0000009749-95-000096.txt : 19950816 0000009749-95-000096.hdr.sgml : 19950816 ACCESSION NUMBER: 0000009749-95-000096 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950814 SROS: AMEX SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANKERS TRUST NEW YORK CORP CENTRAL INDEX KEY: 0000009749 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 136180473 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05920 FILM NUMBER: 95563881 BUSINESS ADDRESS: STREET 1: 280 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2122502500 MAIL ADDRESS: STREET 1: 280 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10017 FORMER COMPANY: FORMER CONFORMED NAME: BT NEW YORK CORP DATE OF NAME CHANGE: 19671107 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1995 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-5920 BANKERS TRUST NEW YORK CORPORATION (Exact name of registrant as specified in its charter) New York 13-6180473 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 280 Park Avenue New York, New York 10017 (Address of principal executive offices) (Zip code) (212) 250-2500 (Registrant's telephone number, including area code) 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 the number of shares outstanding of each of the registrant's classes of common stock as of July 31, 1995: Common Stock, $1 par value, 78,383,895 shares. 1 BANKERS TRUST NEW YORK CORPORATION June 30, 1995 FORM 10-Q TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statement of Income Three Months Ended June 30, 1995 and 1994 2 Six Months Ended June 30, 1995 and 1994 3 Consolidated Balance Sheet At June 30, 1995 and December 31, 1994 4 Consolidated Statement of Changes in Stockholders' Equity Six Months Ended June 30, 1995 and 1994 5 Consolidated Statement of Cash Flows Six Months Ended June 30, 1995 and 1994 6 Consolidated Schedule of Net Interest Revenue Three Months and Six Months Ended June 30, 1995 and 1994 7 In the opinion of management, all material adjustments necessary for a fair presentation of the financial position and results of operations for the interim periods presented have been made. All such adjustments were of a normal recurring nature. The results of operations for the three months and six months ended June 30, 1995 are not necessarily indicative of the results of operations for the full year or any other interim period. The financial statements included in this Form 10-Q should be read with reference to the Corporation's 1994 Annual Report as supplemented by the first quarter 1995 Form 10-Q. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 35 SIGNATURE 36 2 PART I. FINANCIAL INFORMATION BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (in millions, except per share data) (unaudited)
Increase THREE MONTHS ENDED JUNE 30, 1995 1994 (Decrease) NET INTEREST REVENUE Interest revenue $1,520 $1,255 $ 265 Interest expense 1,298 946 352 Net interest revenue 222 309 (87) Provision for credit losses - - - Net interest revenue after provision for credit losses 222 309 (87) NONINTEREST REVENUE Trading 79 124 (45) Fiduciary and funds management 166 187 (21) Fees and commissions 211 195 16 Securities available for sale gains 17 19 (2) Other 114 112 2 Total noninterest revenue 587 637 (50) NONINTEREST EXPENSES Salaries 194 189 5 Incentive compensation and employee benefits 135 202 (67) Occupancy, net 38 38 - Furniture and equipment 40 37 3 Other 271 222 49 Total noninterest expenses 678 688 (10) Income before income taxes 131 258 (127) Income taxes 40 77 (37) NET INCOME $ 91 $ 181 $ (90) NET INCOME APPLICABLE TO COMMON STOCK $ 79 $ 172 $ (93) EARNINGS PER COMMON SHARE: PRIMARY $.98 $2.09 $(1.11) FULLY DILUTED $.98 $2.09 $(1.11) Cash dividends declared per common share $1.00 $.90 $.10
3 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (in millions, except per share data) (unaudited)
Increase SIX MONTHS ENDED JUNE 30, 1995 1994 (Decrease) NET INTEREST REVENUE Interest revenue $2,873 $2,466 $ 407 Interest expense 2,469 1,787 682 Net interest revenue 404 679 (275) Provision for credit losses 14 - 14 Net interest revenue after provision for credit losses 390 679 (289) NONINTEREST REVENUE Trading 1 138 (137) Fiduciary and funds management 337 375 (38) Fees and commissions 356 377 (21) Securities available for sale gains 19 23 (4) Other 216 229 (13) Total noninterest revenue 929 1,142 (213) NONINTEREST EXPENSES Salaries 402 366 36 Incentive compensation and employee benefits 268 364 (96) Occupancy, net 79 75 4 Furniture and equipment 82 76 6 Provision for severance-related costs 50 - 50 Other 531 448 83 Total noninterest expenses 1,412 1,329 83 Income (loss) before income taxes (93) 492 (585) Income taxes (27) 147 (174) NET INCOME (LOSS) $ (66) $ 345 $(411) NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ (86) $ 331 $(417) EARNINGS (LOSS) PER COMMON SHARE: PRIMARY $(1.10) $3.99 $(5.09) FULLY DILUTED $(1.10) $3.99 $(5.09) Cash dividends declared per common share $2.00 $1.80 $.20
4 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ($ in millions, except par value) (unaudited)
June 30,December 31, 1995 1994 ASSETS Cash and due from banks $ 1,739 $ 1,985 Interest-bearing deposits with banks 1,357 3,390 Federal funds sold 238 2,544 Securities purchased under resale agreements 17,629 9,943 Securities borrowed 6,929 6,197 Trading assets 50,565 47,514 Securities available for sale 6,479 7,475 Loans 11,537 12,501 Allowance for credit losses (1,243) (1,252) Premises and equipment, net 931 915 Due from customers on acceptances 370 378 Accounts receivable and accrued interest 2,697 2,356 Other assets 3,709 3,070 Total $102,937 $97,016 LIABILITIES Deposits Noninterest-bearing In domestic offices $ 2,465 $ 3,285 In foreign offices 527 541 Interest-bearing In domestic offices 5,170 5,769 In foreign offices 14,443 15,344 Total deposits 22,605 24,939 Trading liabilities 28,404 20,949 Securities sold under repurchase agreements 18,933 15,617 Other short-term borrowings 14,010 18,222 Acceptances outstanding 370 378 Accounts payable and accrued expenses 3,615 3,174 Other liabilities 2,347 2,328 Long-term debt 7,514 6,455 Total liabilities 97,798 92,062 PREFERRED STOCK OF SUBSIDIARY 250 250 STOCKHOLDERS' EQUITY Preferred stock 863 395 Common stock, $1 par value Authorized, 300,000,000 shares Issued, 83,678,973 shares 84 84 Capital surplus 1,300 1,317 Retained earnings 3,240 3,494 Common stock in treasury, at cost: 1995, 5,327,632 shares; 1994, 5,609,707 shares (391) (416) Other (207) (170) Total stockholders' equity 4,889 4,704 Total $102,937 $97,016
5 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (in millions) (unaudited)
SIX MONTHS ENDED JUNE 30, 1995 1994 PREFERRED STOCK Balance, January 1 $ 395 $ 250 Preferred stock issued 468 200 Balance, June 30 863 450 COMMON STOCK Balance, January 1 and June 30 84 84 CAPITAL SURPLUS Balance, January 1 1,317 1,321 Preferred stock issuance and conversion costs (16) (4) Common stock distributed under employee benefit plans (1) 2 Balance, June 30 1,300 1,319 RETAINED EARNINGS Balance, January 1 3,494 3,226 Net income (loss) (66) 345 Cash dividends declared Preferred stock (18) (13) Common stock (157) (143) Treasury stock distributed under employee benefit plans (13) (11) Balance, June 30 3,240 3,404 COMMON STOCK IN TREASURY, AT COST Balance, January 1 (416) (233) Purchases of stock (13) (156) Restricted stock granted, net 4 6 Treasury stock distributed under employee benefit plans 34 25 Balance, June 30 (391) (358) COMMON STOCK ISSUABLE - STOCK AWARDS Balance, January 1 160 143 Deferred stock awards granted, net 31 35 Deferred stock distributed (16) - Balance, June 30 175 178 DEFERRED COMPENSATION - STOCK AWARDS Balance, January 1 (63) (47) Deferred stock awards granted, net (22) (36) Restricted stock granted, net (2) (5) Amortization of deferred compensation, net 19 31 Balance, June 30 (68) (57) CUMULATIVE TRANSLATION ADJUSTMENTS Balance, January 1 (336) (319) Translation adjustments 13 (46) Income taxes applicable to translation adjustments (24) 42 Balance, June 30 (347) (323) SECURITIES VALUATION ALLOWANCE Balance, January 1 69 109 Change in unrealized net gains, after applicable income taxes and minority interest (36) (13) Balance, June 30 33 96 TOTAL STOCKHOLDERS' EQUITY, JUNE 30 $4,889 $4,793
6 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (in millions) (unaudited)
SIX MONTHS ENDED JUNE 30, 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (66) $ 345 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for credit losses 14 - Provision for severance-related costs 50 - Provision for policyholder benefits 127 107 Deferred income taxes (33) (74) Depreciation and amortization of premises and equipment 67 60 Other, net (45) (69) Earnings adjusted for noncash charges and credits 114 369 Net change in: Trading assets (3,874) (5,615) Trading liabilities 7,914 15,577 Receivables and payables from securities transactions 126 (330) Other operating assets and liabilities, net (759) 401 Securities available for sale gains (19) (23) Net cash provided by operating activities 3,502 10,379 CASH FLOWS FROM INVESTING ACTIVITIES Net change in: Interest-bearing deposits with banks 1,903 32 Federal funds sold 2,306 (1,212) Securities purchased under resale agreements (7,616) (2,683) Securities borrowed (732) (2,459) Loans 960 1,892 Securities available for sale: Purchases (1,621) (3,352) Maturities and other redemptions 1,687 1,723 Sales 1,163 1,307 Acquisitions of premises and equipment (73) (100) Other, net (64) 4 Net cash used in investing activities (2,087) (4,848) CASH FLOWS FROM FINANCING ACTIVITIES Net change in: Deposits (2,135) (2,821) Securities sold under repurchase agreements 3,240 (2,378) Other short-term borrowings (3,990) 670 Issuances of long-term debt 2,196 916 Repayments of long-term debt (1,000) (958) Issuances of preferred stock 221 196 Purchases of treasury stock (13) (156) Cash dividends paid (174) (157) Other, net 11 17 Net cash used in financing activities (1,644) (4,671) Net effect of exchange rate changes on cash (17) 52 NET INCREASE (DECREASE)IN CASH AND DUE FROM BANKS (246) 912 Cash and due from banks, beginning of year 1,985 1,750 Cash and due from banks, end of period $1,739 $ 2,662 Interest paid $2,310 $1,756 Income taxes paid, net $182 $156 Noncash investing activities $41 $120 Noncash financing activities: Conversion of debt to preferred stock $243 $- Other - 6 Total noncash financing activities $243 $6
7 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES CONSOLIDATED SCHEDULE OF NET INTEREST REVENUE (in millions) (unaudited)
Three Months Ended Six Months Ended June 30, June 30, 1995 1994 1995 1994 INTEREST REVENUE Interest-bearing deposits with banks $ 60 $ 24 $ 109 $ 58 Federal funds sold 21 4 56 6 Securities purchased under resale agreements 284 108 495 204 Securities borrowed 125 43 233 73 Trading assets 714 761 1,330 1,521 Securities available for sale Taxable 81 64 170 125 Exempt from federal income taxes 15 22 31 43 Loans 220 229 449 436 Total interest revenue 1,520 1,255 2,873 2,466 INTEREST EXPENSE Deposits In domestic offices 98 62 191 107 In foreign offices 237 149 478 302 Trading liabilities 237 237 450 433 Securities sold under repurchase agreements 310 234 546 448 Other short-term borrowings 307 204 605 378 Long-term debt 109 60 199 119 Total interest expense 1,298 946 2,469 1,787 NET INTEREST REVENUE $ 222 $ 309 $ 404 $ 679
8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Bankers Trust New York Corporation (the "Parent Company") and subsidiaries (collectively, the "Corporation", or the "Firm") earned $91 million for the quarter ended June 30, 1995, or $.98 primary earnings per share. In the second quarter of 1994, the Corporation earned $181 million, or $2.09 primary earnings per share. For the first six months of 1995, the Corporation recorded a loss of $31 million, or $.65 primary loss per share excluding an after-tax provision for severance-related costs of $35 million taken in connection with the Corporation's expense reduction programs. Net loss for the first six months, including the effect of this provision was $66 million, or $1.10 primary loss per share. For the six months ended June 30, 1994, net income was $345 million, or $3.99 primary earnings per share. BUSINESS FUNCTIONS ANALYSIS Because the Corporation's business is complex in nature and its operations are highly integrated, it is impractical to segregate the respective contributions of the business functions with precision. For example, the Client Advisory function is difficult to split from the Client Finance function, since most complex financings include both an element of advice and the arrangement of credit for the client. Further, transactions undertaken for purposes of Client Financial Risk Management may contain an element of Client Finance or Trading and Positioning. Finally, the Trading and Positioning function serves as an element of support for client-based activities. As a result, estimates and subjective judgments have been made to apportion revenue and expenses among the business functions. In addition, certain revenue and expenses have been excluded from the business functions because, in the opinion of management, they could not be reasonably allocated or because their attribution to a particular function would be distortive. The following table breaks down earnings on the basis of the Corporation's five business functions, which represent its core business activities and are an important tool for analyzing the results of operations. Detailed definitions of these categories, as well as a discussion of the methodology used to calculate their results, appear in the 1994 Annual Report on Form 10-K. 9 BUSINESS FUNCTIONS (continued)
Business Functions Profitability (in millions) Quarter Ended Six Months Ended June 30, Increase June 30, Increase 1995 1994 (Decrease) 1995 1994 (Decrease) Client Finance $ 48 $ 36 $ 12 $ 62 $ 79 $ (17) Client Advisory 19 23 (4) 39 53 (14) Client Financial Risk Management (49) 50 (99) (171) 164 (335) Client Transaction Processing 25 26 (1) 33 58 (25) Trading and Positioning 53 52 1 17 3 14 Unallocated (5) (6) 1 (46) (12) (34) Income (Loss) $ 91 $181 $(90) $ (66) $345 $(411)
Client Finance - Client Finance income was $48 million in the second quarter of 1995, up $12 million, or 33 percent, from last year's second quarter. This increase was primarily attributable to strong levels of loan syndication and private placement fees. Income for the first half of 1995 was $62 million, down from $79 million recorded in the comparable period in 1994. Client Advisory - Client Advisory income was $19 million in the current quarter, a decline of $4 million from the prior year's second quarter. This decline was primarily due to decreased revenue from merger and acquisition, financial advisory and funds management activities offset in part by higher revenue from the Corporation's Chilean insurance subsidiaries. Income for the first six months of 1995 was $39 million, down from $53 million recorded in 1994. Client Financial Risk Management - As a result of a successful reduction of loss making positions, principally in Latin American derivatives, the net loss in Client Financial Risk Management has been reduced by $73 million, to $49 million in the second quarter of 1995. Additionally, though comprised of low margin transactions, client derivatives volume remained steady during the second quarter. Income for the three and six months ended June 30, 1995 declined by $99 million and $335 million, respectively as compared to the same periods in 1994. Client Transaction Processing - Client Transaction Processing income was $25 million, down $1 million from the prior year's second quarter due to a decline in transaction volumes in fiduciary services. This was offset in part by a small gain on the sale of one of the Corporation's trust businesses. Client Transaction Processing revenue for the first half of 1995 declined $25 million from the first half of 1994. 10 BUSINESS FUNCTIONS (continued) Trading and Positioning - Trading and Positioning income of $53 million during the current quarter was virtually unchanged from the prior year's second quarter. The results of the current quarter were a significant improvement over the weak first quarter as trading performance generally improved in the Latin American, Australian and Asian markets. Trading and Positioning income for the first six months of 1995 improved by $14 million over the comparable 1994 period. Unallocated - Included in the unallocated category for the first six months of 1995 was a $35 million after-tax provision for severance-related costs associated with the expense reduction programs. REVENUE The table below shows net interest revenue, average balances and average rates. The tax equivalent adjustment is made to present the revenue and yields on certain assets, primarily tax-exempt securities and loans, as if such revenue were taxable.
Quarter Ended Six Months Ended June 30, June 30, 1995 1994 1995 1994 NET INTEREST REVENUE (in millions) Book basis $222 $309 $404 $679 Tax equivalent adjustment 9 21 24 42 Fully taxable basis $231 $330 $428 $721 AVERAGE BALANCES (in millions) Interest-earning assets $81,393 $74,107 $79,819 $77,553 Interest-bearing liabilities 77,674 71,197 76,664 74,547 Earning assets financed by noninterest-bearing funds $ 3,719 $ 2,910 $ 3,155 $ 3,006 AVERAGE RATES (fully taxable basis) Yield on interest-earning assets 7.53% 6.91% 7.32% 6.52% Cost of interest-bearing liabilities 6.70 5.33 6.49 4.83 Interest rate spread .83 1.58 .83 1.69 Contribution of noninterest-bearing funds .31 .21 .25 .18 Net interest margin 1.14% 1.79% 1.08% 1.87%
Net interest revenue for the second quarter of 1995 totaled $222 million, down $87 million, or 28 percent, from the second quarter of 1994. Of this decline, $64 million was from trading-related net interest revenue. 11 REVENUE (continued) Net interest revenue was $404 million for the first six months of 1995, down $275 million, or 41 percent, from the first half of 1994. Of this decline, $240 million was from trading-related net interest revenue. A significant portion of the Firm's trading and risk management activities involve positions in interest rate instruments and related derivatives. The revenue from these activities can periodically shift between trading and net interest, depending on a variety of factors, including risk management strategies. Therefore, the Corporation views trading revenue and trading-related net interest revenue together.
Trading- Related Net Trading Interest (in millions) Revenue Revenue Total Quarter ended June 30, 1995 Interest rate risk $ 10 $ 72 $ 82 Foreign exchange risk 5 - 5 Equity and commodity risk 64 (15) 49 Total $ 79 $ 57 $ 136 Quarter ended June 30, 1994 Interest rate risk $ 197 $122 $319 Foreign exchange risk (111) - (111) Equity and commodity risk 38 (1) 37 Total $ 124 $121 $245 Six months ended June 30, 1995 Interest rate risk $(47) $ 90 $ 43 Foreign exchange risk (38) - (38) Equity and commodity risk 86 (32) 54 Total $ 1 $ 58 $ 59 Six months ended June 30, 1994 Interest rate risk $229 $307 $536 Foreign exchange risk (221) - (221) Equity and commodity risk 130 (9) 121 Total $138 $298 $436
12 REVENUE (continued) Second Quarter 1995 vs. Second Quarter 1994 Interest Rate Risk - The Firm's positions in interest rate instruments and related derivative products remained adversely affected by the general market downturn. Although volumes in these products remained relatively steady, activity during the second quarter of 1995 was comprised mainly of relatively low margin transactions. As a result, trading and trading- related net interest revenue declined by $237 million, compared to an exceptionally strong second quarter of 1994. Foreign Exchange Risk - Foreign exchange risk revenue was weak due to the continued volatility in foreign currency markets, however, the second quarter performance reflected an increase of $116 million compared to the same period in 1994. The variance was affected by a significant loss in 1994 related to Latin American markets. Equity and Commodity Risk - Total trading and trading-related net interest revenue increased $12 million compared to the second quarter in 1994. Improved performance in equity and equity derivatives spurred an increase in this category. Six Months 1995 vs. Six Months 1994 Interest Rate Risk - The Firm's positions in interest rate instruments were adversely affected by the general volatility in interest rates that occurred in the first half of 1995, coupled with liquidity problems affecting the Firm's derivatives products in the emerging markets of Latin America. Foreign Exchange Risk - Foreign exchange results improved significantly compared to a weak first half of 1994. The improvement was principally due to a rebound in the Firm's proprietary trading businesses, as well as the previously mentioned effect of the loss in 1994 related to Latin American markets. Equity Risk and Commodity Risk - Trading and trading-related net interest revenue declined by $67 million compared to the first half of 1994 primarily due to the overall downturn in derivative products in this category. 13 REVENUE (continued) Shown below is a comparison of the components of noninterest revenue (in millions).
Quarter Ended Six Months Ended June 30, Increase June 30, Increase 1995 1994 (Decrease) 1995 1994(Decrease) Trading $ 79 $124 $(45) $ 1 $138 $(137) Fiduciary and funds management 166 187 (21) 337 375 (38) Fees and commissions Corporate finance fees 127 115 12 199 223 (24) Service charges on deposit accounts 17 22 (5) 36 44 (8) Acceptances and letters of credit commissions 11 10 1 21 21 - Other 56 48 8 100 89 11 Total fees and commissions 211 195 16 356 377 (21) Securities available for sale gains 17 19 (2) 19 23 (4) Other noninterest revenue Insurance premiums 63 41 22 112 96 16 Net revenue from equity investment transactions 13 26 (13) 39 55 (16) Other 38 45 (7) 65 78 (13) Total other noninterest revenue 114 112 2 216 229 (13) Total noninterest revenue $587 $637 $(50) $929 $1,142 $(213)
Second Quarter 1995 vs. Second Quarter 1994 Fiduciary and funds management revenue totaled $166 million for the second quarter, down $21 million, or 11 percent, from the same period last year. The decrease in revenue was due primarily to a decline in transaction volumes in fiduciary services. Fees and commissions of $211 million increased by $16 million, or 8 percent, from the second quarter of 1994. Corporate finance fees of $127 million increased by $12 million, or 10 percent, from the same period last year. Higher revenue from loan syndication and private placement fees were partially offset by lower revenue from securities underwriting and financial advisory activities. The Corporation's securities available for sale gains were $17 million, compared with $19 million in the prior year's second quarter. 14 REVENUE (continued) Other noninterest revenue totaled $114 million, up $2 million, from the prior year's quarter. This increase was primarily a result of higher insurance premium revenue recorded in the Corporation's Chilean subsidiaries due to an increase in the number of annuity policies sold. This was partially offset by lower net gains from sales of equity investments. Six Months 1995 vs. Six Months 1994 Fiduciary and funds management revenue of $337 million decreased $38 million, or 10 percent, from the first six months of 1994. Decreased revenue was recorded by most business activities within this revenue category, primarily due to a decline in transaction volumes. Fees and commissions decreased $21 million, or 6 percent, from the first half of 1994. The $24 million, or 11 percent, decrease in corporate finance fees was due to lower revenue from securities underwriting fees, offset in part by higher revenue from private placement and loan syndication fees. Other noninterest revenue totaled $216 million, down $13 million from the first half of 1994. The decrease was due to lower net gains from sales of equity investments, offset in part by higher insurance premium revenue recorded in the Corporation's Chilean subsidiaries due to an increase in the number of annuity policies sold. Also contributing to the year-to-year decline was the impact of the 1994 insurance settlement related to the fire at the Corporation's headquarters at 280 Park Avenue. This was offset in part by charges taken in 1994 related to the funds management business. PROVISION AND ALLOWANCE FOR CREDIT LOSSES The provision for credit losses is dependent upon management's evaluation as to the amount needed to maintain the allowance for credit losses at a level considered appropriate in relation to the risk of losses inherent in the portfolio. No provision for credit losses was required for the current or prior year's second quarter. Net charge-offs for the quarter were $2 million, compared with $5 million a year ago. Nonrefinancing country net charge- offs for the current quarter were $3 million, compared with $16 million in the prior year's second quarter, which all related to real estate loans. Refinancing country recoveries for the second quarter of 1995 were $1 million, compared with $11 million of recoveries in last year's second quarter. 15 PROVISION AND ALLOWANCE FOR CREDIT LOSSES (continued) The provision for credit losses and the other changes in the allowance for credit losses are shown below (in millions).
Quarter Ended Six Months Ended June 30, June 30, Allowance for credit losses 1995 1994 1995 1994 Balance, beginning of period $1,245 $1,345 $1,252 $1,324 Net charge-offs (recoveries) Charge-offs 13 17 47 38 Recoveries 11 12 24 54 Total net charge-offs (recoveries)* 2 5 23 (16) Provision for credit losses - - 14 - Balance, end of period $1,243 $1,340 $1,243 $1,340 *Components: Secured by real estate $(3) $ 14 $ 3 $ 12 Real estate related - 2 2 2 Highly leveraged 2 - 22 (9) Other 4 - 4 9 Refinancing country (1) (11) (8) (30) Total $ 2 $ 5 $23 $(16)
The allowance for credit losses, at $1.243 billion at June 30, 1995, was down $2 million from its level at March 31, 1995, and down $9 million from December 31, 1994. The allowance was equal to 134 percent, 127 percent and 126 percent of total cash basis loans at June 30, 1995, March 31, 1995 and December 31, 1994, respectively. The Corporation believes that its allowance must be viewed in its entirety and therefore is available for potential credit losses in its entire portfolio, including loans, credit-related commitments, derivatives and other financial instruments. In the opinion of management, the allowance, when taken as a whole, is adequate to absorb reasonably estimated credit losses inherent in the Corporation's portfolio. On January 1, 1995, the Corporation adopted SFAS 114, "Accounting by Creditors for Impairment of a Loan" as amended by SFAS 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure." SFAS 114 requires the creation of a valuation allowance for impaired loans. Under SFAS 114, a loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the loan's contractual terms. At June 30, 1995, the recorded investment in loans that was considered to be impaired under SFAS 114 was $1.026 billion which consisted of total cash basis loans and renegotiated loans. Included in this amount was $578 million of loans for which the related valuation allowance was $98 million. 16 EXPENSES Second Quarter 1995 vs. Second Quarter 1994 Total noninterest expenses of $678 million decreased by $10 million from the second quarter of 1994. Incentive compensation and employee benefits expense decreased $67 million, or 33 percent, due principally to lower bonus expense reflecting the reduced earnings. Salaries expense increased $5 million, or 3 percent, from the second quarter of 1994 due mostly to salary increases. All other expenses totaled $349 million for the quarter, up $52 million, or 18 percent, from last year's second quarter. The provision for policyholder benefits accounted for approximately half of this increase due to an increase in the number of annuity policies sold at the Corporation's Chilean insurance subsidiaries. Six Months 1995 vs. Six Months 1994 Total noninterest expenses of $1.412 billion for the first six months of 1995 increased by $83 million, or 6 percent, from the first half of 1994. Excluding the provision for severance-related costs of $50 million, noninterest expenses were $1.362 billion, an increase of $33 million, or 2 percent, from the first six months of 1994. Incentive compensation and employee benefits expense decreased $96 million, or 26 percent, due to lower bonus expense reflecting the reduced earnings. Salaries expense increased $36 million, or 10 percent, from the first half of 1994. The number of full time staff at June 30, 1995 decreased by 742, to 13,787 from December 31, 1994. Management has implemented expense reduction programs designed to reduce overall operating expenses -- principally noninterest expenses before bonus, policyholder benefits and minority interest. At this operating expense level, the Corporation previously announced that it would be reducing these expenses by approximately $200 million in 1995 and approximately $275 million annually thereafter. Operating expense trends in the first and second quarters of 1995 show that the Corporation is on target to achieve these cost reductions. All other expenses, excluding the provision for severance-related costs, totaled $692 million for the first six months of 1995, up $93 million, or 16 percent, from the first half of 1994. Increases in professional fees, provision for policyholder benefits, agency personnel fees and minority interest accounted for approximately two-thirds of this increase. INCOME TAXES Income tax expense for the second quarter of 1995 amounted to $40 million, compared with $77 million for the second quarter of 1994. For the first six months of 1995, income tax benefit was $27 million, compared with income tax expense of $147 million for the first half of 1994. The effective tax rates for the quarter and six months ended June 30, 1995, were 31 percent and 29 percent, respectively, compared with 30 percent for the quarter and six months ended June 30, 1994. 17 EARNINGS PER COMMON SHARE Primary and fully diluted earnings per common share amounts are computed by subtracting from earnings the dividend requirements on preferred stock to arrive at earnings applicable to common stock and dividing this amount by the average number of common and common equivalent shares outstanding during the period. For the first six months of 1995, common stock equivalents were excluded from the computation as the effect would have been anti-dilutive. For the second quarter of 1995 and the second quarter and six months ended June 30, 1994, for both primary and fully diluted earnings per share, the average number of common and common equivalent shares outstanding was the sum of the average number of shares of common stock outstanding and the incremental number of shares issuable under outstanding stock options and deferred stock awards that had a dilutive effect as computed under the treasury stock method. Under this method, the number of incremental shares is determined by assuming the issuance of the outstanding stock options and deferred stock awards reduced by the number of shares assumed to be repurchased from the issuance proceeds, using the market price of the Parent Company's common stock. For primary earnings per share, this market price is the average market price for the period, while for fully diluted earnings per share, it is the period-end market price if it is higher than the average market price. At no time during the three and six month periods ended June 30, 1995 and 1994 did the Corporation have outstanding any securities which were convertible to the Parent Company's common stock. The earnings applicable to common stock and the number of shares used for primary and fully diluted earnings per share were as follows (in millions):
Quarter Ended Six Months Ended June 30, June 30, 1995 1994 1995 1994 Net income (loss) applicable to common stock $79 $172 $(86) $331 Average number of common shares outstanding 78.318 79.432 78.332 79.870 Primary earnings (loss) per share Average number of common and common equivalent shares outstanding (1) 80.564 82.168 78.332 82.914 Fully diluted earnings (loss) per share Average number of common and common equivalent shares outstanding - assuming full dilution (1) 80.796 82.213 78.332 82.936 (1) Common stock equivalents are excluded from the six months ended June 30, 1995 computation as the effect would be anti-dilutive.
18 BALANCE SHEET ANALYSIS The following table highlights the changes in the balance sheet. Since quarter-end balances can be distorted by one-day fluctuations, an analysis of changes in the quarterly averages is provided to give a better indication of balance sheet trends.
CONDENSED AVERAGE BALANCE SHEETS (in millions) 2nd Qtr 1st Qtr 4th Qtr 1995 1995 1994 ASSETS Interest-bearing deposits with banks $ 2,276 $ 2,634 $ 2,139 Federal funds sold 1,331 2,396 1,497 Securities purchased under resale agreements 23,020 18,596 14,380 Securities borrowed 8,533 7,658 6,494 Trading assets 29,477 28,368 33,106 Securities available for sale Taxable 4,231 4,929 5,240 Exempt from federal income taxes 1,749 1,964 2,238 Total securities available for sale 5,980 6,893 7,478 Loans 10,776 11,683 12,548 Total interest-earning assets 81,393 78,228 77,642 Cash and due from banks 1,615 1,629 1,835 Noninterest-earning trading assets 20,884 17,520 19,778 All other assets 7,137 8,415 8,081 Allowance for credit losses (1,256) (1,253) (1,327) Total $109,773 $104,539 $106,009 LIABILITIES Interest-bearing deposits In domestic offices $ 5,802 $ 5,764 $ 5,584 In foreign offices 16,042 15,786 15,611 Total interest-bearing deposits 21,844 21,550 21,195 Trading liabilities 10,000 11,438 8,856 Securities sold under repurchase agreements 23,967 19,021 20,833 Other short-term borrowings 14,750 17,166 18,327 Long-term debt 7,113 6,467 6,310 Total interest-bearing liabilities 77,674 75,642 75,521 Noninterest-bearing deposits 3,169 3,296 3,728 Noninterest-bearing trading liabilities 17,821 15,003 15,539 All other liabilities 6,124 5,662 6,212 Total liabilities 104,788 99,603 101,000 PREFERRED STOCK OF SUBSIDIARY 250 250 250 STOCKHOLDERS' EQUITY Preferred stock 691 479 395 Common stockholders' equity 4,044 4,207 4,364 Total stockholders' equity 4,735 4,686 4,759 Total $109,773 $104,539 $106,009 The condensed average balance sheets are presented on a different basis than the spot balance sheets, in that the various categories of interest- earning assets and interest-bearing liabilities exclude certain noninterest- earning/bearing components included in the spot balance sheet captions. These components, excluding noninterest-earning/bearing trading assets/liabilities, are included in "all other assets" and "all other liabilities" in the condensed average balance sheets.
19 BALANCE SHEET ANALYSIS (continued) Second Quarter 1995 vs. First Quarter 1995 The Corporation's average total assets amounted to $109.8 billion for the second quarter of 1995, an increase of $5.2 billion or 5 percent, from the first quarter of 1995. Average interest-earning assets increased $3.2 billion, or 4 percent, and the proportion of interest-earning assets to total assets decreased slightly, from 75 percent to 74 percent. The increase in interest-earning assets was primarily due to increases in securities purchased under resale agreements (up $4.4 billion, or 24 percent) and trading assets (up $1.1 billion, or 4 percent) offset in part by a decrease in federal funds sold (down $1.1 billion, or 44 percent). Interest-earning trading assets as a percentage of average total assets was unchanged at 27 percent. Noninterest-earning trading assets increased $3.4 billion, or 19 percent, from the first quarter of 1995. Average total liabilities increased $5.2 billion, or 5 percent, from the first quarter of 1995. Interest-bearing liabilities increased $2.0 billion, or 3 percent, from the first quarter of 1995. This increase was primarily attributable to an increase in securities sold under repurchase agreements (up $4.9 billion, or 26 percent) offset in part by a decrease in other short-term borrowings (down $2.4 billion or 14 percent). Total short- term borrowings (securities sold under repurchase agreements and other short-term borrowings) as a percentage of total interest-bearing liabilities increased from 48 percent to 50 percent in the second quarter of 1995. Noninterest-bearing trading liabilities increased $2.8 billion, or 19 percent, from the first quarter of 1995. Second Quarter 1995 vs. Fourth Quarter 1994 The Corporation's average total assets for the second quarter of 1995, increased $3.8 billion, or 4 percent, from the fourth quarter of 1994. Average interest-earning assets increased $3.8 billion, or 5 percent, and the proportion of interest-earning assets to total assets increased slightly, from 73 percent to 74 percent. The increase in interest-earning assets was primarily due to increases in securities purchased under resale agreements (up $8.6 billion, or 60 percent) and securities borrowed (up $2.0 billion, or 31 percent) offset by a decrease in interest-earning trading assets (down $3.6 billion, or 11 percent). As a percentage of average total assets, interest-earning trading assets decreased from 31 percent to 27 percent in the second quarter of 1995, while loans decreased from 12 percent to 10 percent. Noninterest-earning trading assets increased $1.1 billion from the fourth quarter of 1994. Average total liabilities increased $3.8 billion, or 4 percent, from the fourth quarter of 1994. Interest-bearing liabilities increased $2.2 billion from last year's fourth quarter. This increase was primarily attributable to increases in securities sold under repurchase agreements (up $3.1 billion, or 15 percent) and trading liabilities (up $1.1 billion, or 13 percent) offset in part by a decrease in other short-term borrowings (down $3.6 billion, or 20 percent). Total short-term borrowings (securities sold under repurchase agreements and other short-term 20 BALANCE SHEET ANALYSIS (continued) borrowings) as a percentage of total interest-bearing liabilities decreased from 52 percent to 50 percent in the first half of 1995. Noninterest- bearing trading liabilities increased $2.3 billion from the fourth quarter of 1994. Trading Assets and Trading Liabilities The components of these accounts, which are carried at fair value, were as follows (in millions):
June 30, December 31, 1995 1994 TRADING ASSETS U.S. government and agency securities $ 9,774 $10,974 Obligations of U.S. states and political subdivisions 560 179 Foreign government securities 10,692 8,359 Corporate debt securities 4,767 5,571 Equity securities 3,830 3,850 Bankers acceptances and certificates of deposit 1,976 1,316 Swaps, options and other derivative contracts (1) 15,560 14,071 Other 3,406 3,194 Total trading assets $50,565 $47,514 TRADING LIABILITIES Securities sold, not yet purchased U.S. government and agency securities $ 6,220 $4,159 Foreign government securities 4,188 2,751 Equity securities 2,523 2,298 Other 365 174 Swaps, options and other derivative contracts (1) 15,108 11,567 Total trading liabilities $28,404 $20,949 (1)Comprised of fair values of interest rate instruments, foreign exchange rate instruments, and equity and commodity instruments, reduced by the effects of master netting agreements, in accordance with FASB Interpretation No. 39.
21 BALANCE SHEET ANALYSIS (continued) Securities Available for Sale The fair value, amortized cost and gross unrealized holding gains and losses for the Corporation's securities available for sale follow (in millions):
June 30, March 31,December 31, 1995 1995 1994 Fair value $6,479 $6,019 $7,475 Amortized cost 6,396 5,898 7,306 Excess of fair value over amortized cost (1) $ 83 $ 121 $ 169 (1) Components: Unrealized gains $ 168 $189 $ 270 Unrealized losses (85) (68) (101) $ 83 $121 $ 169
Long-term Debt During the second quarter of 1995, the Corporation obtained $1.189 billion of cash proceeds from the issuances of long-term debt and repaid $219 million of long-term debt. The larger of these debt issuances and redemptions were as follows (in millions):
Face Amount Issuances Redemptions Parent Company Floating Rate Notes due May 1998 $300 Floating Rate Notes due June 2000 $200 8 1/4% Subordinated Notes due May 2005 $150 7 1/2% Subordinated Notes due June 2010 $75 7.50% Convertible Capital Securities due August 2033 (1) $97 Bankers Trust Company Redeemable Preference Securities due December 1996 to April 1997 (2) $312 (1) This debt was converted to Preferred Stock, Series P during the second quarter of 1995. See Preferred Stock section for further details. (2) At June 30, 1995, certain subsidiaries of Bankers Trust Company had outstanding ($1.4 billion) of mandatorily redeemable preference securities with maturities ranging from September 1996 to April 1997.
22 BALANCE SHEET ANALYSIS (continued) Preferred Stock Issuance On May 15, 1995, the Corporation reset the interest rate on its $100 million 7.50% Convertible Capital Securities giving the holders the right to convert the debt securities into depositary shares. Holders of more than $96.4 million aggregate principal amount of the 7.50% Convertible Capital Securities have converted their securities into approximately 3.9 million depositary receipts, each representing a one-fortieth interest in a share of the Parent Company's 7.50% Cumulative Preferred Stock, Series P (Liquidation Preference - $1,000 per share) ("Series P"). Dividends on the Series P are cumulative and payable quarterly on February 15, May 15, August 15 and November 15 of each year, commencing with the date succeeding original issuance. At the option of the Corporation, the Series P may be redeemed, in whole or in part, at $1,200 per share (or $30 per depositary share) on or before August 15, 1998 and thereafter at $1,000 per share (or $25 per depositary share), plus, in each case, accrued and unpaid dividends to the redemption date. Any optional redemption shall be with the approval of the Federal Reserve Board unless at that time that body should determine that its approval is not required. On June 30, 1995, the Corporation issued $125 million, or 5 million depositary shares at $25 per share, each representing a one-hundredth interest in a share of the Corporation's 7 3/4% Cumulative Preferred Stock, Series S (Liquidation Preference - $2,500 per share) ("Series S"). Dividends on the Series S are cumulative and payable quarterly on March 1, June 1, September 1 and December 1 of each year, commencing with the date succeeding original issuance. At the option of the Corporation, the Series S may be redeemed, in whole or in part, on or after June 1, 2000, at $2,500 per share (or $25 per depositary share), plus, in each case, accrued and unpaid dividends to the redemption date. Any optional redemption shall be with the approval of the Federal Reserve Board unless at that time that body should determine that its approval is not required. The preferred stock component of total stockholders' equity increased by approximately $224 million during the second quarter of 1995 primarily as a result of the above. 23 TRADING DERIVATIVES The Corporation actively manages trading positions in a variety of derivative contracts. Most of the Corporation's trading positions are established as a result of providing derivative products to meet customers' demands. To anticipate customer demand for such transactions, the Corporation also carries an inventory of capital market instruments and maintains its access to market liquidity by quoting bid and offer prices to, and trading with, other market makers. These two activities are essential to provide customers with capital market products at competitive prices. All positions are reported at fair value and changes in fair values are reflected in trading revenue as they occur. The following tables reflect the gross fair values and balance sheet amounts of trading derivatives:
At June 30, Average During 1995 2nd Qtr.1995 (Liabi- (Liabi- (in millions) Assets lities) Assets lities) OTC Financial Instruments Interest Rate and Currency Swap Contracts $17,515 $(19,039) $17,272 $(17,802) Interest Rate Contracts Forwards 142 (138) 135 (150) Options purchased 1,204 1,024 Options written (1,514) (1,632) Foreign Exchange Rate Contracts Spot and Forwards 12,574 (11,029) 20,112 (18,447) Options purchased 1,526 1,784 Options written (1,117) (1,437) Equity-related contracts 1,718 (1,799) 1,452 (1,604) Commodity-related and other contracts 692 (497) 574 (421) Exchange-Traded Options Interest Rate 187 (67) 147 (59) Foreign Exchange - - - - Equity 147 (53) 138 (50) Commodity - - 27 (19) Total Gross Fair Values 35,705 (35,253) 42,665 (41,621) Impact of Netting Agreements (20,145) 20,145 (25,094) 25,094 $15,560(1) $17,571 $(15,108)(1) $(16,527) (1) As reflected on the balance sheet in "Trading Assets" and "Trading Liabilities."
24 TRADING DERIVATIVES (continued)
At December 31, Average During 1994 4th Qtr.1994 (Liabi- (Liabi- (in millions) Assets lities) Assets lities) OTC Financial Instruments Interest Rate and Currency Swap Contracts $15,055 $(11,388) $15,087 $(12,042) Interest Rate Contracts Forwards 91 (127) 77 (96) Options purchased 1,211 1,363 Options written (2,330) (2,109) Foreign Exchange Rate Contracts Spot and Forwards 8,127 (7,988) 12,133 (12,150) Options purchased 1,504 1,378 Options written (1,522) (1,280) Equity-related contracts 1,005 (1,316) 1,660 (1,778) Commodity-related and other contracts 578 (451) 479 (411) Exchange-Traded Options Interest Rate 191 (113) 105 (80) Foreign Exchange - (62) 19 (54) Equity 82 (43) 90 (63) Total Gross Fair Values 27,844 (25,340) 32,391 (30,063) Impact of Netting Agreements (13,773) 13,773 (17,843) 17,843 $14,071 (1) $14,548 $(11,567) (1) $(12,220) (1) As reflected on the balance sheet in "Trading Assets" and "Trading Liabilities."
END-USER DERIVATIVES The Corporation, as an end user, utilizes various types of derivative products (principally interest rate swaps) to manage the interest rate, currency and other market risks associated with certain liabilities and assets such as interest-bearing deposits, short-term borrowings and long- term debt as well as investments in non-marketable equity instruments and net investments in foreign entities. Revenue or expense pertaining to management of interest rate exposure is predominantly recognized over the life of the contract as an adjustment to interest revenue or expense. At June 30, 1995, total net end-user derivative unrealized losses were $58 million, compared to $330 million of total net end-user derivative unrealized losses at December 31, 1994. The $272 million improvement during the first half of 1995 was due to decreases in interest rates. 25 END-USER DERIVATIVES (continued) The following tables provide the gross unrealized gains and losses for end-user derivatives. Gross unrealized gains and losses for hedges of securities available for sale are recognized in the financial statements with the offset as an adjustment to securities valuation allowance in stockholders' equity. Gross unrealized gains and losses for hedges of other assets, interest-bearing deposits, other short-term borrowings, long- term debt and net investments in foreign subsidiaries are not yet recognized in the financial statements.
Other Net invest- short- ments in Securities Interest -term Long- foreign (in millions) available Other bearing borrow- term subsi- June 30, 1995 for sale assets deposits ings debt diaries Total Interest Rate Swaps Pay Variable Unrealized Gain $ - $- $ 114 $ 7 $ 224 $- $ 345 Unrealized (Loss) - - (28) (5) (65) - (98) Pay Variable Net - - 86 2 159 - 247 Pay Fixed Unrealized Gain 1 - 31 - 4 - 36 Unrealized (Loss) (57) - (70) (1) (78) - (206) Pay Fixed Net (56) - (39) (1) (74) - (170) Total Unrealized Gain 1 - 145 7 228 - 381 Total Unrealized (Loss) (57) - (98) (6) (143) - (304) Total Net $(56) $- $ 47 $ 1 $ 85 $- $ 77 Forward Rate Agreements Unrealized Gain $- $- $ 7 $- $- $- $ 7 Unrealized (Loss) - - (7) - - - (7) Net $- $- $ - $- $- $- $ - Currency Swaps Unrealized Gain $- $- $ 17 $ - $ 9 $ 2 $ 28 Unrealized (Loss) - - (18) - (52) (26) (96) Net $- $- $ (1) $ - $(43) $(24) $(68) Other Contracts (1) Unrealized Gain $ - $ 1 $ - $- $- $- $ 1 Unrealized (Loss) (5) (57) (10) - - - (72) Net $(5) $(56) $(10) $- $- $- $(71) Total Unrealized Gain $ 1 $ 1 $ 169 $ 7 $ 237 $ 2 $ 417 Total Unrealized (Loss) (62) (57) (133) (6) (195) (26) (479) Total Net $(61) $(56) $ 36 $ 1 $ 42 $(24) $ (62) (1) Other contracts are principally equity swaps and collars.
26 END-USER DERIVATIVES (continued)
Other Net invest- short- ments in Securities Interest- term Long- foreign (in millions) available Other bearing borrow- term subsi- December 31, 1994for sale assets deposits ings debt diaries Total Interest Rate Swaps Pay Variable Unrealized Gain $ - $- $ 17 $ 4 $ 62 $- $ 83 Unrealized (Loss) (1) - (191) (4) (200) - (396) Pay Variable Net (1) - (174) - (138) - (313) Pay Fixed Unrealized Gain 48 - 105 - 28 - 181 Unrealized (Loss) (19) - (31) - (15) - (65) Pay Fixed Net 29 - 74 - 13 - 116 Total Unrealized Gain 48 - 122 4 90 - 264 Total Unrealized (Loss) (20) - (222) (4) (215) - (461) Total Net $ 28 $- $(100) $ - $(125) $- $(197) Forward Rate Agreements Unrealized Gain $- $- $ 4 $- $- $- $ 4 Unrealized (Loss) - - (5) - - - (5) Net $- $- $(1) $- $- $- $(1) Currency Swaps Unrealized Gain $- $- $ 9 $ - $ 4 $ - $ 13 Unrealized (Loss) - - (2) (1) (74) (22) (99) Net $- $- $ 7 $(1) $(70) $(22) $(86) Other Contracts (1) Unrealized Gain $5 $ 2 $- $- $- $- $ 7 Unrealized (Loss) - (53) - - - - (53) Net $5 $(51) $- $- $- $- $(46) Total Unrealized Gain $ 53 $ 2 $ 135 $ 4 $ 94 $ - $ 288 Total Unrealized (Loss) (20) (53) (229) (5) (289) (22) (618) Total Net $ 33 $(51) $ (94) $(1) $(195) $(22) $(330) (1) Other contracts are principally equity swaps and collars.
27 END-USER DERIVATIVES (continued) For pay variable and pay fixed interest rate swaps entered into as an end user, the weighted average receive rate and weighted average pay rate (interest rates were based on the weighted averages of both U.S. and non- U.S. currencies) by maturity and corresponding notional amounts were as follows ($ in millions):
At June 30, 1995 Notional Amount Paying Variable Paying Fixed Maturing Notional Receive Pay Notional Receive Pay Total In: Amount Rate Rate Amount Rate Rate Notional 1995 $ 8,458 5.97% 5.91% $3,241 6.10% 6.24% $11,699 1996-1997 15,371 6.30 5.17 7,531 4.83 6.25 22,902 1998-1999 2,431 6.20 5.90 843 4.38 5.07 3,274 2000 and thereafter 4,969 6.67 5.92 1,629 5.85 7.60 6,598 Total $31,229 $13,244 $44,473 All rates were those in effect at June 30, 1995. Variable rates are primarily based on LIBOR and may change significantly, affecting future cash flows.
At December 31, 1994 Notional Amount Paying Variable Paying Fixed Maturing Notional Receive Pay Notional Receive Pay Total In: Amount Rate Rate Amount Rate Rate Notional 1995 $11,211 5.88% 6.09% $2,908 5.90% 6.00% $14,119 1996-1997 7,830 6.03 5.77 3,219 5.92 5.78 11,049 1998-1999 2,444 5.81 5.83 993 5.34 5.38 3,437 2000 and thereafter 4,113 6.79 5.72 1,730 5.83 8.13 5,843 Total $25,598 $8,850 $34,448 All rates were those in effect at December 31, 1994. Variable rates are primarily based on LIBOR and may change significantly, affecting future cash flows. The December 31, 1994 table corrects a typographical error which transposed the rates shown under the respective headings "Receive Rate" and "Pay Rate" that appeared on page 73 of the 1994 10-K.
28 REGULATORY CAPITAL The Federal Reserve Board's capital adequacy guidelines mandate that minimum ratios ("FRB Minimum Regulatory Guidelines") be maintained by bank holding companies and banks. The Corporation's 1994 Annual Report on Form 10-K, on page 31, provides a detailed discussion of both these regulatory capital guidelines and the federal bank regulations regarding capital tiers under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") for the Corporation's bank subsidiaries. Based on their respective regulatory capital ratios at June 30, 1995, both Bankers Trust Company ("BTCo.") and Bankers Trust (Delaware) are well capitalized, based on the definitions in the regulations issued by the Federal Reserve Board and the other federal bank regulatory agencies setting forth the general capital requirements mandated by FDICIA. All three regulatory capital ratios, at both June 30, 1995 and December 31, 1994, excluded any benefit from the adoption of SFAS 115. The table below indicates the regulatory capital ratios of the Corporation and BTCo. and the minimum regulatory guidelines.
FRB Minimum June 30, December 31, Regulatory 1995 1994 Guidelines CORPORATION Risk-Based Ratios Tier 1 Capital 8.64% 9.05% 4.0% Total Capital 13.93% 14.77% 8.0% Leverage Ratio 5.52% 5.26% 3.0% BTCo. Risk-Based Ratios Tier 1 Capital 9.25% 9.92% 4.0% Total Capital 11.91% 12.90% 8.0% Leverage Ratio 5.31% 5.91% 3.0%
The following were the essential components of the Corporation's risk- based capital ratios (in millions):
June 30, December 31, 1995 1994 Tier 1 Capital $4,613 $4,372 Tier 2 Capital 2,826 2,760 Total Capital $7,439 $7,132 Total risk-weighted assets $53,385 $48,285
29 REGULATORY CAPITAL (continued) During the first half of 1995, the Corporation's Tier 1 Capital and Total Capital ratios declined by 41 basis points and 84 basis points, respectively, as the increase in capital was more than offset by the increase in total risk-weighted assets. The Leverage Ratio increased by 26 basis points during the first half of 1995 as a result of the increase in Tier 1 Capital. The $241 million increase in Tier 1 Capital was primarily attributable to the issuances of preferred stock offset by the decrease in retained earnings due to the cash dividends declared as well as the net loss recorded during the first half of 1995. The Corporation's total risk- weighted assets at June 30, 1995 were $5.100 billion higher than at year- end 1994. LIQUIDITY Liquidity management at the Corporation focuses on both asset liquidity and liability management. Enhancing asset liquidity remains a particularly important element of our liquidity management philosophy. At the same time, management is continually seeking opportunities to further diversify the Corporation's funding sources. Liquid assets consist of cash and due from banks, interest-bearing deposits with banks, federal funds sold, securities purchased under resale agreements, securities borrowed, trading assets and securities available for sale. At June 30, 1995, the Corporation's liquid assets amounted to $84.9 billion, or 82 percent of gross total assets, compared with 83 percent and 80 percent, respectively, at March 31, 1995 and December 31, 1994. Cash Flows The following comments apply to the consolidated statement of cash flows, which appears on page 6. Cash and due from banks decreased $246 million during the first six months of 1995, as the sum of net cash used in investing and financing activities exceeded the net cash provided by operating activities. Within the investing activities category, cash outflows from net changes in securities purchased under resale agreements ($7.6 billion) was offset in part by cash inflows from sales, maturities and other redemptions of securities available for sale ($2.9 billion) as well as net changes in federal funds sold ($2.3 billion). The $1.6 billion of net cash used in financing activities was largely the result of cash outflows from the net changes in other short-term borrowings ($4.0 billion) and deposits ($2.1 billion) as well as from repayments of long-term debt ($1.0 billion) offset in part by the cash inflows from the net change in securities sold under repurchase agreements ($3.2 billion) and issuances of long-term debt ($2.2 billion). The $3.5 billion of net cash provided by operating activities primarily resulted from a $4.0 billion net change in trading assets and liabilities. 30 LIQUIDITY (continued) For the six months ended June 30, 1994, cash and due from banks increased $912 million, as the net cash provided by operating activities exceeded the sum of net cash used in investing and financing activities. The $10.4 billion of net cash provided by operating activities primarily resulted from a $10.0 billion net change in trading assets and liabilities. Within the investing activities category, cash outflows from purchases of securities available for sale ($3.4 billion) as well as net changes in securities purchased under resale agreements ($2.7 billion), securities borrowed ($2.5 billion) and federal funds sold ($1.2 billion) were offset in part by cash inflows from sales, maturities and other redemptions of securities available for sale ($3.0 billion) and a net change in loans ($1.9 billion). The $4.7 billion of net cash used in financing activities primarily resulted from net changes of $2.8 billion in deposits and $2.4 billion in securities sold under repurchase agreements. Interest Rate Sensitivity Condensed interest rate sensitivity data for the Corporation at June 30, 1995 is presented in the table below. For purposes of this presentation, the interest-earning/bearing components of trading assets and trading liabilities are assumed to reprice within three months. The interest rate gaps reported in the table arise when assets are funded with liabilities having different repricing intervals, after considering the effect of off-balance sheet hedging instruments. Since these gaps are actively managed and change daily as adjustments are made in interest rate views and market outlook, positions at the end of any period may not be reflective of the Corporation's interest rate view in subsequent periods. Active management dictates that longer-term economic views are balanced against prospects of short-term interest rate changes in all repricing intervals.
By Repricing Interval Non- interest- Within 1 - 5 After bearing (in billions) June 30, 1995 1 year years 5 years funds Total Assets $ 70.8 $ 2.1 $ 2.2 $ 27.8 $102.9 Liabilities, preferred stock of subsidiary and preferred stock (63.9) (5.7) (2.3) (27.0) (98.9) Common stockholders' equity - - - (4.0) (4.0) Effect of off-balance sheet hedging instruments (8.6) 6.3 2.3 - - Interest rate sensitivity gap $ (1.7) $ 2.7 $ 2.2 $(3.2) $ -
31 NONPERFORMING ASSETS The components of cash basis loans, renegotiated loans, other real estate and other nonperforming assets are shown below ($ in millions).
June 30, December 31, 1995 1994 CASH BASIS LOANS (NONREFINANCING COUNTRY) Domestic Commercial and industrial $310 $316 Secured by real estate 341 277 Financial institutions 10 25 Total domestic 661 618 International Commercial and industrial 188 247 Secured by real estate 71 79 Financial institutions 3 48 Other 2 2 Total international 264 376 Total cash basis loans (nonrefinancing country) 925 994 CASH BASIS LOANS (REFINANCING COUNTRY) International - 2 Total cash basis loans $925 $996 Ratio of cash basis loans to total loans 8.0% 8.0% Ratio of allowance for credit losses to cash basis loans 134% 126% RENEGOTIATED LOANS Secured by real estate $ 89 $65 Other nonrefinancing country 12 1 Total renegotiated loans $101 $66 OTHER REAL ESTATE $263 $301 OTHER NONPERFORMING ASSETS Assets acquired in credit workouts $62 $61 Nonperforming derivative contracts 2 2 Total other nonperforming assets $64 $63 Loans 90 days or more past due and still accruing interest $- $-
32 NONPERFORMING ASSETS (continued) An analysis of the changes in the Corporation's total cash basis loans during the first six months of 1995 follows (in millions).
Balance, December 31, 1994 $ 996 Net transfers to cash basis loans 124 Net paydowns (162) Charge-offs (47) Transfers from other real estate 35 Other (21) Balance, June 30, 1995 $ 925
The Corporation's total cash basis loans amounted to $925 million at June 30, 1995, down $71 million, or 7 percent, from December 31, 1994. Commercial and industrial loans to highly leveraged borrowers decreased $40 million, to $110 million during the first half of 1995. Within cash basis loans secured by real estate loans were $412 million and $356 million at June 30, 1995 and December 31, 1994, respectively. Also within cash basis loans were leveraged derivative contracts of $283 million and $351 million at June 30, 1995 and December 31, 1994, respectively. Approximately 60 percent of the June 30, 1995 amount related to transactions with Procter & Gamble, which company, has filed a lawsuit against certain subsidiaries of the Corporation in connection with these leveraged derivative contracts. The suit seeks to void and rescind two interest rate swap transactions entered into with Bankers Trust Company and claims $195.5 million in compensatory damages and unspecified punitive damages. The Corporation is contesting this litigation. Other real estate decreased by $38 million during the first half of 1995 primarily as a result of the adoption of SFAS 114 during the first quarter of 1995 which required the transfer of in-substance foreclosed properties, where the Corporation had not taken possession of the collateral, to cash basis. 33 NONPERFORMING ASSETS (continued) The following table sets forth the approximate effect on interest revenue of cash basis loans and renegotiated loans. This disclosure reflects the interest on loans which were carried on the balance sheet and classified as either cash basis or renegotiated at June 30 of each year. The rates used in determining the gross amount of interest that would have been recorded at the original rate were not necessarily representative of current market rates.
Six Months Ended June 30, (in millions) 1995 1994 Domestic Loans Gross amount of interest that would have been recorded at original rate $32 $21 Less, interest, net of reversals, recognized in interest revenue 4 2 Reduction of interest revenue 28 19 International Loans Gross amount of interest that would have been recorded at original rate 10 9 Less, interest, net of reversals, recognized in interest revenue - 2 Reduction of interest revenue 10 7 Total reduction of interest revenue $38 $26
HIGHLY LEVERAGED TRANSACTIONS Amounts included in the table and discussion which follow are generally based on the definition that the Corporation uses in order to monitor the extent of its exposure to highly leveraged transactions ("HLTs"). The Corporation's 1994 Annual Report on Form 10-K, on page 39, provides a detailed discussion of the definition.
Highly Leveraged Transactions June 30, December 31, (in millions) 1995 1994 Loans Senior debt $628 $ 959 Subordinated debt 71 101 Total loans $699 $1,060 Unfunded commitments Commitments to lend $501 $311 Letters of credit 137 198 Total unfunded commitments $638 $509 Equity investments $638 $413 Commitments to invest $308 $313
34 HIGHLY LEVERAGED TRANSACTIONS (continued) The Corporation's outstanding loans were to 78 separate borrowers in 34 separate industry groups at June 30, 1995, compared to 76 separate borrowers in 30 separate industry groups at December 31, 1994. The industrial machinery group, at 18 percent, was the only industry concentration which exceeded 10 percent of total HLT loans outstanding at June 30, 1995. In addition to the amounts shown in the table above, at June 30, 1995, the Corporation had issued commitment letters which had been accepted, subject to documentation and certain other conditions, of $1.2 billion (which were in various stages of syndication) and had additional HLTs in various stages of discussion and negotiation. During the first half of 1995, the Corporation originated $690 million of HLT commitments. It should be noted that the Corporation's loans and commitments in connection with HLTs fluctuate as new loans and commitments are made and as loans and commitments are syndicated, participated or paid. All loans and commitments to finance HLTs are reviewed and approved by senior credit officers of the Corporation. In addition to a strict transactional and credit approval process, the portfolio of leveraged loans and commitments is actively monitored and managed to minimize risk through diversification among borrowers and industries. As part of this strategy, sell and hold targets are regularly updated in connection with market opportunities and the addition of new HLTs. Retention by the Corporation after syndication and sales of loan participations has typically been less than $50 million, and the average outstanding for the portfolio at June 30, 1995 was less than $9 million. However, at June 30, 1995, the Corporation had total exposure (loans outstanding plus unfunded commitments) in excess of $50 million to 8 separate highly leveraged borrowers. At June 30, 1995, $110 million of the HLT loan portfolio was on a cash basis. In addition, $7 million of the equity investments in HLT companies represented assets acquired in credit workouts, which are reported as other nonperforming assets. Net charge-offs of $22 million of HLT loans were recorded in the first half of 1995. In addition, the Corporation recorded a net gain of $28 million in connection with the sales and/or write-offs of its equity investments in highly leveraged companies during the first half of 1995. Generally, fees (typically 2 to 4 percent of the principal amount committed) and interest charged (typically LIBOR plus 1.5 to 3 percent) on HLT loans are higher than on other credits. The Corporation does not account for revenue or expenses from HLTs separately from its other corporate lending activities. However, it is estimated that transaction fees recognized for lending activities relating to HLTs were approximately $54 million during the first half of 1995 and that as of June 30, 1995, approximately $19 million of fees were deferred and will be recognized as future revenue. 35 PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (4) Instruments Defining the Rights of Security Holders, Including Indentures (v) - The Corporation hereby agrees to furnish to the Commission, upon request, a copy of any instru- ments defining the rights of holders of long-term debt issued by Bankers Trust New York Corporation or its subsidiaries. (12) Statement re Computation of Ratios (27) Financial Data Schedule (b) Reports on Form 8-K - Bankers Trust New York Corporation filed six reports on Form 8-K during the quarter ended June 30, 1995. - The report dated April 18, 1995 filed the Corporation's Press Release dated April 18, 1995, which announced earnings for the quarter ended March 31, 1995. - The report dated April 19, 1995 filed an underwriting agreement covering the issuance and sale by Bankers Trust New York Corporation of 8-1/4% Subordinated Notes due 2005 and various other exhibits related to the issuance. - The report dated May 16, 1995 filed the Corporation's Press Release which announced that Charles S. Sanford, Jr., chairman and chief executive officer of Bankers Trust New York Corporation and Bankers Trust Company, announced his intention to retire no later than the middle of 1996. - The report dated June 19, 1995 filed an underwriting agreement covering the issuance and sale by Bankers Trust New York Corporation of 7-1/2% Subordinated Notes due 2010 and various other exhibits related to the issuance. - The report dated June 22, 1995 filed the Corporation's Press Release which announced that Timothy T. Yates, chief financial officer and controller of Bankers Trust New York Corporation, announced his intention to retire in the summer of 1996. - The report dated June 27, 1995 filed an underwriting agreement covering the issuance and sale of 5,000,000 Depositary Shares, each representing a one-hundredth interest in a share of 7 3/4% Cumulative Preferred Stock, Series S, an Amendment to the Restated Certificate of Incorporation and various other exhibits related to the issuance. 36 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 14, 1995. BANKERS TRUST NEW YORK CORPORATION BY: GEOFFREY M. FLETCHER Geoffrey M. Fletcher Senior Vice President and Principal Accounting Officer 37 BANKERS TRUST NEW YORK CORPORATION FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1995 EXHIBIT INDEX (4) Instruments Defining the Rights of Security Holders, Including Indentures (v) - Long-Term Debt Indentures (a) (12) Statement re Computation of Ratios (a) - Computation of Consolidated Ratios of Earnings to Fixed Charges (b) - Computation of Consolidated Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements (27) Financial Data Schedule [FN] (a) The Corporation hereby agrees to furnish to the Commission, upon request, a copy of any instruments defining the rights of holders of long- term debt issued by Bankers Trust New York Corporation or its subsidiaries. 38 39 EX-12 2 EXHIBIT 12(a) BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES COMPUTATION OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES (dollars in millions)
Six Months Ended Year Ended December 31, June 30, 1990 1991 1992 1993 1994 1995 Earnings: 1. Income (loss) before income taxes and cumulative effects of accounting changes $ 815 $ 834 $ 906 $1,550 $ 869 $ (93) 2. Add: Fixed charges excluding capitalized interest (Line 10) 4,826 3,614 3,099 3,148 3,884 2,482 3. Less: Equity in undistri- buted income of unconsolidated subsidiaries and affiliates 47 31 40 30 45 10 4. Earnings including interest on deposits 5,594 4,417 3,965 4,668 4,708 2,379 5. Less: Interest on deposits 2,226 1,589 1,119 1,013 965 669 6. Earnings excluding interest on deposits$3,368 $2,828 $2,846 $3,655 $3,743 $1,710 Fixed Charges: 7. Interest Expense $4,799 $3,585 $3,072 $3,122 $3,858 $2,469 8. Estimated interest component of net rental expense 27 29 27 26 26 13 9. Amortization of debt issuance expense - - - - - - 10. Total fixed charges including interest on deposits and excluding capitalized interest 4,826 3,614 3,099 3,148 3,884 2,482 11. Add: Capitalized interest - - - - - - 12. Total fixed charges 4,826 3,614 3,099 3,148 3,884 2,482 13. Less: Interest on deposits (Line 5) 2,226 1,589 1,119 1,013 965 669 14. Fixed charges excluding interest on deposits $2,600 $2,025 $1,980 $2,135 $2,919 $1,813 Consolidated Ratios of Earnings to Fixed Charges: Including interest on deposits (Line 4/Line 12) 1.16 1.22 1.28 1.48 1.21 .96 Excluding interest on deposits (Line 6/Line 14) 1.30 1.40 1.44 1.71 1.28 .94 For the six months ended June 30, 1995, earnings, as defined, did not cover fixed charges, by $103 million, as a result of a net loss recorded during the period.
EX-12 3 EXHIBIT 12(b) BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES COMPUTATION OF CONSOLIDATED RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENTS (dollars in millions)
Six Months Ended Year Ended December 31, June 30, 1990 1991 1992 1993 1994 1995 Earnings: 1. Income (loss) before income taxes and cumulative effect of accounting changes $ 815 $ 834 $ 906 $1,550 $ 869 $ (93) 2. Add: Fixed charges excluding capitalized interest (Line 13) 4,826 3,614 3,099 3,148 3,884 2,482 3. Less: Equity in undistri- buted income of unconsolidated subsidiaries and affiliates 47 31 40 30 45 10 4. Earnings including interest on deposits 5,594 4,417 3,965 4,668 4,708 2,379 5. Less: Interest on deposits 2,226 1,589 1,119 1,013 965 669 6. Earnings excluding interest on deposits$3,368 $2,828 $2,846 $3,655 $3,743 $1,710 Preferred Stock Dividend Requirements: 7. Preferred stock dividend requirements $ 31 $ 34 $ 30 $ 23 $ 28 $ 20 8. Ratio of income from continuing operations before income taxes to income from continuing operations after income taxes 123% 125% 142% 145% 141% 141% 9. Preferred stock dividend requirements on a pretax basis $ 38 $ 43 $ 43 $ 33 $ 39 $ 28 Fixed Charges: 10. Interest Expense $4,799 $3,585 $3,072 $3,122 $3,858 $2,469 11. Estimated interest component of net rental expense 27 29 27 26 26 13 12. Amortization of debt issuance expense - - - - - - 13. Total fixed charges including interest on deposits and excluding capitalized interest 4,826 3,614 3,099 3,148 3,884 2,482 14. Add: Capitalized interest - - - - - - 15. Total fixed charges 4,826 3,614 3,099 3,148 3,884 2,482 16. Add: Preferred stock dividend require- ments - pretax (Line 9) 38 43 43 33 39 28 17. Total combined fixed charges and preferred stock dividend require- ments on a pretax basis 4,864 3,657 3,142 3,181 3,923 2,510 18. Less: Interest on deposits (Line 5) 2,226 1,589 1,119 1,013 965 669 19. Combined fixed charges and preferred stock dividend requirements on a pretax basis excluding interest on deposits $2,638 $2,068 $2,023 $2,168 $2,958 $1,841 Consolidated Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements: Including interest on deposits (Line 4/Line 17) 1.15 1.21 1.26 1.47 1.20 .95 Excluding interest on deposits (Line 6/Line 19) 1.28 1.37 1.41 1.69 1.27 .93 For the six months ended June 30, 1995, earnings, as defined, did not cover combined fixed charges and preferred stock dividend requirements, by $131 million, as a result of a net loss recorded during the period.
BANKERS TRUST NEW YORK CORPORATION 280 PARK AVENUE NEW YORK, NEW YORK 10017 Geoffrey M. Fletcher Senior Vice President and Principal Accounting Officer August 14, 1995 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Dear Sirs: Accompanying this letter is Bankers Trust New York Corporation's quarterly report on Form 10-Q for the quarter ended June 30, 1995 (the "Form 10-Q"). The Form 10-Q is being filed electronically through the EDGAR System. If there are any question or comments in connection with the enclosed filing, please contact the undersigned at 212-250-7098. Very truly yours, BANKERS TRUST NEW YORK CORPORATION By: GEOFFREY M. FLETCHER Geoffrey M. Fletcher Senior Vice President and Principal Accounting Officer Attachment EX-27 4
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CONDITION AT JUNE 30, 1995 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 6-MOS DEC-31-1995 JAN-01-1995 JUN-30-1995 1,739 1,357 238 50,565 6,479 0 0 11,537 1,243 102,937 22,605 32,943 5,962 7,514 84 0 863 3,942 102,937 449 201 893 2,873 669 2,469 404 14 19 1,412 (93) (93) 0 0 (66) (1.10) (1.10) 1.08 925 0 101 0 1,252 47 24 1,243 252 247 744 Short-term borrowings include the following: Securities sold under repurchase agreements 18,933 Other short-term borrowings 14,010 Total 32,943 Other liabilities include the following: Accounts payable and accrued expenses 3,615 Other liabilities 2,347 Total 5,962 Other interest income includes the following: Interest-bearing deposits with banks 109 Federal funds sold 56 Securities purchased under resale agreements 495 Securities borrowed 233 Total 893