-----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, GUKO+lVRNvaFsMbPi8nj4ppw6dwZr8ej8ybZvyZCJ0PJCbv/DRsdFllhsrbcFwsS Zbi9vam6+D0CtRy/DyfcWQ== 0000950123-98-003043.txt : 19980331 0000950123-98-003043.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950123-98-003043 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NYSE 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: 98577394 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 THE 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, 1997 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 7 1/2% CUMULATIVE PREFERRED STOCK (STATED VALUE--$100) EVIDENCED BY FLOATING RATE SUBORDINATED NOTES DUE 2003 DEPOSITARY SHARES REPRESENTING ONE QUARTER SHARE OF PREFERRED STOCK FLOATING RATE SUBORDINATED NOTES DUE AUGUST 1, 2003 7.58% CUMULATIVE PREFERRED STOCK (STATED VALUE--$100) EVIDENCED BY 7 7/8% SUBORDINATED NOTES DUE 2004 DEPOSITARY SHARES REPRESENTING ONE QUARTER SHARE OF PREFERRED STOCK 8% SUBORDINATED NOTES DUE 2004 8.40% CUMULATIVE PREFERRED STOCK (STATED VALUE--$25) 6.50% SUBORDINATED NOTES DUE 2005 9.76% CUMULATIVE PREFERRED STOCK (STATED VALUE--$25) 8% SUBORDINATED NOTES DUE 2005 10 1/2% CUMULATIVE PREFERRED STOCK (STATED VALUE--$25) 6.25% SUBORDINATED NOTES DUE 2006 10.84% CUMULATIVE PREFERRED STOCK (STATED VALUE--$25) 6 1/8% SUBORDINATED NOTES DUE 2008 10.96% CUMULATIVE PREFERRED STOCK (STATED VALUE--$25) 6.75% SUBORDINATED NOTES DUE 2008 ADJUSTABLE RATE CUMULATIVE PREFERRED STOCK, SERIES L (STATED VALUE--$100) 6.50% SUBORDINATED NOTES DUE 2009 ADJUSTABLE RATE CUMULATIVE PREFERRED STOCK, SERIES N (STATED VALUE--$25) GUARANTEE OF 7.34% CAPITAL SECURITIES, SERIES D, OF 7 3/4% SUBORDINATED NOTES DUE 1999 CHASE CAPITAL IV 8% SUBORDINATED NOTES DUE 1999 GUARANTEE OF 7.03% CAPITAL SECURITIES, SERIES E, OF 7.50% SUBORDINATED NOTES DUE 2003 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, 1998: 422,132,341 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, 1998 WAS $52,004,000,000.
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 19, 1998 PART III (OTHER THAN INFORMATION INCLUDED 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 Government Monetary Policies and Economic Controls ..................................... 1 Supervision and Regulation ............................................................. 1 Important Factors Relating to Forward-Looking Statements ............................... 5 Foreign Operations ..................................................................... 6 Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential ............................................. 75 Securities Portfolio ................................................................... 82 Loan Portfolio ......................................................................... 30-34, 56, 83-85 Summary of Loan Loss Experience ........................................................ 36-37, 57, 86-87 Deposits ............................................................................... 87 Return on Equity and Assets ............................................................ 18 Short-Term and Other Borrowed Funds .................................................... 88 Item 2 Properties ............................................................................. 6 Item 3 Legal Proceedings ...................................................................... 6 Item 4 Submission of Matters to a Vote of Security Holders .................................... 7 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 PART I ITEM 1: BUSINESS - ------------------------------------------------------------------------------- On March 31, 1996, The Chase Manhattan Corporation ("heritage Chase") merged with and into Chemical Banking Corporation ("Chemical"). Upon consummation of the merger, Chemical Banking Corporation changed its name to "The Chase Manhattan Corporation". THE MERGER WAS ACCOUNTED FOR AS A POOLING OF INTERESTS AND, ACCORDINGLY, THE INFORMATION PRESENTED IN THIS ANNUAL REPORT ON FORM 10-K PRESENTS THE COMBINED RESULTS OF HERITAGE CHASE AND CHEMICAL AS IF THE MERGER HAD BEEN IN EFFECT FOR ALL PERIODS PRESENTED. IN ADDITION, CERTAIN AMOUNTS IN PRIOR PERIODS HAVE BEEN RECLASSIFIED TO CONFORM TO THE CURRENT PRESENTATION. 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 Texas and formerly known as "Texas Commerce Bank, National Association"; and Chase Manhattan Bank USA, National Association ("Chase USA"), a national bank headquartered in 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. At December 31, 1997, Chase was the largest bank holding company in the United States in terms of total assets and Chase Bank was the 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, subsidiaries and affiliated banks. LINES-OF-BUSINESS Chase's activities are internally organized, for management reporting purposes, into three major business franchises (Global Banking, National Consumer Services and Chase Technology Solutions). A description of Chase's business franchises and the products and services they provide to their respective client bases are discussed in the section of Management's Discussion and Analysis entitled "Lines of Business Results" beginning on page 21. 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 money market and other 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. GOVERNMENT MONETARY POLICIES AND ECONOMIC CONTROLS The earnings and business of Chase are affected by general economic conditions, both domestic and international. In addition, fiscal or other policies that are adopted by various regulatory authorities of the United States, by foreign governments, and by international agencies can have important consequences on the financial performance of Chase. Chase is particularly affected by the policies of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), which regulates the national supply of bank credit. An important purpose of these policies is to curb inflation and moderate recessions through the control of the supply of money and credit. The Federal Reserve Board uses its powers to establish reserve requirements of insured depository institutions and to conduct open market operations in United States government securities so as to influence the supply of money and credit. These policies have a direct effect on the amounts of bank loans and deposits and on interest rates charged on loans and paid on deposits, with the result that Federal Reserve Board policies can have a material effect on bank earnings. Chase has economic, credit, legal, and other specialists who monitor economic conditions, and domestic and foreign government policies and actions. However, since it is difficult to predict changes in macroeconomic conditions and in governmental policies and actions relating thereto, it is difficult to foresee the effects of any such changes on the business and earnings of Chase and its subsidiaries. SUPERVISION AND REGULATION General: Chase is subject to regulation as a registered bank holding company under the BHCA. As such, Chase is required to file with the Federal Reserve Board an annual report and other information required quarterly pursuant to the BHCA. 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 THE CHASE MANHATTAN CORPORATION 1 4 PART I 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 may not acquire direct or indirect ownership or control of more than 5% of the voting shares of any domestic bank without the prior approval of the Federal Reserve Board. 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". In accordance with the foregoing restrictions, Chase's bank subsidiaries could, during 1998, without the approval of their relevant banking regulators, pay aggregate dividends of approximately $1.4 billion to their respective bank holding companies, plus an additional aggregate amount equal to their net income from January 1, 1998 through the date in 1998 of any such dividend payment. 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 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. Capital Requirements: The Federal banking regulators have also adopted risk-based capital and leverage guidelines, which 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 includes common equity, qualifying perpetual preferred stock, minority interests in the equity accounts of consolidated subsidiaries, less goodwill and other non-qualifying intangibles and other assets. Tier 2 Capital includes, among other items, perpetual preferred equity not qualifying as Tier 1 Capital, limited-life preferred stock with an original maturity of greater than 20 years, mandatory convertible debt, subordinated debt and intermediate-term preferred stock with an original weighted-average maturity of at least five years, the allowance for credit losses (up to 1.25% of risk-weighted assets), less required deductions as provided by regulation. 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%, of which at least 4% must be Tier 1 Capital. 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 banking organizations that have well-diversified risk (including no undue interest rate risk); excellent asset quality; high liquidity; good earnings; and, in general, are considered strong banking organizations. Other banking organizations are expected to have ratios of at least 4%-5% depending upon their particular condition and growth plans. Higher capital ratios could be required if warranted by the particular circumstance or risk profile of a given banking organization. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") required each Federal banking regulator to revise its risk-based capital standards within 18 months of enactment of the statute to ensure that those standards take adequate account of interest rate risk, concentration of credit risk and the risk of non-traditional activities. On December 15, 1994, the Federal banking regulators adopted amendments to their respective risk-based capital requirements that explicitly identify concentration of credit risk and certain risks arising from non-traditional activities, and the management of such risks, as important factors to consider in assessing an institution's overall capital adequacy. The amendments do not, however, mandate any specific adjustments to the risk-based capital calculations as a result of such factors. In May 1996, the Federal banking agencies announced that they were going to refrain from imposing a separate, explicit capital charge for interest rate risk, although they might do so in the future. Effective January 1, 1998, the risk-based capital rules were amended to incorporate a measure for market risk in foreign exchange and commodity activities and in the trading of debt and equity instruments and to require banking organizations with relatively large trading activities (such as Chase) to maintain capital for market risk in an amount that may be calculated by using the banking organizations' own internal value-at-risk models (subject to parameters set by the regulators). Chase elected to adopt these guidelines effective with the third quarter of 1997. 2 THE CHASE MANHATTAN CORPORATION 5 PART I 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. The current risk-based capital rules require a banking organization that transfers assets with recourse to maintain capital against the entire amount of the transferred assets. A third-party banking organization that provides a letter of credit or other credit enhancement (a "direct credit substitute") in connection with such a transfer of assets, however, need only maintain capital against the amount of the direct credit substitute. In general, the proposed amendments would extend the capital treatment applicable to asset transfers with recourse to those direct credit substitutes that provided credit enhancement to senior positions. The proposed amendments also set forth a multi-level approach to assessing capital requirements in certain asset securitizations. The proposed amendments would use credit ratings from nationally recognized securities rating organizations to measure relative exposure to credit risk and to determine the associated risk-based capital requirements. Positions rated AAA would receive a 20% risk-weight. Other investment grade positions would be covered by either: (i) a face value approach (under which capital would be held only against the face value of the position, risk-weighted at 100% (i.e., the current treatment afforded direct credit substitutes)) or (ii) a modified gross-up approach (under which capital would have to be held not only against the amount of the position but also against the amount of all senior positions, but at a reduced risk-weight of 50%). In the case of positions rated below investment grade, capital would be required to be held against the position and all senior positions at the full risk-weight (in most cases, 100%.) These requirements would be subject to the low-level recourse rule, pursuant to which the capital required to be held against any position is never greater than the position itself. Chase is in the process of evaluating the effect of the proposed amendments. FDICIA: FDICIA also required the FDIC to establish a risk-based assessment system for FDIC deposit insurance and 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 such institutions' Federal banking regulators, and requires the Federal banking regulator to take "prompt corrective action" with respect to a depository institution if such institution does not meet certain capital adequacy standards. Prompt Corrective Action: 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: (i) well capitalized (an institution that has a Total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6% and a Tier 1 leverage ratio of at least 5% and is not subject to a written agreement, order, capital directive or prompt corrective action directive); (ii) adequately capitalized (an institution that has a Total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 4% and a Tier 1 leverage ratio of at least 4%, or 3% in some cases); (iii) undercapitalized (an institution that has a Total risk-based capital ratio of under 8% or a Tier 1 risk-based capital ratio under 4% or a Tier 1 leverage ratio under 4%, or 3% in some cases); (iv) significantly undercapitalized (an institution that has a Total risk-based capital ratio of under 6% or a Tier 1 risk-based capital ratio under 3% or a Tier 1 leverage ratio under 3%), and (v) critically undercapitalized (an institution that has a ratio of tangible equity to total assets of 2% or less). 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 such holding company's subsidiary banking institution. 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 such guarantee. As of the date hereof, each of Chase's banking subsidiaries was "well capitalized". Brokered Deposits: The ability of depository institutions to accept brokered deposits is regulated under FDICIA. The term "brokered deposits" is defined to include deposits that are solicited by a bank's affiliates on its behalf. A significant portion of Chase Bank's and Chase USA's wholesale deposits are solicited on their behalf by broker-dealer affiliates and are considered brokered deposits. Under the rule, (i) an "undercapitalized" institution is prohibited from accepting, renewing or rolling over brokered deposits, (ii) an "adequately capitalized" institution must obtain a waiver from the FDIC before accepting, renewing or rolling over brokered deposits and is not permitted to pay interest on brokered deposits accepted in such institution's normal market area at rates that "significantly exceed" rates paid on deposits of similar maturity in such area, and (iii) a "well capitalized" institution may accept, renew or roll over brokered deposits without restriction. The definitions of "well capitalized", "adequately capitalized", and "undercapitalized" are the same as those utilized in the "prompt corrective action" rules described above. FDIC Insurance Assessments: 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. THE CHASE MANHATTAN CORPORATION 3 6 PART I Pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the "Deposit Funds Act") 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. The Deposit Funds Act also imposed an annual assessment on all depository institutions in order to pay interest on bonds issued by the Financing Corporation ("FICO") in connection with the resolution of savings association insolvencies occurring prior to 1991. The FICO assessment is 1.3 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 Funds Act. Powers of the FDIC Upon Insolvency of an Insured Depository Institution: The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") imposes liability on an FDIC-insured depository institution (such as Chase's bank subsidiaries) 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 superior in right of payment to claims of the holding company and its affiliates against such depository institution. In the event an insured depository institution becomes insolvent, or upon the occurrence of certain other events specified in the Federal Deposit Insurance Act, whenever the FDIC is appointed the conservator or receiver of such insured depository institution, the FDIC has the power: (i) to transfer any of such bank's assets and liabilities to a new obligor (including, but not limited to, another financial institution acquiring all or a portion of the bank's business, assets or liabilities), without the approval of such bank's creditors; (ii) to enforce the terms of such bank's contracts pursuant to their terms; or (iii) to repudiate or disaffirm any contract or lease to which such 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 such depository institution. Such provisions of the Federal Deposit Insurance Act 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 such banks to investors (hereinafter referred to 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. The Omnibus Budget Reconciliation Act of 1993 included a "depositor preference" provision, which provides that the claims of a receiver of an insured depository institution for administrative expenses and the claims of holders of deposit liabilities (including the FDIC, as subrogee of such holders) have priority over the claims of other unsecured creditors of such institution, including public noteholders, in the event of the liquidation or other resolution of such 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, holders of deposit obligations of such depository institution. Other Supervision and Regulation: Under Federal Reserve Board policy, Chase is expected to act as a source of financial strength to each bank subsidiary and to commit resources to support such bank subsidiary 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 thereof. Such restrictions prevent Chase and other affiliates from borrowing from a bank subsidiary unless the loans are secured in specified amounts. 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 4 THE CHASE MANHATTAN CORPORATION 7 PART I 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, Chase's mutual funds, 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. Such 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. The Federal Reserve Board previously required Section 20 subsidiaries to operate under a large number of conditions, commonly referred to as "firewalls", that had separated Section 20 companies from affiliated banks and, to a certain degree, from other bank holding company affiliates. Effective October 31, 1997, the Federal Reserve Board eliminated most firewalls and incorporated the remaining firewalls in a statement of operating standards, thus enabling CSI to operate more efficiently. In addition, effective March 6, 1997, the Federal Reserve Board 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 this regulatory action has been to enable Chase to substantially expand CSI's 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 RELATING TO FORWARD-LOOKING STATEMENTS From time to time, Chase has made and will make forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, in its filings with the Securities and Exchange Commission or in oral statements by senior management to analysts, investors, representatives of the media and others. Chase notes that any such forward-looking statements speak only as of the date they are made, and Chase undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. All forward-looking statements, by their nature, are subject to risks and uncertainties, and Chase's actual future results may differ materially from those set forth in such forward-looking statements. Factors that might cause Chase's future financial performance to vary include, but are not limited to, the credit, market, operational, liquidity, interest rate and other risks discussed in the "Management Discussion and Analysis" and "Supervision and Regulation" sections of this report, as well as the following: Competition: As noted above, Chase operates in a highly competitive environment. Chase expects that competitive conditions will continue to intensify as a result of technological advances. Technological advances have, for example, 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. Competition is also expected to increase as a result of legislation enacted in 1994 permitting interstate banking. Certain legislative proposals introduced in Congress from time to time would permit new types of affiliations between banks and financial service companies, including securities firms, and could, if enacted, also have increased competitive effects (See "Legislation" below). Foreign Operations: Chase does business throughout the world, including in developing regions of the world commonly known as emerging markets. Chase also invests in the securities of corporations located in such emerging markets. Chase's businesses and revenues derived from emerging markets securities are subject to risk of loss from unfavorable political and diplomatic developments, currency fluctuations, social instability, changes in governmental policies, expropriation, nationalization, confiscation of assets and changes in legislation relating to foreign ownership. In addition, foreign trading markets, particularly in emerging market countries are often smaller, less liquid, and more volatile than the U.S. trading markets. Government Monetary Policies and Economic Controls: As noted above in Item 1 of this report, the earnings and business of Chase are affected by general economic conditions, both domestic and international, and by the fiscal or other policies that are adopted by various regulatory authorities of the United States, foreign governments, and international agencies. 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 risks of default on their obligations to Chase. THE CHASE MANHATTAN CORPORATION 5 8 PART I Legislation: Federal and state legislation affecting the banking industry has played, and will continue to play, a significant role in shaping the nature of the financial services industry. For example, during 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle Act") was enacted. As a result of the passage of the Riegle Act and "early opt-in" by the states of New York, New Jersey and Connecticut, Chase was able to integrate the branches of its New Jersey and Connecticut banks into Chase Bank, thereby increasing the operational efficiency of such branches. However, another effect of the early "opt-in" by New York, New Jersey and Connecticut may be to increase competition within the tri-state region, although Chase cannot predict whether and to what extent such competition will increase. The State of Texas has "opted-out" of the provisions of the Riegle Act. Legislative proposals, including proposals to revise fundamentally the bank regulatory system, allow banking organizations to engage in a broader range of activities and permit commercial organizations to engage in banking, are from time to time introduced in Congress. If enacted, such legislation could substantially change the competitive environment in which Chase and its subsidiaries operate. Chase cannot predict at this time the extent to which Chase and its subsidiaries might be affected by any of these initiatives. 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, as well as Chase's credit quality, could be adversely affected by a worsening of general economic conditions, particularly by a higher domestic interest rate environment, as well as by foreign and domestic trading market conditions. 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. 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's corporate finance business, adversely impact Chase's loan and deposit spreads and affect its domestic trading revenues. Revenues from foreign trading markets may also be subject to negative fluctuations as a result of the impact of unfavorable political and diplomatic developments, social instability and changes in the policies of central banks or foreign governments, and the impact of these fluctuations could be accentuated by the volatility and lack of relative liquidity in some of these foreign trading markets. FOREIGN OPERATIONS For geographic distributions of average assets, total revenue, total expense, income before income tax expense and net income, see Note Twenty Three on page 72. For a discussion of foreign loans, see Note Four on page 56 and see the sections entitled "Foreign Consumer" and "Foreign Commercial" in Management's Discussion and Analysis, each of which is on page 33, and "Cross-Border Outstandings," on page 84. 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 built in 1992 and fully occupies a two-building complex known as Chase MetroTech 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 occupies, in the aggregate, approximately 800,000 square feet of space in the United Kingdom. The most significant components of leased space in London are 240,000 square feet at 125 London Wall and 147,000 square feet at Thomas More Square. Chase also owns and occupies a 300,000 square foot operations center in Bournemouth. 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. 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. ITEM 3: LEGAL PROCEEDINGS - ------------------------------------------------------------------------------- Due to the nature of the businesses in which it is engaged, 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 6 THE CHASE MANHATTAN CORPORATION 9 PART I 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 affect on its consolidated financial condition. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------------------------- None. EXECUTIVE OFFICERS OF THE REGISTRANT - -------------------------------------------------------------------------------
NAME AGE POSITIONS AND OFFICES HELD WITH CHASE AND CHASE BANK - --------------------------------------------------------------------------------------------------------------------------- WALTER V. SHIPLEY 62 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 59 President and Chief Operating Officer of Chase and Chase Bank since March 31, 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 on March 31, 1996. WILLIAM B. HARRISON JR. 54 Vice Chairman of the Board of Chase and Chase Bank, and responsible for Chase's Global Banking businesses. He has been a Director of Chase since 1991 and of Chase Bank since 1990. DONALD L. BOUDREAU 57 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 50 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. 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 51 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 Banking Corporation and The Chase Manhattan Corporation, during the five fiscal years ended December 31, 1997. There are no family relationships among the foregoing executive officers. THE CHASE MANHATTAN CORPORATION 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 the Common Stock on the New York Stock Exchange for the last two years, see the section entitled "Quarterly Financial Information (Unaudited)" on page 73. Chase declared quarterly cash dividends on its Common Stock in the amount of $.62 per share for each quarter of 1997 and $.56 per share for each quarter of 1996. At February 28, 1998, there were 83,472 holders of record of Chase's Common Stock. During the fourth quarter of 1997, shares of common stock of Chase were issued in transactions exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) thereof. Shares of common stock were issued to retired executive officers who had deferred receipt of such common stock pursuant to the Corporate Performance Incentive Plan as follows: October 3, 1997 - 281 shares; and November 17, 1997 - 1,766 shares. Shares of common stock were issued to retired directors who had deferred receipt of such common stock pursuant to the Deferred Compensation Plan for Non-Employee Directors and to serving directors as a share grant as follows: October 10, 1997 - 154 shares; and December 1, 1997 - - 2,652 shares. ITEM 6: SELECTED FINANCIAL DATA - ------------------------------------------------------------------------------- For five-year selected financial data, see "Summary of Selected Financial Data" on page 18. 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 44. ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------------------- For information related to market risk, see the Market Risk Management section on pages 37 through 41 and Note One on page 50. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------------------------------------------------------------------------------- The consolidated financial statements, together with the Notes thereto and the report of Price Waterhouse LLP dated January 20, 1998 thereon, appear on pages 45 through 73. Supplementary financial data for each full quarter within the two years ended December 31, 1997 is included on page 73 in the table entitled "Quarterly Financial Information (Unaudited)". Also included is a "Glossary of Terms" on page 74. 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 - ------------------------------------------------------------------------------- Pursuant to Instruction G (3) to Form 10-K, 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 19, 1998, 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 1997 fiscal year. 8 THE CHASE MANHATTAN CORPORATION 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 45. 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 By-laws, as amended as of March 17, 1998, of The Chase Manhattan Corporation. 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 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 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). 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). THE CHASE MANHATTAN CORPORATION 9 12 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 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 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. 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. 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). 10.3 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). THE CHASE MANHATTAN CORPORATION 10 13 PART IV 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. 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. 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). 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). THE CHASE MANHATTAN CORPORATION 11 14 PART IV 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 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 57. (b) REPORTS ON FORM 8-K - A Current Report on Form 8-K dated October 21, 1997 was filed on October 24, 1997 setting forth The Chase Manhattan Corporation's financial results for the third quarter of 1997 and announcing The Chase Manhattan Corporation's agreement to purchase the credit card portfolio of The Bank of New York. - A Current Report on Form 8-K dated November 13, 1997 was filed on November 13, 1997 reporting trading revenue losses for the month of October. - A Current Report on Form 8-K dated November 24, 1997 was filed on December 4, 1997 attaching certain legal opinions in connection with the issuance of the 7.34% Capital Securities, Series D, of Chase Capital IV. 12 THE CHASE MANHATTAN CORPORATION 15 Pages 13-16 Not Used 16 FINANCIAL SECTION TABLE OF CONTENTS Management's Discussion and Analysis: 18 Summary of Selected Financial Data 19 Overview 20 Managed Operating Results 21 Lines of Business Results Global Banking National Consumer Services Chase Technology Solutions Corporate 25 Results of Operations Net Interest Income Provision for Credit Losses Noninterest Revenue Noninterest Expense Income Taxes 29 Credit Risk Management Loan Portfolio Consumer Portfolio Commercial Portfolio Industry Diversification Cross-Border Exposure Derivative and Foreign Exchange Financial Instruments Allowance for Credit Losses 37 Market Risk Management Trading Activities Asset/Liability Management 41 Operating Risk Management 41 Capital and Liquidity Risk Management 43 Accounting and Reporting Developments 44 Comparison between 1996 and 1995 AUDITED FINANCIAL STATEMENTS: 45 Management's Report on Responsibility for Financial Reporting 45 Report of Independent Accountants 46 Consolidated Financial Statements 50 Notes to Consolidated Financial Statements SUPPLEMENTARY DATA: 73 Quarterly Financial Information 74 Glossary of Terms THE CHASE MANHATTAN CORPORATION 17 17 MANAGEMENT'S DISCUSSION AND ANALYSIS -- SUMMARY OF SELECTED FINANCIAL DATA
(in millions, except per share and ratio data) As of or for the year ended December 31, 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------- AS REPORTED BASIS Revenues $ 16,783 $ 15,852 $ 14,960 $ 15,013 $ 15,472 Noninterest Expenses (excluding Restructuring Costs) 9,877 9,330 9,375 9,537 9,625 Restructuring Costs 192 1,814 15 465 203 Provision for Credit Losses 804 897 758 1,050 2,820 Net Income Before Accounting Changes 3,708 2,461 2,970 2,486 2,026 Net Income(a) $ 3,708 $ 2,461 $ 2,959 $ 2,486 $ 2,394 - --------------------------------------------------------------------------------------------------------------- Net Income Per Common Share:(b) Basic $ 8.30 $ 5.13 $ 6.33 $ 5.05 $ 4.88 Diluted 8.03 4.94 6.04 4.97 4.79 Book Value at December 31, 47.51 42.58 41.81 37.37 36.10 Market Value at December 31, 109.50 89.38 58.75 35.88 40.13 Cash Dividends Declared 2.48 2.24 1.94 1.64 1.37 - --------------------------------------------------------------------------------------------------------------- Performance Ratios Return on Average Total Assets 1.04% .77% .96% .87% .97% Return on Average Common Equity 18.73 12.48 16.15 13.86 14.62 Common Dividend Payout Ratio 30 44 29 30 26 - --------------------------------------------------------------------------------------------------------------- Selected Balance Sheet Items Loans $168,454 $155,092 $150,207 $142,231 $137,117 Total Assets 365,521 336,099 303,989 285,383 251,948 Deposits 193,688 180,921 171,534 166,462 169,786 Long-Term Debt 13,387 12,714 12,825 13,061 13,833 Total Stockholders' Equity 21,742 20,994 20,836 18,873 19,101 - --------------------------------------------------------------------------------------------------------------- Capital Ratios(c) Tier 1 Risk-Based Capital Ratio 7.90% 8.15% 8.22% 8.05% 8.06% Total Risk-Based Capital Ratio 11.64 11.78 12.27 12.23 12.35 Tier 1 Leverage 6.03 6.79 6.68 6.63 7.35 - --------------------------------------------------------------------------------------------------------------- MANAGED OPERATING BASIS* Operating Revenues $ 17,674 $ 16,428 $ 15,048 $ 14,943 $ 14,911 Operating Noninterest Expenses 9,730 9,306 9,450 9,487 8,798 Credit Costs(d) 1,809 1,451 853 1,261 2,907 Operating Net Income $ 3,849 $ 3,516 $ 2,903 $ 2,559 $ 1,956 - --------------------------------------------------------------------------------------------------------------- Operating Net Income Per Common Share:(b) Basic $ 8.64 $ 7.55 $ 6.20 $ 5.22 $ 3.86 Diluted 8.35 7.27 5.92 5.13 3.80 - --------------------------------------------------------------------------------------------------------------- Performance Ratios Return on Average Common Equity 19.48% 18.35% 15.82% 14.32% 11.57% Common Dividend Payout Ratio 29 30 29 29 33 Efficiency Ratio 55 57 63 63 59 - --------------------------------------------------------------------------------------------------------------- Selected Balance Sheet Items Loans - Managed $185,306 $168,089 $156,758 $144,920 $140,867 Total Assets - Managed 382,373 349,096 310,540 288,072 255,698 - ---------------------------------------------------------------------------------------------------------------
* Note-Excludes the impact of credit card securitizations, restructuring costs and special items. For a listing of special items, see Glossary of Terms on page 74. (a) Accounting changes include the adoption of SFAS 106 in 1995 for the accounting for other postretirement benefits relating to the foreign plans of The Chase Manhattan Corporation ("Chase"). Also reflects the adoption in 1993 of SFAS 106 for Chase's domestic plans and SFAS 109 relating to accounting for income taxes. The basic and diluted net income per common share before accounting changes in 1995 were $6.36 and $6.07, respectively. The basic and diluted net income per common share before accounting changes in 1993 were $4.02 and $3.96, respectively. (b) Effective December 31, 1997, Chase adopted SFAS 128 relating to the computation of earnings per share ("EPS"), which replaced primary EPS with basic EPS and fully-diluted EPS with diluted EPS. Prior period amounts have been restated. (c) The December 31, 1997 ratios are calculated under the Federal Reserve Board's new risk-based capital guidelines incorporating market-risk adjusted capital. Prior periods have not been restated. (d) Includes provision for credit losses, foreclosed property expenses and charge-offs related to the securitized credit card portfolio. 18 THE CHASE MANHATTAN CORPORATION 18 MANAGEMENT'S DISCUSSION AND ANALYSIS Certain forward-looking statements contained herein are subject to risks and uncertainties. Chase's actual results may differ materially from those set forth in such forward-looking statements. Reference is made to Chase's reports filed with the Securities and Exchange Commission for a discussion of factors that may cause such differences to occur. See Glossary of Terms on page 74 for a definition of certain terms used throughout the annual report. - -------------------------------------------------------------------------------- OVERVIEW - -------------------------------------------------------------------------------- For 1997, Chase's net income was a record $3.71 billion or $8.03 per share on a diluted basis, compared with $2.46 billion or $4.94 per share on a diluted basis in 1996. The results for both years included the impact of merger-related restructuring costs. Management measures Chase's financial performance and that of its business units based on managed operating earnings, which excludes the impact of credit card securitizations, restructuring costs and special items. For a discussion of managed operating results, see the section that follows. Operating highlights for 1997 included: o Return on common stockholders' equity of 19.5%, up from 18.4% in 1996. o A 15% increase in operating earnings per share to $8.35. o An 8% increase in managed revenues to almost $18 billion. o Another improvement in Chase's efficiency ratio to 55%. o A quarterly dividend increase of 11% to $2.48 per share on an annual basis. The 1997 results underscored the strength of Chase's balanced mix of businesses. Despite the difficult market conditions that existed in the fourth quarter of 1997, revenue growth continued to accelerate, with eight of Chase's eleven key businesses growing at double-digit levels during the fourth quarter. Operating expenses increased 5% from 1996 reflecting higher investment spending and increased incentives related to the growth in market-sensitive revenues, offset by $635 million of incremental merger savings. Expense savings (since the merger on March 31, 1996) have totaled approximately $1.2 billion. Chase repurchased net 9.8 million common shares in 1997 as part of a stock repurchase plan begun in October 1996. Under the plan, Chase is authorized through the end of 1998 to repurchase up to an aggregate of $2.5 billion of its common shares, net of issuances for employee benefit and other plans. From the inception of the program through year-end 1997, Chase completed net repurchases of 19.7 million shares ($2.1 billion). In 1997, Chase adopted the Federal Reserve Board's new guidelines for the calculation of market risk-adjusted capital. These guidelines incorporate the use of internal models to measure market risk. In addition, the capital and assets of Chase Securities Inc. are now included in the calculation of risk-based capital ratios. Chase's Tier 1 and Total Capital ratios were 7.9% and 11.6%, respectively, and its Tier 1 leverage ratio was 6.0% at December 31, 1997. Chase's financial performance goals over the next several years include an average return on common equity of 18% or higher, growth in managed operating revenues accelerating to 10% per year and double-digit growth in operating earnings per share. During the latter part of 1997, Chase started a Business Effectiveness Review Project, the goals of which are to fully realize Chase's potential. Through changes in the role and organization of corporate and business level functional staff, Chase hopes to promote faster decision-making at lower cost. This project will also create the sharing of staff services at fewer levels within the organization and the transfer of a significant number of activities to a global "shared services" entity. An implementation plan for the project is expected to be completed by the end of March 1998. [graph 1 - See Appendix I] [graph 2 - See Appendix I] THE CHASE MANHATTAN CORPORATION 19 19 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- MANAGED OPERATING RESULTS - -------------------------------------------------------------------------------- Managed operating results exclude the impact of credit card securitizations, restructuring costs and special items. To further facilitate analysis of Chase's financial results, management categorizes the revenue components of the managed operating income statement as either market-sensitive or nonmarket-sensitive related revenues. Market-sensitive revenues include trading revenues (including trading-related net interest income), corporate finance and syndication fees, securities gains and revenue from equity-related investments. Nonmarket-sensitive revenues, which are subject to less market volatility, include all the remaining revenue components on the income statement. The following supplemental information provides a reconciliation between Chase's reported results and Chase's results on a managed operating basis. For a further discussion of credit card securitizations and their impact on the income statement, see pages 32-33.
1997 ------------------------------------------------------ Managed Year Ended December 31, Reported Credit Card Special Operating (in millions, except per share data) Results(a) Securitizations(b) Items(c) Basis - ----------------------------------------------------------------------------------------------- INCOME STATEMENT Market-Sensitive Revenue $ 4,292 $ -- $ -- $ 4,292 Nonmarket-Sensitive Revenue 12,491 993 (102)(e) 13,382 - ----------------------------------------------------------------------------------------------- Total Revenue 16,783 993 (102) 17,674 Noninterest Expense 9,865 -- (135)(f) 9,730 - ----------------------------------------------------------------------------------------------- Operating Margin 6,918 993 33 7,944 Credit Costs(d) 816 993 -- 1,809 - ----------------------------------------------------------------------------------------------- Income Before Restructuring Costs 6,102 -- 33 6,135 Restructuring Costs 192 -- (192) -- - ----------------------------------------------------------------------------------------------- Income Before Taxes 5,910 -- 225 6,135 Tax Expense (Benefit) 2,202 -- 84 2,286 - ----------------------------------------------------------------------------------------------- Net Income (Loss) $ 3,708 $ -- $ 141 $ 3,849 - ----------------------------------------------------------------------------------------------- Net Income Per Common Share: Basic $ 8.30 $ 8.64 Diluted $ 8.03 $ 8.35 - ----------------------------------------------------------------------------------------------- 1996 ------------------------------------------------------ Managed Year Ended December 31, Reported Credit Card Special Operating (in millions, except per share data) Results(a) Securitizations(b) Items(c) Basis - ------------------------------------------------------------------------------------------------ INCOME STATEMENT Market-Sensitive Revenue $ 3,767 $ -- $ -- $ 3,767 Nonmarket-Sensitive Revenue 12,085 570 6(g) 12,661 - ------------------------------------------------------------------------------------------------ Total Revenue 15,852 570 6 16,428 Noninterest Expense 9,346 -- (40)(h) 9,306 - ------------------------------------------------------------------------------------------------ Operating Margin 6,506 570 46 7,122 Credit Costs(d) 881 570 -- 1,451 - ------------------------------------------------------------------------------------------------ Income Before Restructuring Costs 5,625 -- 46 5,671 Restructuring Costs 1,814 -- (1,814) -- - ------------------------------------------------------------------------------------------------ Income Before Taxes 3,811 -- 1,860 5,671 Tax Expense (Benefit) 1,350 -- 805(i) 2,155 - ------------------------------------------------------------------------------------------------ Net Income (Loss) $ 2,461 $ -- $ 1,055 $ 3,516 - ----------------------------------------------------------------------------------------------- Net Income Per Common Share: Basic $ 5.13 $ 7.55 Diluted $ 4.94 $ 7.27 - ------------------------------------------------------------------------------------------------
(a) Represents results reported in Chase's financial statements, except that revenues are categorized between market-sensitive and nonmarket-sensitive revenues, restructuring costs have been separately displayed and foreclosed property expense is included in Credit Costs. (b) This column excludes the impact of credit card securitizations. (c) Includes restructuring costs and special items. (d) Credit Costs include the Provision for Credit Losses and Foreclosed Property Expense. (e) 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. (f) Costs incurred for the accelerated vesting of stock-based incentive awards. (g) Receipt of $54 million of interest related to Federal and State tax audit settlements offset by a $60 million loss on the sale of a building in Japan. (h) Costs incurred in combining Chase's foreign retirement plans. (i) Reflects tax benefits related to restructuring costs as well as aggregate tax benefits and refunds. Operating revenues in 1997 rose 8% to $17.67 billion, reflecting a 14% increase in market-sensitive revenues and a 6% increase in nonmarket-sensitive revenues. Market-sensitive revenues in 1997 reflect double-digit increases over 1996 in corporate finance fees, securities gains and equity-related revenue. Trading-related revenue in 1997 rose 4% from last year, despite the difficult market conditions that existed in the 1997 fourth quarter. Although components of market-sensitive revenues experience volatility from time to time, such as that experienced in trading-related revenue in the fourth quarter of 1997, over the past ten years market-sensitive revenues have increased at a compound annual growth rate ("CAGR") of 14%, as shown in the following graph. Nonmarket-sensitive revenues increased 6% from last year, reflecting higher trust and investment management fees and credit card revenue. Over the past 10 years, nonmarket-sensi- [graph 3 - See Appendix I] 20 THE CHASE MANHATTAN CORPORATION 20 MANAGEMENT'S DISCUSSION AND ANALYSIS tive revenues have increased at a CAGR of 2%; however, Chase has experienced an acceleration of the growth rate, as evidenced by annual growth of 5% in 1996 and 6% in 1997. Nonmarket-sensitive revenues incorporate various unrelated lines of businesses. Some of these revenue components, although highly profitable, have little growth potential, while other revenue components have rapid growth rates. Management expects both the market-sensitive and nonmarket-sensitive revenues of Chase to experience fluctuations from time to time and, accordingly, does not expect the components of operating revenue to grow at these historical CAGRs every fiscal year. See Results of Operations, for a discussion of Chase's revenue and expense on a reported basis. - -------------------------------------------------------------------------------- LINES OF BUSINESS RESULTS - -------------------------------------------------------------------------------- Chase's businesses are organized into three major business franchises, Global Banking, National Consumer Services ("NCS") and Chase Technology Solutions ("CTS"), which includes Global Services. Within each of these franchises, key businesses are measured independently on a profit and loss and rate-of-return basis, as well as by other key performance measures. Lines of business results are subject to restatement as appropriate whenever there are refinements in management reporting policies or changes to the management organization. Results have been restated to reflect Chase's new organizational structure. The lines of business results for Middle Market Banking and the global banking portion of Chase Bank of Texas, National Association ("Chase Texas"), formerly Texas Commerce Bank, National Association, are now reported in the Global Banking line 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. Chase's economic risk-based capital methodology is the basis for allocating equity to business units. This methodology quantifies credit, market and operating risks within each business and allocates capital accordingly.
LINES OF BUSINESS RESULTS Global National Global Services Banking Consumer Services (Within CTS) Total(a) Year Ended December 31, --------------------- --------------------- --------------------- ---------------------- (in millions, except ratios) 1997 1996 1997 1996 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Net Interest Income - Managed(b) $ 2,840 $ 2,929 $ 5,185 $ 4,819 $ 1,018 $ 927 $ 8,696 $ 8,498 Noninterest Revenue - Managed(b) 5,518 4,948 2,156 1,831 1,290 1,144 8,978 7,930 Noninterest Expense 4,036 3,955 3,833 3,734 1,675 1,608 9,730 9,306 - ------------------------------------------------------------------------------------------------------------------------------------ Operating Margin 4,322 3,922 3,508 2,916 633 463 7,944 7,122 Credit Costs - Managed 386 379 1,816 1,363 2 1 1,809 1,451 - ------------------------------------------------------------------------------------------------------------------------------------ Operating Income Before Taxes 3,936 3,543 1,692 1,553 631 462 6,135 5,671 Income Taxes 1,464 1,324 653 604 236 173 2,286 2,155 - ------------------------------------------------------------------------------------------------------------------------------------ Operating Net Income(c) $ 2,472 $ 2,219 $ 1,039 $ 949 $ 395 $ 289 $ 3,849 $ 3,516 - ------------------------------------------------------------------------------------------------------------------------------------ Average Common Equity $ 10,592 $ 10,511 $ 4,761 $ 4,461 $ 1,049 $ 1,105 $ 18,828 $ 17,965 Average Assets $256,095 $230,397 $100,308 $ 91,417 $ 11,889 $ 9,620 $356,346 $321,240 Return on Common Equity 22.4% 19.9% 20.9% 20.1% 36.7% 24.9% 19.5% 18.4% Efficiency Ratio - Managed 48% 50% 52% 56% 73% 78% 55% 57% - ------------------------------------------------------------------------------------------------------------------------------------
(a) Total column includes Corporate results. See description of Corporate results on page 24. (b) Trading-related net interest income is reflected in the Noninterest Revenue-Managed caption. (c) Operating net income excludes restructuring costs and special items. [graph 4 - See Appendix I] THE CHASE MANHATTAN CORPORATION 21 21 MANAGEMENT'S DISCUSSION AND ANALYSIS Global Banking Global Banking operates in more than 50 countries, including major operations in all key international financial centers. Terminal Businesses represents discontinued portfolios (primarily the remaining refinancing country debt and commercial real estate problem assets). Global Banking's operating net income for 1997 was $2.47 billion, an increase of $253 million over 1996. Operating return on equity in 1997 was 22%, compared with 20% in 1996. These favorable results were due primarily to increases in fee revenue and trading-related revenue, coupled with higher securities gains. The following table sets forth certain key financial performance measures of the businesses within Global Banking for the periods indicated.
1997 1996 --------------------------------------- ------------------------------------- Operating Managed Operating Managed Managed Net Efficiency Managed Net Efficiency Year Ended December 31, (in millions, except ratios) Revenues Income ROCE Ratio Revenues Income ROCE Ratio - ------------------------------------------------------------------------------------------------------------------------------------ Global Banking: Global Markets $ 2,954 $ 955 39.9% 50% $ 2,667 $ 807 34.2% 54% Global Investment Banking and Corporate Lending: Corporate Finance 1,020 253 53.1 58 834 172 36.0 65 Corporate Lending 1,465 488 13.8 30 1,608 564 16.2 27 ------- ------- ------- ------- Total Global Investment Banking and Corporate Lending 2,485 741 18.7 42 2,442 736 18.7 40 Chase Capital Partners 738 409 31.1 12 703 397 35.8 9 Global Asset Management and Private Banking 751 143 32.4 68 674 115 23.9 70 Middle Markets 839 211 22.0 49 826 190 17.6 52 Chase Texas(a) 1,328 291 19.5 61 1,230 269 19.0 63 Terminal Businesses 45 (38) NM NM (36) (100) NM NM - ------------------------------------------------------------------------------------------------------------------------------------
(a) Represents consolidated results for Chase Texas. NM - Not meaningful Global Markets: Global Markets' activities encompass the trading and sale of foreign exchange, derivatives, fixed income securities and commodities. As a leader in capital markets, Chase operates 24 hours a day covering the major international cross-border financial markets, as well as many local markets in both developed and emerging countries. Global Markets is a recognized world leader in such key activities as foreign exchange, interest rate swaps and emerging markets debt. For 1997, net income was $955 million with a return on common equity of 40%, compared with $807 million and 34% in 1996, reflecting improved treasury results and higher trading-related revenues. For 1997, trading-related revenue was $2,038 million, an increase of 4% from last year's results, driven by higher foreign exchange, derivatives, and securities results worldwide. Also included within Global Markets are Chase's domestic and international treasury units, which have primary responsibility for Chase's asset/liability management activities ("ALM"). ALM activities in the treasury units are managed on a total return basis with one of the primary objectives being the creation of economic value over time. Total return combines the reported revenues (net interest income and securities gains/losses) and the change in the net unrealized appreciation/depreciation of all financial instruments and underlying balance sheet items. In 1997, the total return from ALM activities amounted to $476 million pre-tax before expenses. Global Investment Banking and Corporate Lending: Global Investment Banking and Corporate Lending finances and advises corporations, financial institutions, financial sponsors and governments by providing integrated one-stop financial solutions and industry expertise to clients globally. Client industries include broker/dealers, chemicals, healthcare, insurance, media and telecommunications, multinationals, natural resources, oil and gas, power and environmental, real estate, retail and transportation. The product offerings encompass syndicated finance, high-yield securities, merger and acquisitions, project finance, restructuring, private placements, lease financing, trade finance and lending. Chase continues to maintain its lead position in loan syndication and in leveraged finance. Net income in 1997 was $741 million, up slightly when compared with 1996. These results were driven by increased corporate finance revenues, including significant increases in merger and acquisition advisory revenues, offset by lower lending revenues. Chase Capital Partners: Chase Capital Partners ("CCP") is a global private equity organization with approximately $5.0 billion under management, including $3.6 billion in equity-related investments. CCP provides equity and mezzanine financing for a wide variety of investment opportunities in the United States and abroad. During 1997, CCP committed $1.1 billion, including $922 million in funded investments, in over 100 venture capital, management buyout, recapitalization, growth-equity and mezzanine transactions. These amounts compare with $725 million in commitments and more than 60 transactions in 1996. CCP's net income rose 3% to $409 million in 1997, reflecting higher revenue from equity-related investments. 22 THE CHASE MANHATTAN CORPORATION 22 MANAGEMENT'S DISCUSSION AND ANALYSIS Global Asset Management and Private Banking: The Global Asset Management and Private Banking group serves a global client base of high net worth individuals, families, institutional and mutual fund and self-directed investors. Services include investment management for institutional investors globally, Vista Mutual Funds (at December 31, 1997, the fourth largest bank-managed mutual fund family in the U.S.) and a full range of integrated private banking capabilities, including investment management and advisory services, trust and estate planning, global custody, global mutual funds, credit and banking, and philanthropic advisory services. Total assets under management amounted to $155 billion at December 31, 1997. Net income grew 24% to $143 million in 1997, with a return on common equity of 32%. Revenues for 1997 rose 11%, driven by growth in assets under management as well as increased investment advisory activities. 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 also the market leader in the New York metropolitan tri-state area where it has relationships with 53% of middle market companies and is lead bank for 25% of these companies. Net income was $211 million for 1997, a $21 million increase when compared with 1996 results, reflecting higher deposit volume, increased corporate finance activity and productivity gains. Chase Texas: Chase Texas is the primary bank for more large corporations and middle market companies than any other bank in Texas. Chase Texas also maintains a strong consumer banking presence through its 125 locations. Additionally, Chase Texas was the largest bank for personal and corporate trust services in the Southwest in 1997. Net income for 1997 was $291 million, a $22 million increase when compared with 1996 results. These favorable results were attributable to revenue growth of 8%, reflecting an increase in fee-based activities and higher loan and deposit volumes. The 1997 net income of $291 million allocated by each major business franchise was as follows: $157 million in Global Banking, $75 million in NCS and $59 million in CTS. NATIONAL CONSUMER SERVICES (NCS) For 1997, NCS's operating net income was $1.04 billion, a $90 million increase over 1996. Operating return on common equity was 21%, compared with 20% in 1996. These favorable results reflected higher revenue (driven by higher loan volume in credit cards and mortgage banking products) and the benefit of merger-related savings, and were partially offset by 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. The following table sets forth certain key financial performance measures of the businesses within NCS for the periods indicated.
1997 1996 --------------------------------------- ---------------------------------------- Operating Managed Operating Managed Year Ended December 31, Managed Net Efficiency Managed Net Efficiency (in millions, except ratios) Revenues(a) Income ROCE Ratio Revenues(a) Income ROCE Ratio - --------------------------------------------------------------------------------------------------------------------- National Consumer Services: Credit Cards $3,345 $ 325 18.3% 39% $2,917 $ 344 21.8% 42% Retail Payments and Investments 2,551 395 27.2 71 2,472 349 24.4 74 Mortgage Banking 741 180 15.6 56 652 106 7.9 67 National Consumer Finance 649 123 25.7 40 599 137 29.8 42 - ---------------------------------------------------------------------------------------------------------------------
(a) Insurance products managed within Retail Payments and Investments, but included for reporting purposes in Credit Cards, Mortgage Banking, and National Consumer Finance, generated revenues of $102 million and $81 million in 1997 and 1996, respectively. Credit Cards: Chase Cardmember Services ("CCS") ranks as the fourth largest bank card issuer in the United States with a $32.5 billion managed portfolio at December 31, 1997. In November 1997, Chase acquired substantially all of The Bank of New York's credit card portfolio, totaling approximately 3.5 million accounts and approximately $4 billion in outstandings. CCS established a joint venture with First Data Corporation resulting in one of the largest merchant credit card processors in the U.S. CCS now reflects the results of the International Consumer business, which includes The Manhattan Card Company Limited (which became wholly owned in 1998), the third-largest credit card issuer in Hong Kong, and which provides consumer banking in Hong Kong, Panama and the Eastern Caribbean. For 1997, credit card operating net income was $325 million, a decline of $19 million or 6% due to higher funding costs in Hong Kong. In the U.S., increased charge-offs and costs related to the co-branded Wal-Mart MasterCard were offset by revenue growth. In 1997, revenue increased 15% as a result of growth in both the core portfolio and from co-branded initiatives, and from higher fees and risk-based pricing initiatives. THE CHASE MANHATTAN CORPORATION 23 23 MANAGEMENT'S DISCUSSION AND ANALYSIS Retail Payments and Investments: At December 31, 1997, Retail Payments and Investments had the leading share of primary bank relationships among consumers and small businesses in the New York metropolitan tri-state area. Retail Payments and Investments offers customers convenient access to financial services through the largest branch and proprietary ATM networks in the region plus state-of-the-art telephone, PC and Internet services. In addition to its banking activities, Retail Payments and Investments includes brokerage services and markets insurance and investment products nationwide. Net income in 1997 was $395 million, a 13% increase from 1996, reflecting higher deposit volumes, increased investment product sales, greater Chase banking card usage and lower expenses from merger savings. The results for Retail Payments and Investments include the consumer-related results of Chase Texas. Mortgage Banking: At December 31, 1997, Mortgage Banking was the third-largest originator and servicer of residential mortgage loans in the U.S., serving more than 1.9 million customers nationwide. In 1997, Chase acquired $17 billion in mortgage servicing rights from Source One Mortgage Services Corporation ("Source One") and, at December 31, 1997, Chase's servicing portfolio totaled $169 billion. In 1997, $40 billion in residential mortgage loans were originated. Net income improved in 1997 to $180 million, a $74 million increase from 1996. Net income for 1997 includes $20 million pre-tax amortization of goodwill. The favorable 1997 results arose from a 14% increase in revenue, reflecting higher origination volume, wider origination margins, servicing portfolio growth and loan growth. Also contributing to the increase were lower expenses as a result of merger savings and productivity gains resulting from the reengineering of the mortgage origination business. National Consumer Finance: National Consumer Finance ("NCF") is a leading provider of automobile financing, home equity-secured lending, student lending, unsecured consumer lending ("Chase Advantage Credit") and manufactured housing financing. At December 31, 1997, Chase Auto Finance had $13.2 billion in outstandings with $10.8 billion in new originations for 1997. In 1997, NCF's revenue increased by 8% as a result of growth in loan volume. However, net income in 1997 was $123 million, a $14 million decrease when compared with 1996. The lower net income was the result of a higher credit provision and the impact of a joint venture formed with the Student Loan Marketing Association ("Sallie Mae") in late 1996. Revenues from the Sallie Mae joint venture are accounted for on an equity basis, causing the amount of reported revenues to be lower than they would have been if accounted for on a consolidated basis. Excluding the effects of this joint venture, revenues grew by 16%. CHASE TECHNOLOGY SOLUTIONS (CTS) In order to establish a fully integrated transaction processing platform, Chase has combined its global services businesses, information technology and operations and electronic commerce initiatives into a new group called CTS. Global Services, within CTS, is a leading provider of information and transaction services globally and includes custody, cash management, trust and other fiduciary services. As the world's largest provider of global custody and a leader in trust and agency services, Global Services was custodian for $4.5 trillion in assets and serviced over $3.0 trillion in outstanding debt at December 31, 1997. 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 volumes. Operating net income for Global Services in 1997 was $395 million, an increase of $106 million, or 37%, from 1996. These favorable results were due to strong revenue growth, reflecting an increase in assets under custody and new business initiatives, as well as continued productivity gains. The results for Global Services include the global services-related results of Chase Texas. CORPORATE Corporate includes the effects remaining at the Corporate level after the implementation of management accounting policies, including residual credit provision and tax expense. Corporate also includes unallocated special items, such as results attributed to Chase's investment in CIT, prior to its sale. For 1997, Corporate had an operating net loss of $57 million compared with operating net income of $59 million in 1996. NEW CAPITAL ALLOCATION METHODS For 1998, Chase has taken several steps to change the way it allocates capital to its business units. While the primary basis for allocating capital continues to be based on quantitative measures of credit risk, market risk and operating risk, two changes to the methodology have been introduced. First, recognizing that there are certain minimum capital ratios that must be met to maintain Chase and its banks at regulator-defined "well capitalized" levels, a leverage capital "tax" on managed assets and some off-balance sheet instruments has been incorporated in attributed capital at the line of business level. Second, businesses have been allocated capital equal to one hundred percent of any goodwill and certain intangibles generated through acquisitions. As restated in the results below, these refinements result in the attribution of capital to the lines of business for 1997 and 1996 in excess of Chase's actual amount of common equity, as compared to the under-attribution of capital to businesses under the previous policies reflected above. Chase intends to continue to review and refine its capital allocation methodologies, with restatements to lines of business results when appropriate. 24 THE CHASE MANHATTAN CORPORATION 24 MANAGEMENT'S DISCUSSION AND ANALYSIS In addition, in 1998 Chase has adopted "shareholder value added," or SVA, as its primary measure of business unit performance. SVA is defined as operating net income on a cash basis (or operating net income excluding the impact of amortization of goodwill and certain intangibles) less an explicit charge for allocated capital. This measure provides a clear link between capital employed and the return on that capital. Business unit managers will be judged on their ability to increase SVA. To help investors evaluate the impact of these changes, the restated results for 1997 are shown below along with the growth from 1996 to reflect results as if these policies had been in effect since the beginning of 1996.
1997 Growth from 1996 ------------------------------------------ ------------------------ Operating Average Operating Year Ended December 31, (in millions) Cash Income SVA Common Equity Cash Income SVA - ------------------------------------------------------------------------------------------------------------- Global Banking $ 2,581 $ 799 $12,826 $ 252 $ 220 National Consumer Services 1,131 356 5,480 88 52 Global Services (within CTS) 429 245 1,325 120 133 Total (includes Corporate results) $ 3,957 $ 1,327 $18,828 $ 336 $ 260 - -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- NET INTEREST INCOME Reported net interest income of $8.16 billion in 1997 was down slightly when compared with the 1996 level. Excluding the impact of credit card securitizations and interest on tax audit settlements in 1996, net interest income on a managed basis increased 4% in 1997. The increase was primarily due to higher volumes of consumer-related loans (particularly credit cards and auto financings), partially offset by a greater level of lower-yielding earning assets (which support Chase's trading and treasury businesses) and lower spreads in the commercial and consumer loan portfolio.
- ----------------------------------------------------------------------------------------- Year Ended December 31, 1997 1996 Change - ----------------------------------------------------------------------------------------- Net Interest Income (in millions) Managed Basis $ 9,411 $ 9,082 3.6% Impact of Securitizations (1,253) (914) Tax Audit Settlements -- 54 - ----------------------------------------------------------------------------------------- Reported $ 8,158 $ 8,222 (0.8)% - ----------------------------------------------------------------------------------------- Average Interest-Earning Assets (in billions) Managed Basis $ 301.2 $ 271.5 10.9% Impact of Securitizations (14.6) (10.6) - ----------------------------------------------------------------------------------------- Reported $ 286.6 $ 260.9 9.9% - ----------------------------------------------------------------------------------------- Net Yield on Interest-Earning Assets(a) Managed Basis 3.13% 3.34% (21)bp Impact of Securitizations (.27) (.20) (7)bp Tax Audit Settlements -- .02 (2)bp - ----------------------------------------------------------------------------------------- Reported 2.86% 3.16% (30)bp - -----------------------------------------------------------------------------------------
(a) Reflected on a taxable equivalent basis in order to permit comparisons of yields on tax-exempt and taxable assets. bp - Denotes basis points 25 The reported and managed net yields on average interest-earning assets for 1997 decreased in comparison with 1996. The declines in net yield are primarily due to a greater level of lower-yielding liquid assets, driven by Chase's trading and treasury businesses, and generally narrower spreads on commercial and consumer loan products. The drop in reported net yield was also due to ongoing credit card securitizations, which removed higher-yielding credit card loans from the balance sheet. Average interest-earning assets retained on the balance sheet increased by 10% in 1997, principally as a result of a 20% increase in liquid interest-earning assets. Average total loans (both commercial and consumer) and securities also increased in 1997, but each decreased slightly as a percentage of total interest-earning assets as shown in the table which follows.
- -------------------------------------------------------------------------------- Interest-Earning Assets Year Ended December 31, (in billions) 1997 1996 - -------------------------------------------------------------------------------- Loans $ 159.9 56% $ 150.0 57% Securities 46.1 16 43.7 17 Liquid Assets 80.6 28 67.2 26 - -------------------------------------------------------------------------------- Total $ 286.6 100% $ 260.9 100% - --------------------------------------------------------------------------------
The growth in interest-earning assets in 1997 was funded by Federal funds purchased and securities sold under repurchase agreements, which provides short-term funding for trading-related positions. Additionally, higher deposit levels and other borrowings also funded the growth in interest-earning assets. THE CHASE MANHATTAN CORPORATION 25 26 MANAGEMENT'S DISCUSSION AND ANALYSIS PROVISION FOR CREDIT LOSSES Chase's provision for credit losses, which in 1997 equaled net charge-offs, amounted to $804 million for the year, down 10% from 1996. The decrease in the provision was 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. Management expects the provision for credit losses in 1998 will be higher than in 1997, primarily as a result of a higher volume of credit card outstandings and anticipated charges from the Asian commercial portfolio. For a discussion of Chase's net charge-offs, see Credit Risk Management on pages 29-37. NONINTEREST REVENUE Noninterest revenue rose 13% in 1997. The 1997 results were particularly strong in several key areas (notably corporate finance fees, securities gains, trust fees, credit card revenues and other revenue). Chase continues to generate overall fee growth by offering clients integrated financing and advisory solutions and new products and by generating new business.
- -------------------------------------------------------------------------------- Year Ended December 31, (in millions) 1997 1996 - -------------------------------------------------------------------------------- Corporate Finance and Syndication Fees $1,136 $ 950 Trust, Custody, and Investment Management Fees 1,307 1,176 Credit Card Revenue 1,183 1,063 Service Charges on Deposit Accounts 376 394 Fees for Other Financial Services 1,607 1,529 - -------------------------------------------------------------------------------- Total Fees and Commissions 5,609 5,112 Trading Revenue 1,323 1,371 Securities Gains 312 135 Revenue from Equity-Related Investments 806 726 Other Revenue 575 286 - -------------------------------------------------------------------------------- Total Noninterest Revenue $8,625 $7,630 - --------------------------------------------------------------------------------
Fees and Commissions Corporate finance and syndication fees of $1.14 billion in 1997 increased by $186 million, or 20%, over the 1996 level. These results are due to strong investment banking deal flow, and reflect significant market share gains in high-yield and investment-grade debt underwriting and in mergers and acquisitions advisory activities. During 1997, Chase acted as arranger for approximately $606 billion of syndicated credit facilities, a reflection of its large client base and strong distribution network. Trust, custody and investment management fees rose 11% to $1.31 billion in 1997. These favorable results were largely attributable to growth in domestic and foreign assets under custody, expanded securities lending activity and a higher level of assets under management, including Chase's proprietary Vista mutual funds.
- -------------------------------------------------------------------------------- Year Ended December 31, (in millions) 1997 1996 - -------------------------------------------------------------------------------- Trust, Custody and Investment Management Product Diversification: Institutional(a) $ 679 $ 590 Personal(b) 419 399 Mutual Fund Fees(c) 104 83 Other Trust Fees 105 104 - -------------------------------------------------------------------------------- Total Trust, Custody, and Investment Management Fees $1,307 $1,176 - --------------------------------------------------------------------------------
(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 administrative, custody, trustee and other fees in connection with Chase's proprietary Vista mutual funds. Credit card revenue increased 11% for 1997, as a result of growth in managed outstandings, including the Wal-Mart co-branded product. The increase in revenue for 1997 was reduced by a rise in net charge-offs on the securitized portfolio, which decreased the excess servicing fees Chase received from the securitizations. Average managed credit card receivables grew 13% to $26.8 billion in 1997. For a further discussion of the credit card portfolio and related securitization activity, see pages 32-33. Fees for other financial services in 1997 increased modestly from 1996 to $1.61 billion. The following table provides the significant components of fees for other financial services.
- -------------------------------------------------------------------------------- Year Ended December 31, (in millions) 1997 1996 - -------------------------------------------------------------------------------- Fees for Other Financial Services: Fees in Lieu of Compensating Balances $ 314 $ 295 Commissions on Letters of Credit and Acceptances 307 330 Mortgage Servicing Fees 231 204 Loan Commitment Fees 120 120 Other Fees 635 580 - -------------------------------------------------------------------------------- Total Fees for Other Financial Services $1,607 $1,529 - --------------------------------------------------------------------------------
The higher level of mortgage servicing fees for 1997 reflects an increase in mortgage servicing volume resulting from the acquisition of the Source One portfolio in February 1997 and greater origination volumes. Higher fees related to brokerage commissions, investment services and cash management services contributed to the increase in other fees. 26 THE CHASE MANHATTAN CORPORATION 27 MANAGEMENT'S DISCUSSION AND ANALYSIS Trading Revenue
- -------------------------------------------------------------------------------- Year Ended December 31, (in millions) 1997 1996 - -------------------------------------------------------------------------------- Trading Revenue $1,323 $1,371 Net Interest Income Impact(a) 715 585 - -------------------------------------------------------------------------------- Total Trading-Related Revenue $2,038 $1,956 - -------------------------------------------------------------------------------- Product Diversification: Interest Rate Contracts(b) $ 726 $ 535 Foreign Exchange Contracts(b) 803 444 Debt Instruments and Other(b) 509 977 - -------------------------------------------------------------------------------- Total Trading-Related Revenue $2,038 $1,956 - --------------------------------------------------------------------------------
(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. Reported trading revenues declined $48 million or 4%, in 1997, however, trading-related revenues increased 4% from 1996. The increase in revenue from interest rate contracts was primarily due to volatility exhibited in the overseas markets, particularly Asia. The rise in foreign exchange revenue reflected strong earnings across a broad spectrum of currencies. This was the result of recent volatility in the Asian markets and an increase in currency trading activity in the European markets caused by uncertainty as to the integration of the European Monetary Union. Debt instruments and other revenue decreased from the prior year primarily due to the unusually volatile and adverse trading markets in the latter part of October. During that period, there were sharp declines and a loss of liquidity for certain securities, particularly emerging markets debt securities. Trading revenues are affected by many factors, including volatility of currencies and interest rates, the volume of transactions executed by Chase on behalf of its customers, Chase's success in proprietary positioning, the credit standing of Chase, and the steps taken by central banks and governments that affect financial markets. Chase expects its trading revenues will fluctuate as these factors vary from period to period. Other Noninterest Revenue
- -------------------------------------------------------------------------------- Year Ended December 31, (in millions) 1997 1996 - -------------------------------------------------------------------------------- Securities Gains $ 312 $ 135 - -------------------------------------------------------------------------------- Revenue from Equity-Related Investments $ 806 $ 726 - -------------------------------------------------------------------------------- Other Revenue: Residential Mortgage Origination/Sales Activities $ 130 $ 63 Net Losses on Disposition of Available-for-Sale Loans -- (80) Gains on Sales of Partially-Owned Investments 102 -- Loss on Sale of a Building in Japan -- (60) All Other Revenue 343 363 - -------------------------------------------------------------------------------- Total Other Revenue $ 575 $ 286 - --------------------------------------------------------------------------------
Securities gains from sales from the available-for-sale portfolio were realized in connection with Chase's ALM activities. The higher gains in 1997 were primarily the result of sales of U.S. Government and agency securities and sales of securities overseas. Revenue from equity-related investments includes income from a wide variety of investments both in the United States and abroad. The 1997 results of $806 million were 11% higher than the prior year, reflecting market conditions which continued to favor corporate mergers and small-cap stocks. At December 31, 1997, the carrying value of Chase's equity-related investments approximated $3.6 billion. Chase believes that equity-related investments will continue to make contributions to its earnings, although the timing of the recognition of gains is unpredictable and revenues could vary significantly from period to period. Other revenue, which includes gains and losses from the sale of nonstrategic assets and from securitizations, rose $289 million in 1997 from the prior year. The 1997 results included higher residential mortgage origination and sales revenue resulting from higher origination volumes and more favorable market conditions. Other revenue in 1997 includes the following special items: a $58 million gain on the sale of Chase's remaining investment in CIT and a $44 million gain on the sale of a partially-owned foreign investment. The 1996 results included the following special item: a $60 million loss on the sale of a building in Japan. During 1997, Chase's investment in CIT contributed $53 million in equity income compared with $48 million in 1996. NONINTEREST EXPENSE Noninterest expense, excluding restructuring costs and foreclosed property expense, was $9.87 billion in 1997, an increase of 6% from the prior year. The 1997 results included higher investment spending on new product offerings and technology, higher incentive costs and the accelerated vesting of stock-based incentive awards. Partially offsetting these expenses were incremental merger savings of $635 million in 1997. For 1997, underlying operating noninterest expense growth before merger saves was 10%.
- -------------------------------------------------------------------------------- Year Ended December 31, (in millions) 1997 1996 - -------------------------------------------------------------------------------- Salaries $ 4,598(a) $ 4,232 Employee Benefits 839 926(b) Occupancy Expense 767 824 Equipment Expense 792 724 Other Expense 2,869 2,640 - -------------------------------------------------------------------------------- Subtotal 9,865 9,346 Foreclosed Property Expense 12 (16) Restructuring Costs 192 1,814 - -------------------------------------------------------------------------------- Total Noninterest Expense $ 10,069 $ 11,144 - -------------------------------------------------------------------------------- Operating Efficiency Ratio(c) 58.1% 58.6% Managed Operating Efficiency Ratio(c)(d) 54.8 56.6 - --------------------------------------------------------------------------------
(a) Includes $135 million for accelerated vesting of stock-based incentive awards. (b) Includes $40 million to conform retirement benefits for foreign employees. (c) Excludes restructuring costs, foreclosed property expense, costs associated with a real estate investment trust ("REIT") subsidiary and special items. (d) Excludes the impact of credit card securitizations. THE CHASE MANHATTAN CORPORATION 27 28 MANAGEMENT'S DISCUSSION AND ANALYSIS Chase's managed operating efficiency ratio improved to 55% in 1997, compared with 57% in 1996. [graph 5 -- See Appendix I] Salaries and Employee Benefits The increase in salaries for 1997 was due to higher incentive costs as a result of higher earnings across a number of businesses, investments in selected growth businesses, and competitive market pressures across many segments of Global Banking. The increase also reflected the accelerated vesting of stock-based incentive awards, which resulted in a charge of $135 million in 1997 and is treated as a special item by Chase. The following table presents Chase's full-time equivalent employees in domestic and foreign offices.
- -------------------------------------------------------------------------------- At December 31, 1997 1996 - -------------------------------------------------------------------------------- Domestic Offices 58,580 57,592 Foreign Offices 10,453 10,193 - -------------------------------------------------------------------------------- Total Full-Time Equivalent Employees 69,033 67,785 - --------------------------------------------------------------------------------
The slight increase in full-time equivalent employees since December 31, 1996 reflects planned growth in selected businesses. Employee benefits decreased $87 million during 1997, when compared with 1996. Included in the results for 1996 was a $40 million charge related to conforming retirement benefits provided to foreign employees, which is treated as a special item. Also contributing to the decline in 1997 were lower costs associated with various benefit plans. Occupancy and Equipment Expense Occupancy expense decreased in 1997, largely as a result of the consolidation of operations and branch facilities from merger integration efforts. Equipment expense increased in 1997, primarily as a result of increased software expenses incurred to enhance processing systems throughout Chase, and technology expenditures necessary to support targeted growth businesses. Other Expense
- -------------------------------------------------------------------------------- Year Ended December 31, (in millions) 1997 1996 - -------------------------------------------------------------------------------- Other Expense: Professional Services $ 575 $ 530 Marketing Expense 415 346 Telecommunications 307 326 Travel and Entertainment 220 213 Amortization of Intangibles 172 169 Minority Interest(a) 74 54 All Other 1,106 1,002 - -------------------------------------------------------------------------------- Total Other Expense $2,869 $2,640 - --------------------------------------------------------------------------------
(a) Includes REIT minority interest expense of $44 million in 1997 and $13 million in 1996. Other expense for 1997 increased by $229 million. The increase includes expenses related to marketing and other costs for the co-branded Wal-Mart MasterCard, which began in the fourth quarter of 1996 and for marketing costs for PC Banking, and Better Banking products and services. Also contributing to the increase were costs associated with the Bank of New York's credit card portfolio, which was acquired in late 1997 and higher minority interest expense associated with the REIT, which was established in the 1996 fourth quarter. Partially offsetting these increases were lower telecommunications expenses in 1997, due to Chase's sourcing and other expense-reduction initiatives. Chase has been actively working on the year 2000 computer problem for the past several years and has made significant progress in repairing its systems. To date, Chase has completed the inventory, assessment and strategy phases of its year 2000 program. During these phases, Chase identified hardware and software that required modification, developed implementation plans, prioritized tasks and established implementation time frames. The process has required working with vendors, third-party service providers, customers as well as with internal Chase users of systems applications. The scope of the effort involves over 2,000 business applications and 3,000 unique external interfaces and more than 1,300 locations worldwide. Although many of these applications, interfaces and locations are already able to handle post-year 2000 data processing, much work remains to be completed. Chase previously estimated the cost to remediate the year 2000 problem at approximately $250 million. The current estimate has been revised to approximately $300 million to account for enhanced testing environments and the acceleration of certain systems upgrades. Chase expects to incur the largest portion of this cost in 1998. During 1998, year 2000 activities are being given highest priority, and Chase is targeting to have all major systems repaired and the majority of testing completed by year end. The results of these efforts will continue to enhance Chase's already strong technology platforms. 28 THE CHASE MANHATTAN CORPORATION 29 MANAGEMENT'S DISCUSSION AND ANALYSIS In concert with its systems efforts, Chase is continually staying abreast of potential exposures and business risks that may be caused by the year 2000. Working within industry forums, Chase is helping to define the necessary levels of testing across the financial services industry to prepare for the year 2000. In addition, Chase is working closely with its customers to prepare for the year 2000 and develop contingency plans that will minimize the impact that may result from the century date change. Chase is also preparing its computer systems and applications for the commencement of the third stage of the Economic and Monetary Union (currently anticipated to occur on or about January 1, 1999, subject to the fulfillment of certain conditions), whereupon a new currency, "the euro," would become the official currency in some or all of the member states of the European Union. Chase expects that a significant proportion of the year 2000 and euro conversion costs will represent the redeployment of Chase's existing resources. Foreclosed Property Expense Foreclosed property expense was $12 million in 1997, compared with a credit of $16 million in 1996, reflecting smaller gains on the sale of a lower level of foreclosed properties during 1997. Restructuring Costs In connection with the merger of The Chase Manhattan Corporation and Chemical Banking Corporation, 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 have been recognized as incurred. These remaining merger-related expenses (originally estimated at $250 million) are expected to total approximately $375 million. These additional costs primarily relate to technology and systems integration costs. Merger-related expenses of $192 million were incurred in 1997, resulting in cumulative-to-date merger-related expenses of $356 million. At December 31, 1997, the reserve balance associated with the $1.65 billion merger-related restructuring charge was approximately $394 million, the majority of which is related to the disposition of certain facilities, premises and equipment. INCOME TAXES Chase recognized income tax expense of $2.20 billion in 1997, compared with $1.35 billion in 1996. The 1996 amount includes tax benefits related to restructuring costs as well as aggregate tax benefits and refunds of $132 million. Chase's effective tax rate was 37.3% for 1997, compared with 38.0% (excluding the aforementioned tax benefits and refunds) for 1996. CREDIT RISK MANAGEMENT Credit risk is the risk of loss from the default by an obligor or counterparty. Under the direction of Chase's Chief Credit Officer, policies and procedures for measuring and managing this risk are formulated, approved and communicated throughout Chase. Senior credit executives are responsible for maintaining credit processes, addressing transaction and product risk issues, providing an independent review function and monitoring the aggregate portfolio. Credit risk management is an integrated and continuous process operating at both the transaction and portfolio levels. At the transaction level, credits are originated by line business units in the context of business strategies that address the potential risks and rewards of specific market segments. Credit executives are involved early in the origination and underwriting process to ensure adherence to risk policies and underwriting standards. Transactions or product offerings require approval by an officer with the requisite credit authority. Such authorities are differentiated by dollar amount, risk rating and industry expertise. Only a limited number of highly experienced credit executives have sufficient authority to approve major exposures. Portfolio diversification lowers Chase's risk profile. Within the loan, derivatives and foreign exchange instruments portfolios, diversification is achieved by minimizing excessive concentrations to any one obligor, industry, risk grade, product or geographic location. For a further discussion of these portfolios, see the sections that follow. THE CHASE MANHATTAN CORPORATION 29 30 MANAGEMENT'S DISCUSSION AND ANALYSIS LOAN PORTFOLIO The following table presents loan-related information for the dates indicated.
- ---------------------------------------------------------------------------------------------------------------------------------- Nonperforming Past Due 90 Days and Loans Assets Net Charge-offs Over and Accruing ------------------ -------------- --------------- -------------------- As of or for the year ended December 31, (in millions) 1997 1996 1997 1996 1997 1996 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- CONSUMER Domestic Consumer: 1-4 Family Residential Mortgages $ 38,680 $ 36,621 $ 340 $ 249 $ 32 $ 30 $ 2 $ 7 Credit Card 15,631 12,157 -- -- 543 618 256 267 Auto Financings 13,243 11,121 31 28 61 38 20 6 Other Consumer (a) 8,543 9,185 7 7 171 138 142 115 - ---------------------------------------------------------------------------------------------------------------------------------- Total Domestic Consumer 76,097 69,084 378 284 807 824 420 395 Foreign Consumer 3,976 3,286 21 17 14 9 7 6 - ---------------------------------------------------------------------------------------------------------------------------------- Total Consumer 80,073 72,370 399 301 821 833 427 401 - ---------------------------------------------------------------------------------------------------------------------------------- COMMERCIAL Domestic Commercial: Commercial and Industrial 37,931 34,742 258 444 23 86 18 19 Commercial Real Estate 5,030 5,934 75 156 (37) 14 14 8 Financial Institutions 6,652 5,540 1 2 (1) -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Total Domestic Commercial 49,613 46,216 334 602 (15) 100 32 27 Foreign Commercial: Commercial and Industrial 27,628 23,109 164 79 9 (22) -- 6 Commercial Real Estate 713 800 -- 1 -- (3) -- -- Financial Institutions & Foreign Gov't 10,427 12,597 11 38 (11) (11) -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Total Foreign Commercial 38,768 36,506 175 118 (2) (36) -- 6 - ---------------------------------------------------------------------------------------------------------------------------------- Total Commercial 88,381 82,722 509 720 (17) 64 32 33 - ---------------------------------------------------------------------------------------------------------------------------------- Total Loans $168,454 $155,092 $ 908 $1,021 $ 804 $ 897 $ 459 $ 434 - ---------------------------------------------------------------------------------------------------------------------------------- Charge Related to Conforming Credit Card Charge-off Policies -- -- -- 102 - ---------------------------------------------------------------------------------------------------------------------------------- Assets Acquired as Loan Satisfactions 110 130 -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Total Nonperforming Assets & Net Charge-offs $1,018 $1,151 $ 804 $ 999 - ----------------------------------------------------------------------------------------------------------------------------------
(a) 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, 1997 and 1996, student loans that were past due 90 days and over and still accruing were approximately $43 million and $54 million, respectively. [graph 6 -- See Appendix I] 30 THE CHASE MANHATTAN CORPORATION 31 MANAGEMENT'S DISCUSSION AND ANALYSIS The consumer and commercial segments of the portfolio have different risk characteristics and different techniques are utilized to measure and manage their respective credit risks. The consumer loan risk management process utilizes sophisticated credit scoring and other analytical methods to differentiate risk characteristics. Risk management procedures include monitoring both loan origination credit standards and loan performance quality indicators. The consumer portfolio review process also includes evaluating product-line performance, geographic diversity and consumer economic trends. Credit facilities within the commercial sector are risk-rated based on an assessment of the business and financial risks of the borrower. Risk ratings are periodically checked against external benchmarks, such as bond ratings, when available. Facilities have hold targets based on their risk rating and other factors and are often syndicated to lower potential concentration risks. Aggregate exposure to a single obligor and affiliated parties is monitored against target thresholds. The risk characteristics of industries and countries are also evaluated by industry specialists and country risk managers who provide insight into the portfolio. Their evaluation is incorporated into the credit risk management process at both the transaction and portfolio levels through the facility grading mechanism and by direct consultation with originating officers. Finally, the aggregate portfolio is regularly monitored to detect changes in its overall risk profile or potential concentration risks. Chase's loans outstanding totaled $168.5 billion at December 31, 1997, an increase of $13.4 billion, or 9%, from the 1996 year-end. The increase reflects higher demand for consumer and commercial loans, partially offset by the impact of credit card, auto loan, residential and commercial mortgage securitizations. Chase's nonperforming assets at year-end 1997 were $1,018 million, a decrease of $133 million from the 1996 year-end level. The reduction reflects the continued low level of loans being placed on nonperforming status and repayments, charge-offs and loans returned to accrual status. Management expects there will be an increase in nonperforming assets in 1998 primarily as a result of the deterioration of credit conditions in a number of Asian countries. [graph 7 -- See Appendix I] Total net charge-offs were $804 million in 1997, compared with $897 million in 1996. The 1996 amount excludes a charge of $102 million related to post-merger conforming of credit card charge-off policies. Total net charge-offs on a managed basis were $1,780 million in 1997, compared with $1,435 million in 1996 (excluding the aforementioned charge of $102 million). The increases in managed net charge-offs for 1997 reflect growth in average managed credit card outstandings and higher levels of personal bankruptcies and delinquencies. CONSUMER PORTFOLIO Domestic Consumer Residential Mortgage Loans: 1-4 family residential mortgage loans at December 31, 1997 were $38.7 billion, an increase of $2.1 billion from the 1996 year-end, primarily reflecting a higher level of adjustable-rate loan outstandings. At December 31, 1997, nonperforming domestic residential mortgage loans as a percentage of the residential mortgage portfolio were 0.88%, compared with 0.68% at the 1996 year-end. Residential Mortgage Loans by Geographic Region
- -------------------------------------------------------------------------------- December 31, (in millions) 1997 1996 - -------------------------------------------------------------------------------- New York City $ 3,193 $ 3,722 New York (Excluding New York City) 4,233 4,892 Remaining Northeast 5,944 6,231 - -------------------------------------------------------------------------------- Total Northeast 13,370 14,845 Southeast 4,983 4,364 Midwest 2,236 3,222 Texas 3,257 2,320 Southwest (Excluding Texas) 1,071 926 California 8,998 7,997 West (Excluding California) 4,765 2,947 - -------------------------------------------------------------------------------- Total $38,680 $36,621 - --------------------------------------------------------------------------------
Chase both originates and services residential mortgage loans as part of its mortgage banking activities. The following table presents the residential mortgage servicing portfolio activity for 1997 and 1996.
- -------------------------------------------------------------------------------- Year Ended December 31, (in billions) 1997 1996 - -------------------------------------------------------------------------------- Balance at Beginning of Year $ 140.6 $ 132.1 Originations 40.1 32.8 Acquisitions 17.0(a) 1.1 Repayments and Sales (28.9) (25.4) - -------------------------------------------------------------------------------- Balance at End of Year $ 168.8 $ 140.6 - --------------------------------------------------------------------------------
(a) Includes acquisition of Source One portfolio in February 1997. THE CHASE MANHATTAN CORPORATION 31 32 MANAGEMENT'S DISCUSSION AND ANALYSIS Mortgage servicing rights ("MSRs"), which are included in other assets, amounted to $2,075 million at December 31, 1997, compared with $1,404 million at December 31, 1996. The higher level of MSRs reflects the corresponding increase in Chase's residential mortgage servicing portfolio, primarily due to the acquisition of the Source One servicing portfolio. Chase continually evaluates prepayment exposure of the servicing portfolio, and adjusts the remaining life or balance, if necessary, of the servicing rights as a result of prepayments, and utilizes derivative contracts (interest rate swaps and purchased option contracts) to reduce its exposure to prepayment risks. 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. Chase securitized $4.7 billion of credit card receivables during 1997, compared with $7.5 billion of receivables during 1996. At December 31, 1997, Chase had $32.5 billion of managed receivables (of which $15.6 billion of receivables were on the balance sheet), compared with $25.2 billion (of which $12.2 billion were on the balance sheet) at year-end 1996. The increase reflects the purchase of substantially all of The Bank of New York's credit card portfolio in late 1997, totaling approximately 3.5 million accounts and approximately $4.0 billion in outstandings. The continued strong growth in credit card outstandings is also due in large part to increased card utilization and improvement in activation and retention programs. Domestic Credit Card Receivables by Geographic Region
- -------------------------------------------------------------------------------- December 31, (in millions) 1997 1996 - -------------------------------------------------------------------------------- New York City $ 779 $ 917 New York (Excluding New York City) 1,121 894 Remaining Northeast 2,703 2,280 - -------------------------------------------------------------------------------- Total Northeast 4,603 4,091 Southeast 2,836 1,989 Midwest 3,165 2,309 Texas 1,126 816 Southwest (Excluding Texas) 821 518 California 2,053 1,746 West (Excluding California) 1,027 688 - -------------------------------------------------------------------------------- Total $15,631 $12,157 - --------------------------------------------------------------------------------
The following table presents Chase's managed credit card-related data for the periods presented.
- -------------------------------------------------------------------------------- As of or for the year ended December 31, (in millions) 1997 1996 - -------------------------------------------------------------------------------- Average Managed Credit Card Receivables $26,848 $23,709 Past Due 90 Days and Over and Accruing 633 564 As a Percentage of Average Credit Card Receivables 2.36% 2.38% Net Charge-offs 1,519 1,156(a) As a Percentage of Average Credit Card Receivables 5.66% 4.87% - --------------------------------------------------------------------------------
(a) Excludes a charge related to post-merger conforming of credit card charge-off policies. [graph 8 -- See Appendix I] The increase in net charge-offs of managed credit card receivables for 1997 reflects growth in average managed credit card outstandings and higher levels of personal bankruptcies and delinquencies. Management currently expects Chase's credit card net charge-offs, as a percentage of average managed credit card receivables, to increase modestly in 1998 when compared with 1997, due to the generally lower credit quality of The Bank of New York's portfolio, a factor which was anticipated at the time of the acquisition. Credit Card Securitizations: In a credit card securitization, Chase takes a portion of its credit card receivables and packages them into securities. Securitizations change Chase's status from that of a lender to that of a loan servicer. The securitization of credit card receivables does not significantly affect Chase's reported net income. Due to the revolving nature of the credit card receivables sold, the recognition of servicing fees results in a pattern of income recognition that is substantially similar to the pattern that would be experienced if the receivables had not been sold. The initial gain or loss on the sale of the securitized receivables is recorded at the time of the securitization. Thereafter, for securitized receivables, amounts [graph 9 -- See Appendix I] 32 THE CHASE MANHATTAN CORPORATION 33 MANAGEMENT'S DISCUSSION AND ANALYSIS that would previously have been reported as net interest income and as provision for credit losses are instead reported as components of noninterest revenue in the income statement, as shown in the following table.
- -------------------------------------------------------------------------------- Favorable (Unfavorable) Impact ----------------------- Year Ended December 31, (in millions) 1997 1996 - -------------------------------------------------------------------------------- Net Interest Income $(1,253) $(914) Provision for Credit Losses 993 570 Credit Card Revenue 233 318 Other Revenue 27 26 - -------------------------------------------------------------------------------- Pre-tax Income Impact of Securitizations $ -- $ -- - --------------------------------------------------------------------------------
Auto Financings: This portfolio consists of auto loans and leases. Auto financings were $13.2 billion at December 31, 1997, an increase of $2.1 billion from the prior year. The increase in auto financings reflected continued strong consumer demand due to favorable pricing programs, partially offset by the impact of auto loan securitizations. Total originations were $10.8 billion in 1997, compared with $11.6 billion in 1996. Chase securitized approximately $3.6 billion of auto loans during 1997, compared with approximately $4.0 billion during 1996. Net charge-offs were $61 million in 1997, an increase of $23 million from 1996, primarily reflecting growth in the portfolio and the unfavorable performance of a discontinued product line. The largest concentrations of auto financings are in the Texas, New York and California markets, representing 16%, 15% and 13%, respectively, of the portfolio. No other state represents more than 8% of the auto financings portfolio. Other Consumer Loans: Other consumer loans consist primarily of unsecured revolving lines of credit, manufactured housing financing and student loans. Other consumer loans were $8.5 billion at December 31, 1997, a decrease of $0.6 billion from the prior year-end level. The decrease primarily reflected the sale of recreational vehicle and marine loan portfolios during the 1997 third quarter. The $33 million increase in net charge-offs for 1997 reflects higher personal bankruptcies on unsecured revolving lines of credit. Foreign Consumer Foreign consumer loans consist primarily of loans secured by 1-4 family residential properties and other loans to individuals outside the United States, primarily in Hong Kong. Also included in foreign consumer loans are the credit card loans of The Manhattan Card Company Limited, the third-largest card issuer in Hong Kong. Foreign consumer loans were $4.0 billion at December 31, 1997, a $0.7 billion increase during 1997. COMMERCIAL PORTFOLIO Domestic Commercial Commercial and Industrial: The domestic commercial and industrial portfolio totaled $37.9 billion at December 31, 1997, compared with $34.7 billion at December 31, 1996. The portfolio consists primarily of loans made to large corporate and middle market customers and is diversified geographically and by industry. Net charge-offs of domestic commercial and industrial loans were $23 million in 1997, compared with $86 million in 1996, reflecting a continuation of the strong credit quality experienced over the past several years. Commercial Real Estate: The domestic 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). Domestic commercial real estate loans were $5.0 billion at December 31, 1997, a decrease of $0.9 billion from 1996, principally as a result of securitizations, repayments from borrowers, transfers, collections and sales primarily from the terminal commercial real estate portfolio. Nonperforming domestic commercial real estate loans were $75 million at December 31, 1997, a 52% decrease from 1996. There were net recoveries of domestic commercial real estate loans in 1997 amounting to $37 million, compared with net charge-offs of $14 million in 1996. The largest concentrations of domestic commercial real estate loans are in the New York/New Jersey and Texas markets, representing 44% and 21%, respectively, of the portfolio. No other state represented more than 9% of the domestic commercial real estate loan portfolio. Financial Institutions: The domestic financial institutions portfolio includes loans to commercial banks and companies whose businesses primarily involve lending, financing, investing, underwriting or insurance. Loans to domestic financial institutions were $6.7 billion at December 31, 1997, an increase from $5.5 billion at December 31, 1996. The portfolio maintained its strong credit quality throughout 1997, with a net recovery of $1 million in 1997 and no net charge-offs in 1996. Foreign Commercial Commercial and Industrial: The foreign commercial and industrial portfolio totaled $27.6 billion at year-end 1997, an increase of $4.5 billion from 1996. The portfolio consists primarily of loans made to large corporate and middle market customers and is diversified geographically and by industry. Net charge-offs increased to $9 million in 1997 from net recoveries of $22 million in 1996. Nonperforming assets increased $85 million in 1997 when compared with 1996. Nonperforming assets in Asia totaled less than $100 million at December 31, 1997. THE CHASE MANHATTAN CORPORATION 33 34 MANAGEMENT'S DISCUSSION AND ANALYSIS Commercial Real Estate: Total foreign commercial real estate loans at December 31, 1997 were $0.7 billion, a slight decrease from the 1996 year-end level of $0.8 billion. Financial Institutions and Foreign Governments: This portfolio consists of loans to commercial banks and companies whose businesses primarily involve lending, financing, investing, underwriting or insurance as well as to governments in foreign countries, and their ministries, departments and agencies. Loans to foreign financial institutions were $7.0 billion at December 31, 1997, an increase of $0.5 billion from December 31, 1996. Foreign government loans were $3.4 billion at December 31, 1997, a $2.7 billion decrease from year-end 1996. In 1997, net recoveries for the portfolio were $11 million, the same as in 1996. INDUSTRY DIVERSIFICATION Based upon the industry classifications utilized by Chase at December 31, 1997, there were no industry segments that exceeded 5% of total commercial and industrial loans outstanding. CROSS-BORDER EXPOSURE Credits denominated in a currency other than that of the country in which a borrower is located, such as dollar-denominated loans made overseas, are called "cross-border" credits. In addition to the credit risk associated with any borrower, these particular credits are also subject to "country risk" -- economic and political risk factors specific to the country of the borrower that may make the borrower unable or unwilling to pay principal and interest according to contractual terms. Other risks associated with these credits include the possibility of insufficient foreign exchange and restrictions on its availability. To minimize country risk, Chase monitors its foreign credits in each country with specific consideration given to maturity, currency, industry and geographic concentration of the credits. The Asian financial turmoil, which started in July 1997, has affected many countries where Chase has had long-standing banking relationships. The table below presents Chase's exposure to selected Asian countries. The basis of presentation is consistent with that used by Chase's credit risk management policies in assessing Chase's cross-border risk. The cross-border exposures represent both the public and private sectors and are presented net of written guarantees and tangible liquid collateral when held outside the foreign country. The table below includes local currency outstandings in these individual countries that are not funded by local currency borrowings and includes issued letters of credit and undrawn commitments to extend credit. Countries in which Chase's cross-border outstandings are greater than 1% of total assets are disclosed in Chase's Annual Report on Form 10-K. SELECTED ASIAN COUNTRY EXPOSURE
- --------------------------------------------------------------------------------------------------------- December 31, 1997 (in billions) Lending-Related Trading Foreign Total Cross- and Other(a) Assets(b) Exchange(c) Derivatives(c) Border Exposure - --------------------------------------------------------------------------------------------------------- Korea $3.1 $0.3 $1.7 $0.3 $5.4 Hong Kong 3.1 -- 0.2 0.3 3.6 Indonesia 1.7 0.1 0.6 0.2 2.6 Thailand 1.4 0.1 0.5 0.1 2.1 Singapore 1.2 -- 0.6 -- 1.8 Malaysia 0.9 -- 0.2 -- 1.1 Philippines 1.0 0.1 -- -- 1.1 China 0.6 0.1 0.1 -- 0.8 Taiwan 0.7 0.1 -- -- 0.8 India 0.2 -- -- -- 0.2 - ---------------------------------------------------------------------------------------------------------
(a) Includes loans and accrued interest, interest-bearing deposits with banks, acceptances, other monetary assets, issued letters of credit, undrawn commitments to extend credit and local currency assets net of local currency liabilities. (b) Trading assets represent debt and equity instruments. (c) Foreign exchange largely represents the mark-to-market exposure of spot and forward contracts. Derivatives largely represent the mark-to-market exposure of risk management instruments. Mark-to-market exposure is a measure, at a point in time, of the value of a foreign exchange or derivative contract in the open market. The impact of legally enforceable master netting agreements on these foreign exchange and derivative contracts reduced exposure by $0.7 billion. Korea: Korea developed severe international liquidity problems in late 1997, when capital flight exerted pressure on the won and international creditors showed increasing reluctance to roll over Korea's short-term external debt. In response to these problems, a group of official creditor institutions and bilateral lenders led by the International Monetary Fund ("IMF") agreed to provide financial support amounting to approximately $57 billion based on Korea's agreement to undertake far-reaching economic reforms. The Korean Government and a group of international banks have reached agreement on a plan to extend the maturities of approximately $24 billion of short-term credits to the Korean banking system. The bank refinancing plan is designed to help Korea solve its short-term liquidity problem, while supporting the country's economic program. 34 THE CHASE MANHATTAN CORPORATION 35 MANAGEMENT'S DISCUSSION AND ANALYSIS [graph 10 -- See Appendix I] Under the plan, Korean banks will offer to exchange their short-term, nontrade credits for loans with maturities of one, two or three years, guaranteed by the Republic of Korea. These loans will bear floating interest rates of 2.25%, 2.5% and 2.75% above the six-month London Interbank Offer Rate ("LIBOR"). The debt exchange is expected to be completed in April 1998. Creditor banks (including Chase) currently are supporting a program to roll over short-term maturities to Korean financial institutions through March 31, 1998. Indonesia: The financial situation in Indonesia with its external creditors deteriorated in late 1997 amidst concerns about its banking system and uncertainties about the country's ability to service its foreign debt following the sizable devaluation of the rupiah. The IMF and other multilateral organizations have pledged $18 billion in support of reform measures, with governments pledging an additional $16 billion in "standby" assistance. In an effort to restore confidence in the financial system, the Indonesian government has guaranteed the claims of depositors and creditors of its domestic banks. With some private borrowers experiencing difficulties in servicing their foreign currency debts at the current rupiah/dollar exchange rate, the government has set up two committees in an effort to facilitate negotiations between individual borrowers and their creditors. Despite these initiatives, Indonesia's access to the private international credit and capital markets currently remains effectively closed. DERIVATIVE AND FOREIGN EXCHANGE FINANCIAL INSTRUMENTS 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. Derivative and foreign exchange transactions involve credit and market risk. The effective management of credit and market risk is vital to the success of Chase's trading and ALM activities. Because of changing market environments, the monitoring and managing of these risks is a continual process. For a further discussion of market risk, see the Market Risk Management section on page 37. Chase seeks to control the credit risk arising from derivative and foreign exchange transactions through its credit approval process and the use of risk control limits and monitoring procedures. Chase uses the same credit procedures when entering into derivative and foreign exchange transactions as it does for traditional lending products. The credit approval process involves evaluating each counterparty's creditworthiness, assessing the appropriateness of the derivative, foreign exchange and structured transaction to the risks the counterparty is attempting to manage, and determining if there are specific transaction characteristics that would alter the risk profile. Credit limits are calculated and monitored on the basis of potential exposures, which take into consideration current market values and estimates of potential future movements in market values. If collateral is deemed necessary to reduce credit risk, then the amount and nature of the collateral obtained is based on management's credit evaluation of the customer. Chase believes the true measure of credit risk is the replacement cost of the derivative or foreign exchange contract. This is also referred to as repayment risk or the mark-to-market exposure amount. While notional principal is the most commonly used volume measure in the derivative and foreign exchange markets, it is not a 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. 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. THE CHASE MANHATTAN CORPORATION 35 36 MANAGEMENT'S DISCUSSION AND ANALYSIS 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. If there is a net negative number, then Chase's exposure to the counterparty is considered to be zero. 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. For the notional amounts and related credit risk exposure amounts by product, see Note Eighteen. Many of Chase's derivative and foreign exchange contracts are short-term, which also mitigates credit risk as transactions settle quickly. The following table provides the remaining maturities of derivative and foreign exchange contracts outstanding at December 31, 1997 and 1996. Percentages are based upon remaining contract life of mark-to-market exposure amounts.
- -------------------------------------------------------------------------------------------------------------- 1997 1996 --------------------------------------------- -------------------------------------------- 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 3 months 15% 53% 14% 29% 15% 59% 26% 31% 3 to 6 months 6 22 12 13 5 21 5 11 6 to 12 months 6 20 25 12 8 15 28 10 1 to 5 years 47 5 48 32 52 5 40 35 Over 5 years 26 -- 1 14 20 -- 1 13 - -------------------------------------------------------------------------------------------------------------- Total 100% 100% 100% 100% 100% 100% 100% 100% - --------------------------------------------------------------------------------------------------------------
Chase routinely enters into derivative and foreign exchange transactions with regulated financial institutions, which Chase believes have relatively low credit risk. At December 31, 1997, approximately 85% of Chase's mark-to-market exposure in derivative and foreign exchange transactions was with commercial bank and financial institution counterparties, most of whom are dealers in these products. 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 as well as the notional amount of such derivatives were insignificant at December 31, 1997. Chase's actual credit losses arising from derivative and foreign exchange transactions were immaterial from 1995 through 1997. Additionally, as of both December 31, 1997 and 1996, nonperforming derivatives contracts were immaterial. ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses provides for risks of losses inherent in the credit extension process for loans, derivative and foreign exchange financial instruments and lending-related commitments. These commitments include letters of credit, guarantees, and undrawn commitments to extend credit. The allowance is a general allowance available for all credit activities. At December 31, 1997, the allowance for credit losses was allocated into three components: an allowance for credit losses on loans; an allowance for credit losses on derivative and foreign exchange financial instruments; and an allowance for credit losses on lending-related commitments (see Note One). During 1997, there were no provisions or charge-offs made to the latter two components. However, in 1997, there was a transfer of $100 million from the allowance for credit losses on loans to the allowance for credit losses on lending-related commitments as a result of the inclusion (in the evaluation of the allowance) of undrawn commitments to extend credit. The 1996 amounts have not been reclassified due to immateriality. Chase deems its allowance for credit losses at December 31, 1997 to be adequate (i.e., sufficient to absorb losses that may currently exist for all credit activities, but are not yet identifiable). Estimating potential future losses is inherently uncertain and depends on many factors, including general macroeconomic and political conditions, rating migration, structural changes within industries 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
- -------------------------------------------------------------------------------- December 31, (in millions, except ratios) 1997 1996 - -------------------------------------------------------------------------------- Allowance for Credit Losses: Loans $3,624 $3,549 Derivative and Foreign Exchange Contracts 75 75 Lending-Related Commitments 170 70 - -------------------------------------------------------------------------------- Aggregate Allowance $3,869 $3,694 - -------------------------------------------------------------------------------- Allowance for Credit Losses on Loans to: Nonperforming Loans 399% 348% Loans at Period-End 2.15 2.29 Average Loans 2.27 2.37 - --------------------------------------------------------------------------------
36 THE CHASE MANHATTAN CORPORATION 37 MANAGEMENT'S DISCUSSION AND ANALYSIS [graph 11 -- See Appendix I] MARKET RISK MANAGEMENT The market risk management function is responsible for the measurement, monitoring and control of market risk, and the communication of risk limits throughout Chase in connection with its trading and ALM activities. TRADING ACTIVITIES An integral strategy of Chase's risk management governance structure is to manage the market risks associated with trading activities through geographic and product diversification. Trading activities are conducted in more than 20 countries throughout the world, with an emphasis placed on the major trading centers in North America, Europe and Asia. Chase trades a wide range of products, including derivative and foreign exchange instruments, corporate securities, government securities and emerging markets instruments. A description of the classes of debt, equity and risk management instruments used in Chase's trading activities, as well as the credit risk and market risk factors involved in such activities, are disclosed in Notes Two and Eighteen. Chase generates revenue through four fundamental trading activities: market-making, sales, arbitrage and positioning. Market-making: Chase trades with the intention of profiting from the spread between bid and ask prices. Market-making tends to be one of the more stable trading businesses since it is related principally to market volumes. Sales: Chase provides products for its clients at competitive prices. Sales, like market-making, is considered to be a relatively stable activity because revenue is related principally to the volume of products sold to Chase's worldwide client base. Arbitrage: Chase enters into a risk position and offsets that risk in a different, but closely related, market or instrument. Chase believes arbitrage can be effectively utilized to generate revenue based on its knowledge of products and participation in markets where there are numerous products that relate to each other. Positioning: Chase takes certain positions in financial instruments in anticipation of changes in the value of such instruments. This trading strategy is considered to have the lowest stability of the four fundamental trading activities. Management believes a risk management process that allows risk-taking within well-defined limits can be used to create and enhance both shareholder value and competitive advantage through the effective utilization of risk capital. In support of this philosophy, Chase has defined several fundamental risk management principles, including: o Formal definition of risk management governance; o Measurement of risk using a "value-at-risk" ("VAR") methodology and portfolio stress testing; and o Continual evaluation of risk appetite, communicated through risk limits. Risk Management Governance: The risk management governance structure at Chase begins with broad oversight responsibility by the Board of Directors. The Risk Policy Committee, a committee of the Board of Directors that oversees market and credit risk, has been delegated the responsibility to review Chase's risk management policies and approve aggregate levels of market risk as recommended by senior management. Active day-to-day management of market risk extends from the highest levels of Chase's senior management into the business areas. The Risk Management Committee, comprised of the most senior business-line, market risk, credit and finance executives, provides overall direction for the market risk profile of Chase and a forum to discuss market risk issues that may require increased corporate awareness. The Market Risk Committee is comprised of senior business-line and independent risk managers who have direct accountability for all market risk activities corporate-wide. Responsibilities of the committee include the review of market risk measurement methodologies, risk limits and risk capital assessments. Under the direction of the Vice Chairman for Finance and Risk Management, the Market Risk Management Group functions independently from the business units in identifying, assessing and controlling market risk and in providing analytics and support for the Committees. This group is responsible for the development of risk measurement and capital allocation methodologies, conducting VAR backtests and portfolio stress tests, on-site reviews of business units taking market risk, setting and monitoring risk limits and reviewing models used for valuation and risk reporting in business units. THE CHASE MANHATTAN CORPORATION 37 38 MANAGEMENT'S DISCUSSION AND ANALYSIS Measurement of Risk: Chase uses both historic simulation and Monte Carlo statistical techniques to estimate a daily VAR, which is defined as the potential overnight loss from adverse market movements. The historic simulation methodology assumes an observation period of one year for the historical data look-back period, a "one-tailed" 99 percent confidence interval, and a one-day holding period for positions. To estimate VAR, a distribution of potential changes in the market value of the current portfolio is created by valuing the portfolio using the most recent 264 trading days of market price and rate changes. The VAR is then calculated so that potential portfolio losses are expected to be less than the VAR amount for 99 out of every 100 trading days. Daily VAR calculations are performed for all material trading portfolios and market risk-related ALM portfolios, with results reported by business unit and in the aggregate. See page 40 for the daily VAR related to the ALM portfolio. The total VAR for Chase's mark-to-market trading portfolio as of December 31, 1997 was as follows:
- -------------------------------------------------------------------------------- At December 31, 1997 (in millions) VAR - -------------------------------------------------------------------------------- Interest Rate VAR $23.6 Foreign Exchange VAR 10.1 Commodities VAR 3.8 Equities VAR 5.0 Less: Portfolio Diversification (14.0) - -------------------------------------------------------------------------------- Total VAR $28.5 - --------------------------------------------------------------------------------
The total Chase VAR was less than the arithmetic sum of the VARs of the four risk components of the trading portfolio due to risk-offsets as a result of portfolio diversification. Risk-offsets result from portfolio diversification because the components of the portfolio will not all move in the same direction on any given day. The accuracy of the VAR measurement is evaluated each day by backtesting the risk estimate against the actual daily market risk-related revenue. During 1997, trading losses on two days exceeded Chase's total VAR estimate for each day. While the loss on one of these days was not statistically significant, the loss incurred on the other was several times larger than that day's estimated VAR. Statistical models of risk measurement 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 and at any level of aggregation. Chase believes its historic simulation methodology is not as dependent on assumptions about the distribution of portfolio losses as are other VAR methodologies. Nevertheless, all statistical models have a degree of uncertainty associated with the assumptions employed. The Chase VAR methodology assumes that the relationships among market prices and rates that have been observed over the last year are valid for estimating risk over the next trading day. In addition, the Chase VAR estimate, like all other VAR methodologies, is dependent on the quality of available market data. Although the one-year look-back period used for the historic simulation methodology meets regulatory standards, this methodology alone may not capture periods of large price and rate movements. When portfolios are subject to large price shocks, such as that which occurred in 1992 as a result of the breakdown in the European Exchange Rate Mechanism, the historical relationships among market prices and rates might not hold. Management believes stress tests are an integral part of an effective risk management process. As a result of the volatile market conditions experienced in October and November, 1997, stress tests have assumed equal standing to VAR as a risk measurement and control technique for market risk. Chase complements its daily VAR measure by conducting monthly portfolio stress tests consisting of multiple historical and hypothetical scenarios. In each scenario, all current mark-to-market and ALM positions are revalued using a specified set of changes in market prices and rates. Stress tests enable management to explore such potential risks in Chase's portfolios. The monthly stress test results are discussed at all levels of the market risk management governance structure and distributed to line management for risk management decision-making. Evaluation of Risk Appetite: Chase utilizes a comprehensive limit structure as part of the 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 positions, 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 ensure consistency with trading strategies and material developments in market conditions, with updates 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 following chart contains a histogram of Chase's daily market risk-related revenue for 1997 and 1996. 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. 38 THE CHASE MANHATTAN CORPORATION 39 MANAGEMENT'S DISCUSSION AND ANALYSIS [graph 12 -- See Appendix I] For 1997, Chase posted positive daily market risk-related revenue for 229 out of 259 days, with 77 days exceeding positive $15 million. For 1996, Chase posted positive daily market risk-related revenue for 243 out of 260 days, with 32 days exceeding positive $15 million. The large increase in days exceeding positive $15 million reflected continued efforts to build key trading activities, as witnessed by the record trading results achieved through the first nine months of 1997. In 1997, Chase incurred five daily trading losses in excess of negative $15 million. Four of the five losses resulted from sharp price declines and a loss of liquidity for certain securities, particularly emerging market debt instruments, during the difficult and unusually volatile trading markets in late October. For 1996, Chase did not have any daily trading losses over $15 million. ASSET/LIABILITY MANAGEMENT Key elements of Chase's ALM process include oversight by the Board of Directors and senior management as to the level of balance sheet interest rate risk that may be assumed by Chase relative to its financial condition, earnings and capital. The Board of Directors reviews and approves risk management policies, risk limits and the control framework and delegates to the Risk Policy Committee of the Board specific oversight functions. The Asset-Liability Committee (the "Committee"), comprised of representatives of the Executive Committee and senior business, market risk and finance executives, establishes the interest rate risk appetite for Chase's nontrading activities. The Committee is supported by a comprehensive risk management process that identifies, measures, manages and monitors interest rate risk. A key element of Chase's ALM process is that it allows the assumption of 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. Interest rate risk arises from a variety of factors, including differences in the timing between the contractual maturity or repricing (the "repricing") of Chase's assets, liabilities and derivative instruments. Chase's net interest income and financial condition are affected by changes in the level of market interest rates as the repricing characteristics of its loans and other interest-earning assets do not necessarily match those of its deposits, other borrowings and capital. In the case of floating-rate assets and liabilities, Chase may also be exposed to basis risk, which is the difference in repricing characteristics of two floating rate indices, such as the Prime lending rate and the three-month LIBOR. In addition, many of Chase's products have embedded options that impact pricing and principal balance levels. 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. Chase uses derivative instruments to adjust the interest rate repricing characteristics of specific on-balance sheet assets and liabilities, or groups of assets and liabilities with similar repricing characteristics. See Note One for a discussion of Chase's accounting policy relative to derivative instruments used for ALM. Measuring Interest Rate Sensitivity: In managing exposure, Chase uses quantifications of net gap exposure, measurements of earnings at risk (the risk to earnings from adverse movements in interest rates) based on earnings simulations, and valuation sensitivity measures. 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 applica- THE CHASE MANHATTAN CORPORATION 39 40 MANAGEMENT'S DISCUSSION AND ANALYSIS ble, concerning their most likely repricing behaviors. Derivative instruments used in interest rate sensitivity management are also included in the applicable gap intervals. 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. Conversely, a positive gap -- more assets repricing than liabilities -- will benefit earnings if rates are rising and will detract from earnings in a falling rate environment. Interest Rate Sensitivity Table
- ------------------------------------------------------------------------------------------------------------ Over At December 31, 1997 (in millions) 1-3 Months 4-6 Months 7-12 Months 1-5 Years 5 Years Total - ------------------------------------------------------------------------------------------------------------ Balance Sheet $(23,159) $ 952 $ 8,184 $ 36,958 $(22,935) $ -- - ------------------------------------------------------------------------------------------------------------ Derivative Instruments Affecting Interest Rate Sensitivity(a) 6,555 (5,050) (5,239) (476) 4,210 -- - ------------------------------------------------------------------------------------------------------------ Interest Rate Sensitivity Gap (16,604) (4,098) 2,945 36,482 (18,725) -- - ------------------------------------------------------------------------------------------------------------ Cumulative Interest Rate Sensitivity Gap $(16,604) $(20,702) $(17,757) $ 18,725 $ -- $ -- - ------------------------------------------------------------------------------------------------------------ % of Total Assets (5)% (6)% (5)% 5% --% -- - ------------------------------------------------------------------------------------------------------------
(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 activities. At December 31, 1997, Chase had $17.8 billion more liabilities than assets repricing within one year (including net repricing effects of derivative instruments), amounting to 5% 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 effect 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), 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, 1997, 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 in developed markets are adjusted to reflect their historical volatility relative to the U.S. dollar rate volatility. For example, if Australian dollar historical rate volatility is twice that of the U.S. dollar, a 200bp rate shock would be employed. These non-U.S. dollar rate shocks ranged in magnitude from approximately 100bp to 300bp. For the emerging markets and for those Asian currencies which experienced recent market volatilities, statistical analysis is supplemented with management's judgement to arrive at rate shocks that Chase believes are reasonably possible of occurring. These rate shocks ranged from 400bp to 1500bp. These sensitivity measurements exclude the benefits of portfolio diversification which would be expected to reduce Chase's overall risk profile. At December 31, 1997, based on Chase's simulation model and applying such immediate increases in market interest rates, earnings at risk over the next twelve months are estimated to be approximately 3.5% of projected 1998 after-tax net income. During 1997, Chase's earnings at risk to an immediate rise in interest rates (based on the aforementioned rate shocks) averaged less than 3% of after-tax net income. The rate shocks employed are hypothetical rate scenarios used to calibrate risk that Chase believes to be reasonably possible of occurring in the near-term and do not necessarily represent management's current view of future market developments. Chase also calculates a daily VAR on its market risk-related nontrading activities. The VAR for the ALM portfolio as of December 31, 1997 was $45.9 million, substantially all of which was interest rate related. The VAR methodology used to measure nontrading risk exposure for the ALM portfolio is the same as that used for Chase's trading portfolio. The non-trading portfolio is also subject to the same market risk management procedures as are applied to Chase's trading portfolio, including VAR reporting, portfolio stress testing, backtesting and limits setting and review. 40 THE CHASE MANHATTAN CORPORATION 41 MANAGEMENT'S DISCUSSION AND ANALYSIS All the measurements of risk previously described are made based upon Chase's 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, 1997, Chase's earnings sensitivity to changes in foreign currency rates was immaterial. Impact of ALM Derivative Activity: The unfavorable impact on net interest income from Chase's ALM derivative activities was $262 million for 1997, compared with $103 million for 1996. Chase also has derivatives that affect noninterest revenue, such as derivatives linked to mortgage servicing rights and mortgage and consumer loans held for sale. The unfavorable impact on noninterest revenue of these derivatives was $50 million for 1997 compared with a favorable impact of $7 million in 1996. 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) 1997 1996 Change - -------------------------------------------------------------------------------- ALM Derivative Contracts: Net Deferred Gains (Losses) $ -- $ (42) $ 42 Net Unrecognized Gains (Losses) (392) (243) (149) - -------------------------------------------------------------------------------- Net ALM Derivative Gains (Losses) $(392) $(285) $(107) - --------------------------------------------------------------------------------
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. These net unrecognized losses do not include the net favorable impact from the assets/liabilities being hedged by these derivative contracts. For a further discussion of unrecognized gains/losses on open derivative contracts, see Note Twenty One. The deferred gains and losses at December 31, 1997 are expected to be amortized as yield adjustments in interest income, interest expense or 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 (Losses) on Closed ALM Contracts and of Premiums on Open ALM Options Contracts
- -------------------------------------------------------------------------------- Deferred Year Ended December 31, (in millions) Gains/(Losses) Premiums - -------------------------------------------------------------------------------- 1998 $ 1 $ 34 1999 (26) 41 2000 (11) 41 2001 (10) 18 2002 and After 46 40 - -------------------------------------------------------------------------------- Total $ -- $174 - --------------------------------------------------------------------------------
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. CAPITAL AND LIQUIDITY RISK MANAGEMENT CAPITAL Chase's level of capital at December 31, 1997 remained strong, with capital ratios well in excess of regulatory guidelines. At December 31, 1997, Tier 1 and Total Capital ratios were 7.9% and 11.6%, respectively, and the Tier 1 leverage ratio was 6.0%. During the 1997 third quarter, Chase adopted the Federal Reserve Board's new risk-based capital guidelines incorporating market risk-adjusted capital. The new guidelines require banks and bank holding companies that have significant market risk exposure to measure that risk utilizing a value-at-risk model and to maintain a commensurate amount of capital. Under the new standard, risk-based capital ratios take into account both the general market risk and specific risk of debt and equity trading portfolios, and the general market risk associated with all other trading positions, and nontrading foreign exchange and commodity positions. In addition, the assets and off-balance sheet financial instruments and related capital of Chase's securities subsidiary, Chase Securities Inc., are now included in the calculation of these ratios. The provisions of SFAS 115 continue to be excluded. The adoption of these new capital guidelines THE CHASE MANHATTAN CORPORATION 41 42 MANAGEMENT'S DISCUSSION AND ANALYSIS [graph 13 -- See Appendix I] had a favorable impact largely as a result of the inclusion of the capital of Chase's securities subsidiary. Prior periods have not been restated. Chase is committed to maintaining a disciplined capital policy and intends to maintain its capital at levels that will allow it to support its growth and make investments, including acquisitions in its core businesses. As part of this policy, Chase expects to manage toward a Tier 1 Capital ratio of 8% to 8.25%. During 1997, the total capitalization of Chase (the sum of Tier 1 and Tier 2 Capital) increased by $3.9 billion to $33.3 billion. The increase was primarily due to the retention of earnings generated during 1997 (net income less common and preferred dividends), the inclusion of the capital of Chase Securities Inc., as mentioned above, and the issuance of $1.1 billion of capital securities (net of discount) by Chase subsidiaries. Partially offsetting these amounts was the impact of the common stock purchase program and the redemption of $910 million of preferred stock. See Notes Six through Nine. [graph 14 -- See Appendix I]
- -------------------------------------------------------------------------------- December 31, (in millions) 1997 1996 - -------------------------------------------------------------------------------- Tier 1 Capital: Common Stockholders' Equity $19,907 $18,632 Nonredeemable Preferred Stock 1,740 2,650 Minority Interest(a) 2,440 1,294 Less: Goodwill 1,310 1,353 Nonqualifying Intangible Assets 183 128 50% Investment in Securities Subsidiary -- 780 - -------------------------------------------------------------------------------- Tier 1 Capital $22,594 $20,315 - -------------------------------------------------------------------------------- Tier 2 Capital: Long-Term Debt and Other Instruments Qualifying as Tier 2 7,128 6,709 Qualifying Allowance for Credit Losses 3,581 3,121 Less: 50% Investment in Securities Subsidiary -- 780 - -------------------------------------------------------------------------------- Tier 2 Capital 10,709 9,050 - -------------------------------------------------------------------------------- Total Qualifying Capital $33,303 $29,365 - --------------------------------------------------------------------------------
(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. In October 1996, Chase announced a common stock purchase program. The program authorizes Chase to purchase through December 31, 1998 up to $2.5 billion of its common stock, plus an amount of its common stock as may be necessary to provide for expected issuances under Chase's dividend reinvestment plan and its various stock-based director and employee benefit plans. From inception through December 31, 1997, Chase repurchased 32.6 million common shares ($3.2 billion) and reissued from treasury approximately 12.9 million common shares ($1.1 billion) under its benefit plans, resulting in a net repurchase of 19.7 million common shares ($2.1 billion). In the first quarter of 1997, Chase raised the cash dividend on its common stock to $.62 per share, from $.56 per share. Management currently expects that Chase's dividend policy will generally be to pay a common stock dividend equal to approximately 25% to 35% of Chase's operating net income 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. LIQUIDITY Chase manages its liquidity in order to ensure the availability of sufficient cash flows to meet all of Chase's financial commitments and to capitalize on opportunities for Chase's business expansion. 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 opportunities arise. Liquidity is managed on a daily basis at both the parent company and the subsidiary levels, enabling senior management to monitor changes in liquidity and to react accordingly to fluctuations in market conditions. Contingency plans exist and could be implemented 42 THE CHASE MANHATTAN CORPORATION 43 MANAGEMENT'S DISCUSSION AND ANALYSIS on a timely basis to minimize the risk associated with dramatic changes in market conditions. 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. The primary 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 considers funds from such sources to comprise its subsidiary banks' "core" deposit base because of the historical stability of these sources of funds. These deposits fund a portion of Chase's asset base, thereby reducing Chase's reliance on other, more volatile and costly sources of funds. Chase's average core deposits for 1997 were $80 billion, or 50% of average loans. Chase holds marketable securities and other short-term investments that can be readily converted to cash. As part of Chase's ongoing capital management process, loan syndication networks and securitization programs are maintained in order to facilitate the timely disposition of assets, when deemed desirable. Chase is an active participant in the capital markets and issues commercial paper, medium-term notes, long-term debt, common stock and preferred stock. At December 31, 1997, Chase's long-term debt was $13.39 billion. During 1997, Chase issued $2.81 billion of long-term debt, $1.59 billion of long-term debt matured and $546 million was redeemed. Chase continually evaluates the opportunities to redeem its outstanding debt and preferred stock in light of current market conditions. During the first quarter of 1998, Chase redeemed $200 million of its 7.92% cumulative preferred stock, and called for redemption $172 million of its 8.40% cumulative preferred stock and $200 million of its 7.58% cumulative preferred stock. An additional $340 million of Chase's fixed-rate preferred stock becomes callable in 1998. ACCOUNTING AND REPORTING DEVELOPMENTS REPURCHASE AND OTHER AGREEMENTS In December 1996, the FASB issued SFAS 127, which deferred the effective date of SFAS 125 relating to repurchase agreements, securities lending and other secured financing transactions. SFAS 127 will be effective for calendar year 1998. Chase believes that the adoption of SFAS 127 will not have a material effect on its earnings, liquidity or capital resources. REPORTING COMPREHENSIVE INCOME In June 1997, the FASB issued SFAS 130, which becomes effective for financial statements beginning in the first quarter of 1998. SFAS 130 defines the concept of "comprehensive income" and establishes the standards for reporting "comprehensive income." Comprehensive income is defined to include net income, as currently reported, as well as unrealized gains and losses on available-for-sale securities, foreign currency translation adjustments and certain other items not currently included in the income statement. SFAS 130 also sets forth requirements on how comprehensive income should be presented as part of an issuer's financial statements. Chase is currently assessing how it will disclose comprehensive income in its financial statements. The adoption of SFAS 130 will not affect Chase's earnings, liquidity or capital resources. SEGMENTS In June 1997, the FASB issued SFAS 131, which becomes effective for financial statements for the year ended 1998. SFAS 131 defines the criteria by which an issuer is to determine the number and nature of its "operating segments" and sets forth the financial information that is required to be disclosed about such operating segments. Chase is currently assessing the manner in which it will disclose the required information. CAPITALIZATION OF CERTAIN SOFTWARE COSTS In March 1998, the AICPA issued SOP 98-1, which will become effective for financial statements for calendar year 1999, with early adoption encouraged. SOP 98-1 requires the capitalization of eligible costs of specified activities related to computer software developed or obtained for internal use. Chase is assessing how the capitalization of these costs, which are currently expensed by Chase, will affect its earnings, liquidity, or capital resources. Management does not believe the impact of adoption will be material. THE CHASE MANHATTAN CORPORATION 43 44 MANAGEMENT'S DISCUSSION AND ANALYSIS COMPARISON BETWEEN 1996 AND 1995 Chase's operating net income was $3.52 billion in 1996, an increase of 21% from 1995. On a diluted basis, earnings per share rose 23% when compared with the prior year. Reported net income was $2.46 billion in 1996, compared with $2.96 billion in 1995. Diluted earnings per share were $4.94 in 1996, compared with $6.04 for the prior year. Chase's net interest income was $8.22 billion in 1996, an increase of $99 million from 1995, reflecting a higher level of interest-earning assets (particularly consumer receivables and trading-related assets), as well as the funding benefit of higher equity levels. Also contributing to the increase was $54 million of interest related to Federal and State tax audit settlements in 1996. Average interest-earning assets were $260.9 billion in 1996, compared with $244.5 billion in 1995. Provision for credit losses in 1996 increased by $139 million from the 1995 level. Net charge-offs increased $57 million in 1996 when compared with the prior year, excluding a charge of $102 million recorded in 1996 related to post-merger conforming of credit card charge-off policies. The increases in both the provision and net charge-offs resulted primarily from higher commercial net charge-offs as a result of a lower level of recoveries. Noninterest revenue was $7.63 billion in 1996, a 12% increase from 1995, reflecting strong revenue performance as discussed below. Corporate finance and syndication fees in 1996 increased 17% as a result of strong loan syndication, advisory and debt securities underwriting activities. The active merger and acquisition environment during 1996 was an underlying factor for the increases in these activities. Trust, custody, and investment management fees for 1996 increased 16%, reflecting increased global services and securities processing activities, higher fees attributable to growth in assets under management and growth in fees from the Vista mutual funds. Credit card revenue increased $229 million from the 1995 level as a result of an increase in securitization volume as well as overall growth in managed outstandings. Fees for other financial services for 1996 increased 5% from 1995, primarily due to an increase in fees related to automobile securitizations, and higher transaction volume and a larger customer base at Chase's discount brokerage firm, Brown and Company. Trading-related revenue (which includes net interest income attributable to trading activities) in 1996 increased 37% from the prior year, benefitting from anticipated volatility in the currency markets and from strong performances in emerging markets in Latin America and Eastern Europe. Revenue from equity-related investments in 1996 increased by $100 million from the 1995 level, reflecting the continuing benefits of a broad-based portfolio of investments in an active market. Contributing to the decline in other noninterest revenue for 1996, were higher net losses related to the disposition of available-for-sale emerging markets securities, lower revenue from residential mortgage origination/sales activities, a $60 million loss on the sale of a building in Japan in 1996 and lower equity income from Chase's investment in CIT. In addition, the 1995 results included an $85 million gain on the sale of an investment in Far East Bank and Trust Company. Noninterest expense for 1996 includes noninterest expenses of $44 million related to the introduction of Chase's co-branded Wal-Mart MasterCard and $13 million of expenses associated with preferred stock dividends associated with the REIT, both of which commenced in the 1996 fourth quarter. Salaries increased by $24 million in 1996 as a result of higher incentive costs due to strong revenue growth for most businesses and a competitive recruiting environment for specialized skills in selected businesses. Also contributing to the increase in salaries was the vesting in 1996 of certain stock-based incentive awards, as a result of the improvement in Chase's stock price. Partially offsetting these increases were the impact of personnel reductions undertaken in 1996 as a result of the merger. Occupancy and Equipment expense both decreased in 1996, largely as a result of the consolidation of operations and branch facilities from merger integration efforts, the disposition of equipment as well as pre-merger expense-reduction programs. Foreclosed property expense was a credit of $16 million in 1996, compared with a credit of $75 million in 1995, due to lower gains on the sale of a lower level of foreclosed properties during 1996. In connection with the merger, $1.9 billion of one-time merger-related costs were identified, of which $1.65 billion was taken as a restructuring charge on March 31, 1996. Additional merger-related expenses of $164 million were incurred during 1996 and included in the restructuring costs caption of the income statement. Other expense decreased by $51 million, or 2%, during 1996. The improvement reflected lower FDIC assessments of $108 million. Reductions were also experienced in various expense categories such as stationery and other supplies, postage and shipping, reflecting Chase's sourcing and other expense-reduction initiatives. Chase's income tax expense decreased by $492 million from 1995. The 1996 amount includes tax benefits related to restructuring costs, as well as aggregate tax benefits and refunds of $132 million. Chase's effective tax rates for 1996 and 1995 (excluding the aforementioned tax benefits and refunds) were 38.0% and 38.3%, respectively. 44 THE CHASE MANHATTAN CORPORATION 45 MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING 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 judgments. 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, 1997, 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 Price Waterhouse LLP has performed an independent audit of Chase's financial statements. Management has made available to Price Waterhouse 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 Price Waterhouse 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/ Joseph L. Sclafani Joseph L. Sclafani Executive Vice President and Controller January 20, 1998 REPORT OF INDEPENDENT ACCOUNTANTS [Logo] Price Waterhouse LLP 1177 Avenue of the Americas, 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, 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/ Price Waterhouse LLP January 20, 1998 THE CHASE MANHATTAN CORPORATION 45 46 CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------------------------------------- December 31, (in millions, except share data) 1997 1996 - ------------------------------------------------------------------------------------------------------- Assets Cash and Due from Banks $ 15,704 $ 14,605 Deposits with Banks 2,886 8,344 Federal Funds Sold and Securities Purchased Under Resale Agreements 30,928 28,966 Trading Assets: Debt and Equity Instruments 34,641 30,377 Risk Management Instruments, Net of Allowance for Credit Losses of $75 in 1997 and 1996 37,752 29,579 Securities: Available-for-Sale 49,755 44,691 Held-to-Maturity (Market Value: $2,995 in 1997 and $3,849 in 1996) 2,983 3,855 Loans 168,454 155,092 Allowance for Credit Losses 3,624 3,549 --------------------- Net Loans 164,830 151,543 Premises and Equipment 3,780 3,642 Due from Customers on Acceptances 1,719 2,276 Accrued Interest Receivable 3,359 3,020 Other Assets 17,184 15,201 - ------------------------------------------------------------------------------------------------------- Total Assets $ 365,521 $ 336,099 - ------------------------------------------------------------------------------------------------------- Liabilities Deposits: Domestic: Noninterest-Bearing $ 46,603 $ 42,726 Interest-Bearing 71,576 67,186 Foreign: Noninterest-Bearing 3,205 4,331 Interest-Bearing 72,304 66,678 --------------------- Total Deposits 193,688 180,921 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 56,126 53,868 Commercial Paper 4,744 4,500 Other Borrowed Funds 6,861 9,231 Acceptances Outstanding 1,719 2,276 Trading Liabilities 52,438 38,136 Accounts Payable, Accrued Expenses and Other Liabilities, Including the Allowance for Credit Losses of $170 in 1997 and $70 in 1996 12,526 12,309 Long-Term Debt 13,387 12,714 Guaranteed Preferred Beneficial Interests in Corporation's Junior Subordinated Deferrable Interest Debentures 1,740 600 - ------------------------------------------------------------------------------------------------------- Total Liabilities 343,229 314,555 - ------------------------------------------------------------------------------------------------------- Commitments and Contingencies (See Note Twenty Four) Preferred Stock of Subsidiary 550 550 Stockholders' Equity Preferred Stock 1,740 2,650 Common Stock (Authorized 750,000,000 Shares, Issued 440,753,296 Shares in 1997 and 440,747,317 Shares in 1996) 441 441 Capital Surplus 10,360 10,459 Retained Earnings 11,103 8,627 Net Unrealized Gain (Loss) on Available-for-Sale Securities 95 (288) Treasury Stock, at Cost (19,788,820 Shares in 1997 and 9,936,716 Shares in 1996) (1,997) (895) - ------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 21,742 20,994 - ------------------------------------------------------------------------------------------------------- Total Liabilities, Preferred Stock of Subsidiary and Stockholders' Equity $ 365,521 $ 336,099 - -------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these Statements. 46 THE CHASE MANHATTAN CORPORATION 47 CONSOLIDATED STATEMENT OF INCOME
- ------------------------------------------------------------------------------------------------- Year ended December 31, (in millions, except per share data) 1997 1996 1995 - ------------------------------------------------------------------------------------------------- Interest Income Loans $12,826 $ 12,359 $ 12,842 Securities 3,028 2,862 2,591 Trading Assets 2,770 1,898 1,385 Federal Funds Sold and Securities Purchased Under Resale Agreements 2,607 2,135 1,889 Deposits with Banks 525 537 824 - ------------------------------------------------------------------------------------------------- Total Interest Income 21,756 19,791 19,531 - ------------------------------------------------------------------------------------------------- Interest Expense Deposits 6,561 6,038 6,291 Short-Term and Other Borrowings 5,903 4,630 4,175 Long-Term Debt 1,134 901 942 - ------------------------------------------------------------------------------------------------- Total Interest Expense 13,598 11,569 11,408 - ------------------------------------------------------------------------------------------------- Net Interest Income 8,158 8,222 8,123 Provision for Credit Losses 804 897 758 - ------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Credit Losses 7,354 7,325 7,365 - ------------------------------------------------------------------------------------------------- Noninterest Revenue Corporate Finance and Syndication Fees 1,136 950 810 Trust, Custody, and Investment Management Fees 1,307 1,176 1,018 Credit Card Revenue 1,183 1,063 834 Service Charges on Deposit Accounts 376 394 417 Fees for Other Financial Services 1,607 1,529 1,453 Trading Revenue 1,323 1,371 1,065 Securities Gains 312 135 132 Revenue from Equity-Related Investments 806 726 626 Other Revenue 575 286 482 - ------------------------------------------------------------------------------------------------- Total Noninterest Revenue 8,625 7,630 6,837 - ------------------------------------------------------------------------------------------------- Noninterest Expense Salaries 4,598 4,232 4,208 Employee Benefits 839 926 899 Occupancy Expense 767 824 897 Equipment Expense 792 724 755 Foreclosed Property Expense 12 (16) (75) Restructuring Costs 192 1,814 15 Other Expense 2,869 2,640 2,691 - ------------------------------------------------------------------------------------------------- Total Noninterest Expense 10,069 11,144 9,390 - ------------------------------------------------------------------------------------------------- Income Before Income Tax Expense and Effect of Accounting Change 5,910 3,811 4,812 Income Tax Expense 2,202 1,350 1,842 - ------------------------------------------------------------------------------------------------- Income Before Effect of Accounting Change 3,708 2,461 2,970 Net Effect of Change in Accounting Principle -- -- (11) - ------------------------------------------------------------------------------------------------- Net Income $ 3,708 $ 2,461 $ 2,959 - ------------------------------------------------------------------------------------------------- Net Income Applicable to Common Stock $ 3,526 $ 2,242 $ 2,732 - ------------------------------------------------------------------------------------------------- Earnings Per Share: Basic: Income Before Effect of Accounting Change $ 8.30 $ 5.13 $ 6.36 Net Income $ 8.30 $ 5.13 $ 6.33 Diluted: Income Before Effect of Accounting Change $ 8.03 $ 4.94 $ 6.07 Net Income $ 8.03 $ 4.94 $ 6.04 - -------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these Statements. THE CHASE MANHATTAN CORPORATION 47 48 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------- Year ended December 31, (in millions) 1997 1996 1995 - ---------------------------------------------------------------------------------------------- Preferred Stock Balance at Beginning of Year $ 2,650 $ 2,650 $ 2,850 Redemption of Stock (910) -- (200) - ---------------------------------------------------------------------------------------------- Balance at End of Year 1,740 2,650 2,650 - ---------------------------------------------------------------------------------------------- Common Stock Balance at Beginning of Year 441 458 447 Retirement of Treasury Stock -- (20) -- Issuance of Stock -- 3 11 - ---------------------------------------------------------------------------------------------- Balance at End of Year 441 441 458 - ---------------------------------------------------------------------------------------------- Capital Surplus Balance at Beginning of Year 10,459 11,075 10,671 Retirement of Treasury Stock -- (433) -- New Issuances of Stock -- 42 307 Shares Issued for Employee Stock-Based Awards and Certain Related Tax Benefits (99) (225) 97 - ---------------------------------------------------------------------------------------------- Balance at End of Year 10,360 10,459 11,075 - ---------------------------------------------------------------------------------------------- Retained Earnings Balance at Beginning of Year 8,627 7,997 6,045 Net Income 3,708 2,461 2,959 Retirement of Treasury Stock -- (557) -- Cash Dividends Declared: Preferred Stock (182) (219) (227) Common Stock (1,050) (1,061)(a) (789) Accumulated Translation Adjustment(b) -- 6 9 - ---------------------------------------------------------------------------------------------- Balance at End of Year 11,103 8,627 7,997 - ---------------------------------------------------------------------------------------------- Net Unrealized Gain (Loss) on Securities Available-for-Sale Balance at Beginning of Year (288) (237) (473) Net Change in Fair Value of Securities Available-for-Sale 383 (51) 236 - ---------------------------------------------------------------------------------------------- Balance at End of Year 95 (288) (237) - ---------------------------------------------------------------------------------------------- Common Stock in Treasury, at Cost Balance at Beginning of Year (895) (1,107) (667) Retirement of Treasury Stock -- 1,010 -- Purchase of Treasury Stock (2,169) (2,037) (1,389) Reissuance of Treasury Stock 1,067 1,239 949 - ---------------------------------------------------------------------------------------------- Balance at End of Year (1,997) (895) (1,107) - ---------------------------------------------------------------------------------------------- Total Stockholders' Equity $ 21,742 $ 20,994 $ 20,836 - ----------------------------------------------------------------------------------------------
(a) Includes fourth quarter 1995 common stock dividends of $80 million declared and paid by heritage Chase in the 1996 first quarter. (b) Balance was $17 million at December 31, 1997. The Notes to Consolidated Financial Statements are an integral part of these Statements. 48 THE CHASE MANHATTAN CORPORATION 49 CONSOLIDATED STATEMENT OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------- Year ended December 31, (in millions) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- Operating Activities Net Income $ 3,708 $ 2,461 $ 2,959 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Effect of Change in Accounting Principle -- -- 11 Provision for Credit Losses 804 897 758 Restructuring Costs 192 1,814 15 Depreciation and Amortization 951 869 866 Net Change In: Trading-Related Assets (11,437) (9,245) (6,466) Accrued Interest Receivable (339) (479) (86) Other Assets (2,264) 1,167 328 Trading-Related Liabilities 14,708 3,826 3,423 Accrued Interest Payable 123 395 12 Other Liabilities (627) (1,743) (1,430) Other, Net (358) (945) (746) - ---------------------------------------------------------------------------------------------------------- Net Cash Provided (Used) by Operating Activities 5,461 (983) (356) - ---------------------------------------------------------------------------------------------------------- Investing Activities Net Change In: Deposits with Banks 5,458 124 4,054 Federal Funds Sold and Securities Purchased Under Resale Agreements (5,673) (12,929) 2,094 Loans Due to Sales and Securitizations 26,967 37,428 32,987 Other Loans, Net (37,445) (42,935) (44,455) Other, Net 64 (905) (1,281) Proceeds from the Maturity of Held-to-Maturity Securities 959 1,057 2,395 Purchases of Held-to-Maturity Securities (130) (277) (1,052) Proceeds from the Maturity of Available-for-Sale Securities 10,250 8,513 7,427 Proceeds from the Sale of Available-for-Sale Securities 95,045 44,194 54,290 Purchases of Available-for-Sale Securities (109,849) (60,380) (69,311) Cash Used in Acquisitions (5,153) -- (10) Proceeds from Divestitures of Nonstrategic Businesses 847 -- 1,050 - ---------------------------------------------------------------------------------------------------------- Net Cash Used by Investing Activities (18,660) (26,110) (11,812) - ---------------------------------------------------------------------------------------------------------- Financing Activities Net Change In: Noninterest-Bearing Domestic Demand Deposits 3,914 5,743 2,588 Domestic Time and Savings Deposits 4,509 4,160 (1,279) Foreign Deposits 4,500 (471) 6,153 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 5,969 18,029 5,287 Other Borrowed Funds (2,126) (199) 2,199 Other, Net (556) 361 378 Proceeds from the Issuance of Long-Term Debt and Capital Securities 3,945 1,891 1,876 Repayments of Long-Term Debt (2,134) (1,453) (2,076) Proceeds from the Issuance of Stock 967 1,082 665 Proceeds from the Issuance of Preferred Stock of Subsidiary -- 550 -- Redemption of Preferred Stock (910) -- -- Treasury Stock Purchased (2,585) (1,611) (1,389) Cash Dividends Paid (1,212) (1,188) (978) - ---------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 14,281 26,894 13,424 - ---------------------------------------------------------------------------------------------------------- Effect of Exchange Rate Changes on Cash and Due from Banks 17 10 (7) Net Increase (Decrease) in Cash and Due from Banks 1,099 (189) 1,249 Cash and Due from Banks at the Beginning of the Year 14,605 14,794 13,545 - ---------------------------------------------------------------------------------------------------------- Cash and Due from Banks at the End of the Year $ 15,704 $ 14,605 $ 14,794 Cash Interest Paid $ 13,475 $ 11,174 $ 11,248 Taxes Paid $ 1,144 $ 1,650 $ 1,309 - ----------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these Statements. THE CHASE MANHATTAN CORPORATION 49 50 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 domestic and international 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 lines, see the first paragraph of the Lines of Business section on page 21 of Management's Discussion and Analysis ("MD&A"). 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 Merger was accounted for as a pooling of interests and, accordingly, the information included in the financial statements presents the combined results of heritage Chase and Chemical as if the Merger had been in effect for all periods presented. 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 pro-rata share of earnings (losses) of these companies is included in Other Revenue. Assets held in an agency or fiduciary capacity by commercial banking subsidiaries and by trust and investment advisory subsidiaries 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. The portion of the market valuation of risk management instruments attributable to credit considerations as well as ongoing direct servicing costs is deferred and accreted to income over the life of the instruments. Interest earned on debt and dividends earned on equity instruments are reported as interest income. Interest payable on securities sold but not yet purchased and structured notes is reported as interest expense. 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. Risk Management Instruments: Chase deals in interest rate, foreign exchange, equity, commodity and other contracts to generate trading revenues. Such contracts include futures, forwards, forward rate agreements, swaps and options (including interest rate caps and floors). The estimated fair values of such contracts are reported on a gross basis as Trading Assets-Risk Management Instruments for positive fair values and Trading Liabilities for negative fair values. Contracts executed with the same counterparty under legally enforceable master netting agreements are presented on a net basis. 50 THE CHASE MANHATTAN CORPORATION 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DERIVATIVES USED IN ASSET/LIABILITY MANAGEMENT ACTIVITIES As part of its asset/liability management ("ALM") activities, Chase uses interest rate swaps and futures and, to a lesser degree, 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 instruments. Derivative contracts used for ALM activities have high correlation between the derivatives contract and the item being hedged, both at inception and throughout the hedge period. Additionally, these derivative contracts are linked to specific assets or liabilities or groups of similar assets or similar liabilities. For futures contracts only, a risk-reduction criteria is also required. The instruments that meet the above criteria are accounted for under the accrual method or available-for-sale fair value method, as discussed below. Instruments 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 to interest income or interest expense, or noninterest revenue over the contract life. Available-for-Sale Fair Value Method: Derivatives linked to available-for-sale securities are carried at fair value. The accrual of interest receivable or interest payable 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 Stockholders' Equity. This policy is consistent with the reporting of unrealized gains and losses on the related securities. For both of the above 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 positions. 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 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 contract are recognized as a component 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. The amounts advanced under resale agreements and the amounts borrowed under repurchase agreements 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. During 1997, the maximum month-end balances of outstanding resale and repurchase agreements, respectively, were $43.2 billion and $63.7 billion. The daily average amounts of outstanding resale and repurchase agreements were $38.8 billion and $56.3 billion, respectively. Chase takes possession of securities purchased under resale agreements. Chase monitors the market value of securities and adjusts the level of collateral for resale and repurchase agreements, as appropriate. 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 interest rates and resulting prepayment risk, or other factors. Available-for-Sale securities are carried at fair value. Unrealized gains and losses on these securities, along with any unrealized gains and losses on related derivatives, are reported, net of applicable taxes, 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. 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 prepayments of principal in the calculation of the effective yield for collateralized mortgage obligations ("CMOs") and mortgage-backed securities ("MBSs"). The prepayment of CMOs and MBSs is actively monitored through Chase's portfolio management function. Chase typically invests in CMOs and MBSs with stable cash flows, thereby limiting the impact of interest rate fluctuations on the portfolio. Management regularly performs simulation testing THE CHASE MANHATTAN CORPORATION 51 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS regarding the impact that interest and market rate changes would have on its CMO and MBS portfolios. CMOs and MBSs that management believes have high prepayment risk are included in the available-for-sale portfolio. LOANS Loans are generally reported at the principal amount outstanding, net of the allowance for credit 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 are classified as loans, but are measured using SFAS 115. 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. These sales are generally without recourse to Chase. A limited number of assets are sold with recourse 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 has ceased. 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, 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, cash receipts, whether designated as principal or interest, 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 credit losses upon reaching specified stages of delinquency. This policy excludes residential mortgage products and auto loans 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. Loans are considered impaired when it is probable that the borrower will be unable to pay contractual interest or principal payments as scheduled in the loan agreement. Chase accounts for and discloses nonaccrual commercial loans as impaired. 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. 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 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. 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, derivatives and foreign exchange financial 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 judgment of management, an extension of credit is deemed uncollectible, in whole or in part. Beginning December 31, 1996, in accordance with the AICPA's Audit and Accounting Guide for Banks and Savings Institutions ("AICPA Audit Guide"), Chase allocates the allowance for credit losses into three components:
Allowance for credit losses on: Reported in: - -------------------------------------------------------------------------------- Loans Separate Caption- Allowance for Credit Losses - -------------------------------------------------------------------------------- Derivative and Foreign Exchange Contracts Trading Assets-Risk Management Instruments - -------------------------------------------------------------------------------- Lending-Related Commitments Other Liabilities - --------------------------------------------------------------------------------
Chase views the aggregate allowance for credit losses to be available for all credit activities. 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 52 THE CHASE MANHATTAN CORPORATION 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 estimated useful life of the related asset or the lease term, whichever is shorter. Maintenance and repairs are charged to expense as incurred, while major improvements are capitalized. OTHER ASSETS 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 estimated fair value less costs to sell. Writedowns at the date of transfer (to Assets Acquired as Loan Satisfactions) and within six months after the date of transfer are charged to the allowance for credit losses. Writedowns of such assets after six months from the transfer date are included in Foreclosed Property Expense. Operating expenses, net of related revenue, and gains and losses on sales of these assets 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 judgment 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. Equity and Equity-Related Investments: Equity and equity-related investments include venture capital activities and emerging markets investments. 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). Marketable holdings are marked-to-market at a discount to the public value. Income from these investments is reported in Revenue from Equity-Related Investments. 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 Corporate finance and syndication 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. Corporate finance and syndication fees are recognized when the services to which they relate have been provided. In addition, recognition of syndication fees is subject to satisfying certain 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 received in connection with mortgage servicing, loan commitments, standby letters of credit, compensating balances, insurance products and brokerage and other fees. Trust, custody, and investment management fees and fees for other financial services are generally recognized over the period 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. Calculations are based on the provisions of enacted tax laws and the tax rates in effect for current and future years. The deferred tax liability (asset) is determined based on enacted 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. THE CHASE MANHATTAN CORPORATION 53 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOREIGN CURRENCY TRANSLATION Assets and liabilities denominated in foreign currencies are translated to U.S. dollars using prevailing 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 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. - -------------------------------------------------------------------------------- 2 - TRADING ACTIVITIES - -------------------------------------------------------------------------------- Chase generates trading revenue through market-making, sales, arbitrage and positioning. A description of the various classes of derivative and foreign exchange instruments used in Chase's trading activities as well as the credit and market risk factors involved in its trading activities are disclosed in Note Eighteen. TRADING REVENUE The following table sets forth the components of total trading-related revenue.
- -------------------------------------------------------------------------------- Year Ended December 31, (in millions) 1997 1996 1995 - -------------------------------------------------------------------------------- Trading Revenue $1,323 $1,371 $1,065 Net Interest Income Impact(a) 715 585 363 - -------------------------------------------------------------------------------- Total Trading-Related Revenue $2,038 $1,956 $1,428 - -------------------------------------------------------------------------------- Product Diversification: Interest Rate Contracts(b) $ 726 $ 535 $ 429 Foreign Exchange Contracts(c) 803 444 584 Debt Instruments and Other(d) 509 977 415 - -------------------------------------------------------------------------------- Total Trading-Related Revenue $2,038 $1,956 $1,428 - --------------------------------------------------------------------------------
(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. TRADING ASSETS AND LIABILITIES The following table presents trading assets and trading liabilities for the dates indicated.
- ------------------------------------------------------------------------------- December 31, (in millions) 1997 1996 - ------------------------------------------------------------------------------- Trading Assets - Debt and Equity Instruments: U.S. Government, Federal Agencies and Municipal Securities $ 8,329 $ 8,523 Certificates of Deposit, Bankers' Acceptances and Commercial Paper 3,117 1,486 Debt Securities Issued by Foreign Governments 11,063 12,284 Debt Securities Issued by Foreign Financial Institutions 5,399 3,569 Corporate Securities 1,833 1,873 Other 4,900 2,642 - ------------------------------------------------------------------------------- Total Trading Assets-Debt and Equity Instruments $ 34,641 $ 30,377 - ------------------------------------------------------------------------------- Trading Assets - Risk Management Instruments: Interest Rate Contracts $ 15,980 $ 14,227 Foreign Exchange Contracts 20,225 13,760 Equity, Commodity and Other Contracts 1,622 1,667 Allowance for Credit Losses for Derivative and Foreign Exchange Contracts (75) (75) - ------------------------------------------------------------------------------- Total Trading Assets-Risk Management Instruments $ 37,752 $ 29,579 - ------------------------------------------------------------------------------- Trading Liabilities - Risk Management Instruments: Interest Rate Contracts $ 17,668 $ 14,622 Foreign Exchange Contracts 20,475 12,867 Equity, Commodity and Other Contracts 1,558 1,202 - ------------------------------------------------------------------------------- Trading Liabilities-Risk Management Instruments $ 39,701 $ 28,691 - ------------------------------------------------------------------------------- Securities Sold, Not Yet Purchased $ 9,818 $ 7,242 - ------------------------------------------------------------------------------- Structured Notes $ 2,919 $ 2,203 - ------------------------------------------------------------------------------- Total Trading Liabilities $ 52,438 $ 38,136 - -------------------------------------------------------------------------------
Average trading assets and average trading liabilities were as follows for the periods indicated.
- ------------------------------------------------------------------------------- Year Ended December 31, (in millions) 1997 1996 - ------------------------------------------------------------------------------- Trading Assets-Debt and Equity Instruments $35,660 $29,595 - ------------------------------------------------------------------------------- Trading Assets-Risk Management Instruments $34,426 $26,684 - ------------------------------------------------------------------------------- Trading Liabilities-Risk Management Instruments $35,309 $27,421 Securities Sold, Not Yet Purchased 10,719 8,160 Structured Notes 2,378 126 - ------------------------------------------------------------------------------- Total Trading Liabilities $48,406 $35,707 - -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 3 - SECURITIES - -------------------------------------------------------------------------------- See Note One for a discussion of the accounting policies relating to securities. Net gains from available-for-sale securities sold in 1997, 1996 and 1995 amounted to $312 million (gross gains of $496 million and gross losses of $184 million), $135 million (gross gains of $281 million and gross losses of $146 million), and $130 million (gross gains of $570 million 54 THE CHASE MANHATTAN CORPORATION 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS and gross losses of $440 million), respectively. There were no sales of held-to-maturity securities during the three years ended December 31, 1997. During 1995, early redemption of certain held-to-maturity securities by their issuers resulted in a $2 million gain. In accordance with the adoption of the SFAS 115 Implementation Guide, Chase reassessed the classification of all securities held during 1995. The result of the one-time reassessment was the reclassification of $4.7 billion of held-to-maturity securities to available-for-sale securities and $11 million of held-to-maturity securities to trading assets. Unrealized net gains related to the transfer of held-to-maturity securities to available-for-sale securities were $21 million after-tax. The amortized cost of held-to-maturity securities transferred to trading assets approximated the fair value. The amortized cost and estimated fair value of available-for-sale securities and held-to-maturity securities, including the impact of related derivatives, were as follows for the dates indicated:
1997 1996 ------------------------------------------ ----------------------------------------- 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 $27,849 $ 97 $ 3 $27,943 $20,961 $ 18 $285 $20,694 Collateralized Mortgage Obligations 2,013 5 -- 2,018 2,293 1 2 2,292 Other, primarily U.S. Treasuries 11,492 18 49 11,461 12,250 3 193 12,060 Obligations of State and Political Subdivisions 274 2 -- 276 325 2 -- 327 Debt Securities Issued by Foreign Governments 6,153 47 62 6,138 6,893 100 3 6,990 Corporate Debt Securities 606 17 1 622 923 43 14 952 Equity Securities 876 197 58 1,015 957 116 25 1,048 Other, primarily Asset-Backed Securities(a) 308 3 29 282 328 1 1 328 - ------------------------------------------------------------------------------------------------------------------------------------ Total Available-for-Sale Securities $49,571 $386 $202 $49,755 $44,930 $284 $523 $44,691 - ------------------------------------------------------------------------------------------------------------------------------------ Held-to-Maturity Securities U.S. Government and Federal Agency/Corporation Obligations: Mortgage-Backed Securities $ 1,256 $ 12 $ 1 $ 1,267 $ 1,584 $ 4 $ 8 $ 1,580 Collateralized Mortgage Obligations 1,660 4 3 1,661 2,075 6 9 2,072 Other, primarily U.S. Treasuries 52 -- -- 52 73 -- -- 73 Other, primarily Asset-Backed Securities(a) 15 -- -- 15 123 1 -- 124 - ------------------------------------------------------------------------------------------------------------------------------------ Total Held-to-Maturity Securities $ 2,983 $ 16 $ 4 $ 2,995 $ 3,855 $ 11 $ 17 $ 3,849 - ------------------------------------------------------------------------------------------------------------------------------------
(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, 1997 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, 1997 (in millions) Cost Value Yield(a) Cost Value Yield(a) - ---------------------------------------------------------------------------------------------------------- Due in One Year or Less $ 2,620 $ 2,585 6.43% $ 124 $ 124 4.84% Due After One Year Through Five Years 12,393 12,332 6.04 300 301 6.47 Due After Five Years Through Ten Years 5,103 5,122 6.41 408 410 6.93 Due After Ten Years(b) 29,455 29,716 7.03 2,151 2,160 6.54 - ---------------------------------------------------------------------------------------------------------- Total Securities $49,571 $49,755 6.68% $2,983 $2,995 6.51% - ----------------------------------------------------------------------------------------------------------
(a) 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. (b) Securities with no stated maturity are included with securities with a remaining 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. THE CHASE MANHATTAN CORPORATION 55 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 4 - LOANS - -------------------------------------------------------------------------------- The composition of the loan portfolio at each of the dates indicated was as follows:
- ------------------------------------------------------------------------------------------------------------------ 1997 1996 -------------------------------- -------------------------------- December 31, (in millions) Domestic Foreign Total Domestic Foreign Total - ------------------------------------------------------------------------------------------------------------------ Consumer: 1-4 Family Residential Mortgages $ 38,683 $ 1,472 $ 40,155 $ 36,665 $ 1,276 $ 37,941 Credit Card 15,631 615 16,246 12,157 537 12,694 Auto Financings 14,199 15 14,214 11,815 -- 11,815 Other Consumer 8,668 1,877 10,545 9,386 1,479 10,865 - ------------------------------------------------------------------------------------------------------------------ Total Consumer 77,181 3,979 81,160 70,023 3,292 73,315 - ------------------------------------------------------------------------------------------------------------------ Commercial: Commercial and Industrial 38,272 27,733 66,005 34,996 23,199 58,195 Commercial Real Estate: Commercial Mortgage 4,084 663 4,747 5,040 755 5,795 Construction 946 50 996 894 45 939 Financial Institutions 6,692 7,015 13,707 5,570 6,480 12,050 Foreign Governments and Official Institutions -- 3,451 3,451 -- 6,171 6,171 - ------------------------------------------------------------------------------------------------------------------ Total Commercial 49,994 38,912 88,906 46,500 36,650 83,150 - ------------------------------------------------------------------------------------------------------------------ Total Loans 127,175 42,891 170,066 116,523 39,942 156,465 Unearned Income (1,465) (147) (1,612) (1,223) (150) (1,373) - ------------------------------------------------------------------------------------------------------------------ Loans, Net of Unearned Income $ 125,710 $ 42,744 $ 168,454 $ 115,300 $ 39,792 $ 155,092 - ------------------------------------------------------------------------------------------------------------------
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. As a result of the reassessment of the securities portfolio in connection with the adoption of the SFAS 115 Implementation Guide, the entire held-to-maturity portfolio of Brady Bonds, other loans and related derivatives (measured pursuant to SFAS 115) were reclassified to the available-for-sale category in 1995. The amount of the reclassification was $1,972 million at amortized cost. Unrealized net losses related to the transfer were $454 million, after tax. The amortized cost and estimated fair value of loans measured pursuant to SFAS 115 (which are all available-for-sale), including the impact of related derivatives, for the dates indicated were as follows:
- -------------------------------------------------------------------------------- December 31, (in millions) 1997 1996 - -------------------------------------------------------------------------------- Amortized Cost $ 1,005 $ 1,869 Gross Unrealized Gains 89 93 Gross Unrealized Losses (112) (369) - -------------------------------------------------------------------------------- Fair Value $ 982 $ 1,593 - --------------------------------------------------------------------------------
The gains and losses on the disposition of emerging markets securities for the dates indicated were as follows:
- -------------------------------------------------------------------------------- Year Ended December 31, (in millions) 1997 1996 1995 - -------------------------------------------------------------------------------- Gross Gains $ 121 $ 155 $ 204 Gross Losses (121) (235) (253) - -------------------------------------------------------------------------------- Net Losses $-- $ (80) $ (49) - -------------------------------------------------------------------------------- Cash Proceeds $ 897 $ 952 $ 1,193 - --------------------------------------------------------------------------------
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) 1997 1996 - -------------------------------------------------------------------------------- Impaired Loans with an Allowance $483 $ 535 Impaired Loans without an Allowance(a) 24 182 - -------------------------------------------------------------------------------- Total Impaired Loans $507 $ 717 - -------------------------------------------------------------------------------- Allowance for Impaired Loans under SFAS 114(b) $174 $ 194 Average Balance of Impaired Loans During the Year $628 $1,104 Interest Income Recognized on Impaired Loans During the Year $ 8 $ 30 - --------------------------------------------------------------------------------
(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 a part of Chase's overall allowance for credit losses. 56 THE CHASE MANHATTAN CORPORATION 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 5 - ALLOWANCE FOR CREDIT LOSSES - -------------------------------------------------------------------------------- The composition of the allowance for credit losses is as follows:
- ------------------------------------------------------------------------------------------------------------- December 31, (in millions) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------- Loans $ 3,624 $ 3,549 $ 3,784 Derivative and Foreign Exchange Contracts 75 75 -- Lending-Related Commitments 170 70 -- - ------------------------------------------------------------------------------------------------------------- Aggregate Allowance $ 3,869 $ 3,694 $ 3,784 - -------------------------------------------------------------------------------------------------------------
The table below summarizes the changes in the allowance for credit losses on loans.
- ------------------------------------------------------------------------------------------------------------- Year Ended December 31, (in millions) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------- Allowance at January 1 $ 3,549 $ 3,784 $ 3,894 Provision for Credit Losses 804 897 758 Charge-Offs (1,096) (1,187) (1,278) Recoveries 292 290 438 - ------------------------------------------------------------------------------------------------------------- Net Charge-Offs (804) (897) (840) Charge Related to Conforming Credit Card Charge-Off Policies -- (102)(a) -- Transfer to Trading Assets - Risk Management Instruments (See Note One) -- (75) -- Transfer to Other Liabilities (See Note One) (100)(b) (70) -- Allowance Related to Purchased (Disposed) Portfolios and Subsidiaries(c) 172(c) 13 (31)(c) Foreign Exchange Translation Adjustment 3 (1) 3 - ------------------------------------------------------------------------------------------------------------- Allowance at December 31 $ 3,624 $ 3,549 $ 3,784 - -------------------------------------------------------------------------------------------------------------
(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) During 1997, there was a transfer of $100 million to the allowance for credit losses on lending-related commitments as a result of the inclusion in that allowance of undrawn commitments to extend credit. (c) Includes approximately $160 million related to the purchase of the Bank of New York credit card portfolio in 1997, and $28 million related to the sale of banking operations in southern and central New Jersey in 1995. - -------------------------------------------------------------------------------- 6 - LONG-TERM DEBT - -------------------------------------------------------------------------------- The following table is a summary of long-term debt (net of unamortized original issue debt discount, where applicable).
- ---------------------------------------------------------------------------------------------------------------------------------- By remaining maturity at December 31,(a) Under After 1997 1996 (in millions) 1 year 1-5 years 5 years Total Total - ---------------------------------------------------------------------------------------------------------------------------------- Parent Company: Senior Debt: Fixed Rate $ 363 $ 611 $ 116 $ 1,090 $ 1,663 Variable Rate 667 1,315 72 2,054 1,794 Modified Interest Rates(b) 5.30-6.63% 2.82-10.44% 5.49-6.72% 2.82-10.44% 2.82-10.17% Subordinated Debt: Fixed Rate -- 2,365 3,998 6,363 5,670 Variable Rate 50 250 714 1,014 1,282 Modified Interest Rates(b) 10.06% 5.94-10.38% 5.69-8.00% 5.69-10.38% 5.45-10.38% - ---------------------------------------------------------------------------------------------------------------------------------- Subtotal $ 1,080 $ 4,541 $ 4,900 $ 10,521 $ 10,409 - ---------------------------------------------------------------------------------------------------------------------------------- Subsidiaries: Senior Debt: Fixed Rate $ 23 $ 533 $ 195 $ 751 $ 480 Variable Rate 25 699 25 749 226 Modified Interest Rates(b) 5.88-10.25% 5.86-10.26% 4.00-10.60% 4.00-10.60% 4.00-10.60% Subordinated Debt: Fixed Rate -- 316 650 966 1,003 Variable Rate -- 150 250 400 596 Modified Interest Rates(b) -- 3.24-7.25% 5.84-6.58% 3.24-7.25% 3.23-10.00% - ---------------------------------------------------------------------------------------------------------------------------------- Subtotal $ 48 $ 1,698 $ 1,120 $ 2,866 $ 2,305 - ---------------------------------------------------------------------------------------------------------------------------------- Total Long-Term Debt $ 1,128 $ 6,239 $ 6,020 $ 13,387(c) $ 12,714 - ----------------------------------------------------------------------------------------------------------------------------------
(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, 1997, long-term debt aggregating $3.1 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 1997 are $1,128 million in 1998, $1,573 million in 1999, $1,511 million in 2000, $976 million in 2001 and $2,179 million in 2002. THE CHASE MANHATTAN CORPORATION 57 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 1997 mature at various dates through 2027 and carry contractual interest rates ranging from 4.00% to 11.83%. The consolidated weighted-average interest rates on fixed-rate debt at December 31, 1997 and 1996 were 7.56% and 7.78%, respectively. Variable-rate debt outstanding, with contractually-determined interest rates ranging from 5.57% to 6.58% at December 31, 1997, mature at various dates through 2009. The consolidated weighted-average interest rates on variable-rate debt at December 31, 1997 and 1996 were 5.94% and 5.69%, respectively. Included in long-term debt are equity commitment notes and equity contract notes totaling $875 million and $968 million at December 31, 1997 and 1996, respectively. At December 31, 1997, 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 $390 million at December 31, 1997. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES At December 31, 1997, four separate wholly-owned Delaware statutory business trusts established by Chase had issued an aggregate $1,740 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 assets of each statutory business trust are these 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 as of December 31, 1997.
Amount of Capital Securities, Net of Discount ----------------------------- Name of Trust 1997 (in millions) 1996 Stated Maturity Interest Rate Interest Payment Dates - ------------------------------------------------------------------------------------------------------------------ Chase Capital I $ 600 $600 12/1/2026 7.67% Semi-annual - commencing 6/1/97 Chase Capital II 494 -- 2/1/2027 LIBOR + .50% Quarterly - commencing 5/1/97 Chase Capital III 296 -- 3/1/2027 LIBOR + .55% Quarterly - commencing 6/1/97 Chase Capital IV 350 -- 12/6/2027 7.34% Quarterly - commencing 3/31/98 - ------------------------------------------------------------------------------------------------------------------ Total $1,740 $600 - ------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 7 - PREFERRED STOCK OF SUBSIDIARY - -------------------------------------------------------------------------------- In September 1996, Chase Preferred Capital Corporation ("Chase Preferred Capital"), a wholly-owned subsidiary of Chase Bank, 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. 58 THE CHASE MANHATTAN CORPORATION 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 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, 1997 and 1996 were 45.6 million and 82.0 million, respectively. As shown in the summary that follows, during 1997, Chase redeemed four preferred stock issues, each at a redemption price of $25.00 per share, together with any accrued but unpaid dividends. Dividends on shares of each outstanding series of preferred stock are payable quarterly and are cumulative. 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. The following is a summary of Chase's preferred stocks outstanding:
Outstanding at December 31, Stated Value and Shares --------------------------- Earliest Rate in Effect at Redemption Price Per Share(a) (in millions) 1997 (in millions) 1996 Redemption Date December 31, 1997 - ---------------------------------------------------------------------------------------------------------------------------------- 7.92% Cumulative $100.00 2.0(b) $ 200 $ 200 10/1/1997 7.920% 8.40% Cumulative 25.00 6.9 172 172 3/31/1998 8.400 7.58% Cumulative 100.00 2.0(b) 200 200 4/1/1998 7.580 7.50% Cumulative 100.00 2.0(b) 200 200 6/1/1998 7.500 10.50% Cumulative 25.00 5.6 140 140 9/30/1998 10.500 Adjustable Rate, Series L 100.00 2.0 200 200 6/30/1999 5.586(c) Adjustable Rate, Series N 25.00 9.1 228 228 6/30/1999 5.653(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 9.08% Cumulative 25.00 6.0 -- 150 -- -- 8.375% Cumulative 25.00 14.0 -- 350 -- -- 8.50% Cumulative 25.00 6.8 -- 170 -- -- 8.32% Cumulative 25.00 9.6 -- 240 -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Total Preferred Stock $1,740 $2,650 - ----------------------------------------------------------------------------------------------------------------------------------
(a) Redemption price includes 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 money market rates. The minimum and maximum rates are 4.50% and 10.50%, respectively, for each of Series L and Series N. - -------------------------------------------------------------------------------- 9 - COMMON STOCK - -------------------------------------------------------------------------------- Chase is authorized to issue 750 million shares of common stock, with a $1 par value per share. The number of shares of common stock issued and outstanding, for the dates indicated, were as follows:
- -------------------------------------------------------------------------------- December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Issued 440,753,296 440,747,317(a) 457,587,675 Held in Treasury (19,788,820) (9,936,716)(a) (22,583,225) - -------------------------------------------------------------------------------- Outstanding 420,964,476 430,810,601 435,004,450 - --------------------------------------------------------------------------------
(a) Under the terms of the Merger agreement, on March 31, 1996 all 18.6 million treasury shares of heritage Chase were cancelled and retired. During 1997, Chase repurchased approximately 21.1 million shares of its outstanding common stock under a stock repurchase plan announced in October 1996. During 1997, approximately 11.3 million shares were issued from treasury under various employee stock option and other plans. During 1996, 3.2 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, 1997, approximately 66 million shares of common stock were reserved for issuance under various employee incentive, option and stock purchase plans and under Chase's Dividend Reinvestment Plan. Under Chase's Dividend Reinvestment Plan, stockholders may reinvest all or part of their quarterly dividends in shares of common stock. Common stock newly issued, or distributed from treasury, during 1997, 1996 and 1995 was as follows:
- -------------------------------------------------------------------------------- Year Ended December 31, 1997 1996 1995 - -------------------------------------------------------------------------------- Employee Benefit and Compensation Plans(a) 11,098,394 19,357,254 17,649,425 Dividend Reinvestment and Stock Purchase Plans 166,968 118,080 385,513 Stock Warrants -- 3,169,695 53,362 Conversion of 10% Convertible Preferred Stock -- -- 7,639,424 Acquisition of U.S. Trust -- -- 6,883,685 - -------------------------------------------------------------------------------- Total Shares Newly Issued or Distributed from Treasury(b) 11,265,362 22,645,029 32,611,409 - --------------------------------------------------------------------------------
(a) Amount includes 5,040,838, 11,184,277 and 11,385,569 shares of common stock issued in 1997, 1996 and 1995, respectively, under broad-based employee stock option plans. See Note Fifteen for a discussion of Chase's employee stock option plans. (b) Shares distributed from treasury were 11,250,737 in 1997, 20,056,837 in 1996 and 22,132,496 in 1995. THE CHASE MANHATTAN CORPORATION 59 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 10 - EARNINGS PER SHARE - -------------------------------------------------------------------------------- On December 31, 1997, Chase adopted SFAS 128, which establishes new standards for computing and presenting earnings per share (EPS) and simplifies previously issued accounting standards related to EPS. SFAS 128 has replaced the concept of "primary EPS" with "basic EPS" and the concept of "fully-diluted EPS" with "diluted EPS." The impact of the adoption of SFAS 128 for 1997 was that basic EPS was $0.19 higher than primary EPS. The difference between diluted EPS and fully-diluted EPS was immaterial. Prior periods have been restated to conform with the current presentation. Basic and diluted EPS were as follows for the dates indicated:
- -------------------------------------------------------------------------------- Year Ended December 31, (in millions, except per share data) 1997 1996 1995 - -------------------------------------------------------------------------------- Basic Earnings and Shares: Income Before Effect of Accounting Change $ 3,708 $ 2,461 $ 2,970 Effect of Change in Accounting Principle -- -- (11)(a) - -------------------------------------------------------------------------------- Net Income 3,708 2,461 2,959 Less: Preferred Stock Dividends 182 219 227 - -------------------------------------------------------------------------------- Net Income Applicable to Common Stock $ 3,526 $ 2,242 $ 2,732 Weighted-Average Basic Shares Outstanding 424.6 436.8 431.6 - -------------------------------------------------------------------------------- Basic Earnings Per Share: Income Before Effect of Accounting Change $ 8.30 $ 5.13 $ 6.36 Effect of Change in Accounting Principle -- -- (0.03)(a) - -------------------------------------------------------------------------------- Net Income $ 8.30 $ 5.13 $ 6.33 - -------------------------------------------------------------------------------- Diluted Earnings and Shares: Net Income Applicable to Common Stock $ 3,526 $ 2,242 $ 2,732 Add: Applicable Dividend on Convertible Preferred Stock -- -- 7(b) - -------------------------------------------------------------------------------- Adjusted Net Income $ 3,526 $ 2,242 $ 2,739 - -------------------------------------------------------------------------------- Weighted-Average Basic Shares Outstanding 424.6 436.8 431.6 Add: Broad-Based Options 5.7 5.7 10.1 Options to Key Employees 8.9 9.6 7.2 Warrants -- 1.3 1.5 10% Convertible Preferred Stock -- -- 3.1 - -------------------------------------------------------------------------------- Total Additional Shares 14.6 16.6 21.9 - -------------------------------------------------------------------------------- Weighted-Average Diluted Shares Outstanding 439.2 453.4 453.5 - -------------------------------------------------------------------------------- Diluted Earnings Per Share: Income Before Effect of Accounting Change $ 8.03 $ 4.94 $ 6.07 Effect of Change in Accounting Principle -- -- (0.03)(a) - -------------------------------------------------------------------------------- Net Income $ 8.03 $ 4.94 $ 6.04 - --------------------------------------------------------------------------------
(a) On January 1, 1995, Chase adopted SFAS 106 for the accounting for other postretirement benefits relating to its foreign plans. (b) During the second quarter of 1995, Chase called for redemption all of the outstanding shares of its 10% convertible preferred stock. Substantially all of the 10% convertible stock was converted to common stock prior to redemption. The preferred dividends amounted to $7 million before conversion. Basic EPS is computed by dividing net income available to common shares outstanding by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed using the same method as basic EPS, but reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Also, for purposes of diluted EPS, net income available for common stock is adjusted 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) 1997 1996 1995 - -------------------------------------------------------------------------------- Fees in Lieu of Compensating Balances $ 314 $ 295 $ 281 Commissions on Letters of Credit and Acceptances 307 330 350 Mortgage Servicing Fees 231 204 212 Loan Commitment Fees 120 120 123 Other Fees 635 580 487 - -------------------------------------------------------------------------------- Total Fees for Other Financial Services $1,607 $1,529 $1,453 - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 12 - RESTRUCTURING COSTS AND OTHER EXPENSE - -------------------------------------------------------------------------------- Restructuring Costs: 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 have been recognized as incurred. These remaining merger-related expenses (originally estimated at $250 million) are expected to total approximately $375 million. These additional costs primarily relate to technology and systems integration costs. Merger-related expenses of $192 million were incurred during 1997, resulting in cumulative-to-date merger-related expenses of $356 million. These costs are reflected in the Restructuring Costs caption of the Income Statement. At December 31, 1997, the reserve balance associated with the $1.65 billion merger-related restructuring charge was approximately $394 million, the majority of which is related to the disposition of certain facilities, premises and equipment. The 1995 results included a $15 million restructuring charge related to exiting from a futures brokerage business. 60 THE CHASE MANHATTAN CORPORATION 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Other Expense: Details of other expense were as follows:
- -------------------------------------------------------------------------------- Year Ended December 31, (in millions) 1997 1996 1995 - -------------------------------------------------------------------------------- Other Expense: Professional Services $ 575 $ 530 $ 559 Marketing Expense 415 346 372 Telecommunications 307 326 333 Travel and Entertainment 220 213 206 Amortization of Intangibles 172 169 182 Minority Interest 74 54 27 FDIC Assessments 14 9(a) 117 All Other 1,092 993 895 - -------------------------------------------------------------------------------- Total Other Expense $2,869 $2,640 $2,691 - --------------------------------------------------------------------------------
(a) Reflects the impact of the reduction in the Federal Deposit Insurance Corporation ("FDIC") assessment rate. - -------------------------------------------------------------------------------- 13 - 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) 1997 1996 - -------------------------------------------------------------------------------- Federal Deferred Tax Assets: Reserves for Credit Losses $ 930 $ 911 Reserves Other Than Credit Losses 832 1,004 Fair Value Adjustments-Available-for-Sale-Securities -- 148 Interest and Fee Accrual Differences 92 91 Foreign Operations 589 518 Postretirement Benefits 224 197 Other 105 71 - -------------------------------------------------------------------------------- Gross Federal Deferred Tax Assets $2,772 $2,940 - -------------------------------------------------------------------------------- Federal Deferred Tax Liabilities: Leasing Transactions $1,625 $1,290 Fair Value Adjustments-Available-for-Sale-Securities 69 -- Depreciation and Amortization 266 156 Other 171 163 - -------------------------------------------------------------------------------- Gross Federal Deferred Tax Liabilities $2,131 $1,609 - -------------------------------------------------------------------------------- Deferred Federal Tax Asset Valuation Reserve $ 90 $ 98 - -------------------------------------------------------------------------------- Net Federal Deferred Tax Asset After Valuation Reserve $ 551 $1,233 - --------------------------------------------------------------------------------
Chase's valuation reserve for Federal income taxes of $90 million at December 31, 1997 related primarily to tax benefits associated with foreign operations. These tax benefits are subject to tax law limitations on realization. This valuation reserve was established in accordance with the requirements of SFAS 109. A Federal deferred tax asset has been recorded in accordance with SFAS 109 related to deferred foreign taxes. Deferred foreign tax liabilities were $181 million as of December 31, 1997. Chase expects that, when paid, these foreign taxes will be creditable against its Federal income tax liability. Deferred State and Local tax liabilities approximated $138 million as of December 31, 1997. 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) 1997 1996 1995 - -------------------------------------------------------------------------------- Current Income Tax Expense: Federal $ 813 $ 1,022 $ 1,232 Foreign 614 541 381 State and Local 226 169 264 - -------------------------------------------------------------------------------- Total Current Expense 1,653 1,732 1,877 - -------------------------------------------------------------------------------- Deferred Income Tax Expense (Benefit): Federal 483 (99) (164) Foreign (39) (101) 111 State and Local 105 (182) 18 - -------------------------------------------------------------------------------- Total Deferred Expense (Benefit) 549 (382) (35) - -------------------------------------------------------------------------------- Total Income Tax Expense $ 2,202 $ 1,350 $ 1,842 - --------------------------------------------------------------------------------
The preceding table does not reflect the tax effects of unrealized gains and losses with respect to available-for-sale securities and certain tax benefits associated with Chase's employee stock plans, both of which are recorded directly in stockholders' equity. Stockholders' equity decreased by $35 million and $38 million, respectively, in 1997 and 1995 and increased by $254 million in 1996 as a result of these tax effects. The tax expense applicable to securities gains and losses for the years 1997, 1996 and 1995 was $116 million, $51 million and $68 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) 1997 1996 1995 - -------------------------------------------------------------------------------- Statutory U.S. Federal Tax Expense $ 2,068 $ 1,334 $ 1,684 Increase (Decrease) in Tax Expense Resulting From: State and Local Income Taxes, Net of Federal Income Tax Benefit 215 (8) 183 Other-Net (81) 24 (25) - -------------------------------------------------------------------------------- Total Income Tax Expense $ 2,202 $ 1,350 $ 1,842 - --------------------------------------------------------------------------------
The following table presents the domestic and foreign components of income before income taxes for the past three years.
- -------------------------------------------------------------------------------- Year Ended December 31, (in millions) 1997 1996 1995 - -------------------------------------------------------------------------------- Domestic $4,087 $2,458 $3,710 Foreign(a) 1,823 1,353 1,102 - -------------------------------------------------------------------------------- Income Before Income Taxes $5,910 $3,811 $4,812 - --------------------------------------------------------------------------------
(a) For purposes of this table, foreign income is defined as income generated from operations located outside the United States. THE CHASE MANHATTAN CORPORATION 61 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 14 - POSTRETIREMENT EMPLOYEE BENEFITS PLANS - -------------------------------------------------------------------------------- As of December 31, 1996, the prior domestic plans of heritage Chase and Chemical were merged. As of January 1, 1997, the postretirement employee benefit plans were amended. The impact of plan amendments on benefit obligations was immaterial. 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. Chase's prior domestic plan had a cash balance formula that provided for benefits based on salary and service, subject to a minimum benefit level, while Chemical's prior domestic plan included both a cash balance feature and a final-average-pay feature. The 1997 unrecognized amount primarily resulted from returns higher than expected on plan assets. Domestic Pension Plan
- -------------------------------------------------------------------------------- December 31, (in millions) 1997 1996 - -------------------------------------------------------------------------------- Benefit Obligation $(2,282) $(2,028) Plan Assets at Fair Value 2,732 2,349 - -------------------------------------------------------------------------------- Plan Assets in Excess of Benefit Obligation 450 321 Unrecognized Amounts (239) (31) - -------------------------------------------------------------------------------- Prepaid Pension Cost Reported in Other Assets $ 211 $ 290 - -------------------------------------------------------------------------------- Employer Contributions to Trust $ 0 $ 0 Benefits Paid Out of the Trust 167 152 Weighted-Average Annualized Actuarial Assumptions as of December 31: Discount Rate 7.00% 7.50% Assumed Rate of Long-Term Return on Plan Assets 8.50 9.00 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 1997, $98 million in 1996 and $88 million in 1995. The decrease in expense from 1996 to 1997 primarily reflects lower service costs as a result of the plan amendments 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 $26 million in 1997, $47 million in 1996, and $45 million in 1995. At December 31, 1997 and 1996, Chase's liability included in Accrued Expenses related to plans that Chase elected not to prefund fully totaled $167 million and $177 million, respectively. Employee Benefits expense related to defined contribution plans totaled $127 million in 1997, $95 million in 1996 and $94 million in 1995. Chase increased its match on the domestic 401(k) Savings Plan to 5%, from 4%, effective January 1, 1997. The variances in 1997 expense for the various plans detailed above primarily resulted from plan design changes incidental to the Merger. During 1996, Chase also recognized a one-time 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. As with the prior Chase and Chemical benefits, life insurance benefits are noncontributory. Postretirement Medical and Life Insurance Liability
- -------------------------------------------------------------------------------- At or for the Year Ended December 31, (in millions) 1997 1996 - -------------------------------------------------------------------------------- Benefit Obligation $(799) $(779) Unrecognized Amounts (31) (26) - -------------------------------------------------------------------------------- Accrued Postretirement Medical and Life Insurance Cost Reported in Accrued Expenses $(830) $(805) - -------------------------------------------------------------------------------- Benefits Paid(a) $ 43 $ 41 - --------------------------------------------------------------------------------
(a) Benefits paid in 1997 consisted of $34 million of employer contributions and $9 million of retiree contributions. The periodic postretirement medical and life insurance expense (reported in Employee Benefits expense) totaled $68 million in 1997, $67 million in 1996 and $65 million in 1995. In addition, the adoption of SFAS 106 in 1995 (relating to Chase's foreign employees) resulted in a charge of $17 million ($11 million after-tax). The discount rates and rates of increase in 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, 1997, the assumed weighted-average medical benefits cost trend rate used to measure the expected cost of benefits covered was 8.5% for 1998, declining gradually over six years to a floor of 5.3%. The effect of a 1% change in the assumed medical cost trend rate would result in a corresponding change in the December 31, 1997 benefit obligation and 1997 periodic expense by up to 7%. 62 THE CHASE MANHATTAN CORPORATION 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 15 - 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, 1997 1996 1995 --------------------------- --------------------------- --------------------------- (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 21,601 $41.49 21,836 $35.83 21,924 $33.27 Granted 5,976 92.38 5,327 58.32 4,937 42.09 Exercised (5,229) 40.44 (5,132) 34.23 (4,389) 30.04 Cancelled (310) 67.50 (430) 48.69 (636) 36.11 - ---------------------------------------------------------------------------------------------------------------------- Options Outstanding, December 31 22,038(a) $56.27 21,601 $41.49 21,836 $35.83 - ---------------------------------------------------------------------------------------------------------------------- Options Exercisable, December 31 13,632 $42.60 12,995 $34.91 12,748 $32.45 - ----------------------------------------------------------------------------------------------------------------------
(a) Of the total options outstanding at December 31, 1997, 4,698,000 options (4,608,000 were exercisable) had exercise prices ranging from $10 to $35, or $29.20 on average, and a weighted-average remaining contractual life of 4.9 years; 11,490,000 options (8,916,000 were exercisable) had exercise prices ranging from $35.01 to $75, or $48.96 on average, and a remaining life of 6.7 years; 5,850,000 options (108,000 exercisable) had exercise prices ranging from $75.01 to $118.91, or $92.38 on average, and a remaining life of 9.0 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 (or cash, in some cases) after a specified period of continued employment; the recipient is entitled to receive cash payments equivalent to dividends on the underlying common stock during the period the RSU is outstanding. For 1995 and 1996 LTIP awards, vesting for most restricted shares and RSUs accelerated if Chase's stock price reached and sustained target prices for a minimum period (the "targets") during the service period. For half of the award, vesting was conditioned solely on continued employment; for the other half, the awards would have been forfeited if the targets were not achieved ("forfeitable restricted stock and RSUs"). During 1996, 2.4 million of such awards (all payable solely in stock) were granted; all 1996 grants vested in 1997 as a result of the targets having been achieved. During 1995, 859,000 (67,000 payable in cash) of such awards were granted; all 1995 grants vested in 1995 and 1996 as a result of the targets having been achieved. Additional restricted stock and RSUs are outstanding for which vesting is conditioned solely on continued employment. During 1997, 1996, and 1995, respectively, 616,000, 207,000, and 489,000 of such awards were granted. In 1997 and 1996, these awards primarily were issued under the deferred equity plan. Awards in 1995 primarily were granted under the prior Chase plan. BROAD-BASED EMPLOYEE STOCK OPTIONS In December 1996, Chase adopted its Value Sharing Plan, under which 9.7 million options to purchase common stock were granted to substantially all full-time (150 options each) and part-time (75 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. The 1996 award became exercisable in 1997 as a result of the target having been achieved. A second installment of 10.2 million options with similar terms was granted in December 1997 to eligible active employees on the grant date. A third and last installment is currently intended to be issued in December 1998. The exercise and target prices for the last installment will be determined at the time of the grant; other terms are expected to be similar to the 1996 and 1997 awards. Both of Chase's predecessor institutions made similar awards in 1994. All outstanding options expire ten years after the grant date. Options outstanding under the prior Chemical plan became exercisable during 1995 when the targets were achieved. Options outstanding under the prior Chase plan became exercisable in December 1995 as a result of Chase shareholder approval of the Merger. THE CHASE MANHATTAN CORPORATION 63 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 1997 1996 1995 --------------------------- --------------------------- --------------------------- (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 16,878 $ 65.07 18,536 $ 35.40 32,498 $ 36.39 Granted 10,222 111.69 9,676 86.38 450 39.76 Exercised (5,041) 65.41 (11,184) 34.59 (11,386) 38.36 Cancelled (655) 83.31 (150) 45.94 (3,026) 35.56 - ---------------------------------------------------------------------------------------------------------------------- Options Outstanding, December 31 21,404(a) $ 87.14 16,878 $ 65.07 18,536 $ 35.40 - ---------------------------------------------------------------------------------------------------------------------- Options Exercisable, December 31 11,182 $ 64.70 7,237 $ 36.69 18,536 $ 35.40 - ----------------------------------------------------------------------------------------------------------------------
(a) Of the total options outstanding at December 31, 1997, all options were exercisable except for the 1997 grant under the Value Sharing Plan. The exercise prices for the options outstanding were: $34.30, on average, ($30.77 to $45.31) for the 1,848,000 options from the prior Chase plan; $40.50 for the 3,179,000 options from the prior Chemical plan; $86.38 for the 6,155,000 options granted in 1996 under the Value Sharing Plan; and $111.69 for the 10,222,000 options granted in 1997 under the Value Sharing Plan. The average remaining contractual life was 8.8 years for all options outstanding, and 7.8 years for exercisable options outstanding. COMPARISON OF THE FAIR- AND INTRINSIC-VALUE-BASED MEASUREMENT METHODS SFAS 123, which established accounting and reporting standards for stock-based incentive plans, is effective for awards granted in 1995 and subsequent years. It allows two alternative methods for accounting for employee incentives: (a) the fair-value-based method, or (b) the intrinsic-value-based method, on which Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", was based. Chase accounts for its employee stock-based compensation plans under the intrinsic-value-based method. There is no expense recognized for stock options, as they have no intrinsic value on the grant date. Forfeitable restricted stock and RSUs are valued at the vesting date stock price. The expense for restricted stock and RSUs other than forfeitable awards is measured by the grant-date stock price. If the recipient may elect to receive cash payment in lieu of stock, expense is measured by the amount of cash paid. Stock compensation expense recognized in reported earnings totaled $228 million in 1997 and $65 million in 1996, before taxes. The increase primarily resulted from increases in Chase's stock price, which increased the value and/or triggered the vesting of some awards. If Chase had adopted the fair-value-based method, 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 2.5% lower than reported 1997 amounts, 1.5% lower than reported 1996 amounts, and .8% lower than reported 1995 amounts. The impact of stock compensation on pro forma expense increased in 1997, as compared with 1996, primarily due to the impact of the vesting of options granted in December 1996 under the Value Sharing Plan and the higher cost of options granted in 1997. The 1996 Value Share options vested when the target was achieved in 1997, and therefore all remaining pro forma expense would have been recognized. The cost of 1997 grants increased as a result of revised 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 options granted during the past two years.
- -------------------------------------------------------------------------------- Year Ended December 31, 1997 1996 - -------------------------------------------------------------------------------- Weighted-Average Grant Date Fair Value:(a) Options Granted to: Key Employees $26.58 $13.91 All Other Employees 29.13 16.66 All Restricted Stock and RSUs Payable in Stock 95.74 46.15 Weighted-Average Annualized Option Valuation Assumptions: Risk-Free Interest Rate 5.96% 5.99% Expected Dividend Yield (b) 2.29 3.50 Expected Common Stock Price Volatility 23 22 Assumed Weighted-Average Expected Life of Options (in Years): Key Employee Stock Options 6.3 7.2 Broad-Based Employee Stock Options 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. 64 THE CHASE MANHATTAN CORPORATION 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 16 - 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 1997 and $1.2 billion during 1996. 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 capital and surplus; the aggregate amount of all such loans is limited to 20% of the banking subsidiary's capital and surplus. Chase was 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 and the 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 $1.4 billion at December 31, 1997. - -------------------------------------------------------------------------------- 17 - 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 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 requirements by their respective primary regulators (see table below). Management believes that as of December 31, 1997, Chase met all capital requirements to which it is subject and is not aware of any subsequent events that would alter this classification. During 1997, Chase adopted the Federal Reserve Board's new risk-based capital guidelines incorporating market-risk capital. For a further discussion, see paragraph two of the Capital section on page 41 of the MD&A. 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, 1997 (in millions) Capital(b) Capital Assets(c) Assets Capital(d)(f) Capital(d)(f) Leverage(e)(f) - ----------------------------------------------------------------------------------------------------------------------------------- Chase(a) $ 22,594 $ 33,303 $286,163 $374,863 7.90% 11.64% 6.03% - ----------------------------------------------------------------------------------------------------------------------------------- Chase Bank 16,702 24,875 230,947 301,705 7.23 10.77 5.54 - ----------------------------------------------------------------------------------------------------------------------------------- Chase USA 2,393 3,532 30,982 29,162 7.72 11.40 8.21 - ----------------------------------------------------------------------------------------------------------------------------------- Chase Texas 1,418 1,986 18,373 21,627 7.72 10.81 6.56 - ----------------------------------------------------------------------------------------------------------------------------------- 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) Includes off-balance sheet risk-weighted assets in the amounts of $97,996 million, $88,391 million, $3,791 million and $4,036 million, respectively, at December 31, 1997. (d) 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. (e) Tier 1 Capital divided by adjusted average assets (net of allowance for credit losses, goodwill and certain intangible assets). (f) The provisions of SFAS 115 do not apply to the calculation of these ratios. (g) As defined by the regulations issued by the Federal Reserve Board, the FDIC and the Comptroller of the Currency. (h) Represents requirements for bank subsidiaries pursuant to regulations issued under FDICIA. There is no Tier 1 Leverage component in the definition of a well capitalized bank holding company. THE CHASE MANHATTAN CORPORATION 65 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 18 - DERIVATIVE AND FOREIGN EXCHANGE FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- Chase utilizes various derivative and foreign exchange financial instruments for trading purposes and for purposes other than trading, such as ALM. These transactions involve credit risk and market risk. A discussion of the credit and market risks involved with these financial instruments is included in the first six paragraphs of the Derivative and Foreign Exchange Financial Instruments section of the MD&A on pages 35-36, and paragraphs one, two and eight through eleven of the Market Risk Management section of the MD&A on page 37. 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. Derivative and Foreign Exchange Instruments Used for ALM Purposes: 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 39. 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) for the dates indicated below.
Notional Amounts(a) Credit Exposure ------------------------ ----------------------- December 31, (in billions) 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Interest Rate Contracts Interest Rate Swaps Trading $3,206.0 $2,300.3 $ 14.0 $11.4 ALM 98.2 96.4 0.6 0.7 Futures, Forwards and Forward Rate Agreements Trading 1,643.7 1,209.6 0.3 0.5 ALM 42.6 30.8 -- -- Purchased Options Trading 316.1 172.7 1.7 2.3 ALM 13.1 15.5 -- -- Written Options Trading 395.7 199.4 -- -- ALM 0.2 1.4 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Total Interest Rate Contracts $5,715.6 $4,026.1 $ 16.6 $14.9 - ------------------------------------------------------------------------------------------------------------------------------------ Foreign Exchange Contracts Spot, Forward and Futures Contracts Trading $1,521.7 $1,308.6 $ 14.4 $10.0 ALM 72.6 60.1 -- -- Other Foreign Exchange Contracts(b) Trading 358.7 267.4 5.8 3.8 ALM 5.2 4.2 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Total Foreign Exchange Contracts $1,958.2 $1,640.3 $ 20.2 $13.8 - ------------------------------------------------------------------------------------------------------------------------------------ Equity, Commodity and Other Contracts Trading $ 64.4 $ 45.7 $ 1.6 $ 1.7 - ------------------------------------------------------------------------------------------------------------------------------------ Total Equity, Commodity and Other Contracts $ 64.4 $ 45.7 $ 1.6 $ 1.7 - ------------------------------------------------------------------------------------------------------------------------------------ Total Credit Exposure Recorded on the Balance Sheet $ 38.4 $30.4 - ------------------------------------------------------------------------------------------------------------------------------------
(a) The notional amounts of exchange-traded interest rate contracts, foreign exchange contracts, and equity, commodity and other contracts were $691.2 billion, $22.8 billion and $6.1 billion, respectively, at December 31, 1997, compared with $521.5 billion, $9.5 billion and $6.4 billion, respectively, at December 31, 1996. 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 $123.9 billion, $126.6 billion and $113.4 billion, respectively, at December 31, 1997, compared with $89.6 billion, $94.2 billion and $87.8 billion, respectively, at December 31, 1996. 66 THE CHASE MANHATTAN CORPORATION 67 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. Interest rate swaps are contracts in which a series of interest rate flows in a single currency are exchanged over a prescribed period. The notional amount on which the interest payments are based is not exchanged. Most interest rate swaps involve the exchange of fixed and floating interest payments. 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. The risks inherent in interest rate and cross-currency swaps are the potential inability of a counterparty to meet the terms of its contract and the risk associated with changes in the market values of the contracts due to movements in the underlying interest rates. 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. The credit risk inherent in futures and forwards is the risk that the exchange party may default. Futures contracts settle in cash daily and, therefore, there is minimal credit risk to Chase. The credit risk inherent in forwards arises from the potential inability of counterparties to meet the terms of their contracts. Both futures and forwards are also subject to the market risk of movements in interest rates or the value of the underlying securities or instruments. 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. The notional amount on which the interest payments are based is not exchanged. The maturity of these agreements is typically less than two years. The credit and market risk is similar to forward contracts discussed above. Interest rate options, which include caps and floors, are contracts which transfer, modify, or reduce interest rate risk in exchange for the payment of a premium when the contract is initiated. As a writer of interest rate caps, floors and other 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 currencies instead of interest rates. The credit risk inherent in options is the risk that the exchange party may default. Chase's use of written options as part of its ALM 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 their estimated fair value. Foreign exchange contracts are used for the future receipt or delivery of foreign currency at previously agreed-upon terms. The risks inherent in these contracts are the potential inability of a counterparty to meet the terms of its contract and the risk associated with changes in the market values of the underlying currencies. Equity, commodity and other contracts include swaps and options and are similar to interest rate contracts, except that they are based on commodity indices (e.g., gold) or equity prices, instead of interest rates. To reduce its exposure to the market risks related to the above-mentioned classes of derivative and foreign exchange instruments, Chase may enter into offsetting positions. To reduce credit risk, 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. Derivatives and foreign exchange instruments are generally either negotiated over-the-counter ("OTC") contracts or standardized contracts executed on a recognized exchange. Standardized exchange-traded derivatives primarily include futures and options. Negotiated OTC derivatives are generally entered into between two counterparties that negotiate specific agreement terms, including the underlying instrument, amount, exercise price and maturity. Included as part of the preceding notional table are transactions involving "when-issued securities", which Chase enters into primarily as part of its trading activities. When-issued securities are commitments to purchase or sell securities authorized for issuance, but not yet actually issued, and are not recorded on the balance sheet until issued. However, these commitments are marked-to-market with the resulting gains or losses reflected in trading revenue. THE CHASE MANHATTAN CORPORATION 67 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 19 - 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. In accordance with the AICPA Audit Guide, Chase allocated $170 million of its allowance for credit losses to lending-related commitments, which is reported in Other Liabilities. See Note One on page 52. The following table summarizes the contract amounts relating to Chase's lending-related financial instruments at December 31, 1997 and 1996. Off-Balance Sheet Lending-Related Financial Instruments
December 31, (in millions) 1997 1996 - -------------------------------------------------------------------------------- Credit Card Lines $ 75,659 $ 54,192 Other Commitments to Extend Credit 123,569 94,278 Standby Letters of Credit and Guarantees (Net of Risk Participations of $6,309 and $5,205) 33,164 30,843 Other Letters of Credit 4,665 5,588 Customers' Securities Lent 52,123 38,715 - --------------------------------------------------------------------------------
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 written 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. - -------------------------------------------------------------------------------- 20 - 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. The initial segmentation of the portfolio for this purpose is by product within the consumer portfolio and by industry and geography within the commercial portfolio. 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. Chase's exposures within these major segments can be diversified by risk ratings, maturity and geography and segmented within industry classifications. These diversification factors reduce concentration risk. For geographic and other concentrations, reference is made to the following areas of the MD&A: - -------------------------------------------------------------------------------- Residential Mortgage Loans by Geographic Region Table on Page 31 - -------------------------------------------------------------------------------- Domestic Credit Card Receivables by Geographic Region Table on Page 32 - -------------------------------------------------------------------------------- Auto Financings Second Paragraph on Page 33 - -------------------------------------------------------------------------------- Domestic Commercial Real Estate Fourth Paragraph on Page 33 - -------------------------------------------------------------------------------- Industry Diversification Page 34 - -------------------------------------------------------------------------------- Cross-Border Exposure Second and Third Paragraphs on Page 34 - -------------------------------------------------------------------------------- Derivative and Foreign Exchange Financial Instruments Seventh and Eighth Paragraph on Pages 35-36 - --------------------------------------------------------------------------------
1997 Distributions 1996 Distributions ---------------------------------------- ------------------------------------------- Credit On-Balance Off-Balance Credit On-Balance Off-Balance December 31, (in billions) Exposure Sheet Sheet Exposure Sheet Sheet - ----------------------------------------------------------------------------------------------------------------------------- Credit Cards $ 92.0 $ 16.3 $ 75.7 $ 66.9 $ 12.7 $ 54.2 Residential Mortgages 42.0 40.2 1.8 39.4 37.9 1.5 Depository Institutions 27.7 10.5 17.2 25.1 13.0 12.1 Auto Financings 14.5 14.2 0.3 11.8 11.8 -- Commercial Real Estate 9.0 5.7 3.3 8.4 6.7 1.7 - ----------------------------------------------------------------------------------------------------------------------------- Total $ 185.2 $ 86.9 $ 98.3 $ 151.6 $ 82.1 $ 69.5 - -----------------------------------------------------------------------------------------------------------------------------
68 THE CHASE MANHATTAN CORPORATION 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 21 - 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 to be valued using 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 negligible credit losses. The fair value of loans held for accelerated disposition is also considered to approximate carrying value. See Note One. 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 loan type. 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 venture capital 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. 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. THE CHASE MANHATTAN CORPORATION 69 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Trading Liabilities: Chase carries trading liabilities, which include securities sold, not yet purchased, structured notes as well as derivative and foreign exchange instruments, at estimated fair value. Long-Term Debt-Related Instruments: The valuation of long-term debt, including the guaranteed preferred beneficial interest 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 at December 31, 1997 and 1996 of financial assets and liabilities valued under SFAS 107 and certain derivative contracts used for ALM activities related to these financial assets and liabilities. The table excludes those derivative contracts used by Chase to manage the risks associated with its mortgage servicing rights that are not required to be fair valued under SFAS 107. At December 31, 1997, the carrying value of these derivative contracts was $109 million, and gross unrecognized gains and losses were $107 million and $7 million, respectively, resulting in an estimated fair value of $209 million.
Financial Assets/ Derivative Contracts Financial Liabilities Used for ALM Activities ---------------------------- ---------------------------------------- Gross Gross Estimated Unrecog- Unrecog- Estimated Carrying Fair Carrying nized nized Fair December 31, 1997 (in millions) Value(a)(b) Value(a)(b) Value(c) Gains Losses Value(e) - ------------------------------------------------------------------------------------------------------------------------------------ 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 Credit Losses 164,830 167,122 183 130 (485) (172) Other Assets(d) 3,147 3,741 46 90 (59) 77 - ------------------------------------------------------------------------------------------------------------------------------------ Total Financial Assets $ 357,077 $ 359,975 $ 232 $ 265 $ (561) $ (64) - ------------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1996 (in millions) - ------------------------------------------------------------------------------------------------------------------------------------ Financial Assets: Assets for Which Fair Value Approximates Carrying Value $ 65,517 $ 65,517 $ 24 $ 21 $ (10) $ 35 Trading Assets 59,956 59,956 -- -- -- -- Securities Available-for-Sale 44,691 44,691 (53) -- -- (53) Securities Held-to-Maturity 3,855 3,849 -- -- -- -- Loans, Net of Allowance for Credit Losses 151,543 153,541 133 311 (440) 4 Other Assets(d) 2,942 3,277 118 180 (149) 149 - ------------------------------------------------------------------------------------------------------------------------------------ Total Financial Assets $ 328,504 $ 330,831 $ 222 $ 512 $ (599) $ 135 - ------------------------------------------------------------------------------------------------------------------------------------ Financial Liabilities: Liabilities for Which Fair Value Approximates Carrying Value $ 225,647 $ 225,647 $ 8 $ 73 $ (124) $ (43) Domestic Time Deposits 37,047 37,482 158 76 (173) 61 Trading Liabilities 38,136 38,136 -- -- -- -- Long-Term Debt-Related Instruments 13,314 13,361 (90) 116 (111) (85) - ------------------------------------------------------------------------------------------------------------------------------------ Total Financial Liabilities $ 314,144 $ 314,626 $ 76 $ 265 $ (408) $ (67) - ------------------------------------------------------------------------------------------------------------------------------------
(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 these contracts in its ALM activities to modify the interest rate characteristics of balance sheet instruments such as available-for-sale securities, loans and deposits. Gross unrecognized losses from daily margin settlements on open futures contracts were $3 million at December 31, 1997, in contrast to an unrecognized net gain of $3 million at December 31, 1996. (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 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) Included in other assets are derivative contracts entered into prior to January 1, 1995 and used in place of cash market instruments. Effective January 1, 1995, this practice was discontinued. At December 31, 1997, 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. 70 THE CHASE MANHATTAN CORPORATION 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 22 - PARENT COMPANY - -------------------------------------------------------------------------------- Parent Company - Balance Sheet
- -------------------------------------------------------------------------------- December 31, (in millions) 1997 1996 - -------------------------------------------------------------------------------- Assets Cash with Banks $ 323 $ 12 Deposits with Banking Subsidiaries 1,811 4,136 Securities Purchased Under Resale Agreements 1,915 1,478 Short-Term Advances to Banking Subsidiaries 68 100 Short-Term Advances to Nonbanking Subsidiaries 3,800 1,895 Long-Term Advances to Banking Subsidiaries 4,492 4,602 Long-Term Advances to Nonbanking Subsidiaries 750 570 Investment (at Equity) in Banking Subsidiaries 23,368 22,206 Investment (at Equity) in Nonbanking Subsidiaries 2,406 2,387 Other Assets 791 568 - -------------------------------------------------------------------------------- Total Assets $39,724 $37,954 - -------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Other Borrowed Funds, primarily Commercial Paper $ 4,812 $ 4,775 Other Liabilities 715 1,024 Long-Term Debt(a) 12,455 11,161 - -------------------------------------------------------------------------------- Total Liabilities 17,982 16,960 Stockholders' Equity 21,742 20,994 - -------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $39,724 $37,954 - --------------------------------------------------------------------------------
(a) At December 31, 1997, aggregate annual maturities for all issues for the years 1998 through 2002 were $1,080 million, $1,523 million, $984 million, $955 million and $1,079 million, respectively. Parent Company - Statement of Income
- -------------------------------------------------------------------------------- Year Ended December 31, (in millions) 1997 1996 1995 - -------------------------------------------------------------------------------- Income Dividends from Banking Subsidiaries $2,175 $1,993(a) $1,601 Dividends from Nonbanking Subsidiaries 226 7 15 Interest from Banking Subsidiaries 518 610 530 Interest from Nonbanking Subsidiaries 279 205 232 All Other Income 21 13 178 - -------------------------------------------------------------------------------- Total Income 3,219 2,828 2,556 - -------------------------------------------------------------------------------- Expense Interest on: Other Borrowed Funds, primarily Commercial Paper 247 293 328 Long-Term Debt 849 742 744 All Other Expense 49 97 61 - -------------------------------------------------------------------------------- Total Expense 1,145 1,132 1,133 - -------------------------------------------------------------------------------- Income Before Income Tax Benefit and Equity in Undistributed Net Income of Subsidiaries 2,074 1,696 1,423 Income Tax Benefit 120 117 73 Equity in Undistributed Net Income of Subsidiaries 1,514 648 1,463 - -------------------------------------------------------------------------------- Net Income $3,708 $2,461 $2,959 - --------------------------------------------------------------------------------
(a) Includes a noncash dividend of $657 million. Parent Company - Statement of Cash Flows
- ------------------------------------------------------------------------------------------------------------------ Year Ended December 31, (in millions) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Operating Activities Net Income $ 3,708 $ 2,461 $ 2,959 Less--Net Income of Subsidiaries 3,915 2,648 3,079 - ------------------------------------------------------------------------------------------------------------------ Parent Company Net Loss (207) (187) (120) Add--Dividends from Subsidiaries 2,401 1,343 1,616 Other--Net (72) 140 (60) - ------------------------------------------------------------------------------------------------------------------ Net Cash Provided by Operating Activities 2,122 1,296 1,436 - ------------------------------------------------------------------------------------------------------------------ Investing Activities Net Change In: Deposits with Banking Subsidiaries 2,325 2,084 (1,424) Advances to Subsidiaries (1,944) (31) (68) Investment (at Equity) in Subsidiaries 724 8 (218) Securities Purchased Under Resale Agreements (437) (963) 410 Proceeds from the Maturity/Sale of Available-for-Sale Securities 35 150 118 Proceeds from Divestitures of Nonstrategic Businesses -- -- 490 Other--Net (92) (34) (52) - ------------------------------------------------------------------------------------------------------------------ Net Cash Provided (Used) by Investing Activities 611 1,214 (744) - ------------------------------------------------------------------------------------------------------------------ Financing Activities Net Change in Other Borrowed Funds 37 (1,630) 581 Net Proceeds from the Issuance (Repayment) of Long-Term Debt 1,281 513 603 Proceeds from the Issuance of Stock 967 1,082 740 Redemption of Preferred Stock (910) -- -- Treasury Stock Purchased (2,585) (1,611) (1,389) Cash Dividends Paid (1,212) (1,188) (978) - ------------------------------------------------------------------------------------------------------------------ Net Cash Used by Financing Activities (2,422) (2,834) (443) - ------------------------------------------------------------------------------------------------------------------ Net Increase (Decrease) in Cash with Banks 311 (324) 249 Cash with Banks at the Beginning of the Year 12 336 87 - ------------------------------------------------------------------------------------------------------------------ Cash with Banks at the End of the Year $ 323 $ 12 $ 336 - ------------------------------------------------------------------------------------------------------------------ Cash Interest Paid $ 1,118 $ 1,041 $ 1,060 Taxes Paid $ 709 $ 1,297 $ 957
THE CHASE MANHATTAN CORPORATION 71 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 23 - 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 expenses between domestic and international operations. For a discussion of these estimates and allocations, see paragraphs two and three of Lines of Business Results on page 21 of the MD&A.
Income Average Before Net For the Year Ended December 31, (in millions) Assets Revenue(a) Expense(b) Income Taxes Income - ------------------------------------------------------------------------------------------------------------------------------------ 1997 Europe $ 76,232 $ 2,004 $ 1,077 $ 927 $ 645 Asia and Pacific 35,139 1,266 762 504 324 Latin America and the Caribbean 15,520 404 310 94 56 Middle East and Africa 877 110 21 89 53 Other(c) 3,083 57 16 41 23 - ------------------------------------------------------------------------------------------------------------------------------------ Total International 130,851 3,841 2,186 1,655 1,101 Total Domestic 225,495 12,942 8,687 4,255 2,607 - ------------------------------------------------------------------------------------------------------------------------------------ Total Corporation $356,346 $ 16,783 $ 10,873 $ 5,910 $ 3,708 - ------------------------------------------------------------------------------------------------------------------------------------ 1996 Europe $ 56,953 $ 2,103 $ 1,284 $ 819 $ 510 Asia and Pacific 30,122 1,045 822 223 139 Latin America and the Caribbean 17,572 506 355 151 107 Middle East and Africa 1,319 80 21 59 35 Other(c) 2,322 25 13 12 8 - ------------------------------------------------------------------------------------------------------------------------------------ Total International 108,288 3,759 2,495 1,264 799 Total Domestic 212,952 12,093 9,546 2,547 1,662 - ------------------------------------------------------------------------------------------------------------------------------------ Total Corporation $321,240 $ 15,852 $ 12,041 $ 3,811 $ 2,461 - ------------------------------------------------------------------------------------------------------------------------------------ 1995 Europe $ 45,376 $ 1,471 $ 928 $ 543 $ 342 Asia and Pacific 30,348 1,124 730 394 251 Latin America and the Caribbean 19,833 800 433 367 232 Middle East and Africa 1,635 67 34 33 21 Other(c) 1,731 20 12 8 5 - ------------------------------------------------------------------------------------------------------------------------------------ Total International 98,923 3,482 2,137 1,345 851 Total Domestic 208,462 11,478 8,011 3,467 2,108 - ------------------------------------------------------------------------------------------------------------------------------------ Total Corporation $307,385 $ 14,960 $ 10,148 $ 4,812 $ 2,959 - ------------------------------------------------------------------------------------------------------------------------------------
(a) Revenue is comprised of Net Interest Income and Noninterest Revenue. (b) Expense is comprised of Noninterest Expense and Provision for Credit Losses. (c) No geographic region included in Other exceeds 10% of the total for Chase. - -------------------------------------------------------------------------------- 24 - COMMITMENTS AND CONTINGENCIES - -------------------------------------------------------------------------------- At December 31, 1997, 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, 1997 were as follows: 72 THE CHASE MANHATTAN CORPORATION 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, (in millions) - ----------------------------------------------------------------- 1998 $ 404 1999 343 2000 294 2001 258 2002 237 After 940 - ----------------------------------------------------------------- Total Minimum Payments Required $ 2,476 - ----------------------------------------------------------------- Less: Sublease Rentals Under Noncancelable Subleases $ (207) - ----------------------------------------------------------------- Net Minimum Payment Required $ 2,269 - -----------------------------------------------------------------
Total rental expense was as follows:
- -------------------------------------------------------------------------------- Year Ended December 31, (in millions) 1997 1996 1995 - -------------------------------------------------------------------------------- Gross Rentals $ 498 $ 526 $ 558 Sublease Rentals (170) (177) (173) - -------------------------------------------------------------------------------- Net Rent Expense $ 328 $ 349 $ 385 - --------------------------------------------------------------------------------
At December 31, 1997, assets amounting to $55 billion were pledged to secure public deposits and for other purposes. The significant components of the pledged assets at December 31, 1997 were as follows: $24 billion were loans, $26 billion were securities, and the remaining $5 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)
1997 1996 --------------------------------------- -------------------------------------- (in millions, except per share data) 4th 3rd 2nd 1st 4th 3rd 2nd 1st - ------------------------------------------------------------------------------------------------------------------------------------ AS REPORTED BASIS Revenues $ 4,084 $ 4,409 $ 4,140 $ 4,150 $ 3,938 $ 3,925 $ 3,954 $ 4,035 Noninterest Expenses (excluding Restructuring Costs) 2,470 2,590 2,400 2,417 2,303 2,288 2,302 2,437 Restructuring Costs 20 71 71 30 104 32 22 1,656 Provision for Credit Losses 205 190 189 220 182 220 250 245 Net Income (Loss) $ 874 $ 982 $ 925 $ 927 $ 836 $ 858 $ 856 $ (89) Net Income (Loss) Per Common Share:(a) Basic $ 1.99 $ 2.23 $ 2.06 $ 2.02 $ 1.78 $ 1.83 $ 1.84 $ (0.32) Diluted 1.94 2.16 2.00 1.97 1.74 1.78 1.79 (0.32) - ------------------------------------------------------------------------------------------------------------------------------------ MANAGED OPERATING BASIS* Operating Revenues $ 4,289 $ 4,658 $ 4,407 $ 4,320 $ 4,099 $ 4,073 $ 4,110 $ 4,146 Operating Noninterest Expenses 2,467 2,499 2,400 2,364 2,304 2,286 2,310 2,406 Credit Costs(b) 471 445 456 437 342 370 398 341 Operating Net Income $ 850 $ 1,081 $ 969 $ 949 $ 901 $ 878 $ 870 $ 867 Operating Net Income Per Common Share: Basic $ 1.93 $ 2.46 $ 2.17 $ 2.08 $ 1.93 $ 1.88 $ 1.87 $ 1.87 Diluted 1.89 2.38 2.11 2.02 1.88 1.83 1.82 1.81 - ------------------------------------------------------------------------------------------------------------------------------------ PRICE PER COMMON SHARE: (c) High $126.56 $120.50 $104.38 $110.50 $ 95.88 $ 81.25 $ 74.38 $ 73.50 Low 102.50 93.63 84.63 85.63 79.88 64.25 64.25 52.13 Close 109.50 118.00 97.06 93.88 89.38 80.13 70.63 70.50 - ------------------------------------------------------------------------------------------------------------------------------------
* Note - Excludes the impact of credit card securitizations, restructuring costs and special items. For a listing of special items, see Glossary of Terms on page 74. (a) Effective December 31, 1997, Chase adopted SFAS 128 relating to the computation of EPS, which replaced primary EPS with basic EPS and fully-diluted EPS with diluted EPS. Prior period amounts have been restated. (b) Includes provision for credit losses, foreclosed property expenses and charge-offs 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. THE CHASE MANHATTAN CORPORATION 73 74 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 24) AICPA: "American Institute of Certified Public Accountants." (Pages 43, 52 and 68) Asset/Liability Management ("ALM"): The management and control of the sensitivity of Chase's income to changes in market interest rates. (Page 39) CHIPS: "Clearing House Interbank Payments System", a money transfer system that enables banks to make transfers through a central clearinghouse mechanism. (Page 24) Credit Risk: The possibility that a loss may occur should a borrower or counterparty fail to honor fully the terms of a contract. (Pages 29 and 35) Derivative and Foreign Exchange Instruments: Interest rate swaps, forward rate agreements, futures, forwards, options, equity, commodity and other contracts used for asset and liability management or trading purposes. The instruments represent contracts with counterparties where payments are made to or from the counterparty based upon specific interest rates, currency levels, other market rates, or on terms predetermined by the contract. (Pages 35 and 66) Efficiency Ratio: Noninterest expense as a percentage of the total of net interest income and noninterest revenue (excluding restructuring costs, foreclosed property expense, special items and costs associated with the REIT). (Pages 18, 19 and 27) FASB: Financial Accounting Standards Board. (Page 43) FedWire: A computerized money transfer system linking the U.S. Federal Reserve System banks, branches and member banks. (Page 24) FDICIA: The Federal Deposit Insurance Corporation Improvement Act of 1991 pursuant to which each Federal banking regulator was required to revise its risk-based capital standards to ensure that those standards take adequate account of interest rate risk, concentration of credit risk and the risk of nontraditional activities. (Page 65) Managed Operating Results: Reported results excluding the impact of credit card securitizations, restructuring costs and special items. (Pages 18 and 19) Market Risk: The risk of loss resulting from changes in the prices of financial instruments in the markets in which Chase participates, such as changes in the value of foreign exchange or fixed-income securities. (Page 35) Net Yield on Interest-Earning Assets: The average rate for interest-earning assets less the average rate paid for all sources of funds. (Page 25) Operating Net Income: Reported net income excluding restructuring costs and special items. (Pages 18 and 19) Replacement Cost of Derivative or Foreign Exchange Products: The cost to replace the derivative or foreign exchange contract at current market rates should the counterparty default prior to the settlement date. ( Page 35) SFAS: Statement of Financial Accounting Standards. SFAS 106: "Employers' Accounting for Postretirement Benefits Other Than Pensions." (Pages 18 and 62) SFAS 107: "Disclosures About Fair Value of Financial Instruments." (Page 69) SFAS 109: "Accounting for Income Taxes." (Pages 18 and 61) SFAS 114: "Accounting by Creditors for Impairment of a Loan." (Page 56) SFAS 115: "Accounting for Certain Investments in Debt and Equity Securities." (Pages 55 and 56) SFAS 123: "Accounting for Stock Based Compensation." (Page 64) SFAS 125: "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." (Page 43) SFAS 127: "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." (Page 43) SFAS 128: "Earnings per Share." (Page 60) SFAS 130: "Reporting Comprehensive Income." (Page 43) SFAS 131: "Disclosure About Segments of an Enterprise and Related Information." (Page 43) Special Items: In 1997, includes 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 gains on the sales of Chase's investment in Far East Bank and Trust Company, Chemical New Jersey Holding, Inc. and the loss on the sale of half of Chase's 40% interest in CIT. 1994 and 1993 included charges related to assets held for accelerated disposition and gains on the sales of such assets as well as gains on emerging markets past-due interest bond sales. Additionally, 1995 and 1993 included the impact of changes in accounting principles. (Pages 18 and 19) Statement of Position ("SOP") 98-1: "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." (Page 43) Underlying Operating Noninterest Expense: Noninterest expense, excluding restructuring costs, foreclosed property expense, costs associated with the REIT and special items, before the effects of any merger-related cost savings. (Page 27) 74 THE CHASE MANHATTAN CORPORATION 75 DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIALS A three-year summary of Chase's consolidated average balances, interest rates and interest differentials on a taxable-equivalent basis for the years 1995 through 1997 is provided on pages 76 and 77. 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 43% in each of the years 1995 through 1997. 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 50. A summary of interest rates and interest differentials segregated between domestic and foreign operations for the years 1995 through 1997 is presented on pages 78 and 79. Regarding the basis of segregation between the domestic and foreign components, see Note Twenty Three at page 72. 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 $6,856 million in 1997, an increase of $135 million from the prior year. The increase in 1997 was primarily attributable to a higher level of interest-earning assets (for further discussion, see the section entitled "Net Interest Income" in Management's Discussion and Analysis at page 25). Net interest income from foreign operations was $1,327 million for 1997, compared with $1,534 million in 1996. The decline reflected lower net yields on interest-earning assets. The table on pages 80 and 81 presents an analysis of the effect on net interest income of volume and rate changes for the periods 1997 over 1996 and 1996 over 1995. In this analysis, the change due to the volume/rate variance has been allocated to volume. THE CHASE MANHATTAN CORPORATION 75 76 Consolidated Average Balance Sheet, Interest and Rates
YEAR ENDED DECEMBER 31, 1997 ------------------------------------------- (TAXABLE-EQUIVALENT INTEREST AND RATES; IN MILLIONS, EXCEPT RATES) BALANCE INTEREST RATE - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Deposits with Banks $ 5,105 $ 525 10.28% Federal Funds Sold and Securities Purchased Under Resale Agreements 39,836 2,607 6.54 Trading Assets-Debt and Equity Instruments 35,660 2,771 7.77 Securities: Available-for-Sale 42,610 2,817 6.61(a) Held-to-Maturity 3,432 228 6.65 - ---------------------------------------------------------------------------------------------------------------------------------- Total Securities 46,042 3,045 6.61 - ---------------------------------------------------------------------------------------------------------------------------------- Domestic Loans 120,279 10,146 8.44 Foreign Loans 39,653 2,687 6.78 - ---------------------------------------------------------------------------------------------------------------------------------- Total Loans 159,932 12,833(b) 8.02 - ---------------------------------------------------------------------------------------------------------------------------------- Total Interest-Earning Assets 286,575 21,781 7.60% - ---------------------------------------------------------------------------------------------------------------------------------- Allowance for Credit Losses on Loans (3,435) Cash and Due from Banks 13,678 Trading Assets-Risk Management Instruments, Net of Allowance for Credit Losses in 1997 and 1996 34,426 All Other Assets 25,102 - ---------------------------------------------------------------------------------------------------------------------------------- Total Assets $ 356,346 - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES Domestic Retail Deposits $ 57,455 2,238 3.90% Domestic Negotiable Certificates of Deposit and Other Deposits 10,928 656 6.00 Deposits in Foreign Offices 68,712 3,667 5.34 - ---------------------------------------------------------------------------------------------------------------------------------- Total Interest-Bearing Deposits 137,095 6,561 4.79 - ---------------------------------------------------------------------------------------------------------------------------------- Short-Term and Other Borrowings: Federal Funds Purchased and Securities Sold Under Repurchase Agreements 66,789 3,643 5.45 Commercial Paper 4,283 228 5.33 Other Borrowings(c) 20,663 2,032 9.83 - ---------------------------------------------------------------------------------------------------------------------------------- Total Short-Term and Other Borrowings 91,735 5,903 6.43 Long-Term Debt 14,315 1,134 7.92 - ---------------------------------------------------------------------------------------------------------------------------------- Total Interest-Bearing Liabilities 243,145 13,598 5.59 - ---------------------------------------------------------------------------------------------------------------------------------- Noninterest Bearing Deposits 42,067 Trading Liabilities-Risk Management Instruments 35,309 All Other Liabilities, Including the Allowance for Credit Losses in 1997 and 1996 14,235 - ---------------------------------------------------------------------------------------------------------------------------------- Total Liabilities 334,756 - ---------------------------------------------------------------------------------------------------------------------------------- PREFERRED STOCK OF SUBSIDIARY 550 STOCKHOLDERS' EQUITY Preferred Stock 2,212 Common Stockholders' Equity 18,828 - ---------------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 21,040(d) - ---------------------------------------------------------------------------------------------------------------------------------- Total Liabilities, Preferred Stock of Subsidiary and Stockholders' Equity $ 356,346 - ---------------------------------------------------------------------------------------------------------------------------------- Interest Rate Spread 2.01% - ---------------------------------------------------------------------------------------------------------------------------------- Net Interest Income and Net Yield on Interest-Earning Assets $ 8,183 2.86% - ----------------------------------------------------------------------------------------------------------------------------------
(a) For the years ended December 31, 1997, 1996 and 1995, the annualized rate for available-for-sale securities based on amortized cost was 6.64%, 6.48% and 7.26%, respectively. (b) Fees and commissions on loans included in loan interest amounted to $149 million in 1997, $177 million in 1996 and $167 million in 1995. (c) Includes securities sold but not yet purchased and structured notes. (d) The ratio of average stockholders' equity to average assets was 5.9% for 1997 and 6.4% for each of 1996 and 1995. 76 THE CHASE MANHATTAN CORPORATION 77
1996 1995 ------------------------------------------------- ----------------------------------------------- Balance Interest Rate Balance Interest Rate - --------------------------------------------------------------------------------------------------------------------------------- $ 6,479 $ 537 8.29% $ 10,877 $ 824 7.58% 31,165 2,135 6.85 29,465 1,889 6.41 29,595 1,897 6.41 20,935 1,385 6.62 39,538 2,580 6.53(a) 26,946 1,948 7.23(a) 4,174 302 7.24 9,756 667 6.84 - --------------------------------------------------------------------------------------------------------------------------------- 43,712 2,882 6.59 36,702 2,615 7.12 - --------------------------------------------------------------------------------------------------------------------------------- 113,554 9,584 8.44 110,752 9,725 8.78 36,442 2,789 7.65 35,776 3,138 8.77 - --------------------------------------------------------------------------------------------------------------------------------- 149,996 12,373(b) 8.25 146,528 12,863(b) 8.78 - --------------------------------------------------------------------------------------------------------------------------------- 260,947 19,824 7.60% 244,507 19,576 8.01% - --------------------------------------------------------------------------------------------------------------------------------- (3,684) (3,840) 12,070 13,874 26,684 30,397 25,223 22,447 - --------------------------------------------------------------------------------------------------------------------------------- $ 321,240 $ 307,385 - --------------------------------------------------------------------------------------------------------------------------------- $ 56,144 1,969 3.51% $ 55,389 1,962 3.54% 8,009 517 6.46 9,948 624 6.27 65,869 3,552 5.39 65,276 3,705 5.68 - --------------------------------------------------------------------------------------------------------------------------------- 130,022 6,038 4.64 130,613 6,291 4.82 - --------------------------------------------------------------------------------------------------------------------------------- 54,655 2,883 5.28 44,720 2,686 6.01 5,199 274 5.27 5,672 327 5.77 16,695 1,473 8.82 13,033 1,162 8.92 - --------------------------------------------------------------------------------------------------------------------------------- 76,549 4,630 6.05 63,425 4,175 6.58 12,811 901 7.03 13,080 942 7.20 - --------------------------------------------------------------------------------------------------------------------------------- 219,382 11,569 5.27 207,118 11,408 5.51 - --------------------------------------------------------------------------------------------------------------------------------- 39,562 37,698 27,421 31,665 14,102 11,261 - --------------------------------------------------------------------------------------------------------------------------------- 300,467 287,742 - --------------------------------------------------------------------------------------------------------------------------------- 158 -- 2,650 2,730 17,965 16,913 - --------------------------------------------------------------------------------------------------------------------------------- 20,615(d) 19,643(d) - --------------------------------------------------------------------------------------------------------------------------------- $ 321,240 $ 307,385 - --------------------------------------------------------------------------------------------------------------------------------- 2.33% 2.50% - --------------------------------------------------------------------------------------------------------------------------------- $ 8,255 3.16% $ 8,168 3.34% - ---------------------------------------------------------------------------------------------------------------------------------
THE CHASE MANHATTAN CORPORATION 77 78 INTEREST RATES AND INTEREST DIFFERENTIAL ANALYSIS OF NET INTEREST INCOME - DOMESTIC AND FOREIGN
1997 ----------------------------------------------------- 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 $ 5,105 $ 525 10.28% Federal Funds Sold and Securities Purchased Under Resale Agreements: Domestic 22,130 1,330 6.01 Foreign 17,706 1,277 7.21 Securities and Trading Assets: Domestic 55,921 3,771 6.74 Foreign 25,781 2,045 7.93 Loans: Domestic 120,279 10,141 8.43 Foreign 39,653 2,692 6.78 - ------------------------------------------------------------------------------------------------------------------------------ Total Interest-Earning Assets 286,575 21,781 7.60 - ------------------------------------------------------------------------------------------------------------------------------ INTEREST-BEARING LIABILITIES: Interest -Bearing Deposits: Domestic 68,383 2,894 4.23 Foreign 68,712 3,667 5.34 Federal Funds Purchased and Securities Sold Under Repurchase Agreements: Domestic 50,981 2,782 5.46 Foreign 15,808 861 5.44 Other Borrowed Funds: Domestic 15,372 1,294 8.43 Foreign 9,574 966 10.07 Long-Term Debt, primarily Domestic 14,315 1,134 7.92 Intra-Company Funding: Domestic 9,946 472 -- Foreign (9,946) (472) -- - ------------------------------------------------------------------------------------------------------------------------------ Total Interest-Bearing Liabilities 243,145 13,598 5.59 Noninterest-Bearing Liabilities: Domestic 39,985 Foreign 3,445 - ------------------------------------------------------------------------------------------------------------------------------ Total Investable Funds $ 286,575 $13,598 4.74% - ------------------------------------------------------------------------------------------------------------------------------ Net Interest Income and Net Yield $ 8,183 2.86% Domestic 6,856 3.45% Foreign 1,327 1.51% - ------------------------------------------------------------------------------------------------------------------------------ Percentage of Total Assets and Liabilities Attributable to Foreign Operations: Assets 37.2% Liabilities 36.8% - ------------------------------------------------------------------------------------------------------------------------------
78 THE CHASE MANHATTAN CORPORATION 79
1996 1995 -------------------------------------------------- --------------------------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE - ----------------------------------------------------------------------------------------------------------------------------- $ 6,479 $ 537 8.29% $ 10,877 $ 824 7.58% 21,526 1,137 5.28 24,815 1,517 6.11 9,639 998 10.35 4,650 372 8.00 51,896 3,315 6.39 40,252 2,753 6.84 21,411 1,464 6.84 17,385 1,247 7.17 113,554 9,584 8.44 110,752 9,725 8.78 36,442 2,789 7.65 35,776 3,138 8.77 - ----------------------------------------------------------------------------------------------------------------------------- 260,947 19,824 7.60 244,507 19,576 8.01 - ----------------------------------------------------------------------------------------------------------------------------- 64,153 2,486 3.88 65,337 2,586 3.96 65,869 3,552 5.39 65,276 3,705 5.68 45,607 2,209 4.84 38,581 2,257 5.85 9,048 674 7.45 6,139 429 6.99 15,209 1,118 7.35 15,652 1,234 7.88 6,685 629 9.41 3,053 255 8.35 12,811 901 7.03 13,080 942 7.20 13,003 654 -- 10,331 584 -- (13,003) (654) -- (10,331) (584) -- - ----------------------------------------------------------------------------------------------------------------------------- 219,382 11,569 5.27 207,118 11,408 5.51 36,867 33,535 4,698 3,854 - ----------------------------------------------------------------------------------------------------------------------------- $260,947 $ 11,569 4.44% $244,507 $11,408 4.67% - ----------------------------------------------------------------------------------------------------------------------------- $ 8,255 3.16% $ 8,168 3.34% 6,721 3.59% 6,449 3.67% 1,534 2.08% 1,719 2.51% - ----------------------------------------------------------------------------------------------------------------------------- 38.8% 36.3% 38.9% 37.0% - -----------------------------------------------------------------------------------------------------------------------------
THE CHASE MANHATTAN CORPORATION 79 80 CHANGE IN NET INTEREST INCOME, VOLUME AND RATE ANALYSIS
1997 OVER 1996 -------------------------------------------------- INCREASE (DECREASE) DUE TO CHANGE IN: ------------------------------------- NET (ON A TAXABLE-EQUIVALENT BASIS; IN MILLIONS) VOLUME RATE CHANGE - -------------------------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS Deposits with Banks, primarily Foreign $ (141) $ 129 $ (12) Federal Funds Sold and Securities Purchased Under Resale Agreements: Domestic 36 157 193 Foreign 582 (303) 279 Securities and Trading Assets: Domestic 274 182 456 Foreign 348 233 581 Loans: Domestic 568 (11) 557 Foreign 220 (317) (97) - -------------------------------------------------------------------------------------------------------------------------------- Change in Interest Income 1,887 70 1,957 - -------------------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES Interest-Bearing Deposits: Domestic 179 229 408 Foreign 152 (37) 115 Federal Funds Purchased and Securities Sold Under Repurchase Agreements: Domestic 290 283 573 Foreign 369 (182) 187 Other Borrowed Funds: Domestic 12 164 176 Foreign 293 44 337 Long-Term Debt, primarily Domestic 119 114 233 Intra Company Funding: Domestic (146) (36) (182) Foreign 146 36 182 - -------------------------------------------------------------------------------------------------------------------------------- Change in Interest Expense 1,414 615 2,029 - -------------------------------------------------------------------------------------------------------------------------------- Change in Net Interest Income $ 473 $ (545) $ (72) - --------------------------------------------------------------------------------------------------------------------------------
80 THE CHASE MANHATTAN CORPORATION 81
1996 OVER 1995 ------------------------------------------------ Increase (decrease) due to change in: ------------------------------------- Net Volume Rate Change - ------------------------------------------------------- $ (364) $ 77 $ (287) (174) (206) (380) 517 109 626 743 (181) 562 274 (57) 217 236 (377) (141) 52 (401) (349) - ------------------------------------------------------- 1,284 (1,036) 248 - ------------------------------------------------------- ( 45) (55) (100) 37 (190) (153) 342 (390) (48) 217 28 245 (33) (83) (116) 341 33 374 (19) (22) (41) 134 (64) 70 (134) 64 (70) - ------------------------------------------------------- 840 (679) 161 - ------------------------------------------------------- $ 444 $ (357) $ 87 - -------------------------------------------------------
THE CHASE MANHATTAN CORPORATION 81 82 SECURITIES PORTFOLIO The amortized cost, estimated fair value and average yield, including the impact of related derivatives, at December 31, 1997, of Chase's available-for-sale and held-to-maturity securities by contractual maturity range and type of security are presented in the table which follows:
Maturity Schedule of Available-for-Sale Securities Due in 1 Due After 1 Due After 5 December 31, 1997 (in millions, rates on a taxable-equivalent basis) Year or less Through 5 Years Through 10 Years - --------------------------------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT AND FEDERAL AGENCY/CORPORATION OBLIGATIONS: Amortized Cost $ 884 $ 8,064 $4,092 Fair Value 882 8,010 4,114 Average Yield(b) 5.25% 5.46% 6.01% - --------------------------------------------------------------------------------------------------------------------------------- OBLIGATIONS OF STATE AND POLITICAL SUBDIVISIONS: Amortized Cost $ 180 $ 37 $ 45 Fair Value 180 37 47 Average Yield(b) 4.96% 5.43% 5.72% - --------------------------------------------------------------------------------------------------------------------------------- OTHER:(c) Amortized Cost $1,556 $ 4,292 $ 966 Fair Value 1,523 4,285 961 Average Yield(b) 7.27% 7.12% 8.16% - --------------------------------------------------------------------------------------------------------------------------------- TOTAL AVAILABLE-FOR-SALE SECURITIES:(d) Amortized Cost $2,620 $12,393 $5,103 Fair Value 2,585 12,332 5,122 Average Yield(b) 6.43% 6.04% 6.41% - ---------------------------------------------------------------------------------------------------------------------------------
Maturity Schedule of Available-for-Sale Securities Due After December 31, 1997 (in millions, rates on a taxable-equivalent basis) 10 Years(a) Total - ------------------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT AND FEDERAL AGENCY/CORPORATION OBLIGATIONS: Amortized Cost $28,314 $41,354 Fair Value 28,416 41,422 Average Yield(b) 7.13% 6.65% - ------------------------------------------------------------------------------------------------------------------- OBLIGATIONS OF STATE AND POLITICAL SUBDIVISIONS: Amortized Cost $ 12 $ 274 Fair Value 12 276 Average Yield(b) 5.93% 5.19% - ------------------------------------------------------------------------------------------------------------------- OTHER:(c) Amortized Cost $ 1,129 $ 7,943 Fair Value 1,288 8,057 Average Yield(b) 4.34% 6.88% - ------------------------------------------------------------------------------------------------------------------- TOTAL AVAILABLE-FOR-SALE SECURITIES:(d) Amortized Cost $29,455 $49,571 Fair Value 29,716 49,755 Average Yield(b) 7.03% 6.68% - -------------------------------------------------------------------------------------------------------------------
Maturity Schedule of Held-to-Maturity Securities Due in 1 Due After 1 Due After 5 December 31, 1997 (in millions, rates on a taxable-equivalent basis) Year or less Through 5 Years Through 10 Years - --------------------------------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT AND FEDERAL AGENCY/CORPORATION OBLIGATIONS: Amortized Cost $ 124 $300 $398 Fair Value 124 301 400 Average Yield(b) 4.84% 6.47% 6.88% - --------------------------------------------------------------------------------------------------------------------------------- OTHER:(c) Amortized Cost $ -- $ -- $ 10 Fair Value -- -- 10 Average Yield(b) --% --% 8.94% - --------------------------------------------------------------------------------------------------------------------------------- TOTAL HELD-TO-MATURITY SECURITIES:(e) Amortized Cost $124 $300 $408 Fair Value 124 301 410 Average Yield(b) 4.84% 6.47% 6.93% - ---------------------------------------------------------------------------------------------------------------------------------
Maturity Schedule of Held-to-Maturity Securities Due After December 31, 1997 (in millions, rates on a taxable-equivalent basis) 10 Years(a) Total - ------------------------------------------------------------------------------------------------------------------- U.S. GOVERNMENT AND FEDERAL AGENCY/CORPORATION OBLIGATIONS: Amortized Cost $2,146 $2,968 Fair Value 2,155 2,980 Average Yield(b) 6.53% 6.50% - ------------------------------------------------------------------------------------------------------------------- OTHER:(c) Amortized Cost $ 5 $ 15 Fair Value 5 15 Average Yield(b) 9.06% 8.97% - ------------------------------------------------------------------------------------------------------------------- TOTAL HELD-TO-MATURITY SECURITIES:(e) Amortized Cost $2,151 $2,983 Fair Value 2,160 2,995 Average Yield(b) 6.54% 6.51% - -------------------------------------------------------------------------------------------------------------------
(a) Securities with no stated maturity are included with securities with a remaining 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. (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, collateralized mortgage obligations of private issuers, other debt and equity securities. (d) For the amortized cost of U.S. Treasury and Federal Agencies, Obligations of State and Political Subdivisions, and Other securities at December 31, 1996, see Note Three on pages 54 and 55. At December 31, 1995, the amortized cost of U.S. Treasury and Federal Agencies, Obligations of State and Political Subdivisions, and Other securities was $25,181 million, $633 million, and $10,898 million, respectively. (e) For the amortized cost of U.S. Treasury and Federal Agencies and Other securities at December 31, 1996, see Note Three on pages 54 and 55. At December 31, 1995, the amortized cost of U.S. Treasury and Federal Agencies and Other securities was $4,488 million and $140 million, respectively. There were no Obligations of State and Political Subdivisions at December 31, 1996 and 1995. Of the securities held in Chase's securities portfolios, the U.S. Government and certain of its agencies were the only issuers whose securities exceeded 10% of Chase's total stockholders' equity at December 31, 1997. For a further discussion of Chase's securities portfolios, see Note Three on pages 54 and 55. 82 THE CHASE MANHATTAN CORPORATION 83 LOAN PORTFOLIO The table below sets forth the amount of loans outstanding by type for the dates indicated:
December 31, (in millions) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------------- DOMESTIC LOANS: Commercial and Industrial $ 38,272 $ 34,996 $ 32,972 $ 30,990 $ 30,109 Financial Institutions 6,692 5,570 5,766 5,277 6,239 Commercial Real Estate - Commercial Mortgage 4,084 5,040 5,514 6,125 7,892 Commercial Real Estate - Construction 946 894 1,148 1,580 2,545 Consumer 77,181 70,023 69,596 63,758 54,359 - ----------------------------------------------------------------------------------------------------------------------------------- Total Domestic Loans 127,175 116,523 114,996 107,730 101,144 - ----------------------------------------------------------------------------------------------------------------------------------- FOREIGN LOANS: Commercial, Industrial and Consumer 32,425 27,291 24,786 21,946 22,673 Foreign Governments and Official Institutions 3,451 6,171 6,076 7,859 8,530 Financial Institutions 7,015 6,480 5,422 5,591 5,476 - ----------------------------------------------------------------------------------------------------------------------------------- Total Foreign Loans 42,891 39,942 36,284 35,396 36,679 - ----------------------------------------------------------------------------------------------------------------------------------- Total Loans 170,066 156,465 151,280 143,126 137,823 - ----------------------------------------------------------------------------------------------------------------------------------- Unearned Income (1,612) (1,373) (1,073) (895) (706) - ----------------------------------------------------------------------------------------------------------------------------------- Loans, Net of Unearned Income $ 168,454 $ 155,092 $ 150,207 $ 142,231 $ 137,117 - -----------------------------------------------------------------------------------------------------------------------------------
The foreign loan portfolio includes Brady Bonds which are subject to the provisions of SFAS 115. Commercial mortgages provide financing for the acquisition or refinancing of commercial properties. Construction loans are generally originated to finance the construction of real estate projects. When the real estate project has cash flows sufficient to support a commercial mortgage, the loan is transferred from construction status to commercial mortgage status. For a discussion of Chase's loan outstandings, see "Loan Portfolio" on page 30. MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES The following table shows loan maturity distribution based upon the stated terms of the loan agreements, and sensitivity to changes in interest rates of the loan portfolio, excluding consumer loans, at December 31, 1997:
Within 1-5 After 5 December 31, 1997 (in millions) 1 Year(a) Years Years Total - ----------------------------------------------------------------------------------------------------------------------------- Domestic (excluding consumer loans): Commercial and Industrial $11,634 $21,545 $5,093 $38,272 Financial Institutions 6,104 393 195 6,692 Commercial Real Estate 554 3,938 538 5,030 Foreign(b) 30,095 4,950 3,867 38,912 - ----------------------------------------------------------------------------------------------------------------------------- Total $48,387 $30,826 $9,693 $88,906 - ----------------------------------------------------------------------------------------------------------------------------- Loans at Fixed Interest Rates $ 2,012 $1,053 Loans at Variable Interest Rates 28,814 8,640 - ----------------------------------------------------------------------------------------------------------------------------- Total $30,826 $9,693 - -----------------------------------------------------------------------------------------------------------------------------
(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 10 years. THE CHASE MANHATTAN CORPORATION 83 84 CROSS-BORDER OUTSTANDINGS Credits denominated in a currency other than that of the country in which a borrower is located, such as dollar-denominated loans made overseas, are called "cross-border" credits. In addition to the credit risk associated with any borrower, these particular credits are also subject to "country risk" - economic and political risk factors specific to the country of the borrower that may make the borrower unable or unwilling to pay principal and interest according to contractual terms. Other risks associated with these credits include the possibility of insufficient foreign exchange and restrictions on its availability. To minimize country risk, Chase monitors its foreign credits in each country with specific consideration given to maturity, currency, industry and geographic concentration of the credits. The following table lists all countries in which Chase's cross-border outstandings exceeded 1% of consolidated assets as of any of the dates specified. For a further discussion of Chase's cross-border exposure, see page 34. CROSS-BORDER OUTSTANDINGS EXCEEDING ONE PERCENT OF TOTAL ASSETS(a)
CROSS-BORDER TOTAL OUTSTANDINGS CROSS-BORDER AS A PERCENTAGE (IN MILLIONS) AT DECEMBER 31 PUBLIC BANKS OTHER OUTSTANDINGS(b) OF TOTAL ASSETS - --------------------------------------------------------------------------------------------------------------------- Japan 1997 $ 852 $ 1,818 $ 600 $3,270 .89% 1996 1,312 3,111 863 5,286 1.57 1995 905 2,708 1,724 5,337 1.76 - --------------------------------------------------------------------------------------------------------------------- Germany 1997 4,807 1,030 506 6,343 1.74 1996 3,757 1,120 366 5,243 1.56 1995 4,315 339 413 5,067 1.67 - --------------------------------------------------------------------------------------------------------------------- United Kingdom 1997 1,427 494 7,572 9,493 2.60 1996 975 932 4,076 5,983 1.78 1995 192 915 3,314 4,421 1.45 - --------------------------------------------------------------------------------------------------------------------- Canada 1997 2,349 493 976 3,818 1.04 1996 1,501 308 967 2,776 .83 1995 549 118 687 1,354 .45 - --------------------------------------------------------------------------------------------------------------------- Italy 1997 1,318 434 212 1,964 .54 1996 3,074 329 215 3,618 1.08 1995 1,055 304 216 1,575 .52 - --------------------------------------------------------------------------------------------------------------------- Brazil 1997 1,671 403 1,370 3,444 .94 1996 1,295 297 1,468 3,060 .91 1995 1,029 424 1,856 3,309 1.09 - ---------------------------------------------------------------------------------------------------------------------
(a) Outstandings include loans and accrued interest, interest-bearing deposits with banks, securities, acceptances and other monetary assets, except equity investments. These outstandings represent both the public and private sectors and are presented on a risk basis, i.e., net of written guarantees and tangible liquid collateral when held outside the foreign country. At December 31, 1997, 1996 and 1995, outstandings to Korea were $2,816 million, $2,691 million, and $2,809 million, respectively, which were in excess of .75% of total assets. (b) Outstandings exclude equity received in debt-for-equity conversions, which is recorded initially at fair market value and generally accounted for under the cost method. Commitments (outstanding letters of credit, standby letters of credit, guarantees and unused legal commitments) are excluded. At December 31, 1997, off-balance sheet commitments, after adjusting for transfers of risk, amounted to $2,563 million for Japan, $1,553 million for Germany, $3,652 million for the United Kingdom, $1,647 million Risk Elements for Canada, $750 million for Italy and $268 million for Brazil. The majority of outstandings reflected in the above table were short-term in nature. These outstandings generally represent interbank placements and trading assets. Due to the short-term nature of interbank placements and trading assets, 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. 84 THE CHASE MANHATTAN CORPORATION 85 RISK ELEMENTS The following table sets forth the nonperforming assets and contractually past-due loans at the dates indicated:
December 31, (in millions) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------- Domestic Nonperforming Loans: Nonaccruing Loans $ 712 $ 848 $1,115 $1,091 $2,543 Renegotiated Loans -- 38 35 37 37 - -------------------------------------------------------------------------------------------------- Total Domestic Nonperforming Loans 712 886 1,150 1,128 2,580 - -------------------------------------------------------------------------------------------------- Foreign Nonperforming Loans: Nonaccruing Loans 195 132 339 457 1,061 Renegotiated Loans 1 3 4 4 4 - -------------------------------------------------------------------------------------------------- Total Foreign Nonperforming Loans 196 135 343 461 1,065 - -------------------------------------------------------------------------------------------------- Total Nonperforming Loans 908 1,021 1,493 1,589 3,645 - -------------------------------------------------------------------------------------------------- Assets Acquired as Loan Satisfactions (primarily Real Estate) 110 130 171 537 1,985 - -------------------------------------------------------------------------------------------------- Total Nonperforming Assets $1,018 $1,151 $1,664 $2,126 $5,630 - -------------------------------------------------------------------------------------------------- CONTRACTUALLY PAST-DUE LOANS(a) Domestic: Consumer $ 420 $ 395 $ 528 $ 485 $ 485 Commercial 32 27 92 64 87 - -------------------------------------------------------------------------------------------------- Total Domestic 452 422 620 549 572 - -------------------------------------------------------------------------------------------------- Foreign 7 12 44 181 12 - -------------------------------------------------------------------------------------------------- Total $ 459 $ 434 $ 664 $ 730 $ 584 - --------------------------------------------------------------------------------------------------
(a) Accruing loans past-due 90 days or more as to principal and interest, which are not characterized as nonperforming loans. Renegotiated loans are those for which concessions, such as the reduction of interest rates or 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 nonaccrual and renegotiated loans, excluding loans held for accelerated disposition, and the amount of interest income on the carrying value of such 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 1997, when compared with 1996, in total negative impact on interest income reflects a lower level of interest that was recognized in income on a cash basis.
Year Ended December 31, (in millions) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------- Domestic: Gross Amount of Interest That Would Have Been Recorded at the Original Rate $ 63 $ 81 $ 94 Interest That Was Recognized in Income (9) (25) (23) - ----------------------------------------------------------------------------------------------------------- Negative Impact-Domestic 54 56 71 - ----------------------------------------------------------------------------------------------------------- Foreign: Gross Amount of Interest That Would Have Been Recorded at the Original Rate 17 11 34 Interest That Was Recognized in Income (2) (7) (11) - ----------------------------------------------------------------------------------------------------------- Negative Impact-Foreign 15 4 23 - ----------------------------------------------------------------------------------------------------------- Total Negative Impact on Interest Income $ 69 $ 60 $ 94 - -----------------------------------------------------------------------------------------------------------
THE CHASE MANHATTAN CORPORATION 85 86 SUMMARY OF LOAN LOSS EXPERIENCE Beginning December 31, 1996, in accordance with the AICPA's Audit and Accounting Guide for Banks and Savings Institutions, the allowance for credit losses has been allocated into three components: an allowance for credit losses on loans; an allowance for credit losses on derivative and foreign exchange financial instruments; and an allowance for credit losses on lending-related commitments. For a further discussion see page 36 and Note One at page 52. Prior period amounts have not been reclassified due to immateriality. Chase views the aggregate allowance for credit losses to be available for all credit activities. ALLOWANCE FOR CREDIT LOSSES ON LOANS The table below summarizes the changes in the allowance for credit losses on loans during the periods indicated.
Year Ended December 31, (in millions) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------- Balance at Beginning of Year $ 3,549 $ 3,784 $ 3,894 $ 4,445 $ 4,938 Provision for Credit Losses 804 897 758 1,050 2,254(g) Provision for Loans Held for Accelerated Disposition -- -- -- -- 566 CHARGE-OFFS Domestic: Commercial and Industrial (114) (181) (169) (252) (658) Financial Institutions -- -- -- (19) (57) Consumer (913) (921) (967) (871) (908)(g) Commercial Real Estate (5) (47) (84) (386) (564) Foreign (64) (38) (58) (442)(f) (948)(h) - ----------------------------------------------------------------------------------------------------------------------- Total Charge-Offs (1,096) (1,187) (1,278) (1,970) (3,135) - ----------------------------------------------------------------------------------------------------------------------- RECOVERIES Domestic: Commercial and Industrial 91 95 173 165 125 Financial Institutions 1 -- 12 7 2 Consumer 106 97 108 106 95 Commercial Real Estate 42 33 53 96 43 Foreign 52 65 92 132 252(i) - ----------------------------------------------------------------------------------------------------------------------- Total Recoveries 292 290 438 506 517 - ----------------------------------------------------------------------------------------------------------------------- NET CHARGE-OFFS (804) (897) (840) (1,464) (2,618) Charge Related to Conforming Credit Card Charge-off Policies -- (102) -- -- -- Charge for Assets Transferred to Held- for-Accelerated Disposition -- -- -- (148) (701) Transfer to Trading Assets-Risk Management Instruments -- (75)(c) -- -- -- Transfer to Other Liabilities (100)(a) (70)(a) -- -- -- Other 175(b) 12(d) (28)(e) 11 6 - ----------------------------------------------------------------------------------------------------------------------- Balance at End of Year $ 3,624 $ 3,549 $ 3,784 $ 3,894 $ 4,445 - -----------------------------------------------------------------------------------------------------------------------
(a) Transfer relates to the allowance for credit losses on letters of credit, guarantees, and undrawn commitments to extend credit. (b) Includes approximately $160 million related to the purchase of the Bank of New York credit card portfolio. (c) Transfer relates to the allowance for credit losses on derivative and foreign exchange financial instruments. (d) Relates primarily to the consolidation of a foreign subsidiary. (e) Relates primarily to the sale of banking operations in southern and central New Jersey. (f) Includes $291 million related to management's final valuation of the emerging markets portfolio. (g) Includes $55 million related to the decision to accelerate the disposition of certain nonperforming residential mortgage loans. (h) Includes losses on sales and swaps of loans previously classified as emerging markets. (i) Includes $175 million of recoveries on the disposition of emerging markets debt. LOAN LOSS ANALYSIS
Year Ended December 31, (in millions, except ratios) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------ BALANCES Loans-Average $159,932 $149,996 $146,528 $136,713 $140,245 Loans-Year End 168,454 155,092 150,207 142,231 137,117 Net Charge-Offs 804 999(a) 840 1,612(b) 3,319(b) Allowance for Credit Losses on Loans 3,624 3,549 3,784 3,894 4,445 Nonperforming Loans 908 1,021 1,493 1,589 3,645 RATIOS Net Charge-Offs to: Loans-Average .50% .67% .57% 1.18% 2.37% Allowance for Credit Losses on Loans 22.19 28.15 22.20 41.40 74.67 Allowance for Credit Losses on Loans to: Loans-Year End 2.15 2.29 2.52 2.74 3.24 Nonperforming Loans 399.12 347.60 253.45 245.06 121.95 - ------------------------------------------------------------------------------------------------------------------------------
(a) Includes a charge of $102 million related to conforming credit card charge-off policies. See page 31 for a further discussion. (b) Includes charges for assets transferred to held for accelerated disposition of $148 million and $701 million in 1994 and 1993, respectively. 86 THE CHASE MANHATTAN CORPORATION 87 ALLOWANCE FOR CREDIT LOSSES-FOREIGN The following table shows the changes in the portion of the allowance for credit losses allocated to loans related to foreign operations:
Year Ended December 31, (in millions) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------- Balance at Beginning of Year $446 $431 $428 $ 721 $1,452 Provision for Credit Losses 12 (24) (32) 12 171 Charge-offs (64) (38) (58) (442) (948) Recoveries 52 65 92 132 252 - --------------------------------------------------------------------------------------------- Net (Charge-Offs) Recoveries (12) 27 34 (310) (696) Transfer to Domestic Allowance -- -- -- -- (200) Other (2) 12 1 5 (6) - --------------------------------------------------------------------------------------------- Balance at End of Year $444 $446 $431 $ 428 $ 721 - ---------------------------------------------------------------------------------------------
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) 1997 1996 1995 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- Domestic: Noninterest-Bearing Demand $ 23,483 $ 27,284 $ 30,647 --% --% --% Interest-Bearing Demand 3,563 3,375 8,358 1.78 2.05 1.52 Savings 50,198 43,986 36,074 2.75 2.89 3.56 Time 29,529 25,349 25,165 4.91 4.52 4.68 - ------------------------------------------------------------------------------------------------------------------------- Total Domestic Deposits 106,773 99,994 100,244 2.71 2.49 2.58 - ------------------------------------------------------------------------------------------------------------------------- Foreign: Noninterest-Bearing Demand 3,363 2,918 2,684 -- -- -- Interest-Bearing Demand 25,480 19,551 17,561 4.44 4.50 5.00 Savings 824 862 755 3.60 3.39 3.95 Time 42,722 46,259 47,067 5.87 5.72 5.94 - ------------------------------------------------------------------------------------------------------------------------- Total Foreign Deposits 72,389 69,590 68,067 5.07 5.10 5.44 - ------------------------------------------------------------------------------------------------------------------------- Total Deposits $179,162 $169,584 $168,311 3.66% 3.56% 3.74% - -------------------------------------------------------------------------------------------------------------------------
The following table presents deposits by maturity range and type at December 31, 1997:
Domestic Time Other Domestic Deposits in Certificates of Deposit Time Deposits Foreign Offices By remaining maturity at December 31, 1997 (in millions) ($100,000 or More) ($100,000 or More) ($100,000 or More) - ------------------------------------------------------------------------------------------------------------------- Three Months or Less $ 8,009 $11,271 $44,566 Over Three Months but within Six Months 1,724 144 3,353 Over Six Months but within Twelve Months 652 131 2,422 Over Twelve Months 244 67 1,851 - ------------------------------------------------------------------------------------------------------------------- Total $10,629 $11,613 $52,192 - -------------------------------------------------------------------------------------------------------------------
At December 31, 1997, total interest bearing deposits in domestic offices were $71,576 million, of which $10,629 million were time certificates of deposit in denominations of $100,000 or more, $11,613 million were other time deposits in denominations of $100,000 or more, and $42,283 million were money market deposit accounts and other savings accounts. Deposits of $100,000 or more in foreign offices totaled $52,192 million, substantially all of which were interest-bearing. THE CHASE MANHATTAN CORPORATION 87 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 for the years indicated:
(in millions, except rates) 1997 1996 1995 - ---------------------------------------------------------------------------------- Federal funds purchased and securities sold under repurchase agreements: Balance at year-end $56,126 $53,868 $37,263 Average daily balance during the year 66,789 54,655 44,720 Maximum month-end balance 80,633 67,750 52,655 Weighted-average rate at December 31 5.90% 5.45% 5.82% Weighted-average rate during the year 5.45% 5.28% 6.01% - ---------------------------------------------------------------------------------- Commercial paper: Balance at year-end $ 4,744 $ 4,500 $ 6,275 Average daily balance during the year 4,283 5,199 5,672 Maximum month-end balance 4,951 5,991 6,275 Weighted-average rate at December 31 5.64% 5.07% 5.52% Weighted-average rate during the year 5.33% 5.27% 5.77% - ---------------------------------------------------------------------------------- Other Borrowed Funds-Other borrowings:(a) Balance at year-end $ 6,861 $ 9,231 $ 7,661 Average daily balance during the year 7,566 8,535 5,956 Maximum month-end balance 8,958 12,509 9,117 Weighted-average rate at December 31(b) 9.38% 9.97% 6.96% Weighted-average rate during the year(b) 9.83% 8.82% 11.08% - ----------------------------------------------------------------------------------
(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 in domestic and foreign offices that generally have maturities of one year or less. At December 31, 1997, Chase had unused lines of credit available for general corporate purposes, including the payment of commercial paper borrowings, amounting to $1.0 billion. 88 THE CHASE MANHATTAN CORPORATION 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 WALTER V. SHIPLEY ------------------------------- (Walter V. Shipley, Chairman and Chief Executive Officer) Date: March 17, 1998 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 -------- ---- WALTER V. SHIPLEY Director, Chairman and Chief Executive Officer - ----------------------------- (Principal Executive Officer) (Walter V. Shipley) THOMAS G. LABRECQUE Director, President and Chief Operating Officer - ----------------------------- (Thomas G. Labrecque) WILLIAM B. HARRISON JR. Director and Vice Chairman of the Board - ----------------------------- (William B. Harrison Jr.) HANS W. BECHERER Director - ----------------------------- (Hans W. Becherer) FRANK A. BENNACK JR. Director March 17, 1998 - ----------------------------- (Frank A. Bennack Jr.) SUSAN V. BERRESFORD Director - ----------------------------- (Susan V. Berresford) M. ANTHONY BURNS Director - ----------------------------- (M. Anthony Burns) H. LAURANCE FULLER Director - ----------------------------- (H. Laurance Fuller) MELVIN R. GOODES Director - ----------------------------- (Melvin R. Goodes)
THE CHASE MANHATTAN CORPORATION 89 90
CAPACITY DATE -------- ---- WILLIAM H. GRAY, III Director - ----------------------------- (William H. Gray, III) GEORGE V. GRUNE Director - ----------------------------- (George V. Grune) HAROLD S. HOOK Director - ----------------------------- (Harold S. Hook) HELENE L. KAPLAN Director - ----------------------------- (Helene L. Kaplan) HENRY B. SCHACHT Director - ----------------------------- (Henry B. Schacht) March 17, 1998 ANDREW C. SIGLER Director - ----------------------------- (Andrew C. Sigler) JOHN R. STAFFORD Director - ----------------------------- (John R. Stafford) MARINA v.N. WHITMAN Director - ----------------------------- (Marina v.N. Whitman) MARC J. SHAPIRO Vice Chairman - ----------------------------- Finance and Risk Management (Marc J. Shapiro) (Principal Financial Officer) JOSEPH L. SCLAFANI Executive Vice President and Controller - ----------------------------- (Principal Accounting Officer) (Joseph L. Sclafani)
90 THE CHASE MANHATTAN CORPORATION 91 APPENDIX I 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 19 Bar graph entitled "Operating Net Income and Return on Common Equity in billions, except ratios" presenting the following information: Operating Net Income 5 Year CAGR = 24% 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Operating Net Income $1.96 $2.56 $2.90 $3.52 $ 3.85 Return on Common Equity 11.6% 14.3% 15.8% 18.4% 19.5% 2 19 Bar graph entitled "Operating Diluted Net Income Per Common Share" presenting the following information: 5 Year CAGR = 26% 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Operating Diluted Net Income Per Common Share $3.80 $5.13 $5.92 $7.27 $ 8.35 3 20 Line graph entitled "Market Sensitive Revenues in millions, 1988-1997" presenting the following information. 1988 1989 1990 1991 1992 ---- ---- ---- ---- ---- Logarithmic Regression $1,286 $1,464 $1,667 $1,898 $2,161 1988 - 1997 CAGR = 14% Market-Sensitive Revenues 1,521 1,508 1,373 1,660 2,074 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Logarithmic Regression $2,460 $2,800 $3,188 $3,629 $4,132 1988 - 1997 CAGR = 14% Market-Sensitive Revenues 3,122 2,574 3,012 3,767 4,292
92
GRAPHIC NUMBER PAGE DESCRIPTION - -------------- ---- ----------- 4 21 Pie chart entitled "Managed Revenue by Key Businesses 1997" presenting the following information: NATIONAL CONSUMER SERVICES 1997 National Consumer Finance 3% Mortgage Banking 4% Retail Payments and Investments 14% Credit Cards 18% GLOBAL BANKING 1997 Chase Capital Partners 4% Global Asset Management and Private Banking 4% Middle Markets 5% Chase Texas 7% Global Investment Banking and Corporate Lending 13% Global Markets 16% CHASE TECHNOLOGY SOLUTIONS 1997 Global Services 12% 5 28 Line graph entitled "Managed Operating Efficiency Ratio" presenting the following information: Improvement Since 1993 = 400 Basis Points 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Managed Operating - Efficiency Ratio 59% 63% 63% 57% 55% 6 30 Pie chart entitled "Diversification of Loan Portfolio at December 31, 1997" presenting the following information: CONSUMER Domestic Residential Mortgage 23% Domestic Credit Cards 9% Domestic Auto Financings 8% Domestic Other Consumer 6% Foreign Consumer 2% COMMERCIAL Domestic Financial Institutions 4% Domestic Commercial Real Estate 3% Domestic Commercial and Industrial 23% Foreign Commercial and Industrial 16% Foreign Financial Institutions 4% Foreign Government 2%
93
GRAPHIC NUMBER PAGE DESCRIPTION - -------------- ---- ----------- 7 31 Bar graph entitled "Nonperforming Assets in millions at December 31" presenting the following information: 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Nonperforming Assets $5,630 $2,126 $1,664 $1,151 $1,018 ====== ====== ====== ====== ====== 8 32 Bar graph entitled "Managed Credit Card Receivables in billions at December 31," presenting the following information: Managed 5 Year CAGR = 15% 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Owned $13.6 $17.0 $17.1 $12.2 $15.6 ===== ===== ===== ===== ===== Managed $17.4 $19.7 $23.7 $25.2 $32.5 ===== ===== ===== ===== ===== 9 32 Bar graph entitled "Managed Credit Card- Related Information, As of or for the year ended December 31, in millions, except ratios" presenting the following information: 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Net Charge-offs of Managed Credit Card Receivables $ 779 $ 745 $ 849 $1,156 $1,519 Net Charge-offs of Managed Credit Card Receivables as a percentage of Average Managed Credit Card Receivables 4.91% 4.30% 4.05% 4.87% 5.66% Past Due 90 Days and Over and Accruing as a percentage of Average Managed Credit Card Receivables 2.53% 2.21% 2.37% 2.38% 2.36% 10 35 Pie chart entitled "Cross-Border Exposure by Region December 31, 1997" presenting the following information: SELECTED ASIAN EXPOSURES Korea 4% Indonesia 2% Selected Other Asian Countries 9% (Selected Other Asian Countries are included in a table on page 34.) ALL OTHER CROSS-BORDER EXPOSURES Other Asian Countries 12% Eastern Europe 2% Other 3% Latin America 15% Europe/Canada 53%
94
GRAPHIC NUMBER PAGE DESCRIPTION - -------------- ---- ----------- 11 37 Bar graph entitled "Allowance for Credit Losses on Loans and Coverage Ratio in millions, except ratios at December 31," presenting the following information: 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Total Allowance for Credit Losses on Loans $4,445 $3,894 $3,784 $3,549 $3,624 Total Allowance on Loans as a Percentage of Total Nonperforming Loans 122% 245% 253% 348% 399%
12 39 Bar graph entitled "Histogram of Daily Market Risk-Related Revenue for 1997 and 1996" presenting the following information: Millions of dollars 0 - 5 5 - 10 10 - 15 15 - 20 ----- ------ ------- ------- Number of trading days 1997 market risk-related 37 55 60 40 revenue was within the above prescribed positive 1996 dollar range 65 86 60 24 Millions of dollars 20 - 25 25 - 30 30 and Over ------- ------- ----------- Number of trading days 1997 market risk-related 24 8 5 revenue was within the above prescribed positive 1996 dollar range 6 2 0 Millions of dollars 0 - (5) (5) - (10) (10) - (15) (15) - (20) ------- -------- ---------- --------- Number of trading days 1997 market risk-related 13 7 5 1 revenue was within the above prescribed negative 1996 dollar range 14 2 1 0 Millions of dollars (20) - (25) (25) - (30) (30) and Over ---------- --------- ------------ Number of trading days 1997 market risk-related 0 2 2 revenue was within the above prescribed negative 1996 dollar range 0 0 0
95
GRAPHIC NUMBER PAGE DESCRIPTION - -------------- ---- ----------- 13 42 Bar graph entitled "Risk-Based Capital Ratios at December 31," presenting the following information: 1993 1994 1995 1996 1997 ----- ----- ----- ----- ----- Total Risk-Based Capital Ratio 12.4% 12.2% 12.3% 11.8% 11.6% Tier 1 Risk-Based Capital Ratio 8.1% 8.1% 8.2% 8.2% 7.9% Tier 1 Leverage Ratio 7.4% 6.6% 6.7% 6.8% 6.0% The minimum regulatory requirements for the above ratios are as follows: Minimum Total Risk-Based Capital Ratio 8% Minimum Tier 1 Risk-Based Capital Ratio 4% Minimum Tier 1 Leverage Ratio 3% During 1997, Chase adopted the Federal Reserve Board's new guidelines for calculating market risk-adjusted capital. Prior period ratios have not been restated. 14 42 Bar graph entitled "Market Capitalization in billions at December 31," presenting the following information: 5 Year CAGR = 24% 1993 1994 1995 1996 1997 ----- ----- ----- ----- ----- Market Capitalization $17.8 $15.4 $25.6 $38.5 $46.1
96 EXHIBIT INDEX 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 By-laws, as amended as of March 17, 1998, of The Chase Manhattan Corporation. 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 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 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). 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). 97 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 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 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. 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. 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). 10.3 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). 98 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. 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. 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). 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). 99 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-3.2 2 BY-LAWS, AS AMENDED THROUGH MARCH 17, 1998 1 Exhibit 3.2 BY-LAWS THE CHASE MANHATTAN CORPORATION AS AMENDED THROUGH March 17, 1998 Office of the Secretary 270 Park Avenue, 35th floor New York, New York 10017 2 CONTENTS SUBJECT ARTICLE I MEETINGS OF STOCKHOLDERS Section 1.01 Annual Meeting Section 1.02 Special Meetings Section 1.03 Notice of Meetings Section 1.04 Quorum Section 1.05 Organization Section 1.06 Voting Section 1.07 List of Stockholders Section 1.08 Inspectors of Election Section 1.09 Notice of Stockholder Business and Director Nominations. II BOARD OF DIRECTORS Section 2.01 Number Section 2.02 Vacancies Section 2.03 Annual Meeting Section 2.04 Regular Meetings Section 2.05 Special Meetings Section 2.06 Quorum Section 2.07 Rules and Regulations Section 2.08 Compensation III COMMITTEES Section 3.01 Executive Committee Section 3.02 Audit Committee Section 3.03 Other Committees IV OFFICERS AND AGENTS Section 4.01 Officers Section 4.02 Clerks and Agents Section 4.03 Term of Office Section 4.04 Chairman of the Board Section 4.05 President Section 4.06 Vice Chairman of the Board Section 4.07 Chief Financial Officer Section 4.08 Controller Section 4.09 Secretary Section 4.10 Assistant Corporate Secretary Section 4.11 General Auditor Section 4.12 Powers and Duties of Other Officers 3 V PROXIES RE STOCK OR OTHER SECURITIES OF OTHER CORPORATIONS VI SHARES AND THEIR TRANSFER Section 6.01 Certificates for Stock Section 6.02 Transfers of Stock Section 6.03 Regulations Section 6.04 Lost, Stolen, Destroyed and Mutilated Certificates Section 6.05 Fixing Date for Determination of Stockholders of Record VII CORPORATE SEAL VIII FISCAL YEAR IX INDEMNIFICATION Section 9.01 Right to Indemnification Section 9.02 Contracts and Funding Section 9.03 Employee Benefit Plans Section 9.04 Indemnification Not Exclusive Right Section 9.05 Advancement of Expenses; Procedures X BY-LAWS Section 10.01 Inspection Section 10.02 Amendments Section 10.03 Construction 4 BY-LAWS OF THE CHASE MANHATTAN CORPORATION ARTICLE I MEETINGS OF STOCKHOLDERS SECTION 1.01. Annual Meeting. The annual meeting of the stockholders of The Chase Manhattan Corporation (the "Corporation") shall be held on the third Tuesday in May in each year (or, if that day shall be a legal holiday then on the next preceding business day) at such time and place within or without the State of Delaware, as may be specified in the notice thereof, as shall be fixed by the Board of Directors (the "Board"), for the purpose of electing directors and for the transaction of such other business as may properly be brought before such meeting. If any annual meeting shall not be held on the day designated or the directors shall not have been elected thereat or at any adjournment thereof, thereafter the Board shall cause a special meeting of the stockholders to be held as soon as practicable for the election of directors. At such special meeting the stockholders may elect directors and transact other business with the same force and effect as at an annual meeting of the stockholders duly called and held. SECTION 1.02. Special Meetings. A special meeting of the stockholders may be called at any time by the Board, the Chairman of the Board (herein called the Chairman), the President or a Vice Chairman of the Board or otherwise as provided by the General Corporation Law of the State of Delaware (herein called Delaware General Corporation Law). Such meetings shall be held at such places, within or without the State of Delaware, as may from time to time be designated by the Board or in the respective notices or waivers of notice thereof. SECTION 1.03. Notice of Meetings. Except as may otherwise expressly be required by law, notice of the place, date and hour of holding each annual and special meeting of the stockholders and the purpose or purposes thereof shall be delivered personally or mailed in a postage prepaid envelope, not less than ten (10) nor more than sixty (60) days before the date of such meeting, to each person who appears on the stock books and records of the Corporation as a stockholder entitled to vote at such meeting, and, if mailed, it shall be directed to such stockholder at his address as it appears on such records unless he shall have filed with the Secretary of the Corporation a written request that notice intended for him be mailed to some other address, in which case it shall be mailed to the address designated in such request. Notice of any meeting of stockholders shall not be required to be given to any stockholder who shall attend such meeting in person or by proxy and shall not, at the beginning of such meeting, object to the transaction of any business because the meeting has not been lawfully called or convened, or who shall, either before or after the meeting, submit a signed waiver of notice, in person or by proxy. Unless the Board shall fix a new record date for an adjourned meeting, notice of such adjourned meeting need not be given if the time and place to which the meeting shall be adjourned were announced at the meeting - 1 - 5 at which the adjournment was taken, provided that the adjournment is not for more than thirty (30) days. SECTION 1.04. Quorum. At each meeting of the stockholders, stockholders holding of record shares of common stock constituting a majority of the voting power of stock of the Corporation having general voting power (shares having such general voting power being hereinafter sometimes referred to as a "voting interest of the stockholders") shall be present in person or by proxy to constitute a quorum for the transaction of business. In the absence of a quorum at any such meeting or any adjournment or adjournments thereof, a majority in voting interest of the stockholders present in person or by proxy and entitled to vote thereat, or in the absence therefrom of all the stockholders, any officer entitled to preside at, or to act as secretary of, such meeting may adjourn such meeting from time to time. At any such adjourned meeting at which a quorum may be present, any business may be transacted which might have been transacted at the meeting as originally called. The absence from any meeting of stockholders holding the number of shares of stock of the Corporation required by the laws of the State of Delaware or by the Certificate of Incorporation of the Corporation or by these By-laws for action upon any given matter shall not prevent action at such meeting upon any other matter or matters which may properly come before the meeting, if there shall be present thereat in person or by proxy stockholders holding the number of shares of stock of the Corporation required in respect of such other matter or matters. SECTION 1.05. Organization. At each meeting of the stockholders, the Chairman, or, if he shall be absent therefrom, the President, or a Vice Chairman of the Board, or, if they also shall be absent therefrom, another officer of the Corporation chosen as chairman of such meeting by a majority in voting interest of the stockholders present in person or by proxy and entitled to vote thereat, or, if all the officers of the Corporation shall be absent therefrom, a stockholder holding of record shares of stock of the Corporation so chosen, shall act as chairman of the meeting and preside thereat; and the Secretary, or, if he shall be absent from such meeting or shall be required pursuant to the provisions of this Section to act as chairman of such meeting, the person (who shall be an Assistant Corporate Secretary, if an Assistant Corporate Secretary shall be present thereat) whom the chairman of such meeting shall appoint shall act as secretary of such meeting and keep the minutes thereof. SECTION 1.06. Voting. Except as otherwise provided in the Certificate of Incorporation, each stockholder shall, at each meeting of the stockholders, be entitled to one vote in person or by proxy for each share of stock of the Corporation held by him and registered in his name on the stock books and records of the Corporation: (a) on the date fixed pursuant to the provisions of Article VI of these By-laws as the record date for the determination of stockholders who shall be entitled to notice of and to vote at such meeting, or (b) if no such record date shall have been so fixed, then at the close of business on the day next preceding the day on which notice of the meeting shall be given. - 2 - 6 Persons holding in a fiduciary capacity stock of the Corporation shall be entitled to vote such stock so held, and persons whose stock is pledged shall be entitled to vote such stock, unless in the transfer by the pledgor on the books of the Corporation he shall have expressly empowered the pledgee to vote thereon, in which case only the pledgee, or his proxy, may represent such stock and vote thereon. If shares of stock of the Corporation shall stand of record in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety or otherwise, or if two or more persons shall have the same fiduciary relationship respecting the same shares of stock of the Corporation, unless the Secretary shall have been given written notice to the contrary and have been furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (a) if only one shall vote, his act shall bind all; (b) if more than one shall vote, the act of the majority so voting shall bind all; and (c) if more than one shall vote, but the vote shall be evenly split on any particular matter, then, except as otherwise required by the Delaware General Corporation Law, each faction may vote the shares in question proportionally. If the instrument so filed shall show that any such tenancy is held in unequal interests, the majority or even-split for the purpose of the next foregoing sentence shall be a majority or even-split in interest. Any vote on stock of the Corporation may be given at any meeting of the stockholders by the stockholder entitled thereto in person or by his proxy appointed by an instrument in writing subscribed by such stockholder or by his attorney thereunto authorized and delivered to the Secretary of the Corporation or to the secretary of the meeting, or by the transmitting or authorizing the transmission of a telegram, cablegram, or other means of electronic transmission to the person who will be the holder of the proxy to receive such transmission, provided that any such telegram, cablegram, or other means of electronic transmission must either set forth or be submitted with information from which it can be determined that the telegram, cablegram or other electronic transmission was authorized by the stockholder. Any copy, facsimile telecommunication or other reliable reproduction of such writing or transmission may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that any such reproduction is a complete reproduction of the entire original writing or transmission. No proxy shall be voted or acted upon after three (3) years from its date, unless said proxy shall provide for a longer period. At all meetings of the stockholders all matters, except those otherwise specified in these By-laws, and except also those the manner of deciding upon which is otherwise expressly regulated by law or by the Certificate of Incorporation of the Corporation, shall be decided by the vote of a majority in voting interest of the stockholders present in person or by proxy and entitled to vote thereat, a quorum being present. Except in the case of votes for the election of directors, unless demanded by a stockholder of the Corporation present in person or by proxy at any meeting of the stockholders and entitled to vote thereat or so directed by the chairman of the meeting, the vote thereat need not be by ballot. Upon a demand of any such stockholder for a vote by ballot on any question or at the direction of such chairman that a vote by ballot be taken on any question, such vote shall be taken. - 3 - 7 On a vote by ballot each ballot shall be signed by the stockholder voting, or by his proxy, if there be such proxy, and shall state the number of shares voted. SECTION 1.07. List of Stockholders. It shall be the duty of the Secretary or other officer of the Corporation who shall have charge of its stock books and records, either directly or through another officer of the Corporation designated by him or through a transfer agent appointed by the Board, to prepare and make, at least ten (10) days before every meeting of the stockholders, a complete list of the stockholders entitled to vote thereat, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to said meeting, either at a place within the city where said meeting is to be held, which place shall be specified in the notice of said meeting, or, if not so specified, at the place where said meeting is to be held. The list shall also be produced and kept at the time and place of said meeting during the whole time thereof, and may be inspected by any stockholder who shall be present thereat. Upon the willful neglect or refusal of the directors to produce such list at any meeting for the election of directors, they shall be ineligible for election to any office at such meeting. The stock books and records shall be the only evidence as to who are the stockholders entitled to examine the stock books and records of the Corporation, or such list, or to vote in person or by proxy at any meeting of stockholders. SECTION 1.08. Inspectors of Election. At each meeting of the stockholders, the chairman of such meeting may appoint two or more Inspectors of Election to act thereat. Each Inspector of Election so appointed shall first subscribe an oath or affirmation faithfully to execute the duties of an Inspector of Election at such meeting with strict impartiality and according to the best of his ability. Such Inspectors of Election, if any, shall take charge of the ballots at such meeting and after the balloting thereat on any question shall count the ballots cast thereon and shall make a report in writing to the secretary of such meeting of the results thereof. An Inspector of Election need not be a stockholder of the Corporation, and any officer of the Corporation may be an Inspector of Election on any question other than a vote for or against his election to any position with the Corporation or on any other question in which he may be directly interested. SECTION 1.09. Notice of Stockholder Business and Director Nominations. (a) Business and Director Nominations to be Considered at Annual Meeting of Stockholders. (1) Nominations of persons for election to the Board and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board, or (iii) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in this By-law who is entitled to vote at the meeting and complies with the notice procedures set forth in this By-law. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (a)(1) of this By-law Section 1.09, (i) the stockholder must have given timely notice thereof in writing to the Secretary of - 4 - 8 the Corporation and (ii) such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal offices of the Corporation not later than the close of business on the 90th day nor earlier than the 120th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than thirty (30) days before or more than sixty (60) days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or re-election as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (A) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner, (B) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and any such beneficial owner, and (C) whether the proponent intends or is part of a group which intends to solicit proxies from other stockholders in support of such proposal or nomination. (3) Notwithstanding anything in the second sentence of paragraph (a)(2) of this By-law to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least ninety (90) days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this By-law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation. - 5 - 9 (b) Business and Director Nominations to be Considered at Special Meetings of Stockholders. (1) Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. (2) Nominations of persons for election to the Board may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (i) by or at the direction of the Board; or (ii) provided that the Board has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who (A) is a stockholder of record at the time of giving of notice provided for in this By-law, (B) shall be entitled to vote at the meeting, and (C) complies with the notice procedures set forth in this By-law. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more persons to the Board, any such stockholder may nominate a person or persons (as the case may be) for election to such position(s) as specified in the Corporation's notice of meeting, if the stockholder's notice required by paragraph (a)(2) of this By-law shall be delivered to the Secretary at the principal offices of the Corporation not earlier than the 90th day prior to such special meeting, and not later than the close of business on the later of the 60th day and prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and the nominees proposed by the Board for election at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. (c) General. (1) Only such persons who are nominated in accordance with the procedures set forth in this By-law (or who are elected or appointed to the Board pursuant to Article II, Section 2.02 of these By-laws) shall be eligible to serve as directors of the Corporation and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this By-law. (2) Except as otherwise provided by law, the Restated Certificate of Incorporation or these By-laws, the chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this By-law and if any nomination or business is not in compliance with this By-law to declare that such defective proposal or nomination shall be disregarded. (3) For purposes of this By-law, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable - 6 - 10 national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (4) Notwithstanding the foregoing provisions of this By-law, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-law. Nothing in this By-law shall be deemed to affect any rights (i) of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders of any series of preferred stock to elect directors under specified circumstances. ARTICLE II BOARD OF DIRECTORS SECTION 2.01. Number. The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors, of such number as may be fixed from time to time by resolution adopted by the Board or by the stockholders, selected, organized and continued in accordance with the provisions of the laws of the State of Delaware. Each director hereafter elected shall hold office until the annual meeting of stockholders and until his successor is elected and has qualified, or until his death or until he shall resign or shall have been removed. SECTION 2.02. Vacancies. In case of any increase in the number of directors, the additional director or directors, and in case of any vacancy in the Board due to death, resignation, removal, disqualification or any other cause, the successors to fill the vacancies shall be elected by a majority of the directors then in office, for a term expiring at the next annual meeting of stockholders. SECTION 2.03. Annual Meeting. An annual meeting of the directors shall be held each year, without notice, immediately following the annual meeting of stockholders. The time and place of such meeting shall be designated by the Board. At such meeting, the directors shall, after qualifying, elect from their own number a Chairman of the Board, a President and one or more Vice Chairmen of the Board, and shall elect or appoint such other officers authorized by these By-laws as they may deem desirable, and appoint the Committees specified in Article III hereof. The directors may also elect to serve at the pleasure of the Board, one or more Honorary Directors, not members of the Board. Honorary Directors of the Board shall be paid such compensation or such fees for attendance at meetings of the Board, and meetings of other committees of the Board, as the Board shall determine from time to time. SECTION 2.04. Regular Meetings. The Board shall hold a regular meeting without notice at the principal office of the Corporation on the third Tuesday in each month, with such exceptions as shall be determined by the Board, at such time as shall be determined by the Board, unless another time or place, within or without the State of Delaware, shall be fixed by resolution of the Board. Should the day appointed for a regular meeting fall on a legal holiday, the meeting shall be held at the same time on the preceding day or on such other day as the Board may order. - 7 - 11 SECTION 2.05. Special Meetings. Special meetings of the Board shall be held whenever called by the Chairman, the President, a Vice Chairman of the Board, the Secretary or a majority of the directors at the time in office. A notice shall be given as hereinafter in this Section provided of each such special meeting, in which shall be stated the time and place of such meeting, but, except as otherwise expressly provided by law or by these By-laws, the purposes thereof need not be stated in such notice. Except as otherwise provided by law, notice of each such meeting shall be mailed to each director, addressed to him at his residence or usual place of business, at least two (2) days before the day on which such meeting is to be held, or shall be sent addressed to him at such place by telegraph, cable, wireless or other form of recorded communication or be delivered personally or by telephone not later than noon of the calendar day before the day on which such meeting is to be held. At any regular or special meeting of the Board, or any committee thereof, one or more Board or committee members may participate in such meeting by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. This type of participation shall constitute presence in person at the meeting. Notice of any meeting of the Board shall not, however, be required to be given to any director who submits a signed waiver of notice whether before or after the meeting, or if he shall be present at such meeting; and any meeting of the Board shall be a legal meeting without any notice thereof having been given if all the directors of the Corporation then in office shall be present thereat. SECTION 2.06. Quorum. One-third of the members of the entire Board, or the next highest integer in the event of a fraction, shall constitute a quorum, but if less than a quorum be present, a majority of those present may adjourn any meeting from time to time and the meeting may be held as adjourned without further notice. SECTION 2.07. Rules and Regulations. The Board may adopt such rules and regulations for the conduct of its meetings and the management of the affairs of the Corporation as it may deem proper, not inconsistent with the laws of the State of Delaware or these By-laws. SECTION 2.08. Compensation. Directors shall be entitled to receive from the Corporation such amount per annum and in addition, or in lieu thereof, such fees for attendance at meetings of the Board or of any committee, or both, as the Board from time to time shall determine. The Board may also likewise provide that the Corporation shall reimburse each such director or member of such committee for any expenses paid by him on account of his attendance at any such meeting. Nothing in this Section contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. ARTICLE III COMMITTEES SECTION 3.01. Executive Committee. The Board, by resolution adopted by a majority of the entire Board, shall appoint an Executive Committee which, when the Board is not in session, shall have and may exercise all the powers of the Board that lawfully may be delegated, including without limitation the power and authority to declare dividends. The Executive Committee shall consist of such number of directors as the Board shall from time to time determine, but not less than - 8 - 12 five and one of whom shall be designated by the Board as Chairman thereof, as follows: (a) the Chairman of the Board, the President, the Vice Chairmen of the Board; and (b) such other directors, none of whom shall be an officer of the Corporation, as shall be appointed to serve at the pleasure of the Board. The Board, by resolution adopted by a majority of the entire Board, may (a) designate one or more directors as alternate members of the Executive Committee or (b) specify that the member or members of the Executive Committee present and not disqualified from voting at a meeting of the Executive Committee, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board to act at such meeting in place of any absent or disqualified member. The attendance of one-third of the members of the Committee or their substitutes, or the next highest integer in the event of a fraction, at any meeting shall constitute a quorum, and the act of a majority of those present at a meeting thereof at which a quorum is present shall be the act of the Committee. All acts done and powers conferred by the Committee from time to time shall be deemed to be, and may be certified as being done or conferred under authority of the Board. The Committee shall fix its own rules and procedures, and the minutes of the meetings of the Committee shall be submitted at the next regular meeting of the Board at which a quorum is present, or if impracticable, at the next such subsequent meeting. The Committee shall hold meetings "On Call" and such meetings may be called by the Chairman of the Executive Committee, the Chairman of the Board, the President, a Vice Chairman of the Board, or the Secretary. Notice of each such meeting of the Committee shall be given by mail, telegraph, cable, wireless or other form of recorded communication or be delivered personally or by telephone to each member of the Committee not later than the day before the day on which such meeting is to be held. Notice of any such meeting need not be given to any member of the Committee who submits a signed waiver of notice whether before or after the meeting, or if he shall be present at such meeting; and any meeting of the Committee shall be a legal meeting without any notice thereof having been given, if all the members of the Committee shall be present thereat. In the case of any meeting, in the absence of the Chairman of the Executive Committee, such member as shall be designated by the Chairman of the Executive Committee or the Executive Committee shall act as Chairman of the meeting. SECTION 3.02. Audit Committee. The Board, by resolution adopted by a majority of the entire Board, shall appoint an Audit Committee composed of not less than three of its members, none of whom shall be an officer of the Corporation, to hold office at its pleasure and one of whom shall be designated by the Board as Chairman thereof. The Committee shall make such examination into the affairs of the Corporation and make such reports in writing thereof as may be directed by the Board. The attendance of one-third of the members of the Committee, or the next highest integer in the event of a fraction, at any meeting shall constitute a quorum, and the act of a majority of those present at a meeting thereof at which a quorum is present shall be the act of the Committee. SECTION 3.03. Other Committees. The Board, by resolution adopted by a majority of the entire Board, may appoint, from time to time, such other committees composed of not less than two of its members for such purposes and with such duties and powers as the Board may determine. The attendance of one-third of the members of such other committees, or the next highest integer in the event of a fraction, at any meeting shall constitute a quorum, and the act of a majority of those present at a meeting thereof at which a quorum is present shall be the act of such other committees. - 9 - 13 ARTICLE IV OFFICERS AND AGENTS SECTION 4.01. Officers. The officers of the Corporation shall be (a) a Chairman of the Board, a President and one or more Vice Chairmen of the Board, each of whom must be a director and shall be elected by the Board; (b) a Chief Financial Officer, a Controller, a Secretary, and a General Auditor, each of whom shall be elected by the Board; and (c) such other officers as may from time to time be elected by the Board or under its authority, or appointed by the Chairman or the President or a Vice Chairman of the Board. SECTION 4.02. Clerks and Agents. The Board may elect and dismiss, or the Chairman or the President or a Vice Chairman of the Board may appoint and dismiss, or delegate to any other officers authority to appoint and dismiss, such clerks, agents and employees as may be deemed advisable for the prompt and orderly transaction of the Corporation's business, and may prescribe, or authorize the appointing officers to prescribe, their respective duties, subject to the provisions of these By-laws. SECTION 4.03. Term of Office. The officers designated in Section 4.01(a) shall be elected by the Board at its annual meeting. The officers designated in Section 4.01(b) may be elected at the annual or any other meeting of the Board. The officers designated in Section 4.01(c) may be elected at the annual or any other meeting of the Board or appointed at any time by the designated proper officers. Any vacancy occurring in any office designated in Section 4.01(a) may be filled at any regular or special meeting of the Board. The officers elected pursuant to Section 4.01(a) shall each hold office for the term of one year and until their successors are elected, unless sooner disqualified or removed by a vote of two-thirds of the whole Board. All other officers, clerks, agents and employees elected by the Board, or appointed by the Chairman, the President, or a Vice Chairman of the Board, or under their authority, shall hold their respective offices at the pleasure of the Board or officers elected pursuant to Sections 4.01(a). SECTION 4.04. Chairman of the Board. The Chairman shall be the chief executive officer of the Corporation and shall have, subject to the control of the Board, general supervision and direction of the business and affairs of the Corporation and of its several officers. He shall preside at all meetings of the stockholders and at all meetings of the Board. He shall have the right to execute any document or perform any act which could be or is required to be executed or performed by the President of the Corporation. He shall have the power to sign checks, orders, contracts, leases, notes, drafts and other documents and instruments in connection with the business of the Corporation, and together with the Secretary or an Assistant Corporate Secretary execute conveyances of real estate and other documents and instruments to which the seal of the Corporation is affixed. He shall perform such other duties as from time to time may be prescribed by the Board. SECTION 4.05. President. The President shall, subject to the direction and control of the Board and the Chairman, participate in the supervision of the business and affairs of the Corporation. In general, the President shall perform all duties incident to the office of President, and such other duties as from time to time may be prescribed by the Board or the Chairman. In the - 10 - 14 absence of the Chairman, the President, shall preside at meetings of stockholders and of the Board. The President shall have the same power to sign for the Corporation as is prescribed in these By-laws for the Chairman. SECTION 4.06. Vice Chairman of the Board. The Vice Chairman of the Board, or if there be more than one, then each of them, shall, subject to the direction and control of the Board and the Chairman, participate in the supervision of the business and affairs of the Corporation, and shall have such other duties as may be prescribed from time to time by the Board or the Chairman. In the absence of the Chairman and the President, a Vice Chairman, as designated by the Chairman or the Board, shall preside at meetings of the stockholders and of the Board. Each Vice Chairman shall have the same power to sign for the Corporation as is prescribed in these By-laws for the Chairman. SECTION 4.07. Chief Financial Officer. The Chief Financial Officer shall have such powers and perform such duties as the Board, the Chairman, the President or a Vice Chairman of the Board may from time to time prescribe which may include, without limitation, responsibility for strategic planning, corporate finance, control, tax and auditing and shall perform such other duties as may be prescribed by these By-laws. SECTION 4.08. Controller. The Controller shall exercise general supervision of the accounting departments of the Corporation. He shall be responsible to the Chief Financial Officer and shall render reports from time to time relating to the general financial condition of the Corporation. He shall render such other reports and perform such other duties as from time to time may be prescribed by the Chief Financial Officer, a Vice Chairman of the Board, the President or the Chairman. SECTION 4.09. Secretary. The Secretary shall: (a) record all the proceedings of the meetings of the stockholders, the Board and the Executive Committee in one or more books kept for that purpose; (b) see that all notices are duly given in accordance with the provisions of these By-laws or as required by law; (c) be custodian of the seal of the Corporation; and he may see that such seal or a facsimile thereof is affixed to any documents the execution of which on behalf of the Corporation is duly authorized and may attest such seal when so affixed; and (d) in general, perform all duties incident to the office of Secretary and such other duties as from time to time may be prescribed by the Board and the Chairman. SECTION 4.10. Assistant Corporate Secretary. At the request of the Secretary, or in case of his absence or inability to act, the Assistant Corporate Secretary, or if there be more than one, any of the Assistant Corporate Secretaries, shall perform the duties of the Secretary and, when so acting, shall have all the powers of, and be subject to all the restrictions upon, the Secretary. Each - 11 - 15 Assistant Corporate Secretary shall perform such other duties as from time to time may be prescribed by the Secretary, a Vice Chairman of the Board, the President or the Chairman. SECTION 4.11. General Auditor. The General Auditor shall continuously examine the affairs of the Corporation. He shall have and may exercise such powers and duties as from time to time may be prescribed by the Board, the Chairman, a Vice Chairman of the Board, the President or the Chief Financial Officer. SECTION 4.12. Powers and Duties of Other Officers. The powers and duties of all other officers of the Corporation shall be those usually pertaining to their respective offices, subject to the direction and control of the Board and as otherwise provided in these By-laws. ARTICLE V PROXIES RE STOCK OR OTHER SECURITIES OF OTHER CORPORATIONS Unless otherwise provided by the Board, the Chairman, the President, a Vice Chairman of the Board, the Chief Financial Officer or the Secretary may from time to time (a) appoint an attorney or attorneys or an agent or agents of the Corporation to exercise in the name and on behalf of the Corporation the powers and rights which the Corporation may have as the holder of stock or other securities in any other corporation to vote or consent in respect of such stock or other securities; (b) instruct the person or persons so appointed as to the manner of exercising such powers and rights; and (c) execute or cause to be executed in the name and on behalf of the Corporation and under its corporate seal, or otherwise, all such written proxies or other instruments as he may deem necessary or proper in order that the Corporation may exercise its said powers and rights. ARTICLE VI SHARES AND THEIR TRANSFER SECTION 6.01. Certificates for Stock. The shares of all classes or series of the capital stock of the Corporation may be uncertificated shares, except to the extent otherwise required by applicable law and except to the extent shares are represented by outstanding certificates that have not been surrendered to the Corporation or its transfer agent. Notwithstanding the foregoing, every owner of stock of the Corporation of any class (or, if stock of any class shall be issuable in series, any series of such class) shall be entitled to have a certificate, in such form as the Board shall prescribe, certifying the number of shares of stock of the Corporation of such class, or such class and series, owned by him. The certificates representing shares of stock of each class (or, if there shall be more than one series of any class, each series of such class) shall be numbered in the order in which they shall be issued and shall be signed in the name of the Corporation by the Chairman, the President, or a Vice Chairman of the Board, and by the Secretary or an Assistant Corporate Secretary; provided, however, that if any such certificate is countersigned by a registrar and the Board shall by resolution so authorize, the signatures of such Chairman, President, Vice Chairman of the Board, Secretary or Assistant Corporate Secretary or any transfer agent may be facsimiles. In - 12 - 16 case any officer or officers or transfer agent of the Corporation who shall have signed, or whose facsimile signature or signatures shall have been placed upon any such certificate shall cease to be such officer or officers or transfer agent before such certificate shall have been issued, such certificate may be issued by the Corporation with the same effect as though the person or persons who signed such certificate, or whose facsimile signature or signatures shall have been placed thereupon were such officer and officers or transfer agent at the date of issue. A stock ledger shall be kept of the respective names of the persons, firms or corporations owning stock represented by certificates for stock of the Corporation, the number, class and series of shares represented by such certificates, respectively, and the respective dates thereof, and in case of cancellation, the respective dates of cancellation. Every certificate surrendered to the Corporation for exchange or transfer shall be cancelled and a new certificate or certificates shall not be issued in exchange for any existing certificate until such existing certificate shall have been so cancelled, except in cases provided for in Section 6.04 or otherwise required by law. SECTION 6.02. Transfers of Stock. Transfers of shares of the stock of the Corporation shall be made on the stock books and records of the Corporation only by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary, or with a transfer agent duly appointed, and upon surrender of the certificate or certificates for such shares properly endorsed, if such shares are represented by a certificate, and payment of all taxes thereon. The person in whose name shares of stock stand on the stock books and records of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation. SECTION 6.03. Regulations. The Board may make such rules and regulations as it may deem expedient, not inconsistent with these By-laws, concerning the issue, transfer and registration of uncertificated shares or certificates for stock of the Corporation. The Board may appoint, or authorize any officer or officers to appoint, one or more transfer agents and one or more registrars, and may require all certificates for stock to bear the signature or signatures of any of them. SECTION 6.04. Lost, Stolen, Destroyed and Mutilated Certificates. The owner of any stock of the Corporation shall immediately notify the Corporation of any loss, theft, destruction or mutilation of any certificate therefor, and the Corporation may issue uncertificated shares or a new certificate for stock in the place of any certificate theretofore issued by it and alleged to have been lost, stolen or destroyed, and the Board may, in its discretion, require the owner of the lost, stolen or destroyed certificate or his legal representatives to give the Corporation a bond in such sum, limited or unlimited, and in such form and with such surety or sureties, as the Board shall in its uncontrolled discretion determine, to indemnify the Corporation against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate, or the issuance of any such new certificate. The Board may, however, in its discretion refuse to issue any such new certificate except pursuant to legal proceedings under the laws of the State of Delaware in such case made and provided. SECTION 6.05. Fixing Date for Determination of Stockholders of Record. (a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board may fix a - 13 - 17 record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board, and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record is fixed by the Board, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. (b) In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board. If no record date has been fixed by the Board, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board is required by Delaware General Corporation Law, shall be the first date on which signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board and prior action by the Board is required by Delaware General Corporation Law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board adopts the resolution taking such prior action. (c) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be the close of business on the day on which the Board adopts the resolution relating thereto. ARTICLE VII CORPORATE SEAL The corporate seal of the Corporation shall be in the form of a circle and shall bear the full name of the Corporation and the words and figures "Corporate Seal 1968 Delaware". - 14 - 18 ARTICLE VIII FISCAL YEAR The fiscal year of the Corporation shall be the calendar year. ARTICLE IX INDEMNIFICATION SECTION 9.01. Right to Indemnification. The Corporation shall to the fullest extent permitted by applicable law as then in effect indemnify any person (the "Indemnitee") who was or is involved in any manner (including, without limitation, as a party or a witness), or is threatened to be made so involved, in any threatened, pending or completed investigation, claim, action, suit or proceeding, whether civil, administrative or investigative (including without limitation, any action, suit or proceeding by or in the right of the Corporation to procure a judgment in its favor) (a "Proceeding") by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer or employee or agent of another corporation, partnership, joint venture, trust or other enterprise against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such Proceeding. Such indemnification shall be a contract right and shall include the right to receive payment in advance of any expenses incurred by the Indemnitee in connection with such Proceeding, consistent with the provisions of applicable law as then in effect. SECTION 9.02. Contracts and Funding. The Corporation may enter into contracts with any director, officer, employee or agent of the Corporation in furtherance of the provisions of this Article IX and may create a trust fund, grant a security interest or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided in this Article IX. SECTION 9.03. Employee Benefit Plans. For purposes of this Article IX, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee, or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner not opposed to the best interest of a corporation. SECTION 9.04. Indemnification Not Exclusive Right. The right of indemnification and advancement of expenses provided in this Article IX shall not be exclusive of any other rights to which a person seeking indemnification may otherwise be entitled, under any statute, by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his - 15 - 19 official capacity and as to action in another capacity while holding such office. The provisions of this Article IX shall inure to the benefit of the heirs and legal representatives of any person entitled to indemnity under this Article IX and shall be applicable to Proceedings commenced or continuing after the adoption of this Article IX, whether arising from acts or omissions occurring before or after such adoption. SECTION 9.05. Advancement of Expenses; Procedures. In furtherance, but not in limitation, of the foregoing provisions, the following procedures and remedies shall apply with respect to advancement of expenses and the right to indemnification under this Article IX: (a) Advancement of Expenses. All reasonable expenses incurred by or on behalf of the Indemnitee in connection with any Proceeding shall be advanced to the Indemnitee by the Corporation within twenty (20) days after the receipt by the Corporation of a statement or statements from the indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the expenses incurred by the Indemnitee and, if required by law at the time of such advance, shall include or be accompanied by an undertaking by or on behalf of the Indemnitee to repay the amounts advanced if it should ultimately be determined that the Indemnitee is not entitled to be indemnified against such expenses. (b) Written Request for Indemnification. To obtain indemnification under this Article IX, an Indemnitee shall submit to the Secretary of the Corporation a written request, including such documentation and information as is reasonably available to the Indemnitee and reasonably necessary to determine whether and to what extent the Indemnitee is entitled to indemnification (the "Supporting Documentation"). The determination of the Indemnitee's entitlement to indemnification shall be made within a reasonable time after receipt by the Corporation of the written request for indemnification together with the Supporting Documentation. The Secretary of the Corporation shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that the Indemnitee has requested indemnification. (c) Procedure for Determination. The Indemnitee's entitlement to indemnification under this Article IX shall be determined (i) by the Board by a majority vote of a quorum (as defined in Article II of these By-laws) consisting of directors who were not parties to such action, suit or proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders, but only if a majority of the disinterested directors, if they constitute a quorum of the board, presents the issue of entitlement to indemnification to the stockholders for their determination. ARTICLE X BY-LAWS SECTION 10.01. Inspection. A copy of the By-laws shall at all times be kept in a convenient place at the principal office of the Corporation, and shall be open for inspection by stockholders during business hours. - 16 - 20 SECTION 10.02. Amendments. Except as otherwise specifically provided by statute, these By-laws may be added to, amended, altered or repealed at any meeting of the Board by vote of a majority of the entire Board, provided that written notice of any such proposed action shall be given to each director prior to such meeting, or that notice of such addition, amendment, alteration or repeal shall have been given at the preceding meeting of the Board. SECTION 10.03. Construction. The masculine gender, where appearing in these By-laws, shall be deemed to include the feminine gender. -17- EX-4.8 3 GUARANTEE AGREEMENT 1 EXHIBIT 4.8 GUARANTEE AGREEMENT BETWEEN THE CHASE MANHATTAN CORPORATION (AS GUARANTOR) AND THE BANK OF NEW YORK (AS TRUSTEE) DATED AS OF JANUARY 24, 1997 2 CROSS-REFERENCE TABLE*
Section of Trust Indenture Act Section of of 1939, as amended Guarantee Agreement - ------------------- ------------------- 310(a).................................................................4.1(a) 310(b).................................................................4.1(c), 2.8 310(c).................................................................Inapplicable 311(a).................................................................2.2(b) 311(b).................................................................2.2(b) 311(c).................................................................Inapplicable 312(a).................................................................2.2(a) 312(b).................................................................2.2(b) 313....................................................................2.3 314(a).................................................................2.4 314(b).................................................................Inapplicable 314(c).................................................................2.5 314(d).................................................................Inapplicable 314(e).................................................................1.1, 2.5, 3.2 314(f).................................................................2.1, 3.2 315(a).................................................................3.1(d) 315(b).................................................................2.7 315(c).................................................................3.1 315(d).................................................................3.1(d) 316(a).................................................................1.1, 2.6, 5.4 316(b).................................................................5.3 316(c).................................................................8.2 317(a).................................................................Inapplicable 317(b).................................................................Inapplicable 318(a).................................................................2.1(b) 318(b).................................................................2.1 318(c).................................................................2.1(a)
- ---------- * This Cross-Reference Table does not constitute part of the Guarantee Agreement and shall not affect the interpretation of any of its terms or provisions. 3 TABLE OF CONTENTS
Page ARTICLE I. DEFINITIONS .......................................................................... 1 Section 1.1. Definitions.................................................................. 1 ARTICLE II. TRUST INDENTURE ACT .................................................................. 3 Section 2.1. Trust Indenture Act; Application............................................. 3 Section 2.2. List of Holders.............................................................. 4 Section 2.3. Reports by the Guarantee Trustee............................................. 4 Section 2.4. Periodic Reports to the Guarantee Trustee.................................... 4 Section 2.5. Evidence of Compliance with Conditions Precedent............................. 4 Section 2.6. Events of Default; Waiver.................................................... 4 Section 2.7. Event of Default; Notice..................................................... 5 Section 2.8. Conflicting Interests........................................................ 5 ARTICLE III. POWERS, DUTIES AND RIGHTS OF THE GUARANTEE TRUSTEE........................... 5 Section 3.1. Powers and Duties of the Guarantee Trustee................................... 5 Section 3.2. Certain Rights of Guarantee Trustee.......................................... 6 Section 3.3. Indemnity.................................................................... 8 ARTICLE IV. GUARANTEE TRUSTEE............................................................ 8 Section 4.1. Guarantee Trustee: Eligibility............................................... 8 Section 4.2. Appointment, Removal and Resignation of the Guarantee Trustee................ 9 ARTICLE V. GUARANTEE............................................................................. 9 Section 5.1. Guarantee.................................................................... 9 Section 5.2. Waiver of Notice and Demand.................................................. 9 Section 5.3. Obligations Not Affected..................................................... 10 Section 5.4. Rights of Holders............................................................ 10 Section 5.5. Guarantee of Payment......................................................... 11 Section 5.6. Subrogation.................................................................. 11 Section 5.7. Independent Obligations...................................................... 11 ARTICLE VI. COVENANTS AND SUBORDINATION.................................................. 11 Section 6.1. Subordination................................................................ 11 Section 6.2. Pari Passu Guarantees........................................................ 11
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Page ARTICLE VII. TERMINATION.................................................................. 12 Section 7.1. Termination.................................................................. 12 ARTICLE VIII. MISCELLANEOUS................................................................ 12 Section 8.1. Successors and Assigns....................................................... 12 Section 8.2. Amendments................................................................... 12 Section 8.3. Notices...................................................................... 12 Section 8.4. Benefit...................................................................... 13 Section 8.5. Interpretation............................................................... 13 Section 8.6. Governing Law................................................................ 14
5 GUARANTEE AGREEMENT This GUARANTEE AGREEMENT, dated as of January 24, 1997, is executed and delivered by THE CHASE MANHATTAN CORPORATION, a Delaware corporation (the "Guarantor") having its principal office at 270 Park Avenue, New York, New York 10017, and THE BANK OF NEW YORK, a New York banking corporation, as trustee (the "Guarantee Trustee"), for the benefit of the Holders (as defined herein) from time to time of the Capital Securities and Common Securities (each as defined herein and together, the "Securities") of Chase Capital II, a Delaware statutory business trust (the "Issuer"). WHEREAS, pursuant to an Amended and Restated Trust Agreement, dated as of January 24, 1997 (the "Trust Agreement"), among the Guarantor, as Depositor, the Property Trustee and the Delaware Trustee named therein, the Administrative Trustees named therein and the Holders from time to time of undivided beneficial interests in the assets of the Issuer, the Issuer is issuing $500,000,000 aggregate Liquidation Amount (as defined in the Trust Agreement) of its Global Floating Rate Capital Securities, Series B, Liquidation Amount $1,000 per preferred security) (the "Capital Securities") representing preferred undivided beneficial interests in the assets of the Issuer and having the terms set forth in the Trust Agreement; WHEREAS, the Capital Securities will be issued by the Issuer and the proceeds thereof, together with the proceeds from the issuance of the Issuer's Common Securities (as defined herein), will be used to purchase the Debentures (as defined in the Trust Agreement) of the Guarantor which will be deposited with The Bank of New York, as Property Trustee under the Trust Agreement, as trust assets; and WHEREAS, as incentive for the Holders to purchase Securities the Guarantor desires irrevocably and unconditionally to agree, to the extent set forth herein, to pay to the Holders of the Securities the Guarantee Payments (as defined herein) and to make certain other payments on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the purchase by each Holder of Securities, which purchase the Guarantor hereby agrees shall benefit the Guarantor, the Guarantor executes and delivers this Guarantee Agreement for the benefit of the Holders from time to time of the Securities. ARTICLE I. DEFINITIONS SECTION 1.1. Definitions. As used in this Guarantee Agreement, the terms set forth below shall, unless the context otherwise requires, have the following meanings. Capitalized or otherwise defined terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Trust Agreement as in effect on the date hereof. 6 2 "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person; provided, however, that an Affiliate of the Guarantor shall not be deemed to be an Affiliate of the Issuer. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Board of Directors" means either the board of directors of the Guarantor or any committee of that board duly authorized to act hereunder or any directors or officers of the Guarantor to whom such board of directors or such committee shall have duly delegated its authority. "Common Securities" means the securities representing common undivided beneficial interests in the assets of the Issuer. "Event of Default" means a default by the Guarantor on any of its payment or other obligations under this Guarantee Agreement; provided, however, that, except with respect to a default in payment of any Guarantee Payments, the Guarantor shall have received notice of default and shall not have cured such default within 90 days after receipt of such notice. "Guarantee Payments" means the following payments or distributions, without duplication, with respect to the Securities, to the extent not paid or made by or on behalf of the Issuer: (i) any accumulated and unpaid Distributions (as defined in the Trust Agreement) required to be paid on the Securities, to the extent the Issuer shall have funds on hand available therefor at such time, (ii) the redemption price, including all accrued and unpaid Distributions to the date of redemption (the"Redemption Price"), with respect to any Securities called for redemption by the Issuer, to the extent the Issuer shall have funds on hand available therefor at such time, and (iii) upon a voluntary or involuntary termination, winding up or liquidation of the Issuer, unless Debentures are distributed to the Holders, the lesser of (a) the aggregate of the Liquidation Amount plus accrued and unpaid Distributions to the date of payment and (b) the amount of assets of the Issuer remaining available for distribution to Holders in liquidation of the Issuer after satisfaction of liabilities to creditors of the Issuer as required by applicable law (in either case, the "Liquidation Distribution"). "Guarantee Trustee" means The Bank of New York, until a Successor Guarantee Trustee has been appointed and has accepted such appointment pursuant to the terms of this Guarantee Agreement, and thereafter means each such Successor Guarantee Trustee. "Holder" means any holder, as registered on the books and records of the Issuer, of any Securities; provided, however, that in determining whether the holders of the requisite percentage of Securities have given any request, notice, consent or waiver hereunder, "Holder" shall not include the Guarantor, the Guarantee Trustee, or any Affiliate of the Guarantor or the Guarantee Trustee. "Indenture" means the Junior Subordinated Indenture dated as of December 1, 1996, as supplemented and amended between the Guarantor and The Bank of New York, as trustee. "List of Holders" has the meaning specified in Section 2.2(a). 7 3 "Majority in aggregate Liquidation Amount of the Securities" means, except as provided by the Trust Indenture Act, a vote by the Holder(s), voting separately as a class, of more than 50% of the aggregate Liquidation Amount of all then outstanding Securities issued by the Issuer. "Officers' Certificate" means, with respect to any Person, a certificate signed by the Chairman or a Vice Chairman of the Board of Directors of such Person or the President or a Vice President of such Person, and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of such Person, and delivered to the Guarantee Trustee. Any Officers' Certificate delivered with respect to compliance with a condition or covenant provided for in this Guarantee Agreement shall include: (a) a statement that each officer signing the Officers' Certificate has read the covenant or condition and the definitions relating thereto; (b) a brief statement of the nature and scope of the examination or investigation undertaken by each officer in rendering the Officers' Certificate; (c) a statement that each officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each officer, such condition or covenant has been complied with. "Person" means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature. "Responsible Officer" when used with respect to the Guarantee Trustee means any officer of the Guarantee Trustee assigned by the Guarantee Trustee from time to time to administer its corporate trust matters. "Successor Guarantee Trustee" means a successor Guarantee Trustee possessing the qualifications to act as Guarantee Trustee under Section 4.1. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended. ARTICLE II. TRUST INDENTURE ACT SECTION 2.1. Trust Indenture Act; Application. (a) This Guarantee Agreement is subject to the provisions of the Trust Indenture Act that are required to be part of this Guarantee Agreement and shall, to the extent applicable, be governed by such provisions. (b) If and to the extent that any provision of this Guarantee Agreement limits, qualifies or conflicts with the duties imposed by Sections 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. 8 4 SECTION 2.2. List of Holders. (a) The Guarantor will furnish or cause to be furnished to the Guarantee Trustee: (i) semi-annually, not more than 15 days after January 15 and July 15 in each year, a list, in such form as the Guarantee Trustee may reasonably require, of the names and addresses of the Holders as of such January 1 and July 1, and (ii) at such other times as the Guarantee Trustee may request in writing, within 30 days after the receipt by the Guarantor of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished, excluding from any such list names and addresses received by the Guarantee Trustee in its capacity as Securities Registrar. (b) The Guarantee Trustee shall comply with its obligations under Section 311(a), Section 311(b) and Section 312(b) of the Trust Indenture Act. SECTION 2.3. Reports by the Guarantee Trustee. The Guarantee Trustee shall transmit to Holders such reports concerning the Guarantee Trustee and its actions under this Guarantee Agreement as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. If required by Section 313(a) of the Trust Indenture Act, the Guarantee Trustee shall, within sixty days after each May 15 following the date of this Guarantee Agreement deliver to Holders a brief report, dated as of such May 15, which complies with the provisions of such Section 313(a). SECTION 2.4. Periodic Reports to the Guarantee Trustee. The Guarantor shall provide to the Guarantee Trustee, the Securities and Exchange Commission and the Holders such documents, reports and information, if any, as required by Section 314 of the Trust Indenture Act and the compliance certificate required by Section 314 of the Trust Indenture Act, in the form, in the manner and at the times required by Section 314 of the Trust Indenture Act. Delivery of such reports, information and documents to the Guarantee Trustee is for informational purposes only and the Guarantee Trustee's receipt of such shall not constitute constructive notice of any information contained therein, including the Guarantor's compliance with any of its covenants hereunder (as to which the Guarantee Trustee is entitled to rely exclusively on Officers' Certificates). SECTION 2.5. Evidence of Compliance with Conditions Precedent. The Guarantor shall provide to the Guarantee Trustee such evidence of compliance with such conditions precedent, if any, provided for in this Guarantee Agreement that relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(1) may be given in the form of an Officers' Certificate. SECTION 2.6. Events of Default; Waiver. 9 5 The Holders of a Majority in aggregate Liquidation Amount of the Securities may, by vote, on behalf of the Holders, waive any past Event of Default and its consequences. Upon such waiver, any such Event of Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Guarantee Agreement, but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent therefrom. SECTION 2.7. Event of Default; Notice. (a) The Guarantee Trustee shall, within 90 days after the occurrence of an Event of Default, transmit by mail, first class postage prepaid, to the Holders, notices of all Events of Default actually known to the Guarantee Trustee, unless such defaults have been cured before the giving of such notice, provided, that, except in the case of a default in the payment of a Guarantee Payment, the Guarantee Trustee shall be protected in withholding such notice if and so long as the Board of Directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Guarantee Trustee in good faith determines that the withholding of such notice is in the interests of the Holders. (b) The Guarantee Trustee shall not be deemed to have knowledge of any Event of Default unless the Guarantee Trustee shall have received written notice, or a Responsible Officer charged with the administration of this Guarantee Agreement shall have obtained written notice, of such Event of Default. SECTION 2.8. Conflicting Interests. The Trust Agreement shall be deemed to be specifically described in this Guarantee Agreement for the purposes of clause (i) of the first proviso contained in Section 310(b) of the Trust Indenture Act. ARTICLE III. POWERS, DUTIES AND RIGHTS OF THE GUARANTEE TRUSTEE SECTION 3.1. Powers and Duties of the Guarantee Trustee. (a) This Guarantee Agreement shall be held by the Guarantee Trustee for the benefit of the Holders, and the Guarantee Trustee shall not transfer this Guarantee Agreement to any Person except a Holder exercising his or her rights pursuant to Section 5.4(iv) or to a Successor Guarantee Trustee on acceptance by such Successor Guarantee Trustee of its appointment to act as Successor Guarantee Trustee. The right, title and interest of the Guarantee Trustee shall automatically vest in any Successor Guarantee Trustee, upon acceptance by such Successor Guarantee Trustee of its appointment hereunder, and such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered pursuant to the appointment of such Successor Guarantee Trustee. (b) If an Event of Default has occurred and is continuing, the Guarantee Trustee shall enforce this Guarantee Agreement for the benefit of the Holders. (c) The Guarantee Trustee, before the occurrence of any Event of Default and after the curing of all Events of Default that may have occurred, shall undertake to perform only such duties as are 10 6 specifically set forth in this Guarantee Agreement, and no implied covenants shall be read into this Guarantee Agreement against the Guarantee Trustee. In case an Event of Default has occurred (that has not been cured or waived pursuant to Section 2.6), the Guarantee Trustee shall exercise such of the rights and powers vested in it by this Guarantee Agreement, and use the same degree of care and skill in its exercise thereof, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (d) No provision of this Guarantee Agreement shall be construed to relieve the Guarantee Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (i) prior to the occurrence of any Event of Default and after the curing or waiving of all such Events of Default that may have occurred: (A) the duties and obligations of the Guarantee Trustee shall be determined solely by the express provisions of this Guarantee Agreement, and the Guarantee Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Guarantee Agreement; and (B) in the absence of bad faith on the part of the Guarantee Trustee, the Guarantee Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Guarantee Trustee and conforming to the requirements of this Guarantee Agreement; but in the case of any such certificates or opinions that by any provision hereof or of the Trust Indenture Act are specifically required to be furnished to the Guarantee Trustee, the Guarantee Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Guarantee Agreement; (ii) the Guarantee Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Guarantee Trustee, unless it shall be proved that the Guarantee Trustee was negligent in ascertaining the pertinent facts upon which such judgment was made; (iii) the Guarantee Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a Majority in aggregate Liquidation Amount of the Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee, or exercising any trust or power conferred upon the Guarantee Trustee under this Guarantee Agreement; and (iv) no provision of this Guarantee Agreement shall require the Guarantee Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if the Guarantee Trustee shall have reasonable grounds for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Guarantee Agreement or adequate indemnity against such risk or liability is not reasonably assured to it. SECTION 3.2. Certain Rights of Guarantee Trustee. 11 7 (a) Subject to the provisions of Section 3.1: (i) The Guarantee Trustee may rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document reasonably believed by it to be genuine and to have been signed, sent or presented by the proper party or parties. (ii) Any direction or act of the Guarantor contemplated by this Guarantee Agreement shall be sufficiently evidenced by an Officers' Certificate unless otherwise prescribed herein. (iii) Whenever, in the administration of this Guarantee Agreement, the Guarantee Trustee shall deem it desirable that a matter be proved or established before taking, suffering or omitting to take any action hereunder, the Guarantee Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and rely upon an Officers' Certificate which, upon receipt of such request from the Guarantee Trustee, shall be promptly delivered by the Guarantor. (iv) The Guarantee Trustee may consult with legal counsel of its selection, and the advice or opinion of such legal counsel with respect to legal matters shall be full and complete authorization and protection in respect of any action taken, suffered or omitted to be taken by it hereunder in good faith and in accordance with such advice or opinion. Such legal counsel may be legal counsel to the Guarantor or any of its Affiliates and may be one of its employees. The Guarantee Trustee shall have the right at any time to seek instructions concerning the administration of this Guarantee Agreement from any court of competent jurisdiction. (v) The Guarantee Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Guarantee Agreement at the request or direction of any Holder, unless such Holder shall have provided to the Guarantee Trustee such adequate security and indemnity as would satisfy a reasonable person in the position of the Guarantee Trustee, against the costs, expenses (including attorneys' fees and expenses) and liabilities that might be incurred by it in complying with such request or direction, including such reasonable advances as may be requested by the Guarantee Trustee; provided that, nothing contained in this Section 3.2(a)(v) shall be taken to relieve the Guarantee Trustee, upon the occurrence of an Event of Default, of its obligation to exercise the rights and powers vested in it by this Guarantee Agreement. (vi) The Guarantee Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Guarantee Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit. (vii) The Guarantee Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through its agents or attorneys, and the Guarantee Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed with due care by it hereunder. 12 8 (viii) Whenever in the administration of this Guarantee Agreement the Guarantee Trustee shall deem it desirable to receive written instructions with respect to enforcing any remedy or right or taking any other action hereunder, the Guarantee Trustee (A) may request instructions from the Holders, (B) may refrain from enforcing such remedy or right or taking such other action until such written instructions are received, and (C) shall be protected in acting in accordance with such written instructions. (ix) The Guarantee Trustee shall not be liable for any action taken, suffered, or omitted to be taken by it in good faith and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Guarantee Agreement. (b) No provision of this Guarantee Agreement shall be deemed to impose any duty or obligation on the Guarantee Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it in any jurisdiction in which it shall be illegal, or in which the Guarantee Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Guarantee Trustee shall be construed to be a duty to act in accordance with such power and authority. SECTION 3.3. Indemnity. The Guarantor agrees to indemnify the Guarantee Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on the part of the Guarantee Trustee, arising out of or in connection with the acceptance or administration of this Guarantee Agreement, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. ARTICLE IV. GUARANTEE TRUSTEE SECTION 4.1. Guarantee Trustee: Eligibility. (a) There shall at all times be a Guarantee Trustee which shall: (i) not be an Affiliate of the Guarantor; and (ii) be a Person that is eligible pursuant to the Trust Indenture Act to act as such and has a combined capital and surplus of at least $50,000,000, and shall be a corporation meeting the requirements of Section 310(a) of the Trust Indenture Act. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority, then, for the purposes of this Section and to the extent permitted by the Trust Indenture Act, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. (b) If at any time the Guarantee Trustee shall cease to be eligible to so act under Section 4.1(a), the Guarantee Trustee shall immediately resign in the manner and with the effect set out in Section 4.2(c). 13 9 (c) If the Guarantee Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Guarantee Trustee and Guarantor shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. SECTION 4.2. Appointment, Removal and Resignation of the Guarantee Trustee. (a) Subject to Section 4.2(b), the Guarantee Trustee may be appointed or removed without cause at any time by the Guarantor. (b) The Guarantee Trustee shall not be removed until a Successor Guarantee Trustee has been appointed and has accepted such appointment by written instrument executed by such Successor Guarantee Trustee and delivered to the Guarantor. If an instrument of acceptance by a Successor Guarantee Trustee shall not have been delivered to the Guarantee Trustee within 30 days after such removal, the Guarantee Trustee being removed may petition any court of competent jurisdiction for the appointment of a Successor Guarantee Trustee. (c) The Guarantee Trustee appointed hereunder shall hold office until a Successor Guarantee Trustee shall have been appointed or until its removal or resignation. The Guarantee Trustee may resign from office (without need for prior or subsequent accounting) by an instrument in writing executed by the Guarantee Trustee and delivered to the Guarantor, which resignation shall not take effect until a Successor Guarantee Trustee has been appointed and has accepted such appointment by instrument in writing executed by such Successor Guarantee Trustee and delivered to the Guarantor and the resigning Guarantee Trustee. (d) If no Successor Guarantee Trustee shall have been appointed and accepted appointment as provided in this Section 4.2 within 60 days after delivery to the Guarantor of an instrument of resignation, the resigning Guarantee Trustee may petition, at the expense of the Guarantor, any court of competent jurisdiction for appointment of a Successor Guarantee Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Successor Guarantee Trustee. ARTICLE V. GUARANTEE SECTION 5.1. Guarantee. The Guarantor irrevocably and unconditionally agrees to pay in full to the Holders the Guarantee Payments (without duplication of amounts theretofore paid by or on behalf of the Issuer), as and when due, regardless of any defense, right of set-off or counterclaim which the Issuer may have or assert. The Guarantor's obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by the Guarantor to the Holders or by causing the Issuer to pay such amounts to the Holders. SECTION 5.2. Waiver of Notice and Demand. The Guarantor hereby waives notice of acceptance of the Guarantee Agreement and of any liability to which it applies or may apply, presentment, demand for payment, any right to require a 14 10 proceeding first against the Guarantee Trustee, Issuer or any other Person before proceeding against the Guarantor, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. SECTION 5.3. Obligations Not Affected. The obligations, covenants, agreements and duties of the Guarantor under this Guarantee Agreement shall in no way be affected or impaired by reason of the happening from time to time of any of the following: (a) the release or waiver, by operation of law or otherwise, of the performance or observance by the Issuer of any express or implied agreement, covenant, term or condition relating to the Securities to be performed or observed by the Issuer; (b) the extension of time for the payment by the Issuer of all or any portion of the Distributions (other than an extension of time for payment of Distributions that results from the extension of any interest payment period on the Debentures as provided in the Indenture), Redemption Price, Liquidation Distribution or any other sums payable under the terms of the Securities or the extension of time for the performance of any other obligation under, arising out of, or in connection with, the Securities; (c) any failure, omission, delay or lack of diligence on the part of the Holders to enforce, assert or exercise any right, privilege, power or remedy conferred on the Holders pursuant to the terms of the Securities, or any action on the part of the Issuer granting indulgence or extension of any kind; (d) the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Issuer or any of the assets of the Issuer; (e) any invalidity of, or defect or deficiency in, the Securities; (f) the settlement or compromise of any obligation guaranteed hereby or hereby incurred; or (g) any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a guarantor, it being the intent of this Section 5.3 that the obligations of the Guarantor hereunder shall be absolute and unconditional under any and all circumstances. There shall be no obligation of the Holders to give notice to, or obtain the consent of, the Guarantor with respect to the happening of any of the foregoing. SECTION 5.4. Rights of Holders. The Guarantor expressly acknowledges that: (i) this Guarantee Agreement will be deposited with the Guarantee Trustee to be held for the benefit of the Holders; (ii) the Guarantee Trustee has the right to enforce this Guarantee Agreement on behalf of the Holders; (iii) the Holders of a Majority in liquidation preference of the Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee in respect of this 15 11 Guarantee Agreement or exercising any trust or power conferred upon the Guarantee Trustee under this Guarantee Agreement; and (iv) any Holder may institute a legal proceeding directly against the Guarantor to enforce its rights under this Guarantee Agreement, without first instituting a legal proceeding against the Guarantee Trustee, the Issuer or any other Person. SECTION 5.5. Guarantee of Payment. This Guarantee Agreement creates a guarantee of payment and not of collection. This Guarantee Agreement will not be discharged except by payment of the Guarantee Payments in full (without duplication of amounts theretofore paid by the Issuer) or upon distribution of Debentures to Holders as provided in the Trust Agreement. SECTION 5.6. Subrogation. The Guarantor shall be subrogated to all (if any) rights of the Holders against the Issuer in respect of any amounts paid to the Holders by the Guarantor under this Guarantee Agreement and shall have the right to waive payment by the Issuer pursuant to Section 5.1; provided, however, that the Guarantor shall not (except to the extent required by mandatory provisions of law) be entitled to enforce or exercise any rights which it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this Guarantee Agreement, if, at the time of any such payment, any amounts are due and unpaid under this Guarantee Agreement. If any amount shall be paid to the Guarantor in violation of the preceding sentence, the Guarantor agrees to hold such amount in trust for the Holders and to pay over such amount to the Holders. SECTION 5.7. Independent Obligations. The Guarantor acknowledges that its obligations hereunder are independent of the obligations of the Issuer with respect to the Securities and that the Guarantor shall be liable as principal and as debtor hereunder to make Guarantee Payments pursuant to the terms of this Guarantee Agreement notwithstanding the occurrence of any event referred to in subsections (a) through (g), inclusive, of Section 5.3 hereof. ARTICLE VI. COVENANTS AND SUBORDINATION SECTION 6.1. Subordination. The obligations of the Guarantor under this Guarantee Agreement will constitute unsecured obligations of the Guarantor and will rank subordinate and junior in right of payment to all Senior Debt (as defined in the Indenture) of the Guarantor, except those made pari passu or subordinate to such obligations expressly by their terms. in the same manner as set forth in Article XIII of the Indenture. SECTION 6.2. Pari Passu Guarantees. The obligations of the Guarantor under this Guarantee Agreement shall rank pari passu with the obligations of the Guarantor under any similar Guarantee Agreements issued by the Guarantor on behalf of the holders of preferred securities issued by any Trust (as defined in the Indenture). 16 12 * ARTICLE VII. TERMINATION SECTION 7.1. Termination. This Guarantee Agreement shall terminate and be of no further force and effect upon (i) full payment of the Redemption Price of all Securities, (ii) the distribution of Debentures to the Holders in exchange for all of the Securities or (iii) full payment of the amounts payable in accordance with the Trust Agreement upon liquidation of the Issuer. Notwithstanding the foregoing, this Guarantee Agreement will continue to be effective or will be reinstated, as the case may be, if at any time any Holder must restore payment of any sums paid with respect to Securities or this Guarantee Agreement. ARTICLE VIII. MISCELLANEOUS SECTION 8.1. Successors and Assigns. All guarantees and agreements contained in this Guarantee Agreement shall bind the successors, assigns, receivers, trustees and representatives of the Guarantor and shall inure to the benefit of the Holders of the Securities then outstanding. Except in connection with a consolidation, merger or sale involving the Guarantor that is permitted under Article VIII of the Indenture and pursuant to which the successor or assignee agrees in writing to perform the Guarantor's obligations hereunder, the Guarantor shall not assign its obligations hereunder. SECTION 8.2. Amendments. Except with respect to any changes which do not adversely affect the rights of the Holders or the Guarantee Trustee in any material respect (in which case no consent of the Holders or the Guarantee Trustee, as the case may be, will be required), this Guarantee Agreement may only be amended with the prior approval of the Holders of not less than a Majority in Liquidation Amount of all the outstanding Securities and of the Guarantee Trustee. The provisions of Article VI of the Trust Agreement concerning meetings of the Holders shall apply to the giving of such approval. SECTION 8.3. Notices. Any notice, request or other communication required or permitted to be given hereunder shall be in writing, duly signed by the party giving such notice, and delivered, telecopied or mailed by first class mail as follows: (a) if given to the Guarantor, to the address set forth below or such other address, facsimile number or to the attention of such other Person as the Guarantor may give notice to the Holders: 17 13 The Chase Manhattan Corporation 270 Park Avenue New York, New York 10017 Facsimile No.: 212-270-1604 Attention: Treasurer (b) if given to the Issuer, in care of the Guarantee Trustee, at the Issuer's (and the Guarantee Trustee's) address set forth below or such other address as the Guarantee Trustee on behalf of the Issuer may give notice to the Holders: Chase Capital II c/o The Chase Manhattan Corporation 270 Park Avenue New York, New York 10017 Facsimile No.: 212-270-1604 Attention: Treasurer with a copy to: The Bank of New York 101 Barclay Street, Floor 21 West New York, New York 10286 Facsimile No.: 212-815-5915 Attention: Corporate Trust Administration (c) if given to any Holder, at the address set forth on the books and records of the Issuer. All notices hereunder shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid, except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. SECTION 8.4. Benefit. This Guarantee Agreement is solely for the benefit of the Holders and is not separately transferable from the Securities. SECTION 8.5. Interpretation. In this Guarantee Agreement, unless the context otherwise requires: (a) capitalized terms used in this Guarantee Agreement but not defined in the preamble hereto have the respective meanings assigned to them in Section 1.1; 18 14 (b) a term defined anywhere in this Guarantee Agreement has the same meaning throughout; (c) all references to "the Guarantee Agreement" or "this Guarantee Agreement" are to this Guarantee Agreement as modified, supplemented or amended from time to time; (d) all references in this Guarantee Agreement to Articles and Sections are to Articles and Sections of this Guarantee Agreement unless otherwise specified; (e) a term defined in the Trust Indenture Act has the same meaning when used in this Guarantee Agreement unless otherwise defined in this Guarantee Agreement or unless the context otherwise requires; (f) a reference to the singular includes the plural and vice versa; and (g) the masculine, feminine or neuter genders used herein shall include the masculine, feminine and neuter genders. SECTION 8.6. Governing Law. THIS GUARANTEE AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF. 19 15 This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. THIS GUARANTEE AGREEMENT is executed as of the day and year first above written. THE CHASE MANHATTAN CORPORATION By: /s/ Deborah L. Duncan ------------------------------ Name: Deborah L. Duncan Title: Treasurer THE BANK OF NEW YORK as Guarantee Trustee By: /s/ Paul J. Schmalzel ------------------------------ Name: Paul J. Schmalzel Title: Assistant Treasurer EX-4.9 4 AMENDED AND RESTATED TRUST AGREEMENT 1 Exhibit 4.9 AMENDED AND RESTATED TRUST AGREEMENT among THE CHASE MANHATTAN CORPORATION, as Depositor, THE BANK OF NEW YORK, as Property Trustee, THE BANK OF NEW YORK (DELAWARE), as Delaware Trustee, THE ADMINISTRATIVE TRUSTEES NAMED HEREIN, and THE SEVERAL HOLDERS (AS DEFINED HEREIN) Dated as of January 24, 1997 CHASE CAPITAL II 2 CHASE CAPITAL II Certain Sections of this Trust Agreement relating to Sections 310 through 318 of the Trust Indenture Act of 1939: Trust Indenture Trust Agreement Act Section Section - --------------- --------------- (Section) 310 (a)(1)......................................... 8.7 (a)(2)......................................... 8.7 (a)(3)......................................... 8.9 (a)(4)......................................... 2.7(a)(ii) (b)............................................ 8.8 (Section) 311 (a)............................................ 8.13 (b)............................................ 8.13 (Section) 312 (a)............................................ 5.7 (b)............................................ 5.7 (c)............................................ 5.7 (Section) 313 (a)............................................ 8.14(a) (a)(4)......................................... 8.14(b) (b)............................................ 8.14(b) (c)............................................ 10.9 (d)............................................ 8.14(c) (Section) 314 (a)............................................ 8.15 (b)............................................ Not Applicable (c)(1)......................................... 8.16 (c)(2)......................................... 8.16 (c)(3)......................................... Not Applicable (d)............................................ Not Applicable (e)............................................ 1.1, 8.16 (Section) 315 (a)............................................ 8.1(a), 8.3(a) (b)............................................ 8.2, 10.9 (c)............................................ 8.1(a) (d)............................................ 8.1, 8.3 (e)............................................ Not Applicable (Section) 316 (a)............................................ Not Applicable (a)(1)(A)...................................... Not Applicable (a)(1)(B)...................................... Not Applicable (a)(2)......................................... Not Applicable (b)............................................ 5.14 (c)............................................ 6.7 (Section) 317 (a)(1)......................................... Not Applicable (a)(2)......................................... Not Applicable (b)............................................ 5.9 (Section) 318 (a)............................................ 10.11 3 Trust Indenture Trust Agreement Act Section Section - --------------- --------------- Note: This reconciliation and tie sheet shall not, for any purpose, be deemed to be a part of the Trust Agreement. 4 TABLE OF CONTENTS ARTICLE I DEFINED TERMS............................. 1 SECTION 1.1 Definitions. ............................................. 1 ARTICLE II CONTINUATION OF THE TRUST....................... 10 SECTION 2.1 Name. .................................................... 10 SECTION 2.2 Office of the Delaware Trustee; Principal Place of Business. ...................................................... 10 SECTION 2.3 Initial Contribution of Trust Property; Organizational Expenses. ...................................................... 10 SECTION 2.4 Issuance of the Capital Securities. ...................... 10 SECTION 2.5 Issuance of the Common Securities; Subscription and Purchase of Debentures. ........................................ 10 SECTION 2.6 Declaration of Trust. .................................... 11 SECTION 2.7 Authorization to Enter into Certain Transactions. ........ 11 SECTION 2.8 Assets of Trust. ......................................... 14 SECTION 2.9 Title to Trust Property. ................................. 14 ARTICLE III PAYMENT ACCOUNT............................ 15 SECTION 3.1 Payment Account. ......................................... 15 ARTICLE IV DISTRIBUTIONS; REDEMPTION....................... 15 SECTION 4.1 Distributions. ........................................... 16 SECTION 4.2 Redemption. .............................................. 17 SECTION 4.3 Subordination of Common Securities. ...................... 18 SECTION 4.4 Payment Procedures. ...................................... 19 SECTION 4.5 Tax Returns and Reports. ................................. 19 SECTION 4.6 Payment of Expenses of the Trust. ........................ 19 SECTION 4.7 Payments under Indenture or Pursuant to Direct Actions. .. 19 ARTICLE V TRUST SECURITIES CERTIFICATES..................... 19 SECTION 5.1 Initial Ownership. ....................................... 19 SECTION 5.2 The Trust Securities Certificates. ....................... 19 SECTION 5.3 Execution and Delivery of Trust Securities Certificates. . 20 SECTION 5.4 Registration of Transfer and Exchange of Capital Securities Certificates. ....................................... 20 SECTION 5.5 Mutilated, Destroyed, Lost or Stolen Trust Securities Certificates. .................................................. 21 SECTION 5.6 Persons Deemed Securityholders. .......................... 21 SECTION 5.7 Access to List of Securityholders' Names and Addresses. .. 22 i 5 PAGE SECTION 5.8 Maintenance of Office or Agency. ......................... 22 SECTION 5.9 Appointment of Paying Agent. ............................. 22 SECTION 5.10 Ownership of Common Securities by Depositor. ............ 23 SECTION 5.11 Book-Entry Capital Securities Certificates; Common Securities Certificate. ........................................ 23 SECTION 5.12 Notices to Clearing Agency. ............................. 24 SECTION 5.13 Definitive Capital Securities Certificates. ............. 24 SECTION 5.14 Rights of Securityholders. .............................. 24 SECTION 5.15 CUSIP Numbers. .......................................... 26 ARTICLE VI ACTS OF SECURITYHOLDERS; MEETINGS; VOTING............... 27 SECTION 6.1 Limitations on Voting Rights. ............................ 27 SECTION 6.2 Notice of Meetings. ...................................... 27 SECTION 6.3 Meetings of Capital Securityholders. ..................... 28 SECTION 6.4 Voting Rights. ........................................... 28 SECTION 6.5 Proxies, etc. ............................................ 28 SECTION 6.6 Securityholder Action by Written Consent. ................ 29 SECTION 6.7 Record Date for Voting and Other Purposes. ............... 29 SECTION 6.8 Acts of Securityholders. ................................. 29 SECTION 6.9 Inspection of Records. ................................... 30 ARTICLE VII REPRESENTATIONS AND WARRANTIES..................... 30 SECTION 7.1 Representations and Warranties of the Property Trustee and the Delaware. .............................................. 30 SECTION 7.2 Representations and Warranties of Depositor. ............. 31 ARTICLE VIII THE TRUSTEES............................. 32 SECTION 8.1 Certain Duties and Responsibilities. ..................... 32 SECTION 8.2 Certain Notices. ......................................... 33 SECTION 8.3 Certain Rights of Property Trustee. ...................... 33 SECTION 8.4 Not Responsible for Recitals or Issuance of Securities. .. 35 SECTION 8.5 May Hold Securities. ..................................... 35 SECTION 8.6 Compensation; Indemnity; Fees. ........................... 36 SECTION 8.7 Corporate Property Trustee Required; Eligibility of Trustees. ...................................................... 37 SECTION 8.8 Conflicting Interests. ................................... 37 SECTION 8.9 Co-Trustees and Separate Trustee. ........................ 37 SECTION 8.10 Resignation and Removal; Appointment of Successor. ...... 39 SECTION 8.11 Acceptance of Appointment by Successor. ................. 40 SECTION 8.12 Merger, Conversion, Consolidation or Succession to Business. ...................................................... 40 SECTION 8.13 Preferential Collection of Claims Against Depositor or Trust. ...................................................... 41 SECTION 8.14 Reports by Property Trustee. ............................ 41 SECTION 8.15 Reports to the Property Trustee. ........................ 42 SECTION 8.16 Evidence of Compliance with Conditions Precedent. ....... 42 6 PAGE SECTION 8.17 Number of Trustees. ..................................... 42 SECTION 8.18 Delegation of Power. .................................... 42 ARTICLE IX TERMINATION, LIQUIDATION AND MERGER.................. 43 SECTION 9.1 Termination Upon Expiration Date. ........................ 43 SECTION 9.2 Early Termination. ....................................... 43 SECTION 9.3 Termination. ............................................. 43 SECTION 9.4 Liquidation. ............................................. 44 SECTION 9.5 Mergers, Consolidations, Amalgamations or Replacements of the Trust. .................................................. 45 ARTICLE X MISCELLANEOUS PROVISIONS........................ 46 SECTION 10.1 Limitation of Rights of Securityholders. ................ 46 SECTION 10.2 Liability of the Common Securityholder. ................. 46 SECTION 10.3 Amendment. .............................................. 46 SECTION 10.4 Separability. ........................................... 47 SECTION 10.6 Payments Due on Non-Business Day. ....................... 48 SECTION 10.7 Successors. ............................................. 48 SECTION 10.8 Headings. ............................................... 48 SECTION 10.9 Reports, Notices and Demands. ........................... 48 SECTION 10.10 Agreement Not to Petition. ............................. 49 SECTION 10.11 Trust Indenture Act; Conflict with Trust Indenture Act.. 49 SECTION 10.12 Acceptance of Terms of Trust Agreement, Guarantee and Indenture. ..................................................... 50 SECTION 10.13 Holders are Parties. ................................... 50 SECTION 10.14 Counterparts. .......................................... 51 7 AMENDED AND RESTATED TRUST AGREEMENT, dated as of January 24, 1997, among (i) The Chase Manhattan Corporation, a Delaware corporation (including any successors or assigns, the "Depositor"), (ii) The Bank of New York, a New York banking corporation, as property trustee (in each such capacity, the "Property Trustee" and, in its separate corporate capacity and not in its capacity as Property Trustee, the "Bank"), (iii) The Bank of New York (Delaware), a banking corporation organized under the laws of the State of Delaware, as Delaware trustee (the "Delaware Trustee"), (iv) Peter J. Tobin, an individual, and Deborah L. Duncan, an individual, each of whose address is c/o The Chase Manhattan Corporation, 270 Park Avenue, New York, NY 10017 (each an "Administrative Trustee" and collectively the "Administrative Trustees") (the Property Trustee, the Delaware Trustee and the Administrative Trustees referred to collectively as the "Trustees") and (v) the several Holders, as hereinafter defined. WITNESSETH WHEREAS, the Depositor and the Delaware Trustee have heretofore duly declared and established a business trust pursuant to the Delaware Business Trust Act by the entering into that certain Trust Agreement, dated as of October 24, 1996 (the "Original Trust Agreement"), and by the execution and filing with the Secretary of State of the State of Delaware of the Certificate of Trust, filed on October 28, 1996, and the Restated Certificate of Trust, filed on November 12, 1996, both attached as parts of Exhibit A (together the "Certificate of Trust"); and WHEREAS, the Depositor and the Trustees desire to amend and restate the Original Trust Agreement in its entirety as set forth herein to provide for, among other things, (i) the issuance of the Common Securities by the Trust to the Depositor, (ii) the issuance and sale of the Capital Securities by the Trust pursuant to the Underwriting Agreement and (iii) the acquisition by the Trust from the Depositor of all of the right, title and interest in the Debentures; NOW THEREFORE, in consideration of the agreements and obligations set forth herein and for other good and valuable consideration, the sufficiency of which is hereby acknowledged, each party, for the benefit of the other parties and for the benefit of the Securityholders, hereby amends and restates the Original Trust Agreement in its entirety and agrees as follows: ARTICLE I DEFINED TERMS SECTION 1.1 Definitions. For all purposes of this Trust Agreement, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; 8 2 (b) all other terms used herein that are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (c) unless the context otherwise requires, any reference to an "Article" or a "Section" refers to an Article or a Section, as the case may be, of this Trust Agreement; and (d) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Trust Agreement as a whole and not to any particular Article, Section or other subdivision. "Act" has the meaning specified in Section 6.8. "Additional Amount" means, with respect to Trust Securities of a given Liquidation Amount and/or a given period, the amount of Additional Interest (as defined in the Indenture) paid by the Depositor on a Like Amount of Debentures for such period. "Administrative Trustee" means each of the individuals identified as an "Administrative Trustee" in the preamble to this Trust Agreement solely in such individual's capacity as Administrative Trustee of the Trust formed and continued hereunder and not in such individual's individual capacity, or such Administrative Trustee's successor in interest in such capacity, or any successor trustee appointed as herein provided. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Bank" has the meaning specified in the preamble to this Trust Agreement. "Bankruptcy Event" means, with respect to any Person: (a) the entry of a decree or order by a court having jurisdiction in the premises judging such Person a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjudication or composition of or in respect of such Person under any applicable federal or state bankruptcy, insolvency, reorganization or other similar law, or appointing a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of such Person or of any substantial part of its property or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days; or (b) the institution by such Person of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable federal or state bankruptcy, insolvency, reorganization or other similar law, or the consent by it to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or similar official) of such Person or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its 9 3 inability to pay its debts generally as they become due and its willingness to be adjudicated a bankrupt, or the taking of corporate action by such Person in furtherance of any such action. "Bankruptcy Laws" has the meaning specified in Section 10.10. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Depositor to have been duly adopted by the Depositor's Board of Directors, or such committee of the Board of Directors or officers of the Depositor to which authority to act on behalf of the Board of Directors has been delegated, and to be in full force and effect on the date of such certification, and delivered to the Trustees. "Book-Entry Capital Securities Certificates" means a beneficial interest in the Capital Securities Certificates, ownership and transfers of which shall be made through book entries by a Clearing Agency as described in Section 5.11. "Business Day" means a day other than (a) a Saturday or Sunday, (b) a day on which banking institutions in The City of New York are authorized or required by law or executive order to remain closed, or (c) a day on which the Property Trustee's Corporate Trust Office or the Corporate Trust Office of the Debenture Trustee is closed for business. "Capital Security" means an undivided beneficial interest in the assets of the Trust, having a Liquidation Amount of $1,000 and having the rights provided therefor in this Trust Agreement, including the right to receive Distributions and a Liquidation Distribution as provided herein. "Capital Securities Certificate" means a certificate evidencing ownership of Capital Securities, substantially in the form attached as Exhibit D. "Capital Treatment Event" means the reasonable determination by the Depositor that, as a result of any amendment to, or change (including any proposed change) in, the laws (or any regulations thereunder) of the United States or any political subdivision thereof or therein, or as a result of any official or administrative pronouncement or action or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or such proposed change, pronouncement, action or decision is announced on or after the date of issuance of the Capital Securities hereunder, there is more than an insubstantial risk that the Depositor will not be entitled to treat an amount equal to the Liquidation Amount of the Capital Securities as "Tier 1 Capital" (or the then equivalent thereof) for purposes of the capital adequacy guidelines of the Federal Reserve, as then in effect and applicable to the Depositor. "Certificate Depository Agreement" means the agreement among the Trust, the Depositor and The Depository Trust Company, as the initial Clearing Agency, dated as of the Closing Date, relating to the Trust Securities Certificates, substantially in the form attached as Exhibit B, as the same may be amended and supplemented from time to time. "Certificate of Trust" has the meaning specified in the recitals hereof, as amended from time to time. 10 4 "Clearing Agency" means an organization registered as a "clearing agency" pursuant to Section 17A of the Securities Exchange Act of 1934, as amended. The Depository Trust Company will be the initial Clearing Agency. "Clearing Agency Participant" means a broker, dealer, bank, other financial institution or other Person for whom from time to time a Clearing Agency effects book-entry transfers and pledges of securities deposited with the Clearing Agency. "Closing Date" means the date of execution and delivery of this Trust Agreement. "Code" means the Internal Revenue Code of 1986, as amended. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, as amended, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Common Securities Certificate" means a certificate evidencing ownership of Common Securities, substantially in the form attached as Exhibit C. "Common Security" means an undivided beneficial interest in the assets of the Trust, having a Liquidation Amount of $1,000 and having the rights provided therefor in this Trust Agreement, including the right to receive Distributions and a Liquidation Distribution as provided herein. "Corporate Trust Office" means (i) when used with respect to the Property Trustee, the principal office of the Property Trustee located in New York, New York, and (ii) when used with respect to the Debenture Trustee, the principal office of the Debenture Trustee located in New York, New York. "Debenture Event of Default" means an "Event of Default" as defined in the Indenture. "Debenture Maturity Date" means the date specified pursuant to the terms of the Debentures as the date on which the principal of the Debentures is due and payable, as such date may be shortened pursuant to the terms of the Debentures. "Debenture Redemption Date" means, with respect to any Debentures to be redeemed under the Indenture, the date fixed for redemption under the Indenture. "Debenture Tax Event" means a "Tax Event" as defined in the Indenture. "Debenture Trustee" means The Bank of New York, a New York banking corporation, as trustee under the Indenture, and any successor trustee appointed as provided therein. "Debentures" means the $515,464,000 aggregate principal amount of the Depositor's Global Floating Rate Junior Subordinated Deferrable Interest Debentures, Series B, issued pursuant to the Indenture. 11 5 "Definitive Capital Securities Certificates" means either or both (as the context requires) of (a) Capital Securities Certificates issued as Book-Entry Capital Securities Certificates as provided in Section 5.11(a) and (b) Capital Securities Certificates issued in certificated, fully registered form as provided in Section 5.13. "Delaware Business Trust Act" means Chapter 38 of Title 12 of the Delaware Code, 12 Del. C. 3801, et seq., as it may be amended from time to time. "Delaware Trustee" means the Person identified as the "Delaware Trustee" in the preamble to this Trust Agreement solely in its capacity as Delaware Trustee of the Trust formed and continued hereunder and not in its individual capacity, or its successor in interest in such capacity, or any successor trustee appointed as herein provided. "Depositor" has the meaning specified in the preamble to this Trust Agreement. "Distribution Date" has the meaning specified in Section 4.1(a). "Distributions" means amounts payable in respect of the Trust Securities as provided in Section 4.1. "Early Termination Event" has the meaning specified in Section 9.2. "Event of Default" means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) the occurrence of a Debenture Event of Default; or (b) default by the Property Trustee in the payment of any Distribution when it becomes due and payable, and continuation of such default for a period of 30 days; or (c) default by the Property Trustee in the payment of any Redemption Price of any Trust Security when it becomes due and payable; or (d) default in the performance, or breach, in any material respect, of any covenant or warranty of the Trustees in this Trust Agreement (other than a covenant or warranty a default in the performance or breach of which is dealt with in clause (b) or (c) above) and continuation of such default or breach for a period of 90 days after there has been given, by registered or certified mail, to the defaulting Trustee or Trustees by the Holders of at least 25% in aggregate Liquidation Amount of the Outstanding Capital Securities, a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (e) the occurrence of a Bankruptcy Event with respect to the Property Trustee and the failure by the Depositor to appoint a successor Property Trustee within 90 days thereof. 12 6 "Expiration Date" has the meaning specified in Section 9.1. "Federal Reserve" means the Board of Governors of the Federal Reserve System, as from time to time constituted, or if at any time after the execution of this Trust Agreement the Federal Reserve is not existing and performing the duties now assigned to it, then the body performing such duties at such time. "Guarantee" means the Guarantee Agreement executed and delivered by the Depositor and The Bank of New York, as trustee, contemporaneously with the execution and delivery of this Trust Agreement, for the benefit of the Holders of the Trust Securities, as amended from time to time. "Indenture" means the Junior Subordinated Indenture, dated as of December 1, 1996, between the Depositor and the Debenture Trustee, as trustee, as amended or supplemented from time to time. "Lien" means any lien, pledge, charge, encumbrance, mortgage, deed of trust, adverse ownership interest, hypothecation, assignment, security interest or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever. "Like Amount" means (a) with respect to a redemption of Trust Securities, Trust Securities having a Liquidation Amount equal to the principal amount of Debentures to be contemporaneously redeemed in accordance with the Indenture the proceeds of which will be used to pay the Redemption Price of such Trust Securities, and (b) with respect to a distribution of Debentures to Holders of Trust Securities in connection with a dissolution or liquidation of the Trust, Debentures having a principal amount equal to the Liquidation Amount of the Trust Securities of the Holder to whom such Debentures are distributed. "Liquidation Amount" means the stated amount of $1,000 per Trust Security. "Liquidation Date" means the date on which Debentures are to be distributed to Holders of Trust Securities in connection with a termination and liquidation of the Trust pursuant to Section 9.4(a). "Liquidation Distribution" has the meaning specified in Section 9.4(d). "1940 Act" means the Investment Company Act of 1940, as amended. "Officers' Certificate" means a certificate signed by the Chairman and Chief Executive Officer, President or a Vice President, and by the Treasurer, an Associate Treasurer, an Assistant Treasurer, the Controller, the Secretary or an Assistant Secretary, of the Depositor, and delivered to the appropriate Trustee. One of the officers signing an Officers' Certificate given pursuant to Section 8.16 shall be the principal executive, financial or accounting officer of the Depositor. Any Officers' Certificate delivered with respect to compliance with a condition or covenant provided for in this Trust Agreement shall include: (a) a statement that each officer signing the Officers' Certificate has read the covenant or condition and the definitions relating thereto; 13 7 (b) a brief statement of the nature and scope of the examination or investigation undertaken by each officer in rendering the Officers' Certificate; (c) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such officer, such condition or covenant has been complied with. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Trust, the Property Trustee or the Depositor, and who shall be reasonably acceptable to the Property Trustee. "Original Trust Agreement" has the meaning specified in the recitals to this Trust Agreement. "Outstanding", when used with respect to Trust Securities, means, as of the date of determination, all Trust Securities theretofore executed and delivered under this Trust Agreement, except: (a) Trust Securities theretofore cancelled by the Securities Registrar or delivered to the Securities Registrar for cancellation; (b) Trust Securities for whose payment or redemption money in the necessary amount has been theretofore deposited with the Property Trustee or any Paying Agent for the Holders of such Trust Securities; provided that, if such Trust Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Trust Agreement; and (c) Trust Securities which have been paid or in exchange for or in lieu of which other Capital Securities have been executed and delivered pursuant to this Trust Agreement, including pursuant to Sections 5.4, 5.5, 5.11 and 5.13; provided, however, that in determining whether the Holders of the requisite Liquidation Amount of the Outstanding Capital Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Capital Securities owned by the Depositor, any Trustee or any Affiliate of the Depositor or any Trustee shall be disregarded and deemed not to be Outstanding, except that (a) in determining whether any Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Capital Securities that such Trustee actually knows to be so owned shall be so disregarded and (b) the foregoing shall not apply at any time when all of the outstanding Capital Securities are owned by the Depositor, one or more of the Trustees and/or any such Affiliate. Capital Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Administrative Trustees the pledgee's right so to act with respect to such Capital Securities and that the pledgee is not the Depositor or any Affiliate of the Depositor. 14 8 "Owner" means each Person who is the beneficial owner of a Book-Entry Capital Securities Certificate as reflected in the records of the Clearing Agency or, if a Clearing Agency Participant is not the beneficial owner, then as reflected in the records of a Person maintaining an account with such Clearing Agency (directly or indirectly, in accordance with the rules of such Clearing Agency). "Paying Agent" means any paying agent or co-paying agent appointed pursuant to Section 5.9 and shall initially be the Bank. "Payment Account" means a segregated non-interest-bearing corporate trust account maintained by the Property Trustee with the Bank in its corporate trust department for the benefit of the Securityholders in which all amounts paid in respect of the Debentures will be held and from which the Property Trustee, through the Paying Agent, shall make payments to the Securityholders in accordance with Sections 4.1 and 4.2. "Person" means any individual, corporation, partnership, joint venture, trust, limited liability company or corporation, unincorporated organization or government or any agency or political subdivision thereof. "Property Trustee" means the Person identified as the "Property Trustee" in the preamble to this Trust Agreement solely in its capacity as Property Trustee of the Trust heretofore created and continued hereunder and not in its individual capacity, or its successor in interest in such capacity, or any successor property trustee appointed as herein provided. "Redemption Date" means, with respect to any Trust Security to be redeemed, the date fixed for such redemption by or pursuant to this Trust Agreement; provided that each Debenture Redemption Date and the Debenture Maturity Date shall be a Redemption Date for a Like Amount of Trust Securities. "Redemption Price" means, with respect to any Trust Security, the Liquidation Amount of such Trust Security, plus accumulated and unpaid Distributions to the Redemption Date, paid by the Depositor upon the concurrent redemption of a Like Amount of Debentures, allocated on a pro rata basis (based on Liquidation Amounts) among the Trust Securities. "Relevant Trustee" shall have the meaning specified in Section 8.10. "Securities Register" and "Securities Registrar" have the respective meanings specified in Section 5.4. "Securityholder" or "Holder" means a Person in whose name a Trust Security or Trust Securities is registered in the Securities Register; any such Person shall be a beneficial owner within the meaning of the Delaware Business Trust Act; provided, however, that in determining whether the Holders of the requisite amount of Capital Securities have voted on any matter provided for in this Trust Agreement, then for the purpose of any such determination, so long as Definitive Capital Securities Certificates have not been issued, the term Securityholders or Holders as used herein shall refer to the Owners. 15 9 "Tax Event" means the receipt by the Trust of an Opinion of Counsel experienced in such matters to the effect that, as a result of any amendment to, or change (including any announced proposed change) in, the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein, or as a result of any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or which proposed change, pronouncement or decision is announced on or after the date of issuance of the Capital Securities under this Trust Agreement, there is more than an insubstantial risk that (i) the Trust is, or will be within 90 days after the date of such Opinion of Counsel, subject to United States federal income tax with respect to income received or accrued on the Debentures, (ii) interest payable by the Depositor on the Debentures is not, or within 90 days after the date of such Opinion of Counsel, will not be, deductible by the Depositor, in whole or in part, for United States federal income tax purposes or (iii) the Trust is, or will be within 90 days after the date of such Opinion of Counsel, subject to more than a de minimis amount of other taxes, duties or other governmental charges. "Trust" means the Delaware business trust created and continued hereby and identified on the cover page to this Trust Agreement. "Trust Agreement" means this Amended and Restated Trust Agreement, as the same may be modified, amended or supplemented in accordance with the applicable provisions hereof, including (i) all exhibits hereto and (ii) for all purposes of this Trust Agreement and any such modification, amendment or supplement, the provisions of the Trust Indenture Act that are deemed to be a part of and govern this Trust Agreement and any such modification, amendment or supplement, respectively. "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed; provided, however, that in the event the Trust Indenture Act of 1939 is amended after such date, "Trust Indenture Act" means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended. "Trust Property" means (a) the Debentures, (b) any cash on deposit in, or owing to, the Payment Account and (c) all proceeds and rights in respect of the foregoing. "Trust Securities Certificate" means any one of the Common Securities Certificates or the Capital Securities Certificates. "Trust Security" means any one of the Common Securities or the Capital Securities. "Trustees" means, collectively, the Property Trustee, the Delaware Trustee and the Administrative Trustees. "Underwriting Agreement" means the Pricing Agreement, dated as of January 16, 1997, among the Trust, the Depositor and Goldman, Sachs & Co.; Chase Securities Inc.; Merrill Lynch, Pierce, Fenner & Smith Incorporated; Bear, Stearns & Co. Inc.; Credit Suisse First Boston Corporation; Lehman Brothers Inc.; Morgan Stanley & Co. Incorporated; Salomon Brothers Inc; Smith Barney Inc. and UBS Securities LLC, the underwriters named therein, incorporating the Standard Provisions dated January 16, 1997. 16 10 ARTICLE II CONTINUATION OF THE TRUST SECTION 2.1 Name. The Trust continued hereby shall be known as "Chase Capital II," as such name may be modified from time to time by the Administrative Trustees following written notice to the Holders of Trust Securities and the other Trustees, in which name the Trustees engage in the transactions contemplated hereby, make and execute contracts and other instruments on behalf of the Trust and sue and be sued. SECTION 2.2 Office of the Delaware Trustee; Principal Place of Business. The address of the Delaware Trustee in the State of Delaware is c/o The Bank of New York (Delaware), White Clay Center, Route 273, Newark, Delaware 19711, Attention: Corporate Trust Department, or such other address in the State of Delaware as the Delaware Trustee may designate by written notice to the Securityholders and the Depositor. The principal executive office of the Trust is c/o The Chase Manhattan Corporation, 270 Park Avenue, New York, NY 10017. SECTION 2.3 Initial Contribution of Trust Property; Organizational Expenses. The Property Trustee acknowledges receipt in trust from the Depositor in connection with the Original Trust Agreement of the sum of $10, which constituted the initial Trust Property. The Depositor shall pay organizational expenses of the Trust as they arise or shall, upon request of any Trustee, promptly reimburse such Trustee for any such expenses paid by such Trustee. The Depositor shall make no claim upon the Trust Property for the payment of such expenses. SECTION 2.4 Issuance of the Capital Securities. As of January 16, 1997, the Depositor, on behalf of the Trust and pursuant to the Original Trust Agreement, executed and delivered the Underwriting Agreement. Contemporaneously with the execution and delivery of this Trust Agreement, an Administrative Trustee, on behalf of the Trust, shall execute in accordance with Section 5.2 and deliver to the Underwriters named in the Underwriting Agreement Capital Securities Certificates, registered in the name of the nominee of the initial Clearing Agency, in an aggregate amount of 500,000 Capital Securities having an aggregate Liquidation Amount of $500,000,000, against receipt of an aggregate purchase price plus accrued distributions from January 24, 1997, if any, of such Capital Securities of $494,140,000 which amount such Administrative Trustee shall promptly deliver to the Property Trustee. SECTION 2.5 Issuance of the Common Securities; Subscription and Purchase of Debentures. Contemporaneously with the execution and delivery of this Trust Agreement, an Administrative Trustee, on behalf of the Trust, shall execute in accordance with Section 5.2 and deliver to the Depositor Common Securities Certificates, registered in the name of the Depositor, 17 11 in an aggregate amount of 15,464 Common Securities having an aggregate Liquidation Amount of $15,464,000 against payment by the Depositor of an aggregate purchase price therefor of $15,282,762, which amount such Administrative Trustee shall promptly deliver to the Property Trustee. Contemporaneously therewith, an Administrative Trustee, on behalf of the Trust, shall subscribe to and purchase from the Depositor Debentures, registered in the name of the Trust and having an aggregate principal amount equal to $515,464,000, and, in satisfaction of the purchase price plus accrued interest from January 24, 1997, if any, for such Debentures, the Property Trustee, on behalf of the Trust, shall deliver to the Depositor the sum of $509,422,762 (being the sum of the amounts delivered to the Property Trustee pursuant to (i) the second sentence of Section 2.4 and (ii) the first sentence of this Section 2.5). SECTION 2.6 Declaration of Trust. The exclusive purposes and functions of the Trust are (a) to issue and sell Trust Securities, (b) to use the proceeds from such sale to acquire the Debentures and (c) to engage in those activities necessary or incidental thereto. The Depositor hereby appoints the Trustees as trustees of the Trust, to have all the rights, powers and duties to the extent set forth herein, and the Trustees hereby accept such appointment. The Property Trustee hereby declares that it will hold the Trust Property in trust upon and subject to the conditions set forth herein for the benefit of the Trust and the Securityholders. The Administrative Trustees shall have all rights, powers and duties set forth herein and in accordance with applicable law with respect to accomplishing the purposes of the Trust. The Delaware Trustee shall not be entitled to exercise any powers, nor shall the Delaware Trustee have any of the duties and responsibilities, of the Property Trustee or the Administrative Trustees set forth herein. The Delaware Trustee shall be one of the Trustees of the Trust for the sole and limited purpose of fulfilling the requirements of Section 3807 of the Delaware Business Trust Act. SECTION 2.7 Authorization to Enter into Certain Transactions. (a) The Trustees shall conduct the affairs of the Trust in accordance with the terms of this Trust Agreement. Subject to the limitations set forth in paragraph (b) of this Section and Article VIII and in accordance with the following provisions (i) and (ii), the Trustees shall have the authority to enter into all transactions and agreements determined by the Trustees to be appropriate in exercising the authority, express or implied, otherwise granted to the Trustees under this Trust Agreement, and to perform all acts in furtherance thereof, including without limitation, the following: (i) As among the Trustees, each Administrative Trustee shall have the power and authority to act on behalf of the Trust with respect to the following matters: (A) the issuance and sale of the Trust Securities; (B) to cause the Trust to enter into, and to execute, deliver and perform on behalf of the Trust, the Certificate Depository Agreement and such other agreements as may be necessary or desirable in connection with the purposes and function of the Trust; (C) assisting in the registration of the Capital Securities under the Securities Act of 1933, as amended, and under state securities or blue sky laws, 18 12 and the qualification of this Trust Agreement as a trust indenture under the Trust Indenture Act; (D) assisting in the listing, if any, of the Capital Securities upon such national securities exchange or exchanges or automated quotation system or systems as shall be determined by the Depositor and the registration of the Capital Securities under the Securities Exchange Act of 1934, as amended, and the preparation and filing of all periodic and other reports and other documents pursuant to the foregoing; (E) the sending of notices (other than notices of default) and other information regarding the Trust Securities and the Debentures to the Securityholders in accordance with this Trust Agreement; (F) the appointment of a Paying Agent and Securities Registrar in accordance with this Trust Agreement; (G) registering transfer of the Trust Securities in accordance with this Trust Agreement; (H) to the extent provided in this Trust Agreement, the winding up of the affairs of and liquidation of the Trust and the execution and filing of the certificate of cancellation with the Secretary of State of the State of Delaware; (I) unless otherwise determined by the Depositor, the Property Trustee or the Administrative Trustees, or as otherwise required by the Delaware Business Trust Act or the Trust Indenture Act, to execute on behalf of the Trust (either acting alone or together with any or all of the Administrative Trustees) any documents that the Administrative Trustees have the power to execute pursuant to this Trust Agreement; and (J) the taking of any action incidental to the foregoing as the Trustees may from time to time determine is necessary or advisable to give effect to the terms of this Trust Agreement for the benefit of the Securityholders (without consideration of the effect of any such action on any particular Securityholder). (ii) As among the Trustees, the Property Trustee shall have the power, duty and authority to act on behalf of the Trust with respect to the following matters: (A) the establishment of the Payment Account; (B) the receipt of the Debentures; (C) the collection of interest, principal and any other payments made in respect of the Debentures in the Payment Account; (D) the distribution through the Paying Agent of amounts owed to the Securityholders in respect of the Trust Securities; 19 13 (E) the exercise of all of the rights, powers and privileges of a holder of the Debentures; (F) the sending of notices of default and other information regarding the Trust Securities and the Debentures to the Securityholders in accordance with this Trust Agreement; (G) the distribution of the Trust Property in accordance with the terms of this Trust Agreement; (H) to the extent provided in this Trust Agreement, the winding up of the affairs of and liquidation of the Trust and the execution and filing of the certificate of cancellation with the Secretary of State of the State of Delaware; and (I) except as otherwise provided in this Section 2.7(a)(ii), the Property Trustee shall have none of the duties, liabilities, powers or the authority of the Administrative Trustees set forth in Section 2.7(a)(i). (b) So long as this Trust Agreement remains in effect, the Trust (or the Trustees acting on behalf of the Trust) shall not undertake any business, activities or transaction except as expressly provided herein or contemplated hereby. In particular, the Trustees shall not (i) acquire any investments or engage in any activities not authorized by this Trust Agreement, (ii) sell, assign, transfer, exchange, mortgage, pledge, set-off or otherwise dispose of any of the Trust Property or interests therein, including to Securityholders, except as expressly provided herein, (iii) take any action that would cause the Trust to fail or cease to qualify as a "grantor trust" for United States federal income tax purposes, (iv) incur any indebtedness for borrowed money or issue any other debt, (v) take or consent to any action that would result in the placement of a Lien on any of the Trust Property, (vi) invest any proceeds received by the Trust from holding the Debentures, but shall distribute all such proceeds to Holders of Trust Securities pursuant to the terms of this Trust Agreement and of the Securities; (vii) acquire any assets other than the Trust Property, (viii) possess any power or otherwise act in such a way as to vary the Trust Property, (ix) possess any power or otherwise act in such a way as to vary the terms of the Securities in any way whatsoever (except to the extent expressly authorized in this Trust Agreement or by the terms of the Trust Securities) or (x) issue any securities or other evidences of beneficial ownership of, or beneficial interest in, the Trust other than the Trust Securities. The Administrative Trustees shall defend all claims and demands of all Persons at any time claiming any Lien on any of the Trust Property adverse to the interest of the Trust or the Securityholders in their capacity as Securityholders. (c) In connection with the issue and sale of the Capital Securities, the Depositor shall have the right and responsibility to assist the Trust with respect to, or effect on behalf of the Trust, the following (and any actions taken by the Depositor in furtherance of the following prior to the date of this Trust Agreement are hereby ratified and confirmed in all respects): (i) the preparation and filing by the Trust with the Commission and the execution on behalf of the Trust of one or more registration statements on the appropriate form in relation to the Capital Securities, including any amendments thereto; 20 14 (ii) the determination of the states in which to take appropriate action to qualify or register for sale all or part of the Capital Securities and the determination of any and all such acts, other than actions which must be taken by or on behalf of the Trust, and the advice to the Trustees of actions they must take on behalf of the Trust, and the preparation for execution and filing of any documents to be executed and filed by the Trust or on behalf of the Trust, as the Depositor deems necessary or advisable in order to comply with the applicable laws of any such states; (iii) the preparation for filing by the Trust and execution on behalf of the Trust of an application to the New York Stock Exchange or any other national stock exchange or the Nasdaq National Market or any other automated quotation system for listing upon notice of issuance of any Capital Securities and filing with such exchange or self-regulatory organization such notifications and documents as may be necessary from time to time to maintain such listing; (iv) the negotiation of the terms of, and the execution and delivery of, the Underwriting Agreement providing for the sale of the Capital Securities; and (v) the taking of any other actions necessary or desirable to carry out any of the foregoing activities. (d) Notwithstanding anything herein to the contrary, the Administrative Trustees are authorized and directed to conduct the affairs of the Trust and to operate the Trust so that the Trust will not be deemed to be an "investment company" required to be registered under the 1940 Act, or fail to be classified as a grantor trust for United States federal income tax purposes and so that the Debentures will be treated as indebtedness of the Depositor for United States federal income tax purposes. In this connection, the Depositor and the Administrative Trustees are authorized to take any action, not inconsistent with applicable law, the Certificate of Trust or this Trust Agreement, that each of the Depositor and any Administrative Trustee determines in its discretion to be necessary or desirable for such purposes, as long as such action does not adversely affect in any material respect the interests of the Holders of the Capital Securities. SECTION 2.8 Assets of Trust. The assets of the Trust shall consist solely of the Trust Property. SECTION 2.9 Title to Trust Property. Legal title to all Trust Property shall be vested at all times in the Property Trustee (in its capacity as such) and shall be held and administered by the Property Trustee for the benefit of the Trust and the Securityholders in accordance with this Trust Agreement. 21 15 ARTICLE III PAYMENT ACCOUNT SECTION 3.1 Payment Account. (a) On or prior to the Closing Date, the Property Trustee shall establish the Payment Account. The Property Trustee and any agent of the Property Trustee shall have exclusive control and sole right of withdrawal with respect to the Payment Account for the purpose of making deposits in and withdrawals from the Payment Account in accordance with this Trust Agreement. All monies and other property deposited or held from time to time in the Payment Account shall be held by the Property Trustee in the Payment Account for the exclusive benefit of the Securityholders and for distribution as herein provided, including (and subject to) any priority of payments provided for herein. (b) The Property Trustee shall deposit in the Payment Account, promptly upon receipt, all payments of principal of or interest or premium on, and any other payments or proceeds with respect to, the Debentures. Amounts held in the Payment Account shall not be invested by the Property Trustee. ARTICLE IV DISTRIBUTIONS; REDEMPTION SECTION 4.1 Distributions. (a) The Trust Securities represent undivided beneficial ownership interests in the Trust Property, and Distributions (including of Additional Amounts) will be made on the Trust Securities at the rate and on the dates that payments of interest (including of Additional Interest, as defined in the Indenture) are made on the Debentures. Accordingly: (i) Distributions on the Trust Securities shall be cumulative, and will accumulate whether or not there are funds of the Trust available for the payment of Distributions. Distributions shall accrue from January 24, 1997, and, except in the event (and to the extent) that the Depositor exercises its right to defer the payment of interest on the Debentures pursuant to the Indenture, shall be payable quarterly in arrears on February 1, May 1, August 1 and November 1 of each year, commencing on May 1, 1997. If any date on which a Distribution is otherwise payable on the Trust Securities is not a Business Day, then the payment of such Distribution shall be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) except that, if such Business Day is in the next succeeding calendar year, payment of such Distribution shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date (each date on which Distributions are payable in accordance with this Section 4.1(a), a "Distribution Date"). (ii) Assuming payments of interest on the Debentures are made when due (and before giving effect to Additional Amounts, if applicable), Distributions on the Trust 22 16 Securities shall be payable at the rate per annum provided for in the Debentures. The amount of Distributions payable for any period shall be computed on the basis of the actual number of days in the period (which number of actual days shall include the first day but exclude the last day of such period) divided by 360. The amount of Distributions payable for any period shall include the Additional Amounts, if any. (iii) Distributions on the Trust Securities shall be made by the Property Trustee from the Payment Account and shall be payable on each Distribution Date only to the extent that the Trust has funds then on hand and available in the Payment Account for the payment of such Distributions. (b) Distributions on the Trust Securities with respect to a Distribution Date shall be payable to the Holders thereof as they appear on the Securities Register for the Trust Securities on the relevant record date, which shall be one Business Day prior to such Distribution Date; provided, however, that in the event that the Capital Securities do not remain in book-entry-only form, the relevant record date shall be the 15th day of the month prior to the relevant Distribution Date (whether or not such record date is a Business Day). SECTION 4.2 Redemption. (a) On each Debenture Redemption Date and on the Debenture Maturity Date (which shall include the Stated Maturity in the case of a Maturity Advancement (as defined in the Debentures)), the Trust will be required to redeem a Like Amount of Trust Securities at the Redemption Price. (b) Notice of redemption shall be given by the Property Trustee by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date to each Holder of Trust Securities to be redeemed, at such Holder's address appearing in the Security Register. All notices of redemption shall state: (i) the Redemption Date; (ii) the Redemption Price; (iii) the CUSIP number; (iv) if less than all the Outstanding Trust Securities are to be redeemed, the identification and the total Liquidation Amount of the particular Trust Securities to be redeemed; (v) that on the Redemption Date the Redemption Price will become due and payable upon each such Trust Security to be redeemed and that Distributions thereon will cease to accrue on and after said date; and (vi) if the Capital Securities are no longer in book-entry-only form, the place and address where the Holders shall surrender their Capital Securities Certificates. 23 17 (c) The Trust Securities redeemed on each Redemption Date shall be redeemed at the Redemption Price with the proceeds from the contemporaneous redemption or payment at Debenture Maturity Date. Redemptions of the Trust Securities shall be made and the Redemption Price shall be payable on each Redemption Date only to the extent that the Trust has funds then on hand and available in the Payment Account for the payment of such Redemption Price. (d) If the Property Trustee gives a notice of redemption in respect of any Capital Securities, then, by 12:00 noon, New York City time, on the Redemption Date, subject to Section 4.2(c), the Property Trustee will, so long as the Capital Securities are in book-entry-only form, irrevocably deposit with the Clearing Agency for the Capital Securities funds sufficient to pay the applicable Redemption Price and will give such Clearing Agency irrevocable instructions and authority to pay the Redemption Price to the Holders thereof. If the Capital Securities are no longer in book-entry-only form, the Property Trustee, subject to Section 4.2(c), will irrevocably deposit with the Paying Agent funds sufficient to pay the applicable Redemption Price and will give the Paying Agent irrevocable instructions and authority to pay the Redemption Price to the Holders thereof upon surrender of their Capital Securities Certificates. Notwithstanding the foregoing, Distributions payable on or prior to the Redemption Date for any Trust Securities called for redemption shall be payable to the Holders of such Trust Securities as they appear on the Securities Register for the Trust Securities on the relevant record dates for the related Distribution Dates. If notice of redemption shall have been given and funds deposited as required, then upon the date of such deposit, all rights of Securityholders holding Trust Securities so called for redemption will cease, except the right of such Securityholders to receive the Redemption Price and any Distribution payable on or prior to the Redemption Date, but without interest thereon, and such Trust Securities will cease to be Outstanding. In the event that any date on which any Redemption Price is payable is not a Business Day, then payment of the Redemption Price payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day falls in the next calendar year, such payment will be made on the immediately preceding Business Day, in each case, with the same force and effect as if made on such date. In the event that payment of the Redemption Price in respect of any Trust Securities called for redemption is improperly withheld or refused and not paid either by the Trust or by the Depositor pursuant to the Guarantee, Distributions on such Trust Securities will continue to accrue, at the then applicable rate, from the Redemption Date originally established by the Trust for such Trust Securities to the date such Redemption Price is actually paid, in which case the actual payment date will be the date fixed for redemption for purposes of calculating the Redemption Price. (e) Payment of the Redemption Price on the Trust Securities shall be made to the recordholders thereof as they appear on the Securities Register for the Trust Securities on the relevant record date, which shall be one Business Day prior to the relevant Redemption Date; provided, however, that in the event that the Capital Securities do not remain in book-entry-only form, the relevant record date shall be the date fifteen days prior to the relevant Redemption Date. (f) Subject to Section 4.3(a), if less than all the Outstanding Trust Securities are to be redeemed on a Redemption Date, then the aggregate Liquidation Amount of Trust Securities to be redeemed shall be allocated on a pro rata basis (based on Liquidation Amounts) among the Common Securities and the Capital Securities. The particular Capital Securities to be redeemed shall be selected on a pro rata basis (based upon Liquidation Amounts) not more than 60 days 24 18 prior to the Redemption Date by the Property Trustee from the Outstanding Capital Securities not previously called for redemption, by such method (including, without limitation, by lot) as the Property Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions (equal to $1,000 or an integral multiple of $1,000 in excess thereof) of the Liquidation Amount of Capital Securities of a denomination larger than $1,000. The Property Trustee shall promptly notify the Security Registrar in writing of the Capital Securities selected for redemption and, in the case of any Capital Securities selected for partial redemption, the Liquidation Amount thereof to be redeemed. For all purposes of this Trust Agreement, unless the context otherwise requires, all provisions relating to the redemption of Capital Securities shall relate, in the case of any Capital Securities redeemed or to be redeemed only in part, to the portion of the Liquidation Amount of Capital Securities that has been or is to be redeemed. SECTION 4.3 Subordination of Common Securities. (a) Payment of Distributions (including Additional Amounts, if applicable) on, and the Redemption Price of, the Trust Securities, as applicable, shall be made, subject to Section 4.2(f), pro rata among the Common Securities and the Capital Securities based on the Liquidation Amount of the Trust Securities; provided, however, that if on any Distribution Date or Redemption Date any Event of Default resulting from a Debenture Event of Default shall have occurred and be continuing, no payment of any Distribution (including Additional Amounts, if applicable) on, or Redemption Price of, any Common Security, and no other payment on account of the redemption, liquidation or other acquisition of Common Securities, shall be made unless payment in full in cash of all accumulated and unpaid Distributions (including Additional Amounts, if applicable) on all Outstanding Capital Securities for all Distribution periods terminating on or prior thereto, or in the case of payment of the Redemption Price the full amount of such Redemption Price on all Outstanding Capital Securities then called for redemption, shall have been made or provided for, and all funds immediately available to the Property Trustee shall first be applied to the payment in full in cash of all Distributions (including Additional Amounts, if applicable) on, or the Redemption Price of, Capital Securities then due and payable. (b) In the case of the occurrence of any Event of Default resulting from any Debenture Event of Default, the Holder of Common Securities will be deemed to have waived any right to act with respect to any such Event of Default under this Trust Agreement until the effect of all such Events of Default with respect to the Capital Securities have been cured, waived or otherwise eliminated. Until any such Event of Default under this Trust Agreement with respect to the Capital Securities has been so cured, waived or otherwise eliminated, the Property Trustee shall act solely on behalf of the Holders of the Capital Securities and not the Holder of the Common Securities, and only the Holders of the Capital Securities will have the right to direct the Property Trustee to act on their behalf. SECTION 4.4 Payment Procedures. Payments of Distributions (including Additional Amounts, if applicable) in respect of the Capital Securities shall be made by check mailed to the address of the Person entitled thereto as such address shall appear on the Securities Register or, if the Capital Securities are held by a Clearing Agency, such Distributions shall be made to the Clearing Agency in immediately available funds, which shall credit the relevant Persons' accounts at such Clearing Agency on the applicable Distribution Dates. Payments in respect of the Common Securities shall be made in 25 19 such manner as shall be mutually agreed in writing between the Property Trustee and the Common Securityholder. SECTION 4.5 Tax Returns and Reports. The Administrative Trustees shall prepare (or cause to be prepared), at the Depositor's expense, and file all United States federal, state and local tax and information returns and reports required to be filed by or in respect of the Trust. In this regard, the Administrative Trustees shall (a) prepare and file (or cause to be prepared and filed) the appropriate Internal Revenue Service Form required to be filed in respect of the Trust in each taxable year of the Trust and (b) prepare and furnish (or cause to be prepared and furnished) to each Securityholder the appropriate Internal Revenue Service form and the information required to be provided on such form. The Administrative Trustees shall provide the Depositor and the Property Trustee with a copy of all such returns and reports promptly after such filing or furnishing. The Trustees shall comply with United States federal withholding and backup withholding tax laws and information reporting requirements with respect to any payments to Securityholders under the Trust Securities. SECTION 4.6 Payment of Expenses of the Trust. Pursuant to Section 10.6 of the Indenture, the Depositor, as borrower, has agreed to pay to the Trust, and reimburse the Trust for, the full amount of any costs, expenses or liabilities of the Trust (other than obligations of the Trust to pay the Holders of any Capital Securities or other similar interests in the Trust the amounts due such Holders pursuant to the terms of the Capital Securities or such other similar interests, as the case may be), including, without limitation, any taxes, duties or other governmental charges of whatever nature (other than withholding taxes) imposed on the Trust by the United States or any other taxing authority. Such payment obligation includes any such costs, expenses or liabilities of the Trust that are required by applicable law to be satisfied in connection with a termination of the Trust. SECTION 4.7 Payments under Indenture or Pursuant to Direct Actions. Any amount payable hereunder to any Holder of Capital Securities shall be reduced by the amount of any corresponding payment such Holder (or an Owner with respect to the Holder's Capital Securities) has directly received pursuant to Section 5.8 of the Indenture or Section 5.14 of this Trust Agreement. ARTICLE V TRUST SECURITIES CERTIFICATES SECTION 5.1 Initial Ownership. Upon the creation of the Trust and the contribution by the Depositor pursuant to Section 2.3 and until the issuance of the Trust Securities, and at any time during which no Trust Securities are outstanding, the Depositor shall be the sole beneficial owner of the Trust. SECTION 5.2 The Trust Securities Certificates. 26 20 The Capital Securities Certificates shall be issued in minimum denominations of $1,000 Liquidation Amount and integral multiples of $1,000 in excess thereof, and the Common Securities Certificates shall be issued in denominations of $1,000 Liquidation Amount and integral multiples thereof. The Trust Securities Certificates shall be executed on behalf of the Trust by manual or facsimile signature of at least one Administrative Trustee and, if executed on behalf of the Trust by facsimile, countersigned by a transfer agent or its agent. The Capital Securities Certificates shall be authenticated by the Property Trustee by manual or facsimile signature of an authorized signatory thereof and, if executed by such authorized signatory of the Property Trustee by facsimile, countersigned by a transfer agent or its agent. Trust Securities Certificates bearing the manual signatures of individuals who were, at the time when such signatures shall have been affixed, authorized to sign on behalf of the Trust or the Property Trustee or, if executed on behalf of the Trust or the Property Trustee by facsimile, countersigned by a transfer agent or its agent, shall be validly issued and entitled to the benefits of this Trust Agreement, notwithstanding that such individuals or any of them shall have ceased to be so authorized prior to the delivery of such Trust Securities Certificates or did not hold such offices at the date of delivery of such Trust Securities Certificates. A transferee of a Trust Securities Certificate shall become a Securityholder, and shall be entitled to the rights and subject to the obligations of a Securityholder hereunder, upon due registration of such Trust Securities Certificate in such transferee's name pursuant to Sections 5.4, 5.11 and 5.13. SECTION 5.3 Execution and Delivery of Trust Securities Certificates. On the Closing Date, the Administrative Trustees shall cause Trust Securities Certificates, in an aggregate Liquidation Amount as provided in Sections 2.4 and 2.5, to be executed on behalf of the Trust and delivered to or upon the written order of the Depositor, signed by its chairman of the board, its president, any executive vice president or any vice president, treasurer or assistant treasurer or controller without further corporate action by the Depositor, in authorized denominations. SECTION 5.4 Registration of Transfer and Exchange of Capital Securities Certificates. The Depositor shall keep or cause to be kept, at the office or agency maintained pursuant to Section 5.8, a register or registers for the purpose of registering Trust Securities Certificates and transfers and exchanges of Capital Securities Certificates (the "Securities Register") in which the transfer agent and registrar designated by the Depositor (the "Securities Registrar"), subject to such reasonable regulations as it may prescribe, shall provide for the registration of Capital Securities Certificates and Common Securities Certificates (subject to Section 5.10 in the case of the Common Securities Certificates) and registration of transfers and exchanges of Capital Securities Certificates as herein provided. The Bank shall be the initial Securities Registrar. Upon surrender for registration of transfer of any Capital Securities Certificate at the office or agency maintained pursuant to Section 5.8, the Administrative Trustees or any one of them shall execute on behalf of the Trust (and if executed on behalf of the Trust by a facsimile signature, such certificate shall be countersigned by a transfer agent or its agent) and deliver, in the name of the designated transferee or transferees, one or more new Capital Securities Certificates in authorized denominations of a like aggregate Liquidation Amount dated the date of execution by such Administrative Trustee or Trustees. The Securities Registrar shall not be 27 21 required to register the transfer of any Capital Securities that have been called for redemption during a period beginning at the opening of business 15 days before the day of selection for such redemption. At the option of a Holder, Capital Securities Certificates may be exchanged for other Capital Securities Certificates in authorized denominations of the same class and of a like aggregate Liquidation Amount upon surrender of the Capital Securities Certificates to be exchanged at the office or agency maintained pursuant to Section 5.8. Every Capital Securities Certificate presented or surrendered for registration of transfer or exchange shall be accompanied by a written instrument of transfer in form satisfactory to an Administrative Trustee and the Securities Registrar duly executed by the Holder or his attorney duly authorized in writing. Each Capital Securities Certificate surrendered for registration of transfer or exchange shall be cancelled and subsequently disposed of by an Administrative Trustee or the Securities Registrar in accordance with such Person's customary practice. No service charge shall be made for any registration of transfer or exchange of Capital Securities Certificates, but the Securities Registrar may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer or exchange of Capital Securities Certificates. SECTION 5.5 Mutilated, Destroyed, Lost or Stolen Trust Securities Certificates. If (a) any mutilated Trust Securities Certificate shall be surrendered to the Securities Registrar, or if the Securities Registrar shall receive evidence to its satisfaction of the destruction, loss or theft of any Trust Securities Certificate and (b) there shall be delivered to the Securities Registrar and the Administrative Trustees such security or indemnity as may be required by them to save each of them harmless, then in the absence of notice that such Trust Securities Certificate shall have been acquired by a bona fide purchaser, the Administrative Trustees, or any one of them, on behalf of the Trust shall execute by manual or facsimile signature and, if executed on behalf of the Trust by facsimile signature, such certificate shall be countersigned by a transfer agent, and make available for delivery, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Trust Securities Certificate, a new Trust Securities Certificate of like class, tenor and denomination. In connection with the issuance of any new Trust Securities Certificate under this Section, the Administrative Trustees or the Securities Registrar may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Any duplicate Trust Securities Certificate issued pursuant to this Section shall constitute conclusive evidence of an undivided beneficial interest in the Trust Property, as if originally issued, whether or not the lost, stolen or destroyed Trust Securities Certificate shall be found at any time. SECTION 5.6 Persons Deemed Securityholders. The Trustees or the Securities Registrar shall treat the Person in whose name any Trust Securities Certificate shall be registered in the Securities Register as the owner of such Trust Securities Certificate for the purpose of receiving Distributions and for all other purposes whatsoever, and neither the Trustees nor the Securities Registrar shall be bound by any notice to the contrary. 28 22 SECTION 5.7 Access to List of Securityholders' Names and Addresses. Each Holder and each Owner shall be deemed to have agreed not to hold the Depositor, the Property Trustee or the Administrative Trustees accountable by reason of the disclosure of its name and address, regardless of the source from which such information was derived. SECTION 5.8 Maintenance of Office or Agency. The Administrative Trustees shall maintain an office or offices or agency or agencies where Capital Securities Certificates may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Trustees in respect of the Trust Securities Certificates may be served. The Administrative Trustees initially designate The Bank of New York, 101 Barclay Street, Floor 21 West, New York, New York 10286, Attn: Corporate Trust Department, as its principal corporate trust office for such purposes. The Administrative Trustees shall give prompt written notice to the Depositor, the Property Trustee and to the Securityholders of any change in the location of the Securities Register or any such office or agency. SECTION 5.9 Appointment of Paying Agent. The Paying Agent shall make Distributions to Securityholders from the Payment Account and shall report the amounts of such Distributions to the Property Trustee and the Administrative Trustees. Any Paying Agent shall have the revocable power to withdraw funds from the Payment Account for the purpose of making the Distributions referred to above. The Administrative Trustees may revoke such power and remove the Paying Agent if such Trustees determine in their sole discretion that the Paying Agent shall have failed to perform its obligations under this Trust Agreement in any material respect. The Paying Agent shall initially be the Bank, and any co-paying agent chosen by the Bank, and acceptable to the Administrative Trustees and the Depositor. Any Person acting as Paying Agent shall be permitted to resign as Paying Agent upon 30 days' written notice to the Administrative Trustees, the Property Trustee and the Depositor. In the event that the Bank shall no longer be the Paying Agent or a successor Paying Agent shall resign or its authority to act be revoked, the Administrative Trustees shall appoint a successor that is acceptable to the Property Trustee and the Depositor to act as Paying Agent (which shall be a bank or trust company). The Administrative Trustees shall cause such successor Paying Agent or any additional Paying Agent appointed by the Administrative Trustees to execute and deliver to the Trustees an instrument in which such successor Paying Agent or additional Paying Agent shall agree with the Trustees that as Paying Agent, such successor Paying Agent or additional Paying Agent will hold all sums, if any, held by it for payment to the Securityholders in trust for the benefit of the Securityholders entitled thereto until such sums shall be paid to such Securityholders. The Paying Agent shall return all unclaimed funds to the Property Trustee and upon resignation or removal of a Paying Agent such Paying Agent shall also return all funds in its possession to the Property Trustee. The provisions of Sections 8.1, 8.3 and 8.6 herein shall apply to the Bank also in its role as Paying Agent, for so long as the Bank shall act as Paying Agent and, to the extent applicable, to any other paying agent appointed hereunder, and any Paying Agent shall be bound by the requirements with respect to paying agents of securities issued pursuant to the Trust Indenture Act. Any reference in this Agreement to the Paying Agent shall include any co-paying agent unless the context requires otherwise. 29 23 SECTION 5.10 Ownership of Common Securities by Depositor. On the Closing Date, the Depositor shall acquire and retain beneficial and record ownership of the Common Securities. To the fullest extent permitted by law, other than a transfer in connection with a consolidation or merger of the Depositor into another Person, or any conveyance, transfer or lease by the Depositor of its properties and assets substantially as an entirety to any Person, pursuant to Section 8.1 of the Indenture, any attempted transfer of the Common Securities shall be void. The Administrative Trustees shall cause each Common Securities Certificate issued to the Depositor to contain a legend stating "THIS CERTIFICATE IS NOT TRANSFERABLE TO ANY PERSON". SECTION 5.11 Book-Entry Capital Securities Certificates; Common Securities Certificate. (a) The Capital Securities Certificates, upon original issuance, will be issued in the form of a typewritten Capital Securities Certificate or Certificates representing Book-Entry Capital Securities Certificates, to be delivered to The Depository Trust Company, the initial Clearing Agency, by, or on behalf of, the Trust. Such Capital Securities Certificate or Certificates shall initially be registered on the Securities Register in the name of Cede & Co., the nominee of the initial Clearing Agency, and no Owner will receive a Definitive Capital Securities Certificate representing such Owner's interest in such Capital Securities, except as provided in Section 5.13. Unless and until Definitive Capital Securities Certificates have been issued to Owners pursuant to Section 5.13: (i) the provisions of this Section 5.11(a) shall be in full force and effect; (ii) the Securities Registrar and the Trustees shall be entitled to deal with the Clearing Agency for all purposes of this Trust Agreement relating to the Book-Entry Capital Securities Certificates (including the payment of the Liquidation Amount of and Distributions on the Capital Securities evidenced by Book-Entry Capital Securities Certificates and the giving of instructions or directions to Owners of Capital Securities evidenced by Book-Entry Capital Securities Certificates) as the sole Holder of Capital Securities evidenced by Book-Entry Capital Securities Certificates and shall have no obligations to the Owners thereof; (iii) to the extent that the provisions of this Section 5.11 conflict with any other provisions of this Trust Agreement, the provisions of this Section 5.11 shall control; and (iv) the rights of the Owners of the Book-Entry Capital Securities Certificates shall be exercised only through the Clearing Agency and shall be limited to those established by law and agreements between such Owners and the Clearing Agency and/or the Clearing Agency Participants. Pursuant to the Certificate Depository Agreement, unless and until Definitive Capital Securities Certificates are issued pursuant to Section 5.13, the initial Clearing Agency will make book-entry transfers among the Clearing Agency Participants and receive and transmit payments on the Capital Securities to such Clearing Agency Participants. 30 24 (b) A single Common Securities Certificate representing the Common Securities shall be issued to the Depositor in the form of a definitive Common Securities Certificate. SECTION 5.12 Notices to Clearing Agency. To the extent that a notice or other communication to the Owners is required under this Trust Agreement, unless and until Definitive Capital Securities Certificates shall have been issued to Owners pursuant to Section 5.13, the Trustees shall give all such notices and communications specified herein to be given to Owners to the Clearing Agency, and shall have no obligations to the Owners. SECTION 5.13 Definitive Capital Securities Certificates. If (a) the Depositor advises the Trustees in writing that the Clearing Agency is no longer willing or able to properly discharge its responsibilities with respect to the Capital Securities Certificates, and the Depositor is unable to locate a qualified successor, (b) the Depositor at its option advises the Trustees in writing that it elects to terminate the book-entry system through the Clearing Agency or (c) after the occurrence of a Debenture Event of Default, Owners of Capital Securities Certificates representing beneficial interests aggregating at least a majority of the Liquidation Amount advise the Administrative Trustees in writing that the continuation of a book-entry system through the Clearing Agency is no longer in the best interest of the Owners of Capital Securities Certificates, then the Administrative Trustees shall notify other Trustees and the Clearing Agency, and the Clearing Agency, in accordance with its customary rules and procedures, shall notify all Clearing Agency Participants for whom it holds Capital Securities of the occurrence of any such event and of the availability of the Definitive Capital Securities Certificates to Owners of such class or classes, as applicable, requesting the same. Upon surrender to the Administrative Trustees of the typewritten Capital Securities Certificate or Certificates representing the Book-Entry Capital Securities Certificates by the Clearing Agency, accompanied by registration instructions, the Administrative Trustees, or any one of them, shall execute the Definitive Capital Securities Certificates in accordance with the instructions of the Clearing Agency or, if executed on behalf of the Trust by facsimile, countersigned by a transfer agent or its agent. Neither the Securities Registrar nor the Trustees shall be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be protected in relying on, such instructions. Upon the issuance of Definitive Capital Securities Certificates, the Trustees shall recognize the Holders of the Definitive Capital Securities Certificates as Securityholders. The Definitive Capital Securities Certificates shall be typewritten, printed, lithographed or engraved or may be produced in any other manner as is reasonably acceptable to the Administrative Trustees that meets the requirements of any stock exchange or automated quotation system on which the Capital Securities are then listed or approved for trading, as evidenced by the execution thereof by the Administrative Trustees or any one of them. SECTION 5.14 Rights of Securityholders. (a) The legal title to the Trust Property is vested exclusively in the Property Trustee (in its capacity as such) in accordance with Section 2.9, and the Securityholders shall not have any right or title therein other than the undivided beneficial ownership interest in the assets of the Trust conferred by their Trust Securities and they shall have no right to call for any partition or division of property, profits or rights of the Trust except as described below. The Trust Securities shall be 31 25 personal property giving only the rights specifically set forth therein and in this Trust Agreement. The Trust Securities shall have no preemptive or similar rights and when issued and delivered to Securityholders against payment of the purchase price therefor will be fully paid and nonassessable by the Trust. The Holders of the Capital Securities, in their capacities as such, shall be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. (b) For so long as any Capital Securities remain Outstanding, if, upon a Debenture Event of Default, the Debenture Trustee fails or the holders of not less than 25% in principal amount of the outstanding Debentures fail to declare the principal of all of the Debentures to be immediately due and payable, the Holders of at least 25% in Liquidation Amount of the Capital Securities then Outstanding shall have such right by a notice in writing to the Depositor and the Debenture Trustee; and upon any such declaration such principal amount of and the accrued interest on all of the Debentures shall become immediately due and payable as set forth in the Indenture, provided that the payment of principal and interest on such Debentures shall remain subordinated to the extent provided in the Indenture. At any time after such a declaration of acceleration with respect to the Debentures has been made and before a judgment or decree for payment of the money due has been obtained by the Debenture Trustee as in the Indenture provided, the Holders of a majority in Liquidation Amount of the Capital Securities, by written notice to the Property Trustee, the Depositor and the Debenture Trustee, may rescind and annul such declaration and its consequences if: (i) the Depositor has paid or deposited with the Debenture Trustee a sum sufficient to pay (A) all overdue installments of interest (including any Additional Interest (as defined in the Indenture)) on all of the Debentures, (B) the principal of any Debentures which have become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the Debentures, and (C) all sums paid or advanced by the Debenture Trustee under the Indenture and the reasonable compensation, expenses, disbursements and advances of the Debenture Trustee and the Property Trustee, their agents and counsel; and (ii) all Events of Default with respect to the Debentures, other than the non-payment of the principal of the Debentures which has become due solely by such acceleration, have been cured or waived as provided in Section 5.13 of the Indenture. The holders of a majority in aggregate Liquidation Amount of the Capital Securities may, on behalf of the Holders of all the Capital Securities, waive any past default under the Indenture, except a default in the payment of principal or interest (unless all Events of Default with respect to the Debentures, other than the non-payment of the principal of the Debentures which has become due solely by such acceleration, have been cured or annulled as provided in Section 5.3 of the Indenture and the Company has paid or deposited with the Debenture Trustee a sum sufficient to pay all overdue installments of interest (including any Additional Interest (as defined in the 32 26 Indenture)) on the Debentures, the principal of any Debentures which have become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the Debentures, and all sums paid or advanced by the Debenture Trustee under the Indenture and the reasonable compensation, expenses, disbursements and advances of the Debenture Trustee and the Property trustee, their agents and counsel) or a default in respect of a covenant or provision which under the Indenture cannot be modified or amended without the consent of the holder of each outstanding Debenture. No such rescission shall affect any subsequent default or impair any right consequent thereon. Upon receipt by the Property Trustee of written notice declaring such an acceleration, or rescission and annulment thereof, by Holders of the Capital Securities all or part of which is represented by Book-Entry Capital Securities Certificates, a record date shall be established for determining Holders of Outstanding Capital Securities entitled to join in such notice, which record date shall be at the close of business on the day the Property Trustee receives such notice. The Holders of Outstanding Capital Securities on such record date, or their duly designated proxies, and only such Persons, shall be entitled to join in such notice, whether or not such Holders remain Holders after such record date; provided, that, unless such declaration of acceleration, or rescission and annulment, as the case may be, shall have become effective by virtue of the requisite percentage having joined in such notice prior to the day which is 90 days after such record date, such notice of declaration of acceleration, or rescission and annulment, as the case may be, shall automatically and without further action by any Holder be canceled and of no further effect. Nothing in this paragraph shall prevent a Holder, or a proxy of a Holder, from giving, after expiration of such 90-day period, a new written notice of declaration of acceleration, or rescission and annulment thereof, as the case may be, that is identical to a written notice which has been canceled pursuant to the proviso to the preceding sentence, in which event a new record date shall be established pursuant to the provisions of this Section 5.14(b). (c) For so long as any Capital Securities remain Outstanding, to the fullest extent permitted by law and subject to the terms of this Trust Agreement and the Indenture, upon a Debenture Event of Default specified in Section 5.1(1) or 5.1(2) of the Indenture, any Holder of Capital Securities shall have the right to institute a proceeding directly against the Depositor, pursuant to Section 5.8 of the Indenture, for enforcement of payment to such Holder of the principal amount of or interest on Debentures having a principal amount equal to the Liquidation Amount of the Capital Securities of such Holder (a "Direct Action"). Except as set forth in Section 5.14(b) and this Section 5.14(c), the Holders of Capital Securities shall have no right to exercise directly any right or remedy available to the holders of, or in respect of, the Debentures. SECTION 5.15 CUSIP Numbers. The Administrative Trustees in issuing the Capital Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Property Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Capital Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Capital Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Administrative Trustees will promptly notify the Property Trustee of any change in the CUSIP numbers. 33 27 ARTICLE VI ACTS OF SECURITYHOLDERS; MEETINGS; VOTING SECTION 6.1 Limitations on Voting Rights. (a) Except as provided in this Section, in Sections 5.14, 8.10 and 10.3 and in the Indenture and as otherwise required by law, no Holder of Capital Securities shall have any right to vote or in any manner otherwise control the administration, operation and management of the Trust or the obligations of the parties hereto, nor shall anything herein set forth, or contained in the terms of the Trust Securities Certificates, be construed so as to constitute the Securityholders from time to time as partners or members of an association. (b) So long as any Debentures are held by the Property Trustee, the Trustees shall not (i) direct the time, method and place of conducting any proceeding for any remedy available to the Debenture Trustee, or executing any trust or power conferred on the Debenture Trustee with respect to such Debentures, (ii) waive any past default which is waiveable under Section 5.13 of the Indenture, (iii) exercise any right to rescind or annul a declaration that the principal of all the Debentures shall be due and payable or (iv) consent to any amendment, modification or termination of the Indenture or the Debentures, where such consent shall be required, without, in each case, obtaining the prior approval of the Holders of at least a majority in Liquidation Amount of all Outstanding Capital Securities, provided, however, that where a consent under the Indenture would require the consent of each holder of Debentures affected thereby, no such consent shall be given by the Property Trustee without the prior written consent of each Holder of Capital Securities. The Trustees shall not revoke any action previously authorized or approved by a vote of the Holders of Capital Securities, except by a subsequent vote of the Holders of Capital Securities. The Property Trustee shall notify all Holders of the Capital Securities of any notice of default received from the Debenture Trustee with respect to the Debentures. In addition to obtaining the foregoing approvals of the Holders of the Capital Securities, prior to taking any of the foregoing actions, the Administrative Trustees shall, at the expense of the Depositor, obtain an Opinion of Counsel experienced in such matters to the effect that such action shall not cause the Trust to fail to be classified as a grantor trust for United States federal income tax purposes. (c) If any proposed amendment to the Trust Agreement provides for, or the Trustees otherwise propose to effect, (i) any action that would adversely affect in any material respect the powers, preferences or special rights of the Capital Securities, whether by way of amendment to the Trust Agreement or otherwise, or (ii) the dissolution, winding-up or termination of the Trust, other than pursuant to the terms of this Trust Agreement, then the Holders of Outstanding Capital Securities as a class will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of the Holders of at least a majority in Liquidation Amount of the Outstanding Capital Securities. Notwithstanding any other provision of this Trust Agreement, no amendment to this Trust Agreement may be made if, as a result of such amendment, it would cause the Trust to fail to be classified as a grantor trust for United States federal income tax purposes. SECTION 6.2 Notice of Meetings. 34 28 Notice of all meetings of the Capital Securityholders, stating the time, place and purpose of the meeting, shall be given by the Property Trustee pursuant to Section 10.9 to each Capital Securityholder of record, at his registered address, at least 15 days and not more than 90 days before the meeting. At any such meeting, any business properly before the meeting may be so considered whether or not stated in the notice of the meeting. Any adjourned meeting may be held as adjourned without further notice. SECTION 6.3 Meetings of Capital Securityholders. No annual meeting of Securityholders is required to be held. The Administrative Trustees, however, shall call a meeting of Capital Securityholders to vote on any matter upon the written request of the Capital Securityholders of record of 25% of the Outstanding Capital Securities (based upon their Liquidation Amount) and the Administrative Trustees or the Property Trustee may, at any time in their discretion, call a meeting of Capital Securityholders to vote on any matters as to which Capital Securityholders are entitled to vote. Capital Securityholders of record of 50% of the Outstanding Capital Securities (based upon their Liquidation Amount), present in person or by proxy, shall constitute a quorum at any meeting of Capital Securityholders. If a quorum is present at a meeting, an affirmative vote by the Capital Securityholders of record present, in person or by proxy, holding more than a majority of the Outstanding Capital Securities (based upon their Liquidation Amount) held by holders of record of Outstanding Capital Securities present, either in person or by proxy, at such meeting shall constitute the action of the Capital Securityholders, unless this Trust Agreement requires a greater number of affirmative votes. SECTION 6.4 Voting Rights. Securityholders shall be entitled to one vote for each $1,000 of Liquidation Amount represented by their Trust Securities in respect of any matter as to which such Securityholders are entitled to vote. SECTION 6.5 Proxies, etc. At any meeting of Securityholders, any Securityholder entitled to vote thereat may vote by proxy, provided that no proxy shall be voted at any meeting unless it shall have been placed on file with the Administrative Trustees, or with such other officer or agent of the Trust as the Administrative Trustees may direct, for verification prior to the time at which such vote shall be taken. Pursuant to a resolution of the Property Trustee, proxies may be solicited in the name of the Property Trustee or one or more officers of the Property Trustee. Only Securityholders of record shall be entitled to vote. When Trust Securities are held jointly by several Persons, any one of them may vote at any meeting in person or by proxy in respect of such Trust Securities, but if more than one of them shall be present at such meeting in person or by proxy, and such joint owners or their proxies so present disagree as to any vote to be cast, such vote shall not be received in respect of such Trust Securities. A proxy purporting to be executed by or on behalf of a Securityholder shall be deemed valid unless challenged at or prior to its exercise, and the burden 35 29 of proving invalidity shall rest on the challenger. No proxy shall be valid more than three years after its date of execution. SECTION 6.6 Securityholder Action by Written Consent. Any action which may be taken by Securityholders at a meeting may be taken without a meeting if Securityholders holding more than a majority of all Outstanding Trust Securities (based upon their Liquidation Amount) entitled to vote in respect of such action (or such larger proportion thereof as shall be required by any express provision of this Trust Agreement) shall consent to the action in writing. SECTION 6.7 Record Date for Voting and Other Purposes. For the purposes of determining the Securityholders who are entitled to notice of and to vote at any meeting or by written consent, or to participate in any Distribution on the Trust Securities in respect of which a record date is not otherwise provided for in this Trust Agreement, or for the purpose of any other action, the Administrative Trustees may from time to time fix a date, not more than 90 days prior to the date of any meeting of Securityholders or the payment of a Distribution or other action, as the case may be, as a record date for the determination of the identity of the Securityholders of record for such purposes. SECTION 6.8 Acts of Securityholders. Any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Trust Agreement to be given, made or taken by Securityholders or Owners may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Securityholders or Owners in person or by an agent duly appointed in writing; and, except as otherwise expressly provided herein, such action shall become effective when such instrument or instruments are delivered to an Administrative Trustee. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Securityholders or Owners signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Trust Agreement and (subject to Section 8.1) conclusive in favor of the Trustees, if made in the manner provided in this Section. The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which any Trustee receiving the same deems sufficient. The ownership of Capital Securities shall be proved by the Securities Register. Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Securityholder of any Trust Security shall bind every future Securityholder of the same Trust 36 30 Security and the Securityholder of every Trust Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustees or the Trust in reliance thereon, whether or not notation of such action is made upon such Trust Security. Without limiting the foregoing, a Securityholder entitled hereunder to take any action hereunder with regard to any particular Trust Security may do so with regard to all or any part of the Liquidation Amount of such Trust Security or by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or any part of such Liquidation Amount. If any dispute shall arise between the Securityholders and the Administrative Trustees or among such Securityholders or Trustees with respect to the authenticity, validity or binding nature of any request, demand, authorization, direction, consent, waiver or other Act of such Securityholder or Trustee under this Article VI, then the determination of such matter by the Property Trustee shall be conclusive with respect to such matter. SECTION 6.9 Inspection of Records. Upon reasonable notice to the Administrative Trustees and the Property Trustee, the records of the Trust shall be open to inspection by Securityholders during normal business hours for any purpose reasonably related to such Securityholder's interest as a Securityholder. ARTICLE VII REPRESENTATIONS AND WARRANTIES SECTION 7.1 Representations and Warranties of the Property Trustee and the Delaware Trustee. The Property Trustee and the Delaware Trustee, each severally on behalf of and as to itself, hereby represents and warrants for the benefit of the Depositor and the Securityholders that: (a) the Property Trustee is a New York banking corporation duly organized, validly existing and in good standing under the laws of the State of New York; (b) the Property Trustee has full corporate power, authority and legal right to execute, deliver and perform its obligations under this Trust Agreement and has taken all necessary action to authorize the execution, delivery and performance by it of this Trust Agreement; (c) the Delaware Trustee is a Delaware banking corporation duly organized, validly existing and in good standing in the State of Delaware; (d) the Delaware Trustee has full corporate power, authority and legal right to execute, deliver and perform its obligations under this Trust Agreement and has taken all necessary action to authorize the execution, delivery and performance by it of this Trust Agreement; 37 31 (e) this Trust Agreement has been duly authorized, executed and delivered by the Property Trustee and the Delaware Trustee and constitutes the valid and legally binding agreement of each of the Property Trustee and the Delaware Trustee enforceable against each of them in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles; (f) the execution, delivery and performance of this Trust Agreement has been duly authorized by all necessary corporate or other action on the part of the Property Trustee and the Delaware Trustee and does not require any approval of stockholders of the Property Trustee and the Delaware Trustee and such execution, delivery and performance will not (i) violate the charter or by-laws of the Property Trustee or the Delaware Trustee, (ii) violate any provision of, or constitute, with or without notice or lapse of time, a default under, or result in the creation or imposition of, any Lien on any properties included in the Trust Property pursuant to the provisions of, any indenture, mortgage, credit agreement, license or other agreement or instrument to which the Property Trustee or the Delaware Trustee is a party or by which it is bound, or (iii) violate any law, governmental rule or regulation of the State of New York or the State of Delaware, as the case may be, governing the banking, trust or general powers of the Property Trustee or the Delaware Trustee (as appropriate in context) or any order, judgment or decree applicable to the Property Trustee or the Delaware Trustee; (g) neither the authorization, execution or delivery by the Property Trustee or the Delaware Trustee of this Trust Agreement nor the consummation of any of the transactions by the Property Trustee or the Delaware Trustee (as appropriate in context) contemplated herein or therein requires the consent or approval of, the giving of notice to, the registration with or the taking of any other action with respect to any governmental authority or agency under any existing New York or Delaware law governing the banking, trust or general powers of the Property Trustee or the Delaware Trustee, as the case may be; and (h) there are no proceedings pending or, to the best of each of the Property Trustee's and the Delaware Trustee's knowledge, threatened against or affecting the Property Trustee or the Delaware Trustee in any court or before any governmental authority, agency or arbitration board or tribunal which, individually or in the aggregate, would materially and adversely affect the Trust or would question the right, power and authority of the Property Trustee or the Delaware Trustee, as the case may be, to enter into or perform its obligations as one of the Trustees under this Trust Agreement. SECTION 7.2 Representations and Warranties of Depositor. The Depositor hereby represents and warrants for the benefit of the Securityholders that: (a) the Trust Securities Certificates issued at the Closing Date on behalf of the Trust have been duly authorized and will have been, duly and validly executed, issued and delivered by the Trustees pursuant to the terms and provisions of, and in accordance with the requirements of, this Trust Agreement and the Securityholders will be, as of such date, entitled to the benefits of this Trust Agreement; and 38 32 (b) there are no taxes, fees or other governmental charges payable by the Trust (or the Trustees on behalf of the Trust) under the laws of the State of Delaware or any political subdivision thereof in connection with the execution, delivery and performance by the Property Trustee or the Delaware Trustee, as the case may be, of this Trust Agreement. ARTICLE VIII THE TRUSTEES SECTION 8.1 Certain Duties and Responsibilities. (a) The duties and responsibilities of the Trustees shall be as provided by this Trust Agreement and, in the case of the Property Trustee, by the Trust Indenture Act. Notwithstanding the foregoing, no provision of this Trust Agreement shall require the Trustees to expend or risk their own funds or otherwise incur any financial liability in the performance of any of their duties hereunder, or in the exercise of any of their rights or powers, if they shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to them. Whether or not therein expressly so provided, every provision of this Trust Agreement relating to the conduct or affecting the liability of or affording protection to the Trustees shall be subject to the provisions of this Section. Nothing in this Trust Agreement shall be construed to release an Administrative Trustee from liability for its own gross negligent action, its own gross negligent failure to act, or its own willful misconduct. To the extent that, at law or in equity, an Administrative Trustee has duties (including fiduciary duties) and liabilities relating thereto to the Trust or to the Securityholders, such Administrative Trustee shall not be liable to the Trust or to any Securityholder for such Trustee's good faith reliance on the provisions of this Trust Agreement. The provisions of this Trust Agreement, to the extent that they restrict the duties and liabilities of the Administrative Trustees otherwise existing at law or in equity, are agreed by the Depositor and the Securityholders to replace such other duties and liabilities of the Administrative Trustees. (b) All payments made by the Property Trustee or a Paying Agent in respect of the Trust Securities shall be made only from the revenue and proceeds from the Trust Property and only to the extent that there shall be sufficient revenue or proceeds from the Trust Property to enable the Property Trustee or a Paying Agent to make payments in accordance with the terms hereof. Each Securityholder, by its acceptance of a Trust Security, agrees that it will look solely to the revenue and proceeds from the Trust Property to the extent legally available for distribution to it as herein provided and that the Trustees are not personally liable to it for any amount distributable in respect of any Trust Security or for any other liability in respect of any Trust Security. This Section 8.1(b) does not limit the liability of the Trustees expressly set forth elsewhere in this Trust Agreement or, in the case of the Property Trustee, in the Trust Indenture Act. (c) No provision of this Trust Agreement shall be construed to relieve the Property Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: 39 33 (i) the Property Trustee shall not be liable for any error of judgment made in good faith by an authorized officer of the Property Trustee, unless it shall be proved that the Property Trustee was negligent in ascertaining the pertinent facts; (ii) the Property Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a majority in Liquidation Amount of the Trust Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Property Trustee, or exercising any trust or power conferred upon the Property Trustee under this Trust Agreement; (iii) the Property Trustee's sole duty with respect to the custody, safe keeping and physical preservation of the Debentures and the Payment Account shall be to deal with such property in a similar manner as the Property Trustee deals with similar property for its own account, subject to the protections and limitations on liability afforded to the Property Trustee under this Trust Agreement and the Trust Indenture Act; (iv) the Property Trustee shall not be liable for any interest on any money received by it except as it may otherwise agree in writing with the Depositor; and money held by the Property Trustee need not be segregated from other funds held by it except in relation to the Payment Account maintained by the Property Trustee pursuant to Section 3.1 and except to the extent otherwise required by law; and (v) the Property Trustee shall not be responsible for monitoring the compliance by the Administrative Trustees or the Depositor with their respective duties under this Trust Agreement, nor shall the Property Trustee be liable for the default or misconduct of the Administrative Trustees or the Depositor. SECTION 8.2 Certain Notices. Within ten Business Days after the occurrence of any Event of Default actually known to the Property Trustee, the Property Trustee shall transmit, in the manner and to the extent provided in Section 10.9, notice of such Event of Default to the Securityholders, the Administrative Trustees and the Depositor, unless such Event of Default shall have been cured or waived. Within five Business Days after the receipt of notice of the Depositor's exercise of its right to defer the payment of interest on the Debentures pursuant to the Indenture, the Administrative Trustee shall transmit, in the manner and to the extent provided in Section 10.9, notice of such exercise to the Securityholders and the Property Trustee, unless such exercise shall have been revoked. SECTION 8.3 Certain Rights of Property Trustee. Subject to the provisions of Section 8.1: (a) the Property Trustee may rely and shall be protected in acting or refraining from acting in good faith upon any resolution, Opinion of Counsel, certificate, written representation of a 40 34 Holder or transferee, certificate of auditors or any other certificate, statement, instrument, opinion, report, notice, request, consent, order, appraisal, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) if (i) in performing its duties under this Trust Agreement the Property Trustee is required to decide between alternative courses of action or (ii) in construing any of the provisions of this Trust Agreement the Property Trustee finds the same ambiguous or inconsistent with any other provisions contained herein or (iii) the Property Trustee is unsure of the application of any provision of this Trust Agreement, then, except as to any matter as to which the Capital Securityholders are entitled to vote under the terms of this Trust Agreement, the Property Trustee shall deliver a notice to the Depositor requesting written instructions of the Depositor as to the course of action to be taken and the Property Trustee shall take such action, or refrain from taking such action, as the Property Trustee shall be instructed in writing to take, or to refrain from taking, by the Depositor; provided, however, that if the Property Trustee does not receive such instructions of the Depositor within ten Business Days after it has delivered such notice, or such reasonably shorter period of time set forth in such notice (which to the extent practicable shall not be less than two Business Days), it may, but shall be under no duty to, take or refrain from taking such action not inconsistent with this Trust Agreement as it shall deem advisable and in the best interests of the Securityholders, in which event the Property Trustee shall have no liability except for its own bad faith, negligence or willful misconduct; (c) any direction or act of the Depositor or the Administrative Trustees contemplated by this Trust Agreement shall be sufficiently evidenced by an Officers' Certificate; (d) whenever in the administration of this Trust Agreement, the Property Trustee shall deem it desirable that a matter be established before undertaking, suffering or omitting any action hereunder, the Property Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and rely upon an Officers' Certificate which, upon receipt of such request, shall be promptly delivered by the Depositor or the Administrative Trustees; (e) the Property Trustee shall have no duty to see to any recording, filing or registration of any instrument (including any financing or continuation statement or any filing under tax or securities laws) or any rerecording, refiling or reregistration thereof; (f) the Property Trustee may consult with counsel of its selection (which counsel may be counsel to the Depositor or any of its Affiliates, and may include any of its employees) and the advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon and in accordance with such advice, such counsel may be counsel to the Depositor or any of its Affiliates, and may include any of its employees; the Property Trustee shall have the right at any time to seek instructions concerning the administration of this Trust Agreement from any court of competent jurisdiction; (g) the Property Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Trust Agreement at the request or direction of any of the Securityholders pursuant to this Trust Agreement, unless such Securityholders shall have offered 41 35 to the Property Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (h) the Property Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, note or other evidence of indebtedness or other paper or document, unless requested in writing to do so by one or more Securityholders, but the Property Trustee may make such further inquiry or investigation into such facts or matters as it may see fit; (i) the Property Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through its agents or attorneys, provided that the Property Trustee shall be responsible for its own negligence or recklessness with respect to selection of any agent or attorney appointed by it hereunder; (j) whenever in the administration of this Trust Agreement the Property Trustee shall deem it desirable to receive written instructions with respect to enforcing any remedy or right or taking any other action hereunder the Property Trustee (i) may request written instructions from the Holders of the Trust Securities which written instructions may only be given by the Holders of the same proportion in Liquidation Amount of the Trust Securities as would be entitled to direct the Property Trustee under the terms of the Trust Securities in respect of such remedy, right or action, (ii) may refrain from enforcing such remedy or right or taking such other action until such written instructions are received, and (iii) shall be protected in acting in accordance with such written instructions; and (k) except as otherwise expressly provided by this Trust Agreement, the Property Trustee shall not be under any obligation to take any action that is discretionary under the provisions of this Trust Agreement. No provision of this Trust Agreement shall be deemed to impose any duty or obligation on the Property Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it, in any jurisdiction in which it shall be illegal, or in which the Property Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts, or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Property Trustee shall be construed to be a duty. SECTION 8.4 Not Responsible for Recitals or Issuance of Securities. The recitals contained herein and in the Trust Securities Certificates shall be taken as the statements of the Trust, and the Trustees do not assume any responsibility for their correctness. The Trustees shall not be accountable for the use or application by the Depositor of the proceeds of the Debentures. SECTION 8.5 May Hold Securities. Any Trustee or any other agent of any Trustee or the Trust, in its individual or any other capacity, may become the owner or pledgee of Trust Securities and, subject to Sections 8.8 and 42 36 8.13, except as provided in the definition of the term "Outstanding" in Article I, may otherwise deal with the Trust with the same rights it would have if it were not a Trustee or such other agent. SECTION 8.6 Compensation; Indemnity; Fees. Pursuant to Section 10.6 of the Indenture, the Depositor, as borrower, agrees: (a) to pay to the Trustees from time to time such compensation as shall be agreed in writing with the Depositor for all services rendered by them hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (b) except as otherwise expressly provided herein, to reimburse the Trustees upon request for all reasonable expenses, disbursements and advances incurred or made by the Trustees in accordance with any provision of this Trust Agreement (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (c) to the fullest extent permitted by applicable law, to indemnify and hold harmless (i) each Trustee, (ii) any Affiliate of any Trustee, (iii) any officer, director, shareholder, employee, representative or agent of any Trustee, and (iv) any employee or agent of the Trust or its Affiliates, (referred to herein as an "Indemnified Person") from and against any and all loss, damage, liability, tax, penalty, expense or claim of any kind or nature whatsoever incurred by such Indemnified Person by reason of the creation, operation or termination of the Trust or any act or omission performed or omitted by such Indemnified Person in good faith on behalf of the Trust and in a manner such Indemnified Person reasonably believed to be within the scope of authority conferred on such Indemnified Person by this Trust Agreement, except that no Indemnified Person shall be entitled to be indemnified in respect of any loss, damage or claim incurred by such Indemnified Person by reason of negligence or willful misconduct with respect to such acts or omissions. When the Property Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 5.1(4) or Section 5.1(5) of the Indenture, the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable federal or state bankruptcy, insolvency or other similar law. The provisions of this Section 8.6 shall survive the termination of this Trust Agreement. No Trustee may claim any lien or charge on any Trust Property as a result of any amount due pursuant to this Section 8.6. The Depositor and any Trustee (in the case of the Property Trustee, subject to Section 8.8 hereof) may engage in or possess an interest in other business ventures of any nature or description, independently or with others, similar or dissimilar to the business of the Trust, and the Trust and the Holders of Trust Securities shall have no rights by virtue of this Trust Agreement in and to such independent ventures or the income or profits derived therefrom, and the pursuit of any such venture, even if competitive with the business of the Trust, shall not be deemed wrongful or improper. Neither the Depositor, nor any Trustee, shall be obligated to present any particular investment or other opportunity to the Trust even if such opportunity is of a character that, if 43 37 presented to the Trust, could be taken by the Trust, and the Depositor or any Trustee shall have the right to take for its own account (individually or as a partner or fiduciary) or to recommend to others any such particular investment or other opportunity. Any Trustee may engage or be interested in any financial or other transaction with the Depositor or any Affiliate of the Depositor, or may act as depository for, trustee or agent for, or act on any committee or body of holders of, securities or other obligations of the Depositor or its Affiliates. SECTION 8.7 Corporate Property Trustee Required; Eligibility of Trustees. (a) There shall at all times be a Property Trustee hereunder with respect to the Trust Securities. The Property Trustee shall be a Person that is eligible pursuant to the Trust Indenture Act to act as such and has a combined capital and surplus of at least $50,000,000. If any such Person publishes reports of condition at least annually, pursuant to law or to the requirements of its supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Property Trustee with respect to the Trust Securities shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. (b) There shall at all times be one or more Administrative Trustees hereunder with respect to the Trust Securities. Each Administrative Trustee shall be either a natural person who is at least 21 years of age or a legal entity that shall act through one or more persons authorized to bind that entity. (c) There shall at all times be a Delaware Trustee with respect to the Trust Securities. The Delaware Trustee shall either be (i) a natural person who is at least 21 years of age and a resident of the State of Delaware or (ii) a legal entity with its principal place of business in the State of Delaware and that otherwise meets the requirements of applicable Delaware law that shall act through one or more persons authorized to bind such entity. SECTION 8.8 Conflicting Interests. If the Property Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Property Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Trust Agreement. SECTION 8.9 Co-Trustees and Separate Trustee. Unless an Event of Default shall have occurred and be continuing, at any time or times, for the purpose of meeting the legal requirements of the Trust Indenture Act or of any jurisdiction in which any part of the Trust Property may at the time be located, the Depositor and the Administrative Trustees, by agreed action of the majority of such Trustees, shall have power to appoint, and upon the written request of the Administrative Trustees, the Depositor shall for such purpose join with the Administrative Trustees in the execution, delivery, and performance of all instruments and agreements necessary or proper to appoint, one or more Persons approved by the Property Trustee either to act as co-trustee, jointly with the Property Trustee, of all or any part of such Trust Property, or to the extent required by law to act as separate trustee of any such 44 38 property, in either case with such powers as may be provided in the instrument of appointment, and to vest in such Person or Persons in the capacity aforesaid, any property, title, right or power deemed necessary or desirable, subject to the other provisions of this Section. If the Depositor does not join in such appointment within 15 days after the receipt by it of a request so to do, or in case a Debenture Event of Default has occurred and is continuing, the Property Trustee alone shall have power to make such appointment. Any co-trustee or separate trustee appointed pursuant to this Section shall either be (i) a natural person who is at least 21 years of age and a resident of the United States or (ii) a legal entity with its principal place of business in the United States that shall act through one or more persons authorized to bind such entity. Should any written instrument from the Depositor be required by any co-trustee or separate trustee so appointed for more fully confirming to such co-trustee or separate trustee such property, title, right, or power, any and all such instruments shall, on request, be executed, acknowledged and delivered by the Depositor. Every co-trustee or separate trustee shall, to the extent permitted by law, but to such extent only, be appointed subject to the following terms, namely: (a) The Trust Securities shall be executed and delivered and all rights, powers, duties, and obligations hereunder in respect of the custody of securities, cash and other personal property held by, or required to be deposited or pledged with, the Trustees specified hereunder shall be exercised solely by such Trustees and not by such co-trustee or separate trustee. (b) The rights, powers, duties, and obligations hereby conferred or imposed upon the Property Trustee in respect of any property covered by such appointment shall be conferred or imposed upon and exercised or performed by the Property Trustee or by the Property Trustee and such co-trustee or separate trustee jointly, as shall be provided in the instrument appointing such co-trustee or separate trustee, except to the extent that under any law of any jurisdiction in which any particular act is to be performed, the Property Trustee shall be incompetent or unqualified to perform such act, in which event such rights, powers, duties and obligations shall be exercised and performed by such co-trustee or separate trustee. (c) The Property Trustee at any time, by an instrument in writing executed by it, with the written concurrence of the Depositor, may accept the resignation of or remove any co-trustee or separate trustee appointed under this Section, and, in case a Debenture Event of Default has occurred and is continuing, the Property Trustee shall have power to accept the resignation of, or remove, any such co-trustee or separate trustee without the concurrence of the Depositor. Upon the written request of the Property Trustee, the Depositor shall join with the Property Trustee in the execution, delivery and performance of all instruments and agreements necessary or proper to effectuate such resignation or removal. A successor to any co-trustee or separate trustee so resigned or removed may be appointed in the manner provided in this Section. (d) No co-trustee or separate trustee hereunder shall be personally liable by reason of any act or omission of the Property Trustee or any other trustee hereunder. (e) The Property Trustee shall not be liable by reason of any act of a co-trustee or separate trustee. 45 39 (f) Any Act of Holders delivered to the Property Trustee shall be deemed to have been delivered to each such co-trustee and separate trustee. SECTION 8.10 Resignation and Removal; Appointment of Successor. No resignation or removal of any Trustee (the "Relevant Trustee") and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 8.11. Subject to the immediately preceding paragraph, the Relevant Trustee may resign at any time by giving written notice thereof to the Securityholders. If the instrument of acceptance by the successor Trustee required by Section 8.11 shall not have been delivered to the Relevant Trustee within 30 days after the giving of such notice of resignation, the Relevant Trustee may petition, at the expense of the Trust, any court of competent jurisdiction for the appointment of a successor Relevant Trustee. Unless a Debenture Event of Default shall have occurred and be continuing, any Trustee may be removed at any time by Act of the Common Securityholder. If a Debenture Event of Default shall have occurred and be continuing, the Property Trustee or the Delaware Trustee, or both of them, may be removed at such time by Act of the Holders of a majority in Liquidation Amount of the Capital Securities, delivered to the Relevant Trustee (in its individual capacity and on behalf of the Trust). An Administrative Trustee may be removed by the Common Securityholder at any time. If the instrument of acceptance by the successor Trustee required by Section 8.11 shall not have been delivered to the Relevant Trustee within 30 days after such removal, the Relevant Trustee may petition, at the expense of the Trust, any court of competent jurisdiction for the appointment of a successor Relevant Trustee. If any Trustee shall resign, be removed or become incapable of acting as Trustee, or if a vacancy shall occur in the office of any Trustee for any cause, at a time when no Debenture Event of Default shall have occurred and be continuing, the Common Securityholder, by Act of the Common Securityholder delivered to the retiring Trustee, shall promptly appoint a successor Trustee or Trustees, and the retiring Trustee shall comply with the applicable requirements of Section 8.11. If the Property Trustee or the Delaware Trustee shall resign, be removed or become incapable of continuing to act as the Property Trustee or the Delaware Trustee, as the case may be, at a time when a Debenture Event of Default shall have occurred and be continuing, the Capital Securityholders, by Act of the Securityholders of a majority in Liquidation Amount of the Capital Securities then Outstanding delivered to the retiring Relevant Trustee, shall promptly appoint a successor Relevant Trustee or Trustees, and such successor Trustee shall comply with the applicable requirements of Section 8.11. If an Administrative Trustee shall resign, be removed or become incapable of acting as Administrative Trustee, at a time when a Debenture Event of Default shall have occurred and be continuing, the Common Securityholder by Act of the Common Securityholder delivered to the Administrative Trustee shall promptly appoint a successor Administrative Trustee or Administrative Trustees and such successor Administrative Trustee or Trustees shall comply with the applicable requirements of Section 8.11. If no successor Relevant Trustee shall have been so appointed by the Common Securityholder or the Capital Securityholders and accepted appointment in the manner required by Section 8.11, any Securityholder who has been a Securityholder of Trust Securities for at least six months may, on 46 40 behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Relevant Trustee. The Property Trustee shall give notice of each resignation and each removal of a Trustee and each appointment of a successor Trustee to all Securityholders in the manner provided in Section 10.9 and shall give notice to the Depositor. Each notice shall include the name of the successor Relevant Trustee and the address of its Corporate Trust Office if it is the Property Trustee. Notwithstanding the foregoing or any other provision of this Trust Agreement, in the event any Administrative Trustee or a Delaware Trustee who is a natural person dies or becomes, in the opinion of the Depositor, incompetent or incapacitated, the vacancy created by such death, incompetence or incapacity may be filled by (a) the unanimous act of the remaining Administrative Trustees if there are at least two of them or (b) otherwise by the Depositor (with the successor in each case being a Person who satisfies the eligibility requirement for Administrative Trustees or Delaware Trustee, as the case may be, set forth in Section 8.7). SECTION 8.11 Acceptance of Appointment by Successor. In case of the appointment hereunder of a successor Relevant Trustee, the retiring Relevant Trustee and each successor Relevant Trustee with respect to the Trust Securities shall execute and deliver an amendment hereto wherein each successor Relevant Trustee shall accept such appointment and which (a) shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor Relevant Trustee all the rights, powers, trusts and duties of the retiring Relevant Trustee with respect to the Trust Securities and the Trust and (b) shall add to or change any of the provisions of this Trust Agreement as shall be necessary to provide for or facilitate the administration of the Trust by more than one Relevant Trustee, it being understood that nothing herein or in such amendment shall constitute such Relevant Trustees co-trustees and upon the execution and delivery of such amendment the resignation or removal of the retiring Relevant Trustee shall become effective to the extent provided therein and each such successor Relevant Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Relevant Trustee; but, on written request of the Trust or any successor Relevant Trustee such retiring Relevant Trustee shall duly assign, transfer and deliver to such successor Relevant Trustee all Trust Property, all proceeds thereof and money held by such retiring Relevant Trustee hereunder with respect to the Trust Securities and the Trust. Upon written request of any such successor Relevant Trustee, the Trust shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Relevant Trustee all such rights, powers and trusts referred to in the preceding paragraph. No successor Relevant Trustee shall accept its appointment unless at the time of such acceptance such successor Relevant Trustee shall be qualified and eligible under this Article. SECTION 8.12 Merger, Conversion, Consolidation or Succession to Business. Any Person into which the Property Trustee or the Delaware Trustee may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, 47 41 conversion or consolidation to which such Relevant Trustee shall be a party, or any Person succeeding to all or substantially all the corporate trust business of such Relevant Trustee, shall be the successor of such Relevant Trustee hereunder, provided such Person shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. SECTION 8.13 Preferential Collection of Claims Against Depositor or Trust. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other similar judicial proceeding relative to the Trust or any other obligor upon the Trust Securities or the property of the Trust or of such other obligor or their creditors, the Property Trustee (irrespective of whether any Distributions on the Trust Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Property Trustee shall have made any demand on the Trust for the payment of any past due Distributions) shall be entitled and empowered, to the fullest extent permitted by law, by intervention in such proceeding or otherwise: (a) to file and prove a claim for the whole amount of any Distributions owing and unpaid in respect of the Trust Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Property Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Property Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (b) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Property Trustee and, in the event the Property Trustee shall consent to the making of such payments directly to the Holders, to pay to the Property Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Property Trustee, its agents and counsel, and any other amounts due the Property Trustee. Nothing herein contained shall be deemed to authorize the Property Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement adjustment or compensation affecting the Trust Securities or the rights of any Holder thereof or to authorize the Property Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 8.14 Reports by Property Trustee. (a) The Property Trustee shall transmit to Securityholders such reports concerning the Property Trustee and its actions under this Trust Agreement as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. If required by Section 313(a) of the Trust Indenture Act, the Property Trustee shall, within sixty days after each May 15 following the date of this Trust Agreement deliver to Securityholders a brief report, dated as of such May 15, which complies with the provisions of such Section 313(a). 48 42 (b) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Property Trustee with each national stock exchange, the Nasdaq National Market or such other interdealer quotation system or self-regulatory organization upon which the Trust Securities are listed or traded, if any, with the Commission and with the Depositor. The Depositor will promptly notify the Property Trustee of any such listing or trading. SECTION 8.15 Reports to the Property Trustee. The Depositor and the Administrative Trustees on behalf of the Trust shall provide to the Property Trustee such documents, reports and information as required by Section 314 of the Trust Indenture Act (if any) and the compliance certificate required by Section 314(a) of the Trust Indenture Act in the form, in the manner and at the times required by Section 314 of the Trust Indenture Act. Delivery of such reports, information and documents to the Property Trustee is for informational purposes only and the Property Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Trust's compliance with any of its covenants hereunder (as to which the Property Trustee is entitled to rely exclusively on Officers' Certificates). SECTION 8.16 Evidence of Compliance with Conditions Precedent. Each of the Depositor and the Administrative Trustees on behalf of the Trust shall provide to the Property Trustee such evidence of compliance with any conditions precedent, if any, provided for in this Trust Agreement that relate to any of the matters set forth in Section 314 (c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(1) of the Trust Indenture Act shall be given in the form of an Officers' Certificate. SECTION 8.17 Number of Trustees. (a) The number of Trustees shall be four, provided that the Holder of all of the Common Securities by written instrument may increase or decrease the number of Administrative Trustees. The Property Trustee and the Delaware Trustee may be the same Person. (b) If a Trustee ceases to hold office for any reason and the number of Administrative Trustees is not reduced pursuant to Section 8.17(a), or if the number of Trustees is increased pursuant to Section 8.17(a), a vacancy shall occur. The vacancy shall be filled with a Trustee appointed in accordance with Section 8.10. (c) The death, resignation, retirement, removal, bankruptcy, incompetence or incapacity to perform the duties of a Trustee shall not operate to dissolve, terminate or annul the Trust. Whenever a vacancy in the number of Administrative Trustees shall occur, until such vacancy is filled by the appointment of an Administrative Trustee in accordance with Section 8.10, the Administrative Trustees in office, regardless of their number (and notwithstanding any other provision of this Agreement), shall have all the powers granted to the Administrative Trustees and shall discharge all the duties imposed upon the Administrative Trustees by this Trust Agreement. SECTION 8.18 Delegation of Power. 49 43 (a) Any Administrative Trustee may, by power of attorney consistent with applicable law, delegate to any other natural person over the age of 21 his or her power for the purpose of executing any documents contemplated in Section 2.7(a), including any registration statement or amendment thereto filed with the Commission, or making any other governmental filing; and (b) The Administrative Trustees shall have power to delegate from time to time to such of their number or to the Depositor the doing of such things and the execution of such instruments either in the name of the Trust or the names of the Administrative Trustees or otherwise as the Administrative Trustees may deem expedient, to the extent such delegation is not prohibited by applicable law or contrary to the provisions of this Trust Agreement, as set forth herein. ARTICLE IX TERMINATION, LIQUIDATION AND MERGER SECTION 9.1 Termination Upon Expiration Date. Unless earlier terminated, the Trust shall automatically terminate on December 31, 2051 (the "Expiration Date"), following the distribution of the Trust Property in accordance with Section 9.4. SECTION 9.2 Early Termination. The first to occur of any of the following events is an "Early Termination Event": (a) the occurrence of a Bankruptcy Event in respect of, or the dissolution or liquidation of, the Holder of the Common Securities; (b) the written direction to the Property Trustee from the Depositor at any time to terminate the Trust and, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, distribute Debentures to Securityholders in exchange for the Capital Securities (which direction is optional and wholly within the discretion of the Depositor); (c) the redemption of all of the Capital Securities in connection with the redemption of all of the Debentures; and (d) the entry of an order for dissolution of the Trust by a court of competent jurisdiction. SECTION 9.3 Termination. The respective obligations and responsibilities of the Trustees and the Trust created and continued hereby shall terminate upon the latest to occur of the following: (a) the distribution by the Property Trustee to Securityholders upon the liquidation of the Trust pursuant to Section 9.4, or upon the redemption of all of the Trust Securities pursuant to Section 4.2, of all amounts required to be distributed hereunder upon the final payment of the Trust Securities; (b) the payment of any expenses owed by the Trust; and (c) the discharge of all administrative duties of 50 44 the Administrative Trustees, including the performance of any tax reporting obligations with respect to the Trust or the Securityholders. SECTION 9.4 Liquidation. (a) If an Early Termination Event specified in clause (a), (b) or (d) of Section 9.2 occurs or upon the Expiration Date, the Trust shall be liquidated by the Trustees as expeditiously as the Trustees determine to be possible by distributing, after satisfaction or the making of reasonable provisions for the payment of liabilities to creditors of the Trust as provided by applicable law, to each Securityholder a Like Amount of Debentures, subject to Section 9.4(d). Notice of liquidation shall be given by the Property Trustee by first-class mail, postage prepaid mailed not later than 30 nor more than 60 days prior to the Liquidation Date to each Holder of Trust Securities at such Holder's address appearing in the Securities Register. All notices of liquidation shall: (i) state the CUSIP, Common Code and ISIN Numbers of the Trust Securities; (ii) state the Liquidation Date; (iii) state that from and after the Liquidation Date, the Trust Securities will no longer be deemed to be Outstanding and any Trust Securities Certificates not surrendered for exchange will be deemed to represent a Like Amount of Debentures; and (iv) provide such information with respect to the mechanics by which Holders may exchange Trust Securities Certificates for Debentures, or if Section 9.4(d) applies receive a Liquidation Distribution, as the Administrative Trustees or the Property Trustee shall deem appropriate. (b) Except where Section 9.2(c) or 9.4(d) applies, in order to effect the liquidation of the Trust and distribution of the Debentures to Securityholders, the Property Trustee shall establish a record date for such distribution (which shall be not more than 45 days prior to the Liquidation Date) and, either itself acting as exchange agent or through the appointment of a separate exchange agent, shall establish such procedures as it shall deem appropriate to effect the distribution of Debentures in exchange for the Outstanding Trust Securities Certificates. (c) Except where Section 9.2(c) or 9.4(d) applies, after the Liquidation Date, (i) the Trust Securities will no longer be deemed to be Outstanding, (ii) certificates representing a Like Amount of Debentures will be issued to Holders of Trust Securities Certificates, upon surrender of such certificates to the Administrative Trustees or their agent for exchange, (iii) the Depositor shall use its best efforts to have the Debentures listed on the New York Stock Exchange or on such other exchange, interdealer quotation system or self-regulatory organization as the Capital Securities are then listed or traded, (iv) any Trust Securities Certificates not so surrendered for exchange will be deemed to represent a Like Amount of Debentures, accruing interest at the rate provided for in the Debentures from the last Distribution Date on which a Distribution was made on such Trust Securities Certificates until such certificates are so surrendered (and until such certificates are so surrendered, no payments of interest or principal will be made to Holders of Trust Securities Certificates with respect to such Debentures) and (v) all rights of Securityholders 51 45 holding Trust Securities will cease, except the right of such Securityholders to receive Debentures upon surrender of Trust Securities Certificates. (d) In the event that, notwithstanding the other provisions of this Section 9.4, whether because of an order for dissolution entered by a court of competent jurisdiction or otherwise, distribution of the Debentures in the manner provided herein is determined by the Property Trustee not to be practical, the Trust Property shall be liquidated, and the Trust shall be dissolved, wound-up or terminated, by the Property Trustee. In such event, on the date of the dissolution, winding-up or other termination of the Trust, Securityholders will be entitled to receive out of the assets of the Trust available for distribution to Securityholders, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, an amount equal to the Liquidation Amount per Trust Security plus accumulated and unpaid Distributions thereon to the date of payment (such amount being the "Liquidation Distribution"). If, upon any such dissolution, winding up or termination, the Liquidation Distribution can be paid only in part because the Trust has insufficient assets available to pay in full the aggregate Liquidation Distribution, then, subject to the next succeeding sentence, the amounts payable by the Trust on the Trust Securities shall be paid on a pro rata basis (based upon Liquidation Amounts). The Holder of the Common Securities will be entitled to receive Liquidation Distributions upon any such dissolution, winding-up or termination pro rata (determined as aforesaid) with Holders of Capital Securities, except that, if a Debenture Event of Default has occurred and is continuing, the Capital Securities shall have a priority over the Common Securities. SECTION 9.5 Mergers, Consolidations, Amalgamations or Replacements of the Trust. The Trust may not merge with or into, consolidate, amalgamate, or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to any corporation or other Person, except pursuant to this Article IX. At the request of the Depositor, with the consent of the Administrative Trustees and without the consent of the Holders of the Capital Securities, the Property Trustee or the Delaware Trustee, the Trust may merge with or into, consolidate, amalgamate, or be replaced by or convey, transfer or lease its properties and assets substantially as an entirety to a trust organized as such under the laws of any State; provided, that (i) such successor entity either (a) expressly assumes all of the obligations of the Trust with respect to the Capital Securities or (b) substitutes for the Capital Securities other securities having substantially the same terms as the Capital Securities (the "Successor Securities") so long as the Successor Securities rank the same as the Capital Securities rank in priority with respect to distributions and payments upon liquidation, redemption and otherwise, (ii) the Depositor expressly appoints a trustee of such successor entity possessing the same powers and duties as the Property Trustee as the holder of the Debentures, (iii) the Successor Securities are listed or traded, or any Successor Securities will be listed upon notification of issuance, on any national securities exchange or other organization on which the Capital Securities are then listed or traded, if any, (iv) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not cause the Capital Securities (including any Successor Securities) to be downgraded by any nationally recognized statistical rating organization, (v) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the holders of the Capital Securities (including any Successor Securities) in any material respect, (vi) such successor entity has a purpose identical to that of the Trust, (vii) prior to such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, the Depositor has received an Opinion of Counsel to the effect that (a) such merger, consolidation, 52 46 amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the holders of the Capital Securities (including any Successor Securities) in any material respect, and (b) following such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, neither the Trust nor such successor entity will be required to register as an investment company under the 1940 Act and (viii) the Depositor owns all of the common securities of such successor entity and guarantees the obligations of such successor entity under the Successor Securities at least to the extent provided by the Guarantee. Notwithstanding the foregoing, the Trust shall not, except with the consent of Holders of 100% in Liquidation Amount of the Capital Securities, consolidate, amalgamate, merge with or into, or be replaced by or convey, transfer or lease its properties and assets substantially as an entirety to any other Person or permit any other Person to consolidate, amalgamate, merge with or into, or replace it if such consolidation, amalgamation, merger, replacement, conveyance, transfer or lease would cause the Trust or the successor entity to be classified as other than a grantor trust for United States federal income tax purposes. ARTICLE X MISCELLANEOUS PROVISIONS SECTION 10.1 Limitation of Rights of Securityholders. The death, incapacity, liquidation, dissolution, termination or bankruptcy of any Person having an interest, beneficial or otherwise, in Trust Securities shall not operate to terminate this Trust Agreement, nor entitle the legal representatives or heirs of such Person or any Securityholder for such Person, to claim an accounting, take any action or bring any proceeding in any court for a partition or winding up of the arrangements contemplated hereby, nor otherwise affect the rights, obligations and liabilities of the parties hereto or any of them. SECTION 10.2 Liability of the Common Securityholder. The Holder of the Common Securities shall be liable for all of the debts and obligations of the Trust (other than with respect to the Securities) to the extent not satisfied out of the Trust's assets. SECTION 10.3 Amendment. (a) This Trust Agreement may be amended from time to time by the Property Trustee, the Administrative Trustees and the Depositor, without the consent of any Securityholders, (i) to cure any ambiguity, correct or supplement any provision herein which may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Trust Agreement, which shall not be inconsistent with the other provisions of this Trust Agreement, or (ii) to modify, eliminate or add to any provisions of this Trust Agreement to such extent as shall be necessary to ensure that the Trust will be classified for United States federal income tax purposes as a grantor trust at all times that any Trust Securities are outstanding or to ensure that the Trust will not be required to register as an investment company under the 1940 Act; provided, however, that in the case of clause (i) or clause (ii), such action shall not adversely affect in any material respect the interests of any Securityholder, and 53 47 any amendments of this Trust Agreement shall become effective when notice thereof is given to the Securityholders. (b) Except as provided in Section 10.3(c) hereof, any provision of this Trust Agreement may be amended by the Trustees and the Depositor with (i) the consent of Trust Securityholders representing not less than a majority (based upon Liquidation Amounts) of the Trust Securities then Outstanding and (ii) receipt by the Trustees of an Opinion of Counsel to the effect that such amendment or the exercise of any power granted to the Trustees in accordance with such amendment will not affect the Trust's status as a grantor trust for United States federal income tax purposes or the Trust's exemption from status of an investment company under the 1940 Act. (c) In addition to and notwithstanding any other provision in this Trust Agreement, without the consent of each affected Securityholder (such consent being obtained in accordance with Section 6.3 or 6.6 hereof), this Trust Agreement may not be amended to (i) change the amount or timing of any Distribution on the Trust Securities or otherwise adversely affect the amount of any Distribution required to be made in respect of the Trust Securities as of a specified date or (ii) restrict the right of a Securityholder to institute suit for the enforcement of any such payment on or after such date; notwithstanding any other provision herein, without the unanimous consent of the Securityholders (such consent being obtained in accordance with Section 6.3 or 6.6 hereof), this paragraph (c) of this Section 10.3 may not be amended. (d) Notwithstanding any other provisions of this Trust Agreement, no Trustee shall enter into or consent to any amendment to this Trust Agreement which would cause the Trust to fail or cease to qualify for the exemption from status of an investment company under the 1940 Act or fail or cease to be classified as a grantor trust for United States federal income tax purposes. (e) Notwithstanding anything in this Trust Agreement to the contrary, without the consent of the Depositor, this Trust Agreement may not be amended in a manner which imposes any additional obligation on the Depositor. (f) In the event that any amendment to this Trust Agreement is made, the Administrative Trustees shall promptly provide to the Depositor a copy of such amendment. (g) Neither the Property Trustee nor the Delaware Trustee shall be required to enter into any amendment to this Trust Agreement which affects its own rights, duties or immunities under this Trust Agreement. The Property Trustee shall be entitled to receive an Opinion of Counsel and an Officers' Certificate stating that any amendment to this Trust Agreement is in compliance with this Trust Agreement. SECTION 10.4 Separability. In case any provision in this Trust Agreement or in the Trust Securities Certificates shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 10.5 Governing Law. 54 48 THIS TRUST AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF EACH OF THE SECURITYHOLDERS, THE TRUST AND THE TRUSTEES WITH RESPECT TO THIS TRUST AGREEMENT AND THE TRUST SECURITIES SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE (WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES). SECTION 10.6 Payments Due on Non-Business Day. If the date fixed for any payment on any Trust Security shall be a day that is not a Business Day, then such payment need not be made on such date but may be made on the next succeeding day that is a Business Day (except as otherwise provided in Sections 4.1(a) and 4.2(d)), with the same force and effect as though made on the date fixed for such payment, and no interest shall accrue thereon for the period after such date. SECTION 10.7 Successors. This Trust Agreement shall be binding upon and shall inure to the benefit of any successor to the Depositor, the Trust or the Relevant Trustee, including any successor by operation of law. Except in connection with a consolidation, merger or sale involving the Depositor that is permitted under Article Eight of the Indenture and pursuant to which the assignee agrees in writing to perform the Depositor's obligations hereunder, the Depositor shall not assign its obligations hereunder. SECTION 10.8 Headings. The Article and Section headings are for convenience only and shall not affect the construction of this Trust Agreement. SECTION 10.9 Reports, Notices and Demands. Any report, notice, demand or other communication which by any provision of this Trust Agreement is required or permitted to be given or served to or upon any Securityholder or the Depositor may be given or served in writing by deposit thereof, first-class postage prepaid, in the United States mail, hand delivery or facsimile transmission, in each case, addressed, (a) in the case of a Capital Securityholder, to such Capital Securityholder as such Securityholder's name and address may appear on the Securities Register; and (b) in the case of the Common Securityholder or the Depositor, to The Chase Manhattan Corporation, 270 Park Avenue, New York, New York 10017, Attention: Treasurer, facsimile no.: (212) 270-1604. Such notice, demand or other communication to or upon a Securityholder shall be deemed to have been sufficiently given or made, for all purposes, upon hand delivery, mailing or transmission. Any notice, demand or other communication which by any provision of this Trust Agreement is required or permitted to be given or served to or upon the Trust, the Property Trustee, the Delaware Trustee or the Administrative Trustees shall be given in writing addressed (until another address is published by the Trust) as follows: (a) with respect to the Property Trustee to The Bank of New York, 101 Barclay Street, New York, New York 10286, Attention: Corporate Trust Administration; (b) with respect to the Delaware Trustee, to The Bank of New 55 49 York (Delaware), White Clay Center, Route 273, Newark, Delaware, with a copy to the Property Trustee at the address set forth in Clause (a); and (c) with respect to the Administrative Trustees, to them at the address above for notices to the Depositor, marked "Attention Administrative Trustees of Chase Capital II." Such notice, demand or other communication to or upon the Trust or the Property Trustee shall be deemed to have been sufficiently given or made only upon actual receipt of the writing by the Trust or the Property Trustee. SECTION 10.10 Agreement Not to Petition. Each of the Trustees and the Depositor agree for the benefit of the Securityholders that, until at least one year and one day after the Trust has been terminated in accordance with Article IX, they shall not file, or join in the filing of, a petition against the Trust under any bankruptcy, insolvency, reorganization or other similar law (including, without limitation, the United States Bankruptcy Code) (collectively, "Bankruptcy Laws") or otherwise join in the commencement of any proceeding against the Trust under any Bankruptcy Law. In the event the Depositor takes action in violation of this Section 10.10, the Property Trustee agrees, for the benefit of Securityholders, that at the expense of the Depositor, it shall file an answer with the bankruptcy court or otherwise properly contest the filing of such petition by the Depositor against the Trust or the commencement of such action and raise the defense that the Depositor has agreed in writing not to take such action and should be stopped and precluded therefrom and such other defenses, if any, as counsel for the Trustee or the Trust may assert. The provisions of this Section 10.10 shall survive the termination of this Trust Agreement. SECTION 10.11 Trust Indenture Act; Conflict with Trust Indenture Act. (a) This Trust Agreement is subject to the provisions of the Trust Indenture Act that are required or deemed to be part of this Trust Agreement and shall, to the extent applicable, be governed by such provisions. (b) The Property Trustee shall be the only Trustee which is a trustee for the purposes of the Trust Indenture Act. (c) If any provision hereof limits, qualifies or conflicts with another provision hereof which is required or deemed to be included in this Trust Agreement by any of the provisions of the Trust Indenture Act, such required or deemed provision shall control. If any provision of this Trust Agreement modifies or excludes any provision of the Trust Indenture Act which may be so modified or excluded, the latter provision shall be deemed to apply to this Trust Agreement as so modified or excluded, as the case may be. (d) The application of the Trust Indenture Act to this Trust Agreement shall not affect the nature of the Trust Securities as equity securities representing undivided beneficial interests in the assets of the Trust. 56 50 SECTION 10.12 Acceptance of Terms of Trust Agreement, Guarantee and Indenture. THE RECEIPT AND ACCEPTANCE OF A TRUST SECURITY OR ANY INTEREST THEREIN BY OR ON BEHALF OF A SECURITYHOLDER OR ANY BENEFICIAL OWNER, WITHOUT ANY SIGNATURE OR FURTHER MANIFESTATION OF ASSENT, SHALL CONSTITUTE THE UNCONDITIONAL ACCEPTANCE BY THE SECURITYHOLDER AND ALL OTHERS HAVING A BENEFICIAL INTEREST IN SUCH TRUST SECURITY OF ALL THE TERMS AND PROVISIONS OF THIS TRUST AGREEMENT AND AGREEMENT TO THE SUBORDINATION PROVISIONS AND OTHER TERMS OF THE GUARANTEE AND THE INDENTURE, AND SHALL CONSTITUTE THE AGREEMENT OF THE TRUST, SUCH SECURITYHOLDER AND SUCH OTHERS THAT THE TERMS AND PROVISIONS OF THIS TRUST AGREEMENT SHALL BE BINDING, OPERATIVE AND EFFECTIVE AS BETWEEN THE TRUST AND SUCH SECURITYHOLDER AND SUCH OTHERS. SECTION 10.13 Holders are Parties. Notwithstanding that Holders have not executed and delivered this Trust Agreement or any counterpart thereof, Holders shall be deemed to be parties to this Trust Agreement and shall be bound by all of the terms and conditions hereof and of the Trust Securities by acceptance and delivery of the Trust Securities. 57 51 SECTION 10.14 Counterparts. This Trust Agreement may contain more than one counterpart of the signature page and this Trust Agreement may be executed by the affixing of the signature of each of the Trustees of one of such counterpart signature pages. All of such counterpart signature pages shall be read as though one, and they shall have the same force and effect as though all of the signers had signed a single signature page. THE CHASE MANHATTAN CORPORATION By: /s/ Deborah L. Duncan ------------------------------------- Name: Deborah L. Duncan Title: Treasurer THE BANK OF NEW YORK, as Property Trustee By: /s/ Paul J. Schmalzel ------------------------------------- Name: Paul J. Schmalzel Title: Assistant Treasurer THE BANK OF NEW YORK (DELAWARE), as Delaware Trustee By: /s/ Melissa J. Beneduce ------------------------------------- Name: Melissa J. Beneduce Title: Assistant Vice President /s/ Peter J. Tobin ---------------------------------------- PETER J. TOBIN as Administrative Trustee /s/ Deborah L. Duncan ---------------------------------------- DEBORAH L. DUNCAN as Administrative Trustee EX-10.10 5 LONG TERM INCENTIVE PROGRAM 1 EXHIBIT 10.10 THE LONG TERM INCENTIVE PROGRAM OF MANUFACTURERS HANOVER CORPORATION AND SUBSIDIARIES SECTION 1 - PURPOSE AND TERM OF PLAN The Long Term Incentive Program is designed, through grants of awards and deferred compensation, to attract and retain the services of selected key officers who are in a position to make a material contribution to the successful operation of the business of Manufacturers Hanover Corporation or one or more of its subsidiaries. Long term incentive compensation awards under the Plan shall be made to selected Participants in the form of one or more of: Restricted Stock, Restricted Stock Units, stock options (including incentive stock options and performance stock options) and Stock Appreciation Rights. The Plan became effective January 19, 1982, and no awards may be made under the Plan subsequent to January 18, 1992. SECTION 2 - DEFINITIONS For the purpose of this Plan, the following terms shall have the following meanings: (a) "Board of Directors" means the Board of Directors of the Corporation. (b) "Committee" means the Compensation Committee of the Board of Directors or such other committee as may be designated by the Board of Directors. (c) "Common Stock" means the common stock of the Corporation. (d) "Corporation" means Manufacturers Hanover Corporation. (e) "Corporation's Stock Price Index" means, with respect to any Stock Performance Period, the numerical result of (i) dividing the Fair Market Value of the Corporation's Common Stock on the last day of the Stock Performance Period by the Fair Market Value of such Common Stock on the first day of the Stock Performance Period (the 'quotient') and (ii) subtracting one (1.0) from such quotient." (f) "Disability" means a physical or mental impairment sufficient to make the individual eligible for benefits under the Long Term Disability Plan of Manufacturers Hanover Trust Company, so long as such impairment also constitutes a disability within the meaning of Section 105(d)(4) of the Internal Revenue Code of 1954. 2 -2- (g) "Fair Market Value" on a specified day means, with respect to the common stock of the Corporation (or, as the case may be, a member of the Peer Group), the closing price on that day as reported on the New York Stock Exchange -- Composite Tape, or if no sale of the common stock shall have occurred on the Exchange that day, on the next preceding day on which there was such a sale. If such common stock is not traded on the New York Stock Exchange, the fair market value shall be such amount as shall be reasonably determined by the Committee. (h) "Option Period" means the period from the grant of an option to its expiration, as described in Section 6.3. (i) "Optionee" means a Participant who has been granted an option under the Plan. (j) "Participant" means a key officer of the Corporation or of a Subsidiary who has been selected by the Committee to receive an award under the Plan. (k) "Peer Group" means a group of institutions, as selected by the Committee. The Committee shall have complete discretion to select appropriate institutions to be included in the Peer Group and to add institutions to or delete institutions from the Peer Group from time to time. (l) "Peer Group Stock Price Index" means, with respect to any Stock Performance Period, the numerical result of (i) dividing the average Fair Market Value of the common stock of all members of the Peer Group on the last day of the Stock Performance Period by the average Fair Market Value of the common stock of all members of the Peer Group on the first day of the Stock Performance Period (the 'quotient') and (ii) subtracting one (1.0) from such quotient. (m) "Performance Period" means, with respect to any financial measure of the Corporation relating to a performance stock option, a period of years, as determined by the Committee, which shall commence with the first day of the calendar quarter following the calendar quarter in which the grant of the option occurs. 3 -3- (n) "Performance Program" means, collectively, the decisions of the Committee regarding the designation of the Peer Group, Return on Equity and T-Bill Rate and any other designations or decisions made by the Committee in accordance with the Plan which will determine the price at, and the extent to, which a Performance Stock option award may be exercised. The Performance Program with respect to any Performance Stock option shall be set within three months of the date of grant. (o) "Plan" means the Long Term Incentive Program of Manufacturers Hanover Corporation and Subsidiaries. (p) "Plan Year" means the calendar year. (q) "Restricted Period" means the period of up to fourteen (14) years selected by the Committee pursuant to Section 4.2 or 5.1. (r) "Restricted Stock" means Common Stock which has been awarded to a Participant subject to the restrictions referred to in Section 4.2, so long as such restrictions are in effect. (s) "Restricted Stock Unit" means the right to receive a payment on or about the last day of a Restricted Period in the form of cash or stock, as further described in Section 5. (t) "Retirement" means normal or early retirement under the terms of a pension plan of the Corporation or a Subsidiary or voluntary termination of employment; provided, however, that in either case, the Corporation must have given its prior consent to treat the individual's termination of employment as a retirement. (u) "Return on Equity" means, with respect to any Performance Period, the annual rate of return on equity of the Corporation (or such other financial measure, with respect to the Corporation, as the Committee shall deem appropriate) or of a designated segment of the Corporation or any of its Subsidiaries, as calculated by the Committee." 4 -4- (v) "Stock Appreciation Right" means, with respect to a share of Common Stock, the right to receive in the form of Common Stock and/or cash, as determined by the Committee, an amount equal to the excess of the Fair Market Value of the share of Common Stock on the day the right is exercised over the price at which the Participant could exercise an option to purchase the share. (w) "Stock Performance Period" means, with respect to any performance stock option, a period of years, as determined by the Committee which shall commence on the day the options is granted. (x) "Subsidiary" means any corporation or other legal entity, domestic or foreign, more than 50% of the voting power of which is owned or controlled, directly or indirectly, by the Corporation. (y) "T-Bill Rate" means, with respect to any Performance Period, the annual rate of return on capital invested in U.S. treasury bills on the first day of the Performance Period, which capital and earnings thereon are continuously reinvested upon maturity of such bills in new U.S. treasury bills until the last day of the Performance Period. SECTION 3 - GENERAL PROVISIONS 3.1 The Committee shall from time to time designate those persons to be granted awards under the Plan during each Plan Year, the type of awards granted, the number of shares, units, options or rights, as the case may be, which shall be granted to each such person, the Restricted Period or Option Period with respect to the awards, and any other conditions relating to the awards as it may deem appropriate, consistent with the provisions of the Plan. Participants shall be selected from among the key officers of the Corporation and its Subsidiaries who are in a position to have a material impact on the results of the operations of the Corporation and its Subsidiaries in future years. Participants may be designated at any time during a Plan Year, and it shall not be necessary that all Participants be designated at the same meeting of the Committee. 5 -5- 3.2 (a) Shares of Common Stock which may be issued under the Plan may be either authorized and unissued shares of Common Stock or authorized and issued shares of Common Stock held in the Corporation's Treasury. Subject to Section 9.7, the number of shares of Common Stock with respect to which awards may be granted under the Plan in any Plan Year shall be one-half of one percent (0.5%) of the total shares of Common Stock outstanding on the last day of the preceding Plan Year (including treasury shares); provided, however, that the number of shares of Common Stock which may be issued during the term of the Plan under options and Stock Appreciation Rights shall not exceed 1,000,000. For this purpose, in addition to the number of shares of Common Stock with respect to which awards are actually made under the Plan, there shall be deemed to be awarded the number of shares of Common Stock equal to the number of Restricted Stock Units awarded under the Plan. (b) Notwithstanding Section 3.2(a), to the extent that the number of shares of Common Stock with respect to which awards may be granted under the Plan in any Plan Year exceeds the number of shares of Common Stock with respect to which awards were granted under the Plan during the Plan Year, such excess shall be available for grant under the Plan in succeeding Plan Years. (c) Any shares of Common Stock returned to the Corporation as the result of the forfeiture of Restricted Stock, and any shares of Common Stock with respect to which the Restricted Stock Units shall be forfeited or options shall expire or terminate (other than by reason of the exercise of Stock Appreciation Rights) shall again be available for grant under the Plan. 6 -6- SECTION 4 - RESTRICTED STOCK 4.1 An award of Restricted Stock shall entitle a Participant to receive, on the date or dates designated by the Committee, the number of shares of Common Stock selected by the Committee. Restricted Stock awards shall be expressly subject to the terms and conditions described in this Section 4. 4.2 During the Restricted Period selected by the Committee, shares of Restricted Stock awarded to the Participant may not be sold, assigned, transferred, pledged or otherwise encumbered, except as hereinafter provided. Except for such restrictions, the Participant, as owner of such shares, shall have all the rights of a stockholder, including (but not limited to) the right to receive all dividends paid on such shares (subject to the provisions of Sections 9.7 and 9.9) and the right to vote such shares. 4.3 If a Participant ceases to be an employee of the Corporation or its Subsidiaries during the Restricted Period for any reason other than death, Disability or Retirement, all shares of Restricted Stock theretofore awarded to him which are still subject to the restrictions imposed by Section 4.2 shall upon such termination of employment be forfeited and returned to the Corporation. 4.4 If a Participant ceases to be an employee of the Corporation or its Subsidiaries during the Restricted Period by reason of death, Disability or Retirement, shares of Restricted Stock shall become free of the restrictions in Section 4.2 to the extent determined by the Committee and the Corporation will deliver to him or his beneficiary, as the case may be, within 60 days, such shares of Common Stock pursuant to Section 4.7. Shares of Common Stock which do not become free of restrictions shall be forfeited and returned to the Corporation. 7 -7- 4.5 Each Participant awarded shares of Restricted Stock shall enter into an Agreement with the Corporation in a form specified by the Committee, agreeing to the terms and conditions of the award and such other matters as the Committee shall in its sole discretion determine. 4.6 Each certificate issued in respect of shares of Restricted Stock awarded under the Plan shall be registered in the name of the Participant, shall be deposited by him with the Corporation together with a stock power endorsed in blank and shall bear the following (or a similar) legend: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) contained in Section 4 of the Long Term Incentive Program of Manufacturers Hanover Corporation and Subsidiaries and an Agreement entered into between the registered owner and Manufacturers Hanover Corporation. A copy of such Plan and Agreement is on file in the office of the Secretary of Manufacturers Hanover Corporation, 350 Park Avenue, New York, 10022". 4.7 When the restrictions imposed by Section 4.2 or other similar restrictions expire or have otherwise been satisfied with respect to one or more shares of Restricted Stock, the Corporation shall deliver to the Participant (or his legal representative, beneficiary or heir) one share of Common Stock, without the legend referred to in Section 4.6, for each such share of Restricted Stock deposited with it by the Participant pursuant to Section 4.6. At that time, the Agreement referred to in Section 4.5, as it relates to such shares, shall be terminated. 8 -8- SECTION 5 - RESTRICTED STOCK UNITS 5.1 Each Restricted Stock Unit awarded to a Participant shall, subject to the remaining provisions of this Section 5, and such other conditions as the Committee shall prescribe, entitle the Participant to receive, on or about the last day of the Restricted Period designated by the Committee, a payment in the form, as determined by the Participant prior to the last day of the Restricted Period, of (i) one share of Common Stock or (ii) cash in an amount equal to the Fair Market Value of a share of Common Stock on the last day of the Restricted Period. 5.2 During the Restricted Period of Restricted Stock Units awarded to a Participant, the Participant shall receive in cash, at the time that dividends are distributed to shareholders with respect to Common Stock, the amount which the Participant would have received as a dividend had the Participant held the number of shares of Common Stock equal to the number of Restricted Stock Units credited to the Participant (hereinafter referred to as "dividend equivalents"); provided, however, that a Participant may irrevocably elect within 30 days after the commencement of the Restricted Period or prior to the beginning of any Plan Year to defer receipt of dividend equivalents otherwise payable during that Plan Year and/or any subsequent Plan Years to the end of the Restricted Period, or, if earlier, the termination of his employment with the Corporation or its Subsidiaries. An election to defer may be revoked with respect to dividend equivalents payable in any succeeding Plan Year prior to the beginning of that Plan Year. Amounts so deferred shall be credited with interest as a rate determined periodically by the Committee. No interest shall be payable, however, with respect to any dividend equivalents which relate to Restricted Stock Units which are forfeited pursuant to Section 5.3 below. 9 -9- 5.3 If a Participant ceases to be an employee of the Corporation or its Subsidiaries during the Restricted Period for any reason other than death, Disability or Retirement, all Restricted Stock Units theretofore awarded to him shall upon such termination of employment be forfeited and shall cease to be credited to him and he shall receive any dividend equivalents deferred pursuant to Section 5.2, without interest thereon. 5.4 If a Participant ceases to be an employee of the Corporation or its Subsidiaries during the Restricted Period by reason of death, Disability or Retirement, then his Restricted Stock Units shall become free of such restrictions to the extent determined by the Committee, and the Corporation within 60 days thereafter will pay him or his beneficiary, as the case may be, with respect to each such Unit, one share of Common Stock or an amount of cash equal to the Fair Market Value of a share of Common Stock on the date the event described in this Section 5.4 occurred. Restricted Stock Units which do not become free of restrictions shall be forfeited. In either event the Participant shall receive any dividend equivalents deferred pursuant to Section 5.2, plus interest thereon. SECTION 6 - STOCK OPTIONS AND STOCK APPRECIATION RIGHTS ------------------------------------------------------- 6.1 The Committee may grant incentive stock options, non-qualified stock options (including performance stock options having the features described in Section 6.2(b) and Section 6.3) and/or Stock Appreciation Rights to eligible individuals, subject to the terms and conditions set forth in this Section 6. The grant of an option shall be evidenced by a written option agreement executed by the Corporation and the Optionee, which may contain such additional terms and conditions as the Committee may from time to time prescribe. 10 -10- 6.2 a) The option price per share with respect to each option shall (except as provided under paragraph (b) of Section 6.2) not be less than 100 per cent of the Fair Market Value of a share of Common Stock on the day the option is granted. b) The option price per share with respect to each performance stock option initially shall be 100 percent of the Fair Market Value of a share of Common Stock on the day the option is granted (the 'Initial Price'), and shall be adjusted thereafter as follows: if the Corporation's Stock Price Index minus the Peer Group Stock Price Index for the applicable Stock Performance Period (the 'index differential') is greater than zero, the Initial Price reduced by the product of the index differential and the Initial Price shall be the option price (the 'Final Price'). The Final Price shall not, however, be less than fifty percent (50%) of the Initial Price. The Final Price shall equal the Initial Price if the Corporation's Stock Price Index or the index differential is zero or less. In lieu of the foregoing reduction in price, the Committee may provide that an option be exercisable at the Initial Price and that the Optionee receive, at the time of exercise, in cash, the excess of the Initial Price over the Final Price. 6.3 Options granted under this Plan shall expire no later than the day preceding the fifteenth (15th) anniversary of the date the option was granted; provided that no incentive stock option shall be exercisable after the expiration of ten (10) years from the date such option is granted. The period of time from the date of grant of an option to its expiration date shall be known as the "Option Period". No option shall become exercisable within one year after the date of grant; the Committee may prescribe the date or dates thereafter upon which all or a portion of the option becomes exercisable. On the date a performance stock option first becomes exercisable, the portion (if any) of such option which shall become exercisable will be determined by the Committee in accordance with the Performance Program. 11 -11- 6.4 At the time of exercising any option in whole or in part, the Optionee or other person exercising the option shall pay the Corporation in the form of cash and/or Common Stock (including Restricted Stock) or other property acceptable to the Corporation the full option price of the shares so purchased. The shares shall thereupon be promptly delivered. No optionee or his legal representatives, legatees or distributees, as the case may be, will be deemed to be a holder of any shares pursuant to exercise of an option until the date of issuance of a stock certificate to him for such shares. The proceeds of the sale of stock subject to options are to be added to the general funds of the Corporation and used for its general corporate purposes. 6.5 If, prior to the end of the Option Period, the Optionee shall cease to be employed by the Corporation or its Subsidiaries (otherwise than by reason of the death, Disability or Retirement of the Optionee), each option shall remain exercisable for a period of three (3) months from the date of cessation of employment (but not later than the end of the Option Period) to the extent it was exercisable at the time of cessation of employment, and thereafter all such options shall terminate. If, prior to the end of the Option Period, the Optionee shall cease to be employed by reason of Retirement, each option shall remain exercisable for a period of five years from the date of Retirement (but not later than the end of the Option Period) to the extent that it was exercisable at the time of Retirement, and thereafter all such options shall terminate. If, prior to the end of the Option Period, the Optionee shall cease to be employed by the Corporation or its Subsidiaries by reason of death or Disability each option shall remain exercisable for a period of one year form the date of cessation of employment (but not later than the end of the Option Period) to the extent that it was exercisable at the time of cessation of employment, and thereafter all such options shall terminate. Notwithstanding the provisions of this paragraph, if the Optionee is discharged for cause (which shall be defined as participation in conduct during employment consisting of fraud, felony, willful misconduct or commission of any act which causes or may reasonably be expected to cause substantial damage to the Corporation or a Subsidiary) each option to the extent not previously exercised shall terminate at once. 12 -12- 6.6 The Committee may grant Stock Appreciation Rights to selected Participants. Stock Appreciation Rights shall be issued in tandem with options so that exercise of a Stock Appreciation Right will have the effect of terminating the option or portion thereof to which it relates, and exercise of an option or portion thereof to which a Stock Appreciation Right relates will similarly have the effect of terminating the Stock Appreciation Right. Stock Appreciation Rights shall be exercisable in the same installments and shall be subject to the same terms and conditions as the options to which they relate, as well as such other terms and conditions which the Committee shall deem appropriate. 6.7 The aggregate Fair Market Value (determined as of the date the option is granted) of the Common Stock for which any employee may be granted incentive stock options in any calendar year ending prior to January 1, 1987 under this or any other stock option plan maintained by the Corporation and/or its Subsidiaries shall not exceed (a) $100,000 plus (b) the "carryover amount" for that calendar year. The "carryover amount" with respect to a calendar year shall equal (a) one-half of the sum of the excess, for each of the preceding three calendar years (excluding years prior to 1981) of $100,000 over the Fair Market Value (determined as of the time the option is granted) of the Common Stock for which the meployee was granted incentive stock options under this or any other stock option plan maintained by the Corporation and/or its Subsidiaries, minus (b) the amount of any such excess used as a carryover amount in the grant of incentive stock options in any preceding calendar year. For purposes of this paragraph, the amount of options granted in any calendar year shall be treated as first using up the $100,000 limitation for that year and any additional grants shall be treated as using up unused carryover amounts in the order of the calendar years in which the carryover amounts arose. 13 -13- 6.8 The aggregate Fair Market Value (determined as of the date the option is granted) of the Common Stock for which any employee may be granted, after December 31, 1986, incentive stock options which are exercisable for the first time by such employee during any one calendar year under this or any other stock option plan maintained by the Corporation and/or its Subsidiaries shall not exceed $100,000. SECTION 7 - ADMINISTRATION 7.1 The Plan shall be administered by the Committee, which shall be composed of such members (not less than three) of the Board of Directors as shall be appointed from time to time by the Board. No person who is an officer of the Corporation or any of its Subsidiaries shall be appointed a member of the Committee. Any member of the Committee may resign at any time. The Board of Directors may remove any member of the Committee at any time and may fill any vacancy in the Committee. 7.2 Subject to the provisions of the Plan, the Committee shall have exclusive power to select the key officers who shall be Participants and to determine the amount of, of method of determining, the awards to be made to each such Participant. 7.3 The Committee's interpretation of the Plan or of any award granted pursuant thereto shall be final and binding on all Participants. 7.4 The Committee shall have the authority to establish, adopt or revise such rules or regulations relating to the Plan as it may deem necessary or advisable for the administration of the Plan, including, but not limited to, the determination of the criteria and methods under which the exercise price and other terms relating to performance stock options shall be determined. 14 -14- SECTION 8 - AMENDMENT OR TERMINATION 8.1 The Board of Directors may amend any provision of the Plan or any agreement thereunder at any time; provided, however, that without the approval of shareholders no amendment may be made that would (i) increase the maximum number of shares to be issued under the Plan; (ii) extend the term during which options may be granted under the Plan; (iii) reduce the option price per share to less than the Fair Market Value of the Common Stock on the date the option was granted. The Board of Directors shall also have the right to terminate the Plan at any time. If the Plan is terminated, deferred compensation shall nevertheless be paid out in accordance with the provisions of the Plan as in effect prior to its termination, including the provisions relating to the authority of the Committee to administer and interpret the Plan. Except with the consent of the Participant, no amendment, suspension or termination shall impair the rights of any Participant in any Common Stock, units, options or rights awarded to such participant under the Plan. 8.2 The Committee may in any Plan Year refrain from designating any Participants or may refrain from making any awards, but such action shall not be deemed a termination of the Plan. No Participant or officer shall have any claim or right to be granted awards under the Plan. SECTION 9 - MISCELLANEOUS 9.1 The fact that a key officer has been designated as a participant shall not confer on him any right to be retained in the employ of the Corporation or one or more of its Subsidiaries, or to be designated as a Participant in any subsequent Plan Year. 15 -15- 9.2 No award under this Plan shall be taken into account in determining a Participant's compensation for the purposes of any group life insurance or other employee benefit or pension plan of the Corporation or a Subsidiary, including the Retirement Plan of Manufacturers Hanover Trust Company and Certain Affiliated Companies and the Savings Incentive Plan of Manufacturers Hanover Corporation. 9.3 This Plan shall not be deemed an exclusive method of providing incentive compensation for the officers and employees of the Corporation and its Subsidiaries, nor shall it preclude the Board of Directors from authorizing or approving other forms of incentive compensation. 9.4 All expenses and costs in connection with the operation of the Plan shall be borne by the Corporation. 9.5 Options, rights and units granted or awarded pursuant to this Plan shall not be transferable by the Participant other than by will or the laws of descent and distribution, and options and rights granted thereunder shall be exercisable, during a Participant's lifetime, only by him. 9.6 A Participant may appoint a beneficiary (on a form supplied by the Committee) to receive Restricted Stock Unit payments and exercise options and/or rights in the event of his death, and may change his beneficiary at any time prior to his date of death. 16 -16- 9.7 In the event of any change in the outstanding shares of Common Stock by reason of any stock dividend or split, recapitalization, merger, consolidation, combination or exchange of shares or other similar corporate change, the maximum aggregate number and class of shares in which awards may be granted under the Plan, the number of Restricted Stock units outstanding and the number of shares subject to outstanding options and Stock Appreciation Rights and the Corporation's Stock Price Index with respect to any Stock Performance Period, shall be appropriately adjusted by the Committee, whose determination shall be conclusive. Any shares of stock or other securities received by a Participant with respect to shares of Restricted Stock will be subject to the same restrictions and shall be deposited with the Corporation. 9.8 In the event of any change in the outstanding shares of the common stock of any member of the Peer Group merger, consolidation, combination or exchange of shares or other similar corporate change, the Peer Group Stock Price Index with respect to any affected Stock Performance Period may be appropriately adjusted by the Committee, whose determination shall be conclusive. 9.9 If the Corporation shall be consolidated or merged with another corporation, each Participant who has received shares of Restricted Stock that are still subject to restrictions imposed by Section 4.2 may be required to deposit with the successor corporation the stock, securities or other property that he is entitled to receive by reason of his ownership of the shares of Restricted Stock, and such stock, securities or other property shall become subject to the restrictions imposed by Section 4.2 and shall bear an appropriate legend similar in form and substance to the legend set forth in Section 4.6. 17 -17- 9.10 The Corporation shall be entitled to withhold from awards paid under the Plan the amount of taxes the Corporation deems necessary to satisfy any applicable Federal, state and local income tax withholding obligations arising from the payment of the award or to make other appropriate arrangements with Participants to satisfy such obligations. EX-10.13 6 FORMS OF SEVERANCE AGREEMENTS 1 EXHIBIT 10.13 AGREEMENT THIS AGREEMENT dated as of November 30, 1997, is made by and between The Chase Manhattan Corporation, a Delaware corporation, (the "Company"), and <> (the "Executive"). WHEREAS the Company considers it essential to the best interests of its shareholders to foster the continuous employment of key management personnel; and WHEREAS the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of key members of the management of the Company and its subsidiaries, including the Executive, to their assigned duties; NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this Agreement are provided in Section 15 hereof. 2. Term of Agreement. This Agreement shall commence on January 1, 1998, and shall continue in effect through the later of (a) December 31, 2000, or (b) if a Change in Control occurs on or prior to December 31, 2000, the second anniversary of the date on which such Change in Control occurs. 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and its subsidiaries and in consideration of the Executive's covenants 2 2 set forth in Section 5 hereof, the Company agrees, subject to the terms and conditions hereof, to pay (or cause an employing subsidiary to pay) the Executive the "Severance Payments" described in Section 4.01 hereof and the other payments and benefits described herein in the event the Executive's employment with the Company and its subsidiaries is terminated during the term of this Agreement. No amount or benefit shall be payable under this Agreement unless there shall have been a termination of the Executive's employment with the Company and its subsidiaries, as described in Section 4.01 hereof. This Agreement shall not be construed as creating an express or implied contract of employment, and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company or any of its subsidiaries. 4. Severance Payments. 4.01 Subject to Section 5.03 hereof, the Company shall pay (or cause an employing subsidiary to pay) the Executive the amounts, and provide the benefits, described in this Section 4.01 (the "Severance Payments") upon the termination of the Executive's employment with the Company and its subsidiaries during the term of this Agreement, unless such termination is by the Company or a subsidiary for Cause, by reason of death or Disability, or by the Executive without Good Reason. (a) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive a 3 3 series of substantially equal bi-weekly cash installment payments over the course of 24 months totalling two times the sum of (i) the Executive's Annual Base Salary in effect immediately prior to the occurrence of the event or circumstance upon which the Notice of Termination is based, and (ii) the average percentage annual bonus paid or determined and payable to the Executive in respect of the three preceding calendar years (expressed as a percentage of Annual Base Salary in effect at the end of each of such years), multiplied by the Executive's Annual Base Salary described in Section 4.01(a)(i) above. The Executive may elect, prior to the receipt of any payments under this Section 4.01(a), to receive the amount described in this Section 4.01(a) in the form of a lump-sum payment as soon as practicable following the Date of Termination; provided, however, that if the Executive makes such a lump-sum election, the Executive shall forego any rights to receive the benefits described in Section 4.01(b) below. (b) Except where the Executive has made a lump-sum election pursuant to the terms of Section 4.01(a) above, for a 24 month period after the Date of Termination, the Company shall provide the Executive with life, accident and health insurance benefits substantially similar to those which the Executive is receiving immediately prior to the Notice of Termination (without giving effect to any reduction in such benefits that constitutes Good Reason); provided, however, that the Executive shall pay his or her portion of premiums or contributions with respect to such insurance benefits at 4 4 the active employee rate; and provided, further, that all general changes to the Company's life, accident and health insurance benefit programs shall apply to the Executive. (To receive health insurance coverage under this Section 4.01(b), Executive must elect coverage in accordance with the Consolidated Omnibus Budget and Reconciliation Act of 1985, as amended.) Benefits otherwise receivable by the Executive pursuant to this Section 4.01(b) shall be reduced to the extent comparable benefits are actually received by or made available to the Executive without cost during such period following the Executive's termination of employment (and any such benefits actually received by the Executive shall be reported to the Company by the Executive). (c) If, as of the Date of Termination, the Executive has been employed by the Company and its subsidiaries for five consecutive years, such Executive shall be entitled, commencing immediately following the 24 month period over which payments are made under Section 4.01(a) (or, in the event the Executive has chosen to receive a lump sum under Section 4.01(a), immediately following his or her Date of Termination), to coverage under the Company's retiree medical and life insurance programs and shall be treated as if all age and service requirements had been satisfied under such programs. The Executive shall be required to pay his or her portion of premiums or contributions with respect to such programs and such premiums or contributions payable by the Executive shall be computed as if the Executive had the greater of (i) the Executive's actual years of service or 5 5 (ii) fifteen (15) years of service. The Executive shall be entitled to the same level of benefits under the retiree medical and life insurance programs as would be provided to senior executives of the Company retiring as of the Executive's Date of Termination, as may be applicable from time to time. Nothing in this Agreement shall have the effect of reducing benefits under any retiree medical or life insurance programs otherwise applicable to the Executive, provided that there shall be no duplication of benefits. Benefits otherwise receivable by the Executive pursuant to this Section 4.01(c) shall be reduced to the extent comparable benefits are actually received by or made available to the Executive without cost during such period following the Executive's termination of employment (and any such benefits actually received by the Executive shall be reported to the Company by the Executive). (d) Pursuant to the terms of The Chase Manhattan Corporation 1996 Long-Term Incentive Plan (or any successor plan, if applicable) (the "LTIP"), the Compensation and Benefits Committee of the Board has determined that, as of the Executive's Date of Termination, all awards made under the LTIP shall vest, including but not limited to the following, except as set forth below: (i) all stock options granted to the Executive under the LTIP shall become exercisable and any termination of the Executive's employment giving rise to Severance Payments shall be treated as a job elimination for purposes of exercising stock options under the LTIP, (ii) all restricted stock 6 6 units granted to the Executive under the LTIP shall vest and (iii) the restrictions on all restricted stock or other stock-based awards granted to the Executive under the LTIP that would lapse in whole or in part by reference to the Executive's period of employment shall lapse; provided, however, that notwithstanding the foregoing, any portion of a grant of stock options, restricted stock units, restricted stock or other stock-based awards awarded to the Executive under the LTIP that would vest, lapse or become exercisable solely by reference to performance criteria, such as the attainment by Company stock of a designated stock price target, shall remain in place, and will vest, lapse or become exercisable only if such restrictions lapse generally for other holders of such grant. 4.02 Notwithstanding any other provisions of this Agreement (but subject to Section 5.03 hereof), in the event that any payment or benefit received or to be received by the Executive in connection with the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company or any of its subsidiaries) (all such payments and benefits, including the Severance Payments, being hereinafter called "Total Payments") would subject the Executive to an Excise Tax, the provisions set forth in Appendix B hereof shall be followed. 4.03 No payments under this Section 4 shall be taken into account in computing any contribution to or benefit under any qualified plan (as described in Code Section 401(a)) or 7 7 nonqualified plan maintained by the Company or any subsidiaries or affiliates thereof. 5. The Executive's Covenants. 5.01 (a) Executive shall not, without the prior written consent of the Company, use, divulge, disclose or make accessible to any other person, firm, partnership, corporation or other entity any Confidential Information, except (i) while employed by the Company or any subsidiary, in the business of and for the benefit of the Company or any subsidiary, or (ii) when required to do so by a court of competent jurisdiction, by any governmental agency having supervisory authority over the business of the Company or any subsidiary, or by any administrative body or legislative body (including a committee thereof) with jurisdiction to order Executive to divulge, disclose or make accessible such information. (b) Executive and the Company shall not (except as required by law) directly or indirectly make any statement or release any information, or encourage others to make any statement or release any information that is designed to embarrass or criticize the other (or their respective employees, directors or shareholders). 5.02 For one year following the Date of Termination, Executive shall not (without the prior written consent of the Company), either on his or her own behalf or on behalf of any person, firm or company, directly or indirectly solicit or offer employment to any person who is or was employed by the Restricted Group. 8 8 5.03 As a condition of receiving payments and benefits under this Agreement, the Executive agrees to sign the form of release attached hereto as Appendix A. 5.04 Executive and the Company agree that the covenants set forth in this Section 5 are reasonable covenants under the circumstances, and further agree that, if in the opinion of any court of competent jurisdiction, such restraint is not reasonable in any respect, this Agreement shall be deemed modified to the least degree necessary to make the Agreement reasonable and fully enforceable. Executive agrees that any breach of the covenants contained in this Section 5 would irreparably injure the Company. Accordingly, Executive agrees that the Company may, in addition to pursuing any other remedies it may have in law or in equity, cease making any payments otherwise required by this Agreement and obtain an injunction against Executive from any court having jurisdiction over the matter restraining any further violation of this Agreement by Executive. 6. Termination Procedures. 6.01 Notice of Termination. During the term of this Agreement, any purported termination of the Executive's employment with the Company and its subsidiaries (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 9 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail 9 9 the facts and circumstances claimed to provide a basis for termination of the Executive's employment with the Company and its subsidiaries under the provision so indicated. 6.02 Date of Termination. "Date of Termination", with respect to any purported termination of the Executive's employment during the term of this Agreement, shall mean (a) if the Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty (30) day period), and (b) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company or a subsidiary, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 7. No Mitigation; Generally No Offset. The Company agrees that, if the Executive's employment is terminated during the term of this Agreement, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 4. Further, the amount of any payment or benefit provided for in Section 4 (other than Section 4.01(b) or Section 4.01(c), to the extent provided therein) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount 10 10 claimed to be owed by the Executive to the Company or any of its subsidiaries, or otherwise. 8. Successors; Binding Agreement. 8.01 In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason during the term of this Agreement, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 8.02 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, 11 11 shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 9. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: The Chase Manhattan Corporation 270 Park Avenue New York, New York 10017 Attention: General Counsel To the Executive: <> <> <> <> <> 10. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar 12 12 provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York without regard to conflicts of law principles. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. If the employment of the Executive has been terminated and the Executive has commenced receiving Severance Payments, or if a Notice of Termination has been given to the Executive, then the obligations of the Company and the Executive under Sections 4, 5 and 6 shall survive the expiration of the term of this Agreement. 11. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 12. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 13. Entire Agreement. The Agreement represents the entire agreement between the Company and the Executive with 13 13 respect to the subject matter addressed herein and supersedes any prior agreement(s) relating to such subject matter between the Company and Executive. 14. Settlement of Disputes; Arbitration. All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Company and shall be in writing. The Company shall respond in writing to any such claim within sixty (60) days following receipt of such claim. Failure to respond to such claim within such period shall be deemed a denial of such claim. Any denial by the Company of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Company shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal in writing to the Company a decision of the Company within sixty (60) days after notification by the Company that the Executive's claim has been denied. The Company shall respond in writing to any such appeal within sixty (60) days following receipt of such appeal. Failure to respond to such appeal within such period shall be deemed a denial of such appeal. Except with respect to matters arising under Section 5.04 of this Agreement, any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in New York, New York in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. 14 14 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (a) "Annual Base Salary" shall mean the Executive's regular basic annual rate of compensation prior to any reduction therein under a salary reduction agreement pursuant to Section 401(k) or Section 125 of the Code, and shall not include (without limitation) cost of living allowances and post allowances for foreign service, fees, retainers, reimbursements, bonuses, incentive awards, prizes or similar payments. (b) "Base Amount" shall have the meaning defined in Section 280G(b)(3) of the Code. (c) "Beneficial Owner" shall have the meaning defined in Rule 13d-3 under the Exchange Act. (d) "Board" shall mean the Board of Directors of the Company. (e) "Cause" for termination by the Company or a subsidiary of the Executive's employment, during the term of this Agreement, shall mean: (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company, or a subsidiary of the Company, as such duties may be defined from time to time, or abide by the written policies of the Company or of the Executive's primary employer (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of 15 15 Termination for Good Reason by the Executive pursuant to Section 6.01) after a written demand for substantial performance is delivered to the Executive by the Company, which demand specifically identifies the manner in which the Company believes that the Executive has not substantially performed the Executive's duties or has not abided by written policies, or (ii) the willful engaging by the Executive in conduct which is demonstrably injurious to the Company or its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and its subsidiaries. (f) A "Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following clauses shall have been satisfied: (i) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities; or (ii) during any period of twenty-four (24) consecutive months (not including any period prior to 16 16 the commencement of the term of this Agreement), individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in clauses (i), (iii) or (iv) of this Section 15(f)) whose election by the Board or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board; or (iii) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, or a plan of complete liquidation of the Company, other than (A) a merger, consolidation or liquidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or a subsidiary, at least 80% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger, consolidation or 17 17 liquidation, or (B) a merger, consolidation or liquidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (iv) the shareholders of the Company approve an agreement for the sale or disposition by the Company (other than to a subsidiary) of all or substantially all the Company's assets. (g) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (h) "Company" shall mean The Chase Manhattan Corporation and any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law or otherwise. (i) "Confidential Information" shall mean non-public information concerning the financial data, strategic business plans, product development (or other proprietary product data), customer lists, marketing plans and other non-public, proprietary and confidential information of the Restricted Group or the customers of the Restricted Group, that, in any case, is not otherwise available to the public (other than by Executive's breach of the terms hereof). (j) "Date of Termination" shall have the meaning stated in Section 6.02 hereof. (k) "Disability" shall be deemed the reason for the termination by the Company or a subsidiary of the Executive's employment, if, as a result of the Executive's 18 18 incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company and its subsidiaries for a period of six (6) consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (l) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (m) "Excise Tax" shall mean any excise tax imposed under Section 4999 of the Code. (n) "Executive" shall mean the individual named in the first paragraph of this Agreement. (o) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) of any one of the following acts, or failure to act, unless, in the case of any act or failure to act described in clause (i), (ii), (iii), (iv), (v) or (vi) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (i) a substantial diminution, occurring on or after the date of (or in contemplation of) a Change in Control, in the overall importance of the Executive's role, as determined by balancing (A) any increase or decrease in the scope of the Executive's management 19 19 responsibilities against (B) any increase or decrease in the relative sizes of the businesses, activities or functions (or portions thereof) for which the Executive has responsibility; provided, however, that none of (I) a change in the Executive's title or employer, (II) a change in the hierarchy and (III) a change in the Executive's responsibilities from line to staff or vice versa, either individually or collectively shall, by itself or themselves, be considered Good Reason; (ii) a reduction in the Executive's Annual Base Salary as in effect on the date hereof or as the same may be increased from time to time; (iii) the relocation of the principal place of the Executive's employment to a location that is more than fifty (50) miles from such principal place of employment immediately prior to the commencement of the term of this Agreement (unless such relocation is to the New York Metropolitan Area or from one location outside of the United States to another location outside the United States); provided, however, that no relocation shall constitute Good Reason unless the Executive gives notice to the Company objecting to such relocation within sixty (60) days after such relocation; (iv) the failure by the Company or a subsidiary to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation 20 20 under any deferred compensation program of the Company or a subsidiary within thirty (30) days after the date such compensation is due; (v) the failure by the Company or a subsidiary to pay the Executive by February 15 following any calendar year an annual cash bonus for such calendar year that, in the reasonable, good faith judgment of the Compensation and Benefits Committee of the Board (or its designee), fairly reflects the performance of the Executive, any unit or units (or portions thereof) for which the Executive was responsible and the Company as a whole during such calendar year; provided, however, that the Executive may not claim that a bonus equal to or greater than the highest annual bonus paid to the Executive for any of the three calendar years immediately preceding the commencement of the term of this Agreement does not fairly reflect such performance; or (vi) the failure by the Company or a subsidiary to include the Executive in any other employee benefit or compensation plan or arrangement on a basis reasonably comparable to that generally available to other executives of the Company and its subsidiaries having responsibilities of equal importance to those of the Executive; provided, however, that failure to include the Executive in a plan or arrangement designed for a general category of positions that does not include the Executive's position, as determined in good 21 21 faith by the Compensation and Benefits Committee of the Board (or its designee), shall not be considered Good Reason. The Executive's right to terminate employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. (p) "Gross-Up Payment" shall have the meaning given in Appendix B hereof. (q) "LTIP" shall have the meaning stated in Section 4.01(d) hereof. (r) "Notice of Termination" shall have the meaning stated in Section 6.01 hereof. (s) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof; however, a Person shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company. (t) "Restricted Group" shall mean the Company, its subsidiaries and their affiliates. 22 22 (u) "Severance Payments" shall mean those payments described in Section 4.01 hereof. (v) "Total Payments" shall mean those payments described in Section 4.02 hereof. THE CHASE MANHATTAN CORPORATION By____________________________ John J. Farrell Director Human Resources ____________________________ Executive 23 23 APPENDIX A FORM OF RELEASE For and in consideration of the payments and other benefits described in the Agreement dated as of November 30, 1997, between The Chase Manhattan Corporation (the "Company") and me (the "Agreement"), and for other good and valuable consideration, I hereby release the Company, its divisions, affiliates, subsidiaries, parents, branches, predecessors, successors, assigns, officers, directors, trustees, employees, agents, shareholders, administrators, representatives, attorneys, insurers and fiduciaries, past, present and future (the "Released Parties") from any and all claims of any kind which I now have or may have against the Released Parties, whether known or unknown to me, by reason of facts which have occurred on or prior to the date that I have signed this Release (except a claim for the payments described in the Agreement). Such released claims include, without limitation, any and all claims under federal, state or local laws pertaining to employment, including the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. Section 2000e et seq., the Fair Labor Standards Act, as amended, 29 U.S.C. Section 201 et seq., the Americans with Disabilities Act, as amended, 42 U.S.C. Section 12101 et seq., the Reconstruction Era Civil Rights Act, as amended, 42 U.S.C. Section 1981 et seq., the Rehabilitation Act of 1973, as amended, 29 U.S.C. Section 701 et seq., the Family and Medical Leave Act of 1992, 29 U.S.C. Section 2601 et seq., the New York State Human Rights Law, N.Y. Exec. Law, Section 296 et seq., the New York City Administrative Code, the New Jersey State Law Against Discrimination, N.J. Stat., Section 10:5-1, et seq., and Connecticut General Statutes, Section 46a-60 et seq., and any and all state or local laws regarding employment discrimination and/or federal, state or local laws of any type or description regarding employment, including but not limited to any claims arising from or derivative of my employment with the Company and its subsidiaries, as well as any and all claims under state contract or tort law. I have read this Release carefully, acknowledge that I have been given at least 21 days to consider all of its terms, and have been advised to consult with an attorney and any other advisors of my choice prior to executing this Release, and I fully understand that by signing below I am voluntarily giving up any right which I may have to sue or bring any other claims against the Released Parties, including any rights and claims under the Age Discrimination in Employment Act. I also understand that I have a period of 7 days after signing this Release within which to revoke my agreement, and that neither the Company nor any other person is obligated to make any payments or provide any other benefits to me pursuant to the attached Agreement until 8 days have passed since my signing of this Release without my signature having been revoked. Finally, I have not been forced or pressured in any manner whatsoever to sign this Release, and I agree to all of its terms voluntarily. 24 24 Notwithstanding anything else herein to the contrary, this Release shall not affect: the obligations of the Company set forth in the Agreement or other obligations that, by their terms, are to be performed after the date hereof (including, without limitation, obligations to me under any stock option, stock award or incentive plans or agreements or obligations under any pension plan or other benefit or deferred compensation plan, all of which shall remain in effect in accordance with their terms); obligations to indemnify me respecting acts or omissions in connection with my service as an officer or employee of the Company and its subsidiaries; or any right I may have to obtain contribution in the event of the entry of judgment against me as a result of any act or failure to act for which both I and the Company are jointly responsible. This Release, and the attached Agreement, are final and binding and may not be changed or modified except in a writing signed by both parties. - -------------------------- ------------------------------ Date Executive 25 25 APPENDIX B EXCISE TAX PROCEDURES 1. In the event that the Executive becomes entitled to the Severance Payments, if any of the Total Payments will be subject to the Excise Tax, and if such Total Payments less the Excise Tax is less than the maximum amount of Total Payments which would otherwise be payable to the Executive without the imposition of an Excise Tax, then, to the extent necessary to eliminate the imposition of an Excise Tax (and after taking into account any reduction in the Total Payments provided by reason of Section 280G of the Code in such other plan, arrangement or agreement), (a) the cash Severance Payments shall first be reduced (if necessary, to zero), and (b) all other non-cash Severance Payments shall next be reduced (if necessary, to zero). For purposes of this limitation: (i) no portion of the Total Payments the receipt or enjoyment of which the Executive shall have effectively waived in writing prior to the Date of Termination shall be taken into account; (ii) no portion of the Total Payments shall be taken into account which in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to the Executive does not constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code, including by reason of Section 280G(b)(4)(A) of the Code; (iii) the Severance Payments shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (i) or (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4)(B) of the Code or are otherwise not subject to disallowance as deductions, in the opinion of the tax counsel referred to in clause (ii); and (iv) the value of any non-cash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and 280G(d)(4) of the Code. 2. In the event that the Executive becomes entitled to the Severance Payments, if any of the Total Payments will be subject to the Excise Tax, and if such Total Payments less the Excise Tax thereon is greater than the maximum amount of Total Payments which would otherwise be payable to the Executive without the imposition of a Excise Tax, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income tax and Excise Tax upon the payment provided for by this Section 2, shall be equal to the Total Payments. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax: (a) the Total Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of Section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the 26 26 Company's independent auditors and reasonably acceptable to the Executive such Total Payments (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of Section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax; and (b) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and 280G(d)(4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and applicable state and local income taxes at the highest marginal rate of taxation, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of the Executive's employment, the Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by the Executive to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of the Executive's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) at the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Severance Payments. 3. The payments provided for in Sections 1 and 2 hereof shall be made not later than the fifteenth day following the Date of Termination, provided, however, that if the amounts of such payments, and the limitation on such payments set forth in Section 1 hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of 27 27 Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) business day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). At the time that payments are made under this Section 3, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from outside counsel, auditors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 4. If the benefits provided to the Executive under Section 4.01(b) or 4.01(c) of the Agreement shall result in a decrease, pursuant to Section 4.02 of the Agreement, in the Severance Payments, and such Section 4.01(b) or 4.01(c) benefits are thereafter reduced because of the receipt of comparable benefits, the Company shall, at the time of such reduction, pay to the Executive the lesser of (a) the amount of the decrease made in the Severance Payments pursuant to Section 4.02 of the Agreement, or (b) the maximum amount which can be paid to the Executive without being, or causing any other payment to be, nondeductible by reason of Section 280G of the Code. EX-11.1 7 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 60.
Year Ended December 31, (in millions, except per share amounts) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE BASIC Earnings: Income Before Effect of Accounting Change $3,708 $2,461 $2,970 Net Effect of Change in Accounting Principle -- -- (11)(a) - --------------------------------------------------------------------------------------------------------- Net Income $3,708 $2,461 $2,959 Less: Preferred Stock Dividends 182 219 227 - --------------------------------------------------------------------------------------------------------- Net Income Applicable to Common Stock $3,526 $2,242 $2,732 - --------------------------------------------------------------------------------------------------------- Shares: Basic Average Common Shares Outstanding 424.6 436.8 431.6 - --------------------------------------------------------------------------------------------------------- Basic Earnings Per Share: Income Before Effect of Accounting Change $ 8.30 $ 5.13 $ 6.36 Net Effect of Change in Accounting Principle -- -- (0.03)(a) - --------------------------------------------------------------------------------------------------------- Net Income $ 8.30 $ 5.13 $ 6.33 - --------------------------------------------------------------------------------------------------------- DILUTED Earnings: Net Income Applicable to Common Stock $3,526 $2,242 $2,732 Add: Applicable Dividend on Convertible Preferred Stock(b) -- -- 7 - --------------------------------------------------------------------------------------------------------- Adjusted Net Income $3,526 $2,242 $2,739 - --------------------------------------------------------------------------------------------------------- Shares: Basic Average Common Shares Outstanding 424.6 436.8 431.6 Additional Shares Issuable Upon Exercise of Stock Options for Dilutive Effect and Conversion of Preferred Stock(b) 14.6 16.6 21.9 - --------------------------------------------------------------------------------------------------------- Average Common Shares Outstanding Assuming Dilution 439.2 453.4 453.5 - --------------------------------------------------------------------------------------------------------- Diluted Earnings Per Share: Income Before Effect of Accounting Change $ 8.03 $ 4.94 $ 6.07 Net Effect of Change in Accounting Principle -- -- (0.03)(a) - --------------------------------------------------------------------------------------------------------- Net Income $ 8.03 $ 4.94 $ 6.04 - ---------------------------------------------------------------------------------------------------------
(a) On January 1, 1995, Chase adopted SFAS 106 for the accounting for other postretirement benefits relating to its foreign plans. (b) During the second quarter of 1995, Chase called for redemption all of the outstanding shares of its 10% convertible preferred stock. Substantially all of the 10% convertible stock was converted to common stock prior to redemption. The preferred dividends amounted to $7 million before conversion. EX-12.1 8 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) 1997 - --------------------------------------------------------------------------------------------------- EXCLUDING INTEREST ON DEPOSITS Income before income taxes $ 5,910 - --------------------------------------------------------------------------------------------------- Fixed charges: Interest expense 7,037 One third of rents, net of income from subleases(a) 109 - --------------------------------------------------------------------------------------------------- Total fixed charges 7,146 - --------------------------------------------------------------------------------------------------- Less: Equity in undistributed income of affiliates (67) - --------------------------------------------------------------------------------------------------- Earnings before taxes and fixed charges, excluding capitalized interest $ 12,989 - --------------------------------------------------------------------------------------------------- Fixed charges, as above $ 7,146 - --------------------------------------------------------------------------------------------------- Ratio of earnings to fixed charges 1.82 - --------------------------------------------------------------------------------------------------- INCLUDING INTEREST ON DEPOSITS Fixed charges, as above $ 7,146 Add: Interest on deposits 6,561 - --------------------------------------------------------------------------------------------------- Total fixed charges and interest on deposits $ 13,707 - --------------------------------------------------------------------------------------------------- Earnings before taxes and fixed charges, excluding capitalized interest, as above $ 12,989 Add: Interest on deposits 6,561 - --------------------------------------------------------------------------------------------------- Total earnings before taxes, fixed charges and interest on deposits $ 19,550 - --------------------------------------------------------------------------------------------------- Ratio of earnings to fixed charges 1.43 - ---------------------------------------------------------------------------------------------------
(a) The proportion deemed representative of the interest factor. EX-12.2 9 COMPUTATION OF RATIO OF EARNINGS 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) 1997 - --------------------------------------------------------------------------------------------------- EXCLUDING INTEREST ON DEPOSITS Income before income taxes $ 5,910 - --------------------------------------------------------------------------------------------------- Fixed charges: Interest expense 7,037 One third of rents, net of income from subleases(a) 109 - --------------------------------------------------------------------------------------------------- Total fixed charges 7,146 - --------------------------------------------------------------------------------------------------- Less: Equity in undistributed income of affiliates (67) - --------------------------------------------------------------------------------------------------- Earnings before taxes and fixed charges, excluding capitalized interest $ 12,989 - --------------------------------------------------------------------------------------------------- Fixed charges, as above $ 7,146 - --------------------------------------------------------------------------------------------------- Preferred stock dividends 182 - --------------------------------------------------------------------------------------------------- Fixed charges including preferred stock dividends $ 7,328 - --------------------------------------------------------------------------------------------------- Ratio of earnings to fixed charges and preferred stock dividend requirements 1.77 - --------------------------------------------------------------------------------------------------- INCLUDING INTEREST ON DEPOSITS Fixed charges including preferred stock dividends, as above $ 7,328 Add: Interest on deposits 6,561 - --------------------------------------------------------------------------------------------------- Total fixed charges including preferred stock dividends and interest on deposits $ 13,889 - --------------------------------------------------------------------------------------------------- Earnings before taxes and fixed charges, excluding capitalized interest, as above $ 12,989 Add: Interest on deposits 6,561 - --------------------------------------------------------------------------------------------------- Total earnings before taxes, fixed charges and interest on deposits $ 19,550 - --------------------------------------------------------------------------------------------------- Ratio of earnings to fixed charges and preferred stock dividend requirements 1.41 - ---------------------------------------------------------------------------------------------------
(a) The proportion deemed representative of the interest factor. EX-21.1 10 LIST OF SUBSIDIARIES OF THE CHASE MANHATTAN CORP. 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 254 Realty Corp. Puerto Rico 100 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 Chase Investment Bank (Panama), S.A. Panama 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 Bank Norge, A.S. Norway 100 Chase Manhattan Holdings (Australia) Ltd. Delaware 100 CMBAL Limited Australia 100 Chase Manhattan International Bank, Inc. Puerto Rico 100 Chase Manhattan Securities S.A. Spain 100 Chase Manhattan Securities (C.I.) Limited Channel Islands 100 Chemical Asset Management Limited Channel Islands 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 Chemco Equipment Finance Ltd. United Kingdom 100 Goldway Ltd. United Kingdom 100 Chase Trust Bank Japan 100 Chaseinvest S.p.A. Italy 100 Chemical Asia Limited Hong Kong 100 Chemical Australia (Holdings) Limited Australia 100 Chase Securities Australia Limited Australia 100 Chemical Bank (Guernsey) Limited Channel Islands 100
2 LIST OF SUBSIDIARIES (CONTINUED)
Percentage of voting Organized under securities owned by Name the laws of immediate parent - ------------------------------------------------------------------------------------------------------------------------ Chemical International Trust Company Limited Cayman Islands 100% Manufacturers Hanover Arrendamento Mercantil S.A. Brazil 100 Manhattan Card Co. Limited Hong Kong 99 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 Chemgraphics Systems, Inc. New Jersey 100 Chemical Acceptance Corporation Delaware 100 Chemical Mortgage Company Ohio 100 Manufacturers Hanover Leasing International Corp. Delaware 100 Metal Holdings Inc. Liberia 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 Capital I Delaware 100 Chase Capital II Delaware 100 Chase Capital III Delaware 100 Chase Capital IV 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 CBC 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 Chemical 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 Chase Manhattan Financial Corporation, Ltd. Delaware 100 Margaretten Financial Corporation Delaware 100 Chase Manhattan Mortgage Corporation New Jersey 100
3 LIST OF SUBSIDIARIES (CONTINUED)
Percentage of voting Organized under securities owned by Name the laws of immediate parent - ------------------------------------------------------------------------------------------------------------------------ Chase Bank of Texas, National Association United States 100% Chase Bank of Texas - San Angelo, N.A. United States 100 Texas Commerce Trust Company of New York New York 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 Manhattan Realty Leasing Corporation New York 100 Chase Securities Inc. Delaware 100 Chase Trade, Inc. Delaware 100 Chatham Ventures, Inc. New York 100 Chemical Business Credit Corp. Delaware 100 Chemical Equity Incorporated New York 100 Chemical International Capital Finance Limited United Kingdom 100 Chemical Investments, Inc. Delaware 100 Chemical Shareholder Services of California, Inc. Delaware 100 Chemical Shareholder Services Partner, Inc. Delaware 100 ChaseMellon Shareholder Services L.L.C. Delaware 50 Chemical New York, N.V. Netherland Antilles 100 Clintstone Properties Inc. New York 100 CMRCC, Inc. New York 100 Chase Manhattan Equities Corporation Delaware 100 Grovehill Corporation Delaware 100 Octagon Credit Investors, Inc. Delaware 100 Offshore Equities, 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 11 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, 33-36164, 33-4031, 33-40485, 33-42367, 33-45228, 33-45266, 33-47105, 33-49965, 33-53306, 33-55295, 33-57104, 33-58144, 33-60262, 33-64261, 33-67742, 33-68724, 33-7299, 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 and 333-37567-03) and in the Registration Statements on Form S-8 (Nos. 33-01776, 33-13457, 33-14997, 33-19852, 33-26523, 33-40272, 33-40675, 33-45017, 33-45018, 33-49909, 33-49911, 33-49913, 33-54547, 33-62453, 33-63833, 333-02073, 333-07941, 333-15281 and 333-22451) of The Chase Manhattan Corporation or affiliates of our report dated January 20, 1998 appearing on page 45 of this Form 10-K. PRICE WATERHOUSE LLP New York, New York March 27, 1998 EX-27.1 12 FINANCIAL DATA SCHEDULE
9 0000019617 THE CHASE MANHATTAN CORPORATION 1,000,000 U.S. DOLLAR 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1 15,704 2,886 30,928 72,393 49,755 2,983 2,995 168,454 3,624 365,521 193,688 67,731 64,964 13,387 0 1,740 441 19,561 365,521 12,826 3,028 3,132 21,756 6,561 13,598 8,158 804 312 10,069 5,910 3,708 0 0 3,708 8.30 8.03 2.86 908 459 0 0 3,549 1,096 292 3,624 3,180 444 0
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