130 17,184 - ----------------------------------------------------------------------------------------------------------- Total Assets $ 365,875 $ 365,521 - ----------------------------------------------------------------------------------------------------------- LIABILITIES Deposits: Domestic: Noninterest-Bearing $ 47,541 $ 46,603 Interest-Bearing 85,886 71,576 Foreign: Noninterest-Bearing 4,082 3,205 Interest-Bearing 74,928 72,304 --------- --------- Total Deposits 212,437 193,688 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 41,632 56,126 Commercial Paper 7,788 4,744 Other Borrowed Funds 7,239 6,861 Acceptances Outstanding 1,223 1,719 Trading Liabilities 38,502 52,438 Accounts Payable, Accrued Expenses and Other Liabilities, Including the Allowance for Credit Losses of $170 in 1998 and 1997 14,291 12,526 Long-Term Debt 16,187 13,387 Guaranteed Preferred Beneficial Interests in Corporation's Junior Subordinated Deferrable Interest Debentures 2,188 1,740 - ----------------------------------------------------------------------------------------------------------- Total Liabilities 341,487 343,229 - ----------------------------------------------------------------------------------------------------------- Commitments and Contingencies (See Note Twenty-Six) PREFERRED STOCK OF SUBSIDIARY 550 550 STOCKHOLDERS' EQUITY Preferred Stock 1,028 1,740 Common Stock (Authorized 1,500,000,000 Shares, Issued 881,688,611 Shares in 1998 and 881,506,592 Shares in 1997) 882 441 Capital Surplus 9,836 10,360 Retained Earnings 13,544 11,086 Accumulated Other Comprehensive Income 392 112 Treasury Stock, at Cost (33,703,249 Shares in 1998 and 39,577,640 Shares in 1997) (1,844) (1,997) - ----------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 23,838 21,742 - ----------------------------------------------------------------------------------------------------------- Total Liabilities, Preferred Stock of Subsidiary and Stockholders' Equity $ 365,875 $ 365,521 - -----------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these Statements. 45 45 Consolidated Statement of Income The Chase Manhattan Corporation
- ----------------------------------------------------------------------------------------------------- Year ended December 31, (in millions, except per share data) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------- Interest Income Loans $ 13,389 $ 12,921 $ 12,468 Securities 3,616 3,028 2,862 Trading Assets 2,431 2,770 1,898 Federal Funds Sold and Securities Purchased Under Resale Agreements 2,211 2,607 2,135 Deposits with Banks 642 525 537 - ----------------------------------------------------------------------------------------------------- Total Interest Income 22,289 21,851 19,900 - ----------------------------------------------------------------------------------------------------- INTEREST EXPENSE Deposits 6,840 6,561 6,038 Short-Term and Other Borrowings 5,612 5,903 4,630 Long-Term Debt 1,271 1,134 901 - ----------------------------------------------------------------------------------------------------- Total Interest Expense 13,723 13,598 11,569 - ----------------------------------------------------------------------------------------------------- Net Interest Income 8,566 8,253 8,331 Provision for Loan Losses 1,343 804 897 - ----------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Loan Losses 7,223 7,449 7,434 - ----------------------------------------------------------------------------------------------------- NONINTEREST REVENUE Investment Banking Fees 1,502 1,136 950 Trust, Custody and Investment Management Fees 1,543 1,307 1,176 Credit Card Revenue 1,474 1,088 954 Fees for Other Financial Services 2,093 1,983 1,923 Trading Revenue 1,449 1,323 1,371 Provision for Risk Management Instrument Credit Losses (211) -- -- Securities Gains 609 312 135 Private Equity Gains 967 831 749 Other Revenue 664 575 286 - ----------------------------------------------------------------------------------------------------- Total Noninterest Revenue 10,090 8,555 7,544 - ----------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Salaries 5,025 4,598 4,232 Employee Benefits 854 839 926 Occupancy Expense 798 767 824 Equipment Expense 890 792 724 Restructuring Costs 529 192 1,814 Other Expense 3,287 2,906 2,647 - ----------------------------------------------------------------------------------------------------- Total Noninterest Expense 11,383 10,094 11,167 - ----------------------------------------------------------------------------------------------------- Income Before Income Tax Expense 5,930 5,910 3,811 Income Tax Expense 2,148 2,202 1,350 - ----------------------------------------------------------------------------------------------------- NET INCOME $ 3,782 $ 3,708 $ 2,461 - ----------------------------------------------------------------------------------------------------- Net Income Applicable to Common Stock $ 3,684 $ 3,526 $ 2,242 - ----------------------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE: Basic $ 4.35 $ 4.15 $ 2.57 Diluted 4.24 4.01 2.47 - -----------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these Statements. 46 46 Consolidated Statement of Changes in Stockholders' Equity The Chase Manhattan Corporation
- ------------------------------------------------------------------------------------------- Year ended December 31, (in millions) 1998 1997 1996 - ------------------------------------------------------------------------------------------- PREFERRED STOCK Balance at Beginning of Year $ 1,740 $ 2,650 $ 2,650 Issuance of Stock 200 -- -- Redemption of Stock (912) (910) -- - ------------------------------------------------------------------------------------------- Balance at End of Year 1,028 1,740 2,650 - ------------------------------------------------------------------------------------------- COMMON STOCK Balance at Beginning of Year 441 441 458 Issuance of Common Stock for a Two-for-One Stock Split 441 -- -- Retirement of Treasury Stock -- -- (20) Issuance of Stock -- -- 3 - ------------------------------------------------------------------------------------------- Balance at End of Year 882 441 441 - ------------------------------------------------------------------------------------------- CAPITAL SURPLUS Balance at Beginning of Year 10,360 10,459 11,075 Issuance of Common Stock for a Two-for-One Stock Split (441) -- -- Retirement of Treasury Stock -- -- (433) New Issuances of Stock -- -- 42 Shares Issued and Commitments to Issue Common Stock for Employee Stock-Based Awards and Related Tax Effects (83) (99) (225) - ------------------------------------------------------------------------------------------- Balance at End of Year 9,836 10,360 10,459 - ------------------------------------------------------------------------------------------- RETAINED EARNINGS Balance at Beginning of Year 11,086 8,610 7,986 Net Income 3,782 3,708 2,461 Retirement of Treasury Stock -- -- (557) Cash Dividends Declared: Preferred Stock (98) (182) (219) Common Stock (1,226) (1,050) (1,061)(a) - ------------------------------------------------------------------------------------------- Balance at End of Year 13,544 11,086 8,610 - ------------------------------------------------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE INCOME Balance at Beginning of Year 112 (271) (226) Other Comprehensive Income 280 383 (45) - ------------------------------------------------------------------------------------------- Balance at End of Year 392 112 (271) - ------------------------------------------------------------------------------------------- TREASURY STOCK, AT COST Balance at Beginning of Year (1,997) (895) (1,107) Purchase of Treasury Stock (1,091) (2,169) (2,037) Reissuance of Treasury Stock 1,244 1,067 1,239 Retirement of Treasury Stock -- -- 1,010 - ------------------------------------------------------------------------------------------- Balance at End of Year (1,844) (1,997) (895) - ------------------------------------------------------------------------------------------- Total Stockholders' Equity $ 23,838 $ 21,742 $ 20,994 - ------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME: Net Income $ 3,782 $ 3,708 $ 2,461 Other Comprehensive Income (Loss) 280 383 (45) - ------------------------------------------------------------------------------------------- Comprehensive Income $ 4,062 $ 4,091 $ 2,416 - -------------------------------------------------------------------------------------------
(a) Includes fourth quarter 1995 common stock dividends of $80 million declared and paid by heritage Chase in the 1996 first quarter. The Notes to Consolidated Financial Statements are an integral part of these Statements. 47 47 Consolidated Statement of Cash Flows The Chase Manhattan Corporation
- --------------------------------------------------------------------------------------------------------------- Year ended December 31, (in millions) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net Income $ 3,782 $ 3,708 $ 2,461 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Loan Losses 1,343 804 897 Provision for Risk Management Instrument Credit Losses 211 -- -- Restructuring Costs 529 192 1,814 Depreciation and Amortization 1,170 951 869 Net Change In: Trading-Related Assets 14,785 (11,437) (9,245) Accrued Interest Receivable 1,043 (339) (479) Other Assets (5,030) (2,264) 1,167 Trading-Related Liabilities (14,445) 14,708 3,826 Accrued Interest Payable (714) 123 395 Other Liabilities 1,591 (627) (1,743) Other, Net (673) (358) (945) - --------------------------------------------------------------------------------------------------------------- Net Cash Provided (Used) by Operating Activities 3,592 5,461 (983) - --------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Net Change In: Deposits with Banks (4,326) 5,458 124 Federal Funds Sold and Securities Purchased Under Resale Agreements 8,626 (5,673) (12,929) Loans Due to Sales and Securitizations 45,400 26,967 37,428 Other Loans, Net (52,052) (37,445) (42,935) Other, Net (801) 64 (905) Proceeds from the Maturity of Held-to-Maturity Securities 1,382 959 1,057 Purchases of Held-to-Maturity Securities (91) (130) (277) Proceeds from the Maturity of Available-for-Sale Securities 27,035 10,250 8,513 Proceeds from the Sale of Available-for-Sale Securities 162,870 95,045 44,194 Purchases of Available-for-Sale Securities (201,622) (109,849) (60,380) Cash Used in Acquisitions (981) (5,153) -- Proceeds from Divestitures of Nonstrategic Businesses -- 847 -- - --------------------------------------------------------------------------------------------------------------- Net Cash Used by Investing Activities (14,560) (18,660) (26,110) - --------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net Change In: Noninterest-Bearing Domestic Demand Deposits 938 3,914 5,743 Domestic Time and Savings Deposits 14,310 4,509 4,160 Foreign Deposits 3,501 4,500 (471) Federal Funds Purchased and Securities Sold Under Repurchase Agreements (10,679) 5,969 18,029 Other Borrowed Funds 3,422 (2,126) (199) Other, Net (352) (556) 361 Proceeds from the Issuance of Long-Term Debt and Capital Securities 5,182 3,945 1,891 Repayments of Long-Term Debt (1,949) (2,134) (1,453) Proceeds from the Issuance of Stock 1,232 967 1,082 Proceeds from the Issuance of Preferred Stock of Subsidiary -- -- 550 Redemption of Preferred Stock (912) (910) -- Treasury Stock Purchased (1,091) (2,585) (1,611) Cash Dividends Paid (1,278) (1,212) (1,188) - --------------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 12,324 14,281 26,894 - --------------------------------------------------------------------------------------------------------------- Effect of Exchange Rate Changes on Cash and Due from Banks 8 17 10 Net Increase (Decrease) in Cash and Due from Banks 1,364 1,099 (189) Cash and Due from Banks at the Beginning of the Year 15,704 14,605 14,794 - --------------------------------------------------------------------------------------------------------------- Cash and Due from Banks at the End of the Year $ 17,068 $ 15,704 $ 14,605 Cash Interest Paid $ 13,009 $ 13,475 $ 11,174 Taxes Paid $ 1,405 $ 1,144 $ 1,650 - ---------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these Statements. 48 48 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- The Chase Manhattan Corporation ("Chase") is a bank holding company organized under the laws of the State of Delaware and registered under the Bank Holding Company Act. Chase conducts its worldwide financial services businesses through various bank and nonbank subsidiaries. The principal bank subsidiaries of Chase are The Chase Manhattan Bank ("Chase Bank"), a New York State bank headquartered in New York City; Chase Bank of Texas, National Association ("Chase Texas"), a national bank headquartered in Houston, Texas; and Chase Manhattan Bank USA, National Association ("Chase USA"), a national bank headquartered in Wilmington, Delaware. The principal nonbank subsidiary of Chase is Chase Securities Inc., Chase's "Section 20" subsidiary, which is engaged in securities underwriting and dealing activities. For a discussion of Chase's business segment information, see Note Twenty-Three. On March 31, 1996, The Chase Manhattan Corporation ("heritage Chase") merged (the "Merger") with and into Chemical Banking Corporation ("Chemical"). Upon consummation of the merger, Chemical changed its name to "The Chase Manhattan Corporation." The accounting and financial reporting policies of Chase and its subsidiaries conform to generally accepted accounting principles ("GAAP") and prevailing industry practices. Additionally, where applicable, the policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. Financial statements prepared in conformity with GAAP require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expense and disclosure of contingent assets and liabilities. Certain amounts in prior periods have been reclassified to conform to the current presentation. The following is a description of significant accounting policies. Basis of Presentation The consolidated financial statements include the accounts of Chase and its majority-owned subsidiaries, after eliminating intercompany balances and transactions. Equity investments of 20%-50% ownership interest are generally accounted for in accordance with the equity method of accounting and are reported in Other Assets. Chase's proportional share of earnings (losses) of these companies is included in Other Revenue. Assets held in an agency or fiduciary capacity by Chase are not assets of Chase and, accordingly, are not included in the Consolidated Balance Sheet. Trading Activities Chase trades debt and equity instruments and risk management instruments, as discussed below. These instruments are carried at their estimated fair value. Quoted market prices, when available, are used to determine the fair value of trading instruments. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of instruments with similar characteristics, or discounted cash flows. Realized and unrealized gains (losses) on these instruments are recognized in Trading Revenue. Interest earned on debt and dividends earned on equity instruments are reported as interest income. Debt and Equity Instruments; Securities Sold, Not Yet Purchased; and Structured Notes: Debt and equity instruments, which include securities, loans, and other credit instruments held for trading purposes, are reported as Trading Assets. Obligations to deliver securities sold but not yet purchased and structured notes issued by Chase are reported as Trading Liabilities. Interest payable on securities sold but not yet purchased and on structured notes is reported as interest expense. Risk Management Instruments: Chase deals in interest rate, foreign exchange, equity, commodity, and other contracts to generate trading revenues. These contracts include futures, forwards, forward rate agreements, swaps, and options (including interest rate caps and floors). The estimated fair values of these contracts are reported on a gross basis as Trading Assets-Risk Management Instruments for contracts having a positive fair value and Trading Liabilities for contracts having a negative fair value. Contracts executed with the same counterparty under legally enforceable master netting agreements are presented on a net basis. Derivatives Used in Asset/Liability Management Activities As part of its asset/liability management ("ALM") activities, Chase uses interest rate swaps, futures, forward rate agreements, and option contracts (including interest rate caps and floors) to hedge exposures or to modify the interest rate characteristics of related balance sheet items. Derivative contracts used for ALM activities have a high correlation with the balance sheet item being hedged. This high level correlation is requiredboth at inception and throughout the hedge period. These derivative contracts are linked to specific assets or liabilities or groups of similar assets or liabilities. A risk reduction criterion is also required for futures contracts. The derivative contracts that meet the above criteria are accounted for under the accrual method or available-for-sale fair value method, as discussed below. Derivative contracts that subsequently fail to meet the criteria are redesignated as trading activities. Accrual Method: Under the accrual method, interest income or expense on derivative contracts is accrued and there is no recognition of unrealized gains and losses on the derivatives on the balance sheet. Premiums on option contracts are amortized over the contract life to interest income, interest expense, or noninterest revenue. Available-for-Sale Fair Value Method: Derivatives linked to available-for-sale securities are carried at fair value. The accrual of interest income or interest expense on these derivatives is reported in Interest Income on Securities. Changes in the market values of these derivatives, exclusive of net interest accruals, are reported, net of applicable taxes, in the Accumulated Other Comprehensive Income caption in Stockholders' Equity. This policy is consistent with the reporting of unrealized gains and losses on the related available-for-sale securities. 49 49 Notes to Consolidated Financial Statements For both of the above accounting methods, realized gains and losses from the settlement or termination of derivative contracts are deferred as adjustments to the carrying values of the related balance sheet items. The realized gains and losses are amortized to interest income, interest expense, or noninterest revenue over the appropriate risk management periods (generally the remaining life of the derivative at the date of its termination or the remaining life of the linked asset or liability). Amortization commences when the contract is settled or terminated. If the related assets or liabilities are sold or otherwise disposed of, then the deferred gains and losses on the derivative contracts are recognized as a part of the gain or loss on disposition of the related assets or liabilities. Resale and Repurchase Agreements Chase enters into short-term purchases of securities under agreements to resell ("resale agreements") and sales of securities under agreements to repurchase ("repurchase agreements") of substantially identical securities. Prior to 1998, resale agreements and repurchase agreements were accounted for as secured lending and secured borrowing transactions, respectively. Effective January 1, 1998, Chase implemented SFAS 127, which had deferred the effective date of SFAS 125 relating to the accounting for securities lending, repurchase agreements, and other secured financing transactions. Under the new standards, resale agreements and repurchase agreements are accounted for as secured lending and secured borrowing transactions, respectively, when certain criteria are met. If the criteria are not met, then Chase accounts for its resale agreements as purchases of securities with related off-balance sheet forward commitments to resell and accounts for its repurchase agreements as sales of securities with related off-balance sheet forward commitments to repurchase. For resale agreements accounted for as secured lending transactions where Chase, as the secured party, has taken control of the securities received as collateral, Chase recognizes the securities in trading assets and records an obligation to return those securities in trading liabilities. For repurchase agreements accounted for as secured borrowing transactions where the secured party has taken control of securities pledged by Chase as collateral, Chase reclassifies the securities pledged as a receivable. The impact of adopting SFAS 127 on Chase's earnings, liquidity, and capital resources was not material. The amounts advanced under resale agreements accounted for as secured lending transactions and the amounts borrowed under repurchase agreements accounted for as secured borrowing transactions are carried on the balance sheet at the amount advanced or borrowed plus accrued interest. Interest earned on resale agreements and interest incurred on repurchase agreements are reported as interest income and interest expense, respectively. Chase offsets resale and repurchase agreements executed with the same counterparty under legally enforceable netting agreements that meet the applicable netting criteria. Chase takes possession of securities purchased under resale agreements. Chase monitors the market value of these securities and adjusts the level of collateral for resale and repurchase agreements, as appropriate. During 1998, the maximum month-end balances of outstanding resale and repurchase agreements, were $34.3 billion and $58.3 billion, respectively. The daily average amounts of outstanding resale and repurchase agreements were $31.7 billion and $46.7 billion, respectively. Securities Securities are classified as available-for-sale when, in management's judgement, they may be sold in response to or in anticipation of changes in market conditions. Available-for-sale securities and the related hedge are carried on the balance sheet at fair value. Unrealized gains and losses on these securities are reported, net of applicable taxes, in the Accumulated Other Comprehensive Income caption in Stockholders' Equity. Securities that Chase has the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost on the balance sheet. Interest and dividend income on securities, including amortization of premiums and accretion of discounts, are reported in Interest Income on Securities. Interest income is recognized using the interest method. The specific identification method is used to determine realized gains and losses on sales of securities, which are reported in Securities Gains. The carrying value of individual securities is reduced through writedowns against Securities Gains to reflect other-than-temporary impairments in value. Chase anticipates prepayment of principal in the calculation of the effective yield for mortgage-backed securities ("MBSs") and collateralized mortgage obligations ("CMOs"). The prepayment of MBSs and CMOs is actively monitored through Chase's portfolio management function. Chase typically invests in MBSs and CMOs with stable cash flows, thereby limiting the impact of interest rate fluctuations on the portfolio. Management regularly performs simulation testing regarding the impact that market conditions would have on its MBS and CMO portfolios. MBSs and CMOs that management believes have high prepayment risk are included in the available-for-sale portfolio and are reported at fair value. Loans Loans are generally reported at the principal amount outstanding, net of the allowance for loan losses, unearned income and any net deferred loan fees (nonrefundable yield-related loan fees, net of related direct origination costs). Loans held for sale are carried at the lower of aggregate cost or fair value. Certain loans meeting the accounting definition of a security under SFAS 115 are classified as loans and measured at fair value. Interest income is recognized using the interest method or on a basis approximating a level rate of return over the term of the loan. Chase sells or securitizes certain commercial and consumer loans. Some loans are sold with recourse to Chase for which appropriate reserves are provided. Gains and losses are reported in Other Revenue. Nonaccrual loans are those loans on which the accrual of interest is discontinued. Loans other than certain consumer loans discussed below are placed on nonaccrual status immediately if, in the opinion of management, full payment of principal or interest is in doubt, or when principal or interest is past due 90 days or more and collateral, 50 50 if any, is insufficient to cover principal and interest. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed against interest income. In addition, the amortization of net deferred loan fees is suspended when a loan is placed on nonaccrual status. Interest income on nonaccrual loans is recognized only to the extent received in cash. However, where there is doubt regarding the ultimate collectibility of the loan principal, all cash receipts are thereafter applied to reduce the carrying value of the loan. Loans are restored to accrual status only when interest and principal payments are brought current and future payments are reasonably assured. Consumer loans are generally charged to the allowance for loan losses upon reaching specified stages of delinquency. This policy excludes residential mortgage products and auto financings which are accounted for in accordance with the nonaccrual loan policy discussed above. Credit card loans, for example, are charged off at the earlier of 180 days past due or 75 days after notification of the filing of bankruptcy. Other consumer products are generally charged-off at 120 days past due. Accrued interest is reversed against interest income when the consumer loan is charged-off. Chase accounts for and discloses nonaccrual commercial loans as impaired loans. Impaired loans are carried at the present value of the future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or at the fair value of the collateral if the loan is collateral dependent. Chase recognizes interest income on impaired loans as discussed above for nonaccrual loans. Chase excludes from impaired loans its small-balance homogeneous consumer loans, loans carried at fair value or the lower of cost or fair value, debt securities, and leases. A collateralized loan is considered an in-substance foreclosure and is reclassified to Assets Acquired as Loan Satisfactions only when Chase has taken physical possession of the collateral, regardless of whether formal foreclosure proceedings have taken place. Allowance for Credit Losses The allowance for credit losses provides for risks of losses inherent in the credit extension process for loans, risk management instruments and lending-related commitments. These commitments include letters of credit, guarantees and undrawn commitments to extend credit. The allowance is a general allowance and is periodically reviewed and analyzed. The analyses include consideration of the risk rating of individual credits, the size and diversity of the portfolio, economic and political conditions, prior loss experience, and results of periodic credit reviews of the portfolio. The allowance for credit losses is increased by provisions for credit losses charged against income and is reduced by charge-offs, net of recoveries. Charge-offs are recorded when, in the judgement of management, an extension of credit is deemed uncollectible, in whole or in part. Chase allocates the allowance for credit losses into these components:
Reported in: Allowance for credit ------------------------------------------------- losses on: Balance Sheet Income Statement - -------------------------------------------------------------------------------- Loans Allowance for Loan Provision for Loan Losses Losses - -------------------------------------------------------------------------------- Risk Management Instruments Trading Assets- Provision for Risk Risk Management Management Instrument Instruments Credit Losses - -------------------------------------------------------------------------------- Lending-Related Commitments Other Liabilities Fee Revenue - --------------------------------------------------------------------------------
Premises and Equipment Premises and equipment, including leasehold improvements, are carried at cost less accumulated depreciation and amortization. Capital leases are included in premises and equipment at the capitalized amount less accumulated amortization. Depreciation and amortization of premises are included in Occupancy Expense, while depreciation of equipment is included in Equipment Expense. Depreciation and amortization are computed using the straight-line method over the estimated useful life of the owned asset and, for leasehold improvements, over the lesser of the remaining term of the leased facility or the estimated economic life of the improvement. Maintenance and repairs are charged to expense as incurred, while major improvements are capitalized. Chase early adopted AICPA SOP 98-1 effective January 1, 1998. SOP 98-1 requires the capitalization of eligible costs of specified activities related to computer software developed or obtained for internal use. Chase capitalized $123 million of such costs in 1998. Other Assets Private Equity Investments: Private equity investments include direct equity and equity-related investments and fund investments. Marketable holdings are marked-to-market at the public market value less a liquidity discount. Nonmarketable holdings are carried at cost, with the exception of holdings in which a subsequent investment by an unaffiliated party indicates a valuation in excess of cost (in which case an unrealized gain is recorded based on such valuation) and holdings for which evidence of an other-than-temporary decline in value exists (in which case an impairment loss is recorded). Income from these investments is reported in Private Equity Gains. 51 51 Notes to Consolidated Financial Statements Assets Acquired as Loan Satisfactions: Assets acquired in full or partial satisfaction of loans, primarily consisting of real estate, are reported at the lower of cost or fair value (less costs to sell for real estate). Writedowns at the date of transfer (to Assets Acquired as Loan Satisfactions) are charged to the allowance for loan losses, and subsequently are charged to Foreclosed Property Expense. For real estate, operating expenses (net of related revenues) and gains and losses on sales are reported in Foreclosed Property Expense. Assets Held for Accelerated Disposition: These assets consist primarily of real estate loans and real estate assets acquired as loan satisfactions. At the date of transfer to the accelerated disposition portfolio, these assets are recorded at their initial estimated disposition value less costs to sell. Subsequently, assets held for accelerated disposition are carried at the lower of cost or current estimated disposition value. Cash interest received from these assets is recognized either in income or applied to reduce the carrying value of loans, depending on management's judgement of collectibility. Any adjustments to the carrying value of these assets or realized gains and losses on the sale of these assets are reported in Other Revenue. Intangibles: Goodwill and other acquired intangibles, such as core deposits and credit card relationships, are amortized over the estimated periods to be benefited, generally ranging from 10 to 25 years. An impairment review is performed periodically on these assets. Mortgage Servicing Rights: Capitalized mortgage servicing assets consist of purchased and originated servicing rights. These rights are amortized into Fees for Other Financial Services in proportion to, and over the period of, the estimated future net servicing income stream of the underlying mortgage loans. Mortgage servicing rights are assessed for impairment based on the fair value of the right and any related derivative contracts. Impairment is evaluated by stratifying the mortgage servicing rights by interest rate bands. Fair value is determined considering market prices for similar assets or based on discounted cash flows using market-based prepayment estimates for similar coupons as well as incremental direct and indirect costs. Fee-Based Revenue Investment banking fees primarily include fees received for managing and syndicating loan arrangements; providing financial advisory services in connection with leveraged buyouts, recapitalizations, and mergers and acquisitions; arranging private placements; and underwriting debt and equity securities. Investment banking fees are recognized when the services to which they relate have been provided. In addition, recognition of syndication fees is subject to satisfying certain syndication tests. Trust, custody, and investment management fees primarily include fees received in connection with personal, corporate, and employee benefit trust and investment management activities. Fees for other financial services primarily include fees from deposit accounts, mortgage servicing, loan commitments, standby letters of credit, compensating balances, insurance products, brokerage services and other financial service-related products. All of these fees are generally recognized over the period that the related service is provided. Credit card revenues primarily include fees received in connection with credit card activities such as annual, late payment, cash advance, and interchange fees, as well as servicing fees earned in connection with securitization activities. Credit card revenues are generally recognized as billed, except for annual fees, which are recognized over a twelve-month period. Income Taxes Chase recognizes both the current and deferred tax consequences of all transactions that have been recognized in the financial statements. The deferred tax liability (asset) is determined based on applicable tax rates which will be in effect when the underlying items of income and expense are expected to be reported to the taxing authorities. Net deferred tax assets, whose realization is dependent on taxable earnings of future years, are recognized when a "more-likely-than-not" criterion is met. Annual deferred tax expense (benefit) is equal to the change in the deferred tax liability (asset) account from the beginning to the end of the year. A current tax liability (asset) is recognized for the estimated taxes payable or refundable for the current year. Foreign Currency Translation Assets and liabilities denominated in foreign currencies are translated to U.S. dollars using applicable rates of exchange. Gains and losses on foreign currency translation from operations for which the functional currency is other than the U.S. dollar, together with related hedges and tax effects, are reported in Other Comprehensive Income within Stockholders' Equity. For foreign operations for which the U.S. dollar is the functional currency, gains and losses resulting from converting foreign currency assets, liabilities and related hedges to the U.S. dollar are reported in the income statement. Statement of Cash Flows Cash and cash equivalents reported in the Consolidated Statement of Cash Flows represent the amounts included in the balance sheet caption Cash and Due from Banks. Cash flows from loans and deposits are reported on a net basis. 52 52 - -------------------------------------------------------------------------------- 2 -- TRADING ACTIVITIES - -------------------------------------------------------------------------------- Trading Revenue The following table sets forth the components of total trading-related revenue.
Year Ended December 31, (in millions) 1998 1997 1996 - -------------------------------------------------------------------------------- Trading Revenue $1,449(e) $1,323 $1,371 Net Interest Income Impact(a) 711 613 486 - -------------------------------------------------------------------------------- Total Trading-Related Revenue $2,160 $1,936 $1,857 - -------------------------------------------------------------------------------- Product Diversification: Interest Rate Contracts(b) $ 695 $ 704 $ 515 Foreign Exchange Contracts(c) 963 790 432 Debt Instruments, Equities and Commodities(d) 502 442 910 - -------------------------------------------------------------------------------- Total Trading-Related Revenue $2,160(e) $1,936 $1,857 - --------------------------------------------------------------------------------
(a) Trading-related net interest income includes interest recognized on interest-earning and interest-bearing trading-related positions as well as management allocations reflecting the funding cost or benefit associated with trading positions. This amount is included in net interest income on the Consolidated Statement of Income. (b) Includes interest rate swaps, cross-currency interest rate swaps, foreign exchange forward contracts, interest rate futures and options, forward rate agreements and related hedges. (c) Includes foreign exchange spot and option contracts. (d) Includes U.S. and foreign government and government agency securities, corporate debt instruments, emerging markets debt instruments, debt-related derivatives, equity securities, equity derivatives and commodity derivatives. (e) Excludes the provision for risk management instrument credit losses of $211 million in 1998. There were no provisions in prior years. Trading Assets and Liabilities The following table presents trading assets and trading liabilities for the dates indicated.
December 31, (in millions) 1998 1997 - -------------------------------------------------------------------------------- Trading Assets Debt and Equity Instruments: U.S. Government, Federal Agencies and Municipal Securities $ 5,881 $ 8,329 Certificates of Deposit, Bankers' Acceptances and Commercial Paper 3,375 3,117 Debt Securities Issued by Foreign Governments 9,774 11,063 Debt Securities Issued by Foreign Financial Institutions 229 5,399 Corporate Securities 1,598 1,833 Other 3,987 4,900 - -------------------------------------------------------------------------------- Total Trading Assets-Debt and Equity Instruments $24,844 $34,641 - -------------------------------------------------------------------------------- Risk Management Instruments: Interest Rate Contracts $12,707 $15,980 Foreign Exchange Contracts 16,013 20,225 Debt, Equity, Commodity and Other Contracts 4,278 1,622 Allowance for Risk Management Instrument Credit Losses (150) (75) - -------------------------------------------------------------------------------- Total Trading Assets-Risk Management Instruments $32,848 $37,752 - -------------------------------------------------------------------------------- Trading Liabilities Risk Management Instruments: Interest Rate Contracts $13,298 $17,668 Foreign Exchange Contracts 16,592 20,475 Debt, Equity, Commodity and Other Contracts 2,790 1,558 - -------------------------------------------------------------------------------- Trading Liabilities-Risk Management Instruments $32,680 $39,701 Securities Sold, Not Yet Purchased 4,608 9,818 Structured Notes 1,214 2,919 - -------------------------------------------------------------------------------- Total Trading Liabilities $38,502 $52,438 - --------------------------------------------------------------------------------
Average trading assets and liabilities were as follows for the periods indicated.
Year Ended December 31, (in millions) 1998 1997 - -------------------------------------------------------------------------------- Trading Assets-Debt and Equity Instruments $30,021 $35,660 - -------------------------------------------------------------------------------- Trading Assets-Risk Management Instruments $36,127 $34,426 - -------------------------------------------------------------------------------- Trading Liabilities-Risk Management Instruments $37,200 $35,309 Securities Sold, Not Yet Purchased 6,604 10,719 Structured Notes 2,855 2,378 - -------------------------------------------------------------------------------- Total Trading Liabilities $46,659 $48,406 - --------------------------------------------------------------------------------
53 53 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 3 -- SECURITIES - -------------------------------------------------------------------------------- See Note One for a discussion of the accounting policies relating to securities. Net gains from available-for-sale securities sold in 1998, 1997 and 1996 amounted to $609 million (gross gains of $949 million and gross losses of $340 million), $312 million (gross gains of $496 million and gross losses of $184 million), and $135 million (gross gains of $281 million and gross losses of $146 million), respectively. There were no sales of held-to-maturity securities during the three years ended December 31, 1998. The amortized cost and estimated fair value of securities, including the impact of related derivatives, were as follows for the dates indicated:
1998 1997 ------------------------------------------ ------------------------------------------ Gross Gross Gross Gross Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair December 31, (in millions) Cost Gains Losses Value Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------------------------------------- Available-for-Sale Securities: U.S. Government and Federal Agency/Corporation Obligations: Mortgage-Backed Securities $42,916 $ 94 $ 16 $42,994 $27,849 $ 97 $ 3 $27,943 Collateralized Mortgage Obligations 260 -- -- 260 2,013 5 -- 2,018 U.S. Treasuries 8,844 285 13 9,116 11,492 18 49 11,461 Obligations of State and Political Subdivisions 226 1 -- 227 274 2 -- 276 Debt Securities Issued by Foreign Governments 8,176 108 58 8,226 6,153 47 62 6,138 Corporate Debt Securities 261 6 12 255 606 17 1 622 Equity Securities 832 233 7 1,058 876 197 58 1,015 Other, primarily Asset-Backed Securities(a) 628 44 5 667 308 3 29 282 - ----------------------------------------------------------------------------------------------------------------------------------- Total Available-for-Sale Securities $62,143 $771 $111 $62,803 $49,571 $386 $202 $49,755 - ----------------------------------------------------------------------------------------------------------------------------------- Held-to-Maturity Securities: U.S. Government and Federal Agency/Corporation Obligations: Mortgage-Backed Securities $ 898 $ 16 $ -- $ 914 $ 1,256 $ 12 $ 1 $ 1,267 Collateralized Mortgage Obligations 720 1 1 720 1,660 4 3 1,661 U.S. Treasuries 65 -- -- 65 52 -- -- 52 Other, primarily Asset-Backed Securities(a) 4 -- -- 4 15 -- -- 15 - ----------------------------------------------------------------------------------------------------------------------------------- Total Held-to-Maturity Securities $ 1,687 $ 17 $ 1 $ 1,703 $ 2,983 $ 16 $ 4 $ 2,995 - -----------------------------------------------------------------------------------------------------------------------------------
(a) Includes CMOs of private issuers, which generally have underlying collateral consisting of obligations of U.S. Government and Federal agencies and corporations. See Note One for further discussion. The amortized cost, estimated fair value, and average yield at December 31, 1998 of Chase's available-for-sale and held-to-maturity securities by contractual maturity range are presented in the following table.
Available-for-Sale Securities Held-to-Maturity Securities -------------------------------------- -------------------------------------- Maturity Schedule of Securities Amortized Fair Average Amortized Fair Average December 31, 1998 (in millions) Cost Value Yield(a) Cost Value Yield(a) - ------------------------------------------------------------------------------------------------------------------------- Due in One Year or Less $ 2,789 $ 2,838 4.32% $ 88 $ 88 5.67% Due After One Year Through Five Years 9,595 9,711 6.13 169 171 7.77 Due After Five Years Through Ten Years 5,472 5,644 5.51 135 135 6.70 Due After Ten Years(b) 44,287 44,610 6.21 1,295 1,309 6.47 - ------------------------------------------------------------------------------------------------------------------------- Total Securities $62,143 $62,803 6.05% $ 1,687 $ 1,703 6.57% - -------------------------------------------------------------------------------------------------------------------------
(a) The average yield is based on amortized cost balances at year-end. Yields are derived by dividing interest income (including the effect of related derivatives on available-for-sale securities) and the amortization of premiums and accretion of discounts by total amortized cost. Taxable-equivalent yields are used where applicable. (b) Securities with no stated maturity are included with securities with a contractual maturity of ten years or more. Substantially all of Chase's MBSs and CMOs are due in ten years or more based on contractual maturity. The estimated duration, which reflects anticipated future prepayments based on a consensus of dealers in the market, is approximately 3 years for MBSs, and less than 1 year for CMOs. 54 54 - -------------------------------------------------------------------------------- 4 -- LOANS - -------------------------------------------------------------------------------- The composition of the loan portfolio at each of the dates indicated was as follows:
1998 1997 -------------------------------- -------------------------------- December 31, (in millions) Domestic Foreign Total Domestic Foreign Total - -------------------------------------------------------------------------------------------------------- Consumer: 1-4 Family Residential Mortgages $ 41,831 $ 1,467 $ 43,298 $ 38,680 $ 1,472 $ 40,152 Credit Card 14,229 718 14,947 15,631 615 16,246 Auto Financings 16,456 1 16,457 13,243 15 13,258 Other Consumer 8,375 1,621 9,996 8,543 1,874 10,417 - -------------------------------------------------------------------------------------------------------- Total Consumer 80,891 3,807 84,698 76,097 3,976 80,073 - -------------------------------------------------------------------------------------------------------- Commercial: Commercial and Industrial 43,123 24,664 67,787 37,931 27,628 65,559 Commercial Real Estate: Commercial Mortgage 3,029 337 3,366 4,084 663 4,747 Construction 955 30 985 946 50 996 Financial Institutions 6,583 4,537 11,120 6,652 6,989 13,641 Foreign Governments -- 4,798 4,798 -- 3,438 3,438 - -------------------------------------------------------------------------------------------------------- Total Commercial 53,690 34,366 88,056 49,613 38,768 88,381 - -------------------------------------------------------------------------------------------------------- Total Loans(a) $134,581 $ 38,173 $172,754 $125,710 $ 42,744 $168,454 - --------------------------------------------------------------------------------------------------------
(a) Loans are presented net of unearned income of $1,667 million and $1,612 million at December 31, 1998 and 1997, respectively. Bonds issued to Chase by foreign governments (such as Mexico, Venezuela and Brazil) as part of a debt renegotiation (i.e., "Brady Bonds") are classified as loans, but are subject to the provisions of SFAS 115. The amortized cost and estimated fair value of loans measured in accordance with SFAS 115 (which are all available-for-sale), including the impact of related derivatives, were as follows:
December 31, (in millions) 1998 1997 - -------------------------------------------------------------------------------- Amortized Cost $ 623 $ 1,005 Gross Unrealized Gains 47 89 Gross Unrealized Losses (101) (112) - -------------------------------------------------------------------------------- Fair Value $ 569 $ 982 - --------------------------------------------------------------------------------
The gains and losses on the disposition of the above-mentioned loans were as follows:
Year Ended December 31, (in millions) 1998 1997 1996 - -------------------------------------------------------------------------------- Gross Realized Gains $ 44 $ 121 $ 155 Gross Realized Losses (46) (121) (235) - -------------------------------------------------------------------------------- Net Losses $ (2) $ -- $ (80) - -------------------------------------------------------------------------------- Cash Proceeds from Sales $ 344 $ 897 $ 952 - --------------------------------------------------------------------------------
Impaired Loans The following table sets forth information about Chase's impaired loans. Chase uses the discounted cash flow method as its primary method for valuing its impaired loans.
December 31, (in millions) 1998 1997 - -------------------------------------------------------------------------------- Impaired Loans with an Allowance $1,020 $ 483 Impaired Loans without an Allowance(a) 25 24 - -------------------------------------------------------------------------------- Total Impaired Loans $1,045 $ 507 - -------------------------------------------------------------------------------- Allowance for Impaired Loans under SFAS 114(b) $ 314 $ 174 Average Balance of Impaired Loans During the Year $ 820 $ 628 Interest Income Recognized on Impaired Loans During the Year $ 10 $ 8 - --------------------------------------------------------------------------------
(a) When the discounted cash flows, collateral value or market price equals or exceeds the carrying value of the loan, then the loan does not require an allowance under SFAS 114. (b) The allowance for impaired loans under SFAS 114 is included in Chase's allowance for loan losses. 55 55 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 5 -- ALLOWANCE FOR LOAN LOSSES - -------------------------------------------------------------------------------- The table below summarizes the changes in the allowance for loan losses.
Year Ended December 31, (in millions) 1998 1997 1996 - -------------------------------------------------------------------------------------------------------- Allowance at January 1 $ 3,624 $ 3,549 $ 3,784 Provision for Loan Losses 1,343 804 897 Charge-Offs (1,791) (1,096) (1,187) Recoveries 373 292 290 ------- ------- ------- Net Charge-Offs (1,418) (804) (897) Charge Related to Conforming Credit Card Charge-Off Policies -- -- (102)(a) Transfer to Trading Assets-Risk Management Instruments -- -- (75) Transfer to Other Liabilities -- (100) (70) Allowance Related to Purchased Portfolios and Subsidiaries 5 172(b) 13 Foreign Exchange Translation Adjustment (2) 3 (1) - -------------------------------------------------------------------------------------------------------- Allowance at December 31 $ 3,552 $ 3,624 $ 3,549 - --------------------------------------------------------------------------------------------------------
(a) During 1996, Chase incurred a charge of $102 million as a result of conforming the credit card charge-off policies of the heritage Chase and Chemical. (b) Includes approximately $160 million related to the purchase of a credit card portfolio. - -------------------------------------------------------------------------------- 6 -- LONG-TERM DEBT - -------------------------------------------------------------------------------- The following table is a summary of long-term debt (net of unamortized original issue debt discount).
By remaining maturity at December 31,(a) Under After 1998 1997 (in millions) 1 year 1-5 years 5 years Total Total - ---------------------------------------------------------------------------------------------------------------------------------- Parent Company: Senior Debt: Fixed Rate $ -- $ 709 $ 115 $ 824 $ 1,090 Variable Rate 623 3,853 49 4,525 2,054 Modified Interest Rates(b) 5.16 - 5.85% 5.20 - 9.78% 5.06 - 5.49% 5.06 - 9.78% 2.82 - 10.44% Subordinated Debt: Fixed Rate 1,400 1,365 4,387 7,152 6,363 Variable Rate -- 692 298 990 1,014 Modified Interest Rates(b) 7.58 - 10.38% 5.22 - 10.13% 5.27 - 8.00% 5.22 - 10.38% 5.69 - 10.38% - ---------------------------------------------------------------------------------------------------------------------------------- Subtotal $2,023 $6,619 $4,849 $13,491 $10,521 - ---------------------------------------------------------------------------------------------------------------------------------- Subsidiaries: Senior Debt: Fixed Rate $ 340 $ 311 $ 128 $ 779 $ 751 Variable Rate - 700 - 700 749 Modified Interest Rates(b) 5.66-10.01% 5.86 - 9.77% 4.00-10.60% 4.00-10.60% 4.00 - 10.60% Subordinated Debt: Fixed Rate -- 318 649 967 966 Variable Rate -- 250 - 250 400 Modified Interest Rates(b) --% 3.24 - 7.25% 5.12 - 5.81% 3.24 - 7.25% 3.24 - 7.25% - ---------------------------------------------------------------------------------------------------------------------------------- Subtotal $ 340 $1,579 $ 777 $ 2,696 $ 2,866 - ---------------------------------------------------------------------------------------------------------------------------------- Total Long-Term Debt $2,363 $8,198 $5,626 $16,187(c) $13,387 - ----------------------------------------------------------------------------------------------------------------------------------
(a) Remaining maturity is based on contractual maturity of the debt. (b) The interest rates shown have been adjusted to reflect the effect of ALM derivative contracts, primarily interest rate swaps, used to convert Chase's fixed-rate debt to variable rates. The interest rates shown are those in effect at year-end. (c) At December 31, 1998, long-term debt aggregating $3.7 billion was redeemable at the option of Chase, in whole or in part, prior to maturity, based on the terms specified in their respective notes. The aggregate principal amount of debt that matures in each of the five years subsequent to 1998 are $2,363 million in 1999, $3,651 million in 2000, $1,356 million in 2001, $1,912 million in 2002 and $1,279 million in 2003. Chase issues long-term debt denominated in various currencies, although predominately in U.S. dollars, with both fixed and variable interest rates. Fixed-rate debt outstanding at December 31, 1998 mature at various dates through 2048 and carry contractual interest rates ranging from 4.00% to 11.83%. The consolidated weighted-aver- 56 56 age interest rates on fixed-rate debt at December 31, 1998 and 1997 were 7.43% and 7.56%, respectively. Variable-rate debt outstanding, with contractually-determined interest rates ranging from 4.40% to 6.15% at December 31, 1998, mature at various dates through 2028. The consolidated weighted-average contractual interest rates on variable-rate debt at December 31, 1998 and 1997 were 5.42% and 5.94%, respectively. Included in long-term debt are equity commitment notes and equity contract notes totaling $875 million at December 31, 1998. At December 31, 1998, Chase had designated proceeds from the sale of capital securities, as defined in regulations by the Board of Governors of the Federal Reserve System ("Federal Reserve Board"), in an amount sufficient to satisfy fully the requirements of its equity commitment and equity contract notes. Chase has guaranteed several long-term debt issues of its subsidiaries. Guaranteed debt totaled $375 million at December 31, 1998. Guaranteed Preferred Beneficial Interests in Corporation's Junior Subordinated Deferrable Interest Debentures At December 31, 1998, six separate wholly-owned Delaware statutory business trusts established by Chase had issued an aggregate $2,188 million in capital securities, net of discount. The capital securities qualify as Tier 1 Capital of Chase. The proceeds from each issuance were invested in a corresponding series of junior subordinated deferrable interest debentures of Chase. The sole asset of each statutory business trust is the debentures. Chase has fully and unconditionally guaranteed each of the business trust's obligations under each trust's capital securities. Each trust's capital securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures at their stated maturity or earlier redemption. The following is a summary of Chase's outstanding capital securities, net of discount, issued by each trust and the junior subordinated deferrable interest debentures issued by Chase to each trust as of December 31, 1998.
($ in millions) Amount of Capital Securities, Net Principal Amount of Stated Maturity of Interest Rate of Interest of Discount Issued Chase Debentures, Capital Securities Capital Securities Payment/Distribution Name of Trust by Trust(a) Held by Trust(b) and Debentures and Debentures Dates - ------------------------------------------------------------------------------------------------------------------------------------ Chase Capital I $ 600 $ 619 12/1/2026 7.67% Semi-annual - commencing 6/1/97 Chase Capital II 494 516 2/1/2027 LIBOR + .50% Quarterly - commencing 5/1/97 Chase Capital III 296 309 3/1/2027 LIBOR + .55% Quarterly - commencing 6/1/97 Chase Capital IV 350 361 12/6/2027 7.34% Quarterly - commencing 3/31/98 Chase Capital V 200 206 3/31/2028 7.03% Quarterly - commencing 3/31/98 Chase Capital VI 248 258 8/1/2028 LIBOR + .625% Quarterly - commencing 11/1/98 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 2,188 $ 2,269 - ------------------------------------------------------------------------------------------------------------------------------------
(a) Represents the amount of capital securities issued to the public by each trust. These amounts are reflected as liabilities of Chase. (b) Represents the principal amount of Chase debentures held as assets by each trust. These amounts represent intercompany transactions and are eliminated in Chase's consolidated financial statements. - -------------------------------------------------------------------------------- 7 -- PREFERRED STOCK OF SUBSIDIARY - -------------------------------------------------------------------------------- In September 1996, Chase Preferred Capital Corporation ("Chase Preferred Capital"), a wholly-owned subsidiary of Chase Bank, publicly issued 22 million shares of 8.10% Cumulative Preferred Stock, Series A ("Series A Preferred Shares"), with a liquidation preference of $25 per share. Chase Preferred Capital is a real estate investment trust ("REIT") established for the purpose of acquiring, holding and managing real estate mortgage assets. Dividends on the Series A Preferred Shares are cumulative and are payable quarterly. The dividends are recorded as minority interest expense by Chase. The Series A Preferred Shares are generally not redeemable prior to September 18, 2001. On or after that date, the Series A Preferred Shares may be redeemed for cash at the option of Chase Preferred Capital, in whole or in part, at a redemption price of $25 per share, plus any accrued and unpaid dividends. The Series A Preferred Shares are treated as Tier 1 Capital of Chase. The Series A Preferred Shares are not subject to any sinking fund or mandatory redemption and are not convertible into any other securities of Chase Preferred Capital or Chase or any of its subsidiaries. - -------------------------------------------------------------------------------- 8 -- PREFERRED STOCK - -------------------------------------------------------------------------------- Chase is authorized to issue 200 million shares of preferred stock, in one or more series, with a par value of $1 per share. Outstanding shares of preferred stock at December 31, 1998 and 1997 were 31.1 million and 45.6 million, respectively. As shown in the summary table that follows, during 1998 Chase issued $200 million of Fixed/Adjustable Rate, Noncumulative preferred stock. Also during 1998, Chase redeemed five series of preferred stock, three at redemption prices of $100 per share and two at redemption prices of $25 per share, together in each case with any accrued but unpaid dividends. Dividends on shares of each outstanding series of preferred stock are payable quarterly. All the preferred stock outstanding have preference over Chase's common stock for the payment of dividends and the distribution of assets in the event of a liquidation or dissolution of Chase. 57 57 Notes to Consolidated Financial Statements The following is a summary of Chase's preferred stocks outstanding:
Rate in Stated Value Outstanding at December 31, Earliest Effect at and Redemption Shares --------------------------- Redemption December 31, Price Per Share(a) (in millions) 1998 (in millions) 1997 Date 1998 - --------------------------------------------------------------------------------------------------------------------------------- Adjustable Rate, Series L Cumulative $100.00 2.0 $ 200 $ 200 6/30/1999 4.500%(c) Adjustable Rate, Series N Cumulative 25.00 9.1 228 228 6/30/1999 4.505(c) 9.76% Cumulative 25.00 4.0 100 100 9/30/1999 9.760 10.96% Cumulative 25.00 4.0 100 100 6/30/2000 10.960 10.84% Cumulative 25.00 8.0 200 200 6/30/2001 10.840 Fixed/Adjustable Rate, Noncumulative 50.00 4.0 200 -- 6/30/2003 4.960(c) 7.92% Cumulative 100.00 2.0(b) -- 200 -- -- 8.40% Cumulative 25.00 6.9 -- 172 -- -- 7.58% Cumulative 100.00 2.0(b) -- 200 -- -- 7.50% Cumulative 100.00 2.0(b) -- 200 -- -- 10.50% Cumulative 25.00 5.6 -- 140 -- -- - --------------------------------------------------------------------------------------------------------------------------------- Total Preferred Stock $1,028 $1,740 - ---------------------------------------------------------------------------------------------------------------------------------
(a) Redemption price includes amount shown in the table plus any accrued but unpaid dividends. (b) Shares of each of these series are represented by 8.0 million depositary shares, each representing .25 of a share. (c) Floating rates are based on certain U.S. Treasury rates. The minimum and maximum rates for Series L and Series N are 4.50% and 10.50%, respectively. The fixed/adjustable rate preferred stock remains fixed at 4.96% through June 30, 2003; thereafter, the minimum and maximum rates are 5.46% and 11.46%, respectively. - -------------------------------------------------------------------------------- 9 -- COMMON STOCK - -------------------------------------------------------------------------------- On May 19, 1998, the stockholders approved a two-for-one stock split of Chase common stock. The additional shares issued as a result of the split were distributed on June 12, 1998 to stockholders of record at the close of business on May 20, 1998. A total of 440,767,205 shares of common stock were issued in connection with the split, including 14,176,530 shares held in treasury. As a result of the stock split, $441 million was reclassified from capital surplus to common stock. The stock split did not cause any changes in the $1 par value per share of the common stock or in total stockholders' equity. All references to the number of common shares and to per common share amounts have been restated to reflect the effects of the stock split. Chase is authorized to issue 1.5 billion shares of common stock, with a $1 par value per share. The number of shares of common stock issued and outstanding, were as follows:
December 31, (in millions) 1998 1997 1996 - -------------------------------------------------------------------------------- Issued 881.7 881.5 881.5 Held in Treasury (33.7) (39.6) (19.9) - -------------------------------------------------------------------------------- Outstanding 848.0 841.9 861.6 - --------------------------------------------------------------------------------
In November 1998, Chase authorized the repurchase of up to $3 billion of common stock in the open market or through negotiated transactions. This amount is in addition to any amounts necessary to provide for issuances under Chase's dividend reinvestment plan and its various stock-based director and employee benefit plans. The new authorization became effective January 4, 1999. During 1998, Chase repurchased approximately 18.0 million shares of outstanding common stock under a stock repurchase plan which began in October 1996 and expired on December 31, 1998. During 1998, approximately 24.1 million shares were issued, primarily from treasury, under various employee stock option and other plans. During 1996, 6.3 million shares were issued from treasury upon the exercise of warrants issued in 1993 by Chase. The warrants expired June 30, 1996. As of December 31, 1998, approximately 139.0 million unissued shares of common stock were reserved for issuance under various employee incentive, option and stock purchase plans and under Chase's Dividend Reinvestment Plan. Common shares issued (newly issued, or distributed from treasury) during 1998, 1997 and 1996 were as follows:
Year Ended December 31, (in millions) 1998 1997 1996 - -------------------------------------------------------------------------------- Employee Benefit and Compensation Plans(a) 23.8 22.2 38.7 Dividend Reinvestment and Stock Purchase Plans .3 .3 .3 Stock Warrants -- -- 6.3 - -------------------------------------------------------------------------------- Total Shares Newly Issued or Distributed from Treasury(b) 24.1 22.5 45.3 - --------------------------------------------------------------------------------
(a) See Note Sixteen for a discussion of Chase's employee stock option plans. (b) Shares distributed from treasury were 23.9 million in 1998, 22.5 million in 1997 and 40.1 million in 1996. 58 58 - -------------------------------------------------------------------------------- 10 -- EARNINGS PER SHARE - -------------------------------------------------------------------------------- Basic and diluted earnings per share ("EPS") were as follows for the dates indicated:
Year Ended December 31, (in millions, except per share data) 1998 1997 1996 - -------------------------------------------------------------------------------- Basic Earnings Per Share: Net Income $3,782 $3,708 $2,461 Less: Preferred Stock Dividends 98 182 219 - -------------------------------------------------------------------------------- Net Income Applicable to Common Stock $3,684 $3,526 $2,242 Weighted-Average Basic Shares Outstanding 846.1 849.2 873.6 - -------------------------------------------------------------------------------- Net Income Per Share $ 4.35 $ 4.15 $ 2.57 - -------------------------------------------------------------------------------- Diluted Earnings Per Share: Net Income Applicable to Common Stock $3,684 $3,526 $2,242 - -------------------------------------------------------------------------------- Weighted-Average Basic Shares Outstanding 846.1 849.2 873.6 Add: Broad-Based Options 6.5 11.4 11.4 Options to Key Employees 16.7 17.8 19.2 Warrants -- -- 2.6 - -------------------------------------------------------------------------------- Total Additional Shares 23.2 29.2 33.2 - -------------------------------------------------------------------------------- Weighted-Average Diluted Shares Outstanding 869.3 878.4 906.8 - -------------------------------------------------------------------------------- Net Income Per Share $ 4.24 $ 4.01 $ 2.47 - --------------------------------------------------------------------------------
Basic EPS is computed by dividing net income applicable to common shares outstanding by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed using the same method as basic EPS, but reflects the potential dilution that could occur if convertible securities or other contracts to issue common stock were converted or exercised into common stock. Also, for purposes of diluted EPS, net income available for common stock is adjusted, if applicable, for any convertible preferred stock dividends, convertible debt interest or any other changes in income that could result from the assumed conversion of securities and other contracts. - -------------------------------------------------------------------------------- 11 -- FEES FOR OTHER FINANCIAL SERVICES - -------------------------------------------------------------------------------- Details of fees for other financial services were as follows:
Year Ended December 31, (in millions) 1998 1997 1996 - -------------------------------------------------------------------------------- Service Charges on Deposit Accounts $ 368 $ 376 $ 394 Fees in Lieu of Compensating Balances 344 314 295 Commissions on Letters of Credit and Acceptances 301 307 330 Mortgage Servicing Fees 192 231 204 Insurance Fees(a) 145 91 43 Brokerage and Investment Services 142 128 115 Loan Commitment Fees 136 120 120 Other Fees 465 416 422 - -------------------------------------------------------------------------------- Total Fees for Other Financial Services $2,093 $1,983 $1,923 - --------------------------------------------------------------------------------
(a) Insurance amount excludes certain insurance fees related to credit cards and mortgage products, which are included in those revenue captions. - -------------------------------------------------------------------------------- 12 -- RESTRUCTURING COSTS AND OTHER EXPENSE - -------------------------------------------------------------------------------- Restructuring Costs: The 1998 results included a pre-tax charge of $510 million taken in connection with initiatives to streamline support functions and realign certain business activities. These costs relate to planned staff reductions of approximately 4,500 positions (approximately $338 million), costs in connection with planned dispositions of certain premises and equipment (approximately $144 million) and other expenses (approximately $28 million). As of December 31, 1998, the reserve balance was $359 million of which $232 million related to staff reductions, $107 million related to dispositions of certain premises and equipment and $20 million related to other expenses. Chase expects that the remaining reserve related to staff reductions will be largely used during the next 12 months. In connection with the merger of heritage Chase and Chemical, a $1.65 billion restructuring charge was recorded on the March 31, 1996 merger date. Merger-related expenses that did not qualify for immediate recognition were recognized as incurred and primarily related to technology and systems integration costs. These residual merger-related expenses were $19 million in 1998, $192 million in 1997 and $164 million in 1996 and are reflected in the Restructuring Costs caption of the income statement. No further merger-related expenses are expected to be taken. Other Expense: Details of other expense were as follows:
Year Ended December 31, (in millions) 1998 1997 1996 - -------------------------------------------------------------------------------- Professional Services $ 668 $ 575 $ 530 Marketing Expense 419 415 346 Telecommunications 349 307 326 Travel and Entertainment 243 220 213 Amortization of Intangibles 261 172 169 Minority Interest(a) 50 74 54 Foreclosed Property Expense 5 12 (16) All Other 1,292 1,131 1,025 - -------------------------------------------------------------------------------- Total Other Expense $ 3,287 $ 2,906 $ 2,647 - --------------------------------------------------------------------------------
(a) Includes REIT minority interest expense of $44 million in each of 1998 and 1997, and $13 million in 1996. - -------------------------------------------------------------------------------- 13 -- COMPREHENSIVE INCOME - -------------------------------------------------------------------------------- In 1998, Chase adopted SFAS 130, which defines and establishes the standards for reporting comprehensive income. Comprehensive income for Chase includes net income, as well as the change in unrealized gains and losses on available-for-sale securities and foreign currency translation (each of which includes the impact of related derivatives). Chase has presented these items net of tax in the Statement of Changes in Stockholders' Equity. The following table presents the components of other comprehensive income and the amount of income tax expense or benefit allocated to each component. 59 59 Notes to Consolidated Financial Statements
1998 1997 1996 ----------------------------- ----------------------------- ----------------------------- Tax Tax Tax Before (Expense) Before (Expense) Before (Expense) For the Year Ended December 31, Tax or Net of Tax Tax or Net of Tax Tax or Net of Tax (in millions) Amount Benefit Amount Amount Benefit Amount Amount Benefit Amount - ----------------------------------------------------------------------------------------------------------------------------------- Net Unrealized Gains (losses) on Securities Available-for-Sale: Balance at Beginning of Year $ 95 $(288) $(237) Net unrealized holding gains (losses) arising during the period $ 590 $(219) 371 $ 750 $(325) 425 $(215) $ 66 (149) Reclassification adjustment for (gains) losses included in net income(a) (145) 54 (91) (74) 32 (42) 141 (43) 98 - ----------------------------------------------------------------------------------------------------------------------------------- Change During Period 445 (165) 280 676 (293) 383 (74) 23 (51) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at End of Year(b) $ 375 $ 95 $(288) - ----------------------------------------------------------------------------------------------------------------------------------- Accumulated Translation Adjustment: Balance at Beginning of Year $ 17 $ 17 $ 11 Net translation gains (losses) arising during the period -- -- -- -- -- -- $ 12 $ (3) 9 Reclassification adjustment for (gains) losses included in net income(a) -- -- -- -- -- -- (4) 1 (3) - ----------------------------------------------------------------------------------------------------------------------------------- Change During Period -- -- -- -- -- -- 8 (2) 6 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at End of Year $ 17 $ 17 $ 17 - ----------------------------------------------------------------------------------------------------------------------------------- Other Comprehensive Income (Loss) for the Period $ 445 $(165) $ 280 $ 676 $(293) $ 383 $ (66) $ 21 $ (45) - -----------------------------------------------------------------------------------------------------------------------------------
(a) Represents amounts recognized in net income during the period that had previously been displayed as part of other comprehensive income. (b) Represents the after-tax difference between the fair value and amortized cost of available-for-sale securities portfolio, including securities classified as loans, which are subject to the provisions of SFAS 115. See Notes Three and Four. - -------------------------------------------------------------------------------- 14 -- INCOME TAXES - -------------------------------------------------------------------------------- Deferred income tax expense (benefit) results from differences between amounts of assets and liabilities as measured for financial reporting and income tax return purposes. The significant components of Federal deferred tax assets and liabilities are reflected in the following table.
December 31, (in millions) 1998 1997 - -------------------------------------------------------------------------------- Federal Deferred Tax Assets: Reserves for Credit Losses $ 970 $ 980 Reserves Other Than Credit Losses 720 759 Interest and Fee Accrual Differences 19 42 Foreign Operations 447 566 Employee Benefits 562 394 Other 92 83 - -------------------------------------------------------------------------------- Gross Federal Deferred Tax Assets $ 2,810 $2,824 - -------------------------------------------------------------------------------- Federal Deferred Tax Liabilities: Leasing Transactions $ 1,895 $1,633 Fair Value Adjustments 286 141 Depreciation and Amortization 480 270 Other 123 139 - -------------------------------------------------------------------------------- Gross Federal Deferred Tax Liabilities $ 2,784 $2,183 - -------------------------------------------------------------------------------- Deferred Federal Tax Asset Valuation Reserve $ 40 $ 90 - -------------------------------------------------------------------------------- Net Federal Deferred Tax Asset (Liability) After Valuation Reserve $ (14) $ 551 - --------------------------------------------------------------------------------
A Federal deferred tax asset and valuation reserve have been recorded in accordance with SFAS 109, relating primarily to tax benefits associated with foreign operations. While these tax benefits are subject to tax law limitations on their realization, Chase has realized a portion thereby reducing the required valuation reserve at December 31, 1998 to $40 million. Deferred foreign tax liabilities were $164 million as of December 31, 1998. Chase expects that, when paid, these foreign taxes will be creditable on its Federal income tax return. Deferred State and Local tax liabilities approximated $170 million as of December 31, 1998. The New York State and City valuation reserve of $148 million was released to income during the first quarter of 1996. The components of income tax expense included in the Consolidated Statement of Income were as follows:
Year Ended December 31, (in millions) 1998 1997 1996 - -------------------------------------------------------------------------------- Current Income Tax Expense: Federal $ 723 $ 813 $ 1,022 Foreign 712 614 541 State and Local 282 226 169 - -------------------------------------------------------------------------------- Total Current Expense 1,717 1,653 1,732 - -------------------------------------------------------------------------------- Deferred Income Tax Expense (Benefit): Federal 446 483 (99) Foreign (17) (39) (101) State and Local 2 105 (182) - -------------------------------------------------------------------------------- Total Deferred Expense (Benefit) 431 549 (382) - -------------------------------------------------------------------------------- Total Income Tax Expense $ 2,148 $ 2,202 $ 1,350 - --------------------------------------------------------------------------------
60 60 The preceding table does not reflect the tax effects of unrealized gains and losses on available-for-sale securities and certain tax benefits associated with Chase's employee stock plans. The tax effect of these items are recorded directly in stockholders' equity. Stockholders' equity increased by $58 million and $254 million, respectively, in 1998 and 1996 and decreased by $35 million in 1997 as a result of these tax effects. Federal income taxes have not been provided on the undistributed earnings of certain foreign subsidiaries, to the extent such earnings have been reinvested abroad for an indefinite period of time. For 1998, such earnings approximate $266 million on a pre-tax basis. At December 31, 1998, the cumulative amount of undistributed earnings was approximately $764 million. It is not practicable at this time to determine the income tax liability that would result upon repatriation of these earnings. The tax expense applicable to securities gains and losses for the years 1998, 1997 and 1996 was $219 million, $116 million and $51 million, respectively. A reconciliation of the income tax expense computed at the applicable statutory U.S. income tax rate to the actual income tax expense for the past three years is shown in the following table.
Year Ended December 31, (in millions) 1998 1997 1996 - -------------------------------------------------------------------------------- Statutory U.S. Federal Tax Expense $ 2,075 $ 2,068 $ 1,334 Increase (Decrease) in Tax Expense Resulting From: State and Local Income Taxes, Net of Federal Income Tax Benefit 185 215 (8) Foreign Subsidiary Earnings (70) (45) (23) Other-Net (42) (36) 47 - -------------------------------------------------------------------------------- Total Income Tax Expense $ 2,148 $ 2,202 $ 1,350 - --------------------------------------------------------------------------------
The following table presents the domestic and foreign components of income before income tax expense.
Year Ended December 31, (in millions) 1998 1997 1996 - -------------------------------------------------------------------------------- Domestic $ 4,315 $ 4,087 $ 2,458 Foreign(a) 1,615 1,823 1,353 - -------------------------------------------------------------------------------- Income Before Income Tax Expense $ 5,930 $ 5,910 $ 3,811 - --------------------------------------------------------------------------------
(a) For purposes of this table, foreign income is defined as income generated from operations located outside the United States. - -------------------------------------------------------------------------------- 15 -- POSTRETIREMENT EMPLOYEE BENEFITS PLANS - -------------------------------------------------------------------------------- Pension Plans The accompanying table presents the funded status and actuarial assumptions for Chase's noncontributory domestic defined benefit pension plan (the "domestic pension plan"). The domestic pension plan employs a cash balance defined benefit formula that provides for benefits based on salary and service. The 1998 unrecognized amount primarily resulted from returns higher than expected on plan assets. DOMESTIC PENSION PLAN
As of or for the Year Ended December 31, (in millions) 1998 1997 - -------------------------------------------------------------------------------- Benefit Obligation $(2,473) $(2,282) Plan Assets at Fair Value 2,880 2,732 - -------------------------------------------------------------------------------- Plan Assets in Excess of Benefit Obligation 407 450 Unrecognized Amounts (275) (239) - -------------------------------------------------------------------------------- Prepaid Pension Cost Reported in Other Assets $ 132 $ 211 - -------------------------------------------------------------------------------- Employer Contributions to Trust $ 0 $ 0 Benefits Paid Out of the Trust 174 167 Weighted-Average Annualized Actuarial Assumptions as of December 31: Discount Rate 6.75% 7.00% Assumed Rate of Long-Term Return on Plan Assets 8.50% 8.50% Rate of Increase in Future Compensation 5.00% 5.00% - --------------------------------------------------------------------------------
The periodic domestic pension plan expense (reported in Employee Benefits expense) totaled $79 million in each of 1998 and 1997 and $98 million in 1996. The decrease in expense from 1996 to 1997 primarily reflects lower service costs as a result of plan amendments as of January 1, 1997, and actuarial gains. Chase also has a number of other defined benefit pension plans -- domestic plans not subject to Title IV of the Employee Retirement Income Security Act and several foreign pension plans. Employee Benefits expense related to these plans totaled $28 million in 1998, $26 million in 1997 and $47 million in 1996. At December 31, 1998 and 1997, Chase's liability included in Accrued Expenses related to plans that Chase elected not to prefund fully totaled $201 million and $167 million, respectively. Employee Benefits expense related to defined contribution plans totaled $135 million in 1998, $127 million in 1997 and $95 million in 1996. Chase increased its match on the domestic 401(k) Savings Plan to 5%, from 4%, effective January 1, 1997. During 1996, Chase also recognized a pre-tax $40 million charge as a result of conforming retirement benefits provided to foreign employees. Postretirement Medical and Life Insurance Chase provides postretirement medical and life insurance benefits to qualifying domestic and foreign employees. These benefits vary with length of service and date of hire and, commencing in 1997, provide for limits on Chase's share of covered medical benefits. The medical benefits are contributory and the life insurance benefits are noncontributory. POSTRETIREMENT MEDICAL AND LIFE INSURANCE LIABILITY
As of or for the Year Ended December 31, (in millions) 1998 1997 - -------------------------------------------------------------------------------- Benefit Obligation $(767) $(799) Unrecognized Amounts (86) (31) - -------------------------------------------------------------------------------- Accrued Postretirement Medical and Life Insurance Cost Reported in Accrued Expenses $(853) $(830) - -------------------------------------------------------------------------------- Benefits Paid(a) $ 42 $ 43 - --------------------------------------------------------------------------------
(a) Net of $7 million and $9 million of retiree contributions, in 1998 and 1997, respectively. 61 61 Notes to Consolidated Financial Statements The periodic postretirement medical and life insurance expense (reported in Employee Benefits expense) totaled $65 million in 1998, $68 million in 1997 and $67 million in 1996. The discount rates and rates of increase for future compensation used to determine the actuarial values for postretirement medical and life insurance benefits are generally consistent with those used for the domestic pension plan. At December 31, 1998, the assumed weighted-average medical benefits cost trend rate used to measure the expected cost of benefits covered was 7.6% for 1999, declining gradually over six years to a floor of 4.8%. The effect of a 1% change in the assumed medical cost trend rate would result in a corresponding change in the December 31, 1998 benefit obligation and 1998 periodic expense by up to 5.4%. - -------------------------------------------------------------------------------- 16 -- EMPLOYEE STOCK-BASED INCENTIVES - -------------------------------------------------------------------------------- Key Employee Stock-Based Awards Chase has a long-term stock-based incentive plan (the "LTIP") that provides for grants of common stock-based awards, including stock options, restricted stock, and restricted stock units ("RSUs") to certain key employees. Awards also were granted under the prior Chase and Chemical plans. In addition, a portion of incentive compensation exceeding specified levels is paid in restricted stock or RSUs (the "deferred equity plan"). Under the LTIP and prior plans, stock options have been granted with exercise prices equal to Chase's common stock price on the grant date. Generally, options cannot be exercised until at least one year after the grant date, and become exercisable over various periods as determined at the time of the grant. Options generally expire ten years after the grant date. The accompanying table presents a summary of key employee option activity during the last three years. KEY EMPLOYEE STOCK OPTIONS
Year Ended December 31, 1998 1997 1996 ----------------------------- ---------------------------- ---------------------------- (Amounts in thousands, Number of Weighted-Average Number of Weighted-Average Number of Weighted-Average except per share amounts) Options Exercise Price Options Exercise Price Options Exercise Price - ----------------------------------------------------------------------------------------------------------------------------------- Options Outstanding, January 1 44,076 $ 28.14 43,202 $ 20.75 43,672 $ 17.92 Granted 11,486 54.92 11,952 46.19 10,654 29.16 Exercised (8,493) 22.70 (10,458) 20.22 (10,264) 17.12 Cancelled (265) 47.25 (620) 33.75 (860) 24.35 - ----------------------------------------------------------------------------------------------------------------------------------- Options Outstanding, December 31 46,804(a) $ 34.57 44,076 $ 28.14 43,202 $ 20.75 - ----------------------------------------------------------------------------------------------------------------------------------- Options Exercisable, December 31 27,271 $ 25.15 27,264 $ 21.30 25,990 $ 17.46 - -----------------------------------------------------------------------------------------------------------------------------------
(a) Of the total options outstanding at December 31, 1998, 10,428,000 options (all were exercisable) had exercise prices ranging from $5 to $20, or $15.63 on average, and a weighted-average remaining contractual life of 4.2 years; 14,276,000 options (12,419,000 were exercisable) had exercise prices ranging from $20.01 to $40, or $23.68 on average, and a remaining life of 6.4 years; 22,100,000 options (4,424,000 exercisable) had exercise prices ranging from $40.01 to $76.28, or $50.55 on average, and a remaining life of 8.6 years. Restricted stock and RSUs are granted at no cost to the recipient. Restricted stock and RSUs are subject to forfeiture until certain restrictions have lapsed, including continued employment for a specified period. The recipient of a share of restricted stock is entitled to voting rights and dividends on the common stock. An RSU entitles the recipient to receive a share of common stock after the applicable restrictions lapse; the recipient is entitled to receive cash payments equivalent to dividends on the underlying common stock during the period the RSU is outstanding. During 1998, 7.8 million of LTIP awards (all payable solely in stock) were granted. For all 1998 LTIP awards, vesting for restricted shares and RSUs is conditioned on continued employment. Of the total 7.8 million LTIP awards granted, vesting of 1.2 million of such awards is also conditioned upon Chase's stock price reaching and sustaining target prices (the "targets") during the service period; the awards are forfeited in their entirety if the targets are not achieved ("forfeitable awards"). The target price for half the 1998 forfeitable awards exceeded the stock price on the grant date by 42% and for the other half (which is subject to a minimum vesting period) by 56%. There were 583,000 of forfeitable awards that vested in 1998 as a result of the targets having been achieved. Under the LTIP, in 1997 and 1996, 710,000 and 4.9 million awards (all payable solely in stock), respectively, were granted. For all of the 1997 awards and half of the 1996 awards, vesting was conditioned solely on continued employment; the other half of the 1996 awards consisted of forfeitable awards. In addition, vesting for 1996 awards accelerated if targets were met. All 1996 grants vested in 1997 as a result of the targets having been achieved. Under the deferred equity plan, additional restricted stock and RSUs are outstanding for which vesting is conditioned solely on continued employment. During 1998, 1997, and 1996, respectively, 520,000, 522,000, and 325,000 of such awards were granted. Broad-Based Employee Stock Options In December 1996, Chase adopted its Value Sharing Plan, under which 19.4 million options to purchase common stock were granted to substantially all full-time (300 options each) and part-time (150 options each) employees. The exercise price was equal to the stock price on the grant date. The options were to become exercisable after six years, or earlier if Chase's stock price reached and sustained target prices for a minimum period. A second installment of 20.4 million 62 62 options with similar terms was granted in December 1997 to eligible active employees on the grant date. The 1996 and 1997 awards became exercisable in 1997 and 1998, respectively, as a result of the targets having been achieved. A third and last installment of 21.6 million options with similar terms was granted in December 1998. All outstanding options expire ten years after their respective grant dates. The following table presents the activity in the broad-based employee stock option plans during the past three years. BROAD-BASED EMPLOYEE STOCK OPTIONS
Year Ended December 31, 1998 1997 1996 ------------------------------ ---------------------------- ---------------------------- (Amounts in thousands, Number of Weighted-Average Number of Weighted-Average Number of Weighted-Average except per share amounts) Options Exercise Price Options Exercise Price Options Exercise Price - ---------------------------------------------------------------------------------------------------------------------------------- Options Outstanding, January 1 42,808 $ 43.57 33,756 $ 32.54 37,072 $ 17.70 Granted 21,559 59.94 20,444 55.85 19,352 43.19 Exercised (8,168) 43.92 (10,082) 32.71 (22,368) 17.30 Cancelled (3,659) 44.68 (1,310) 41.66 (300) 22.97 - ---------------------------------------------------------------------------------------------------------------------------------- Options Outstanding, December 31 52,540(a) $ 49.65 42,808 $ 43.57 33,756 $ 32.54 - ---------------------------------------------------------------------------------------------------------------------------------- Options Exercisable, December 31 31,057 $ 42.53 22,364 $ 32.35 14,474 $ 18.35 - ----------------------------------------------------------------------------------------------------------------------------------
(a) Of the total options outstanding at December 31, 1998, all options were exercisable except for the 1998 grant under the Value Sharing Plan. The exercise prices for the options outstanding were: $17.07 on average ($15.39 to $22.66) for the 2,794,000 options granted under the prior Chase plan; $20.25 for the 5,396,000 options granted under the prior Chemical plan; and $43.19 for the 8,931,000 options granted in 1996, $55.85 for the 13,936,000 options granted in 1997, and $59.94 for the 21,483,000 options granted in 1998 under the Value Sharing Plan. The average remaining contractual life was 8.6 years for all options outstanding, and 7.7 years for exercisable options outstanding. Comparison of the Fair- and Intrinsic-Value-Based Measurement Methods Chase accounts for its employee stock-based compensation plans under the intrinsic-value-based method in accordance with SFAS 123. There is no expense recognized for stock options, as they have no intrinsic value on the grant date. Forfeitable restricted stock and RSUs are expensed based upon the target prices. The expense for restricted stock and RSUs other than forfeitable awards is measured by the grant-date stock price. Pre-tax stock compensation expense recognized in reported earnings totaled $253 million in 1998, $228 million in 1997, and $65 million in 1996. The increase from 1996 to 1997 primarily resulted from increases in Chase's stock price, which increased the value and triggered the vesting of some awards. In 1998 and 1997 there was $37 million and $135 million, respectively, of costs incurred for the accelerated vesting of stock-based incentive awards. If Chase had adopted the fair-value-based method pursuant to SFAS 123, options would be valued using a Black-Scholes model. Forfeitable restricted stock and RSUs would be valued at the grant-date stock price, after deducting the value assigned to the probability that the stock price would not reach the target. The expense would be the same as under the intrinsic-value-based method for restricted stock and RSUs other than forfeitable awards, and for any awards for which cash payments may be received in lieu of stock. The pro forma net income and basic and diluted earnings per share impact, if the fair-value-based method were adopted, would have been up to 5.7% lower than reported 1998 amounts, 2.5% lower than reported 1997 amounts, and 1.5% lower than reported 1996 amounts. The impact of stock compensation on pro forma expense increased in 1998 and 1997, as compared with the respective prior years, primarily due to the impact of the vesting of options granted in December 1997 and 1996 under the Value Sharing Plan and the higher fair value of options as compared with the prior years. The 1997 and 1996 Value Sharing Plan options vested when the targets were achieved in 1998 and 1997, respectively, and therefore all remaining pro forma expense would have been recognized. The fair value of 1998 and 1997 grants increased over the respective prior years as a result of updated valuation assumptions, based on factors such as the increase in the stock price. The following table presents the weighted-average grant-date fair value for equity awards and the assumptions used to value the options using a Black-Scholes model for equity awards granted during the past three years.
Year Ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- Weighted-Average Grant-Date Fair Value:(a) Options Granted to: Key Employees $14.69 $13.29 $ 6.96 All Other Employees 18.50 14.57 8.33 All Restricted Stock and RSUs Payable in Stock 50.01 47.87 23.08 Weighted-Average Annualized Option Valuation Assumptions: Risk-Free Interest Rate 4.81% 5.96% 5.99% Expected Dividend Yield(b) 2.66 2.29 3.50 Expected Common Stock Price Volatility 31 23 22 Assumed Weighted-Average Expected Life of Options (in Years): Key Employee Stock Options 6.8 6.3 7.2 Broad-Based Employee Stock Options 6.0 6.0 5.1 - --------------------------------------------------------------------------------
(a) Under the fair-value-based method, the grant-date fair value for an option equals the sum of the annual probability of exercise or vested termination, multiplied by the dividend-adjusted Black-Scholes-derived value of an option terminating in that year. (b) The expected dividend yield is based primarily on historical data at the grant dates. 63 63 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 17 -- RESTRICTIONS ON CASH AND INTERCOMPANY FUNDS TRANSFERS - -------------------------------------------------------------------------------- The Federal Reserve Board requires depository institutions to maintain cash reserves with a Federal Reserve Bank. The average amount of reserve balances deposited by Chase's bank subsidiaries with various Federal Reserve Banks was approximately $0.7 billion during both 1998 and 1997. Restrictions imposed by Federal law prohibit Chase and certain other affiliates from borrowing from banking subsidiaries unless the loans are secured in specified amounts. Such secured loans to Chase or to other affiliates generally are limited to 10% of the banking subsidiary's total capital, as determined by the risk-based capital guidelines; the aggregate amount of all such loans is limited to 20% of the banking subsidiary's total capital, as determined by the risk-based capital guidelines. Chase and its affiliates were well within these limits throughout the year. The principal sources of Chase's income (on a parent company-only basis) are dividends and interest from Chase Bank and the other banking and nonbanking subsidiaries of Chase. In addition to dividend restrictions set forth in statutes and regulations, the Federal Reserve Board, the Office of the Comptroller of the Currency ("OCC") and the Federal Deposit Insurance Corporation ("FDIC") have authority under the Financial Institutions Supervisory Act to prohibit or to limit the payment of dividends by the banking organizations they supervise, including Chase and its subsidiaries that are banks or bank holding companies, if, in the banking regulator's opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the banking organization. Chase's bank subsidiaries could, without the approval of their relevant banking regulators, pay dividends to their respective bank holding companies in amounts up to the limitations imposed upon such banks by regulatory restrictions. These dividend limitations, in the aggregate, totaled approximately $2.6 billion at December 31, 1998. - -------------------------------------------------------------------------------- 18 -- CAPITAL - -------------------------------------------------------------------------------- There are two categories of risk-based capital: core capital (referred to as Tier 1 Capital) and supplementary capital (referred to as Tier 2 Capital). Tier 1 Capital includes common stockholders' equity, qualifying preferred stock, minority interest, less goodwill and other adjustments. Tier 2 Capital consists of preferred stock not qualifying as Tier 1, long-term debt and other instruments qualifying as Tier 2, and the aggregate allowance for credit losses up to a certain percentage of risk-weighted assets. Under the risk-based capital guidelines of the Federal Reserve Board, Chase is required to maintain minimum ratios of Tier 1 and Total (Tier 1 plus Tier 2) Capital to risk-weighted assets. Failure to meet these minimum requirements could result in actions taken by the regulators. Bank subsidiaries are also subject to these capital requirements by their respective primary regulators. Management believes that as of December 31, 1998, Chase met all capital requirements to which it is subject and is not aware of any subsequent events that would alter this classification. The following table presents the risk-based capital ratios for Chase and its significant banking subsidiaries.
Ratios Risk- Adjusted ---------------------------------------------- Tier 1 Total Weighted Average Tier 1 Total Tier 1 December 31, 1998 (in millions) Capital(b)(c) Capital(c) Assets(d) Assets Capital(c)(e) Capital(c)(e) Leverage(c)(f) - ---------------------------------------------------------------------------------------------------------------------------------- Chase(a) $ 24,116 $ 34,829 $289,367 $375,886 8.33% 12.04% 6.42% - ---------------------------------------------------------------------------------------------------------------------------------- Chase Bank 17,965 26,161 231,026 303,839 7.78% 11.32% 5.91% - ---------------------------------------------------------------------------------------------------------------------------------- Chase USA 2,964 4,117 32,677 31,873 9.07% 12.60% 9.30% - ---------------------------------------------------------------------------------------------------------------------------------- Chase Texas 1,401 2,050 19,740 23,607 7.10% 10.39% 5.93% - ---------------------------------------------------------------------------------------------------------------------------------- Well Capitalized Ratios(g) 6.00% 10.00% 5.00%(h) - ---------------------------------------------------------------------------------------------------------------------------------- Minimum Capital Ratios(g) 4.00% 8.00% 3.00% - ----------------------------------------------------------------------------------------------------------------------------------
(a) Assets and capital amounts for Chase's banking subsidiaries reflect intercompany transactions, whereas the respective amounts for Chase reflect the elimination of intercompany transactions. (b) In accordance with Federal Reserve Board risk-based capital guidelines, minority interest for Chase includes preferred stock instruments issued by subsidiaries of Chase. For a further discussion, see Notes Six and Seven. (c) The provisions of SFAS 115 do not apply to the calculations of the Tier 1 Capital and Tier 1 Leverage ratios. Effective September 30, 1998, the risk-based capital guidelines were changed to permit the inclusion of 45% of the pre-tax unrealized gain on certain equity securities in the calculation of Tier 2 Capital. This change in the risk-based guidelines had an immaterial impact on Chase's 1998 Tier 2 and Total Capital ratios. (d) Includes off-balance sheet risk-weighted assets in the amounts of $95,059 million, $86,409 million, $3,815 million and $4,015 million, respectively, at December 31, 1998. (e) Tier 1 Capital or Total Capital, as applicable, divided by risk-weighted assets. Risk-weighted assets include assets and off-balance sheet positions, weighted by the type of instruments and the risk weight of the counterparty, collateral or guarantor. (f) Tier 1 Capital divided by adjusted average assets (net of allowance for credit losses, goodwill and certain intangible assets). (g) As defined by the regulations issued by the Federal Reserve Board, the FDIC and the OCC. (h) Represents requirements for bank subsidiaries pursuant to regulations issued under The Federal Deposit Insurance Corporation Improvement Act. There is no Tier 1 Leverage component in the definition of a well capitalized bank holding company. 64 64 - -------------------------------------------------------------------------------- 19 -- DERIVATIVE AND FOREIGN EXCHANGE CONTRACTS - -------------------------------------------------------------------------------- Chase utilizes derivative and foreign exchange financial instruments for both trading and non-trading activities, such as ALM. A discussion of the credit and market risks involved with these instruments is included in the first six paragraphs of the Derivative and Foreign Exchange Contracts section of the Management's Discussion and Analysis ("MD&A") on pages 34-35, and paragraphs one through four of the Market Risk Management section of the MD&A on page 36. Derivative and Foreign Exchange Instruments Used for Trading Purposes: The credit risk associated with Chase's trading activities is recorded on the balance sheet. The effects of any market risk (gains or losses) on Chase's trading activities have been reflected in trading revenue, as the trading instruments are marked-to-market daily. See Note One. Derivative and Foreign Exchange Instruments Used for ALM Activities: A discussion of Chase's objectives and strategies for using these instruments for ALM activities is included in the first four paragraphs of the Asset/Liability Management discussion of the MD&A on page 38. Chase believes the best measure of credit risk is the mark-to-market exposure amount of the derivative or foreign exchange contract. This is also referred to as repayment risk or the replacement cost. While notional principal is the most commonly used volume measure in the derivative and foreign exchange markets, it is not a useful measure of credit or market risk. The notional principal typically does not change hands, but is simply a quantity upon which interest and other payments are calculated. The notional principal amounts of Chase's derivative and foreign exchange products greatly exceed the possible credit and market loss that could arise from such transactions. The following table summarizes the aggregate notional amounts of derivative and foreign exchange contracts as well as the credit exposure related to these instruments (after taking into account the effects of legally enforceable master netting agreements).
Notional Amounts(a) Credit Exposure ---------------------- ---------------------- December 31, (in billions) 1998 1997 1998 1997 - ----------------------------------------------------------------------------------------------------------- Interest Rate Contracts Interest Rate Swaps Trading $4,882.4 $3,206.0 $ 10.8 $ 14.0 ALM 97.8 98.2 0.3 0.6 Futures, Forwards and Forward Rate Agreements Trading 2,090.0 1,643.7 0.4 0.3 ALM 74.6 42.6 -- -- Purchased Options Trading 443.8 316.1 1.5 1.7 ALM 52.6 13.1 -- -- Written Options Trading 503.2 395.7 -- -- ALM 27.5 0.2 -- -- - ----------------------------------------------------------------------------------------------------------- Total Interest Rate Contracts $8,171.9 $5,715.6 $ 13.0 $ 16.6 - ----------------------------------------------------------------------------------------------------------- Foreign Exchange Contracts Spot, Forward and Futures Contracts Trading $1,532.6 $1,521.7 $ 11.0 $ 14.4 ALM 54.0 72.6 -- -- Other Foreign Exchange Contracts(b) Trading 449.8 358.7 5.0 5.8 ALM 4.2 5.2 -- -- - ----------------------------------------------------------------------------------------------------------- Total Foreign Exchange Contracts $2,040.6 $1,958.2 $ 16.0 $ 20.2 - ----------------------------------------------------------------------------------------------------------- Debt, Equity, Commodity and Other Contracts Trading $ 140.5 $ 64.4 $ 4.3 $ 1.6 - ----------------------------------------------------------------------------------------------------------- Total Debt, Equity, Commodity and Other Contracts $ 140.5 $ 64.4 $ 4.3 $ 1.6 - ----------------------------------------------------------------------------------------------------------- Total Credit Exposure Recorded on the Balance Sheet $ 33.3 $ 38.4 - -----------------------------------------------------------------------------------------------------------
(a) The notional amounts of exchange-traded interest rate contracts, foreign exchange contracts, and equity, commodity and other contracts were $699.3 billion, $3.3 billion and $3.9 billion, respectively, at December 31, 1998, compared with $691.2 billion, $22.8 billion and $6.1 billion, respectively, at December 31, 1997. The credit risk for these contracts was minimal as exchange-traded contracts principally settle daily in cash. (b) Includes notional amounts of purchased options, written options and cross-currency interest rate swaps of $137.0 billion, $ 137.9 billion and $179.1 billion, respectively, at December 31, 1998, compared with $123.9 billion, $126.6 billion and $113.4 billion, respectively, at December 31, 1997. 65 65 Notes to Consolidated Financial Statements Classes of Derivative and Foreign Exchange Instruments: The following instruments are used by Chase for purposes of both trading and ALM activities. Derivative and foreign exchange instruments may be broadly categorized as exchange-traded or over-the-counter ("OTC"). Exchange-traded instruments are executed through a recognized exchange as standardized contracts, and are primarily futures and options. OTC contracts are executed between two counterparties who negotiate specific agreement terms, including the underlying instrument, notional amount, exercise price and maturity. In this context the underlying instrument may include interest rates, foreign exchange rates, commodities, debt or equity instruments. Interest rate swaps are contracts in which a series of interest rate flows in a single currency are exchanged over a prescribed period. Interest rate swaps are the most common type of derivative contract that Chase utilizes for both assets and liabilities. An example of a situation in which Chase would utilize an interest rate swap would be to convert its fixed-rate debt to a variable rate. By entering into the swap, the principal amount of the debt would remain unchanged but the interest streams would change. Cross-currency interest rate swaps are contracts that generally involve the exchange of both interest and principal amounts in two different currencies. Interest rate futures and forwards are contracts for the delayed delivery of securities or money market instruments. The selling party agrees to deliver on a specified future date, a specified instrument, at a specified price or yield. Forward rate agreements are contracts to exchange payments on a specified future date, based on a market change in interest rates from trade date to contract settlement date. Interest rate options, including caps and floors, are contracts to modify interest rate risk in exchange for the payment of a premium when the contract is initiated. As a writer of interest rate options, Chase receives a premium in exchange for bearing the risk of unfavorable changes in interest rates. Conversely, as a purchaser of an option, Chase pays a premium for the right, but not the obligation, to buy or sell a financial instrument or currency at predetermined terms in the future. Foreign currency options are similar to interest rate options, except that they are based on foreign exchange rates. Chase's use of written options as part of its ALM activities is permitted only in those circumstances where they are specifically linked to purchased options. All unmatched written options are included in the trading portfolio at fair value. Foreign exchange contracts are used for the future receipt or delivery of foreign currency at previously agreed-upon terms. Debt, equity, commodity and other contracts include swaps and options and are similar to interest rate contracts, except that the underlying instrument is debt, equity or commodity-related. Credit derivatives are considered debt-related and are included in this category of derivatives. These instruments are all subject to market risk, representing potential loss due to adverse movements in the underlying instrument. Credit risk arises primarily from OTC contracts, since exchange-traded contracts are generally settled daily. Market risk is reduced by entering into offsetting positions using other financial instruments. Credit risk is reduced significantly by entering into legally enforceable master netting agreements. To further reduce exposure, management may deem it necessary to obtain collateral. The amount and nature of the collateral obtained is based on management's credit evaluation of the customer. Collateral held varies, but may include cash, securities, accounts receivable, inventory, property, plant and equipment and real estate. - -------------------------------------------------------------------------------- 20 -- OFF-BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- In addition to derivative and foreign exchange instruments, Chase also utilizes lending-related financial instruments in order to meet the financing needs of its customers. Chase issues commitments to extend credit, standby and other letters of credit and guarantees, and also provides securities-lending services. For lending-related financial instruments, the contractual amount of the financial instrument represents the maximum potential credit risk if the counterparty does not perform according to the terms of the contract. A large majority of these commitments expire without being drawn upon. As a result, total contractual amounts are not representative of Chase's actual future credit exposure or liquidity requirements for these commitments. To provide for risks of losses inherent in the credit extension process, Chase allocates $170 million of its allowance for credit losses to lending-related commitments, which is reported in Other Liabilities. See Note One. The following table summarizes the contract amounts relating to Chase's lending-related financial instruments at December 31, 1998 and 1997. OFF-BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS
December 31, (in millions) 1998 1997 - -------------------------------------------------------------------------------- Credit Card Lines $ 80,763 $ 75,659 Other Unfunded Commitments to Extend Credit 144,519 123,569 Standby Letters of Credit and Guarantees (Net of Risk Participations of $6,666 and $6,309) 32,277 33,164 Other Letters of Credit 3,740 4,665 Customers' Securities Lent 58,592 52,123 - --------------------------------------------------------------------------------
66 66 Unfunded commitments to extend credit are agreements to lend to a customer who has complied with predetermined contractual conditions. Commitments generally have fixed expiration dates. Standby letters of credit and guarantees are conditional commitments issued by Chase generally to guarantee the performance of a customer to a third party in borrowing arrangements, such as commercial paper, bond financing, construction and similar transactions. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers and may be reduced by participations to third parties. Chase holds collateral to support those standby letters of credit and guarantees when deemed necessary. Customers' securities lent are customers' securities held by Chase, as custodian, which are lent to third parties. Chase obtains collateral, with a market value exceeding 100% of the contract amount, for customers' securities lent, which is used to indemnify customers against possible losses resulting from third-party defaults. - -------------------------------------------------------------------------------- 21 -- CREDIT RISK CONCENTRATIONS - -------------------------------------------------------------------------------- Concentrations of credit risk arise when a number of customers are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Chase regularly monitors various segments of its credit risk portfolio to assess potential concentration risks and to obtain collateral when deemed necessary. Chase's exposures within these major segments are diversified and these diversification factors reduce concentration risk. For geographic and other concentrations, reference is made to the following tables in the MD&A:
- -------------------------------------------------------------------------------- Residential Mortgage Loans by Geographic Region Table on Page 32 - -------------------------------------------------------------------------------- Managed Credit Card Loans by Geographic Region Table on Page 32 - -------------------------------------------------------------------------------- Auto Financings by Geographic Region Table on Page 32 - -------------------------------------------------------------------------------- Cross-Border Exposure Table on Page 34 - -------------------------------------------------------------------------------- Derivative and Foreign Exchange Contracts Table on Page 35 - --------------------------------------------------------------------------------
The table below indicates major product and industry segments including both on-balance sheet (principally loans) and off-balance sheet (principally commitments to extend credit) exposures.
1998 Distributions 1997 Distributions ---------------------------------------- ---------------------------------------- Credit On-Balance Off-Balance Credit On-Balance Off-Balance December 31, (in billions) Exposure Sheet Sheet Exposure Sheet Sheet - -------------------------------------------------------------------------------------------------------------------------- Credit Cards $ 95.7 $ 14.9 $ 80.8 $ 91.9 $ 16.2 $ 75.7 Residential Mortgages 45.2 43.3 1.9 42.0 40.2 1.8 Depository Institutions 51.5 33.9 17.6 53.5 36.3 17.2 Auto Financings 16.8 16.5 0.3 13.6 13.3 0.3 Commercial Real Estate 7.0 4.4 2.6 9.0 5.7 3.3 - -------------------------------------------------------------------------------------------------------------------------- Total $ 216.2 $ 113.0 $ 103.2 $ 210.0 $ 111.7 $ 98.3 - --------------------------------------------------------------------------------------------------------------------------
67 67 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 22 -- FAIR VALUE OF FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- The fair value of a financial instrument is the current amount that would be exchanged between willing parties (other than in a forced sale or liquidation), and is best evidenced by a quoted market price, if one exists. Quoted market prices are not available for a significant portion of Chase's financial instruments. As a result, the fair values presented are estimates derived using present value or other valuation techniques and may not be indicative of net realizable value. In addition, the calculation of estimated fair value is based on market conditions at a specific point in time and may not be reflective of future fair values. Certain financial instruments and all nonfinancial instruments are excluded from the scope of SFAS 107. Accordingly, the fair value disclosures required by SFAS 107 provide only a partial estimate of the fair value of Chase. For example, the values associated with the various ongoing businesses that Chase operates are excluded. Chase has developed long-term relationships with its customers through its deposit base and its credit card accounts, commonly referred to as core deposit intangibles and credit card relationships. In the opinion of management, these items in the aggregate add significant value to Chase, but their fair value is not disclosed in this Note. Fair values among financial institutions are not comparable due to the wide range of permitted valuation techniques and numerous estimates that must be made. This lack of objective valuation standard introduces a great degree of subjectivity to these derived or estimated fair values. Therefore, readers are cautioned in using this information for purposes of evaluating the financial condition of Chase compared with other financial institutions. The following summary presents the methodologies and assumptions used to estimate the fair value of Chase's financial instruments required under the guidelines of SFAS 107. Financial Assets Assets for Which Fair Value Approximates Carrying Value: The fair values of certain financial assets carried at cost, including cash and due from banks, deposits with banks, Federal funds sold and securities purchased under resale agreements, due from customers on acceptances, short-term receivables and accrued interest receivable, are considered to approximate their respective carrying values due to their short-term nature and generally negligible credit losses. Trading Assets: Chase carries trading assets, which include debt and equity instruments as well as the positive fair value on derivative and foreign exchange instruments, at estimated fair value. Securities: Held-to-maturity securities are carried at amortized cost. Available-for-sale securities and related derivative contracts are carried at fair value. The fair value of actively-traded securities is determined by the secondary market, while the fair value for nonactively-traded securities is based on independent broker quotations. Loans: Loans are valued using methodologies suitable for each type of loan. The fair value of Chase's commercial loan portfolio is estimated by assessing the two main risk components of the portfolio: credit and interest. The estimated cash flows are adjusted to reflect the inherent credit risk and then discounted, using rates appropriate for each maturity that incorporate the effects of interest rate changes. Generally, emerging market loans are valued based on secondary market prices. For consumer installment loans (including auto financings) and residential mortgages for which market rates for comparable loans are readily available, the fair values are estimated by discounting cash flows, adjusted for prepayments. The discount rates used for consumer installment loans are current rates offered by commercial banks and thrifts. For residential mortgages, secondary market yields for comparable MBSs, adjusted for risk, are used. The fair value of credit card receivables is estimated by discounting expected cash flows. The discount rates used for credit card receivables incorporate the effects of interest rate changes only, since the estimated cash flows are adjusted for credit risk. Other Assets: This caption consists primarily of equity investments, including private equity investments. The fair value of these investments is determined on an individual basis. The valuation methodologies include market values of publicly-traded securities, cash flow analyses and reference to values of comparable private companies. Financial Liabilities Liabilities for Which Fair Value Approximates Carrying Value: SFAS 107 requires that the fair value disclosed for deposit liabilities with no stated maturity (i.e., demand, savings and certain money market deposits) be equal to the carrying value. SFAS 107 does not allow for the recognition of the inherent funding value of these instruments. The fair value of foreign deposits, Federal funds purchased and securities sold under repurchase agreements, commercial paper, other borrowed funds, acceptances outstanding, accounts payable and accrued liabilities are considered to approximate their respective carrying values due to their short-term nature. 68 68 Domestic Time Deposits: The fair value of time deposits is estimated by discounting cash flows based on contractual maturities at the interest rates for raising funds of similar maturity. Trading Liabilities: Chase carries trading liabilities, which include securities sold, not yet purchased, structured notes as well as derivative and foreign exchange contracts, at estimated fair value. Long-Term Debt-Related Instruments: The valuation of long-term debt, including the guaranteed preferred beneficial interests in Chase's junior subordinated deferrable interest debentures, takes into account several factors, including current market interest rates and Chase's credit rating. Quotes are gathered from various investment banking firms for indicative yields for Chase's securities over a range of maturities. Chase has reviewed the unfunded portion of commitments to extend credit as well as standby and other letters of credit and has determined that the fair value of such financial instruments is not material. The following table presents the carrying value and estimated fair value of financial assets and liabilities valued under SFAS 107 and certain derivative contracts used for ALM activities related to these financial assets and liabilities.
Financial Assets/ Financial Liabilities Derivative Contracts Used for ALM Activities ------------------------------- ----------------------------------------------------- Estimated Gross Gross Estimated Carrying Fair Carrying Unrecognized Unrecognized Fair December 31, 1998 (in millions) Value(a)(b) Value(a)(b) Value(c) Gains Losses Value(e) - ------------------------------------------------------------------------------------------------------------------------------------ Financial Assets: Assets for Which Fair Value Approximates Carrying Value $ 59,251 $ 59,251 $ 41 $ 70 $(159) $ (48) Trading Assets 57,692 57,692 -- -- -- -- Securities Available-for-Sale 62,803 62,803 (151) -- -- (151) Securities Held-to-Maturity 1,687 1,703 -- -- -- -- Loans, Net of Allowance for Loan Losses 169,202 171,063 90 335 (678) (253) Other Assets(d) 5,103 6,047 118 283 (74) 327 - ------------------------------------------------------------------------------------------------------------------------------------ Total Financial Assets $355,738 $358,559 $ 98 $688 $(911) $(125) - ------------------------------------------------------------------------------------------------------------------------------------ Financial Liabilities: Liabilities for Which Fair Value Approximates Carrying Value $247,833 $247,833 $ 106 $159 $(413) $(148) Domestic Time Deposits 35,933 35,746 260 308 (112) 456 Trading Liabilities 38,502 38,502 -- -- -- -- Long-Term Debt-Related Instruments 18,375 18,438 68 430 (31) 467 - ------------------------------------------------------------------------------------------------------------------------------------ Total Financial Liabilities $340,643 $340,519 $ 434 $897 $(556) $ 775 - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1997 (in millions) - ------------------------------------------------------------------------------------------------------------------------------------ Financial Assets: Assets for Which Fair Value Approximates Carrying Value $ 63,969 $ 63,969 $ 54 $ 45 $ (17) $ 82 Trading Assets 72,393 72,393 -- -- -- -- Securities Available-for-Sale 49,755 49,755 (51) -- -- (51) Securities Held-to-Maturity 2,983 2,995 -- -- -- -- Loans, Net of Allowance for Loan Losses 164,830 167,122 183 130 (485) (172) Other Assets(d) 3,147 3,741 155 197 (66) 286 - ------------------------------------------------------------------------------------------------------------------------------------ Total Financial Assets $357,077 $359,975 $ 341 $372 $(568) $ 145 - ------------------------------------------------------------------------------------------------------------------------------------ Financial Liabilities: Liabilities for Which Fair Value Approximates Carrying Value $250,433 $250,433 $ 58 $ 97 $(381) $(226) Domestic Time Deposits 24,503 23,569 242 150 (226) 166 Trading Liabilities 52,438 52,438 -- -- -- -- Long-Term Debt-Related Instruments 15,127 15,260 45 200 (33) 212 - ------------------------------------------------------------------------------------------------------------------------------------ Total Financial Liabilities $342,501 $341,700 $ 345 $447 $(640) $ 152 - ------------------------------------------------------------------------------------------------------------------------------------
(a) Includes the carrying value and estimated fair value of derivative contracts used for ALM activities. (b) The carrying value and estimated fair value of daily margin settlements on open futures contracts are primarily included in Other Assets on the balance sheet, except when used in connection with available-for-sale securities, which are carried at fair value and are included in Securities Available-for-Sale on the balance sheet. Chase uses futures contracts in its ALM activities to modify the interest rate characteristics of balance sheet instruments such as available-for-sale securities, loans and deposits. Unrecognized net losses from daily margin settlements on open futures contracts were $8 million at December 31, 1998 and $3 million at December 31, 1997. (c) The carrying value of derivatives used for ALM activities is recorded as receivables and payables and is primarily included in Other Assets on the balance sheet, except for derivatives used in connection with available-for-sale securities, which are carried at fair value and are included in Securities: Available-for-Sale on the balance sheet. (d) At December 31, 1998, deferred gains and losses associated with anticipatory ALM transactions were insignificant. (e) Derivative contracts used for ALM activities were valued using market prices or pricing models consistent with methods used by Chase in valuing similar instruments used for trading purposes. 69 69 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 23 -- SEGMENT INFORMATION - -------------------------------------------------------------------------------- Effective December 31, 1998, Chase adopted SFAS 131 which defines the criteria by which management determines the number and nature of its "operating segments" and sets forth the financial information that is required to be disclosed about these operating segments. Chase's businesses are organized into three major franchises (segments): Global Bank, National Consumer Services ("NCS") and Chase Technology Solutions ("CTS"), which includes Global Services. These franchises are based on the nature of the products and services provided, the type or class of customer, and Chase's management organization. Chase uses SVA, Operating Earnings and Cash Operating Earnings as its measures of franchise profitability. For a discussion of these measurements, see Management Performance Measurements in the MD&A on page 19 and the Glossary of Terms on page 76. The accounting policies of the segments are principally the same as those described in Note One. Operating revenues and expenses directly associated with each respective franchise are included in determining their operating earnings. Guidelines exist for assigning those remaining expenses that are not directly incurred by the franchises, such as overhead and taxes. In addition, management has developed a risk-adjusted capital methodology that quantifies different types of risk -- credit, market and operating -- within the various businesses and assigns capital SEGMENT RESULTS AND RECONCILIATION (Table continued on next page)
Global National Global Services Year Ended December 31, Bank Consumer Services (Within CTS) ------------------------------- ------------------------------ -------------------------- (in millions, except ratios) 1998 1997 1996 1998 1997 1996 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Operating Net Interest Income $ 2,914 $ 3,160 $ 3,205 $ 5,528 $ 5,266 $ 4,931 $ 1,135 $1,031 $ 961 Operating Noninterest Revenue 6,456 5,285 4,977 2,654 2,062 1,730 1,458 1,247 1,131 Equity-Related Income(b) 1 26 1 34 22 13 -- 5 5 Intersegment Revenue(c) (73) 1 (195) (13) (9) (11) 74 58 27 - ------------------------------------------------------------------------------------------------------------------------------------ Total Revenue 9,298 8,472 7,988 8,203 7,341 6,663 2,667 2,341 2,124 - ------------------------------------------------------------------------------------------------------------------------------------ Noninterest Expense 4,242 3,787 3,624 3,859 3,604 3,507 1,830 1,628 1,585 Non-Cash Expense(d) 208 215 251 318 242 234 85 58 50 - ------------------------------------------------------------------------------------------------------------------------------------ Total Expense 4,450 4,002 3,875 4,177 3,846 3,741 1,915 1,686 1,635 - ------------------------------------------------------------------------------------------------------------------------------------ Operating Margin 4,848 4,470 4,113 4,026 3,495 2,922 752 655 489 Credit Costs 345 390 379 2,230 1,817 1,363 2 2 1 - ------------------------------------------------------------------------------------------------------------------------------------ Operating Earnings (Loss) Before Taxes 4,503 4,080 3,734 1,796 1,678 1,559 750 653 488 Income Taxes (Benefit) 1,690 1,541 1,423 694 648 609 284 245 182 - ------------------------------------------------------------------------------------------------------------------------------------ Operating Earnings (Loss) $ 2,813 $ 2,539 $ 2,311 $ 1,102 $ 1,030 $ 950 $ 466 $ 408 $ 306 Restructuring Costs and Special Items -- -- -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Net Income -- -- -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Cash Operating Earnings (Loss) $ 2,855 $ 2,572 $ 2,347 $ 1,265 $ 1,128 $ 1,044 $ 496 $ 423 $ 319 - ------------------------------------------------------------------------------------------------------------------------------------ Average Common Equity $ 13,924 $ 12,989 $ 12,674 $ 6,381 $ 5,260 $ 4,973 $ 1,879 $1,687 $1,707 Average Managed Assets(e) $267,227 $260,809 $236,903 $106,703 $95,264 $86,064 $10,386 $9,403 $7,564 Shareholder Value Added $ 985 $ 770 $ 560 $ 409 $ 400 $ 344 $ 243 $ 188 $ 78 Cash Return on Common Equity 20.1% 19.0% 17.4% 19.4% 20.6% 19.9% 26.0% 24.2% 17.6% Cash Efficiency Ratio 47% 47% 48% 49% 51% 55% 70% 71% 76% - ------------------------------------------------------------------------------------------------------------------------------------
(a) Corporate/Reconciling Items includes the non-global services portion of Chase Technology Solutions, Global Asset Management and Mutual Funds business, corporate staff areas and the net effect of management accounting policies. (b) Equity-related income includes all equity income of investees accounted for by the equity method. (c) Intersegment revenue includes intercompany revenue and revenue sharing agreements, net of intersegment expenses. Transactions between business segments are primarily conducted at fair value. (d) Non-cash expense represents all depreciation and amortization expense included in Noninterest Expense. (e) Excludes the impact of credit card securitizations. The impact of securitizations on total average assets was $18,011 million in 1998, $14,553 million in 1997 and $10,634 million in 1996. NM - Not Meaningful 70 70 accordingly. The provision for loan losses is allocated to the segments utilizing a credit risk methodology applied consistently across Chase and a risk grading system appropriate for a segment's portfolio. The Corporate/Reconciling Items column reflects revenues and expenses excluded from the determination of the franchises' operating earnings. This column includes the effects remaining at the Corporate level after the implementation of management accounting policies, including residual provision for loan losses and income tax expenses (the difference between the amounts allocated to business units and Chase's consolidated provision for loan losses and income tax expense). Also included are the results of certain operations, such as Chase's Global Asset Management and Mutual Funds business and the non-global services portion of Chase Technology Solutions. A summary of the segment results and reconciliation is shown in the following table. For a further discussion concerning Chase's business franchises (segments), including a description of products, services and method of distribution, see Lines of Business Results in the MD&A on page 19. Additionally, financial information relating to Chase's operations by geographic area is in the following note (Note Twenty-Four). SEGMENT RESULTS AND RECONCILIATION (continuation of table)
Year Ended December 31, Corporate/Reconciling Items(a) Total ------------------------------ ------------------------------------- (in millions, except ratios) 1998 1997 1996 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------- Operating Net Interest Income $ (453) $ (564) $ (392) $ 9,124 $ 8,893 $ 8,705 Operating Noninterest Revenue 99 120 (149) 10,667 8,714 7,689 Equity-Related Income(b) (2) 39 38 33 92 57 Intersegment Revenue(c) 12 (50) 179 -- -- -- - --------------------------------------------------------------------------------------------------------------- Total Revenue (344) (455) (324) 19,824 17,699 16,451 - --------------------------------------------------------------------------------------------------------------- Noninterest Expense 23 -- (121) 9,954 9,019 8,595 Non-Cash Expense(d) 247 221 199 858 736 734 - --------------------------------------------------------------------------------------------------------------- Total Expense 270 221 78 10,812 9,755 9,329 - --------------------------------------------------------------------------------------------------------------- Operating Margin (614) (676) (402) 9,012 7,944 7,122 Credit Costs 130 (400) (292) 2,707 1,809 1,451 - --------------------------------------------------------------------------------------------------------------- Operating Earnings (Loss) Before Taxes (744) (276) (110) 6,305 6,135 5,671 Income Taxes (Benefit) (379) (148) (59) 2,289 2,286 2,155 - --------------------------------------------------------------------------------------------------------------- Operating Earnings (Loss) $ (365) $ (128) $ (51) $ 4,016 $ 3,849 $ 3,516 Restructuring Costs and Special Items -- -- -- (234) (141) (1,055) - --------------------------------------------------------------------------------------------------------------- Net Income -- -- -- $ 3,782 $ 3,708 $ 2,461 - --------------------------------------------------------------------------------------------------------------- Cash Operating Earnings (Loss) $ (339) $ (102) $ (25) $ 4,277 $ 4,021 $ 3,685 - --------------------------------------------------------------------------------------------------------------- Average Common Equity $ (856) $(1,108) $(1,389) $ 21,328 $ 18,828 $ 17,965 Average Managed Assets(e) $ 6,906 $ 5,423 $ 1,343 $ 391,222 $ 370,899 $ 331,874 Shareholder Value Added $ (231) $ 35 $ 149 $ 1,406 $ 1,393 $ 1,131 Cash Return on Common Equity NM NM NM 19.6% 20.4% 19.3% Cash Efficiency Ratio NM NM NM 53% 54% 56% - ---------------------------------------------------------------------------------------------------------------
71 71 Notes to Consolidated Financial Statements The tables below present reconciliations of the combined segment information included in the preceding table to Chase's reported revenues and net income as included in the Consolidated Statement of Income.
Year Ended December 31, (in millions) 1998 1997 1996 - -------------------------------------------------------------------------------- Segments' Operating Revenues $ 20,168 $ 18,154 $ 16,775 Corporate/Reconciling items (344) (455) (324) - -------------------------------------------------------------------------------- Consolidated Operating Revenues 19,824 17,699 16,451 Impact of securitizations (1,148) (993) (570) Provision for risk management instrument credit losses (211) -- -- Special items 191 102 (6) - -------------------------------------------------------------------------------- Consolidated Revenue $ 18,656 $ 16,808 $ 15,875 - -------------------------------------------------------------------------------- Year Ended December 31, (in millions) 1998 1997 1996 - -------------------------------------------------------------------------------- Segments' Cash Operating Earnings $ 4,616 $ 4,123 $ 3,710 Corporate/Reconciling items (339) (102) (25) - -------------------------------------------------------------------------------- Consolidated Cash Operating Earnings 4,277 4,021 3,685 Amortization of goodwill and certain intangibles (261) (172) (169) - -------------------------------------------------------------------------------- Consolidated Operating Earnings 4,016 3,849 3,516 Special items and restructuring costs (234) (141) (1,055) - -------------------------------------------------------------------------------- Consolidated Net Income $ 3,782 $ 3,708 $ 2,461 - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 24 -- INTERNATIONAL OPERATIONS - -------------------------------------------------------------------------------- The following table presents average assets and income statement information relating to the international and domestic operations of Chase by major geographic areas, based on the domicile of the customer. Chase defines international activities as business transactions that involve customers residing outside of the United States. However, a definitive separation of Chase's domestic and foreign businesses cannot be performed because many of Chase's domestic operations service international business. As these operations are highly integrated, estimates and subjective assumptions have been made to apportion revenue and expense between domestic and international operations. The estimates and assumptions used to apportion revenue and expense are consistent with the allocations used for Chase's segment reporting in Note Twenty-Three. There are no individual foreign countries where Chase derives over 10% of its total consolidated revenue.
Income Average Before Net For the Year Ended December 31, (in millions) Assets Revenue(a) Expense(b) Income Taxes Income - ----------------------------------------------------------------------------------------------------------------------------------- 1998 Europe/Middle East and Africa $ 69,953 $ 1,984 $ 1,298 $ 686 $ 489 Asia and Pacific 28,167 1,250 866 384 257 Latin America and the Caribbean 12,500 706 317 389 252 Other(c) 1,340 31 14 17 9 - ----------------------------------------------------------------------------------------------------------------------------------- Total International 111,960 3,971 2,495 1,476 1,007 Total Domestic 261,251 14,685 10,231 4,454 2,775 - ----------------------------------------------------------------------------------------------------------------------------------- Total Corporation 373,211 $ 18,656 $ 12,726 $ 5,930 $ 3,782 - ----------------------------------------------------------------------------------------------------------------------------------- 1997 Europe/Middle East and Africa $ 67,011 $ 2,146 $ 1,137 $ 1,009 $ 668 Asia and Pacific 21,910 1,354 793 561 359 Latin America and the Caribbean 14,552 442 344 98 66 Other(c) 1,214 31 17 14 8 - ----------------------------------------------------------------------------------------------------------------------------------- Total International 104,687 3,973 2,291 1,682 1,101 Total Domestic 251,659 12,835 8,607 4,228 2,607 - ----------------------------------------------------------------------------------------------------------------------------------- Total Corporation 356,346 $ 16,808 $ 10,898 $ 5,910 $ 3,708 - ----------------------------------------------------------------------------------------------------------------------------------- 1996 Europe/Middle East and Africa $ 74,993 $ 2,245 $ 1,310 $ 935 $ 605 Asia and Pacific 28,634 1,058 827 231 141 Latin America and the Caribbean 17,222 515 359 156 92 Other(c) 1,308 30 14 16 10 - ----------------------------------------------------------------------------------------------------------------------------------- Total International 122,157 3,848 2,510 1,338 848 Total Domestic 199,083 12,027 9,554 2,473 1,613 - ----------------------------------------------------------------------------------------------------------------------------------- Total Corporation 321,240 $ 15,875 $ 12,064 $ 3,811 $ 2,461 - -----------------------------------------------------------------------------------------------------------------------------------
(a) Revenue is comprised of Net Interest Income and Noninterest Revenue. Chase has no single customer that represents more than 10% of its revenues. (b) Expense is comprised of Noninterest Expense and Provision for Loan Losses. (c) No geographic region included in Other exceeds 10% of the total for Chase. 72 72 - -------------------------------------------------------------------------------- 25 -- PARENT COMPANY - -------------------------------------------------------------------------------- PARENT COMPANY - BALANCE SHEET
December 31, (in millions) 1998 1997 - -------------------------------------------------------------------------------- Assets Cash with Banks $ 628 $ 323 Deposits with Banking Subsidiaries 5,294 1,811 Securities Purchased Under Resale Agreements 2,498 1,915 Short-Term Advances to Subsidiaries 5,460 3,868 Long-Term Advances to Subsidiaries 5,085 5,242 Investment (at Equity) in Subsidiaries 28,513 25,774 Other Assets 919 791 - -------------------------------------------------------------------------------- Total Assets $48,397 $39,724 - -------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Other Borrowed Funds, primarily Commercial Paper $ 7,904 $ 4,812 Other Liabilities 769 715 Long-Term Debt(a) 15,886 12,455 - -------------------------------------------------------------------------------- Total Liabilities 24,559 17,982 Stockholders' Equity 23,838 21,742 - -------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $48,397 $39,724 - --------------------------------------------------------------------------------
(a) Includes long-term debt, net of discount, with subsidiaries of $2,395 million and $1,934 million at December 31, 1998 and 1997, respectively. At December 31, 1998, aggregate principal amount of all debt that matures in the years 1999 through 2003 were $2,023 million, $3,288 million, $1,330 million, $1,083 million and $1,057 million, respectively. PARENT COMPANY - STATEMENT OF INCOME
Year Ended December 31, (in millions) 1998 1997 1996 - -------------------------------------------------------------------------------- Income Dividends from Subsidiaries $2,283 $2,401 $2,000(a) Interest from Subsidiaries 889 797 815 All Other Income 7 21 13 - -------------------------------------------------------------------------------- Total Income 3,179 3,219 2,828 - -------------------------------------------------------------------------------- Expense Interest on: Other Borrowed Funds, primarily Commercial Paper 278 247 293 Long-Term Debt 945 849 742 All Other Expense 45 49 97 - -------------------------------------------------------------------------------- Total Expense 1,268 1,145 1,132 - -------------------------------------------------------------------------------- Income Before Income Tax Benefit and Equity in Undistributed Net Income of Subsidiaries 1,911 2,074 1,696 Income Tax Benefit 131 120 117 Equity in Undistributed Net Income of Subsidiaries 1,740 1,514 648 - -------------------------------------------------------------------------------- Net Income $3,782 $3,708 $2,461 - --------------------------------------------------------------------------------
(a) Includes a noncash dividend of $657 million. PARENT COMPANY - STATEMENT OF CASH FLOWS
Year Ended December 31, (in millions) 1998 1997 1996 - --------------------------------------------------------------------------------------------------- Operating Activities Net Income $ 3,782 $ 3,708 $ 2,461 Less--Net Income of Subsidiaries 4,023 3,915 2,648 ------- ------- ------- Parent Company Net Loss (241) (207) (187) Add--Dividends from Subsidiaries 2,283 2,401 1,343 Other, Net 29 (72) 140 - --------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 2,071 2,122 1,296 - --------------------------------------------------------------------------------------------------- Investing Activities Net Change In: Deposits with Banking Subsidiaries (3,483) 2,325 2,084 Advances to Subsidiaries (1,435) (1,944) (31) Investment (at Equity) in Subsidiaries (723) 724 8 Securities Purchased Under Resale Agreements (583) (437) (963) Proceeds from the Maturity/Sale of Available-for-Sale Securities -- 35 150 Other, Net (3) (92) (34) - --------------------------------------------------------------------------------------------------- Net Cash Provided (Used) by Investing Activities (6,227) 611 1,214 - --------------------------------------------------------------------------------------------------- Financing Activities Net Change in Other Borrowed Funds 3,092 37 (1,630) Net Proceeds from the Issuance of Long-Term Debt 3,418 1,281 513 Proceeds from the Issuance of Stock 1,232 967 1,082 Redemption of Preferred Stock (912) (910) -- Treasury Stock Purchased (1,091) (2,585) (1,611) Cash Dividends Paid (1,278) (1,212) (1,188) - --------------------------------------------------------------------------------------------------- Net Cash Provided (Used) by Financing Activities 4,461 (2,422) (2,834) - --------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash with Banks 305 311 (324) Cash with Banks at the Beginning of the Year 323 12 336 - --------------------------------------------------------------------------------------------------- Cash with Banks at the End of the Year $ 628 $ 323 $ 12 - --------------------------------------------------------------------------------------------------- Cash Interest Paid $ 1,242 $ 1,118 $ 1,041 Taxes Paid $ 1,072 $ 709 $ 1,297 - ---------------------------------------------------------------------------------------------------
73 73 Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 26 - COMMITMENTS AND CONTINGENCIES - -------------------------------------------------------------------------------- At December 31, 1998, Chase and its subsidiaries were obligated under a number of noncancelable operating leases for premises and equipment used primarily for banking purposes. Certain leases contain rent escalation clauses for real estate taxes and other operating expenses and renewal option clauses calling for increased rents. No lease agreement imposes any restrictions on Chase's ability to pay dividends, engage in debt or equity financing transactions, or enter into further lease agreements. Future minimum rental payments required under operating leases with initial and remaining noncancelable lease terms in excess of one year as of December 31, 1998 were as follows:
Year Ended December 31, (in millions) - -------------------------------------------------------------------------------- 1999 $ 400 2000 335 2001 279 2002 230 2003 187 After 810 - -------------------------------------------------------------------------------- Total Minimum Payments Required $ 2,241 - -------------------------------------------------------------------------------- Less: Sublease Rentals Under Noncancelable Subleases $ (184) - -------------------------------------------------------------------------------- Net Minimum Payment Required $ 2,057 - --------------------------------------------------------------------------------
Total rental expense was as follows:
- -------------------------------------------------------------------------------- Year Ended December 31, (in millions) 1998 1997 1996 - -------------------------------------------------------------------------------- Gross Rentals $ 511 $ 498 $ 526 Sublease Rentals (164) (170) (177) - -------------------------------------------------------------------------------- Net Rent Expense $ 347 $ 328 $ 349 - --------------------------------------------------------------------------------
At December 31, 1998, assets amounting to $46 billion were pledged to secure public deposits and for other purposes. The significant components of the pledged assets at December 31, 1998 were as follows: $27 billion were securities, $16 billion were loans, and the remaining $3 billion were primarily trading assets. Chase and its subsidiaries are defendants in a number of legal proceedings. After reviewing with counsel all such actions and proceedings pending against or involving Chase and its subsidiaries, management does not expect the aggregate liability or loss, if any, resulting therefrom to have a material adverse effect on the consolidated financial condition of Chase. Chase may guarantee the obligations of its subsidiaries. These guarantees rank on a parity with all other unsecured and unsubordinated indebtedness of Chase. See Note Six for a discussion of Chase's guarantees of long-term debt issues for its subsidiaries. SUPPLEMENTARY DATA-QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1998 1997 --------------------------------------- --------------------------------------- (in millions, except per share data) 4th 3rd 2nd 1st 4th 3rd 2nd 1st - ---------------------------------------------------------------------------------------------------------------------------- As Reported Basis Revenue $5,060 $4,218 $4,755 $4,623 $4,090 $4,415 $4,153 $4,150 Noninterest Expense (excluding Restructuring Costs) 2,873 2,647 2,714 2,620 2,476 2,596 2,413 2,417 Restructuring Costs -- -- 8 521 20 71 71 30 Provision for Loan Losses 411 272 328 332 205 190 189 220 Net Income $1,146 $ 837 $1,074 $ 725 $ 874 $ 982 $ 925 $ 927 Net Income Per Common Share: Basic $ 1.34 $ 0.96 $ 1.24 $ 0.82 $ 1.00 $ 1.11 $ 1.03 $ 1.01 Diluted 1.31 0.94 1.20 0.80 0.97 1.08 1.00 0.99 - ---------------------------------------------------------------------------------------------------------------------------- Operating Basis(a) Operating Revenue $5,350 $4,508 $5,051 $4,915 $4,295 $4,664 $4,420 $4,320 Operating Noninterest Expense 2,870 2,614 2,712 2,616 2,473 2,505 2,413 2,364 Credit Costs(b) 704 749 626 628 471 445 456 437 Operating Earnings $1,146 $ 738 $1,079 $1,053 $ 850 $1,081 $ 969 $ 949 Operating Earnings Per Common Share: Basic $ 1.34 $ 0.84 $ 1.24 $ 1.21 $ 0.97 $ 1.23 $ 1.08 $ 1.04 Diluted 1.31 0.82 1.21 1.17 0.94 1.19 1.06 1.01 - ---------------------------------------------------------------------------------------------------------------------------- Share Price: (c) High $72.56 $77.56 $76.50 $69.56 $63.28 $60.25 $52.19 $55.25 Low 35.56 40.06 64.19 49.28 51.25 46.81 42.31 42.81 Close 71.00 43.13 75.50 67.44 54.75 59.00 48.53 46.94 - ----------------------------------------------------------------------------------------------------------------------------
(a) Excludes the impact of credit card securitizations, restructuring costs and special items. For a listing of special items, see Glossary of Terms on page 76. (b) Includes provision for loan losses, provision for risk management instrument credit losses, foreclosed property expense and credit costs related to the securitized credit card portfolio. (c) Chase's common stock is listed and traded on the New York Stock Exchange and the London Stock Exchange Limited. The high, low and closing prices of Chase's common stock are from the New York Stock Exchange Composite Transaction Tape. Share-related data for all prior periods have been restated to reflect a two-for-one common stock split, effective as of close of business May 20, 1998. 74 74 Supplementary Data SELECTED FINANCIAL DATA (UNAUDITED)
(in millions, except per share and ratio data) - ------------------------------------------------------------------------------------------------------------------------- As of or for the year ended December 31, 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------- AS REPORTED BASIS Revenue $ 18,656 $ 16,808 $ 15,875 $ 14,960 $ 15,013 Noninterest Expense (excluding Restructuring Costs) 10,854 9,902 9,353 9,375 9,537 Restructuring Costs 529 192 1,814 15 465 Provision for Loan Losses 1,343 804 897 758 1,050 Net Income(a) $ 3,782 $ 3,708 $ 2,461 $ 2,959 $ 2,486 - ------------------------------------------------------------------------------------------------------------------------- Net Income Per Common Share:(b) Basic $ 4.35 $ 4.15 $ 2.57 $ 3.16 $ 2.53 Diluted 4.24 4.01 2.47 3.02 2.49 Cash Dividends Declared 1.44 1.24 1.12 0.97 0.82 Book Value at December 31, 26.90 23.76 21.29 20.90 18.69 Share Price at December 31, 71.00 54.75 44.69 29.38 17.94 - ------------------------------------------------------------------------------------------------------------------------- Performance Ratios Return on Average Assets 1.01% 1.04% .77% .96% .87% Return on Average Common Equity 17.27 18.73 12.48 16.15 13.86 Common Dividend Payout Ratio 33 30 44 29 30 - ------------------------------------------------------------------------------------------------------------------------- Selected Balance Sheet Items Loans $172,754 $168,454 $155,092 $150,207 $142,231 Total Assets 365,875 365,521 336,099 303,989 285,383 Deposits 212,437 193,688 180,921 171,534 166,462 Long-Term Debt 16,187 13,387 12,714 12,825 13,061 Total Stockholders' Equity 23,838 21,742 20,994 20,836 18,873 - ------------------------------------------------------------------------------------------------------------------------- OPERATING BASIS(c) Operating Revenue $ 19,824 $ 17,699 $ 16,451 $ 15,048 $ 14,943 Operating Noninterest Expense 10,812 9,755 9,329 9,450 9,487 Credit Costs(d) 2,707 1,809 1,451 853 1,261 Operating Earnings $ 4,016 $ 3,849 $ 3,516 $ 2,903 $ 2,559 - ------------------------------------------------------------------------------------------------------------------------- Operating Earnings Per Common Share:(b) Basic $ 4.63 $ 4.32 $ 3.77 $ 3.10 $ 2.61 Diluted 4.51 4.17 3.64 2.96 2.57 - ------------------------------------------------------------------------------------------------------------------------- Operating Performance Ratios Return on Average Managed Assets 1.03% 1.04% 1.06% .93% .88% Return on Average Common Equity 18.37 19.48 18.35 15.82 14.32 Common Dividend Payout Ratio 31 29 30 29 29 Efficiency Ratio(e) 54 55 57 63 63 Shareholder Value Added (SVA) $1,406 $1,393 $1,131 $ 659 $ 403 - ------------------------------------------------------------------------------------------------------------------------- Selected Balance Sheet Items Managed Loans $190,787 $185,306 $168,089 $156,758 $144,920 Total Managed Assets 383,908 382,373 349,096 310,540 288,072 - -------------------------------------------------------------------------------------------------------------------------
(a) 1995 includes an accounting change related to the adoption of SFAS 106 for the accounting for other postretirement benefits relating to foreign plans. Excluding the accounting change, net income, basic and diluted net income per common share were $2,970 million, $3.18 and $3.04, respectively. (b) Share-related data for all prior periods have been restated to reflect a two-for-one common stock split, effective as of close of business May 20, 1998. (c) Excludes the impact of credit card securitizations, restructuring costs and special items. For a listing of special items, see Glossary of Terms on page 76. (d) Includes provision for loan losses, provision for risk management instrument credit losses, foreclosed property expense and credit costs related to the securitized credit card portfolio. (e) Excludes costs associated with the REIT. 75 75 Glossary of Terms The page numbers included after each definition below represent the pages in the MD&A and Notes to Consolidated Financial Statements where the term is primarily used. ACH: "Automated Clearing House," a firm set up and used by member financial institutions to combine, sort and distribute payment orders. (Page 23) AICPA: "American Institute of Certified Public Accountants." (Page 51) Asset/Liability Management ("ALM"): The management of the sensitivity of Chase's income to changes in market interest rates. (Pages 38 and 49) CAGR: "Compound Annual Growth Rate." (Pages 18, 24 and 25) Cash Operating Earnings: Operating earnings excluding the impact of amortization of goodwill and certain intangibles. (Page 19) CHIPS: "Clearing House Interbank Payments System", a money transfer system that enables banks to make transfers through a central clearinghouse mechanism. (Page 23) Credit Risk: The risk of loss due to the failure of a borrower or counterparty to fulfill its contractual obligations. (Page 29) Efficiency Ratio: Noninterest expense as a percentage of the total of net interest income and noninterest revenue (excluding restructuring costs, foreclosed property expense, provision for risk management instrument credit losses, special items and costs associated with the REIT). (Pages 18, 27 and 75) FASB: Financial Accounting Standards Board. (Page 43) Federal Deposit Insurance Corporation Improvement Act: Under the act, each Federal banking regulator was required to revise its risk-based capital standards to ensure that those standards took adequate account of interest rate risk, concentration of credit risk and the risk of nontraditional activities. (Page 64) FedWire: A computerized money transfer system linking Federal Reserve System banks, branches and member banks. (Page 23) Managed Credit Card Receivables or Managed Basis: Consistent with industry practice, Chase uses this terminology to define its credit card receivables on the balance sheet plus securitized credit card receivables. (Pages 19 and 32) Market Risk: The risk of loss resulting from an adverse change in the value of financial instruments caused by a change in market prices or rates. (Page 36) Net Yield on Interest-Earning Assets: The average rate for interest-earning assets less the average rate paid for all sources of funds. (Page 26) Operating Basis or Operating Earnings: Reported results excluding the impact of credit card securitizations, restructuring costs and special items. (Pages 18, 19 and 24) Operating Risk: Risk of loss due to fraud by employees or outsiders, unauthorized transactions by employees, and errors relating to computer and telecommunications systems. (Page 41) REIT: "Real Estate Investment Trust." (Pages 27 and 75) SFAS: Statement of Financial Accounting Standards. SFAS 106: "Employers' Accounting for Postretirement Benefits Other Than Pensions." (Page 75) SFAS 107: "Disclosures about Fair Value of Financial Instruments." (Page 68) SFAS 109: "Accounting for Income Taxes." (Page 60) SFAS 114: "Accounting by Creditors for Impairment of a Loan." (Page 55) SFAS 115: "Accounting for Certain Investments in Debt and Equity Securities." (Page 55) SFAS 123: "Accounting for Stock-Based Compensation." (Page 63) SFAS 125: "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." (Page 50) SFAS 127: "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." (Page 50) SFAS 130: "Reporting Comprehensive Income." (Page 59) SFAS 131: "Disclosure about Segments of an Enterprise and Related Information." (Page 70) SFAS 133: "Accounting for Derivative Instruments and Hedging Activities." (Page 43) Shareholder Value Added ("SVA"): Represents operating earnings excluding the impact of amortization of goodwill and certain intangibles (i.e., cash operating earnings), minus preferred dividends and an explicit charge for capital. (Pages 18 and 19) SOP 98-1: Statement of Position for "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." (Page 51) Special Items: In 1998, included interest income from prior years' tax refunds and costs incurred for accelerated vesting of stock-based incentive awards. In 1997, included gains on the sales of Chase's remaining interest in CIT and a partially-owned foreign investment, as well as costs incurred for accelerated vesting of stock-based incentive awards. 1996 included aggregate tax benefits and refunds, the loss on the sale of a building in Japan and costs incurred in combining Chase's foreign retirement plans. 1995 included the impact of an accounting change, gains on the sales of Chase's investment in Far East Bank and Trust Company, Chemical New Jersey Holdings, Inc. and the loss on the sale of half of Chase's 40% interest in CIT. 1994 included gains on sales of assets held for accelerated disposition and emerging markets past-due interest bonds. (Pages 19, 24 and 75) Stress Testing: A risk management tool used to measure market risk in an extreme market environment. (Page 36) Value at Risk ("VAR"): The potential overnight loss from adverse market movements. (Page 36) Year 2000: The problem of many existing computer programs not being able to recognize properly a year beginning with "20" instead of "19", as these programs only use the last two digits to refer to a year. (Page 41) 76 76 ================================================================================ DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIALS A summary of Chase's consolidated average balances, interest rates and interest differentials on a taxable-equivalent basis for the years 1996 through 1998 is provided on pages 78 and 79. Income computed on a taxable-equivalent basis is the income reported in the Consolidated Statement of Income adjusted to make income and earning yields on assets exempt from income taxes (primarily Federal taxes) comparable to other taxable income. The incremental tax rate used for calculating the taxable equivalent adjustment was approximately 42% in each of the years 1996 through 1998. A substantial portion of Chase's securities are taxable. Within the Consolidated Average Balance Sheet, Interest and Rates summary, the principal amounts of nonaccrual and renegotiated loans have been included in the average loan balances used to determine the average interest rate earned on loans. For additional information on nonaccrual loans, including interest accrued, see Note One on page 49. A summary of interest rates and interest differentials segregated between domestic and foreign operations for the years 1996 through 1998 is presented on pages 80 and 81. The segregation between domestic and foreign components is based on the location of the office recording the transaction. A portion of Chase's international operations are funded by domestic sources (intra-company funding). Generally, the source of such domestic funds is the Parent Company which, in order to optimize Chase's overall liquidity, deposits its excess short-term funds with Chase Bank's Nassau Branch to hold until such funds are needed. Intra-company funding is very short-term in nature and Chase believes such funds are not subject to cross-border risk. Domestic net interest income was $6,922 million in 1998, a decrease of $30 million from the prior year. The decrease in 1998 was primarily attributable to ongoing credit card securitizations (which removed higher yielding credit card loans from the balance sheet), and the impact of narrower spreads, partially offset by interest on prior years' tax refunds. For further discussion, see the section entitled "Net Interest Income" in the MD&A on page 25. Net interest income from foreign operations was $1,668 million for 1998, compared with $1,327 million in 1997. The increase reflected higher net yields on interest-earning assets. The table on page 82 presents an analysis of the effect on net interest income of volume and rate changes for the periods 1998 versus 1997 and 1997 versus 1996. In this analysis, the change due to the volume/rate variance has been allocated to volume. 77 77 Consolidated Average Balance Sheet, Interest and Rates
1998 Year Ended December 31, ------------------------------------- (Taxable-Equivalent Interest and Rates; in millions, except rates) Balance Interest Rate - --------------------------------------------------------------------------------------------------------------------- Assets Deposits with Banks $ 5,934 $ 642 10.82% Federal Funds Sold and Securities Purchased Under Resale Agreements 32,955 2,211 6.71 Trading Assets-Debt and Equity Instruments 30,021 2,431 8.10 Securities: Available-for-Sale 56,137 3,486 6.21(a) Held-to-Maturity 2,347 149 6.35 Loans 169,386 13,394(b) 7.91 - --------------------------------------------------------------------------------------------------------------------- Total Interest-Earning Assets 296,780 22,313 7.52% - --------------------------------------------------------------------------------------------------------------------- Allowance for Loan Losses (3,544) Cash and Due from Banks 14,305 Trading Assets-Risk Management Instruments, Net of Allowance for Credit Losses 36,127 All Other Assets 29,543 - --------------------------------------------------------------------------------------------------------------------- Total Assets $ 373,211 - --------------------------------------------------------------------------------------------------------------------- Liabilities Interest-Bearing Deposits $ 153,545 6,840(c) 4.45%(c) Federal Funds Purchased and Securities Sold Under Repurchase Agreements 61,237 3,403 5.56 Commercial Paper 5,046 259 5.13 Other Borrowings(d) 15,607 1,950 12.49 Long-Term Debt 16,478 1,271 7.71 - --------------------------------------------------------------------------------------------------------------------- Total Interest-Bearing Liabilities 251,913 13,723 5.45 - --------------------------------------------------------------------------------------------------------------------- Noninterest Bearing Deposits 46,169 Trading Liabilities-Risk Management Instruments 37,200 All Other Liabilities, Including the Allowance for Credit Losses 14,771 - --------------------------------------------------------------------------------------------------------------------- Total Liabilities 350,053 - --------------------------------------------------------------------------------------------------------------------- Preferred Stock of Subsidiary 550 Stockholders' Equity Preferred Stock 1,280 Common Stockholders' Equity 21,328 - --------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 22,608(e) - --------------------------------------------------------------------------------------------------------------------- Total Liabilities, Preferred Stock of Subsidiary and Stockholders' Equity $ 373,211 - --------------------------------------------------------------------------------------------------------------------- Interest Rate Spread 2.07% - --------------------------------------------------------------------------------------------------------------------- Net Interest Income and Net Yield on Interest-Earning Assets $ 8,590(c) 2.89%(c) - ---------------------------------------------------------------------------------------------------------------------
(a) The annualized rate for available-for-sale securities based on amortized cost was 6.26% in 1998, 6.64% in 1997 and 6.48% in 1996. (b) Fees and commissions on loans included in loan interest amounted to $141 million in 1998, $149 million in 1997 and $177 million in 1996. (c) Includes $191 million of interest income resulting from the refund of prior years' taxes. Excluding this amount, the net yield on interest-earning assets would be 2.83%. (d) Includes securities sold but not yet purchased and structured notes. (e) The ratio of average stockholders' equity to average assets was 6.1% for 1998, 5.9% for 1997, and 6.4% for 1996. The return on average stockholders' equity was 16.7% for 1998, 17.6% for 1997, and 11.9% for 1996. 78 78
1997 1996 ------------------------------------- ------------------------------------- Balance Interest Rate Balance Interest Rate - --------------------------------------------------------------------------------------- $ 5,105 $ 525 10.28% $ 6,479 $ 537 8.29% 39,836 2,607 6.54 31,165 2,135 6.85 35,660 2,771 7.77 29,595 1,897 6.41 42,610 2,817 6.61(a) 39,538 2,580 6.53(a) 3,432 228 6.65 4,174 302 7.24 159,932 12,929(b) 8.08 149,996 12,482(b) 8.32 - --------------------------------------------------------------------------------------- 286,575 21,877 7.63% 260,947 19,933 7.64% - --------------------------------------------------------------------------------------- (3,435) (3,684) 13,678 12,070 34,426 26,684 25,102 25,223 - --------------------------------------------------------------------------------------- $356,346 $321,240 - --------------------------------------------------------------------------------------- $137,095 6,561 4.79% $130,022 6,038 4.64% 66,789 3,643 5.45 54,655 2,883 5.28 4,283 228 5.33 5,199 274 5.27 20,663 2,032 9.83 16,695 1,473 8.82 14,315 1,134 7.92 12,811 901 7.03 - --------------------------------------------------------------------------------------- 243,145 13,598 5.59 219,382 11,569 5.27 - --------------------------------------------------------------------------------------- 42,067 39,562 35,309 27,421 14,235 14,102 - --------------------------------------------------------------------------------------- 334,756 300,467 - --------------------------------------------------------------------------------------- 550 158 2,212 2,650 18,828 17,965 - --------------------------------------------------------------------------------------- 21,040(e) 20,615(e) $356,346 $321,240 - --------------------------------------------------------------------------------------- 2.04% 2.37% - --------------------------------------------------------------------------------------- $ 8,279 2.89% $ 8,364 3.21% - ---------------------------------------------------------------------------------------
79 79 Interest Rates and Interest Differential Analysis of Net Interest Income - Domestic and Foreign
1998 ------------------------------------ Year Ended December 31, Average Average (Taxable-Equivalent Interest and Rates; in millions, except rates) Balance Interest Rate - ------------------------------------------------------------------------------------------------------ Interest-Earning Assets: Deposits with Banks, primarily Foreign $ 5,934 $ 642 10.82% Federal Funds Sold and Securities Purchased Under Resale Agreements: Domestic 15,304 947 6.19 Foreign 17,651 1,264 7.16 Securities and Trading Assets: Domestic 67,516 4,513 6.68 Foreign 20,989 1,553 7.40 Loans: Domestic 129,098 9,944 7.70 Foreign 40,288 3,450 8.56 - ------------------------------------------------------------------------------------------------------ Total Interest-Earning Assets 296,780 22,313 7.52 - ------------------------------------------------------------------------------------------------------ Interest-Bearing Liabilities: Interest-Bearing Deposits: Domestic 77,189 2,835(a) 3.67(a) Foreign 76,356 4,005 5.25 Federal Funds Purchased and Securities Sold Under Repurchase Agreements: Domestic 46,679 2,525 5.41 Foreign 14,558 878 6.03 Other Borrowed Funds: Domestic 13,971 1,242 8.88 Foreign 6,682 967 14.48 Long-Term Debt, primarily Domestic 16,478 1,271 7.71 Intra-Company Funding: Domestic 16,513 811 -- Foreign (16,513) (811) -- -------- ------- Total Interest-Bearing Liabilities 251,913 13,723 5.45 Noninterest-Bearing Liabilities: Domestic 41,563 Foreign 3,304 - ------------------------------------------------------------------------------------------------------ Total Investable Funds $296,780 $13,723 4.63% - ------------------------------------------------------------------------------------------------------ Net Interest Income and Net Yield $ 8,590(a) 2.89%(a) Domestic 6,922(a) 3.27%(a) Foreign 1,668 1.97% - ------------------------------------------------------------------------------------------------------ Percentage of Total Assets and Liabilities Attributable to Foreign Operations: Assets 35.0% Liabilities 34.4% - ------------------------------------------------------------------------------------------------------
(a) See note (c) on page 78. Excluding the tax refund, the domestic net yield on interest-earning assets would be 3.18%. 80 80
1997 1996 ------------------------------------- ------------------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate - --------------------------------------------------------------------------------------- $ 5,105 $ 525 10.28% $ 6,479 $ 537 8.29% 22,130 1,330 6.01 21,526 1,137 5.28 17,706 1,277 7.21 9,639 998 10.35 55,921 3,771 6.74 51,896 3,315 6.39 25,781 2,045 7.93 21,411 1,464 6.84 120,279 10,242 8.52 113,554 9,693 8.54 39,653 2,687 6.78 36,442 2,789 7.65 - --------------------------------------------------------------------------------------- 286,575 21,877 7.63 260,947 19,933 7.64 - --------------------------------------------------------------------------------------- 68,383 2,894 4.23 64,153 2,486 3.88 68,712 3,667 5.34 65,869 3,552 5.39 50,981 2,782 5.46 45,607 2,209 4.84 15,808 861 5.44 9,048 674 7.45 15,372 1,294 8.43 15,209 1,118 7.35 9,574 966 10.07 6,685 629 9.41 14,315 1,134 7.92 12,811 901 7.03 9,946 472 -- 13,003 654 -- (9,946) (472) -- (13,003) (654) -- -------- ------- -------- ------- 243,145 13,598 5.59 219,382 11,569 5.27 39,985 36,867 3,445 4,698 - --------------------------------------------------------------------------------------- $286,575 $13,598 4.74% $260,947 $11,569 4.43% - --------------------------------------------------------------------------------------- $ 8,279 2.89% $ 8,364 3.21% 6,952 3.50% 6,830 3.65% 1,327 1.51% 1,534 2.08% - --------------------------------------------------------------------------------------- 34.3% 34.0% 33.8% 33.7% - ---------------------------------------------------------------------------------------
81 81 Change in Net Interest Income, Volume and Rate Analysis
1998 VERSUS 1997 1997 VERSUS 1996 -------------------------------------------- --------------------------------------------- Increase (decrease) due to change in: Increase (decrease) due to change in: (On a Taxable-Equivalent Basis; ------------------------------------- Net ------------------------------------- Net in millions) Volume Rate Change Volume Rate Change - -------------------------------------------------------------------------------------------------------------------------------- Interest-Earning Assets Deposits with Banks, primarily Foreign $ 89 $ 28 $ 117 $ (141) $ 129 $ (12) Federal Funds Sold and Securities Purchased Under Resale Agreements: Domestic (423) 40 (383) 36 157 193 Foreign (4) (9) (13) 582 (303) 279 Securities and Trading Assets: Domestic 776 (34) 742 274 182 456 Foreign (355) (137) (492) 348 233 581 Loans: Domestic 688 (986) (298) 572 (23) 549 Foreign 57 706 763 215 (317) (102) - -------------------------------------------------------------------------------------------------------------------------------- Change in Interest Income 828 (392) 436 1,886 58 1,944 - -------------------------------------------------------------------------------------------------------------------------------- Interest-Bearing Liabilities Interest-Bearing Deposits: Domestic 323 (382) (59) 179 229 408 Foreign 401 (63) 338 152 (37) 115 Federal Funds Purchased and Securities Sold Under Repurchase Agreements: Domestic (232) (25) (257) 290 283 573 Foreign (76) 93 17 369 (182) 187 Other Borrowed Funds: Domestic (121) 69 (52) 12 164 176 Foreign (421) 422 1 293 44 337 Long-Term Debt, primarily Domestic 167 (30) 137 119 114 233 Intra Company Funding: Domestic 323 16 339 (146) (36) (182) Foreign (323) (16) (339) 146 36 182 - -------------------------------------------------------------------------------------------------------------------------------- Change in Interest Expense 41 84 125 1,414 615 2,029 - -------------------------------------------------------------------------------------------------------------------------------- Change in Net Interest Income $ 787 $ (476) $ 311 $ 472 $ (557) $ (85) - --------------------------------------------------------------------------------------------------------------------------------
82 82 ================================================================================ SECURITIES PORTFOLIO The amortized cost, estimated fair value and average yield (including the impact of related derivatives) of Chase's securities by contractual maturity range and type of security are presented in the table which follows:
Maturity Schedule of Available-for-Sale Securities December 31, 1998 Due in 1 Due After 1 Due After 5 Due After (in millions, rates on a taxable-equivalent basis) Year or less Through 5 Years Through 10 Years 10 Years(a) Total - ---------------------------------------------------------------------------------------------------------------------------- U.S. Government and Federal Agency/Corporation Obligations: Amortized Cost $ 620 $3,436 $4,802 $43,162 $52,020 Fair Value 648 3,513 4,968 43,241 52,370 Average Yield(b) 4.96% 5.13% 5.38% 6.28% 6.10% - ---------------------------------------------------------------------------------------------------------------------------- Obligations of State and Political Subdivisions: Amortized Cost $ 191 $ 8 $ 5 $ 22 $ 226 Fair Value 191 8 5 23 227 Average Yield(b) 4.08% 5.44% 5.54% 5.18% 4.27% - ---------------------------------------------------------------------------------------------------------------------------- Other:(c) Amortized Cost $1,978 $6,151 $ 665 $ 1,103 $ 9,897 Fair Value 1,999 6,190 671 1,346 10,206 Average Yield(b) 4.14% 6.69% 6.44% 3.64% 5.83% - ---------------------------------------------------------------------------------------------------------------------------- Total Available-for-Sale Securities:(d) Amortized Cost $2,789 $9,595 $5,472 $44,287 $62,143 Fair Value 2,838 9,711 5,644 44,610 62,803 Average Yield(b) 4.32% 6.13% 5.51% 6.21% 6.05% - ---------------------------------------------------------------------------------------------------------------------------- Maturity Schedule of Held-to-Maturity Securities December 31, 1998 Due in 1 Due After 1 Due After 5 Due After (in millions, rates on a taxable-equivalent basis) Year or less Through 5 Years Through 10 Years 10 Years(a) Total - ---------------------------------------------------------------------------------------------------------------------------- U.S. Government and Federal Agency/Corporation Obligations: Amortized Cost $ 88 $ 169 $ 135 $ 1,291 $ 1,683 Fair Value 88 171 135 1,305 1,699 Average Yield(b) 5.67% 7.77% 6.70% 6.47% 6.57% - ---------------------------------------------------------------------------------------------------------------------------- Other:(c) Amortized Cost $ -- $ -- $ -- $ 4 $ 4 Fair Value -- -- -- 4 4 Average Yield(b) --% --% --% 6.50% 6.50% - ---------------------------------------------------------------------------------------------------------------------------- Total Held-to-Maturity Securities:(d) Amortized Cost $ 88 $ 169 $ 135 $ 1,295 $ 1,687 Fair Value 88 171 135 1,309 1,703 Average Yield(b) 5.67% 7.77% 6.70% 6.47% 6.57% - ----------------------------------------------------------------------------------------------------------------------------
(a) Securities with no stated maturity are included with securities with a contractual maturity of ten years or more. Substantially all of Chase's mortgaged-backed securities ("MBSs") and collateralized mortgage obligations ("CMOs") are due in ten years or more based on contractual maturity. The estimated duration, which reflects anticipated future prepayments based on a consensus of dealers in the market, is approximately 3 years for MBSs, and less than 1 year for CMOs. (b) The average yield is based on amortized cost balances at the end of the year. Yields are derived by dividing interest income, adjusted for the effect of related derivatives on available-for-sale securities and the amortization of premiums and accretion of discounts, by total amortized cost. Taxable-equivalent yields are used, where applicable. (c) Includes investments in debt securities issued by foreign governments, corporate debt securities, CMOs of private issuers, other debt and equity securities. (d) For the amortized cost of the above categories of securities at December 31, 1997, see Note Three on page 54. At December 31, 1996, the amortized cost of U.S. Treasury and Federal Agencies, Obligations of State and Political Subdivisions, and Other available-for-sale securities was $35,504 million, $325 million, and $9,101 million, respectively. At December 31, 1996, the amortized cost of U.S. Treasury and Federal Agencies and Other held-to-maturity securities was $3,732 million and $123 million, respectively. For held-to-maturity securities, there were no Obligations of State and Political Subdivisions at December 31, 1996. Of the securities held in Chase's securities portfolios, securities issued by the Federal Republic of Germany exceeded 10% of Chase's total stockholders' equity at December 31, 1998, and had at that date a fair value of $3,037 million and an amortized cost of $2,986 million. The U.S. Government and certain of its agencies were the only other issuers whose securities exceeded 10% of Chase's total stockholders' equity at December 31, 1998. For a further discussion of Chase's securities portfolios, see Note Three on page 54. 83 83 ================================================================================ LOAN PORTFOLIO The table below sets forth the amount of loans outstanding by type:
December 31, (in millions) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------- Domestic Loans: Commercial and Industrial $ 43,123 $ 37,931 $ 34,742 $ 32,276 $ 30,492 Financial Institutions 6,583 6,652 5,540 5,714 5,237 Commercial Real Estate - Commercial Mortgage 3,029 4,084 5,040 5,512 6,123 Commercial Real Estate - Construction 955 946 894 1,148 1,580 Consumer 80,891 76,097 69,084 69,431 63,632 - ------------------------------------------------------------------------------------------------- Total Domestic Loans 134,581 125,710 115,300 114,081 107,064 - ------------------------------------------------------------------------------------------------- Foreign Loans: Commercial and Industrial 25,031 28,341 23,909 21,650 19,153 Foreign Governments and Official Institutions 4,798 3,438 6,140 6,043 7,794 Financial Institutions 4,537 6,989 6,457 5,398 5,555 Consumer 3,807 3,976 3,286 3,035 2,665 - ------------------------------------------------------------------------------------------------- Total Foreign Loans 38,173 42,744 39,792 36,126 35,167 - ------------------------------------------------------------------------------------------------- Total Loans(a) $172,754 $168,454 $155,092 $150,207 $142,231 - -------------------------------------------------------------------------------------------------
(a) Loans are presented net of unearned income of $1,667 million, $1,612 million, $1,373 million, $1,073 million and $895 million at December 31, 1998, 1997, 1996, 1995 and 1994, respectively. For a discussion of Chase's loan outstandings, see "Credit-Related Portfolio" on page 31. Maturities and Sensitivity to Changes in Interest Rates The following table shows commercial loan maturity and floating/fixed distribution based upon the stated terms of the loan agreements at December 31, 1998. The table below does not include the impact of derivative instruments.
Within 1-5 After 5 December 31, 1998 (in millions) 1 Year(a) Years Years Total - -------------------------------------------------------------------------------- Domestic: Commercial and Industrial $13,693 $24,053 $5,377 $43,123 Financial Institutions 5,344 1,173 66 6,583 Commercial Real Estate 772 2,740 472 3,984 Foreign(b) 29,419 2,957 1,990 34,366 - -------------------------------------------------------------------------------- Total Commercial Loans $49,228 $30,923 $7,905 $88,056 - -------------------------------------------------------------------------------- Loans at Fixed Interest Rates $ 1,644 $ 900 Loans at Variable Interest Rates 29,279 7,005 - -------------------------------------------------------------------------------- Total Commercial Loans $30,923 $7,905 - --------------------------------------------------------------------------------
(a) Includes demand loans, overdrafts and loans having no stated schedule of repayments and no stated maturity. (b) Substantially all foreign loans that meet the accounting definition of a security pursuant to SFAS 115 mature in over 5 years. 84 84 Cross-Border Outstandings Cross-border disclosure is based upon the Federal Financial Institutions Examination Council ("FFIEC") guidelines governing the determination of cross-border risk. The following table lists all countries in which Chase's cross-border outstandings exceed .75% of consolidated assets as of any of the dates specified. This includes certain exposures that are not required under the disclosure requirements of the SEC. The most significant differences between the FFIEC and SEC methodologies relate to the treatment of local country exposure and foreign exchange and derivatives. For a further discussion of Chase's cross-border exposure, see pages 33-34. Cross-Border Outstandings Exceeding .75 Percent of Total Assets
Net Local Total Total Country Cross-Border Cross-Border (in millions) At December 31, Public Banks Other Assets Outstandings(a) Commitments(b) Exposure - --------------------------------------------------------------------------------------------------------------------------- Germany 1998 $4,913 $7,180 $1,084 $3,615 $16,792 $1,627 $ 18,419 1997 4,459 3,609 438 1,210 9,716 1,203 10,919 1996 3,777 2,857 561 1,116 8,311 2,040 10,351 - --------------------------------------------------------------------------------------------------------------------------- Italy 1998 5,933 1,403 316 377 8,029 608 8,637 1997 1,304 1,737 387 -- 3,428 706 4,134 1996 3,582 7,080 215 536 11,413 963 12,376 - --------------------------------------------------------------------------------------------------------------------------- United Kingdom 1998 1,401 1,414 2,849 -- 5,664 1,855 7,519 1997 1,180 1,942 6,094 1,548 10,764 1,460 12,224 1996 1,095 3,007 5,872 -- 9,974 2,767 12,741 - --------------------------------------------------------------------------------------------------------------------------- Japan 1998 3,298 997 542 74 4,911 1,993 6,904 1997 935 4,524 1,052 -- 6,511 2,303 8,814 1996 1,312 5,771 2,494 1,402 10,979 2,502 13,481 - --------------------------------------------------------------------------------------------------------------------------- Canada 1998 872 988 737 534 3,131 1,550 4,681 1997 1,446 1,106 736 214 3,502 937 4,439 1996 1,501 691 1,040 163 3,395 1,328 4,723 - --------------------------------------------------------------------------------------------------------------------------- France 1998 830 2,101 428 179 3,538 1,166 4,704 1997 605 1,871 345 38 2,859 1,240 4,099 1996 284 2,314 564 21 3,183 1,839 5,022 - --------------------------------------------------------------------------------------------------------------------------- Brazil 1998 914 363 1,324 518 3,119 74 3,193 1997 1,766 408 1,536 862 4,572 195 4,767 1996 1,637 322 1,768 2,069 5,796 195 5,991 - --------------------------------------------------------------------------------------------------------------------------- Korea 1998 97 426 857 937 2,317 76 2,393 1997 478 1,787 1,653 1,189 5,107 184 5,291 1996 87 1,423 1,552 554 3,616 421 4,037 - ---------------------------------------------------------------------------------------------------------------------------
(a) Outstandings include loans and accrued interest, interest-bearing deposits with banks, acceptances, other monetary assets, cross-border trading debt and equity instruments, foreign exchange and derivative contracts, and local country assets, net of local country liabilities. (b) Commitments include outstanding letters of credit and undrawn commitments to extend credit. Chase's balances tend to fluctuate greatly and the amount of outstandings at year-end tends to be a function of timing, rather than representing a consistent trend. 85 85 Risk Elements The following table sets forth the nonperforming assets and contractually past-due loans at the dates indicated:
December 31, (in millions) 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------- Domestic Nonperforming Loans: Nonaccruing Loans $ 742 $ 712 $ 848 $1,115 $1,091 Renegotiated Loans -- -- 38 35 37 ------ ------ ------ ------ ------ Total Domestic Nonperforming Loans 742 712 886 1,150 1,128 ------ ------ ------ ------ ------ Foreign Nonperforming Loans: Nonaccruing Loans 698 195 132 339 457 Renegotiated Loans -- 1 3 4 4 ------ ------ ------ ------ ------ Total Foreign Nonperforming Loans 698 196 135 343 461 ------ ------ ------ ------ ------ Total Nonperforming Loans 1,440 908 1,021 1,493 1,589 ------ ------ ------ ------ ------ Derivative and Foreign Exchange Contracts 50 -- -- -- -- Assets Acquired as Loan Satisfactions (primarily Real Estate) 116 110 130 171 537 - --------------------------------------------------------------------------------------------------------- Total Nonperforming Assets $1,606 $1,018 $1,151 $1,664 $2,126 - --------------------------------------------------------------------------------------------------------- Contractually Past-Due Loans(a) Domestic: Consumer $ 422 $ 420 $ 395 $ 528 $ 485 Commercial 43 32 27 92 64 ------ ------ ------ ------ ------ Total Domestic 465 452 422 620 549 Foreign 41 7 12 44 181 - --------------------------------------------------------------------------------------------------------- Total $ 506 $ 459 $ 434 $ 664 $ 730 - ---------------------------------------------------------------------------------------------------------
(a) Accruing loans past-due 90 days or more as to principal and interest, which are not characterized as nonperforming loans. For a discussion of nonaccrual loan and past due loan policies, see Note One on page 49. Renegotiated loans are those for which concessions, such as the reduction of interest rates or the deferral of interest or principal payments, have been granted due to a deterioration in the borrowers' financial condition. Interest on renegotiated loans is accrued at the renegotiated rates. Certain renegotiated loan agreements call for additional interest to be paid on a deferred or contingent basis. Such interest is recognized in income only as collected. Impact of Nonperforming Loans on Interest Income The following table presents the amount of interest income recorded by Chase on its nonperforming loans and the amount of interest income on the carrying value of these loans that would have been recorded if these loans had been current in accordance with their original terms (i.e., interest at original rates). The increase in 1998, when compared with 1997, in total negative impact on interest income reflects a higher level of interest that was not recognized in income due to the increased level of foreign nonperforming loans.
Year Ended December 31, (in millions) 1998 1997 1996 - --------------------------------------------------------------------------------------------------- Domestic: Gross Amount of Interest That Would Have Been Recorded at the Original Rate $ 66 $ 63 $ 81 Interest That Was Recognized in Income (9) (9) (25) ----- ---- ---- Negative Impact-Domestic 57 54 56 ----- ---- ---- Foreign: Gross Amount of Interest That Would Have Been Recorded at the Original Rate 55 17 11 Interest That Was Recognized in Income (4) (2) (7) ----- ---- ---- Negative Impact-Foreign 51 15 4 - --------------------------------------------------------------------------------------------------- Total Negative Impact on Interest Income $ 108 $ 69 $ 60 - ---------------------------------------------------------------------------------------------------
86 86 ================================================================================ SUMMARY OF LOAN LOSS EXPERIENCE For a further discussion, see Note One on page 49 and Note Five on page 56. Allowance for Loan Losses The table below summarizes the changes in the allowance for loan losses during the periods indicated.
Year Ended December 31, (in millions) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------ Balance at Beginning of Year $ 3,624 $ 3,549 $ 3,784 $ 3,894 $ 4,445 Provision for Loan Losses 1,343 804 897 758 1,050 Charge-Offs Domestic: Commercial and Industrial (99) (114) (181) (169) (252) Financial Institutions -- -- -- -- (19) Consumer (1,158) (913) (921) (967) (871) Commercial Real Estate (6) (5) (47) (84) (386) Foreign (528) (64) (38) (58) (442)(a) - ------------------------------------------------------------------------------------------------------------------------ Total Charge-Offs (1,791) (1,096) (1,187) (1,278) (1,970) - ------------------------------------------------------------------------------------------------------------------------ Recoveries Domestic: Commercial and Industrial 165 91 95 173 165 Financial Institutions 2 1 -- 12 7 Consumer 121 106 97 108 106 Commercial Real Estate 20 42 33 53 96 Foreign 65 52 65 92 132 - ------------------------------------------------------------------------------------------------------------------------ Total Recoveries 373 292 290 438 506 - ------------------------------------------------------------------------------------------------------------------------ Net Charge-Offs (1,418) (804) (897) (840) (1,464) Charge Related to Conforming Credit Card Charge-off Policies -- -- (102) -- -- Charge for Assets Transferred to Held-for-Accelerated Disposition -- -- -- -- (148) Transfer to Trading Assets-Risk Management Instruments -- -- (75)(b) -- -- Transfer to Other Liabilities -- (100)(c) (70)(c) -- -- Allowance Related to Purchased (Disposed) Portfolios and Subsidiaries (d) 5 172 13 (31) 4 Foreign Exchange Translation Adjustment (2) 3 (1) 3 7 - ------------------------------------------------------------------------------------------------------------------------ Balance at End of Year $ 3,552 $ 3,624 $ 3,549 $ 3,784 $ 3,894 - ------------------------------------------------------------------------------------------------------------------------
(a) Includes $291 million related to management's final valuation of the emerging markets portfolio. (b) Relates to the transfer to the allowance for credit losses on risk management instruments. (c) Relates to the transfer to the allowance for credit losses on lending-related commitments. (d) Includes approximately $160 million related to the purchase of a credit card portfolio in 1997 and $28 million related to the sale of banking operations in southern and central New Jersey in 1995. Loan Loss Analysis
Year Ended December 31, (in millions, except ratios) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------ Balances Loans-Average $169,386 $159,932 $149,996 $146,528 $136,713 Loans-Year End 172,754 168,454 155,092 150,207 142,231 Net Charge-Offs 1,418 804 999(a) 840 1,612(b) Allowance for Loan Losses:(c) Domestic 2,489 2,767 2,898 3,217 3,240 Foreign 1,063 857 651 567 654 - ------------------------------------------------------------------------------------------------------------ Total Allowance for Loan Losses 3,552 3,624 3,549 3,784 3,894 - ------------------------------------------------------------------------------------------------------------ Nonperforming Loans 1,440 908 1,021 1,493 1,589 Ratios Net Charge-Offs to: Loans-Average .84% .50% .67% .57% 1.18% Allowance for Loan Losses 39.92 22.19 28.15 22.20 41.40 Allowance for Loan Losses to: Loans-Year End 2.06 2.15 2.29 2.52 2.74 Nonperforming Loans 246.67 399.12 347.60 253.45 245.06 - ------------------------------------------------------------------------------------------------------------
(a) Includes a charge of $102 million related to conforming credit card charge-off policies. (b) Includes a charge of $148 million for assets transferred to held-for-accelerated disposition. (c) The allowance for loan losses is a general allowance. For purposes of this table, management has allocated the entire allowance for loan losses between the domestic and foreign portfolios. Prior years' balances have been revised to reflect the current presentation. 87 87 ================================================================================ DEPOSITS The following data provides a summary of Chase's average deposits and average interest rates for the years indicated:
Average Balances Average Interest Rates (in millions, except interest rates) 1998 1997 1996 1998 1997 1996 - --------------------------------------------------------------------------------------------------------- Domestic: Noninterest-Bearing Demand $ 25,041 $ 23,483 $ 27,284 --% --% --% Interest-Bearing Demand 3,300 3,563 3,375 1.51 1.78 2.05 Savings 53,960 50,198 43,986 2.56 2.75 2.89 Time 37,646 29,529 25,349 3.73 4.91 4.52 - --------------------------------------------------------------------------------------------------------- Total Domestic Deposits 119,947 106,773 99,994 2.36 2.71 2.49 - --------------------------------------------------------------------------------------------------------- Foreign: Noninterest-Bearing Demand 3,088 3,363 2,918 -- -- -- Interest-Bearing Demand 31,350 25,480 19,551 4.93 4.44 4.50 Savings 839 824 862 3.76 3.60 3.39 Time 44,490 42,722 46,259 5.46 5.87 5.72 - --------------------------------------------------------------------------------------------------------- Total Foreign Deposits(a) 79,767 72,389 69,590 5.02 5.07 5.10 - --------------------------------------------------------------------------------------------------------- Total Deposits $199,714 $179,162 $169,584 3.42% 3.66% 3.56% - ---------------------------------------------------------------------------------------------------------
(a) The majority of foreign deposits were in denominations of $100,000 or more. The following table presents the maturities for domestic time certificates of deposit in denominations of $100,000 or more at December 31, 1998:
Domestic Time Certificates of Deposit By remaining maturity at December 31, 1998 (in millions) ($100,000 or More) - ------------------------------------------------------------------------------------- Three Months or Less $ 12,414 Over Three Months but within Six Months 3,907 Over Six Months but within Twelve Months 1,744 Over Twelve Months 275 - ------------------------------------------------------------------------------------- Total $ 18,340 - -------------------------------------------------------------------------------------
At December 31, 1998, other domestic time deposits in denominations of $100,000 or more totaled $18,927 million, substantially all of which mature in three months or less. 88 88 ================================================================================ SHORT-TERM AND OTHER BORROWED FUNDS The following data provides a summary of Chase's short-term and other borrowed funds and weighted-average rates on these funds:
(in millions, except rates) 1998 1997 1996 - -------------------------------------------------------------------------------- Federal funds purchased and securities sold under repurchase agreements: Balance at year-end $41,632 $56,126 $53,868 Average daily balance during the year 61,237 66,789 54,655 Maximum month-end balance 70,062 80,633 67,750 Weighted-average rate at December 31 5.91% 5.90% 5.45% Weighted-average rate during the year 5.56% 5.45% 5.28% - -------------------------------------------------------------------------------- Commercial paper: Balance at year-end $ 7,788 $ 4,744 $ 4,500 Average daily balance during the year 5,046 4,283 5,199 Maximum month-end balance 8,217 4,951 5,991 Weighted-average rate at December 31 4.78% 5.64% 5.07% Weighted-average rate during the year 5.13% 5.33% 5.27% - -------------------------------------------------------------------------------- Other Borrowed Funds-Other borrowings:(a) Balance at year-end $ 7,239 $ 6,861 $ 9,231 Average daily balance during the year 6,148 7,566 8,535 Maximum month-end balance 8,175 8,958 12,509 Weighted-average rate at December 31(b) 12.23% 9.38% 9.97% Weighted-average rate during the year(b) 12.49% 9.83% 8.82% - --------------------------------------------------------------------------------
(a) Excludes securities sold but not yet purchased and structured notes. (b) The weighted-average interest rates reflect the impact of local interest rates prevailing in certain Latin American countries with highly inflationary economies. Federal funds purchased represents overnight funds. Securities sold under repurchase agreements generally mature between one day and three months. Commercial paper is generally issued in amounts not less than $100,000 and with maturities of 270 days or less. Other borrowings consist of demand notes, term Federal funds purchased and various other borrowings that generally have maturities of one year or less. At December 31, 1998, Chase had unused lines of credit available for general corporate purposes, including the payment of commercial paper borrowings, amounting to $1.0 billion. 89 89 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf of the undersigned, thereunto duly authorized. THE CHASE MANHATTAN CORPORATION (Registrant) By /s/ WALTER V. SHIPLEY ------------------------------------- (Walter V. Shipley, Chairman and Chief Executive Officer) Date: March 10, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacity and on the date indicated. Chase does not exercise the power of attorney to sign on behalf of any Director. Capacity Date -------- ---- /s/ WALTER V. SHIPLEY Director, Chairman and Chief - --------------------------- Executive Officer (Principal (Walter V. Shipley) Executive Officer) /s/ THOMAS G. LABRECQUE Director, President and Chief - --------------------------- Operating Officer (Thomas G. Labrecque) /s/ WILLIAM B. HARRISON JR. Director and Vice Chairman - --------------------------- of the Board (William B. Harrison Jr.) /s/ HANS W. BECHERER Director - --------------------------- (Hans W. Becherer) /s/ FRANK A. BENNACK JR. Director March 10, 1999 - --------------------------- (Frank A. Bennack Jr.) /s/ SUSAN V. BERRESFORD Director - --------------------------- (Susan V. Berresford) /s/ M. ANTHONY BURNS Director - --------------------------- (M. Anthony Burns) /s/ H. LAURANCE FULLER Director - --------------------------- (H. Laurance Fuller) /s/ MELVIN R. GOODES Director - --------------------------- (Melvin R. Goodes) 90 90 Capacity Date -------- ---- /s/ WILLIAM H. GRAY, III Director - --------------------------- (William H. Gray, III) /s/ GEORGE V. GRUNE Director - --------------------------- (George V. Grune) /s/ HAROLD S. HOOK Director - --------------------------- (Harold S. Hook) /s/ HELENE L. KAPLAN Director - --------------------------- (Helene L. Kaplan) /s/ HENRY B. SCHACHT Director - --------------------------- (Henry B. Schacht) March 10, 1999 /s/ ANDREW C. SIGLER Director - --------------------------- (Andrew C. Sigler) /s/ JOHN R. STAFFORD Director - --------------------------- (John R. Stafford) /s/ MARINA v.N. WHITMAN Director - --------------------------- (Marina v.N. Whitman) /s/ MARC J. SHAPIRO Vice Chairman - --------------------------- Finance and Risk Management (Marc J. Shapiro) (Principal Financial Officer) /s/ JOSEPH L. SCLAFANI Executive Vice President and - --------------------------- Controller (Joseph L. Sclafani) (Principal Accounting Officer) 91 91 APPENDIX 1 NARRATIVE DESCRIPTION OF GRAPHIC IMAGE MATERIAL Pursuant to Item 304 of Regulation S-T, the following is a description of the graphic image material included in the foregoing Management's Discussion and Analysis of Financial Condition.
GRAPHIC NUMBER PAGE DESCRIPTION - -------------- ---- ----------- 1 18 Bar graph entitled "Chase's Common Share Price Through the 1990's" presenting the following information at December 31, 1990 1991 1992 1993 1994 ---- ---- ---- ---- ---- 9-Year Compound Annual $ 5 $ 11 $ 19 $ 20 $ 18 Growth Rate ("CAGR") =19% 1995 1996 1997 1998 ---- ---- ---- ---- $ 29 $ 45 $ 55 $ 71 2 20 Pie Chart entitled "Operating Revenues by Business Franchise 1998" presenting the following information: Global Bank 46% National Consumer Services 41% Global Services 13% 3 21 Pie Chart entitled "Global Bank Operating Revenues by Key Businesses 1998" presenting the following information: Global Markets 36% Global Investment Banking 12% Corporate Lending 14% Chase Capital Partners 8% Global Private Bank 7% Middle Markets 8% Chase Texas (consolidated) 15%
92
GRAPHIC NUMBER PAGE DESCRIPTION - -------------- ---- ----------- 4 22 Pie Chart entitled "National Consumer Services Operating Revenues by Key Businesses 1998" presenting the following information: Chase Cardmember Services 48% Regional Consumer Banking 29% Chase Home Finance 13% Diversified Consumer Services 10% 5 24 Line graph entitled "Market-Sensitive Revenue" in millions, presenting the following information: 1989 1990 1991 1992 1993 ---- ---- ---- ---- ---- Logarithmic Regression $1,459 $1,668 $1,907 $2,181 $2,495 1989 - 1998 CAGR = 14% Market-Sensitive Revenue 1,508 1,373 1,660 2,209 3,122 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- Logarithmic Regression $2,853 $3,263 $3,731 $4,267 $4,879 1989 - 1998 CAGR = 14% Market-Sensitive Revenue 2,574 2,996 3,691 4,215 5,238 6 27 Line graph entitled "Operating Efficiency Ratio" presenting the following information: Improvement since 1994 = 900 Basis Points 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- Operating - Efficiency Ratio 63% 63% 57% 55% 54%
93
GRAPHIC NUMBER PAGE DESCRIPTION - -------------- ---- ----------- 7 30 Pie chart entitled "Diversification of Managed Credit-Related Portfolio at December 31, 1998" presenting the following information: CONSUMER Domestic Residential Mortgages 19% Domestic Managed Credit Cards 14% Domestic Auto Financings 7% Domestic Other Consumer 4% Foreign Consumer 2% COMMERCIAL Domestic Commercial and Industrial 19% Derivative and FX Contracts 15% Foreign Commercial and Industrial 11% Domestic Financial Institutions 3% Foreign Governments 2% Domestic Commercial Real Estate 2% Foreign Financial Institutions 2% 8 37 Bar graph entitled "Histogram of Daily Market Risk-Related Revenue for 1998 and 1997" presenting the following information: Millions of dollars 0 - 5 5 - 10 10 - 15 15 - 20 20 - 25 25 - 30 30 and Over ----- ------ ------- ------- ------- ------- ----------- 1998 Number of trading days ---- market risk-related 35 46 52 40 20 12 17 revenue was within the 1997 above prescribed positive ---- dollar range 37 55 60 40 24 8 5 Millions of dollars 0-(5) (5)-(10) (10)-(15) (15)-(20) (20)-(25) (25)-(30) (30) and Over ----- ------ ------- ------- ------- ------- ----------- 1998 Number of trading days ---- market risk-related 15 9 4 3 1 3 2 revenue was within the 1997 above prescribed negative ---- dollar range 13 7 5 1 0 2 2
94
GRAPHIC NUMBER PAGE DESCRIPTION - -------------- ---- ----------- 9 40 Bar graph entitled "Risk-Based Capital Ratios at December 31, in billions, except ratios" presenting the following information: 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- Total Capital Ratio 12.2% 12.3% 11.8% 11.6% 12.0% Tier 1 Capital Ratio 8.1% 8.2% 8.2% 7.9% 8.3% Tier 1 Leverage Ratio 6.6% 6.7% 6.8% 6.0% 6.4% Qualifying Capital $26.3 $28.3 $29.4 $33.3 $34.8 During 1997, Chase adopted the Federal Reserve Board's guidelines for calculating market risk-adjusted capital. Prior period ratios have not been restated. 10 41 Bar graph entitled "Market Capitalization at December 31, in billions" presenting the following information: 5 Year CAGR = 28% 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- Market Capitalization $15.4 $25.6 $38.5 $46.1 $60.2
95 Exhibit Index ------------- Item No. Description 3.1 Restated Certificate of Incorporation of The Chase Manhattan Corporation (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-8 (File No. 333-07941) of The Chase Manhattan Corporation). 3.2 Certificate of Amendment of Restated Certificate of Incorporation of The Chase Manhattan Corporation (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-3 (File No. 333-56573) of The Chase Manhattan Corporation). 3.3 Certificate of Designations of Fixed/Adjustable Rate Noncumulative Preferred Stock of The Chase Manhattan Corporation (incorporated by reference to Exhibit 3.3 to the Registration Statement on Form S-3 (File No. 333-56573) of The Chase Manhattan Corporation). 3.4 By-laws, as amended as of March 17, 1998, of The Chase Manhattan Corporation (incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K, dated December 31, 1997, of The Chase Manhattan Corporation, File No. 1-5805). 4.1 Indenture, dated as of December 1, 1989, between Chemical Banking Corporation and The Chase Manhattan Bank (National Association), as succeeded to by Bankers Trust Company, as Trustee (incorporated by reference to Exhibit 4.9 to the Registration Statement on Form S-3 (File No. 33-32409) of Chemical Banking Corporation). 4.2(a) Indenture, dated as of April 1, 1987, as amended and restated as of December 15, 1992, between Chemical Banking Corporation and Morgan Guaranty Trust Company of New York, as succeeded to by U.S. Bank Trust National Association (formerly known as First Trust of New York, National Association), as Trustee (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, dated December 22, 1992, of Chemical Banking Corporation, File No. 1-5805). 4.2(b) Second Supplemental Indenture, dated as of October 8, 1996, between The Chase Manhattan Corporation and U.S. Bank Trust National Association (formerly known as First Trust of New York, National Association), as Trustee, to the Indenture, dated as of April 1, 1987, as amended and restated as of December 15, 1992 (incorporated by reference to Exhibit 4.5 to the Registration Statement on Form S-3 (File No. 333-14959) of The Chase Manhattan Corporation). 4.3(a) Indenture, dated as of June 1, 1985, between Manufacturers Hanover Corporation and IBJ Schroder Bank and Trust Company, as Trustee, relating to the 8 1/2% Subordinated Capital Notes Due February 15, 1999 (incorporated by reference to Exhibit 4(b) to the Current Report on Form 8-K, dated February 27, 1987, of Manufacturers Hanover Corporation, File No. 1-5923-1) . 4.3(b) First Supplemental Indenture, dated as of December 31, 1991, among Chemical Banking Corporation, Manufacturers Hanover Corporation and IBJ Schroder Bank and Trust Company, as Trustee, to the Indenture, dated June 1, 1985 (incorporated by reference to Exhibit 4.18(b) to the Annual Report on Form 10-K, dated December 31, 1991, of Chemical Banking Corporation, File No. 1-5805). 4.3(c) Second Supplemental Indenture, dated as of October 8, 1996, between The Chase Manhattan Corporation and IBJ Schroder Bank and Trust Company, as Trustee, to the Indenture, dated June 1, 1985 (incorporated by reference to Exhibit 4.12 to the Registration Statement on Form S-3 (File No. 333-14959) of The Chase Manhattan Corporation). 4.4(a) Indenture, dated as of July 1, 1986, between The Chase Manhattan Corporation and Bankers Trust Company, as Trustee (incorporated by reference to Exhibit (4)(a) to the Registration Statement on Form S-3 (File No. 33-7299) of The Chase Manhattan Corporation). 96 Exhibit Index ------------- Item No. Description 4.4(b) First Supplemental Indenture, dated as of November 1, 1990, between The Chase Manhattan Corporation and Bankers Trust Company, as Trustee, to the Indenture, dated as of July 1, 1986 (incorporated by reference to Exhibit (4)(b) to the Registration Statement on Form S-3 (File No. 33-40485) of The Chase Manhattan Corporation). 4.4(c) Second Supplemental Indenture, dated as of May 1, 1991, between The Chase Manhattan Corporation and Bankers Trust Company, as Trustee, to the Indenture, dated as of July 1, 1986 (incorporated by reference to Exhibit (4)(c) to the Registration Statement on Form S-3 (File No. 33-42367) of The Chase Manhattan Corporation). 4.4(d) Third Supplemental Indenture, dated as of March 29, 1996, among Chemical Banking Corporation, The Chase Manhattan Corporation and Bankers Trust Company, as Trustee, to the Indenture, dated as of July 1, 1986 (incorporated by reference to Exhibit 4.18 to the Registration Statement on Form S-3 (File No. 333-14959) of The Chase Manhattan Corporation). 4.5(a) Amended and Restated Indenture, dated as of September 1, 1993, between The Chase Manhattan Corporation and Chemical Bank, as Trustee (incorporated by reference to Exhibit (4)(cc) to the Current Report on Form 8-K, dated August 19, 1993, of The Chase Manhattan Corporation, File No. 1-5945). 4.5(b) First Supplemental Indenture, dated as of March 29, 1996, among Chemical Banking Corporation, The Chase Manhattan Corporation, Chemical Bank, as resigning Trustee, and U.S. Bank Trust National Association (formerly known as First Trust of New York, National Association), as successor Trustee, to the Amended and Restated Indenture, dated as of September 1, 1993 (incorporated by reference to Exhibit 4.22 to the Registration Statement on Form S-3 (File No. 333-14959) of The Chase Manhattan Corporation). 4.5(c) Second Supplemental Indenture, dated as of October 8, 1996, between The Chase Manhattan Corporation and U.S. Bank Trust National Association (formerly known as First Trust of New York, National Association), as Trustee, to the Amended and Restated Indenture, dated as of September 1, 1993 (incorporated by reference to Exhibit 4.23 to the Registration Statement on Form S-3 (File No. 333-14959) of The Chase Manhattan Corporation). 4.6(a) Indenture, dated as of May 15, 1993, between Margaretten Financial Corporation and The Bank of New York, as Trustee, relating to the 6 3/4% Guaranteed Notes due June 15, 2000 (incorporated by reference to Exhibit 4(a) to the Registration Statement on Form S-3 (No. 33-60262) of Margaretten Financial Corporation). 4.6(b) Supplemental Indenture, dated as of July 22, 1994, to the Indenture, dated as of May 15, 1993, among Margaretten Financial Corporation, Chemical Banking Corporation and The Bank of New York, as Trustee, and Guarantee, dated as of July 22, 1994, by Chemical Banking Corporation (incorporated by reference to Exhibit 4.34 to the Current Report on Form 8-K, dated September 28, 1994, of Chemical Banking Corporation, File No. 1-5805). 4.7 Junior Subordinated Indenture, dated as of December 1, 1996, between The Chase Manhattan Corporation and The Bank of New York, as Debenture Trustee (incorporated by reference to Exhibit 4.24 to the Registration Statement on Form S-3 (File No. 333-19719) of The Chase Manhattan Corporation). 4.8 Guarantee Agreement, dated as of January 24, 1997, between The Chase Manhattan Corporation and The Bank of New York, as Trustee, with respect to the Global Floating Rate Capital Securities, Series B, of Chase Capital II (incorporated by reference to Exhibit 4.8 to the Annual Report on Form 10-K, dated December 31, 1997, of The Chase Manhattan Corporation, File No. 1-5805). 4.9 Amended and Restated Trust Agreement, dated as of January 24, 1997, among The Chase Manhattan Corporation, The Bank of New York, as Property Trustee, The Bank of New York (Delaware), as Delaware Trustee, and the Administrative Trustees named therein, with respect to Chase Capital II (incorporated by reference to Exhibit 4.9 to the Annual Report on Form 10-K, dated December 31, 1997, of The Chase Manhattan Corporation, File No. 1-5805). 10.1 Deferred Compensation Plan for Non-Employee Directors of The Chase Manhattan Corporation and The Chase Manhattan Bank, as amended and restated effective December 1996 (incorporated by reference to Exhibit 10.1 to the Annual Report on Form 10-K, dated December 31, 1996, of The Chase Manhattan Corporation, File No. 1-5805). 10.2 Post-Retirement Compensation Plan for Non-Employee Directors, as amended and restated as of May 21, 1996 (incorporated by reference to Exhibit 10.2 to the Annual Report on Form 10-K, dated December 31, 1996, of The Chase Manhattan Corporation, File No. 1-5805). 97 Exhibit Index ------------- Item No. Description 10.3 Deferred Compensation Plan of Chemical Banking Corporation and Participating Companies, as amended through January 1, 1993 (incorporated by reference to Exhibit 10.5 to the Annual Report on Form 10-K, dated December 31, 1994, of Chemical Banking Corporation, File No. 1-5805). 10.4 The Chase Manhattan Corporation 1996 Long-Term Incentive Plan (incorporated by reference to the Schedule 14A, filed on April 17, 1996, of The Chase Manhattan Corporation, File No. 1-5805). 10.5 The Chase Manhattan 1994 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10O to The Chase Manhattan Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, File No. 1-5945). 10.6 Amendment to The Chase Manhattan 1994 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10S to The Chase Manhattan Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, File No. 1-5945). 10.7 Chemical Banking Corporation Long-Term Stock Incentive Plan, as amended and restated as of May 19, 1992 (incorporated by reference to Exhibit 10.7 to the Annual Report on Form 10-K, dated December 31, 1992, of Chemical Banking Corporation, File No. 1-5805). 10.8 The Chase Manhattan 1987 Long-Term Incentive Plan, as amended (incorporated by reference to Exhibit 10A to The Chase Manhattan Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-5945). 10.9 Amendment to The Chase Manhattan 1987/82 Long-Term Incentive Plan (incorporated by reference to Exhibit 10T to the Quarterly Report on Form 10-Q, for the quarter ended September 30, 1995, of The Chase Manhattan Corporation, File No. 1-5945) 10.10 Long Term Incentive Program of Manufacturers Hanover Corporation (incorporated by reference to Exhibit 10.10 to the Annual Report on Form 10-K, dated December 31, 1997, of The Chase Manhattan Corporation, File No. 1-5805). 10.11 Key Executive Performance Plan of Chemical Banking Corporation (incorporated by reference to Exhibit 10.4 to the Annual Report on Form 10-K, dated December 31, 1994, of Chemical Banking Corporation, File No. 1-5805). 10.12 The Chase Manhattan Annual Incentive Arrangement for Certain Executive Officers (incorporated by reference to Exhibit 10W to the Quarterly Report on Form 10-Q, for the quarter ended September 30, 1995, of The Chase Manhattan Corporation, File No. 1-5945) 10.13 Forms of severance agreements as entered into by The Chase Manhattan Corporation and certain of its executive officers (incorporated by reference to Exhibit 10.13 to the Annual Report on Form 10-K, dated December 31, 1997, of The Chase Manhattan Corporation, File No. 1-5805). 10.14 Form of termination agreement as entered into by The Chase Manhattan Corporation and Donald L. Boudreau (incorporated by reference to the Annual Report on Form 10-K, dated December 31, 1994, of The Chase Manhattan Corporation, File No. 1-5945). 10.15 Form of amendment to the termination agreement as entered into by The Chase Manhattan Corporation and Donald L. Boudreau (incorporated by reference to the Quarterly Report on Form 10-Q, dated September 30, 1995, of The Chase Manhattan Corporation, File No. 1-5945). 10.16 Permanent Life Insurance Options Plan (incorporated by reference to Exhibit 10.11 to the Annual Report on Form 10-K, dated December 31, 1992, of Chemical Banking Corporation, File No. 1 -5805). 10.17 Executive Retirement Plan of Chemical Banking Corporation and Certain Subsidiaries (incorporated by reference to Exhibit 10.8 to the Annual Report on Form 10-K, dated December 31, 1995, of Chemical Banking Corporation, File No. 1-5805). 10.18 Supplemental Retirement Plan of Chemical Bank and Certain Affiliated Companies, restated effective January 1, 1993 and as amended through January 1, 1995 (incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K, dated December 31, 1995, of Chemical Banking Corporation, File No. 1-5805). 98 Exhibit Index ------------- Item No. Description 10.19 Supplemental Retirement Plan of The Chase Manhattan Bank, as amended (incorporated by reference to Exhibit 10G of The Chase Manhattan Corporation's Annual Report on Form 10-K for the year ended December 31, 1989, File No. 1-5945). 10.20 Further Amendment to the Supplemental Retirement Plan of The Chase Manhattan Bank (incorporated by reference to Exhibit 10G of The Chase Manhattan Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-5945) 10.21 Amendment to Supplemental Retirement Plan of The Chase Manhattan Bank (incorporated herein by reference to Exhibit 10Z to The Chase Manhattan Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, File No. 1-5945). 10.22 Supplemental Benefit Plan of The Chase Manhattan Bank, as amended (incorporated by reference to Exhibit 10H of The Chase Manhattan Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-5945). 10.23 Amendment to Supplemental Benefit Plan of The Chase Manhattan Bank (incorporated herein by reference to Exhibit 10AA to The Chase Manhattan Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, File No. 1-5945). 10.24 TRA86 Supplemental Benefit Plan of The Chase Manhattan Bank, as amended (incorporated by reference to Exhibit 10I of The Chase Manhattan Corporation's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 1-5945). 10.25 Amendment to TRA86 Supplemental Benefit Plan of The Chase Manhattan Bank (incorporated herein by reference to Exhibit 10BB to The Chase Manhattan Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, File No. 1-5945). 11.1 Computation of earnings per common share. 12.1 Computation of ratio of earnings to fixed charges. 12.2 Computation of ratio of earnings to fixed charges and preferred stock dividend requirements. 21.1 List of Subsidiaries of The Chase Manhattan Corporation. 22.1 Annual Report on Form 11-K of the 401(k) Savings Plan of The Chase Manhattan Bank (to be filed by amendment pursuant to Rule 15d-21 under the Securities Exchange Act of 1934). 23.1 Consent of Independent Accountants. 27.1 Financial Data Schedule. EX-11.1 2 COMPUTATION OF EARNINGS PER COMMON SHARE 1 EXHIBIT 11.1 The Chase Manhattan Corporation and Subsidiaries Computation of Earnings Per Common Share For a discussion of the computation of basic and diluted earnings per common share, see Note Ten on page 59.
Year Ended December 31, (in millions, except per share amounts) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------ Basic Earnings Per Share Earnings: Net Income $3,782 $3,708 $2,461 Less: Preferred Stock Dividends 98 182 219 - ------------------------------------------------------------------------------------------------------ Net Income Applicable to Common Stock $3,684 $3,526 $2,242 - ------------------------------------------------------------------------------------------------------ Shares:(a) Basic Average Common Shares Outstanding 846.1 849.2 873.6 - ------------------------------------------------------------------------------------------------------ Net Income Per Share $ 4.35 $ 4.15 $ 2.57 - ------------------------------------------------------------------------------------------------------ Diluted Earnings Per Share Earnings: Net Income Applicable to Common Stock $3,684 $3,526 $2,242 - ------------------------------------------------------------------------------------------------------ Shares:(a) Basic Average Common Shares Outstanding 846.1 849.2 873.6 Additional Shares Issuable Upon Exercise of Stock Options for Dilutive Effect and Conversion of Preferred Stock 23.2 29.2 33.2 - ------------------------------------------------------------------------------------------------------ Average Common Shares Outstanding Assuming Dilution 869.3 878.4 906.8 - ------------------------------------------------------------------------------------------------------ Net Income Per Share: $ 4.24 $ 4.01 $ 2.47 - ------------------------------------------------------------------------------------------------------
(a) Share-related data for all periods have been restated to reflect a 2-for-1 common stock split, effective as of close of business on May 20, 1998. EX-12.1 3 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 Exhibit 12.1 The Chase Manhattan Corporation and Subsidiaries Computation of Ratio of Earnings to Fixed Charges
Year Ended December 31, (in millions, except ratios) 1998 - ------------------------------------------------------------------------------------------- Excluding Interest on Deposits Income before income taxes $ 5,930 -------- Fixed charges: Interest expense 6,883 One third of rents, net of income from subleases(a) 116 -------- Total fixed charges 6,999 -------- Less: Equity in undistributed income of affiliates (33) -------- Earnings before taxes and fixed charges, excluding capitalized interest $ 12,896 -------- Fixed charges, as above $ 6,999 -------- Ratio of earnings to fixed charges 1.84 -------- Including Interest on Deposits Fixed charges, as above $ 6,999 Add: Interest on deposits 6,840 -------- Total fixed charges and interest on deposits $ 13,839 -------- Earnings before taxes and fixed charges, excluding capitalized interest, as above $ 12,896 Add: Interest on deposits 6,840 -------- Total earnings before taxes, fixed charges and interest on deposits $ 19,736 -------- Ratio of earnings to fixed charges 1.43 -------- - -------------------------------------------------------------------------------------------
(a) The proportion deemed representative of the interest factor. EX-12.2 4 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12.2 The Chase Manhattan Corporation and Subsidiaries Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividend Requirements
Year Ended December 31, (in millions, except ratios) 1998 - ------------------------------------------------------------------------------------------- Excluding Interest on Deposits Income before income taxes $ 5,930 -------- Fixed charges: Interest expense 6,883 One third of rents, net of income from subleases(a) 116 -------- Total fixed charges 6,999 -------- Less: Equity in undistributed income of affiliates (33) -------- Earnings before taxes and fixed charges, excluding capitalized interest $ 12,896 -------- Fixed charges, as above $ 6,999 -------- Preferred stock dividends 98 -------- Fixed charges including preferred stock dividends $ 7,097 -------- Ratio of earnings to fixed charges and preferred stock dividend requirements 1.82 -------- Including Interest on Deposits Fixed charges including preferred stock dividends, as above $ 7,097 Add: Interest on deposits 6,840 -------- Total fixed charges including preferred stock dividends and interest on deposits $ 13,937 -------- Earnings before taxes and fixed charges, excluding capitalized interest, as above $ 12,896 Add: Interest on deposits 6,840 -------- Total earnings before taxes, fixed charges and interest on deposits $ 19,736 -------- Ratio of earnings to fixed charges and preferred stock dividend requirements 1.42 -------- - -------------------------------------------------------------------------------------------
(a) The proportion deemed representative of the interest factor. EX-21.1 5 LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 The Chase Manhattan Corporation List of Subsidiaries Chase has the following subsidiaries:
Percentage of voting Organized under securities owned by Name the laws of immediate parent - ---------------------------------------------------------------------------------------------------------------- The Chase Manhattan Bank New York 100% CB Capital Investors, Inc. Delaware 100 CB Capital Investors, L.P. Delaware 80 Chase & M.D. Sass Partners New York 64 Chase Access Services Corporation Delaware 100 Chase Asset Management, Inc. Delaware 100 Chase Bank International United States 100 Chase Commercial Mortgage Securities Corp. New York 100 Chase Community Development, Inc. Delaware 100 Chase Equipment Leasing Inc. New York 100 Chase Investment Services Corp. Delaware 100 Chase Manhattan Automotive Finance Corporation Delaware 100 Chase Manhattan Capital Corporation New York 100 Chase Manhattan Capital, L.P. Delaware 80 Chase Manhattan International Inc. United States 100 Chase Manhattan International Finance Ltd. United States 100 Banco Chase Manhattan, S.A. Brazil 100 Bancroft Holdings B.V. The Netherlands 100 CMBAL Limited Australia 100 Chase Securities Australia Limited Australia 100 Chase Investment Bank (Panama), S.A. Panama 100 Chase Japan Ltd. Delaware 100 Chase Manhattan Asia Limited Hong Kong 100 Chase Manhattan Bank (Ireland) plc Ireland 100 Chase Manhattan Bank (M) Berhad Malaysia 100 Chase Manhattan Bank A.G. Germany 100 Chase Manhattan Bank CMB S.A. Spain 100 Chase Manhattan Bank France France 100 Chase Manhattan Bank Luxembourg, S.A. Luxembourg 100 Chase Manhattan Bank Mexico, S.A. Mexico 100 Chase Manhattan Card Company Ltd. Hong Kong 100 Chase Manhattan (SEA) Limited Singapore 100 Chase Manhattan Securities S.A. Spain 100 Chase Manhattan Securities (C.I.) Limited Channel Islands 100 Chase Manhattan International Bank, Inc. Puerto Rico 100 Chase Manhattan (Thailand) Ltd. Thailand 100 Chase Manhattan Trading, S.A. Argentina 100 Chase Manhattan Trust Cayman Ltd. Cayman Islands 100 Chase Manhattan Trust Company (Hong Kong) Ltd. Hong Kong 100 Chase Manhattan (U.K.) Holdings Limited United Kingdom 100 Chase Export Finance Limited United Kingdom 100 Chase Asset Management (London) Limited United Kingdom 100 Chase Manhattan plc United Kingdom 100 Chase Manhattan International Ltd. United Kingdom 100 Goldway Ltd. United Kingdom 100 Chase Trust Bank Japan 100 Chemical Asia Limited Hong Kong 100
2 List of Subsidiaries (continued)
Percentage of voting Organized under securities owned by Name the laws of immediate parent - ---------------------------------------------------------------------------------------------------------------- Norchem Holdings e Negocios, S.A. Brazil 49% Norchem Leasing S.A. Arrendamento Mercantil Brazil 50 The Chase Manhattan Bank of Canada Canada 100 The Chase Manhattan Private Bank & Trust Company (Bahamas) Limited Bahamas 100 The Chase Manhattan Private Bank (Switzerland), S.A. Switzerland 100 The Saudi Investment Bank Saudi Arabia 7.5 Chase Manhattan Mortgage Holdings, Inc. Delaware 100 Chase Mortgage Services, Inc. Delaware 100 Chase Manhattan Overseas Corporation New York 100 Chase Merchant Ventures, Inc. Delaware 100 Chase Merchant Services LLC Delaware 50 Chem Network Processing Services, Inc. New Jersey 100 Chase Manhattan Acceptance Corporation Delaware 100 Chase Mortgage Company Ohio 100 Chase Preferred Capital Corporation Delaware 100 Harvest Opportunity Holdings Corp. New York 100 Manufacturers Hanover Leasing International Corp. Delaware 100 MH Financial Management Systems, Inc. Delaware 100 Other Subsidiaries of Chase Brown & Company Securities Corporation Massachusetts 100 Capital Markets Transactions, Inc. Delaware 100 CBC - USA Inc. Delaware 100 CCC Holding Inc. Delaware 100 Chase Commercial Corporation New Jersey 100 Chase Business Credit Corp. Delaware 100 Chase Capital I Delaware 100 Chase Capital II Delaware 100 Chase Capital III Delaware 100 Chase Capital IV Delaware 100 Chase Capital V Delaware 100 Chase Capital VI Delaware 100 Chase Capital Corporation Delaware 100 Chase Capital Financing Ltd. United Kingdom 100 Chase (Jersey) Ltd. United Kingdom 100 Chase Finance (Jersey) Ltd. United Kingdom 100 Chase Cardholder Services, Inc. Delaware 100 Chase Equity Holdings, Inc. Delaware 100 CMC Holding (Delaware) Inc. Delaware 100 A.S. Holding Corporation Delaware 100 Chase Manhattan Bank Delaware Delaware 100 Chase Agency Services, Inc. Delaware 100 Chase Insurance Agency, Inc. Delaware 100 CSL Leasing Inc. Delaware 100 Chase Data Services Corporation Delaware 100 Western Hemisphere Life Insurance Company Delaware 100 Chase Manhattan Bank U.S.A., National Association United States 100 Chase BankCard Services, Inc. Delaware 100 Margaretten Financial Corporation Delaware 100 Chase Manhattan Mortgage Corporation New Jersey 100
96 3 List of Subsidiaries (continued)
Percentage of voting Organized under securities owned by Name the laws of immediate parent - ---------------------------------------------------------------------------------------------------------------- Chase Manhattan Trust Company, National Association United States 100% Chase Bank of Texas, National Association United States 100 Chase Bank of Texas - San Angelo, N.A. United States 100 Chase Funding Inc. New York 100 Chase Futures & Options, Inc. Delaware 100 Chase Holding Delaware Inc. Delaware 100 Chase Manhattan Bank and Trust Company, National Association United States 100 Chase Manhattan Private Bank, N.A. United States 100 Chase Home Mortgage Corporation of the Southeast Florida 100 Chase International Capital Finance Limited United Kingdom 100 Chase Manhattan Realty Leasing Corporation New York 100 Chase Securities Inc. Delaware 100 Chase Shareholder Services of California, Inc. Delaware 100 Chase Shareholder Services Partner, Inc. Delaware 100 ChaseMellon Shareholder Services L.L.C. Delaware 50 Chase Trade, Inc. Delaware 100 Chatham Ventures, Inc. New York 100 Chemical Equity Incorporated New York 100 Chemical Investments, Inc. Delaware 100 Chemical New York, N.V. Netherland Antilles 100 Clintstone Properties Inc. New York 100 CMRCC, Inc. New York 100 CMC-OCI, Inc. Delaware 100 Hatherley Insurance Ltd. Bermuda 100 Offshore Equities, Inc. New York 100 Special Situation Fund Advisors, Inc. New York 100 Support Development Corporation Delaware 100
The names of certain other direct and indirect subsidiaries of Chase have been omitted from the list above because such unnamed subsidiaries considered in the aggregate as a single subsidiary would not constitute a significant subsidiary. EX-23.1 6 CONSENT OF INDEPENDENT ACCOUNTANTS 1 Exhibit 23.1 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (Nos. 2-98344, 33-13062, 33-15230, 33-15266, 33-20950, 33-40485, 33-45228, 33-45266, 33-47105, 33-49965, 33-55295, 33-57104, 33-58144, 33-60262, 33-64261, 333-14959, 333-14959-01, 333-14959-02, 333-14959-03, 333-16773, 333-19719, 333-22437, 333-37567, 333-37567-01, 333-37567-02, 333-37567-03, 333-36587, 333-36587-01, 333-36587-02, 333-36587-03, 333-42807, 333-56573 and 333-70639) and in the Registration Statements on Form S-8 (Nos. 33-01776, 33-13457, 33-33220, 33-40272, 33-40675, 33-45017, 33-45018, 33-49909, 33-49911, 33-49913, 33-54547, 33-62453, 33-63833, 333-07941, 333-15281, 333-22451 and 333-73119) of The Chase Manhattan Corporation or affiliates of our report dated January 19, 1999 appearing on page 44 of this Form 10-K. PRICEWATERHOUSECOOPERS LLP New York, New York March 11, 1999 EX-27.1 7 FINANCIAL DATA SCHEDULE
9 This schedule contains selected summary financial information extracted from the Consolidated Balance Sheet at December 31, 1998 and Consolidated Statement of Income for the 12 months ended December 31, 1998 and is qualified in its entirety by reference to such financial statements. 1,000,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 17,068 7,212 18,487 57,692 62,803 1,687 1,703 172,754 3,552 365,875 212,437 56,659 52,793 16,187 0 1,028 882 21,928 365,875 13,389 3,616 2,853 22,289 6,840 13,723 8,566 1,343 609 11,383 5,930 3,782 0 0 3,782 4.35 4.24 2.89 1,440 506 0 0 3,624 1,791 373 3,552 2,489 1,063 0 On May 19, 1998, Stockholders of Chase approved a two-for-one common stock split, effective as of close of business May 20, 1998.
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