-----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, QJU5v3wQWezE+8Ase+OFZ6RfhBEh3ajpsDxGBvse2ihqETUktjg8pV43weEXL7kp nex2WUSQ/aTE3fxfOxtZKA== 0000009749-97-000131.txt : 19971117 0000009749-97-000131.hdr.sgml : 19971117 ACCESSION NUMBER: 0000009749-97-000131 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: SEC FILE NUMBER: 001-05920 FILM NUMBER: 97721782 BUSINESS ADDRESS: STREET 1: 130 LIBERTY STREET CITY: NEW YORK STATE: NY ZIP: 10006 BUSINESS PHONE: 2122502500 MAIL ADDRESS: STREET 1: 130 LIBERTY STREET CITY: NEW YORK STATE: NY ZIP: 10006 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, 1997 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, 1997: Common Stock, $1 par value, 97,961,940 shares. 1 BANKERS TRUST NEW YORK CORPORATION September 30, 1997 FORM 10-Q TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statement of Income Three Months Ended September 30, 1997 and 1996 2 Nine Months Ended September 30, 1997 and 1996 3 Consolidated Balance Sheet At September 30, 1997 and December 31, 1996 4 Consolidated Statement of Changes in Stockholders' Equity Nine Months Ended September 30, 1997 and 1996 5 Consolidated Statement of Cash Flows Nine Months Ended September 30, 1997 and 1996 6 Consolidated Schedule of Net Interest Revenue Three Months and Nine Months Ended September 30, 1997 and 1996 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, 1997 are not necessarily indicative of the results of operations for the full year or any other interim period. The merger of Alex. Brown Incorporated and Bankers Trust New York Corporation was completed on September 1, 1997. The merger was accounted for as a pooling of interests and all periods presented have been restated as if Alex. Brown Incorporated and Bankers Trust New York Corporation had always been combined. The financial statements included in this Form 10-Q should be read with reference to the supplemental consolidated financial statements as filed on Form 8-K dated September 1, 1997, as well as the historical consolidated financial statements of Alex. Brown Incorporated and Bankers Trust New York Corporation, included in their Annual Reports on Form 10-K for the fiscal year ended December 31, 1996. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 38 Item 6. Exhibits and Reports on Form 8-K 39 SIGNATURE 40 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, 1997 1996 (Decrease) NET INTEREST REVENUE Interest revenue $1,789 $1,704 $ 85 Interest expense 1,474 1,434 40 Net interest revenue 315 270 45 Provision for credit losses 10 - 10 Net interest revenue after provision for credit losses 305 270 35 NONINTEREST REVENUE Trading 387 252 135 Fiduciary and funds management 277 216 61 Corporate finance fees 305 193 112 Other fees and commissions 158 130 28 Net revenue from equity investment transactions 73 79 (6) Securities available for sale gains 18 11 7 Insurance premiums 76 52 24 Other 171 56 115 Total noninterest revenue 1,465 989 476 NONINTEREST EXPENSES Salaries and commissions 333 295 38 Incentive compensation and employee benefits 543 273 270 Agency and other professional service fees 105 73 32 Communication and data services 58 63 (5) Occupancy, net 45 43 2 Furniture and equipment 55 46 9 Travel and entertainment 36 27 9 Provision for policyholder benefits 90 66 24 Other 97 78 19 Restructuring charges 57 - 57 Total noninterest expenses 1,419 964 455 Income before income taxes 351 295 56 Income taxes 105 93 12 NET INCOME $ 246 $ 202 $ 44 NET INCOME APPLICABLE TO COMMON STOCK* $ 235 $ 194 $ 41 Cash dividends declared per common share $1.00 $1.00 $- EARNINGS PER COMMON SHARE: PRIMARY $2.25 $1.85 $.40 FULLY DILUTED $2.16 $1.80 $.36 * Amounts shown are used to calculate primary earnings per common share. 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, 1997 1996 (Decrease) NET INTEREST REVENUE Interest revenue $5,200 $4,822 $378 Interest expense 4,214 4,052 162 Net interest revenue 986 770 216 Provision for credit losses 10 5 5 Net interest revenue after provision for credit losses 976 765 211 NONINTEREST REVENUE Trading 1,013 746 267 Fiduciary and funds management 769 633 136 Corporate finance fees 789 651 138 Other fees and commissions 445 407 38 Net revenue from equity investment transactions 129 182 (53) Securities available for sale gains 100 51 49 Insurance premiums 203 177 26 Other 277 202 75 Total noninterest revenue 3,725 3,049 676 NONINTEREST EXPENSES Salaries and commissions 941 841 100 Incentive compensation and employee benefits 1,362 898 464 Agency and other professional service fees 296 236 60 Communication and data services 173 177 (4) Occupancy, net 132 128 4 Furniture and equipment 163 135 28 Travel and entertainment 101 77 24 Provision for policyholder benefits 231 216 15 Other 292 247 45 Restructuring charges 57 - 57 Total noninterest expenses 3,748 2,955 793 Income before income taxes 953 859 94 Income taxes 294 277 17 NET INCOME $ 659 $ 582 $ 77 NET INCOME APPLICABLE TO COMMON STOCK* $ 622 $ 545 $ 77 Cash dividends declared per common share $3.00 $3.00 $- EARNINGS PER COMMON SHARE: PRIMARY $6.00 $5.30 $.70 FULLY DILUTED $5.80 $5.13 $.67 * Amounts shown are used to calculate primary earnings per common share. Certain prior period amounts have been reclassified to conform to the current presentation.
4 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ($ in millions, except par value)
September 30, December 31, 1997* 1996 ASSETS Cash and due from banks $ 1,625 $ 1,568 Interest-bearing deposits with banks 2,522 2,210 Federal funds sold 2,241 1,684 Securities purchased under resale agreements 24,902 18,002 Securities borrowed 16,138 17,005 Trading assets: Government securities 11,650 16,849 Corporate debt securities 9,362 8,033 Equity securities 8,010 6,089 Swaps, options and other derivatives 13,720 11,410 Other trading assets 9,833 6,748 Total trading assets 52,575 49,129 Securities available for sale 7,577 7,920 Loans, net of allowance for credit losses of $759 at September 30, 1997 and $773 at December 31, 1996 20,544 15,107 Customer receivables 1,711 1,529 Accounts receivable and accrued interest 3,977 3,077 Other assets 6,275 5,547 Total $140,087 $122,778 LIABILITIES Noninterest-bearing deposits Domestic offices $ 2,134 $ 2,600 Foreign offices 1,294 1,013 Interest-bearing deposits Domestic offices 20,490 9,928 Foreign offices 22,161 16,774 Total deposits 46,079 30,315 Trading liabilities: Securities sold, not yet purchased Government securities 6,724 7,668 Equity securities 5,445 4,174 Other trading liabilities 407 334 Swaps, options and other derivatives 13,517 11,585 Total trading liabilities 26,093 23,761 Securities loaned and securities sold under repurchase agreements 20,158 23,454 Other short-term borrowings 19,329 19,409 Accounts payable and accrued expenses 6,255 4,837 Other liabilities, including allowance for credit losses of $213 at September 30, 1997 and $200 at December 31, 1996 3,998 2,836 Long-term debt not included in risk-based capital 7,655 8,732 Long-term debt included in risk-based capital 2,918 2,576 Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital 1,471 730 Total liabilities 133,956 116,650 PREFERRED STOCK OF SUBSIDIARY - 250 STOCKHOLDERS' EQUITY Preferred stock 703 810 Common stock, $1 par value Authorized, 300,000,000 shares Issued: 1997, 105,362,258; 1996, 103,624,555 shares 105 104 Capital surplus 1,541 1,437 Retained earnings 4,176 3,988 Common stock in treasury, at cost: 1997, 5,756,621 shares; 1996, 4,435,226 shares (545) (372) Other stockholders' equity 151 (89) Total stockholders' equity 6,131 5,878 Total $140,087 $122,778 * 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, 1997 1996 PREFERRED STOCK Balance, January 1 $ 810 $ 865 Preferred stock issued - 1 Preferred stock redeemed (100) - Preferred stock repurchased (7) (50) Balance, September 30 703 816 COMMON STOCK Balance, January 1 104 103 Issuance of common stock 1 1 Balance, September 30 105 104 CAPITAL SURPLUS Balance, January 1 1,437 1,386 Issuance of common stock 59 15 Repurchase and retirement of common stock (6) (16) Common stock distributed under employee benefit plans 51 21 Preferred stock repurchased - 6 Balance, September 30 1,541 1,412 RETAINED EARNINGS Balance, January 1 3,988 3,702 Net income 659 582 Cash dividends declared Preferred stock (38) (44) Common stock (268) (252) Treasury stock distributed under employee benefit plans (165) (38) Treasury stock associated with acquisition - (7) Balance, September 30 4,176 3,943 COMMON STOCK IN TREASURY, AT COST Balance, January 1 (372) (336) Purchases of stock (563) (250) Restricted stock granted (cancelled), net (9) 35 Treasury stock distributed under employee benefit plans 399 168 Treasury stock associated with acquisition - 210 Balance, September 30 (545) (173) COMMON STOCK ISSUABLE - STOCK AWARDS Balance, January 1 526 233 Deferred stock awards granted, net 167 67 Deferred stock distributed (18) (1) Balance, September 30 675 299 DEFERRED COMPENSATION - STOCK AWARDS Balance, January 1 (308) (151) Deferred stock awards (granted), net (168) (66) Restricted stock (granted) cancelled, net 8 (36) Amortization of deferred compensation, net 215 121 Balance, September 30 (253) (132) CUMULATIVE TRANSLATION ADJUSTMENTS Balance, January 1 (364) (348) Translation adjustments 48 (40) Income taxes applicable to translation adjustments (41) 24 Balance, September 30 (357) (364) SECURITIES VALUATION ALLOWANCE Balance, January 1 57 19 Change in unrealized net gains, after applicable income taxes and minority interest 29 6 Balance, September 30 86 25 TOTAL STOCKHOLDERS' EQUITY, SEPTEMBER 30 $6,131 $5,930
6 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (in millions) (unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 659 $ 582 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 10 5 Provision for policyholder benefits 231 216 Restructuring charges 57 - Deferred income taxes (133) 162 Depreciation and other amortization and accretion 308 117 Other, net 55 (66) Earnings adjusted for noncash charges and credits 1,187 1,016 Net change in: Trading assets (3,153) (526) Trading liabilities 2,730 (851) Receivables and payables from securities transactions (253) 2,328 Customer receivables (22) (166) Other operating assets and liabilities, net 183 (1,002) Securities available for sale gains (100) (51) Net cash provided by operating activities 572 748 CASH FLOWS FROM INVESTING ACTIVITIES Net change in: Interest-bearing deposits with banks (365) (2,118) Federal funds sold (557) (2) Securities purchased under resale agreements (6,899) (8,768) Securities borrowed 868 (4,078) Loans (5,694) (2,423) Securities available for sale: Purchases (4,317) (4,161) Maturities and other redemptions 2,437 2,327 Sales 874 501 Acquisitions of premises and equipment (184) (144) Other, net 729 153 Net cash used in investing activities (13,108) (18,713) CASH FLOWS FROM FINANCING ACTIVITIES Net change in: Deposits 15,682 2,860 Securities loaned and securities sold under repurchase agreements (3,220) 9,264 Other short-term borrowings 496 3,041 Issuances of long-term debt* 5,474 2,553 Repayments of long-term debt (4,876) (859) Issuances of common stock 42 16 Repurchase and retirement of common stock - (16) Redemptions of preferred stock of subsidiary (250) - Redemptions and repurchases of preferred stock (107) (44) Purchases of treasury stock (563) (250) Cash dividends paid (285) (293) Other, net 248 138 Net cash provided by financing activities 12,641 16,410 Net effect of exchange rate changes on cash (48) 22 NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 57 (1,533) Cash and due from banks, beginning of period 1,568 2,399 Cash and due from banks, end of period $ 1,625 $ 866 Interest paid $3,729 $4,088 Income taxes paid, net $170 $248 Noncash investing activities $90 $269 Noncash financing activities: Conversion of debt to preferred stock $- $1 * Includes $741 million at September 30, 1997, related to mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital ("trust preferred capital securities"). 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, 1997 1996 1997 1996 INTEREST REVENUE Interest-bearing deposits with banks $ 106 $ 59 $ 253 $ 142 Federal funds sold 86 33 196 92 Securities purchased under resale agreements 339 371 983 841 Securities borrowed 173 226 532 697 Trading assets 568 596 1,817 1,888 Securities available for sale Taxable 108 115 314 315 Exempt from federal income taxes 7 4 23 16 Loans 369 270 985 743 Customer receivables 33 30 97 88 Total interest revenue 1,789 1,704 5,200 4,822 INTEREST EXPENSE Interest-bearing deposits Domestic offices 250 95 596 267 Foreign offices 301 244 810 707 Trading liabilities 94 202 371 663 Securities loaned and securities sold under repurchase agreements 343 454 1,016 1,173 Other short-term borrowings 305 294 872 809 Long-term debt 151 145 465 433 Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital 30 - 84 - Total interest expense 1,474 1,434 4,214 4,052 NET INTEREST REVENUE $ 315 $ 270 $ 986 $ 770
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 $246 million for the three months ended September 30, 1997, or $2.16 fully diluted earnings per share. In the third quarter of 1996, the Corporation earned $202 million, or $1.80 fully diluted earnings per share. For the first nine months of 1997, the Corporation earned $659 million, or $5.80 fully diluted earnings per share. For the first nine months of 1996, the Corporation earned $582 million, or $5.13 fully diluted earnings per share. THE MERGER On September 1, 1997, Alex. Brown Incorporated ("Alex. Brown") was merged into a wholly-owned subsidiary of Bankers Trust New York Corporation (the "Merger"). In conjunction with the Merger, each share of Alex. Brown common stock then outstanding was converted into 0.83 shares of Bankers Trust New York Corporation's common stock. The Merger was treated as a tax free exchange. The consolidated financial statements give retroactive effect to the Merger in a transaction accounted for as a pooling of interests. The pooling of interests method of accounting requires the restatement of all periods presented as if Alex. Brown and Bankers Trust New York Corporation had always been combined. The consolidated statement of changes in stockholders' equity reflects the accounts of the Corporation as if the additional common stock had been issued during all the periods presented. The consolidated financial statements should be read in conjunction with the Corporation's supplemental consolidated financial statements and notes thereto for the year ended 1996 included in the Corporation's Current Report on Form 8-K dated September 1, 1997 and filed on September 9, 1997 (the "Form 8-K"), as well as the historical consolidated financial statements of Alex. Brown Incorporated and Bankers Trust New York Corporation, included in their Annual Reports on Form 10-K for the fiscal year ended December 31, 1996. The combined and separate results of operations for Bankers Trust New York Corporation and Alex. Brown Incorporated during the periods preceding the Merger were as follows (in millions):
Three Months Ended Nine Months Ended September 30, 1996 September 30, 1996 Total Revenues* Bankers Trust New York Corporation $1,059 $3,058 Alex. Brown Incorporated 200 756 Combined $1,259 $3,814 Net Income Bankers Trust New York Corporation $ 176 $ 465 Alex. Brown Incorporated 26 117 Combined $ 202 $ 582 * Net interest revenue after provision for credit losses plus noninterest revenue.
9 ORGANIZATIONAL UNIT 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 diverse 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 judgments have been made to apportion revenue and expense items. In addition, certain revenue and expenses have been segregated and reported in Corporate/Other because, in the opinion of management, they could not be reasonably allocated or because their contributions to a particular organizational unit would be distortive. The internal management accounting process, unlike financial accounting in accordance with generally accepted accounting principles, is based on the way management views its business 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 generally restate this analysis to conform with material changes in the allocation process and/or significant changes in organizational structure. The following tables present results by Organizational Unit:
Total Non- Pretax Net Three Months Ended September 30, 1997 Total Net interest Income/ Income/ (in millions) Revenue Expenses (Loss) (Loss) Investment Banking $ 625 $ 335 $ 290 $204 Risk Management Services 117 101 16 11 Trading & Sales 128 86 42 30 Private Client Services Group 174 145 29 20 Global Institutional Services 241 211 30 21 Australia/New Zealand 136 113 23 17 Asia 8 34 (26) (19) Latin America 203 144 59 42 Corporate/Other 138 250 (112) (80) Total $1,770 $1,419 $ 351 $246
Total Non- Pretax Net Three Months Ended September 30, 1996 Total Net interest Income/ Income/ (in millions) Revenue Expenses (Loss) (Loss) Investment Banking $ 344 $195 $149 $102 Risk Management Services 75 66 9 6 Trading & Sales 105 64 41 28 Private Client Services Group 142 123 19 13 Global Institutional Services 211 183 28 19 Australia/New Zealand 144 86 58 40 Asia 30 24 6 4 Latin America 123 95 28 19 Corporate/Other 85 128 (43) (29) Total $1,259 $964 $295 $202
10 ORGANIZATIONAL UNIT RESULTS (continued)
Total Non- Pretax Net Nine Months Ended September 30, 1997 Total Net interest Income/ Income/ (in millions) Revenue Expenses (Loss) (Loss) Investment Banking $1,533 $ 882 $ 651 $ 452 Risk Management Services 329 287 42 29 Trading & Sales 436 249 187 129 Private Client Services Group 482 394 88 61 Global Institutional Services 679 609 70 48 Australia/New Zealand 418 308 110 77 Asia 59 93 (34) (25) Latin America 518 371 147 103 Corporate/Other 247 555 (308) (215) Total $4,701 $3,748 $ 953 $ 659
Total Non- Pretax Net Nine Months Ended September 30, 1996 Total Net interest Income/ Income/ (in millions) Revenue Expenses (Loss) (Loss) Investment Banking $1,174 $ 634 $ 540 $ 366 Risk Management Services 177 198 (21) (14) Trading & Sales 288 189 99 67 Private Client Services Group 454 372 82 55 Global Institutional Services 619 540 79 53 Australia/New Zealand 372 228 144 98 Asia 98 76 22 15 Latin America 425 321 104 70 Corporate/Other 207 397 (190) (128) Total $3,814 $2,955 $ 859 $ 582
Changes in Organizational Structure Results of Alex. Brown are included primarily in Investment Banking and Private Client Services Group. The Private Client Services Group also includes the results of the Corporation's historical private banking and active domestic equity management businesses. The quantitative and indexed investment management business, previously included in Investment Management, is now included in Global Institutional Services. All active international and global investment activities are included in Australia/New Zealand. The results by organizational units have been restated to conform to the new presentation. Organizational Unit Results The Investment Banking business contributed net income of $204 million in the third quarter of 1997, up $102 million from a year ago. Net income for the first nine months of 1997 was $452 million compared to $366 million for the first nine months of 1996. The increase from the prior year periods reflected higher revenues from corporate finance activities in addition to higher revenues from private equity investments. In addition, real estate investment banking activities contributed strong corporate finance revenues as compared to the prior year periods. Risk Management Services recorded net income of $11 million in the third quarter of 1997, up $5 million from the third quarter of 1996. Compared to the prior year period, revenues from new derivatives transactions and Eastern Europe activities improved. Net income for the first nine months of 1997 was $29 million compared with a net loss of $14 million in the prior year period. The first nine months of 1996 reflected losses incurred in the commodity derivatives books when copper prices dropped sharply. Beginning in 1997, the responsibility for managing the metals and mining commodities book was transferred to Australia/NZ. 11 ORGANIZATIONAL UNIT RESULTS (continued) Trading & Sales contributed $30 million of net income in the third quarter of 1997, up $2 million from the 1996 third quarter. Net income was $129 million for the first nine months of 1997 versus $67 million in the year ago period. The year-to-date improvement was largely due to strong arbitrage activities as compared to the first nine months of 1996. The Corporation's Private Client Services Group business reported net income of $20 million for the current quarter, up $7 million from the 1996 comparable period. All major business lines in Private Client Services Group improved as compared to the prior year period. For the first nine months of 1997, net income was $61 million compared to $55 million in the prior year period. Global Institutional Services contributed $21 million of net income in the third quarter of 1997, up $2 million from the 1996 third quarter. Revenues of $241 million were up $30 million from the third quarter of 1996 primarily due to the acquisition of NationsBank's institutional trust business. The current quarter also reflected improved results from investment management and securities lending activities as compared to the third quarter of 1996. Net income for the first nine months of 1997 was $48 million compared to $53 million for the first nine months of 1996. The year-over-year decrease was primarily due to increased personnel-related costs as a result of higher staff levels. Net income of the Australia/NZ business was $17 million in the third quarter of 1997, down $23 million from the third quarter of 1996. The decline in net income from the prior year period was mainly attributable to lower trading revenue partly offset by improved revenues from fiduciary and funds management. In addition, personnel-related costs increased as a result of higher staff levels. At September 30, 1997, assets under management in Australia/NZ's investment management business were approximately $45 billion, compared to $34 billion at September 30, 1996. Net income was $77 million for the first nine months of 1997 versus $98 million in the year ago period. The year-over-year decrease was primarily due to increased personnel-related costs as a result of higher staff levels. Asia net loss was $19 million in the third quarter of 1997, compared to net income of $4 million in the third quarter of 1996. As a result of continuing economic instability and heightened credit concerns in Southeast Asia, the Corporation has recognized a decline in value for certain investments in the region and has taken other credit-related charges. For the first nine months of 1997, the net loss was $25 million compared to net income of $15 million in the prior year period. The decrease from the prior year period resulted from the losses incurred in Southeast Asia. Latin America net income was $42 million in the third quarter of 1997, up $23 million from the third quarter of 1996. The current quarter included the remaining gain resulting from the completion of the final stage in the sale of 50 percent of the Corporation's stake in a Chilean insurance company. Net income for the first nine months of 1997 was $103 million compared with net income of $70 million in the prior year period. The first nine months of 1997 included the total gain in the sale of 50 percent of the Corporation's stake in a Chilean insurance company. Corporate/Other net loss was $80 million in the third quarter of 1997, compared with a net loss of $29 million in the third quarter of 1996. During the current quarter, the Corporation recognized $57 million in pre- tax restructuring charges and $42 million in other integration costs, offset partly by the pre-tax gain of $73 million on the sale of 280 Park Avenue, a midtown Manhattan office building. The prior year period included an after-tax gain of $18 million on the sale of its subsidiary, Golden American Life Insurance Company. For the first nine months of 1997, the net loss was $215 million compared to a net loss of $128 million in the prior year period. In addition to the items recognized in the third quarter of 1997, the first nine months of 1997 included the effects of increased incentive compensation and employee benefits and consulting expenses associated with several strategic and infrastructure improvement projects. 12 REVENUE Net Interest Revenue The table below presents 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, 1997 1996 1997 1996 NET INTEREST REVENUE (in millions) Book basis $ 315 $ 270 $ 986 $ 770 Tax equivalent adjustment 7 4 20 12 Fully taxable basis $ 322 $ 274 $ 1,006 $ 782 AVERAGE BALANCES (in millions) Interest-earning assets $105,676 $100,401 $101,961 $93,799 Interest-bearing liabilities 102,225 91,993 97,768 87,819 Earning assets financed by noninterest-bearing funds $ 3,451 $ 8,408 $ 4,193 $ 5,980 AVERAGE RATES (fully taxable basis) Yield on interest-earning assets 6.74% 6.77% 6.84% 6.88% Cost of interest-bearing liabilities 5.72 6.20 5.76 6.16 Interest rate spread 1.02 .57 1.08 .72 Contribution of noninterest-bearing funds .19 .52 .24 .39 Net interest margin 1.21% 1.09% 1.32% 1.11%
Net interest revenue for the third quarter of 1997 totaled $315 million, up $45 million, or 17 percent, from the third quarter of 1996. The $45 million increase in net interest revenue was primarily due to a $28 million increase in trading-related net interest revenue, which totaled $105 million for the third quarter of 1997. Nontrading-related net interest revenue totaled $210 million for the third quarter of 1997 versus $193 million for the comparable period in 1996. Net interest revenue was $986 million for the first nine months of 1997, up $216 million, or 28 percent from the first nine months of 1996. The $216 million increase in net interest revenue was primarily due to a $203 million increase in trading-related net interest revenue, which totaled $395 million for the first nine months of 1997. Nontrading-related net interest revenue totaled $591 million for the first nine months of 1997 versus $578 million for the comparable period in 1996. 13 REVENUE (continued) In the third quarter of 1997, the interest rate spread was 1.02 percent compared to .57 percent in the prior year period. Net interest margin increased to 1.21 percent from 1.09 percent. The yield on interest- earning assets declined by 3 basis points and the cost of interest-bearing liabilities declined by 48 basis points. Average interest-earning assets totaled $105.7 billion for the third quarter of 1997, up $5.3 billion from the same period in 1996. The increase was primarily attributable to growth in the loan portfolio. Average interest-bearing liabilities totaled $102.2 billion for the third quarter of 1997, up $10.2 billion from the same period in 1996. The increase was primarily attributable to a rise in interest-bearing deposits. Trading Revenue The Firm's trading and risk management businesses include significant activities in interest rate instruments and related derivatives. These activities can periodically shift revenue 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 1997 totaled $492 million, up $163 million from the third quarter of 1996. Combined trading revenue and trading-related net interest revenue for the first nine months of 1997 was $1.408 billion, up $470 million from the $938 million reported in the first nine months of 1996. 14 REVENUE (continued) The table below presents 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, 1997 Interest rate risk $170 $121 $291 Foreign exchange risk 119 - 119 Equity and commodity risk 98 (16) 82 Total $387 $105 $492 Quarter ended September 30, 1996 Interest rate risk $143 $ 90 $233 Foreign exchange risk 31 - 31 Equity and commodity risk 78 (13) 65 Total $252 $ 77 $329 Nine Months ended September 30, 1997 Interest rate risk $ 522 $431 $ 953 Foreign exchange risk 205 - 205 Equity and commodity risk 286 (36) 250 Total $1,013 $395 $1,408 Nine Months ended September 30, 1996 Interest rate risk $393 $222 $615 Foreign exchange risk 111 - 111 Equity and commodity risk 242 (30) 212 Total $746 $192 $938
Third Quarter 1997 vs. Third Quarter 1996 Interest Rate Risk - The increase in revenue was primarily due to strong results in the bond market and arbitrage trading, as well as increased activity in Europe and Asia partly offset by decreased revenues in Australia and New Zealand. Foreign Exchange Risk - Foreign exchange revenue increased from the same period last year principally due to strong arbitrage and derivative trading revenues and increased activity in Asia. Equity and Commodity Risk - Trading revenue increased from the same period last year primarily due to strong equity arbitrage trading. 15 REVENUE (continued) Nine Months 1997 vs. Nine Months 1996 Interest Rate Risk - The increase in revenue was principally due to strong results in the bond market, arbitrage trading, increased flow of client trading services and increased revenue from proprietary trading activities and improved performance in Asia. Foreign Exchange Risk - Foreign exchange risk revenue increased compared to the same period last year principally due to improved revenue from proprietary and customer activities and arbitrage and derivative trading results. Equity and Commodity Risk - The increase in total trading revenue as compared to the same period last year is principally due to strong trading in energy and commodity derivatives and equity arbitrage in the first nine months of 1997 and nonrecurring losses in commodity derivatives in the first nine months of 1996. Noninterest Revenue (Excluding Trading) Third Quarter 1997 vs. Third Quarter 1996 Fiduciary and funds management revenue was $277 million in the third quarter of 1997, up $61 million from the prior year period. Funds management, client processing services and global private banking commissions contributed to this increase. Corporate finance fees of $305 million increased 58 percent from the $193 million earned in the third quarter of 1996, primarily due to higher fees for arranging and underwriting bond and equity financings, higher loan syndication fees and increased merger and acquisition fees. Other noninterest revenue totaled $171 million in the current quarter, compared to $56 million in the third quarter of 1996. The current quarter included a pre-tax gain of $73 million on the sale of 280 Park Avenue, a midtown Manhattan office building. The current quarter also included the remaining gain resulting from the completion of the final stage in the sale of 50 percent of the Corporation's stake in a Chilean insurance company. The prior year quarter included a gain on the sale of Golden American Life Insurance Company, an indirect wholly-owned subsidiary acquired in satisfaction of debt in 1992. 16 REVENUE (continued) Nine Months 1997 vs. Nine Months 1996 Fiduciary and funds management fees of $769 million increased $136 million from the first nine months of 1996. Funds management, global private banking commissions and client processing services contributed to this increase. Corporate finance fees totaled $789 million for the first nine months of 1997, up $138 million from the prior year period, primarily due to higher fees for arranging financings, merger and acquisition fees and loan syndication fees, partially offset by lower securities underwriting and management fees. The Corporation's private equity investment activities largely contributed to the changes in securities available for sale gains (up $49 million) and net revenue from equity investment transactions (down $53 million). Other noninterest revenue totaled $277 million for the first nine months of 1997, compared to $202 million in the prior year period. The current period included a pre-tax gain of $73 million on the sale of 280 Park Avenue, a midtown Manhattan office building and the total gain in the sale of 50 percent of the Corporation's stake in a Chilean insurance company. The prior year period included a gain on the sale of Golden American Life Insurance Company, an indirect wholly-owned subsidiary acquired in satisfaction of debt in 1992 and a gain on the sale of Compensa, which was the smaller of the Corporation's Chilean insurance subsidiaries. PROVISION AND ALLOWANCE FOR CREDIT LOSSES The provision for credit losses is determined based 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. A $10 million provision for credit losses was recorded for the current quarter versus none for the prior year's third quarter. Net charge-offs for the third quarter were $11 million, compared with $5 million a year ago. The provision for credit losses amounted to $10 million for the first nine months of 1997, compared with $5 million for the prior year comparable period. Net charge-offs for the first nine months of 1997 were $28 million, compared with $30 million for the comparable 1996 period. In accordance with the American Institute of Certified Public Accountants Banks and Savings Institutions Audit and Accounting Guide, the Corporation has allocated its total allowance for credit losses as follows: $759 million as a reduction of loans, and $213 million as other liabilities related to other credit-related items. The Corporation continues to believe that the total allowance for credit losses is available for credit losses in its entire portfolio, which is comprised of loans, credit-related commitments, derivatives and other financial instruments. Due to a multitude of complex and changing factors that are collectively weighed in determining the adequacy of the allowance for credit losses, management expects that the allocation of the total allowance for credit losses may be adjusted as risk factors change. Prior period amounts have not been restated. 17 PROVISION AND ALLOWANCE FOR CREDIT LOSSES (continued) The provision for credit losses and the other changes in the allowance for credit losses are shown below (in millions).
Quarter Ended Nine Months Ended September 30, September 30, Allowance for credit losses 1997 1996 1997 1996 Balance, beginning of period $973 $972 $973 $992 Net charge-offs Charge-offs 30 19 66 68 Recoveries 19 14 38 38 Total net charge-offs(1) 11 5 28 30 Provision for credit losses 10 - 10 5 Allowance related to acquisition of an affiliate - - 17 - Balance, end of period(2) $972 $967 $972 $967 (1) Components of Net Charge-offs: Secured by real estate $(1) $(1) $ - $ - Real estate related - (1) - 3 Highly leveraged 7 (5) 23 18 Other 5 14 6 15 Refinancing country - (2) (1) (6) Total $11 $ 5 $28 $30 (2) Allocation: Loans $759 Other Liabilities 213 Balance, end of period $972
The allowance for credit losses that has been allocated to loans, was $759 million at September 30, 1997 compared to $773 million at December 31, 1996. This allowance was equal to 255 percent and 171 percent of total cash basis loans at September 30, 1997 and December 31, 1996, respectively. These ratios were computed using the amounts that were allocated to loans. Impaired loans under SFAS 114, which consisted of total cash basis loans and renegotiated loans, were $335 million and $489 million at September 30, 1997 and December 31, 1996, respectively. Included in these amounts were $142 million and $227 million of loans which required a valuation allowance of $35 million and $57 million at those same dates, respectively. 18 EXPENSES Third Quarter 1997 vs. Third Quarter 1996 Total noninterest expenses of $1.419 billion increased by $455 million, or 47 percent, from the third quarter of 1996. Included in noninterest expenses were restructuring charges of $57 million associated with the Merger, such as severance, lease terminations and direct costs of completing the Merger, and other integration costs of $42 million. Salaries and commissions expense increased $38 million, or 13 percent, principally due to a 5 percent increase in the average number of employees, annual pay increases and higher broker commission revenue. Incentive compensation and employee benefits, the largest component of noninterest expenses, increased $270 million due to higher profitability and the increase in the average number of employees. Nine Months 1997 vs. Nine Months 1996 Total noninterest expenses of $3.748 billion increased by $793 million from the first nine months of 1996. Salaries and commissions expense increased $100 million, or 12 percent, due to an increase in the average number of employees and to annual pay increases. Incentive compensation and employee benefits increased $464 million due to higher profitability and an increase in the average number of employees. Also included in noninterest expenses were restructuring charges and other integration costs as previously mentioned. INCOME TAXES Income tax expense for the third quarter of 1997 amounted to $105 million, compared with $93 million for the third quarter of 1996. For the first nine months of 1997, income tax expense was $294 million compared with $277 million in the first nine months of 1996. The effective tax rate was 30 percent for the current quarter, 31 percent for the nine months ended September 30, 1997 and 32 percent for the prior year quarter and nine months ended September 30, 1996. EARNINGS PER COMMON SHARE Primary earnings per common share amounts were computed by subtracting from earnings the dividend requirements on preferred stock to arrive at net income applicable to common stock ("net income applicable to common stock") and dividing this amount by the average number of common and common equivalent shares outstanding during the period. Fully diluted earnings per share amounts were calculated by adjusting net income applicable to common stock for interest expense on the convertible subordinated debentures and dividing this amount by the average number of common and common equivalent shares outstanding during the period. 19 EARNINGS PER COMMON SHARE (continued) For primary 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. Fully diluted earnings per share further assumes the conversion into common stock of convertible subordinated debentures, if dilutive. Under the treasury stock 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. 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):
Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Net income applicable to common stock - primary $ 235 $ 194 $ 622 $ 545 Net income applicable to common stock - assuming full dilution 235 195 625 546 Average number of common shares outstanding 97.714 99.665 97.348 98.275 Average common and common equivalent shares outstanding - primary 104.358 104.787 103.698 102.782 Average common and common equivalent shares outstanding assuming full dilution 108.914 108.380 107.702 106.426
20 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 1997 1997 1996 ASSETS Interest-earning Interest-bearing deposits with banks $ 4,682 $ 4,329 $ 3,546 Federal funds sold 6,040 4,313 2,018 Securities purchased under resale agreements 24,242 23,433 22,401 Securities borrowed 13,405 14,527 15,850 Trading assets 29,402 28,039 31,613 Securities available for sale Taxable 6,156 6,571 6,777 Exempt from federal income taxes 1,149 1,136 1,077 Total securities available for sale 7,305 7,707 7,854 Loans Domestic offices 9,693 8,952 8,226 Foreign offices 9,344 9,302 7,032 Total loans 19,037 18,254 15,258 Customer receivables 1,563 1,587 1,517 Total interest-earning assets 105,676 102,189 100,057 Noninterest-earning Cash and due from banks 1,567 1,600 1,394 Noninterest-earning trading assets 22,978 20,193 17,699 All other assets 10,512 9,210 8,671 Allowance for credit losses (753) (770) (988) Total $139,980 $132,422 $126,833 LIABILITIES Interest-bearing Interest-bearing deposits Domestic offices $ 18,908 $ 14,690 $ 8,738 Foreign offices 21,536 20,218 18,812 Total interest-bearing deposits 40,444 34,908 27,550 Trading liabilities 6,289 4,630 9,746 Securities loaned and securities sold under repurchase agreements 22,963 25,554 26,173 Other short-term borrowings 20,447 20,854 18,950 Long-term debt 10,611 11,269 11,372 Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures 1,471 1,470 165 Total interest-bearing liabilities 102,225 98,685 93,956 Noninterest-bearing Noninterest-bearing deposits 3,168 3,003 3,518 Noninterest-bearing trading liabilities 18,743 16,258 15,725 All other liabilities 9,775 8,595 7,428 Total liabilities 133,911 126,541 120,627 PREFERRED STOCK OF SUBSIDIARY - - 250 STOCKHOLDERS' EQUITY Preferred stock 703 704 815 Common stockholders' equity 5,366 5,177 5,141 Total stockholders' equity 6,069 5,881 5,956 Total $139,980 $132,422 $126,833
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 are as follows.
September 30, June 30, December 31, (in millions) 1997 1997 1996 Fair value $7,577 $7,478 $7,920 Amortized cost 7,414 7,334 7,755 Excess of fair value over amortized cost * $ 163 $ 144 $ 165 * Components: Unrealized gains $240 $ 195 $ 245 Unrealized losses (77) (51) (80) $163 $ 144 $ 165
Long-term Debt The larger of long-term debt issuances and maturities/redemptions which occurred during the third quarter of 1997 are as follows (in millions):
Face Amount Maturities/ Issuances Redemptions Parent Company 5.78% Senior European Medium Term Notes due August 2000 $300 5.84% Senior European Medium Term Notes due July 2002 $300 Bankers Trust Company Redeemable Preference Securities due September 2000 to March 2004 $2,427 5.79% Redeemable Preference Securities due November 2000 $808
22 TRADING DERIVATIVES The Corporation actively manages trading positions in a variety of derivative contracts. 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 markets instruments and maintains its access to market liquidity by quoting bid and offer prices to, and trading with, other market makers. These two activities are essential to provide customers with capital market products at competitive prices. All positions are reported at fair value and changes in fair values are reflected in trading revenue as they occur. The following tables reflect the gross fair values and balance sheet amounts of trading derivative financial instruments:
At September 30, Average During 1997 3rd Qtr. 1997 (Liabi- (Liabi- (in millions) Assets lities) Assets lities) OTC Financial Instruments Interest Rate and Currency Swap Contracts $ 18,121 $(16,928) $ 16,625 $(15,277) Interest Rate Contracts Forwards 41 (42) 46 (53) Options purchased 1,085 1,118 Options written (1,236) (1,261) Foreign Exchange Rate Contracts Spot and Forwards 12,457 (12,816) 14,382 (14,565) Options purchased 1,096 1,162 Options written (1,003) (1,108) Equity-related contracts 3,817 (4,426) 3,524 (4,380) Commodity-related and other contracts 719 (789) 629 (663) Exchange-Traded Options Interest Rate 3 (2) 5 (4) Equity 426 (320) 336 (207) Total Gross Fair Values 37,765 (37,562) 37,827 (37,518) Impact of Netting Agreements (24,045) 24,045 (23,963) 23,963 $ 13,720(1) $ 13,864 $(13,517)(1) $(13,555) (1) As reflected on the balance sheet in "Trading Assets" and "Trading Liabilities."
23 TRADING DERIVATIVES (continued)
At December 31, Average During 1996 4th Qtr.1996 (Liabi- (Liabi- (in millions) Assets lities) Assets lities) OTC Financial Instruments Interest Rate and Currency Swap Contracts $ 16,582 $(15,394) $ 16,258 $(15,498) Interest Rate Contracts Forwards 84 (86) 53 (50) Options purchased 1,149 1,183 Options written (1,252) (1,313) Foreign Exchange Rate Contracts Spot and Forwards 9,855 (10,935) 8,642 (9,893) Options purchased 917 1,143 Options written (953) (1,104) Equity-related contracts 2,696 (2,941) 2,389 (2,426) Commodity-related and other contracts 679 (690) 747 (712) Exchange-Traded Options Interest Rate 10 (12) 11 (15) Foreign exchange - - - (6) Equity 251 (135) 244 (115) Total Gross Fair Values 32,223 (32,398) 30,670 (31,132) Impact of Netting Agreements (20,813) 20,813 (19,580) 19,580 $11,410(1) $ 11,090 $(11,585)(1) $(11,552) (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 securities available for sale, loans, 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 $98 million at September 30, 1997 compared with an unrealized gain of $54 million at December 31, 1996. The $44 million increase during the first nine months of 1997 was primarily due to a decrease in 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, 1997 for sale Loans assets deposits ings debt(1) diaries Total Interest Rate Swaps Pay Variable Unrealized Gain $ 1 $ - $ - $ 76 $ 7 $ 278 $ - $ 362 Unrealized (Loss) - (10) - (24) (8) (84) - (126) Pay Variable Net 1 (10) - 52 (1) 194 - 236 Pay Fixed Unrealized Gain 3 - - 26 11 5 - 45 Unrealized (Loss) (38) - - (12) (43) (72) - (165) Pay Fixed Net (35) - - 14 (32) (67) - (120) Total Unrealized Gain 4 - - 102 18 283 - 407 Total Unrealized (Loss) (38) (10) - (36) (51) (156) - (291) Total Net $(34) $(10) $ - $ 66 $(33) $ 127 $ - $ 116 Forward Rate Agreements Unrealized Gain $ - $ - $ - $ - $ - $ - $ - $ - Unrealized (Loss) - - - (1) - - - (1) Net $ - $ - $ - $(1) $ - $ - $ - $(1) Currency Swaps and Forwards Unrealized Gain $10 $1 $ 1 $10 $ 8 $ 34 $ 31 $ 95 Unrealized (Loss) - - - (1) (3) (62) (41) (107) Net $10 $1 $ 1 $ 9 $ 5 $ (28) $(10) $(12) Other Contracts (2) Unrealized Gain $ 3 $1 $ - $ - $ - $ - $ - $ 4 Unrealized (Loss) (8) - (1) - - - (9) Net $(5) $1 $(1) $ - $ - $ - $ - $ (5) Total Unrealized Gain $ 17 $ 2 $ 1 $112 $ 26 $ 317 $ 31 $ 506 Total Unrealized (Loss) (46) (10) (1) (38) (54) (218) (41) (408) Total Net $(29) $(8) $ - $ 74 $(28) $ 99 $(10) $ 98 (1) Includes trust preferred capital securities. (2) 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, 1996 for sale Loans assets deposits ings debt(1) diaries Total Interest Rate Swaps Pay Variable Unrealized Gain $ 1 $ - $ - $ 62 $ 7 $ 198 $ - $ 268 Unrealized (Loss) - (14) - (23) (6) (93) - (136) Pay Variable Net 1 (14) - 39 1 105 - 132 Pay Fixed Unrealized Gain 3 - - 13 - 1 - 17 Unrealized (Loss) (50) (9) - (45) (1) (28) - (133) Pay Fixed Net (47) (9) - (32) (1) (27) - (116) Total Unrealized Gain 4 - - 75 7 199 - 285 Total Unrealized (Loss) (50) (23) - (68) (7) (121) - (269) Total Net $(46) $(23) $ - $ 7 $ - $ 78 $ - $ 16 Forward Rate Agreements Unrealized Gain $ - $ - $ - $ 1 $ - $ - $ - $ 1 Unrealized (Loss) - - - (1) - - - (1) Net $ - $ - $ - $ - $ - $ - $ - $ - Currency Swaps and Forwards Unrealized Gain $ - $ - $ 1 $ 27 $ - $ 53 $ 42 $ 123 Unrealized (Loss) - - - (3) - (18) (41) (62) Net $ - $ - $ 1 $ 24 $ - $ 35 $ 1 $ 61 Other Contracts (2) Unrealized Gain $ - $ - $ - $ - $ - $ - $ - $ - Unrealized (Loss) (19) - (4) - - - - (23) Net $(19) $ - $(4) $ - $ - $ - $ - $ (23) Total Unrealized Gain $ 4 $ - $ 1 $103 $ 7 $ 252 $ 42 $ 409 Total Unrealized (Loss) (69) (23) (4) (72) (7) (139) (41) (355) Total Net $(65) $(23) $(3) $ 31 $ - $ 113 $ 1 $ 54 (1) Includes trust preferred capital securities. (2) Other contracts are principally equity swaps and collars.
26 END-USER DERIVATIVES (continued) For pay variable and pay fixed interest rate swaps entered into as an end user, the weighted average receive rate and 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, 1997 Notional Amount Paying Variable Paying Fixed Maturing Notional Receive Pay Notional Receive Pay Total In: Amount Rate Rate Amount Rate Rate Notional 1997 $19,542 5.73% 5.68% $1,533 5.79% 5.98% $21,075 1998-1999 30,461 5.97 5.74 4,813 5.20 5.87 35,274 2000-2001 5,037 5.93 5.55 1,352 3.68 5.12 6,389 2002 and thereafter 8,571 6.65 5.60 1,014 5.87 7.01 9,585 Total $63,611 $8,712 $72,323
All rates were those in effect at September 30, 1997. Variable rates are primarily based on LIBOR and may change significantly, affecting future cash flows.
At December 31, 1996 Notional Amount Paying Variable Paying Fixed Maturing Notional Receive Pay Notional Receive Pay Total In: Amount Rate Rate Amount Rate Rate Notional 1997 $33,275 5.59% 5.52% $4,056 5.23% 5.71% $37,331 1998-1999 7,957 5.96 5.52 2,095 4.82 5.82 10,052 2000-2001 3,614 6.84 5.63 867 4.11 5.67 4,481 2002 and thereafter 5,579 6.79 5.65 932 5.61 7.14 6,511 Total $50,425 $7,950 $58,375
All rates were those in effect at December 31, 1996. Variable rates are primarily based on LIBOR and may change significantly, affecting future cash flows. 27 REGULATORY CAPITAL The Corporation and its banking subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. The Federal Reserve Board's ("FRB") risk-based capital guidelines addressing the capital adequacy of bank holding companies and banks (collectively, "banking organizations") include a definition of capital and a framework for calculating risk-weighted assets. In addition, these guidelines specify minimum risk-based capital ratios to be maintained by banking organizations. The FRB also has a minimum Leverage ratio which is used as a supplement to the risk-based capital ratios in evaluating the capital adequacy of banking organizations. See pages 19 and 83 of Exhibit 99.1 of the Form 8-K dated for a detailed discussion of these guidelines and regulations. In 1996, the FRB and the other U.S. federal banking agencies jointly issued an amendment to the capital adequacy guidelines to incorporate a measure for market risk ("the market risk amendment"). Essentially, this amendment changes the calculation of risk-weighted assets in the trading accounts, and includes the positions and capital of the Corporation's Section 20 subsidiary, BT Alex. Brown Incorporated in the combined credit risk and market risk capital calculation of the Corporation. In all other respects (including the exclusion of the positions and capital of the international insurance entities), the current capital adequacy guidelines remain unchanged. All banking organizations with significant trading activity must adopt this amendment by January 1, 1998. Banking organizations may choose to adopt early during 1997, with prior approval from their primary federal regulator. See page 22 of Exhibit 99.1 of the Form 8-K for further detailed discussion on the market risk amendment. The Corporation adopted the market risk amendment as of March 31, 1997 and was the first banking organization to adopt such amendment. Based on their respective regulatory capital ratios as of September 30, 1997, both the Corporation and Bankers Trust Company ("BTCo") 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, as applicable. 28 REGULATORY CAPITAL (continued) The Corporation's and BTCo's ratios are presented in the table below. The ratios for December 31, 1996 have not been restated for the adoption of the market risk amendment.
FRB Minimum To Be Well Actual Actual for Capitalized as of as of Capital Under September 30,December 31, Adequacy Regulatory 1997 1996 Purposes Guidelines Tier 1 Capital Corporation 8.4% 9.3% 4.0% 6.0% BTCo 8.7% 9.3% 4.0% 6.0% Total Capital Corporation 13.6% 13.8% 8.0% 10.0% BTCo 12.1% 12.9% 8.0% 10.0% Leverage Corporation 4.9% 5.9% 3.0%(1) 3.0%(1) BTCo 5.3% 5.3% 3.0%(1) 5.0% (1) These minimum levels for the Leverage ratio may be set 100 to 200 basis points higher depending upon other regulatory criteria.
29 REGULATORY CAPITAL (continued) The following are the essential components of the Corporation's and BTCo's risk-based capital ratios. The December 31, 1996 balances have not been restated for the adoption of the market risk amendment.
Actual as of Actual as of September 30, December 31, (in millions) 1997 1996 Corporation Tier 1 Capital $ 6,745 $ 5,690 Tier 2 Capital 3,681 2,734 Tier 3 Capital 408 - Total Capital $10,834 $ 8,424 Total risk-weighted assets $79,951 $61,213 BTCo Tier 1 Capital $5,576 $ 4,869 Tier 2 Capital 2,200 1,900 Total Capital $7,776 $ 6,769 Total risk-weighted assets $64,024 $52,484
Comparing September 30, 1997 to December 31, 1996, the Corporation's Tier 1 Capital and Total Capital ratios declined 90 basis points and 20 basis points, respectively. These declines were primarily due to an increase in risk-weighted assets of $19 billion, offset by an increase to Tier 1 and Total Capital of $1 billion and $2 billion, respectively. With the adoption of the market risk amendment, the Corporation's Leverage ratio decreased 100 basis points as BT Alex. Brown Incorporated's average assets and capital were included in this calculation at September 30, 1997. BTCo's Tier 1 Capital and Total Capital ratios decreased by 60 basis points and 80 basis points, respectively, as a result of a $12 billion increase in risk-weighted assets, partially offset by an increase to Tier 1 and Total Capital of $700 million and $1.0 billion, respectively. BTCo's Leverage ratio was unchanged as the increase in the quarterly average assets was offset by the increase in Tier 1 Capital. 30 LIQUIDITY Liquidity is the ability to have funds available at all times to meet the commitments of the Corporation. The Corporation has a formal process for managing global liquidity for the Firm as a whole and 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 reasonably foreseeable circumstances. Management maintains appropriate asset liquidity and actively manages liability/capital levels, maturities and diversification. The fundamental objective 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 collateralized with U.S. government or other marketable securities, or cash equivalents. Trading assets are marked to market daily and primarily consist of swaps, options and other derivative contracts, foreign government securities, corporate debt securities, U.S. government and agency securities, and equity securities. The Corporation's liquid assets amounted to $107.6 billion as of September 30, 1997, $101.1 billion as of June 30, 1997, and $97.5 billion as of December 31, 1996, which equaled 76 percent, 76 percent, and 79 percent of gross total assets at those dates respectively. 31 LIQUIDITY (continued) Cash Flows The following comments apply to the consolidated statement of cash flows, which appears on page 6. Cash and due from banks increased by $57 million during the first nine months of 1997 as the sum of the net cash provided by financing activities and operating activities exceeded the net cash used in investing activities. The $12.6 billion of net cash provided by financing activities was primarily the result of cash inflows from the net change in deposits ($15.7 billion) and issuances of long-term debt ($5.5 billion), partially offset by repayments of long-term debt ($4.9 billion) and cash outflows from the net change in securities loaned and securities sold under repurchase agreements ($3.2 billion). The $572 million of net cash provided by operating activities was largely the result of cash inflows from the net change in trading liabilities ($2.7 billion) and earnings adjusted for noncash charges and credits ($1.2 billion), offset in part by cash outflows from the net change in trading assets ($3.2 billion). Within the investing activities category, the $13.1 billion of net cash used was primarily the result of cash outflows from the net change in securities purchased under resale agreements ($6.9 billion) and loans ($5.7 billion), as well as purchases of securities available for sale ($4.3 billion). This was partly offset by cash inflows from maturities and other redemptions of securities available for sale ($2.4 billion). Cash and due from banks decreased by $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 activities and net cash provided by operating activities. Within the investing activities category, cash outflows from the net changes in securities purchased under resale agreements ($8.8 billion), securities borrowed ($4.1 billion), loans ($2.4 billion), interest-bearing deposits with banks ($2.1 billion) and purchases of securities available for sale ($4.2 billion), were partially offset by cash inflows from maturities and other redemptions of securities available for sale ($2.3 billion). The $16.4 billion of net cash provided by financing activities was largely the result of cash inflows from the net changes in securities loaned and securities sold under repurchase agreements ($9.3 billion), other short-term borrowings ($3.0 billion), deposits ($2.9 billion) and issuances of long-term debt ($2.6 billion). The $748 million of net cash provided by operating activities primarily resulted from cash inflows from the net change in receivables and payables from securities transactions ($2.3 billion), partly offset by cash outflows from net changes in other operating assets and liabilities, net ($1.0 billion) and trading liabilities ($851 million). 32 LIQUIDITY (continued) Interest Rate Sensitivity Condensed interest rate sensitivity data for the Corporation at September 30, 1997 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- (in billions) Within 1 - 5 After bearing September 30, 1997 1 year years 5 years funds Total Assets $ 99.6 $ 3.0 $ 3.6 $ 33.9 $ 140.1 Liabilities and preferred stock (91.0) (5.9) (5.1) (32.7) (134.7) Common stockholders' equity - - - (5.4) (5.4) Effect of off-balance sheet hedging instruments (14.1) 8.8 5.3 - - Interest rate sensitivity gap $ (5.5) $ 5.9 $ 3.8 $ (4.2) $ -
33 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, 1997 1996 CASH BASIS LOANS Domestic Commercial and industrial $ 81 $ 117 Secured by real estate 108 233 Total domestic 189 350 International Commercial and industrial 65 57 Secured by real estate 32 39 Financial institutions - 4 Other 12 2 Total international 109 102 Total cash basis loans $298 $ 452 Ratio of cash basis loans to total gross loans 1.4% 2.9% Ratio of allowance for credit losses to cash basis loans (1) 255% 171% RENEGOTIATED LOANS Secured by real estate $37 $37 Total renegotiated loans $37 $37 OTHER REAL ESTATE $190 $213 OTHER NONPERFORMING ASSETS Assets acquired in credit workouts $5 $10 Total other nonperforming assets $5 $10 Loans 90 days or more past due and still accruing interest $- $- (1) Ratio was computed using the allowance for credit losses that had been allocated to loans of $759 million and $773 million at September 30, 1997 and December 31, 1996, respectively.
34 NONPERFORMING ASSETS (continued) An analysis of the changes in the Corporation's total cash basis loans during the first nine months of 1997 follows (in millions).
Balance, December 31, 1996 $ 452 Net transfers to cash basis loans 87 Net paydowns (113) Charge-offs (66) Transfers to other real estate (10) Other (52) Balance, September 30, 1997 $ 298
The Corporation's total cash basis loans amounted to $298 million at September 30, 1997, down $154 million, or 34 percent, from December 31, 1996. This decline is primarily attributable to decreases in loans secured by real estate ($132 million) and highly leveraged loans ($61 million). Within cash basis loans, loans secured by real estate were $140 million and $272 million at September 30, 1997 and December 31, 1996, respectively. Commercial and industrial loans to highly leveraged borrowers were $56 million and $117 million at September 30, 1997 and December 31, 1996, respectively. 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 which would have been recorded at the original rate were not necessarily representative of current market rates. 35 NONPERFORMING ASSETS (continued)
Nine Months Ended September 30, (in millions) 1997 1996 Domestic Loans Gross amount of interest that would have been recorded at original rate $14 $31 Less, interest, net of reversals, recognized in interest revenue 3 5 Reduction of interest revenue 11 26 International Loans Gross amount of interest that would have been recorded at original rate 4 8 Less, interest, net of reversals, recognized in interest revenue - - Reduction of interest revenue 4 8 Total reduction of interest revenue $15 $34
HIGHLY LEVERAGED TRANSACTIONS Amounts included in the table and discussion which follow generally reflect the definition that the Corporation uses in order to monitor the extent of its exposure to highly leveraged transactions ("HLTs"). See page 41 of Exhibit 99.1 to the Form 8-K for a detailed discussion of the definition.
Highly Leveraged Transactions September 30, December 31, (in millions) 1997 1996 Loans Senior debt $2,110 $1,587 Subordinated debt 53 76 Total loans $2,163 $1,663 Unfunded commitments Commitments to lend $1,128 $ 875 Letters of credit 181 128 Total unfunded commitments $1,309 $1,003 Equity investments $ 834 $ 665 Commitments to invest $ 698 $ 425
36 HIGHLY LEVERAGED TRANSACTIONS (continued) The Corporation's outstanding loans were to 163 separate borrowers in 47 separate industry groups at September 30, 1997, compared to 127 separate borrowers in 43 separate industry groups at December 31, 1996. The food, wholesale and retail group at 29 percent was the only industry concentration which exceeded 10 percent of total HLT loans outstanding at September 30, 1997. In addition to the amounts shown in the table above, at September 30, 1997, the Corporation had issued commitment letters which had been accepted, subject to documentation and certain other conditions, of $530 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 1997, the Corporation originated $4.0 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 per borrower for the portfolio at September 30, 1997 was less than $14 million. However, at September 30, 1997, the Corporation had total exposure (loans outstanding plus unfunded commitments) in excess of $50 million to 10 separate highly leveraged borrowers. At September 30, 1997, $56 million of the HLT loan portfolio was on a cash basis. In addition, $4 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 $23 million of HLT loans were recorded in the first nine months of 1997. In addition, the Corporation recorded a net gain of $74 million in connection with the sales and/or write-offs of certain equity investments in highly leveraged companies during the first nine months of 1997. 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 $108 million during the first nine months of 1997 and that as of September 30, 1997, approximately $14 million of fees were deferred and will be recognized as future revenue. 37 ACCOUNTING DEVELOPMENTS In February, 1997, the FASB issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 establishes standards for computing and presenting earnings per share ("EPS"). SFAS No. 128 replaces the presentation of primary EPS with basic EPS and fully diluted EPS with diluted EPS. Basic EPS excludes dilution and is calculated by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed similarly to fully diluted EPS. SFAS No. 128 is effective for financial statement periods ending after December 15, 1997, and requires restatement of all prior period EPS data. The adoption of SFAS No. 128 is not expected to have a material impact on the Corporation's fully diluted EPS computations. RECENT DEVELOPMENTS On October 20, 1997, the Corporation and Metropolitan Life Insurance Company ("MetLife") announced that they have entered into an agreement whereby MetLife will acquire the Corporation's defined contribution recordkeeping and participant services businesses. The transaction is expected to close by year-end, and the Corporation expects to recognize a gain on the sale in the fourth quarter. 38 PART II. OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) A Special Meeting of Stockholders was held on August 13, 1997. (b) The following are the voting results on the matter which was submitted to the stockholders:
For Against Withheld Resolutions To approve the issuance of up to 25,957,061 shares of Bankers Trust New York Corporation common stock and associated purchase rights pursuant to the merger of Alex. Brown Incorporated with and into a wholly-owned subsidiary of Bankers Trust New York Corporation. 58,702,969 533,806 293,001
The text of the matters referred to under this Item 4 is set forth in the Proxy Statement/Prospectus dated July 11, 1997 previously filed with the Commission and incorporated herein by reference. 39 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 security holders 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 (b) Reports on Form 8-K - Bankers Trust New York Corporation filed five reports on Form 8-K during the quarter ended September 30, 1997. - The report dated July 17, 1997, and amended by the Form 8-K/A filed on July 18, 1997 filed the Corporation's Press Release dated July 17, 1997, which announced earnings for the quarter ending June 30, 1997. - The report dated August 14, 1997 and filed on August 20, 1997 reported that Bankers Trust Company, a wholly owned subsidiary of Bankers Trust New York Corporation had entered into an agreement to sell the office building located at 280 Park Avenue for $321 million, and is expected to recognize a gain of approximately $75 million. In addition, the report filed a press release which announced that the Corporation and Bankers Trust Company had elected four directors to its board, and filed the Corporation's opinion of counsel delivered in connection with the issuance of the Corporation's 7.15% Subordinated Notes due August 14, 2012. - The report dated September 1, 1997 and filed on September 4, 1997, announced that on September 1, 1997, Alex. Brown Incorporated merged into BT Alex Brown Holdings Incorporated, a wholly owned subsidiary of Bankers Trust New York Corporation, and filed year-end historical Alex. Brown Incorporated financial information as well as certain Pro Forma Combined Financial Statements. - The report dated September 1, 1997 and filed on September 9, 1997, filed certain 1996 year-end and 1997 quarterly supplemental financial information restating the Corporation's historical consolidated financial statements to reflect the Merger. - The report dated September 1, 1997 and filed on September 12, 1997, filed 1997 first and second quarter historical Alex. Brown Incorporated financial information. 40 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, 1997. BANKERS TRUST NEW YORK CORPORATION BY: /S/ RONALD HASSEN RONALD HASSEN Senior Vice President (Principal Accounting Officer) BANKERS TRUST NEW YORK CORPORATION FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 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 with Alvin B. Krongard (2) Employment agreement with Mayo A. Shattuck III (3) Split-Dollar Insurance Agreement (4) Alex. Brown Incorporated 1991 Equity Incentive Plan (12) Statement re Computation of Ratios (a) - Computation of Consolidated Ratios of Earnings to Fixed Charges (b) - Computation of Consolidated Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements (27) Financial Data Schedule [FN] (a) The Corporation hereby agrees to furnish to the Commission, upon request, a copy of any instruments defining the rights of holders of long-term debt issued by Bankers Trust New York Corporation or its subsidiaries. EX-10.III.A1 2 EXHIBIT 10(iii)(A)(1) EMPLOYMENT AGREEMENT AMENDED AND RESTATED AGREEMENT by and between Bankers Trust New York Corporation, a New York corporation (the "Company") and Alvin B. Krongard (the "Executive"), dated as of the 21st day of April, 1997. 1. Employment Period. Subject to the consummation of the transactions contemplated by the Agreement and Plan of Merger among the Company, Merger Sub and Alex. Brown Incorporated, a Maryland corporation ("Pathfinder") dated as of April 6, 1997 (the "Merger Agreement"), the Company hereby agrees to employ the Executive, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the closing date of the transactions contemplated by the Merger Agreement (the "Commencement Date") and ending on December 31, 1999 (the "Employment Period"). 2. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, the Executive shall serve as a Vice Chairman of the Board of Directors of the Company, reporting directly to the Chief Executive Officer of the Company. The Executive's office shall be located in Baltimore, Maryland. The Company agrees to nominate the Executive to serve as a member of its board of directors following the Commencement Date. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote full attention and time during normal business hours to the business and affairs of the Company and to use the Executive's reasonable best efforts to perform such responsibilities in a professional manner. It shall not be a violation of this Agreement for the executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Commencement Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Commencement Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. (i) Base Salary. Until such time as the long-term incentives described in Section 2(b)(iii) below are fully vested, the Executive shall receive an annual base salary ("Annual Base Salary") of $350,000 payable in cash. The Annual Base Salary shall be paid no less frequently than in equal monthly installments. (ii) Annual Bonus. For calendar year 1997, the Executive will receive the Executive's current salary plus a bonus on a basis consistent with Pathfinder's past practices. Until such time as the long-term incentives described in Section 2(b)(iii) below are fully vested, in addition to Annual Base Salary, the Executive shall be awarded an annual bonus (the "Annual Bonus") which is consistent with Company practice and policy with respect to its investment banking division but which for calendar years 1998 and 1999 will not be less than $3,500,000 (the "Minimum Bonus"), payable in the same ratio of cash and equity incentives as peer executives of the Company. (iii) Long-Term Incentives. Upon commencement of the Employment Period, the Executive shall receive a grant of 60,000 Company stock options (the "Initial Grant") and additional grants of 60,000 stock options in calendar years 1998 and 1999 (the "Additional Grants"), in each case with an exercise price equal to the Fair Market Value of the stock subject thereto on the date of grant (collectively, the "Stock Options"). The Initial Grant shall vest and become exercisable one-third on the first anniversary of the date of grant, an additional one-third on the second anniversary of the date of grant and a final one-third on the third anniversary of the date of grant. The Additional Grants shall vest and become exercisable on the first anniversary of the date of grant. For purposes this Section 2(b)(iii), the "Fair Market Value" of the Company's common stock shall be the average closing price of the Company's common stock on the New York Stock Exchange for the five trading days prior to the date of grant. The Stock Options shall provide that if the Company shall terminate the Executive's employment other than for Cause during or after the Employment Period, including by reason of the Executive's death or Disability, or the Executive shall terminate employment for Good Reason during or after the Employment Period, such Stock Options shall become immediately vested. The Executive shall also be granted 75,000 PEP units in each of calendar years 1998 and 1999 pursuant to the Company's Partnership Equity Plan (the "PEP Units"). The Company agrees to consider the participation of the Executive in incentive compensation plans applicable to peer executives, with such participation being in the Company's sole discretion. (iv) Savings and Retirement Plans. During the Employment Period, the Executive shall be eligible to participate in all savings and retirement plans, practices, policies and programs to the extent applicable generally to other peer executives of the Company and its affiliated companies, provided that the Executive's participation in the Company's qualified retirement plan may be delayed until the effectiveness of the Company's cash balance pension plan. For purposes of all such plans, the Company shall credit the Executive with full credit for all service credited under the Pathfinder Retirement Savings Plan (including service with Pathfinder prior to the Commencement Date) for purposes of eligibility to participate and receive benefits and vesting but not for benefit accruals in any Company retirement plan. (v) Welfare and Other Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare, fringe, change of control protection, vacation and other similar benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies. For purposes of all such plans, the Company shall credit the Executive with full credit for all service credited under the corresponding Pathfinder benefit plans for purposes of eligibility to participate and receive benefits but not for purposes of vesting benefit accruals. With respect to the Company's welfare benefit plans, the Company shall cause any such plan to waive any pre-existing condition exclusions and actively- at-work requirements thereunder with respect to the Executive and his eligible dependents and shall ensure that any covered expenses incurred on or before the Commencement Date shall be taken into account for purposes of satisfying applicable deductible, coinsurance and maximum out-of-pocket provisions after the Commencement Date to the extent that such expenses are taken into account for the benefit of peer executives of the Company. (vi) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable business expenses incurred by the Executive, in accordance with the policies of the Company. (vii) Indemnity. The Executive shall be indemnified by the Company against claims arising in connection with the Executive's status as an employee, officer, director or agent of the Company in accordance with the Company's indemnity policies for its senior executives, subject to applicable law. 3. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall have the meaning set forth in the Company's Long-Term Disability Plan. (b) Cause. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) intentional gross misconduct by the Executive damaging in a material way to the Company, or (ii) a material breach of this Agreement, after the Company has given the Executive notice thereof and a reasonable opportunity to cure. (c) Good Reason. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean a material breach by the Company of this Agreement after the Executive has given the Company notice of the breach and a reasonable opportunity to cure. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 10(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 4. Obligations of the Company upon Termination. (a) Good Reason; Other Than for Cause. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause, including by reason of the Executive's death or Disability, or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the amounts set forth in clauses A and B below: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the Minimum Bonus and (y) a fraction (the"Proration Fraction"), the numerator of which is the number of days in the current calendar year through the Date of Termination, and the denominator of which is 365 and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the ("Accrued Obligations"); and B. the amount equal to the product of (1) the number of years (including fractions thereof) remaining from the Date of Termination until December 31, 1999 and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Minimum Bonus, which amount shall be discounted to present value at the applicable federal rate, as defined in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended; and (ii) the Stock Options and PEP Units shall become immediately vested; (iii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is entitled to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies, excluding any severance plan or policy except to the extent that such plan or policy provides, in accordance with its terms, benefits with a value in excess of the benefits payable to the Executive under this Section 4 (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause or the Executive terminates employment without Good Reason during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) Accrued Obligations less the amount determined under Section 4(a)(i)A(2) hereof, and (y) Other Benefits, in each case to the extent theretofore unpaid. 5. Arbitration. The Company and the Executive agree that any disputes with respect to this Agreement shall be subject to binding arbitration in New York City in accordance with the rules of the American Arbitration Association. The proceedings and the results of such arbitration shall be treated as confidential information subject to Section 6(a) hereof. The Company agrees to pay for the costs of arbitration and shall reimburse the Executive for his reasonable attorney's fees provided that the Executive prevails on at least one material issue in the arbitration. 6. Confidential Information/Noncompetition. (a) The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process (provided the Company has been given notice of and opportunity to challenge or limit the scope of disclosure purportedly so required), communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (b) While employed by the Company, the Executive shall comply with the rules and policies of the Company, including without limitation the Company's Rules for Business Conduct and compliance policies. After termination of the Executive's employment with the Company, the Executive shall comply with those aspects of such rules and policies which apply to conduct after termination of employment. (c) Until December 31, 1999, the Executive will not directly or indirectly, own, manage, operate, control or participate in the ownership, management, operation or control of, or be connected as an officer, employee, partner, director or otherwise with, or have any financial interest in, any business which is in competition with the investment banking, corporate finance, corporate advisory, asset management or M&A business conducted by Pathfinder or the Company or any of its affiliates in any geographic area where such business is being conducted during such period. Ownership, for personal investment purposes only, of not to exceed 2% of the voting stock of any publicly held corporation shall not constitute a violation hereof. (d) While employed by the Company or any of its affiliates or Pathfinder and for one year after the Executive's termination of employment, the Executive will not, directly or indirectly, solicit for employment by other than the Company any person employed by the Company or its affiliates or Pathfinder at the effective time of the Merger (as defined in the Merger Agreement) (the "Merger"), nor will the Executive, directly or indirectly, solicit for employment by other than the Company any person known by him to be employed at the time by Pathfinder or the Company or its affiliates. (e) The provisions of Section 6(c) and (d) shall remain in full force and effect until the expiration of the period specified herein notwithstanding the earlier termination of the Executive's employment hereunder. 7. Specific Performance. The Executive acknowledges that a violation on his part of any of the covenants contained in Section 6 hereof would cause immeasurable and irreparable damage to the Company. Accordingly, the Executive agrees that the Company shall be entitled to injunctive relief in any court of competent jurisdiction for any actual or threatened violation of any such covenant in addition to any other remedies it may have. The Executive agrees that in the event that any arbitrator or court of competent jurisdiction shall finally hold that any provision of Section 6 hereof is void or constitutes an unreasonable restriction against the Executive, the provisions of such Section 6 shall not be rendered void but shall apply to such extent as such arbitrator or court may determine constitutes a reasonable restriction under the circumstances. 8. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 9. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary not-withstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive whether pursuant to this Agreement or otherwise, and determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by KPMG Peat Marwick (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross- Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross- Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an aftertax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross- Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: c/o Alex Brown Incorporated 135 E. Baltimore Street Baltimore, Maryland 21202 If to the Company: One Bankers Trust Plaza 130 Liberty Street New York, New York 10006 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The Company's obligation to make the payments provided for in this Agreement and otherwise to perform obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others, other than claims for a breach of Section 6 of this Agreement. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment. (d) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (e) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (f) On and after the Commencement Date, this Agreement shall supersede any other agreement between the parties or between Pathfinder and the Executive with respect to the subject matter hereof. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /S/ ALVIN B. KRONGARD ALVIN B. KRONGARD BANKERS TRUST NEW YORK CORPORATION By /S/ MARK BIELER MARK BIELER EX-10.III.A2 3 EXHIBIT 10(iii)(A)(2) EMPLOYMENT AGREEMENT AMENDED AND RESTATED AGREEMENT by and between Bankers Trust New York Corporation, a New York corporation (the "Company") and Mayo A. Shattuck III (the "Executive"), dated as of the 29th day of April, 1997. 1. Employment Period. Subject to the consummation of the transactions contemplated by the Agreement and Plan of Merger among the Company, Merger Sub and Alex. Brown Incorporated, a Maryland corporation ("Pathfinder") dated as of April 6, 1997 (the "Merger Agreement"), the Company hereby agrees to employ the Executive, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the closing date of the transactions contemplated by the Merger Agreement (the "Commencement Date") and ending on December 31, 1999 (the "Employment Period"). 2 Terms of Employment. (a) Position and Duties. (i) During the Employment Period, the Executive shall serve as a Vice Chairman of the Company and its co-head of investment banking, reporting directly to the Chief Executive Officer of the Company. The Executive's office shall be located in Baltimore, Maryland. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote full attention and time during normal business hours to the business and affairs of the Company and to use the Executive's reasonable best efforts to perform such responsibilities in a professional manner. It shall not be a violation of this Agreement for the executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Commencement Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Commencement Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. (i) Base Salary. Until such time as the long-term incentives described in Section 2(b)- (iii) below are fully vested, the Executive shall receive an annual base salary ("Annual Base Salary") of $350,000 payable in cash. The Annual Base Salary shall be paid no less frequently than in equal monthly installments. (ii) Annual Bonus. For calendar year 1997, the Executive will receive the Executive's current salary plus a bonus on a basis consistent with Pathfinder's past practices. Until such time as the long-term incentives described in Section 2(b)(iii) below are fully vested, in addition to Annual Base Salary, the Executive will be awarded an annual bonus (the "Annual Bonus") which is consistent with Company practice and policy with respect to its investment banking division but which for calendar year 1998 and 1999 will not be less than $3,500,000 (the "Minimum Bonus"), payable in the same ratio of cash and equity incentives as peer executives of the Company. (iii) Long-Term Incentives. Upon commencement of the Employment Period, the Executive shall receive a grant of 80,000 Company stock options (the "Initial Grant") and additional grants of 60,000 stock options in calendar years 1998 and 1999 (the "Additional Grants"), in each case with an exercise price equal to the Fair Market Value of the stock subject thereto on the date of grant (collectively, the "Stock Options"). The Initial Grant shall vest and become exercisable one-third on the first anniversary of the date of grant, an additional one-third on the second anniversary of the date of grant and a final one-third on the third anniversary of the date of grant. The Additional Grants shall vest and become exercisable on the first anniversary of the date of grant. For purposes this Section 2(b)(iii), the "Fair Market Value" of the Company's common stock shall be the average closing price of the Company's common stock on the New York Stock Exchange for the five trading days prior to the date of grant. The Stock Options shall provide that if the Company shall terminate the Executive's employment other than for Cause during or after the Employment Period, including by reason of the Executive's death or Disability, or the Executive shall terminate employment for Good Reason during or after the Employment Period, such Stock Options shall become immediately vested. The Executive shall also be granted 75,000 PEP units in each of calendar years 1998 and 1999 pursuant to the Company's Partnership Equity Plan (the "PEP Units"). The Company agrees to consider the participation of the Executive in incentive compensation plans applicable to peer executives, with such participation being in the Company's sole discretion. (iv) Savings and Retirement Plans. During the Employment Period, the Executive shall be eligible to participate in all savings and retirement plans, practices, policies and programs to the extent applicable generally to other peer executives of the Company and its affiliated companies, provided that the Executive's participation in the Company's qualified retirement plan may be delayed until the effectiveness of the Company's cash balance pension plan. For purposes of all such plans, the Company shall credit the Executive with full credit for all service credited under the Pathfinder Retirement Savings Plan (including service with Pathfinder prior to the Commencement Date) for purposes of eligibility to participate and receive benefits and vesting but not for benefit accruals in any Company retirement plan. (v) Welfare and Other Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare, fringe, change of control protection, vacation and other similar benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies. For purposes of all such plans, the Company shall credit the Executive with full credit for all service credited under the corresponding Pathfinder benefit plans for purposes of eligibility to participate and receive benefits but not for purposes of vesting benefit accruals. With respect to the Company's welfare benefit plans, the Company shall cause any such plan to waive any pre-existing condition exclusions and actively- at-work requirements thereunder with respect to the Executive and his eligible dependents and shall ensure that any covered expenses incurred on or before the Commencement Date shall be taken into account for purposes of satisfying applicable deductible, coinsurance and maximum out-of-pocket provisions after the Commencement Date to the extent that such expenses are taken into account for the benefit of peer executives of the Company. (vi) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable business expenses incurred by the Executive, in accordance with the policies of the Company. (vii) Indemnity. The Executive shall be indemnified by the Company against claims arising in connection with the Executive's status as an employee, officer, director or agent of the Company in accordance with the Company's indemnity policies for its senior executives, subject to applicable law. 3. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall have the meaning set forth in the Company's Long-Term Disability Plan. (b) Cause. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) intentional gross misconduct by the Executive damaging in a material way to the Company, or (ii) a material breach of this Agreement, after the Company has given the Executive notice thereof and a reasonable opportunity to cure. (c) Good Reason. The Executive's employment may be terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean a material breach by the Company of this Agreement after the Executive has given the Company notice of the breach and a reasonable opportunity to cure. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 10(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 4. Obligations of the Company upon Termination. (a) Good Reason; Other Than for Cause. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause, including by reason of the Executive's death or Disability, or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the amounts set forth in clauses A and B below: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the Minimum Bonus and (y) a fraction (the "Proration Fraction"), the numerator of which is the number of days in the current calendar year through the Date of Termination, and the denominator of which is 365 and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the "Accrued Obligations"); and B. the amount equal to the product of (1) the number of years (including fractions thereof) remaining from the Date of Termination until December 31, 1999 and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Minimum Bonus, which amount shall be discounted to present value at the applicable federal rate, as defined in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended; and (ii) the Stock Options and PEP Units shall become immediately vested; (iii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is entitled to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies, excluding any severance plan or policy except to the extent that such plan or policy provides, in accordance with its terms, benefits with a value in excess of the benefits payable to the Executive under this Section 4 (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause or the Executive terminates employment without Good Reason during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) Accrued Obligations less the amount determined under Section 4(a)(i)A(2) hereof, and (y) Other Benefits, in each case to the extent theretofore unpaid. 5. Arbitration. The Company and the Executive agree that any disputes with respect to this Agreement shall be subject to binding arbitration in New York City in accordance with the rules of the American Arbitration Association. The proceedings and the results of such arbitration shall be treated as confidential information subject to Section 6(a) hereof. The Company agrees to pay for the costs of arbitration and shall reimburse the Executive for his reasonable attorney's fees provided that the Executive prevails on at least one material issue in the arbitration. 6. Confidential Information/Noncompetition. (a) The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process (provided the Company has been given notice of and opportunity to challenge or limit the scope of disclosure purportedly so required), communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. (b) While employed by the Company, the Executive shall comply with the rules and policies of the Company, including without limitation the Company's Rules for Business Conduct and compliance policies. After termination of the Executive's employment with the Company, the Executive shall comply with those aspects of such rules and policies which apply to conduct after termination of employment. (c) Until December 31, 1999, the Executive will not directly or indirectly, own, manage, operate, control or participate in the ownership, management, operation or control of, or be connected as an officer, employee, partner, director or otherwise with, or have any financial interest in, any business which is in competition with the investment banking, corporate finance, corporate advisory, asset management or M&A business conducted by Pathfinder or the Company or any of its affiliates in any geographic area where such business is being conducted during such period. Ownership, for personal investment purposes only, of not to exceed 2% of the voting stock of any publicly held corporation shall not constitute a violation hereof. (d) While employed by the Company or any of its affiliates or Pathfinder and for one year after the Executive's termination of employment, the Executive will not, directly or indirectly, solicit for employment by other than the Company any person employed by the Company or its affiliates or Pathfinder at the effective time of the Merger (as defined in the Merger Agreement) (the "Merger"), nor will the Executive, directly or indirectly, solicit for employment by other than the Company any person known by him to be employed at the time by Pathfinder or the Company or its affiliates. (e) The provisions of Section 6(c) and (d) shall remain in full force and effect until the expiration of the period specified herein notwithstanding the earlier termination of the Executive's employment hereunder. 7. Specific Performance. The Executive acknowledges that a violation on his part of any of the covenants contained in Section 6 hereof would cause immeasurable and irreparable damage to the Company. Accordingly, the Executive agrees that the Company shall be entitled to injunctive relief in any court of competent jurisdiction for any actual or threatened violation of any such covenant in addition to any other remedies it may have. The Executive agrees that in the event that any arbitrator or court of competent jurisdiction shall finally hold that any provision of Section 6 hereof is void or constitutes an unreasonable restriction against the Executive, the provisions of such Section 6 shall not be rendered void but shall apply to such extent as such arbitrator or court may determine constitutes a reasonable restriction under the circumstances. 8. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 9. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary not-withstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive whether pursuant to this Agreement or otherwise, and determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by KPMG Peat Marwick (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross- Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross- Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30 day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross- Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: c/o Alex. Brown Incorporated 135 E. Baltimore Street Baltimore, Maryland 21202 If to the Company: One Bankers Trust Plaza 130 Liberty Street New York, New York 10006 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The Company's obligation to make the payments provided for in this Agreement and otherwise to perform obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others, other than claims for a breach of Section 6 of this Agreement. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment. (d) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (e) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (f) On and after the Commencement Date, this Agreement shall supersede any other agreement between the parties or between Pathfinder and the Executive with respect to the subject matter hereof. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /S/ MAYO A. SHATTUCK III MAYO A. SHATTUCK III BANKERS TRUST NEW YORK CORPORATION By /S/ MARK BIELER MARK BIELER EX-10.III.A3 4 EXHIBIT 10(iii)(A)(3) On September 1, 1997, Alex. Brown Incorporated was acquired by Bankers Trust New York Corporation (the "Corporation") and the Corporation assumed the obligations under the following Agreement. SPLIT-DOLLAR INSURANCE AGREEMENT This Agreement is made as of this _____ day of _______________________ between Alex. Brown & Sons Incorporated, a Maryland corporation with offices at 135 East Baltimore Street, Baltimore, Maryland 21202 (the "Corporation"), and ___________________________________ (the "Employee"). WHEREAS the Corporation and the Employee wish to become co-owners of one or more life insurance policies on the Employee's life (the "Policies") to be issued hereunder by Confederation Life Insurance Company or such other insurance company as shall be mutually determined by the Corporation and the Employee ("Insurer"). NOW, THEREFORE in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration had and received, the parties agree as follows: ARTICLE I. Acquisition of Insurance A. The Corporation and the Employee have applied to Insurer for a limited payment whole life policy on the Employee's life (hereinafter called "Initial Policy") in an amount sufficient to provide a death benefit equal to $600,000 (the "Target Benefit"). B. The Corporation and the Employee acknowledge that the Corporation shall have the right, for such reasons as the Corporation deems appropriate, in its sole discretion, to elect not to pay any premiums due on any of the Policies. The Employee agrees that neither the Employee, any beneficiary designated by the Employee, nor the Employee's estate will have any claim against the Corporation or any Insurer (including CLIC) as a consequence of any exercise by the Corporation of its aforementioned right. C. The Corporation and the Employee will use reasonable efforts to cause the aforementioned Policies to be issued. When issued, (i) the policy number; (ii) the issue date; and (iii) the face amount of the policy will be recorded on Schedule A, attached hereto. All such Policies will then be subject to the terms of this Agreement. ARTICLE II. Ownership of Insurance and Designation of Beneficiary If the proceeds of the Policies shall become payable by reason of the Employee's death, it is agreed that the Insurer will pay the policy proceeds in the following manner: A. The Target Benefit of the Policies' proceeds will be paid to the beneficiary designated by the Employee pursuant to the Insurer's Designation of Beneficiary and Ownership Rights form. B. The remainder of the Policies' proceeds shall be paid to the Corporation. While the Employee is living, the Employee shall have the right to change and successively change the beneficiary(ies) designated under paragraph A above by executing a new beneficiary designation form in use by the Insurer from time to time. While the Employee is living, the Corporation, its successors or assigns, alone shall have the right to change and successively change the beneficiary designated under subparagraph B above. The Corporation and the Employee agree to take whatever steps are necessary, including filing documents requested by the Insurer, to effectuate the intent of this Agreement. ARTICLE III. Payment of Premiums on Policy A. Subject to Article I, paragraph B, the Corporation will pay the full amount of each annual premium due pursuant to the terms of the Policies on the date each such premium is due through the anticipated pay period for each policy. If dividends and paid-up whole life insurance additions are insufficient to cover premiums due after the anticipated pay period, premiums may be paid pursuant to Article IV. B. The Employee agrees that the Employee will pay to the Corporation, as the Employee's share of the first five annual premiums paid by the Corporation, an amount as indicated on Schedule B, attached hereto. Following payment of the first five annual premiums due on each policy, the Corporation and the Employee shall authorize the Insurer to apply current and accumulated policy dividends, as well as the value of any Increasing Whole Life Rider forming part of the Policies, to pay the entire annual premium to the Insurer due for each year thereafter. ARTICLE IV. Dividends and Policy Loans A. At the option of the Corporation, any dividends declared by the Insurer on any Policies issued hereunder may be applied either (i) to purchase additional paid up insurance on the life of the Employee, or (ii) to reduce that portion of the premiums owed by the Corporation on any Policies with respect to which such dividend is declared or on any other Policies issued on the Employee's life pursuant to this Agreement. In addition, the Corporation shall have the right at any time to surrender existing paid-up dividend whole life insurance additions in order to reduce premiums on any Policies issued hereunder. B. The Employee hereby consents to and agrees that the Corporation, without notice to the Employee, may obtain policy loans in any amount which shall not exceed the amount of the "net premium outlay" as defined in Article V, paragraph A. Such loans may be obtained from the Insurer or from others. The Employee will execute and deliver any documents reasonably required by any lender to evidence such loans. Interest on any such loans paid by the Corporation shall be recovered by the Corporation as if such interest (including compounded interest) was part of the "net premium outlay" as defined in Article V, paragraph A. The decision as to whether or not to obtain policy loans is at the sole option of the Corporation. Nothing in this section shall limit the Corporation's right pursuant to Article I, paragraph B, to let the Policies be cancelled for failure to pay premiums. ARTICLE V. Recovery by Corporation of its Premium Outlay A. For purposes of this Agreement, "net premium outlay" means the sum of the total annual premiums paid by the Corporation on any Policies issued hereunder plus any interest (including compounded interest) paid by the Corporation on account of loans obtained for the purpose of paying premiums beyond the anticipated pay period, less amounts paid by the Employee pursuant to Article III. B. If any Policies issued hereunder are cancelled during the Employee's lifetime for any reason within five (5) years from the date hereof, then, except as provided in Article XI, the entire cash surrender value accrued under any such Policies shall be paid to the Corporation in satisfaction of the amount of the Corporation's net premium outlay even if the amount of such cash surrender value exceeds said premium outlay. If the cash surrender value paid to the Corporation is less than the Corporation's net premium outlay, the Employee shall have no obligation to repay such deficit amount to the Corporation. C. If any Policies issued hereunder are cancelled for any reason during the Employee's lifetime after the expiration of five (5) years from the date hereof, the Insurer will pay the Corporation the entire cash surrender value within thirty (30) days. Only that portion of the cash surrender value of any such Policies which equals the Corporation's net premium outlay with respect to such Policies shall be retained by the Corporation. Any cash surrender value in excess of the Corporation's net premium outlay shall be paid to the Employee by the Corporation as agent for the Insurer. If the cash surrender value paid to the Corporation is less than the Corporation's net premium outlay, the Employee shall have no obligation to repay such deficit amount to the Corporation. ARTICLE VI. Additional Policy Benefits Upon mutual consent, the Corporation and the Employee may agree upon additional policy benefits and agree as to the manner in which the premiums for such benefits shall be paid. ARTICLE VII. Maryland Law to Govern This Agreement shall be subject to and shall be construed under the laws of the State of Maryland without giving effect to principles of conflict of laws. ARTICLE VIII. Employee Agrees Not To Take Certain Action The Employee shall take no action with respect to the Policies which would in any way compromise or jeopardize the Corporation's rights described in the Agreement, including, without limitation, the Corporation's right to be repaid the Policies' premium amounts paid by the Corporation toward premiums on the Policies. ARTICLE IX. Death Claims When the Employee dies, death benefits will be paid as outlined in Article II hereof. ARTICLE X. Termination of Agreement This Agreement shall terminate on written notice given by either party to the other. ARTICLE XI. Disposition of Policy on Termination of Agreement If this Agreement is terminated, the Corporation shall notify the Insurer and such notification shall serve as a cancellation of the Policies described in Article V, unless prior to such notification the Employee repays to the Corporation the amount of its net premium outlay, in which case the Corporation agrees to cooperate with the Employee to cause the Employee to become the sole owner of the Policies and to have the Corporation withdraw from any aspect of the Policies. If any such Policies are encumbered by policy loans when the net premium outlay is being repaid, the Corporation shall either remove the encumbrance or reduce the amount to be paid by the Employee to the Corporation by the amount of the indebtedness, which indebtedness shall be assumed and become the obligation of the Employee. ARTICLE XII. Terms of Policy to Control The Insurer shall be fully discharged from any and all liability under the terms of any Policies issued by it hereunder, upon payment or other performance of its obligations in accordance with the terms of such Policies. ARTICLE XIII. Miscellaneous A. This Agreement shall not be modified or amended except by a writing signed by the Corporation and the Employee. This Agreement shall be binding upon the heirs, administrators or executors and the successors and assigns of each party to this Agreement. B. The parties shall execute and deliver any additional documents which are required to give full force and effect to the transactions contemplated hereunder. IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the date first above written. By: Employee Alex. Brown & Sons Incorporated By: EX-10.III.A4 5 EXHIBIT 10(iii)(A)(4) On September 1, 1997, Alex. Brown Incorporated was acquired by Bankers Trust New York Corporation (the "Corporation") and the Corporation assumed the obligations under the following Plan. ALEX. BROWN INCORPORATED 1991 EQUITY INCENTIVE PLAN Section I. Purpose The purpose of the Alex. Brown Incorporated 1991 Equity Incentive Plan (the "Plan") is to attract and retain key employees, to provide an incentive for them to assist the Company achieve long- range performance goals, and to enable such key employees to participate in the long-term growth of the Company. Section 2. Definitions "Affiliate" means any business entity in which the Company owns directly or indirectly 50% or more of the total combined voting power or has a significant financial interest as determined by the Committee. "Award" means any Option, Stock Appreciation Right, Performance Share, Restricted Stock, Other Stock-Based Award or Stock Unit awarded under the Plan. "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended from time to time and any successor to such Code. "Committee" means a committee of not less than three members of the Board appointed by the Board to administer the Plan, each of whom is a "disinterested person" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, or any successor provision, as applicable to the Plan at the time of determination. "Common Stock" or "Stock" means the Common Stock, $.10 par value, of the Company. "Company" means Alex. Brown Incorporated. "Designated Beneficiary" means the beneficiary designated by a Participant, in a manner and to the extent determined by the Committee, to receive amounts due or exercise rights of the Participant in the event of the Participant's death. In the absence of an effective designation by a Participant, Designated Beneficiary shall mean the Participant's estate. "Fair Market Value" means, with respect to Common Stock or any other property, the fair market value of such property as determined by the Committee in good faith or in the manner established by the Committee from time to time. "Incentive Stock Option" means an option to purchase shares of Common Stock awarded to a Participant under Section 6 which is intended to meet the requirements of Section 422 of the Code or any successor provision. "Nonstatutory Stock Option" means an option to purchase shares of Common Stock awarded to a Participant under Section 6 which is not intended to be an Incentive Stock Option. "Option" means an Incentive Stock Option or a Nonstatutory Stock Option. "Other Stock-Based Award" means Awards, other than Options, Stock Appreciation Rights, Performance Shares, Restricted Stock or Stock Units, having a Common Stock element and awarded to a Participant under Section 10. "Participant" means a person selected by the Committee to receive an Award under the Plan. "Performance Cycle" or "Cycle" means the period of time selected by the Committee during which performance is measured for the purpose of determining the extent to which an award of Performance Shares, or any other Award requiring measurement of performance, has been earned. "Performance Shares" mean shares of Common Stock which may be earned by the achievement of performance goals awarded to a Participant under Section 8. "Reporting Person" means a person subject to Section 16 of the Securities Exchange Act of 1934 or any successor provision. "Restricted Period" means the period during which any Award may be forfeited to the Company pursuant to the terms and conditions of such Award. "Restricted Stock" means shares of Common Stock subject to forfeiture awarded to a Participant under Section 9. "Stock Appreciation Right" or "SAR" means a right to receive any excess in value of shares of Common Stock over the exercise price awarded to a Participant under Section 7. "Stock Unit" means an award of Common Stock or units that are valued in whole or in part by reference to, or otherwise based on, the value of Common Stock, awarded to a Participant under Section 11. Section 3. Administration The Plan shall be administered by the Committee. The Committee shall have authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the operation of the Plan as it shall from time to time consider advisable, and to interpret the provisions of the Plan. The Committee's decisions shall be final and binding. To the extent permitted by applicable law, the Committee may delegate to one or more executive officers of the Company the power to make Awards to Participants who are not Reporting Persons and all determinations under the Plan with respect thereto, provided that the Committee shall fix the maximum amount of such Awards for the group and a maximum for any one Participant. Section 4. Eligibility All employees of the Company or any Affiliate capable, in the sole judgment of the Committee, of contributing significantly to the successful performance of the Company, other than a person who has irrevocably elected not to be eligible, are eligible to be Participants in the Plan. Incentive Stock Options may be awarded only to persons eligible to receive such Options under the Code. Section 5. Stock Available for Awards (a) Subject to adjustment under subsection (b), Awards may be made under the Plan in each calendar year during any part of which the Plan is effective in respect of a maximum of seven and one-half percent (7.5%) of the total shares of Common Stock outstanding on the first day of such year, provided that the maximum number of shares of Common Stock in respect of which Awards may be granted for 1991 is 350,000. If any Award in respect of shares of Common Stock expires or is terminated unexercised or is forfeited for any reason or settled in a manner that results in fewer shares outstanding than were initially awarded, including without limitation the surrender of shares in payment of the Award or any tax obligation thereon, the shares subject to such Award, to the extent of such expiration, termination, forfeiture or decrease, shall again be available for award under the Plan. Common Stock issued through the assumption or substitution of outstanding grants from any acquired company shall not reduce the shares available for Awards under the Plan. (b) In the event that the Committee determines that any stock dividend, extraordinary cash dividend, creation of a class of equity securities, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Stock at a price substantially below fair market value, or other similar transaction affects the Common Stock such that an adjustment is required in order to preserve the benefits or potential benefits intended to be made available under the Plan, then the Committee, subject, in the case of Incentive Stock Options, to any limitation required under the Code, shall equitably adjust any or all of (i) the number and kind of shares in respect of which Awards may be made under the Plan, (ii) the number and kind of shares subject to outstanding Awards, and (iii) the award, exercise or conversion price with respect to any of the foregoing, and if considered appropriate, the Committee may make provisions for a cash payment with respect to an outstanding Award, provided that the number of shares subject to any Award shall always be a whole number. (c) Notwithstanding any other provision of the Plan, no more than 1,000,000 shares of Common Stock shall be cumulatively available for the award of Incentive Stock Options; provided that to the extent an Incentive Stock Option expires or is terminated unexercised or is forfeited for any reason the shares which were subject to such option may again be awarded as Incentive Stock Options. Section 6. Stock Options (a) Subject to the provisions of the Plan, the Committee may award Incentive Stock Options and Nonstatutory Stock Options and determine the number of shares to be covered by each Option, the option price therefor and the conditions and limitations applicable to the exercise of the Option. The terms and conditions of Incentive Stock Options shall be subject to and comply with Section 422 of the Code, or any successor provision, and any regulations thereunder. (b) The Committee shall establish the option price at the time each Option is awarded, which price shall not be less than 100% of the Fair Market Value of the Common Stock on the date of award with respect to Incentive Stock Options and not less than 50% of the Fair Market Value of the Common Stock on the date of award with respect to Nonstatutory Stock Options. (c) Each Option shall be exercisable at such times and subject to such terms and conditions as the Committee may specify in the applicable Award or thereafter. The Committee may impose such conditions with respect to the exercise of Options, including conditions relating to applicable federal or state securities laws, as it considers necessary or advisable. (d) No shares shall be delivered pursuant to any exercise of an Option until payment in full of the option price therefor is received by the Company. Such payment may be made in whole or in part in cash or, to the extent permitted by the Committee at or after the award of the Option, by delivery of a note or shares of Common Stock owned by the optionee, including Restricted Stock valued at its Fair Market Value on the date of delivery, or such other lawful consideration as the Committee may determine. (e) The Committee may provide for the automatic award of an Option upon the delivery of shares to the Company in payment of an Option for up to the number of shares so delivered. Section 7. Stock Appreciation Rights (a) Subject to the provisions of the Plan, the Committee may award SARs in tandem with an Option (at or after the award of the Option), or alone and unrelated to an Option. SARs in tandem with an Option shall terminate to the extent that the tandem Option is exercised. SARs shall have an exercise price of not less than 50% of the Fair Market Value of the Common Stock on the date of award, or in the case of SARs in tandem with Options, the exercise price of the related Option. (b) An SAR related to an Option which can only be exercised during limited periods following a change in control of the Company, may entitle the Participant to receive an amount based upon the highest price paid or offered for Common Stock in any transaction relating to the change in control or paid during the thirty-day period immediately preceding the occurrence of the change in control in any transaction reported in the market in which the Common Stock is normally traded. Section 8. Performance Shares (a) Subject to the provisions of the Plan, the Committee may award Performance Shares and determine the number of such shares for each Performance Cycle and the duration of each Performance Cycle. There may be more than one Performance Cycle in existence at any one time, and the duration of Performance Cycles may differ from each other. The payment value of Performance Shares shall be equal to the Fair Market Value of the Common Stock on the date the Performance Shares are earned or, in the discretion of the Committee, on the date the Committee determines that the Performance Shares have been earned. (b) The Committee shall establish performance goals for each Cycle, for the purposes of determining the extent to which Performance Shares awarded for such Cycle are earned and of accomplishing such objectives the Committee may from time to time select. During any Cycle, the Committee may adjust the performance goals for such Cycle as it deems equitable in recognition of unusual or nonrecurring events affecting the Company, changes in applicable tax laws or accounting principles, or such other factors as the Committee may determine. (c) As soon as practicable after the end of a Performance Cycle, the Committee shall determine the number of Performance Shares which have been earned on the basis of performance in relation to the established performance goals. The payment values of earned Performance shares shall be distributed to the Participant or, if the Participant has died, to the participant's Designated Beneficiary, as soon as practicable thereafter. The Committee shall determine, at or after the time of award, whether payment values will be settled in whole or in part in cash or other property, including Common Stock or Awards. Section 9. Restricted Stock (a) Subject to the provisions of the Plan, the Committee may award shares of Restricted Stock and determine the duration of the Restricted Period, and the conditions under which, the shares may be forfeited to the Company and the other terms and conditions of such Awards. Shares of Restricted Stock shall be issued for no cash consideration or such minimum consideration as may be required by applicable law. (b) Shares of Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered, except as permitted by the Committee, during the Restricted Period. Shares of Restricted Stock shall be evidenced in such manner as the Committee may determine. Any certificates issued in respect of shares of Restricted Stock shall be registered in the name of the Participant and unless otherwise determined by the Committee, deposited by the Participant, together with a stock power endorsed in blank, with the Company. At the expiration of the Restricted Period, the Company shall deliver such certificates to the Participant or if Participant has died, to the Participant's Designated Beneficiary. Section 10. Other Stock-Based Awards (a) Subject to the provisions of the Plan, the Committee may make other awards of Common Stock and other awards that are valued in whole or in part by reference to, or are otherwise based on, Common Stock, including, without limitation, convertible preferred stock, convertible debentures, exchangeable securities and Common Stock awards or options. Other Stock-Based Awards may be granted either alone or in addition to or in tandem with Options, SARs, Performance Shares, Restricted Stock or Stock Units granted under the Plan and/or cash awards made outside of the Plan. (b) The Committee may establish performance goals, which may be based on performance goals related to book value, subsidiary performance or such other criteria as the Committee may establish, Restricted Periods, Performance Cycles, conversion prices (provided no conversion price shall be less than 50% of the Fair Market Value of the Common Stock on the date of award of any Other Stock-Based Award), maturities and security, if any, for any Other Stock-Based Award. Other Stock-Based Awards may be sold to Participants at the face value thereof or any discount therefrom (up to 50%) or awarded for no consideration or minimum consideration as may be required by applicable law. Section 11. Stock Units (a) Subject to the provisions of the Plan, the Committee may award Stock Units subject to such terms, restrictions, conditions, performance goals, Restricted Periods, vesting requirements and payment rules as the Committee shall determine. (b) Shares of Common Stock awarded in connection with a Stock Unit Award shall be issued for no cash consideration or such minimum consideration as may be required by applicable law. Section 12. General Provisions Applicable to Awards (a) Transferability of Awards and Holding Period. No Participant shall have the right to assign any Award or the right to receive any Award or any other right or interest under the Plan, contingent or otherwise, or to cause or permit any encumbrance, pledge or charge of any nature to be imposed on any such Award or right to receive any Award or any such right or interest other than by will or the laws of descent and distribution. Awards shall be exercisable or convertible (as the case may be) during the Participant's lifetime only by the Participant or the Participant's guardian or legal representative. (b) Documentation. Each Award under the Plan shall be evidenced by a writing delivered to the Participant specifying the terms and conditions thereof and containing such other terms and conditions not inconsistent with the provisions of the Plan as the Committee considers necessary or advisable to achieve the purposes of the Plan or comply with applicable tax and regulatory laws and accounting principles. (c) Committee Discretion. Each type of Award may be made alone, in addition to or in relation to any other type of Award. The terms of each type of Award need not be identical, and the Committee need not treat Participants uniformly. Except as otherwise provided by the Plan or a particular Award, any determination with respect to an Award may be made by the Committee at the time of award or at any time thereafter. (d) Settlement. The Committee shall determine whether Awards are settled in whole or in part in cash, Common Stock, other securities of the Company, Awards or other property. The Committee may permit a Participant to defer all or any portion of a payment under the Plan, including the crediting of interest on deferred amounts denominated in cash and dividend equivalents on amounts denominated in Common Stock. (e) Dividends and Cash Awards. In the discretion of the Committee, any Award under the Plan may provide the Participant with (i) dividends or dividend equivalents payable currently or deferred with or without interest, and (ii) cash payments in lieu of or in addition to an Award. (f) Termination of Employment. The Committee shall determine the effect on an Award of the disability, death, retirement or other termination of employment of a Participant and the extent to which, and the period during which, the Participant's legal representative, guardian or Designated Beneficiary may receive payment of an Award or exercise rights thereunder. (g) Change in Control. In order to preserve a Participant's rights under an Award in the event of a change in control of the Company, the Committee in its discretion may, at the time an Award is made or at any time thereafter, take one or more of the following actions: (i) provide for the acceleration of any time period relating to the exercise or realization of the Award, (ii) provide for the purchase of the Award upon the Participant's request for an amount of cash or other property that could have been received upon the exercise or realization of the Award had the Award been currently exercisable or payable, (iii) adjust the terms of the Award in a manner determined by the Committee to reflect the change in control, (iv) cause the Award to be assumed, or new rights substituted therefor, by another entity, or (v) make such other provision as the Committee may consider equitable and in the best interests of the Company. (h) Loans. The Committee may authorize the making of loans or cash payments to Participants in connection with any Award under the Plan, which may be secured by any security, including Common Stock, underlying or related to such Award (provided that such Loan shall not exceed the Fair Market Value of the security subject to such Award), and which may be forgiven upon such terms and conditions as the Committee may establish at the time of such loan or at any time thereafter. (i) Withholding. The Participant shall pay to the Company, or make provision satisfactory to the Committee for payment of, any taxes required by law to be withheld in respect of Awards under the Plan no later than the date of the event creating the tax liability. In the Committee's discretion, such tax obligations may be paid in whole or in part in shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their Fair Market Value on the date of delivery. The Company and its Affiliates may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to the Participant. (j) Foreign Nationals. Awards may be made to Participants who are foreign nationals or employed outside the United States on such terms and conditions different from those specified in the Plan as the Committee considers necessary or advisable to achieve the purposes of the Plan or comply with applicable laws. (k) Amendment of Award. The Committee may amend, modify or terminate any outstanding Award, including, without limitation, substituting therefor another Award of the same or a different type, changing the option price, date of exercise or realization, modifying performance goals, Restricted Periods, Performance Cycles, or vesting requirements, and converting an Incentive Stock Option to a Nonstatutory Stock Option, provided that the Participant's consent to such action shall be required unless the Committee determines that the action, taking into account any related action, would not materially and adversely affect the Participant's interest in the Award. Section 13. Miscellaneous (a) No Right to Employment. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment. The Company expressly reserves the right at any time to dismiss a Participant free from any liability or claim under the Plan, except as expressly provided in the applicable Award. (b) No Rights As Stockholder. Subject to the provisions of the applicable Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed under the Plan until he or she becomes the holder thereof. A Participant to whom Common Stock is awarded shall be considered the holder of the Stock at the time of the Award except as otherwise provided in the applicable Award. (c) Effective Date. Subject to the approval of the shareholders of the Company, the Plan shall be effective as of January 10, 1991. Prior to such approval, Awards may be made under the Plan expressly subject to such approval. (d) Term of Plan. No Award shall be granted pursuant to the Plan on or after the tenth anniversary of the date of stockholder approval, but Awards granted prior to such tenth anniversary may extend beyond that date. (e) Applicability to Other Plans. Subject to stockholder approval of the Plan, no further stock options shall be granted under the Alex. Brown Incorporated 1986, 1987 and 1990 Stock Option Plans and no further restricted stock grants shall be made under the Alex. Brown Incorporated 1987 Restricted Stock Plan. Existing and outstanding stock options and restricted stock awards under such plans shall remain in effect pursuant to the terms of the agreements governing such options and grants and shall continue to be governed by such plans to the extent applicable. (f) Amendment of Plan. The Board may amend, suspend or terminate the Plan or any portion thereof at any time, provided that no amendment shall be made without stockholder approval if such approval is necessary to comply with any applicable tax or regulatory requirement, including any requirement for exemptive relief under Section 16(b) of the Securities Exchange Act of 1934, or any successor provision. (g) Governing Law. The provisions of the Plan shall be governed by and interpreted in accordance with the laws of the State of Maryland. Federal Income Tax Consequences of the Alex. Brown Incorporated 1991 Equity Incentive Plan as Proposed to be Amended Incentive Stock Options. An optionee will not recognize taxable income upon the grant or exercise of an ISO under the 1991 Equity Incentive Plan. If no disposition of shares issued to an optionee pursuant to the exercise of an ISO is made by the optionee within two years from the date of grant or within one year from the transfer of such shares to the optionee, then (a) upon sale of such shares, any amount realized in excess of the option price (the amount paid for the shares) will be taxed to the optionee as a long-term capital gain and any loss sustained will be a long-term capital loss and (b) no deduction will be allowed to the Company for Federal income tax purposes. The exercise of ISOs will give rise to a positive adjustment to alternative minimum taxable income that may result in alternative minimum tax liability for the optionee. If an SAR is granted with respect to an outstanding ISO, the ISO may be disqualified and converted to a nonstatutory stock option. If shares of Common Stock acquired upon the exercise of an ISO are disposed of prior to the expiration of the two-year and one- year holding periods described above (a "disqualifying disposition") generally (a) the optionee will recognize ordinary income in the year of disposition in an amount equal to the excess (if any) of the fair market value of the shares at exercise (or, if less, the amount realized on a sale of such shares) over the option price thereof, and (b) the Company will be entitled to deduct such amount, subject to applicable withholding requirements. Any further gain realized will be taxed as short-term or long-term capital gain and will not result in any deduction by the Company. Special rules apply where the optionee is subject to Section 16(b) of the Exchange Act or where all or a portion of the exercise price of the ISO is paid by tendering shares of Common Stock. A disqualifying disposition will reverse the alternative minimum taxable income adjustment associated with the exercise of the ISO. Nonstatutory Stock Options. No income is recognized by the optionee at the time the option is granted. Generally, (a) at exercise, ordinary income is recognized by the optionee in an amount equal to the difference between the option price and the fair market value of the shares on the date of exercise, and the Company receives a tax deduction for the same amount, subject to applicable withholding requirements, and (b) at disposition, appreciation or depreciation after the date of exercise is treated as either short-term or long-term capital gain or loss depending on how long the shares have been held. Generally, persons subject to Section 16(b) of the Exchange Act are not taxed until the later of (i) six months after grant of the option or (ii) exercise of the option, with the excess of the fair market value of the stock at such time over the option price being taxed as ordinary income; the holding period for determining whether subsequent gain or loss will be a short-term or long-term capital gain or loss begins at the time of ordinary income recognition. However, if exercise occurs within six months of the date of grant of the option, an optionee may elect under Section 83(b) of the Code, within 30 days after exercise, to be taxed at the time of exercise, in which case his or her holding period for capital- gain purposes will begin upon exercise. Stock Appreciation Rights. A grantee will not recognize taxable income upon the grant of an SAR. On the exercise of an SAR, in general, (a) any cash received and the fair market value on the exercise date of any shares received will constitute ordinary income to the grantee at the time of exercise, and (b) the Company will be entitled to deduct such amount, subject to applicable withholding requirements. If a grantee who is subject to the restrictions of Section 16(b) of the Exchange Act receives shares by reason of the exercise of an SAR, (other than SARs subject to certain limitations specified in Rule 16b-3 under the Exchange Act), compensation income is recognized at the time of the lapse of such restrictions (but no later than six months after exercise) with the amount measured by the fair market value of the shares at that time unless the grantee elects under Section 83(b) of the Code, within 30 days after exercise, to be taxed at the time of exercise. Performance Shares. The fair market value of any shares received as payment in respect of performance shares, less any amount paid by the grantee, will constitute ordinary income to the grantee in the year in which paid, and the Company will generally be entitled to deduct such amount, subject to applicable withholding requirements. Restricted Stock. A grantee normally will not recognize taxable income upon a grant of restricted stock, and the Company will not be entitled to a deduction, until termination of the restrictions. Upon termination of the restrictions, in general, (a) the grantee will recognize ordinary income in an amount equal to the fair market value of the shares at that time less any amount paid by the grantee, and (b) the Company will be entitled to deduct such amount, subject to applicable withholding requirements. However, if a grantee elects under Section 83(b) of the Code, within 30 days after receipt of the stock, the grantee's recognition of income and the Companys deduction is determined at the time the restricted stock is granted. Stock Units. In general, (a) the grantee must recognize ordinary income equal to the fair market value of the shares received in connection with a stock unit award, less any amount paid by the grantee, at the time the shares become transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, and (b) the Company will be entitled to a deduction in the same amount and at the same time as the grantee recognizes income. However, a grantee may elect under Section 83(b) of the Code, within 30 days after receipt of the shares, to be taxed at the time of receipt of the shares, in which case the grantee's recognition of income and the Company's deduction is determined at the time the shares are received. Other Stock-Based Awards. In general, (a) the grantee must recognize ordinary income equal to the amount of any cash received and the fair market value of any shares or other property received in connection with other stock-based awards, less any amount paid by the grantee, at the time of receipt, in the case of cash, and, in the case of shares or other property, at the time that such shares or other property become transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, and (b) the Company will be entitled to a deduction in the same amount and at the same time that the grantee recognizes income. However, a grantee may elect under Section 83(b) of the Code, within 30 days after receipt of the shares or other property, to be taxed at the time of receipt, in which case the grantee's recognition of income and the Company's deduction will be determined at the time the shares or other property are received. An employee will not recognize taxable income or loss upon the conversion of debentures into shares of the Company's Common Stock. The employee's tax basis in the shares will be equal to the tax basis of the debentures converted for such shares and the holding period of the shares will include the holding period of the debentures. The employee will have capital gain or loss upon the sale, of the shares acquired pursuant to the conversion of the debentures. The Company will have no tax deduction relating to the conversion of debentures or any subsequent sale of the shares of the Company's Common Stock. Loan Forgiveness. An employee will have ordinary income upon forgiveness of a loan, or any portion thereof, and the Company will generally be entitled to a deduction equal to the income recognized by the employee, subject to applicable withholding requirements. EX-12.A 6 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, 1992 1993 1994 1995 1996 1997 Earnings: 1. Income before income taxes and cumulative effects of accounting changes $ 1,001 $1,698 $ 987 $ 469 $ 1,131 $ 953 2. Add: Fixed charges excluding capitalized interest (Line 10) 3,115 3,168 3,911 5,138 5,483 4,243 3. Less: Equity in undistri- buted income of unconsolidated subsidiaries and affiliates 40 30 45 28 30 (113) 4. Earnings including interest on deposits 4,076 4,836 4,853 5,579 6,584 5,309 5. Less: Interest on deposits 1,119 1,013 965 1,360 1,355 1,406 6. Earnings excluding interest on deposits $2,957 $3,823 $3,888 $4,219 $5,229 $3,903 Fixed Charges: 7. Interest Expense $3,083 $3,137 $3,880 $5,105 $5,451 $4,214 8. Estimated interest component of net rental expense 32 31 31 33 32 26 9. Amortization of debt issuance expense - - - - - 3 10. Total fixed charges including interest on deposits and excluding capitalized interest 3,115 3,168 3,911 5,138 5,483 4,243 11. Add: Capitalized interest - - - - - _____- 12. Total fixed charges 3,115 3,168 3,911 5,138 5,483 4,243 13. Less: Interest on deposits (Line 5) 1,119 1,013 965 1,360 1,355 1,406 14. Fixed charges excluding interest on deposits $1,996 $2,155 $2,946 $3,778 $4,128 $ 2,837 Consolidated Ratios of Earnings to Fixed Charges: Including interest on deposits (Line 4/Line 12) 1.31 1.53 1.24 1.09 1.20 1.25 Excluding interest on deposits (Line 6/Line 14) 1.48 1.77 1.32 1.12 1.27 1.38
EX-12.B 7 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, 1992 1993 1994 1995 1996 1997 Earnings: 1. Income before income taxes and cumulative effect of accounting changes $ 1,001 $1,698 $ 987 $ 469 $ 1,131 $ 953 2. Add: Fixed charges excluding capitalized interest (Line 13) 3,115 3,168 3,911 5,138 5,483 4,243 3. Less: Equity in undistri- buted income of unconsolidated subsidiaries and affiliates 40 30 45 28 30 ___(113) 4. Earnings including interest on deposits 4,076 4,836 4,853 5,579 6,584 5,309 5. Less: Interest on deposits 1,119 1,013 965 1,360 1,355 ___1,406 6. Earnings excluding interest on deposits$2,957 $3,823 $3,888 $4,219 $5,229 $3,903 Preferred Stock Dividend Requirements: 7. Preferred stock dividend requirements $ 30 $ 23 $ 28 $ 51 $ 51 $37 8. Ratio of income from continuing operations before income taxes to income from continuing operations after income taxes 144% 147% 144% 151% 148% 145% 9. Preferred stock dividend requirements on a pretax basis $ 43 $ 34 $ 40 $ 77 $ 75 $ 54 Fixed Charges: 10. Interest Expense $3,083 $3,137 $3,880 $5,105 $5,451 $4,214 11. Estimated interest component of net rental expense 32 31 31 33 32 26 12. Amortization of debt issuance expense - - - - - 3 13. Total fixed charges including interest on deposits and excluding capitalized interest 3,115 3,168 3,911 5,138 5,483 4,243 14. Add: Capitalized interest - - - - - - 15. Total fixed charges 3,115 3,168 3,911 5,138 5,483 4,243 16. Add: Preferred stock dividend require- ments - pretax (Line 9) 43 34 40 77 75 54 17. Total combined fixed charges and preferred stock dividend require- ments on a pretax basis 3,158 3,202 3,951 5,215 5,558 4,297 18. Less: Interest on deposits (Line 5) 1,119 1,013 965 1,360 1,355 1,406 19. Combined fixed charges and preferred stock dividend requirements on a pretax basis excluding interest on deposits $2,039 $2,189 $2,986 $3,855 $4,203 $2,891 Consolidated Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements: Including interest on deposits (Line 4/Line 17) 1.29 1.51 1.23 1.07 1.18 1.24 Excluding interest on deposits (Line 6/Line 19) 1.45 1.75 1.30 1.09 1.24 1.35
EX-27 8
9 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CONDITION AT SEPTEMBER 30, 1997 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 9-MOS DEC-31-1997 SEP-30-1997 1,625 2,522 2,241 52,575 7,577 0 0 21,303 759 140,087 46,079 39,487 9,551 12,044 0 703 105 5,323 140,087 985 337 2,061 5,200 1,406 4,214 986 10 100 3,748 953 953 0 0 659 6.00 5.80 1.32 298 0 37 0 973 66 38 972 117 206 436 Short-term borrowings include the following: Securities loaned and securities sold under repurchase agreements 20,158 Other short-term borrowings 19,329 Total 39,487 Other liabilities include the following: Accounts payable and accrued expenses 6,255 Other liabilities 3,296 Total 9,551 Other interest income includes the following: Interest-bearing deposits with banks 253 Federal funds sold 196 Securities purchased under repurchase agreements 983 Securities borrowed 532 Customer receivables 97 Total 2,061 The Corporation has allocated its total allowance for credit losses as follows: 759 as a reduction of loans and 213 as other liabilities related to all other credit-related items.
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