-----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, JMA0LA7Lyp+QuNoFE8HgrwDVxbYuvcSRQJU64BP1VYeeEb4eGbaLRFAuBNbk50a3 A99lB6HfviHuGV6kIaO+QA== 0000950123-96-001197.txt : 19960321 0000950123-96-001197.hdr.sgml : 19960321 ACCESSION NUMBER: 0000950123-96-001197 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960320 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHEMICAL BANKING CORP CENTRAL INDEX KEY: 0000019617 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 132624428 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-05805 FILM NUMBER: 96536678 BUSINESS ADDRESS: STREET 1: 270 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2122706000 FORMER COMPANY: FORMER CONFORMED NAME: CHEMICAL NEW YORK CORP DATE OF NAME CHANGE: 19880508 10-K405 1 CHEMICAL BANKING 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, 1995 number 1-5805 CHEMICAL BANKING 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 Name of Each Exchange on ------------------- which Registered ------------------------ Common Stock........................................................................ New York Stock Exchange, Inc. 10.96% Cumulative Preferred Stock (Stated Value--$25)............................... New York Stock Exchange, Inc. 8 3/8% Cumulative Preferred Stock (Stated Value--$25)............................... New York Stock Exchange, Inc. 7.92% Cumulative Preferred Stock (Stated Value--$100) evidenced by Depositary Shares Representing One Quarter Share of Preferred Stock............... New York Stock Exchange, Inc. 7.58% Cumulative Preferred Stock (Stated Value--$100) evidenced by Depositary Shares Representing One Quarter Share of Preferred Stock............... New York Stock Exchange, Inc. 7 1/2% Cumulative Preferred Stock (Stated Value--$100) evidenced by Depositary Shares Representing One Quarter Share of Preferred Stock............... New York Stock Exchange, Inc. Adjustable Rate Cumulative Preferred Stock, Series L (Stated Value--$100)........... New York Stock Exchange, Inc. Rights to Purchase Units of Junior Participating Preferred Stock.................... New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None Number of Shares of Common Stock outstanding on February 29, 1996: 250,539,802 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 Chemical Banking Corporation Common Stock held by non-affiliates of Chemical Banking Corporation on February 29, 1996 was $17,810,000,000.
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 21, 1996 Part III (other than information included in the proxy statement pursuant to Rule 402 (i), (k) and (l) of Regulation S-K)
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FORM 10-K INDEX PART I PAGE - ------ ---- Item 1 Business................................................................................. 1 Overview............................................................................. 1 Organizational Review................................................................ 1 Competition.......................................................................... 1 Government Monetary Policies and Economic Controls................................... 2 Supervision and Regulation........................................................... 2 Foreign Operations................................................................... 5 Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential........................................... 77 Investment Portfolio................................................................. 52 Loan Portfolio......................................................... 24-28, 55, 84-85 Summary of Loan Loss Experience............................................ 30, 56, 86-87 Deposits........................................................................... 87-88 Return on Equity and Assets.......................................................... 13 Short-Term Borrowings................................................................ 57 Item 2 Properties............................................................................... 5 Item 3 Legal Proceedings........................................................................ 6 Item 4 Submission of Matters to a Vote of Security Holders...................................... 6 Executive Officers of the Registrant..................................................... 7 Part II - ------- Item 5 Market for Registrant's Common Equity and Related Stockholder Matters.................................................................. 8 Item 6 Selected Financial Data.................................................................. 8 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................. 8 Item 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 the Corporation...................................... 9 Item 11 Executive Compensation................................................................... 9 Item 12 Security Ownership of Certain Beneficial Owners and Management........................................................................... 9 Item 13 Certain Relationships and Related Transactions........................................... 9 Part IV - ------- Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K............................................................................. 10
3 Part I - -------------------------------------------------------------------------------- ITEM 1: BUSINESS On March 31, 1996, The Chase Manhattan Corporation ("Chase") will merge with and into Chemical Banking Corporation (the "Corporation"). Upon consummation of the merger, Chemical Banking Corporation will change its name to "The Chase Manhattan Corporation". (See The Merger with Chase on page 15 for a more complete description of the merger). Because the merger, which will be accounted for as a pooling of interests, occurred subsequent to December 31, 1995, the information presented in this Annual Report on Form 10-K does not give effect to the impact of the merger. Unless otherwise stated, the information presented relates to Chemical Banking Corporation prior to the merger with Chase. However, supplemental financial statements included on pages 97 through 103 present the combined financial condition and results of operations of Chemical Banking Corporation and Chase as if the merger had been in effect for all periods presented. - -------------------------------------------------------------------------------- OVERVIEW The Corporation 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"). The Corporation conducts domestic and international financial services business through various bank and non-bank subsidiaries. At December 31, 1995, the principal bank subsidiaries of the Corporation were Chemical Bank, a New York banking corporation ("Chemical Bank"), and Texas Commerce Bank National Association, a subsidiary of Texas Commerce Equity Holdings, Inc. ("Texas Commerce"), a Delaware bank holding company subsidiary of the Corporation. On December 31, 1991, Manufacturers Hanover Corporation ("MHC") merged with and into the Corporation (the "MHC Merger") and, on March 31, 1996, The Chase Manhattan Corporation ("Chase") will merge with and into the Corporation (the "Chase Merger"). At December 31, 1995, the Corporation was the fifth largest bank holding company in the United States in terms of total assets and Chemical Bank was the third largest bank in the United States in terms of total assets. The bank and non-bank subsidiaries of the Corporation operate nationally as well as through overseas branches and an international network of representative offices, subsidiaries and affiliated banks. The financial services provided by the Corporation's domestic subsidiaries include personal and commercial checking accounts, savings and time deposit accounts, personal and business loans, consumer financing, leasing, real estate financing, investment banking, mortgage banking, money transfer, cash management, safe deposit facilities, personal trust and estate administration, corporate and institutional trust and securities processing services, full investment services, discount brokerage, United States Government and Federal agency securities dealership, corporate debt and equity securities dealership and underwriting, and United States corporate tax depository facilities. Internationally, services also include correspondent banking arrangements, merchant banking, and underwriting and trading of Eurosecurities. The Corporation also provides products to ensure that a customer will have a specific currency exchange or interest rate at some future date. These products include interest rate and currency swaps, interest rate options, forward rate agreements, forward interest rate contracts, foreign exchange contracts and financial futures. The Corporation retains a 20% interest in the CIT Group Holdings, Inc. ("CIT"). CIT, directly or through its subsidiaries, engages in diversified financial services activities, primarily in the United States. For additional information pertaining to CIT, see the sections entitled "Overview", "Noninterest Revenue" and "Other Events" in the Management's Discussion and Analysis section at pages 14, 16 and 39, respectively. Certain amounts in prior periods have been reclassified to conform to the current presentation. ORGANIZATIONAL REVIEW The Corporation's activities are internally organized, for management reporting purposes, into various business sectors. A description of the Corporation's business sectors, as well as developments that have occurred during 1995 with respect to these business sectors, are discussed in the Management's Discussion and Analysis section beginning on page 20. COMPETITION The Corporation and its subsidiaries and affiliates operate in a highly competitive environment. The Corporation'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, the Corporation and its bank and non-bank subsidiaries face increased competition with respect to the diverse financial services and products they offer. Competitors also include finance companies, brokerage firms, investment banking companies, 1 4 merchant banks, insurance 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 the Corporation and its bank subsidiaries. GOVERNMENT MONETARY POLICIES AND ECONOMIC CONTROLS The earnings and business of the Corporation 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 the Corporation. The Corporation 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. Among the instruments of monetary policy available to the Federal Reserve Board are engaging in open-market operations in United States Government securities; changing the discount rates of borrowings of depository institutions; imposing or changing reserve requirements against depository institutions' deposits and certain assets of foreign branches; and imposing or changing reserve requirements against certain borrowings by banks and their affiliates (including parent corporations such as the Corporation). These methods are used in varying combinations to influence the overall growth of bank loans, investments, and deposits, and the interest rates charged on loans or paid for deposits. The Corporation 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 the Corporation and its subsidiaries. SUPERVISION AND REGULATION The Corporation is subject to regulation as a registered bank holding company under the BHCA. As such, the Corporation is required to file with the Federal Reserve Board an annual report and other information required quarterly pursuant to the BHCA. The Corporation is also subject to the examination powers of the Federal Reserve Board. Under the BHCA, the Corporation 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, the Corporation is prohibited, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any corporation that is engaged in activities that are not closely related to banking, and 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 the Corporation that are state member banks of the Federal Reserve System (a "state member bank") or national banks. Non-bank subsidiaries of the Corporation are not subject to such limitations. The amount of dividends that may be paid by a state member bank, such as Chemical Bank, or by a national bank, such as Texas Commerce Bank National Association, 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 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". The New York State Banking Department imposes a similar recent earnings test on the payment of dividends by New York State-chartered banks, such as Chemical Bank. In accordance with the foregoing restrictions, the Corporation's bank subsidiaries could, during 1996, without the approval of their relevant banking regulators, pay dividends estimated at approximately $423 million to their respective bank holding companies, plus an additional amount equal to their net income from January 1, 1996 through the date in 1996 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 the Corporation 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. For a further discussion of the dividend restrictions imposed on the Corporation's bank subsidiaries, see Note 15, "Restrictions on Cash and Intercompany Fund Transfers" on page 62. 2 5 Risk-Based Capital: The Federal banking regulatory authorities have also adopted risk-based capital and leverage guidelines, which require that the Corporation'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, a banking organization's 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 for Tier 1, 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, qualifying allowance for credit losses, 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 regulatory authorities 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 circumstances 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 nontraditional 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 nontraditional 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 calculation as a result of such factors. On August 2, 1995, the Federal banking regulators published amendments to their risk-based capital rules that include interest-rate risk as a qualitative factor to be considered in assessing capital adequacy. Concurrent with the publication of the amendments, the Federal banking regulators proposed a system for measuring interest rate risk and announced their intention, after a trial period to evaluate the reliability and accuracy of the proposed system, to initiate a rulemaking process for the purpose of amending the risk-based capital rules to include an explicit capital charge for interest-rate risk that will be based upon the level of a banking organization's measured interest-rate risk exposure. On July 14, 1995, the Federal banking regulators issued a proposal to amend their risk-based capital rules to incorporate a measure for market risk in foreign exchange and commodity activities and in the trading of debt and equity instruments. Under the proposal, banking organizations with relatively large trading activities would calculate their capital charges for market risk using their own internal value-at-risk models (subject to parameters set by the regulators) or, alternatively, risk management techniques developed by the regulators. The effect of the proposed rules would be that, in addition to existing capital requirements for credit risk, certain institutions, including the Corporation, would be required to hold capital based on the measure of their market risk exposure. These institutions would be able to satisfy this additional requirement, in part, by issuing short-term subordinated debt that qualifies as Tier 3 Capital. The proposed rule would go into effect at the end of 1997. FDICIA: FDICIA required the FDIC to establish a risk-based assessment system for FDIC deposit insurance and revises 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%); (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%); (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%); (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). Supervisory actions by the appropriate Federal banking regulator will depend upon an institution's classification within the five categories. All institutions are generally prohibited from declaring any dividends, making any other capital distribution, or paying a management fee to any controlling person, if such payment would cause the institution to become undercapitalized. Additional supervisory actions are mandated for an institution falling into one of the three "undercapitalized" categories, with the severity of supervisory action increasing at greater levels of capital deficiency. For example, critically undercapitalized institutions are, among other things, restricted from making any principal or interest payments on subordinated debt without prior approval of their Federal banking regulator. The regulations apply only to banks and not to bank holding companies, such as the Corporation; 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. At December 31, 1995, each of the Corporation's banking subsidiaries were "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 Chemical Bank's wholesale deposits are solicited on its behalf by a broker-dealer affiliate of Chemical Bank 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. Effective June 1995, such premiums ranged from 4 basis points to 31 basis points of domestic deposits. Effective January 1, 1996, depository institutions in the top risk classification category will pay only the statutory minimum of $2,000 annually for deposit insurance and remaining depository institutions will pay premiums ranging from 3 basis points to 30 basis points of domestic deposits. Each of the Corporation's banks, including Chemical Bank and Texas Commerce Bank National Association, will pay the statutory minimum premium. The rate schedule is subject to future adjustments by the FDIC. In addition, the FDIC has authority to impose special assessments from time to time. 3 6 Other FDICIA Rules: Other rules that have been adopted pursuant to FDICIA include: (i) real estate lending standards for banks, which provide guidelines concerning loan-to-value ratios for various types of real estate loans; (ii) rules relating to consumer lending, including regulations governing advertising and disclosures required for consumer deposit accounts; (iii) rules requiring depository institutions to develop and implement internal procedures to evaluate and control credit and settlement exposure to their correspondent banks; (iv) rules implementing the FDICIA provision prohibiting, with certain exceptions, FDIC-insured state banks from making equity investments of the types and amount, or from engaging as principal in activities, not permissible for national banks; (v) rules mandating enhanced financial reporting and audit requirements; (vi) notice provisions in the case of branch closings; and (vii) rules addressing certain "safety and soundness" issues. 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 the Corporation's bank subsidiaries) for costs incurred by the FDIC in connection with the insolvency of other FDIC-insured institutions under common control with such institution (commonly referred to as "cross-guarantees" of insured depository institutions). 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's assets. Such provisions of the Federal Deposit Insurance Act would be applicable to obligations and liabilities of those of the Corporation's subsidiaries that are insured depository institutions, such as Chemical Bank and Texas Commerce Bank National Association, 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 provided 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 the Corporation that is an insured depository institution, such as Chemical Bank or Texas Commerce Bank National Association, 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, the Corporation 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. 4 7 The bank subsidiaries of the Corporation are subject to certain restrictions imposed by Federal law on extensions of credit to, and certain other transactions with, the Corporation and certain other affiliates and on investments in stock or securities thereof. Such restrictions prevent the Corporation and other affiliates from borrowing from a bank subsidiary unless the loans are secured in specified amounts. Without the prior approval of the Federal Reserve Board, secured loans, other transactions and investments by any bank subsidiary are generally limited in amount as to the Corporation and as to each of the other affiliates to 10% of the bank's capital and surplus and as to the Corporation and all such other affiliates to an aggregate of 20% of the bank's capital and surplus. Federal law also requires that transactions between a bank subsidiary and the Corporation or certain non-bank affiliates, including extensions of credit, sales of securities or assets and the provision of services, be conducted on terms at least as favorable to the bank subsidiary as those that apply or that would apply to comparable transactions with unaffiliated parties. The Corporation's bank and non-bank subsidiaries are subject to direct supervision and regulation by various other Federal and state authorities. Chemical Bank, as a New York State-chartered bank and member bank of the Federal Reserve System, is subject to supervision and regulation of the New York State Banking Department as well as by the Federal Reserve Board and the FDIC. The Corporation's national bank subsidiaries, such as Texas Commerce Bank National Association and Chemical Bank National Association, 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 activities of the Corporation's broker-dealers are subject to the regulations of the Securities and Exchange Commission and the National Association of Securities Dealers, Inc., and, in the case of Chemical Securities Inc. (the Corporation's "Section 20" subsidiary ("CSI")), are subject to the supervision and regulation of the Federal Reserve Board (which has imposed conditions governing CSI's activities, including limitations on the gross revenues that may be derived from certain of CSI's activities). Additionally, various securities activities conducted by the bank subsidiaries of the Corporation, such as acting as a transfer agent, the making available of mutual funds and providing other types of investment management services, are subject to the regulations of the Securities and Exchange Commission and, with respect to certain activities of its mutual funds, the Federal Reserve Board. Numerous Federal and state consumer laws impose requirements on the making, enforcement and collection of consumer loans, including credit card loans, and on the types of disclosures that need to be made in connection with such loans. Finally, the types of activities in which the foreign branches of Chemical Bank and the international subsidiaries of the Corporation 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. FOREIGN OPERATIONS For geographic distributions of average assets, total revenue, total expense, income before income tax expense and net income, see Note Twenty Four, "International Operations", on page 71. For a discussion of foreign loans, see Note Five, "Loans", on page 55 and see the sections entitled "Foreign Portfolio" and "Cross-Border Outstandings," on pages 27 and 28. - -------------------------------------------------------------------------------- ITEM 2: PROPERTIES The headquarters of the Corporation is located in New York City at 270 Park Avenue, which is a 50-story bank and office building owned by the Corporation. This location contains approximately 1.3 million square feet of commercial office and retail space. The Corporation also owns and occupies a 22-story bank and office building at 4 New York Plaza with 900,000 square feet of commercial office and retail space. The Corporation also occupies, under leasehold agreements, office space at 55 Water Street, 95 Wall Street and various other locations in New York City. The Corporation, as lessee, also occupies offices in the United Kingdom. The most significant office space leased in the United Kingdom is 168,000 square feet at 125 London Wall, which lease expires in December 2017. In addition, the Corporation and its subsidiaries own and occupy administrative and operational facilities in Hicksville, New York; Houston, Texas; McAllen, Texas; Austin, Texas; Arlington, Texas and El Paso, Texas. The Corporation and its subsidiaries occupy branch offices and other locations throughout the United States and in foreign countries under various types of ownership and leasehold agreements which, when considered in the aggregate, are not material to its operations. 5 8 - -------------------------------------------------------------------------------- ITEM 3: LEGAL PROCEEDINGS The Securities and Exchange Commission has commenced an investigation relating to the $70 million loss incurred by the Corporation in the fourth quarter of 1994 resulting from unauthorized foreign exchange transactions involving the Mexican peso. The Corporation is cooperating with this investigation. The Corporation cannot determine at this time the outcome of the investigation but believes it will not have a material adverse effect on the consolidated financial condition of the Corporation. LITIGATION RELATING TO THE CHASE MERGER: On August 28, 1995, three complaints were filed in the Court of Chancery for New Castle County, Delaware, in actions entitled Simon v. Chase Manhattan Corporation, et al., Civil Action No. 14505, Rampel & Rampel, P.A. Profit Sharing Plan v. Chase Manhattan Corp., et. al., Civil Action No. 14506 and Goldstein v. Chase Manhattan Corp., et al., Civil Action 14508. The complaints, each of which purports to initiate a class action on behalf of all Chase stockholders, name Chase, the Corporation and certain current and former directors of Chase as defendants. The complaints allege that (i) the Chase Merger entails breaches of fiduciary duties owed by the director defendants to Chase stockholders, (ii) the consideration provided in the Chase Merger by the Corporation is inadequate, (iii) the Chase Merger is unfair to Chase stockholders and a product of Chase directors' acting out of self-interest and (iv) the Corporation aided and abetted the Chase directors' alleged breach of fiduciary duties. The complaints seek, among other relief, an injunction preventing consummation of the Chase Merger and damages in unspecified amounts. The Corporation and Chase believe the actions to be without merit and intend to contest them vigorously. - -------------------------------------------------------------------------------- ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The following matters were submitted to a vote at a Special Meeting of Stockholders of the Corporation. The Special Meeting of the Stockholders was held on December 11, 1995. A total of 195,065,240 shares, or 78.1% of the 249,904,977 shares entitled to vote at the Special Meeting, were represented at the meeting. (1) Approval and Adoption of the Agreement and Plan of Merger ("the Merger Agreement") - - The approval and adoption of the Merger Agreement providing for a merger of The Chase Manhattan Corporation with and into the Corporation, with the combined entity adopting the Chase name was approved by 99.4% of the votes cast. The proposal received a "for" vote of 193,265,800 and an "against" vote of 1,164,519. The number of votes abstaining was 634,921. There were no broker non-votes. (2) Amendment and Restatement of the Corporation's Certificate of Incorporation - - A proposal to amend and restate the Corporation's Restated Certificate of Incorporation to increase the number of authorized shares of Common Stock, par value $1.00 per share, from 400 million to 750 million shares and to make certain other technical amendments was approved by 99.0% of the votes cast. The proposal received a "for" vote of 192,109,363 and an "against" vote of 1,916,798. The number of votes abstaining was 1,039,079. There were no broker non-votes. 6 9
EXECUTIVE OFFICERS OF THE REGISTRANT POSITIONS AND OFFICES HELD NAME AGE WITH THE CORPORATION AND WITH CHEMICAL BANK - ------------------------------------------------------------------------------------------------------------------ Walter V. Shipley 60 Chairman of the Board and Chief Executive Officer of the Corporation and Chemical Bank. From the MHC Merger until December 31, 1993, President of the Corporation and Chemical Bank. Prior to the MHC Merger, Mr. Shipley had served as Chairman and Chief Executive Officer of Chemical Banking Corporation and Chemical Bank since 1983. Director of the Corporation and Chemical Bank since 1982. Edward D. Miller 55 President of the Corporation and Chemical Bank. From the MHC Merger until December 31, 1993, Vice Chairman of the Corporation and Chemical Bank. A Director of the Corporation and Chemical Bank since the MHC Merger. Prior to the MHC Merger, Mr. Miller had served as a Vice Chairman and a Director of MHC since December 1988. William B. Harrison Jr. 52 Vice Chairman of the Corporation and Chemical Bank. A Director of the Corporation since the MHC Merger and of Chemical Bank since August 1990. Prior to the MHC Merger, Mr. Harrison had been an Executive Officer of the Corporation since 1988. Peter J. Tobin 52 Executive Vice President and Chief Financial Officer of the Corporation and Chemical Bank. Prior to the MHC Merger, Mr. Tobin had served in the same capacity for MHC since December 1985. William C. Langley 57 Executive Vice President and Chief Credit and Risk Policy Officer of the Corporation and Chemical Bank. Prior to the MHC Merger, Mr. Langley had served as Executive Vice President of MHC since 1983.
Unless otherwise noted, all of the Corporation's above-named executive officers have continuously held senior-level positions with the Corporation and Chemical Bank during the five fiscal years ended December 31, 1995. There are no family relationships among the foregoing executive officers. 7 10 Part II - -------------------------------------------------------------------------------- ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The outstanding shares of the Corporation's Common Stock are listed on the New York Stock Exchange and the International Stock Exchange of the United Kingdom and the Republic of Ireland. For the quarterly high and low prices of the Common Stock on the New York Stock Exchange and the quarterly dividends declared data for the Corporation's common stock for the last two years, see the section entitled "Quarterly Financial Information" on page 75. At February 29, 1996, there were approximately 56,640 holders of record of the Corporation's Common Stock. - -------------------------------------------------------------------------------- ITEM 6: SELECTED FINANCIAL DATA For five-year selected financial data, see "Summary of Selected Financial Data" on page 13. - -------------------------------------------------------------------------------- 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 13 through 41. - -------------------------------------------------------------------------------- ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements appear, together with the Notes thereto and the report of Price Waterhouse LLP dated January 16, 1996 thereon, on pages 42 through 74. Supplementary financial data for each full quarter within the two years ended December 31, 1995 is included on page 75 in the table entitled "Quarterly Financial Information". Also included is the "Consolidated Balance Sheet" for Chemical Bank and Subsidiaries on page 76. - -------------------------------------------------------------------------------- ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 8 11 Part III - ----------------------------------------------------------------------- ITEM 10:DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION 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 by 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 the Corporation's definitive proxy statement for the annual meeting of stockholders, to be held May 21, 1996, which proxy statement will be filed with Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the close of the Corporation's 1995 fiscal year. 9 12 Part IV - ------------------------------------------------------------------------ ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) EXHIBITS 1. Financial Statements The consolidated financial statements, the Notes thereto and the report thereon listed in Item 8 are set forth commencing on page 42. 2. Financial Statement Schedules None. 3. Exhibits 2.1 Agreement and Plan of Merger, dated as of August 27, 1995, between Chemical Banking Corporation and The Chase Manhattan Corporation (incorporated by reference to Exhibit 2.1 to the Registration Statement on Form S-4 (File No. 33-63833) of Chemical Banking Corporation). 2.2 Stock Option Agreement, dated as of August 27, 1995, between Chemical Banking Corporation, as Issuer, and The Chase Manhattan Corporation, as Grantee (incorporated by reference to Exhibit 2.2 to the Registration Statement on Form S-4 (File No. 33-63833) of Chemical Banking Corporation). 2.3 Stock Option Agreement, dated as of August 27, 1995, between The Chase Manhattan Corporation, as Issuer, and Chemical Banking Corporation, as Grantee (incorporated by reference to Exhibit 2.3 to the Registration Statement on Form S-4 (File No. 33-63833) of Chemical Banking Corporation. 2.4 Employee Benefits Agreement, dated as of August 27, 1995, between Chemical Banking Corporation and The Chase Manhattan Corporation (incorporated by reference to Exhibit 2.4 to the Registration Statement on Form S-4 (File No. 33-63833) of Chemical Banking Corporation). 3.1 (a) Restated Certificate of Incorporation of Chemical Banking Corporation (incorporated by reference to Exhibit 3.1 of the Annual Report on Form 10-K dated December 31, 1993 of Chemical Banking Corporation). 3.1 (b) Certificate of Designations of Adjustable Rate Cumulative Preferred Stock, Series L (incorporated by reference to Exhibit 2 to the Registration Statement on Form 8-A dated June 6, 1994 of Chemical Banking Corporation). 3.2 By-laws of Chemical Banking Corporation, as amended (incorporated by reference to Exhibit 3.2 of the Annual Report on Form 10-K dated December 31, 1993 of Chemical Banking Corporation). 4.1 (a) Form of Rights Agreement, dated as of April 13, 1989 between Chemical Banking Corporation and Harris Trust Company of New York, as amended (incorporated by reference to Exhibit 4 to the Current Report on Form 8-K of Chemical Banking Corporation dated April 13, 1989). 4.1 (b) Letter of Appointment dated December 23, 1991 of Chemical Banking Corporation appointing Chemical Bank, as successor Rights Agent under the Rights Agreement (incorporated by reference to Exhibit 4.13(b) of the Annual Report on Form 10-K dated December 31, 1991 of Chemical Banking Corporation). 4.2 Form of Indenture dated as of December 1, 1989 between Chemical Banking Corporation and The Chase Manhattan Bank (National Association), which Indenture includes the form of Debt Securities (incorporated by reference to Exhibit 4.9 to the Registration Statement on Form S-3 (File No. 33-32409) of Chemical Banking Corporation). 4.3 Form of 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, which Indenture includes the form of Subordinated Debt Securities (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K dated December 22, 1992 of Chemical Banking Corporation). 4.4 (a) Form of Indenture dated as of June 1, 1982 between Manufacturers Hanover Corporation and Morgan Guaranty Trust Company of New York, as succeeded to by First Trust of New York (National Association), as Trustee, which Indenture includes the form of Debt Securities (incorporated by reference to Exhibit 4(a) to the Registration Statement on Form S-3 (File No. 2-82433) of Manufacturers Hanover Corporation). 4.4 (b) Form of First Supplemental Indenture dated as of January 15, 1986 to the Indenture dated as of June 1, 1982 between Manufacturers Hanover Corporation and Morgan Guaranty Trust Company of New York, as succeeded to by First Trust of New York (National Association), as Trustee, relating to the Senior Debt Securities (incorporated by reference to Exhibit 1 to the Current Report on Form 8-K dated as of January 29, 1986 of Manufacturers Hanover Corporation). 4.4 (c) Form of Second Supplemental Indenture dated as of March 13, 1991 to the Indenture dated as of June 1, 1982 between Manufacturers Hanover Corporation and Morgan Guaranty Trust Company of New York, as succeeded to by First Trust of New York (National Association), as Trustee, relating to the Senior Debt Securities (incorporated by reference to Exhibit 4 to the Current Report on Form 8-K dated March 19, 1991 of Manufacturers Hanover Corporation). 10 13 - ------------------------------------------------------------------------ 4.4 (d) Form of Third Supplemental Indenture dated as of December 31, 1991 among Chemical Banking Corporation, Manufacturers Hanover Corporation and Morgan Guaranty Trust Company of New York, as succeeded to by First Trust of New York (National Association), as Trustee, to the Indenture dated as of June 1, 1982 (incorporated by reference to Exhibit 4.14(d) of the Annual Report on Form 10-K dated December 31, 1991 of Chemical Banking Corporation). 4.5 (a) Form of Indenture dated as of June 1, 1985 between Manufacturers Hanover Corporation and IBJ Schroder Bank and Trust Company, as Trustee, relating to 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). 4.5 (b) Form of First Supplemental Indenture dated as of December 31, 1991 among Chemical Banking Corporation, Manufacturers Hanover Corporation and IBJ Schroder Bank and Trust Company 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). 4.6 (a) Form of 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 Registration Statement on Form S-3 (No. 33-60262) of Margaretten Financial Corporation). 4.6 (b) Form of 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). 10.1 Key Executive Performance Plan of Chemical Banking Corporation (incorporated by reference to Exhibit 10.4 to the Annual Report on Form 10-K for the year ended December 31, 1994 of Chemical Banking Corporation). 10.2 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 for the year ended December 31, 1994 of Chemical Banking Corporation). 10.3 Deferred Compensation Plan for Non-Employee Directors of Chemical Banking Corporation and Chemical Bank, as amended and restated effective December 15, 1992 (incorporated by reference to Exhibit 10.6 to the Annual Report on Form 10-K for the year ended December 31, 1992 of Chemical Banking Corporation). 10.4 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 for the year ended December 31, 1992 of Chemical Banking Corporation). 10.5 Forms of employment agreements as entered into by Chemical Banking Corporation and certain of its executive officers. 10.6 Post-Retirement Compensation Plan for Non-Employee Directors, as amended and restated as of December 15, 1992 (incorporated by reference to Exhibit 10.10 to the Annual Report on Form 10-K for the year ended December 31, 1992 of Chemical Banking Corporation). 11 14 - ------------------------------------------------------------------------ 10.7 Permanent Life Insurance Options Plan (incorporated by reference to Exhibit 10.11 to the Annual Report on Form 10-K for the year ended December 31, 1992 of Chemical Banking Corporation). 10.8 Executive Retirement Plan of Chemical Banking Corporation and Certain Subsidiaries. 10.9 Supplemental Retirement Plan of Chemical Bank and Certain Affiliated Companies, restated effective January 1, 1993 and as amended through January 1, 1995. 11.1 Computation of Net Income per Common Share. 12.0 Computation of ratio of earnings to fixed charges. 12.1 Computation of ratio of earnings to fixed charges and preferred stock dividend requirements. 21.1 List of Subsidiaries of Chemical Banking Corporation. 22.1 Annual Report on Form 11-K of the Chemical Savings Plan of Chemical Bank and Certain Affiliates (to be filed by amendment pursuant to Rule 15d-21 under the Securities Exchange Act of 1934). 22.2 Annual Report on Form 11-K of the Margaretten Financial Corporation Savings Plan (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. 99.0 Supplemental Pro Forma Financial Statements. The Corporation hereby agrees to furnish to the Commission, upon request, copies of instruments defining the rights of holders for the following outstanding nonregistered long-term debt of the Corporation and its subsidiaries: Floating Rate Subordinated Note Due 1998 of the Corporation; Subordinated Floating Rate Notes Due 2003 of the Corporation; Floating Rate Note Due 2002 of the Corporation; Zero-Coupon Note Due 2002 of the Corporation; Serial Zero Coupon Guaranteed Notes Due 1984-2003 of the Corporation; 8.35% Senior Notes Due January 27, 2000 of the Corporation; Floating Rate Senior Notes Due October 17, 2001 of the Corporation; Senior Floating Rate Notes Due to 2000 of the Corporation; 7 1/4% Subordinated Notes Due 2002 of Chemical Bank; 7% Subordinated Notes Due 2005 of Chemical Bank; Floating Rate Subordinated Notes Due May 5, 2003 of Chemical Bank; Floating Rate Subordinated Notes Due June 15, 2000 of Chemical Bank; Floating Rate Subordinated Notes Due July 29, 2003 of Chemical Bank; 6.58% Subordinated Notes Due 2005 of Chemical Bank; 6.70% Subordinated Notes Due 2008 of Chemical Bank; 6.125% Subordinated Notes Due 2008 of Chemical Bank; Adjustable Rate Notes Due April 1, 2011 of Texas Commerce Bancshares, Inc.; Floating Rate Subordinated Notes Due 1997 of Manufacturers Hanover Corporation; Floating Rate Subordinated Capital Notes Due April 1997 of Manufacturers Hanover Trust Company; and LIBOR Note, Series C, Due March 1998 of Manufacturers Hanover Corporation. 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 Corporation and its subsidiaries on a consolidated basis. (b) REPORTS ON FORM 8-K - - A Current Report on Form 8-K dated October 18, 1995 was filed setting forth the Corporation's financial results for the 1995 third quarter. - - A Current Report on Form 8-K dated October 26, 1995 was filed setting forth certain financial information for The Chase Manhattan Corporation and pro forma combined financial information for the combined entity giving effect to the merger. - - A Current Report on Form 8-K dated December 14, 1995 was filed announcing that stockholders of the Corporation as well as stockholders of The Chase Manhattan Corporation had approved the planned merger of the two companies. - - A Current Report on Form 8-K dated December 19, 1995 was filed announcing that the Corporation had completed the sale of half of its 40% interest in The CIT Group. 12 15 MANAGEMENT'S DISCUSSION AND ANALYSIS Chemical Banking Corporation SUMMARY OF SELECTED FINANCIAL DATA and Subsidiaries
(in millions, except per share and ratio data) As of or for the year ended December 31, 1995 1994 1993 1992 1991 - ----------------------------------------------------------------------------------------------------------------------- FOR THE YEAR Net Interest Income $ 4,689 $ 4,674 $ 4,636 $ 4,598 $ 4,080 Provision for Losses 478 550 1,259 1,365 1,345 Noninterest Revenue 3,766 3,597 4,024 3,026 2,862 Noninterest Expense 5,001 5,509 5,293 4,930 5,307 Income Tax Expense 1,160 918 539 243 136 Income Before Effect of Accounting Changes 1,816 1,294 1,569 1,086 154 Net Effect of Changes in Accounting Principles(a) (11) -- 35 -- -- Net Income $ 1,805 $ 1,294 $ 1,604 $ 1,086 $ 154 - ----------------------------------------------------------------------------------------------------------------------- PER COMMON SHARE Income Before Effect of Accounting Changes: Primary $ 6.77 $ 4.60 $ 5.57 $ 3.85 $ .11 Income Before Effect of Accounting Changes: Fully-Diluted 6.51 4.54 5.48 3.81 .11 Net Income Per Share: Primary 6.73 4.60 5.71 3.85 .11 Net Income Per Share: Fully-Diluted 6.47 4.54 5.62 3.81 .11 Book Value at December 31, 42.56 37.88 37.60 32.43 31.02 Market Value at December 31, 58.75 35.88 40.13 38.63 21.25 Cash Dividends Declared(b) 1.94 1.64 1.37 1.20 1.05 - ----------------------------------------------------------------------------------------------------------------------- PRO FORMA(c) Net Income $ 1,816 $ 1,446 $ 1,305 $ 784 $ 540 Net Income Per Common Share: Primary 6.77 5.20 4.53 2.61 2.21 Net Income Per Common Share:Fully-Diluted 6.51 5.13 4.47 2.61 2.20 Return on Average Common Stockholders' Equity 17.19% 13.94% 13.22% 8.37% 6.74% - ----------------------------------------------------------------------------------------------------------------------- TOTAL AT YEAR-END Loans $ 82,143 $ 78,767 $ 75,381 $ 82,010 $ 84,237 Total Assets 182,926(d) 171,423(d) 149,888 139,655 138,930 Deposits 98,417 96,506 98,277 94,173 92,950 Long-Term Debt 7,329 7,991 8,192 6,798 5,738 Total Stockholders' Equity 11,912 10,712 11,164 9,851 7,281 - ----------------------------------------------------------------------------------------------------------------------- PERFORMANCE RATIOS Return on Average Total Assets 1.00%(d) .78%(d) 1.11% .78% .11% Return on Average Common Stockholders' Equity 17.08 12.32 16.66 12.36 .33 Return on Average Total Stockholders' Equity 16.00 11.80 15.16 11.65 2.02 Common Dividend Payout 28 35 24 32 1,280 Efficiency Ratio(e) 59 63 58 61 65 - ----------------------------------------------------------------------------------------------------------------------- CAPITAL RATIOS Tier 1 Leverage(f) 6.43% 6.26% 7.16% 6.88% 4.81% Tier 1 Risk-Based Capital Ratio(f) 8.45 8.02 7.93 7.20 5.01 Total Risk-Based Capital Ratio(f) 12.10 11.97 11.86 11.29 8.90 - -----------------------------------------------------------------------------------------------------------------------
(a) On January 1, 1995, the Corporation adopted Statement of Financial Accounting Standards No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"), for the accounting for other postretirement benefits relating to the Corporation's foreign plans. On January 1, 1993, the Corporation adopted SFAS 106 for its domestic plans, which resulted in a charge of $415 million and Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109")which resulted in an income tax benefit of $450 million. (b) The 1991 amount excludes cash dividends of $.29 per share of Class B Common Stock. The Class B Common Stock was converted into the Corporation's Common Stock in the first quarter of 1992. (c) The Corporation recognized its remaining Federal income tax benefits in 1993. The pro forma section presents the earnings prior to 1994 on a fully-taxed basis and excludes the impact of the $11 million accounting change in 1995, the $260 million restructuring charge in 1994, the $115 million merger-related charge and $35 million benefit of accounting changes in 1993 and the $625 million restructuring charge in 1991. (d) On January 1, 1994, the Corporation adopted Financial Accounting Standards Board ("FASB") Interpretation No. 39 ("FASI 39"). Excluding the gross up impact of FASI 39, the return on average assets for 1995 and 1994 was 1.14% and 0.86%, respectively. (e) Excludes restructuring charges, foreclosed property expense and, in 1994 and 1993, gains on emerging markets past-due interest bond sales. (f) Risk-based capital and leverage ratios exclude the assets and off-balance sheet financial instruments of the Corporation's securities subsidiary, Chemical Securities Inc., as well as the Corporation's investment in this subsidiary. 13 16 MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------------------------------------------------- On March 31, 1996, The Chase Manhattan Corporation ("Chase") will merge with and into Chemical Banking Corporation (the "Corporation"). Upon consummation of the merger, Chemical Banking Corporation will change its name to "The Chase Manhattan Corporation" ("New Chase"). (See The Merger with Chase on page 15 for a further description of the merger). Because the merger, which will be accounted for as a pooling of interests, occurred subsequent to December 31, 1995, the information presented in this Annual Report on Form 10-K does not give effect to the impact of the merger. Consequently, unless otherwise expressly stated, the information presented relates to Chemical Banking Corporation prior to the merger with Chase. Supplemental financial statements that reflect the combined financial condition and results of operations of the Corporation and Chase, as if the merger had been in effect for all periods presented, are included on pages 97 through 103. - -------------------------------------------------------------------------------- - - OVERVIEW Chemical Banking Corporation (the "Corporation") reported record net income of $1,805 million for 1995, an increase of 39% from net income of $1,294 million in 1994. The 1994 results included a fourth quarter restructuring charge of $260 million ($152 million after-tax). The Corporation's primary earnings per share were $6.73 in 1995, an increase of 46% from $4.60 in 1994. On a fully-diluted basis, earnings per share were $6.47 in 1995, compared with $4.54 for the prior year. Excluding the fourth quarter of 1994 restructuring charge, net income for 1995 increased 25% from comparable earnings of $1,446 million in 1994. Primary earnings per share increased 29% from $5.20 in 1994, while fully-diluted earnings per share increased 26% from $5.13 a year ago. The 1995 results were characterized by revenue growth, lower expenses and a disciplined use of capital. On December 1, 1994, the Corporation announced a two-year program ("Actions to Improve Earnings Per Share") designed to produce earnings per share growth of more than 15% in 1995 and in 1996, an efficiency ratio of 60% in 1995 and 57% by 1996, and a return on common stockholders' equity of 15% in 1995 and 16% by 1996. The following table compares the Corporation's 1995 actual results with the goals announced in the Corporation's Actions to Improve Earnings Per Share program.
Year Ended December 31, 1995 Goals 1995 Results - ---------------------------------------------------------------------- Earnings Per Share Growth Above 15% 26% Efficiency Ratio 60% 59% Return on Common Stockholders' Equity 15% 17% Annual Core Revenue Growth 4% 4% Annual Core Expense Growth Flat Declined 1% Capital Discipline: Divestitures Completed Stock buyback In process(a) - ---------------------------------------------------------------------- (a) Buyback program modified in accordance with "pooling-of-interests" accounting rules.
In connection with the capital discipline phase of the program, the Corporation took the following actions during 1995: - - The Corporation completed two transactions in the fourth quarter as part of its plan to free up capital through the sale of non-strategic businesses. On October 6, 1995, the Corporation sold its banking operations in southern and central New Jersey to PNC Bank Corp. for approximately $490 million. The sale did not include the Corporation's franchise in northeastern New Jersey, where it retains 39 branches and private banking operations. On December 15, 1995, the Corporation completed the sale of half its 40% interest in the CIT Group Holdings, Inc. ("CIT") to The Dai-Ichi Kangyo Bank for approximately $430 million. The two transactions resulted in a net after-tax gain of approximately $25 million. - - In the 1995 first quarter, the Corporation sold its interest in Far East Bank and Trust Company in the Philippines, resulting in an $85 million gain ($51 million after tax). This transaction was part of the Corporation's plan to sell minority interests in overseas entities that are not considered strategic. - - The Corporation formed a joint venture with Mellon Bank Corporation that provides stock transfer and related shareholder services to publicly-held companies. The joint venture is a 50/50 partnership, with both entities sharing equally in the joint venture's initial capitalization, including investments in new technology. CREDIT PROFILE The Corporation's nonperforming assets at December 31, 1995 were $906 million, a decline of 20% from $1,139 million at year-end 1994. As a result of the continued decline in nonperforming assets, the ratio of the allowance for credit losses to nonperforming loans reached 278% at December 31, 1995, compared with 267% at December 31, 1994. Nonperforming assets have declined by $5,681 million, or 86%, from their peak level of $6,587 million in September 1992. CAPITAL At December 31, 1995, the Corporation's Tier 1 Capital and Total Capital ratios were 8.45% and 12.10%, respectively, well in excess of the minimum ratios specified by the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). At December 31, 1995, the Corporation was "well capitalized", as defined by the Federal Reserve Board. 14 17 Chemical Banking Corporation and Subsidiaries - -------------------------------------------------------------------------------- - -THE MERGER WITH CHASE On March 31, 1996, Chase will merge with and into the Corporation. Upon consummation of the merger, the Corporation will have in excess of $300 billion in total assets and $20 billion in shareholders' equity making it the largest banking institution in the United States. Under the terms of the merger agreement, approximately 186 million shares of the Corporation's common stock will be issued in exchange for all of the outstanding shares of Chase's common stock (based on an exchange ratio of 1.04 shares of the Corporation's common stock for each share of Chase's common stock). All of Chase's series of preferred stock will be exchanged on a one-for-one basis for a corresponding series of the Corporation's preferred stock having substantially the same terms as the Chase preferred stock so converted. The merger will be accounted for as a pooling of interests. The supplemental financial statements presented on pages 97 through 103 of this report present the financial condition and results of operations of the Corporation and Chase as if the merger had been in effect for all periods presented. At the time of the merger announcement on August 28, 1995, it was estimated that annual cost savings from the merger would be $1.5 billion to be achieved within three years of the merger date by consolidating certain operations and eliminating redundant costs. In connection with the merger announcement, the Corporation estimated that it would take a pre-tax merger charge of $1.5 billion, principally as a result of severance expenses associated with the elimination of approximately 12,000 positions from a combined staff of 75,000 located in 39 states and 51 countries and expenses associated with the elimination of offices and redundant operations. Since the date of the merger announcement, the Corporation has continued to evaluate the costs anticipated to be incurred in connection with the merger, as well as the cost savings from the merger, and currently anticipates that the merger-related restructuring charge, as well as the cost savings, will each be higher than originally announced. For further information regarding the merger, see Note Two of the Notes to Consolidated Financial Statements. - -------------------------------------------------------------------------------- - -RESULTS OF OPERATIONS
NET INTEREST INCOME Year Ended December 31, (in millions) 1995 1994 - ----------------------------------------------------------------------- Net Interest Income: Domestic $ 3,887 $ 3,818 Overseas 802 856 - ----------------------------------------------------------------------- Total Net Interest Income 4,689 4,674 Taxable Equivalent Adjustment 26 24 - ----------------------------------------------------------------------- Net Interest Income-Taxable Equivalent Basis(a) $ 4,715 $ 4,698 - ----------------------------------------------------------------------- Average Interest-Earning Assets: Domestic $104,060 $ 96,448 Overseas 37,555 33,597 - ----------------------------------------------------------------------- Total Average Interest-Earning Assets: $141,615 $130,045 - ----------------------------------------------------------------------- Net Yield on Interest-Earning Assets: Domestic 3.76% 3.98% Overseas 2.14 2.55 - ----------------------------------------------------------------------- Consolidated Net Yield on Interest-Earning Assets 3.33% 3.61% - -----------------------------------------------------------------------
(a) Reflected on a taxable equivalent basis in order to permit comparisons of yields on tax-exempt and taxable assets. Reported net interest income for 1995 was $4,689 million, compared with $4,674 million in 1994. The 1995 results were affected by the securitization of $2.25 billion in credit card receivables and the sale of certain New Jersey operations in the fourth quarter, which reduced 1995 net interest income by $49 million and $33 million, respectively. Excluding the impact of these factors, the improvement in 1995 when compared with the prior year was primarily due to an $11.6 billion increase in interest-earning assets (led by growth in consumer loans) and a reduction in the cost of carrying nonperforming loans, partially offset by narrower spreads. The interest rate spread, which is the difference between the average rate on interest-earning assets and the average rate on interest-bearing liabilities, was 2.59% for 1995, compared with 3.07% for 1994. The net yield on interest-earning assets, which is the average rate for interest-earning assets less the average rate paid for all sources of funds, including the impact of interest-free funds, was 3.33% in 1995, compared with 3.61% in 1994. The declines in 1995 principally reflected narrower loan spreads due to increased pressure on loan pricing, the impact of higher interest rates on wholesale funding, and the securitization of credit card receivables. These factors were partially offset by the reduction in nonperforming loans and an increased contribution from noninterest-bearing funds. The following table reflects the composition of interest-earning assets as a percentage of total earning assets as well as the interest rate spread and the net yield on interest-earning assets for the periods indicated.
AVERAGE INTEREST-EARNING ASSET MIX Year Ended December 31, (in billions) 1995 1994 - ---------------------------------------------------------------------------- Consumer Loans $ 33.2 24% $ 27.3 21% Commercial Loans 48.4 34 47.9 37 - --------------------------------------------------------------------------- Total Loans 81.6 58 75.2 58 Securities 29.9 21 26.2 20 Liquid Interest-Earning Assets 30.1 21 28.6 22 - --------------------------------------------------------------------------- Total Interest-Earning Assets $141.6 100% $130.0 100% - --------------------------------------------------------------------------- Interest Rate Spread 2.59% 3.07% - --------------------------------------------------------------------------- Consolidated Net Yield on Interest-Earning Assets 3.33% 3.61% - ---------------------------------------------------------------------------
15 18 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- The Corporation's average total loans in 1995 were $81.6 billion, compared with $75.2 billion in 1994. The increase reflected the continued growth in consumer loans (principally from residential mortgage and credit card activities) and commercial lending, partially offset by a reduction in the commercial real estate portfolio. The growth in interest-earning assets was funded by a $9.6 billion increase in interest-bearing liabilities. For 1995, average interest-bearing liabilities were $121.7 billion, compared with $112.1 billion for 1994, principally due to a higher level of foreign interest-bearing deposits and Federal funds purchased and securities sold under repurchase agreements. The Corporation utilizes repurchase agreements as a source of short-term funding for trading-related positions and for its securities portfolio. The negative impact on net interest income from nonperforming loans (excluding nonperforming loans held for accelerated disposition) in 1995 was $53 million, compared with $65 million in 1994, reflecting the continued reduction in the level of the Corporation's nonperforming loans. The favorable impact on net interest income from the Corporation's asset/liability derivative activities, whereby derivative instruments are used in order to alter the yield on certain of the Corporation's assets and liabilities, was $28 million for 1995, compared with $190 million for 1994. For a further discussion of derivative instruments used in the Corporation's asset/liability management ("ALM") activities as well as the Corporation's sensitivity to interest rates, see the Asset/Liability Management section on pages 32-36. For additional information on average balances and net interest income, see the Average Consolidated Balance Sheets, Interest and Rates on pages 78 to 83. PROVISION FOR LOSSES The provision for losses in 1995 was $478 million, compared with $550 million in 1994, as a result of a decline in loan net charge-offs due to an overall improvement in the Corporation's credit profile. For a discussion of the Corporation's net charge-offs, see page 24. NONINTEREST REVENUE Noninterest revenue totaled $3,766 million in 1995, an increase of 5% when compared with 1994. The 1995 results reflected increased revenues from corporate finance and syndication fees, fees for other financial services, credit card revenue and securities gains. These increases were partially offset by declines in trust and investment management fees, trading revenue, and losses on emerging markets bond sales. The following table presents the components of noninterest revenue for the periods indicated.
Year Ended December 31, (in millions) 1995 1994 - ------------------------------------------------------------- Corporate Finance and Syndication Fees $ 531 $ 405 Trust and Investment Management Fees 379 421 Credit Card Revenue 378 315 Service Charges on Deposit Accounts 297 300 Fees for Other Financial Services 850 833 - ------------------------------------------------------------- Total Fees and Commissions 2,435 2,274 Trading Revenue 624 645 Securities Gains 119 66 Other Revenue 588 612 - ------------------------------------------------------------- Total Noninterest Revenue $3,766 $3,597 - -------------------------------------------------------------
FEES AND COMMISSIONS Corporate finance and syndication fees include revenue from managing and syndicating loan arrangements; providing financial advisory services in connection with leveraged buyouts, recapitalizations and mergers and acquisitions; and arranging private placements and underwriting debt and equity securities. Corporate finance and syndication fees in 1995 reached a record level of $531 million, a 31% increase from the prior year, reflecting increases in global investment banking activities, especially loan syndications and new issues of high-yield securities. During 1995, the Corporation acted as agent or co-agent for approximately $423 billion of syndicated credit facilities, compared with $319 billion in 1994, a reflection of the Corporation's large client base and strong emphasis on distribution. Trust and investment management fees are primarily comprised of corporate, institutional and private banking (personal trust) activities provided to corporations and individuals on a global basis. The Corporation's corporate and institutional trust area provides customers with a full range of services such as trustee and securities processing, as well as investment advisory and administrative functions for customers' pension and other employee benefit plans. The Corporation's private banking area provides a full range of services for high-net worth individuals. The Corporation's family of proprietary mutual funds, The Hanover Funds, are managed within the private banking area. The following table reflects the components of trust and investment management fees for the periods indicated.
Year Ended December 31, (in millions) 1995 1994 - ------------------------------------------------------------------------- Trust and Investment Management Fees: Personal Trust and Investment Management Fees $206 $206 Corporate and Institutional Trust Fees 131 176 Other, primarily Foreign Asset Management 42 39 - ------------------------------------------------------------------------- Total Trust and Investment Management Fees $379 $421 - -------------------------------------------------------------------------
16 19 Chemical Banking Corporation and Subsidiaries - -------------------------------------------------------------------------------- Personal trust and investment management fees in 1995 remained consistent with the prior year due to an increase in assets under management, offset by pricing pressures. Corporate and institutional trust fees decreased 26% from the 1994 level largely due to the absence of $46 million in fees in 1995 related to the joint venture with Mellon Bank Corporation. As a result of the shareholder services joint venture between the Corporation and Mellon Bank Corporation, effective January 1, 1995, revenues and expenses of the affected business units were reflected on an equity basis within other revenue. Credit card revenue increased $63 million from the 1994 level due to an increased volume of retail credit card receivables from a growing cardholder base, as well as increased fees related to the securitization of $2.25 billion in credit card outstandings in the fourth quarter of 1995. For a further discussion of the credit card portfolio and related securitization activity, see page 25. Fees for other financial services for 1995 were $850 million, an increase of $17 million from a year ago. The following table reflects the components of fees for other financial services for the periods indicated.
Year Ended December 31, (in millions) 1995 1994 - ---------------------------------------------------------------------- Fees in Lieu of Compensating Balances $187 $203 Commissions on Letters of Credit and Acceptances 154 151 Loan Commitment Fees 87 86 Mortgage Servicing Fees 94 79 Other 328 314 - ---------------------------------------------------------------------- Total Fees for Other Financial Services $850 $833 - ----------------------------------------------------------------------
Mortgage servicing fees increased $15 million in 1995 reflecting a higher level of mortgage servicing volume resulting from the acquisition of Margaretten Financial Corporation ("Margaretten") on July 1, 1994, as well as additions to the portfolio from mortgage originations. The Corporation's residential mortgage servicing portfolio increased $1.9 billion to $54.6 billion in 1995. For a further discussion on the Corporation's mortgage banking activities, see the residential mortgage section on page 25. The improvement in other fees for 1995 reflected higher brokerage commissions of $17 million, due to higher transaction volume at the Corporation's discount brokerage firm, Brown and Company. Fees in lieu of compensating balances decreased by $16 million in 1995 when compared with 1994. Customers often pay for cash management or other banking services by maintaining noninterest-bearing deposits. As interest rates increase, the required compensating balance for a given level of service will decrease. As a result, during 1995, when short-term interest rates were higher than in 1994, a greater volume of customers maintained a compensating balance in lieu of paying a fee for services. TRADING REVENUE The following table sets forth the components of total trading-related revenue for 1995 and 1994. Net interest income related to trading activities should be reviewed in conjunction with the trading revenue amounts in the following table.
Year Ended December 31, (in millions) 1995 1994 - ----------------------------------------------------------- Trading Revenue $624 $645 Net Interest Income Impact(a) 177 15 - ----------------------------------------------------------- Total Trading Related Revenue $801 $660 - ----------------------------------------------------------- Product Diversification: Interest Rate Contracts(b) $275 $384 Foreign Exchange Revenues(c) 291 157 Debt Instruments and Other(d) 235 119 - ----------------------------------------------------------- Total Trading Related Revenue $801 $660 - -----------------------------------------------------------
(a) Net interest income attributable to trading activities includes accruals on interest-earning and interest-bearing trading-related positions as well as a management allocation reflecting the funding cost or benefit associated with trading positions. (b) Includes interest rate swaps, cross-currency interest rate swaps, foreign exchange forward contracts, interest rate futures, and 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 securities, emerging markets debt instruments, debt-related derivatives, equity securities, equity derivatives, and commodity derivatives. The $109 million decrease in revenue from interest rate contracts during 1995 was primarily due to unexpected volatility in certain European interest rate markets. During 1995, combined foreign exchange revenue increased $134 million, benefiting from anticipated volatility in the currency markets (in particular from changes in the Yen, Deutsche mark and Pound Sterling) and from the Corporation's market-making activities, which increase during periods of volatility. The 1994 foreign exchange amount reflects a $70 million loss resulting from unauthorized foreign exchange transactions involving the Mexican peso. The $116 million increase in combined debt instruments and other revenue during 1995 was primarily due to a strong performance in high-yield securities as well as increased stability in the prices of emerging markets securities during the year. Trading revenues are affected by many factors, including volatility of currencies and interest rates, the volume of transactions executed by the Corporation on behalf of its customers, the Corporation's success in proprietary positioning, the improvements in its credit ratings, and the steps taken by central banks and governments which affect financial markets. The Corporation expects its trading revenues will fluctuate as these factors will vary from period to period. 17 20 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- OTHER NONINTEREST REVENUE The following table presents securities gains and the composition of other revenue for 1995 and 1994.
Year Ended December 31, (in millions) 1995 1994 - --------------------------------------------------------------------- Securities Gains $ 119 $ 66 - --------------------------------------------------------------------- Other Revenue: Revenue from Equity-Related Investments $ 378 $362 Net Gains (Losses) on Emerging Markets Securities Sales (86) 127 Gain on the Sale of the Corporation's Investment in Far East Bank & Trust Company 85 -- Residential Mortgage Originations/ Sales Activities 55 (15) All Other Revenue 156 138 - --------------------------------------------------------------------- Total Other Revenue $ 588 $612 - ---------------------------------------------------------------------
Securities gains were $119 million in 1995, compared with $66 million in 1994. The higher level of securities gains, all of which resulted from sales from the available-for-sale portfolio, were made in connection with the Corporation's ALM activities. Included in the 1995 results was a $13 million permanent impairment loss on Barings Bank PLC securities held by the Corporation and an $11 million loss on available-for-sale securities sales recorded at Chemical Bank New Jersey as part of the repositioning of the retained branches. For further discussion of the Corporation's securities, see Note Four of the Notes to Consolidated Financial Statements. The Corporation's other revenue was $588 million in 1995, compared with $612 million in 1994. Revenue from equity-related investments, which includes income from venture capital activities and emerging markets investments, was $378 million in 1995, an increase of 4% from 1994. There was no significant individual transaction gain recognized in the 1995 results, while the 1994 results included the recognition of a $78 million gain related to a single emerging market equity investment. At December 31, 1995, the Corporation had equity-related investments with a carrying value of $2.0 billion. Average revenue from equity-related investments was approximately $93 million per quarter, based upon revenues during the last eight quarterly periods. The 1995 results included net losses of $86 million related to the disposition of emerging market available-for-sale securities. Such dispositions are part of the Corporation's ongoing efforts to manage its exposure in its available-for-sale portfolios. The 1994 results included net gains of $127 million from sales of emerging markets past-due interest bonds. Residential mortgage originations/sales activities in 1995 increased by $70 million from 1994 results primarily due to a more favorable interest rate environment in 1995 and the impact of the adoption in 1995 of Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS 122"). For a further discussion of SFAS 122, see Note One of the Notes to Consolidated Financial Statements on page 47. All other revenue includes the Corporation's share of net income from its interest in CIT which, after purchase accounting adjustments, was $77 million in 1995, an increase from $73 million in 1994. On December 15, 1995, the Corporation reduced its interest in CIT from 40% to 20%. NONINTEREST EXPENSE Noninterest expense in 1995 was $5,001 million, compared with $5,509 million in 1994. Included in the results for 1994 was a $260 million restructuring charge taken in connection with the Corporation's Actions to Improve Earnings Per Share, and a $48 million restructuring charge related to the closing of 50 New York State branches. Excluding the restructuring charges in 1994, noninterest expense for 1995 decreased by $200 million, or 4% from 1994. The improvement from the prior year reflects the benefits of certain expense-reduction initiatives announced on December 1, 1994 by the Corporation as part of its Actions to Improve Earnings Per Share. Also contributing to the reduction in noninterest expense in 1995 was lower FDIC premium expense of $83 million reflecting a reduction in the FDIC assessment rate and the sale of Chemical New Jersey Holdings to PNC Bank Corp. ("PNC") which resulted in a noninterest expense reduction of approximately $31 million. Additionally, as a result of the shareholder services joint venture agreement with Mellon Bank Corporation, approximately $67 million of 1995 expenses associated with the stock transfer and related shareholder servicing operations were recorded on an equity basis within noninterest revenue. The decrease in noninterest expense from 1994 was partially offset by the inclusion of a full year of noninterest expense relating to Margaretten (compared with only six months of noninterest expense in 1994), as Margaretten was acquired in July 1994. The following table presents the components of noninterest expense for the periods indicated.
Year Ended December 31, (in millions) 1995 1994 - ------------------------------------------------------------- Salaries $2,332 $2,205 Employee Benefits 434 439 Occupancy Expense 520 573 Equipment Expense 395 382 Foreclosed Property Expense (23) 41 Restructuring Charge -- 308 Other Expense 1,343 1,561 - ------------------------------------------------------------- Total Noninterest Expense $5,001 $5,509 - -------------------------------------------------------------
18 21 Chemical Banking Corporation and Subsidiaries - -------------------------------------------------------------------------------- The Corporation's efficiency ratio improved to 59.4% in 1995 compared with 63.4% in 1994. Achieving an efficiency ratio of 60% in 1995 was a primary goal of the Corporation's Actions to Improve Earnings Per Share. The computation of the efficiency ratio (noninterest expense as a percentage of the total of net interest income and noninterest revenue) excludes any restructuring charges, foreclosed property expense and, in 1994, gains on emerging markets-related past-due interest bond sales. SALARIES AND EMPLOYEE BENEFITS The increase in salaries in 1995 was primarily due to higher incentive costs as a result of improved earnings for most businesses and a competitive recruiting environment for specialized skills at selected businesses. Also contributing to the increase in salaries was the vesting of various stock incentive awards due to the improvement in the Corporation's stock price during 1995, the continued growth in the Corporation's securities underwriting business and the additional staff costs resulting from the 1994 Margaretten acquisition. Partially offsetting these increases were the impact of personnel reductions undertaken in 1995 and lower salaries expense as a result of the sale of the southern and central New Jersey banking operations of Chemical New Jersey Holdings and the equity accounting for the shareholder services joint venture with Mellon Bank Corporation. The following table presents the Corporation's full-time equivalent employees at the dates indicated.
December 31, 1995 1994 - -------------------------------------------------------------- Domestic Offices 35,646 38,706 Foreign Offices 3,432 3,424 - -------------------------------------------------------------- Total Full-Time Equivalent Employees 39,078 42,130 - --------------------------------------------------------------
At December 31, 1995, there were approximately 2,800 positions eliminated from the 3,700 positions targeted for elimination as part of the Corporation's Actions to Improve Earnings Per Share. OCCUPANCY AND EQUIPMENT EXPENSE Occupancy expense was $520 million in 1995, a decrease of $53 million from 1994. The decline from 1994 is largely the result of the consolidation of operational and branch facilities and other expense-reduction initiatives. Equipment expense in 1995 was $395 million, compared with $382 million in 1994. The higher level of equipment expense in 1995 was due to continued technology enhancements to support the Corporation's investment in certain key businesses (in particular its trading and consumer banking businesses). FORECLOSED PROPERTY EXPENSE Foreclosed property expense was a credit of $23 million in 1995, compared with an expense of $41 million in 1994, reflecting the significant progress in reducing the Corporation's nonperforming real estate portfolio. The 1995 amount included proceeds received by Texas Commerce on the sale of certain foreclosed properties previously written down. Included in the 1994 results was a $12 million charge in conjunction with the transfer of certain real estate assets to the held-for-accelerated-disposition category. RESTRUCTURING CHARGE As part of the Actions to Improve Earnings Per Share announced in the fourth quarter of 1994, the Corporation recorded a $260 million restructuring charge. This charge was related to severance and other termination-related costs of $138 million associated with the elimination of 3,700 positions and costs of $122 million for the disposition of certain facilities, premises and equipment, and the termination of leases. The staff reductions are tied to specific expense reduction initiatives such as commercial lending re-engineering, branch network rationalization, and the process improvement program at Texas Commerce and have occurred within all business sectors of the Corporation. During 1994, the Corporation also recorded a restructuring charge of $48 million related to the closing of 50 New York branches and a staff reduction of 650. For a further discussion of the Corporation's restructuring charges included in noninterest expense, see Note Sixteen of the Notes to Consolidated Financial Statements. OTHER NONINTEREST EXPENSE The following table presents the components of other expense for the periods indicated.
Year Ended December 31, (in millions) 1995 1994 - ------------------------------------------------------------- Other Expense:(a) Professional Services $ 205 $ 225 Marketing Expense 178 186 FDIC Assessments 77 160 Telecommunications 148 153 Amortization of Intangibles 101 115 All Other 634 722 - ------------------------------------------------------------- Total Other Expense $1,343 $1,561 - -------------------------------------------------------------
(a) Certain prior period amounts have been reclassified to conform with the current year's presentation. Professional services, marketing expense and telecommunications expense all decreased in 1995 when compared with 1994 primarily as a result of the Corporation's sourcing and other expense-reduction initiatives. FDIC assessments declined $83 million during 1995 reflecting a reduction in FDIC assessment rates. Amortization of intangibles decreased by $14 million during 1995 due in part to the sale of the southern and central New Jersey banking operations of Chemical New Jersey Holdings. All other expense, which includes various smaller expense categories such as stationery and other supplies, postage, shipping, travel and insurance, decreased by 12% in 1995 when compared with 1994 reflecting the Corporation's sourcing and other expense-reduction initiatives. 19 22 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- INCOME TAXES The following table presents the Corporation's income tax expense and effective tax rate for the periods indicated.
Year Ended December 31, ($ in millions) 1995 1994 - ---------------------------------------------------------- Income Tax Expense $1,160 $ 918 Effective Tax Rate 39.0% 41.5% - ----------------------------------------------------------
Included in the 1995 income tax expense is a tax benefit of approximately $25 million related to the sale of Chemical New Jersey Holdings and half of the Corporation's 40% interest in CIT. For additional information, refer to Note Seventeen of the Notes to Consolidated Financial Statements. - -------------------------------------------------------------------------------- - - LINES OF BUSINESS RESULTS The Corporation conducts domestic and international financial services businesses through various bank and non-bank subsidiaries. At December 31, 1995, the principal bank subsidiaries of the Corporation were Chemical Bank and Texas Commerce Bank National Association. Lines-of-Business Results: Profitability of the Corporation is tracked with an internal management information system that produces lines-of-business performance data for all sectors. A set of management accounting policies has been developed and implemented to ensure that the reported results reflect the economics of their businesses. Lines-of-business results are subject to restatement as appropriate whenever there are refinements in management reporting policies or changes to the management organization. Thus, certain amounts reported in prior periods have been restated to conform with the current 1995 presentation. Lines-of-business results are subject to further restatements as may be necessary to reflect future changes in internal management reporting. Guidelines exist for assigning expenses that are not directly incurred by businesses, such as overhead and taxes, as well as for allocating shareholders' equity and the provision for losses, utilizing a risk-based methodology. Noninterest expenses of the Corporation are fully allocated to the business units except for special corporate one-time charges. Management has developed a risk-adjusted capital methodology that quantifies different types of risk - credit, market, operating/business - within various businesses and assigns capital accordingly. Credit risk is computed using a risk-grading system that is consistently applied throughout the Corporation. A long-term expected tax rate is assigned in evaluating the Corporation's businesses. Commencing in 1995, Texas Commerce's results are reported on a management accounting basis instead of a legal entity basis. The 1994 results for Texas Commerce have been restated to conform to the current presentation. The results for Texas Commerce are included within the Consumer and Relationship Banking results.
Consumer and Terminal Global Bank Relationship Banking (LDC and Real Estate) Total(a) Year Ended December 31, (in millions, except ratios) 1995 1994 1995 1994 1995 1994 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ Net Interest Income $ 1,119 $ 1,055 $ 3,686 $ 3,687 $ 38 $ 80 $ 4,689 $ 4,674 Noninterest Revenue 1,896 1,538 1,831 1,767 (14) 276 3,766 3,597 Noninterest Expense 1,366 1,292 3,574 3,779 51 58 5,024 5,468(b) - ------------------------------------------------------------------------------------------------------------------------------ Operating Margin 1,649 1,301 1,943 1,675 (27) 298 3,431 2,803 Credit Provision(c) 152 194 543 467 39 165 478 550 Foreclosed Property Expense (1) (1) (33) (26) 3 53 (23) 41 - ------------------------------------------------------------------------------------------------------------------------------ Income (Loss) Before Taxes 1,498 1,108 1,433 1,234 (69) 80 2,976 2,212 Income Taxes (Benefits) 567 418 562 506 (22) 38 1,160 918 - ------------------------------------------------------------------------------------------------------------------------------ Net Income (Loss) Before Accounting Changes 931 690 871 728 (47) 42 1,816 1,294 Accounting Changes (SFAS 106) -- -- -- -- -- -- (11) -- - ------------------------------------------------------------------------------------------------------------------------------ Net Income (Loss) $ 931 $ 690 $ 871 $ 728 $ (47) $ 42 $ 1,805 $ 1,294 - ------------------------------------------------------------------------------------------------------------------------------ Average Assets $109,797 $100,342 $66,824 $63,191 $6,617 $8,199 $180,697 $166,679 Return on Common Equity 23.6% 16.2% 19.3% 16.4% NM NM 17.1% 12.3% Return on Assets .85% .69% 1.30% 1.15% NM NM 1.00% 0.78% Efficiency Ratio(d) 45.3% 49.8% 64.8% 68.4% NM NM 59.4% 63.4% - ------------------------------------------------------------------------------------------------------------------------------
(a) Total column includes Corporate sector. See description of Corporate sector on page 22. (b) Includes restructuring charges of $308 million in 1994. (c) The provision is allocated to each sector utilizing a credit risk methodology which is computed using a risk-grading system for that sector's loan portfolio. The difference between the risk-based provision and the Corporation's provision is included in the Corporate sector. (d) The computation of the efficiency ratio (noninterest expense as a percentage of the total of net interest income and noninterest revenue) excludes restructuring charges, foreclosed property expense, and, in 1994, gains on emerging markets past-due interest bond sales. NM - Not meaningful. 20 23 Chemical Banking Corporation and Subsidiaries - -------------------------------------------------------------------------------- GLOBAL BANK The Global Bank provides banking, financial advisory, trading and investment services to corporations and public-sector clients worldwide through a network of offices in 35 countries, including major operations in all key international financial centers. The Global Bank is comprised of three principal business lines: Global Banking & Investment Banking (client management, loan syndications and portfolio investments; high-yield finance; venture capital; mergers and acquisitions and other advisory services); Global Markets (foreign exchange dealing; derivatives trading and structuring, risk management and sales; securities structuring, underwriting, trading and sales; and management of the Corporation's funding and securities investment activities); and Regional Centers (all wholesale banking; investment banking; capital markets and other activities outside of the United States and the major cross-border financial centers). The Global Bank seeks to optimize its risk profile and profitability by emphasizing originations, underwriting, distribution, and risk management products. The Global Bank's net income in 1995 was $931 million, an increase of $241 million from 1994. The sector's return on equity in 1995 was 23.6%, compared with 16.2% in 1994. The increase in the 1995 results reflects higher corporate finance and syndication fees, the gain related to the sale of the Corporation's investment in Far East Bank and Trust Company and securities gains, partially offset by lower trading revenue. The following table sets forth the significant components of the Global Bank's total revenue by business for the periods indicated.
Year Ended December 31, (in millions) 1995 1994 - ------------------------------------------------------------- Total Revenue: Global Banking & Investment Banking $ 1,212 $ 961 Global Markets 1,092 1,122 Regional Centers 617 437 - -------------------------------------------------------------
Revenue for Global Banking & Investment Banking increased in 1995 by $251 million when compared with 1994. The increase from last year was primarily due to higher fee revenue as a result of the Corporation's leading market share in the loan syndication business and increased revenue from equity-related investments in 1995. Revenue for Global Markets decreased in 1995 when compared with 1994, primarily as a result of a $69 million decline in trading revenue, reflecting unexpected volatility of interest rates in the foreign trading markets. The decrease in revenue from last year was also affected by lower net interest income due to higher short-term interest rates in 1995. Revenue for Regional Centers increased $180 million in 1995, when compared with 1994. Increased commercial loan volume and improved interest rate environments, primarily in Latin America, increased net interest income by $42 million for 1995, compared with 1994 results. Trading revenue increased $34 million, primarily in Europe. Also contributing to the increase in revenue for 1995 was the gain related to the sale of the Corporation's interest in Far East Bank and Trust Company. CONSUMER AND RELATIONSHIP BANKING Consumer and Relationship Banking includes Metropolitan Banking (consumer banking and commercial and professional banking); Retail Card Services; Mortgage Bank; National Consumer Finance (home secured lending, student lending, and other consumer lending); Middle Market (regional commercial banking); Private Banking; Geoserve (cash management, funds transfer, trade, corporate trust and securities services worldwide); and Texas Commerce. The Corporation maintains a leading market share position in serving the financial needs of middle market commercial enterprises and small businesses in the New York metropolitan area. Private Banking serves a high net-worth clientele with banking, advisory and investment services. Texas Commerce is a leader in providing financial products and services to businesses and individuals throughout Texas and is the primary bank for more large corporations and middle market companies than any other bank in Texas. On October 6, 1995, the Corporation sold Chemical New Jersey Holdings, Inc. to PNC for approximately $490 million. The sale did not include Chemical's franchise in northeastern New Jersey, where it retains 39 branches and its private banking operations. For a further discussion of this sale, see Other Events section on Page 39. For 1995, Consumer and Relationship Banking's net income was $871 million, an increase of $143 million from the prior year. The 1994 results included a $48 million restructuring charge ($28 million after-tax) related to the closing of 50 New York branches and a staff reduction of 650. Excluding the restructuring charge, Consumer and Relationship Banking's earnings for 1995 increased by $115 million when compared with 1994 due to lower noninterest expense of $157 million (relating to the reduced FDIC premium expense coupled with the positive effects of the Corporation's Actions to Improve Earnings Per Share program), higher noninterest revenue of $64 million and lower foreclosed property expense of $7 million. These factors were partially offset by a higher credit provision of $76 million. The higher credit provision in 1995 reflects the substantial growth in credit card outstandings. 21 24 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- The following table sets forth the significant components of Consumer and Relationship Banking's total revenue by business for the periods indicated.
Year Ended December 31, (in millions) 1995 1994 - ----------------------------------------------------------- Total Revenue: Metropolitan Banking $1,089 $1,041 Retail Card Services 1,126 1,020 Mortgage Bank 240 212 National Consumer Finance 211 211 Middle Market 567 571 Private Banking 323 307 Geoserve 700 688(a) Texas Commerce 1,126 1,087 - -----------------------------------------------------------
(a) Effective January 1, 1995, revenues and expenses of the business units that contributed to the shareholder services joint venture with Mellon Bank Corporation were reflected on an equity basis within the Geoserve line. The 1994 amounts have been restated to disclose revenue related to the shareholder services joint venture on a comparable basis. Metropolitan Banking had revenue growth of $48 million in 1995, an increase of 5% when compared with 1994. The improvement in 1995 was due mainly to favorable deposit spreads, targeted customer segmentation and repricing initiatives. Retail Card Services revenue increased $106 million, or 10%, in 1995, compared with 1994. An increase in Shell MasterCard outstandings and resulting strong fee growth contributed to the increase in revenue. In the fourth quarter of 1995, Retail Card Services securitized approximately $2.25 billion of credit card receivables which reduced net interest income. However, this decrease was offset by increased fee revenue and a lower provision for credit losses. Total outstandings for Retail Card Services at the 1995 year-end were $8.7 billion, compared with $9.3 billion at the end of 1994. The decrease in 1995 reflects the aforementioned securitization. The Mortgage Bank continues to be faced with fierce competition due to industry overcapacity and higher interest rates, both of which have adversely affected the 1995 results. Despite these factors, during 1995 the Mortgage Bank recorded increased revenues when compared with 1994, primarily due to the implementation of SFAS 122 as well as higher servicing-related revenues as a result of the acquisition of Margaretten. National Consumer Finance revenues have remained relatively stable in 1995, when compared with 1994. National Consumer Finance outstandings increased in 1995 by more than 18% over 1994. Despite the increase in outstandings, competitive pricing pressures largely offset the favorable impact from the higher level of outstandings. Middle Market revenues were essentially flat for 1995, when compared with 1994. Middle Market experienced favorable deposit spreads and a reduction in the level of nonperforming assets in 1995; however, loan spreads and deposit volumes have decreased primarily due to heightened competition. Private Banking revenue increased $16 million, or 5%, in 1995, compared with 1994. Private Banking revenue for 1995 includes the adverse impact of an $11 million loss from the sale of Barings Bank PLC securities. Excluding this loss, Private Banking's revenues for 1995 would have reflected a 9% increase over 1994. These positive results are attributable to loan and deposit growth, favorable deposit spreads and higher fees generated by greater volume in the brokerage business for 1995. Geoserve revenues increased $12 million in 1995, when compared with 1994. The improvement in 1995 reflects a 6% increase experienced by treasury management products, partially offset by a decline in global securities and trust revenue. Texas Commerce revenue increased $39 million, or 4%, in 1995, compared with 1994. The improvement in 1995 was due to higher net interest income resulting from growth in loan volume and more favorable interest rate spreads. Also, contributing to the increase in earnings for 1995 was lower foreclosed property expense. The substantial decrease in foreclosed property expense is attributable to the improvement in the Texas real estate market and payments received related to certain foreclosed properties that were previously written down. TERMINAL BUSINESSES (LDC AND REAL ESTATE) Terminal Businesses represents discontinued portfolios which are primarily the refinancing country debt portfolio and the Corporation's commercial real estate nonperforming portfolio, primarily at Chemical Bank. Terminal businesses had net losses of $47 million for 1995 compared with net income of $42 million in 1994. The unfavorable 1995 results, when compared with 1994, were primarily due to losses of $86 million related to the disposition of available-for-sale emerging markets securities, compared with gains of $127 million from sales of such securities in 1994. Net interest income decreased $42 million in 1995 due to a decline in loan outstandings. The improvements in credit provision and foreclosed property expense reflects the significant progress made in managing the Corporation's real estate portfolio. Total nonperforming assets for this category at December 31, 1995 were $207 million, down $79 million from $286 million at December 31, 1994. The improvement in nonperforming asset levels from last year is the result of increased liquidity in the real estate markets and successful workout activities. CORPORATE Corporate includes the management results attributed to the parent company; the Corporation's investment in CIT; and some effects remaining at the corporate level after the implementation of management accounting policies, including residual credit provision and tax expense. On December 15, 1995, the Corporation completed the sale of half its 40% interest in the CIT to The Dai-Ichi Kangyo Bank for approximately $430 million. Corporate had net income of $50 million for 1995, which includes an $11 million after-tax charge due to the adoption of SFAS 106 for foreign employees and a $6 million writedown associated with certain nonperforming residential mortgages. In 1994, the net loss of $166 million included a $152 million after-tax restructuring charge associated with the Actions to Improve Earnings Per Share. 22 25 Chemical Banking Corporation and Subsidiaries - -------------------------------------------------------------------------------- - - CREDIT RISK MANAGEMENT Credit risk for both lending-related products and derivative and foreign exchange products represents the possibility that a loss may occur if a borrower or counterparty fails to honor fully the terms of a contract. Under the direction of the Chief Credit Officer, risk policies are formulated, approved and communicated throughout the Corporation. The Credit Risk Management Committee, chaired by the Chief Credit Officer, is responsible for maintaining a sound credit process, addressing risk issues, and reviewing the portfolio. The Corporation's credit risk management is an integrated process operating concurrently at the transaction and portfolio levels. For credit origination, business professionals formulate strategies, target markets, and determine acceptable levels of risk. Credit executives work with business originators during the underwriting process to review adherence to risk policies. Portfolio diversification lowers the Corporation's risk profile. In addition to the diversification achieved by the expanse of the Corporation's businesses, the Corporation diversifies by securitizing and selling credit assets such as loans, thereby seeking to avoid unacceptable risk concentrations. Loan Portfolio: 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. Within the commercial segment, each credit facility is risk graded. Facilities are subject to hold targets based on risk, and are often syndicated in order to lower potential concentration risks. Syndication consists of arranging a credit facility between a borrower and a group of lenders, in which each lender assumes a share of the facility thereby limiting the Corporation's risk with regard to the facility. The syndicated portions are not recorded on the Corporation's consolidated balance sheet. These activities enable the Corporation to function as a financial intermediary between other suppliers and users of funds. In contrast, loan sales occur only after a loan is funded by the Corporation. Such loans are generally sold to maturity and without recourse to the Corporation. Real estate problem assets are managed in special units staffed for restructuring, workout and collection. The Corporation reassesses the market value of real estate owned for possible impairment on a continual basis. The loan review process includes industry specialists and country-risk managers who provide expert insight into the portfolio. Industries and countries are also evaluated in a process which is incorporated into credit-risk decisions through the facility-risk grading system and by direct consultation with originating officers. Overseas extensions of credit require not only the normal credit-risk analysis associated with the decision to extend financing to a particular customer, but also an assessment of country risk. Country risk arises from economic, social and political factors that might affect a borrower's ability to repay in the currency of the extension of credit. Cross-border credit exposures are those that borrowers must repay in a currency other than their local currency or to a lender in a different country. One of the major risk factors associated with cross-border credit exposures is the possibility that a country's foreign exchange reserves may be insufficient or unavailable to permit timely repayment by borrowers domiciled in that country, even if the borrowers possess sufficient local currency. In addition, global economic, social and political conditions, local and foreign government actions and associated events can affect business activities in a country and a borrower's ability and/or willingness to repay external debt obligations. The Corporation has a country-risk assessment process by which it monitors and analyzes the economic, social and political environments in all countries in which it conducts business or in which its borrowers reside. These in-depth assessments, conducted by a team of economists and political analysts, in conjunction with local management, are utilized by the Corporation in connection with its system of managing total country exposures. Derivative and Foreign Exchange Financial Instruments: The Corporation 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. The Corporation 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, first, evaluating each counterparty's creditworthiness, 23 26 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- then, where appropriate, assessing the applicability of such instruments to the risks the counterparty is attempting to manage and determining if there are specific transaction characteristics which alter the risk profile. Credit limits are calculated and monitored on the basis of potential exposure which takes into consideration current market value and estimates of potential future movements in market values. If collateral is deemed necessary to reduce credit risk, 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. LOAN PORTFOLIO The Corporation's loans outstanding totaled $82.1 billion at December 31, 1995, an increase of $3.4 billion from the 1994 year end, reflecting growth in both the domestic consumer and the commercial and industrial loan portfolios. The Corporation's nonperforming assets at December 31, 1995 were $906 million, a decrease of $233 million from the 1994 year-end level. The reduction in nonperforming assets reflects the improvement in the Corporation's credit profile as a result of a lower level of loans being placed on nonperforming status, repayments, charge-offs and the Corporation's continuing loan workout and collection activities. Total net charge-offs were $553 million in 1995 compared with $947 million in 1994. The 1994 amount excluded a $148 million charge related to the decision to designate certain real estate assets as held-for-accelerated-disposition. For a further discussion of nonperforming assets and net charge-offs, see the various credit portfolio sections that follow. The following table presents the Corporation's loan and nonperforming asset balances by portfolio at December 31, 1995 and 1994 and the related net charge-off amounts for the periods indicated. Additionally, loans which were past due 90 days or more as to principal or interest but not characterized as nonperforming are also included in the table below.
Past Due 90 Days or More Loans Nonperforming Assets Net Charge-offs and Still Accruing As of or for the year ended December 31, (in millions) 1995 1994 1995 1994 1995 1994 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Domestic Consumer: Residential Mortgage(a) $17,746 $13,560 $123 $ 92 $ 52 $ 47 $ -- $ -- Credit Card 8,678 9,261 -- -- 411 329 208 176 Other Consumer (b) 7,009 7,265 5 12 31 19 120 118 - ----------------------------------------------------------------------------------------------------------------------------------- Total Domestic Consumer 33,433 30,086 128 104 494 395 328 294 - ----------------------------------------------------------------------------------------------------------------------------------- Domestic Commercial: Commercial and Industrial 22,451 20,805 321 354 24 81 21 18 Commercial Real Estate(c) 4,850 5,650 176 156 53 165 12 18 Financial Institutions 4,123 3,918 1 4 (3) (1) -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Total Domestic Commercial 31,424 30,373 498 514 74 245 33 36 - ----------------------------------------------------------------------------------------------------------------------------------- Total Domestic 64,857 60,459 626 618 568 640 361 330 Foreign, primarily Commercial 17,286 18,308 230 311 (15) 307 -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Total Loans $82,143 $78,767 $856(d) $ 929 $553 $947 $361 $330 - ----------------------------------------------------------------------------------------------------------------------------------- Assets Acquired as Loan Satisfactions -- -- 50(d) 210 -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Total Nonperforming Assets -- -- $906 $1,139 -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Assets Held for Accelerated Disposition -- -- $412 $ 526 -- $148 -- -- - -----------------------------------------------------------------------------------------------------------------------------------
(a) Consists of 1-4 family residential mortgages. (b) Consists of installment loans (direct and indirect types of consumer finance) and student loans. 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, 1995 and 1994, student loans which were past due 90 days or more and still accruing were approximately $107 million and $105 million, respectively. (c) Represents loans secured primarily by real property, other than loans secured by mortgages on 1-4 family residential properties. (d) Total loans include $727 million of loans considered impaired under SFAS No 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). In addition, on January 1, 1995, $122 million of assets for which the Corporation did not have possession were reclassified from Assets Acquired as Loan Satisfactions to Nonperforming Loans pursuant to the adoption of SFAS 114. 24 27 Chemical Banking Corporation and Subsidiaries - -------------------------------------------------------------------------------- DOMESTIC CONSUMER PORTFOLIO The domestic consumer loan portfolio consists of one-to-four family residential mortgages, credit cards and other consumer loans. The domestic consumer loan portfolio totaled $33.4 billion at December 31, 1995, an increase of 11% from the prior year end. As a percentage of the total loan portfolio, consumer loans grew to 41% at the end of 1995, an increase from 38% at December 31, 1994. Residential Mortgage Loans: Residential mortgage loans at December 31, 1995 were $17.7 billion, an increase of $4.2 billion from the 1994 year-end, primarily reflecting increases in adjustable-rate loan outstandings. The following table presents the residential mortgage loans outstanding by geographic region at the dates indicated. RESIDENTIAL MORTGAGE LOANS BY GEOGRAPHIC REGION
December 31, (in millions) 1995 1994 - -------------------------------------------------------------- New York City $ 2,532 $ 2,656 New York (Excluding New York City) 2,225 2,295 Remaining Northeast 2,755 3,167 - -------------------------------------------------------------- Total Northeast 7,512 8,118 Southeast 2,388 1,367 Midwest 1,793 1,057 Southwest(a) 1,671 1,368 West(b) 4,382 1,650 - -------------------------------------------------------------- Total $17,746 $13,560 - --------------------------------------------------------------
(a) Includes mortgage loans in the Texas market of $1,505 million and $1,254 million at December 31, 1995 and December 31, 1994, respectively. (b) Includes mortgage loans in the California market of $2,910 million and $758 million at December 31, 1995 and December 31, 1994, respectively. Total nonperforming residential mortgage loans at December 31, 1995 were $123 million, compared with $92 million at December 31, 1994. Net charge-offs were $52 million in 1995, an increase of 11% when compared with $47 million in 1994, primarily resulting from the growth in residential mortgage loans during 1995. The percentage of net charge-offs to average residential mortgage loans for 1995 declined to .32% from .37% for the prior year. During the 1995 fourth quarter, the Corporation transferred $421 million of residential mortgage loans into the accelerated disposition portfolio. For a further discussion of the transfer, see the Assets Held for Accelerated Disposition section on page 28. The Corporation both originates and services residential mortgage loans as part of its mortgage banking activities. After origination, the Corporation typically sells loans to investors, primarily in the secondary market, while retaining the rights to service such loans. In addition to originating mortgage servicing rights, the Corporation also purchases and sells mortgage servicing rights. The Corporation may purchase bulk rights to service a loan portfolio or the Corporation may purchase loans directly and then sell such loans while retaining the servicing rights. As disclosed in Note One of the Notes to Consolidated Financial Statements, the Corporation adopted Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS 122") in 1995. SFAS 122 requires that when a definitive plan exists to sell or securitize mortgage loans and retain the servicing rights related thereto, a mortgage banking enterprise should recognize as separate assets the rights to service mortgage loans for others, irrespective of whether those servicing rights are acquired through the purchase or origination of mortgage loans. The following table presents the residential mortgage servicing activity for 1995 and 1994.
Year Ended December 31, (in millions) 1995 1994 - ------------------------------------------------------------- Balance at Beginning of Year $52,694 $33,133 Originations 13,560 12,674 Acquisitions -- 17,005 Repayments 6,757 5,240 Sales 4,907 4,878 - ------------------------------------------------------------- Balance at End of Year $54,590 $52,694 - -------------------------------------------------------------
Mortgage servicing rights (included in other assets) amounted to $496 million at December 31, 1995, compared with $469 million at December 31, 1994. The increase from the 1994 year-end level reflects the corresponding increase in the Corporation's residential mortgage servicing portfolio and the recognition of originated mortgage servicing rights as assets beginning in 1995 pursuant to SFAS 122. Capitalized mortgage servicing rights are amortized into income in proportion to, and over the period of, the estimated future net servicing income stream of the underlying mortgage loans. The Corporation continually evaluates prepayment exposure of the portfolio, adjusting the balance and remaining life of the servicing rights as a result of prepayments and utilizing derivative contracts to reduce its exposure to such prepayments. The mortgage loans to which the Corporation's servicing rights relate are, to a substantial degree, of recent vintage (i.e., originated in the period 1992 through 1995 when interest rates were relatively low). For a further discussion, see the Other Market Risk Management section on page 35. Credit Card Loans: The Corporation evaluates its credit card exposure based on its "managed receivables", which include credit card receivables on the balance sheet as well as credit card receivables which have been securitized. During the fourth quarter of 1995, the Corporation securitized $2.25 billion of credit card receivables, compared with none in 1994. At December 31, 1995, the 25 28 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- Corporation had $10.9 billion of managed receivables ($8.7 billion of receivables on the balance sheet) compared with $9.3 billion at year-end 1994, reflecting the continued strong growth in credit card outstandings, principally due to the co-branded Shell Mastercard program. The following table presents the Corporation's domestic credit card receivables by geographic region at the dates indicated. DOMESTIC CREDIT CARD RECEIVABLES BY GEOGRAPHIC REGION
December 31, (in millions) 1995 1994 - ------------------------------------------------------------- New York City $ 880 $1,036 New York (Excluding New York City) 774 916 Remaining Northeast 1,450 1,618 - ------------------------------------------------------------- Total Northeast 3,104 3,570 Southeast 1,248 1,238 Midwest 1,734 1,841 Southwest(a) 877 864 West(b) 1,715 1,748 - ------------------------------------------------------------- Total $8,678 $9,261 - -------------------------------------------------------------
(a) Includes credit card receivables in the Texas market of $670 million and $658 million at December 31, 1995 and December 31, 1994, respectively. (b) Includes credit card receivables in the California market of $1,226 million and $1,252 million at December 31, 1995 and December 31, 1994, respectively. Total credit card net charge-offs were $411 million in 1995, an increase of $82 million from the 1994 level due largely to growth in outstandings in the credit card portfolio. The following table presents the Corporation's average managed credit card receivables (credit card receivables on the balance sheet plus securitized credit card receivables), 90 days and over and accruing, net credit losses as well as related ratios for the managed credit card portfolio for the periods presented.
As of or for the Year Ended December 31, (in millions, except ratios) 1995 1994 - -------------------------------------------------------------------------------- Average Managed Credit Card Receivables $9,780(a) $7,541 Past Due 90 Days & Over and Accruing 272 176 As a Percentage of Average Credit Card Receivables 2.78% 2.33% Net Charge-offs 423(b) 329 As a Percentage of Average Credit Card Receivables 4.33% 4.36% - --------------------------------------------------------------------------------
(a) Includes $409 million of average securitized credit card receivables. (b) Includes $12 million of net charge-offs related to securitized credit card receivables. Credit Card Securitization: During the 1995 fourth quarter, the Corporation securitized $2.25 billion of credit card receivables. The securitization of credit card receivables does not significantly affect the Corporation's reported net income. The initial gains on these sales are recorded at the time of the securitization. Given the revolving nature of the receivables sold, recognition of servicing fees results in a pattern of income recognition that is similar to the pattern that would be experienced if the receivables had not been sold. Gains on securitizations were not material in 1995. The term of each securitization transaction averages approximately five years. However, because securitization changes the Corporation's status from that of a lender to that of a loan servicer, there is a change in the classification in which the revenue associated with the securitization is reported in the income statement. For securitized receivables, amounts that would previously have been reported as net interest income and as provision for losses are instead reported as components of noninterest revenue (i.e., as credit card revenue and as other revenue). Because credit losses become a component of the cash flows arising from the securitized transaction, the Corporation's revenues over the terms of a securitization transaction may vary depending upon the credit performance of the securitized receivables. However, the Corporation's exposure to credit losses on the securitized receivables is contractually limited to these cash flows. The following table outlines the impact of the securitizations of credit card receivables by showing the favorable (unfavorable) change in the reported consolidated statement of income line items.
Favorable (Unfavorable) Year Ended December 31, (in millions) Impact 1995 - --------------------------------------------------------------------- Net Interest Income $(49) Provision for Losses 12 Credit Card Revenue 30 Other Revenue 7 - --------------------------------------------------------------------- Pre-tax Income Impact of Securitization $ -- - ---------------------------------------------------------------------
Other Consumer Loans: Other consumer loans consists of installment loans (direct and indirect types of consumer finance), automobile financings and student loans. Other consumer loans were $7,009 million at December 31, 1995 compared with $7,265 million at December 31, 1994. The decrease in loan outstandings at December 31, 1995 was primarily due to the sale of the Corporation's banking operations in southern and central New Jersey. Excluding the impact of this sale, other consumer loans increased approximately 10% from the 1994 level due to growth in the installment loan portfolio, primarily in Texas. Total net charge-offs were $31 million in 1995, an increase of $12 million from the 1994 level. The percentage of net charge-offs to average other consumer loans (excluding student loans) was .64% in 1995, compared with .41% in 1994. The increase in the charge-offs percentage was largely due to charge-offs taken in connection with small discontinued product lines. There are essentially no credit losses in the student loan portfolio due to the existence of Federal and State government agency guarantees. DOMESTIC COMMERCIAL PORTFOLIO Domestic Commercial and Industrial Portfolio: The domestic commercial and industrial portfolio totaled $22.5 billion at December 31, 1995, compared with $20.8 billion at December 31, 1994. The portfolio consists primarily of loans made to large corporate and middle market customers and is diversified geographically and by industry. The largest industry concentrations are oil and gas and retailing which approximate $2.1 billion (or 2.6% of total loans) and $1.7 billion (or 2.0% of total loans), respectively. All of the other industries are each less than 2% of total loans. 26 29 Chemical Banking Corporation and Subsidiaries - -------------------------------------------------------------------------------- The Corporation is a leading participant in loan originations and sales. This loan distribution capability allows the Corporation to compete aggressively and profitably in wholesale lending markets by enabling it to reduce larger individual credit exposures and thereby to price more flexibly than if all loans were held as permanent investments. The Corporation also benefits from increased liquidity. During 1995, the Corporation acted as agent or co-agent for approximately $423 billion in syndicated credit facilities, compared with $319 billion in 1994. Nonperforming domestic commercial and industrial loans were $321 million at December 31, 1995, compared with $354 million at December 31, 1994. Domestic commercial and industrial loan net charge-offs in 1995 totaled $24 million, compared with $81 million in the prior year. Domestic Commercial Real Estate Portfolio: The domestic commercial real estate portfolio represents loans secured primarily by real property, other than loans secured by one-to-four family residential properties (which are included in the consumer loan portfolio). The domestic commercial real estate loan portfolio totaled $4.9 billion at December 31, 1995, a decline from $5.7 billion at December 31, 1994. The decrease from the 1994 year-end was principally attributable to repayments. The following table sets forth the major components of the domestic commercial real estate loan portfolio at the dates indicated.
December 31, (in millions) 1995 1994 - ----------------------------------------------------------------- Commercial Mortgages $4,051 $4,680 Construction Loans 799 970 - ----------------------------------------------------------------- Total Domestic Commercial Real Estate Loans $4,850 $5,650 - -----------------------------------------------------------------
Commercial mortgages provide financing for the acquisition or refinancing of commercial properties, and typically have terms ranging from two-to-five years. 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. The largest concentration of domestic commercial real estate loans is in the New York/New Jersey and Texas markets, representing 48% and 32%, respectively, of the domestic commercial real estate portfolio. No other state represents more than 2% of the domestic commercial real estate loan portfolio. Nonperforming domestic commercial real estate assets were $187 million at December 31, 1995, compared with $249 million at December 31, 1994. The improvement in nonperforming domestic commercial real estate asset levels in 1995 is the result of increased liquidity in the commercial real estate markets coupled with successful workout activities. Domestic commercial real estate net charge-offs in 1995 totaled $53 million, compared with $165 million in the prior year. The lower net charge-offs are due in part to the decision in December 1994 to designate certain real estate assets for accelerated disposition. For a more detailed discussion see the Assets Held for Accelerated Disposition section on page 28. During 1995, the Corporation recorded a $26 million net recovery of writedowns as a result of payments received on certain foreclosed properties which had been previously written down. Net writedowns of domestic commercial real estate owned totaled $68 million in 1994. Domestic Financial Institutions Portfolio: 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 $4,123 million at December 31, 1995 or 5% of total loans outstanding at December 31, 1995, compared with $3,918 million at December 31, 1994. Loans to domestic financial institutions are predominantly secured loans to broker-dealers, which account for approximately half of the total portfolio. The portfolio maintained its strong credit quality during 1995 as the Corporation had net recoveries of $3 million in 1995 compared with net recoveries of $1 million in 1994. FOREIGN PORTFOLIO The foreign portfolio includes commercial and industrial loans, loans to financial institutions, commercial real estate loans, loans to foreign governments and official institutions, and consumer loans. At December 31, 1995, the Corporation's total foreign loans were $17.3 billion, compared with $18.3 billion at December 31, 1994. Included in foreign loans were commercial and industrial loans of $8.4 billion at the end of 1995, an increase of $.8 billion from the 1994 year-end. Total foreign commercial real estate loans at December 31, 1995 were $.4 billion, compared with $.5 billion at December 31, 1994. The bulk of the foreign real estate portfolio is located in the United Kingdom and Hong Kong. Foreign nonperforming loans at December 31, 1995 were $230 million, a decrease from $311 million at December 31, 1994. The foreign portfolio experienced net recoveries of $15 million in 1995 compared with net charge-offs of $307 million in 1994. A $291 million charge was incurred in 1994 in connection with management's final valuation of the emerging markets portfolio, at which time the Corporation's medium- and long-term outstandings to the various emerging markets countries were adjusted to estimated net recoverable values of such loans. The remaining emerging markets allowance was transferred to the general allowance for credit losses. For year-end loan balances by type of loan included in the foreign portfolio, refer to Note Five of the Notes to Consolidated Financial Statements. 27 30 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- CROSS-BORDER OUTSTANDINGS The following table lists all countries in which the Corporation's cross-border outstandings exceeded 1% of consolidated assets as of any of the dates specified. The Corporation does not have significant local currency outstandings in the individual countries listed in the following table that are not hedged or funded by local currency borrowings. CROSS-BORDER OUTSTANDINGS EXCEEDING ONE PERCENT OF TOTAL ASSETS(a)(b)
Cross-Border Total Outstandings Cross-Border as a Percentage (in millions) At December 31 Public Banks Other Outstandings(c) of Total Assets - ---------------------------------------------------------------------------------------------------- Japan 1995 $ 895 $1,158 $ 524 $2,577(d) 1.41% 1994 238 3,200 368 3,806(d) 2.22 1993 27 3,955 257 4,239(d) 2.83 - ---------------------------------------------------------------------------------------------------- United Kingdom 1995 92 215 1,634 1,941 1.06% 1994 95 605 914 1,614 0.94 1993 106 1,035 1,086 2,227 1.49 - ---------------------------------------------------------------------------------------------------- Germany 1995 4,305 269 113 4,687(e) 2.56% 1994 1,480 246 453 2,179(e) 1.27 1993 2,021 314 356 2,691(e) 1.80 - ----------------------------------------------------------------------------------------------------
(a) Outstandings (including loans and accrued interest, interest-bearing deposits with banks, securities, acceptances and other monetary assets, except equity investments) represent those of 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, 1995, outstandings to Norway and Korea amounted to $1,589 million and $1,469 million, respectively, which were in excess of .75% of total assets. At December 31, 1994 and 1993, outstandings to Brazil amounted to $1,327 million and $1,328 million, respectively, which were in excess of .75% of total assets in each respective year. At December 31, 1993, outstandings to Italy amounted to $1,281 million, which were in excess of .75% of 1993 total assets. (b) At December 31, 1995, 1994 and 1993, the Corporation's total exposure to Mexico was $1,156 million, $879 million and $708 million, respectively, which was composed largely of trade and short-term credits. The above amounts exclude bonds received as part of debt renegotiations (i.e., Brady Bonds) with a face value of $1,486 million, $2,199 million and $2,195 million, respectively, and current carrying value of $996 million, $1,827 million and $2,097 million, respectively, which are collateralized by zero-coupon United States Treasury obligations. (c) 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, 1995, off-balance sheet commitments, after adjusting for transfers of risk, amounted to $1,692 million for Japan, $970 million for the United Kingdom, and $691 million for Germany. (d) The average outstandings to Japan during 1995, 1994 and 1993 (based on quarter-end amounts) were approximately $2.2 billion, $3.2 billion and $3.6 billion, respectively. (e) The average outstandings to Germany during 1995, 1994 and 1993 (based on quarter-end amounts) were approximately $3.8 billion, $2.2 billion and $1.2 billion, respectively. The majority of outstandings to Japan and Germany are short-term in nature, which mitigates the credit risk as transactions settle quickly. These outstandings generally represent interbank placements and trading assets. Due to the short-term nature of interbank placements and trading assets, the Corporation's balances with Japan and Germany 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. ASSETS HELD FOR ACCELERATED DISPOSITION In the fourth quarter of 1995, the Corporation transferred $421 million of residential mortgage loans into the accelerated-disposition portfolio. This was done as part of a decision to accelerate the disposition of residential mortgage loans originally extended several years earlier under a reduced documentation mortgage program that was discontinued. In December 1994, the Corporation segregated real estate loans and real estate owned and designated such assets as assets held for accelerated disposition. In conjunction with this transfer, the Corporation reevaluated its carrying values for these assets to facilitate their rapid disposition and recorded a charge of $148 million to the allowance for credit losses. As a result of these actions, these assets were excluded from the December 31, 1995 and 1994 nonperforming assets category. The following table presents the reconciliation of Assets Held for Accelerated Disposition for 1995 and 1994.
Carrying Value Year Ended December 31, (in millions) 1995 1994 - ------------------------------------------------------------- Balance at Beginning of Year $ 526 $ -- Additions 421 526 Sales (535) -- - ------------------------------------------------------------- Balance at End of Year $ 412(a) $526(a) - -------------------------------------------------------------
(a) Includes $412 million and $87 million of loans that were performing at December 31, 1995 and 1994, respectively. 28 31 Chemical Banking Corporation and Subsidiaries - -------------------------------------------------------------------------------- DERIVATIVE AND FOREIGN EXCHANGE FINANCIAL INSTRUMENTS In the normal course of its business, the Corporation 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 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. These instruments can provide a cost-effective alternative to assuming and mitigating risk associated with traditional on-balance sheet instruments. Derivative and foreign exchange transactions involve, to varying degrees, credit risk (i.e., the possibility that a loss may occur because a party to a transaction fails to perform according to the terms of a contract) and market risk (i.e., the possibility that a change in interest or currency rates will cause the value of a financial instrument to decrease or become more costly to settle). The effective management of credit and market risk is vital to the success of the Corporation's trading activities and asset/liability management. Because of the changing market environment, 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 31. The Corporation believes the true measure of credit risk exposure is the replacement cost of the derivative or foreign exchange product (i.e., the cost to replace the contract at current market rates should the counterparty default prior to the settlement date). This is also referred to as repayment risk or the mark-to-market exposure amount. The notional principal of derivative and foreign exchange instruments is the amount on which interest and other payments in a transaction are based. For derivative transactions, the notional principal typically does not change hands; it is simply a quantity that is used to calculate payments. 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 of the Corporation's derivative and foreign exchange products greatly exceeds the possible credit and market loss that could arise from such transactions. As a result, the Corporation does not consider the notional principal to be indicative of its credit or market risk exposure. 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 the Corporation and, therefore, creates a repayment risk for the Corporation. When the mark-to-market is negative, the Corporation owes the counterparty. In this situation, the Corporation does not have repayment risk. When the Corporation 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, the Corporation's exposure to the counterparty is considered zero. Net mark-to-market is, in the Corporation's view, the best measure of credit risk when there is a legally enforceable master netting agreement between the Corporation and the counterparty. The Corporation routinely enters into derivative and foreign exchange product transactions with regulated financial institutions, which the Corporation believes have relatively low credit risk. At December 31, 1995, approximately 86% of the mark-to-market exposure of such activities were with commercial bank and financial institution counterparties most of which are dealers in these products. Non-financial institutions accounted for only approximately 14% of the Corporation's derivative and foreign exchange mark-to-market exposure. The Corporation does not deal, to any material extent, in derivatives which dealers of derivatives (such as other banks and financial institutions) consider to be "complex" (i.e., exotic and/or leveraged). As a result, the mark-to-market exposure of such derivatives was approximately 2% of the Corporation's total mark-to-market exposure of all its derivatives contracts at December 31, 1995. Many of the Corporation's contracts are short-term, which mitigates credit risk as transactions settle quickly. The following table provides the remaining maturities of derivative and foreign exchange contracts outstanding at December 31, 1995 and 1994, respectively. Percentages are based upon remaining contract life of mark-to-market exposure amounts. 29 32 MANAGEMENT'S DISCUSSION AND ANALYSIS - --------------------------------------------------------------------------------
1995 1994 - -------------------------------------------------------------------------------------------------- Interest Rate Foreign Exchange Interest Rate Foreign Exchange At December 31, Contracts Contracts Total Contracts Contracts Total - -------------------------------------------------------------------------------------------------- Less than 3 months 11% 60% 28% 11% 57% 32% 3 to 6 months 8 27 15 8 24 15 6 to 12 months 8 11 9 12 12 12 1 to 5 years 42 2 28 54 6 33 Over 5 years 31 -- 20 15 1 8 - -------------------------------------------------------------------------------------------------- Total 100% 100% 100% 100% 100% 100% - --------------------------------------------------------------------------------------------------
The following table summarizes the aggregate notional amounts of interest rate and foreign exchange contracts as well as the credit exposure related to these instruments (after taking into account the net effects of legally enforceable master netting agreements) for the dates indicated below.
Notional Amounts Credit Exposure December 31, (in billions) 1995 1994 1995 1994 - -------------------------------------------------------------------------------------- Total Interest Rate Contracts $2,496.2 $2,289.4 $ 9.9 $ 8.1 Total Foreign Exchange Contracts 954.8 901.1 7.9 9.5 Total Stock Index Options and Commodity Contracts 11.3 4.5 0.2 0.3 - -------------------------------------------------------------------------------------- Total(a) $3,462.3 $3,195.0 $18.0 $17.9 - --------------------------------------------------------------------------------------
(a) The notional amounts of exchange-traded interest rate contracts, foreign exchange contracts, and commodity contracts were $362.5 billion, $.8 billion and $2.9 billion, respectively, at December 31, 1995. The credit risk exposure for these contracts was minimal since exchange-traded contracts principally settle daily in cash. ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses is available to absorb potential credit losses from the entire loan portfolio, as well as derivative and foreign exchange transactions. The Corporation deems its allowance for credit losses at December 31, 1995 to be adequate. Although the Corporation considers that it has sufficient reserves to absorb losses that may currently exist in the portfolio, but are not yet identifiable, the precise loss content is subject to continuing review based on quality indicators, industry and geographic concentrations, changes in business conditions, and other external factors such as competition and legal and regulatory requirements. The Corporation will continue to reassess the adequacy of the allowance for credit losses. During 1995, 1994 and 1993, the Corporation's actual credit losses arising from derivative and foreign exchange transactions were immaterial. Additionally, at December 31, 1995 and 1994, nonperforming derivatives contracts were immaterial. The following tables reflect the activity in the Corporation's allowance for credit losses for the years ended December 31, 1995 and 1994 as well as the allowance coverage ratios.
Year Ended December 31, (in millions) 1995 1994 - ---------------------------------------------------------------- Total Allowance at January 1 $2,480 $ 3,020 Provision for Losses 478 550 Charge-Offs (825) (1,266) Recoveries 272 319 - ---------------------------------------------------------------- Net Charge-Offs (553) (947) Charge for Assets Transferred to Held for Accelerated Disposition -- (148) Other (26)(a) 5 - ---------------------------------------------------------------- Total Allowance at December 31 $2,379 $ 2,480 - ----------------------------------------------------------------
(a) Includes $28 million related to sale of the Corporation's banking operations in southern and central New Jersey. ALLOWANCE COVERAGE RATIOS
December 31, 1995 1994 - --------------------------------------------------------------- Allowance for Credit Losses to: Loans at Period-End 2.90% 3.15% Average Loans 2.91 3.30 Nonperforming Loans 277.92 266.95 - ---------------------------------------------------------------
30 33 - -------------------------------------------------------------------------------- - - MARKET RISK MANAGEMENT The Corporation's management of its market risk deals with the risks related to its trading activities and asset/liability management activities. TRADING ACTIVITIES The Corporation uses its trading assets and liabilities, comprised of debt and equity instruments and risk management instruments, to meet the financial needs of its customers and to generate revenues through its trading activities. A description of the classes of debt and equity instruments and risk management instruments used in the Corporation's trading activities as well as the credit risk and market risk factors involved in such activities are disclosed in Notes Three and Nineteen of the Notes to Consolidated Financial Statements. The Corporation has four fundamental trading activities which generate revenue. The Corporation is primarily engaged in the generally stable businesses of market-making, sales and arbitrage, while placing less emphasis on the potentially less-stable business of positioning. Market-making: The Corporation trades with the intention of making a profit based on the spread between bid and ask prices. Market-making, compared with other trading activities, is considered to be a relatively stable business by the Corporation because revenue is related principally to market volumes, rather than to anticipating correctly material changes in the prices of various financial instruments. The Corporation considers market-making to be a key trading activity in its over-the-counter traded businesses, particularly in its derivative, foreign exchange, and government markets businesses. Sales: The Corporation provides products for its clients at competitive prices. The Corporation believes sales to be a relatively stable business because revenue is related principally to the volume of products sold to the Corporation's worldwide client base. Arbitrage: The Corporation enters into a risk position and offsets that risk in different but closely related markets or instruments. Because of the nature of trading markets, where there are numerous instruments that relate to one another, the Corporation believes it can effectively utilize this strategy. The Corporation considers arbitrage to be a key fundamental of its trading business. Positioning: The Corporation takes certain positions in the market in anticipation of changes that may occur within the market. This strategy has the lowest stability of all four trading activities and the Corporation's emphasis in this area is less than in the other trading activities. The Corporation manages the market risk associated with these trading activities on an aggregate basis at the business unit level. Risk limits originate with the Chairman of the Market Risk Committee who determines instrument authorities and exposure levels of individual business units. Criteria for risk limit determination include, among other factors, relevant market analysis, market liquidity, prior track record, business strategy, and management experience and depth. Procedures and policies specify authorized instruments and exposure levels. Critical risk limits that are designated as primary are centrally tracked and reported on a daily basis, while less-critical risk limits are independently monitored and centrally reported on a periodic basis. Individual business units often set additional internal limits. The Market Risk Management Group (the "Group") performs independent analysis of instrument authority, limit requests, and limit utilization. In addition, the Group tracks market risk-related revenue and compares it to the actual market risk incurred to produce such revenue and assesses risk levels and related topics. Other focuses include measurement and calculation of value-at-risk, criteria for official volatility and correlation statistics, and formulas for determination of market-related credit exposure. Additionally, the Group reviews the market risk related to new products (as one element of the Corporation's new product process) and provides independent review of the mathematical and simulation models utilized by business units. The Group combines efforts with other functional units to assess cross-discipline risks in business units having significant market risk. In addition to the Chairman of the Market Risk Committee and the Group, the Board of Directors of the Corporation also reviews the market risk related to trading activities. The Corporation's business strategy seeks to manage the market risks associated with its trading activities through product, functional and geographic diversification. The Corporation trades in a wide range of products which include not only foreign exchange and derivatives but also securities, including emerging markets debt instruments. The Corporation's trading activities are geographically diverse. Trading activities are undertaken in more than 20 countries, with a majority of the Corporation's transactions in the developed countries, such as the United States, Japan, Singapore, United Kingdom and Western Europe. The effects of market gains or losses on the Corporation's trading activities are reported in trading revenue, as the trading instruments are marked-to-market on a daily basis. Measuring Market Risk: The Corporation's overall risk management process utilizes a limit system incorporating three types of risk control: value-at-risk, non-statistical limits, and stop loss advisories. Value-at-risk is defined as the potential overnight dollar loss from adverse market movements that would cover 97.5% of likely market movements, which are determined by using two years of 31 34 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- historical price and rate data. The value-at-risk calculations employ nearly 3,100 volatilities and 1.24 million correlations (updated quarterly) of various market instruments. The Corporation monitors value-at-risk figures for major business units on a daily basis so that the potential for market loss can be properly reflected. The methodology generally used to offset positions within a business unit is deemed by the Corporation to be conservative. Only partial credit for correlation between instruments within each business unit is incorporated since correlations can exhibit instability during volatile market environments. Aggregating across business units with no correlation offset resulted in an aggregated daily average value-at-risk figure of $30 million in 1995. The historical correlation among business units is captured by using actual trading results. Based on actual 1995 trading results, 95% of the variation in the Corporation's daily trading results fell within a $19 million band centered on the daily average amount for the year. The 1995 presentation of the Corporation's measure of risk, based on actual trading results, has changed from prior period disclosures. Value-at-risk is an important concept, but it is not the sole control measure used in the risk management process. Non-statistical limits include net open positions, basis point values, position concentrations, and position ages. These non-statistical measures are accorded the same importance as value-at-risk. Stop loss advisories also are used to advise senior management when losses of a certain threshold are sustained from a business activity. The use of non-statistical measures and stop loss advisories to complement value-at-risk limits reduces the likelihood that potential trading losses will reach the daily average value-at-risk amount. HISTOGRAM OF DAILY MARKET RISK-RELATED TRADING REVENUE FOR 1995 [GRAPH 1 -- SEE APPENDIX 1] The above chart contains a histogram of the Corporation's daily market risk-related revenue for 1995. Market risk-related revenue is defined as the daily change in value in the trading portfolios plus any trading-related net interest income or other revenue. Net interest income related to funding and investment activity is excluded. The histogram covers the Corporation's major trading units which constitute approximately 98% of its trading activity. For the twelve months ended December 31, 1995, the Corporation posted positive daily market risk-related revenue for 225 out of 266 business trading days for international and domestic units. For 243 of the 266 days, the Corporation's daily market risk-related revenue or losses occurred within the negative $5 million to positive $10 million range, which is representative of the Corporation's emphasis on market-making and sales activities. The low number of outlier results (13 days having positive or negative market risk-related revenues exceeding $10 million) exemplifies the Corporation's diversified approach to market risk management as a business strategy. ASSET/LIABILITY MANAGEMENT The objective of the asset/liability management process is to manage and control the sensitivity of the Corporation's income to changes in market interest rates. The process operates under the authority and direction of the Asset and Liability Policy Committee, comprised of the Office of the Chairman and senior business and finance executives. The Committee seeks to ensure that the risk to earnings from adverse movements in interest rates are kept within specified limits deemed acceptable by the Corporation. The Corporation's net interest income is affected by changes in the level of market interest rates based upon differences in timing between the contractual maturity or repricing (the "repricing") of its assets and liabilities. Interest rate sensitivity arises in the ordinary course of the Corporation's banking business as the repricing characteristics of its loans do not necessarily match those of its deposits and other borrowings. This sensitivity can be altered by adjusting the Corporation's investments and the maturities of its wholesale funding activities, and with the use of derivative instruments. The Corporation, as part of its asset/liability management process, employs a variety of on-balance sheet and derivative instruments in managing its exposure to fluctuations in market interest rates. The Corporation primarily uses its securities portfolio, and to a lesser degree 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. Derivative instruments include interest rate swaps, futures, forward rate agreements and options and are generally accorded accrual accounting treatment in the Corporation's financial statements. (See Note One of the Notes to Consolidated Financial Statements for a discussion of the Corporation's accounting policy relative to 32 35 derivative instruments used for asset/liability management and Note Nineteen of the Notes to Consolidated Financial Statements for the aggregate notional principal of derivative instruments). Risk Management and Control: A key element of the Corporation's asset/liability management process is that it allows the assumption of interest sensitivity at a decentralized level by authorized units with close contacts to the markets. These units are subject to individual authorities and limits administered centrally which are intended to control the size of exposures by currency and the instruments that can be used to manage the sensitivities. The Asset and Liability Policy Committee has ultimate responsibility for the Corporation's consolidated interest rate exposure. In addition to the individual limits placed on the decentralized risk management units, the Committee has established "global" limits for consolidated exposures along three dimensions of risk. These limits cover net gap exposure, earnings at risk, and the sensitivity of the Corporation's equity to changes in interest rate levels. Measuring Interest Rate Sensitivity: Management uses a variety of techniques to measure its interest rate sensitivity. One such tool is aggregate net gap analysis, an example of which is presented below. Assets and liabilities are placed in gap intervals based on their contractual maturities or repricing dates. Assets and liabilities, for which no specific repricing dates exist, are placed in gap intervals based on management's judgments concerning their most likely repricing behaviors. Derivatives used in asset/liability 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 net interest income in a declining interest rate environment and will detract from net interest income in a rising interest rate environment. Conversely, a positive gap - more assets repricing than liabilities - will benefit net interest income if rates are rising and will detract from net interest income in a falling rate environment. INTEREST SENSITIVITY TABLE
Over At December 31, 1995 (in millions) 1-3 Months 4-6 Months 7-12 Months 1-5 Years 5 Years Total - ---------------------------------------------------------------------------------------------------------------------------------- Assets Deposits With Banks $ 2,461 $ 185 $ 20 $ -- $ -- $ 2,666 Federal Funds Sold and Securities Purchased Under Resale Agreements 8,033 -- -- -- -- 8,033 Trading Account Assets 36,020 -- -- -- -- 36,020 Securities 2,342 1,518 1,541 13,442 15,942 34,785 Loans 45,809 6,899 6,050 16,256 4,750 79,764 Noninterest Earning Assets 9,065 169 368 2,667 9,389 21,658 - ---------------------------------------------------------------------------------------------------------------------------------- Total Assets $103,730 $ 8,771 $ 7,979 $32,365 $30,081 $182,926 - ---------------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Deposits $ 56,066 $ 7,586 $ 7,177 $11,493 $16,095 $ 98,417 Short-Term and Other Borrowings 34,231 655 1 5 21 34,913 Long-Term Debt 2,655 463 12 1,526 2,673 7,329 Other Liabilities 24,297 8 8 70 5,972 30,355 Stockholders' Equity -- -- -- -- 11,912 11,912 - ---------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $117,249 $ 8,712 $ 7,198 $13,094 $36,673 $182,926 - ---------------------------------------------------------------------------------------------------------------------------------- Balance Sheet (13,519) 59 781 19,271 (6,592) -- - ---------------------------------------------------------------------------------------------------------------------------------- Derivative Instruments Affecting Interest-Rate Sensitivity(a) 4,411 (375) (2,302) (2,119) 385 -- - ---------------------------------------------------------------------------------------------------------------------------------- Interest-Rate-Sensitivity Gap (9,108) (316) (1,521) 17,152 (6,207) -- - ---------------------------------------------------------------------------------------------------------------------------------- Cumulative Interest-Rate Sensitivity Gap (9,108) (9,424) (10,945) 6,207 -- -- - ---------------------------------------------------------------------------------------------------------------------------------- % of Total Assets (5)% (5)% (6)% 3% -- -- - ----------------------------------------------------------------------------------------------------------------------------------
(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 the Corporation's overall asset/liability management activities. 33 36 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- At December 31, 1995, the Corporation had $10,945 million more liabilities than assets repricing within one year (including net repricing effect of derivative positions), amounting to 6.0% of total assets. The consolidated gaps include exposure to U.S. dollar interest rates as well as exposure to non-U.S. dollar rates in currency markets in which the Corporation does business. Since U.S. interest rates and non-U.S. interest rates may not move in tandem, the overall cumulative gaps may tend to overstate the exposures of the Corporation. Gap analysis is the simplest representation of the Corporation'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 the balance sheet. Accordingly, the Asset and Liability Policy Committee conducts simulations of net interest income under a variety of market interest rate scenarios. These simulations provide the Committee with an estimate of earnings at risk for given changes in interest rates. The difference between these projections of net interest income (after tax), as a percentage of projected net income, represent earnings at risk. At December 31, 1995, based on these simulations, earnings at risk to an immediate 100 basis point rise in market interest rates was estimated to be less than four percent of projected 1996 after-tax net income excluding any merger-related restructuring charges. The immediate 100 basis point rise in interest rates is a hypothetical rate scenario, used to calibrate risk, and does not necessarily represent management's current view of future market developments. All the measurements of risk described above are based upon the Corporation's business mix and interest rate exposures at a particular point in time. The exposures change continuously as a result of the Corporation's ongoing business and its risk management initiatives. While management believes these measures provide a meaningful representation of the Corporation's interest rate sensitivity, they do not necessarily take into account all business developments which have an effect on net income, such as changes in credit quality or the size and composition of the balance sheet. Interest rate swaps: Interest rate swaps are one of the various financial instruments used in the Corporation's ALM activities. Although the Corporation believes the results of its ALM activities should be evaluated on an integrated basis, taking into consideration all on-balance sheet and related derivative instruments and not a specific group of financial instruments, the interest rate swap maturity table, which follows, provides an indication of the Corporation's interest rate swaps activity. The following table summarizes the outstanding ALM interest rate swaps notional amounts at December 31, 1995, by yearly intervals. The decrease in notional amounts from one period to the next period represents maturities of the underlying contracts. The weighted average interest rates to be received and paid on such swaps are presented for each yearly interval. Variable rates presented are generally based on the short-term interest rates for relevant currencies such as the London Interbank Offered Rate (LIBOR). Basis swaps are interest rate swaps based on two floating rate indices (e.g., LIBOR and prime). The table was prepared under the assumption that variable interest rates remain constant at December 31, 1995 levels and, accordingly, the actual interest rates to be received or paid will be different to the extent that such variable rates fluctuate from December 31, 1995 levels. However, the Corporation expects the impact of any interest rate changes to be largely mitigated by corresponding changes in the interest rates and values associated with the linked assets and liabilities. 34 37 - -------------------------------------------------------------------------------- OUTSTANDING INTEREST RATE SWAPS NOTIONAL AMOUNTS AND RECEIVE/PAY RATES BY YEARLY INTERVALS
For the Year Beginning January 1, ($ in millions) 1996 1997 1998 1999 2000 Thereafter - ---------------------------------------------------------------------------------------------------------------------- RECEIVE FIXED SWAPS: Notional amount $19,898 $12,374 $ 6,758 $ 5,284 $4,557 $2,354 Weighted-average: Receive rate 6.67% 6.88% 7.06% 7.08% 6.93% 6.60% Pay rate 5.28 5.71 5.94 5.95 5.88 5.79 PAY FIXED SWAPS: Notional amount $22,107 $12,463 $ 7,850 $ 5,592 $3,830 $2,106 Weighted-average: Receive rate 5.64% 5.69% 5.84% 5.93% 5.91% 5.94% Pay rate 6.89 7.14 7.33 7.38 7.35 7.49 BASIS SWAPS Notional amount $ 5,437 $ 3,910 $ 2,984 $ 2,065 $ 767 $ 612 Weighted-average: Receive rate 6.35% 5.82% 5.89% 5.91% 5.94% 5.94% Pay rate 6.18 5.45 5.82 5.89 5.93 5.92 - ---------------------------------------------------------------------------------------------------------------------- Total Notional Amounts(a) $47,442 $28,747 $17,592 $12,941 $9,154 $5,072 - ----------------------------------------------------------------------------------------------------------------------
(a) At December 31, 1995, approximately $17 billion of notional amounts are interest rate swaps that, as part of the Corporation's asset/liability management, are used in place of cash market instruments. Of this amount, $10 billion is expected to mature in 1996, $4 billion in 1997 with the remaining $3 billion in 1998 and thereafter. The unrecognized net gain related to these positions was approximately $49 million. See Note One of the Notes to Consolidated Financial Statements for a discussion of the Corporation's accounting policy relative to derivative instruments used for ALM. The following table summarizes certain of the Corporation's assets and liabilities at December 31, 1995 with the notional or contract amount of related derivatives used for ALM purposes. DERIVATIVE PRODUCTS AND RELATED BALANCE SHEET POSITIONS
Contract/ Notional Amount(a) ------------------------- Published Interest Other Balance Sheet Rate ALM December 31, (in millions) Amount Swaps Contracts(b) - -------------------------------------------------------------------------------- Securities $30,157 $ 1,824 $ 560 Loans 82,143 21,797 39,571 Other Assets 8,036 305 3,143 Deposits 98,417 3,343 15,644 Long-Term Debt 7,329 2,910 -- - --------------------------------------------------------------------------------
(a) At December 31, 1995, the total notional amounts of approximately $17 billion for interest rate swaps and $3 billion for other ALM contracts, both of which are used in place of cash instruments (See Note One of the Notes to Consolidated Financial Statements), have been excluded from the above table. (b) Includes futures, forward rate agreements and options. In the normal course of its ALM business, the Corporation does not generally terminate its interest rate swaps. Deferred gains/losses primarily relate to securities futures and forward contracts used in connection with available-for-sale securities. The unrecognized gains/losses relating to ALM activities primarily relate to interest rate swap contracts. The following table reflects changes in value of the Corporation's ALM derivative contracts (both deferred gains/losses and unrecognized gains/losses) for the year ended 1995. For further discussion of both the Corporation's deferred and unrecognized gains/losses relating to its ALM activities, see Notes Nineteen and Twenty Two, respectively. CHANGE IN VALUE OF ALM DERIVATIVE PRODUCTS
Change in December 31, ($ in millions) 1995 1994 Value - -------------------------------------------------------------------------------- ALM Derivative Contracts: Net Deferred Gains (Losses) $(130) $ 14 $(144) Net Unrecognized Gains (Losses) (96)(a) (784) 688 - ------------------------------------------------------------------------------- Net ALM Derivative Gains (Losses) $(226) $(770) $ 544 - --------------------------------------------------------------------------------
(a) Amount includes $97 million in net unrecognized losses from daily margin settlements on open futures contracts. For additional information, refer to Note Twenty Two of the Notes to Consolidated Financial Statements. The net deferred losses at December 31, 1995 are expected to be amortized over the periods reflected in the following table. The amortization of deferred gains and losses are recognized as yield adjustments in interest income or interest expense. AMORTIZATION OF NET DEFERRED GAINS/(LOSSES) ON CLOSED ALM CONTRACTS
Year Ended December 31, (in millions) - -------------------------------------------------------------------------------- 1996 $ (34) 1997 (33) 1998 (32) 1999 (21) 2000 and After (10) - -------------------------------------------------------------------------------- Net Deferred Gains/(Losses) on ALM Contracts Closed $(130) - --------------------------------------------------------------------------------
The Consolidated Balance Sheet includes net unamortized premiums paid on open ALM option contracts amounting to $10 million at December 31, 1995 which will be amortized in 1996. OTHER MARKET RISK MANAGEMENT The Corporation uses various derivative contracts to reduce risks associated with its mortgage servicing, loan sales, other consumer loan activities and capital-related foreign currency exposures. 35 38 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- The value of the Corporation's mortgage servicing rights is affected by the level of prepayments made by mortgage holders resulting from changes in interest rates. Purchased interest rate floor contracts are used to mitigate such risk. Essentially all contracts linked to mortgage servicing assets mature within three years. The Corporation also originates certain mortgage and consumer loans for sale or securitization to third-party investors. To reduce the risk of changes in value between the time that such loans are originated and the date of sale, the Corporation enters into futures, forward, and purchased option contracts. Contracts related to loans available for sale generally mature within one year. Foreign currency exposures, primarily the net investment in overseas entities, are managed through the use of foreign exchange forward contracts matching outstanding foreign currency positions on a currency-by-currency basis. These contracts hedge the impact of foreign exchange rate changes on the Corporation's net investment in its overseas entities. - -------------------------------------------------------------------------------- - - OPERATING RISK MANAGEMENT The Corporation, like all large financial institutions, 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. The Corporation maintains a system of controls that is designed to keep operating risk at appropriate levels in view of the financial strength of the Corporation, the characteristics of the businesses and markets in which the Corporation operates, competitive circumstances and regulatory considerations. However, from time to time in the past the Corporation has suffered losses from operating risk, and there can be no assurance that the Corporation will not suffer such losses in the future. - -------------------------------------------------------------------------------- - - CAPITAL AND LIQUIDITY RISK MANAGEMENT CAPITAL The Corporation's level of capital at December 31, 1995 remained strong, with capital ratios well in excess of regulatory guidelines. The Corporation's Tier 1 and Total Capital ratios were 8.45% and 12.10%, respectively, at December 31, 1995. These ratios, as well as the leverage ratio discussed below, exclude the assets and off-balance sheet financial instruments of the Corporation's securities subsidiary, Chemical Securities, Inc. ("CSI"), as well as the Corporation's investment in such subsidiary. In addition, the provisions of SFAS 115 do not apply to the calculation of these ratios. Total capitalization (the sum of Tier 1 Capital and Tier 2 Capital as discussed below) increased by $1.3 billion during 1995 to $15.8 billion at December 31, 1995. The Corporation manages its capital to execute its strategic business plans and support its growth and investments, including acquisition strategies in its core businesses. As part of the Corporation's Actions to Improve Earnings Per Share, the Corporation completed two divestitures in the fourth quarter of 1995 - the sale of Chemical New Jersey Holdings' banking operations in southern and central New Jersey to PNC Bank Corp. and the sale of half the Corporation's 40% interest in CIT. During 1995, the Corporation repurchased approximately 14.4 million shares of its outstanding common stock in the open market. These share repurchases were largely undertaken to meet the anticipated needs of the Corporation's employee stock option and incentive plans. During 1995, approximately 12.8 million shares (11.9 million from treasury) were issued under various employee stock option and incentive plans and 7.6 million shares of common stock were issued (from treasury) due to the conversion of the Corporation's 10% convertible preferred stock. In the second quarter of 1995, the Board of Directors of the Corporation increased the quarterly dividend on the outstanding shares of the Corporation's common stock to $.50 per share, an increase of 14% from $.44 per share. On an annualized basis, this represents an increase in the dividend rate to $2.00 per share from $1.76 per share. For 1995, the Corporation's ratio of common dividends to earnings applicable to common stock was 28%, compared with 35% in 1994. The Corporation's total stockholders' equity at the 1995 year-end was $11.9 billion, compared with $10.7 billion at December 31, 1994. The $1.2 billion increase primarily reflected the retention of earnings (net income of $1.8 billion less total common and preferred stock dividends of $.6 billion) generated during 1995. 36 39 Chemical Banking Corporation and Subsidiaries - ------------------------------------------------------------------------------ The tables which follow sets forth various capital ratios and components of capital at the dates indicated. CAPITAL RATIOS
Minimum Regulatory December 31, (ratios) 1995 1994 Requirement - -------------------------------------------------------------------------------- Corporation: Tier 1 Capital Ratio(a)(c) 8.45% 8.02% 4.00% Total Capital Ratio(a)(c) 12.10 11.97 8.00 Tier 1 Leverage Ratio(b)(c) 6.43 6.26 3.00-5.00 Common Stockholders' Equity to Total Assets 5.83 5.40 -- Total Stockholders' Equity to Total Assets 6.51 6.25 -- - -------------------------------------------------------------------------------- Chemical Bank: Tier 1 Capital Ratio(a)(c) 7.65 7.60 4.00 Total Capital Ratio(a)(c) 11.49 11.91 8.00 Tier 1 Leverage Ratio(b)(c) 5.54 5.72 3.00-5.00 - --------------------------------------------------------------------------------
(a) Tier 1 Capital or Total Capital divided by risk-weighted assets. Risk-weighted assets include assets and off-balance sheet positions, weighted by the type of instrument and the risk weight of the counterparty, collateral or guarantor. (b) Tier 1 Capital divided by adjusted average assets. (c) Including the Corporation's securities subsidiary, the December 31, 1995 Tier 1 Capital, Total Capital and Tier 1 Leverage ratios were 8.65%, 12.56% and 6.18%, respectively, compared with 8.20%, 12.35% and 5.95%, respectively, at December 31, 1994. COMPONENTS OF CAPITAL
December 31, (in millions) 1995 1994 - -------------------------------------------------------------------------------- TIER 1 CAPITAL: Common Stockholders' Equity $ 10,965 $ 9,700 Nonredeemable Preferred Stock 1,250 1,450 Minority Interest 70 63 Less: Goodwill 731 1,068 Non-Qualifying Intangible Assets 115 142 50% Investment in CSI 377 246 - -------------------------------------------------------------------------------- Tier 1 Capital 11,062 9,757 - -------------------------------------------------------------------------------- TIER 2 CAPITAL: Long-Term Debt Qualifying as Tier 2 3,509 3,519 Qualifying Allowance for Credit Losses 1,646 1,532 Less: 50% Investment in CSI 377 246 - -------------------------------------------------------------------------------- Tier 2 Capital 4,778 4,805 - -------------------------------------------------------------------------------- Total Qualifying Capital $ 15,840 $ 14,562 - -------------------------------------------------------------------------------- Risk-Weighted Assets(a) $130,909 $121,660 - --------------------------------------------------------------------------------
(a) Includes off-balance sheet risk-weighted assets in the amount of $41,704 million and $37,157 million, respectively, at December 31, 1995 and December 31, 1994. Under the risk-based capital guidelines of the Federal bank regulatory authorities, banking organizations are required to maintain certain ratios of "Qualifying Capital" to "risk-weighted assets". "Qualifying Capital" is classified into two tiers, referred to as Tier 1 Capital and Tier 2 Capital. Under the guidelines, both the Corporation's and Chemical Bank's Tier 1 Capital ratio and Total Capital ratio to risk-weighted assets were well in excess of the minimum ratios of 4% and 8%, respectively. To be "well capitalized," a banking organization must have a Tier 1 Capital ratio of at least 6%, Total Capital ratio of at least 10%, and Tier 1 leverage ratio of at least 5%. At December 31, 1995, the capital ratios for each of the Corporation's banking subsidiaries exceeded the ratios required to be well capitalized. The Tier 1 leverage ratio is defined as Tier 1 Capital (as defined under the risk-based capital guidelines) 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 circumstances or risk profile of a given banking organization. The Federal Reserve Board has not advised the Corporation of any specific minimum Tier 1 leverage ratio applicable to it. At December 31, 1995, the Corporation had in place a Shareholders' Rights Plan. The Shareholders' Rights Plan contains provisions intended to protect stockholders in the event of unsolicited offers, attempts to acquire the Corporation and other coercive or unfair takeover tactics that could impair the Board of Directors' ability to represent stockholders' interests fully. On January 18, 1996, the Corporation announced that it would redeem all outstanding rights issued under its Shareholders' Rights Plan. The redemption will be effective on the first regular common stock dividend record date occurring after the consummation of the merger with Chase. The merger is scheduled to be completed on March 31, 1996, and the rights would be redeemed from all stockholders of record on the anticipated common stock dividend record date of April 4, 1996. Under the Shareholder Rights Plan, the redemption price is $0.01 per right. Payment of the redemption price is intended to be made at the same time as payment of the 1996 first-quarter common stock dividend. 37 40 MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- LIQUIDITY The objective of liquidity management is to ensure the availability of sufficient cash flows to meet all of the Corporation's financial commitments and to capitalize on opportunities for the Corporation's business expansion. Liquidity management addresses the Corporation'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 effectively changes in liquidity and to react accordingly to fluctuations in market conditions. Contingency plans exist and could be implemented on a timely basis to minimize the risk associated with dramatic changes in market conditions. In managing liquidity, the Corporation takes into account the various legal limitations on the extent to which banks may pay dividends to their parent companies or finance or otherwise supply funds to certain of their affiliates. For additional information, refer to Note Fifteen of the Notes to Consolidated Financial Statements. The primary source of liquidity for the bank subsidiaries of the Corporation derives from their ability to generate core deposits (which includes all deposits except noninterest-bearing time deposits, foreign deposits and certificates of deposit of $100,000 or more). The Corporation considers funds from such sources to comprise its subsidiary banks' "core" deposit base because of the historical stability of such sources of funds. The average core deposits at the Corporation's bank subsidiaries for 1995 were $54 billion. These deposits fund a portion of the Corporation's asset base, thereby reducing the Corporation's reliance on other, more volatile, sources of funds. The Corporation's average core deposits as a percentage of average loans was 66% for 1995. Foreign deposits generated in the Corporation's global wholesale and retail businesses are also considered to be an additional source of liquidity for the Corporation. The Corporation holds marketable securities and other short-term investments which can be readily converted to cash. As part of the Corporation's on-going capital management process, loan syndication networks and retail securitization programs are maintained in order to facilitate the timely disposition of assets, if and when deemed desirable. The Corporation is an active participant in the capital markets. In addition to issuing commercial paper and medium-term notes, the Corporation raises funds through the issuance of long-term debt, common stock and preferred stock. During 1995, the Corporation issued $1,153 million of long-term debt, including $631 million through its medium-term note program. The Corporation's long-term debt at December 31, 1995 was $7,329 million, a decrease of $662 million from the 1994 year-end. The decrease resulted from maturities of $1,218 million of the Corporation's long-term debt (including $499 million of senior medium-term notes and $719 million of other senior notes) and the redemption of $600 million of senior notes. These decreases were partially offset by additions to the Corporation's long-term debt of $1,153 million (including $360 million of senior medium-term notes, $271 million of subordinated medium-term notes and $522 million of other senior notes). As previously discussed, during the second quarter of 1995, the Corporation called all of the outstanding shares of its 10% convertible preferred stock for redemption. Substantially all of the 10% convertible preferred stock was converted prior to the redemption date, at the option of the holders thereof, into approximately 7.6 million shares of the Corporation's common stock. The shares of common stock issued upon such conversion were issued from treasury. The following table shows the debt ratings of the Corporation as well as Chemical Bank. These ratings upgrades enhanced and should continue to enhance the Corporation's access to global capital and money markets, a primary source of liquidity for an international money-center institution. The ability to access this geographically diverse assortment of distribution channels and to issue a wide variety of capital and money market instruments at various maturities provides the Corporation with a full array of alternatives for managing its liquidity position.
Debt Ratings Corporation Bank December 31, 1995 1994 1995 1994 - ------------------------------------------------------------- Moody's Senior A1 A2 Aa3 Aa3 Subordinated A2 A3 A1 A2 Standard & Poor's Senior A A A+ A+ Subordinated A- A- A A - -------------------------------------------------------------
38 41 Chemical Banking Corporation and Subsidiaries - -------------------------------------------------------------------------------- - - OTHER EVENTS JOINT VENTURE WITH MELLON BANK CORPORATION The Corporation and Mellon Bank Corporation have formed a joint venture that focuses on providing stock transfer and related shareholder services to publicly-held companies. The joint venture is called Chemical Mellon Shareholder Services, and is a 50/50 partnership, with Mellon Bank Corporation and the Corporation sharing equally in the joint venture's initial capitalization, including investments in new technology. The joint venture was accounted for as an equity investment effective January 1, 1995, with revenues and expenses of the affected business units recorded in other revenue. SALE OF CHEMICAL BANK NEW JERSEY NATIONAL ASSOCIATION On October 6, 1995, the Corporation sold Chemical New Jersey Holdings, Inc. and its subsidiaries, including Chemical Bank New Jersey National Association, to PNC Bank Corp. for approximately $490 million. The sale did not include the Corporation's franchise in northeastern New Jersey or the Montclair, Morristown, Ridgewood and Summit offices of Princeton Bank and Trust Company. These remaining branches and offices are being repositioned as a strategic component of the Corporation's regional banking in metropolitan New York. The after-tax gain on the sale was approximately $45 million. SALE OF HALF INTEREST IN CIT On December 15, 1995, the Corporation sold half of its 40% interest in CIT to The Dai-Ichi Kangyo Bank for approximately $430 million, resulting in an after-tax loss of approximately $20 million. The Corporation has given Dai-Ichi Kangyo a five-year option to purchase its remaining 20% interest and CIT has given the Corporation public offering registration rights with respect to this 20% share, which would take effect at the end of the option period. - -------------------------------------------------------------------------------- - - ACCOUNTING DEVELOPMENTS ACCOUNTING FOR STOCK-BASED COMPENSATION In October 1995, the Financial Accounting Standards Board, ("FASB") issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 establishes financial accounting and reporting standards for stock-based compensation plans. Such plans include all arrangements by which employees or others receive shares of stock or other equity instruments of the Corporation, or arrangements by which the Corporation incurs liabilities in amounts based on the price of the Corporation's stock. Examples are stock options, restricted stock, restricted stock units, stock appreciation rights and stock purchase plans. SFAS 123 allows two alternative accounting methods: (1) a fair-value-based method, or (2) an intrinsic value-based method which is already prescribed by Accounting Policy Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Both the accounting and disclosure requirements of SFAS 123 are effective for fiscal years beginning after December 15, 1995. The Corporation intends to continue accounting for its employee stock compensation plans under its current method (APB 25), and will adopt the disclosure requirements of SFAS 123 in 1996. 39 42 MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------------------------------------------------- - - COMPARISON BETWEEN 1994 AND 1993 OPERATING HIGHLIGHTS The Corporation's net income for 1994, including a fourth-quarter restructuring charge of $260 million ($152 million after-tax), was $1,294 million, or $4.60 per primary share and $4.54 on a fully-diluted basis. Reported 1993 net income was $1,604 million, or $5.71 per primary share and $5.62 on a fully-diluted basis, which included the recognition of remaining income tax benefits of $331 million, a $115 million Manufacturers Hanover Corporation ("MHC") merger-related charge ($67 million after-tax), and a net positive impact of $35 million related to accounting changes. Net income, before the fourth-quarter 1994 restructuring charge, was $1,446 million, or $5.20 per primary share and $5.13 on a fully-diluted basis. These 1994 results reflected an 11% increase from comparable pro forma earnings of $1,305 million, or $4.53 per primary share and $4.47 on a fully-diluted basis in 1993. On December 1, 1994, the Corporation announced its Actions to Improve Earnings Per Share Program, designed to produce earnings per share growth of more than 15% in 1995 and in 1996, as well as an efficiency ratio of 57% and a return on common stockholders' equity of 16% by 1996. NET INTEREST INCOME The Corporation's net interest income was $4,674 million in 1994, compared with $4,636 million in 1993. The rise in 1994 was attributable to an increase in average interest-earning assets, which more than offset the effect of rising interest rates. Average interest-earning assets were $130.0 billion in 1994, an increase of 4% from $124.9 billion in 1993, reflecting a higher level of liquid assets and securities. The composition of average interest-earning assets shifted during the latter part of 1993 and early part of 1994 to support the Corporation's trading businesses. PROVISION FOR LOSSES AND NET CHARGE-OFFS The provision for losses in 1994 was $550 million, compared with $1,259 million in 1993, a decline of 56%. Net charge-offs in 1994 were $1,095 million compared with $1,281 million in 1993. The 1994 results included a $148 million charge related to the decision to designate certain assets as held-for-accelerated-disposition as well as a $291 million charge incurred in connection with management's final valuation of its emerging markets portfolio. As a result of management's evaluation of the continuing improvement in the Corporation's credit profile, the provision for losses in 1994 was lower than the Corporation's net charge-offs. NONINTEREST REVENUE Noninterest revenue totaled $3,597 million in 1994, compared with $4,024 million in 1993. The decrease from the prior year reflected lower trading revenue, a decline in securities gains, and a decline in gains on the sales of emerging markets-related past-due interest bonds (included in other revenue). These decreases were partially offset by increased revenues from corporate finance fees, credit card revenue, trust and investment management fees, as well as increased revenues from equity-related investments (included in other revenue). Corporate finance and syndication fees in 1994 reached a then record level of $405 million, a 20% increase from the prior year, principally resulting from the continued strong growth in loan syndication and other investment banking activities. Trust and investment management fees in 1994 were $421 million, an increase of $15 million from 1993. The higher level of fees reflected a 5% increase in personal trust fees, principally due to new customer relationships developed as a result of the acquisition of Ameritrust Texas Corporation ("Ameritrust") by Texas Commerce. Corporate and institutional trust fees also increased 5% from the 1993 level largely due to the inclusion of Ameritrust results for the full year in 1994 versus only three months in 1993. Credit card revenue in 1994 was $315 million, an increase of 32% from 1993, reflecting a growing cardholder base, primarily as a result of the Corporation's co-branded Shell MasterCard program, which was launched in the fourth quarter of 1993. Service charges on deposit accounts totaled $300 million in 1994, an increase of 4% over 1993, principally reflecting pricing initiatives during the first half of 1994 related to retail accounts, partially offset by a slightly smaller deposit base. Fees for other financial services for 1994 were $833 million, an increase of $4 million from 1993, primarily due to increased mortgage servicing fees reflecting a higher level of mortgage servicing volume from the Margaretten acquisition as well as additions to the portfolio from mortgage originations. Trading-related revenue in 1994 was $660 million, a decrease of 40% from the prior year due to a difficult trading environment during 1994, when compared with 1993. The interest rate environment in the U.S. and European markets was volatile during 1994, while difficult conditions existed in the emerging debt markets, and European government bond markets. Additionally, during 1994, the Corporation incurred a $70 million loss resulting from unauthorized foreign exchange transactions involving the Mexican peso. Securities gains were $66 million in 1994, compared with $142 million in 1993. The decrease was due to the higher interest rate environment exerting downward pressure on market prices. The Corporation's other noninterest revenue for 1994 was $612 million, compared with $710 million in 1993. Revenue from equity-related investments, which includes income from venture 40 43 Chemical Banking Corporation and Subidiaries - ------------------------------------------------------------------------------- capital activities and emerging markets investments, was $362 million in 1994, an increase of 30% from 1993. Included in other noninterest revenue in 1994 was $127 million of net gains from the sale of emerging markets-related past-due interest bonds, compared with $306 million in 1993. All other noninterest revenue was $123 million in 1994, compared with $126 million in 1993. Included in the 1994 amount was equity income from CIT of $73 million, an increase from $65 million in 1993. NONINTEREST EXPENSE Noninterest expense in 1994 was $5,509 million, compared with $5,293 million in 1993. Included in the results for 1994 was a $260 million restructuring charge taken in connection with the aforementioned Actions to Improve Earnings Per Share Program, and a $48 million restructuring charge related to the closing of 50 New York State branches. The 1993 results included a $115 million charge related to the final assessment of costs associated with the merger with MHC and a $43 million charge associated with the acquisition of certain assets of the First City Banks by Texas Commerce. Excluding all restructuring charges in both years, noninterest expense for 1994 was $5,201 million, an increase of 1% from 1993. Noninterest expense for 1994, when compared with the prior year, reflected higher expenses associated with investments in certain key businesses such as the Shell MasterCard program, the trading and securities businesses, Margaretten and Ameritrust. Salaries and employee benefits expenses in 1994 were $2,644 million, compared with $2,466 million in 1993. The increase in 1994 was primarily due to the Margaretten acquisition, the implementation of the Shell MasterCard program, additional staff costs resulting from the 1993 acquisition of Ameritrust by Texas Commerce, and the increase in the Corporation's securities underwriting business. Occupancy expense was $573 million in 1994, a decrease of $14 million from 1993. The decline from 1993 principally resulted from the termination of a facilities lease in London at the beginning of 1994, the impact of branch divestitures, and the continuing consolidation of the New York branch system. Partially offsetting these factors were additional occupancy expense related to the Margaretten acquisition, as well as costs associated with the consolidation and relocation of certain data centers. Equipment expense in 1994 was $382 million, an increase of $45 million, principally due to higher costs incurred for system enhancements to support the Corporation's trading activities, the consolidation of its data centers, and for upgrades to its ATM technology. Foreclosed property expense was $41 million in 1994, compared with $287 million in 1993, reflecting significant progress in managing the Corporation's real estate portfolio. The 1994 expense benefited by approximately $42 million of gains from the sale of foreclosed property. Also included in the 1994 results was a $12 million charge in conjunction with the transfer of certain real estate assets to the held for accelerated disposition category. Included in the 1993 results was a $20 million writedown related to the accelerated disposition of nonperforming residential mortgage assets. For 1994, other expense was $1,561 million, an increase of 7% from the 1993 level. The increase reflects higher professional services and telecommunication costs, as well as the full-year impact in 1994 of expenses associated with the First City Banks and Ameritrust acquisitions, and the inclusion of Margaretten since its acquisition on July 1, 1994. INCOME TAXES The Corporation recorded income tax expense of $918 million in 1994, compared with $539 million in 1993. Included in the 1993 income tax expense were approximately $331 million of Federal income tax benefits. The Corporation recognized its remaining available Federal income tax benefits in accordance with SFAS 109 in the third quarter of 1993. As a result, earnings, beginning in the fourth quarter of 1993, have been reported on a fully-taxed basis. The Corporation's effective tax rate was 41.5% in 1994, compared with 25.6% in 1993. Excluding the $331 million of benefits recognized under SFAS 109 for 1993, the Corporation's effective tax rate for 1993 would have been 41.3%. NONPERFORMING ASSETS The Corporation's total nonperforming assets at December 31, 1994 were $1,139 million, a decline of 68% from $3,525 million at December 31, 1993. This improvement in the Corporation's credit profile is a result of a significantly lower level of loans being placed on nonperforming status, repayments, charge-offs, the Corporation's continuing loan workout and collection activities, as well as the impact of the strategic actions discussed below. In October 1994, the Corporation sold a $341 million (face value) portfolio of commercial real estate mortgage loans and real estate assets, which contained approximately 86% nonperforming loans and foreclosed properties. Additionally, in December 1994, the Corporation segregated approximately $735 million of real estate loans and real estate owned (approximately $580 million nonperforming assets) and designated such assets as Assets Held for Accelerated Disposition. ALLOWANCE FOR CREDIT LOSSES The total allowance for credit losses at December 31, 1994 was $2,480 million, or 3.15% of total loans and 266.95% of nonperforming loans at year-end, compared with $3,020 million, or 4.01% of total loans and 116.56% of nonperforming loans at the 1993 year-end. 41 44 Chemical Banking Corporation and Subsidiaries MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING - ------------------------------------------------------------------------------- - - TO OUR STOCKHOLDERS The management of Chemical Banking Corporation and its subsidiaries 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. The Corporation maintains a strong internal auditing program that independently assesses the effectiveness of the internal controls and recommends possible improvements thereto. Management believes that as of December 31, 1995, the Corporation 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 the Corporation's financial statements. Management has made available to Price Waterhouse LLP all of the Corporation'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. Walter V. Shipley Chairman of the Board and Chief Executive Officer Peter J. Tobin Chief Financial Officer Joseph L. Sclafani Senior Vice President and Controller January 16, 1996 REPORT OF INDEPENDENT ACCOUNTANTS - -------------------------------------------------------------------------------- - - PRICE WATERHOUSE LLP 1177 AVENUE OF THE AMERICAS, NEW YORK, NY 10036 To the Board of Directors and Stockholders of Chemical Banking 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 Chemical Banking Corporation and its subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, 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 audits 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. As described in Notes Four, Thirteen and Seventeen to the consolidated financial statements, in 1993 the Corporation changed its method of accounting for certain investments in debt and marketable equity securities, postretirement benefits other than pensions, and income taxes. January 16, 1996 42 45 Chemical Banking Corporation and Subsidiaries CONSOLIDATED BALANCE SHEET
December 31, (in millions, except share data) 1995 1994 - ------------------------------------------------------------------------------------------------------------------ ASSETS Cash and Due from Banks $ 9,077 $ 8,832 Deposits with Banks 2,666 5,649 Federal Funds Sold and Securities Purchased Under Resale Agreements 8,033 12,797 Trading Assets: Debt and Equity Instruments 18,317 11,093 Risk Management Instruments 17,703 17,709 Securities: Available-for-Sale 30,157 18,431 Held-to-Maturity (Market Value: $4,659 in 1995 and $8,106 in 1994) 4,628 8,566 Loans (Net of Unearned Income: $485 in 1995 and $460 in 1994) 82,143 78,767 Allowance for Credit Losses (2,379) (2,480) Premises and Equipment 2,038 2,134 Due from Customers on Acceptances 1,179 1,088 Accrued Interest Receivable 1,328 1,190 Other Assets 8,036 7,647 - ------------------------------------------------------------------------------------------------------------------ Total Assets $ 182,926 $ 171,423 - ------------------------------------------------------------------------------------------------------------------ LIABILITIES Deposits: Domestic Noninterest-Bearing $ 21,673 $ 21,399 Domestic Interest-Bearing 44,491 46,799 Foreign 32,253 28,308 - ------------------------------------------------------------------------------------------------------------------ Total Deposits 98,417 96,506 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 25,675 23,098 Other Borrowed Funds 9,238 7,130 Acceptances Outstanding 1,193 1,104 Trading Liabilities 24,270 20,692 Accounts Payable, Accrued Expenses and Other Liabilities 4,892 4,190 Long-Term Debt 7,329 7,991 - ------------------------------------------------------------------------------------------------------------------ Total Liabilities 171,014 160,711 - ------------------------------------------------------------------------------------------------------------------ Commitments and Contingencies (See Note Twenty Three) STOCKHOLDERS' EQUITY Preferred Stock 1,250 1,450 Common Stock (Authorized 400,000,000 Shares, Issued 254,930,904 Shares in 1995 and 254,009,187 Shares in 1994) 255 254 Capital Surplus 6,479 6,544 Retained Earnings 4,493 3,263 Net Unrealized Loss on Securities Available-for-Sale, Net of Taxes (303) (438) Treasury Stock, at Cost (4,414,830 Shares in 1995 and 9,497,533 Shares in 1994) (262) (361) - ------------------------------------------------------------------------------------------------------------------ Total Stockholders' Equity 11,912 10,712 - ------------------------------------------------------------------------------------------------------------------ Total Liabilities and Stockholders' Equity $ 182,926 $ 171,423 - ------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these Statements. 43 46 Chemical Banking Corporation and Subsidiaries CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31, (in millions, except per share data) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Loans $ 7,024 $5,730 $5,620 Securities 2,162 1,715 1,727 Trading Assets 878 722 449 Federal Funds Sold and Securities Purchased Under Resale Agreements 785 550 339 Deposits With Banks 269 371 268 - ------------------------------------------------------------------------------------------------------------------------- Total Interest Income 11,118 9,088 8,403 - ------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Deposits 3,657 2,378 2,241 Short-Term and Other Borrowings 2,226 1,500 992 Long-Term Debt 546 536 534 - ------------------------------------------------------------------------------------------------------------------------- Total Interest Expense 6,429 4,414 3,767 - ------------------------------------------------------------------------------------------------------------------------- Net Interest Income 4,689 4,674 4,636 Provision for Losses 478 550 1,259 - ------------------------------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Losses 4,211 4,124 3,377 - ------------------------------------------------------------------------------------------------------------------------- NONINTEREST REVENUE Corporate Finance and Syndication Fees 531 405 338 Trust and Investment Management Fees 379 421 406 Credit Card Revenue 378 315 238 Service Charges on Deposit Accounts 297 300 288 Fees for Other Financial Services 850 833 829 Trading Revenue 624 645 1,073 Securities Gains 119 66 142 Other Revenue 588 612 710 - ------------------------------------------------------------------------------------------------------------------------- Total Noninterest Revenue 3,766 3,597 4,024 - ------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Salaries 2,332 2,205 2,070 Employee Benefits 434 439 396 Occupancy Expense 520 573 587 Equipment Expense 395 382 337 Foreclosed Property Expense (23) 41 287 Restructuring Charge -- 308 158 Other Expense 1,343 1,561 1,458 - ------------------------------------------------------------------------------------------------------------------------- Total Noninterest Expense 5,001 5,509 5,293 - ------------------------------------------------------------------------------------------------------------------------- Income Before Income Tax Expense and Effect of Accounting Changes 2,976 2,212 2,108 Income Tax Expense 1,160 918 539 - ------------------------------------------------------------------------------------------------------------------------- Income Before Effect of Accounting Changes 1,816 1,294 1,569 Net Effect of Changes in Accounting Principles (11) -- 35 - ------------------------------------------------------------------------------------------------------------------------- Net Income $ 1,805 $1,294 $1,604 - ------------------------------------------------------------------------------------------------------------------------- Net Income Applicable to Common Stock $ 1,700 $1,156 $1,449 - ------------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE: Primary: Income Before Effect of Accounting Changes $ 6.77 $ 4.60 $ 5.57 Net Effect of Changes in Accounting Principles (0.04) -- .14 - ------------------------------------------------------------------------------------------------------------------------- Net Income $ 6.73 $ 4.60 $ 5.71 - ------------------------------------------------------------------------------------------------------------------------- Assuming Full Dilution: Income Before Effect of Accounting Changes $ 6.51 $ 4.54 $ 5.48 Net Effect of Changes in Accounting Principles (0.04) -- .14 - ------------------------------------------------------------------------------------------------------------------------- Net Income $ 6.47 $ 4.54 $ 5.62 - ------------------------------------------------------------------------------------------------------------------------- Average Common and Common Equivalent Shares 252.6 251.3 253.9 - ------------------------------------------------------------------------------------------------------------------------- Average Common Shares Assuming Full Dilution 263.8 258.9 261.6 - -------------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these Statements. 44 47 Chemical Banking Corporation and Subsidiaries CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Year Ended December 31, (in millions) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------ PREFERRED STOCK Balance at Beginning of Year $ 1,450 $ 1,654 $ 1,848 Issuance of Stock -- 200 400 Redemption of Stock -- (404) (594) Conversion of Stock (200) -- -- - ------------------------------------------------------------------------------------------------------------------------------ Balance at End of Year 1,250 1,450 1,654 - ------------------------------------------------------------------------------------------------------------------------------ COMMON STOCK Balance at Beginning of Year 254 253 247 Issuance of Stock 1 1 6 - ------------------------------------------------------------------------------------------------------------------------------ Balance at End of Year 255 254 253 - ------------------------------------------------------------------------------------------------------------------------------ CAPITAL SURPLUS Balance at Beginning of Year 6,544 6,553 6,376 Issuance of Stock (72)(a) 12 194 Premium on Redemption of Preferred Stock -- (12) (17) Restricted Stock Granted, Net of Amortization 7 (9) -- - ------------------------------------------------------------------------------------------------------------------------------ Balance at End of Year 6,479 6,544 6,553 - ------------------------------------------------------------------------------------------------------------------------------ RETAINED EARNINGS Balance at Beginning of Year 3,263 2,501 1,392 Net Income 1,805 1,294 1,604 Cash Dividends Declared: Preferred Stock (105) (126) (155) Common Stock (480) (406) (345) Accumulated Translation Adjustment(b) 10 -- 5 - ------------------------------------------------------------------------------------------------------------------------------ Balance at End of Year 4,493 3,263 2,501 - ------------------------------------------------------------------------------------------------------------------------------ NET UNREALIZED GAIN (LOSS) ON SECURITIES AVAILABLE-FOR-SALE, NET OF TAXES Balance at Beginning of Year (438) 215 -- Impact of Accounting Change -- -- 215 Net Change in Fair Value of Securities Available-for-Sale, Net of Taxes 135 (653) -- - ------------------------------------------------------------------------------------------------------------------------------ Balance at End of Year (303) (438) 215 - ------------------------------------------------------------------------------------------------------------------------------ COMMON STOCK IN TREASURY, AT COST Balance at Beginning of Year (361) (12) (12) Purchase of Treasury Stock (762) (387) -- Reissuance of Treasury Stock 861 38 -- - ------------------------------------------------------------------------------------------------------------------------------ Balance at End of Year (262) (361) (12) - ------------------------------------------------------------------------------------------------------------------------------ Total Stockholders' Equity $ 11,912 $ 10,712 $ 11,164 - ------------------------------------------------------------------------------------------------------------------------------
(a) Primarily reflects the effect of common stock reissued from Treasury due to the conversion of the Corporation's 10% convertible preferred stock. (b) Balance was $0 million, ($10) million and ($10) million at December 31, 1995, 1994, and 1993, respectively. The Notes to Consolidated Financial Statements are an integral part of these Statements. 45 48 Chemical Banking Corporation and Subsidiaries CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31, (in millions) 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net Income $ 1,805 $ 1,294 $ 1,604 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Net Effect of Changes in Accounting Principles 11 -- (35) Provision for Losses 478 550 1,259 Restructuring Charge -- 308 158 Depreciation and Amortization 366 377 333 Net Change In: Trading-Related Assets (6,120) (1,789) (10,513) Accrued Interest Receivable (149) (56) (20) Other Assets (1,042) 889 1,702 Trading-Related Liabilities 3,477 1,696 -- Accrued Interest Payable (85) 91 22 Other Liabilities (594) 622 1,361 Other, Net (252) (808) (730) - -------------------------------------------------------------------------------------------------------------------- Net Cash Provided (Used) by Operating Activities (2,105) 3,174 (4,859) - -------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Net Change In: Deposits with Banks 2,983 407 (4,169) Federal Funds Sold and Securities Purchased Under Resale Agreements 4,278 (2,241) (2,424) Loans Due to Sales and Securitizations 12,717 9,136 12,403 Other Loans, Net (19,345) (13,123) (5,657) Other, Net (1,217) 220 389 Proceeds from the Maturity of Held-to-Maturity Securities 1,517 2,816 4,968 Proceeds from the Sale of Held-to-Maturity Securities -- -- 152 Purchases of Held-to-Maturity Securities (678) (1,194) (6,444) Proceeds from the Maturity of Available-for-Sale Securities 5,566 3,498 1,608 Proceeds from the Sale of Available-for-Sale Securities 51,445 18,556 5,352 Purchases of Available-for-Sale Securities (64,367) (25,697) (7,568) Proceeds from Divestitures of Non-Strategic Businesses 1,050 -- -- Cash Used in Acquisitions -- (373) (481) - -------------------------------------------------------------------------------------------------------------------- Net Cash Provided (Used) by Investing Activities (6,051) (7,995) (1,871) - -------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net Change In: Noninterest-Bearing Domestic Demand Deposits 837 (2,041) (115) Domestic Time and Savings Deposits (164) (5,124) (1,716) Foreign Deposits 3,945 5,414 2,887 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 3,063 10,241 (2,278) Other Borrowed Funds 2,108 (197) 5,625 Other, Net 88 (18) (344) Proceeds from the Issuance of Long-Term Debt 1,153 1,672 3,451 Repayments of Long-Term Debt (1,818) (2,042) (2,299) Proceeds from the Issuance of Stock 504 254 591 Redemption of Preferred Stock -- (416) (610) Treasury Stock Purchased (762) (387) -- Cash Dividends Paid (548) (521) (480) - -------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 8,406 6,835 4,712 - -------------------------------------------------------------------------------------------------------------------- Effect of Exchange Rate Changes on Cash and Due from Banks (5) (34) 24 Net Increase (Decrease) in Cash and Due from Banks 245 1,980 (1,994) Cash and Due from Banks at the Beginning of the Year 8,832 6,852 8,846 - -------------------------------------------------------------------------------------------------------------------- Cash and Due from Banks at the End of the Year $ 9,077 $ 8,832 $ 6,852 - -------------------------------------------------------------------------------------------------------------------- Cash Interest Paid $ 6,514 $ 4,323 $ 3,745 - -------------------------------------------------------------------------------------------------------------------- Taxes Paid $ 911 $ 1,011 $ 390 - --------------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these Statements. 46 49 Chemical Banking Corporation and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Chemical Banking Corporation (the "Corporation") 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 Corporation conducts its domestic and international financial services businesses through various bank and non-bank subsidiaries. The principal bank subsidiaries of the Corporation are Chemical Bank, a New York banking corporation ("Chemical Bank"), and Texas Commerce Bank National Association, a subsidiary of Texas Commerce Equity Holdings, Inc. ("Texas Commerce"), a Delaware bank holding company subsidiary of the Corporation. The Corporation provides diversified financial services principally through two sectors: the Global Bank and Consumer and Relationship Banking. The Global Bank provides domestic and international corporate finance, wholesale banking, and investment services and emphasizes originations, underwriting, distribution, and risk management products. Consumer and Relationship Banking serves a wide range of customer needs and includes consumer, commercial and professional, middle market, and private banking; and trust, cash management, funds transfer, and trade and securities services. The accounting and financial reporting policies of the Corporation and its subsidiaries conform to generally accepted accounting principles and prevailing industry practices and, where applicable, the accounting and reporting guidelines prescribed by the Securities and Exchange Commission and bank regulatory authorities. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The following is a description of significant accounting policies. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Corporation and its majority-owned subsidiaries, after eliminating material intercompany balances and transactions. Equity investments in less than majority-owned companies (20%-50% ownership interest) are generally accounted for in accordance with the equity method of accounting and are reported in Other Assets. The Corporation'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 the Corporation and, accordingly, are not included in the Consolidated Balance Sheet. Certain amounts in prior periods have been reclassified to conform to the current presentation. 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 and liabilities to the U.S. dollar, including the related hedges, are reported in the income statement. TRADING ACTIVITIES The Corporation 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 as the basis to determine the fair value of trading instruments. If quoted market prices are not available, fair values are estimated on the basis of 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. A portion of the market valuation relating to certain risk management instruments is deferred and accreted to income over the life of the instruments to match ongoing servicing costs and credit risks, as appropriate. Interest earned on debt and dividends earned on equity instruments and interest payable on securities sold but not yet purchased are reported as interest income and interest expense, respectively. Debt and Equity Instruments and Securities Sold, Not Yet Purchased: Debt and equity instruments include securities, loans, and other credit instruments held for trading purposes and are reported as Trading Assets. Obligations to deliver securities sold but not yet purchased are reported as Trading Liabilities. Risk Management Instruments: The Corporation primarily deals in interest rate, foreign exchange, and commodity contracts to generate trading revenues. Such contracts include futures, forwards, swaps, and options (including interest rate caps and floors). The estimated fair value of such contracts are reported on a gross basis as Trading Assets-Risk Management Instruments (positive fair values) and Trading Liabilities (negative fair values), except for contracts executed with the same counterparty under legally-enforceable master netting agreements, which are reported on a net basis. DERIVATIVES USED IN ASSET/LIABILITY MANAGEMENT ACTIVITIES As part of its asset/liability management activities, the Corporation primarily uses interest rate swaps and futures and to a lesser extent 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. Futures 47 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- contracts are designated as hedges when they reduce risk and there is high correlation between the futures contract and the item being hedged, both at inception and throughout the hedge period. Interest rate swaps, forward rate agreements, and option contracts are generally used to modify the interest rate characteristics of balance sheet instruments and are linked to specific assets or groups of similar assets or to specific liabilities or groups of similar liabilities. The instruments that meet the above criteria are accounted for under the accrual method, or available-for-sale fair value method, as discussed below. Accrual Method: Under the accrual method, interest income or expense on the derivative contract is accrued and there is no recognition of unrealized gains and losses on the derivative in the balance sheet. Premiums on option contracts are amortized to interest income or interest expense over the life of such contracts. 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 in Stockholders' Equity, net of applicable taxes, consistent with the reporting of unrealized gains and losses on the related securities. For both the accrual and available-for-sale fair value method, realized gains and losses from the settlement or termination of derivatives contracts are deferred on the balance sheet and are amortized to interest income or interest expense over the appropriate risk management periods. Amortization commences when the contract is settled or terminated. If the related assets or liabilities are sold or otherwise disposed, the gain or loss on the derivative contract is recognized as an adjustment to the gain or loss on disposition of the related assets or liabilities. Prior to January 1, 1995, the Corporation used interest rate contracts in place of cash market instruments. Effective January 1, 1995, this practice was discontinued. Accordingly, interest rate contracts entered into subsequent to January 1, 1995 that do not meet the hedge or linkage criteria described above are designated as trading activities and are accounted for at estimated fair value. SECURITIES PURCHASED UNDER RESALE AGREEMENTS AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS The Corporation 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. Such agreements are carried on the balance sheet at the amount advanced or borrowed, respectively, plus accrued interest. Interest earned on resale agreements and interest incurred on repurchase agreements are reported as Interest Income and Interest Expense, respectively. The Corporation offsets resale and repurchase agreements executed with the same counterparty under legally-enforceable netting agreements that meet the applicable netting criteria. It is the Corporation's policy to obtain control or take possession of securities purchased under resale agreements. The Corporation monitors the market value of securities and adjusts the level of collateral for resale and repurchase agreements, as appropriate. AVAILABLE-FOR-SALE AND HELD-TO-MATURITY SECURITIES Effective December 31, 1993, the Corporation adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). For a further discussion of SFAS 115 and the Financial Accounting Series Special Report on SFAS 115, issued during the 1995 fourth quarter, see Note Four. Securities that may be sold in response to or in anticipation of changes in interest rates and resulting prepayment risk, or other factors, are classified as Available-for-Sale and 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 the Corporation has the positive intent and ability to hold to maturity are classified as Held-to-Maturity and are carried at amortized cost. During 1993, securities that might have been sold prior to maturity were carried at the lower of aggregate cost or market value, with any valuation adjustments reported in Securities Gains. 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. Individual securities are reduced through writedowns against Securities Gains to reflect other-than-temporary impairments in value. The Corporation anticipates prepayments of principal in the calculation of the effective yield for collateralized mortgage obligations ("CMOs") and mortgage-backed securities. The prepayment of CMOs and mortgage-backed securities is actively monitored through the Corporation's portfolio management function. The Corporation typically invests in CMOs and mortgage-backed securities with stable cash flows and relatively short duration, thereby limiting the impact of interest rate fluctuations on the portfolio. Management regularly does simulation testing regarding the impact that interest and market rate changes would have on its CMO and mortgage-backed securities portfolios. CMOs and mortgage-backed securities which management believes have high prepayment risk are included in the available-for-sale portfolio. 48 51 Chemical Banking Corporation and Subsidiaries - -------------------------------------------------------------------------------- LOANS Loans are generally reported at the principal amount outstanding, net of unearned income and net deferred loan fees (nonrefundable yield-related loan fees, net of related direct origination costs), if any. 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 pursuant to 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. The Corporation sells or securitizes certain commercial and consumer loans. Such sales are generally without recourse to the Corporation. Gains or losses, as appropriate, 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, principal or interest is not likely to be paid in accordance with the terms of the loan agreement, 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 (exclusive of residential mortgage products which are accounted for in accordance with the nonaccrual loan policy discussed above) are generally charged to the allowance for credit losses upon reaching specified stages of delinquency. Accrued interest is reversed against interest income when such consumer loans are charged off. 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 taken into income only as collected. Effective January 1, 1995, the Corporation adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"), and Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" ("SFAS 118"). SFAS 114 requires that the carrying value of an impaired loan be based on the present value of expected 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. Under SFAS 114, a loan is considered impaired when, based on current information, it is probable that the borrower will be unable to pay contractual interest or principal payments as scheduled in the loan agreement. SFAS 114 applies to all loans except smaller-balance homogeneous consumer loans, loans carried at fair value or the lower of cost or fair value, debt securities, and leases. Generally, the Corporation applies SFAS 114 to nonaccrual commercial loans and renegotiated loans. In addition, SFAS 114 modified the accounting for in-substance foreclosures ("ISF"). Effective January 1, 1995, a collateralized loan is considered an ISF and reclassified to Assets Acquired as Loan Satisfactions only when the Corporation has taken physical possession of the collateral regardless of whether formal foreclosure proceedings have taken place. SFAS 118 permits a creditor to use existing methods for recognizing interest revenue on impaired loans. The Corporation recognizes interest income on impaired loans pursuant to the discussion above for nonaccrual and renegotiated loans. ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses provides for risks of losses inherent in the credit-extension process. The allowance is a general allowance and is based on periodic reviews and analyses of the portfolio, which comprises primarily loans and derivatives and foreign exchange contracts. The periodic analyses include consideration of such factors as 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 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. Other charges to the allowance include amounts related to loans transferred to Assets Held for Accelerated Disposition. PREMISES AND EQUIPMENT Premises and equipment, including leasehold improvements, are carried at cost less accumulated depreciation and amortization. Capital leases are included in Premises and Equipment at the capitalized amount less accumulated amortization. Depreciation and amortization of premises are included in Occupancy Expense, while depreciation of equipment is included in Equipment Expense. Depreciation and amortization are computed using the straight-line method over the estimated useful life of the owned asset and, for leasehold improvements, over the 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. 49 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- OTHER ASSETS Assets Acquired As Loan Satisfactions: Assets acquired in full or partial satisfaction of loans are reported at the lower of cost or estimated fair value less costs to sell. These assets are primarily real estate. Writedowns at the date of transfer from Loans 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 subsequent to six months from the date of transfer are included in Foreclosed Property Expense. Operating expenses, net of related revenue, and gains and losses on sales of such assets are reported net in Foreclosed Property Expense. Assets Held for Accelerated Disposition: Assets held for accelerated disposition 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. Assets held for accelerated disposition are carried at the lower of cost or current estimated disposition value. Any adjustments to the carrying value of these assets or realized gains and losses as assets are sold 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, net of other-than-temporary impairment losses. Marketable holdings are marked-to-market at a discount to the public value. Income from these investments is reported in Other Revenue. Intangibles: Goodwill and other acquisition 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. Goodwill amounted to $0.7 billion at December 31, 1995 compared with $1.1 billion at December 31, 1994. The decrease in goodwill during 1995 was primarily due to the sale of the Corporation's banking operations in southern and central New Jersey and half of its 40% interest in the CIT Group Holdings, Inc. Mortgage Servicing Rights: In 1995, the Corporation adopted Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS 122"). SFAS 122 amends Statement of Financial Accounting Standards No. 65, "Accounting for Certain Mortgage Banking Activities" ("SFAS 65"), to require that when a definitive plan exists to sell or securitize mortgage loans and to retain the servicing rights related thereto, a mortgage banking enterprise should recognize as separate assets the rights to service mortgage loans for others, irrespective of whether those servicing rights are acquired through the purchase or the origination of the mortgage loans. Under SFAS 65, only purchased mortgage servicing rights were permitted to be recognized as separate assets. Capitalized mortgage servicing assets are amortized into noninterest revenue in proportion to, and over the period of, the estimated future net servicing income stream of the underlying mortgage loans. SFAS 122 requires that capitalized mortgage servicing rights be assessed for impairment based on the fair value of those rights. The Corporation's policy for evaluating impairment is to stratify the mortgage servicing rights by year of origination. Fair value is determined considering market prices for similar assets and based on discounted cash flows using market based prepayment estimates for similar coupons and 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; and arranging private placements and underwriting debt and equity securities. Trust and investment management fees primarily include fees received in connection with personal, corporate, and employee benefit trust and investment management activities. 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. Fees for other financial services primarily include fees received in connection with mortgage servicing, loan commitments, standby letters of credit and compensating balances and other fees. Corporate finance and syndication fees are recognized when services to which they relate have been provided. In addition, recognition of syndication fees is subject to certain tests being satisfied. Trust and investment management fees and fees for other financial services are generally recognized over the period that the related service is provided. Credit card revenues are generally recognized as billed, except for annual fees, which are recognized over a twelve-month period. INCOME TAXES The Corporation 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- 50 53 Chemical Banking Corporation and Subsidiaries - -------------------------------------------------------------------------------- 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. EARNINGS PER SHARE Primary earnings per share is computed by dividing net income after deducting preferred stock dividends by average common and common equivalent shares which reflect the dilutive effects of stock options during the respective period. The dilutive effect of stock options is computed under the treasury stock method using the average market price of the Corporation's common stock for the period. Earnings per common share, assuming full dilution, is computed based on the average number of common shares outstanding during the period, including the dilutive effect of stock options and any convertible preferred stock outstanding during the period. The dilutive effect of outstanding stock options is computed using the greater of the closing market price or the average market price of the Corporation's common stock for the period. Any stock options exercised or any preferred stocks converted are assumed to have occurred at the beginning of the period. Net income applicable to common stock is adjusted for dividends declared during the period on the convertible preferred stock. During 1995, the Corporation changed its reporting of earnings per share ("EPS") for all periods from "simple" EPS (which is based solely on the average number of common shares outstanding) to reporting "primary" and "fully-diluted" EPS. Previously, the Corporation reported simple EPS, since the differences between simple EPS and primary EPS or simple EPS and fully-diluted EPS were not material (less than 3%). STATEMENT OF CASH FLOWS For purposes of preparing the Consolidated Statement of Cash Flows, the Corporation defines cash and cash equivalents as those amounts included in the balance sheet caption Cash and Due from Banks. Cash flows from loans and deposits are reported on a net basis. Changes in assets and liabilities are net of the effects of sales and acquisitions. - ------------------------------------------------------------------------------- 2 AGREEMENT TO MERGE WITH CHASE MANHATTAN CORPORATION On August 28, 1995, the Corporation and The Chase Manhattan Corporation ("Chase") announced a definitive agreement to merge in a stock-for-stock transaction. The merger agreement provides that 1.04 shares of the Corporation's common stock will be issued in exchange for each share of Chase common stock on a tax-free basis. All of Chase's series of preferred stock will be exchanged on a one-for-one basis for a corresponding series of the Corporation's preferred stock having substantially the same terms as the Chase preferred stock so converted. The merger was approved by the common shareholders of both institutions at special stockholder meetings on December 11, 1995. On January 5, 1996, the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and the Office of the State Bank Commissioner of Delaware approved the applications for the merger. On January 11, 1996, the Corporation received approval from the New York State Banking Department to merge with Chase. As a result, both companies have received all regulatory approvals necessary to consummate the merger. The merger is scheduled to be completed on March 31, 1996, and will be accounted for as a pooling of interests. The effects of the merger have not been reflected in the financial statements herein. At the time of the merger announcement, it was estimated that a one-time pre-tax restructuring charge of $1.5 billion would be incurred upon consummation of the merger, principally as a result of severance expenses associated with the elimination of approximately 12,000 positions from a combined staff of 75,000 located in 39 states and 51 countries and expenses associated with the elimination of offices and redundant operations. Since that date, the Corporation has continued to evaluate the costs anticipated to be incurred in connection with the merger, as well as the cost savings from the merger, and currently anticipates that the merger-related restructuring charge, as well as the cost savings, will each be higher than originally announced. - -------------------------------------------------------------------------------- 3 TRADING ACTIVITIES The Corporation uses its trading assets and liabilities to meet the financial needs of its customers and to generate revenues through its trading activities. The Corporation generates such trading revenue through market-making, sales, arbitrage and, to a lesser degree, positioning. A description of the classes of derivative and foreign exchange instruments used in the Corporation's trading activities, as well as the credit and market risk factors involved in such activities, are disclosed in Note Nineteen. TRADING ASSETS AND LIABILITIES Trading assets include debt and equity instruments and derivative contracts with positive fair values. Trading liabilities are comprised of securities sold, not yet purchased and derivative contracts with negative fair values. Trading assets and trading liabilities (which are 51 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- carried at estimated fair value, after taking into account the effects of legally enforceable master netting agreements on risk management instruments) are presented in the following table for the dates indicated.
December 31, (in millions) 1995 1994 - ------------------------------------------------------------------------------------ Trading Assets - Debt and Equity Instruments: U.S. Government, Federal Agencies and Municipal Securities $ 7,442 $ 2,875 Certificates of Deposit, Bankers' Acceptances, and Commercial Paper 1,399 1,644 Debt Securities Issued by Foreign Governments 4,144 1,983 Debt Securities Issued by Foreign Financial Institutions 3,145 3,119 Loans 282 339 Corporate Securities 647 325 Other 1,258 808 - ------------------------------------------------------------------------------------ Total Trading Assets-Debt and Equity Instruments(a) $18,317 $11,093 - ------------------------------------------------------------------------------------ Trading Assets - Risk Management Instruments: Interest Rate Contracts $ 9,566 $ 7,950 Foreign Exchange Contracts 7,873 9,500 Stock Index Options and Commodity Contracts 264 259 - ------------------------------------------------------------------------------------ Total Trading Assets-Risk Management Instruments $17,703 $17,709 - ------------------------------------------------------------------------------------ Trading Liabilities - Risk Management Instruments: Interest Rate Contracts $11,130 $ 6,980 Foreign Exchange Contracts 8,159 8,872 Stock Index Options and Commodity Contracts 172 127 - ------------------------------------------------------------------------------------ Total Trading Liabilities-Risk Management Instruments $19,461 $15,979 - ------------------------------------------------------------------------------------ Securities Sold, Not Yet Purchased $ 4,809 $ 4,713 - ------------------------------------------------------------------------------------ Total Trading Liabilities $24,270 $20,692 - ------------------------------------------------------------------------------------
(a) Includes emerging markets instruments of $522 million in 1995 and $544 million in 1994. TRADING REVENUE The following table sets forth the components of total trading-related revenue.
Year Ended December 31, (in millions) 1995 1994 1993 - ------------------------------------------------------------------------------- Trading Revenue $624 $645 $1,073 Net Interest Income Impact(a) 177 15 35 - ------------------------------------------------------------------------------- Total Trading-Related Revenue $801 $660 $1,108 - ------------------------------------------------------------------------------- Product Diversification: Interest Rate Contracts(b) $275 $384 $ 443 Foreign Exchange Revenues(c) 291 157(e) 312 Debt Instruments and Other(d) 235 119 353 - ------------------------------------------------------------------------------- Total Trading-Related Revenue $801 $660 $1,108 - -------------------------------------------------------------------------------
(a) Net interest income attributable to trading activities includes accruals on interest-earning and interest-bearing trading-related positions as well as a management allocation reflecting the funding cost or benefit associated with trading positions. (b) Includes interest rate swaps, currency swaps, foreign exchange forward contracts, interest rate futures, and 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 securities, emerging markets debt instruments, debt-related derivatives, equity securities, equity derivatives, and commodity derivatives. (e) Reflects $70 million reduction as a result of losses sustained from unauthorized foreign exchange transactions involving the Mexican peso. - -------------------------------------------------------------------------------- 4 SECURITIES See Note One for a discussion of the accounting policies relating to securities. 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: 52 55 Chemical Banking Corporation and Subsidiaries
- -------------------------------------------------------------------------------------------------------------------------- December 31, 1995 Gross Gross Amortized Unrealized Unrealized Fair (in millions) Cost Gains Losses Value(a) - -------------------------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE SECURITIES U.S. Government and Federal Agency/Corporation Obligations: Mortgage-Backed Securities $18,886 $204 $2 $19,088 Collateralized Mortgage Obligations 446 -- 1 445 Other, primarily U.S. Treasuries 2,542 3 42 2,503 Obligations of State and Political Subdivisions 319 -- -- 319 Debt Securities Issued by Foreign Governments 5,972 217 138 6,051 Corporate Debt Securities 521 19 9 531 Collateralized Mortgage Obligations(b) 145 -- -- 145 Equity Securities 317 -- 4 313 Other, primarily Asset-Backed Securities 757 6 1 762 - -------------------------------------------------------------------------------------------------------------------------- Total Available-for-Sale Securities Carried at Fair Value(c) $29,905 $449 $197 $30,157 - -------------------------------------------------------------------------------------------------------------------------- HELD-TO-MATURITY SECURITIES U.S. Government and Federal Agency/Corporation Obligations: Mortgage-Backed Securities $1,782 $24 $1 $1,805 Collateralized Mortgage Obligations 2,624 11 6 2,629 Other, primarily U.S. Treasuries 82 -- -- 82 Obligations of State and Political Subdivisions 1 -- -- 1 Collateralized Mortgage Obligations(b) 48 2 -- 50 Other, primarily Asset-Backed Securities 91 1 -- 92 - -------------------------------------------------------------------------------------------------------------------------- Total Held-to-Maturity Securities(d) $4,628 $38 $7 $4,659 - -------------------------------------------------------------------------------------------------------------------------- December 31, 1994 Gross Gross Amortized Unrealized Unrealized Fair (in millions) Cost Gains Losses Value(a) - -------------------------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE SECURITIES U.S. Government and Federal Agency/Corporation Obligations: Mortgage-Backed Securities $8,151 $554 $593 $8,112 Collateralized Mortgage Obligations 354 1 28 327 Other, primarily U.S. Treasuries 6,414 8 359 6,063 Obligations of State and Political Subdivisions -- -- -- -- Debt Securities Issued by Foreign Governments 2,736 16 134 2,618 Corporate Debt Securities 358 6 5 359 Collateralized Mortgage Obligations(b) 262 1 3 260 Equity Securities 240 -- -- 240 Other, primarily Asset-Backed Securities 462 1 11 452 - -------------------------------------------------------------------------------------------------------------------------- Total Available-for-Sale Securities Carried at Fair Value(c) $18,977 $587 $1,133 $18,431 - -------------------------------------------------------------------------------------------------------------------------- HELD-TO-MATURITY SECURITIES U.S. Government and Federal Agency/Corporation Obligations: Mortgage-Backed Securities $3,615 $-- $209 $3,406 Collateralized Mortgage Obligations 3,871 -- 237 3,634 Other, primarily U.S. Treasuries 130 -- 2 128 Obligations of State and Political Subdivisions 118 1 -- 119 Collateralized Mortgage Obligations(b) 140 1 4 137 Other, primarily Asset-Backed Securities 692 2 12 682 - -------------------------------------------------------------------------------------------------------------------------- Total Held-to-Maturity Securities(d) $8,566 $4 $464 $8,106 - --------------------------------------------------------------------------------------------------------------------------
(a) The Corporation's portfolio of securities generally consists of investment-grade securities. The fair value of actively-traded securities is determined by the secondary market, while the fair value for non-actively-traded securities is based on independent broker quotations. (b) Collateralized mortgage obligations of private issuers generally have underlying collateral consisting of obligations of U.S. Government and Federal agencies and corporations. (c) At December 31, 1993, the fair value of U.S. Treasury and Federal Agencies and Other securities was $11,897 million and $3,943 million, respectively. There were no Obligations of State and Political Subdivisions. (d) At December 31, 1993, the amortized cost of U.S. Treasury and Federal Agencies, Obligations of State and Political Subdivisions, and Other securities was $9,142 million, $13 million, and $953 million, respectively. Cash proceeds from the sale of available-for-sale securities during 1995, 1994 and 1993 were $51,445 million, $18,556 million, and $5,352 million, respectively. Net gains from available-for-sale securities sold in 1995, 1994 and 1993 amounted to $119 million (gross gains of $436 million and gross losses of $317 million), $66 million (gross gains of $141 million and gross losses of $75 million), and $139 million (gross gains of $178 million and gross losses of $39 million), respectively. There were no sales of held-to-maturity securities during 1995 and 1994. Cash proceeds from the sales of held-to-maturity securities during 1993 were $152 million. Gross gains from held-to-maturity securities sold amounted to $3 million in 1993 (there were no losses from sales of such securities in 1993). During the fourth quarter of 1995, the Financial Accounting Standards Board issued Financial Accounting Series Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115 Implementation Guide"). In accordance with the adoption of the SFAS 115 Implementation Guide, the Corporation reassessed the classifications of all securities held. The result of the one-time reassessment was the reclassification of $3,141 million 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 $11 million after-tax. The amortized cost of the held-to-maturity securities transferred to trading assets approximated the fair value. See Note Five for a discussion of loans accounted for pursuant to SFAS 115. Of the securities held in the Corporation's securities portfolios, securities issued by the Federal Republic of Germany exceeded 10% of the Corporation's total stockholders' equity at December 31, 1995, with a fair value of $2,845 million and an amortized cost of $2,525 million. U.S. Government and Federal Agencies were the only other issuers whose securities exceeded 10% of the Corporation's total stockholders' equity at December 31, 1995. The amortized cost, estimated fair value, and average yield of securities and related derivatives at December 31, 1995 by contractual maturity range and type of security are presented in the table which follow: 53 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------------------------------------------------------------- Maturity Schedule of Available-for-Sale Securities Due in 1 Due After 1 Due After 5 Due After December 31, 1995 (in millions, except yields) Year or less Through 5 Years Through 10 Years 10 Years(a) Total - ----------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury and Federal Agencies: Amortized Cost $ 403 $1,240 $2,029 $18,202 $21,874 Fair Value 404 1,242 1,990 18,400 22,036 Average Yield(b) 6.52% 5.71% 5.77% 7.41% 7.14% - ----------------------------------------------------------------------------------------------------------------------------------- Obligations of State and Political Subdivisions: Amortized Cost $ 299 $ 17 $ 2 $ 1 $ 319 Fair Value 299 17 2 1 319 Average Yield(b) 4.00% 5.34% 10.28% 10.46% 4.13% - ----------------------------------------------------------------------------------------------------------------------------------- Other:(c) Amortized Cost $1,494 $3,764 $1,851 $ 603 $ 7,712 Fair Value 1,497 3,847 1,862 596 7,802 Average Yield(b) 7.96% 6.26% 8.04% 6.10% 7.00% - ----------------------------------------------------------------------------------------------------------------------------------- Total Available-for-Sale Securities: Amortized Cost $2,196 $5,021 $3,882 $18,806 $29,905 Fair Value 2,200 5,106 3,854 18,997 30,157 Average Yield(b) 7.15% 6.12% 6.85% 7.37% 7.07% - -----------------------------------------------------------------------------------------------------------------------------------
Maturity Schedule of Held-to-Maturity Securities Due in 1 Due After 1 Due After 5 Due After December 31, 1995 (in millions, except yields) Year or less Through 5 Years Through 10 Years Years(a) Total - ----------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury and Federal Agencies: Amortized Cost $ 81 $ 649 $ 936 $ 2,822 $ 4,488 Fair Value 81 655 942 2,838 4,516 Average Yield(b) 5.05% 6.39% 7.04% 6.77% 6.74% - ----------------------------------------------------------------------------------------------------------------------------------- Other:(c) Amortized Cost $ -- $ 3 $ 83 $ 54 $ 140 Fair Value -- 3 84 56 143 Average Yield(b) -- 6.50% 7.28% 9.34% 8.07% - ----------------------------------------------------------------------------------------------------------------------------------- Total Held-to-Maturity Securities: Amortized Cost $ 81 $ 652 $1,019 $ 2,876 $ 4,628 Fair Value 81 658 1,026 2,894 4,659 Average Yield(b) 5.05% 6.39% 7.06% 6.82% 6.78% - -----------------------------------------------------------------------------------------------------------------------------------
(a) Securities with no stated maturity are included with securities with a remaining maturity of ten years or more. Substantially all of the Corporation's mortgage-backed securities are due in ten years or more based on contractual maturity. The estimated duration of mortgage-backed securities, which reflects anticipated future prepayments based on a consensus of dealers in the market, is approximately 5 years. (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 the 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, equity and other debt securities. 54 57 Chemical Banking Corporation and Subsidiaries - -------------------------------------------------------------------------------- 5 LOANS The composition of the loan portfolio at each of the dates indicated was as follows:
1995 1994 --------------------------------- --------------------------------- December 31, (in millions) Domestic Foreign Total Domestic Foreign Total - ------------------------------------------------------------------------------------------------------------------------------ COMMERCIAL: Commercial Real Estate $ 4,850 $ 420 $ 5,270 $ 5,650 $ 482 $ 6,132 Commercial and Industrial 21,946 7,823 29,769 20,251 6,939 27,190 Financial Institutions 4,175 3,578 7,753 3,958 3,628 7,586 Foreign Governments and Official Institutions -- 4,836 4,836 -- 6,567 6,567 Lease Financings 781 609 1,390 763 699 1,462 - ------------------------------------------------------------------------------------------------------------------------------ Total Commercial 31,752 17,266 49,018 30,622 18,315 48,937 - ------------------------------------------------------------------------------------------------------------------------------ CONSUMER: Residential Mortgage 17,751 121 17,872 13,567 154 13,721 Credit Card 8,678 -- 8,678 9,261 -- 9,261 Auto Loans 1,115 -- 1,115 1,829 -- 1,829 Other Consumer 5,931 14 5,945 5,463 16 5,479 - ------------------------------------------------------------------------------------------------------------------------------ Total Consumer 33,475 135 33,610 30,120 170 30,290 - ------------------------------------------------------------------------------------------------------------------------------ Total Loans 65,227 17,401 82,628 60,742 18,485 79,227 Unearned Income (370) (115) (485) (283) (177) (460) - ------------------------------------------------------------------------------------------------------------------------------ Loans, Net of Unearned Income $ 64,857 $ 17,286 $ 82,143 $ 60,459 $ 18,308 $ 78,767 - ------------------------------------------------------------------------------------------------------------------------------
Certain loans that meet the accounting definition of a security are classified as loans and are measured pursuant to SFAS 115, along with related derivatives. Bonds that have been issued by foreign governments (such as Mexico, Venezuela and Brazil) to financial institutions, including the Corporation, as part of a debt renegotiation (i.e., "Brady Bonds") are subject to the provisions of SFAS 115. In connection with the adoption of the SFAS 115 Implementation Guide in the fourth quarter of 1995, the Corporation reassessed the classification of all securities held. The result of the one-time reassessment was the reclassification of the entire held-to-maturity portfolio of Brady Bonds, other loans, and related derivatives (measured pursuant to SFAS 115), to available-for-sale. The amount of the reclassification was $1,972 million at amortized cost. Unrealized net losses related to the transfer were $454 million after-tax. A significant portion of the Brady Bonds within the available-for-sale portfolio are collateralized by zero-coupon United States Treasury obligations. The interest on Brady Bonds is also collateralized for up to two years. Management continually evaluates and monitors the ability of each of the countries within the portfolio to perform and believes that any unrealized losses on its available-for-sale portfolio are temporary in nature. The amortized cost and estimated fair value of loans measured pursuant to SFAS 115, including the impact of related derivatives, for the dates indicated were as follows:
Gross Gross Amortized Unrealized Unrealized Fair December 31, 1995 (in millions) Cost Gains Losses Value - ------------------------------------------------------------------------------------ Total (and Available-for-Sale) $2,350 $ 25 $ 813 $1,562 - ------------------------------------------------------------------------------------ December 31, 1994 - ------------------------------------------------------------------------------------ Available-for-Sale $1,635 $150 $ 369 $1,416 Held-to-Maturity 1,998 10 848 1,160 - ------------------------------------------------------------------------------------ Total $3,633 $160 $1,217 $2,576 - ------------------------------------------------------------------------------------
The 1995 results included a net loss of $86 million (gross gains of $167 million and gross losses of $253 million) related to the disposition of emerging market securities previously recorded as available-for-sale. The sale was part of the Corporation's ongoing efforts to manage its emerging markets exposure in its available-for-sale portfolio. The 1994 results included a net gain of $127 million (gross gains of $146 million and gross losses of $19 million) on the disposition of emerging market securities. Cash proceeds from the sale of these available-for-sale loans during 1995 and 1994 were $1,130 million and $411 million, respectively. 55 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 6 ALLOWANCE FOR CREDIT LOSSES The table below summarizes the changes in the allowance for credit losses during the periods indicated.
Year Ended December 31, (in millions) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------- Balance at Beginning of Year $ 2,480 $ 3,020 $ 3,025 Provision for Losses 478 550 1,259(b) Charge-Offs (825) (1,266) (1,624)(b) Recoveries 272 319 343 - ------------------------------------------------------------------------------------------------------------------------- Net Charge-Offs (553) (947) (1,281) Charge for Assets Transferred to Held for Accelerated Disposition -- (148) -- Other (26)(a) 5 17(c) - ------------------------------------------------------------------------------------------------------------------------- Balance at End of Year $ 2,379 $ 2,480 $ 3,020 - -------------------------------------------------------------------------------------------------------------------------
(a) Includes $28 million related to the sale of banking operations in southern and central New Jersey. (b) Includes $55 million related to the decision to accelerate the disposition of certain nonperforming residential mortgage loans. (c) Includes $19 million increase in the allowance related to the acquisition by Texas Commerce of certain assets of First City Bancorporation of Texas, Inc. Completion of the Brazilian refinancing package during 1994 essentially brought to a close the broad rescheduling programs begun in the mid-1980s. Accordingly, during the second quarter of 1994, the Corporation combined its then remaining emerging markets allowance with its general allowance for credit losses. - -------------------------------------------------------------------------------- 7 NONPERFORMING ASSETS The following table sets forth the nonperforming assets and contractually past-due loans of the Corporation at the dates indicated. NONPERFORMING ASSETS
December 31, (in millions) 1995 1994 - ------------------------------------------------------------------ Total Domestic Nonperforming Loans $626 $ 618 Total Foreign Nonperforming Loans 230 311 - ------------------------------------------------------------------ Total Nonperforming Loans 856(a) 929 Assets Acquired as Loan Satisfactions (primarily Real Estate) 50(a) 210 - ------------------------------------------------------------------ Total Nonperforming Assets $906 $1,139 - ------------------------------------------------------------------ Contractually Past-Due Loans(b) $361 $ 330 - ------------------------------------------------------------------
(a) Includes $727 million of loans considered impaired under SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). In addition, on January 1, 1995, $122 million of assets for which the Corporation did not have possession were reclassified from Assets Acquired as Loan Satisfactions to Nonperforming Loans pursuant to the adoption of SFAS 114. (b) Accruing loans past-due 90 days or more as to principal and interest, which are not characterized as nonperforming loans. Includes consumer loans, exclusive of residential mortgage loans, which are generally not classified as nonperforming but, rather, are charged off on a formula basis upon reaching certain specified stages of delinquency. The following table presents the Corporation's assets held for accelerated disposition at the dates indicated: ASSETS HELD FOR ACCELERATED DISPOSITION
December 31, (in millions) 1995 1994 - -------------------------------------------------------------------------- Loans(a) $412 $336 Real Estate Owned -- 190 - -------------------------------------------------------------------------- Total Assets Held for Accelerated Disposition $412 $526 - --------------------------------------------------------------------------
(a) Includes $412 million and $87 million of loans that were performing at December 31, 1995 and 1994, respectively. The following table presents the amount of interest income recorded by the Corporation on its nonaccrual and renegotiated loans and the amount of interest income on the carrying value of such loans that would have been recorded had these loans been current in accordance with their original terms (interest at original rates). 56 59 Chemical Banking Corporation and Subsidiaries - -------------------------------------------------------------------------------- IMPACT OF NONPERFORMING LOANS ON INTEREST INCOME(a)
Year Ended December 31, (in millions) 1995 1994 1993 - ------------------------------------------------------------------------------------- Domestic: Gross Amount of Interest That Would Have Been Recorded at the Original Rate $ 58 $ 80 $ 180 Interest That Was Recognized in Income (15) (28) (38) - ------------------------------------------------------------------------------------- Negative Impact-Domestic 43 52 142 - ------------------------------------------------------------------------------------- Foreign: Gross Amount of Interest That Would Have Been Recorded at the Original Rate 17 22 54 Interest That Was Recognized in Income (7) (9) (85) - ------------------------------------------------------------------------------------- Negative (Positive) Impact-Foreign 10 13 (31) - ------------------------------------------------------------------------------------- Total Negative Impact on Interest Income $53 $ 65 $ 111 - -------------------------------------------------------------------------------------
(a) Excludes nonperforming loans held for accelerated disposition. IMPAIRED LOANS The following table presents the Corporation's impaired loans disclosures. The Corporation uses the discounted cash flow method as its primary method for valuing its impaired loans.
December 31, (in millions) 1995 - --------------------------------------------------------------- Impaired Loans with an Allowance $425 Impaired Loans without an Allowance(a) 302 - --------------------------------------------------------------- Total Impaired Loans $727 - --------------------------------------------------------------- Allowance for Impaired Loans under SFAS 114(b) $136 - --------------------------------------------------------------- Average Balance of Impaired Loans During the Year Ended December 31, 1995 $876 - --------------------------------------------------------------- Interest Income Recognized on Impaired Loans During the Year Ended December 31, 1995 $ 15 - ---------------------------------------------------------------
(a) Impaired loans for which the discounted cash flow, collateral value or market price equals or exceeds the carrying value of the loan. Such loans do not require an allowance under SFAS 114. (b) The Allowance for Impaired Loans under SFAS 114 is a part of the Corporation's overall Allowance for Credit Losses. - -------------------------------------------------------------------------------- 8 SHORT-TERM AND OTHER BORROWED FUNDS
(in millions) 1995 1994 1993 - ------------------------------------------------------------------------------------------ Federal funds purchased and securities sold under repurchase agreements: Balance at year end $25,675 $23,098 $12,857 Average daily balance during the year 25,299 19,154 15,461 Maximum month-end balance 30,911 23,241 16,071 Weighted-average rate at December 31 5.85% 5.46% 2.85% Weighted-average rate during the year 5.70% 4.41% 3.05% - ------------------------------------------------------------------------------------------ Other Borrowed Funds-Commercial paper: Balance at year end $4,852 $4,075 $2,423 Average daily balance during the year 3,955 2,760 2,438 Maximum month-end balance 4,852 4,075 2,764 Weighted-average rate at December 31 5.52% 5.18% 2.81% Weighted-average rate during the year 5.73% 4.29% 3.42% - ------------------------------------------------------------------------------------------ Other Borrowed Funds-Other borrowings: Balance at year end $4,386 $3,055 $4,431 Average daily balance during the year 3,166 2,965 3,382 Maximum month-end balance 5,345 5,607 9,428 Weighted-average rate at December 31 6.53% 6.35% 8.31% Weighted-average rate during the year 6.41% 6.12% 6.56% - ------------------------------------------------------------------------------------------
Federal funds purchased represent 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 of one year or less, and various other borrowings in domestic and foreign offices that generally have maturities of one year or less. At December 31, 1995, the Corporation had unused lines of credit available for general corporate purposes, including the payment of commercial paper borrowings, amounting to $750 million. - -------------------------------------------------------------------------------- 9 FEES FOR OTHER FINANCIAL SERVICES AND OTHER REVENUE Details of fees for other financial services were as follows:
Year Ended December 31, (in millions) 1995 1994 1993 - --------------------------------------------------------------------------------------- Fees in Lieu of Compensating Balances $187 $203 $209 Commissions on Letters of Credit and Acceptances 154 151 155 Loan Commitment Fees 87 86 90 Mortgage Servicing Fees 94 79 63 Other 328 314 312 - --------------------------------------------------------------------------------------- Total Fees for Other Financial Services $850 $833 $829 - ---------------------------------------------------------------------------------------
Details of other revenue were as follows:
Year Ended December 31, (in millions) 1995 1994 1993 - ---------------------------------------------------------------------------------------- Revenue from Equity-Related Investments $378 $362 $278 Net Gains (Losses) on Emerging Markets Securities Sales (86) 127 306 Gain on the Sale of the Corporation's Investment in Far East Bank & Trust Company 85 -- -- Residential Mortgage Origination/Sales Activities 55 (15) 6 All Other Revenue 156 138 120 - ---------------------------------------------------------------------------------------- Total Other Revenue $ 588 $612 $710 - ----------------------------------------------------------------------------------------
57 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 10 LONG-TERM DEBT The accompanying table is a summary of long-term debt (net of unamortized original issue debt discount, where applicable) displayed by remaining maturity at December 31, 1995. The distribution by remaining maturity is based on contractual maturity.
Under Due Due 1995 1994 By remaining maturity at December 31, (in millions) 1 year 1-5 years 6-15 years Total Total - ----------------------------------------------------------------------------------------------------------------------------------- Parent Company: Senior Debt: Fixed Rate $30 $663 $20 $713 $647 Variable Rate 805 1,180 325 2,310 2,563 Modified Interest Rates(a) 5.56 - 9.80% 5.75 - 8.13% 5.73 - 10.21% 5.56 - 10.21% 3.23 - 10.85% Subordinated Debt: Fixed Rate -- 699 1,467 2,166 1,895 Variable Rate -- 142 100 242 242 Modified Interest Rates(a) --% 6.19 - 10.38% 5.84 - 8.63% 5.84 - 10.38% 5.64 - 10.38% - ----------------------------------------------------------------------------------------------------------------------------------- Subtotal $835 $2,684 $1,912 $5,431 $5,347 - ----------------------------------------------------------------------------------------------------------------------------------- Subsidiaries: Senior Debt: Fixed Rate $15 $208 $100 $323 $391 Variable Rate 10 -- -- 10 710 Modified Interest Rates(a) 10.48% 6.43 - 10.26% 10.23 - 10.26% 6.43 - 10.48% 3.76 - 10.52% Subordinated Debt: Fixed Rate -- -- 969 969 947 Variable Rate -- 346 250 596 596 Modified Interest Rates(a) --% 5.75 - 6.21% 6.00 - 7.25% 5.75 - 7.25% 5.64 - 7.25% - ----------------------------------------------------------------------------------------------------------------------------------- Subtotal $25 $554 $1,319 $1,898 $2,644 - ----------------------------------------------------------------------------------------------------------------------------------- Total Long-Term Debt $860 $3,238 $3,231 $7,329 $7,991 - -----------------------------------------------------------------------------------------------------------------------------------
(a) The interest rates shown have been adjusted to reflect the effect of ALM derivative contracts, primarily interest rate swaps, used to convert a majority of the Corporation's fixed-rate debt to variable rates. The interest rates shown for variable rate issues, including those converted to variable rate, are those in effect at December 31, 1995. The Corporation issues long-term debt denominated in various currencies, predominately in U.S. dollars, with both fixed and variable interest rates. Fixed-rate debt outstanding at December 31, 1995 matures at various dates through 2010 at contractual interest rates ranging from 5.00% to 11.83%. The consolidated weighted-average contractual interest rate on fixed-rate debt was 7.82% at both December 31, 1995 and 1994. Variable-rate debt outstanding, with contractual interest rates ranging from 5.34% to 6.63% at December 31, 1995, matures at various dates through 2005. The consolidated weighted-average interest rates on variable-rate debt at December 31, 1995 and 1994 were 6.06% and 5.64%, respectively. Included in long-term debt are equity commitment notes and equity contract notes totaling $693 million at both December 31, 1995 and 1994. Equity commitment notes require that the Corporation issue, prior to the maturity of such notes, shares of common stock or perpetual preferred stock or other securities of the Corporation (collectively, "Capital Securities") approved by the Federal Reserve Board equal to 100% of the original aggregate principal amount of the notes. Equity contract notes require the Corporation to exchange the notes at maturity for Capital Securities with a market value equal to the principal amount of the notes or, at the Corporation's option, to pay the principal of the notes from amounts representing designated proceeds from the sale of Capital Securities. At December 31, 1995, the Corporation had designated proceeds from the sale of Capital Securities in an amount sufficient to satisfy fully the dedication requirements of its equity commitment and equity contract notes. The Corporation has guaranteed several long-term debt issues of its subsidiaries. Such guaranteed debt totaled $420 million and $435 million at December 31, 1995 and 1994, respectively. At December 31, 1995, long-term debt aggregating $200 million was redeemable at the option of the Corporation, in whole or in part, prior to maturity, based on the terms specified in the respective notes. The aggregate principal amount of debt that matures in each of the five years subsequent to December 31, 1995 is $860 million in 1996, $738 million in 1997, $758 million in 1998, $699 million in 1999, and $1,043 million in 2000. 58 61 Chemical Banking Corporation and Subsidiaries - -------------------------------------------------------------------------------- 11 PREFERRED STOCK At December 31, 1995, the Corporation was authorized to issue 200 million shares of preferred stock, in one or more series, with a par value of $1 per share. At December 31, 1995 and 1994, 26 million and 30 million shares, respectively, of preferred stock were outstanding. During 1995, the Corporation called all of the outstanding shares of its 10% convertible preferred stock for redemption. Substantially all of the 10% convertible preferred stock was converted prior to the redemption date, at the option of the holders thereof, into approximately 7.6 million shares of the Corporation's common stock. The shares of common stock issued upon the conversion were issued from treasury. At December 31, 1995, four million shares of preferred stock designated as Junior Participating Preferred Stock were reserved for issuance under the Corporation's Shareholders' Rights Plan (see Note Eighteen). During 1994, the Corporation redeemed all 33.6 million outstanding shares of its Adjustable Rate Cumulative Preferred Stock, Series C. The redemption price was $12.36 per share (which included a premium of $.36 per share) plus accrued but unpaid dividends to the date of redemption. During 1994, the Corporation issued two million shares of Adjustable Rate Cumulative Preferred Stock, Series L Preferred ("Adjustable Rate, Series L"), with a stated value of $100 per share. Dividends on shares of each preferred stock issue are payable quarterly and are cumulative. All the preferred stocks outstanding have preference over the Corporation's common stock with respect to the payment of dividends and the distribution of assets in the event of a liquidation or dissolution of the Corporation. The following is a summary of the Corporation's preferred stocks outstanding at December 31, 1995 and 1994:
(Dollars and shares in millions, Stated Outstanding at December 31, Earliest Redemption Rate in Effect at except per share data and rates) Value Shares 1995 1994 Redemption Date Price(b) December 31, 1995 - ------------------------------------------------------------------------------------------------------------------------------------ 10.96% Cumulative $ 25.00 4.0 $100 $100 6/30/2000 $ 25.00 10.960% 10.00% Convertible 50.00 4.0 -- 200 -- -- -- 8.375% Cumulative 25.00 14.0 350 350 6/1/1997 25.00 8.375% 7.92% Cumulative 100.00 2.0(a) 200 200 10/1/1997 100.00 7.920% 7.58% Cumulative 100.00 2.0(a) 200 200 4/1/1998 100.00 7.580% 7.50% Cumulative 100.00 2.0(a) 200 200 6/1/1998 100.00 7.500% Adjustable Rate, Series L 100.00 2.0 200 200 6/30/1999 100.00 5.502(c) - ------------------------------------------------------------------------------------------------------------------------------------ Total Preferred Stock $1,250 $1,450 - ------------------------------------------------------------------------------------------------------------------------------------
(a) Such shares are represented by depositary shares, each representing one-quarter share of preferred stock. (b) Plus accrued but unpaid dividends. (c) Floating rates are based on certain money market rates. The minimum and maximum rates are 4.50% and 10.50%, respectively for the Adjustable Rate, Series L. - -------------------------------------------------------------------------------- 12 COMMON STOCK At December 31,1995, the Corporation was authorized to issue 400 million shares of common stock, $1 par value per share. In December 1995, the shareholders of the Corporation approved an amendment to increase the number of authorized shares of common stock to 750 million. The amendment will be effective upon consummation of the merger with Chase. At December 31, 1995, 1994, and 1993, the number of shares of common stock issued and outstanding were as follows:
December 31, 1995 1994 1993 - ---------------------------------------------------------------------------- Issued 254,930,904 254,009,187 253,397,864 Held in Treasury (4,414,830) (9,497,533) (515,782) - ---------------------------------------------------------------------------- Outstanding 250,516,074 244,511,654 252,882,082 - ----------------------------------------------------------------------------
During 1995, the Corporation repurchased approximately 14.4 million shares of its outstanding common stock in the open market. These share repurchases have been utilized to offset the effects of common stock issuances upon the exercise of options in various outstanding employee stock option and incentive plans. During 1995, approximately 12.8 million shares (11.9 million from treasury) were issued under various employee stock option and incentive plans. Additionally, in 1995, 7.6 million shares of common stock were issued (also from treasury) upon the conversion of the Corporation's 10% convertible preferred stock. 59 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- As of December 31, 1995, approximately 15,131,468 shares of common stock were reserved for issuance under various employee incentive and stock purchase plans and under the Corporation's Dividend Reinvestment Plan. Under the Corporation's Dividend Reinvestment Plan, stockholders may reinvest all or part of their quarterly dividends in shares of common stock. Common stock issued, or distributed from treasury, during 1995, 1994 and 1993 was as follows:
Year Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------- Employee Benefit and Compensation Plans 12,692,961(a) 1,210,011 1,733,973 Dividend Reinvestment and Stock Purchase Plans 121,065 456,767 539,919 Conversion of 10% Convertible Preferred Stock 7,639,424 -- -- Public Offerings -- -- 3,800,000 - ------------------------------------------------------------------------------------------- Total Shares Issued, or Distributed from Treasury(b) 20,453,450 1,666,778 6,073,892 - -------------------------------------------------------------------------------------------
(a) Amount includes 8,886,969 of common stock issued related to the Employee Stock Option Plan. See Note Fourteen for a discussion of the Corporation's Employee Stock Option Plan. (b) During 1995 and 1994, 19,530,163 and 1,055,455, respectively, of these shares were distributed from treasury. No shares were distributed from treasury in 1993. 13 POSTRETIREMENT BENEFITS Pension Plans: The Corporation has a noncontributory pension plan that covers substantially all domestic employees and provides for defined benefits pursuant to a cash balance feature and a final-average-pay feature (the "noncontributory pension plan"). Contributions will be made to the noncontributory pension plan within the range of levels permitted under applicable law. The accompanying tables present the aggregate funded status and the net asset amounts included in other assets and the components of expense included in employee benefits expense for the Corporation's noncontributory pension plan. FUNDED STATUS OF PENSION PLANS
December 31, (in millions) 1995 1994 - ----------------------------------------------------------------------------------------- Actuarial Present Value of Benefit Obligation: Accumulated Benefit Obligation Vested Benefits $ (974) $ (817) Nonvested Benefits (51) (44) Additional Benefits Based on Future Salary Levels (160) (135) - ----------------------------------------------------------------------------------------- Projected Benefit Obligation for Service Rendered to Date (1,185) (996) Plan Assets at Fair Value, primarily Listed Stocks, U.S. Bonds and Commingled Funds 1,525 1,296 - ----------------------------------------------------------------------------------------- Plan Assets in Excess of Projected Benefit Obligation 340 300 Unrecognized Net Loss 76 161 Unrecognized Net Asset (46) (60) Unrecognized Prior Service (Benefit) Cost (34) (31) - ----------------------------------------------------------------------------------------- Prepaid Pension Cost $ 336 $ 370 - ----------------------------------------------------------------------------------------- Annualized Actuarial Assumptions: Discount Rate 7.25% 8.75% Rate of Increase in Future Compensation 5.00 5.00 - -----------------------------------------------------------------------------------------
COMPONENTS OF NET PENSION EXPENSE
Year Ended December 31, (in millions) 1995 1994 1993 - ---------------------------------------------------------------------------------------- Cost of Benefits Earned $ 85 $ 96 $ 87 Interest Cost on Projected Benefit Obligation 81 72 69 Actual (Gain) Loss on Plan Assets (326) 15 (157) Net Amortization and Deferral 192 (145) 24 - ---------------------------------------------------------------------------------------- Net Periodic Pension Expense $ 32 $ 38 $ 23 - ---------------------------------------------------------------------------------------- Annualized Actuarial Assumptions: Discount Rate 8.75% 7.50% 8.75% Assumed Rate of Long-Term Return on Plan Assets 9.50 8.50 9.50 Rate of Increase in Future Compensation 5.00 5.00 6.00 - ----------------------------------------------------------------------------------------
In addition to the noncontributory pension plan, the Corporation also maintains a number of defined benefit pension plans in foreign jurisdictions covering the employees of certain foreign operations. Contributions are made to the foreign plans in accordance with local plan and legal requirements. The Corporation has elected not to prefund fully several defined benefit plans based on plan and legal requirements. At December 31, 1995 and 1994, the Corporation's accrued liability included in accrued expenses related to those plans totaled $56 million and $46 million, respectively. The employee benefits expense related to these plans was $12 million in 1995, $11 million in 1994, and $8 million in 1993. The Corporation has several defined contribution plans. The most significant is a Savings Incentive Plan ("SIP") offered to domestic employees. Subject to certain limits, the SIP allows employees to make tax-deferred investments and earn matching contributions from the Corporation. Employee benefits expense related to defined contribution plans totaled $58 million in 1995, $51 million in 1994, and $42 million in 1993. 60 63 Chemical Banking Corporation and Subsidiaries - -------------------------------------------------------------------------------- Postretirement Medical and Life Insurance Benefits: The Corporation provides postretirement medical and life insurance benefits to substantially all domestic employees hired prior to April 15, 1992, and to certain foreign employees. The employees must meet certain age and length-of-service requirements at retirement. The amount of benefits provided varies with length of service and date of hire. The Corporation has not prefunded these benefits. Effective January 1, 1995, the Corporation adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"), for postretirement medical benefits for its foreign employees. Consistent with the January 1, 1993 adoption of SFAS 106 for domestic employees, the Corporation elected to expense the entire unrecognized accumulated obligation as of the date of adoption of SFAS 106 related to its foreign employees via a one-time pre-tax charge of $17 million ($11 million after-tax). The accompanying tables present the components of the liability included in accrued expenses, and the periodic expense included in employee benefits expense related to providing postretirement medical and life insurance benefits. The discount rates and rates of increase in future compensation used to determine the actuarial values for these benefits generally are consistent with those used for the noncontributory pension plan. For 1995, the assumed medical benefits cost trend rate used to measure the expected cost of benefits was 11% for 1996, declining by 1% per year to a floor of 6%. The effect of a 1% increase in the assumed medical benefits cost trend rate would be to increase each of the December 31, 1995 accumulated obligation and related periodic expense by approximately 8%. COMPONENTS OF POSTRETIREMENT MEDICAL AND LIFE INSURANCE LIABILITY
December 31, (in millions) 1995 1994 - ------------------------------------------------------------- Accumulated Benefit Obligation: Retirees $ 455 $ 391 Active Employees 73 57 - ------------------------------------------------------------- Accumulated Benefit Obligation 528 448 Unrecognized Net Loss (72) (24) - ------------------------------------------------------------- Accrued Postretirement Medical and Life Insurance Benefits $ 456 $ 424 - -------------------------------------------------------------
The unrecognized net loss at December 31, 1995 resulted primarily from the change in the discount rate at December 31, 1995. COMPONENTS OF NET POSTRETIREMENT MEDICAL AND LIFE INSURANCE EXPENSE
Year Ended December 31, (in millions) 1995 1994 1993 - ---------------------------------------------------------------------------------------- Cost of Benefits Earned $ 4 $ 4 $ 3 Interest Cost on Accumulated Benefit Obligation 38 36 35 Amortization of Net Loss -- 2 -- - ---------------------------------------------------------------------------------------- Net Postretirement Medical and Life Insurance Expense $42 $42 $ 38 - ----------------------------------------------------------------------------------------
14 EMPLOYEE STOCK INCENTIVE PLANS EXECUTIVE INCENTIVE PLANS The Corporation has a long-term stock incentive plan (the "Plan") which provides for stock-based awards, including stock options, restricted stock, and restricted stock units, to certain key employees. Pursuant to the Plan, stock options are issued at prices at least equal to the market value of the Corporation's common stock on the grant date. Generally, options cannot be exercised until one year after the grant date and become exercisable over various periods as determined at the time of grant. Options generally expire ten years after the grant date. No compensation expense is required to be recognized in conjunction with such options granted or exercised; amounts received upon the exercise of options are recorded as common stock and capital surplus. Restricted stock and restricted stock units are issued under the Plan at no cost to the recipient. Restricted stock is awarded subject to the risk of forfeiture until certain restrictions, including continued employment for a specified number of years, have lapsed. The recipient is, however, entitled to the voting rights and dividends on the stock. Restricted stock units entitle their holders to receive shares of common stock after a certain period of continued employment. The holders of restricted stock units are entitled to receive cash payments equivalent to the dividends that would have been received if the units were shares of common stock. Most restricted stock and restricted stock units awarded under the Plan during 1995 and 1994 vest when the Corporation's common stock price reaches and sustains targeted prices for a minimum period of time. At December 31, 1995, more than half of all such awards had vested as a result of the first two targets having been attained. During 1995, restricted stock and restricted stock units totaling 858,680 were issued under the Plan. The number of such awards issued under the Plan during 1994 totaled 901,300. Compensation expense relating to most restricted stock and restricted stock units (i.e., for awards where the number of shares to be issued at the end of the restricted period is determined on the grant date) is equal to the market value of the Corporation's common stock on the grant date; for other awards, compensation expense generally is equal to the market value on the date the restrictions lapse (i.e., for awards that are forfeitable in the event that targets are not attained or that are payable in cash). Compensation expense is recognized over the restricted period. The following table presents a summary of the aggregate option transactions under the Plan during 1995 and 1994. 61 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
1995 1994 Stock Stock Year ended December 31, Options Option Price Options Option Price - ------------------------------------------------------------------------------------------------------------------------- Options Outstanding, January 1 14,066,326 $10.88 - $43.13 11,440,548 $10.88 - $43.13 Granted 3,127,300 37.82 - 51.25 3,335,337 21.80 - 40.19 Exercised 1,835,515 10.88 - 43.13 457,620 10.88 - 39.06 Cancelled 188,645 25.13 - 47.33 251,939 10.88 - 43.13 - ------------------------------------------------------------------------------------------------------------------------- Options Outstanding, December 31 15,169,466 $10.88 - $51.25 14,066,326 $10.88 - $43.13 - ------------------------------------------------------------------------------------------------------------------------- Options Exercisable at December 31 8,964,994 $10.88 - $47.33 7,546,369 $10.88 - $43.13 - -------------------------------------------------------------------------------------------------------------------------
At December 31, 1995 and 1994, 201,422 and 197,924 shares, respectively, of the Corporation's common stock were reserved for issuance and available for future awards under the Plan. In January of each year the Corporation reserves additional shares equal to 1.5% of its outstanding shares of common stock for future awards under the Plan. EMPLOYEE STOCK OPTION PLAN In 1994, the Corporation granted 20,025,250 non-qualified stock options to purchase shares of its common stock to all full-time (500 options each) and part-time (250 options each) employees (excluding senior officers). These options were granted at the $40.50 market price of the Corporation's common stock on June 15, 1994 and were exercisable in three installments if the Corporation's common stock price closed at, or above, certain targeted prices for a pre-specified period. During 1995, all three minimum target prices were met and maintained for the specified periods, giving grant recipients the right to exercise all of their options. Any options not exercised by June 14, 2004 will be forfeited as of that date. Neither the grant nor the exercise of the options result in a charge to the Corporation's earnings under current accounting rules. The following table presents the activity in the employee stock option plan during 1995 and 1994.
1995 1994 Number of Number of Year ended December 31, Options Option Price Options Option Price - -------------------------------------------------------------------------------------------------------- Options Outstanding, January 1 18,784,750 $40.50 -- $ -- Granted -- -- 20,025,250 40.50 Exercised 8,884,550 40.50 -- -- Cancelled 1,074,475 40.50 1,240,500 40.50 - -------------------------------------------------------------------------------------------------------- Options Outstanding, December 31 8,825,725 $40.50 18,784,750 $40.50 - --------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 15 RESTRICTIONS ON CASH AND INTERCOMPANY FUNDS TRANSFERS Federal Reserve Board regulations require depository institutions to maintain cash reserves with a Federal Reserve Bank. The average amount of reserve balances deposited by the Corporation with various Federal Reserve Banks was approximately $675 million during 1995 and $1 billion during 1994. Restrictions imposed by Federal law prohibit the Corporation and certain other affiliates from borrowing from banking subsidiaries unless the loans are secured in specified amounts. Such secured loans to the Corporation or to each of certain 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. The Corporation was well within these limits throughout the year. The principal sources of the Corporation's income (on a parent company-only basis) are dividends and interest from Chemical Bank and the other banking and non-banking subsidiaries of the Corporation. Federal law imposes limitations on the payment of dividends by the subsidiaries of the Corporation that are state member banks of the Federal Reserve System (a "state member bank") or are national banks. Under such limitations, dividend payments by such banks are limited to the lesser of (i) the amount of "undivided profits" (as defined) and (ii) absent regulatory approval, an amount not in excess of "net income" (as defined) for the current year plus "retained net income" (as defined) for the preceding two years. Non-bank subsidiaries of the Corporation are not subject to such limitations. In accordance with the foregoing restrictions, the Corporation's bank subsidiaries could, during 1996, without the approval of their relevant banking regulators, pay dividends of approximately $423 million to their respective bank holding companies, plus an additional amount equal to their net income from January 1, 1996 through the date in 1996 of any such dividend payment. In determining whether, and to what extent, to pay dividends, each subsidiary bank must also consider the effect of applicable regulatory capital guidelines and leverage limitations. 62 65 Chemical Banking Corporation and Subsidiaries - -------------------------------------------------------------------------------- In addition to dividend restrictions, the Federal Reserve Board, the Office of 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 the Corporation 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. - ------------------------------------------------------------------------------- 16 RESTRUCTURING CHARGES AND OTHER EXPENSE Restructuring Charges: In December 1994, the Corporation announced a two-year program to improve earnings per share and return on equity and, as a result, recorded a pre-tax restructuring charge of $260 million. The charge is related to severance and other termination-related costs of $138 million associated with the elimination of 3,700 positions and costs of $122 million for the disposition of certain facilities, premises and equipment, and the termination of leases. The staff reductions have been tied to specific expense-reduction initiatives, such as commercial lending re-engineering, branch network rationalization, and the process improvement program at Texas Commerce and have occurred within the Global Bank, Consumer and Relationship Banking and Corporate sectors. At December 31, 1995, the Corporation had eliminated approximately 2,800 of the 3,700 positions targeted for elimination. Also at December 31, 1995, the reserve balance associated with this charge was approximately $115 million. During 1994, the Corporation also included in noninterest expense a restructuring charge of $48 million related to the closing of 50 New York branches and a staff reduction of 650. In 1993, the Corporation completed an assessment of costs associated with the merger of the Corporation and MHC on December 31, 1991, and, as a result, included in noninterest expense a charge of $115 million. Also in 1993, the Corporation's Texas Commerce subsidiary incurred a restructuring charge of $43 million in connection with the acquisition of assets and assumption of liabilities of four banks (the "First City Banks") of the former First City Bancorporation of Texas, Inc. from the FDIC. At December 31, 1995, the remaining reserve related to the New York branch restructuring charge taken in 1994 and both restructuring charges taken in 1993 was immaterial. Other Expense: Details of other expense were as follows:
Year Ended December 31, (in millions) 1995 1994 1993 - -------------------------------------------------------------------------------- Other Expense:(a) Professional Services $ 205 $225 $193 Marketing Expense 178 186 187 FDIC Assessments 77(b) 160 175 Telecommunications 148 153 131 Amortization of Intangibles 101 115 106 All Other 634 722 666 - -------------------------------------------------------------------------------- Total Other Expense $1,343 $1,561 $1,458 - --------------------------------------------------------------------------------
(a) Certain prior period amounts have been reclassified to conform with the current year's presentation. (b) Reflects the impact of a reduction in the FDIC assessment rate. - ------------------------------------------------------------------------------- 17 INCOME TAXES The Corporation accounts for income taxes pursuant to SFAS 109. The Corporation adopted SFAS 109 as of January 1, 1993 on a prospective basis and recognized a favorable cumulative effect on income tax expense of $450 million. A valuation reserve was established as of January 1, 1993, in accordance with the requirements of SFAS 109, for tax benefits available to the Corporation but for which realization was in doubt. The Corporation's valuation reserve for Federal taxes was $86 million at December 31, 1995, relating primarily to tax benefits associated with foreign operations which are subject to tax law limitations on realization. Deferred income tax expense (benefit) results from differences between amounts of assets and liabilities as measured for income tax return and financial reporting purposes. The significant components of Federal deferred tax assets and liabilities as of December 31, 1995 and 1994 are reflected in the following table. 63 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------
December 31, (in millions) 1995 1994 - ------------------------------------------------------------------------------------- Federal Deferred Tax Assets: Reserves for Credit Losses $ 491 $ 510 Reserves Other Than Credit Losses 417 487 Fair Value Adjustments--Available-for-Sale Securities 162 230 Interest and Fee Accrual Differences 84 225 Foreign Operations 237 188 Postretirement Benefits 159 144 Other 138 179 - ------------------------------------------------------------------------------------- Gross Federal Deferred Tax Assets $1,688 $1,963 - ------------------------------------------------------------------------------------- Federal Deferred Tax Liabilities: Leasing Transactions $ 489 $ 563 Pension Benefits 110 134 Depreciation and Amortization 122 148 Other 126 185 - ------------------------------------------------------------------------------------- Gross Federal Deferred Tax Liabilities $ 847 $1,030 - ------------------------------------------------------------------------------------- Deferred Federal Tax Asset Valuation Reserve $ 86 $ 115 - ------------------------------------------------------------------------------------- Net Federal Deferred Tax Asset After Valuation Reserve $ 755 $ 818 - -------------------------------------------------------------------------------------
A valuation reserve approximating $148 million at December 31, 1995, has been established against all New York State and City deferred tax assets. The Corporation has recorded deferred New York State and City tax liabilities of approximately $130 million, net of deferred tax assets and related valuation reserve, as of December 31, 1995. Foreign deferred taxes are approximately $150 million as of December 31, 1995 and a federal deferred tax asset has been recorded in accordance with SFAS 109. The Corporation expects that when paid, these foreign taxes will be creditable against its federal income tax liability. The components of income tax expense included in the Consolidated Statement of Income were as follows:
Year Ended December 31, (in millions) 1995 1994 1993 - ------------------------------------------------------------------------------------- Current Income Tax Expense (Benefit): Federal $ 768 $489 $ 360 Foreign 204 122 201 State and Local 162 197 203 - ------------------------------------------------------------------------------------- Total Current 1,134 808 764 - ------------------------------------------------------------------------------------- Deferred Income Tax Expense (Benefit): Federal (84) 68 (229) Foreign 78 28 (17) State and Local 32 14 21 - ------------------------------------------------------------------------------------- Total Deferred 26 110 (225) - ------------------------------------------------------------------------------------- Total Income Tax Expense $ 1,160 $918 $ 539 - -------------------------------------------------------------------------------------
Not reflected in the preceding table are the tax effects of unrealized gains and losses, with respect to available-for-sale securities that are recorded directly in stockholders' equity, pursuant to SFAS 115 and certain tax benefits associated with the Corporation's employee stock plans. Stockholders' equity decreased by $19 million and $145 million, respectively, in 1995 and 1993 and increased by $472 million in 1994 due to the tax effects. The tax expense applicable to securities gains and losses for the years 1995, 1994 and 1993 was $47 million, $27 million, and $62 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) 1995 1994 1993 - -------------------------------------------------------------------------------------------------- Statutory U.S. Federal Tax Expense $ 1,042 $ 774 $ 738 Increase (Decrease) in Tax Expense Resulting From: (Recognized) Unrecognized Tax Benefits -- -- (331) Tax-Exempt Interest and Dividends (39) (34) (34) State and Local Income Taxes, Net of Federal Income Tax Benefit 126 137 145 Nondeductible Expense 65 22 24 Other--Net (34) 19 (3) - --------------------------------------------------------------------------------------------------- Total Income Tax Expense $ 1,160 $ 918 $ 539 - ---------------------------------------------------------------------------------------------------
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) 1995 1994 1993 - ------------------------------------------------------------------------- Domestic $2,561 $1,665 $1,783 Foreign(a) 415 547 325 - -------------------------------------------------------------------------- Income Before Income Taxes $2,976 $2,212 $2,108 - --------------------------------------------------------------------------
(a) For purposes of this disclosure, foreign income is defined as income generated from operations located outside the United States. - --------------------------------------------------------------------------- 18 SHAREHOLDERS' RIGHTS PLAN At December 31, 1995, the Corporation had in place a Shareholders' Rights Plan. The Shareholders' Rights Plan contains provisions intended to protect stockholders in the event of unsolicited offers or attempts to acquire the Corporation, including offers that do not treat all stockholders equally, acquisitions in the open market of shares constituting control without offering fair value to all stockholders, and other coercive or unfair takeover tactics that could impair the Board of Directors' ability to represent stockholders' interests fully. The Shareholders' Rights Plan provides that attached to each share of common stock is one right (a "Right") to purchase a unit consisting of one one-hundredth of a share of Junior Participating Preferred Stock for an exercise price of $150 per unit, subject to adjustment. The Rights have certain anti-takeover effects. The Rights may cause substantial dilution to a person that attempts to acquire the Corporation without the approval of the Board of Directors unless the offer is conditioned on a substantial number of Rights being acquired. The Rights, however, should not affect offers for all outstanding shares of common stock at a fair price and otherwise in the best interests of the Corporation and its stockholders as determined by the Board of Directors. The Board of Directors may, at its option, redeem all, but not fewer than all, of the then outstanding Rights at any time until the 10th business day following a public announcement that a person or a group had acquired beneficial ownership of 20% or more of the Corporation's outstanding common stock or total voting power. 64 67 Chemical Banking Corporation and Subsidiaries - -------------------------------------------------------------------------------- 19 DERIVATIVE AND FOREIGN EXCHANGE FINANCIAL INSTRUMENTS The Corporation utilizes various derivative and foreign exchange financial instruments for trading purposes and for purposes other than trading, such as asset/liability management. These financial 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. Such derivative and foreign exchange transactions involve, to varying degrees, credit risk and market risk. For a discussion of the credit and market risks involved with derivative and foreign exchange financial instruments, reference is made to the first three paragraphs of the Derivative and Foreign Exchange Financial Instruments section of the Management's Discussion and Analysis ("MD&A") on page 29, the first ten paragraphs of the Credit Risk Management section of the MD&A on page 23, and paragraphs eight through eleven of the Market Risk Management section of the MD&A on page 31. Derivative and Foreign Exchange Instruments Used for Trading Purposes: The credit risk associated with the Corporation's trading activities is disclosed on the balance sheet. The effects of any market risk (gains or losses) on the Corporation's trading activities have been reflected in trading revenue, as the trading instruments are marked-to-market on a daily basis. See Note One for a discussion of the Corporation's trading activities and Note Three for the types and categories of these trading instruments. Derivative and Foreign Exchange Instruments Used for Purposes Other than Trading: The Corporation's principal objective in using derivatives for purposes other than trading is for its asset/liability management. For a further discussion of the Corporation's objectives and strategies for employing derivative and foreign exchange instruments for asset/liability management activities, reference is made to the first three paragraphs of the Asset/Liability Management discussion in the MD&A on page 32 and the Other Market Risk Management section on page 35. The majority of the Corporation's derivatives used for asset/ liability management are transacted through its trading units. For the disclosure of the fair value associated with the Corporation's asset/liability management activities, see Note Twenty Two. At December 31, 1995, gross deferred gains and gross deferred losses relating to closed derivative contracts used in asset/liability management activities were $57 million and $187 million, respectively. See Note One on page 47 for the accounting method used for these contracts and the Amortization of Net Deferred Gains/Losses on Closed ALM Contracts table on page 35 of the MD&A. The Corporation also uses selected derivative financial instruments to manage the sensitivity to changes in market interest rates on anticipated transactions; however, such transactions are not significant. Accordingly, at December 31, 1995, deferred gains and losses associated with such transactions were immaterial. The following table summarizes the aggregate notional amounts of interest rate 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. The table should be read in conjunction with the preceding narrative as well as the descriptions of these products and their risks immediately following. 65 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------- Notional Amounts(a) Credit Exposure December 31, (in billions) 1995 1994 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- INTEREST RATE CONTRACTS Futures, Forwards and Forward Rate Agreements Trading $ 877.2 $ 951.0 $ 1.2 $ 0.8 Asset and Liability Management 33.9 32.8 0.1 -- Interest Rate Swaps Trading 1,387.6 1,107.9 8.2 6.9 Asset and Liability Management 47.4 50.7 0.2 0.2 Purchased Options Trading 60.2 60.5 0.2 0.2 Asset and Liability Management 17.8 13.7 -- -- Written Options Trading 65.8 69.5 -- -- Asset and Liability Management 6.3 3.3 -- -- - --------------------------------------------------------------------------------------------------------------------------- Total Interest Rate Contracts $2,496.2 $2,289.4 $ 9.9 $ 8.1 - --------------------------------------------------------------------------------------------------------------------------- FOREIGN EXCHANGE CONTRACTS Spot, Forward and Futures Contracts Trading $ 824.8 $ 794.0 $ 5.9 $ 7.3 Asset and Liability Management 8.9 12.3 -- -- Other Foreign Exchange Contracts(b) Trading 120.4 94.5 2.0 2.2 Asset and Liability Management 0.7 0.3 -- -- - --------------------------------------------------------------------------------------------------------------------------- Total Foreign Exchange Contracts $ 954.8 $ 901.1 $ 7.9 $ 9.5 - --------------------------------------------------------------------------------------------------------------------------- STOCK INDEX OPTIONS AND COMMODITY CONTRACTS Trading $ 11.3 $ 4.5 $ 0.2 $ 0.3 - --------------------------------------------------------------------------------------------------------------------------- Total Stock Index Options and Commodity Contracts $ 11.3 $ 4.5 $ 0.2 $ 0.3 - --------------------------------------------------------------------------------------------------------------------------- Total Credit Exposure Recorded on the Balance Sheet $ 18.0 $ 17.9 - ---------------------------------------------------------------------------------------------------------------------------
(a) The notional amounts of exchange-traded interest rate contracts, foreign exchange contracts, and commodity contracts were $362.5 billion, $.8 billion and $2.9 billion, respectively, at December 31, 1995. The credit risk amounts of these contracts were minimal since exchange-traded contracts principally settle daily in cash. (b) Includes notional amounts of purchased options, written options and cross-currency interest rate swaps of $42.1 billion, $46.1 billion and $32.9 billion, respectively, at December 31, 1995, compared with $34.2 billion, $38.4 billion and $22.2 billion, respectively, at December 31, 1994. Classes of Derivative and Foreign Exchange Instruments: The following classes of derivative and foreign exchange instruments refer to instruments that are used by the Corporation for purposes of both trading and asset/liability management. Interest rate futures and forwards are contracts for the delayed delivery of securities or money market instruments in which the seller 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 the Corporation. 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 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 certain 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. 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. Cross-currency interest rate swaps are contracts that involve the exchange of both interest and principal amounts in two different currencies. The risks inherent in interest rate and cross-currency swap 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 contracts due to movements in the underlying interest rates. 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, the Corporation receives a premium in exchange for bearing the risk of unfavorable changes in interest rates. Conversely, as a purchaser of an option, the Corporation 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 option contracts, except that they are based on currencies instead of interest rates. 66 69 Chemical Banking Corporation and Subsidiaries - -------------------------------------------------------------------------------- The Corporation's use of written options as part of its asset/liability management is permitted only in those circumstances where they are specifically linked to purchased options and in order to mitigate interest rate risk. All unmatched written options are included in the trading portfolio and are marked-to-market. Foreign exchange contracts are contracts 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. Stock index option contracts are contracts to pay or receive cash flows from counterparties based upon the increase or decrease in the underlying index. Commodity contracts include swaps, caps and floors and are similar to interest rate contracts, except that they are based on commodity indices instead of interest rates. To reduce its exposure to market risk related to the above-mentioned classes of derivative and foreign exchange instruments, the Corporation 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 products 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 financial instruments presented in the preceding notional table are transactions involving "when-issued securities", which the Corporation 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. Accordingly, such commitments 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. - ------------------------------------------------------------------------------- 20 OFF-BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS In addition to using derivative and foreign exchange financial instruments, the Corporation also utilizes lending-related financial instruments in order to meet the financing needs of its customers. The Corporation issues commitments to extend credit, standby and other letters of credit, and guarantees, and also provides securities-lending services. For these 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 the Corporation's actual future credit exposure or liquidity requirements for such commitments. The following table summarizes the lending-related contract amounts relating to these financial instruments at December 31, 1995 and 1994. OFF-BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS
December 31, (in millions) 1995 1994 - ------------------------------------------------------------------------------- Commitments to Extend Credit $60,755(a) $49,266(a) Standby Letters of Credit and Guarantees (Net of Risk Participations of $3,646 and $5,218) 13,554 12,451 Other Letters of Credit 2,825 2,860 Customers' Securities Lent 18,388 18,979 - -------------------------------------------------------------------------------
(a) Excludes credit card commitments of $20 billion and $19 billion at December 31, 1995 and 1994, respectively. 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 the Corporation 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. The Corporation holds collateral to support those standby letters of credit and guarantees written for which collateral is deemed necessary. At December 31, 1995, all of the Corporation's standby letters of credit and guarantees written expire in less than five years. Customers' securities lent are customers' securities held by the Corporation, as custodian, which are lent to third parties. The Corporation obtains collateral, with a market value exceeding 100% of the contract amount, which is used to indemnify customers against possible losses resulting from third-party defaults. 67 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 21 CONCENTRATIONS OF CREDIT RISK 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. Concentrations of credit risk indicate the relative sensitivity of the Corporation's performance to both positive and negative developments affecting a particular industry. Based on the nature of the banking business, management does not believe that any of these concentrations are unusual. The accompanying table presents the Corporation's significant concentrations of credit risk for all financial instruments, including both on-balance sheet as well as off-balance sheet instruments (which primarily include lending-related financial instruments). The Corporation has procedures to monitor counterparty credit risk and to obtain collateral when deemed necessary. Accordingly, management believes that the total credit exposure shown below is not representative of the potential risk of loss inherent in the portfolio.
1995 1994 Distributions Distributions Total Credit % of On-Balance Off-Balance Total Credits % of On-Balance Off-Balance December 31, (in billions) Exposure Total Sheet Sheet Exposure Total Sheet Sheet - ------------------------------------------------------------------------------------------------------------------------------- Consumer $ 55 19% $ 35 $ 20 $ 52 20% $ 31 $21 Real Estate Related 9 3 7 2 10 4 8 2 Financial Institutions 53 19 37 16 57 21 43 14 U.S. Government and Agencies 34 12 34 -- 25 9 25 -- Foreign Governments and Official Institutions 20 7 17 3 15 6 13 2 Brokers and Dealers 35 12 11 24 36 14 13 23 Commercial and Industrial and Other 80 28 36 44 70 26 33 37 - ------------------------------------------------------------------------------------------------------------------------------- Total $286 100% $177 $109 $265 100% $166 $99 - -------------------------------------------------------------------------------------------------------------------------------
The Corporation's balance sheet exposure to consumers was mainly residential mortgages and credit card outstandings, with off-balance sheet exposure concentrated in unfunded credit card commitments. For a geographic concentration of residential mortgages and credit card outstandings, reference is made to the tables entitled Residential Mortgage Loans by Geographic Region and Domestic Credit Card Receivables by Geographic Region within the Domestic Consumer Portfolio section of the MD&A on pages 25 and 26, respectively. Geographic concentrations are a factor most directly affecting the credit risk of the real estate and emerging markets segments of the Corporation's loan portfolio. The Corporation's real estate portfolio is primarily concentrated in the New York Metropolitan area and in Texas. Its emerging markets portfolio is largely concentrated in Latin America, principally Mexico, Venezuela and Brazil. - -------------------------------------------------------------------------------- 22 FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" ("SFAS 107"), requires the Corporation to disclose fair value information about financial instruments for which it is practicable to estimate the value, whether or not such financial instruments are recognized on the balance sheet. Fair value is the amount at which a financial instrument could be exchanged in a current transaction 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 the Corporation'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 the 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 the Corporation. For example, the values associated with the various ongoing businesses which the Corporation operates are excluded. The Corporation 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 addition, relationships with mortgage servicing customers that originated prior to the adoption of SFAS 122 also provide significant economic value not currently reflected in the balance sheet. In the opinion of management, these items in the aggregate add significant value to the Corporation, but their fair value is not disclosed in this Note. 68 71 Chemical Banking Corporation and Subsidiaries - -------------------------------------------------------------------------------- Fair values among financial institutions are not comparable due to the wide range of permitted valuation techniques and the 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 the information disclosed in this Note for purposes of evaluating the financial condition of the Corporation compared with other financial institutions. The following summary presents the methodologies and assumptions used to estimate the fair value of the Corporation's financial instruments required to be valued pursuant to SFAS 107. FINANCIAL ASSETS Assets for Which Fair Value Approximates Carrying Value: The fair value 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, is 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. As discussed in Note One, such loans are carried at the lower of cost or current estimated disposition value. Trading Assets: The Corporation carries trading assets, which includes debt and equity instruments as well as the positive fair values of derivative and foreign exchange instruments, at estimated fair value. The fair value of these instruments were valued using either quoted market prices, pricing models, quoted market prices of financial instruments with similar characteristics or discounted cash flows. For the fair value of trading assets, see Note Three. Securities: Securities held-to-maturity are carried at amortized cost. Securities available-for-sale and interest rate contracts used in connection with the available-for-sale portfolio are carried at fair value. The valuation methodologies for securities are discussed in Note Four. Loans: Loans are valued using methodologies suitable for each loan type. Certain of these methodologies and key assumptions made are discussed below. The fair value of the Corporation's commercial loan portfolio was estimated by assessing the two main risk components of the portfolio: credit and interest. The estimated cash flows were 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 were valued based on secondary market prices. For consumer installment loans and residential mortgages, for which market rates for comparable loans are readily available, the fair value was estimated by discounting cash flows, adjusted for prepayments. The discount rates used for consumer installment loans were current rates offered by commercial banks and thrifts; for residential mortgages, secondary market yields for comparable mortgage-backed securities, adjusted for risk, were used. The fair value of credit card receivables was estimated by discounting expected cash flows. The discount rates used incorporated the effects of interest rate changes only, since the estimated cash flows were adjusted for credit risk. Other Assets: Other Assets consist primarily of equity investments, including venture capital investments. The fair value of these investments was determined on an individual basis. The valuation methodologies included market values of publicly-traded securities, independent appraisals, and cash flow analyses. 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, other borrowed funds, acceptances outstanding, short-term payables, and 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 was estimated by discounting cash flows based on contractual maturities at the interest rates for funds of similar maturity. Trading Liabilities-Risk Management Instruments: The Corporation records the negative fair values on derivatives and foreign exchange instruments at estimated fair value. These instruments were valued using either quoted market prices, pricing models, quoted market prices of financial instruments with similar characteristics or discounted cash flows. For the fair value of trading liabilities, see Note Three. Long-Term Debt: The valuation of long-term debt takes into account several factors, including current market interest rates and the Corporation's credit rating. Quotes were gathered from various investment banking firms for indicative yields for the Corporation's securities over a range of maturities. UNUSED COMMITMENTS AND LETTERS OF CREDIT The Corporation 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 tables present the carrying value and estimated fair value at December 31, 1995 and 1994, of financial assets and liabilities valued under SFAS 107 and certain derivative contracts used for ALM activities related to such financial assets and liabilities. 69 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------------------------------------- Financial Assets/ Financial Liabilities Derivative Contracts Used for ALM Activities(e) - ---------------------------------------------------------------------------------------------------------------------------------- Estimated Gross Gross Estimated Carrying Fair Carrying Unrecognized Unrecognized Fair December 31, 1995 (in millions) Value(a)(b) Value(a)(b) Value(c) Gains Losses Value - ---------------------------------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS: Assets for Which Fair Value Approximates Carrying Value $ 25,210 $ 25,210 $ -- $ -- $ -- $ -- Trading Assets: Debt and Equity Instruments 18,317 18,317(f) -- -- -- -- Risk Management Instruments 17,703 17,703(g) -- -- -- -- Securities Held-to-Maturity 4,628 4,659 -- -- -- -- Securities Available-for-Sale 30,157 30,157 (78) -- -- (78) Loans, Net of Unearned Income 82,143 82,116 81 155 (322) (86) Allowance for Credit Losses (2,379) -- -- -- -- -- Derivatives in Lieu of Cash Market Instruments(d) 68 117 68 276 (227) 117 Other Assets 2,050 2,565 -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Total Financial Assets $ 177,897 $180,844 $ 71 $431 $(549) $(47) - ---------------------------------------------------------------------------------------------------------------------------------- FINANCIAL LIABILITIES: Liabilities for Which Fair Value Approximates Carrying Value $ 128,097 $128,101 $(14) $ 21 $(25) $(18) Domestic Time Deposits 14,991 15,092 60 52 (24) 88 Long-Term Debt 7,329 7,477 19 116 (21) 114 Trading Liabilities - Risk Management Instruments 19,461 19,461(g) -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Total Financial Liabilities $ 169,878 $170,131 $ 65 $189 $(70) $184 - ----------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------- Financial Assets/ Financial Liabilities Derivative Contracts Used for ALM Activities(e) - ---------------------------------------------------------------------------------------------------------------------------------- Estimated Gross Gross Estimated Carrying Fair Carrying Unrecognized Unrecognized Fair December 31, 1994 (in millions) Value(a)(b) Value(a)(b) Value(c) Gains Losses Value - ---------------------------------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS: Assets for Which Fair Value Approximates Carrying Value $ 31,883 $ 31,883 $ -- $ -- $ -- $ -- Trading Assets: Debt and Equity Instruments 11,093 11,093(f) -- -- -- -- Risk Management Instruments 17,709 17,709(g) -- -- -- -- Securities Held-to-Maturity 8,566 8,106 -- -- -- -- Securities Available-for-Sale 18,431 18,431 542 -- -- 542 Loans, Net of Unearned Income 78,767 77,169 123 145 (175) 93 Allowance for Credit Losses (2,480) -- -- -- -- -- Derivatives in Lieu of Cash Market Instruments(d) 97 175 97 194 (116) 175 Other Assets 1,971 2,260 -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Total Financial Assets $166,037 $166,826 $762 $339 $(291) $810 - ---------------------------------------------------------------------------------------------------------------------------------- FINANCIAL LIABILITIES: Liabilities for Which Fair Value Approximates Carrying Value $120,579 $120,579 $ 4 $ -- $ (18) $ (14) Domestic Time Deposits 15,675 16,369 20 5 (716) (691) Long-Term Debt 7,991 7,918 26 1 (104) (77) Trading Liabilities - Risk Management Instruments 15,979 15,979(g) -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------------- Total Financial Liabilities $160,224 $160,845 $ 50 $ 6 $(838) $(782) - ----------------------------------------------------------------------------------------------------------------------------------
(a) The carrying value and estimated fair value include 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. The Corporation uses these contracts in its ALM activities to modify the interest rate characteristics of balance sheet instruments such as securities available-for-sale, loans and deposits. Gross unrecognized gains and losses from daily margin settlements on open futures contracts were $4 million and $101 million, respectively, at December 31, 1995. The unrecognized gains and losses from such contracts are amortized to interest income after the contracts close. See page 35 of the MD&A for a discussion of closed derivative contracts related to ALM activities. (c) The carrying value of derivatives used for asset/liability management 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) Represents derivative contracts that, as part of the Corporation's asset/liability management, are used in place of cash market instruments. For further discussion, see Note One. (e) Derivative Contacts Used for Asset/Liability Management Activities were valued using market prices or pricing models consistent with methods used by the Corporation in valuing similar instruments used for trading purposes. (f) The average fair value of debt and equity instruments held for trading purposes was $12,811 million during 1995 and $11,347 million during 1994. For a further breakout of the fair value of Trading Assets - Debt and Equity Instruments, see Note Three. (g) The average fair value of Trading Assets - Risk Management Instruments and Trading Liabilities - Risk Management Instruments in 1995 was $20,963 million and $21,748 million, respectively. The average fair value of Trading Assets Risk Management Instruments and Trading Liabilities - Risk Management Instruments in 1994 was $17,779 million and $16,143 million, respectively. 70 73 Chemical Banking Corporation and Subsidiaries - -------------------------------------------------------------------------------- In addition to the derivative contracts in the above tables, the Corporation also uses derivative contracts (primarily interest rate floors and swaps) to manage the risks associated with its mortgage servicing activities; that are not required to be fair valued under SFAS 107. At December 31, 1995, the notional amount of such derivatives was $3.2 billion, the carrying value was $7.7 million, and gross unrecognized gains and losses were $19.9 million and $3.4 million, respectively, resulting in an estimated fair value of $24.2 million. - -------------------------------------------------------------------------------- 23 COMMITMENTS AND CONTINGENCIES At December 31, 1995, the Corporation 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 the Corporation affecting its ability to pay dividends, engage in debt or equity financing transactions, or to enter into further lease agreements. Future minimum rental payments required under operating leases with initial or remaining noncancelable lease terms in excess of one year as of December 31, 1995 were as follows:
Year Ended December 31, (in millions) - ------------------------------------------------------------- 1996 $ 204 1997 196 1998 180 1999 167 2000 154 After 662 - ------------------------------------------------------------- Total Minimum Payments Required $1,563 - ------------------------------------------------------------- Less: Sublease Rentals Under Noncancelable Subleases $ (181) - ------------------------------------------------------------- Net Minimum Payment Required $1,382 - -------------------------------------------------------------
Total rental expense in 1995, 1994 and 1993 was as follows:
Year Ended December 31, (in millions) 1995 1994 1993 - -------------------------------------------------------------------------- Gross Rentals $ 334 $ 363 $ 384 Sublease Rentals (63) (56) (60) - -------------------------------------------------------------------------- Total $ 271 $ 307 $ 324 - --------------------------------------------------------------------------
At December 31, 1995 and 1994, assets amounting to $35 billion and $28 billion, respectively, were pledged to secure public deposits and for other purposes. The significant components of the $35 billion of assets pledged at December 31, 1995 were as follows: $13 billion were securities, $11 billion were loans, and the remaining $11 billion were primarily trading account assets. These amounts compare with $9 billion of securities, $9 billion of loans, and $10 billion of trading account assets pledged at December 31, 1994. The Corporation and its subsidiaries are defendants in a number of legal proceedings. After reviewing with counsel all such actions and proceedings pending against or involving the Corporation 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 the Corporation. - -------------------------------------------------------------------------------- 24 INTERNATIONAL OPERATIONS The accompanying table presents average assets and income statement information for 1995, 1994 and 1993 relating to international and domestic operations of the Corporation by major geographic areas, based on the domicile of the customer. The Corporation defines international activities as business transactions that involve customers residing outside of the United States. However, a definitive separation of the Corporation's domestic and foreign businesses cannot be performed because many of the Corporation'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. Estimates of the following are allocated on a management accounting basis: stockholders' equity, interest costs charged to users of funds, and overhead, administrative, and other expenses incurred by one area on behalf of another. The provision for losses is allocated based on charge-off experience and risk characteristics of the portfolio. The Corporation considers the balance in the allowance for credit losses to be available for both domestic and foreign exposures; however, a portion of the allowance is allocated to international operations based on a methodology consistent with the allocation of the provision for losses. Certain amounts in prior periods have been reclassified among the geographic regions to conform to the current year's presentation. 71 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- Income Average Before Net As of or for the Year Ended December 31, (in millions) Assets Revenue(a) Expense(b) Income Taxes Income - ----------------------------------------------------------------------------------------------------------------------------------- 1995 Europe $ 28,964 $ 751 $ 408 $ 343 $ 206 Asia and Pacific 15,365 501 230 271 163 Latin America and the Caribbean 7,851 195 97 98 60 Middle East and Africa 1,162 25 20 5 3 Other(c) 1,373 12 8 4 2 - ----------------------------------------------------------------------------------------------------------------------------------- Total International 54,715 1,484 763 721 434 Total Domestic 125,982 6,971 4,716 2,255 1,371 - ----------------------------------------------------------------------------------------------------------------------------------- Total Corporation $180,697 $8,455 $5,479 $2,976 $1,805 - ----------------------------------------------------------------------------------------------------------------------------------- 1994 Europe $ 28,847 $ 738 $ 409 $ 329 $ 199 Asia and Pacific 10,191 346 216 130 80 Latin America and the Caribbean 7,695 543 273 270 165 Middle East and Africa 1,156 35 21 14 9 Other(c) 780 21 12 9 6 - ----------------------------------------------------------------------------------------------------------------------------------- Total International 48,669 1,683 931 752 459 Total Domestic 118,010 6,588 5,128 1,460 835 - ----------------------------------------------------------------------------------------------------------------------------------- Total Corporation $166,679 $8,271 $6,059 $2,212 $1,294 - ----------------------------------------------------------------------------------------------------------------------------------- 1993 Europe $ 15,622 $ 831 $ 569 $ 262 $ 157 Asia and Pacific 6,100 338 202 136 71 Latin America and the Caribbean 8,328 616 161 455 273 Middle East and Africa 984 31 23 8 5 Other(c) 726 18 13 5 3 - ----------------------------------------------------------------------------------------------------------------------------------- Total International 31,760 1,834 968 866 509 Total Domestic 113,121 6,826 5,584 1,242 1,095 - ----------------------------------------------------------------------------------------------------------------------------------- Total Corporation $144,881 $8,660 $6,552 $2,108 $1,604 - -----------------------------------------------------------------------------------------------------------------------------------
(a) Revenue is comprised of Net Interest Income and Noninterest Revenue. (b) Expense is comprised of Noninterest Expense and Provision for Losses. (c) No geographic region included in other international amounts to more than 10% of the total for the Corporation. 72 75 Chemical Banking Corporation and Subsidiaries - -------------------------------------------------------------------------------- 25 PARENT COMPANY Condensed financial information of Chemical Banking Corporation, the Parent Company, is presented below. For purposes of preparing the Statement of Cash Flows, cash and cash equivalents are those amounts included in the balance sheet caption Cash with Banks. BALANCE SHEET
December 31, (in millions) 1995 1994 - ---------------------------------------------------------------------------------- Assets Cash with Banks $ 324 $ 76 Deposits with Banking Subsidiaries 4,822 3,581 Securities Purchased Under Resale Agreements-Chemical Securities Inc. 80 430 Available-for-Sale Securities 10 -- Short-Term Advances to Subsidiaries: Banking 3 23 Nonbanking 1,777 1,567 Long-Term Advances to Subsidiaries: Banking 2,257 2,187 Nonbanking 310 115 Investment (at Equity) in Subsidiaries: Banking 11,417 10,718 Nonbanking 1,362 1,137 Other Assets 411 673 - ---------------------------------------------------------------------------------- Total Assets $22,773 $20,507 - ---------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Other Borrowed Funds, primarily Commercial Paper $ 4,839 $ 3,968 Other Liabilities 451 340 Intermediate- and Long-Term Debt(a) 5,571 5,487 - ---------------------------------------------------------------------------------- Total Liabilities 10,861 9,795 Stockholders' Equity 11,912 10,712 - ---------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $22,773 $20,507 - ----------------------------------------------------------------------------------
(a) At December 31, 1995, aggregate annual maturities for all issues for the years 1996 through 2000 were $835 million, $518 million, $745 million, $685 million, and $730 million, respectively. STATEMENT OF INCOME
Year Ended December 31, (in millions) 1995 1994 1993 - --------------------------------------------------------------------------------------- Income Dividends from Subsidiaries: Banking $ 1,078 $ 1,291 $ 588 Nonbanking 15 102 23 Interest from Subsidiaries: Banking 304 258 255 Nonbanking 182 95 71 All Other Income 9 2 -- - --------------------------------------------------------------------------------------- Total Income 1,588 1,748 937 - --------------------------------------------------------------------------------------- Expense Interest on: Other Borrowed Funds, primarily Commercial Paper 224 104 75 Intermediate- and Long-Term Debt 390 357 361 All Other Expense 21 39 96 - --------------------------------------------------------------------------------------- Total Expense 635 500 532 - --------------------------------------------------------------------------------------- Income Before Income Tax Expense (Benefit) and Equity in Undistributed Net Income of Subsidiaries 953 1,248 405 Income Tax Expense (Benefit) (58) (42) (76) Equity in Undistributed Net Income of Subsidiaries 794 4 1,123 - --------------------------------------------------------------------------------------- Net Income $ 1,805 $ 1,294 $1,604 - ---------------------------------------------------------------------------------------
73 76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS Year Ended December 31, (in millions) 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------- Operating Activities Net Income $ 1,805 $ 1,294 $ 1,604 Less--Net Income of Subsidiaries 1,887 1,397 1,734 - --------------------------------------------------------------------------------------------------------------------------- Parent Company Net Loss (82) (103) (130) Add--Dividends from Subsidiaries 1,086 1,393 611 Other--Net 248 131 (131) - --------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 1,252 1,421 350 - --------------------------------------------------------------------------------------------------------------------------- Investing Activities Net (Increase) Decrease in Deposits with Banking Subsidiaries (1,241) (2,376) (155) Net (Increase) Decrease in Short-Term Advances to Subsidiaries (190) 449 242 Net (Increase) Decrease in Long-Term Advances to Subsidiaries (265) (10) 650 Net (Increase) Decrease in Investment (at Equity) in Subsidiaries (342) (300) (430) Net (Increase) Decrease in Securities Under Resale Agreement-Chemical Securities Inc. 350 156 (586) Proceeds from the Sale of Banking Operations in Southern and Central New Jersey 490 -- -- Purchase of Available-for-Sale Securities (10) -- -- Other--Net (12) (101) -- - --------------------------------------------------------------------------------------------------------------------------- Net Cash Used by Investing Activities (1,220) (2,182) (279) - --------------------------------------------------------------------------------------------------------------------------- Financing Activities Net Increase (Decrease) in Other Borrowed Funds 870 1,928 6 Proceeds from the Issuance of Long-Term Debt 1,126 1,217 2,408 Repayments of Long-Term Debt (1,049) (1,307) (2,014) Proceeds from the Issuance of Stock 579 254 591 Purchase of Treasury Stock (762) (387) -- Redemption of Preferred Stock -- (416) (610) Cash Dividends Paid (548) (521) (480) - --------------------------------------------------------------------------------------------------------------------------- Net Cash Provided (Used) by Financing Activities 216 768 (99) - --------------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash 248 7 (28) Cash with Banks at the Beginning of the Year 76 69 97 - --------------------------------------------------------------------------------------------------------------------------- Cash with Banks at the End of the Year $ 324 $ 76 $ 69 - --------------------------------------------------------------------------------------------------------------------------- Cash Interest Paid $ 611 $ 449 $ 421 Taxes Paid (Refunded) $ 752 $ (123) $ 89 - ---------------------------------------------------------------------------------------------------------------------------
74 77 Chemical Banking Corporation and Subsidiaries SUPPLEMENTARY DATA QUARTERLY FINANCIAL INFORMATION 1995-1994
(in millions, except per share and stock price data) 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- 4th 3rd 2nd 1st 4th 3rd 2nd 1st Net Interest Income $1,174 $1,197 $1,162 $1,156 $1,169 $1,177 $1,185 $1,143 Provision for Losses 116 122 120 120 85 100 160 205 Noninterest Revenue 958 977 961 870 815 984 867 931 Noninterest Expense 1,250 1,257 1,248 1,246 1,593 1,311 1,281 1,324 - ----------------------------------------------------------------------------------------------------------------------------------- Income Before Income Tax Expense and Effect of Accounting Change 766 795 755 660 306 750 611 545 Income Tax Expense (Benefit) 276 318 302 264 127 311 254 226 - ----------------------------------------------------------------------------------------------------------------------------------- Income Before Effect of Accounting Change 490 477 453 396 179 439 357 319 Effect of Change in Accounting Principle -- -- -- (11)(a) -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Net Income $ 490 $ 477 $ 453 $ 385 $ 179(b) $ 439 $ 357 $ 319 - ----------------------------------------------------------------------------------------------------------------------------------- Per Common Share: Primary: Income Before Effect of Accounting Change $ 1.81 $ 1.74 $ 1.72 $ 1.49 $ .61 $ 1.59 $ 1.27 $ 1.12 Effect of Change in Accounting Principle -- -- -- (.04)(a) -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Net Income $ 1.81 $ 1.74 $ 1.72 $ 1.45 $ .61(b) $ 1.59 $ 1.27 $ 1.12 - ----------------------------------------------------------------------------------------------------------------------------------- Assuming Full Dilution: Income Before Effect of Accounting Change $ 1.81 $ 1.70 $ 1.68 $ 1.46 $ .61 $ 1.56 $ 1.25 $ 1.11 Effect of Change in Accounting Principle -- -- -- (.04)(a) -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Net Income $ 1.81 $ 1.70 $ 1.68 $ 1.42 $ .61(b) $ 1.56 $ 1.25 $ 1.11 - ----------------------------------------------------------------------------------------------------------------------------------- Cash Dividends Declared Per Share $ .50 $ .50 $ .50 $ .44 $ .44 $ .44 $ .38 $ .38 Average Common and Common Equivalent Shares 256.5 260.1 248.3 245.3 246.3 248.6 255.1 255.3 Average Common Shares Assuming Full Dilution 257.3 266.1 254.8 253.0 254.0 256.3 263.0 263.0 - ----------------------------------------------------------------------------------------------------------------------------------- Stock Price Per Common Share:(c) High $64.75 $61.63 $48.75 $40.88 $38.63 $40.00 $40.88 $42.13 Low 53.88 46.25 37.50 35.75 33.63 34.88 33.88 34.50 Close 58.75 60.88 47.25 37.75 35.88 35.00 38.50 36.38 - -----------------------------------------------------------------------------------------------------------------------------------
(a) On January 1, 1995, the Corporation adopted SFAS 106 for the accounting for other postretirement benefits relating to the Corporation's foreign plans. (b) Excluding the impact of the $260 million ($152 million after tax) restructuring charge in the fourth quarter of 1994, proforma net income was $331 million or $1.22 per primary share. (c) The Corporation's common stock is listed and traded on the New York Stock Exchange and the International Stock Exchange of the United Kingdom and Republic of Ireland. The high, low and closing prices of the Corporation's common stock are from the New York Stock Exchange Composite Transaction Tape. 75 78 Chemical Bank and Subsidiaries CONSOLIDATED BALANCE SHEET
December 31, (in millions, except share data) 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and Due from Banks $ 6,371 $ 6,258 Deposits with Banks 2,544 5,484 Federal Funds Sold and Securities Purchased Under Resale Agreements 5,621 5,898 Trading Assets: Debt and Equity Instruments 10,338 8,088 Risk Management Instruments 17,625 17,694 Securities: Available-for-Sale 26,348 16,362 Held-to-Maturity (Market Value: $3,830 in 1995 and $5,981 in 1994) 3,807 6,316 Loans (Net of Unearned Income: $434 in 1995 and $405 in 1994) 67,079 62,272 Allowance for Credit Losses (2,021) (2,022) Premises and Equipment 1,355 1,409 Due from Customers on Acceptances 1,166 1,064 Accrued Interest Receivable 1,053 989 Other Assets 3,464 3,702 - ---------------------------------------------------------------------------------------------------------------------------- Total Assets $144,750 $133,514 - ---------------------------------------------------------------------------------------------------------------------------- LIABILITIES Deposits: Domestic Noninterest-Bearing $ 15,508 $ 15,143 Domestic Interest-Bearing 31,996 31,868 Foreign 36,978 31,230 - ---------------------------------------------------------------------------------------------------------------------------- Total Deposits 84,482 78,241 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 17,172 16,183 Other Borrowed Funds 7,174 6,654 Acceptances Outstanding 1,180 1,081 Trading Liabilities 19,467 16,950 Accounts Payable, Accrued Expenses and Other Liabilities 3,653 3,029 Long-Term Debt 1,575 2,303 Long-Term Debt Payable to Parent Company 1,867 1,867 - ---------------------------------------------------------------------------------------------------------------------------- Total Liabilities 136,570 126,308 - ---------------------------------------------------------------------------------------------------------------------------- STOCKHOLDER'S EQUITY Common Stock ($12 Par Value; Issued and Outstanding 51,633,170 Shares) 620 620 Capital Surplus 4,665 4,501 Retained Earnings 3,185 2,495 Net Unrealized Loss on Securities Available-for-Sale, Net of Taxes (290) (410) - ---------------------------------------------------------------------------------------------------------------------------- Total Stockholder's Equity 8,180 7,206 - ---------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholder's Equity $144,750 $133,514 - ----------------------------------------------------------------------------------------------------------------------------
76 79 - ------------------------------------------------------------------------------ DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL A three-year summary of the Corporation's consolidated average balances, interest rates and interest differentials on a taxable-equivalent basis for the years 1993 through 1995, is provided on pages 78 and 79. Income computed on a taxable-equivalent basis is income as 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 1993 through 1995. The majority of the Corporation's securities are taxable. Within the consolidated average balance sheet, interest and rate schedules, 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. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed against interest income. Subsequent cash receipts are applied either to the outstanding principal balance or recorded as interest income, depending on management's assessment of the ultimate collectibility of principal and interest. Interest income is accrued on renegotiated loans at the renegotiated rates. Certain renegotiated loan agreements call for additional interest to be paid on a deferred or a contingent basis. Such interest is taken into income only as collected. A summary of interest rates and interest differentials segregated between domestic and foreign operations for the years 1993 through 1995 is presented on pages 80 and 81 herein. Regarding the basis of segregation between the domestic and foreign components, see Note Twenty Four of the Notes to Consolidated Financial Statements at page 71. A portion of the Corporation's international operations are being funded by domestic sources (intra-company funding). Generally, the source of such domestic funds is the Parent Company which, in order to optimize the Corporation's overall liquidity, deposits its excess short-term funds with Chemical Bank's Nassau Branch to hold until such funds are needed. Intra-company funding is very short-term in nature and the Corporation believes such funds are not subject to cross-border risk. Domestic net interest income was $3,913 million in 1995, an increase of $71 million from the prior year. The increase in 1995 was attributable to a higher level of interest-earning assets and the reduction in the cost of carrying nonperforming loans, partially offset by narrower spreads due to higher short-term interest rates (for further discussion, see the section entitled "Net Interest Income" in Management's Discussion and Analysis at page 15). Net interest income from foreign operations was $802 million for 1995, compared with $856 million in 1994. The decline reflected a lower net yield as a result of the shift in the composition of the Corporation's foreign interest-earning assets. The tables on pages 82 and 83 herein present an analysis of the effect on net interest income of volume and rate changes for the periods 1995 over 1994 and 1994 over 1993. In this analysis, the change due to the volume/rate variance has been allocated to volume. 77 80 AVERAGE CONSOLIDATED BALANCE SHEET, INTEREST AND RATES
Year Ended December 31, 1995 (Taxable-Equivalent Interest and Rates; in millions) Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------------------ ASSETS Deposits With Banks $ 3,545 $ 269 7.59% Federal Funds Sold and Securities Purchased Under Resale Agreements 13,732 785 5.72 Trading Assets-Debt and Equity Instruments 12,811 878 6.85 Securities: Held-to-Maturity 7,914 537 6.78 Available-for-Sale 21,964 1,637 7.45(b) Securities(a) -- -- -- - ------------------------------------------------------------------------------------------------------------------------------ Total Securities 29,878 2,174 7.28 - ------------------------------------------------------------------------------------------------------------------------------ Domestic Loans 63,613 5,414 8.51 Foreign Loans 18,036 1,624 9.00 - ------------------------------------------------------------------------------------------------------------------------------ Total Loans 81,649 7,038(c) 8.62 - ------------------------------------------------------------------------------------------------------------------------------ Total Interest-Earning Assets 141,615 11,144 7.87% - ------------------------------------------------------------------------------------------------------------------------------ Allowance for Credit Losses (2,440) Cash and Due from Banks 7,795 Trading Assets Risk Management Instruments 20,963 All Other Assets 12,764 - ------------------------------------------------------------------------------------------------------------------------------ Total Assets $180,697 - ------------------------------------------------------------------------------------------------------------------------------ LIABILITIES Domestic Retail Deposits $ 41,121 1,507 3.67% Domestic Negotiable Certificates of Deposit and Other Deposits 5,450 290 5.32 Deposits in Foreign Offices 29,544 1,860 6.29 - ------------------------------------------------------------------------------------------------------------------------------ Total Time and Savings Deposits 76,115 3,657 4.80 - ------------------------------------------------------------------------------------------------------------------------------ Short-Term and Other Borrowings: Federal Funds Purchased and Securities Sold Under Repurchase Agreements 25,299 1,442 5.70 Commercial Paper 3,955 227 5.73 Other Borrowings(e) 8,692 557 6.41 - ------------------------------------------------------------------------------------------------------------------------------ Total Short-Term and Other Borrowings 37,946 2,226 5.87 Long-Term Debt 7,635 546 7.16 - ------------------------------------------------------------------------------------------------------------------------------ Total Interest-Bearing Liabilities 121,696 6,429 5.28 - ------------------------------------------------------------------------------------------------------------------------------ Demand Deposits 20,227 Trading Liabilities Risk Management Instruments 21,748 All Other Liabilities 5,743 - ------------------------------------------------------------------------------------------------------------------------------ Total Liabilities 169,414 - ------------------------------------------------------------------------------------------------------------------------------ STOCKHOLDERS' EQUITY Preferred Stock 1,330 Common Stockholders' Equity 9,953 - ------------------------------------------------------------------------------------------------------------------------------ Total Stockholders' Equity 11,283(d) - ------------------------------------------------------------------------------------------------------------------------------ Total Liabilities and Stockholders' Equity $180,697 - ------------------------------------------------------------------------------------------------------------------------------ Interest Rate Spread 2.59% - ------------------------------------------------------------------------------------------------------------------------------ Net Interest Income and Net Yield on Interest-Earning Assets $ 4,715 3.33% - ------------------------------------------------------------------------------------------------------------------------------
(a) On December 31, 1993, the Corporation adopted SFAS 115. Previously reported amounts have not been restated to conform with the current presentation. (b) For the years ended December 31, 1995 and 1994, the annualized rate for securities available-for-sale based on amortized cost was 7.41% and 6.42%, respectively. (c) Fees and commissions on loans included in loan interest amounted to $111 million in 1995, $141 million in 1994 and $176 million in 1993. (d) The ratio of average stockholders' equity to average assets was 6.2% for 1995, 6.6% for 1994 and 7.3% for 1993. (e) Includes securities sold but not yet purchased. 78 81 Chemical Banking Corporation and Subsidiaries
1994 1993 Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------------------- $ 5,257 $ 371 7.07% $ 4,202 $ 268 6.39% 12,000 550 4.58 10,300 339 3.29 11,347 722 6.37 8,039 449 5.59 9,204 620 6.73 -- -- -- 17,003 1,104 6.49(b) -- -- -- -- -- -- 23,654 1,731 7.32 - ------------------------------------------------------------------------------------------------------------------------------- 26,207 1,724 6.58 23,654 1,731 7.32 - ------------------------------------------------------------------------------------------------------------------------------- 57,377 4,522 7.88 57,701 4,197 7.28 17,857 1,223 6.85 21,038 1,440 6.85 - ------------------------------------------------------------------------------------------------------------------------------- 75,234 5,745(c) 7.64 78,739 5,637(c) 7.16 - ------------------------------------------------------------------------------------------------------------------------------- 130,045 9,112 7.01% 124,934 8,424 6.74% - ------------------------------------------------------------------------------------------------------------------------------- (2,872) (3,084) 8,491 8,537 17,779 -- 13,236 14,494 - ------------------------------------------------------------------------------------------------------------------------------- $166,679 $144,881 - ------------------------------------------------------------------------------------------------------------------------------- $ 43,861 1,164 2.66% $ 46,598 1,237 2.65% 5,128 186 3.64 6,242 191 3.05 24,051 1,028 4.27 21,066 813 3.86 - ------------------------------------------------------------------------------------------------------------------------------- 73,040 2,378 3.26 73,906 2,241 3.03 - ------------------------------------------------------------------------------------------------------------------------------- 19,154 844 4.41 15,461 472 3.05 2,760 118 4.29 2,438 83 3.42 8,775 538 6.12 6,663 437 6.56 - ------------------------------------------------------------------------------------------------------------------------------- 30,689 1,500 4.89 24,562 992 4.04 8,419 536 6.37 8,053 534 6.64 - ------------------------------------------------------------------------------------------------------------------------------- 112,148 4,414 3.94 106,521 3,767 3.54 - ------------------------------------------------------------------------------------------------------------------------------- 21,723 21,750 16,143 -- 5,703 6,027 - ------------------------------------------------------------------------------------------------------------------------------- 155,717 134,298 - ------------------------------------------------------------------------------------------------------------------------------- 1,579 1,887 9,383 8,696 - ------------------------------------------------------------------------------------------------------------------------------- 10,962(d) 10,583(d) - ------------------------------------------------------------------------------------------------------------------------------- $166,679 $144,881 - ------------------------------------------------------------------------------------------------------------------------------- 3.07% 3.20% - ------------------------------------------------------------------------------------------------------------------------------- $4,698 3.61% $4,657 3.73% - -------------------------------------------------------------------------------------------------------------------------------
79 82 INTEREST RATES AND INTEREST DIFFERENTIAL ANALYSIS OF NET INTEREST INCOME - DOMESTIC AND FOREIGN
1995 --------------------------------------------- Average Average (in millions; interest and average rates on a taxable-equivalent basis) balance Interest rate - ------------------------------------------------------------------------------------------------------------------------------- DOMESTIC INTEREST-EARNING ASSETS: Deposits With Banks $ 135 $ 11 8.05% Federal Funds Sold and Securities Purchased Under Resale Agreements 9,642 551 5.71 Securities and Trading Assets 30,670 2,122 6.92 Loans 63,613 5,414 8.51 - ------------------------------------------------------------------------------------------------------------------------------- Total Interest-Earning Assets 104,060 8,098 7.78 - ------------------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES: Deposits: Domestic Retail Time Deposits 41,121 1,507 3.67 Domestic Negotiable Certificates of Deposit and Other Deposits 5,450 290 5.32 - ------------------------------------------------------------------------------------------------------------------------------- Total Deposits 46,571 1,797 3.86 - ------------------------------------------------------------------------------------------------------------------------------- Short-Term Borrowings: Federal Funds Purchased and Securities Sold Under Repurchase Agreements 19,894 1,094 5.50 Other Borrowed Funds 10,705 677 6.33 - ------------------------------------------------------------------------------------------------------------------------------- Total Short-Term Borrowings 30,599 1,771 5.79 - ------------------------------------------------------------------------------------------------------------------------------- Long-Term Debt 7,418 521 7.03 Intra-Company Funding-Net 1,993 96 4.80 - ------------------------------------------------------------------------------------------------------------------------------- Total Interest-Bearing Liabilities 86,581 4,185 4.83 Noninterest-Bearing Liabilities 17,479 -- -- - ------------------------------------------------------------------------------------------------------------------------------- Total Investable Funds $104,060 4,185 4.02 - ------------------------------------------------------------------------------------------------------------------------------- Domestic Net Interest Income and Net Yield $3,913 3.76% - ------------------------------------------------------------------------------------------------------------------------------- FOREIGN INTEREST-EARNING ASSETS: Deposits With Banks $ 3,410 $ 258 7.57% Federal Funds Sold and Securities Purchased Under Resale Agreements 4,090 234 5.72 Securities and Trading Assets 12,019 930 7.74 Loans 18,036 1,624 9.00 - ------------------------------------------------------------------------------------------------------------------------------- Total Interest-Earning Assets $ 37,555 3,046 8.11 - ------------------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES: Deposits $ 29,544 1,860 6.29 - ------------------------------------------------------------------------------------------------------------------------------- Short-Term Borrowings: Federal Funds Purchased and Securities Sold Under Repurchase Agreements 5,405 348 6.44 Other Borrowed Funds 1,942 107 5.49 - ------------------------------------------------------------------------------------------------------------------------------- Total Short-Term Borrowings 7,347 455 6.19 - ------------------------------------------------------------------------------------------------------------------------------- Long-Term Debt 217 25 11.54 Intra-Company Funding-Net (1,993) (96) 4.80 - ------------------------------------------------------------------------------------------------------------------------------- Total Interest-Bearing Liabilities 35,115 2,244 6.39 Noninterest-Bearing Liabilities 2,440 -- -- - ------------------------------------------------------------------------------------------------------------------------------- Total Investable Funds $ 37,555 2,244 5.97 - ------------------------------------------------------------------------------------------------------------------------------- Foreign Net Interest Income and Net Yield $ 802 2.14% - ------------------------------------------------------------------------------------------------------------------------------- Percentage of Total Assets and Liabilities Attributable to Foreign Operations: Assets 34.0% Liabilities 33.2% - -------------------------------------------------------------------------------------------------------------------------------
80 83 Chemical Banking Corporation and Subsidiaries
1994 1993 ------------------------------------------ ----------------------------------------------- Average Average Average Average balance Interest rate balance Interest rate - ----------------------------------------------------------------------------------------------------------------------------- $ 85 $ 6 7.22% $ 232 $ 10 4.65% 10,947 477 4.36 9,946 314 3.16 28,039 1,789 6.38 25,977 1,741 6.70 57,377 4,522 7.88 57,701 4,197 7.28 - ----------------------------------------------------------------------------------------------------------------------------- $96,448 6,794 7.04 $93,856 6,262 6.67 - ----------------------------------------------------------------------------------------------------------------------------- $43,861 1,164 2.66 $46,598 1,237 2.65 5,128 186 3.64 6,242 191 3.05 - ----------------------------------------------------------------------------------------------------------------------------- 48,989 1,350 2.76 52,840 1,428 2.70 - ----------------------------------------------------------------------------------------------------------------------------- 18,041 710 3.94 14,413 397 2.76 9,983 550 5.50 7,881 412 5.24 - ----------------------------------------------------------------------------------------------------------------------------- 28,024 1,260 4.49 22,294 809 3.63 - ----------------------------------------------------------------------------------------------------------------------------- 8,190 480 5.86 7,763 494 6.37 (4,348) (138) -- (4,835) (187) -- - ----------------------------------------------------------------------------------------------------------------------------- 80,855 2,952 3.65 78,062 2,544 3.26 15,593 -- -- 15,794 -- -- - ----------------------------------------------------------------------------------------------------------------------------- $96,448 2,952 3.06 $93,856 2,544 2.71 - ----------------------------------------------------------------------------------------------------------------------------- $3,842 3.98% $3,718 3.96% - ----------------------------------------------------------------------------------------------------------------------------- $ 5,172 $ 365 7.07% $ 3,970 $ 258 6.49% 1,053 73 6.91 354 25 6.93 9,515 657 6.90 5,716 439 7.67 17,857 1,223 6.85 21,038 1,440 6.85 - ----------------------------------------------------------------------------------------------------------------------------- $33,597 2,318 6.90 $31,078 2,162 6.95 - ----------------------------------------------------------------------------------------------------------------------------- $24,051 1,028 4.27 $21,066 813 3.86 - ----------------------------------------------------------------------------------------------------------------------------- 1,113 134 12.04 1,048 75 7.15 1,552 106 6.85 1,220 108 8.82 - ----------------------------------------------------------------------------------------------------------------------------- 2,665 240 9.02 2,268 183 8.05 - ----------------------------------------------------------------------------------------------------------------------------- 229 56 24.48 290 40 13.77 4,348 138 3.14 4,835 187 3.86 - ----------------------------------------------------------------------------------------------------------------------------- 31,293 1,462 4.67 28,459 1,223 4.29 2,304 -- -- 2,619 -- -- - ----------------------------------------------------------------------------------------------------------------------------- $33,597 1,462 4.35 $31,078 1,223 3.93 - ----------------------------------------------------------------------------------------------------------------------------- $ 856 2.55% $ 939 3.02% - ----------------------------------------------------------------------------------------------------------------------------- 31.7% 24.5% 31.1% 25.2% - -----------------------------------------------------------------------------------------------------------------------------
81 84 CHANGE IN NET INTEREST INCOME, VOLUME AND RATE ANALYSIS
Consolidated ----------------------------------------------- 1995 OVER 1994 Increase (decrease) due to change in: Net ------------------------------------- (in millions; interest and average rates on a taxable-equivalent basis) Volume Rate Change - ----------------------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS Deposits With Banks $(129) $ 27 $ (102) Federal Funds Sold and Securities Purchased Under Resale Agreements 100 135 235 Securities and Trading Assets 375 231 606 Loans 548 745 1,293 - ----------------------------------------------------------------------------------------------------------------------------- Change in Interest Income 894 1,138 2,032 - ----------------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES Deposits: Domestic Retail Time Deposits (100) 443 343 Domestic Negotiable Certificates of Deposit and Other Deposits 18 86 104 Deposits in Foreign Offices 346 486 832 - ----------------------------------------------------------------------------------------------------------------------------- Total Deposits 264 1,015 1,279 - ----------------------------------------------------------------------------------------------------------------------------- Short-Term Borrowings: Federal Funds Purchased and Securities Sold Under Repurchase Agreements 379 219 598 Other Borrowed Funds 66 62 128 - ----------------------------------------------------------------------------------------------------------------------------- Total Short-Term Borrowings 445 281 726 - ----------------------------------------------------------------------------------------------------------------------------- Long-Term Debt (56) 66 10 Intra-Company Funding -- -- -- - ----------------------------------------------------------------------------------------------------------------------------- Change in Interest Expense 653 1,362 2,015 - ----------------------------------------------------------------------------------------------------------------------------- Change in Net Interest Income $ 241 $ (224) $ 17 - ----------------------------------------------------------------------------------------------------------------------------- 1994 OVER 1993 INTEREST-EARNING ASSETS Deposits With Banks $ 74 $ 29 $ 103 Federal Funds Sold and Securities Purchased Under Resale Agreements 92 119 211 Securities and Trading Assets 393 (127) 266 Loans (238) 346 108 - ----------------------------------------------------------------------------------------------------------------------------- Change in Interest Income 321 367 688 - ----------------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES Deposits: Domestic Retail Time Deposits (78) 5 (73) Domestic Negotiable Certificates of Deposit and Other Deposits (42) 37 (5) Deposits in Foreign Offices 129 86 215 - ----------------------------------------------------------------------------------------------------------------------------- Total Deposits 9 128 137 - ----------------------------------------------------------------------------------------------------------------------------- Short-Term Borrowings: Federal Funds Purchased and Securities Sold Under Repurchase Agreements 151 221 372 Other Borrowed Funds 140 (4) 136 - ----------------------------------------------------------------------------------------------------------------------------- Total Short-Term Borrowings 291 217 508 - ----------------------------------------------------------------------------------------------------------------------------- Long-Term Debt 11 (9) 2 Intra-Company Funding -- -- -- - ----------------------------------------------------------------------------------------------------------------------------- Change in Interest Expense 311 336 647 - ----------------------------------------------------------------------------------------------------------------------------- Change in Net Interest Income $ 10 $ 31 $ 41 - -----------------------------------------------------------------------------------------------------------------------------
82 85 Chemical Banking Corporation and Subsidiaries
Domestic Foreign --------------------------------------------------- -------------------------------------------------- Increase (decrease) due to change in: Net Increase (decrease) due to change in: Net ------------------------------------- ------------------------------------- Volume Rate Change Volume Rate Change - ----------------------------------------------------------------------------------------------------------------------------- $ 4 $ 1 $ 5 $(133) $ 26 $(107) (74) 148 74 174 (13) 161 182 151 333 193 80 273 531 361 892 17 384 401 - ----------------------------------------------------------------------------------------------------------------------------- 643 661 1,304 251 477 728 - ----------------------------------------------------------------------------------------------------------------------------- (100) 443 343 -- -- -- 18 86 104 -- -- -- -- -- -- 346 486 832 - ----------------------------------------------------------------------------------------------------------------------------- (82) 529 447 346 486 832 - ----------------------------------------------------------------------------------------------------------------------------- 103 281 384 276 (62) 214 44 83 127 22 (21) 1 - ----------------------------------------------------------------------------------------------------------------------------- 147 364 511 298 (83) 215 - ----------------------------------------------------------------------------------------------------------------------------- (55) 96 41 (1) (30) (31) 306 (72) 234 (306) 72 (234) - ----------------------------------------------------------------------------------------------------------------------------- 316 917 1,233 337 445 782 - ----------------------------------------------------------------------------------------------------------------------------- $ 327 $(256) 71 $ (86) $ 32 (54) - ----------------------------------------------------------------------------------------------------------------------------- $ (10) $ 6 $ (4) $ 84 $ 23 $ 107 44 119 163 48 -- 48 131 (83) 48 262 (44) 218 (21) 346 325 (217) -- (217) - ----------------------------------------------------------------------------------------------------------------------------- 144 388 532 177 (21) 156 - ----------------------------------------------------------------------------------------------------------------------------- (78) 5 (73) -- -- -- (42) 37 (5) -- -- -- -- -- -- 129 86 215 - ----------------------------------------------------------------------------------------------------------------------------- (120) 42 (78) 129 86 215 - ----------------------------------------------------------------------------------------------------------------------------- 143 170 313 8 51 59 118 20 138 22 (24) (2) - ----------------------------------------------------------------------------------------------------------------------------- 261 190 451 30 27 57 - ----------------------------------------------------------------------------------------------------------------------------- 26 (40) (14) (15) 31 16 14 35 49 (14) (35) (49) - ----------------------------------------------------------------------------------------------------------------------------- 181 227 408 130 109 239 - ----------------------------------------------------------------------------------------------------------------------------- $ (37) $ 161 $ 124 $ 47 $(130) $ (83) - -----------------------------------------------------------------------------------------------------------------------------
83 86 - -------------------------------------------------------------------------- LOAN PORTFOLIO The table below sets forth the amount of loans outstanding by type for the dates indicated:
December 31, (in millions) 1995 1994 1993 1992 1991 - --------------------------------------------------------------------------------------------------------------------------------- Domestic Loans: Commercial and Financial $26,902 $24,972 $23,848 $29,277 $32,904 Consumer 33,475 30,120 25,798 23,599 20,436 Commercial Real Estate 4,850 5,650 7,338 8,103 8,737 - --------------------------------------------------------------------------------------------------------------------------------- Total Domestic Loans 65,227 60,742 56,984 60,979 62,077 - --------------------------------------------------------------------------------------------------------------------------------- Foreign Loans: Commercial, Industrial and Consumer 8,987 8,290 7,353 8,115 8,742 Foreign Governments and Official Institutions 4,836 6,567 7,558 8,266 8,740 Financial Institutions 3,578 3,628 3,963 5,145 5,278 - ---------------------------------------------------------------------------------------------------------------------------------- Total Foreign Loans(a) 17,401 18,485 18,874 21,526 22,760 - --------------------------------------------------------------------------------------------------------------------------------- Total Loans 82,628 79,227 75,858 82,505 84,837 - --------------------------------------------------------------------------------------------------------------------------------- Unearned Income (485) (460) (477) (495) (600) - --------------------------------------------------------------------------------------------------------------------------------- Loans, Net of Unearned Income $82,143 $78,767 $75,381 $82,010 $84,237 - ---------------------------------------------------------------------------------------------------------------------------------
(a) For loans measured pursuant to SFAS 115 at December 31, 1995 and 1994, see Note Five on page 55. At December 31, 1993, $3,783 million of loans, primarily renegotiated loans, were measured under SFAS 115, including $1,962 million that were classified as held-to-maturity and carried at amortized cost, and $1,821 million designated as available-for-sale and carried at fair value. For a discussion of the Corporation's loan outstandings, see "Net Interest Income" and "Loan Portfolio" on pages 15 and 24, respectively. 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, 1995:
Within 1-5 After 5 December 31, 1995 (in millions) 1 Year(a) Years Years Total - ----------------------------------------------------------------------------------------------------------------------------- Domestic: Commercial and Financial $14,419 $ 8,933 $3,550 $26,902 Commercial Real Estate 1,582 2,568 700 4,850 Foreign(b) 9,892 3,695 3,679 17,266 - ----------------------------------------------------------------------------------------------------------------------------- Total $25,893 $15,196 $7,929 $49,018 - ----------------------------------------------------------------------------------------------------------------------------- Loans at Fixed Interest Rates $ 1,722 $1,155 Loans at Variable Interest Rates 13,474 6,774 - ----------------------------------------------------------------------------------------------------------------------------- Total $15,196 $7,929 - -----------------------------------------------------------------------------------------------------------------------------
(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 mature in over 10 years. 84 87 - ------------------------------------------------------------------------------- RISK ELEMENTS The following table sets forth the nonperforming assets and contractually past-due loans at the dates indicated:
December 31, (in millions) 1995 1994 1993 1992 1991 - ---------------------------------------------------------------------------------------------------------------------------------- Domestic Nonperforming Loans: Nonaccruing Loans $591 $ 581 $1,661 $2,974 $3,099 Renegotiated Loans 35 37 37 -- 7 - ---------------------------------------------------------------------------------------------------------------------------------- Total Domestic Nonperforming Loans 626 618 1,698 2,974 3,106 - ---------------------------------------------------------------------------------------------------------------------------------- Foreign Nonperforming Loans:(a) Nonaccruing Loans 226 307 889 1,837 1,515 Renegotiated Loans 4 4 4 5 7 - ---------------------------------------------------------------------------------------------------------------------------------- Total Foreign Nonperforming Loans 230 311 893 1,842 1,522 - ---------------------------------------------------------------------------------------------------------------------------------- Total Nonperforming Loans 856(b) 929 2,591 4,816 4,628 - ---------------------------------------------------------------------------------------------------------------------------------- Assets Acquired as Loan Satisfactions (primarily Real Estate) 50(b) 210 934 1,276 1,527 - ---------------------------------------------------------------------------------------------------------------------------------- Total Nonperforming Assets $906 $1,139 $3,525 $6,092 $6,155 - ---------------------------------------------------------------------------------------------------------------------------------- CONTRACTUALLY PAST-DUE LOANS(c) Domestic $361 $ 330 $ 323 $ 393 $ 393 Foreign -- -- -- -- 30 - ---------------------------------------------------------------------------------------------------------------------------------- Total $361 $ 330 $ 323 $ 393 $ 423 - ----------------------------------------------------------------------------------------------------------------------------------
(a) Includes loans previously classified as emerging markets loans. Previously reported loan amounts have been reclassified to conform with the current presentation. (b) Includes $727 million of loans considered impaired under SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). In addition, on January 1, 1995, $122 million of assets for which the Corporation did not have possession were reclassified from Assets Acquired as Loan Satisfactions to Nonperforming Loans pursuant to the adoption of SFAS 114. (c) Accruing loans past-due 90 days or more as to principal and interest, which are not characterized as nonperforming loans. Primarily consists of consumer loans, exclusive of residential mortgage loans, which are generally not classified as nonperforming but, rather, are charged off on a formula basis upon reaching certain specified stages of delinquency. See Note Seven, "Nonperforming Assets", on pages 56 and 57 for interest income calculated on the carrying value of nonaccrual and renegotiated loans that would have been recorded had these loans been current in accordance with their original terms ( interest at original rates), and the amount of interest income on these loans that was included in income for the periods indicated. 85 88 - ------------------------------------------------------------------------------ ALLOWANCE FOR CREDIT LOSSES The table below summarizes the changes in the allowance for credit losses during the periods indicated.
Year Ended December 31, (in millions) 1995 1994 1993 1992 1991 - --------------------------------------------------------------------------------------------------------------------------- Balance at Beginning of Year $2,480 $3,020 $3,025 $ 3,275 $ 4,229 Provision for Losses 478 550 1,259(d) 1,365 1,345 CHARGE-OFFS Domestic: Commercial and Financial (150) (206) (496) (511) (528) Consumer (552) (458) (467)(d) (449) (456) Commercial Real Estate (77) (201) (259) (302) (265) Foreign(a) (46) (401)(c) (402) (494) (1,228)(g) - --------------------------------------------------------------------------------------------------------------------------- Total Charge-Offs (825) (1,266) (1,624) (1,756) (2,477) - --------------------------------------------------------------------------------------------------------------------------- RECOVERIES Domestic: Commercial and Financial 129 126 74 61 70 Consumer 58 63 48 49 46 Commercial Real Estate 24 36 15 12 12 Foreign 61 94 206(e) 25 44 - --------------------------------------------------------------------------------------------------------------------------- Total Recoveries 272 319 343 147 172 - --------------------------------------------------------------------------------------------------------------------------- NET CHARGE-OFFS (553) (947) (1,281) (1,609) (2,305) Charge for Assets Transferred to Held-for-Accelerated Disposition -- (148) -- -- -- Other (26)(b) 5 17(f) (6) 6 - --------------------------------------------------------------------------------------------------------------------------- Balance at End of Year $2,379 $2,480 $3,020 $ 3,025 $ 3,275 - ---------------------------------------------------------------------------------------------------------------------------
(a) Includes losses on sales and swaps of loans previously classified as emerging markets. (b) Includes $28 million related to the sale of banking operations in southern and central New Jersey. (c) Includes $291 million related to management's final evaluation of the emerging markets portfolio. (d) Includes $55 million related to the decision to accelerate the disposition of certain nonperforming residential mortgage loans. (e) Includes $175 million of recoveries on the disposition of emerging markets debt. (f) Includes $19 million increase in allowance related to the acquisition by Texas Commerce of certain assets of First City Bancorporation of Texas, Inc. (g) Includes a $902 million charge to adjust Brazilian medium- and long-term outstandings to an estimated net recoverable value. 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, including activity related to countries engaged in debt rescheduling:
Year Ended December 31, (in millions) 1995 1994 1993 1992 1991 - --------------------------------------------------------------------------------------------------------------------------- Balance at Beginning of Year $369 $ 665 $ 887 $1,337 $ 2,464 Provision for Losses (13) 8 174 225 52 Charge-offs (46) (401) (402) (494) (1,228) Recoveries 61 94 206 25 44 Transfer from (to) Domestic Allowance -- -- (200) (200) -- Other -- 3 -- (6) 5 - --------------------------------------------------------------------------------------------------------------------------- Balance at End of Year $371 $ 369 $ 665 $ 887 $ 1,337 - ---------------------------------------------------------------------------------------------------------------------------
The consolidated year-end allowance for credit losses is available to absorb potential credit losses from the entire loan portfolio, as well as derivative and foreign exchange transactions. 86 89 - ------------------------------------------------------------------------------- LOAN LOSS ANALYSIS
Year Ended December 31, (in millions) 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------------- BALANCES Loans-Average $81,649 $75,234 $78,739 $82,173 $84,520 Loans-Year End 82,143 78,767 75,381 82,010 84,237 Net Charge-Offs 553 1,095(a) 1,281 1,609 2,305 Allowance for Credit Losses 2,379 2,480 3,020 3,025 3,275 Nonperforming Loans 856 929 2,591 4,816 4,628 RATIOS Net Charge-Offs to: Loans-Average 0.68% 1.46% 1.63% 1.96% 2.73% Allowance for Credit Losses 23.25 44.15 42.42 53.19 70.38 Allowance for Credit Losses to: Loans-Year End 2.90 3.15 4.01 3.69 3.89 Nonperforming Loans 277.92 266.95 116.56 62.81 70.76 - -------------------------------------------------------------------------------------------------------------------------------
(a) Includes a $148 million charge for assets transferred to held for accelerated disposition. DEPOSITS The following data provide a summary of the Corporation's average deposits and average interest rates for the years 1993-1995:
Average Balances Average Interest Rates -------------------------- ------------------------- (in millions, except interest rates) 1995 1994 1993 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------- Domestic: Noninterest-Bearing Demand $20,227 $21,723 $21,750 --% --% --% Interest-Bearing Demand 5,956 6,556 6,456 1.44 1.36 1.60 Savings 24,883 26,812 27,553 3.59 2.43 2.22 Time 15,732 15,621 18,831 5.19 3.89 3.79 - ----------------------------------------------------------------------------------------------------------------------------- Total Domestic Deposits 66,798 70,712 74,590 2.69 1.91 1.91 - ----------------------------------------------------------------------------------------------------------------------------- Foreign: Noninterest-Bearing Demand 137 165 157 -- -- -- Interest-Bearing Demand 10,606 8,893 7,969 5.56 4.28 4.87 Savings 22 23 43 2.88 2.98 2.48 Time 18,779 14,970 12,897 6.76 4.32 3.28 - ----------------------------------------------------------------------------------------------------------------------------- Total Foreign Deposits(a) 29,544 24,051 21,066 6.29 4.27 3.86 - ----------------------------------------------------------------------------------------------------------------------------- Total Deposits $96,342 $94,763 $95,656 3.80% 2.51% 2.34% - -----------------------------------------------------------------------------------------------------------------------------
(a) Substantially all of the foreign deposits are in denominations of $100,000 or more. 87 90 - ------------------------------------------------------------------------------- The following table presents deposits by maturity range and type for the dates indicated:
Domestic Time Other Domestic Deposits in Certificates of Deposit Time Deposits Foreign Offices (in millions) ($100,000 or More) ($100,000 or More) ($100,000 or More) - --------------------------------------------------------------------------------------------------------------------------------- By remaining maturity at December 31, 1995 1994 1995 1994 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- Three Months or Less $3,346 $3,402 $1,902 $2,088 $28,778 $25,682 Over Three Months but within Six Months 860 469 2 7 2,467 1,204 Over Six Months but within Twelve Months 352 460 2 6 809 1,227 Over Twelve Months 435 849 51 68 199 195 - ------------------------------------------------------------------------------------------------------------------------------- Total $4,993 $5,180 $1,957 $2,169 $32,253 $28,308 - -------------------------------------------------------------------------------------------------------------------------------
At December 31, 1995, total time and savings deposits in domestic offices were $44,491 million, of which $4,993 million were time certificates of deposit in denominations of $100,000 or more, $1,957 million were other time deposits in denominations of $100,000 or more, and $29,782 million were money market deposit accounts and other savings accounts. Deposits of $100,000 or more in foreign offices totaled $32,253 million, substantially all of which were interest-bearing. At December 31, 1994, total time and savings deposits in domestic offices were $46,799 million, of which $5,180 million were time certificates of deposit in denominations of $100,000 or more, $2,169 million were other time deposits in denominations of $100,000 or more, and $31,386 million were money market deposit accounts and other savings accounts. Deposits of $100,000 or more in foreign offices totaled $28,308 million, substantially all of which were interest-bearing. 88 91 - -------------------------------------------------------------------------------- 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, on the 20th day of February, 1996. CHEMICAL BANKING CORPORATION (Registrant) By WALTER V. SHIPLEY ------------------------------------ (Walter V. Shipley, Chairman of the Board and Chief Executive Officer) This report has been reviewed by each member of the Board of Directors and pursuant to the requirements of the Securities Exchange Act of 1934, signed on behalf of the registrant by members present at the meeting of the Board of Directors on the date indicated. The Corporation does not exercise the power of attorney to sign on behalf of any Director.
CAPACITY DATE -------- ---- WALTER V. SHIPLEY Director and Chairman of - ------------------------------ the Board (Walter V. Shipley) (Principal Executive Officer) EDWARD D. MILLER Director and President - ------------------------------ (Edward D. Miller) WILLIAM B. HARRISON JR. Director and Vice Chairman - ------------------------------ (William B. Harrison Jr.) FRANK A. BENNACK JR. Director February 20, 1996 - ------------------------------ (Frank A. Bennack Jr.) MICHEL C. BERGERAC Director - ------------------------------ (Michel C. Bergerac) RANDOLPH W. BROMERY Director - ------------------------------ (Randolph W. Bromery) CHARLES W. DUNCAN JR. Director - ------------------------------ (Charles W. Duncan Jr.) MELVIN R. GOODES Director - ------------------------------ (Melvin R. Goodes)
89 92 - --------------------------------------------------------------------------------
CAPACITY DATE GEORGE V. GRUNE Director - ------------------------------ (George V. Grune) HAROLD S. HOOK Director - ------------------------------ (Harold S. Hook) HELENE L. KAPLAN Director - ------------------------------ (Helene L. Kaplan) J. BRUCE LLEWELLYN Director - ------------------------------ (J. Bruce Llewellyn) JOHN P. MASCOTTE Director - ------------------------------ (John P. Mascotte) JOHN F. MCGILLICUDDY Director - ------------------------------ (John F. McGillicuddy) ANDREW C. SIGLER Director February 20, 1996 - ------------------------------ (Andrew C. Sigler) MICHAEL I. SOVERN Director - ------------------------------ (Michael I. Sovern) JOHN R. STAFFORD Director - ------------------------------ (John R. Stafford) W. BRUCE THOMAS Director - ------------------------------ (W. Bruce Thomas) MARINA v.N. WHITMAN Director - ------------------------------ (Marina v.N. Whitman) RICHARD D. WOOD Director - ------------------------------ (Richard D. Wood) PETER J. TOBIN Executive Vice President - ------------------------------ and Chief Financial Officer (Peter J. Tobin) (Principal Financial Officer) JOSEPH L. SCLAFANI Senior Vice President and Controller - ------------------------------ (Principal Accounting Officer) (Joseph L. Sclafani)
90 93 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 and Results of Operations.
GRAPHIC NUMBER PAGE DESCRIPTION - ------ ---- ----------- 1 32 Bar Graph entitled "Histogram of Daily Market Risk-Related Trading Revenue for 1995" presenting the following information: Millions of dollars 0-5 5-10 10-15 More than 15 --- ---- ----- ------------ Number of days trading revenue was within the above prescribed positive dollar range 128 88 9 0 Millions of dollars 0-(5) (5)-(10) (10)-(15) Less than (15) ----- -------- --------- -------------- Number of days trading revenue was within the above prescribed negative dollar range 27 10 3 1 The Histogram includes all business trading days for international and domestic units
94 EXHIBIT INDEX ------------- Exhibit No. Description ------- ----------- 2.1 Agreement and Plan of Merger, dated as of August 27, 1995, between Chemical Banking Corporation and The Chase Manhattan Corporation (incorporated by reference to Exhibit 2.1 to the Registration Statement on Form S-4 (File No. 33-63833) of Chemical Banking Corporation). 2.2 Stock Option Agreement, dated as of August 27, 1995, between Chemical Banking Corporation, as Issuer, and The Chase Manhattan Corporation, as Grantee (incorporated by reference to Exhibit 2.2 to the Registration Statement on Form S-4 (File No. 33-63833) of Chemical Banking Corporation). 2.3 Stock Option Agreement, dated as of August 27, 1995, between The Chase Manhattan Corporation, as Issuer, and Chemical Banking Corporation, as Grantee (incorporated by reference to Exhibit 2.3 to the Registration Statement on Form S-4 (File No. 33-63833) of Chemical Banking Corporation). 2.4 Employee Benefits Agreement, dated as of August 27, 1995, between Chemical Banking Corporation and The Chase Manhattan Corporation (incorporated by reference to Exhibit 2.4 to the Registration Statement on Form S-4 (File No. 33-63833) of Chemical Banking Corporation). 3.1 (a) Restated Certificate of Incorporation of Chemical Banking Corporation (incorporated by reference to Exhibit 3.1 of the Annual Report on Form 10-K dated December 31, 1993 of Chemical Banking Corporation). 3.1 (b) Certificate of Designations of Adjustable Rate Cumulative Preferred Stock, Series L (incorporated by reference to Exhibit 2 to the Registration Statement on Form 8-A dated June 6, 1994 of Chemical Banking Corporation). 3.2 By-laws of Chemical Banking Corporation, as amended (incorporated by reference to Exhibit 3.2 of the Annual Report on Form 10-K dated December 31, 1993 of Chemical Banking Corporation). 4.1 (a) Form of Rights Agreement, dated as of April 13, 1989 between Chemical Banking Corporation and Harris Trust Company of New York, as amended (incorporated by reference to Exhibit 4 to the Current Report on Form 8-K of Chemical Banking Corporation dated April 13, 1989). 4.1 (b) Letter of Appointment dated December 23, 1991 of Chemical Banking Corporation appointing Chemical Bank, as successor Rights Agent under the Rights Agreement (incorporated by reference to Exhibit 4.13(b) of the Annual Report on Form 10-K dated December 31, 1991 of Chemical Banking Corporation). 4.2 Form of Indenture dated as of December 1, 1989 between Chemical Banking Corporation and The Chase Manhattan Bank (National Association), which Indenture includes the form of Debt Securities (incorporated by reference to Exhibit 4.9 to the Registration Statement on Form S-3 (File No. 33-32409) of Chemical Banking Corporation). 4.3 Form of 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, which Indenture includes the form of Subordinated Debt Securities (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K dated December 22, 1992 of Chemical Banking Corporation). 4.4 (a) Form of Indenture dated as of June 1, 1982 between Manufacturers Hanover Corporation and Morgan Guaranty Trust Company of New York, as succeeded to by First Trust of New York (National Association), as Trustee, which Indenture includes the form of Debt Securities (incorporated by reference to Exhibit 4(a) to the Registration Statement on Form S-3 (File No. 2-82433) of Manufacturers Hanover Corporation). 4.4 (b) Form of First Supplemental Indenture dated as of January 15, 1986 to the Indenture dated as of June 1, 1982 between Manufacturers Hanover Corporation and Morgan Guaranty Trust Company of New York, as succeeded to by First Trust of New York (National Association), as Trustee, relating to the Senior Debt Securities (incorporated by reference to Exhibit 1 to the Current Report on Form 8-K dated as of January 29, 1986 of Manufacturers Hanover Corporation). 4.4 (c) Form of Second Supplemental Indenture dated as of March 13, 1991 to the Indenture dated as of June 1, 1982 between Manufacturers Hanover Corporation and Morgan Guaranty Trust Company of New York, as succeeded to by First Trust of New York (National Association), as Trustee, relating to the Senior Debt Securities (incorporated by reference to Exhibit 4 to the Current Report on Form 8-K dated March 19, 1991 of Manufacturers Hanover Corporation). 95 Exhibit No. Description ------- ----------- 4.4 (d) Form of Third Supplemental Indenture dated as of December 31, 1991 among Chemical Banking Corporation, Manufacturers Hanover Corporation and Morgan Guaranty Trust Company of New York, as succeeded to by First Trust of New York (National Association), as Trustee, to the Indenture dated as of June 1, 1982 (incorporated by reference to Exhibit 4.14(d) of the Annual Report on Form 10-K dated December 31, 1991 of Chemical Banking Corporation). 4.5 (a) Form of Indenture dated as of June 1, 1985 between Manufacturers Hanover Corporation and IBJ Schroder Bank and Trust Company, as Trustee, relating to 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). 4.5 (b) Form of First Supplemental Indenture dated as of December 31, 1991 among Chemical Banking Corporation, Manufacturers Hanover Corporation and IBJ Schroder Bank and Trust Company 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). 4.6 (a) Form of 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 Registration Statement on Form S-3 (No. 33-60262) of Margaretten Financial Corporation). 4.6 (b) Form of 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). 10.1 Key Executive Performance Plan of Chemical Banking Corporation (incorporated by reference to Exhibit 10.4 to the Annual Report on Form 10-K for the year ended December 31, 1994 of Chemical Banking Corporation). 10.2 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 for the year ended December 31, 1994 of Chemical Banking Corporation). 10.3 Deferred Compensation Plan for Non-Employee Directors of Chemical Banking Corporation and Chemical Bank, as amended and restated effective December 15, 1992 (incorporated by reference to Exhibit 10.6 to the Annual Report on Form 10-K for the year ended December 31, 1992 of Chemical Banking Corporation). 10.4 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 for the year ended December 31, 1992 of Chemical Banking Corporation). 10.5 Forms of employment agreements as entered into by Chemical Banking Corporation and certain of its executive officers. 10.6 Post-Retirement Compensation Plan for Non-Employee Directors, as amended and restated as of December 15, 1992 (incorporated by reference to Exhibit 10.10 to the Annual Report on Form 10-K for the year ended December 31, 1992 of Chemical Banking Corporation). 96 Exhibit No. Description ------- ----------- 10.7 Permanent Life Insurance Options Plan (incorporated by reference to Exhibit 10.11 to the Annual Report on Form 10-K for the year ended December 31, 1992 of Chemical Banking Corporation). 10.8 Executive Retirement Plan of Chemical Banking Corporation and Certain Subsidiaries. 10.9 Supplemental Retirement Plan of Chemical Bank and Certain Affiliated Companies, restated effective January 1, 1993 and as amended through January 1, 1995. 11.1 Computation of Net Income per Common Share. 12.0 Computation of ratio of earnings to fixed charges. 12.1 Computation of ratio of earnings to fixed charges and preferred stock dividend requirements. 21.1 List of Subsidiaries of Chemical Banking Corporation. 22.1 Annual Report on Form 11-K of the Chemical Savings Plan of Chemical Bank and Certain Affiliates (to be filed by amendment pursuant to Rule 15d-21 under the Securities Exchange Act of 1934). 22.2 Annual Report on Form 11-K of the Margaretten Financial Corporation Savings Plan (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. 99.0 Supplemental Pro Forma Financial Statements. EX-10.5 2 EMPLOYMENT AGREEMENT 1 Exhibit 10.5 AGREEMENT THIS AGREEMENT dated as of August 27, 1995 is made by and between Chemical Banking 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 Company has entered into an Agreement and Plan of Merger with The Chase Manhattan Corporation, dated as of August 27, 1995, under which Chase will be merged into the Company (the "Merger"); and WHEREAS the Board of Directors of the Company (the "Board") recognizes that, as is the case with many publicly-held corporations, the Merger and the uncertainty and questions which it may raise among management may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders; 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 2 2 assigned duties without distraction in the face of potential uncertainty arising from the Merger; 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 the last Section hereof. 2. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect through December 31, 1996; provided, however, if Shareholder Approval shall have occurred during the term of this Agreement, this Agreement shall continue in effect for a period of 24 months beyond the month in which such Shareholder Approval occurred. 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 set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the "Severance Payments" described in Section 6.01 hereof and the other payments and benefits described herein in the event the Executive's employment with the Company is terminated following Shareholder Approval and during the term of this Agreement. No amount or benefit shall be payable under this Agreement unless there shall have been (or, under the terms hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company, as described in Section 6.01 hereof, following 3 3 Shareholder Approval. 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. The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement the Executive will remain in the employ of the Company until the earliest of (i) a date which is twelve (12) months from the date of such Board Approval, (ii) the date of Shareholder Approval, (iii) the date of termination by the Executive of the Executive's employment for Good Reason (determined by treating the Board Approval as Shareholder Approval in applying the definition of Good Reason), by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 5.01 Following Shareholder Approval and during the term of this Agreement, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Executive's full salary shall be paid to the Executive by the Company at a rate no less than the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company or its subsidiaries during such period, 4 4 until the Executive's employment is terminated by the Company for Disability. 5.02 If the Executive's employment shall be terminated for any reason following Shareholder Approval and during the term of this Agreement, the Executive's full salary shall be paid to the Executive by the Company through the Date of Termination at the rate in effect at the time the Notice of Termination is given, together with all compensation and benefits payable to or with respect to the Executive through the Date of Termination under the terms of any compensation or benefit plan, program or arrangement maintained by the Company or its subsidiaries during such period. 5.03 If the Executive's employment shall be terminated for any reason following Shareholder Approval and during the term of this Agreement, the Executive's normal post-termination compensation and benefits shall be paid to the Executive as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the retirement, insurance and other compensation or benefit plans, programs and arrangements maintained by the Company or its subsidiaries. 6. Severance Payments. 6.01 The Company shall pay the Executive the payments described in this Section 6.01 (the "Severance Payments") upon the termination of the Executive's employment with the Company following Shareholder Approval and during the term of this Agreement, in addition to the payments and benefits described in 5 5 Section 5 hereof, unless such termination is (i) by the Company for Cause, (ii) by reason of death, Disability or Retirement, or (iii) by the Executive without Good Reason. The Executive's employment shall be deemed to have been terminated following Shareholder Approval by the Company without Cause or by the Executive with Good Reason if the Executive's employment is terminated prior to Shareholder Approval without Cause at the request of Chase (or its affiliate) or if the Executive terminates his employment with Good Reason prior to Shareholder Approval (determined by treating Board Approval as Shareholder Approval in applying the definition of Good Reason) if the circumstance or event which constitutes Good Reason occurs at the request of Chase (or its affiliate). The Executive's employment with the Company shall not be deemed terminated solely because of a redesignation of the Executives's title or employer among the Company and its primary subsidiaries. (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 lump sum severance payment, in cash, equal to three times the sum of (i) the higher of 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 or in effect immediately prior to Shareholder Approval, and (ii) the average percentage annual bonus paid or determined and payable to the Executive over the preceding five years 6 6 (expressed as a percentage of Annual Base Salary) and applied to the Executive's Annual Base Salary as determined pursuant to clause (i) above. (B) For a 36 month period after the Date of Termination, the Company shall arrange to provide the Executive with life, disability, 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 subsequent to Shareholder Approval which reduction constitutes Good Reason). Benefits otherwise receivable by the Executive pursuant to this Section 6.01(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). If the benefits provided to the Executive under this Section 6.01(B) shall result in a decrease, pursuant to Section 6.02, in the Severance Payments and these Section 6.01(B) benefits are thereafter reduced pursuant to the immediately preceding sentence because of the receipt of comparable benefits, the Company shall, at the time of such reduction, pay to the Executive the lesser of (i) the amount of the decrease made in the Severance Payments pursuant to Section 6.02(a), or (ii) the maximum amount which can be paid to the Executive without being, or causing any other 7 7 payment to be, nondeductible by reason of section 280G of the Code. (C) "Employee Benefits" to which the Executive was entitled pursuant to an individual agreement with the Company as in effect immediately prior to the effective date hereof shall be provided to the Executive in accordance with the terms thereof. Employee Benefits, for this purpose, shall include benefits and other rights granted under such individual agreement with respect to the Company's (i) Permanent Life Insurance Options Plan, (ii) Supplemental Savings Incentive Plan, (iii) Supplemental Retirement Benefits Plan, (iv) Executive Cash Plan for Retirement, (v) post-retirement benefits under a welfare benefits plan and (vi) any additional supplemental pension benefit provided for under the terms of the individual agreement. Notwithstanding the foregoing, there shall be no duplication of benefits or payments under this Agreement and any such individual agreement. 6.02 (a) Notwithstanding any other provisions of this Agreement, in the event that any payment or benefit received or to be received by the Executive in connection with Shareholder Approval or 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, any Person whose actions result in Shareholder Approval or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance 8 8 Payments, being hereinafter called "Total Payments") would subject the Executive to an 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 9 9 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 (4) of the Code. (b) 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 6.02(b), 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, (i) 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 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 10 10 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 (ii) 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 (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 11 11 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. 6.03 The payments provided for in Section 6.01(A) and Section 6.02(b) 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 6.02(a) 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 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 12 12 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, 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). 6.04 The Company also shall pay to the Executive reasonable legal fees and reasonable expenses incurred in good faith by the Executive as a result of a termination which entitles the Executive to the Severance Payments (including, but not limited, to all such fees and expenses, if any, incurred in disputing any such termination or in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder). Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 13 13 7. Termination Procedures and Compensation During Dispute. 7.01 Notice of Termination. After Shareholder Approval and during the term of this Agreement, any purported termination of the Executive's employment with the Company (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 10 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 the facts and circumstances claimed to provide a basis for termination of the Executive's employment with the Company under the provision so indicated. 7.02 Date of Termination. "Date of Termination", with respect to any purported termination of the Executive's employment after Shareholder Approval and during the term of this Agreement, shall mean (i) 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 (ii) 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, 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) 14 14 days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 7.03 Dispute Concerning Termination. If within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.03), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. 7.04 Compensation During Dispute. If a purported termination occurs following Shareholder Approval and during the term of this Agreement, and such termination is disputed in accordance with Section 7.03 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in 15 15 accordance with Section 7.03 hereof. Amounts paid under this Section 7.04 are in addition to all other amounts due under this Agreement (other than those due under Section 5.02 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. 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 6 or Section 7.04. Further, the amount of any payment or benefit provided for in Section 6 (other than Section 6.01(B)) or Section 7.04 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 claimed to be owed by the Executive to the Company or any of its subsidiaries, or otherwise. 9. Successors; Binding Agreement. 9.01 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 16 16 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 after Shareholder Approval, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 9.02 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, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. 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: 17 17 To the Company: Chemical Banking Corporation 270 Park Avenue New York, New York 10017 Attention: General Counsel To the Executive: 11. 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 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 18 18 which the Executive has agreed. The obligations of the Company and the Executive under Sections 6 and 7 shall survive the expiration of the term of this Agreement. 12. 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. 13. 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. 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 19 19 (60) days following receipt of such appeal. Failure to respond to such appeal within such period shall be deemed a denial of such appeal. 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; provided, however, that the Executive shall be entitled to seek specific performance of the Executive's right to be paid by the Company until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 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 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) "Board" shall mean the Board of Directors of the Company. 20 20 (D) "Board Approval" shall mean the approval by the Board of the Agreement and Plan of Merger, dated as of August 27, 1995, between Chemical Banking Corporation and The Chase Manhattan Corporation. (E) "Cause" for termination by the Company of the Executive's employment, after Shareholder Approval, 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 Termination for Good Reason by the Executive pursuant to Section 7.01) 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 and materially 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 21 21 without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and its subsidiaries. (F) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (G) "Company" shall mean Chemical Banking Corporation and any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law or otherwise (except in determining, under Section 15(F) hereof, whether or not Shareholder Approval of the Company has occurred in connection with such succession). (H) "Date of Termination" shall have the meaning stated in Section 7.02 hereof. (I) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's 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 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. (J) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. 22 22 (K) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (L) "Executive" shall mean the individual named in the first paragraph of this Agreement. (M) "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), (IV), (V), (VI) or (VII) 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 in the overall importance of the Executive's role, as determined by balancing (i) any increase or decrease in the scope of the Executive's management responsibilities against (ii) 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 (a) a change in the Executive's title or employer, (b) a change in the hierarchy and (c) a change in the Executive's responsibilities from line to staff or vice versa, shall, by itself, 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; 23 23 (III) the relocation of the principal place of the Executive's employment to a location that is more than 50 miles from such principal place of employment immediately prior to Shareholder Approval (unless such relocation is to the New York Metropolitan Area or from one location outside of the United States); (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 under any deferred compensation program of the Company or a subsidiary within seven (7) days of 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 Committee of the Board of Directors of the Company (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 Shareholder Approval does not fairly reflect such performance; (VI) the failure by the Company or a subsidiary to include the Executive in any other employee benefit or 24 24 compensation plan or arrangement on a basis reasonably comparable to that of other executives of the Company 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 faith by the Compensation Committee of the Board of Directors of the Company (or its designee), shall not be considered Good Reason; or (VII) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.01; for purposes of this Agreement, no such purported termination shall be effective. 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. (N) "Gross-Up Payment" shall have the meaning given in Section 6.02(b) hereof. (O) "Notice of Termination" shall have the meaning stated in Section 7.01 hereof. (P) "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 25 25 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 stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. (Q) "Retirement" shall be deemed the reason for the termination by the Company or the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, not including early retirement, generally applicable to its salaried employees, as in effect immediately prior to Board Approval, or in accordance with any retirement arrangement established by the Board with the Executive's consent with respect to the Executive. (R) "Severance Payments" shall mean those payments described in Section 6.01 hereof. 26 26 (S) "Shareholder Approval" shall mean the approval by the shareholders of the Company and Chase of the Agreement and Plan of Merger, dated as of August 27, 1995, between Chemical Banking Corporation and The Chase Manhattan Corporation. (T) "Total Payments" shall mean those payments described in Section 6.02 hereof. CHEMICAL BANKING CORPORATION By _________________________ Name: Title: ____________________________ Executive 27 AGREEMENT THIS AGREEMENT dated as of August 27, 1995 is made by and between Chemical Banking 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 Company has entered into an Agreement and Plan of Merger with The Chase Manhattan Corporation, dated as of August 27, 1995, under which Chase will be merged into the Company (the "Merger"); and WHEREAS the Board of Directors of the Company (the "Board") recognizes that, as is the case with many publicly-held corporations, the Merger and the uncertainty and questions which it may raise among management may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders; 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 without distraction in the face of potential uncertainty arising from the Merger; 28 2 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 the last Section hereof. 2. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect through December 31, 1996; provided, however, if Shareholder Approval shall have occurred during the term of this Agreement, this Agreement shall continue in effect for a period of 24 months beyond the month in which such Shareholder Approval occurred. 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 set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the "Severance Payments" described in Section 6.01 hereof and the other payments and benefits described herein in the event the Executive's employment with the Company is terminated following Shareholder Approval and during the term of this Agreement. No amount or benefit shall be payable under this Agreement unless there shall have been (or, under the terms hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company, as described in Section 6.01 hereof, following Shareholder Approval. This Agreement shall not be construed as creating an express or implied contract of employment and, except 29 3 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. The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement the Executive will remain in the employ of the Company until the earliest of (i) a date which is twelve (12) months from the date of such Board Approval, (ii) the date of Shareholder Approval, (iii) the date of termination by the Executive of the Executive's employment for Good Reason (determined by treating the Board Approval as Shareholder Approval in applying the definition of Good Reason), by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 5.01 Following Shareholder Approval and during the term of this Agreement, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Executive's full salary shall be paid to the Executive by the Company at a rate no less than the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company or its subsidiaries during such period, until the Executive's employment is terminated by the Company for Disability. 30 4 5.02 If the Executive's employment shall be terminated for any reason following Shareholder Approval and during the term of this Agreement, the Executive's full salary shall be paid to the Executive by the Company through the Date of Termination at the rate in effect at the time the Notice of Termination is given, together with all compensation and benefits payable to or with respect to the Executive through the Date of Termination under the terms of any compensation or benefit plan, program or arrangement maintained by the Company or its subsidiaries during such period. 5.03 If the Executive's employment shall be terminated for any reason following Shareholder Approval and during the term of this Agreement, the Executive's normal post-termination compensation and benefits shall be paid to the Executive as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the retirement, insurance and other compensation or benefit plans, programs and arrangements maintained by the Company or its subsidiaries. 6. Severance Payments. 6.01 The Company shall pay the Executive the payments described in this Section 6.01 (the "Severance Payments") upon the termination of the Executive's employment with the Company following Shareholder Approval and during the term of this Agreement, in addition to the payments and benefits described in Section 5 hereof, unless such termination is (i) by the Company for Cause, (ii) by reason of death, Disability or Retirement, or 31 5 (iii) by the Executive without Good Reason. The Executive's employment shall be deemed to have been terminated following Shareholder Approval by the Company without Cause or by the Executive with Good Reason if the Executive's employment is terminated prior to Shareholder Approval without Cause at the request of Chase (or its affiliate) or if the Executive terminates his employment with Good Reason prior to Shareholder Approval (determined by treating Board Approval as Shareholder Approval in applying the definition of Good Reason) if the circumstance or event which constitutes Good Reason occurs at the request of Chase (or its affiliate). The Executive's employment with the Company shall not be deemed terminated solely because of a redesignation of the Executives's title or employer among the Company and its primary subsidiaries. (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 lump sum severance payment, in cash, equal to two times the sum of (i) the higher of 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 or in effect immediately prior to Shareholder Approval, and (ii) the average percentage annual bonus paid or determined and payable to the Executive over the preceding five years (expressed as a percentage of Annual Base Salary) and 32 6 applied to the Executive's Annual Base Salary as determined pursuant to clause (i) above. (B) For a 24 month period after the Date of Termination, the Company shall arrange to provide the Executive with life, disability, 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 subsequent to Shareholder Approval which reduction constitutes Good Reason). Benefits otherwise receivable by the Executive pursuant to this Section 6.01(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). If the benefits provided to the Executive under this Section 6.01(B) shall result in a decrease, pursuant to Section 6.02, in the Severance Payments and these Section 6.01(B) benefits are thereafter reduced pursuant to the immediately preceding sentence because of the receipt of comparable benefits, the Company shall, at the time of such reduction, pay to the Executive the lesser of (i) the amount of the decrease made in the Severance Payments pursuant to Section 6.02(a), or (ii) the maximum amount which can be paid to the Executive without being, or causing any other 33 7 payment to be, nondeductible by reason of section 280G of the Code. (C) "Employee Benefits" to which the Executive was entitled pursuant to an individual agreement with the Company as in effect immediately prior to the effective date hereof shall be provided to the Executive in accordance with the terms thereof. Employee Benefits, for this purpose, shall include benefits and other rights granted under such individual agreement with respect to the Company's (i) Permanent Life Insurance Options Plan, (ii) Supplemental Savings Incentive Plan, (iii) Supplemental Retirement Benefits Plan, (iv) Executive Cash Plan for Retirement, (v) post-retirement benefits under a welfare benefits plan and (vi) any additional supplemental pension benefit provided for under the terms of the individual agreement. Notwithstanding the foregoing, there shall be no duplication of benefits or payments under this Agreement and any such individual agreement. 6.02 (a) Notwithstanding any other provisions of this Agreement, in the event that any payment or benefit received or to be received by the Executive in connection with Shareholder Approval or 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, any Person whose actions result in Shareholder Approval or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance 34 8 Payments, being hereinafter called "Total Payments") would subject the Executive to an 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 35 9 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 (4) of the Code. (b) 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 6.02(b), 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, (i) 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 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 36 10 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 (ii) 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 (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 37 11 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. 6.03 The payments provided for in Section 6.01(A) and Section 6.02(b) 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 6.02(a) 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 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 38 12 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, 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). 6.04 The Company also shall pay to the Executive reasonable legal fees and reasonable expenses incurred in good faith by the Executive as a result of a termination which entitles the Executive to the Severance Payments (including, but not limited, to all such fees and expenses, if any, incurred in disputing any such termination or in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder). Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 39 13 7. Termination Procedures and Compensation During Dispute. 7.01 Notice of Termination. After Shareholder Approval and during the term of this Agreement, any purported termination of the Executive's employment with the Company (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 10 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 the facts and circumstances claimed to provide a basis for termination of the Executive's employment with the Company under the provision so indicated. 7.02 Date of Termination. "Date of Termination", with respect to any purported termination of the Executive's employment after Shareholder Approval and during the term of this Agreement, shall mean (i) 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 (ii) 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, 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) 40 14 days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 7.03 Dispute Concerning Termination. If within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.03), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. 7.04 Compensation During Dispute. If a purported termination occurs following Shareholder Approval and during the term of this Agreement, and such termination is disputed in accordance with Section 7.03 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in 41 15 accordance with Section 7.03 hereof. Amounts paid under this Section 7.04 are in addition to all other amounts due under this Agreement (other than those due under Section 5.02 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. 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 6 or Section 7.04. Further, the amount of any payment or benefit provided for in Section 6 (other than Section 6.01(B)) or Section 7.04 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 claimed to be owed by the Executive to the Company or any of its subsidiaries, or otherwise. 9. Successors; Binding Agreement. 9.01 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 42 16 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 after Shareholder Approval, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 9.02 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, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. 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: 43 17 To the Company: Chemical Banking Corporation 270 Park Avenue New York, New York 10017 Attention: General Counsel To the Executive: 11. 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 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 44 18 which the Executive has agreed. The obligations of the Company and the Executive under Sections 6 and 7 shall survive the expiration of the term of this Agreement. 12. 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. 13. 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. 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 45 19 (60) days following receipt of such appeal. Failure to respond to such appeal within such period shall be deemed a denial of such appeal. 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; provided, however, that the Executive shall be entitled to seek specific performance of the Executive's right to be paid by the Company until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 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 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) "Board" shall mean the Board of Directors of the Company. 46 20 (D) "Board Approval" shall mean the approval by the Board of the Agreement and Plan of Merger, dated as of August 27, 1995, between Chemical Banking Corporation and The Chase Manhattan Corporation. (E) "Cause" for termination by the Company of the Executive's employment, after Shareholder Approval, 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 Termination for Good Reason by the Executive pursuant to Section 7.01) 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 and materially 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 47 21 without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and its subsidiaries. (F) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (G) "Company" shall mean Chemical Banking Corporation and any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law or otherwise (except in determining, under Section 15(F) hereof, whether or not Shareholder Approval of the Company has occurred in connection with such succession). (H) "Date of Termination" shall have the meaning stated in Section 7.02 hereof. (I) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's 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 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. (J) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. 48 22 (K) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (L) "Executive" shall mean the individual named in the first paragraph of this Agreement. (M) "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), (IV), (V), (VI) or (VII) 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 in the overall importance of the Executive's role, as determined by balancing (i) any increase or decrease in the scope of the Executive's management responsibilities against (ii) 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 (a) a change in the Executive's title or employer, (b) a change in the hierarchy and (c) a change in the Executive's responsibilities from line to staff or vice versa, shall, by itself, 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; 49 23 (III) the relocation of the principal place of the Executive's employment to a location that is more than 50 miles from such principal place of employment immediately prior to Shareholder Approval (unless such relocation is to the New York Metropolitan Area or from one location outside of the United States); (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 under any deferred compensation program of the Company or a subsidiary within seven (7) days of 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 Committee of the Board of Directors of the Company (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 Shareholder Approval does not fairly reflect such performance; (VI) the failure by the Company or a subsidiary to include the Executive in any other employee benefit or 50 24 compensation plan or arrangement on a basis reasonably comparable to that of other executives of the Company 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 faith by the Compensation Committee of the Board of Directors of the Company (or its designee), shall not be considered Good Reason; or (VII) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.01; for purposes of this Agreement, no such purported termination shall be effective. 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. (N) "Gross-Up Payment" shall have the meaning given in Section 6.02(b) hereof. (O) "Notice of Termination" shall have the meaning stated in Section 7.01 hereof. (P) "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 51 25 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 stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. (Q) "Retirement" shall be deemed the reason for the termination by the Company or the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, not including early retirement, generally applicable to its salaried employees, as in effect immediately prior to Board Approval, or in accordance with any retirement arrangement established by the Board with the Executive's consent with respect to the Executive. (R) "Severance Payments" shall mean those payments described in Section 6.01 hereof. 52 26 (S) "Shareholder Approval" shall mean the approval by the shareholders of the Company and Chase of the Agreement and Plan of Merger, dated as of August 27, 1995, between Chemical Banking Corporation and The Chase Manhattan Corporation. (T) "Total Payments" shall mean those payments described in Section 6.02 hereof. CHEMICAL BANKING CORPORATION By _________________________ Name: Title: ____________________________ Executive EX-10.8 3 EXECUTIVE RETIREMENT PLAN 1 EXHIBIT 10.8 [CHEMICAL BANKING CORPORATION LOGO] EXECUTIVE RETIREMENT PLAN OF CHEMICAL BANKING CORPORATION AND CERTAIN SUBSIDIARIES PURPOSE. This Plan is a pension plan designed to provide supplemental retirement benefits to a select group of management or highly compensated employees. This Plan shall be unfunded and shall not be subject to Parts 2, 3 or 4 of Title 1 of the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended from time to time. ARTICLE I. DEFINITIONS. The following are defined terms wherever they appear in the Plan: "Accrual Amount" shall mean the amount which has been specified in writing, from time to time, by the Administrator to the Participant pursuant to which his/her benefit will be based at termination of employment with an Employer; provided that the Accrual Amount at the time specified by the Administrator shall not exceed the amount specified by the Committee for the salary grade level of the Participant; provided, that if an individual becomes eligible to participate after age 58 and declines to satisfy certain conditions with the consent of the Administrator, the Administrator may take into consideration in specifying the Accrual Amount that such conditions have not been satisfied. "Accrued Benefit" shall mean the amount calculated pursuant to Section 3.1(a) as of any determination date, as if the Participant had terminated employment on such date. It shall not include actuarial factors, payment dates, form of payment and other optional benefits hereunder. 2 "Administrator" shall mean the individual holding the title Director of Human Resources of the Corporation or the Bank, or any successor title. "Bank" shall mean Chemical Bank, or any successor thereto, whether by merger, consolidation, purchase of substantially all its assets, or otherwise. "Board" shall mean the Board of Directors of the Corporation; provided that any action taken by a duly authorized committee of the Board (including any action pursuant to Article 6.1) within the scope of the authority designated to it by the Board, shall be considered an action of the Board for purposes of this Plan. "Cause" shall mean either (i) any violation of the Code of Conduct of the Corporation, including, but not limited to, an act or acts of personal dishonesty resulting or intended to result in the personal enrichment of the Participant to the detriment of his/her Employer and gross negligence or willful misconduct in the performance of the Participant's duties, or (ii) the issuance of an order by a United States or State bank regulatory authority, removing the Participant from office pursuant to a disciplinary proceeding based on the actions of the Participant. "Corporation" shall mean Chemical Banking Corporation or any successor thereto, whether by merger, consolidation, purchase of substantially all its assets, or otherwise. "Disability Plan" shall mean the Long-Term Disability Plan of Chemical Bank and Certain Affiliated Companies. "Disabled" or "Disability" shall mean a condition resulting in the receipt of benefits by a Participant under the Long-Term Disability Plan. 2 3 "Early Retirement" shall mean a termination of employment of an Employee with an Employer or any Subsidiary on or after attaining age 55 and with a Period of Service of at least 10 years. "Effective Date" shall mean April 1, 1995. "Employee" shall mean an individual who is a salaried employee of an Employer. "Employer" shall mean the Corporation or any Subsidiary which is designated by the Administrator as an Employer. "Initial Plan Participation Date" shall mean the date specified by the Administrator in the notice referred to in Section 2.1, which shall not be earlier than the date that the individual satisfies the criteria established by the Board for participation, and in no event earlier than January 1, 1992. "Normal Retirement" shall mean termination of employment of an Employee with an Employer or any Subsidiary on or after attaining age 60 with a Period of Service of at least 10 years. "Participant" shall mean each Employee of the Employer who is eligible to participate under Section 2.1 and elects to participate as provided for in Section 2.2. "Period of Service" shall have the meaning ascribed thereto by the Retirement Plan of Chemical Bank and Certain Affiliated Companies, or its successor plan; provided that a Period of Service shall exclude service prior to the date of acquisition with respect to an entity acquired by an Employer after January 1, 1995, unless the Administrator specifies to the contrary. "Plan" shall mean this Executive Retirement Plan of Chemical Banking Corporation and Certain Subsidiaries. 3 4 "Retirement Plan" shall mean the Retirement Plan of Chemical Bank and Certain Affiliated Companies, or its successor plan. "Subsidiary" shall mean an entity in which an Employer owns directly, or indirectly, fifty percent or more of the outstanding voting common stock or, if not a corporation, fifty percent or more of the voting power of such entity. "Surviving Spouse" shall have the meaning ascribed to the individual entitled to the Final Salary Benefit of a Participant under the Retirement Plan upon the death of a Participant. ARTICLE II. PARTICIPATION. 2.1 Eligibility. The Administrator shall notify, in writing, each key Employee who is eligible to participate in the Plan and shall specify in such writing the Initial Plan Participation Date and Level of Participation of each such Employee; provided that each such key Employee shall have satisfied the criteria established by the Board for participation in this Plan, or shall be listed on Schedule I hereto. 2.2 Participation. Each Employee shall elect within [sixty days] after the date of notification by the Administrator of his/her eligibility to participate in the Plan by completing such forms as the Administrator shall require, including but not limited to, an agreement to participate in other programs as the Administrator may specify and by providing, from time to time, such information as may be specified by the Administrator. If any individual does not elect to participate in the Plan when first eligible, the Administrator, in his/her sole discretion, may extend on another date or dates the opportunity to participate hereunder to such individual on such terms and conditions as the Administrator may specify in writing. 2.3 (a) Discontinued Participation by Election of Employer. Notwithstanding the continued employment of a Participant with an Employer, the Administrator may in the exercise of his/her sole discretion, terminate the participation of any Participant by written notice to the 4 5 Participant. No additional benefits shall be accrued under Section 3.1(a) from the date active participation ceases hereunder, as specified by the Administrator. Such Accrued Benefit shall be subject to vesting under Section 4.1 and to the provisions of Section 3.1(c) or (d), if applicable, upon termination of employment with an Employer or Subsidiary. (b) Discontinued Participation by Election of Participant. A Participant may voluntarily discontinue participation in the Plan at any time by giving 30 days' advance written notice to the Administrator. No additional benefits shall be accrued under Section 3.1(a) from the date active participation ceases hereunder, as specified by the Administrator. Such Accrued Benefit shall be forfeited unless the Participant is vested pursuant to Section 4.1 as of the date of receipt of the notice by the Administrator. In addition, unless such Participant, as of the date of receipt of the notice by the Administrator, has satisfied the criteria for Retirement or Early Retirement, as the case may be, such Accrued Benefit (if vested) shall be treated in accordance with Section 3.1(e). ARTICLE III. BENEFITS. 3.1 (a) Annuity Benefits. Subject to Sections 3.1(b)-(f), each Participant who is vested pursuant to Section 4.1, shall receive an annual annuity, payable in 12 equal monthly installments, for life commencing at age 65, equal to the product of (i) his/her Period of Service from the Initial Plan Participation Date to the date of termination of employment with an Employer (or the date participation is discontinued, as specified pursuant to Section 2.3, if applicable) multiplied by (ii) his/her Accrual Amount as specified by the Administrator. (b) Change in Participant Level. Notwithstanding Section 3.1(a), if a Participant, within a 60 day period following written notice from the Administrator that such Participant is eligible to participate at an increased Accrual Amount, does not satisfy various criteria as specified by the Administrator for participation at such increased Accrual Amount, the annuity benefit described in Section 3.1(a) shall be based on the Accrual Amount for which such criteria were satisfied. 5 6 (c) Normal Retirement. Upon Normal Retirement, a Participant shall receive the annual annuity benefit as calculated under Section 3.1(a) without actuarial reduction. (d) Early Retirement. Upon Early Retirement, a Participant shall receive the annual annuity benefit as calculated under Section 3.1(a) reduced by 0.5% for each month prior to age 60 that such benefit commences. (e) Vested Terminated Benefits. Upon a termination of employment with an Employer or a Subsidiary after a Period of Service of at least 10 years but before attaining age 55, a Participant shall receive the annual annuity benefit as calculated under Section 3.1(a) commencing at age 65; provided that if the benefit commences prior to age 65, it shall be reduced by .625% for each month prior to age 65 that such benefit commences. (See Section 5.1(b) for payment date.) (f) Disability. If a Participant becomes Disabled and receives for an 18 month period disability benefits from the Disability Plan, the Accrual Amount per one year Period of Service, as specified by written notice from Administrator, shall be reduced by 50% for each one year Period of Service commencing as of the first day of the month following the expiration of such 18 month period until the first to occur: (i) the date of a Participant's return to active employment with an Employer, or (ii) the date of termination of employment, or (iii) the date disability benefits cease under the Disability Plan. ARTICLE IV. VESTING DATE. 4.1 Vesting. A Participant shall vest in his/her annuity benefit described in Section 3.1 after a Period of Service of at least 10 years. If employment terminates with an Employer or Subsidiary at any time prior to the satisfaction of such Period of Service, all 6 7 benefits described in Article III of the Plan shall be forfeited and shall not be restored upon rehire or recommencement of participation. 4.2 Forfeiture of Benefits. Notwithstanding Section 4.1 to the contrary, Accrued Benefits (whether or not in pay status) shall be terminated and forfeited in the following circumstances: (i) a termination of employment for Cause; (ii) within 2 years of a termination of employment, the solicitation of the customers, or clients of the Employer or any affiliate of the Employer by the Participant in order to compete with his/her Employer or any affiliate of the Employer; (iii) within 2 years of termination of employment, the hiring of, or the attempt to hire, the Employees of the Employer or any affiliate of the Employer; (iv) at any time after a termination of employment, a release to any party unrelated to an Employer of secret or confidential information obtained by the Participant in the course of his/her employment, except as the case may be required by law; or (v) at any time, an attempt to assign, encumber or hypothecate benefits as provided in Section 7.1. ARTICLE V. PAYMENT. 5.1(a) Annuity Payments on Retirement. If employment terminates as a result of Normal Retirement or Early Retirement, benefits shall commence on the first day of the month following such Normal or Early Retirement in the form specified in Section 3.1(a) and subject 7 8 to the reduction specified in Section 3.1(d), if applicable. The Administrator may, in his/her sole discretion, specify a form of annuity other than a single life annuity. The Administrator shall specify such actuarial factors as he/she deems reasonable or appropriate in converting the single life annuity under Section 3.1(a) into such other annuity form. (b) Other Annuity Payment. Except as otherwise provided in Section 5.1(a) above, payment of the annuity benefit under the Plan shall be made at the same time, in the same form of payment as of the Participant's Final Salary Benefit under the Retirement Plan. The Administrator may, however, in his/her and absolute discretion, provide for a different form of payments. The Administrator shall specify such actuarial factors as he/she deems reasonable or appropriate in converting the single life annuity under Section 3.1(a) into such other annuity form. 5.2 Survivor Benefit After Termination of Employment. In the event that a Participant with a vested annuity benefit dies after his/her employment has terminated but before the annuity commences, the Surviving Spouse of such individual shall receive an amount equal to that provided to a surviving spouse under a 50% joint and survivor annuity commencing on the first day of the month following (i) the date of death if death occurs after age 55 or (ii) the date that such Participant would have attained age 55 if death occurs before age 55. The amount of such spousal annuity shall be based upon the assumption that the Participant had received the benefit specified in Section 3.1(a) on the later of the day preceding his date of death or age 55, in the form of a 50% joint and survivor benefit, and immediately died. The Administrator may, specify such actuarial factors as he/she deems reasonable or appropriate in converting the single life annuity under Section 3.1(a) into a 50% joint and survivor annuity benefit. 5.3 Small Benefits. If any annuity payment hereunder is $200.00 or less per month, the Administrator shall, within a reasonable period of time following the date that the first such payment is due, convert such amount into a lump sum utilizing such actuarial factors as he/she deems appropriate or reasonable and shall pay out the lump sum value as soon as practicable 8 9 thereafter. Payment of such lump sum shall relieve and discharge the Plan of all liability to make further payments. 5.4 Responsibility for Payment. Payment of annuity benefits under the Plan shall be made by the Employer who last employed the Participant. In the case benefits are payable with respect to a Participant whose service included employment with more than one Employer, the Administrator, in his sole discretion , shall determine any amounts to be reimbursed by the prior Employer to the Employer paying benefits hereunder. 5.5 Withholding. The Employer shall withhold any amount required to be withheld under applicable Federal, state and local laws, and any such payment shall be reduced by the amount so withheld. 5.6 Participant's Rights Unsecured. All annuity payments under the Plan shall be made from the general funds of the Employer. No assets of the Employer shall be required to be segregated or earmarked to represent any liability for the annuity benefits under Section 3.1, but the Employer shall have the right to establish vehicles to assist it in meeting its obligations hereunder. The rights of any person to receive benefits under the Plan shall be only those of a general unsecured creditor; and such status shall not be enhanced by reason of the establishment of any vehicles to assist the Employer in meeting its obligations hereunder. ARTICLE VI AMENDMENT AND TERMINATION. 6.1 Amendment. The Board may amend the Plan in any respect and at any time; provided, however, that no amendment shall have the effect of reducing (i) any benefit then being paid to any Participant or to any other person pursuant to Articles III, or (ii) the Accrued Benefit under Section 3.1(a), theretofore accrued on behalf of any Participant. 9 10 6.2 Termination. The Board may terminate the Plan at any time. In the event of termination, the Plan shall continue in force with respect to any Participant, or other person entitled to an Accrued Benefit under Article III to the extent accrued under the Plan prior to its termination, and shall be binding upon any successor to substantially all the assets of the Corporation or any other Employer. Notwithstanding the foregoing, the Board may determine that it is in the best interests of the Corporation, the Employers or the Participants to terminate the Plan in its entirety and distribute to each Participant (or each person entitled to receive payments hereunder) the value of his/her benefits hereunder, utilizing such actuarial factors, as the Administrator in his/her sole discretion shall deem reasonable. ARTICLE VII. GENERAL PROVISIONS. 7.1 Assignability. No right to receive payments hereunder shall be transferable or assignable by a Participant, other than by will or by the laws of descent and distribution or by a court of competent jurisdiction. Any other attempted assignment or alienation of payments hereunder shall be void and of no force or effect and shall result in forfeiture of benefits. 7.2 Administration. Except as otherwise provided herein, the Plan shall be administered by the Administrator, who shall have the authority to adopt rules and regulations for carrying out the provisions of the Plan, and who shall interpret, construe and implement the provisions of the Plan, including eligibility to participate, Initial Plan Participation Date, Accrual Amount, the entitlement to benefits, the amount of benefits and actuarial factors. 7.3 Legal Opinions. The Administrator may consult with legal counsel, who may be counsel for the Bank or other counsel, with respect to his obligations or duties hereunder, or with respect to any action proceeding or any question of law, and shall not be liable with respect to any action taken, or omitted, by him in good faith pursuant to the advice of such counsel. 7.4 Liability. Any decision made or action taken by the Board, the board of directors (or governing body) of an Employer, Committee, the Administrator or any employee of the 10 11 Corporation or of any Employer, arising out of, or in connection with, the construction, administration, interpretation and effect of the Plan, shall be within absolute discretion of such person, and will be conclusive and binding on all parties. Neither the Administrator nor a member of the Board or the board of directors (or governing body) of an Employer or the Committee and no Employee shall be liable for any act or action hereunder, whether of omission or commission, by any other member or employee or by any agent to whom duties in connection with the administration of the Plan have been delegated or for anything done or omitted to be done in connection with this Plan, except in circumstances involving bad faith. 7.5 Corporate Reorganization. In the event that a corporation or unincorporated entity ceases to meet the definition of an Employer, such corporation or entity shall cease to be an Employer under the Plan and its employees shall cease to be Participants under the Plan. Benefits shall be frozen as specified in Article II. 7.6 Construction. The masculine gender, where appearing in this Plan, shall be deemed to also include the feminine gender. The singular shall also include the plural, where appropriate. 7.7 Claims and Appeals. The Administrator shall establish a claims and appeals procedure that satisfies the requirements of Part 5 of Title I of ERISA. 7.8 Governing Law. The Plan shall be construed and administered in accordance with the laws of the State of New York. 7.9 Not an Employment Contract. Nothing herein shall be construed to confer upon any person any legal right to continued employment with the Corporation or any Subsidiary. 11 EX-10.9 4 SUPPLEMENTAL RETIREMENT PLAN 1 Exhibit 10.9 SUPPLEMENTAL RETIREMENT PLAN OF CHEMICAL BANK AND CERTAIN AFFILIATED COMPANIES RESTATED EFFECTIVE JANUARY 1, 1993 (AS AMENDED THROUGH JANUARY 1, 1995) PURPOSE This Plan is the successor to, and continuation of, the Executive Cash Plan for Retirement of Chemical Banking Corporation and Certain Subsidiaries and of the Supplemental Retirement Benefits of Manufacturers Hanover Trust Company and Certain Affiliated Companies. The purpose of this Plan is to provide an alternate means of paying benefits to certain designated executives participating in the Retirement Plan of Chemical Bank and Certain Affiliated Companies (the "Retirement Plan") which are otherwise precluded under the terms of the Plan. Article I. Definitions The following are defined terms wherever they appear in the Plan: 1.1 "Account" shall have the meaning ascribed thereto under the Retirement Plan. 1.2 "Administrator" shall mean the individual holding the title of Senior Vice President of Compensation and Employee Benefits of Chemical Banking Corporation or the Bank, or successor title, who shall be responsible for those functions assigned to him under the Plan. 1.3 "Affiliated Company" shall have the meaning ascribed thereto under the Retirement Plan. 2 2 1.4 "Bank" shall mean Chemical Bank. 1.5 "Beneficiary" shall have the meaning ascribed thereto under the Retirement Plan. 1.6 "Board" shall mean the Board of Directors of the Bank; provided that any action taken by a duly authorized committee of the Board (including any action pursuant to Article VII) within the scope of authority delegated to it by the Board shall be considered an action of the Board for purposes of this Plan. 1.7 "Code" shall mean the Internal Revenue Code of 1986. Except as otherwise provided, all references to any section of the Code shall be deemed to refer only to such section, as in effect January 1, 1993. 1.8 "Committee" shall mean the Compensation and Benefits Committee of the Board of Directors of the Bank. 1.9 "Compensation Limit" shall mean the dollar limitation imposed by Section 401(a)(17) of the Code on the amount of Salary taken into account in computing benefits under the Retirement Plan. 1.10 "Credit Balance" shall have the meaning ascribed thereto under the Retirement Plan. 1.11 "Effective Date" shall mean January 1, 1993. 1.12 "Employee" shall mean an individual who is an employee of an Employer and a participant in the Retirement Plan. 1.13 "Employer" shall have the meaning ascribed thereto under the Retirement Plan; provided that such entity adopts the Plan by act of its board of directors and which adoption is approved by the Committee or Administrator; provided, however, that any entity 3 3 participating in the MHT Plan or the Prior Plan on December 31, 1992 shall be an Employer under the Plan. 1.14 "Executive Retirement Plan" shall mean the Executive Retirement Plan of Chemical Banking Corporation. 1.15 "Final Average Salary" shall have the meaning ascribed thereto under the Retirement Plan. 1.16 "Final Salary Benefit" shall have the meaning ascribed thereto under the Retirement Plan. 1.17 "Interest Credit" shall have the meaning ascribed thereto under the Retirement Plan. 1.18 "MHT Plan" shall mean the Supplemental Retirement Benefits Plan of Manufacturers Hanover Trust Company and Certain Affiliated Companies as in effect immediately prior to January 1, 1993. 1.19 "Participant" shall mean each Employee of an Employer who participates in the Plan in accordance with the terms and conditions set forth herein. 1.20 "Period of Service" shall have the meaning ascribed thereto under the Retirement Plan. 1.21 "Plan" shall mean the Supplemental Retirement Plan of Chemical Bank and Certain Affiliated Companies, as in effect at any time. 1.22 "Prior Plan" shall mean the Executive Cash Plan for Retirement of Chemical Banking Corporation and Affiliated Companies. 1.23 "Retirement Benefits" shall mean the Credit Balance and Final Salary Benefit under the Retirement Plan. 4 4 1.24 "Retirement Plan" shall mean the Retirement Plan of Chemical Bank and Certain Affiliated Companies, as in effect at any time and as amended from time to time. 1.25 "Salary" has the meaning ascribed thereto by the Retirement Plan. 1.26 "Transition Credit" has the meaning ascribed thereto by the Retirement Plan. Article II. Participation 2.1 Eligibility for Credit Balance and Final Average Salary. Commencing as of January 1, 1993, each Employee whose Salary exceeds the Compensation Limit during any calendar year shall be a Participant as of such date with respect to the benefits described in Sections 3.1 and 3.2. 2.2 Eligibility for Special Salary Credit Based Upon Bonus. Effective as of January 1, 1993, each Employee who participated in the Prior Plan and received Salary Credit based upon a Bonus as of December 31, 1992 shall be a Participant to the extent described in Section 3.4 2.3 Section 415 Limits. Commencing on or after January 1, 1993, if an Employee's distribution of Retirement Benefits is subject to the limitations of Section 415 of the Code, such Employee shall be a Participant as of the date of such distribution and shall be eligible for the benefits described in Section 3.3. Article III. Benefits 3.1 Salary Credits. (a) Effective as of January 1, 1993, each Participant described in Section 2.1 whose Salary in any calendar year exceeds the Compensation Limit shall have an amount credited to an Account under the Plan equal to the excess of (i) the Salary-Based Credit that would have been accrued under the Retirement Plan but for such 5 5 Compensation Limit for such calendar year over (ii) the amount actually credited under the Retirement Plan for such calendar year. (b) Interest Credits. Salary credits hereunder shall be made on a quarterly basis as provided in the Retirement Plan. Accounts shall be credited with the Interest Credits that would have been provided under the Retirement Plan but for the Compensation Limit's application to the Salary-Based Credits. 3.2 Final Average Salary Benefit. Effective as of January 1, 1993, each Participant described in Section 2.1, whose Final Average Salary under the Retirement Plan is reduced by the application of the Compensation Limit in calculating benefits under the Retirement Plan, shall receive a benefit hereunder based upon an annuity for his/her life in an amount equal to the excess of the (i) Final Salary Benefit that would have been payable under the Retirement Plan (including any minimum benefit) without taking into account such Compensation Limit over (ii) Final Salary Benefit actually payable under the Retirement Plan. 3.3 Excess Benefits. Upon any distribution of Retirement Benefits, each Employee whose Retirement Benefits are reduced in any calendar year by application of the limitations of Section 415 of the Code shall receive an amount equal to the excess of the (i) Retirement Benefits payable under the Retirement Plan without application of Section 415 of the Code over (ii) amount actually payable under the Retirement Plan for such calendar year. 3.4 (a) Bonus. The Account of each Participant, whose employment has not terminated by the date that a Bonus is awarded, shall receive a Salary-Based Credit based upon the amount of Bonus specified in this subsection. For any Bonus paid in respect of calendar year 1993, an amount equal to twenty-five percent of the Bonus (unless the Prior Plan specified a higher amount for the Participant) shall be treated as if it were Salary (as 6 6 defined in the Retirement Plan). For any Bonus paid in respect of calendar year 1994, an amount equal to twenty-five percent of the Bonus but only with respect to those individuals who would not be eligible to participate in the Executive Retirement Plan; provided that if Participant would not be eligible to participate in the Executive Retirement Plan and is an Employee on March 31, 1995, the percentage of Bonus treated as Salary shall be seventy-five percent rather than twenty-five percent; provided, further, that after the accrual on account of the 1994 Bonus, there shall be no additional accruals with respect to a Bonus. (b) Interest Credits. The account described in Section 3.4(a) shall receive Interest Credits as set forth in the Retirement Plan. (c) Deferred Compensation. For purposes of Section 3.4(a), the amount of a Bonus includes any amounts deferred under the Deferred Compensation Plan. (d) Date of Credit. For purposes of Section 3.4(a), the Bonus payable on account as of a calendar year, but payable in the next succeeding year shall be credited to an Account as of each December 31. (e) Payment. The Committee shall specify the form and timing of the payment of this benefit. 3.5 Aggregate. Except with respect to the benefits described in Section 3.4 and Section 6.1, the total value of the benefits to be received under the Plan when combined with the Retirement Benefits shall never exceed the value of the Retirement Benefits that would have been payable under the Retirement Plan but for the application of Section 415 of the Code and the Compensation Limit. Such value shall be determined each time that Retirement Benefits are to be paid and the amount payable hereunder shall be appropriately adjusted. 7 7 Article IV. Vesting 4.1 Account and Final Salary Benefit. The benefits described in Sections 3.1, 3.2, 3.3 and 3.4 shall vest upon the date that the benefits under the Retirement Plan vest. Benefits hereunder shall be forfeited upon a termination employment with an Employer or Affiliated Company if such Participant is not then vested in his/her Retirement Benefits. Article V. Payment 5.1 Payment. Except as otherwise provided herein, payment of any amount under the Plan shall be made at the same time, in the same forms of payment, and to the same person or persons as payment of the Participant's Retirement Benefits. The Committee may, however, in its discretion, provide for a different form of payments; provided that if any benefit payable hereunder has a present lump sum value of less than $10,000, such amount may be paid to such Participant in a lump sum in complete discharge of any obligation hereunder. 5.2 Employer Responsible for Payment. Payment of benefits under the Plan shall be made by the Employer who employed the Participant with respect to whom such benefits are payable. In case such benefits are payable with respect to a Participant whose service included employment with more than one Employer, the Administrator shall determine the proportion of such benefit to be paid by each Employer. 5.3 Withholding. The Employer making a payment under this Plan shall withhold any amount required to be withheld under applicable Federal, state and local income tax laws, and any such payment shall be reduced by the amount so withheld. 8 8 5.4 Participant's Rights Unsecured. All payments under the Plan shall be made from the general funds of the Employer making the payment. No assets of the Employer shall be required to be segregated or earmarked to represent any liability for supplemental benefits hereunder, but the Corporation shall have the right to establish vehicles to assist it and the other Employers in meeting their obligations hereunder. The rights of any person to receive benefits under the Plan shall be only those of a general unsecured creditor; and such status shall not be enhanced by reason of the establishment of any funding vehicles to assist the Employers in meeting their obligations hereunder. 5.5 Beneficiary. Upon the death of a Participant who has vested benefits payable under this Plan, the Beneficiary of such Participant under the Retirement Plan shall receive a benefit equal to the amount in excess of the Compensation Limit and Section 415 limitation which a Beneficiary of a Participant would have been entitled to receive under the Retirement Plan. Article VI. Prior Plan and MHT Plan 6.1 Prior Plan. (a) Any individual who was a Participant in the Prior Plan and whose benefit has not been distributed as of January 1, 1993, shall have an Account under the Plan. To the extent provided under Prior Plan, Interest Credits and/or Transition Credits shall be added to the Account, as if such account were an Account under the Retirement Plan. (b) An individual shall vest in the balance of such Account under the Prior Plan as provided in Section 4.1. Benefits are forfeited upon a termination of employment with an Employer or an Affiliated Company if the individual has not satisfied such criteria. 9 9 (c) Distribution of such Account shall be paid in the manner set forth in Section 5.1. (d) Benefits in pay status or deferred under the Prior Plan shall continue to be paid or deferred under the election in effect. 6.2 MHT Plan. (a) Individuals receiving benefits from the MHT Plan shall continue to receive such benefits under the Plan. (b) Individuals who terminated employment on or before January 1, 1993, having satisfied the age and service criteria for a benefit under the MHT Plan and whose benefit under the Retirement Plan is limited by Section 415 of the Code and/or the Compensation Limit shall receive a benefit hereunder as provided for the MHT Plan, provided that such benefit shall not be paid in the form of a lump sum. Article VII. Amendment and Termination 7.1 Amendment. The Board may amend the Plan in any respect and at any time; provided, however, that no amendment shall have the effect of reducing (i) any benefit then being paid to any Participant or to any other person pursuant to Articles III or VI, or (ii) the vested amount of any benefit under Sections 3.1, 3.2, 3.3 and 3.4 theretofore accrued on behalf of any Participant. 7.2 Termination. The Board may terminate the Plan at any time. In the event of termination, the Plan shall continue in force with respect to any Participant, or other person entitled to receive a benefit under Sections 3.1, 3.2, 3.3 and 3.4 to the extent accrued and vested under the Plan prior to its termination, and shall be binding upon any successor to substantially all the assets of the Corporation or any other Employer. Notwithstanding the foregoing, the Board may determine that it is in the best interests of the Corporation, the 10 10 Employers or the Participants to terminate the Plan in its entirety and distribute to each Participant (or other person entitled to receive payments hereunder) the benefit of such Participant thereunder. Article VIII. General Provisions 8.1 Assignability. No right to receive payments hereunder shall be transferable or assignable by a Participant except as provided by Article III of the Plan, or by will or by the laws of descent and distribution or by a court of competent jurisdiction. Any other attempted assignment or alienation of payments hereunder shall be void and of no force or effect. 8.2 Administration. Except as otherwise provided herein, the Plan shall be administered by the Administrator, who shall have the authority to adopt rules and regulations for carrying out the provisions of the Plan, and who shall interpret, construe and implement the provisions of the Plan, including eligibility to participate, the entitlement to benefits and the amount of such benefits. 8.3 Legal Opinions. The Administrator may consult with legal counsel, who may be counsel for the Bank or other counsel, with respect to his obligations or duties hereunder, or with respect to any action proceeding or any question of law, and shall not be liable with respect to any action taken, or omitted, by him in good faith pursuant to the advice of such counsel. 8.4 Liability. Any decision made or action taken by the Board, the board of directors (or governing body) of an Employer, Committee, the Administrator or any employee of the Bank or of any Employer, arising out of, or in connection with, the construction, administration, interpretation and effect of the Plan shall be within its absolute discretion, and 11 11 will be conclusive and binding on all parties. Neither the Administrator nor a member of the Board or the board of directors (or governing body) of an Employer or the Committee and no Employee shall be liable for any act or action hereunder, whether of omission or commission, by any other member or employee or by any agent to whom duties in connection with the administration of the Plan have been delegated or, except in circumstances involving bad faith, for anything done or omitted to be done in connection with this Plan. 8.5 Corporate Reorganization. In the event that a corporation or unincorporated entity ceases to meet the definition of an Employer under Section 1.13, such corporation or entity shall cease to be an Employer under the plan and its employees shall cease to be Participants under the Plan, and the Plan shall be treated as though a separate plan for the benefit of its employees who were Participants in the plan to govern the accrued benefits of each such Participant (or any person entitled to benefits in respect of such a Participant). 8.6 Construction. The masculine gender, where appearing in this Plan, shall be deemed to also include the feminine gender. The singular shall also include the plural, where appropriate. 8.7 Governing Law. The Plan shall be construed and administered in accordance with the laws of the State of New York. 8.8 Not an Employment Contract. Nothing herein shall be construed to confer upon any person any legal right to continued employment with the Bank or any Affiliated Company. EX-11.1 5 COMPUTATION OF NET INCOME 1 - -------------------------------------------------------------------------------- EXHIBIT 11.1 CHEMICAL BANKING CORPORATION AND SUBSIDIARIES COMPUTATION OF NET INCOME PER COMMON SHARE In the 1995 second quarter, the Corporation changed its reporting of earnings per share ("EPS") from reporting simple EPS (which is based solely on the average number of common shares outstanding) to reporting primary and fully-diluted EPS (which are based on the average number of common and common equivalent shares outstanding). Previously, the Corporation reported simple EPS, since the difference between simple EPS and primary EPS or simple EPS and fully-diluted EPS were not material (less than 3%). Primary and fully-diluted EPS are now being reported for all periods presented. For a further discussion on the computation of primary and fully-diluted EPS, see Note One on page 51.
Year Ended December 31, (in millions, except per share amounts) 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE PRIMARY Earnings: Income Before Effect of Accounting Changes $1,816 $1,294 $1,569 Net Effect of Changes in Accounting Principles (11) -- 35 - ------------------------------------------------------------------------------------------------------------------------------ Net Income $1,805 $1,294 $1,604 Less: Preferred Stock Dividend Requirements 105 138 155 - ------------------------------------------------------------------------------------------------------------------------------ Net Income Applicable to Common Stock $1,700 $1,156 $1,449 - ------------------------------------------------------------------------------------------------------------------------------ Shares: Average Common and Common Equivalent Shares Outstanding 252.6 251.3 253.9 - ------------------------------------------------------------------------------------------------------------------------------ Primary Earnings Per Share: Income Before Effect of Accounting Changes $ 6.77 $ 4.60 $ 5.57 Net Effect of Changes in Accounting Principles (0.04) -- 0.14 - ------------------------------------------------------------------------------------------------------------------------------ Net Income $ 6.73 $ 4.60 $ 5.71 - ------------------------------------------------------------------------------------------------------------------------------ ASSUMING FULL DILUTION Earnings: Net Income Applicable to Common Stock $1,700 $1,156 $1,449 Add: Applicable Dividend on Convertible Preferred Stock 7 20 20 - ------------------------------------------------------------------------------------------------------------------------------ Adjusted Net Income $1,707 $1,176 $1,469 - ------------------------------------------------------------------------------------------------------------------------------ Shares: Average Common and Common Equivalent Shares Outstanding 252.6 251.3 253.9 Additional Shares Issuable Upon Exercise of Stock Options for Dilutive Effect and Conversion of Preferred Stock(a) 11.2 7.6 7.7 - ------------------------------------------------------------------------------------------------------------------------------ Adjusted Shares of Common and Common Equivalent Shares Outstanding 263.8 258.9 261.6 - ------------------------------------------------------------------------------------------------------------------------------ Earnings Per Share Assuming Full Dilution: Income Before Effect of Accounting Changes $ 6.51 $ 4.54 $ 5.48 Net Effect of Changes in Accounting Principles (0.04) -- 0.14 - ------------------------------------------------------------------------------------------------------------------------------ Net Income $ 6.47 $ 4.54 $ 5.62 - ------------------------------------------------------------------------------------------------------------------------------
(a) During the second quarter of 1995, the Corporation called all of the outstanding shares of its 10% convertible preferred stock for redemption. Substantially all of the 10% convertible preferred stock was converted, at the option of the holders thereof, to common stock. The common stock was issued from treasury. 91 EX-12.0 6 COMPUTATION OF RATIO OF EARNINGS 1 - -------------------------------------------------------------------------------- EXHIBIT 12.0 CHEMICAL BANKING CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31, 1995 (in millions, except ratios) - ----------------------------------------------------------------------------------------------------------------------------- EXCLUDING INTEREST ON DEPOSITS Income before income taxes and effect of accounting change $2,976 - ----------------------------------------------------------------------------------------------------------------------------- Fixed charges: Interest expense 2,772 One third of rents, net of income from subleases(a) 90 - ----------------------------------------------------------------------------------------------------------------------------- Total fixed charges 2,862 - ----------------------------------------------------------------------------------------------------------------------------- Less: Equity in undistributed income of affiliates (110) - ----------------------------------------------------------------------------------------------------------------------------- Earnings before taxes, fixed charges and effect of accounting change, excluding capitalized interest $5,728 - ----------------------------------------------------------------------------------------------------------------------------- Fixed charges, as above $2,862 - ----------------------------------------------------------------------------------------------------------------------------- Ratio of earnings to fixed charges 2.00 - ----------------------------------------------------------------------------------------------------------------------------- INCLUDING INTEREST ON DEPOSITS Fixed charges, as above $2,862 Add: Interest on deposits 3,657 - ----------------------------------------------------------------------------------------------------------------------------- Total fixed charges and interest on deposits $6,519 - ----------------------------------------------------------------------------------------------------------------------------- Earnings before taxes, fixed charges and effect of accounting change, excluding capitalized interest, as above $5,728 Add: Interest on deposits 3,657 - ----------------------------------------------------------------------------------------------------------------------------- Total earnings before taxes, fixed charges, effect of accounting change and interest on deposits $9,385 - ----------------------------------------------------------------------------------------------------------------------------- Ratio of earnings to fixed charges 1.44 - -----------------------------------------------------------------------------------------------------------------------------
(a) The proportion deemed representative of the interest factor. 92 EX-12.1 7 COMPUTATION OF RATIO OF EARNINGS 1 - -------------------------------------------------------------------------------- EXHIBIT 12.1 CHEMICAL BANKING CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENTS
Year Ended December 31, 1995 (in millions, except ratios) - ----------------------------------------------------------------------------------------------------------------------------- EXCLUDING INTEREST ON DEPOSITS Income before income taxes and effect of accounting change $2,976 - ----------------------------------------------------------------------------------------------------------------------------- Fixed charges: Interest expense 2,772 One third of rents, net of income from subleases(a) 90 - ----------------------------------------------------------------------------------------------------------------------------- Total fixed charges 2,862 - ----------------------------------------------------------------------------------------------------------------------------- Less: Equity in undistributed income of affiliates (110) - ----------------------------------------------------------------------------------------------------------------------------- Earnings before taxes, fixed charges and effect of accounting change, excluding capitalized interest $5,728 - ----------------------------------------------------------------------------------------------------------------------------- Fixed charges, as above $2,862 - ----------------------------------------------------------------------------------------------------------------------------- Preferred stock dividends 105 - ----------------------------------------------------------------------------------------------------------------------------- Fixed charges including preferred stock dividends $2,967 - ----------------------------------------------------------------------------------------------------------------------------- Ratio of earnings to fixed charges and preferred stock dividend requirements 1.93 - ----------------------------------------------------------------------------------------------------------------------------- INCLUDING INTEREST ON DEPOSITS Fixed charges including preferred stock dividends, as above $2,967 Add: Interest on deposits 3,657 - ----------------------------------------------------------------------------------------------------------------------------- Total fixed charges including preferred stock dividends and interest on deposits $6,624 - ----------------------------------------------------------------------------------------------------------------------------- Earnings before taxes, fixed charges and effect of accounting change, excluding capitalized interest, as above $5,728 Add: Interest on deposits 3,657 - ----------------------------------------------------------------------------------------------------------------------------- Total earnings before taxes, fixed charges, effect of accounting change and interest on deposits $9,385 - ----------------------------------------------------------------------------------------------------------------------------- Ratio of earnings to fixed charges and preferred stock dividend requirements 1.42 - -----------------------------------------------------------------------------------------------------------------------------
(a) The proportion deemed representative of the interest factor. 93 EX-21.1 8 LIST OF SUBSIDIARIES 1 - -------------------------------------------------------------------------------- EXHIBIT 21.1 CHEMICAL BANKING CORPORATION LIST OF SUBSIDIARIES The Corporation has the following subsidiaries, all of which are included in the Corporation's Consolidated Financial Statements:
Percentage of voting Organized under securities owned by Name the laws of immediate parent - --------------------------------------------------------------------------------------------------------------------------------- Chemical Bank New York 100% CB Capital Investors Inc. Delaware 100 ChemLease Worldwide, Inc. New York 100 Chemco International, Inc. United States 100 Chemical International Finance, Ltd. United States 100 CB Beteiligungs und Verwaltungs GmbH Germany 100 Chemical Bank A.G. Germany 100 Chemical Bank (Guernsey) Limited Channel Islands 100 Chemical Bank (U.K.) Holdings Limited United Kingdom 100 Chemical Investment Bank Limited United Kingdom 100 Chemical Bank & Trust (Bahamas) Limited Bahamas 100 Chemical Bank - France France 100 Chemical Bank Mexico, S.A. Mexico 100 Chemical Ireland Limited Ireland 100 Chemical Trust and Banking Company Limited Japan 100 Banco Chemical (Portugal) S.A. Portugal 73 Chemical Bank of Canada Canada 30 Chemical Bank of Canada Canada 70 Chemical Mortgage Company Ohio 100 ChemCredit, Inc. New York 100 Chemical Acceptance Corporation Delaware 100 Chemical Acceptance Corporation I Delaware 100 Chemical Mortgage Acceptance Corp. Delaware 100 Chemical Community Development Inc. Delaware 100 Chemical Investment Services Corp. New York 100 Manufacturers Hanover Leasing Corporation Delaware 100 Texas Commerce Equity Holdings, Inc. Delaware 100 Texas Commerce Bank, N.A. United States 100 Texas Commerce Operating Services, Inc. Delaware 100 Chemical Bank New Jersey, N.A. United States 100 Chemical Investor Services, Inc. Delaware 100 Chemical Bank, National Association United States 100 Chemical Financial Services Corporation Ltd. Delaware 100 Chemical Financial Management Corporation Ohio 100 Margaretten Financial Corporation Delaware 100 Chemical Residential Mortgage Corporation New Jersey 100
94 2 - -------------------------------------------------------------------------------- LIST OF SUBSIDIARIES (CONTINUED)
Percentage of voting Organized under securities owned by Name the laws of immediate parent - --------------------------------------------------------------------------------------------------------------------------------- Brown & Company Securities Corporation Massachusetts 100% CBC-USA, Inc. Delaware 100 CBC Capital Partners, Inc. Delaware 100 CBC Holding (Delaware) Inc. Delaware 100 Chemical Bank Delaware Delaware 100 Chemical Insurance Agency, Inc. Delaware 100 Chemical Synthetic Leasing, Inc. Delaware 100 The CIT Group Holdings, Inc. Delaware 20 Chatham Ventures, Inc. New York 100 Chemical Venture Capital Associates California 80 Chemical Equity Associates California 80 Chemical European Equity Associates L.P. Delaware 80 Chemical Business Credit Corp. Delaware 100 Chemical Capital Corporation New York 100 Chemical Connecticut Corporation Connecticut 100 Chemical Holding Delaware, Inc. Delaware 100 Chemical Thrift Holdings Inc. Delaware 100 Chemical Bank FSB United States 100 Chemical Trust Company of California California 100 CBC Holding (California) Inc. California 100 Van Deventer & Hoch California 50 Chemical Educational Services Corporation Delaware 100 Chemical Equity Incorporated New York 100 Chemical Futures & Options, Inc. Delaware 100 Chemical Investments, Inc. Delaware 100 Chemical Markets Transactions, Inc. Delaware 100 Chemical Mellon Shareholder Services, L.L.C. Delaware 50 Chemical Mortgage Securities, Inc. New York 100 Chemical New England Corporation Delaware 100 Chemical New York, N.V. Netherlands Antilles 100 Chemical Realty Corporation New York 100 Chemical Securities Inc. Delaware 100 CHL High Yield, Inc Delaware 100 Manufacturers Hanover Wheelease, Inc. Delaware 100 Offshore Equities, Inc. New York 100 The Portfolio Group, Inc. New York 100
The names of certain other direct and indirect subsidiaries of the Corporation 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. 95 EX-23.1 9 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. 33-18640, 33-21488, 33-24224, 33-24654, 33-33220, 33-45228, 33-47105, 33-53306, 33-57104, 33-58634, 33-49965, 33-67742 and 33-68724) and in the Registration Statements on Form S-8 (Nos. 33-01776, 33-13457, 33-14997, 33-19852, 33-26523, 33-40675, 33-40272, 33-45017, 33-45018, 33-49909, 33-49911, 33-49913, 33-54547, 33-54549, 33-59543 and 33-62453) of Chemical Banking Corporation of our report dated January 16, 1996 appearing on page 42 of this Form 10-K. PRICE WATERHOUSE LLP New York, New York March 20, 1996 96 EX-99.0 10 SUPPLEMENTAL PRO FORMA FINANCIAL STATEMENTS 1 - -------------------------------------------------------------------------------- EXHIBIT 99.0 CHEMICAL BANKING CORPORATION AND THE CHASE MANHATTAN CORPORATION UNAUDITED PRO FORMA COMBINED BALANCE SHEET (IN MILLIONS) The following unaudited pro forma combined balance sheet combines the historical consolidated balance sheets of Chemical Banking Corporation (the "Corporation") and The Chase Manhattan Corporation ("Chase") giving effect to the merger of the Corporation and Chase (the "Merger"), which will occur on March 31, 1996 and will be accounted for as a pooling of interests, as if the Merger had been effective on December 31, 1995. Certain previously reported balance sheet amounts for the Corporation and Chase have been reclassified to conform with the current presentation. The information set forth below should be read in conjunction with the notes to the pro forma combined financial statements which describe the pro forma adjustments. The effect of the estimated $1.5 billion restructuring charge ($925 million net of tax) initially expected to be taken in connection with the Merger, as well as the effect of anticipated cost savings in connection with the Merger, have not been reflected in the pro forma combined balance sheet and statements of income. Since the date of the Merger announcement, the Corporation has continued to evaluate the costs anticipated to be incurred in connection with the Merger, as well as the cost savings from the Merger, and currently anticipates that the merger-related restructuring charge, as well as the cost savings, will each be higher than originally announced. The pro forma financial data are not necessarily indicative of the actual financial position that would have occurred had the Merger been consummated on December 31, 1995 or that may be obtained in the future. 97 2 CHEMICAL BANKING CORPORATION AND THE CHASE MANHATTAN CORPORATION UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(in millions) At December 31, 1995 - -------------------------------------------------------------------------------------------------------------------------------- Chemical Chase Pro Forma Pro Forma Historical Historical Adjustments Combined ---------- ---------- ----------- --------- (a, b, c) ASSETS Cash and Due from Banks $ 9,077 $ 5,717 $ -- $ 14,794 Deposits with Banks 2,666 5,802 -- 8,468 Federal Funds Sold and Securities Purchased Under Resale Agreements 8,033 9,428 -- 17,461 Trading Assets: Debt and Equity Instruments 18,317 7,895 -- 26,212 Risk Management Instruments 17,703 8,122 -- 25,825 Securities:(d) Available-for-Sale 30,157 6,984 -- 37,141 Held-to-Maturity 4,628 -- -- 4,628 Loans 82,143 68,064 -- 150,207 Allowance for Credit Losses (2,379) (1,405) -- (3,784) Premises and Equipment 2,038 1,829 (110)(e) 3,757 Due from Customers on Acceptances 1,179 717 -- 1,896 Accrued Interest Receivable 1,328 1,213 -- 2,541 Other Assets 8,036 6,807 -- 14,843 - ------------------------------------------------------------------------------------------------------------------------------ Total Assets $182,926 $121,173 $(110) $303,989 - ------------------------------------------------------------------------------------------------------------------------------ LIABILITIES Deposits: Domestic Noninterest-Bearing $ 21,673 $ 13,741 $ -- $ 35,414 Domestic Interest-Bearing 44,491 20,149 -- 64,640 Foreign 32,253 39,227 -- 71,480 - ------------------------------------------------------------------------------------------------------------------------------ Total Deposits 98,417 73,117 -- 171,534 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 25,675 11,588 -- 37,263 Other Borrowed Funds 9,238 4,698 -- 13,936 Acceptances Outstanding 1,193 722 -- 1,915 Trading Liabilities 24,270 10,071 -- 34,341 Accounts Payable, Accrued Expenses and Other Liabilities 4,892 6,347 (42)(e) 11,339 142(f) Long-Term Debt 7,329 5,496 -- 12,825 - ------------------------------------------------------------------------------------------------------------------------------ Total Liabilities 171,014 112,039 100 283,153 - ------------------------------------------------------------------------------------------------------------------------------ STOCKHOLDERS' EQUITY Preferred Stock 1,250 1,400 -- 2,650 Common Stock 255 390 (206)(g) 439 Capital Surplus 6,479 4,409 (263)(g) 10,625 Retained Earnings 4,493 3,714 (68)(e) 7,621 (142)(f) (376)(g) Net Unrealized Gain (Loss) on Securities Available-for-Sale, Net of Taxes (303) 66 -- (237) Treasury Stock, at Cost (262) (845) 845(g) (262) - ------------------------------------------------------------------------------------------------------------------------------ Total Stockholders' Equity 11,912 9,134 (210) 20,836 - ------------------------------------------------------------------------------------------------------------------------------ Total Liabilities and Stockholders' Equity $182,926 $121,173 $(110) $303,989 - ------------------------------------------------------------------------------------------------------------------------------
See Notes to Unaudited Pro Forma Combined Financial Statements. 98 3 - -------------------------------------------------------------------------------- CHEMICAL BANKING CORPORATION AND THE CHASE MANHATTAN CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME (IN MILLIONS, EXCEPT PER SHARE DATA) The following unaudited pro forma combined statements of income, for the years ended December 31, 1995, 1994 and 1993 combine the historical consolidated statements of income of the Corporation and Chase giving effect to the Merger, which will occur on March 31, 1996 and will be accounted for as a pooling of interests, as if the Merger had been effective as of the beginning of the periods indicated after giving effect to the pro forma adjustments described in the notes to the pro forma combined financial statements. Certain previously reported income statement amounts for the Corporation and Chase have been reclassified to conform to the new presentation. The effect of the estimated $1.5 billion restructuring charge ($925 million net of tax) initially expected to be taken in connection with the Merger, as well as the effect of anticipated cost savings in connection with the Merger, have not been reflected in the pro forma combined balance sheet and statements of income. Since the date of the Merger announcement, the Corporation has continued to evaluate the costs anticipated to be incurred in connection with the Merger, as well as the cost savings from the Merger, and currently anticipates that the merger-related restructuring charge, as well as the cost savings, will each be higher than originally announced. The pro forma financial data are not necessarily indicative of the results that actually would have occurred had the Merger been consummated on the dates indicated or that may be obtained in the future. 99 4 CHEMICAL BANKING CORPORATION AND THE CHASE MANHATTAN CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
(in millions, except per share data) For the Year Ended December 31, 1995 - ---------------------------------------------------------------------------------------------------------------------------- Chemical Chase Pro Forma Pro Forma Historical Historical Adjustments Combined ---------- ---------- ----------- --------- (a, b) INTEREST INCOME Loans $ 7,024 $5,883 $ -- $12,907 Securities 2,162 429 -- 2,591 Trading Assets 878 586 -- 1,464 Federal Funds Sold and Securities Purchased Under Resale Agreements 785 1,104 -- 1,889 Deposits With Banks 269 555 -- 824 - ---------------------------------------------------------------------------------------------------------------------------- Total Interest Income 11,118 8,557 -- 19,675 - ---------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Deposits 3,657 2,634 -- 6,291 Short-Term and Other Borrowings 2,226 1,949 -- 4,175 Long-Term Debt 546 396 -- 942 - ---------------------------------------------------------------------------------------------------------------------------- Total Interest Expense 6,429 4,979 -- 11,408 - ---------------------------------------------------------------------------------------------------------------------------- Net Interest Income 4,689 3,578 -- 8,267 Provision for Credit Losses 478 280 -- 758 - ---------------------------------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Credit Losses 4,211 3,298 -- 7,509 - ---------------------------------------------------------------------------------------------------------------------------- NONINTEREST REVENUE Corporate Finance and Syndication Fees 531 309 -- 840 Trust and Investment Management Fees 379 575 -- 954 Credit Card Revenue 378 391 -- 769 Service Charges on Deposit Accounts 297 120 -- 417 Fees for Other Financial Services 850 603 -- 1,453 Trading Revenue 624 412 -- 1,036 Securities Gains 119 13 -- 132 Other Revenue 588 504 -- 1,092 - ---------------------------------------------------------------------------------------------------------------------------- Total Noninterest Revenue 3,766 2,927 -- 6,693 - ---------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Salaries 2,332 1,876 -- 4,208 Employee Benefits 434 535 (14)(f) 955 Occupancy Expense 520 377 -- 897 Equipment Expense 395 328 32(e) 755 Foreclosed Property Expense (23) (52) -- (75) Restructuring Charge -- 15 -- 15 Other Expense 1,343 1,292 -- 2,635 - ---------------------------------------------------------------------------------------------------------------------------- Total Noninterest Expense 5,001 4,371 18 9,390 - ---------------------------------------------------------------------------------------------------------------------------- Income Before Income Tax Expense and Effect of Accounting Change 2,976 1,854 (18) 4,812 Income Tax Expense 1,160 689 (7) 1,842 - ---------------------------------------------------------------------------------------------------------------------------- Income Before Effect of Accounting Change $ 1,816 $1,165 $(11) $ 2,970 - ---------------------------------------------------------------------------------------------------------------------------- Income Applicable to Common Stock $ 1,711 $1,043 $(11) $ 2,743 - ---------------------------------------------------------------------------------------------------------------------------- Income Per Share (Before Accounting Change): Primary $ 6.77 $ 5.76 $ 6.23 Assuming Full Dilution $ 6.51 $ 5.72 $ 6.07 - ---------------------------------------------------------------------------------------------------------------------------- Average Common Shares Outstanding: Primary 252.6 181.0 440.8(g) Assuming Full Dilution 263.8 182.4 453.5(g) - ----------------------------------------------------------------------------------------------------------------------------
See Notes to Unaudited Pro Forma Combined Financial Statements. 100 5 CHEMICAL BANKING CORPORATION AND THE CHASE MANHATTAN CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
(in millions, except per share data) For the Year Ended December 31, 1994 - ---------------------------------------------------------------------------------------------------------------------------- Chemical Chase Pro Forma Pro Forma Historical Historical Adjustments Combined ---------- ---------- ----------- --------- (a, b) INTEREST INCOME Loans $5,730 $5,325 $ -- $11,055 Securities 1,715 614 -- 2,329 Trading Assets 722 560 -- 1,282 Federal Funds Sold and Securities Purchased Under Resale Agreements 550 1,277 -- 1,827 Deposits With Banks 371 498 -- 869 - --------------------------------------------------------------------------------------------------------------------------- Total Interest Income 9,088 8,274 -- 17,362 - --------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Deposits 2,378 2,326 -- 4,704 Short-Term and Other Borrowings 1,500 1,947 -- 3,447 Long-Term Debt 536 312 -- 848 - --------------------------------------------------------------------------------------------------------------------------- Total Interest Expense 4,414 4,585 -- 8,999 - --------------------------------------------------------------------------------------------------------------------------- Net Interest Income 4,674 3,689 -- 8,363 Provision for Credit Losses 550 500 -- 1,050 - --------------------------------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Credit Losses 4,124 3,189 -- 7,313 - --------------------------------------------------------------------------------------------------------------------------- NONINTEREST REVENUE Corporate Finance and Syndication Fees 405 233 -- 638 Trust and Investment Management Fees 421 567 -- 988 Credit Card Revenue 315 388 -- 703 Service Charges on Deposit Accounts 300 108 -- 408 Fees for Other Financial Services 833 580 -- 1,413 Trading Revenue 645 551 -- 1,196 Securities Gains 66 (1) -- 65 Other Revenue 612 627 -- 1,239 - --------------------------------------------------------------------------------------------------------------------------- Total Noninterest Revenue 3,597 3,053 -- 6,650 - --------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Salaries 2,205 1,773 -- 3,978 Employee Benefits 439 504 (14)(f) 929 Occupancy Expense 573 395 -- 968 Equipment Expense 382 307 35(e) 724 Foreclosed Property Expense 41 9 -- 50 Restructuring Charge 308 157 -- 465 Other Expense 1,561 1,327 -- 2,888 - --------------------------------------------------------------------------------------------------------------------------- Total Noninterest Expense 5,509 4,472 21 10,002 - --------------------------------------------------------------------------------------------------------------------------- Income Before Income Tax Expense 2,212 1,770 (21) 3,961 Income Tax Expense 918 565 (8) 1,475 - --------------------------------------------------------------------------------------------------------------------------- Net Income $1,294 $1,205 $(13) $ 2,486 - --------------------------------------------------------------------------------------------------------------------------- Income Applicable to Common Stock $1,156 $1,078 $(13) $ 2,221 - --------------------------------------------------------------------------------------------------------------------------- Income Per Share : Primary $ 4.60 $ 5.87 $ 5.02 Assuming Full Dilution $ 4.54 $ 5.84 $ 4.97 - --------------------------------------------------------------------------------------------------------------------------- Average Common Shares Outstanding: Primary 251.3 183.6 442.2(g) Assuming Full Dilution 258.9 184.6 450.9(g) - ---------------------------------------------------------------------------------------------------------------------------
See Notes to Unaudited Pro Forma Combined Financial Statements. 101 6 CHEMICAL BANKING CORPORATION AND THE CHASE MANHATTAN CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
(in millions, except per share data) For the Year Ended December 31, 1993 - ---------------------------------------------------------------------------------------------------------------------------- Chemical Chase Pro Forma Pro Forma Historical Historical Adjustments Combined ---------- ---------- ----------- --------- (a, b) INTEREST INCOME Loans $5,620 $5,632 $ -- $11,252 Securities 1,727 685 -- 2,412 Trading Assets 449 313 -- 762 Federal Funds Sold and Securities Purchased Under Resale Agreements 339 1,029 -- 1,368 Deposits With Banks 268 717 -- 985 - --------------------------------------------------------------------------------------------------------------------------- Total Interest Income 8,403 8,376 -- 16,779 - --------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Deposits 2,241 2,014 -- 4,255 Short-Term and Other Borrowings 992 2,171 -- 3,163 Long-Term Debt 534 491 -- 1,025 - --------------------------------------------------------------------------------------------------------------------------- Total Interest Expense 3,767 4,676 -- 8,443 - --------------------------------------------------------------------------------------------------------------------------- Net Interest Income 4,636 3,700 -- 8,336 Provision for Credit Losses 1,259 995 -- 2,254 Provision for Loans Held for Accelerated Disposition -- 566 -- 566 - --------------------------------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Credit Losses and Provision for Loans Held for Accelerated Disposition 3,377 2,139 -- 5,516 - --------------------------------------------------------------------------------------------------------------------------- NONINTEREST REVENUE Corporate Finance and Syndication Fees 338 194 -- 532 Trust and Investment Management Fees 406 465 -- 871 Credit Card Revenue 238 427 -- 665 Service Charges on Deposit Accounts 288 109 -- 397 Fees for Other Financial Services 829 514 -- 1,343 Trading Revenue 1,073 716 -- 1,789 Securities Gains 142 47 -- 189 Other Revenue 710 640 -- 1,350 - --------------------------------------------------------------------------------------------------------------------------- Total Noninterest Revenue 4,024 3,112 -- 7,136 - --------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSE Salaries 2,070 1,590 -- 3,660 Employee Benefits 396 487 (14)(f) 869 Occupancy Expense 587 404 -- 991 Equipment Expense 337 298 29(e) 664 Foreclosed Property Expense 287 222 -- 509 Provision for Other Real Estate Held for Accelerated Disposition -- 318 -- 318 Restructuring Charge 158 45 -- 203 Other Expense 1,458 1,156 -- 2,614 - --------------------------------------------------------------------------------------------------------------------------- Total Noninterest Expense 5,293 4,520 15 9,828 - --------------------------------------------------------------------------------------------------------------------------- Income Before Income Tax Expense and Effect of Accounting Changes 2,108 731 (15) 2,824 Income Tax Expense 539 265 (6) 798 - --------------------------------------------------------------------------------------------------------------------------- Income Before Effect of Accounting Changes $1,569 $ 466 $ (9) $ 2,026 - --------------------------------------------------------------------------------------------------------------------------- Income Applicable to Common Stock $1,414 $ 326 $ (9) $ 1,731 - --------------------------------------------------------------------------------------------------------------------------- Income Per Share (Before Accounting Changes): Primary $ 5.57 $ 1.89 $ 4.00 Assuming Full Dilution $ 5.48 $ 1.88 $ 3.96 - --------------------------------------------------------------------------------------------------------------------------- Average Common Shares Outstanding: Primary 253.9 172.3 433.1(g) Assuming Full Dilution 261.6 173.2 441.7(g) - ---------------------------------------------------------------------------------------------------------------------------
See Notes to Unaudited Pro Forma Combined Financial Statements. 102 7 NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (a) The Corporation and Chase are reviewing their accounting policies and as a result of this review, it may be necessary to restate either the Corporation's or Chase's financial statements to conform to those accounting policies that are determined to be most appropriate by the combined company. While certain restatements of prior periods have been included in the pro forma combined financial statements included herein, further restatements may be necessary upon the completion of this review process. (b) Transactions between the Corporation and Chase are not material in relation to the pro forma combined financial statements and therefore intercompany balances have not been eliminated from the pro forma combined amounts. (c) The pro forma financial information presented does not give effect to the planned net repurchase of the Corporation's Common Stock and of Chase's Common Stock (after giving effect to the issuance of shares by both the Corporation and Chase under various employee benefit plans) prior to the consummation of the Merger pursuant to their respective previously announced buyback programs. (d) The Corporation and Chase intend to review their combined securities portfolio to determine the classification of such securities as either available-for-sale or held-to-maturity in connection with the combined company's anticipated interest rate risk position. As a result of this review, certain reclassifications of the combined company's securities might take place. Any such reclassifications will be accounted for in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." (e) Chase's historical financial data reflect the capitalization of computer software costs. To conform to the Corporation's accounting policy, Chase's historical financial data have been adjusted on a pro forma basis to recognize immediately as expense those computer software costs that are capitalized. The pro forma adjustment to the balance sheet reflects the unamortized capitalized computer software costs of $110 million ($68 million net of tax) as of December 31, 1995. The pro forma adjustment to the statement of income for each period reflects the net impact of (i) charging to expense computer software costs that were capitalized during each respective period less (ii) the elimination of the previously recorded amortization of capitalized computer software costs. (f) Chase elected at the time of its adoption of SFAS No. 106 (effective January 1, 1993) to amortize the transition liability for accumulated postretirement benefits over 20 years, while the Corporation upon its adoption of SFAS No. 106 (effective January 1, 1993) elected to expense its entire transition liability. To conform with the Corporation's adoption of SFAS No. 106, Chase's historical financial data have been adjusted on a pro forma basis to reverse the amortization of Chase's transition liability reflected as a component of OPEB expense under SFAS 106. Chase's transition liability of approximately $270 million ($167 million after-tax), net of the $41 million ($25 million after-tax) reversal of amortization expense, has been reflected in retained earnings on the pro forma consolidated balance sheet. Both the pre-tax and tax effect are included in the caption "Accounts Payable, Accrued Expenses and Other Liabilities" on the pro forma balance sheet. (g) The Merger will be accounted for on a pooling of interests accounting basis and, accordingly, the related pro forma adjustments to the common stock, capital surplus and retained earnings accounts at December 31, 1995 reflect (i) an exchange of 184.5 million shares of the Corporation's common stock (using the exchange ratio of 1.04) for the 177.4 million shares of Chase common stock outstanding at December 31, 1995; (ii) the exchange of each outstanding share of Chase preferred stock into one share of the Corporation's preferred stock; and (iii) the cancellation and retirement of all remaining shares of Chase common stock held in Chase's treasury. Reference is made to the Form 8-K, which the Corporation has filed with the Securities and Exchange Commission on October 26, 1995, for more information regarding the Merger. For the income per share calculations, the pro forma combined average common shares outstanding (primary and assuming full dilution) reflects the exchange of the Corporation's common stock (using the exchange ratio of 1.04) for the outstanding shares of Chase common stock. 103 EX-27 11 FINANCIAL DATA SCHEDULE
9 0000019617 CHEMICAL BANKING CORPORATION 1,000,000 UNITED STATES DOLLARS YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1 9,077 2,666 8,033 36,020 30,157 4,628 4,659 82,143 2,379 182,926 98,417 34,913 29,162 7,329 0 1,250 255 10,407 182,926 7,024 2,162 1,054 11,118 3,657 6,429 4,689 478 119 5,001 2,976 1,816 0 (11) 1,805 6.73 6.47 3.33 817 361 39 0 2,480 825 272 2,379 2,008 371 0
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