-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, POKyEPJiLq3YBNeY94IjJSdKi0UCV1osOXuaG7jDjEj83n8rbhK25LrBfhqU9k4Q YzbfYalmpYuSCsuoaBoODg== 0000009749-96-000144.txt : 19961118 0000009749-96-000144.hdr.sgml : 19961118 ACCESSION NUMBER: 0000009749-96-000144 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 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: 96665762 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 September 30, 1996 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.) 130 Liberty Street New York, New York 10006 (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 October 31, 1996: Common Stock, $1 par value, 81,748,778 shares. 1 BANKERS TRUST NEW YORK CORPORATION September 30, 1996 FORM 10-Q TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statement of Income Three Months Ended September 30, 1996 and 1995 2 Nine Months Ended September 30, 1996 and 1995 3 Consolidated Balance Sheet At September 30, 1996 and December 31, 1995 4 Consolidated Statement of Changes in Stockholders' Equity Nine Months Ended September 30, 1996 and 1995 5 Consolidated Statement of Cash Flows Nine Months Ended September 30, 1996 and 1995 6 Consolidated Schedule of Net Interest Revenue Three Months and Nine Months Ended September 30, 1996 and 1995 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 nine months ended September 30, 1996 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 1995 Annual Report as supplemented by the 1996 Forms 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 SEPTEMBER 30, 1996 1995 (Decrease) NET INTEREST REVENUE Interest revenue $1,669 $1,556 $113 Interest expense 1,421 1,352 69 Net interest revenue 248 204 44 Provision for credit losses - 7 (7) Net interest revenue after provision for credit losses 248 197 51 NONINTEREST REVENUE Trading 219 257 (38) Fiduciary & funds management 196 174 22 Corporate finance fees 119 74 45 Other fees & commissions 86 78 8 Net revenue from equity investment transactions 74 85 (11) Securities available for sale gains 11 10 1 Insurance premiums 52 64 (12) Other 54 13 41 Total noninterest revenue 811 755 56 NONINTEREST EXPENSES Salaries 229 196 33 Incentive compensation & employee benefits 228 187 41 Agency & other professional service fees 70 70 - Communication & data services 52 45 7 Occupancy, net 38 41 (3) Furniture & equipment 42 40 2 Travel & entertainment 24 20 4 Provision for policyholder benefits 66 75 (9) Other 60 54 6 Total noninterest expenses 809 728 81 Income before income taxes 250 224 26 Income taxes 74 69 5 NET INCOME $ 176 $ 155 $ 21 NET INCOME APPLICABLE TO COMMON STOCK $ 168 $ 139 $ 29 Cash dividends declared per common share $1.00 $1.00 $- EARNINGS PER COMMON SHARE: PRIMARY $1.99 $1.72 $.27 FULLY DILUTED $1.98 $1.71 $.27 Certain prior period amounts have been reclassified to conform to the current presentation.
3 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (in millions, except per share data) (unaudited)
Increase NINE MONTHS ENDED SEPTEMBER 30, 1996 1995 (Decrease) NET INTEREST REVENUE Interest revenue $4,718 $4,429 $289 Interest expense 4,014 3,821 193 Net interest revenue 704 608 96 Provision for credit losses 5 21 (16) Net interest revenue after provision for credit losses 699 587 112 NONINTEREST REVENUE Trading 612 258 354 Fiduciary & funds management 577 511 66 Corporate finance fees 341 273 68 Other fees & commissions 255 235 20 Net revenue from equity investment transactions 167 124 43 Securities available for sale gains 51 29 22 Insurance premiums 177 176 1 Other 179 78 101 Total noninterest revenue 2,359 1,684 675 NONINTEREST EXPENSES Salaries 632 598 34 Incentive compensation & employee benefits 690 455 235 Agency & other professional service fees 228 214 14 Communication & data services 145 140 5 Occupancy, net 111 120 (9) Furniture & equipment 124 122 2 Travel & entertainment 66 67 (1) Provision for policyholder benefits 216 202 14 Other 183 172 11 Provision for severance-related costs - 50 (50) Total noninterest expenses 2,395 2,140 255 Income before income taxes 663 131 532 Income taxes 198 42 156 NET INCOME $ 465 $ 89 $376 NET INCOME APPLICABLE TO COMMON STOCK $ 428 $ 53 $375 Cash dividends declared per common share $3.00 $3.00 $- EARNINGS PER COMMON SHARE: PRIMARY $5.19 $.66 $4.53 FULLY DILUTED $5.16 $.65 $4.51 Certain prior period amounts have been reclassified to conform to the current presentation.
4 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ($ in millions, except par value)
September 30,December 31, 1996* 1995 ASSETS Cash and due from banks $ 825 $ 2,337 Interest-bearing deposits with banks 4,100 2,023 Federal funds sold 856 854 Securities purchased under resale agreements 22,073 13,206 Securities borrowed 14,926 10,951 Trading assets: Government securities 16,075 20,704 Corporate debt securities 8,678 5,648 Equity securities 5,585 5,098 Swaps, options and other derivatives 10,363 10,555 Other trading assets 7,056 5,888 Total trading assets 47,757 47,893 Securities available for sale 7,461 6,283 Loans 15,264 12,633 Allowance for credit losses (967) (992) Accounts receivable and accrued interest 3,417 4,220 Other assets 5,135 4,594 Total $120,847 $104,002 LIABILITIES Noninterest-bearing deposits Domestic offices $ 2,552 $ 2,687 Foreign offices 647 605 Interest-bearing deposits Domestic offices 7,401 5,402 Foreign offices 18,072 17,014 Total deposits 28,672 25,708 Trading liabilities: Securities sold, not yet purchased Government securities 11,020 11,092 Equity securities 3,729 3,262 Other trading liabilities 389 473 Swaps, options and other derivatives 10,266 11,264 Total trading liabilities 25,404 26,091 Securities sold under repurchase agreements 23,989 15,247 Other short-term borrowings 18,799 15,761 Accounts payable and accrued expenses 5,252 3,931 Other liabilities 2,650 2,736 Long-term debt 10,507 9,294 Total liabilities 115,273 98,768 PREFERRED STOCK OF SUBSIDIARY 250 250 STOCKHOLDERS' EQUITY Preferred stock 816 865 Common stock, $1 par value Authorized, 300,000,000 shares Issued, 83,678,973 shares 84 84 Capital surplus 1,319 1,302 Retained earnings 3,450 3,316 Common stock in treasury, at cost: 1996, 2,193,093 shares; 1995, 4,602,855 shares (173) (336) Other stockholders' equity (172) (247) Total stockholders' equity 5,324 4,984 Total $120,847 $104,002 * Unaudited Certain prior period amounts have been reclassified to conform to the current presentation.
5 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (in millions) (unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 1996 1995 PREFERRED STOCK Balance, January 1 $ 865 $ 395 Preferred stock issued 1 470 Preferred stock repurchased (50) - Balance, September 30 816 865 COMMON STOCK Balance, January 1 and September 30 84 84 CAPITAL SURPLUS Balance, January 1 1,302 1,317 Preferred stock issuance and conversion costs - (17) Common stock distributed under employee benefit plans 11 1 Preferred stock repurchased 6 - Balance, September 30 1,319 1,301 RETAINED EARNINGS Balance, January 1 3,316 3,494 Net income 465 89 Cash dividends declared Preferred stock (44) (33) Common stock (242) (235) Treasury stock distributed under employee benefit plans (38) (20) Treasury stock associated with acquisition (7) - Balance, September 30 3,450 3,295 COMMON STOCK IN TREASURY, AT COST Balance, January 1 (336) (416) Purchases of stock (250) (13) Restricted stock granted, net 35 9 Treasury stock distributed under employee benefit plans 168 47 Treasury stock associated with acquisition 210 - Balance, September 30 (173) (373) COMMON STOCK ISSUABLE - STOCK AWARDS Balance, January 1 233 160 Deferred stock awards granted, net 67 34 Deferred stock distributed (1) (16) Balance, September 30 299 178 DEFERRED COMPENSATION - STOCK AWARDS Balance, January 1 (151) (63) Deferred stock awards granted, net (66) (34) Restricted stock granted, net (36) (7) Amortization of deferred compensation, net 121 42 Balance, September 30 (132) (62) CUMULATIVE TRANSLATION ADJUSTMENTS Balance, January 1 (348) (336) Translation adjustments (40) (9) Income taxes applicable to translation adjustments 24 (4) Balance, September 30 (364) (349) SECURITIES VALUATION ALLOWANCE Balance, January 1 19 69 Change in unrealized net gains, after applicable income taxes and minority interest 6 53 Balance, September 30 25 122 TOTAL STOCKHOLDERS' EQUITY, SEPTEMBER 30 $5,324 $5,061
6 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (in millions) (unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 465 $ 89 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 5 21 Provision for severance-related costs - 50 Provision for policyholder benefits 216 202 Deferred income taxes 168 (141) Depreciation and amortization of premises and equipment 107 101 Other, net (90) (62) Earnings adjusted for noncash charges and credits 871 260 Net change in: Trading assets (429) (3,610) Trading liabilities (865) 4,302 Receivables and payables from securities transactions 2,366 514 Other operating assets and liabilities, net (962) (518) Securities available for sale gains (51) (29) Net cash provided by operating activities 930 919 CASH FLOWS FROM INVESTING ACTIVITIES Net change in: Interest-bearing deposits with banks (2,118) 1,618 Federal funds sold (2) 2,515 Securities purchased under resale agreements (8,766) (4,632) Securities borrowed (3,975) (2,700) Loans (2,423) (426) Securities available for sale: Purchases (4,161) (3,034) Maturities and other redemptions 2,327 2,413 Sales 501 1,436 Acquisitions of premises and equipment (135) (94) Other, net 144 (88) Net cash used in investing activities (18,608) (2,992) CASH FLOWS FROM FINANCING ACTIVITIES Net change in: Deposits 2,860 (673) Securities sold under repurchase agreements 9,114 1,946 Other short-term borrowings 2,911 (1,498) Issuances of long-term debt 2,553 3,210 Repayments of long-term debt (856) (1,137) Issuances of preferred stock - 221 Purchases of preferred stock (44) - Purchases of treasury stock (250) (13) Cash dividends paid (283) (268) Other, net 139 21 Net cash provided by financing activities 16,144 1,809 Net effect of exchange rate changes on cash 22 (6) NET DECREASE IN CASH AND DUE FROM BANKS (1,512) (270) Cash and due from banks, beginning of year 2,337 1,985 Cash and due from banks, end of period $ 825 $ 1,715 Interest paid $4,049 $3,618 Income taxes paid, net $135 $191 Noncash investing activities $269 $92 Noncash financing activities: Conversion of debt to preferred stock $1 $245 Certain prior period amounts have been reclassified to conform to the current presentation.
7 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES CONSOLIDATED SCHEDULE OF NET INTEREST REVENUE (in millions) (unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 INTEREST REVENUE Interest-bearing deposits with banks $ 58 $ 45 $ 141 $ 154 Federal funds sold 33 12 92 68 Securities purchased under resale agreements 371 189 840 547 Securities borrowed 224 204 690 574 Trading assets 595 778 1,884 2,108 Securities available for sale Taxable 115 82 315 252 Exempt from federal income taxes 4 13 16 44 Loans 269 233 740 682 Total interest revenue 1,669 1,556 4,718 4,429 INTEREST EXPENSE Deposits In domestic offices 95 93 267 284 In foreign offices 244 236 707 714 Trading liabilities 202 275 663 725 Securities sold under repurchase agreements 448 312 1,156 858 Other short-term borrowings 291 315 799 920 Long-term debt 141 121 422 320 Total interest expense 1,421 1,352 4,014 3,821 NET INTEREST REVENUE $ 248 $ 204 $ 704 $ 608 Certain prior period amounts have been reclassified to conform to the current presentation.
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 $176 million for the quarter ended September 30, 1996, or $1.99 primary earnings per share. In the third quarter of 1995, the Corporation earned $155 million, or $1.72 primary earnings per share. For the first nine months of 1996, the Corporation earned $465 million, or $5.19 primary earnings per share. The Corporation earned $89 million, or $.66 primary earnings per share in the comparable period of 1995. ORGANIZATIONAL UNITS RESULTS Organizational Unit business results are determined based on the Corporation's internal management accounting process, which allocates revenue and expenses among the Organizational Units. Because the Corporation's business is complex in nature and its operations are integrated, it is impractical to segregate respective contributions of the Organizational Units with precision. As a result, estimates and subjective judgments have been made to apportion revenue and expense items. The internal management accounting process, unlike financial accounting in accordance with generally accepted accounting principles, is based on the way Bankers Trust's businesses are managed and is not necessarily comparable with similar information disclosed by other financial institutions. In order to provide comparability from one period to the next, the Corporation will restate this analysis to conform with material changes in the allocation process and/or significant changes in organizational structure. The following tables analyze the results by Organizational Units:
Total Non- Pretax Net Three Months Ended September 30, 1996 Total Net interest Income/ Income/ (in millions) Revenue Expenses (Loss) (Loss) Investment Banking $ 231 $122 $109 $ 77 Risk Management Services 84 80 4 3 Trading & Sales 107 65 42 29 Investment Management 76 70 6 4 Client Processing Services 200 165 35 25 Australia/New Zealand 138 77 61 43 Asia 30 24 6 5 Latin America 123 94 29 20 Corporate/Other 70 112 (42) (30) Total $1,059 $809 $250 $176
9 ORGANIZATIONAL UNITS RESULTS (continued)
Total Non- Pretax Net Three Months Ended September 30, 1995 Total Net interest Income/ Income/ (in millions) Revenue Expenses (Loss) (Loss) Investment Banking $184 $ 83 $101 $ 70 Risk Management Services 107 94 13 9 Trading & Sales 124 70 54 38 Investment Management 64 68 (4) (3) Client Processing Services 177 140 37 25 Australia/New Zealand 97 65 32 22 Asia 7 26 (19) (14) Latin America 123 119 4 3 Corporate/Other 69 63 6 5 Total $952 $728 $224 $155
Total Non- Pretax Net Nine Months Ended September 30, 1996 Total Net interest Income/ Income/ (in millions) Revenue Expenses (Loss) (Loss) Investment Banking $ 709 $ 335 $ 374 $ 263 Risk Management Services 206 233 (27) (18) Trading & Sales 292 191 101 70 Investment Management 219 206 13 9 Client Processing Services 590 488 102 72 Australia/New Zealand 350 211 139 98 Asia 98 75 23 18 Latin America 425 318 107 75 Corporate/Other 169 338 (169) (122) Total $3,058 $2,395 $ 663 $ 465
Total Non- Pretax Net Nine Months Ended September 30, 1995 Total Net interest Income/ Income/ (in millions) Revenue Expenses (Loss) (Loss) Investment Banking $ 450 $ 210 $ 240 $ 168 Risk Management Services 198 242 (44) (30) Trading & Sales 262 180 82 57 Investment Management 200 206 (6) (5) Client Processing Services 530 426 104 72 Australia/New Zealand 291 191 100 69 Asia 59 72 (13) (9) Latin America 168 323 (155) (109) Corporate/Other 113 290 (177) (124) Total $2,271 $2,140 $ 131 $ 89
10 ORGANIZATIONAL UNITS RESULTS (continued) The Investment Banking business produced net income of $77 million in the third quarter of 1996, compared with $70 million in the third quarter of the previous year. Net income for the first nine months of 1996 increased $95 million to $263 million. Higher revenue from corporate finance, private equity investments and real estate investment banking accounted for most of this increase from the first nine months of 1995. Risk Management Services produced net income of $3 million in the third quarter of 1996, down $6 million from the third quarter of 1995. For the first nine months of 1996 this unit incurred a net loss of $18 million versus a net loss of $30 million for the same period in 1995. Net income from the Trading & Sales business, at $29 million, was down $9 million from the third quarter of 1995. Net income for the first nine months of 1996 was $70 million versus $57 million for the comparable period in 1995. The year-over-year improvement was primarily due to strong results from arbitrage trading. The Corporation's Investment Management business, which for reporting purposes does not include investment management activities in Australia/NZ, reported net income of $4 million for the current quarter up $7 million from the 1995 comparable period. Net income for the first nine months of 1996 was $9 million compared to a net loss of $5 million in the first nine months of 1995. At September 30, 1996, assets under management in this organizational unit were approximately $193 billion, compared to $177 billion at September 30, 1995. Client Processing Services contributed $25 million of net income in the third quarter of 1996, in line with the third quarter of 1995. Net income for the first nine months of 1996 was $72 million, even with the first nine months of 1995. Total revenue for the first nine months of 1996 increased 11 percent from the comparable 1995 period, offset by higher expenses, primarily related to technology spending. Net income of the Australia/NZ business was $43 million in the third quarter of 1996, up $21 million from the third quarter of 1995. Virtually all major business lines in Australia/NZ improved, led by the Financial Markets Group. Net income for the first nine months of 1996 increased to $98 million from $69 million recorded for the same period in 1995. At September 30, 1996, assets under management in Australia/NZ's investment management business were approximately $25 billion, compared to $22 billion at September 30, 1995. Asia net income was $5 million in the third quarter of 1996, up $19 million from the third quarter of 1995. The increase from the third quarter of 1995 was primarily due to improved risk management results. Net income was $18 million for the first nine months of 1996 compared to a net loss of $9 million for the first nine months of 1995. Latin America net income was $20 million in the third quarter of 1996, up $17 million from the third quarter of 1995. Net income for the first nine months of 1996 was $75 million compared to a net loss of $109 million in the comparable period of 1995. The loss incurred in the first nine 11 ORGANIZATIONAL UNITS RESULTS (continued) months of 1995 was the result of certain client risk management and trading positions that were affected by extreme volatility and illiquidity in Latin American securities markets after the Mexican peso devaluation. Corporate/Other, which includes unallocated portions of corporate functions, produced a net loss of $30 million in the third quarter of 1996 compared with net income of $5 million in the third quarter of 1995. The current quarter's results included a net gain after-tax of $18 million on the sale of Golden American Life Insurance Company, an indirect wholly- owned subsidiary of the Corporation acquired in satisfaction of debt in 1992. For the first nine months of 1996 the net loss was $122 million compared with a net loss of $124 million for the first nine months of 1995. 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.
Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 NET INTEREST REVENUE (in millions) Book basis $248 $204 $704 $608 Tax equivalent adjustment 4 11 12 35 Fully taxable basis $252 $215 $716 $643 AVERAGE BALANCES (in millions) Interest-earning assets $98,184 $82,288 $91,612 $80,651 Interest-bearing liabilities 91,015 77,668 86,892 77,002 Earning assets financed by noninterest-bearing funds $ 7,169 $ 4,620 $ 4,720 $ 3,649 AVERAGE RATES (fully taxable basis) Yield on interest-earning assets 6.78% 7.56% 6.90% 7.40% Cost of interest-bearing liabilities 6.21 6.91 6.17 6.63 Interest rate spread .57 .65 .73 .77 Contribution of noninterest-bearing funds .45 .39 .31 .30 Net interest margin 1.02% 1.04% 1.04% 1.07%
Net interest revenue for the third quarter of 1996 totaled $248 million, up $44 million, or 22 percent, from the third quarter of 1995. The $44 million increase in net interest revenue was primarily due to a $51 million increase in trading-related net interest revenue, which totaled $71 million for the third quarter of 1996. Nontrading-related net interest revenue which is considered to be historically a more stable component of overall net interest revenue, totaled $177 million for the third quarter of 1996 versus $184 million for the comparable period in 1995. Net interest revenue was $704 for the first nine months of 1996, up $96 million, or 16 12 REVENUE (continued) percent from the first nine months of 1995. Nontrading-related net interest revenue totaled $539 million for the first nine months of 1996 versus $530 for the comparable period in 1995. 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. Combined trading revenue and trading-related net interest revenue for the third quarter of 1996 totaled $290 million, up $13 million from the third quarter of 1995. Combined trading revenue and trading-related net interest revenue for the first nine months of 1996 was $777 million, up $441 million from the $336 million reported in the first nine months of 1995. The table below quantifies the Corporation's trading revenue and trading-related net interest revenue by major category of market risk. These categories are based on management's view of the predominant underlying risk exposure of each of the Firm's trading positions.
Trading- Related Net Trading Interest (in millions) Revenue Revenue Total Quarter ended September 30, 1996 Interest rate risk $121 $ 83 $204 Foreign exchange risk 32 - 32 Equity and commodity risk 66 (12) 54 Total $219 $ 71 $290 Quarter ended September 30, 1995 Interest rate risk $ 89 $ 27 $116 Foreign exchange risk 68 - 68 Equity and commodity risk 100 (7) 93 Total $257 $ 20 $277 Nine Months ended September 30, 1996 Interest rate risk $354 $194 $548 Foreign exchange risk 112 - 112 Equity and commodity risk 146 (29) 117 Total $612 $165 $777 Nine Months ended September 30, 1995 Interest rate risk $ 42 $117 $159 Foreign exchange risk 30 - 30 Equity and commodity risk 186 (39) 147 Total $258 $ 78 $336
13 REVENUE (continued) Third Quarter 1996 vs. Third Quarter 1995 Interest Rate Risk - The increase in combined trading and trading- related net interest revenue was primarily due to a strong interest rate trading environment in the third quarter of 1996 as a result of the general rally in rates and a tightening to a historically low level of Corporate to Treasury spreads. Also contributing to the increase was strong performance from the Firm's activities in Australia. Foreign Exchange Risk - Foreign exchange risk revenue declined from the third quarter of 1995, as reduced spreads negatively affected this category. This decline was partially offset by improved performance in Latin American and Asian foreign exchange markets. Equity and Commodity Risk - Total trading and trading-related net interest revenue declined compared to the same period last year due to a decline in equity related products in the Risk Management Services, Trading & Sales and Investment Banking Organizational Units. Nine Months 1996 vs. Nine Months 1995 Interest Rate Risk - The increase in revenue was principally due to a rebound in the Firm's activities in Latin America as 1995 was characterized by heightened volatility in interest rates coupled with liquidity problems in the emerging markets of Latin America. Foreign Exchange Risk - Trading revenue improved compared to the same period last year due to improved performance in Australian, Asian and Latin American foreign exchange markets. The first half of 1995 was affected by global volatility in foreign exchange markets during which the dollar fell to record lows against the Japanese Yen and German Mark. Equity and Commodity Risk - Total trading and trading related net interest revenue declined compared to the same period last year due to losses incurred in the commodity derivatives books when copper prices dropped sharply. 14 REVENUE (continued) Shown below is a comparison of the components of noninterest revenue (excluding trading).
Quarter Ended Nine Months Ended September 30, Increase September 30, Increase (in millions) 1996 1995 (Decrease) 1996 1995 (Decrease) Fiduciary & funds management revenue $196 $174 $ 22 $ 577 $ 511 $ 66 Corporate finance fees 119 74 45 341 273 68 Other fees and commissions: Service charges on deposit accounts 16 18 (2) 49 54 (5) Transaction processing fees 38 34 4 112 103 9 Other 32 26 6 94 78 16 Total other fees & commissions 86 78 8 255 235 20 Net revenue from equity investment transactions 74 85 (11) 167 124 43 Securities available for sale gains 11 10 1 51 29 22 Insurance premiums 52 64 (12) 177 176 1 Other 54 13 41 179 78 101 Total noninterest revenue (excluding trading) $592 $498 $ 94 $1,747 $1,426 $321
15 REVENUE (continued) Third Quarter 1996 vs. Third Quarter 1995 Fiduciary and funds management revenue totaled $196 million for the third quarter of 1996, up $22 million, or 13 percent, from the comparable period last year. Virtually all major activities within this category contributed to the year-over-year increase. Corporate finance fees of $119 million increased by $45 million, or 61 percent, from the same period last year, mostly due to higher revenue from financial advisory, commercial banking and merger and acquisition activities. Other fees and commissions totaled $86 million, an increase of $8 million, or 10 percent, compared with last year's comparable period. Net revenue from equity investment transactions was $74 million, down $11 million from the prior year's comparable period. The third quarter of 1995 included a $62 million pre-tax gain on the sale of a portion of the Corporation's merchant banking investment in Northwest Airlines Corporation. All other noninterest revenue totaled $117 million, up $30 million from the prior year's third quarter. Contributing to this increase was a gain on the sale of Golden American Life Insurance Company, an indirect wholly-owned subsidiary of the Corporation acquired in satisfaction of debt in 1992. Nine Months Ended 1996 vs. Nine Months Ended 1995 Fiduciary and funds management fees of $577 million, increased $66 million, or 13 percent, from the first nine months of 1995. Virtually all major activities within this category contributed to the increased revenues. Corporate finance fees totaled $341 million, an increase of $68 million, or 25 percent from the first nine months of 1995. Increased revenue was due to securities underwriting, commercial banking and financial advisory activities. Other fees and commissions totaled $255 million, up $20 million, or 9 percent compared to last year's first nine months. Net revenue from equity investment transactions was $167 million, up $43 million from the first nine months of 1995. This increase was attributable primarily to activities within the Corporate Finance and Private Equity Investment Units of Investment Banking. All other noninterest revenue totaled $407 million, up $124 million from the first nine months of 1995. Contributing to this increase were gains on the sale of Compensa, the smaller of the Corporation's two Chilean insurance subsidiaries, and on the sale of Golden American Life Insurance Company. 16 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 third quarter of 1996 compared with $7 million for the prior year's third quarter. Net charge-offs for the third quarter were $5 million, compared with $218 million a year ago. The current quarter's net charge-offs included $16 million of net charge-offs related to settlements of old leveraged derivative transactions. The provision for credit losses and the other changes in the allowance for credit losses are shown below (in millions).
Quarter Ended Nine Months Ended September 30, September 30, Allowance for credit losses 1996 1995 1996 1995 Balance, beginning of period $972 $1,243 $992 $1,252 Net charge-offs Charge-offs 19 223 68 270 Recoveries 14 5 38 29 Total net charge-offs* 5 218 30 241 Provision for credit losses - 7 5 21 Balance, end of period $967 $1,032 $967 $1,032 *Components: Secured by real estate $(1) $ 9 $ - $ 12 Real estate related (1) - 3 2 Highly leveraged (5) 6 18 28 Other 14 203 15 207 Refinancing country (2) - (6) (8) Total $ 5 $218 $30 $241
The allowance for credit losses, at $967 million at September 30, 1996, was down $5 million from its level at June 30, 1996. The allowance was equal to 198 percent, 170 percent, and 133 percent of total cash basis loans at September 30, 1996, June 30, 1996, and December 31, 1995, 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 entire portfolio. 17 PROVISION AND ALLOWANCE FOR CREDIT LOSSES (continued) The recorded investment in loans that was considered to be impaired under SFAS 114 was $577 million and $844 million which consisted of total cash basis loans and renegotiated loans at September 30, 1996 and December 31, 1995, respectively. Included in these amounts were $246 million and $458 million of loans for which the related valuation allowance was $56 million and $90 million at these dates, respectively. EXPENSES Third Quarter 1996 vs. Third Quarter 1995 Total noninterest expenses of $809 million increased by $81 million, or 11 percent, from the third quarter of 1995. Incentive compensation and employee benefits increased $41 million while salaries expense increased $33 million primarily due to annual pay increases, as well as an increase in the average number of employees. All other expenses totaled $352 million for the quarter, up $7 million, or 2 percent, from last year's third quarter. Nine Months 1996 vs. Nine Months 1995 Total noninterest expenses of $2.395 billion for the first nine months of 1996 increased by $255 million, or 12 percent from the first nine months of 1995. Incentive compensation and employee benefits expense increased $235 million, mostly due to higher bonus expense reflecting improved earnings. Salaries expense increased $34 million in the first nine months of 1996 primarily due to higher average salaries as well as an increase in the average number of employees. All other expenses totaled $1.073 billion for the first nine months of 1996, down $14 million, or 1 percent from last year's comparable period. The first nine months of 1995 included a $50 million pre-tax provision for severance-related costs. INCOME TAXES Income tax expense for the third quarter of 1996 amounted to $74 million, compared with $69 million for the third quarter of 1995. For the first nine months of 1996, income tax expense was $198 million compared with $42 million for the first nine months of 1995. The effective tax rate was 30 percent for both the quarter and nine months ended September 30, 1996 compared with 31 percent and 32 percent for the quarter and nine months ended September 30, 1995. 18 EARNINGS PER COMMON SHARE Primary and fully diluted earnings per common share amounts were 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 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 month and nine month periods ended September 30, 1996 and 1995 did the Corporation have outstanding any securities which were convertible into the Parent Company's common stock. Overall earnings per share of $1.99 included partially offsetting items that produced a net increase of $0.02 per share. During the quarter the Corporation purchased $50 million of its Series Q and Series R preferred stock at a discount, which is reflected as an increase in earnings per share of $0.08. Offsetting this increase is a reduction in earnings per share of approximately $0.06 due to a net increase of common shares primarily issued in connection with the purchase of Wolfensohn. During the quarter the Corporation announced its authorization to repurchase up to three million shares of its common stock, in addition to its previously announced program to repurchase shares issued under employee stock option and award plans. 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 Nine MonthsEnded September 30, September 30, 1996 1995 1996 1995 Net income applicable to common stock $168 $139 $428 $53 Average number of common shares outstanding 79.731 78.423 78.356 78.362 Average common and common equivalent shares outstanding - primary 84.442 81.039 82.416 80.788 Average common and common equivalent shares outstanding assuming full dilution 84.885 81.403 82.935 80.987
19 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) 3rd Qtr 2nd Qtr 4th Qtr 1996 1996 1995 ASSETS Interest-earning Interest-bearing deposits with banks $ 3,301 $ 2,114 $ 3,624 Federal funds sold 2,389 2,318 2,387 Securities purchased under resale agreements 26,342 21,636 15,167 Securities borrowed 14,847 15,820 13,817 Trading assets 30,687 29,376 31,926 Securities available for sale Taxable 5,730 5,480 5,206 Exempt from federal income taxes 1,075 1,201 1,365 Total securities available for sale 6,805 6,681 6,571 Loans In domestic offices 7,192 7,106 7,199 In foreign offices 6,621 5,951 5,624 Total loans 13,813 13,057 12,823 Total interest-earning assets 98,184 91,002 86,315 Noninterest-earning Cash and due from banks 1,233 1,210 1,972 Noninterest-earning trading assets 16,180 17,425 17,858 All other assets 8,773 9,104 9,736 Allowance for credit losses (972) (989) (1,028) Total $123,398 $117,752 $114,853 LIABILITIES Interest-bearing Interest-bearing deposits In domestic offices $ 6,927 $ 6,039 $ 5,788 In foreign offices 16,852 15,861 18,404 Total interest-bearing deposits 23,779 21,900 24,192 Trading liabilities 11,744 12,178 12,599 Securities sold under repurchase agreements 27,765 28,554 22,680 Other short-term borrowings 17,156 13,677 15,960 Long-term debt 10,571 10,393 8,904 Total interest-bearing liabilities 91,015 86,702 84,335 Noninterest-bearing Noninterest-bearing deposits 3,142 3,034 3,606 Noninterest-bearing trading liabilities 15,576 15,118 15,392 All other liabilities 8,106 7,526 6,240 Total liabilities 117,839 112,380 109,573 PREFERRED STOCK OF SUBSIDIARY 250 250 250 STOCKHOLDERS' EQUITY Preferred stock 864 866 865 Common stockholders' equity 4,445 4,256 4,165 Total stockholders' equity 5,309 5,122 5,030 Total $123,398 $117,752 $114,853 The condensed average balance sheets are presented on a slightly different basis than the balance sheets presented in the financial statements section of this report, in that the various categories of interest-earning assets and interest-bearing liabilities exclude certain noninterest- earning/bearing components included in the 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. Certain prior period amounts have been reclassified to conform to the current presentation.
20 BALANCE SHEET ANALYSIS (continued) Third Quarter 1996 vs. Second Quarter 1996 The Corporation's average total assets amounted to $123.4 billion for the third quarter of 1996, an increase of $5.6 billion, or 5 percent, from the second quarter of 1996. Average interest-earning assets increased $7.2 billion, or 8 percent, and the proportion of interest-earning assets to total assets increased from 77 percent to 80 percent. The increase in interest-earning assets was primarily due to increases in securities purchased under resale agreements (up $4.7 billion, or 22 percent), trading assets (up $1.3 billion or 4 percent) and interest-bearing deposits with banks (up $1.2 billion, or 56 percent), offset in part by a decrease in securities borrowed (down $973 million, or 6 percent). Interest-earning trading assets, as a percentage of total assets remained constant at 25 percent. Noninterest-earning trading assets declined $1.2 billion, or 7 percent, from the second quarter of 1996. Average total liabilities increased $5.5 billion, or 5 percent from the second quarter of 1996. Within interest-bearing liabilities, increases in other short-term borrowings (up $3.5 billion, or 25 percent and total interest-bearing deposits (up $1.9 billion, or 9 percent) were offset in part by a decrease in securities sold under repurchase agreements (down $789 million, or 3 percent). Total short-term borrowings (securities sold under repurchase agreements and other short-term borrowings) as a percentage of total interest-bearing liabilities remained constant at 49 percent. Third Quarter 1996 vs. Fourth Quarter 1995 The Corporation's average total assets for the third quarter of 1996 increased $8.5 billion, or 7 percent from the fourth quarter of 1995. Average interest-earning assets increased $11.9 billion, or 14 percent, and the proportion of interest-earning assets to total assets increased from 75 percent to 80 percent. The increase in interest-earning assets was primarily due to increases in securities purchased under resale agreements (up $11.2 billion, or 74 percent), securities borrowed (up $1.0 billion, or 7 percent) and total loans (up $1.0 billion or 8 percent), offset in part by a decrease in trading assets (down $1.2 billion, or 4 percent). Interest-earning trading assets, as a percentage of total assets, declined from 28 percent to 25 percent. Noninterest-earning trading assets declined $1.7 billion, or 9 percent, from the fourth quarter of 1995. Average total liabilities increased $8.3 billion, or 8 percent from the fourth quarter of 1995. Within interest-bearing liabilities, increases in securities sold under repurchase agreements (up $5.1 billion, or 22 percent, long-term debt (up $1.7 billion or 19 percent) and other short- term borrowings (up $1.2 billion, or 7 percent) were offset in part by a decrease in trading liabilities (down $855 million, or 7 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 46 percent to 49 percent. 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):
September 30, June 30,December 31, 1996 1996 1995 Fair value $7,461 $6,851 $6,283 Amortized cost 7,382 6,818 6,204 Excess of fair value over amortized cost * $ 79 $ 33 $ 79 * Components: Unrealized gains $158 $113 $ 182 Unrealized losses (79) (80) (103) $ 79 $ 33 $ 79
Long-term Debt During the third quarter of 1996, the Corporation obtained $535 million of cash proceeds from the issuances of long-term debt and repaid $493 million of long-term debt. The larger of these debt issuances were as follows (in millions):
Face Amount Parent Company 6 5/8% Notes due July 30, 1999 $250 BT Securities Corporation Senior Subordinated Floating Rate Notes due 1999 $200
22 TRADING DERIVATIVES The Corporation actively manages, in accordance with the Corporation's risk management policies, trading positions in a variety of derivative books. Many 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 trading 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 derivative financial instruments:
At September 30, Average During 1996 3rd Qtr. 1996 (Liabi- (Liabi- (in millions) Assets lities) Assets lities) OTC Financial Instruments Interest Rate and Currency Swap Contracts $ 15,131 $(14,009)$ 13,689 $(13,198) Interest Rate Contracts Forwards 54 (44) 48 (46) Options purchased 1,100 1,001 Options written (1,258) (1,287) Foreign Exchange Rate Contracts Spot and Forwards 7,538 (8,566) 6,665 (8,025) Options purchased 978 854 Options written (1,013) (943) Equity-related contracts 2,185 (2,063) 2,000 (2,257) Commodity-related and other contracts 588 (632) 517 (596) Exchange-Traded Options Interest Rate 2 (6) 4 (9) Foreign exchange - - 1 - Equity 251 (139) 163 (72) Total Gross Fair Values 27,827 (27,730) 24,942 (26,433) Impact of Netting Agreements (17,464) 17,464 (15,160) 15,160 $ 10,363(1) $9,782 $(10,266)(1) $(11,273) (1) As reflected on the balance sheet in "Trading Assets" and "Trading Liabilities."
23 TRADING DERIVATIVES (continued)
At December 31, Average During 1995 4th Qtr. 1995 (Liabi- (Liabi- (in millions) Assets lities) Assets lities) OTC Financial Instruments Interest Rate and Currency Swap Contracts $ 15,858 $(15,471) $ 16,260 $(14,960) Interest Rate Contracts Forwards 83 (81) 127 (104) Options purchased 1,426 1,299 Options written (1,312) (1,729) Foreign Exchange Rate Contracts Spot and Forwards 7,931 (8,937) 9,473 (10,236) Options purchased 999 1,213 Options written (941) (1,148) Equity-related contracts 2,011 (2,359) 1,838 (2,093) Commodity-related and other contracts 541 (531) 542 (468) Exchange-Traded Options Interest Rate 33 (16) 32 (39) Equity 137 (80) 158 (105) Total Gross Fair Values 29,019 (29,728) 30,942 (30,882) Impact of Netting Agreements (18,464) 18,464 (19,152) 19,152 $ 10,555(1) $ 11,790 $(11,264)(1) $(11,730) (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. Total net end-user derivative unrealized gains were $17 million and $212 million at September 30, 1996 and December 31, 1995, respectively. The $195 million decrease during the first nine months of 1996 was primarily due to increases in long-term interest rates. 24 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 loans, 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- Sept. 30, 1996 for sale Loans assets deposits ings debt diaries Total Interest Rate Swaps Pay Variable Unrealized Gain $1 $ - $- $ 42 $ - $205 $- $ 248 Unrealized (Loss) - (5) - (39) (9) (89) - (142) Pay Variable Net 1 (5) - 3 (9) 116 - 106 Pay Fixed Unrealized Gain 5 - - 17 - 15 - 37 Unrealized (Loss) (42) (9) - (45) - (4) - (100) Pay Fixed Net (37) (9) - (28) - 11 - (63) Total Unrealized Gain 6 - - 59 - 220 - 285 Total Unrealized (Loss) (42) (14) - (84) (9) (93) - (242) Total Net $(36) $(14) $- $(25) $(9) $127 $- $ 43 Forward Rate Agreements Unrealized Gain $- $- $- $ 1 $- $- $- $ 1 Unrealized (Loss) - - - (1) - - - (1) Net $- $- $- $ - $- $- $- $ - Currency Swaps and Forwards Unrealized Gain $- $- $1 $23 $ - $ 21 $ 23 $ 68 Unrealized (Loss) - - - (3) (2) (48) (34) (87) Net $- $- $1 $20 $(2) $(27) $(11) $(19) Other Contracts (1) Unrealized Gain $ - $- $ - $- $- $- $- $ - Unrealized (Loss) (4) - (3) - - - - (7) Net $(4) $- $(3) $- $- $- $- $(7) Total Unrealized Gain $ 6 $ - $ 1 $ 83 $ - $ 241 $ 23 $ 354 Total Unrealized (Loss) (46) (14) (3) (88) (11) (141) (34) (337) Total Net $(40) $(14) $(2) $ (5) $(11)$ 100 $(11)$ 17 (1) Other contracts are principally equity swaps and collars.
25 END-USER DERIVATIVES (continued)
Other Net invest- short- ments in Securities Interest- term Long- foreign (in millions) available Other bearing borrow term subsi- Dec. 31, 1995 for sale Loans assets deposits ings debt diaries Total Interest Rate Swaps Pay Variable Unrealized Gain$ - $ - $- $132 $ 4 $339 $- $ 475 Unrealized (Loss) - (5) - (7) (1) (24) - (37) Pay Variable Net - (5) - 125 3 315 - 438 Pay Fixed Unrealized Gain - - - 11 - 14 - 25 Unrealized (Loss) (88) - - (82) (1) (21) - (192) Pay Fixed Net (88) - - (71) (1) (7) - (167) Total Unrealized Gain - - - 143 4 353 - 500 Total Unrealized (Loss) (88) (5) - (89) (2) (45) - (229) Total Net $(88) $(5) $- $ 54 $ 2 $308 $- $ 271 Forward Rate Agreements Unrealized Gain $- $- $- $ 1 $- $- $- $ 1 Unrealized (Loss) - - - (1) - - - (1) Net $- $- $- $ - $- $- $- $ - Currency Swaps and Forwards Unrealized Gain $- $- $1 $ 17 $ - $ 20 $ 14 $ 52 Unrealized (Loss) - - - (12) (1) (48) (30) (91) Net $- $- $1 $ 5 $(1) $(28) $(16) $(39) Other Contracts (1) Unrealized Gain $ - $- $ 1 $- $- $- $- $ 1 Unrealized (Loss) (5) - (16) - - - - (21) Net $(5) $- $(15) $- $- $- $- $(20) Total Unrealized Gain $ - $ - $ 2 $ 161 $ 4 $373 $ 14 $ 554 Total Unrealized (Loss) (93) (5) (16) (102) (3) (93) (30) (342) Total Net $(93) $(5) $(14) $ 59 $ 1 $280 $(16)$ 212 (1) Other contracts are principally equity swaps and collars. Certain amounts have been reclassified to conform to the current presentation.
26 END-USER DERIVATIVES (continued) For paying variable and paying 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 September 30, 1996 Notional Amount Paying Variable Paying Fixed Maturing Notional Receive Pay Notional Receive Pay Total In: Amount Rate Rate Amount Rate Rate Notional 1996 $20,080 5.58% 5.49% $2,581 5.71% 5.84% $22,661 1997-1998 20,493 5.73 5.54 4,560 4.90 5.93 25,053 1999-2000 5,385 6.32 5.88 1,298 3.60 4.94 6,683 2001 and thereafter 5,841 6.49 5.59 891 5.36 7.22 6,732 Total $51,799 $9,330 $61,129 All rates were those in effect at September 30, 1996. Variable rates are primarily based on LIBOR and may change significantly, affecting future cash flows.
At December 31, 1995 Notional Amount Paying Variable Paying Fixed Maturing Notional Receive Pay Notional Receive Pay Total In: Amount Rate Rate Amount Rate Rate Notional 1996 $30,770 5.97% 5.87% $ 8,742 6.00% 6.21% $39,512 1997-1998 6,558 5.99 5.84 3,657 5.33 5.76 10,215 1999-2000 3,448 6.57 6.34 1,373 3.86 4.99 4,821 2001 and thereafter 3,927 6.64 5.93 629 5.91 7.34 4,556 Total $44,703 $14,401 $59,104 All rates were those in effect at December 31, 1995. Variable rates are primarily based on LIBOR and may change significantly, affecting future cash flows.
27 REGULATORY CAPITAL The Federal Reserve Board's ("FRB") capital adequacy guidelines mandate that minimum capital ratios be maintained by bank holding companies and their bank subsidiaries. In addition, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") mandated the establishment of capital tiers for banks based on these ratios. The Corporation's 1995 Annual Report on Form 10-K, on page 42, provides a detailed discussion of these guidelines and regulations. Based on their respective regulatory capital ratios as of September 30, 1996, both Bankers Trust Company ("BTCo") and Bankers Trust (Delaware) are well capitalized, as defined in the regulations issued by the FRB and the other federal bank regulatory agencies setting forth the general capital requirements mandated by FDICIA. The table below presents the regulatory capital ratios of Bankers Trust New York Corporation and BTCo at September 30, 1996 and December 31, 1995, along with the FRB's minimum regulatory guidelines. All of these regulatory capital ratios exclude any impact of the securities valuation allowance which is determined in accordance with SFAS 115.
FRB Minimum September 30, December 31, Regulatory 1996 1995 Guidelines CORPORATION Risk-Based Ratios Tier 1 Capital 8.0% 8.5% 4.0% Total Capital 12.7% 13.9% 8.0% Leverage Ratio 5.3% 5.1% 3.0% BTCo Risk-Based Ratios Tier 1 Capital 9.1% 9.5% 4.0% Total Capital 12.2% 12.8% 8.0% Leverage Ratio 5.5% 5.1% 3.0%
The following were the essential components of the Corporation's and BTCo's risk-based capital ratios (in millions):
September 30, December 31, 1996 1995 Corporation Tier 1 Capital $4,770 $4,512 Tier 2 Capital 2,781 2,858 Total Capital $7,551 $7,370 Total risk-weighted assets $59,397 $53,021
28 REGULATORY CAPITAL (continued)
September 30,December 31, 1996 1995 BTCo Tier 1 Capital $4,712 $4,394 Tier 2 Capital 1,631 1,532 Total Capital $6,343 $5,926 Total risk-weighted assets $52,012 $46,389
Comparing September 30, 1996 to December 31, 1995, the Corporation's Tier 1 Capital and Total Capital ratios declined by 50 basis points and 120 basis points, respectively, as a result of the increase in total risk- weighted assets. The Corporation's total risk-weighted assets at September 30, 1996 were $6.376 billion higher than at year-end 1995. The Leverage Ratio increased by 20 basis points at September 30, 1996 compared to December 31, 1995 primarily as a result of an increase in Tier 1 Capital. These factors were also the causes for the variances in BTCo's Capital and Leverage ratios. PREFERRED STOCK During the third quarter of 1996, the Parent Company purchased $50 million of its Adjustable Rate Cumulative Preferred Stock, Series Q and Series R at a discount of $6 million. LIQUIDITY Liquidity is the ability to have the funds available at all times to meet the commitments of the Corporation. The Corporation has a formal process for managing liquidity on a global basis for the Firm as a whole as well as for each of its significant subsidiaries. Management's guiding policy is to maintain conservative levels of liquidity designed to ensure that the Firm has the ability to meet its obligations under all conceivable circumstances. Management maintains a dual focus to ensure a conservative liquidity position by promoting asset liquidity and actively managing liability/capital levels, maturities and diversification. The fundamental objective in this regard is to ensure that, even in the event of a complete loss of access to the liability markets, the Corporation will be able to continue to fund those assets that cannot be liquidated in a timely manner. Most of the Corporation's assets are highly liquid and of high credit quality. The Corporation maintains excess liquidity through its base of liquid assets. 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. Securities purchased under resale agreements and securities borrowed are virtually all short-term in nature and are 29 LIQUIDITY (continued) collateralized with U.S. government or other marketable securities, or cash equivalents. Trading assets are marked to market daily and primarily consist of U.S. government and agency securities, state and municipal securities, foreign government obligations, and money market instruments. The Corporation's liquid assets amounted to $98.0 billion and $93.5 billion as of September 30, and June 30, 1996, and $83.5 billion as of December 31, 1995, which equaled 80 percent, 81 percent, and 80 percent of gross total assets at those dates respectively. Cash Flows The following comments apply to the consolidated statement of cash flows, which appears on page 6. Cash and due from banks decreased $1.5 billion during the first nine months of 1996, as the net cash used in investing activities exceeded the sum of the net cash provided by financing and operating activities. The $18.6 billion of net cash used in investing activities was mostly attributable to the net changes in securities purchased under resale agreements ($8.8 billion), securities borrowed ($4.0 billion), and loans ($2.4 billion), as well as purchases of securities available for sale ($4.2 billion), offset in part by maturities and other redemptions of securities available for sale ($2.3 billion). The $16.1 billion of net cash provided by financing activities was primarily the result of increases in the net changes in securities sold under repurchase agreements ($9.1 billion), other short-term borrowings ($2.9 billion) and deposits ($2.9 billion), as well as issuances of long-term debt ($2.6 billion), partially offset by repayments of long-term debt ($856 million). The increase in net cash provided by operating activities was mostly due to an increase in the net change in receivables and payables from securities transactions ($2.4 billion), offset in part by a decrease in other operating assets and liabilities, net ($962 million). Cash and due from banks decreased $270 million during the first nine months of 1995, as the net cash used in investing activities exceeded the sum of the net cash provided by financing and operating activities. Within the investing activities category, cash outflows from net changes in securities purchased under resale agreements ($4.6 billion), securities borrowed($2.7 billion) and purchases of securities available for sale ($3.0 billion) were offset in part by cash inflows from sales, maturities and other redemptions of securities available for sale ($3.8 billion) as well as net changes in federal funds sold ($2.5 billion). The $1.8 billion of net cash provided by financing activities was largely the result of cash inflows from the issuances of long-term debt ($3.2 billion) and net changes in securities sold under repurchase agreements ($1.9 billion) offset in part by cash outflows from the net changes in other short-term borrowings ($1.5 billion) and repayments of long-term debt ($1.1 billion). The $919 million of net cash provided by operating activities primarily resulted from a $692 million net change in trading assets and liabilities. 30 LIQUIDITY (continued) Interest Rate Sensitivity Condensed interest rate sensitivity data for the Corporation at September 30, 1996 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) Sept. 30, 1996 1 year years 5 years funds Total Assets $ 89.2 $ 4.7 $ 2.4 $ 24.5 $ 120.8 Liabilities, preferred stock of subsidiary and preferred stock (83.2) (4.6) (3.4) (25.1) (116.3) Common stockholders' equity - - - (4.5) (4.5) Effect of off-balance sheet hedging instruments (8.8) 5.8 3.0 - - Interest rate sensitivity gap $ (2.8) $ 5.9 $ 2.0 $ (5.1) $ -
31 NONPERFORMING ASSETS The components of cash basis loans, renegotiated loans, other real estate and other nonperforming assets are shown below ($ in millions).
September 30,December 31, 1996 1995 CASH BASIS LOANS Domestic Commercial and industrial $118 $263 Secured by real estate 233 297 Financial institutions - 10 Total domestic 351 570 International Commercial and industrial 73 106 Secured by real estate 58 65 Financial institutions 4 3 Lease financing 2 - Total international 137 174 Total cash basis loans $488 $744 Ratio of cash basis loans to total loans 3.2% 5.9% Ratio of allowance for credit losses to cash basis loans 198% 133% RENEGOTIATED LOANS Secured by real estate $89 $ 88 Other - 12 Total renegotiated loans $89 $100 OTHER REAL ESTATE $220 $259 OTHER NONPERFORMING ASSETS Assets acquired in credit workouts $13 $66 Other - 1 Total other nonperforming assets $13 $67 Loans 90 days or more past due and still accruing interest $- $26
32 NONPERFORMING ASSETS (continued) An analysis of the changes in the Corporation's total cash basis loans during the first nine months of 1996 follows (in millions).
Balance, December 31, 1995 $ 744 Net transfers to cash basis loans 22 Net paydowns (162) Charge-offs (68) Transfers to other real estate (7) Other (41) Balance, September 30, 1996 $ 488
The Corporation's total cash basis loans amounted to $488 million at September 30, 1996, down $256 million, or 34 percent, from December 31, 1995. This decline is attributable to collections and charge-offs in connection with the settlement of old derivative transactions ($78 million) as well as decreases in loans secured by real estate ($71 million) and various commercial and industrial loans ($101 million). Also within cash basis loans, loans secured by real estate were $291 million and $362 million at September 30, 1996 and December 31, 1995, respectively. Commercial and industrial loans to highly leveraged borrowers were $99 million and $153 million at September 30, 1996 and December 31, 1995, respectively. Within cash basis loans, leveraged derivative contracts were $42 million and $104 million at September 30, 1996 and December 31, 1995, respectively. Based on an analysis of the potential outcome of the remaining outstanding issues relating to leveraged derivative transactions, management continues to believe that the expected financial impact should be covered by existing reserves. 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 September 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. 33 NONPERFORMING ASSETS (continued)
Nine Months Ended September 30, (in millions) 1996 1995 Domestic Loans Gross amount of interest that would have been recorded at original rate $31 $50 Less, interest, net of reversals, recognized in interest revenue 5 7 Reduction of interest revenue 26 43 International Loans Gross amount of interest that would have been recorded at original rate 8 13 Less, interest, net of reversals, recognized in interest revenue - - Reduction of interest revenue 8 13 Total reduction of interest revenue $34 $56
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 1995 Annual Report on Form 10-K, on page 57, provides a detailed discussion of the definition.
Highly Leveraged Transactions September 30, December 31, (in millions) 1996 1995 Loans Senior debt $1,266 $1,105 Subordinated debt 71 68 Total loans $1,337 $1,173 Unfunded commitments Commitments to lend $462 $539 Letters of credit 109 263 Total unfunded commitments $571 $802 Equity investments $673 $648 Commitments to invest $273 $289
34 HIGHLY LEVERAGED TRANSACTIONS (continued) The Corporation's outstanding loans were to 106 separate borrowers in 41 separate industry groups at September 30, 1996, compared to 97 separate borrowers in 38 separate industry groups at December 31, 1995. There were no industry concentrations which exceeded 10 percent of total HLT loans outstanding at September 30, 1996. In addition to the amounts shown in the table above, at September 30, 1996, the Corporation had issued commitment letters which had been accepted, subject to documentation and certain other conditions, of $843 million (which were in various stages of syndication) and had additional HLTs in various stages of discussion and negotiation. During the first nine months of 1996, the Corporation originated $3.2 billion 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 September 30, 1996 was less than $13 million. However, at September 30, 1996, the Corporation had total exposure (loans outstanding plus unfunded commitments) in excess of $50 million to 6 separate highly leveraged borrowers. At September 30, 1996, $99 million of the HLT loan portfolio was on a cash basis. In addition, $6 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 $18 million of HLT loans were recorded in the first nine months of 1996. In addition, the Corporation recorded a net gain of $101 million in connection with the sales and/or write-offs of its equity investments in highly leveraged companies during the first nine months of 1996. 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 $80 million during the first nine months of 1996 and that as of September 30, 1996, 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. (10) Material Contracts iii(A) Management Contracts and Compensation Plans (12) Statement re Computation of Ratios (27) Financial Data Schedule (99) Additional Exhibits (b) Reports on Form 8-K - Bankers Trust New York Corporation filed four reports on Form 8-K during the quarter ended September 30, 1996. - The report dated July 18, 1996, filed the Corporation's Press Release dated July 18, 1996, which announced earnings for the quarter ended June 30, 1996. - The report dated July 22, 1996, announced the filing of the Corporation's Registration Statement on Form S-3 to register three million shares of its Common Stock which will be issued in connection with the merger of Wolfensohn & Co., Inc., with and into BT Securities Corporation, a wholly-owned subsidiary of the Corporation. In addition, the Board of Directors of the Corporation approved the repurchase of up to three million shares of the Corporation's Common Stock over the next year. - The report dated July 26, 1996, filed the Corporation's opinion of counsel delivered in connection with the issuance of the Corporation's 6-5/8% Notes due July 30, 1999. - The report dated August 1, 1996, filed the Corporation's Press Release dated August 1, 1996, which announced that Wolfensohn & Co., Inc. has merged with Bankers Trust. 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 November 14, 1996. BANKERS TRUST NEW YORK CORPORATION BY: GEOFFREY M. FLETCHER Geoffrey M. Fletcher Senior Vice President and Principal Accounting Officer BANKERS TRUST NEW YORK CORPORATION FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996 EXHIBIT INDEX (4) Instruments Defining the Rights of Security Holders, Including Indentures (v) - Long-Term Debt Indentures (a) (10) Material Contracts iii (a) Management Contracts and Compensation Plans (1) Employment Agreement for David Marshall (2) Consulting Agreement with Paul Volcker (3) BT Investments (Australia) Limited Group Notional Equity Participation Plan, as amended (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 (99) (i) Additional Exhibits (1) Organizational Units Results for the three months ended March 31, June 30, September 30, and December 31, 1995 and the three months ended March 31, June 30, and September 30, 1996. [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. EX-10.III.A1 2 EXHIBIT 10(iii)(A)(1) Bankers Trust Company 130 Liberty Street, New York, New York 10006 Frank N. Newman Mailing Address: Chairman of the Board P.O. Box 318 and Church Street Station Chief Executive Officer New York, New York 10008 Tel: 212-250-9088 Fax: 212-669-6000 September 9, 1996 By Facsimile Mr. David Marshall 115 Hazelton Avenue Toronto, Ontario M5R 2E4 Dear David: It gives me great pleasure to extend to you the following offer of employment. You will be responsible for the firm's information systems and will be a member of the Management Committee. For the term of this agreement, you will report to me, as Chief Executive Officer of the Bankers Trust New York Corporation ("the Parent") and Bankers Trust Company (the "Company"). Your services shall be principally performed, and your office shall be located, in New York City. Your corporate title for the Parent will be Executive Vice President, and subject to approval by the Board, Senior Managing Director for the Company. Your functional title for both the Parent and Company will be Chief Information Officer. Your annual base salary will be US$325,000 paid monthly in equal installments. Your annual base salary will be subject to annual review by the Parent's compensation committee in accordance with the Parent's practice and may be increased from time to time at the sole discretion of the compensation committee. On your start date, on or about October 15, 1996, hereinafter the "Commencement Date", you will receive: A special one-time payment of US$470,000 (less mandatory deductions), 60,000 units from the Partnership for One Hundred Plan (POP), 25,000 units from the Partnership Equity Plan, 40,000-share stock option award, and, A US$70,000 contribution to your ADCAP account. Your above-mentioned stock options, as well as the options granted to you in respect of services for 1997 and 1998 as described below, are to be awarded under the terms and conditions of the Parent's Stock Option and Stock Award Plan. The exercise price of stock options will be based on the average of the high and low trading prices of the Parent's common stock on the respective grant dates as shown on the New York Stock Exchange transactions tape. In addition, stock options have a term of 10 years from the date of grant, will be subject to accelerated vesting under the Plan, as described below, and will vest on the first anniversary of the date of each such grant. For your services in 1996, you will also receive a guaranteed minimum bonus of $675,000 (less mandatory deductions). Payment of the net after-tax amount will be paid on the date that the firm normally pays bonus awards to senior management (usually, in the following January). For your services in 1997, you will receive the following in addition to your base salary: A guaranteed minimum bonus of US$750,000 (less mandatory deductions) on the day that performances bonuses are normally paid to senior management. A 50,000-share stock option award to be granted on the normal award date (usually in June). 50,000 units in the Partnership Equity Plan (PEP). A $70,000 contribution to your ADCAP account. For your services in 1998, you will receive the following in addition to your base salary: A guaranteed minimum bonus of US$850,000 (less mandatory deductions) on the day that performances bonuses are normally paid to senior management. A 50,000-share stock option award to be granted on the normal award date (usually in June). 50,000 units in the Partnership Equity Plan (PEP). A $70,000 contribution to your ADCAP account. Bonus awards to managing directors of the firm are payable 70% in cash and 30% in equity of the firm, under the Equity Participation Plan. In connection with your relocation to New York, you will be reimbursed or paid directly for reasonable relocation expenses for you and your family. For these purposes, relocation expenses include: House-hunting expenses to include all travel, hotel, ground transportation and childcare expenses for you and your spouse. Temporary living expenses for you and your family for up to nine (9) months from the Commencement Date. Home buy-out of your existing residence based on the average of two independent appraisals. Usual and customary closing costs on the sale of your existing home (including brokerage commissions) and on the acquisition of your new home, including two points on any acquisition mortgage and any brokerage commissions paid by you in connection with such purchase. Travel expenses and the cost of moving your household goods. A relocation allowance of $50,000. The above relocation allowance and all reimbursements and payments of relocation expenses will be grossed-up for tax purposes. During the term of your employment with either the Company or Parent you will be entitled to participate in all employee benefit plans, programs and arrangements of the Parent or any of its affiliates now or hereinafter made available to any senior executives of the Company or Parent on a basis no less favorable than is made available to any other such senior executives (including, without limitation, each plan, program or arrangement providing for retirement benefits, supplemental and excess retirement benefits, annual and long-term incentive compensation, stock options, group life insurance, accident and death insurance, medical and dental insurance, sick leave, disability benefits and fringe benefits and perquisites). In addition, you will be entitled to at least five (5) weeks paid vacation per calendar year and you shall receive prompt reimbursement from the Company or Parent for all reasonable out-of-pocket expenses incurred by you in performing your duties for the Company or Parent. You will be afforded the same indemnification protection regarding directors and officers liability that the Company and Parent provide to their senior executive officers and directors. In addition, you will be covered by any directors and officers liability policy generally in force for the Company's and Parent's senior executive officers and directors. Our offer is contingent upon your completing our standard employment package. The package includes an employment application, a security data sheet, a personal information form, and confirmation of employment authorization (which will include completing the Immigration and Naturalization Service's Form I-9). You will also have to read and sign the Substance Abuse Policy Employee Acknowledgment Form which is enclosed in the envelope marked "Medical Evaluation." In addition, it will be necessary for you to successfully complete a medical evaluation, a background investigation, including, but not limited to, a credit investigation, and all other components of the Company's and Parent's pre-employment screening process to the Company's and Parent's satisfaction. You may schedule an appointment for your medical evaluation by calling Peter Gurney of Human Resources at (212) 250-2219. Please complete and bring the forms in the envelope marked "Medical Evaluation" to your appointment. You will be eligible to start employment once you have received notification of the successful completion of your medical evaluation and credit investigation which we estimate will take 48 hours. The Parent recently reviewed its policies and procedures as they relate to the handling of information of a proprietary or confidential nature. Included in this policy is a requirement that all employee and related accounts be maintained in designated accounts from Bankers Trust, Fleet Corporation or Smith Barney, Inc. Additional information pertaining to this policy can be found in the Bankers Trust employee booklet entitled, "Confidential Information, Insider Trading and Related Matters." Pursuant to new SEC rules pertaining to equity-based compensation plans, all equity awards included in this letter are subject to approval of the Board of Directors of the Parent. In the event that before the third anniversary of the Commencement date, the term of this agreement, your employment is terminated by the Parent and Company other than for Cause (as defined in the Parent's Separation Policy), the following will occur: All cash due you from your annual base salary and guaranteed bonuses as provided in this agreement, to the extent not previously paid will be immediately paid out to you as a lump-sum, net of applicable withholding taxes; Your POP Unit Award will immediately vest. Your POP Units will remain in the plan and will be cash valued and paid to you at the earlier of the end of the Plan's five-year performance period or upon the stock price reaching $100; All PEP units provided by this agreement, to the extent not yet converted into book-entry shares of stock under the terms of the plan, will have a guaranteed cash-value of $25.00 per unit and be immediately distributed to you; and, All stock options as provided in this agreement which had been granted to you prior to the off-payroll date, which have not vested on the off-payroll date, will vest and become immediately exercisable. Following the term of this agreement, you will be subject to the provisions of the Parent's standard separation policy. Upon a Change of Control, all guaranteed bonuses, PEP shares/units, stock options, and POP units will vest and be distributed in accordance with the provisions of the Parent's Change of Control Policy. Needless to say, we are all very enthusiastic at the prospect of your joining Bankers Trust. Please sign and return one copy of this letter upon your acceptance of our offer. Call me if you have any questions regarding our offer. Sincerely, /S/FRANK N. NEWMAN Frank N. Newman Agreed to: /S/DAVID MARSHALL David Marshall September 9, 1996 Date page Bankers Trust Company 130 Liberty Street, New York, New York 10006 EX-10.III.A2 3 EXHIBIT 10(iii)(A)(2) In June of 1996, Paul Volcker, who became a member of the Board of Directors of Bankers Trust New York Corporation (the "Corporation") and Bankers Trust Company on September 16, 1996, entered into a consulting arrangement with the Corporation. Mr. Volcker will receive a consultancy fee of $500,000 for the year ended December 31, 1996, which will be paid on a monthly basis. Up to $200,000 will be made available for setting up of an office and for hiring of an assistant. Fees for subsequent years will be mutually agreed upon at the beginning of each such year. While Mr. Volcker is free to undertake other consulting arrangements, he has agreed that through December 31, 1996, he will not become an officer, director or partner of an existing investment or commercial banking firm engaged in significant merger and acquisition activities or having more than $25 million in capital. Also he will not associate with any newly established company engaging in substantial merger and acquisition activities other than with the knowledge of, and in conjunction with the Corporation. After December 31, 1996, and prior to June 30, 1998, Mr. Volcker will not join any investment or commercial banking firm with capital of $100 million or more and in significant competition with the Corporation. In the event that he does participate in a small new or existing firm, he further agreed to make a good faith effort to refer clients to the Corporation for execution of merger and acquisition or financing transactions. EX-10.III.A3 4 EXHIBIT 10(iii)(A)(3) Phantom Stock Award Agreement PHANTOM STOCK BONUS AWARD AGREEMENT OF AUSTRALIA between Bankers Trust Australia Limited ("BT Bank"), an indirect subsidiary of Bankers Trust New York Corporation (the "Corporation"), the Corporation and (the "Recipient"). WHEREAS, the purpose of BT Bank Phantom Stock Bonus Awards is to aid BT Bank in securing and retaining officers and other key employees of outstanding ability and to motivate such employees to exert their best efforts on behalf of BT Bank, and have a favourable impact on the management, growth and protection of the business of BT Bank and its subsidiaries; and WHEREAS, in consideration of the Recipient's past services in the employment of BT Bank for the calendar year and of the agreement of the Recipient to continue in the employment of BT Bank for the time being, the Human Resources Committee of the Corporation (the "Committee") has resolved (and so directs BT Bank), subject to the provisions of this Agreement, to award the Recipient a US$ cash bonus equal to the US$ fair market value of shares of the Corporation's Common Stock (the "Phantom Stock"), such cash bonus being calculated and payable at the end of a deferral period beginning on the date hereof and, subject to Section 2 hereof, ending on (the "Deferral Period") and in connection with such award, BT Bank, the Corporation and the Recipient agree as follows: 1. Upon receipt of this Agreement executed by the Recipient, BT Bank and the Corporation for the purposes of calculating the award will notionally grant of Phantom Stock to the Recipient. This notional grant is to be used as the basis for calculating the amount of bonus payable by BT Bank to the Recipient at the end of the Deferral Period. Subject to Section 2, at the end of the Deferral Period, BT Bank will pay a bonus to the Recipient equal to, the greater of, the amount determined by multiplying the number of shares of Phantom Stock awarded to the Recipient times the US$ fair market value of the Corporation's common stock, par value US$1 per share (the "Common Stock") upon the expiration of the Deferral Period, or, an amount determined by multiplying the number of shares of Phantom Stock awarded to the Recipient times US$ . The Recipient irrevocably authorizes and directs BT Bank to deduct PAYE tax from the amount of the bonus. 2. The Recipient acknowledges that the Recipient's rights hereunder may not be sold, assigned, transferred, pledged or otherwise dealt with or encumbered. Whilst this award is only payable at the end of the Deferral Period, it is nonforfeitable on and after (the "Vesting Date"). If the Recipient ceases to be employed by the Corporation or any of its direct or indirect subsidiaries prior to the Vesting Date, the Recipient agrees that the Recipient's rights hereunder will be forfeited without any action required by the Recipient, the Committee or BT Bank. However, the Committee may, in its absolute discretion, when it finds that it would be in the best interest of BT Bank to do so, deem the Recipient to have met the vesting period requirements and so direct BT Bank. The Committee, as part of exercising this discretion, may take into account any factors it thinks fit including (without limitation) whether the Recipient resigned from his/her employment or was terminated by BT Bank; the reason for the cessation of employment; whether the Recipient intended or was likely to commence employment with a competitor; whether the employee has accepted new employment and will be performing roles and functions in the new employment which are similar to those the employee performed while employed by BT (or any related body corporate of BT). Whether or not the roles and functions are considered "similar" will be determined in the absolute discretion of the directors. Whether the Recipient caused, or was likely to cause any damage to the business or reputation of BT Bank (or any related body corporate of BT Bank); whether the Recipient attempted to entice or take clients or other employees of BT Bank (or any related body corporate of BT Bank) with him or her. Further, notwithstanding anything in the foregoing to the contrary, upon a Change of Control, as defined in Schedule I to this Agreement, the Deferral Period in respect of all of the bonus award shall be deemed to have ended immediately before such Change of Control. 3. The Recipient shall not have either voting or dividend rights with respect to the notional grant of Phantom Stock; however, the Recipient shall be entitled to receive from BT Bank, by way of additional bonus remuneration, dividend equivalent payments with respect to the Phantom Stock that will coincide with the dividends actually paid by the Corporation on its Common Stock in terms of both payment amounts and periods. The Recipient will become entitled to the dividend equivalent amount on the ex date applicable to the dividend actually paid by the Corporation on its Common Stock. The dividend equivalent payments will be converted to A$ by BT Bank at the closing A$/US$ exchange rate on the business day preceding payment of the dividend equivalent amount by BT Bank (as determined by BT Bank in good faith). The dividend equivalent payments shall be made within thirty days after the relevant dividends are paid by the Corporation and will be made Net After Tax. 4. Neither this Agreement nor any action taken under this Agreement shall be construed as giving the Recipient any right to be retained in the employ of BT Bank. 5. The Recipient acknowledges that the Committee may in its absolute discretion (including, without limitation, to take account of any consolidation, subdivision or bonus issue of the Corporation's stock) amend the terms and conditions of this Agreement including retroactive amendments and may so direct BT Bank, provided, however, that no such amendment shall materially impair the Recipient's rights hereunder without his or her consent. 6. The award of bonus set forth in this Agreement shall be subject to cancellation by the Committee, which will so advise BT Bank, unless within twenty one (21) days of the date herein above set forth the Recipient delivers or mails a duly executed copy of this Agreement, to Bankers Trust New York Corporation, 130 Liberty Street, c/o Human Resources Department, New York, New York 10006. 7. Notwithstanding anything to the contrary in this Agreement, the amount of the bonus is to be reduced by the payroll tax, superannuation fund contributions (in lieu of superannuation guarantee charge) and any other computation type "on" costs determined by BT Bank in good faith to be referable thereto. 8. As used in this Agreement, "Net After Tax" means the amount determined by BT Bank in good faith after deduction from the bonus amount, as reduced under Section 7, of the normal pay as you earn tax installment deductions. 9. As used in this Agreement, the "fair market value" of the Corporation's Common Stock on a particular day is the weighted average price of the Corporation's Common Stock traded on the New York Stock Exchange on that particular day (or where that particular day is not a business day, the immediate preceding business day) as determined in good faith by BT Bank, as to which a certificate in writing by the secretary for the time being of BT Bank shall (in the absence of fraud or manifest material error) be conclusive. 10.Notwithstanding the foregoing, this award of bonus is contingent on the approval of the Committee and the Board of Directors of the Corporation. 11.This agreement shall be construed and its provisions enforced and administered in accordance with the law of Australia. IN WITNESS WHEREOF, BT Bank and the Corporation have duly executed this Phantom Stock Bonus Plan Agreement on the date set forth above. BANKERS TRUST NEW YORK CORPORATION BY BANKERS TRUST AUSTRALIA LIMITED BY Agreed to this 3rd day of August, 1995 Recipient Schedule 1 As used in this Agreement, a "Change of Control" shall mean the following events: (i) The acquisition, other than from the Corporation, by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either the then outstanding shares of common stock of the Corporation (the "Outstanding Corporation Common Stock") or the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election for directors (the "Corporation Voting Securities"), provided, however, that any acquisition by the Corporation or any of its subsidiaries, or any employee benefit plan (or related unit) of the Corporation or its subsidiaries, or any corporation with respect to which, following such acquisition, more than 80% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors, is then beneficially owned, directly or indirectly by the individuals and entities who were the beneficial owners, respectively, of the Outstanding Corporation Common Stock and Corporation Voting Securities immediately prior to such acquisition in substantially the same proportion as their ownership, immediately prior to such acquisition, of the Outstanding Corporation Common Stock and Corporation Voting Securities, as the case may be, shall not constitute a Change of Control; or (ii) Individuals who, as of January 1, 1994, constitute the Board (as of the date hereof the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Corporation's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Directors of the Corporation (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act); or (iii) Approval by the stockholders of the Corporation of a reorganization, merger or consolidation, in each case, with respect to which the individual and entities who were the respective beneficial owners of the common stock and voting securities of the Corporation immediately prior to such reorganization, merger or consolidation do not, following such reorganization, merger or consolidation, beneficially own, directly or indirectly, more than 80% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such reorganization, merger of consolidation, or a complete liquidation or dissolution of the Corporation or of the sale or other disposition of all or substantially all of the assets of the Corporation. Anything herein to the contrary notwithstanding, a Change of Control shall not be deemed to have occurred if such Change of Control results from or arises out of a purchase or other acquisition of the Corporation, directly or indirectly, by a corporation or other entity in which the Recipient has a direct or indirect equity interest; provided, however, that the limitation contained in this sentence shall not apply to any direct or indirect equity interest in a corporation or other entity (a) which equity interest is part of a class of equity interests which are publicly traded on any securities exchange or other market system, (b) received by the Recipient, without the Recipient's concurrence or consent, as a result of a purchase or other acquisition of the Corporation by such corporation or other entity, or (c) received by the Recipient without the Recipient's concurrence or consent, in connection with a purchase or other acquisition of the Corporation by such corporation or other entity in respect of any stock options or performance awards granted to the Recipient by the BT Bank or the Corporation. EX-12.A 5 EXHIBIT 12(a) BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES COMPUTATION OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES (dollars in millions)
Nine Months Ended Year Ended December 31, Sept 30, 1991 1992 1993 1994 1995 1996 Earnings: 1. Income before income taxes and cumulative effects of accounting changes $ 834 $ 906 $1,550 $ 869 $ 215 $ 663 2. Add: Fixed charges excluding capitalized interest (Line 10) 3,614 3,099 3,148 3,884 5,356 4,034 3. Less: Equity in undistri- buted income of unconsolidated subsidiaries and affiliates 31 40 30 45 28 23 4. Earnings including interest on deposits 4,417 3,965 4,668 4,708 5,543 4,674 5. Less: Interest on deposits 1,589 1,119 1,013 965 1,359 1,016 6. Earnings excluding interest on deposits $2,828 $2,846 $3,655 $3,743 $4,184 $3,658 Fixed Charges: 7. Interest Expense $3,585 $3,072 $3,122 $3,858 $5,330 $4,014 8. Estimated interest component of net rental expense 29 27 26 26 26 20 9. Amortization of debt issuance expense - - - - - - 10. Total fixed charges including interest on deposits and excluding capitalized interest 3,614 3,099 3,148 3,884 5,356 4,034 11. Add: Capitalized interest - - - - - - 12. Total fixed charges 3,614 3,099 3,148 3,884 5,356 4,034 13. Less: Interest on deposits (Line 5) 1,589 1,119 1,013 965 1,359 1,016 14. Fixed charges excluding interest on deposits $2,025 $1,980 $2,135 $2,919 $3,997 $3,018 Consolidated Ratios of Earnings to Fixed Charges: Including interest on deposits (Line 4/Line 12) 1.22 1.28 1.48 1.21 1.03 1.16 Excluding interest on deposits (Line 6/Line 14) 1.40 1.44 1.71 1.28 1.05 1.21
EX-12.B 6 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)
Nine Months Ended Year Ended December 31, Sept 30, 1991 1992 1993 1994 1995 1996 Earnings: 1. Income before income taxes and cumulative effect of accounting changes $ 834 $ 906 $1,550 $ 869 $ 215 $ 663 2. Add: Fixed charges excluding capitalized interest (Line 13) 3,614 3,099 3,148 3,884 5,356 4,034 3. Less: Equity in undistri- buted income of unconsolidated subsidiaries and affiliates 31 40 30 45 28 23 4. Earnings including interest on deposits 4,417 3,965 4,668 4,708 5,543 4,674 5. Less: Interest on deposits 1,589 1,119 1,013 965 1,359 1,016 6. Earnings excluding interest on deposits $2,828 $2,846 $3,655 $3,743 $4,184 $3,658 Preferred Stock Dividend Requirements: 7. Preferred stock dividend requirements $ 34 $ 30 $ 23 $ 28 $ 51 $ 37 8. Ratio of income from continuing operations before income taxes to income from continuing operations after income taxes 125% 142% 145% 141% 145% 143% 9. Preferred stock dividend requirements on a pretax basis $ 43 $ 43 $ 33 $ 39 $ 74 $ 53 Fixed Charges: 10. Interest Expense $3,585 $3,072 $3,122 $3,858 $5,330 $4,014 11. Estimated interest component of net rental expense 29 27 26 26 26 20 12. Amortization of debt issuance expense - - - - - - 13. Total fixed charges including interest on deposits and excluding capitalized interest 3,614 3,099 3,148 3,884 5,356 4,034 14. Add: Capitalized interest - - - - - - 15. Total fixed charges 3,614 3,099 3,148 3,884 5,356 4,034 16. Add: Preferred stock dividend require- ments - pretax (Line 9) 43 43 33 39 74 53 17. Total combined fixed charges and preferred stock dividend require- ments on a pretax basis 3,657 3,142 3,181 3,923 5,430 4,087 18. Less: Interest on deposits (Line 5) 1,589 1,119 1,013 965 1,359 1,016 19. Combined fixed charges and preferred stock dividend requirements on a pretax basis excluding interest on deposits $2,068 $2,023 $2,168 $2,958 $4,071 $3,071 Consolidated Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements: Including interest on deposits (Line 4/Line 17) 1.21 1.26 1.47 1.20 1.02 1.14 Excluding interest on deposits (Line 6/Line 19) 1.37 1.41 1.69 1.27 1.03 1.19
BANKERS TRUST NEW YORK CORPORATION 130 LIBERTY STREET NEW YORK, NEW YORK 10006 Geoffrey M. Fletcher Senior Vice President and Principal Accounting Officer November 14, 1996 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 September 30, 1996 (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 7
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CONDITION AT SEPTEMBER 30, 1996 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 825 4,100 856 47,757 7,461 0 0 15,264 967 120,847 28,672 42,788 7,902 10,507 0 816 84 4,424 120,847 740 331 1,763 4,718 974 4,014 704 5 51 2,395 663 663 0 0 465 5.19 5.16 1.04 488 0 89 0 992 68 38 967 232 215 520 Short-term borrowings include the following: Securities sold under repurchase agreements 23,989 Other short-term borrowings 18,799 Total 42,788 Other liabilities include the following: Accounts payable and accrued expenses 5,252 Other liabilities 2,650 Total 7,902 Other interest income includes the following: Interest-bearing deposits with banks 141 Federal funds sold 92 Securities purchased under resale agreements 840 Securities borrowed 690 Total 1,763
EX-99 8 EXHIBIT 99.1 The following tables analyze the results by Organizational Units. Refer to page 8 of the Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 for Organizational Units' assumptions.
Total Non- Pretax Net Three Months Ended March 31, 1996 Total Net interest Income/ Income/ (in millions) Revenue Expenses (Loss) (Loss) Investment Banking $204 $ 95 $109 $ 77 Risk Management Services 78 77 1 1 Trading & Sales 96 61 35 24 Investment Management 69 68 1 1 Client Processing Services 187 157 30 21 Australia/New Zealand 98 64 34 24 Asia 33 25 8 6 Latin America 136 109 27 19 Corporate/Other 57 105 (48) (35) Total $958 $761 $197 $138
Total Non- Pretax Net Three Months Ended June 30, 1996 Total Net interest Income/ Income/ (in millions) Revenue Expenses (Loss) (Loss) Investment Banking $ 274 $118 $156 $109 Risk Management Services 44 76 (32) (22) Trading & Sales 89 65 24 17 Investment Management 74 68 6 4 Client Processing Services 203 166 37 26 Australia/New Zealand 114 70 44 31 Asia 35 26 9 7 Latin America 166 115 51 36 Corporate/Other 42 121 (79) (57) Total $1,041 $825 $216 $151
Total Non- Pretax Net Three Months Ended September 30, 1996 Total Net interest Income/ Income/ (in millions) Revenue Expenses (Loss) (Loss) Investment Banking $ 231 $122 $109 $ 77 Risk Management Services 84 80 4 3 Trading & Sales 107 65 42 29 Investment Management 76 70 6 4 Client Processing Services 200 165 35 25 Australia/New Zealand 138 77 61 43 Asia 30 24 6 5 Latin America 123 94 29 20 Corporate/Other 70 112 (42) (30) Total $1,059 $809 $250 $176
Total Non- Pretax Net Three Months Ended March 31, 1995 Total Net interest Income/ Income/ (in millions) Revenue Expenses (Loss) (Loss) Investment Banking $ 95 $ 63 $ 32 $ 24 Risk Management Services 35 77 (42) (30) Trading & Sales 70 54 16 11 Investment Management 67 73 (6) (4) Client Processing Services 174 145 29 20 Australia/New Zealand 95 64 31 22 Asia 15 20 (5) (3) Latin America (62) 92 (154) (108) Corporate/Other 21 146 (125) (89) Total $510 $734 $(224) $(157)
Total Non- Pretax Net Three Months Ended June 30, 1995 Total Net interest Income/ Income/ (in millions) Revenue Expenses (Loss) (Loss) Investment Banking $171 $ 64 $107 $ 74 Risk Management Services 56 71 (15) (9) Trading & Sales 68 56 12 8 Investment Management 69 65 4 2 Client Processing Services 179 141 38 27 Australia/New Zealand 99 62 37 25 Asia 37 26 11 8 Latin America 107 112 (5) (4) Corporate/Other 23 81 (58) (40) Total $809 $678 $131 $ 91
Total Non- Pretax Net Three Months Ended September 30, 1995 Total Net interest Income/ Income/ (in millions) Revenue Expenses (Loss) (Loss) Investment Banking $184 $ 83 $101 $ 70 Risk Management Services 107 94 13 9 Trading & Sales 124 70 54 38 Investment Management 64 68 (4) (3) Client Processing Services 177 140 37 25 Australia/New Zealand 97 65 32 22 Asia 7 26 (19) (14) Latin America 123 119 4 3 Corporate/Other 69 63 6 5 Total $952 $728 $224 $155
Total Non- Pretax Net Three Months Ended December 31, 1995 Total Net interest Income/ Income/ (in millions) Revenue Expenses (Loss) (Loss) Investment Banking $333 $106 $227 $158 Risk Management Services 34 95 (61) (44) Trading & Sales 99 64 35 25 Investment Management 65 72 (7) (5) Client Processing Services 187 157 30 21 Australia/New Zealand 110 65 45 33 Asia 17 29 (12) (10) Latin America 99 116 (17) (11) Corporate/Other (6) 54 (60) (41) Total $938 $758 $180 $126
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