<PAGE> 1
BANKERS TRUST NEW YORK CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
Pages 2-13 represent portions of the 1994 Annual Report to Stockholders which
are not required by the Form 10-K report and are not "filed" as part of the
Form 10-K.
The Form 10-K cover page and cross reference index are on pages 89 and 90,
respectively.
<PAGE> 2
TABLE 1 FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
($ in millions, except per share data) 1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR
Net interest revenue (book basis) $ 1,172 $ 1,314 $ 1,147 $ 737 $ 793
Noninterest revenue 2,473 3,364 2,331 2,522 2,327
Income before cumulative effects of accounting changes $ 615 $ 1,070 $ 639 $ 667 $ 665
Cumulative effects of accounting changes -- (75) 446 -- --
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 615 $ 995 $ 1,085 $ 667 $ 665
============================================================================================================================
PER COMMON SHARE
Primary Earnings Per Share
Income before cumulative effects of accounting changes $ 7.17 $ 12.40 $ 7.23 $ 7.65 $ 7.71
Cumulative effects of accounting changes -- (.89) 5.30 -- --
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 7.17 $ 11.51 $ 12.53 $ 7.65 $ 7.71
============================================================================================================================
Fully Diluted Earnings Per Share
Income before cumulative effects of accounting changes $ 7.17 $ 12.29 $ 7.22 $ 7.65 $ 7.70
Cumulative effects of accounting changes -- (.88) 5.29 -- --
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 7.17 $ 11.41 $ 12.51 $ 7.65 $ 7.70
============================================================================================================================
Cash dividends declared $ 3.70 $ 3.24 $ 2.88 $ 2.605 $2.3825
-- as a percentage of net income (1) 52% 26% 40% 34% 31%
Book value, end of year (2) 53.67 51.90 43.23 34.93 30.70
Market price
High 84 5/8 83 1/2 70 1/8 68 46 3/4
Low 54 3/4 65 3/4 50 39 1/2 28 1/2
End of year 55 3/8 79 1/8 68 1/2 63 3/4 43 3/8
Price/earnings ratio, end of year (1) 7.7x 6.4x 9.5x 8.3x 5.6x
Cash dividend yield, end of year 7.2% 4.5% 4.6% 4.4% 5.9%
AT YEAR END
Total assets $97,016 $92,082 $72,886 $63,959 $63,596
Long-term debt 6,455 5,597 3,992 3,081 2,650
Preferred stock of subsidiary 250 250 -- -- --
Common stockholders' equity 4,309 4,284 3,621 2,912 2,524
Total stockholders' equity 4,704 4,534 4,121 3,412 3,024
PROFITABILITY RATIOS
Return on average common stockholders' equity (1) 13.48% 26.33% 19.52% 23.10% 26.74%
Return on average total stockholders' equity (1) 12.97% 25.01% 17.65% 20.59% 24.10%
Return on average total assets (1) .59% 1.25% .86% 1.09% 1.04%
CAPITAL RATIOS
Common stockholders' equity to total assets, end of year 4.44% 4.65% 4.97% 4.55% 3.97%
Total stockholders' equity to total assets, end of year 4.85% 4.92% 5.65% 5.33% 4.76%
Average total stockholders' equity to average total assets 4.52% 4.91% 5.44% 5.29% 4.30%
Risk-based capital ratios (1992 year-end guidelines) (3)
Tier 1 capital 9.05% 8.50% 7.75% 6.11% 5.43%
Total capital 14.77% 14.46% 13.64% 10.86% 10.03%
Leverage Ratio 5.26% 6.28% 6.05% 5.15% 4.49%
EMPLOYEES, AT DECEMBER 31
In domestic offices 8,258 8,300 8,096 7,745 8,689
In foreign offices 6,271 5,271 4,821 4,343 4,626
- ----------------------------------------------------------------------------------------------------------------------------
Total 14,529 13,571 12,917 12,088 13,315
============================================================================================================================
</TABLE>
(1) These figures exclude the cumulative effects of accounting changes recorded
in 1993 and 1992.
(2) This calculation includes the effect of common shares issuable under
deferred stock awards.
(3) All three regulatory capital ratios, at both December 31, 1994 and 1993,
exclude any benefit from the adoption of SFAS 115.
14 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 3
FINANCIAL REVIEW
Management's discussion and analysis of Bankers Trust New York Corporation's
results of operations and financial condition appears on pages 15 through 41.
The discussion and analysis should be read in conjunction with the financial
statements and supplemental financial data which begin on page 44.
RESULTS OF OPERATIONS
SUMMARY OF RESULTS
Bankers Trust New York Corporation and subsidiaries (the "Corporation", or the
"Firm") earned $615 million, or $7.17 primary earnings per share for 1994.
Income before cumulative effects of accounting changes for 1993 was a record
$1.070 billion, or $12.40 primary earnings per share.
The 1994 results reflected significant declines in trading and
trading-related net interest revenue from the record results achieved in 1993,
as market conditions were persistently difficult throughout the year. The 1994
results also reflected record levels of fees and commissions and fiduciary and
funds management revenue as well as a decline in noninterest expenses and a
lower provision for credit losses.
The Corporation's business and its profitability are affected by a wide
range of financial, market, regulatory, political and other factors. During the
first quarter of 1995, these factors have created a very difficult business
environment. The first quarter to date has shown a deterioration of market
conditions in many Latin American countries, continuing slowness in the market
for risk management products and unsettled global market conditions,
interspersed with several serious market shocks. These adverse factors have
created business conditions significantly more difficult than those of the
fourth quarter of 1994 resulting in significant declines in many parts of the
Corporation's business which, in turn, have negatively impacted earnings. In
particular, the Corporation has experienced losses in certain of its Latin
America and other trading positions as well as a sharp fall off in revenues
from the sale of risk management products. The Corporation cannot predict
when the business environment will improve. Management of the Corporation is
implementing a number of significant expense reduction programs. Without
considering a possible charge in connection with the expense reduction
programs, the Corporation estimates that the first quarter will show an
after-tax loss of up to approximately $125 million. The Corporation's capital
base and liquidity position remain very strong.
BUSINESS FUNCTIONS
In addition to the reported income statement categories, the Corporation breaks
down and analyzes its businesses on the basis of five interrelated business
functions which represent its core business activities. Their definitions and
respective shares of income before cumulative effects of accounting changes are
presented below:
- -- Client Finance: Meeting the credit and capital needs of clients.
- -- Client Advisory: Providing advice and structuring transactions designed to
implement client financial strategies.
- -- Client Financial Risk Management: Helping clients manage their financial
exposures.
- -- Client Transaction Processing: Providing operating and administrative
services to clients.
- -- Trading and Positioning: Proprietary activity involving securities,
derivatives, currency, commodity and funding transactions, as well as
positions assumed as part of client risk management activities.
Because the Corporation's business is complex in nature and its operations
are highly integrated, it is impractical to segregate the respective
contributions of the business functions with precision. For example, the Client
Advisory function is difficult to split from the Client Finance function, since
most complex financings include both an element of advice and the arrangement
of credit to the client. Further, transactions undertaken for purposes of
Client Financial Risk Management may contain an element of Client Finance or
Trading and Positioning. Finally, the Trading and Positioning function serves
as an element of support for client-based activities. As a result, estimates
and subjective judgments have been made to apportion revenue and expenses among
the business functions. In addition, certain revenue and expenses have been
excluded from the business functions because, in the opinion of management,
they could not be reasonably allocated or because their attribution to a
particular function would be distortive. In 1994, 1993 and 1992 approximately
$41 million, $59 million and $40 million, respectively, of corporate expenses
and, in 1992, approximately $95 million of revenue (principally interest) were
not allocated or attributed to business functions. The corporate expenses in
all years included items such as premises costs for temporarily unoccupied
space, and in 1994, also included a charge of $10 million with respect to a
settlement with the Securities and Exchange Commission and the Commodity
Futures Trading Commission. Despite these important qualifications concerning
the precision of the allocation of income before cumulative effects of
accounting changes among the functions, the Corporation believes that the
categories and the amounts presented provide a reasonable insight into the
sources of its income. Subject to the foregoing limitations, estimates and
assumptions, a discussion of significant factors affecting the results is
presented below.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 15
<PAGE> 4
BUSINESS FUNCTIONS PROFITABILITY
<TABLE>
<CAPTION>
(in millions) Year Ended December 31, 1994 1993
- ----------------------------------------------------------------------
<S> <C> <C>
Client Finance $140 $ 76
Client Advisory 87 63
Client Financial Risk Management 259 336
Client Transaction Processing 99 60
Trading and Positioning 71 594
Other (unallocated) (41) (59)
- ----------------------------------------------------------------------
Income Before Cumulative Effects $615 $1,070
======================================================================
</TABLE>
Client Finance -- Client Finance activities generate net interest revenue
and corporate finance fees from the following major products: debt and equity
underwriting, commercial paper, lending, loan syndication, leasing, structured
finance and private placements. Client Finance income in 1994 rose 84 percent,
to $140 million, up from $76 million in 1993, mainly as a result of increased
volumes of loan syndications throughout the year and lower credit costs
attributable to the continuing improvement in the Corporation's loan portfolio.
Client Finance income in 1993 rose to $76 million from a slight loss in
1992, principally due to a strong market for debt underwritings worldwide,
improved profitability of loan syndications and a decline in credit costs.
Client Advisory -- Client Advisory activities include asset management,
trust advisory, mergers and acquisitions, strategic risk management, insurance
and other specialized advisory services. These activities principally give rise
to fiduciary and funds management revenue, and fees and commissions. Client
Advisory income rose to $87 million in 1994 from $63 million in 1993, an
increase of 38 percent. This increase was principally attributable to an
overall increase in assets under management at the Corporation's BT Australia
subsidiary, improved margins in the insurance business conducted by the
Corporation's Chilean subsidiary, Consorcio Nacional de Seguros S.A., and
higher merger and acquisition fees. These positive factors in 1994 were
somewhat offset by lower levels of performance-based funds management fees.
Client Advisory income in 1993 declined by approximately 45 percent, to
$63 million from 1992. While the majority of services earned higher revenue
than in 1992, this was offset by increased investments in human resources and
technology necessary to support business expansion and enhance the related
infrastructure. Performance-based funds management fees declined from their
1992 level.
Client Financial Risk Management -- Primary risk management products
include derivatives contracts related to interest rates, currencies, equities
and commodities (or indices thereof), and credit. These products generate both
trading and net interest revenue. Client Financial Risk Management income fell
23 percent in 1994 to $259 million, from a record $336 million in 1993.
Uncertain market conditions and an overall slowdown in transaction volumes in
the marketplace contributed to this decline in profitability. In addition, $35
million of trading revenue related to leveraged derivative transactions was not
recognized due to credit concerns. See page 28 for a further discussion on
leveraged derivative transactions.
During 1993, the Corporation benefited from the expanded use of risk
management products by clients on a global basis. As a result, Client Financial
Risk Management income increased to $336 million in 1993, approximately a 50
percent increase from 1992.
Client Transaction Processing -- This business function produces net
interest revenue, fiduciary and funds management revenue, and fees and
commissions from money transfer, securities custody and clearance, securities
lending, and retirement plan recordkeeping and administrative services. In
1994, Client Transaction Processing income rose 65 percent, to $99 million,
from $60 million in 1993. Key contributors to this increase were improved money
transfer volumes and increased participation in securitized trust arrangements
(involving collateralized mortgages and other types of asset-backed
financings).
Processing volumes in 1993 were up slightly from 1992. However, profit
margins were generally flat to slightly down which, together with higher
expenses due to significant investments in technology (designed to improve
future margins), led to a modest decline in 1993.
Trading and Positioning -- Trading and positioning activities involve U.S.
government and agency securities, foreign government securities, various
derivative positions (including those assumed on behalf of clients),
currencies, equities (including private equities which are generally held for
the intermediate- to long-term) and increasingly, commodities, which generate
trading, net interest and other revenue. Trading and Positioning income in 1994
dropped 88 percent, to $71 million, from the record $594 million in 1993 as a
result of the persistently difficult trading year.
Trading and Positioning income in 1993 tripled as compared to 1992 as a
result of favorable market conditions surrounding interest rates, and
profitable trading opportunities in emerging markets, especially Latin America.
FINANCIAL REPORTING MATTERS
During the fourth quarter of 1994, the Corporation adopted Financial Accounting
Standards Board ("FASB") Interpretation No. 41 ("FIN 41"), "Offsetting of
Amounts Related to Certain Repurchase and Reverse Repurchase Agreements." FIN
41 allows the netting, under certain circumstances, of certain repurchase and
reverse repurchase agreements. It was the Corporation's former policy to record
such transactions on a gross basis on the balance sheet. As the result of this
adoption, at December 31, 1994, the Corporation's consolidated total assets and
total liabilities each decreased by approximately $500 million.
16 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 5
On January 1, 1994, the Corporation adopted FASB Interpretation No. 39
("FIN 39"), "Offsetting of Amounts Related to Certain Contracts." FIN 39
requires that unrealized gains and losses on swaps, forwards, options and
similar contracts be recognized as assets and liabilities, except where such
gains and losses arise from contracts covered by qualifying master netting
agreements. It was the Corporation's former policy to record such unrealized
gains and losses on a net basis on the balance sheet. As the result of this
adoption, at December 31, 1994, the Corporation's consolidated total assets and
total liabilities each increased by approximately $12 billion.
Effective December 31, 1993, the Corporation adopted Statement of
Financial Accounting Standards ("SFAS") 115, "Accounting for Certain
Investments in Debt and Equity Securities." This accounting standard mandates
that affected securities which are neither trading securities nor held to
maturity be designated as available for sale and reported at fair value, with
unrealized gains and losses recorded directly to a separate component of
stockholders' equity. At December 31, 1993, the Corporation recorded a credit
of $145 million ($88 million on an after-tax basis) in the securities valuation
allowance component of stockholders' equity, representing the net unrealized
gains on securities available for sale. The adoption of SFAS 115 had no effect
on net income.
On January 1, 1993, the Corporation adopted SFAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" and SFAS 112,
"Employers' Accounting for Postemployment Benefits." In adopting SFAS 106 and
SFAS 112, the Corporation recorded charges to earnings of $100 million and $7
million, respectively, (or $70 million and $5 million, respectively, net of
income taxes) as the cumulative effects of these changes in accounting
principles. Effective January 1, 1992, the Corporation adopted SFAS 109,
"Accounting for Income Taxes," resulting in the recording of a $446 million
credit to earnings for the cumulative effect of that accounting change.
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.
STATEMENT OF INCOME ANALYSIS
NET INTEREST REVENUE
Net interest revenue for 1994 was $1.172 billion, down $142 million, or 11
percent, from 1993. Net interest revenue of $1.314 billion in 1993 increased by
$167 million, or 15 percent, from the amount earned in 1992.
The $142 million decrease in net interest revenue during 1994 was due to a
$141 million, or 23 percent, decrease in trading-related net interest revenue,
which totaled $460 million for 1994.
A significant portion of the Firm's trading and risk management activities
involve positions in interest rate instruments and related derivatives. The
revenue from these activities can
TABLE 2 NET INTEREST REVENUE ANALYSIS
The table below presents the Corporation's trend of net interest revenue,
average balances and rates. For further details on these statistics, see pages
80 through 82.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
($ in millions) Year Ended December 31, 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest revenue
Book basis $ 1,172 $ 1,314 $ 1,147
Tax equivalent adjustment * 83 82 52
- --------------------------------------------------------------------------------------------------------------
Fully taxable basis $ 1,255 $ 1,396 $ 1,199
==============================================================================================================
Average balances
Interest-earning assets $76,300 $76,798 $66,329
Interest-bearing liabilities 73,748 69,676 59,563
- --------------------------------------------------------------------------------------------------------------
Earning assets financed by noninterest-bearing funds $ 2,552 $ 7,122 $ 6,766
==============================================================================================================
Average rates (fully taxable basis)
Yield on interest-earning assets 6.70% 5.88% 6.44%
Cost of interest-bearing liabilities 5.23 4.48 5.16
- --------------------------------------------------------------------------------------------------------------
Interest rate spread 1.47 1.40 1.28
Contribution of noninterest-bearing funds .17 .42 .53
- --------------------------------------------------------------------------------------------------------------
Net interest margin 1.64% 1.82% 1.81%
==============================================================================================================
</TABLE>
* The applicable combined federal, state and local incremental tax rates
used to determine the amounts of the tax equivalent adjustments (which
recognize the income tax savings on tax-exempt assets) were 42 percent for
both 1994 and 1993 and 41 percent for 1992.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 17
<PAGE> 6
periodically shift between trading and net interest, depending on a variety of
factors, including risk management strategies. Therefore, the Corporation
views trading revenue and trading-related net interest revenue together, which
is discussed in the trading revenue section below.
The Firm's non-trading-related net interest revenue, considered to be a
more stable component of overall net interest revenue, was virtually unchanged
compared to 1993. Total non-trading-related net interest revenue was $712
million for 1994, compared to $713 million in 1993.
The average balances of non-trading-related interest-earning assets and
interest-bearing liabilities were virtually unchanged from 1993. The average
interest rate spread also remained relatively constant in 1994 versus 1993.
For the 1993 versus 1992 comparison, fully taxable net interest revenue
increased by $197 million. This increase was due to a $274 million, or 84
percent, increase in trading-related net interest revenue, which totaled $601
million for 1993. The Firm's trading-related net interest revenue began to
climb significantly in the third quarter of 1992, and, on a year-over-year
basis, it increased in each quarter of 1993. Aside from trading-related net
interest revenue, the Corporation's fully taxable net interest revenue for 1993
declined by $77 million, or 9 percent, from 1992. This decrease was primarily
attributable to the combination of lower levels of average interest-earning
assets, particularly loans, and a $38 million decline, to $48 million, in
interest recognized on past due claims with Argentina and Brazil.
PROVISION FOR CREDIT LOSSES
The provision for credit losses amounted to $25 million for 1994, compared with
$93 million for 1993 and $225 million in 1992. 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.
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 between worldwide interest
rates, exchange rates and equity and commodity indices. Trading revenue is
generated by proprietary activities and client-related activities. Proprietary
activities include the trading of U.S. government and agency securities,
foreign sovereign securities, foreign exchange and currency options and
commodities, as well as the intermediate and longer-term proprietary trading of
liquid securities, foreign exchange and derivative products. The Firm also
trades restructured loans, bonds, equities and other instruments of Latin
American and other emerging markets issuers. Trading activities also 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.
A significant portion of the Firm's trading and risk management strategies
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 strategies.
Trading-related net interest revenue represents interest earned on cash
instruments held in the trading positions for either proprietary trading or
risk management purposes, less the cost to fund both cash and derivative
positions.
For the year 1994, trading revenue was $465 million, down $1.166 billion,
or 71 percent, from the record $1.631 billion reported in 1993, which was $735
million higher than 1992. Trading-related net interest revenue decreased to
$460 million, down $141 million, or 23 percent, from $601 million in 1993,
which was $274 million higher than 1992.
The $1.307 billion decline in combined trading revenue and trading-related
net interest revenue in 1994 resulted from sharply lower revenue from the
Firm's proprietary trading activities, as market conditions were persistently
difficult throughout the year. In addition, demand for the Corporation's risk
management products slowed from the record levels recorded in 1993.
The table below quantifies 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.
<TABLE>
<CAPTION>
Trading-
Related
Net
Trading Interest
(in millions) Revenue Revenue Total
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Year ended December 31, 1994
Interest rate risk $ 278 $495 $ 773
Foreign exchange risk (54) -- (54)
Equity and commodity risk 241 (35) 206
- ------------------------------------------------------------------------------------------
Total $ 465 $460 $ 925
==========================================================================================
Year ended December 31, 1993
Interest rate risk $1,066 $642 $1,708
Foreign exchange risk 191 -- 191
Equity and commodity risk 374 (41) 333
- ------------------------------------------------------------------------------------------
Total $1,631 $601 $2,232
==========================================================================================
Year ended December 31, 1992 $ 896 $327 $1,223
==========================================================================================
</TABLE>
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 sharp, global increase in interest rates that occurred
during the first quarter of 1994 adversely affected the full range of the
Firm's positions in these
18 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 7
interest-rate-sensitive instruments; those most significantly affected involved
European, Japanese and emerging market sovereign debt. As a result, total
trading revenue and trading-related net interest revenue related to interest
rate risk positions fell over 50 percent to $773 million in 1994 from $1.7
billion in 1993.
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. The global increase in interest
rates referred to above also had a considerable affect upon foreign currency
prices, which adversely impacted positions. Total trading revenue and
trading-related net interest revenue related to foreign exchange risk resulted
in a loss of $54 million in 1994, compared to a gain of $191 million in 1993.
Equity and Commodity Risk
The Firm's trading and risk management activities also include positions in
equity securities and commodities and related derivatives. Although results in
1994 from these positions held up better relative to those involving interest
rate and foreign exchange risk, they nonetheless showed a year-to-year decline
in total trading revenue and trading-related net interest revenue of
approximately 40 percent, down to $206 million from the $333 million in 1993.
The decline was principally attributable to lower total trading revenue during
1994 from equity securities positions in issuers from the emerging markets of
Asia and Latin America.
The largest portion of the increase in 1993 combined trading revenue and
trading-related net interest revenue from that of 1992 related to the Firm's
businesses which are primarily engaged in the trading of sovereign bonds and
other interest-rate-sensitive securities and particularly in instruments
denominated in European currencies and in Yen as well as the issues of several
emerging market countries. These positions were acquired in connection with
both proprietary and client risk management activities.
FIDUCIARY AND FUNDS MANAGEMENT REVENUE
Fiduciary and funds management revenue was a record $740 million in 1994, up
$37 million, or 5 percent, from the $703 million earned in 1993, which was $55
million higher than the $648 million recorded in 1992. The increase in 1994 was
primarily due to a higher level of assets under management, particularly in the
global private banking activities at the Corporation's BT Australia subsidiary,
as well as increased revenue from custodian and global fiduciary services,
offset in part by a decline in performance-based funds management fees.
The increase in 1993 compared to 1992 was primarily due to new business in
securities lending and retirement services, as well as higher levels of private
banking assets under management. These improvements were partially offset by a
decline in performance-based funds management fees.
FEES AND COMMISSIONS
Fees and commissions totaled a record $756 million for 1994, which represented
an increase of $46 million, or 6 percent, from 1993. Corporate finance fees
increased $24 million, or 6 percent, during 1994 to their highest level in five
years. This increase was due to higher revenue from loan syndication fees,
offset in part by lower fees from securities underwriting and lease syndication
activities.
Fees and commissions totaled $710 million in 1993 which was $122 million
higher than the $588 million earned in 1992. Corporate finance fees of $407
million for 1993 increased by $81 million, or 25 percent, over the 1992 amount.
The increase was driven by higher revenue from securities underwriting and loan
and lease syndication activities, as the extremely favorable market conditions
led many of the Firm's clients to restructure their balance sheets. The largest
components of the remaining $41 million increase were fees from the structuring
of products for employee benefit plans and fees for brokerage services.
OTHER NONINTEREST REVENUE
Other noninterest revenue totaled $440 million for 1994, an increase of $133
million, or 43 percent, from 1993. This increase was due to several factors
including a $59 million increase in insurance premium revenue, a lower level of
losses from the revaluation of non-trading foreign currency investments, the
impact of an insurance settlement related to the January 1993 fire at the
Corporation's headquarters at 280 Park Avenue and unrealized gains related to
certain venture capital assets. These results were offset in part by charges
related to the funds management business.
Other noninterest revenue totaled $307 million for 1993, an increase of
$104 million from 1992. The largest factor in this increase was a nearly
ten-fold increase in net revenue from equity investment transactions, including
write-offs, to a record $126 million. This category of other noninterest
revenue included $32 million of total equity write-offs in 1993 (down from $52
million in 1992), as well as a $16 million gain on the sale of the
Corporation's minority interest in A.F.P. Provida, S.A., a Chilean pension fund
administrator. Also contributing to the year-to-year increase in other
noninterest revenue were a $14 million increase in insurance premium revenue
and a 1993 gain on the sale of the Corporation's Bankstat business. Partially
offsetting these factors was a higher level of losses from the revaluation of
non-trading foreign currency investments and a
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 19
<PAGE> 8
1993 writedown of assets previously acquired in satisfaction of indebtedness as
well as gains during 1992 from the partial curtailment of an overseas defined
benefit plan ($15 million) and the sale of the San Francisco branch of the
California subsidiary ($10 million).
NONINTEREST EXPENSES
Total noninterest expenses were $2.751 billion for 1994, a decrease of $284
million, or 9 percent, from the $3.035 billion recorded in 1993. Incentive
compensation and employee benefits expense decreased $448 million, or 38
percent, primarily due to lower bonus expense reflecting the reduced earnings.
Salaries expense increased $87 million, or 13 percent, in 1994. The average
number of employees increased by 5 percent from 1993, to 14,005.
All other noninterest expenses totaled $1.253 billion for 1994, up $77
million, or 7 percent, from 1993. Increases in the provision for policyholder
benefits, service bureaus, agency personnel fees and minority interest were
offset in part by a decrease in other real estate expense, primarily resulting
from a gain on the sale of a foreclosed property as well as a lower level of
contributions expense.
Total noninterest expenses were $3.035 billion for 1993, an increase of
$688 million, or 29 percent, from the $2.347 billion recorded in 1992.
Incentive compensation and employee benefits expense increased by $442 million,
or 61 percent, driven by a higher bonus expense recorded in connection with the
increased earnings, although higher severance expense was also a factor in the
increase. Salaries expense was up $57 million, or 9 percent, in 1993. The
average number of employees increased by 7 percent from the 1992 figure, to
13,334.
All other noninterest expenses totaled $1.176 billion for 1993, which was
$189 million, or 19 percent, higher than in 1992. Increases in other real
estate expense, fees for professional services, agency personnel fees, the
provision for policyholder benefits and contributions expense accounted for
two-thirds of the total 1993 increase.
INCOME TAXES
Income tax expense for 1994 amounted to $254 million, compared with $480
million for 1993. The effective tax rate for 1994 was 29 percent, while the
1993 effective tax rate was 31 percent. The 1993 figure excluded the income
taxes included in the reported cumulative effects of accounting changes for
SFAS 106 and SFAS 112.
The effective tax rate for 1992 was 29 percent, which excluded the income
taxes included in the reported cumulative effect of accounting changes for SFAS
109.
In connection with the adoption of SFAS 109, a valuation allowance of $227
million was recorded effective January 1, 1992. The valuation allowance, the
amount of which was unchanged through December 31, 1994, related to deferred
tax assets, the realization of which are dependent on the source and mix of
future income.
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 summarized results of operations for
1994, 1993 and 1992 have been segregated between domestic and international
operations in Note 21 of Notes to Financial Statements. This analysis, which is
based on the domicile of the customer, incorporates numerous subjective
assumptions.
International net income totaled $368 million for 1994, compared with $865
million for 1993. International operations contributed 60 percent and 87
percent of the Corporation's net income in 1994 and 1993, respectively.
The decrease in 1994 international net income as compared to 1993 was
primarily due to reduced net income in the United Kingdom and Asia. United
Kingdom's net income decreased by $366 million in 1994, as trading revenue
decreased significantly. Asia net income decreased by $143 million primarily
due to lower trading revenue in Hong Kong, Singapore, and Tokyo and an increase
in noninterest expenses.
Domestic net income increased by $117 million to $247 million in 1994,
primarily due to higher fees and commissions, decreases in the provision for
credit losses noninterest expenses, partially offset by lower trading revenue.
International total assets were $57.2 billion at December 31, 1994,
compared with $47.8 billion at December 31, 1993, which represented 48 percent
and 46 percent of total consolidated assets (before intersegment eliminations),
respectively. The $9.4 billion increase was primarily due to an increase in
United Kingdom assets of $10.9 billion and an increase in Australia/New Zealand
assets of $2.4 billion, offset in part by a $5.6 billion decrease in Europe
assets. United Kingdom assets increased primarily due to an increase in trading
assets, federal funds sold and securities purchased under resale agreements.
Australia/New Zealand assets increased primarily due to an
20 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 9
increase in trading assets. Europe assets decreased primarily due to a decrease
in trading assets. Domestic total assets increased $4.2 billion to $60.9
billion primarily due to an increase in federal funds sold and securities
purchased under resale agreements, partially offset by a decrease in net loans
and lease financing.
International net income totaled $865 million for 1993, compared with $964
million for 1992. International operations contributed 87 percent and 89
percent of the Corporation's net income in 1993 and 1992, respectively.
Included in 1992 net income was the $446 million credit for the cumulative
effect of adopting SFAS 109, which was primarily attributable to the Western
Hemisphere. International income before cumulative effects of accounting
changes increased by $347 million in 1993, to $865 million. Significant
geographic components of this increase follow.
United Kingdom earnings improved by $388 million in 1993, as trading
revenue improved significantly and was partially offset by higher noninterest
expenses. Asia income increased by $51 million, primarily due to higher trading
revenue in Hong Kong, Singapore, Tokyo and Seoul, offset in part by lower net
interest revenue and higher noninterest expenses. Western Hemisphere income
declined by $35 million, primarily due to lower interest revenue from
nonaccrual Brazilian assets and a higher provision for policyholder claims,
partially offset by increases in trading revenue, insurance premium revenue and
interest revenue from nonaccrual Argentine assets. Australia/New Zealand
earnings decreased by $24 million, primarily due to higher noninterest expenses
and lower trading revenue, partially offset by higher fiduciary and funds
management revenue and fees and commissions.
Domestic net income increased by $9 million to $130 million in 1993.
Excluding the cumulative effects of adopting SFAS 106 and SFAS 112, domestic
earnings increased by $84 million. This increase was primarily due to higher
net interest revenue, fees and commissions, and other noninterest revenue, as
well as a lower provision for credit losses, partially offset by lower trading
revenue and higher noninterest expenses.
International total assets were $47.8 billion at December 31, 1993,
compared with $37.0 billion at December 31, 1992, and represented 46 percent
and 43 percent of total consolidated assets (before intersegment eliminations),
respectively. The $10.8 billion increase was primarily due to increases in
United Kingdom and Europe trading assets.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 21
<PAGE> 10
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 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
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(in millions) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Interest-bearing deposits with banks $ 2,139 $ 2,042 $ 2,777
Federal funds sold 1,497 488 746
Securities purchased under resale agreements 14,380 8,791 14,148
Securities borrowed 6,494 2,343 --
Trading assets 33,106 41,942 26,547
Securities available for sale
Taxable 5,240 -- --
Exempt from federal income taxes 2,238 -- --
- --------------------------------------------------------------------------------------------------------------
Total securities available for sale 7,478 -- --
Investment securities
Taxable -- 5,541 5,321
Exempt from federal income taxes -- 1,030 901
- --------------------------------------------------------------------------------------------------------------
Total investment securities -- 6,571 6,222
Loans
In domestic offices 6,750 8,446 10,997
In foreign offices 5,798 5,765 6,026
- --------------------------------------------------------------------------------------------------------------
Total loans 12,548 14,211 17,023
- --------------------------------------------------------------------------------------------------------------
Total interest-earning assets 77,642 76,388 67,463
Cash and due from banks 1,835 1,971 1,466
Noninterest-earning trading assets 19,778 3,772 1,726
All other assets 8,081 6,528 5,520
Allowance for credit losses (1,327) (1,494) (1,667)
- --------------------------------------------------------------------------------------------------------------
Total $106,009 $87,165 $74,508
==============================================================================================================
LIABILITIES
Interest-bearing deposits
In domestic offices $ 5,584 $ 8,511 $ 8,231
In foreign offices 15,611 12,410 11,798
- --------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 21,195 20,921 20,029
Trading liabilities 8,856 7,430 5,693
Securities sold under repurchase agreements 20,833 21,671 18,800
Other short-term borrowings 18,327 14,504 11,009
Long-term debt 6,310 5,450 4,102
- --------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 75,521 69,976 59,633
Noninterest-bearing deposits 3,728 3,932 4,417
Noninterest-bearing trading liabilities 15,539 1,694 1,087
All other liabilities 6,212 6,883 5,180
- --------------------------------------------------------------------------------------------------------------
Total Liabilities 101,000 82,485 70,317
- --------------------------------------------------------------------------------------------------------------
PREFERRED STOCK OF SUBSIDIARY 250 250 --
- --------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock 395 250 500
Common stockholders' equity 4,364 4,180 3,691
- --------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 4,759 4,430 4,191
- --------------------------------------------------------------------------------------------------------------
Total $106,009 $87,165 $74,508
==============================================================================================================
</TABLE>
The condensed average balance sheets are presented on a different basis than
the spot balance sheets, in that the various categories of interest-earning
assets and interest-bearing liabilities exclude certain
noninterest-earning/bearing components included in the spot balance sheet
captions. These components, excluding noninterest-earning/bearing trading
assets/liabilities, are included in "all other assets" and "all other
liabilities" in the condensed average balance sheets.
22 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 11
The Corporation's strategy has de-emphasized traditional lend and hold
banking in favor of fee-based origination, distribution and advisory services,
as well as dealing and trading in liquid, marked-to-market trading assets. This
strategy has resulted in an improvement in the liquidity of the Corporation's
balance sheet.
Average total assets amounted to $106.0 billion in the fourth quarter of
1994, an increase of $18.8 billion, or 22 percent, from 1993 which had
increased $12.7 billion, or 17 percent, from 1992.
Average interest-earning assets increased by $1.3 billion, or 2 percent,
however, the proportion of interest-earning assets to total assets decreased,
from 88 percent to 73 percent, due primarily to the adoption of FIN 39,
effective January 1, 1994.
Combined securities purchased under resale agreements and securities
borrowed represented 20 percent of total assets in 1994, up from 13 percent in
1993, which was down from 19 percent in 1992. The year-to-year fluctuations in
these assets resulted primarily from U.S. government and agency positions
maintained by BT Securities Corporation to facilitate its trading and financing
activities.
Interest-earning trading assets averaged $33.1 billion, or 31 percent of
total assets in the fourth quarter of 1994. These assets declined by 21 percent
from 1993, after increasing 58 percent from 1992. Trading activities are
conducted globally and monitored centrally. Management anticipates continued
variability in trading account size and composition as market conditions and
views of the economic cycle change and as the Corporation expands the markets
and instruments in which it trades.
The average balance of total loans declined for the eighth consecutive
year. Loans represented 12 percent, 16 percent and 23 percent of average total
assets in 1994, 1993 and 1992, respectively. This declining loan trend reflects
the fact that the majority of the medium- and long-term loans that the
Corporation originates are sold or participated to other institutions.
Conversely, the percentage of liquid assets to total assets rose from 72
percent in 1992 to 78 percent in 1993 and to 82 percent in 1994. Management
anticipates a continuation of the trend whereby the Corporation's loan
portfolio has decreased in absolute size and has been surpassed by liquid
assets, led by trading assets, as a percentage of total assets.
Noninterest-earning trading assets increased $16.0 billion due primarily
to the adoption of FIN 39.
Average total liabilities amounted to $101.0 billion in the fourth quarter
of 1994, an $18.5 billion, or 22 percent, increase from 1993, which had
increased $12.2 billion, or 17 percent, from 1992.
Interest-bearing liabilities as a percentage of total funding sources was
71 percent in 1994, down from 80 percent in both 1993 and 1992.
Interest-bearing liabilities increased $5.5 billion from 1993. During 1994, the
Corporation's excess of interest-earning assets over interest-bearing
liabilities decreased from $6.4 billion to $2.1 billion, or from 8 percent to 3
percent of interest-earning assets. Noninterest-bearing trading liabilities
increased $13.8 billion in 1994 due primarily to the adoption of FIN 39.
Combined total stockholders' equity and preferred stock of subsidiary for
1994 increased to $5.0 billion, or 7 percent over 1993, which increased 12
percent over 1992. The 1994 increase was due primarily to the retention of $296
million of earnings, as well as the net issuance of preferred stock, while the
1993 increase was due primarily to the retention of $708 million of earnings
(which included a $75 million charge to earnings due to the cumulative effects
of accounting changes).
RISK MANAGEMENT
The Corporation has made substantial investments in both information technology
and human resources to support its risk management processes. The Global Risk
Management Department and the Global Credit Department monitor and develop
management policies for the market and credit risk of the Corporation's
businesses worldwide. These teams of risk management professionals are
independent of the Corporation's business functions and report directly to
senior management.
The Corporation's guiding philosophy toward risk management is to make it
an integral part of the Corporation's business decisions and culture. The
Corporation implements this philosophy by practicing the following four
principles: (1) a firm-wide commitment to effective risk management starts at
the senior-management level; (2) a strong, centralized and independent control
function for risk management operating in conjunction with decentralized
business activities best serves the Corporation's desire to be agile and
efficient in business activities and prudent in overall risk-taking; (3)
diversification is an efficient mechanism for managing risk; and (4) returns
earned must be commensurate with the marginal risk associated with each
business activity.
Persistently difficult market conditions tested the Firm's ability to
translate these principles into effective risk management during 1994. The
market environment during the year may be characterized as a lengthy period of
modest and trendless fluctuations in asset prices transpiring between two major
capital market events that occurred at either end of the year. The year began
with a sharp, global increase in interest rates and ended with a further
increase in U.S. short-term interest rates and turmoil in Latin American
capital markets that affected asset values throughout emerging markets. These
events were unusual in the degree to which interest rates across international
markets moved together. This phenomenon of increased correlation among interest
rates reduced the risk management benefits derived from diversification across
interest-sensitive instruments.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 23
<PAGE> 12
The Corporation responded to this adverse and unsettled market environment
through an orderly withdrawal in the first quarter of 1994 from substantial
market positions in its Trading and Positioning function. This withdrawal and
the resulting risk reduction is clearly shown by Figure 1. Figure 1 reports the
Daily Price Volatility for each day's positions, which is defined to be the
99th percentile potential loss over a one-day holding period. This means that a
daily loss exceeding the Daily Price Volatility would occur less than 1 percent
of the time or about once per one-hundred days if we held the positions
constant throughout that period. The Daily Price Volatility is calculated
using statistical models that are based on the historical behavior of market
prices and yields.
As shown in Figure 1, the Daily Price Volatility for the Corporation
declined from an average of approximately $70 million during January to a level
of approximately $30 million by the end of February. This decline occurred
predominantly in the Trading and Positioning function of the Firm. The
positions related to the Trading and Positioning function reflect discretionary
exposures undertaken by the Firm using its capital and, therefore, most clearly
reflect strategic changes in market positioning.
The risk associated with the Corporation's Client Financial Risk
Management activities, which reflect hedging positions maintained to offset
risks undertaken on behalf of clients, including derivative products, remained
fairly constant throughout the year.
Figure 1: Daily Price Volatility:
This figure is a line diagram showing the behavior of the Daily Price
Volatility for the Total Corporation and its Trading and Positioning and Client
Risk Management functions. The Figure shows that the Daily Price Volatility for
the Corporation started at a level of approximately $70 million at the
beginning of January 1994, declined sharply during February to a level of
approximately $30 million, and except for minor fluctuations, remained at that
level for the remainder of the year. The Daily Price Volatility attributable to
the Trading and Positioning function behaved similarly during the year.
It started at $60 million in January, declined to $20 million during February,
and remained at approximately that level for the rest of 1994. In contrast to
the patterns for Trading and Positioning and the Total Corporation, the Daily
Price Volatility attributable to the Client Risk Management function remained
remarkably stable throughout the year. It averaged about $15 million for the
year and fluctuated between $10 million and $20 million for all but a couple of
days, when it rose to $25 million.
The risk reduction that occurred during February 1994 reflected the
Corporation's decision to reduce its exposure in its Trading and Positioning
accounts due to fluctuations in interest rates. For the Corporation, the
average Daily Price Volatility that was due to interest-rate risk fell by 35
percent between the first and second quarters. Also, interest-rate risk was the
single largest source of market risk during the year with an average Daily
Price Volatility of $29 million. In comparison, the Corporation's average Daily
Price Volatility across all market risks was $35 million in 1994.
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. These figures
incorporate the effects of nonlinear payoffs or convexity imparted by the
presence of options in the portfolios and are calculated through the use of
proprietary simulation techniques. A question that naturally arises is the
validity of these risk measurement techniques. The diagrams in Figure 2 provide
evidence that the methodology employed provides conservative and reasonable
statistical measures of risk. The diagrams show for each activity the absolute
value of the daily ratio of profit and loss flows to risk capital.
Observations that lie above the diagonal line that bisect the diagram indicate
days when the absolute value of the profits and losses exceeded the Daily Price
Volatility, which occurs when the realized profit or loss lies outside the
confidence interval implied by the Daily Price Volatility. According to the
statistical specification underlying the Daily Price Volatility methodology,
only approximately 2 percent of the observations should lie above the diagonal,
which implies that approximately five of the daily observations should lie
above the diagonal in each diagram. One reason that fewer points lie above the
diagonals is that Daily Price Volatility measures the potential change in the
market value of a given portfolio due solely to price fluctuations irrespective
of the accounting treatment of positions. For example, a relatively small
number of securities and other positions that are not marked-to-market
according to accounting standards but whose economic values are functions of
market variables are included in Daily Price Volatility but omitted from the
Corporation's daily profit and loss flows. However, the key information
provided by these diagrams is that the statistical methodology appears to
provide a reasonable picture of the Corporation's exposure to market risk.
24 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 13
The Figure contains three scatter diagrams showing Daily Price Volatility
and P&L pairs that occurred during the year for the Trading and Positioning
function, the total Corporation, and the Client Financial Risk Management
function, respectively. The following are detailed descriptions of each
diagram.
Figure 2A: The Total Corporation - Daily Price Volatility vs. P&L
The Figure displays a scatter diagram of Daily Price Volatility and P&L pairs
that occurred during the year for the Corporation. The diagram is square in
shape with a diagonal line that slopes upward from the left bottom corner to the
right upper corner of the diagram. The horizontal axis shows the Daily Price
Volatility with a range of 0 to 80 million. The vertical axis shows the
absolute values of daily P&L, also with a range of 0 to 80 million. The scatter
plot shows that all points lie below the diagonal, meaning the Daily Price
Volatility is more than the absolute value of the P&L for every observation.
Most points lie substantially below the diagonal, with a concentration occurring
near the horizontal axis at a Daily Price Volatility level of approximately $30
million. Four points lie just below the diagonal; three occur at Daily Price
Volatility levels of approximately $30 million and one occurs at a Daily Price
Volatility Level of approximately $45 million. A second grouping of points
rises from the horizontal axis in a roughly vertical pattern at a Daily Price
Volatility level of approximately $65 million, with the highest point occurring
at a P&L level of approximately $30 million (or roughly halfway between the
horizontal axis and the diagonal at a Daily Price Volatility level of $65
million).
Figure 2B: Trading and Positioning - Daily Price Volatility vs. P&L
The Figure displays a scatter diagram of Daily Price Volatility and P&L pairs
that occurred during the year for the Trading and Positioning function. The
diagram is square in shape with a diagonal line that slopes upward from the left
bottom corner to the right upper corner of the diagram. The horizontal axis
shows the Daily Price Volatility with a range of 0 to 80 million. The vertical
axis shows the absolute values of daily P&L, also with a range of 0 to 80
million. The scatter plot shows that all but 3 points lie below the diagonal,
meaning the Daily Price Volatility is more than the absolute value of that day's
P&L for most points, and that one point lies approximately on the diagonal line
that bisects the diagram. There are two concentrations of points, with both
lying near the horizontal axis. The first occurs at Daily Price Volatilities of
approximately $20 million and contains substantially more points than the second
concentration. The second concentration occurs at a Daily Price Volatility of
approximately $60 million.
Figure 2C: Client Financial Risk Management - Daily Price Volatility vs. P&L
The Figure displays a scatter diagram of Daily Price Volatility and P&L pairs
that occurred during the year for the Client Financial Risk Management
function. The diagram is square in shape with a diagonal line that slopes
upward from the left bottom corner to the right upper corner of the diagram.
The horizontal axis shows the Daily Price Volatility with a range of 0 to 80
million. The vertical axis shows the absolute values of daily P&L, also with a
range of 0 to 80 million. The scatter plot shows that all points lie below
the diagonal, meaning the Daily Price Volatility is more than the absolute
value of the P&L for every observation. Most points lie substantially below the
diagonal, with all but approximately 10 points located in a concentration near
the horizontal axis between Daily Price Volatility levels of $10 and $20
million. Five points lie just below the diagonal, and they are also located
between Daily Price Volatility levels of $10 and $20 million. Approximately
four points have Daily Price Volatility levels above $20 million. These
points occur at Daily Price Volatility levels ranging from $20 to $30 million,
and all of these points lie well below the diagonal line.
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 judgement 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.
RAROC -- Performance Measurement and Capital Adequacy
The Corporation pioneered the development of risk-based capital attribution
processes. The internal risk capital model, RAROC, is integral to the
conceptual framework of management which has as its objective maximizing return
on equity, where risk capital is attributed to a business activity according to
the level of risk it assumes. Risk capital produced 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 to cover any after-tax loss over a one year holding period.
Specifically, if the Corporation maintained absolutely static portfolio
positions for one year from today there would be less than a 1 percent chance
that the portfolio would decline by more than the RAROC risk capital amount
after adjusting for taxes.
Conceptually, RAROC captures the following general classes of risk: market
risk, credit risk and operational risk. Market risk is the potential loss in
economic value due to changes in interest rates, currency, equity and commodity
prices, and volatilities. Contractual commitments of the Firm whose economic
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 economic value of all extensions of credit, on- and
off-balance sheet, by the Corporation. Potential incidents that disrupt normal
business processes or otherwise cause losses are termed operational risks. The
following are examples of operational risks: losses due to personnel
unavailability, malfeasance, or errors; losses due to natural disasters; and
losses that result from the failure of an exchange.
Credit Risk Management
The Credit Policy Department, headed by the Chief Credit Officer, is
responsible for developing credit policies, as well as for monitoring and
managing the 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 issuer, borrower, 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 credit risk usages by entity versus the limits at the
product and business activity level. The Credit Policy Department monitors
country exposures and assigns country risk ratings. It also monitors country,
industry, name/counterparty, product and regional risk concentrations in order
to evaluate the degree of diversification in the portfolio.
RAROC credit capital reflects the exposure of the overall portfolio of the
Corporation to default risk and the translation of this risk into potential
losses using proprietary statistical models. These statistical models
incorporate information on
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 25
<PAGE> 14
the duration of the exposure, the potential magnitude of the exposure, and the
creditworthiness of the borrowers/issuers/counterparties.
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.
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 22 of
Notes to 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 continuous 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 or rates. 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.
Trading derivatives have been carried on the balance sheet at their
current gross fair values since January 1, 1994, in accordance with FIN 39.
Prior to this date, it was industry practice to record such contracts at their
fair values on a net basis. Contracts with positive fair values are now
recorded as assets and contracts with negative fair values are now recorded as
liabilities, after application of qualifying master netting agreements.
Substantially all of the Corporation's derivative positions at December 31,
1994 were trading-related, with gains and losses included in trading revenue as
they occur. These positions may vary in size from period to period, similar to
the positions in cash instruments also carried in the Corporation's trading
accounts. Average trading assets and trading liabilities related to
derivatives during 1994 were $15.443 billion and $13.187 billion, respectively.
The notional amounts of derivatives are not recorded on the balance sheet.
New disclosures of the gross fair values of trading derivatives that are
presented in Note 22 of Notes to Financial Statements in accordance with SFAS
119, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments" 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 OTC markets and exchange-traded options markets for interest
rate, foreign exchange rate, equity and commodity derivatives during the year.
Any measurement of risk is meaningful only where 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.
Following the sharp increase in U.S. interest rates in the first quarter
of 1994, the global cash markets for bonds and equities experienced turbulence
as did the global derivatives markets. As a direct result of this market
volatility, certain customers suffered losses from leveraged derivative
transactions they had entered into with certain subsidiaries of the
Corporation. In the fourth quarter, the Corporation and certain subsidiaries
entered into agreements with its primary state and federal banking regulators
concerning the conduct of their leveraged derivative transactions business.
Also in the fourth quarter, a subsidiary of the Corporation settled (without
admitting or denying liability) actions brought against it by two other U.S.
regulators in connection with the sale of derivatives to a single client. These
events have accelerated ongoing industry and regulatory examination of
derivatives sales practices, and have increased market awareness of derivative
transactions in general. These developments may serve to strengthen the
derivatives industry in the long run. In the short term, however, the events of
the fourth quarter created adverse publicity for the Corporation. The
Corporation cannot predict the future effect on the derivatives business in
general, or the Corporation's derivatives business in particular, of these
events or of the current legislative, regulatory, and media attention being
given to derivatives.
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, investments in
non-marketable equity securities and net investments in foreign subsidiaries.
For example, the Corporation's Treasury
26 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 15
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 24 and Note 22 of Notes to Financial Statements for the fair value of
end-user derivatives and related financial instruments and additional end-user
information. End-user derivatives represented approximately 2 percent of
aggregate notional amounts outstanding at December 31, 1994.
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 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 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 4 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. As shown in
Table 4, 93% of the derivatives-related credit risk at December 31, 1994 was to
investment-grade customers. 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 cost, after netting and collateral, of $10.937
billion more accurately portrays the credit risk associated with the
Corporation's derivatives activities with external customers at December 31,
1994 than does the gross replacement cost.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 27
<PAGE> 16
TABLE 4 DERIVATIVES-RELATED CREDIT RISK
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Replacement Collateral Replacement
Replacement Cost (After Held Cost After
Cost Netting and Netting and
($ in millions) December 31, 1994 (Gross) Agreements) Applied Collateral Percentage
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Internal Rating for Customer
1 to 4 $24,866 $11,685 $1,541 $10,144 93%
5 1,500 951 290 661 6%
6 to 8 323 280 148 132 1%
- ----------------------------------------------------------------------------------------------------------------------------------
Total $26,689(1) $12,916 $1,979 $10,937 100%
==================================================================================================================================
</TABLE>
(1) End-user derivatives and exchange-traded options are not included.
The weighted average remaining maturity of the OTC trading derivatives
portfolio was approximately 2 1/2 years for customers rated 1 to 4, 2 1/3 years
for customers rated 5 and 1 1/2 years for customers rated 6 to 8.
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 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 FIN
39, 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).
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. Charge-offs related to derivative contracts
totaled $77 million during 1994.
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 1994, reflect to some extent the
credit-risk-reducing impact of legally enforceable master netting agreements.
However, these standards reflect the credit risk of derivatives on a
conservative basis, as the calculation of the "add-on" component for potential
future credit risk exposure caused by price volatility does not reflect the
benefit for the reduction of future credit risk obtained from master netting
agreements. At December 31, 1994, the risk-weighted amounts that were
calculated based on these international standards for derivative financial
instruments aggregated to $8.1 billion.
Presented below is a maturity profile of the Corporation's major trading
derivative products. This profile is based upon notional amounts and indicates
the extent of the Corporation's involvement in derivative transactions of
certain maturities. The notional amounts presented in Note 22 of Notes to
Financial Statements, upon which these percentages are based, do not
necessarily represent cash flows and do not represent a quantification of the
market risk or credit risk of these positions.
<TABLE>
<CAPTION>
MATURITY PROFILE OF TRADING DERIVATIVES (1)
Cross Foreign
Remaining Interest Rate Currency Exchange
Maturity at December 31, 1994 Swaps Swaps Forwards(2)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Within 12 months 27% 28% 97%
After 1 but within 3 years 39% 38% 3%
After 3 but within 5 years 20% 18% --%
After 5 years 14% 16% --%
- --------------------------------------------------------------------------------------------------------------
Total 100% 100% 100%
==============================================================================================================
</TABLE>
(1) Based on contractual notional amounts and 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 not reflected above.
(2) Of the total notional amounts of foreign exchange forward contracts, 58
percent mature within 3 months.
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
28 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 17
(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 1994, $520 million of leveraged derivative transactions were
reclassified to the loan portfolio at amounts equal to or less than the
contractual amounts due. These transactions are not included in
Table 4. Prior to the reclassifications, trading revenue of $35 million
related to these transactions was not recognized due to credit concerns. In
the fourth quarter of 1994, $72 million of these leveraged derivative loans
were charged-off to the allowance for credit losses. At December 31, 1994 the
balance included in loans after charge-offs and cash collections was $433
million of which $351 million was classified as cash basis loans.
Approximately one half of these cash basis loans relate to transactions with
Procter & Gamble.
With these transfers and charge-offs, the Corporation has taken action on
those leveraged derivative transactions that likely will not perform according
to the contracts and has charged-off the balances deemed to be uncollectible.
For further information regarding regulatory and legal matters, refer to
"Supervision and Regulation" and "Legal Proceedings" on pages 85 and 87,
respectively.
Further information applicable to derivatives in general may be found in the
following sections:
<TABLE>
<CAPTION>
Relevant Information Page Title
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue by risk category 18 Trading Revenue
Daily Price Volatility,
RAROC and
credit management 23 Risk Management
Risk-weighted amounts 31 Capital Resources
Credit losses 33 Summary of Credit Loss
Experience
Nonperforming amounts 36 Nonperforming Assets
Accounting 48 Significant Accounting
Policies
Balance sheet amounts 50 Trading Assets and Trading
Liabilities
Product descriptions, fair values 66 Derivatives and Financial
and notional amounts Instruments With
Off-Balance Sheet Risk
Significant counterparties 70 Concentrations of Credit Risk
End-user derivatives 70 Fair Value of Financial
Instruments
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Corporation believes that it has sufficient resources to meet the present
and foreseeable needs of its business operations for liquidity and capital
resources, which are discussed separately below.
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 liquidity on a global basis for the Firm as a whole as well as for its
significant legal entities. Management's guiding policy is to maintain
conservative levels of liquidity to ensure that the Firm has the ability to
meet its obligations under all conceivable circumstances. Management maintains
a dual focus to ensure a conservative liquidity position by promoting asset
liquidity and actively managing liability/capital levels, maturities and
diversification. The fundamental objective in this regard is to ensure that,
even in the event of a complete loss of access to the liability markets, the
Corporation will be able to fund those assets that cannot be liquidated in a
timely manner.
Over the past several years the Corporation has continued to improve asset
liquidity and to strengthen its global funding presence. The Corporation has
placed a special emphasis on developing and strengthening funding management,
policies and practices. This has been achieved, in part, by centralizing all
of the Firm's funding into one organizational unit while retaining a funding
presence in local markets globally. Consolidation of the 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.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 29
<PAGE> 18
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. The Corporation
believes it has improved its ability to withstand severe 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 (which approximates the value at which each of these
assets can be liquidated.) These assets include U.S. government and agency
securities, state and municipal securities, foreign government obligations, and
money market instruments, which together constitute the majority of total
trading assets. At December 31, 1994, the Corporation's liquid assets amounted
to $79.0 billion, or 80 percent of gross total assets, up from 77 percent at
December 31, 1993.
In recent years, the Corporation has improved its liquidity by enhancing
asset liquidity and increasing asset turnover. In particular, significant steps
have been made in improving the liquidity of the Firm's loan portfolio through
overall shrinkage of loan assets, improved quality and salability of remaining
loans, strengthening of loan distribution and trading capabilities, and
development of new non-traditional investors for loan risk.
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 to other
transactions or services provided in its Global Assets business. Also, the
Corporation has increased the proportion of active unsecured funding which is
provided by capital and long-term debt. The Corporation's capital and long-term
debt, taken together, have increased by 41 percent since the end of 1992.
One of the Corporation's principal sources of day-to-day funding is
provided by securities sold under repurchase agreements, generally involving
U.S. government and agency securities. Short-term financing is also available
to the Corporation under various commercial paper programs. The Corporation
maintains its own funding team and sales force which place directly with
investors the majority of its purchased funds. This enables the Corporation to
develop and maintain ongoing relationships with a diverse group of investors.
The Corporation had available $500 million of unused committed bank lines at
December 31, 1994, which could be used as back-up facilities for the Parent
Company's commercial paper program or for general purposes. The remainder of
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 at December 31, 1994 totaled
$6.5 billion, substantially all of which was unsecured, and consisted of $3.5
billion in senior borrowings and $3.0 billion of subordinated debt, issued
principally by the Parent Company and Bankers Trust Company ("BTCo."), the
Corporation's principal banking subsidiary. These borrowings mature between
1995 and 2033, as detailed in Note 9 of Notes to Financial Statements.
The following information should be read in conjunction with the
consolidated statement of cash flows, which appears on page 47.
Cash and due from banks increased $235 million for the year ended December
31, 1994, as the net cash provided by operating activities exceeded the net
cash used in investing and financing activities. The $12.2 billion of net cash
provided by operating activities primarily resulted from a $12.2 billion net
change in trading assets and liabilities. Within investing activities, cash
outflows from purchases of securities available for sale ($5.8 billion),
increases in securities borrowed ($3.3 billion), federal funds sold ($2.2
billion) and interest-bearing deposits with banks ($1.8 billion), were
partially offset by cash inflows from sales, maturities and other redemptions
of securities available for sale ($5.1 billion) and a decrease in loans ($3.2
billion). Within financing activities, cash outflows from a net change in
securities sold under repurchase agreements ($8.3 billion) and repayments of
long-term debt ($1.6 billion), were offset in part by issuances of long-term
debt ($2.4 billion) and an increase in deposits ($1.4 billion).
For the year ended December 31, 1993, cash and due from banks increased
$366 million, as the net cash provided by financing activities exceeded the net
cash used in operating and investing activities. The $13.0 billion of net cash
provided by financing activities resulted from net increases of $7.6 billion in
other short-term borrowings and $6.4 billion in securities sold under
repurchase agreements, partially offset by a $2.1 billion decrease in deposits.
The $11.9 billion of net cash used in operating activities primarily resulted
from a $14.6 billion increase in net trading assets, offset in part by $1.5
billion of earnings adjusted for noncash charges and credits. Within investing
activities, cash outflows from purchases of investment securities ($8.1
billion) and from a net change in securities purchased
30 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 19
under resale agreements ($2.9 billion), were offset in part by cash inflows
from sales, maturities and other redemptions of investment securities ($7.6
billion) and a decrease in interest-bearing deposits with banks ($1.4 billion).
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 total stockholders' equity and preferred stock of subsidiary
totaled $4.954 billion on December 31, 1994, up $170 million, or 4 percent,
from year end 1993, which was up $663 million, or 16 percent, from year end
1992. The increase in 1994 was due primarily to net income and the net issuance
of preferred stock, partially offset by $319 million of dividends declared. The
increase in 1993 was primarily attributable to net income, partially offset by
$287 million of dividends declared.
The Corporation's primary measure of capital strength is the RAROC system
which quantifies and assigns capital to business activities based upon their
credit, interest rate, foreign currency, equity, commodity, liquidity and
operating risks. In addition, 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 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.
Under the risk-based capital guidelines, there are two categories of
capital: core capital ("Tier 1") and supplemental capital ("Tier 2"),
collectively referred to as Total Capital. Tier 1 Capital includes common
stockholders' equity, qualifying perpetual preferred stock and minority
interest in equity accounts of consolidated subsidiaries. Tier 2 capital
includes perpetual preferred stock (to the extent ineligible for Tier 1),
hybrid capital instruments (i.e., perpetual debt and mandatory convertible
securities) and limited amounts of subordinated debt, intermediate-term
preferred stock and a portion of the allowance for credit losses.
The Federal Reserve Board's leverage constraint guidelines establish a
minimum ratio of Tier 1 Capital to quarterly average total assets ("Leverage
Ratio").
In accordance with Federal Reserve Board guidelines, the stockholder's
equity ($426 million at December 31, 1994 and $453 million at December 31,
1993) and risk assets of BT Securities Corporation are excluded from the
calculation of the regulatory capital ratios. In computing these ratios, 50
percent of the securities subsidiary's 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 assets
of certain foreign insurance subsidiaries of the Corporation.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") established five capital tiers for banks. Pursuant to that statute,
the federal bank regulatory agencies have defined the five capital tiers for
banks. Under these regulations, a bank is defined to be well capitalized, the
highest tier, 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.
Based on their respective regulatory capital ratios at December 31, 1994,
both BTCo. and Bankers Trust (Delaware) are well capitalized, based on the
definitions in the regulations issued by the Federal Reserve Board and the
other federal bank regulatory agencies setting forth the general capital
requirements mandated by FDICIA.
All three regulatory capital ratios, at both December 31, 1994 and 1993,
excluded any benefit from the adoption of SFAS 115.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 31
<PAGE> 20
Table 5 indicates the regulatory capital ratios of the Corporation and
BTCo. at December 31, 1994 and 1993 and the minimum regulatory guidelines.
TABLE 5 REGULATORY CAPITAL RATIOS
<TABLE>
<CAPTION>
FRB
Minimum
December 31, December 31, Regulatory
1994 1993 Guidelines
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporation
Risk-Based Ratios
Tier 1 Capital 9.05% 8.50% 4.0%
Total Capital 14.77% 14.46% 8.0%
Leverage Ratio 5.26% 6.28% 3.0%
BTCo.
Risk-Based Ratios
Tier 1 Capital 9.92% 9.38% 4.0%
Total Capital 12.90% 12.96% 8.0%
Leverage Ratio 5.91% 6.01% 3.0%
-------------
</TABLE>
The following were the essential components of the Corporation's
risk-based capital ratios at the end of the two most recent years:
<TABLE>
<CAPTION>
(in millions) December 31, 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Tier 1 Capital $ 4,372 $ 4,072
Tier 2 Capital 2,760 2,859
- ------------------------------------------------------------------------------------------
Total Capital $ 7,132 $ 6,931
==========================================================================================
Total risk-weighted assets $48,285 $47,916
==========================================================================================
</TABLE>
TABLE 6 RISK-WEIGHTED ASSETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(in billions) December 31, 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
Balance Balance
sheet/ Risk- sheet/ Risk-
notional weighted notional weighted
amount amounts amount amounts
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks and interest-bearing deposits with banks $ 5.4 $ .9 $ 3.4 $ .6
Federal funds sold and securities purchased under resale agreements 12.5 3.0 9.9 2.2
Securities borrowed 6.2 .2 2.9 --
Trading assets 47.5 11.2 48.3 10.3
Securities available for sale 7.5 4.4 7.1 2.7
Loans 12.5 11.9 15.2 12.7
Allowance for credit losses (1.3) -- (1.3) --
All other assets 6.7 4.4 6.6 5.0
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets 97.0 36.0 92.1 33.5
Less: applicable assets of BT Securities Corporation (1) 15.7 1.8 24.3 1.2
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS $ 81.3 $ 34.2 $ 67.8 $32.3
- ----------------------------------------------------------------------------------------------------------------------------------
OFF-BALANCE SHEET EXPOSURES
Derivatives $1,981.7 $ 8.1 $1,907.2 $ 8.8
Credit-related arrangements 13.2 5.6 15.9 7.2
Securities lending indemnifications 21.0 .3 16.6 .4
When-issued securities and other 10.0 .5 7.5 --
- ----------------------------------------------------------------------------------------------------------------------------------
Total off-balance sheet exposures 2,025.9 14.5 1,947.2 16.4
Less: applicable off-balance sheet exposures of BT Securities
Corporation (1) (87.2) (.2) 24.9 .1
- ----------------------------------------------------------------------------------------------------------------------------------
OFF-BALANCE SHEET EXPOSURES $2,113.1 14.7 $1,922.3 16.3
-------- --------
Less: allowance for credit losses limitation adjustment .6 .7
----- -----
TOTAL RISK-WEIGHTED ASSETS $48.3 $47.9
----------------------- -----
</TABLE>
(1) As well as certain foreign insurance subsidiaries
32 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 21
The Tier 1 Capital and Total Capital ratios increased by 55 basis points
and 31 basis points, respectively, as the increase in capital more than offset
the increase in total risk-weighted assets. The Leverage Ratio decreased by 102
basis points as a result of a 28 percent increase in quarterly average total
assets, primarily due to the adoption of FIN 39. The $300 million increase in
Tier 1 Capital was primarily attributable to the retention of earnings, the
issuance of Series Q and Series R Preferred Stock and the inclusion of net
deferred tax assets which are permissible for regulatory capital, offset in
part by the redemption of Series D Preferred Stock and the Corporation's
previously announced stock repurchase plan. The Corporation's total
risk-weighted assets at December 31, 1994 were $369 million higher than at
year-end 1993.
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. These 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.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 33
<PAGE> 22
TABLE 7 ANALYSIS OF THE ALLOWANCE FOR CREDIT LOSSES
The following table analyzes the changes in the allowance for credit losses.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
($ in millions) Year Ended December 31, 1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR CREDIT LOSSES, BEGINNING OF YEAR $1,324 $1,620 $1,806 $2,169 $2,732
- ----------------------------------------------------------------------------------------------------------------------------------
CHARGE-OFFS
Domestic (nonrefinancing country)
Commercial and industrial 55 64 164 89 110
Financial institutions 11 4 -- 2 --
Real estate
Construction 1 6 3 1 6
Mortgage 23 51 35 22 1
Other -- 1 -- 1 4
International
Nonrefinancing country 77 302 98 152 118
Refinancing country 1 32 43 220 250
- ----------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 168 460 343 487 489
- ----------------------------------------------------------------------------------------------------------------------------------
RECOVERIES
Domestic (nonrefinancing country)
Commercial and industrial 24 19 7 24 28
Financial institutions -- -- -- -- 1
Real estate
Construction 1 -- -- -- --
Mortgage -- 1 1 -- --
Other -- 2 2 -- 1
International
Nonrefinancing country 8 7 16 5 15
Refinancing country 38 42 23 20 12
- ----------------------------------------------------------------------------------------------------------------------------------
Total recoveries 71 71 49 49 57
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL NET CHARGE-OFFS (1) 97 389 294 438 432
LOSSES ON SALES AND SWAPS OF REFINANCING COUNTRY LOANS -- -- 117 163 325
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL NET CHARGES TO THE ALLOWANCE 97 389 411 601 757
PROVISION FOR CREDIT LOSSES 25 93 225 238 194
- ----------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR CREDIT LOSSES, END OF YEAR $1,252 $1,324 $1,620 $1,806 $2,169
==================================================================================================================================
PERCENTAGE OF TOTAL NET CHARGES TO AVERAGE LOANS FOR THE YEAR .78% 2.54% 2.45% 3.15% 3.57%
==================================================================================================================================
(1) Components:
Secured by real estate $ 24 $ 116 $ 71 $ 61 $ 17
Real estate related 23 3 27 40 11
Highly leveraged (5) 15 117 63 126
Other 92 265 59 74 40
Refinancing country (37) (10) 20 200 238
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 97 $ 389 $ 294 $ 438 $ 432
==================================================================================================================================
</TABLE>
34 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 23
Provision and Allowance for Credit Losses
The provision for credit losses amounted to $25 million for 1994, compared with
$93 million for 1993 and $225 million in 1992. In 1991, the provision for
credit losses totaled $238 million, an increase of $44 million from 1990.
Total net charge-offs for 1994 were $97 million, compared with $389
million in the prior year and $294 million during 1992. Nonrefinancing country
net charge-offs for 1994 were $134 million and included $72 million related to
certain leveraged derivative contracts that were reclassified as receivables to
the loan portfolio and subsequently charged-off. Nonrefinancing country net
charge-offs also included $47 million of real estate loans and $5 million of
net recoveries from highly leveraged borrowers. For 1993, nonrefinancing
country net charge-offs were $399 million and included charge-offs of $221
million which resulted from the sale of Mexican government Par and Discount
Bonds and industrial development bonds, as well as the loss on revaluation to
market value of the remainder of these bonds as a result of their designation
as securities available for sale in connection with the adoption of SFAS 115 at
December 31, 1993. Net charge-offs of $119 million of real estate loans and $15
million of loans to highly leveraged borrowers were also recorded during 1993.
The Corporation recorded $37 million and $10 million of refinancing country net
recoveries in 1994 and 1993, respectively.
The allowance for credit losses decreased to $1.252 billion at December
31, 1994, from $1.324 billion at year-end 1993 and $1.620 billion at December
31, 1992. The allowance was equal to 126 percent, 136 percent and 118 percent
of total cash basis loans at December 31, 1994, 1993 and 1992, respectively.
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. The allowance for credit losses is available for credit losses in
the entire portfolio which is comprised of loans, credit-related commitments,
derivatives and other financial instruments. Therefore, the Corporation
believes that the allowance must be viewed in its entirety.
<TABLE>
<CAPTION>
(in millions) December 31, 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic
Commercial and industrial $ 133 $ 115 $ 162 $ 147 $ 148
Financial institutions 20 8 19 32 32
Real estate
Construction 5 15 10 10 3
Mortgage 54 65 50 60 28
Other 2 1 4 12 15
- ------------------------------------------------------------------------------------------------------------------------
Total domestic 214 204 245 261 226
International 266 190 403 599 1,112
- ------------------------------------------------------------------------------------------------------------------------
Total allocated 480 394 648 860 1,338
Unallocated portion*
Domestic 402 599 368 347 195
International 370 331 604 599 636
- ------------------------------------------------------------------------------------------------------------------------
Total allowance for
credit losses $1,252 $1,324 $1,620 $1,806 $2,169
========================================================================================================================
</TABLE>
* This amount and any unabsorbed portion of the allocated allowance is also
available for credit losses in the entire portfolio.
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:
<TABLE>
<CAPTION>
(in millions)
Year Ended December 31, 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $521 $1,007 $1,198 $1,748 $2,495
- ------------------------------------------------------------------------------------------------------------------------
Net charge-offs
Charge-offs 78 334 141 372 368
Recoveries 46 49 39 25 27
- ------------------------------------------------------------------------------------------------------------------------
Total net charge-offs 32 285 102 347 341
Losses on sales and swaps of
refinancing country loans - - 117 163 325
- ------------------------------------------------------------------------------------------------------------------------
Total net charges to
the allowance 32 285 219 510 666
Provision for credit losses 11 40 61 148 112
Reallocation (to) from
domestic allowance 136 (241) (33) (188) (193)
- ------------------------------------------------------------------------------------------------------------------------
Balance, end of year $636 $ 521 $1,007 $1,198 $1,748
========================================================================================================================
</TABLE>
The $136 million reallocation during 1994 from the domestic to the
international component of the allowance for credit losses, as well as the 1993
reallocation of $241 million from the international to the domestic component
of the allowance for credit losses, was based on the continuing evaluation of
the Corporation's overall credit portfolio. During 1993, the reduction in the
international allowance was primarily attributable to the sale of Mexican
government Par and Discount Bonds and the designation of the remainder of these
bonds, as well as certain Brazilian government bonds, as securities available
for sale.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 35
<PAGE> 24
NONPERFORMING ASSETS
Table 8 shows the Corporation's trend of cash basis loans, renegotiated loans,
other real estate and other nonperforming assets.
TABLE 8 NONPERFORMING ASSETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
($ in millions) December 31, 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash basis loans (nonrefinancing country)
Domestic
Commercial and industrial $316 $285 $ 481 $ 588 $ 550
Secured by real estate 277 306 349 403 314
Financial institutions 25 30 2 3 4
Lease financing -- -- 1 3 2
- ------------------------------------------------------------------------------------------------------------------------
Total domestic 618 621 833 997 870
- ------------------------------------------------------------------------------------------------------------------------
International
Commercial and industrial 247 84 167 288 261
Secured by real estate 79 149 148 172 87
Financial institutions 48 -- -- 5 --
Other 2 2 8 9 24
- ------------------------------------------------------------------------------------------------------------------------
Total international 376 235 323 474 372
- ------------------------------------------------------------------------------------------------------------------------
Total cash basis loans (nonrefinancing
country) 994 856 1,156 1,471 1,242
Cash basis loans (refinancing country)
International 2 118 221 279 522
- ------------------------------------------------------------------------------------------------------------------------
Total cash basis loans $996 $974 $1,377 $1,750 $1,764
========================================================================================================================
Ratio of cash basis loans to total loans 8.0% 6.4% 8.0% 10.3% 8.2%
========================================================================================================================
Ratio of allowance for credit losses to cash
basis loans 126% 136% 118% 103% 123%
========================================================================================================================
Renegotiated loans
Venezuelan government Par Bonds $ -- $ -- $ -- $ 249 $ 249
Mexican government Par Bonds (1) -- -- 611 611 611
Highly leveraged -- 6 27 31 --
Secured by real estate 65 14 20 -- --
Other nonrefinancing country 1 1 1 -- --
- ------------------------------------------------------------------------------------------------------------------------
Total renegotiated loans $ 66 $ 21 $ 659 $ 891 $ 860
========================================================================================================================
Other real estate $301 $287 $ 315 $ 255 $ 92
========================================================================================================================
Other nonperforming assets
Assets acquired in credit workouts $ 61 $ 85 $ 73 $ 34 $ --
Nonperforming derivative contracts 2 16 26 21 4
Other -- -- 6 7 28
- ------------------------------------------------------------------------------------------------------------------------
Total other nonperforming assets $ 63 $101 $ 105 $ 62 $ 32
========================================================================================================================
Loans 90 days or more past due and still
accruing interest (2) $ -- $ 40 $ 86 $ 15 $ --
========================================================================================================================
</TABLE>
(1) During 1991, the Corporation reclassified its Mexican outstandings to
nonrefinancing country status.
(2) Represents loans 90 days or more past due with respect to interest or
principal. These loans were well secured and in the process of collection.
The December 31, 1993 and 1992 balances includes $15 million and $66
million of international loans, respectively.
36 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 25
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 examined to determine whether it
represents a potential loss. Whenever the probability of loss is believed to be
greater than 50 percent, an immediate charge-off of the amount deemed
uncollectible is recorded. The remaining portion, if any, is immediately placed
on a cash basis, even if the borrower is still making required payments. 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 doubtful. It is the Corporation's policy to place all assets
classified 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 $996 million at
December 31, 1994, an increase of $22 million, or 2 percent, from 1993, which
had decreased $403 million, or 29 percent, from 1992. The nonrefinancing
country component of total cash basis loans increased by $138 million during
1994, while the refinancing country component decreased by $116 million.
Nonrefinancing country cash basis loans increased during 1994, primarily due to
$423 million of leveraged derivative contracts that were reclassified as
receivables to the loan portfolio and placed on a cash basis. Of this amount,
$72 million was subsequently charged-off to the allowance for credit losses.
Approximately one half of the remainder related to transactions with Procter &
Gamble, which company, along with other counterparties, have made various
claims against the Corporation in connection with various leveraged derivative
transactions. With these transfers and charge-offs, the Corporation has taken
action on those leveraged derivative transactions that likely will not perform
according to the contracts and has charged-off the balances deemed to be
uncollectible. However, there can be no assurance that there will not be other
such actions or claims in the future. Within total nonrefinancing country cash
basis loans, loans secured by real estate decreased $99 million, to $356
million and real estate related loans (included within the domestic commercial
and industrial category in Table 8) decreased by $29 million, to $29 million.
Also included in total nonrefinancing country cash basis loans were commercial
and industrial loans to highly leveraged borrowers which decreased $43 million,
to $150 million at December 31, 1994. The decrease in refinancing country cash
basis loans was primarily due to the conversion of loans to Brady bonds when a
debt exchange took place between the Brazilian government and its commercial
bank creditors, including the Corporation, which completed the long-awaited
refinancing of Brazil's medium- and long-term debt.
An analysis of the changes in the Corporation's total cash basis loans
follows:
<TABLE>
<CAPTION>
(in millions)
Year Ended December 31, 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $974 $1,377 $1,750 $1,764 $1,351
Net transfers to cash basis loans 520 230 312 849 1,119
Net paydowns (130) (140) (112) (182) (210)
Charge-offs (163) (232) (322) (479) (406)
Transfers to other real estate (72) (10) (87) (159) (72)
Transfers to other
nonperforming assets (7) (58) (45) (4) --
Loan sales (49) (153) (50) (26) (37)
Other (77) (40) (69) (13) 19
- ------------------------------------------------------------------------------------------------------------------------
Balance, end of year $996 $ 974 $1,377 $1,750 $1,764
========================================================================================================================
</TABLE>
The $403 million decrease in total cash basis loans during 1993 reflected
a $300 million decrease in nonrefinancing country cash basis loans and a $103
million decrease in refinancing country cash basis loans. Within total
nonrefinancing country cash basis loans were commercial and industrial loans to
highly leveraged borrowers of $193 million and $430 million at December 31,
1993 and 1992, respectively. The $237 million decrease in this category
resulted primarily from the combination of $94 million of loan sales and
conversions of $58 million of loans to equity interests (resulting in
reclassifications from cash basis loans to assets acquired in credit workouts).
Also within nonrefinancing country cash basis loans, loans secured by real
estate decreased $42 million, to $455 million and real estate related loans
(mainly included within the domestic commercial and industrial category in
Table 8) decreased by $25 million, to $58 million. The decrease in refinancing
country cash basis loans was primarily due to $35 million of loan sales, $32
million of charge-offs and a $30 million transfer of Brazilian sovereign bonds
to securities available for sale in connection with the adoption of SFAS 115.
At December 31, 1993 and 1992, all of the Corporation's refinancing country
cash basis loans were to Brazilian borrowers.
The Corporation's renegotiated loans increased $45 million during 1994,
primarily due to the $51 million increase in loans secured by real estate.
Renegotiated loans declined $638 million during 1993, due almost entirely to
the sale of $225 million of Mexican government Par Bonds and the transfer of
the balance of the bonds to securities available for sale upon adoption of SFAS
115.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 37
<PAGE> 26
SPECIAL PORTFOLIO SEGMENTS
REAL ESTATE PORTFOLIO
The global real estate loan portfolio totaled $1.7 billion at December 31,
1994. This included domestic loans secured by real estate of $1.360 billion,
international loans secured by real estate of $140 million, and total real
estate related loans of $200 million. The largest geographic concentration
within loans secured by real estate was in properties in the Mid-Atlantic
region, at 48 percent, of which New York City and its suburbs comprised
approximately 61 percent. The next largest geographic concentrations were loans
secured by properties in California, which comprised 12 percent and New
England, which comprised 8 percent of the total. The largest product-type
concentrations were loans secured by office buildings, 1-4 family residential
properties, mixed-use properties and retail properties at 21 percent, 16
percent, 15 percent and 14 percent, respectively. All other concentrations
within this total were individually less than 10 percent of total loans secured
by real estate. 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 $445 million of standby
letters of credit and $105 million of unused commitments to extend credit in
connection with its commercial real estate financing activities at December 31,
1994.
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 9 details the global real estate
portfolio at December 31, 1994.
TABLE 9 REAL ESTATE LOANS AND OTHER REAL ESTATE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Outstanding Balance
-------------------------------------------------
Inter- Cash Basis
(in millions) December 31, 1994 Domestic national Total Balance
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans secured by real estate
Land under development $ 32 $ 2 $ 34 $ 28
Construction
Under construction 43 - 43 1
In lease-up (1) 159 - 159 19
Standing (2)
1-4 family residential 215 32 247 17
Multifamily residential 102 1 103 7
Commercial 809 105 914(3) 284
- ------------------------------------------------------------------------------------------------------------------------
Total loans secured by real estate 1,360 140 1,500 356
Real estate related loans 190 10 200 29
- ------------------------------------------------------------------------------------------------------------------------
Total real estate loans $1,550 $150 $1,700 $385
========================================================================================================================
Other real estate $ 196 $105 $ 301
====================================================================================================
</TABLE>
(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 $65 million of renegotiated loans.
38 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 27
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 an 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 10 HIGHLY LEVERAGED TRANSACTIONS
<TABLE>
<CAPTION>
(in millions) December 31, 1994 1993
- ----------------------------------------------------------------------
<S> <C> <C>
Loans
Senior debt $ 959 $1,314
Subordinated debt 101 126
- ----------------------------------------------------------------------
Total loans $1,060 $1,440
======================================================================
Unfunded commitments
Commitments to lend $ 311 $ 603
Letters of credit 198 201
- ----------------------------------------------------------------------
Total unfunded commitments $ 509 $ 804
======================================================================
Equity investments $ 413 $ 477
======================================================================
Commitments to invest $ 313 $ 127
======================================================================
</TABLE>
The Corporation's outstanding loans were to 76 separate borrowers in 30
separate industry groups at December 31, 1994, compared to 105 separate
borrowers in 35 separate industry groups at December 31, 1993. The industrial
machinery group, at 18 percent, and the processed food and beverage group, at
13 percent, were the only industry concentrations which exceeded 10 percent of
total HLT loans outstanding at December 31, 1994.
In addition to the amounts shown in Table 10, at December 31, 1994, the
Corporation had issued commitment letters which had been accepted, subject to
documentation and certain other conditions, of $550 million (which were in
various stages of syndication) and had additional HLTs in various stages of
discussion and negotiation.
During 1994, 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 for the portfolio at December 31, 1994 was less than
$14 million. However, at December 31, 1994, the Corporation had total exposure
(loans outstanding plus unfunded commitments) in excess of $50 million to 8
separate highly leveraged borrowers.
At December 31, 1994, $150 million of the HLT loan portfolio was on a cash
basis. In addition, $10 million of the equity investments in HLT companies
represented assets acquired in credit workouts, which are reported as other
nonperforming assets. Net recoveries of $5 million of HLT loans were recorded
in 1994. In addition, the Corporation recorded a net gain of $80 million in
connection with the sales and/or write-offs of certain equity investments in
highly leveraged companies during 1994.
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
$103 million during 1994 and that as of December 31, 1994, approximately $16
million of fees were deferred and will be recognized as future revenue.
During the first quarter of 1994, the Corporation transferred
approximately $238 million of outstanding loans to highly leveraged borrowers
from its loan portfolio to trading. None of the loans were classified as
nonperforming assets at the time of transfer. These and other trading assets
have been excluded from the Corporation's HLT outstandings at December 31, 1994
as reported above. No significant impact on earnings was recorded as a result
of this transfer.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 39
<PAGE> 28
CROSS-BORDER OUTSTANDINGS
The Corporation's cross-border outstandings reflect certain economic and
political risks which differ from those associated with its domestic
outstandings. These risks include those arising from exchange rate
fluctuations, restrictions on the transfer of funds and balance-of-payments
issues.
Set forth in Table 11 are the Corporation's cross-border outstandings at
December 31, 1994, 1993 and 1992, for each foreign country where such
outstandings exceeded one percent of total assets. The cross-border
outstandings were compiled based upon category and domicile of ultimate risk
and are comprised of balances with banks, trading securities, securities
available for sale, securities purchased under resale agreements, loans,
accrued interest receivable, acceptances outstanding and investments with
foreign entities. The amounts outstanding for each country exclude local
currency outstandings to the extent funded in local currency.
TABLE 11 CROSS-BORDER OUTSTANDINGS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Governments Banks and
% of and Other Commercial
Total Total Official Financial and
($ in millions) Outstandings Assets Institutions Institutions Industrial Other
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1994
Japan $4,661 4.80% $1,911 $2,267 $483 $ --
United Kingdom 1,960 2.02 26 1,787 145 2
Italy 1,574 1.62 1,039 449 86 --
France 1,559 1.61 105 1,091 363 --
Germany 1,424 1.47 585 698 140 1
Mexico (1) 1,416 1.46 509 801 106 --
Argentina (1) 1,072 1.10 912 22 138 --
Spain 1,035 1.07 628 374 32 1
- ------------------------------------------------------------------------------------------------------------------------
At December 31, 1993
Japan $3,986 4.33% $1,368 $1,920 $698 $ --
France 2,630 2.86 1,248 1,167 215 --
United Kingdom 2,585 2.81 32 2,396 153 4
Italy 2,178 2.37 1,807 299 72 --
Mexico 1,641 1.78 1,226 314 101 --
Germany 1,623 1.76 981 348 294 --
Spain 1,135 1.23 849 195 90 1
- ------------------------------------------------------------------------------------------------------------------------
At December 31, 1992
Japan $2,886 3.96% $ 236 $2,373 $277 $ --
France 2,105 2.89 686 1,189 230 --
Germany 1,647 2.26 998 597 52 --
Mexico 1,470 2.02 1,138 327 5 --
Switzerland 1,080 1.48 -- 1,074 3 3
United Kingdom 903 1.24 45 660 193 5
Australia 892 1.22 279 571 42 --
Italy 843 1.16 340 476 27 --
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) At December 31, 1994, the Corporation's Mexican cross-border outstandings
primarily consisted of trading assets carried at fair value and securities
purchased under resale agreements. The Argentine cross-border outstandings
consisted primarily of trading assets carried at fair value.
40 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 29
Governments and official institutions are comprised of foreign governments
and their agencies; state, provincial and local governments and their agencies;
and central banks. Banks and other financial institutions are comprised of
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 11.
<TABLE>
<CAPTION>
Cash Basis Renegotiated
(in millions) Loans Loans
- ----------------------------------------------------------------------
<S> <C> <C>
AT DECEMBER 31, 1994
United Kingdom $11 $ --
Other 27 --
- ----------------------------------------------------------------------
Total $38 $ --
======================================================================
At December 31, 1993
United Kingdom $10 $ --
Other 10 --
- ----------------------------------------------------------------------
Total $20 $ --
======================================================================
At December 31, 1992
Mexico (1) $-- $537
United Kingdom 18 --
Other 17 --
- ----------------------------------------------------------------------
Total $35 $537
======================================================================
</TABLE>
(1) At December 31, 1992, renegotiated loans excluded $74 million representing
the market value of U.S. Treasury securities collateralizing Mexican
government Par Bonds. During 1993, $225 million of these Par Bonds were
sold; the rest were transferred to securities available for sale.
At December 31, 1994, total cross-border commitments to borrowers or
counterparties domiciled in the countries presented in Table 11 were: Japan,
$62 million; United Kingdom, $289 million; Italy, $6 million; France, $72
million; Germany, $140 million; Mexico, $2 million; Argentina, $51 million; and
Spain, $27 million.
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 .99 percent of total assets. Argentina was the only country whose
cross-border outstanding was between .75 percent and 1.00 percent of total
assets at December 31, 1993. The aggregate cross-border outstandings for this
country amounted to $845 million, or .92 percent of total assets. There were no
countries whose cross-border outstandings were between .75 percent and 1.00
percent of total assets at December 31, 1992.
ACCOUNTING DEVELOPMENTS
The following is a summary of accounting pronouncements not yet adopted that
will impact the Corporation.
LOAN IMPAIRMENT
In May 1993, the FASB issued SFAS 114, "Accounting by Creditors for Impairment
of a Loan" as amended in October 1994 by SFAS 118, "Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosures." SFAS 114, as
amended, is effective for fiscal years beginning after December 15, 1994, with
earlier adoption permissible. 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. 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.
The Corporation adopted SFAS 114 on January 1, 1995. However, adoption of
this standard at December 31, 1994 would only have resulted in an allocation of
a portion of the existing allowance for credit losses to a specific valuation
allowance for impaired loans, with no resulting impact on the Corporation's net
income, stockholders' equity or total assets.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 41
<PAGE> 30
42 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 31
FINANCIAL REPORTS SECTION
<TABLE>
<S> <C>
FINANCIAL STATEMENTS
Consolidated Statement of Income 44
Consolidated Balance Sheet 45
Consolidated Statement of Changes in Stockholders' Equity 46
Consolidated Statement of Cash Flows 47
Notes to Financial Statements 48
MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING 77
REPORT OF INDEPENDENT AUDITORS 78
SUPPLEMENTAL FINANCIAL DATA
Condensed Quarterly Consolidated Statement of Income 79
Stockholder Data 79
Average Balances, Interest and Average Rates 80
Volume/Rate Analysis of Changes in Net Interest Revenue 82
Interest Rate Sensitivity 83
Deposits 83
</TABLE>
10-K REPORT
This Annual Report includes the Corporation's SEC Report on Form 10-K. However,
portions of the Annual Report, such as pages 2-13, are not required by the Form
10-K report and are not part of the Corporation's Form 10-K. Only those
sections of the Annual Report referenced in the cross-reference index on page
90 are incorporated in the Form 10-K.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 43
<PAGE> 32
CONSOLIDATED STATEMENT OF INCOME (in millions, except per share data)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INTEREST REVENUE
Interest revenue $5,030 $4,436 $4,219
Interest expense 3,858 3,122 3,072
- -------------------------------------------------------------------------------------------------------------------------
NET INTEREST REVENUE 1,172 1,314 1,147
Provision for credit losses 25 93 225
- -------------------------------------------------------------------------------------------------------------------------
NET INTEREST REVENUE AFTER PROVISION FOR CREDIT LOSSES 1,147 1,221 922
- -------------------------------------------------------------------------------------------------------------------------
NONINTEREST REVENUE
Trading 465 1,631 896
Fiduciary and funds management 740 703 648
Fees and commissions 756 710 588
Securities available for sale gains 72 -- --
Investment securities gains (losses) -- 13 (4)
Other 440 307 203
- -------------------------------------------------------------------------------------------------------------------------
Total noninterest revenue 2,473 3,364 2,331
- -------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
Salaries 774 687 630
Incentive compensation and employee benefits 724 1,172 730
Occupancy, net 146 155 151
Furniture and equipment 163 144 132
Other 944 877 704
- -------------------------------------------------------------------------------------------------------------------------
Total noninterest expenses 2,751 3,035 2,347
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effects of
accounting changes 869 1,550 906
Income taxes 254 480 267
- -------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECTS OF ACCOUNTING CHANGES 615 1,070 639
Cumulative effects of accounting changes -- (75) 446
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 615 $ 995 $1,085
=========================================================================================================================
NET INCOME APPLICABLE TO COMMON STOCK $ 587 $ 972 $1,055
=========================================================================================================================
PRIMARY EARNINGS PER COMMON SHARE:
INCOME BEFORE CUMULATIVE EFFECTS OF ACCOUNTING CHANGES $ 7.17 $12.40 $ 7.23
Cumulative effects of accounting changes -- (.89) 5.30
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 7.17 $11.51 $12.53
=========================================================================================================================
FULLY DILUTED EARNINGS PER COMMON SHARE:
INCOME BEFORE CUMULATIVE EFFECTS OF ACCOUNTING CHANGES $ 7.17 $12.29 $ 7.22
Cumulative effects of accounting changes -- (.88) 5.29
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 7.17 $11.41 $12.51
=========================================================================================================================
Cash dividends declared per common share $ 3.70 $ 3.24 $ 2.88
=========================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
44 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 33
CONSOLIDATED BALANCE SHEET ($ in millions, except par value)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
December 31, 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,985 $ 1,750
Interest-bearing deposits with banks 3,390 1,638
Federal funds sold 2,544 361
Securities purchased under resale agreements 9,943 9,567
Securities borrowed 6,197 2,937
Trading assets 47,514 48,276
Securities available for sale 7,475 7,073
Loans 12,501 15,200
Allowance for credit losses (1,252) (1,324)
Premises and equipment, net 915 719
Due from customers on acceptances 378 455
Accounts receivable and accrued interest 2,356 2,561
Other assets 3,070 2,869
- -----------------------------------------------------------------------------------------------------
Total $97,016 $92,082
=====================================================================================================
LIABILITIES
Deposits
Noninterest-bearing
In domestic offices $ 3,285 $ 3,185
In foreign offices 541 707
Interest-bearing
In domestic offices 5,769 7,120
In foreign offices 15,344 11,764
- -----------------------------------------------------------------------------------------------------
Total deposits 24,939 22,776
Trading liabilities 20,949 9,349
Securities sold under repurchase agreements 15,617 23,834
Other short-term borrowings 18,222 18,992
Acceptances outstanding 378 455
Accounts payable and accrued expenses 3,174 3,771
Other liabilities 2,328 2,524
Long-term debt 6,455 5,597
- -----------------------------------------------------------------------------------------------------
Total liabilities 92,062 87,298
- -----------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Notes 7 and 22)
PREFERRED STOCK OF SUBSIDIARY 250 250
- -----------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock 395 250
Common stock, $1 par value
Authorized, 300,000,000 shares
Issued 83,678,973 shares 84 84
Capital surplus 1,317 1,321
Retained earnings 3,494 3,226
Common stock in treasury, at cost: 1994, 5,609,707 shares;
1993, 3,076,439 shares (416) (233)
Other (170) (114)
- -----------------------------------------------------------------------------------------------------
Total stockholders' equity 4,704 4,534
- -----------------------------------------------------------------------------------------------------
Total $97,016 $92,082
=====================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 45
<PAGE> 34
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (in millions)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCK
Balance, beginning of year $ 250 $ 500 $ 500
Preferred stock issued 350 -- --
Preferred stock redeemed (205) (250) --
- -------------------------------------------------------------------------------------------------------------------------
Balance, end of year 395 250 500
- -------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
Balance, beginning of year 84 84 83
Common stock issued under employee benefit plans -- -- 1
- -------------------------------------------------------------------------------------------------------------------------
Balance, end of year 84 84 84
- -------------------------------------------------------------------------------------------------------------------------
CAPITAL SURPLUS
Balance, beginning of year 1,321 1,306 1,262
Preferred stock and other issuance costs (8) -- (4)
Common stock issued or distributed under employee benefit plans 4 15 48
- -------------------------------------------------------------------------------------------------------------------------
Balance, end of year 1,317 1,321 1,306
- -------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance, beginning of year 3,226 2,552 1,743
Net income 615 995 1,085
Cash dividends declared
Preferred stock (28) (22) (30)
Common stock (291) (265) (238)
Treasury stock distributed under employee benefit plans (28) (34) (8)
- --------------------------------------------------------------------------------------------------------------------------
Balance, end of year 3,494 3,226 2,552
- -------------------------------------------------------------------------------------------------------------------------
COMMON STOCK IN TREASURY, AT COST
Balance, beginning of year (233) (52) (20)
Purchases of stock (267) (313) (106)
Restricted stock granted, net 50 16 29
Treasury stock distributed under employee benefit plans 34 116 45
- -------------------------------------------------------------------------------------------------------------------------
Balance, end of year (416) (233) (52)
- -------------------------------------------------------------------------------------------------------------------------
COMMON STOCK ISSUABLE -- STOCK AWARDS
Balance, beginning of year 143 53 42
Deferred stock awards granted, net 18 100 27
Deferred stock distributed (1) (10) (16)
- -------------------------------------------------------------------------------------------------------------------------
Balance, end of year 160 143 53
- -------------------------------------------------------------------------------------------------------------------------
DEFERRED COMPENSATION -- STOCK AWARDS
Balance, beginning of year (47) (54) (46)
Deferred stock awards granted, net (17) (99) (26)
Restricted stock granted, net (40) (18) (34)
Amortization of deferred compensation, net 41 124 52
- -------------------------------------------------------------------------------------------------------------------------
Balance, end of year (63) (47) (54)
- -------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TRANSLATION ADJUSTMENTS
Balance, beginning of year (319) (288) (169)
Translation adjustments (76) (36) (93)
Income taxes applicable to translation adjustments 59 5 (26)
- -------------------------------------------------------------------------------------------------------------------------
Balance, end of year (336) (319) (288)
- -------------------------------------------------------------------------------------------------------------------------
SECURITIES VALUATION ALLOWANCE
Balance, beginning of year 109 20 17
Change in unrealized net gains, after applicable income
taxes and minority interest (40) 1 3
Unrealized net gain, net of applicable income taxes,
on securities available for sale upon adoption of SFAS 115 -- 88 --
- -------------------------------------------------------------------------------------------------------------------------
Balance, end of year 69 109 20
- -------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity, end of year $4,704 $4,534 $4,121
=========================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
46 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 35
CONSOLIDATED STATEMENT OF CASH FLOWS (in millions)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 615 $ 995 $ 1,085
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Cumulative effects of accounting changes -- 75 (446)
Provision for credit losses 25 93 225
Provision for policyholder benefits 205 140 120
Deferred income taxes (141) (37) 67
Depreciation and amortization of premises and equipment 128 107 98
Other, net (86) 111 (25)
- -------------------------------------------------------------------------------------------------------------------------
Earnings adjusted for noncash charges and credits 746 1,484 1,124
Net change in:
Trading assets 1,003 (18,904) (7,472)
Trading liabilities 11,220 4,342 1,588
Receivables and payables from securities transactions (516) 1,096 (616)
Other operating assets and liabilities, net (150) 100 933
Securities available for sale gains (72) -- --
Investment securities (gains) losses -- (13) 4
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 12,231 (11,895) (4,439)
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in:
Interest-bearing deposits with banks (1,791) 1,422 881
Federal funds sold (2,183) 77 (419)
Securities purchased under resale agreements (127) (2,909) (1,971)
Securities borrowed (3,260) 229 --
Loans 3,225 1,191 (916)
Securities available for sale:
Purchases (5,830) -- --
Maturities and other redemptions 2,947 -- --
Sales 2,201 -- --
Investment securities:
Purchases -- (8,128) (6,639)
Maturities and other redemptions -- 6,462 5,256
Sales -- 1,134 1,195
Acquisitions of premises and equipment (292) (179) (137)
Other, net (68) (65) (445)
- -------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (5,178) (766) (3,195)
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in:
Deposits 1,426 (2,059) 2,655
Securities sold under repurchase agreements (8,297) 6,416 4,907
Other short-term borrowings (393) 7,555 (1,031)
Issuances of long-term debt 2,411 2,220 2,041
Repayments of long-term debt (1,615) (711) (1,157)
Issuance of preferred stock of subsidiary -- 247 --
Issuances of preferred stock 342 -- --
Redemptions of preferred stock (205) (250) --
Issuance of common stock -- -- 27
Purchases of treasury stock (267) (313) (106)
Cash dividends paid (322) (281) (262)
Other, net 23 200 213
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (6,897) 13,024 7,287
- -------------------------------------------------------------------------------------------------------------------------
Net effect of exchange rate changes on cash 79 3 (16)
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 235 366 (363)
Cash and due from banks, beginning of year 1,750 1,384 1,747
- -------------------------------------------------------------------------------------------------------------------------
Cash and due from banks, end of year $ 1,985 $ 1,750 $ 1,384
=========================================================================================================================
Interest paid $ 3,737 $ 3,098 $ 3,079
=========================================================================================================================
Income taxes paid, net $ 216 $ 144 $ 142
=========================================================================================================================
Noncash investing activities:
Conversions of loans to other real estate and assets acquired in
credit workouts $ 73 $ 68 $ 132
Exchanges of Chilean government bonds for annuity contracts 91 89 48
Other 32 -- 24
- -------------------------------------------------------------------------------------------------------------------------
Total noncash investing activities $ 196 $ 157 $ 204
=========================================================================================================================
Noncash financing activity: exchange of series preferred stock $ -- $ -- $ 45
=========================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 47
<PAGE> 36
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
The following are the significant accounting policies of Bankers Trust New York
Corporation and its subsidiaries (the "Corporation"). These policies conform
with generally accepted accounting principles and prevailing industry
practices, as applicable to 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 generally
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, monitors their fair value and
requests additional collateral when deemed appropriate.
During the fourth quarter of 1994, the Corporation adopted FIN 41,
"Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase
Agreements." FIN 41 allows the netting, under certain circumstances, of certain
repurchase and reverse repurchase agreements. It was the Corporation's former
policy to record such transactions on a gross basis on the balance sheet. As
the result of this adoption, at December 31, 1994, the Corporation's
consolidated total assets and total liabilities each decreased by approximately
$500 million.
Securities borrowed 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 assets or available for
sale at the date of acquisition.
Debt and equity securities, as well as money market instruments which are
classified as trading assets and 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. 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.
Gains and losses resulting from these positions are included in trading
revenue.
On January 1, 1994, the Corporation adopted FIN 39, "Offsetting of Amounts
Related to Certain Contracts." FIN 39 requires that unrealized gains and losses
on swaps, forwards, options and similar contracts be recognized as assets and
liabilities, except where such gains and losses arise from contracts covered by
qualifying master netting agreements. It was the Corporation's former policy to
record such unrealized gains and losses on a net basis on the balance sheet. As
the result of this adoption, at December 31, 1994, the Corporation's
consolidated total assets and total liabilities each increased by approximately
$12 billion.
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, currency and other market risks arising
from a number of categories of its assets and liabilities. 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
48 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 37
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 spot exchange rates, are recorded in stockholders' equity as
cumulative translation adjustments.
Cash Basis Loans, Renegotiated Loans, Other Real Estate and Other
Nonperforming Assets
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 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 workouts, either
formally or through in-substance foreclosure, 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 is comprised of 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.
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; regular examinations and evaluations of the
quality of the portfolio by the Credit Audit Department and by the bank
regulatory authorities; the actual loss experience and the level of the
allowance.
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 improvement, whichever are shorter. Maintenance
and repairs are charged to expense and improvements are capitalized. Gains and
losses on dispositions are 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 included in other noninterest revenue.
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 provision for benefits is included in
other noninterest expenses.
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.
Deferred Stock Awards
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.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 49
<PAGE> 38
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.
NOTE 2 -- CHANGES IN ACCOUNTING PRINCIPLES
During the fourth quarter of 1994, the Corporation adopted FIN 41, "Offsetting
of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements."
FIN 41 allows the netting, under certain circumstances, of certain repurchase
and reverse repurchase agreements. It was the Corporation's former policy to
record such transactions on a gross basis on the balance sheet. As the result
of this adoption, at December 31, 1994, the Corporation's consolidated total
assets and total liabilities each decreased by approximately $500 million.
On January 1, 1994, the Corporation adopted FIN 39, "Offsetting of Amounts
Related to Certain Contracts." FIN 39 requires that unrealized gains and losses
on swaps, forwards, options and similar contracts be recognized as assets and
liabilities, except where such gains and losses arise from contracts covered by
qualifying master netting agreements. It was the Corporation's former policy to
record such unrealized gains and losses on a net basis on the balance sheet. As
the result of this adoption, at December 31, 1994, the Corporation's
consolidated total assets and total liabilities each increased by approximately
$12 billion.
Effective December 31, 1993, the Corporation adopted SFAS 115, "Accounting
For Certain Investments in Debt and Equity Securities." As the result of this
adoption, the Corporation recorded a credit of $145 million ($88 million on an
after-tax basis) in stockholders' equity as securities valuation allowance. The
adoption of SFAS 115 had no effect on net income.
On January 1, 1993, the Corporation adopted SFAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" and SFAS 112,
"Employers' Accounting for Postemployment Benefits." As the result of this
adoption, the Corporation recorded charges of $100 million and $7 million,
respectively, (or $70 million and $5 million, respectively, net of income
taxes) as the cumulative effects of these changes in accounting principles.
Effective January 1, 1992, the Corporation adopted SFAS 109, "Accounting
for Income Taxes." The adoption of SFAS 109, resulted in a $324 million upward
restatement of consolidated net income for 1992. This amount consisted of a
$446 million credit recorded as the cumulative effect of the accounting change
and a $122 million increase in income taxes.
NOTE 3 -- TRADING ASSETS AND TRADING LIABILITIES
The components of these accounts, which are carried at fair value, were as
follows:
<TABLE>
<CAPTION>
(in millions) December 31, 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TRADING ASSETS
U.S. government and agency securities $10,974 $19,648
Obligations of U.S. states and political subdivisions 179 494
Foreign government securities 8,359 13,229
Corporate debt securities 5,571 5,565
Equity securities 3,850 3,804
Bankers acceptances and certificates of deposit 1,316 2,178
Swaps, options and other derivative contracts (1) 14,071 732
Other 3,194 2,626
- -------------------------------------------------------------------------------------------------------------------------------
Total trading assets $47,514 $48,276
===============================================================================================================================
TRADING LIABILITIES
Securities sold, not yet purchased
U.S. government and agency securities $ 4,159 $ 4,023
Foreign government securities 2,751 3,099
Equity securities 2,298 1,644
Other 174 583
Swaps, options and other derivative contracts (1) 11,567 --
- -------------------------------------------------------------------------------------------------------------------------------
Total trading liabilities $20,949 $ 9,349
===============================================================================================================================
</TABLE>
(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 FIN 39, at
December 31, 1994. At December 31, 1993, prior to the adoption of FIN 39,
the Corporation's policy was to record the unrealized gains and losses on
these contracts on a net basis.
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.
50 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 39
NOTE 4 -- SECURITIES AVAILABLE FOR SALE; INVESTMENT SECURITIES
The fair value, amortized cost, and gross unrealized holding gains and losses
for the Corporation's securities available for sale follow:
<TABLE>
<CAPTION>
(in millions) December 31, 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Unrealized Holding Unrealized Holding
Fair --------------------- Amortized Fair ------------------ Amortized
Value Gains (Losses) Cost Value Gains (Losses) Cost
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities
U.S. government and agencies $ 893 $ 8 $ (19) $ 904 $1,091 $ 33 $ (36) $1,094
States of the U.S. and
political subdivisions 2,249 75 (46) 2,220 1,561 125 (59) 1,495
Asset-backed 1,447 4 (4) 1,447 1,105 3 -- 1,102
Foreign governments 1,469 37 (11) 1,443 1,305 17 -- 1,288
Corporate debt 1,000 21 (14) 993 1,667 32 (30) 1,665
Equity securities 417 125 (7) 299 344 98 (8) 254
- ---------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $7,475 $270 $(101) $7,306 $7,073 $308 $(133) $6,898
=================================================================================================================================
</TABLE>
Except for U.S. government and agencies, 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, 1994.
The components of securities available for sale gains (losses) as reported
in the consolidated statement of income follow:
<TABLE>
<CAPTION>
(in millions) Year Ended December 31, 1994
- ----------------------------------------------------------------------------
<S> <C>
Debt securities -- gross realized gains $ 43
Debt securities -- gross realized losses (39)
Equity securities -- net realized gains 68
- ----------------------------------------------------------------------------
Total securities available for sale gains $ 72
============================================================================
</TABLE>
The components of investment securities gains (losses) as reported in the
consolidated statement of income follow:
<TABLE>
<CAPTION>
(in millions) Year Ended December 31, 1993 1992
- ----------------------------------------------------------------------------
<S> <C> <C>
Debt securities -- gross realized gains $ 7 $ 8
Debt securities -- gross realized losses (5) (28)
Equity securities -- net realized gains 11 16
- ----------------------------------------------------------------------------
Total investment securities gains (losses) $ 13 $ (4)
============================================================================
</TABLE>
The Corporation's investment securities' book value and market value (or
estimated market value for certain investment securities where no market
quotations were available), including gross unrealized gains and losses follow:
<TABLE>
<CAPTION>
(in millions) December 31, 1992
- ------------------------------------------------------------------------------------------
Gross Unrealized
Book -------------------- Market
Value Gains (Losses) Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 569 $ 5 $ -- $ 574
-- portion carried at market 44 -- -- 44
U.S. government agencies and corporations 883 20 (1) 902
-- portion carried at market 65 -- -- 65
States of the U.S. and political
subdivisions 1,312 77 (1) 1,388
Other bonds, notes, debentures and
redeemable preferred stock 2,526 8 (9) 2,525
-- portion carried at market 639 -- -- 639
Federal Reserve Bank and other corporate
stock 73 1 (1) 73
-- portion carried at market 104 -- -- 104
- ------------------------------------------------------------------------------------------
Total investment securities $6,215 $111 $(12) $6,314
==========================================================================================
</TABLE>
The following table shows the fair value, remaining maturities,
approximate weighted average yields (not on a fully taxable basis) and total
amortized cost by maturity distribution of the debt components of the
Corporation's securities available for sale at December 31, 1994.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Maturity Distribution
----------------------------------------------------------------------------------------------------
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years Total
- ------------------------------------------------------------------------------------------------------------------------------------
($ in millions) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and agencies $ 223 4.14% $ 670 5.44% $ -- --% $ -- --% $ 893 5.12%
States of the U.S. and
political subdivisions 559 8.46 593 6.51 510 5.83 587 6.71 2,249 6.89
Asset-backed securities 30 5.87 878 6.21 514 6.34 25 6.45 1,447 6.25
Foreign government securities 439 7.51 597 8.88 281 6.33 152 6.53 1,469 7.74
Corporate debt 119 6.39 599 6.30 226 7.74 56 7.44 1,000 6.70
- -----------------------------------------------------------------------------------------------------------------------------------
Total fair value $1,370 $3,337 $1,531 $820 $7,058
====================================== ====== ====== ==== ======
Total amortized cost $1,350 $3,339 $1,516 $802 $7,007
====================================== ====== ====== ==== ======
</TABLE>
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 51
<PAGE> 40
NOTE 5 -- LOANS
The following table summarizes the composition of loans at the end of each of
the last five years:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
($ in millions) December 31, 1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic
Commercial and industrial $ 2,218 18% $ 2,794 18% $ 3,727 21% $ 4,074 24% $ 5,111 24%
Financial institutions 2,221 17 3,210 21 4,544 26 3,020 18 3,701 17
Real estate
Construction 234 2 245 2 261 2 405 2 484 2
Mortgage 1,126 9 1,550 10 1,625 9 1,499 9 1,677 8
Other 1,044 8 1,780 12 1,312 8 1,247 7 1,715 8
- ----------------------------------------------------------------------------------------------------------------------------------
Total domestic 6,843 54 9,579 63 11,469 66 10,245 60 12,688 59
- ----------------------------------------------------------------------------------------------------------------------------------
International
Governments and official
institutions 184 2 456 3 1,316 8 1,709 10 2,297 11
Banks and other financial
institutions 2,994 24 1,935 12 1,076 6 973 5 1,752 8
Commercial and industrial 1,428 11 1,721 11 1,930 11 2,409 14 3,097 14
Real estate
Construction 2 -- 2 -- 18 -- 161 1 209 1
Mortgage 138 1 261 2 394 2 465 3 430 2
Other 1,014 8 1,346 9 1,212 7 1,175 7 1,107 5
- ----------------------------------------------------------------------------------------------------------------------------------
Total international 5,760 46 5,721 37 5,946 34 6,892 40 8,892 41
- ----------------------------------------------------------------------------------------------------------------------------------
Gross loans 12,603 100% 15,300 100% 17,415 100% 17,137 100% 21,580 100%
=== === === === ===
Less, unearned income 102 100 97 90 106
- --------------------------------------- ------- ------- ------- -------
Total loans $12,501 $15,200 $17,318 $17,047 $21,474
======================================= ======= ======= ======= =======
</TABLE>
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,
1994.
The following table shows certain maturity information for the
Corporation's loans at December 31, 1994, excluding 1-4 family mortgages,
installment loans and lease financing:
<TABLE>
<CAPTION>
Remaining Maturity
- ----------------------------------------------------------------------
Within After one After
one but within five
(in millions) year five years years Total
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Domestic
Commercial and industrial $ 682 $1,321 $ 215 $ 2,218
Financial institutions 2,173 41 7 2,221
Real estate
Construction 83 151 - 234
Mortgage 543 318 50 911
Other 765 28 - 793
- ----------------------------------------------------------------------
Total domestic 4,246 1,859 272 6,377
International 4,222 611 767 5,600
- ----------------------------------------------------------------------
Total $8,468 $2,470 $1,039 $11,977
======================================================================
Loans due after one year
With predetermined interest
rates $ 445 $ 753
======================================================================
With floating or adjustable
interest rates $2,025 $ 286
======================================================================
</TABLE>
Cash Basis Loans and Renegotiated Loans
The Corporation's cash basis loans and renegotiated loans are summarized as
follows:
<TABLE>
<CAPTION>
(in millions) December 31, 1994 1993
- ----------------------------------------------------------------------
<S> <C> <C>
Cash basis loans
Domestic $618 $621
International 378 353
- ----------------------------------------------------------------------
Total cash basis loans $996 $974
======================================================================
Renegotiated loans
Domestic $ 66 $ 21
International -- --
- ----------------------------------------------------------------------
Total renegotiated loans $ 66 $ 21
======================================================================
</TABLE>
At December 31, 1994 and 1993, the Corporation had commitments to make
additional loans to borrowers on a cash basis or renegotiated status of $4
million and $29 million, respectively.
52 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 41
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.
<TABLE>
<CAPTION>
(in millions) Year Ended December 31, 1994 1993 1992
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Domestic loans
Gross amount of interest that would
have been recorded at original rate $52 $56 $ 82
Less, interest, net of reversals,
recognized in interest revenue 3 8 18
- ---------------------------------------------------------------------
Reduction of interest revenue 49 48 64
- ---------------------------------------------------------------------
International loans
Gross amount of interest that would
have been recorded at original rate 27 29 95
Less, interest, net of reversals,
recognized in interest revenue 4 22 108
- ---------------------------------------------------------------------
Reduction of (Increase in) interest revenue 23 7 (13)
- ---------------------------------------------------------------------
Total reduction of interest revenue $72 $55 $ 51
=====================================================================
</TABLE>
In May 1993, the FASB issued SFAS 114, "Accounting by Creditors for
Impairment of a Loan" as amended in October 1994 by SFAS 118, "Accounting by
Creditors for Impairment of a Loan -- Income Recognition and Disclosures." SFAS
114, as amended, is effective for fiscal years beginning after December 15,
1994, with earlier adoption permissible. 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. 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.
The Corporation adopted SFAS 114 on January 1, 1995. However, adoption of
this standard at December 31, 1994 would only have resulted in an allocation of
a portion of the existing allowance for credit losses to a specific valuation
allowance for impaired loans, with no resulting impact on the Corporation's net
income, stockholders' equity or total assets.
NOTE 6 -- ALLOWANCE FOR CREDIT LOSSES
An analysis of the changes in the Corporation's allowance for credit losses
follows:
<TABLE>
<CAPTION>
(in millions) Year Ended December 31, 1994 1993 1992
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $1,324 $1,620 $1,806
- ---------------------------------------------------------------------
Net charge-offs
Charge-offs 168 460 343
Recoveries 71 71 49
- ---------------------------------------------------------------------
Total net charge-offs 97 389 294
Losses on sales and swaps of
refinancing country loans -- -- 117
- ---------------------------------------------------------------------
Total net charges to the allowance 97 389 411
Provision for credit losses 25 93 225
- ---------------------------------------------------------------------
Balance, end of year $1,252 $1,324 $1,620
=====================================================================
</TABLE>
NOTE 7 -- PREMISES AND EQUIPMENT; LEASES
An analysis of premises and equipment follows:
<TABLE>
<CAPTION>
(in millions) December 31, 1994 1993
- ---------------------------------------------------------------------
<S> <C> <C>
Land $ 73 $ 70
Buildings 313 211
Leasehold improvements 311 263
Furniture and equipment 908 737
Property leased under capital leases
Land and buildings 76 76
Equipment 3 2
Construction-in-progress 24 19
- ---------------------------------------------------------------------
Total 1,708 1,378
Less, accumulated depreciation and amortization 793 659
- ---------------------------------------------------------------------
Net book value $ 915 $ 719
=====================================================================
</TABLE>
Included in accumulated depreciation and amortization was accumulated
amortization related to capitalized leases of $26 million and $25 million at
December 31, 1994 and 1993, respectively.
The Corporation is a lessee under lease agreements covering real property
and equipment. Certain leases contain purchase or bargain renewal options. The
future minimum lease payments required under the Corporation's capital leases
and the present value of such payments at the end of 1994 were as follows:
<TABLE>
<CAPTION>
(in millions) December 31, 1994
- ---------------------------------------------------------------------
<S> <C>
1995 $ 7
1996 7
1997 7
1998 7
1999 7
2000 and later 93
- ---------------------------------------------------------------------
Total minimum lease payments 128*
Less, amount representing interest 60
- ---------------------------------------------------------------------
Total present value of minimum lease payments 68
Less, loans to lessors of certain leased premises 63
- ---------------------------------------------------------------------
Obligations under capital leases, net $ 5
=====================================================================
</TABLE>
* Net minimum lease payments were $103 million after deducting minimum
non-cancelable sublease rentals of $25 million.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 53
<PAGE> 42
The future minimum lease payments required under the Corporation's
noncancelable operating leases at the end of 1994 were as follows:
<TABLE>
<CAPTION>
(in millions) December 31, 1994
- ---------------------------------------------------------------------
<S> <C>
1995 $ 58
1996 54
1997 50
1998 47
1999 48
2000 and later 196
- ---------------------------------------------------------------------
Total minimum lease payments $453*
=====================================================================
</TABLE>
* Net minimum lease payments were $445 million after deducting minimum
noncancelable sublease rentals of $8 million.
The following shows the net rental expense for all operating leases:
<TABLE>
<CAPTION>
(in millions) Year Ended December 31, 1994 1993 1992
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Gross rental expense $87 $87 $95
Less, sublease rental income 9 9 14
- ---------------------------------------------------------------------
Net rental expense $78 $78 $81
=====================================================================
</TABLE>
NOTE 8 -- SECURITIES SOLD UNDER REPURCHASE
AGREEMENTS AND OTHER SHORT-TERM BORROWINGS
Short-term borrowings are borrowed funds generally with an original maturity of
one year or less. Debt instruments which contain a provision for early
redemption, exercisable at the option of the security holder, are classified on
the basis of the earliest possible redemption date.
Securities sold under repurchase agreements and federal funds purchased
generally mature in one day; commercial paper generally matures within 90 days.
The details of these borrowings for the years 1994, 1993 and 1992 are
presented below:
<TABLE>
<CAPTION>
($ in millions) 1994 1993 1992
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Securities sold under repurchase agreements
Balance at year end $15,617 $23,834 $17,451
Average amount outstanding 21,814 23,772 20,241
Maximum amount outstanding at
any month end 28,409 28,575 26,540
Average interest rate for the year 4.20% 3.64% 4.03%
Average interest rate on year-end balance 5.34% 3.59% 3.27%
Federal funds purchased
Balance at year end $ 3,463 $ 5,242 $ 2,926
Average amount outstanding 2,908 2,674 2,686
Maximum amount outstanding at
any month end 6,742 5,719 5,254
Average interest rate for the year 3.37% 2.49% 3.12%
Average interest rate on year-end balance 4.60% 2.50% 1.83%
Commercial paper
Balance at year end $ 8,009 $ 7,156 $ 5,001
Average amount outstanding 7,387 5,415 4,494
Maximum amount outstanding at
any month end 9,378 7,156 5,367
Average interest rate for the year 4.59% 3.65% 5.01%
Average interest rate on year-end balance 5.38% 3.47% 4.07%
Other
Balance at year end $ 6,750 $ 6,594 $ 3,852
Average amount outstanding 6,961 4,628 3,851
Maximum amount outstanding at
any month end 7,832 6,594 4,281
Average interest rate for the year 6.57% 7.39% 8.20%
Average interest rate on year-end balance 6.27% 5.76% 7.05%
- ----------------------------------------------------------------------
</TABLE>
The Parent Company had standby lines of credit amounting to $500 million
at December 31, 1994 with banks other than its subsidiaries to support its
commercial paper outstanding. It has never been necessary for the Parent
Company to activate these lines of credit.
54 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 43
NOTE 9 -- LONG-TERM DEBT
Long-term debt is summarized as follows, based on the contractual terms of each
issue:
<TABLE>
<CAPTION>
Fixed Rate Floating Rate Dec. 31, Dec. 31,
-------------------- -------------------- 1994 1993
(in millions) Senior Subordinated Senior Subordinated Total Total
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Parent Company
Due in 1994 $ -- $ -- $ -- $ -- $ -- $ 150
Due in 1995 300 -- 155 -- 455 419
Due in 1996 599 150 10 -- 759 761
Due in 1997 -- 199 211 -- 410 201
Due in 1998 100 -- 67 -- 167 130
Due in 1999 -- 100 59 150 309 395
Due in 2000-2004 14 982 23 398 1,417 1,531
Thereafter -- 390 -- 81 471 344
- -------------------------------------------------------------------------------------------
Total $1,013 $1,821 $ 525 $629 $3,988 $3,931
- -------------------------------------------------------------------------------------------
BTCo.
Due in 1994 $ -- $ -- $ -- $ -- $ -- $ 598
Due in 1995 -- 100 388 -- 488 341
Due in 1996 -- -- 845 -- 845 40
Due in 1997 -- 24 263 -- 287 86
Due in 1998 -- 26 71 -- 97 135
Due in 1999 -- 7 108 -- 115 104
Due in 2000-2004 19 25 118 -- 162 75
Thereafter -- 8 71 -- 79 14
- -------------------------------------------------------------------------------------------
Total $ 19 $ 190 $1,864 $ -- $2,073 $1,393
- -------------------------------------------------------------------------------------------
BT Securities Corporation
Variable Rate Subordinated Notes due Feb. 1997 to Nov. 1999
($63 million at fixed rate at Dec. 1994) $ 319 $ 162
Bankers Trust (Delaware)
Zero Coupon Bank Notes due June 1994 to Dec. 1996 75 87
Other Subsidiaries -- 24
- -------------------------------------------------------------------------------------------
Total long-term debt $6,455 $5,597
===========================================================================================
</TABLE>
Based solely on the contractual terms of the debt issues, at December 31,
1994 and 1993 the Corporation's total fixed rate long-term debt had a weighted
average interest rate of 7.26 percent and 7.50 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.
The weighted average effective interest rates for total long-term debt,
including the effects of the related swap agreements, were 6.23 percent and
3.58 percent at December 31, 1994 and 1993, respectively.
Certain debt securities 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 bank regulations governing capital
adequacy. In this regard, at December 31, 1994 and 1993, the Parent Company had
dedicated $598 million and $473 million, respectively, of net proceeds from
such issuances.
At December 31, 1994, the Parent Company had outstanding two issues of
Convertible Capital Securities due 2033 and totaling $250 million. These are
subordinated debt securities which under certain circumstances can be converted
into Parent Company preferred stock. See Note 11 for additional information.
The payment of principal and interest on a BTCo. $100 million issue of
Subordinated Notes due March 1995 is unconditionally guaranteed on a
subordinated basis by the Parent Company. The notes were issued during 1992 as
part of an offering of Preferred Purchase Units. See Note 11 for additional
information.
NOTE 10 -- 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 year ended December 31, 1994 and 1993, the
composite average dividend rates on the four series of BTOF Preferred were 4.32
percent and 3.20 percent, respectively. At December 31, 1994 and 1993, the
composite average dividend rates were 6.44 percent and 3.41 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 exer-
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 55
<PAGE> 44
cise 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 $100,000 per share. The Exchange Preferred
Stock has terms identical to the BTOF Preferred, except that the Parent Company
can redeem the Exchange Preferred in whole or in part, the dividend periods are
generally 49 days and the maximum rate for any dividend period under no
circumstances will exceed 24 percent per annum.
NOTE 11 -- PREFERRED STOCK
SERIES PREFERRED STOCK
The Parent Company is authorized to issue 10 million shares of Series Preferred
Stock, without par value. All shares of Series Preferred Stock constitute one
and the same class and have equal rank and priority over common stockholders as
to dividends and in the event of liquidation. Each series of Series Preferred
Stock has a liquidation preference per share (as indicated below), plus accrued
and unpaid dividends, as well as contingent voting rights. The Series Preferred
Stock outstandings were as follows:
<TABLE>
<CAPTION>
($ in millions) December 31, 1994 1993
- ----------------------------------------------------------------------
<S> <C> <C>
Series D, Outstanding: 4,105,550 shares $ -- $205
Series J, Outstanding: 447,225 shares 45 45
Series Q, Outstanding: 80,000 shares 200 --
Series R, Outstanding: 60,000 shares 150 --
- ----------------------------------------------------------------------
Total preferred stock $395 $250
======================================================================
</TABLE>
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 12 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. After the exchange, there remained outstanding 4,105,550 shares, or
$205,277,500 liquidation value, of the Series D. On September 1, 1994, the
Corporation redeemed its Fixed/Adjustable Rate Cumulative Preferred Stock,
Series D.
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 percentage 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 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. On that same date, the
Purchase Contracts required the purchase, at a price of $25 per share, of 4
million depositary shares, 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").
56 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 45
Dividends on the Series I are cumulative and payable quarterly, 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.
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 10 for a more detailed discussion of this agreement.
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 are subordinated and
can 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. The Parent Company, at
its option, may reset at any time the interest rate on the 7 5/8% Convertible
Capital Securities to a rate of 6 1/8 percent per annum. As previously
announced, the Corporation has opted to reset the interest rate to 6 1/8
percent per annum effective March 1, 1995. Holders now have 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").
On March 1, 1995, approximately 5.8 million depositary receipts were
issued 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 $144
million.
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 on or before June 1,
1998 and thereafter at $250 per 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 are subordinated and
can 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. The Parent
Company, at its option, may reset at any time the interest rate on the 7.50%
Convertible Capital Securities to a rate of 6.00 percent per annum. As
previously announced, the Corporation has opted to reset the interest rate to
6.00 percent per annum effective May 15, 1995. Holders now have 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").
Dividends on the Series P, when and if issued, will be 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, when and if
issued, will be redeemable at the Parent Company's option, in whole or in part,
at $1,200 per share on or before August 15, 1998 and thereafter at $1,000 per
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"). 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.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 57
<PAGE> 46
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"). 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.
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.
NOTE 12 -- 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.
58 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 47
NOTE 13 -- COMMON STOCK
The purposes and number of shares of common stock issued, distributed from
treasury and purchased for treasury during 1994, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1994 1993 1992
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Common shares outstanding,
beginning of year 80,602,534 82,873,988 82,418,670
- ---------------------------------------------------------------------------
Shares issued or distributed under
Employee Benefit Plans:
1976 Stock Option Plan 3,000 9,376 37,787
1985 Stock Option and
Stock Award Plan
Stock options 144,769 869,966 977,504
Restricted stock awards, net (12,619) (25,664) (45,258)
Deferred stock awards 15,829 204,827 392,917
1991 Stock Option and
Stock Award Plan
Stock options 274,864 591,776 191,772
Restricted stock awards, net (5,298) 231,671 564,966
Deferred stock awards 7,459 -- --
1994 Stock Option and
Stock Award Plan
Stock options -- -- --
Restricted stock awards, net 661,400 -- --
Deferred stock awards -- -- --
- ---------------------------------------------------------------------------
Total shares issued or distributed 1,089,404 1,881,952 2,119,688
Shares purchased for treasury (3,622,672) (4,153,406) (1,664,370)
- ---------------------------------------------------------------------------
Common shares outstanding,
end of year 78,069,266 80,602,534 82,873,988
===========================================================================
</TABLE>
At December 31, 1994, common stock was reserved for issuance or
distribution as follows:
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------
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 14,338,600
1991 Stock Option and Stock Award Plan 6,971,290
1985 Stock Option and Stock Award Plan 2,504,571
1976 Stock Option and Stock Award Plan 911,312
- ---------------------------------------------------------------------------
Total 29,512,652
===========================================================================
</TABLE>
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 common 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. The
Corporation currently intends to satisfy the awards to be granted under the
1994 Stock Option and Stock Award Plan and prior Stock Option and Stock Award
Plans with treasury shares acquired through open market purchases and may
purchase up to 4 million shares during the remainder of 1995 and the first
quarter of 1996 for this purpose.
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.
Stock appreciation rights ("SARs") entitled their holders, at the
discretion of the Committee, to receive cash or stock equal to the excess of
the fair market value on the date of exercise over the related option price.
The exercise of SARs reduced the stock options otherwise exercisable;
similarly, the exercise of stock options canceled the corresponding SARs. The
Committee may permit delivery of the Parent Company's common shares already
owned by the optionee in payment for the exercise of a stock option.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 59
<PAGE> 48
The following is a summary of stock option and SAR transactions which
occurred during 1992, 1993 and 1994:
<TABLE>
<CAPTION>
Option Price
Options SARs Per Share
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1991 4,959,503 16,927 $19.75 - $60.9375
Granted 1,806,000 -- 56.75 - 64.2813
Exercised (1,207,063) (8,397) 19.75 - 54.125
Cancelled (87,397) (2,166)
- ---------------------------------------------------------------
December 31, 1992 5,471,043 6,364 19.75 - 64.2813
Granted 2,132,000 -- 70.4375 - 80.75
Exercised (1,471,118) (2,491) 19.75 - 56.75
Cancelled (39,991) (3,873)
- ---------------------------------------------------------------
December 31, 1993 6,091,934 -- 19.75 - 80.75
- ---------------------------------------------------------------
Granted 2,448,000 -- 27.0625 - 80.75
Exercised (422,633) -- 67.0625 - 70.25
Cancelled (314,653) -- 19.75 - 70.4375
- ---------------------------------------------------------------
December 31, 1994 7,802,648 -- 27.0625 - 80.75
===============================================================
Exercisable at:
December 31, 1993 3,969,934 --
===============================================================
December 31, 1994 5,358,148 --
===============================================================
</TABLE>
For options outstanding at December 31, 1994 and 1993, the average option
price per share was $62.34 and $58.77, respectively, and the range of
expiration dates was 1995 through 2004 and 1994 through 2003, respectively.
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 three years. The restriction period was generally
five years, prior to October 15, 1991. At that time all previously issued
restricted stock grants were given vesting dates of their original date or
October 15, 1994, whichever was earlier. 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 stock, the amount of which
is determined by a formula based on the Corporation's financial performance
during a specific year. Beginning in 1992, awards vest immediately at the end
of the performance year but are not distributed until after a specified
deferral period, generally five years after the performance year. Also, during
the deferral period, the 1994, 1993 and 1992 awards earn the equivalent of
earnings per common share ("EPS"). Of these earnings, the portion equal to the
current per share dividend is paid out currently in cash and the balance (EPS
less cash dividends) is reinvested into additional deferred stock, but will not
vest until the end of such deferral period. Prior to 1992, deferred stock
awards, including the reinvestment of dividend equivalents, generally did not
vest or become distributable until after four years from the date of award. At
December 31, 1994 and 1993, there were deferred stock awards outstanding of
2,223,232 shares and 1,944,977 shares, respectively. These amounts represent
the common stock issuable included in the calculations of the Corporation's
book value per common share at those dates.
After providing for stock options granted, restricted stock awards and
deferred stock awards, there were 11,601,183 shares under the 1994 Plan at
December 31, 1994 and 942,276 shares under the 1991 Plan at December 31, 1993,
available for future grant.
NOTE 14 -- 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 $622 million and $180 million at December
31, 1994 and 1993, respectively. For the years 1994 and 1993, the average
required reserve balances of these banks amounted to $243 million and $214
million, respectively.
Assets, principally securities available for sale, of approximately $6.495
billion at December 31, 1994 were pledged as collateral for borrowings, to
secure public and trust deposits, 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 capital and
surplus, as defined, 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
1995 without approval of the regulatory authorities of $1.036 billion of its
retained earnings at December 31, 1994, plus an additional amount equal to net
profits, as defined, for 1995 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.
60 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 49
NOTE 15 -- INTEREST REVENUE AND INTEREST EXPENSE
The following are the components of interest revenue and interest expense:
<TABLE>
<CAPTION>
(in millions) Year Ended December 31, 1994 1993 1992
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST REVENUE
Trading assets $2,930 $2,413 $1,686
Loans 876 884 1,076
Interest-bearing deposits with banks 124 214 287
Federal funds sold 31 22 27
Securities purchased under resale
agreements 468 381 624
Securities borrowed 211 127 --
Securities available for sale
Taxable 312 -- --
Exempt from federal income taxes 78 -- --
Investment securities
Taxable -- 329 465
Exempt from federal income taxes -- 66 54
- ---------------------------------------------------------------------------
Total interest revenue 5,030 4,436 4,219
- ---------------------------------------------------------------------------
INTEREST EXPENSE
Deposits
In domestic offices 268 218 281
In foreign offices 696 795 838
Trading liabilities 807 424 301
Securities sold under repurchase
agreements 917 865 816
Other short-term borrowings 894 606 625
Long-term debt 276 214 211
- ---------------------------------------------------------------------------
Total interest expense 3,858 3,122 3,072
- ---------------------------------------------------------------------------
Net interest revenue $1,172 $1,314 $1,147
===========================================================================
</TABLE>
NOTE 16 -- TRADING REVENUE; FEES AND COMMISSIONS;
OTHER NONINTEREST REVENUE
The following are the components of trading revenue, fees and commissions and
other noninterest revenue:
<TABLE>
<CAPTION>
(in millions) Year Ended December 31, 1994 1993 1992
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
TRADING REVENUE(1)
Trading $519 $1,440 $565
Foreign exchange trading (54) 191 331
- ---------------------------------------------------------------------------
Total trading revenue $465 $1,631 $896
===========================================================================
FEES AND COMMISSIONS
Corporate finance fees $431 $ 407 $326
Service charges on deposit accounts 84 90 81
Acceptances and letters of credit
commissions 44 50 52
Other 197 163 129
- ---------------------------------------------------------------------------
Total fees and commissions $756 $ 710 $588
===========================================================================
OTHER NONINTEREST REVENUE
Insurance premiums $183 $ 124 $110
Net revenue from equity investment
transactions, including write-offs 109 126 13
Other 148 57 80
- ---------------------------------------------------------------------------
Total other noninterest revenue $440 $ 307 $203
===========================================================================
</TABLE>
(1) The 1994 and 1993 trading revenue can be broken down by major category of
market risk. For 1994, the interest rate risk, foreign exchange risk and
equity and commodity risk was $278 million, $(54) million and $241 million,
respectively. For 1993, the interest rate risk, foreign exchange risk and
equity and commodity risk was $1.066 billion, $191 million and $374
million, respectively.
NOTE 17 -- OTHER NONINTEREST EXPENSES
The following are the components of other noninterest expenses:
<TABLE>
<CAPTION>
(in millions) Year Ended December 31, 1994 1993 1992
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for policyholder benefits $205 $140 $120
Fees for professional services 151 149 121
Telecommunications 114 91 80
Agency personnel fees 117 88 63
Travel and entertainment 99 85 70
Service bureaus 76 40 37
Other 182 284 213
- ---------------------------------------------------------------------------
Total other noninterest expenses $944 $877 $704
===========================================================================
</TABLE>
NOTE 18 -- PENSION AND OTHER EMPLOYEE BENEFIT 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.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 61
<PAGE> 50
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 March 31, 1992, a foreign defined benefit plan was changed for
most employees to a defined contribution plan, on a prospective basis. As a
result of this change, the Corporation recognized a $15 million partial pension
curtailment gain in other noninterest revenue.
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 1994, 1993 and 1992 included the following components:
<TABLE>
<CAPTION>
(in millions) 1994 1993 1992
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Principal defined benefit plans
(domestic and foreign)
Service cost -- benefits earned $ 23 $ 20 $ 20
Interest cost on projected benefit
obligations 37 33 34
Actual return on plan assets 6 (89) (39)
Net amortization and deferral (73) 23 (29)
- ---------------------------------------------------------------------------
Total (7) (13) (14)
Defined contribution plans 10 12 12
Other plans 2 4 2
- ---------------------------------------------------------------------------
Pension expense $ 5 $ 3 $ --
===========================================================================
</TABLE>
The actuarial assumptions used for the principal domestic defined benefit
plan were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate in determining expense 7.25% 8.00% 8.00%
Discount rate in determining benefit
obligations at year end 8.75% 7.25% 8.00%
Rate of increase in future compensation
levels for determining expense 5.00% 5.00% 6.00%
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%
</TABLE>
At year end 1994, the effect of changing the discount rate from 7.25% to
8.75% was to decrease the projected benefit obligation, accumulated benefit
obligation and vested benefit obligation by $85 million, $64 million and $62
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.
At year end 1993, the effect of changing the discount rate from 8.00% to
7.25% was to increase the projected benefit obligation, accumulated benefit
obligation and vested benefit obligation by $44 million, $26 million and $23
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:
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
- ---------------------------------------------------------------------------------------
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Accumulated Benefits
(in millions) Benefits Exceed Assets Benefits Exceed Assets
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value
of benefit obligations:
Vested benefit obligations $(339) $(19) $(350) $(21)
=======================================================================================
Accumulated benefit
obligations $(351) $(20) $(377) $(22)
=======================================================================================
Projected benefit obligations $(418) $(21) $(471) $(25)
Plan assets at fair value 674 1 717 3
- ---------------------------------------------------------------------------------------
Funded status 256 (20) 246 (22)
Unrecognized net (assets)
obligations (35) 2 (40) 2
Unrecognized prior service cost 20 -- 10 --
Unrecognized net (gain) loss (106) 3 (88) 5
Additional minimum liability -- (4) -- (4)
- ---------------------------------------------------------------------------------------
Prepaid (accrued) pension cost $135 $(19) $ 128 $(19)
=======================================================================================
</TABLE>
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.
On January 1, 1993, the Corporation adopted SFAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" and immediately
recognized its entire net transition obligation, by recording a charge of $100
million ($70 million on an after-tax basis) as the cumulative effect of this
change in accounting principle. SFAS 106 requires the use of actuarial-basis
accrual accounting for all employer-provided postretirement benefits other than
pensions.
62 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 51
The Corporation's postretirement benefits expense for the year ended
December 31, 1994 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, 1993, postretirement benefits expense was $11 million. This
consisted of $9 million of interest cost on accumulated postretirement benefit
obligations and $2 million of service cost attributable to service during the
year. Prior to adoption of SFAS 106, the Corporation's practice was to
recognize the cost, net of retiree contributions, of both of these benefit
plans each year as incurred. Expenses related to these plans were $7 million
for the year ended 1992.
The actuarial assumptions used for the Corporation's postretirement
benefit plans were as follows:
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
- ----------------------------------------------------------------------------------------
Retiree Retiree Retiree Retiree
Health Life Health Life
($ in millions) Care Insurance Care Insurance
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Health care cost trend rate:
First year 12.00% N/A 13.00% N/A
========================================================================================
Ultimate rate after 7 years
(1994) and 8 years (1993)
(based on roughly
equal annual decreases) 5.50% N/A 5.50% N/A
========================================================================================
Discount rate in determining
expense 7.25% 7.25% 8.00% 8.00%
========================================================================================
Discount rate in determining
benefit obligations at year-end 8.75% 8.75% 7.25% 7.25%
========================================================================================
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 $6 N/A $9 N/A
========================================================================================
The 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 or the year ended $1 N/A $1 N/A
========================================================================================
N/A Not applicable.
</TABLE>
At year end 1994, the effect of changing the discount rate from 7.25% to
8.75% was to decrease the accumulated postretirement benefit obligation for the
retiree health care plan and the retiree life insurance plan by $16 million and
$3 million, respectively. Effective January 1, 1994 the plan was amended
regarding retiree deductibles. The effect of the plan amendment was to increase
the accumulated postretirement benefit obligation by $9 million.
At year end 1993, the effect of changing the discount rate from 8.00% to
7.25% was to increase the accumulated postretirement benefit obligation for the
retiree health care plan by $5 million. The effect of the discount rate change
on the retiree life insurance plan was immaterial.
The following table sets forth the funded status and amounts recognized in
the Corporation's balance sheet:
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
- -----------------------------------------------------------------------------------------
Retiree Retiree Retiree Retiree
Health Life Health Life
(in millions) Care Insurance Care Insurance
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulated postretirement
benefit obligation:
Retirees $ (63) $(4) $ (63) $(4)
Fully eligible plan participants (15) -- (14) (2)
Other active plan participants (16) (4) (34) (3)
- -----------------------------------------------------------------------------------------
(94) (8) (111) (9)
Plan assets at fair value -- 4 -- 5
- -----------------------------------------------------------------------------------------
Funded status (94) (4) (111) (4)
Unrecognized prior service cost 9 -- -- --
Unrecognized net (gain) loss (26) -- 5 1
- -----------------------------------------------------------------------------------------
Accrued postretirement
benefit cost $(111) $(4) $(106) $(3)
=========================================================================================
</TABLE>
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 4.73 percent, 9.00 percent
and 4.98 percent for 1994, 1993 and 1992, respectively. The sum of the Fixed
Contribution and the Profit-Driven Contribution amounted to $41 million, $53
million and $41 million for the years 1994, 1993 and 1992, respectively.
Effective January 1, 1992, the Corporation changed a previously informal
service-based plan covering its employees in the United Kingdom to a profit
sharing plan (called the "Share and Discretionary Cash Scheme"). The
Corporation's contributions
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 63
<PAGE> 52
to this plan range from 0 percent 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 Corporation
committed to a minimum contribution of 10 percent for the years 1993 and 1992.
The contribution for 1994 was 8.69 percent. The amount of expense recognized
for the Share and Discretionary Cash Scheme was $8 million, $5 million and $6
million for 1994, 1993 and 1992, respectively.
Postemployment Benefits
On January 1, 1993, the Corporation adopted SFAS 112 "Employers' Accounting for
Postemployment Benefits" by recording a charge of $7 million ($5 million on an
after-tax basis) as the cumulative effect of this change in accounting
principle. SFAS 112 establishes accounting standards for employer-provided
benefits which cover former or inactive employees after employment but before
retirement ("postemployment benefits"). Postemployment benefits include
severance benefits, short- and long-term disability benefits, workers'
compensation and the continuation of health care and life insurance coverage.
SFAS 112 requires employers to recognize the probable and reasonably estimable
costs of postemployment benefits on an accrual basis.
NOTE 19 -- 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 and cumulative effects of accounting changes follow:
<TABLE>
<CAPTION>
(in millions) Year Ended December 31, 1994 1993 1992
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $139 $ (101) $(58)
Foreign 730 1,651 964
- ---------------------------------------------------------------------------
Total $869 $1,550 $906
===========================================================================
</TABLE>
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 $1.2 billion at December 31, 1994. Federal taxes which would have
approximated $220 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, excluding the cumulative effects
of accounting changes, follows:
<TABLE>
<CAPTION>
(in millions) Year Ended December 31, 1994 1993 1992
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes applicable to:
Income before income taxes* $254 $480 $267
Capital surplus (5) (16) (15)
Cumulative translation adjustments (59) (5) 26
Securities valuation allowance (16) 56 2
- ---------------------------------------------------------------------------
Total $174 $515 $280
===========================================================================
</TABLE>
* Includes income tax expense related to securities available for sale
transactions of $26 million in 1994 and includes income tax expense related
to investment securities transactions of $5 million and $3 million in 1993
and 1992, respectively.
The components of consolidated income taxes, excluding the cumulative
effects of accounting changes, follow:
<TABLE>
<CAPTION>
(in millions) Year Ended December 31, 1994 1993 1992
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $ 5 $ 5 $ 4
Foreign 294 524 189
State and local 16 23 20
- ---------------------------------------------------------------------------
Total 315 552 213
- ---------------------------------------------------------------------------
Deferred
Federal (102) 70 48
Foreign (61) (114) 32
State and local 22 7 (13)
- ---------------------------------------------------------------------------
Total (141) (37) 67
- ---------------------------------------------------------------------------
Total $ 174 $ 515 $280
===========================================================================
</TABLE>
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 and cumulative effects of accounting changes:
<TABLE>
<CAPTION>
Year Ended December 31, 1994 1993 1992
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. federal statutory income tax rate 35% 35% 34%
State and local income taxes 2 1 --
Tax-exempt income (6) (2) (2)
Foreign subsidiary earnings (1) (1) --
Change in unrecognized tax benefits -- -- --
Other items, net (1) (2) (3)
- ---------------------------------------------------------------------------
Effective income tax rate 29% 31% 29%
===========================================================================
</TABLE>
64 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 53
The following is an analysis of the Corporation's net deferred tax assets:
<TABLE>
<CAPTION>
(in millions) December 31, 1994 1993
- ---------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets $1,053 $1,072
Valuation allowance 227 227
- ---------------------------------------------------------------------------
Deferred tax assets net of valuation allowance 826 845
Deferred tax liabilities 617 777
- ---------------------------------------------------------------------------
Net deferred tax assets $ 209 $ 68
===========================================================================
</TABLE>
At December 31, 1994, the Corporation's deferred tax assets were primarily
related to credit losses ($633 million) and deferred tax liabilities were
primarily related to certain trading activities ($179 million) and lease
financing activities ($221 million). At December 31, 1993, the Corporation's
deferred tax assets were primarily related to credit losses ($684 million) and
deferred tax liabilities were primarily related to certain trading activities
($266 million) and lease financing activities ($283 million). For income tax
purposes the Corporation had approximately $85 million of foreign tax credit
carryforwards that will expire in 1999.
NOTE 20 -- EARNINGS PER COMMON SHARE
Effective with its December 31, 1993 financial statements, the Corporation
changed its reporting of earnings per common share. The Corporation now reports
primary and fully diluted earnings per share. Previously, the Corporation's
reported earnings per common share were based solely on the number of average
common shares outstanding, due to the fact that the difference between that
figure and primary earnings per share was not significant. Primary and fully
diluted earnings per share are now reported for all prior periods presented.
Primary and fully diluted earnings per common share amounts were computed
by subtracting from the applicable earnings the dividend requirements on
preferred stock to arrive at earnings applicable to common stock and dividing
this amount by the average number of common and common equivalent shares
outstanding during the year.
For both primary and fully diluted earnings per share, the average number
of common and common equivalent shares outstanding was the sum of the average
number of shares of common stock outstanding and the incremental number of
shares issuable under outstanding stock options and deferred stock awards that
had a dilutive effect as computed under the treasury stock method. Under this
method, the number of incremental shares is determined by assuming the issuance
of the outstanding stock options and deferred stock awards reduced by the
number of shares assumed to be repurchased from the issuance proceeds, using
the market price of the Parent Company's common stock. For primary earnings per
share, this market price is the average market price for the period, while for
fully diluted earnings per share, it is the period-end market price, if it is
higher than the average price. At no time during the three-year period ended
December 31, 1994 did the Corporation have outstanding any securities which
were convertible to the Parent Company's common stock.
The earnings applicable to common stock and the number of shares used for
primary and fully diluted earnings per share were as follows:
<TABLE>
<CAPTION>
(in millions) Year Ended December 31, 1994 1993 1992
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings applicable to common stock:
Income before cumulative effects
of accounting changes $587 $1,047 $ 609
Cumulative effects of accounting
changes -- (75) 446
- -------------------------------------------------------------------------
Net income $587 $ 972 $1,055
=========================================================================
Average number of common shares
outstanding 79.012 82.249 82.898
Primary earnings per share
Average number of common and
common equivalent shares
outstanding 81.825 84.456 84.201
Fully diluted earnings per share
Average number of common and
common equivalent shares
outstanding -- assuming
full dilution 81.865 85.183 84.336
=========================================================================
</TABLE>
NOTE 21 -- INTERNATIONAL OPERATIONS
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: interest revenue and interest expense are
apportioned to geographic areas based upon the geographic distribution of
average assets, which reflects the domicile of the customer; charges for funds
transferred from domestic to international locations are based upon the cost of
short-term funds; allocation of the provision for credit losses is based upon
total net charges to the allowance for credit losses and adjusted to reflect
management's assessment of the risks associated with the domestic and
international portfolios; noninterest revenue is generally distributed based on
the location of the office recording the revenue; noninterest expenses are
generally apportioned to the geographic area where the revenue is attributed;
and adjustments are made for the difference between foreign and U.S. tax rates.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 65
<PAGE> 54
Subject to the above limitations, estimates and assumptions, the following
tables present information attributable to international operations:
<TABLE>
<CAPTION>
Income
Total Total Total before Net
($ in millions) assets revenue expenses taxes income
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------
Total international 57,242 4,206 3,701 505 368
Domestic operations 60,883 4,210 3,846 364 247
Intersegment eliminations (21,109) (913) (913) -- --
- -------------------------------------------------------------------------------------------------------
Total $97,016 $7,503 $6,634 $869 $615
=======================================================================================================
International percentage of
total (before intersegment
eliminations) 48% 50% 49% 58% 60%
=======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Income
Total Total Total before Net
($ in millions) assets revenue expenses taxes (1) income
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1993
- -------------------------------------------------------------------------------------------------------
International operations
Asia $ 6,942 $ 678 $ 454 $ 224 $151
Australia/New Zealand 5,730 637 428 209 141
Western Hemisphere 7,683 562 462 100 68
Europe 12,351 686 639 47 32
United Kingdom 14,791 2,266 1,570 696 471
Middle East/Africa 307 29 26 3 2
- -------------------------------------------------------------------------------------------------------
Total international 47,804 4,858 3,579 1,279 865
Domestic operations 56,634 3,715 3,444 271 130
Intersegment eliminations (12,356) (773) (773) -- --
- -------------------------------------------------------------------------------------------------------
Total $ 92,082 $7,800 $6,250 $1,550 $995
=======================================================================================================
International percentage of
total (before intersegment
eliminations) 46% 57% 51% 83% 87%
=======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Income
Total Total Total before Net
($ in millions) assets revenue expenses taxes (1) income
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1992
- -------------------------------------------------------------------------------------------------------
International operations
Asia $ 6,866 $ 567 $ 420 $147 $ 122
Australia/New Zealand 5,052 756 518 238 165
Western Hemisphere 6,963 595 487 108 469
Europe 8,803 671 600 71 75
United Kingdom 8,696 1,221 1,069 152 83
Middle East/Africa 605 57 35 22 50
- -------------------------------------------------------------------------------------------------------
Total international 36,985 3,867 3,129 738 964
Domestic operations 48,794 3,383 3,215 168 121
Intersegment eliminations (12,893) (700) (700) -- --
- -------------------------------------------------------------------------------------------------------
Total $72,886 $6,550 $5,644 $906 $1,085
=======================================================================================================
International percentage of
total (before intersegment
eliminations) 43% 53% 49% 81% 89%
=======================================================================================================
</TABLE>
(1) Excludes cumulative effects of accounting changes.
NOTE 22 -- 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 23, "Derivatives"
on page 26, "Summary of Credit Loss Experience" on page 33 and "Nonperforming
Assets" on page 36. For the risk-based capital equivalent amounts of the
Corporation's derivative and off-balance sheet exposures, which also are not
included as part of these audited financial statements, see "Capital Resources"
on page 31.
66 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 55
Trading Derivative Financial Instruments
The Corporation actively manages trading positions in a variety of derivative
contracts. Most of the Corporation's trading positions are established as a
result of providing derivative products to meet customers' demands. To
anticipate customer demand for such transactions, the Corporation also carries
an inventory of capital market instruments and maintains its access to market
liquidity by quoting bid and offer prices to, and trading with, other market
makers. These two activities are essential to provide customers with capital
market products at competitive prices. All positions are reported at fair value
and changes in fair values are reflected in trading revenue as they occur.
Trading derivatives have been carried on the balance sheet at their
current gross fair values since January 1, 1994, in accordance with FIN 39.
Prior to this date, it was industry practice to record such contracts at their
fair values on a net basis. Contracts with positive fair values are now
recorded as assets and contracts with negative fair values are now recorded as
liabilities, after application of qualifying master netting agreements. As a
result, both assets and liabilities increased by approximately $12 billion at
December 31, 1994. Adoption of FIN 39 resulted in net decreases in the
Corporation's ratios of stockholders' equity to total assets and the Leverage
Ratio; however, net income and the risk-based capital ratios were not affected.
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
depth of involvement in the over-the-counter (OTC) markets for interest rate,
foreign exchange rate, and equity and commodity price derivatives 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
consolidated balance sheet.
The following table reflects the gross fair values and balance sheet
amounts of trading derivatives:
<TABLE>
<CAPTION>
At December 31, 1994 Average during 1994
---------------------------------------------------
(in millions) Assets (Liabilities) Assets (Liabilities)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTC Financial Instruments
Interest Rate and Currency
Swap Contracts $15,055 $(11,388) $15,646 $(12,589)
Interest Rate Contracts
Forwards 91 (127) 66 (74)
Options purchased 1,211 1,131
Options written (2,330) (1,707)
Foreign Exchange Rate Contracts
Spot and Forwards 8,127 (7,988) 9,544 (9,715)
Options purchased 1,504 1,420
Options written (1,522) (1,276)
Equity-related contracts 1,005 (1,316) 1,499 (1,788)
Commodity-related and other
contracts 578 (451) 464 (398)
Exchange-Traded Options
Interest Rate 191 (113) 77 (50)
Foreign Exchange -- (62) 21 (32)
Equity 82 (43) 86 (69)
Commodity -- -- -- --
- -------------------------------------------------------------------------------------------
Total Gross Fair Values 27,844 (25,340) 29,954 (27,698)
- -------------------------------------------------------------------------------------------
Impact of Netting Agreements (13,773) 13,773 (14,511) 14,511
- -------------------------------------------------------------------------------------------
Total assets reflected on balance
sheet in "Trading Assets" $14,071 $15,443
======= =======
Total liabilities reflected on balance
sheet in "Trading Liabilities" $(11,567) $(13,187)
======== ========
</TABLE>
Derivatives 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 26. 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.
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
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.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 67
<PAGE> 56
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 24.
Contractual Notional Amounts of Trading and End-User Derivative
Financial Instruments
Contractual 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 not reflected in the table below.
<TABLE>
<CAPTION>
Contractual Notional Amounts
(in millions) December 31, 1994 December 31, 1993
- -----------------------------------------------------------------------------------------------
End User End User
Trading (1)(2) Trading (1)(2)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate contracts
Swaps $ 480,962 $34,448 $ 349,669 $37,228
Futures and forwards 322,854 5,725 466,770 --
Options purchased 203,598 194 147,488 --
Options written 237,336 -- 326,609 --
- -----------------------------------------------------------------------------------------------
Total $1,244,750 $40,367 $1,290,536 $37,228
- -----------------------------------------------------------------------------------------------
Foreign exchange rate contracts
Spot, forwards, futures $ 555,092 $ 1,919 $ 447,427 $ 1,142
Swaps 58,930 1,575 50,664 1,286
Options purchased 27,835 -- 35,385 --
Options written 31,332 -- 37,846 --
- -----------------------------------------------------------------------------------------------
Total $ 673,189 $ 3,494 $ 571,322 $ 2,428
- -----------------------------------------------------------------------------------------------
Equity, commodity and other contracts (3)
Swaps, futures and forwards $ 19,980 $ 150 $ 20,691 $ 150
Options purchased 21,904 69 11,493 90
Options written 21,833 -- 13,188 --
- -----------------------------------------------------------------------------------------------
Total $ 63,717 $ 219 $ 45,372 $ 240
===============================================================================================
</TABLE>
(1) These are transacted with derivatives traders within the Corporation who
are intermediaries to external markets.
(2) These are hedges of securities available for sale, other assets,
interest-bearing deposits, other short-term borrowings, long-term debt and
net investments in foreign subsidiaries.
(3) Represents primarily stock or stock index contracts.
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").
68 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 57
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 $1.917 billion and
$2.519 billion at December 31, 1994 and 1993, respectively. The underlying debt
securities were primarily obligations of U.S. and foreign central and local
governments and U.S. federal agencies.
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.
<TABLE>
<CAPTION>
Securities and Money Market Activities
(in millions) December 31, 1994 December 31, 1993
- ---------------------------------------------------------------------------------------
Contract Credit Risk Contract Credit Risk
Amount Amount Amount Amount
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
When-issued securities and other
Commitments to sell $ 3,956 $ 10 $ 2,964 $ 3
Commitments to
purchase (1) 6,093 6,101 4,540 4,561
Securities lending
indemnifications 21,018 21,018 16,590 16,590
=======================================================================================
</TABLE>
(1) Includes $1.5 billion of forward-dated money market assets at December 31,
1994.
When-issued securities normally begin trading when the U.S. Treasury or
some other issuer of securities announces a forthcoming 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 $23
billion at December 31, 1994 and $17 billion at December 31, 1993.
<TABLE>
<CAPTION>
Credit-Related Arrangements
(in millions) December 31, 1994 December 31, 1993
- ---------------------------------------------------------------------------------------
Contract Credit Risk Contract Credit Risk
Amount Amount Amount Amount
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commitments to extend
credit (1) $8,808 $8,808 $10,835 $10,835
Standby letters of credit and
similar arrangements (2) 4,413 4,413 5,093 5,093
=======================================================================================
</TABLE>
(1) Includes participations to other entities of approximately $2 billion and
$3 billion at December 31, 1994 and 1993, respectively. Of the
non-participated amount, approximately $3 billion and $4 billion expire in
one year or less at December 31, 1994 and 1993, respectively. Both the
contract amount and the credit risk amount included commitments to enter
into resale agreements of $.5 billion at December 31, 1993.
(2) Includes participations to other entities of approximately $2 billion at
both December 31, 1994 and 1993.
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 financial statements, is disclosed
on page 38 and page 39, respectively.
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, 1994, $2.865
billion will expire within one year, $1.344 billion from one to four years and
$204 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.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 69
<PAGE> 58
NOTE 23 -- 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 40
percent and 48 percent of total credit risk at December 31, 1994 and 1993,
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 25 industrialized nations, primarily
the countries of Western Europe, the U.S., Canada, Japan, Australia and New
Zealand. For risk-based capital purposes, domestic and foreign bank regulators
assign OECD country central governments, their agencies and their central banks
a credit risk weighting of zero percent, which means that no 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.
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 at December 31, 1994 and 1993. The decrease in
off-balance sheet credit risk of OECD country banks was primarily caused by
adoption of FIN 39 in 1994.
<TABLE>
<CAPTION>
Credit Risk
- -------------------------------------------------------------------------
On-Balance Off-Balance
(in millions) Sheet Sheet Total
- -------------------------------------------------------------------------
<S> <C> <C> <C>
1994
- -------------------------------------------------------------------------
Significant concentrations (1)
OECD country banks (2) $21,949 $ 4,556 $ 26,505
OECD country governments 19,968 5,934 25,902
- -------------------------------------------------------------------------
Total significant concentrations 41,917 10,490 52,407
All other (3)(4) 47,253 31,674 78,927
- -------------------------------------------------------------------------
Total $89,170 $42,164 $131,334
=========================================================================
1993
- -------------------------------------------------------------------------
Significant concentrations
OECD country banks (2) $10,640 $18,843 $ 29,483
OECD country governments 34,343 6,368 40,711
- -------------------------------------------------------------------------
Total significant concentrations 44,983 25,211 70,194
All other (3)(4) 39,391 36,592 75,983
- -------------------------------------------------------------------------
Total $84,374 $61,803 $146,177
=========================================================================
</TABLE>
(1) For these purposes, Mexico has been excluded from the OECD categories.
(2) Included in the on-balance sheet component of this category was
approximately $6 billion and $3 billion at December 31, 1994 and 1993,
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 $5 billion and $6 billion at December 31,
1994 and 1993, respectively, that was collateralized by cash and U.S.
government securities. Included in the off-balance sheet component of this
category at December 31, 1994 was approximately $20 billion that was
collateralized by cash and U.S. government securities and approximately $6
billion of unused commitments to extend credit, approximately $3 billion of
which expire in one year or less. The corresponding amounts for December
31, 1993 were $16 billion, $8 billion and $4 billion, respectively.
(4) Includes:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Credit Risk
- -------------------------------------------------------------------------
On-Balance Off-Balance
(in millions) Sheet Sheet Total
- -------------------------------------------------------------------------
<S> <C> <C> <C>
1994
- -------------------------------------------------------------------------
Real estate $1,700 $550 $2,250
Highly leveraged 1,060 509 1,569
1993
- -------------------------------------------------------------------------
Real estate $2,272 $749 $3,021
Highly leveraged 1,440 804 2,244
</TABLE>
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 financial statements, appears on pages 38 and
39, respectively.
NOTE 24 -- 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 for December 31, 1994 disclosure purposes. 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.
70 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 59
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.
<TABLE>
<CAPTION>
Fair Value of Financial Instruments
- ------------------------------------------------------------------------------------------------------------------------------------
Underlying Effect of Fair Value Over
(in millions) December 31, 1994 Book Value Fair Value End-User Derivative Total Fair Value (Under) Book Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINANCIAL ASSETS, INCLUDING HEDGES
Cash and due from banks $ 1,985 $ 1,985 $ -- $ 1,985 $ --
Interest-bearing deposits with banks 3,390 3,390 -- 3,390 --
Federal funds sold 2,544 2,544 -- 2,544 --
Securities purchased under resale agreements 9,943 9,943 -- 9,943 --
Securities borrowed 6,197 6,197 -- 6,197 --
Trading assets (see Notes 3 and 22) 47,514 47,514 -- 47,514 --
Securities available for sale (see Note 4) 7,475 7,442 33 7,475 --
Loans (excluding leases), commitments to
extend credit and standby letters of credit 12,181 11,807 -- 11,807 (374)
Allowance for credit losses (1,252) -- -- -- 1,252
Due from customers on acceptances 378 378 -- 378 --
Accounts receivable and accrued interest 2,356 2,356 -- 2,356 --
Other financial assets 1,669 1,893 (51) 1,842 173
FINANCIAL LIABILITIES, INCLUDING HEDGES
Noninterest-bearing deposits 3,826 3,826 -- 3,826 --
Interest-bearing deposits 21,113 21,089 94 21,183 70
Trading liabilities (see Notes 3 and 22) 20,949 20,949 -- 20,949 --
Securities sold under repurchase agreements 15,617 15,614 -- 15,614 (3)
Other short-term borrowings 18,222 18,220 1 18,221 (1)
Acceptances outstanding 378 378 -- 378 --
Other financial liabilities 3,574 3,574 -- 3,574 --
Long-term debt 6,455 6,287 195 6,482 27
Net investments in foreign subsidiaries -- -- (22) (22) (22)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(in millions) December 31, 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINANCIAL ASSETS, INCLUDING HEDGES
Cash and due from banks $ 1,750 $ 1,750 $ -- $ 1,750 $ --
Interest-bearing deposits with banks 1,638 1,638 -- 1,638 --
Federal funds sold 361 361 -- 361 --
Securities purchased under resale agreements 9,567 9,564 -- 9,564 (3)
Securities borrowed 2,937 2,937 -- 2,937 --
Trading assets (see Notes 3 and 22) 48,276 48,276 -- 48,276 --
Securities available for sale (see Note 4) 7,073 7,178 (105) 7,073 --
Loans (excluding leases), commitments to
extend credit and standby letters of credit 14,861 14,523 -- 14,523 (338)
Allowance for credit losses (1,324) -- -- -- 1,324
Due from customers on acceptances 455 455 -- 455 --
Accounts receivable and accrued interest 2,561 2,561 -- 2,561 --
Other financial assets 1,651 1,844 (42) 1,802 151
FINANCIAL LIABILITIES, INCLUDING HEDGES
Noninterest-bearing deposits 3,892 3,892 -- 3,892 --
Interest-bearing deposits 18,884 18,962 (17) 18,945 61
Trading liabilities (see Notes 3 and 22) 9,349 9,349 -- 9,349 --
Securities sold under repurchase agreements 23,834 23,834 -- 23,834 --
Other short-term borrowings 18,992 18,980 9 18,989 (3)
Acceptances outstanding 455 455 -- 455 --
Other financial liabilities 5,086 5,086 -- 5,086 --
Long-term debt 5,597 5,814 (143) 5,671 74
</TABLE>
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 71
<PAGE> 60
A discussion of the nature, objectives and strategies for using end-user
derivatives can be found in Note 22.
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 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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Net
Securities Interest- Other Long- Investments
Available Other bearing short-term term in Foreign
(in millions) December 31, 1994 For Sale assets deposits borrowings debt Subsidiaries Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST RATE SWAPS
Pay Variable Unrealized Gain $ -- $ -- $ 17 $ 4 $ 62 $ -- $ 83
Pay Variable Unrealized (Loss) (1) -- (191) (4) (200) -- (396)
- -----------------------------------------------------------------------------------------------------------------------------------
Pay Variable Net (1) -- (174) -- (138) -- (313)
- -----------------------------------------------------------------------------------------------------------------------------------
Pay Fixed Unrealized Gain 48 -- 105 -- 28 -- 181
Pay Fixed Unrealized (Loss) (19) -- (31) -- (15) -- (65)
- -----------------------------------------------------------------------------------------------------------------------------------
Pay Fixed Net 29 -- 74 -- 13 -- 116
- -----------------------------------------------------------------------------------------------------------------------------------
Total Unrealized Gain 48 -- 122 4 90 -- 264
- -----------------------------------------------------------------------------------------------------------------------------------
Total Unrealized (Loss) (20) -- (222) (4) (215) -- (461)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Net $ 28 $ -- $(100) $ -- $(125) $ -- $(197)
===================================================================================================================================
FORWARD RATE AGREEMENTS
Unrealized Gain $ -- $ -- $ 4 $ -- $ -- $ -- $ 4
Unrealized (Loss) -- -- (5) -- -- -- (5)
- -----------------------------------------------------------------------------------------------------------------------------------
Net $ -- $ -- $ (1) $ -- $ -- $ -- $ (1)
===================================================================================================================================
CURRENCY SWAP
Unrealized Gain $ -- $ -- $ 9 $ -- $ 4 $ -- $ 13
Unrealized (Loss) -- -- (2) (1) (74) (22) (99)
- -----------------------------------------------------------------------------------------------------------------------------------
Net $ -- $ -- $ 7 $ (1) $ (70) $(22) $ (86)
===================================================================================================================================
OTHER CONTRACTS (1)
Unrealized Gain $ 5 $ 2 $ -- $ -- $ -- $ -- $ 7
Unrealized (Loss) -- (53) -- -- -- -- (53)
- -----------------------------------------------------------------------------------------------------------------------------------
Net $ 5 $(51) $ -- $ -- $ -- $ -- $ (46)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Unrealized Gain $ 53 $ 2 $ 135 $ 4 $ 94 $ -- $ 288
Total Unrealized (Loss) (20) (53) (229) (5) (289) (22) (618)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Net $ 33 $(51) $ (94) $ (1) $(195) $(22) $(330)
===================================================================================================================================
<CAPTION>
(in millions) December 31, 1993 (2)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Unrealized Gains $ 3 $ 10 $ 252 $ -- $ 290 $ -- $ 555
Total Unrealized (Loss) (108) (52) (235) (9) (147) -- (551)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Net $(105) $(42) $ 17 $ (9) $ 143 $ -- $ 4
===================================================================================================================================
</TABLE>
(1) Other contracts are principally equity swaps and collars.
(2) The Corporation reviewed its characterization of certain derivative
contracts associated with short-term borrowings and long-term debt. Based
upon this review, December 31, 1993 unrealized gains and losses for other
short-term borrowings and unrealized gains for long-term debt have been
restated to exclude certain trading derivative contracts previously
disclosed as end-user derivatives. This exclusion had no impact on net
income.
72 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 61
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, 1994 were as follows:
<TABLE>
<CAPTION>
Interest Foreign Total
(in millions) Rate Currency Equity Notional
Notional Amount Maturing in: Risk Risk* Risk Amount
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995 $19,934 $2,341 $146 $22,421
1996-1997 11,153 449 73 11,675
1998-1999 3,437 340 -- 3,777
2000 and thereafter 5,843 364 -- 6,207
- -------------------------------------------------------------------------------------
Total $40,367 $3,494 $219 $44,080
- -------------------------------------------------------------------------------------
</TABLE>
* Currency swaps and currency forwards are primarily based upon Australian
dollar / U.S. dollar and Japanese yen / U.S. dollar contracts.
For pay variable and pay fixed interest rate swaps entered into as an end
user, the weighted average receive rate and pay rate (interest rates were based
on the weighted averages of both U.S. and non-U.S. currencies) by maturity and
corresponding notional amounts at December 31, 1994 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Paying Variable Paying Fixed
-------------------------------------- -------------------------------------
($ in millions) Notional Receive Pay Notional Receive Pay Total
Notional Amount Maturing In: Amount Rate Rate Amount Rate Rate Notional
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1995 $11,211 6.09% 5.88% $2,908 6.00% 5.90% $14,119
1996-1997 7,830 5.77 6.03 3,219 5.78 5.92 11,049
1998-1999 2,444 5.83 5.81 993 5.38 5.34 3,437
2000 and thereafter 4,113 5.72 6.79 1,730 8.13 5.83 5,843
- ------------------------------------------------------------------------------------------------------------------------------------
Total $25,598 $8,850 $34,448
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All rates were those in effect at December 31, 1994. Variable rates are
primarily based on LIBOR and may change significantly, affecting future cash
flows.
The remaining maturities of the notional amounts of end-user derivatives
at December 31, 1993 were as follows:
<TABLE>
<CAPTION>
Interest Foreign Total
(in millions) Rate Currency Equity Notional
Notional Amount Maturing in: Risk Risk Risk Amount
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994 $14,625 $1,720 $ 96 $16,441
1995-1996 12,081 238 122 12,441
1997-1998 4,527 171 22 4,720
1999 and thereafter 5,995 299 -- 6,294
- -------------------------------------------------------------------------------------
Total $37,228 $2,428 $240 $39,896
=====================================================================================
</TABLE>
For interest rate swaps entered into as an end user, the weighted average
receive rate and weighted average pay rate by maturity and corresponding
notional amounts at December 31, 1993 were as follows:
<TABLE>
<CAPTION>
($ in millions) Notional Receive Pay
Notional Amount Maturing in: Amount Rate Rate
- ----------------------------------------------------------------------
<S> <C> <C> <C>
1994 $14,616 7.23% 3.98%
1995-1996 12,081 4.35 4.06
1997-1998 4,527 4.62 3.96
1999 and thereafter 5,995 5.34 4.48
- ----------------------------------------------------------------------
Total $37,219
======================================================================
</TABLE>
All rates were those in effect at December 31, 1993.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 73
<PAGE> 62
The effect of these end-user derivatives was to increase net interest
revenue by $102 million and $192 million, respectively, for the years ended
December 31, 1994 and 1993.
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, 1994 and December 31, 1993 was not
material.
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:
<TABLE>
<CAPTION>
Assets Liabilities
- -----------------------------------------------------------------
<S> <C>
Cash and due from banks Interest-bearing deposits
Interest-bearing deposits Securities sold under
with banks repurchase agreements
Federal funds sold Other short-term borrowings
Securities purchased under Acceptances outstanding
resale agreements Accounts payable and accrued
Securities borrowed expenses
Due from customers on Other financial liabilities
acceptances
Accounts receivable and
accrued interest
</TABLE>
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.
The estimated fair values of securities available for sale were generally
based on quoted market prices, broker quotes or dealer quotes.
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.
Other financial assets consisted primarily of investments in equity
instruments (excluding, in accordance with SFAS 107, investments accounted for
under the equity method), cash and cash margins with broker and net unrealized
gains on foreign exchange positions. At December 31, 1993 unrestricted
marketable equity securities were reclassified from other financial assets to
securities available for sale, reflecting the Corporation's adoption of SFAS
115 as of that date. 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, 1994 and 1993.
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.
74 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 63
NOTE 25 -- CONDENSED PARENT COMPANY FINANCIAL
STATEMENTS
<TABLE>
<CAPTION>
Condensed Statement of Income
(in millions) Year Ended December 31, 1994 1993 1992
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE
Dividends
Banks $ 320 $ 112 $ 215
Nonbanks 264 71 78
Interest from subsidiaries 367 191 214
Other interest 209 119 95
Trading (81) 4 (1)
Other -- 38 (12)
- ------------------------------------------------------------------------------------------
Total revenue 1,079 535 589
- ------------------------------------------------------------------------------------------
EXPENSES
Interest to subsidiaries 40 23 27
Other interest 566 310 325
Other 20 36 68
- ------------------------------------------------------------------------------------------
Total expenses 626 369 420
- ------------------------------------------------------------------------------------------
Income before income taxes and
equity in undistributed income of
subsidiaries and affiliates 453 166 169
Income taxes (99) (13) (46)
- ------------------------------------------------------------------------------------------
Income before equity in undistributed
income of subsidiaries and affiliates 552 179 215
Equity in undistributed income of
subsidiaries and affiliates before
cumulative effects of accounting changes 63 891 424
- ------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECTS
OF ACCOUNTING CHANGES 615 1,070 639
Equity in cumulative effects of
accounting changes of subsidiary -- (75) 446
- ------------------------------------------------------------------------------------------
NET INCOME $ 615 $ 995 $1,085
==========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Condensed Balance Sheet
(in millions) December 31, 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 72 $ 10
Interest-bearing deposits with bank subsidiaries 1,509 662
Securities purchased under resale agreements
with nonbank subsidiary 1,104 321
Trading assets 1,579 1,920
Securities available for sale 2,023 652
Loans 21 55
Investments in subsidiaries and affiliates
Banks 4,453 4,210
Nonbanks 1,017 1,088
Receivables from subsidiaries and affiliates
Banks 1,512 1,381
Nonbanks 5,672 4,937
Accounts receivable and accrued interest 379 202
Other assets 313 606
- ------------------------------------------------------------------------------------------
Total assets $19,654 $16,044
==========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Trading liabilities $ 128 $ 170
Commercial paper 6,320 5,664
Other short-term borrowings 3,250 579
Payables to subsidiaries and affiliates
Banks 126 64
Nonbanks 826 755
Other liabilities 312 347
Long-term debt 3,988 3,931
- ------------------------------------------------------------------------------------------
Total liabilities 14,950 11,510
- ------------------------------------------------------------------------------------------
Total stockholders' equity 4,704 4,534
- ------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $19,654 $16,044
==========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Condensed Statement of Cash Flows
(in millions) Year Ended December 31, 1994 1993 1992
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 615 $ 995 $ 1,085
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Equity in undistributed income
of subsidiaries and affiliates, before
cumulative effects of accounting changes (63) (891) (424)
Equity in cumulative effects of
accounting changes of subsidiary -- 75 (446)
Deferred income taxes (59) 42 (7)
Net change in trading assets 342 (1,390) (52)
Net change in trading liabilities (42) 168 (79)
Other, net 124 113 (32)
- ------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 917 (888) 45
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in:
Interest-bearing deposits with bank subsidiaries (847) (140) 983
Securities purchased under resale agreements
with nonbank subsidiary (784) 888 (863)
Short-term notes receivable from subsidiaries
and affiliates 745 (361) 705
Securities available for sale:
Purchases (2,304) -- --
Maturities and other redemptions 396 -- --
Sales 501 -- --
Investment securities:
Purchases -- (3,309) (1,753)
Maturities and other redemptions -- 3,427 1,631
Sales -- 47 132
Increases in long-term notes receivable
from subsidiaries (2,133) (2,322) (1,002)
Decreases in long-term notes receivable
from subsidiaries 640 89 344
Capital contributed to subsidiaries and affiliates (152) (7) (317)
Return of capital from subsidiaries and affiliates 2 -- 201
Other, net -- (8) (158)
- ------------------------------------------------------------------------------------------
Net cash used in investing activities (3,936) (1,696) (97)
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in:
Commercial paper and other short-term
borrowings 3,327 2,073 (192)
Short-term notes payable to subsidiaries 133 156 94
Issuance of long-term debt 421 1,338 978
Repayments of long-term debt (370) (205) (523)
Issuance of preferred stock 342 -- --
Redemption of preferred stock (205) (250) --
Issuance to subsidiary of preferred stock -- 247 --
Redemption from subsidiary of preferred stock -- (247) --
Issuances of common stock -- -- 27
Purchases of treasury stock (267) (313) (106)
Cash dividends paid (322) (281) (262)
Other, net 22 74 38
- ------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,081 2,592 54
- ------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND DUE
FROM BANKS 62 8 2
- ------------------------------------------------------------------------------------------
Cash and due from banks, beginning of year 10 2 --
- ------------------------------------------------------------------------------------------
Cash and due from banks, end of year $ 72 $ 10 $ 2
==========================================================================================
Interest paid $ 587 $ 326 $ 337
==========================================================================================
Income taxes paid $ 7 $ -- $ --
==========================================================================================
Noncash financing activity:
Exchange of series of preferred stock $ -- $ -- $ 45
==========================================================================================
</TABLE>
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 75
<PAGE> 64
NOTE 26 -- BANKERS TRUST COMPANY CONSOLIDATED
SUMMARIZED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Consolidated Statement of Income
(in millions) Year Ended December 31, 1994 1993 1992
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INTEREST REVENUE
Interest revenue $2,900 $2,812 $2,787
Interest expense 2,271 2,072 1,996
- ------------------------------------------------------------------------------------------
NET INTEREST REVENUE 629 740 791
Provision for credit losses (3) 96 165
- ------------------------------------------------------------------------------------------
NET INTEREST REVENUE AFTER PROVISION
FOR CREDIT LOSSES 632 644 626
- ------------------------------------------------------------------------------------------
NONINTEREST REVENUE
Trading 786 1,875 1,009
Fiduciary and funds management 698 661 622
Fees and commissions 541 477 426
Securities available for sale gains 13 -- --
Investment securities gains (losses) -- 4 (20)
Other 213 107 112
- ------------------------------------------------------------------------------------------
Total noninterest revenue 2,251 3,124 2,149
- ------------------------------------------------------------------------------------------
NONINTEREST EXPENSES
Salaries 656 570 529
Incentive compensation and employee
benefits 563 943 590
Occupancy, net 134 142 141
Furniture and equipment 149 131 123
Other 823 911 686
- ------------------------------------------------------------------------------------------
Total noninterest expenses 2,325 2,697 2,069
- ------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effects of accounting changes 558 1,071 706
Income taxes 166 327 196
- ------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECTS OF
ACCOUNTING CHANGES 392 744 510
Cumulative effects of accounting
changes -- (75) 446
- ------------------------------------------------------------------------------------------
NET INCOME $ 392 $ 669 $ 956
==========================================================================================
</TABLE>
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.
<TABLE>
<CAPTION>
(in millions) Year Ended December 31, 1994 1993 1992
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest revenue $ 97 $ 45 $ 26
Interest expense 185 143 164
Noninterest revenue 62 43 41
Noninterest expenses 289 326 254
</TABLE>
<TABLE>
<CAPTION>
(in millions) December 31, 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Interest-earning assets $1,433 $1,387
Noninterest-earning assets 1,348 357
Interest-bearing liabilities 4,566 3,507
Noninterest-bearing liabilities 1,757 304
</TABLE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet
($ in millions, except par values) December 31, 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,023 $ 1,795
Interest-bearing deposits with banks 3,680 2,182
Federal funds sold 2,544 439
Securities purchased under resale agreements 8,006 6,930
Trading assets 34,364 23,992
Securities available for sale 3,858 5,072
Loans 12,035 13,563
Allowance for credit losses (1,179) (1,249)
Premises and equipment, net 872 687
Due from customers on acceptances 378 455
Accounts receivable and accrued interest 438 1,737
Other assets 3,889 2,329
- ------------------------------------------------------------------------------------------
Total assets $70,908 $57,932
==========================================================================================
LIABILITIES
Deposits
Noninterest-bearing
In domestic offices $ 3,454 $ 3,250
In foreign offices 555 738
Interest-bearing
In domestic offices 4,837 6,147
In foreign offices 17,590 12,749
- ------------------------------------------------------------------------------------------
Total deposits 26,436 22,884
Trading liabilities 20,461 7,763
Securities sold under repurchase agreements 4,263 4,194
Other short-term borrowings 8,910 12,251
Acceptances outstanding 378 455
Accounts payable and accrued expenses 302 1,944
Other liabilities 2,778 1,921
Long-term debt 3,230 2,590
- ------------------------------------------------------------------------------------------
Total liabilities 66,758 54,002
- ------------------------------------------------------------------------------------------
STOCKHOLDER'S EQUITY
Floating rate non-cumulative preferred stock --
Series A, $1 million par value
Authorized, issued and outstanding: 250 shares 250 250
Common stock, $10 par value
Authorized, issued and outstanding:
85,166,667 shares 852 702
Capital surplus 498 498
Retained earnings 2,875 2,756
Cumulative translation adjustments (344) (321)
Securities valuation allowance 19 45
- ------------------------------------------------------------------------------------------
Total stockholder's equity 4,150 3,930
- ------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $70,908 $57,932
==========================================================================================
</TABLE>
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 115 effective
December 31, 1993, SFAS 106 and SFAS 112 effective January 1, 1993 and SFAS 109
effective January 1, 1992. The statement of income effects of adoption
presented there were recorded by BTCo.
76 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 65
MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Bankers Trust New York Corporation and its subsidiaries (the
"Corporation") is responsible for preparing the accompanying financial
statements. The financial statements were prepared in accordance with generally
accepted accounting principles and prevailing industry practices, as applicable
to the Corporation. The financial statements include amounts that are based on
management's best estimates and judgments. Management also prepared the other
information in the Annual Report and is responsible for its accuracy and
consistency with the financial statements.
The management of the Corporation has established and maintains an
internal control structure and monitors that structure for compliance with
established policies and procedures. The objectives of an internal control
structure are to provide reasonable, but not absolute, assurance as to the
integrity and reliability of the financial statements, the protection of assets
from unauthorized use or disposition, and that transactions are executed in
accordance with management's authorization. The Corporation maintains an
Internal Audit Department that independently monitors and assesses the
effectiveness of the internal controls and recommends possible improvements
thereto. The Corporation also maintains a Credit Policy Department which
develops and administers procedures to measure, monitor and control credit
risks across all businesses and recommends to management specific measures for
portfolio restructuring designed to reduce the risk of loss. In addition,
management recognizes its responsibility to foster a strong ethical environment
within the Corporation to ensure that its business affairs are conducted with
integrity and in accordance with high standards of personal and corporate
conduct. This responsibility is characterized and reflected in the
Corporation's Rules for Business Conduct, which are distributed to all
employees of the Corporation. As part of the monitoring system, the Corporation
maintains a Corporate Compliance Department having oversight responsibilities
for administering and coordinating the application of these standards of
conduct.
The Corporation's Board of Directors appoints an Audit Committee composed
solely of outside directors. The function of the Audit Committee is to oversee
the accounting, reporting, audit and internal control policies and procedures
established by the Corporation's management. The Committee meets regularly with
management and the internal, credit and independent auditors. The auditors have
free access to the Audit Committee without the presence of management. The
Committee reports regularly to the Board of Directors on its activities, and
such other matters as it deems necessary.
The Corporation's annual financial statements have been audited by Ernst &
Young LLP, independent auditors, whose appointment by the Board of Directors
was approved by the stockholders. Management has made available to Ernst &
Young LLP all the Corporation's financial records and related data, as well as
the minutes of stockholders' and directors' meetings. Furthermore, management
believes that all its representations to Ernst & Young LLP are valid and
appropriate. In addition, Ernst & Young LLP, in determining the nature and
extent of their auditing procedures, evaluated the Corporation's accounting
procedures and policies and the effectiveness of the related internal control
structure.
Management believes that, as of December 31, 1994, the Corporation's
internal control structure was adequate to accomplish the objectives discussed
herein.
Charles S. Sanford, Jr.
Chairman of the Board and
Chief Executive Officer
Timothy T. Yates
Executive Vice President,
Chief Financial Officer and
Controller
March 10, 1995
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 77
<PAGE> 66
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Bankers Trust New York Corporation
We have audited the accompanying consolidated balance sheet of Bankers Trust
New York Corporation and Subsidiaries (the "Corporation") at December 31, 1994
and 1993, 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, 1994. 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, 1994 and 1993, and the
consolidated results of operations and cash flows for each of the three years
in the period ended December 31, 1994 in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the financial statements, in 1994 the
Corporation adopted, during the fourth quarter of 1994, Financial Accounting
Standards Board ("FASB") Interpretation No. 41, "Offsetting of Amounts Related
to Certain Repurchase and Reverse Repurchase Agreements" and as of January 1,
1994, FASB Interpretation No. 39, "Offsetting of Amounts Related to Certain
Contracts." Also, in 1993 the Corporation adopted, as of December 31, 1993,
Statement of Financial Accounting Standards ("SFAS") 115, "Accounting for
Certain Investments in Debt and Equity Securities," and as of January 1, 1993,
SFAS 106, "Employers' Accounting for Postemployment Benefits Other than
Pensions," and SFAS 112, "Employers' Accounting for Postemployment Benefits."
In addition, effective January 1, 1992, the Corporation adopted SFAS 109,
"Accounting for Income Taxes."
ERNST & YOUNG LLP
New York, New York
January 26, 1995,
except for Note 11, as to which the date is
March 1, 1995
78 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 67
SUPPLEMENTAL FINANCIAL DATA
The statistical data on pages 79 through 83 should be read in conjunction with
the Financial Review and the 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, except for the
cumulative effects of accounting changes for postretirement and postemployment
benefits (recorded in the first quarter of 1993).
CONDENSED QUARTERLY CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
(in millions, except per share data)
- ---------------------------------------------------------------------------------------------------------------------------------
1994 1993
----------------------------------------- --------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest revenue $1,357 $1,207 $1,255 $1,211 $1,171 $1,177 $1,067 $1,021
Interest expense 1,128 943 946 841 798 835 768 721
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest revenue 229 264 309 370 373 342 299 300
Provision for credit losses 8 17 -- -- 23 17 23 30
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest revenue after provision
for credit losses 221 247 309 370 350 325 276 270
Total noninterest revenue 624 707 637 505 869 929 832 734
Total noninterest expenses 709 713 688 641 816 789 749 681
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and
cumulative effects of accounting
changes 136 241 258 234 403 465 359 323
Income taxes 35 72 77 70 124 155 108 93
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECTS
OF ACCOUNTING CHANGES 101 169 181 164 279 310 251 230
Cumulative effects of
accounting changes -- -- -- -- -- -- -- (75)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 101 $ 169 $ 181 $ 164 $ 279 $ 310 $ 251 $ 155
=================================================================================================================================
Net income applicable to
common stock $ 95 $ 161 $ 172 $ 159 $ 273 $ 305 $ 246 $ 148
=================================================================================================================================
PRIMARY EARNINGS PER COMMON SHARE:
INCOME BEFORE CUMULATIVE EFFECTS
OF ACCOUNTING CHANGES $ 1.19 $ 1.98 $ 2.09 $ 1.90 $ 3.26 $ 3.60 $ 2.90 $ 2.64
Cumulative effects
of accounting changes -- -- -- -- -- -- -- (.89)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1.19 $ 1.98 $ 2.09 $ 1.90 $ 3.26 $ 3.60 $ 2.90 $ 1.75
=================================================================================================================================
FULLY DILUTED EARNINGS PER
COMMON SHARE:
INCOME BEFORE CUMULATIVE
EFFECTS OF
ACCOUNTING CHANGES $ 1.18 $ 1.98 $ 2.09 $ 1.90 $ 3.25 $ 3.60 $ 2.90 $ 2.63
Cumulative effects
of accounting changes -- -- -- -- -- -- -- (.88)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1.18 $ 1.98 $ 2.09 $ 1.90 $ 3.25 $ 3.60 $ 2.90 $ 1.75
=================================================================================================================================
Cash dividends declared per
common share $ 1.00 $ .90 $ .90 $ .90 $ .90 $ .78 $ .78 $ .78
=================================================================================================================================
STOCKHOLDER DATA
- ---------------------------------------------------------------------------------------------------------------------------------
Market price (1)
High $67 5/8 $74 $74 $84 5/8 $ 83 $83 1/2 $78 $74 1/4
Low 54 3/4 63 1/2 64 1/2 69 1/8 74 73 3/4 67 1/2 65 3/4
End of quarter 55 3/8 66 3/4 66 5/8 71 79 1/8 80 74 1/8 71 1/2
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on the Composite Tape. Market prices at January 31, 1995 for common
stock were as follows: High, $62 7/8; Low, $62 1/4; Close, $62 5/8.
DIVIDENDS
Cash dividends on common stock were paid quarterly in 1994 on the 25th of
January, April, July and October.
NUMBER OF SECURITY HOLDERS
At January 31, 1995, the approximate number of holders of record of
common stock was 21,973.
STOCK LISTINGS
The principal markets on which the common stock is traded are the New York
Stock Exchange (Symbol: BT) and the London Stock Exchange.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 79
<PAGE> 68
AVERAGE BALANCES, INTEREST AND AVERAGE RATES
The following table shows the major consolidated assets and liabilities,
together with their respective interest amounts and rates earned or paid by the
Corporation. Cash basis and renegotiated loans are included in the averages to
determine an effective yield on all loans. The average balances are principally
daily averages.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1994 1993 1992
---------------------------- --------------------------- ------------------------
Average Average Average Average Average Average
($ in millions) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-bearing deposits with banks
(primarily in foreign offices) $ 1,523 $ 124 8.14% $ 2,698 $ 214 7.93% $ 3,211 $ 287 8.94%
Federal funds sold
(in domestic offices) 634 31 4.89% 708 22 3.11% 714 27 3.78%
Securities purchased under resale
agreements (primarily in domestic
offices) 13,260 468 3.53% 9,969 381 3.82% 15,020 624 4.15%
Securities borrowed (in domestic
offices) 5,018 211 4.20% 4,216 127 3.01% -- -- --
Trading assets
In domestic offices (1) 20,739 1,911 9.21% 20,810 1,414 6.79% 13,060 901 6.90%
In foreign offices 15,787 1,054 6.68% 16,490 1,033 6.26% 11,115 798 7.18%
- ------------------------------------------------------------- ------------------ --------------
Total trading assets (1) 36,526 2,965 8.12% 37,300 2,447 6.56% 24,175 1,699 7.03%
Securities available for sale
In domestic offices
Taxable 2,043 134 6.56% -- -- -- -- -- --
Exempt from federal income taxes (1) 1,374 75 5.46% -- -- -- -- -- --
In foreign offices
Taxable 3,042 178 5.85% -- -- -- -- -- --
Exempt from federal income taxes (1) 410 49 11.95% -- -- -- -- -- --
- ------------------------------------------------------------- ------------------ --------------
Total securities available for sale (1) 6,869 436 6.35% -- -- -- -- -- --
Investment securities
In domestic offices
Taxable -- -- -- 2,644 129 4.88% 2,236 167 7.47%
Exempt from federal income taxes (1) -- -- -- 598 59 9.87% 418 40 9.57%
In foreign offices
Taxable -- -- -- 2,959 200 6.76% 3,381 298 8.81%
Exempt from federal income taxes (1) -- -- -- 396 50 12.63% 412 46 11.17%
- ------------------------------------------------------------- ------------------ -------------
Total investment securities (1) -- -- -- 6,597 438 6.64% 6,447 551 8.55%
Loans
In domestic offices
Commercial and industrial 2,123 141 6.64% 3,065 157 5.12% 3,739 224 5.99%
Financial institutions 920 49 5.33% 1,635 81 4.95% 2,743 122 4.45%
Secured by real estate 1,503 82 5.46% 1,787 89 4.98% 1,913 98 5.12%
Other (1) 2,311 147 6.36% 2,986 121 4.05% 1,555 84 5.40%
- ------------------------------------------------------------- ------------------ -------------
Total in domestic offices (1) 6,857 419 6.11% 9,473 448 4.73% 9,950 528 5.31%
In foreign offices 5,613 444 7.91% 5,837 430 7.37% 6,812 540 7.93%
- ------------------------------------------------------------- ------------------ --------------
Total loans, excluding fees (1) 12,470 863 6.92% 15,310 878 5.73% 16,762 1,068 6.37%
Loan fees 15 11 15
- ------------------------------------------------------------ ------------------ --------------
Total loans, including fees (1) 12,470 878 7.04% 15,310 889 5.81% 16,762 1,083 6.46%
- ------------------------------------------------------------- ------------------ --------------
TOTAL INTEREST-EARNING ASSETS (1) 76,300 $5,113 6.70% 76,798 $4,518 5.88% 66,329 $4,271 6.44%
====== ====== ======
Cash and due from banks 1,912 1,767 1,508
Noninterest-earning trading assets 19,992 2,377 3,121
Due from customers on acceptances 348 372 218
All other assets 7,618 5,844 5,243
Allowance for credit losses (1,342) (1,535) (1,725)
- -------------------------------------------------- -------- -------
TOTAL ASSETS $104,828 $85,623 $74,694
================================================== ======== ========
% of assets attributable to
foreign offices 51% 45% 43%
</TABLE>
The average balance sheets are presented on a different basis than the spot
balance sheets, in that the various categories of interest-earning assets and
interest-bearing liabilities exclude certain noninterest-earning/bearing
components included in the spot balance sheet captions. These components,
excluding noninterest-earning/bearing trading assets/liabilities, are included
in "all other assets" and "all other liabilities" in the average balance
sheets.
(1) Interest and average rates are presented on a fully taxable basis. The
applicable combined federal, state and local incremental tax rates used to
determine the amounts of the tax equivalent adjustments to interest revenue
(which recognize the income tax savings on tax-exempt assets) were 42
percent for both 1994 and 1993 and 41 percent for 1992.
80 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 69
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1994 1993 1992
------------------------------ --------------------------- -------------------------
Average Average Average Average Average Average
($ in millions) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits
In domestic offices
Time deposits $ 700 $ 50 7.14% $ 2,425 $ 115 4.74% $ 2,952 $ 174 5.89%
Other 5,519 218 3.95% 5,835 103 1.77% 4,060 107 2.64%
- -------------------------------------------------------------- ----------------- ---------------
Total in domestic offices 6,219 268 4.31% 8,260 218 2.64% 7,012 281 4.01%
In foreign offices
Deposits from banks in
foreign countries 5,248 296 5.64% 5,937 398 6.70% 4,772 356 7.46%
Other time and savings deposits 6,027 345 5.72% 6,259 319 5.10% 6,277 386 6.15%
Other 1,221 55 4.50% 1,405 78 5.55% 1,333 96 7.20%
- -------------------------------------------------------------- ----------------- ---------------
Total in foreign offices 12,496 696 5.57% 13,601 795 5.85% 12,382 838 6.77%
- -------------------------------------------------------------- ----------------- ---------------
Total interest-bearing deposits 18,715 964 5.15% 21,861 1,013 4.63% 19,394 1,119 5.77%
Trading liabilities
In domestic offices 4,453 486 10.91% 3,947 250 6.33% 3,789 203 5.36%
In foreign offices 5,682 321 5.65% 2,522 174 6.90% 1,335 98 7.34%
- -------------------------------------------------------------- ----------------- ---------------
Total trading liabilities 10,135 807 7.96% 6,469 424 6.55% 5,124 301 5.87%
Securities sold under
repurchase agreements
In domestic offices 20,009 797 3.98% 21,748 675 3.10% 18,200 684 3.76%
In foreign offices 1,805 120 6.65% 2,024 190 9.39% 2,041 132 6.47%
- -------------------------------------------------------------- ----------------- ---------------
Total securities sold under
repurchase agreements 21,814 917 4.20% 23,772 865 3.64% 20,241 816 4.03%
Other short-term borrowings
In domestic offices 12,768 582 4.56% 8,506 330 3.88% 7,323 339 4.63%
In foreign offices 4,488 312 6.95% 4,211 276 6.55% 3,708 286 7.71%
- -------------------------------------------------------------- ----------------- ---------------
Total other short-term borrowings 17,256 894 5.18% 12,717 606 4.77% 11,031 625 5.67%
Long-term debt
In domestic offices 4,985 243 4.87% 4,425 185 4.18% 3,536 190 5.37%
In foreign offices 843 33 3.91% 432 29 6.71% 237 21 8.86%
- -------------------------------------------------------------- ----------------- ---------------
Total long-term debt 5,828 276 4.74% 4,857 214 4.41% 3,773 211 5.59%
- -------------------------------------------------------------- ----------------- ---------------
TOTAL INTEREST-BEARING LIABILITIES 73,748 $3,858 5.23% 69,676 $3,122 4.48% 59,563 $3,072 5.16%
====== ====== ======
Noninterest-bearing deposits
In domestic offices 3,210 3,315 3,402
In foreign offices 587 539 618
- -------------------------------------------------- ------- -------
Total noninterest-bearing deposits 3,797 3,854 4,020
Noninterest-bearing trading liabilities 15,680 1,542 1,763
Acceptances outstanding 363 387 226
All other liabilities 6,247 5,725 5,056
Preferred stock of subsidiary 250 236 --
Stockholders' Equity
Preferred stock 388 302 500
Common stockholders' equity 4,355 3,901 3,566
- -------------------------------------------------- ------- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $104,828 $85,623 $74,694
================================================== ======= =======
% of liabilities attributable
to foreign offices 42% 38% 42%
Rate spread 1.47% 1.40% 1.28%
Net interest margin (net interest
revenue to total interest-earning
assets)
In domestic offices $ 45,722 $ 728 1.59% $46,227 $ 862 1.86% $40,133 $ 695 1.73%
In foreign offices 30,578 527 1.72% 30,571 534 1.75% 26,196 504 1.92%
- -------------------------------------------------------------- ----------------- ---------------
Total $ 76,300 $1,255 1.64% $76,798 $1,396 1.82% $66,329 $1,199 1.81%
============================================================== ================= ===============
</TABLE>
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 81
<PAGE> 70
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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1994/93 1993/92
------------------------------------- -------------------------------------
Increase (decrease) due to change in: Increase (decrease) due to change in:
------------------------------------- -------------------------------------
Average Average Average Average
(in millions) Balance Rate Total Balance Rate Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
INTEREST REVENUE
Interest-bearing deposits with banks $ (96) $ 6 $ (90) $ (43) $ (30) $ (73)
Federal funds sold (3) 12 9 -- (5) (5)
Securities purchased under resale agreements 118 (31) 87 (196) (47) (243)
Securities borrowed 27 57 84 63 64 127
Trading assets (52) 570 518 869 (121) 748
Securities available for sale 218 218 436 -- -- --
Investment securities (219) (219) (438) 13 (126) (113)
Loans (181) 170 (11) (88) (106) (194)
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest revenue (188) 783 595 618 (371) 247
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest-bearing deposits (155) 106 (49) 130 (236) (106)
Trading liabilities 278 105 383 85 38 123
Securities sold under repurchase agreements (75) 127 52 133 (84) 49
Other short-term borrowings 231 57 288 86 (105) (19)
Long-term debt 45 17 62 54 (51) 3
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 324 412 736 488 (438) 50
- -----------------------------------------------------------------------------------------------------------------------------------
Net change in net interest revenue $(512) $ 371 $(141) $ 130 $ 67 $ 197
===================================================================================================================================
DOMESTIC OFFICES
INTEREST REVENUE
Interest-bearing deposits with banks $ (8) $ 13 $ 5 $ (3) $ 14 $ 11
Federal funds sold (3) 12 9 -- (5) (5)
Securities purchased under resale agreements 40 5 45 (198) (92) (290)
Securities borrowed 27 57 84 63 64 127
Trading assets (5) 502 497 527 (14) 513
Securities available for sale 104 105 209 -- -- --
Investment securities (94) (94) (188) 39 (58) (19)
Loans (144) 120 (24) (25) (55) (80)
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest revenue (83) 720 637 403 (146) 257
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest-bearing deposits (63) 113 50 44 (107) (63)
Trading liabilities 36 200 236 9 38 47
Securities sold under repurchase agreements (57) 179 122 121 (130) (9)
Other short-term borrowings 187 65 252 50 (59) (9)
Long-term debt 25 33 58 42 (47) (5)
Funds provided to foreign offices 227 (276) (49) 54 51 105
Funds provided by foreign offices (95) 216 121 (15) (9) (24)
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 260 530 790 305 (263) 42
- -----------------------------------------------------------------------------------------------------------------------------------
Net change in net interest revenue $(343) $ 190 $(153) $ 98 $ 117 $ 215
===================================================================================================================================
FOREIGN OFFICES
INTEREST REVENUE
Interest-bearing deposits with banks $ (79) $ (16) $ (95) $ (40) $ (44) $ (84)
Securities purchased under resale agreements 97 (55) 42 56 (9) 47
Trading assets (45) 66 21 339 (104) 235
Securities available for sale 113 114 227 -- -- --
Investment securities (125) (125) (250) (37) (57) (94)
Loans (17) 30 13 (74) (40) (114)
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest revenue (56) 14 (42) 244 (254) (10)
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest-bearing deposits (63) (36) (99) 78 (121) (43)
Trading liabilities 184 (37) 147 82 (6) 76
Securities sold under repurchase agreements (19) (51) (70) (1) 59 58
Other short-term borrowings 19 17 36 36 (46) (10)
Long-term debt 20 (16) 4 14 (6) 8
Funds provided by domestic offices (227) 276 49 (54) (51) (105)
Funds provided to domestic offices 95 (216) (121) 15 9 24
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 9 (63) (54) 170 (162) 8
- -----------------------------------------------------------------------------------------------------------------------------------
Net change in net interest revenue $ (65) $ 77 $ 12 $ 74 $ (92) $ (18)
===================================================================================================================================
</TABLE>
82 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 71
INTEREST RATE SENSITIVITY
Interest rate sensitivity data for the Corporation at December 31, 1994 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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
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, 1994 months six months one year five years years funds Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-bearing deposits with banks $ 3,305 $ 27 $ 58 $ -- $ -- $ -- $ 3,390
Federal funds sold 2,544 -- -- -- -- -- 2,544
Securities purchased under resale agreements 9,869 74 -- -- -- -- 9,943
Securities borrowed 6,197 -- -- -- -- -- 6,197
Trading assets 29,174 -- -- -- -- 18,340 47,514
Securities available for sale 2,805 527 708 1,434 2,001 -- 7,475
Loans 9,424 1,371 183 892 631 -- 12,501
Noninterest-earning assets and
allowance for credit losses -- -- -- -- -- 7,452 7,452
- ----------------------------------------------------------------------------------------------------------------------------------
Total 63,318 1,999 949 2,326 2,632 25,792 97,016
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES, PREFERRED STOCK OF SUBSIDIARY
AND STOCKHOLDERS' EQUITY
Interest-bearing deposits 16,067 3,094 1,142 740 70 -- 21,113
Trading liabilities 7,040 -- -- -- -- 13,909 20,949
Securities sold under repurchase agreements 15,457 160 -- -- -- -- 15,617
Other short-term borrowings 14,931 2,195 761 219 116 -- 18,222
Long-term debt 1,432 280 291 2,802 1,650 -- 6,455
Preferred stock of subsidiary 250 -- -- -- -- -- 250
Preferred stock -- -- -- 395 -- -- 395
Noninterest-bearing liabilities and common
stockholders' equity -- -- -- -- -- 14,015 14,015
- ----------------------------------------------------------------------------------------------------------------------------------
Total 55,177 5,729 2,194 4,156 1,836 27,924 97,016
- ----------------------------------------------------------------------------------------------------------------------------------
Effect of off-balance sheet hedging instruments (8,734) 2,056 2,056 3,311 1,311 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SENSITIVITY GAP $ (593) $(1,674) $ 811 $1,481 $2,107 $(2,132) $ --
==================================================================================================================================
CUMULATIVE INTEREST RATE SENSITIVITY GAP $ (593) $(2,267) $(1,456) $ 25 $2,132 $ -- $ --
==================================================================================================================================
</TABLE>
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,
1994 were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(in millions) Domestic Foreign Total
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Certificates of deposit of $100,000 or more
3 months or less $ 18 $ 779 $ 797
Over 3 through 6 months -- 986 986
Over 6 through 12 months 199 164 363
Over 12 months 435 223 658
- ----------------------------------------------------------------------------------------------
Total 652 2,152 2,804
- ----------------------------------------------------------------------------------------------
Other time deposits of $100,000 or more
3 months or less 43 8,923 8,966
Over 3 through 6 months 53 1,593 1,646
Over 6 through 12 months 1 613 614
Over 12 months 1 68 69
- ----------------------------------------------------------------------------------------------
Total 98 11,197 11,295
- ----------------------------------------------------------------------------------------------
Other 5,019 1,995 7,014
- ----------------------------------------------------------------------------------------------
Total interest-bearing deposits $5,769 $15,344 $21,113
==============================================================================================
</TABLE>
Deposits by foreign depositors in domestic offices amounted to $1.0 billion,
$1.1 billion and $.9 billion at December 31, 1994, 1993 and 1992, respectively.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 83
<PAGE> 72
DESCRIPTION OF BUSINESS
BANKERS TRUST NEW YORK CORPORATION
Bankers Trust New York Corporation (the "Parent Company" and, together with its
subsidiaries, the "Corporation", or the "Firm") is a registered bank holding
company which was incorporated in 1965. The Parent Company, which accounted for
4 percent of consolidated assets at December 31, 1994, supplies Bankers Trust
Company, BT Securities Corporation and its other subsidiaries with various
advisory services and coordinates their general policies and activities.
The Parent Company is a legal entity separate and distinct from its
subsidiaries. The rights of the Parent Company to participate in any
distribution of assets of any subsidiary upon its liquidation or reorganization
or otherwise are subject to the prior claims of creditors of that subsidiary,
except to the extent that the Parent Company may itself be a creditor of that
subsidiary and its claims are recognized. Claims on the Parent Company's
subsidiaries by creditors other than the Parent Company include long-term debt
and substantial obligations with respect to deposit liabilities, trading
liabilities, commercial paper, securities sold under repurchase agreements and
federal funds purchased, as well as various other liabilities.
ORGANIZATIONAL UNITS
The Corporation concentrates its financial and managerial resources on
selected markets and services its clients by meeting their needs for financing,
advisory, processing and sophisticated risk management solutions. The Firm also
conducts its own proprietary operations. The Corporation currently organizes
its personnel into the following organizational units.
The Global Investment Bank delivers the Firm's full range of financing,
and risk management product and advisory capabilities to its corporate,
financial institution and investor clients in developed countries. These
include the underwriting, distribution and trading of public equity and debt
(both investment grade and high-yield); private placements; structured finance;
asset finance; interest rate, currency, equity, commodity and credit derivative
products, as well as merger and acquisition advisory services and a variety of
other advisory services that assist clients in the management of strategic
risk.
Global Emerging Markets provides many of the same products and services
to clients in Asia, Latin America, the Middle East and Africa. Prominent among
these are financial advisory services to governments and both state-owned and
privatized businesses. This group also sells, trades and distributes
restructured loans, bonds, equities and other instruments of Latin American and
other emerging markets issuers.
Global Investment Management is responsible for most of the Firm's
investment management business for pension funds, corporations and other
institutional investors worldwide. The services they provide include both the
active and passive management of equities, fixed income securities and other
financial instruments, including currencies and derivatives, in many of the
world's major financial markets.
The Corporation's Global Markets Proprietary businesses are comprised
of Global Trading and the Global Portfolio Group. The Global Trading group
manages the risk assumed in helping clients manage their risk and enters into
securities, derivatives, currency, commodity and funding transactions on a
proprietary basis. The Global Portfolio Group is responsible for: the funding
of the Corporation worldwide; capital and liquidity management; the management
of the Corporation's securities available for sale portfolio; and the
intermediate and longer-term proprietary trading of liquid securities, foreign
exchange and derivative products.
Global Assets is engaged in the gathering, moving and managing of assets
for both institutional and individual clients throughout the world. Global
Institutional Services delivers many of 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 to sponsors
of U.S. defined benefit and defined contribution plans the Corporation's full
range of services, including recordkeeping and administrative services and
portfolio measurement. The Individual Services Group, through its Private Bank,
and Mutual Fund and Brokerage Services units, provides wealthy individuals,
foundations, private companies and individual investors with a wide range of
Global Assets' services.
Other businesses include real estate finance and principal investing.
Insurance Activities
The Corporation has two majority-owned Chilean subsidiaries, known as Consorcio
and Compensa. Consorcio underwrites pension-related life and disability
insurance, and both companies sell pension-related life annuities.
BUSINESS FUNCTIONS
Because of the close interrelationship among its organizational units, the
Corporation breaks down and analyzes its business on the basis of five business
functions, which represent the Firm's core business activities. A business
function is often common to two or more of the organizational units described
above. Descriptions of each of the Firm's five business functions appear on
page 15.
84 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 73
BANKERS TRUST COMPANY
The Parent Company's principal banking subsidiary is Bankers Trust Company,
which, along with its subsidiaries ("BTCo."), accounted for 69 percent of the
Corporation's consolidated assets at December 31, 1994. BTCo., founded in 1903,
is among the largest commercial banks in New York City and the United States,
based on total assets. BTCo. originates loans and other forms of credit,
accepts deposits, arranges financings and provides numerous other commercial
banking and financial services. BTCo. provides a broad range of financial
advisory services to its clients. It also engages in the trading of currencies,
securities, derivatives and commodities.
BT SECURITIES CORPORATION
BT Securities Corporation ("BT Securities"), a wholly-owned subsidiary of the
Parent Company, accounted for 19 percent of the Corporation's consolidated
assets at December 31, 1994. BT Securities is a primary dealer in U.S.
Government securities. It also structures, underwrites and deals in money
market instruments, commercial paper, and municipal, asset-backed and corporate
debt and equity securities. BT Securities also provides advisory and private
placement services and structures a broad range of derivative transactions for
clients.
BANKERS TRUST (DELAWARE)
Bankers Trust (Delaware) is a state bank chartered under the laws of Delaware,
which, along with its subsidiaries, accounted for 2 percent of the
Corporation's consolidated assets at December 31, 1994. Bankers Trust
(Delaware) engages in commercial banking activities, with an emphasis on
lending, funding and corporate finance. BT Commercial Corporation, its
wholly-owned subsidiary, is a commercial finance company.
SUPERVISION AND REGULATION
BT Securities has entered into a settlement agreement with the Securities and
Exchange Commission (the "SEC") and the Commodity Futures Trading Commission
(the "CFTC") concerning all investigations of the Corporation and its
subsidiaries by those agencies with respect to the conduct of its business in
privately negotiated over-the-counter derivatives (the "Derivatives"). As part
of that settlement entered into on December 22, 1994, the SEC and the CFTC
agreed not to pursue further Bankers Trust related entities concerning
Derivatives matters prior to the settlement date (although they did reserve the
right to pursue individuals), and BT Securities paid $10 million in civil
penalties and has agreed to retain an independent consultant to examine its
conduct of the Derivatives business and to implement such consultant's
recommendations.
The Corporation, BTCo. and BTSecurities have also entered into a Written
Agreement with the Federal Reserve Bank of New York and a Memorandum of
Understanding with the New York State Banking Department concerning the
Corporation's leveraged derivative transaction business, each of which call for
an independent counsel review and the establishment of a Compliance Committee
of the Board of Directors of the Corporation to monitor compliance with the
Written Agreement and the Memorandum of Understanding.
The Corporation cannot predict the effect on the derivative business
in general, or the Corporation's derivative business in particular, of these
events or of the current legislative, regulatory and media attention being
given to the derivatives industry.
Details with respect to the foregoing are set forth in the Corporation's
Current Reports on Form 8-K dated December 4, 1994, December 22, 1994 and
January 19, 1995 which have been filed with the SEC.
The Parent Company is a bank holding company within the meaning of the
Bank Holding Company Act of 1956, and as such is required to register with the
Federal Reserve Board. As a registered bank holding company, the Parent Company
is required to file with the Federal Reserve Board certain reports and
information and is restricted in its acquisitions, certain of which are subject
to approval by the Federal Reserve Board. In addition, the Parent Company would
be required to obtain the approval of the New York State Banking Department in
order for it to acquire certain bank and nonbank subsidiaries.
The Parent Company and its nonbank subsidiaries are affiliates of BTCo.
and Bankers Trust (Delaware) within the meaning of applicable federal
statutes, and such banks are therefore subject to restrictions on loans and
other extensions of credit to the Parent Company and certain other affiliates
and on certain other types of transactions with them or involving their
securities.
BTCo. is subject to the supervision of, and to examination by, the New
York State Banking Department, the Federal Reserve Board and the Federal
Deposit Insurance Corporation. Bankers Trust (Delaware) is subject to
regulation by the Office of the State Bank Commissioner of the State of
Delaware and by the Federal Deposit Insurance Corporation. See Note 14 of Notes
to Financial Statements for the required reserve balances maintained by the
Corporation's subsidiary banks at a Federal Reserve Bank and limitations on the
availability of BTCo.'s undistributed earnings for the payment of dividends.
BT Securities is registered as a broker-dealer in all 50 states, the
District of Columbia and Puerto Rico and with the SEC, and is a member of the
National Association of Securities Dealers, Inc. and is therefore subject to
supervision by those regulators. As a bank securities affiliate, BT Securities
is subject to the supervision of the Federal Reserve Board, which has imposed
limitations on the gross revenue from certain activities of such affiliates and
certain other conditions governing their operations.
The Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA") provides for cross-guarantees of the liabilities of insured
depository institutions pursuant to which any bank or savings association
subsidiary of a
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 85
<PAGE> 74
holding company may be required to reimburse the FDIC for any loss or
anticipated loss to the FDIC that arises from a default of any of such holding
company's other subsidiary banks or savings associations or assistance provided
to such an institution in danger of default.
In December 1991, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") was enacted. FDICIA substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and
revised several other federal banking statutes.
FDICIA establishes five capital tiers, ranging from "well capitalized,"
to "critically undercapitalized." A depository institution is well capitalized
if it significantly exceeds the minimum level required by regulation for each
relevant capital measure. Under FDICIA, an institution that is not well
capitalized is generally prohibited from accepting brokered deposits and
offering interest rates on deposits higher than the prevailing rate in its
market; in addition, "pass through" insurance coverage may not be available for
certain employee benefit accounts. FDICIA also requires an undercapitalized
depository institution to submit an acceptable capital restoration plan to the
appropriate federal bank regulatory agency. One requisite element of such a
plan is that the institution's parent holding company must guarantee compliance
by the institution with the plan, subject to certain limitations. In the event
of the parent holding company's bankruptcy, the guarantee, and any other
commitments that the parent holding company has made to federal bank regulators
to maintain the capital of its depository institution subsidiaries, would be
assumed by the bankruptcy trustee and entitled to priority in payment.
Based on their respective regulatory capital ratios at December 31,
1994, both BTCo. and Bankers Trust (Delaware) are well capitalized, based on
the definitions in the regulations issued by the Federal Reserve Board and the
other federal bank regulatory agencies setting forth the general capital
requirements mandated by FDICIA. See "Capital Resources" on page 31 for
information regarding the Corporation's and BTCo.'s regulatory capital ratios.
FDICIA contains numerous other provisions, including new reporting
requirements, termination of the "too big to fail" doctrine except for special
cases, limitations on the FDIC's payment of deposits at foreign branches and
revised regulatory standards for, among other things, real estate lending and
capital adequacy.
A federal depositor preference statute was enacted in 1993 providing
that deposits and certain claims for administrative expenses and employee
compensation against an insured depository institution would be afforded a
priority over other general claims against such an institution, including
federal funds and letters of credit, in the "liquidation or other resolution"
of such an institution by any receiver.
In addition to banking and securities laws, regulations and regulatory
agencies governing the Corporation worldwide, the Corporation also is subject
to various other laws, regulations and regulatory agencies throughout the
United States and in other countries. Furthermore, various proposals, bills and
regulations have been and are being considered in the United States Congress,
the New York State Legislature and various other governmental regulatory and
legislative bodies, which could result in changes in the profitability and
governance of the Corporation. It cannot be predicted whether new legislation
or regulations will be adopted and, if so, how they would affect the
Corporation.
References under the caption "Supervision and Regulation" to
applicable statutes, regulations and orders are brief summaries of portions
thereof which do not purport to be complete and which are qualified in their
entirety by reference thereto.
COMPETITION AND OTHER MARKET FACTORS
The banking and securities businesses are intensely competitive and the
Corporation competes for business with other financial services organizations,
including major commercial and investment banks and finance and investment
advisory companies, located in principal cities throughout the world.
The business of a large financial services organization such as the
Corporation is influenced by prevailing economic conditions and governmental
policies, both foreign and domestic. The actions and policy directives of the
Federal Reserve Board determine to a significant degree the cost and the
availability of funds obtained from money market sources for lending and
investing. Federal Reserve Board policies and regulations also influence,
directly and indirectly, the rates of interest paid by commercial banks on
their time and savings deposits. The nature and impact on the Corporation of
future changes in economic conditions and monetary and fiscal policies, both
foreign and domestic, are not predictable. Additionally, the Corporation's
international operations, which are widely diversified geographically and vary
from country to country, include certain economic and political risks which
differ from those associated with its domestic operations. These risks include
the possibility of expropriation of assets, exchange rate fluctuations,
restrictions on the withdrawal of funds and balance-of-payments problems.
PROPERTIES
BTCo. owns a 42-story office building located at 280 Park Avenue, a 10-story
office building at 4 Albany Street in Manhattan, and a 998-year leasehold
interest in an eight-story office building in the Broadgate complex in London,
England. The other principal office premises leased are a 39-story building
known as One Bankers Trust Plaza, seven stories of a 37-story building at 14-16
Wall Street, (both in Manhattan), an eight-story building in Jersey City, New
Jersey and a three-story
86 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 75
building in Nashville, Tennessee and a significant portion of a 42-story office
building in Sydney, Australia. Portions of certain of these properties are
leased to tenants or subtenants. BTCo. has exercised its purchase option on One
Bankers Trust Plaza for a closing in January 1996. The anticipated purchase
price for this property does not represent a material commitment for BTCo. In
addition to the offices referred to above, branch offices and locations for
other activities are occupied in cities throughout the world under various
types of ownership and leaseholds. See Note 7 of Notes to Financial Statements
for additional information concerning lease commitments.
LEGAL PROCEEDINGS
Various actions and proceedings involving the Parent Company and various
of its subsidiaries are currently pending. Management, after discussions with
counsel, does not anticipate that losses, if any, resulting from these actions
and proceedings would be material.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 87
<PAGE> 76
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names and ages of the executive officers of the Parent
Company, positions held and the year from which held. These officers are
elected annually by the Board of Directors. There are no family relationships
among such persons.
* CHARLES S. SANFORD, JR., 58
Chairman of the Board
Chairman of the Board of the Parent Company and of BTCo. since 1987 and
Director since 1982; Deputy Chairman 1986-1987; President of the Parent
Company and of BTCo. 1983-1986; Executive Vice President in charge of the
Resources Management Department of BTCo. 1974-1983.
JAMES J. BAECHLE, 62
Executive Vice President and
General Counsel
Executive Vice President of the Parent Company since 1980; Managing Director
of BTCo. since June 1992; Executive Vice President of BTCo. 1979-1992;
General Counsel of the Parent Company and/or BTCo. since 1971.
JOSEPH A. MANGANELLO, Jr., 59
Executive Vice President and
Chief Credit Officer
Executive Vice President and Chief Credit Officer of the Parent Company since
1988; Managing Director of BTCo. since June 1992 and Chief Credit Officer
since 1984; Executive Vice President of BTCo. 1982-1992; Department Head of
the United States Department of BTCo. prior to 1984. He is in charge of the
Credit Policy Department.
* EUGENE B. SHANKS, Jr., 48
President
President and Director of the Parent Company and BTCo. since January 1992;
Executive Vice President of the Parent Company 1987-1992 and Managing
Director of BTCo. 1986-1992; in charge of the Technology Department,
Strategic Planning Department and the London operation of the Resources
Management Department prior to 1986. He is in charge of the Global Markets
Proprietary, Global Assets and Global Investment Management businesses and,
with Mr. Vojta, manages the Global Investment Bank.
* GEORGE J. VOJTA, 59
Vice Chairman
Vice Chairman and Director of the Parent Company and BTCo. since January
1992; Executive Vice President of the Parent Company and BTCo. 1984-1992. He
is in charge of the Global Emerging Markets, Real Estate Finance and
Principal Investing businesses and, with Mr. Shanks, manages the Global
Investment Bank.
TIMOTHY T. YATES, 47
Executive Vice President,
Chief Financial Officer and Controller
Executive Vice President and Chief Financial Officer of the Parent Company
and Managing Director and Chief Financial Officer of BTCo. since 1991;
Controller since 1993; Managing Director of BTCo. and Chief of Staff of
Global Markets 1989-1991; Managing Director of BTCo. and later, BT Securities
Corporation in charge of High Yield/Structured Sales 1985-1989.
*Management Committee
88 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 77
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 1994
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-5920
BANKERS TRUST NEW YORK CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NEW YORK 13-6180473
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
280 PARK AVENUE
NEW YORK, NY 10017
(Address of principal (Zip code)
executive offices)
</TABLE>
(212) 250-2500
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each
exchange on
Title of each class which registered
- ------------------------------------------------------- -----------------------
<S> <C>
COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE
PREFERRED SHARE PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
8.55% CUMULATIVE PREFERRED STOCK, NEW YORK STOCK EXCHANGE
SERIES I ($250 LIQUIDATION PREFERENCE)
DEPOSITARY SHARES REPRESENTING A ONE-FOURTH INTEREST NEW YORK STOCK EXCHANGE
IN A SHARE OF 8.55% CUMULATIVE PREFERRED STOCK,
SERIES I ($100 LIQUIDATION PREFERENCE)
DEPOSITARY SHARES REPRESENTING A ONE-TENTH INTEREST AMERICAN STOCK EXCHANGE
IN A SHARE OF 7 5/8% CUMULATIVE PREFERRED STOCK,
SERIES O ($250 LIQUIDATION PREFERENCE)
7.50% CONVERTIBLE CAPITAL SECURITIES DUE 2033 AMERICAN STOCK EXCHANGE
DEPOSITARY SHARES REPRESENTING A ONE-FORTIETH INTEREST AMERICAN STOCK EXCHANGE
IN A SHARE OF 7.50% CUMULATIVE PREFERRED STOCK,
SERIES P ($1,000 LIQUIDATION PREFERENCE)
ADJUSTABLE RATE CUMULATIVE PREFERRED STOCK, SERIES Q NEW YORK STOCK EXCHANGE
DEPOSITARY SHARES REPRESENTING A ONE-HUNDREDTH INTEREST NEW YORK STOCK EXCHANGE
IN A SHARE OF ADJUSTABLE RATE CUMULATIVE PREFERRED
STOCK, SERIES Q ($2,500 LIQUIDATION PREFERENCE)
ADJUSTABLE RATE CUMULATIVE PREFERRED STOCK, SERIES R NEW YORK STOCK EXCHANGE
DEPOSITARY SHARES REPRESENTING A ONE-HUNDREDTH INTEREST NEW YORK STOCK EXCHANGE
IN A SHARE OF ADJUSTABLE RATE CUMULATIVE PREFERRED
STOCK, SERIES R ($2,500 LIQUIDATION PREFERENCE)
</TABLE>
Securities Registered Pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant as of January 31, 1995: Common Stock, $1 par value,
$4,857,482,448.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of January 31, 1995: Common Stock, $1 par value,
78,363,334 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1995 Annual Meeting of Stockholders
are incorporated by reference into Part III.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 89
<PAGE> 78
FORM 10-K CROSS-REFERENCE INDEX
<TABLE>
<CAPTION>
Part I
Item No. Pages
<S> <C>
1. BUSINESS
Description of Business 84
Supplemental Financial Data
International Operations 65
Distribution of Assets, Liabilities and
Stockholders' Equity; Interest Rates and
Interest Differential 80
Investment Portfolio 51
Loan Portfolio 36, 38, 39, 40, 49, 52
Summary of Credit Loss Experience 33, 52
Deposits 81, 83
Return on Equity and Assets 14
Short-Term Borrowings 54
2. PROPERTIES 86
3. LEGAL PROCEEDINGS 87
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS *
- EXECUTIVE OFFICERS OF THE REGISTRANT 88
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 60, 79
6. SELECTED FINANCIAL DATA 14
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 15
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Bankers Trust New York Corporation and
Subsidiaries (Consolidated) 44 - 47
Notes to Financial Statements 48
Report of Independent Auditors 78
Selected Quarterly Financial Data 79
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE *
Part III
The information required by Items 10 through 13 in this part is omitted
pursuant to Instruction G of Form 10-K since the Corporation intends to file
with the Commission a definitive Proxy Statement, pursuant to Regulation 14A,
not later than 120 days after December 31, 1994.
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) (1) Financial Statements - See Item 8.
(2) Financial Statement Schedules
All schedules normally required by Form 10-K
are omitted since they are either not applicable
or the required information is shown in the
financial statements or the notes thereto.
(3) Exhibits
3. Articles of Incorporation and By-laws,
as amended **
4. Instruments Defining the Rights of
Security Holders, Including Indentures
(ii) Long-Term Debt Indentures ***
10. Material Contracts
(ii) (D) Leases for Principal Premises
described on page 86 **
(iii) (A) Compensation, Incentive and
Benefit Plans **
12. Statements Re Computation of Ratios **
21. Subsidiaries of the Registrant **
23. Consent of Experts **
24. Power of Attorney **
27. Financial Data Schedule
99. Additional Exhibits
(i) Preferred Share Purchase Rights **
(ii) Written Agreement dated December 4,
1994 among Bankers Trust New York
Corporation, Bankers Trust Company,
BT Securities Corporation and the
Federal Reserve Bank of New York. **
(iii) BT Securities offers of settlement to the
Securities and Exchange Commission
(the "SEC") and the Commodity
Futures Trading Commission (the
"CFTC"), the SEC's Order Instituting
Proceedings and its Findings and Order
and the CFTC's Complaint and its
Opinion and Order. **
(b) Reports on Form 8-K - The Corporation filed two
reports on Form 8-K during the quarter ended
December 31, 1994.
-- The report dated December 4, 1994 filed a Written
Agreement by and among Bankers Trust New York
Corporation, Bankers Trust Company, BT
Securities Corporation and the Federal Reserve
Bank of New York regarding Bankers Trust New
York Corporation's leveraged derivative transaction
business and a press release regarding these matters.
-- The report dated December 22, 1994 filed
BT Securities offers of settlement
to the SEC and the CFTC, the SEC's Order
Instituting Proceedings, the CFTC's Complaint
and Opinion and Order and a press release
regarding these matters.
</TABLE>
* Not applicable.
** A copy of any exhibit not contained herein may be obtained
by writing to James T. Byrne, Jr., Office of the Secretary,
Bankers Trust New York Corporation, 280 Park Avenue-Mail
Stop 1175, New York, NY 10017.
*** The Corporation hereby agrees to furnish to the Commission,
upon request, a copy of any instruments defining the rights
of holders of long-term debt issued by the Parent Company or
its subsidiaries.
This report on Form 10-K has not been approved or disapproved by
the Securities and Exchange Commission nor has the Commission
passed upon the accuracy or adequacy of this report. Portions of
the 1994 Annual Report to the Corporation's stockholders are not
required by the Form 10-K report and are not "filed" as part of
the Form 10-K. Only those sections of the Annual Report
referenced in the above index are incorporated in the Form 10-K.
90 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
<PAGE> 79
FORM 10-K SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 10, 1995.
Bankers Trust New York Corporation
By JAMES T. BYRNE, JR.
--------------------------------------------------------
(James T. Byrne, Jr., Senior Vice President and
Secretary)
- -------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities
indicated on March 10, 1995.
<TABLE>
<S> <C>
CHARLES S. SANFORD, JR.* Chairman of the Board,
- ----------------------------------- Chief Executive Officer
(Charles S. Sanford, Jr.) and Director
(Principal Executive
Officer)
TIMOTHY T. YATES* Executive Vice
- ----------------------------------- President, Chief
(Timothy T. Yates) Financial Officer
and Controller
(Principal Financial
Officer)
GEOFFREY M. FLETCHER* Senior Vice President
- ----------------------------------- (Principal Accounting
(Geoffrey M. Fletcher) Officer)
GEORGE B. BEITZEL* Director
- -----------------------------------
(George B. Beitzel)
PHILLIP A. GRIFFITHS* Director
- -----------------------------------
(Phillip A. Griffiths)
WILLIAM R. HOWELL* Director
- -----------------------------------
(William R. Howell)
JON M. HUNTSMAN* Director
- -----------------------------------
(Jon M. Huntsman)
VERNON E. JORDAN, JR.* Director
- -----------------------------------
(Vernon E. Jordan, Jr.)
HAMISH MAXWELL* Director
- -----------------------------------
(Hamish Maxwell)
DONALD F. McCULLOUGH* Director
- -----------------------------------
(Donald F. McCullough)
N. J. NICHOLAS JR.* Director
- -----------------------------------
(N. J. Nicholas Jr.)
RUSSELL E. PALMER* Director
- -----------------------------------
(Russell E. Palmer)
DIDIER PINEAU-VALENCIENNE* Director
- -----------------------------------
(Didier Pineau-Valencienne)
EUGENE B. SHANKS, JR.* President and
- ----------------------------------- Director
(Eugene B. Shanks, Jr.)
PATRICIA CARRY STEWART* Director
- -----------------------------------
(Patricia Carry Stewart)
GEORGE J. VOJTA* Vice Chairman
- ----------------------------------- and Director
(George J. Vojta)
</TABLE>
*By JAMES T. BYRNE, JR.
---------------------------------------
(James T. Byrne, Jr., Attorney-in-Fact)
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 91
<PAGE> 80
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
FORM 10-K
FILED UNDER
THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 1994
BANKERS TRUST NEW YORK CORPORATION
92
<PAGE> 81
BANKERS TRUST NEW YORK CORPORATION
EXHIBIT INDEX TO FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
3. Articles of Incorporation and By-laws, as amended
Restated Certificate of Incorporation of the Registrant filed with the
State of New York on June 9, 1988 (1)
Certificate of Amendment of the Restated Certificate of Incorporation of
the Registrant filed with the State of New York on
August 30, 1989 (1)
Certificate of Amendment of the Restated Certificate of Incorporation of
the Registrant filed with the State of New York on June 14, 1990 (1)
Certificate of Amendment of the Restated Certificate of Incorporation of
the Registrant filed with the State of New York on March 20, 1992 (1)
Certificate of Amendment of the Restated Certificate of Incorporation of
the Registrant filed with the State of New York on
October 27, 1992 (1)
Certificate of Amendment of the Restated Certificate of Incorporation of
the Registrant filed with the State of New York on
January 21, 1993 (1)
Certificate of Amendment of the Restated Certificate of Incorporation of
the Registrant filed with the State of New York
on June 1, 1993 (1)
Certificate of Amendment of the Restated Certificate of Incorporation of
the Registrant filed with the State of New York
on August 18, 1993 (2)
Certificate of Amendment of the Restated Certificate of Incorporation of
the Registrant filed with the State of New York
on March 25, 1994 (3)
Certificate of Amendment of the Restated Certificate of Incorporation of
the Registrant filed with the State of New York
on August 22, 1994 (4)
By-laws as in effect September 21, 1993 (1)
4. Instruments Defining the Rights of Security Holders, Including Indentures
(ii) Long-Term Debt Indentures 90
10. Material Contracts
(ii) (D) Leases for Principal Premises Described on Page 86
Lease Agreement relating to the 39-story building known as
One Bankers Trust Plaza (5)
Lease Agreement relating to the seven stories of a 37-story building
located at 14-16 Wall Street (6)
Lease Agreement relating to the eight-story building located
in Jersey City, New Jersey (7)
Lease Agreement relating to the eight-story building located in
London, England (8)
Lease Agreement relating to the three-story
building in Nashville, Tennessee (9)
Synopsis of the Agreement for Sub-Lease and the Sub-Lease relating
to the 42-story building located in Sydney, Australia (10)
(iii) (A) Compensation, Incentive and Benefit Plans
1994 Stock Option and Stock Award Plan (11)
1991 Stock Option and Stock Award Plan (12)
1985 Stock Option and Stock Award Plan (13)
January, 1989 amendments thereto (11)
Stock Option Plan (1976) (5)
January, 1989 amendments thereto (11)
Additional Capital Accumulation Plan (14)
The Supplemental Executive Retirement Plan (8)
Deferred Compensation Plan for Directors (5)
January, 1989 amendments to the Deferred
Compensation Plan for Directors and The Supplemental
Executive Retirement Plan (11)
12. Statements Re Computation of Ratios
Computation of Consolidated Ratios of Earnings
to Fixed Charges 95
Computation of Consolidated Ratios of Earnings to Combined
Fixed Charges and Preferred Stock
Dividends Requirements 96
21. Subsidiaries of the Registrant 97
23. Consent of Experts 98
24. Power of Attorney 99
27. Financial Data Schedule 101
99. Additional Exhibits
(i) Rights Agreement dated as of February 22, 1988
describing the terms of the Preferred Share Purchase Rights (8)
(ii) Written Agreement dated December 4, 1994 among Bankers Trust New
York Corporation, Bankers Trust Company,
BT Securities Corporation and the Federal Reserve
Bank of New York 102
(iii) (1) Offer of Settlement of BT Securities Corporation before the
Securities and Exchange Commission, dated December 21, 1994. (15)
(2) Offer of Settlement of Respondent BT Securities Corporation
before the Commodity Futures Trading Commission, dated
December 21, 1994. (15)
(3) Order instituting Proceedings Pursuant to Section 8A of
the Securities Act of 1933 and Sections 15(b) and 21C of the
Securities Exchange Act of 1934, and Findings and Order
imposing Remedial Sanctions. In re BT Securities Corporation,
Securities Act of 1933 Release No. 7124 (Dec. 22, 1994) (15)
(4) Complaint Pursuant to Sections 6(c) and 6(d) of the Commodity
Exchange Act and Opinion and Order Accepting Offer of
Settlement, Making Findings and Imposing Remedial Sanctions,
in re BT Securities Corporation, CFTC Docket No. 95-2
(Dec. 22, 1994). (15)
</TABLE>
(NOTE: FOOTNOTE REFERENCES FOR THIS INDEX APPEAR ON THE NEXT PAGE.)
93
<PAGE> 82
BANKERS TRUST NEW YORK CORPORATION
EXHIBIT INDEX TO FORM 10-K FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1994
FOOTNOTE REFERENCES
(1) This document is incorporated by reference from Bankers Trust New York
Corporation's Form 8-K dated September 24, 1993, file number 1-5920.
(2) This document is incorporated by reference from Bankers Trust New York
Corporation's Form 8-K dated August 6, 1993, file number 1-5920.
(3) This document is incorporated by reference from Bankers Trust New York
Corporation's Form 8-K dated March 21, 1994, file number 1-5920.
(4) This document is incorporated by reference from Bankers Trust New York
Corporation's Form 8-K dated August 12, 1994, file number 1-5920.
(5) This document is incorporated by reference from Bankers Trust New York
Corporation's Form 10-K for the year ended December 31, 1980, file
number 1-5920.
(6) This document is incorporated by reference from Bankers Trust New York
Corporation's Form 10-K for the year ended December 31, 1986, file
number 1-5920.
(7) This document is incorporated by reference from Bankers Trust New York
Corporation's Form 10-K for the year ended December 31, 1983, file
number 1-5920.
(8) This document is incorporated by reference from Bankers Trust New York
Corporation's Form 10-K for the year ended December 31, 1987, file
number 1-5920.
(9) This document is incorporated by reference from Bankers Trust New York
Corporation's Form 10-K for the year ended December 31, 1992, file
number 1-5920.
(10) This document is incorporated by reference from Bankers Trust New York
Corporation's Form 10-K for the year ended December 31, 1993, file
number 1-5920.
(11) This document is incorporated by reference from Bankers Trust New York
Corporation's Registration Statement on Form S-8 (No. 33-54971) as filed
on August 9, 1994.
(12) This document is incorporated by reference from Bankers Trust New York
Corporation's Registration Statement on Form S-8 (No. 33-41014) as
filed on June 10, 1991.
(13) This document is incorporated by reference from Bankers Trust New York
Corporation's Proxy Statement dated as of March 21, 1988, file number
1-5920.
(14) This document is incorporated by reference from Bankers Trust New York
Corporation's Form 10-K for the year ended December 31, 1989, file
number 1-5920.
(15) This document is incorporated by reference from Bankers Trust New York
Corporation's Form 8-K dated December 22, 1994, file number 1-5920.
94
<PAGE> 1
EXHIBIT 12(a)
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
COMPUTATION OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
($ in millions)
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
1990 1991 1992 1993 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS:
1. Income (loss) before income taxes and
cumulative effects of accounting changes $ 815 $ 834 $ 906 $1,550 $ 869
2. Add: Fixed charges excluding capitalized
interest (Line 10) 4,826 3,614 3,099 3,148 3,884
3. Less: Equity in undistributed income of unconsolidated
subsidiaries and affiliates 47 31 40 30 45
- ------------------------------------------------------------------------------------------------------------
4. Earnings including interest on deposits 5,594 4,417 3,965 4,668 4,708
5. Less: Interest on deposits 2,226 1,589 1,119 1,013 965
- ------------------------------------------------------------------------------------------------------------
6. Earnings excluding interest on deposits $3,368 $2,828 $2,846 $3,655 $3,743
============================================================================================================
- ------------------------------------------------------------------------------------------------------------
FIXED CHARGES:
7. Interest expense $4,799 $3,585 $3,072 $3,122 $3,858
8. Estimated interest component of net rental expense 27 29 27 26 26
9. Amortization of debt issuance expense -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------
10. Total fixed charges including interest on deposits and
excluding capitalized interest 4,826 3,614 3,099 3,148 3,884
11. Add: Capitalized interest -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------
12. Total fixed charges 4,826 3,614 3,099 3,148 3,884
13. Less: Interest on deposits (Line 5) 2,226 1,589 1,119 1,013 965
- ------------------------------------------------------------------------------------------------------------
14. Fixed charges excluding interest
on deposits $2,600 $2,025 $1,980 $2,135 $2,919
============================================================================================================
- ------------------------------------------------------------------------------------------------------------
CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES:
Including interest on deposits (Line 4/Line 12) 1.16 1.22 1.28 1.48 1.21
============================================================================================================
Excluding interest on deposits (Line 6/Line 14) 1.30 1.40 1.44 1.71 1.28
============================================================================================================
</TABLE>
95
<PAGE> 1
EXHIBIT 12(b)
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
COMPUTATION OF CONSOLIDATED RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDEND REQUIREMENTS
($ in millions)
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------
1990 1991 1992 1993 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS:
- ---------
1. Income (loss) before income taxes and cumulative effects
of accounting changes $ 815 $ 834 $ 906 $1,550 $ 869
2. Add: Fixed charges excluding capitalized
interest (Line 13) 4,826 3,614 3,099 3,148 3,884
3. Less: Equity in undistributed income of unconsolidated
subsidiaries and affiliates 47 31 40 30 45
- ------------------------------------------------------------------------------------------------------------
4. Earnings including interest on deposits 5,594 4,417 3,965 4,668 4,708
5. Less: Interest on deposits 2,226 1,589 1,119 1,013 965
- ------------------------------------------------------------------------------------------------------------
6. Earnings excluding interest on deposits $3,368 $2,828 $2,846 $3,655 $3,743
============================================================================================================
PREFERRED STOCK DIVIDEND REQUIREMENTS:
7. Preferred stock dividend requirements $ 31 $ 34 $ 30 $ 23 $ 28
8. Ratio of income from continuing operations before
income taxes to income from continuing operations
after income taxes 123% 125% 142% 145% 141%
- ------------------------------------------------------------------------------------------------------------
9. Preferred stock dividend requirements
on a pretax basis $ 38 $ 43 $ 43 $ 33 $ 39
============================================================================================================
FIXED CHARGES:
10. Interest Expense $4,799 $3,585 $3,072 $3,122 $3,858
11. Estimated interest component of net rental expense 27 29 27 26 26
12. Amortization of debt issuance expense -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------
13. Total fixed charges including interest on deposits and
excluding capitalized interest 4,826 3,614 3,099 3,148 3,884
14. Add: Capitalized interest -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------
15. Total fixed charges 4,826 3,614 3,099 3,148 3,884
16. Add: Preferred stock dividend requirements -
pretax (Line 9) 38 43 43 33 39
- ------------------------------------------------------------------------------------------------------------
17. Total combined fixed charges and preferred
stock dividend requirements on a
pretax basis 4,864 3,657 3,142 3,181 3,923
18. Less: Interest on deposits (Line 5) 2,226 1,589 1,119 1,013 965
- ------------------------------------------------------------------------------------------------------------
19. Combined fixed charges and preferred stock dividend
requirements on a pretax basis excluding
interest on deposits $2,638 $2,068 $2,023 $2,168 $2,958
============================================================================================================
CONSOLIDATED RATIOS OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENTS:
Including interest on deposits
(Line 4/Line 17) 1.15 1.21 1.26 1.47 1.20
============================================================================================================
Excluding interest on deposits
(Line 6/Line 19) 1.28 1.37 1.41 1.69 1.27
============================================================================================================
</TABLE>
96
<PAGE> 1
EXHIBIT 21
BANKERS TRUST NEW YORK CORPORATION
SUBSIDIARIES OF THE REGISTRANT
DECEMBER 31, 1994
<TABLE>
<CAPTION>
SUBSIDIARY (1) STATE OF INCORPORATION
-------------- ----------------------
<S> <C>
Bankers Trust Company New York
BT Securities Corporation Delaware
BT Holdings (NY) Inc. New York
Bankers Trust (Delaware) Delaware
</TABLE>
All other subsidiaries of the Corporation, in the aggregate, would not
constitute a significant subsidiary, as defined.
(1) Subsidiaries' names listed hereon are names under which such subsidiaries
do business.
97
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 Nos. 2-96104, 33-13278, 33-27498, 33-45699, 33-58340, 33-50395 and
33-51615 and Form S-8 Nos. 2-67517, 2-97972, 33-20693, 33-21564, 33-41014,
33-52329 and 33-54971) and related Prospectuses of Bankers Trust New York
Corporation of our report dated January 26, 1995, except for Note 11, as to
which the date is March 1, 1995, with respect to the consolidated financial
statements of Bankers Trust New York Corporation included in this Annual Report
(Form 10-K) for the year ended December 31, 1994.
/S/ ERNST & YOUNG LLP
New York, New York
March 10, 1995
98
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors and
officers of Bankers Trust New York Corporation hereby constitute and appoint
Charles S. Sanford, Jr., Eugene B. Shanks, Jr., George J. Vojta, James J.
Baechle, Timothy T. Yates and James T. Byrne, Jr., or any one of them, their
true and lawful attorney or attorneys and agent or agents, with the power and
authority to sign the names of the undersigned to the Annual Report for the
year 1994 of Bankers Trust New York Corporation on Form 10-K pursuant to
Section 13 of the Securities and Exchange Act of 1934 and each of the
undersigned does hereby ratify and confirm all that said attorney or attorneys
and agent or agents or any one of them shall do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, each of the undersigned has subscribed these presents.
<TABLE>
<S> <C>
February 21, 1995 Bankers Trust New York Corporation
By /S/ CHARLES S. SANFORD, JR.
----------------------------
Charles S. Sanford, Jr.
Chairman of the Board
</TABLE>
/S/ CHARLES S. SANFORD, JR.
--------------------------------------
Charles S. Sanford, Jr.
Chairman of the Board,
Chief Executive Officer and Director
(Principal Executive Officer)
/S/ TIMOTHY T. YATES
--------------------------------------
Timothy T. Yates
Chief Financial Officer and Controller
(Principal Financial Officer)
/S/ GEOFFREY M. FLETCHER
--------------------------------------
Geoffrey M. Fletcher
Senior Vice President
(Principal Accounting Officer)
99
<PAGE> 2
<TABLE>
<S> <C> <C>
FEBRUARY 21, 1995
/S/ GEORGE B. BEITZEL
--------------------------------------
George B. Beitzel Director
/S/ PHILLIP A. GRIFFITHS
--------------------------------------
Phillip A. Griffiths Director
/S/ WILLIAM R. HOWELL
--------------------------------------
William R. Howell Director
/S/ JON M. HUNTSMAN
--------------------------------------
Jon M. Huntsman Director
/S/ VERNON E. JORDAN, JR.
--------------------------------------
Vernon E. Jordan, Jr. Director
/S/ HAMISH MAXWELL
--------------------------------------
Hamish Maxwell Director
/S/ DONALD F. McCULLOUGH
--------------------------------------
Donald F. McCullough Director
/S/ N.J. NICHOLAS JR.
--------------------------------------
N.J. Nicholas Jr. Director
/S/ RUSSELL E. PALMER
--------------------------------------
Russell E. Palmer Director
/S/ DIDIER PINEAU-VALENCIENNE
--------------------------------------
Didier Pineau-Valencienne Director
/S/ EUGENE B. SHANKS, JR.
--------------------------------------
Eugene B. Shanks, Jr. Director
/S/ PATRICIA C. STEWART
--------------------------------------
Patricia C. Stewart Director
/S/ GEORGE J. VOJTA
--------------------------------------
George J. Vojta Director
</TABLE>
100
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BANKERS
TRUST NEW YORK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CONDITION
AT DECEMBER 31, 1994 AND THE CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND
TWELVE MONTHS ENDED DECEMBER 31, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1994 DEC-31-1994
<PERIOD-START> JAN-01-1994 OCT-01-1994
<PERIOD-END> DEC-31-1994 DEC-31-1994
<CASH> 1,985 1,985
<INT-BEARING-DEPOSITS> 3,390 3,390
<FED-FUNDS-SOLD> 2,544 2,544
<TRADING-ASSETS> 47,514 47,514
<INVESTMENTS-HELD-FOR-SALE> 7,475 7,475
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 12,501 12,501
<ALLOWANCE> (1,252) (1,252)
<TOTAL-ASSETS> 97,016 97,016
<DEPOSITS> 24,939 24,939
<SHORT-TERM> 33,839<F1> 33,839
<LIABILITIES-OTHER> 5,502<F2> 5,502
<LONG-TERM> 6,455 6,455
<COMMON> 84 84
0 0
395 395
<OTHER-SE> 4,225 4,225
<TOTAL-LIABILITIES-AND-EQUITY> 97,016 97,016
<INTEREST-LOAN> 876 238
<INTEREST-INVEST> 390 117
<INTEREST-OTHER> 834<F3> 293
<INTEREST-TOTAL> 5,030 1,357
<INTEREST-DEPOSIT> 964 314
<INTEREST-EXPENSE> 3,858 1,128
<INTEREST-INCOME-NET> 1,172 229
<LOAN-LOSSES> 25 8
<SECURITIES-GAINS> 72 21
<EXPENSE-OTHER> 2,751 709
<INCOME-PRETAX> 869 136
<INCOME-PRE-EXTRAORDINARY> 869 136
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 615 101
<EPS-PRIMARY> 7.17 1.19
<EPS-DILUTED> 7.17 1.18
<YIELD-ACTUAL> 1.64 1.29
<LOANS-NON> 996 996
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 66 66
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 1,324 1,329
<CHARGE-OFFS> 168 93
<RECOVERIES> 71 8
<ALLOWANCE-CLOSE> 1,252 1,252
<ALLOWANCE-DOMESTIC> 214 214
<ALLOWANCE-FOREIGN> 266 266
<ALLOWANCE-UNALLOCATED> 772 772
<FN>
<F1>Short-term borrowings include the
following:
Securities sold under repurchase agreements 15,617
Other short-term borrowings 18,222
Total 33,839
<F2>Other liabilities include the following:
Accounts payable and accrued expenses 3,174
Other liabilities 2,328
Total 5,502
<F3>Other interest income includes the
following:
Interest-bearing deposits with banks 124 39
Federal funds sold 31 22
Securities purchased under resale agreements 468 150
Securities borrowed 211 82
Total 834 293
</FN>
</TABLE>
<PAGE> 1
Exhibit 99(ii)
UNITED STATES OF AMERICA
BEFORE THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
WASHINGTON, D.C.
- - - - - - - - - - - - - - - - - - - - x
WRITTEN AGREEMENT By :
and Among
: DOCKET NOs.
BANKERS TRUST NEW YORK CORPORATION 94-082-WA/RB-HC
New York, New York : 94-082-WA/RB-SM
94-082-WA/RB-HCS
and :
BANKERS TRUST COMPANY :
New York, New York
:
and
:
BT SECURITIES CORPORATION
New York, New York :
and :
FEDERAL RESERVE BANK OF NEW YORK :
New York, New York
- - - - - - - - - - - - - - - - - - - - x
WHEREAS, in recognition of their common goals to ensure the
prudent operation of the leveraged derivative transaction business, and to
ensure compliance with applicable federal and state laws, rules and
regulations by Bankers Trust New York Corporation, New York, New York
("BTNYC"), a registered bank holding company, Bankers Trust Company, New
York, New York ("Bankers Trust"), a State-member bank, and BT Securities
Corporation, New York, New York ("BT Securities"), a wholly owned
subsidiary of BTNYC authorized pursuant to Section 4(c)(8) of the Bank
Holding
<PAGE> 2
Company Act of 1956, as amended, to engage to a limited extent in
underwriting and dealing of securities, BTNYC, Bankers Trust, BT Securities
(collectively "BT"), and the Federal Reserve Bank of New York (the "Reserve
Bank") have mutually agreed to enter into this Written Agreement (the
"Agreement");
WHEREAS, for purposes of this Agreement the leveraged
derivative transaction business is intended to encompass derivative
transactions (i) where a market move of two standard deviations in the
first month would lead to a reduction in value to the counterparty of the
lower of 15 percent of the notional amount or $10 million, and (ii) for
notes or transactions with a final exchange of principal, where
counterparty principal (rather than coupon) is at risk at maturity, and
(iii) for coupon swaps, where the coupon can drop to zero (or below) or
exceed twice the market rate for that market and maturity, and (iv) for
spread trades that include an explicit leverage factor, where a spread is
defined as the difference in the yield between two asset classes (such
transactions shall be referred to herein individually as "LDTs" and
collectively the "LDT Business");
WHEREAS, the Reserve Bank is currently engaged in an annual
inspection and examination of BTNYC and its banking and nonbanking
subsidiaries; and, in connection with that review, it has had a series of
discussions with representatives of
<PAGE> 3
BTNYC and its subsidiaries regarding the management and control of the LDT
Business;
WHEREAS, as a result of such discussions, BTNYC has undertaken
a comprehensive review of its LDT Business under the close direction of the
audit committee of BTNYC's board of directors, and with active
participation of outside counsel and accountants, to ensure that the LDT
Business will be appropriately managed and controlled going forward;
WHEREAS, a written report of the findings and conclusions of
the above-referenced comprehensive review has been presented to, and
approved by, BTNYC's board of directors on November 15, 1994, and forwarded
to the Reserve Bank, and such findings and conclusions will be reflected in
the development and implementation of improved polices and procedures
governing the LDT Business;
WHEREAS, upon the recommendation of the Reserve Bank and the
staff of the Board of Governors of the Federal Reserve System ("Board of
Governors"), the Board of Governors has authorized the Reserve Bank to
enter into this Agreement with BTNYC, Bankers Trust, and BT Securities;
<PAGE> 4
WHEREAS, on December 4, 1994, the respective boards of
directors of BTNYC and Bankers Trust, at duly constituted meetings, each
adopted a resolution authorizing and directing Charles S. Sanford, Jr.,
Chairman of the Board, to enter into this Agreement on behalf of BTNYC and
Bankers Trust, and consenting to compliance with each and every provision
of this Agreement by BTNYC, Bankers Trust and their institution-affiliated
parties, as defined in Sections 3(u) and 8(b)(3) of the Federal Deposit
Insurance Act, as amended (the "FDI Act") (12 U.S.C. secs. 1813(u) and
1818(b)(3)); and
WHEREAS, on December 2, 1994, the board of directors of BT
Securities, at a duly constituted meeting, adopted a resolution authorizing
and directing Howard M. Schneider, President, to enter into this Agreement
on behalf of BT Securities, and consenting to compliance with each and
every provision of this Agreement by BT Securities and its institution-
affiliated parties.
NOW, THEREFORE, before the taking of any testimony or
adjudication of or finding on any issue of fact or law herein, and without
this Agreement constituting an admission of any allegation made or implied
by the Board of Governors or the Reserve Bank, BTNYC, Bankers Trust, BT
Securities, and the Reserve Bank hereby agree as follows:
<PAGE> 5
Client Selection and Appropriateness
- -------------------------------------
1. (a) BT shall conduct its LDT Business in a manner which
seeks to reasonably ensure that each LDT customer has the capability to
understand the nature and material terms, conditions, and risks of any LDT
entered into with the customer.
(b) By December 31, 1994, BTNYC, Bankers Trust, and BT
Securities shall jointly develop and submit to the Reserve Bank written
policies and procedures designed to accomplish the objectives set forth in
paragraph 1(a) hereof and to ensure that BT's client selection and
appropriateness policies for the LDT Business are otherwise consistent with
safe and sound banking practices.
LDT Marketing Policies and Procedures
- -------------------------------------
2. (a) BT shall make disclosures in connection with sales and
restructurings of LDTs that provide customers with sufficient information
to allow the customer to understand the nature and material terms,
conditions, and risks of any LDT or restructuring thereof entered into with
the customer.
(b) By December 31, 1994, BTNYC, Bankers Trust, and BT
Securities shall jointly develop and submit to the Reserve Bank written
policies and procedures designed to accomplish the objectives set forth in
paragraph 2(a) hereof and to ensure that BT's marketing and sales practices
in the LDT Business are otherwise consistent with safe and sound
<PAGE> 6
banking practices. The policies and procedures submitted shall address,
consider, and include, at a minimum, the following:
(1) New product identification and introduction;
(2) disclosures to each customer of the nature, and material terms,
conditions, and risks of LDTs to be entered into with the
customer; and
(3) distribution of (A) written term sheets and (B) sensitivity
analyses designed to illustrate a broad range of outcomes and
distribution of risks at maturity. Price sensitivity over the
life of a transaction will be addressed by the periodic
quotation of indicative prices and by the inclusion of
appropriate disclosure language (to be agreed with the Reserve
Bank) in term sheets, sensitivity analyses, and indicative
price quote communications. A sensitivity analysis should be
delivered (i) upon entering into an LDT, and (ii) upon receipt
of a request from a customer for an update of such information.
(Each term sheet and sensitivity analysis shall set out the
definitions and assumptions used therein. Written
communications to a customer after execution of an LDT shall
include a notice to the customer that an updated sensitivity
analysis is available upon request.)
LDT Pricing and Valuation
- -------------------------
3. (a) BT shall conduct its LDT Business in a manner which
seeks to ensure reasonable transparency of LDT pricing and valuation to its
customers.
(b) By December 31, 1994, BTNYC, Bankers Trust, and BT
Securities shall jointly develop and submit to the Reserve Bank written
policies and procedures designed to accomplish the objectives set forth in
paragraph 3(a) hereof and to ensure that BT's pricing and valuation
practices in the LDT Business are otherwise consistent with safe and sound
<PAGE> 7
banking practices. Such policies and procedures shall, at a minimum,
address, consider, and include the following:
(1) The provision of indicative quotes and firm quotes to
customers;
(2) the provision of daily indicative quotes to customers with
highly market sensitive LDTs, and monthly indicative quotes to
customers with all other types of LDTs;
(3) the methodology for making valuation adjustments;
(4) the analytical foundation for the valuation adjustment
methodology; and
(5) documentation and review of customer quotes as they relate to
LDT values reflected in BT's books, and all valuation
adjustment decisions.
LDT Management and Supervision
- ------------------------------
4. By December 31, 1994, BTNYC, Bankers Trust, and BT
Securities shall jointly develop and submit to the Reserve Bank a written
plan to augment the management and supervision process with respect to BT's
LDT Business. At a minimum, the plan shall address, consider and include
the following:
(a) The review of client relationships and individual transactions;
(b) the oversight and control of the structuring and restructuring
of individual transactions;
(c) the oversight and performance evaluation of individual officers
and employees in the LDT Business by supervisors and managers
with responsibility for the LDT Business;
(d) the oversight and performance evaluation of managers of the LDT
Business by senior management of BTNYC, Bankers Trust, and BT
Securities;
<PAGE> 8
(e) the monitoring and correction of weaknesses and deficiencies in
the LDT Business noted in regulatory reports of examination and
inspection; and
(f) the monitoring of BT's compliance in its LDT Business with all
applicable federal and state laws, rules, and regulations, this
Agreement, and the policies and procedures of BTNYC, Bankers
Trust, and BT Securities.
Compliance Committee
- --------------------
5. (a) Within 15 days of this Agreement, the board of
directors of BTNYC shall form a Compliance Committee, comprised of outside
directors, to monitor compliance with the provisions of the Agreement.
(b) Beginning on March 31, 1995, BTNYC's management shall
prepare a quarterly report for the review and approval of the Compliance
Committee which describes and documents BT's compliance with the plans,
policies, and procedures, and the program and engagement letter required by
this Agreement. The Compliance Committee shall provide such written
reports to the Reserve Bank contemporaneous with their submission to the
board of directors of BTNYC.
LDT Staff Training
- ------------------
6. By December 31, 1994, BTNYC, Bankers Trust and BT
Securities shall jointly develop and submit to the Reserve Bank a training
program for their marketing and sales staffs in the LDT Business. The
program, at a minimum, shall address and consider the requirements of this
Agreement, other
<PAGE> 9
applicable BT internal policies and procedures, and business ethics.
LDT Credit Administration
- -------------------------
7. By December 31, 1994, BTNYC, Bankers Trust and BT
Securities shall jointly develop and submit to the Reserve Bank written
policies and procedures regarding the establish-ment and administration of
LDT Business credit facilities. The LDT Business credit administration
policies and procedures shall, at a minimum, address, consider and include
the following:
(a) The credit approval and post-approval credit review processes;
(b) monitoring and reporting of customer current market values and
potential exposures, and actions to be taken as a result of
such monitoring and reporting;
(c) evaluation of the appropriateness and consistency with sound
banking practice of customer transactions, including those of
structured note purchasers, with special attention to
restructurings; and
(d) standards for credit file documentation and maintenance.
Internal Audit and Internal Reporting
- -------------------------------------
8. (a) By December 31, 1994, BTNYC, Bankers Trust, and BT
Securities shall jointly develop and submit to the Reserve Bank written
policies and procedures designed to strengthen and maintain internal audit
coverage and audit procedures for the LDT Business.
<PAGE> 10
(b) By December 31, 1994, BTNYC, Bankers Trust and BT
Securities shall jointly develop and submit to the Reserve Bank written
policies and procedures relating to BT's internal reporting system which
are designed, at a minimum, to improve the availability of information to
BT's senior management regarding the exposure of BTNYC, or any of its
subsidiaries, to LDT Business customers.
Affiliate Transactions and Firewalls
- ------------------------------------
9. (a) BTNYC, Bankers Trust, and BT Securities shall not
engage, directly or indirectly, or participate in any violation of Section
23B of the Federal Reserve Act (the "FRA") (12 U.S.C. sec. 371c-1) or of
any of the conditions imposed by the Board of Governors in connection with
its approval for BTNYC and BT Securities to engage in any securities-
related activities (commonly referred to as "Firewalls") including the
provisions of the Order Conditionally Approving Applications to Engage, to
a Limited Extent, in Underwriting and Dealing in Certain Securities, dated
January 18, 1989, as amended by subsequent orders issued by the Board of
Governors, or interpretations thereof, in the conduct of BT's LDT Business.
(b) By December 31, 1994, BTNYC, Bankers Trust and BT
Securities shall jointly conduct, with the assistance of outside counsel, a
comprehensive review of (i) the method for allocating revenue and expense
in the LDT Business among
<PAGE> 11
Bankers Trust and its "affiliates" as defined in Section 23A of the FRA (12
U.S.C. sec. 371c), and (ii) BT's compliance in connection with its LDT
Business with Firewalls related to corporate separateness and management
interlocks. By January 31, 1995, BTNYC shall submit to the Reserve Bank a
written report of the methodology, findings and conclusions of the
comprehensive review, and a description of any changes made or contemplated
as a result of such findings and conclusions. At a minimum, this
comprehensive review shall address, consider, and include the following:
(1) An analysis and review of LDTs for market risk, credit risk and
other contingencies related to the LDT Business;
(2) the nature and extent of services provided to Bankers Trust by
BT Securities in marketing LDTs, including a survey of current
market practice regarding compensation for such services;
(3) the appropriate allocation between Bankers Trust and BT
Securities of losses arising from market risk, credit risk, and
other contingencies;
(4) the fairness to Bankers Trust of the compensation it has paid
to BT Securities for services rendered in connection with LDTs
between Bankers Trust and its customers from January 1, 1992
through the date of this Agreement;
(5) the amount to be reimbursed by BT Securities to Bankers Trust,
including appropriate interest, for all compensation received
by BT Securities for services rendered in connection with LDTs
in excess of Bankers Trust's current profit allocation policy
since the adoption of its current policy;
(6) the additional amount, if any, to be reimbursed by BT
Securities to Bankers Trust, including appropriate interest, to
cure any violation of Section 23B of the FRA, uncovered in the
review,
<PAGE> 12
in connection with the provision of services in the LDT
Business between January 1, 1992 and the date of this
Agreement; and
(7) allocation of responsibilities in the LDT Business between
Bankers Trust and BT Securities including organizational charts
and reporting lines.
(c) By January 31, 1995, BT Securities shall make payment
to Bankers Trust to the extent required by paragraphs 9(b)(5) and (6)
hereof and provide the Reserve Bank with a written statement detailing the
amount of compensation paid, including interest, and the methodology used
to calculate the aggregate amount of the payment.
(d) By January 31, 1995, BTNYC shall develop and submit
to the Reserve Bank compliance policies and procedures designed to ensure
that Bankers Trust complies with Section 23B of the FRA and applicable
Firewalls in connection with its LDT Business and the findings and
conclusions of the comprehensive review required by paragraph 9(b) hereof.
(e) By January 31, 1995, Bankers Trust shall obtain an
opinion of outside counsel as to whether the methodology for allocating
revenue and expense in the LDT Business among Bankers Trust and its
affiliates complies with Section 23B of the FRA, and shall provide a copy
of the counsel's opinion to the Reserve Bank.
Special Counsel
- ---------------
10. (a) As soon as practical, but no later than December 31,
1994, BTNYC shall retain qualified independent
<PAGE> 13
legal counsel, acceptable to the Reserve Bank, to conduct a review of: (1)
any conduct by BT officers and employees related to the LDT Business which
does not comport with industry standards, BT's Code of Conduct, or
applicable law; and (2) whether any disciplinary action is appropriate with
respect to officers and employees engaged in the LDT Business, including
failure by management to supervise adequately BT employees.
(b) Within 10 days of the retention of special counsel, BTNYC
shall submit to the Reserve Bank a proposed engagement letter relating to
the scope of the independent counsel review required by this paragraph.
The engagement letter shall, at a minimum, include a requirement that (1)
to the extent possible, the special counsel review will be completed within
120 days of inception; (2) the special counsel will prepare a comprehensive
report regarding his or her findings; and (3) the special counsel's report
will be provided contemporaneously to BTNYC's board of directors and to the
Reserve Bank upon its completion.
Restrictions on Certain Officers and Employees
- ----------------------------------------------
11. BTNYC, Bankers Trust, and BT Securities shall provide the
Reserve Bank with 30 days' prior written notice before any officer and
employee who has been reassigned as of the date of this Agreement, or
thereafter, on account of his
<PAGE> 14
or her LDT Business-related activity is returned to his or her prior
position or assigned to any position involving, in any manner, the sale of
any products to BT customers.
Restrictions on New LDT Business
- --------------------------------
12. BTNYC, Bankers Trust, and BT Securities shall continue to
comply with the interim written LDT Business policy approved by the audit
committee of BTNYC's board of directors on October 7, 1994, and submitted
to the Reserve Bank, until the plans, policies, procedures, and the program
are approved and adopted in accordance with the provisions of this
Agreement, and the Reserve Bank agrees in writing to the termination of the
interim written policy.
Review and Approval of Plans
- ----------------------------
13. The plans, policies, procedures, training program
and engagement letter required by paragraphs 1(b), 2(b), 3(b), 4, 6, 7,
8(a), 8(b), 9(d), and 10(b) hereof shall be reviewed and approved by
BTNYC's board of directors, or a designated committee thereof, prior to
submission to the Reserve Bank. Such plans, policies, procedures, training
program, and engagement letter shall be submitted to the Reserve Bank
within the required time periods set forth in this Agreement. In the
absence of any objections from the Reserve Bank within 30 days of receipt,
BTNYC, Bankers Trust, and BT Securities shall each, as soon as practical,
adopt,
<PAGE> 15
where applicable, the plans, policies, procedures, training program, and
engagement letter, including any Reserve Bank modifications thereto, and
then shall comply fully with them. The adopted plans, policies,
procedures, training program, and engagement letter shall not be amended or
rescinded without 30 days' prior written notice to the Reserve Bank, which
may offer objections to any amendment or rescission.
Communications
- --------------
14. All communications regarding this Agreement shall be sent
to:
(a) Mr. Chester B. Feldberg
Executive Vice President
Federal Reserve Bank of New York
33 Liberty Street
New York, NY 10045
(b) Mr. Charles S. Sanford, Jr.
Chairman of the Board
Bankers Trust New York Corporation
and
Bankers Trust Company
One Bankers Trust Plaza
130 Liberty Street
New York, NY 10006
(c) Mr. Howard M. Schneider
President
BT Securities Corporation
One Bankers Trust Plaza
130 Liberty Street
New York, NY 10006
Miscellaneous Provisions
- ------------------------
15. The provisions of this Agreement shall be binding on
BTNYC, Bankers Trust, BT Securities and each of
<PAGE> 16
their institution-affiliated parties, in their capacities as such, and
their successors and assigns.
16. Each provision of this Agreement shall remain effective
and enforceable until stayed, modified, terminated or suspended in writing
by the Reserve Bank.
17. The provisions of this Agreement shall not bar, estop, or
otherwise prevent the Board of Governors or any federal or state agency or
department from taking any other action affecting BTNYC, Bankers Trust, and
BT Securities or any of their current or former institution-affiliated
parties.
18. Notwithstanding any provision of this Agreement to the
contrary, the Reserve Bank may, at its sole discretion, grant written
extensions of time to BTNYC, Bankers Trust, and BT Securities to comply
with any provision of this Agreement.
<PAGE> 17
19. This Agreement is a "written agreement" for the purposes
of Section 8 of the FDI Act (12 U.S.C. sec. 1818).
IN WITNESS THEREOF, the parties have caused this Agreement to
be executed as of this 4th day of December, 1994.
BANKERS TRUST NEW YORK FEDERAL RESERVE BANK OF
CORPORATION NEW YORK, Pursuant to
Delegated Authority
BANKERS TRUST COMPANY
New York, New York
By:/s/ Charles S. Sanford, Jr. By:/s/ Chester B. Feldberg
Charles S. Sanford, Jr. Chester B. Feldberg
Chairman of the Boards Executive Vice President
BT SECURITIES CORPORATION
New York, New York
By:/s/ Howard M. Schneider
Howard M. Schneider
President
<PAGE> 18
The undersigned directors of BTNYC acknowledge that each has read the
foregoing and approves of the consent thereto by BTNYC.
/s/ Charles S. Sandord, Jr. /s/ George B. Beitzel
Charles S. Sanford, Jr. George B. Beitzel
/s/ Phillip A. Griffiths /s/ William R. Howell
Phillip A. Griffiths William R. Howell
/s/ Jon M. Huntsman /s/ Vernon E. Jordan, Jr.
Jon M. Huntsman Vernon E. Jordan, Jr.
/s/ Hamish Maxwell /s/ Donald F. McCullough
Hamish Maxwell Donald F. McCullough
/s/ N.J. Nicholas Jr. /s/ Russell E. Palmer
N.J. Nicholas Jr. Russell E. Palmer
/s/ Didier Pineau-Valencienne /s/ Eugene B. Shanks, Jr.
Didier Pineau-Valencienne Eugene B. Shanks, Jr.
/s/ Patricia Carry Stewart /s/ George J. Vojta
Patricia Carry Stewart George J. Vojta
