-----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, V3FdG49ysXyGfU33gzpTkeb9kMQIus4uKKLaZAi7bSIQv5B50+KnPKSP+2Bgmok0 2hLzfcpfwBH17yHmkQRqnw== 0000950130-97-004021.txt : 19970912 0000950130-97-004021.hdr.sgml : 19970912 ACCESSION NUMBER: 0000950130-97-004021 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19970901 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19970909 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: 8-K SEC ACT: SEC FILE NUMBER: 001-05920 FILM NUMBER: 97677692 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 8-K 1 FORM 8-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 F O R M 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) September 1, 1997 ------------------ BANKERS TRUST NEW YORK CORPORATION ------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) NEW YORK ------------------------------------------------------------------------ (State or other jurisdiction of incorporation) 1-5920 13-6180473 ------------------------ ------------------------------- (Commission file number) (IRS employer identification no.) 130 LIBERTY STREET, NEW YORK, NEW YORK 10006 ------------------------------------------------------------------------ (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (212) 250-2500 -------------- ITEM 5 OTHER EVENTS As previously reported by Bankers Trust New York Corporation (the "Corporation") on its Current Report on Form 8-K filed September 4, 1997, Alex. Brown Incorporated ("ABI") merged into BT Alex. Brown Holdings Incorporated, a wholly- owned subsidiary of the Corporation (the "Merger"). The Merger was accounted for as a "pooling of interests" under generally accepted accounting principles. The year end audited supplemental consolidated financial information of the Corporation restating the Corporation's historical consolidated financial statements to reflect the Merger is contained in Exhibit 99.1 including Management's Discussion and Analysis of Financial Condition and Results of Operations, the audited supplemental consolidated balance sheet at December 31, 1996 and December 31, 1995 and the audited supplemental consolidated statements of income and changes in stockholders' equity and cash flows for the years ended December 31, 1996, December 31, 1995 and December 31, 1994, and the notes thereto. The first quarter unaudited supplemental financial information of the Corporation restating the Corporation's historical consolidated financial statements to reflect the Merger is contained in Exhibit 99.2 including Management's Discussion and Analysis of Financial Condition and Results of Operations, the unaudited interim supplemental consolidated balance sheet at March 31, 1997, the audited supplemental consolidated balance sheet at December 31, 1996 and the unaudited interim supplemental consolidated statements of income and changes in stockholders' equity and cash flows for the three months ended March 31, 1997 and 1996. The second quarter unaudited supplemental financial information of the Corporation restating the Corporation's historical consolidated financial statements to reflect the Merger is contained in Exhibit 99.3 including Management's Discussion and Analysis of Financial Condition and Results of Operations, the unaudited interim supplemental consolidated balance sheet at June 30, 1997, the audited supplemental consolidated balance sheet at December 31, 1996 and the unaudited interim supplemental consolidated statements of income for the three months and six months ended June 30, 1997 and 1996 and statements of changes in stockholders' equity and cash flows for the six months ended June 30, 1997 and 1996. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (c) Exhibits (12.a) Statement regarding Computation of Consolidated Ratios of Earnings to Fixed Charges (12.b) Statement regarding Computation of Consolidated Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements (23.1) Consent of Ernst & Young LLP. (23.2) Consent of KPMG Peat Marwick LLP. (23.3) Consent of KPMG Peat Marwick LLP. (27.1) Financial Data Schedule at December 31, 1996 and for the twelve months ended December 31, 1996. (27.2) Financial Data Schedule at March 31, 1997 and for the three months ended March 31, 1997. (27.3) Financial Data Schedule at June 30, 1997 and for the six months ended June 30, 1997. (99.1) Management's Discussion and Analysis of Financial Condition and Results of Operations, the audited supplemental consolidated balance sheet at December 31, 1996 and December 31, 1995 and the audited supplemental consolidated statements of income and changes in stockholders' equity and cash flows for the years ended December 31, 1996, December 31, 1995 and December 31, 1994, and the notes thereto. (99.2) Management's Discussion and Analysis of Financial Condition and Results of Operations, the unaudited interim supplemental consolidated balance sheet at March 31, 1997, the audited supplemental consolidated balance sheet at December 31, 1996 and the unaudited interim supplemental consolidated statements of income and changes in stockholders' equity and cash flows for the three months ended March 31, 1997 and 1996. (99.3) Management's Discussion and Analysis of Financial Condition and Results of Operations, the unaudited interim supplemental consolidated balance sheet at June 30, 1997, the audited supplemental consolidated balance sheet at December 31, 1996 and the unaudited interim supplemental consolidated statements of income for the three months and six months ended June 30, 1997 and 1996 and statements of changes in stockholders' equity and cash flows for the six months ended June 30, 1997 and 1996. (99.4) The audited consolidated statements of financial condition of Alex. Brown Incorporated as of December 31, 1996 and December 31, 1995 and the related consolidated statements of earnings, cash flows and stockholders' equity for each of the years in the three-year period ended December 31, 1996. (This document is incorporated by reference to Registrant's Current Report on Form 8-K filed September 4, 1997). (99.5) The audited consolidated balance sheet of Bankers Trust New York Corporation as of December 31, 1996 and December 31, 1995 and the related consolidated statements of income, cash flows and stockholders' equity for each of the years in the three-year period ended December 31, 1996. (This document is incorporated by reference to Registrant's Annual Report on Form 10-K filed March 6, 1997). SIGNATURES 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, hereunto duly authorized. BANKERS TRUST NEW YORK CORPORATION September 9, 1997 by /s/ RICHARD H. DANIEL RICHARD H. DANIEL Vice Chairman and Controller (Principal Financial Officer) EX-12.(A) 2 RATIOS OF EARNINGS TO FIXED CHARGES EXHIBIT 12(a) BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES COMPUTATION OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES (dollars in millions)
Six Months Ended Year Ended December 31, June 30, ----------------------------------------------------------- 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 $ 602 2. Add: Fixed charges excluding capitalized interest (Line 10) 3,115 3,168 3,911 5,138 5,483 2,759 3. Less: Equity in undistri- buted income of unconsolidated subsidiaries and affiliates 40 30 45 28 30 (54) ------ ------ ------ ------ ------ ------ 4. Earnings including interest on deposits 4,076 4,836 4,853 5,579 6,584 3,415 5. Less: Interest on deposits 1,119 1,013 965 1,360 1,355 855 ------ ------ ------ ------ ------ ------ 6. Earnings excluding interest on deposits $2,957 $3,823 $3,888 $4,219 $5,229 $2,560 ====== ====== ====== ====== ====== ====== Fixed Charges: 7. Interest Expense $3,083 $3,137 $3,880 $5,105 $5,451 $2,740 8. Estimated interest component of net rental expense 32 31 31 33 32 17 9. Amortization of debt issuance expense - - - - - 2 ------ ------ ------ ------ ------ ------ 10. Total fixed charges including interest on deposits and excluding capitalized interest 3,115 3,168 3,911 5,138 5,483 2,759 11. Add: Capitalized interest - - - - - - ------ ------ ------ ------ ------ ------ 12. Total fixed charges 3,115 3,168 3,911 5,138 5,483 2,759 13. Less: Interest on deposits (Line 5) 1,119 1,013 965 1,360 1,355 855 ------ ------ ------ ------ ------ ------ 14. Fixed charges excluding interest on deposits $1,996 $2,155 $2,946 $3,778 $4,128 $1,904 ====== ====== ====== ====== ====== ====== 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 1.24 ====== ====== ====== ====== ====== ====== Excluding interest on deposits (Line 6/Line 14) 1.48 1.77 1.32 1.12 1.27 1.34 ====== ====== ====== ====== ====== ======
EX-12.(B) 3 RATIOS OF EARNINGS TO COMBINED FIXED CHARGES EXHIBIT 12(b) BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES COMPUTATION OF CONSOLIDATED RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENTS (dollars in millions)
Six Months Ended Year Ended December 31, June 30, -------------------------------------------- -------- 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 $ 602 2. Add: Fixed charges excluding capitalized interest (Line 13) 3,115 3,168 3,911 5,138 5,483 2,759 3. Less: Equity in undistri- buted income of unconsolidated subsidiaries and affiliates 40 30 45 28 30 (54) ------ ------ ------ ------ ------ ------ 4. Earnings including interest on deposits 4,076 4,836 4,853 5,579 6,584 3,415 5. Less: Interest on deposits 1,119 1,013 965 1,360 1,355 855 ------ ------ ------ ------ ------ ------ 6. Earnings excluding interest on deposits $2,957 $3,823 $3,888 $4,219 $5,229 $2,560 ====== ====== ====== ====== ====== ====== Preferred Stock Dividend Requirements: 7. Preferred stock dividend requirements $ 30 $ 23 $ 28 $ 51 $ 51 $ 25 8. Ratio of income from continuing operations before income taxes to income from continuing operations after income taxes 144% 147% 144% 151% 148% 146% ------ ------ ------ ------ ------ ------ 9. Preferred stock dividend requirements on a pretax basis $ 43 $ 34 $ 40 $ 77 $ 75 $ 37 ====== ====== ====== ====== ====== ====== Fixed Charges: 10. Interest Expense $3,083 $3,137 $3,880 $5,105 $5,451 $2,740 11. Estimated interest component of net rental expense 32 31 31 33 32 17 12. Amortization of debt issuance expense - - - - - 2 ------ ------ ------ ------ ------ ------ 13. Total fixed charges including interest on deposits and excluding capitalized interest 3,115 3,168 3,911 5,138 5,483 2,759 14. Add: Capitalized interest - - - - - - ------ ------ ------ ------ ------ ------ 15. Total fixed charges 3,115 3,168 3,911 5,138 5,483 2,759 16. Add: Preferred stock dividend require- ments - pretax (Line 9) 43 34 40 77 75 37 ------ ------ ------ ------ ------ ------ 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 2,796 18. Less: Interest on deposits (Line 5) 1,119 1,013 965 1,360 1,355 855 ------ ------ ------ ------ ------ ------ 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 $1,941 ====== ====== ====== ====== ====== ====== 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 1.22 ====== ====== ====== ====== ====== ====== Excluding interest on deposits (Line 6/Line 19) 1.45 1.75 1.30 1.09 1.24 1.32 ====== ====== ====== ====== ====== ======
EX-23.1 4 CONSENT OF ERNST & YOUNG LLP Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-3 Nos. 33-13278, 33-27498, 33-45699, 33-58340, 33-50395, 33-51615, 33- 65301, 333-08549, 333-15089, 333-15089-01 through 04 and 333-32909, Form S-4 Nos. 333-22733, 333-22733-01 and 333-31061, and Form S-8 Nos. 2-67517, 2-97972, 33-20693, 33-21564, 33-41014, 33-52329, 33-54971, 333-12181, 333-19963, 333- 34371 and 333-31061) and in the related Prospectuses of Bankers Trust New York Corporation (the "Corporation") of our report dated January 23, 1997, except for Note 28, as to which the date is March 6, 1997, with respect to the consolidated financial statements of Bankers Trust New York Corporation and Subsidiaries included in its Annual Report (Form 10-K) for the year ended December 31, 1996, prior to their restatement for the 1997 pooling-of-interests with Alex. Brown Incorporated as described in Note 1 to the supplemental consolidated financial statements. /s/ ERNST & YOUNG LLP New York, New York September 8, 1997 EX-23.2 5 CONSENT OF KPMG PEAT MARWICK LLP Exhibit 23.2 Consent of Independent Auditors ------------------------------- The Board of Directors Bankers Trust New York Corporation: We consent to the incorporation by reference in the Registration Statements (Form S-3 Nos. 33-27498, 33-45699, 33-58340, 33-50395, 33-51615, 33-65301, 333-08549, 333-15089, 333-15089-01 through -04, 333-32909, Form S-4 Nos. 333-22733, 333-22733-01, 333-31061 and Form S-8 Nos. 2-67517, 2-97972, 33-20693, 33-21564, 33-41014, 33-52329, 33-54971, 333-12181, 333-19963, 333-31061 and 333- 34371) of our report dated January 20, 1997, with respect to the consolidated statements of financial condition of Alex. Brown Incorporated and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996, which report appears in the Form 8-K of Bankers Trust New York Corporation. /s/ KPMG Peat Marwick LLP Baltimore, Maryland September 8, 1997 EX-23.3 6 CONSENT OF KPMG PEAT MARWICK LLP Exhibit 23.3 Consent of Independent Auditors ------------------------------- The Board of Directors Bankers Trust New York Corporation: We consent to the incorporation by reference in the Registration Statements (Form S-3 Nos. 33-27498, 33-45699, 33-58340, 33-50395, 33-51615, 33-65301, 333-08549, 333-15089, 333-15089-01 through -04, 333-32909, Form S-4 Nos. 333-22733, 333-22733-01, 333-31061 and Form S-8 Nos. 2-67517, 2-97972, 33-20693, 33-21564, 33-41014, 33-52329, 33-54971, 333-12181, 333-19963, 333-31061, and 333-34371) of our report dated September 5, 1997, with respect to the supplemental consolidated balance sheet of Bankers Trust New York Corporation and Subsidiaries (the "Company") as of December 31, 1996 and 1995, and the related supplemental consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ending December 31, 1996, which appears in the Current Report on Form 8-K dated September 1, 1997 of the Company. /s/ KPMG Peat Marwick LLP New York, New York September 8, 1997 EX-27.1 7 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENT OF CONDITION AT DECEMBER 31, 1996 AND THE SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1568 2210 1684 49129 7290 0 0 15880 773 122778 30315 42863 7076 12038 0 810 104 4964 122778 1046 459 2472 6508 1355 5451 1057 5 75 4038 1131 1131 0 0 766 6.93 6.71 1.12 452 0 37 0 992 89 65 973 161 144 468 Short-term borrowings include the following: Securities sold under repurchase agreements 23454 Other short-term borrowings 19409 Total 42863 Other liabilities include the following: Accounts payable and accrued expenses 4837 Other liabilities 2239 Total 7076 Other interest income includes the following: Interest-bearing deposits with banks 214 Federal funds sold 119 Securities purchased under resale agreements 1314 Securities borrowed 825 Total 2472 The Corporation has allocated its total allowance for credit losses as follows: 773 as a reduction of loans and 200 as other liabilities related to all other credit-related items.
EX-27.2 8 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENT OF CONDITION AT MARCH 31, 1997 AND THE SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 3-MOS DEC-31-1997 MAR-31-1997 1679 2581 1195 47692 7986 0 0 18040 758 125531 35589 42896 7292 12797 0 704 105 4974 125531 302 120 627 1681 396 1349 332 0 14 1106 292 292 0 0 200 1.81 1.76 1.40 332 0 37 0 973 33 18 958 136 143 479 Short-term borrowings include the following: Securities sold under repurchase agreements 22576 Other short-term borrowings 20320 Total 42896 Other liabilities include the following: Accounts payable and accrued expenses 4727 Other liabilities 2565 Total 7292 Other interest income include the following: Interest-bearing deposits with banks 65 Federal funds sold 49 Securities repurchased under resale agreements 330 Securities borrowed 183 Total 627 The Corporation has allocated its total allowance for credit losses as follows: 758 as a reduction of loans and 200 as other liabilities related to all other credit-related items.
EX-27.3 9 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENT OF CONDITION AT JUNE 30, 1997 AND THE SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 6-MOS DEC-31-1997 JUN-30-1997 1756 2334 1305 49201 7478 0 0 19767 767 131563 38430 42500 9674 12877 0 703 105 5158 131563 616 222 1261 3411 855 2740 671 0 82 2329 602 602 0 0 413 3.75 3.64 1.35 305 0 37 0 973 36 19 973 134 208 425 Short-term borrowings include the following: Securities sold under repurchase agreements 22973 Other short-term borrowings 19527 Total 42500 Other liabilities include the following: Accounts payable and accrued expenses 6170 Other liabilities 3504 Total 9674 Other interest income include the following: Interest-bearing deposits with banks 147 Federal funds sold 110 Securities repurchased under resale agreements 645 Securities borrowed 359 Total 1261 The Corporation has allocated its total allowance for credit losses as follows: 767 as a reduction of loans and 206 as other liabilities related to all other credit-related items.
EX-99.1 10 SUPP. FIN. INFO. FOR THE YEARS ENDED DEC. 31, 1996, 1995, 1994 TABLE 1 FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
($ in millions, except per share data) 1996 1995 1994 1993 1992 - ---------------------------------------- --------- --------- -------- -------- -------- FOR THE YEAR Net interest revenue (book basis) $ 1,057 $ 884 $ 1,216 $ 1,346 $ 1,172 Noninterest revenue 4,117 3,129 3,013 3,945 2,751 Income before cumulative effects of accounting changes $ 766 $ 311 $ 686 $ 1,159 $ 698 Cumulative effects of accounting changes - - - (75) 446 - ---------------------------------------- -------- -------- ------- ------- ------- Net income $ 766 $ 311 $ 686 $ 1,084 $ 1,144 ======================================== ======== ======== ======= ======= ======= PER COMMON SHARE Primary Earnings Per Share Income before cumulative effects of accounting changes $ 6.93 $ 2.59 $ 6.51 $ 10.90 $ 6.43 Cumulative effects of accounting changes - - - (.72) 4.30 - ---------------------------------------- -------- -------- ------- ------- ------- Net income $ 6.93 $ 2.59 $ 6.51 $ 10.18 $ 10.73 ======================================== ======== ======== ======= ======= ======= Fully Diluted Earnings Per Share Income before cumulative effects of accounting changes $ 6.71 $ 2.53 $ 6.33 $ 10.60 $ 6.33 Cumulative effects of accounting changes - - - (.70) 4.23 - ---------------------------------------- -------- -------- ------- ------- ------- Net income $ 6.71 $ 2.53 $ 6.33 $ 9.90 $ 10.56 ======================================== ======== ======== ======= ======= ======= Cash dividends declared $ 4.00 $ 4.00 $ 3.70 $ 3.24 $ 2.88 -as a percentage of net income (1) 60% 158% 58% 31% 45% Book value, end of year 49.21 45.73 47.74 45.54 37.94 Market price High 90 7/8 72 84 5/8 83 1/2 70 1/8 Low 61 49 3/4 54 3/4 65 3/4 50 End of year 86 1/4 66 1/2 55 3/8 79 1/8 68 1/2 Price/earnings ratio, end of year (1) 12.4x 25.7x 8.5x 7.3x 10.7x Cash dividend yield, end of year 4.6% 6.0% 7.2% 4.5% 4.6% AT YEAR END Total assets $122,778 $106,199 $98,362 $93,365 $73,971 Long-term debt not included in risk-based capital 8,732 7,127 4,317 3,296 2,335 Long-term debt included in risk-based capital 2,576 2,360 2,225 2,378 1,706 Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital 730 - - - - Preferred stock of subsidiary 250 250 250 250 - Preferred stock (Corporation) 810 865 395 250 500 Common stockholders' equity 5,068 4,608 4,682 4,630 3,895 Total stockholders' equity 5,878 5,473 5,077 4,880 4,395 PROFITABILITY RATIOS Return on average common stockholders' equity (1) 14.6% 5.7% 14.0% 26.5% 19.8% Return on average total stockholders' equity (1) 13.3% 5.9% 13.4% 25.3% 18.0% Return on average total assets (1) .63% .28% .65% 1.34% .92% CAPITAL RATIOS Common stockholders' equity to total assets, end of year 4.1% 4.3% 4.8% 5.0% 5.3% Total stockholders' equity to total assets, end of year 4.8% 5.2% 5.2% 5.2% 6.0% Average total stockholders' equity to average total assets 4.7% 4.7% 4.8% 5.3% 5.1% Bankers Trust New York Corporation: Risk-Based Capital Ratios Tier 1 Capital (2) 9.3% 9.0% 9.5% 8.9% 8.1% Total Capital (2) 13.8% 14.0% 14.8% 14.5% 13.7% Leverage Ratio (2) 5.9% 5.4% 5.5% 6.6% 6.3% Bankers Trust Company: Risk-Based Capital Ratios Tier 1 Capital (2) 9.3% 9.5% 9.9% 9.4% 8.0% Total Capital (2) 12.9% 12.8% 12.9% 13.0% 12.0% Leverage Ratio (2) 5.3% 5.1% 5.9% 6.0% 5.6% EMPLOYEES, AT DECEMBER 31 In domestic offices 11,055 10,137 10,545 10,454 10,057 In foreign offices 6,881 6,365 6,314 5,298 4,844 - ---------------------------------------- -------- -------- ------- ------- ------- Total 17,936 16,502 16,859 15,752 14,901 ======================================== ======== ======== ======= ======= =======
(1) These figures exclude the cumulative effects of accounting changes recorded in 1993 and 1992. (2) Regulatory capital ratios at December 31, 1992 were not restated in connection with the adoption, retroactive to January 1, 1992, of SFAS 109. 1 FINANCIAL REVIEW Management's discussion and analysis of Bankers Trust New York Corporation's results of operations and financial condition appears on pages 2 through 45. The discussion and analysis should be read in conjunction with the supplemental financial statements and supplemental financial data, which begin on page 46. 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 "Exchange Ratio"). The Merger was treated as a tax free exchange. The supplemental 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. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling of interests method in financial statements that do not include the date of consummation. The supplemental consolidated financial statements do not extend through the date of consummation. However, they will become the historical consolidated financial statements of Bankers Trust New York Corporation together with its subsidiaries (the "Corporation" or the "Firm") after financial statements covering the date of consummation of the business combination are issued. The supplemental 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 supplemental consolidated financial statements, including the notes thereto, should be read in conjunction with the historical consolidated financial statements of Alex. Brown and Bankers Trust New York Corporation, included in their Annual Reports on Form 10-K for the fiscal years ended December 31, 1996. RESULTS OF OPERATIONS SUMMARY OF 1996 RESULTS For the year 1996, the Corporation earned $766 million, or $6.93 primary earnings per share. For the year 1995, the Corporation earned $311 million, or $2.59 primary earnings per share. For the year, total net revenues (net interest revenue after provision for credit losses plus noninterest revenue) of $5.169 billion were up $1.187 billion, or 30 percent, from 1995. This increase was broadly based and reflected growth in nearly all of the Firm's businesses. Net revenues reached their second highest level in the Corporation's history, trailing only the record set in 1993. Total noninterest expenses for the year increased $525 million, or 15 percent, from 1995. This increase was primarily due to incentive compensation related to the improved financial performance and higher employee benefits. Credit quality continued to improve during the year. At December 31, 1996, total cash basis loans amounted to $452 million, down from $744 million at December 31, 1995. 2 ORGANIZATIONAL HIGHLIGHTS The Corporation delivers a wide range of financial products and services worldwide principally through eight broad Organizational Units. Five units are organized around specific products and services: Investment Banking, Risk Management Services, Trading & Sales, Investment Management, and Client Processing Services. Three additional units are organized to deliver these same types of financial products and services with the unique local expertise necessary to operate successfully in Australia/New Zealand, Asia and Latin America. 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 restate this analysis to conform with material changes in the allocation process and/or significant changes in organizational structure. The information presented below reflects the results by organizational units. The historical amounts of Alex. Brown have been included in Investment Banking, Investment Management and Corporate Other, (in millions): 3
Total Non- Pretax Net Year Ended Total Net interest Income/ Income/ December 31, 1996 Revenue Expenses (Loss) (Loss) - ---------------------------- --------- ---------- -------- -------- Investment Banking $1,440 $ 807 $ 633 $ 426 Risk Management Services 321 335 (14) (9) Trading & Sales 425 275 150 105 Investment Management 712 611 101 62 Client Processing Services 801 668 133 94 Australia/New Zealand 481 294 187 132 Asia 133 104 29 23 Latin America 526 410 116 82 Corporate/Other 330 534 (204) (149) - ---------------------------- ------ ------ ------ ----- Total $5,169 $4,038 $1,131 $ 766 ============================ ====== ====== ====== ===== Total Non- Pretax Net Year Ended Total Net interest Income/ Income/ December 31, 1995* Revenue Expenses (Loss) (Loss) - ---------------------------- ------ ------ ------ ----- Investment Banking $1,145 $ 559 $ 586 $ 398 Risk Management Services 232 337 (105) (74) Trading & Sales 361 244 117 82 Investment Management 590 557 33 18 Client Processing Services 717 583 134 93 Australia/New Zealand 401 256 145 102 Asia 76 101 (25) (19) Latin America 267 439 (172) (120) Corporate/Other 193 437 (244) (169) - ---------------------------- ------ ------ ------ ----- Total $3,982 $3,513 $ 469 $ 311 ============================ ====== ====== ====== ===== Total Non- Pretax Net Year Ended Total Net interest Income/ Income/ December 31, 1994* Revenue Expenses (Loss) (Loss) - ---------------------------- ------ ------ ------ ----- Investment Banking $ 823 $ 527 $ 296 $ 181 Risk Management Services 631 401 230 163 Trading & Sales 90 238 (148) (95) Investment Management 487 513 (26) (18) Client Processing Services 741 578 163 98 Australia/New Zealand 436 203 233 152 Asia 144 86 58 43 Latin America 537 359 178 109 Corporate/Other 315 312 3 53 - ---------------------------- ------ ------ ------ ----- Total $4,204 $3,217 $ 987 $ 686 ============================ ====== ====== ====== =====
* Prior year information has been restated to conform to the current year presentation. 4 Investment Banking delivers the Firm's full range of financing, advisory and ------------------ research products and services to corporate, financial institution and investor clients. Services include underwriting, distribution and trading of public equity and debt (both investment grade and high-yield); private placements and structured finance; and merger and acquisition advisory services. The unit is also responsible for the Firm's private equity investments. The Corporation's Asset-Based Lending activities are included in Investment Banking. Investment Banking 1996 net income of $426 million, which was up $28 million from a year ago, reflected strong results from corporate finance activities including loan syndication, private placements and underwritings. Investment Banking net income in 1995 benefited from an after-tax gain of $144 million from the sale of a substantial portion of the Corporation's investment in Northwest Airlines Corporation. Risk Management Services assists clients in the management of their financial ------------------------ and economic risk. Products and services include interest rate, currency, equity, commodity and credit derivatives, as well as risk management advisory services. This unit also manages the Corporation's risk associated with client derivative transactions. The 1996 net loss of $9 million compared to a net loss of $74 million in 1995. The 1996 results included losses associated with the steep drop in the price of copper early in the year. Revenues from new client derivative transactions increased during 1996. Trading & Sales provides financial products and services to the Corporation's --------------- clients and enters into securities, currency, commodity, and derivatives transactions on a proprietary basis. The unit is also responsible for the Corporation's worldwide funding as well as its capital and liquidity management. Trading & Sales net income of $105 million increased 28 percent from 1995 net income of $82 million. The increase is attributable to arbitrage and foreign exchange trading activities. Investment Management manages investments for pension funds, corporations and --------------------- other institutional investors worldwide. (The Australian funds management business is reported in the results of Australia/New Zealand.) The Corporation's Private Banking activities, although managed separately, are included in Investment Management for reporting purposes. Investment Management net income of $62 million for 1996 increased $44 million from 1995. As of December 31, 1996, assets under management in this organizational unit were approximately $213 billion compared to $185 billion as of December 31, 1995. Client Processing Services delivers the Corporation's processing, fiduciary -------------------------- and trust services, such as cash management, custody and clearance, and deposit and credit services, to corporations, financial institutions and governments and their agencies around the world. It also provides retirement services, including recordkeeping and administrative services and portfolio measurement, to sponsors of U.S. defined benefit and defined contribution plans. Client Processing Services 1996 net income of $94 million increased slightly from 1995 net income of $93 million. Australia/New Zealand provides funds management, corporate finance, and --------------------- financial markets services to local and international clients, and trades for its own account in related markets. Australia/New Zealand net income was $132 million up from $102 million in 1995. The 1996 results reflect strong investment management and trading results. As of December 31, 1996 assets under management in Australia/New Zealand's investment management business were approximately $26 billion, compared to $22 billion in 1995. Asia provides advisory and corporate finance services to financial ---- institutions, governments and both state-owned and private businesses. In addition, it engages in arbitrage trading and equity investments. Asia net income was $23 million in 1996 compared to a $19 million loss in 1995. The current year reflects strong results from trading activities. 5 Latin America engages in trading and distribution, origination and ------------- underwriting of corporate finance securities, mergers and acquisitions services and private equity investments. In addition, this organizational unit, through the Corporation's Chilean insurance subsidiary, underwrites pension-related life and disability insurance and sells pension-related life annuities. Latin America net income was $82 million compared to a net loss of $120 million in 1995. The 1996 results included a $31 million pre-tax gain on the sale of Compensa, which was the smaller of the Corporation's two Chilean insurance subsidiaries. Consorcio, the remaining subsidiary, is the largest life insurance company in Chile. The 1995 results included losses from derivative trading activities. Corporate/Other includes the unallocated costs of corporate staff together with the notional interest income on the Corporation's capital accounts. In addition, the provision for credit losses and various special charges and reserves are reflected within Corporate/Other. Corporate/Other net loss for 1996 was $149 million compared with a 1995 net loss of $169 million. The most notable items in 1996 were $20 million pre-tax reserves related to prior period items in the transaction processing business in addition to exceptional legal and professional fees related to the completion of the Independent Counsel's report and the settlement of old leveraged derivatives disputes. The 1996 results also included a gain on the sale of Golden American Life Insurance Company, an indirect wholly-owned subsidiary of the Corporation acquired in satisfaction of debt in 1992. 6 FINANCIAL REPORTING MATTERS Effective January 1, 1996, the Corporation adopted the pro forma net income and earnings per share disclosure requirements set forth in Statement of Financial Accounting Standards ("SFAS") 123, "Accounting for Stock-Based Compensation." As permitted by SFAS 123, the Corporation will continue to account for stock- based employee compensation plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." On January 1, 1995, the Corporation adopted SFAS 114, "Accounting by Creditors for Impairment of a Loan" as amended by SFAS 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures." SFAS 114 requires the creation of a valuation allowance for impaired loans based on one of the following: the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Under SFAS 114, a loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the loan's contractual terms. At December 31, 1995, adoption of this standard resulted in a $90 million allocation of the existing allowance for credit losses to a specific valuation allowance for impaired loans. As used throughout this Annual Report, the term "International" signifies information based on the domicile of the customer, whereas the term "Foreign Office" refers to the location in which the transaction is recorded. 7 STATEMENT OF INCOME ANALYSIS NET INTEREST REVENUE Net interest revenue for 1996 was $1.057 billion, up $173 million, or 20 percent, from 1995. Net interest revenue of $884 million in 1995 decreased by $332 million, or 27 percent, from the amount earned in 1994. 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, which is discussed in the trading revenue section below. The Firm's nontrading-related net interest revenue, historically a more stable component of overall net interest revenue than trading-related net interest revenue, was $818 million in 1996, compared to $792 million in 1995. For the 1995 versus 1994 comparison, net interest revenue decreased by $332 million due to a $371 million, or 80 percent, decrease in trading-related net interest revenue, which totaled $92 million for 1995. Total nontrading-related net interest revenue was $792 million for 1995 compared to $753 million in 1994. In 1996, the interest rate spread was .74 percent compared to .79 percent in 1995. Net interest margin increased slightly to 1.12 percent from 1.11 percent. The yield on interest-earning assets declined by 38 basis points and was mostly offset by a decline in the cost of interest-bearing liabilities of 33 basis points. In 1995, the interest rate spread declined to .79 percent from 1.46 percent in 1994. Net interest margin decreased to 1.11 percent from 1.68 percent. The cost of interest-bearing liabilities increased at a greater rate than did the yield on interest-earning assets. 8 TABLE 2 NET INTEREST REVENUE ANALYSIS The table below presents the Corporation's trend of net interest revenue, average balances and rates. For further details on these statistics, see pages 129 through 131.
($ in millions) Year Ended December 31, 1996 1995 1994 - ------------------------------------------------------ -------- -------- -------- Net interest revenue Book basis $ 1,057 $ 884 $ 1,216 Tax equivalent adjustment* 16 41 83 - ------------------------------------------------------ ------- ------- ------- Fully taxable basis $ 1,073 $ 925 $ 1,299 ====================================================== ======= ======= ======= Average balances Interest-earning assets $95,441 $83,534 $77,425 Interest-bearing liabilities 89,296 79,405 74,248 - ------------------------------------------------------ ------- ------- ------- Earning assets financed by noninterest-bearing funds $ 6,145 $ 4,129 $ 3,177 ====================================================== ======= ======= ======= Average rates (fully taxable basis) Yield on interest-earning assets 6.84% 7.22% 6.69% Cost of interest-bearing liabilities 6.10 6.43 5.23 - ------------------------------------------------------ ------- ------- ------- Interest rate spread .74 .79 1.46 Contribution of noninterest-bearing funds .38 .32 .22 - ------------------------------------------------------ ------- ------- ------- Net interest margin 1.12% 1.11% 1.68% ====================================================== ======= ======= =======
* The applicable combined federal, state and local incremental tax rate used to determine the amounts of the tax equivalent adjustments (which recognize the income tax savings on tax-exempt assets) was 42 percent for 1996, 1995 and 1994. PROVISION FOR CREDIT LOSSES The provision for credit losses amounted to $5 million for 1996, compared with $31 million for 1995 and $25 million in 1994. A discussion of the Corporation's summary of credit loss experience, including charge-off procedures and the adequacy of the allowance for credit losses, appears on page 33. 9 TRADING REVENUE The Corporation conducts its global trading of debt and equity securities, money market instruments, derivative products and foreign exchange as an integrated business because of the dynamic interplay among worldwide interest rates, exchange rates and equity and commodity indices. Trading revenue is generated by both client-related activities and proprietary activities. These activities encompass the Firm's dealer business of providing risk management products for clients, including derivatives such as swaps, options, forwards and other similar types of contracts. In addition, these activities include the trading of U.S. government and agency securities, foreign sovereign securities, foreign exchange and currency options and commodity futures and options. The Firm also trades restructured loans, bonds, equities and other instruments of Latin American and other emerging markets issuers. Trading-related net interest revenue represents interest earned on cash instruments held in the trading accounts less the cost to fund both cash and derivatives positions. For the year 1996, trading revenue was $1.014 billion, up $533 million, or 111 percent, from the $481 million reported in 1995. The trading revenue in 1995 was down $105 million from the results reported in 1994. Trading-related net interest revenue increased to $239 million in 1996, up $147 million, or 160 percent, from the $92 million reported in 1995. The trading-related net interest revenue in 1995 was down $371 million from 1994 results. The table below presents the Firm'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 - ------------------------------ -------- --------- ------- Year Ended December 31, 1996 Interest rate risk $ 474 $275 $ 749 Foreign exchange risk 178 - 178 Equity and commodity risk 362 (36) 326 - ------------------------------ ------ ---- ------ Total $1,014 $239 $1,253 ============================== ====== ==== ====== Year Ended December 31, 1995 Interest rate risk $ 120 $157 $ 277 Foreign exchange risk 36 - 36 Equity and commodity risk 325 (65) 260 - ------------------------------ ------ ---- ------ Total $ 481 $ 92 $ 573 ============================== ====== ==== ====== Year Ended December 31, 1994 Interest rate risk $ 325 $497 $ 822 Foreign exchange risk (54) - (54) Equity and commodity risk 315 (34) 281 - ------------------------------ ------ ---- ------ Total $ 586 $463 $1,049 ============================== ====== ==== ======
Interest Rate Risk As indicated above, a significant portion of the Firm's trading and risk management activities involve positions in interest rate instruments and related derivatives. The revenue from these activities can periodically shift between trading and trading-related net interest revenue, depending on a variety of factors, including risk management 10 activities. During 1996 the increase in trading and trading-related net interest revenue in this category was primarily due to a rebound in the Firm's activities in Latin America. This rebound was attributed to reduced risk positions in Latin America during 1996 and a return to normal volatility levels in the region. Conversely, 1995 was a year marked, especially in the early months, by heightened volatility in Latin American interest rates coupled with liquidity problems resulting from the Mexican peso devaluation. Also affecting this category in 1996 was an increase in the volume of London, New York, and Tokyo interest rate products, and increased revenue from U.S. bonds attributable to increased capital inflows to the market. As a result, total trading revenue and trading-related net interest revenue associated with interest rate positions increased by 170 percent to $749 million in 1996. During 1995 total trading revenue and trading-related net interest revenue associated with interest rate positions declined by 66 percent to $277 million from $822 million in 1994. This decrease was affected by the heightened volatility in interest rates and associated liquidity problems in the emerging markets of Latin America in 1995 discussed above. Foreign Exchange Risk The Firm's trading and risk management strategies also involve positions in foreign exchange and currency related derivatives such as swaps, options, forwards and other similar types of contracts. Improved performance in the Australian, Asian, and Latin American foreign exchange markets was the primary reason for the $142 million increase in foreign exchange trading revenue compared to 1995. Trading revenue related to foreign exchange risk resulted in a gain of $36 million in 1995, compared with a loss of $54 million in 1994. The general decline in global interest rates favorably impacted positions as trading revenue in this category increased $90 million compared to 1994, due principally to a rebound in the Firm's proprietary trading business. Equity and Commodity Risk The Firm's trading and risk management activities also include positions in equity securities and commodities and related derivatives. Total trading and trading-related net interest revenue related to equity and commodity risk increased $66 million compared to 1995. This increase primarily related to strong results from equity arbitrage trading activities and increases from OTC trading partially offset by losses incurred in the commodity derivatives books when copper prices dropped sharply in 1996. Total trading and trading-related net interest revenue related to equity and commodity risk decreased $21 million in 1995 compared to 1994. This decrease included a decline in equity-related derivative products which was reflective of the lower average margin on derivative products as a whole. This decrease was partially offset by increases from OTC trading. The volatility in the Latin American markets that occurred in 1995 had a ripple effect on equity prices which was also a factor in the overall performance in this category. 11 NONINTEREST REVENUE (EXCLUDING TRADING) The following table presents noninterest revenue (in millions):
Year Ended December 31, 1996 1995 1994 - ------------------------------------------------- ------ ------ ------ Fiduciary and funds management $ 861 $ 752 $ 783 Corporate finance fees 922 691 628 Other fees and commissions 549 491 468 Net revenue from equity investment transactions 230 153 128 Securities available for sale gains 75 180 72 Insurance premiums 230 234 183 Other 236 147 165 - ------------------------------------------------- ------ ------ ------ Total $3,103 $2,648 $2,427 ================================================= ====== ====== ======
Fiduciary and funds management revenue was up $109 million, or 14 percent, from 1995, which was down $31 million from 1994. All major activities within this category contributed to the revenue growth in 1996 which resulted from higher transaction volumes, as well as a higher level of assets under management. The decrease in 1995 compared to 1994 was primarily due to a decline in transaction volumes in global fiduciary services, as well as a decline in brokerage fee income at the Corporation's Australian subsidiary as a result of lower fund growth as compared to 1994. Partially offsetting these factors was an increase in custodian fees due to a higher level of global custody assets under management. Corporate finance fees were up $231 million, or 33 percent from 1995, which were up $63 million from 1994. The increase in 1996 was primarily due to a higher volume of securities underwriting, financial advisory and private placement activities. The increase in 1995 compared to 1994 was primarily due to an increase in revenues from underwriting-related activities. Net revenue from equity investment transactions was up $77 million, or 50 percent, from 1995, which was up $25 million from 1994. The increase in 1996 was primarily due to gains realized in the Private Equity Investment unit of Investment Banking. The 1995 results included a $62 million gain on the sale of a portion of the Corporation's merchant banking investment in Northwest Airlines Corporation. Securities available for sale gains were down $105 million, or 58 percent, from 1995, which were up $108 million from 1994. The 1995 results included a $145 million gain on the sale of most of the Corporation's merchant banking investment in Northwest Airlines Corporation. Insurance premiums decreased $4 million, or 2 percent, from 1995. This decrease was mainly due to the sale of Compensa, which was the smaller of the Corporation's two Chilean insurance subsidiaries, in the second quarter of 1996, partially offset by increased annuity and traditional life insurance activity at Consorcio. Insurance premiums in 1995 were $51 million higher than 1994. Higher insurance premium revenue was realized from the Corporation's Chilean subsidiaries primarily as a result of an increase in their annuity business. Other noninterest revenue increased $89 million, or 61 percent, from 1995. Other noninterest revenue in 1995 was $18 million lower than 1994. The increase in 1996 was primarily due to a $31 million gain on the sale of Compensa, as well as a gain on the sale of Golden American Life Insurance Company, an indirect wholly-owned subsidiary of the Corporation acquired in satisfaction of debt in 1992. 12 NONINTEREST EXPENSES The following table presents noninterest expenses (in millions):
Year Ended December 31, 1996 1995 1994 - ---------------------------------------------- ------ ------ ------ Salaries and commissions $1,155 $1,045 $ 970 Incentive compensation and employee benefits 1,215 832 856 Agency and other professional service fees 322 327 276 Communication and data services 233 220 207 Occupancy, net 172 177 166 Furniture and equipment 187 177 175 Travel and entertainment 116 104 123 Provision for policyholder benefits 280 271 205 Other 358 310 239 Provision for severance-related costs - 50 - - ---------------------------------------------- ------ ------ ------ Total $4,038 $3,513 $3,217 ============================================== ====== ====== ======
Total noninterest expenses increased $525 million, or 15 percent, from 1995. Salaries and commissions expense increased $110 million, or 11 percent, in 1996. Incentive compensation and employee benefits expense increased $383 million, or 46 percent, reflecting an increase in incentive compensation awards in response to increasingly competitive market conditions and improved financial performance. The number of full time staff at December 31, 1996 was 17,936 compared to 16,502 at December 31, 1995. All other noninterest expenses totaled $1.668 billion for 1996, compared with $1.586 billion for 1995 which excluded the provision for severance-related costs of $50 million. Included in the 1996 amount were reserves, as previously discussed, for potential charges established after a review of accounting operations since 1989 in the Corporation's transaction processing business. Total noninterest expenses increased $296 million in 1995 from 1994. Excluding the provision for severance-related costs, noninterest expenses were $3.463 billion, an increase of $246 million, or 8 percent, from 1994. Salaries and commissions expense increased $75 million, or 8 percent, in 1995. Incentive compensation and employee benefits expense decreased $24 million, or 3 percent, due to lower bonus expense reflecting the reduced earnings. All other noninterest expenses, excluding the provision for severance-related costs, totaled $1.586 billion for 1995, which was $195 million, or 14 percent, higher than in 1994. This increase was primarily due to an increase in the provision for policyholder benefits as well as an increase in professional fees, which included exceptional legal costs related to leveraged derivative transactions. The Corporation is engaged in a global effort to manage potential system failure and risk from the "Year 2000" problem. A Year 2000 program has been set up to manage, track and report on the Firm's worldwide effort with the goal of ensuring uninterrupted service across the full range of products and services offered by the Firm. INCOME TAXES Income tax expense for 1996 amounted to $365 million, compared with $158 million for 1995 and $301 million in 1994. The effective tax rate for 1996 was 32 percent, while the 1995 and 1994 effective tax rate was 34 percent and 30 percent, respectively. 13 INTERNATIONAL OPERATIONS International operations have made a significant contribution to consolidated results, consistent with the emphasis the Corporation has placed on foreign markets. The Corporation's assets and results of operations for 1996, 1995 and 1994 have been allocated between domestic and international operations in Note 22 of Notes to Supplemental Financial Statements. This analysis, which is based on the domicile of the customer, incorporates numerous subjective assumptions. Management views the operation of the Corporation on an organizational unit basis, as disclosed on page 3. International net income totaled $297 million for 1996, compared with $106 million for 1995. This represented a contribution of 39 percent and 34 percent to the Corporation's overall net income in 1996 and 1995, respectively. The 1995 balances have been restated to reflect the change in methodology used to allocate corporate overhead and operating expenses. Australia/New Zealand and the United Kingdom had the greatest change in net income. Australia/New Zealand's net income (after corporate expense allocations) increased from $101 million to $144 million due to increases in foreign exchange trading, fiduciary and funds management revenue, and other fees and commissions. The United Kingdom net income was nil (after corporate expense allocations) compared to the prior year's net loss of $144 million. This improvement was driven primarily by positive trading revenues. These increases in international results were partially offset by a reduction in net income for Europe which decreased from $37 million to $18 million. Domestic net income increased by $264 million to $469 million due to increased trading revenue, and other fees and commission income. International total assets were $62.5 billion at December 31, 1996 compared to $51.5 billion at December 31, 1995 which represented 51 percent and 48 percent of total consolidated assets, respectively. The $11 billion increase in assets was primarily due to increases of $2.8 billion for Australia/New Zealand operations, $4.4 billion for the Western Hemisphere, and $6.4 billion for Europe. These increases were offset by a decline of $3.4 billion in the United Kingdom. Australia/New Zealand operations' assets rose due to increases in loans, securities available for sale and trading assets. Assets for Europe and the Western Hemisphere rose as trading assets increased. United Kingdom operations' assets decreased due to a decline in trading assets at year end. Domestic total assets increased $5.6 billion to $60.3 billion driven by increases in trading assets. International net income totaled $106 million for 1995 as restated, compared with $368 million for 1994. International operations contributed 34 percent and 54 percent of the Corporation's net income in 1995 and 1994, respectively. The decrease in 1995 international net income, as compared to 1994, was primarily due to a decline in the Corporation's overall results. The decrease in international operations' income in proportion to domestic income (34 percent in 1995 as compared to 54 percent in 1994) is primarily due to losses incurred in the United Kingdom and a decrease in net income for Australia/New Zealand. The United Kingdom had a net loss (after corporate expense allocations) of $144 million, a decrease of $249 million, which was primarily caused by trading losses. The decrease in net income for Australia/New Zealand (to $101 million from $151 million) was primarily due to foreign exchange trading losses and an overall increase in other expenses. 14 Domestic net income decreased by $113 million, to $205 million in 1995 due to a decline in interest earned caused by a reduction in interest-bearing trading assets, decreases in fees and commissions and increases in interest expense and other noninterest expense. International total assets were $51.5 billion at December 31, 1995, compared with $36.1 billion at December 31, 1994 and represented 48 percent and 37 percent of total consolidated assets, respectively. The $15.4 billion increase was primarily due to an increase in United Kingdom assets of $3.2 billion, an increase in Western Hemisphere assets of $1.5 billion and a decrease in intersegment activity of $10 billion. Assets for both regions rose due to increases in trading assets. Domestic total assets decreased $7.5 billion to $54.7 billion primarily due to reductions in federal funds sold, domestic trading assets and intersegment balances. These decreases were partially offset by an increase in securities purchased under resale agreements. 15 CHANGES IN FINANCIAL CONDITION BALANCE SHEET ANALYSIS Table 3 below highlights the trends in the balance sheet over the past two years. Because annual averages may tend to conceal trends and year-end balances can be distorted by one-day fluctuations, fourth quarter averages for each year are provided to give a better indication of trends in the balance sheet. TABLE 3 CONDENSED BALANCE SHEETS--FOURTH QUARTER AVERAGES
(in millions) 1996 1995 1994 - -------------------------------------------------- --------- --------- -------- ASSETS Interest-earning Interest-bearing deposits with banks $ 3,545 $ 3,624 $ 2,139 Federal funds sold 2,011 2,387 1,497 Securities purchased under resale agreements 22,405 15,184 11,287 Securities borrowed 15,865 14,174 9,746 Trading assets 31,617 32,042 33,219 Securities available for sale Taxable 6,777 5,206 5,240 Exempt from federal income taxes 1,077 1,365 2,238 - -------------------------------------------------- -------- -------- -------- Total securities available for sale 7,854 6,571 7,478 Loans Domestic offices 8,226 7,247 6,783 Foreign offices 7,032 5,624 5,798 - -------------------------------------------------- -------- -------- -------- Total loans 15,258 12,871 12,581 - -------------------------------------------------- -------- -------- -------- Customer receivables 1,683 1,284 824 Total interest-earning assets 100,238 88,137 78,771 Noninterest-earning Cash and due from banks 1,400 2,008 1,855 Noninterest-earning trading assets 17,727 17,872 19,792 All other assets 8,519 9,870 8,239 Allowance for credit losses (988) (1,028) (1,327) - -------------------------------------------------- -------- -------- -------- Total $126,896 $116,859 $107,330 ================================================== ======== ======== ======== LIABILITIES Interest-bearing Interest-bearing deposits Domestic offices $ 8,738 $ 5,788 $ 5,584 Foreign offices 18,812 18,404 15,611 - -------------------------------------------------- -------- -------- -------- Total interest-bearing deposits 27,550 24,192 21,195 Trading liabilities 9,748 12,636 8,881 Securities loaned and securities sold under repurchase agreements 26,214 23,100 21,046 Other short-term borrowings 18,982 16,037 18,423 Long-term debt 11,372 9,098 6,397 Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures 165 - - - -------------------------------------------------- -------- -------- -------- Total interest-bearing liabilities 94,031 85,063 75,942 Noninterest-bearing Noninterest-bearing deposits 3,518 3,606 3,728 Noninterest-bearing trading liabilities 15,725 15,392 15,539 All other liabilities 7,423 7,045 6,736 - -------------------------------------------------- -------- -------- -------- Total Liabilities 120,697 111,106 101,945 PREFERRED STOCK OF SUBSIDIARY 250 250 250 STOCKHOLDERS' EQUITY - -------------------------------------------------- -------- -------- -------- Preferred stock 815 865 395 Common stockholders' equity 5,134 4,638 4,740 - -------------------------------------------------- -------- -------- -------- Total Stockholders' Equity 5,949 5,503 5,135 - -------------------------------------------------- -------- -------- -------- Total $126,896 $116,859 $107,330 ================================================== ======== ======== ========
16 LIQUIDITY AND CAPITAL RESOURCES Management believes that the Corporation has sufficient resources to meet the needs of its business operations for liquidity and capital resources. 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. The Corporation has a strong global funding presence and maintains a centralized funding unit while retaining a funding presence in local markets. A consolidated funding function provides for central coordination and control of pricing and global information and strategy, while the proximity to local markets allows for greater customer diversity and the flexibility to respond quickly to market opportunities. In addition, the Corporation assesses its liquidity profile, such as asset marketability, asset-to-liability repayment/maturity characteristics and funding diversification, under various stress scenarios. Management believes that the Corporation has the ability to withstand severe and prolonged liquidity shocks, both systemic and institution-specific. 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 $97.5 billion as of December 31, 1996, and $84.1 billion as of December 31, 1995, which equaled 79 percent and 78 percent, respectively, of gross total assets. The Corporation continues to focus on extending and diversifying its funding base by geography, investor segment, legal vehicle issuer, and type of instrument. This is done by strengthening secured funding capabilities and issuing a substantial amount of long-term debt and preferred stock in various markets. The Corporation places particular emphasis on a large and diverse base of stable customer deposits, which are generated incidentally from other transactions or services provided in its Client Processing Services business. Also, the Corporation has a relatively high proportion of active unsecured funding which is provided by capital and long-term debt. One of the Corporation's principal sources of day-to-day funding is provided by securities loaned and securities sold under repurchase agreements, generally involving U.S. government and agency securities and other OECD sovereign bonds. Short-term financing is also available to the Corporation under various commercial paper programs. The Corporation maintains its own sales force, which enables the Corporation to develop and maintain ongoing relationships with a diverse group of investors. The Corporation 17 has $450 million of unused committed lines of credit under revolving credit agreements (the "Credit Facilities") with various banks. The Credit Facilities expire between March 1997 and March 1999. The Credit Facilities and certain term loans contain various restrictive financial covenants. There were no outstanding borrowings under the Credit Facilities at December 31, 1996. The Corporation was in compliance with all restrictive covenants contained in the Credit Facilities and applicable term loans at December 31, 1996. The Corporation's short-term borrowings and its deposits are provided by a broadly diversified investor/depositor base in various markets throughout the world. The Corporation's consolidated long-term debt and mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital ("trust preferred capital securities"), at December 31, 1996 totaled $12.0 billion, substantially all of which was unsecured, and consisted of $7.7 billion in senior borrowings, $3.6 billion of subordinated debt, and $730 million of trust preferred capital securities issued principally by the Parent Company and Bankers Trust Company ("BTCo"), the Corporation's principal banking subsidiary. These liabilities mature between 1997 and 2033, as detailed in Notes 9 and 10 of Notes to Supplemental Financial Statements. The following information should be read in conjunction with the consolidated statement of cash flows, which appears on page 50. For the year ended 1996, cash and due from banks decreased $831 million as the net cash used in investing activities and operating activities exceeded the net cash provided by financing activities. Within investing activities, cash outflows from purchases of securities available for sale ($5.9 billion), securities borrowed ($5.7 billion), securities purchased under resale agreements ($4.8 billion), and loans ($2.9 billion), were partially offset by cash inflows from sales, maturities and other redemptions of securities available for sale ($4.8 billion). The $3.8 billion of net cash used in operating activities was primarily the result of net changes in trading assets ($2.7 billion) and trading liabilities ($2.4 billion) partially offset by net changes in receivables and payables from securities transactions ($1.2 billion). Within financing activities, cash inflows from securities loaned and securities sold under repurchase agreements ($8.3 billion), deposits ($4.7 billion), issuances of long-term debt and trust preferred capital securities ($4.3 billion) and other short-term borrowings ($3.4 billion) were partially offset by cash outflows from repayments of long-term debt ($1.3 billion). For the year ended 1995, cash and due from banks increased $390 million as the net cash provided by operating activities and financing activities exceeded the net cash used in investing activities. The $3.5 billion of net cash provided by operating activities primarily resulted from $5.9 billion of net cash provided by a net change in trading liabilities offset in part by $1.4 billion and $1.0 billion of net cash used by net changes in trading assets and receivables and payables from securities transactions, respectively. Within investing activities, cash outflows from securities purchased under resale agreements ($6.4 billion), purchases of securities available for sale ($4.2 billion) and securities borrowed ($1.8 billion), were offset in part by cash inflows from sales, maturities and other redemptions of securities available for sale ($5.7 billion), federal funds sold ($1.7 billion) and interest-bearing deposits with banks ($1.2 billion). Within financing activities, cash inflows from the issuances of long-term debt ($4.8 billion) were partially offset by cash outflows from other short-term borrowings ($2.2 billion) and repayments of long- term debt ($1.6 billion). 18 CAPITAL RESOURCES The Corporation pursues capital management with the objective of enhancing its ability to execute its global strategic business plans while retaining financial flexibility. Management believes that a strong capital base is critical to achieving these objectives. Combined consolidated total stockholders' equity and preferred stock of subsidiary totaled $6.128 billion on December 31, 1996, up $405 million, or 7 percent, from year end 1995, which was up $396 million, or 7 percent, from year end 1994. The increase in 1996 was primarily due to net income, exercise of employee stock options, and shares issued in connection with an acquisition, partially offset by dividends declared and the repurchase of stock. The increase in 1995 was primarily due to the issuance of preferred stock and net income, partially offset by dividends declared. In December 1996, the Corporation, through newly established subsidiary trusts, issued $750 million of trust preferred capital securities, a type of security that is reported within the Corporation's liabilities, but qualifies as regulatory capital (refer to Note 10 of Notes to the Supplemental Financial Statements for further discussion of these securities). The Corporation's issuance of trust preferred capital securities was an important factor in the 19 percent increase in the Corporation's Tier 1 Capital and the 13 percent increase in Total Capital during 1996. The Corporation's primary measure of capital strength is the RAROC framework (see page 27 for further discussion), which quantifies and assigns capital to business activities based upon their credit, interest rate, foreign currency, equity, commodity, liquidity and operating risks. Changes in the Corporation's global balance sheet are monitored centrally on a regular basis. In addition, the Corporation actively monitors compliance with bank regulatory capital requirements, focusing primarily on the risk-based capital guidelines. The Corporation manages its capital base and on- and off-balance sheet items to ensure that it remains strongly capitalized. The Federal Reserve Board's 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 by assigning assets and off-balance sheet items to broad risk categories, as well as minimum risk-based capital ratios to be maintained by banking organizations. A banking organization's risk-based capital ratios are calculated by dividing its qualifying capital by its risk-weighted assets. The Federal Reserve Board also has a minimum Leverage Ratio which is used as a supplement to the risk-based capital ratios in evaluating the capital adequacy of banks and bank holding companies. The Leverage Ratio is calculated by dividing Tier 1 Capital by adjusted quarterly average assets. The following discussion of the risk-based capital and leverage ratios should be read in conjunction with Note 16 of the Notes to Supplemental Financial Statements, which details the components of Tier 1 Capital and Tier 2 Capital, as well as the regulatory guidelines for well-capitalized banks and bank holding companies. The Corporation's and BTCo's regulatory capital ratios are presented in Table 4. The Corporation's risk-weighted assets are presented in Table 5. During 1996, the Corporation's Tier 1 Capital ratio and Leverage ratio increased by 30 and 50 basis points, respectively, due primarily to the issuance of $750 million of trust preferred capital securities. The Corporation's Total Capital ratio decreased by 20 basis points due primarily to an increase in risk- weighted assets. Refer to Table 5, which details the Corporation's risk- weighted assets. 19 During 1996, BTCo's Total Capital ratio increased by 10 basis points, due primarily to the issuance of $250 million of trust preferred capital securities (included in the $750 million above) which qualifies as Tier 2 Capital for BTCo. The Leverage ratio increased by 20 basis points, due to a slight increase in Tier 1 Capital. However, the increase in Tier 1 Capital was offset by higher risk-weighted assets, resulting in a 20 basis points decrease to the Tier 1 Capital ratio. Table 4 presents the regulatory capital ratios of the Corporation and BTCo at December 31, 1996 and 1995 and the well capitalized guidelines. TABLE 4 REGULATORY CAPITAL RATIOS
Well December 31, December 31, Capitalized 1996 1995 Guidelines ------------- ------------- ------------ CORPORATION Risk-Based Ratios Tier 1 Capital 9.3% 9.0% 6.0% Total Capital 13.8% 14.0% 10.0% Leverage Ratio 5.9% 5.4% 3.0-4.0% BTCo Risk-Based Ratios Tier 1 Capital 9.3% 9.5% 6.0% Total Capital 12.9% 12.8% 10.0% Leverage Ratio 5.3% 5.1% 5.0%
The following were the essential components (in millions) used in calculating the Corporation's and BTCo's risk-based capital ratios:
December 31, 1996 1995 - ---------------------------- ------- ------- CORPORATION Tier 1 Capital $ 5,690 $ 4,789 Tier 2 Capital 2,734 2,654 - ---------------------------- ------- ------- Total Capital $ 8,424 $ 7,443 ============================ ======= ======= Total risk-weighted assets $61,213 $53,266 ============================ ======= ======= BTCo Tier 1 Capital $ 4,869 $ 4,394 Tier 2 Capital 1,900 1,532 - ---------------------------- ------- ------- Total Capital $ 6,769 $ 5,926 ============================ ======= ======= Total risk-weighted assets $52,484 $46,389 ============================ ======= =======
20 TABLE 5 RISK-WEIGHTED ASSETS--CORPORATION (in billions)
December 31, 1996 1995 - ---------------------------------------------- ------------------- ------------------------ Balance Balance sheet/ Risk- sheet/ Risk- notional weighted notional weighted amount amounts amount(2) amounts(2) --------- -------- ----------- ----------- ASSETS Cash and due from banks and interest-bearing deposits with banks $ 3.8 $ .8 $ 4.4 $ .7 Federal funds sold and securities purchased under resale agreements 19.7 1.3 14.1 .8 Securities borrowed 17.0 10.3 11.3 4.5 Trading assets 49.1 18.2 48.0 16.0 Securities available for sale 7.9 4.0 6.3 4.6 Loans 15.9 12.4 12.7 11.0 Allowance for credit losses (.8) - (1.0) - All other assets 10.2 8.2 10.4 6.5 - ---------------------------------------------- -------- ----- -------- ----- Total assets 122.8 55.2 106.2 44.1 Less: applicable assets of BT Alex. Brown Incorporated (1) 24.8 10.4 20.7 6.2 - ---------------------------------------------- -------- ----- -------- ----- ASSETS $ 98.0 $44.8 $ 85.5 $37.9 ============================================== ======== ===== ======== ===== OFF-BALANCE SHEET EXPOSURES Derivatives $1,803.4 $ 6.1 $1,746.3 $ 7.4 Credit-related arrangements 16.7 8.3 13.9 7.0 Securities lending indemnifications 37.8 1.9 28.8 .9 When-issued securities and other 4.0 .3 10.2 .3 - ---------------------------------------------- -------- ----- -------- ----- Total off-balance sheet exposures 1,861.9 16.6 1,799.2 15.6 Less: applicable off-balance sheet exposures of BT Alex. Brown Incorporated (1) 3.9 - 2.2 - - ---------------------------------------------- -------- ----- -------- ----- OFF-BALANCE SHEET EXPOSURES $1,858.0 $16.6 $1,797.0 15.6 ============================================== ======== ===== ======== ===== Less: allowance for credit losses limitation adjustment .2 .3 - ---------------------------------------------- ----- ----- TOTAL RISK-WEIGHTED ASSETS $61.2 $53.2 ============================================== ===== =====
(1) As well as certain foreign insurance subsidiaries. (2) Certain amounts have been restated to conform with the current presentation. 21 Future Developments: The Measure of Market Risk in the Trading Accounts as Defined by the BIS In 1996 the Federal Reserve Board and the other U.S. federal bank regulatory agencies jointly issued a final rule that amends the current risk-based capital guidelines to incorporate a measure for market risk ("the market risk amendment"). The market risk amendment is consistent with the amendment to the Basle Capital Accord adopted by the Basle Committee on Banking Supervision at the Bank for International Settlements ("the BIS"), which is described below. Essentially, the market risk amendment will change in future years the calculation of risk-weighted assets in the trading accounts, as well as include the positions and capital of all non-bank subsidiaries in the combined credit risk and market risk capital calculation of the Corporation. In all other respects, the current capital adequacy guidelines will remain in effect. The Corporation will be subject to this amendment. Compliance is mandatory by January 1, 1998 for those banks that meet certain threshold tests. Banks may choose to adopt early during 1997, with prior approval from their primary federal regulator. The market risk amendment allows banks to measure general market risk using a bank's internal risk model. Capital charges for market risk are calculated based upon the level of general market risk and specific risk. General market risk refers to changes in value due to variations in market conditions (i.e., levels of rates, prices, etc.). Specific risk refers to the risk of variations in value due to changes in factors associated with a particular security (for example, the credit rating of a corporate debenture). Under the provisions of the final rule implementing the amendment in the U.S., models and processes used to manage market risk must meet a number of quantitative and qualitative standards. The following is a summary of these standards: Quantitative Standards o the general market risk capital must be based on a Value at Risk approach and computed daily; o the Value at Risk must be calibrated to a ten-day holding period and a 99 percent confidence level (i.e., if the Corporation maintained an absolutely static portfolio for ten business days, there would be a 1 percent chance that the portfolio would decline in value by more than the Value at Risk); o the risk model must capture the non-linear price characteristics of option positions; o the historical observation period for estimating risk factors must be at least one year; o for interest rates, there must be a set of risk factors corresponding to each currency in which the bank has interest rate sensitive on- or off-balance sheet positions; o for interest rates, the risk measurement system must incorporate separate risk factors to capture spread risk between government and other fixed-income securities; o for exchange rates, the risk measurement system should incorporate risk factors corresponding to the individual foreign currencies in which the bank's positions are denominated; o for equity prices, there should be risk factors corresponding to each of the equity markets in which the bank holds significant positions; o for commodity prices, there should be risk factors corresponding to each of the commodity markets in which the bank holds significant positions. 22 Qualitative Standards o the bank should have an independent risk control unit that reports directly to senior management; o the unit should conduct regular backtesting; o the bank's risk measurement model should be integrated into the day-to-day risk management process of the bank; o the risk measurement model should be complemented by a routine and rigorous program of stress testing. The Corporation believes that the risk management process and the risk model employed to produce its Daily Price Volatility and RAROC meet the standards established by the BIS and the Federal Reserve Board. After making certain interpretations in order to apply the new rule to the Corporation's positions at December 31, 1996, it is estimated that the Tier 1 Capital and the Total Capital ratios would have been somewhat higher on a fully consolidated basis under the new guidelines. 23 RISK MANAGEMENT Risk management is a core competency from which the Corporation derives many of its competitive advantages. The ability to measure and manage risk is a prime concern in all of the Corporation's business decisions, and sensitivity to risk management innovations and issues is an integral part of its culture. Four overarching principles guide the Corporation's management of risk: o a firm-wide commitment to effective risk management starts at the senior- management level; o a strong, centralized and independent control function for risk management operating in conjunction with decentralized business activities enables the Corporation to be agile and efficient in its business activities, yet prudent in its overall risk-taking; o diversification is an efficient mechanism for managing risk; o returns earned must be commensurate with the marginal risk associated with each business activity. The Corporation has made substantial investments in both information technology and human capital to support its risk management processes. Proprietary systems allow a team of dedicated risk management professionals to track the Corporation's global portfolio from its offices worldwide. This team of risk management professionals is independent of the Corporation's business lines and reports directly to senior management. Market Risk Each day the Corporation's risk management process assembles position and risk information on financial instruments of the Firm whose economic (fair) value is a function of market-determined variables: interest rates, currency exchange rates, equity prices, and commodity prices. This information is consolidated into daily risk and limits reports for the Corporation and business lines. These reports are reviewed by the Corporation's senior risk managers and provide them with a consistent set of information upon which to base their business judgments. One summary measure of market risk that is produced by this process is Daily Price Volatility. The Daily Price Volatility of a portfolio is the potential loss in fair value that would be exceeded 1 percent of the time if that portfolio were held unchanged for one day. The Daily Price Volatility information in the table and diagram reported below reflects the market risk for virtually all of the Corporation's financial assets and liabilities irrespective of accounting classification. The positions captured by the Daily Price Volatility include both derivative and cash positions which are reported as trading assets and liabilities, repurchase and resale agreements, funding assets and liabilities, deposits, assets held for sale and end-user derivatives. The Daily Price Volatility is based upon proprietary simulation and risk modeling techniques and incorporates the nonlinear payoffs, or convexity, and the volatility risk stemming from options in the Corporation's portfolio. Figure 1 shows the frequency distribution of Daily Price Volatility for 1996 business days for the overall Corporation. The diagram illustrates that the Daily Price Volatility for the overall Corporation had an approximately bell- shaped distribution. The distribution was centered at $39 million and ranged between $27 million and $54 million during 1996. 24 Figure 1 1996 BTNY DPV Frequency Distribution(a) The figure displays a histogram. Daily Price Volatility (DPV) amounts ranging from $27 million to $54 million appear on the horizontal axis and Frequency amounts ranging from 0 to 25 observations are displayed on the vertical axis. The DPV has an approximately bell shaped distribution. The DPV reaches frequencies of approximately 21 to 22 observations at the top portion of the bell curve (i.e. between DPV's of $33 million and $43 million). A portion of the middle of the bell curve (i.e. between DPV's of $35 million and $39 million) dips to frequencies ranging from 11 to 15 observations. Frequencies are much lower (from 0 to 6 observations) for DPV's at the tail ends of the curve (i.e. within the ranges $27 million to $31 million and $46 million to $54 million). Table 6 shows the sensitivity of the Corporation's market-risk profile by risk class in 1996 and 1995. The Corporation's portfolio, on average, in 1996 was most sensitive to changes in interest rates and equity prices. Note that the impact of diversification across all risk classes reduced total risk by $15 million on average in 1996. The table also shows that in comparison to 1995 the Corporation maintained a modestly higher average exposure to market risk during 1996. This increase occurred primarily with respect to equity and interest rate risk and reflected the Corporation's assessment of improved market opportunities in 1996 relative to 1995. Although average risk exposure increased during 1996, the Corporation ended the year with relatively low risk exposures compared to both the average for 1996 and the exposure at the end of 1995. TABLE 6 BTNY DAILY PRICE VOLATILITY STATISTICS (IN MILLIONS)(a)
1996 1996 1996 December 31, Market Risk Average Minimum Maximum 1996 - ------------------- -------- ------- ------- ------------- Interest rate $ 25 $ 17 $ 39 $ 17 Currency 11 6 20 10 Equity 16 12 20 17 Commodity 2 1 4 2 Diversification (15) -- -- (14) - ------------------- ----- ----- ----- ----- Overall portfolio $ 39 * * $ 32 =================== ===== ===== ===== ===== 1995 1995 1995 December 31, Market Risk Average Minimum Maximum 1995 - ------------------- ----- ----- ----- ----- Interest rate $ 20 $ 12 $ 32 $ 24 Currency 10 5 26 10 Equity 13 7 21 17 Commodity 3 1 5 4 Diversification (16) -- -- (15) - ------------------- ----- ----- ----- ----- Overall portfolio $ 30 * * $ 40 =================== ===== ===== ===== =====
* The minimum (maximum) for each risk category occurred on different days so it is not meaningful to total the amounts presented above. During 1996 and 1995, respectively, the minimum Daily Price Volatilities for the overall portfolio were $27 million and $19 million, and the maximum Daily Price Volatilities were $54 million and $44 million. (a) Due to the inability to obtain Alex. Brown historical daily price volatility information, "Figure 1-BTNY DPV Frequency Distribution" and Table 6-BTNY Daily Price Volatility Statistics" does not reflect the Merger. However, the Corporation does not anticipate Alex. Brown's impact to be material. 25 The methodology underlying these Daily Price Volatility calculations and the risk-adjusted return on capital ("RAROC") calculations described below relies on established asset pricing and statistical models. The Daily Price Volatility is a loss amount that would be exceeded 1 percent of the time. This implies that one would expect two or three instances each year when the daily loss amount exceeded the Daily Price Volatility. A comparison between our Daily Price Volatility amounts and accounting profit/loss flows for each business day during 1996 revealed no instances in which a loss greater than the Daily Price Volatility occurred. It is important to note that this comparison does not represent a formal statistical test because Daily Price Volatility measures the risk of a static portfolio, but the profits and losses occurring in any given day reflect a changing portfolio. Furthermore, because Daily Price Volatility measures the potential economic variation in the Corporation's market sensitive positions, it includes the risk of certain positions that are not marked-to- market daily in accordance with accounting standards and that are omitted from the portion of the Corporation's daily profit/loss flows used in this comparison. The absence of outliers (i.e., losses greater than Daily Price Volatility) during 1996, however, suggests that the methodology provides a reasonable statistical measure of the Corporation's exposure to market risk. The Daily Price Volatility, as a statistical measure of potential loss, provides an objective benchmark of portfolio risk which complements, but does not substitute for, management's judgment of the appropriate level and mix of risk taken by the Corporation. Furthermore, the methodology employed in the calculation of Daily Price Volatility will change due to enhancements in risk- assessment and information-processing technologies and as new risks are undertaken by the Corporation. Daily Price Volatility is supplemented by the statistical measures of risk and return provided by the RAROC system (discussed below), by scenario analyses performed periodically by the risk management group, and by a formal limits process that monitors excess concentration or exposure to liquidity risk in the portfolio. The RAROC system provides information on the potential effect of large changes in interest rates, currency, equity and commodity prices, and volatilities. As such, it produces a stress test of the Corporation's positions each business day. Taken together, all of these measures and reports provide the Corporation's senior management with timely and relevant risk information. 26 RAROC--Performance Measurement and Capital Adequacy The Corporation pioneered the development of risk-based capital attribution processes. The Corporation's risk capital model, RAROC, is integral to management's conceptual framework for strategic decision making. This framework has as its objective maximizing return on risk capital, where risk capital is attributed to a business activity according to the level of risk it assumes. Risk capital calculated by the RAROC framework is used to support decisions on the allocation of human and financial resources. In addition, the disciplined assessment of risk in RAROC produces a benchmark for assessing capital adequacy both for the Corporation and for its major businesses. The definition of risk capital produced by the RAROC process is the amount of funds required 99 percent of the time to cover a potential after-tax loss over a one year holding period. Specifically, if the Corporation maintained an absolutely static portfolio (of assets, counterparties and businesses) for one year, there would be a 1 percent chance that the portfolio would decline in value by more than the RAROC risk capital amount after adjusting for taxes. RAROC is designed to assess the following general classes of risk: market risk, credit risk and operational risk. Market risk is the potential loss in economic (fair) value due to changes in interest rates, currency, equity and commodity prices, and volatilities. Financial instruments of the Corporation whose fair values are functions of these market variables are included in the assessment of market risk irrespective of accounting designation. Credit risk is defined as potential loss in fair value of all extensions of credit, on- and off-balance sheet, by the Corporation. Operational risk is defined by the Corporation in the context of five risk classes: Employee, Technology, Relationship/Liability, Physical Assets, and Other External. Losses that are characterized as operational include but are not limited to the following examples: losses due to personnel unavailability or injury, natural disasters, the failure of external systems such as an exchange, or a failure of internal controls. A process using actuarial and other proprietary models has been implemented to provide an estimate of the potential losses from these risks. However, by their nature, these risks are difficult to measure or quantify and the process has less precision than approaches used for other types of risks. CREDIT RISK MANAGEMENT The Credit Department, headed by the Chief Credit Officer, is responsible for developing credit policies, as well as for monitoring and managing overall credit risk. The department evaluates the creditworthiness of each borrower/issuer/counterparty and assigns a rating for each. Credit limits are established at the portfolio level by borrower/issuer/counterparty and by other categories. One credit officer is responsible for reviewing the entire credit risk portfolio of a borrower/issuer/counterparty regardless of the nature of the exposure (e.g., loans, securities, derivatives). Credit officers also monitor the usage of credit risk by entity versus the limits at the product and business activity level. The Credit Department monitors country exposures and assigns country risk ratings. It also monitors country, industry, borrower/issuer/counterparty, product and regional risk concentrations in order to evaluate the degree of diversification in the portfolio. RAROC credit capital represents the translation into potential losses of the exposure of the overall portfolio of the Corporation to default risk. This translation is accomplished using proprietary statistical models. These statistical models incorporate information on the duration of the exposure, the potential magnitude of the exposure, and the creditworthiness of the borrower/issuer/counterparty. The Corporation's senior risk managers regularly review and actively manage the credit risks at the portfolio level to ensure that the risk characteristics and degree of diversification as reflected in RAROC capital calculations conform with the Corporation's policies. 27 DERIVATIVES Derivatives are swaps, futures, forwards, options and other similar types of contracts based on interest rates, foreign exchange rates and the prices of equities and commodities (or related indices). Derivatives are generally either privately-negotiated over-the-counter ("OTC") contracts or standard contracts transacted through regulated exchanges. OTC contracts generally consist of swaps, forwards and options. In the normal course of business, with the agreement of the original customer, OTC derivatives may be terminated or assigned to another customer. Exchange-traded derivatives include futures and options. These capital markets products are described further in Note 23 of Notes to Supplemental Financial Statements. Derivatives may be used for either trading or end-user purposes. Trading Derivatives The Corporation holds derivatives in connection with its activities as a dealer acting as principal for particular transactions with clients, as a market maker quoting bid and offer prices to provide liquidity and regular availability of derivatives for clients, as a risk manager of its own trading positions resulting from these client-driven transactions and, finally, as a position taker in the expectation of profiting from favorable movements in prices, rates or indices. As a result, the Corporation may build up sizable positions in derivatives. The risks of derivative positions are managed in accordance with the Corporation's risk management policies. Substantially all of the Corporation's derivative positions at December 31, 1996 were trading-related, with gains and losses included in trading revenue as they occur. Contracts with positive fair values are recorded as assets and contracts with negative fair values are recorded as liabilities, after application of qualifying master netting agreements. These positions may vary in size from period to period, similar to the positions in cash instruments also carried in the Corporation's trading account. Average trading assets and trading liabilities related to derivatives during 1996 were $10.4 billion and $11.6 billion, respectively. The notional amounts, which are not recorded on the balance sheet, of trading derivatives totaled $1,735 billion at December 31, 1996 and indicate the volume of activity but do not represent the Corporation's exposure to market or credit risk. End-User Derivatives The Corporation utilizes end-user derivatives to manage exposures to interest rate, foreign currency and equity 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 securities and net investments in foreign subsidiaries. For example, the Corporation's Treasury Department, which manages the majority of the Corporation's end-user derivatives, utilizes certain instruments (principally interest rate swaps) to transform fixed-rate-paying liabilities into variable-rate-paying liabilities. See Note 25 and Note 23 of Notes to Supplemental Financial Statements for the fair value of end-user derivatives and related financial instruments and additional end-user information. The notional amounts, which are not recorded on the balance sheet, of end-user derivatives totaled $68 billion at December 31, 1996 and indicate the volume of activity but do not represent the Corporation's exposure to market or credit risk. These contracts represent less than 4 percent of the aggregate notional amounts of all derivatives outstanding at year end. Market Risk The market risk of derivatives arises principally from the potential for changes in interest rates, foreign exchange rates, and equity and commodity prices and is generally similar to the market risk of the cash instruments underlying the contracts. The market risk to the Corporation is not measured by the price sensitivity of the individual contracts, but by the net price sensitivity of the relevant portfolio, including cash instruments. The Corporation generally manages its exposures by taking risk-offsetting positions. Therefore, the Corporation believes it is not meaningful to view the market 28 risk of derivatives in isolation. Market exposures arising from derivatives are monitored in the Corporation's RAROC system and are included in the Daily Price Volatility amounts discussed in the preceding Risk Management section. Liquidity Risk In times of stress, sharp price movements or volatility shocks may reduce liquidity in certain derivatives positions, as well as in cash instruments. The liquidity risk of derivatives is substantially based on the liquidity of the underlying cash instrument, which affects the ability of the Corporation to alter the risk profile of its positions rapidly and at a reasonable cost. The Corporation's mark-to-market practices for derivatives include adjustments in consideration of liquidity risks, when appropriate. These practices are consistent with those applied to the Corporation's trading positions in cash instruments. Derivatives-Related Credit Risk Derivative transactions create dynamic credit exposure which changes as markets move. The credit risk of derivatives arises from the potential for a customer to default on its contractual obligations. Accordingly, credit risk related to derivatives depends on the following: the current fair value of the contracts with the customer; the potential credit exposure over time; the extent to which legally enforceable netting arrangements allow the fair value of offsetting contracts with that customer to be netted against each other; the extent to which collateral held against the contracts reduces credit risk exposure; and the likelihood of default by the customer. The Corporation monitors and manages the credit risk associated with derivatives by applying a uniform credit process for all credit exposures. The credit risk of derivatives is included in the Corporation's centralized credit management and RAROC systems. In order to reduce derivatives-related credit risk, the Corporation enters into master netting agreements that provide for offsetting of all contracts under each such agreement and obtains collateral where appropriate. Such master netting agreements contemplate payment netting as well as the net settlement of all covered contracts through a single payment in a single currency with the same counterparty in the event that a default (including insolvency) under the agreement occurs. The Corporation monitors credit risk exposure on a gross and a net basis and on a collateralized and an uncollateralized basis, as appropriate. Table 7 summarizes the Corporation's derivatives-related credit risk. It displays, by internal rating, the Corporation's current credit risk to customers. The majority of the Corporation's derivative transactions are with foreign and U.S. commercial banks, as well as corporations, governments and their agencies, securities firms and other financial institutions. Current credit risk is calculated based on the current replacement cost of outstanding positions with customers in OTC derivative financial instruments. The gross replacement cost of a derivative portfolio with a customer is the positive mark- to-market value of all transactions with that customer without the effects of netting or collateral arrangements. The replacement costs, after netting and collateral, of $9.487 billion more accurately portray the credit risk associated with the Corporation's derivatives activities with external customers at December 31, 1996 than do the gross replacement costs. The increase compared to 1995 was predominantly related to short-term foreign exchange forward contracts with foreign and U.S. commercial bank counterparties. Approximately 92 percent of the derivatives-related credit risk at December 31, 1996 was to investment- grade customers. Internal ratings are based upon the Corporation's assessment of the customer's creditworthiness. Ratings of 1 to 4 generally equate to investment-grade ratings (BBB/Baa and higher) from rating agencies in the U.S. markets. A rating of 5 usually approximates long-term debt ratings of BB/Ba. Ratings of 6 to 8 are generally equivalent to B/B and below. Customers in the 6 to 8 category may be internally designated for special 29 monitoring by the Credit Audit Department. Factors such as guarantors and collateral held, as well as the impact of country risk on private foreign companies, may differentiate the Corporation's ratings from those of the rating agencies. The Corporation applies netting based upon the criteria prescribed by Financial Accounting Standards Board ("FASB") Interpretation No. 39 ("FIN 39"), "Offsetting of Amounts Related to Certain Contracts," which provides that offsetting is appropriate where the available evidence indicates that there are reasonable assurances that the right of setoff contained in a master netting agreement governing derivatives contracts would be upheld after default, including in the event of the customer's bankruptcy. Collateral also reduces credit risk. The Corporation generally accepts collateral in the form of cash, U.S. Treasuries, and other approved securities (generally, only liquid, marketable, publicly-traded securities are acceptable). TABLE 7 DERIVATIVES-RELATED CREDIT RISK(1)
Internal Rating For Customer -------------------------------------- (in millions) December 31, 1996 1 to 4 5 6 to 8 Total - ------------------------------------------------- -------- ------- ------ -------- Replacement costs (gross) $ 28,079 $ 3,338 $120 $ 31,537 Impact of netting agreements (18,628) (2,133) (52) (20,813) - ------------------------------------------------- -------- ------- ---- -------- Replacement costs (after netting agreements) 9,451 1,205 68 10,724 Collateral held and applied (763) (459) (15) (1,237) - ------------------------------------------------- -------- ------- ---- -------- Replacement costs after netting and collateral $ 8,688 $ 746 $ 53 $ 9,487 ================================================= ======== ======= ==== ======== Replacement costs after netting and collateral, December 31, 1995 $ 7,946 $ 606 $131 $ 8,683 ================================================= ======== ======= ==== ========
(1) End-user derivatives and exchange-traded contracts are not included. The Corporation's allowance for credit losses is available for credit losses related to derivatives contracts. Derivatives are considered by the Credit Audit Department when it reviews both general and specific credit risks in the Corporation's portfolio. Net charge-offs to the allowance that were related to derivative contracts totaled $22 million during 1996 and $240 million during 1995 (see Leveraged Derivative Transactions section below). The international bank regulatory standards for risk-based capital consider the credit risk arising from derivatives in the assessment of capital adequacy. These standards were issued under the Basle Capital Accord of July 1988 and adopted in 1989 by the U.S. bank regulators, including the Federal Reserve Board. These standards use a formula-based assessment of customer credit risk which, as amended at year-end 1995, reflect the credit-risk-reducing impact of legally enforceable master netting agreements. These standards include a calculation for estimating the potential future credit exposure caused by potential price volatility (the "add-on"). At December 31, 1996, this add-on was $9.0 billion before application of risk weightings, of which 91 percent, 8 percent, and 1 percent related to customers internally rated 1 to 4, 5, and 6 to 8, respectively. At December 31, 1996, the risk-weighted amounts (reflecting both current and potential future credit exposure) that were calculated based on these international standards for derivative financial instruments aggregated to $6.1 billion. 30 Presented in Table 8 below is a maturity profile of the Corporation's trading derivative products. This profile indicates the extent of the Corporation's involvement in derivative transactions of specific maturities and also provides the basis for calculating the estimate of potential future credit exposure (the add-on) under the international bank regulatory standards. The percentages in Table 8 are based on notional amounts which do not necessarily represent cash flows and do not represent a quantification of the market risk or credit risk of these positions. TABLE 8 MATURITY PROFILE OF TRADING DERIVATIVES(1)(2)
Interest Foreign Equity- Commodity Rate Exchange Related and Other Remaining Maturity at December 31, 1996 Total Contracts Contracts Contracts Contracts - ----------------------------------------- ------ ---------- ---------- ---------- ---------- Within 12 months 61% 21% 38% 1% 1% After 1 but within 5 years 30% 27% 3% -% -% After 5 years 9% 8% 1% -% -% - ----------------------------------------- --- -- -- - - Total 100% 56% 42% 1% 1% ========================================= === == == = =
(1) Based on notional amounts. Includes both purchase and sale contracts and contracts for which the fair values are recorded as trading assets and as trading liabilities. The leveraging effects of leveraged derivative transactions are reflected above. (2) Presented in accordance with the risk-based capital standards, this maturity profile does not include futures contracts, spot foreign exchange contracts, or options written. These types of contracts are considered in the Corporation's market and credit risk management processes. Leveraged Derivative Transactions A leveraged derivative transaction is a specific type of derivative financial instrument containing a formula or multiplier which, for any given change in market prices, could cause the change in the transaction's fair value to be significantly different from the change in fair value that would occur for a similar transaction without the formula or multiplier. Cash instruments (including structured notes) with embedded forward or option features and all former leveraged derivative transactions that are now included in the loan portfolio are excluded from the foregoing definition. The Corporation's leveraged derivative transactions are carried at fair value in the trading portfolio on the consolidated balance sheet and changes in fair value are reported in trading revenue as they occur. The Corporation's leveraged derivative transactions are affected by the same general market risks as the trading portfolio as a whole and are subject to the risk management policies outlined in the preceding section. During 1996 no material leveraged derivative transactions were reclassified to the loan portfolio at amounts equal to or less than the contractual amounts due, compared to $33 million in 1995. These transactions are not included in Tables 7 and 8. In 1996, $26 million of these leveraged derivative loans were charged- off to the allowance for credit losses, compared to $245 million in 1995. Amounts charged to trading revenue resulting from settlements of leveraged derivative transactions remaining in the trading portfolio were immaterial in 1996. At December 31, 1996 the balance included in loans after charge-offs and cash collections was $20 million of which $12 million was classified as cash basis loans. 31 Further information applicable to derivatives in general may be found in the following sections:
Relevant Information Page Title - ----------------------------------- ---- ----------------------------- Risk-weighted amounts 19 Capital Resources Revenue by risk category 10 Trading Revenue Daily Price Volatility, RAROC and credit management 24 Risk Management Credit losses 33 Summary of Credit Loss Experience Nonperforming amounts 37 Nonperforming Assets Accounting 51 Significant Accounting Policies Balance sheet amounts 57 Trading Assets and Trading Liabilities Product descriptions, fair values and notional amounts 97 Derivatives and Financial Instruments With Off-Balance Sheet Risk Significant counterparties 106 Concentrations of Credit Risk End-user derivatives 108 Fair Value of Financial Instruments
32 SUMMARY OF CREDIT LOSS EXPERIENCE Charge-Off Procedures and Adequacy of the Allowance for Credit Losses As part of the Corporation's overall management and control process, the Credit Audit Department is charged with the responsibility for performing an ongoing independent examination of the portfolio. Counterparty risk exposure is analyzed across all product lines including loans, credit-related commitments, derivatives and other financial instruments. All significant items in the portfolio are reviewed annually; those under special supervision, such as cash basis loans and renegotiated loans, are reviewed quarterly. In addition, all levels of management are required to bring to the attention of the Credit Audit Department any credit risk where an additional review of the counterparty's financial position is believed to be warranted. The Credit Audit Department reports at least quarterly to the Audit Committee of the Board of Directors which, in turn, reports to the full Board of Directors, with recommendations for charge-offs. The Board has the final decision-making responsibility in authorizing charge-offs. In addition to the above procedures, federal and State of New York bank examiners perform examinations of the Corporation's credit risks. The reports on these examinations are reviewed by the Credit Audit Department with the Audit Committee. The provision for credit losses is dependent upon management's evaluation as to the amount needed to maintain the allowance for credit losses at a level considered appropriate in relation to the risk of losses inherent in the portfolio. Various factors are collectively weighed by management in determining the adequacy of the allowance. The Credit Audit Department and bank regulatory authorities assess and issue reports on the quality of the portfolio and on the adequacy of the allowance. As part of their annual audit, the Corporation's independent auditors assess the adequacy of the allowance and the provision for credit losses. Their procedures include discussions with management, a review of selected credit files and an evaluation of the periodic reports issued by the Credit Audit Department and regulatory examiners. In the opinion of management, the allowance, when taken as a whole, is adequate to absorb reasonably estimated credit losses inherent in the Corporation's portfolio. 33 TABLE 9 ANALYSIS OF THE ALLOWANCE FOR CREDIT LOSSES The following table analyzes the changes in the allowance for credit losses ($ in millions).
Year Ended December 31, 1996 1995 1994 1993 1992 - ------------------------------------- ------ ------- ------- ------- ------- ALLOWANCE FOR CREDIT LOSSES, BEGINNING OF YEAR $ 992 $1,252 $1,324 $1,620 $1,806 CHARGE-OFFS Domestic (nonrefinancing country) Commercial and industrial 46 177 55 64 164 Financial institutions - - 11 4 - Real estate Construction 3 10 1 6 3 Mortgage 18 22 23 51 35 Other - - - 1 - International Nonrefinancing country 22 121 77 302 98 Refinancing country - - 1 32 43 - ------------------------------------- ----- ------ ------ ------ ------ Total charge-offs 89 330 168 460 343 - ------------------------------------- ----- ------ ------ ------ ------ RECOVERIES Domestic (nonrefinancing country) Commercial and industrial 32 11 24 19 7 Real estate Construction - - 1 - - Mortgage 7 4 - 1 1 Other - - - 2 2 International Nonrefinancing country 20 15 8 7 16 Refinancing country 6 9 38 42 23 - ------------------------------------- ----- ------ ------ ------ ------ Total recoveries 65 39 71 71 49 - ------------------------------------- ----- ------ ------ ------ ------ TOTAL NET CHARGE-OFFS (1) 24 291 97 389 294 LOSSES ON SALES AND SWAPS OF REFINANCING COUNTRY LOANS - - - - 117 - ------------------------------------- ----- ------ ------ ------ ------ TOTAL NET CHARGES TO THE ALLOWANCE 24 291 97 389 411 PROVISION FOR CREDIT LOSSES 5 31 25 93 225 - ------------------------------------- ----- ------ ------ ------ ------ ALLOWANCE FOR CREDIT LOSSES, END OF YEAR (2) $ 973 $ 992 $1,252 $1,324 $1,620 ===================================== ===== ====== ====== ====== ====== PERCENTAGE OF TOTAL NET CHARGES TO AVERAGE LOANS FOR THE YEAR .18% 2.48% .78% 2.54% 2.45% ===================================== ===== ====== ====== ====== ====== (1) Components: Secured by real estate $ 14 $ 23 $ 24 $ 116 $ 71 Real estate related 3 2 23 3 27 Highly leveraged 11 30 (5) 15 117 Other * 2 245 92 265 59 Refinancing country (6) (9) (37) (10) 20 - ------------------------------------- ----- ------ ------ ------ ------ Total $ 24 $ 291 $ 97 $ 389 $ 294 ===================================== ===== ====== ====== ====== ====== (2) Allocation: ** Loans $ 773 Other liabilities 200 - ------------------------------------- ----- Balance, End of Year $ 973 ===================================== =====
* The 1996, 1995 and 1994 amounts included net charge-offs of $15 million, $240 million and $72 million, respectively, related to leveraged derivative transactions. ** Beginning December 31, 1996, the Corporation has allocated its total allowance for credit losses between a reduction of loans and as other liabilities related to other credit-related items. Prior year amounts have not been restated. For further detail, see discussion on the following page. 34 Provision and Allowance for Credit Losses The provision for credit losses amounted to $5 million for 1996, compared with $31 million for 1995 and $25 million in 1994. The total allowance for credit losses decreased to $973 million at December 31, 1996, from $992 million at year end 1995 and $1.252 billion at December 31, 1994. Beginning December 31, 1996, in accordance with the American Institute of Certified Public Accountants Banks and Savings Institutions Audit Guide, the Corporation has allocated its total allowance for credit losses as follows: $773 million as a reduction of loans, and $200 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 year amounts have not been restated. Pursuant to a regulatory requirement, the table below provides the components of the allowance for credit losses by category. This breakdown of the allowance at each year end reflects management's best estimate of possible credit losses and may not necessarily be indicative of actual future charge-offs (in millions).
December 31, 1996 1995 1994 1993 1992 - ------------------------------------ ----- ----- ------ ------ ------ Domestic Commercial and industrial $ 75 $ 165 $ 133 $ 115 $ 162 Financial institutions 10 20 20 8 19 Real estate Construction 8 8 5 15 10 Mortgage 67 70 54 65 50 Other 1 3 2 1 4 - ------------------------------------ ----- ----- ------ ------ ------ Total domestic 161 266 214 204 245 International 144 222 266 190 403 - ------------------------------------ ----- ----- ------ ------ ------ Total allocated 305 488 480 394 648 Unallocated portion* Domestic 288 306 402 599 368 International 180 198 370 331 604 - ------------------------------------ ----- ----- ------ ------ ------ Allowance for credit losses--loans 773 - - - - Allowance for credit losses--other liabilities 200 - - - - - ------------------------------------ ----- ----- ------ ------ ------ Total $ 973 $ 992 $1,252 $1,324 $1,620 ==================================== ===== ===== ====== ====== ======
* This amount and any unabsorbed portion of the allocated allowance is also available for credit losses in the entire portfolio. 35 For purposes of providing information required by regulatory authorities and subject to the above limitations, the following table presents an analysis of the changes in the international component of the allowance for credit losses (in millions):
Year Ended December 31, 1996 1995 1994 1993 1992 - ------------------------------------ ------ ------ ----- ------- ------- Balance, beginning of year $ 420 $ 636 $ 521 $1,007 $1,198 - ------------------------------------ ----- ----- ----- ------ ------ Net charge-offs Charge-offs 22 121 78 334 141 Recoveries 26 24 46 49 39 - ------------------------------------ ----- ----- ----- ------ ------ Total net charge-offs (recoveries) (4) 97 32 285 102 Losses on sales and swaps of refinancing country loans - - - - 117 - ------------------------------------ ----- ----- ----- ------ ------ Total net charges (recoveries) to the allowance (4) 97 32 285 219 Provision for credit losses (1) 9 11 40 61 Reclass to other liabilities (24) - - - - Reallocation (to) from domestic allowance (75) (128) 136 (241) (33) - ------------------------------------ ----- ----- ----- ------ ------ Balance, end of year* $ 324 $ 420 $ 636 $ 521 $1,007 ==================================== ===== ===== ===== ====== ======
* The December 31, 1996 amount represents the international component of the allowance for credit losses that has been allocated to loans. The $75 million reallocation during 1996 and the $128 million reallocation during 1995, from the international to the domestic component of the allowance for credit losses, was based on the continuing evaluation of the Corporation's overall credit portfolio. 36 NONPERFORMING ASSETS Table 10 shows the Corporation's trend of cash basis loans, renegotiated loans, other real estate and other nonperforming assets ($ in millions). TABLE 10 NONPERFORMING ASSETS
December 31, 1996 1995 1994 1993 1992 - ------------------------------------------- ------ ------ ------ ------ ------- Cash basis loans (nonrefinancing country) Domestic Commercial and industrial $ 117 $ 263 $ 316 $ 285 $ 481 Secured by real estate 233 297 277 306 349 Financial institutions - 10 25 30 2 Other - - - - 1 - ------------------------------------------- ----- ----- ----- ----- ------ Total domestic 350 570 618 621 833 - ------------------------------------------- ----- ----- ----- ----- ------ International Commercial and industrial 57 106 247 84 167 Secured by real estate 39 65 79 149 148 Financial institutions 4 3 48 - - Other 2 - 2 2 8 - ------------------------------------------- ----- ----- ----- ----- ------ Total international 102 174 376 235 323 - ------------------------------------------- ----- ----- ----- ----- ------ Total cash basis loans (nonrefinancing country) 452 744 994 856 1,156 Cash basis loans (refinancing country) International - - 2 118 221 - ------------------------------------------- ----- ----- ----- ----- ------ Total cash basis loans $ 452 $ 744 $ 996 $ 974 $1,377 =========================================== ===== ===== ===== ===== ====== Ratio of cash basis loans to total gross loans 2.9% 5.9% 8.0% 6.4% 8.0% =========================================== ===== ===== ===== ===== ====== Ratio of allowance for credit losses to cash basis loans (1) 171% 133% 126% 136% 118% =========================================== ===== ===== ===== ===== ====== Renegotiated loans Mexican government Par Bonds $ - $ - $ - $ - $ 611 Highly leveraged - - - 6 27 Secured by real estate 37 88 65 14 20 Other - 12 1 1 1 - ------------------------------------------- ----- ----- ----- ----- ------ Total renegotiated loans $ 37 $ 100 $ 66 $ 21 $ 659 =========================================== ===== ===== ===== ===== ====== Other real estate $ 213 $ 259 $ 301 $ 287 $ 315 =========================================== ===== ===== ===== ===== ====== Other nonperforming assets Assets acquired in credit workouts $ 10 $ 66 $ 61 $ 85 $ 73 Other - 1 2 16 32 - ------------------------------------------- ----- ----- ----- ----- ------ Total other nonperforming assets $ 10 $ 67 $ 63 $ 101 $ 105 =========================================== ===== ===== ===== ===== ====== Loans 90 days or more past due and still accruing interest (2) $ - $ 26 $ - $ 40 $ 86 =========================================== ===== ===== ===== ===== ======
(1) The 1996 ratio was computed using the $773 million allowance for credit losses that has been allocated to loans. (2) Represents loans 90 days or more past due with respect to interest or principal. These loans were considered to be well secured and were in the process of collection. The December 31, 1993 and 1992 balances include $15 million and $66 million of international loans, respectively. 37 Each quarter an extensive review is performed by the Credit Audit Department and senior credit management of all cash basis loans and classified assets. Each borrower/counterparty is evaluated to determine whether it represents a potential loss. Whenever the probability of loss is believed to be greater than 50 percent, a charge-off of the amount deemed uncollectible is recommended to the Audit Committee of the Board of Directors. Once a charge-off is taken the remaining portion, if any, is immediately placed on a cash basis. If the probability of loss is believed to be less than 50 percent, but collection or liquidation in full is questionable if present trends continue, the asset is classified as doubtful. It is the Corporation's policy to place all assets classified as doubtful on a cash basis, even if the borrower is still making required payments. In addition, it is generally the Corporation's policy that loans be immediately placed on a cash basis when they become 90 days past due with respect to interest or principal. The Corporation's total cash basis loans amounted to $452 million at December 31, 1996, a decrease of $292 million, or 39 percent, from 1995, which had decreased $252 million, or 25 percent, from 1994. Cash basis loans decreased $292 million during 1996, primarily due to collections and charge-offs in connection with the settlement of old derivative transactions of $109 million, which were primarily classified as commercial and industrial loans, as well as a $90 million decrease in loans secured by real estate and an $87 million decrease in various other commercial and industrial loans. Within cash basis loans, loans secured by real estate were $272 million at December 31, 1996. Commercial and industrial loans to highly leveraged borrowers decreased $36 million to $117 million. An analysis of the changes in the Corporation's total cash basis loans follows:
(in millions) Year Ended December 31, 1996 1995 1994 1993 1992 - ----------------------------------- ------ ------ ------ ------- ------- Balance, beginning of year $ 744 $ 996 $ 974 $1,377 $1,750 Net transfers to cash basis loans 96 314 520 230 312 Net paydowns (241) (221) (130) (140) (112) Charge-offs (87) (330) (163) (232) (322) Net transfers from (to) other real estate (14) 13 (72) (10) (87) Transfers to other nonperforming assets - - (7) (58) (45) Loan sales (38) (1) (49) (153) (50) Other (8) (27) (77) (40) (69) - ----------------------------------- ----- ----- ----- ------ ------ Balance, end of year $ 452 $ 744 $ 996 $ 974 $1,377 =================================== ===== ===== ===== ====== ======
Cash basis loans decreased $252 million during 1995, primarily due to charge- offs of $245 million and payments of $81 million on cash basis leveraged derivative transactions. These were partially offset by additional transfers of leveraged derivative transactions to cash basis loans of $79 million. Within cash basis loans, loans secured by real estate increased by $6 million, to $362 million during 1995. Also included in cash basis loans were commercial and industrial loans to highly leveraged borrowers which increased $3 million, to $153 million at December 31, 1995. 38 Renegotiated loans decreased to $37 million at December 31, 1996 due to $63 million of transfers to cash basis loans. In 1995, renegotiated loans increased $34 million primarily due to an increase in loans secured by real estate of $23 million. Other real estate decreased $46 million to $213 million at December 31, 1996. The decrease was primarily attributable to $73 million of sales of properties offset by an additional $24 million of foreclosed properties during 1996. Other real estate decreased $42 million during 1995 primarily as a result of the adoption of SFAS 114 during the first quarter of 1995. SFAS 114 required the transfer of in-substance foreclosed properties, where the Corporation had not taken possession of the collateral, to cash basis loans. 39 SPECIAL PORTFOLIO SEGMENTS REAL ESTATE PORTFOLIO The global real estate loan portfolio totaled $2.002 billion at December 31, 1996. This included domestic loans secured by real estate of $1.695 billion, international loans secured by real estate of $130 million, and total real estate related loans of $177 million. The largest geographic concentration within loans secured by real estate was in properties in the Mid-Atlantic region, at 25 percent, of which New York City and its suburbs comprised approximately 57 percent. The next largest geographic concentrations were loans secured by properties in California, Texas and the Southeast region, which comprised 19 percent, 12 percent and 11 percent of the total, respectively. The largest product-type concentrations were loans secured by office buildings, apartments, and 1-4 family residential properties at 24 percent, 19 percent and 11 percent, respectively. All other concentrations were individually less than 11 percent of total loans secured by real estate. Approximately 50 percent of the loans secured by real estate were purchased in the secondary market. These were comprised primarily of domestic commercial real estate loans. Real estate related loans consist of loans made for any purpose to organizations or individuals, 80 percent of whose revenues or assets are derived from or consist of real estate ventures or holdings, that are not collateralized by cash or marketable securities and are not secured by real estate. The Corporation was also obligated under $239 million of standby letters of credit and $155 million of unused commitments to extend credit in connection with its commercial real estate financing activities at December 31, 1996. Because of the diversity of the portfolio, the risks of real estate lending reflect both general and local economic conditions. Management closely monitors the portfolio, and formal reviews are conducted at least annually, with many exposures reviewed quarterly. Table 11 details the global real estate portfolio at December 31, 1996 (in millions). TABLE 11 REAL ESTATE LOANS AND OTHER REAL ESTATE
Outstanding Balance ----------------------------- Inter- Cash Basis December 31, 1996 Domestic national Total Balance - ------------------------------------------ -------- -------- --------- ---------- Loans secured by real estate Land under development $ 24 $ - $ 24 $ 21 Construction In lease-up (1) 109 - 109 10 Standing (2) 1-4 family residential 190 26 216 1 Multifamily residential 365 24 389 10 Commercial 1,007 80 1,087(3) 230 - ------------------------------------------ ------ ---- ------ ---- Total loans secured by real estate 1,695 130 1,825 272 Real estate related loans 130 47 177 25 - ------------------------------------------ ------ ---- ------ ---- Total real estate loans $1,825 $177 $2,002 $297 ========================================== ====== ==== ====== ==== Other real estate $ 125 $ 88 $ 213
(1) In lease-up are completed properties that are less than 85 percent leased- up. (2) Standing properties have been built, developed and leased-up such that the project is considered stabilized. (3) Includes $37 million of renegotiated loans. 40 HIGHLY LEVERAGED TRANSACTIONS For purposes of monitoring the extent of its exposure to highly leveraged transactions ("HLTs"), the Corporation utilizes the following definition. HLTs are financing transactions the purpose of which involves a buyout, acquisition or recapitalization and which (i) doubles the subject company's liabilities and results in a leverage ratio higher than 50 percent or (ii) results in a leverage ratio higher than 75 percent or (iii) is designated a HLT by a syndication agent. Borrowers are delisted from HLT status when (1) cash flow tests, relative to their industry or peer group, are met, or (2) they are no longer highly leveraged upon emergence from Chapter 11 bankruptcy or similar proceeding. In addition, certain loans which are fully collateralized by cash or cash equivalent securities are excluded from HLT reporting. Amounts included in the table and discussion which follow generally reflect the above definition. TABLE 12 HIGHLY LEVERAGED TRANSACTIONS
(in millions) December 31, 1996 1995 - ---------------------------- ------ ------ Loans Senior debt $1,587 $1,105 Subordinated debt 76 68 - ---------------------------- ------ ------ Total loans $1,663 $1,173 ============================ ====== ====== Unfunded commitments Commitments to lend $ 875 $ 539 Letters of credit 128 263 - ---------------------------- ------ ------ Total unfunded commitments $1,003 $ 802 ============================ ====== ====== Equity investments $ 665 $ 648 ============================ ====== ====== Commitments to invest $ 425 $ 289 ============================ ====== ======
The Corporation's outstanding loans were to 127 separate borrowers in 43 separate industry groups at December 31, 1996, compared to 97 separate borrowers in 38 separate industry groups at December 31, 1995. There were no industry concentrations which exceeded 10 percent of total HLT loans outstanding at December 31, 1996. In addition to the amounts shown in Table 12, at December 31, 1996, the Corporation had issued commitment letters which had been accepted, subject to documentation and certain other conditions, of $749 million (which were in various stages of syndication) and had additional HLTs in various stages of discussion and negotiation. During 1996, the Corporation originated $5.4 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 December 31, 1996 was less than $14 million. However, at December 31, 1996, the Corporation had total exposure (loans outstanding plus unfunded commitments) in excess of $50 million to 7 separate highly leveraged borrowers. 41 At December 31, 1996, $117 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 $11 million of HLT loans were recorded in 1996. In addition, the Corporation recorded a net gain of $143 million in connection with the sales and/or write-offs of certain equity investments in highly leveraged companies during 1996. Generally, fees (typically 2 to 4 percent of the principal amount committed) and interest charged (typically LIBOR plus 1.5 to 3 percent) on HLT loans are higher than on other credits. The Corporation does not account for revenue or expenses from HLTs separately from its other corporate lending activities. However, it is estimated that transaction fees recognized for lending activities relating to highly leveraged transactions were approximately $120 million during 1996 and that as of December 31, 1996, approximately $24 million of fees were deferred and will be recognized as future revenue. 42 CROSS-BORDER OUTSTANDINGS The Corporation's cross-border outstandings reflect certain additional economic and political risks beyond those associated with its domestic outstandings. These risks include those arising from exchange rate fluctuations, restrictions on the transfer of funds and balance-of-payments issues. Set forth in Table 13 are the Corporation's cross-border outstandings at December 31, 1996, 1995 and 1994, for each foreign country where such outstandings exceeded one percent of total assets. The cross-border outstandings were compiled based upon category and domicile of ultimate risk and are comprised of balances with banks, trading securities, securities available for sale, securities purchased under resale agreements, loans, accrued interest receivable, acceptances outstanding and investments with foreign entities. The amounts outstanding for each country exclude local currency outstandings. The Corporation does not have significant local currency outstandings to the individual countries listed in the following table that are not hedged or are not funded by local currency borrowings. TABLE 13 CROSS-BORDER OUTSTANDINGS
Governments Banks and % of and Other Commercial Total Total Official Financial and ($ in millions) Outstandings Assets Institutions Institutions Industrial Other - ---------------------- ------------ ------- ------------ ------------ ---------- ----- AT DECEMBER 31, 1996 United Kingdom $3,904 3.18% $ 12 $3,461 $ 430 $1 Switzerland 3,598 2.93 - 3,332 266 - France 3,485 2.84 63 3,005 416 1 Spain 2,670 2.17 960 1,667 43 - Japan (1) 2,523 2.05 477 979 1,067 - Germany 1,700 1.38 537 758 405 - Mexico (2) 1,332 1.08 676 329 327 - Italy 1,285 1.05 751 384 150 - Brazil (2) 1,266 1.03 569 454 243 - At December 31, 1995 Japan (1) $2,844 2.68% $ 456 $1,393 $ 987 $8 France 2,150 2.02 291 1,615 244 - United Kingdom 1,945 1.83 19 1,448 478 - Spain 1,877 1.77 1,338 494 44 1 Italy 1,522 1.43 1,265 209 48 - Brazil (2) 1,120 1.05 475 494 151 - At December 31, 1994 Japan $4,661 4.74% $1,911 $2,267 $ 483 $- United Kingdom 1,960 1.99 26 1,787 145 2 Italy 1,574 1.60 1,039 449 86 - France 1,559 1.58 105 1,091 363 - Germany 1,424 1.45 585 698 140 1 Mexico (2) 1,416 1.44 509 801 106 - Argentina (2) 1,072 1.09 912 22 138 - Spain 1,035 1.05 628 374 32 1
(1) The Corporation's cross-border outstandings with Japanese banks and other financial institutions primarily consisted of interest-bearing deposits with banks and trading assets carried at fair value. (2) The Corporation's cross-border outstandings as presented above for Brazil and Argentina primarily consisted of trading assets which are carried at fair value. The cross-border outstanding for Mexico primarily consisted of trading assets carried at fair value and securities purchased under resale agreements. 43 Governments and official institutions comprises foreign governments and their agencies; state, provincial and local governments and their agencies; and central banks. Banks and other financial institutions comprises commercial and savings banks and other similar institutions accepting short-term deposits, including government-owned banks which do not function as central banks, and nonbank credit and financial companies. The following table details the cash basis loans and renegotiated loans components of the outstandings included in Table 13.
Cash Basis Renegotiated (in millions) Loans Loans - ---------------------- ---------- ------------ AT DECEMBER 31, 1996 Italy $ 3 -$ Spain 2 - - ---------------------- --- ------------ Total $ 5 -$ ====================== === ============ At December 31, 1995 Italy $16 -$ - ---------------------- --- ------------ Total $16 -$ ====================== === ============ At December 31, 1994 United Kingdom $11 -$ Other 27 - - ---------------------- --- ------------ Total $38 -$ ====================== === ============
At December 31, 1996, total cross-border commitments to borrowers or counterparties domiciled in the countries presented in Table 13 were: United Kingdom, $242 million; Switzerland, $66 million; France, $121 million; Spain, $1 million; Japan, $39 million; Germany, $212 million; Mexico, $16 million; Italy, $2 million; and Brazil, $24 million. Hong Kong and Canada were the only countries whose cross-border outstanding was between .75 percent and 1.00 percent of total assets at December 31, 1996. The aggregate cross-border outstandings for these countries amounted to $1.1 billion, or .92 percent of total assets for Hong Kong and $914 million, or .74 percent of total assets for Canada. Mexico, Germany and Belgium were the only countries whose cross-border outstanding was between .75 percent and 1.00 percent of total assets at December 31, 1995. The aggregate cross-border outstandings for these countries amounted to $1.0 billion, or .96 percent of total assets for Mexico (a majority of which consisted of trading assets carried at fair value), $939 million, or .88 percent of total assets for Germany, and $840 million, or .79 percent of total assets for Belgium. Switzerland was the only country whose cross-border outstanding was between .75 percent and 1.00 percent of total assets at December 31, 1994. The aggregate cross-border outstandings for this country amounted to $963 million, or .98 percent of total assets. 44 ACCOUNTING DEVELOPMENTS In June 1996, the FASB issued SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 125 establishes, among other things, criteria for determining whether a transfer of financial assets is a sale or a secured borrowing. As issued, SFAS 125 is effective for all transfers occurring after December 31, 1996. In December 1996, the FASB issued SFAS 127 which defers for one year the effective date of some portions of SFAS 125 which relate to collateral, repurchase agreements, dollar-rolls, securities lending and similar transactions. The adoption as of January 1, 1997 of the effective portions of SFAS 125 will not have a material impact on the Corporation's net income, stockholders' equity or total assets. The Corporation is continuing to assess the impact of the portions of SFAS 125 required to be adopted as of January 1, 1998, and does not expect a material impact on the Corporation's net income, stockholders' equity or total assets. 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. 45
Financial Reports Section FINANCIAL STATEMENTS SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME 47 SUPPLEMENTAL CONSOLIDATED BALANCE SHEET 48 SUPPLEMENTAL CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY 49 SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS 50 NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS 51 REPORT OF INDEPENDENT AUDITORS 126 SUPPLEMENTAL FINANCIAL DATA CONDENSED QUARTERLY CONSOLIDATED STATEMENT OF INCOME 128 STOCKHOLDER DATA 128 AVERAGE BALANCES, INTEREST AND AVERAGE RATES 129 VOLUME/RATE ANALYSIS OF CHANGES IN NET INTEREST REVENUE 131 INTEREST RATE SENSITIVITY 132 DEPOSITS 133
46 SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME (in millions, except per share data)
Year Ended December 31, 1996 1995 1994 - -------------------------------------------------------- ------ ------ ------ NET INTEREST REVENUE Interest revenue $6,508 $5,989 $5,096 Interest expense 5,451 5,105 3,880 - -------------------------------------------------------- ------ ------ ------ NET INTEREST REVENUE 1,057 884 1,216 Provision for credit losses 5 31 25 - -------------------------------------------------------- ------ ------ ------ NET INTEREST REVENUE AFTER PROVISION FOR CREDIT LOSSES 1,052 853 1,191 - -------------------------------------------------------- ------ ------ ------ NONINTEREST REVENUE Trading 1,014 481 586 Fiduciary and funds management 861 752 783 Corporate finance fees 922 691 628 Other fees and commissions 549 491 468 Net revenue from equity investment transactions 230 153 128 Securities available for sale gains 75 180 72 Insurance premiums 230 234 183 Other 236 147 165 - -------------------------------------------------------- ------ ------ ------ Total noninterest revenue 4,117 3,129 3,013 - -------------------------------------------------------- ------ ------ ------ NONINTEREST EXPENSES Salaries and commissions 1,155 1,045 970 Incentive compensation and employee benefits 1,215 832 856 Agency and other professional service fees 322 327 276 Communication and data services 233 220 207 Occupancy, net 172 177 166 Furniture and equipment 187 177 175 Travel and entertainment 116 104 123 Provision for policyholder benefits 280 271 205 Other 358 310 239 Provision for severance-related costs - 50 - - -------------------------------------------------------- ------ ------ ------ Total noninterest expenses 4,038 3,513 3,217 - -------------------------------------------------------- ------ ------ ------ Income before income taxes 1,131 469 987 Income taxes 365 158 301 - -------------------------------------------------------- ------ ------ ------ NET INCOME $ 766 $ 311 $ 686 ======================================================== ====== ====== ====== NET INCOME APPLICABLE TO COMMON STOCK $ 715 $ 260 $ 658 ======================================================== ====== ====== ====== EARNINGS PER COMMON SHARE: PRIMARY $6.93 $2.59 $6.51 ======================================================== ====== ====== ====== FULLY DILUTED $6.71 $2.53 $6.33 ======================================================== ====== ====== ====== Cash dividends declared per common share $4.00 $4.00 $3.70 ======================================================== ====== ====== ======
The accompanying notes are an integral part of the supplemental financial statements. 47 SUPPLEMENTAL CONSOLIDATED BALANCE SHEET ($ in millions, except par value)
December 31, 1996 1995 - ------------------------------------------------------------ --------- --------- ASSETS Cash and due from banks $ 1,568 $ 2,399 Interest-bearing deposits with banks 2,210 2,023 Federal funds sold 1,684 854 Securities purchased under resale agreements 18,002 13,241 Securities borrowed 17,005 11,309 Trading assets: Government securities 16,858 20,750 Corporate debt securities 8,039 5,695 Equity securities 6,089 5,116 Swaps, options and other derivatives 11,410 10,555 Other trading assets 6,733 5,888 - ------------------------------------------------------------ -------- -------- Total trading assets 49,129 48,004 Securities available for sale 7,920 6,283 Loans - 12,681 Allowance for credit losses - (992) Loans, net of allowance for credit losses of $773 at December 31, 1996 15,107 - Customer receivables 1,529 1,322 Due from customers on acceptances 597 500 Accounts receivable and accrued interest 3,077 4,297 Other assets 4,950 4,278 - ------------------------------------------------------------ -------- -------- Total $122,778 $106,199 ============================================================ ======== ======== LIABILITIES Noninterest-bearing deposits Domestic offices $ 2,600 $ 2,687 Foreign offices 1,013 605 Interest-bearing deposits Domestic offices 9,928 5,402 Foreign offices 16,774 17,014 - ------------------------------------------------------------ -------- -------- Total deposits 30,315 25,708 Trading liabilities: Securities sold, not yet purchased Government securities 7,668 11,127 Equity securities 4,174 3,275 Other trading liabilities 334 479 Swaps, options and other derivatives 11,585 11,264 - ------------------------------------------------------------ -------- -------- Total trading liabilities 23,761 26,145 Securities loaned and securities sold under repurchase agreements 23,454 15,684 Other short-term borrowings 19,409 15,861 Acceptances outstanding 597 500 Accounts payable and accrued expenses 4,837 4,850 Other liabilities, including allowance for credit losses of $200 at December 31, 1996 2,239 2,241 Long-term debt not included in risk-based capital 8,732 7,127 Long-term debt included in risk-based capital 2,576 2,360 Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital 730 - - ------------------------------------------------------------ -------- -------- Total liabilities 116,650 100,476 ============================================================ ======== ======== Commitments and contingent liabilities (Notes 7 and 23) PREFERRED STOCK OF SUBSIDIARY 250 250 - ------------------------------------------------------------ -------- -------- STOCKHOLDERS' EQUITY Preferred stock 810 865 Common stock, $1 par value Authorized, 300,000,000 shares Issued: 1996, 103,624,555 shares; 1995, 103,017,180 shares 104 103 Capital surplus 1,437 1,386 Retained earnings 3,988 3,702 Common stock in treasury, at cost: 1996, 4,435,226 shares; 1995, 4,602,855 shares (372) (336) Other stockholders' equity (89) (247) - ------------------------------------------------------------ -------- -------- Total stockholders' equity 5,878 5,473 - ------------------------------------------------------------ -------- -------- Total $122,778 $106,199 ============================================================ ======== ========
The accompanying notes are an integral part of the supplemental financial statements. 48 SUPPLEMENTAL CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (in millions)
Year Ended December 31, 1996 1995 1994 - ---------------------------------------------------------------------- --------- -------------- -------- PREFERRED STOCK Balance, beginning of year $ 865 $ 395 $ 250 Preferred stock issued 1 470 350 Preferred stock repurchased (56) - - Preferred stock redeemed - - (205) - ---------------------------------------------------------------------- -------- --- ------- Balance, end of year 810 865 395 - ---------------------------------------------------------------------- -------- --- ------- COMMON STOCK Balance, beginning of year 103 101 102 Issuance of common stock 1 2 1 Repurchase and retirement of common stock - - (2) - ---------------------------------------------------------------------- -------- --- ------- Balance, end of year 104 103 101 - ---------------------------------------------------------------------- -------- --- ------- CAPITAL SURPLUS Balance, beginning of year 1,386 1,371 1,407 Issuance of common stock 19 26 7 Repurchase and retirement of common stock (16) - (46) Preferred stock issuance and conversion costs - (17) (8) Common stock distributed under employee benefit plans 41 6 11 Preferred stock repurchased 7 - - - ---------------------------------------------------------------------- -------- --- ------- Balance, end of year 1,437 1,386 1,371 - ---------------------------------------------------------------------- -------- --- ------- RETAINED EARNINGS Balance, beginning of year 3,702 3,796 3,467 Net income 766 311 686 Cash dividends declared Preferred stock (58) (47) (28) Common stock (335) (326) (301) Treasury stock distributed under employee benefit plans (80) (32) (28) Treasury stock associated with acquisition (7) - - - ---------------------------------------------------------------------- -------- --- ------- Balance, end of year 3,988 3,702 3,796 - ---------------------------------------------------------------------- -------- --- ------- COMMON STOCK IN TREASURY, AT COST Balance, beginning of year (336) (416) (233) Purchases of stock (608) (38) (267) Restricted stock granted, net 37 54 50 Treasury stock distributed under employee benefit plans 325 64 34 Treasury stock associated with acquisition 210 - - - ---------------------------------------------------------------------- -------- --- ------- Balance, end of year (372) (336) (416) - ---------------------------------------------------------------------- -------- --- ------- COMMON STOCK ISSUABLE -- STOCK AWARDS Balance, beginning of year 233 160 143 Deferred stock awards granted, net 294 89 18 Deferred stock distributed (1) (16) (1) - ---------------------------------------------------------------------- -------- --- ------- Balance, end of year 526 233 160 - ---------------------------------------------------------------------- -------- --- ------- DEFERRED COMPENSATION -- STOCK AWARDS Balance, beginning of year (151) (63) (47) Deferred stock awards granted, net (293) (88) (17) Restricted stock granted, net (38) (48) (40) Amortization of deferred compensation, net 174 48 41 - ---------------------------------------------------------------------- -------- --- ------- Balance, end of year (308) (151) (63) - ---------------------------------------------------------------------- -------- --- ------- CUMULATIVE TRANSLATION ADJUSTMENTS Balance, beginning of year (348) (336) (319) Translation adjustments (40) (3) (76) Income taxes applicable to translation adjustments 24 (9) 59 - ---------------------------------------------------------------------- -------- --- ------- Balance, end of year (364) (348) (336) - ---------------------------------------------------------------------- -------- --- ------- SECURITIES VALUATION ALLOWANCE Balance, beginning of year 19 69 109 Change in unrealized net gains, after applicable income taxes and minority interest 38 (50) (40) - ---------------------------------------------------------------------- -------- --- ------- Balance, end of year 57 19 69 - ---------------------------------------------------------------------- -------- --- ------- Total stockholders' equity, end of year $ 5,878 $ 5,473 $ 5,077 ====================================================================== ======== === =======
The accompanying notes are an integral part of the supplemental financial statements. 49 SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS (in millions)
Year Ended December 31, 1996 1995 1994 - ---------------------------------------------------------------------- -------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 766 $ 311 $ 686 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for credit losses 5 31 25 Provision for severance-related costs - 50 - Provision for policyholder benefits 280 271 205 Deferred income taxes 72 (270) (152) Depreciation and amortization of premises and equipment 159 147 138 Other, net (108) (69) (97) - ---------------------------------------------------------------------- -------- - ------ Earnings adjusted for noncash charges and credits 1,174 471 805 Net change in: Trading assets (2,742) (1,392) 989 Trading liabilities (2,361) 5,857 11,218 Receivables and payables from securities transactions 1,196 (1,035) (586) Customer receivables (41) (293) (74) Other operating assets and liabilities, net (952) 48 (186) Securities available for sale gains (75) (180) (72) - ---------------------------------------------------------------------- -------- - ------ Net cash provided by (used in) operating activities (3,801) 3,476 12,094 - ---------------------------------------------------------------------- -------- - ------ CASH FLOWS FROM INVESTING ACTIVITIES Net change in: Interest-bearing deposits with banks (217) 1,194 (1,791) Federal funds sold (830) 1,690 (2,183) Securities purchased under resale agreements (4,750) (6,401) (127) Securities borrowed (5,697) (1,778) (3,251) Loans (2,914) (279) 3,225 Securities available for sale: Purchases (5,910) (4,164) (5,830) Maturities and other redemptions 3,191 3,875 2,947 Sales 1,571 1,871 2,201 Acquisitions of premises and equipment (215) (148) (307) Other, net 105 (93) (32) - ---------------------------------------------------------------------- -------- - ------ Net cash used in investing activities (15,666) (4,233) (5,148) - ---------------------------------------------------------------------- -------- - ------ CASH FLOWS FROM FINANCING ACTIVITIES Net change in: Deposits 4,708 833 1,426 Securities loaned and securities sold under repurchase agreements 8,334 (492) (8,174) Other short-term borrowings 3,425 (2,198) (399) Issuances of long-term debt* 4,262 4,786 2,426 Repayments of long-term debt (1,312) (1,634) (1,624) Issuances of common stock 19 15 7 Repurchase and retirement of common stock (17) (1) (46) Issuances of preferred stock - 221 342 Redemptions and repurchases of preferred stock (49) - (205) Purchases of treasury stock (608) (38) (267) Cash dividends paid (392) (372) (332) Other, net 258 34 23 - ---------------------------------------------------------------------- -------- - ------ Net cash provided by (used in) financing activities 18,628 1,154 (6,823) - ---------------------------------------------------------------------- -------- - ------ Net effect of exchange rate changes on cash 8 (7) 79 - ---------------------------------------------------------------------- -------- - ------ NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (831) 390 202 Cash and due from banks, beginning of year 2,399 2,009 1,807 - ---------------------------------------------------------------------- -------- - ------ Cash and due from banks, end of year 1,568 2,399 2,009 Interest paid $ 5,513 $ 5,110 3,757 ====================================================================== ======== = ====== Income taxes paid, net $ 329 $ 282 285 ====================================================================== ======== = ====== Noncash investing activities: Conversions of loans to other real estate and assets acquired in credit workouts $ 24 $ 24 $ 73 Exchanges of Chilean government bonds for annuity contracts 76 88 91 Other** 203 - 32 - ---------------------------------------------------------------------- -------- -------- -------- Total noncash investing activities $ 303 $ 112 $ 196 ====================================================================== ======== ======== ======== Noncash financing activity: conversion of debt to preferred stock $ 1 $ 245 $ - ====================================================================== ======== ======== ========
* Includes $730 million related to mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital. ** 1996 amount related to treasury stock associated with acquisition. The accompanying notes are an integral part of the supplemental financial statements. 50 NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS NOTE 1--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES 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 "Exchange Ratio"). The Merger was treated as a tax free exchange. The supplemental 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. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling of interests method in financial statements that do not include the date of consummation. The supplemental consolidated financial statements do not extend through the date of consummation. However, they will become the historical consolidated financial statements of Bankers Trust New York Corporation together with its subsidiaries (the "Corporation" or the "Firm") after financial statements covering the date of consummation of the business combination are issued. The supplemental 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 supplemental consolidated financial statements, including the notes thereto, should be read in conjunction with the historical consolidated financial statements of Alex. Brown and Bankers Trust New York Corporation, included in their Annual Reports on Form 10-K for the fiscal years ended December 31, 1996. The Corporation The Corporation is a global provider of a wide range of financial services. The accounting policies of the Corporation conform with generally accepted accounting principles and prevailing industry practices. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from management's estimates. The following is a description of the significant accounting policies of the Corporation. Principles of Consolidation The consolidated financial statements of the Corporation include Bankers Trust New York Corporation (the "Parent Company"), Bankers Trust Company and its subsidiaries ("BTCo") and all other significant, majority-owned subsidiaries, after elimination of material intercompany transactions and accounts. Other companies in which there is at least 20 percent ownership are accounted for in accordance with the equity method of accounting. These investments are reported in other assets and the related equity income or loss, as well as disposition gains and losses, is included in other noninterest revenue. Resale and Repurchase Agreements; Securities Borrowed Resale and repurchase agreements are generally treated as collateralized financing transactions and are carried at the amounts at which the securities were initially acquired or sold. The Corporation generally takes possession of securities purchased under resale agreements, which are primarily U.S. government and federal agency securities and other OECD country sovereign bonds, monitors their fair value and requests additional collateral when deemed appropriate. The Corporation offsets resale and repurchase agreements which meet the applicable netting criteria. 51 Securities borrowed that are cash collateralized are recorded at the amount of cash collateral deposited with the lender. The Corporation monitors its market exposure with respect to securities borrowed transactions daily and requests the return of excess collateral as required. Trading Securities; Securities Available for Sale The Corporation designates securities as either trading or available for sale at the date of acquisition. Debt and marketable equity securities and money market instruments which are classified as trading assets, as well as short trading positions which are classified as trading liabilities are carried at their fair values with the resulting gains and losses included in trading revenue. Securities available for sale, including applicable hedges, are valued at fair value with the resulting net unrealized gains or losses recorded in stockholders' equity as securities valuation allowance. Realized gains and losses, as well as the amortization of premiums and accretion of discounts, are recorded in earnings. The specific identification method is used to determine the cost of securities sold. Fair value is generally based on quoted market prices or broker or dealer price quotations. Derivatives Swaps, futures contracts, forward commitments, options and other similar types of contracts and commitments based on either interest rates or foreign exchange rates, as well as equity and commodity derivatives, are traded by the Corporation and are carried at their fair values as either trading assets or trading liabilities. Fair values for derivatives are based on quoted market prices or pricing models which take into account current market and contractual prices of the underlying instruments, as well as time value and yield curve or volatility factors underlying the positions. Unrealized gains and losses are reported as assets and liabilities except for gains and losses arising from contracts covered by qualifying master netting agreements which are reported on a net basis. Gains and losses resulting from these positions are included in trading revenue. In addition to its trading activities, the Corporation, as an end user, utilizes various types of derivative products (principally interest rate and currency swaps) to manage the interest rate, currency and other market risks arising from a number of categories of its assets and liabilities. Derivatives used to manage such risks must be designated as a hedge at their inception and must remain effective as a hedge throughout the hedge period. 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. Realized gains and losses on hedges of equities classified as other assets are included in the carrying amounts of those assets and are ultimately recognized in income when those assets are sold. Derivatives are also used to manage the risks associated with securities available for sale. These derivatives are carried at fair value with the resulting net unrealized gains and losses recorded in stockholders' equity as securities valuation allowance. The discount or premium on foreign exchange forward contracts and the interest on swaps used as hedges of net investments in foreign entities, as well as the net unrealized gains and losses from revaluing these contracts to the spot exchange rates, are recorded in stockholders' equity as cumulative translation adjustments. 52 Loans, Other Real Estate and Other Nonperforming Assets Loans generally are stated at their outstanding unpaid principal balances net of any deferred fees on originated loans, or unamortized premiums or discounts on purchased loans. Interest income is accrued on the unpaid principal balance. Loan origination fees are deferred and recognized as an adjustment of the yield (interest income) of the related loans. Generally, when a loan is in default as to payment of principal or interest for 90 days or when, in the judgment of management, the accrual of interest should be ceased before 90 days, it is the Corporation's policy to place such a loan on a "cash basis." In addition, all loans classified as doubtful and all partially charged-off loans are placed on a cash basis, even if the borrower is still making required payments. Any accrued but unpaid interest previously recorded on cash basis loans is reversed against current period interest revenue. Cash receipts of interest on cash basis loans are recorded as either revenue or a reduction of principal, according to management's judgment as to the collectibility of principal. Renegotiated loans are those which have been renegotiated to an effective interest rate lower than the then-current market rate because of a deterioration in the financial position of the borrower. Interest on such loans is accrued at the renegotiated rate. Other real estate and other assets acquired in credit work-outs, are recorded at the lower of fair value or the recorded investment in the related loan and are classified as other assets. Any excess of the recorded investment in the loan over the fair value of the asset acquired is accounted for as a charge to the allowance for credit losses. Allowance For Credit Losses The allowance for credit losses is available for credit losses arising from the Corporation's portfolio which comprises loans, credit-related commitments, derivatives and other financial instruments. Whenever the Credit Audit Department determines that the probability of loss is greater than 50 percent, a charge-off of the amount deemed uncollectible is recommended to the Audit Committee of the Board of Directors. Subsequent recoveries, if any, are credited to the allowance. Included in the allowance for credit losses is a valuation allowance for impaired loans. A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the loan's contractual terms. Impairment is measured based on one of the following: the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. A multitude of complex and changing factors are collectively weighed by management in determining the adequacy of the allowance. These factors include management's review of the extent of existing risks in the portfolio and of prevailing economic conditions, evaluations of the quality of the portfolio by the Credit Audit Department and by the bank regulatory authorities, and the actual loss experience and the level of the allowance. Assessing the adequacy of the allowance for credit losses is inherently subjective as it requires making material estimates, including the amount and timing of future cash flows expected to be received on impaired loans, that may be susceptible to significant change. In the opinion of management, the allowance, when taken as a whole, is adequate to absorb reasonably estimated credit losses inherent in the Corporation's entire portfolio. Beginning December 31, 1996, 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 to a portion reported as a reduction of loans and a portion related to other credit-related items reported as other 53 liabilities. Prior year amounts have not been restated. Due to the inherent subjectivity in assessing the adequacy of the allowance for credit losses discussed above, management expects that the allocation of the total allowance for credit losses may be adjusted as risk factors change. Customer Receivables Customer receivables include amounts due on uncompleted transactions and margin balances. Securities owned by customers and held as collateral for these receivables are not reflected in the financial statements. Premises and Equipment Premises and equipment owned are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the terms of the leases or the estimated useful lives of the improvements, whichever are shorter. Maintenance and repairs are charged to expense and improvements are capitalized. Gains and losses on dispositions are generally reflected in earnings. Leased properties meeting certain criteria are capitalized and amortized using the straight-line method over the terms of the leases. Insurance Revenue and Expense For the Corporation's life insurance subsidiaries, premiums are recognized as revenue over the premium paying period of the related disability, annuity and other life insurance policies and are recorded in noninterest revenue as insurance premiums. Liabilities for future insurance benefits and the related provision for policyholder benefits reflect the present value of actuarially determined obligations net of future premiums. The liabilities for future benefits are included in other liabilities and the expense recorded in noninterest expenses as provision for policyholder benefits. Income Taxes The Corporation recognizes the current and deferred tax consequences of all transactions that have been recognized in the financial statements using the provisions of the enacted tax laws. Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences. The amount of deferred tax assets is reduced, if necessary, to the amount that, based on available evidence, will more likely than not be realized. Stock-Based Compensation The Corporation accounts for its stock option awards under the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock. The Corporation makes pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied as required by Statement of Financial Accounting Standards ("SFAS") 123, "Accounting for Stock-Based Compensation." The Corporation records its obligations under outstanding deferred stock awards in stockholders' equity as common stock issuable-stock awards. The related deferred compensation is also included in stockholders' equity. These classifications are based upon the Corporation's intent to settle these awards with its common stock. 54 Statement of Cash Flows For purposes of the consolidated statement of cash flows, the Corporation's cash and cash equivalents are cash and due from banks. Net cash flows from instruments such as futures, forwards, options and swaps used to hedge assets or liabilities are classified as cash flows from operating activities. The Corporation reports the cash flows from loans made to customers and principal collected on loans, as well as from interest-bearing deposits accepted and repaid by its bank subsidiaries, on a net basis. Since the gross cash flows from the Corporation's nonbank subsidiaries' loans and interest-bearing deposits are not significant to the consolidated statement, such cash flows are also reported on a net basis. Reclassifications Certain prior period amounts have been reclassified to conform to the current presentation. 55 NOTE 2--CHANGE IN ACCOUNTING PRINCIPLES Loan Impairment On January 1, 1995, the Corporation adopted SFAS 114, "Accounting by Creditors for Impairment of a Loan." This statement, as amended by SFAS 118, "Accounting for Impairment of a Loan--Income Recognition and Disclosures," requires the creation of a valuation allowance for impaired loans based on one of the following: the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Under SFAS 114, a loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the loan's contractual terms. Adoption of this standard resulted in an allocation of a portion of the existing allowance for credit losses to a specific valuation allowance for impaired loans. Additionally, under SFAS 114, a loan is classified as in-substance foreclosure when physical possession of the collateral has been taken regardless of whether formal foreclosure proceedings have taken place. As a result, during the first quarter of 1995, loans previously classified as other real estate but for which the Corporation had not taken possession of the collateral were transferred to cash basis loans. This reclassification did not impact the Corporation's financial condition or results of operations. 56 NOTE 3--TRADING ASSETS AND TRADING LIABILITIES The components of these accounts, which are carried at fair value, were as follows:
(in millions) December 31, 1996 1995 - --------------------------------------------------------- ------- ------- TRADING ASSETS U.S. government and agency securities $ 7,643 $10,639 Obligations of U.S. states and political subdivisions 392 430 Foreign government securities 8,823 9,681 Corporate debt securities 8,039 5,695 Equity securities 6,089 5,116 Swaps, options and other derivative contracts (1) 11,410 10,555 Bankers acceptances and certificates of deposit` 2,542 1,572 Other 4,191 4,316 - --------------------------------------------------------- ------- ------- Total trading assets $49,129 $48,004 ========================================================= ======= ======= TRADING LIABILITIES Securities sold, not yet purchased U.S. government and agency securities $ 4,921 $ 8,022 Obligations of U.S. states and political subdivisions - 7 Foreign government securities 2,747 3,098 Equity securities 4,174 3,275 Other 334 479 Swaps, options and other derivative contracts(1) 11,585 11,264 - --------------------------------------------------------- ------- ------- Total trading liabilities $23,761 $26,145 ========================================================= ======= =======
(1) Comprised of fair values of interest rate instruments, foreign exchange rate instruments, and equity and commodity instruments, reduced by the effects of master netting agreements, in accordance with Financial Accounting Standards Board ("FASB") Interpretation No. 39 ("FIN 39"), "Offsetting of Amounts Related to Certain Contracts." Securities sold, not yet purchased are recorded as liabilities on the balance sheet and have off-balance sheet market risk to the extent that the Corporation, in satisfying this obligation, may have to purchase securities at a higher market price than that recorded on the balance sheet. 57 NOTE 4--SECURITIES AVAILABLE FOR SALE The fair value, amortized cost, and gross unrealized holding gains and losses for the Corporation's securities available for sale follow:
(in millions) December 31, 1996 - -------------------------- ------- Gross Amor Fair Unrealized Holding tized --------------------------------------- Value Gains (Losses) Cost ------ ------------------ ------------------- ------ Debt securities U.S. government and agencies $ 332 $ - $ - $ 332 States of the U.S. and political subdivisions 1,261 51 (37) 1,247 Asset-backed 1,352 1 (1) 1,352 Foreign governments 1,455 33 (4) 1,426 Corporate debt 2,872 22 (26) 2,876 Mortgage-backed 12 - - 12 Equity securities 636 138 (12) 510 - ------------------------------------- ------ ------------------ ------------------- ------ Total securities available for sale $7,920 $ 245 $ (80) $7,755 ===================================== ====== ================== ================== ====== (in millions) December 31, 1995 1994 - -------------------------- ---- ---- Gross Amor- Gross Amor- Fair Unrealized Holding tized Fair Unrealized Holding tized ------------------ ------------------ Value Gains (Losses) Cost Value Gains (Losses) Cost ----- ----- ------ ---- ----- ----- ------ ---- Debt securities U.S. government and agencies $ 431 $ 2 $ (5) $ 434 $ 893 $ 8 $ (19) $ 904 States of the U.S. and political subdivisions 1,387 66 (56) 1,377 2,249 75 (46) 2,220 Asset-backed 1,198 4 (6) 1,200 1,447 4 (4) 1,447 Foreign governments 1,669 14 (11) 1,666 1,469 37 (11) 1,443 Corporate debt 1,179 13 (17) 1,183 1,000 21 (14) 993 Mortgage-backed 9 - - 9 - - - - Equity securities 410 83 (8) 335 417 125 (7) 299 - ------------------------------------- ------ ----- ----- ------ -------- ----- --------- ------ Total securities available for sale $6,283 $ 182 $(103) $6,204 $7,475 $ 270 $(101) $7,306 ===================================== ====== ===== ===== ====== ======== ===== ========= ======
Except for securities of the Government of Chile, there were no securities of any individual issuer included in securities available for sale that exceeded 10 percent of the Corporation's total stockholders' equity at December 31, 1996. The Chilean securities are part of the portfolio of Consorcio having an amortized cost and a fair value of $562 million and $573 million, respectively. 58 The components of securities available for sale gains as reported in the consolidated statement of income follow:
(in millions) Year Ended December 31, 1996 1995 1994 - ------------------------------------------- ------ ------ ------ Debt securities--gross realized gains $ 39 $ 28 $ 43 Debt securities--gross realized losses (11) (27) (39) Equity securities--net realized gains 47 179 68 - ------------------------------------------- ----- ----- ----- Total securities available for sale gains $ 75 $ 180 $ 72 =========================================== ===== ===== =====
The following table shows the fair value, remaining maturities, approximate weighted average yields (based on amortized cost) and total amortized cost by maturity distribution of the debt components of the Corporation's securities available for sale at December 31, 1996.
Maturity Distribution ----------------------------------------------------------------------------------------------------------- After One After Five Within But Within But Within After Mortgage One Year Five Years Ten Years Ten Years Backed Total -------- ---------- ---------- --------- -------------- -------------- ($ in millions) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield - ----------------- -------- ------ ---------- ------ ---------- ------ --------- ------ ------ ------ ------ ------ U.S. government and agencies $ 266 5.98% $ 63 5.91% $ - -% $ 3 6.60% $ - -% $ 332 5.97% States of the U.S. and political subdivisions 75 2.39 312 4.48 443 5.69 431 6.05 - - 1,261 5.29 Asset-backed securities 173 5.53 699 6.11 371 5.98 109 6.14 - - 1,352 6.00 Foreign government securities 525 16.12 467 6.71 274 6.77 189 6.91 - - 1,455 10.16 Corporate debt 1,686 5.76 972 5.66 144 5.64 70 7.46 - - 2,872 5.76 Mortgage-backed - - - - - - - - 12 15.24 12 15.24 - ----------------- ------ ----- ------ ---- ------ ---- --------- ----- ------ ----- ------ ----- Total fair value $2,725 $2,513 $1,232 $802 $12 $7,284 ================= ====== ====== ====== ========= ====== ====== Total amortized cost $2,717 $2,519 $1,214 $783 $12 $7,245 ================= ====== ====== ====== ========= ====== ======
59 NOTE 5--LOANS The following table summarizes the composition of loans at the end of each of the last five years:
($ in millions) December 31, 1996 1995 1994 1993 1992 - ------------------------------ ------- ------- ------- ------- ------- Domestic Commercial and industrial $ 3,422 21% $ 2,520 20% $ 2,218 18% $ 2,794 18% $ 3,727 21% Financial institutions 1,631 10 1,778 14 2,221 17 3,210 21 4,544 26 Real estate Construction 133 1 154 1 234 2 245 2 261 2 Mortgage 1,562 10 1,276 10 1,126 9 1,550 10 1,625 9 Other 1,436 9 1,490 11 1,078 8 1,809 12 1,316 8 - ------------------------------ ------- --- ------- --- ------- --- ------- --- ------- --- Total domestic 8,184 51 7,218 56 6,877 54 9,608 63 11,473 66 - ------------------------------ ------- --- ------- --- ------- --- ------- --- ------- --- International Governments and official institutions 237 1 227 2 184 2 456 3 1,316 8 Banks and other financial institutions 3,482 22 1,543 13 2,994 24 1,935 12 1,076 6 Commercial and industrial 2,759 17 1,934 15 1,428 11 1,721 11 1,930 11 Real estate Construction - - 2 - 2 - 2 - 18 - Mortgage 130 1 176 1 138 1 261 2 394 2 Other 1,290 8 1,701 13 1,014 8 1,346 9 1,212 7 - ------------------------------ ------- --- ------- --- ------- --- ------- --- ------- --- Total international 7,898 49 5,583 44 5,760 46 5,721 37 5,946 34 - ------------------------------ ------- --- ------- --- ------- --- ------- --- ------- --- Gross loans 16,082 100% 12,801 100% 12,637 100% 15,329 100% 17,419 100% === === === === Less: unearned income 202 120 102 100 97 - ------------------------------ ------- ------- ------- ------- ------- Total loans $15,880 $12,681 $12,535 $15,229 $17,322 ============================== ======= ======= ======= ======= =======
On a global basis, the commercial and industrial category and the "other" category included no single industry group with aggregate borrowings from the Corporation in excess of 10 percent of the total loan portfolio at December 31, 1996. 60 The following table shows certain maturity information for the Corporation's loans at December 31, 1996, excluding 1-4 family mortgages, installment loans and lease financing:
Remaining Maturity ----------------------------------- Within After One After One But Within Five (in millions) Year Five Years Years Total - -------------------------------------------- ------ ---------- ------ ------- Domestic Commercial and industrial $ 483 $2,035 $ 904 $ 3,422 Financial institutions 1,470 141 20 1,631 Real estate Construction 10 123 - 133 Mortgage 443 825 102 1,370 Other 1,028 133 46 1,207 - -------------------------------------------- ------ ------ ------ ------- Total domestic 3,434 3,257 1,072 7,763 International 5,349 1,864 357 7,570 - -------------------------------------------- ------ ------ ------ ------- Total $8,783 $5,121 $1,429 $15,333 ============================================ ====== ====== ====== ======= Loans due after one year With predetermined interest rates $1,780 $ 475 ============================================ ====== ====== With floating or adjustable interest rates $3,341 $ 954 ============================================ ====== ======
Cash Basis Loans and Renegotiated Loans The Corporation's cash basis loans and renegotiated loans are summarized as follows:
(in millions) December 31, 1996 1995 - ---------------------------- ----- ----- Cash basis loans Domestic $ 350 $ 570 International 102 174 - ---------------------------- ----- ----- Total cash basis loans $ 452 $ 744 ============================ ===== ===== Renegotiated loans Domestic $ 37 $ 100 International - - - ---------------------------- ----- ----- Total renegotiated loans $ 37 $ 100 ============================ ===== =====
At December 31, 1996 and 1995, the Corporation had commitments to make additional loans to borrowers on a cash basis or renegotiated status of $26 million and $27 million, respectively. 61 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 December 31 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.
(in millions) Year Ended December 31, 1996 1995 1994 - ---------------------------------------- ----- ----- ----- Domestic loans Gross amount of interest that would have been recorded at original rate $ 38 $ 64 $ 52 Less, interest, net of reversals, recognized in interest revenue 7 13 3 - ---------------------------------------- ----- ----- ----- Reduction of interest revenue 31 51 49 - ---------------------------------------- ----- ----- ----- International loans Gross amount of interest that would have been recorded at original rate 9 15 27 Less, interest, net of reversals, recognized in interest revenue - - 4 - ---------------------------------------- ----- ----- ----- Reduction of interest revenue 9 15 23 - ---------------------------------------- ----- ----- ----- Total reduction of interest revenue $ 40 $ 66 $ 72 ======================================== ===== ===== =====
On January 1, 1995, the Corporation adopted SFAS 114. This statement, as amended by SFAS 118, requires the creation of a valuation allowance for impaired loans. A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the loan's contractual terms. At December 31, 1996 and December 31, 1995, the recorded investment in loans that was considered to be impaired under SFAS 114 was $489 million and $844 million, respectively, which consisted of total cash basis loans and renegotiated loans. Included in these amounts were $227 million and $458 million of loans which required a valuation allowance of $57 million and $90 million at those same dates, respectively. The average recorded investment in impaired loans during the years ended December 31, 1996 and December 31, 1995 was approximately $633 million and $951 million, respectively. For the years ended December 31, 1996 and December 31, 1995, the Corporation recognized interest income on impaired loans of $7 million and $13 million, respectively, using the cash basis method of income recognition described above and in Note 1. Also as a result of the adoption of SFAS 114, $35 million of in- substance foreclosed properties were transferred from other real estate to cash basis loans for the year ended December 31, 1995. 62 NOTE 6--ALLOWANCE FOR CREDIT LOSSES An analysis of the changes in the Corporation's allowance for credit losses follows:
(in millions) Year Ended December 31, 1996 1995 1994 - --------------------------------------- ----- ------ ------ Balance, beginning of year $ 992 $1,252 $1,324 - --------------------------------------- ----- ------ ------ Net charge-offs Charge-offs 89 330 168 Recoveries 65 39 71 - --------------------------------------- ----- ------ ------ Total net charge-offs 24 291 97 Provision for credit losses 5 31 25 - --------------------------------------- ----- ------ ------ Balance, end of year (1) $ 973 $ 992 $1,252 ======================================= ===== ====== ====== (1) Allocation*: Loans $ 773 Other liabilities 200 - --------------------------------------- ----- Balance, end of year $ 973 ======================================= =====
* See Note 1 for discussion of allowance for credit losses. 63 NOTE 7--PREMISES AND EQUIPMENT; LEASES An analysis of premises and equipment follows:
(in millions) December 31, 1996 1995 - ------------------------------------------------ ------ ------ Land $ 99 $ 73 Buildings 425 321 Leasehold improvements 393 369 Furniture and equipment 1,138 1,029 Property leased under capital leases Land and buildings - 76 Equipment 3 3 Construction-in-progress 29 14 - ------------------------------------------------ ------ ------ Total 2,087 1,885 Less accumulated depreciation and amortization 1,063 948 - ------------------------------------------------ ------ ------ Net book value $1,024 $ 937 ================================================ ====== ======
Included in accumulated depreciation and amortization was accumulated amortization related to capital leases of $2 million and $28 million at December 31, 1996 and 1995, respectively. The Corporation is a lessee under lease agreements covering real property and equipment. Certain leases contain purchase or bargain renewal options. On January 24, 1996, BTCo closed on the purchase of One Bankers Trust Plaza which, at December 31, 1995, was classified as property leased under capital leases. The future minimum lease payments required under the Corporation's noncancelable operating leases at the end of 1996 were as follows:
(in millions) December 31, 1996 - ------------------------------ ------ 1997 $ 82 1998 75 1999 72 2000 69 2001 56 2002 and later 277 ----- Total minimum lease payments $ 631* =====
* Net minimum lease payments were $619 million after deducting minimum noncancelable sublease rentals of $12 million. The following shows the net rental expense for all operating leases:
(in millions) Year Ended December 31, 1996 1995 1994 - --------------------------------------- ----- ----- ----- Gross rental expense $ 103 $ 102 $ 103 Less sublease rental income 3 3 9 - --------------------------------------- ----- ----- ----- Net rental expense $ 100 $ 99 $ 94 ======================================= ===== ===== =====
64 NOTE 8--SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER SHORT-TERM BORROWINGS Short-term borrowings are borrowed funds generally with an original maturity of one year or less. Debt instruments which contain a provision for early redemption, exercisable at the option of the security holder, are classified on the basis of the earliest possible redemption date. Securities sold under repurchase agreements and federal funds purchased generally mature in one day; commercial paper generally matures within 90 days. The details of these borrowings for the years 1996, 1995 and 1994 are presented below:
($ in millions) 1996 1995 1994 - --------------------------------------------- -------- -------- -------- Securities loaned and securities sold under repurchase agreements Balance at year end $23,454 $15,684 $15,867 Average amount outstanding 26,961 21,861 22,119 Maximum amount outstanding at any month end 30,471 28,465 29,077 Average interest rate for the year 5.93% 5.44% 4.20% Average interest rate on year-end balance 5.81% 6.21% 5.34% Federal funds purchased Balance at year end $ 5,475 $ 4,658 $ 3,463 Average amount outstanding 3,684 3,623 2,908 Maximum amount outstanding at any month end 6,982 6,313 6,742 Average interest rate for the year 4.97% 5.47% 3.37% Average interest rate on year-end balance 5.77% 5.07% 4.60% Commercial paper Balance at year end $ 8,080 $ 6,860 $ 8,009 Average amount outstanding 7,399 7,022 7,387 Maximum amount outstanding at any month end 9,076 8,239 9,378 Average interest rate for the year 5.78% 6.25% 4.59% Average interest rate on year-end balance 5.61% 5.81% 5.38% Other Balance at year end $ 5,854 $ 4,343 $ 6,796 Average amount outstanding 5,373 5,802 7,074 Maximum amount outstanding at any month end 6,534 7,079 7,925 Average interest rate for the year 7.26% 7.03% 6.56% Average interest rate on year-end balance 6.08% 7.41% 6.27%
65 NOTE 9--LONG-TERM DEBT In accordance with the Federal Reserve Board's Capital Adequacy Guidelines, long-term debt included in risk-based capital must meet specific criteria. Generally, qualifying debt must be unsecured, subordinated and have an original weighted-average maturity of at least five years. Additionally, the outstanding amount of long-term debt included in risk-based capital is reduced as these issues approach maturity. That is, one-fifth of the original issue is amortized each year during the last five years before maturity. Long-term debt included in risk-based capital and other long-term debt are summarized as follows, based on the contractual terms of each issue: Long-term debt included in risk-based capital
Dec. 31, Dec. 31, Subordinated Subordinated 1996 1995 (in millions) Fixed Rate Floating Rate Total Total - ----------------------------------------------------- ------------ ------------- --------- --------- Parent Company Due in 1996 $ - $ - $ - $ 150 Due in 1997 199 - 199 199 Due in 1998 - - - - Due in 1999 100 150 250 250 Due in 2000 200 - 200 199 Due in 2001 210 - 210 210 Due in 2002-2006 1,020 413 1,433 1,331 Thereafter 710 - 710 414 - ----------------------------------------------------- ------ ---- ------ ------ Total $2,439 $563 $3,002 $2,753 - ----------------------------------------------------- ------ ---- ------ ------ BTCo Due in 1996 $ - $ - $ - $ - Due in 1997 24 - 24 25 Due in 1998 27 - 27 28 Due in 1999 8 - 8 7 Due in 2000 7 - 7 7 Due in 2001 7 - 7 6 Due in 2002-2006 26 - 26 24 Thereafter - - - - - ----------------------------------------------------- ------ ---- ------ ------ Total $ 99 $ - $ 99 $ 97 - ----------------------------------------------------- ------ ---- ------ ------ Total long-term debt $3,101 $2,850 - ----------------------------------------------------- ------ ------ Less: Amortization for risk-based capital purposes (525) (490) - ----------------------------------------------------- ------ ------ Total long-term debt included in risk-based capital $2,576 $2,360 ===================================================== ====== ======
66 Long-term debt not included in risk-based capital
Dec. 31, Dec. 31, Senior Senior 1996 1995 (in millions) Fixed Rate Floating Rate Total Total - --------------------------------------------------------- ---------- ------------- -------- -------- Parent Company Due in 1996 $ - $ - $ - $ 594 Due in 1997 - 66 66 25 Due in 1998 102 420 522 544 Due in 1999 251 29 280 42 Due in 2000 4 457 461 482 Due in 2001 286 563 849 56 Due in 2002-2006 137 59 196 138 Thereafter - - - - - --------------------------------------------------------- ---- ------ ------ ------ Total $780 $1,594 $2,374 $1,881 - --------------------------------------------------------- ---- ------ ------ ------ BTCo Due in 1996 $ - $ - $ - $ 564 Due in 1997 21 1,590 1,611 1,099 Due in 1998 100 303 403 280 Due in 1999 21 119 140 92 Due in 2000 - 987 987 1,464 Due in 2001 8 644 652 63 Due in 2002-2006 332 449 781 591 Thereafter 8 155 163 21 - --------------------------------------------------------- ---- ------ ------ ------ Total $490 $4,247 $4,737 $4,174 - --------------------------------------------------------- ---- ------ ------ ------ BT Alex. Brown Incorporated Senior/Junior Subordinated Notes due Feb. 1997 to Nov. 1999 ($62 million at fixed rate at Dec. 1996) $ 518 $ 320 Senior Floating Rate Note due Sept. 1998 to Mar. 1999 499 200 Term loans due February 1997 to August 1999 16 20 Bankers Trust (Delaware) Zero Coupon Bank Notes due Dec. 1996 - 42 BTC Mortgage Investors Trust (fixed rate) 63 - - --------------------------------------------------------- ------ ------ Total long-term debt $8,207 $6,637 Add: Amortization for risk-based capital purposes 525 490 - --------------------------------------------------------- ------ ------ Total long-term debt not included in risk-based capital $8,732 $7,127 ========================================================= ====== ======
Based solely on the contractual terms of the debt issues, at December 31, 1996 and 1995 the Corporation's total fixed rate long-term debt had a weighted average interest rate of 7.28 percent and 7.51 percent, respectively. The Corporation has entered into interest rate and currency swap agreements for many of its long-term debt issues, in order to manage its interest rate and currency risks. The interest rates for the floating rate debt issues and the fixed rate debt issues effectively converted to floating are generally based on LIBOR, although in certain instances they are subject to minimum interest rates as specified in the agreements governing the respective issues. 67 The weighted average effective interest rates for total long-term debt, including the effects of the related swap agreements, were 5.90 percent and 6.40 percent at December 31, 1996 and 1995, respectively. The Corporation issued $25 million convertible subordinated debentures in June 1986. The debentures are due June 2001, bear interest at 5 3/4% and are convertible into the Corporation's common stock at the rate of one share of common stock for each $20.90 of principal amount of debentures. The debentures are redeemable at the option of the Corporation at 100.5% through June 11, 1997 and at par thereafter. During 1996 and 1995, $75,000 and $13,040,000 par value, respectively, of the debentures were converted into 3,586 and 623,685 shares, respectively, of the Corporation's common stock. Mandatory convertible securities (equity commitment and equity contract notes) include covenants requiring the Parent Company, from time to time or at maturity, as appropriate, to issue common stock or other securities in an amount equal to the principal amount of the debt securities, in order to comply with capital adequacy guidelines. In this regard, at December 31, 1996 and 1995, the Parent Company had dedicated $448 million and $598 million, respectively of net proceeds from such issuances. At December 31, 1996 and 1995, certain subsidiaries of Bankers Trust Company had outstanding $2.76 billion and $2.94 billion, respectively of mandatory redeemable preference securities as included in the table above which are not included in risk-based capital. Maturities at December 31, 1996 range from March 1997 to October 2002 and maturities at December 31, 1995 range from September 1996 to December 2003. 68 NOTE 10--MANDATORILY REDEEMABLE CAPITAL SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES INCLUDED IN RISK-BASED CAPITAL Corporation-Obligated BT Institutional Capital Trust A ("Trust A") and BT Institutional Capital Trust B ("Trust B"), wholly-owned subsidiaries of the Corporation, have outstanding $300 million 8.09% Capital Securities, Series A, ("Series A Securities") and $200 million 7.75% Capital Securities, Series B ("Series B Securities"), respectively (collectively, the "Capital Securities"). The Capital Securities have a liquidation value of $1,000 per Capital Security. Series A Securities and Series B Securities represent preferred undivided beneficial interests in the assets of Trust A and Trust B, respectively. The Corporation is the holder of all of the beneficial interests represented by common securities of Trust A and Trust B ("Common Securities" and, collectively with the Capital Securities, the "Trust Securities"). Trust A and Trust B exist for the sole purpose of issuing the Trust Securities and investing the proceeds thereof in 8.09% Junior Subordinated Deferrable Interest Debentures, Series A and 7.75% Junior Subordinated Deferrable Interest Debentures, Series B (collectively, the "Junior Subordinated Debentures") issued by the Corporation. The Junior Subordinated Debentures are unsecured and subordinated to all senior indebtedness of the Corporation and will be the sole assets of Trust A and Trust B. Payments under the Junior Subordinated Debentures by the Corporation are the same as those for the Capital Securities described below. The Corporation has guaranteed all of the obligations of Trust A and Trust B under the Capital Securities, but only in each case to the extent of funds held by Trust A and Trust B, respectively. Holders of the Series A Securities and Series B Securities will be entitled to receive preferential cumulative cash distributions accumulating from December 1, 1996 and payable semi-annually in arrears on the first day of June and December of each year, commencing June 1, 1997, at the annual rate of 8.09% and 7.75%, respectively, of the liquidation amount of $1,000 per Capital Security. The Capital Securities are subject to mandatory redemption upon repayment of the Junior Subordinated Debentures at maturity on December 1, 2026. The Junior Subordinated Debentures may be redeemed at the option of the Corporation on or after December 1, 2006, or at any time upon the occurrence of certain events. BTCo-Obligated BTC Capital Trust I (the "Trust"), a wholly-owned subsidiary of BTCo, has outstanding $250 million Floating Rate Capital Securities, Series A (the "Capital Securities"). The Capital Securities have a liquidation value of $1,000 per Capital Security. The Capital Securities represent preferred undivided beneficial interests in the assets of the Trust. BTCo is the holder of all of the beneficial interests represented by common securities of the Trust ("Common Securities" and, collectively with the Capital Securities, the "Trust Securities"). The Trust exists for the sole purpose of issuing the Trust Securities and investing the proceeds thereof in Floating Rate Junior Subordinated Deferrable Interest Debentures, Series A (the "Junior Subordinated Debentures") issued by BTCo. The Junior Subordinated Debentures are unsecured and subordinated to all senior indebtedness of BTCo and will be the sole assets of the Trust. Payments under the Junior Subordinated Debentures by BTCo are the same as those for the Capital Securities described below. BTCo has guaranteed all of the Trust's obligations under the Capital Securities, but only in each case to the extent of funds held by the Trust. 69 Holders of the Capital Securities will be entitled to receive preferential cumulative cash distributions accumulating from December 30, 1996 and payable quarterly in arrears on each March 30, June 30, September 30, and December 30, commencing March 30, 1997, in respect of the liquidation amount of $1,000 per Capital Security at a rate per annum equal to 3-Month LIBOR plus 0.75%. The Capital Securities are subject to mandatory redemption upon repayment of the Junior Subordinated Debentures at maturity on December 30, 2026. In addition, the Junior Subordinated Debentures may be redeemed at the option of BTCo on or after December 30, 2006, or at any time upon the occurrence of certain events. See Note 28 for details of mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital ("trust preferred capital securities") issued subsequent to December 31, 1996. 70 NOTE 11--PREFERRED STOCK OF SUBSIDIARY On January 22, 1993, BT Overseas Finance N. V. ("BTOF"), an indirect, wholly- owned subsidiary of the Parent Company authorized to issue 10,000 preferred shares, $.01 par value, issued $250 million, or 2,500 shares, of Auction Rate Cumulative Preferred Stock in four series of 625 shares each--Series A-D ("BTOF Preferred"). The BTOF Preferred has contingent voting rights and a liquidation preference of $100,000 per share, plus accrued and unpaid dividends. Each of the four series is identical, except that dividend rates and dividend payment dates vary and separate auctions on different auction dates are held for each series. The shares of each series of BTOF Preferred are redeemable, in whole but not in part, except under certain circumstances, at the option of BTOF at a redemption price of $100,000 per share, plus accrued and unpaid dividends to the date of redemption. Dividends on each series of BTOF Preferred are cumulative and payable generally every 28 days at a rate per annum determined by auction. The rate for any dividend period is subject to a minimum rate, in certain circumstances, based upon the "AA" Corporate Commercial Paper Rate and a maximum rate based upon selected short- and long-term U.S. Treasury securities as determined at the particular auction date. For the years ended December 31, 1996 and 1995, the composite average dividend rates on the four series of BTOF Preferred were 5.64 percent and 6.14 percent, respectively. At December 31, 1996 and 1995, the composite average dividend rates were 5.76 percent and 6.06 percent, respectively. In addition, BTOF and the Parent Company entered into an agreement pursuant to which the Parent Company agreed to sell to BTOF, upon BTOF's exercise of its right to purchase, 2,500 shares (in four series of 625 shares) of the Parent Company's Auction Rate Cumulative Preferred Stock, Series K-N ("Exchange Preferred"). BTOF and the Parent Company also agreed that BTOF will purchase and exchange the Exchange Preferred for BTOF Preferred, upon the Parent Company's exercise of its right to cause such for one or more series, or upon the occurrence of certain other events, in whole but not in part. The purchase price of the Exchange Preferred in either case is $100,000 per share. The Exchange Preferred Stock has terms identical to the BTOF Preferred, except that the Parent Company can redeem the Exchange Preferred in whole or in part, the dividend periods are generally 49 days and the maximum rate for any dividend period under no circumstances will exceed 24 percent per annum. See Note 28 for details regarding the redemption subsequent to December 31, 1996, of BTOF Series A through D Preferred Stock. 71 NOTE 12--PREFERRED STOCK SERIES PREFERRED STOCK The Parent Company is authorized to issue 10 million shares of Series Preferred Stock, without par value. All shares of Series Preferred Stock constitute one and the same class and have equal rank and priority over common stockholders as to dividends and in the event of liquidation. Each series of Series Preferred Stock has a liquidation preference per share (as indicated below), plus accrued and unpaid dividends, as well as contingent voting rights. The Series Preferred Stock outstandings were as follows:
($ in millions) December 31, 1996 1995 - ----------------------------------------- ----- ----- Series J, Outstanding: 447,225 shares $ 45 $ 45 Series Q, Outstanding: 64,771 shares 162 200 Series R, Outstanding: 52,533 shares 131 150 Series I, Outstanding: 1,000,000 shares 100 100 Series O, Outstanding: 592,031 shares 148 147 Series P, Outstanding: 98,795 shares 99 98 Series S, Outstanding: 50,000 shares 125 125 - ----------------------------------------- ----- ----- Total preferred stock $ 810 $ 865 ========================================= ===== =====
Series C Junior Participating Preferred Stock The Parent Company has designated 1 million shares of the Series Preferred Stock as Series C Junior Participating Preferred Stock ("Series C"), which are issuable on the exercise of Preferred Share Purchase Rights pursuant to a Rights Agreement adopted by the Corporation in February 1988. See Note 13 for a more detailed discussion of this agreement. No Series C shares have ever been issued. Fixed/Adjustable Rate Cumulative Preferred Stock, Series D and J On August 31, 1989, the Parent Company issued $250 million, or 5 million shares, of Fixed/Adjustable Rate Cumulative Preferred Stock, Series D (Liquidation Preference--$50 per share) ("Series D"). On October 28, 1992, the Parent Company exchanged 447,225 shares of Fixed/Adjustable Rate Cumulative Preferred Stock, Series J (Liquidation Preference--$100 per share) ("Series J") for 894,450 shares of its Series D amounting to $44,722,500 liquidation value. On September 1, 1994, the Corporation redeemed its remaining outstanding 4,105,550 shares, or $205,277,500 liquidation value, of the Series D Fixed/Adjustable Rate Cumulative Preferred Stock. At the option of the Parent Company, the Series J may be redeemed, in whole or in part, on or after December 1, 1995 and prior to December 1, 1997 at $103.00 per share and thereafter at $100.00 per share, plus accrued and unpaid dividends to the redemption date. However, these shares may be redeemed in whole earlier if the dividend rate is adjusted upwards as a result of an amendment to effect a change in the dividends exclusion per- centage provisions of the Internal Revenue Code. Any optional redemption shall be with the approval of the Federal Reserve Board unless at that time that body should determine that its approval is not required. Dividends on the Series J are cumulative and payable quarterly on March 1, June 1, September 1 and December 1 of each year. The Series J dividend rate is fixed at 7.375 percent per annum prior to December 1, 1997. Thereafter, the dividend rate is determined by a formula that considers the interest rates of selected short- and long-term U.S. Treasury securities at the time the rate is set plus an incremental increase based on a relationship of the Parent Company's then current quarterly cash dividend declared on common stock and the last quarterly cash dividend paid on common stock prior to September 1, 1997. The Series J adjustable rate in no event will be less than 7 percent or greater than 17 percent per annum. Both the fixed and adjustable rates may be subject to 72 adjustment in the event of enactment of an amendment to effect a change in the dividends exclusion percentage provisions of the Internal Revenue Code. The dividend rate for the Series D was fixed at 8.72 percent per annum prior to redemption and the dividend payment dates were identical to Series J. 8.55% Cumulative Preferred Stock, Series I On March 23, 1992, Bankers Trust Company issued $100 million of 6.90% Subordinated Notes due March 1995 (the "Notes"). The Notes, which were guaranteed on a subordinated basis by the Parent Company, were issued as part of 4 million Preferred Purchase Units ("Units"). Each Unit consisted of a Note with a $25 principal amount, a subordinated guaranty by the Parent Company of such Note, and a preferred stock purchase contract (the "Purchase Contract") issued by the Parent Company. Holders of the Units were entitled to receive 8.55 percent per annum with respect to each Unit, payable quarterly, which consisted of the interest on the Notes and a contract fee in respect of the Purchase Contracts. On March 1, 1995, the Notes matured and, in accordance with the original terms of the Purchase Contracts, the holders of the Units were required to purchase 4 million depositary shares, at $25 per share, each representing a one-fourth interest in a share of the Parent Company's 8.55% Cumulative Preferred Stock, Series I (Liquidation Preference--$100 per share) ("Series I"). Dividends on the Series I are cumulative and payable quarterly on March 1, June 1, September 1 and December 1 of each year, commencing on June 1, 1995, at a fixed rate of 8.55 percent of the liquidation preference per annum. Shares of the Series I are not redeemable prior to March 1, 1997, when they will become redeemable at the Parent Company's option at $100 per share, plus an amount equal to accrued and unpaid dividends. Any optional redemption shall be with the approval of the Federal Reserve Board unless at that time that body should determine that its approval is not required. See Note 28 for details regarding the redemption, subsequent to December 31, 1996, of 8.55% Cumulative Preferred Stock, Series I. Auction Rate Cumulative Preferred Stock, Series K, L, M and N The Parent Company, as part of an agreement with BTOF, holds in treasury Auction Rate Cumulative Preferred Stock in four series of 625 shares each-Series K, Series L, Series M and Series N (Liquidation Preference--$100,000 per share). See Note 11 for a more detailed discussion of this agreement and Note 28 for details regarding the redemption, subsequent to December 31, 1996, of BTOF Series A through D Preferred Stock. 7 5/8% Cumulative Preferred Stock, Series O On June 2, 1993, the Parent Company issued $150 million of 7 5/8% Convertible Capital Securities due June 2033. These debt securities were subordinated and could only be redeemed in whole but not in part, on or after June 1, 1998 at par, plus accrued and unpaid interest to the redemption date. On March 1, 1995, the Parent Company reset the interest rate on the 7 5/8% Convertible Capital Securities to a rate of 6 1/8 percent per annum giving holders of this issue the right, at any time prior to redemption or maturity, to convert the debt securities into depositary shares, at $25 per share, each representing a one- tenth interest in a share of the Parent Company's 7 5/8% Cumulative Preferred Stock, Series O (Liquidation Preference--$250 per share) ("Series O"). During 1995, holders of the Convertible Capital Securities converted their securities for approximately 5.9 million depositary receipts, each evidencing a depositary share representing a one-tenth interest in a share of the Corporation's Series O for a total amount of approximately $147 million. 73 Dividends on the Series O are cumulative and payable quarterly on each March 1, June 1, September 1 and December 1, commencing with the date succeeding original issuance. Shares of Series O are redeemable at the Parent Company's option, in whole or in part, at $300 per share (or $30 per depositary share) on or before June 1, 1998 and thereafter at $250 per share (or $25 per depositary share), plus, in each case, accrued and unpaid dividends to the redemption date. Any optional redemption shall be with the approval of the Federal Reserve Board unless at that time that body should determine that its approval is not required. 7.50% Cumulative Preferred Stock, Series P On August 19, 1993, the Parent Company issued $100 million of 7.50% Convertible Capital Securities due August 2033. These debt securities were subordinated and could only be redeemed, in whole but not in part, on or after August 15, 1998 at par, plus accrued and unpaid interest to the redemption date. On May 15, 1995, the Parent Company reset the interest rate on the 7.50% Convertible Capital Securities to a rate of 6.00 percent per annum giving holders of this issue the right, at any time prior to redemption or maturity, to convert the debt securities into depositary shares, at $25 per share, each representing a one- fortieth interest in a share of the Parent Company's 7.50% Cumulative Preferred Stock, Series P (Liquidation Preference--$1,000 per share) ("Series P"). During 1995, holders of the Convertible Capital Securities converted their securities for approximately 3.9 million depositary receipts, each evidencing a depositary share representing a one-fortieth interest in a share of the Corporation's Series P for a total amount of approximately $98 million. Dividends on the Series P are cumulative and payable quarterly on February 15, May 15, August 15 and November 15, commencing with the date succeeding original issuance. Shares of Series P are redeemable at the Parent Company's option, in whole or in part, at $1,200 per share (or $30 per depositary share) on or before August 15, 1998 and thereafter at $1,000 per share (or $25 per depositary share), plus, in each case, accrued and unpaid dividends to the redemption date. Any optional redemption shall be with the approval of the Federal Reserve Board unless at that time that body should determine that its approval is not required. Adjustable Rate Cumulative Preferred Stock, Series Q On March 28, 1994, the Parent Company issued $200 million, or 8 million depositary shares at $25 per share, each representing a one-hundredth interest in a share of Adjustable Rate Cumulative Preferred Stock, Series Q (Liquidation Preference--$2,500 per share) ("Series Q"). During 1996, the Parent Company repurchased approximately 1.5 million shares of Series Q. At the option of the Parent Company, the Series Q may be redeemed, in whole or in part, on or after March 1, 1999, at $2,500 per share (or $25 per depositary share), plus, in each case, accrued and unpaid dividends to the redemption date. Any optional redemption shall be with the approval of the Federal Reserve Board unless at that time that body should determine that its approval is not required. Dividends on the Series Q are cumulative and payable quarterly on March 1, June 1, September 1 and December 1 of each year. The initial dividend rate was 5.90 percent per annum for the dividend period ending on May 31, 1994. Thereafter, the dividend rate is determined by a formula that considers the interest rates of selected short- and long-term U.S. Treasury securities at the time the rate is set. In no event will the dividend rate be less than 4 1/2 percent or more than 10 1/2 percent per annum. Adjustable Rate Cumulative Preferred Stock, Series R On August 22, 1994, the Parent Company issued $150 million, or 6 million depositary shares at $25 per share, each representing a one-hundredth interest in a share of Adjustable Rate Cumulative Preferred Stock, Series R (Liquidation Preference--$2,500 per share) ("Series R"). During 1996, the Parent Company repurchased approximately 750 thousand shares of 74 Series R. At the option of the Parent Company, the Series R may be redeemed, in whole or in part, on or after September 1, 1999, at $2,500 per share (or $25 per depositary share), plus, in each case, accrued and unpaid dividends to the redemption date. Any optional redemption shall be with the approval of the Federal Reserve Board unless at that time that body should determine that its approval is not required. Dividends on the Series R are cumulative and payable quarterly on March 1, June 1, September 1 and December 1 of each year. The initial dividend rate was 6.42 percent per annum for the dividend period ending on November 30, 1994. Thereafter, the dividend rate is determined by a formula that considers the interest rates of selected short- and long-term U.S. Treasury securities at the time the rate is set. In no event will the dividend rate be less than 4 1/2 percent or more than 10 1/2 percent per annum. 7.75% Cumulative Preferred Stock, Series S On June 30, 1995, the Corporation issued $125 million, or 5 million depositary shares at $25 per share, each representing a one-hundredth interest in a share of the Corporation's 7 3/4% Cumulative Preferred Stock, Series S (Liquidation Preference--$2,500 per share) ("Series S"). Dividends on the Series S are cumulative and payable quarterly on March 1, June 1, September 1 and December 1 of each year, commencing with the date succeeding original issuance. At the option of the Corporation, the Series S may be redeemed, in whole or in part, on or after June 1, 2000, at $2,500 per share (or $25 per depositary share), plus, in each case, accrued and unpaid dividends to the redemption date. Any optional redemption shall be with the approval of the Federal Reserve Board unless at that time that body should determine that its approval is not required. SERIAL PREFERRED STOCK In 1990, stockholders voted in favor of an amendment to the Restated Certificate of Incorporation of Bankers Trust New York Corporation to increase the number of shares of authorized preferred stock from 10 million to 20 million and created a new class of preferred stock called Serial Preferred Stock which would have equal rank as the Series Preferred Stock as well as priority over common stockholders as to dividends and in the event of liquidation. The Parent Company has decided to defer action on implementing this approved amendment at this time. 75 NOTE 13--PREFERRED SHARE PURCHASE RIGHTS On February 16, 1988, the Board of Directors of the Parent Company declared a dividend distribution of one Preferred Share Purchase Right ("Right") for each share of common stock held, payable February 26, 1988 to stockholders of record on that date. Rights also automatically attach to each share of common stock issued after February 26, 1988. Each Right entitles the record holder to purchase from the Parent Company a one-hundredth interest in a share of the Parent Company's Series C Junior Participating Preferred Stock at an exercise price of $140, subject to certain adjustments. The Rights will not be exercisable or transferable apart from the common stock until the 10th day after either a public announcement that a person or group (an "Acquiring Person") has acquired beneficial ownership of 20 percent or more of the common stock, or the announcement or commencement of a tender offer for 20 percent or more of the common stock. If the Corporation is acquired or 50 percent or more of its consolidated assets or earning power are sold, each holder of a Right will have the right to receive, upon the exercise at the then current exercise price of the Right, that number of shares of common stock of the acquiring company which have a market value of two times the exercise price of the Right. If any person becomes an Acquiring Person (unless such person first acquires 20 percent or more of the outstanding common shares by a purchase pursuant to a tender offer for all of the common shares for cash, which purchase increases such person's beneficial ownership to 80 percent or more of the outstanding common shares), each holder of a Right other than Rights beneficially owned by the Acquiring Person (which will be void), will have the right to receive upon exercise that number of common shares having a market value of two times the exercise price of the Right. The Rights will expire on February 26, 1998, but may be redeemed at any time prior to a person or group acquiring the beneficial ownership of 20 percent or more of the common stock. Until a Right is exercised, the holder will have no rights as a stockholder of the Parent Company. After the acquisition by a person or group of beneficial ownership of 20 percent or more of the outstanding common shares and prior to the acquisition by such person or group of 50 percent or more of the outstanding common shares, the Board of Directors of the Parent Company may exchange the Rights (other than Rights owned by such person or group), in whole or in part, at an exchange ratio of one common share, or a one-hundredth interest in a share of Series C Junior Participating Preferred Stock (or a share of a class or series of the Parent Company's preferred stock having equivalent rights, preferences and privileges), per Right (subject to adjustment). If issued, each share of Series C Junior Participating Preferred Stock will be entitled, subject to adjustment, to (i) a quarterly dividend of the greater of $1 per share or 100 times the quarterly dividend declared on each share of common stock, (ii) in the event of liquidation, dissolution or winding up, a preferential liquidation payment of the greater of $100 per share or 100 times the liquidation payment made per share of common stock, and (iii) 100 votes per share voting together with the holders of the Parent Company's common stock on all matters. Under certain conditions, the Rights will also be redeemed in connection with an acquisition of all of the Parent Company's common stock for cash in a transaction approved by the Parent Company's stockholders. Subject to certain specified conditions, a special meeting of the Parent Company's stockholders to vote on such a transaction will be called upon the request of a potential acquiror. These statements are qualified in their entirety by reference to the Rights Agreement, a copy of which was filed with the Securities and Exchange Commission. 76 NOTE 14--COMMON STOCK AND STOCK-BASED COMPENSATION PLANS The purposes and number of shares of common stock issued, distributed from treasury and purchased for treasury during 1996, 1995 and 1994 were as follows (1):
Year Ended December 31, 1996 1995 1994 - ---------------------------------------------- ----------- ----------- ----------- Common shares outstanding, beginning of year 98,414,325 95,860,331 99,721,291 - ---------------------------------------------- ---------- ---------- ---------- Shares issued or distributed under Employee Benefit Plans: Bankers Trust New York Corporation 1976 Stock Option Plan - - 3,000 1985 Stock Option and Stock Award Plan Stock options 674,441 260,993 144,769 Restricted stock awards, net - - (12,619) Deferred stock awards 31,701 - 15,829 1991 Stock Option and Stock Award Plan Stock options 1,654,567 367,728 274,864 Restricted stock awards, net (31,293) (84,539) (5,298) Deferred stock awards - 242,264 7,459 1994 Stock Option and Stock Award Plan Stock options 1,907,957 7,000 - Restricted stock awards, net 541,910 813,901 661,400 Deferred stock awards 265 - - Alex. Brown Stock Option Plan 472,945 539,884 296,396 Employee Debenture Conversions 141,275 64,267 135,221 Equity Compensation Plan 271,185 163,894 254,281 Employee Stock Purchase Plan 126,701 113,850 129,683 Other, net 21,165 78,415 22,935 Conversion of 5 3/4% Convertible Subordinated Debentures 3,586 623,685 - - ---------------------------------------------- ---------- ---------- ---------- Total shares issued or distributed 5,816,405 3,191,342 1,927,920 Shares issued for acquisitions 2,881,476 - - Shares purchased for treasury (7,493,395) (600,495) (3,622,672) Shares purchased and retired (429,482) (36,853) (2,166,208) - ---------------------------------------------- ---------- ---------- ---------- Common shares outstanding, end of year 99,189,329 98,414,325 95,860,331 ============================================== ========== ========== ==========
(1) The information presented reflects the additional shares issued to Alex. Brown shareholders pursuant to the Exchange Ratio. 77 The following is a summary of stock option transactions which occurred during 1994, 1995 and 1996 (number of shares in thousands):
Weighted-Average Exercise Price Exercise Price Options Per Option Per Option - -------------------------------- ------------------- ------------------- December 31, 1993 8,716 $ 6.83 - $80.75 $46.08 Granted 2,962 20.23 - 70.25 61.78 Exercised (733) 6.83 - 70.4375 33.75 Cancelled (410) 47.13 - ------------------- ------ December 31, 1994 10,535 6.83 - 80.75 51.30 =================== ====== Granted 3,197 30.90 - 69.0625 58.60 Exercised (1,181) 6.83 - 68.625 32.99 Cancelled (874) 63.85 - ------------------- ------ December 31, 1995 11,677 6.83 - 80.75 54.22 =================== ====== Granted 3,953 38.84 - 83.3125 74.99 Exercised (4,729) 6.83 - 70.4375 55.15 Cancelled (500) 58.86 - ------------------- ------ December 31, 1996 10,401 14.01 - 83.3125 61.18 =================== ====== ================ Exercisable at: December 31, 1995 7,461 56.28 =================== ====== ================ December 31, 1996 5,429 56.75 =================== ====== ================
The weighted-average remaining contractual life for options outstanding at December 31, 1996 was 7.9 years. The following table sets forth information about stock options outstanding at December 31, 1996 (number of shares in thousands):
Options Outstanding Options Exercisable ---------------------------------- --------------------------- Weighted Average Weighted Average Weighted Average Range of Number of Remaining Exercise Number of Exercise Exercise Prices shares Contractual Life Price Shares Price - ------------------ --------- ---------------- ---------------- --------- ---------------- $14.01 - 21.59 749 3.1 years $20.71 620 $20.53 $25.17 - 30.90 832 8.6 27.54 334 27.20 $38.84 - 83.3125 8,820 8.3 67.78 4,475 63.98 ---------------- ------ --- ------ ----- ------ 10,401 7.9 $61.18 5,429 $56.75 ====== === ====== ===== ======
At December 31, 1996, common stock was reserved for issuance or distribution as follows:
Dividend Reinvestment and Common Stock Purchase Plan 2,512,549 Employee Benefit Plans PartnerShare (including ESOP shares) 2,274,330 1994 Stock Option and Stock Award Plan 11,067,567 1991 Stock Option and Stock Award Plan 4,822,563 1985 Stock Option and Stock Award Plan 1,537,435 - ------------------------------------------------------ ---------- Total 22,214,444 ====================================================== ==========
The Corporation's stock-based compensation plans currently consist of the continuation of Alex. Brown's and the Corporation's respective plans that were in effect prior to the Merger. Accordingly, the following information summarizes Alex. Brown's and the Firm's predecessor plans. 78 BANKERS TRUST NEW YORK CORPORATION'S PREDECESSOR PLANS At the Annual Meeting of Stockholders on April 19, 1994, the stockholders approved the 1994 Stock Option and Stock Award Plan (the "1994 Plan") which made available for grant, until April 21, 1998, 15 million common shares. The 1994 Plan permits the granting of nonqualified and incentive stock options, restricted stock, deferred stock and other stock-based awards (collectively, the "Awards"). Awards are still outstanding under the 1991 Stock Option and Stock Award Plan (the "1991 Plan") and the 1985 Stock Option and Stock Award Plan (the "1985 Plan"). No further Awards will be granted under either the 1991 Plan, as of April 19, 1994 or the 1985 Plan, as of April 16, 1991 or the 1976 Stock Option Plan. These plans are administered by a Committee of the Board of Directors (the "Committee"), none of whom is eligible to participate therein. The Committee determines whether, to what extent and under what circumstances the Awards may be settled in cash. Awards granted under these plans may be satisfied through the use of the Parent Company's authorized but unissued shares or shares held in the Parent Company's treasury. At the Annual Meeting of Stockholders scheduled for April 15, 1997, stockholders will vote on a proposed plan which, if adopted, would be called the 1997 Stock Option and Stock Award Plan (the "1997 Plan"). The provisions of this proposed plan are generally similar to the 1994 Plan and would make 20 million shares available for grant under its terms. The Board of Directors has authorized a stock purchase program to satisfy the awards to be granted under the proposed 1997 Plan and under prior Stock Option and Stock Award Plans. The authorization includes the 20 million shares that are subject to the proposed 1997 Plan. The Corporation intends to satisfy awards granted under the 1997 Plan through the issuance of treasury shares acquired in open market purchases. Stock options are granted to purchase stock at a price not less than the fair market value on the date of grant and may be outstanding for any period up to 10 years and one day from the date of grant. Generally, no stock option may be exercised until the employee has remained in the continuous employ of the Corporation for one year after the option is granted. Recipients of restricted stock have all the rights of a stockholder of the Corporation, except for limitations on sale or use of shares during the restriction period, generally two to three years. Restricted stock must be issued from treasury shares. The Committee determines all conditions of the awards, including whether to permit or require cash dividends to be deferred or reinvested. Deferred stock awards are the right to receive common stock of the Corporation at a specified future date. The awards vest from one to three years from the date of the award. For deferred stock awards, shares of stock are not distributed until after a specified deferral period extending up to five years from the vesting date. Prior to distribution, awards may earn amounts equivalent to quarterly dividends declared by the Corporation and may also earn the equivalent of the excess of quarterly earnings per common share over the cash dividends. At December 31, 1996 and 1995, there were deferred stock awards outstanding of 6,721,996 shares and 3,334,674 shares, respectively. After providing for stock options granted, restricted stock awards and deferred stock awards, there were 189,548 and 7,073,010 shares available for future grant under the 1994 Plan at December 31, 1996 and 1995, respectively. Compensation expense recognized for the restricted stock awards and deferred stock awards was $174 million and $48 million in 1996 and 1995, respectively. The weighted-average grant-date fair value of restricted stock awards and deferred stock awards granted during 1996 was $82.86. 79 ALEX. BROWN PREDECESSOR PLANS Equity Incentive Plan Pursuant to the 1991 Equity Incentive Plan (the "Plan"), Alex. Brown may make stock based awards, including stock options, convertible debentures and restricted stock awards, to key employees in any calendar year in respect of a maximum of 7.5% of the total shares of common stock outstanding on the first day of such year. During 1995 and 1994, the Corporation sold 72,479 and 22,721 shares of common stock, respectively, at market to certain employees pursuant to the Plan. The Corporation has also sold convertible subordinated debentures to certain employees pursuant to the Plan. The debentures are generally convertible into the Corporation's common stock three years after the date issued or in stages beginning four years after the date issued. The debentures may be redeemed at par if the employee terminates employment with the Corporation. The Corporation made loans to the employees to finance the entire purchase price of the stock and debentures. The Corporation has agreed to forgive certain loans over six years if the Corporation's return on equity exceeds certain targets during the period and may forgive portions of other loans on a discretionary basis. Loan forgiveness resulted in compensation expense of $9,287,000, $3,952,000 and $3,054,000 in 1996, 1995 and 1994, respectively. Information related to debentures outstanding at December 31, 1996 and issued in January 1997 was as follows:
Weighted average Principal amount Weighted average conversion of debentures interest rate Due Date price/share - ------------------------- ----------------- -------- ---------------- $ 356,000 8.125% 1997 $ 6.83 1,578,000 6.750% 1998 20.48 1,900,000 6.375% 1999 18.47 3,725,000 5.375% 2000 23.16 26,867,000 5.858% 2001 20.67 15,544,000 6.106% 2002 39.24 25,555,000 6.313% 2003 50.83
Stock Options The Corporation has granted nonqualified stock options to certain employees and directors. Payment for the shares may be made in cash, shares of the Corporation's common stock or a combination thereof. Options granted since January 1993 are generally exercisable in six equal installments beginning one year from the date of grant and expire after ten years. The exercise price for these options is 25% greater than the lesser of the average market value of the Corporation's common stock 30 days prior to the date of grant or the market value on the date of grant. Options previously granted are generally exercisable in five equal installments beginning one year from the date of grant and expire after five years. Equity Compensation Plan During 1996, 1995 and 1994, certain key employees had a portion of cash compensation withheld and replaced by restricted common stock of the Corporation at a 15% discount from market and interests in investment accounts through which the employees can direct investments in selected Corporation-sponsored investment vehicles. Compensation expense is recorded currently based on the value of the stock and interests in the investment accounts on the award date. The restricted stock cannot be sold and funds cannot be withdrawn from the investment accounts for three years (five years if employment terminates during the initial three year period). The Corporation may allow participants to extend the deferral period. These restrictions are removed in the event of death, disability or retirement. Pursuant to the Equity Compensation Plan, $18,240,000, $11,102,000, and $7,080,000 of cash compensation was withheld and replaced by 199,982, 80 203,128 and 161,922 shares of the Corporation's common stock and interests in investment accounts for 1996, 1995 and 1994, respectively. SFAS 123 PRO FORMA INFORMATION The Corporation applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Corporation's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Corporation had accounted for its employee stock options under the fair value method of SFAS 123. Excluding the additional shares issued to Alex. Brown shareholders pursuant to the Exchange Ratio, the weighted average fair value of options granted during 1996 was $14.88 per option. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1996 and 1995, respectively; risk-free interest rates of 6.77% and 5.91%; dividend yield of 5.0% for both years; volatility factor of the expected market price of the Corporation's common stock of 23% for both years; and a weighted-average expected life of the option of 5 years. The weighted average fair value of Alex. Brown options granted during 1996 and 1995 were $3,318,000 and $2,244,000, respectively, on the dates of grant. The fair values of options granted were calculated using the Black-Scholes option-pricing model with the following weighted average assumptions, used for grants in 1996 and 1995, respectively: risk-free interest rate of 5.7% and 7.8%; expected volatility of 41% in both years; dividend yield of 1.9% and 2.3%; expected dividend growth rate of 26.4% and 27.1%; and expected lives of eight years and expected forfeitures of 18% for both years. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options' historical vesting period. The following pro forma information reflects the compensation expense that would have been recognized under SFAS 123 for both Alex. Brown and the Corporation on an historical basis. The fair values of options have not been restated to reflect the Merger.
(in millions except for earnings per share information) 1996 1995 - --------------------------------------------------------- ----- ----- Net income: As reported $ 766 $ 311 Pro forma $ 739 $ 301 Primary earnings per share: As reported $6.93 $2.59 Pro forma $6.67 $2.49 Fully diluted earnings per share: As reported $6.71 $2.53 Pro forma $6.47 $2.43
Because compensation expense associated with an award is recognized over the vesting period, the initial impact on pro forma net income may not be representative of compensation expense in future years, when the effect of the amortization of multiple awards would be reflected in the income statement. 81 NOTE 15--ASSET AND DIVIDEND RESTRICTIONS The Federal Reserve Act, as amended by the Monetary Control Act of 1980, requires that reserve balances on certain deposits of depository institutions be maintained at the Federal Reserve Bank. The reserve balances of the Corporation's subsidiary banks were $180 million and $633 million at December 31, 1996 and 1995, respectively. For the years 1996 and 1995, the average reserve balances of these banks amounted to $196 million and $199 million, respectively. Assets, principally trading assets and securities available for sale, of approximately $6.310 billion at December 31, 1996 were pledged as collateral to secure public and trust deposits, for borrowings, and for other purposes. Federal law also requires that "covered transactions," as defined, engaged in by insured banks and their subsidiaries with certain affiliates, including the Parent Company, be at arm's length and limited to 20 percent of Tier 1 Capital and Tier 2 Capital as defined by the Federal Reserve Bank risk-based capital guidelines, the balance of the institutions allowance for loan and lease losses not included in Tier 2 Capital, and "covered transactions" with any one such affiliate be limited to 10 percent of capital and surplus. Covered transactions are defined to include, among other things, loans and other extensions of credit to such an affiliate and guarantees, acceptances and letters of credit issued on behalf of such an affiliate. Such loans, other extensions of credit, guarantees, acceptances and letters of credit must be secured. Other restrictions also apply to inter-affiliate transactions. Limitations exist on the availability of BTCo's undistributed earnings for the payment of dividends to the Parent Company without prior approval of the bank regulatory authorities. In this regard, BTCo can declare dividends in 1997 without approval of the regulatory authorities of $251 million of its retained earnings at December 31, 1996, plus an additional amount equal to net profits, as defined, for 1997 up to the date of any such dividend declaration. The Federal Reserve Board may prohibit the payment of dividends if it determines that circumstances relating to the financial condition of a bank are such that the payment of dividends would be an unsafe and unsound practice. Certain other subsidiaries are subject to various regulatory and other restrictions which may limit cash dividends and advances to the Parent Company. 82 NOTE 16--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 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 by assigning assets and off-balance sheet items to broad risk categories, as well as minimum risk-based capital ratios to be maintained by banking organizations. A banking organization's risk-based capital ratios are calculated by dividing its qualifying capital by its risk-weighted assets. The Federal Reserve Board also has a minimum Leverage Ratio which is used as a supplement to the risk- based capital ratios in evaluating the capital adequacy of banks and bank holding companies. The Leverage Ratio is calculated by dividing Tier 1 Capital by adjusted quarterly average assets. Failure to meet minimum capital requirements can initiate certain mandates, and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on the consolidated financial statements of the Corporation and BTCo. Under the risk-based capital guidelines, there are two categories of capital: core capital ("Tier 1 Capital") and supplemental capital ("Tier 2 Capital"), collectively referred to as Total Capital. Tier 1 Capital includes common stockholders' equity, qualifying perpetual preferred stock, qualifying trust preferred capital securities and minority interest in equity accounts of consolidated subsidiaries. Tier 2 Capital includes perpetual preferred stock and trust preferred capital securities (to the extent ineligible for Tier 1 Capital), hybrid capital instruments (i.e., perpetual debt and mandatory convertible securities), limited amounts of subordinated debt, intermediate-term preferred stock, and a portion of the allowance for credit losses. In accordance with current Federal Reserve Board (FRB) guidelines, the stockholder's equity and risk-weighted assets of BT Alex. Brown Incorporated are excluded from the calculation of the regulatory capital ratios. In computing these ratios, 50 percent of BT Alex. Brown Incorporated stockholder's equity is deducted from the Corporation's Tier 1 Capital, and 50 percent is deducted from Tier 2 Capital. Similar treatment is accorded the stockholder's equity and risk- weighted assets of certain foreign insurance subsidiaries of the Corporation. In addition, under the prompt corrective action provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), five capital categories were established for banks. Pursuant to that statute, the federal bank regulatory agencies have specifically defined these categories by determining that a bank is well capitalized if it maintains a Tier 1 Capital ratio of at least 6 percent, a Total Capital ratio of at least 10 percent and a Leverage ratio of at least 5 percent. The Federal Reserve Board has also adopted these same thresholds for the Tier 1 Capital ratio and Total Capital ratio in defining a well-capitalized bank holding company. The well-capitalized threshold for the Leverage ratio has been established at 3.0 percent or 4.0 percent, depending on other regulatory criteria. Based on their respective regulatory capital ratios at December 31, 1996 and December 31, 1995, both the Corporation and BTCo are well capitalized. There are no conditions or events that management believes have changed the Corporation's and BTCo's well-capitalized status. 83 The Corporation's actual capital amounts and ratios are presented in the table below.
FRB Minimum To Be Well For Capitalized Capital Under Actual as of Actual as of Adequacy Regulatory 12/31/96 12/31/95 Purposes: Guidelines: ---------------- ---------------- ---------- ------------ ($ in millions) Amount Ratio Amount Ratio Ratio Ratio - -------------------- -------- ------- -------- ------- ---------- ------------ Total Capital (1) Corporation (2) $ 8,424 13.8% $ 7,443 14.0% 8.0% 10.0% BTCo 6,769 12.9% 5,926 12.8% 8.0% 10.0% Tier 1 Capital (1) Corporation (2) $ 5,690 9.3% $ 4,789 9.0% 4.0% 6.0% BTCo 4,869 9.3% 4,394 9.5% 4.0% 6.0% Leverage (3)(4) Corporation (2) $ 5,690 5.9% $ 4,789 5.4% 3.0% 3.0-4.0% BTCo 4,869 5.3% 4,394 5.1% 3.0% 5.0%
(1) Ratios are calculated on Tier 1 Capital and Total Capital as a percentage of risk-weighted assets. (2) Capital and risk-weighted assets of BT Alex. Brown Incorporated and certain foreign insurance subsidiaries of the Corporation have been excluded in accordance with current Federal Reserve Board guidelines. (3) Ratio is calculated on Tier 1 Capital as a percentage of adjusted quarterly average assets. (4) Minimum capital adequacy levels for the Leverage ratio may be set 100 to 200 basis points higher depending upon other regulatory criteria. 84 NOTE 17--INTEREST REVENUE AND INTEREST EXPENSE The following are the components of interest revenue and interest expense:
(in millions) Year Ended December 31, 1996 1995 1994 - --------------------------------------------------------- ------ ------ ------ INTEREST REVENUE Interest-bearing deposits with banks $ 214 $ 207 $ 124 Federal funds sold 119 104 31 Securities purchased under resale agreements 1,314 829 386 Securities borrowed 825 745 298 Trading assets 2,410 2,682 2,936 Securities available for sale Taxable 424 332 312 Exempt from federal income taxes 35 60 78 Loans 1,046 944 879 Customer receivables 121 86 52 - --------------------------------------------------------- ------ ------ ------ Total interest revenue 6,508 5,989 5,096 - --------------------------------------------------------- ------ ------ ------ INTEREST EXPENSE Interest-bearing deposits Domestic offices 384 376 268 Foreign offices 971 984 696 Trading liabilities 862 1,053 807 Securities loaned and securities sold under repurchase agreements 1,598 1,189 928 Other short-term borrowings 1,000 1,045 901 Long-term debt 633 458 280 Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital 3 - - - --------------------------------------------------------- ------ ------ ------ Total interest expense 5,451 5,105 3,880 - --------------------------------------------------------- ------ ------ ------ Net interest revenue $1,057 $ 884 $1,216 ========================================================= ====== ====== ======
85 NOTE 18--TRADING REVENUE The following are the components of trading revenue:
(in millions) Year Ended December 31, 1996 1995 1994 - --------------------------------------- ------ ----- ------ Interest rate risk $ 474 $ 120 $ 325 Foreign exchange risk 178 36 (54) Equity and commodity risk 362 325 315 - --------------------------------------- ------ ----- ----- Total trading revenue $1,014 $ 481 $ 586 ======================================= ====== ===== =====
86 NOTE 19--PENSION AND OTHER EMPLOYEE BENEFIT PLANS The Corporation's employee benefit plans currently consist of the continuation of Alex. Brown's and the Corporation's respective plans that were in effect prior to the Merger. Accordingly, the following information summarizes the Alex. Brown's and the Firm's predecessor plans. The Corporation is currently in the process of reviewing the benefit plans of both predecessor institutions. BANKERS TRUST NEW YORK CORPORATION'S PREDECESSOR PLANS Pension Plans The Corporation has a trusteed, noncontributory, defined benefit pension plan covering substantially all domestic employees. The pension plan benefit formula is based upon years of service and average compensation over the final years of service. For this principal domestic pension plan, the Corporation's policy is to fund amounts which are actuarially determined in accordance with the applicable provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). Pension plan assets for this plan primarily consist of equity and debt securities managed by BTCo. The Corporation also has a domestic, unfunded defined contribution plan, as well as both defined benefit and defined contribution retirement and similar plans covering the majority of its foreign employees. Contributions to defined contribution plans are based upon a percentage of salary. Effective June 30, 1994, a foreign defined benefit plan was changed to a defined contribution plan. As a result of this change, the Corporation recognized a $7 million curtailment/settlement gain in other noninterest revenue. Pension expense for 1996, 1995 and 1994 included the following components:
(in millions) 1996 1995 1994 - --------------------------------------------------------------------------------------------------- ------ ------ ------ Principal defined benefit plans (domestic and foreign) Service cost--benefits earned $ 23 $ 17 $ 23 Interest cost on projected benefit obligations 42 38 37 Actual return on plan assets (78) (151) 6 Net amortization and deferral 5 83 (73) - --------------------------------------------------------------------------------------------------- ----- ----- ----- Total (8) (13) (7) Defined contribution plans 24 20 10 Other plans 4 5 2 - --------------------------------------------------------------------------------------------------- ----- ----- ----- Pension expense $ 20 $ 12 $ 5 =================================================================================================== ===== ===== ===== The actuarial assumptions used for the principal domestic defined benefit plan were as follows: 1996 1995 1994 ----- ----- ----- Discount rate in determining expense 7.00% 8.75% 7.25% Discount rate in determining benefit obligations at year end 7.50% 7.00% 8.75% Rate of increase in future compensation levels for determining expense 5.00% 5.00% 5.00% Rate of increase in future compensation levels for determining benefit obligations at year end 5.00% 5.00% 5.00% Expected long-term rate of return on assets 9.00% 9.00% 9.00%
87 At year end 1996, the effect of changing the discount rate from 7.00% to 7.50% was to decrease the projected benefit obligation, accumulated benefit obligation and vested benefit obligation by $43 million, $34 million and $34 million, respectively. At year end 1995, the effect of changing the discount rate from 8.75% to 7.00% was to increase the projected benefit obligation, accumulated benefit obligation and vested benefit obligation by $96 million, $73 million and $70 million, respectively. Effective January 1, 1994, several plan changes were implemented, principally a change in early retirement benefits for certain vested employees. The effect of the plan changes was to increase the projected benefit obligation, accumulated benefit obligation and vested benefit obligation by $13 million, $9 million and $8 million, respectively. The assumptions used for the other domestic and the principal foreign defined benefit plans were substantially similar to those used for the principal domestic plan, given local economic conditions in the cases of the principal foreign plans. The following table sets forth the funded status and amounts recognized in the Corporation's balance sheet for its principal domestic and foreign defined benefit pension plans:
December 31, 1996 December 31, 1995 ---------------------------------- ---------------------------------- Assets Exceed Accumulated Assets Exceed Accumulated Accumulated Benefits Accumulated Benefits (in millions) Benefits Exceed Assets Benefits Exceed Assets - --------------------------------- ------------------ -------------- ------------------ -------------- Actuarial present value of benefit obligations: Vested benefit obligations $(465) $(20) $(445) $(22) ================================= ===== ==== ===== ==== Accumulated benefit obligations $(482) $(20) $(460) $(22) ================================= ===== ==== ===== ==== Projected benefit obligations $(565) $(21) $(544) $(23) Plan assets at fair value 863 1 795 1 - --------------------------------- ----- ---- ----- ---- Funded status 298 (20) 251 (22) Unrecognized net (assets) obligations (23) 1 (28) 1 Unrecognized prior service cost 15 - 17 - Unrecognized net (gain) loss (129) 3 (92) 4 Additional minimum liability - (4) - (5) - --------------------------------- ----- ---- ----- ---- Prepaid (accrued) pension cost $ 161 $(20) $ 148 $(22) ================================= ===== ==== ===== ====
Postretirement Benefits The Corporation provides health care benefits to employees (retirees) who met specific age and/or service requirements on January 1, 1990 provided that they retire (retired) under the principal domestic pension plan with at least ten years of service. This plan is contributory for participating retirees and also requires them to absorb deductibles and coinsurance. The Corporation funds the cost of postretirement health care as benefits are paid. The Corporation also provides noncontributory life insurance benefits for substantially all domestic retirees with at least ten years of service. The Corporation's policy with respect to this plan is to make contributions up to the limits specified by Section 419 of the U.S. Internal Revenue Code. 88 The Corporation's postretirement benefits expense for the year ended December 31, 1996 was $10 million. This consisted of $9 million of interest cost on accumulated postretirement benefit obligations and $1 million of service cost attributable to service during the year. For the year ended December 31, 1995 postretirement benefits expense was $9 million. This consisted of $8 million of interest cost on accumulated postretirement benefit obligations and $1 million of service cost attributable to service during the year. For the year ended December 31, 1994 postretirement benefits expense was $10 million. This consisted of $9 million of interest cost on accumulated postretirement benefit obligations and $1 million of service cost attributable to service during the year. The actuarial assumptions used for the Corporation's postretirement benefit plans were as follows:
December 31, 1996 December 31, 1995 -------------------------- -------------------- Retiree Retiree Retiree Retiree Health Life Health Life ($ in millions) Care Insurance Care Insurance - ------------------------------------------- -------------- ---------- -------- ---------- Health care cost trend rate: First year 10.00% N/A 11.00% N/A =========================================== ============= ========= ======= ========= Ultimate rate after 5 years (1996) and 6 years (1995) (based on roughly equal annual decreases) 5.50% N/A 5.50% N/A Discount rate in determining expense 7.00% 7.00% 8.75% 8.75% =========================================== ============= ========= ======= ========= Discount rate in determining benefit obligations at year-end 7.50% 7.50% 7.00% 7.00% =========================================== ============= ========= ======= ========= Rate of increase in future compensation levels for determining benefit obligation at both beginning and end of the year N/A 5.00% N/A 5.00% =========================================== ============= ========= ======= ========= Expected long-term rate of return on plan assets N/A 9.00% N/A 9.00% Effect of a one-percentage-point increase in the health care cost trend rates on the accumulated postretirement benefit obligation $ 9 N/A $ 6 N/A Effect of a one-percentage-point increase in the assumed health care cost trend rates on the aggregate of the service and interest cost components of net periodic postretirement expense for the year ended $ 1 N/A $ 1 N/A =========================================== ============= ========= ======= =========
N/A Not applicable. At year end 1996, the effect of changing the discount rate from 7.00% to 7.50% was to decrease the accumulated postretirement benefit obligation for the retiree health care plan and the retiree life insurance plan by $2 million and $1 million, respectively. At year end 1995, the effect of changing the discount rate from 8.75% to 7.00% was to increase the accumulated postretirement benefit obligation for the retiree health care plan and the retiree life insurance plan by $2 million and $1 million, respectively. 89 The following table sets forth the funded status and amounts recognized in the Corporation's balance sheet:
December 31, 1996 December 31, 1995 -------------------------- -------------------- Retiree Retiree Retiree Retiree Health Life Health Life ($ in millions) Care Insurance Care Insurance - ------------------------------------- -------------- ---------- -------- ---------- Accumulated postretirement benefit obligation: Retirees $ (80) $ (6) $ (62) $ (5) Fully eligible plan participants (17) - (16) - Other active plan participants (21) (6) (18) (5) - ------------------------------------- ----- ---- ----- ---- (118) (12) (96) (10) Plan assets at fair value - 4 - 5 - ------------------------------------- ----- ---- ----- ---- Funded status (118) (8) (96) (5) Unrecognized prior service cost 7 - 8 - Unrecognized net (gain) loss (4) 3 (23) 1 - ------------------------------------- ----- ---- ----- ---- Accrued postretirement benefit cost $(115) $ (5) $(111) $ (4) ===================================== ===== ==== ===== ====
Profit Sharing Plans The Corporation maintains a noncontributory profit sharing plan, called PartnerShare, covering substantially all domestic employees. The Corporation's contribution consists of a fixed contribution equal to six percent of eligible domestic employees' annual salary (the "Fixed Contribution") as well as an additional contribution of from zero to nine percent of eligible employees' annual salary, which percentage is calculated using a formula based on the Corporation's consolidated income before income taxes (the "Profit-Driven Contribution"). The Profit-Driven Contribution was 4.75 percent, 1.69 percent and 4.73 percent for 1996, 1995 and 1994, respectively. The sum of the Fixed Contribution and the Profit-Driven Contribution amounted to $41 million, $29 million and $41 million for the years 1996, 1995 and 1994, respectively. The Corporation also has a profit sharing plan (called the "Share and Discretionary Cash Scheme") covering its employees in the United Kingdom. The Corporation's contributions to this plan range from zero to 14 percent of eligible employees' annual salary, which percentage is calculated using a formula based on the Corporation's consolidated income before income taxes. The contribution for 1996, 1995 and 1994 was 8.72 percent, 3.11 percent and 8.69 percent, respectively. The amount of expense recognized for the Share and Discretionary Cash Scheme was $7 million, $2 million and $8 million for 1996, 1995 and 1994, respectively. ALEX. BROWN'S PREDECESSOR PLANS Retirement Plans The Corporation maintains a 401(k) deferred compensation and profit sharing plan (the "Plan"). Alex. Brown employees are permitted within limitations imposed by tax law to make pretax contributions to the Plan pursuant to salary reduction agreements. The Corporation may make discretionary matching and profit sharing contributions to the Plan and may make additional contributions to preserve the Plan's tax exempt status. The Corporation also has retirement plans for certain Alex. Brown employees in foreign offices not covered by the Plan. Compensation expense for the Corporation's contributions to retirement plans was $13 million, $10 million and $5 million for 1996, 1995 and 1994, respectively. 90 Employee Stock Purchase Plan The Corporation maintains an employee stock purchase plan pursuant to which Alex. Brown employees may purchase shares of the Corporation's common stock through payroll deductions, subject to certain limitations, at a price equal to 85% of the fair market value of the stock on four quarterly investments dates. The plan provides for the issuance of up to 1,245,000 shares. A total of 945,767 shares have been issued under the plan, including 126,709 shares in 1996. Deferred Compensation Plan The Corporation maintains a deferred compensation plan for certain investment representatives. Eligible participants can direct the investment of their deferred compensation amounts by selecting among various Corporation-sponsored investment vehicles and the common stock of the Corporation at a 15% discount from market. The employees vest in the deferred compensation accounts after four years. The deferred compensation is forfeited if the Alex. Brown employee terminates employment with the Corporation during the vesting period except for termination due to death, disability or retirement. The Corporation may allow participants to extend the deferral period after vesting. The amount of deferred compensation, including any stock discounts, is being amortized over the periods in which the Alex. Brown employees are providing the related services (compensation expense of $1 million for 2000, $2 million for 1999, $3 million for 1998, $4 million for 1997, $3 million for 1996, $2 million for 1995 and $1 million for 1994). 91 NOTE 20--INCOME TAXES The Corporation files consolidated income tax returns which include all significant domestic subsidiaries. The domestic and foreign components of consolidated income before income taxes follow:
(in millions) Year Ended December 31, 1996 1995 1994 - --------------------------------------- ------ ----- ----- Domestic $ 347 $ 69 $ 257 Foreign 784 400 730 - --------------------------------------- ------ ----- ----- Total $1,131 $ 469 $ 987 ======================================= ====== ===== =====
For purposes of determining the above amounts, foreign income is defined as income recorded by operations located outside of the U.S. Undistributed earnings of certain foreign subsidiaries amounted to approximately $1.3 billion at December 31, 1996. Federal taxes which would have approximated $270 million, assuming utilization of foreign tax credits, have not been provided on these earnings, as they are permanently reinvested outside the U.S. Deferred income taxes result from differences in the timing of revenue and expense recognition for income tax and financial reporting purposes. An analysis of consolidated income taxes follows:
(in millions) Year Ended December 31, 1996 1995 1994 - --------------------------------------- ------ ------ ------ Income taxes applicable to: Income before income taxes* $ 365 $ 158 $ 301 Capital surplus (26) 3 (5) Cumulative translation adjustments (24) 9 (59) Securities valuation allowance 32 (26) (16) - --------------------------------------- ----- ----- ----- Total $ 347 $ 144 $ 221 ======================================= ===== ===== =====
* Includes income tax expense related to securities available for sale transactions of $30 million, $74 million and $26 million in 1996, 1995 and 1994, respectively. 92 The components of consolidated income taxes follow:
(in millions) Year Ended December 31, 1996 1995 1994 - --------------------------------------- ------ ------ ------ Current Federal $ 107 $ 65 $ 52 Foreign 124 317 294 State and local 44 32 27 - --------------------------------------- ----- ----- ----- Total current 275 414 373 - --------------------------------------- ----- ----- ----- Deferred Federal (52) (132) (111) Foreign 125 (141) (61) State and local (1) 3 20 - --------------------------------------- ----- ----- ----- Total deferred 72 (270) (152) - --------------------------------------- ----- ----- ----- Total $ 347 $ 144 $ 221 ======================================= ===== ===== =====
The following is an analysis of the difference between the U.S. federal statutory income tax rate and the effective tax rate on consolidated income before income taxes:
Year Ended December 31, 1996 1995 1994 - ---------------------------------------- ----- ----- ----- U.S. federal statutory income tax rate 35% 35% 35% State and local income taxes 4 8 3 Tax-exempt income (3) (8) (6) Foreign subsidiary earnings (2) 3 (1) Other items, net (2) (4) (1) - ---------------------------------------- ---- ---- ---- Effective income tax rate 32% 34% 30% ======================================== ==== ==== ====
The following is an analysis of the Corporation's net deferred tax assets:
(in millions) December 31, 1996 1995 - ------------------------------------------------ ------ ------ Deferred tax assets $1,172 $1,124 Valuation allowance 227 227 - ------------------------------------------------ ------ ------ Deferred tax assets net of valuation allowance 945 897 Deferred tax liabilities 520 401 - ------------------------------------------------ ------ ------ Net deferred tax assets $ 425 $ 496 ================================================ ====== ======
At December 31, 1996, the Corporation's deferred tax assets were primarily related to credit losses ($440 million), foreign tax credit carryforwards ($135 million) that will expire in 1999, 2000 and 2001, and a net operating loss carryforward ($30 million) which expires in 2011. Deferred tax liabilities were primarily related to certain trading activities ($119 million) and lease financing activities ($176 million). At December 31, 1995, the Corporation's deferred tax assets were primarily related to credit losses ($533 million), foreign tax credit carryforwards ($140 million) that will expire in 1999 and 2000, and a net operating loss carryforward ($41 million) which expires in 2009. Deferred tax liabilities were primarily related to certain trading activities ($62 million) and lease financing activities ($155 million). 93 NOTE 21--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 year. 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 year. 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) Year Ended December 31, 1996 1995 1994 - -------------------------------------------------- -------- -------- -------- Net income applicable to common stock - primary $ 715 $ 260 $ 658 Net income applicable to common stock - assuming full dilution $ 718 $ 262 $ 660 ================================================== ======== ======== ======== Average number of common shares outstanding 98.387 97.254 97.885 Average common and common equivalent shares outstanding--primary 103.153 100.235 101.018 Average common and common equivalent shares outstanding--assuming full dilution 106.889 103.664 104.260 ================================================== ======== ======== ========
94 NOTE 22--INTERNATIONAL OPERATIONS Management views the operation of the Corporation on an organizational unit basis, as disclosed in the Management Discussion and Analysis on page 3. However, in order to comply with the financial reporting regulations of the Securities and Exchange Commission, the Corporation is required to report international operations on the basis of the domicile of the customer. Pursuant to these regulations, any business transacted with a customer who is domiciled outside the U.S. is reported as international operations. Due to the complex nature of the Corporation's businesses and because its revenue from customers domiciled outside the U.S. is recorded in both domestic and foreign offices, it is impossible to segregate with precision the respective contributions to income from the domestic and international operations. As these operations are highly integrated, estimates and subjective assumptions have been made to apportion revenue and expenses between domestic and international operations. These estimates and assumptions include the following: interest revenue and interest expense are apportioned to geographic areas based on the geographic distribution of average interest earning assets. The geographic location of the assets is determined by the domicile of the customer, or for interest earning securities, by the domicile of the issuer. For the year ended December 31, 1996, trading gains and losses are allocated based on the geographic distribution of average trading assets as determined by the domicile of the issuer. For the years ended December 31, 1995 and 1994, trading gains and losses are allocated based on the location of the office recording the gains/losses. All other noninterest revenue is allocated based on the geographic location of the office recording the income. Noninterest expense is basically apportioned geographically based on the geographical distribution of operating income (net interest revenue plus noninterest revenue). Corporate overhead expenses are allocated based upon average assets by geographic region. International offices are assessed a cost of funds charge based on a short-term funding rate. Allocation of the provision for credit losses is based on the geographical distribution of net charges to the allowance for credit losses and management's assessment of the risks associated with the domestic and international portfolios. International taxes are calculated based on the foreign tax rate for each foreign office. Earning assets are allocated by the domicile of the customer. All other assets are allocated based on the location of the office recording the assets. Subject to the above limitations, estimates and assumptions, the following tables present information attributable to international operations (in millions):
Income Total Total Total before Net assets revenue(1) expenses(1) taxes income --------- ---------- ----------- ------- ------- 1996 - ------------------------------- International operations Asia $ 9,633 $ 613 $ 516 $ 97 $ 71 Australia/New Zealand 10,489 1,031 834 197 144 Western Hemisphere 14,634 1,275 1,193 82 60 Europe 14,359 965 941 24 18 United Kingdom 25,451 1,027 1,027 - - Middle East/Africa 692 40 35 5 4 Intersegment eliminations (12,759) (591) (591) - - - ------------------------------- -------- ------- ------ ------ ---- Total international 62,499 4,360 3,955 405 297 Domestic operations 60,279 6,265 5,539 726 469 - ------------------------------- -------- ------- ------ ------ ---- Total $122,778 $10,625 $9,494 $1,131 $766 =============================== ======== ======= ====== ====== ==== International as a percentage of total 51% 41% 42% 36% 39% =============================== ======== ======= ====== ====== ====
95
Income Total Total Total before Net assets revenue(1) expenses(1)(2) taxes(2) income(2) --------- ---------- -------------- --------- --------- 1995 - ------------------------------- International operations Asia $ 7,565 $ 710 $ 609 $ 101 $ 70 Australia/New Zealand 7,658 803 657 146 101 Western Hemisphere 10,245 1,201 1,138 63 43 Europe 8,001 818 764 54 37 United Kingdom 28,850 599 807 (208) (144) Middle East/Africa 302 15 17 (2) (1) Intersegment eliminations (11,119) (751) (751) - - - ------------------------------- -------- ------ ------ ----- ----- Total international 51,502 3,395 3,241 154 106 Domestic operations 54,697 5,723 5,408 315 205 - ------------------------------- -------- ------ ------ ----- ----- Total $106,199 $9,118 $8,649 $ 469 $ 311 =============================== ======== ====== ====== ===== ===== International as a percentage of total 48% 37% 37% 33% 34% =============================== ======== ====== ====== ===== ===== Income Total Total Total before Net assets revenue(1) expenses(1) taxes income -------- ------ ------ ----- ----- 1994 - ------------------------------- International operations Asia $ 7,867 $ 434 $ 423 $ 11 $ 8 Australia/New Zealand 8,086 733 526 207 151 Western Hemisphere 8,775 896 793 103 75 Europe 6,746 581 544 37 27 United Kingdom 25,645 1,546 1,402 144 105 Middle East/Africa 123 16 13 3 2 Intersegment eliminations (21,109) (913) (913) - - - ------------------------------- -------- ------ ------ ----- ----- Total international 36,133 3,293 2,788 505 368 Domestic operations 62,229 4,816 4,334 482 318 - ------------------------------- -------- ------ ------ ----- ----- Total $ 98,362 $8,109 $7,122 $ 987 $ 686 =============================== ======== ====== ====== ===== ===== International as a percentage of total 37% 41% 39% 51% 54% =============================== ======== ====== ====== ===== =====
(1) Total revenue includes interest revenue and noninterest revenue. Total expenses includes interest expense, noninterest expenses and provision for credit losses. (2) 1995 balances have been restated to reflect the change in methodology for allocating operating and corporate overhead expenses. Changes had no material impact on 1994 balances. 96 NOTE 23--DERIVATIVE FINANCIAL INSTRUMENTS AND FINANCIAL INSTRUMENTS WITH OFF- BALANCE SHEET RISK In the normal course of business, the Corporation is a party to a variety of derivative and off-balance sheet financial instruments to meet the needs of its customers, to manage its exposure to interest rate and other risks, and to take trading positions. These financial instruments consist of derivatives (such as swaps and options), when-issued securities, securities lending indemnifications, and credit-related arrangements and involve varying degrees of credit risk and market risk. Credit risk, as defined by SFAS 105, represents the maximum potential accounting loss due to possible non-performance by obligors and counterparties under the terms of their contracts. Market risk represents the potential loss due to the decrease in the value of a financial instrument caused primarily by changes in interest rates or foreign exchange rates, or the prices of equities or commodities (or related indices). The Corporation manages the credit risk of its derivative and off-balance sheet portfolios by limiting the total amount of arrangements outstanding with individual customers; by monitoring the size and maturity structure of the portfolios; by obtaining collateral based on management's credit assessment of the customer; and by applying a uniform credit process for all credit exposures. Collateral held generally includes cash and U.S. government and federal agency securities. In order to reduce derivatives-related credit risk, the Corporation enters into master netting agreements which incorporate the right of setoff to provide for the net settlement of covered contracts with the same customer in the event of default or other cancellation of the agreement. In addition, management evaluates these portfolios periodically to determine whether the allowance for credit losses is adequate to absorb potential losses in such portfolios. For a further discussion of derivative financial instruments (including leveraged derivative transactions) the related market and credit risks, and controls used to monitor such risks, which is not included as part of these audited financial statements, see "Risk Management" on page 24, "Derivatives" on page 28, "Summary of Credit Loss Experience" on page 33 and "Nonperforming Assets" on page 37. For the risk-weighted amounts under the risk-based capital guidelines of the Corporation's derivative and off-balance sheet exposures, which also are not included as part of these audited supplemental financial statements, see "Capital Resources" on page 19. 97 Trading Derivative Financial Instruments 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. As required by SFAS 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," the amounts disclosed below represent the end-of-period fair values of trading derivatives and their average aggregate fair values during the year. These amounts are presented gross before the impact of master netting agreements and collateral. The gross fair values of trading derivatives do not represent the amount of market or credit risk of derivatives in the trading portfolio. Rather, they indicate the extent of involvement in the over-the-counter (OTC) markets for interest rate, foreign exchange rate, equity and commodity price derivatives, and exchange traded options during the year. Any measurement of risk is meaningful only when all related factors are identified, such as risk-offsetting transactions, master netting agreements, and the value of any related collateral. The Corporation considers such factors in its RAROC system and in other internal risk analyses. The accounting impact of netting agreements, which is applied on a cross-product basis in accordance with the terms of each master agreement and which is calculated based on the criteria prescribed by FIN 39, is provided below in order to display how these amounts are reflected in trading assets and trading liabilities in the supplemental consolidated balance sheet. 98 Contracts with positive fair values are recorded as assets and contracts with negative fair values are recorded as liabilities after application of master netting agreements. The following table reflects the gross fair values and balance sheet amounts of trading derivative financial instruments:
At December 31, 1996 Average during 1996 ---------------------------- ------------------------ (in millions) Assets (Liabilities) Assets (Liabilities) - --------------------------------------- ---------- ---------------- --------- ------------- OTC Financial Instruments Interest Rate and Currency Swap Contracts $ 16,582 $(15,394) $ 14,880 $(14,345) Interest Rate Contracts Forwards 84 (86) 63 (61) Options purchased 1,149 1,118 Options written (1,252) (1,323) Foreign Exchange Rate Contracts Spot and Forwards 9,855 (10,935) 7,754 (9,118) Options purchased 917 986 Options written (953) (983) Equity-related contracts 2,696 (2,941) 2,128 (2,374) Commodity-related and other contracts 679 (690) 585 (594) Exchange-Traded Options Interest Rate 10 (12) 19 (10) Foreign Exchange - - - (2) Equity 251 (135) 181 (82) - --------------------------------------- --------- -------- -------- -------- Total Gross Fair Values 32,223 (32,398) 27,714 (28,892) - --------------------------------------- --------- -------- -------- -------- Impact of Netting Agreements (20,813) 20,813 (17,314) 17,314 - --------------------------------------- --------- -------- -------- -------- $11,410(1) $ 10,400 ========= ======== $(11,585)(1) $(11,578) ======== ========
99
At December 31, 1995 Average during 1995 ---------------------------- ------------------------ (in millions) Assets (Liabilities) Assets (Liabilities) - --------------------------------------- ---------- ---------------- --------- ------------- OTC Financial Instruments Interest Rate and Currency Swap Contracts $ 15,858 $(15,471) $ 15,901 $(15,288) Interest Rate Contracts Forwards 83 (81) 114 (116) Options purchased 1,426 1,139 Options written (1,312) (1,727) Foreign Exchange Rate Contracts Spot and Forwards 7,931 (8,937) 12,041 (11,795) Options purchased 999 1,462 Options written (941) (1,269) Equity-related contracts 2,011 (2,359) 1,549 (1,756) Commodity-related and other contracts 541 (531) 607 (472) Exchange-Traded Options Interest Rate 33 (16) 106 (62) Foreign Exchange - - 1 (11) Equity 137 (80) 131 (69) Commodity - - 7 (5) - --------------------------------------- --------- -------- -------- -------- Total Gross Fair Values 29,019 (29,728) 33,058 (32,570) - --------------------------------------- --------- -------- -------- -------- Impact of Netting Agreements (18,464) 18,464 (19,389) 19,389 - --------------------------------------- --------- -------- -------- -------- $10,555(1) $ 13,669 ========= ======== $(11,264)(1) $(13,181) ======== ========
(1) As reflected on the balance sheet in "Trading Assets" and "Trading Liabilities." Derivative contracts are generally either privately-negotiated OTC contracts or standard contracts transacted through regulated exchanges. For information as to the credit risk of OTC trading derivatives, which is not included as part of these audited financial statements, see "Derivatives" on page 28. Fair values of futures contracts are not included above due to cash margining requirements of regulated exchanges. Monthly averages are used in the table above. 100 End-User Derivative Financial Instruments 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. When the Corporation purchases assets and issues liabilities at fixed interest rates it subjects itself to fair value fluctuations as market interest rates change. These fluctuations in fair value are managed by entering into interest rate contracts which change the fixed rate instrument into a variable rate instrument. When the Corporation purchases foreign currency denominated assets, issues foreign currency denominated debt or has foreign net investments, it subjects itself to changes in value as exchange rates move. These fluctuations are managed by entering into currency swaps and forwards. The Corporation's investments in nonmarketable and restricted equity instruments classified in other assets are subject to changes in market values. These changes are managed by entering into equity swaps and options. The fair values and other information related to end-user derivatives are disclosed in Note 25. 101 Notional Amounts of Trading and End-User Derivative Financial Instruments Notional amounts indicate the extent of the Corporation's involvement in the various types and uses of derivative financial instruments and do not measure the Corporation's exposure to credit or market risks and do not necessarily represent the amounts exchanged by the parties to the instruments. The amounts exchanged are based on the contractual notional amounts and the other terms of the instruments. Notional amounts are not included in the consolidated balance sheet and generally exceed the future cash requirements relating to the instruments. The leveraging effects of leveraged derivative transactions are reflected in the table below.
Notional Amounts (in millions) December 31, 1996 December 31,1995 - -------------------------------------------------------------------------- ----------------------------- ---------------------- End End Trading User(1) Trading User(1) ----------------- ---------- ---------- ---------- Interest rate contracts Swaps $ 589,739 $58,375 $ 540,124 $59,104 Futures 102,389 - 118,822 - Forwards 67,183 3,325 74,247 2,213 Options purchased Exchange traded 41,106 - 52,020 - OTC 93,734 1,014 97,461 104 Options written Exchange traded 42,300 - 41,833 - OTC 96,843 - 111,706 - - -------------------------------------------------------------------------- ---------- ------- ---------- ------- Total $1,033,294 $62,714 $1,036,213 $61,421 ========================================================================== ========== ======= ========== ======= Foreign exchange rate contracts Spot, forwards, futures $ 539,805 $ 2,358 $ 475,435 $ 1,990 Swaps 60,200 2,480 59,360 1,557 OTC options purchased 23,118 - 22,345 - OTC options written 24,994 - 23,791 - - -------------------------------------------------------------------------- ---------- ------- ---------- ------- Total $ 648,117 $ 4,838 $ 580,931 $ 3,547 ========================================================================== ========== ======= ========== ======= Equity derivative contracts Swaps $ 6,165 $ 224 $ 5,681 $ 22 Futures and forwards 2,932 - 2,766 - Options purchased Exchange traded 3,097 - 2,726 - OTC 13,556 1 12,801 69 Options written Exchange traded 2,648 - 6,808 - OTC 14,420 - 11,334 - - -------------------------------------------------------------------------- ---------- ------- ---------- ------- Total $ 42,818 $ 225 $ 42,116 $ 91 ========================================================================== ========== ======= ========== ======= Commodity and other contracts (2) Swaps $ 3,168 $ - $ 4,003 $ - Futures 792 - 1,622 - Forwards 2,304 - 2,098 - Options purchased Exchange traded 663 - 1,755 - OTC 1,879 - 5,040 - Options written Exchange traded 604 - 2,207 - OTC 1,956 - 5,213 - - -------------------------------------------------------------------------- ---------- ------- ---------- ------- Total $ 11,366 $ - $ 21,938 $ - ========================================================================== ========== ======= ========== =======
(1) These are hedges of securities available for sale, loans, other assets, interest-bearing deposits, other short-term borrowings, long-term debt and net investments in foreign subsidiaries. These are transacted with derivatives traders within the Corporation who are intermediaries to external markets. (2) Excluded from the notional amounts above were benefit-responsive contracts reflecting actuarial-related risk, minimal market risk and no credit risk, for which the notional values totaled $11.5 billion and $12.1 billion at December 31, 1996 and 1995, respectively. 102 SWAPS Interest rate swap contracts generally represent the contractual exchange of fixed and floating rate payments of a single currency, based on a notional amount and an interest reference rate. Cross-currency interest rate swap contracts generally involve the exchange of payments which are based on the interest reference rates available at the inception of the contract on two different currency principal balances that are exchanged. The principal balances are re-exchanged at an agreed upon rate at a specified future date. Equity swap contracts typically involve the payment of an amount equal to the total return of a U.S. or international equity index, basket of equities, or an individual equity over a fixed time period in exchange for receiving a floating interest rate, both based upon the same notional amount. FUTURES AND FORWARDS Futures and forward contracts represent commitments to purchase or sell securities, money market instruments, foreign currencies or commodities at a future date and at a specified price. Futures contracts are traded on regulated U.S. and international exchanges. The Corporation intends to close out most open positions in futures contracts prior to maturity, therefore future cash receipts or payments are generally limited to the change in fair value of the underlying instruments. Since futures contracts generally entail daily net cash margining with regulated exchanges, the credit risk is generally minimized to a one-day receivable. Included in this category of contracts are spot foreign currency contracts, cash-settled index contracts, and forward rate agreements (agreements to exchange amounts at a specified future date for interest rate differentials between an agreed interest rate and a reference rate, computed on a notional amount). OPTIONS Option contracts are either deliverable or cash-settled. Deliverable contracts convey to the purchaser (holder) the right to buy (call) or sell (put) securities, money market instruments, foreign currencies or commodities at or before a specified date for a contracted price from the seller (writer) of the contract. Cash-settled contracts convey to the purchaser the right to the monetary equivalent of the increase (call) or decrease (put), or a percentage thereof, in a specified reference rate or index, computed on a notional amount, from the writer. The initial price of an option contract is equal to the premium paid by the purchaser and is significantly less than the contract or notional amount. Included in these contracts are: (i) interest rate caps, floors and collars, which are agreements to make periodic payments for interest rate differentials between an agreed upon interest rate and a reference rate and (ii) purchased options to enter into future (or cancel existing) interest rate swap contracts ("swap options"). The Corporation is subject to credit risk as a purchaser of an option contract, and is subject to market risk to the extent of the purchase price of the option. The Corporation is subject to market risk on its written option contracts, but not to credit risk, except as noted below, since the customer has already performed according to the terms of the contract by paying a cash premium up front. However, for SFAS 105 purposes, credit risk arises to the extent that the option contract requires or permits settlement in the underlying instrument, and that instrument is subject to credit risk. Such amounts related to certain written put option contracts on debt securities and certain forward contracts to purchase debt securities were $2.677 billion and $4.469 billion at December 31, 1996 and 1995, respectively. The underlying debt securities were primarily obligations of the U.S. and foreign central and local governments and U.S. federal agencies. 103 Financial Instruments with Off-Balance Sheet Credit Risk As required by SFAS 105, off-balance sheet credit risk amounts are determined without consideration of the value of any related collateral and reflect the total potential loss on commitments to purchase when-issued securities for all obligors (including governments); securities lending indemnifications; and undrawn commitments, standby letters of credit and similar arrangements. SECURITIES AND MONEY MARKET ACTIVITIES
(in millions) December 31, 1996 December 31, 1995 - ------------------------------------- ------------------ ------------------ Credit Credit Contract Risk Contract Risk Amount Amount Amount Amount --------- ------- --------- ------- When-issued securities and other Commitments to sell $ 1,440 $ 2 $ 6,705 $ 1 Commitments to purchase (1) 2,511 2,524 3,532 3,511 Securities lending indemnifications 37,799 37,799 28,761 28,761 - ------------------------------------- ------- ------- ------- -------
(1) Includes $1.1 billion and $.6 billion of forward-dated money market assets at December 31, 1996 and 1995, respectively. When-issued securities normally begin trading when the U.S. Treasury or some other issuer of securities announces a forth-coming issue. (In some cases, trading may begin in anticipation of such an announcement.) Such transactions are contingent upon the actual issuance of the security. Since the exact price and terms of the security are unknown before the issue date, trading prior to that date is on a "yield" basis. On the issue date the exact terms and price of the security become known and when-issued trading continues until settlement date, when the securities are delivered and the issuer is paid. On settlement date, the securities purchased by the Corporation are reported on the balance sheet. Securities lending indemnifications represent the market value of customers' securities lent to third parties. The Corporation indemnifies customers to the extent of the replacement cost and/or the market value of the securities in the event of a failure by a third party to return the securities lent. The market value of collateral, primarily cash, received for customers' securities lent was in excess of the contract amounts and was approximately $39 billion at December 31, 1996 and $30 billion at December 31, 1995. 104 CREDIT-RELATED ARRANGEMENTS
(in millions) December 31, 1996 December 31, 1995 - ---------------------------------- ----------------- ----------------- Credit Credit Contract Risk Contract Risk Amount Amount Amount Amount -------- ------- ---------- ------ Commitments to extend credit (1) $12,809 $12,809 $9,382 $9,382 Standby letters of credit and similar arrangements (2) 3,974 3,974 4,562 4,562 - ---------------------------------- ------- ------- ------ ------
(1) Includes participations to other entities of approximately $2 billion at December 31, 1996 and 1995. Of the non-participated amount, approximately $2 billion and $3 billion expire in one year or less at December 31, 1996 and 1995, respectively. Additionally, both the contract amount and the credit risk amount include commitments to enter into securities resale agreements of $2.0 billion and $.8 billion at December 31, 1996 and 1995, respectively. (2) Includes participations to other entities of approximately $1 billion at December 31, 1996 and 1995. Commitments to extend credit represent contractual commitments to make loans and revolving credits. Commitments generally have fixed expiration dates or other termination clauses and require the payment of a fee. Since commitments may expire without being drawn upon, the total contract amounts do not necessarily represent future cash requirements. Included in the amounts above are unused commitments to extend credit that are related to loans held for trading purposes. Information regarding the Corporation's credit risk with respect to real estate financing activities and highly leveraged transactions, which is not included as part of the audited supplemental financial statements, is disclosed on pages 40 through 42. Standby letters of credit and similar arrangements ("standbys"), issued primarily to support corporate obligations, commit the Corporation to make payments on behalf of customers contingent upon the failure of the customer to perform under the terms of the contract. Standbys outstanding related to customer obligations, such as commercial paper, medium- and long-term notes and debentures (including industrial revenue obligations), as well as other financial and performance-related obligations. At December 31, 1996, $2.747 billion will expire within one year, $1.058 billion from one to four years and $169 million after four years. For standbys, commitments to extend credit and securities lending indemnifications, the credit risk amount represents the contractual amount. Standbys and commitments to extend credit would have market risk if issued or extended at a fixed rate of interest. However, these contracts are primarily made at a floating rate. Fees received are generally recognized as revenue over the life of the commitment. 105 NOTE 24--CONCENTRATIONS OF CREDIT RISK The Corporation, as required by SFAS 105, has identified two significant concentrations of credit risk: OECD country banks and OECD country central governments, their agencies and central banks. Together they represented 34 percent and 36 percent of total credit risk at December 31, 1996 and 1995, respectively. The Organization for Economic Cooperation and Development (OECD) is an international organization of countries which are committed to market- oriented economic policies, including the promotion of private enterprise and free market prices, liberal trade policies, and the absence of exchange controls. The OECD consists of 29 industrialized countries that are located primarily in Western Europe and North America, as well as Australia, Japan, New Zealand and South Korea. For risk-based capital purposes, domestic and foreign bank regulators generally assign OECD country central governments, their agencies and their central banks a credit risk weighting of zero percent, which means that no credit risk capital is required to support their financial instruments. OECD country banks are assigned the next lowest credit risk weighting (20 percent) by these regulators. The largest counterparty concentration was the U.S. government and its related entities, which comprised approximately 51 percent of the OECD country governments category. Within all other counterparties, the amount collateralized by cash and U.S. government securities represented approximately 26 percent of total credit risk. The following table reflects the aggregate credit risk by groups of counterparties, as defined by SFAS 105, relating to on- and off-balance sheet financial instruments, including derivatives, at December 31, 1996 and 1995. The increase in the OECD country banks category compared to 1995 was predominantly related to short-term, liquid transactions with European and U.S. banks. 106
CREDIT RISK On-Balance Off-Balance (in millions) Sheet Sheet Total - -------------------------------------- ---------- ----------- -------- 1996 - -------------------------------------- Significant concentrations (1) OECD country banks (2) $ 34,799 $ 4,040 $ 38,839 OECD country governments 16,083 3,194 19,277 - -------------------------------------- -------- ------- -------- Total significant concentrations 50,882 7,234 58,116 All other (3)(4) 60,531 52,463 112,994 - -------------------------------------- -------- ------- -------- Total $111,413 $59,697 $171,110 ====================================== ======== ======= ======== 1995 - -------------------------------------- Significant concentrations (1) OECD country banks (2) $ 21,615 $ 3,894 $ 25,509 OECD country governments 19,872 6,590 26,462 - -------------------------------------- -------- ------- -------- Total significant concentrations 41,487 10,484 51,971 All other (3)(4) 54,079 40,210 94,289 - -------------------------------------- -------- ------- -------- Total $ 95,566 $50,694 $146,260 ====================================== ======== ======= ========
(1) For these purposes, Poland has been excluded from the OECD categories at December 31, 1996 and the Czech Republic and Mexico were excluded at December 31, 1995. (2) Included in the on-balance sheet component of this category was approximately $4 billion and $5 billion at December 31, 1996 and 1995, respectively, that was collateralized by U.S. government securities. (3) The "all other" category of credit risk is diversified with respect to type of obligor and counterparty. Included in the on-balance sheet component of this category was approximately $8 billion and $10 billion at December 31, 1996 and 1995, respectively, that was collateralized by cash and U.S. government securities. Included in the off-balance sheet component of this category at December 31, 1996 was approximately $37 billion that was collateralized by cash and U.S. government securities and approximately $11 billion of unused commitments to extend credit, approximately $5 billion of which expire in one year or less. The corresponding amounts for December 31, 1995 were $28 billion, $6 billion and $3 billion, respectively. (4) Includes: CREDIT RISK
On-Balance Off-Balance (in millions) Sheet Sheet Total - ------------------------------------------------------------------------------------------ ------ ------ ------ 1996 - ------------------------------------------------------------------------------------------ Real estate $2,002 $ 394 $2,396 Highly leveraged 1,663 1,003 2,666 1995 - ------------------------------------------------------------------------------------------ Real estate $1,802 $ 443 $2,245 Highly leveraged 1,173 802 1,975
Information regarding the Corporation's credit risk with respect to real estate financing activities and highly leveraged transactions, which is not included as part of the audited supplemental financial statements, appears on pages 40 through 42. 107 NOTE 25--FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS 107, "Disclosures about Fair Value of Financial Instruments," requires the disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Quoted market prices, when available, are used as the measure of fair value. In cases where quoted market prices are not available, fair values are based on present value estimates or other valuation techniques. These derived fair values are significantly affected by assumptions used, principally the timing of future cash flows and the discount rate. Because assumptions are inherently subjective in nature, the estimated fair values cannot be substantiated by comparison to independent market quotes and, in many cases, the estimated fair values would not necessarily be realized in an immediate sale or settlement of the instrument. The disclosure requirements of SFAS 107 exclude certain financial instruments and all nonfinancial instruments (e.g., franchise value of businesses). Accordingly, the aggregate fair value amounts presented do not represent management's estimation of the underlying value of the Corporation. SFAS 119 amended SFAS 107 disclosure requirements as of December 31, 1994. The amendments, among others, require that the disclosures distinguish between financial instruments held for trading purposes, measured at fair value with gains and losses recognized in earnings, and financial instruments held or issued for purposes other than trading. The fair value of derivative financial instruments must be disclosed separately from nonderivative financial instruments. Additionally, the fair value of derivative financial instruments may not be netted with the fair value of other derivative financial instruments, except as allowed by FIN 39. 108 The following are the estimated fair values of the Corporation's financial instruments followed by a general description of the methods and assumptions used to estimate such fair values. FAIR VALUE OF FINANCIAL INSTRUMENTS
Under- lying Effect of Total Fair Value Book Fair End-User Fair Over (Under) (in millions) December 31, 1996 Value Value Derivative Value Book Value - ----------------------------------------- -------- ------- ----------- ------- ------------ FINANCIAL ASSETS, INCLUDING HEDGES Cash and due from banks $ 1,568 $ 1,568 $ - $ 1,568 $ - Interest-bearing deposits with banks 2,210 2,212 - 2,212 2 Federal funds sold 1,684 1,684 - 1,684 - Securities purchased under resale agreements 18,002 18,004 - 18,004 2 Securities borrowed 17,005 17,005 - 17,005 - Trading assets (see Notes 3 and 23) 49,129 49,129 - 49,129 - Securities available for sale (see Note 4) 7,920 7,985 (65) 7,920 - Loans (excluding leases), commitments to extend credit and standby letters of credit 15,615 15,440 (23) 15,417 (198) Allowance for credit losses (773) - - - 773 Customer receivables 1,529 1,529 - 1,529 - Due from customers on acceptances 597 597 - 597 - Accounts receivable and accrued interest 3,077 3,077 - 3,077 - Other financial assets 2,161 2,239 (3) 2,236 75 FINANCIAL LIABILITIES, INCLUDING HEDGES Noninterest-bearing deposits 3,613 3,613 - 3,613 - Interest-bearing deposits 26,702 26,729 (31) 26,698 (4) Trading liabilities (see Notes 3 and 23) 23,761 23,761 - 23,761 - Securities loaned and securities sold under repurchase agreements 23,454 23,456 - 23,456 2 Other short-term borrowings 19,409 19,416 - 19,416 7 Acceptances outstanding 597 597 - 597 - Other financial liabilities 6,402 6,402 - 6,402 - Allowance for credit losses 200 - - - (200) Long-term debt* 12,038 12,259 (113) 12,146 108 Net investments in foreign subsidiaries - - 1 1 1
109
(in millions) December 31, 1995 - ----------------------------------------- FINANCIAL ASSETS, INCLUDING HEDGES Cash and due from banks $ 2,399 $ 2,399 $ - $ 2,399 $ - Interest-bearing deposits with banks 2,023 2,027 - 2,027 4 Federal funds sold 854 854 - 854 - Securities purchased under resale agreements 13,241 13,242 - 13,242 1 Securities borrowed 11,309 11,309 - 11,309 - Trading assets (see Notes 3 and 23) 48,004 48,004 - 48,004 - Securities available for sale (see Note 4) 6,283 6,376 (93) 6,283 - Loans (excluding leases), commitments to extend credit and standby letters of credit 12,400 12,141 (5) 12,136 (264) Allowance for credit losses (992) - - - 992 Customer receivables 1,322 1,322 - 1,322 - Due from customers on acceptances 500 500 - 500 - Accounts receivable and accrued interest 4,297 4,297 - 4,297 - Other financial assets 1,959 2,133 (14) 2,119 160 FINANCIAL LIABILITIES, INCLUDING HEDGES Noninterest-bearing deposits 3,292 3,292 - 3,292 - Interest-bearing deposits 22,416 22,440 (59) 22,381 (35) Trading liabilities (see Notes 3 and 23) 26,145 26,145 - 26,145 - Securities loaned and securities sold under repurchase agreements 15,684 15,690 - 15,690 6 Other short-term borrowings 15,861 15,879 (1) 15,878 17 Acceptances outstanding 500 500 - 500 - Other financial liabilities 5,090 5,090 - 5,090 - Long-term debt 9,487 9,840 (280) 9,560 73 Net investments in foreign subsidiaries - - (16) (16) (16)
* 1996 includes trust preferred capital securities. 110 A discussion of the nature, objectives and strategies for using end-user derivatives can be found in Note 23. The following table provides 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 supplemental financial statements.
Net Invest- ments in Securities Interest- Other Long- foreign (in millions) available Other bearing short-term term subsi- December 31, 1996 for sale Loans assets deposits borrowings 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 ============================= ==== ===== ====== ==== === ===== =========== =====
111
Net Invest- ments in Securities Interest- Other Long- foreign (in millions) available Other bearing short-term term subsi- December 31, 1995 for sale Loans assets deposits borrowings debt(1) diaries Total - ----------------------------- ----------- ------ ------- ---------- ----------- -------- ------------ ------ INTEREST RATE SWAPS Pay Variable Unrealized Gain $ - $ - $ - $ 132 $ 4 $339 $ - $ 475 Unrealized (Loss) - (5) - (7) (1) (24) - (37) - ----------------------------- ---------- ----- ------ ----- --- ---- ----------- ----- Pay Variable Net - (5) - 125 3 315 - 438 - ----------------------------- ---------- ----- ------ ----- --- ---- ----------- ----- Pay Fixed Unrealized Gain - - - 11 - 14 - 25 Unrealized (Loss) (88) - - (82) (1) (21) - (192) - ----------------------------- ---------- ----- ------ ----- --- ---- ----------- ----- Pay Fixed Net (88) - - (71) (1) (7) - (167) - ----------------------------- ---------- ----- ------ ----- --- ---- ----------- ----- Total Unrealized Gain - - - 143 4 353 - 500 Total Unrealized (Loss) (88) (5) - (89) (2) (45) - (229) - ----------------------------- ---------- ----- ------ ----- --- ---- ----------- ----- Total Net $(88) $(5) $ - $ 54 $ 2 $308 $ - $ 271 ============================= ========== ===== ====== ===== === ==== =========== ===== FORWARD RATE AGREEMENTS Unrealized Gain $ - $ - $ - $ 1 $ - $ - $ - $ 1 Unrealized (Loss) - - - (1) - - - (1) - ----------------------------- ---------- ----- ------ ----- --- ---- ----------- ----- Net $ - $ - $ - $ - $ - $ - $ - $ - ============================= ========== ===== ====== ===== === ==== =========== ===== CURRENCY SWAPS AND FORWARDS Unrealized Gain $ - $ - $ 1 $ 17 $ - $ 20 $ 14 $ 52 Unrealized (Loss) - - - (12) (1) (48) (30) (91) - ----------------------------- ---------- ----- ------ ----- --- ---- ----------- ----- Net $ - $ - $ 1 $ 5 $(1) $(28) $(16) $ (39) ============================= ========== ===== ====== ===== === ==== =========== ===== OTHER CONTRACTS (2) Unrealized Gain $ - $ - $ 1 $ - $ - $ - $ - $ 1 Unrealized (Loss) (5) - (16) - - - - (21) - ----------------------------- ---------- ----- ------ ----- --- ---- ----------- ----- Net $ (5) $ - $(15) $ - $ - $ - $ - $ (20) ============================= ========== ===== ====== ===== === ==== =========== ===== Total Unrealized Gain $ - $ - $ 2 $ 161 $ 4 $373 $ 14 $ 554 Total Unrealized (Loss) (93) (5) (16) (102) (3) (93) (30) (342) - ----------------------------- ---------- ----- ------ ----- --- ---- ----------- ----- Total Net $(93) $(5) $(14) $ 59 $ 1 $280 $(16) $ 212 ============================= ========== ===== ====== ===== === ==== =========== =====
(1) 1996 includes trust preferred capital securities. (2) Other contracts are principally equity swaps and collars. 112 The unrealized gains and losses on these hedges were determined on the basis of valuation pricing models which take into account current market and contractual prices of the underlying instruments, as well as time value and yield curve or volatility factors underlying the positions. The remaining maturities of the notional amounts of end-user derivatives at December 31, 1996 and December 31, 1995 were as follows:
December 31, 1996 Interest Foreign Total (in millions) Rate Currency Equity Notional Notional Amount Maturing in: Risk Risk* Risk Amount - ------------------------------ -------- -------- ------ -------- 1997 $41,168 $3,271 $ 20 $44,459 1998-1999 10,540 750 101 11,391 2000-2001 4,490 689 104 5,283 2002 and thereafter 6,516 128 - 6,644 ------- ------ ---- ------- Total $62,714 $4,838 $225 $67,777 ======= ====== ==== ======= December 31, 1995 Interest Foreign Total (in millions) Rate Currency Equity Notional Notional Amount Maturing in: Risk Risk* Risk Amount ------- ------ ---- ------- 1996 $41,825 $ 667 $ 91 $42,583 1997-1998 10,218 2,305 - 12,523 1999-2000 4,821 466 - 5,287 2001 and thereafter 4,557 109 - 4,666 ------- ------ ---- ------- Total $61,421 $3,547 $ 91 $65,059 ======= ====== ==== =======
* Currency swaps and currency forwards are primarily based upon Australian dollar/U.S. dollar and Japanese yen/U.S. dollar contracts. 113 For pay variable and pay fixed interest rate swaps entered into as an end user, the weighted average receive rate and pay rate (interest rates were based on the weighted averages of both U.S. and non-U.S. currencies) by maturity and corresponding notional amounts at December 31, 1996 and December 31, 1995 were as follows:
December 31, 1996 ($ in millions) Paying Variable Paying Fixed ---------------------------- ------------------------ Notional Amount Notional Receive Pay Notional Receive Pay Total Maturing 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 $58,375 ======= ====== =======
All rates were those in effect at December 31, 1996. Variable rates are primarily based on LIBOR and may change significantly, affecting future cash flows.
December 31, 1995 ($ in millions) Paying Variable Paying Fixed ---------------------------- ------------------------ Notional Amount Notional Receive Pay Notional Receive Pay Total Maturing In: Amount Rate Rate Amount Rate Rate Notional - --------------------- ------------ -------- ----- -------- -------- ----- -------- 1996 $30,770 5.97% 5.87% $ 8,742 6.00% 6.21% $39,512 1997-1998 6,558 5.99 5.84 3,657 5.33 5.76 10,215 1999-2000 3,448 6.57 6.34 1,373 3.86 4.99 4,821 2001 and thereafter 3,927 6.64 5.93 629 5.91 7.34 4,556 ------- ---- ---- ------- ---- ---- ------- Total $44,703 $14,401 $59,104 ======= ======= =======
All rates were those in effect at December 31, 1995. Variable rates are primarily based on LIBOR and may change significantly, affecting future cash flows. 114 The effect of these end-user derivatives was a net decrease in revenue of $29 million for the year ended December 31, 1996 and a net increase in revenue of $22 million for the year ended December 31, 1995. The Corporation has reviewed its other categories of off-balance sheet instruments (forward-dated assets and liabilities, securities lending indemnifications and securities borrowed) accounted for at cost and has determined that, in the case of each such category, the unrealized gain or loss on such instruments at both December 31, 1996 and 1995 was not material. 115 Methods and Assumptions For short-term financial instruments, defined as those with remaining maturities of 90 days or less, the carrying amount was considered to be a reasonable estimate of fair value. The following instruments were predominantly short-term: Assets Liabilities - ------ ----------- Cash and due from banks Interest-bearing deposits Interest-bearing deposits Securities loaned and securities with banks sold under repurchase agreements Federal funds sold Other short-term borrowings Securities purchased under Acceptances outstanding resale agreements Other financial liabilities Securities borrowed Customer receivables Due from customers on acceptances Accounts receivable and accrued interest For those components of the above-listed financial instruments with remaining maturities greater than 90 days, fair value was determined by discounting contractual cash flows using rates which could be earned for assets with similar remaining maturities and, in the case of liabilities, rates at which the liabilities with similar remaining maturities could be issued as of the balance sheet date. As indicated in Note 1, trading assets (including derivatives), trading liabilities and securities available for sale are carried at their fair values. For short-term loans and variable rate loans which reprice within 90 days, the carrying value was considered to be a reasonable estimate of fair value. For those loans for which quoted market prices were available, fair value was based on such prices. For other types of loans, fair value was estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. In addition, for loans secured by real estate, appraisal values for the collateral were considered in the fair value determination. The fair value estimate of commitments to extend credit and standby letters of credit represented the unrealized gains and losses on those off-balance sheet positions and was generally determined in the same manner as loans. 116 Other financial assets consisted primarily of investments in equity instruments (excluding, in accordance with SFAS 107, investments accounted for under the equity method) and cash and cash margins with brokers. The fair value of non-marketable equity instruments was determined by matrix pricing utilizing market prices for comparable publicly traded instruments, adjusted for liquidity and contractual arrangements. Noninterest-bearing deposits do not have defined maturities. In accordance with SFAS 107, fair value represented the amount payable on demand as of the balance sheet date. Other financial liabilities consisted primarily of accounts payable and accrued expenses at both December 31, 1996 and 1995. The fair value of long-term debt was estimated by using market quotes as well as discounting the remaining contractual cash flows using a rate at which the Corporation could issue debt with a similar remaining maturity as of the balance sheet date. 117 NOTE 26--CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
Condensed Statement of Income (in millions) Year Ended December 31, 1996 1995 1994 - ---------------------------------------------- ------ ------ ------- REVENUE Dividends Banks $ 48 $ 75 $ 320 Nonbanks 196 86 264 Interest from subsidiaries 503 551 367 Other interest 157 150 209 Trading - 44 (81) Securities available for sale gains (losses) (7) 114 17 Other 18 85 (17) - ---------------------------------------------- ----- ------ ------ Total revenue 915 1,105 1,079 - ---------------------------------------------- ----- ------ ------ EXPENSES Interest to subsidiaries 109 71 40 Other interest 643 714 566 Other 33 - 20 - ---------------------------------------------- ----- ------ ------ Total expenses 785 785 626 - ---------------------------------------------- ----- ------ ------ Income before income taxes and equity in undistributed income of subsidiaries and affiliates 130 320 453 Income taxes (benefit) (99) 25 (99) Income before equity in undistributed income of subsidiaries and affiliates 229 295 552 Equity in undistributed income of subsidiaries and affiliates 537 16 134 - ---------------------------------------------- ----- ------ ------ NET INCOME $ 766 $ 311 $ 686 ============================================== ===== ====== ======
118
Condensed Balance Sheet (in millions) December 31, 1996 1995 - ----------------------------------------------------- -------- -------- ASSETS Cash and due from banks $ 24 $ 8 Interest-bearing deposits with bank subsidiaries 3,297 2,540 Securities purchased under resale agreements with nonbank subsidiary 701 2,213 Securities purchased under resale agreements with third party - 48 Trading assets 2,809 1,475 Securities available for sale 1,577 1,301 Loans 245 24 Investments in subsidiaries and affiliates Banks 4,716 4,641 Nonbanks 2,279 1,435 Receivables from subsidiaries and affiliates Banks 1,584 1,418 Nonbanks 5,182 3,363 Accounts receivable and accrued interest 370 348 Other assets 255 148 - ----------------------------------------------------- ------- ------- Total assets $23,039 $18,962 ===================================================== ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Trading liabilities $ 478 $ 348 Commercial paper 5,723 5,306 Other short-term borrowings 1,905 960 Payables to subsidiaries and affiliates Banks 652 170 Nonbanks 2,702 1,794 Other liabilities 330 278 Long-term debt 5,371 4,633 - ----------------------------------------------------- ------- ------- Total liabilities 17,161 13,489 - ----------------------------------------------------- ------- ------- Total stockholders' equity 5,878 5,473 - ----------------------------------------------------- ------- ------- Total liabilities and stockholders' equity $23,039 $18,962 ===================================================== ======= =======
119
CONDENSED STATEMENT OF CASH FLOWS (in millions) Year Ended December 31, 1996 1995 1994 - ----------------------------------------------------- ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 766 $ 311 $ 686 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in undistributed loss (income) of subsidiaries and affiliates (537) (16) (134) Deferred income taxes (29) 3 (59) Net change in trading assets (1,334) 104 342 Net change in trading liabilities 130 220 (42) Securities available for sale (gains) losses 7 (114) (17) Other, net (323) 282 107 - ----------------------------------------------------- ------- ------- ------- Net cash provided by (used in) operating activities (1,320) 790 883 - ----------------------------------------------------- ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Net change in: Interest-bearing deposits with bank subsidiaries (757) (1,031) (847) Securities purchased under resale agreements with nonbank subsidiary (1,512) (1,109) (784) Securities purchased under resale agreements with third party 48 (48) - Short-term notes receivable from subsidiaries and affiliates 2,557 1,591 745 Securities available for sale: Purchases (746) (388) (2,304) Maturities and other redemptions 229 360 396 Sales 260 876 501 Increases in long-term notes receivable from subsidiaries (2,015) (484) (2,133) Decreases in long-term notes receivable from subsidiaries 871 1,379 640 Capital contributed to subsidiaries and affiliates (867) (290) (152) Return of capital from subsidiaries and affiliates 700 - 2 Other, net (223) 22 34 - ----------------------------------------------------- ------- ------- ------- Net cash provided by (used in) investing activities (1,455) 878 (3,902) - ----------------------------------------------------- ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in: Commercial paper and other short-term borrowings 1,363 (3,304) 3,327 Short-term notes payable to subsidiaries 878 1,012 133 Issuance of long-term notes payable to subsidiaries 512 - - Issuance of long-term debt 1,680 1,496 421 Repayments of long-term debt (864) (791) (370) Issuance of preferred stock - 221 342 Redemption/repurchase of preferred stock (49) - (205) Purchases of treasury stock (608) (38) (267) Cash dividends paid (378) (361) (322) Other, net 257 33 22 - ----------------------------------------------------- ------- ------- ------- Net cash (used in) provided by financing activities 2,791 (1,732) 3,081 - ----------------------------------------------------- ------- ------- ------- NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 16 (64) 62 Cash and due from banks, beginning of year 8 72 10 - ----------------------------------------------------- ------- ------- ------- Cash and due from banks, end of year $ 24 $ 8 $ 72 ===================================================== ======= ======= ======= Interest paid $ 737 $ 772 $ 587 ===================================================== ======= ======= ======= Income taxes paid $ 19 $ 9 $ 7 ===================================================== ======= ======= ======= Noncash financing activity: Conversion of debt to preferred stock $ 1 $ 245 $ - ===================================================== ======= ======= ======= Noncash investing activity: Treasury stock associated with acquisition $ 203 $ - $ - ===================================================== ======= ======= =======
120 NOTE 27--BANKERS TRUST COMPANY CONSOLIDATED SUMMARIZED FINANCIAL INFORMATION
Consolidated Statement of Income (in millions) Year Ended December 31, 1996 1995 1994 - -------------------------------------------------------- ------- ------- ------- NET INTEREST REVENUE Interest revenue $4,124 $3,656 $2,900 Interest expense 3,346 3,069 2,271 - -------------------------------------------------------- ------ ------ ------ NET INTEREST REVENUE 778 587 629 Provision for credit losses (9) (31) (3) - -------------------------------------------------------- ------ ------ ------ NET INTEREST REVENUE AFTER PROVISION FOR CREDIT LOSSES 787 618 632 - -------------------------------------------------------- ------ ------ ------ NONINTEREST REVENUE Trading 670 279 786 Fiduciary and funds management 720 642 698 Fees and commissions 562 484 541 Securities available for sale gains (losses) 23 (4) 13 Other 295 163 213 - -------------------------------------------------------- ------ ------ ------ Total noninterest revenue 2,270 1,564 2,251 - -------------------------------------------------------- ------ ------ ------ NONINTEREST EXPENSES Salaries and commissions 729 683 656 Incentive compensation and employee benefits 716 524 563 Occupancy, net 142 141 134 Furniture and equipment 155 146 149 Provision for severance related costs - 43 - Other 856 736 823 - -------------------------------------------------------- ------ ------ ------ Total noninterest expenses 2,598 2,273 2,325 - -------------------------------------------------------- ------ ------ ------ Income (Loss) before income taxes 459 (91) 558 Income taxes (benefit) 115 (53) 166 - -------------------------------------------------------- ------ ------ ------ NET INCOME (LOSS) $ 344 $ (38) $ 392 ======================================================== ====== ====== ======
121 In the normal course of business, BTCo enters into various transactions with the Parent Company and the Parent Company's other subsidiaries. Included in the above financial statements were the following transactions and balances with such affiliates.
(in millions) Year Ended December 31, 1996 1995 1994 - --------------------------------------- ----- ------ ------ Interest revenue $ 174 $ 129 $ 97 Interest expense 249 276 185 Noninterest revenue 112 65 18 Noninterest expenses 228 203 289 (in millions) December 31, 1996 1995 - --------------------------------------- ------ ------ Interest-earning assets $1,395 $1,357 Noninterest-earning assets 618 554 Interest-bearing liabilities 5,040 4,778 Noninterest-bearing liabilities 729 495
122
Consolidated Balance Sheet ($ in millions, except par values) December 31, 1996 1995 - --------------------------------------------------- -------- -------- ASSETS Cash and due from banks $ 1,544 $ 2,305 Interest-bearing deposits with banks 2,494 1,982 Federal funds sold 1,789 854 Securities purchased under resale agreements 12,389 8,566 Securities borrowed 8,275 6,031 Trading assets 38,272 35,142 Securities available for sale 4,239 3,280 Loans - 11,393 Allowance for credit losses - (941) Loans, net of allowance for credit losses of $723 at December 31, 1996 13,018 - Premises and equipment, net 914 834 Due from customers on acceptances 597 500 Accounts receivable and accrued interest 2,200 3,790 Other assets 2,412 2,141 - --------------------------------------------------- ------- ------- Total assets $88,143 $75,877 =================================================== ======= ======= LIABILITIES Noninterest-bearing deposits Domestic offices $ 2,791 $ 2,815 Foreign offices 1,029 645 Interest-bearing deposits Domestic offices 9,196 4,615 Foreign offices 20,556 20,018 - --------------------------------------------------- ------- ------- Total deposits 33,572 28,093 Trading liabilities 19,172 19,087 Securities loaned and securities sold under repurchase agreements 10,095 7,275 Other short-term borrowings 10,391 8,342 Acceptances outstanding 597 500 Accounts payable and accrued expenses 1,993 1,810 Other liabilities, including allowance for credit losses of $200 at December 31, 1996 1,212 1,006 Long-term debt not included in risk-based capital 4,828 4,248 Long-term debt included in risk-based capital 1,162 1,180 Mandatorily redeemable capital securities of subsidiary trust holding solely junior subordinated deferrable interest debentures included in risk-based capital 243 - - --------------------------------------------------- ------- ------- Total liabilities 83,265 71,541 - --------------------------------------------------- ------- ------- STOCKHOLDER'S EQUITY Floating rate non-cumulative preferred stock- Series A, $1 million par value Authorized, issued and outstanding: 1996, 600 shares; 1995, 500 shares 600 500 Common stock, $10 par value Authorized, issued and outstanding: 1996, 100,166,667 shares; 1995, 85,166,667 shares 1,001 852 Capital surplus 540 528 Retained earnings 3,133 2,822 Cumulative translation adjustments (382) (365) Securities valuation allowance (14) (1) - --------------------------------------------------- ------- ------- Total stockholder's equity 4,878 4,336 - --------------------------------------------------- ------- ------- Total liabilities and stockholder's equity $88,143 $75,877 =================================================== ======= =======
See Note 9 for details of BTCo's long-term debt issued to nonaffiliates. Note 2 discusses the effects of the Corporation's adoption of SFAS 114 effective January 1, 1995. 123 NOTE 28--SUBSEQUENT EVENTS Mandatorily Redeemable Capital Securities of Subsidiary Trusts Holding Solely Junior Subordinated Deferrable Interest Debentures Included in Risk-Based Capital. Subsequent to December 31, 1996, BT Capital Trust A ("Trust A"), BT Preferred Capital Trust I ("Trust I") and BT Preferred Capital Trust II ("Trust II"), wholly-owned subsidiaries of the Corporation issued $250 million 7.90% Capital Securities, Series A1, ("Series A1 Securities"), $250 million 8 1/8% Preferred Securities, Series I ("Series I Securities") and $250 million 7.875% Preferred Securities, Series II ("Series II Securities"), respectively. The Series A1 Securities and the Series II Securities have a liquidation value of $1,000 per Series A1 Security and Series II Security, respectively. The Series I Securities have a liquidation value of $25 per Series I Security. Series A1 Securities, Series I Securities and Series II Securities represent preferred undivided beneficial interests in the assets of Trust A, Trust I and Trust II, respectively. The Corporation is the holder of all of the beneficial interests represented by common securities of Trust A, Trust I and Trust II ("Common Securities" and, collectively with the Series A1 Securities, Series I Securities and Series II Securities, the "Trust Securities"). Trust A, Trust I and Trust II exist for the sole purpose of issuing the Trust Securities and investing the proceeds thereof in 7.90% Junior Subordinated Deferrable Interest Debentures, Series A1, 8 1/8% Junior Subordinated Deferrable Interest Debentures, Series I and 7.875% Junior Subordinated Deferrable Interest Debentures, Series II (the "Series A1 Debentures," the "Series I Debentures" and the "Series II Debentures" and collectively, the "Junior Subordinated Debentures") issued by the Corporation. The Junior Subordinated Debentures are unsecured and subordinated to all senior indebtedness of the Corporation and will be the sole assets of Trust A, Trust I and Trust II. Payments under the Junior Subordinated Debentures by the Corporation are the same as those for the Series A1 Securities, Series I Securities and Series II Securities described below, respectively. The Corporation has guaranteed the obligations of Trust A, Trust I and Trust II under the Series A1 Securities, Series I Securities and Series II Securities, but only in each case to the extent of funds held by Trust A, Trust I and Trust II, respectively. Holders of the Series A1 Securities will be entitled to receive preferential cumulative cash distributions accumulating from January 16, 1997 and payable semi-annually in arrears on the fifteenth day of January and July of each year, commencing July 15, 1997, at the annual rate of 7.90% of the liquidation amount of $1,000 per Series A1 Security. The Series A1 Securities are subject to mandatory redemption upon repayment of the Series A1 Debentures at maturity on January 15, 2027. The maturity date may be shortened under certain circumstances to a date not earlier than January 15, 2017. In addition, the Series A1 Debentures may be redeemed at the option of the Corporation on or after January 15, 2007. Holders of the Series I Securities will be entitled to receive preferential cumulative cash distributions accumulating from February 5, 1997 and payable quarterly in arrears on the last day of March, June, September and December of each year, commencing March 31, 1997, at the annual rate of 8 1/8% of the liquidation amount of $25 per Series I Security. The Series I Securities are subject to mandatory redemption upon repayment of the Series I Debentures at maturity on February 1, 2037. The maturity date may be shortened under certain circumstances to a date not earlier than February 1, 2002. In addition, the Series I Debentures may be redeemed at the option of the Corporation on or after February 1, 2002. Holders of the Series II Securities will be entitled to receive preferential cumulative cash distributions accumulating from February 25, 1997, and payable semi-annually in arrears on the twenty fifth day of February and August of each year, commencing August 25, 1997, at the annual rate of 7.875% of the liquidation amount of $1,000 per Series II Security. The Series II Securities are subject to mandatory redemption upon repayment of 124 the Series II Debentures at maturity on February 25, 2027. The maturity date may be shortened under certain circumstances to a date not earlier than February 25, 2012. In addition, the Series II Debentures may be redeemed at the option of the Corporation on or after February 25, 2007. In addition, the Corporation issued approximately $750 million in long-term debt subsequent to December 31, 1996. Redemption of Preferred Stock of Subsidiary On February 27, 1997, BT Overseas Finance N.V. ("BTOF") redeemed all 625 shares of its BTOF Auction Rate Cumulative Preferred Stock Series C. The shares were redeemed at a price of $100,000 per share, plus accrued and unpaid dividends on such shares to the redemption date. Dividends on these shares will cease to accumulate on the redemption date. On March 6, 1997, BTOF redeemed all 625 shares of its BTOF Auction Rate Cumulative Preferred Stock Series D. The shares were redeemed at a price of $100,000 per share plus, accrued and unpaid dividends on such shares to the redemption date. Dividends on these shares will cease to accumulate on the redemption date. On February 21, 1997, BTOF announced that it will redeem all 625 outstanding shares of its BTOF Auction Rate Cumulative Preferred Stock, Series A on March 13, 1997. The shares will be redeemed at a redemption price of $100,000 per share plus accrued and unpaid dividends to the redemption date. Dividends on these shares will cease to accumulate on the redemption date, unless BTOF fails to pay the redemption price. On February 28, 1997, BTOF announced that it will redeem all 625 outstanding shares of its BTOF Auction Rate Cumulative Preferred Stock, Series B on March 20, 1997. The shares will be redeemed at a redemption price of $100,000 per share plus accrued and unpaid dividends to the redemption date. Dividends on these shares will cease to accumulate on the redemption date, unless BTOF fails to pay the redemption price. Preferred Stock Redemption On March 1, 1997, the Parent Company exercised its right of redemption on 1 million shares of the 8.55% Cumulative Preferred Stock, Series I at $100 per share plus an amount equal to accrued and unpaid dividends to the date of redemption. 125 INDEPENDENT AUDITORS' REPORT The Board of Directors Bankers Trust New York Corporation: We have audited the combination of Bankers Trust New York Corporation and Subsidiaries (the "Corporation") and Alex. Brown Incorporated as reflected in the accompanying supplemental consolidated balance sheet of the Corporation as of December 31, 1996 and 1995, and the related supplemental consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These supplemental consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on the combination of the Corporation and Alex. Brown Incorporated as reflected in these supplemental consolidated financial statements based on our audit procedures. We previously audited and reported on the consolidated balance sheet of Alex. Brown Incorporated as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996, prior to their restatement for the 1997 pooling-of-interests with the Corporation and have issued our report thereon dated January 20, 1997. Such report and the accompanying Alex. Brown Incorporated consolidated financial statements are included in the Corporation's Current Report on Form 8-K dated September 1, 1997 incorporated by reference herein. The contribution of Alex. Brown Incorporated to combined restated assets as reflected in the supplemental consolidated financial statements represented 2 percent and 2 percent as of December 31, 1996 and 1995, respectively; to combined restated revenues represented 20 percent, 19 percent and 14 percent; and to combined restated net income represented 20 percent, 31 percent and 10 percent for the years ended December 31, 1996, 1995 and 1994, respectively. Separate consolidated financial statements of the Corporation included in the supplemental consolidated financial statements were audited and reported on separately by other auditors who have issued their report thereon dated January 23, 1997 except for Note 28, as to which the date is March 6, 1997. Such report is presented herein. The supplemental consolidated financial statements give retroactive effect to the merger of the Corporation and Alex. Brown Incorporated on September 1, 1997, which has been accounted for as a pooling-of-interests as described in Note 1 to the supplemental consolidated financial statements. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling-of-interests method in financial statements that do not include the date of consummation. These financial statements do not extend through the date of consummation. However, they will become the historical consolidated financial statements of the Corporation after financial statements covering the date of consummation of the business combination are issued. In our opinion, the supplemental consolidated financial statements referred to above have been properly combined on the basis described in Note 1 of the notes to the supplemental consolidated financial statements. /s/ KPMG PEAT MARWICK LLP New York, New York September 5, 1997 126 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Bankers Trust New York Corporation We have audited the consolidated balance sheet of Bankers Trust New York Corporation and Subsidiaries (the "Corporation") at December 31, 1996 and 1995, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996 (not presented herein), prior to their restatement for the 1997 pooling-of-interests with Alex. Brown Incorporated as described in Note 1 to the supplemental consolidated financial statements. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bankers Trust New York Corporation and Subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP New York, New York January 23, 1997 except for Note 28, as to which the date is March 6, 1997 127 SUPPLEMENTAL FINANCIAL DATA The statistical data on pages 128 through 133 should be read in conjunction with the Financial Review and the supplemental financial statements included elsewhere in this Annual Report. In the opinion of management, all material adjustments necessary for a fair presentation of the results of operations for the interim periods have been made. All such adjustments were of a normal recurring nature. CONDENSED QUARTERLY CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share data) - -------------------------------------- 1996 1995 --------------------------------- ----------------------------------- Fourth Third Second First Fourth Third Second First ------- ------- ------- ------- ------- ------- ------- -------- Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter ------- ------- ------- ------- ------- ------- ------- -------- Interest revenue $ 1,686 $ 1,704 $ 1,495 $ 1,623 $ 1,490 $ 1,583 $ 1,543 $ 1,373 Interest expense 1,399 1,434 1,229 1,389 1,260 1,361 1,306 1,178 - -------------------------------------- ------- ------- ------- ------- ------- ------- ------- ------- Net interest revenue 287 270 266 234 230 222 237 195 Provision for credit losses - - - 5 10 7 - 14 - -------------------------------------- ------- ------- ------- ------- ------- ------- ------- ------- Net interest revenue after provision for credit losses 287 270 266 229 220 215 237 181 - -------------------------------------- ------- ------- ------- ------- ------- ------- ------- ------- Total noninterest revenue 1,068 989 1,072 988 953 938 765 473 Total noninterest expenses 1,083 964 1,038 953 938 891 833 851 - -------------------------------------- ------- ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes 272 295 300 264 235 262 169 (197) Income taxes (benefit) 88 93 99 85 75 84 55 (56) - -------------------------------------- ------- ------- ------- ------- ------- ------- ------- ------- NET INCOME (LOSS) $ 184 $ 202 $ 201 $ 179 $ 160 $ 178 $ 114 $ (141) ====================================== ======= ======= ======= ======= ======= ======= ======= ======= Net income (loss) applicable to common stock $ 170 $ 194 $ 187 $ 164 $ 145 $ 162 $ 102 $ (149) ====================================== ======= ======= ======= ======= ======= ======= ======= ======= EARNINGS (LOSS) PER COMMON SHARE: Primary $ 1.64 $ 1.85 $ 1.82 $ 1.62 $ 1.43 $ 1.61 $ 1.02 $ (1.54) Fully diluted 1.59 $ 1.80 $ 1.77 1.57 1.39 $ 1.56 $ 1.00 $ (1.54) ====================================== ======= ======= ======= ======= ======= ======= ======= ======= Cash dividends declared per common share $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ====================================== ======= ======= ======= ======= ======= ======= ======= ======= STOCKHOLDER DATA Market price (1) High $90 7/8 $83 1/2 $77 7/8 $72 3/8 $ 71 $ 72 $64 3/4 $64 7/8 Low 78 68 1/4 65 1/2 61 60 1/4 60 3/4 52 49 3/4 End of quarter 86 1/4 78 5/8 73 7/8 70 7/8 66 1/2 70 1/4 62 52 1/4
(1) Based on the Composite Tape. Market prices at January 31, 1997 for common stock were as follows: High, $85 7/8; Low, $84 7/8; Close, $85. DIVIDENDS Cash dividends on common stock were paid quarterly in 1996 on the 25th of January, April, July and October. NUMBER OF SECURITY HOLDERS At January 31, 1997, the approximate number of holders of record of common stock was 24,000. STOCK LISTINGS The principal markets on which the common stock is traded are the New York Stock Exchange (Symbol: BT) and the London Stock Exchange. 128 AVERAGE BALANCES, INTEREST AND AVERAGE RATES The following table shows the major consolidated assets and liabilities, together with their respective interest amounts and rates earned or paid by the Corporation. Cash basis and renegotiated loans are included in the averages to determine an effective yield on all loans. The average balances are principally daily averages.
1996 1995 1994 ----------------------------- ----------------------------- ----------------------------- Average Average Average Average Average Average ($ in millions) Balance Interest Rate Balance Interest Rate Balance Interest Rate - ------------------------------- --------- -------- -------- --------- -------- -------- --------- -------- -------- ASSETS Interest-bearing deposits with banks (primarily in foreign offices) $ 2,786 $ 214 7.68% $ 2,777 $ 207 7.45% $ 1,523 $ 124 8.14% Federal funds sold (in domestic offices) 2,179 119 5.46% 1,726 104 6.03% 634 31 4.89% Securities purchased under resale agreements In domestic offices 14,368 800 5.57% 10,400 598 5.75% 8,449 255 3.02% In foreign offices 7,444 514 6.90% 5,732 231 4.03% 2,393 131 5.47% - ------------------------------- -------- ------ -------- ------ -------- ------ Total securities purchased under resale agreements 21,812 1,314 6.02% 16,132 829 5.14% 10,842 386 3.56% Securities borrowed In domestic offices 13,555 678 5.00% 10,647 604 5.67% 5,785 244 4.22% In foreign offices 2,241 147 6.56% 2,245 141 6.28% 1,870 54 2.89% - ------------------------------- -------- ------ -------- ------ -------- ------ Total securities borrowed 15,796 825 5.22% 12,892 745 5.78% 7,655 298 3.89% Trading Assets In domestic offices (1) 14,475 1,164 8.04% 14,656 1,376 9.39% 20,824 1,917 9.21% In foreign offices 16,140 1,251 7.75% 16,058 1,320 8.22% 15,787 1,054 6.68% - ------------------------------- -------- ------ -------- ------ -------- ------ Total trading assets (1) 30,615 2,415 7.89% 30,714 2,696 8.78% 36,611 2,971 8.12% Securities available for sale In domestic offices Taxable 2,674 195 7.29% 1,891 165 8.73% 2,043 134 6.56% Exempt from federal income taxes (1) 1,029 29 2.82% 1,340 51 3.81% 1,374 75 5.46% In foreign offices Taxable 3,151 229 7.27% 2,899 167 5.76% 3,042 178 5.85% Exempt from federal income taxes (1) 142 16 11.27% 320 35 10.94% 410 49 11.95% - ------------------------------- -------- ------ -------- ------ -------- ------ Total securities available for sale (1) 6,996 469 6.70% 6,450 418 6.48% 6,869 436 6.35% Loans In domestic offices Commercial and industrial 2,894 221 7.64% 2,178 160 7.35% 2,123 141 6.64% Financial institutions 942 64 6.79% 620 51 8.23% 920 49 5.33% Secured by real estate 1,409 97 6.88% 1,398 95 6.80% 1,503 82 5.46% Other (1) 2,177 124 5.70% 2,335 134 5.74% 2,344 150 6.40% - ------------------------------- -------- ------ -------- ------ -------- ------ Total in domestic offices (1) 7,422 506 6.82% 6,531 440 6.74% 6,890 422 6.12% In foreign offices 6,253 517 8.27% 5,263 487 9.25% 5,613 444 7.91% - ------------------------------- -------- ------ -------- ------ -------- ------ Total loans, excluding fees (1) 13,675 1,023 7.48% 11,794 927 7.86% 12,503 866 6.93% Loan fees 24 18 15 - ------------------------------- ------ ------ ------ Total loans, including fees (1) 13,675 1,047 7.66% 11,794 945 8.01% 12,503 881 7.05% - ------------------------------- -------- ------ -------- ------ -------- ------ Customer Receivables In domestic offices 1,582 121 7.65% 1,049 86 8.20% 788 52 6.60% In foreign offices - - - - - - - ------------------------------- -------- ------ -------- ------ -------- ------ Total customer receivables 1,582 121 7.65% 1,049 86 8.20% 788 52 6.60% TOTAL INTEREST-EARNING ASSETS (1) 95,441 $6,524 6.84% 83,534 6,030 7.22% 77,425 5,179 6.69% Cash and due from banks 1,350 1,798 1,939 Noninterest-earning trading assets 17,081 19,013 20,004 Due from customers on acceptances 554 434 348 All other assets 8,349 7,740 7,870 Allowance for credit losses (986) (1,196) (1,342) - ------------------------------- -------- -------- -------- TOTAL ASSETS $121,789 $111,323 $106,244 =============================== ======== ======== ======== % of assets attributable to foreign offices 58% 53% 50%
(1) Interest and average rates are presented on a fully taxable basis. The applicable combined federal, state and local incremental tax rate used to determine the amounts of the tax equivalent adjustments to interest revenue (which recognize the income tax savings on tax-exempt assets) was 42 percent for 1996, 1995 and 1994. 129
1996 1995 1994 ---------------------------- ---------------------------- ---------------------------- Average Average Average Average Average Average ($ in millions) Balance Interest Rate Balance Interest Rate Balance Interest Rate - ------------------------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits In domestic offices Time deposits $ 3,088 $ 180 5.83% $ 1,384 $ 99 7.15% $ 700 $ 50 7.14% Other 3,824 204 5.33% 4,338 277 6.39% 5,519 218 3.95% - ------------------------------- -------- ------ -------- ------ -------- ------ Total in domestic offices 6,912 384 5.56% 5,722 376 6.57% 6,219 268 4.31% In foreign offices Deposits from banks in foreign countries 7,045 401 5.69% 7,432 496 6.67% 5,248 296 5.64% Other time and savings deposits 7,802 466 5.97% 7,370 408 5.54% 6,027 345 5.72% Other 2,039 104 5.10% 1,513 80 5.29% 1,221 55 4.50% - ------------------------------- -------- ------ -------- ------ -------- ------ Total in foreign offices 16,886 971 5.75% 16,315 984 6.03% 12,496 696 5.57% - ------------------------------- -------- ------ -------- ------ -------- ------ Total interest-bearing deposits 23,798 1,355 5.69% 22,037 1,360 6.17% 18,715 964 5.15% Trading liabilities In domestic offices 7,808 595 7.62% 6,293 622 9.88% 4,453 486 10.91% In foreign offices 3,576 267 7.47% 4,922 431 8.76% 5,682 321 5.65% - ------------------------------- -------- ------ -------- ------ -------- ------ Total trading liabilities 11,384 862 7.57% 11,215 1,053 9.39% 10,135 807 7.96% Securities loaned and securities sold under repurchase agreements In domestic offices 19,106 1,049 5.49% 17,269 1,003 5.81% 20,314 808 3.98% In foreign offices 7,855 549 6.99% 4,592 186 4.05% 1,805 120 6.65% - ------------------------------- -------- ------ -------- ------ -------- ------ Total securities loaned and securities sold under repurchase agreements 26,961 1,598 5.93% 21,861 1,189 5.44% 22,119 928 4.20% Other short-term borrowings In domestic offices 11,261 633 5.62% 12,051 719 5.97% 12,881 589 4.57% In foreign offices 5,195 367 7.06% 4,396 326 7.42% 4,488 312 6.95% - ------------------------------- -------- ------ -------- ------ -------- ------ Total other short-term borrowings 16,456 1,000 6.08% 16,447 1,045 6.35% 17,369 901 5.19% Long-term debt In domestic offices 6,748 411 6.09% 5,249 341 6.50% 5,067 247 4.87% In foreign offices 3,907 222 5.68% 2,596 117 4.51% 843 33 3.91% - ------------------------------- -------- ------ -------- ------ -------- ------ Total long-term debt 10,655 633 5.94% 7,845 458 5.84% 5,910 280 4.74% - ------------------------------- -------- ------ -------- ------ -------- ------ Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures 42 3 7.14% - - - - - - - ------------------------------- -------- ------ -------- ------ -------- ------ TOTAL INTEREST-BEARING LIABILITIES 89,296 5,451 6.10% 79,405 5,105 6.43% 74,248 3,880 5.23% Noninterest-bearing deposits In domestic offices 2,661 2,921 3,210 In foreign offices 600 509 587 - ------------------------------- -------- -------- -------- Total noninterest-bearing deposits 3,261 3,430 3,797 Noninterest-bearing trading liabilities 15,502 16,232 15,707 Acceptances outstanding 555 441 363 All other liabilities 7,152 6,286 6,768 Preferred stock of subsidiary 250 250 250 Stockholders' Equity Preferred stock 853 726 388 Common stockholders' equity 4,920 4,553 4,723 - ------------------------------- -------- -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $121,789 $111,323 $106,244 =============================== ======== ======== ======== % of liabilities attributable to foreign offices 60% 53% 42% Rate spread .74% .79% 1.46% Net interest margin (net interest revenue to total interest-earning assets) In domestic offices $57,349 $ 597 1.04% $48,332 $438 .91% $46,847 $ 772 1.65% In foreign offices 38,092 476 1.25% 35,202 487 1.38% 30,578 527 1.72% - ------------------------------- ------- ------ ------- ---- ------- ------ Total $95,441 $1,073 1.12% $83,534 $925 1.11% $77,425 $1,299 1.68% =============================== ======= ====== ======= ==== ======= ======
130 VOLUME/RATE ANALYSIS OF CHANGES IN NET INTEREST REVENUE The following table attributes changes in fully taxable net interest revenue to changes in either average daily balances or average rates for both interest- earning assets and interest-bearing sources of funds. Because of the numerous simultaneous balance and rate changes during any period, it is not possible to precisely allocate such changes between balances and rates. For purposes of this table, changes which are not due solely to balance or rate changes are allocated to such categories based on the respective percentage changes in average daily balances and average rates.
1996/95 1995/94 ---------------------------- ----------------------------- Increase (decrease) Increase (decrease) due to change in: due to change in: Average Average Average Average Balance Rate Total Balance Rate Total --------- --------- ------ --------- --------- ------- CONSOLIDATED INTEREST REVENUE Interest-bearing deposits with banks $ 1 $ 6 $ 7 $ 94 $ (11) $ 83 Federal funds sold 25 (10) 15 64 9 73 Securities purchased under resale agreements 326 159 485 232 211 443 Securities borrowed 157 (77) 80 262 185 447 Trading assets (9) (272) (281) (504) 229 (275) Securities available for sale 36 15 51 (27) 9 (18) Loans 145 (43) 102 (52) 116 64 Customer receivables 41 (6) 35 20 14 34 - ------------------------------------- ----- -------- ----- ----- -------- ------ Total interest revenue 722 (228) 494 89 762 851 - ------------------------------------- ----- -------- ----- ----- -------- ------ INTEREST EXPENSE Interest-bearing deposits 104 (109) (5) 187 209 396 Trading liabilities 16 (207) (191) 92 154 246 Securities loaned and securities sold under repurchase agreements 295 114 409 (11) 272 261 Other short-term borrowings 2 (47) (45) (50) 194 144 Long-term debt 167 8 175 104 74 178 Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures 3 - 3 - - - - ------------------------------------- ----- -------- ----- ----- -------- ------ Total interest expense 587 (241) 346 322 903 1,225 - ------------------------------------- ----- -------- ----- ----- -------- ------ Net change in net interest revenue $ 135 $ 13 $ 148 $(233) $ (141) $ (374) ===================================== ===== ======== ===== ===== ======== ====== DOMESTIC OFFICES INTEREST REVENUE Interest-bearing deposits with banks $ (15) $ (6) $ (21) $ 17 $ 15 $ 32 Federal funds sold 25 (10) 15 64 9 73 Securities purchased under resale agreements 221 (19) 202 70 273 343 Securities borrowed 151 (77) 74 255 105 360 Trading assets (17) (195) (212) (578) 37 (541) Securities available for sale 30 (22) 8 (12) 19 7 Loans 64 6 70 (24) 46 22 Customer receivables 41 (6) 35 20 14 34 - ------------------------------------- ----- -------- ----- ----- -------- ------ Total interest revenue 500 (329) 171 (188) 518 330 - ------------------------------------- ----- -------- ----- ----- -------- ------ INTEREST EXPENSE Interest-bearing deposits 71 (63) 8 (23) 131 108 Trading liabilities 132 (159) (27) 185 (49) 136 Securities loaned and securities sold under repurchase agreements 103 (57) 46 (135) 330 195 Other short-term borrowings (45) (41) (86) (40) 170 130 Long-term debt 92 (22) 70 9 85 94 Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures 3 - 3 - - - Funds provided to foreign offices (352) 287 (65) 7 22 29 Funds provided by foreign offices 601 (386) 215 127 (26) 101 - ------------------------------------- ----- -------- ----- ----- -------- ------ Total interest expense 605 (441) 164 130 663 793 - ------------------------------------- ----- -------- ----- ----- -------- ------ Net change in net interest revenue $(105) $ 112 $ 7 $(318) $ (145) $ (463) ===================================== ===== ======== ===== ===== ======== ====== FOREIGN OFFICES INTEREST REVENUE Interest-bearing deposits with banks $ 2 $ 26 $ 28 $ 71 $ (20) $ 51 Securities purchased under resale agreements 84 199 283 142 (42) 100 Securities borrowed - 6 6 13 74 87 Trading assets 7 (76) (69) 18 248 266 Securities available for sale 5 38 43 (15) (10) (25) Loans 86 (54) 32 (29) 71 42 - ------------------------------------- ----- -------- ----- ----- -------- ------ Total interest revenue 184 139 323 200 321 521 - ------------------------------------- ----- -------- ----- ----- -------- ------ INTEREST EXPENSE Interest-bearing deposits 34 (47) (13) 227 61 288 Trading liabilities (107) (57) (164) (48) 158 110 Securities loaned and securities sold under repurchase agreements 180 183 363 128 (62) 66 Other short-term borrowings 57 (16) 41 (6) 20 14 Long-term debt 69 36 105 78 6 84 Funds provided by domestic offices 352 (287) 65 (7) (22) (29) Funds provided to domestic offices (601) 386 (215) (127) 26 (101) - ------------------------------------- ----- -------- ----- ----- -------- ------ Total interest expense (16) 198 182 245 187 432 - ------------------------------------- ----- -------- ----- ----- -------- ------ Net change in net interest revenue $ 200 $ (59) $ 141 $ (45) $ 134 $ 89 ===================================== ===== ======== ===== ===== ======== ======
131 INTEREST RATE SENSITIVITY Interest rate sensitivity data for the Corporation at December 31, 1996 is presented in the table below. For purposes of this presentation, the interest- earning/bearing components of trading assets and trading liabilities are assumed to reprice within three months. The interest rate gaps reported in the table arise when assets are funded with liabilities having different repricing intervals, after considering the effect of off-balance sheet hedging instruments. Since these gaps are actively managed and change daily as adjustments are made in interest rate views and market outlook, positions at the end of any period may not be reflective of the Corporation's interest rate view in subsequent periods. Active management dictates that longer-term economic views are balanced against prospects of short-term interest rate changes in all repricing intervals.
By Repricing Interval ------------------------------------------------------- After three After six After Non- Within months months one year After interest- three but within but within but within five bearing (in millions) December 31, 1996 months six months one year five years years funds Total - ----------------------------------- --------- ------------ ----------- ---------- ------ ---------- -------- ASSETS Interest-bearing deposits with banks $ 2,000 $ 123 $ 87 $ - $ - $ - $ 2,210 Federal funds sold 1,684 - - - - - 1,684 Securities purchased under resale agreements 17,445 482 75 - - - 18,002 Securities borrowed 17,005 - - - - - 17,005 Trading assets 31,425 - - - - 17,704 49,129 Securities available for sale 1,355 583 1,922 2,102 1,958 - 7,920 Customer receivables 1,487 - - - - 42 1,529 Gross loans 11,566 1,313 736 1,755 510 - 15,880 Noninterest-earning assets and allowance for credit losses - - - - - 9,419 9,419 - ----------------------------------- -------- ------- ------- ------ ------ --------- -------- Total 83,967 2,501 2,820 3,857 2,468 27,165 122,778 - ----------------------------------- -------- ------- ------- ------ ------ --------- -------- LIABILITIES, PREFERRED STOCK OF SUBSIDIARY AND STOCKHOLDERS' EQUITY Interest-bearing deposits 20,479 2,245 2,341 907 730 - 26,702 Trading liabilities 7,966 - - - - 15,795 23,761 Securities loaned and securities sold under repurchase agreements 23,188 216 50 - - - 23,454 Other short-term borrowings 16,658 1,884 437 68 362 - 19,409 Long-term debt 3,532 1,581 244 3,727 2,224 - 11,308 Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures - - - - 730 - 730 Preferred stock of subsidiary 250 - - - - - 250 Preferred stock 145 - - 665 - - 810 Noninterest-bearing liabilities, including allowance for credit losses, and common stockholders' equity - - - - - 16,354 16,354 - ----------------------------------- -------- ------- ------- ------ ------ --------- -------- Total 72,218 5,926 3,072 5,367 4,046 32,149 122,778 - ----------------------------------- -------- ------- ------- ------ ------ --------- -------- Effect of off-balance sheet hedging instruments (16,891) 3,577 2,691 7,552 3,071 - - - ----------------------------------- -------- ------- ------- ------ ------ --------- -------- INTEREST RATE SENSITIVITY GAP $ (5,142) $ 152 $ 2,439 $6,042 $1,493 $(4,984) $ - =================================== ======== ======= ======= ====== ====== ========= ======== CUMULATIVE INTEREST RATE SENSITIVITY GAP $ (5,142) $(4,990) $(2,551) $3,491 $4,984 $ - $ - =================================== ======== ======= ======= ====== ====== ========= ========
132 DEPOSITS The Corporation's certificates of deposit and other time deposits issued by domestic and foreign offices in amounts of $100,000 or more, together with their remaining maturities, and other interest-bearing deposits at December 31, 1996 were as follows:
(in millions) Domestic Foreign Total - --------------------------------------------- -------- ------- ------- Certificates of deposit of $100,000 or more 3 months or less $ 630 $ 2,142 $ 2,772 Over 3 through 6 months 927 426 1,353 Over 6 through 12 months 2,501 138 2,639 Over 12 months 149 12 161 - --------------------------------------------- ------ ------- ------- Total 4,207 2,718 6,925 - --------------------------------------------- ------ ------- ------- Other time deposits of $100,000 or more 3 months or less 156 9,612 9,768 Over 3 through 6 months 6 1,272 1,278 Over 6 through 12 months 2 953 955 Over 12 months - 69 69 - --------------------------------------------- ------ ------- ------- Total 164 11,906 12,070 - --------------------------------------------- ------ ------- ------- Other 5,557 2,150 7,707 - --------------------------------------------- ------ ------- ------- Total interest-bearing deposits $9,928 $16,774 $26,702 ============================================= ====== ======= =======
Deposits by foreign depositors in domestic offices amounted to $1.2 billion, $1.0 billion and $1.0 billion at December 31, 1996, 1995 and 1994, respectively. 133 EX-99.2 11 SUPP. FIN. INFO. FOR THE THREE MONTHS ENDED MARCH 31, 1997/96 Exhibit 99.2 1 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME (in millions, except per share data) (unaudited)
Increase THREE MONTHS ENDED MARCH 31, 1997 1996 (Decrease) - --------------------------------------------------- ------ ------ ---- NET INTEREST REVENUE Interest revenue $1,681 $1,623 $ 58 Interest expense 1,349 1,389 (40) - --------------------------------------------------- ------ ------ ---- Net interest revenue 332 234 98 Provision for credit losses - 5 (5) - --------------------------------------------------- ------ ------ ---- Net interest revenue after provision for credit losses 332 229 103 - --------------------------------------------------- ------ ------ ---- NONINTEREST REVENUE Trading 311 300 11 Fiduciary and funds management 231 200 31 Corporate finance fees 215 188 27 Other fees and commissions 139 140 (1) Net revenue from equity investment transactions 47 27 20 Securities available for sale gains 14 15 (1) Insurance premiums 63 62 1 Other 46 56 (10) - --------------------------------------------------- ------ ------ ---- Total noninterest revenue 1,066 988 78 - --------------------------------------------------- ------ ------ ---- NONINTEREST EXPENSES Salaries and commissions 305 267 38 Incentive compensation and employee benefits 376 307 69 Agency and other professional service fees 90 63 27 Communication and data services 56 55 1 Occupancy, net 43 42 1 Furniture and equipment 54 45 9 Travel and entertainment 30 22 8 Provision for policyholder benefits 68 72 (4) Other 84 80 4 - --------------------------------------------------- ------ ------ ---- Total noninterest expenses 1,106 953 153 - --------------------------------------------------- ------ ------ ---- Income before income taxes 292 264 28 Income taxes 92 85 7 - --------------------------------------------------- ------ ------ ---- NET INCOME $ 200 $ 179 $ 21 =================================================== ====== ====== ==== NET INCOME APPLICABLE TO COMMON STOCK $ 187 $ 164 $ 23 =================================================== ====== ====== ==== Cash dividends declared per common share $1.00 $1.00 $ - =================================================== ====== ====== ==== EARNINGS PER COMMON SHARE: PRIMARY $1.81 $1.62 $.19 =================================================== ====== ====== ==== FULLY DILUTED $1.76 $1.57 $.19 =================================================== ====== ====== ====
2 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED BALANCE SHEET ($ in millions, except par value)
March 31, December 31, 1997* 1996 -------- -------- ASSETS Cash and due from banks $ 1,679 $ 1,568 Interest-bearing deposits with banks 2,581 2,210 Federal funds sold 1,195 1,684 Securities purchased under resale agreements 22,316 18,002 Securities borrowed 14,245 17,005 Trading assets: Government securities 11,821 16,858 Corporate debt securities 8,508 8,039 Equity securities 7,061 6,089 Swaps, options and other derivatives 11,222 11,410 Other trading assets 9,080 6,733 - ------------------------------------------------------------ -------- -------- Total trading assets 47,692 49,129 Securities available for sale 7,986 7,920 Loans, net of allowance for credit losses of $758 at March 31, 1997 and $773 at December 31, 1996 17,282 15,107 Customer receivables 1,582 1,529 Accounts receivable and accrued interest 3,262 3,077 Other assets 5,711 5,547 - ------------------------------------------------------------ -------- -------- Total $125,531 $122,778 ============================================================ ======== ======== LIABILITIES Noninterest-bearing deposits Domestic offices $ 2,803 $ 2,600 Foreign offices 1,052 1,013 Interest-bearing deposits Domestic offices 12,365 9,928 Foreign offices 19,369 16,774 - ------------------------------------------------------------ -------- -------- Total deposits 35,589 30,315 Trading liabilities: Securities sold, not yet purchased Government securities 3,986 7,668 Equity securities 4,950 4,174 Other trading liabilities 443 334 Swaps, options and other derivatives 11,177 11,585 - ------------------------------------------------------------ -------- -------- Total trading liabilities 20,556 23,761 Securities loaned and securities sold under repurchase agreements 22,576 23,454 Other short-term borrowings 20,320 19,409 Accounts payable and accrued expenses 4,727 4,837 Other liabilities, including allowance for credit losses of $200 at both March 31, 1997 and December 31, 1996 3,183 2,836 Long-term debt not included in risk-based capital 8,164 8,732 Long-term debt included in risk-based capital 3,164 2,576 Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital 1,469 730 - ------------------------------------------------------------ -------- -------- Total liabilities 119,748 116,650 - ------------------------------------------------------------ -------- -------- PREFERRED STOCK OF SUBSIDIARY - 250 - ------------------------------------------------------------ -------- -------- STOCKHOLDERS' EQUITY Preferred stock 704 810 Common stock, $1 par value Authorized, 300,000,000 shares Issued: 1997, 104,362,661 shares; 1996, 103,624,555 shares 105 104 Capital surplus 1,477 1,437 Retained earnings 4,065 3,988 Common stock in treasury, at cost: 1997, 5,965,427 shares; 1996, 4,435,226 shares (527) (372) Other stockholders' equity (41) (89) - ------------------------------------------------------------ -------- -------- Total stockholders' equity 5,783 5,878 - ------------------------------------------------------------ -------- -------- Total $125,531 $122,778 ============================================================ ======== ========
FN * Unaudited 3 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (in millions) (unaudited)
THREE MONTHS ENDED MARCH 31, 1997 1996 - --------------------------------------------------------- ------ ------ PREFERRED STOCK Balance, January 1 $ 810 $ 865 Preferred stock issued - 1 Preferred stock redeemed (100) - Preferred stock repurchased (6) - - --------------------------------------------------------- ------ ------ Balance, March 31 704 866 - --------------------------------------------------------- ------ ------ COMMON STOCK Balance, January 1 104 103 Issuance of common stock 1 1 - --------------------------------------------------------- ------ ------ Balance, March 31 105 104 - --------------------------------------------------------- ------ ------ CAPITAL SURPLUS Balance, January 1 1,437 1,386 Issuance of common stock 19 11 Common stock distributed under employee benefit plans 21 9 - --------------------------------------------------------- ------ ------ Balance, March 31 1,477 1,406 - --------------------------------------------------------- ------ ------ RETAINED EARNINGS Balance, January 1 3,988 3,702 Net income 200 179 Cash dividends declared Preferred stock (14) (15) Common stock (82) (82) Treasury stock distributed under employee benefit plans (27) (9) - --------------------------------------------------------- ------ ------ Balance, March 31 4,065 3,775 - --------------------------------------------------------- ------ ------ COMMON STOCK IN TREASURY, AT COST Balance, January 1 (372) (336) Purchases of stock (244) (20) Restricted stock granted, net (14) 23 Treasury stock distributed under employee benefit plans 103 22 - --------------------------------------------------------- ------ ------ Balance, March 31 (527) (311) - --------------------------------------------------------- ------ ------ COMMON STOCK ISSUABLE - STOCK AWARDS Balance, January 1 526 233 Deferred stock awards granted, net 66 66 Deferred stock distributed (14) (1) - --------------------------------------------------------- ------ ------ Balance, March 31 578 298 - --------------------------------------------------------- ------ ------ DEFERRED COMPENSATION - STOCK AWARDS Balance, January 1 (308) (151) Deferred stock awards granted, net (66) (66) Restricted stock granted, net 14 (22) Amortization of deferred compensation, net 63 41 - --------------------------------------------------------- ------ ------ Balance, March 31 (297) (198) - --------------------------------------------------------- ------ ------ CUMULATIVE TRANSLATION ADJUSTMENTS Balance, January 1 (364) (348) Translation adjustments 11 (17) Income taxes applicable to translation adjustments (8) 16 - --------------------------------------------------------- ------ ------ Balance, March 31 (361) (349) - --------------------------------------------------------- ------ ------ SECURITIES VALUATION ALLOWANCE Balance, January 1 57 19 Change in unrealized net gains, after applicable income taxes and minority interest (18) (9) - --------------------------------------------------------- ------ ------ Balance, March 31 39 10 - --------------------------------------------------------- ------ ------ TOTAL STOCKHOLDERS' EQUITY, MARCH 31 $5,783 $5,601 ========================================================= ====== ======
4 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS (in millions) (unaudited)
THREE MONTHS ENDED MARCH 31, 1997 1996 - ------------------------------------------------------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 200 $ 179 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses - 5 Provision for policyholder benefits 68 72 Deferred income taxes (43) 25 Depreciation and other amortization and accretion 64 64 Other, net 23 (9) - ------------------------------------------------------- ------- ------- Earnings adjusted for noncash charges and credits 312 336 Net change in: Trading assets 2,030 2,252 Trading liabilities (3,031) 695 Receivables and payables from securities transactions 271 (93) Customer receivables (93) 80 Other operating assets and liabilities, net 162 565 Securities available for sale gains (14) (15) - ------------------------------------------------------- ------- ------- Net cash (used in) provided by operating activities (363) 3,820 - ------------------------------------------------------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Net change in: Interest-bearing deposits with banks (360) 624 Federal funds sold 489 (184) Securities purchased under resale agreements (4,314) (2,330) Securities borrowed 2,760 (4,599) Loans (2,359) (348) Securities available for sale: Purchases (1,786) (1,568) Maturities and other redemptions 593 892 Sales 73 135 Acquisitions of premises and equipment (71) (55) Other, net (3) 16 - ------------------------------------------------------- ------- ------- Net cash used in investing activities (4,978) (7,417) - ------------------------------------------------------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in: Deposits 5,070 (3,250) Securities loaned and securities sold under repurchase agreements (870) 8,166 Other short-term borrowings 978 (3,306) Issuances of long-term debt* 2,500 1,050 Repayments of long-term debt (1,601) (189) Issuance of common stock 19 11 Redemptions and repurchases of preferred stock (106) - Redemptions of preferred stock of subsidiary (250) - Purchases of treasury stock (244) (20) Cash dividends paid (97) (97) Other, net 61 15 - ------------------------------------------------------- ------- ------- Net cash provided by financing activities 5,460 2,380 - ------------------------------------------------------- ------- ------- Net effect of exchange rate changes on cash (8) 17 - ------------------------------------------------------- ------- ------- NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 111 (1,200) Cash and due from banks, beginning of period 1,568 2,399 - ------------------------------------------------------- ------- ------- Cash and due from banks, end of period $ 1,679 $ 1,199 ======================================================= ======= ======= Interest paid $ 1,173 $ 1,447 ======================================================= ======= ======= Income taxes (refunded) paid, net $ (1) $ 97 ======================================================= ======= ======= Noncash investing activities $ 46 $ 30 ======================================================= ======= ======= Noncash financing activities: Conversion of debt to preferred stock $ - $ 1 ======================================================= ======= =======
FN * Includes $739 million at March 31, 1997 which is related to mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital. Certain prior period amounts have been reclassified to conform to the current presentation. 5 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED SCHEDULE OF NET INTEREST REVENUE (in millions) (unaudited)
Three Months Ended March 31, Increase 1997 1996 (Decrease) ------ ------ ----- INTEREST REVENUE Interest-bearing deposits with banks $ 65 $ 43 $ 22 Federal funds sold 49 28 21 Securities purchased under resale agreements 330 194 136 Securities borrowed 183 228 (45) Trading assets 600 773 (173) Securities available for sale Taxable 106 90 16 Exempt from federal income taxes 14 7 7 Loans 302 232 70 Customer receivables 32 28 4 - ---------------------------------------------- ------ ------ ----- Total interest revenue 1,681 1,623 58 - ---------------------------------------------- ------ ------ ----- INTEREST EXPENSE Interest-bearing deposits Domestic offices 146 88 58 Foreign offices 250 247 3 Trading liabilities 151 326 (175) Securities loaned and securities sold under repurchase agreements 339 314 25 Other short-term borrowings 291 274 17 Long-term debt 148 140 8 Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital 24 - 24 - ---------------------------------------------- ------ ------ ----- Total interest expense 1,349 1,389 (40) - ---------------------------------------------- ------ ------ ----- NET INTEREST REVENUE $ 332 $ 234 $ 98 ============================================== ====== ====== =====
6 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 $200 million for the quarter ended March 31, 1997, or $1.81 primary earnings per share. In the first quarter of 1996, the Corporation earned $179 million, or $1.62 primary 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 "Exchange Ratio"). The Merger was treated as a tax free exchange. The supplemental 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. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling of interests method in financial statements that do not include the date of consummation. The supplemental consolidated financial statements do not extend through the date of consummation. However, they will become the historical consolidated financial statements of Bankers Trust New York Corporation together with its subsidiaries after financial statements covering the date of consummation of the business combination are issued. The supplemental 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 supplemental consolidated financial statements, including the notes thereto, should be read in conjunction with the historical consolidated financial statements of Alex. Brown and Bankers Trust New York Corporation, included in their Annual Reports on Form 10-K for the fiscal years ended December 31, 1996. 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 restate this analysis to conform with material changes in the allocation process and/or significant changes in organizational structure. 7 ORGANIZATIONAL UNIT RESULTS (CONTINUED) The information presented below reflects the results by Organizational Units. The historical amounts of Alex. Brown have been included in Investment Banking, Investment Management and Corporate/Other.
Total Non- Pretax Net Three Months Ended March 31, 1997 Total Net interest Income/ Income/ (in millions) Revenue Expenses (Loss) (Loss) - ----------------------------------- ------ ------ ---- ---- Investment Banking $ 402 $ 242 $160 $110 Risk Management Services 105 89 16 11 Trading & Sales 134 73 61 43 Investment Management 186 151 35 23 Client Processing Services 196 178 18 13 Australia/New Zealand 129 81 48 34 Asia 40 29 11 8 Latin America 143 110 33 23 Corporate/Other 63 153 (90) (65) - ----------------------------------- ------ ------ ---- ---- Total $1,398 $1,106 $292 $200 =================================== ====== ====== ==== ====
Total Non- Pretax Net Three Months Ended March 31, 1996 Total Net interest Income/ Income/ (in millions) Revenue Expenses (Loss) (Loss) - ----------------------------------- ------ ------ ---- ---- Investment Banking $ 362 $ 194 $168 $112 Risk Management Services 63 69 (6) (4) Trading & Sales 90 56 34 24 Investment Management 173 143 30 19 Client Processing Services 182 156 26 18 Australia/New Zealand 98 64 34 24 Asia 33 26 7 5 Latin America 136 108 28 20 Corporate/Other 80 137 (57) (39) - ----------------------------------- ------ ------ ---- ---- Total $1,217 $ 953 $264 $179 =================================== ====== ====== ==== ====
CHANGES IN ORGANIZATIONAL STRUCTURE To move risk management capabilities closer to clients, responsibility for the convertible debt business and for management of the metals and mining commodities book has been transferred from Risk Management Services to ------------------------ Investment Banking and Australia/New Zealand, respectively. - ------------------ --------------------- In addition, the Emerging Europe, Middle East and Africa unit has been formed, combining people with risk management, trading, and investment banking expertise. For external reporting purposes this new unit is included in Risk ---- Management Services. Prior period results have been restated for the changes in - ------------------- organizational structure except for the transfer of responsibility for managing the metals and mining commodities book in Australia/New Zealand which is --------------------- reflected in 1997 results only. 8 ORGANIZATIONAL UNIT RESULTS (continued) The Investment Banking business contributed net income of $110 million in ------------------ the first quarter of 1997, down slightly from $112 million a year ago. Risk Management Services recorded net income of $11 million in the first ------------------------ quarter of 1997, up $15 million from the first quarter of 1996. Revenues of $105 million were up $42 million from the first quarter of 1996. Compared to the prior year period, revenues from new derivatives transactions and from the Emerging Europe, Middle East and Africa unit improved. Net income from the Trading & Sales business, at $43 million, was up $19 --------------- million from the first quarter of 1996. The current quarter's improvement was largely due to higher revenues from trading and client-related business as compared to the prior year period. The Corporation's Investment Management business, which for reporting --------------------- purposes does not include funds management activities in Australia/NZ, reported net income of $23 million for the current quarter, up $4 million from the 1996 comparable period due to an increase in assets under management. At March 31, 1997, assets under management in this organizational unit were approximately $219 billion, compared to $194 billion at March 31, 1996. Client Processing Services contributed $13 million of net income in the -------------------------- first quarter of 1997, down $5 million from the 1996 first quarter. Revenues of $196 million were up $14 million from the first quarter of 1996. The decline in net income from a year ago reflected higher operations costs and growth in staff expense. Net income of the Australia/NZ business was $34 million in the first quarter ------------ of 1997, up $10 million from the first quarter of 1996. The increase from the prior year period was primarily due to improved revenues from trading activities and fiduciary and funds management offset in part by increased salaries and incentive compensation and employee benefits as a result of higher staff levels. At March 31, 1997, assets under management in Australia/NZ's investment management business were approximately $27 billion, compared to $23 billion at March 31, 1996. Asia net income was $8 million in the first quarter of 1997, up $3 million ---- from the first quarter of 1996. The current quarter's increase was primarily due to very strong results in North Asia. Offsetting the improved results in North Asia were losses incurred during the first quarter from the Corporation's investment in Thai Investment and Securities Co. in Thailand. Thailand is currently experiencing a significant reduction in its economic growth and the Thai stock market has experienced a steep decline. Latin America net income was $23 million in the first quarter of 1997, up $3 ------------- million from the first quarter of 1996. An increase in trading-related activities contributed to the current quarter's results. 9 ORGANIZATIONAL UNIT RESULTS (continued) Corporate/Other net loss was $65 million in the first quarter of 1997, --------------- compared with a net loss of $39 million in the first quarter of 1996. The current quarter included the effects of increased incentive compensation and employee benefits, a contribution to the BT Foundation, and consulting expenses associated with several strategic and infrastructure improvement projects. 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 March 31, Increase 1997 1996 (Decrease) ------- ------- ------- NET INTEREST REVENUE (in millions) Book basis $ 332 $ 234 $ 98 Tax equivalent adjustment 7 4 3 - -------------------------------------- ------- ------- ------- Fully taxable basis $ 339 $ 238 $ 101 ====================================== ======= ======= ======= AVERAGE BALANCES (in millions) Interest-earning assets $98,064 $87,679 $10,385 Interest-bearing liabilities 92,195 83,734 8,461 - -------------------------------------- ------- ------- ------- Earning assets financed by noninterest-bearing funds $ 5,869 $ 3,945 $ 1,924 ====================================== ======= ======= ======= AVERAGE RATES (fully taxable basis) Yield on interest-earning assets 6.98% 7.46% (.48)% Cost of interest-bearing liabilities 5.93 6.67 .74 - -------------------------------------- ------- ------- ------- Interest rate spread 1.05 .79 .26 Contribution of noninterest-bearing funds .35 .30 .05 - -------------------------------------- ------- ------- ------- Net interest margin 1.40% 1.09% .31% ====================================== ======= ======= =======
Net interest revenue for the first quarter of 1997 totaled $332 million, up $98 million, or 42 percent, from the first quarter of 1996. The $98 million increase in net interest revenue was primarily due to a $104 million increase in trading-related net interest revenue, which totaled $135 million for the first quarter of 1997. Nontrading-related net interest revenue which is considered to be historically a more stable component of overall net interest revenue, totaled $197 million for the first quarter of 1997 versus $203 million for the comparable period in 1996. 10 REVENUE (continued) In the first quarter of 1997, the interest rate spread was 1.05 percent compared to .79 percent in the prior year period. Net interest margin increased to 1.40 percent from 1.09 percent. The yield on interest earning assets decreased by 48 basis points and the cost of interest-bearing liabilities decreased 74 basis points. 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 first quarter of 1997 totaled $446 million, up $115 million from the first quarter of 1996. 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 March 31, 1997 Interest rate risk $178 $149 $327 Foreign exchange risk 38 - 38 Equity and commodity risk 95 (14) 81 - ------------------------------ ---- ---- ---- Total $311 $135 $446 ============================== ==== ==== ==== Quarter ended March 31, 1996 Interest rate risk $166 $ 53 $219 Foreign exchange risk 17 - 17 Equity and commodity risk 117 (22) 95 - ------------------------------ ---- ---- ---- Total $300 $ 31 $331 ============================== ==== ==== ====
11 REVENUE (continued) Interest Rate Risk - The increase in revenue was due to increased flow of client trading services, strong results from proprietary trading activities, and increased revenue from bond trading activities attributable to increased capital inflows to the market. Also, contributing to the increase was improved performance from the Firm's trading activities in Asia and Latin America. Foreign Exchange Risk - Foreign exchange risk revenue increased from the first quarter of 1996 principally due to strong performance in the Firm's activities in Australia including both proprietary and customer related revenues. Equity and Commodity Risk - Total trading and trading-related net interest revenue decreased compared to the same period last year primarily due to decreases in equity trading. Noninterest Revenue (Excluding Trading) Fiduciary and funds management revenue was $231 million in the first quarter of 1997, up $31 million, or 16 percent, from the comparable period last year. All activities within this category contributed to the year-over-year increase, especially global private banking commissions, funds management revenue and custodian fees. Corporate finance fees of $215 million increased $27 million, or 14 percent, from the same period last year, primarily due to higher private placement fees, merger and acquisition fees and loan syndication fees. 12 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. No provision for credit losses was required for the first quarter of 1997 compared with $5 million for the prior year's first quarter. Net charge-offs for the first quarter were $15 million, compared with $10 million a year ago. In accordance with the American Institute of Certified Public Accountant's Banks and Savings Institutions Audit and Accounting Guide, the Corporation has allocated its total allowance for credit losses as follows: $758 million as a reduction of loans, and $200 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. The provision for credit losses and the other changes in the allowance for credit losses are shown below (in millions).
Quarter Ended March 31, Allowance for credit losses 1997 1996 - ------------------------------------ ----- ----- Balance, beginning of period $ 973 $ 992 Net charge-offs Charge-offs 33 28 Recoveries 18 18 - ------------------------------------ ----- ----- Total net charge-offs(1) 15 10 Provision for credit losses - 5 - ------------------------------------ ----- ----- Balance, end of period(2) $ 958 $ 987 ==================================== ===== ===== (1) Components of Net Charge-offs: Secured by real estate $ (1) $ 1 Real estate related - 4 Highly leveraged 16 20 Other - (12) Refinancing country - (3) - ------------------------------------ ----- ----- Total $ 15 $ 10 ==================================== ===== ===== (2) Allocation: Loans $ 758 Other Liabilities 200 - ------------------------------------ ----- Balance, end of period $ 958 ==================================== =====
13 PROVISION AND ALLOWANCE FOR CREDIT LOSSES (continued) The allowance for credit losses that has been allocated to loans, was $758 million at March 31, 1997 compared to $773 million at December 31, 1996. The allowance was equal to 228 percent and 171 percent of total cash basis loans at March 31, 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 $369 million and $489 million at March 31, 1997 and December 31, 1996, respectively. Included in these amounts were $152 million and $227 million of loans which required a valuation allowance of $30 million and $57 million at those same dates, respectively. EXPENSES Total noninterest expenses of $1.106 billion increased by $153 million, or 16 percent, from the first quarter of 1996. Salaries and commissions expense increased $38 million, or 14 percent, principally due to an 8 percent increase in the average number of employees and to merit increases. Incentive compensation and employee benefits, the largest component of noninterest expenses, increased $69 million due to higher earnings, greater emphasis on performance-based compensation and the increase in the average number of employees. INCOME TAXES Income tax expense for the first quarter of 1997 amounted to $92 million, compared with $85 million for the first quarter of 1996. The effective tax rate was 32 percent for both the current and prior year quarter. 14 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. 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 March 31, 1997 1996 -------- -------- Net income applicable to common stock - primary $ 187 $ 164 Net income applicable to common stock - assuming full dilution $ 188 $ 164 Average number of common shares outstanding 97.443 97.215 Average common and common equivalent shares outstanding - primary 103.778 101.078 Average common and common equivalent shares outstanding assuming full dilution 107.034 104.808
15 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) 1st Qtr 4th Qtr Increase 1997 1996 (Decrease) -------- -------- ------- ASSETS Interest-earning Interest-bearing deposits with banks $ 3,396 $ 3,545 $ (149) Federal funds sold 3,723 2,011 1,712 Securities purchased under resale agreements 22,157 22,405 (248) Securities borrowed 15,043 15,865 (822) Trading assets 28,224 31,617 (3,393) Securities available for sale Taxable 6,988 6,777 211 Exempt from federal income taxes 1,148 1,077 71 - ------------------------------------------------ -------- -------- ------- Total securities available for sale 8,136 7,854 282 Loans Domestic offices 8,267 8,226 41 Foreign offices 7,437 7,032 405 - ------------------------------------------------ -------- -------- ------- Total loans 15,704 15,258 446 - ------------------------------------------------ -------- -------- ------- Customer receivables 1,681 1,683 (2) - ------------------------------------------------ -------- -------- ------- Total interest-earning assets 98,064 100,238 (2,174) Noninterest-earning Cash and due from banks 1,336 1,400 (64) Noninterest-earning trading assets 18,977 17,727 1,250 All other assets 8,551 8,519 32 Allowance for credit losses (802) (988) 186 - ------------------------------------------------ -------- -------- ------- Total $126,126 $126,896 $ (770) ================================================ ======== ======== ======= LIABILITIES Interest-bearing Interest-bearing deposits Domestic offices $ 11,748 $ 8,738 $ 3,010 Foreign offices 19,661 18,812 849 - ------------------------------------------------ -------- -------- ------- Total interest-bearing deposits 31,409 27,550 3,859 Trading liabilities 6,103 9,748 (3,645) Securities loaned and securities sold under repurchase agreements 22,850 26,214 (3,364) Other short-term borrowings 19,261 18,982 279 Long-term debt 11,377 11,372 5 Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures 1,195 165 1,030 - ------------------------------------------------ -------- -------- ------- Total interest-bearing liabilities 92,195 94,031 (1,836) Noninterest-bearing Noninterest-bearing deposits 3,152 3,518 (366) Noninterest-bearing trading liabilities 16,987 15,725 1,262 All other liabilities 7,731 7,423 308 - ------------------------------------------------ -------- -------- ------- Total liabilities 120,065 120,697 (632) - ------------------------------------------------ -------- -------- ------- PREFERRED STOCK OF SUBSIDIARY 182 250 (68) - ------------------------------------------------ -------- -------- ------- STOCKHOLDERS' EQUITY Preferred stock 773 815 (42) Common stockholders' equity 5,106 5,134 (28) - ------------------------------------------------ -------- -------- ------- Total stockholders' equity 5,879 5,949 (70) - ------------------------------------------------ -------- -------- ------- Total $126,126 $126,896 $ (770) ================================================ ======== ======== =======
16 BALANCE SHEET ANALYSIS (continued) The Corporation's average total assets amounted to $126.1 billion for the first quarter of 1997, a decrease of $770 million, or 1 percent, from the fourth quarter of 1996. Average interest-earning assets decreased $2.2 billion, or 2 percent, and the proportion of interest-earning assets to total assets decreased from 79 percent to 78 percent. The decrease in interest-earning assets was primarily due to decreases in trading assets (down $3.4 billion or 11 percent) and securities borrowed (down $822 million, or 5 percent), offset in part by an increase in federal funds sold (up $1.7 billion, or 85 percent). Interest- earning trading assets, as a percentage of total assets declined from 25 percent to 22 percent. Noninterest-earning trading assets increased $1.3 billion, or 7 percent, from the fourth quarter of 1996. Average total liabilities decreased $632 million from the fourth quarter of 1996. Within interest-bearing liabilities, decreases in trading liabilities (down $3.6 billion, or 37 percent) and securities sold under repurchase agreements (down $3.4 billion, or 13 percent) were offset in part by increases in total interest-bearing deposits (up $3.9 billion or 14 percent) and mandatorily redeemable capital securities (up $1.0 billion, or 624 percent). Total short-term borrowings (securities loaned and securities sold under repurchase agreements and other short-term borrowings) as a percentage of total interest-bearing liabilities declined from 48 percent to 46 percent. Securities Available for Sale The fair value, amortized cost and gross unrealized holding gains and losses for the Corporation's securities available for sale follow. During the first quarter of 1997, the Corporation transferred approximately $1.1 billion of asset-backed securities from securities-available-for-sale to trading account assets. This transfer, which had no impact on the current quarter's income, was the result of a change in risk management strategies.
March 31, December 31, (in millions) 1997 1996 - --------------------------- ------ ------ Fair value $7,986 $7,920 Amortized cost 7,854 7,755 - --------------------------- ------ ------ Excess of fair value over amortized cost * $ 132 $ 165 =========================== ====== ====== * Components: Unrealized gains $ 210 $ 245 Unrealized losses (78) (80) - --------------------------- ------ ------ $ 132 $ 165 ====== ======
17 BALANCE SHEET ANALYSIS (continued) Long-term Debt The larger of long-term debt issuances and maturities/redemptions which occurred during the first quarter of 1997 are as follows (in millions):
Face Amount Maturities/ Issuances Redemptions ----------- ----------- Parent Company - --------------------------------------- 8% Subordinated Debentures - $200 Floating Rate Notes due May 1998 - $300 Floating Rate Notes due January 2002 $250 - Bankers Trust Company - --------------------------------------- Floating Rate Notes due February 2002 $324 - Redeemable Preference Securities - $510 Redeemable Preference Securities due March 2004 (1) $651 -
FN (1) At March 31, 1997, certain subsidiaries of Bankers Trust Company had outstanding ($3.0 billion) of mandatorily redeemable preference securities with maturities ranging from April 1997 to March 2004. Trust Preferred Capital Securities During the first quarter of 1997, BT Capital Trust A ("Trust A"), BT Preferred Capital Trust I ("Trust I") and BT Preferred Capital Trust II ("Trust II"), wholly-owned subsidiaries of the Corporation issued $250 million 7.90% Capital Securities, Series A1, ("Series A1 Securities"), $250 million 8 1/8% Preferred Securities, Series I ("Series I Securities") and $250 million 7.875% Preferred Securities, Series II ("Series II Securities"), respectively. The Series A1 Securities and the Series II Securities have a liquidation value of $1,000 per Series A1 Security and Series II Security, respectively. The Series I Securities have a liquidation value of $25 per Series I Security. Series A1 Securities, Series I Securities and Series II Securities represent preferred undivided beneficial interests in the assets of Trust A, Trust I and Trust II, respectively. The Corporation is the holder of all of the beneficial interests represented by common securities of Trust A, Trust I and Trust II ("Common Securities" and, collectively with the Series A1 Securities, Series I Securities and Series II Securities, the "Trust Securities"). Trust A, Trust I and Trust II exist for the sole purpose of issuing the Trust Securities and investing the proceeds thereof in 7.90% Junior Subordinated Deferrable Interest Debentures, Series A1, 8 1/8% Junior Subordinated Deferrable Interest Debentures, Series I and 7.875% Junior Subordinated Deferrable Interest Debentures, Series II (the "Series A1 18 BALANCE SHEET ANALYSIS (continued) Debentures," the "Series I Debentures" and the "Series II Debentures" and collectively, the "Junior Subordinated Debentures") issued by the Corporation. The Junior Subordinated Debentures are unsecured and subordinated to all senior indebtedness of the Corporation and will be the sole assets of Trust A, Trust I and Trust II. Payments under the Junior Subordinated Debentures by the Corporation are the same as those for the Series A1 Securities, Series I Securities and Series II Securities described below, respectively. The obligations of the Corporation under the Junior Subordinated Debentures, the relevant indenture and trust agreement, the relevant guarantee by the Corporation of the obligations of Trust A, Trust I and Trust II and certain other related agreements, in the aggregate, constitute a full and unconditional guarantee of the relevant trust's obligations under the Series A1 Securities, Series I Securities and Series II Securities. Holders of the Series A1 Securities will be entitled to receive preferential cumulative cash distributions accumulating from January 16, 1997 and payable semi-annually in arrears on the fifteenth day of January and July of each year, commencing July 15, 1997, at the annual rate of 7.90% of the liquidation amount of $1,000 per Series A1 Security. The Series A1 Securities are subject to mandatory redemption upon repayment of the Series A1 Debentures at maturity on January 15, 2027. The maturity date may be shortened under certain circumstances to a date not earlier than January 15, 2017. In addition, the Series A1 Debentures may be redeemed at the option of the Corporation on or after January 15, 2007. On March 18, 1997, BT Capital Trust B, a wholly-owned subsidiary of the Corporation, offered to exchange $250 million of its 7.90% Capital Securities, Series B1 (the "Series B1 Securities"), which had been registered under the Securities Act of 1933, for any and all of the outstanding 7.90% Capital Securities, Series A1 of BT Capital Trust A. BT Capital Trust B exists for the sole purpose of issuing the Series B1 Securities and investing the proceeds thereof in 7.90% Junior Subordinated Deferrable Interest Debentures, Series B1 issued by the Corporation. The Series B1 Securities are identical in all material respects to the Series A1 Securities. On April 21, 1997, $250 million of the Series B1 Securities were exchanged for all of the Series A1 Securities. Holders of the Series I Securities will be entitled to receive preferential cumulative cash distributions accumulating from February 5, 1997 and payable quarterly in arrears on the last day of March, June, September and December of each year, commencing March 31, 1997, at the annual rate of 8 1/8% of the liquidation amount of $25 per Series I Security. The Series I Securities are subject to mandatory redemption upon repayment of the Series I Debentures at maturity on February 1, 2037. The maturity date may be shortened under certain circumstances to a date not earlier than February 1, 2002. In addition, the Series I Debentures may be redeemed at the option of the Corporation on or after February 1, 2002. Holders of the Series II Securities will be entitled to receive preferential cumulative cash distributions accumulating from February 25, 1997, and payable semi-annually in arrears on the twenty fifth day of February and August of each year, commencing August 25, 1997, at the annual rate of 7.875% of the liquidation amount of $1,000 per Series II Security. 19 BALANCE SHEET ANALYSIS (continued) The Series II Securities are subject to mandatory redemption upon repayment of the Series II Debentures at maturity on February 25, 2027. The maturity date may be shortened under certain circumstances to a date not earlier than February 25, 2012. In addition, the Series II Debentures may be redeemed at the option of the Corporation on or after February 25, 2007. 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 March 31, Average During 1997 1st Qtr. 1997 ------------------ ------------------ (Liabi- (Liabi- (in millions) Assets lities) Assets lities) - --------------------------------------- -------- -------- -------- -------- OTC Financial Instruments Interest Rate and Currency Swap Contracts $ 15,502 $(13,981) $ 16,805 $(15,203) Interest Rate Contracts Forwards 40 (42) 73 (75) Options purchased 1,010 1,138 Options written (1,142) (1,211) Foreign Exchange Rate Contracts Spot and Forwards 12,889 (14,231) 13,663 (14,629) Options purchased 893 1,094 Options written (940) (1,100) Equity-related contracts 2,882 (2,877) 3,141 (3,328) Commodity-related and other contracts 594 (640) 614 (635) Exchange-Traded Options Interest Rate 12 (12) 18 (8) Equity 207 (119) 237 (130) - --------------------------------------- -------- -------- -------- -------- Total Gross Fair Values 34,029 (33,984) 36,783 (36,319) - --------------------------------------- -------- -------- -------- -------- Impact of Netting Agreements (22,807) 22,807 (24,071) 24,071 - --------------------------------------- -------- -------- -------- -------- $ 11,222(1) $ 12,712 ======== ======== $(11,177)(1) $(12,248) ======== ========
FN (1) As reflected on the balance sheet in "Trading Assets" and "Trading Liabilities." 20 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) ======== ========
FN (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 losses were $149 million at March 31, 1997 compared with an unrealized gain of $54 million at December 31, 1996. The $203 million decrease during the first quarter of 1997 was primarily due to increases in long-term interest rates. 21 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- March 31, 1997 for sale Loans assets deposits ings debt(1) diaries Total - ----------------------------- ---------- ----- ------ -------- ------- ----- ------- ----- Interest Rate Swaps Pay Variable Unrealized Gain $ - $ - $ - $ 22 $ 8 $ 148 $ - $ 178 Unrealized (Loss) - (10) - (80) (13) (184) - (287) - ----------------------------- ---- ----- ------ ----- ---- ----- -------- ----- Pay Variable Net - (10) - (58) (5) (36) - (109) - ----------------------------- ---- ----- ------ ----- ---- ----- -------- ----- Pay Fixed Unrealized Gain 12 - - 20 1 22 - 55 Unrealized (Loss) (21) - - (34) (3) (30) - (88) - ----------------------------- ---- ----- ------ ----- ---- ----- -------- ----- Pay Fixed Net (9) - - (14) (2) (8) - (33) - ----------------------------- ---- ----- ------ ----- ---- ----- -------- ----- Total Unrealized Gain 12 - - 42 9 170 - 233 - ----------------------------- ---- ----- ------ ----- ---- ----- -------- ----- Total Unrealized (Loss) (21) (10) - (114) (16) (214) - (375) - ----------------------------- ---- ----- ------ ----- ---- ----- -------- ----- Total Net $ (9) $(10) $ - $ (72) $ (7) $ (44) $ - $(142) ============================= ==== ===== ====== ===== ==== ===== ======== ===== Forward Rate Agreements Unrealized Gain $ - $ - $ - $ 3 $ - $ - $ - $ 3 Unrealized (Loss) - - - (1) - - - (1) - ----------------------------- ---- ----- ------ ----- ---- ----- -------- ----- Net $ - $ - $ - $ 2 $ - $ - $ - $ 2 ============================= ==== ===== ====== ===== ==== ===== ======== ===== Currency Swaps and Forwards Unrealized Gain $ 3 $ - $ 1 $ - $ 3 $ 63 $ 37 $ 107 Unrealized (Loss) (3) (1) - (1) (4) (22) (44) (75) - ----------------------------- ---- ----- ------ ----- ---- ----- -------- ----- Net $ - $ (1) $ 1 $ (1) $ (1) $ 41 $ (7) $ 32 ============================= ==== ===== ====== ===== ==== ===== ======== ===== Other Contracts (2) Unrealized Gain $ 1 $ - $ - $ - $ - $ - $ - $ 1 Unrealized (Loss) (37) - (5) - - - - (42) - ----------------------------- ---- ----- ------ ----- ---- ----- -------- ----- Net $(36) $ - $(5) $ - $ - $ - $ - $ (41) ============================= ==== ===== ====== ===== ==== ===== ======== ===== Total Unrealized Gain $ 16 $ - $ 1 $ 45 $ 12 $ 233 $ 37 $ 344 Total Unrealized (Loss) (61) (11) (5) (116) (20) (236) (44) (493) - ----------------------------- ---- ----- ------ ----- ---- ----- -------- ----- Total Net $(45) $(11) $(4) $ (71) $ (8) $ (3) $ (7) $(149) ============================= ==== ===== ====== ===== ==== ===== ======== =====
FN (1) Includes trust preferred capital securities. (2) Other contracts are principally equity swaps and collars. 22 END-USER DERIVATIVES (continued)
Other Net invest- short- ments in Securities Interest- term Long- foreign (in millions) available Other bearing borrow- term subsi- December 31, 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 ============================= ==== ===== ====== ==== ======= ===== ======== =====
FN (1) Includes trust preferred capital securities. (2) Other contracts are principally equity swaps and collars. 23 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 March 31, 1997 Notional Amount Paying Variable Paying Fixed ------------------------ ----------------------------- Maturing Notional Receive Pay Notional Receive Pay Total In: Amount Rate Rate Amount Rate Rate Notional - --------------------- ------- ---- ---- ------ ---- ---- ------- 1997 $31,262 5.56% 5.68% $1,627 4.70% 5.46% $32,889 1998-1999 11,571 5.91 5.55 2,716 4.68 5.59 14,287 2000-2001 3,886 6.72 5.69 1,901 5.45 5.92 5,787 2002 and thereafter 7,877 6.98 5.67 1,181 5.81 7.25 9,058 - --------------------- ------- ---- ---- ------ ---- ---- ------- Total $54,596 $7,425 $62,021 ===================== ======= ====== =======
FN All rates were those in effect at March 31, 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 ====================== ======= ====== =======
FN 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. 24 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 to this Current Report on Form 8-K 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 "Section 20" securities 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. Compliance with the market risk amendment is mandatory by January 1, 1998 for those banking organizations that meet certain thresholds with regard to their trading activity. Banking organizations may choose to adopt early during 1997, with prior approval from their primary federal regulator. See page 22 of Exhibit 99.1 to this Current Report on 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 March 31, 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. 25 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 March 31, December 31, Adequacy Regulatory 1997 1996 Purposes Guidelines -------- ----------- -------- ---------- Tier 1 Capital Corporation 9.2% 9.3% 4.0% 6.0% BTCo 8.6% 9.3% 4.0% 6.0% Total Capital Corporation 15.2% 13.8% 8.0% 10.0% BTCo 12.1% 12.9% 8.0% 10.0% Leverage Corporation 5.1% 5.9% 3.0%(1) 3.0%(1) BTCo 5.4% 5.3% 3.0%(1) 5.0%
FN (1) These minimum levels for the Leverage ratio may be set 100 to 200 basis points higher depending upon other regulatory criteria. 26 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 March 31, December 31, (in millions) 1997 1996 - ----------------------------- ------------ ------------ Corporation Tier 1 Capital $ 6,299 $ 5,690 Tier 2 Capital 3,542 2,734 Tier 3 Capital 655 - - ----------------------------- ------- ------- Total Capital $10,496 $ 8,424 ============================= ======= ======= Total risk-weighted assets $68,878 $61,213 ============================= ======= ======= BTCo Tier 1 Capital $ 4,896 $ 4,869 Tier 2 Capital 1,949 1,900 - ----------------------------- ------- ------- Total Capital $ 6,845 $ 6,769 ============================= ======= ======= Total risk-weighted assets $56,815 $52,484 ============================= ======= =======
Comparing March 31, 1997 to December 31, 1996, the Corporation's Tier 1 Capital ratio declined 10 basis points due to an increase in risk-weighted assets. The Corporation's risk-weighted assets at March 31, 1997 were $7.7 billion higher than at year-end 1996. The Total Capital ratio of the Corporation increased 140 basis points due to the issuance of trust preferred capital securities and the addition of BT Alex. Brown Incorporated's subordinated debt as a component of Total Capital (as Tier 3 Capital) in accordance with the market risk amendment. With the adoption of the market risk amendment, the Corporation's Leverage ratio decreased 80 basis points as BT Alex. Brown Incorporated's average assets and capital were included in this calculation for the first time. BTCo's Tier 1 Capital and Total Capital ratios decreased by 70 basis points and 80 basis points, respectively, as a result of a $4.3 billion increase in risk-weighted assets. BTCo's Leverage ratio increased by 10 basis points. 27 PREFERRED STOCK During the first quarter of 1997, the Corporation redeemed all 1 million outstanding shares of its 8.55% Cumulative Preferred Stock, Series I at a price of $100 million. In addition, the Corporation repurchased approximately $6 million of its Adjustable Rate Cumulative Preferred Stock, Series Q and Series R. PREFERRED STOCK OF SUBSIDIARY During the first quarter of 1997, BT Overseas Finance N.V. ("BTOF"), an indirect wholly-owned subsidiary of the Corporation, redeemed all 2,500 shares of its BTOF Auction Rate cumulative Preferred Stock Series A-D at a price of $250 million. 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 $97.7 billion as of March 31, 1997 and $97.5 billion as of December 31, 1996, which equaled 77 percent, and 79 percent of gross total assets at those dates respectively. 28 LIQUIDITY (continued) Cash Flows The following comments apply to the consolidated statement of cash flows, which appears on page 5. Cash and due from banks increased by $111 million during the first quarter of 1997, as the net cash provided by financing activities was partially offset by the sum of the net cash used in investing activities and the net cash used in operating activities. The $5.5 billion of net cash provided by financing activities was primarily the result of a positive net change in deposits ($5.1 billion) and issuances of long-term debt ($2.5 billion), offset in part by repayments of long-term debt ($1.6 billion). The $5.0 billion of net cash used in investing activities was primarily the result of cash outflows from the net changes in securities purchased under resale agreements ($4.3 billion) and loans ($2.4 billion), and purchases of securities available for sale ($1.8 billion), partially offset by cash inflows from the net change in securities borrowed ($2.8 billion), and maturities and other redemptions of securities available for sale ($593 million). The $363 million of net cash used in operating activities was primarily the result of a negative net change in trading liabilities ($3.0 billion) partially offset by a positive net change in trading assets ($2.0 billion) and receivables and payables from securities transactions ($271 million). Cash and due from banks decreased by $1.2 billion during the first quarter of 1996, as the net cash used in investing activities exceeded the sum of the net cash provided by operating and financing activities. The $7.4 billion of net cash used in investing activities was primarily the result of cash outflows from the net change in securities borrowed ($4.6 billion), securities purchased under resale agreements ($2.3 billion) and purchases of securities available for sale ($1.6 billion). This was partially offset by cash inflows from maturities and other redemptions of securities available for sale ($892 million). The $3.8 billion of net cash provided by operating activities primarily resulted from a $2.9 billion net change in trading assets and trading liabilities. The $2.4 billion of net cash provided by financing activities was primarily the result of an increase in the net change in securities loaned and securities sold under repurchase agreements ($8.2 billion) and the proceeds from the issuances of long-term debt ($1.1 billion), offset in part by cash outflows from a $3.3 billion net change in other short-term borrowings and a $3.3 billion net change in deposits. 29 LIQUIDITY (continued) Interest Rate Sensitivity Condensed interest rate sensitivity data for the Corporation at March 31, 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- Within 1 - 5 After bearing (in billions) March 31, 1997 1 year years 5 years funds Total - ------------------------------- ------ ------ ----- --------- ------- Assets $ 89.3 $ 4.2 $ 3.4 $ 28.6 $ 125.5 Liabilities and preferred stock (81.3) (6.6) (4.6) (27.9) (120.4) Common stockholders' equity (5.1) (5.1) Effect of off-balance sheet hedging instruments (13.1) 8.7 4.4 - - ------ ------ ----- --------- ------- Interest rate sensitivity gap $ (5.1) $ 6.3 $ 3.2 $ (4.4) $ - ====== ====== ===== ========= =======
30 NONPERFORMING ASSETS The components of cash basis loans, renegotiated loans, other real estate and other nonperforming assets are shown below ($ in millions).
March 31, December 31, 1997 1996 ----- ----- CASH BASIS LOANS Domestic Commercial and industrial $ 106 $ 117 Secured by real estate 153 233 - ------------------------------------------------ ----- ----- Total domestic 259 350 - ------------------------------------------------ ----- ----- International Commercial and industrial 38 57 Secured by real estate 32 39 Financial institutions 1 4 Other 2 2 - ------------------------------------------------ ----- ----- Total international 73 102 - ------------------------------------------------ ----- ----- Total cash basis loans $ 332 $ 452 ================================================ ===== ===== Ratio of cash basis loans to total gross loans 1.8% 2.9% ================================================ ===== ===== Ratio of allowance for credit losses to cash basis loans (1) 228% 171% ================================================ ===== ===== RENEGOTIATED LOANS Secured by real estate $ 37 $ 37 - ------------------------------------------------ ----- ----- Total renegotiated loans $ 37 $ 37 ================================================ ===== ===== OTHER REAL ESTATE $ 188 $ 213 ================================================ ===== ===== OTHER NONPERFORMING ASSETS Assets acquired in credit workouts $ 8 $ 10 - ------------------------------------------------ ----- ----- Total other nonperforming assets $ 8 $ 10 ================================================ ===== ===== Loans 90 days or more past due and still accruing interest $ - $ - ================================================ ===== =====
FN (1) Ratio was computed using the allowance for credit losses that has been allocated to loans of $758 million and $773 million at March 31, 1997 and December 31, 1996, respectively. 31 NONPERFORMING ASSETS (continued) An analysis of the changes in the Corporation's total cash basis loans during the first quarter of 1997 follows (in millions). Balance, December 31, 1996 $452 Net transfers to cash basis loans 16 Net paydowns (69) Charge-offs (33) Transfers to other real estate (2) Other (32) - ----------------------------------- ---- Balance, March 31, 1997 $332 =================================== ==== The Corporation's total cash basis loans amounted to $332 million at March 31, 1997, down $120 million, or 27 percent, from December 31, 1996. This decline is primarily attributable to decreases in loans secured by real estate ($87 million) and highly leveraged loans ($29 million). Within cash basis loans, loans secured by real estate were $185 million and $272 million at March 31, 1997 and December 31, 1996, respectively. Commercial and industrial loans to highly leveraged borrowers were $88 million and $117 million at March 31, 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 March 31 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. 32 NONPERFORMING ASSETS (continued)
Three Months Ended March 31, (in millions) 1997 1996 - ----------------------------------------------- ----- ----- Domestic Loans Gross amount of interest that would have been recorded at original rate $ 6 $ 14 Less, interest, net of reversals, recognized in interest revenue 1 1 - ----------------------------------------------- ----- ----- Reduction of interest revenue 5 13 - ----------------------------------------------- ----- ----- International Loans Gross amount of interest that would have been recorded at original rate 2 3 Less, interest, net of reversals, recognized in interest revenue - - - ----------------------------------------------- ----- ----- Reduction of interest revenue 2 3 - ----------------------------------------------- ----- ----- Total reduction of interest revenue $ 7 $ 16 =============================================== ===== =====
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 this Current Report on Form 8-K for a detailed discussion of the definition.
Highly Leveraged Transactions March 31, December 31, (in millions) 1997 1996 - ------------------------------- ------ ------ Loans Senior debt $1,580 $1,587 Subordinated debt 70 76 - ------------------------------- ------ ------ Total loans $1,650 $1,663 =============================== ====== ====== Unfunded commitments Commitments to lend $ 904 $ 875 Letters of credit 148 128 - ------------------------------- ------ ------ Total unfunded commitments $1,052 $1,003 =============================== ====== ====== Equity investments $ 744 $ 665 =============================== ====== ====== Commitments to invest $ 443 $ 425 =============================== ====== ======
33 HIGHLY LEVERAGED TRANSACTIONS (continued) The Corporation's outstanding loans were to 130 separate borrowers in 43 separate industry groups at March 31, 1997, compared to 127 separate borrowers in 43 separate industry groups at December 31, 1996. The miscellaneous manufacturing and services group at 11 percent was the only industry concentration which exceeded 10 percent of total HLT loans outstanding at March 31, 1997. In addition to the amounts shown in the table above, at March 31, 1997, the Corporation had issued commitment letters which had been accepted, subject to documentation and certain other conditions, of $41 million (which were in various stages of syndication) and had additional HLTs in various stages of discussion and negotiation. During the first quarter of 1997, the Corporation originated $755 million of HLT commitments. It should be noted that the Corporation's loans and commitments in connection with HLTs fluctuate as new loans and commitments are made and as loans and commitments are syndicated, participated or paid. All loans and commitments to finance HLTs are reviewed and approved by senior credit officers of the Corporation. In addition to a strict transactional and credit approval process, the portfolio of leveraged loans and commitments is actively monitored and managed to minimize risk through diversification among borrowers and industries. As part of this strategy, sell and hold targets are regularly updated in connection with market opportunities and the addition of new HLTs. Retention by the Corporation after syndication and sales of loan participations has typically been less than $50 million, and the average outstanding per borrower for the portfolio at March 31, 1997 was less than $13 million. However, at March 31, 1997, the Corporation had total exposure (loans outstanding plus unfunded commitments) in excess of $50 million to 10 separate highly leveraged borrowers. At March 31, 1997, $88 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 $16 million of HLT loans were recorded in the first quarter of 1997. In addition, the Corporation recorded a net gain of $27.2 million in connection with the sales and/or write-offs of certain equity investments in highly leveraged companies during the first quarter 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 $31 million during the first quarter of 1997 and that as of March 31, 1997, approximately $29 million of fees were deferred and will be recognized as future revenue. 34 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. EX-99.3 12 SUPP. FIN. INFO. FOR THE SIX MONTHS ENDED JUNE 30, 1997/96 1 Exhibit 99.3 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME (in millions, except per share data) (unaudited)
Increase THREE MONTHS ENDED JUNE 30, 1997 1996 (Decrease) - --------------------------------------------------- ------ ------ ---- NET INTEREST REVENUE Interest revenue $1,730 $1,495 $235 Interest expense 1,391 1,229 162 - --------------------------------------------------- ------ ------ ---- Net interest revenue 339 266 73 Provision for credit losses - - - - --------------------------------------------------- ------ ------ ---- Net interest revenue after provision for credit losses 339 266 73 - --------------------------------------------------- ------ ------ ---- NONINTEREST REVENUE Trading 315 195 120 Fiduciary and funds management 264 220 44 Corporate finance fees 269 270 (1) Other fees and commissions 144 134 10 Net revenue from equity investment transactions 9 76 (67) Securities available for sale gains 68 25 43 Insurance premiums 64 63 1 Other 61 89 (28) - --------------------------------------------------- ------ ------ ---- Total noninterest revenue 1,194 1,072 122 - --------------------------------------------------- ------ ------ ---- NONINTEREST EXPENSES Salaries and commissions 303 280 23 Incentive compensation and employee benefits 443 318 125 Agency and other professional service fees 102 100 2 Communication and data services 57 57 - Occupancy, net 44 41 3 Furniture and equipment 54 45 9 Travel and entertainment 36 28 8 Provision for policyholder benefits 72 78 (6) Other 112 91 21 - --------------------------------------------------- ------ ------ ---- Total noninterest expenses 1,223 1,038 185 - --------------------------------------------------- ------ ------ ---- Income before income taxes 310 300 10 Income taxes 97 99 (2) - --------------------------------------------------- ------ ------ ---- NET INCOME $ 213 $ 201 $ 12 =================================================== ====== ====== ==== NET INCOME APPLICABLE TO COMMON STOCK $ 201 $ 187 $ 14 =================================================== ====== ====== ==== Cash dividends declared per common share $1.00 $1.00 $ - =================================================== ====== ====== ==== EARNINGS PER COMMON SHARE: PRIMARY $1.94 $1.82 $.12 =================================================== ====== ====== ==== FULLY DILUTED $1.88 $1.77 $.11 =================================================== ====== ====== ====
2 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME (in millions, except per share data) (unaudited)
Increase SIX MONTHS ENDED JUNE 30, 1997 1996 (Decrease) - --------------------------------------------------- ------ ------ ---- NET INTEREST REVENUE Interest revenue $3,411 $3,118 $293 Interest expense 2,740 2,618 122 - --------------------------------------------------- ------ ------ ---- Net interest revenue 671 500 171 Provision for credit losses - 5 (5) - --------------------------------------------------- ------ ------ ---- Net interest revenue after provision for credit losses 671 495 176 - --------------------------------------------------- ------ ------ ---- NONINTEREST REVENUE Trading 626 495 131 Fiduciary and funds management 495 420 75 Corporate finance fees 484 458 26 Other fees and commissions 283 274 9 Net revenue from equity investment transactions 56 103 (47) Securities available for sale gains 82 40 42 Insurance premiums 127 125 2 Other 107 145 (38) - --------------------------------------------------- ------ ------ ---- Total noninterest revenue 2,260 2,060 200 - --------------------------------------------------- ------ ------ ---- NONINTEREST EXPENSES Salaries and commissions 608 547 61 Incentive compensation and employee benefits 819 625 194 Agency and other professional service fees 192 163 29 Communication and data services 113 112 1 Occupancy, net 87 83 4 Furniture and equipment 108 90 18 Travel and entertainment 66 50 16 Provision for policyholder benefits 140 150 (10) Other 196 171 25 - --------------------------------------------------- ------ ------ ---- Total noninterest expenses 2,329 1,991 338 - --------------------------------------------------- ------ ------ ---- Income before income taxes 602 564 38 Income taxes 189 184 5 - --------------------------------------------------- ------ ------ ---- NET INCOME $ 413 $ 380 $ 33 =================================================== ====== ====== ==== NET INCOME APPLICABLE TO COMMON STOCK $ 388 $ 351 $ 37 =================================================== ====== ====== ==== Cash dividends declared per common share $2.00 $2.00 $ - =================================================== ====== ====== ==== EARNINGS PER COMMON SHARE: PRIMARY $3.75 $3.44 $.31 =================================================== ====== ====== ==== FULLY DILUTED $3.64 $3.33 $.31 =================================================== ====== ====== ====
3 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED BALANCE SHEET ($ in millions, except par value)
June 30, December 31, 1997* 1996 -------- -------- ASSETS Cash and due from banks $ 1,756 $ 1,568 Interest-bearing deposits with banks 2,334 2,210 Federal funds sold 1,305 1,684 Securities purchased under resale agreements 25,758 18,002 Securities borrowed 13,285 17,005 Trading assets: Government securities 12,338 16,858 Corporate debt securities 9,644 8,039 Equity securities 8,066 6,089 Swaps, options and other derivatives 10,824 11,410 Other trading assets 8,329 6,733 - ------------------------------------------------------------ -------- -------- Total trading assets 49,201 49,129 Securities available for sale 7,478 7,920 Loans, net of allowance for credit losses of $767 at June 30, 1997 and $773 at December 31, 1996 19,000 15,107 Customer receivables 1,630 1,529 Accounts receivable and accrued interest 3,448 3,077 Other assets 6,368 5,547 - ------------------------------------------------------------ -------- -------- Total $131,563 $122,778 ============================================================ ======== ======== LIABILITIES Noninterest-bearing deposits Domestic offices $ 3,046 $ 2,600 Foreign offices 1,439 1,013 Interest-bearing deposits Domestic offices 15,618 9,928 Foreign offices 18,327 16,774 - ------------------------------------------------------------ -------- -------- Total deposits 38,430 30,315 Trading liabilities: Securities sold, not yet purchased Government securities 4,958 7,668 Equity securities 5,002 4,174 Other trading liabilities 401 334 Swaps, options and other derivatives 11,064 11,585 - ------------------------------------------------------------ -------- -------- Total trading liabilities 21,425 23,761 Securities loaned and securities sold under repurchase agreements 22,973 23,454 Other short-term borrowings 19,527 19,409 Accounts payable and accrued expenses 6,170 4,837 Other liabilities, including allowance for credit losses of $206 at June 30, 1997 and $200 at December 31, 1996 4,195 2,836 Long-term debt not included in risk-based capital 8,468 8,732 Long-term debt included in risk-based capital 2,939 2,576 Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital 1,470 730 - ------------------------------------------------------------ -------- -------- Total liabilities 125,597 116,650 - ------------------------------------------------------------ -------- -------- PREFERRED STOCK OF SUBSIDIARY - 250 - ------------------------------------------------------------ -------- -------- STOCKHOLDERS' EQUITY Preferred stock 703 810 Common stock, $1 par value Authorized, 300,000,000 shares Issued: 1997, 104,789,875; 1996, 103,624,555 shares 105 104 Capital surplus 1,491 1,437 Retained earnings 4,168 3,988 Common stock in treasury, at cost: 1997, 6,011,773 shares; 1996, 4,435,226 shares (513) (372) Other stockholders' equity 12 (89) - ------------------------------------------------------------ -------- -------- Total stockholders' equity 5,966 5,878 - ------------------------------------------------------------ -------- -------- Total $131,563 $122,778 ============================================================ ======== ======== * Unaudited
4 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (in millions) (unaudited)
SIX MONTHS ENDED JUNE 30, 1997 1996 - --------------------------------------------------------- ------ ------ PREFERRED STOCK Balance, January 1 $ 810 $ 865 Preferred stock issued - 1 Preferred stock redeemed (100) - Preferred stock repurchased (7) - - --------------------------------------------------------- ------ ------ Balance, June 30 703 866 - --------------------------------------------------------- ------ ------ COMMON STOCK Balance, January 1 104 103 Issuance of common stock 1 1 - --------------------------------------------------------- ------ ------ Balance, June 30 105 104 - --------------------------------------------------------- ------ ------ CAPITAL SURPLUS Balance, January 1 1,437 1,386 Issuance of common stock 31 14 Repurchase and retirement of common stock (4) (1) Common stock distributed under employee benefit plans 27 14 - --------------------------------------------------------- ------ ------ Balance, June 30 1,491 1,413 - --------------------------------------------------------- ------ ------ RETAINED EARNINGS Balance, January 1 3,988 3,702 Net income 413 380 Cash dividends declared Preferred stock (26) (29) Common stock (165) (165) Treasury stock distributed under employee benefit plans (42) (24) - --------------------------------------------------------- ------ ------ Balance, June 30 4,168 3,864 - --------------------------------------------------------- ------ ------ COMMON STOCK IN TREASURY, AT COST Balance, January 1 (372) (336) Purchases of stock (274) (38) Restricted stock granted (cancelled), net (17) 19 Treasury stock distributed under employee benefit plans 150 82 - --------------------------------------------------------- ------ ------ Balance, June 30 (513) (273) - --------------------------------------------------------- ------ ------ COMMON STOCK ISSUABLE - STOCK AWARDS Balance, January 1 526 233 Deferred stock awards granted (cancelled), net 61 63 Deferred stock distributed (18) (1) - --------------------------------------------------------- ------ ------ Balance, June 30 569 295 - --------------------------------------------------------- ------ ------ DEFERRED COMPENSATION - STOCK AWARDS Balance, January 1 (308) (151) Deferred stock awards (granted) cancelled, net (61) (62) Restricted stock (granted) cancelled, net 16 (19) Amortization of deferred compensation, net 125 82 - --------------------------------------------------------- ------ ------ Balance, June 30 (228) (150) - --------------------------------------------------------- ------ ------ CUMULATIVE TRANSLATION ADJUSTMENTS Balance, January 1 (364) (348) Translation adjustments 26 (27) Income taxes applicable to translation adjustments (23) 18 - --------------------------------------------------------- ------ ------ Balance, June 30 (361) (357) - --------------------------------------------------------- ------ ------ SECURITIES VALUATION ALLOWANCE Balance, January 1 57 19 Change in unrealized net gains, after applicable income taxes and minority interest (25) (18) - --------------------------------------------------------- ------ ------ Balance, June 30 32 1 - --------------------------------------------------------- ------ ------ TOTAL STOCKHOLDERS' EQUITY, JUNE 30 $5,966 $5,763 ========================================================= ====== ======
5 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS (in millions) (unaudited)
SIX MONTHS ENDED JUNE 30, 1997 1996 - ------------------------------------------------------- ------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 413 $ 380 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses - 5 Provision for policyholder benefits 140 150 Deferred income taxes (65) 97 Depreciation and other amortization and accretion 184 131 Other, net 91 (60) - ------------------------------------------------------- ------- -------- Earnings adjusted for noncash charges and credits 763 703 Net change in: Trading assets 530 3,677 Trading liabilities (2,127) (236) Receivables and payables from securities transactions 644 1,346 Customer receivables 59 (94) Other operating assets and liabilities, net 877 370 Securities available for sale gains (82) (40) - ------------------------------------------------------- ------- -------- Net cash provided by operating activities 664 5,726 - ------------------------------------------------------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Net change in: Interest-bearing deposits with banks (136) (79) Federal funds sold 379 489 Securities purchased under resale agreements (7,756) (11,966) Securities borrowed 3,720 (2,558) Loans (3,982) (1,500) Securities available for sale: Purchases (2,836) (2,918) Maturities and other redemptions 1,897 1,823 Sales 237 260 Acquisitions of premises and equipment (134) (89) Other, net 140 115 - ------------------------------------------------------- ------- -------- Net cash used in investing activities (8,471) (16,423) - ------------------------------------------------------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in: Deposits 7,916 (517) Securities loaned and securities sold under repurchase agreements (455) 9,023 Other short-term borrowings 359 (26) Issuances of long-term debt* 3,221 2,018 Repayments of long-term debt (2,313) (366) Issuances of common stock 23 14 Repurchase and retirement of common stock (4) (1) Redemptions of preferred stock of subsidiary (250) - Redemptions and repurchases of preferred stock (107) - Purchases of treasury stock (274) (38) Cash dividends paid (191) (194) Other, net 89 63 - ------------------------------------------------------- ------- -------- Net cash provided by financing activities 8,014 9,976 - ------------------------------------------------------- ------- -------- Net effect of exchange rate changes on cash (19) 12 - ------------------------------------------------------- ------- -------- NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 188 (709) Cash and due from banks, beginning of period 1,568 2,399 - ------------------------------------------------------- ------- -------- Cash and due from banks, end of period $ 1,756 $ 1,690 ======================================================= ======= ======== Interest paid $ 2,539 $ 2,649 ======================================================= ======= ======== Income taxes paid, net $ 71 $ 214 ======================================================= ======= ======== Noncash investing activities $ 86 $ 50 ======================================================= ======= ======== Noncash financing activities: Conversion of debt to preferred stock $ - $ 1 ======================================================= ======= ========
* Includes $740 million at June 30, 1997, related to mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital. Certain prior period amounts have been reclassified to conform to the current presentation. 6 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED SCHEDULE OF NET INTEREST REVENUE (in millions) (unaudited)
Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 1997 1996 1997 1996 ------ ------ ------ ------ INTEREST REVENUE Interest-bearing deposits with banks $ 82 $ 40 $ 147 $ 83 Federal funds sold 61 31 110 59 Securities purchased under resale agreements 315 276 645 470 Securities borrowed 176 243 359 471 Trading assets 648 519 1,248 1,292 Securities available for sale Taxable 96 110 206 200 Exempt from federal income taxes 6 5 16 12 Loans 314 241 616 473 Customer receivables 32 30 64 58 - ---------------------------------------------- ------ ------ ------ ------ Total interest revenue 1,730 1,495 3,411 3,118 - ---------------------------------------------- ------ ------ ------ ------ INTEREST EXPENSE Interest-bearing deposits Domestic offices 200 84 346 172 Foreign offices 259 216 509 463 Trading liabilities 125 135 276 461 Securities loaned and securities sold under repurchase agreements 335 405 674 719 Other short-term borrowings 276 241 567 515 Long-term debt 166 148 314 288 Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital 30 - 54 - - ---------------------------------------------- ------ ------ ------ ------ Total interest expense 1,391 1,229 2,740 2,618 - ---------------------------------------------- ------ ------ ------ ------ NET INTEREST REVENUE $ 339 $ 266 $ 671 $ 500 ============================================== ====== ====== ====== ======
7 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 $213 million for the three months ended June 30, 1997, or $1.88 fully diluted earnings per share. In the second quarter of 1996, the Corporation earned $201 million, or $1.77 fully diluted earnings per share. For the first six months of 1997, the Corporation earned $413 million, or $3.64 fully diluted earnings per share. For the first six months of 1996, the Corporation earned $380 million, or $3.33 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 "Exchange Ratio"). The Merger was treated as a tax free exchange. The supplemental 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. Generally accepted accounting principles proscribe giving effect to a consummated business combination accounted for by the pooling of interests method in financial statements that do not include the date of consummation. The supplemental consolidated financial statements do not extend through the date of consummation. However, they will become the historical consolidated financial statements of Bankers Trust New York Corporation together with its subsidiaries after financial statements covering the date of consummation of the business combination are issued. The supplemental 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 supplemental consolidated financial statements, including the notes thereto, should be read in conjunction with the historical consolidated financial statements of Alex. Brown and Bankers Trust New York Corporation, included in their Annual Reports on Form 10-K for the fiscal years ended December 31, 1996. 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. 8 ORGANIZATIONAL UNIT RESULTS (continued) The information presented below reflects the results by Organizational Units. The historical amounts of Alex. Brown have been included in Investment Banking, Investment Management and Corporate/Other.
Total Non- Pretax Net Three Months Ended June 30, 1997 Total Net interest Income/ Income/ (in millions) Revenue Expenses (Loss) (Loss) - ---------------------------------- ------ ------ ----- ----- Investment Banking $ 479 $ 284 $ 195 $ 134 Risk Management Services 107 97 10 7 Trading & Sales 168 84 84 59 Investment Management 192 160 32 20 Client Processing Services 208 182 26 18 Australia/New Zealand 132 99 33 23 Asia 11 31 (20) (14) Latin America 172 117 55 39 Corporate/Other 64 169 (105) (73) - ---------------------------------- ------ ------ ----- ----- Total $1,533 $1,223 $ 310 $ 213 ================================== ====== ====== ===== =====
Total Non- Pretax Net Three Months Ended June 30, 1996 Total Net interest Income/ Income/ (in millions) Revenue Expenses (Loss) (Loss) - ---------------------------------- ------ ------ ----- ----- Investment Banking $ 439 $ 224 $ 215 $ 143 Risk Management Services 38 64 (26) (18) Trading & Sales 84 59 25 17 Investment Management 189 157 32 20 Client Processing Services 197 169 28 20 Australia/New Zealand 114 67 47 33 Asia 36 26 10 7 Latin America 166 118 48 33 Corporate/Other 75 154 (79) (54) - ---------------------------------- ------ ------ ----- ----- Total $1,338 $1,038 $ 300 $ 201 ================================== ====== ====== ===== =====
Total Non- Pretax Net Six Months Ended June 30, 1997 Total Net interest Income/ Income/ (in millions) Revenue Expenses (Loss) (Loss) - ---------------------------------- ------ ------ ----- ----- Investment Banking $ 881 $ 526 $ 355 $ 244 Risk Management Services 212 186 26 18 Trading & Sales 302 157 145 102 Investment Management 378 311 67 43 Client Processing Services 404 360 44 31 Australia/New Zealand 261 180 81 57 Asia 51 60 (9) (6) Latin America 315 227 88 62 Corporate/Other 127 322 (195) (138) - ---------------------------------- ------ ------ ----- ----- Total $2,931 $2,329 $ 602 $ 413 ================================== ====== ====== ===== =====
9 ORGANIZATIONAL UNIT RESULTS (continued)
Total Non- Pretax Net Six Months Ended June 30, 1996 Total Net interest Income/ Income/ (in millions) Revenue Expenses (Loss) (Loss) - -------------------------------- --------- ---------- -------- -------- Investment Banking $ 801 $ 418 $ 383 $255 Risk Management Services 101 133 (32) (22) Trading & Sales 174 115 59 41 Investment Management 362 300 62 39 Client Processing Services 379 325 54 38 Australia/New Zealand 212 131 81 57 Asia 69 52 17 12 Latin America 302 226 76 53 Corporate/Other 155 291 (136) (93) - -------------------------------- ------ ------ ----- ---- Total $2,555 $1,991 $ 564 $380 ================================ ====== ====== ===== ====
The Investment Banking business contributed net income of $134 million in ------------------ the second quarter, down from $143 million a year ago. The decrease from the prior year period reflected lower corporate underwriting revenues and higher personnel-related costs. Revenue from private equity investments declined from the high level of the second quarter of 1996. For the first six months of 1997, net income was $244 million versus $255 million for the first six months of 1996. The year-over-year decrease resulted primarily from lower corporate underwriting revenues. Risk Management Services recorded net income of $7 million in the second ------------------------ quarter of 1997, up $25 million from the second quarter of 1996. Net income was $18 million in the first half of 1997 compared to a net loss of $22 million in the first half of 1996. The prior year periods 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. ------------ Net income from the Trading & Sales business, at $59 million, was up $42 --------------- million from the second quarter of 1996. Net income was $102 million for the first six months of 1997 compared to $41 million for the prior year period. The current quarter and year-to-date improvement was largely due to strong arbitrage activities as compared to the prior year periods. The Corporation's Investment Management business, which for reporting --------------------- purposes does not include funds management activities in Australia/NZ, reported net income of $20 million for the current quarter, even with the 1996 comparable period. Net income was $43 million in the first half of 1997, up $4 million from the first half of 1996. Improved performance fees contributed to the increase from the prior year quarter and the first six months of 1996. At June 30, 1997, assets under management in this organizational unit were approximately $256 billion, compared to $202 billion at June 30, 1996. 10 ORGANIZATIONAL UNIT RESULTS (continued) Client Processing Services contributed $18 million of net income in the -------------------------- second quarter of 1997, down $2 million from the 1996 second quarter. Revenues of $208 million were up $11 million from the second quarter of 1996. The decline in net income from the year ago quarter reflected higher personnel- related costs and technology costs. Net income was $31 million in the first half of 1997 compared with $38 million in the first half of 1996. Net income of the Australia/NZ business was $23 million in the second ------------ quarter of 1997, down $10 million from the second quarter of 1996. The decrease from the prior year quarter was primarily due to higher personnel-related costs as a result of increased staff levels offset in part by improved revenues from trading activities and fiduciary and funds management. At June 30, 1997, assets under management in Australia/NZ's investment management business were approximately $28 billion, compared to $24 billion at June 30, 1996. Net income for the first six months of 1997 was $57 million, even with the first six months of 1996. Asia net loss was $14 million in the second quarter of 1997 compared to net ---- income of $7 million in the second quarter of 1996. Thailand is currently experiencing a significant reduction in its economic growth and the Thai stock market has experienced a steep decline. As a result, the Corporation recognized a decline in value of its unconsolidated investment in a Thai finance company. Partially offsetting this decline, the Corporation recognized trading gains from favorable Thai baht currency positions. The combined effect of these factors in Thailand resulted in a pre-tax net loss of $22 million. For the first six months of 1997, the Asia organizational unit incurred a net loss of $6 million compared to net income of $12 million in the prior year period. The decrease from the prior year period resulted from the losses incurred in Thailand as previously mentioned. Latin America net income was $39 million in the second quarter of 1997, up ------------- $6 million from the second quarter of 1996. A pre-tax gain of $22 million ($15 million after-tax) was recorded during the current quarter resulting from the completion of the first stage of the sale of 50% of the Corporation's stake in Consorcio, the largest life insurance and annuity firm in Chile. The prior year's quarter included a $31 million pre-tax gain on the sale of Compensa, which was the smaller of the Corporation's Chilean insurance subsidiaries. Net income for the first half of 1997 was $62 million compared to $53 million in the first half of 1996. Corporate/Other net loss was $73 million in the second quarter of 1997, --------------- compared with a net loss of $54 million in the second quarter of 1996. For the first six months of 1997, this unit incurred a net loss of $138 million versus a net loss of $93 million in the prior year period. The first half of 1997 included the effects of increased incentive compensation and employee benefits and consulting expenses associated with several strategic and infrastructure improvement projects. The prior year period included higher levels of legal and professional fees. 11 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 Six Months Ended June 30, June 30, ------------------ ------------------ 1997 1996 1997 1996 -------- ------- -------- ------- NET INTEREST REVENUE (in millions) Book basis $ 339 $ 266 $ 671 $ 500 Tax equivalent adjustment 6 4 13 8 - -------------------------------------- -------- ------- -------- ------- Fully taxable basis $ 345 $ 270 $ 684 $ 508 ====================================== ======== ======= ======== ======= AVERAGE BALANCES (in millions) Interest-earning assets $102,280 $93,324 $100,193 $90,496 Interest-bearing liabilities 98,695 87,564 95,451 85,634 - -------------------------------------- -------- ------- -------- ------- Earning assets financed by noninterest-bearing funds $ 3,585 $ 5,760 $ 4,742 $ 4,862 ====================================== ======== ======= ======== ======= AVERAGE RATES (fully taxable basis) Yield on interest-earning assets 6.81% 6.46% 6.89% 6.95% Cost of interest-bearing liabilities 5.65 5.65 5.79 6.15 - -------------------------------------- -------- ------- -------- ------- Interest rate spread 1.16 .81 1.10 .80 Contribution of noninterest-bearing funds .19 .35 .28 .33 - -------------------------------------- -------- ------- -------- ------- Net interest margin 1.35% 1.16% 1.38% 1.13% ====================================== ======== ======= ======== =======
Net interest revenue for the second quarter of 1997 totaled $339 million, up $73 million, or 27 percent, from the second quarter of 1996. The $73 million increase in net interest revenue was primarily due to an $84 million increase in trading-related net interest revenue, which totaled $148 million for the second quarter of 1997. Nontrading-related net interest revenue totaled $191 million for the second quarter of 1997 versus $202 million for the comparable period in 1996. Net interest revenue was $671 million for the first six months of 1997, up $171 million, or 34 percent from the first half of 1996. Nontrading-related net interest revenue totaled $388 million for the first six months of 1997 versus $405 million for the comparable period in 1996. 12 REVENUE (continued) In the second quarter of 1997, the interest rate spread was 1.16 percent compared to .81 percent in the prior year period. Net interest margin increased to 1.35 percent from 1.16 percent. The yield on interest earning assets rose by 35 basis points and the cost of interest-bearing liabilities was flat. Average interest-earning assets totaled $102.3 billion for the second quarter of 1997, up $9.0 billion from the same period in 1996. The increase was primarily attributable to growth in the loan portfolio. 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 second quarter of 1997 totaled $463 million, up $204 million from the second quarter of 1996. Combined trading revenue and trading-related net interest revenue for the first six months of 1997 was $909 million, up $319 million from the $590 million reported in the first half of 1996. 13 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 June 30, 1997 Interest rate risk $174 $154 $328 Foreign exchange risk 48 - 48 Equity and commodity risk 93 (6) 87 - -------------------------------- ---- ---- ---- Total $315 $148 $463 ================================ ==== ==== ==== Quarter ended June 30, 1996 Interest rate risk $ 84 $ 59 $143 Foreign exchange risk 63 - 63 Equity and commodity risk 48 5 53 - -------------------------------- ---- ---- ---- Total $195 $ 64 $259 ================================ ==== ==== ==== Six Months ended June 30, 1997 Interest rate risk $352 $303 $655 Foreign exchange risk 86 - 86 Equity and commodity risk 188 (20) 168 - -------------------------------- ---- ---- ---- Total $626 $283 $909 ================================ ==== ==== ==== Six Months ended June 30, 1996 Interest rate risk $250 $112 $362 Foreign exchange risk 80 - 80 Equity and commodity risk 165 (17) 148 - -------------------------------- ---- ---- ---- Total $495 $ 95 $590 ================================ ==== ==== ====
Second Quarter 1997 vs. Second Quarter 1996 Interest Rate Risk - The increase in revenue was primarily due to strong results in the bond market and increased activity in foreign markets including Europe, Australia and New Zealand. Foreign Exchange Risk - Foreign exchange revenue decreased from the same period last year principally due to a decline in revenue from activities in Australia. Equity and Commodity Risk - Total trading and trading-related net interest revenue increased from the same period last year. The prior year period reflected losses incurred in the commodity derivatives books when copper prices dropped sharply. 14 REVENUE (continued) Six Months 1997 vs. Six Months 1996 Interest Rate Risk - The increase in revenue was principally due to strong results in the bond market, increased flow of client trading services and increased revenue from proprietary trading activities. Improved performance in Asia, Australia and New Zealand also contributed to the increase. Foreign Exchange Risk - Foreign exchange risk revenue increased compared to the same period last year principally due to improved revenues from proprietary and customer activities. Equity and Commodity Risk - The increase in total trading and trading related revenue as compared to the same period last year is principally due to strong revenue from precious metals in the first half of 1997 and nonrecurring losses in commodity derivatives in the first half of 1996. Noninterest Revenue (Excluding Trading) Second Quarter 1997 vs. Second Quarter 1996 Fiduciary and funds management revenue was $264 million in the second quarter of 1997 up $44 million from the prior year period. Client processing services, funds management and global private banking commissions contributed to this increase. The Corporation's private equity investment activities largely contributed to the changes in securities available for sale gains (up $43 million) and net revenue from equity investment transactions (down $67 million). 15 REVENUE (continued) Six Months 1997 vs. Six Months 1996 Fiduciary and funds management fees of $495 million increased $75 million from the first six months of 1996. Higher revenue from funds management, client processing services and global private banking commissions were the primary contributors to this increase. Corporate finance fees totaled $484 million for the first half of 1997, up $26 million from the prior year period, primarily due to higher fees for arranging financings, merger and acquisition fees and loan syndication fees. The Corporation's private equity investment activities largely contributed to the changes in securities available for sale gains (up $42 million) and net revenue from equity investment transactions (down $47 million). 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. No provision for credit losses was required for the current or prior year's second quarter. Net charge-offs for the second quarter were $2 million, compared with $15 million a year ago. In accordance with the American Institute of Certified Public Accountant's Banks and Savings Institutions Audit and Accounting Guide, the Corporation has allocated its total allowance for credit losses as follows: $767 million as a reduction of loans, and $206 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. 16 PROVISION AND ALLOWANCE FOR CREDIT LOSSES (continued) The provision for credit losses and the other changes in the allowance for credit losses are shown below (in millions).
Quarter Ended Six Months Ended June 30, June 30, ------------- ---------------- Allowance for credit losses 1997 1996 1997 1996 - ------------------------------------ ----- ----- ----- ----- Balance, beginning of period $ 958 $ 987 $ 973 $ 992 Net charge-offs Charge-offs 3 21 36 49 Recoveries 1 6 19 24 - ------------------------------------ ----- ----- ----- ----- Total net charge-offs(1) 2 15 17 25 Provision for credit losses - - - 5 Allowance related to acquisition of an affiliate 17 - 17 - - ------------------------------------ ----- ----- ----- ----- Balance, end of period(2) $ 973 $ 972 $ 973 $ 972 ==================================== ===== ===== ===== ===== (1) Components of Net Charge-offs: Secured by real estate $ 2 $ - $ 1 $ 1 Real estate related - - - 4 Highly leveraged - 3 16 23 Other 1 13 1 1 Refinancing country (1) (1) (1) (4) - ------------------------------------ ----- ----- ----- ----- Total $ 2 $ 15 $ 17 $ 25 ==================================== ===== ===== ===== ===== (2) Allocation: Loans $ 767 Other Liabilities 206 - ------------------------------------ ----- Balance, end of period $ 973 ==================================== =====
The allowance for credit losses that has been allocated to loans, was $767 million at June 30, 1997 compared to $773 million at December 31, 1996. The allowance was equal to 251 percent and 171 percent of total cash basis loans at June 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 $342 million and $489 million at June 30, 1997 and December 31, 1996, respectively. Included in these amounts were $128 million and $227 million of loans which required a valuation allowance of $31 million and $57 million at those same dates, respectively. 17 EXPENSES Second Quarter 1997 vs. Second Quarter 1996 Total noninterest expenses of $1.223 billion increased by $185 million, or 18 percent, from the second quarter of 1996. Salaries and commissions expense increased $23 million, or 8 percent, principally due to a 7 percent increase in the average number of employees and to annual pay increases. Incentive compensation and employee benefits, the largest component of noninterest expenses, increased $125 million due to higher profitability and the increase in the average number of employees. Six Months 1997 vs. Six Months 1996 Total noninterest expenses of $2.329 billion increased by $338 million for the first six months of 1997. Salaries and commissions expense increased $61 million, or 11 percent, due to an increase in the average number of employees and to annual pay increases. Incentive compensation and employee benefits increased $194 million due to higher profitability and an increase in the average number of employees. INCOME TAXES Income tax expense for the second quarter of 1997 amounted to $97 million, compared with $99 million for the second quarter of 1996. For the first six months of 1997, income tax expense was $189 million compared with $184 million in the first half of 1996. The effective tax rate was 31 percent for both the current quarter and six months ended June 30, 1997 and 33 percent for the prior year quarter and six months ended June 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. 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 18 EARNINGS PER COMMON SHARE (continued) 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 Six Months Ended June 30, June 30, ------------------ ------------------ 1997 1996 1997 1996 -------- -------- -------- -------- Net income applicable to common stock - primary $ 201 $ 187 $ 388 $ 351 Net income applicable to common stock - assuming full dilution 201 187 389 351 Average number of common shares outstanding 96.887 97.934 97.162 97.575 Average common and common equivalent shares outstanding - primary 102.957 102.470 103.365 101.774 Average common and common equivalent shares outstanding assuming full dilution 106.890 105.992 107.046 105.433
19 BALANCE SHEET ANALYSIS The following table highlights the changes in the balance sheet. Since quarter-end balances can be distorted by one-day fluctuations, an analysis of changes in the quarterly averages is provided to give a better indication of balance sheet trends.
CONDENSED AVERAGE BALANCE SHEETS -------------------------------- (in millions) 2nd Qtr 1st Qtr 4th Qtr 1997 1997 1996 -------- -------- -------- ASSETS Interest-earning Interest-bearing deposits with banks $ 4,330 $ 3,396 $ 3,545 Federal funds sold 4,313 3,723 2,011 Securities purchased under resale agreements 23,433 22,157 22,405 Securities borrowed 14,488 15,043 15,865 Trading assets 28,092 28,224 31,617 Securities available for sale Taxable 6,571 6,988 6,777 Exempt from federal income taxes 1,136 1,148 1,077 - ------------------------------------------------ -------- -------- -------- Total securities available for sale 7,707 8,136 7,854 Loans Domestic offices 8,952 8,267 8,226 Foreign offices 9,302 7,437 7,032 - ------------------------------------------------ -------- -------- -------- Total loans 18,254 15,704 15,258 - ------------------------------------------------ -------- -------- -------- Customer receivables 1,663 1,681 1,683 - ------------------------------------------------ -------- -------- -------- Total interest-earning assets 102,280 98,064 100,238 Noninterest-earning Cash and due from banks 1,612 1,336 1,400 Noninterest-earning trading assets 20,166 18,977 17,727 All other assets 9,136 8,551 8,519 Allowance for credit losses (770) (802) (988) - ------------------------------------------------ -------- -------- -------- Total $132,424 $126,126 $126,896 ================================================ ======== ======== ======== LIABILITIES Interest-bearing Interest-bearing deposits Domestic offices $ 14,690 $ 11,748 $ 8,738 Foreign offices 20,218 19,661 18,812 - ------------------------------------------------ -------- -------- -------- Total interest-bearing deposits 34,908 31,409 27,550 Trading liabilities 4,616 6,103 9,748 Securities loaned and securities sold under repurchase agreements 25,569 22,850 26,214 Other short-term borrowings 20,862 19,261 18,982 Long-term debt 11,270 11,377 11,372 Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures 1,470 1,195 165 - ------------------------------------------------ -------- -------- -------- Total interest-bearing liabilities 98,695 92,195 94,031 Noninterest-bearing Noninterest-bearing deposits 3,003 3,152 3,518 Noninterest-bearing trading liabilities 16,279 16,987 15,725 All other liabilities 8,571 7,731 7,423 - ------------------------------------------------ -------- -------- -------- Total liabilities 126,548 120,065 120,697 - ------------------------------------------------ -------- -------- -------- PREFERRED STOCK OF SUBSIDIARY - 182 250 - ------------------------------------------------ -------- -------- -------- STOCKHOLDERS' EQUITY Preferred stock 704 773 815 Common stockholders' equity 5,172 5,106 5,134 - ------------------------------------------------ -------- -------- -------- Total stockholders' equity 5,876 5,879 5,949 - ------------------------------------------------ -------- -------- -------- Total $132,424 $126,126 $126,896 ================================================ ======== ======== ========
20 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.
June 30, March 31, December 31, (in millions) 1997 1997 1996 - --------------------------- ------ ------ ------ Fair value $7,478 $7,986 $7,920 Amortized cost 7,334 7,854 7,755 - --------------------------- ------ ------ ------ Excess of fair value over amortized cost * $ 144 $ 132 $ 165 =========================== ====== ====== ====== * Components: Unrealized gains $ 195 $ 210 $ 245 Unrealized losses (51) (78) (80) - --------------------------- ------ ------ ------ $ 144 $ 132 $ 165 ====== ====== ======
Long-term Debt The larger of long-term debt issuances and maturities/redemptions which occurred during the second quarter of 1997 are as follows (in millions):
Face Amount ------------------- Maturities/ Issuances Redemptions --------- ----------- Parent Company - -------------- Floating Rate Notes due March 2000 $250 Bankers Trust Company - --------------------- Redeemable Preference Securities due April 1997 and April 2000 $333 Floating Rate Notes due May 2002 $239 Floating Rate Notes due June 2007 $118
21 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 June 30, Average During 1997 2nd Qtr. 1997 ------------------- ------------------- (Liabi- (Liabi- (in millions) Assets lities) Assets lities) - --------------------------------------- -------- -------- -------- -------- OTC Financial Instruments Interest Rate and Currency Swap Contracts $ 15,039 $(14,075) $ 15,215 $(13,923) Interest Rate Contracts Forwards 54 (64) 43 (47) Options purchased 1,098 1,056 Options written (1,201) (1,183) Foreign Exchange Rate Contracts Spot and Forwards 10,850 (11,061) 12,863 (14,021) Options purchased 977 921 Options written (965) (950) Equity-related contracts 3,108 (4,092) 2,925 (3,311) Commodity-related and other contracts 570 (606) 588 (648) Exchange-Traded Options Interest Rate 6 (3) 18 (13) Equity 276 (151) 246 (133) - --------------------------------------- -------- -------- -------- -------- Total Gross Fair Values 31,978 (32,218) 33,875 (34,229) - --------------------------------------- -------- -------- -------- -------- Impact of Netting Agreements (21,154) 21,154 (22,246) 22,246 - --------------------------------------- -------- -------- -------- -------- $ 10,824(1) $ 11,629 ======== ======== $(11,064)(1) ======== $(11,983) ======== (1) As reflected on the balance sheet in "Trading Assets" and "Trading Liabilities."
22 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 losses were $108 million at June 30, 1997 compared with an unrealized gain of $54 million at December 31, 1996. The $162 million decrease during the first half of 1997 was primarily due to increases in long-term interest rates. 23 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- June 30, 1997 for sale Loans assets deposits ings debt(1) diaries Total - ----------------------------- ---------- ----- ------ --------- ------- ----- ----------- ----- Interest Rate Swaps Pay Variable Unrealized Gain $ 1 $ - $ - $ 44 $ 11 $ 193 $ - $ 249 Unrealized (Loss) - (26) - (41) (16) (96) - (179) - ----------------------------- ---- ----- ------ ---- ---- ----- -------- ----- Pay Variable Net 1 (26) - 3 (5) 97 - 70 - ----------------------------- ---- ----- ------ ---- ---- ----- -------- ----- Pay Fixed Unrealized Gain 4 - - 17 - 8 - 29 Unrealized (Loss) (28) - - (42) (1) (56) - (127) - ----------------------------- ---- ----- ------ ---- ---- ----- -------- ----- Pay Fixed Net (24) - - (25) (1) (48) - (98) - ----------------------------- ---- ----- ------ ---- ---- ----- -------- ----- Total Unrealized Gain 5 - - 61 11 201 - 278 - ----------------------------- ---- ----- ------ ---- ---- ----- -------- ----- Total Unrealized (Loss) (28) (26) - (83) (17) (152) - (306) - ----------------------------- ---- ----- ------ ---- ---- ----- -------- ----- Total Net $(23) $(26) $ - $(22) $ (6) $ 49 $ - $ (28) ============================= ==== ===== ====== ==== ==== ===== ======== ===== Forward Rate Agreements Unrealized Gain $ - $ - $ - $ 1 $ - $ - $ - $ 1 Unrealized (Loss) - - - (1) - - - (1) - ----------------------------- ---- ----- ------ ---- ---- ----- -------- ----- Net $ - $ - $ - $ - $ - $ - $ - $ - ============================= ==== ===== ====== ==== ==== ===== ======== ===== Currency Swaps and Forwards Unrealized Gain $ - $ - $ 1 $ - $ 4 $ 54 $ 40 $ 99 Unrealized (Loss) (5) - - (1) (6) (109) (46) (167) - ----------------------------- ---- ----- ------ ---- ---- ----- -------- ----- Net $ (5) $ - $ 1 $ (1) $ (2) $ (55) $ (6) $ (68) ============================= ==== ===== ====== ==== ==== ===== ======== ===== Other Contracts (2) Unrealized Gain $ 4 $ - $ - $ - $ - $ - $ - $ 4 Unrealized (Loss) (10) - (6) - - - - (16) - ----------------------------- ---- ----- ------ ---- ---- ----- -------- ----- Net $ (6) $ - $(6) $ - $ - $ - $ - $ (12) ============================= ==== ===== ====== ==== ==== ===== ======== ===== Total Unrealized Gain $ 9 $ - $ 1 $ 62 $ 15 $ 255 $ 40 $ 382 Total Unrealized (Loss) (43) (26) (6) (85) (23) (261) (46) (490) - ----------------------------- ---- ----- ------ ---- ---- ----- -------- ----- Total Net $(34) $(26) $(5) $(23) $ (8) $ (6) $ (6) $(108) ============================= ==== ===== ====== ==== ==== ===== ======== ===== (1) Includes trust preferred capital securities. (2) Other contracts are principally equity swaps and collars.
24 END-USER DERIVATIVES (continued)
Other Net invest- short- ments in Securities Interest- term Long- foreign (in millions) available Other bearing borrow- term subsi- December 31, 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.
25 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 June 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 $22,963 5.68% 5.67% $1,552 5.46% 5.82% $24,515 1998-1999 17,026 5.98 5.75 4,199 4.95 5.82 21,225 2000-2001 5,350 6.76 5.93 1,176 3.61 4.94 6,526 2002 and thereafter 8,506 6.85 5.78 1,253 6.10 7.09 9,759 - --------------------- ------- ---- ---- ------ ---- ---- ------- Total $53,845 $8,180 $62,025 ===================== ======= ====== ======= All rates were those in effect at June 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.
26 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 this Current Report on Form 8-K 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 "Section 20" securities 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. Compliance with the market risk amendment is mandatory by January 1, 1998 for those banking organizations that meet certain thresholds with regard to their trading activity. 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 this Current Report on 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 June 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. 27 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 June 30, December 31, Adequacy Regulatory 1997 1996 Purposes Guidelines -------- ----------- -------- ------------ Tier 1 Capital Corporation 9.2% 9.3% 4.0% 6.0% BTCo 9.0% 9.3% 4.0% 6.0% Total Capital Corporation 14.8% 13.8% 8.0% 10.0% BTCo 12.4% 12.9% 8.0% 10.0% Leverage Corporation 5.0% 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.
28 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 June 30, December 31, (in millions) 1997 1996 - -------------------------- ------------ ------------ Corporation Tier 1 Capital $ 6,530 $ 5,690 Tier 2 Capital 3,534 2,734 Tier 3 Capital 517 - - ------------------------------ ------- ------- Total Capital $10,581 $ 8,424 ============================== ======= ======= Total risk-weighted assets $71,286 $61,213 ============================== ======= ======= BTCo Tier 1 Capital $ 5,247 $ 4,869 Tier 2 Capital 2,031 1,900 - ------------------------------ ------- ------- Total Capital $ 7,278 $ 6,769 ============================== ======= ======= Total risk-weighted assets $58,591 $52,484 ============================== ======= =======
Comparing June 30, 1997 to December 31, 1996, the Corporation's Tier 1 Capital ratio declined 10 basis points due to an increase in risk-weighted assets partially offset by an increase in Tier 1 Capital. The Corporation's risk-weighted assets at June 30, 1997 were $10.1 billion higher than at year-end 1996 while its Tier 1 Capital was $840 million higher. The Total Capital ratio of the Corporation increased 100 basis points due to the issuance of trust preferred capital securities and the addition of BT Alex. Brown Incorporated's subordinated debt as a component of Total Capital (as Tier 3 Capital in accordance with the market risk amendment), offset by the $10.1 billion increase in risk-weighted assets. With the adoption of the market risk amendment as of March 31, 1997, the Corporation's Leverage ratio decreased 90 basis points as BT Alex. Brown Incorporated's average assets and capital were included in this calculation for the first time. BTCo's Tier 1 Capital and Total Capital ratios decreased by 30 basis points and 50 basis points, respectively, as a result of a $6.1 billion increase in risk-weighted assets, partially offset by an increase to Tier 1 and Total Capital of $378 million and $509 million, respectively. BTCo's Leverage ratio was unchanged as the increase in the quarterly average assets was offset by the increase in Tier 1 Capital. 29 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 $101.1 billion as of June 30, 1997, $97.7 billion as of March 31, 1997 and $97.5 billion as of December 31, 1996, which equaled 76 percent, 77 percent, and 79 percent of gross total assets at those dates respectively. 30 LIQUIDITY (continued) Cash Flows The following comments apply to the consolidated statement of cash flows, which appears on page 5. Cash and due from banks increased by $188 million during the first six 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 increase in cash provided by financing activities was primarily due to the net changes in deposits ($7.9 billion) and the issuance of long-term debt ($3.2 billion), partially offset by repayments of long-term debt ($2.3 billion). Within net cash provided by operating activities, cash inflows from other operating assets and liabilities, net ($877 million), net changes in receivables and payables from securities transactions ($644 million) and net changes in trading assets ($530 million), was mostly offset by cash outflows from net changes in trading liabilities ($2.1 billion). The $8.5 billion of net cash used in investing activities was primarily the result of cash outflows from the net changes in securities purchased under resale agreements ($7.8 billion) and loans ($4.0 billion) and from purchases of securities available for sale ($2.8 billion), partially offset by cash inflows from the net change in securities borrowed ($3.7 billion) and maturities and other redemptions of securities available for sale ($1.9 billion). Cash and due from banks decreased $709 million during the first six months of 1996, as the net cash used in investing activities exceeded the sum of the net cash provided by financing and operating activities. The $16.4 billion of net cash used in investing activities was largely the result of cash outflows from net changes in securities purchased under resale agreements ($12.0 billion), purchases of securities available for sale ($2.9 billion) and net changes in securities borrowed ($2.6 billion) partially offset by cash inflows from maturities and other redemptions of securities available for sale ($1.8 billion). The $10.0 billion of net cash provided by financing activities was primarily the result of an increase in the net change in securities loaned and securities sold under repurchase agreements ($9.0 billion) and from issuances of long-term debt ($2.0 billion), offset in part by a decrease in the net change in deposits ($517 million) and repayments of long-term debt ($366 million). The increase in net cash provided by operating activities was mostly due to an increase in net changes in trading assets ($3.7 billion) and net changes in receivables and payables from securities transactions ($1.3 billion). 31 LIQUIDITY (continued) Interest Rate Sensitivity Condensed interest rate sensitivity data for the Corporation at June 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- Within 1 - 5 After bearing (in billions) June 30, 1997 1 year years 5 years funds Total - ------------------------------- ------ ------ ----- ------ ------- Assets $ 94.3 $ 4.0 $ 3.1 $ 30.2 $ 131.6 Liabilities and preferred stock (82.8) (7.6) (5.0) (30.9) (126.3) Common stockholders' equity - - - (5.3) (5.3) Effect of off-balance sheet hedging instruments (15.5) 10.7 4.8 - - ------ ------ ----- ------ ------- Interest rate sensitivity gap $ (4.0) $ 7.1 $ 2.9 $ (6.0) $ - ====== ====== ===== ====== =======
32 NONPERFORMING ASSETS The components of cash basis loans, renegotiated loans, other real estate and other nonperforming assets are shown below ($ in millions).
June 30, December 31, 1997 1996 ----- ----- CASH BASIS LOANS Domestic Commercial and industrial $ 105 $ 117 Secured by real estate 124 233 - ------------------------------------------------ ----- ----- Total domestic 229 350 - ------------------------------------------------ ----- ----- International Commercial and industrial 37 57 Secured by real estate 32 39 Financial institutions 2 4 Other 5 2 - ------------------------------------------------ ----- ----- Total international 76 102 - ------------------------------------------------ ----- ----- Total cash basis loans $ 305 $ 452 ================================================ ===== ===== Ratio of cash basis loans to total gross loans 1.5% 2.9% ================================================ ===== ===== Ratio of allowance for credit losses to cash basis loans (1) 251% 171% ================================================ ===== ===== RENEGOTIATED LOANS Secured by real estate $ 37 $ 37 - ------------------------------------------------ ----- ----- Total renegotiated loans $ 37 $ 37 ================================================ ===== ===== OTHER REAL ESTATE $ 196 $ 213 ================================================ ===== ===== OTHER NONPERFORMING ASSETS Assets acquired in credit workouts $ 8 $ 10 - ------------------------------------------------ ----- ----- Total other nonperforming assets $ 8 $ 10 ================================================ ===== ===== Loans 90 days or more past due and still accruing interest $ - $ - ================================================ ===== ===== (1) Ratio was computed using the allowance for credit losses that has been allocated to loans of $767 million and $773 million at June 30, 1997 and December 31, 1996, respectively.
33 NONPERFORMING ASSETS (continued) An analysis of the changes in the Corporation's total cash basis loans during the first six months of 1997 follows (in millions).
Balance, December 31, 1996 $452 Net transfers to cash basis loans 18 Net paydowns (87) Charge-offs (36) Transfers to other real estate (10) Other (32) - ----------------------------------- ---- Balance, June 30, 1997 $305 =================================== ====
The Corporation's total cash basis loans amounted to $305 million at June 30, 1997, down $147 million, or 33 percent, from December 31, 1996. This decline is primarily attributable to decreases in loans secured by real estate ($116 million) and highly leveraged loans ($41 million). Within cash basis loans, loans secured by real estate were $156 million and $272 million at June 30, 1997 and December 31, 1996, respectively. Commercial and industrial loans to highly leveraged borrowers were $76 million and $117 million at June 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 June 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. 34 NONPERFORMING ASSETS (continued)
Six Months Ended June 30, -------------- (in millions) 1997 1996 - ----------------------------------------------- ----- ----- Domestic Loans Gross amount of interest that would have been recorded at original rate $ 12 $ 24 Less, interest, net of reversals, recognized in interest revenue 2 4 - ----------------------------------------------- ----- ----- Reduction of interest revenue 10 20 - ----------------------------------------------- ----- ----- International Loans Gross amount of interest that would have been recorded at original rate 4 6 Less, interest, net of reversals, recognized in interest revenue - - - ----------------------------------------------- ----- ----- Reduction of interest revenue 4 6 - ----------------------------------------------- ----- ----- Total reduction of interest revenue $ 14 $ 26 =============================================== ===== =====
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 this Current Report on Form 8-K for a detailed discussion of the definition.
Highly Leveraged Transactions June 30, December 31, (in millions) 1997 1996 - ------------------------------- ------ ------ Loans Senior debt $1,894 $1,587 Subordinated debt 59 76 - ------------------------------- ------ ------ Total loans $1,953 $1,663 =============================== ====== ====== Unfunded commitments Commitments to lend $ 900 $ 875 Letters of credit 239 128 - ------------------------------- ------ ------ Total unfunded commitments $1,139 $1,003 =============================== ====== ====== Equity investments $ 801 $ 665 =============================== ====== ====== Commitments to invest $ 604 $ 425 =============================== ====== ======
35 HIGHLY LEVERAGED TRANSACTIONS (continued) The Corporation's outstanding loans were to 156 separate borrowers in 44 separate industry groups at June 30, 1997, compared to 127 separate borrowers in 43 separate industry groups at December 31, 1996. There were no industry concentrations which exceeded 10 percent of total HLT loans outstanding at June 30, 1997. In addition to the amounts shown in the table above, at June 30, 1997, the Corporation had issued commitment letters which had been accepted, subject to documentation and certain other conditions, of $1.77 billion (which were in various stages of syndication) and had additional HLTs in various stages of discussion and negotiation. During the first half of 1997, the Corporation originated $2.2 billion of HLT commitments. It should be noted that the Corporation's loans and commitments in connection with HLTs fluctuate as new loans and commitments are made and as loans and commitments are syndicated, participated or paid. All loans and commitments to finance HLTs are reviewed and approved by senior credit officers of the Corporation. In addition to a strict transactional and credit approval process, the portfolio of leveraged loans and commitments is actively monitored and managed to minimize risk through diversification among borrowers and industries. As part of this strategy, sell and hold targets are regularly updated in connection with market opportunities and the addition of new HLTs. Retention by the Corporation after syndication and sales of loan participations has typically been less than $50 million, and the average outstanding per borrower for the portfolio at June 30, 1997 was less than $13 million. However, at June 30, 1997, the Corporation had total exposure (loans outstanding plus unfunded commitments) in excess of $50 million to 11 separate highly leveraged borrowers. At June 30, 1997, $76 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 $16 million of HLT loans were recorded in the first half of 1997. In addition, the Corporation recorded a net gain of $26.5 million in connection with the sales and/or write-offs of certain equity investments in highly leveraged companies during the first six 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 $77 million during the first half of 1997 and that as of June 30, 1997, approximately $19 million of fees were deferred and will be recognized as future revenue. 36 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. -----END PRIVACY-ENHANCED MESSAGE-----