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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, 1999 number 1-5805
The Chase Manhattan Corporation
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-2624428
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
270 Park Avenue, New York, N.Y. 10017
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 270-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock
10.84% Cumulative Preferred Stock (Stated Value--$25)
10.96% Cumulative Preferred Stock (Stated Value--$25)
Adjustable Rate Cumulative Preferred Stock, Series L (Stated Value--$100)
Adjustable Rate Cumulative Preferred Stock, Series N (Stated Value--$25)
7.50% Subordinated Notes Due 2003
Floating Rate Subordinated Notes Due 2003
Floating Rate Subordinated Notes Due August 1, 2003
6.50% Subordinated Notes Due 2005
6.25% Subordinated Notes Due 2006
6 1/8% Subordinated Notes Due 2008
6.75% Subordinated Notes Due 2008
6.50% Subordinated Notes Due 2009
Guarantee of 7.34% Capital Securities, Series D, of Chase Capital IV
Guarantee of 7.03% Capital Securities, Series E, of Chase Capital V
Guarantee of 7.00% Capital Securities, Series G, of Chase Capital VII
All such securities are listed on the New York Stock Exchange.
Securities registered pursuant to Section 12(g) of the Act: None
Number of Shares of Common Stock outstanding on February 29, 2000: 817,792,605
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. |_|
The aggregate market value of The Chase Manhattan Corporation Common Stock
held by non-affiliates of The Chase Manhattan Corporation on February 29, 2000
was $65,062,000,000.
Document incorporated by reference Part of Form 10-K into
in this Form 10-K which incorporated
---------------------------------- ----------------------
Proxy statement for the annual meeting of Part III
stockholders to be held May 16, 2000
(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
Lines of Business ............................................... 1
Competition ..................................................... 1
Supervision and Regulation ...................................... 1
Important Factors That May Affect Future Results ................ 6
Foreign Operations .............................................. 7
Distribution of Assets, Liabilities and
Stockholders' Equity; Interest Rates and
Interest Differentials .......................................89-93
Securities Portfolio ............................................ 94
Loan Portfolio ......................................38-43, 67, 95-97
Summary of Loan Loss Experience ...........................44, 67, 98
Deposits ........................................................ 99
Return on Equity and Assets ...................................87, 90
Short-Term and Other Borrowed Funds ............................. 99
Item 2 Properties ...................................................... 8
Item 3 Legal Proceedings ............................................... 8
Item 4 Submission of Matters to a Vote of Security Holders ............. 8
Executive Officers of the Registrant ............................ 9
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters ......................................... 10
Item 6 Selected Financial Data ......................................... 10
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 10
Item 7A Quantitative and Qualitative Disclosures about
Market Risk ................................................. 10
Item 8 Financial Statements and Supplementary Data ..................... 10
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ......................... 10
PART III
Item 10 Directors and Executive Officers of Chase ....................... 10
Item 11 Executive Compensation .......................................... 10
Item 12 Security Ownership of Certain Beneficial Owners
and Management .............................................. 10
Item 13 Certain Relationships and Related Transactions .................. 10
PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K ......................................... 11
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PART I
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ITEM 1: BUSINESS
OVERVIEW
The Chase Manhattan Corporation ("Chase") is a bank holding company organized
under the laws of the State of Delaware in 1968 and registered under the Bank
Holding Company Act (the "BHCA") of 1956.
Chase conducts its domestic and international financial services
businesses through various bank and nonbank subsidiaries. The principal bank
subsidiaries of Chase are: The Chase Manhattan Bank ("Chase Bank"), a New York
banking corporation headquartered in New York City, Chase Manhattan Bank USA,
National Association ("Chase USA"), a national bank headquartered in Wilmington,
Delaware and Chase Bank of Texas, National Association ("Chase Texas"). The
principal nonbank subsidiary of Chase is Chase Securities Inc. ("CSI"), which is
engaged in securities underwriting and dealing activities.
The bank and nonbank subsidiaries of Chase operate nationally as well as
through overseas branches, representative offices and affiliated banks.
LINES OF BUSINESS
Chase's activities are internally organized, for management reporting purposes,
into three major business franchises (Global Bank, National Consumer Services
and Global Services). A description of Chase's business franchises and the
products and services they provide to their respective client bases are
discussed in the "Lines of Business Results" section of Management's Discussion
and Analysis ("MD&A") beginning on page 29 and Note Twenty-Three on page 82.
COMPETITION
Chase and its subsidiaries and affiliates operate in a highly competitive
environment. Chase's bank subsidiaries compete with other domestic and foreign
banks, thrift institutions, credit unions, and mutual funds for deposits and
other sources of funds. In addition, Chase and its bank and nonbank subsidiaries
face increased competition with respect to the diverse financial services and
products they offer. Competitors include finance companies, brokerage firms,
investment banking companies, merchant banks, insurance companies, credit card
companies, mortgage banking companies, leasing companies, e-commerce and other
internet-based companies, and a variety of other financial services and advisory
companies. It is possible that competition will become even more intense as a
result of the recent enactment of the financial modernization legislation
discussed in more detail below.
SUPERVISION AND REGULATION
Financial Modernization Legislation: In November 1999, long-awaited financial
modernization legislation, entitled the Gramm Leach Bliley Act ("GLBA"), was
enacted that eliminated certain legal barriers separating the conduct of various
types of financial services businesses, such as commercial banking, investment
banking and insurance. In addition, GLBA substantially revamped the regulatory
scheme within which financial institutions such as Chase operate. While certain
provisions of GLBA became effective upon enactment, many major provisions do not
become effective until March 11, 2000 or May 2001 and most of the regulations
implementing the law have not yet been issued. As a result, while certain of the
provisions of GLBA expected to affect Chase's operations are summarized below,
the overall impact of GLBA on Chase cannot be predicted at this time.
Permissible Business Activities; Conversion to Financial Holding Company: Prior
to enactment of GLBA, a registered bank holding company such as Chase could
engage only in the business of managing and controlling banks and furnishing
specified services to subsidiaries and could not acquire any nonbanking company
unless the company's business was so closely related to banking as to be a
proper incident thereto. Upon effectiveness of GLBA, bank holding companies
meeting certain eligibility criteria may elect to become "financial holding
companies", which may engage in any activities that are "financial in nature",
as well as in additional activities that the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") determines are incidental or
complementary to financial activities. Under GLBA, "financial activities"
specifically include insurance, securities underwriting and dealing, merchant
banking, investment advisory and lending activities.
Chase anticipates that it will become a financial holding company as of
March 13, 2000, or as soon thereafter as practicable. As such, Chase will be
permitted to conduct, or to acquire companies engaged in, permissible financial
or other activities without prior approval by the Federal Reserve Board (but
subject to certain new conditions imposed by GLBA). Federal Reserve Board
approval will continue to be required for acquisitions of banks or savings
associations. In particular, upon effectiveness of Chase's election to become a
financial holding company:
o Various restrictions imposed by the Glass-Steagall Act will be eliminated,
including restrictions on: (i) affiliations between Chase's bank
subsidiaries and certain securities firms, (ii) Chase's ability to control
and distribute mutual funds and (iii) the portion of Chase's revenues that
may be derived from securities underwriting and dealing activities;
o BHCA restrictions on Chase's ability to acquire substantial equity
ownership or control of nonfinancial companies will be eliminated in the
merchant banking context, thereby permitting certain nonbank subsidiaries
of Chase to make merchant banking investments in unlimited amounts,
subject to conditions imposed by GLBA; and
o Limitations on Chase's insurance activities will be eliminated.
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PART I
Under interim regulations implemented by the Federal Reserve Board, if any
depository institution controlled by a financial holding company ceases to be
well-capitalized or well-managed, the Federal Reserve Board may impose
corrective capital or managerial requirements on the financial holding company
and place limitations on its ability to conduct the broader financial activities
permissible for financial holding companies. In addition, the Federal Reserve
Board may require divestiture of the holding company's depository institutions
if the deficiencies persist. The interim regulations also provide that if any
depository institution controlled by a financial holding company fails to
maintain a satisfactory rating under the Community Reinvestment Act ("CRA"), the
Federal Reserve Board must prohibit the financial holding company and its
subsidiaries from engaging in any additional activities other than those
permissible for bank holding companies that are not financial holding companies.
Chase believes that its subsidiaries currently meet the capital, management and
CRArequirements necessary to permit them to conduct the broader activities
permitted under GLBA. However, there can be no assurance that this will continue
be the case in the future.
Primary Regulation of Chase; Functional Regulation Under GLBA: As a bank holding
company, Chase's primary Federal regulator is currently the Federal Reserve
Board. Upon effectiveness of Chase's election to become a financial holding
company under GLBA, the current regulatory system will be modified by a system
of "functional regulation", in which the Federal Reserve Board will act as an
"umbrella regulator" and certain of Chase's subsidiaries will be regulated
directly by additional regulatory authorities based on the particular activities
of those subsidiaries (e.g., securities and investment advisory activities will
be regulated by the Securities and Exchange Commission (the "SEC") and insurance
activities will be regulated by state insurance commissioners). Under the new
system, Chase must continue to file reports and other information with, and
submit to examination by, the Federal Reserve Board as umbrella regulator.
However, under GLBA, with respect to matters affecting functionally regulated
subsidiaries, the Federal Reserve Board will be required to defer to the
applicable functional regulators unless the Federal Reserve Board concludes that
the activities at issue pose a risk to a depository institution or breach a
specific law the Federal Reserve Board has authority to enforce.
While GLBA provides generally for the system of functional regulation
described above, detailed regulations implementing that system have not yet been
adopted by the various regulators. Accordingly, Chase is unable to determine at
this time the extent to which the new system will affect the particular
regulatory obligations of Chase and its subsidiaries or their relationships with
their respective regulators.
Impact of GLBA on Activities of Bank Subsidiaries: Under GLBA, subject to
certain conditions imposed by their respective banking regulators, national and
state-chartered banks will be permitted to form "financial subsidiaries" that
may conduct financial or incidental activities, thereby permitting bank
subsidiaries to engage in certain activities that were previously impermissible.
In order to insulate the parent bank from the risk of these new financial
activities, GLBA imposes several safeguards and restrictions on financial
subsidiaries, including that the bank's equity investment in the financial
subsidiary be deducted from the bank's assets and tangible equity for purposes
of calculating the bank's capital adequacy. In addition, GLBA imposes new
restrictions on transactions between the bank and its financial subsidiaries
similar to restrictions currently applicable to transactions between banks and
nonbank affiliates. See "FDICIA" and "Other Supervision and Regulation" below.
Effect of GLBA on Bank Broker-Dealer and Investment Advisory Activities: To
promote the system of functional regulation described above, GLBA provides for
the amendment of certain Federal securities laws to eliminate various exemptions
previously available to banks. For example, following May 2001, banks will no
longer be exempt from the broker-dealer provisions of the Securities Exchange
Act of 1934. As a result, as of that date, Chase's bank subsidiaries must either
register with the SEC as broker-dealers or cease conducting activities deemed
broker-dealer activities. GLBA does retain a more limited exemption from
broker-dealer registration for certain "banking" products and activities,
including, among others, municipal and exempted securities transactions;
brokerage, safe keeping and custody arrangements; and trust, securitization and
derivatives products and activities. Effective May 2001, the Investment Advisers
Act of 1940 also will be amended to eliminate certain provisions exempting banks
from the registration requirements of that statute, and the Investment Company
Act of 1940 will be amended to provide the SEC with regulatory authority over
various bank mutual fund activities.
Dividend Restrictions: Federal law imposes limitations on the payment of
dividends by the subsidiaries of Chase that are state member banks of the
Federal Reserve System (a "state member bank") or national banks. Nonbank
subsidiaries of Chase are not subject to those limitations. The amount of
dividends that may be paid by a state member bank, such as Chase Bank, or by a
national bank, such as Chase USA or Chase Texas, is limited to the lesser of the
amounts calculated under a "recent earnings" test and an "undivided profits"
test. Under the recent earnings test, a dividend may not be paid if the total of
all dividends declared by a bank in any calendar year is in excess of the
current year's net income combined with the retained net income of the two
preceding years, unless the bank obtains the approval of its appropriate Federal
banking regulator (which, in the case of a state member bank, is the Federal
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Reserve Board and, in the case of a national bank, is the Office of the
Comptroller of the Currency (the "Comptroller of the Currency")). Under the
undivided profits test, a dividend may not be paid in excess of a bank's
"undivided profits." See Note Seventeen on page 76 for the amount of dividends
that Chase's principal bank subsidiaries could pay, during 2000, to their
respective bank holding companies without the approval of their relevant banking
regulators.
In addition to the dividend restrictions described above, the Federal
Reserve Board, the Comptroller of the Currency and the Federal Deposit Insurance
Corporation ("FDIC") have authority to prohibit or to limit the payment of
dividends by the banking organizations they supervise, including Chase and its
bank and bank holding company subsidiaries, if, in the banking regulator's
opinion, payment of a dividend would constitute an unsafe or unsound practice in
light of the financial condition of the banking organization.
Capital Requirements: The Federal banking regulators have adopted risk-based
capital and leverage guidelines that require that Chase's capital-to-assets
ratios meet certain minimum standards.
The risk-based capital ratio is determined by allocating assets and
specified off-balance sheet financial instruments into four weighted categories,
with higher levels of capital being required for the categories perceived as
representing greater risk. Under the guidelines, capital is divided into two
tiers: Tier 1 Capital and Tier 2 Capital. For a further discussion of Tier 1
Capital and Tier 2 Capital, see Note Eighteen on page 76. 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 Capital ratio
(Total Capital to risk-weighted assets) of 8% and a Tier 1 Capital ratio of 4%.
The risk-based capital requirements explicitly identify concentration of
credit risk and certain risks arising from non-traditional activities, and the
management of those risks, as important factors to consider in assessing an
institution's overall capital adequacy. In addition, the risk-based capital
rules incorporate a measure for market risk in foreign exchange and commodity
activities and in the trading of debt and equity instruments. The market
risk-based capital rules require banking organizations with large trading
activities (such as Chase) to maintain capital for market risk in an amount
calculated by using the banking organizations' own internal value-at-risk models
(subject to parameters set by the regulators).
In March 2000, the Federal banking agencies published for comment
regulations to amend the risk-based capital requirements with respect to
recourse arrangements and securitization transactions. In general, the proposal
would amend the risk-based capital standards in order to treat recourse
obligations and direct credit substitutes (such as letters of credit and spread
accounts) more consistently for risk-based capital purposes. The proposed
amendments also set forth a multi-level approach to assessing capital
requirements in certain asset securitizations.
The Federal banking regulators have also established minimum leverage
ratio guidelines. The leverage ratio is defined as Tier 1 Capital divided by
average total assets (net of allowance for credit losses, goodwill and certain
intangible assets). The minimum leverage ratio is 3% for strong bank holding
companies (i.e., those rated composite 1 under the Bank subsidiaries, Other
subsidiaries, Parent company, Earnings and Capital adequacy ("BOPEC") rating
system) and for bank holding companies that have implemented the Federal Reserve
Board's risk-based capital measure for market risk. Other bank holding companies
must have a minimum leverage ratio of 4%. Bank holding companies may be expected
to maintain ratios well above the minimum levels depending upon their particular
condition, risk profile and growth plans.
Tier 1 Components: Capital surplus and common stock remain the most important
forms of capital at Chase. Because common equity has no maturity date and
because dividends on common stock are paid only when and if declared by the
Board of Directors, common equity is available to absorb losses over long
periods of time. Noncumulative perpetual preferred stock is similar to common
stock in its ability to absorb losses. If the Board of Directors does not
declare a dividend on noncumulative perpetual preferred stock in any dividend
period, the holders of the instrument are never entitled to receive that
dividend payment. Chase's noncumulative preferred stock is a type commonly
referenced as a "FRAP": a fixed-rate/adjustable preferred stock. However,
because the interest rate on FRAPs may increase (up to a pre-determined
ceiling), the Federal Reserve treats Chase's noncumulative FRAPs in a manner
similar to cumulative perpetual preferred and trust preferred securities. The
Federal Reserve permits cumulative perpetual preferred stock and trust preferred
securities to be included in Tier 1 Capital, but only up to certain limits, as
these financial instruments do not provide as strong protection against losses
as common equity and noncumulative, non-FRAP securities. Cumulative perpetual
preferred stock does not have a maturity date, similar to other forms of Tier 1
Capital. However, any dividends not declared on cumulative preferred stock
accumulate and thus continue to be due to the holder of the instrument until all
arrearages are satisfied. Trust preferred securities are a type of security
generally issued by a special purpose trust established and owned by Chase.
Proceeds from the issuance to the public of the trust preferred security are
lent to Chase for at least 30 (but not more than 50) years. The intercompany
note that evidences this loan provides that the interest payments by Chase on
the note may be deferred for up to five years. During the period of any such
deferral, no payments of dividends may be made on any outstanding Chase
preferred or common stock nor on the outstanding trust preferred securities
issued to the public.
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PART I
Tier 2 Components: Long term subordinated debt (generally having an initial
maturity of 10 - 12 years) is the primary form of Chase's Tier 2 Capital.
Subordinated debt is deemed a form of regulatory capital because payments on the
debt are subordinated to other creditors of Chase, including holders of senior
and medium long-term debt and counterparties on derivative contracts.
Under GLBA, all financial holding companies would also be considered bank
holding companies for purposes of the capital requirements described above.
However, GLBA specifically prohibits the Federal Reserve Board from imposing
capital adequacy rules on certain functionally regulated subsidiaries (such as
broker-dealers and insurance companies) that are in compliance with the
applicable capital requirements of their functional regulators. Because the
Federal Reserve Board has not yet proposed amendments to its capital
requirements in response to these provisions, Chase cannot predict the impact of
any such amended guidelines on its capital ratios.
The risk-based minimum capital requirements adopted by the Federal banking
agencies follow the Capital Accord of the Basle Committee on Banking
Supervision. The Basle Committee, which consists of banking supervisors from the
principal nations whose banking organizations are active internationally, issued
its Capital Accord to achieve convergence in the capital regulations applicable
to internationally active banking organizations. In June 1999, the Basle
Committee issued a Consultative Paper that sought comment on a proposed
replacement for the Capital Accord. The replacement would consist of a
"three-pillar" framework that would entail more differentiated minimum capital
requirements based on perceived creditworthiness; closer regulatory supervision;
and greater market discipline to be achieved through enhanced public disclosure.
FDICIA: The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") revised certain provisions of the Federal Deposit Insurance Act, as
well as certain other Federal banking statutes. In general, FDICIA provides for
expanded regulation of depository institutions and their affiliates, including
parent holding companies, by their Federal banking regulators and requires the
relevant Federal banking regulator to take "prompt corrective action" with
respect to a depository institution if that institution does not meet certain
capital adequacy standards.
Pursuant to FDICIA, the Federal Reserve Board, the FDIC and the
Comptroller of the Currency adopted regulations setting forth a five-tier scheme
for measuring the capital adequacy of the depository institutions they
supervise. Under the regulations (commonly referred to as the "prompt corrective
action" rules), an institution would be placed in one of the following five
capital categories when these ratios fall within the prescribed ranges:
Ratios
---------------------------------------------
Total Tier 1 Tier 1
Capital Capital Leverage
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At Least
---------------------------------------------
Well Capitalized 10% 6% 5%
Adequately Capitalized 8% 4% 4%(a)
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Less Than
---------------------------------------------
Undercapitalized 8% 4% 4%(a)
Significantly Undercapitalized 6% 3% 3%
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Critically Undercapitalized Tangible equity to total assets of 2% or less
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(a) May be 3% in some cases.
An institution may be treated as being in a capital category lower than that
indicated based on other supervisory criteria.
Supervisory actions by the appropriate Federal banking regulator generally
will depend upon an institution's classification within the five capital
categories. The regulations apply only to banks and not to bank holding
companies such as Chase; however, subject to limitations that may be imposed
pursuant to GLBA, as described below, the Federal Reserve Board is authorized to
take appropriate action at the holding company level based on the
undercapitalized status of the holding company's subsidiary banking
institutions. In certain instances relating to an undercapitalized banking
institution, the bank holding company would be required to guarantee the
performance of the undercapitalized subsidiary and may be liable for civil money
damages for failure to fulfill its commitments on that guarantee.
Under FDICIA only a "well capitalized" depository institution may, without
prior regulatory approval, accept brokered deposits (e.g. deposits solicited by
a bank's affiliates on its behalf), offer interest rates on deposits
significantly higher than the prevailing rate in its market or "pass through"
deposit insurance coverage to the participants of certain employee benefit
plans.
As of December 31, 1999, each of Chase's banking subsidiaries was "well
capitalized".
FDIC Insurance Assessments: FDICIA also required the FDIC to establish a
risk-based assessment system for FDIC deposit insurance. Under the FDIC's
risk-based insurance premium assessment system, each depository institution is
assigned to one of nine risk classifications based upon certain capital and
supervisory measures and, depending upon its classification, is assessed
insurance premiums on its deposits.
Depository institutions insured by the Bank Insurance Fund ("BIF") are
required to pay premiums ranging from 0 basis points to 27 basis points of
domestic deposits. Each of Chase's banks, including Chase Bank, Chase USA and
Chase Texas, currently qualifies for the 0 basis point assessment. All
depository institutions must also pay an annual assessment so that the Financing
Corporation ("FICO") may pay interest on bonds it issued in connection with the
resolution of savings association insolvencies occurring prior to 1991. The FICO
assessment is 1.2 basis points of domestic deposits in the case of BIF-insured
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institutions such as Chase Bank, Chase USA and Chase Texas. The rate schedules
are subject to future adjustments by the FDIC. In addition, the FDIC has
authority to impose special assessments from time to time, subject to certain
limitations specified in the Deposit Insurance Funds Act.
Powers of the FDIC Upon Insolvency of an Insured Depository Institution: An
FDIC-insured depository institution (such as Chase's bank subsidiaries) can be
held liable for any loss incurred or expected to be incurred by the FDIC in
connection with another FDIC-insured institution under common control with such
institution being in "default" or "in danger of default" (commonly referred to
as "cross-guarantee" liability). "Default" is generally defined as the
appointment of a conservator or receiver and "in danger of default" is defined
as certain conditions indicating that a default is likely to occur absent
regulatory assistance. An FDIC cross-guarantee claim against a depository
institution is generally superior in right of payment to claims of the holding
company and its affiliates against such depository institution.
If the FDIC is appointed the conservator or receiver of an insured
depository institution, upon its insolvency or in certain other events, the FDIC
has the power: (i) to transfer any of the depository institution's assets and
liabilities to a new obligor without the approval of the depository
institution's creditors; (ii) to enforce the terms of the depository
institution's contracts pursuant to their terms; or (iii) to repudiate or
disaffirm any contract or lease to which the depository institution is a party,
the performance of which is determined by the FDIC to be burdensome and the
disaffirmance or repudiation of which is determined by the FDIC to promote the
orderly administration of the depository institution. The above provisions would
be applicable to obligations and liabilities of those of Chase's subsidiaries
that are insured depository institutions, such as Chase Bank, Chase USA and
Chase Texas, including, without limitation, obligations under senior or
subordinated debt issued by those banks to investors (referred to below as
"public noteholders") in the public markets.
Under Federal law, the claims of a receiver of an insured depository
institution for administrative expenses and the claims of holders of domestic
deposit liabilities (including the FDIC, as subrogee of the depositors) have
priority over the claims of other unsecured creditors of the institution,
including public noteholders, in the event of the liquidation or other
resolution of the institution. As a result, whether or not the FDIC ever sought
to repudiate any obligations held by public noteholders of any subsidiary of
Chase that is an insured depository institution, such as Chase Bank, Chase USA
or Chase Texas, the public noteholders would be treated differently from, and
could receive, if anything, substantially less than, the depositors of the
depository institution.
Other Supervision and Regulation: Under current Federal Reserve Board policy,
Chase is expected to act as a source of financial strength to its bank
subsidiaries and to commit resources to support the bank subsidiaries in
circumstances where it might not do so absent such policy. However, because GLBA
provides for functional regulation of financial holding company activities by
various regulators, GLBA prohibits the Federal Reserve Board from requiring
payment by a holding company or subsidiary to a depository institution if the
functional regulator of the payor objects to such payment. In such a case, the
Federal Reserve Board could instead require the divestiture of the depository
institution and impose operating restrictions pending the divestiture.
Subject to the restrictions under GLBA described in the preceding
paragraph, any loans by a bank holding company to any of its subsidiary banks
are subordinate in right of payment to deposits and to certain other
indebtedness of the subsidiary banks. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a Federal bank
regulatory agency to maintain the capital of a subsidiary bank at a certain
level will be assumed by the bankruptcy trustee and entitled to a priority of
payment.
The bank subsidiaries of Chase are subject to certain restrictions imposed
by Federal law on extensions of credit to, and certain other transactions with,
Chase and certain other affiliates and on investments in stock or securities of
Chase and those affiliates. These restrictions prevent Chase and other
affiliates from borrowing from a bank subsidiary unless the loans are secured in
specified amounts.
Chase's bank and nonbank subsidiaries are subject to direct supervision
and regulation by various other Federal and state authorities (many of which
will be considered "functional regulators" under GLBA). Chase Bank, as a New
York State-chartered bank and state member bank, is subject to supervision and
regulation by the New York State Banking Department as well as by the Federal
Reserve Board and the FDIC. Chase's national bank subsidiaries, such as Chase
USA and Chase Texas, are subject to substantially similar supervision and
regulation by the Comptroller of the Currency. Supervision and regulation by
each of the foregoing regulatory agencies generally include comprehensive annual
reviews of all major aspects of the relevant bank's business and condition, as
well as the imposition of periodic reporting requirements and limitations on
investments and other powers. Chase also conducts securities underwriting,
dealing and brokerage activities through CSI and other broker-dealer
subsidiaries, all of which are subject to the regulations of the SEC and the
National Association of Securities Dealers, Inc. As of February 1, 2000, CSI
became a member of the New York Stock Exchange. The operations of The Chase
Vista Funds, the mutual funds advised by Chase, are also subject to regulation
by the SEC. The types of activities in which the foreign branches of Chase Bank
and the international subsidiaries of Chase may engage are subject to various
restrictions imposed by the Federal Reserve Board. Those foreign branches and
international subsidiaries are also subject to the laws and banking authorities
of the countries in which they operate.
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PART I
The activities of Chase Bank, Chase USA and Chase Texas as consumer
lenders are also subject to regulation under various Federal laws including the
Truth-in-Lending, the Equal Credit Opportunity, the Fair Credit Reporting, the
Fair Debt Collection Practice and the Electronic Funds Transfer Acts, as well as
various state laws. These statutes impose requirements on the making,
enforcement and collection of consumer loans and on the types of disclosures
that need to be made in connection with such loans.
In addition, under new requirements imposed by GLBA, Chase and its
subsidiaries will be required periodically to disclose to its retail customers
Chase's policies and practices with respect to (i) the sharing of nonpublic
customer information with Chase affiliates and others and (ii) the
confidentiality and security of that information. Under GLBA, retail customers
also must be given the opportunity to opt out of information sharing
arrangements with non-affiliates, subject to certain exceptions set forth in
GLBA.
As part of its commitment to protecting customer privacy, Chase, in
January 2000, agreed with the New York State Attorney General that it will not
disclose any customer information to third-party marketing firms, other than the
customer's name, address and phone number. In addition, if the customer does not
want to receive any offers or information from any third-party marketing firms,
the customer may "opt-out" of such solicitations, in which case, no private
information about the customer will be shared with third-party marketing firms.
IMPORTANT FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, Chase has made and will make forward-looking statements.
These statements can be identified by the fact that they do not relate strictly
to historical or current facts. Forward-looking statements often use words such
as "anticipate," "target," "expect," "estimate," "intend," "plan," "goal,"
"believe" or other words of similar meaning. Forward-looking statements give
Chase's current expectations or forecasts of future events, circumstances or
results. Chase's disclosure in this report, including in the MD&A section,
contains forward-looking statements. Chase may also make forward-looking
statements in its other documents filed with the SEC and in other written
materials. In addition, Chase's senior management may make forward-looking
statements orally to analysts, investors, representatives of the media and
others.
Any forward-looking statements made by or on behalf of Chase speak only as
of the date they are made. Chase does not undertake to update forward-looking
statements to reflect the impact of circumstances or events that arise after the
date the forward-looking statement was made. The reader should, however, consult
any further disclosures of a forward-looking nature Chase may make in its Annual
Reports on Form 10-K, its Quarterly Reports on Form 10-Q and its Current Reports
on Form 8-K.
All forward-looking statements, by their nature, are subject to risks and
uncertainties. Chase's actual future results may differ materially from those
set forth in Chase's forward-looking statements. Factors that might cause
Chase's future financial performance to vary from that described in its
forward-looking statements include the credit, market, operational, liquidity,
interest rate and other risks discussed in the MD&A section of this report and
in other periodic reports filed with the SEC. In addition, the following
discussion sets forth certain risks and uncertainties that Chase believes could
cause its actual future results to differ materially from expected results.
However, other factors besides those listed below or discussed in Chase's
reports to the SEC could also adversely affect Chase's results and the reader
should not consider any such list of factors to be a complete set of all
potential risks or uncertainties. This discussion is provided as permitted by
the Private Securities Litigation Reform Act of 1995.
Business Conditions and General Economy. Chase is a leading provider of services
in the global banking, global services and national consumer services
businesses. The profitability of these businesses could be adversely affected by
a worsening of general economic conditions in the United States or abroad,
including a downturn in domestic or foreign securities and trading market
conditions. Such factors could adversely affect the value or credit quality of
Chase's on-balance sheet and off-balance sheet assets and the revenues based on
the mark-to-market values in certain of its businesses, including Chase Capital
Partners. An economic downturn or significantly higher interest rates could
increase the risk that a greater number of Chase's customers would become
delinquent on their loans or other obligations to Chase, or would refrain from
obtaining additional debt. Further, a higher rate of delinquencies by customers
or counterparties would result in a higher level of charge-offs and a higher
level of provision for Chase, which could adversely affect Chase's income. See
also "Factors Affecting Allowance for Credit Losses" on the following page. In
addition, a higher level of domestic or foreign interest rates or a downturn in
trading markets could affect the amount of assets under management by Chase (for
example, by affecting the flows of moneys to or from the mutual funds managed by
Chase) and impact the willingness of financial investors to participate in loan
syndications and underwritings managed by Chase.
Competition. Chase operates in a highly competitive environment and expects
various factors to cause competitive conditions to continue to intensify. For
example, technological advances and the growth of e-commerce have made it
possible for non-depository institutions to offer products and services that
were traditionally banking products and for financial institutions to compete
with technology companies in providing electronic and internet-based financial
solutions. In addition, investment banks and insurance companies are
increasingly
6
9
competing in traditional banking businesses, such as syndicated lending and
consumer banking, and banking institutions are continuing to diversify their
financial products and services into non-traditional areas. Chase expects this
cross-industry competition to continue to intensify, particularly as continued
merger activity produces larger, better-capitalized companies that are capable
of offering a wider array of products and services. In addition, the enactment
of financial modernization legislation, discussed above, may further accelerate
competitive trends by eliminating various regulatory barriers to cross-industry
activities and acquisitions.
Foreign Operations; Trading in Foreign Securities. Chase does business
throughout the world, including in developing regions of the world commonly
known as emerging markets. Chase's businesses and revenues derived from foreign
operations are subject to risk of loss from unfavorable political and diplomatic
developments, currency fluctuations, social instability, changes in governmental
policies or policies of central banks, expropriation, nationalization,
confiscation of assets and changes in legislation relating to foreign ownership.
Chase also invests in the securities of corporations located in foreign
jurisdictions, including emerging markets. Revenues from the trading of foreign
securities may also be subject to negative fluctuations as a result of the
above factors. The impact of these fluctuations could be accentuated because,
generally, foreign trading markets, particularly in emerging markets countries,
are smaller, less liquid and more volatile than U.S. trading markets.
Operating Risk. Chase, like all large corporations, is exposed to many types of
operating risk, including the risk of fraud by employees or outsiders,
unauthorized transactions by employees or operational errors, including clerical
or recordkeeping errors or errors resulting from faulty computer or
telecommunications systems. Given the high volume of transactions at Chase,
certain errors may be repeated or compounded before they are discovered and
successfully rectified. In addition, Chase's necessary dependence upon automated
systems to record and process its transaction volume may further increase the
risk that technical system flaws or employee tampering or manipulation of those
systems will result in losses that are difficult to detect. Although Chase
maintains a system of controls designed to keep operating risk at appropriate
levels, Chase has suffered losses from operating risk and there can be no
assurance that Chase will not suffer losses from operating risks in the future.
Government Monetary Policies and Economic Controls. Chase's businesses and
earnings are affected by general economic conditions, both domestic and
international. Chase's businesses and earnings are also affected by the fiscal
or other policies that are adopted by various regulatory authorities of the
U.S., foreign governments, and international agencies. For example, policies and
regulations of the Federal Reserve Board influence, directly and indirectly, the
rate of interest paid by commercial banks on their interest-bearing deposits and
may also impact the value of financial instruments held by Chase. These actions
of the Federal Reserve Board also determine to a significant degree the cost to
Chase of funds for lending and investing. The nature and impact of future
changes in economic and market conditions and fiscal policies are not
predictable and are beyond Chase's control. In addition, these policies and
conditions can impact Chase's customers and counterparties, both in the U.S. and
abroad, which may increase the risk that such customers or counterparties
default on their obligations to Chase.
Factors Affecting Revenues. Chase's management categorizes the revenue
components of Chase's operating earnings as either market-sensitive revenues or
less market-sensitive revenues. Market-sensitive revenues are affected by many
factors, including Chase's credit standing and its success in proprietary
positioning, volatility in interest rates and in equity and debt markets, and
the economic, political and business factors described above. Chase anticipates
that its market-sensitive revenues will experience volatility from time to time
as a result of these factors. Management also expects that less market-sensitive
revenues will experience fluctuations from time-to-time and, accordingly, the
annual growth rate of its less market-sensitive revenues may not continue to
accelerate each and every year at the pace achieved during the past four years.
Factors Affecting Allowance for Credit Losses. Chase's allowances for credit
losses are intended to cover probable credit losses inherent in the credit
extension process for loans and lending-related commitments. Each of the
components of the allowances for credit losses is based upon management's
estimates of probable loss from various segments of the portfolio. Estimating
losses is inherently uncertain. The estimation process assumes that past
experience is a valid indicator for estimating prospective losses, which may not
always be the case. The accuracy of estimates reflected in the allowance may be
affected by a number of factors, ranging from external macroeconomic factors to
limitations inherent in the estimation methodology itself. These factors
include, among others: general economic and political developments; structural
changes that may affect particular industries; currency devaluations that may
affect cross-border exposures; changes in underwriting standards; legal and
regulatory requirements affecting reserving practices; the volatility of default
probabilities, rating migrations and loss severity; and the quality of available
data.
FOREIGN OPERATIONS
For geographic distributions of average assets, total revenue, total expense,
income before income tax expense and net income, see Note Twenty-Four on page
84. For a discussion of foreign loans, see Note Four on page 67 and see the
sections entitled "Commercial Loans" and "Cross-Border Exposure" in the MD&A, on
pages 42 and 43, and "Cross-Border Outstandings," on page 96.
7
10
PART I
ITEM 2: PROPERTIES
The headquarters of Chase is located in New York City at 270 Park Avenue, which
is a 50-story bank and office building owned by Chase. This location contains
approximately 1.3 million square feet of commercial office and retail space.
Chase also owns and occupies a 60-story building at One Chase Manhattan
Plaza in New York City. This location has approximately 2 million square feet of
commercial office and retail space, of which approximately 800,000 square feet
is leased to outside tenants.
Chase also owns and occupies a 22-story building at 4 New York Plaza, New
York City, with 900,000 square feet of commercial office and retail space.
Chase built in 1992 and fully occupies a two-building complex known as
Chase MetroTech Center in downtown Brooklyn, New York. This facility contains
approximately 1.75 million square feet and houses, among other things,
operations and product support functions.
Chase and its subsidiaries also own and occupy administrative and
operational facilities in Hicksville, New York; Tampa, Florida; Tempe, Arizona;
and in Houston, Arlington, and El Paso, Texas.
Chase occupies, in the aggregate, approximately 945,000 square feet of
space in the United Kingdom. The most significant components of leased space in
London are 350,000 square feet at 125 London Wall and 170,000 square feet at
Thomas More Square. Chase also owns and occupies a 300,000 square foot
operations center in Bournemouth.
In addition, Chase and its subsidiaries occupy branch offices and other
administrative and operational facilities throughout the U.S. and in foreign
countries under various types of ownership and leasehold agreements.
The majority of the properties occupied by Chase are used across all of
Chase's business segments and for corporate activities.
ITEM 3: LEGAL PROCEEDINGS
As previously reported, 50-Off Stores, Inc. v. Banque Paribas (Suisse) S.A., a
lawsuit in the United States District Court for the Western District of Texas
alleging conversion of shares of common stock held in a custody account of The
Chase Manhattan Bank, judgment was entered against the Bank for $148.6 million
in punitive and compensatory damages, plus post-judgment interest. On appeal by
Chase, the United States Court of Appeals for the Fifth Circuit reversed the
punitive damage award of $138 million, resulting in a remaining award of $10.6
million in compensatory damages. Both the plaintiff and Chase filed petitions
for rehearing with the Fifth Circuit, which petitions were denied. Plaintiff
filed a petition for a writ of certiorari with the U.S. Supreme Court, which
petition was also denied. The $10.6 million judgment of the Fifth Circuit is now
final.
In June 1999, Sumitomo Corporation filed a lawsuit against The Chase
Manhattan Bank in the United States District Court for the Southern District of
New York. The complaint alleges that during the period from 1994 to 1996, the
Bank assisted a Sumitomo employee in making copper trades by funding
unauthorized loans to the Sumitomo employee. The complaint alleges that the Bank
knew the employee did not have authority to enter into the transactions on
behalf of Sumitomo. The complaint asserts claims under the Racketeer Influenced
and Corrupt Practices Act ("RICO") and New York common law and alleges damages
of $532 million (subject to trebling under RICO), plus punitive damages.
CSI has been named as a defendant in five of eleven actions that were
filed in the United States District Court for the Northern District of Oklahoma
beginning in October 1999 arising out of the failure of Commercial Financial
Service, Inc. ("CFS"). Plaintiffs in these actions are institutional investors
who purchased over $1.6 billion in original face amount of asset-backed
securities issued by CFS. The securities were backed by delinquent credit card
receivables. In addition to CSI, the defendants in various of the actions are
the founders and key executives of CFS, as well as its auditors, its outside
counsel and the rating agencies that rated the securities. CSI is alleged to
have been the investment banker to CFS and to have acted as an initial purchaser
and as placement agent in connection with the issuance of certain of the
securities. Plaintiffs allege that defendants either knew or were reckless in
not knowing that the securities were sold to plaintiffs on the basis of
misleading misrepresentations and omissions of material facts. The complaints
against CSI assert claims under the Securities Exchange Act of 1934, the
Oklahoma Securities Act, and under common law theories of fraud and negligent
misrepresentation. In the actions against CSI, plaintiffs seek approximately
$930 million in damages allegedly suffered as a result of defendants'
misrepresentations and omissions, plus punitive damages. CSI has not yet
answered or moved with respect to the complaints.
In addition to the matters described above, Chase and its subsidiaries
have been named from time to time as defendants in various legal actions and
proceedings arising in connection with their respective businesses and have been
involved from time to time in investigations and proceedings by governmental
agencies. In view of the inherent difficulty of predicting the outcome of such
matters, Chase cannot state what the eventual outcome of pending matters will
be. Chase is contesting the allegations made in each pending matter and
believes, based on current knowledge and after consultation with counsel, that
the outcome of such matters will not have a material adverse effect on the
consolidated financial condition of Chase, but may be material to Chase's
operating results for any particular period, depending on the level of Chase's
income for such period.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Positions and offices held with Chase
(at December 31, 1999)
William B. Harrison, Jr. 56 Chairman and Chief Executive Officer of Chase and Chase Bank. From June through
December 1999, Mr. Harrison had been President and Chief Executive Officer of Chase
and Chase Bank, prior to which he had been Vice Chairman of the Board.
Walter V. Shipley 64 Chairman and Chief Executive Officer of Chase and Chase Bank 1983-1992 and 1994 to
June 1999. Chairman of Chase and Chase Bank, June 1999 through December 1999,
retiring effective January 1, 2000.
Donald L. Boudreau 59 Vice Chairman of Chase and Chase Bank, responsible for National Consumer Services.
Until 1997, Mr. Boudreau had been responsible for Chase's consumer credit
businesses and, prior to the merger, a Vice Chairman and a Director of heritage
Chase.
Neal S. Garonzik 52 Vice Chairman of Chase and Chase Bank, responsible for asset management business
and strategic initiatives in equities and, since January 2000, private banking and
Chase.com. Mr. Garonzik joined Chase in 1999. Until 1997, he was with Morgan
Stanley Dean Witter & Co., most recently as a member of the firm's management
committee and head of its equity division, and from 1997 until joining Chase he was
a private investor.
Donald H. Layton 49 Vice Chairman of Chase and Chase Bank. He is responsible for Global Markets and the
international infrastructure and, since 1999, Global Services.
James B. Lee Jr. 47 Vice Chairman of Chase and Chase Bank. He is responsible for Global Client
Management and Investment Banking.
Denis J. O'Leary 43 Executive Vice President of Chase and Chase Bank, responsible since January 2000
for Chase.com and prior to that Deputy Manager of Chase's National Consumer
Services business. From 1993 through 1997, he was Chase's chief information officer.
Marc J. Shapiro 52 Vice Chairman of Chase and Chase Bank, responsible for Finance, Risk Management and
Administration, and since January 2000 for Chase Technology Solutions. Until 1997,
he was Chairman and Chief Executive Officer of Chase Bank of Texas (formerly Texas
Commerce Bank).
Joseph G. Sponholz 55 Vice Chairman of Chase and Chase Bank, responsible until January 2000 for Chase.com
and Chase Technology Solutions. Until 1997, he had been Executive Vice President
and Chief Administrative Officer.
Jeffrey C. Walker 44 Managing Partner of Chase and of Chase Capital Partners, Chase's global private
equity fund.
Dina Dublon 46 Chief Financial Officer of Chase and Chase Bank. Until 1998, she was Executive Vice
President, Corporate Planning, and prior to the merger she was Corporate Treasurer.
John J. Farrell 47 Director of Human Resources of Chase and Chase Bank. Prior to the merger, he held
the same position at heritage Chase.
Frederick W. Hill 49 Director of Corporate Marketing and Communications of Chase and Chase Bank since
1997. Before joining Chase, he had been Senior Vice President, communications and
community relations, for McDonnell Douglas Corporation since 1995.
William H. McDavid 53 General Counsel of Chase and Chase Bank.
Joseph L. Sclafani 50 Executive Vice President and Controller of Chase and Chase Bank.
Robert S. Strong 50 Executive Vice President and Chief Credit Officer of Chase and Chase Bank. Prior to
the merger, he was responsible for the global portfolio management unit at heritage
Chase.
Unless otherwise noted, during the five fiscal years ended December 31, 1999,
all of Chase's above-named executive officers have continuously held
senior-level positions with Chase or its predecessor institutions, Chemical
Banking Corporation and The Chase Manhattan Corporation (heritage Chase), which
merged on March 31, 1996. There are no family relationships among the foregoing
executive officers.
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PART II, III & IV
PART II
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ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The outstanding shares of Chase's common stock are listed and traded on the New
York Stock Exchange and the London Stock Exchange Limited. For the quarterly
high and low prices of Chase's common stock on the New York Stock Exchange for
the last two years, see the section entitled "Supplementary Information -
Selected Quarterly Financial Data (Unaudited)" on page 86. Chase declared
quarterly cash dividends on its common stock in the amount of $.41 per share for
each quarter of 1999 and $.36 per share for each quarter of 1998. At February
29, 2000, there were 97,725 holders of record of Chase's common stock.
During the fourth quarter of 1999, shares of common stock of Chase were
issued in transactions exempt from registration under Section 4(2) of the
Securities Act of 1933. Such shares of common stock of Chase were issued to
retired directors who had deferred receipt of common stock pursuant to the
Deferred Compensation Plan for Non-Employee Directors and to active directors
who elected to receive, rather than defer, an annual stock grant. These
issuances amounted to 320 shares on October 1, 1999, and 3,230 shares on
December 1, 1999.
ITEM 6: SELECTED FINANCIAL DATA
For five-year selected financial data, see "Selected Financial Data (Unaudited)"
on page 87.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations, entitled "Management's Discussion and Analysis", appears on pages 18
through 55.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information related to market risk, see the "Market Risk Management" section
on pages 45 through 50, Note One on page 61 and Note Nineteen on page 77.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, together with the notes thereto and the
report of PricewaterhouseCoopers LLP dated January 18, 2000 thereon, appear on
pages 56 through 86. Supplementary financial data for each full quarter within
the two years ended December 31, 1999 is included on page 86 in the table
entitled "Supplementary Information - Selected Quarterly Financial Data
(Unaudited)". Also included is a "Glossary of Terms" on page 88.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
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ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF CHASE
See Item 13 below.
ITEM 11: EXECUTIVE COMPENSATION
See Item 13 below.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See Item 13 below.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information related to Chase's Executive Officers is included on page 9.
Pursuant to Instruction G (3) to Form 10-K, the remainder of the information to
be provided in Items 10, 11, 12 and 13 of Form 10-K (other than information
pursuant to Rule 402 (i), (k) and (l) of Regulation S-K) are incorporated by
reference to Chase's definitive proxy statement for the annual meeting of
stockholders, to be held May 16, 2000, which proxy statement will be filed with
the Securities and Exchange Commission pursuant to Regulation 14A within 120
days of the close of Chase's 1999 fiscal year.
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13
PART IV
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ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) EXHIBITS, FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
1. Financial Statements
The consolidated financial statements, the notes thereto and the report
thereon listed in Item 8 are set forth commencing on page 56.
2. Financial Statement Schedules
None.
3. Exhibits
3.1 Restated Certificate of Incorporation of The Chase Manhattan Corporation
(incorporated by reference to Exhibit 4.1 to the Registration Statement
on Form S-8 (File No. 333-07941) of The Chase Manhattan Corporation).
3.2 Certificate of Amendment of Restated Certificate of Incorporation of The
Chase Manhattan Corporation (incorporated by reference to Exhibit 3.2 to
the Registration Statement on Form S-3 (File No. 333-56573) of The Chase
Manhattan Corporation).
3.3 Certificate of Designations of Fixed/Adjustable Rate, Noncumulative
Preferred Stock of The Chase Manhattan Corporation (incorporated by
reference to Exhibit 3.3 to the Registration Statement on Form S-3 (File
No. 333-56573) of The Chase Manhattan Corporation).
3.4 By-laws, as amended as of June 1, 1999, of The Chase Manhattan
Corporation (incorporated by reference to Exhibit 4.4 to the Registration
Statement on Form S-8 (File No. 333-92217) of The Chase Manhattan
Corporation.
4.1 Indenture, dated as of December 1, 1989, between Chemical Banking
Corporation and The Chase Manhattan Bank (National Association), as
succeeded to by Bankers Trust Company, as Trustee (incorporated by
reference to Exhibit 4.9 to the Registration Statement on Form S-3 (File
No. 33-32409) of Chemical Banking Corporation).
4.2(a) Indenture, dated as of April 1, 1987, as amended and restated as of
December 15, 1992, between Chemical Banking Corporation and Morgan
Guaranty Trust Company of New York, as succeeded to by U.S. Bank Trust
National Association (formerly known as First Trust of New York, National
Association), as Trustee (incorporated by reference to Exhibit 4.1 to the
Current Report on Form 8-K, dated December 22, 1992, of Chemical Banking
Corporation, File No. 1-5805).
4.2(b) Second Supplemental Indenture, dated as of October 8, 1996, between The
Chase Manhattan Corporation and U.S. Bank Trust National Association
(formerly known as First Trust of New York, National Association), as
Trustee, to the Indenture, dated as of April 1, 1987, as amended and
restated as of December 15, 1992 (incorporated by reference to Exhibit
4.5 to the Registration Statement on Form S-3 (File No. 333-14959) of The
Chase Manhattan Corporation).
4.3(a) Indenture, dated as of July 1, 1986, between The Chase Manhattan
Corporation and Bankers Trust Company, as Trustee (incorporated by
reference to Exhibit (4)(a) to the Registration Statement on Form S-3
(File No. 33-7299) of The Chase Manhattan Corporation).
4.3(b) First Supplemental Indenture, dated as of November 1, 1990, between The
Chase Manhattan Corporation and Bankers Trust Company, as Trustee, to the
Indenture, dated as of July 1, 1986 (incorporated by reference to Exhibit
(4)(b) to the Registration Statement on Form S-3 (File No. 33-40485) of
The Chase Manhattan Corporation).
4.3(c) Second Supplemental Indenture, dated as of May 1, 1991, between The Chase
Manhattan Corporation and Bankers Trust Company, as Trustee, to the
Indenture, dated as of July 1, 1986 (incorporated by reference to Exhibit
(4)(c) to the Registration Statement on Form S-3 (File No. 33-42367) of
The Chase Manhattan Corporation).
4.3(d) Third Supplemental Indenture, dated as of March 29, 1996, among Chemical
Banking Corporation, The Chase Manhattan Corporation and Bankers Trust
Company, as Trustee, to the Indenture, dated as of July 1, 1986
(incorporated by reference to Exhibit 4.18 to the Registration Statement
on Form S-3 (File No. 333-14959) of The Chase Manhattan Corporation).
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PART IV
4.4(a) Amended and Restated Indenture, dated as of September 1, 1993, between
The Chase Manhattan Corporation and Chemical Bank, as Trustee
(incorporated by reference to Exhibit (4)(cc) to the Current Report on
Form 8-K, dated August 19, 1993, of The Chase Manhattan Corporation, File
No. 1-5945).
4.4(b) First Supplemental Indenture, dated as of March 29, 1996, among Chemical
Banking Corporation, The Chase Manhattan Corporation, Chemical Bank, as
resigning Trustee, and U.S. Bank Trust National Association (formerly
known as First Trust of New York, National Association), as successor
Trustee, to the Amended and Restated Indenture, dated as of September 1,
1993 (incorporated by reference to Exhibit 4.22 to the Registration
Statement on Form S-3 (File No. 333-14959) of The Chase Manhattan
Corporation).
4.4(c) Second Supplemental Indenture, dated as of October 8, 1996, between The
Chase Manhattan Corporation and U.S. Bank Trust National Association
(formerly known as First Trust of New York, National Association), as
Trustee, to the Amended and Restated Indenture, dated as of September 1,
1993 (incorporated by reference to Exhibit 4.23 to the Registration
Statement on Form S-3 (File No. 333-14959) of The Chase Manhattan
Corporation).
4.5(a) Indenture, dated as of May 15, 1993, between Margaretten Financial
Corporation and The Bank of New York, as Trustee, relating to the 6 3/4%
Guaranteed Notes due June 15, 2000 (incorporated by reference to Exhibit
4(a) to the Registration Statement on Form S-3 (No. 33-60262) of
Margaretten Financial Corporation).
4.5(b) Supplemental Indenture, dated as of July 22, 1994, to the Indenture,
dated as of May 15, 1993, among Margaretten Financial Corporation,
Chemical Banking Corporation and The Bank of New York, as Trustee, and
Guarantee, dated as of July 22, 1994, by Chemical Banking Corporation
(incorporated by reference to Exhibit 4.34 to the Current Report on Form
8-K, dated September 28, 1994, of Chemical Banking Corporation, File No.
1-5805).
4.6 Junior Subordinated Indenture, dated as of December 1, 1996, between The
Chase Manhattan Corporation and The Bank of New York, as Debenture
Trustee (incorporated by reference to Exhibit 4.24 to the Registration
Statement on Form S-3 (File No. 333-19719) of The Chase Manhattan
Corporation).
4.7 Guarantee Agreement, dated as of January 24, 1997, between The Chase
Manhattan Corporation and The Bank of New York, as Trustee, with respect
to the Global Floating Rate Capital Securities, Series B, of Chase
Capital II (incorporated by reference to Exhibit 4.8 to the Annual Report
on Form 10-K, dated December 31, 1997, of The Chase Manhattan
Corporation, File No. 1-5805).
4.8 Amended and Restated Trust Agreement, dated as of January 24, 1997, among
The Chase Manhattan Corporation, The Bank of New York, as Property
Trustee, The Bank of New York (Delaware), as Delaware Trustee, and the
Administrative Trustees named therein, with respect to Chase Capital II
(incorporated by reference to Exhibit 4.9 to the Annual Report on Form
10-K, dated December 31, 1997, of The Chase Manhattan Corporation, File
No. 1-5805).
10.1 Deferred Compensation Plan for Non-Employee Directors of The Chase
Manhattan Corporation and The Chase Manhattan Bank, as amended and
restated effective December 1996 (incorporated by reference to Exhibit
10.1 to the Annual Report on Form 10-K, dated December 31, 1996, of The
Chase Manhattan Corporation, File No. 1-5805).
10.2 Post-Retirement Compensation Plan for Non-Employee Directors, as amended
and restated as of May 21, 1996 (incorporated by reference to Exhibit
10.2 to the Annual Report on Form 10-K, dated December 31, 1996, of The
Chase Manhattan Corporation, File No. 1-5805).
10.3 Deferred Compensation Plan of Chemical Banking Corporation and
Participating Companies, as amended through January 1, 1993 (incorporated
by reference to Exhibit 10.5 to the Annual Report on Form 10-K, dated
December 31, 1994, of Chemical Banking Corporation, File No. 1-5805).
10.4 The Chase Manhattan Corporation 1996 Long-Term Incentive Plan
(incorporated by reference to Schedule 14A, filed on April 17, 1996, of
The Chase Manhattan Corporation, File No. 1-5805).
10.5 The Chase Manhattan 1994 Long-Term Incentive Plan (incorporated herein by
reference to Exhibit 10O to The Chase Manhattan Corporation's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994, File No.
1-5945).
10.6 Amendment to The Chase Manhattan 1994 Long-Term Incentive Plan
(incorporated herein by reference to Exhibit 10S to The Chase Manhattan
Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 1-5945).
12
15
10.7 Chemical Banking Corporation Long-Term Stock Incentive Plan, as amended
and restated as of May 19, 1992 (incorporated by reference to Exhibit
10.7 to the Annual Report on Form 10-K, dated December 31, 1992, of
Chemical Banking Corporation, File No. 1-5805).
10.8 The Chase Manhattan 1987 Long-Term Incentive Plan, as amended
(incorporated by reference to Exhibit 10A to The Chase Manhattan
Corporation's Annual Report on Form 10-K for the year ended December 31,
1990, File No. 1-5945).
10.9 Amendment to The Chase Manhattan 1987/82 Long-Term Incentive Plan
(incorporated by reference to Exhibit 10T to the Quarterly Report on Form
10-Q, for the quarter ended September 30, 1995, of The Chase Manhattan
Corporation, File No. 1-5945)
10.10 Long Term Incentive Program of Manufacturers Hanover Corporation
(incorporated by reference to Exhibit 10.10 to the Annual Report on Form
10-K, dated December 31, 1997, of The Chase Manhattan Corporation, File
No. 1-5805).
10.11 Key Executive Performance Plan of The Chase Manhattan Corporation, as
amended and restated January 1, 1999 (incorporated by reference to
Schedule 14A, filed on March 25, 1999, of the The Chase Manhattan
Corporation, File No. 1-5805).
10.12 The Chase Manhattan Annual Incentive Arrangement for Certain Executive
Officers (incorporated by reference to Exhibit 10W to the Quarterly
Report on Form 10-Q, for the quarter ended September 30, 1995, of The
Chase Manhattan Corporation, File No. 1-5945)
10.13 Forms of severance agreements as entered into by The Chase Manhattan
Corporation and certain of its executive officers (incorporated by
reference to Exhibit 10.13 to the Annual Report on Form 10-K, dated
December 31, 1997, of The Chase Manhattan Corporation, File No. 1-5805).
10.14 Form of termination agreement as entered into by The Chase Manhattan
Corporation and Donald L. Boudreau (incorporated by reference to the
Annual Report on Form 10-K, dated December 31, 1994, of The Chase
Manhattan Corporation, File No. 1-5945).
10.15 Form of amendment to the termination agreement as entered into by The
Chase Manhattan Corporation and Donald L. Boudreau (incorporated by
reference to the Quarterly Report on Form 10-Q, dated September 30, 1995,
of The Chase Manhattan Corporation, File No. 1-5945).
10.16 Permanent Life Insurance Options Plan (incorporated by reference to
Exhibit 10.11 to the Annual Report on Form 10-K, dated December 31, 1992,
of Chemical Banking Corporation, File No. 1 -5805).
10.17 Executive Retirement Plan of Chemical Banking Corporation and Certain
Subsidiaries (incorporated by reference to Exhibit 10.8 to the Annual
Report on Form 10-K, dated December 31, 1995, of Chemical Banking
Corporation, File No. 1-5805).
10.18 Supplemental Retirement Plan of Chemical Bank and Certain Affiliated
Companies, restated effective January 1, 1993 and as amended through
January 1, 1995 (incorporated by reference to Exhibit 10.9 to the Annual
Report on Form 10-K, dated December 31, 1995, of Chemical Banking
Corporation, File No. 1-5805).
10.19 Supplemental Retirement Plan of The Chase Manhattan Bank, as amended
(incorporated by reference to Exhibit 10G of The Chase Manhattan
Corporation's Annual Report on Form 10-K for the year ended December 31,
1989, File No. 1-5945).
10.20 Further Amendment to the Supplemental Retirement Plan of The Chase
Manhattan Bank (incorporated by reference to Exhibit 10G of The Chase
Manhattan Corporation's Annual Report on Form 10-K for the year ended
December 31, 1990, File No. 1-5945)
10.21 Amendment to Supplemental Retirement Plan of The Chase Manhattan Bank
(incorporated herein by reference to Exhibit 10Z to The Chase Manhattan
Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 1-5945).
10.22 Supplemental Benefit Plan of The Chase Manhattan Bank, as amended
(incorporated by reference to Exhibit 10H of The Chase Manhattan
Corporation's Annual Report on Form 10-K for the year ended December 31,
1990, File No. 1-5945).
10.23 Amendment to Supplemental Benefit Plan of The Chase Manhattan Bank
(incorporated herein by reference to Exhibit 10AA to The Chase Manhattan
Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 1-5945).
10.24 TRA86 Supplemental Benefit Plan of The Chase Manhattan Bank, as amended
(incorporated by reference to Exhibit 10I of The Chase Manhattan
Corporation's Annual Report on Form 10-K for the year ended December 31,
1990, File No. 1-5945).
13
16
PART IV
10.25 Amendment to TRA86 Supplemental Benefit Plan of The Chase Manhattan Bank
(incorporated herein by reference to Exhibit 10BB to The Chase Manhattan
Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 1- 5945).
11.1 Computation of earnings per common share.
12.1 Computation of ratio of earnings to fixed charges.
12.2 Computation of ratio of earnings to fixed charges and preferred stock
dividend requirements.
21.1 List of Subsidiaries of The Chase Manhattan Corporation.
22.1 Annual Report on Form 11-K of the 401(k) Savings Plan of The Chase
Manhattan Bank (to be filed by amendment pursuant to Rule 15d-21 under
the Securities Exchange Act of 1934).
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule.
The Chase Manhattan Corporation hereby agrees to furnish to the
Commission, upon request, copies of instruments defining the rights of holders
for the outstanding nonregistered long-term debt of The Chase Manhattan
Corporation and its subsidiaries. These instruments have not been filed as
exhibits hereto by reason that the total amount of each issue of such securities
does not exceed 10% of the total assets of The Chase Manhattan Corporation and
its subsidiaries on a consolidated basis. In addition, The Chase Manhattan
Corporation hereby agrees to file with the Commission, upon request, the
Guarantees and the Amended and Restated Trust Agreements for each Delaware
business trust subsidiary that has issued Capital Securities. The provisions of
such agreements differ from the documents constituting Exhibits 4.8 and 4.9 to
this report only with respect to the pricing terms of each series of Capital
Securities; these pricing terms are disclosed in Footnote Six of the Notes to
Consolidated Financial Statements on page 69.
(B) REPORTS ON FORM 8-K
o A Current Report on Form 8-K dated October 20, 1999 was filed on
October 21, 1999 setting forth The Chase Manhattan Corporation's
financial results for the third quarter of 1999.
o A Current Report on Form 8-K dated November 1, 1999 was filed on
November 2, 1999 announcing that fourth quarter trading revenues
would be reduced by approximately $60 million as a result of the
correction of prior period trading profits.
14
17
Pages 15-16 Not Used
18
CHASE 1999 ANNUAL REPORT
This section of the Annual Report provides Management's Discussion and Analysis
of financial condition and results of operations for The Chase Manhattan
Corporation ("Chase"). See Glossary of Terms on page 88 for a definition of
terms used throughout this Annual Report.
Certain Forward-Looking Statements
The Management's Discussion and Analysis contains certain forward-looking
statements. Those forward-looking statements are subject to risks and
uncertainties and Chase's actual results may differ from those statements. See
Chase's reports filed with the Securities and Exchange Commission for a
discussion of factors that may cause any differences to occur.
FINANCIAL TABLE OF CONTENTS
Management's Discussion and Analysis:
18 Overview
20 Management Performance Measurements
21 Results of Operations
29 Lines of Business Results
36 Risk Management
37 Credit Risk Management
45 Market Risk Management
51 Capital and Liquidity Risk Management
54 Operating Risk Management
54 Other Events
55 Accounting and Reporting Developments
55 Comparison Between 1998 and 1997
Audited Financial Statements:
56 Management's Report on Responsibility for Financial Reporting
56 Report of Independent Accountants
57 Consolidated Financial Statements
61 Notes to Consolidated Financial Statements
Supplementary Information:
86 Selected Quarterly Financial Data
87 Selected Financial Data
88 Glossary of Terms
19
=> MANAGEMENT'S DISCUSSION AND ANALYSIS
THE CHASE MANHATTAN CORPORATION
OVERVIEW
------- ------- -------------
Year ended December 31, Over/(Under)
(In millions, except per share and ratio data) 1999 1998 1998
- --------------------------------------------------------------------------------------------
OPERATING BASIS(A)
Revenue $22,982 $19,613 17%
Earnings 5,394 4,016 34
Diluted Earnings Per Share 6.21 4.51 38
Diluted Cash Earnings Per Share 6.56 4.81 36
Shareholder Value Added 2,763 1,406 97
Return on Average Common Equity 24.2% 18.4% 580 bp
Efficiency Ratio 52 55 (300)bp
Cash Efficiency Ratio 51 54 (300)bp
- --------------------------------------------------------------------------------------------
REPORTED BASIS
Net Income $ 5,446 $ 3,782 44%
Diluted Net Income Per Share 6.27 4.24 48
Return on Average Common Equity 24.5% 17.3% 720 bp
Tier 1 Capital Ratio 8.4 8.3 100 bp
- --------------------------------------------------------------------------------------------
(a) Operating basis excludes the impact of credit card securitizations,
restructuring costs and special items. Cash basis is operating basis
excluding the impact of the amortization of goodwill and certain other
intangibles. See page 20 for further discussion.
bp- Denotes basis points; 100 bp equals 1%.
Chase's 1999 financial results added another solid year to its track record
since the 1996 merger of Chase and Chemical, demonstrating the power of Chase's
leadership positions and its effective management of capital, risk and expenses.
For 1999, operating earnings increased 34% to $5.4 billion, and diluted
operating earnings per share rose 38% to $6.21. Since the merger, Chase has
produced a compound annual growth rate in operating revenues of 11%, a compound
annual growth rate in earnings per share of 20% and a return on common equity in
excess of 18%.
Diverse Franchise
During 1999, Global Bank had cash operating earnings growth of 49% and revenue
growth of 30%, reflecting its increasing market share in investment banking and
capital markets activities and its significant private equity business.
National Consumer Services posted a 16% increase in cash operating earnings,
reflecting improved credit quality and business volume increases, and produced
an 8% growth in revenues. Global Services had cash operating earnings growth of
8% and revenue growth of 10%, reflecting the benefit of its leadership positions
in a consolidating industry, despite a decline in the level of excess balances
maintained by customers.
[Graph 1--See Appendix 1]
OPERATING HIGHLIGHTS FOR 1999:
=> Revenue growth of 17%
=> Earnings per share growth of 38%
=> Shareholder Value Added of $2.76 billion, up 97%
=> Return on Common Equity of 24%
=> Repurchase of $2.3 billion of equity and dividend increase of 14%
=> Acquisition of Hambrecht & Quist Group in December 1999
- --------------------------------------------------------------------------------
Financial Disciplines
Chase's market-leading businesses are managed with strict financial discipline,
with attention to risk, capital and expense management so that they can continue
to deliver value for shareholders.
o Risk management focuses on credit, market and operating risks. Risk
management processes include diversification, management of concentrations
and stress testing. The allocation of risk-adjusted capital is used to
measure the performance of its business units. For example, the capital
required to support the commercial loan portfolio declined during the year
as credit quality improved.
[Graph 2--See Appendix 1]
18
20
Despite an increase in syndicated loans arranged by Chase, the overall
commercial loan portfolio on the balance sheet declined slightly as a
result of Chase's disciplined loan distribution process. Market risk
discipline, including the use of stress testing, extends across all of
Chase's businesses. Stress test exposure to potential loss in difficult
markets is subject to a system of advisory limits and drives market risk
capital allocations.
o Capital management is driven by the measurement of Shareholder Value Added
("SVA") and a commitment by Chase to strong capitalization. During 1999,
risk-weighted assets grew 4%, the Tier 1 Capital ratio exceeded
management's target range of 8 - 8.25% and free cash flow from operations
permitted significant stock repurchases and important strategic
investments.
o Expense management has resulted in a 51% cash efficiency ratio for 1999.
Each year, Chase looks to balance the annual growth rate in operating
noninterest expense and the growth rate in revenues. Long-term
initiatives, such as the formation of Chase Business Services in 1998 and
the planned relocation of major processing operations to lower-cost
geographic sites, create longer-term efficiencies and expense savings to
support Chase's investment in its growth businesses.
[Graph 3--See Appendix 1]
Investing for Growth
Investing for growth is one of Chase's strategic priorities: a commitment to use
its resources to strengthen its competitiveness where it has leadership
positions. Recent investments by Chase include the acquisition of the investment
banking firm of Hambrecht & Quist Group ("H&Q"), an acquisition of a major
mortgage business and a credit card portfolio. Progress also continued on
Chase.com initiatives, including an initial public offering by ShopNow.com, an
internet company in which Chase has both an equity investment and a credit card
alliance; and a venture in Intelisys, an e-commerce business-to-business
procurement company.
Chase is a strong believer in e-commerce to propel ongoing growth. Chase.com is
intended to be Chase's incubator for developing new internet businesses and for
entering into internet-related alliances and joint ventures in order to create
significant value for the future. Chase also is web-enabling its existing
businesses to enhance distribution and gain new efficiencies. Also, a growing
part of Chase's internet business practice is supporting the evolution and
growth in the New Economy and, accordingly, approximately 63% of Chase's Private
Equity direct investments are in the New Economy.
- --------------------------------------------------------------------------------
1999 INITIATIVES
=> Acquisitions
o Hambrecht & Quist Group
o Mellon Bank Corporation's mortgage business
o Huntington National Bank's credit card portfolio
=> E-Commerce
o Chase.com creation
o ShopNow.com joint venture (internet shopping mall)
o Intelisys joint venture (procurement company)
o Spectrum joint venture (electronic bill payment)
=> Efficiency
o Announced planned move of significant processing operations to
Houston, Dallas and Tampa
o Selling nonstrategic real estate and branches
o Consolidation of asset management business
- --------------------------------------------------------------------------------
Financial Performance Goals
Chase has targeted its financial performance goals over time as:
o average ROCE of 18% or higher
o annual growth in operating revenue exceeding 10%
o double-digit growth in operating earnings per share
19
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE CHASE MANHATTAN CORPORATION
MANAGEMENT PERFORMANCE MEASUREMENTS
- --------------------------------------------------------------------------------
=> Performance is measured on an operating basis
=> Shareholder Value Added is Chase's primary performance measure of its
businesses
- --------------------------------------------------------------------------------
Operating Basis
Results on an operating basis exclude the impact of restructuring costs, credit
card securitizations, and nonrecurring gains and losses (special items). Special
items are viewed by management as those revenue and expense transactions that
are not part of Chase's normal day-to-day business operations or are unusual in
nature, thereby impacting management's analysis of trends. For example, special
items include gains or losses on sales of significant nonstrategic assets;
interest income from the refund of prior years' taxes; or infrequent charges
such as the accelerated vesting of employee stock-based incentive awards. In
1999, management generally defined special items as nonrecurring revenues or
expenses in excess of $50 million.
Periodically, Chase securitizes a portion of its credit card portfolio by
selling a pool of credit card receivables to a trust, which issues securities to
investors. The receivables underlying the securities that were sold to investors
are not included in Chase's consolidated results. Securitization changes Chase's
status from that of a lender to that of a servicer. When credit card receivables
are securitized, Chase ceases to accrue interest on the receivables and instead
receives fees for continuing to service those receivables. As a result,
securitization does not significantly affect Chase's reported and operating net
income; however, it does affect the classification of items in the Consolidated
Statement of Income.
Cash Operating Earnings
Cash operating earnings are defined as operating earnings excluding the impact
of amortization of goodwill and certain other intangibles. Cash operating
earnings provide management with an indicator of each of its businesses' free
cash flow.
Shareholder Value Added
Introduced in 1998, SVA is defined as cash operating earnings minus preferred
dividends and a charge for allocated equity capital. The capital charge is
calculated by multiplying 13% (management's proxy for the after-tax return
required by shareholders for the use of their capital) by the amount of
risk-adjusted capital assigned to each business unit.
SVA measures the incremental return generated by each business unit above that
required by Chase's shareholders. For example, if new capital can be employed
over time at a return in excess of 13% or if activities or assets that do not
return 13% on capital can be eliminated, SVA will increase. SVA measures the
dollar benefit (or cost) of employing capital to the business units versus
returning capital to shareholders. Management measures each business unit on its
contribution to long-term growth in SVA.
The following table provides a reconciliation between Chase's reported financial
statements and as presented on an operating basis.
1999
--------------------------------------------------
Year Ended December 31, Reported Credit Special Operating
(in millions, except per share data) Results(a) Card(b) Items(c) Basis
- ------------------------------------------------------------------------------------------
INCOME STATEMENT
Market-Sensitive Revenue $ 7,392 $ -- $ -- $ 7,392
Less Market-Sensitive Revenue 14,825 993 (228) 15,590
- ------------------------------------------------------------------------------------------
Total Revenue 22,217 993 (228) 22,982
Noninterest Expense 12,173 -- (100) 12,073
- ------------------------------------------------------------------------------------------
Operating Margin 10,044 993 (128) 10,909
Credit Costs 1,621 993 -- 2,614
- ------------------------------------------------------------------------------------------
Income Before Restructuring Costs 8,423 -- (128) 8,295
Restructuring Costs 48 -- (48) --
- ------------------------------------------------------------------------------------------
Income Before Income Tax Expense 8,375 -- (80) 8,295
Tax Expense 2,929 -- (28) 2,901
- ------------------------------------------------------------------------------------------
Net Income $ 5,446 $ -- $ (52) $ 5,394
- ------------------------------------------------------------------------------------------
Net Income Per Common Share:
Basic $ 6.49 $ 6.42
Diluted 6.27 6.21
- ------------------------------------------------------------------------------------------
1998
--------------------------------------------------
Year Ended December 31, Reported Credit Special Operating
(in millions, except per share data) Results(a) Card(b) Items(c) Basis
- ------------------------------------------------------------------------------------------
INCOME STATEMENT
Market-Sensitive Revenue $ 5,027 $ -- $ -- $ 5,027
Less Market-Sensitive Revenue 13,629 1,148 (191) 14,586
- ------------------------------------------------------------------------------------------
Total Revenue 18,656 1,148 (191) 19,613
Noninterest Expense 10,854 -- (37) 10,817
- ------------------------------------------------------------------------------------------
Operating Margin 7,802 1,148 (154) 8,796
Credit Costs 1,343 1,148 -- 2,491
- ------------------------------------------------------------------------------------------
Income Before Restructuring Costs 6,459 -- (154) 6,305
Restructuring Costs 529 -- (529) --
- ------------------------------------------------------------------------------------------
Income Before Income Tax Expense 5,930 -- 375 6,305
Tax Expense 2,148 -- 141 2,289
- ------------------------------------------------------------------------------------------
Net Income $ 3,782 $ -- $ 234 $ 4,016
- ------------------------------------------------------------------------------------------
Net Income Per Common Share:
Basic $ 4.35 $ 4.63
Diluted 4.24 4.51
- ------------------------------------------------------------------------------------------
(a) Represents the amounts that are reported in Chase's financial statements.
The only exception is that revenues are categorized between
market-sensitive and less market-sensitive revenues, and restructuring
costs have been separately displayed.
(b) This column excludes the impact of credit card securitizations. For
securitized receivables, amounts that previously would have been reported
as net interest income and as provision for loan losses are instead
reported as components of noninterest revenue.
(c) Includes restructuring costs and special items. The 1999 special items
include $62 million of interest income from prior years' tax refunds, $166
million in gains from sales of nonstrategic assets ($95 million was from
the sale of One New York Plaza and $71 million was from the sale of
branches in Beaumont, Texas) and a $100 million special contribution to
The Chase Manhattan Foundation. In 1998, the results included $191 million
of interest income from prior years' tax refunds and $37 million of costs
incurred for accelerated vesting of stock-based incentive awards.
20
22
RESULTS OF OPERATIONS
The following section provides a discussion of Chase's results of operations as
reported in its financial statements as well as on an operating basis.
Management categorizes its revenue components as either market-sensitive or less
market-sensitive.
MARKET-SENSITIVE REVENUE
- --------------------------------------------------------------------------------
=> Market-sensitive revenues in 1999 increased 47% over 1998
=> Market-sensitive revenues have increased at a compound annual growth rate
of approximately 15% since 1988
- --------------------------------------------------------------------------------
Market-sensitive revenues are derived from Chase's extensive Global Bank
franchise. These revenues typically are more sensitive to global market factors
than those produced by other Chase businesses.
Market-sensitive revenues include investment banking fees, trading revenues
(including trading-related net interest income), securities gains and private
equity gains. In 1999, total market-sensitive revenues rose by 47% and were
approximately $1,441 million above Chase's current trendline.
[Graph 4--See Appendix 1]
------ ------
Year Ended December 31, (in millions) 1999 1998
- --------------------------------------------------------------------------------
Investment Banking Fees $1,887 $1,502
Trading-Related Revenue 2,882 1,949
Securities Gains 101 609
Private Equity Gains 2,522 967
- --------------------------------------------------------------------------------
Total Market-Sensitive Revenue $7,392 $5,027
- --------------------------------------------------------------------------------
INVESTMENT BANKING FEES
- --------------------------------------------------------------------------------
Chase's investment banking franchise provides integrated financial solutions to
corporations, financial institutions, governments, financial sponsors and
entrepreneurs worldwide. Investment banking fees include fees from loan
syndications, debt and equity securities underwriting, and merger and
acquisition advisory activities.
Investment banking fees rose 26% to $1.89 billion in 1999. These strong results
were due to significant market share growth in loan syndications, merger and
acquisitions advisory, and corporate bond underwriting, plus focused initiatives
in Europe and the New Economy. They also reflect Chase's ability to leverage its
broad customer base, strong distribution network and leadership positions in an
attractive financial market environment. Over the past five years, Chase's
investment banking fees have increased at a compound annual growth rate of 26%.
Loan Syndications
Chase has been the world's leading arranger of syndicated loan financing for
eight consecutive years. The syndicated loan market is the world's largest new-
issue corporate capital market. During 1999, Chase was book manager on 34% of
U.S. syndicated credit facilities, up significantly from 26% in 1998. This
represented $357 billion in 1999, a volume increase of 31% over the prior year.
Chase has led numerous benchmark syndicated loan transactions in 1999, including
those for New Economy companies, non-U.S. borrowers and acquisition-related
financings.
----------- -----------
1999 1998
Year Ended U.S. Market U.S. Market
December 31, Rank Share Rank Share
- --------------------------------------------------------------------------------
Loan Syndications(a) 1 34% 1 26%
High-Yield(b) 4 11% 6 6%
Investment Grade(a) 3 12% 5 8%
Mergers and Acquisitions(a) 6 14% 9 10%
- --------------------------------------------------------------------------------
(a) Source is Thomson Financial Securities Data ("TFSD").
(b) Source is McCarthy, Crisanti & Maffei, Inc ("MCM").
Debt and Equity Securities Underwriting
Chase underwrites a wide variety of debt securities globally and, as a result of
the acquisition of H&Q, now provides equity underwriting to the fastest growing
sectors of the New Economy in the U.S. Before being acquired by Chase, H&Q
21
23
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE CHASE MANHATTAN CORPORATION
ranked as the 3rd leading equity underwriter to the technology sector. Over the
past three years, Chase has become a "bulge bracket" underwriter in investment
grade and high-yield corporate U.S. debt securities as well as Asian bonds, in
addition to its long-standing strong Latin American capabilities.
Merger and Acquisition Advisory
High levels of merger and acquisition advisory activities continued throughout
1999 as a result of consolidation and globalization among various industries.
Chase advised on merger and acquisition transactions totaling $295 billion in
worldwide announced transaction volume, a 68% increase from the prior year.
Chase has improved in market rank and share, rising to 6th in the U.S. and 14%
in the U.S., respectively.
[Graph 5--See Appendix 1]
TRADING-RELATED REVENUE
- --------------------------------------------------------------------------------
Chase's extensive trading organization serves institutional investors and
corporations from a network of 30 trading rooms around the world. Chase is the
world's largest foreign exchange and derivatives dealer (with more than $12
trillion in notional volume outstanding). Chase makes markets in more than 60
currencies and is the leading market maker in U.S. dollar interest rate
products. Products include spot and forward foreign exchange contracts, as well
as a broad array of derivative financial instruments that are used by clients to
manage exposures to changes in interest rates, currencies, and equities and
commodities prices.
Chase also is a market maker in the major debt markets, with particular emphasis
on the U.S., the new Euro and cross-border markets.
Trading-related revenue, which includes trading-related net interest income,
increased 48% from 1998 to $2.88 billion, primarily as a result of strong
performance across traditional products, particularly debt instruments and
interest rate products, and in other products, such as equity and commodity
derivatives.
During the fourth quarter of 1999, trading-related revenues were reduced by
approximately $60 million as a result of a correction of trading revenues from
previous periods.
Interest Rate Contracts
Revenue from interest rate contracts increased in 1999 as a result of interest
rate movements in the European markets. Additionally, the 1998 results were
negatively impacted by the economic crisis in Asia.
Foreign Exchange
During 1999, foreign exchange revenues, although strong, declined due to a
return to relatively normal volatility in the Asian markets.
Equities and Commodities
Equities and commodities revenue increased for 1999, reflecting favorable market
conditions for equity derivative products throughout 1999 and a focus on
structured deals.
Debt Instruments and Other
The increase in debt instruments and other resulted from continued improvement
in emerging markets activities and in the high-grade bond market, when compared
with the unsettled markets of 1998. The 1999 results reflected buoyant primary
and secondary debt markets in the U.S. investment grade and Latin American
sectors and generally increased market penetration globally.
------ ------
Year Ended December 31, (in millions) 1999 1998
- --------------------------------------------------------------------------------
Trading Revenue - Reported(a) $2,137 $1,238
Net Interest Income Impact(b) 745 711
- --------------------------------------------------------------------------------
Total Trading-Related Revenue $2,882 $1,949
- --------------------------------------------------------------------------------
Product Diversification:
Interest Rate Contracts(b) $ 989 $ 607
Foreign Exchange Revenue(b) 807 936
Equities and Commodities(b) 355 156
Debt Instruments and Other(b) 731 250
- --------------------------------------------------------------------------------
Total Trading-Related Revenue $2,882 $1,949
- --------------------------------------------------------------------------------
(a) Impact of charge-offs for risk management instruments are included in
trading revenue. All prior periods have been restated.
(b) For descriptions of net interest income impact and the classes of
financial instruments comprising these categories, see Note Two.
SECURITIES GAINS
- --------------------------------------------------------------------------------
Securities investments primarily include liquid securities held in connection
with Chase's treasury activities. Chase's domestic and international treasury
units manage Chase's asset and liability interest rate risk.
Securities gains realized in 1999 were $101 million, compared with $609 million
in the prior year. The decline in 1999 was due to higher market interest rates
during the year. Additionally, due to adverse market conditions that existed
during 1998, many investors chose safer investments, such as U.S. Treasuries,
which increased the value of these securities. The 1998 results include
significant gains from the sale of these securities.
22
24
PRIVATE EQUITY GAINS
- --------------------------------------------------------------------------------
Private equity gains largely result from the business of Chase Capital Partners
("CCP"), one of the world's largest and most diversified private equity
investors, with investments in more than 25 countries. The table to the right
shows CCP's direct and fund investment portfolio, totaling $8.7 billion at
December 31, 1999. In addition, CCP manages $6.3 billion of leveraged
loan/high-yield funds and investments in other equity and asset funds, bringing
total funds under management to $15 billion.
CCP invests throughout the entire life cycle of the business development process
and was an early investor in the New Economy. Approximately 63% of CCP's direct
investments are in technology, information services, media, telecommunications
and life science companies. As a result, Chase is one of the largest
participants in this field.
The level of CCP investments has approximately doubled every two years since
1995, reflecting a compound annual growth rate of 43%. The time period for
investments to mature also has shortened significantly. These two factors, and a
stock market receptive to technology and telecommunications stocks, have
contributed to the strong 1999 results.
CCP INVESTMENT PORTFOLIO
-------------- ------
December 31, 1999 (in millions) Carrying Value Cost
- --------------------------------------------------------------------------------
Public Securities (68 Companies) $2,611 $ 707
Non-Public Direct Securities (503 Companies) 4,214 4,332
Non-Public Fund Investments (282 Funds) 1,844 1,867
- --------------------------------------------------------------------------------
Total Investment Portfolio $8,669 $6,906
- --------------------------------------------------------------------------------
Private equity gains for 1999 totaled $2.52 billion, an increase of $1.56
billion (or 161%) over the prior year. These results reflect CCP's increased
investment pace, early focus on New Economy areas and a strong equity market.
Fueling revenues were initial public offerings of portfolio positions such as
Triton PCS, Telecorp PCS, StarMedia and iXL Enterprises; appreciation of other
positons; and realized gains from sales of both public and private investments.
PRIVATE EQUITY GAINS
------ ------
Year Ended December 31,
(in millions) 1999 1998
- --------------------------------------------------------------------------------
Realized Gains $1,257 $ 916
Mark-to-Market Gains 1,265 51
- --------------------------------------------------------------------------------
Total Private Equity Gains $2,522 $ 967
- --------------------------------------------------------------------------------
The table above breaks out the private equity gains between realized gains from
investment sales and those gains recognized through mark-to-market appreciation.
For 1999, approximately half of CCP's private equity revenue was from realized
gains.
Since its inception in 1984, CCP has made more than 950 direct equity and
mezzanine investments. Since 1984, aggregate liquidated investments have
generated internal rates of return in excess of 40%. The pie graph below
reflects the diversification of CCP's portfolio by industry sector. CCP also has
diverse revenue streams with each industry sector generating internal rates of
return of at least 20%.
Chase believes that equity-related investments will continue to make substantial
contributions to its earnings, although the timing of the recognition of gains
is unpredictable and revenues could vary significantly from period to period.
For a further discussion of CCP's business, visit the CCP web site at:
www.chasecapital.com.
[Graph 6--See Appendix 1]
[Graph 7--See Appendix 1]
23
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE CHASE MANHATTAN CORPORATION
LESS MARKET-SENSITIVE REVENUE
- --------------------------------------------------------------------------------
=> Less market-sensitive revenues on an operating basis increased 7% in 1999
over 1998
=> Less market-sensitive revenues comprise approximately 68% of Chase's total
revenues
- --------------------------------------------------------------------------------
Since 1988, less market-sensitive revenues have increased at a CAGR of 3%;
however, Chase has experienced an acceleration of this growth rate, as evidenced
by annual growth in less market-sensitive revenues of 6 - 8% per year in each of
the last four years.
Less market-sensitive revenue on an operating basis includes the components in
the table to the right.
Less market-sensitive revenues derive largely from Chase's extensive domestic
consumer banking activities, global services and global private banking
franchises and from credit products provided to large corporate and middle
market clients. These revenues generally experience less market volatility than
those global banking revenues which are characterized as market-sensitive.
------- ------- ---------
Year Ended December 31, (in millions) 1999 1998 % Change
- ------------------------------------------------------------------------------------------
Net Interest Income (excluding Trading-Related NII) $ 9,272 $ 9,124 2%
Less Market-Sensitive Fee Revenue:
Trust, Custody and Investment Management Fees 1,801 1,543
Credit Card Revenue 1,380 1,175
Fees for Other Financial Services 2,496 2,093
- ------------------------------------------------------------------------------------------
Total Less Market-Sensitive Fee Revenue 5,677 4,811 18
Other Revenue 641 651 (2)
- ------------------------------------------------------------------------------------------
Total Less Market-Sensitive Revenue $15,590 $14,586 7%
- ------------------------------------------------------------------------------------------
NET INTEREST INCOME
- --------------------------------------------------------------------------------
Net interest income ("NII") is derived from all three of Chase's business
franchises. Less market-sensitive operating NII adjusts reported NII for special
items, the impact of credit card securitizations and the trading- related NII
that is considered part of market-sensitive revenue. The following table
reconciles reported NII and less market-sensitive operating NII.
--------- --------- -----------
Year Ended December 31, 1999 1998 % Change
- -------------------------------------------------------------------------------------------------
Net Interest Income (in millions)
Reported NII $ 8,744 $ 8,566 2%
Add Impact of Credit Card Securitizations 1,335 1,460
Less Trading-Related NII (745) (711)
Less Interest on Tax Refunds(a) (62) (191)
- -------------------------------------------------------------------------------------------------
Operating NII (Less Market-Sensitive) $ 9,272 $ 9,124 2%
- -------------------------------------------------------------------------------------------------
Average Interest-Earning Assets (in billions)
Reported $ 294.2 $ 296.8 (1)%
Add Impact of Credit Card Securitizations 17.7 18.0
Less Trading-Related Assets (52.2) (61.4)
- -------------------------------------------------------------------------------------------------
Managed (Less Market-Sensitive) $ 259.7 $ 253.4 2%
- -------------------------------------------------------------------------------------------------
Net Yield on Interest-Earning Assets(b)
Reported 2.98% 2.89% 9 bp
Add Impact of Credit Card Securitizations 0.26 0.30 (4)
Impact of Trading-Related NII 0.36 0.48 (12)
Less Impact of Tax Refunds(a) (0.02) (0.06) 4
- -------------------------------------------------------------------------------------------------
Managed (Less Market-Sensitive) 3.58% 3.61% (3)bp
- -------------------------------------------------------------------------------------------------
(a) In management's view, these tax refunds are special items and are excluded
from operating results.
(b) Disclosed on a taxable equivalent basis
bp- Denotes basis points; 100 bp equals 1%.
Reported NII was $8.74 billion in 1999, an increase of 2% from 1998, and
operating NII also increased 2% to $9.27 billion in 1999. The increase in
operating NII was primarily due to higher average managed interest-earning
assets, particularly domestic consumer loans. These increases were partially
offset by a decline in the average foreign commercial loan portfolio, as Chase
continued to reduce its exposure to emerging markets during 1999.
The net yield on a managed basis was 3.58% for 1999, down slightly from 1998. A
slight improvement in commercial loan spreads was offset by a decline in
interest-free balances (noninterest-bearing funds which support interest-earning
assets). As a result of decreases in both the volume and rate earned on
interest-free funds, interest-free funds contributed 58 basis points to the net
yield in 1999, down from 82 basis points in 1998.
24
26
TRUST, CUSTODY AND INVESTMENT MANAGEMENT FEES
- --------------------------------------------------------------------------------
Trust, Custody and Investment Management Fees, which are generated by each of
the three major franchises, rose 17% to $1.80 billion in 1999. These favorable
results were largely attributable to portfolio acquisitions in the institutional
trust business in late 1998 and internally generated growth in the personal and
mutual funds businesses.
Institutional
Chase's institutional trust business provides custody and other investor
services to mutual funds, investment managers, pension funds, insurance
companies and financial institutions throughout the world. Also provided are
securities processing services, including trustee and agency services for
corporations, municipalities and other issuers. Revenues increased 19% primarily
due to the Morgan Stanley Dean Witter & Co. ("Morgan Stanley") global custody
acquisition and the PNC Bank Corp. ("PNC") corporate trust portfolio acquisition
(both in late 1998), coupled with increased business activity.
Personal
Chase's personal trust fees reflect the business done with retail-based
customers and high net worth individuals. Revenues for 1999 grew 11%, when
compared with 1998, reflecting strong growth in the U.S.
------ ------
Year Ended December 31, (in millions) 1999 1998
- --------------------------------------------------------------------------------
Trust, Custody and Investment Management Fees:
Institutional(a) $1,076 $ 905
Personal(b) 518 466
Mutual Funds(c) 174 136
Other Trust Fees 33 36
- --------------------------------------------------------------------------------
Total $1,801 $1,543
- --------------------------------------------------------------------------------
(a) Represents fees for trustee, agency, registrar, securities-lending and
broker-clearing, custody and maintenance of securities.
(b) Represents fees for trustee, estate, custody, advisory and investment
management services.
(c) Represents investment management, administrative, custody and other fees
in connection with Chase's proprietary global mutual funds.
Mutual Funds
Revenues from Chase's global mutual funds for 1999 increased 28% as the market
value of fund assets under management continued to increase during 1999.
The following table shows the growth in Chase's assets under custody and under
management. The increase in institutional assets under custody was primarily due
to the previously-mentioned portfolio acquisitions.
------ ------
December 31, (in billions) 1999 1998
- --------------------------------------------------------------------------------
Assets Under Administration/Custody:
Institutional $5,415 $4,646
Personal 110 99
Mutual Funds 51 42
- --------------------------------------------------------------------------------
Total $5,576 $4,787
- --------------------------------------------------------------------------------
Assets Under Management:
Institutional $ 116 $ 92
Personal 56 52
Mutual Funds 54 46
- --------------------------------------------------------------------------------
Total $ 226 $ 190
- --------------------------------------------------------------------------------
CREDIT CARD REVENUE
- --------------------------------------------------------------------------------
Chase is the 4th largest bank card issuer in the U.S. At year-end 1999,
worldwide managed credit card outstandings stood at $34 billion, reflecting a 4%
increase over the 1998 level.
Credit card revenues include interchange income (which is a
transaction-processing fee), late fees, cash advance, annual and overlimit fees
as well as servicing fees associated with securitization activities.
Credit card revenue on a reported basis increased 15% for 1999. The higher
revenues were due to increased customer usage, higher late fees and lower
charge-offs on the securitized portfolio (which increased the servicing fees
Chase received from this portfolio).
The following table reconciles Chase's reported credit card revenue and
operating credit card revenue, which excludes the impact of credit card
securitizations.
Year Ended December 31, ------ -------
(in millions) 1999 1998
- --------------------------------------------------------------------------------
Reported Credit Card
Revenue $1,698 $1,474
Less Impact of Credit Card
Securitizations (318) (299)
- --------------------------------------------------------------------------------
Operating Credit Card Revenue $1,380 $1,175
- --------------------------------------------------------------------------------
For a further discussion of the credit card portfolio, see page 41.
25
27
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE CHASE MANHATTAN CORPORATION
FEES FOR OTHER FINANCIAL SERVICES
- --------------------------------------------------------------------------------
------ ------
Year Ended December 31, (in millions) 1999 1998
- --------------------------------------------------------------------------------
Fees for Other Financial Services:
Mortgage Servicing Fees $ 405 $ 192
Service Charges on Deposit Accounts 393 368
Fees in Lieu of Compensating Balances 378 344
Commissions on Letters of Credit and Acceptances 285 301
Brokerage and Investment Services 198 142
Insurance Fees 171 145
Loan Commitment Fees 139 136
Other Fees 527 465
- --------------------------------------------------------------------------------
Total Fees for Other Financial Services $2,496 $2,093
- --------------------------------------------------------------------------------
Fees for other financial services increased to $2.50 billion in 1999. The table
above provides the significant components of fees for other financial services.
o Mortgage servicing fees increased by 111% in 1999 due to a larger
servicing portfolio and a lower amortization rate on the mortgage
servicing rights. The servicing portfolio increased 46% from prior year
levels due to lower prepayments, higher origination volume and the
acquisition of the mortgage business from Mellon Bank Corporation
("Mellon") in the third quarter of 1999. During 1999, mortgage interest
rates increased, which resulted in lower prepayments of mortgage loans
and, as a result, lowered the amortization rate of the mortgage servicing
rights.
o Service charges on deposits increased 7% during 1999, reflecting growth in
customer deposits and higher fees charged on deposit-related products.
o Fees in lieu of compensating balances increased 10% as a result of greater
utilization of products by customers and a decrease in the deposit levels
of customers paying with compensating balances.
o Brokerage and investment services rose $56 million for the year due to a
significant increase in customer activity at Brown & Company, Chase's
discount brokerage firm within National Consumer Services. In the past
year, Brown & Company has tripled its average trades per day to
approximately 35,000, two-thirds of which are now online.
o Insurance fees include fees from credit-related products (such as insuring
the payment of credit card and auto loans in the event of loss of life,
disability and other catastrophic events), as well as from
non-credit-related products (such as life, health and property insurance,
and annuities). In 1999, insurance fees rose 18% primarily due to higher
annuity sales and new business relating to insuring the payment of credit
card debts.
o Other fees rose 13% during 1999 due to higher interchange income related
to debit card transactions, cash management fees pertaining to EZ Pass and
higher business volume across a number of products.
OTHER REVENUE
- --------------------------------------------------------------------------------
Year Ended December 31, ------ ------
(in millions) 1999 1998
- --------------------------------------------------------------------------------
Other Revenue:
Residential Mortgage
Origination/Sales Activities $ 323 $ 356
All Other Revenue 318 295
- --------------------------------------------------------------------------------
Operating Other Revenue 641 651
- --------------------------------------------------------------------------------
Gains on Sales of
Nonstrategic Assets(a) 166 --
Credit Card Securitizations 24 13
- --------------------------------------------------------------------------------
Reported Other Revenue $ 831 $ 664
- --------------------------------------------------------------------------------
(a) In management's view, these gains are special items and are excluded from
operating results.
Reported other revenue includes gains from the sale of nonstrategic assets and
the impact of credit card securitizations. The 1999 reported results included
two special gains: $95 million from the sale of One New York Plaza and $71
million from the sale of branches in Beaumont, Texas.
Operating other revenue decreased 2% during 1999 and reflects:
o Lower revenue from residential mortgage activities (which includes
origination and sales of loans and selective dispositions of mortgage
servicing rights) as a result of higher interest rates and more
competitive pricing during 1999, resulting in lower margins on loan sales;
o An increase in operating all other revenue, which includes gains in 1999
from sales of student loans, a gain on the sale of upstate New York
branches and improved results from the Octagon Credit Investment Fund
(which was established in early 1998, and substantially sold to investors
in late 1999), partially offset by the effect of a gain in 1998 from the
sale of a foreign operation.
26
28
NONINTEREST EXPENSE
- --------------------------------------------------------------------------------
=> Chase manages operating noninterest expense to support revenue growth
=> Cash operating efficiency ratio of 51% for 1999
- --------------------------------------------------------------------------------
------ ------
Year Ended December 31, (in millions, except ratios) 1999 1998
- --------------------------------------------------------------------------------
Operating:
Salaries $5,678 $4,988
Employee Benefits 964 854
Occupancy Expense 866 798
Equipment Expense 1,015 890
Other Expense 3,550 3,287
- --------------------------------------------------------------------------------
Operating Noninterest Expense 12,073 10,817
- --------------------------------------------------------------------------------
Special Contribution to the Foundation(a) 100 --
Restructuring Costs 48 529
Accelerated Vesting of Stock-Based Incentive Awards
(included in Salaries)(d) -- 37
- --------------------------------------------------------------------------------
Reported Noninterest Expense $12,221 $11,383
- --------------------------------------------------------------------------------
Operating Efficiency Ratio(b) 52.3% 54.9%
Cash Operating Efficiency Ratio(b)(c) 51.0% 53.6%
- --------------------------------------------------------------------------------
(a) Represents a $100 million special contribution to The Chase Manhattan
Foundation included in Other Expense. In management's view, this
contribution is a special item and is excluded from operating results.
(b) Excludes restructuring costs, costs associated with a real estate
investment trust ("REIT") subsidiary, nonrecurring revenue and expense
items (special items), and the impact of credit card securitizations.
(c) Excludes the impact of amortization of goodwill and certain other
intangibles.
(d) In management's view, this cost is a special item and is excluded from
operating results.
[Graph 8--See Appendix 1]
Total reported noninterest expenses were $12.22 billion in 1999, an increase
from $11.38 billion last year. Excluding the impact of restructuring costs and
special items, operating noninterest expenses were $12.07 billion in 1999, an
increase of 12% from the prior year. The growth in expenses included processing
costs and goodwill expense associated with portfolio acquisitions, investment
spending on new product offerings, technology spending on Year 2000 and
Chase.com, and higher incentive costs.
SALARIES AND EMPLOYEE BENEFITS
- --------------------------------------------------------------------------------
The increase in salaries and employee benefits on an operating basis for 1999
was due to higher incentive costs, primarily driven by the growth in
market-sensitive revenues. Also contributing to the increase was the net
addition of 2,118 full-time equivalent employees. The increased head count
reflects the H&Q acquisition, an acquisition in the mortgage business and the
impact of internal growth in selected businesses. These increases were partially
offset by staff reductions related to initiatives to streamline support
functions and realign certain business activities.
The 1998 reported results include $37 million of costs incurred for the
accelerated vesting of stock-based incentive awards.
The following table presents Chase's full-time equivalent employees for the
dates indicated.
------ ------
December 31, 1999 1998
- --------------------------------------------------------------------------------
Domestic 63,259 61,472
Foreign 11,542 11,211
- --------------------------------------------------------------------------------
Total Full-Time
Equivalent Employees 74,801 72,683
- --------------------------------------------------------------------------------
OCCUPANCY AND EQUIPMENT EXPENSE
- --------------------------------------------------------------------------------
Occupancy expense increased by $68 million during 1999, compared with 1998. The
increase was primarily due to higher occupancy costs resulting from business
expansions and acquisitions occurring in late 1998 and 1999.
The higher equipment expense for 1999 reflects depreciation expense from the
capitalization of costs related to more advanced hardware systems across all
businesses. The increase also was related to higher rental costs for Year 2000
compliant computer equipment. For a discussion of Year 2000 implementation, see
the Operating Risk Management Section on page 54.
27
29
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE CHASE MANHATTAN CORPORATION
OTHER EXPENSE
- --------------------------------------------------------------------------------
Reported other expense for 1999 included a $100 million special contribution to
The Chase Manhattan Foundation. Operating other expense increased by $263
million in 1999 from 1998 due to the following:
o Professional services costs increased $51 million, reflecting higher
consultant utilization to work on Year 2000 and Chase.com efforts and a
higher level of legal expenses connected with the greater volume of
investment banking deals and private equity investments.
o Marketing expense increased due to aggressive direct mailing programs for
Chase's credit cards and to a more visible promotion of the Chase brand.
o Telecommunications costs rose reflecting increased installation and usage
stemming from growth in business volume at all of Chase's major
franchises.
o Selected portfolio acquisitions during late 1998 and 1999 contributed to
the increase in the amortization of intangibles.
o All other expenses increased as a result of greater outside processing
volume at Chase Cardmember Services, due in part to higher customer usage,
and a global custody acquisition in late 1998.
------ ------
Year Ended December 31, (in millions) 1999 1998
- --------------------------------------------------------------------------------
Other Expense:
Professional Services $ 719 $ 668
Marketing Expense 459 419
Telecommunications 383 349
Amortization of Intangibles 297 261
Travel and Entertainment 226 243
Minority Interest(a) 49 50
Foreclosed Property Expense 15 5
All Other 1,402 1,292
- --------------------------------------------------------------------------------
Operating Other Expense 3,550 3,287
Foundation Contribution(b) 100 --
- --------------------------------------------------------------------------------
Total Reported Other Expense $3,650 $3,287
- --------------------------------------------------------------------------------
(a) Includes REIT minority interest expense of $44 million in both 1999 and
1998.
(b) Represents special contribution to The Chase Manhattan Foundation.
RESTRUCTURING COSTS
- --------------------------------------------------------------------------------
Chase's expense management includes long-term strategic restructuring
initiatives, such as the relocation of operations for Global Services businesses
and consumer call centers, and other business initiatives, such as the
consolidation of operations.
In connection with these new initiatives, in the fourth quarter of 1999, Chase
incurred a charge of $100 million associated with planned consolidation actions
in certain businesses and a charge of $75 million in connection with planned
staff reductions and disposition of premises and equipment resulting from the
announced relocation of several businesses to Florida, Texas, and Massachusetts.
The $175 mil lion restructuring charge in the fourth quarter of 1999 includes
severance costs associated with the relocation of 2,300 positions and the
projected elimination of 800 positions ($125 million). The remaining
restructuring costs encompass the planned disposition of certain premises and
equipment ($50 million).
Chase anticipates realizing approximately $80 million annually in savings from
its business consolidation initiatives, commencing in 2001. In addition, Chase
anticipates that the total cost of its relocation initiatives will amount to
approximately $360 million (including the aforementioned $75 million charge
taken in 1999, an additional $200 million of expenses expected to be incurred in
2000, and expenses of approximately $85 million expected to be incurred in
2001). Annual savings from the relocation initiatives are expected to be
approximately $50 million in 2001, eventually increasing to approximately $90
million in 2003.
During the 1998 first quarter, Chase incurred a pre-tax charge of $510 million
in connection with initiatives to streamline support functions and realign
certain business activities. In December 1999, $127 million of costs were
reversed primarily related to occupancy not fully utilized under the $510
million charge taken in 1998.
CREDIT COSTS
Credit costs include credit losses related to Chase's securitized credit card
loans. The following table shows the components of credit costs.
------ ------
Year Ended December 31, (in millions) 1999 1998
- --------------------------------------------------------------------------------
Provision for Loan Losses $1,621 $1,343
Credit Costs Associated with Credit Card Securitizations 993 1,148
- --------------------------------------------------------------------------------
Operating Credit Costs $2,614 $2,491
- --------------------------------------------------------------------------------
Credit costs in 1999 increased from 1998 levels primarily due to the impact of
higher charge-offs and lower recoveries in the commercial loan portfolio. For a
discussion of Chase's net charge-offs, see page 39.
INCOME TAXES
Chase recognized income tax expense of $2.93 billion in 1999, compared with
$2.15 billion in 1998. Chase's effective tax rate was 35.0% for 1999, compared
with 36.2% for 1998. The improvement in the effective tax rate was the result of
the positive impact of tax planning initiatives.
28
30
LINES OF BUSINESS RESULTS
- --------------------------------------------------------------------------------
CHASE IS ORGANIZED INTO THREE MAJOR BUSINESSES:
=> Global Bank
=> National Consumer Services
=> Global Services
- --------------------------------------------------------------------------------
[Graph 9--See Appendix 1]
Chase is organized into three major businesses: Global Bank, National Consumer
Services ("NCS") and Global Services. These businesses are segmented based on
the products and services provided or the type of customer serviced and reflect
the manner in which financial information is evaluated by management. Presenting
lines of business information allows for a more informed judgment about Chase as
a whole.
Chase allocates equity to its businesses primarily utilizing an economic
risk-adjusted capital methodology. This methodology quantifies credit, market
and operating risks within each business unit and assigns capital accordingly.
The underlying approach to credit, market and operating risk measurement is
further described on page 36.
Capital also is assessed against Chase business units for certain non-risk
adjusted factors. A "leverage capital tax" is assessed against managed assets
and some off-balance sheet instruments. This capital assessment recognizes that
Chase must maintain certain minimum regulatory ratios. Businesses also are
assessed capital equal to one hundred percent of any goodwill and certain other
intangibles generated through acquisitions to create accountability for the use
of capital in acquisitions.
These two non-risk adjusted assessments complement the economic risk-adjusted
capital allocation and provide the businesses with the financial framework to
evaluate the trade-off in the use of capital by the business versus its return
to shareholders. Taken all together, these capital elements provide Chase with
the attributed capital used to measure SVA for each line of business.
Lines of business results are subject to restatement as appropriate whenever
there are refinements to Chase's risk measurement methodology or in management
reporting policies or changes to the management organization. For example,
organizational changes in 1999 affected the Middle Markets business, which
previously reported into the Global Bank and which now reports into National
Consumer Services; and the Global Asset Management and Mutual Funds business,
which previously was included in Corporate and which now reports into the Global
Bank. Prior periods have been restated to reflect these changes.
FINANCIAL RESULTS
- --------------------------------------------------------------------------------
The table below provides summary financial information on an operating basis for
the three major franchises. The discussion that follows the table focuses on
business unit performance within these franchises. See Note Twenty-Three for
further disclosure of Chase's business segments.
LINES OF BUSINESS RESULTS
Global Bank National Consumer Services
Year Ended December 31, ---------------------------- ----------------------------
(in millions, except ratios) 1999 Over/(Under) 1998 1999 Over/(Under) 1998
- ---------------------------------------------------------------------------------------------
Operating Revenue $10,379 $2,424 30% $9,847 $ 698 8%
Cash Operating Earnings 3,564 1,177 49 1,677 232 16
Average Common Equity 12,616 640 5 7,823 180 2
Average Managed Assets 235,197 (16,166) (6) 129,314 10,268 9
Shareholder Value Added 1,885 1,109 143 636 218 52
Cash Return on Common Equity 27.9% -- 850bp 21.1% -- 260bp
Cash Efficiency Ratio 43 -- (600) 50 -- --
- ---------------------------------------------------------------------------------------------
Global Services Total(a)
Year Ended December 31, ---------------------------- ----------------------------
(in millions, except ratios) 1999 Over/(Under) 1998 1999 Over/(Under) 1998
- ----------------------------------------------------------------------------------------------
Operating Revenue $ 3,120 $ 294 10% $ 22,982 $ 3,369 17%
Cash Operating Earnings 525 39 8 5,691 1,414 33
Average Common Equity 2,855 672 31 21,977 649 3
Average Managed Assets 16,540 2,204 15 387,858 (3,364) (1)
Shareholder Value Added 145 (48) (25) 2,763 1,357 97
Cash Return on Common Equity 18.1% -- (370)bp 25.6% -- 600bp
Cash Efficiency Ratio 74 -- 200 51 -- (300)
- ----------------------------------------------------------------------------------------------
(a) Total column includes Support Units and Corporate results, see discussion
on page 35.
bp- Denotes basis points; 100 bp equals 1%.
29
31
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE CHASE MANHATTAN CORPORATION
GLOBAL BANK
- --------------------------------------------------------------------------------
=> Global Markets
=> Chase Capital Partners
=> Global Investment Banking
=> Corporate Lending and
Portfolio Management
=> Global Private Bank
- --------------------------------------------------------------------------------
[Graph 10 - See Appendix 1]
Global Bank combines the strengths of a leading commercial bank and a leading
investment bank to meet the needs of corporations, institutional investors,
financial institutions, governments, entrepreneurs and private clients around
the world.
BUSINESS PROFILE
- --------------------------------------------------------------------------------
The Global Bank integrates a broad range of leading product capabilities,
industry knowledge and geographic reach to produce superior customer solutions.
Through its presence in approximately 50 countries, the Global Bank serves an
extensive array of clients, from large corporations with longstanding global
relationships to a growing franchise of clients in the fastest growing sectors
of the New Economy. The Hambrecht & Quist acquisition, completed on December 9,
1999, strengthened the Global Bank franchise, which now provides equity
underwriting, advisory services and research capabilities for the New Economy
sector, further serving Chase's clients' needs.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Global Bank's 1999 results reflect Chase's stronger competitive position. Cash
operating earnings in 1999 rose $1.2 billion, or 49%, due to strong private
equity gains, trading-related revenue and investment banking fees, partially
offset by higher incentives as a result of strong growth in revenues and also
lower securities gains. The cash efficiency ratio was 43%, with a 1999 cash
return on equity of 28%.
For a further discussion of Global Bank's integrated products, see the Revenue
discussion beginning on page 21.
[Graph 11 - See Appendix 1]
- --------------------------------------------------------------------------------
1999 HIGHLIGHTS
=> Cash operating earnings increased by $1.2 billion
=> Cash Return on Common Equity was 28%
=> Cash Efficiency ratio improved to 43%
=> Acquisition of H&Q
- --------------------------------------------------------------------------------
1999 Over/(Under) 1998
------------------------------------ --------------------------------------
Cash Cash Cash Cash
Year Ended December 31, Operating Operating Efficiency Operating Operating Efficiency
(in millions, except ratios) Revenues Earnings Ratio Revenues Earnings Ratio
- ------------------------------------------------------------------------------------------------------------
Global Markets $4,090 $1,369 48% 20% 35% (400)bp
Chase Capital Partners 2,330 1,383 7 178 210 (800)
Global Investment Banking 1,576 335 66 25 15 400
Corporate Lending and Portfolio
Management 1,546 548 29 (2) (2) 100
Global Private Bank 887 169 67 4 (6) 300
Other Global Bank (a) (50) (240) NM NM NM NM
- ------------------------------------------------------------------------------------------------------------
Total $10,379 $3,564 43% 30% 49% (600)bp
- ------------------------------------------------------------------------------------------------------------
(a) Other Global Bank includes Chase's Global Asset Management and Mutual
Funds business and discontinued operations. Total assets under management
amounted to $226 billion at December 31, 1999.
bp- Denotes basis points; 100 bp equals 1%.
NM- Not meaningful
30
32
GLOBAL BANK (CONTINUED)
Global Markets
Global Markets is a $4 billion sales and trading organization that serves
institutional investors and corporations from a network of 30 trading rooms
around the world. Activities include sales, trading, origination, underwriting
and research covering the global foreign exchange, derivatives and fixed income
capital markets. Through its treasury operations, Global Markets also manages
Chase's interest rate exposures and fixed income portfolios.
Global Markets 1999 cash operating earnings were $1.4 billion, an increase of
35% from 1998. Cash return on common equity was 43% in 1999. The cash efficiency
ratio was 48% in 1999. Operating revenues increased 20% to $4.1 billion in 1999,
as a result of a strong performance across a wide variety of trading products.
The treasury businesses are managed through a "total return" discipline, which
measures economic value-added by capturing both realized income (securities
gains and net interest income) and unrealized gains or losses on assets and
liabilities.
Net interest income and securities gains/losses on Chase's treasury activities
complement and offer strategic balance to Chase's principal mark-to-market
trading activities.
The total return (pre-tax before expenses) from interest rate risk management
activities of the treasury units amounted to $278 million for 1999, compared
with $523 million for 1998. The decline in total return was related to the
higher global interest rate environment during 1999.
Chase Capital Partners
Chase Capital Partners is one of the world's largest and most diversified
private equity investors with approximately $8.7 billion in investments
(including $1.8 billion in fund investments), representing investments in more
than 25 countries. CCP invests throughout the entire life cycle of the business
development process. CCP has seven offices with over 100 investment
professionals and maintains over 30 strategic relationships which are integrated
into the CCP deal flow network. CCP currently manages a $15 billion portfolio
which includes over 570 direct equity investments, leveraged loan / high-yield
funds and investments in other equity and asset funds.
Gains of $2.52 billion recognized during 1999 reflected continued strength in
the equity markets for technology and internet initial public offerings ("IPOs")
and the positive impact of maturing investments within the portfolio. Cash
operating earnings increased to $1.4 billion in 1999, as a result of the
strength in the equity markets.
Global Investment Banking
Global Investment Banking ("GIB") advises and provides integrated financial
solutions to corporations, financial institutions, governments, financial
sponsors and entrepreneurs worldwide. Product offerings include syndicated
financing, mergers and acquisitions advisory, high-yield securities
underwriting, real estate advisory, restructuring advisory services, project
finance, and private placements. As a result of the acquisition of H&Q, Chase,
through its Chase H&Q division, now provides equity underwriting, advisory
services and research to the fastest growing sectors of the New Economy.
Revenues and cash operating earnings for GIB rose 25% and 15%, respectively, in
1999, when compared with 1998, reflecting continued growth in market share in
mergers and acquisitions advisory, high-yield bond underwriting, and loan
syndications. Expenses increased due to investment spending during 1999, as a
result of a competitive recruiting environment for specialized skills in this
growth business.
Corporate Lending and Portfolio Management
Corporate Lending and Portfolio Management (formerly Corporate Lending) provides
credit and lending services to clients globally utilizing a strategy that
emphasizes loan origination for distribution. An active portfolio management
effort is an integral part of corporate lending activities and is focused on
managing concentrations by product, borrower, risk grade, industry and
geography.
During 1999, both revenues and cash operating earnings decreased 2%, while SVA
improved over 1998. The use of SVA in pricing and portfolio analysis has
resulted in higher spreads on retained assets and the disposition of
less-SVA-attractive loans. During 1999, the loan portfolio's average balance
decreased by over $3 billion and internal risk capital usage decreased by over
$500 million, which contributed to SVA growth with improvements across all
geographies.
Global Private Bank
The Global Private Bank serves a client base of high net worth individuals and
families. As one of the leading private banks globally, with more than $150
billion in client assets, Chase focuses on bringing its clients integrated
wealth management solutions that leverage all of Chase's capabilities.
Cash operating earnings decreased 6% during 1999 from 1998, reflecting an
increase in expenses due primarily to on-going investments in technology and a
restructuring of international activities. Revenues for 1999 grew 4% when
compared with 1998, with a double-digit increase in the U.S., reflecting strong
investment-oriented fee growth, partially offset by lower fees in non-core
international activities.
31
33
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE CHASE MANHATTAN CORPORATION
NATIONAL CONSUMER SERVICES
- --------------------------------------------------------------------------------
=> Chase Cardmember Services
=> Regional Consumer Banking
=> Chase Home Finance
=> Diversified Consumer Services
=> Middle Markets
- --------------------------------------------------------------------------------
National Consumer Services serves 32 million customers nationwide offering a
wide variety of financial products and services through a diverse array of
distribution channels.
[Graph 12--See Appendix 1]
[Graph 13--See Appendix 1]
BUSINESS PROFILE
- --------------------------------------------------------------------------------
NCS is focused on delivering financial solutions to consumers, as well as middle
market and small businesses, across the U.S. Financial solutions are delivered
to consumers through distribution channels that include:
o Branch and ATM networks
o Internet banking
o Telephone
o Direct mail
NCS combines a nationwide consumer presence with a leading small business and
Middle Market franchise in the New York tri-state region and in key Texas
markets. NCS's strategy is driven by information technology, which provides
insights into customer behavior, requirements and preferences, enabling
development of financial solutions that meet customer needs.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Cash operating earnings and SVA increased by 16% and 52%, respectively, over
1998. The increase in cash operating earnings was attributable to the growth in
servicing of residential mortgages and auto loans, higher deposit levels and
higher fees, including an increased level of customer activity through Brown &
Company, Chase's discount brokerage firm. Also contributing to the growth in
cash operating earnings was the significant improvement in credit quality,
particularly in Chase's Cardmember Services business, partially offset by
significant investments in internet and technology activities. The increased SVA
reflects the improvement in earnings and a disciplined use of capital.
Results for National Consumer Services in 2000 are expected to reflect the
anticipated benefits of expense management, continuation of good credit quality
and moderate revenue growth. However, increases in interest rates during the
year would reduce NCS's anticipated growth in cash operating earnings.
- --------------------------------------------------------------------------------
1999 HIGHLIGHTS
=> Cash operating earnings increased by 16%
=> Growth in SVA of 52%
=> Cash efficiency ratio was 50%
- --------------------------------------------------------------------------------
1999 Over/(Under) 1998
--------------------------------- -----------------------------------
Cash Cash Cash Cash
Year Ended December 31, Operating Operating Efficiency Operating Operating Efficiency
(in millions, except ratios) Revenues Earnings Ratio Revenues Earnings Ratio
- -----------------------------------------------------------------------------------------------------
Chase Cardmember Services $4,004 $523 35% 2% 16% -- bp
Regional Consumer Banking 2,410 420 69 9 17 (200)
Chase Home Finance 1,212 284 58 18 13 200
Diversified Consumer Services 1,125 187 53 20 33 --
Middle Markets 980 233 55 2 4 --
Other NCS 116 30 NM NM NM NM
- -----------------------------------------------------------------------------------------------------
Total $9,847 $1,677 50% 8% 16% -- bp
- -----------------------------------------------------------------------------------------------------
bp- Denotes basis points; 100 bp equals 1%.
NM- Not meaningful
32
34
NATIONAL CONSUMER SERVICES (CONTINUED)
Chase Cardmember Services
Chase Cardmember Services ("CCS") is the 4th largest bank card issuer in the
U.S. CCS also includes Chase's international consumer business, including the
3rd largest credit card issuer in Hong Kong, and other international consumer
banking activities, primarily in Hong Kong. CCS is the largest issuer of
co-branded gasoline purchase cards (with Shell Oil) and has co-brand
relationships with significant partners such as Wal-Mart, Toys "R" Us, Bell
Atlantic, Continental Airlines and ShopNow.com, an internet shopping mall. CCS
also is the largest merchant processor in the U.S. through a joint venture with
First Data Corporation.
CCS earned $523 million in cash operating earnings in 1999, a 16% increase over
1998. This improvement was driven by higher credit card usage, the impact of
competitive pricing initiatives in late 1998 and a significant improvement in
credit quality due to lower consumer bankruptcies and enhanced collections
performance. Partially offsetting these favorable factors were higher marketing,
technology and investment spending. At year-end 1999, worldwide managed credit
card outstandings stood at $34 billion, reflecting a 4% increase over the 1998
level.
Regional Consumer Banking
Regional Consumer Banking ("RCB") has a leading share of primary bank
relationships among consumers and small businesses in the New York metropolitan
tri-state area and is a leading retail institution in key Texas markets. RCB
offers customers convenient access to financial services through the largest
branch and proprietary ATM networks in the New York metropolitan region, as
well as internet and telephone banking. RCB is also a leader in the development
of electronic bill presentment and payment.
RCB generated $420 million in cash operating earnings in 1999, a 17% improvement
over 1998 performance. Revenue increased by 9% reflecting strong deposit growth,
higher small business lending volume and increased banking fees. Expenses grew
only by 4%, despite significant increases in technology and internet spending.
RCB continued to rationalize its physical distribution network in 1999 by
selling nonstrategic branches in upstate New York and Texas.
Chase Home Finance
Chase Home Finance ("CHF") serves more than 3.2 million customers nationwide as
the largest originator and servicer of residential mortgage loans and is a
leading provider of home equity and manufactured housing financing. On September
30, 1999, Chase acquired Mellon's mortgage business, which consisted primarily
of a mortgage servicing portfolio. As part of its efforts to broaden
distribution channels, CHF has established strategic alliances with home
builders and realtors.
In 1999, CHF had cash operating earnings of $284 million, which was 13% better
than its 1998 results. For most of 1999, the housing market was strong and CHF
originated $93.4 billion in mortgage, home equity and manufactured housing
loans. This represented a 9% growth over the record levels experienced in 1998.
CHF's servicing portfolio also increased significantly (46%), aided by the
acquisition of the Mellon mortgage business. Expenses increased as a result of
the higher business volumes and technology spending. Management anticipates a
decline in origination volume in 2000, when compared with 1999 levels, as a
result of a rising interest rate environment.
Diversified Consumer Services
Diversified Consumer Services ("DCS") is one of the largest bank originators of
auto loans and leases in the U.S. and a leading provider of student loans
through its joint venture with Sallie Mae. DCS also offers brokerage services
(principally through Brown & Company) and investment products, including
financial planning and investment and retirement services, and insurance.
DCS's cash operating earnings reached $187 million in 1999, an increase of 33%
over 1998. Revenues increased 20%, primarily as a result of net interest income
and fee increases due to higher auto outstandings. Additionally, higher volumes
in the investment and insurance businesses contributed to the increase. In late
1998, DCS shifted to an originate-and-sell strategy for student loans and, as a
result, 1999 included $49 million of gains on portfolio loan sales, compared
with $25 million in 1998.
Middle Markets
Middle Markets is the leading provider in the New York tri-state area and in key
Texas markets of financial services to middle market companies (companies
with annual sales ranging from $3 million to $500 million).
Middle Markets generated cash operating earnings of $233 million, a 4% increase
over 1998 performance. These results were favorably affected by higher loan
volume, improved credit quality and disciplined expense management.
33
35
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE CHASE MANHATTAN CORPORATION
GLOBAL SERVICES
- --------------------------------------------------------------------------------
=> Global Investor Services
=> Chase Treasury Solutions
=> Capital Markets Fiduciary Services
- --------------------------------------------------------------------------------
Global Services is a recognized leader in information and transaction processing
services, moving trillions of dollars daily in securities and cash for its
wholesale customers.
[Graph 14 - See Appendix 1]
BUSINESS PROFILE
- --------------------------------------------------------------------------------
o Global Investor Services ("GIS") provides custody and other investor
services to mutual funds, investment managers, pension funds, insurance
companies and banks throughout the world. As one of the world's largest
custodians, Chase holds in trust and custody $5.6 trillion in assets. Core
products include custody, account administration, trade execution,
off-shore fund servicing, investment and risk management, and securities
lending.
o Chase Treasury Solutions ("CTS") is a leader in providing treasury, cash
management, multicurrency payment, trade finance, cross-border liquidity
information and web-enabled solutions to corporations, financial
institutions, middle market companies, governments and agencies around the
world. CTS is the market leader in FedWire, ACH and CHIPS volume.
o Capital Markets Fiduciary Services ("CMFS") provides securities processing
services, including trustee and agency services for corporations,
municipalities and other issuers, as well as support services for a range
of capital markets instruments. Product offerings include collateral
agency, compliance testing and analytics for collateralized loan and bond
obligations. CMFS provides trust services for over $3 trillion in debt
principal.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For 1999, Global Services' cash operating earnings increased by $39 million,
when compared with 1998, and revenue was up 10% for the year. Of Global
Services' three major business lines, two had strong revenue growth in 1999.
Revenues increased 20% at GIS, primarily resulting from the acquisition of a
global custody business from Morgan Stanley in late 1998. Revenues increased 16%
at CMFS due to the PNC corporate trust portfolio acquisition in late 1998,
coupled with increased business activity. Revenues at CTS, Chase's cash
management business, were consistent with last year's level primarily due to a
decline in the level of excess balances maintained by customers and by a
moderation in the growth of processing services.
Expenses increased due to investment spending and costs related to Year 2000
initiatives coupled with costs incurred to address recordkeeping functions
related to bond administration (see the Operating Risk Management section on
page 54).
Chase expects to effect certain efficiency improvements in its Global Services
business during 2000.
[Graph 15 - See Appendix 1]
- --------------------------------------------------------------------------------
1999 HIGHLIGHTS
=> Cash operating earnings increased by 8%
=> Cash return on common equity was 18%
=> Operating revenue increased by 10%
- --------------------------------------------------------------------------------
1999 Over/(Under) 1998
--------------------------------- ------------------------------------
Cash Cash Cash Cash
Year Ended December 31, Operating Operating Efficiency Operating Operating Efficiency
(in millions, except ratios) Revenues Earnings Ratio Revenues Earnings Ratio
- -------------------------------------------------------------------------------------------------------
Global Services $3,120 $525 74% 10% 8% 200 bp
- -------------------------------------------------------------------------------------------------------
bp- Denotes basis points; 100 bp equals 1%.
34
36
SUPPORT UNITS AND CORPORATE
Chase.com
The Chase.com organization was created in June 1999 and is intended to be
Chase's incubator for developing new internet businesses and for entering into
internet-related alliances and joint ventures in order to create significant
value for the future. Chase also is web-enabling each of its existing businesses
to enhance distribution and gain new efficiencies. Also, a growing part of
Chase's internet business practice is supporting the evolution and growth in the
New Economy.
During the 1999 third quarter, Chase invested in and created a credit card
alliance with ShopNow.com, an internet company which provides customers with a
convenient way to make purchases through the internet. Other examples of
Chase.com initiatives include a joint venture Chase formed with Wells Fargo &
Company and First Union Corporation called Spectrum, which will permit the
payment of bills electronically. Chase.com is also involved with Chase's venture
in Intelisys, an e-commerce business-to-business procurement company.
Chase Business Services
Chase Business Services ("CBS") was established in 1998 to manage Chase's
support services such as real estate management, human resource operations,
procurement and financial services. CBS's mission is to provide these services
to Chase businesses in a manner which is competitive with comparable providers
in terms of price and service quality. CBS is leveraging technology and gaining
cost-efficiencies to provide services that are better, faster, easier and
cheaper. Since its inception, CBS has contributed significant savings, which are
being invested into selective growth opportunities within Chase. Savings are
achieved through improved business practices such as consolidation of services,
improved vendor management, use of technology, reduction in demand for services
and outsourcing.
Technology Solutions
Technology Solutions is a multifaceted technology company within Chase.
Technology Solutions processes more than $4 trillion in transactions daily and
manages over 300 business application systems. Technology Solutions provides
support for line of business driven e-commerce infrastructure needs, including
Chase.com and ChaseWeb, and positions Chase as an industry leader in
business-driven technology deployment. Specific products and services include
data processing and network services, system development and maintenance,
website and groupware development as well as website hosting to Chase businesses
worldwide.
Corporate
Corporate includes the effects remaining at the corporate level after the
implementation of management accounting policies.
For 1999, Corporate and the other support units had a cash operating loss of $75
million, compared with a cash operat ing loss of $41 million in 1998. Prior
periods have been restated to reflect refinements in management reporting
policies or changes to the management organization.
Chase utilizes an internal expense allocation process that aligns the cost of
each of its operational and staff support services, such as those listed above,
with the respective revenue generating businesses. This allows Chase to evaluate
the performance of each of its businesses on a fully allocated basis.
35
37
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE CHASE MANHATTAN CORPORATION
RISK MANAGEMENT
- --------------------------------------------------------------------------------
=> Credit Risk Management
=> Market Risk Management
=> Capital and Liquidity Risk Management
=> Operating Risk Management
- --------------------------------------------------------------------------------
Chase is in the business of managing risk to create shareholder value. The major
risks to which Chase is exposed are credit, market and operating risk.
Chase's risk management is guided by several principles, including:
o Formal definition of risk management governance;
o Risk oversight independent of business units;
o Continual evaluation of risk appetite, communicated through risk limits;
o Diversification;
o Disciplined risk assessment and measurement, including Value-at-Risk
analysis and portfolio stress testing; and
o Performance measurement (SVA) that allocates risk-adjusted capital to
business units.
Risk management and oversight begins with the Risk Policy Committee of the Board
of Directors, which approves the governance of these activities, delegating the
formulation of policy and day-to-day risk oversight and management to Chase's
Executive Committee and to the three corporate risk committees:
o Credit Risk Committee
o Market Risk Committee
o Capital Committee
The Executive Committee provides guidance regarding strategies and risk appetite
and is responsible for an integrated view of Chase's risk exposures, including
the interdependencies among its various risk categories. The corporate risk
committees have decision-making authority for their respective areas of
responsibility, with major policy decisions and risk exposures subject to review
by the Executive Committee.
Chase's adoption of SVA, which incorporates a risk-adjusted capital methodology
as its primary performance measure has strengthened its risk management
discipline by highlighting to the business units the cost of capital that will
be charged to them based on the particular credit, market and operational risks
of their activities. The result of this discipline has been controlled growth
in, and a lower risk profile for, the assets on Chase's balance sheet.
-------------------------
Risk Policy Committee
of Board of Directors
-------------------------
o Oversees Risk Management
-------------------------
-------------------------
Executive Committee
-------------------------
o Strategic Guidance
o Integrated View
-------------------------
- ------------------------ ------------------------- -----------------------
Credit Risk Committee Market Risk Committee Capital Committee
- ------------------------ ------------------------- -----------------------
o Establishes policies o Establishes policies o Establishes capital
for credit risk for market risk and liquidity
management, including management, including policies.
limits for country, market risk limits
product, industry and for all trading, o Responsible for
single obligor investment securities methodology used to
exposures. and balance sheet measure and allocate
activities. operating risk.
o Responsible for the
methodology, models o Responsible for the o Approves policies and
and assumptions used methodology, models methodologies for
to measure credit and assumptions used funds transfer
risk. to measure market and pricing, internal
interest rate risk. capital allocation
o Oversees Chase's and SVA.
credit portfolio o Monitors and reviews
optimization current positions for o Monitors and reviews
strategies, risk compliance with capital policy
profile trends, established limits. execution and
critical problem strategies.
portfolio and
allowances for credit
losses.
- ------------------------ ------------------------- -----------------------
36
38
CREDIT RISK MANAGEMENT
- --------------------------------------------------------------------------------
=> Disciplined processes are in place that are intended to ensure that credit
risks are accurately assessed and properly approved and monitored
=> An independent credit risk management function exists within each major
business unit
- --------------------------------------------------------------------------------
Credit risk is the risk of loss due to borrower or counterparty default. Credit
risk is managed at both the transaction and portfolio levels. Risk management
processes are disciplined and designed both to preserve the independence and
integrity of risk assessment and to integrate effectively with business
management.
CREDIT RISK MANAGEMENT PROCESS
- --------------------------------------------------------------------------------
Risk Measurement
Chase's credit risk management discipline begins with an assessment of the risk
of loss resulting from the default by an obligor or counterparty. All credit
exposures are assessed, whether on- or off- balance sheet. These exposures
include loans, receivables under derivative and foreign exchange contracts, and
lending-related commitments (e.g., letters of credit and undrawn commitments to
extend credit).
Using statistical techniques, estimates are made, for each segment of the
portfolio, of expected losses (on average, over a cycle) and unexpected losses.
The latter represents the potential volatility of actual losses relative to the
expected level of loss. These estimates drive the credit cost allocations to
business units, which are incorporated into the business unit SVA measurement.
Consequently, a unit's credit risk profile is an important factor in assessing
its performance.
Credit losses are not the most significant indicator of risk. If losses were
entirely predictable, the expected loss rate could be factored into product
prices and covered as a normal and recurring cost of doing business. It is the
volatility or uncertainty of loss rates around expected levels that creates risk
and is the primary concern of credit risk management.
The risks of the consumer and commercial portfolios are markedly different.
Broadly speaking, losses on consumer exposures are more predictable, less
volatile and less cyclical than losses on commercial exposures. For the latter,
the loss volatility can be much greater over the course of an economic cycle.
The Cost of Credit Risk - Loss Provisions and Capital Allocation
Chase uses its estimates of expected loss and loss volatility, respectively, to
set risk-adjusted loss provisions and allocate credit risk capital by portfolio
segment. Within the consumer businesses, allocations are differentiated by
product and product segment. In the commercial portfolio, allocations are
differentiated by risk rating, maturity and industry. Off-balance sheet
exposures are converted to loan equivalent amounts, based on their probability
of being drawn, before applying the expected loss and capital factors.
Risk Management Processes
Chase's credit risk management process is guided by policies and procedures
established by the Chief Credit Officer. At both the business unit and corporate
level, disciplined processes are in place that are intended to ensure that risks
are accurately assessed and properly approved and monitored.
In addition to establishing corporate-wide policies and procedures, the Chief
Credit Officer has the primary responsibility for the credit risk measurement
framework, allocating the cost of credit, assessing concentration risks, setting
limits to provide for adequate portfolio diversification, delegating approval
authorities and managing problem assets.
Within each major business unit, there is an independent credit risk management
function that reports jointly to the business executive and the Chief Credit
Officer. These units are responsible for the tactical credit decision making.
They approve significant new transactions and product offerings, have the final
authority over credit risk assessment and monitor the credit risk profile of the
business unit's portfolio.
37
39
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE CHASE MANHATTAN CORPORATION
Credit Risk Management for Consumer Assets
Consumer credit risk management uses sophisticated portfolio modeling, credit
scoring and decision support tools to project credit risks and establish
underwriting standards. Risk parameters are established in the early stages of
product development, and the cost of credit risk is an integral part of the
pricing and evaluation of a product's profit dynamics. Consumer portfolios are
monitored to identify deviations from expected performance and shifts in
consumers' patterns of behavior.
Credit Risk Management for Commercial Assets
Within the commercial sector, credit risk management begins with the client
selection process. Chase's global industry approach helps Chase to be aware of
an industry's developing risk so that exposures can be reduced where risk is
increasing. Overseas, client selection is especially important. Chase's
international strategy, especially in emerging markets, is to focus on the
largest, leading firms with cross-border financing needs.
Concentration management is critical to managing commercial credit risk. Chase
manages concentrations by obligor, risk grade, industry, product and geographic
location. Concentration management is also facilitated by Chase's strategy of
origination for distribution.
CREDIT-RELATED PORTFOLIO
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1999 HIGHLIGHTS
=> Overall credit quality of both commercial and consumer portfolios
improved in 1999
=> 3% reduction in Chase's loan loss allowance
=> Charge-offs in the managed portfolio were up modestly
- --------------------------------------------------------------------------------
[Graph 16--See Appendix 1]
Chase's managed credit-related assets totaled $228 billion at December 31, 1999,
an increase of $4 billion or 2% from year-end 1998, reflecting increased
consumer borrowing, partially offset by lower foreign commercial loans. Chase's
portfolio is balanced between commercial and consumer assets, with consumer
assets comprising 47% of Chase's managed credit-related portfolio at December
31, 1999. Over the past decade, the consumer portfolio has been increasing as a
percentage of total credit-related assets, and management expects this trend to
continue. Net charge-offs in the managed portfolio increased modestly in 1999,
as a result of higher charge-offs in the commercial portfolio, partially offset
by lower consumer charge-offs.
Commercial
Chase Originates for Distribution
Chase's business strategy is to originate for distribution: over 90% of Chase's
wholesale loan originations were distributed into the marketplace, permitting
high revenue growth with minimal loan portfolio growth. Loan outstandings for
Chase's commercial portfolio declined slightly over the last two years, while
loan originations continued to grow. In addition, Chase's SVA discipline
discourages holding assets that do not generate a positive return above the cost
of risk-adjusted capital. This provides a useful screen in selecting loan assets
to add to the balance sheet.
38
40
[Graph 17--See Appendix 1]
Improving Credit Quality
The segment of the commercial portfolio with internal ratings equivalent to
investment grade ratings has grown approximately $5 billion in 1999. The "below
investment grade" component has been reduced largely as a result of diligent
efforts to reduce Chase's cross-border exposures. Commercial nonperforming
assets increased $158 million during 1999 but remained a fairly modest 1% of the
total commercial credit-related portfolio. The overall result: at December 31,
1999, 54% of Chase's commercial credit-related assets were investment grade,
while 46% were below investment grade, including 1% nonperforming.
Diversification
Chase is focused on diversifying its commercial credit-related assets. The graph
below displays credit-related assets of Chase's 10 largest industry groups.
o Commercial banking, Chase's largest industry group, results from its
market-leading positions in derivatives and in providing credit to other
financial institutions. It is a high-quality portfolio, as evidenced by its
large share of investment grade exposures.
o The second largest industry group consists of clients of Chase's private
banking, investment management and discount brokerage operations. That
group's diversification is a result of the large numbers of individual
clients comprising it.
o The 3rd largest industry group is the holding and investment companies
component. The underlying exposures are not highly correlated with each
other, providing a diversified, high-quality portfolio.
o The remaining industry groups are each less than 5% of Chase's total
commercial outstandings, providing a diversified base of industry exposure.
Net Charge-Offs
In 1999, Chase's commercial net charge-offs increased by $206 million from 1998.
The increase was predominantly caused by the deteriorating creditworthiness of
one large customer in Asia and significantly lower recoveries in 1999. Chase
continued to reduce exposures in emerging market countries throughout the year
and took a substantial charge-off for the one large Asian customer during the
1999 fourth quarter. Chase's net charge-off rate on average commercial loans was
0.63% for 1999 and 0.40% for 1998. Chase expects that the annual commercial loan
net charge-off rate, over time, will be in the range of 40 - 60 basis points.
[Graph 18--See Appendix 1]
39
41
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE CHASE MANHATTAN CORPORATION
Consumer
Chase's consumer portfolio is diversified by many different products, including
mortgages, credit cards and auto loans. This portfolio is primarily domestic and
is geographically well-diversified.
Chase's managed consumer portfolio totaled $106 billion at December 31, 1999, an
increase of $4 billion or 4% during 1999. The following pie graph provides a
summary of Chase's consumer portfolio by loan type and the related charge-off
rates. Chase's largest component, residential mortgage loans, comprises 43% of
the total consumer portfolio and is primarily secured by first mortgages. The
credit card portfolio, which accounted for approximately one-third of Chase's
consumer outstandings, showed a significant improvement in its charge-off rate
in 1999. Auto finance, which accounted for approximately 17% of the consumer
portfolio, operated at modest charge-off rates during 1999.
[Graph 19--See Appendix 1]
CONSUMER LOANS BY GEOGRAPHIC REGION
Residential Managed Credit Auto
Mortgage Loans Card Loans Financings
------------------ ------------------ -------------------
December 31, (in millions) 1999 1998 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------
New York City $5,962 $5,889 $2,058 $2,096 $1,577 $1,421
New York (Excluding New York City) 2,109 1,955 2,166 2,204 827 805
Remaining Northeast 6,209 6,072 6,183 5,969 4,070 3,705
- -----------------------------------------------------------------------------------------------------
Total Northeast 14,280 13,916 10,407 10,269 6,474 5,931
Southeast 5,690 5,208 6,238 5,807 2,991 2,571
Midwest 3,223 3,434 6,260 5,918 1,823 1,648
Texas 3,575 3,311 2,721 2,588 3,668 2,961
Southwest (Excluding Texas) 1,205 1,174 1,578 1,484 853 827
California 12,519 11,029 4,286 4,297 2,135 2,081
West (Excluding California) 3,770 3,759 2,082 1,899 498 437
Foreign 1,520 1,467 761 718 48 1
- -----------------------------------------------------------------------------------------------------
Total $45,782 $43,298 $34,333 $32,980 $18,490 $16,457
- -----------------------------------------------------------------------------------------------------
40
42
CREDIT-RELATED PORTFOLIO -- YEAR-TO-YEAR ANALYSIS
- --------------------------------------------------------------------------------
The following table presents credit-related information for the dates indicated.
Credit-Related Nonperforming Past Due 90 Days and
Assets Assets Net Charge-offs Over and Accruing
As of or for the year ended December 31, ----------------- ----------------- ----------------- -----------------
(in millions, except ratios) 1999 1998 1999 1998 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
CONSUMER LOANS
Domestic Consumer:
1-4 Family Residential Mortgages $ 44,262 $ 41,831 $ 286 $ 313 $ 29 $ 31 $ -- $ 3
Credit Card - Reported 15,633 14,229 40(c) -- 828 762 280 302
Credit Card Securitizations(a) 17,939 18,033 -- -- 993 1,148 348 379
- ---------------------------------------------------------------------------------------------------------------------------
Credit Card - Managed 33,572 32,262 40 -- 1,821 1,910 628 681
Auto Financings 18,442 16,456 83 50 81 77 2 20
Other Consumer(b) 6,902 8,375 7 6 196 167 65 97
- ---------------------------------------------------------------------------------------------------------------------------
Total Domestic Consumer 103,178 98,924 416 369 2,127 2,185 695 801
Foreign Consumer 2,800 2,939 22 23 37 25 15 10
- ---------------------------------------------------------------------------------------------------------------------------
Total Consumer Loans 105,978 101,863 438 392 2,164 2,210 710 811
- ---------------------------------------------------------------------------------------------------------------------------
COMMERCIAL LOANS
Domestic Commercial:
Commercial and Industrial 48,097 43,123 380 331 207 (66) 23 42
Commercial Real Estate 3,636 3,984 51 41 (14) (14) 5 1
Financial Institutions 4,211 6,583 12 1 45 (2) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total Domestic Commercial Loans 55,944 53,690 443 373 238 (82) 28 43
Foreign Commercial:
Commercial and Industrial 25,179 25,532 642 603 322 408 4 7
Commercial Real Estate 125 367 -- -- -- -- -- --
Financial Institutions 3,598 4,537 96 22 4 24 20 24
Foreign Governments 3,274 4,798 41 50 (2) 6 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total Foreign Commercial Loans 32,176 35,234 779 675 324 438 24 31
- ---------------------------------------------------------------------------------------------------------------------------
DERIVATIVE AND FX CONTRACTS
Commercial and Industrial 12,512 12,488 -- 13 NA NA 1 --
Financial Institutions 19,749 19,414 34 37 NA NA -- --
Foreign Governments 1,350 1,353 -- -- NA NA -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total Derivative and FX Contracts 33,611 33,255 34 50 NA NA 1 --
- ---------------------------------------------------------------------------------------------------------------------------
Total Commercial Credit-Related 121,731 122,179 1,256 1,098 562 356 53 74
- ---------------------------------------------------------------------------------------------------------------------------
Total Managed Credit-Related $227,709 $224,042 $1,694 $1,490 $2,726 $2,566 $ 763 $885
- ---------------------------------------------------------------------------------------------------------------------------
Assets Acquired as Loan Satisfactions 102 116
- ---------------------------------------------------------------------------------------------------------------------------
Total Nonperforming Assets $1,796 $1,606
- ---------------------------------------------------------------------------------------------------------------------------
Average Annual
Net Charge-off Rate
As of or for the year ended December 31, -------------------
(in millions, except ratios) 1999 1998
- --------------------------------------------------------------
CONSUMER LOANS
Domestic Consumer:
1-4 Family Residential Mortgages .07% .08%
Credit Card - Reported 5.82 5.74
Credit Card Securitizations(a) 5.60 6.36
- --------------------------------------------------------------
Credit Card - Managed 5.70 6.10
Auto Financings .45 .54
Other Consumer(b) 2.80 1.90
- --------------------------------------------------------------
Total Domestic Consumer 2.13 2.29
Foreign Consumer 1.11 .65
- --------------------------------------------------------------
Total Consumer Loans 2.10 2.22
- --------------------------------------------------------------
COMMERCIAL LOANS
Domestic Commercial:
Commercial and Industrial .45 NM
Commercial Real Estate NM NM
Financial Institutions 1.07 NM
- --------------------------------------------------------------
Total Domestic Commercial Loans .44 NM
Foreign Commercial:
Commercial and Industrial 1.21 1.60
Commercial Real Estate NM NM
Financial Institutions .11 .43
Foreign Governments NM .13
- --------------------------------------------------------------
Total Foreign Commercial Loans .95 1.20
- --------------------------------------------------------------
DERIVATIVE AND FX CONTRACTS
Commercial and Industrial NA NA
Financial Institutions NA NA
Foreign Governments NA NA
- --------------------------------------------------------------
Total Derivative and FX Contracts NA NA
- --------------------------------------------------------------
Total Commercial Credit-Related .48 .29
- --------------------------------------------------------------
Total Managed Credit-Related 1.23% 1.14%
- --------------------------------------------------------------
Assets Acquired as Loan Satisfactions
- --------------------------------------------------------------
Total Nonperforming Assets
- --------------------------------------------------------------
(a) Represents the portion of Chase's credit card receivables that have been
securitized. For further discussion of credit card securitizations, see
page 20.
(b) Consists of installment loans (direct and indirect types of consumer
finance), student loans and unsecured revolving lines of credit. There are
essentially no credit losses in the student loan portfolio due to the
existence of Federal and State government agency guarantees. At December
31, 1999 and 1998, student loans that were past due 90 days and over and
still accruing were approximately $2 million and $40 million,
respectively.
(c) Includes currently performing loans placed on a cash basis because of
concerns as to collectibility.
NA- Not applicable-Risk management instruments are marked to market and are
included as part of the valuation of Chase's Trading Assets-Risk
Management Instruments.
NM- Not meaningful
Consumer Loans
Residential Mortgage Loans:
1-4 family residential mortgage loans increased 6% at December 31, 1999, when
compared with the 1998 year-end. Charge-offs for 1999 decreased $2 million, when
compared with the previous year, despite the 6% growth in the portfolio in 1999.
The 1999 net charge-off rate decreased to .07%, reflecting the continued strong
credit quality of the portfolio.
Credit Card Loans: Chase analyzes its credit card portfolio on a "managed
basis," which includes credit card receivables on the balance sheet, as well as
credit card receivables that have been securitized.
Managed credit card receivables increased 4% in 1999 compared with 1998. The
decrease in the net charge-off rate was a result of lower customer bankruptcy
levels. Management anticipates that the managed credit card net charge-off ratio
for full-year 2000 will be lower than for the full-year 1999.
Auto Financings: Auto financings increased 12% from 1998, reflecting strong
consumer demand during the first half of 1999 due to favorable pricing programs.
The 1999 charge-off rate of .45% is indicative of this portfolio's selective
approach to asset origination.
Other Consumer Loans: Other domestic consumer loans decreased 18% from 1998 due
to the sale of student loans during the first half of 1999. The increase in the
net charge-off rate in 1999 reflects the sale of government-guaranteed student
loans and higher losses in an expanding new product line.
41
43
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE CHASE MANHATTAN CORPORATION
Commercial Loans
Commercial and Industrial: The commercial and industrial portfolio consists
primarily of loans made to large corporate and middle-market customers. The
domestic commercial portfolio increased $5.0 billion from 1998 year-end. Net
charge-offs were $207 million, or .45% of the portfolio, in 1999, compared with
net recoveries in 1998. Net charge-offs for the portfolio remained at a low
level, indicative of the portfolio's diversification and strong credit quality.
The foreign commercial and industrial portfolio totaled $25.2 billion at
December 31, 1999 and outstandings were relatively unchanged from 1998 year-end
levels. Nonperforming foreign commercial and industrial loans increased $39
million, primarily due to a single Asian credit. Net charge-off levels for 1999
decreased in comparison with the prior year by $86 million, or 21%. The decline
reflects an improvement from the particularly adverse market conditions in the
third quarter of 1998.
Commercial Real Estate: The commercial real estate portfolio represents loans
secured primarily by real property (other than loans secured by mortgages on 1-4
family residential properties, which are included in the consumer loan
portfolio). Chase carefully monitors its exposure to commercial real estate.
Commercial real estate loans decreased $0.6 billion from 1998, principally as a
result of securitizations, sales and repayments.
Financial Institutions: The financial institutions portfolio includes loans to
commercial banks and companies whose businesses primarily involve lending,
financing, investing, underwriting or insurance. Loans to financial institutions
decreased $3.3 billion in 1999 from 1998 levels, primarily in the domestic
portion of the portfolio. Nonperforming financial institution loans increased by
$85 million in 1999, primarily in the foreign portfolio. The total portfolio
experienced net charge-offs of $49 million in 1999, compared with $22 million in
1998.
Foreign Governments: This portfolio consists of loans to governments of foreign
countries and their ministries, departments and agencies. Foreign government
loans were $3.3 billion at December 31, 1999, a $1.5 billion decrease from
year-end 1998. Net recoveries for the portfolio were $2 million in 1999,
compared with net charge-offs of $6 million in 1998.
Derivative and Foreign Exchange Contracts
In the normal course of its business, Chase utilizes derivative and foreign
exchange financial instruments to meet the financial needs of its customers, to
generate revenues through its trading activities, and to manage its exposure to
fluctuations in interest and currency rates.
Chase uses the same credit procedures when entering into derivative and foreign
exchange transactions as it does for traditional lending products.
Chase's primary counterparties in derivatives and foreign exchange are
investment grade financial institutions, most of which are dealers in these
products.
Many of Chase's derivative and foreign exchange contracts are short-term, which
also mitigates credit risk as transactions settle quickly. The table at the
bottom of the page provides the remaining maturities of derivative and foreign
exchange contracts outstanding at December 31, 1999 and 1998. The lengthening of
the maturity profile during 1999 is the result of the improved creditworthiness
of Chase over the last several years (as evidenced by credit rating upgrades)
and the maturation of the derivatives market where longer maturities are
becoming more commonplace.
Chase does not deal, to any significant extent, in derivatives which dealers of
derivatives (such as other banks and financial institutions) consider to be
leveraged. As a result, the mark-to-market exposure of such derivatives was not
material at December 31, 1999.
At December 31, 1999, nonperforming derivative contracts were $34 million,
compared with $50 million at December 31, 1998.
MATURITY PROFILE 1999 1998
-------------------------------------------- --------------------------------------------
Interest Foreign Equity, Interest Foreign Equity,
Rate Exchange Commodity and Rate Exchange Commodity and
December 31, Contracts Contracts Other Contracts Total Contracts Contracts Other Contracts Total
- ----------------------------------------------------------------------------------------------------------------
Less than 1 year 15% 90% 27% 34% 15% 93% 38% 37%
1 to 5 years 46 8 69 38 48 5 59 37
Over 5 years 39 2 4 28 37 2 3 26
- ----------------------------------------------------------------------------------------------------------------
Total 100% 100% 100% 100% 100% 100% 100% 100%
- ----------------------------------------------------------------------------------------------------------------
Percentages are based upon remaining contract life of mark-to-market exposure
amounts.
42
44
CROSS-BORDER EXPOSURE
- --------------------------------------------------------------------------------
Chase has an extensive country risk process to aid in managing its cross- border
exposures. As part of this process, Chase includes both its credit-related
lending and trading exposures in assessing its cross-border risk. At December
31, 1999, total cross-border assets were 17.8% of Chase's total managed assets.
At that date, Chase's combined exposures in emerging markets in Latin America
and Asia totaled 2.7% of total managed assets. Chase has reduced Latin American
exposure by 4% and Asian exposure by 11% during 1999. These reductions were made
because Chase implemented a strategy to lower its exposure as a result of the
increased risk profile of these markets. Management believes Chase's current
level of cross-border exposure reflects appropriate levels of business, market,
credit and capital risk given its business mix. At these levels of risk, Chase
remains committed to these markets.
[Graph 20--See Appendix 1]
The following table presents Chase's cross-border exposure to emerging Latin
American and Asian countries. Cross- border disclosure is based on the Federal
Financial Institutions Examination Council ("FFIEC") guidelines governing the
determination of cross-border risk.
SELECTED COUNTRY EXPOSURE(a)
1999 1998
----------------------------------------------------------------------- --------------------------
Gross Local Net Country-Related Net Country-
Lending- Trading- Country Less Local Cross-Border Resale Cross-Border Related Resale
December 31, (in billions) Related(b) Related (c) Assets Funding Exposure(a) Agreements(a) Exposure Agreements
- ------------------------------------------------------------------------------------------------------------------------------------
LATIN AMERICA
Brazil $ 0.9 $ 0.2 $ 1.3 $ (1.0) $ 1.4 $ 0.9 $ 2.3 $ 0.9
Argentina 2.1 0.2 0.4 (0.3) 2.4 0.6 2.3 0.5
Mexico 1.6 0.8 0.4 (0.4) 2.4 0.5 1.8 0.4
Chile 0.9 -- 0.1 (0.1) 0.9 -- 0.9 --
Colombia 0.6 -- -- -- 0.6 -- 0.8 --
Venezuela 0.3 -- -- -- 0.3 0.1 0.4 --
All Other Latin America(d) 0.7 0.1 0.8 (0.8) 0.8 -- 1.0 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Latin America $ 7.1 $ 1.3 $ 3.0 $ (2.6) $ 8.8 $ 2.1 $ 9.5 $ 1.8
- ------------------------------------------------------------------------------------------------------------------------------------
EMERGING ASIA
International Monetary Fund
("IMF") Countries:
South Korea $ 0.6 $ 0.2 $ 0.9 $ (0.3) $ 1.4 $ -- $ 2.4 $ --
Indonesia 0.8 0.1 0.1 (0.1) 0.9 -- 1.2 --
Thailand 0.1 0.1 0.7 (0.2) 0.7 -- 0.9 --
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal 1.5 0.4 1.7 (0.6) 3.0 -- 4.5 --
Other Emerging Asia:
Hong Kong 0.4 0.1 4.5 (4.5) 0.5 -- 0.8 --
Singapore 0.8 0.1 0.1 (0.1) 0.9 -- 0.8 --
Philippines 0.1 0.1 0.3 (0.1) 0.4 -- 0.6 --
Malaysia 0.1 0.1 0.6 (0.1) 0.7 -- 0.6 --
China 0.2 0.2 0.1 (0.1) 0.4 -- 0.6 --
All Other Asia 0.3 -- 0.5 (0.3) 0.5 -- 0.5 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Emerging Asia(e) $ 3.4 $ 1.0 $ 7.8 $ (5.8) $ 6.4 $ -- $ 8.4 $ --
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Cross-border disclosure is based on FFIEC guidelines governing the
determination of cross-border risk. Under FFIEC guidelines, resale
agreements are reported by the country of the issuer of the underlying
security. Chase, however, does not consider the cross-border risk of
resale agreements to depend upon the country of the issuer of the
underlying security and, as a result, has presented these amounts
separately in the above table.
(b) Includes loans and accrued interest receivable, interest-bearing deposits
with banks, acceptances, other monetary assets, issued letters of credit
and undrawn commitments to extend credit.
(c) Includes cross-border trading debt and equity instruments and the
mark-to-market exposure of foreign exchange and derivative contracts. The
amounts associated with foreign exchange and derivative contracts are
presented after taking into account the impact of legally enforceable
master netting agreements.
(d) Excludes Bermuda and Cayman Islands.
(e) Excludes Japan, Australia and New Zealand. The net cross-border exposure
for Japan, Australia and New Zealand at December 31, 1999 was $4.9
billion, $2.0 billion and $0.3 billion, respectively, compared with $5.2
billion, $1.9 billion and $0.6 billion, respectively, at December 31,
1998. Japan also had country-related resale agreements of $3.3 billion at
December 31, 1999, compared with $1.7 billion at December 31, 1998.
43
45
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE CHASE MANHATTAN CORPORATION
ALLOWANCE FOR CREDIT LOSSES
- --------------------------------------------------------------------------------
Loans
Chase's Allowance for Loan Losses is intended to cover probable credit losses as
of December 31, 1999 for which either the asset is not specifically identified
or the size of the loss has not been fully determined. Within the allowance,
there are both specific and expected loss components as well as a residual
component.
The specific loss component covers those commercial loans deemed by Chase to be
criticized. Chase internally categorizes its criticized commercial loans into
three groups: doubtful, substandard and special mention.
All nonperforming loans are characterized as either doubtful or substandard.
Nonperforming commercial loans are considered by Chase to be impaired loans. The
allowance for impaired loans is computed using the methodology under SFAS 114.
An allowance is established when the discounted cash flows (or collateral value
or observable market price) of an impaired loan is lower than the carrying value
of that loan. For the purposes of computing the specific loss component of the
allowance, larger impaired loans are evaluated individually and smaller impaired
loans are evaluated as a pool using Chase's historical loss experience for this
class of assets. The criticized but still performing loans are also evaluated as
a pool using historical loss rates.
The expected loss component covers performing commercial loans (except
criticized loans) and consumer loans.
Expected losses are the product of default probability and loss severity. The
computation of the expected loss component of the allowance is based on
estimates of these factors in Chase's credit risk capital model. These estimates
are differentiated by risk rating and maturity for commercial loans and by
product for consumer loans.
The expected loss estimates for each consumer loan portfolio are based primarily
on Chase's recent historical loss experience for the applicable portfolio.
In addition, a portfolio segment component may be established for a particular
geographic or industry segment of the portfolio, if, in management's judgment,
it is probable that expected losses for that component will be higher than
indicated by the base level expected loss factors from the credit risk capital
model.
Finally, a residual component is maintained to cover uncertainties that could
affect management's estimate of probable losses. The residual component of the
allowance reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating specific losses and
expected losses in both the commercial and consumer portfolio. It is expected
that the residual component of the allowance will range between 10% and 20% of
the total Allowance for Loan Losses.
Factors affecting the uncertainty of specific loss and expected loss estimates
include the volatility of default probabilities, rating migrations and loss
severity. These uncertainties could also relate to current macroeconomic and
political conditions, the impact of currency devaluations on cross-border
exposures, changes in underwriting standards, unexpected correlations within the
portfolio, or other factors.
Chase's Credit Risk Committee reviews, at least quarterly, the Allowance for
Loan Losses relative to the risk profile of the portfolio and current economic
conditions. The allowance is adjusted based on that review if, in management's
judgment, changes are warranted.
During 1999, there was an improvement in Chase's credit risk profile and,
accordingly, Chase reduced its Allowance for Loan Losses by $95 million in the
fourth quarter. In 1998, the Allowance for Loan Losses was reduced by $75
million as a result of the redesignation of $75 million of the allowance to
Trading Assets: Risk Management Instruments. As of December 31, 1999, Chase
deems its allowance to be adequate (i.e. sufficient to absorb losses that may
currently exist but are not yet identifiable).
Lending-Related Commitments
To provide for risks of losses inherent in the credit extension process,
management also computes specific and expected loss components as well as a
residual component for lending-related commitments, using a methodology similar
to that used for the loan portfolio. At December 31, 1999 and 1998, the
Allowance for Credit Losses on Lending-Related Commitments was $170 million,
which amount is reported in Other Liabilities.
ALLOWANCE FOR CREDIT LOSSES
December 31, (in millions, except ratios) 1999 1998
- --------------------------------------------------------------------------------
Allowance for Loan Losses $3,457 $3,552
- --------------------------------------------------------------------------------
Allowance for Loan Losses to:
Nonperforming Loans 208% 247%
Loans at Period-End 1.96 2.06
Average Loans 1.99 2.10
- --------------------------------------------------------------------------------
Allowance for Credit Losses on Lending-Related Commitments $ 170 $ 170
- --------------------------------------------------------------------------------
44
46
MARKET RISK MANAGEMENT
- --------------------------------------------------------------------------------
=> Stress Testing and Value-at-Risk are equally important in managing
revenue volatility
=> Market risk disciplines extend across trading, asset / liability and
investment activities
=> Internal capital is allocated on the basis of the higher of Stress
Test or VAR
- --------------------------------------------------------------------------------
Market risk is the exposure to adverse changes in the values of financial
instruments caused by changes in market prices or rates, including changes in
interest rates, foreign exchange rates, and equity and commodity prices.
OVERVIEW
- --------------------------------------------------------------------------------
Chase has developed comprehensive market risk management practices that
incorporate and, in many instances, set the standard for best practices in risk
management techniques and risk management execution.
Chase's Market Risk Management Group consists of approximately 60 professionals
located in New York, London, Hong Kong, Tokyo and Brazil and functions
independently from Chase's business units.
Chase is exposed to market risk in its trading portfolios because the values of
its trading positions are sensitive to changes in market prices and rates.
Market risks generally are categorized as interest rate, foreign exchange,
equity and commodity risks.
Chase also is exposed to market risk in its investment portfolio and commercial
banking activities (Asset/Liability ("A/L") activities) because the revenues
Chase derives from these activities, such as net interest income and securities
gains and losses, are sensitive to changes in interest rates. Interest rate risk
arises from a variety of factors, including differences in timing between the
maturity or repricing of assets, liabilities and derivatives. For example, the
repricing characteristics of loans and other interest-earning assets do not
necessarily match those of deposits, borrowings or other liabilities.
In trading, investment and A/L activities, Chase also is exposed to basis risk,
which is the difference in the pricing characteristics of two instruments. Basis
risk occurs when the market rates or pricing indices for different financial
instruments change at different times or by different amounts. For example, when
Chase's Prime-priced commercial loans are funded with LIBOR-indexed liabilities,
Chase is exposed to the difference between changes in Prime and LIBOR rates.
In 1999, Chase extended the market risk measurement and control disciplines used
in its trading and investment portfolios to its A/L activities. The result of
this effort has been an enhanced management of the market risk in its A/L
activities and an improved picture of market risk across Chase as a whole.
RISK MEASUREMENT
- --------------------------------------------------------------------------------
Because no single risk statistic can reflect all aspects of market risk, Chase
utilizes several risk measures. These measures are Value-at-Risk ("VAR"), stress
testing and other nonstatistical risk measures. Their use in combination is key
to enhancing the stability of revenues from market risk activities because,
taken together, these risk measures provide a more comprehensive view of market
risk exposure than any of them taken individually.
Value-at-Risk
VAR is a measure of the dollar amount of potential loss from adverse market
moves in an everyday market environment. The VAR looks forward one trading day
and is the loss expected to be exceeded with a 1 in 100 chance.
The VAR methodology used at Chase is historical simulation, which assumes that
actual observed historical changes in market indices, such as interest rates,
foreign exchange rates, and equity and commodity prices, reflect future possible
changes. In its daily VAR calculations, Chase uses the most recent one-year
historical changes in market prices and rates. Chase's historical simulation is
applied to end-of-day positions, and it is shown by individual position and by
aggregated positions by business, geography, currency and type of risk.
Statistical models of risk measurement, such as VAR, provide an objective,
independent assessment of how much risk is being taken. Chase's historical
simulation methodology permits consistent and comparable measurement of risk
across instruments and portfolios. Historical simulation also makes it easy to
examine the VAR for any desired segment of the total portfolio and to examine
that segment's contribution to total risk. The VAR calculations are performed
for all material trading and investment portfolios and for all material market
risk-related A/L activities.
45
47
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE CHASE MANHATTAN CORPORATION
All statistical models have a degree of uncertainty associated with the
assumptions employed. Chase believes its use of historical simulation for its
VAR calculations is not as dependent on assumptions about the distribution of
portfolio losses as are other VAR methodologies that are parameter-based. The
Chase VAR methodology assumes that the relationships among market rates and
prices that have been observed over the last year are valid for estimating risk
over the next trading day. In addition, Chase's VAR estimate, as with all VAR
methodologies, is dependent on the quality of available market data. Recognizing
these shortcomings, Chase uses diagnostic information to evaluate continually
the reasonableness of its VAR model. This information includes the calculation
of statistical confidence intervals around the daily VAR estimate and daily
"back testing" of VAR against actual financial results.
Stress Testing
Whereas VAR captures Chase's exposure to unlikely events in normal markets,
stress testing discloses the risk under plausible events in abnormal markets.
Portfolio stress testing is integral to the market risk management process and
is co-equal with, and complementary to, VAR as a risk measurement and control
tool. Giving equal weight to each produces a risk profile that is diverse,
disciplined and flexible enough to capture revenue-generating opportunities
during times of normal market moves but that also is prepared for periods of
market turmoil.
Chase's corporate stress tests are built around changes in market rates and
prices that result from pre-specified economic scenarios, including both
historical and hypothetical market events. Using economic events (actual and
hypothetical) as a basis for stress testing allows easier interpretation of
stress results than scenarios based on arbitrarily specified shocks to market
rates, volatilities or correlations. As with VAR, stress test calculations are
performed for all material trading, investment and A/L portfolios. Stress test
scenarios are chosen so they test "conventional wisdom" and focus on risks
relevant to the positions taken in Chase's portfolios.
Chase's stress test methodology assumes no actions are taken during a stress
event to change the risk profile of its portfolios. This captures the decreased
liquidity that frequently accompanies abnormal markets and results in a
conservative stress loss estimate.
Stress scenarios are built using a very detailed view of markets. For each
corporate stress scenario, more than 11,000 individual shocks to market rates
and prices are specified. These include, for example, highly detailed yield
curve and credit spread shocks involving more than 60 countries,
maturity-specific shocks to market volatilities and shocks to individual foreign
exchange cross-rates. By minimizing the use of approximations and proxies in the
construction of stress scenarios, the stress results are enhanced at the
aggregate level and can be disaggregated to examine meaningfully the exposures
arising from smaller portfolios or individual positions.
A key to the success of stress testing at Chase is continuous review and
updating of stress scenarios. This is a dynamic process that is responsive to
changes in positions and economic events and looks to prior stress tests to
identify areas where scenario refinements can be made. During 1999, Chase
implemented or substantially modified six corporate stress test scenarios.
Corporate stress tests are performed approximately monthly on randomly selected
dates. As of December 31, 1999, Chase's corporate stress tests consisted of six
historical and five hypothetical scenarios. The historical scenarios included
the 1994 bond market sell-off, the 1994 Mexican peso crisis and the 1998 Russian
crisis. The hypothetical scenarios included examinations of potential market
crises originating in the United States, Japan and the Euro bloc. For example,
in Chase's hypothetical "flight to quality" scenario, political instability in
certain emerging markets causes a general sell-off in emerging markets assets
and an investment "flight" to U.S. and selected other "safe haven" countries.
Stress testing also is utilized at the trading desk level, thereby permitting
traders and their management to explore in detail the impact of those economic
scenarios that most stress the factors unique to the individual business
activity. Desk-level stress tests are performed weekly.
Chase also performs NII stress tests that highlight exposures from factors such
as administered rates (e.g., prime lending rate), pricing strategies on consumer
and business deposits, changes in balance sheet mix and the effect of various
options embedded in the balance sheet. NII stress tests take into account
forecasted balance sheet changes (such as asset sales and securitizations, as
well as prepayment and reinvestment behavior).
At year-end 1999, Chase's corporate NII stress tests consisted of one historical
and four hypothetical scenarios.
Nonstatistical Risk Measures
Nonstatistical risk measures include net open positions, basis point values,
option sensitivities, position concentrations and position turnover. These risk
measures provide additional information on an exposure's "size" and "direction."
For example, a basis point value for a portfolio shows whether a one
one-hundredth percentage point (or one "basis point") increase in a market rate
will give rise to a profit or loss and of what magnitude.
During the first quarter of 1999, Chase extended the use of basis point value
("BPV"), previously used only for its trading portfolios, to supplement other
measures of interest rate and basis risk in Chase's A/L activities.
46
48
RISK MANAGEMENT
- --------------------------------------------------------------------------------
Chase has evolved a multi-tiered, many faceted approach to market risk control,
combining several quantitative risk measurement tools.
Included among the controls instituted at Chase are Board of Directors-approved
VAR limits and stress-loss advisory limits and the incorporation of stress test
exposures into Chase's internal capital allocation methodology. When a
Board-approved VAR or stress-loss advisory is exceeded, a review of the
portfolio is automatically triggered.
Primary control of risk is established through limits. Chase's limit structure
extends to desk-level activities and includes a listing of authorized
instruments, maximum tenors, statistical and nonstatistical limits and loss
advisories. The limit structure promotes the alignment of corporate risk
appetite with trading, investment and A/L risk-taking activities.
VAR limits on market risk activities exist at the aggregate and business unit
levels. In addition, Chase maintains nonstatistical risk limits to control risk
in those instances where statistical assumptions break down. Criteria for risk
limits include, among other factors, relevant market analysis, market liquidity,
prior track record, business strategy, and management experience and depth. Risk
limits are reviewed regularly to maintain consistency with trading strategies
and material developments in market conditions, and are updated at least twice a
year. Chase also uses stop-loss advisories to inform line management when losses
are sustained from a trading activity. Chase believes the use of nonstatistical
measures and stop-loss advisories in tandem with VAR limits reduces the
likelihood that potential trading losses will reach the daily VAR limit under
normal market conditions.
Trading Activities
Chase is exposed to interest rate, foreign exchange, equity and commodity market
risk in its trading portfolios. No single risk statistic can reflect all aspects
of market risk; in addition, market risk exposures change continuously through
daily trading activities. Nonetheless, the tables that follow provide a
meaningful overview of Chase's market risk exposure arising from its trading
activities.
Value-at-Risk
The table that follows represents Chase's average and period-end VARs for its
total trading portfolio and for each of the major components constituting that
portfolio.
Marked-to-Market Trading Portfolio
-------------------------------------------------------------------
Year Ended December 31, 1999
------------------------------- At December 31, At December 31,
Average Minimum Maximum 1999 1998
(in millions) VAR VAR VAR VAR VAR
- ----------------------------------------------------------------------------------------------------
Interest Rate $20.2 $10.7 $36.5 $20.0 $20.1
Foreign Exchange 7.0 2.3 21.3 3.0 2.3
Equities 6.3 3.4 10.1 7.2 4.6
Commodities 3.5 1.9 9.0 3.4 2.6
Hedge Fund Investments 4.1 3.1 4.6 3.3 NA
Less: Portfolio Diversification (17.0) NM NM (13.7) (8.9)
- ----------------------------------------------------------------------------------------------------
Total VAR $24.1 $12.3 $41.8 $23.2 $20.7
- ----------------------------------------------------------------------------------------------------
NM- Because the minimum and maximum may occur on different days for different
risk components, it is not meaningful to compute a portfolio
diversification effect. In addition, Chase's average and period-end VAR is
less than the sum of the VARs of its market risk components due to risk
offsets resulting from portfolio diversification.
NA - Not available. Chase started reporting in 1999 its market risk exposure
to hedge fund investments as a separate VAR category.
[Graph 21--See Appendix 1]
47
49
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE CHASE MANHATTAN CORPORATION
This is the first year in which Chase is reporting its market risk exposure to
hedge fund investments as a separate VAR category.
The preceding chart contains a histogram of Chase's daily market risk-related
revenue for 1999 and 1998. Market risk-related revenue is defined as the daily
change in value in mark-to-market trading portfolios plus any trading-related
NII or other revenue. Trading-related NII includes interest recognized on
interest-earning and interest-bearing trading-related positions as well as
management allocations reflecting the funding cost or benefit associated with
trading positions.
In 1999, Chase posted positive daily market risk-related revenue for 250 out of
260 days, with 62 days exceeding positive $20 million. In 1998, Chase posted
positive daily market risk-related revenue for 222 out of 259 days, with 49 days
exceeding positive $20 million. The increase in the number of days in which
trading revenues exceeded $20 million in 1999 versus 1998 underscores Chase's
success in its continued efforts to build key trading activities. Chase incurred
no daily trading losses in excess of $20 million in 1999, compared with six days
in 1998.
Stress Testing
The following table represents the potential stress test loss (pre-tax) in
Chase's trading portfolio predicted by Chase's stress test scenarios. This is
the first year that Chase is providing this stress testing information. Chase's
average potential trading-related stress test loss was predicted to be
approximately $186 million pre-tax in 1999. Chase's largest potential stress
test loss of $302 million was observed under a replay of the historical 1998
Russian crisis scenario. At the date of this stress test, Chase had a
larger-than- usual exposure to interest rates in Latin America and Asia. In
addition to the 1998 Russian crisis scenario, the historical 1994 bond market
sell-off scenario frequently is a scenario that produces potential large stress
test losses in Chase's trading portfolio.
-------------------------------------------------------------------
Marked-to-Market Trading Activities
Largest Monthly Stress Test - Pre-Tax
- ------------------------------------------------------------------------------------------------
Year Ended December 31, 1999
--------------------------------- At December At December
(in millions) Average Minimum Maximum 1999 1998
- ------------------------------------------------------------------------------------------------
Stress Test Loss - Pre-Tax $(186) $(112) $(302) $(231) $(150)
- ------------------------------------------------------------------------------------------------
Investment Portfolio and Asset/Liability Activities
The tables that follow are intended to provide a meaningful representation of
market risk exposure in Chase's investment portfolio and A/L activities at the
dates indicated. However, these exposures change constantly as a result of
changes in the portfolios. In addition, these risk measurements do not take into
account all factors that have an effect on Chase's investment portfolios and A/L
activities, such as changes in credit quality.
Net Interest Income: Stress Testing
Chase previously has reported its NII sensitivity as its estimate of accounting
income sensitivity to an immediate 100 basis point shock in interest rates. NII
sensitivity takes into account forecasts of balance sheet changes (such as
securitizations or prepayment and reinvestment) and forecasts of changes in
interest rate spreads.
At December 31, 1999, Chase's NII sensitivity over the next 12 months to an
immediate 100 basis point shock in interest rates was estimated to be
approximately 3% of projected net income for full-year 2000. At December 31,
1998, Chase's exposure under the same scenario was approximately 3% of projected
1999 net income.
As a result of the convergence between trading and investment portfolios and A/L
activities, in 1999 Chase implemented Net Interest Income stress testing. NII
stress testing differs from NII sensitivity in that it allows for changes in the
level and shape of the yield curve as well as changes in interest rate spreads
over a one-year period. As a result, Chase views NII stress testing as producing
more realistic results than NII sensitivity. NII stress testing also results in
more conservative estimates of NII sensitivity because yield curve levels in one
year frequently change more than 100 basis points. In addition, NII stress tests
assume no management response to unfavorable market conditions for an entire
year.
Chase has implemented NII stress testing using historical and hypothetical
scenarios. The historical scenario is a replay of the rate and spread changes
that occurred in 1994. The various hypothetical scenarios examine the impact of
alternative patterns in the U.S. dollar yield curve and in U.S. dollar spreads.
At year-end 1999, Chase's largest potential NII stress test loss was estimated
to be approximately 8% of projected net income for full-year 2000.
48
50
Value-at-Risk
At December 31, 1999, Chase's average and period-end VARs for its investment
portfolio and market risk-related A/L activities, and for each of the major
components constituting those portfolios, were as follows:
Market Risk-Related A/L Activities
-------------------------------------------------------------------
Year Ended December 31, 1999
-------------------------------- At December 31, At December 31,
Average Minimum Maximum 1999 1998
(in millions) VAR VAR VAR VAR VAR
- ----------------------------------------------------------------------------------------------------
Interest Rate $77.2 $ 63.3 $99.3 $66.7 $79.7
Hedge Fund Investments (a) 9.6 0.6 15.4 0.6 NA
Less: Portfolio Diversification (9.2) NM NM (0.6) --
- ----------------------------------------------------------------------------------------------------
Total VAR $77.6 $ 63.4 $99.8 $66.7 $79.7
- ----------------------------------------------------------------------------------------------------
(a) Represents Chase's investment in Long-Term Capital Management, which was
largely disposed of by year-end.
NM- Because the minimum and maximum may occur on different days for different
risk components, it is not meaningful to compute a portfolio
diversification effect. In addition, Chase's average and period-end VAR is
less than the sum of the VARs of its market risk components due to risk
offsets resulting from portfolio diversification.
NA - Not available. Chase started reporting in 1999 its market risk exposure
to hedge fund investments as a separate VAR category.
Average aggregate VAR increased from 1998, due to an acquisition of a large
mortgage servicing portfolio in September 1999. VARs tend to be larger during
periods in which Chase takes a particular view on interest rates in its
investment portfolios. Investment portfolio positions are generally taken in
liquid instruments such as government securities and mortgage-backed securities.
Nonstatistical Risk Measures
Chase disclosed previously its exposure to interest rate risk using a "funding
gap" measure. Funding gaps represent net notional exposure at various
maturities. In 1999, Chase replaced funding gaps with a BPV measure. As
described above, BPV measures the change in market value of Chase's investment
portfolio and A/L activities to a one basis point increase in interest rates
(directional risk) or one basis point widening of spreads (basis risk).
BPV measures the potential change in the market value of Chase's investment
portfolio and A/L activities, while the NII stress test measures the potential
change in Chase's earnings. In addition, the BPV measure incorporates all future
cash flows discounted to the present while the NII stress test looks forward one
year only. As a result, BPV exposures will generally be much greater than the
NII stress test for the same position.
The table that follows shows that Chase had an average directional BPV value of
($4.9) million (pre-tax), indicating that the market value of Chase's A/L
positions would decline approximately $5 million for every one basis point
increase in interest rates along the interest rate yield curve. This compares
with a directional BPV of ($6.4) million at December 31, 1998.
The following table also shows that the economic value of Chase's investment
portfolio and A/L activities would decline by $10.7 million (pre-tax) for every
one basis point widening of interest rate spreads. This compares with a BPV of
($15.4) million at December 31, 1998.
The BPV measures in the following table include exposure to U.S. dollar interest
rates as well as exposure to non-U.S. dollar interest rates. Exposure to
non-U.S. dollar interest rates is less than 10% of Chase's total directional
interest rate exposure. Exposure to non-U.S. dollar basis risk is immaterial.
Foreign currency exposures arising from A/L activities conducted in Chase's
overseas units and net investments in overseas entities are managed through the
use of foreign exchange forward contracts. Foreign currency exposures are
matched to hedge the impact of foreign exchange rate changes. At December 31,
1999, Chase's earnings sensitivity to changes in foreign currency rates was
immaterial.
Market Risk-Related A/L Activities
-----------------------------------------------------------------------
Year Ended December 31, 1999
----------------------------------- At December 31, At December 31,
(in millions) Average Minimum Maximum 1999 1998
- -----------------------------------------------------------------------------------------------------
Directional Risk $ (4.9) $(4.0) $ (6.8) $ (4.7) $ (6.4)
Basis Risk $ (10.7) $(7.3) $(13.2) $(13.2) $(15.4)
- -----------------------------------------------------------------------------------------------------
49
51
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE CHASE MANHATTAN CORPORATION
Economic Value Stress Testing
As part of the extension of its market risk measurement and control discipline
to its investment portfolio and A/L activities, in 1999 Chase implemented
economic value stress testing for its investment portfolios and A/L activities.
Economic value stress testing represents the anticipated change in value of
Chase's assets and liabilities under certain stress test scenarios. This
contrasts with the more conventional NII stress testing analysis, discussed
previously, that shows the potential change in Chase's accounting earnings over
the next year.
Although Chase performs several historical and hypothetical stress test
scenarios, one historical scenario - the 1994 bond sell-off - throughout 1999
has consistently produced the largest potential loss. This scenario hypothesizes
significant increases in interest rates and significant increases in spreads. As
of December 31, 1999, the potential impact of the 1994 bond sell-off scenario on
the economic value of Chase's investment portfolio and A/L activities would be
equivalent to less than 1% of Chase's market capitalization.
Aggregate Exposure
The table that follows represents Chase's average and period-end VARs for its
trading and investment portfolios and A/L activities.
Chase's average and period-end VARs are less than the sum of the respective
trading and A/L VARs shown in the above tables (by $19.3 million and $15.9
million, respectively) due to risk offsets, resulting from portfolio
diversification that occurs across the trading and A/L portfolios. The increase
in the average VAR between 1998 and 1999 levels is the result of the VAR
increase in the A/L portfolio, as discussed above.
Chase conducts daily VAR "backtesting" for both regulatory compliance with the
Basle Committee on Banking Supervision market risk capital rules and for
internal evaluation of VAR against trading revenues. During 1999, no daily
trading loss exceeded that day's trading VAR. This compares with an expected
number of approximately 3 days.
Aggregate Portfolio
--------------------------------------------------------------------
Year Ended December 31, 1999
------------------------------- At December 31, At December 31,
Average Minimum Maximum 1999 1998
(in millions) VAR VAR VAR VAR VAR
- -----------------------------------------------------------------------------------------------------
Trading Portfolio $ 24.1 $ 12.3 $ 41.8 $23.2 $20.7
Market Risk-Related
A/L Activities 77.6 63.4 99.8 66.7 79.7
Less: Portfolio Diversification (19.3) NM NM (15.9) (17.9)
- -----------------------------------------------------------------------------------------------------
Aggregate VAR $ 82.4 $ 67.4 $106.3 $74.0 $82.5
- -----------------------------------------------------------------------------------------------------
NM- Because the minimum and maximum may occur on different days for different
risk components, it is not meaningful to compute a portfolio
diversification effect. In addition, Chase's average and period-end VAR is
less than the sum of the VARs of its market risk components due to risk
offsets resulting from portfolio diversification.
Impact of A/L Derivative Activity
The following table reflects the deferred gains and losses on closed derivative
contracts and unrecognized gains and losses on open derivative contracts
utilized in Chase's A/L activities.
----- ---- ------
December 31, (in millions) 1999 1998 Change
- ------------------------------------------------------
A/L Derivative Contracts:
Net Deferred Gains $ 205 $402 $ (197)
Net Unrecognized
Gains (Losses) (877) 110 (987)
- ------------------------------------------------------
Net A/L Derivative
Gains (Losses) $(672) $512 $(1,184)
- ------------------------------------------------------
Net deferred gains and losses on closed contracts relate to futures, forwards
and swaps used in connection with available-for-sale securities, loans, deposits
and debt. The net unrecognized gains and losses relating to A/L activities are
largely the result of interest rate swaps, options, forward and futures
contracts primarily used in connection with loans, deposits and debt. For a
further discussion of unrecognized gains/losses on open derivative contracts,
see Note Twenty-Two.
Deferred gains and losses are expected to be amortized as yield adjustments in
NII or recognized in noninterest revenue over the periods reflected in the
following table. Premiums relating to open A/L option contracts are included on
the balance sheet and are amortized as a reduction to NII or noninterest revenue
over the periods reflected in the following table.
------------ ------
Year Ended December 31, Net Deferred Option
(in millions) Gains/(Losses) Premiums
- -------------------------------------------------------
2000 $ 16 $101
2001 (1) 28
2002 15 12
2003 16 9
2004 and After 159 1
- -------------------------------------------------------
Total $205 $151
- -------------------------------------------------------
50
52
CAPITAL AND LIQUIDITY RISK MANAGEMENT
=> Chase maintains capital and liquidity levels to support operations, even
under stress conditions
=> Chase is committed to maintaining strong capitalization, to the
reinvestment of capital in new businesses and to the return of excess
capital to shareholders
CAPITAL
- --------------------------------------------------------------------------------
Chase's capital levels are determined taking into consideration several factors,
including internal credit risk models, market risk models, operational risk
concerns, Federal Reserve guidelines, competitor levels and rating agency
guidelines.
Chase sets a variety of internal capital targets. Currently, Chase's most
important capital target is to maintain a Tier 1 Capital ratio in the range of
8% to 8.25%. Capital generated in excess of this target will be used for
purchases of Chase common stock or for future investment and acquisition
opportunities. The Capital Committee reviews Chase's capital targets and
policies regularly in light of changing economic conditions and business needs.
--------------------------------
---- ---- ----
Year Ended December 31, (in billions) 1999 1998 1997
- ------------------------------------------------------------------------------------------------
SOURCES OF FREE CASH FLOW
Cash Operating Earnings Less Dividends $ 4.3 $ 2.9 $ 2.7
Plus: Preferred Stock and Equivalents/Special Items 0.2 (0.7) 0.8
Less: Capital for Internal Asset Growth (1.0) (0.3) (2.6)
- ------------------------------------------------------------------------------------------------
Total Sources of Free Cash Flow $ 3.5 $ 1.9 $ 0.9
- ------------------------------------------------------------------------------------------------
USES OF FREE CASH FLOW
Increases (Decreases) in Capital Ratios $ 0.1 $ 1.2 $(0.7)
Acquisitions 1.1 0.8 0.4
Repurchases Net of Stock Issuances for Employee Plans 2.3 (0.1) 1.2
- ------------------------------------------------------------------------------------------------
Total Uses of Free Cash Flow $ 3.5 $ 1.9 $ 0.9
- ------------------------------------------------------------------------------------------------
[Graph 22--See Appendix 1]
Capital targets may not always be maintained on a quarter-to-quarter basis. A
large acquisition may cause the capital levels to drop below target temporarily.
The acquisition of H&Q caused Chase to significantly reduce common stock
repurchases during the fourth quarter of 1999.
The chart above, sources/uses of free cash flow shows how Chase viewed its
capital generation and use during the past three years. The "sources of free
cash flow" shows that the primary source of Chase's free capital is cash
operating earnings (less dividend requirements) generated in the ordinary course
by Chase's businesses. As assets grow in
51
53
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE CHASE MANHATTAN CORPORATION
the normal course of Chase's businesses, Chase is required to retain additional
capital in order to maintain its capital ratios within targeted levels.
Therefore, the sources of free cash flow equals the retained earnings generated,
less the additional capital needed to support new assets in order to maintain
targeted capital ratios. This total amount is Chase's "free cash" or capital in
excess of target ratios.
The "uses of free cash flow" shows the uses to which Chase's "excess capital"
has been put during the past three years. Excess capital has been used to
support goodwill and other assets acquired through acquisition and for share
purchases. The line "Increases (Decreases) in Capital Ratios" represents the
amount of capital retained by Chase, causing Chase's capital ratios to rise (or
fall) from targeted levels.
During 1999, $3.5 billion of free cash flow was generated, 84% more than that
generated during 1998 and more than three times that generated in 1997. During
1999, less capital was needed for internal growth (the primary use of capital in
1997) or to bolster capital ratios (the primary use of capital in 1998). The
excess cash flow in 1999 was primarily used for stock repurchases and to support
the H&Q acquisition.
Dividends: In the first quarter of 1999, Chase raised the quarterly cash
dividend on its common stock to $.41 per share from $.36 per share. Chase's
dividend policy is to pay common stock dividends equal to approximately 25% to
35% of Chase's operating earnings, less preferred stock dividends. Chase's
future dividend policies will be determined by its Board of Directors taking
into consideration Chase's earnings and financial condition and applicable
governmental regulations and policies.
Buybacks: During 1999, Chase purchased its common stock under an authorization
announced in November 1998. As of December 31, 1999, Chase had purchased
approximately net $2.3 billion under this program.
On January 19, 2000, Chase authorized the commencement of a new repurchase
program. Under the new authorization, Chase may purchase up to $5 billion of its
common stock in the open market or through negotiated transactions, in addition
to any amounts necessary to provide for issuances under Chase's dividend
reinvestment plan and its various stock-based director and employee benefit
plans.
Regulatory Capital: The Federal Reserve requires Chase to maintain certain
minimum capital-to-assets ratios. These risk-based capital ratios are determined
by allocating assets and specified off-balance sheet financial instruments into
four weighted categories, with higher levels of capital being required for
categories perceived as representing greater risk. Capital is divided into two
tiers: Tier 1 Capital and Tier 2 Capital. In addition to retained earnings, the
Federal Reserve permits Chase to raise Tier 1 and Tier 2 Capital by issuing
different types of financial instruments to the public. These financial
instruments are then classified as either Tier 1 or Tier 2, depending upon their
terms and the types of conditions or covenants they place upon the issuer.
Tier 1 Capital includes securities with no fixed maturity date, such as common
stock, nonredeemable perpetual preferred stock and the minority interest of
nonconsolidated affiliates (which may include securities commonly referred to as
"trust preferreds").
At December 31, 1999, Chase had $728 million principal amount of cumulative
perpetual preferred stock outstanding and $2,538 million principal amount of
trust preferred securities outstanding. Additionally, at December 31, 1999,
Chase had $200 million of noncumulative
[Graph 23--See Appendix 1]
---- ----
December 31, (In millions) 1999 1998
- --------------------------------------------------------------------------------
Tier 1 Capital
Common Stockholders' Equity $24,160 $22,435
Nonredeemable Preferred Stock 928 1,028
Minority Interest(a) 3,301 2,806
Less: Goodwill 2,856 2,030
Nonqualifying Intangible Assets 80 123
- --------------------------------------------------------------------------------
Tier 1 Capital $25,453 $24,116
- --------------------------------------------------------------------------------
Tier 2 Capital
Long-Term Debt and Other Instruments
Qualifying as Tier 2 7,405 7,093
Qualifying Allowance for Credit Losses 3,627 3,620
- --------------------------------------------------------------------------------
Tier 2 Capital 11,032 10,713
- --------------------------------------------------------------------------------
Total Qualifying Capital $36,485 $34,829
- --------------------------------------------------------------------------------
(a) Minority interest includes trust preferred stocks of certain business
trust subsidiaries and the preferred stock of a REIT subsidiary of Chase.
For a further discussion, see Notes Six and Seven.
52
54
perpetual preferred stock outstanding (commonly referred to as a "FRAP").
Federal Reserve guidelines currently provide that cumulative preferred, trust
preferred and noncumulative FRAP securities may not constitute more than 25% of
an issuer's Tier 1 capital. At December 31, 1999, these forms of securities
constituted approximately 14% of Chase's Tier 1 Capital.
Tier 2 Capital includes subordinated long-term debt and similar instruments and
"qualified loan loss reserves," such as the allowance for loan losses. The
amount of subordinated long-term debt that may be included in Tier 2 Capital may
not exceed more than 50% of the issuer's Tier 1 Capital. In addition, the
capital treatment accorded long-term subordinated debt is reduced as it
approaches maturity. Qualified loan loss reserves may be included in Tier 2
Capital up to 1.25% of risk-weighted assets. Total Tier 2 Capital is limited to
100% of Tier 1 Capital.
Capital Ratios: Chase's level of capital at December 31, 1999 remained strong,
with capital ratios in excess of regulatory guidelines. Management estimates
that risk-weighted assets at December 31, 1999 increased approximately $5
billion as a result of Year 2000-related balance sheet management actions of
Chase and cash management activities of clients. Chase's Tier 1 capital ratio
was 8.4% at December 31, 1999, despite the temporary growth in the year-end
risk-weighted assets and net repurchases of $2.3 billion during the year.
Chase's Total Capital ratio was 12.1% and the Tier 1 Leverage ratio (defined as
Tier 1 Capital divided by average total assets, net of allowance for loan
losses, goodwill and other intangible assets) was 6.6% at December 31, 1999.
Regulatory minimum capital ratios are 4%, 8% and 3%, respectively.
[Graph 24--See Appendix 1]
LIQUIDITY
- --------------------------------------------------------------------------------
While capital is held to absorb losses over time, liquidity is managed to meet
Chase's known and unanticipated cash funding needs. Chase must maintain
sufficient liquidity for operations and to meet payment demands on borrowings
and to make new loans and investments as opportunities arise.
Maintaining too much liquidity is costly. Chase manages its liquidity on a daily
basis, both at the parent company and subsidiary levels. In managing liquidity,
Chase takes into account the various legal limitations on the extent to which
its subsidiary banks may pay dividends to their parent companies or finance
their affiliates.
The parent company routinely accesses liquidity in the public markets through
the issuance of medium term notes and commercial paper. Contingency plans exist
(such as lines of credit) that could be implemented on a timely basis to
minimize the liquidity risks that might arise upon the occurrence of a dramatic
change in market conditions.
Liquidity management provides for the appropriate mix of "core" and "non-core"
deposits and capital to raise funds. A major source of liquidity for Chase's
bank subsidiaries derives from their ability to generate core deposits. Core
deposits include all deposits, except noninterest bearing time deposits and
certificates of deposit of $100,000 or more. Chase also generates substantial
non-core deposits from its Global Services business and from low-cost wholesale
deposits (including foreign deposits and purchases of Federal funds).
Chase holds marketable securities and other short-term investments that can be
readily converted to cash. In addition, as part of Chase's ongoing capital
management process, loan syndication networks and securitization programs are
utilized to facilitate the disposition of assets when deemed desirable.
53
55
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE CHASE MANHATTAN CORPORATION
OPERATING RISK MANAGEMENT & OTHER EVENTS
=> Management maintains a comprehensive system of internal controls intended
to provide for proper authorization of transactions, the safeguarding of
assets and the reliability of financial records
=> Successful completion of Year 2000 initiatives
Chase is exposed to many types of operating risk, including the risk of fraud by
employees or outsiders, unauthorized transactions by employees, and errors
relating to computer and telecommunications systems.
OPERATING RISK MANAGEMENT
- --------------------------------------------------------------------------------
Chase maintains systems of controls that it believes are reasonably designed to
provide management and the Board of Directors with timely and accurate
information about the operations of Chase. These systems have been designed to
keep operating risk at appropriate levels in view of Chase's financial strength,
the characteristics of its businesses and the markets in which it operates, and
the competitive and regulatory environment to which it is subject. However,
Chase has suffered losses from operating risk from time to time as discussed
below and there can be no assurance that Chase will not suffer such losses in
the future.
Chase has identified some deficiencies in the computerized bond recordkeeping
system in the bond paying agency function within Chase's Capital Markets
Fiduciary Services group. These deficiencies include an overstatement by the
computer system of the amount of outstanding bonds and matured unpresented bonds
and other items.
Because of these deficiencies, Chase is currently unable to totally confirm
through a complete reconciliation of the relevant accounts that the value of
bonds that could potentially be presented for payment does not exceed the amount
of cash on hand for payment of such bonds. Chase has under way a project to
correct the system's deficiencies and to reconcile the affected accounts. Chase
incurred some immaterial costs in the second half of 1999 in connection with
this project. While management considers it likely that additional costs will be
incurred during the remaining course of the project, it does not, based upon its
experience to date, expect them to be material. The Securities and Exchange
Commission has commenced an investigation relating to the question of whether,
in connection with this matter, there have been violations of its transfer
agency recordkeeping or reporting regulations and whether Chase's disclosure
regarding these issues have been adequate and timely.
In early 2000, Chase established two additional risk committees that are under
the responsibility of Chase's Executive Committee. The Operating Risk Committee
will review the design of the control function within Chase and the Fiduciary
Risk Committee will be responsible for approving Chase's policies for fiduciary
risk.
A Look Back at Y2K: As a result of the extensive efforts undertaken by Chase's
Year 2000 ("Y2K") Program over the last four and a half years, Chase
successfully managed the millennium date change. The fourth quarter of 1999 was
focused almost entirely on final preparations for the event.
Chase's Year 2000 Program Office established 79 command centers worldwide, which
were staffed during the transition weekend of December 30, 1999 - January 4,
2000, monitoring "wellness checks" of facilities and systems. These efforts
enabled Chase, as businesses opened worldwide in 2000, to operate normally
across all product lines and geographies, without it experiencing any material
interruptions or causing any material disruptions to its customers. Ongoing
problem tracking and reporting will continue throughout 2000 in order to manage
any latent Y2K issues that may arise. Full-year 1999 costs for Chase's Y2K
efforts remained at approximately $158 million.
OTHER EVENTS
- --------------------------------------------------------------------------------
Acquisition of Hambrecht & Quist
Chase acquired the H&Q Group for $1.46 billion on December 9, 1999. The
acquisition was accounted for under the purchase method. Revenues and expenses
of H&Q were included in Chase's Global Investment Banking results for the period
subsequent to December 8, 1999.
For the fiscal year ended September 30, 1999, H&Q had gross revenues of $653
million, net income of $119 million and earnings per share of $4.45. H&Q's total
assets at September 30, 1999 were $1.0 billion. These results are not included
in Chase's 1999 financial results.
54
56
ACCOUNTING AND REPORTING DEVELOPMENTS, & COMPARISON BETWEEN 1998 AND 1997
ACCOUNTING AND REPORTING DEVELOPMENTS
- --------------------------------------------------------------------------------
Derivatives
In 1998, the FASB issued SFAS 133, which establishes accounting and reporting
standards for all derivative instruments, including certain derivative
instruments embedded in other financial instruments (collectively referred to as
derivatives), and for hedging activities. SFAS 133 requires that an entity
measure all derivatives at fair value and recognize those derivatives as either
assets or liabilities on the balance sheet. The change in a derivative's fair
value is generally to be recognized in current period earnings.
During the second quarter of 1999, the FASB issued SFAS 137, which delayed the
effective date of SFAS 133 for one year, with early adoption permitted. Chase
will, therefore, not be required to adopt SFAS 133 until calendar year 2001.
Chase already recognizes the derivatives used in its trading activities on its
balance sheet at fair value, with changes in the fair values of such derivatives
included in earnings. This represents the substantial majority of the
derivatives utilized by Chase. With respect to those other derivatives used as
hedges of its assets, liabilities and commitments, Chase is currently assessing
the impact of the adoption of SFAS 133 on its hedging activities and its effect
on its financial condition and operating performance.
Allowance for Loan Losses
In 1999, the Accounting Standard Executive Committee of the AICPA formed the
Allowance for Loan Losses Task Force ("Task Force") to research current
accounting guidance and practices as they relate to loan losses. The initial
expectations are that the Task Force will develop a statement of position that
will provide additional accounting and reporting guidance and clarification on
the factors to consider in determining the allowance for loan losses. The Task
Force is in its early stages of deliberation and its impact on the financial
industry is yet to be determined.
COMPARISON BETWEEN 1998 AND 1997
- --------------------------------------------------------------------------------
Results of Operations
Chase's operating earnings were $4.02 billion in 1998, an increase of 4% from
1997. Diluted operating earnings per share increased 8%, when compared with the
prior year.
Reported net income was $3.78 billion in 1998, compared with $3.71 billion in
1997. Diluted net income per share was $4.24 in 1998, compared with $4.01 in
1997.
Operating revenues in 1998 rose 11% to $19.61 billion, reflecting a 19% increase
in market-sensitive revenues and an 8% increase in less market-sensitive
revenues. Market-sensitive revenue growth in 1998 included double-digit
increases in investment banking fees, securities gains and private equity gains.
Trading-related revenue increased slightly, despite difficult market conditions
in the 1998 third quarter.
The increase in less market-sensitive revenues from 1997 reflected higher trust,
custody and investment management fees and credit card revenue. Operating net
interest income was $9.12 billion in 1998, a 3% increase from the previous year.
The increase was primarily due to higher volumes of consumer-related loans
(particularly residential mortgages) and domestic commercial loans, partially
offset by the impact of generally narrower spreads on loans.
Operating expenses were $10.82 billion in 1998, an increase of 11% from the
prior year. The growth in expenses included costs associated with portfolio
acquisitions, investment spending on new product offerings, Y2K, European
Monetary Union ("EMU") and other technology spending, and higher incentive
costs, partially offset by the impact of the capitalization of certain software
costs.
Credit costs during 1998 were $2.49 billion, an increase of $694 million from
the 1997 level, primarily due to higher credit losses in the commercial
portfolio, particularly for exposures related to Asia and Russia, and in the
credit card portfolio. The provision for loan losses increased by $539 million,
or 67%, from the 1997 level due to increased foreign commercial charge-offs,
primarily as a result of conditions in Asia and Russia, and the generally lower
credit quality of an acquired credit card portfolio.
Income tax expense in 1998 was $2.15 billion, compared with $2.20 billion in
1997. The effective tax rate was 36.2% for 1998, compared with 37.3% for 1997.
Lines of Business Results
Global Bank operating revenues in 1998 rose $742 million, or 10%, due to higher
investment banking fees, strong growth in most global markets activities and
private equity gains, despite unusually high volatility in the financial markets
during the second half of 1998. Operating expenses increased 15% over 1997,
while credit costs rose by $252 million. Cash operating earnings and SVA for
1998 decreased $44 million and $132 million, respectively.
National Consumer Services cash operating earnings for 1998 increased $109
million, or 8%, over 1997. Revenue growth of 10% contributed to the increase in
cash operating earnings and reflected higher revenues and volumes across all of
NCS's businesses. SVA was relatively flat compared with 1997 due to an increased
capital allocation to NCS as a result of acquired portfolios.
Global Services cash operating earnings in 1998 increased $55 million, or 13%,
from 1997. SVA increased $50 million in 1998. Revenue growth was strong across
all three businesses within Global Services, rising 10% overall due, in part, to
higher operating volumes from portfolio acquisitions. Earnings also benefited
from continued productivity gains, tempered by technology investments related to
preparations for Y2K and EMU initiatives.
55
57
=> MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING AND REPORT
OF INDEPENDENT ACCOUNTANTS
THE CHASE MANHATTAN CORPORATION
To Our Stockholders:
The management of Chase has the responsibility for preparing the accompanying
consolidated financial statements and for their integrity and objectivity. The
statements were prepared in accordance with accounting principles generally
accepted in the United States. The consolidated financial statements include
amounts that are based on management's best estimates and judgments. Management
also prepared the other information in the annual report and is responsible for
its accuracy and consistency with the consolidated financial statements.
Management maintains a comprehensive system of internal control to assure
the proper authorization of transactions, the safeguarding of assets and the
reliability of the financial records. The system of internal control provides
for appropriate division of responsibility and is documented by written policies
and procedures that are communicated to employees. Chase maintains a strong
internal auditing program that independently assesses the effectiveness of the
system of internal control and recommends any possible improvements. Management
believes that as of December 31, 1999, Chase maintains an effective system of
internal control.
The Audit Committee of the Board of Directors reviews the systems of
internal control and financial reporting. The Committee, which is comprised of
directors who are independent from Chase, meets and consults regularly with
management, the internal auditors and the independent accountants to review the
scope and results of their work.
The accounting firm of PricewaterhouseCoopers LLP has performed an
independent audit of Chase's financial statements. Management has made available
to PricewaterhouseCoopers LLP all of Chase's financial records and related data,
as well as the minutes of stockholders' and directors' meetings. Furthermore,
management believes that all representations made to PricewaterhouseCoopers LLP
during its audit were valid and appropriate. The firm's report appears below.
/s/ William B. Harrison Jr.
William B. Harrison, Jr.
Chairman and Chief Executive Officer
/s/ Marc J. Shapiro
Marc J. Shapiro
Vice Chairman
Finance, Risk Management and Administration
/s/ Dina Dublon
Dina Dublon
Executive Vice President
and Chief Financial Officer
January 18, 2000
PricewaterhouseCoopers [LOGO]
PricewaterhouseCoopers LLP o 1177 Avenue of the Americas o New York, NY 10036
To the Board of Directors and Stockholders
of The Chase Manhattan Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
The Chase Manhattan Corporation and its subsidiaries at December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. 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 auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
January 18, 2000
56
58
=> CONSOLIDATED BALANCE SHEET
THE CHASE MANHATTAN CORPORATION
--------- ---------
December 31, (in millions, except share data) 1999 1998
- -----------------------------------------------------------------------------------------------------------
ASSETS
Cash and Due from Banks $ 16,229 $ 17,068
Deposits with Banks 28,076 7,212
Federal Funds Sold and Securities Purchased Under Resale Agreements 23,823 18,487
Trading Assets:
Debt and Equity Instruments 30,191 24,844
Risk Management Instruments 33,078 32,848
Securities:
Available-for-Sale 60,625 62,803
Held-to-Maturity (Market Value: $876 in 1999 and $1,703 in 1998) 888 1,687
Loans (Net of Allowance for Loan Losses of $3,457 in 1999 and $3,552 in 1998) 172,702 169,202
Premises and Equipment 4,439 4,055
Due from Customers on Acceptances 622 1,223
Accrued Interest Receivable 2,505 2,316
Other Assets 32,927 24,130
- -----------------------------------------------------------------------------------------------------------
Total Assets $ 406,105 $ 365,875
- -----------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Domestic:
Noninterest-Bearing $ 49,468 $ 47,541
Interest-Bearing 80,132 85,886
Foreign:
Noninterest-Bearing 6,061 4,082
Interest-Bearing 106,084 74,928
--------- ---------
Total Deposits 241,745 212,437
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 50,148 41,632
Commercial Paper 8,509 7,788
Other Borrowed Funds 5,145 7,239
Acceptances Outstanding 622 1,223
Trading Liabilities 38,573 38,502
Accounts Payable, Accrued Expenses and Other Liabilities, Including the
Allowance for Credit Losses of $170 in 1999 and 1998 17,056 14,291
Long-Term Debt 17,602 16,187
Guaranteed Preferred Beneficial Interests in Corporation's Junior
Subordinated Deferrable Interest Debentures 2,538 2,188
- -----------------------------------------------------------------------------------------------------------
Total Liabilities 381,938 341,487
- -----------------------------------------------------------------------------------------------------------
Commitments and Contingencies (See Note Twenty-Six)
PREFERRED STOCK OF SUBSIDIARY 550 550
STOCKHOLDERS' EQUITY
Preferred Stock 928 1,028
Common Stock (Authorized 1,500,000,000 Shares,
Issued 881,874,621 Shares in 1999 and 881,688,611 Shares in 1998) 882 882
Capital Surplus 9,714 9,836
Retained Earnings 17,547 13,544
Accumulated Other Comprehensive Income (Loss) (1,454) 392
Treasury Stock, at Cost (54,703,888 Shares in 1999 and 33,703,249 Shares in 1998) (4,000) (1,844)
- -----------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 23,617 23,838
- -----------------------------------------------------------------------------------------------------------
Total Liabilities, Preferred Stock of Subsidiary and Stockholders' Equity $ 406,105 $ 365,875
- -----------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
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59
=> CONSOLIDATED STATEMENT OF INCOME
THE CHASE MANHATTAN CORPORATION
------- ------- -------
Year Ended December 31, (in millions, except per share data) 1999 1998 1997
- --------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $13,113 $13,389 $12,921
Securities 3,216 3,616 3,028
Trading Assets 1,705 2,431 2,770
Federal Funds Sold and Securities Purchased Under Resale Agreements 1,451 2,211 2,607
Deposits with Banks 752 642 525
- --------------------------------------------------------------------------------------------------
Total Interest Income 20,237 22,289 21,851
- --------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits 6,592 6,840 6,561
Short-Term and Other Borrowings 3,653 5,612 5,903
Long-Term Debt 1,248 1,271 1,134
- --------------------------------------------------------------------------------------------------
Total Interest Expense 11,493 13,723 13,598
- --------------------------------------------------------------------------------------------------
Net Interest Income 8,744 8,566 8,253
Provision for Loan Losses 1,621 1,343 804
- --------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 7,123 7,223 7,449
- --------------------------------------------------------------------------------------------------
NONINTEREST REVENUE
Investment Banking Fees 1,887 1,502 1,136
Trust, Custody and Investment Management Fees 1,801 1,543 1,307
Credit Card Revenue 1,698 1,474 1,088
Fees for Other Financial Services 2,496 2,093 1,983
Trading Revenue 2,137 1,238 1,323
Securities Gains 101 609 312
Private Equity Gains 2,522 967 831
Other Revenue 831 664 575
- --------------------------------------------------------------------------------------------------
Total Noninterest Revenue 13,473 10,090 8,555
- --------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries 5,678 5,025 4,598
Employee Benefits 964 854 839
Occupancy Expense 866 798 767
Equipment Expense 1,015 890 792
Restructuring Costs 48 529 192
Other Expense 3,650 3,287 2,906
- --------------------------------------------------------------------------------------------------
Total Noninterest Expense 12,221 11,383 10,094
- --------------------------------------------------------------------------------------------------
Income Before Income Tax Expense 8,375 5,930 5,910
Income Tax Expense 2,929 2,148 2,202
- --------------------------------------------------------------------------------------------------
NET INCOME $ 5,446 $ 3,782 $ 3,708
- --------------------------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 5,375 $ 3,684 $ 3,526
- --------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
Basic $ 6.49 $ 4.35 $ 4.15
Diluted 6.27 4.24 4.01
- --------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
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=> CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
THE CHASE MANHATTAN CORPORATION
-------- -------- --------
Year Ended December 31, (in millions) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
PREFERRED STOCK
Balance at Beginning of Year $ 1,028 $ 1,740 $ 2,650
Issuance of Stock -- 200 --
Redemption of Stock (100) (912) (910)
- -----------------------------------------------------------------------------------------------------------------
Balance at End of Year 928 1,028 1,740
- -----------------------------------------------------------------------------------------------------------------
COMMON STOCK
Balance at Beginning of Year 882 441 441
Issuance of Common Stock for a Two-for-One Stock Split -- 441 --
- -----------------------------------------------------------------------------------------------------------------
Balance at End of Year 882 882 441
- -----------------------------------------------------------------------------------------------------------------
CAPITAL SURPLUS
Balance at Beginning of Year 9,836 10,360 10,459
Issuance of Common Stock for a Two-for-One Stock Split -- (441) --
Issuance of Common Stock and Options for the
(Purchase Accounting) Acquisition of H&Q 215 -- --
Shares Issued and Commitments to Issue Common Stock for
Employee Stock-Based Awards and Related Tax Effects (337) (83) (99)
- -----------------------------------------------------------------------------------------------------------------
Balance at End of Year 9,714 9,836 10,360
- -----------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at Beginning of Year 13,544 11,086 8,610
Net Income 5,446 3,782 3,708
Cash Dividends Declared:
Preferred Stock (71) (98) (182)
Common Stock (1,372) (1,226) (1,050)
- -----------------------------------------------------------------------------------------------------------------
Balance at End of Year 17,547 13,544 11,086
- -----------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at Beginning of Year 392 112 (271)
Other Comprehensive Income (Loss) (1,846) 280 383
- -----------------------------------------------------------------------------------------------------------------
Balance at End of Year (1,454) 392 112
- -----------------------------------------------------------------------------------------------------------------
TREASURY STOCK, AT COST
Balance at Beginning of Year (1,844) (1,997) (895)
Purchase of Treasury Stock (4,349) (1,091) (2,169)
Reissuance of Treasury Stock 1,981 1,244 1,067
Reissuance of Treasury Stock for the (Purchase Accounting) Acquisition of H&Q 212 -- --
- -----------------------------------------------------------------------------------------------------------------
Balance at End of Year (4,000) (1,844) (1,997)
- -----------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity $ 23,617 $ 23,838 $ 21,742
- -----------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME
Net Income $ 5,446 $ 3,782 $ 3,708
Other Comprehensive Income (Loss) (1,846) 280 383
- -----------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 3,600 $ 4,062 $ 4,091
- -----------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
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=> CONSOLIDATED STATEMENT OF CASH FLOWS
THE CHASE MANHATTAN CORPORATION
--------- --------- ---------
Year Ended December 31, (in millions) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 5,446 $ 3,782 $ 3,708
Adjustments to Reconcile Net Income to Net Cash Provided by
Operating Activities:
Provision for Loan Losses 1,621 1,343 804
Restructuring Costs 48 529 192
Depreciation and Amortization 1,403 1,170 951
Net Change In:
Trading-Related Assets (4,865) 14,996 (11,437)
Accrued Interest Receivable (189) 1,043 (339)
Other Assets (6,752) (5,030) (2,264)
Trading-Related Liabilities 172 (14,445) 14,708
Accrued Interest Payable 732 (714) 123
Other Liabilities (812) 1,591 (627)
Other, Net (180) (673) (358)
- ----------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Operating Activities (3,376) 3,592 5,461
- ----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Net Change In:
Deposits with Banks (20,864) (4,326) 5,458
Federal Funds Sold and Securities Purchased Under Resale Agreements (5,229) 8,626 (5,673)
Loans Due to Sales and Securitizations 40,913 45,400 26,967
Other Loans, Net (42,381) (52,052) (37,445)
Other, Net (387) (801) 64
Proceeds from the Maturity of Held-to-Maturity Securities 799 1,382 959
Purchases of Held-to-Maturity Securities (21) (91) (130)
Proceeds from the Maturity of Available-for-Sale Securities 8,834 27,035 10,250
Proceeds from the Sale of Available-for-Sale Securities 85,479 162,870 95,045
Purchases of Available-for-Sale Securities (95,432) (201,622) (109,849)
Cash Used in Acquisitions (3,142) (981) (5,153)
Proceeds from Divestitures of Nonstrategic Businesses and Assets 235 -- 847
- ----------------------------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (31,196) (14,560) (18,660)
- ----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net Change In:
Noninterest-Bearing Domestic Demand Deposits 1,927 938 3,914
Domestic Time and Savings Deposits (5,754) 14,310 4,509
Foreign Deposits 33,135 3,501 4,500
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 8,409 (10,679) 5,969
Other Borrowed Funds (1,373) 3,422 (2,126)
Other, Net (352) (352) (556)
Proceeds from the Issuance of Long-Term Debt and Capital Securities 4,710 5,182 3,945
Repayments of Long-Term Debt (2,965) (1,949) (2,134)
Proceeds from the Issuance of Stock 1,842 1,232 967
Redemption of Preferred Stock (100) (912) (910)
Treasury Stock Purchased (4,349) (1,091) (2,585)
Cash Dividends Paid (1,402) (1,278) (1,212)
- ----------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 33,728 12,324 14,281
- ----------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Due from Banks 5 8 17
Net Increase (Decrease) in Cash and Due from Banks (839) 1,364 1,099
Cash and Due from Banks at the Beginning of the Year 17,068 15,704 14,605
- ----------------------------------------------------------------------------------------------------------------
Cash and Due from Banks at the End of the Year $ 16,229 $ 17,068 $ 15,704
Cash Interest Paid $ 10,761 $ 13,009 $ 13,475
Taxes Paid $ 785 $ 1,405 $ 1,144
- ----------------------------------------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
Statements.
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=> NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE CHASE MANHATTAN CORPORATION
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Chase Manhattan Corporation ("Chase") is a bank holding company organized
under the laws of the State of Delaware and registered under the Bank Holding
Company Act.
Chase conducts its worldwide financial services businesses through various
bank and nonbank subsidiaries. The principal bank subsidiaries of Chase are The
Chase Manhattan Bank ("Chase Bank"), a New York State bank headquartered in New
York City; Chase Bank of Texas, National Association ("Chase Texas"), a national
bank headquartered in Houston, Texas; and Chase Manhattan Bank USA, National
Association ("Chase USA"), a national bank headquartered in Wilmington,
Delaware. The principal nonbank subsidiary of Chase is Chase Securities Inc.,
which is engaged in securities underwriting and dealing activities. For a
discussion of Chase's business segment information, see Note Twenty-Three.
The accounting and financial reporting policies of Chase and its
subsidiaries conform to generally accepted accounting principles ("GAAP") and
prevailing industry practices. Additionally, where applicable, the policies
conform to the accounting and reporting guidelines prescribed by bank regulatory
authorities. Financial statements prepared in conformity with GAAP require
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expense and disclosure of contingent assets and
liabilities.
Chase acquired the H&Q Group ("H&Q") on December 9, 1999. The acquisition
was accounted for under the purchase method. Revenues and expenses of H&Q were
included in Chase's results for the period subsequent to December 8, 1999.
Certain amounts in prior periods have been reclassified to conform to the
current presentation. The following is a description of significant accounting
policies.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Chase and its
majority-owned subsidiaries, after eliminating intercompany balances and
transactions. Equity investments of 20%-50% ownership interest are generally
accounted for in accordance with the equity method of accounting and are
reported in Other Assets. Chase's proportional share of earnings (losses) of
these companies is included in Other Revenue.
Assets held in an agency or fiduciary capacity by Chase are not assets of
Chase and, accordingly, are not included in the Consolidated Balance Sheet.
TRADING ACTIVITIES
Chase trades debt and equity instruments and risk management instruments, as
discussed below. These instruments are carried at their estimated fair value.
Quoted market prices, when available, are used to determine the fair value of
trading instruments. If quoted market prices are not available, then fair values
are estimated by using pricing models, quoted prices of instruments with similar
characteristics or discounted cash flows.
Realized and unrealized gains (losses) on these instruments are recognized
in Trading Revenue.
Debt and Equity Instruments; Securities Sold, Not Yet Purchased; and Structured
Notes: Debt and equity instruments, which include securities, loans and other
credit instruments held for trading purposes, are reported as Trading Assets.
Interest earned on debt securities and dividends earned on equity instruments
are reported as interest income. Included in Trading Liabilities are obligations
to deliver securities sold but not yet purchased and structured notes. Interest
payable on securities sold but not yet purchased and structured notes is
reported as interest expense.
Risk Management Instruments: Chase deals in interest rate, foreign exchange,
equity, commodity and other contracts to generate trading revenues. These
contracts include futures, forwards, forward rate agreements, swaps, and options
(including interest rate caps and floors). The estimated fair values of these
contracts are reported on a gross basis as Trading Assets-Risk Management
Instruments for contracts having a positive fair value and Trading Liabilities
for contracts having a negative fair value. Contracts executed with the same
counterparty under legally enforceable master netting agreements are presented
on a net basis.
DERIVATIVES USED IN ASSET/LIABILITY ACTIVITIES
As part of its asset/liability activities, Chase uses interest rate swaps,
futures, forward rate agreements and option contracts (including interest rate
caps and floors) to hedge exposures or to modify the interest rate
characteristics of related balance sheet items. Derivative contracts used for
asset/liability activities have a "high correlation" with the balance sheet item
being hedged. These derivative contracts are linked to specific assets or
liabilities or groups of similar assets or liabilities. This high-level
correlation is required both at inception and throughout the hedge period. A
risk-reduction criterion is also required for futures contracts.
The derivative contracts that meet the above criteria are accounted for
under the accrual method or available-for-sale ("AFS") fair value method, as
discussed below. Derivative contracts that subsequently fail to meet the
criteria are redesignated as trading activities.
Accrual Method: Under the accrual method, interest income or expense on
derivative contracts is accrued, and there is no recognition of unrealized gains
and losses on the derivatives on the balance sheet. Premiums on option contracts
are amortized over the contract life to interest income, interest expense or
noninterest revenue.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE CHASE MANHATTAN CORPORATION
Available-for-Sale Fair Value Method: Derivatives linked to AFS securities are
carried at fair value. The accrual of interest income or interest expense on
these derivatives is reported in Interest Income on Securities. Changes in the
market values of these derivatives, exclusive of net interest accruals, are
reported, net of applicable taxes, in the Accumulated Other Comprehensive Income
caption in Stockholders' Equity. This policy is consistent with the reporting of
unrealized gains and losses on the related AFS securities.
For both of the above accounting methods, realized gains and losses from
the settlement or termination of derivative contracts are deferred as
adjustments to the carrying values of the related balance sheet items. The
realized gains and losses are amortized to interest income, interest expense or
noninterest revenue over the appropriate risk management periods (generally the
remaining life of the derivative at the date of its termination or the remaining
life of the linked asset or liability). Amortization commences when the contract
is settled or terminated. If the related assets or liabilities are sold or
otherwise disposed of, then the deferred gains and losses on the derivative
contracts are recognized as a part of the gain or loss on the disposition of the
related assets or liabilities.
RESALE AND REPURCHASE AGREEMENTS
Chase enters into purchases of securities under agreements to resell ("resale
agreements") and sales of securities under agreements to repurchase ("repurchase
agreements") of substantially identical securities. Resale agreements and
repurchase agreements are generally accounted for as secured lending and secured
borrowing transactions, respectively.
The amounts advanced under resale agreements and the amounts borrowed
under repurchase agreements are carried on the balance sheet at the amount
advanced or borrowed plus accrued interest. Interest earned on resale agreements
and interest incurred on repurchase agreements are reported as interest income
and interest expense, respectively. Chase offsets resale and repurchase
agreements executed with the same counterparty under legally enforceable netting
agreements that meet the applicable netting criteria. Chase takes possession of
securities purchased under resale agreements. Chase monitors the market value of
these securities and adjusts the level of collateral for resale and repurchase
agreements, as appropriate. During 1999, the maximum month-end balances of
outstanding resale and repurchase agreements were $34.0 billion and $43.6
billion, respectively. The daily average amounts of outstanding resale and
repurchase agreements were $29.0 billion and $38.1 billion, respectively.
SECURITIES
Securities are classified as available-for-sale when, in management's judgment,
they may be sold in response to or in anticipation of changes in market
conditions. AFS securities and the related hedge are carried on the balance
sheet at fair value. Unrealized gains and losses on these securities are
reported, net of applicable taxes, in the Accumulated Other Comprehensive Income
caption in Stockholders' Equity. Securities that Chase has the positive intent
and ability to hold to maturity are classified as held-to-maturity and are
carried at amortized cost on the balance sheet.
Interest and dividend income on securities, including amortization of
premiums and accretion of discounts, are reported in Interest Income on
Securities. Interest income is recognized using the interest method. The
specific identification method is used to determine realized gains and losses on
sales of securities, which are reported in Securities Gains. The carrying value
of individual securities is reduced through writedowns against Securities Gains
to reflect other-than-temporary impairments in value.
Chase anticipates prepayment of principal in the calculation of the
effective yield for mortgage-backed securities ("MBS") and collateralized
mortgage obligations ("CMO"). The prepayment of MBSs and CMOs is actively
monitored through Chase's portfolio management function. Chase typically invests
in MBSs and CMOs with stable cash flows, thereby limiting the impact of interest
rate fluctuations on the portfolio. Management regularly performs simulation
testing regarding the impact that market conditions would have on its MBS and
CMO portfolios. MBSs and CMOs that management believes have high prepayment risk
are included in the AFS portfolio and are reported at fair value.
LOANS
Loans are generally reported at the principal amount outstanding, net of the
allowance for loan losses, unearned income and any net deferred loan fees
(nonrefundable yield-related loan fees, net of related direct origination
costs). Loans held for sale are carried at the lower of aggregate cost or fair
value. Certain loans meeting the accounting definition of a security under SFAS
115 are classified as loans and measured at fair value. Interest income is
recognized using the interest method or on a basis approximating a level rate of
return over the term of the loan.
Chase sells or securitizes certain commercial and consumer loans. Some
loans are sold with recourse to Chase for which appropriate reserves are
provided. Gains and losses are reported in Other Revenue.
Nonaccrual loans are those loans on which the accrual of interest is
discontinued. Loans other than certain consumer loans discussed below are placed
on nonaccrual status immediately if, in the opinion of management, full payment
of principal or interest is in doubt or when principal or interest is past due
90 days or more and collateral, if any, is insufficient to cover principal and
interest. Interest accrued but not collected at the date a loan is placed on
nonaccrual status is reversed against interest income. In addition, the
amortization of net deferred loan fees is suspended when a loan is placed on
nonaccrual status. Interest income on nonaccrual loans is recognized only to the
extent received in cash. However, where there is doubt regarding the ultimate
collectibility of the loan principal, all cash receipts are thereafter applied
to reduce the carry-
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64
ing value of the loan. Loans are restored to accrual status only when interest
and principal payments are brought current and future payments are reasonably
assured.
Consumer loans are generally charged to the allowance for loan losses upon
reaching specified stages of delinquency. This policy excludes residential
mortgage products and auto financings, which are accounted for in accordance
with the nonaccrual loan policy discussed above. Credit card loans, for example,
are charged off at the earlier of 180 days past due or 75 days after
notification of the filing of bankruptcy. Other consumer products are generally
charged off at 120 days past due. Accrued interest is reversed against interest
income when the consumer loan is charged off.
Chase accounts for and discloses nonaccrual commercial loans as impaired
loans. Impaired loans are carried at the present value of the future cash flows
discounted at the loan's effective interest rate or, as a practical expedient,
at the loan's observable market price or at the fair value of the collateral if
the loan is collateral-dependent. Chase recognizes interest income on impaired
loans as discussed above for nonaccrual loans. Chase excludes from impaired
loans its small-balance homogeneous consumer loans, loans carried at fair value
or the lower of cost or fair value, debt securities, and leases.
A collateralized loan is considered an in-substance foreclosure and is
reclassified to Assets Acquired as Loan Satisfactions only when Chase has taken
physical possession of the collateral, regardless of whether formal foreclosure
proceedings have taken place.
ALLOWANCE FOR CREDIT LOSSES
Chase's Allowance for Loan Losses is intended to cover probable credit losses as
of December 31, 1999 for which either the asset is not specifically identified
or the size of the loss has not been fully determined. Within the allowance,
there are both specific and expected loss components as well as a residual
component.
The specific loss component covers those commercial loans deemed by Chase
to be criticized. Chase internally categorizes its criticized commercial loans
into three groups: doubtful, substandard and special mention.
All nonperforming loans are characterized as either doubtful or
substandard. Nonperforming commercial loans are considered by Chase to be
impaired loans. The allowance for impaired loans is computed using the
methodology under SFAS 114. An allowance is established when the discounted cash
flows (or collateral value or observable market price) of an impaired loan is
lower than the carrying value of that loan. For the purposes of computing the
specific loss component of the allowance, larger impaired loans are evaluated
individually and smaller impaired loans are evaluated as a pool using Chase's
historical loss experience for this class of assets. The criticized but still
performing loans are also evaluated as a pool using historical loss rates.
The expected loss component covers performing commercial loans (except
criticized loans) and consumer loans.
Expected losses are the product of default probability and loss severity.
The computation of the expected loss component of the allowance is based on
estimates of these factors in Chase's credit risk capital model. These estimates
are differentiated by risk rating and maturity for commercial loans and by
product for consumer loans.
The expected loss estimates for each consumer loan portfolio are based
primarily on Chase's recent historical loss experience for the applicable
portfolio.
In addition, a portfolio segment component may be established for a
particular geographic or industry segment of the portfolio, if, in management's
judgment, it is probable that expected losses for that component will be higher
than indicated by the base level expected loss factors from the credit risk
capital model.
Finally, a residual component is maintained to cover uncertainties that
could affect management's estimate of probable losses. The residual component of
the allowance reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating specific losses and
expected losses in both the commercial and consumer portfolio. It is expected
that the residual component of the allowance will range between 10% and 20% of
the total Allowance for Loan Losses.
Factors affecting the uncertainty of specific loss and expected loss
estimates include the volatility of default probabilities, rating migrations and
loss severity. These uncertainties could also relate to current macroeconomic
and political conditions, the impact of currency devaluations on cross-border
exposures, changes in underwriting standards, unexpected correlations within the
portfolio, or other factors.
Chase's Credit Risk Committee reviews, at least quarterly, the Allowance
for Loan Losses relative to the risk profile of the portfolio and current
economic conditions. The allowance is adjusted based on that review if, in
management's judgment, changes are warranted.
During 1999, there was an improvement in Chase's credit risk profile and,
accordingly, Chase reduced its Allowance for Loan Losses by $95 million in the
fourth quarter. In 1998, the Allowance for Loan Losses was reduced by $75
million as a result of the redesignation of $75 million of the allowance to
Trading Assets: Risk Management Instruments. As of December 31, 1999, Chase
deems its allowance to be adequate (i.e. sufficient to absorb losses that may
currently exist but are not yet identifiable).
To provide for risks of losses inherent in the credit extension process,
management also computes specific and expected loss components as well as a
residual component for lending-related commitments, using a methodology similar
to that used for the loan portfolio.
Chase maintains an allowance for credit losses as follows:
---------------------------------------------------------
Reported in:
Allowance for credit
losses on: Balance Sheet Income Statement
- --------------------------------------------------------------------------------
Loans Allowance for Loan Losses Provision for Loan Losses
- --------------------------------------------------------------------------------
Lending-Related Other Liabilities Fee Revenue
Commitments
- --------------------------------------------------------------------------------
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE CHASE MANHATTAN CORPORATION
During the second quarter of 1999, Chase reclassified the Allowance for
Credit Losses on Risk Management Instruments to be included as part of the
valuation of its Trading Assets: Risk Management Instruments. All prior periods
were reclassified.
PREMISES AND EQUIPMENT
Premises and equipment, including leasehold improvements, are carried at cost
less accumulated depreciation and amortization. Capital leases are included in
premises and equipment at the capitalized amount less accumulated amortization.
Depreciation and amortization of premises are included in Occupancy Expense,
while depreciation of equipment is included in Equipment Expense. Depreciation
and amortization are computed using the straight-line method over the estimated
useful life of the owned asset and, for leasehold improvements, over the lesser
of the remaining term of the leased facility or the estimated economic life of
the improvement. Maintenance and repairs are charged to expense as incurred,
while major improvements are capitalized.
Chase capitalizes the eligible costs of specified activities related to
computer software developed or obtained for internal use.
OTHER ASSETS
Private Equity Investments: Public securities held by Chase Capital Partners are
marked-to-market at the quoted public value less liquidity discounts, with the
resulting unrealized gains/(losses) included in the income statement. Chase's
valuation policy for public securities incorporates the use of liquidity
discounts and price averaging methodologies in certain circumstances to take
into account the fact that Chase can not immediately realize such public quoted
values due to the numerous regulatory, corporate and contractual sales
restrictions. Nonpublic investments are carried at cost, which is viewed as an
approximation of fair value. The carrying value of nonpublic investments is
adjusted for holdings in which a subsequent investment by an unaffiliated party
indicates a valuation in excess of cost and for holdings for which evidence of
an other-than-temporary decline in value exists.
Assets Acquired as Loan Satisfactions: Assets acquired in full or partial
satisfaction of loans, primarily consisting of real estate, are reported at the
lower of cost or fair value (less costs to sell for real estate). Writedowns at
the date of transfer (to Assets Acquired as Loan Satisfactions) are charged to
the Allowance for Loan Losses and subsequently are charged to Foreclosed
Property Expense. For real estate, operating expenses (net of related revenues)
and gains and losses on sales are reported in Foreclosed Property Expense.
Intangibles: Goodwill and other acquired intangibles, such as core deposits and
credit card relationships, are amortized over the estimated periods to be
benefited, generally ranging from 7 to 25 years, with an average maturity of 16
years. An impairment review is performed periodically on these assets.
Mortgage Servicing Rights: Capitalized mortgage servicing assets consist of
purchased and originated servicing rights. These rights are amortized into Fees
for Other Financial Services in proportion to, and over the period of, the
estimated future net servicing income stream of the underlying mortgage loans.
Mortgage servicing rights are assessed for impairment based on the fair value of
the right and any related derivative contracts. Impairment is evaluated by
stratifying the mortgage servicing rights by interest rate bands. Fair value is
determined considering market prices for similar assets or based on discounted
cash flows using market-based prepayment estimates for similar coupons as well
as incremental direct and indirect costs.
FEE-BASED REVENUE
Investment banking fees primarily include fees received for managing and
syndicating loan arrangements; providing financial advisory services in
connection with leveraged buyouts, recapitalizations, and mergers and
acquisitions; arranging private placements; and underwriting debt and equity
securities. Investment banking fees are recognized when the services to which
they relate have been provided. In addition, recognition of syndication fees is
subject to satisfying certain syndication tests.
Trust, custody and investment management fees primarily include fees
received in connection with personal, corporate, and employee benefit trust and
investment management activities.
Credit card revenues primarily include interchange income, late fees, cash
advance, annual and overlimit fees, as well as servicing fees earned in
connection with securitization activities. Credit card revenues are generally
recognized as billed, except for annual fees, which are recognized over a
12-month period.
Fees for other financial services primarily include fees from deposit
accounts, mortgage servicing, loan commitments, standby letters of credit,
compensating balances, insurance products, brokerage services and other
financial service-related products. All of these fees are generally recognized
over the period that the related service is provided.
INCOME TAXES
Chase recognizes both the current and deferred tax consequences of all
transactions that have been recognized in the financial statements. The deferred
tax liability (asset) is determined based on applicable tax rates which will be
in effect when the underlying items of income and expense are expected to be
reported to the taxing authorities. Net deferred tax assets, whose realization
is dependent on taxable earnings of future years, are recognized when a
"more-likely-than-not" criterion is met. Annual deferred tax expense (benefit)
is equal to the change in the deferred tax liability (asset) account from the
beginning to the end of the year. A current tax liability (asset) is recognized
for the estimated taxes payable or refundable for the current year.
64
66
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated to U.S.
dollars using applicable rates of exchange. Gains and losses on foreign currency
translation from operations for which the functional currency is other than the
U.S. dollar, together with related hedges and tax effects, are reported in Other
Comprehensive Income within Stockholders' Equity. For foreign operations for
which the U.S. dollar is the functional currency, gains and losses resulting
from converting foreign currency assets, liabilities, and related hedges to the
U.S. dollar are reported in the income statement.
STATEMENT OF CASH FLOWS
Cash and cash equivalents reported in the Consolidated Statement of Cash Flows
represent the amounts included in the balance sheet caption Cash and Due from
Banks. Cash flows from loans and deposits are reported on a net basis.
2 - TRADING ACTIVITIES
TRADING REVENUE
The following table sets forth the components of total trading-related revenue.
-------- ------- -------
Year Ended December 31, (in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Trading Revenue(a) $ 2,137 $ 1,238 $ 1,323
Net Interest Income Impact(b) 745 711 613
- --------------------------------------------------------------------------------
Total Trading-Related Revenue $ 2,882 $ 1,949 $ 1,936
- --------------------------------------------------------------------------------
Product Diversification:
Interest Rate Contracts(c) $ 989 $ 607 $ 704
Foreign Exchange Revenue(d) 807 936 790
Equities and Commodities(e) 355 156 148
Debt Instruments and Other(f) 731 250 294
- --------------------------------------------------------------------------------
Total Trading-Related Revenue $ 2,882 $ 1,949 $ 1,936
- --------------------------------------------------------------------------------
(a) Impact of charge-offs for risk management instruments are included in
trading revenue. All prior periods have been restated.
(b) Trading-related net interest income includes interest recognized on
interest-earning and interest-bearing trading-related positions as well as
management allocations reflecting the funding cost or benefit associated
with trading positions. This amount is included in net interest income on
the Consolidated Statement of Income.
(c) Includes interest rate swaps, cross-currency interest rate swaps, foreign
exchange forward contracts, interest rate futures and options, forward
rate agreements and related hedges.
(d) Includes foreign exchange spot and option contracts.
(e) Includes equity securities, equity derivatives, commodities and commodity
derivatives.
(f) Includes U.S. and foreign government and government agency securities,
corporate debt instruments, emerging markets debt instruments,
debt-related derivatives and credit derivatives.
TRADING ASSETS AND LIABILITIES
The following table presents trading assets and trading liabilities for the
dates indicated.
-------- -------
December 31, (in millions) 1999 1998
- --------------------------------------------------------------------------------
TRADING ASSETS
Debt and Equity Instruments:
U.S. Government, Federal Agencies and
Municipal Securities $ 5,890 $ 5,881
Certificates of Deposit, Bankers' Acceptances
and Commercial Paper 7,343 3,375
Debt Securities Issued by Foreign Governments 9,688 9,774
Corporate Securities 3,582 1,598
Other 3,688 4,216
- --------------------------------------------------------------------------------
Total Trading Assets-Debt and Equity Instruments $ 30,191 $24,844
- --------------------------------------------------------------------------------
Risk Management Instruments:
Interest Rate Contracts $ 9,871 $12,595
Foreign Exchange Contracts 15,836 15,984
Debt, Equity, Commodity and Other Contracts 7,371 4,269
- --------------------------------------------------------------------------------
Total Trading Assets-Risk Management Instruments $ 33,078 $32,848
- --------------------------------------------------------------------------------
TRADING LIABILITIES
Risk Management Instruments:
Interest Rate Contracts $ 10,423 $13,298
Foreign Exchange Contracts 12,053 16,592
Equity, Commodity and Other Contracts 5,270 2,790
- --------------------------------------------------------------------------------
Trading Liabilities-Risk Management Instruments $ 27,746 $32,680
Securities Sold, Not Yet Purchased 9,902 4,608
Structured Notes 925 1,214
- --------------------------------------------------------------------------------
Total Trading Liabilities $ 38,573 $38,502
- --------------------------------------------------------------------------------
Average trading assets and liabilities were as follows for the periods
indicated.
-------- -------
Year Ended December 31, (in millions) 1999 1998
- --------------------------------------------------------------------------------
Trading Assets-Debt and Equity Instruments $ 26,974 $30,021
Trading Assets-Risk Management Instruments $ 29,031 $36,127
- --------------------------------------------------------------------------------
Trading Liabilities-Risk Management Instruments $ 27,515 $37,200
Securities Sold, Not Yet Purchased 8,271 6,604
Structured Notes 1,071 2,855
- --------------------------------------------------------------------------------
Total Trading Liabilities $ 36,857 $46,659
- --------------------------------------------------------------------------------
65
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE CHASE MANHATTAN CORPORATION
3 - SECURITIES
See Note One for a discussion of the accounting policies relating to securities.
Net gains from available-for-sale securities sold in 1999, 1998 and 1997
amounted to $101 million (gross gains of $381 million and gross losses of $280
million), $609 million (gross gains of $949 million and gross losses of $340
million) and $312 million (gross gains of $496 million and gross losses of $184
million), respectively. There were no sales of held-to-maturity securities
during the three years ended December 31, 1999.
Unrealized net losses in Chase's AFS securities portfolio were
approximately $2.5 billion, before taxes, at December 31,1999, a decrease from a
net unrealized gain of approximately $0.6 billion, before taxes, at year-end
1998. The market valuation does not include the favorable impact of changes in
interest rates on related funding.
The amortized cost and estimated fair value of securities, including the
impact of related derivatives, were as follows for the dates indicated:
1999
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, (in millions) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE SECURITIES
U.S. Government and Federal Agency/Corporation Obligations:
Mortgage-Backed Securities $27,938 $ 6 $ 1,618 $26,326
Collateralized Mortgage Obligations 5,355 -- 19 5,336
U.S. Treasuries 18,297 2 951 17,348
Obligations of State and Political Subdivisions 207 -- 2 205
Debt Securities Issued by Foreign Governments 9,469 5 110 9,364
Corporate Debt Securities 379 2 13 368
Equity Securities 783 184 1 966
Other, primarily Asset-Backed Securities(a) 692 32 12 712
- --------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities $63,120 $ 231 $ 2,726 $60,625
- --------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES
U.S. Government and Federal Agency/Corporation Obligations:
Mortgage-Backed Securities $ 687 $ -- $ 12 $ 675
Collateralized Mortgage Obligations 141 -- -- 141
U.S. Treasuries 58 -- -- 58
Other, primarily Asset-Backed Securities(a) 2 1 1 2
- --------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities $ 888 $ 1 $ 13 $ 876
- --------------------------------------------------------------------------------------------------------
1998
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, (in millions) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE SECURITIES
U.S. Government and Federal Agency/Corporation Obligations:
Mortgage-Backed Securities $42,916 $ 94 $ 16 $42,994
Collateralized Mortgage Obligations 260 -- -- 260
U.S. Treasuries 8,844 285 13 9,116
Obligations of State and Political Subdivisions 226 1 -- 227
Debt Securities Issued by Foreign Governments 8,176 108 58 8,226
Corporate Debt Securities 261 6 12 255
Equity Securities 832 233 7 1,058
Other, primarily Asset-Backed Securities(a) 628 44 5 667
- --------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities $62,143 $ 771 $ 111 $62,803
- --------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES
U.S. Government and Federal Agency/Corporation Obligations:
Mortgage-Backed Securities $ 898 $ 16 $ -- $ 914
Collateralized Mortgage Obligations 720 1 1 720
U.S. Treasuries 65 -- -- 65
Other, primarily Asset-Backed Securities(a) 4 -- -- 4
- --------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities $ 1,687 $ 17 $ 1 $ 1,703
- --------------------------------------------------------------------------------------------------------
(a) Includes CMOs of private issuers, which generally have underlying
collateral consisting of obligations of U.S. Government and Federal
agencies and corporations. See Note One for a further discussion.
The amortized cost, estimated fair value and average yield at December 31,
1999 of Chase's AFS and HTM securities by contractual maturity range are
presented in the following table.
Available-for-Sale Securities Held-to-Maturity Securities
------------------------------- ------------------------------
Maturity Schedule of Securities Amortized Fair Average Amortized Fair Average
December 31, 1999 (in millions) Cost Value Yield(a) Cost Value Yield(a)
- -----------------------------------------------------------------------------------------------------------------
Due in One Year or Less $ 3,707 $ 3,658 3.30% $ 138 $ 136 6.92%
Due After One Year Through Five Years 14,916 14,497 5.16 24 24 8.67
Due After Five Years Through Ten Years 9,358 8,792 5.36 1 1 7.42
Due After Ten Years(b) 35,139 33,678 6.20 725 715 6.51
- -----------------------------------------------------------------------------------------------------------------
Total Securities $ 63,120 $ 60,625 5.66% $ 888 $ 876 6.63%
- -----------------------------------------------------------------------------------------------------------------
(a) The average yield is based on amortized cost balances at year-end. Yields
are derived by dividing interest income (including the effect of related
derivatives on AFS securities and the amortization of premiums and
accretion of discounts) by total amortized cost. Taxable-equivalent yields
are used where applicable.
(b) Securities with no stated maturity are included with securities with a
contractual maturity of ten years or more. Substantially all of Chase's
MBSs and CMOs are due in ten years or more based on contractual maturity.
The estimated duration, which reflects anticipated future prepayments
based on a consensus of dealers in the market, is approximately 3 years
for MBSs, and less than 1 year for CMOs.
66
68
4 - LOANS
The composition of the loan portfolio at each of the dates indicated was as
follows:
1999 1998
----------------------------- -----------------------------
December 31, (in millions) Domestic Foreign Total Domestic Foreign Total
- ------------------------------------------------------------------------------------------------------
CONSUMER
1-4 Family Residential Mortgages $ 44,262 $ 1,520 $ 45,782 $ 41,831 $ 1,467 $ 43,298
Credit Card 15,633 761 16,394 14,229 718 14,947
Auto Financings 18,442 48 18,490 16,456 1 16,457
Other Consumer 6,902 471 7,373 8,375 753 9,128
- ------------------------------------------------------------------------------------------------------
Total Consumer 85,239 2,800 88,039 80,891 2,939 83,830
- ------------------------------------------------------------------------------------------------------
COMMERCIAL
Commercial and Industrial 48,097 25,179 73,276 43,123 25,532 68,655
Commercial Real Estate:
Commercial Mortgage 2,836 37 2,873 3,029 337 3,366
Construction 800 88 888 955 30 985
Financial Institutions 4,211 3,598 7,809 6,583 4,537 11,120
Foreign Governments -- 3,274 3,274 -- 4,798 4,798
- ------------------------------------------------------------------------------------------------------
Total Commercial 55,944 32,176 88,120 53,690 35,234 88,924
- ------------------------------------------------------------------------------------------------------
Total Loans(a) $141,183 $34,976 $176,159 $134,581 $38,173 $172,754
- ------------------------------------------------------------------------------------------------------
(a) Loans are presented net of unearned income of $1,518 million and $1,667
million at December 31, 1999 and 1998, respectively.
Bonds issued to Chase by foreign governments as part of a debt
renegotiation (i.e., "Brady Bonds") are classified as loans but are subject to
the provisions of SFAS 115. During 1999, Chase sold substantially all of its
holdings of "Brady Bonds". Aggregate cash proceeds of $553 million from these
loan sales approximated carrying value.
Impaired Loans
The table to the right sets forth information about Chase's impaired loans.
Chase uses the discounted cash flow method as its primary method for valuing its
impaired loans.
------ ------
December 31, (in millions) 1999 1998
- --------------------------------------------------------------------------------
Impaired Loans with an Allowance $ 937 $1,020
Impaired Loans without an Allowance(a) 284 25
- --------------------------------------------------------------------------------
Total Impaired Loans $1,221 $1,045
- --------------------------------------------------------------------------------
Allowance for Impaired Loans under SFAS 114(b) $ 280 $ 314
Average Balance of Impaired Loans During the Year $1,216 $ 820
Interest Income Recognized on Impaired Loans
During the Year $ 15 $ 10
- --------------------------------------------------------------------------------
(a) When the discounted cash flows, collateral value or market price equals or
exceeds the carrying value of the loan, then the loan does not require an
allowance under SFAS 114.
(b) The allowance for impaired loans under SFAS 114 is included in Chase's
allowance for loan losses.
5 - ALLOWANCE FOR LOAN LOSSES
The table below summarizes the changes in the allowance for loan losses.
Year Ended December 31, ------ ------ -------
(in millions) 1999 1998 1997
- -------------------------------------------------------------------------------
Allowance at January 1 $3,552 $3,624 $ 3,549
Provision for Loan Losses 1,621 1,343 804
Charge-Offs (1,987) (1,791) (1,096)
Recoveries 254 373 292
------ ------ -------
Net Charge-Offs (1,733) (1,418) (804)
Transfer to Other Liabilities -- -- (100)
Allowance Related to Purchased Portfolios 18 5 172(a)
Foreign Exchange Translation Adjustment (1) (2) 3
- -------------------------------------------------------------------------------
Allowance at December 31 $3,457 $3,552 $ 3,624
- -------------------------------------------------------------------------------
(a) Includes approximately $160 million related to the purchase of a credit
card portfolio.
67
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE CHASE MANHATTAN CORPORATION
6 - LONG-TERM DEBT
The following table is a summary of long-term debt (net of unamortized original
issue debt discount).
------------ ----------- ----------- ------------ ------------
By remaining maturity at December 31,(a) Under After 1999 1998
(in millions) 1 year 1-5 years 5 years Total Total
- --------------------------------------------------------------------------------------------------------------------------------
PARENT COMPANY
Senior Debt: Fixed Rate $ 200 $ 1,386 $ 117 $ 1,703 $ 824
Variable Rate 2,685 3,316 71 6,072 4,525
Modified Interest Rates(b) 5.51 - 6.71% 5.84 - 6.75% 4.74 - 6.36% 4.74 - 6.75% 5.06 - 9.78%
Subordinated Debt: Fixed Rate 150 1,218 5,262 6,630 7,152
Variable Rate 250 441 299 990 990
Modified Interest Rates(b) 6.19 - 10.13% 5.22 - 9.38% 5.36 - 7.75% 5.22 - 10.13% 5.22 - 10.38%
- --------------------------------------------------------------------------------------------------------------------------------
Subtotal $ 3,285 $ 6,361 $ 5,749 $15,395 $13,491
- --------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARIES
Senior Debt: Fixed Rate $ 165 $ 166 $ 116 $ 447 $ 779
Variable Rate 25 500 15 540 700
Modified Interest Rates(b) 6.47 - 10.69% 4.00 - 10.47% 5.95 - 10.60% 4.00 - 10.69% 4.00 - 10.60%
Subordinated Debt: Fixed Rate -- 321 649 970 967
Variable Rate -- 250 -- 250 250
Modified Interest Rates(b) -- 3.24 - 7.25% 6.21 - 6.58% 3.24 - 7.25% 3.24 - 7.25%
- --------------------------------------------------------------------------------------------------------------------------------
Subtotal $ 190 $ 1,237 $ 780 $ 2,207 $ 2,696
- --------------------------------------------------------------------------------------------------------------------------------
Total Long-Term Debt $ 3,475 $ 7,598 $ 6,529 $17,602(c) $16,187
- --------------------------------------------------------------------------------------------------------------------------------
(a) Remaining maturity is based on contractual maturity of the debt.
(b) The interest rates shown have been adjusted to reflect the effect of
asset/liability derivative contracts, primarily interest rate swaps, used
to convert Chase's fixed-rate debt to variable rates. The interest rates
shown are those in effect at year-end.
(c) At December 31, 1999, long-term debt aggregating $2.8 billion was
redeemable at the option of Chase, 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 1999 are $3,475 million in 2000, $2,578 million in 2001, $2,800 million
in 2002, $1,290 million in 2003 and $930 million in 2004.
Chase issues long-term debt denominated in various currencies, although
predominately in U.S. dollars, with both fixed and variable interest rates.
Fixed-rate debt outstanding at December 31, 1999 mature at various dates
through 2048 and carry contractual interest rates ranging from 4.00% to 10.60%.
The consolidated weighted-average interest rates on fixed-rate debt at December
31, 1999 and 1998 were 7.00% and 7.43%, respectively. Variable-rate debt
outstanding, with contractually determined interest rates ranging from 5.27% to
6.90% at December 31, 1999, mature at various dates through 2039. The
consolidated weighted-average contractual interest rates on variable-rate debt
at December 31, 1999 and 1998 were 6.21% and 5.42%, respectively.
Included in long-term debt are equity contract notes totaling $150 million
at December 31, 1999. At December 31, 1999, Chase had designated proceeds from
the sale of capital securities, as defined in regulations by the Board of
Governors of the Federal Reserve System ("Federal Reserve Board"), in an amount
sufficient to satisfy fully the requirements of its equity contract notes.
Chase has guaranteed several long-term debt issues of its subsidiaries.
Guaranteed debt totaled $360 million at December 31, 1999.
68
70
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CORPORATION'S JUNIOR SUBORDINATED
DEFERRABLE INTEREST DEBENTURES
At December 31, 1999, seven separate wholly owned Delaware statutory business
trusts established by Chase had issued an aggregate $2,538 million in capital
securities, net of discount. The capital securities qualify as Tier 1 Capital of
Chase. The proceeds from each issuance were invested in a corresponding series
of junior subordinated deferrable interest debentures of Chase. The sole asset
of each statutory business trust is the debentures. Chase has fully and
unconditionally guaranteed each of the business trust's obligations under each
trust's capital securities. Each trust's capital securities are subject to
mandatory redemption, in whole or in part, upon repayment of the debentures at
their stated maturity or earlier redemption.
The following is a summary of Chase's outstanding capital securities, net
of discount, issued by each trust and the junior subordinated deferrable
interest debentures issued by Chase to each trust as of December 31, 1999.
--------------------------- ------------------- ------------------ ------------------
($ in millions) Amount of Capital Principal Amount of Stated Maturity of Interest Rate of
Securities, Net of Discount Chase Debentures, Capital Securities Capital Securities
Name of Trust Issued by Trust(a) Held by Trust(b) and Debentures and Debentures
- ---------------------------------------------------------------------------------------------------------------
Chase Capital I $ 600 $ 619 12/1/2026 7.67%
Chase Capital II 494 516 2/1/2027 LIBOR + .50%
Chase Capital III 296 309 3/1/2027 LIBOR + .55%
Chase Capital IV 350 361 12/6/2027 7.34%
Chase Capital V 200 206 3/31/2028 7.03%
Chase Capital VI 248 258 8/1/2028 LIBOR + .625%
Chase Capital VII 350 361 5/15/2029 7.00%
- ---------------------------------------------------------------------------------------------------------------
Total $ 2,538 $2,630
- ---------------------------------------------------------------------------------------------------------------
------------------------------
Interest
Payment/Distribution
Name of Trust Dates
- --------------------------------------------------
Chase Capital I Semi-annual - commencing 6/1/97
Chase Capital II Quarterly - commencing 5/1/97
Chase Capital III Quarterly - commencing 6/1/97
Chase Capital IV Quarterly - commencing 3/31/98
Chase Capital V Quarterly - commencing 3/31/98
Chase Capital VI Quarterly - commencing 11/1/98
Chase Capital VII Quarterly - commencing 7/31/99
- --------------------------------------------------
(a) Represents the amount of capital securities issued to the public by each
trust. These amounts are reflected as liabilities of Chase.
(b) Represents the principal amount of Chase debentures held as assets by each
trust. These amounts represent intercompany transactions and are
eliminated in Chase's consolidated financial statements.
7 - PREFERRED STOCK OF SUBSIDIARY
In September 1996, Chase Preferred Capital Corporation ("Chase Preferred
Capital"), a wholly owned subsidiary of Chase Bank, publicly issued 22 million
shares of 8.10% Cumulative Preferred Stock, Series A ("Series A Preferred
Shares"), with a liquidation preference of $25 per share. Chase Preferred
Capital is a real estate investment trust ("REIT") established for the purpose
of acquiring, holding and managing real estate mortgage assets. Dividends on the
Series A Preferred Shares are cumulative and are payable quarterly. The
dividends are recorded as minority interest expense by Chase.
The Series A Preferred Shares are generally not redeemable prior to
September 18, 2001. On or after that date, the Series A Preferred Shares may be
redeemed for cash at the option of Chase Preferred Capital, in whole or in part,
at a redemption price of $25 per share, plus any accrued and unpaid dividends.
The Series A Preferred Shares are treated as Tier 1 Capital of Chase. The Series
A Preferred Shares are not subject to any sinking fund or mandatory redemption
and are not convertible into any other securities of Chase Preferred Capital,
Chase or any of its subsidiaries. The total amount of Preferred Stock of
Subsidiary outstanding at both December 31, 1999 and 1998 was $550 million.
8 - PREFERRED STOCK
Chase is authorized to issue 200 million shares of preferred stock, in one or
more series, with a par value of $1 per share. Outstanding shares of preferred
stock at December 31, 1999 and 1998 were 27.1 million and 31.1 million,
respectively.
During 1999, Chase redeemed its 9.76% Cumulative Preferred Stock, at a
redemption price of $25 per share, together with any accrued but unpaid
dividends.
Dividends on shares of each outstanding series of preferred stock are
payable quarterly. All the preferred stock outstanding have preference over
Chase's common stock for the payment of dividends and the distribution of assets
in the event of a liquidation or dissolution of Chase.
69
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE CHASE MANHATTAN CORPORATION
The following is a summary of Chase's preferred stocks outstanding:
Outstanding at December 31,
Stated Value and Shares ---------------------------
Redemption Price Per Share(a) (in millions) 1999 (in millions) 1998
- -----------------------------------------------------------------------------------------------------------------
Adjustable Rate, Series L Cumulative $ 100.00 2.0 $ 200 $ 200
Adjustable Rate, Series N Cumulative 25.00 9.1 228 228
10.96% Cumulative 25.00 4.0 100 100
10.84% Cumulative 25.00 8.0 200 200
Fixed/Adjustable Rate, Noncumulative 50.00 4.0 200 200
9.76% Cumulative 25.00 4.0 -- 100
- -----------------------------------------------------------------------------------------------------------------
Earliest Rate in Effect at
Redemption Date December 31, 1999
- ------------------------------------------------------------------------
Adjustable Rate, Series L Cumulative 6/30/1999 5.124%(b)
Adjustable Rate, Series N Cumulative 6/30/1999 5.185(b)
10.96% Cumulative 6/30/2000 10.960
10.84% Cumulative 6/30/2001 10.840
Fixed/Adjustable Rate, Noncumulative 6/30/2003 4.960(b)
9.76% Cumulative -- --
- ------------------------------------------------------------------------
(a) Redemption price includes amount shown in the table plus any accrued but
unpaid dividends.
(b) Floating rates are based on certain U.S. Treasury rates. The minimum and
maximum rates for Series L and Series N are 4.50% and 10.50%,
respectively. The fixed/adjustable rate preferred stock remains fixed at
4.96% through June 30, 2003; thereafter, the minimum and maximum rates are
5.46% and 11.46%, respectively.
9 - COMMON STOCK
Chase is authorized to issue 1.5 billion shares of common stock, with a $1 par
value per share. The number of shares of common stock issued and outstanding
were as follows:
----- ----- -----
December 31, (in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Issued 881.9 881.7 881.5
Held in Treasury (54.7) (33.7) (39.6)
- --------------------------------------------------------------------------------
Outstanding 827.2 848.0 841.9
- --------------------------------------------------------------------------------
In January 2000, Chase authorized the repurchase of up to $5 billion of common
stock in the open market or through negotiated transactions. This amount is in
addition to any amounts necessary to provide for issuances under Chase's
dividend reinvestment plan and its various stock-based director and employee
benefit plans. The new authorization became effective January 19, 2000.
During 1999, Chase repurchased approximately 54.4 million shares of
outstanding common stock under a stock repurchase plan, which began on January
4, 1999. During 1999, approximately 33.6 million shares were issued, primarily
from treasury, under various employee stock option and other stock-based plans.
As of December 31, 1999, approximately 111.2 million unissued shares of
common stock were reserved for issuance under various employee incentive, option
and stock purchase plans.
Common shares issued (newly issued or distributed from treasury) during
1999, 1998 and 1997 were as follows:
---- ---- ----
Year Ended December 31, (in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Employee Benefit and
Compensation Plans(a) 33.3 23.8 22.2
Dividend Reinvestment and
Stock Purchase Plans .3 .3 .3
- --------------------------------------------------------------------------------
Total Shares Newly Issued or
Distributed from Treasury(b) 33.6 24.1 22.5
- --------------------------------------------------------------------------------
(a) See Note Sixteen for a discussion of Chase's employee stock option plans.
(b) Shares distributed from treasury were 33.4 million in 1999, 23.9 million
in 1998 and 22.5 million in 1997.
On May 19, 1998, the stockholders approved a two-for-one stock split of
Chase common stock. A total of 440,767,205 shares of common stock were issued in
connection with the split, including 14,176,530 shares held in treasury. As a
result of the stock split, $441 million was reclassified from capital surplus to
common stock. The stock split did not cause any changes in the $1 par value per
share of the common stock or in total stockholders' equity.
10 - EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") were as follows for the dates
indicated:
Year Ended December 31, ------- ------- -------
(in millions, except per share data) 1999 1998 1997
- --------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Net Income $ 5,446 $ 3,782 $ 3,708
Less: Preferred Stock Dividends 71 98 182
- --------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 5,375 $ 3,684 $ 3,526
Weighted-Average Basic Shares Outstanding 828.8 846.1 849.2
Net Income Per Share $ 6.49 $ 4.35 $ 4.15
- --------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Net Income Applicable to Common Stock $ 5,375 $ 3,684 $ 3,526
------- ------- -------
Weighted-Average Basic Shares Outstanding 828.8 846.1 849.2
Add: Broad-Based Options 9.2 6.5 11.4
Options to Key Employees 19.0 16.7 17.8
------- ------- -------
Total Additional Shares 28.2 23.2 29.2
- --------------------------------------------------------------------------------
Weighted-Average Diluted Shares Outstanding 857.0 869.3 878.4
- --------------------------------------------------------------------------------
Net Income Per Share $ 6.27 $ 4.24 $ 4.01
- --------------------------------------------------------------------------------
70
72
Basic EPS is computed by dividing net income applicable to common stock by
the weighted-average number of common shares outstanding for the period. Diluted
EPS is computed using the same method as basic EPS, but common shares
outstanding reflect the potential dilution that could occur if convertible
securities or other contracts to issue common stock were converted or exercised
into common stock. The impact of Chase's stock repurchase program reduces the
weighted-average number of common shares for both the basic and diluted EPS
computation. For purposes of diluted EPS, net income available for common stock
is the same as the basic computation, as Chase had no convertible securities
and, therefore, no adjustments to net income available for common stock were
necessary.
11 - FEES FOR OTHER FINANCIAL SERVICES
Details of fees for other financial services were as follows:
------ ------ ------
Year Ended December 31, (in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Mortgage Servicing Fees $ 405 $ 192 $ 231
Service Charges on Deposit Accounts 393 368 376
Fees in Lieu of Compensating Balances 378 344 314
Commissions on Letters of Credit and Acceptances 285 301 307
Brokerage and Investment Services 198 142 128
Insurance Fees 171 145 91
Loan Commitment Fees 139 136 120
Other Fees 527 465 416
- --------------------------------------------------------------------------------
Total Fees for Other Financial Services $2,496 $2,093 $1,983
- --------------------------------------------------------------------------------
12 - RESTRUCTURING COSTS AND OTHER EXPENSE
Restructuring Costs: Chase's expense management includes long-term strategic
restructuring initiatives, such as the relocation of operations for Global
Services businesses and consumer call centers, and other business initiatives,
such as consolidations of operations.
In connection with these new initiatives, in the fourth quarter of 1999,
Chase incurred a charge of $100 million associated with planned consolidation
actions in certain businesses and a charge of $75 million in connection with
planned staff reductions and disposition of premises and equipment resulting
from the announced relocation of several businesses to Florida, Texas, and
Massachusetts. The $175 million restructuring charge in the fourth quarter of
1999 includes severance costs associated with the relocation of 2,300 positions
and the projected elimination of 800 positions ($125 million). The remaining
restructuring costs encompass the planned disposition of certain premises and
equipment ($50 million).
During the 1998 first quarter, Chase incurred a pre-tax charge of $510
million in connection with initiatives to streamline support functions and
realign certain business activities. In December 1999, $127 million of costs
were reversed primarily related to occupancy not fully utilized under the $510
million charge taken in 1998.
Other Expense: Details of other expense were as follows:
------ ------ -------
Year Ended December 31, (in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Professional Services $ 719 $ 668 $ 575
Marketing Expense 459 419 415
Telecommunications 383 349 307
Amortization of Intangibles 297 261 172
Travel and Entertainment 226 243 220
Minority Interest(a) 49 50 74
Foreclosed Property Expense 15 5 12
Special Contribution to the Foundation(b) 100 -- --
All Other 1,402 1,292 1,131
- --------------------------------------------------------------------------------
Total Other Expense $3,650 $3,287 $ 2,906
- --------------------------------------------------------------------------------
(a) Includes REIT minority interest expense of $44 million in each of 1999,
1998 and 1997.
(b) Represents a $100 million special contribution to The Chase Manhattan
Foundation.
13 - COMPREHENSIVE INCOME
Comprehensive income for Chase includes net income, as well as the change in
unrealized gains and losses on AFS securities and foreign currency translation
(each of which includes the impact of related derivatives). Chase has presented
these items net of tax in the Statement of Changes in Stockholders' Equity.
The following table presents cumulative other comprehensive income
balances:
---------------- -------------- -------------
Cumulative
Unrealized Other
Year Ended December 31, Gains (Losses) Translation Comprehensive
(in millions) On Securities(a) Adjustments(b) Income
- --------------------------------------------------------------------------------
Balance December 31, 1996 $ (288) $ 17 $ (271)
Net change 383 -- 383
------- ----- -------
Balance December 31, 1997 95 17 112
Net change 280 -- 280
------- ----- -------
Balance December 31, 1998 375 17 392
Net change (1,846) -- (1,846)
------- ----- -------
Balance December 31, 1999 $(1,471) $ 17 $(1,454)
======= ===== =======
- --------------------------------------------------------------------------------
(a) Represents the after-tax difference between the fair value and amortized
cost of available-for-sale securities portfolio, including securities
classified as loans which are subject to the provisions of SFAS 115.
(b) Includes gains and losses on foreign currency translation from operations
for which the functional currency is other than the U.S. dollar, together
with the related hedges and tax effects.
71
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE CHASE MANHATTAN CORPORATION
The net change in the table below represents other comprehensive income.
This net change amount for Chase represents two components: net unrealized
holding gains/(losses) and reclassification adjustments. The reclassification
adjustment in the table below represents amounts recognized in net income during
the period that had previously been displayed as part of other comprehensive
income.
-------- ----- -----
Year Ended December 31, (in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Net unrealized holdings gains (losses)
arising during the period, net of taxes(a) $(1,717) $ 371 $ 425
Reclassification adjustment for (gains) losses
included in net income, net of taxes(b) (129) (91) (42)
- --------------------------------------------------------------------------------
Net change $(1,846) $ 280 $ 383
- --------------------------------------------------------------------------------
(a) Net of tax benefit of $1,169 million in 1999 and net of tax expense of
$219 million in 1998 and $325 million in 1997.
(b) Net of taxes of $88 million, $54 million and $32 million for 1999, 1998
and 1997, respectively.
14 - INCOME TAXES
Deferred income tax expense (benefit) results from differences between amounts
of assets and liabilities as measured for financial reporting and income tax
return purposes. The significant components of deferred tax assets and
liabilities are reflected in the following table.
------- ------
December 31, (in millions) 1999 1998
- --------------------------------------------------------------------------------
DEFERRED TAX ASSETS
Allowance for Credit Losses $ 1,022 $1,038
Allowance Other Than Credit Losses 611 800
Foreign Operations 186 360
Employee Benefits 1,116 784
Fair Value Adjustments 299 --
Other -- 36
- --------------------------------------------------------------------------------
Gross Deferred Tax Assets $ 3,234 $3,018
- --------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES
Leasing Transactions $ 2,416 $2,370
Fair Value Adjustments -- 313
Depreciation and Amortization 561 481
Other 199 162
- --------------------------------------------------------------------------------
Gross Deferred Tax Liabilities $ 3,176 $3,326
- --------------------------------------------------------------------------------
Valuation Allowance $ 45 $ 40
- --------------------------------------------------------------------------------
Net Deferred Tax Asset (Liability) $ 13 $ (348)
- --------------------------------------------------------------------------------
A valuation allowance has been recorded in accordance with SFAS 109,
relating primarily to tax benefits associated with foreign operations and with
state and local deferred tax assets.
Chase expects that, when paid, the deferred foreign taxes of $206 million
at December 31, 1999 will be creditable on its Federal income tax return.
The components of income tax expense included in the Consolidated
Statement of Income were as follows:
------ ------- ------
Year Ended December 31, (in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Current Income Tax Expense
Federal $ 828 $ 723 $ 813
Foreign 779 712 614
State and Local 241 282 226
- --------------------------------------------------------------------------------
Total Current Expense 1,848 1,717 1,653
- --------------------------------------------------------------------------------
Deferred Income Tax Expense
Federal 1,014 446 483
Foreign 42 (17) (39)
State and Local 25 2 105
- --------------------------------------------------------------------------------
Total Deferred Expense 1,081 431 549
- --------------------------------------------------------------------------------
Total Income Tax Expense $2,929 $ 2,148 $2,202
- --------------------------------------------------------------------------------
The preceding table does not reflect the tax effects of unrealized gains
and losses on available-for-sale securities and certain tax benefits associated
with Chase's employee stock plans. The tax effect of these items are recorded
directly in stockholders' equity. Stockholders' equity increased by $1,673
million and $58 million, respectively, in 1999 and 1998 and decreased by $35
million in 1997 as a result of these tax effects.
Federal income taxes have not been provided on the undistributed earnings
of certain foreign subsidiaries, to the extent such earnings have been
reinvested abroad for an indefinite period of time. For 1999, such earnings
approximate $290 million on a pre-tax basis. At December 31, 1999, the
cumulative amount of undistributed earnings was approximately $1,054 million. It
is not practicable at this time to determine the income tax liability that would
result upon repatriation of these earnings.
The tax expense applicable to securities gains and losses for the years
1999, 1998 and 1997 was $36 million, $219 million and $116 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) 1999 1998 1997
- --------------------------------------------------------------------------------
Statutory U.S. Federal Tax Expense $2,931 $ 2,075 $2,068
Increase (Decrease) in Tax Expense
Resulting from:
State and Local Income Taxes, Net of
Federal Income Tax Benefit 173 185 215
Foreign Subsidiary Earnings (75) (70) (45)
Other-Net (100) (42) (36)
- --------------------------------------------------------------------------------
Total Income Tax Expense $2,929 $ 2,148 $2,202
- --------------------------------------------------------------------------------
72
74
The following table presents the domestic and foreign components of income
before income tax expense.
------ ------- -------
Year Ended December 31, (in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Domestic $5,984 $ 4,315 $ 4,087
Foreign(a) 2,391 1,615 1,823
- --------------------------------------------------------------------------------
Income Before Income Tax Expense $8,375 $ 5,930 $ 5,910
- --------------------------------------------------------------------------------
(a) For purposes of this table, foreign income is defined as income generated
from operations located outside the United States.
15 - POSTRETIREMENT EMPLOYEE BENEFITS PLANS
PENSION PLANS
The accompanying table presents the funded status and actuarial assumptions for
Chase's noncontributory domestic defined benefit pension plan (the "domestic
pension plan"). The domestic pension plan employs a cash balance defined benefit
formula that provides for benefits based on salary and service. The 1999
unrecognized amount primarily resulted from higher than expected returns on plan
assets.
DOMESTIC PENSION PLAN
------- -------
As of or for the Year Ended December 31, (in millions) 1999 1998
- --------------------------------------------------------------------------------
Benefit Obligation $(2,594) $(2,473)
Plan Assets at Fair Value 3,053 2,880
- --------------------------------------------------------------------------------
Plan Assets in Excess of Benefit Obligation 459 407
Unrecognized Amounts (418) (275)
- --------------------------------------------------------------------------------
Prepaid Pension Cost Reported in Other Assets $ 41 $ 132
- --------------------------------------------------------------------------------
Employer Contributions to Trust $ -- $ --
Benefits Paid Out of the Trust 185 174
Weighted-Average Annualized Actuarial Assumptions
as of December 31:
Discount Rate 8.00% 6.75%
Assumed Rate of Long-Term Return
on Plan Assets 9.00% 8.50%
Rate of Increase in Future Compensation 5.66% 5.00%
- --------------------------------------------------------------------------------
The periodic domestic pension plan expense (reported in Employee Benefits
expense) totaled $91 million in 1999 and $79 million in each of 1998 and 1997.
The increase in the 1999 expense from 1998 primarily reflects higher service
costs and lower actuarial gains.
Chase also has a number of other defined benefit pension plans (i.e.,
domestic plans not subject to Title IV of the Employee Retirement Income
Security Act) and several foreign pension plans. Employee Benefits expense
related to these plans totaled $30 million in 1999, $28 million in 1998 and $26
million in 1997. At December 31, 1999 and 1998, Chase's liability included in
Accrued Expenses related to plans that Chase elected not to prefund fully
totaled $159 million and $201 million, respectively.
Employee Benefits expense related to defined contribution plans totaled
$142 million in 1999, $135 million in 1998 and $127 million in 1997.
POSTRETIREMENT MEDICAL AND LIFE INSURANCE
Chase provides postretirement medical and life insurance benefits to qualifying
domestic and foreign employees. These benefits vary with length of service and
date of hire and provide for limits on Chase's share of covered medical
benefits. The medical benefits are contributory and the life insurance benefits
are noncontributory.
POSTRETIREMENT MEDICAL AND LIFE INSURANCE LIABILITY
------ -----
As of or for the Year Ended December 31, (in millions) 1999 1998
- --------------------------------------------------------------------------------
Benefit Obligation $ (682) $(767)
Unrecognized Amounts (179) (86)
- --------------------------------------------------------------------------------
Accrued Postretirement Medical and Life Insurance
Cost Reported in Accrued Expenses $ (861) $(853)
- --------------------------------------------------------------------------------
Benefits Paid(a) $ 52 $ 42
- --------------------------------------------------------------------------------
(a) Net of $8 million and $7 million of retiree contributions in 1999 and
1998, respectively.
The periodic postretirement medical and life insurance expense (reported
in Employee Benefits expense) totaled $60 million in 1999, $65 million in 1998
and $68 million in 1997.
The discount rates and rates of increase for future compensation used to
determine the actuarial values for postretirement medical and life insurance
benefits are generally consistent with those used for the domestic pension plan.
At December 31, 1999, the assumed weighted-average medical benefits cost trend
rate used to measure the expected cost of benefits covered was 7.5% for 2000,
declining gradually over six years to a floor of 5.6%. The effect of a 1% change
in the assumed medical cost trend rate would result in a corresponding change in
the December 31, 1999 benefit obligation and 1999 periodic expense by up to
4.4%.
73
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE CHASE MANHATTAN CORPORATION
16 - EMPLOYEE STOCK-BASED INCENTIVES
KEY EMPLOYEE STOCK-BASED AWARDS
Chase has a long-term stock-based incentive plan (the "LTIP") that provides for
grants of common stock-based awards, including stock options, restricted stock
and restricted stock units ("RSU") to certain key employees. In addition, a
portion of incentive compensation exceeding specified levels is paid in
restricted stock or RSUs (the "deferred equity plan").
Under the LTIP plan, stock options have been granted with exercise prices
equal to Chase's common stock price on the grant date. Generally, options cannot
be exercised until at least one year after the grant date, and become
exercisable over various periods as determined at the time of the grant. Options
generally expire ten years after the grant date.
The accompanying table presents a summary of key employee option activity
during the last three years.
KEY EMPLOYEE STOCK OPTIONS
Year Ended December 31, 1999 1998 1997
------------------------------- ----------------------------- ----------------------------
(Amounts in thousands, Number of Weighted-Average Number of Weighted-Average Number of Weighted-Average
except per share amounts) Options Exercise Price Options Exercise Price Options Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------------
Options Outstanding, January 1 46,804 $ 34.57 44,076 $ 28.14 43,202 $ 20.75
Granted 14,605(a) 62.04 11,486 54.92 11,952 46.19
Exercised (8,490) 27.27 (8,493) 22.70 (10,458) 20.22
Canceled (481) 58.62 (265) 47.25 (620) 33.75
- ---------------------------------------------------------------------------------------------------------------------------------
Options Outstanding, December 31 52,438(b) $ 43.77 46,804 $ 34.57 44,076 $ 28.14
- ---------------------------------------------------------------------------------------------------------------------------------
Options Exercisable, December 31 29,620 $ 30.85 27,271 $ 25.15 27,264 $ 21.30
- ---------------------------------------------------------------------------------------------------------------------------------
(a) Includes 3,416,000 options at a weighted average exercise price of $23.41
related to acquisition of H&Q.
(b) Of the total options outstanding at December 31, 1999, 9,420,000 options
(8,646,000 were exercisable) had exercise prices ranging from $5 to $20,
or $15.12 on average, and a weighted-average remaining contractual life of
3.2 years; 11,752,000 options (11,128,000 were exercisable) had exercise
prices ranging from $20.01 to $40.00, or $25.90 on average, and a
remaining contractual life of 5.1 years; 31,266,000 options (9,846,000
were exercisable) had exercise prices ranging from $40.01 to $87.59, or
$59.12 on average, and a remaining contractual life of 8.0 years.
Restricted stock and RSUs are granted at no cost to the recipient.
Restricted stock and RSUs are subject to forfeiture until certain restrictions
have lapsed, including continued employment for a specified period. The
recipient of a share of restricted stock is entitled to voting rights and
dividends on the common stock. An RSU entitles the recipient to receive a share
of common stock after the applicable restrictions lapse; the recipient is
entitled to receive cash payments equivalent to dividends on the underlying
common stock during the period the RSU is outstanding.
During 1999, 9.4 million of LTIP awards (all payable solely in stock) were
granted. For all 1999 LTIP awards, vesting for restricted shares and RSUs is
conditioned on continued employment. Of the total 9.4 million LTIP awards
granted, vesting of 887,000 of such awards is also conditioned upon Chase's
stock price reaching and sustaining target prices (the "targets") during the
service period, subject to minimum vesting periods; the awards are forfeited in
their entirety if the targets are not achieved ("forfeitable awards"). The
target stock price of $110 for half of the 1999 forfeitable awards exceeded the
stock price on the grant date by approximately 50% and the target stock price of
$125 for the other half exceeded the stock price on the grant date by
approximately 70%.
Under the LTIP, in 1998 and 1997, 7.8 million and 710,000 awards (all
payable solely in stock), respectively, were granted. Of the total 7.8 million
LTIP awards granted in 1998, 1.2 million of such awards are forfeitable. Half of
the 1998 forfeitable awards vested in 1998 as a result of the target price
having been achieved. For the remaining half of the 1998 forfeitable awards, the
target price was achieved in 1999 but the awards are still subject to a minimum
vesting period. For all the 1997 awards, vesting was conditioned solely on
continued employment.
Under the deferred equity plan, additional restricted stock and RSUs are
outstanding for which vesting is conditioned solely on continued employment.
During 1999, 1998, and 1997, respectively, 99,000, 520,000 and 522,000 of such
awards were granted.
BROAD-BASED EMPLOYEE STOCK OPTIONS
Under the Value Sharing Plan originally adopted by Chase in December 1996,
annual awards were granted in December of 1996, 1997 and 1998. The 1996, 1997
and 1998 awards became exercisable in 1997, 1998 and 1999, respectively, as a
result of the target prices having been achieved. All outstanding options expire
10 years after their respective grant dates. The following table presents the
activity in the broad-based employee stock option plans during the past three
years.
74
76
BROAD-BASED EMPLOYEE STOCK OPTIONS
Year Ended December 31, 1999 1998 1997
------------------------------ ------------------------------ ------------------------------
(Amounts in thousands, Number of Weighted-Average Number of Weighted-Average Number of Weighted-Average
except per share amounts) Options Exercise Price Options Exercise Price Options Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
Options Outstanding, January 1 52,540 $ 49.65 42,808 $ 43.57 33,756 $ 32.54
Granted -- -- 21,559 59.94 20,444 55.85
Exercised (16,572) 52.86 (8,168) 43.92 (10,082) 32.71
Canceled (2,010) 59.78 (3,659) 44.68 (1,310) 41.66
- ------------------------------------------------------------------------------------------------------------------------------------
Options Outstanding, December 31 33,958(a) $ 47.48 52,540 $ 49.65 42,808 $ 43.57
- ------------------------------------------------------------------------------------------------------------------------------------
Options Exercisable, December 31 33,958 $ 47.48 31,057 $ 42.53 22,364 $ 32.35
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Of the total options outstanding at December 31, 1999, all options were
exercisable. The exercise prices for the options were: $17.07 ($15.39 to
$22.66) for the 2,265,000 options granted under the prior Chase plan;
$20.25 for the 4,489,000 options granted under the prior Chemical plan;
and $43.19 for the 6,658,000 options granted in 1996, $55.85 for the
8,824,000 options granted in 1997 and $59.94 for the 11,722,000 options
granted in 1998 under the Value Sharing Plan. The average remaining
contractual life was 7.4 years for all options outstanding and
exercisable.
COMPARISON OF THE FAIR- AND INTRINSIC-VALUE-BASED MEASUREMENT METHODS
Chase accounts for its employee stock-based compensation plans under the
intrinsic-value-based method in accordance with SFAS 123. There is no expense
recognized for stock options, as they have no intrinsic value on the grant date.
Forfeitable restricted stock and RSUs are expensed based upon the target prices.
The expense for restricted stock and RSUs other than forfeitable awards is
measured by the grant-date stock price. Pre-tax stock compensation expense
recognized in reported earnings totaled $341 million in 1999, $253 million in
1998 and $228 million in 1997. In 1998 and 1997, there was $37 million and $135
million, respectively, of costs incurred for the accelerated vesting of
stock-based incentive awards.
If Chase had adopted the fair-value-based method pursuant to SFAS 123,
options would be valued using a Black-Scholes model. Forfeitable restricted
stock and RSUs would be valued at the grant-date stock price, after deducting
the value assigned to the probability that the stock price would not reach the
target. The expense would be the same as under the intrinsic-value-based method
for restricted stock and RSUs other than forfeitable awards, and for any awards
for which cash payments may be received in lieu of stock. The pro forma net
income and basic and diluted earnings per share impact, if the fair-value-based
method had been adopted, would have been up to 6.2% lower than reported 1999
amounts, 5.7% lower than reported 1998 amounts, and 2.5% lower than reported
1997 amounts. The impact of stock compensation on pro forma expense increased in
1999 and 1998, as compared with the respective prior years, primarily due to the
impact of the vesting of options granted in December 1998 and 1997 under the
Value Sharing Plan and the higher fair value of options as compared with the
prior years. The 1998 and 1997 Value Sharing Plan options vested when the
targets were achieved in 1999 and 1998, respectively, and, therefore, all
remaining pro forma expense would have been recognized. The fair value of 1999
and 1998 grants increased over the respective prior years as a result of updated
valuation assumptions, based on factors such as an increase in the stock price.
The following table presents the weighted-average grant-date fair value
for equity awards and the assumptions used to value the options using a
Black-Scholes model for equity awards granted during the past three years.
---------- --------- ---------
Year Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------
Weighted-Average Grant-Date Fair Value(a)
Options Granted to:
Key Employees $ 27.31 $ 14.69 $ 13.29
All Other Employees -- 18.50 14.57
All Restricted Stock and RSUs Payable
in Stock 68.54 50.01 47.87
Weighted-Average Annualized Option
Valuation Assumptions
Risk-Free Interest Rate 6.65% 4.81% 5.96%
Expected Dividend Yield(b) 2.23 2.66 2.29
Expected Common Stock Price Volatility 34 31 23
Assumed Weighted-Average Expected
Life of Options (in Years)
Key Employee Stock Options 6.8 6.8 6.3
Broad-Based Employee Stock Options -- 6.0 6.0
- ------------------------------------------------------------------------------
(a) Under the fair-value-based method, the grant-date fair value for an option
equals the sum of the annual probability of exercise or vested
termination, multiplied by the dividend-adjusted Black-Scholes-derived
value of an option terminating in that year.
(b) The expected dividend yield is based primarily on historical data at the
grant dates.
75
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE CHASE MANHATTAN CORPORATION
17 - RESTRICTIONS ON CASH AND INTERCOMPANY FUNDS TRANSFERS
The Federal Reserve Board requires depository institutions to maintain cash
reserves with a Federal Reserve Bank. The average amount of reserve balances
deposited by Chase's bank subsidiaries with various Federal Reserve Banks was
approximately $0.7 billion during both 1999 and 1998.
Restrictions imposed by Federal law prohibit Chase and certain other
affiliates from borrowing from banking subsidiaries unless the loans are secured
in specified amounts. Such secured loans to Chase or to other affiliates
generally are limited to 10% of the banking subsidiary's total capital, as
determined by the risk-based capital guidelines; the aggregate amount of all
such loans is limited to 20% of the banking subsidiary's total capital, as
determined by the risk-based capital guidelines. Chase and its affiliates were
well within these limits throughout the year.
The principal sources of Chase's income (on a parent company-only basis)
are dividends and interest from Chase Bank and the other banking and nonbanking
subsidiaries of Chase. In addition to dividend restrictions set forth in
statutes and regulations, the Federal Reserve Board, the Office of the
Comptroller of the Currency ("OCC") and the Federal Deposit Insurance
Corporation ("FDIC") have authority under the Financial Institutions Supervisory
Act to prohibit or to limit the payment of dividends by the banking
organizations they supervise, including Chase and its subsidiaries that are
banks or bank holding companies, if, in the banking regulator's opinion, payment
of a dividend would constitute an unsafe or unsound practice in light of the
financial condition of the banking organization.
At December 31, 1999, Chase's bank subsidiaries could pay, in the
aggregate, $2.4 billion in dividends to their respective bank holding companies,
without approval of their relevant banking regulators.
18 - CAPITAL
There are two categories of risk-based capital: core capital (referred to as
Tier 1 Capital) and supplementary capital (referred to as Tier 2 Capital). Tier
1 Capital includes common stockholders' equity, qualifying preferred stock,
minority interest, less goodwill and other adjustments. Tier 2 Capital consists
of preferred stock not qualifying as Tier 1, long-term debt and other
instruments qualifying as Tier 2, and the aggregate allowance for credit losses
up to a certain percentage of risk-weighted assets. Under the risk-based capital
guidelines of the Federal Reserve Board, Chase is required to maintain minimum
ratios of Tier 1 and Total (Tier 1 plus Tier 2) Capital to risk-weighted assets.
Failure to meet these minimum requirements could result in actions taken by the
regulators. Bank subsidiaries are also subject to these capital requirements by
their respective primary regulators. Management believes that as of December 31,
1999, Chase met all capital requirements to which it is subject and is not aware
of any subsequent events that would alter this classification.
The following table presents the risk-based capital ratios for Chase and
its significant banking subsidiaries.
------------- ---------- ----------- -------- ------------- ------------- --------------
Risk- Adjusted Tier 1 Total Tier 1
Tier 1 Total Weighted Average Capital(c)(e) Capital(c)(e) Leverage(c)(f)
December 31, 1999 (in millions) Capital(b)(c) Capital(c) Assets(d) Assets Ratio Ratio Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
Chase(a) $ 25,453 $36,485 $301,501 $385,838 8.44% 12.10% 6.60%
Chase Bank 18,648 26,277 238,443 311,398 7.82% 11.02% 5.99%
Chase USA 3,021 4,200 34,726 34,180 8.70% 12.09% 8.84%
Chase Texas 1,605 2,266 18,908 22,554 8.49% 11.98% 7.12%
Well Capitalized Ratios(g) 6.00% 10.00% 5.00%(h)
Minimum Capital Ratios(g) 4.00% 8.00% 3.00%
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Assets and capital amounts for Chase's banking subsidiaries reflect
intercompany transactions, whereas the respective amounts for Chase
reflect the elimination of intercompany transactions.
(b) In accordance with Federal Reserve Board risk-based capital guidelines,
minority interest for Chase includes preferred stock instruments issued by
subsidiaries of Chase. For a further discussion, see Notes Six and Seven.
(c) The provisions of SFAS 115 do not apply to the calculations of the Tier 1
Capital and Tier 1 Leverage ratios. The risk-based capital guidelines do
permit the inclusion of 45% of the pre-tax unrealized gain on certain
equity securities in the calculation of Tier 2 Capital.
(d) Includes off-balance sheet risk-weighted assets in the amounts of $93,150
million, $84,908 million, $2,537 million and $3,996 million, respectively,
at December 31, 1999.
(e) Tier 1 Capital or Total Capital, as applicable, divided by risk-weighted
assets. Risk-weighted assets include assets and off-balance sheet
positions, weighted by the type of instruments and the risk weight of the
counterparty, collateral or guarantor.
(f) Tier 1 Capital divided by adjusted average assets (net of allowance for
loan losses, goodwill and certain intangible assets).
(g) As defined by the regulations issued by the Federal Reserve Board, the
FDIC and the OCC.
(h) Represents requirements for bank subsidiaries pursuant to regulations
issued under The Federal Deposit Insurance Corporation Improvement Act.
There is no Tier 1 Leverage component in the definition of a well
capitalized bank holding company.
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19 - DERIVATIVE AND FOREIGN EXCHANGE CONTRACTS
Chase utilizes derivative and foreign exchange financial instruments for both
trading and asset/liability activities. A discussion of the credit risk
associated with these instruments is included in the Derivative and Foreign
Exchange Contracts section of the Management's Discussion and Analysis ("MD&A")
on page 42. For a discussion of Chase's market risk, see the Overview within the
Market Risk Management section of the MD&A on page 45.
Derivative and Foreign Exchange Instruments Used for Trading Purposes: The
credit risk associated with Chase's trading activities is recorded on the
balance sheet. The effects of any market risk (gains or losses) on Chase's
trading activities have been reflected in trading revenue, as the trading
instruments are marked-to-market daily. See Note One.
Derivative and Foreign Exchange Instruments Used for Asset/Liability Activities:
A discussion of Chase's use of these instruments for asset/liability activities
is included in Note One.
Chase believes the best measure of credit risk is the mark-to-market
exposure amount of the derivative or foreign exchange contract. This is also
referred to as repayment risk or the replacement cost.
While notional principal is the most commonly used volume measure in the
derivative and foreign exchange markets, it is not a useful measure of credit or
market risk. The notional principal typically does not change hands, but is
simply a quantity upon which interest and other payments are calculated. The
notional principal amounts of Chase's derivative and foreign exchange products
greatly exceed the possible credit and market loss that could arise from such
transactions.
The following table summarizes the aggregate notional amounts of
derivative and foreign exchange contracts as well as the credit exposure related
to these instruments (after taking into account the effects of legally
enforceable master netting agreements).
Notional Amounts(a) Credit Exposure
--------------------- ---------------------
December 31, (in billions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------
INTEREST RATE CONTRACTS
Interest Rate Swaps
Trading $ 7,127.9 $ 4,882.4 $ 8.5 $ 10.7
Asset/Liability 84.0 97.8 0.4 0.3
Futures, Forwards and Forward Rate Agreements
Trading 2,531.4 2,090.0 0.2 0.4
Asset/Liability 82.1 74.6 -- --
Purchased Options
Trading 504.9 443.8 1.2 1.5
Asset/Liability 95.9 52.6 -- --
Written Options
Trading 650.6 503.2 -- --
Asset/Liability 50.1 27.5 -- --
- ---------------------------------------------------------------------------------------------------
Total Interest Rate Contracts $11,126.9 $ 8,171.9 $ 10.3 $ 12.9
- ---------------------------------------------------------------------------------------------------
FOREIGN EXCHANGE CONTRACTS
Spot, Forward and Futures Contracts
Trading $ 1,232.5 $ 1,532.6 $ 9.6 $ 11.0
Asset/Liability 9.6 54.0 -- --
Other Foreign Exchange Contracts(b)
Trading 408.4 449.8 6.2 5.0
Asset/Liability 1.6 4.2 -- --
- ---------------------------------------------------------------------------------------------------
Total Foreign Exchange Contracts $ 1,652.1 $ 2,040.6 $ 15.8 $ 16.0
- ---------------------------------------------------------------------------------------------------
DEBT, EQUITY, COMMODITY AND OTHER CONTRACTS
Trading $ 157.6 $ 140.5 $ 7.4 $ 4.3
- ---------------------------------------------------------------------------------------------------
Total Debt, Equity, Commodity and Other Contracts $ 157.6 $ 140.5 $ 7.4 $ 4.3
- ---------------------------------------------------------------------------------------------------
Total Credit Exposure Recorded on the Balance Sheet $ 33.5 $ 33.2
- ---------------------------------------------------------------------------------------------------
(a) The notional amounts of exchange-traded interest rate contracts, foreign
exchange contracts, and equity, commodity and other contracts were
$1,075.4 billion, $3.0 billion and $13.0 billion, respectively, at
December 31, 1999, compared with $699.3 billion, $3.3 billion and $3.9
billion, respectively, at December 31, 1998. The credit risk for these
contracts was minimal as exchange-traded contracts principally settle
daily in cash.
(b) Includes notional amounts of purchased options, written options and
cross-currency interest rate swaps of $93.5 billion, $ 97.2 billion and
$219.3 billion, respectively, at December 31, 1999, compared with $137.0
billion, $137.9 billion and $179.1 billion, respectively, at December 31,
1998.
77
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE CHASE MANHATTAN CORPORATION
When Chase has more than one transaction outstanding with a counterparty,
and there exists a legally enforceable master netting agreement with the
counterparty, the "net" mark-to-market exposures represent the netting of the
positive and negative exposures with the same counterparty. Net mark-to-market
is, in Chase's view, the best measure of credit risk when there is a legally
enforceable master netting agreement between Chase and the counterparty.
Classes of Derivative and Foreign Exchange Instruments: The following
instruments are used by Chase for purposes of both trading and asset/liability
activities.
Derivative and foreign exchange instruments may be broadly categorized as
exchange-traded or over-the-counter ("OTC"). Exchange-traded instruments are
executed through a recognized exchange as standardized contracts and are
primarily futures and options. OTC contracts are executed between two
counterparties that negotiate specific agreement terms, including the underlying
instrument, notional amount, exercise price and maturity. In this context, the
underlying instrument may include interest rates, foreign exchange rates,
commodities, debt or equity instruments.
Interest rate swaps are contracts in which a series of interest rate flows
in a single currency is exchanged over a prescribed period. Interest rate swaps
are the most common type of derivative contract that Chase utilizes for both
assets and liabilities. An example of a situation in which Chase would utilize
an interest rate swap would be to convert its fixed-rate debt to a variable
rate. By entering into the swap, the principal amount of the debt would remain
unchanged but the interest streams would change. Cross-currency interest rate
swaps are contracts that generally involve the exchange of both interest and
principal amounts in two different currencies.
Interest rate futures and forwards are contracts for the delayed delivery
of securities or money market instruments. The selling party agrees to deliver,
on a specified future date, a specified instrument at a specified price or
yield.
Forward rate agreements are contracts to exchange payments on a specified
future date, based on a market change in interest rates from trade date to
contract settlement date.
Interest rate options, including caps and floors, are contracts to modify
interest rate risk in exchange for the payment of a premium when the contract is
initiated. As a writer of interest rate options, Chase receives a premium in
exchange for bearing the risk of unfavorable changes in interest rates.
Conversely, as a purchaser of an option, Chase pays a premium for the right, but
not the obligation, to buy or sell a financial instrument or currency at
predetermined terms in the future. Foreign currency options are similar to
interest rate options, except that they are based on foreign exchange rates.
Chase's use of written options as part of its asset/liability activities
is permitted only in those circumstances where they are specifically linked to
purchased options. All unmatched written options are included in the trading
portfolio at fair value.
Foreign exchange contracts are used for the future receipt or delivery of
foreign currency at previously agreed-upon terms.
Debt, equity, commodity and other contracts include swaps and options and
are similar to interest rate contracts, except that the underlying instrument is
debt, equity or commodity-related. Credit derivatives are considered
debt-related and are included in this category of derivatives.
These instruments are all subject to market risk, representing potential
loss due to adverse movements in the underlying instrument. Credit risk arises
primarily from OTC contracts, since exchange-traded contracts are generally
settled daily.
Market risk is reduced by entering into offsetting positions using other
financial instruments.
Credit risk is reduced significantly by entering into legally enforceable
master netting agreements. To further reduce exposure, management may obtain
collateral. The amount and nature of the collateral obtained is based on
management's credit evaluation of the customer. Collateral held varies, but may
include cash, securities, accounts receivable, inventory, property, plant and
equipment and real estate.
20 - OFF-BALANCE SHEET LENDING-RELATED FINANCIAL INSTRUMENTS
In addition to derivative and foreign exchange instruments, Chase also utilizes
lending-related financial instruments in order to meet the financing needs of
its customers. Chase issues commitments to extend credit, standby and other
letters of credit and guarantees, and also provides securities-lending services.
For lending-related financial instruments, the contractual amount of the
financial instrument represents the maximum potential credit risk if the
counterparty does not perform according to the terms of the contract. A large
majority of these commitments expire without being drawn upon. As a result,
total contractual amounts are not representative of Chase's actual future credit
exposure or liquidity requirements for these commitments.
Additionally, to provide for risks of losses inherent in the credit
extension process, management computes specific and expected loss components as
well as a residual component for lending-related commitments. At December 31,
1999 and 1998, the Allowance for Credit Losses on Lending-Related Commitments
was $170 million, which is reported in Other Liabilities.
The following table summarizes the contract amounts relating to Chase's
lending-related financial instruments at December 31, 1999 and 1998.
OFF-BALANCE SHEET LENDING-RELATED
FINANCIAL INSTRUMENTS
------- --------
December 31, (in millions) 1999 1998
- --------------------------------------------------------------------------------
Credit Card Lines $ 88,702 $ 80,763
Other Unfunded Commitments to Extend Credit 165,381 144,519
Standby Letters of Credit and Guarantees (Net of
Risk Participations of $6,531 and $6,666) 30,800 32,277
Other Letters of Credit 4,190 3,740
Customers' Securities Lent 83,117 58,592
- --------------------------------------------------------------------------------
78
80
Unfunded commitments to extend credit are agreements to lend to a customer
who has complied with predetermined contractual conditions. Commitments
generally have fixed expiration dates.
Standby letters of credit and guarantees are conditional commitments
issued by Chase generally to guarantee the performance of a customer to a third
party in borrowing arrangements, such as commercial paper, bond financing,
construction and similar transactions. The credit risk involved in issuing
standby letters of credit is essentially the same as that involved in extending
loan facilities to customers and may be reduced by participations to third
parties. Chase holds collateral to support those standby letters of credit and
guarantees when deemed necessary.
Customers' securities lent are customers' securities held by Chase, as
custodian, which are lent to third parties. Chase obtains collateral, with a
market value exceeding 100% of the contract amount, for customers' securities
lent, which is used to indemnify customers against possible losses resulting
from third-party defaults.
21 - CREDIT RISK CONCENTRATIONS
Concentrations of credit risk arise when a number of customers are engaged in
similar business activities, or activities in the same geographic region, or
have similar economic features that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic
conditions.
Chase regularly monitors various segments of its credit risk portfolio to
assess potential concentration risks and to obtain collateral when deemed
necessary.
Chase's exposures within these major segments are diversified and these
diversification factors reduce concentration risk. For geographic and other
concentrations, reference is made to the following tables in the MD&A:
Table on:
- ----------------------------------------------------------------------
Residential Mortgage Loans by Geographic Region Page 40
Managed Credit Card Loans by Geographic Region Page 40
Auto Financings by Geographic Region Page 40
Derivative and Foreign Exchange Contracts Page 42
Cross-Border Exposure Page 43
- ----------------------------------------------------------------------
The table below indicates major product and industry segments, including
both on-balance sheet (principally loans) and off-balance sheet (principally
commitments to extend credit) exposures.
1999 Distributions 1998 Distributions
----------------------------------- -----------------------------------
Credit On-Balance Off-Balance Credit On-Balance Off-Balance
December 31, (in billions) Exposure Sheet Sheet Exposure Sheet Sheet
- ------------------------------------------------------------------------------------------------------
Credit Cards $105.1 $ 16.4 $ 88.7 $ 95.7 $ 14.9 $ 80.8
Residential Mortgages 49.1 45.8 3.3 45.2 43.3 1.9
Depository Institutions 73.8 52.0 21.8 51.5 33.9 17.6
Auto Financings 18.7 18.5 0.2 16.8 16.5 0.3
Commercial Real Estate 6.2 3.8 2.4 7.0 4.4 2.6
- ------------------------------------------------------------------------------------------------------
Total $252.9 $ 136.5 $ 116.4 $216.2 $113.0 $103.2
- ------------------------------------------------------------------------------------------------------
22 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the current amount that would be
exchanged between willing parties (other than in a forced sale or liquidation),
and is best evidenced by a quoted market price, if one exists.
Quoted market prices are not available for all of Chase's financial
instruments. As a result, the fair values presented are estimates derived using
present value or other valuation techniques and may not be indicative of net
realizable value. In addition, the calculation of estimated fair value is based
on market conditions at a specific point in time and may not be reflective of
future fair values.
Certain financial instruments and all nonfinancial instruments are
excluded from the scope of SFAS 107. Accordingly, the fair value disclosures
required by SFAS 107 provide only a partial estimate of the fair value of Chase.
For example, the values associated with the various ongoing businesses that
Chase operates are excluded. Chase has developed long-term relationships with
its customers through its deposit base and its credit card accounts, commonly
referred to as core deposit intangibles and credit card relationships. In the
opinion of management, these items in the aggregate add significant value to
Chase, but their fair value is not disclosed in this Note.
Fair values among financial institutions are not comparable due to the
wide range of permitted valuation techniques and numerous estimates that must be
made. This lack of objective valuation standard introduces a great degree of
subjectivity to these derived or estimated fair values. Therefore, readers are
cautioned in using this information for purposes of evaluating the financial
condition of Chase, compared with other financial institutions.
The following summary presents the methodologies and assumptions used to
estimate the fair value of Chase's financial instruments required under the
guidelines of SFAS 107.
79
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE CHASE MANHATTAN CORPORATION
FINANCIAL ASSETS
Assets for Which Fair Value Approximates Carrying Value: The fair values of
certain financial assets carried at cost, including cash and due from banks,
deposits with banks, Federal funds sold and securities purchased under resale
agreements, due from customers on acceptances, short-term receivables and
accrued interest receivable, are considered to approximate their respective
carrying values due to their short-term nature and generally negligible credit
losses.
Trading Assets: Chase carries trading assets, which include debt and equity
instruments as well as the positive fair value on derivative and foreign
exchange instruments, at estimated fair value.
Securities: Available-for-sale securities and related derivative contracts are
carried at fair value. Held-to-maturity securities are carried at amortized
cost. The fair value of actively-traded securities is determined by the
secondary market, while the fair value for nonactively traded securities is
based on independent broker quotations.
Loans: Loans are valued using methodologies suitable for each type of loan.
The fair value of Chase's commercial loan portfolio is estimated by
assessing the two main risk components of the portfolio: credit and interest.
The estimated cash flows are adjusted to reflect the inherent credit risk and
then are discounted, using a rate appropriate for each maturity that
incorporates the effects of interest rate changes. Generally, emerging market
loans are valued based on secondary market prices.
For consumer installment loans (including auto financings) and residential
mortgages for which market rates for comparable loans are readily available, the
fair values are estimated by discounting cash flows, adjusted for prepayments.
The discount rates used for consumer installment loans are current rates offered
by commercial banks and thrifts. For residential mortgages, secondary market
yields for comparable MBSs, adjusted for risk, are used. The fair value of
credit card receivables is estimated by discounting expected cash flows. The
discount rates used for credit card receivables incorporate the effects of
interest rate changes only, since the estimated cash flows are adjusted for
credit risk.
Other Assets: This caption consists primarily of private equity investments.
Nonpublic investments are carried at cost, which is viewed as an approximation
of fair value. The carrying value of nonpublic investments is adjusted for
holdings in which a subsequent investment by an unaffiliated party indicates a
valuation in excess of cost and for holdings for which evidence of an
other-than-temporary decline in value exists.
Public securities held by Chase Capital Partners are valued at quoted
market prices (prior to any liquidity discounts) for the purpose of fair value
disclosure required by SFAS 107.
FINANCIAL LIABILITIES
Liabilities for Which Fair Value Approximates Carrying Value: SFAS 107 requires
that the fair value disclosed for deposit liabilities with no stated maturity
(i.e., demand, savings and certain money market deposits) be equal to the
carrying value. SFAS 107 does not allow for the recognition of the inherent
funding value of these instruments.
The fair value of foreign deposits, Federal funds purchased and securities
sold under repurchase agreements, commercial paper, other borrowed funds,
acceptances outstanding, accounts payable and accrued liabilities are considered
to approximate their respective carrying values due to their short-term nature.
Domestic Time Deposits: The fair value of time deposits is estimated by
discounting cash flows based on contractual maturities at the interest rates for
raising funds of similar maturity.
Trading Liabilities: Chase carries trading liabilities, which include securities
sold, not yet purchased, structured notes, and derivative and foreign exchange
contracts, at estimated fair value.
Long-Term Debt-Related Instruments: The valuation of long-term debt, including
the guaranteed preferred beneficial interests in Chase's junior subordinated
deferrable interest debentures, takes into account several factors, including
current market interest rates and Chase's credit rating. Quotes are gathered
from various investment banking firms for indicative yields for Chase's
securities over a range of maturities.
Lending-Related Commitments: Chase has reviewed the unfunded portion of
commitments to extend credit as well as standby and other letters of credit and
has determined that the fair value of such financial instruments is not
material.
80
82
The following table presents the carrying value and estimated fair value
of financial assets and liabilities valued under SFAS 107, and certain
derivative contracts used for asset/liability activities related to these
financial assets and liabilities.
Financial Assets/Financial Liabilities
--------------------------------------
Estimated
Carrying Fair
December 31, 1999 (in millions) Value(a)(b) Value(a)(b)
- ------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
Assets for Which Fair Value Approximates Carrying Value $ 81,126 $ 81,126
Trading Assets 63,269 63,269
Securities Available-for-Sale 60,625 60,625
Securities Held-to-Maturity 888 876
Loans, Net of Allowance for Loan Losses 172,702 173,405
Other Assets(e) 8,804 10,168
- ------------------------------------------------------------------------------------------------
Total Financial Assets $387,414 $389,469
- ------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES
Liabilities for Which Fair Value Approximates Carrying Value $292,343 $292,343
Domestic Time Deposits 30,022 30,207
Trading Liabilities 38,573 38,573
Long-Term Debt-Related Instruments 20,140 19,476
- ------------------------------------------------------------------------------------------------
Total Financial Liabilities $381,078 $380,599
- ------------------------------------------------------------------------------------------------
December 31, 1998
FINANCIAL ASSETS
Assets for Which Fair Value Approximates Carrying Value $ 59,251 $ 59,251
Trading Assets 57,692 57,692
Securities Available-for-Sale 62,803 62,803
Securities Held-to-Maturity 1,687 1,703
Loans, Net of Allowance for Loan Losses 169,202 171,063
Other Assets(e) 5,103 5,444
- ------------------------------------------------------------------------------------------------
Total Financial Assets $355,738 $357,956
- ------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES
Liabilities for Which Fair Value Approximates Carrying Value $247,833 $247,833
Domestic Time Deposits 35,933 35,746
Trading Liabilities 38,502 38,502
Long-Term Debt-Related Instruments 18,375 18,438
- ------------------------------------------------------------------------------------------------
Total Financial Liabilities $340,643 $340,519
- ------------------------------------------------------------------------------------------------
Derivative Contracts Used for Asset/Liability Activities
---------------------------------------------------------
Gross Gross Estimated
Carrying Unrecognized Unrecognized Fair
December 31, 1999 (in millions) Value(c) Gains Losses Value(d)
- -------------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
Assets for Which Fair Value Approximates Carrying Value $ 4 $ 15 $ (9) $ 10
Trading Assets -- -- -- --
Securities Available-for-Sale (22) -- -- (22)
Securities Held-to-Maturity -- -- -- --
Loans, Net of Allowance for Loan Losses (19) 249 (179) 51
Other Assets(e) 93 28 (345) (224)
- -------------------------------------------------------------------------------------------------------------------------
Total Financial Assets $ 56 $ 292 $ (533) $ (185)
- -------------------------------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES
Liabilities for Which Fair Value Approximates Carrying Value $ 227 $ 69 $ (381) $ (85)
Domestic Time Deposits 243 27 (239) 31
Trading Liabilities -- -- -- --
Long-Term Debt-Related Instruments 63 79 (213) (71)
- -------------------------------------------------------------------------------------------------------------------------
Total Financial Liabilities $ 533 $ 175 $ (833) $ (125)
- -------------------------------------------------------------------------------------------------------------------------
December 31, 1998
FINANCIAL ASSETS
Assets for Which Fair Value Approximates Carrying Value $ 41 $ 70 $ (159) $ (48)
Trading Assets -- -- -- --
Securities Available-for-Sale (151) -- -- (151)
Securities Held-to-Maturity -- -- -- --
Loans, Net of Allowance for Loan Losses 90 335 (678) (253)
Other Assets(e) 118 283 (74) 327
- -------------------------------------------------------------------------------------------------------------------------
Total Financial Assets $ 98 $ 688 $ (911) $ (125)
- -------------------------------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES
Liabilities for Which Fair Value Approximates Carrying Value $ 106 $ 159 $ (413) $ (148)
Domestic Time Deposits 260 308 (112) 456
Trading Liabilities -- -- -- --
Long-Term Debt-Related Instruments 68 430 (31) 467
- -------------------------------------------------------------------------------------------------------------------------
Total Financial Liabilities $ 434 $ 897 $ (556) $ 775
- -------------------------------------------------------------------------------------------------------------------------
(a) Includes the carrying value and estimated fair value of derivative
contracts used for asset/liability activities.
(b) The carrying value and estimated fair value of daily margin settlements on
open futures contracts are primarily included in Other Assets on the
balance sheet, except when used in connection with available-for-sale
securities, which are carried at fair value and are included in
Securities: Available-for-Sale on the balance sheet. Chase uses futures
contracts in its asset/liability activities to modify the interest rate
characteristics of balance sheet instruments such as available-for-sale
securities, loans and deposits. Unrecognized net gains from daily margin
settlements on open futures contracts were $22 million at December 31,
1999, in contrast to an unrecognized net loss of $8 million at December
31, 1998.
(c) The carrying value of derivatives used for asset/liability activities is
recorded as receivables and payables and is primarily included in Other
Assets on the balance sheet, except for derivatives used in connection
with available-for-sale securities, which are carried at fair value and
are included in Securities: Available-for-Sale on the balance sheet.
(d) Derivative contracts used for asset/liability activities were valued using
market prices or pricing models consistent with methods used by Chase in
valuing similar instruments used for trading purposes.
(e) At December 31, 1999, deferred gains and losses associated with
anticipatory asset/liability transactions were insignificant.
81
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE CHASE MANHATTAN CORPORATION
23 - SEGMENT INFORMATION
Chase is organized into three major businesses: Global Bank, National Consumer
Services ("NCS") and Global Services. These businesses are segmented based on
the products and services provided, or the type of customer serviced, and
reflect the manner in which financial information is evaluated by management.
Presenting lines-of-business information allows for a more informed judgment
about Chase as a whole.
Chase uses SVA, Operating Earnings and Cash Operating Earnings as its
measures of franchise profitability. For a discussion of these measurements, see
Management Performance Measurements in the MD&A on page 20 and the Glossary of
Terms on page 88.
The accounting policies of the segments are principally the same as those
described in Note One. Operating revenues and expenses directly associated with
each respective franchise are included in determining their operating earnings.
Guidelines exist for assigning those remaining expenses that are not directly
incurred by the franchises, such as overhead and taxes. In addition, management
has developed a risk-adjusted capital methodology that quantifies different
types of risk -- credit,
SEGMENT RESULTS AND RECONCILIATION (table continued on next page)
Global National
Year Ended December 31, Bank Consumer Services
------------------------------------ -----------------------------------
(in millions, except ratios) 1999 1998 1997 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Operating Net Interest Income $ 2,073 $ 1,928 $ 2,142 $ 6,309 $ 6,284 $ 6,082
Operating Noninterest Revenue 8,298 6,109 5,073 3,455 2,829 2,210
Equity-Related Income(b) 2 6 1 69 34 22
Intersegment Revenue(c) 6 (88) (3) 14 2 (6)
- ----------------------------------------------------------------------------------------------------------------------
Total Revenue 10,379 7,955 7,213 9,847 9,149 8,308
- ----------------------------------------------------------------------------------------------------------------------
Noninterest Expense 4,293 3,747 3,206 4,767 4,438 4,206
Non-Cash Expense(d) 207 193 207 355 332 255
- ----------------------------------------------------------------------------------------------------------------------
Total Expense 4,500 3,940 3,413 5,122 4,770 4,461
- ----------------------------------------------------------------------------------------------------------------------
Operating Margin 5,879 4,015 3,800 4,725 4,379 3,847
Credit Costs 372 204 (48) 2,233 2,279 1,826
- ----------------------------------------------------------------------------------------------------------------------
Operating Earnings (Loss) Before Taxes 5,507 3,811 3,848 2,492 2,100 2,021
Income Taxes (Benefit) 1,994 1,466 1,451 974 823 790
- ----------------------------------------------------------------------------------------------------------------------
Operating Earnings (Loss) $ 3,513 $ 2,345 $ 2,397 $ 1,518 $ 1,277 $ 1,231
Restructuring Costs and Special Items -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Net Income -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Cash Operating Earnings (Loss) $ 3,564 $ 2,387 $ 2,431 $ 1,677 $ 1,445 $ 1,336
- ----------------------------------------------------------------------------------------------------------------------
Average Common Equity $ 12,616 $ 11,976 $ 11,005 $ 7,823 $ 7,643 $ 6,608
Average Managed Assets(e) $ 235,197 $ 251,363 $ 243,842 $ 129,314 $ 119,046 $ 107,169
Shareholder Value Added $ 1,885 $ 776 $ 908 $ 636 $ 418 $ 422
Cash Return on Common Equity 27.9% 19.4% 21.3% 21.1% 18.5% 19.4%
Cash Efficiency Ratio 43% 49% 47% 50% 50% 52%
- ----------------------------------------------------------------------------------------------------------------------
Global
Year Ended December 31, Services
-----------------------------------
(in millions, except ratios) 1999 1998 1997
- ----------------------------------------------------------------------------
Operating Net Interest Income $ 1,242 $ 1,233 $ 1,105
Operating Noninterest Revenue 1,770 1,516 1,395
Equity-Related Income(b) 12 7 7
Intersegment Revenue(c) 96 70 61
- ----------------------------------------------------------------------------
Total Revenue 3,120 2,826 2,568
- ----------------------------------------------------------------------------
Noninterest Expense 2,238 1,989 1,816
Non-Cash Expense(d) 134 87 61
- ----------------------------------------------------------------------------
Total Expense 2,372 2,076 1,877
- ----------------------------------------------------------------------------
Operating Margin 748 750 691
Credit Costs 9 16 32
- ----------------------------------------------------------------------------
Operating Earnings (Loss) Before Taxes 739 734 659
Income Taxes (Benefit) 276 277 242
- ----------------------------------------------------------------------------
Operating Earnings (Loss) $ 463 $ 457 $ 417
Restructuring Costs and Special Items -- -- --
- ----------------------------------------------------------------------------
Net Income -- -- --
- ----------------------------------------------------------------------------
Cash Operating Earnings (Loss) $ 525 $ 486 $ 431
- ----------------------------------------------------------------------------
Average Common Equity $ 2,855 $ 2,183 $ 2,084
Average Managed Assets(e) $ 16,540 $ 14,336 $ 14,661
Shareholder Value Added $ 145 $ 193 $ 143
Cash Return on Common Equity 18.1% 21.8% 19.9%
Cash Efficiency Ratio 74% 72% 72%
- ----------------------------------------------------------------------------
(a) Corporate/Reconciling Items includes Support Units, Corporate and the net
effect of management accounting policies.
(b) Equity-related income includes all equity income of investees accounted
for by the equity method.
(c) Intersegment revenue includes intercompany revenue and revenue sharing
agreements, net of intersegment expenses. Transactions between business
segments are primarily conducted at fair value.
(d) Non-cash expense represents all depreciation and amortization expense
included in Noninterest Expense. The amortization of mortgage servicing
rights is included in operating noninterest revenue. See Note One on page
64 for a further discussion of Chase's mortgage servicing rights.
(e) Excludes the impact of credit card securitizations. The impact of
securitizations on total average assets was $17,711 million in 1999,
$18,011 million in 1998 and $14,553 million in 1997.
NM - Not Meaningful
82
84
market and operating -- within the various businesses and assigns capital
accordingly. The provision for loan losses is allocated to the segments
utilizing a credit risk methodology applied consistently across Chase and a risk
grading system appropriate for a segment's portfolio.
A summary of the business segment results is shown in the following table.
The Corporate/Reconciling Items column reflects revenues and expenses excluded
from the determination of the franchises' operating earnings. This column
includes the effects remaining at the Corporate level after the implementation
of management accounting policies, including income tax expenses (the difference
between the amounts allocated to business units and Chase's consolidated income
tax expense).
For a further discussion concerning Chase's business franchises
(segments), including a description of products, services and method of
distribution, see Lines-of-Business Results in the MD&A on page 29.
Additionally, financial information relating to Chase's operations by geographic
area is in the following note (Note Twenty-Four).
(table continued from previous page)
Year Ended December 31, Corporate/Reconciling Items(a) Total
----------------------------------- ------------------------------------
(in millions, except ratios) 1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Operating Net Interest Income $ (352) $ (321) $ (436) $ 9,272 $ 9,124 $ 8,893
Operating Noninterest Revenue 110 3 61 13,633 10,457 8,739
Equity-Related Income(b) (6) (15) 37 77 32 67
Intersegment Revenue(c) (116) 16 (52) -- -- --
- --------------------------------------------------------------------------------------------------------------------
Total Revenue (364) (317) (390) 22,982 19,613 17,699
- --------------------------------------------------------------------------------------------------------------------
Noninterest Expense (184) (215) (197) 11,114 9,959 9,031
Non-Cash Expense(d) 263 246 213 959 858 736
- --------------------------------------------------------------------------------------------------------------------
Total Expense 79 31 16 12,073 10,817 9,767
- --------------------------------------------------------------------------------------------------------------------
Operating Margin (443) (348) (406) 10,909 8,796 7,932
Credit Costs -- (8) (13) 2,614 2,491 1,797
- --------------------------------------------------------------------------------------------------------------------
Operating Earnings (Loss) Before Taxes (443) (340) (393) 8,295 6,305 6,135
Income Taxes (Benefit) (343) (277) (197) 2,901 2,289 2,286
- --------------------------------------------------------------------------------------------------------------------
Operating Earnings (Loss) $ (100) $ (63) $ (196) $ 5,394 $ 4,016 $ 3,849
Restructuring Costs and Special Items -- -- -- 52 (234) (141)
- --------------------------------------------------------------------------------------------------------------------
Net Income -- -- -- $ 5,446 $ 3,782 $ 3,708
- --------------------------------------------------------------------------------------------------------------------
Cash Operating Earnings (Loss) $ (75) $ (41) $ (177) $ 5,691 $ 4,277 $ 4,021
- --------------------------------------------------------------------------------------------------------------------
Average Common Equity $ (1,317) $ (474) $ (869) $ 21,977 $ 21,328 $ 18,828
Average Managed Assets(e) $ 6,807 $ 6,477 $ 5,227 $ 387,858 $ 391,222 $ 370,899
Shareholder Value Added $ 97 $ 19 $ (80) $ 2,763 $ 1,406 $ 1,393
Cash Return on Common Equity NM NM NM 25.6% 19.6% 20.4%
Cash Efficiency Ratio NM NM NM 51% 54% 54%
- --------------------------------------------------------------------------------------------------------------------
The tables below present reconciliations of the combined segment information
included in the preceding table to Chase's reported revenue and net income as
included in the Consolidated Statement of Income.
-------- -------- -------
Year Ended December 31, (in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Segments' Operating Revenue $ 23,346 $ 19,930 $18,089
Corporate/Reconciling items (364) (317) (390)
-------- -------- -------
Consolidated Operating Revenue 22,982 19,613 17,699
Impact of securitizations (993) (1,148) (993)
Special items 228 191 102
- --------------------------------------------------------------------------------
Consolidated Revenue $ 22,217 $ 18,656 $16,808
- --------------------------------------------------------------------------------
------- -------- -------
Year Ended December 31, (in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Segments' Cash Operating Earnings $ 5,766 $ 4,318 $ 4,198
Corporate/Reconciling items (75) (41) (177)
------- -------- -------
Consolidated Cash Operating Earnings 5,691 4,277 4,021
Amortization of goodwill
and certain intangibles (297) (261) (172)
------- -------- -------
Consolidated Operating Earnings 5,394 4,016 3,849
Special items and restructuring costs 52 (234) (141)
- --------------------------------------------------------------------------------
Consolidated Net Income $ 5,446 $ 3,782 $ 3,708
- --------------------------------------------------------------------------------
83
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE CHASE MANHATTAN CORPORATION
24 - INTERNATIONAL OPERATIONS
The following table presents average assets and income statement information
relating to the international and domestic operations of Chase by major
geographic areas, based on the domicile of the customer. Chase defines
international activities as business transactions that involve customers
residing outside the U.S. However, a definitive separation of Chase's domestic
and foreign businesses cannot be performed because many of Chase's domestic
operations service international business.
As these operations are highly integrated, estimates and subjective
assumptions have been made to apportion revenue and expense between domestic and
international operations. The estimates and assumptions used to apportion
revenue and expense are consistent with the allocations used for Chase's segment
reporting in Note Twenty-Three. There are no individual foreign countries where
Chase derives over 10% of its total consolidated revenue.
-------- ---------- ---------- ------------- -------
Average Income Before Net
For the Year Ended December 31, (in millions) Assets Revenue(a) Expense(b) Income Taxes Income
- -----------------------------------------------------------------------------------------------------------
1999
Europe/Middle East and Africa $ 70,512 $ 2,581 $ 1,454 $ 1,127 $ 774
Asia and Pacific 25,474 1,315 1,079 236 153
Latin America and the Caribbean 10,202 683 304 379 248
Other(c) 1,361 45 15 30 18
-------- -------- ------- ------- -------
Total International 107,549 4,624 2,852 1,772 1,193
Total Domestic 262,598 17,593 10,990 6,603 4,253
- -----------------------------------------------------------------------------------------------------------
Total Corporation $370,147 $ 22,217 $13,842 $ 8,375 $ 5,446
- -----------------------------------------------------------------------------------------------------------
1998
Europe/Middle East and Africa $ 70,829 $ 2,019 $ 1,305 $ 714 $ 487
Asia and Pacific 26,750 1,275 890 385 243
Latin America and the Caribbean 12,431 687 305 382 247
Other(c) 1,313 30 15 15 8
-------- -------- ------- ------- -------
Total International 111,323 4,011 2,515 1,496 985
Total Domestic 261,888 14,645 10,211 4,434 2,797
- -----------------------------------------------------------------------------------------------------------
Total Corporation $373,211 $ 18,656 $12,726 $ 5,930 $ 3,782
- -----------------------------------------------------------------------------------------------------------
1997
Europe/Middle East and Africa $ 66,698 $ 2,130 $ 1,191 $ 939 $ 630
Asia and Pacific 22,376 1,310 807 503 322
Latin America and the Caribbean 14,383 414 339 75 49
Other(c) 1,152 29 17 12 7
-------- -------- ------- ------- -------
Total International 104,609 3,883 2,354 1,529 1,008
Total Domestic 251,737 12,925 8,544 4,381 2,700
- -----------------------------------------------------------------------------------------------------------
Total Corporation $356,346 $ 16,808 $10,898 $ 5,910 $ 3,708
- -----------------------------------------------------------------------------------------------------------
(a) Revenue is comprised of Net Interest Income and Noninterest Revenue. Chase
has no single customer that represents more than 10% of its revenues.
(b) Expense is comprised of Noninterest Expense and Provision for Loan Losses.
(c) No geographic region included in Other exceeds 10% of the total for Chase.
84
86
25 - PARENT COMPANY
PARENT COMPANY - BALANCE SHEET
-------- --------
December 31, (in millions) 1999 1998
- -------------------------------------------------------------------------------
Assets
Cash with Banks $ 48 $ 628
Deposits with Banking Subsidiaries 5,341 5,294
Securities Purchased Under Resale Agreements 1,656 2,498
Short-Term Advances to Subsidiaries 8,643 5,460
Long-Term Advances to Subsidiaries 5,885 5,085
Investment (at Equity) in Subsidiaries 29,384 28,513
Other Assets 1,566 919
- -------------------------------------------------------------------------------
Total Assets $ 52,523 $ 48,397
- -------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Other Borrowed Funds, primarily Commercial Paper $ 9,282 $ 7,904
Other Liabilities 873 769
Long-Term Debt(a) 18,751 15,886
- -------------------------------------------------------------------------------
Total Liabilities 28,906 24,559
Stockholders' Equity 23,617 23,838
- -------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 52,523 $ 48,397
- -------------------------------------------------------------------------------
(a) Includes long-term debt with subsidiaries, net of discount, of $3,356
million and $2,395 million at December 31, 1999 and 1998, respectively. At
December 31, 1999, aggregate principal amount of all debt that matures in
the years 2000 through 2004 were $3,285 million, $2,551 million, $2,567
million, $1,058 million and $924 million, respectively.
PARENT COMPANY - STATEMENT OF INCOME
------- ------ -------
Year Ended December 31, (in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Income
Dividends from Subsidiaries $ 4,423 $2,283 $ 2,401
Interest from Subsidiaries 1,012 889 797
All Other Income 22 7 21
- --------------------------------------------------------------------------------
Total Income 5,457 3,179 3,219
- --------------------------------------------------------------------------------
Expense
Interest on:
Other Borrowed Funds, primarily
Commercial Paper 296 278 247
Long-Term Debt 1,076 945 849
All Other Expense 26 45 49
- --------------------------------------------------------------------------------
Total Expense 1,398 1,268 1,145
- --------------------------------------------------------------------------------
Income Before Income Tax Benefit
and Equity in Undistributed Net Income
of Subsidiaries 4,059 1,911 2,074
Income Tax Benefit 139 131 120
Equity in Undistributed Net Income
of Subsidiaries 1,248 1,740 1,514
- --------------------------------------------------------------------------------
Net Income $ 5,446 $3,782 $ 3,708
- --------------------------------------------------------------------------------
PARENT COMPANY - STATEMENT OF CASH FLOWS
------- ------- -------
Year Ended December 31, (in millions) 1999 1998 1997
- -----------------------------------------------------------------------------------
Operating Activities
Net Income $ 5,446 $ 3,782 $ 3,708
Less--Net Income of Subsidiaries 5,671 4,023 3,915
------- ------- -------
Parent Company Net Loss (225) (241) (207)
Add--Dividends from Subsidiaries 4,423 2,283 2,401
Other, Net (116) 29 (72)
- -----------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 4,082 2,071 2,122
- -----------------------------------------------------------------------------------
Investing Activities
Net Change In:
Deposits with Banking Subsidiaries (47) (3,483) 2,325
Advances to Subsidiaries (3,984) (1,435) (1,944)
Investment (at Equity) in Subsidiaries (1,190)(a) (723) 724
Securities Purchased Under Resale Agreements 842 (583) (437)
Other, Net 125 (3) (57)
- -----------------------------------------------------------------------------------
Net Cash Provided (Used) by Investing Activities (4,254) (6,227) 611
- -----------------------------------------------------------------------------------
Financing Activities
Net Change in Other Borrowed Funds 1,378 3,092 37
Proceeds from the Issuance of Long-Term Debt 4,683 5,118 3,167
Repayments of Long-Term Debt (2,460) (1,700) (1,886)
Proceeds from the Issuance of Stock 1,842 1,232 967
Redemption of Preferred Stock (100) (912) (910)
Treasury Stock Purchased (4,349) (1,091) (2,585)
Cash Dividends Paid (1,402) (1,278) (1,212)
- -----------------------------------------------------------------------------------
Net Cash Provided (Used) by Financing Activities (408) 4,461 (2,422)
- -----------------------------------------------------------------------------------
Net Increase (Decrease) in Cash with Banks (580) 305 311
Cash with Banks at the Beginning of the Year 628 323 12
- -----------------------------------------------------------------------------------
Cash with Banks at the End of the Year $ 48 $ 628 $ 323
- -----------------------------------------------------------------------------------
Cash Interest Paid $ 1,351 $ 1,242 $ 1,118
Taxes Paid $ 289 $ 1,072 $ 709
- -----------------------------------------------------------------------------------
(a) Includes investment in H&Q.
85
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THE CHASE MANHATTAN CORPORATION
26 - COMMITMENTS AND CONTINGENCIES
At December 31, 1999, Chase and its subsidiaries were obligated under a number
of noncancelable operating leases for premises and equipment used primarily for
banking purposes. Certain leases contain rent escalation clauses for real estate
taxes and other operating expenses and renewal option clauses calling for
increased rents. No lease agreement imposes any restrictions on Chase's ability
to pay dividends, engage in debt or equity financing transactions, or enter into
further lease agreements. Future minimum rental payments required under
operating leases with initial and remaining noncancelable lease terms in excess
of one year as of December 31, 1999 were as follows:
Year Ended December 31, (in millions)
- --------------------------------------------------------------------------------
2000 $ 398
2001 347
2002 288
2003 232
2004 197
After 761
-------
Total Minimum Payments Required $ 2,223
Less: Sublease Rentals Under Noncancelable Subleases (166)
- --------------------------------------------------------------------------------
Net Minimum Payment Required $ 2,057
- --------------------------------------------------------------------------------
Total rental expense was as follows:
------ ------ ------
Year Ended December 31, (in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Gross Rentals $ 555 $ 511 $ 498
Sublease Rentals (121) (164) (170)
- --------------------------------------------------------------------------------
Net Rent Expense $ 434 $ 347 $ 328
- --------------------------------------------------------------------------------
At December 31, 1999, assets amounting to $60 billion were pledged to secure
public deposits and for other purposes. The significant components of the
pledged assets at December 31, 1999 were as follows: $32 billion were
securities, $23 billion were loans, and the remaining $5 billion were primarily
trading assets.
Chase and its subsidiaries are defendants in a number of legal
proceedings. After reviewing with counsel all such actions and proceedings
pending against or involving Chase and its subsidiaries, management does not
expect the aggregate liability or loss, if any, resulting therefrom to have a
material adverse effect on the consolidated financial condition of Chase.
Chase may guarantee the obligations of its subsidiaries. These guarantees
rank on a parity with all other unsecured and unsubordinated indebtedness of
Chase. See Note Six for a discussion of Chase's guarantees of long-term debt
issues of its subsidiaries.
=> SUPPLEMENTARY INFORMATION
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
1999 1998
--------------------------------- ---------------------------------
(in millions, except per share data) 4th 3rd 2nd 1st 4th 3rd 2nd 1st
- ---------------------------------------------------------------------------------------------------------------------------
AS REPORTED BASIS
Revenue $6,266 $5,191 $5,616 $5,144 $5,060 $4,218 $4,755 $4,623
Noninterest Expense (excluding Restructuring Costs) 3,179 2,981 3,068 2,945 2,873 2,647 2,714 2,620
Restructuring Costs 48 -- -- -- -- -- 8 521
Provision for Loan Losses 454 398 388 381 411 272 328 332
Net Income $1,693 $1,187 $1,393 $1,173 $1,146 $ 837 $1,074 $ 725
Net Income Per Common Share:
Basic $ 2.05 $ 1.42 $ 1.65 $ 1.37 $ 1.34 $ 0.96 $ 1.24 $ 0.82
Diluted 1.98 1.37 1.60 1.32 1.31 0.94 1.20 0.80
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING BASIS(a)
Operating Revenue $6,444 $5,429 $5,696 $5,413 $5,344 $4,325 $5,041 $4,903
Operating Noninterest Expense 3,179 2,981 2,968 2,945 2,873 2,610 2,714 2,620
Credit Costs(b) 694 636 634 650 695 570 614 612
Operating Earnings $1,683 $1,187 $1,351 $1,173 $1,146 $ 738 $1,079 $1,053
Operating Earnings Per Common Share:
Basic $ 2.04 $ 1.42 $ 1.60 $ 1.37 $ 1.34 $ 0.84 $ 1.24 $ 1.21
Diluted 1.97 1.37 1.55 1.32 1.31 0.82 1.21 1.17
- ---------------------------------------------------------------------------------------------------------------------------
SHARE PRICE(c)
High $89.25 $88.50 $91.13 $89.50 $72.56 $77.56 $76.50 $69.56
Low 65.81 72.56 70.13 68.06 35.56 40.06 64.19 49.28
Close 77.69 75.38 86.50 81.38 71.00 43.13 75.50 67.44
- ---------------------------------------------------------------------------------------------------------------------------
(a) Excludes the impact of credit card securitizations, restructuring costs
and special items. For a listing of special items, see Glossary of Terms
on page 88.
(b) Includes provision for loan losses and credit costs related to the
securitized credit card portfolio.
(c) Chase's common stock is listed and traded on the New York Stock Exchange
and the London Stock Exchange Limited. The high, low and closing prices of
Chase's common stock are from the New York Stock Exchange Composite
Transaction Tape. Share-related data for the 1998 first quarter have been
restated to reflect a two-for-one common stock split, effective as of the
close of business on May 20, 1998.
86
88
SELECTED FINANCIAL DATA (UNAUDITED) (in millions, except per share and ratio
data)
-------- -------- -------- -------- --------
As of or for the year ended December 31, 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
AS REPORTED BASIS
Revenue $ 22,217 $ 18,656 $ 16,808 $ 15,875 $ 14,960
Noninterest Expense (excluding Restructuring Costs) 12,173 10,854 9,902 9,353 9,375
Restructuring Costs 48 529 192 1,814 15
Provision for Loan Losses 1,621 1,343 804 897 758
Net Income(a) $ 5,446 $ 3,782 $ 3,708 $ 2,461 $ 2,959
Net Income Per Common Share(b)
Basic $ 6.49 $ 4.35 $ 4.15 $ 2.57 $ 3.16
Diluted 6.27 4.24 4.01 2.47 3.02
Cash Dividends Declared 1.64 1.44 1.24 1.12 0.97
Book Value at December 31, 27.43 26.90 23.76 21.29 20.90
Share Price at December 31, 77.69 71.00 54.75 44.69 29.38
Performance Ratios
Return on Average Assets 1.47% 1.01% 1.04% .77% .96%
Return on Average Common Equity 24.46 17.27 18.73 12.48 16.15
Common Dividend Payout Ratio 26 33 30 44 29
Selected Balance Sheet Items
Loans $176,159 $172,754 $168,454 $155,092 $150,207
Total Assets 406,105 365,875 365,521 336,099 303,989
Deposits 241,745 212,437 193,688 180,921 171,534
Long-Term Debt 17,602 16,187 13,387 12,714 12,825
Total Stockholders' Equity 23,617 23,838 21,742 20,994 20,836
- --------------------------------------------------------------------------------------------------------------
OPERATING BASIS(c)
Operating Revenue $ 22,982 $ 19,613 $ 17,699 $ 16,451 $ 15,048
Operating Noninterest Expense 12,073 10,817 9,767 9,313 9,375
Credit Costs(d) 2,614 2,491 1,797 1,467 928
Operating Earnings $ 5,394 $ 4,016 $ 3,849 $ 3,516 $ 2,903
Operating Earnings Per Common Share(b)
Basic $ 6.42 $ 4.63 $ 4.32 $ 3.77 $ 3.10
Diluted 6.21 4.51 4.17 3.64 2.96
Operating Performance Ratios
Return on Average Managed Assets 1.39% 1.03% 1.04% 1.06% .93%
Return on Average Common Equity 24.22 18.37 19.48 18.35 15.82
Common Dividend Payout Ratio 26 31 29 30 29
Efficiency Ratio(e) 52 55 55 57 62
Shareholder Value Added $ 2,763 $ 1,406 $ 1,393 $ 1,131 $ 659
Selected Balance Sheet Items
Managed Loans $194,098 $190,787 $185,306 $168,089 $156,758
Total Managed Assets 424,044 383,908 382,373 349,096 310,540
- --------------------------------------------------------------------------------------------------------------
(a) 1995 includes an accounting change related to the adoption of SFAS 106 for
the accounting for other postretirement benefits relating to foreign
plans. Excluding the accounting change, net income, basic and diluted net
income per common share were $2,970 million, $3.18 and $3.04,
respectively.
(b) Share-related data for all prior periods have been restated to reflect a
two-for-one common stock split, effective as of the close of business on
May 20, 1998.
(c) Excludes the impact of credit card securitizations, restructuring costs
and special items. For a listing of special items, see Glossary of Terms
on page 88.
(d) Includes provision for loan losses and credit costs related to the
securitized credit card portfolio.
(e) Excludes costs associated with the REIT.
87
89
SUPPLEMENTARY INFORMATION
THE CHASE MANHATTAN CORPORATION
GLOSSARY OF TERMS
The page numbers included after each definition below represent the pages in the
MD&A and Notes to Consolidated Financial Statements where the term is primarily
used.
ACH: "Automated Clearing House," a firm set up and used by member financial
institutions to combine, sort and distribute payment orders. (Page 34)
CAGR: "Compound Annual Growth Rate." (Pages 18, 21 and 24)
Cash Operating Earnings: Operating earnings excluding the impact of amortization
of goodwill and certain other intangibles. (Pages 18 and 20)
CHIPS: "Clearing House Interbank Payments System," a money transfer system that
enables banks to make transfers through a central clearinghouse mechanism. (Page
34)
Credit Risk: The risk of loss due to borrower or counterparty default. (Pages 29
and 37)
Efficiency Ratio: Noninterest expense as a percentage of the total of net
interest income and noninterest revenue (excluding restructuring costs, special
items and costs associated with the REIT). (Pages 18, 19 and 27)
FASB: Financial Accounting Standards Board. (Page 55)
Investment Grade Equivalent: Chase's internal risk assessment which represents a
risk profile similar to that of a BBB/Baa or better rating as generally defined
by independent rating agencies, such as Standard & Poor's or Moody's. (Pages 39
and 42)
Managed Credit Card Receivables or Managed Basis: Consistent with industry
practice, Chase uses this terminology to refer to its credit card receivables on
the balance sheet plus securitized credit card receivables. (Pages 24 and 25)
Mark-to-Market 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
Chase and, therefore, creates a repayment risk for Chase. When the
mark-to-market is negative, Chase owes the counterparty. In this situation,
Chase does not have repayment risk. (Pages 23, 31 and 42)
Market Risk: The exposure to adverse changes in the values of financial
instruments caused by changes in market prices or rates. (Pages 29 and 45)
Merger: The term "merger" used throughout the Management's Discussion and
Analysis, refers to the March 31, 1996 merger of The Chase Manhattan Corporation
and Chemical Banking Corporation ("Chemical"). As a result of the merger,
Chemical changed its name to The Chase Manhattan Corporation ("Chase"). (Pages
18 and 19)
Net Yield on Interest-Earning Assets: The average rate for interest-earning
assets less the average rate paid for all sources of funds. (Page 24)
New Economy: Represents the industry sectors and companies (e.g.,
media/telecommunication, technology/information services, life sciences) and the
technologists and entrepreneurs who are at the forefront of future innovations
(e.g., microprocessors, internet). (Pages 19, 21, 23 and 30)
Operating Basis or Operating Earnings: Reported results excluding the impact of
credit card securitizations, restructuring costs and special items. (Pages 18,
19 and 20)
Operating Risk: Risk of loss due to fraud by employees or outsiders,
unauthorized transactions by employees, and errors relating to computer and
telecommunications systems. (Pages 29 and 54)
REIT: "Real Estate Investment Trust." (Pages 27, 28 and 87)
SFAS: Statement of Financial Accounting Standards.
SFAS 106: "Employers' Accounting for Postretirement Benefits Other Than
Pensions." (Page 87)
SFAS 107: "Disclosures about Fair Value of Financial Instruments." (Page 79)
SFAS 109: "Accounting for Income Taxes." (Page 72)
SFAS 114: "Accounting by Creditors for Impairment of a Loan." (Page 67)
SFAS 115: "Accounting for Certain Investments in Debt and Equity Securities."
(Page 67)
SFAS 123: "Accounting for Stock-Based Compensation." (Page 75)
SFAS 133: "Accounting for Derivative Instruments and Hedging Activities." (Page
55)
Shareholder Value Added ("SVA"): Represents operating earnings excluding the
impact of amortization of goodwill and certain other intangibles (i.e., cash
operating earnings), minus preferred dividends and an explicit charge for
capital. (Pages 18 and 20)
Special Items: The 1999 special items were interest income from prior years' tax
refunds, gains from sales of nonstrategic assets and a special contribution to
The Chase Manhattan Foundation. In 1998, special items were interest income from
prior years' tax refunds and costs incurred for accelerated vesting of
stock-based incentive awards. In 1997, special items were gains on the sales of
Chase's remaining interests in The CIT Group Holdings, Inc. and a partially
owned foreign investment, as well as costs incurred for accelerated vesting of
stock-based incentive awards. Special items in 1996 included aggregate tax
benefits and refunds, the loss on the sale of a building in Japan and costs
incurred in combining Chase's foreign retirement plans. Special items in 1995
included the impact of an accounting change, gains on the sales of Chase's
investment in Far East Bank and Trust Company, Chemical New Jersey Holdings,
Inc. and the loss on the sale of half of Chase's 40% interest in CIT. (Pages 18,
20 and 87)
Stress Testing: A risk management tool used to measure market risk in an extreme
market environment. (Pages 18, 19, 36 and 45)
Value-at-Risk ("VAR"): A risk measurement tool used to measure the potential
overnight loss from adverse market movements. (Page 45)
Year 2000 ("Y2K"): The potential problem that many existing computer programs
had of not being able to recognize properly a year beginning with a "20" instead
of "19", as these programs only used the last two digits to refer to a year.
(Pages 27 and 54)
88
90
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIALS
The table below presents an analysis of the effect on net interest income of
volume and rate changes for the periods 1999 versus 1998, and 1998 versus 1997.
In this analysis, the change due to the volume/rate variance has been allocated
to volume.
1999 VERSUS 1998 1998 VERSUS 1997
--------------------------------------- ------------------------------------
Increase (decrease) Increase (decrease)
due to change in: due to change in:
(On a Taxable-Equivalent Basis; ---------------------- Net --------------------- Net
in millions) Volume Rate Change Volume Rate Change
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS
Deposits with Banks, primarily Foreign $ 136 $ (26) $ 110 $ 89 $ 28 $ 117
Federal Funds Sold and Securities
Purchased Under Resale Agreements:
Domestic (26) (162) (188) (423) 40 (383)
Foreign (111) (461) (572) (4) (9) (13)
Securities and Trading Assets:
Domestic (309) (428) (737) 776 (34) 742
Foreign (13) (378) (391) (355) (137) (492)
Loans:
Domestic 553 (4) 549 688 (986) (298)
Foreign (199) (626) (825) 57 706 763
------ ------- ------ ------ ------ -----
Change in Interest Income 31 (2,085) (2,054) 828 (392) 436
------ ------- ------ ------ ------ -----
INTEREST-BEARING LIABILITIES
Interest-Bearing Deposits:
Domestic 113 (118) (5) 323 (382) (59)
Foreign 318 (561) (243) 401 (63) 338
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements:
Domestic (274) (387) (661) (232) (25) (257)
Foreign (145) (286) (431) (76) 93 17
Other Borrowed Funds:
Domestic 60 (380) (320) (121) 69 (52)
Foreign (30) (517) (547) (421) 422 1
Long-Term Debt, primarily Domestic 184 (207) (23) 167 (30) 137
Intra Company Funding:
Domestic 441 (53) 388 323 16 339
Foreign (441) 53 (388) (323) (16) (339)
------ ------- ------ ------ ------ -----
Change in Interest Expense 226 (2,456) (2,230) 41 84 125
------ ------- ------ ------ ------ -----
Change in Net Interest Income $ (195) $ 371 $ 176 $ 787 $ (476) $ 311
------ ------- ------ ------ ------ -----
- -----------------------------------------------------------------------------------------------------------------------------
89
91
CONSOLIDATED AVERAGE BALANCE SHEET, INTEREST AND RATES
A summary of Chase's consolidated average balances, interest rates and interest
differentials on a taxable-equivalent basis for the years 1997 through 1999 is
provided below. Income computed on a taxable-equivalent basis is the income
reported in the Consolidated Statement of Income adjusted to make income and
earning yields on assets exempt from income taxes (primarily Federal taxes)
comparable to other taxable income. The incremental tax rate used for
calculating the taxable-equivalent
(Table continued on next page)
1999
Year Ended December 31, -----------------------------------------------
(Taxable-Equivalent Interest and Rates; in millions, except rates) Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Deposits with Banks $ 7,241 $ 752 10.38%
Federal Funds Sold and Securities Purchased Under Resale Agreements 29,997 1,451 4.84
Trading Assets-Debt and Equity Instruments 26,974 1,705 6.32
Securities:
Available-for-Sale 55,055 3,160 5.74(a)
Held-to-Maturity 1,161 73 6.33
Loans 173,770 13,118(b) 7.55
-------- -------
Total Interest-Earning Assets 294,198 20,259 6.89%
-------- -------
Allowance for Loan Losses (3,504)
Cash and Due from Banks 14,722
Trading Assets-Risk Management Instruments 29,031
All Other Assets 35,700
--------
Total Assets $370,147
--------
LIABILITIES
Interest-Bearing Deposits $163,795 6,592(c) 4.02%(c)
Federal Funds Purchased and Securities Sold Under Repurchase Agreements 51,684 2,311 4.47
Commercial Paper 5,565 272 4.89
Other Borrowings(d) 15,629 1,070 6.85
Long-Term Debt 19,301 1,248 6.46
-------- -------
Total Interest-Bearing Liabilities 255,974 11,493 4.49
-------- -------
Noninterest Bearing Deposits 48,752
Trading Liabilities-Risk Management Instruments 27,515
All Other Liabilities, Including the Allowance for Credit Losses 14,377
--------
Total Liabilities 346,618
--------
PREFERRED STOCK OF SUBSIDIARY 550
STOCKHOLDERS' EQUITY
Preferred Stock 1,002
Common Stockholders' Equity 21,977
--------
Total Stockholders' Equity 22,979(e)
--------
Total Liabilities, Preferred Stock of Subsidiary and Stockholders' Equity $370,147
-------- -----
Interest Rate Spread 2.40%
------- -----
Net Interest Income and Net Yield on Interest-Earning Assets $ 8,766(c) 2.98%(c)
------- -----
- ---------------------------------------------------------------------------------------------------------------------------
Note: The weighted-average interest rates reflect the impact of local interest
rates prevailing in certain Latin American countries with highly
inflationary economies, particularly in 1998 and 1997.
(a) The annualized rate for available-for-sale securities based on amortized
cost was 5.63% in 1999, 6.26% in 1998 and 6.64% in 1997.
(b) Fees and commissions on loans included in loan interest amounted to $185
million in 1999, $141 million in 1998 and $149 million in 1997.
(c) 1999 and 1998 include, respectively, $62 million and $191 million of
interest income resulting from the refund of prior years' taxes. Excluding
these amounts, the net yields on interest- earning assets would be 2.96%
in 1999 and 2.83% in 1998.
(d) Includes securities sold, not yet purchased and structured notes.
(e) The ratio of average stockholders' equity to average assets was 6.2% for
1999, 6.1% for 1998 and 5.9% for 1997. The return on average stockholders'
equity was 23.7% for 1999, 16.7% for 1998 and 17.6% for 1997.
90
92
adjustment was approximately 42% in each of the years 1997 through 1999. A
substantial portion of Chase's securities are taxable.
Within the Consolidated Average Balance Sheet, Interest and Rates summary,
the principal amounts of nonaccrual and renegotiated loans have been included in
the average loan balances used to determine the average interest rate earned on
loans. For additional information on nonaccrual loans, including interest
accrued, see Note One on page 61.
(Continuation of table)
1998 1997
-------------------------------------------------- -------------------------------------------------
Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------
$ 5,934 $ 642 10.82% $ 5,105 $ 525 10.28%
32,955 2,211 6.71 39,836 2,607 6.54
30,021 2,431 8.10 35,660 2,771 7.77
56,137 3,486 6.21(a) 42,610 2,817 6.61(a)
2,347 149 6.36 3,432 228 6.65
169,386 13,394(b) 7.91 159,932 12,929(b) 8.08
-------- ------- -------- -------
296,780 22,313 7.52% 286,575 21,877 7.63%
-------- ------- -------- -------
(3,544) (3,435)
14,305 13,678
36,127 34,426
29,543 25,102
-------- --------
$373,211 $356,346
-------- --------
$153,545 6,840(c) 4.45%(c) $137,095 6,561 4.79%
61,237 3,403 5.56 66,789 3,643 5.45
5,046 259 5.13 4,283 228 5.33
15,607 1,950 12.49 20,663 2,032 9.83
16,478 1,271 7.71 14,315 1,134 7.92
-------- ------- -------- -------
251,913 13,723 5.45 243,145 13,598 5.59
-------- ------- -------- -------
46,169 42,067
37,200 35,309
14,771 14,235
-------- --------
350,053 334,756
-------- --------
550 550
1,280 2,212
21,328 18,828
-------- --------
22,608(e) 21,040(e)
-------- --------
$373,211 $356,346
-------- ----- -------- -----
2.07% 2.04%
------- ----- ------- -----
$ 8,590 (c) 2.89%(c) $ 8,279 2.89%
------- ----- ------- -----
- ---------------------------------------------------------------------------------------------------------------------------
91
93
INTEREST RATES AND INTEREST DIFFERENTIAL ANALYSIS OF
NET INTEREST INCOME - DOMESTIC AND FOREIGN
A summary of interest rates and interest differentials segregated between
domestic and foreign operations for the years 1997 through 1999 is presented
below. The segregation between the domestic and foreign components is based on
the location of the office recording the transaction. Chase employs a
centralized funds management process in order to optimize its overall liquidity
profile. Intra-company funding are generally dollar-denominated deposits
originated in various foreign and domestic locations that are centrally managed
by Chase's treasury units.
(Table continued on next page)
1999
-----------------------------------------------------
Year Ended December 31, Average Average
(Taxable-Equivalent Interest and Rates; in millions, except rates) Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Deposits with Banks, primarily Foreign $ 7,241 $ 752 10.38%
Federal Funds Sold and Securities Purchased
Under Resale Agreements:
Domestic 14,795 759 5.13
Foreign 15,202 692 4.55
Securities and Trading Assets:
Domestic 62,459 3,776 6.05
Foreign 20,731 1,162 5.60
Loans:
Domestic 136,317 10,493 7.70
Foreign 37,453 2,625 7.01
-------- -------
Total Interest-Earning Assets 294,198 20,259 6.89
-------- -------
INTEREST-BEARING LIABILITIES:
Interest-Bearing Deposits:
Domestic 80,392 2,830(a) 3.52(a)
Foreign 83,403 3,762 4.51
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements:
Domestic 40,715 1,864 4.58
Foreign 10,969 447 4.07
Other Borrowed Funds:
Domestic 14,969 922 6.16
Foreign 6,225 420 6.75
Long-Term Debt, primarily Domestic 19,301 1,248 6.46
Intra-Company Funding:
Domestic 26,087 1,199 --
Foreign (26,087) (1,199) --
-------- -------
Total Interest-Bearing Liabilities 255,974 11,493 4.49
Noninterest-Bearing Liabilities:(b)
Domestic 32,521
Foreign 5,703
-------- -------
Total Investable Funds $294,198 $11,493 3.91%
-------- -------
Net Interest Income and Net Yield $ 8,766(a) 2.98%(a)
Domestic 7,038(a) 3.29%(a)
Foreign 1,728 2.14%
Percentage of Total Assets and Liabilities Attributable
to Foreign Operations:
Assets 30.7%
Liabilities 30.4%
- -----------------------------------------------------------------------------------------------------------------------------
(a) See note (c) on page 90. Excluding the tax refunds, the domestic net
yields on interest-earning assets would be 3.27% in 1999 and 3.18% in
1998.
(b) Represents the amount of noninterest-bearing liabilities funding
interest-earning assets.
92
94
Domestic net interest income was $7,038 million in 1999, an increase of
$116 million from the prior year. The increase in 1999 was primarily
attributable to slightly higher net yields and an increase in the volume of
interest-earning assets. Net interest income from foreign operations was $1,728
million for 1999, compared with $1,668 million in 1998. The increase reflected
higher net yields on interest-earning assets.
For further discussion, see the section entitled "Net Interest Income" in
the MD&A on page 24.
(Continuation of table)
1998 1997
--------------------------------------------------- ----------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------
$ 5,934 $ 642 10.82% $ 5,105 $ 525 10.28%
15,304 947 6.19 22,130 1,330 6.01
17,651 1,264 7.16 17,706 1,277 7.21
67,516 4,513 6.68 55,921 3,771 6.74
20,989 1,553 7.40 25,781 2,045 7.93
129,098 9,944 7.70 120,279 10,242 8.52
40,288 3,450 8.56 39,653 2,687 6.78
-------- ------- -------- -------
296,780 22,313 7.52 286,575 21,877 7.63
-------- ------- -------- -------
77,189 2,835(a) 3.67(a) 68,383 2,894 4.23
76,356 4,005 5.25 68,712 3,667 5.34
46,679 2,525 5.41 50,981 2,782 5.46
14,558 878 6.03 15,808 861 5.44
13,971 1,242 8.88 15,372 1,294 8.43
6,682 967 14.48 9,574 966 10.07
16,478 1,271 7.71 14,315 1,134 7.92
16,513 811 -- 9,946 472 --
( 16,513) ( 811) -- ( 9,946) ( 472) --
-------- ------- -------- -------
251,913 13,723 5.45 243,145 13,598 5.59
41,563 39,985
3,304 3,445
-------- ------- -------- -------
$296,780 $13,723 4.63% $286,575 $13,598 4.74%
-------- ------- -------- -------
$ 8,590(a) 2.89%(a) $ 8,279 2.89%
6,922(a) 3.27%(a) 6,952 3.50%
1,668 1.97% 1,327 1.51%
32.6% 32.0%
31.9% 31.4%
- -----------------------------------------------------------------------------------------------------------------------------
93
95
SECURITIES PORTFOLIO
The amortized cost, estimated fair value and average yield (including the impact
of related derivatives) of Chase's securities by contractual maturity range and
type of security are presented in the table which follows:
Maturity Schedule of
Available-for-Sale Securities ------------------------------------------------------------------------------------
December 31, 1999 (in millions, Due in 1 Due After 1 Due After 5 Due After
rates on a taxable-equivalent basis) Year or less Through 5 Years Through 10 Years 10 Years(a) Total
- ------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND FEDERAL
AGENCY/CORPORATION OBLIGATIONS:
Amortized Cost $ 148 $ 9,305 $8,309 $33,828 $51,590
Fair Value 148 8,954 7,723 32,185 49,010
Average Yield(b) 3.66% 5.15% 5.42% 6.28% 5.93%
OBLIGATIONS OF STATE AND POLITICAL
SUBDIVISIONS:
Amortized Cost $ 159 $ 8 $ 4 $ 36 $ 207
Fair Value 159 8 4 34 205
Average Yield(b) 4.90% 4.71% 4.79% 5.06% 4.92%
OTHER:(c)
Amortized Cost $3,400 $ 5,603 $1,045 $ 1,275 $11,323
Fair Value 3,351 5,535 1,065 1,459 11,410
Average Yield(b) 3.21% 5.19% 4.88% 4.18% 4.45%
TOTAL AVAILABLE-FOR-SALE SECURITIES:(d)
Amortized Cost $3,707 $14,916 $9,358 $35,139 $63,120
Fair Value 3,658 14,497 8,792 33,678 60,625
Average Yield(b) 3.30% 5.16% 5.36% 6.20% 5.66%
- ------------------------------------------------------------------------------------------------------------------------------
Maturity Schedule of
Held-to-Maturity Securities
U.S. GOVERNMENT AND FEDERAL
AGENCY/CORPORATION OBLIGATIONS:
Amortized Cost $ 138 $ 24 $ 1 $ 723 $ 886
Fair Value 136 24 1 713 874
Average Yield(b) 6.92% 8.67% 7.42% 6.51% 6.63%
OTHER:(c)
Amortized Cost $ -- $ -- $ -- $ 2 $ 2
Fair Value -- -- -- 2 2
Average Yield(b) --% --% --% 5.25% 5.25%
TOTAL HELD-TO-MATURITY SECURITIES:(d)
Amortized Cost $ 138 $ 24 $ 1 $ 725 $ 888
Fair Value 136 24 1 715 876
Average Yield(b) 6.92% 8.67% 7.42% 6.51% 6.63%
- ------------------------------------------------------------------------------------------------------------------------------
(a) Securities with no stated maturity are included with securities with a
contractual maturity of ten years or more. Substantially all of Chase's
mortgaged-backed securities ("MBSs") and collateralized mortgage
obligations ("CMOs") are due in ten years or more based on contractual
maturity. The estimated duration, which reflects anticipated future
prepayments based on a consensus of dealers in the market, is
approximately 3 years for MBSs, and less than 1 year for CMOs.
(b) The average yield is based on amortized cost balances at the end of the
year. Yields are derived by dividing interest income, adjusted for the
effect of related derivatives on available-for-sale securities and the
amortization of premiums and accretion of discounts, by total amortized
cost. Taxable-equivalent yields are used, where applicable.
(c) Includes investments in debt securities issued by foreign governments,
corporate debt securities, CMOs of private issuers, other debt and equity
securities.
(d) For the amortized cost of the above categories of securities at December
31, 1998, see Note Three on page 66. At December 31, 1997, the amortized
cost of U.S. Treasury and Federal Agencies, Obligations of State and
Political Subdivisions, and Other available-for-sale securities was
$41,354 million, $274 million, and $7,943 million, respectively. At
December 31, 1997, the amortized cost of U.S. Treasury and Federal
Agencies and Other held-to-maturity securities was $2,968 million and $15
million, respectively. For held-to-maturity securities, there were no
Obligations of State and Political Subdivisions at December 31, 1997.
U.S. Government and certain of its agencies were the only issuers whose
securities exceeded 10% of Chase's total stockholders' equity at December 31,
1999.
For a further discussion of Chase's securities portfolios, see Note Three
on page 66.
94
96
\
LOAN PORTFOLIO
The table below sets forth the amount of loans outstanding by type:
-------- -------- -------- -------- --------
December 31, (in millions) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
DOMESTIC LOANS:
Commercial and Industrial $ 48,097 $ 43,123 $ 37,931 $ 34,742 $ 32,276
Financial Institutions 4,211 6,583 6,652 5,540 5,714
Commercial Real Estate - Commercial Mortgage 2,836 3,029 4,084 5,040 5,512
Commercial Real Estate - Construction 800 955 946 894 1,148
Consumer 85,239 80,891 76,097 69,084 69,431
-------- -------- -------- -------- --------
Total Domestic Loans 141,183 134,581 125,710 115,300 114,081
-------- -------- -------- -------- --------
FOREIGN LOANS:
Commercial and Industrial 25,304 25,899 28,921 24,335 22,050
Foreign Governments and Official Institutions 3,274 4,798 3,438 6,140 6,043
Financial Institutions 3,598 4,537 6,989 6,457 5,398
Consumer 2,800 2,939 3,396 2,860 2,635
-------- -------- -------- -------- --------
Total Foreign Loans 34,976 38,173 42,744 39,792 36,126
-------- -------- -------- -------- --------
Total Loans(a) $176,159 $172,754 $168,454 $155,092 $150,207
-------- -------- -------- -------- --------
- ------------------------------------------------------------------------------------------------------
(a) Loans are presented net of unearned income of $1,518 million, $1,667
million, $1,612 million, $1,373 million and $1,073 million at December 31,
1999, 1998, 1997, 1996 and 1995, respectively. For a discussion of Chase's
loan outstandings, see "Credit-Related Portfolio" on pages 38-43.
Note: Certain amounts in prior periods have been reclassified to conform to the
current presentation.
Maturities and Sensitivity to Changes in Interest Rates
The following table shows, at December 31, 1999, commercial loan maturity and
distribution between fixed and floating interest rates based upon the stated
terms of the commercial loan agreements. The table below does not include the
impact of derivative instruments.
------------------------------------------------------------
Within 1-5 After 5
December 31, 1999 (in millions) 1 Year(a) Years Years Total
- -----------------------------------------------------------------------------------------------------------------------------
Domestic:
Commercial and Industrial $19,727 $22,301 $6,069 $48,097
Financial Institutions 3,955 214 42 4,211
Commercial Real Estate 1,242 1,823 571 3,636
Foreign 26,653 2,937 2,586 32,176
------- ------- ------ -------
Total Commercial Loans $51,577 $27,275 $9,268 $88,120
------- ------- ------ -------
Loans at Fixed Interest Rates $ 2,048 $1,519
Loans at Variable Interest Rates 25,227 7,749
------- ------
Total Commercial Loans $27,275 $9,268
------- ------
- -----------------------------------------------------------------------------------------------------------------------------
(a) Includes demand loans, overdrafts and loans having no stated schedule of
repayments and no stated maturity.
95
97
Cross-Border Outstandings
Cross-border disclosure is based upon the Federal Financial Institutions
Examination Council ("FFIEC") guidelines governing the determination of
cross-border risk. The following table lists all countries in which Chase's
cross-border outstandings exceed .75% of consolidated assets as of any of the
dates specified. This includes certain exposures that are not required under the
disclosure requirements of the SEC. The most significant differences between the
FFIEC and SEC methodologies relate to the treatments of local country exposure
and foreign exchange and derivatives.
For a further discussion of Chase's cross-border exposure, see page 43.
Cross-Border Outstandings Exceeding .75 Percent of Total Assets
---------------------------------------------------------------------------------------------------------------
Net Local Total Total
Country Cross-Border Cross-Border
(in millions) At December 31, Public Banks Other Assets Outstandings(a) Commitments(b) Exposure
- -------------------------------------------------------------------------------------------------------------------------------
Germany 1999 $ 2,869 $ 8,554 $ 1,107 $ 2,544 $15,074 $ 2,045 $17,119
1998 4,913 7,180 1,084 3,615 16,792 1,627 18,419
1997 4,459 3,609 438 1,210 9,716 1,203 10,919
- -------------------------------------------------------------------------------------------------------------------------------
Italy 1999 $ 6,461 $ 3,627 $ 413 $ 137 $10,638 $ 393 $11,031
1998 5,933 1,403 316 377 8,029 608 8,637
1997 1,304 1,737 387 -- 3,428 706 4,134
- -------------------------------------------------------------------------------------------------------------------------------
France 1999 $ 796 $ 6,753 $ 787 $ 351 $ 8,687 $ 1,553 $10,240
1998 830 2,101 428 179 3,538 1,166 4,704
1997 605 1,871 345 38 2,859 1,240 4,099
- -------------------------------------------------------------------------------------------------------------------------------
Japan 1999 $ 3,975 $ 1,758 $ 536 $ -- $ 6,269 $ 1,984 $ 8,253
1998 3,298 997 542 74 4,911 1,993 6,904
1997 935 4,524 1,052 -- 6,511 2,303 8,814
- -------------------------------------------------------------------------------------------------------------------------------
United Kingdom 1999 $ 804 $ 2,341 $ 2,773 $ -- $ 5,918 $ 1,305 $ 7,223
1998 1,401 1,414 2,849 -- 5,664 1,855 7,519
1997 1,180 1,942 6,094 1,548 10,764 1,460 12,224
- -------------------------------------------------------------------------------------------------------------------------------
Canada 1999 $ 728 $ 3,669 $ 469 $ 542 $ 5,408 $ 1,635 $ 7,043
1998 872 988 737 534 3,131 1,550 4,681
1997 1,446 1,106 736 214 3,502 937 4,439
- -------------------------------------------------------------------------------------------------------------------------------
Belgium 1999 $ 826 $ 3,646 $ 222 $ 3 $ 4,697 $ 895 $ 5,592
1998 11 610 308 2 931 610 1,541
1997 430 559 183 2 1,174 376 1,550
- -------------------------------------------------------------------------------------------------------------------------------
Brazil 1999 $ 752 $ 263 $ 931 $ 317 $ 2,263 $ 83 $ 2,346
1998 914 363 1,324 518 3,119 74 3,193
1997 1,766 408 1,536 862 4,572 195 4,767
- -------------------------------------------------------------------------------------------------------------------------------
South Korea 1999 $ 99 $ 217 $ 452 $ 562 $ 1,330 $ 65 $ 1,395
1998 97 426 857 937 2,317 76 2,393
1997 478 1,787 1,653 1,189 5,107 184 5,291
- -------------------------------------------------------------------------------------------------------------------------------
(a) Outstandings include loans and accrued interest receivable,
interest-bearing deposits with banks, acceptances, other monetary assets,
cross-border trading debt and equity instruments, mark-to-market exposure
of foreign exchange and derivative contracts, and local country assets,
net of local country liabilities.
(b) Commitments include outstanding letters of credit and undrawn commitments
to extend credit.
Chase's balances tend to fluctuate greatly and the amount of outstandings
at year-end tends to be a function of timing, rather than representing a
consistent trend.
96
98
Risk Elements
The following table sets forth the nonperforming assets and contractually
past-due assets at the dates indicated:
------ ------ ------ ------ ------
December 31, (in millions) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
Domestic Nonperforming Loans:
Nonaccruing Loans $ 859 $ 742 $ 712 $ 848 $1,115
Renegotiated Loans -- -- -- 38 35
------ ------ ------ ------ ------
Total Domestic Nonperforming Loans 859 742 712 886 1,150
------ ------ ------ ------ ------
Foreign Nonperforming Loans:
Nonaccruing Loans 801 698 195 132 339
Renegotiated Loans -- -- 1 3 4
------ ------ ------ ------ ------
Total Foreign Nonperforming Loans 801 698 196 135 343
------ ------ ------ ------ ------
Total Nonperforming Loans 1,660 1,440 908 1,021 1,493
------ ------ ------ ------ ------
Derivative and Foreign Exchange Contracts 34 50 -- -- --
Assets Acquired as Loan Satisfactions (primarily Real Estate) 102 116 110 130 171
------ ------ ------ ------ ------
Total Nonperforming Assets $1,796 $1,606 $1,018 $1,151 $1,664
------ ------ ------ ------ ------
CONTRACTUALLY PAST-DUE ASSETS
Domestic Loans:(a)
Consumer $ 347 $ 422 $ 420 $ 395 $ 528
Commercial 28 43 32 27 92
------ ------ ------ ------ ------
Total Domestic 375 465 452 422 620
Foreign Loans(a) 39 41 7 12 44
Derivative and Foreign Exchange Contracts 1 -- 1 -- 3
------ ------ ------ ------ ------
Total $ 415 $ 506 $ 460 $ 434 $ 667
------ ------ ------ ------ ------
- --------------------------------------------------------------------------------------------------------------------------------
(a) Accruing loans past-due 90 days or more as to principal and interest,
which are not characterized as nonperforming loans.
For a discussion of nonaccrual loan and past due loan policies, see Note
One on page 61. Renegotiated loans are those for which concessions, such as the
reduction of interest rates or the deferral of interest or principal payments,
have been granted due to a deterioration in the borrowers' financial condition.
Interest on renegotiated loans is accrued at the renegotiated rates. Certain
renegotiated loan agreements call for additional interest to be paid on a
deferred or contingent basis. Such interest is recognized in income only as
collected.
Impact of Nonperforming Loans on Interest Income
The following table presents the amount of interest income recorded by Chase on
its nonperforming loans and the amount of interest income on the carrying value
of these loans that would have been recorded if these loans had been current in
accordance with their original terms (i.e., interest at original rates). The
increases in both 1999 and 1998 in total negative impact on interest income
reflect a higher level of interest that was not recognized in income due to the
increased levels of nonperforming loans.
---- ---- ----
Year Ended December 31, (in millions) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
DOMESTIC:
Gross Amount of Interest That Would Have Been Recorded at the Original Rate $ 75 $66 $63
Interest That Was Recognized in Income (13) (9) (9)
---- ---- ----
Negative Impact-Domestic 62 57 54
---- ---- ----
FOREIGN:
Gross Amount of Interest That Would Have Been Recorded at the Original Rate 63 55 17
Interest That Was Recognized in Income (6) (4) (2)
---- ---- ----
Negative Impact-Foreign 57 51 15
---- ---- ----
Total Negative Impact on Interest Income $119 $108 $69
---- ---- ----
- -----------------------------------------------------------------------------------------------------------------------------
97
99
SUMMARY OF LOAN LOSS EXPERIENCE
For a further discussion, see Note One on page 61 and Note Five on page 67.
Allowance for Loan Losses
The table below summarizes the changes in the allowance for loan losses during
the periods indicated.
--------- --------- --------- --------- ---------
Year Ended December 31, (in millions) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at Beginning of Year $ 3,552 $ 3,624 $ 3,549 $ 3,784 $ 3,894
Provision for Loan Losses 1,621 1,343 804 897 758
CHARGE-OFFS
Domestic:
Consumer (1,253) (1,158) (913) (921) (967)
Commercial and Industrial (249) (99) (114) (181) (169)
Commercial Real Estate (2) (6) (5) (47) (84)
Financial Institutions (45) -- -- -- --
Foreign (438) (528) (64) (38) (58)
--------- --------- --------- --------- ---------
Total Charge-Offs (1,987) (1,791) (1,096) (1,187) (1,278)
--------- --------- --------- --------- ---------
RECOVERIES
Domestic:
Consumer 119 121 106 97 108
Commercial and Industrial 42 165 91 95 173
Commercial Real Estate 16 20 42 33 53
Financial Institutions -- 2 1 -- 12
Foreign 77 65 52 65 92
--------- --------- --------- --------- ---------
Total Recoveries 254 373 292 290 438
--------- --------- --------- --------- ---------
NET CHARGE-OFFS (1,733) (1,418) (804) (897) (840)
Charge Related to Conforming Credit Card Charge-off Policies -- -- -- (102) --
Transfer to the Allowance for Credit Losses
on Risk Management Instruments -- -- -- (75) --
Transfer to the Allowance for Credit Losses
on Lending-Related Commitments -- -- (100) (70) --
Allowance Related to Purchased (Disposed) Portfolios
and Subsidiaries(a) 18 5 172 13 (31)
Foreign Exchange Translation Adjustment (1) (2) 3 (1) 3
--------- --------- --------- --------- ---------
Balance at End of Year $ 3,457 $ 3,552 $ 3,624 $ 3,549 $ 3,784
--------- --------- --------- --------- ---------
- ----------------------------------------------------------------------------------------------------------------------------------
(a) Includes $160 million in 1997 related to the purchase of a credit card
portfolio and $28 million related to the sale of banking operations in
southern and central New Jersey in 1995.
Loan Loss Analysis --------- --------- --------- --------- ---------
Year Ended December 31, (in millions, except ratios) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCES
Loans-Average $ 173,770 $ 169,386 $ 159,932 $ 149,996 $ 146,528
Loans-Year End 176,159 172,754 168,454 155,092 150,207
Net Charge-Offs 1,733 1,418 804 999(a) 840
Allowance for Loan Losses:
Domestic 2,666 2,489 2,767 2,898 3,217
Foreign 791 1,063 857 651 567
--------- --------- --------- --------- ---------
Total Allowance for Loan Losses 3,457 3,552 3,624 3,549 3,784
--------- --------- --------- --------- ---------
Nonperforming Loans 1,660 1,440 908 1,021 1,493
RATIOS
Net Charge-Offs to:
Loans-Average 1.00% .84% .50% .67% .57%
Allowance for Loan Losses 50.13 39.92 22.19 28.15 22.20
Allowance for Loan Losses to:
Loans-Year End 1.96 2.06 2.15 2.29 2.52
Nonperforming Loans 208.25 246.67 399.12 347.60 253.45
- ----------------------------------------------------------------------------------------------------------------------------------
(a) Includes a charge of $102 million related to conforming credit card
charge-off policies.
98
100
DEPOSITS
The following data provides a summary of the average balances and average
interest rates of Chase's various deposits for the years indicated:
Average Balances Average Interest Rates
---------------------------------- --------------------------------
(in millions, except interest rates) 1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
DOMESTIC:
Noninterest-Bearing Demand $ 23,386 $ 25,041 $ 23,483 --% --% --%
Interest-Bearing Demand 2,627 3,300 3,563 1.35 1.51 1.78
Savings 58,663 53,960 50,198 2.29 2.56 2.75
Time 39,781 37,646 29,529 3.65 3.73 4.91
-------- -------- --------
Total Domestic Deposits 124,457 119,947 106,773 2.27 2.36 2.71
-------- -------- --------
FOREIGN:
Noninterest-Bearing Demand 4,529 3,088 3,363 -- -- --
Interest-Bearing Demand 36,826 31,350 25,480 4.66 4.93 4.44
Savings 1,027 839 824 2.76 3.76 3.60
Time 45,708 44,490 42,722 4.41 5.46 5.87
-------- -------- --------
Total Foreign Deposits(a) 88,090 79,767 72,389 4.27 5.02 5.07
-------- -------- --------
Total Deposits $212,547 $199,714 $179,162 3.10% 3.42% 3.66%
-------- -------- --------
- --------------------------------------------------------------------------------------------------------------------
(a) The majority of foreign deposits were in denominations of $100,000 or
more.
At December 31, 1999, other domestic time deposits in denominations of $100,000
or more totaled $18,401 million, substantially all of which mature in 3 months
or less. The table below presents the maturities for domestic time certificates
of deposit in denominations of $100,000 or more:
3 Months Over 3 Months Over 6 Months Over
By remaining maturity at December 31, 1999 (in millions) Or Less but within 6 Months but within 12 Months 12 Months Total
- ------------------------------------------------------------------------------------------------------------------------------------
Domestic Time Certificates of Deposit ($100,000 or More) $ 9,990 $ 1,810 $ 676 $ 365 $12,841
====================================================================================================================================
SHORT-TERM AND OTHER BORROWED FUNDS
The following data provides a summary of Chase's short-term and other borrowed
funds for the years indicated:
------- ------- -------
(in millions, except rates) 1999 1998 1997
- -------------------------------------------------------------------------------
FEDERAL FUNDS PURCHASED AND SECURITIES
SOLD UNDER REPURCHASE AGREEMENTS:
Balance at year-end $50,148 $41,632 $56,126
Average daily balance during the year 51,684 61,237 66,789
Maximum month-end balance 56,816 70,062 80,633
Weighted-average rate at December 31 4.72% 5.91% 5.90%
Weighted-average rate during the year 4.47% 5.56% 5.45%
COMMERCIAL PAPER:
Balance at year-end $ 8,509 $ 7,788 $ 4,744
Average daily balance during the year 5,565 5,046 4,283
Maximum month-end balance 8,509 8,217 4,951
Weighted-average rate at December 31 5.61% 4.78% 5.64%
Weighted-average rate during the year 4.89% 5.13% 5.33%
OTHER BORROWED FUNDS:(a)
Balance at year-end $ 5,145 $ 7,239 $ 6,861
Average daily balance during the year 6,287 6,148 7,566
Maximum month-end balance 8,550 8,175 8,958
Weighted-average rate at December 31(b) 5.69% 12.23% 9.38%
Weighted-average rate during the year(b) 6.85% 12.49% 9.83%
- -------------------------------------------------------------------------------
(a) Excludes securities sold, not yet purchased and structured notes.
(b) The weighted-average interest rates reflect the impact of local interest
rates prevailing in certain Latin American countries with highly
inflationary economies, particularly in 1998 and 1997.
Federal funds purchased represents overnight funds. Securities sold under
repurchase agreements generally mature between one day and three months.
Commercial paper is generally issued in amounts not less than $100,000 and with
maturities of 270 days or less. Other borrowed funds consist of demand notes,
term Federal funds purchased and various other borrowings that generally have
maturities of one year or less. At December 31, 1999, Chase had unused lines of
credit of $2.0 billion available for general corporate purposes, including the
payment of commercial paper borrowings. Of this amount, $1.0 billion was
cancelled on January 11, 2000.
99
101
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
behalf of the undersigned, thereunto duly authorized.
THE CHASE MANHATTAN CORPORATION
(Registrant)
By /s/ WILLIAM B. HARRISON JR.
-------------------------------------
(William B. Harrison, Jr.
Chairman and Chief Executive Officer)
Date: March 13, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacity and on the date indicated. Chase does not
exercise the power of attorney to sign on behalf of any Director.
CAPACITY DATE
-------- ----
/s/ WILLIAM B. HARRISON JR. Director, Chairman and Chief
- ----------------------------- Executive Officer
(William B. Harrison, Jr.) (Principal Executive Officer)
/s/ HANS W. BECHERER Director
- -----------------------------
(Hans W. Becherer)
/s/ FRANK A. BENNACK JR. Director
- -----------------------------
(Frank A. Bennack Jr.)
/s/ SUSAN V. BERRESFORD Director March 13, 2000
- -----------------------------
(Susan V. Berresford)
/s/ M. ANTHONY BURNS Director
- -----------------------------
(M. Anthony Burns)
/s/ H. LAURANCE FULLER Director
- -----------------------------
(H. Laurance Fuller)
/s/ MELVIN R. GOODES Director
- -----------------------------
(Melvin R. Goodes)
100
102
CAPACITY DATE
-------- ----
/s/ WILLIAM H. GRAY, III Director
- -----------------------------
(William H. Gray, III)
/s/ HAROLD S. HOOK Director
- -----------------------------
(Harold S. Hook)
/s/ HELENE L. KAPLAN Director
- -----------------------------
(Helene L. Kaplan)
/s/ HENRY B. SCHACHT Director
- -----------------------------
(Henry B. Schacht)
March 13, 2000
/s/ ANDREW C. SIGLER Director
- -----------------------------
(Andrew C. Sigler)
/s/ JOHN R. STAFFORD Director
- -----------------------------
(John R. Stafford)
/s/ MARINA v.N. WHITMAN Director
- -----------------------------
(Marina v.N. Whitman)
/s/ MARC J. SHAPIRO Vice Chairman
- -----------------------------
(Marc J. Shapiro) Finance, Risk Management and
Administration
(Principal Financial Officer)
/s/ JOSEPH L. SCLAFANI Executive Vice President
- ----------------------------- and Controller
(Joseph L. Sclafani) (Principal Accounting Officer)
101
103
APPENDIX 1
NARRATIVE DESCRIPTION OF GRAPHIC IMAGE MATERIAL
Pursuant to Item 304 of Regulation S-T, the following is a description of the
graphic image material included in the foregoing Management's Discussion and
Analysis of Financial Condition.
Graph
Number Page Description
- ------ ---- -----------
1 18 Bar graph entitled "Operating Revenues" in millions,
presenting the following information for the years ended
December 31,
Compound Annual 1995 1996 1997
Growth Rate ("CAGR") ---- ---- ----
= 11% $15,048 $16,451 $17,699
1998 1999
---- ----
$19,613 $22,982
Since the Chase and Chemical merger, Chase has produced a
compound annual growth rate ("CAGR") in operating revenues of
11%.
2 18 Bar graph entitled "Operating Diluted Earnings Per Share" in
dollars, presenting the following information for the years
ended December 31,
Compound Annual 1995 1996 1997
Growth Rate ("CAGR") ---- ---- ----
= 20% $2.96 $3.64 $4.17
1998 1999
---- ----
$4.51 $6.21
Since the merger, Chase's Operating Diluted EPS has had an
annual growth rate of 20%.
3 19 Bar graph entitled "Return on Common Equity", presenting the
following information on an operating basis for the years
ended December 31,
Pre-Merger
1993 11.6%
1994 14.3%
1995 15.8%
Post-Merger
1996 18.4%
1997 19.5%
1998 18.4%
1999 24.2%
The graph above contrasts pre- and post-merger profitability.
Since 1995, Chase's return on common equity has exceeded 18%.
104
4 21 Line graph entitled "Market-Sensitive Revenue" in millions,
presenting the following information for the years ended
December 31,
Logarithmic Regression 1988-1999, Compound Annual Growth Rate
("CAGR") = 15%
1988 1989 1990 1991 1992 1993 1994
-----------------------------------------------------------
Logarithmic Regression $1,239 $1,429 $1,648 $1,901 $2,192 $2,529 $2,916
Market-Sensitive Revenue $1,521 $1,508 $1,373 $1,660 $2,209 $3,122 $2,574
1995 1996 1997 1998 1999
-----------------------------------------
Logarithmic Regression $3,363 $3,879 $4,474 $5,160 $5,951
Market-Sensitive Revenue $2,996 $3,691 $4,215 $5,027 $7,392
The graph above illustrates annual market-sensitive revenue
over the last twelve years in comparison to the logarithmic
regression trendline over that same period. The compound
annual growth rate in market-sensitive revenues since 1988 is
15%.
5 22 Bar graph entitled "Investment Banking Fees" in millions,
presenting the following information for the years ended
December 31,
5 Year
Compound Annual 1995 1996 1997
Growth Rate ("CAGR") ---- ---- ----
= 26% $810 $950 $1,136
1998 1999
---- ----
$1,502 $1,887
Over the past 5 years, investment banking fees have increased
at a CAGR of 26%.
6 23 Pie Graph entitled "CCP's Direct Portfolio by Industry",
presenting the following information at December 31, 1999 as a
percentage of carrying value:
571 Portfolio Companies
Energy/Natural Resources 3%
Industrial/Auto 11%
Real Estate 4%
Financial Services 2%
Consumer/Retail 11%
Chemicals 2%
Other 4%
Media/Telecommunications 28%
Technology/Information Services 26% 63% in the New Economy
Life Sciences 9%
This pie graph reflects the diversification of CCP's portfolio
by carrying value at December 31, 1999.
105
7 23 Bar graph entitled "Increasing Investment Pace - Direct Equity
Investments at Cost" in millions, presenting the following
information for the years ended December 31,
Compound Annual Growth Rate ("CAGR") = 43%
1995 1996 1997
---- ---- ----
$462 $705 $816
Number of Deals 71 73 105
1998 1999
---- ----
$1,354 $1,930
Number of Deals 120 169
8 27 Line graph entitled "Cash Operating Efficiency Ratio",
presenting the following information for the years ended
December 31,
Improvement Since 1995=1000 Basis Points
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
61% 56% 54% 54% 51%
This graph shows that for every dollar of revenue earned, how
much is paid for operating expenses (before the amortization
of goodwill and certain other intangibles).
9 29 Pie Graph entitled "Operating Revenues by Business Franchise
1999" presenting the following information:
Global Bank 45%
National Consumer Services 42%
Global Services 13%
10 30 Pie Graph entitled "Global Bank Operating Revenues by Key
Businesses 1999" presenting the following information:
Global Markets 39%
Global Investment Banking 15%
Corporate Lending and Portfolio Management 15%
Chase Capital Partners 22%
Global Private Bank 9%
11 30 Bar graph entitled "Global Bank Operating Revenues and SVA",
presenting the following information for the years ended
December 31,
1997 1998 1999
---- ---- ----
Operating Revenues (in billions) $7.2 $8.0 $10.4
SVA (in millions) $908 $776 $1,885
The above graph demonstrates the changes in Global Bank's
operating revenues and SVA over the past three years.
106
12 32 Pie Graph entitled "National Consumer Services Operating
Revenues by Key Businesses 1999" presenting the following
information:
Chase Cardmember Services 41%
Regional Consumer Banking 25%
Chase Home Finance 12%
Diversified Consumer Services 12%
Middle Markets 10%
13 32 Bar graph entitled "NCS Operating Revenues and SVA",
presenting the following information for the years ended
December 31,
1997 1998 1999
---- ---- ----
Operating Revenues (in billions) $8.3 $9.1 $9.8
SVA (in millions) $422 $418 $636
The above graph demonstrates the changes in NCS's operating
revenues and SVA over the past three years.
14 34 Pie Graph entitled "Global Services Operating Revenues by Key
Businesses 1999" presenting the following information:
Chase Treasury Solutions 41%
Global Investor Services 43%
Capital Markets Fiduciary Services 16%
15 34 Bar graph entitled "Global Services Operating Revenues and
SVA", presenting the following information for the years ended
December 31,
1997 1998 1999
---- ---- ----
Operating Revenues (in billions) $2.6 $2.8 $3.1
SVA (in millions) $143 $193 $145
The above graph demonstrates the changes in Global Service's
operating revenues and SVA over the past three years.
16 38 Bar graph entitled "Managed Credit-Related Assets" in billions,
presenting the following information at December 31,
1997 1998 1999
---- ---- ----
Consumer $97 $102 $106
Commercial $88 $89 $88
Risk Management Instruments $39 $33 $34
This graph shows Chase's balance between consumer and
commercial credit-related assets over the last three years.
17 39 Bar graph entitled "Commercial Credit-Related Assets",
presenting the following information at December 31,
1997 1998 1999
---- ---- ----
Investment Grade Equivalent 46.1% 49.4% 53.9%
Below Investment Grade Performing 53.5% 49.7% 45.1%
Nonperforming Loans, FX and Derivatives 0.4% 0.9% 1.0%
This graph highlights the increasing percentage of investment
grade equivalents over the past three years. The balances
include derivative and FX instruments.
107
18 39 Bar graph entitled "Commercial Credit-Related Assets Industry
Profile - 10 Largest Industries" in billions, presenting the
following information at December 31,
1999 1999 1998 1998
Investment Below Investment Below
Grade Investment Grade Investment
Equivalent Grade Equivalent Grade
----------------------------------------------------------
Commercial Banking $19.4 $3.5 $19.5 $4.6
Private Banking/Investment
Management $7.8 $2.2 $5.5 $2.4
Holding & Investment
Companies $4.5 $2.2 $2.4 $1.8
Securities Brokers, Dealers,
Exchanges $3.8 $1.2 $3.9 $1.0
Real Estate $1.5 $3.5 $1.2 $4.5
Oil & Gas Exploration/
Production $1.1 $2.4 $1.1 $3.1
Investment & Pension Funds $2.1 $1.1 $1.8 $1.4
Business Services $0.7 $2.2 $0.8 $2.0
Shipping $0.6 $2.3 $0.6 $2.3
Utilities $1.3 $1.4 $1.0 $1.9
This graph shows Chase's broad diversification across
industries and its high-quality commercial lending exposure.
The balances include derivative and FX instruments.
19 40 Pie Graph entitled "Worldwide Consumer Managed Loan Portfolio"
presenting the following information:
Percent of loan
category to total 1999 1998
consumer managed Charge-off Charge-off
loan portfolio Rate Rate
--------------------------------------------------
Residential Mortgage 43% .07% .07%
Credit Card Managed 32% 5.66% 6.02%
Auto 17% .45% .55%
Other Consumer 8% 2.54% 1.67%
The graph above shows average annual charge-off rates by
various consumer categories (including domestic and foreign
balances) and the percentage of each loan category to the
total consumer managed loan portfolio at December 31, 1999.
The charge-off rate for the entire consumer portfolio was
2.10% in 1999, a decrease from 2.22% in 1998.
20 43 Pie Chart entitled "Total Managed Assets by Region",
presenting the following information at December 31, 1999
United States/Canada 82.2%
Western Europe 13.4%
Asia Developed 1.2%
Latin America-Emerging 1.4%
Asia-Emerging 1.3%
Eastern Europe/Africa/Middle East 0.5%
This chart displays Chase's net cross-border exposure by
geographic region as a percentage of managed assets.
108
21 47 Bar graph entitled "Histogram of Daily Market Risk-Related
Revenue for 1999 and 1998" presenting the following
information:
Millions of dollars($) 0 - 5 5 - 10 10 - 15 15 - 20 20 - 25 25 - 30 30 and Over
----- ------ ------- ------- ------- ------- -----------
1999
----
Number of trading days 40 54 49 45 32 16 14
market risk-related
revenue was within the 1998
above prescribed positive ----
dollar range 35 46 52 40 20 12 17
Millions of dollars($) 0 - (5)(5) - (10)(10) - (15)(15) - (20)(20) - (25)(25) - (30)(30) and Over
------- --------- ---------- ---------- ---------- ---------- ------------
1999
----
Number of trading days 6 3 1 0 0 0 0
market risk-related
revenue was within the 1998
above prescribed negative ----
dollar range 15 9 4 3 1 3 2
22 51 Line Graph entitled "Capital: Tangible Results" in billions,
presenting the following information at December 31,
Management's
Risk-Weighted Estimate Excluding
Assets Growth Year 2000 Impact
1996 $249
1997 $286 15%
1998 $289 1%
1999 $302 4% $297
The above graph shows the impact Chase's disciplined approach
to balance sheet management has had on the growth in
risk-weighted assets. Management estimates that the impact of
consumer flight to quality over Year 2000 uncertainty
contributed approximately $5 billion to Chase's risk-weighted
assets. Excluding this impact, management estimates that the
increase in risk-weighted assets in 1999 would have been only
approximately 3%.
23 52 Line graph entitled "Risk-Based Capital Ratios at December
31," presenting the following information:
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Total Risk-Based
Capital 12.3% 11.8% 11.6% 12.0% 12.1%
Tier 1 Risk-Based
Capital 8.2% 8.2% 7.9% 8.3% 8.4%
Tier 1 Leverage 6.7% 6.8% 6.0% 6.4% 6.6%
During 1997, Chase adopted the Federal Reserve's
guidelines for calculating market risk-adjusted capital. Prior
period ratios have not been restated.
109
24 53 Bar graph entitled "Market Capitalization at December 31, in
billions" presenting the following information: CAGR = 25%
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Market Capitalization $ 26 $ 39 $ 46 $ 60 $ 64
Chase's market capitalization continues to grow and has more
than doubled since the Merger.
110
EXHIBIT INDEX
Item No. Description
3.1 Restated Certificate of Incorporation of The Chase Manhattan Corporation
(incorporated by reference to Exhibit 4.1 to the Registration Statement
on Form S-8 (File No. 333-07941) of The Chase Manhattan Corporation).
3.2 Certificate of Amendment of Restated Certificate of Incorporation of The
Chase Manhattan Corporation (incorporated by reference to Exhibit 3.2 to
the Registration Statement on Form S-3 (File No. 333-56573) of The Chase
Manhattan Corporation).
3.3 Certificate of Designations of Fixed/Adjustable Rate, Noncumulative
Preferred Stock of The Chase Manhattan Corporation (incorporated by
reference to Exhibit 3.3 to the Registration Statement on Form S-3 (File
No. 333-56573) of The Chase Manhattan Corporation).
3.4 By-laws, as amended as of June 1, 1999, of The Chase Manhattan
Corporation (incorporated by reference to Exhibit 4.4 to the Registration
Statement on Form S-8 (File No. 333-92217) of The Chase Manhattan
Corporation.
4.1 Indenture, dated as of December 1, 1989, between Chemical Banking
Corporation and The Chase Manhattan Bank (National Association), as
succeeded to by Bankers Trust Company, as Trustee (incorporated by
reference to Exhibit 4.9 to the Registration Statement on Form S-3 (File
No. 33-32409) of Chemical Banking Corporation).
4.2(a) Indenture, dated as of April 1, 1987, as amended and restated as of
December 15, 1992, between Chemical Banking Corporation and Morgan
Guaranty Trust Company of New York, as succeeded to by U.S. Bank Trust
National Association (formerly known as First Trust of New York, National
Association), as Trustee (incorporated by reference to Exhibit 4.1 to the
Current Report on Form 8-K, dated December 22, 1992, of Chemical Banking
Corporation, File No. 1-5805).
4.2(b) Second Supplemental Indenture, dated as of October 8, 1996, between The
Chase Manhattan Corporation and U.S. Bank Trust National Association
(formerly known as First Trust of New York, National Association), as
Trustee, to the Indenture, dated as of April 1, 1987, as amended and
restated as of December 15, 1992 (incorporated by reference to Exhibit
4.5 to the Registration Statement on Form S-3 (File No. 333-14959) of The
Chase Manhattan Corporation).
4.3(a) Indenture, dated as of July 1, 1986, between The Chase Manhattan
Corporation and Bankers Trust Company, as Trustee (incorporated by
reference to Exhibit (4)(a) to the Registration Statement on Form S-3
(File No. 33-7299) of The Chase Manhattan Corporation).
4.3(b) First Supplemental Indenture, dated as of November 1, 1990, between The
Chase Manhattan Corporation and Bankers Trust Company, as Trustee, to the
Indenture, dated as of July 1, 1986 (incorporated by reference to Exhibit
(4)(b) to the Registration Statement on Form S-3 (File No. 33-40485) of
The Chase Manhattan Corporation).
4.3(c) Second Supplemental Indenture, dated as of May 1, 1991, between The Chase
Manhattan Corporation and Bankers Trust Company, as Trustee, to the
Indenture, dated as of July 1, 1986 (incorporated by reference to Exhibit
(4)(c) to the Registration Statement on Form S-3 (File No. 33-42367) of
The Chase Manhattan Corporation).
4.3(d) Third Supplemental Indenture, dated as of March 29, 1996, among Chemical
Banking Corporation, The Chase Manhattan Corporation and Bankers Trust
Company, as Trustee, to the Indenture, dated as of July 1, 1986
(incorporated by reference to Exhibit 4.18 to the Registration Statement
on Form S-3 (File No. 333-14959) of The Chase Manhattan Corporation).
111
Exhibit Index
Item No. Description
4.4(a) Amended and Restated Indenture, dated as of September 1, 1993, between
The Chase Manhattan Corporation and Chemical Bank, as Trustee
(incorporated by reference to Exhibit (4)(cc) to the Current Report on
Form 8-K, dated August 19, 1993, of The Chase Manhattan Corporation, File
No. 1-5945).
4.4(b) First Supplemental Indenture, dated as of March 29, 1996, among Chemical
Banking Corporation, The Chase Manhattan Corporation, Chemical Bank, as
resigning Trustee, and U.S. Bank Trust National Association (formerly
known as First Trust of New York, National Association), as successor
Trustee, to the Amended and Restated Indenture, dated as of September 1,
1993 (incorporated by reference to Exhibit 4.22 to the Registration
Statement on Form S-3 (File No. 333-14959) of The Chase Manhattan
Corporation).
4.4(c) Second Supplemental Indenture, dated as of October 8, 1996, between The
Chase Manhattan Corporation and U.S. Bank Trust National Association
(formerly known as First Trust of New York, National Association), as
Trustee, to the Amended and Restated Indenture, dated as of September 1,
1993 (incorporated by reference to Exhibit 4.23 to the Registration
Statement on Form S-3 (File No. 333-14959) of The Chase Manhattan
Corporation).
4.5(a) Indenture, dated as of May 15, 1993, between Margaretten Financial
Corporation and The Bank of New York, as Trustee, relating to the 6 3/4%
Guaranteed Notes due June 15, 2000 (incorporated by reference to Exhibit
4(a) to the Registration Statement on Form S-3 (No. 33-60262) of
Margaretten Financial Corporation).
4.5(b) Supplemental Indenture, dated as of July 22, 1994, to the Indenture,
dated as of May 15, 1993, among Margaretten Financial Corporation,
Chemical Banking Corporation and The Bank of New York, as Trustee, and
Guarantee, dated as of July 22, 1994, by Chemical Banking Corporation
(incorporated by reference to Exhibit 4.34 to the Current Report on Form
8-K, dated September 28, 1994, of Chemical Banking Corporation, File No.
1-5805).
4.6 Junior Subordinated Indenture, dated as of December 1, 1996, between The
Chase Manhattan Corporation and The Bank of New York, as Debenture
Trustee (incorporated by reference to Exhibit 4.24 to the Registration
Statement on Form S-3 (File No. 333-19719) of The Chase Manhattan
Corporation).
4.7 Guarantee Agreement, dated as of January 24, 1997, between The Chase
Manhattan Corporation and The Bank of New York, as Trustee, with respect
to the Global Floating Rate Capital Securities, Series B, of Chase
Capital II (incorporated by reference to Exhibit 4.8 to the Annual Report
on Form 10-K, dated December 31, 1997, of The Chase Manhattan
Corporation, File No. 1-5805).
4.8 Amended and Restated Trust Agreement, dated as of January 24, 1997, among
The Chase Manhattan Corporation, The Bank of New York, as Property
Trustee, The Bank of New York (Delaware), as Delaware Trustee, and the
Administrative Trustees named therein, with respect to Chase Capital II
(incorporated by reference to Exhibit 4.9 to the Annual Report on Form
10-K, dated December 31, 1997, of The Chase Manhattan Corporation, File
No. 1-5805).
10.1 Deferred Compensation Plan for Non-Employee Directors of The Chase
Manhattan Corporation and The Chase Manhattan Bank, as amended and
restated effective December 1996 (incorporated by reference to Exhibit
10.1 to the Annual Report on Form 10-K, dated December 31, 1996, of The
Chase Manhattan Corporation, File No. 1-5805).
10.2 Post-Retirement Compensation Plan for Non-Employee Directors, as amended
and restated as of May 21, 1996 (incorporated by reference to Exhibit
10.2 to the Annual Report on Form 10-K, dated December 31, 1996, of The
Chase Manhattan Corporation, File No. 1-5805).
10.3 Deferred Compensation Plan of Chemical Banking Corporation and
Participating Companies, as amended through January 1, 1993 (incorporated
by reference to Exhibit 10.5 to the Annual Report on Form 10-K, dated
December 31, 1994, of Chemical Banking Corporation, File No. 1-5805).
10.4 The Chase Manhattan Corporation 1996 Long-Term Incentive Plan
(incorporated by reference to Schedule 14A, filed on April 17, 1996, of
The Chase Manhattan Corporation, File No. 1-5805).
10.5 The Chase Manhattan 1994 Long-Term Incentive Plan (incorporated herein by
reference to Exhibit 10O to The Chase Manhattan Corporation's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994, File No.
1-5945).
10.6 Amendment to The Chase Manhattan 1994 Long-Term Incentive Plan
(incorporated herein by reference to Exhibit 10S to The Chase Manhattan
Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 1-5945).
112
Exhibit Index
Item No. Description
10.7 Chemical Banking Corporation Long-Term Stock Incentive Plan, as amended
and restated as of May 19, 1992 (incorporated by reference to Exhibit
10.7 to the Annual Report on Form 10-K, dated December 31, 1992, of
Chemical Banking Corporation, File No. 1-5805).
10.8 The Chase Manhattan 1987 Long-Term Incentive Plan, as amended
(incorporated by reference to Exhibit 10A to The Chase Manhattan
Corporation's Annual Report on Form 10-K for the year ended December 31,
1990, File No. 1-5945).
10.9 Amendment to The Chase Manhattan 1987/82 Long-Term Incentive Plan
(incorporated by reference to Exhibit 10T to the Quarterly Report on Form
10-Q, for the quarter ended September 30, 1995, of The Chase Manhattan
Corporation, File No. 1-5945)
10.10 Long Term Incentive Program of Manufacturers Hanover Corporation
(incorporated by reference to Exhibit 10.10 to the Annual Report on Form
10-K, dated December 31, 1997, of The Chase Manhattan Corporation, File
No. 1-5805).
10.11 Key Executive Performance Plan of The Chase Manhattan Corporation, as
amended and restated January 1, 1999 (incorporated by reference to
Schedule 14A, filed on March 25, 1999, of the The Chase Manhattan
Corporation, File No. 1-5805).
10.12 The Chase Manhattan Annual Incentive Arrangement for Certain Executive
Officers (incorporated by reference to Exhibit 10W to the Quarterly
Report on Form 10-Q, for the quarter ended September 30, 1995, of The
Chase Manhattan Corporation, File No. 1-5945)
10.13 Forms of severance agreements as entered into by The Chase Manhattan
Corporation and certain of its executive officers (incorporated by
reference to Exhibit 10.13 to the Annual Report on Form 10-K, dated
December 31, 1997, of The Chase Manhattan Corporation, File No. 1-5805).
10.14 Form of termination agreement as entered into by The Chase Manhattan
Corporation and Donald L. Boudreau (incorporated by reference to the
Annual Report on Form 10-K, dated December 31, 1994, of The Chase
Manhattan Corporation, File No. 1-5945).
10.15 Form of amendment to the termination agreement as entered into by The
Chase Manhattan Corporation and Donald L. Boudreau (incorporated by
reference to the Quarterly Report on Form 10-Q, dated September 30, 1995,
of The Chase Manhattan Corporation, File No. 1-5945).
10.16 Permanent Life Insurance Options Plan (incorporated by reference to
Exhibit 10.11 to the Annual Report on Form 10-K, dated December 31, 1992,
of Chemical Banking Corporation, File No. 1 -5805).
10.17 Executive Retirement Plan of Chemical Banking Corporation and Certain
Subsidiaries (incorporated by reference to Exhibit 10.8 to the Annual
Report on Form 10-K, dated December 31, 1995, of Chemical Banking
Corporation, File No. 1-5805).
10.18 Supplemental Retirement Plan of Chemical Bank and Certain Affiliated
Companies, restated effective January 1, 1993 and as amended through
January 1, 1995 (incorporated by reference to Exhibit 10.9 to the Annual
Report on Form 10-K, dated December 31, 1995, of Chemical Banking
Corporation, File No. 1-5805).
10.19 Supplemental Retirement Plan of The Chase Manhattan Bank, as amended
(incorporated by reference to Exhibit 10G of The Chase Manhattan
Corporation's Annual Report on Form 10-K for the year ended December 31,
1989, File No. 1-5945).
10.20 Further Amendment to the Supplemental Retirement Plan of The Chase
Manhattan Bank (incorporated by reference to Exhibit 10G of The Chase
Manhattan Corporation's Annual Report on Form 10-K for the year ended
December 31, 1990, File No. 1-5945)
10.21 Amendment to Supplemental Retirement Plan of The Chase Manhattan Bank
(incorporated herein by reference to Exhibit 10Z to The Chase Manhattan
Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 1-5945).
10.22 Supplemental Benefit Plan of The Chase Manhattan Bank, as amended
(incorporated by reference to Exhibit 10H of The Chase Manhattan
Corporation's Annual Report on Form 10-K for the year ended December 31,
1990, File No. 1-5945).
10.23 Amendment to Supplemental Benefit Plan of The Chase Manhattan Bank
(incorporated herein by reference to Exhibit 10AA to The Chase Manhattan
Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 1-5945).
10.24 TRA86 Supplemental Benefit Plan of The Chase Manhattan Bank, as amended
(incorporated by reference to Exhibit 10I of The Chase Manhattan
Corporation's Annual Report on Form 10-K for the year ended December 31,
1990, File No. 1-5945).
113
Exhibit Index
Item No. Description
10.25 Amendment to TRA86 Supplemental Benefit Plan of The Chase Manhattan Bank
(incorporated herein by reference to Exhibit 10BB to The Chase Manhattan
Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 1- 5945).
11.1 Computation of earnings per common share.
12.1 Computation of ratio of earnings to fixed charges.
12.2 Computation of ratio of earnings to fixed charges and preferred stock
dividend requirements.
21.1 List of Subsidiaries of The Chase Manhattan Corporation.
22.1 Annual Report on Form 11-K of the 401(k) Savings Plan of The Chase
Manhattan Bank (to be filed by amendment pursuant to Rule 15d-21 under
the Securities Exchange Act of 1934).
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule.