<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) September 1, 1997
------------------
BANKERS TRUST NEW YORK CORPORATION
------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK
------------------------------------------------------------------------
(State or other jurisdiction of incorporation)
1-5920 13-6180473
------------------------ -------------------------------
(Commission file number) (IRS employer identification no.)
130 LIBERTY STREET, NEW YORK, NEW YORK 10006
------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (212) 250-2500
--------------
<PAGE>
ITEM 5 OTHER EVENTS
As previously reported by Bankers Trust New York Corporation (the "Corporation")
on its Current Report on Form 8-K filed September 4, 1997, Alex. Brown
Incorporated ("ABI") merged into BT Alex. Brown Holdings Incorporated, a wholly-
owned subsidiary of the Corporation (the "Merger"). The Merger was accounted
for as a "pooling of interests" under generally accepted accounting principles.
The year end audited supplemental consolidated financial information of the
Corporation restating the Corporation's historical consolidated financial
statements to reflect the Merger is contained in Exhibit 99.1 including
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the audited supplemental consolidated balance sheet at December 31,
1996 and December 31, 1995 and the audited supplemental consolidated statements
of income and changes in stockholders' equity and cash flows for the years ended
December 31, 1996, December 31, 1995 and December 31, 1994, and the notes
thereto.
The first quarter unaudited supplemental financial information of the
Corporation restating the Corporation's historical consolidated financial
statements to reflect the Merger is contained in Exhibit 99.2 including
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the unaudited interim supplemental consolidated balance sheet at
March 31, 1997, the audited supplemental consolidated balance sheet at December
31, 1996 and the unaudited interim supplemental consolidated statements of
income and changes in stockholders' equity and cash flows for the three months
ended March 31, 1997 and 1996.
The second quarter unaudited supplemental financial information of the
Corporation restating the Corporation's historical consolidated financial
statements to reflect the Merger is contained in Exhibit 99.3 including
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the unaudited interim supplemental consolidated balance sheet at
June 30, 1997, the audited supplemental consolidated balance sheet at December
31, 1996 and the unaudited interim supplemental consolidated statements of
income for the three months and six months ended June 30, 1997 and 1996 and
statements of changes in stockholders' equity and cash flows for the six months
ended June 30, 1997 and 1996.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
(12.a) Statement regarding Computation of Consolidated Ratios of Earnings to
Fixed Charges
(12.b) Statement regarding Computation of Consolidated Ratios of Earnings to
Combined Fixed Charges and Preferred Stock Dividend Requirements
(23.1) Consent of Ernst & Young LLP.
(23.2) Consent of KPMG Peat Marwick LLP.
(23.3) Consent of KPMG Peat Marwick LLP.
(27.1) Financial Data Schedule at December 31, 1996 and for the twelve months
ended December 31, 1996.
(27.2) Financial Data Schedule at March 31, 1997 and for the three months
ended March 31, 1997.
(27.3) Financial Data Schedule at June 30, 1997 and for the six months ended
June 30, 1997.
(99.1) Management's Discussion and Analysis of Financial Condition and Results
of Operations, the audited supplemental consolidated balance sheet at December
31, 1996 and December 31, 1995 and the audited supplemental consolidated
statements of income and changes in stockholders' equity and cash flows for the
years ended December 31, 1996, December 31, 1995 and December 31, 1994, and the
notes thereto.
(99.2) Management's Discussion and Analysis of Financial Condition and Results
of Operations, the unaudited interim supplemental consolidated balance sheet at
March 31, 1997, the audited supplemental consolidated balance sheet at December
31, 1996 and the unaudited interim supplemental consolidated statements of
income and changes in stockholders' equity and cash flows for the three months
ended March 31, 1997 and 1996.
(99.3) Management's Discussion and Analysis of Financial Condition and Results
of Operations, the unaudited interim supplemental consolidated balance sheet at
June 30, 1997, the audited supplemental consolidated balance sheet at December
31, 1996 and the unaudited interim supplemental consolidated statements of
income for the three months and six months ended June 30, 1997 and 1996 and
statements of changes in stockholders' equity and cash flows for the six months
ended June 30, 1997 and 1996.
(99.4) The audited consolidated statements of financial condition of Alex.
Brown Incorporated as of December 31, 1996 and December 31, 1995 and the related
consolidated statements of earnings, cash flows and stockholders' equity for
each of the years in the three-year period ended December 31, 1996. (This
document is incorporated by reference to Registrant's Current Report on Form 8-K
filed September 4, 1997).
(99.5) The audited consolidated balance sheet of Bankers Trust New York
Corporation as of December 31, 1996 and December 31, 1995 and the related
consolidated statements of income, cash flows and stockholders' equity for each
of the years in the three-year period ended December 31, 1996. (This document
is incorporated by reference to Registrant's Annual Report on Form 10-K filed
March 6, 1997).
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
BANKERS TRUST NEW YORK CORPORATION
September 9, 1997
by /s/ RICHARD H. DANIEL
RICHARD H. DANIEL
Vice Chairman and Controller
(Principal Financial Officer)
<PAGE>
EXHIBIT 12(a)
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
COMPUTATION OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
(dollars in millions)
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended December 31, June 30,
-----------------------------------------------------------
1992 1993 1994 1995 1996 1997
---------- ---------- ------ -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
1. Income before
income taxes and
cumulative effects
of accounting
changes $1,001 $1,698 $ 987 $ 469 $1,131 $ 602
2. Add: Fixed charges
excluding
capitalized
interest
(Line 10) 3,115 3,168 3,911 5,138 5,483 2,759
3. Less: Equity in undistri-
buted income of
unconsolidated
subsidiaries and
affiliates 40 30 45 28 30 (54)
------ ------ ------ ------ ------ ------
4. Earnings including
interest on deposits 4,076 4,836 4,853 5,579 6,584 3,415
5. Less: Interest on
deposits 1,119 1,013 965 1,360 1,355 855
------ ------ ------ ------ ------ ------
6. Earnings excluding
interest on deposits $2,957 $3,823 $3,888 $4,219 $5,229 $2,560
====== ====== ====== ====== ====== ======
Fixed Charges:
7. Interest Expense $3,083 $3,137 $3,880 $5,105 $5,451 $2,740
8. Estimated interest
component of net
rental expense 32 31 31 33 32 17
9. Amortization of debt
issuance expense - - - - - 2
------ ------ ------ ------ ------ ------
10. Total fixed charges
including interest on
deposits and excluding
capitalized interest 3,115 3,168 3,911 5,138 5,483 2,759
11. Add: Capitalized
interest - - - - - -
------ ------ ------ ------ ------ ------
12. Total fixed charges 3,115 3,168 3,911 5,138 5,483 2,759
13. Less: Interest on
deposits
(Line 5) 1,119 1,013 965 1,360 1,355 855
------ ------ ------ ------ ------ ------
14. Fixed charges excluding
interest on deposits $1,996 $2,155 $2,946 $3,778 $4,128 $1,904
====== ====== ====== ====== ====== ======
Consolidated Ratios of Earnings
to Fixed Charges:
Including interest on
deposits
(Line 4/Line 12) 1.31 1.53 1.24 1.09 1.20 1.24
====== ====== ====== ====== ====== ======
Excluding interest on
deposits
(Line 6/Line 14) 1.48 1.77 1.32 1.12 1.27 1.34
====== ====== ====== ====== ====== ======
</TABLE>
<PAGE>
EXHIBIT 12(b)
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
COMPUTATION OF CONSOLIDATED RATIOS OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS
(dollars in millions)
<TABLE>
<CAPTION>
Six
Months Ended
Year Ended December 31, June 30,
-------------------------------------------- --------
1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
1. Income before
income taxes and
cumulative effect
of accounting
changes $1,001 $1,698 $ 987 $ 469 $1,131 $ 602
2. Add: Fixed charges
excluding
capitalized
interest
(Line 13) 3,115 3,168 3,911 5,138 5,483 2,759
3. Less: Equity in undistri-
buted income of
unconsolidated
subsidiaries and
affiliates 40 30 45 28 30 (54)
------ ------ ------ ------ ------ ------
4. Earnings including
interest on deposits 4,076 4,836 4,853 5,579 6,584 3,415
5. Less: Interest on
deposits 1,119 1,013 965 1,360 1,355 855
------ ------ ------ ------ ------ ------
6. Earnings excluding
interest on deposits $2,957 $3,823 $3,888 $4,219 $5,229 $2,560
====== ====== ====== ====== ====== ======
Preferred Stock Dividend Requirements:
7. Preferred stock dividend
requirements $ 30 $ 23 $ 28 $ 51 $ 51 $ 25
8. Ratio of income from
continuing operations
before income taxes to
income from continuing
operations after income
taxes 144% 147% 144% 151% 148% 146%
------ ------ ------ ------ ------ ------
9. Preferred stock dividend
requirements on a pretax
basis $ 43 $ 34 $ 40 $ 77 $ 75 $ 37
====== ====== ====== ====== ====== ======
Fixed Charges:
10. Interest Expense $3,083 $3,137 $3,880 $5,105 $5,451 $2,740
11. Estimated interest
component of net
rental expense 32 31 31 33 32 17
12. Amortization of debt
issuance expense - - - - - 2
------ ------ ------ ------ ------ ------
13. Total fixed charges
including interest on
deposits and excluding
capitalized interest 3,115 3,168 3,911 5,138 5,483 2,759
14. Add: Capitalized
interest - - - - - -
------ ------ ------ ------ ------ ------
15. Total fixed charges 3,115 3,168 3,911 5,138 5,483 2,759
16. Add: Preferred stock
dividend require-
ments - pretax
(Line 9) 43 34 40 77 75 37
------ ------ ------ ------ ------ ------
17. Total combined fixed
charges and preferred
stock dividend require-
ments on a pretax
basis 3,158 3,202 3,951 5,215 5,558 2,796
18. Less: Interest on
deposits
(Line 5) 1,119 1,013 965 1,360 1,355 855
------ ------ ------ ------ ------ ------
19. Combined fixed charges
and preferred stock
dividend requirements
on a pretax basis
excluding interest on
deposits $2,039 $2,189 $2,986 $3,855 $4,203 $1,941
====== ====== ====== ====== ====== ======
Consolidated Ratios of Earnings
to Combined Fixed Charges
and Preferred Stock
Dividend Requirements:
Including interest on
deposits
(Line 4/Line 17) 1.29 1.51 1.23 1.07 1.18 1.22
====== ====== ====== ====== ====== ======
Excluding interest on
deposits
(Line 6/Line 19) 1.45 1.75 1.30 1.09 1.24 1.32
====== ====== ====== ====== ====== ======
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 Nos. 33-13278, 33-27498, 33-45699, 33-58340, 33-50395, 33-51615, 33-
65301, 333-08549, 333-15089, 333-15089-01 through 04 and 333-32909, Form S-4
Nos. 333-22733, 333-22733-01 and 333-31061, and Form S-8 Nos. 2-67517, 2-97972,
33-20693, 33-21564, 33-41014, 33-52329, 33-54971, 333-12181, 333-19963, 333-
34371 and 333-31061) and in the related Prospectuses of Bankers Trust New York
Corporation (the "Corporation") of our report dated January 23, 1997, except for
Note 28, as to which the date is March 6, 1997, with respect to the consolidated
financial statements of Bankers Trust New York Corporation and Subsidiaries
included in its Annual Report (Form 10-K) for the year ended December 31, 1996,
prior to their restatement for the 1997 pooling-of-interests with Alex. Brown
Incorporated as described in Note 1 to the supplemental consolidated financial
statements.
/s/ ERNST & YOUNG LLP
New York, New York
September 8, 1997
<PAGE>
Exhibit 23.2
Consent of Independent Auditors
-------------------------------
The Board of Directors
Bankers Trust New York Corporation:
We consent to the incorporation by reference in the Registration Statements
(Form S-3 Nos. 33-27498, 33-45699, 33-58340, 33-50395, 33-51615, 33-65301,
333-08549, 333-15089, 333-15089-01 through -04, 333-32909, Form S-4 Nos.
333-22733, 333-22733-01, 333-31061 and Form S-8 Nos. 2-67517, 2-97972, 33-20693,
33-21564, 33-41014, 33-52329, 33-54971, 333-12181, 333-19963, 333-31061 and 333-
34371) of our report dated January 20, 1997, with respect to the consolidated
statements of financial condition of Alex. Brown Incorporated and subsidiaries
as of December 31, 1996 and 1995, and the related consolidated statements of
earnings, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1996, which report appears in the Form 8-K
of Bankers Trust New York Corporation.
/s/ KPMG Peat Marwick LLP
Baltimore, Maryland
September 8, 1997
<PAGE>
Exhibit 23.3
Consent of Independent Auditors
-------------------------------
The Board of Directors
Bankers Trust New York Corporation:
We consent to the incorporation by reference in the Registration Statements
(Form S-3 Nos. 33-27498, 33-45699, 33-58340, 33-50395, 33-51615, 33-65301,
333-08549, 333-15089, 333-15089-01 through -04, 333-32909, Form S-4 Nos.
333-22733, 333-22733-01, 333-31061 and Form S-8 Nos. 2-67517, 2-97972, 33-20693,
33-21564, 33-41014, 33-52329, 33-54971, 333-12181, 333-19963, 333-31061, and
333-34371) of our report dated September 5, 1997, with respect to the
supplemental consolidated balance sheet of Bankers Trust New York
Corporation and Subsidiaries (the "Company") as of December 31, 1996 and 1995,
and the related supplemental consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ending December 31, 1996, which appears in the Current Report on Form 8-K
dated September 1, 1997 of the Company.
/s/ KPMG Peat Marwick LLP
New York, New York
September 8, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE BANKERS TRUST NEW
YORK CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENT OF
CONDITION AT DECEMBER 31, 1996 AND THE SUPPLEMENTAL CONSOLIDATED STATEMENT OF
INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1568
<INT-BEARING-DEPOSITS> 2210
<FED-FUNDS-SOLD> 1684
<TRADING-ASSETS> 49129
<INVESTMENTS-HELD-FOR-SALE> 7290
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 15880
<ALLOWANCE> 773
<TOTAL-ASSETS> 122778
<DEPOSITS> 30315
<SHORT-TERM> 42863<F1>
<LIABILITIES-OTHER> 7076<F2>
<LONG-TERM> 12038
0
810
<COMMON> 104
<OTHER-SE> 4964
<TOTAL-LIABILITIES-AND-EQUITY> 122778
<INTEREST-LOAN> 1046
<INTEREST-INVEST> 459
<INTEREST-OTHER> 2472<F3>
<INTEREST-TOTAL> 6508
<INTEREST-DEPOSIT> 1355
<INTEREST-EXPENSE> 5451
<INTEREST-INCOME-NET> 1057
<LOAN-LOSSES> 5
<SECURITIES-GAINS> 75
<EXPENSE-OTHER> 4038
<INCOME-PRETAX> 1131
<INCOME-PRE-EXTRAORDINARY> 1131
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 766
<EPS-PRIMARY> 6.93
<EPS-DILUTED> 6.71
<YIELD-ACTUAL> 1.12
<LOANS-NON> 452
<LOANS-PAST> 0
<LOANS-TROUBLED> 37
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 992
<CHARGE-OFFS> 89
<RECOVERIES> 65
<ALLOWANCE-CLOSE> 973<F4>
<ALLOWANCE-DOMESTIC> 161
<ALLOWANCE-FOREIGN> 144
<ALLOWANCE-UNALLOCATED> 468
<FN>
<F1>Short-term borrowings include the following:
Securities sold under repurchase agreements 23454
Other short-term borrowings 19409
Total 42863
<F2>Other liabilities include the following:
Accounts payable and accrued expenses 4837
Other liabilities 2239
Total 7076
<F3>Other interest income includes the following:
Interest-bearing deposits with banks 214
Federal funds sold 119
Securities purchased under resale agreements 1314
Securities borrowed 825
Total 2472
<F4>The Corporation has allocated its total allowance for credit losses as
follows: 773 as a reduction of loans and 200 as other liabilities related to all
other credit-related items.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BANKERS
TRUST NEW YORK CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENT
OF CONDITION AT MARCH 31, 1997 AND THE SUPPLEMENTAL CONSOLIDATED STATEMENT OF
INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1679
<INT-BEARING-DEPOSITS> 2581
<FED-FUNDS-SOLD> 1195
<TRADING-ASSETS> 47692
<INVESTMENTS-HELD-FOR-SALE> 7986
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 18040
<ALLOWANCE> 758
<TOTAL-ASSETS> 125531
<DEPOSITS> 35589
<SHORT-TERM> 42896<F1>
<LIABILITIES-OTHER> 7292<F2>
<LONG-TERM> 12797
0
704
<COMMON> 105
<OTHER-SE> 4974
<TOTAL-LIABILITIES-AND-EQUITY> 125531
<INTEREST-LOAN> 302
<INTEREST-INVEST> 120
<INTEREST-OTHER> 627<F3>
<INTEREST-TOTAL> 1681
<INTEREST-DEPOSIT> 396
<INTEREST-EXPENSE> 1349
<INTEREST-INCOME-NET> 332
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 14
<EXPENSE-OTHER> 1106
<INCOME-PRETAX> 292
<INCOME-PRE-EXTRAORDINARY> 292
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 200
<EPS-PRIMARY> 1.81
<EPS-DILUTED> 1.76
<YIELD-ACTUAL> 1.40
<LOANS-NON> 332
<LOANS-PAST> 0
<LOANS-TROUBLED> 37
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 973
<CHARGE-OFFS> 33
<RECOVERIES> 18
<ALLOWANCE-CLOSE> 958<F4>
<ALLOWANCE-DOMESTIC> 136
<ALLOWANCE-FOREIGN> 143
<ALLOWANCE-UNALLOCATED> 479
<FN>
<F1>Short-term borrowings include the following:
Securities sold under repurchase agreements 22576
Other short-term borrowings 20320
Total 42896
<F2>Other liabilities include the following:
Accounts payable and accrued expenses 4727
Other liabilities 2565
Total 7292
<F3>Other interest income include the following:
Interest-bearing deposits with banks 65
Federal funds sold 49
Securities repurchased under resale agreements 330
Securities borrowed 183
Total 627
<F4>The Corporation has allocated its total allowance for credit losses as
follows: 758 as a reduction of loans and 200 as other liabilities related to
all other credit-related items.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE BANKERS
TRUST NEW YORK CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENT
OF CONDITION AT JUNE 30, 1997 AND THE SUPPLEMENTAL CONSOLIDATED STATEMENT OF
INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 1756
<INT-BEARING-DEPOSITS> 2334
<FED-FUNDS-SOLD> 1305
<TRADING-ASSETS> 49201
<INVESTMENTS-HELD-FOR-SALE> 7478
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 19767
<ALLOWANCE> 767
<TOTAL-ASSETS> 131563
<DEPOSITS> 38430
<SHORT-TERM> 42500<F1>
<LIABILITIES-OTHER> 9674<F2>
<LONG-TERM> 12877
0
703
<COMMON> 105
<OTHER-SE> 5158
<TOTAL-LIABILITIES-AND-EQUITY> 131563
<INTEREST-LOAN> 616
<INTEREST-INVEST> 222
<INTEREST-OTHER> 1261<F3>
<INTEREST-TOTAL> 3411
<INTEREST-DEPOSIT> 855
<INTEREST-EXPENSE> 2740
<INTEREST-INCOME-NET> 671
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 82
<EXPENSE-OTHER> 2329
<INCOME-PRETAX> 602
<INCOME-PRE-EXTRAORDINARY> 602
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 413
<EPS-PRIMARY> 3.75
<EPS-DILUTED> 3.64
<YIELD-ACTUAL> 1.35
<LOANS-NON> 305
<LOANS-PAST> 0
<LOANS-TROUBLED> 37
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 973
<CHARGE-OFFS> 36
<RECOVERIES> 19
<ALLOWANCE-CLOSE> 973<F4>
<ALLOWANCE-DOMESTIC> 134
<ALLOWANCE-FOREIGN> 208
<ALLOWANCE-UNALLOCATED> 425
<FN>
<F1>Short-term borrowings include the following:
Securities sold under repurchase agreements 22973
Other short-term borrowings 19527
Total 42500
<F2>Other liabilities include the following:
Accounts payable and accrued expenses 6170
Other liabilities 3504
Total 9674
<F3>Other interest income include the following:
Interest-bearing deposits with banks 147
Federal funds sold 110
Securities repurchased under resale agreements 645
Securities borrowed 359
Total 1261
<F4>The Corporation has allocated its total allowance for credit losses as
follows: 767 as a reduction of loans and 206 as other liabilities related to
all other credit-related items.
</FN>
</TABLE>
<PAGE>
TABLE 1 FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
($ in millions, except per share data) 1996 1995 1994 1993 1992
- ---------------------------------------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR
Net interest revenue (book basis) $ 1,057 $ 884 $ 1,216 $ 1,346 $ 1,172
Noninterest revenue 4,117 3,129 3,013 3,945 2,751
Income before cumulative effects
of accounting changes $ 766 $ 311 $ 686 $ 1,159 $ 698
Cumulative effects of accounting
changes - - - (75) 446
- ---------------------------------------- -------- -------- ------- ------- -------
Net income $ 766 $ 311 $ 686 $ 1,084 $ 1,144
======================================== ======== ======== ======= ======= =======
PER COMMON SHARE
Primary Earnings Per Share
Income before cumulative effects
of accounting changes $ 6.93 $ 2.59 $ 6.51 $ 10.90 $ 6.43
Cumulative effects of accounting
changes - - - (.72) 4.30
- ---------------------------------------- -------- -------- ------- ------- -------
Net income $ 6.93 $ 2.59 $ 6.51 $ 10.18 $ 10.73
======================================== ======== ======== ======= ======= =======
Fully Diluted Earnings Per Share
Income before cumulative effects
of accounting changes $ 6.71 $ 2.53 $ 6.33 $ 10.60 $ 6.33
Cumulative effects of accounting
changes - - - (.70) 4.23
- ---------------------------------------- -------- -------- ------- ------- -------
Net income $ 6.71 $ 2.53 $ 6.33 $ 9.90 $ 10.56
======================================== ======== ======== ======= ======= =======
Cash dividends declared $ 4.00 $ 4.00 $ 3.70 $ 3.24 $ 2.88
-as a percentage of net
income (1) 60% 158% 58% 31% 45%
Book value, end of year 49.21 45.73 47.74 45.54 37.94
Market price
High 90 7/8 72 84 5/8 83 1/2 70 1/8
Low 61 49 3/4 54 3/4 65 3/4 50
End of year 86 1/4 66 1/2 55 3/8 79 1/8 68 1/2
Price/earnings ratio, end of
year (1) 12.4x 25.7x 8.5x 7.3x 10.7x
Cash dividend yield, end of year 4.6% 6.0% 7.2% 4.5% 4.6%
AT YEAR END
Total assets $122,778 $106,199 $98,362 $93,365 $73,971
Long-term debt not included in
risk-based capital 8,732 7,127 4,317 3,296 2,335
Long-term debt included in
risk-based capital 2,576 2,360 2,225 2,378 1,706
Mandatorily redeemable capital
securities of subsidiary
trusts holding solely junior
subordinated deferrable interest
debentures included in risk-based
capital 730 - - - -
Preferred stock of subsidiary 250 250 250 250 -
Preferred stock (Corporation) 810 865 395 250 500
Common stockholders' equity 5,068 4,608 4,682 4,630 3,895
Total stockholders' equity 5,878 5,473 5,077 4,880 4,395
PROFITABILITY RATIOS
Return on average common
stockholders' equity (1) 14.6% 5.7% 14.0% 26.5% 19.8%
Return on average total
stockholders' equity (1) 13.3% 5.9% 13.4% 25.3% 18.0%
Return on average total assets (1) .63% .28% .65% 1.34% .92%
CAPITAL RATIOS
Common stockholders' equity to
total assets, end of year 4.1% 4.3% 4.8% 5.0% 5.3%
Total stockholders' equity to
total assets, end of year 4.8% 5.2% 5.2% 5.2% 6.0%
Average total stockholders'
equity to average total assets 4.7% 4.7% 4.8% 5.3% 5.1%
Bankers Trust New York Corporation:
Risk-Based Capital Ratios
Tier 1 Capital (2) 9.3% 9.0% 9.5% 8.9% 8.1%
Total Capital (2) 13.8% 14.0% 14.8% 14.5% 13.7%
Leverage Ratio (2) 5.9% 5.4% 5.5% 6.6% 6.3%
Bankers Trust Company:
Risk-Based Capital Ratios
Tier 1 Capital (2) 9.3% 9.5% 9.9% 9.4% 8.0%
Total Capital (2) 12.9% 12.8% 12.9% 13.0% 12.0%
Leverage Ratio (2) 5.3% 5.1% 5.9% 6.0% 5.6%
EMPLOYEES, AT DECEMBER 31
In domestic offices 11,055 10,137 10,545 10,454 10,057
In foreign offices 6,881 6,365 6,314 5,298 4,844
- ---------------------------------------- -------- -------- ------- ------- -------
Total 17,936 16,502 16,859 15,752 14,901
======================================== ======== ======== ======= ======= =======
</TABLE>
(1) These figures exclude the cumulative effects of accounting changes recorded
in 1993 and 1992.
(2) Regulatory capital ratios at December 31, 1992 were not restated in
connection with the adoption, retroactive to January 1, 1992, of SFAS 109.
1
<PAGE>
FINANCIAL REVIEW
Management's discussion and analysis of Bankers Trust New York Corporation's
results of operations and financial condition appears on pages 2 through 45.
The discussion and analysis should be read in conjunction with the supplemental
financial statements and supplemental financial data, which begin on page 46.
The Merger
On September 1, 1997, Alex. Brown Incorporated ("Alex. Brown") was merged into a
wholly-owned subsidiary of Bankers Trust New York Corporation (the "Merger").
In conjunction with the Merger, each share of Alex. Brown common stock then
outstanding was converted into 0.83 shares of Bankers Trust New York
Corporation's common stock (the "Exchange Ratio"). The Merger was treated as a
tax free exchange.
The supplemental consolidated financial statements give retroactive effect to
the Merger in a transaction accounted for as a pooling of interests. The
pooling of interests method of accounting requires the restatement of all
periods presented as if Alex. Brown and Bankers Trust New York Corporation had
always been combined. Generally accepted accounting principles proscribe giving
effect to a consummated business combination accounted for by the pooling of
interests method in financial statements that do not include the date of
consummation. The supplemental consolidated financial statements do not extend
through the date of consummation. However, they will become the historical
consolidated financial statements of Bankers Trust New York Corporation together
with its subsidiaries (the "Corporation" or the "Firm") after financial
statements covering the date of consummation of the business combination are
issued. The supplemental consolidated statement of changes in stockholders'
equity reflects the accounts of the Corporation as if the additional common
stock had been issued during all the periods presented. The supplemental
consolidated financial statements, including the notes thereto, should be read
in conjunction with the historical consolidated financial statements of Alex.
Brown and Bankers Trust New York Corporation, included in their Annual Reports
on Form 10-K for the fiscal years ended December 31, 1996.
RESULTS OF OPERATIONS
SUMMARY OF 1996 RESULTS
For the year 1996, the Corporation earned $766 million, or $6.93 primary
earnings per share. For the year 1995, the Corporation earned $311 million, or
$2.59 primary earnings per share.
For the year, total net revenues (net interest revenue after provision for
credit losses plus noninterest revenue) of $5.169 billion were up $1.187
billion, or 30 percent, from 1995. This increase was broadly based and
reflected growth in nearly all of the Firm's businesses. Net revenues reached
their second highest level in the Corporation's history, trailing only the
record set in 1993.
Total noninterest expenses for the year increased $525 million, or 15 percent,
from 1995. This increase was primarily due to incentive compensation related to
the improved financial performance and higher employee benefits.
Credit quality continued to improve during the year. At December 31, 1996,
total cash basis loans amounted to $452 million, down from $744 million at
December 31, 1995.
2
<PAGE>
ORGANIZATIONAL HIGHLIGHTS
The Corporation delivers a wide range of financial products and services
worldwide principally through eight broad Organizational Units. Five units are
organized around specific products and services: Investment Banking, Risk
Management Services, Trading & Sales, Investment Management, and Client
Processing Services. Three additional units are organized to deliver these same
types of financial products and services with the unique local expertise
necessary to operate successfully in Australia/New Zealand, Asia and Latin
America.
Organizational Unit business results are determined based on the Corporation's
internal management accounting process, which allocates revenue and expenses
among the organizational units. Because the Corporation's business is diverse
in nature and its operations are integrated, it is impractical to segregate
respective contributions of the organizational units with precision. As a
result, estimates and judgments have been made to apportion revenue and expense
items. In addition, certain revenue and expenses have been segregated and
reported in Corporate/Other because in the opinion of management, they could not
be reasonably allocated or because their contributions to a particular
organizational unit would be distortive. The internal management accounting
process, unlike financial accounting in accordance with generally accepted
accounting principles, is based on the way management views its business and is
not necessarily comparable with similar information disclosed by other financial
institutions. In order to provide comparability from one period to the next, the
Corporation will restate this analysis to conform with material changes in the
allocation process and/or significant changes in organizational structure. The
information presented below reflects the results by organizational units. The
historical amounts of Alex. Brown have been included in Investment Banking,
Investment Management and Corporate Other, (in millions):
3
<PAGE>
<TABLE>
<CAPTION>
Total Non- Pretax Net
Year Ended Total Net interest Income/ Income/
December 31, 1996 Revenue Expenses (Loss) (Loss)
- ---------------------------- --------- ---------- -------- --------
<S> <C> <C> <C> <C>
Investment Banking $1,440 $ 807 $ 633 $ 426
Risk Management Services 321 335 (14) (9)
Trading & Sales 425 275 150 105
Investment Management 712 611 101 62
Client Processing Services 801 668 133 94
Australia/New Zealand 481 294 187 132
Asia 133 104 29 23
Latin America 526 410 116 82
Corporate/Other 330 534 (204) (149)
- ---------------------------- ------ ------ ------ -----
Total $5,169 $4,038 $1,131 $ 766
============================ ====== ====== ====== =====
Total Non- Pretax Net
Year Ended Total Net interest Income/ Income/
December 31, 1995* Revenue Expenses (Loss) (Loss)
- ---------------------------- ------ ------ ------ -----
Investment Banking $1,145 $ 559 $ 586 $ 398
Risk Management Services 232 337 (105) (74)
Trading & Sales 361 244 117 82
Investment Management 590 557 33 18
Client Processing Services 717 583 134 93
Australia/New Zealand 401 256 145 102
Asia 76 101 (25) (19)
Latin America 267 439 (172) (120)
Corporate/Other 193 437 (244) (169)
- ---------------------------- ------ ------ ------ -----
Total $3,982 $3,513 $ 469 $ 311
============================ ====== ====== ====== =====
Total Non- Pretax Net
Year Ended Total Net interest Income/ Income/
December 31, 1994* Revenue Expenses (Loss) (Loss)
- ---------------------------- ------ ------ ------ -----
Investment Banking $ 823 $ 527 $ 296 $ 181
Risk Management Services 631 401 230 163
Trading & Sales 90 238 (148) (95)
Investment Management 487 513 (26) (18)
Client Processing Services 741 578 163 98
Australia/New Zealand 436 203 233 152
Asia 144 86 58 43
Latin America 537 359 178 109
Corporate/Other 315 312 3 53
- ---------------------------- ------ ------ ------ -----
Total $4,204 $3,217 $ 987 $ 686
============================ ====== ====== ====== =====
</TABLE>
* Prior year information has been restated to conform to the current year
presentation.
4
<PAGE>
Investment Banking delivers the Firm's full range of financing, advisory and
------------------
research products and services to corporate, financial institution and investor
clients. Services include underwriting, distribution and trading of public
equity and debt (both investment grade and high-yield); private placements and
structured finance; and merger and acquisition advisory services. The unit is
also responsible for the Firm's private equity investments. The Corporation's
Asset-Based Lending activities are included in Investment Banking. Investment
Banking 1996 net income of $426 million, which was up $28 million from a year
ago, reflected strong results from corporate finance activities including loan
syndication, private placements and underwritings. Investment Banking net income
in 1995 benefited from an after-tax gain of $144 million from the sale of a
substantial portion of the Corporation's investment in Northwest Airlines
Corporation.
Risk Management Services assists clients in the management of their financial
------------------------
and economic risk. Products and services include interest rate, currency,
equity, commodity and credit derivatives, as well as risk management advisory
services. This unit also manages the Corporation's risk associated with client
derivative transactions. The 1996 net loss of $9 million compared to a net loss
of $74 million in 1995. The 1996 results included losses associated with the
steep drop in the price of copper early in the year. Revenues from new client
derivative transactions increased during 1996.
Trading & Sales provides financial products and services to the Corporation's
---------------
clients and enters into securities, currency, commodity, and derivatives
transactions on a proprietary basis. The unit is also responsible for the
Corporation's worldwide funding as well as its capital and liquidity management.
Trading & Sales net income of $105 million increased 28 percent from 1995 net
income of $82 million. The increase is attributable to arbitrage and foreign
exchange trading activities.
Investment Management manages investments for pension funds, corporations and
---------------------
other institutional investors worldwide. (The Australian funds management
business is reported in the results of Australia/New Zealand.) The
Corporation's Private Banking activities, although managed separately, are
included in Investment Management for reporting purposes. Investment Management
net income of $62 million for 1996 increased $44 million from 1995. As of
December 31, 1996, assets under management in this organizational unit were
approximately $213 billion compared to $185 billion as of December 31, 1995.
Client Processing Services delivers the Corporation's processing, fiduciary
--------------------------
and trust services, such as cash management, custody and clearance, and deposit
and credit services, to corporations, financial institutions and governments and
their agencies around the world. It also provides retirement services,
including recordkeeping and administrative services and portfolio measurement,
to sponsors of U.S. defined benefit and defined contribution plans. Client
Processing Services 1996 net income of $94 million increased slightly from 1995
net income of $93 million.
Australia/New Zealand provides funds management, corporate finance, and
---------------------
financial markets services to local and international clients, and trades for
its own account in related markets. Australia/New Zealand net income was $132
million up from $102 million in 1995. The 1996 results reflect strong
investment management and trading results. As of December 31, 1996 assets under
management in Australia/New Zealand's investment management business were
approximately $26 billion, compared to $22 billion in 1995.
Asia provides advisory and corporate finance services to financial
----
institutions, governments and both state-owned and private businesses. In
addition, it engages in arbitrage trading and equity investments. Asia net
income was $23 million in 1996 compared to a $19 million loss in 1995. The
current year reflects strong results from trading activities.
5
<PAGE>
Latin America engages in trading and distribution, origination and
-------------
underwriting of corporate finance securities, mergers and acquisitions services
and private equity investments. In addition, this organizational unit, through
the Corporation's Chilean insurance subsidiary, underwrites pension-related life
and disability insurance and sells pension-related life annuities. Latin
America net income was $82 million compared to a net loss of $120 million in
1995. The 1996 results included a $31 million pre-tax gain on the sale of
Compensa, which was the smaller of the Corporation's two Chilean insurance
subsidiaries. Consorcio, the remaining subsidiary, is the largest life
insurance company in Chile. The 1995 results included losses from derivative
trading activities.
Corporate/Other includes the unallocated costs of corporate staff together
with the notional interest income on the Corporation's capital accounts. In
addition, the provision for credit losses and various special charges and
reserves are reflected within Corporate/Other. Corporate/Other net loss for 1996
was $149 million compared with a 1995 net loss of $169 million. The most
notable items in 1996 were $20 million pre-tax reserves related to prior period
items in the transaction processing business in addition to exceptional legal
and professional fees related to the completion of the Independent Counsel's
report and the settlement of old leveraged derivatives disputes. The 1996
results also included a gain on the sale of Golden American Life Insurance
Company, an indirect wholly-owned subsidiary of the Corporation acquired in
satisfaction of debt in 1992.
6
<PAGE>
FINANCIAL REPORTING MATTERS
Effective January 1, 1996, the Corporation adopted the pro forma net income and
earnings per share disclosure requirements set forth in Statement of Financial
Accounting Standards ("SFAS") 123, "Accounting for Stock-Based Compensation."
As permitted by SFAS 123, the Corporation will continue to account for stock-
based employee compensation plans in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees."
On January 1, 1995, the Corporation adopted SFAS 114, "Accounting by Creditors
for Impairment of a Loan" as amended by SFAS 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures." SFAS 114 requires the
creation of a valuation allowance for impaired loans based on one of the
following: the present value of expected future cash flows discounted at the
loan's effective interest rate, the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. Under SFAS 114, a
loan is impaired when, based on current information and events, it is probable
that a creditor will be unable to collect all amounts due according to the
loan's contractual terms. At December 31, 1995, adoption of this standard
resulted in a $90 million allocation of the existing allowance for credit losses
to a specific valuation allowance for impaired loans.
As used throughout this Annual Report, the term "International" signifies
information based on the domicile of the customer, whereas the term "Foreign
Office" refers to the location in which the transaction is recorded.
7
<PAGE>
STATEMENT OF INCOME ANALYSIS
NET INTEREST REVENUE
Net interest revenue for 1996 was $1.057 billion, up $173 million, or 20
percent, from 1995. Net interest revenue of $884 million in 1995 decreased by
$332 million, or 27 percent, from the amount earned in 1994.
The Firm's trading and risk management businesses include significant
activities in interest rate instruments and related derivatives. These
activities can periodically shift revenue between trading and net interest,
depending on a variety of factors, including risk management strategies.
Therefore, the Corporation views trading revenue and trading-related net
interest revenue together, which is discussed in the trading revenue section
below.
The Firm's nontrading-related net interest revenue, historically a more stable
component of overall net interest revenue than trading-related net interest
revenue, was $818 million in 1996, compared to $792 million in 1995.
For the 1995 versus 1994 comparison, net interest revenue decreased by $332
million due to a $371 million, or 80 percent, decrease in trading-related net
interest revenue, which totaled $92 million for 1995. Total nontrading-related
net interest revenue was $792 million for 1995 compared to $753 million in 1994.
In 1996, the interest rate spread was .74 percent compared to .79 percent in
1995. Net interest margin increased slightly to 1.12 percent from 1.11 percent.
The yield on interest-earning assets declined by 38 basis points and was mostly
offset by a decline in the cost of interest-bearing liabilities of 33 basis
points.
In 1995, the interest rate spread declined to .79 percent from 1.46 percent in
1994. Net interest margin decreased to 1.11 percent from 1.68 percent. The
cost of interest-bearing liabilities increased at a greater rate than did the
yield on interest-earning assets.
8
<PAGE>
TABLE 2 NET INTEREST REVENUE ANALYSIS
The table below presents the Corporation's trend of net interest revenue,
average balances and rates. For further details on these statistics, see pages
129 through 131.
<TABLE>
<CAPTION>
($ in millions) Year Ended December 31, 1996 1995 1994
- ------------------------------------------------------ -------- -------- --------
<S> <C> <C> <C>
Net interest revenue
Book basis $ 1,057 $ 884 $ 1,216
Tax equivalent adjustment* 16 41 83
- ------------------------------------------------------ ------- ------- -------
Fully taxable basis $ 1,073 $ 925 $ 1,299
====================================================== ======= ======= =======
Average balances
Interest-earning assets $95,441 $83,534 $77,425
Interest-bearing liabilities 89,296 79,405 74,248
- ------------------------------------------------------ ------- ------- -------
Earning assets financed by noninterest-bearing funds $ 6,145 $ 4,129 $ 3,177
====================================================== ======= ======= =======
Average rates (fully taxable basis)
Yield on interest-earning assets 6.84% 7.22% 6.69%
Cost of interest-bearing liabilities 6.10 6.43 5.23
- ------------------------------------------------------ ------- ------- -------
Interest rate spread .74 .79 1.46
Contribution of noninterest-bearing funds .38 .32 .22
- ------------------------------------------------------ ------- ------- -------
Net interest margin 1.12% 1.11% 1.68%
====================================================== ======= ======= =======
</TABLE>
* The applicable combined federal, state and local incremental tax rate used to
determine the amounts of the tax equivalent adjustments (which recognize the
income tax savings on tax-exempt assets) was 42 percent for 1996, 1995 and
1994.
PROVISION FOR CREDIT LOSSES
The provision for credit losses amounted to $5 million for 1996, compared with
$31 million for 1995 and $25 million in 1994. A discussion of the Corporation's
summary of credit loss experience, including charge-off procedures and the
adequacy of the allowance for credit losses, appears on page 33.
9
<PAGE>
TRADING REVENUE
The Corporation conducts its global trading of debt and equity securities, money
market instruments, derivative products and foreign exchange as an integrated
business because of the dynamic interplay among worldwide interest rates,
exchange rates and equity and commodity indices. Trading revenue is generated
by both client-related activities and proprietary activities. These activities
encompass the Firm's dealer business of providing risk management products for
clients, including derivatives such as swaps, options, forwards and other
similar types of contracts. In addition, these activities include the trading
of U.S. government and agency securities, foreign sovereign securities, foreign
exchange and currency options and commodity futures and options. The Firm also
trades restructured loans, bonds, equities and other instruments of Latin
American and other emerging markets issuers.
Trading-related net interest revenue represents interest earned on cash
instruments held in the trading accounts less the cost to fund both cash and
derivatives positions.
For the year 1996, trading revenue was $1.014 billion, up $533 million, or 111
percent, from the $481 million reported in 1995. The trading revenue in 1995
was down $105 million from the results reported in 1994. Trading-related net
interest revenue increased to $239 million in 1996, up $147 million, or 160
percent, from the $92 million reported in 1995. The trading-related net
interest revenue in 1995 was down $371 million from 1994 results.
The table below presents the Firm's trading revenue and trading-related net
interest revenue by major category of market risk. These categories are based
on management's view of the predominant underlying risk exposure of each of the
Firm's trading positions.
<TABLE>
<CAPTION>
Trading-
Related
Net
Trading Interest
(in millions) Revenue Revenue Total
- ------------------------------ -------- --------- -------
<S> <C> <C> <C>
Year Ended December 31, 1996
Interest rate risk $ 474 $275 $ 749
Foreign exchange risk 178 - 178
Equity and commodity risk 362 (36) 326
- ------------------------------ ------ ---- ------
Total $1,014 $239 $1,253
============================== ====== ==== ======
Year Ended December 31, 1995
Interest rate risk $ 120 $157 $ 277
Foreign exchange risk 36 - 36
Equity and commodity risk 325 (65) 260
- ------------------------------ ------ ---- ------
Total $ 481 $ 92 $ 573
============================== ====== ==== ======
Year Ended December 31, 1994
Interest rate risk $ 325 $497 $ 822
Foreign exchange risk (54) - (54)
Equity and commodity risk 315 (34) 281
- ------------------------------ ------ ---- ------
Total $ 586 $463 $1,049
============================== ====== ==== ======
</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 revenue from these activities can periodically shift between
trading and trading-related net interest revenue, depending on a variety of
factors, including risk management
10
<PAGE>
activities. During 1996 the increase in trading and trading-related net
interest revenue in this category was primarily due to a rebound in the Firm's
activities in Latin America. This rebound was attributed to reduced risk
positions in Latin America during 1996 and a return to normal volatility levels
in the region. Conversely, 1995 was a year marked, especially in the early
months, by heightened volatility in Latin American interest rates coupled with
liquidity problems resulting from the Mexican peso devaluation. Also affecting
this category in 1996 was an increase in the volume of London, New York, and
Tokyo interest rate products, and increased revenue from U.S. bonds attributable
to increased capital inflows to the market. As a result, total trading revenue
and trading-related net interest revenue associated with interest rate positions
increased by 170 percent to $749 million in 1996.
During 1995 total trading revenue and trading-related net interest revenue
associated with interest rate positions declined by 66 percent to $277 million
from $822 million in 1994. This decrease was affected by the heightened
volatility in interest rates and associated liquidity problems in the emerging
markets of Latin America in 1995 discussed above.
Foreign Exchange Risk
The Firm's trading and risk management strategies also involve positions in
foreign exchange and currency related derivatives such as swaps, options,
forwards and other similar types of contracts. Improved performance in the
Australian, Asian, and Latin American foreign exchange markets was the primary
reason for the $142 million increase in foreign exchange trading revenue
compared to 1995.
Trading revenue related to foreign exchange risk resulted in a gain of $36
million in 1995, compared with a loss of $54 million in 1994. The general
decline in global interest rates favorably impacted positions as trading revenue
in this category increased $90 million compared to 1994, due principally to a
rebound in the Firm's proprietary trading business.
Equity and Commodity Risk
The Firm's trading and risk management activities also include positions in
equity securities and commodities and related derivatives. Total trading and
trading-related net interest revenue related to equity and commodity risk
increased $66 million compared to 1995. This increase primarily related to
strong results from equity arbitrage trading activities and increases from OTC
trading partially offset by losses incurred in the commodity derivatives books
when copper prices dropped sharply in 1996.
Total trading and trading-related net interest revenue related to equity and
commodity risk decreased $21 million in 1995 compared to 1994. This decrease
included a decline in equity-related derivative products which was reflective of
the lower average margin on derivative products as a whole. This decrease was
partially offset by increases from OTC trading. The volatility in the Latin
American markets that occurred in 1995 had a ripple effect on equity prices
which was also a factor in the overall performance in this category.
11
<PAGE>
NONINTEREST REVENUE (EXCLUDING TRADING)
The following table presents noninterest revenue (in millions):
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
- ------------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Fiduciary and funds management $ 861 $ 752 $ 783
Corporate finance fees 922 691 628
Other fees and commissions 549 491 468
Net revenue from equity investment transactions 230 153 128
Securities available for sale gains 75 180 72
Insurance premiums 230 234 183
Other 236 147 165
- ------------------------------------------------- ------ ------ ------
Total $3,103 $2,648 $2,427
================================================= ====== ====== ======
</TABLE>
Fiduciary and funds management revenue was up $109 million, or 14 percent,
from 1995, which was down $31 million from 1994. All major activities within
this category contributed to the revenue growth in 1996 which resulted from
higher transaction volumes, as well as a higher level of assets under
management. The decrease in 1995 compared to 1994 was primarily due to a
decline in transaction volumes in global fiduciary services, as well as a
decline in brokerage fee income at the Corporation's Australian subsidiary as a
result of lower fund growth as compared to 1994. Partially offsetting these
factors was an increase in custodian fees due to a higher level of global
custody assets under management.
Corporate finance fees were up $231 million, or 33 percent from 1995, which
were up $63 million from 1994. The increase in 1996 was primarily due to a
higher volume of securities underwriting, financial advisory and private
placement activities. The increase in 1995 compared to 1994 was primarily due
to an increase in revenues from underwriting-related activities.
Net revenue from equity investment transactions was up $77 million, or 50
percent, from 1995, which was up $25 million from 1994. The increase in 1996
was primarily due to gains realized in the Private Equity Investment unit of
Investment Banking. The 1995 results included a $62 million gain on the sale of
a portion of the Corporation's merchant banking investment in Northwest Airlines
Corporation.
Securities available for sale gains were down $105 million, or 58 percent,
from 1995, which were up $108 million from 1994. The 1995 results included a
$145 million gain on the sale of most of the Corporation's merchant banking
investment in Northwest Airlines Corporation.
Insurance premiums decreased $4 million, or 2 percent, from 1995. This
decrease was mainly due to the sale of Compensa, which was the smaller of the
Corporation's two Chilean insurance subsidiaries, in the second quarter of 1996,
partially offset by increased annuity and traditional life insurance activity at
Consorcio. Insurance premiums in 1995 were $51 million higher than 1994.
Higher insurance premium revenue was realized from the Corporation's Chilean
subsidiaries primarily as a result of an increase in their annuity business.
Other noninterest revenue increased $89 million, or 61 percent, from 1995.
Other noninterest revenue in 1995 was $18 million lower than 1994. The increase
in 1996 was primarily due to a $31 million gain on the sale of Compensa, as well
as a gain on the sale of Golden American Life Insurance Company, an indirect
wholly-owned subsidiary of the Corporation acquired in satisfaction of debt in
1992.
12
<PAGE>
NONINTEREST EXPENSES
The following table presents noninterest expenses (in millions):
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
- ---------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Salaries and commissions $1,155 $1,045 $ 970
Incentive compensation and employee benefits 1,215 832 856
Agency and other professional service fees 322 327 276
Communication and data services 233 220 207
Occupancy, net 172 177 166
Furniture and equipment 187 177 175
Travel and entertainment 116 104 123
Provision for policyholder benefits 280 271 205
Other 358 310 239
Provision for severance-related costs - 50 -
- ---------------------------------------------- ------ ------ ------
Total $4,038 $3,513 $3,217
============================================== ====== ====== ======
</TABLE>
Total noninterest expenses increased $525 million, or 15 percent, from 1995.
Salaries and commissions expense increased $110 million, or 11 percent, in 1996.
Incentive compensation and employee benefits expense increased $383 million, or
46 percent, reflecting an increase in incentive compensation awards in response
to increasingly competitive market conditions and improved financial
performance. The number of full time staff at December 31, 1996 was 17,936
compared to 16,502 at December 31, 1995.
All other noninterest expenses totaled $1.668 billion for 1996, compared with
$1.586 billion for 1995 which excluded the provision for severance-related costs
of $50 million. Included in the 1996 amount were reserves, as previously
discussed, for potential charges established after a review of accounting
operations since 1989 in the Corporation's transaction processing business.
Total noninterest expenses increased $296 million in 1995 from 1994.
Excluding the provision for severance-related costs, noninterest expenses were
$3.463 billion, an increase of $246 million, or 8 percent, from 1994. Salaries
and commissions expense increased $75 million, or 8 percent, in 1995. Incentive
compensation and employee benefits expense decreased $24 million, or 3 percent,
due to lower bonus expense reflecting the reduced earnings.
All other noninterest expenses, excluding the provision for severance-related
costs, totaled $1.586 billion for 1995, which was $195 million, or 14 percent,
higher than in 1994. This increase was primarily due to an increase in the
provision for policyholder benefits as well as an increase in professional fees,
which included exceptional legal costs related to leveraged derivative
transactions.
The Corporation is engaged in a global effort to manage potential system
failure and risk from the "Year 2000" problem. A Year 2000 program has been set
up to manage, track and report on the Firm's worldwide effort with the goal of
ensuring uninterrupted service across the full range of products and services
offered by the Firm.
INCOME TAXES
Income tax expense for 1996 amounted to $365 million, compared with $158 million
for 1995 and $301 million in 1994. The effective tax rate for 1996 was 32
percent, while the 1995 and 1994 effective tax rate was 34 percent and 30
percent, respectively.
13
<PAGE>
INTERNATIONAL OPERATIONS
International operations have made a significant contribution to consolidated
results, consistent with the emphasis the Corporation has placed on foreign
markets. The Corporation's assets and results of operations for 1996, 1995 and
1994 have been allocated between domestic and international operations in Note
22 of Notes to Supplemental Financial Statements. This analysis, which is based
on the domicile of the customer, incorporates numerous subjective assumptions.
Management views the operation of the Corporation on an organizational unit
basis, as disclosed on page 3.
International net income totaled $297 million for 1996, compared with $106
million for 1995. This represented a contribution of 39 percent and 34 percent
to the Corporation's overall net income in 1996 and 1995, respectively. The
1995 balances have been restated to reflect the change in methodology used to
allocate corporate overhead and operating expenses.
Australia/New Zealand and the United Kingdom had the greatest change in net
income. Australia/New Zealand's net income (after corporate expense
allocations) increased from $101 million to $144 million due to increases in
foreign exchange trading, fiduciary and funds management revenue, and other fees
and commissions. The United Kingdom net income was nil (after corporate expense
allocations) compared to the prior year's net loss of $144 million. This
improvement was driven primarily by positive trading revenues.
These increases in international results were partially offset by a reduction
in net income for Europe which decreased from $37 million to $18 million.
Domestic net income increased by $264 million to $469 million due to increased
trading revenue, and other fees and commission income.
International total assets were $62.5 billion at December 31, 1996 compared to
$51.5 billion at December 31, 1995 which represented 51 percent and 48 percent
of total consolidated assets, respectively. The $11 billion increase in assets
was primarily due to increases of $2.8 billion for Australia/New Zealand
operations, $4.4 billion for the Western Hemisphere, and $6.4 billion for
Europe. These increases were offset by a decline of $3.4 billion in the United
Kingdom. Australia/New Zealand operations' assets rose due to increases in
loans, securities available for sale and trading assets. Assets for Europe and
the Western Hemisphere rose as trading assets increased. United Kingdom
operations' assets decreased due to a decline in trading assets at year end.
Domestic total assets increased $5.6 billion to $60.3 billion driven by
increases in trading assets.
International net income totaled $106 million for 1995 as restated, compared
with $368 million for 1994. International operations contributed 34 percent and
54 percent of the Corporation's net income in 1995 and 1994, respectively. The
decrease in 1995 international net income, as compared to 1994, was primarily
due to a decline in the Corporation's overall results. The decrease in
international operations' income in proportion to domestic income (34 percent in
1995 as compared to 54 percent in 1994) is primarily due to losses incurred in
the United Kingdom and a decrease in net income for Australia/New Zealand. The
United Kingdom had a net loss (after corporate expense allocations) of $144
million, a decrease of $249 million, which was primarily caused by trading
losses. The decrease in net income for Australia/New Zealand (to $101 million
from $151 million) was primarily due to foreign exchange trading losses and an
overall increase in other expenses.
14
<PAGE>
Domestic net income decreased by $113 million, to $205 million in 1995 due to
a decline in interest earned caused by a reduction in interest-bearing trading
assets, decreases in fees and commissions and increases in interest expense and
other noninterest expense.
International total assets were $51.5 billion at December 31, 1995, compared
with $36.1 billion at December 31, 1994 and represented 48 percent and 37
percent of total consolidated assets, respectively. The $15.4 billion increase
was primarily due to an increase in United Kingdom assets of $3.2 billion, an
increase in Western Hemisphere assets of $1.5 billion and a decrease in
intersegment activity of $10 billion. Assets for both regions rose due to
increases in trading assets. Domestic total assets decreased $7.5 billion to
$54.7 billion primarily due to reductions in federal funds sold, domestic
trading assets and intersegment balances. These decreases were partially offset
by an increase in securities purchased under resale agreements.
15
<PAGE>
CHANGES IN FINANCIAL CONDITION
BALANCE SHEET ANALYSIS
Table 3 below highlights the trends in the balance sheet over the past two
years. Because annual averages may tend to conceal trends and year-end balances
can be distorted by one-day fluctuations, fourth quarter averages for each year
are provided to give a better indication of trends in the balance sheet.
TABLE 3 CONDENSED BALANCE SHEETS--FOURTH QUARTER AVERAGES
<TABLE>
<CAPTION>
(in millions) 1996 1995 1994
- -------------------------------------------------- --------- --------- --------
<S> <C> <C> <C>
ASSETS
Interest-earning
Interest-bearing deposits with banks $ 3,545 $ 3,624 $ 2,139
Federal funds sold 2,011 2,387 1,497
Securities purchased under resale agreements 22,405 15,184 11,287
Securities borrowed 15,865 14,174 9,746
Trading assets 31,617 32,042 33,219
Securities available for sale
Taxable 6,777 5,206 5,240
Exempt from federal income taxes 1,077 1,365 2,238
- -------------------------------------------------- -------- -------- --------
Total securities available for sale 7,854 6,571 7,478
Loans
Domestic offices 8,226 7,247 6,783
Foreign offices 7,032 5,624 5,798
- -------------------------------------------------- -------- -------- --------
Total loans 15,258 12,871 12,581
- -------------------------------------------------- -------- -------- --------
Customer receivables 1,683 1,284 824
Total interest-earning assets 100,238 88,137 78,771
Noninterest-earning
Cash and due from banks 1,400 2,008 1,855
Noninterest-earning trading assets 17,727 17,872 19,792
All other assets 8,519 9,870 8,239
Allowance for credit losses (988) (1,028) (1,327)
- -------------------------------------------------- -------- -------- --------
Total $126,896 $116,859 $107,330
================================================== ======== ======== ========
LIABILITIES
Interest-bearing
Interest-bearing deposits
Domestic offices $ 8,738 $ 5,788 $ 5,584
Foreign offices 18,812 18,404 15,611
- -------------------------------------------------- -------- -------- --------
Total interest-bearing deposits 27,550 24,192 21,195
Trading liabilities 9,748 12,636 8,881
Securities loaned and securities
sold under repurchase agreements 26,214 23,100 21,046
Other short-term borrowings 18,982 16,037 18,423
Long-term debt 11,372 9,098 6,397
Mandatorily redeemable capital securities
of subsidiary trusts holding solely junior
subordinated deferrable interest debentures 165 - -
- -------------------------------------------------- -------- -------- --------
Total interest-bearing liabilities 94,031 85,063 75,942
Noninterest-bearing
Noninterest-bearing deposits 3,518 3,606 3,728
Noninterest-bearing trading liabilities 15,725 15,392 15,539
All other liabilities 7,423 7,045 6,736
- -------------------------------------------------- -------- -------- --------
Total Liabilities 120,697 111,106 101,945
PREFERRED STOCK OF SUBSIDIARY 250 250 250
STOCKHOLDERS' EQUITY
- -------------------------------------------------- -------- -------- --------
Preferred stock 815 865 395
Common stockholders' equity 5,134 4,638 4,740
- -------------------------------------------------- -------- -------- --------
Total Stockholders' Equity 5,949 5,503 5,135
- -------------------------------------------------- -------- -------- --------
Total $126,896 $116,859 $107,330
================================================== ======== ======== ========
</TABLE>
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Management believes that the Corporation has sufficient resources to meet the
needs of its business operations for liquidity and capital resources.
Liquidity
Liquidity is the ability to have funds available at all times to meet the
commitments of the Corporation. The Corporation has a formal process for
managing global liquidity for the Firm as a whole and for each of its
significant subsidiaries. Management's guiding policy is to maintain
conservative levels of liquidity designed to ensure that the Firm has the
ability to meet its obligations under all reasonably foreseeable circumstances.
Management maintains appropriate asset liquidity and actively manages
liability/capital levels, maturities and diversification. The fundamental
objective is to ensure that, even in the event of a complete loss of access to
the liability markets, the Corporation will be able to continue to fund those
assets that cannot be liquidated in a timely manner.
The Corporation has a strong global funding presence and maintains a
centralized funding unit while retaining a funding presence in local markets. A
consolidated funding function provides for central coordination and control of
pricing and global information and strategy, while the proximity to local
markets allows for greater customer diversity and the flexibility to respond
quickly to market opportunities.
In addition, the Corporation assesses its liquidity profile, such as asset
marketability, asset-to-liability repayment/maturity characteristics and funding
diversification, under various stress scenarios. Management believes that the
Corporation has the ability to withstand severe and prolonged liquidity shocks,
both systemic and institution-specific.
Most of the Corporation's assets are highly liquid and of high credit quality.
The Corporation maintains excess liquidity through its base of liquid assets.
Liquid assets consist of cash and due from banks, interest-bearing deposits with
banks, federal funds sold, securities purchased under resale agreements,
securities borrowed, trading assets, and securities available for sale.
Securities purchased under resale agreements and securities borrowed are
virtually all short-term in nature and are collateralized with U.S. government
or other marketable securities, or cash equivalents. Trading assets are marked-
to-market daily and primarily consist of swaps, options and other derivative
contracts, foreign government securities, corporate debt securities, U.S.
government and agency securities, and equity securities. The Corporation's
liquid assets amounted to $97.5 billion as of December 31, 1996, and $84.1
billion as of December 31, 1995, which equaled 79 percent and 78 percent,
respectively, of gross total assets.
The Corporation continues to focus on extending and diversifying its funding
base by geography, investor segment, legal vehicle issuer, and type of
instrument. This is done by strengthening secured funding capabilities and
issuing a substantial amount of long-term debt and preferred stock in various
markets. The Corporation places particular emphasis on a large and diverse base
of stable customer deposits, which are generated incidentally from other
transactions or services provided in its Client Processing Services business.
Also, the Corporation has a relatively high proportion of active unsecured
funding which is provided by capital and long-term debt.
One of the Corporation's principal sources of day-to-day funding is provided
by securities loaned and securities sold under repurchase agreements, generally
involving U.S. government and agency securities and other OECD sovereign bonds.
Short-term financing is also available to the Corporation under various
commercial paper programs. The Corporation maintains its own sales force, which
enables the Corporation to develop and maintain ongoing relationships with a
diverse group of investors. The Corporation
17
<PAGE>
has $450 million of unused committed lines of credit under revolving credit
agreements (the "Credit Facilities") with various banks. The Credit Facilities
expire between March 1997 and March 1999. The Credit Facilities and certain
term loans contain various restrictive financial covenants. There were no
outstanding borrowings under the Credit Facilities at December 31, 1996. The
Corporation was in compliance with all restrictive covenants contained in the
Credit Facilities and applicable term loans at December 31, 1996. The
Corporation's short-term borrowings and its deposits are provided by a broadly
diversified investor/depositor base in various markets throughout the world.
The Corporation's consolidated long-term debt and mandatorily redeemable
capital securities of subsidiary trusts holding solely junior subordinated
deferrable interest debentures included in risk-based capital ("trust preferred
capital securities"), at December 31, 1996 totaled $12.0 billion, substantially
all of which was unsecured, and consisted of $7.7 billion in senior borrowings,
$3.6 billion of subordinated debt, and $730 million of trust preferred capital
securities issued principally by the Parent Company and Bankers Trust Company
("BTCo"), the Corporation's principal banking subsidiary. These liabilities
mature between 1997 and 2033, as detailed in Notes 9 and 10 of Notes to
Supplemental Financial Statements.
The following information should be read in conjunction with the consolidated
statement of cash flows, which appears on page 50.
For the year ended 1996, cash and due from banks decreased $831 million as the
net cash used in investing activities and operating activities exceeded the net
cash provided by financing activities. Within investing activities, cash
outflows from purchases of securities available for sale ($5.9 billion),
securities borrowed ($5.7 billion), securities purchased under resale agreements
($4.8 billion), and loans ($2.9 billion), were partially offset by cash inflows
from sales, maturities and other redemptions of securities available for sale
($4.8 billion). The $3.8 billion of net cash used in operating activities was
primarily the result of net changes in trading assets ($2.7 billion) and trading
liabilities ($2.4 billion) partially offset by net changes in receivables and
payables from securities transactions ($1.2 billion). Within financing
activities, cash inflows from securities loaned and securities sold under
repurchase agreements ($8.3 billion), deposits ($4.7 billion), issuances of
long-term debt and trust preferred capital securities ($4.3 billion) and other
short-term borrowings ($3.4 billion) were partially offset by cash outflows from
repayments of long-term debt ($1.3 billion).
For the year ended 1995, cash and due from banks increased $390 million as the
net cash provided by operating activities and financing activities exceeded the
net cash used in investing activities. The $3.5 billion of net cash provided by
operating activities primarily resulted from $5.9 billion of net cash provided
by a net change in trading liabilities offset in part by $1.4 billion and $1.0
billion of net cash used by net changes in trading assets and receivables and
payables from securities transactions, respectively. Within investing
activities, cash outflows from securities purchased under resale agreements
($6.4 billion), purchases of securities available for sale ($4.2 billion) and
securities borrowed ($1.8 billion), were offset in part by cash inflows from
sales, maturities and other redemptions of securities available for sale ($5.7
billion), federal funds sold ($1.7 billion) and interest-bearing deposits with
banks ($1.2 billion). Within financing activities, cash inflows from the
issuances of long-term debt ($4.8 billion) were partially offset by cash
outflows from other short-term borrowings ($2.2 billion) and repayments of long-
term debt ($1.6 billion).
18
<PAGE>
CAPITAL RESOURCES
The Corporation pursues capital management with the objective of enhancing its
ability to execute its global strategic business plans while retaining financial
flexibility. Management believes that a strong capital base is critical to
achieving these objectives.
Combined consolidated total stockholders' equity and preferred stock of
subsidiary totaled $6.128 billion on December 31, 1996, up $405 million, or 7
percent, from year end 1995, which was up $396 million, or 7 percent, from year
end 1994. The increase in 1996 was primarily due to net income, exercise of
employee stock options, and shares issued in connection with an acquisition,
partially offset by dividends declared and the repurchase of stock. The
increase in 1995 was primarily due to the issuance of preferred stock and net
income, partially offset by dividends declared.
In December 1996, the Corporation, through newly established subsidiary
trusts, issued $750 million of trust preferred capital securities, a type of
security that is reported within the Corporation's liabilities, but qualifies as
regulatory capital (refer to Note 10 of Notes to the Supplemental Financial
Statements for further discussion of these securities). The Corporation's
issuance of trust preferred capital securities was an important factor in the 19
percent increase in the Corporation's Tier 1 Capital and the 13 percent increase
in Total Capital during 1996.
The Corporation's primary measure of capital strength is the RAROC framework
(see page 27 for further discussion), which quantifies and assigns capital to
business activities based upon their credit, interest rate, foreign currency,
equity, commodity, liquidity and operating risks. Changes in the Corporation's
global balance sheet are monitored centrally on a regular basis. In addition,
the Corporation actively monitors compliance with bank regulatory capital
requirements, focusing primarily on the risk-based capital guidelines. The
Corporation manages its capital base and on- and off-balance sheet items to
ensure that it remains strongly capitalized.
The Federal Reserve Board's risk-based capital guidelines addressing the
capital adequacy of bank holding companies and banks (collectively "banking
organizations") include a definition of capital and a framework for calculating
risk-weighted assets by assigning assets and off-balance sheet items to broad
risk categories, as well as minimum risk-based capital ratios to be maintained
by banking organizations. A banking organization's risk-based capital ratios
are calculated by dividing its qualifying capital by its risk-weighted assets.
The Federal Reserve Board also has a minimum Leverage Ratio which is used as a
supplement to the risk-based capital ratios in evaluating the capital adequacy
of banks and bank holding companies. The Leverage Ratio is calculated by
dividing Tier 1 Capital by adjusted quarterly average assets.
The following discussion of the risk-based capital and leverage ratios should
be read in conjunction with Note 16 of the Notes to Supplemental Financial
Statements, which details the components of Tier 1 Capital and Tier 2 Capital,
as well as the regulatory guidelines for well-capitalized banks and bank holding
companies.
The Corporation's and BTCo's regulatory capital ratios are presented in Table
4. The Corporation's risk-weighted assets are presented in Table 5.
During 1996, the Corporation's Tier 1 Capital ratio and Leverage ratio
increased by 30 and 50 basis points, respectively, due primarily to the issuance
of $750 million of trust preferred capital securities. The Corporation's Total
Capital ratio decreased by 20 basis points due primarily to an increase in risk-
weighted assets. Refer to Table 5, which details the Corporation's risk-
weighted assets.
19
<PAGE>
During 1996, BTCo's Total Capital ratio increased by 10 basis points, due
primarily to the issuance of $250 million of trust preferred capital securities
(included in the $750 million above) which qualifies as Tier 2 Capital for BTCo.
The Leverage ratio increased by 20 basis points, due to a slight increase in
Tier 1 Capital. However, the increase in Tier 1 Capital was offset by higher
risk-weighted assets, resulting in a 20 basis points decrease to the Tier 1
Capital ratio.
Table 4 presents the regulatory capital ratios of the Corporation and BTCo at
December 31, 1996 and 1995 and the well capitalized guidelines.
TABLE 4 REGULATORY CAPITAL RATIOS
<TABLE>
<CAPTION>
Well
December 31, December 31, Capitalized
1996 1995 Guidelines
------------- ------------- ------------
<S> <C> <C> <C>
CORPORATION
Risk-Based Ratios
Tier 1 Capital 9.3% 9.0% 6.0%
Total Capital 13.8% 14.0% 10.0%
Leverage Ratio 5.9% 5.4% 3.0-4.0%
BTCo
Risk-Based Ratios
Tier 1 Capital 9.3% 9.5% 6.0%
Total Capital 12.9% 12.8% 10.0%
Leverage Ratio 5.3% 5.1% 5.0%
</TABLE>
The following were the essential components (in millions) used in calculating
the Corporation's and BTCo's risk-based capital ratios:
<TABLE>
<CAPTION>
December 31, 1996 1995
- ---------------------------- ------- -------
<S> <C> <C>
CORPORATION
Tier 1 Capital $ 5,690 $ 4,789
Tier 2 Capital 2,734 2,654
- ---------------------------- ------- -------
Total Capital $ 8,424 $ 7,443
============================ ======= =======
Total risk-weighted assets $61,213 $53,266
============================ ======= =======
BTCo
Tier 1 Capital $ 4,869 $ 4,394
Tier 2 Capital 1,900 1,532
- ---------------------------- ------- -------
Total Capital $ 6,769 $ 5,926
============================ ======= =======
Total risk-weighted assets $52,484 $46,389
============================ ======= =======
</TABLE>
20
<PAGE>
TABLE 5 RISK-WEIGHTED ASSETS--CORPORATION (in billions)
<TABLE>
<CAPTION>
December 31, 1996 1995
- ---------------------------------------------- ------------------- ------------------------
Balance Balance
sheet/ Risk- sheet/ Risk-
notional weighted notional weighted
amount amounts amount(2) amounts(2)
--------- -------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks and interest-bearing
deposits with banks $ 3.8 $ .8 $ 4.4 $ .7
Federal funds sold and securities purchased
under resale agreements 19.7 1.3 14.1 .8
Securities borrowed 17.0 10.3 11.3 4.5
Trading assets 49.1 18.2 48.0 16.0
Securities available for sale 7.9 4.0 6.3 4.6
Loans 15.9 12.4 12.7 11.0
Allowance for credit losses (.8) - (1.0) -
All other assets 10.2 8.2 10.4 6.5
- ---------------------------------------------- -------- ----- -------- -----
Total assets 122.8 55.2 106.2 44.1
Less: applicable assets of
BT Alex. Brown Incorporated (1) 24.8 10.4 20.7 6.2
- ---------------------------------------------- -------- ----- -------- -----
ASSETS $ 98.0 $44.8 $ 85.5 $37.9
============================================== ======== ===== ======== =====
OFF-BALANCE SHEET EXPOSURES
Derivatives $1,803.4 $ 6.1 $1,746.3 $ 7.4
Credit-related arrangements 16.7 8.3 13.9 7.0
Securities lending indemnifications 37.8 1.9 28.8 .9
When-issued securities and other 4.0 .3 10.2 .3
- ---------------------------------------------- -------- ----- -------- -----
Total off-balance sheet exposures 1,861.9 16.6 1,799.2 15.6
Less: applicable off-balance sheet exposures
of BT Alex. Brown Incorporated (1) 3.9 - 2.2 -
- ---------------------------------------------- -------- ----- -------- -----
OFF-BALANCE SHEET EXPOSURES $1,858.0 $16.6 $1,797.0 15.6
============================================== ======== ===== ======== =====
Less: allowance for credit losses limitation
adjustment .2 .3
- ---------------------------------------------- ----- -----
TOTAL RISK-WEIGHTED ASSETS $61.2 $53.2
============================================== ===== =====
</TABLE>
(1) As well as certain foreign insurance subsidiaries.
(2) Certain amounts have been restated to conform with the current presentation.
21
<PAGE>
Future Developments:
The Measure of Market Risk in the Trading Accounts as Defined by the BIS
In 1996 the Federal Reserve Board and the other U.S. federal bank regulatory
agencies jointly issued a final rule that amends the current risk-based capital
guidelines to incorporate a measure for market risk ("the market risk
amendment"). The market risk amendment is consistent with the amendment to the
Basle Capital Accord adopted by the Basle Committee on Banking Supervision at
the Bank for International Settlements ("the BIS"), which is described below.
Essentially, the market risk amendment will change in future years the
calculation of risk-weighted assets in the trading accounts, as well as include
the positions and capital of all non-bank subsidiaries in the combined credit
risk and market risk capital calculation of the Corporation. In all other
respects, the current capital adequacy guidelines will remain in effect.
The Corporation will be subject to this amendment. Compliance is mandatory by
January 1, 1998 for those banks that meet certain threshold tests. Banks may
choose to adopt early during 1997, with prior approval from their primary
federal regulator.
The market risk amendment allows banks to measure general market risk using a
bank's internal risk model. Capital charges for market risk are calculated based
upon the level of general market risk and specific risk. General market risk
refers to changes in value due to variations in market conditions (i.e., levels
of rates, prices, etc.). Specific risk refers to the risk of variations in
value due to changes in factors associated with a particular security (for
example, the credit rating of a corporate debenture).
Under the provisions of the final rule implementing the amendment in the U.S.,
models and processes used to manage market risk must meet a number of
quantitative and qualitative standards. The following is a summary of these
standards:
Quantitative Standards
o the general market risk capital must be based on a Value at Risk approach and
computed daily;
o the Value at Risk must be calibrated to a ten-day holding period and a 99
percent confidence level (i.e., if the Corporation maintained an absolutely
static portfolio for ten business days, there would be a 1 percent chance that
the portfolio would decline in value by more than the Value at Risk);
o the risk model must capture the non-linear price characteristics of option
positions;
o the historical observation period for estimating risk factors must be at least
one year;
o for interest rates, there must be a set of risk factors corresponding to each
currency in which the bank has interest rate sensitive on- or off-balance sheet
positions;
o for interest rates, the risk measurement system must incorporate separate risk
factors to capture spread risk between government and other fixed-income
securities;
o for exchange rates, the risk measurement system should incorporate risk
factors corresponding to the individual foreign currencies in which the bank's
positions are denominated;
o for equity prices, there should be risk factors corresponding to each of the
equity markets in which the bank holds significant positions;
o for commodity prices, there should be risk factors corresponding to each of
the commodity markets in which the bank holds significant positions.
22
<PAGE>
Qualitative Standards
o the bank should have an independent risk control unit that reports directly to
senior management;
o the unit should conduct regular backtesting;
o the bank's risk measurement model should be integrated into the day-to-day
risk management process of the bank;
o the risk measurement model should be complemented by a routine and rigorous
program of stress testing.
The Corporation believes that the risk management process and the risk model
employed to produce its Daily Price Volatility and RAROC meet the standards
established by the BIS and the Federal Reserve Board.
After making certain interpretations in order to apply the new rule to the
Corporation's positions at December 31, 1996, it is estimated that the Tier 1
Capital and the Total Capital ratios would have been somewhat higher on a fully
consolidated basis under the new guidelines.
23
<PAGE>
RISK MANAGEMENT
Risk management is a core competency from which the Corporation derives many of
its competitive advantages. The ability to measure and manage risk is a prime
concern in all of the Corporation's business decisions, and sensitivity to risk
management innovations and issues is an integral part of its culture. Four
overarching principles guide the Corporation's management of risk:
o a firm-wide commitment to effective risk management starts at the senior-
management level;
o a strong, centralized and independent control function for risk management
operating in conjunction with decentralized business activities enables the
Corporation to be agile and efficient in its business activities, yet prudent in
its overall risk-taking;
o diversification is an efficient mechanism for managing risk;
o returns earned must be commensurate with the marginal risk associated with
each business activity.
The Corporation has made substantial investments in both information
technology and human capital to support its risk management processes.
Proprietary systems allow a team of dedicated risk management professionals to
track the Corporation's global portfolio from its offices worldwide. This team
of risk management professionals is independent of the Corporation's business
lines and reports directly to senior management.
Market Risk
Each day the Corporation's risk management process assembles position and risk
information on financial instruments of the Firm whose economic (fair) value is
a function of market-determined variables: interest rates, currency exchange
rates, equity prices, and commodity prices. This information is consolidated
into daily risk and limits reports for the Corporation and business lines.
These reports are reviewed by the Corporation's senior risk managers and provide
them with a consistent set of information upon which to base their business
judgments.
One summary measure of market risk that is produced by this process is Daily
Price Volatility. The Daily Price Volatility of a portfolio is the potential
loss in fair value that would be exceeded 1 percent of the time if that
portfolio were held unchanged for one day. The Daily Price Volatility
information in the table and diagram reported below reflects the market risk for
virtually all of the Corporation's financial assets and liabilities irrespective
of accounting classification. The positions captured by the Daily Price
Volatility include both derivative and cash positions which are reported as
trading assets and liabilities, repurchase and resale agreements, funding assets
and liabilities, deposits, assets held for sale and end-user derivatives. The
Daily Price Volatility is based upon proprietary simulation and risk modeling
techniques and incorporates the nonlinear payoffs, or convexity, and the
volatility risk stemming from options in the Corporation's portfolio.
Figure 1 shows the frequency distribution of Daily Price Volatility for 1996
business days for the overall Corporation. The diagram illustrates that the
Daily Price Volatility for the overall Corporation had an approximately bell-
shaped distribution. The distribution was centered at $39 million and ranged
between $27 million and $54 million during 1996.
24
<PAGE>
Figure 1 1996 BTNY DPV Frequency Distribution(a)
The figure displays a histogram. Daily Price Volatility (DPV) amounts ranging
from $27 million to $54 million appear on the horizontal axis and Frequency
amounts ranging from 0 to 25 observations are displayed on the vertical axis.
The DPV has an approximately bell shaped distribution. The DPV reaches
frequencies of approximately 21 to 22 observations at the top portion of the
bell curve (i.e. between DPV's of $33 million and $43 million). A portion of
the middle of the bell curve (i.e. between DPV's of $35 million and $39 million)
dips to frequencies ranging from 11 to 15 observations. Frequencies are much
lower (from 0 to 6 observations) for DPV's at the tail ends of the curve (i.e.
within the ranges $27 million to $31 million and $46 million to $54 million).
Table 6 shows the sensitivity of the Corporation's market-risk profile by risk
class in 1996 and 1995. The Corporation's portfolio, on average, in 1996 was
most sensitive to changes in interest rates and equity prices. Note that the
impact of diversification across all risk classes reduced total risk by $15
million on average in 1996.
The table also shows that in comparison to 1995 the Corporation maintained a
modestly higher average exposure to market risk during 1996. This increase
occurred primarily with respect to equity and interest rate risk and reflected
the Corporation's assessment of improved market opportunities in 1996 relative
to 1995. Although average risk exposure increased during 1996, the Corporation
ended the year with relatively low risk exposures compared to both the average
for 1996 and the exposure at the end of 1995.
TABLE 6 BTNY DAILY PRICE VOLATILITY STATISTICS (IN MILLIONS)(a)
<TABLE>
<CAPTION>
1996 1996 1996 December 31,
Market Risk Average Minimum Maximum 1996
- ------------------- -------- ------- ------- -------------
<S> <C> <C> <C> <C>
Interest rate $ 25 $ 17 $ 39 $ 17
Currency 11 6 20 10
Equity 16 12 20 17
Commodity 2 1 4 2
Diversification (15) -- -- (14)
- ------------------- ----- ----- ----- -----
Overall portfolio $ 39 * * $ 32
=================== ===== ===== ===== =====
1995 1995 1995 December 31,
Market Risk Average Minimum Maximum 1995
- ------------------- ----- ----- ----- -----
Interest rate $ 20 $ 12 $ 32 $ 24
Currency 10 5 26 10
Equity 13 7 21 17
Commodity 3 1 5 4
Diversification (16) -- -- (15)
- ------------------- ----- ----- ----- -----
Overall portfolio $ 30 * * $ 40
=================== ===== ===== ===== =====
</TABLE>
* The minimum (maximum) for each risk category occurred on different days so
it is not meaningful to total the amounts presented above. During 1996 and
1995, respectively, the minimum Daily Price Volatilities for the overall
portfolio were $27 million and $19 million, and the maximum Daily Price
Volatilities were $54 million and $44 million.
(a) Due to the inability to obtain Alex. Brown historical daily price
volatility information, "Figure 1-BTNY DPV Frequency Distribution" and Table
6-BTNY Daily Price Volatility Statistics" does not reflect the Merger.
However, the Corporation does not anticipate Alex. Brown's impact to be
material.
25
<PAGE>
The methodology underlying these Daily Price Volatility calculations and the
risk-adjusted return on capital ("RAROC") calculations described below relies on
established asset pricing and statistical models. The Daily Price Volatility is
a loss amount that would be exceeded 1 percent of the time. This implies that
one would expect two or three instances each year when the daily loss amount
exceeded the Daily Price Volatility. A comparison between our Daily Price
Volatility amounts and accounting profit/loss flows for each business day during
1996 revealed no instances in which a loss greater than the Daily Price
Volatility occurred. It is important to note that this comparison does not
represent a formal statistical test because Daily Price Volatility measures the
risk of a static portfolio, but the profits and losses occurring in any given
day reflect a changing portfolio. Furthermore, because Daily Price Volatility
measures the potential economic variation in the Corporation's market sensitive
positions, it includes the risk of certain positions that are not marked-to-
market daily in accordance with accounting standards and that are omitted from
the portion of the Corporation's daily profit/loss flows used in this
comparison. The absence of outliers (i.e., losses greater than Daily Price
Volatility) during 1996, however, suggests that the methodology provides a
reasonable statistical measure of the Corporation's exposure to market risk.
The Daily Price Volatility, as a statistical measure of potential loss,
provides an objective benchmark of portfolio risk which complements, but does
not substitute for, management's judgment of the appropriate level and mix of
risk taken by the Corporation. Furthermore, the methodology employed in the
calculation of Daily Price Volatility will change due to enhancements in risk-
assessment and information-processing technologies and as new risks are
undertaken by the Corporation.
Daily Price Volatility is supplemented by the statistical measures of risk and
return provided by the RAROC system (discussed below), by scenario analyses
performed periodically by the risk management group, and by a formal limits
process that monitors excess concentration or exposure to liquidity risk in the
portfolio. The RAROC system provides information on the potential effect of
large changes in interest rates, currency, equity and commodity prices, and
volatilities. As such, it produces a stress test of the Corporation's positions
each business day. Taken together, all of these measures and reports provide
the Corporation's senior management with timely and relevant risk information.
26
<PAGE>
RAROC--Performance Measurement and Capital Adequacy
The Corporation pioneered the development of risk-based capital attribution
processes. The Corporation's risk capital model, RAROC, is integral to
management's conceptual framework for strategic decision making. This framework
has as its objective maximizing return on risk capital, where risk capital is
attributed to a business activity according to the level of risk it assumes.
Risk capital calculated by the RAROC framework is used to support decisions on
the allocation of human and financial resources. In addition, the disciplined
assessment of risk in RAROC produces a benchmark for assessing capital adequacy
both for the Corporation and for its major businesses.
The definition of risk capital produced by the RAROC process is the amount of
funds required 99 percent of the time to cover a potential after-tax loss over a
one year holding period. Specifically, if the Corporation maintained an
absolutely static portfolio (of assets, counterparties and businesses) for one
year, there would be a 1 percent chance that the portfolio would decline in
value by more than the RAROC risk capital amount after adjusting for taxes.
RAROC is designed to assess the following general classes of risk: market
risk, credit risk and operational risk. Market risk is the potential loss in
economic (fair) value due to changes in interest rates, currency, equity and
commodity prices, and volatilities. Financial instruments of the Corporation
whose fair values are functions of these market variables are included in the
assessment of market risk irrespective of accounting designation. Credit risk
is defined as potential loss in fair value of all extensions of credit, on- and
off-balance sheet, by the Corporation.
Operational risk is defined by the Corporation in the context of five risk
classes: Employee, Technology, Relationship/Liability, Physical Assets, and
Other External. Losses that are characterized as operational include but are not
limited to the following examples: losses due to personnel unavailability or
injury, natural disasters, the failure of external systems such as an exchange,
or a failure of internal controls. A process using actuarial and other
proprietary models has been implemented to provide an estimate of the potential
losses from these risks. However, by their nature, these risks are difficult to
measure or quantify and the process has less precision than approaches used for
other types of risks.
CREDIT RISK MANAGEMENT
The Credit Department, headed by the Chief Credit Officer, is responsible for
developing credit policies, as well as for monitoring and managing overall
credit risk. The department evaluates the creditworthiness of each
borrower/issuer/counterparty and assigns a rating for each. Credit limits are
established at the portfolio level by borrower/issuer/counterparty and by other
categories. One credit officer is responsible for reviewing the entire credit
risk portfolio of a borrower/issuer/counterparty regardless of the nature of the
exposure (e.g., loans, securities, derivatives). Credit officers also monitor
the usage of credit risk by entity versus the limits at the product and business
activity level. The Credit Department monitors country exposures and assigns
country risk ratings. It also monitors country, industry,
borrower/issuer/counterparty, product and regional risk concentrations in order
to evaluate the degree of diversification in the portfolio.
RAROC credit capital represents the translation into potential losses of the
exposure of the overall portfolio of the Corporation to default risk. This
translation is accomplished using proprietary statistical models. These
statistical models incorporate information on the duration of the exposure, the
potential magnitude of the exposure, and the creditworthiness of the
borrower/issuer/counterparty. The Corporation's senior risk managers regularly
review and actively manage the credit risks at the portfolio level to ensure
that the risk characteristics and degree of diversification as reflected in
RAROC capital calculations conform with the Corporation's policies.
27
<PAGE>
DERIVATIVES
Derivatives are swaps, futures, forwards, options and other similar types of
contracts based on interest rates, foreign exchange rates and the prices of
equities and commodities (or related indices). Derivatives are generally either
privately-negotiated over-the-counter ("OTC") contracts or standard contracts
transacted through regulated exchanges. OTC contracts generally consist of
swaps, forwards and options. In the normal course of business, with the
agreement of the original customer, OTC derivatives may be terminated or
assigned to another customer. Exchange-traded derivatives include futures and
options. These capital markets products are described further in Note 23 of
Notes to Supplemental Financial Statements. Derivatives may be used for either
trading or end-user purposes.
Trading Derivatives
The Corporation holds derivatives in connection with its activities as a dealer
acting as principal for particular transactions with clients, as a market maker
quoting bid and offer prices to provide liquidity and regular availability of
derivatives for clients, as a risk manager of its own trading positions
resulting from these client-driven transactions and, finally, as a position
taker in the expectation of profiting from favorable movements in prices, rates
or indices. As a result, the Corporation may build up sizable positions in
derivatives. The risks of derivative positions are managed in accordance with
the Corporation's risk management policies.
Substantially all of the Corporation's derivative positions at December 31,
1996 were trading-related, with gains and losses included in trading revenue as
they occur. Contracts with positive fair values are recorded as assets and
contracts with negative fair values are recorded as liabilities, after
application of qualifying master netting agreements. These positions may vary
in size from period to period, similar to the positions in cash instruments also
carried in the Corporation's trading account. Average trading assets and
trading liabilities related to derivatives during 1996 were $10.4 billion and
$11.6 billion, respectively. The notional amounts, which are not recorded on
the balance sheet, of trading derivatives totaled $1,735 billion at December 31,
1996 and indicate the volume of activity but do not represent the Corporation's
exposure to market or credit risk.
End-User Derivatives
The Corporation utilizes end-user derivatives to manage exposures to interest
rate, foreign currency and equity market risks associated with certain
liabilities and assets such as interest-bearing deposits, short-term borrowings
and long-term debt, as well as securities available for sale, loans, investments
in non-marketable equity securities and net investments in foreign subsidiaries.
For example, the Corporation's Treasury Department, which manages the majority
of the Corporation's end-user derivatives, utilizes certain instruments
(principally interest rate swaps) to transform fixed-rate-paying liabilities
into variable-rate-paying liabilities. See Note 25 and Note 23 of Notes to
Supplemental Financial Statements for the fair value of end-user derivatives and
related financial instruments and additional end-user information. The notional
amounts, which are not recorded on the balance sheet, of end-user derivatives
totaled $68 billion at December 31, 1996 and indicate the volume of activity but
do not represent the Corporation's exposure to market or credit risk. These
contracts represent less than 4 percent of the aggregate notional amounts of all
derivatives outstanding at year end.
Market Risk
The market risk of derivatives arises principally from the potential for changes
in interest rates, foreign exchange rates, and equity and commodity prices and
is generally similar to the market risk of the cash instruments underlying the
contracts. The market risk to the Corporation is not measured by the price
sensitivity of the individual contracts, but by the net price sensitivity of the
relevant portfolio, including cash instruments. The Corporation generally
manages its exposures by taking risk-offsetting positions. Therefore, the
Corporation believes it is not meaningful to view the market
28
<PAGE>
risk of derivatives in isolation. Market exposures arising from derivatives are
monitored in the Corporation's RAROC system and are included in the Daily Price
Volatility amounts discussed in the preceding Risk Management section.
Liquidity Risk
In times of stress, sharp price movements or volatility shocks may reduce
liquidity in certain derivatives positions, as well as in cash instruments. The
liquidity risk of derivatives is substantially based on the liquidity of the
underlying cash instrument, which affects the ability of the Corporation to
alter the risk profile of its positions rapidly and at a reasonable cost. The
Corporation's mark-to-market practices for derivatives include adjustments in
consideration of liquidity risks, when appropriate. These practices are
consistent with those applied to the Corporation's trading positions in cash
instruments.
Derivatives-Related Credit Risk
Derivative transactions create dynamic credit exposure which changes as markets
move. The credit risk of derivatives arises from the potential for a customer
to default on its contractual obligations. Accordingly, credit risk related to
derivatives depends on the following: the current fair value of the contracts
with the customer; the potential credit exposure over time; the extent to which
legally enforceable netting arrangements allow the fair value of offsetting
contracts with that customer to be netted against each other; the extent to
which collateral held against the contracts reduces credit risk exposure; and
the likelihood of default by the customer.
The Corporation monitors and manages the credit risk associated with
derivatives by applying a uniform credit process for all credit exposures. The
credit risk of derivatives is included in the Corporation's centralized credit
management and RAROC systems. In order to reduce derivatives-related credit
risk, the Corporation enters into master netting agreements that provide for
offsetting of all contracts under each such agreement and obtains collateral
where appropriate. Such master netting agreements contemplate payment netting
as well as the net settlement of all covered contracts through a single payment
in a single currency with the same counterparty in the event that a default
(including insolvency) under the agreement occurs. The Corporation monitors
credit risk exposure on a gross and a net basis and on a collateralized and an
uncollateralized basis, as appropriate.
Table 7 summarizes the Corporation's derivatives-related credit risk. It
displays, by internal rating, the Corporation's current credit risk to
customers. The majority of the Corporation's derivative transactions are with
foreign and U.S. commercial banks, as well as corporations, governments and
their agencies, securities firms and other financial institutions. Current
credit risk is calculated based on the current replacement cost of outstanding
positions with customers in OTC derivative financial instruments. The gross
replacement cost of a derivative portfolio with a customer is the positive mark-
to-market value of all transactions with that customer without the effects of
netting or collateral arrangements. The replacement costs, after netting and
collateral, of $9.487 billion more accurately portray the credit risk associated
with the Corporation's derivatives activities with external customers at
December 31, 1996 than do the gross replacement costs. The increase compared to
1995 was predominantly related to short-term foreign exchange forward contracts
with foreign and U.S. commercial bank counterparties. Approximately 92 percent
of the derivatives-related credit risk at December 31, 1996 was to investment-
grade customers.
Internal ratings are based upon the Corporation's assessment of the customer's
creditworthiness. Ratings of 1 to 4 generally equate to investment-grade
ratings (BBB/Baa and higher) from rating agencies in the U.S. markets. A rating
of 5 usually approximates long-term debt ratings of BB/Ba. Ratings of 6 to 8
are generally equivalent to B/B and below. Customers in the 6 to 8 category may
be internally designated for special
29
<PAGE>
monitoring by the Credit Audit Department. Factors such as guarantors and
collateral held, as well as the impact of country risk on private foreign
companies, may differentiate the Corporation's ratings from those of the rating
agencies.
The Corporation applies netting based upon the criteria prescribed by
Financial Accounting Standards Board ("FASB") Interpretation No. 39 ("FIN 39"),
"Offsetting of Amounts Related to Certain Contracts," which provides that
offsetting is appropriate where the available evidence indicates that there are
reasonable assurances that the right of setoff contained in a master netting
agreement governing derivatives contracts would be upheld after default,
including in the event of the customer's bankruptcy.
Collateral also reduces credit risk. The Corporation generally accepts
collateral in the form of cash, U.S. Treasuries, and other approved securities
(generally, only liquid, marketable, publicly-traded securities are acceptable).
TABLE 7 DERIVATIVES-RELATED CREDIT RISK(1)
<TABLE>
<CAPTION>
Internal Rating For Customer
--------------------------------------
<S> <C> <C> <C> <C>
(in millions) December 31, 1996 1 to 4 5 6 to 8 Total
- ------------------------------------------------- -------- ------- ------ --------
Replacement costs (gross) $ 28,079 $ 3,338 $120 $ 31,537
Impact of netting agreements (18,628) (2,133) (52) (20,813)
- ------------------------------------------------- -------- ------- ---- --------
Replacement costs (after netting agreements) 9,451 1,205 68 10,724
Collateral held and applied (763) (459) (15) (1,237)
- ------------------------------------------------- -------- ------- ---- --------
Replacement costs after netting and collateral $ 8,688 $ 746 $ 53 $ 9,487
================================================= ======== ======= ==== ========
Replacement costs after netting and collateral,
December 31, 1995 $ 7,946 $ 606 $131 $ 8,683
================================================= ======== ======= ==== ========
</TABLE>
(1) End-user derivatives and exchange-traded contracts are not included.
The Corporation's allowance for credit losses is available for credit losses
related to derivatives contracts. Derivatives are considered by the Credit
Audit Department when it reviews both general and specific credit risks in the
Corporation's portfolio. Net charge-offs to the allowance that were related to
derivative contracts totaled $22 million during 1996 and $240 million during
1995 (see Leveraged Derivative Transactions section below).
The international bank regulatory standards for risk-based capital consider
the credit risk arising from derivatives in the assessment of capital adequacy.
These standards were issued under the Basle Capital Accord of July 1988 and
adopted in 1989 by the U.S. bank regulators, including the Federal Reserve
Board. These standards use a formula-based assessment of customer credit risk
which, as amended at year-end 1995, reflect the credit-risk-reducing impact of
legally enforceable master netting agreements. These standards include a
calculation for estimating the potential future credit exposure caused by
potential price volatility (the "add-on"). At December 31, 1996, this add-on
was $9.0 billion before application of risk weightings, of which 91 percent, 8
percent, and 1 percent related to customers internally rated 1 to 4, 5, and 6 to
8, respectively. At December 31, 1996, the risk-weighted amounts (reflecting
both current and potential future credit exposure) that were calculated based on
these international standards for derivative financial instruments aggregated to
$6.1 billion.
30
<PAGE>
Presented in Table 8 below is a maturity profile of the Corporation's trading
derivative products. This profile indicates the extent of the Corporation's
involvement in derivative transactions of specific maturities and also provides
the basis for calculating the estimate of potential future credit exposure (the
add-on) under the international bank regulatory standards. The percentages in
Table 8 are based on notional amounts which do not necessarily represent cash
flows and do not represent a quantification of the market risk or credit risk of
these positions.
TABLE 8 MATURITY PROFILE OF TRADING DERIVATIVES(1)(2)
<TABLE>
<CAPTION>
Interest Foreign Equity- Commodity
Rate Exchange Related and Other
Remaining Maturity at December 31, 1996 Total Contracts Contracts Contracts Contracts
- ----------------------------------------- ------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Within 12 months 61% 21% 38% 1% 1%
After 1 but within 5 years 30% 27% 3% -% -%
After 5 years 9% 8% 1% -% -%
- ----------------------------------------- --- -- -- - -
Total 100% 56% 42% 1% 1%
========================================= === == == = =
</TABLE>
(1) Based on notional amounts. Includes both purchase and sale contracts and
contracts for which the fair values are recorded as trading assets and as
trading liabilities. The leveraging effects of leveraged derivative
transactions are reflected above.
(2) Presented in accordance with the risk-based capital standards, this maturity
profile does not include futures contracts, spot foreign exchange contracts,
or options written. These types of contracts are considered in the
Corporation's market and credit risk management processes.
Leveraged Derivative Transactions
A leveraged derivative transaction is a specific type of derivative financial
instrument containing a formula or multiplier which, for any given change in
market prices, could cause the change in the transaction's fair value to be
significantly different from the change in fair value that would occur for a
similar transaction without the formula or multiplier. Cash instruments
(including structured notes) with embedded forward or option features and all
former leveraged derivative transactions that are now included in the loan
portfolio are excluded from the foregoing definition. The Corporation's
leveraged derivative transactions are carried at fair value in the trading
portfolio on the consolidated balance sheet and changes in fair value are
reported in trading revenue as they occur. The Corporation's leveraged
derivative transactions are affected by the same general market risks as the
trading portfolio as a whole and are subject to the risk management policies
outlined in the preceding section.
During 1996 no material leveraged derivative transactions were reclassified to
the loan portfolio at amounts equal to or less than the contractual amounts due,
compared to $33 million in 1995. These transactions are not included in Tables
7 and 8. In 1996, $26 million of these leveraged derivative loans were charged-
off to the allowance for credit losses, compared to $245 million in 1995.
Amounts charged to trading revenue resulting from settlements of leveraged
derivative transactions remaining in the trading portfolio were immaterial in
1996. At December 31, 1996 the balance included in loans after charge-offs and
cash collections was $20 million of which $12 million was classified as cash
basis loans.
31
<PAGE>
Further information applicable to derivatives in general may be found in the
following sections:
<TABLE>
<CAPTION>
Relevant Information Page Title
- ----------------------------------- ---- -----------------------------
<S> <C> <C>
Risk-weighted amounts 19 Capital Resources
Revenue by risk category 10 Trading Revenue
Daily Price Volatility, RAROC
and credit management 24 Risk Management
Credit losses 33 Summary of Credit Loss
Experience
Nonperforming amounts 37 Nonperforming Assets
Accounting 51 Significant Accounting
Policies
Balance sheet amounts 57 Trading Assets and Trading
Liabilities
Product descriptions, fair values
and notional amounts 97 Derivatives and Financial
Instruments With
Off-Balance Sheet Risk
Significant counterparties 106 Concentrations of Credit Risk
End-user derivatives 108 Fair Value of Financial
Instruments
</TABLE>
32
<PAGE>
SUMMARY OF CREDIT LOSS EXPERIENCE
Charge-Off Procedures and Adequacy of the Allowance for Credit Losses
As part of the Corporation's overall management and control process, the Credit
Audit Department is charged with the responsibility for performing an ongoing
independent examination of the portfolio. Counterparty risk exposure is
analyzed across all product lines including loans, credit-related commitments,
derivatives and other financial instruments. All significant items in the
portfolio are reviewed annually; those under special supervision, such as cash
basis loans and renegotiated loans, are reviewed quarterly. In addition, all
levels of management are required to bring to the attention of the Credit Audit
Department any credit risk where an additional review of the counterparty's
financial position is believed to be warranted. The Credit Audit Department
reports at least quarterly to the Audit Committee of the Board of Directors
which, in turn, reports to the full Board of Directors, with recommendations for
charge-offs. The Board has the final decision-making responsibility in
authorizing charge-offs.
In addition to the above procedures, federal and State of New York bank
examiners perform examinations of the Corporation's credit risks. The reports
on these examinations are reviewed by the Credit Audit Department with the Audit
Committee.
The provision for credit losses is dependent upon management's evaluation as
to the amount needed to maintain the allowance for credit losses at a level
considered appropriate in relation to the risk of losses inherent in the
portfolio. Various factors are collectively weighed by management in
determining the adequacy of the allowance. The Credit Audit Department and bank
regulatory authorities assess and issue reports on the quality of the portfolio
and on the adequacy of the allowance. As part of their annual audit, the
Corporation's independent auditors assess the adequacy of the allowance and the
provision for credit losses. Their procedures include discussions with
management, a review of selected credit files and an evaluation of the periodic
reports issued by the Credit Audit Department and regulatory examiners.
In the opinion of management, the allowance, when taken as a whole, is
adequate to absorb reasonably estimated credit losses inherent in the
Corporation's portfolio.
33
<PAGE>
TABLE 9 ANALYSIS OF THE ALLOWANCE FOR CREDIT LOSSES
The following table analyzes the changes in the allowance for credit losses ($
in millions).
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994 1993 1992
- ------------------------------------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR CREDIT LOSSES,
BEGINNING OF YEAR $ 992 $1,252 $1,324 $1,620 $1,806
CHARGE-OFFS
Domestic (nonrefinancing country)
Commercial and industrial 46 177 55 64 164
Financial institutions - - 11 4 -
Real estate
Construction 3 10 1 6 3
Mortgage 18 22 23 51 35
Other - - - 1 -
International
Nonrefinancing country 22 121 77 302 98
Refinancing country - - 1 32 43
- ------------------------------------- ----- ------ ------ ------ ------
Total charge-offs 89 330 168 460 343
- ------------------------------------- ----- ------ ------ ------ ------
RECOVERIES
Domestic (nonrefinancing country)
Commercial and industrial 32 11 24 19 7
Real estate
Construction - - 1 - -
Mortgage 7 4 - 1 1
Other - - - 2 2
International
Nonrefinancing country 20 15 8 7 16
Refinancing country 6 9 38 42 23
- ------------------------------------- ----- ------ ------ ------ ------
Total recoveries 65 39 71 71 49
- ------------------------------------- ----- ------ ------ ------ ------
TOTAL NET CHARGE-OFFS (1) 24 291 97 389 294
LOSSES ON SALES AND SWAPS OF
REFINANCING COUNTRY LOANS - - - - 117
- ------------------------------------- ----- ------ ------ ------ ------
TOTAL NET CHARGES TO THE ALLOWANCE 24 291 97 389 411
PROVISION FOR CREDIT LOSSES 5 31 25 93 225
- ------------------------------------- ----- ------ ------ ------ ------
ALLOWANCE FOR CREDIT LOSSES,
END OF YEAR (2) $ 973 $ 992 $1,252 $1,324 $1,620
===================================== ===== ====== ====== ====== ======
PERCENTAGE OF TOTAL NET CHARGES TO
AVERAGE LOANS FOR THE YEAR .18% 2.48% .78% 2.54% 2.45%
===================================== ===== ====== ====== ====== ======
(1) Components:
Secured by real estate $ 14 $ 23 $ 24 $ 116 $ 71
Real estate related 3 2 23 3 27
Highly leveraged 11 30 (5) 15 117
Other * 2 245 92 265 59
Refinancing country (6) (9) (37) (10) 20
- ------------------------------------- ----- ------ ------ ------ ------
Total $ 24 $ 291 $ 97 $ 389 $ 294
===================================== ===== ====== ====== ====== ======
(2) Allocation: **
Loans $ 773
Other liabilities 200
- ------------------------------------- -----
Balance, End of Year $ 973
===================================== =====
</TABLE>
* The 1996, 1995 and 1994 amounts included net charge-offs of $15 million, $240
million and $72 million, respectively, related to leveraged derivative
transactions.
** Beginning December 31, 1996, the Corporation has allocated its total
allowance for credit losses between a reduction of loans and as other
liabilities related to other credit-related items. Prior year amounts have
not been restated. For further detail, see discussion on the following page.
34
<PAGE>
Provision and Allowance for Credit Losses
The provision for credit losses amounted to $5 million for 1996, compared with
$31 million for 1995 and $25 million in 1994.
The total allowance for credit losses decreased to $973 million at December
31, 1996, from $992 million at year end 1995 and $1.252 billion at December 31,
1994. Beginning December 31, 1996, in accordance with the American Institute of
Certified Public Accountants Banks and Savings Institutions Audit Guide, the
Corporation has allocated its total allowance for credit losses as follows: $773
million as a reduction of loans, and $200 million as other liabilities related
to other credit-related items. The Corporation continues to believe that the
total allowance for credit losses is available for credit losses in its entire
portfolio, which is comprised of loans, credit-related commitments, derivatives
and other financial instruments. Due to a multitude of complex and changing
factors that are collectively weighed in determining the adequacy of the
allowance for credit losses, management expects that the allocation of the total
allowance for credit losses may be adjusted as risk factors change. Prior year
amounts have not been restated.
Pursuant to a regulatory requirement, the table below provides the components
of the allowance for credit losses by category. This breakdown of the allowance
at each year end reflects management's best estimate of possible credit losses
and may not necessarily be indicative of actual future charge-offs (in
millions).
<TABLE>
<CAPTION>
December 31, 1996 1995 1994 1993 1992
- ------------------------------------ ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Domestic
Commercial and industrial $ 75 $ 165 $ 133 $ 115 $ 162
Financial institutions 10 20 20 8 19
Real estate
Construction 8 8 5 15 10
Mortgage 67 70 54 65 50
Other 1 3 2 1 4
- ------------------------------------ ----- ----- ------ ------ ------
Total domestic 161 266 214 204 245
International 144 222 266 190 403
- ------------------------------------ ----- ----- ------ ------ ------
Total allocated 305 488 480 394 648
Unallocated portion*
Domestic 288 306 402 599 368
International 180 198 370 331 604
- ------------------------------------ ----- ----- ------ ------ ------
Allowance for credit losses--loans 773 - - - -
Allowance for credit losses--other
liabilities 200 - - - -
- ------------------------------------ ----- ----- ------ ------ ------
Total $ 973 $ 992 $1,252 $1,324 $1,620
==================================== ===== ===== ====== ====== ======
</TABLE>
* This amount and any unabsorbed portion of the allocated allowance is also
available for credit losses in the entire portfolio.
35
<PAGE>
For purposes of providing information required by regulatory authorities and
subject to the above limitations, the following table presents an analysis of
the changes in the international component of the allowance for credit losses
(in millions):
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994 1993 1992
- ------------------------------------ ------ ------ ----- ------- -------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $ 420 $ 636 $ 521 $1,007 $1,198
- ------------------------------------ ----- ----- ----- ------ ------
Net charge-offs
Charge-offs 22 121 78 334 141
Recoveries 26 24 46 49 39
- ------------------------------------ ----- ----- ----- ------ ------
Total net charge-offs
(recoveries) (4) 97 32 285 102
Losses on sales and swaps of
refinancing country loans - - - - 117
- ------------------------------------ ----- ----- ----- ------ ------
Total net charges (recoveries)
to the allowance (4) 97 32 285 219
Provision for credit losses (1) 9 11 40 61
Reclass to other liabilities (24) - - - -
Reallocation (to) from domestic
allowance (75) (128) 136 (241) (33)
- ------------------------------------ ----- ----- ----- ------ ------
Balance, end of year* $ 324 $ 420 $ 636 $ 521 $1,007
==================================== ===== ===== ===== ====== ======
</TABLE>
* The December 31, 1996 amount represents the international component of the
allowance for credit losses that has been allocated to loans.
The $75 million reallocation during 1996 and the $128 million reallocation
during 1995, from the international to the domestic component of the allowance
for credit losses, was based on the continuing evaluation of the Corporation's
overall credit portfolio.
36
<PAGE>
NONPERFORMING ASSETS
Table 10 shows the Corporation's trend of cash basis loans, renegotiated loans,
other real estate and other nonperforming assets ($ in millions).
TABLE 10 NONPERFORMING ASSETS
<TABLE>
<CAPTION>
December 31, 1996 1995 1994 1993 1992
- ------------------------------------------- ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Cash basis loans (nonrefinancing country)
Domestic
Commercial and industrial $ 117 $ 263 $ 316 $ 285 $ 481
Secured by real estate 233 297 277 306 349
Financial institutions - 10 25 30 2
Other - - - - 1
- ------------------------------------------- ----- ----- ----- ----- ------
Total domestic 350 570 618 621 833
- ------------------------------------------- ----- ----- ----- ----- ------
International
Commercial and industrial 57 106 247 84 167
Secured by real estate 39 65 79 149 148
Financial institutions 4 3 48 - -
Other 2 - 2 2 8
- ------------------------------------------- ----- ----- ----- ----- ------
Total international 102 174 376 235 323
- ------------------------------------------- ----- ----- ----- ----- ------
Total cash basis loans
(nonrefinancing country) 452 744 994 856 1,156
Cash basis loans (refinancing country)
International - - 2 118 221
- ------------------------------------------- ----- ----- ----- ----- ------
Total cash basis loans $ 452 $ 744 $ 996 $ 974 $1,377
=========================================== ===== ===== ===== ===== ======
Ratio of cash basis loans
to total gross loans 2.9% 5.9% 8.0% 6.4% 8.0%
=========================================== ===== ===== ===== ===== ======
Ratio of allowance for credit
losses to cash basis loans (1) 171% 133% 126% 136% 118%
=========================================== ===== ===== ===== ===== ======
Renegotiated loans
Mexican government Par Bonds $ - $ - $ - $ - $ 611
Highly leveraged - - - 6 27
Secured by real estate 37 88 65 14 20
Other - 12 1 1 1
- ------------------------------------------- ----- ----- ----- ----- ------
Total renegotiated loans $ 37 $ 100 $ 66 $ 21 $ 659
=========================================== ===== ===== ===== ===== ======
Other real estate $ 213 $ 259 $ 301 $ 287 $ 315
=========================================== ===== ===== ===== ===== ======
Other nonperforming assets
Assets acquired in credit workouts $ 10 $ 66 $ 61 $ 85 $ 73
Other - 1 2 16 32
- ------------------------------------------- ----- ----- ----- ----- ------
Total other nonperforming assets $ 10 $ 67 $ 63 $ 101 $ 105
=========================================== ===== ===== ===== ===== ======
Loans 90 days or more past due and
still accruing interest (2) $ - $ 26 $ - $ 40 $ 86
=========================================== ===== ===== ===== ===== ======
</TABLE>
(1) The 1996 ratio was computed using the $773 million allowance for credit
losses that has been allocated to loans.
(2) Represents loans 90 days or more past due with respect to interest or
principal. These loans were considered to be well secured and were in the
process of collection. The December 31, 1993 and 1992 balances include $15
million and $66 million of international loans, respectively.
37
<PAGE>
Each quarter an extensive review is performed by the Credit Audit Department
and senior credit management of all cash basis loans and classified assets.
Each borrower/counterparty is evaluated to determine whether it represents a
potential loss. Whenever the probability of loss is believed to be greater than
50 percent, a charge-off of the amount deemed uncollectible is recommended to
the Audit Committee of the Board of Directors. Once a charge-off is taken the
remaining portion, if any, is immediately placed on a cash basis. If the
probability of loss is believed to be less than 50 percent, but collection or
liquidation in full is questionable if present trends continue, the asset is
classified as doubtful. It is the Corporation's policy to place all assets
classified as doubtful on a cash basis, even if the borrower is still making
required payments. In addition, it is generally the Corporation's policy that
loans be immediately placed on a cash basis when they become 90 days past due
with respect to interest or principal.
The Corporation's total cash basis loans amounted to $452 million at December
31, 1996, a decrease of $292 million, or 39 percent, from 1995, which had
decreased $252 million, or 25 percent, from 1994.
Cash basis loans decreased $292 million during 1996, primarily due to
collections and charge-offs in connection with the settlement of old derivative
transactions of $109 million, which were primarily classified as commercial and
industrial loans, as well as a $90 million decrease in loans secured by real
estate and an $87 million decrease in various other commercial and industrial
loans.
Within cash basis loans, loans secured by real estate were $272 million at
December 31, 1996. Commercial and industrial loans to highly leveraged borrowers
decreased $36 million to $117 million.
An analysis of the changes in the Corporation's total cash basis loans follows:
<TABLE>
<CAPTION>
(in millions)
Year Ended December 31, 1996 1995 1994 1993 1992
- ----------------------------------- ------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $ 744 $ 996 $ 974 $1,377 $1,750
Net transfers to cash basis loans 96 314 520 230 312
Net paydowns (241) (221) (130) (140) (112)
Charge-offs (87) (330) (163) (232) (322)
Net transfers from (to) other
real estate (14) 13 (72) (10) (87)
Transfers to other nonperforming
assets - - (7) (58) (45)
Loan sales (38) (1) (49) (153) (50)
Other (8) (27) (77) (40) (69)
- ----------------------------------- ----- ----- ----- ------ ------
Balance, end of year $ 452 $ 744 $ 996 $ 974 $1,377
=================================== ===== ===== ===== ====== ======
</TABLE>
Cash basis loans decreased $252 million during 1995, primarily due to charge-
offs of $245 million and payments of $81 million on cash basis leveraged
derivative transactions. These were partially offset by additional transfers of
leveraged derivative transactions to cash basis loans of $79 million.
Within cash basis loans, loans secured by real estate increased by $6 million,
to $362 million during 1995. Also included in cash basis loans were commercial
and industrial loans to highly leveraged borrowers which increased $3 million,
to $153 million at December 31, 1995.
38
<PAGE>
Renegotiated loans decreased to $37 million at December 31, 1996 due to $63
million of transfers to cash basis loans. In 1995, renegotiated loans increased
$34 million primarily due to an increase in loans secured by real estate of $23
million.
Other real estate decreased $46 million to $213 million at December 31, 1996.
The decrease was primarily attributable to $73 million of sales of properties
offset by an additional $24 million of foreclosed properties during 1996.
Other real estate decreased $42 million during 1995 primarily as a result of
the adoption of SFAS 114 during the first quarter of 1995. SFAS 114 required
the transfer of in-substance foreclosed properties, where the Corporation had
not taken possession of the collateral, to cash basis loans.
39
<PAGE>
SPECIAL PORTFOLIO SEGMENTS
REAL ESTATE PORTFOLIO
The global real estate loan portfolio totaled $2.002 billion at December 31,
1996. This included domestic loans secured by real estate of $1.695 billion,
international loans secured by real estate of $130 million, and total real
estate related loans of $177 million. The largest geographic concentration
within loans secured by real estate was in properties in the Mid-Atlantic
region, at 25 percent, of which New York City and its suburbs comprised
approximately 57 percent. The next largest geographic concentrations were loans
secured by properties in California, Texas and the Southeast region, which
comprised 19 percent, 12 percent and 11 percent of the total, respectively. The
largest product-type concentrations were loans secured by office buildings,
apartments, and 1-4 family residential properties at 24 percent, 19 percent and
11 percent, respectively. All other concentrations were individually less than
11 percent of total loans secured by real estate. Approximately 50 percent of
the loans secured by real estate were purchased in the secondary market. These
were comprised primarily of domestic commercial real estate loans. Real estate
related loans consist of loans made for any purpose to organizations or
individuals, 80 percent of whose revenues or assets are derived from or consist
of real estate ventures or holdings, that are not collateralized by cash or
marketable securities and are not secured by real estate. The Corporation was
also obligated under $239 million of standby letters of credit and $155 million
of unused commitments to extend credit in connection with its commercial real
estate financing activities at December 31, 1996.
Because of the diversity of the portfolio, the risks of real estate lending
reflect both general and local economic conditions. Management closely monitors
the portfolio, and formal reviews are conducted at least annually, with many
exposures reviewed quarterly. Table 11 details the global real estate portfolio
at December 31, 1996 (in millions).
TABLE 11 REAL ESTATE LOANS AND OTHER REAL ESTATE
<TABLE>
<CAPTION>
Outstanding Balance
-----------------------------
Inter- Cash Basis
December 31, 1996 Domestic national Total Balance
- ------------------------------------------ -------- -------- --------- ----------
<S> <C> <C> <C> <C>
Loans secured by real estate
Land under development $ 24 $ - $ 24 $ 21
Construction
In lease-up (1) 109 - 109 10
Standing (2)
1-4 family residential 190 26 216 1
Multifamily residential 365 24 389 10
Commercial 1,007 80 1,087(3) 230
- ------------------------------------------ ------ ---- ------ ----
Total loans secured by real estate 1,695 130 1,825 272
Real estate related loans 130 47 177 25
- ------------------------------------------ ------ ---- ------ ----
Total real estate loans $1,825 $177 $2,002 $297
========================================== ====== ==== ====== ====
Other real estate $ 125 $ 88 $ 213
</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 $37 million of renegotiated loans.
40
<PAGE>
HIGHLY LEVERAGED TRANSACTIONS
For purposes of monitoring the extent of its exposure to highly leveraged
transactions ("HLTs"), the Corporation utilizes the following definition. HLTs
are financing transactions the purpose of which involves a buyout, acquisition
or recapitalization and which (i) doubles the subject company's liabilities and
results in a leverage ratio higher than 50 percent or (ii) results in a leverage
ratio higher than 75 percent or (iii) is designated a HLT by a syndication
agent. Borrowers are delisted from HLT status when (1) cash flow tests,
relative to their industry or peer group, are met, or (2) they are no longer
highly leveraged upon emergence from Chapter 11 bankruptcy or similar
proceeding. In addition, certain loans which are fully collateralized by cash
or cash equivalent securities are excluded from HLT reporting.
Amounts included in the table and discussion which follow generally reflect
the above definition.
TABLE 12 HIGHLY LEVERAGED TRANSACTIONS
<TABLE>
<CAPTION>
(in millions) December 31, 1996 1995
- ---------------------------- ------ ------
<S> <C> <C>
Loans
Senior debt $1,587 $1,105
Subordinated debt 76 68
- ---------------------------- ------ ------
Total loans $1,663 $1,173
============================ ====== ======
Unfunded commitments
Commitments to lend $ 875 $ 539
Letters of credit 128 263
- ---------------------------- ------ ------
Total unfunded commitments $1,003 $ 802
============================ ====== ======
Equity investments $ 665 $ 648
============================ ====== ======
Commitments to invest $ 425 $ 289
============================ ====== ======
</TABLE>
The Corporation's outstanding loans were to 127 separate borrowers in 43
separate industry groups at December 31, 1996, compared to 97 separate borrowers
in 38 separate industry groups at December 31, 1995. There were no industry
concentrations which exceeded 10 percent of total HLT loans outstanding at
December 31, 1996.
In addition to the amounts shown in Table 12, at December 31, 1996, the
Corporation had issued commitment letters which had been accepted, subject to
documentation and certain other conditions, of $749 million (which were in
various stages of syndication) and had additional HLTs in various stages of
discussion and negotiation.
During 1996, the Corporation originated $5.4 billion of HLT commitments. It
should be noted that the Corporation's loans and commitments in connection with
HLTs fluctuate as new loans and commitments are made and as loans and
commitments are syndicated, participated or paid.
All loans and commitments to finance HLTs are reviewed and approved by senior
credit officers of the Corporation. In addition to a strict transactional and
credit approval process, the portfolio of leveraged loans and commitments is
actively monitored and managed to minimize risk through diversification among
borrowers and industries. As part of this strategy, sell and hold targets are
regularly updated in connection with market opportunities and the addition of
new HLTs. Retention by the Corporation after syndication and sales of loan
participations has typically been less than $50 million, and the average
outstanding per borrower for the portfolio at December 31, 1996 was less than
$14 million. However, at December 31, 1996, the Corporation had total exposure
(loans outstanding plus unfunded commitments) in excess of $50 million to 7
separate highly leveraged borrowers.
41
<PAGE>
At December 31, 1996, $117 million of the HLT loan portfolio was on a cash
basis. In addition, $4 million of the equity investments in HLT companies
represented assets acquired in credit workouts, which are reported as other
nonperforming assets. Net charge-offs of $11 million of HLT loans were recorded
in 1996. In addition, the Corporation recorded a net gain of $143 million in
connection with the sales and/or write-offs of certain equity investments in
highly leveraged companies during 1996.
Generally, fees (typically 2 to 4 percent of the principal amount committed)
and interest charged (typically LIBOR plus 1.5 to 3 percent) on HLT loans are
higher than on other credits. The Corporation does not account for revenue or
expenses from HLTs separately from its other corporate lending activities.
However, it is estimated that transaction fees recognized for lending activities
relating to highly leveraged transactions were approximately $120 million during
1996 and that as of December 31, 1996, approximately $24 million of fees were
deferred and will be recognized as future revenue.
42
<PAGE>
CROSS-BORDER OUTSTANDINGS
The Corporation's cross-border outstandings reflect certain additional economic
and political risks beyond those associated with its domestic outstandings.
These risks include those arising from exchange rate fluctuations, restrictions
on the transfer of funds and balance-of-payments issues.
Set forth in Table 13 are the Corporation's cross-border outstandings at
December 31, 1996, 1995 and 1994, for each foreign country where such
outstandings exceeded one percent of total assets. The cross-border
outstandings were compiled based upon category and domicile of ultimate risk and
are comprised of balances with banks, trading securities, securities available
for sale, securities purchased under resale agreements, loans, accrued interest
receivable, acceptances outstanding and investments with foreign entities. The
amounts outstanding for each country exclude local currency outstandings. The
Corporation does not have significant local currency outstandings to the
individual countries listed in the following table that are not hedged or are
not funded by local currency borrowings.
TABLE 13 CROSS-BORDER OUTSTANDINGS
<TABLE>
<CAPTION>
Governments Banks and
% of and Other Commercial
Total Total Official Financial and
($ in millions) Outstandings Assets Institutions Institutions Industrial Other
- ---------------------- ------------ ------- ------------ ------------ ---------- -----
<S> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, 1996
United Kingdom $3,904 3.18% $ 12 $3,461 $ 430 $1
Switzerland 3,598 2.93 - 3,332 266 -
France 3,485 2.84 63 3,005 416 1
Spain 2,670 2.17 960 1,667 43 -
Japan (1) 2,523 2.05 477 979 1,067 -
Germany 1,700 1.38 537 758 405 -
Mexico (2) 1,332 1.08 676 329 327 -
Italy 1,285 1.05 751 384 150 -
Brazil (2) 1,266 1.03 569 454 243 -
At December 31, 1995
Japan (1) $2,844 2.68% $ 456 $1,393 $ 987 $8
France 2,150 2.02 291 1,615 244 -
United Kingdom 1,945 1.83 19 1,448 478 -
Spain 1,877 1.77 1,338 494 44 1
Italy 1,522 1.43 1,265 209 48 -
Brazil (2) 1,120 1.05 475 494 151 -
At December 31, 1994
Japan $4,661 4.74% $1,911 $2,267 $ 483 $-
United Kingdom 1,960 1.99 26 1,787 145 2
Italy 1,574 1.60 1,039 449 86 -
France 1,559 1.58 105 1,091 363 -
Germany 1,424 1.45 585 698 140 1
Mexico (2) 1,416 1.44 509 801 106 -
Argentina (2) 1,072 1.09 912 22 138 -
Spain 1,035 1.05 628 374 32 1
</TABLE>
(1) The Corporation's cross-border outstandings with Japanese banks and other
financial institutions primarily consisted of interest-bearing deposits with
banks and trading assets carried at fair value.
(2) The Corporation's cross-border outstandings as presented above for Brazil
and Argentina primarily consisted of trading assets which are carried at
fair value. The cross-border outstanding for Mexico primarily consisted of
trading assets carried at fair value and securities purchased under resale
agreements.
43
<PAGE>
Governments and official institutions comprises foreign governments and their
agencies; state, provincial and local governments and their agencies; and
central banks. Banks and other financial institutions comprises commercial and
savings banks and other similar institutions accepting short-term deposits,
including government-owned banks which do not function as central banks, and
nonbank credit and financial companies.
The following table details the cash basis loans and renegotiated loans
components of the outstandings included in Table 13.
<TABLE>
<CAPTION>
Cash Basis Renegotiated
(in millions) Loans Loans
- ---------------------- ---------- ------------
<S> <C> <C>
AT DECEMBER 31, 1996
Italy $ 3 -$
Spain 2 -
- ---------------------- --- ------------
Total $ 5 -$
====================== === ============
At December 31, 1995
Italy $16 -$
- ---------------------- --- ------------
Total $16 -$
====================== === ============
At December 31, 1994
United Kingdom $11 -$
Other 27 -
- ---------------------- --- ------------
Total $38 -$
====================== === ============
</TABLE>
At December 31, 1996, total cross-border commitments to borrowers or
counterparties domiciled in the countries presented in Table 13 were: United
Kingdom, $242 million; Switzerland, $66 million; France, $121 million; Spain, $1
million; Japan, $39 million; Germany, $212 million; Mexico, $16 million; Italy,
$2 million; and Brazil, $24 million.
Hong Kong and Canada were the only countries whose cross-border outstanding
was between .75 percent and 1.00 percent of total assets at December 31, 1996.
The aggregate cross-border outstandings for these countries amounted to $1.1
billion, or .92 percent of total assets for Hong Kong and $914 million, or .74
percent of total assets for Canada.
Mexico, Germany and Belgium were the only countries whose cross-border
outstanding was between .75 percent and 1.00 percent of total assets at December
31, 1995. The aggregate cross-border outstandings for these countries amounted
to $1.0 billion, or .96 percent of total assets for Mexico (a majority of which
consisted of trading assets carried at fair value), $939 million, or .88 percent
of total assets for Germany, and $840 million, or .79 percent of total assets
for Belgium.
Switzerland was the only country whose cross-border outstanding was between
.75 percent and 1.00 percent of total assets at December 31, 1994. The
aggregate cross-border outstandings for this country amounted to $963 million,
or .98 percent of total assets.
44
<PAGE>
ACCOUNTING DEVELOPMENTS
In June 1996, the FASB issued SFAS 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." SFAS 125 establishes,
among other things, criteria for determining whether a transfer of financial
assets is a sale or a secured borrowing. As issued, SFAS 125 is effective for
all transfers occurring after December 31, 1996.
In December 1996, the FASB issued SFAS 127 which defers for one year the
effective date of some portions of SFAS 125 which relate to collateral,
repurchase agreements, dollar-rolls, securities lending and similar
transactions.
The adoption as of January 1, 1997 of the effective portions of SFAS 125 will
not have a material impact on the Corporation's net income, stockholders' equity
or total assets. The Corporation is continuing to assess the impact of the
portions of SFAS 125 required to be adopted as of January 1, 1998, and does not
expect a material impact on the Corporation's net income, stockholders' equity
or total assets.
In February, 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 establishes
standards for computing and presenting earnings per share ("EPS"). SFAS No. 128
replaces the presentation of primary EPS with basic EPS and fully diluted EPS
with diluted EPS. Basic EPS excludes dilution and is calculated by dividing
income available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted EPS is computed similarly to fully
diluted EPS.
SFAS No. 128 is effective for financial statement periods ending after
December 15, 1997, and requires restatement of all prior period EPS data. The
adoption of SFAS No. 128 is not expected to have a material impact on the
Corporation's fully diluted EPS computations.
45
<PAGE>
<TABLE>
<CAPTION>
Financial Reports Section
<S> <C>
FINANCIAL STATEMENTS
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME 47
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET 48
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY 49
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS 50
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS 51
REPORT OF INDEPENDENT AUDITORS 126
SUPPLEMENTAL FINANCIAL DATA
CONDENSED QUARTERLY CONSOLIDATED STATEMENT OF INCOME 128
STOCKHOLDER DATA 128
AVERAGE BALANCES, INTEREST AND AVERAGE RATES 129
VOLUME/RATE ANALYSIS OF CHANGES IN NET INTEREST REVENUE 131
INTEREST RATE SENSITIVITY 132
DEPOSITS 133
</TABLE>
46
<PAGE>
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME (in millions, except per share
data)
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
- -------------------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
NET INTEREST REVENUE
Interest revenue $6,508 $5,989 $5,096
Interest expense 5,451 5,105 3,880
- -------------------------------------------------------- ------ ------ ------
NET INTEREST REVENUE 1,057 884 1,216
Provision for credit losses 5 31 25
- -------------------------------------------------------- ------ ------ ------
NET INTEREST REVENUE AFTER PROVISION FOR CREDIT LOSSES 1,052 853 1,191
- -------------------------------------------------------- ------ ------ ------
NONINTEREST REVENUE
Trading 1,014 481 586
Fiduciary and funds management 861 752 783
Corporate finance fees 922 691 628
Other fees and commissions 549 491 468
Net revenue from equity investment transactions 230 153 128
Securities available for sale gains 75 180 72
Insurance premiums 230 234 183
Other 236 147 165
- -------------------------------------------------------- ------ ------ ------
Total noninterest revenue 4,117 3,129 3,013
- -------------------------------------------------------- ------ ------ ------
NONINTEREST EXPENSES
Salaries and commissions 1,155 1,045 970
Incentive compensation and employee benefits 1,215 832 856
Agency and other professional service fees 322 327 276
Communication and data services 233 220 207
Occupancy, net 172 177 166
Furniture and equipment 187 177 175
Travel and entertainment 116 104 123
Provision for policyholder benefits 280 271 205
Other 358 310 239
Provision for severance-related costs - 50 -
- -------------------------------------------------------- ------ ------ ------
Total noninterest expenses 4,038 3,513 3,217
- -------------------------------------------------------- ------ ------ ------
Income before income taxes 1,131 469 987
Income taxes 365 158 301
- -------------------------------------------------------- ------ ------ ------
NET INCOME $ 766 $ 311 $ 686
======================================================== ====== ====== ======
NET INCOME APPLICABLE TO COMMON STOCK $ 715 $ 260 $ 658
======================================================== ====== ====== ======
EARNINGS PER COMMON SHARE:
PRIMARY $6.93 $2.59 $6.51
======================================================== ====== ====== ======
FULLY DILUTED $6.71 $2.53 $6.33
======================================================== ====== ====== ======
Cash dividends declared per common share $4.00 $4.00 $3.70
======================================================== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of the supplemental financial
statements.
47
<PAGE>
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET ($ in millions, except par value)
<TABLE>
<CAPTION>
December 31, 1996 1995
- ------------------------------------------------------------ --------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,568 $ 2,399
Interest-bearing deposits with banks 2,210 2,023
Federal funds sold 1,684 854
Securities purchased under resale agreements 18,002 13,241
Securities borrowed 17,005 11,309
Trading assets:
Government securities 16,858 20,750
Corporate debt securities 8,039 5,695
Equity securities 6,089 5,116
Swaps, options and other derivatives 11,410 10,555
Other trading assets 6,733 5,888
- ------------------------------------------------------------ -------- --------
Total trading assets 49,129 48,004
Securities available for sale 7,920 6,283
Loans - 12,681
Allowance for credit losses - (992)
Loans, net of allowance for credit losses of
$773 at December 31, 1996 15,107 -
Customer receivables 1,529 1,322
Due from customers on acceptances 597 500
Accounts receivable and accrued interest 3,077 4,297
Other assets 4,950 4,278
- ------------------------------------------------------------ -------- --------
Total $122,778 $106,199
============================================================ ======== ========
LIABILITIES
Noninterest-bearing deposits
Domestic offices $ 2,600 $ 2,687
Foreign offices 1,013 605
Interest-bearing deposits
Domestic offices 9,928 5,402
Foreign offices 16,774 17,014
- ------------------------------------------------------------ -------- --------
Total deposits 30,315 25,708
Trading liabilities:
Securities sold, not yet purchased
Government securities 7,668 11,127
Equity securities 4,174 3,275
Other trading liabilities 334 479
Swaps, options and other derivatives 11,585 11,264
- ------------------------------------------------------------ -------- --------
Total trading liabilities 23,761 26,145
Securities loaned and securities sold
under repurchase agreements 23,454 15,684
Other short-term borrowings 19,409 15,861
Acceptances outstanding 597 500
Accounts payable and accrued expenses 4,837 4,850
Other liabilities, including allowance for credit
losses of $200 at December 31, 1996 2,239 2,241
Long-term debt not included in risk-based capital 8,732 7,127
Long-term debt included in risk-based capital 2,576 2,360
Mandatorily redeemable capital securities of subsidiary
trusts holding solely junior subordinated deferrable
interest debentures included in risk-based capital 730 -
- ------------------------------------------------------------ -------- --------
Total liabilities 116,650 100,476
============================================================ ======== ========
Commitments and contingent liabilities (Notes 7 and 23)
PREFERRED STOCK OF SUBSIDIARY 250 250
- ------------------------------------------------------------ -------- --------
STOCKHOLDERS' EQUITY
Preferred stock 810 865
Common stock, $1 par value
Authorized, 300,000,000 shares
Issued: 1996, 103,624,555 shares;
1995, 103,017,180 shares 104 103
Capital surplus 1,437 1,386
Retained earnings 3,988 3,702
Common stock in treasury, at cost: 1996, 4,435,226 shares;
1995, 4,602,855 shares (372) (336)
Other stockholders' equity (89) (247)
- ------------------------------------------------------------ -------- --------
Total stockholders' equity 5,878 5,473
- ------------------------------------------------------------ -------- --------
Total $122,778 $106,199
============================================================ ======== ========
</TABLE>
The accompanying notes are an integral part of the supplemental financial
statements.
48
<PAGE>
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (in
millions)
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------- --------- -------------- --------
<S> <C> <C> <C>
PREFERRED STOCK
Balance, beginning of year $ 865 $ 395 $ 250
Preferred stock issued 1 470 350
Preferred stock repurchased (56) - -
Preferred stock redeemed - - (205)
- ---------------------------------------------------------------------- -------- --- -------
Balance, end of year 810 865 395
- ---------------------------------------------------------------------- -------- --- -------
COMMON STOCK
Balance, beginning of year 103 101 102
Issuance of common stock 1 2 1
Repurchase and retirement of common stock - - (2)
- ---------------------------------------------------------------------- -------- --- -------
Balance, end of year 104 103 101
- ---------------------------------------------------------------------- -------- --- -------
CAPITAL SURPLUS
Balance, beginning of year 1,386 1,371 1,407
Issuance of common stock 19 26 7
Repurchase and retirement of common stock (16) - (46)
Preferred stock issuance and conversion costs - (17) (8)
Common stock distributed under employee benefit plans 41 6 11
Preferred stock repurchased 7 - -
- ---------------------------------------------------------------------- -------- --- -------
Balance, end of year 1,437 1,386 1,371
- ---------------------------------------------------------------------- -------- --- -------
RETAINED EARNINGS
Balance, beginning of year 3,702 3,796 3,467
Net income 766 311 686
Cash dividends declared
Preferred stock (58) (47) (28)
Common stock (335) (326) (301)
Treasury stock distributed under employee benefit plans (80) (32) (28)
Treasury stock associated with acquisition (7) - -
- ---------------------------------------------------------------------- -------- --- -------
Balance, end of year 3,988 3,702 3,796
- ---------------------------------------------------------------------- -------- --- -------
COMMON STOCK IN TREASURY, AT COST
Balance, beginning of year (336) (416) (233)
Purchases of stock (608) (38) (267)
Restricted stock granted, net 37 54 50
Treasury stock distributed under employee benefit plans 325 64 34
Treasury stock associated with acquisition 210 - -
- ---------------------------------------------------------------------- -------- --- -------
Balance, end of year (372) (336) (416)
- ---------------------------------------------------------------------- -------- --- -------
COMMON STOCK ISSUABLE -- STOCK AWARDS
Balance, beginning of year 233 160 143
Deferred stock awards granted, net 294 89 18
Deferred stock distributed (1) (16) (1)
- ---------------------------------------------------------------------- -------- --- -------
Balance, end of year 526 233 160
- ---------------------------------------------------------------------- -------- --- -------
DEFERRED COMPENSATION -- STOCK AWARDS
Balance, beginning of year (151) (63) (47)
Deferred stock awards granted, net (293) (88) (17)
Restricted stock granted, net (38) (48) (40)
Amortization of deferred compensation, net 174 48 41
- ---------------------------------------------------------------------- -------- --- -------
Balance, end of year (308) (151) (63)
- ---------------------------------------------------------------------- -------- --- -------
CUMULATIVE TRANSLATION ADJUSTMENTS
Balance, beginning of year (348) (336) (319)
Translation adjustments (40) (3) (76)
Income taxes applicable to translation adjustments 24 (9) 59
- ---------------------------------------------------------------------- -------- --- -------
Balance, end of year (364) (348) (336)
- ---------------------------------------------------------------------- -------- --- -------
SECURITIES VALUATION ALLOWANCE
Balance, beginning of year 19 69 109
Change in unrealized net gains, after applicable
income taxes and minority interest 38 (50) (40)
- ---------------------------------------------------------------------- -------- --- -------
Balance, end of year 57 19 69
- ---------------------------------------------------------------------- -------- --- -------
Total stockholders' equity, end of year $ 5,878 $ 5,473 $ 5,077
====================================================================== ======== === =======
</TABLE>
The accompanying notes are an integral part of the supplemental financial
statements.
49
<PAGE>
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS (in millions)
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------- -------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 766 $ 311 $ 686
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for credit losses 5 31 25
Provision for severance-related costs - 50 -
Provision for policyholder benefits 280 271 205
Deferred income taxes 72 (270) (152)
Depreciation and amortization of premises and equipment 159 147 138
Other, net (108) (69) (97)
- ---------------------------------------------------------------------- -------- - ------
Earnings adjusted for noncash charges and credits 1,174 471 805
Net change in:
Trading assets (2,742) (1,392) 989
Trading liabilities (2,361) 5,857 11,218
Receivables and payables from securities transactions 1,196 (1,035) (586)
Customer receivables (41) (293) (74)
Other operating assets and liabilities, net (952) 48 (186)
Securities available for sale gains (75) (180) (72)
- ---------------------------------------------------------------------- -------- - ------
Net cash provided by (used in) operating activities (3,801) 3,476 12,094
- ---------------------------------------------------------------------- -------- - ------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in:
Interest-bearing deposits with banks (217) 1,194 (1,791)
Federal funds sold (830) 1,690 (2,183)
Securities purchased under resale agreements (4,750) (6,401) (127)
Securities borrowed (5,697) (1,778) (3,251)
Loans (2,914) (279) 3,225
Securities available for sale:
Purchases (5,910) (4,164) (5,830)
Maturities and other redemptions 3,191 3,875 2,947
Sales 1,571 1,871 2,201
Acquisitions of premises and equipment (215) (148) (307)
Other, net 105 (93) (32)
- ---------------------------------------------------------------------- -------- - ------
Net cash used in investing activities (15,666) (4,233) (5,148)
- ---------------------------------------------------------------------- -------- - ------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in:
Deposits 4,708 833 1,426
Securities loaned and securities
sold under repurchase agreements 8,334 (492) (8,174)
Other short-term borrowings 3,425 (2,198) (399)
Issuances of long-term debt* 4,262 4,786 2,426
Repayments of long-term debt (1,312) (1,634) (1,624)
Issuances of common stock 19 15 7
Repurchase and retirement of common stock (17) (1) (46)
Issuances of preferred stock - 221 342
Redemptions and repurchases of preferred stock (49) - (205)
Purchases of treasury stock (608) (38) (267)
Cash dividends paid (392) (372) (332)
Other, net 258 34 23
- ---------------------------------------------------------------------- -------- - ------
Net cash provided by (used in) financing activities 18,628 1,154 (6,823)
- ---------------------------------------------------------------------- -------- - ------
Net effect of exchange rate changes on cash 8 (7) 79
- ---------------------------------------------------------------------- -------- - ------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (831) 390 202
Cash and due from banks, beginning of year 2,399 2,009 1,807
- ---------------------------------------------------------------------- -------- - ------
Cash and due from banks, end of year 1,568 2,399 2,009
Interest paid $ 5,513 $ 5,110 3,757
====================================================================== ======== = ======
Income taxes paid, net $ 329 $ 282 285
====================================================================== ======== = ======
Noncash investing activities:
Conversions of loans to other real estate and assets
acquired in credit workouts $ 24 $ 24 $ 73
Exchanges of Chilean government bonds for annuity
contracts 76 88 91
Other** 203 - 32
- ---------------------------------------------------------------------- -------- -------- --------
Total noncash investing activities $ 303 $ 112 $ 196
====================================================================== ======== ======== ========
Noncash financing activity: conversion of debt to
preferred stock $ 1 $ 245 $ -
====================================================================== ======== ======== ========
</TABLE>
* Includes $730 million related to mandatorily redeemable capital securities of
subsidiary trusts holding solely junior subordinated deferrable interest
debentures included in risk-based capital.
** 1996 amount related to treasury stock associated with acquisition.
The accompanying notes are an integral part of the supplemental financial
statements.
50
<PAGE>
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENTS
NOTE 1--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The Merger
On September 1, 1997, Alex. Brown Incorporated ("Alex. Brown") was merged into a
wholly-owned subsidiary of Bankers Trust New York Corporation (the "Merger").
In conjunction with the Merger, each share of Alex. Brown common stock then
outstanding was converted into 0.83 shares of Bankers Trust New York
Corporation's common stock (the "Exchange Ratio"). The Merger was treated as a
tax free exchange.
The supplemental consolidated financial statements give retroactive effect to
the Merger in a transaction accounted for as a pooling of interests. The
pooling of interests method of accounting requires the restatement of all
periods presented as if Alex. Brown and Bankers Trust New York Corporation had
always been combined. Generally accepted accounting principles proscribe giving
effect to a consummated business combination accounted for by the pooling of
interests method in financial statements that do not include the date of
consummation. The supplemental consolidated financial statements do not extend
through the date of consummation. However, they will become the historical
consolidated financial statements of Bankers Trust New York Corporation together
with its subsidiaries (the "Corporation" or the "Firm") after financial
statements covering the date of consummation of the business combination are
issued. The supplemental consolidated statement of changes in stockholders'
equity reflects the accounts of the Corporation as if the additional common
stock had been issued during all the periods presented. The supplemental
consolidated financial statements, including the notes thereto, should be read
in conjunction with the historical consolidated financial statements of Alex.
Brown and Bankers Trust New York Corporation, included in their Annual Reports
on Form 10-K for the fiscal years ended December 31, 1996.
The Corporation
The Corporation is a global provider of a wide range of financial services. The
accounting policies of the Corporation conform with generally accepted
accounting principles and prevailing industry practices. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the balance sheet date, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
management's estimates. The following is a description of the significant
accounting policies of the Corporation.
Principles of Consolidation
The consolidated financial statements of the Corporation include Bankers Trust
New York Corporation (the "Parent Company"), Bankers Trust Company and its
subsidiaries ("BTCo") and all other significant, majority-owned subsidiaries,
after elimination of material intercompany transactions and accounts. Other
companies in which there is at least 20 percent ownership are accounted for in
accordance with the equity method of accounting. These investments are reported
in other assets and the related equity income or loss, as well as disposition
gains and losses, is included in other noninterest revenue.
Resale and Repurchase Agreements; Securities Borrowed
Resale and repurchase agreements are generally treated as collateralized
financing transactions and are carried at the amounts at which the securities
were initially acquired or sold. The Corporation generally takes possession of
securities purchased under resale agreements, which are primarily U.S.
government and federal agency securities and other OECD country sovereign bonds,
monitors their fair value and requests additional collateral when deemed
appropriate. The Corporation offsets resale and repurchase agreements which
meet the applicable netting criteria.
51
<PAGE>
Securities borrowed that are cash collateralized are recorded at the amount of
cash collateral deposited with the lender. The Corporation monitors its market
exposure with respect to securities borrowed transactions daily and requests the
return of excess collateral as required.
Trading Securities; Securities Available for Sale
The Corporation designates securities as either trading or available for sale at
the date of acquisition.
Debt and marketable equity securities and money market instruments which are
classified as trading assets, as well as short trading positions which are
classified as trading liabilities are carried at their fair values with the
resulting gains and losses included in trading revenue.
Securities available for sale, including applicable hedges, are valued at fair
value with the resulting net unrealized gains or losses recorded in
stockholders' equity as securities valuation allowance. Realized gains and
losses, as well as the amortization of premiums and accretion of discounts, are
recorded in earnings. The specific identification method is used to determine
the cost of securities sold.
Fair value is generally based on quoted market prices or broker or dealer price
quotations.
Derivatives
Swaps, futures contracts, forward commitments, options and other similar types
of contracts and commitments based on either interest rates or foreign exchange
rates, as well as equity and commodity derivatives, are traded by the
Corporation and are carried at their fair values as either trading assets or
trading liabilities. Fair values for derivatives are based on quoted market
prices or pricing models which take into account current market and contractual
prices of the underlying instruments, as well as time value and yield curve or
volatility factors underlying the positions. Unrealized gains and losses are
reported as assets and liabilities except for gains and losses arising from
contracts covered by qualifying master netting agreements which are reported on
a net basis. Gains and losses resulting from these positions are included in
trading revenue.
In addition to its trading activities, the Corporation, as an end user,
utilizes various types of derivative products (principally interest rate and
currency swaps) to manage the interest rate, currency and other market risks
arising from a number of categories of its assets and liabilities. Derivatives
used to manage such risks must be designated as a hedge at their inception and
must remain effective as a hedge throughout the hedge period. Revenue or expense
pertaining to management of interest rate exposure is predominantly recognized
over the life of the contract as an adjustment to interest revenue or expense.
Realized gains and losses on hedges of equities classified as other assets are
included in the carrying amounts of those assets and are ultimately recognized
in income when those assets are sold. Derivatives are also used to manage the
risks associated with securities available for sale. These derivatives are
carried at fair value with the resulting net unrealized gains and losses
recorded in stockholders' equity as securities valuation allowance. The
discount or premium on foreign exchange forward contracts and the interest on
swaps used as hedges of net investments in foreign entities, as well as the net
unrealized gains and losses from revaluing these contracts to the spot exchange
rates, are recorded in stockholders' equity as cumulative translation
adjustments.
52
<PAGE>
Loans, Other Real Estate and Other Nonperforming Assets
Loans generally are stated at their outstanding unpaid principal balances net of
any deferred fees on originated loans, or unamortized premiums or discounts on
purchased loans. Interest income is accrued on the unpaid principal balance.
Loan origination fees are deferred and recognized as an adjustment of the yield
(interest income) of the related loans.
Generally, when a loan is in default as to payment of principal or interest
for 90 days or when, in the judgment of management, the accrual of interest
should be ceased before 90 days, it is the Corporation's policy to place such a
loan on a "cash basis." In addition, all loans classified as doubtful and all
partially charged-off loans are placed on a cash basis, even if the borrower is
still making required payments. Any accrued but unpaid interest previously
recorded on cash basis loans is reversed against current period interest
revenue. Cash receipts of interest on cash basis loans are recorded as either
revenue or a reduction of principal, according to management's judgment as to
the collectibility of principal.
Renegotiated loans are those which have been renegotiated to an effective
interest rate lower than the then-current market rate because of a deterioration
in the financial position of the borrower. Interest on such loans is accrued at
the renegotiated rate.
Other real estate and other assets acquired in credit work-outs, are recorded
at the lower of fair value or the recorded investment in the related loan and
are classified as other assets. Any excess of the recorded investment in the
loan over the fair value of the asset acquired is accounted for as a charge to
the allowance for credit losses.
Allowance For Credit Losses
The allowance for credit losses is available for credit losses arising from the
Corporation's portfolio which comprises loans, credit-related commitments,
derivatives and other financial instruments. Whenever the Credit Audit
Department determines that the probability of loss is greater than 50 percent, a
charge-off of the amount deemed uncollectible is recommended to the Audit
Committee of the Board of Directors. Subsequent recoveries, if any, are
credited to the allowance.
Included in the allowance for credit losses is a valuation allowance for
impaired loans. A loan is impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts due
according to the loan's contractual terms. Impairment is measured based on one
of the following: the present value of expected future cash flows discounted at
the loan's effective interest rate, the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent.
A multitude of complex and changing factors are collectively weighed by
management in determining the adequacy of the allowance. These factors include
management's review of the extent of existing risks in the portfolio and of
prevailing economic conditions, evaluations of the quality of the portfolio by
the Credit Audit Department and by the bank regulatory authorities, and the
actual loss experience and the level of the allowance. Assessing the adequacy
of the allowance for credit losses is inherently subjective as it requires
making material estimates, including the amount and timing of future cash flows
expected to be received on impaired loans, that may be susceptible to
significant change. In the opinion of management, the allowance, when taken as
a whole, is adequate to absorb reasonably estimated credit losses inherent in
the Corporation's entire portfolio.
Beginning December 31, 1996, in accordance with the American Institute of
Certified Public Accountants' Banks and Savings Institutions Audit and
Accounting Guide, the Corporation has allocated its total allowance for credit
losses to a portion reported as a reduction of loans and a portion related to
other credit-related items reported as other
53
<PAGE>
liabilities. Prior year amounts have not been restated. Due to the inherent
subjectivity in assessing the adequacy of the allowance for credit losses
discussed above, management expects that the allocation of the total allowance
for credit losses may be adjusted as risk factors change.
Customer Receivables
Customer receivables include amounts due on uncompleted transactions and margin
balances. Securities owned by customers and held as collateral for these
receivables are not reflected in the financial statements.
Premises and Equipment
Premises and equipment owned are stated at cost less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets. Leasehold improvements are amortized
on a straight-line basis over the terms of the leases or the estimated useful
lives of the improvements, whichever are shorter. Maintenance and repairs are
charged to expense and improvements are capitalized. Gains and losses on
dispositions are generally reflected in earnings.
Leased properties meeting certain criteria are capitalized and amortized using
the straight-line method over the terms of the leases.
Insurance Revenue and Expense
For the Corporation's life insurance subsidiaries, premiums are recognized as
revenue over the premium paying period of the related disability, annuity and
other life insurance policies and are recorded in noninterest revenue as
insurance premiums. Liabilities for future insurance benefits and the related
provision for policyholder benefits reflect the present value of actuarially
determined obligations net of future premiums. The liabilities for future
benefits are included in other liabilities and the expense recorded in
noninterest expenses as provision for policyholder benefits.
Income Taxes
The Corporation recognizes the current and deferred tax consequences of all
transactions that have been recognized in the financial statements using the
provisions of the enacted tax laws. Deferred tax assets and liabilities are
recognized for the estimated future tax effects of temporary differences. The
amount of deferred tax assets is reduced, if necessary, to the amount that,
based on available evidence, will more likely than not be realized.
Stock-Based Compensation
The Corporation accounts for its stock option awards under the intrinsic value
based method of accounting prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." Under the intrinsic value based
method, compensation cost is the excess, if any, of the quoted market price of
the stock at grant date or other measurement date over the amount an employee
must pay to acquire the stock. The Corporation makes pro forma disclosures of
net income and earnings per share as if the fair value based method of
accounting had been applied as required by Statement of Financial Accounting
Standards ("SFAS") 123, "Accounting for Stock-Based Compensation."
The Corporation records its obligations under outstanding deferred stock
awards in stockholders' equity as common stock issuable-stock awards. The
related deferred compensation is also included in stockholders' equity. These
classifications are based upon the Corporation's intent to settle these awards
with its common stock.
54
<PAGE>
Statement of Cash Flows
For purposes of the consolidated statement of cash flows, the Corporation's cash
and cash equivalents are cash and due from banks. Net cash flows from
instruments such as futures, forwards, options and swaps used to hedge assets or
liabilities are classified as cash flows from operating activities.
The Corporation reports the cash flows from loans made to customers and
principal collected on loans, as well as from interest-bearing deposits accepted
and repaid by its bank subsidiaries, on a net basis. Since the gross cash flows
from the Corporation's nonbank subsidiaries' loans and interest-bearing deposits
are not significant to the consolidated statement, such cash flows are also
reported on a net basis.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current
presentation.
55
<PAGE>
NOTE 2--CHANGE IN ACCOUNTING PRINCIPLES
Loan Impairment
On January 1, 1995, the Corporation adopted SFAS 114, "Accounting by Creditors
for Impairment of a Loan." This statement, as amended by SFAS 118, "Accounting
for Impairment of a Loan--Income Recognition and Disclosures," requires the
creation of a valuation allowance for impaired loans based on one of the
following: the present value of expected future cash flows discounted at the
loan's effective interest rate, the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. Under SFAS 114, a
loan is impaired when, based on current information and events, it is probable
that a creditor will be unable to collect all amounts due according to the
loan's contractual terms. Adoption of this standard resulted in an allocation
of a portion of the existing allowance for credit losses to a specific valuation
allowance for impaired loans.
Additionally, under SFAS 114, a loan is classified as in-substance foreclosure
when physical possession of the collateral has been taken regardless of whether
formal foreclosure proceedings have taken place. As a result, during the first
quarter of 1995, loans previously classified as other real estate but for which
the Corporation had not taken possession of the collateral were transferred to
cash basis loans. This reclassification did not impact the Corporation's
financial condition or results of operations.
56
<PAGE>
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, 1996 1995
- --------------------------------------------------------- ------- -------
<S> <C> <C>
TRADING ASSETS
U.S. government and agency securities $ 7,643 $10,639
Obligations of U.S. states and political subdivisions 392 430
Foreign government securities 8,823 9,681
Corporate debt securities 8,039 5,695
Equity securities 6,089 5,116
Swaps, options and other derivative contracts (1) 11,410 10,555
Bankers acceptances and certificates of deposit` 2,542 1,572
Other 4,191 4,316
- --------------------------------------------------------- ------- -------
Total trading assets $49,129 $48,004
========================================================= ======= =======
TRADING LIABILITIES
Securities sold, not yet purchased
U.S. government and agency securities $ 4,921 $ 8,022
Obligations of U.S. states and political subdivisions - 7
Foreign government securities 2,747 3,098
Equity securities 4,174 3,275
Other 334 479
Swaps, options and other derivative contracts(1) 11,585 11,264
- --------------------------------------------------------- ------- -------
Total trading liabilities $23,761 $26,145
========================================================= ======= =======
</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 Financial Accounting Standards
Board ("FASB") Interpretation No. 39 ("FIN 39"), "Offsetting of Amounts
Related to Certain Contracts."
Securities sold, not yet purchased are recorded as liabilities on the balance
sheet and have off-balance sheet market risk to the extent that the Corporation,
in satisfying this obligation, may have to purchase securities at a higher
market price than that recorded on the balance sheet.
57
<PAGE>
NOTE 4--SECURITIES AVAILABLE FOR SALE
The fair value, amortized cost, and gross unrealized holding gains and losses
for the Corporation's securities available for sale follow:
<TABLE>
<CAPTION>
(in millions) December 31, 1996
- -------------------------- -------
Gross Amor
Fair Unrealized Holding tized
---------------------------------------
Value Gains (Losses) Cost
------ ------------------ ------------------- ------
<S> <C> <C> <C> <C>
Debt securities
U.S. government and agencies $ 332 $ - $ - $ 332
States of the U.S. and
political subdivisions 1,261 51 (37) 1,247
Asset-backed 1,352 1 (1) 1,352
Foreign governments 1,455 33 (4) 1,426
Corporate debt 2,872 22 (26) 2,876
Mortgage-backed 12 - - 12
Equity securities 636 138 (12) 510
- ------------------------------------- ------ ------------------ ------------------- ------
Total securities available for sale $7,920 $ 245 $ (80) $7,755
===================================== ====== ================== ================== ======
<CAPTION>
(in millions) December 31, 1995 1994
- -------------------------- ---- ----
Gross Amor- Gross Amor-
Fair Unrealized Holding tized Fair Unrealized Holding tized
------------------ ------------------
Value Gains (Losses) Cost Value Gains (Losses) Cost
----- ----- ------ ---- ----- ----- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities
U.S. government and
agencies $ 431 $ 2 $ (5) $ 434 $ 893 $ 8 $ (19) $ 904
States of the U.S. and
political subdivisions 1,387 66 (56) 1,377 2,249 75 (46) 2,220
Asset-backed 1,198 4 (6) 1,200 1,447 4 (4) 1,447
Foreign governments 1,669 14 (11) 1,666 1,469 37 (11) 1,443
Corporate debt 1,179 13 (17) 1,183 1,000 21 (14) 993
Mortgage-backed 9 - - 9 - - - -
Equity securities 410 83 (8) 335 417 125 (7) 299
- ------------------------------------- ------ ----- ----- ------ -------- ----- --------- ------
Total securities available
for sale $6,283 $ 182 $(103) $6,204 $7,475 $ 270 $(101) $7,306
===================================== ====== ===== ===== ====== ======== ===== ========= ======
</TABLE>
Except for securities of the Government of Chile, there were no securities of
any individual issuer included in securities available for sale that exceeded 10
percent of the Corporation's total stockholders' equity at December 31, 1996.
The Chilean securities are part of the portfolio of Consorcio having an
amortized cost and a fair value of $562 million and $573 million, respectively.
58
<PAGE>
The components of securities available for sale gains as reported in the
consolidated statement of income follow:
<TABLE>
<CAPTION>
(in millions) Year Ended December 31, 1996 1995 1994
- ------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Debt securities--gross realized gains $ 39 $ 28 $ 43
Debt securities--gross realized losses (11) (27) (39)
Equity securities--net realized gains 47 179 68
- ------------------------------------------- ----- ----- -----
Total securities available for sale gains $ 75 $ 180 $ 72
=========================================== ===== ===== =====
</TABLE>
The following table shows the fair value, remaining maturities, approximate
weighted average yields (based on amortized cost) and total amortized cost by
maturity distribution of the debt components of the Corporation's securities
available for sale at December 31, 1996.
<TABLE>
<CAPTION>
Maturity Distribution
-----------------------------------------------------------------------------------------------------------
After One After Five
Within But Within But Within After Mortgage
One Year Five Years Ten Years Ten Years Backed Total
-------- ---------- ---------- --------- -------------- --------------
($ in millions) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ----------------- -------- ------ ---------- ------ ---------- ------ --------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.
government
and
agencies $ 266 5.98% $ 63 5.91% $ - -% $ 3 6.60% $ - -% $ 332 5.97%
States of
the U.S. and
political
subdivisions 75 2.39 312 4.48 443 5.69 431 6.05 - - 1,261 5.29
Asset-backed
securities 173 5.53 699 6.11 371 5.98 109 6.14 - - 1,352 6.00
Foreign
government
securities 525 16.12 467 6.71 274 6.77 189 6.91 - - 1,455 10.16
Corporate debt 1,686 5.76 972 5.66 144 5.64 70 7.46 - - 2,872 5.76
Mortgage-backed - - - - - - - - 12 15.24 12 15.24
- ----------------- ------ ----- ------ ---- ------ ---- --------- ----- ------ ----- ------ -----
Total fair
value $2,725 $2,513 $1,232 $802 $12 $7,284
================= ====== ====== ====== ========= ====== ======
Total amortized
cost $2,717 $2,519 $1,214 $783 $12 $7,245
================= ====== ====== ====== ========= ====== ======
</TABLE>
59
<PAGE>
NOTE 5--LOANS
The following table summarizes the composition of loans at the end of each of
the last five years:
<TABLE>
<CAPTION>
($ in millions) December 31, 1996 1995 1994 1993 1992
- ------------------------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic
Commercial and industrial $ 3,422 21% $ 2,520 20% $ 2,218 18% $ 2,794 18% $ 3,727 21%
Financial institutions 1,631 10 1,778 14 2,221 17 3,210 21 4,544 26
Real estate
Construction 133 1 154 1 234 2 245 2 261 2
Mortgage 1,562 10 1,276 10 1,126 9 1,550 10 1,625 9
Other 1,436 9 1,490 11 1,078 8 1,809 12 1,316 8
- ------------------------------ ------- --- ------- --- ------- --- ------- --- ------- ---
Total domestic 8,184 51 7,218 56 6,877 54 9,608 63 11,473 66
- ------------------------------ ------- --- ------- --- ------- --- ------- --- ------- ---
International
Governments and official
institutions 237 1 227 2 184 2 456 3 1,316 8
Banks and other financial
institutions 3,482 22 1,543 13 2,994 24 1,935 12 1,076 6
Commercial and industrial 2,759 17 1,934 15 1,428 11 1,721 11 1,930 11
Real estate
Construction - - 2 - 2 - 2 - 18 -
Mortgage 130 1 176 1 138 1 261 2 394 2
Other 1,290 8 1,701 13 1,014 8 1,346 9 1,212 7
- ------------------------------ ------- --- ------- --- ------- --- ------- --- ------- ---
Total international 7,898 49 5,583 44 5,760 46 5,721 37 5,946 34
- ------------------------------ ------- --- ------- --- ------- --- ------- --- ------- ---
Gross loans 16,082 100% 12,801 100% 12,637 100% 15,329 100% 17,419 100%
=== === === ===
Less: unearned income 202 120 102 100 97
- ------------------------------ ------- ------- ------- ------- -------
Total loans $15,880 $12,681 $12,535 $15,229 $17,322
============================== ======= ======= ======= ======= =======
</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,
1996.
60
<PAGE>
The following table shows certain maturity information for the Corporation's
loans at December 31, 1996, excluding 1-4 family mortgages, installment loans
and lease financing:
<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 $ 483 $2,035 $ 904 $ 3,422
Financial institutions 1,470 141 20 1,631
Real estate
Construction 10 123 - 133
Mortgage 443 825 102 1,370
Other 1,028 133 46 1,207
- -------------------------------------------- ------ ------ ------ -------
Total domestic 3,434 3,257 1,072 7,763
International 5,349 1,864 357 7,570
- -------------------------------------------- ------ ------ ------ -------
Total $8,783 $5,121 $1,429 $15,333
============================================ ====== ====== ====== =======
Loans due after one year
With predetermined interest rates $1,780 $ 475
============================================ ====== ======
With floating or adjustable interest rates $3,341 $ 954
============================================ ====== ======
</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, 1996 1995
- ---------------------------- ----- -----
<S> <C> <C>
Cash basis loans
Domestic $ 350 $ 570
International 102 174
- ---------------------------- ----- -----
Total cash basis loans $ 452 $ 744
============================ ===== =====
Renegotiated loans
Domestic $ 37 $ 100
International - -
- ---------------------------- ----- -----
Total renegotiated loans $ 37 $ 100
============================ ===== =====
</TABLE>
At December 31, 1996 and 1995, the Corporation had commitments to make
additional loans to borrowers on a cash basis or renegotiated status of $26
million and $27 million, respectively.
61
<PAGE>
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, 1996 1995 1994
- ---------------------------------------- ----- ----- -----
<S> <C> <C> <C>
Domestic loans
Gross amount of interest that would
have been recorded at original rate $ 38 $ 64 $ 52
Less, interest, net of reversals,
recognized in interest revenue 7 13 3
- ---------------------------------------- ----- ----- -----
Reduction of interest revenue 31 51 49
- ---------------------------------------- ----- ----- -----
International loans
Gross amount of interest that would
have been recorded at original rate 9 15 27
Less, interest, net of reversals,
recognized in interest revenue - - 4
- ---------------------------------------- ----- ----- -----
Reduction of interest revenue 9 15 23
- ---------------------------------------- ----- ----- -----
Total reduction of interest revenue $ 40 $ 66 $ 72
======================================== ===== ===== =====
</TABLE>
On January 1, 1995, the Corporation adopted SFAS 114. This statement, as
amended by SFAS 118, requires the creation of a valuation allowance for impaired
loans. A loan is impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due according to
the loan's contractual terms. At December 31, 1996 and December 31, 1995, the
recorded investment in loans that was considered to be impaired under SFAS 114
was $489 million and $844 million, respectively, which consisted of total cash
basis loans and renegotiated loans. Included in these amounts were $227 million
and $458 million of loans which required a valuation allowance of $57 million
and $90 million at those same dates, respectively. The average recorded
investment in impaired loans during the years ended December 31, 1996 and
December 31, 1995 was approximately $633 million and $951 million, respectively.
For the years ended December 31, 1996 and December 31, 1995, the Corporation
recognized interest income on impaired loans of $7 million and $13 million,
respectively, using the cash basis method of income recognition described above
and in Note 1. Also as a result of the adoption of SFAS 114, $35 million of in-
substance foreclosed properties were transferred from other real estate to cash
basis loans for the year ended December 31, 1995.
62
<PAGE>
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, 1996 1995 1994
- --------------------------------------- ----- ------ ------
<S> <C> <C> <C>
Balance, beginning of year $ 992 $1,252 $1,324
- --------------------------------------- ----- ------ ------
Net charge-offs
Charge-offs 89 330 168
Recoveries 65 39 71
- --------------------------------------- ----- ------ ------
Total net charge-offs 24 291 97
Provision for credit losses 5 31 25
- --------------------------------------- ----- ------ ------
Balance, end of year (1) $ 973 $ 992 $1,252
======================================= ===== ====== ======
(1) Allocation*:
Loans $ 773
Other liabilities 200
- --------------------------------------- -----
Balance, end of year $ 973
======================================= =====
</TABLE>
* See Note 1 for discussion of allowance for credit losses.
63
<PAGE>
NOTE 7--PREMISES AND EQUIPMENT; LEASES
An analysis of premises and equipment follows:
<TABLE>
<CAPTION>
(in millions) December 31, 1996 1995
- ------------------------------------------------ ------ ------
<S> <C> <C>
Land $ 99 $ 73
Buildings 425 321
Leasehold improvements 393 369
Furniture and equipment 1,138 1,029
Property leased under capital leases
Land and buildings - 76
Equipment 3 3
Construction-in-progress 29 14
- ------------------------------------------------ ------ ------
Total 2,087 1,885
Less accumulated depreciation and amortization 1,063 948
- ------------------------------------------------ ------ ------
Net book value $1,024 $ 937
================================================ ====== ======
</TABLE>
Included in accumulated depreciation and amortization was accumulated
amortization related to capital leases of $2 million and $28 million at December
31, 1996 and 1995, respectively.
The Corporation is a lessee under lease agreements covering real property and
equipment. Certain leases contain purchase or bargain renewal options. On
January 24, 1996, BTCo closed on the purchase of One Bankers Trust Plaza which,
at December 31, 1995, was classified as property leased under capital leases.
The future minimum lease payments required under the Corporation's
noncancelable operating leases at the end of 1996 were as follows:
<TABLE>
<CAPTION>
(in millions) December 31, 1996
- ------------------------------ ------
<S> <C>
1997 $ 82
1998 75
1999 72
2000 69
2001 56
2002 and later 277
-----
Total minimum lease payments $ 631*
=====
</TABLE>
* Net minimum lease payments were $619 million after deducting minimum
noncancelable sublease rentals of $12 million.
The following shows the net rental expense for all operating leases:
<TABLE>
<CAPTION>
(in millions) Year Ended December 31, 1996 1995 1994
- --------------------------------------- ----- ----- -----
<S> <C> <C> <C>
Gross rental expense $ 103 $ 102 $ 103
Less sublease rental income 3 3 9
- --------------------------------------- ----- ----- -----
Net rental expense $ 100 $ 99 $ 94
======================================= ===== ===== =====
</TABLE>
64
<PAGE>
NOTE 8--SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER SHORT-TERM
BORROWINGS
Short-term borrowings are borrowed funds generally with an original maturity of
one year or less. Debt instruments which contain a provision for early
redemption, exercisable at the option of the security holder, are classified on
the basis of the earliest possible redemption date.
Securities sold under repurchase agreements and federal funds purchased
generally mature in one day; commercial paper generally matures within 90 days.
The details of these borrowings for the years 1996, 1995 and 1994 are presented
below:
<TABLE>
<CAPTION>
($ in millions) 1996 1995 1994
- --------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Securities loaned and securities sold under
repurchase agreements
Balance at year end $23,454 $15,684 $15,867
Average amount outstanding 26,961 21,861 22,119
Maximum amount outstanding at any month end 30,471 28,465 29,077
Average interest rate for the year 5.93% 5.44% 4.20%
Average interest rate on year-end balance 5.81% 6.21% 5.34%
Federal funds purchased
Balance at year end $ 5,475 $ 4,658 $ 3,463
Average amount outstanding 3,684 3,623 2,908
Maximum amount outstanding at any month end 6,982 6,313 6,742
Average interest rate for the year 4.97% 5.47% 3.37%
Average interest rate on year-end balance 5.77% 5.07% 4.60%
Commercial paper
Balance at year end $ 8,080 $ 6,860 $ 8,009
Average amount outstanding 7,399 7,022 7,387
Maximum amount outstanding at any month end 9,076 8,239 9,378
Average interest rate for the year 5.78% 6.25% 4.59%
Average interest rate on year-end balance 5.61% 5.81% 5.38%
Other
Balance at year end $ 5,854 $ 4,343 $ 6,796
Average amount outstanding 5,373 5,802 7,074
Maximum amount outstanding at any month end 6,534 7,079 7,925
Average interest rate for the year 7.26% 7.03% 6.56%
Average interest rate on year-end balance 6.08% 7.41% 6.27%
</TABLE>
65
<PAGE>
NOTE 9--LONG-TERM DEBT
In accordance with the Federal Reserve Board's Capital Adequacy Guidelines,
long-term debt included in risk-based capital must meet specific criteria.
Generally, qualifying debt must be unsecured, subordinated and have an original
weighted-average maturity of at least five years. Additionally, the outstanding
amount of long-term debt included in risk-based capital is reduced as these
issues approach maturity. That is, one-fifth of the original issue is amortized
each year during the last five years before maturity.
Long-term debt included in risk-based capital and other long-term debt are
summarized as follows, based on the contractual terms of each issue:
Long-term debt included in risk-based capital
<TABLE>
<CAPTION>
Dec. 31, Dec. 31,
Subordinated Subordinated 1996 1995
(in millions) Fixed Rate Floating Rate Total Total
- ----------------------------------------------------- ------------ ------------- --------- ---------
<S> <C> <C> <C> <C>
Parent Company
Due in 1996 $ - $ - $ - $ 150
Due in 1997 199 - 199 199
Due in 1998 - - - -
Due in 1999 100 150 250 250
Due in 2000 200 - 200 199
Due in 2001 210 - 210 210
Due in 2002-2006 1,020 413 1,433 1,331
Thereafter 710 - 710 414
- ----------------------------------------------------- ------ ---- ------ ------
Total $2,439 $563 $3,002 $2,753
- ----------------------------------------------------- ------ ---- ------ ------
BTCo
Due in 1996 $ - $ - $ - $ -
Due in 1997 24 - 24 25
Due in 1998 27 - 27 28
Due in 1999 8 - 8 7
Due in 2000 7 - 7 7
Due in 2001 7 - 7 6
Due in 2002-2006 26 - 26 24
Thereafter - - - -
- ----------------------------------------------------- ------ ---- ------ ------
Total $ 99 $ - $ 99 $ 97
- ----------------------------------------------------- ------ ---- ------ ------
Total long-term debt $3,101 $2,850
- ----------------------------------------------------- ------ ------
Less: Amortization for risk-based capital purposes (525) (490)
- ----------------------------------------------------- ------ ------
Total long-term debt included in risk-based capital $2,576 $2,360
===================================================== ====== ======
</TABLE>
66
<PAGE>
Long-term debt not included in risk-based capital
<TABLE>
<CAPTION>
Dec. 31, Dec. 31,
Senior Senior 1996 1995
(in millions) Fixed Rate Floating Rate Total Total
- --------------------------------------------------------- ---------- ------------- -------- --------
<S> <C> <C> <C> <C>
Parent Company
Due in 1996 $ - $ - $ - $ 594
Due in 1997 - 66 66 25
Due in 1998 102 420 522 544
Due in 1999 251 29 280 42
Due in 2000 4 457 461 482
Due in 2001 286 563 849 56
Due in 2002-2006 137 59 196 138
Thereafter - - - -
- --------------------------------------------------------- ---- ------ ------ ------
Total $780 $1,594 $2,374 $1,881
- --------------------------------------------------------- ---- ------ ------ ------
BTCo
Due in 1996 $ - $ - $ - $ 564
Due in 1997 21 1,590 1,611 1,099
Due in 1998 100 303 403 280
Due in 1999 21 119 140 92
Due in 2000 - 987 987 1,464
Due in 2001 8 644 652 63
Due in 2002-2006 332 449 781 591
Thereafter 8 155 163 21
- --------------------------------------------------------- ---- ------ ------ ------
Total $490 $4,247 $4,737 $4,174
- --------------------------------------------------------- ---- ------ ------ ------
BT Alex. Brown Incorporated
Senior/Junior Subordinated Notes due Feb. 1997 to
Nov. 1999 ($62 million at fixed rate at Dec. 1996) $ 518 $ 320
Senior Floating Rate Note due Sept. 1998 to Mar. 1999 499 200
Term loans due February 1997 to August 1999 16 20
Bankers Trust (Delaware)
Zero Coupon Bank Notes due Dec. 1996 - 42
BTC Mortgage Investors Trust (fixed rate) 63 -
- --------------------------------------------------------- ------ ------
Total long-term debt $8,207 $6,637
Add: Amortization for risk-based capital purposes 525 490
- --------------------------------------------------------- ------ ------
Total long-term debt not included in risk-based capital $8,732 $7,127
========================================================= ====== ======
</TABLE>
Based solely on the contractual terms of the debt issues, at December 31, 1996
and 1995 the Corporation's total fixed rate long-term debt had a weighted
average interest rate of 7.28 percent and 7.51 percent, respectively.
The Corporation has entered into interest rate and currency swap agreements
for many of its long-term debt issues, in order to manage its interest rate and
currency risks.
The interest rates for the floating rate debt issues and the fixed rate debt
issues effectively converted to floating are generally based on LIBOR, although
in certain instances they are subject to minimum interest rates as specified in
the agreements governing the respective issues.
67
<PAGE>
The weighted average effective interest rates for total long-term debt,
including the effects of the related swap agreements, were 5.90 percent and 6.40
percent at December 31, 1996 and 1995, respectively.
The Corporation issued $25 million convertible subordinated debentures in June
1986. The debentures are due June 2001, bear interest at 5 3/4% and are
convertible into the Corporation's common stock at the rate of one share of
common stock for each $20.90 of principal amount of debentures. The
debentures are redeemable at the option of the Corporation at 100.5% through
June 11, 1997 and at par thereafter. During 1996 and 1995, $75,000 and
$13,040,000 par value, respectively, of the debentures were converted into 3,586
and 623,685 shares, respectively, of the Corporation's common stock.
Mandatory convertible securities (equity commitment and equity contract notes)
include covenants requiring the Parent Company, from time to time or at
maturity, as appropriate, to issue common stock or other securities in an amount
equal to the principal amount of the debt securities, in order to comply with
capital adequacy guidelines. In this regard, at December 31, 1996 and 1995, the
Parent Company had dedicated $448 million and $598 million, respectively of net
proceeds from such issuances.
At December 31, 1996 and 1995, certain subsidiaries of Bankers Trust Company
had outstanding $2.76 billion and $2.94 billion, respectively of mandatory
redeemable preference securities as included in the table above which are not
included in risk-based capital. Maturities at December 31, 1996 range from
March 1997 to October 2002 and maturities at December 31, 1995 range from
September 1996 to December 2003.
68
<PAGE>
NOTE 10--MANDATORILY REDEEMABLE CAPITAL SECURITIES OF SUBSIDIARY TRUSTS HOLDING
SOLELY JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES INCLUDED IN RISK-BASED
CAPITAL
Corporation-Obligated
BT Institutional Capital Trust A ("Trust A") and BT Institutional Capital Trust
B ("Trust B"), wholly-owned subsidiaries of the Corporation, have outstanding
$300 million 8.09% Capital Securities, Series A, ("Series A Securities") and
$200 million 7.75% Capital Securities, Series B ("Series B Securities"),
respectively (collectively, the "Capital Securities"). The Capital Securities
have a liquidation value of $1,000 per Capital Security. Series A Securities and
Series B Securities represent preferred undivided beneficial interests in the
assets of Trust A and Trust B, respectively. The Corporation is the holder of
all of the beneficial interests represented by common securities of Trust A and
Trust B ("Common Securities" and, collectively with the Capital Securities, the
"Trust Securities").
Trust A and Trust B exist for the sole purpose of issuing the Trust Securities
and investing the proceeds thereof in 8.09% Junior Subordinated Deferrable
Interest Debentures, Series A and 7.75% Junior Subordinated Deferrable Interest
Debentures, Series B (collectively, the "Junior Subordinated Debentures") issued
by the Corporation. The Junior Subordinated Debentures are unsecured and
subordinated to all senior indebtedness of the Corporation and will be the sole
assets of Trust A and Trust B. Payments under the Junior Subordinated
Debentures by the Corporation are the same as those for the Capital Securities
described below. The Corporation has guaranteed all of the obligations of Trust
A and Trust B under the Capital Securities, but only in each case to the extent
of funds held by Trust A and Trust B, respectively.
Holders of the Series A Securities and Series B Securities will be entitled to
receive preferential cumulative cash distributions accumulating from December 1,
1996 and payable semi-annually in arrears on the first day of June and December
of each year, commencing June 1, 1997, at the annual rate of 8.09% and 7.75%,
respectively, of the liquidation amount of $1,000 per Capital Security.
The Capital Securities are subject to mandatory redemption upon repayment of
the Junior Subordinated Debentures at maturity on December 1, 2026. The Junior
Subordinated Debentures may be redeemed at the option of the Corporation on or
after December 1, 2006, or at any time upon the occurrence of certain events.
BTCo-Obligated
BTC Capital Trust I (the "Trust"), a wholly-owned subsidiary of BTCo, has
outstanding $250 million Floating Rate Capital Securities, Series A (the
"Capital Securities"). The Capital Securities have a liquidation value of
$1,000 per Capital Security. The Capital Securities represent preferred
undivided beneficial interests in the assets of the Trust. BTCo is the holder of
all of the beneficial interests represented by common securities of the Trust
("Common Securities" and, collectively with the Capital Securities, the "Trust
Securities").
The Trust exists for the sole purpose of issuing the Trust Securities and
investing the proceeds thereof in Floating Rate Junior Subordinated Deferrable
Interest Debentures, Series A (the "Junior Subordinated Debentures") issued by
BTCo. The Junior Subordinated Debentures are unsecured and subordinated to all
senior indebtedness of BTCo and will be the sole assets of the Trust. Payments
under the Junior Subordinated Debentures by BTCo are the same as those for the
Capital Securities described below. BTCo has guaranteed all of the Trust's
obligations under the Capital Securities, but only in each case to the extent of
funds held by the Trust.
69
<PAGE>
Holders of the Capital Securities will be entitled to receive preferential
cumulative cash distributions accumulating from December 30, 1996 and payable
quarterly in arrears on each March 30, June 30, September 30, and December 30,
commencing March 30, 1997, in respect of the liquidation amount of $1,000 per
Capital Security at a rate per annum equal to 3-Month LIBOR plus 0.75%.
The Capital Securities are subject to mandatory redemption upon repayment of
the Junior Subordinated Debentures at maturity on December 30, 2026. In
addition, the Junior Subordinated Debentures may be redeemed at the option of
BTCo on or after December 30, 2006, or at any time upon the occurrence of
certain events.
See Note 28 for details of mandatorily redeemable capital securities of
subsidiary trusts holding solely junior subordinated deferrable interest
debentures included in risk-based capital ("trust preferred capital securities")
issued subsequent to December 31, 1996.
70
<PAGE>
NOTE 11--PREFERRED STOCK OF SUBSIDIARY
On January 22, 1993, BT Overseas Finance N. V. ("BTOF"), an indirect, wholly-
owned subsidiary of the Parent Company authorized to issue 10,000 preferred
shares, $.01 par value, issued $250 million, or 2,500 shares, of Auction Rate
Cumulative Preferred Stock in four series of 625 shares each--Series A-D ("BTOF
Preferred"). The BTOF Preferred has contingent voting rights and a liquidation
preference of $100,000 per share, plus accrued and unpaid dividends. Each of
the four series is identical, except that dividend rates and dividend payment
dates vary and separate auctions on different auction dates are held for each
series.
The shares of each series of BTOF Preferred are redeemable, in whole but not
in part, except under certain circumstances, at the option of BTOF at a
redemption price of $100,000 per share, plus accrued and unpaid dividends to the
date of redemption.
Dividends on each series of BTOF Preferred are cumulative and payable
generally every 28 days at a rate per annum determined by auction. The rate for
any dividend period is subject to a minimum rate, in certain circumstances,
based upon the "AA" Corporate Commercial Paper Rate and a maximum rate based
upon selected short- and long-term U.S. Treasury securities as determined at the
particular auction date. For the years ended December 31, 1996 and 1995, the
composite average dividend rates on the four series of BTOF Preferred were 5.64
percent and 6.14 percent, respectively. At December 31, 1996 and 1995, the
composite average dividend rates were 5.76 percent and 6.06 percent,
respectively.
In addition, BTOF and the Parent Company entered into an agreement pursuant to
which the Parent Company agreed to sell to BTOF, upon BTOF's exercise of its
right to purchase, 2,500 shares (in four series of 625 shares) of the Parent
Company's Auction Rate Cumulative Preferred Stock, Series K-N ("Exchange
Preferred"). BTOF and the Parent Company also agreed that BTOF will purchase
and exchange the Exchange Preferred for BTOF Preferred, upon the Parent
Company's exercise of its right to cause such for one or more series, or upon
the occurrence of certain other events, in whole but not in part. The purchase
price of the Exchange Preferred in either case is $100,000 per share. The
Exchange Preferred Stock has terms identical to the BTOF Preferred, except that
the Parent Company can redeem the Exchange Preferred in whole or in part, the
dividend periods are generally 49 days and the maximum rate for any dividend
period under no circumstances will exceed 24 percent per annum.
See Note 28 for details regarding the redemption subsequent to December 31,
1996, of BTOF Series A through D Preferred Stock.
71
<PAGE>
NOTE 12--PREFERRED STOCK SERIES PREFERRED STOCK
The Parent Company is authorized to issue 10 million shares of Series Preferred
Stock, without par value. All shares of Series Preferred Stock constitute one
and the same class and have equal rank and priority over common stockholders as
to dividends and in the event of liquidation. Each series of Series Preferred
Stock has a liquidation preference per share (as indicated below), plus accrued
and unpaid dividends, as well as contingent voting rights. The Series Preferred
Stock outstandings were as follows:
<TABLE>
<CAPTION>
($ in millions) December 31, 1996 1995
- ----------------------------------------- ----- -----
<S> <C> <C>
Series J, Outstanding: 447,225 shares $ 45 $ 45
Series Q, Outstanding: 64,771 shares 162 200
Series R, Outstanding: 52,533 shares 131 150
Series I, Outstanding: 1,000,000 shares 100 100
Series O, Outstanding: 592,031 shares 148 147
Series P, Outstanding: 98,795 shares 99 98
Series S, Outstanding: 50,000 shares 125 125
- ----------------------------------------- ----- -----
Total preferred stock $ 810 $ 865
========================================= ===== =====
</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 13 for a more
detailed discussion of this agreement. No Series C shares have ever been issued.
Fixed/Adjustable Rate Cumulative Preferred Stock, Series D and J
On August 31, 1989, the Parent Company issued $250 million, or 5 million shares,
of Fixed/Adjustable Rate Cumulative Preferred Stock, Series D (Liquidation
Preference--$50 per share) ("Series D"). On October 28, 1992, the Parent
Company exchanged 447,225 shares of Fixed/Adjustable Rate Cumulative Preferred
Stock, Series J (Liquidation Preference--$100 per share) ("Series J") for
894,450 shares of its Series D amounting to $44,722,500 liquidation value. On
September 1, 1994, the Corporation redeemed its remaining outstanding 4,105,550
shares, or $205,277,500 liquidation value, of the Series D Fixed/Adjustable Rate
Cumulative Preferred Stock.
At the option of the Parent Company, the Series J may be redeemed, in whole or
in part, on or after December 1, 1995 and prior to December 1, 1997 at $103.00
per share and thereafter at $100.00 per share, plus accrued and unpaid dividends
to the redemption date. However, these shares may be redeemed in whole earlier
if the dividend rate is adjusted upwards as a result of an amendment to effect a
change in the dividends exclusion per- centage provisions of the Internal
Revenue Code. Any optional redemption shall be with the approval of the Federal
Reserve Board unless at that time that body should determine that its approval
is not required.
Dividends on the Series J are cumulative and payable quarterly on March 1,
June 1, September 1 and December 1 of each year. The Series J dividend rate is
fixed at 7.375 percent per annum prior to December 1, 1997. Thereafter, the
dividend rate is determined by a formula that considers the interest rates of
selected short- and long-term U.S. Treasury securities at the time the rate is
set plus an incremental increase based on a relationship of the Parent Company's
then current quarterly cash dividend declared on common stock and the last
quarterly cash dividend paid on common stock prior to September 1, 1997. The
Series J adjustable rate in no event will be less than 7 percent or greater than
17 percent per annum. Both the fixed and adjustable rates may be subject to
72
<PAGE>
adjustment in the event of enactment of an amendment to effect a change in the
dividends exclusion percentage provisions of the Internal Revenue Code. The
dividend rate for the Series D was fixed at 8.72 percent per annum prior to
redemption and the dividend payment dates were identical to Series J.
8.55% Cumulative Preferred Stock, Series I
On March 23, 1992, Bankers Trust Company issued $100 million of 6.90%
Subordinated Notes due March 1995 (the "Notes"). The Notes, which were
guaranteed on a subordinated basis by the Parent Company, were issued as part of
4 million Preferred Purchase Units ("Units"). Each Unit consisted of a Note
with a $25 principal amount, a subordinated guaranty by the Parent Company of
such Note, and a preferred stock purchase contract (the "Purchase Contract")
issued by the Parent Company. Holders of the Units were entitled to receive
8.55 percent per annum with respect to each Unit, payable quarterly, which
consisted of the interest on the Notes and a contract fee in respect of the
Purchase Contracts. On March 1, 1995, the Notes matured and, in accordance with
the original terms of the Purchase Contracts, the holders of the Units were
required to purchase 4 million depositary shares, at $25 per share, each
representing a one-fourth interest in a share of the Parent Company's 8.55%
Cumulative Preferred Stock, Series I (Liquidation Preference--$100 per share)
("Series I").
Dividends on the Series I are cumulative and payable quarterly on March 1,
June 1, September 1 and December 1 of each year, commencing on June 1, 1995, at
a fixed rate of 8.55 percent of the liquidation preference per annum. Shares of
the Series I are not redeemable prior to March 1, 1997, when they will become
redeemable at the Parent Company's option at $100 per share, plus an amount
equal to accrued and unpaid dividends. Any optional redemption shall be with
the approval of the Federal Reserve Board unless at that time that body should
determine that its approval is not required.
See Note 28 for details regarding the redemption, subsequent to December 31,
1996, of 8.55% Cumulative Preferred Stock, Series I.
Auction Rate Cumulative Preferred Stock, Series K, L, M and N
The Parent Company, as part of an agreement with BTOF, holds in treasury Auction
Rate Cumulative Preferred Stock in four series of 625 shares each-Series K,
Series L, Series M and Series N (Liquidation Preference--$100,000 per share).
See Note 11 for a more detailed discussion of this agreement and Note 28 for
details regarding the redemption, subsequent to December 31, 1996, of BTOF
Series A through D Preferred Stock.
7 5/8% Cumulative Preferred Stock, Series O
On June 2, 1993, the Parent Company issued $150 million of 7 5/8% Convertible
Capital Securities due June 2033. These debt securities were subordinated and
could only be redeemed in whole but not in part, on or after June 1, 1998 at
par, plus accrued and unpaid interest to the redemption date. On March 1, 1995,
the Parent Company reset the interest rate on the 7 5/8% Convertible Capital
Securities to a rate of 6 1/8 percent per annum giving holders of this issue the
right, at any time prior to redemption or maturity, to convert the debt
securities into depositary shares, at $25 per share, each representing a one-
tenth interest in a share of the Parent Company's 7 5/8% Cumulative Preferred
Stock, Series O (Liquidation Preference--$250 per share) ("Series O"). During
1995, holders of the Convertible Capital Securities converted their securities
for approximately 5.9 million depositary receipts, each evidencing a depositary
share representing a one-tenth interest in a share of the Corporation's Series O
for a total amount of approximately $147 million.
73
<PAGE>
Dividends on the Series O are cumulative and payable quarterly on each March
1, June 1, September 1 and December 1, commencing with the date succeeding
original issuance. Shares of Series O are redeemable at the Parent Company's
option, in whole or in part, at $300 per share (or $30 per depositary share) on
or before June 1, 1998 and thereafter at $250 per share (or $25 per depositary
share), plus, in each case, accrued and unpaid dividends to the redemption date.
Any optional redemption shall be with the approval of the Federal Reserve Board
unless at that time that body should determine that its approval is not
required.
7.50% Cumulative Preferred Stock, Series P
On August 19, 1993, the Parent Company issued $100 million of 7.50% Convertible
Capital Securities due August 2033. These debt securities were subordinated and
could only be redeemed, in whole but not in part, on or after August 15, 1998 at
par, plus accrued and unpaid interest to the redemption date. On May 15, 1995,
the Parent Company reset the interest rate on the 7.50% Convertible Capital
Securities to a rate of 6.00 percent per annum giving holders of this issue the
right, at any time prior to redemption or maturity, to convert the debt
securities into depositary shares, at $25 per share, each representing a one-
fortieth interest in a share of the Parent Company's 7.50% Cumulative Preferred
Stock, Series P (Liquidation Preference--$1,000 per share) ("Series P"). During
1995, holders of the Convertible Capital Securities converted their securities
for approximately 3.9 million depositary receipts, each evidencing a depositary
share representing a one-fortieth interest in a share of the Corporation's
Series P for a total amount of approximately $98 million.
Dividends on the Series P are cumulative and payable quarterly on February 15,
May 15, August 15 and November 15, commencing with the date succeeding original
issuance. Shares of Series P are redeemable at the Parent Company's option, in
whole or in part, at $1,200 per share (or $30 per depositary share) on or before
August 15, 1998 and thereafter at $1,000 per share (or $25 per depositary
share), plus, in each case, accrued and unpaid dividends to the redemption date.
Any optional redemption shall be with the approval of the Federal Reserve Board
unless at that time that body should determine that its approval is not
required.
Adjustable Rate Cumulative Preferred Stock, Series Q
On March 28, 1994, the Parent Company issued $200 million, or 8 million
depositary shares at $25 per share, each representing a one-hundredth interest
in a share of Adjustable Rate Cumulative Preferred Stock, Series Q (Liquidation
Preference--$2,500 per share) ("Series Q"). During 1996, the Parent Company
repurchased approximately 1.5 million shares of Series Q. At the option of the
Parent Company, the Series Q may be redeemed, in whole or in part, on or after
March 1, 1999, at $2,500 per share (or $25 per depositary share), plus, in each
case, accrued and unpaid dividends to the redemption date. Any optional
redemption shall be with the approval of the Federal Reserve Board unless at
that time that body should determine that its approval is not required.
Dividends on the Series Q are cumulative and payable quarterly on March 1,
June 1, September 1 and December 1 of each year. The initial dividend rate was
5.90 percent per annum for the dividend period ending on May 31, 1994.
Thereafter, the dividend rate is determined by a formula that considers the
interest rates of selected short- and long-term U.S. Treasury securities at the
time the rate is set. In no event will the dividend rate be less than 4 1/2
percent or more than 10 1/2 percent per annum.
Adjustable Rate Cumulative Preferred Stock, Series R
On August 22, 1994, the Parent Company issued $150 million, or 6 million
depositary shares at $25 per share, each representing a one-hundredth interest
in a share of Adjustable Rate Cumulative Preferred Stock, Series R (Liquidation
Preference--$2,500 per share) ("Series R"). During 1996, the Parent Company
repurchased approximately 750 thousand shares of
74
<PAGE>
Series R. At the option of the Parent Company, the Series R may be redeemed, in
whole or in part, on or after September 1, 1999, at $2,500 per share (or $25 per
depositary share), plus, in each case, accrued and unpaid dividends to the
redemption date. Any optional redemption shall be with the approval of the
Federal Reserve Board unless at that time that body should determine that its
approval is not required.
Dividends on the Series R are cumulative and payable quarterly on March 1,
June 1, September 1 and December 1 of each year. The initial dividend rate was
6.42 percent per annum for the dividend period ending on November 30, 1994.
Thereafter, the dividend rate is determined by a formula that considers the
interest rates of selected short- and long-term U.S. Treasury securities at the
time the rate is set. In no event will the dividend rate be less than 4 1/2
percent or more than 10 1/2 percent per annum.
7.75% Cumulative Preferred Stock, Series S
On June 30, 1995, the Corporation issued $125 million, or 5 million depositary
shares at $25 per share, each representing a one-hundredth interest in a share
of the Corporation's 7 3/4% Cumulative Preferred Stock, Series S (Liquidation
Preference--$2,500 per share) ("Series S").
Dividends on the Series S are cumulative and payable quarterly on March 1,
June 1, September 1 and December 1 of each year, commencing with the date
succeeding original issuance. At the option of the Corporation, the Series S
may be redeemed, in whole or in part, on or after June 1, 2000, at $2,500 per
share (or $25 per depositary share), plus, in each case, accrued and unpaid
dividends to the redemption date. Any optional redemption shall be with the
approval of the Federal Reserve Board unless at that time that body should
determine that its approval is not required.
SERIAL PREFERRED STOCK
In 1990, stockholders voted in favor of an amendment to the Restated Certificate
of Incorporation of Bankers Trust New York Corporation to increase the number of
shares of authorized preferred stock from 10 million to 20 million and created a
new class of preferred stock called Serial Preferred Stock which would have
equal rank as the Series Preferred Stock as well as priority over common
stockholders as to dividends and in the event of liquidation. The Parent
Company has decided to defer action on implementing this approved amendment at
this time.
75
<PAGE>
NOTE 13--PREFERRED SHARE PURCHASE RIGHTS
On February 16, 1988, the Board of Directors of the Parent Company declared a
dividend distribution of one Preferred Share Purchase Right ("Right") for each
share of common stock held, payable February 26, 1988 to stockholders of record
on that date. Rights also automatically attach to each share of common stock
issued after February 26, 1988.
Each Right entitles the record holder to purchase from the Parent Company a
one-hundredth interest in a share of the Parent Company's Series C Junior
Participating Preferred Stock at an exercise price of $140, subject to certain
adjustments. The Rights will not be exercisable or transferable apart from the
common stock until the 10th day after either a public announcement that a person
or group (an "Acquiring Person") has acquired beneficial ownership of 20 percent
or more of the common stock, or the announcement or commencement of a tender
offer for 20 percent or more of the common stock. If the Corporation is
acquired or 50 percent or more of its consolidated assets or earning power are
sold, each holder of a Right will have the right to receive, upon the exercise
at the then current exercise price of the Right, that number of shares of common
stock of the acquiring company which have a market value of two times the
exercise price of the Right. If any person becomes an Acquiring Person (unless
such person first acquires 20 percent or more of the outstanding common shares
by a purchase pursuant to a tender offer for all of the common shares for cash,
which purchase increases such person's beneficial ownership to 80 percent or
more of the outstanding common shares), each holder of a Right other than Rights
beneficially owned by the Acquiring Person (which will be void), will have the
right to receive upon exercise that number of common shares having a market
value of two times the exercise price of the Right. The Rights will expire on
February 26, 1998, but may be redeemed at any time prior to a person or group
acquiring the beneficial ownership of 20 percent or more of the common stock.
Until a Right is exercised, the holder will have no rights as a stockholder of
the Parent Company.
After the acquisition by a person or group of beneficial ownership of 20
percent or more of the outstanding common shares and prior to the acquisition by
such person or group of 50 percent or more of the outstanding common shares, the
Board of Directors of the Parent Company may exchange the Rights (other than
Rights owned by such person or group), in whole or in part, at an exchange ratio
of one common share, or a one-hundredth interest in a share of Series C Junior
Participating Preferred Stock (or a share of a class or series of the Parent
Company's preferred stock having equivalent rights, preferences and privileges),
per Right (subject to adjustment).
If issued, each share of Series C Junior Participating Preferred Stock will be
entitled, subject to adjustment, to (i) a quarterly dividend of the greater of
$1 per share or 100 times the quarterly dividend declared on each share of
common stock, (ii) in the event of liquidation, dissolution or winding up, a
preferential liquidation payment of the greater of $100 per share or 100 times
the liquidation payment made per share of common stock, and (iii) 100 votes per
share voting together with the holders of the Parent Company's common stock on
all matters.
Under certain conditions, the Rights will also be redeemed in connection with
an acquisition of all of the Parent Company's common stock for cash in a
transaction approved by the Parent Company's stockholders. Subject to certain
specified conditions, a special meeting of the Parent Company's stockholders to
vote on such a transaction will be called upon the request of a potential
acquiror.
These statements are qualified in their entirety by reference to the Rights
Agreement, a copy of which was filed with the Securities and Exchange
Commission.
76
<PAGE>
NOTE 14--COMMON STOCK AND STOCK-BASED COMPENSATION PLANS
The purposes and number of shares of common stock issued, distributed from
treasury and purchased for treasury during 1996, 1995 and 1994 were as follows
(1):
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
- ---------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Common shares outstanding,
beginning of year 98,414,325 95,860,331 99,721,291
- ---------------------------------------------- ---------- ---------- ----------
Shares issued or distributed under
Employee Benefit Plans:
Bankers Trust New York Corporation
1976 Stock Option Plan - - 3,000
1985 Stock Option and Stock Award Plan
Stock options 674,441 260,993 144,769
Restricted stock awards, net - - (12,619)
Deferred stock awards 31,701 - 15,829
1991 Stock Option and Stock Award Plan
Stock options 1,654,567 367,728 274,864
Restricted stock awards, net (31,293) (84,539) (5,298)
Deferred stock awards - 242,264 7,459
1994 Stock Option and Stock Award Plan
Stock options 1,907,957 7,000 -
Restricted stock awards, net 541,910 813,901 661,400
Deferred stock awards 265 - -
Alex. Brown
Stock Option Plan 472,945 539,884 296,396
Employee Debenture Conversions 141,275 64,267 135,221
Equity Compensation Plan 271,185 163,894 254,281
Employee Stock Purchase Plan 126,701 113,850 129,683
Other, net 21,165 78,415 22,935
Conversion of 5 3/4% Convertible
Subordinated Debentures 3,586 623,685 -
- ---------------------------------------------- ---------- ---------- ----------
Total shares issued or distributed 5,816,405 3,191,342 1,927,920
Shares issued for acquisitions 2,881,476 - -
Shares purchased for treasury (7,493,395) (600,495) (3,622,672)
Shares purchased and retired (429,482) (36,853) (2,166,208)
- ---------------------------------------------- ---------- ---------- ----------
Common shares outstanding, end of year 99,189,329 98,414,325 95,860,331
============================================== ========== ========== ==========
</TABLE>
(1) The information presented reflects the additional shares issued to Alex.
Brown shareholders pursuant to the Exchange Ratio.
77
<PAGE>
The following is a summary of stock option transactions which occurred during
1994, 1995 and 1996 (number of shares in thousands):
<TABLE>
<CAPTION>
Weighted-Average
Exercise Price Exercise Price
Options Per Option Per Option
- -------------------------------- ------------------- -------------------
<S> <C> <C> <C>
December 31, 1993 8,716 $ 6.83 - $80.75 $46.08
Granted 2,962 20.23 - 70.25 61.78
Exercised (733) 6.83 - 70.4375 33.75
Cancelled (410) 47.13
- ------------------- ------
December 31, 1994 10,535 6.83 - 80.75 51.30
=================== ======
Granted 3,197 30.90 - 69.0625 58.60
Exercised (1,181) 6.83 - 68.625 32.99
Cancelled (874) 63.85
- ------------------- ------
December 31, 1995 11,677 6.83 - 80.75 54.22
=================== ======
Granted 3,953 38.84 - 83.3125 74.99
Exercised (4,729) 6.83 - 70.4375 55.15
Cancelled (500) 58.86
- ------------------- ------
December 31, 1996 10,401 14.01 - 83.3125 61.18
=================== ====== ================
Exercisable at:
December 31, 1995 7,461 56.28
=================== ====== ================
December 31, 1996 5,429 56.75
=================== ====== ================
</TABLE>
The weighted-average remaining contractual life for options outstanding at
December 31, 1996 was 7.9 years.
The following table sets forth information about stock options outstanding at
December 31, 1996 (number of shares in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------- ---------------------------
Weighted Average Weighted Average Weighted Average
Range of Number of Remaining Exercise Number of Exercise
Exercise Prices shares Contractual Life Price Shares Price
- ------------------ --------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$14.01 - 21.59 749 3.1 years $20.71 620 $20.53
$25.17 - 30.90 832 8.6 27.54 334 27.20
$38.84 - 83.3125 8,820 8.3 67.78 4,475 63.98
---------------- ------ --- ------ ----- ------
10,401 7.9 $61.18 5,429 $56.75
====== === ====== ===== ======
</TABLE>
At December 31, 1996, common stock was reserved for issuance or distribution as
follows:
<TABLE>
<CAPTION>
<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 11,067,567
1991 Stock Option and Stock Award Plan 4,822,563
1985 Stock Option and Stock Award Plan 1,537,435
- ------------------------------------------------------ ----------
Total 22,214,444
====================================================== ==========
</TABLE>
The Corporation's stock-based compensation plans currently consist of the
continuation of Alex. Brown's and the Corporation's respective plans that were
in effect prior to the Merger. Accordingly, the following information
summarizes Alex. Brown's and the Firm's predecessor plans.
78
<PAGE>
BANKERS TRUST NEW YORK CORPORATION'S PREDECESSOR PLANS
At the Annual Meeting of Stockholders on April 19, 1994, the stockholders
approved the 1994 Stock Option and Stock Award Plan (the "1994 Plan") which made
available for grant, until April 21, 1998, 15 million common shares. The 1994
Plan permits the granting of nonqualified and incentive stock options,
restricted stock, deferred stock and other stock-based awards (collectively, the
"Awards"). Awards are still outstanding under the 1991 Stock Option and Stock
Award Plan (the "1991 Plan") and the 1985 Stock Option and Stock Award Plan (the
"1985 Plan"). No further Awards will be granted under either the 1991 Plan, as
of April 19, 1994 or the 1985 Plan, as of April 16, 1991 or the 1976 Stock
Option Plan. These plans are administered by a Committee of the Board of
Directors (the "Committee"), none of whom is eligible to participate therein.
The Committee determines whether, to what extent and under what circumstances
the Awards may be settled in cash. Awards granted under these plans may be
satisfied through the use of the Parent Company's authorized but unissued shares
or shares held in the Parent Company's treasury.
At the Annual Meeting of Stockholders scheduled for April 15, 1997,
stockholders will vote on a proposed plan which, if adopted, would be called the
1997 Stock Option and Stock Award Plan (the "1997 Plan"). The provisions of
this proposed plan are generally similar to the 1994 Plan and would make 20
million shares available for grant under its terms. The Board of Directors has
authorized a stock purchase program to satisfy the awards to be granted under
the proposed 1997 Plan and under prior Stock Option and Stock Award Plans. The
authorization includes the 20 million shares that are subject to the proposed
1997 Plan. The Corporation intends to satisfy awards granted under the 1997
Plan through the issuance of treasury shares acquired in open market purchases.
Stock options are granted to purchase stock at a price not less than the fair
market value on the date of grant and may be outstanding for any period up to 10
years and one day from the date of grant. Generally, no stock option may be
exercised until the employee has remained in the continuous employ of the
Corporation for one year after the option is granted.
Recipients of restricted stock have all the rights of a stockholder of the
Corporation, except for limitations on sale or use of shares during the
restriction period, generally two to three years. Restricted stock must be
issued from treasury shares. The Committee determines all conditions of the
awards, including whether to permit or require cash dividends to be deferred or
reinvested.
Deferred stock awards are the right to receive common stock of the Corporation
at a specified future date. The awards vest from one to three years from the
date of the award. For deferred stock awards, shares of stock are not
distributed until after a specified deferral period extending up to five years
from the vesting date. Prior to distribution, awards may earn amounts
equivalent to quarterly dividends declared by the Corporation and may also earn
the equivalent of the excess of quarterly earnings per common share over the
cash dividends. At December 31, 1996 and 1995, there were deferred stock awards
outstanding of 6,721,996 shares and 3,334,674 shares, respectively.
After providing for stock options granted, restricted stock awards and
deferred stock awards, there were 189,548 and 7,073,010 shares available for
future grant under the 1994 Plan at December 31, 1996 and 1995, respectively.
Compensation expense recognized for the restricted stock awards and deferred
stock awards was $174 million and $48 million in 1996 and 1995, respectively.
The weighted-average grant-date fair value of restricted stock awards and
deferred stock awards granted during 1996 was $82.86.
79
<PAGE>
ALEX. BROWN PREDECESSOR PLANS
Equity Incentive Plan
Pursuant to the 1991 Equity Incentive Plan (the "Plan"), Alex. Brown may make
stock based awards, including stock options, convertible debentures and
restricted stock awards, to key employees in any calendar year in respect of a
maximum of 7.5% of the total shares of common stock outstanding on the first day
of such year. During 1995 and 1994, the Corporation sold 72,479 and 22,721
shares of common stock, respectively, at market to certain employees pursuant to
the Plan. The Corporation has also sold convertible subordinated debentures to
certain employees pursuant to the Plan. The debentures are generally
convertible into the Corporation's common stock three years after the date
issued or in stages beginning four years after the date issued. The debentures
may be redeemed at par if the employee terminates employment with the
Corporation. The Corporation made loans to the employees to finance the entire
purchase price of the stock and debentures. The Corporation has agreed to
forgive certain loans over six years if the Corporation's return on equity
exceeds certain targets during the period and may forgive portions of other
loans on a discretionary basis. Loan forgiveness resulted in compensation
expense of $9,287,000, $3,952,000 and $3,054,000 in 1996, 1995 and 1994,
respectively. Information related to debentures outstanding at December 31,
1996 and issued in January 1997 was as follows:
<TABLE>
<CAPTION>
Weighted average
Principal amount Weighted average conversion
of debentures interest rate Due Date price/share
- ------------------------- ----------------- -------- ----------------
<S> <C> <C> <C>
$ 356,000 8.125% 1997 $ 6.83
1,578,000 6.750% 1998 20.48
1,900,000 6.375% 1999 18.47
3,725,000 5.375% 2000 23.16
26,867,000 5.858% 2001 20.67
15,544,000 6.106% 2002 39.24
25,555,000 6.313% 2003 50.83
</TABLE>
Stock Options
The Corporation has granted nonqualified stock options to certain employees and
directors. Payment for the shares may be made in cash, shares of the
Corporation's common stock or a combination thereof. Options granted since
January 1993 are generally exercisable in six equal installments beginning one
year from the date of grant and expire after ten years. The exercise price for
these options is 25% greater than the lesser of the average market value of the
Corporation's common stock 30 days prior to the date of grant or the market
value on the date of grant. Options previously granted are generally
exercisable in five equal installments beginning one year from the date of grant
and expire after five years.
Equity Compensation Plan
During 1996, 1995 and 1994, certain key employees had a portion of cash
compensation withheld and replaced by restricted common stock of the Corporation
at a 15% discount from market and interests in investment accounts through which
the employees can direct investments in selected Corporation-sponsored
investment vehicles. Compensation expense is recorded currently based on the
value of the stock and interests in the investment accounts on the award date.
The restricted stock cannot be sold and funds cannot be withdrawn from the
investment accounts for three years (five years if employment terminates during
the initial three year period). The Corporation may allow participants to
extend the deferral period. These restrictions are removed in the event of
death, disability or retirement. Pursuant to the Equity Compensation Plan,
$18,240,000, $11,102,000, and $7,080,000 of cash compensation was withheld and
replaced by 199,982,
80
<PAGE>
203,128 and 161,922 shares of the Corporation's common stock and interests in
investment accounts for 1996, 1995 and 1994, respectively.
SFAS 123 PRO FORMA INFORMATION
The Corporation applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options. Under APB 25, because the
exercise price of the Corporation's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and earnings per share is required
by SFAS 123, and has been determined as if the Corporation had accounted for its
employee stock options under the fair value method of SFAS 123.
Excluding the additional shares issued to Alex. Brown shareholders pursuant to
the Exchange Ratio, the weighted average fair value of options granted during
1996 was $14.88 per option. The fair value for these options was estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1996 and 1995, respectively; risk-free interest
rates of 6.77% and 5.91%; dividend yield of 5.0% for both years; volatility
factor of the expected market price of the Corporation's common stock of 23% for
both years; and a weighted-average expected life of the option of 5 years. The
weighted average fair value of Alex. Brown options granted during 1996 and 1995
were $3,318,000 and $2,244,000, respectively, on the dates of grant. The fair
values of options granted were calculated using the Black-Scholes option-pricing
model with the following weighted average assumptions, used for grants in 1996
and 1995, respectively: risk-free interest rate of 5.7% and 7.8%; expected
volatility of 41% in both years; dividend yield of 1.9% and 2.3%; expected
dividend growth rate of 26.4% and 27.1%; and expected lives of eight years and
expected forfeitures of 18% for both years.
For purposes of pro forma disclosure, the estimated fair value of the options
is amortized to expense over the options' historical vesting period. The
following pro forma information reflects the compensation expense that would
have been recognized under SFAS 123 for both Alex. Brown and the Corporation on
an historical basis. The fair values of options have not been restated to
reflect the Merger.
<TABLE>
<CAPTION>
(in millions except for earnings per share information) 1996 1995
- --------------------------------------------------------- ----- -----
<S> <C> <C>
Net income:
As reported $ 766 $ 311
Pro forma $ 739 $ 301
Primary earnings per share:
As reported $6.93 $2.59
Pro forma $6.67 $2.49
Fully diluted earnings per share:
As reported $6.71 $2.53
Pro forma $6.47 $2.43
</TABLE>
Because compensation expense associated with an award is recognized over the
vesting period, the initial impact on pro forma net income may not be
representative of compensation expense in future years, when the effect of the
amortization of multiple awards would be reflected in the income statement.
81
<PAGE>
NOTE 15--ASSET AND DIVIDEND RESTRICTIONS
The Federal Reserve Act, as amended by the Monetary Control Act of 1980,
requires that reserve balances on certain deposits of depository institutions be
maintained at the Federal Reserve Bank. The reserve balances of the
Corporation's subsidiary banks were $180 million and $633 million at December
31, 1996 and 1995, respectively. For the years 1996 and 1995, the average
reserve balances of these banks amounted to $196 million and $199 million,
respectively.
Assets, principally trading assets and securities available for sale, of
approximately $6.310 billion at December 31, 1996 were pledged as collateral to
secure public and trust deposits, for borrowings, and for other purposes.
Federal law also requires that "covered transactions," as defined, engaged in
by insured banks and their subsidiaries with certain affiliates, including the
Parent Company, be at arm's length and limited to 20 percent of Tier 1 Capital
and Tier 2 Capital as defined by the Federal Reserve Bank risk-based capital
guidelines, the balance of the institutions allowance for loan and lease losses
not included in Tier 2 Capital, and "covered transactions" with any one such
affiliate be limited to 10 percent of capital and surplus. Covered transactions
are defined to include, among other things, loans and other extensions of credit
to such an affiliate and guarantees, acceptances and letters of credit issued on
behalf of such an affiliate. Such loans, other extensions of credit,
guarantees, acceptances and letters of credit must be secured. Other
restrictions also apply to inter-affiliate transactions.
Limitations exist on the availability of BTCo's undistributed earnings for the
payment of dividends to the Parent Company without prior approval of the bank
regulatory authorities. In this regard, BTCo can declare dividends in 1997
without approval of the regulatory authorities of $251 million of its retained
earnings at December 31, 1996, plus an additional amount equal to net profits,
as defined, for 1997 up to the date of any such dividend declaration. The
Federal Reserve Board may prohibit the payment of dividends if it determines
that circumstances relating to the financial condition of a bank are such that
the payment of dividends would be an unsafe and unsound practice.
Certain other subsidiaries are subject to various regulatory and other
restrictions which may limit cash dividends and advances to the Parent Company.
82
<PAGE>
NOTE 16--REGULATORY CAPITAL
The Corporation and its banking subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. The Federal
Reserve Board's risk-based capital guidelines addressing the capital adequacy of
bank holding companies and banks (collectively, "banking organizations") include
a definition of capital and a framework for calculating risk-weighted assets by
assigning assets and off-balance sheet items to broad risk categories, as well
as minimum risk-based capital ratios to be maintained by banking organizations.
A banking organization's risk-based capital ratios are calculated by dividing
its qualifying capital by its risk-weighted assets. The Federal Reserve Board
also has a minimum Leverage Ratio which is used as a supplement to the risk-
based capital ratios in evaluating the capital adequacy of banks and bank
holding companies. The Leverage Ratio is calculated by dividing Tier 1 Capital
by adjusted quarterly average assets.
Failure to meet minimum capital requirements can initiate certain mandates,
and possibly additional discretionary actions by the regulators that, if
undertaken, could have a direct material effect on the consolidated financial
statements of the Corporation and BTCo.
Under the risk-based capital guidelines, there are two categories of capital:
core capital ("Tier 1 Capital") and supplemental capital ("Tier 2 Capital"),
collectively referred to as Total Capital. Tier 1 Capital includes common
stockholders' equity, qualifying perpetual preferred stock, qualifying trust
preferred capital securities and minority interest in equity accounts of
consolidated subsidiaries. Tier 2 Capital includes perpetual preferred stock
and trust preferred capital securities (to the extent ineligible for Tier 1
Capital), hybrid capital instruments (i.e., perpetual debt and mandatory
convertible securities), limited amounts of subordinated debt, intermediate-term
preferred stock, and a portion of the allowance for credit losses.
In accordance with current Federal Reserve Board (FRB) guidelines, the
stockholder's equity and risk-weighted assets of BT Alex. Brown Incorporated are
excluded from the calculation of the regulatory capital ratios. In computing
these ratios, 50 percent of BT Alex. Brown Incorporated stockholder's equity is
deducted from the Corporation's Tier 1 Capital, and 50 percent is deducted from
Tier 2 Capital. Similar treatment is accorded the stockholder's equity and risk-
weighted assets of certain foreign insurance subsidiaries of the Corporation.
In addition, under the prompt corrective action provisions of the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), five capital
categories were established for banks. Pursuant to that statute, the federal
bank regulatory agencies have specifically defined these categories by
determining that a bank is well capitalized if it maintains a Tier 1 Capital
ratio of at least 6 percent, a Total Capital ratio of at least 10 percent and a
Leverage ratio of at least 5 percent.
The Federal Reserve Board has also adopted these same thresholds for the Tier
1 Capital ratio and Total Capital ratio in defining a well-capitalized bank
holding company. The well-capitalized threshold for the Leverage ratio has been
established at 3.0 percent or 4.0 percent, depending on other regulatory
criteria.
Based on their respective regulatory capital ratios at December 31, 1996 and
December 31, 1995, both the Corporation and BTCo are well capitalized. There
are no conditions or events that management believes have changed the
Corporation's and BTCo's well-capitalized status.
83
<PAGE>
The Corporation's actual capital amounts and ratios are presented in the table
below.
<TABLE>
<CAPTION>
FRB
Minimum To Be Well
For Capitalized
Capital Under
Actual as of Actual as of Adequacy Regulatory
12/31/96 12/31/95 Purposes: Guidelines:
---------------- ---------------- ---------- ------------
($ in millions) Amount Ratio Amount Ratio Ratio Ratio
- -------------------- -------- ------- -------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (1)
Corporation (2) $ 8,424 13.8% $ 7,443 14.0% 8.0% 10.0%
BTCo 6,769 12.9% 5,926 12.8% 8.0% 10.0%
Tier 1 Capital (1)
Corporation (2) $ 5,690 9.3% $ 4,789 9.0% 4.0% 6.0%
BTCo 4,869 9.3% 4,394 9.5% 4.0% 6.0%
Leverage (3)(4)
Corporation (2) $ 5,690 5.9% $ 4,789 5.4% 3.0% 3.0-4.0%
BTCo 4,869 5.3% 4,394 5.1% 3.0% 5.0%
</TABLE>
(1) Ratios are calculated on Tier 1 Capital and Total Capital as a percentage of
risk-weighted assets.
(2) Capital and risk-weighted assets of BT Alex. Brown Incorporated and certain
foreign insurance subsidiaries of the Corporation have been excluded in
accordance with current Federal Reserve Board guidelines.
(3) Ratio is calculated on Tier 1 Capital as a percentage of adjusted quarterly
average assets.
(4) Minimum capital adequacy levels for the Leverage ratio may be set 100 to 200
basis points higher depending upon other regulatory criteria.
84
<PAGE>
NOTE 17--INTEREST REVENUE AND INTEREST EXPENSE
The following are the components of interest revenue and interest expense:
<TABLE>
<CAPTION>
(in millions) Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
INTEREST REVENUE
Interest-bearing deposits with banks $ 214 $ 207 $ 124
Federal funds sold 119 104 31
Securities purchased under resale agreements 1,314 829 386
Securities borrowed 825 745 298
Trading assets 2,410 2,682 2,936
Securities available for sale
Taxable 424 332 312
Exempt from federal income taxes 35 60 78
Loans 1,046 944 879
Customer receivables 121 86 52
- --------------------------------------------------------- ------ ------ ------
Total interest revenue 6,508 5,989 5,096
- --------------------------------------------------------- ------ ------ ------
INTEREST EXPENSE
Interest-bearing deposits
Domestic offices 384 376 268
Foreign offices 971 984 696
Trading liabilities 862 1,053 807
Securities loaned and securities sold
under repurchase agreements 1,598 1,189 928
Other short-term borrowings 1,000 1,045 901
Long-term debt 633 458 280
Mandatorily redeemable capital securities of subsidiary
trusts holding solely junior subordinated deferrable
interest debentures included in risk-based capital 3 - -
- --------------------------------------------------------- ------ ------ ------
Total interest expense 5,451 5,105 3,880
- --------------------------------------------------------- ------ ------ ------
Net interest revenue $1,057 $ 884 $1,216
========================================================= ====== ====== ======
</TABLE>
85
<PAGE>
NOTE 18--TRADING REVENUE
The following are the components of trading revenue:
<TABLE>
<CAPTION>
(in millions) Year Ended December 31, 1996 1995 1994
- --------------------------------------- ------ ----- ------
<S> <C> <C> <C>
Interest rate risk $ 474 $ 120 $ 325
Foreign exchange risk 178 36 (54)
Equity and commodity risk 362 325 315
- --------------------------------------- ------ ----- -----
Total trading revenue $1,014 $ 481 $ 586
======================================= ====== ===== =====
</TABLE>
86
<PAGE>
NOTE 19--PENSION AND OTHER EMPLOYEE BENEFIT PLANS
The Corporation's employee benefit plans currently consist of the continuation
of Alex. Brown's and the Corporation's respective plans that were in effect
prior to the Merger. Accordingly, the following information summarizes the
Alex. Brown's and the Firm's predecessor plans.
The Corporation is currently in the process of reviewing the benefit plans of
both predecessor institutions.
BANKERS TRUST NEW YORK CORPORATION'S PREDECESSOR PLANS
Pension Plans
The Corporation has a trusteed, noncontributory, defined benefit pension plan
covering substantially all domestic employees. The pension plan benefit formula
is based upon years of service and average compensation over the final years of
service. For this principal domestic pension plan, the Corporation's policy is
to fund amounts which are actuarially determined in accordance with the
applicable provisions of the Employee Retirement Income Security Act of 1974
("ERISA"). Pension plan assets for this plan primarily consist of equity and
debt securities managed by BTCo.
The Corporation also has a domestic, unfunded defined contribution plan, as
well as both defined benefit and defined contribution retirement and similar
plans covering the majority of its foreign employees. Contributions to defined
contribution plans are based upon a percentage of salary.
Effective June 30, 1994, a foreign defined benefit plan was changed to a
defined contribution plan. As a result of this change, the Corporation
recognized a $7 million curtailment/settlement gain in other noninterest
revenue.
Pension expense for 1996, 1995 and 1994 included the following components:
<TABLE>
<CAPTION>
(in millions) 1996 1995 1994
- --------------------------------------------------------------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Principal defined benefit plans (domestic and foreign)
Service cost--benefits earned $ 23 $ 17 $ 23
Interest cost on projected benefit obligations 42 38 37
Actual return on plan assets (78) (151) 6
Net amortization and deferral 5 83 (73)
- --------------------------------------------------------------------------------------------------- ----- ----- -----
Total (8) (13) (7)
Defined contribution plans 24 20 10
Other plans 4 5 2
- --------------------------------------------------------------------------------------------------- ----- ----- -----
Pension expense $ 20 $ 12 $ 5
=================================================================================================== ===== ===== =====
The actuarial assumptions used for the principal domestic defined benefit plan were as follows:
1996 1995 1994
----- ----- -----
Discount rate in determining expense 7.00% 8.75% 7.25%
Discount rate in determining benefit
obligations at year end 7.50% 7.00% 8.75%
Rate of increase in future compensation
levels for determining expense 5.00% 5.00% 5.00%
Rate of increase in future compensation
levels for determining benefit
obligations at year end 5.00% 5.00% 5.00%
Expected long-term rate of return on assets 9.00% 9.00% 9.00%
</TABLE>
87
<PAGE>
At year end 1996, the effect of changing the discount rate from 7.00% to 7.50%
was to decrease the projected benefit obligation, accumulated benefit obligation
and vested benefit obligation by $43 million, $34 million and $34 million,
respectively.
At year end 1995, the effect of changing the discount rate from 8.75% to 7.00%
was to increase the projected benefit obligation, accumulated benefit obligation
and vested benefit obligation by $96 million, $73 million and $70 million,
respectively.
Effective January 1, 1994, several plan changes were implemented, principally
a change in early retirement benefits for certain vested employees. The effect
of the plan changes was to increase the projected benefit obligation,
accumulated benefit obligation and vested benefit obligation by $13 million, $9
million and $8 million, respectively.
The assumptions used for the other domestic and the principal foreign defined
benefit plans were substantially similar to those used for the principal
domestic plan, given local economic conditions in the cases of the principal
foreign plans.
The following table sets forth the funded status and amounts recognized in the
Corporation's balance sheet for its principal domestic and foreign defined
benefit pension plans:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
---------------------------------- ----------------------------------
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 $(465) $(20) $(445) $(22)
================================= ===== ==== ===== ====
Accumulated benefit
obligations $(482) $(20) $(460) $(22)
================================= ===== ==== ===== ====
Projected benefit obligations $(565) $(21) $(544) $(23)
Plan assets at fair value 863 1 795 1
- --------------------------------- ----- ---- ----- ----
Funded status 298 (20) 251 (22)
Unrecognized net (assets)
obligations (23) 1 (28) 1
Unrecognized prior service cost 15 - 17 -
Unrecognized net (gain) loss (129) 3 (92) 4
Additional minimum liability - (4) - (5)
- --------------------------------- ----- ---- ----- ----
Prepaid (accrued) pension cost $ 161 $(20) $ 148 $(22)
================================= ===== ==== ===== ====
</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.
88
<PAGE>
The Corporation's postretirement benefits expense for the year ended December
31, 1996 was $10 million. This consisted of $9 million of interest cost on
accumulated postretirement benefit obligations and $1 million of service cost
attributable to service during the year. For the year ended December 31, 1995
postretirement benefits expense was $9 million. This consisted of $8 million of
interest cost on accumulated postretirement benefit obligations and $1 million
of service cost attributable to service during the year. For the year ended
December 31, 1994 postretirement benefits expense was $10 million. This
consisted of $9 million of interest cost on accumulated postretirement benefit
obligations and $1 million of service cost attributable to service during the
year.
The actuarial assumptions used for the Corporation's postretirement benefit
plans were as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
-------------------------- --------------------
Retiree Retiree Retiree Retiree
Health Life Health Life
($ in millions) Care Insurance Care Insurance
- ------------------------------------------- -------------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Health care cost trend rate:
First year 10.00% N/A 11.00% N/A
=========================================== ============= ========= ======= =========
Ultimate rate after 5 years
(1996) and 6 years (1995)
(based on roughly equal
annual decreases) 5.50% N/A 5.50% N/A
Discount rate in determining
expense 7.00% 7.00% 8.75% 8.75%
=========================================== ============= ========= ======= =========
Discount rate in determining benefit
obligations at year-end 7.50% 7.50% 7.00% 7.00%
=========================================== ============= ========= ======= =========
Rate of increase in future compensation
levels for determining benefit
obligation at both beginning and end
of the year N/A 5.00% N/A 5.00%
=========================================== ============= ========= ======= =========
Expected long-term rate of return on
plan assets N/A 9.00% N/A 9.00%
Effect of a one-percentage-point
increase in the health care cost trend
rates on the accumulated postretirement
benefit obligation $ 9 N/A $ 6 N/A
Effect of a one-percentage-point increase
in the assumed health care cost trend
rates on the aggregate of the service
and interest cost components of net
periodic postretirement expense for the
year ended $ 1 N/A $ 1 N/A
=========================================== ============= ========= ======= =========
</TABLE>
N/A Not applicable.
At year end 1996, the effect of changing the discount rate from 7.00% to 7.50%
was to decrease the accumulated postretirement benefit obligation for the
retiree health care plan and the retiree life insurance plan by $2 million and
$1 million, respectively.
At year end 1995, the effect of changing the discount rate from 8.75% to 7.00%
was to increase the accumulated postretirement benefit obligation for the
retiree health care plan and the retiree life insurance plan by $2 million and
$1 million, respectively.
89
<PAGE>
The following table sets forth the funded status and amounts recognized in the
Corporation's balance sheet:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
-------------------------- --------------------
Retiree Retiree Retiree Retiree
Health Life Health Life
($ in millions) Care Insurance Care Insurance
- ------------------------------------- -------------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Accumulated postretirement
benefit obligation:
Retirees $ (80) $ (6) $ (62) $ (5)
Fully eligible plan participants (17) - (16) -
Other active plan participants (21) (6) (18) (5)
- ------------------------------------- ----- ---- ----- ----
(118) (12) (96) (10)
Plan assets at fair value - 4 - 5
- ------------------------------------- ----- ---- ----- ----
Funded status (118) (8) (96) (5)
Unrecognized prior service cost 7 - 8 -
Unrecognized net (gain) loss (4) 3 (23) 1
- ------------------------------------- ----- ---- ----- ----
Accrued postretirement benefit cost $(115) $ (5) $(111) $ (4)
===================================== ===== ==== ===== ====
</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 4.75 percent, 1.69 percent
and 4.73 percent for 1996, 1995 and 1994, respectively. The sum of the Fixed
Contribution and the Profit-Driven Contribution amounted to $41 million, $29
million and $41 million for the years 1996, 1995 and 1994, respectively.
The Corporation also has a profit sharing plan (called the "Share and
Discretionary Cash Scheme") covering its employees in the United Kingdom. The
Corporation's contributions to this plan range from zero to 14 percent of
eligible employees' annual salary, which percentage is calculated using a
formula based on the Corporation's consolidated income before income taxes. The
contribution for 1996, 1995 and 1994 was 8.72 percent, 3.11 percent and 8.69
percent, respectively. The amount of expense recognized for the Share and
Discretionary Cash Scheme was $7 million, $2 million and $8 million for 1996,
1995 and 1994, respectively.
ALEX. BROWN'S PREDECESSOR PLANS
Retirement Plans
The Corporation maintains a 401(k) deferred compensation and profit sharing plan
(the "Plan"). Alex. Brown employees are permitted within limitations imposed by
tax law to make pretax contributions to the Plan pursuant to salary reduction
agreements. The Corporation may make discretionary matching and profit sharing
contributions to the Plan and may make additional contributions to preserve the
Plan's tax exempt status. The Corporation also has retirement plans for certain
Alex. Brown employees in foreign offices not covered by the Plan. Compensation
expense for the Corporation's contributions to retirement plans was $13 million,
$10 million and $5 million for 1996, 1995 and 1994, respectively.
90
<PAGE>
Employee Stock Purchase Plan
The Corporation maintains an employee stock purchase plan pursuant to which
Alex. Brown employees may purchase shares of the Corporation's common stock
through payroll deductions, subject to certain limitations, at a price equal to
85% of the fair market value of the stock on four quarterly investments dates.
The plan provides for the issuance of up to 1,245,000 shares. A total of
945,767 shares have been issued under the plan, including 126,709 shares in
1996.
Deferred Compensation Plan
The Corporation maintains a deferred compensation plan for certain investment
representatives. Eligible participants can direct the investment of their
deferred compensation amounts by selecting among various Corporation-sponsored
investment vehicles and the common stock of the Corporation at a 15% discount
from market. The employees vest in the deferred compensation accounts after
four years. The deferred compensation is forfeited if the Alex. Brown employee
terminates employment with the Corporation during the vesting period except for
termination due to death, disability or retirement. The Corporation may allow
participants to extend the deferral period after vesting. The amount of
deferred compensation, including any stock discounts, is being amortized over
the periods in which the Alex. Brown employees are providing the related
services (compensation expense of $1 million for 2000, $2 million for 1999, $3
million for 1998, $4 million for 1997, $3 million for 1996, $2 million for 1995
and $1 million for 1994).
91
<PAGE>
NOTE 20--INCOME TAXES
The Corporation files consolidated income tax returns which include all
significant domestic subsidiaries.
The domestic and foreign components of consolidated income before income taxes
follow:
<TABLE>
<CAPTION>
(in millions) Year Ended December 31, 1996 1995 1994
- --------------------------------------- ------ ----- -----
<S> <C> <C> <C>
Domestic $ 347 $ 69 $ 257
Foreign 784 400 730
- --------------------------------------- ------ ----- -----
Total $1,131 $ 469 $ 987
======================================= ====== ===== =====
</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 $1.3 billion at December 31, 1996. Federal taxes which would have
approximated $270 million, assuming utilization of foreign tax credits, have not
been provided on these earnings, as they are permanently reinvested outside the
U.S.
Deferred income taxes result from differences in the timing of revenue and
expense recognition for income tax and financial reporting purposes.
An analysis of consolidated income taxes follows:
<TABLE>
<CAPTION>
(in millions) Year Ended December 31, 1996 1995 1994
- --------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Income taxes applicable to:
Income before income taxes* $ 365 $ 158 $ 301
Capital surplus (26) 3 (5)
Cumulative translation adjustments (24) 9 (59)
Securities valuation allowance 32 (26) (16)
- --------------------------------------- ----- ----- -----
Total $ 347 $ 144 $ 221
======================================= ===== ===== =====
</TABLE>
* Includes income tax expense related to securities available for sale
transactions of $30 million, $74 million and $26 million in 1996, 1995 and
1994, respectively.
92
<PAGE>
The components of consolidated income taxes follow:
<TABLE>
<CAPTION>
(in millions) Year Ended December 31, 1996 1995 1994
- --------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Current
Federal $ 107 $ 65 $ 52
Foreign 124 317 294
State and local 44 32 27
- --------------------------------------- ----- ----- -----
Total current 275 414 373
- --------------------------------------- ----- ----- -----
Deferred
Federal (52) (132) (111)
Foreign 125 (141) (61)
State and local (1) 3 20
- --------------------------------------- ----- ----- -----
Total deferred 72 (270) (152)
- --------------------------------------- ----- ----- -----
Total $ 347 $ 144 $ 221
======================================= ===== ===== =====
</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:
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
- ---------------------------------------- ----- ----- -----
<S> <C> <C> <C>
U.S. federal statutory income tax rate 35% 35% 35%
State and local income taxes 4 8 3
Tax-exempt income (3) (8) (6)
Foreign subsidiary earnings (2) 3 (1)
Other items, net (2) (4) (1)
- ---------------------------------------- ---- ---- ----
Effective income tax rate 32% 34% 30%
======================================== ==== ==== ====
</TABLE>
The following is an analysis of the Corporation's net deferred tax assets:
<TABLE>
<CAPTION>
(in millions) December 31, 1996 1995
- ------------------------------------------------ ------ ------
<S> <C> <C>
Deferred tax assets $1,172 $1,124
Valuation allowance 227 227
- ------------------------------------------------ ------ ------
Deferred tax assets net of valuation allowance 945 897
Deferred tax liabilities 520 401
- ------------------------------------------------ ------ ------
Net deferred tax assets $ 425 $ 496
================================================ ====== ======
</TABLE>
At December 31, 1996, the Corporation's deferred tax assets were primarily
related to credit losses ($440 million), foreign tax credit carryforwards ($135
million) that will expire in 1999, 2000 and 2001, and a net operating loss
carryforward ($30 million) which expires in 2011. Deferred tax liabilities were
primarily related to certain trading activities ($119 million) and lease
financing activities ($176 million).
At December 31, 1995, the Corporation's deferred tax assets were primarily
related to credit losses ($533 million), foreign tax credit carryforwards ($140
million) that will expire in 1999 and 2000, and a net operating loss
carryforward ($41 million) which expires in 2009. Deferred tax liabilities were
primarily related to certain trading activities ($62 million) and lease
financing activities ($155 million).
93
<PAGE>
NOTE 21--EARNINGS PER COMMON SHARE
Primary earnings per common share amounts were computed by subtracting from
earnings the dividend requirements on preferred stock to arrive at net income
applicable to common stock ("net income applicable to common stock") and
dividing this amount by the average number of common and common equivalent
shares outstanding during the year. Fully diluted earnings per share amounts
were calculated by adjusting net income applicable to common stock for interest
expense on the convertible subordinated debentures and dividing this amount by
the average number of common and common equivalent shares outstanding during the
year.
For primary earnings per share, the average number of common and common
equivalent shares outstanding was the sum of the average number of shares of
common stock outstanding and the incremental number of shares issuable under
outstanding stock options and deferred stock awards that had a dilutive effect
as computed under the treasury stock method. Fully diluted earnings per share
further assumes the conversion into common stock of convertible subordinated
debentures, if dilutive. Under the treasury stock method, the number of
incremental shares is determined by assuming the issuance of the outstanding
stock options and deferred stock awards reduced by the number of shares assumed
to be repurchased from the issuance proceeds, using the market price of the
Parent Company's common stock. For primary earnings per share, this market
price is the average market price for the period, while for fully diluted
earnings per share, it is the period-end market price, if it is higher than the
average market price.
The earnings applicable to common stock and the number of shares used for
primary and fully diluted earnings per share were as follows:
<TABLE>
<CAPTION>
(in millions) Year Ended December 31, 1996 1995 1994
- -------------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Net income applicable to common stock - primary $ 715 $ 260 $ 658
Net income applicable to common stock - assuming
full dilution $ 718 $ 262 $ 660
================================================== ======== ======== ========
Average number of common shares outstanding 98.387 97.254 97.885
Average common and common equivalent shares
outstanding--primary 103.153 100.235 101.018
Average common and common equivalent shares
outstanding--assuming full dilution 106.889 103.664 104.260
================================================== ======== ======== ========
</TABLE>
94
<PAGE>
NOTE 22--INTERNATIONAL OPERATIONS
Management views the operation of the Corporation on an organizational unit
basis, as disclosed in the Management Discussion and Analysis on page 3.
However, in order to comply with the financial reporting regulations of the
Securities and Exchange Commission, the Corporation is required to report
international operations on the basis of the domicile of the customer. Pursuant
to these regulations, any business transacted with a customer who is domiciled
outside the U.S. is reported as international operations. Due to the complex
nature of the Corporation's businesses and because its revenue from customers
domiciled outside the U.S. is recorded in both domestic and foreign offices, it
is impossible to segregate with precision the respective contributions to income
from the domestic and international operations. As these operations are highly
integrated, estimates and subjective assumptions have been made to apportion
revenue and expenses between domestic and international operations. These
estimates and assumptions include the following: interest revenue and interest
expense are apportioned to geographic areas based on the geographic distribution
of average interest earning assets. The geographic location of the assets is
determined by the domicile of the customer, or for interest earning securities,
by the domicile of the issuer. For the year ended December 31, 1996, trading
gains and losses are allocated based on the geographic distribution of average
trading assets as determined by the domicile of the issuer. For the years ended
December 31, 1995 and 1994, trading gains and losses are allocated based on the
location of the office recording the gains/losses. All other noninterest
revenue is allocated based on the geographic location of the office recording
the income. Noninterest expense is basically apportioned geographically based
on the geographical distribution of operating income (net interest revenue plus
noninterest revenue). Corporate overhead expenses are allocated based upon
average assets by geographic region. International offices are assessed a cost
of funds charge based on a short-term funding rate. Allocation of the provision
for credit losses is based on the geographical distribution of net charges to
the allowance for credit losses and management's assessment of the risks
associated with the domestic and international portfolios. International taxes
are calculated based on the foreign tax rate for each foreign office.
Earning assets are allocated by the domicile of the customer. All other
assets are allocated based on the location of the office recording the assets.
Subject to the above limitations, estimates and assumptions, the following
tables present information attributable to international operations (in
millions):
<TABLE>
<CAPTION>
Income
Total Total Total before Net
assets revenue(1) expenses(1) taxes income
--------- ---------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
1996
- -------------------------------
International operations
Asia $ 9,633 $ 613 $ 516 $ 97 $ 71
Australia/New Zealand 10,489 1,031 834 197 144
Western Hemisphere 14,634 1,275 1,193 82 60
Europe 14,359 965 941 24 18
United Kingdom 25,451 1,027 1,027 - -
Middle East/Africa 692 40 35 5 4
Intersegment eliminations (12,759) (591) (591) - -
- ------------------------------- -------- ------- ------ ------ ----
Total international 62,499 4,360 3,955 405 297
Domestic operations 60,279 6,265 5,539 726 469
- ------------------------------- -------- ------- ------ ------ ----
Total $122,778 $10,625 $9,494 $1,131 $766
=============================== ======== ======= ====== ====== ====
International as a percentage
of total 51% 41% 42% 36% 39%
=============================== ======== ======= ====== ====== ====
</TABLE>
95
<PAGE>
<TABLE>
<CAPTION>
Income
Total Total Total before Net
assets revenue(1) expenses(1)(2) taxes(2) income(2)
--------- ---------- -------------- --------- ---------
<S> <C> <C> <C> <C> <C>
1995
- -------------------------------
International operations
Asia $ 7,565 $ 710 $ 609 $ 101 $ 70
Australia/New Zealand 7,658 803 657 146 101
Western Hemisphere 10,245 1,201 1,138 63 43
Europe 8,001 818 764 54 37
United Kingdom 28,850 599 807 (208) (144)
Middle East/Africa 302 15 17 (2) (1)
Intersegment eliminations (11,119) (751) (751) - -
- ------------------------------- -------- ------ ------ ----- -----
Total international 51,502 3,395 3,241 154 106
Domestic operations 54,697 5,723 5,408 315 205
- ------------------------------- -------- ------ ------ ----- -----
Total $106,199 $9,118 $8,649 $ 469 $ 311
=============================== ======== ====== ====== ===== =====
International as a percentage
of total 48% 37% 37% 33% 34%
=============================== ======== ====== ====== ===== =====
Income
Total Total Total before Net
assets revenue(1) expenses(1) taxes income
-------- ------ ------ ----- -----
1994
- -------------------------------
International operations
Asia $ 7,867 $ 434 $ 423 $ 11 $ 8
Australia/New Zealand 8,086 733 526 207 151
Western Hemisphere 8,775 896 793 103 75
Europe 6,746 581 544 37 27
United Kingdom 25,645 1,546 1,402 144 105
Middle East/Africa 123 16 13 3 2
Intersegment eliminations (21,109) (913) (913) - -
- ------------------------------- -------- ------ ------ ----- -----
Total international 36,133 3,293 2,788 505 368
Domestic operations 62,229 4,816 4,334 482 318
- ------------------------------- -------- ------ ------ ----- -----
Total $ 98,362 $8,109 $7,122 $ 987 $ 686
=============================== ======== ====== ====== ===== =====
International as a percentage
of total 37% 41% 39% 51% 54%
=============================== ======== ====== ====== ===== =====
</TABLE>
(1) Total revenue includes interest revenue and noninterest revenue. Total
expenses includes interest expense, noninterest expenses and provision for
credit losses.
(2) 1995 balances have been restated to reflect the change in methodology for
allocating operating and corporate overhead expenses. Changes had no
material impact on 1994 balances.
96
<PAGE>
NOTE 23--DERIVATIVE FINANCIAL INSTRUMENTS AND FINANCIAL INSTRUMENTS WITH OFF-
BALANCE SHEET RISK
In the normal course of business, the Corporation is a party to a variety of
derivative and off-balance sheet financial instruments to meet the needs of its
customers, to manage its exposure to interest rate and other risks, and to take
trading positions. These financial instruments consist of derivatives (such as
swaps and options), when-issued securities, securities lending indemnifications,
and credit-related arrangements and involve varying degrees of credit risk and
market risk.
Credit risk, as defined by SFAS 105, represents the maximum potential
accounting loss due to possible non-performance by obligors and counterparties
under the terms of their contracts. Market risk represents the potential loss
due to the decrease in the value of a financial instrument caused primarily by
changes in interest rates or foreign exchange rates, or the prices of equities
or commodities (or related indices).
The Corporation manages the credit risk of its derivative and off-balance
sheet portfolios by limiting the total amount of arrangements outstanding with
individual customers; by monitoring the size and maturity structure of the
portfolios; by obtaining collateral based on management's credit assessment of
the customer; and by applying a uniform credit process for all credit exposures.
Collateral held generally includes cash and U.S. government and federal agency
securities. In order to reduce derivatives-related credit risk, the Corporation
enters into master netting agreements which incorporate the right of setoff to
provide for the net settlement of covered contracts with the same customer in
the event of default or other cancellation of the agreement. In addition,
management evaluates these portfolios periodically to determine whether the
allowance for credit losses is adequate to absorb potential losses in such
portfolios.
For a further discussion of derivative financial instruments (including
leveraged derivative transactions) the related market and credit risks, and
controls used to monitor such risks, which is not included as part of these
audited financial statements, see "Risk Management" on page 24, "Derivatives" on
page 28, "Summary of Credit Loss Experience" on page 33 and "Nonperforming
Assets" on page 37. For the risk-weighted amounts under the risk-based capital
guidelines of the Corporation's derivative and off-balance sheet exposures,
which also are not included as part of these audited supplemental financial
statements, see "Capital Resources" on page 19.
97
<PAGE>
Trading Derivative Financial Instruments
The Corporation actively manages trading positions in a variety of derivative
contracts. Many of the Corporation's trading positions are established as a
result of providing derivative products to meet customers' demands. To
anticipate customer demand for such transactions, the Corporation also carries
an inventory of capital markets instruments and maintains its access to market
liquidity by quoting bid and offer prices to, and trading with, other market
makers. These two activities are essential to provide customers with capital
market products at competitive prices. All positions are reported at fair value
and changes in fair values are reflected in trading revenue as they occur.
As required by SFAS 119, "Disclosure about Derivative Financial Instruments
and Fair Value of Financial Instruments," the amounts disclosed below represent
the end-of-period fair values of trading derivatives and their average aggregate
fair values during the year. These amounts are presented gross before the
impact of master netting agreements and collateral. The gross fair values of
trading derivatives do not represent the amount of market or credit risk of
derivatives in the trading portfolio. Rather, they indicate the extent of
involvement in the over-the-counter (OTC) markets for interest rate, foreign
exchange rate, equity and commodity price derivatives, and exchange traded
options during the year. Any measurement of risk is meaningful only when all
related factors are identified, such as risk-offsetting transactions, master
netting agreements, and the value of any related collateral. The Corporation
considers such factors in its RAROC system and in other internal risk analyses.
The accounting impact of netting agreements, which is applied on a cross-product
basis in accordance with the terms of each master agreement and which is
calculated based on the criteria prescribed by FIN 39, is provided below in
order to display how these amounts are reflected in trading assets and trading
liabilities in the supplemental consolidated balance sheet.
98
<PAGE>
Contracts with positive fair values are recorded as assets and contracts with
negative fair values are recorded as liabilities after application of master
netting agreements. The following table reflects the gross fair values and
balance sheet amounts of trading derivative financial instruments:
<TABLE>
<CAPTION>
At December 31, 1996 Average during 1996
---------------------------- ------------------------
(in millions) Assets (Liabilities) Assets (Liabilities)
- --------------------------------------- ---------- ---------------- --------- -------------
<S> <C> <C> <C> <C>
OTC Financial Instruments
Interest Rate and Currency
Swap Contracts $ 16,582 $(15,394) $ 14,880 $(14,345)
Interest Rate Contracts
Forwards 84 (86) 63 (61)
Options purchased 1,149 1,118
Options written (1,252) (1,323)
Foreign Exchange Rate Contracts
Spot and Forwards 9,855 (10,935) 7,754 (9,118)
Options purchased 917 986
Options written (953) (983)
Equity-related contracts 2,696 (2,941) 2,128 (2,374)
Commodity-related and other contracts 679 (690) 585 (594)
Exchange-Traded Options
Interest Rate 10 (12) 19 (10)
Foreign Exchange - - - (2)
Equity 251 (135) 181 (82)
- --------------------------------------- --------- -------- -------- --------
Total Gross Fair Values 32,223 (32,398) 27,714 (28,892)
- --------------------------------------- --------- -------- -------- --------
Impact of Netting Agreements (20,813) 20,813 (17,314) 17,314
- --------------------------------------- --------- -------- -------- --------
$11,410(1) $ 10,400
========= ========
$(11,585)(1) $(11,578)
======== ========
</TABLE>
99
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1995 Average during 1995
---------------------------- ------------------------
(in millions) Assets (Liabilities) Assets (Liabilities)
- --------------------------------------- ---------- ---------------- --------- -------------
<S> <C> <C> <C> <C>
OTC Financial Instruments
Interest Rate and Currency
Swap Contracts $ 15,858 $(15,471) $ 15,901 $(15,288)
Interest Rate Contracts
Forwards 83 (81) 114 (116)
Options purchased 1,426 1,139
Options written (1,312) (1,727)
Foreign Exchange Rate Contracts
Spot and Forwards 7,931 (8,937) 12,041 (11,795)
Options purchased 999 1,462
Options written (941) (1,269)
Equity-related contracts 2,011 (2,359) 1,549 (1,756)
Commodity-related and other contracts 541 (531) 607 (472)
Exchange-Traded Options
Interest Rate 33 (16) 106 (62)
Foreign Exchange - - 1 (11)
Equity 137 (80) 131 (69)
Commodity - - 7 (5)
- --------------------------------------- --------- -------- -------- --------
Total Gross Fair Values 29,019 (29,728) 33,058 (32,570)
- --------------------------------------- --------- -------- -------- --------
Impact of Netting Agreements (18,464) 18,464 (19,389) 19,389
- --------------------------------------- --------- -------- -------- --------
$10,555(1) $ 13,669
========= ========
$(11,264)(1) $(13,181)
======== ========
</TABLE>
(1) As reflected on the balance sheet in "Trading Assets" and "Trading
Liabilities."
Derivative contracts are generally either privately-negotiated OTC contracts
or standard contracts transacted through regulated exchanges. For information
as to the credit risk of OTC trading derivatives, which is not included as part
of these audited financial statements, see "Derivatives" on page 28. Fair
values of futures contracts are not included above due to cash margining
requirements of regulated exchanges. Monthly averages are used in the table
above.
100
<PAGE>
End-User Derivative Financial Instruments
The Corporation, as an end user, utilizes various types of derivative products
(principally interest rate swaps) to manage the interest rate, currency and
other market risks associated with certain liabilities and assets such as
interest-bearing deposits, short-term borrowings and long-term debt, as well as
securities available for sale, loans, investments in non-marketable equity
instruments and net investments in foreign entities. Revenue or expense
pertaining to management of interest rate exposure is predominantly recognized
over the life of the contract as an adjustment to interest revenue or expense.
When the Corporation purchases assets and issues liabilities at fixed interest
rates it subjects itself to fair value fluctuations as market interest rates
change. These fluctuations in fair value are managed by entering into interest
rate contracts which change the fixed rate instrument into a variable rate
instrument.
When the Corporation purchases foreign currency denominated assets, issues
foreign currency denominated debt or has foreign net investments, it subjects
itself to changes in value as exchange rates move. These fluctuations are
managed by entering into currency swaps and forwards.
The Corporation's investments in nonmarketable and restricted equity
instruments classified in other assets are subject to changes in market values.
These changes are managed by entering into equity swaps and options.
The fair values and other information related to end-user derivatives are
disclosed in Note 25.
101
<PAGE>
Notional Amounts of Trading and End-User Derivative Financial Instruments
Notional amounts indicate the extent of the Corporation's involvement in the
various types and uses of derivative financial instruments and do not measure
the Corporation's exposure to credit or market risks and do not necessarily
represent the amounts exchanged by the parties to the instruments. The amounts
exchanged are based on the contractual notional amounts and the other terms of
the instruments. Notional amounts are not included in the consolidated balance
sheet and generally exceed the future cash requirements relating to the
instruments. The leveraging effects of leveraged derivative transactions are
reflected in the table below.
<TABLE>
<CAPTION>
Notional Amounts
(in millions) December 31, 1996 December 31,1995
- -------------------------------------------------------------------------- ----------------------------- ----------------------
End End
Trading User(1) Trading User(1)
----------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest rate contracts
Swaps $ 589,739 $58,375 $ 540,124 $59,104
Futures 102,389 - 118,822 -
Forwards 67,183 3,325 74,247 2,213
Options purchased
Exchange traded 41,106 - 52,020 -
OTC 93,734 1,014 97,461 104
Options written
Exchange traded 42,300 - 41,833 -
OTC 96,843 - 111,706 -
- -------------------------------------------------------------------------- ---------- ------- ---------- -------
Total $1,033,294 $62,714 $1,036,213 $61,421
========================================================================== ========== ======= ========== =======
Foreign exchange rate contracts
Spot, forwards, futures $ 539,805 $ 2,358 $ 475,435 $ 1,990
Swaps 60,200 2,480 59,360 1,557
OTC options purchased 23,118 - 22,345 -
OTC options written 24,994 - 23,791 -
- -------------------------------------------------------------------------- ---------- ------- ---------- -------
Total $ 648,117 $ 4,838 $ 580,931 $ 3,547
========================================================================== ========== ======= ========== =======
Equity derivative contracts
Swaps $ 6,165 $ 224 $ 5,681 $ 22
Futures and forwards 2,932 - 2,766 -
Options purchased
Exchange traded 3,097 - 2,726 -
OTC 13,556 1 12,801 69
Options written
Exchange traded 2,648 - 6,808 -
OTC 14,420 - 11,334 -
- -------------------------------------------------------------------------- ---------- ------- ---------- -------
Total $ 42,818 $ 225 $ 42,116 $ 91
========================================================================== ========== ======= ========== =======
Commodity and other contracts (2)
Swaps $ 3,168 $ - $ 4,003 $ -
Futures 792 - 1,622 -
Forwards 2,304 - 2,098 -
Options purchased
Exchange traded 663 - 1,755 -
OTC 1,879 - 5,040 -
Options written
Exchange traded 604 - 2,207 -
OTC 1,956 - 5,213 -
- -------------------------------------------------------------------------- ---------- ------- ---------- -------
Total $ 11,366 $ - $ 21,938 $ -
========================================================================== ========== ======= ========== =======
</TABLE>
(1) These are hedges of securities available for sale, loans, other assets,
interest-bearing deposits, other short-term borrowings, long-term debt and
net investments in foreign subsidiaries. These are transacted with
derivatives traders within the Corporation who are intermediaries to
external markets.
(2) Excluded from the notional amounts above were benefit-responsive contracts
reflecting actuarial-related risk, minimal market risk and no credit risk,
for which the notional values totaled $11.5 billion and $12.1 billion at
December 31, 1996 and 1995, respectively.
102
<PAGE>
SWAPS
Interest rate swap contracts generally represent the contractual exchange of
fixed and floating rate payments of a single currency, based on a notional
amount and an interest reference rate. Cross-currency interest rate swap
contracts generally involve the exchange of payments which are based on the
interest reference rates available at the inception of the contract on two
different currency principal balances that are exchanged. The principal
balances are re-exchanged at an agreed upon rate at a specified future date.
Equity swap contracts typically involve the payment of an amount equal to the
total return of a U.S. or international equity index, basket of equities, or an
individual equity over a fixed time period in exchange for receiving a floating
interest rate, both based upon the same notional amount.
FUTURES AND FORWARDS
Futures and forward contracts represent commitments to purchase or sell
securities, money market instruments, foreign currencies or commodities at a
future date and at a specified price. Futures contracts are traded on regulated
U.S. and international exchanges. The Corporation intends to close out most
open positions in futures contracts prior to maturity, therefore future cash
receipts or payments are generally limited to the change in fair value of the
underlying instruments. Since futures contracts generally entail daily net cash
margining with regulated exchanges, the credit risk is generally minimized to a
one-day receivable. Included in this category of contracts are spot foreign
currency contracts, cash-settled index contracts, and forward rate agreements
(agreements to exchange amounts at a specified future date for interest rate
differentials between an agreed interest rate and a reference rate, computed on
a notional amount).
OPTIONS
Option contracts are either deliverable or cash-settled. Deliverable contracts
convey to the purchaser (holder) the right to buy (call) or sell (put)
securities, money market instruments, foreign currencies or commodities at or
before a specified date for a contracted price from the seller (writer) of the
contract. Cash-settled contracts convey to the purchaser the right to the
monetary equivalent of the increase (call) or decrease (put), or a percentage
thereof, in a specified reference rate or index, computed on a notional amount,
from the writer. The initial price of an option contract is equal to the
premium paid by the purchaser and is significantly less than the contract or
notional amount. Included in these contracts are: (i) interest rate caps,
floors and collars, which are agreements to make periodic payments for interest
rate differentials between an agreed upon interest rate and a reference rate and
(ii) purchased options to enter into future (or cancel existing) interest rate
swap contracts ("swap options").
The Corporation is subject to credit risk as a purchaser of an option
contract, and is subject to market risk to the extent of the purchase price of
the option. The Corporation is subject to market risk on its written option
contracts, but not to credit risk, except as noted below, since the customer has
already performed according to the terms of the contract by paying a cash
premium up front. However, for SFAS 105 purposes, credit risk arises to the
extent that the option contract requires or permits settlement in the underlying
instrument, and that instrument is subject to credit risk. Such amounts related
to certain written put option contracts on debt securities and certain forward
contracts to purchase debt securities were $2.677 billion and $4.469 billion at
December 31, 1996 and 1995, respectively. The underlying debt securities were
primarily obligations of the U.S. and foreign central and local governments and
U.S. federal agencies.
103
<PAGE>
Financial Instruments with Off-Balance Sheet Credit Risk
As required by SFAS 105, off-balance sheet credit risk amounts are determined
without consideration of the value of any related collateral and reflect the
total potential loss on commitments to purchase when-issued securities for all
obligors (including governments); securities lending indemnifications; and
undrawn commitments, standby letters of credit and similar arrangements.
SECURITIES AND MONEY MARKET ACTIVITIES
<TABLE>
<CAPTION>
(in millions) December 31, 1996 December 31, 1995
- ------------------------------------- ------------------ ------------------
Credit Credit
Contract Risk Contract Risk
Amount Amount Amount Amount
--------- ------- --------- -------
<S> <C> <C> <C> <C>
When-issued securities and other
Commitments to sell $ 1,440 $ 2 $ 6,705 $ 1
Commitments to purchase (1) 2,511 2,524 3,532 3,511
Securities lending indemnifications 37,799 37,799 28,761 28,761
- ------------------------------------- ------- ------- ------- -------
</TABLE>
(1) Includes $1.1 billion and $.6 billion of forward-dated money market assets
at December 31, 1996 and 1995, respectively.
When-issued securities normally begin trading when the U.S. Treasury or some
other issuer of securities announces a forth-coming issue. (In some cases,
trading may begin in anticipation of such an announcement.) Such transactions
are contingent upon the actual issuance of the security. Since the exact price
and terms of the security are unknown before the issue date, trading prior to
that date is on a "yield" basis. On the issue date the exact terms and price of
the security become known and when-issued trading continues until settlement
date, when the securities are delivered and the issuer is paid. On settlement
date, the securities purchased by the Corporation are reported on the balance
sheet.
Securities lending indemnifications represent the market value of customers'
securities lent to third parties. The Corporation indemnifies customers to the
extent of the replacement cost and/or the market value of the securities in the
event of a failure by a third party to return the securities lent. The market
value of collateral, primarily cash, received for customers' securities lent was
in excess of the contract amounts and was approximately $39 billion at December
31, 1996 and $30 billion at December 31, 1995.
104
<PAGE>
CREDIT-RELATED ARRANGEMENTS
<TABLE>
<CAPTION>
(in millions) December 31, 1996 December 31, 1995
- ---------------------------------- ----------------- -----------------
Credit Credit
Contract Risk Contract Risk
Amount Amount Amount Amount
-------- ------- ---------- ------
<S> <C> <C> <C> <C>
Commitments to extend credit (1) $12,809 $12,809 $9,382 $9,382
Standby letters of credit and
similar arrangements (2) 3,974 3,974 4,562 4,562
- ---------------------------------- ------- ------- ------ ------
</TABLE>
(1) Includes participations to other entities of approximately $2 billion at
December 31, 1996 and 1995. Of the non-participated amount, approximately $2
billion and $3 billion expire in one year or less at December 31, 1996 and
1995, respectively. Additionally, both the contract amount and the credit
risk amount include commitments to enter into securities resale agreements
of $2.0 billion and $.8 billion at December 31, 1996 and 1995, respectively.
(2) Includes participations to other entities of approximately $1 billion at
December 31, 1996 and 1995.
Commitments to extend credit represent contractual commitments to make loans
and revolving credits. Commitments generally have fixed expiration dates or
other termination clauses and require the payment of a fee. Since commitments
may expire without being drawn upon, the total contract amounts do not
necessarily represent future cash requirements. Included in the amounts above
are unused commitments to extend credit that are related to loans held for
trading purposes. Information regarding the Corporation's credit risk with
respect to real estate financing activities and highly leveraged transactions,
which is not included as part of the audited supplemental financial statements,
is disclosed on pages 40 through 42.
Standby letters of credit and similar arrangements ("standbys"), issued
primarily to support corporate obligations, commit the Corporation to make
payments on behalf of customers contingent upon the failure of the customer to
perform under the terms of the contract. Standbys outstanding related to
customer obligations, such as commercial paper, medium- and long-term notes and
debentures (including industrial revenue obligations), as well as other
financial and performance-related obligations. At December 31, 1996, $2.747
billion will expire within one year, $1.058 billion from one to four years and
$169 million after four years.
For standbys, commitments to extend credit and securities lending
indemnifications, the credit risk amount represents the contractual amount.
Standbys and commitments to extend credit would have market risk if issued or
extended at a fixed rate of interest. However, these contracts are primarily
made at a floating rate. Fees received are generally recognized as revenue over
the life of the commitment.
105
<PAGE>
NOTE 24--CONCENTRATIONS OF CREDIT RISK
The Corporation, as required by SFAS 105, has identified two significant
concentrations of credit risk: OECD country banks and OECD country central
governments, their agencies and central banks. Together they represented 34
percent and 36 percent of total credit risk at December 31, 1996 and 1995,
respectively. The Organization for Economic Cooperation and Development (OECD)
is an international organization of countries which are committed to market-
oriented economic policies, including the promotion of private enterprise and
free market prices, liberal trade policies, and the absence of exchange
controls. The OECD consists of 29 industrialized countries that are located
primarily in Western Europe and North America, as well as Australia, Japan, New
Zealand and South Korea. For risk-based capital purposes, domestic and foreign
bank regulators generally assign OECD country central governments, their
agencies and their central banks a credit risk weighting of zero percent, which
means that no credit risk capital is required to support their financial
instruments. OECD country banks are assigned the next lowest credit risk
weighting (20 percent) by these regulators. The largest counterparty
concentration was the U.S. government and its related entities, which comprised
approximately 51 percent of the OECD country governments category. Within all
other counterparties, the amount collateralized by cash and U.S. government
securities represented approximately 26 percent of total credit risk.
The following table reflects the aggregate credit risk by groups of
counterparties, as defined by SFAS 105, relating to on- and off-balance sheet
financial instruments, including derivatives, at December 31, 1996 and 1995.
The increase in the OECD country banks category compared to 1995 was
predominantly related to short-term, liquid transactions with European and U.S.
banks.
106
<PAGE>
<TABLE>
<CAPTION>
CREDIT RISK
On-Balance Off-Balance
(in millions) Sheet Sheet Total
- -------------------------------------- ---------- ----------- --------
<S> <C> <C> <C>
1996
- --------------------------------------
Significant concentrations (1)
OECD country banks (2) $ 34,799 $ 4,040 $ 38,839
OECD country governments 16,083 3,194 19,277
- -------------------------------------- -------- ------- --------
Total significant concentrations 50,882 7,234 58,116
All other (3)(4) 60,531 52,463 112,994
- -------------------------------------- -------- ------- --------
Total $111,413 $59,697 $171,110
====================================== ======== ======= ========
1995
- --------------------------------------
Significant concentrations (1)
OECD country banks (2) $ 21,615 $ 3,894 $ 25,509
OECD country governments 19,872 6,590 26,462
- -------------------------------------- -------- ------- --------
Total significant concentrations 41,487 10,484 51,971
All other (3)(4) 54,079 40,210 94,289
- -------------------------------------- -------- ------- --------
Total $ 95,566 $50,694 $146,260
====================================== ======== ======= ========
</TABLE>
(1) For these purposes, Poland has been excluded from the OECD categories at
December 31, 1996 and the Czech Republic and Mexico were excluded at
December 31, 1995.
(2) Included in the on-balance sheet component of this category was
approximately $4 billion and $5 billion at December 31, 1996 and 1995,
respectively, that was collateralized by U.S. government securities.
(3) The "all other" category of credit risk is diversified with respect to type
of obligor and counterparty. Included in the on-balance sheet component of
this category was approximately $8 billion and $10 billion at December 31,
1996 and 1995, respectively, that was collateralized by cash and U.S.
government securities. Included in the off-balance sheet component of this
category at December 31, 1996 was approximately $37 billion that was
collateralized by cash and U.S. government securities and approximately $11
billion of unused commitments to extend credit, approximately $5 billion of
which expire in one year or less. The corresponding amounts for December 31,
1995 were $28 billion, $6 billion and $3 billion, respectively.
(4) Includes:
CREDIT RISK
<TABLE>
<CAPTION>
On-Balance Off-Balance
(in millions) Sheet Sheet Total
- ------------------------------------------------------------------------------------------ ------ ------ ------
<S> <C> <C> <C>
1996
- ------------------------------------------------------------------------------------------
Real estate $2,002 $ 394 $2,396
Highly leveraged 1,663 1,003 2,666
1995
- ------------------------------------------------------------------------------------------
Real estate $1,802 $ 443 $2,245
Highly leveraged 1,173 802 1,975
</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 supplemental financial statements, appears on
pages 40 through 42.
107
<PAGE>
NOTE 25--FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures about Fair Value of Financial Instruments," requires the
disclosure of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value. Quoted market prices, when available, are used as the measure of fair
value. In cases where quoted market prices are not available, fair values are
based on present value estimates or other valuation techniques. These derived
fair values are significantly affected by assumptions used, principally the
timing of future cash flows and the discount rate. Because assumptions are
inherently subjective in nature, the estimated fair values cannot be
substantiated by comparison to independent market quotes and, in many cases, the
estimated fair values would not necessarily be realized in an immediate sale or
settlement of the instrument. The disclosure requirements of SFAS 107 exclude
certain financial instruments and all nonfinancial instruments (e.g., franchise
value of businesses). Accordingly, the aggregate fair value amounts presented
do not represent management's estimation of the underlying value of the
Corporation.
SFAS 119 amended SFAS 107 disclosure requirements as of December 31, 1994.
The amendments, among others, require that the disclosures distinguish between
financial instruments held for trading purposes, measured at fair value with
gains and losses recognized in earnings, and financial instruments held or
issued for purposes other than trading. The fair value of derivative financial
instruments must be disclosed separately from nonderivative financial
instruments. Additionally, the fair value of derivative financial instruments
may not be netted with the fair value of other derivative financial instruments,
except as allowed by FIN 39.
108
<PAGE>
The following are the estimated fair values of the Corporation's financial
instruments followed by a general description of the methods and assumptions
used to estimate such fair values.
FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
Under-
lying Effect of Total Fair Value
Book Fair End-User Fair Over (Under)
(in millions) December 31, 1996 Value Value Derivative Value Book Value
- ----------------------------------------- -------- ------- ----------- ------- ------------
<S> <C> <C> <C> <C> <C>
FINANCIAL ASSETS, INCLUDING HEDGES
Cash and due from banks $ 1,568 $ 1,568 $ - $ 1,568 $ -
Interest-bearing deposits
with banks 2,210 2,212 - 2,212 2
Federal funds sold 1,684 1,684 - 1,684 -
Securities purchased under
resale agreements 18,002 18,004 - 18,004 2
Securities borrowed 17,005 17,005 - 17,005 -
Trading assets (see Notes 3
and 23) 49,129 49,129 - 49,129 -
Securities available for sale
(see Note 4) 7,920 7,985 (65) 7,920 -
Loans (excluding leases),
commitments to extend credit and
standby letters of credit 15,615 15,440 (23) 15,417 (198)
Allowance for credit losses (773) - - - 773
Customer receivables 1,529 1,529 - 1,529 -
Due from customers on acceptances 597 597 - 597 -
Accounts receivable and accrued
interest 3,077 3,077 - 3,077 -
Other financial assets 2,161 2,239 (3) 2,236 75
FINANCIAL LIABILITIES, INCLUDING HEDGES
Noninterest-bearing deposits 3,613 3,613 - 3,613 -
Interest-bearing deposits 26,702 26,729 (31) 26,698 (4)
Trading liabilities (see Notes 3
and 23) 23,761 23,761 - 23,761 -
Securities loaned and securities
sold under repurchase agreements 23,454 23,456 - 23,456 2
Other short-term borrowings 19,409 19,416 - 19,416 7
Acceptances outstanding 597 597 - 597 -
Other financial liabilities 6,402 6,402 - 6,402 -
Allowance for credit losses 200 - - - (200)
Long-term debt* 12,038 12,259 (113) 12,146 108
Net investments in foreign subsidiaries - - 1 1 1
</TABLE>
109
<PAGE>
<TABLE>
<CAPTION>
(in millions) December 31, 1995
- -----------------------------------------
<S> <C> <C> <C> <C> <C>
FINANCIAL ASSETS, INCLUDING HEDGES
Cash and due from banks $ 2,399 $ 2,399 $ - $ 2,399 $ -
Interest-bearing deposits
with banks 2,023 2,027 - 2,027 4
Federal funds sold 854 854 - 854 -
Securities purchased under
resale agreements 13,241 13,242 - 13,242 1
Securities borrowed 11,309 11,309 - 11,309 -
Trading assets (see Notes 3
and 23) 48,004 48,004 - 48,004 -
Securities available for sale
(see Note 4) 6,283 6,376 (93) 6,283 -
Loans (excluding leases),
commitments to extend credit
and standby letters of credit 12,400 12,141 (5) 12,136 (264)
Allowance for credit losses (992) - - - 992
Customer receivables 1,322 1,322 - 1,322 -
Due from customers on acceptances 500 500 - 500 -
Accounts receivable and accrued
interest 4,297 4,297 - 4,297 -
Other financial assets 1,959 2,133 (14) 2,119 160
FINANCIAL LIABILITIES, INCLUDING HEDGES
Noninterest-bearing deposits 3,292 3,292 - 3,292 -
Interest-bearing deposits 22,416 22,440 (59) 22,381 (35)
Trading liabilities (see Notes 3
and 23) 26,145 26,145 - 26,145 -
Securities loaned and securities
sold under repurchase agreements 15,684 15,690 - 15,690 6
Other short-term borrowings 15,861 15,879 (1) 15,878 17
Acceptances outstanding 500 500 - 500 -
Other financial liabilities 5,090 5,090 - 5,090 -
Long-term debt 9,487 9,840 (280) 9,560 73
Net investments in foreign subsidiaries - - (16) (16) (16)
</TABLE>
* 1996 includes trust preferred capital securities.
110
<PAGE>
A discussion of the nature, objectives and strategies for using end-user
derivatives can be found in Note 23.
The following table provides the gross unrealized gains and losses for end-
user derivatives. Gross unrealized gains and losses for hedges of securities
available for sale are recognized in the financial statements with the offset as
an adjustment to securities valuation allowance in stockholders' equity. Gross
unrealized gains and losses for hedges of loans, other assets, interest-bearing
deposits, other short-term borrowings, long-term debt and net investments in
foreign subsidiaries are not yet recognized in the supplemental financial
statements.
<TABLE>
<CAPTION>
Net Invest-
ments in
Securities Interest- Other Long- foreign
(in millions) available Other bearing short-term term subsi-
December 31, 1996 for sale Loans assets deposits borrowings debt(1) diaries Total
- ----------------------------- ----------- ------ ------- ---------- ----------- -------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST RATE SWAPS
Pay Variable
Unrealized Gain $ 1 $ - $ - $ 62 $ 7 $ 198 $ - $ 268
Unrealized (Loss) - (14) - (23) (6) (93) - (136)
- ----------------------------- ---- ----- ------ ---- --- ----- ----------- -----
Pay Variable Net 1 (14) - 39 1 105 - 132
- ----------------------------- ---- ----- ------ ---- --- ----- ----------- -----
Pay Fixed
Unrealized Gain 3 -- - 13 - 1 - 17
Unrealized (Loss) (50) (9) - (45) (1) (28) - (133)
- ----------------------------- ---- ----- ------ ---- --- ----- ----------- -----
Pay Fixed Net (47) (9) - (32) (1) (27) - (116)
- ----------------------------- ---- ----- ------ ---- --- ----- ----------- -----
Total Unrealized
Gain 4 -- - 75 7 199 - 285
- ----------------------------- ---- ----- ------ ---- --- ----- ----------- -----
Total Unrealized
(Loss) (50) (23) - (68) (7) (121) - (269)
- ----------------------------- ---- ----- ------ ---- --- ----- ----------- -----
Total Net $(46) $(23) $ - $ 7 $ - $ 78 $ - $ 16
============================= ==== ===== ====== ==== === ===== =========== =====
FORWARD RATE AGREEMENTS
Unrealized Gain $ - $ - $ - $ 1 $ - $ - $ - $ 1
Unrealized (Loss) - - - (1) - - - (1)
- ----------------------------- ---- ----- ------ ---- --- ----- ----------- -----
Net $ - $ - $ - $ - $ - $ - $ - $ -
============================= ==== ===== ====== ==== === ===== =========== =====
CURRENCY SWAPS AND FORWARDS
Unrealized Gain $ - $ - $ 1 $ 27 $ - $ 53 $ 42 $ 123
Unrealized (Loss) - - - (3) - (18) (41) (62)
- ----------------------------- ---- ----- ------ ---- --- ----- ----------- -----
Net $ - $ - $ 1 $ 24 $ - $ 35 $ 1 $ 61
============================= ==== ===== ====== ==== === ===== =========== =====
OTHER CONTRACTS (2)
Unrealized Gain $ - $ - $ - $ - $ - $ - $ - $ -
Unrealized (Loss) (19) - (4) - - - - (23)
- ----------------------------- ---- ----- ------ ---- --- ----- ----------- -----
Net $(19) $ - $(4) $ - $ - $ - $ - $ (23)
============================= ==== ===== ====== ==== === ===== =========== =====
Total Unrealized Gain $ 4 $ - $ 1 $103 $ 7 $ 252 $ 42 $ 409
Total Unrealized (Loss) (69) (23) (4) (72) (7) (139) (41) (355)
- ----------------------------- ---- ----- ------ ---- --- ----- ----------- -----
Total Net $(65) $(23) $(3) $ 31 $ - $ 113 $ 1 $ 54
============================= ==== ===== ====== ==== === ===== =========== =====
</TABLE>
111
<PAGE>
<TABLE>
<CAPTION>
Net Invest-
ments in
Securities Interest- Other Long- foreign
(in millions) available Other bearing short-term term subsi-
December 31, 1995 for sale Loans assets deposits borrowings debt(1) diaries Total
- ----------------------------- ----------- ------ ------- ---------- ----------- -------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST RATE SWAPS
Pay Variable
Unrealized Gain $ - $ - $ - $ 132 $ 4 $339 $ - $ 475
Unrealized (Loss) - (5) - (7) (1) (24) - (37)
- ----------------------------- ---------- ----- ------ ----- --- ---- ----------- -----
Pay Variable Net - (5) - 125 3 315 - 438
- ----------------------------- ---------- ----- ------ ----- --- ---- ----------- -----
Pay Fixed
Unrealized Gain - - - 11 - 14 - 25
Unrealized (Loss) (88) - - (82) (1) (21) - (192)
- ----------------------------- ---------- ----- ------ ----- --- ---- ----------- -----
Pay Fixed Net (88) - - (71) (1) (7) - (167)
- ----------------------------- ---------- ----- ------ ----- --- ---- ----------- -----
Total Unrealized
Gain - - - 143 4 353 - 500
Total Unrealized
(Loss) (88) (5) - (89) (2) (45) - (229)
- ----------------------------- ---------- ----- ------ ----- --- ---- ----------- -----
Total Net $(88) $(5) $ - $ 54 $ 2 $308 $ - $ 271
============================= ========== ===== ====== ===== === ==== =========== =====
FORWARD RATE AGREEMENTS
Unrealized Gain $ - $ - $ - $ 1 $ - $ - $ - $ 1
Unrealized (Loss) - - - (1) - - - (1)
- ----------------------------- ---------- ----- ------ ----- --- ---- ----------- -----
Net $ - $ - $ - $ - $ - $ - $ - $ -
============================= ========== ===== ====== ===== === ==== =========== =====
CURRENCY SWAPS AND FORWARDS
Unrealized Gain $ - $ - $ 1 $ 17 $ - $ 20 $ 14 $ 52
Unrealized (Loss) - - - (12) (1) (48) (30) (91)
- ----------------------------- ---------- ----- ------ ----- --- ---- ----------- -----
Net $ - $ - $ 1 $ 5 $(1) $(28) $(16) $ (39)
============================= ========== ===== ====== ===== === ==== =========== =====
OTHER CONTRACTS (2)
Unrealized Gain $ - $ - $ 1 $ - $ - $ - $ - $ 1
Unrealized (Loss) (5) - (16) - - - - (21)
- ----------------------------- ---------- ----- ------ ----- --- ---- ----------- -----
Net $ (5) $ - $(15) $ - $ - $ - $ - $ (20)
============================= ========== ===== ====== ===== === ==== =========== =====
Total Unrealized Gain $ - $ - $ 2 $ 161 $ 4 $373 $ 14 $ 554
Total Unrealized (Loss) (93) (5) (16) (102) (3) (93) (30) (342)
- ----------------------------- ---------- ----- ------ ----- --- ---- ----------- -----
Total Net $(93) $(5) $(14) $ 59 $ 1 $280 $(16) $ 212
============================= ========== ===== ====== ===== === ==== =========== =====
</TABLE>
(1) 1996 includes trust preferred capital securities.
(2) Other contracts are principally equity swaps and collars.
112
<PAGE>
The unrealized gains and losses on these hedges were determined on the basis
of valuation pricing models which take into account current market and
contractual prices of the underlying instruments, as well as time value and
yield curve or volatility factors underlying the positions.
The remaining maturities of the notional amounts of end-user derivatives at
December 31, 1996 and December 31, 1995 were as follows:
<TABLE>
<CAPTION>
December 31, 1996 Interest Foreign Total
(in millions) Rate Currency Equity Notional
Notional Amount Maturing in: Risk Risk* Risk Amount
- ------------------------------ -------- -------- ------ --------
<S> <C> <C> <C> <C>
1997 $41,168 $3,271 $ 20 $44,459
1998-1999 10,540 750 101 11,391
2000-2001 4,490 689 104 5,283
2002 and thereafter 6,516 128 - 6,644
------- ------ ---- -------
Total $62,714 $4,838 $225 $67,777
======= ====== ==== =======
December 31, 1995 Interest Foreign Total
(in millions) Rate Currency Equity Notional
Notional Amount Maturing in: Risk Risk* Risk Amount
------- ------ ---- -------
1996 $41,825 $ 667 $ 91 $42,583
1997-1998 10,218 2,305 - 12,523
1999-2000 4,821 466 - 5,287
2001 and thereafter 4,557 109 - 4,666
------- ------ ---- -------
Total $61,421 $3,547 $ 91 $65,059
======= ====== ==== =======
</TABLE>
* Currency swaps and currency forwards are primarily based upon Australian
dollar/U.S. dollar and Japanese yen/U.S. dollar contracts.
113
<PAGE>
For pay variable and pay fixed interest rate swaps entered into as an end
user, the weighted average receive rate and pay rate (interest rates were based
on the weighted averages of both U.S. and non-U.S. currencies) by maturity and
corresponding notional amounts at December 31, 1996 and December 31, 1995 were
as follows:
<TABLE>
<CAPTION>
December 31, 1996
($ in millions) Paying Variable Paying Fixed
---------------------------- ------------------------
Notional Amount Notional Receive Pay Notional Receive Pay Total
Maturing In: Amount Rate Rate Amount Rate Rate Notional
- --------------------- ------------ -------- ----- -------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 $33,275 5.59% 5.52% $4,056 5.23% 5.71% $37,331
1998-1999 7,957 5.96 5.52 2,095 4.82 5.82 10,052
2000-2001 3,614 6.84 5.63 867 4.11 5.67 4,481
2002 and thereafter 5,579 6.79 5.65 932 5.61 7.14 6,511
------- ---- ---- ------ ---- ---- -------
Total $50,425 $7,950 $58,375
======= ====== =======
</TABLE>
All rates were those in effect at December 31, 1996. Variable rates are
primarily based on LIBOR and may change significantly, affecting future cash
flows.
<TABLE>
<CAPTION>
December 31, 1995
($ in millions) Paying Variable Paying Fixed
---------------------------- ------------------------
Notional Amount Notional Receive Pay Notional Receive Pay Total
Maturing In: Amount Rate Rate Amount Rate Rate Notional
- --------------------- ------------ -------- ----- -------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $30,770 5.97% 5.87% $ 8,742 6.00% 6.21% $39,512
1997-1998 6,558 5.99 5.84 3,657 5.33 5.76 10,215
1999-2000 3,448 6.57 6.34 1,373 3.86 4.99 4,821
2001 and thereafter 3,927 6.64 5.93 629 5.91 7.34 4,556
------- ---- ---- ------- ---- ---- -------
Total $44,703 $14,401 $59,104
======= ======= =======
</TABLE>
All rates were those in effect at December 31, 1995. Variable rates are
primarily based on LIBOR and may change significantly, affecting future cash
flows.
114
<PAGE>
The effect of these end-user derivatives was a net decrease in revenue of $29
million for the year ended December 31, 1996 and a net increase in revenue of
$22 million for the year ended December 31, 1995.
The Corporation has reviewed its other categories of off-balance sheet
instruments (forward-dated assets and liabilities, securities lending
indemnifications and securities borrowed) accounted for at cost and has
determined that, in the case of each such category, the unrealized gain or loss
on such instruments at both December 31, 1996 and 1995 was not material.
115
<PAGE>
Methods and Assumptions
For short-term financial instruments, defined as those with remaining maturities
of 90 days or less, the carrying amount was considered to be a reasonable
estimate of fair value. The following instruments were predominantly short-term:
Assets Liabilities
- ------ -----------
Cash and due from banks Interest-bearing deposits
Interest-bearing deposits Securities loaned and securities
with banks sold under repurchase agreements
Federal funds sold Other short-term borrowings
Securities purchased under Acceptances outstanding
resale agreements Other financial liabilities
Securities borrowed
Customer receivables
Due from customers
on acceptances
Accounts receivable and
accrued interest
For those components of the above-listed financial instruments with remaining
maturities greater than 90 days, fair value was determined by discounting
contractual cash flows using rates which could be earned for assets with similar
remaining maturities and, in the case of liabilities, rates at which the
liabilities with similar remaining maturities could be issued as of the balance
sheet date.
As indicated in Note 1, trading assets (including derivatives), trading
liabilities and securities available for sale are carried at their fair values.
For short-term loans and variable rate loans which reprice within 90 days, the
carrying value was considered to be a reasonable estimate of fair value. For
those loans for which quoted market prices were available, fair value was based
on such prices. For other types of loans, fair value was estimated by
discounting future cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and for the same
remaining maturities. In addition, for loans secured by real estate, appraisal
values for the collateral were considered in the fair value determination. The
fair value estimate of commitments to extend credit and standby letters of
credit represented the unrealized gains and losses on those off-balance sheet
positions and was generally determined in the same manner as loans.
116
<PAGE>
Other financial assets consisted primarily of investments in equity
instruments (excluding, in accordance with SFAS 107, investments accounted for
under the equity method) and cash and cash margins with brokers. The fair value
of non-marketable equity instruments was determined by matrix pricing utilizing
market prices for comparable publicly traded instruments, adjusted for liquidity
and contractual arrangements.
Noninterest-bearing deposits do not have defined maturities. In accordance
with SFAS 107, fair value represented the amount payable on demand as of the
balance sheet date.
Other financial liabilities consisted primarily of accounts payable and
accrued expenses at both December 31, 1996 and 1995.
The fair value of long-term debt was estimated by using market quotes as well
as discounting the remaining contractual cash flows using a rate at which the
Corporation could issue debt with a similar remaining maturity as of the balance
sheet date.
117
<PAGE>
NOTE 26--CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Condensed Statement of Income
(in millions) Year Ended December 31, 1996 1995 1994
- ---------------------------------------------- ------ ------ -------
<S> <C> <C> <C>
REVENUE
Dividends
Banks $ 48 $ 75 $ 320
Nonbanks 196 86 264
Interest from subsidiaries 503 551 367
Other interest 157 150 209
Trading - 44 (81)
Securities available for sale gains (losses) (7) 114 17
Other 18 85 (17)
- ---------------------------------------------- ----- ------ ------
Total revenue 915 1,105 1,079
- ---------------------------------------------- ----- ------ ------
EXPENSES
Interest to subsidiaries 109 71 40
Other interest 643 714 566
Other 33 - 20
- ---------------------------------------------- ----- ------ ------
Total expenses 785 785 626
- ---------------------------------------------- ----- ------ ------
Income before income taxes and equity
in undistributed income of subsidiaries
and affiliates 130 320 453
Income taxes (benefit) (99) 25 (99)
Income before equity in undistributed
income of subsidiaries and affiliates 229 295 552
Equity in undistributed income of
subsidiaries and affiliates 537 16 134
- ---------------------------------------------- ----- ------ ------
NET INCOME $ 766 $ 311 $ 686
============================================== ===== ====== ======
</TABLE>
118
<PAGE>
<TABLE>
<CAPTION>
Condensed Balance Sheet
(in millions) December 31, 1996 1995
- ----------------------------------------------------- -------- --------
<S> <C> <C>
ASSETS
Cash and due from banks $ 24 $ 8
Interest-bearing deposits with bank subsidiaries 3,297 2,540
Securities purchased under resale agreements
with nonbank subsidiary 701 2,213
Securities purchased under resale agreements
with third party - 48
Trading assets 2,809 1,475
Securities available for sale 1,577 1,301
Loans 245 24
Investments in subsidiaries and affiliates
Banks 4,716 4,641
Nonbanks 2,279 1,435
Receivables from subsidiaries and affiliates
Banks 1,584 1,418
Nonbanks 5,182 3,363
Accounts receivable and accrued interest 370 348
Other assets 255 148
- ----------------------------------------------------- ------- -------
Total assets $23,039 $18,962
===================================================== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Trading liabilities $ 478 $ 348
Commercial paper 5,723 5,306
Other short-term borrowings 1,905 960
Payables to subsidiaries and affiliates
Banks 652 170
Nonbanks 2,702 1,794
Other liabilities 330 278
Long-term debt 5,371 4,633
- ----------------------------------------------------- ------- -------
Total liabilities 17,161 13,489
- ----------------------------------------------------- ------- -------
Total stockholders' equity 5,878 5,473
- ----------------------------------------------------- ------- -------
Total liabilities and stockholders' equity $23,039 $18,962
===================================================== ======= =======
</TABLE>
119
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
(in millions) Year Ended December 31, 1996 1995 1994
- ----------------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 766 $ 311 $ 686
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed loss (income)
of subsidiaries and affiliates (537) (16) (134)
Deferred income taxes (29) 3 (59)
Net change in trading assets (1,334) 104 342
Net change in trading liabilities 130 220 (42)
Securities available for sale (gains) losses 7 (114) (17)
Other, net (323) 282 107
- ----------------------------------------------------- ------- ------- -------
Net cash provided by (used in) operating activities (1,320) 790 883
- ----------------------------------------------------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in:
Interest-bearing deposits with bank subsidiaries (757) (1,031) (847)
Securities purchased under resale agreements
with nonbank subsidiary (1,512) (1,109) (784)
Securities purchased under resale agreements
with third party 48 (48) -
Short-term notes receivable from subsidiaries
and affiliates 2,557 1,591 745
Securities available for sale:
Purchases (746) (388) (2,304)
Maturities and other redemptions 229 360 396
Sales 260 876 501
Increases in long-term notes receivable
from subsidiaries (2,015) (484) (2,133)
Decreases in long-term notes receivable
from subsidiaries 871 1,379 640
Capital contributed to subsidiaries and affiliates (867) (290) (152)
Return of capital from subsidiaries and affiliates 700 - 2
Other, net (223) 22 34
- ----------------------------------------------------- ------- ------- -------
Net cash provided by (used in) investing activities (1,455) 878 (3,902)
- ----------------------------------------------------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in:
Commercial paper and other short-term borrowings 1,363 (3,304) 3,327
Short-term notes payable to subsidiaries 878 1,012 133
Issuance of long-term notes payable to subsidiaries 512 - -
Issuance of long-term debt 1,680 1,496 421
Repayments of long-term debt (864) (791) (370)
Issuance of preferred stock - 221 342
Redemption/repurchase of preferred stock (49) - (205)
Purchases of treasury stock (608) (38) (267)
Cash dividends paid (378) (361) (322)
Other, net 257 33 22
- ----------------------------------------------------- ------- ------- -------
Net cash (used in) provided by financing activities 2,791 (1,732) 3,081
- ----------------------------------------------------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 16 (64) 62
Cash and due from banks, beginning of year 8 72 10
- ----------------------------------------------------- ------- ------- -------
Cash and due from banks, end of year $ 24 $ 8 $ 72
===================================================== ======= ======= =======
Interest paid $ 737 $ 772 $ 587
===================================================== ======= ======= =======
Income taxes paid $ 19 $ 9 $ 7
===================================================== ======= ======= =======
Noncash financing activity:
Conversion of debt to preferred stock $ 1 $ 245 $ -
===================================================== ======= ======= =======
Noncash investing activity:
Treasury stock associated with acquisition $ 203 $ - $ -
===================================================== ======= ======= =======
</TABLE>
120
<PAGE>
NOTE 27--BANKERS TRUST COMPANY CONSOLIDATED SUMMARIZED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Consolidated Statement of Income
(in millions) Year Ended December 31, 1996 1995 1994
- -------------------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
NET INTEREST REVENUE
Interest revenue $4,124 $3,656 $2,900
Interest expense 3,346 3,069 2,271
- -------------------------------------------------------- ------ ------ ------
NET INTEREST REVENUE 778 587 629
Provision for credit losses (9) (31) (3)
- -------------------------------------------------------- ------ ------ ------
NET INTEREST REVENUE AFTER PROVISION FOR CREDIT LOSSES 787 618 632
- -------------------------------------------------------- ------ ------ ------
NONINTEREST REVENUE
Trading 670 279 786
Fiduciary and funds management 720 642 698
Fees and commissions 562 484 541
Securities available for sale gains (losses) 23 (4) 13
Other 295 163 213
- -------------------------------------------------------- ------ ------ ------
Total noninterest revenue 2,270 1,564 2,251
- -------------------------------------------------------- ------ ------ ------
NONINTEREST EXPENSES
Salaries and commissions 729 683 656
Incentive compensation and employee benefits 716 524 563
Occupancy, net 142 141 134
Furniture and equipment 155 146 149
Provision for severance related costs - 43 -
Other 856 736 823
- -------------------------------------------------------- ------ ------ ------
Total noninterest expenses 2,598 2,273 2,325
- -------------------------------------------------------- ------ ------ ------
Income (Loss) before income taxes 459 (91) 558
Income taxes (benefit) 115 (53) 166
- -------------------------------------------------------- ------ ------ ------
NET INCOME (LOSS) $ 344 $ (38) $ 392
======================================================== ====== ====== ======
</TABLE>
121
<PAGE>
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, 1996 1995 1994
- --------------------------------------- ----- ------ ------
<S> <C> <C> <C>
Interest revenue $ 174 $ 129 $ 97
Interest expense 249 276 185
Noninterest revenue 112 65 18
Noninterest expenses 228 203 289
(in millions) December 31, 1996 1995
- --------------------------------------- ------ ------
Interest-earning assets $1,395 $1,357
Noninterest-earning assets 618 554
Interest-bearing liabilities 5,040 4,778
Noninterest-bearing liabilities 729 495
</TABLE>
122
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet
($ in millions, except par values) December 31, 1996 1995
- --------------------------------------------------- -------- --------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,544 $ 2,305
Interest-bearing deposits with banks 2,494 1,982
Federal funds sold 1,789 854
Securities purchased under resale agreements 12,389 8,566
Securities borrowed 8,275 6,031
Trading assets 38,272 35,142
Securities available for sale 4,239 3,280
Loans - 11,393
Allowance for credit losses - (941)
Loans, net of allowance for credit losses
of $723 at December 31, 1996 13,018 -
Premises and equipment, net 914 834
Due from customers on acceptances 597 500
Accounts receivable and accrued interest 2,200 3,790
Other assets 2,412 2,141
- --------------------------------------------------- ------- -------
Total assets $88,143 $75,877
=================================================== ======= =======
LIABILITIES
Noninterest-bearing deposits
Domestic offices $ 2,791 $ 2,815
Foreign offices 1,029 645
Interest-bearing deposits
Domestic offices 9,196 4,615
Foreign offices 20,556 20,018
- --------------------------------------------------- ------- -------
Total deposits 33,572 28,093
Trading liabilities 19,172 19,087
Securities loaned and securities sold
under repurchase agreements 10,095 7,275
Other short-term borrowings 10,391 8,342
Acceptances outstanding 597 500
Accounts payable and accrued expenses 1,993 1,810
Other liabilities, including allowance for
credit losses of $200 at December 31, 1996 1,212 1,006
Long-term debt not included in risk-based capital 4,828 4,248
Long-term debt included in risk-based capital 1,162 1,180
Mandatorily redeemable capital securities of
subsidiary trust holding solely junior
subordinated deferrable interest debentures
included in risk-based capital 243 -
- --------------------------------------------------- ------- -------
Total liabilities 83,265 71,541
- --------------------------------------------------- ------- -------
STOCKHOLDER'S EQUITY
Floating rate non-cumulative preferred stock-
Series A, $1 million par value
Authorized, issued and outstanding:
1996, 600 shares; 1995, 500 shares 600 500
Common stock, $10 par value
Authorized, issued and outstanding: 1996,
100,166,667 shares; 1995, 85,166,667 shares 1,001 852
Capital surplus 540 528
Retained earnings 3,133 2,822
Cumulative translation adjustments (382) (365)
Securities valuation allowance (14) (1)
- --------------------------------------------------- ------- -------
Total stockholder's equity 4,878 4,336
- --------------------------------------------------- ------- -------
Total liabilities and stockholder's equity $88,143 $75,877
=================================================== ======= =======
</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 114 effective
January 1, 1995.
123
<PAGE>
NOTE 28--SUBSEQUENT EVENTS
Mandatorily Redeemable Capital Securities of Subsidiary Trusts Holding Solely
Junior Subordinated Deferrable Interest Debentures Included in Risk-Based
Capital.
Subsequent to December 31, 1996, BT Capital Trust A ("Trust A"), BT
Preferred Capital Trust I ("Trust I") and BT Preferred Capital Trust II ("Trust
II"), wholly-owned subsidiaries of the Corporation issued $250 million 7.90%
Capital Securities, Series A1, ("Series A1 Securities"), $250 million 8 1/8%
Preferred Securities, Series I ("Series I Securities") and $250 million 7.875%
Preferred Securities, Series II ("Series II Securities"), respectively. The
Series A1 Securities and the Series II Securities have a liquidation value of
$1,000 per Series A1 Security and Series II Security, respectively. The Series I
Securities have a liquidation value of $25 per Series I Security. Series A1
Securities, Series I Securities and Series II Securities represent preferred
undivided beneficial interests in the assets of Trust A, Trust I and Trust II,
respectively. The Corporation is the holder of all of the beneficial interests
represented by common securities of Trust A, Trust I and Trust II ("Common
Securities" and, collectively with the Series A1 Securities, Series I Securities
and Series II Securities, the "Trust Securities").
Trust A, Trust I and Trust II exist for the sole purpose of issuing the Trust
Securities and investing the proceeds thereof in 7.90% Junior Subordinated
Deferrable Interest Debentures, Series A1, 8 1/8% Junior Subordinated Deferrable
Interest Debentures, Series I and 7.875% Junior Subordinated Deferrable Interest
Debentures, Series II (the "Series A1 Debentures," the "Series I Debentures" and
the "Series II Debentures" and collectively, the "Junior Subordinated
Debentures") issued by the Corporation. The Junior Subordinated Debentures are
unsecured and subordinated to all senior indebtedness of the Corporation and
will be the sole assets of Trust A, Trust I and Trust II. Payments under the
Junior Subordinated Debentures by the Corporation are the same as those for the
Series A1 Securities, Series I Securities and Series II Securities described
below, respectively. The Corporation has guaranteed the obligations of Trust A,
Trust I and Trust II under the Series A1 Securities, Series I Securities and
Series II Securities, but only in each case to the extent of funds held by Trust
A, Trust I and Trust II, respectively.
Holders of the Series A1 Securities will be entitled to receive preferential
cumulative cash distributions accumulating from January 16, 1997 and payable
semi-annually in arrears on the fifteenth day of January and July of each year,
commencing July 15, 1997, at the annual rate of 7.90% of the liquidation amount
of $1,000 per Series A1 Security. The Series A1 Securities are subject to
mandatory redemption upon repayment of the Series A1 Debentures at maturity on
January 15, 2027. The maturity date may be shortened under certain
circumstances to a date not earlier than January 15, 2017. In addition, the
Series A1 Debentures may be redeemed at the option of the Corporation on or
after January 15, 2007.
Holders of the Series I Securities will be entitled to receive preferential
cumulative cash distributions accumulating from February 5, 1997 and payable
quarterly in arrears on the last day of March, June, September and December of
each year, commencing March 31, 1997, at the annual rate of 8 1/8% of the
liquidation amount of $25 per Series I Security. The Series I Securities are
subject to mandatory redemption upon repayment of the Series I Debentures at
maturity on February 1, 2037. The maturity date may be shortened under certain
circumstances to a date not earlier than February 1, 2002. In addition, the
Series I Debentures may be redeemed at the option of the Corporation on or after
February 1, 2002.
Holders of the Series II Securities will be entitled to receive preferential
cumulative cash distributions accumulating from February 25, 1997, and payable
semi-annually in arrears on the twenty fifth day of February and August of each
year, commencing August 25, 1997, at the annual rate of 7.875% of the
liquidation amount of $1,000 per Series II Security. The Series II Securities
are subject to mandatory redemption upon repayment of
124
<PAGE>
the Series II Debentures at maturity on February 25, 2027. The maturity date
may be shortened under certain circumstances to a date not earlier than February
25, 2012. In addition, the Series II Debentures may be redeemed at the option
of the Corporation on or after February 25, 2007.
In addition, the Corporation issued approximately $750 million in long-term
debt subsequent to December 31, 1996.
Redemption of Preferred Stock of Subsidiary
On February 27, 1997, BT Overseas Finance N.V. ("BTOF") redeemed all 625 shares
of its BTOF Auction Rate Cumulative Preferred Stock Series C. The shares were
redeemed at a price of $100,000 per share, plus accrued and unpaid dividends on
such shares to the redemption date. Dividends on these shares will cease to
accumulate on the redemption date.
On March 6, 1997, BTOF redeemed all 625 shares of its BTOF Auction Rate
Cumulative Preferred Stock Series D. The shares were redeemed at a price of
$100,000 per share plus, accrued and unpaid dividends on such shares to the
redemption date. Dividends on these shares will cease to accumulate on the
redemption date.
On February 21, 1997, BTOF announced that it will redeem all 625 outstanding
shares of its BTOF Auction Rate Cumulative Preferred Stock, Series A on March
13, 1997. The shares will be redeemed at a redemption price of $100,000 per
share plus accrued and unpaid dividends to the redemption date. Dividends on
these shares will cease to accumulate on the redemption date, unless BTOF fails
to pay the redemption price.
On February 28, 1997, BTOF announced that it will redeem all 625 outstanding
shares of its BTOF Auction Rate Cumulative Preferred Stock, Series B on March
20, 1997. The shares will be redeemed at a redemption price of $100,000 per
share plus accrued and unpaid dividends to the redemption date. Dividends on
these shares will cease to accumulate on the redemption date, unless BTOF fails
to pay the redemption price.
Preferred Stock Redemption
On March 1, 1997, the Parent Company exercised its right of redemption on 1
million shares of the 8.55% Cumulative Preferred Stock, Series I at $100 per
share plus an amount equal to accrued and unpaid dividends to the date of
redemption.
125
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Bankers Trust New York Corporation:
We have audited the combination of Bankers Trust New York Corporation and
Subsidiaries (the "Corporation") and Alex. Brown Incorporated as reflected in
the accompanying supplemental consolidated balance sheet of the Corporation as
of December 31, 1996 and 1995, and the related supplemental consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1996. These supplemental
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on the combination of
the Corporation and Alex. Brown Incorporated as reflected in these supplemental
consolidated financial statements based on our audit procedures.
We previously audited and reported on the consolidated balance sheet of Alex.
Brown Incorporated as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996,
prior to their restatement for the 1997 pooling-of-interests with the
Corporation and have issued our report thereon dated January 20, 1997. Such
report and the accompanying Alex. Brown Incorporated consolidated financial
statements are included in the Corporation's Current Report on Form 8-K dated
September 1, 1997 incorporated by reference herein. The contribution of Alex.
Brown Incorporated to combined restated assets as reflected in the supplemental
consolidated financial statements represented 2 percent and 2 percent as of
December 31, 1996 and 1995, respectively; to combined restated revenues
represented 20 percent, 19 percent and 14 percent; and to combined restated net
income represented 20 percent, 31 percent and 10 percent for the years ended
December 31, 1996, 1995 and 1994, respectively. Separate consolidated financial
statements of the Corporation included in the supplemental consolidated
financial statements were audited and reported on separately by other auditors
who have issued their report thereon dated January 23, 1997 except for Note 28,
as to which the date is March 6, 1997. Such report is presented herein.
The supplemental consolidated financial statements give retroactive effect to
the merger of the Corporation and Alex. Brown Incorporated on September 1, 1997,
which has been accounted for as a pooling-of-interests as described in Note 1 to
the supplemental consolidated financial statements. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation. However, they will
become the historical consolidated financial statements of the Corporation after
financial statements covering the date of consummation of the business
combination are issued.
In our opinion, the supplemental consolidated financial statements referred to
above have been properly combined on the basis described in Note 1 of the notes
to the supplemental consolidated financial statements.
/s/ KPMG PEAT MARWICK LLP
New York, New York
September 5, 1997
126
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Bankers Trust New York Corporation
We have audited the consolidated balance sheet of Bankers Trust New York
Corporation and Subsidiaries (the "Corporation") at December 31, 1996 and 1995,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1996 (not presented herein), prior to their restatement for the 1997
pooling-of-interests with Alex. Brown Incorporated as described in Note 1 to the
supplemental consolidated financial statements. These financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Bankers Trust New
York Corporation and Subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
New York, New York
January 23, 1997
except for Note 28, as to
which the date is March 6, 1997
127
<PAGE>
SUPPLEMENTAL FINANCIAL DATA
The statistical data on pages 128 through 133 should be read in conjunction with
the Financial Review and the supplemental financial statements included
elsewhere in this Annual Report.
In the opinion of management, all material adjustments necessary for a fair
presentation of the results of operations for the interim periods have been
made. All such adjustments were of a normal recurring nature.
CONDENSED QUARTERLY CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
(in millions, except per share data)
- --------------------------------------
1996 1995
--------------------------------- -----------------------------------
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 $ 1,686 $ 1,704 $ 1,495 $ 1,623 $ 1,490 $ 1,583 $ 1,543 $ 1,373
Interest expense 1,399 1,434 1,229 1,389 1,260 1,361 1,306 1,178
- -------------------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Net interest revenue 287 270 266 234 230 222 237 195
Provision for credit losses - - - 5 10 7 - 14
- -------------------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Net interest revenue after
provision for credit losses 287 270 266 229 220 215 237 181
- -------------------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Total noninterest revenue 1,068 989 1,072 988 953 938 765 473
Total noninterest expenses 1,083 964 1,038 953 938 891 833 851
- -------------------------------------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes 272 295 300 264 235 262 169 (197)
Income taxes (benefit) 88 93 99 85 75 84 55 (56)
- -------------------------------------- ------- ------- ------- ------- ------- ------- ------- -------
NET INCOME (LOSS) $ 184 $ 202 $ 201 $ 179 $ 160 $ 178 $ 114 $ (141)
====================================== ======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) applicable to
common stock $ 170 $ 194 $ 187 $ 164 $ 145 $ 162 $ 102 $ (149)
====================================== ======= ======= ======= ======= ======= ======= ======= =======
EARNINGS (LOSS)
PER COMMON SHARE:
Primary $ 1.64 $ 1.85 $ 1.82 $ 1.62 $ 1.43 $ 1.61 $ 1.02 $ (1.54)
Fully diluted 1.59 $ 1.80 $ 1.77 1.57 1.39 $ 1.56 $ 1.00 $ (1.54)
====================================== ======= ======= ======= ======= ======= ======= ======= =======
Cash dividends declared per
common share $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====================================== ======= ======= ======= ======= ======= ======= ======= =======
STOCKHOLDER DATA
Market price (1)
High $90 7/8 $83 1/2 $77 7/8 $72 3/8 $ 71 $ 72 $64 3/4 $64 7/8
Low 78 68 1/4 65 1/2 61 60 1/4 60 3/4 52 49 3/4
End of quarter 86 1/4 78 5/8 73 7/8 70 7/8 66 1/2 70 1/4 62 52 1/4
</TABLE>
(1) Based on the Composite Tape. Market prices at January 31, 1997 for common
stock were as follows: High, $85 7/8; Low, $84 7/8; Close, $85.
DIVIDENDS
Cash dividends on common stock were paid quarterly in 1996 on the 25th of
January, April, July and October.
NUMBER OF SECURITY HOLDERS
At January 31, 1997, the approximate number of holders of record of common stock
was 24,000.
STOCK LISTINGS
The principal markets on which the common stock is traded are the New York Stock
Exchange (Symbol: BT) and the London Stock Exchange.
128
<PAGE>
AVERAGE BALANCES, INTEREST AND AVERAGE RATES
The following table shows the major consolidated assets and liabilities,
together with their respective interest amounts and rates earned or paid by the
Corporation. Cash basis and renegotiated loans are included in the averages to
determine an effective yield on all loans. The average balances are principally
daily averages.
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------- ----------------------------- -----------------------------
Average Average Average Average Average Average
($ 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) $ 2,786 $ 214 7.68% $ 2,777 $ 207 7.45% $ 1,523 $ 124 8.14%
Federal funds sold
(in domestic offices) 2,179 119 5.46% 1,726 104 6.03% 634 31 4.89%
Securities purchased under
resale agreements
In domestic offices 14,368 800 5.57% 10,400 598 5.75% 8,449 255 3.02%
In foreign offices 7,444 514 6.90% 5,732 231 4.03% 2,393 131 5.47%
- ------------------------------- -------- ------ -------- ------ -------- ------
Total securities purchased
under resale agreements 21,812 1,314 6.02% 16,132 829 5.14% 10,842 386 3.56%
Securities borrowed
In domestic offices 13,555 678 5.00% 10,647 604 5.67% 5,785 244 4.22%
In foreign offices 2,241 147 6.56% 2,245 141 6.28% 1,870 54 2.89%
- ------------------------------- -------- ------ -------- ------ -------- ------
Total securities borrowed 15,796 825 5.22% 12,892 745 5.78% 7,655 298 3.89%
Trading Assets
In domestic offices (1) 14,475 1,164 8.04% 14,656 1,376 9.39% 20,824 1,917 9.21%
In foreign offices 16,140 1,251 7.75% 16,058 1,320 8.22% 15,787 1,054 6.68%
- ------------------------------- -------- ------ -------- ------ -------- ------
Total trading assets (1) 30,615 2,415 7.89% 30,714 2,696 8.78% 36,611 2,971 8.12%
Securities available for sale
In domestic offices
Taxable 2,674 195 7.29% 1,891 165 8.73% 2,043 134 6.56%
Exempt from federal
income taxes (1) 1,029 29 2.82% 1,340 51 3.81% 1,374 75 5.46%
In foreign offices
Taxable 3,151 229 7.27% 2,899 167 5.76% 3,042 178 5.85%
Exempt from federal
income taxes (1) 142 16 11.27% 320 35 10.94% 410 49 11.95%
- ------------------------------- -------- ------ -------- ------ -------- ------
Total securities available
for sale (1) 6,996 469 6.70% 6,450 418 6.48% 6,869 436 6.35%
Loans
In domestic offices
Commercial and industrial 2,894 221 7.64% 2,178 160 7.35% 2,123 141 6.64%
Financial institutions 942 64 6.79% 620 51 8.23% 920 49 5.33%
Secured by real estate 1,409 97 6.88% 1,398 95 6.80% 1,503 82 5.46%
Other (1) 2,177 124 5.70% 2,335 134 5.74% 2,344 150 6.40%
- ------------------------------- -------- ------ -------- ------ -------- ------
Total in domestic
offices (1) 7,422 506 6.82% 6,531 440 6.74% 6,890 422 6.12%
In foreign offices 6,253 517 8.27% 5,263 487 9.25% 5,613 444 7.91%
- ------------------------------- -------- ------ -------- ------ -------- ------
Total loans, excluding
fees (1) 13,675 1,023 7.48% 11,794 927 7.86% 12,503 866 6.93%
Loan fees 24 18 15
- ------------------------------- ------ ------ ------
Total loans, including
fees (1) 13,675 1,047 7.66% 11,794 945 8.01% 12,503 881 7.05%
- ------------------------------- -------- ------ -------- ------ -------- ------
Customer Receivables
In domestic offices 1,582 121 7.65% 1,049 86 8.20% 788 52 6.60%
In foreign offices - - - - - -
- ------------------------------- -------- ------ -------- ------ -------- ------
Total customer receivables 1,582 121 7.65% 1,049 86 8.20% 788 52 6.60%
TOTAL INTEREST-EARNING
ASSETS (1) 95,441 $6,524 6.84% 83,534 6,030 7.22% 77,425 5,179 6.69%
Cash and due from banks 1,350 1,798 1,939
Noninterest-earning
trading assets 17,081 19,013 20,004
Due from customers on
acceptances 554 434 348
All other assets 8,349 7,740 7,870
Allowance for credit losses (986) (1,196) (1,342)
- ------------------------------- -------- -------- --------
TOTAL ASSETS $121,789 $111,323 $106,244
=============================== ======== ======== ========
% of assets attributable to
foreign offices 58% 53% 50%
</TABLE>
(1) Interest and average rates are presented on a fully taxable basis. The
applicable combined federal, state and local incremental tax rate used to
determine the amounts of the tax equivalent adjustments to interest revenue
(which recognize the income tax savings on tax-exempt assets) was 42 percent
for 1996, 1995 and 1994.
129
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
Average Average Average Average Average Average
($ 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 $ 3,088 $ 180 5.83% $ 1,384 $ 99 7.15% $ 700 $ 50 7.14%
Other 3,824 204 5.33% 4,338 277 6.39% 5,519 218 3.95%
- ------------------------------- -------- ------ -------- ------ -------- ------
Total in domestic
offices 6,912 384 5.56% 5,722 376 6.57% 6,219 268 4.31%
In foreign offices
Deposits from banks
in foreign countries 7,045 401 5.69% 7,432 496 6.67% 5,248 296 5.64%
Other time and savings
deposits 7,802 466 5.97% 7,370 408 5.54% 6,027 345 5.72%
Other 2,039 104 5.10% 1,513 80 5.29% 1,221 55 4.50%
- ------------------------------- -------- ------ -------- ------ -------- ------
Total in foreign
offices 16,886 971 5.75% 16,315 984 6.03% 12,496 696 5.57%
- ------------------------------- -------- ------ -------- ------ -------- ------
Total interest-bearing
deposits 23,798 1,355 5.69% 22,037 1,360 6.17% 18,715 964 5.15%
Trading liabilities
In domestic offices 7,808 595 7.62% 6,293 622 9.88% 4,453 486 10.91%
In foreign offices 3,576 267 7.47% 4,922 431 8.76% 5,682 321 5.65%
- ------------------------------- -------- ------ -------- ------ -------- ------
Total trading liabilities 11,384 862 7.57% 11,215 1,053 9.39% 10,135 807 7.96%
Securities loaned and
securities sold under
repurchase agreements
In domestic offices 19,106 1,049 5.49% 17,269 1,003 5.81% 20,314 808 3.98%
In foreign offices 7,855 549 6.99% 4,592 186 4.05% 1,805 120 6.65%
- ------------------------------- -------- ------ -------- ------ -------- ------
Total securities loaned and
securities sold under
repurchase agreements 26,961 1,598 5.93% 21,861 1,189 5.44% 22,119 928 4.20%
Other short-term borrowings
In domestic offices 11,261 633 5.62% 12,051 719 5.97% 12,881 589 4.57%
In foreign offices 5,195 367 7.06% 4,396 326 7.42% 4,488 312 6.95%
- ------------------------------- -------- ------ -------- ------ -------- ------
Total other short-term
borrowings 16,456 1,000 6.08% 16,447 1,045 6.35% 17,369 901 5.19%
Long-term debt
In domestic offices 6,748 411 6.09% 5,249 341 6.50% 5,067 247 4.87%
In foreign offices 3,907 222 5.68% 2,596 117 4.51% 843 33 3.91%
- ------------------------------- -------- ------ -------- ------ -------- ------
Total long-term debt 10,655 633 5.94% 7,845 458 5.84% 5,910 280 4.74%
- ------------------------------- -------- ------ -------- ------ -------- ------
Mandatorily redeemable
capital securities of
subsidiary trusts holding
solely junior subordinated
deferrable interest
debentures 42 3 7.14% - - - - - -
- ------------------------------- -------- ------ -------- ------ -------- ------
TOTAL INTEREST-BEARING
LIABILITIES 89,296 5,451 6.10% 79,405 5,105 6.43% 74,248 3,880 5.23%
Noninterest-bearing deposits
In domestic offices 2,661 2,921 3,210
In foreign offices 600 509 587
- ------------------------------- -------- -------- --------
Total noninterest-bearing
deposits 3,261 3,430 3,797
Noninterest-bearing trading
liabilities 15,502 16,232 15,707
Acceptances outstanding 555 441 363
All other liabilities 7,152 6,286 6,768
Preferred stock of
subsidiary 250 250 250
Stockholders' Equity
Preferred stock 853 726 388
Common stockholders' equity 4,920 4,553 4,723
- ------------------------------- -------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $121,789 $111,323 $106,244
=============================== ======== ======== ========
% of liabilities attributable
to foreign offices 60% 53% 42%
Rate spread .74% .79% 1.46%
Net interest margin (net
interest revenue to total
interest-earning assets)
In domestic offices $57,349 $ 597 1.04% $48,332 $438 .91% $46,847 $ 772 1.65%
In foreign offices 38,092 476 1.25% 35,202 487 1.38% 30,578 527 1.72%
- ------------------------------- ------- ------ ------- ---- ------- ------
Total $95,441 $1,073 1.12% $83,534 $925 1.11% $77,425 $1,299 1.68%
=============================== ======= ====== ======= ==== ======= ======
</TABLE>
130
<PAGE>
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>
1996/95 1995/94
---------------------------- -----------------------------
Increase (decrease) Increase (decrease)
due to change in: due to change in:
Average Average Average Average
Balance Rate Total Balance Rate Total
--------- --------- ------ --------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
INTEREST REVENUE
Interest-bearing deposits with
banks $ 1 $ 6 $ 7 $ 94 $ (11) $ 83
Federal funds sold 25 (10) 15 64 9 73
Securities purchased under resale
agreements 326 159 485 232 211 443
Securities borrowed 157 (77) 80 262 185 447
Trading assets (9) (272) (281) (504) 229 (275)
Securities available for sale 36 15 51 (27) 9 (18)
Loans 145 (43) 102 (52) 116 64
Customer receivables 41 (6) 35 20 14 34
- ------------------------------------- ----- -------- ----- ----- -------- ------
Total interest revenue 722 (228) 494 89 762 851
- ------------------------------------- ----- -------- ----- ----- -------- ------
INTEREST EXPENSE
Interest-bearing deposits 104 (109) (5) 187 209 396
Trading liabilities 16 (207) (191) 92 154 246
Securities loaned and securities
sold under repurchase agreements 295 114 409 (11) 272 261
Other short-term borrowings 2 (47) (45) (50) 194 144
Long-term debt 167 8 175 104 74 178
Mandatorily redeemable capital
securities of subsidiary trusts
holding solely junior subordinated
deferrable interest debentures 3 - 3 - - -
- ------------------------------------- ----- -------- ----- ----- -------- ------
Total interest expense 587 (241) 346 322 903 1,225
- ------------------------------------- ----- -------- ----- ----- -------- ------
Net change in net interest revenue $ 135 $ 13 $ 148 $(233) $ (141) $ (374)
===================================== ===== ======== ===== ===== ======== ======
DOMESTIC OFFICES
INTEREST REVENUE
Interest-bearing deposits with
banks $ (15) $ (6) $ (21) $ 17 $ 15 $ 32
Federal funds sold 25 (10) 15 64 9 73
Securities purchased under resale
agreements 221 (19) 202 70 273 343
Securities borrowed 151 (77) 74 255 105 360
Trading assets (17) (195) (212) (578) 37 (541)
Securities available for sale 30 (22) 8 (12) 19 7
Loans 64 6 70 (24) 46 22
Customer receivables 41 (6) 35 20 14 34
- ------------------------------------- ----- -------- ----- ----- -------- ------
Total interest revenue 500 (329) 171 (188) 518 330
- ------------------------------------- ----- -------- ----- ----- -------- ------
INTEREST EXPENSE
Interest-bearing deposits 71 (63) 8 (23) 131 108
Trading liabilities 132 (159) (27) 185 (49) 136
Securities loaned and securities
sold under repurchase agreements 103 (57) 46 (135) 330 195
Other short-term borrowings (45) (41) (86) (40) 170 130
Long-term debt 92 (22) 70 9 85 94
Mandatorily redeemable capital
securities of subsidiary trusts
holding solely junior subordinated
deferrable interest debentures 3 - 3 - - -
Funds provided to foreign offices (352) 287 (65) 7 22 29
Funds provided by foreign offices 601 (386) 215 127 (26) 101
- ------------------------------------- ----- -------- ----- ----- -------- ------
Total interest expense 605 (441) 164 130 663 793
- ------------------------------------- ----- -------- ----- ----- -------- ------
Net change in net interest revenue $(105) $ 112 $ 7 $(318) $ (145) $ (463)
===================================== ===== ======== ===== ===== ======== ======
FOREIGN OFFICES
INTEREST REVENUE
Interest-bearing deposits with
banks $ 2 $ 26 $ 28 $ 71 $ (20) $ 51
Securities purchased under resale
agreements 84 199 283 142 (42) 100
Securities borrowed - 6 6 13 74 87
Trading assets 7 (76) (69) 18 248 266
Securities available for sale 5 38 43 (15) (10) (25)
Loans 86 (54) 32 (29) 71 42
- ------------------------------------- ----- -------- ----- ----- -------- ------
Total interest revenue 184 139 323 200 321 521
- ------------------------------------- ----- -------- ----- ----- -------- ------
INTEREST EXPENSE
Interest-bearing deposits 34 (47) (13) 227 61 288
Trading liabilities (107) (57) (164) (48) 158 110
Securities loaned and securities
sold under repurchase agreements 180 183 363 128 (62) 66
Other short-term borrowings 57 (16) 41 (6) 20 14
Long-term debt 69 36 105 78 6 84
Funds provided by domestic offices 352 (287) 65 (7) (22) (29)
Funds provided to domestic offices (601) 386 (215) (127) 26 (101)
- ------------------------------------- ----- -------- ----- ----- -------- ------
Total interest expense (16) 198 182 245 187 432
- ------------------------------------- ----- -------- ----- ----- -------- ------
Net change in net interest revenue $ 200 $ (59) $ 141 $ (45) $ 134 $ 89
===================================== ===== ======== ===== ===== ======== ======
</TABLE>
131
<PAGE>
INTEREST RATE SENSITIVITY
Interest rate sensitivity data for the Corporation at December 31, 1996 is
presented in the table below. For purposes of this presentation, the interest-
earning/bearing components of trading assets and trading liabilities are assumed
to reprice within three months.
The interest rate gaps reported in the table arise when assets are funded with
liabilities having different repricing intervals, after considering the effect
of off-balance sheet hedging instruments. Since these gaps are actively managed
and change daily as adjustments are made in interest rate views and market
outlook, positions at the end of any period may not be reflective of the
Corporation's interest rate view in subsequent periods. Active management
dictates that longer-term economic views are balanced against prospects of
short-term interest rate changes in all repricing intervals.
<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, 1996 months six months one year five years years funds Total
- ----------------------------------- --------- ------------ ----------- ---------- ------ ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-bearing deposits
with banks $ 2,000 $ 123 $ 87 $ - $ - $ - $ 2,210
Federal funds sold 1,684 - - - - - 1,684
Securities purchased under
resale agreements 17,445 482 75 - - - 18,002
Securities borrowed 17,005 - - - - - 17,005
Trading assets 31,425 - - - - 17,704 49,129
Securities available for sale 1,355 583 1,922 2,102 1,958 - 7,920
Customer receivables 1,487 - - - - 42 1,529
Gross loans 11,566 1,313 736 1,755 510 - 15,880
Noninterest-earning assets and
allowance for credit losses - - - - - 9,419 9,419
- ----------------------------------- -------- ------- ------- ------ ------ --------- --------
Total 83,967 2,501 2,820 3,857 2,468 27,165 122,778
- ----------------------------------- -------- ------- ------- ------ ------ --------- --------
LIABILITIES, PREFERRED STOCK
OF SUBSIDIARY AND
STOCKHOLDERS' EQUITY
Interest-bearing deposits 20,479 2,245 2,341 907 730 - 26,702
Trading liabilities 7,966 - - - - 15,795 23,761
Securities loaned and securities
sold under repurchase agreements 23,188 216 50 - - - 23,454
Other short-term borrowings 16,658 1,884 437 68 362 - 19,409
Long-term debt 3,532 1,581 244 3,727 2,224 - 11,308
Mandatorily redeemable capital
securities of subsidiary
trusts holding solely junior
subordinated deferrable
interest debentures - - - - 730 - 730
Preferred stock of subsidiary 250 - - - - - 250
Preferred stock 145 - - 665 - - 810
Noninterest-bearing liabilities,
including allowance for credit
losses, and common stockholders'
equity - - - - - 16,354 16,354
- ----------------------------------- -------- ------- ------- ------ ------ --------- --------
Total 72,218 5,926 3,072 5,367 4,046 32,149 122,778
- ----------------------------------- -------- ------- ------- ------ ------ --------- --------
Effect of off-balance sheet
hedging instruments (16,891) 3,577 2,691 7,552 3,071 - -
- ----------------------------------- -------- ------- ------- ------ ------ --------- --------
INTEREST RATE SENSITIVITY GAP $ (5,142) $ 152 $ 2,439 $6,042 $1,493 $(4,984) $ -
=================================== ======== ======= ======= ====== ====== ========= ========
CUMULATIVE INTEREST RATE
SENSITIVITY GAP $ (5,142) $(4,990) $(2,551) $3,491 $4,984 $ - $ -
=================================== ======== ======= ======= ====== ====== ========= ========
</TABLE>
132
<PAGE>
DEPOSITS
The Corporation's certificates of deposit and other time deposits issued by
domestic and foreign offices in amounts of $100,000 or more, together with their
remaining maturities, and other interest-bearing deposits at December 31, 1996
were as follows:
<TABLE>
<CAPTION>
(in millions) Domestic Foreign Total
- --------------------------------------------- -------- ------- -------
<S> <C> <C> <C>
Certificates of deposit of $100,000 or more
3 months or less $ 630 $ 2,142 $ 2,772
Over 3 through 6 months 927 426 1,353
Over 6 through 12 months 2,501 138 2,639
Over 12 months 149 12 161
- --------------------------------------------- ------ ------- -------
Total 4,207 2,718 6,925
- --------------------------------------------- ------ ------- -------
Other time deposits of $100,000 or more
3 months or less 156 9,612 9,768
Over 3 through 6 months 6 1,272 1,278
Over 6 through 12 months 2 953 955
Over 12 months - 69 69
- --------------------------------------------- ------ ------- -------
Total 164 11,906 12,070
- --------------------------------------------- ------ ------- -------
Other 5,557 2,150 7,707
- --------------------------------------------- ------ ------- -------
Total interest-bearing deposits $9,928 $16,774 $26,702
============================================= ====== ======= =======
</TABLE>
Deposits by foreign depositors in domestic offices amounted to $1.2 billion,
$1.0 billion and $1.0 billion at December 31, 1996, 1995 and 1994, respectively.
133
<PAGE>
Exhibit 99.2
1
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Increase
THREE MONTHS ENDED MARCH 31, 1997 1996 (Decrease)
- --------------------------------------------------- ------ ------ ----
<S> <C> <C> <C>
NET INTEREST REVENUE
Interest revenue $1,681 $1,623 $ 58
Interest expense 1,349 1,389 (40)
- --------------------------------------------------- ------ ------ ----
Net interest revenue 332 234 98
Provision for credit losses - 5 (5)
- --------------------------------------------------- ------ ------ ----
Net interest revenue after provision
for credit losses 332 229 103
- --------------------------------------------------- ------ ------ ----
NONINTEREST REVENUE
Trading 311 300 11
Fiduciary and funds management 231 200 31
Corporate finance fees 215 188 27
Other fees and commissions 139 140 (1)
Net revenue from equity investment transactions 47 27 20
Securities available for sale gains 14 15 (1)
Insurance premiums 63 62 1
Other 46 56 (10)
- --------------------------------------------------- ------ ------ ----
Total noninterest revenue 1,066 988 78
- --------------------------------------------------- ------ ------ ----
NONINTEREST EXPENSES
Salaries and commissions 305 267 38
Incentive compensation and employee benefits 376 307 69
Agency and other professional service fees 90 63 27
Communication and data services 56 55 1
Occupancy, net 43 42 1
Furniture and equipment 54 45 9
Travel and entertainment 30 22 8
Provision for policyholder benefits 68 72 (4)
Other 84 80 4
- --------------------------------------------------- ------ ------ ----
Total noninterest expenses 1,106 953 153
- --------------------------------------------------- ------ ------ ----
Income before income taxes 292 264 28
Income taxes 92 85 7
- --------------------------------------------------- ------ ------ ----
NET INCOME $ 200 $ 179 $ 21
=================================================== ====== ====== ====
NET INCOME APPLICABLE TO COMMON STOCK $ 187 $ 164 $ 23
=================================================== ====== ====== ====
Cash dividends declared per common share $1.00 $1.00 $ -
=================================================== ====== ====== ====
EARNINGS PER COMMON SHARE:
PRIMARY $1.81 $1.62 $.19
=================================================== ====== ====== ====
FULLY DILUTED $1.76 $1.57 $.19
=================================================== ====== ====== ====
</TABLE>
<PAGE>
2
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
($ in millions, except par value)
<TABLE>
<CAPTION>
March 31, December 31,
1997* 1996
-------- --------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,679 $ 1,568
Interest-bearing deposits with banks 2,581 2,210
Federal funds sold 1,195 1,684
Securities purchased under resale
agreements 22,316 18,002
Securities borrowed 14,245 17,005
Trading assets:
Government securities 11,821 16,858
Corporate debt securities 8,508 8,039
Equity securities 7,061 6,089
Swaps, options and other derivatives 11,222 11,410
Other trading assets 9,080 6,733
- ------------------------------------------------------------ -------- --------
Total trading assets 47,692 49,129
Securities available for sale 7,986 7,920
Loans, net of allowance for credit losses
of $758 at March 31, 1997 and $773 at
December 31, 1996 17,282 15,107
Customer receivables 1,582 1,529
Accounts receivable and accrued interest 3,262 3,077
Other assets 5,711 5,547
- ------------------------------------------------------------ -------- --------
Total $125,531 $122,778
============================================================ ======== ========
LIABILITIES
Noninterest-bearing deposits
Domestic offices $ 2,803 $ 2,600
Foreign offices 1,052 1,013
Interest-bearing deposits
Domestic offices 12,365 9,928
Foreign offices 19,369 16,774
- ------------------------------------------------------------ -------- --------
Total deposits 35,589 30,315
Trading liabilities:
Securities sold, not yet purchased
Government securities 3,986 7,668
Equity securities 4,950 4,174
Other trading liabilities 443 334
Swaps, options and other derivatives 11,177 11,585
- ------------------------------------------------------------ -------- --------
Total trading liabilities 20,556 23,761
Securities loaned and securities sold
under repurchase agreements 22,576 23,454
Other short-term borrowings 20,320 19,409
Accounts payable and accrued expenses 4,727 4,837
Other liabilities, including allowance for
credit losses of $200 at both March 31, 1997
and December 31, 1996 3,183 2,836
Long-term debt not included in risk-based capital 8,164 8,732
Long-term debt included in risk-based capital 3,164 2,576
Mandatorily redeemable capital securities of
subsidiary trusts holding solely junior
subordinated deferrable interest debentures
included in risk-based capital 1,469 730
- ------------------------------------------------------------ -------- --------
Total liabilities 119,748 116,650
- ------------------------------------------------------------ -------- --------
PREFERRED STOCK OF SUBSIDIARY - 250
- ------------------------------------------------------------ -------- --------
STOCKHOLDERS' EQUITY
Preferred stock 704 810
Common stock, $1 par value
Authorized, 300,000,000 shares
Issued: 1997, 104,362,661 shares;
1996, 103,624,555 shares 105 104
Capital surplus 1,477 1,437
Retained earnings 4,065 3,988
Common stock in treasury, at cost: 1997, 5,965,427 shares;
1996, 4,435,226 shares (527) (372)
Other stockholders' equity (41) (89)
- ------------------------------------------------------------ -------- --------
Total stockholders' equity 5,783 5,878
- ------------------------------------------------------------ -------- --------
Total $125,531 $122,778
============================================================ ======== ========
</TABLE>
FN
* Unaudited
<PAGE>
3
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in millions)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997 1996
- --------------------------------------------------------- ------ ------
<S> <C> <C>
PREFERRED STOCK
Balance, January 1 $ 810 $ 865
Preferred stock issued - 1
Preferred stock redeemed (100) -
Preferred stock repurchased (6) -
- --------------------------------------------------------- ------ ------
Balance, March 31 704 866
- --------------------------------------------------------- ------ ------
COMMON STOCK
Balance, January 1 104 103
Issuance of common stock 1 1
- --------------------------------------------------------- ------ ------
Balance, March 31 105 104
- --------------------------------------------------------- ------ ------
CAPITAL SURPLUS
Balance, January 1 1,437 1,386
Issuance of common stock 19 11
Common stock distributed under employee
benefit plans 21 9
- --------------------------------------------------------- ------ ------
Balance, March 31 1,477 1,406
- --------------------------------------------------------- ------ ------
RETAINED EARNINGS
Balance, January 1 3,988 3,702
Net income 200 179
Cash dividends declared
Preferred stock (14) (15)
Common stock (82) (82)
Treasury stock distributed under employee benefit plans (27) (9)
- --------------------------------------------------------- ------ ------
Balance, March 31 4,065 3,775
- --------------------------------------------------------- ------ ------
COMMON STOCK IN TREASURY, AT COST
Balance, January 1 (372) (336)
Purchases of stock (244) (20)
Restricted stock granted, net (14) 23
Treasury stock distributed under employee benefit plans 103 22
- --------------------------------------------------------- ------ ------
Balance, March 31 (527) (311)
- --------------------------------------------------------- ------ ------
COMMON STOCK ISSUABLE - STOCK AWARDS
Balance, January 1 526 233
Deferred stock awards granted, net 66 66
Deferred stock distributed (14) (1)
- --------------------------------------------------------- ------ ------
Balance, March 31 578 298
- --------------------------------------------------------- ------ ------
DEFERRED COMPENSATION - STOCK AWARDS
Balance, January 1 (308) (151)
Deferred stock awards granted, net (66) (66)
Restricted stock granted, net 14 (22)
Amortization of deferred compensation, net 63 41
- --------------------------------------------------------- ------ ------
Balance, March 31 (297) (198)
- --------------------------------------------------------- ------ ------
CUMULATIVE TRANSLATION ADJUSTMENTS
Balance, January 1 (364) (348)
Translation adjustments 11 (17)
Income taxes applicable to translation adjustments (8) 16
- --------------------------------------------------------- ------ ------
Balance, March 31 (361) (349)
- --------------------------------------------------------- ------ ------
SECURITIES VALUATION ALLOWANCE
Balance, January 1 57 19
Change in unrealized net gains, after applicable
income taxes and minority interest (18) (9)
- --------------------------------------------------------- ------ ------
Balance, March 31 39 10
- --------------------------------------------------------- ------ ------
TOTAL STOCKHOLDERS' EQUITY, MARCH 31 $5,783 $5,601
========================================================= ====== ======
</TABLE>
<PAGE>
4
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997 1996
- ------------------------------------------------------- ------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 200 $ 179
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses - 5
Provision for policyholder benefits 68 72
Deferred income taxes (43) 25
Depreciation and other amortization
and accretion 64 64
Other, net 23 (9)
- ------------------------------------------------------- ------- -------
Earnings adjusted for noncash charges and credits 312 336
Net change in:
Trading assets 2,030 2,252
Trading liabilities (3,031) 695
Receivables and payables from securities
transactions 271 (93)
Customer receivables (93) 80
Other operating assets and liabilities, net 162 565
Securities available for sale gains (14) (15)
- ------------------------------------------------------- ------- -------
Net cash (used in) provided by operating activities (363) 3,820
- ------------------------------------------------------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in:
Interest-bearing deposits with banks (360) 624
Federal funds sold 489 (184)
Securities purchased under resale agreements (4,314) (2,330)
Securities borrowed 2,760 (4,599)
Loans (2,359) (348)
Securities available for sale:
Purchases (1,786) (1,568)
Maturities and other redemptions 593 892
Sales 73 135
Acquisitions of premises and equipment (71) (55)
Other, net (3) 16
- ------------------------------------------------------- ------- -------
Net cash used in investing activities (4,978) (7,417)
- ------------------------------------------------------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in:
Deposits 5,070 (3,250)
Securities loaned and securities sold
under repurchase agreements (870) 8,166
Other short-term borrowings 978 (3,306)
Issuances of long-term debt* 2,500 1,050
Repayments of long-term debt (1,601) (189)
Issuance of common stock 19 11
Redemptions and repurchases of preferred stock (106) -
Redemptions of preferred stock of subsidiary (250) -
Purchases of treasury stock (244) (20)
Cash dividends paid (97) (97)
Other, net 61 15
- ------------------------------------------------------- ------- -------
Net cash provided by financing activities 5,460 2,380
- ------------------------------------------------------- ------- -------
Net effect of exchange rate changes on cash (8) 17
- ------------------------------------------------------- ------- -------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 111 (1,200)
Cash and due from banks, beginning of period 1,568 2,399
- ------------------------------------------------------- ------- -------
Cash and due from banks, end of period $ 1,679 $ 1,199
======================================================= ======= =======
Interest paid $ 1,173 $ 1,447
======================================================= ======= =======
Income taxes (refunded) paid, net $ (1) $ 97
======================================================= ======= =======
Noncash investing activities $ 46 $ 30
======================================================= ======= =======
Noncash financing activities:
Conversion of debt to preferred stock $ - $ 1
======================================================= ======= =======
</TABLE>
FN
* Includes $739 million at March 31, 1997 which is related to mandatorily
redeemable capital securities of subsidiary trusts holding solely junior
subordinated deferrable interest debentures included in risk-based capital.
Certain prior period amounts have been reclassified to conform to the current
presentation.
<PAGE>
5
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED SCHEDULE OF NET INTEREST REVENUE
(in millions)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, Increase
1997 1996 (Decrease)
------ ------ -----
<S> <C> <C> <C>
INTEREST REVENUE
Interest-bearing deposits with banks $ 65 $ 43 $ 22
Federal funds sold 49 28 21
Securities purchased under resale agreements 330 194 136
Securities borrowed 183 228 (45)
Trading assets 600 773 (173)
Securities available for sale
Taxable 106 90 16
Exempt from federal income taxes 14 7 7
Loans 302 232 70
Customer receivables 32 28 4
- ---------------------------------------------- ------ ------ -----
Total interest revenue 1,681 1,623 58
- ---------------------------------------------- ------ ------ -----
INTEREST EXPENSE
Interest-bearing deposits
Domestic offices 146 88 58
Foreign offices 250 247 3
Trading liabilities 151 326 (175)
Securities loaned and securities sold
under repurchase agreements 339 314 25
Other short-term borrowings 291 274 17
Long-term debt 148 140 8
Mandatorily redeemable capital securities of
subsidiary trusts holding solely junior
subordinated deferrable interest debentures
included in risk-based capital 24 - 24
- ---------------------------------------------- ------ ------ -----
Total interest expense 1,349 1,389 (40)
- ---------------------------------------------- ------ ------ -----
NET INTEREST REVENUE $ 332 $ 234 $ 98
============================================== ====== ====== =====
</TABLE>
<PAGE>
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Bankers Trust New York Corporation (the "Parent Company") and subsidiaries
(collectively, the "Corporation", or the "Firm") earned $200 million for the
quarter ended March 31, 1997, or $1.81 primary earnings per share. In the first
quarter of 1996, the Corporation earned $179 million, or $1.62 primary earnings
per share.
THE MERGER
On September 1, 1997, Alex. Brown Incorporated ("Alex. Brown") was merged into a
wholly-owned subsidiary of Bankers Trust New York Corporation (the "Merger").
In conjunction with the Merger, each share of Alex. Brown common stock then
outstanding was converted into 0.83 shares of Bankers Trust New York
Corporation's common stock (the "Exchange Ratio"). The Merger was treated as a
tax free exchange.
The supplemental consolidated financial statements give retroactive effect to
the Merger in a transaction accounted for as a pooling of interests. The
pooling of interests method of accounting requires the restatement of all
periods presented as if Alex. Brown and Bankers Trust New York Corporation had
always been combined. Generally accepted accounting principles proscribe giving
effect to a consummated business combination accounted for by the pooling of
interests method in financial statements that do not include the date of
consummation. The supplemental consolidated financial statements do not extend
through the date of consummation. However, they will become the historical
consolidated financial statements of Bankers Trust New York Corporation together
with its subsidiaries after financial statements covering the date of
consummation of the business combination are issued. The supplemental
consolidated statement of changes in stockholders' equity reflects the accounts
of the Corporation as if the additional common stock had been issued during all
the periods presented. The supplemental consolidated financial statements,
including the notes thereto, should be read in conjunction with the historical
consolidated financial statements of Alex. Brown and Bankers Trust New York
Corporation, included in their Annual Reports on Form 10-K for the fiscal years
ended December 31, 1996.
ORGANIZATIONAL UNIT RESULTS
Organizational Unit business results are determined based on the
corporation's internal management accounting process, which allocates revenue
and expenses among the organizational units. Because the corporation's business
is diverse in nature and its operations are integrated, it is impractical to
segregate respective contributions of the organizational units with precision.
As a result, estimates and judgments have been made to apportion revenue and
expense items. In addition, certain revenue and expenses have been segregated
and reported in corporate/other because, in the opinion of management, they
could not be reasonably allocated or because their contributions to a particular
organizational unit would be distortive. The internal management accounting
process, unlike financial accounting in accordance with generally accepted
accounting principles, is based on the way management views its business and is
not necessarily comparable with similar information disclosed by other financial
institutions. In order to provide comparability from one period to the next,
the corporation will restate this analysis to conform with material changes in
the allocation process and/or significant changes in organizational structure.
<PAGE>
7
ORGANIZATIONAL UNIT RESULTS (CONTINUED)
The information presented below reflects the results by Organizational
Units. The historical amounts of Alex. Brown have been included in Investment
Banking, Investment Management and Corporate/Other.
<TABLE>
<CAPTION>
Total Non- Pretax Net
Three Months Ended March 31, 1997 Total Net interest Income/ Income/
(in millions) Revenue Expenses (Loss) (Loss)
- ----------------------------------- ------ ------ ---- ----
<S> <C> <C> <C> <C>
Investment Banking $ 402 $ 242 $160 $110
Risk Management Services 105 89 16 11
Trading & Sales 134 73 61 43
Investment Management 186 151 35 23
Client Processing Services 196 178 18 13
Australia/New Zealand 129 81 48 34
Asia 40 29 11 8
Latin America 143 110 33 23
Corporate/Other 63 153 (90) (65)
- ----------------------------------- ------ ------ ---- ----
Total $1,398 $1,106 $292 $200
=================================== ====== ====== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Total Non- Pretax Net
Three Months Ended March 31, 1996 Total Net interest Income/ Income/
(in millions) Revenue Expenses (Loss) (Loss)
- ----------------------------------- ------ ------ ---- ----
<S> <C> <C> <C> <C>
Investment Banking $ 362 $ 194 $168 $112
Risk Management Services 63 69 (6) (4)
Trading & Sales 90 56 34 24
Investment Management 173 143 30 19
Client Processing Services 182 156 26 18
Australia/New Zealand 98 64 34 24
Asia 33 26 7 5
Latin America 136 108 28 20
Corporate/Other 80 137 (57) (39)
- ----------------------------------- ------ ------ ---- ----
Total $1,217 $ 953 $264 $179
=================================== ====== ====== ==== ====
</TABLE>
CHANGES IN ORGANIZATIONAL STRUCTURE
To move risk management capabilities closer to clients, responsibility for
the convertible debt business and for management of the metals and mining
commodities book has been transferred from Risk Management Services to
------------------------
Investment Banking and Australia/New Zealand, respectively.
- ------------------ ---------------------
In addition, the Emerging Europe, Middle East and Africa unit has been
formed, combining people with risk management, trading, and investment banking
expertise. For external reporting purposes this new unit is included in Risk
----
Management Services. Prior period results have been restated for the changes in
- -------------------
organizational structure except for the transfer of responsibility for managing
the metals and mining commodities book in Australia/New Zealand which is
---------------------
reflected in 1997 results only.
<PAGE>
8
ORGANIZATIONAL UNIT RESULTS (continued)
The Investment Banking business contributed net income of $110 million in
------------------
the first quarter of 1997, down slightly from $112 million a year ago.
Risk Management Services recorded net income of $11 million in the first
------------------------
quarter of 1997, up $15 million from the first quarter of 1996. Revenues of
$105 million were up $42 million from the first quarter of 1996. Compared to
the prior year period, revenues from new derivatives transactions and from the
Emerging Europe, Middle East and Africa unit improved.
Net income from the Trading & Sales business, at $43 million, was up $19
---------------
million from the first quarter of 1996. The current quarter's improvement was
largely due to higher revenues from trading and client-related business as
compared to the prior year period.
The Corporation's Investment Management business, which for reporting
---------------------
purposes does not include funds management activities in Australia/NZ, reported
net income of $23 million for the current quarter, up $4 million from the 1996
comparable period due to an increase in assets under management. At March 31,
1997, assets under management in this organizational unit were approximately
$219 billion, compared to $194 billion at March 31, 1996.
Client Processing Services contributed $13 million of net income in the
--------------------------
first quarter of 1997, down $5 million from the 1996 first quarter. Revenues of
$196 million were up $14 million from the first quarter of 1996. The decline in
net income from a year ago reflected higher operations costs and growth in staff
expense.
Net income of the Australia/NZ business was $34 million in the first quarter
------------
of 1997, up $10 million from the first quarter of 1996. The increase from the
prior year period was primarily due to improved revenues from trading activities
and fiduciary and funds management offset in part by increased salaries and
incentive compensation and employee benefits as a result of higher staff levels.
At March 31, 1997, assets under management in Australia/NZ's investment
management business were approximately $27 billion, compared to $23 billion at
March 31, 1996.
Asia net income was $8 million in the first quarter of 1997, up $3 million
----
from the first quarter of 1996. The current quarter's increase was primarily
due to very strong results in North Asia. Offsetting the improved results in
North Asia were losses incurred during the first quarter from the Corporation's
investment in Thai Investment and Securities Co. in Thailand. Thailand is
currently experiencing a significant reduction in its economic growth and the
Thai stock market has experienced a steep decline.
Latin America net income was $23 million in the first quarter of 1997, up $3
-------------
million from the first quarter of 1996. An increase in trading-related
activities contributed to the current quarter's results.
<PAGE>
9
ORGANIZATIONAL UNIT RESULTS (continued)
Corporate/Other net loss was $65 million in the first quarter of 1997,
---------------
compared with a net loss of $39 million in the first quarter of 1996. The
current quarter included the effects of increased incentive compensation and
employee benefits, a contribution to the BT Foundation, and consulting expenses
associated with several strategic and infrastructure improvement projects.
REVENUE
Net Interest Revenue
The table below presents net interest revenue, average balances and average
rates. The tax equivalent adjustment is made to present the revenue and yields
on certain assets, primarily tax-exempt securities and loans, as if such revenue
were taxable.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Increase
1997 1996 (Decrease)
------- ------- -------
<S> <C> <C> <C>
NET INTEREST REVENUE (in millions)
Book basis $ 332 $ 234 $ 98
Tax equivalent adjustment 7 4 3
- -------------------------------------- ------- ------- -------
Fully taxable basis $ 339 $ 238 $ 101
====================================== ======= ======= =======
AVERAGE BALANCES (in millions)
Interest-earning assets $98,064 $87,679 $10,385
Interest-bearing liabilities 92,195 83,734 8,461
- -------------------------------------- ------- ------- -------
Earning assets financed by
noninterest-bearing funds $ 5,869 $ 3,945 $ 1,924
====================================== ======= ======= =======
AVERAGE RATES (fully taxable basis)
Yield on interest-earning assets 6.98% 7.46% (.48)%
Cost of interest-bearing liabilities 5.93 6.67 .74
- -------------------------------------- ------- ------- -------
Interest rate spread 1.05 .79 .26
Contribution of noninterest-bearing
funds .35 .30 .05
- -------------------------------------- ------- ------- -------
Net interest margin 1.40% 1.09% .31%
====================================== ======= ======= =======
</TABLE>
Net interest revenue for the first quarter of 1997 totaled $332 million, up
$98 million, or 42 percent, from the first quarter of 1996. The $98 million
increase in net interest revenue was primarily due to a $104 million increase in
trading-related net interest revenue, which totaled $135 million for the first
quarter of 1997. Nontrading-related net interest revenue which is considered to
be historically a more stable component of overall net interest revenue, totaled
$197 million for the first quarter of 1997 versus $203 million for the
comparable period in 1996.
<PAGE>
10
REVENUE (continued)
In the first quarter of 1997, the interest rate spread was 1.05 percent
compared to .79 percent in the prior year period. Net interest margin increased
to 1.40 percent from 1.09 percent. The yield on interest earning assets
decreased by 48 basis points and the cost of interest-bearing liabilities
decreased 74 basis points.
Trading Revenue
The Firm's trading and risk management businesses include significant
activities in interest rate instruments and related derivatives. These
activities can periodically shift revenue between trading and net interest,
depending on a variety of factors, including risk management strategies.
Therefore, the Corporation views trading revenue and trading-related net
interest revenue together.
Combined trading revenue and trading-related net interest revenue for the
first quarter of 1997 totaled $446 million, up $115 million from the first
quarter of 1996.
The table below presents the Corporation's trading revenue and trading-
related net interest revenue by major category of market risk. These categories
are based on management's view of the predominant underlying risk exposure of
each of the Firm's trading positions.
<TABLE>
<CAPTION>
Trading-
Related
Net
Trading Interest
(in millions) Revenue Revenue Total
- ------------------------------ ---- ---- ----
<S> <C> <C> <C>
Quarter ended March 31, 1997
Interest rate risk $178 $149 $327
Foreign exchange risk 38 - 38
Equity and commodity risk 95 (14) 81
- ------------------------------ ---- ---- ----
Total $311 $135 $446
============================== ==== ==== ====
Quarter ended March 31, 1996
Interest rate risk $166 $ 53 $219
Foreign exchange risk 17 - 17
Equity and commodity risk 117 (22) 95
- ------------------------------ ---- ---- ----
Total $300 $ 31 $331
============================== ==== ==== ====
</TABLE>
<PAGE>
11
REVENUE (continued)
Interest Rate Risk - The increase in revenue was due to increased flow of
client trading services, strong results from proprietary trading activities, and
increased revenue from bond trading activities attributable to increased capital
inflows to the market. Also, contributing to the increase was improved
performance from the Firm's trading activities in Asia and Latin America.
Foreign Exchange Risk - Foreign exchange risk revenue increased from the
first quarter of 1996 principally due to strong performance in the Firm's
activities in Australia including both proprietary and customer related
revenues.
Equity and Commodity Risk - Total trading and trading-related net interest
revenue decreased compared to the same period last year primarily due to
decreases in equity trading.
Noninterest Revenue (Excluding Trading)
Fiduciary and funds management revenue was $231 million in the first quarter
of 1997, up $31 million, or 16 percent, from the comparable period last year.
All activities within this category contributed to the year-over-year increase,
especially global private banking commissions, funds management revenue and
custodian fees.
Corporate finance fees of $215 million increased $27 million, or 14 percent,
from the same period last year, primarily due to higher private placement fees,
merger and acquisition fees and loan syndication fees.
<PAGE>
12
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
The provision for credit losses is determined based upon management's
evaluation as to the amount needed to maintain the allowance for credit losses
at a level considered appropriate in relation to the risk of losses inherent in
the portfolio.
No provision for credit losses was required for the first quarter of 1997
compared with $5 million for the prior year's first quarter. Net charge-offs
for the first quarter were $15 million, compared with $10 million a year ago.
In accordance with the American Institute of Certified Public Accountant's
Banks and Savings Institutions Audit and Accounting Guide, the Corporation has
allocated its total allowance for credit losses as follows: $758 million as a
reduction of loans, and $200 million as other liabilities related to other
credit-related items. The Corporation continues to believe that the total
allowance for credit losses is available for credit losses in its entire
portfolio, which is comprised of loans, credit-related commitments, derivatives
and other financial instruments. Due to a multitude of complex and changing
factors that are collectively weighed in determining the adequacy of the
allowance for credit losses, management expects that the allocation of the total
allowance for credit losses may be adjusted as risk factors change. Prior
period amounts have not been restated.
The provision for credit losses and the other changes in the allowance for
credit losses are shown below (in millions).
<TABLE>
<CAPTION>
Quarter Ended
March 31,
Allowance for credit losses 1997 1996
- ------------------------------------ ----- -----
<S> <C> <C>
Balance, beginning of period $ 973 $ 992
Net charge-offs
Charge-offs 33 28
Recoveries 18 18
- ------------------------------------ ----- -----
Total net charge-offs(1) 15 10
Provision for credit losses - 5
- ------------------------------------ ----- -----
Balance, end of period(2) $ 958 $ 987
==================================== ===== =====
(1) Components of Net Charge-offs:
Secured by real estate $ (1) $ 1
Real estate related - 4
Highly leveraged 16 20
Other - (12)
Refinancing country - (3)
- ------------------------------------ ----- -----
Total $ 15 $ 10
==================================== ===== =====
(2) Allocation:
Loans $ 758
Other Liabilities 200
- ------------------------------------ -----
Balance, end of period $ 958
==================================== =====
</TABLE>
<PAGE>
13
PROVISION AND ALLOWANCE FOR CREDIT LOSSES (continued)
The allowance for credit losses that has been allocated to loans, was $758
million at March 31, 1997 compared to $773 million at December 31, 1996. The
allowance was equal to 228 percent and 171 percent of total cash basis loans at
March 31, 1997 and December 31, 1996, respectively. These ratios were computed
using the amounts that were allocated to loans.
Impaired loans under SFAS 114, which consisted of total cash basis loans and
renegotiated loans, were $369 million and $489 million at March 31, 1997 and
December 31, 1996, respectively. Included in these amounts were $152 million
and $227 million of loans which required a valuation allowance of $30 million
and $57 million at those same dates, respectively.
EXPENSES
Total noninterest expenses of $1.106 billion increased by $153 million, or
16 percent, from the first quarter of 1996. Salaries and commissions expense
increased $38 million, or 14 percent, principally due to an 8 percent increase
in the average number of employees and to merit increases. Incentive
compensation and employee benefits, the largest component of noninterest
expenses, increased $69 million due to higher earnings, greater emphasis on
performance-based compensation and the increase in the average number of
employees.
INCOME TAXES
Income tax expense for the first quarter of 1997 amounted to $92 million,
compared with $85 million for the first quarter of 1996. The effective tax rate
was 32 percent for both the current and prior year quarter.
<PAGE>
14
EARNINGS PER COMMON SHARE
Primary earnings per common share amounts were computed by subtracting from
earnings the dividend requirements on preferred stock to arrive at net income
applicable to common stock ("net income applicable to common stock") and
dividing this amount by the average number of common and common equivalent
shares outstanding during the period. Fully diluted earnings per share amounts
were calculated by adjusting net income applicable to common stock for interest
expense on the convertible subordinated debentures and dividing this amount by
the average number of common and common equivalent shares outstanding during the
period.
For primary earnings per share, the average number of common and common
equivalent shares outstanding was the sum of the average number of shares of
common stock outstanding and the incremental number of shares issuable under
outstanding stock options and deferred stock awards that had a dilutive effect
as computed under the treasury stock method. Fully diluted earnings per share
further assumes the conversion into common stock of convertible subordinated
debentures, if dilutive. Under the treasury stock method, the number of
incremental shares is determined by assuming the issuance of the outstanding
stock options and deferred stock awards reduced by the number of shares assumed
to be repurchased from the issuance proceeds, using the market price of the
Parent Company's common stock. For primary earnings per share, this market
price is the average market price for the period, while for fully diluted
earnings per share, it is the period-end market price, if it is higher than the
average market price.
The earnings applicable to common stock and the number of shares used for
primary and fully diluted earnings per share were as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
-------- --------
<S> <C> <C>
Net income applicable to common stock - primary $ 187 $ 164
Net income applicable to common stock - assuming
full dilution $ 188 $ 164
Average number of common shares outstanding 97.443 97.215
Average common and common equivalent shares
outstanding - primary 103.778 101.078
Average common and common equivalent shares
outstanding assuming full dilution 107.034 104.808
</TABLE>
<PAGE>
15
BALANCE SHEET ANALYSIS
The following table highlights the changes in the balance sheet. Since
quarter-end balances can be distorted by one-day fluctuations, an analysis of
changes in the quarterly averages is provided to give a better indication of
balance sheet trends.
<TABLE>
<CAPTION>
CONDENSED AVERAGE BALANCE SHEETS
(in millions)
1st Qtr 4th Qtr Increase
1997 1996 (Decrease)
-------- -------- -------
<S> <C> <C> <C>
ASSETS
Interest-earning
Interest-bearing deposits with banks $ 3,396 $ 3,545 $ (149)
Federal funds sold 3,723 2,011 1,712
Securities purchased under resale
agreements 22,157 22,405 (248)
Securities borrowed 15,043 15,865 (822)
Trading assets 28,224 31,617 (3,393)
Securities available for sale
Taxable 6,988 6,777 211
Exempt from federal income taxes 1,148 1,077 71
- ------------------------------------------------ -------- -------- -------
Total securities available for sale 8,136 7,854 282
Loans
Domestic offices 8,267 8,226 41
Foreign offices 7,437 7,032 405
- ------------------------------------------------ -------- -------- -------
Total loans 15,704 15,258 446
- ------------------------------------------------ -------- -------- -------
Customer receivables 1,681 1,683 (2)
- ------------------------------------------------ -------- -------- -------
Total interest-earning assets 98,064 100,238 (2,174)
Noninterest-earning
Cash and due from banks 1,336 1,400 (64)
Noninterest-earning trading assets 18,977 17,727 1,250
All other assets 8,551 8,519 32
Allowance for credit losses (802) (988) 186
- ------------------------------------------------ -------- -------- -------
Total $126,126 $126,896 $ (770)
================================================ ======== ======== =======
LIABILITIES
Interest-bearing
Interest-bearing deposits
Domestic offices $ 11,748 $ 8,738 $ 3,010
Foreign offices 19,661 18,812 849
- ------------------------------------------------ -------- -------- -------
Total interest-bearing deposits 31,409 27,550 3,859
Trading liabilities 6,103 9,748 (3,645)
Securities loaned and securities
sold under repurchase agreements 22,850 26,214 (3,364)
Other short-term borrowings 19,261 18,982 279
Long-term debt 11,377 11,372 5
Mandatorily redeemable capital securities
of subsidiary trusts holding solely junior
subordinated deferrable interest debentures 1,195 165 1,030
- ------------------------------------------------ -------- -------- -------
Total interest-bearing liabilities 92,195 94,031 (1,836)
Noninterest-bearing
Noninterest-bearing deposits 3,152 3,518 (366)
Noninterest-bearing trading liabilities 16,987 15,725 1,262
All other liabilities 7,731 7,423 308
- ------------------------------------------------ -------- -------- -------
Total liabilities 120,065 120,697 (632)
- ------------------------------------------------ -------- -------- -------
PREFERRED STOCK OF SUBSIDIARY 182 250 (68)
- ------------------------------------------------ -------- -------- -------
STOCKHOLDERS' EQUITY
Preferred stock 773 815 (42)
Common stockholders' equity 5,106 5,134 (28)
- ------------------------------------------------ -------- -------- -------
Total stockholders' equity 5,879 5,949 (70)
- ------------------------------------------------ -------- -------- -------
Total $126,126 $126,896 $ (770)
================================================ ======== ======== =======
</TABLE>
<PAGE>
16
BALANCE SHEET ANALYSIS (continued)
The Corporation's average total assets amounted to $126.1 billion for the
first quarter of 1997, a decrease of $770 million, or 1 percent, from the fourth
quarter of 1996. Average interest-earning assets decreased $2.2 billion, or 2
percent, and the proportion of interest-earning assets to total assets decreased
from 79 percent to 78 percent. The decrease in interest-earning assets was
primarily due to decreases in trading assets (down $3.4 billion or 11 percent)
and securities borrowed (down $822 million, or 5 percent), offset in part by an
increase in federal funds sold (up $1.7 billion, or 85 percent). Interest-
earning trading assets, as a percentage of total assets declined from 25 percent
to 22 percent. Noninterest-earning trading assets increased $1.3 billion, or 7
percent, from the fourth quarter of 1996.
Average total liabilities decreased $632 million from the fourth quarter of
1996. Within interest-bearing liabilities, decreases in trading liabilities
(down $3.6 billion, or 37 percent) and securities sold under repurchase
agreements (down $3.4 billion, or 13 percent) were offset in part by increases
in total interest-bearing deposits (up $3.9 billion or 14 percent) and
mandatorily redeemable capital securities (up $1.0 billion, or 624 percent).
Total short-term borrowings (securities loaned and securities sold under
repurchase agreements and other short-term borrowings) as a percentage of total
interest-bearing liabilities declined from 48 percent to 46 percent.
Securities Available for Sale
The fair value, amortized cost and gross unrealized holding gains and losses
for the Corporation's securities available for sale follow. During the first
quarter of 1997, the Corporation transferred approximately $1.1 billion of
asset-backed securities from securities-available-for-sale to trading account
assets. This transfer, which had no impact on the current quarter's income, was
the result of a change in risk management strategies.
<TABLE>
<CAPTION>
March 31, December 31,
(in millions) 1997 1996
- --------------------------- ------ ------
<S> <C> <C>
Fair value $7,986 $7,920
Amortized cost 7,854 7,755
- --------------------------- ------ ------
Excess of fair value over
amortized cost * $ 132 $ 165
=========================== ====== ======
* Components:
Unrealized gains $ 210 $ 245
Unrealized losses (78) (80)
- --------------------------- ------ ------
$ 132 $ 165
====== ======
</TABLE>
<PAGE>
17
BALANCE SHEET ANALYSIS (continued)
Long-term Debt
The larger of long-term debt issuances and maturities/redemptions which
occurred during the first quarter of 1997 are as follows (in millions):
<TABLE>
<CAPTION>
Face Amount
Maturities/
Issuances Redemptions
----------- -----------
<S> <C> <C>
Parent Company
- ---------------------------------------
8% Subordinated Debentures - $200
Floating Rate Notes due May 1998 - $300
Floating Rate Notes due January 2002 $250 -
Bankers Trust Company
- ---------------------------------------
Floating Rate Notes due February 2002 $324 -
Redeemable Preference Securities - $510
Redeemable Preference Securities
due March 2004 (1) $651 -
</TABLE>
FN
(1) At March 31, 1997, certain subsidiaries of Bankers Trust Company had
outstanding ($3.0 billion) of mandatorily redeemable preference securities
with maturities ranging from April 1997 to March 2004.
Trust Preferred Capital Securities
During the first quarter of 1997, BT Capital Trust A ("Trust A"), BT
Preferred Capital Trust I ("Trust I") and BT Preferred Capital Trust II ("Trust
II"), wholly-owned subsidiaries of the Corporation issued $250 million 7.90%
Capital Securities, Series A1, ("Series A1 Securities"), $250 million 8 1/8%
Preferred Securities, Series I ("Series I Securities") and $250 million 7.875%
Preferred Securities, Series II ("Series II Securities"), respectively. The
Series A1 Securities and the Series II Securities have a liquidation value of
$1,000 per Series A1 Security and Series II Security, respectively. The Series I
Securities have a liquidation value of $25 per Series I Security. Series A1
Securities, Series I Securities and Series II Securities represent preferred
undivided beneficial interests in the assets of Trust A, Trust I and Trust II,
respectively. The Corporation is the holder of all of the beneficial interests
represented by common securities of Trust A, Trust I and Trust II ("Common
Securities" and, collectively with the Series A1 Securities, Series I Securities
and Series II Securities, the "Trust Securities").
Trust A, Trust I and Trust II exist for the sole purpose of issuing the
Trust Securities and investing the proceeds thereof in 7.90% Junior Subordinated
Deferrable Interest Debentures, Series A1, 8 1/8% Junior Subordinated Deferrable
Interest Debentures, Series I and 7.875% Junior Subordinated Deferrable Interest
Debentures, Series II (the "Series A1
<PAGE>
18
BALANCE SHEET ANALYSIS (continued)
Debentures," the "Series I Debentures" and the "Series II Debentures" and
collectively, the "Junior Subordinated Debentures") issued by the Corporation.
The Junior Subordinated Debentures are unsecured and subordinated to all senior
indebtedness of the Corporation and will be the sole assets of Trust A, Trust I
and Trust II. Payments under the Junior Subordinated Debentures by the
Corporation are the same as those for the Series A1 Securities, Series I
Securities and Series II Securities described below, respectively. The
obligations of the Corporation under the Junior Subordinated Debentures, the
relevant indenture and trust agreement, the relevant guarantee by the
Corporation of the obligations of Trust A, Trust I and Trust II and certain
other related agreements, in the aggregate, constitute a full and unconditional
guarantee of the relevant trust's obligations under the Series A1 Securities,
Series I Securities and Series II Securities.
Holders of the Series A1 Securities will be entitled to receive preferential
cumulative cash distributions accumulating from January 16, 1997 and payable
semi-annually in arrears on the fifteenth day of January and July of each year,
commencing July 15, 1997, at the annual rate of 7.90% of the liquidation amount
of $1,000 per Series A1 Security. The Series A1 Securities are subject to
mandatory redemption upon repayment of the Series A1 Debentures at maturity on
January 15, 2027. The maturity date may be shortened under certain circumstances
to a date not earlier than January 15, 2017. In addition, the Series A1
Debentures may be redeemed at the option of the Corporation on or after January
15, 2007. On March 18, 1997, BT Capital Trust B, a wholly-owned subsidiary of
the Corporation, offered to exchange $250 million of its 7.90% Capital
Securities, Series B1 (the "Series B1 Securities"), which had been registered
under the Securities Act of 1933, for any and all of the outstanding 7.90%
Capital Securities, Series A1 of BT Capital Trust A. BT Capital Trust B exists
for the sole purpose of issuing the Series B1 Securities and investing the
proceeds thereof in 7.90% Junior Subordinated Deferrable Interest Debentures,
Series B1 issued by the Corporation. The Series B1 Securities are identical in
all material respects to the Series A1 Securities. On April 21, 1997, $250
million of the Series B1 Securities were exchanged for all of the Series A1
Securities.
Holders of the Series I Securities will be entitled to receive preferential
cumulative cash distributions accumulating from February 5, 1997 and payable
quarterly in arrears on the last day of March, June, September and December of
each year, commencing March 31, 1997, at the annual rate of 8 1/8% of the
liquidation amount of $25 per Series I Security. The Series I Securities are
subject to mandatory redemption upon repayment of the Series I Debentures at
maturity on February 1, 2037. The maturity date may be shortened under certain
circumstances to a date not earlier than February 1, 2002. In addition, the
Series I Debentures may be redeemed at the option of the Corporation on or after
February 1, 2002.
Holders of the Series II Securities will be entitled to receive preferential
cumulative cash distributions accumulating from February 25, 1997, and payable
semi-annually in arrears on the twenty fifth day of February and August of each
year, commencing August 25, 1997, at the annual rate of 7.875% of the
liquidation amount of $1,000 per Series II Security.
<PAGE>
19
BALANCE SHEET ANALYSIS (continued)
The Series II Securities are subject to mandatory redemption upon repayment of
the Series II Debentures at maturity on February 25, 2027. The maturity date may
be shortened under certain circumstances to a date not earlier than February 25,
2012. In addition, the Series II Debentures may be redeemed at the option of the
Corporation on or after February 25, 2007.
TRADING DERIVATIVES
The Corporation actively manages trading positions in a variety of
derivative contracts. Many of the Corporation's trading positions are
established as a result of providing derivative products to meet customers'
demands. To anticipate customer demand for such transactions, the Corporation
also carries an inventory of capital markets instruments and maintains its
access to market liquidity by quoting bid and offer prices to, and trading with,
other market makers. These two activities are essential to provide customers
with capital market products at competitive prices. All positions are reported
at fair value and changes in fair values are reflected in trading revenue as
they occur.
The following tables reflect the gross fair values and balance sheet amounts
of trading derivative financial instruments:
<TABLE>
<CAPTION>
At March 31, Average During
1997 1st Qtr. 1997
------------------ ------------------
(Liabi- (Liabi-
(in millions) Assets lities) Assets lities)
- --------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
OTC Financial Instruments
Interest Rate and Currency
Swap Contracts $ 15,502 $(13,981) $ 16,805 $(15,203)
Interest Rate Contracts
Forwards 40 (42) 73 (75)
Options purchased 1,010 1,138
Options written (1,142) (1,211)
Foreign Exchange Rate Contracts
Spot and Forwards 12,889 (14,231) 13,663 (14,629)
Options purchased 893 1,094
Options written (940) (1,100)
Equity-related contracts 2,882 (2,877) 3,141 (3,328)
Commodity-related and other contracts 594 (640) 614 (635)
Exchange-Traded Options
Interest Rate 12 (12) 18 (8)
Equity 207 (119) 237 (130)
- --------------------------------------- -------- -------- -------- --------
Total Gross Fair Values 34,029 (33,984) 36,783 (36,319)
- --------------------------------------- -------- -------- -------- --------
Impact of Netting Agreements (22,807) 22,807 (24,071) 24,071
- --------------------------------------- -------- -------- -------- --------
$ 11,222(1) $ 12,712
======== ========
$(11,177)(1) $(12,248)
======== ========
</TABLE>
FN
(1) As reflected on the balance sheet in "Trading Assets" and "Trading
Liabilities."
<PAGE>
20
TRADING DERIVATIVES (continued)
<TABLE>
<CAPTION>
At December 31, Average During
1996 4th Qtr. 1996
-------------------- -------------------
(Liabi- (Liabi-
(in millions) Assets lities) Assets lities)
- --------------------------------------- --------- -------- -------- --------
<S> <C> <C> <C> <C>
OTC Financial Instruments
Interest Rate and Currency
Swap Contracts $ 16,582 $(15,394) $ 16,258 $(15,498)
Interest Rate Contracts
Forwards 84 (86) 53 (50)
Options purchased 1,149 1,183
Options written (1,252) (1,313)
Foreign Exchange Rate Contracts
Spot and Forwards 9,855 (10,935) 8,642 (9,893)
Options purchased 917 1,143
Options written (953) (1,104)
Equity-related contracts 2,696 (2,941) 2,389 (2,426)
Commodity-related and other contracts 679 (690) 747 (712)
Exchange-Traded Options
Interest Rate 10 (12) 11 (15)
Foreign exchange - - - (6)
Equity 251 (135) 244 (115)
- --------------------------------------- --------- -------- -------- --------
Total Gross Fair Values 32,223 (32,398) 30,670 (31,132)
- --------------------------------------- --------- -------- -------- --------
Impact of Netting Agreements (20,813) 20,813 (19,580) 19,580
- --------------------------------------- --------- -------- -------- --------
$11,410(1) $ 11,090
========= ========
$(11,585)(1) $(11,552)
======== ========
</TABLE>
FN
(1) As reflected on the balance sheet in "Trading Assets" and "Trading
Liabilities."
END-USER DERIVATIVES
The Corporation, as an end user, utilizes various types of derivative
products (principally interest rate swaps) to manage the interest rate, currency
and other market risks associated with certain liabilities and assets such as
interest-bearing deposits, short-term borrowings and long-term debt, as well as
securities available for sale, loans, investments in non-marketable equity
instruments and net investments in foreign entities. Revenue or expense
pertaining to management of interest rate exposure is predominantly recognized
over the life of the contract as an adjustment to interest revenue or expense.
Total net end-user derivative unrealized losses were $149 million at March
31, 1997 compared with an unrealized gain of $54 million at December 31, 1996.
The $203 million decrease during the first quarter of 1997 was primarily due to
increases in long-term interest rates.
<PAGE>
21
END-USER DERIVATIVES (continued)
The following tables provide the gross unrealized gains and losses for end-
user derivatives. Gross unrealized gains and losses for hedges of securities
available for sale are recognized in the financial statements with the offset as
an adjustment to securities valuation allowance in stockholders' equity. Gross
unrealized gains and losses for hedges of loans, other assets, interest-bearing
deposits, other short-term borrowings, long-term debt, and net investments in
foreign subsidiaries are not yet recognized in the financial statements.
<TABLE>
<CAPTION>
Other Net invest-
short- ments in
Securities Interest- term Long- foreign
(in millions) available Other bearing borrow- term subsi-
March 31, 1997 for sale Loans assets deposits ings debt(1) diaries Total
- ----------------------------- ---------- ----- ------ -------- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Rate Swaps
Pay Variable
Unrealized Gain $ - $ - $ - $ 22 $ 8 $ 148 $ - $ 178
Unrealized (Loss) - (10) - (80) (13) (184) - (287)
- ----------------------------- ---- ----- ------ ----- ---- ----- -------- -----
Pay Variable Net - (10) - (58) (5) (36) - (109)
- ----------------------------- ---- ----- ------ ----- ---- ----- -------- -----
Pay Fixed
Unrealized Gain 12 - - 20 1 22 - 55
Unrealized (Loss) (21) - - (34) (3) (30) - (88)
- ----------------------------- ---- ----- ------ ----- ---- ----- -------- -----
Pay Fixed Net (9) - - (14) (2) (8) - (33)
- ----------------------------- ---- ----- ------ ----- ---- ----- -------- -----
Total Unrealized
Gain 12 - - 42 9 170 - 233
- ----------------------------- ---- ----- ------ ----- ---- ----- -------- -----
Total Unrealized
(Loss) (21) (10) - (114) (16) (214) - (375)
- ----------------------------- ---- ----- ------ ----- ---- ----- -------- -----
Total Net $ (9) $(10) $ - $ (72) $ (7) $ (44) $ - $(142)
============================= ==== ===== ====== ===== ==== ===== ======== =====
Forward Rate Agreements
Unrealized Gain $ - $ - $ - $ 3 $ - $ - $ - $ 3
Unrealized (Loss) - - - (1) - - - (1)
- ----------------------------- ---- ----- ------ ----- ---- ----- -------- -----
Net $ - $ - $ - $ 2 $ - $ - $ - $ 2
============================= ==== ===== ====== ===== ==== ===== ======== =====
Currency Swaps and Forwards
Unrealized Gain $ 3 $ - $ 1 $ - $ 3 $ 63 $ 37 $ 107
Unrealized (Loss) (3) (1) - (1) (4) (22) (44) (75)
- ----------------------------- ---- ----- ------ ----- ---- ----- -------- -----
Net $ - $ (1) $ 1 $ (1) $ (1) $ 41 $ (7) $ 32
============================= ==== ===== ====== ===== ==== ===== ======== =====
Other Contracts (2)
Unrealized Gain $ 1 $ - $ - $ - $ - $ - $ - $ 1
Unrealized (Loss) (37) - (5) - - - - (42)
- ----------------------------- ---- ----- ------ ----- ---- ----- -------- -----
Net $(36) $ - $(5) $ - $ - $ - $ - $ (41)
============================= ==== ===== ====== ===== ==== ===== ======== =====
Total Unrealized
Gain $ 16 $ - $ 1 $ 45 $ 12 $ 233 $ 37 $ 344
Total Unrealized
(Loss) (61) (11) (5) (116) (20) (236) (44) (493)
- ----------------------------- ---- ----- ------ ----- ---- ----- -------- -----
Total Net $(45) $(11) $(4) $ (71) $ (8) $ (3) $ (7) $(149)
============================= ==== ===== ====== ===== ==== ===== ======== =====
</TABLE>
FN
(1) Includes trust preferred capital securities.
(2) Other contracts are principally equity swaps and collars.
<PAGE>
22
END-USER DERIVATIVES (continued)
<TABLE>
<CAPTION>
Other Net invest-
short- ments in
Securities Interest- term Long- foreign
(in millions) available Other bearing borrow- term subsi-
December 31, 1996 for sale Loans assets deposits ings debt(1) diaries Total
- ----------------------------- -------- ----- ------ --------- ------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Rate Swaps
Pay Variable
Unrealized Gain $ 1 $ - $ - $ 62 $ 7 $ 198 $ - $ 268
Unrealized (Loss) - (14) - (23) (6) (93) - (136)
- ----------------------------- ---- ----- ------ ---- ------- ----- -------- -----
Pay Variable Net 1 (14) - 39 1 105 - 132
- ----------------------------- ---- ----- ------ ---- ------- ----- -------- -----
Pay Fixed
Unrealized Gain 3 - - 13 - 1 - 17
Unrealized (Loss) (50) (9) - (45) (1) (28) - (133)
- ----------------------------- ---- ----- ------ ---- ------- ----- -------- -----
Pay Fixed Net (47) (9) - (32) (1) (27) - (116)
- ----------------------------- ---- ----- ------ ---- ------- ----- -------- -----
Total Unrealized
Gain 4 - - 75 7 199 - 285
- ----------------------------- ---- ----- ------ ---- ------- ----- -------- -----
Total Unrealized
(Loss) (50) (23) - (68) (7) (121) - (269)
- ----------------------------- ---- ----- ------ ---- ------- ----- -------- -----
Total Net $(46) $(23) $ - $ 7 $ - $ 78 $ - $ 16
============================= ==== ===== ====== ==== ======= ===== ======== =====
Forward Rate Agreements
Unrealized Gain $ - $ - $ - $ 1 $ - $ - $ - $ 1
Unrealized (Loss) - - - (1) - - - (1)
- ----------------------------- ---- ----- ------ ---- ------- ----- -------- -----
Net $ - $ - $ - $ - $ - $ - $ - $ -
============================= ==== ===== ====== ==== ======= ===== ======== =====
Currency Swaps and Forwards
Unrealized Gain $ - $ - $ 1 $ 27 $ - $ 53 $ 42 $ 123
Unrealized (Loss) - - - (3) - (18) (41) (62)
- ----------------------------- ---- ----- ------ ---- ------- ----- -------- -----
Net $ - $ - $ 1 $ 24 $ - $ 35 $ 1 $ 61
============================= ==== ===== ====== ==== ======= ===== ======== =====
Other Contracts (2)
Unrealized Gain $ - $ - $ - $ - $ - $ - $ - $ -
Unrealized (Loss) (19) - (4) - - - - (23)
- ----------------------------- ---- ----- ------ ---- ------- ----- -------- -----
Net $(19) $ - $(4) $ - $ - $ - $ - $ (23)
============================= ==== ===== ====== ==== ======= ===== ======== =====
Total Unrealized
Gain $ 4 $ - $ 1 $103 $ 7 $ 252 $ 42 $ 409
Total Unrealized
(Loss) (69) (23) (4) (72) (7) (139) (41) (355)
- ----------------------------- ---- ----- ------ ---- ------- ----- -------- -----
Total Net $(65) $(23) $(3) $ 31 $ - $ 113 $ 1 $ 54
============================= ==== ===== ====== ==== ======= ===== ======== =====
</TABLE>
FN
(1) Includes trust preferred capital securities.
(2) Other contracts are principally equity swaps and collars.
<PAGE>
23
END-USER DERIVATIVES (continued)
For pay variable and pay fixed interest rate swaps entered into as an end
user, the weighted average receive rate and pay rate (interest rates were based
on the weighted averages of both U.S. and non-U.S. currencies) by maturity and
corresponding notional amounts were as follows ($ in millions):
<TABLE>
<CAPTION>
At March 31, 1997
Notional
Amount Paying Variable Paying Fixed
------------------------ -----------------------------
Maturing Notional Receive Pay Notional Receive Pay Total
In: Amount Rate Rate Amount Rate Rate Notional
- --------------------- ------- ---- ---- ------ ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 $31,262 5.56% 5.68% $1,627 4.70% 5.46% $32,889
1998-1999 11,571 5.91 5.55 2,716 4.68 5.59 14,287
2000-2001 3,886 6.72 5.69 1,901 5.45 5.92 5,787
2002 and thereafter 7,877 6.98 5.67 1,181 5.81 7.25 9,058
- --------------------- ------- ---- ---- ------ ---- ---- -------
Total $54,596 $7,425 $62,021
===================== ======= ====== =======
</TABLE>
FN
All rates were those in effect at March 31, 1997. Variable rates are primarily
based on LIBOR and may change significantly, affecting future cash flows.
<TABLE>
<CAPTION>
At December 31, 1996
Notional
Amount Paying Variable Paying Fixed
------------------------ -----------------------------
Maturing Notional Receive Pay Notional Receive Pay Total
In: Amount Rate Rate Amount Rate Rate Notional
- ---------------------- ------- ---- ---- ------ ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 $33,275 5.59% 5.52% $4,056 5.23% 5.71% $37,331
1998-1999 7,957 5.96 5.52 2,095 4.82 5.82 10,052
2000-2001 3,614 6.84 5.63 867 4.11 5.67 4,481
2002 and thereafter 5,579 6.79 5.65 932 5.61 7.14 6,511
- ---------------------- ------- ---- ---- ------ ---- ---- -------
Total $50,425 $7,950 $58,375
====================== ======= ====== =======
</TABLE>
FN
All rates were those in effect at December 31, 1996. Variable rates are
primarily based on LIBOR and may change significantly, affecting future cash
flows.
<PAGE>
24
REGULATORY CAPITAL
The Corporation and its banking subsidiaries are subject to various
regulatory capital requirements administered by the federal banking agencies.
The Federal Reserve Board's ("FRB") risk-based capital guidelines addressing the
capital adequacy of bank holding companies and banks (collectively, "banking
organizations") include a definition of capital and a framework for calculating
risk-weighted assets. In addition, these guidelines specify minimum risk-based
capital ratios to be maintained by banking organizations. The FRB also has a
minimum Leverage ratio which is used as a supplement to the risk-based capital
ratios in evaluating the capital adequacy of banking organizations. See pages
19 and 83 of Exhibit 99.1 to this Current Report on Form 8-K for a detailed
discussion of these guidelines and regulations.
In 1996, the FRB and the other U.S. federal banking agencies jointly issued
an amendment to the capital adequacy guidelines to incorporate a measure for
market risk ("the market risk amendment"). Essentially, this amendment changes
the calculation of risk-weighted assets in the trading accounts, and includes
the positions and capital of the "Section 20" securities subsidiary (BT Alex.
Brown Incorporated) in the combined credit risk and market risk capital
calculation of the Corporation. In all other respects (including the exclusion
of the positions and capital of the international insurance entities), the
current capital adequacy guidelines remain unchanged.
Compliance with the market risk amendment is mandatory by January 1, 1998
for those banking organizations that meet certain thresholds with regard to
their trading activity. Banking organizations may choose to adopt early during
1997, with prior approval from their primary federal regulator. See page 22 of
Exhibit 99.1 to this Current Report on Form 8-K for further detailed discussion
on the market risk amendment.
The Corporation adopted the market risk amendment as of March 31, 1997 and
was the first banking organization to adopt such amendment.
Based on their respective regulatory capital ratios as of March 31, 1997,
both the Corporation and Bankers Trust Company ("BTCo") are well capitalized, as
defined in the regulations issued by the FRB and the other federal bank
regulatory agencies setting forth the general capital requirements mandated by
FDICIA, as applicable.
<PAGE>
25
REGULATORY CAPITAL (continued)
The Corporation's and BTCo's ratios are presented in the table below. The
ratios for December 31, 1996 have not been restated for the adoption of the
market risk amendment.
<TABLE>
<CAPTION>
FRB
Minimum To Be Well
Actual Actual for Capitalized
as of as of Capital Under
March 31, December 31, Adequacy Regulatory
1997 1996 Purposes Guidelines
-------- ----------- -------- ----------
<S> <C> <C> <C> <C>
Tier 1 Capital
Corporation 9.2% 9.3% 4.0% 6.0%
BTCo 8.6% 9.3% 4.0% 6.0%
Total Capital
Corporation 15.2% 13.8% 8.0% 10.0%
BTCo 12.1% 12.9% 8.0% 10.0%
Leverage
Corporation 5.1% 5.9% 3.0%(1) 3.0%(1)
BTCo 5.4% 5.3% 3.0%(1) 5.0%
</TABLE>
FN
(1) These minimum levels for the Leverage ratio may be set 100 to 200 basis
points higher depending upon other regulatory criteria.
<PAGE>
26
REGULATORY CAPITAL (continued)
The following are the essential components of the Corporation's and BTCo's
risk-based capital ratios. The December 31, 1996 balances have not been
restated for the adoption of the market risk amendment.
<TABLE>
<CAPTION>
Actual as of Actual as of
March 31, December 31,
(in millions) 1997 1996
- ----------------------------- ------------ ------------
<S> <C> <C>
Corporation
Tier 1 Capital $ 6,299 $ 5,690
Tier 2 Capital 3,542 2,734
Tier 3 Capital 655 -
- ----------------------------- ------- -------
Total Capital $10,496 $ 8,424
============================= ======= =======
Total risk-weighted assets $68,878 $61,213
============================= ======= =======
BTCo
Tier 1 Capital $ 4,896 $ 4,869
Tier 2 Capital 1,949 1,900
- ----------------------------- ------- -------
Total Capital $ 6,845 $ 6,769
============================= ======= =======
Total risk-weighted assets $56,815 $52,484
============================= ======= =======
</TABLE>
Comparing March 31, 1997 to December 31, 1996, the Corporation's Tier 1
Capital ratio declined 10 basis points due to an increase in risk-weighted
assets. The Corporation's risk-weighted assets at March 31, 1997 were $7.7
billion higher than at year-end 1996. The Total Capital ratio of the
Corporation increased 140 basis points due to the issuance of trust preferred
capital securities and the addition of BT Alex. Brown Incorporated's
subordinated debt as a component of Total Capital (as Tier 3 Capital) in
accordance with the market risk amendment.
With the adoption of the market risk amendment, the Corporation's Leverage
ratio decreased 80 basis points as BT Alex. Brown Incorporated's average assets
and capital were included in this calculation for the first time.
BTCo's Tier 1 Capital and Total Capital ratios decreased by 70 basis points
and 80 basis points, respectively, as a result of a $4.3 billion increase in
risk-weighted assets. BTCo's Leverage ratio increased by 10 basis points.
<PAGE>
27
PREFERRED STOCK
During the first quarter of 1997, the Corporation redeemed all 1 million
outstanding shares of its 8.55% Cumulative Preferred Stock, Series I at a price
of $100 million. In addition, the Corporation repurchased approximately $6
million of its Adjustable Rate Cumulative Preferred Stock, Series Q and Series
R.
PREFERRED STOCK OF SUBSIDIARY
During the first quarter of 1997, BT Overseas Finance N.V. ("BTOF"), an
indirect wholly-owned subsidiary of the Corporation, redeemed all 2,500 shares
of its BTOF Auction Rate cumulative Preferred Stock Series A-D at a price of
$250 million.
LIQUIDITY
Liquidity is the ability to have funds available at all times to meet the
commitments of the Corporation. The Corporation has a formal process for
managing global liquidity for the Firm as a whole and for each of its
significant subsidiaries. Management's guiding policy is to maintain
conservative levels of liquidity designed to ensure that the Firm has the
ability to meet its obligations under all reasonably foreseeable circumstances.
Management maintains appropriate asset liquidity and actively manages
liability/capital levels, maturities and diversification. The fundamental
objective is to ensure that, even in the event of a complete loss of access to
the liability markets, the Corporation will be able to continue to fund those
assets that cannot be liquidated in a timely manner.
Most of the Corporation's assets are highly liquid and of high credit
quality. The Corporation maintains excess liquidity through its base of liquid
assets. Liquid assets consist of cash and due from banks, interest-bearing
deposits with banks, federal funds sold, securities purchased under resale
agreements, securities borrowed, trading assets, and securities available for
sale. Securities purchased under resale agreements and securities borrowed are
virtually all short-term in nature and are collateralized with U.S. government
or other marketable securities, or cash equivalents. Trading assets are marked
to market daily and primarily consist of swaps, options and other derivative
contracts, foreign government securities, corporate debt securities, U.S.
government and agency securities, and equity securities. The Corporation's
liquid assets amounted to $97.7 billion as of March 31, 1997 and $97.5 billion
as of December 31, 1996, which equaled 77 percent, and 79 percent of gross total
assets at those dates respectively.
<PAGE>
28
LIQUIDITY (continued)
Cash Flows
The following comments apply to the consolidated statement of cash flows,
which appears on page 5.
Cash and due from banks increased by $111 million during the first quarter
of 1997, as the net cash provided by financing activities was partially offset
by the sum of the net cash used in investing activities and the net cash used in
operating activities. The $5.5 billion of net cash provided by financing
activities was primarily the result of a positive net change in deposits ($5.1
billion) and issuances of long-term debt ($2.5 billion), offset in part by
repayments of long-term debt ($1.6 billion). The $5.0 billion of net cash used
in investing activities was primarily the result of cash outflows from the net
changes in securities purchased under resale agreements ($4.3 billion) and loans
($2.4 billion), and purchases of securities available for sale ($1.8 billion),
partially offset by cash inflows from the net change in securities borrowed
($2.8 billion), and maturities and other redemptions of securities available for
sale ($593 million). The $363 million of net cash used in operating activities
was primarily the result of a negative net change in trading liabilities ($3.0
billion) partially offset by a positive net change in trading assets ($2.0
billion) and receivables and payables from securities transactions ($271
million).
Cash and due from banks decreased by $1.2 billion during the first quarter
of 1996, as the net cash used in investing activities exceeded the sum of the
net cash provided by operating and financing activities. The $7.4 billion of
net cash used in investing activities was primarily the result of cash outflows
from the net change in securities borrowed ($4.6 billion), securities purchased
under resale agreements ($2.3 billion) and purchases of securities available for
sale ($1.6 billion). This was partially offset by cash inflows from maturities
and other redemptions of securities available for sale ($892 million). The $3.8
billion of net cash provided by operating activities primarily resulted from a
$2.9 billion net change in trading assets and trading liabilities. The $2.4
billion of net cash provided by financing activities was primarily the result of
an increase in the net change in securities loaned and securities sold under
repurchase agreements ($8.2 billion) and the proceeds from the issuances of
long-term debt ($1.1 billion), offset in part by cash outflows from a $3.3
billion net change in other short-term borrowings and a $3.3 billion net change
in deposits.
<PAGE>
29
LIQUIDITY (continued)
Interest Rate Sensitivity
Condensed interest rate sensitivity data for the Corporation at March 31,
1997 is presented in the table below. For purposes of this presentation, the
interest-earning/bearing components of trading assets and trading liabilities
are assumed to reprice within three months.
The interest rate gaps reported in the table arise when assets are funded
with liabilities having different repricing intervals, after considering the
effect of off-balance sheet hedging instruments. Since these gaps are actively
managed and change daily as adjustments are made in interest rate views and
market outlook, positions at the end of any period may not be reflective of the
Corporation's interest rate view in subsequent periods. Active management
dictates that longer-term economic views are balanced against prospects of
short-term interest rate changes in all repricing intervals.
<TABLE>
<CAPTION>
By Repricing Interval Non-
interest-
Within 1 - 5 After bearing
(in billions) March 31, 1997 1 year years 5 years funds Total
- ------------------------------- ------ ------ ----- --------- -------
<S> <C> <C> <C> <C> <C>
Assets $ 89.3 $ 4.2 $ 3.4 $ 28.6 $ 125.5
Liabilities and preferred
stock (81.3) (6.6) (4.6) (27.9) (120.4)
Common stockholders' equity (5.1) (5.1)
Effect of off-balance sheet
hedging instruments (13.1) 8.7 4.4 - -
------ ------ ----- --------- -------
Interest rate sensitivity gap $ (5.1) $ 6.3 $ 3.2 $ (4.4) $ -
====== ====== ===== ========= =======
</TABLE>
<PAGE>
30
NONPERFORMING ASSETS
The components of cash basis loans, renegotiated loans, other real estate
and other nonperforming assets are shown below ($ in millions).
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----- -----
<S> <C> <C>
CASH BASIS LOANS
Domestic
Commercial and industrial $ 106 $ 117
Secured by real estate 153 233
- ------------------------------------------------ ----- -----
Total domestic 259 350
- ------------------------------------------------ ----- -----
International
Commercial and industrial 38 57
Secured by real estate 32 39
Financial institutions 1 4
Other 2 2
- ------------------------------------------------ ----- -----
Total international 73 102
- ------------------------------------------------ ----- -----
Total cash basis loans $ 332 $ 452
================================================ ===== =====
Ratio of cash basis loans to total gross loans 1.8% 2.9%
================================================ ===== =====
Ratio of allowance for credit losses to cash
basis loans (1) 228% 171%
================================================ ===== =====
RENEGOTIATED LOANS
Secured by real estate $ 37 $ 37
- ------------------------------------------------ ----- -----
Total renegotiated loans $ 37 $ 37
================================================ ===== =====
OTHER REAL ESTATE $ 188 $ 213
================================================ ===== =====
OTHER NONPERFORMING ASSETS
Assets acquired in credit workouts $ 8 $ 10
- ------------------------------------------------ ----- -----
Total other nonperforming assets $ 8 $ 10
================================================ ===== =====
Loans 90 days or more past due and still
accruing interest $ - $ -
================================================ ===== =====
</TABLE>
FN
(1) Ratio was computed using the allowance for credit losses that has been
allocated to loans of $758 million and $773 million at March 31, 1997 and
December 31, 1996, respectively.
<PAGE>
31
NONPERFORMING ASSETS (continued)
An analysis of the changes in the Corporation's total cash basis loans
during the first quarter of 1997 follows (in millions).
Balance, December 31, 1996 $452
Net transfers to cash basis loans 16
Net paydowns (69)
Charge-offs (33)
Transfers to other real estate (2)
Other (32)
- ----------------------------------- ----
Balance, March 31, 1997 $332
=================================== ====
The Corporation's total cash basis loans amounted to $332 million at March
31, 1997, down $120 million, or 27 percent, from December 31, 1996.
This decline is primarily attributable to decreases in loans secured by real
estate ($87 million) and highly leveraged loans ($29 million). Within cash
basis loans, loans secured by real estate were $185 million and $272 million at
March 31, 1997 and December 31, 1996, respectively. Commercial and industrial
loans to highly leveraged borrowers were $88 million and $117 million at March
31, 1997 and December 31, 1996, respectively.
The following table sets forth the approximate effect on interest revenue of
cash basis loans and renegotiated loans. This disclosure reflects the interest
on loans which were carried on the balance sheet and classified as either cash
basis or renegotiated at March 31 of each year. The rates used in determining
the gross amount of interest which would have been recorded at the original rate
were not necessarily representative of current market rates.
<PAGE>
32
NONPERFORMING ASSETS (continued)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(in millions) 1997 1996
- ----------------------------------------------- ----- -----
<S> <C> <C>
Domestic Loans
Gross amount of interest that would have
been recorded at original rate $ 6 $ 14
Less, interest, net of reversals, recognized
in interest revenue 1 1
- ----------------------------------------------- ----- -----
Reduction of interest revenue 5 13
- ----------------------------------------------- ----- -----
International Loans
Gross amount of interest that would have
been recorded at original rate 2 3
Less, interest, net of reversals, recognized
in interest revenue - -
- ----------------------------------------------- ----- -----
Reduction of interest revenue 2 3
- ----------------------------------------------- ----- -----
Total reduction of interest revenue $ 7 $ 16
=============================================== ===== =====
</TABLE>
HIGHLY LEVERAGED TRANSACTIONS
Amounts included in the table and discussion which follow generally reflect
the definition that the Corporation uses in order to monitor the extent of its
exposure to highly leveraged transactions ("HLTs"). See page 41 of Exhibit 99.1
to this Current Report on Form 8-K for a detailed discussion of the definition.
<TABLE>
<CAPTION>
Highly Leveraged Transactions
March 31, December 31,
(in millions) 1997 1996
- ------------------------------- ------ ------
<S> <C> <C>
Loans
Senior debt $1,580 $1,587
Subordinated debt 70 76
- ------------------------------- ------ ------
Total loans $1,650 $1,663
=============================== ====== ======
Unfunded commitments
Commitments to lend $ 904 $ 875
Letters of credit 148 128
- ------------------------------- ------ ------
Total unfunded commitments $1,052 $1,003
=============================== ====== ======
Equity investments $ 744 $ 665
=============================== ====== ======
Commitments to invest $ 443 $ 425
=============================== ====== ======
</TABLE>
<PAGE>
33
HIGHLY LEVERAGED TRANSACTIONS (continued)
The Corporation's outstanding loans were to 130 separate borrowers in 43
separate industry groups at March 31, 1997, compared to 127 separate borrowers
in 43 separate industry groups at December 31, 1996. The miscellaneous
manufacturing and services group at 11 percent was the only industry
concentration which exceeded 10 percent of total HLT loans outstanding at March
31, 1997.
In addition to the amounts shown in the table above, at March 31, 1997, the
Corporation had issued commitment letters which had been accepted, subject to
documentation and certain other conditions, of $41 million (which were in
various stages of syndication) and had additional HLTs in various stages of
discussion and negotiation.
During the first quarter of 1997, the Corporation originated $755 million of
HLT commitments. It should be noted that the Corporation's loans and
commitments in connection with HLTs fluctuate as new loans and commitments are
made and as loans and commitments are syndicated, participated or paid.
All loans and commitments to finance HLTs are reviewed and approved by
senior credit officers of the Corporation. In addition to a strict
transactional and credit approval process, the portfolio of leveraged loans and
commitments is actively monitored and managed to minimize risk through
diversification among borrowers and industries. As part of this strategy, sell
and hold targets are regularly updated in connection with market opportunities
and the addition of new HLTs. Retention by the Corporation after syndication
and sales of loan participations has typically been less than $50 million, and
the average outstanding per borrower for the portfolio at March 31, 1997 was
less than $13 million. However, at March 31, 1997, the Corporation had total
exposure (loans outstanding plus unfunded commitments) in excess of $50 million
to 10 separate highly leveraged borrowers.
At March 31, 1997, $88 million of the HLT loan portfolio was on a cash
basis. In addition, $4 million of the equity investments in HLT companies
represented assets acquired in credit workouts, which are reported as other
nonperforming assets. Net charge-offs of $16 million of HLT loans were recorded
in the first quarter of 1997. In addition, the Corporation recorded a net gain
of $27.2 million in connection with the sales and/or write-offs of certain
equity investments in highly leveraged companies during the first quarter of
1997.
Generally, fees (typically 2 to 4 percent of the principal amount committed)
and interest charged (typically LIBOR plus 1.5 to 3 percent) on HLT loans are
higher than on other credits. The Corporation does not account for revenue or
expenses from HLTs separately from its other corporate lending activities.
However, it is estimated that transaction fees recognized for lending activities
relating to HLTs were approximately $31 million during the first quarter of 1997
and that as of March 31, 1997, approximately $29 million of fees were deferred
and will be recognized as future revenue.
<PAGE>
34
ACCOUNTING DEVELOPMENTS
In February, 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128
establishes standards for computing and presenting earnings per share ("EPS").
SFAS No. 128 replaces the presentation of primary EPS with basic EPS and fully
diluted EPS with diluted EPS. Basic EPS excludes dilution and is calculated by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted EPS is computed similarly
to fully diluted EPS.
SFAS No. 128 is effective for financial statement periods ending after
December 15, 1997, and requires restatement of all prior period EPS data. The
adoption of SFAS No. 128 is not expected to have a material impact on the
Corporation's fully diluted EPS computations.
<PAGE>
1
Exhibit 99.3
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Increase
THREE MONTHS ENDED JUNE 30, 1997 1996 (Decrease)
- --------------------------------------------------- ------ ------ ----
<S> <C> <C> <C>
NET INTEREST REVENUE
Interest revenue $1,730 $1,495 $235
Interest expense 1,391 1,229 162
- --------------------------------------------------- ------ ------ ----
Net interest revenue 339 266 73
Provision for credit losses - - -
- --------------------------------------------------- ------ ------ ----
Net interest revenue after provision
for credit losses 339 266 73
- --------------------------------------------------- ------ ------ ----
NONINTEREST REVENUE
Trading 315 195 120
Fiduciary and funds management 264 220 44
Corporate finance fees 269 270 (1)
Other fees and commissions 144 134 10
Net revenue from equity investment transactions 9 76 (67)
Securities available for sale gains 68 25 43
Insurance premiums 64 63 1
Other 61 89 (28)
- --------------------------------------------------- ------ ------ ----
Total noninterest revenue 1,194 1,072 122
- --------------------------------------------------- ------ ------ ----
NONINTEREST EXPENSES
Salaries and commissions 303 280 23
Incentive compensation and employee benefits 443 318 125
Agency and other professional service fees 102 100 2
Communication and data services 57 57 -
Occupancy, net 44 41 3
Furniture and equipment 54 45 9
Travel and entertainment 36 28 8
Provision for policyholder benefits 72 78 (6)
Other 112 91 21
- --------------------------------------------------- ------ ------ ----
Total noninterest expenses 1,223 1,038 185
- --------------------------------------------------- ------ ------ ----
Income before income taxes 310 300 10
Income taxes 97 99 (2)
- --------------------------------------------------- ------ ------ ----
NET INCOME $ 213 $ 201 $ 12
=================================================== ====== ====== ====
NET INCOME APPLICABLE TO COMMON STOCK $ 201 $ 187 $ 14
=================================================== ====== ====== ====
Cash dividends declared per common share $1.00 $1.00 $ -
=================================================== ====== ====== ====
EARNINGS PER COMMON SHARE:
PRIMARY $1.94 $1.82 $.12
=================================================== ====== ====== ====
FULLY DILUTED $1.88 $1.77 $.11
=================================================== ====== ====== ====
</TABLE>
<PAGE>
2
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Increase
SIX MONTHS ENDED JUNE 30, 1997 1996 (Decrease)
- --------------------------------------------------- ------ ------ ----
<S> <C> <C> <C>
NET INTEREST REVENUE
Interest revenue $3,411 $3,118 $293
Interest expense 2,740 2,618 122
- --------------------------------------------------- ------ ------ ----
Net interest revenue 671 500 171
Provision for credit losses - 5 (5)
- --------------------------------------------------- ------ ------ ----
Net interest revenue after provision
for credit losses 671 495 176
- --------------------------------------------------- ------ ------ ----
NONINTEREST REVENUE
Trading 626 495 131
Fiduciary and funds management 495 420 75
Corporate finance fees 484 458 26
Other fees and commissions 283 274 9
Net revenue from equity investment transactions 56 103 (47)
Securities available for sale gains 82 40 42
Insurance premiums 127 125 2
Other 107 145 (38)
- --------------------------------------------------- ------ ------ ----
Total noninterest revenue 2,260 2,060 200
- --------------------------------------------------- ------ ------ ----
NONINTEREST EXPENSES
Salaries and commissions 608 547 61
Incentive compensation and employee benefits 819 625 194
Agency and other professional service fees 192 163 29
Communication and data services 113 112 1
Occupancy, net 87 83 4
Furniture and equipment 108 90 18
Travel and entertainment 66 50 16
Provision for policyholder benefits 140 150 (10)
Other 196 171 25
- --------------------------------------------------- ------ ------ ----
Total noninterest expenses 2,329 1,991 338
- --------------------------------------------------- ------ ------ ----
Income before income taxes 602 564 38
Income taxes 189 184 5
- --------------------------------------------------- ------ ------ ----
NET INCOME $ 413 $ 380 $ 33
=================================================== ====== ====== ====
NET INCOME APPLICABLE TO COMMON STOCK $ 388 $ 351 $ 37
=================================================== ====== ====== ====
Cash dividends declared per common share $2.00 $2.00 $ -
=================================================== ====== ====== ====
EARNINGS PER COMMON SHARE:
PRIMARY $3.75 $3.44 $.31
=================================================== ====== ====== ====
FULLY DILUTED $3.64 $3.33 $.31
=================================================== ====== ====== ====
</TABLE>
<PAGE>
3
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
($ in millions, except par value)
<TABLE>
<CAPTION>
June 30, December 31,
1997* 1996
-------- --------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,756 $ 1,568
Interest-bearing deposits with banks 2,334 2,210
Federal funds sold 1,305 1,684
Securities purchased under resale
agreements 25,758 18,002
Securities borrowed 13,285 17,005
Trading assets:
Government securities 12,338 16,858
Corporate debt securities 9,644 8,039
Equity securities 8,066 6,089
Swaps, options and other derivatives 10,824 11,410
Other trading assets 8,329 6,733
- ------------------------------------------------------------ -------- --------
Total trading assets 49,201 49,129
Securities available for sale 7,478 7,920
Loans, net of allowance for credit losses
of $767 at June 30, 1997 and $773 at
December 31, 1996 19,000 15,107
Customer receivables 1,630 1,529
Accounts receivable and accrued interest 3,448 3,077
Other assets 6,368 5,547
- ------------------------------------------------------------ -------- --------
Total $131,563 $122,778
============================================================ ======== ========
LIABILITIES
Noninterest-bearing deposits
Domestic offices $ 3,046 $ 2,600
Foreign offices 1,439 1,013
Interest-bearing deposits
Domestic offices 15,618 9,928
Foreign offices 18,327 16,774
- ------------------------------------------------------------ -------- --------
Total deposits 38,430 30,315
Trading liabilities:
Securities sold, not yet purchased
Government securities 4,958 7,668
Equity securities 5,002 4,174
Other trading liabilities 401 334
Swaps, options and other derivatives 11,064 11,585
- ------------------------------------------------------------ -------- --------
Total trading liabilities 21,425 23,761
Securities loaned and securities sold under
repurchase agreements 22,973 23,454
Other short-term borrowings 19,527 19,409
Accounts payable and accrued expenses 6,170 4,837
Other liabilities, including allowance for
credit losses of $206 at June 30, 1997
and $200 at December 31, 1996 4,195 2,836
Long-term debt not included in risk-based capital 8,468 8,732
Long-term debt included in risk-based capital 2,939 2,576
Mandatorily redeemable capital securities of
subsidiary trusts holding solely junior
subordinated deferrable interest debentures
included in risk-based capital 1,470 730
- ------------------------------------------------------------ -------- --------
Total liabilities 125,597 116,650
- ------------------------------------------------------------ -------- --------
PREFERRED STOCK OF SUBSIDIARY - 250
- ------------------------------------------------------------ -------- --------
STOCKHOLDERS' EQUITY
Preferred stock 703 810
Common stock, $1 par value
Authorized, 300,000,000 shares
Issued: 1997, 104,789,875;
1996, 103,624,555 shares 105 104
Capital surplus 1,491 1,437
Retained earnings 4,168 3,988
Common stock in treasury, at cost: 1997, 6,011,773 shares;
1996, 4,435,226 shares (513) (372)
Other stockholders' equity 12 (89)
- ------------------------------------------------------------ -------- --------
Total stockholders' equity 5,966 5,878
- ------------------------------------------------------------ -------- --------
Total $131,563 $122,778
============================================================ ======== ========
<FN>
* Unaudited
</TABLE>
<PAGE>
4
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in millions)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997 1996
- --------------------------------------------------------- ------ ------
<S> <C> <C>
PREFERRED STOCK
Balance, January 1 $ 810 $ 865
Preferred stock issued - 1
Preferred stock redeemed (100) -
Preferred stock repurchased (7) -
- --------------------------------------------------------- ------ ------
Balance, June 30 703 866
- --------------------------------------------------------- ------ ------
COMMON STOCK
Balance, January 1 104 103
Issuance of common stock 1 1
- --------------------------------------------------------- ------ ------
Balance, June 30 105 104
- --------------------------------------------------------- ------ ------
CAPITAL SURPLUS
Balance, January 1 1,437 1,386
Issuance of common stock 31 14
Repurchase and retirement of common stock (4) (1)
Common stock distributed under employee
benefit plans 27 14
- --------------------------------------------------------- ------ ------
Balance, June 30 1,491 1,413
- --------------------------------------------------------- ------ ------
RETAINED EARNINGS
Balance, January 1 3,988 3,702
Net income 413 380
Cash dividends declared
Preferred stock (26) (29)
Common stock (165) (165)
Treasury stock distributed under employee benefit plans (42) (24)
- --------------------------------------------------------- ------ ------
Balance, June 30 4,168 3,864
- --------------------------------------------------------- ------ ------
COMMON STOCK IN TREASURY, AT COST
Balance, January 1 (372) (336)
Purchases of stock (274) (38)
Restricted stock granted (cancelled), net (17) 19
Treasury stock distributed under employee benefit plans 150 82
- --------------------------------------------------------- ------ ------
Balance, June 30 (513) (273)
- --------------------------------------------------------- ------ ------
COMMON STOCK ISSUABLE - STOCK AWARDS
Balance, January 1 526 233
Deferred stock awards granted (cancelled), net 61 63
Deferred stock distributed (18) (1)
- --------------------------------------------------------- ------ ------
Balance, June 30 569 295
- --------------------------------------------------------- ------ ------
DEFERRED COMPENSATION - STOCK AWARDS
Balance, January 1 (308) (151)
Deferred stock awards (granted) cancelled, net (61) (62)
Restricted stock (granted) cancelled, net 16 (19)
Amortization of deferred compensation, net 125 82
- --------------------------------------------------------- ------ ------
Balance, June 30 (228) (150)
- --------------------------------------------------------- ------ ------
CUMULATIVE TRANSLATION ADJUSTMENTS
Balance, January 1 (364) (348)
Translation adjustments 26 (27)
Income taxes applicable to translation adjustments (23) 18
- --------------------------------------------------------- ------ ------
Balance, June 30 (361) (357)
- --------------------------------------------------------- ------ ------
SECURITIES VALUATION ALLOWANCE
Balance, January 1 57 19
Change in unrealized net gains, after applicable
income taxes and minority interest (25) (18)
- --------------------------------------------------------- ------ ------
Balance, June 30 32 1
- --------------------------------------------------------- ------ ------
TOTAL STOCKHOLDERS' EQUITY, JUNE 30 $5,966 $5,763
========================================================= ====== ======
</TABLE>
<PAGE>
5
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997 1996
- ------------------------------------------------------- ------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 413 $ 380
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses - 5
Provision for policyholder benefits 140 150
Deferred income taxes (65) 97
Depreciation and other amortization
and accretion 184 131
Other, net 91 (60)
- ------------------------------------------------------- ------- --------
Earnings adjusted for noncash charges and credits 763 703
Net change in:
Trading assets 530 3,677
Trading liabilities (2,127) (236)
Receivables and payables from securities
transactions 644 1,346
Customer receivables 59 (94)
Other operating assets and liabilities, net 877 370
Securities available for sale gains (82) (40)
- ------------------------------------------------------- ------- --------
Net cash provided by operating activities 664 5,726
- ------------------------------------------------------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in:
Interest-bearing deposits with banks (136) (79)
Federal funds sold 379 489
Securities purchased under resale agreements (7,756) (11,966)
Securities borrowed 3,720 (2,558)
Loans (3,982) (1,500)
Securities available for sale:
Purchases (2,836) (2,918)
Maturities and other redemptions 1,897 1,823
Sales 237 260
Acquisitions of premises and equipment (134) (89)
Other, net 140 115
- ------------------------------------------------------- ------- --------
Net cash used in investing activities (8,471) (16,423)
- ------------------------------------------------------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in:
Deposits 7,916 (517)
Securities loaned and securities sold under repurchase
agreements (455) 9,023
Other short-term borrowings 359 (26)
Issuances of long-term debt* 3,221 2,018
Repayments of long-term debt (2,313) (366)
Issuances of common stock 23 14
Repurchase and retirement of common stock (4) (1)
Redemptions of preferred stock of subsidiary (250) -
Redemptions and repurchases of preferred stock (107) -
Purchases of treasury stock (274) (38)
Cash dividends paid (191) (194)
Other, net 89 63
- ------------------------------------------------------- ------- --------
Net cash provided by financing activities 8,014 9,976
- ------------------------------------------------------- ------- --------
Net effect of exchange rate changes on cash (19) 12
- ------------------------------------------------------- ------- --------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 188 (709)
Cash and due from banks, beginning of period 1,568 2,399
- ------------------------------------------------------- ------- --------
Cash and due from banks, end of period $ 1,756 $ 1,690
======================================================= ======= ========
Interest paid $ 2,539 $ 2,649
======================================================= ======= ========
Income taxes paid, net $ 71 $ 214
======================================================= ======= ========
Noncash investing activities $ 86 $ 50
======================================================= ======= ========
Noncash financing activities:
Conversion of debt to preferred stock $ - $ 1
======================================================= ======= ========
<FN>
</TABLE>
* Includes $740 million at June 30, 1997, related to mandatorily redeemable
capital securities of subsidiary trusts holding solely junior subordinated
deferrable interest debentures included in risk-based capital.
Certain prior period amounts have been reclassified to conform to the current
presentation.
<PAGE>
6
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED SCHEDULE OF NET INTEREST REVENUE
(in millions)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
INTEREST REVENUE
Interest-bearing deposits with banks $ 82 $ 40 $ 147 $ 83
Federal funds sold 61 31 110 59
Securities purchased under resale agreements 315 276 645 470
Securities borrowed 176 243 359 471
Trading assets 648 519 1,248 1,292
Securities available for sale
Taxable 96 110 206 200
Exempt from federal income taxes 6 5 16 12
Loans 314 241 616 473
Customer receivables 32 30 64 58
- ---------------------------------------------- ------ ------ ------ ------
Total interest revenue 1,730 1,495 3,411 3,118
- ---------------------------------------------- ------ ------ ------ ------
INTEREST EXPENSE
Interest-bearing deposits
Domestic offices 200 84 346 172
Foreign offices 259 216 509 463
Trading liabilities 125 135 276 461
Securities loaned and securities sold under
repurchase agreements 335 405 674 719
Other short-term borrowings 276 241 567 515
Long-term debt 166 148 314 288
Mandatorily redeemable capital securities of
subsidiary trusts holding solely junior
subordinated deferrable interest debentures
included in risk-based capital 30 - 54 -
- ---------------------------------------------- ------ ------ ------ ------
Total interest expense 1,391 1,229 2,740 2,618
- ---------------------------------------------- ------ ------ ------ ------
NET INTEREST REVENUE $ 339 $ 266 $ 671 $ 500
============================================== ====== ====== ====== ======
</TABLE>
<PAGE>
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Bankers Trust New York Corporation (the "Parent Company") and subsidiaries
(collectively, the "Corporation", or the "Firm") earned $213 million for the
three months ended June 30, 1997, or $1.88 fully diluted earnings per share. In
the second quarter of 1996, the Corporation earned $201 million, or $1.77 fully
diluted earnings per share.
For the first six months of 1997, the Corporation earned $413 million, or
$3.64 fully diluted earnings per share. For the first six months of 1996, the
Corporation earned $380 million, or $3.33 fully diluted earnings per share.
THE MERGER
On September 1, 1997, Alex. Brown Incorporated ("Alex. Brown") was merged into a
wholly-owned subsidiary of Bankers Trust New York Corporation (the "Merger").
In conjunction with the Merger, each share of Alex. Brown common stock then
outstanding was converted into 0.83 shares of Bankers Trust New York
Corporation's common stock (the "Exchange Ratio"). The Merger was treated as a
tax free exchange.
The supplemental consolidated financial statements give retroactive effect to
the Merger in a transaction accounted for as a pooling of interests. The
pooling of interests method of accounting requires the restatement of all
periods presented as if Alex. Brown and Bankers Trust New York Corporation had
always been combined. Generally accepted accounting principles proscribe giving
effect to a consummated business combination accounted for by the pooling of
interests method in financial statements that do not include the date of
consummation. The supplemental consolidated financial statements do not extend
through the date of consummation. However, they will become the historical
consolidated financial statements of Bankers Trust New York Corporation together
with its subsidiaries after financial statements covering the date of
consummation of the business combination are issued. The supplemental
consolidated statement of changes in stockholders' equity reflects the accounts
of the Corporation as if the additional common stock had been issued during all
the periods presented. The supplemental consolidated financial statements,
including the notes thereto, should be read in conjunction with the historical
consolidated financial statements of Alex. Brown and Bankers Trust New York
Corporation, included in their Annual Reports on Form 10-K for the fiscal years
ended December 31, 1996.
ORGANIZATIONAL UNIT RESULTS
Organizational Unit business results are determined based on the
Corporation's internal management accounting process, which allocates revenue
and expenses among the organizational units. Because the Corporation's business
is diverse in nature and its operations are integrated, it is impractical to
segregate respective contributions of the organizational units with precision.
As a result, estimates and judgments have been made to apportion revenue and
expense items. In addition, certain revenue and expenses have been segregated
and reported in Corporate/Other because, in the opinion of management, they
could not be reasonably allocated or because their contributions to a particular
organizational unit would be distortive. The internal management accounting
process, unlike financial accounting in accordance with generally accepted
accounting principles, is based on the way management views its business and is
not necessarily comparable with similar information disclosed by other financial
institutions. In order to provide comparability from one period to the next,
the Corporation will generally restate this analysis to conform with material
changes in the allocation process and/or significant changes in organizational
structure.
<PAGE>
8
ORGANIZATIONAL UNIT RESULTS (continued)
The information presented below reflects the results by Organizational
Units. The historical amounts of Alex. Brown have been included in Investment
Banking, Investment Management and Corporate/Other.
<TABLE>
<CAPTION>
Total Non- Pretax Net
Three Months Ended June 30, 1997 Total Net interest Income/ Income/
(in millions) Revenue Expenses (Loss) (Loss)
- ---------------------------------- ------ ------ ----- -----
<S> <C> <C> <C> <C>
Investment Banking $ 479 $ 284 $ 195 $ 134
Risk Management Services 107 97 10 7
Trading & Sales 168 84 84 59
Investment Management 192 160 32 20
Client Processing Services 208 182 26 18
Australia/New Zealand 132 99 33 23
Asia 11 31 (20) (14)
Latin America 172 117 55 39
Corporate/Other 64 169 (105) (73)
- ---------------------------------- ------ ------ ----- -----
Total $1,533 $1,223 $ 310 $ 213
================================== ====== ====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Total Non- Pretax Net
Three Months Ended June 30, 1996 Total Net interest Income/ Income/
(in millions) Revenue Expenses (Loss) (Loss)
- ---------------------------------- ------ ------ ----- -----
<S> <C> <C> <C> <C>
Investment Banking $ 439 $ 224 $ 215 $ 143
Risk Management Services 38 64 (26) (18)
Trading & Sales 84 59 25 17
Investment Management 189 157 32 20
Client Processing Services 197 169 28 20
Australia/New Zealand 114 67 47 33
Asia 36 26 10 7
Latin America 166 118 48 33
Corporate/Other 75 154 (79) (54)
- ---------------------------------- ------ ------ ----- -----
Total $1,338 $1,038 $ 300 $ 201
================================== ====== ====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Total Non- Pretax Net
Six Months Ended June 30, 1997 Total Net interest Income/ Income/
(in millions) Revenue Expenses (Loss) (Loss)
- ---------------------------------- ------ ------ ----- -----
<S> <C> <C> <C> <C>
Investment Banking $ 881 $ 526 $ 355 $ 244
Risk Management Services 212 186 26 18
Trading & Sales 302 157 145 102
Investment Management 378 311 67 43
Client Processing Services 404 360 44 31
Australia/New Zealand 261 180 81 57
Asia 51 60 (9) (6)
Latin America 315 227 88 62
Corporate/Other 127 322 (195) (138)
- ---------------------------------- ------ ------ ----- -----
Total $2,931 $2,329 $ 602 $ 413
================================== ====== ====== ===== =====
</TABLE>
<PAGE>
9
ORGANIZATIONAL UNIT RESULTS (continued)
<TABLE>
<CAPTION>
Total Non- Pretax Net
Six Months Ended June 30, 1996 Total Net interest Income/ Income/
(in millions) Revenue Expenses (Loss) (Loss)
- -------------------------------- --------- ---------- -------- --------
<S> <C> <C> <C> <C>
Investment Banking $ 801 $ 418 $ 383 $255
Risk Management Services 101 133 (32) (22)
Trading & Sales 174 115 59 41
Investment Management 362 300 62 39
Client Processing Services 379 325 54 38
Australia/New Zealand 212 131 81 57
Asia 69 52 17 12
Latin America 302 226 76 53
Corporate/Other 155 291 (136) (93)
- -------------------------------- ------ ------ ----- ----
Total $2,555 $1,991 $ 564 $380
================================ ====== ====== ===== ====
</TABLE>
The Investment Banking business contributed net income of $134 million in
------------------
the second quarter, down from $143 million a year ago. The decrease from the
prior year period reflected lower corporate underwriting revenues and higher
personnel-related costs. Revenue from private equity investments declined from
the high level of the second quarter of 1996. For the first six months of 1997,
net income was $244 million versus $255 million for the first six months of
1996. The year-over-year decrease resulted primarily from lower corporate
underwriting revenues.
Risk Management Services recorded net income of $7 million in the second
------------------------
quarter of 1997, up $25 million from the second quarter of 1996. Net income was
$18 million in the first half of 1997 compared to a net loss of $22 million in
the first half of 1996. The prior year periods reflected losses incurred in the
commodity derivatives books when copper prices dropped sharply. Beginning in
1997, the responsibility for managing the metals and mining commodities book was
transferred to Australia/NZ.
------------
Net income from the Trading & Sales business, at $59 million, was up $42
---------------
million from the second quarter of 1996. Net income was $102 million for the
first six months of 1997 compared to $41 million for the prior year period. The
current quarter and year-to-date improvement was largely due to strong arbitrage
activities as compared to the prior year periods.
The Corporation's Investment Management business, which for reporting
---------------------
purposes does not include funds management activities in Australia/NZ, reported
net income of $20 million for the current quarter, even with the 1996 comparable
period. Net income was $43 million in the first half of 1997, up $4 million
from the first half of 1996. Improved performance fees contributed to the
increase from the prior year quarter and the first six months of 1996. At June
30, 1997, assets under management in this organizational unit were approximately
$256 billion, compared to $202 billion at June 30, 1996.
<PAGE>
10
ORGANIZATIONAL UNIT RESULTS (continued)
Client Processing Services contributed $18 million of net income in the
--------------------------
second quarter of 1997, down $2 million from the 1996 second quarter. Revenues
of $208 million were up $11 million from the second quarter of 1996. The
decline in net income from the year ago quarter reflected higher personnel-
related costs and technology costs. Net income was $31 million in the first
half of 1997 compared with $38 million in the first half of 1996.
Net income of the Australia/NZ business was $23 million in the second
------------
quarter of 1997, down $10 million from the second quarter of 1996. The decrease
from the prior year quarter was primarily due to higher personnel-related costs
as a result of increased staff levels offset in part by improved revenues from
trading activities and fiduciary and funds management. At June 30, 1997, assets
under management in Australia/NZ's investment management business were
approximately $28 billion, compared to $24 billion at June 30, 1996. Net income
for the first six months of 1997 was $57 million, even with the first six months
of 1996.
Asia net loss was $14 million in the second quarter of 1997 compared to net
----
income of $7 million in the second quarter of 1996. Thailand is currently
experiencing a significant reduction in its economic growth and the Thai stock
market has experienced a steep decline. As a result, the Corporation recognized
a decline in value of its unconsolidated investment in a Thai finance company.
Partially offsetting this decline, the Corporation recognized trading gains from
favorable Thai baht currency positions. The combined effect of these factors in
Thailand resulted in a pre-tax net loss of $22 million. For the first six
months of 1997, the Asia organizational unit incurred a net loss of $6 million
compared to net income of $12 million in the prior year period. The decrease
from the prior year period resulted from the losses incurred in Thailand as
previously mentioned.
Latin America net income was $39 million in the second quarter of 1997, up
-------------
$6 million from the second quarter of 1996. A pre-tax gain of $22 million ($15
million after-tax) was recorded during the current quarter resulting from the
completion of the first stage of the sale of 50% of the Corporation's stake in
Consorcio, the largest life insurance and annuity firm in Chile. The prior
year's quarter included a $31 million pre-tax gain on the sale of Compensa,
which was the smaller of the Corporation's Chilean insurance subsidiaries. Net
income for the first half of 1997 was $62 million compared to $53 million in the
first half of 1996.
Corporate/Other net loss was $73 million in the second quarter of 1997,
---------------
compared with a net loss of $54 million in the second quarter of 1996. For the
first six months of 1997, this unit incurred a net loss of $138 million versus a
net loss of $93 million in the prior year period. The first half of 1997
included the effects of increased incentive compensation and employee benefits
and consulting expenses associated with several strategic and infrastructure
improvement projects. The prior year period included higher levels of legal and
professional fees.
<PAGE>
11
REVENUE
Net Interest Revenue
The table below presents net interest revenue, average balances and average
rates. The tax equivalent adjustment is made to present the revenue and yields
on certain assets, primarily tax-exempt securities and loans, as if such revenue
were taxable.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1997 1996 1997 1996
-------- ------- -------- -------
<S> <C> <C> <C> <C>
NET INTEREST REVENUE (in millions)
Book basis $ 339 $ 266 $ 671 $ 500
Tax equivalent adjustment 6 4 13 8
- -------------------------------------- -------- ------- -------- -------
Fully taxable basis $ 345 $ 270 $ 684 $ 508
====================================== ======== ======= ======== =======
AVERAGE BALANCES (in millions)
Interest-earning assets $102,280 $93,324 $100,193 $90,496
Interest-bearing liabilities 98,695 87,564 95,451 85,634
- -------------------------------------- -------- ------- -------- -------
Earning assets financed by
noninterest-bearing funds $ 3,585 $ 5,760 $ 4,742 $ 4,862
====================================== ======== ======= ======== =======
AVERAGE RATES (fully taxable basis)
Yield on interest-earning assets 6.81% 6.46% 6.89% 6.95%
Cost of interest-bearing liabilities 5.65 5.65 5.79 6.15
- -------------------------------------- -------- ------- -------- -------
Interest rate spread 1.16 .81 1.10 .80
Contribution of noninterest-bearing
funds .19 .35 .28 .33
- -------------------------------------- -------- ------- -------- -------
Net interest margin 1.35% 1.16% 1.38% 1.13%
====================================== ======== ======= ======== =======
</TABLE>
Net interest revenue for the second quarter of 1997 totaled $339 million, up
$73 million, or 27 percent, from the second quarter of 1996. The $73 million
increase in net interest revenue was primarily due to an $84 million increase in
trading-related net interest revenue, which totaled $148 million for the second
quarter of 1997. Nontrading-related net interest revenue totaled $191 million
for the second quarter of 1997 versus $202 million for the comparable period in
1996.
Net interest revenue was $671 million for the first six months of 1997, up
$171 million, or 34 percent from the first half of 1996. Nontrading-related net
interest revenue totaled $388 million for the first six months of 1997 versus
$405 million for the comparable period in 1996.
<PAGE>
12
REVENUE (continued)
In the second quarter of 1997, the interest rate spread was 1.16 percent
compared to .81 percent in the prior year period. Net interest margin increased
to 1.35 percent from 1.16 percent. The yield on interest earning assets rose by
35 basis points and the cost of interest-bearing liabilities was flat. Average
interest-earning assets totaled $102.3 billion for the second quarter of 1997,
up $9.0 billion from the same period in 1996. The increase was primarily
attributable to growth in the loan portfolio.
Trading Revenue
The Firm's trading and risk management businesses include significant
activities in interest rate instruments and related derivatives. These
activities can periodically shift revenue between trading and net interest,
depending on a variety of factors, including risk management strategies.
Therefore, the Corporation views trading revenue and trading-related net
interest revenue together.
Combined trading revenue and trading-related net interest revenue for the
second quarter of 1997 totaled $463 million, up $204 million from the second
quarter of 1996. Combined trading revenue and trading-related net interest
revenue for the first six months of 1997 was $909 million, up $319 million from
the $590 million reported in the first half of 1996.
<PAGE>
13
REVENUE (continued)
The table below presents the Corporation's trading revenue and trading-
related net interest revenue by major category of market risk. These categories
are based on management's view of the predominant underlying risk exposure of
each of the Firm's trading positions.
<TABLE>
<CAPTION>
Trading-
Related
Net
Trading Interest
(in millions) Revenue Revenue Total
- -------------------------------- ------- ---- ----
<S> <C> <C> <C>
Quarter ended June 30, 1997
Interest rate risk $174 $154 $328
Foreign exchange risk 48 - 48
Equity and commodity risk 93 (6) 87
- -------------------------------- ---- ---- ----
Total $315 $148 $463
================================ ==== ==== ====
Quarter ended June 30, 1996
Interest rate risk $ 84 $ 59 $143
Foreign exchange risk 63 - 63
Equity and commodity risk 48 5 53
- -------------------------------- ---- ---- ----
Total $195 $ 64 $259
================================ ==== ==== ====
Six Months ended June 30, 1997
Interest rate risk $352 $303 $655
Foreign exchange risk 86 - 86
Equity and commodity risk 188 (20) 168
- -------------------------------- ---- ---- ----
Total $626 $283 $909
================================ ==== ==== ====
Six Months ended June 30, 1996
Interest rate risk $250 $112 $362
Foreign exchange risk 80 - 80
Equity and commodity risk 165 (17) 148
- -------------------------------- ---- ---- ----
Total $495 $ 95 $590
================================ ==== ==== ====
</TABLE>
Second Quarter 1997 vs. Second Quarter 1996
Interest Rate Risk - The increase in revenue was primarily due to strong
results in the bond market and increased activity in foreign markets including
Europe, Australia and New Zealand.
Foreign Exchange Risk - Foreign exchange revenue decreased from the same
period last year principally due to a decline in revenue from activities in
Australia.
Equity and Commodity Risk - Total trading and trading-related net interest
revenue increased from the same period last year. The prior year period
reflected losses incurred in the commodity derivatives books when copper prices
dropped sharply.
<PAGE>
14
REVENUE (continued)
Six Months 1997 vs. Six Months 1996
Interest Rate Risk - The increase in revenue was principally due to strong
results in the bond market, increased flow of client trading services and
increased revenue from proprietary trading activities. Improved performance in
Asia, Australia and New Zealand also contributed to the increase.
Foreign Exchange Risk - Foreign exchange risk revenue increased compared to
the same period last year principally due to improved revenues from proprietary
and customer activities.
Equity and Commodity Risk - The increase in total trading and trading
related revenue as compared to the same period last year is principally due to
strong revenue from precious metals in the first half of 1997 and nonrecurring
losses in commodity derivatives in the first half of 1996.
Noninterest Revenue (Excluding Trading)
Second Quarter 1997 vs. Second Quarter 1996
Fiduciary and funds management revenue was $264 million in the second
quarter of 1997 up $44 million from the prior year period. Client processing
services, funds management and global private banking commissions contributed to
this increase.
The Corporation's private equity investment activities largely contributed
to the changes in securities available for sale gains (up $43 million) and net
revenue from equity investment transactions (down $67 million).
<PAGE>
15
REVENUE (continued)
Six Months 1997 vs. Six Months 1996
Fiduciary and funds management fees of $495 million increased $75 million
from the first six months of 1996. Higher revenue from funds management, client
processing services and global private banking commissions were the primary
contributors to this increase.
Corporate finance fees totaled $484 million for the first half of 1997, up
$26 million from the prior year period, primarily due to higher fees for
arranging financings, merger and acquisition fees and loan syndication fees.
The Corporation's private equity investment activities largely contributed
to the changes in securities available for sale gains (up $42 million) and net
revenue from equity investment transactions (down $47 million).
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
The provision for credit losses is determined based upon management's
evaluation as to the amount needed to maintain the allowance for credit losses
at a level considered appropriate in relation to the risk of losses inherent in
the portfolio.
No provision for credit losses was required for the current or prior year's
second quarter. Net charge-offs for the second quarter were $2 million,
compared with $15 million a year ago.
In accordance with the American Institute of Certified Public Accountant's
Banks and Savings Institutions Audit and Accounting Guide, the Corporation has
allocated its total allowance for credit losses as follows: $767 million as a
reduction of loans, and $206 million as other liabilities related to other
credit-related items. The Corporation continues to believe that the total
allowance for credit losses is available for credit losses in its entire
portfolio, which is comprised of loans, credit-related commitments, derivatives
and other financial instruments. Due to a multitude of complex and changing
factors that are collectively weighed in determining the adequacy of the
allowance for credit losses, management expects that the allocation of the total
allowance for credit losses may be adjusted as risk factors change. Prior
period amounts have not been restated.
<PAGE>
16
PROVISION AND ALLOWANCE FOR CREDIT LOSSES (continued)
The provision for credit losses and the other changes in the allowance for
credit losses are shown below (in millions).
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
------------- ----------------
Allowance for credit losses 1997 1996 1997 1996
- ------------------------------------ ----- ----- ----- -----
<S> <C> <C> <C> <C>
Balance, beginning of period $ 958 $ 987 $ 973 $ 992
Net charge-offs
Charge-offs 3 21 36 49
Recoveries 1 6 19 24
- ------------------------------------ ----- ----- ----- -----
Total net charge-offs(1) 2 15 17 25
Provision for credit losses - - - 5
Allowance related to acquisition
of an affiliate 17 - 17 -
- ------------------------------------ ----- ----- ----- -----
Balance, end of period(2) $ 973 $ 972 $ 973 $ 972
==================================== ===== ===== ===== =====
(1) Components of Net Charge-offs:
Secured by real estate $ 2 $ - $ 1 $ 1
Real estate related - - - 4
Highly leveraged - 3 16 23
Other 1 13 1 1
Refinancing country (1) (1) (1) (4)
- ------------------------------------ ----- ----- ----- -----
Total $ 2 $ 15 $ 17 $ 25
==================================== ===== ===== ===== =====
(2) Allocation:
Loans $ 767
Other Liabilities 206
- ------------------------------------ -----
Balance, end of period $ 973
==================================== =====
</TABLE>
The allowance for credit losses that has been allocated to loans, was $767
million at June 30, 1997 compared to $773 million at December 31, 1996. The
allowance was equal to 251 percent and 171 percent of total cash basis loans at
June 30, 1997 and December 31, 1996, respectively. These ratios were computed
using the amounts that were allocated to loans.
Impaired loans under SFAS 114, which consisted of total cash basis loans and
renegotiated loans, were $342 million and $489 million at June 30, 1997 and
December 31, 1996, respectively. Included in these amounts were $128 million
and $227 million of loans which required a valuation allowance of $31 million
and $57 million at those same dates, respectively.
<PAGE>
17
EXPENSES
Second Quarter 1997 vs. Second Quarter 1996
Total noninterest expenses of $1.223 billion increased by $185 million, or
18 percent, from the second quarter of 1996. Salaries and commissions expense
increased $23 million, or 8 percent, principally due to a 7 percent increase in
the average number of employees and to annual pay increases. Incentive
compensation and employee benefits, the largest component of noninterest
expenses, increased $125 million due to higher profitability and the increase in
the average number of employees.
Six Months 1997 vs. Six Months 1996
Total noninterest expenses of $2.329 billion increased by $338 million for
the first six months of 1997. Salaries and commissions expense increased $61
million, or 11 percent, due to an increase in the average number of employees
and to annual pay increases. Incentive compensation and employee benefits
increased $194 million due to higher profitability and an increase in the
average number of employees.
INCOME TAXES
Income tax expense for the second quarter of 1997 amounted to $97 million,
compared with $99 million for the second quarter of 1996. For the first six
months of 1997, income tax expense was $189 million compared with $184 million
in the first half of 1996. The effective tax rate was 31 percent for both the
current quarter and six months ended June 30, 1997 and 33 percent for the prior
year quarter and six months ended June 30, 1996.
EARNINGS PER COMMON SHARE
Primary earnings per common share amounts were computed by subtracting from
earnings the dividend requirements on preferred stock to arrive at net income
applicable to common stock ("net income applicable to common stock") and
dividing this amount by the average number of common and common equivalent
shares outstanding during the period. Fully diluted earnings per share amounts
were calculated by adjusting net income applicable to common stock for interest
expense on the convertible subordinated debentures and dividing this amount by
the average number of common and common equivalent shares outstanding during the
period.
For primary earnings per share, the average number of common and common
equivalent shares outstanding was the sum of the average number of shares of
common stock outstanding and the incremental number of shares issuable under
outstanding stock options and deferred stock awards that had a dilutive effect
as computed under the treasury stock method. Fully diluted earnings per share
further assumes the conversion into common stock of convertible subordinated
debentures, if dilutive. Under the treasury stock method, the number of
incremental shares is determined by assuming the issuance of the outstanding
stock options and deferred stock awards
<PAGE>
18
EARNINGS PER COMMON SHARE (continued)
reduced by the number of shares assumed to be repurchased from the issuance
proceeds, using the market price of the Parent Company's common stock. For
primary earnings per share, this market price is the average market price for
the period, while for fully diluted earnings per share, it is the period-end
market price, if it is higher than the average market price.
The earnings applicable to common stock and the number of shares used for
primary and fully diluted earnings per share were as follows (in millions):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income applicable to common stock -
primary $ 201 $ 187 $ 388 $ 351
Net income applicable to common stock -
assuming full dilution 201 187 389 351
Average number of common shares outstanding 96.887 97.934 97.162 97.575
Average common and common equivalent shares
outstanding - primary 102.957 102.470 103.365 101.774
Average common and common equivalent shares
outstanding assuming full dilution 106.890 105.992 107.046 105.433
</TABLE>
<PAGE>
19
BALANCE SHEET ANALYSIS
The following table highlights the changes in the balance sheet. Since
quarter-end balances can be distorted by one-day fluctuations, an analysis of
changes in the quarterly averages is provided to give a better indication of
balance sheet trends.
<TABLE>
<CAPTION>
CONDENSED AVERAGE BALANCE SHEETS
--------------------------------
(in millions)
2nd Qtr 1st Qtr 4th Qtr
1997 1997 1996
-------- -------- --------
<S> <C> <C> <C>
ASSETS
Interest-earning
Interest-bearing deposits with banks $ 4,330 $ 3,396 $ 3,545
Federal funds sold 4,313 3,723 2,011
Securities purchased under resale
agreements 23,433 22,157 22,405
Securities borrowed 14,488 15,043 15,865
Trading assets 28,092 28,224 31,617
Securities available for sale
Taxable 6,571 6,988 6,777
Exempt from federal income taxes 1,136 1,148 1,077
- ------------------------------------------------ -------- -------- --------
Total securities available for sale 7,707 8,136 7,854
Loans
Domestic offices 8,952 8,267 8,226
Foreign offices 9,302 7,437 7,032
- ------------------------------------------------ -------- -------- --------
Total loans 18,254 15,704 15,258
- ------------------------------------------------ -------- -------- --------
Customer receivables 1,663 1,681 1,683
- ------------------------------------------------ -------- -------- --------
Total interest-earning assets 102,280 98,064 100,238
Noninterest-earning
Cash and due from banks 1,612 1,336 1,400
Noninterest-earning trading assets 20,166 18,977 17,727
All other assets 9,136 8,551 8,519
Allowance for credit losses (770) (802) (988)
- ------------------------------------------------ -------- -------- --------
Total $132,424 $126,126 $126,896
================================================ ======== ======== ========
LIABILITIES
Interest-bearing
Interest-bearing deposits
Domestic offices $ 14,690 $ 11,748 $ 8,738
Foreign offices 20,218 19,661 18,812
- ------------------------------------------------ -------- -------- --------
Total interest-bearing deposits 34,908 31,409 27,550
Trading liabilities 4,616 6,103 9,748
Securities loaned and securities sold
under repurchase agreements 25,569 22,850 26,214
Other short-term borrowings 20,862 19,261 18,982
Long-term debt 11,270 11,377 11,372
Mandatorily redeemable capital securities
of subsidiary trusts holding solely junior
subordinated deferrable interest debentures 1,470 1,195 165
- ------------------------------------------------ -------- -------- --------
Total interest-bearing liabilities 98,695 92,195 94,031
Noninterest-bearing
Noninterest-bearing deposits 3,003 3,152 3,518
Noninterest-bearing trading liabilities 16,279 16,987 15,725
All other liabilities 8,571 7,731 7,423
- ------------------------------------------------ -------- -------- --------
Total liabilities 126,548 120,065 120,697
- ------------------------------------------------ -------- -------- --------
PREFERRED STOCK OF SUBSIDIARY - 182 250
- ------------------------------------------------ -------- -------- --------
STOCKHOLDERS' EQUITY
Preferred stock 704 773 815
Common stockholders' equity 5,172 5,106 5,134
- ------------------------------------------------ -------- -------- --------
Total stockholders' equity 5,876 5,879 5,949
- ------------------------------------------------ -------- -------- --------
Total $132,424 $126,126 $126,896
================================================ ======== ======== ========
</TABLE>
<PAGE>
20
BALANCE SHEET ANALYSIS (continued)
Securities Available for Sale
The fair value, amortized cost and gross unrealized holding gains and losses
for the Corporation's securities available for sale are as follows.
<TABLE>
<CAPTION>
June 30, March 31, December 31,
(in millions) 1997 1997 1996
- --------------------------- ------ ------ ------
<S> <C> <C> <C>
Fair value $7,478 $7,986 $7,920
Amortized cost 7,334 7,854 7,755
- --------------------------- ------ ------ ------
Excess of fair value over
amortized cost * $ 144 $ 132 $ 165
=========================== ====== ====== ======
* Components:
Unrealized gains $ 195 $ 210 $ 245
Unrealized losses (51) (78) (80)
- --------------------------- ------ ------ ------
$ 144 $ 132 $ 165
====== ====== ======
</TABLE>
Long-term Debt
The larger of long-term debt issuances and maturities/redemptions which
occurred during the second quarter of 1997 are as follows (in millions):
<TABLE>
<CAPTION>
Face Amount
-------------------
Maturities/
Issuances Redemptions
--------- -----------
<S> <C> <C>
Parent Company
- --------------
Floating Rate Notes due March 2000 $250
Bankers Trust Company
- ---------------------
Redeemable Preference Securities due
April 1997 and April 2000 $333
Floating Rate Notes due May 2002 $239
Floating Rate Notes due June 2007 $118
</TABLE>
<PAGE>
21
TRADING DERIVATIVES
The Corporation actively manages trading positions in a variety of
derivative contracts. Many of the Corporation's trading positions are
established as a result of providing derivative products to meet customers'
demands. To anticipate customer demand for such transactions, the Corporation
also carries an inventory of capital markets instruments and maintains its
access to market liquidity by quoting bid and offer prices to, and trading with,
other market makers. These two activities are essential to provide customers
with capital market products at competitive prices. All positions are reported
at fair value and changes in fair values are reflected in trading revenue as
they occur.
The following tables reflect the gross fair values and balance sheet amounts
of trading derivative financial instruments:
<TABLE>
<CAPTION>
At June 30, Average During
1997 2nd Qtr. 1997
------------------- -------------------
(Liabi- (Liabi-
(in millions) Assets lities) Assets lities)
- --------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
OTC Financial Instruments
Interest Rate and Currency
Swap Contracts $ 15,039 $(14,075) $ 15,215 $(13,923)
Interest Rate Contracts
Forwards 54 (64) 43 (47)
Options purchased 1,098 1,056
Options written (1,201) (1,183)
Foreign Exchange Rate Contracts
Spot and Forwards 10,850 (11,061) 12,863 (14,021)
Options purchased 977 921
Options written (965) (950)
Equity-related contracts 3,108 (4,092) 2,925 (3,311)
Commodity-related and other contracts 570 (606) 588 (648)
Exchange-Traded Options
Interest Rate 6 (3) 18 (13)
Equity 276 (151) 246 (133)
- --------------------------------------- -------- -------- -------- --------
Total Gross Fair Values 31,978 (32,218) 33,875 (34,229)
- --------------------------------------- -------- -------- -------- --------
Impact of Netting Agreements (21,154) 21,154 (22,246) 22,246
- --------------------------------------- -------- -------- -------- --------
$ 10,824(1) $ 11,629
======== ========
$(11,064)(1)
======== $(11,983)
========
<FN>
(1) As reflected on the balance sheet in "Trading Assets" and "Trading
Liabilities."
</TABLE>
<PAGE>
22
TRADING DERIVATIVES (continued)
<TABLE>
<CAPTION>
At December 31, Average During
1996 4th Qtr. 1996
-------------------- -------------------
(Liabi- (Liabi-
(in millions) Assets lities) Assets lities)
- --------------------------------------- --------- -------- -------- --------
<S> <C> <C> <C> <C>
OTC Financial Instruments
Interest Rate and Currency
Swap Contracts $ 16,582 $(15,394) $ 16,258 $(15,498)
Interest Rate Contracts
Forwards 84 (86) 53 (50)
Options purchased 1,149 1,183
Options written (1,252) (1,313)
Foreign Exchange Rate Contracts
Spot and Forwards 9,855 (10,935) 8,642 (9,893)
Options purchased 917 1,143
Options written (953) (1,104)
Equity-related contracts 2,696 (2,941) 2,389 (2,426)
Commodity-related and other contracts 679 (690) 747 (712)
Exchange-Traded Options
Interest Rate 10 (12) 11 (15)
Foreign exchange - - - (6)
Equity 251 (135) 244 (115)
- --------------------------------------- --------- -------- -------- --------
Total Gross Fair Values 32,223 (32,398) 30,670 (31,132)
- --------------------------------------- --------- -------- -------- --------
Impact of Netting Agreements (20,813) 20,813 (19,580) 19,580
- --------------------------------------- --------- -------- -------- --------
$11,410(1) $ 11,090
========= ========
$(11,585)(1) $(11,552)
======== ========
<FN>
(1) As reflected on the balance sheet in "Trading Assets" and "Trading
Liabilities."
</TABLE>
END-USER DERIVATIVES
The Corporation, as an end user, utilizes various types of derivative
products (principally interest rate swaps) to manage the interest rate, currency
and other market risks associated with certain liabilities and assets such as
interest-bearing deposits, short-term borrowings and long-term debt, as well as
securities available for sale, loans, investments in non-marketable equity
instruments and net investments in foreign entities. Revenue or expense
pertaining to management of interest rate exposure is predominantly recognized
over the life of the contract as an adjustment to interest revenue or expense.
Total net end-user derivative unrealized losses were $108 million at June
30, 1997 compared with an unrealized gain of $54 million at December 31, 1996.
The $162 million decrease during the first half of 1997 was primarily due to
increases in long-term interest rates.
<PAGE>
23
END-USER DERIVATIVES (continued)
The following tables provide the gross unrealized gains and losses for end-
user derivatives. Gross unrealized gains and losses for hedges of securities
available for sale are recognized in the financial statements with the offset as
an adjustment to securities valuation allowance in stockholders' equity. Gross
unrealized gains and losses for hedges of loans, other assets, interest-bearing
deposits, other short-term borrowings, long-term debt, and net investments in
foreign subsidiaries are not yet recognized in the financial statements.
<TABLE>
<CAPTION>
Other Net invest-
short- ments in
Securities Interest- term Long- foreign
(in millions) available Other bearing borrow- term subsi-
June 30, 1997 for sale Loans assets deposits ings debt(1) diaries Total
- ----------------------------- ---------- ----- ------ --------- ------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Rate Swaps
Pay Variable
Unrealized Gain $ 1 $ - $ - $ 44 $ 11 $ 193 $ - $ 249
Unrealized (Loss) - (26) - (41) (16) (96) - (179)
- ----------------------------- ---- ----- ------ ---- ---- ----- -------- -----
Pay Variable Net 1 (26) - 3 (5) 97 - 70
- ----------------------------- ---- ----- ------ ---- ---- ----- -------- -----
Pay Fixed
Unrealized Gain 4 - - 17 - 8 - 29
Unrealized (Loss) (28) - - (42) (1) (56) - (127)
- ----------------------------- ---- ----- ------ ---- ---- ----- -------- -----
Pay Fixed Net (24) - - (25) (1) (48) - (98)
- ----------------------------- ---- ----- ------ ---- ---- ----- -------- -----
Total Unrealized
Gain 5 - - 61 11 201 - 278
- ----------------------------- ---- ----- ------ ---- ---- ----- -------- -----
Total Unrealized
(Loss) (28) (26) - (83) (17) (152) - (306)
- ----------------------------- ---- ----- ------ ---- ---- ----- -------- -----
Total Net $(23) $(26) $ - $(22) $ (6) $ 49 $ - $ (28)
============================= ==== ===== ====== ==== ==== ===== ======== =====
Forward Rate Agreements
Unrealized Gain $ - $ - $ - $ 1 $ - $ - $ - $ 1
Unrealized (Loss) - - - (1) - - - (1)
- ----------------------------- ---- ----- ------ ---- ---- ----- -------- -----
Net $ - $ - $ - $ - $ - $ - $ - $ -
============================= ==== ===== ====== ==== ==== ===== ======== =====
Currency Swaps and Forwards
Unrealized Gain $ - $ - $ 1 $ - $ 4 $ 54 $ 40 $ 99
Unrealized (Loss) (5) - - (1) (6) (109) (46) (167)
- ----------------------------- ---- ----- ------ ---- ---- ----- -------- -----
Net $ (5) $ - $ 1 $ (1) $ (2) $ (55) $ (6) $ (68)
============================= ==== ===== ====== ==== ==== ===== ======== =====
Other Contracts (2)
Unrealized Gain $ 4 $ - $ - $ - $ - $ - $ - $ 4
Unrealized (Loss) (10) - (6) - - - - (16)
- ----------------------------- ---- ----- ------ ---- ---- ----- -------- -----
Net $ (6) $ - $(6) $ - $ - $ - $ - $ (12)
============================= ==== ===== ====== ==== ==== ===== ======== =====
Total Unrealized
Gain $ 9 $ - $ 1 $ 62 $ 15 $ 255 $ 40 $ 382
Total Unrealized
(Loss) (43) (26) (6) (85) (23) (261) (46) (490)
- ----------------------------- ---- ----- ------ ---- ---- ----- -------- -----
Total Net $(34) $(26) $(5) $(23) $ (8) $ (6) $ (6) $(108)
============================= ==== ===== ====== ==== ==== ===== ======== =====
<FN>
(1) Includes trust preferred capital securities.
(2) Other contracts are principally equity swaps and collars.
</TABLE>
<PAGE>
24
END-USER DERIVATIVES (continued)
<TABLE>
<CAPTION>
Other Net invest-
short- ments in
Securities Interest- term Long- foreign
(in millions) available Other bearing borrow- term subsi-
December 31, 1996 for sale Loans assets deposits ings debt(1) diaries Total
- ----------------------------- ---------- ----- ------ --------- ------- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Rate Swaps
Pay Variable
Unrealized Gain $ 1 $ - $ - $ 62 $ 7 $ 198 $ - $ 268
Unrealized (Loss) - (14) - (23) (6) (93) - (136)
- ----------------------------- ---- ----- ------ ---- ------- ----- -------- -----
Pay Variable Net 1 (14) - 39 1 105 - 132
- ----------------------------- ---- ----- ------ ---- ------- ----- -------- -----
Pay Fixed
Unrealized Gain 3 - - 13 - 1 - 17
Unrealized (Loss) (50) (9) - (45) (1) (28) - (133)
- ----------------------------- ---- ----- ------ ---- ------- ----- -------- -----
Pay Fixed Net (47) (9) - (32) (1) (27) - (116)
- ----------------------------- ---- ----- ------ ---- ------- ----- -------- -----
Total Unrealized
Gain 4 - - 75 7 199 - 285
- ----------------------------- ---- ----- ------ ---- ------- ----- -------- -----
Total Unrealized
(Loss) (50) (23) - (68) (7) (121) - (269)
- ----------------------------- ---- ----- ------ ---- ------- ----- -------- -----
Total Net $(46) $(23) $ - $ 7 $ - $ 78 $ - $ 16
============================= ==== ===== ====== ==== ======= ===== ======== =====
Forward Rate Agreements
Unrealized Gain $ - $ - $ - $ 1 $ - $ - $ - $ 1
Unrealized (Loss) - - - (1) - - - (1)
- ----------------------------- ---- ----- ------ ---- ------- ----- -------- -----
Net $ - $ - $ - $ - $ - $ - $ - $ -
============================= ==== ===== ====== ==== ======= ===== ======== =====
Currency Swaps and Forwards
Unrealized Gain $ - $ - $ 1 $ 27 $ - $ 53 $ 42 $ 123
Unrealized (Loss) - - - (3) - (18) (41) (62)
- ----------------------------- ---- ----- ------ ---- ------- ----- -------- -----
Net $ - $ - $ 1 $ 24 $ - $ 35 $ 1 $ 61
============================= ==== ===== ====== ==== ======= ===== ======== =====
Other Contracts (2)
Unrealized Gain $ - $ - $ - $ - $ - $ - $ - $ -
Unrealized (Loss) (19) - (4) - - - - (23)
- ----------------------------- ---- ----- ------ ---- ------- ----- -------- -----
Net $(19) $ - $(4) $ - $ - $ - $ - $ (23)
============================= ==== ===== ====== ==== ======= ===== ======== =====
Total Unrealized
Gain $ 4 $ - $ 1 $103 $ 7 $ 252 $ 42 $ 409
Total Unrealized
(Loss) (69) (23) (4) (72) (7) (139) (41) (355)
- ----------------------------- ---- ----- ------ ---- ------- ----- -------- -----
Total Net $(65) $(23) $(3) $ 31 $ - $ 113 $ 1 $ 54
============================= ==== ===== ====== ==== ======= ===== ======== =====
<FN>
(1) Includes trust preferred capital securities.
(2) Other contracts are principally equity swaps and collars.
</TABLE>
<PAGE>
25
END-USER DERIVATIVES (continued)
For pay variable and pay fixed interest rate swaps entered into as an end
user, the weighted average receive rate and pay rate (interest rates were based
on the weighted averages of both U.S. and non-U.S. currencies) by maturity and
corresponding notional amounts were as follows ($ in millions):
<TABLE>
<CAPTION>
At June 30, 1997
Notional
Amount Paying Variable Paying Fixed
------------------------ -------------------------
Maturing Notional Receive Pay Notional Receive Pay Total
In: Amount Rate Rate Amount Rate Rate Notional
- --------------------- ------- ------- ---- -------- ------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 $22,963 5.68% 5.67% $1,552 5.46% 5.82% $24,515
1998-1999 17,026 5.98 5.75 4,199 4.95 5.82 21,225
2000-2001 5,350 6.76 5.93 1,176 3.61 4.94 6,526
2002 and thereafter 8,506 6.85 5.78 1,253 6.10 7.09 9,759
- --------------------- ------- ---- ---- ------ ---- ---- -------
Total $53,845 $8,180 $62,025
===================== ======= ====== =======
<FN>
All rates were those in effect at June 30, 1997. Variable rates are primarily
based on LIBOR and may change significantly, affecting future cash flows.
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1996
Notional
Amount Paying Variable Paying Fixed
------------------------ -------------------------
Maturing Notional Receive Pay Notional Receive Pay Total
In: Amount Rate Rate Amount Rate Rate Notional
- ---------------------- ------- ---- ---- ------ ------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 $33,275 5.59% 5.52% $4,056 5.23% 5.71% $37,331
1998-1999 7,957 5.96 5.52 2,095 4.82 5.82 10,052
2000-2001 3,614 6.84 5.63 867 4.11 5.67 4,481
2002 and thereafter 5,579 6.79 5.65 932 5.61 7.14 6,511
- ---------------------- ------- ---- ---- ------ ---- ---- -------
Total $50,425 $7,950 $58,375
====================== ======= ====== =======
<FN>
All rates were those in effect at December 31, 1996. Variable rates are
primarily based on LIBOR and may change significantly, affecting future cash
flows.
</TABLE>
<PAGE>
26
REGULATORY CAPITAL
The Corporation and its banking subsidiaries are subject to various
regulatory capital requirements administered by the federal banking agencies.
The Federal Reserve Board's ("FRB") risk-based capital guidelines addressing the
capital adequacy of bank holding companies and banks (collectively, "banking
organizations") include a definition of capital and a framework for calculating
risk-weighted assets. In addition, these guidelines specify minimum risk-based
capital ratios to be maintained by banking organizations. The FRB also has a
minimum Leverage ratio which is used as a supplement to the risk-based capital
ratios in evaluating the capital adequacy of banking organizations. See pages
19 and 83 of Exhibit 99.1 of this Current Report on Form 8-K for a detailed
discussion of these guidelines and regulations.
In 1996, the FRB and the other U.S. federal banking agencies jointly issued
an amendment to the capital adequacy guidelines to incorporate a measure for
market risk ("the market risk amendment"). Essentially, this amendment changes
the calculation of risk-weighted assets in the trading accounts, and includes
the positions and capital of the "Section 20" securities subsidiary (BT Alex.
Brown Incorporated) in the combined credit risk and market risk capital
calculation of the Corporation. In all other respects (including the exclusion
of the positions and capital of the international insurance entities), the
current capital adequacy guidelines remain unchanged.
Compliance with the market risk amendment is mandatory by January 1, 1998
for those banking organizations that meet certain thresholds with regard to
their trading activity. Banking organizations may choose to adopt early during
1997, with prior approval from their primary federal regulator. See page 22 of
Exhibit 99.1 of this Current Report on Form 8-K for further detailed discussion
on the market risk amendment.
The Corporation adopted the market risk amendment as of March 31, 1997 and
was the first banking organization to adopt such amendment.
Based on their respective regulatory capital ratios as of June 30, 1997,
both the Corporation and Bankers Trust Company ("BTCo") are well capitalized, as
defined in the regulations issued by the FRB and the other federal bank
regulatory agencies setting forth the general capital requirements mandated by
FDICIA, as applicable.
<PAGE>
27
REGULATORY CAPITAL (continued)
The Corporation's and BTCo's ratios are presented in the table below. The
ratios for December 31, 1996 have not been restated for the adoption of the
market risk amendment.
<TABLE>
<CAPTION>
FRB
Minimum To Be Well
Actual Actual for Capitalized
as of as of Capital Under
June 30, December 31, Adequacy Regulatory
1997 1996 Purposes Guidelines
-------- ----------- -------- ------------
<S> <C> <C> <C> <C>
Tier 1 Capital
Corporation 9.2% 9.3% 4.0% 6.0%
BTCo 9.0% 9.3% 4.0% 6.0%
Total Capital
Corporation 14.8% 13.8% 8.0% 10.0%
BTCo 12.4% 12.9% 8.0% 10.0%
Leverage
Corporation 5.0% 5.9% 3.0%(1) 3.0%(1)
BTCo 5.3% 5.3% 3.0%(1) 5.0%
<FN>
(1) These minimum levels for the Leverage ratio may be set 100 to 200 basis
points higher depending upon other regulatory criteria.
</TABLE>
<PAGE>
28
REGULATORY CAPITAL (continued)
The following are the essential components of the Corporation's and BTCo's
risk-based capital ratios. The December 31, 1996 balances have not been
restated for the adoption of the market risk amendment.
<TABLE>
<CAPTION>
Actual as of Actual as of
June 30, December 31,
(in millions) 1997 1996
- -------------------------- ------------ ------------
<S> <C> <C>
Corporation
Tier 1 Capital $ 6,530 $ 5,690
Tier 2 Capital 3,534 2,734
Tier 3 Capital 517 -
- ------------------------------ ------- -------
Total Capital $10,581 $ 8,424
============================== ======= =======
Total risk-weighted assets $71,286 $61,213
============================== ======= =======
BTCo
Tier 1 Capital $ 5,247 $ 4,869
Tier 2 Capital 2,031 1,900
- ------------------------------ ------- -------
Total Capital $ 7,278 $ 6,769
============================== ======= =======
Total risk-weighted assets $58,591 $52,484
============================== ======= =======
</TABLE>
Comparing June 30, 1997 to December 31, 1996, the Corporation's Tier 1
Capital ratio declined 10 basis points due to an increase in risk-weighted
assets partially offset by an increase in Tier 1 Capital. The Corporation's
risk-weighted assets at June 30, 1997 were $10.1 billion higher than at year-end
1996 while its Tier 1 Capital was $840 million higher. The Total Capital ratio
of the Corporation increased 100 basis points due to the issuance of trust
preferred capital securities and the addition of BT Alex. Brown Incorporated's
subordinated debt as a component of Total Capital (as Tier 3 Capital in
accordance with the market risk amendment), offset by the $10.1 billion increase
in risk-weighted assets.
With the adoption of the market risk amendment as of March 31, 1997, the
Corporation's Leverage ratio decreased 90 basis points as BT Alex. Brown
Incorporated's average assets and capital were included in this calculation for
the first time.
BTCo's Tier 1 Capital and Total Capital ratios decreased by 30 basis points
and 50 basis points, respectively, as a result of a $6.1 billion increase in
risk-weighted assets, partially offset by an increase to Tier 1 and Total
Capital of $378 million and $509 million, respectively. BTCo's Leverage ratio
was unchanged as the increase in the quarterly average assets was offset by the
increase in Tier 1 Capital.
<PAGE>
29
LIQUIDITY
Liquidity is the ability to have funds available at all times to meet the
commitments of the Corporation. The Corporation has a formal process for
managing global liquidity for the Firm as a whole and for each of its
significant subsidiaries. Management's guiding policy is to maintain
conservative levels of liquidity designed to ensure that the Firm has the
ability to meet its obligations under all reasonably foreseeable circumstances.
Management maintains appropriate asset liquidity and actively manages
liability/capital levels, maturities and diversification. The fundamental
objective is to ensure that, even in the event of a complete loss of access to
the liability markets, the Corporation will be able to continue to fund those
assets that cannot be liquidated in a timely manner.
Most of the Corporation's assets are highly liquid and of high credit
quality. The Corporation maintains excess liquidity through its base of liquid
assets. Liquid assets consist of cash and due from banks, interest-bearing
deposits with banks, federal funds sold, securities purchased under resale
agreements, securities borrowed, trading assets, and securities available for
sale. Securities purchased under resale agreements and securities borrowed are
virtually all short-term in nature and are collateralized with U.S. government
or other marketable securities, or cash equivalents. Trading assets are marked
to market daily and primarily consist of swaps, options and other derivative
contracts, foreign government securities, corporate debt securities, U.S.
government and agency securities, and equity securities. The Corporation's
liquid assets amounted to $101.1 billion as of June 30, 1997, $97.7 billion as
of March 31, 1997 and $97.5 billion as of December 31, 1996, which equaled 76
percent, 77 percent, and 79 percent of gross total assets at those dates
respectively.
<PAGE>
30
LIQUIDITY (continued)
Cash Flows
The following comments apply to the consolidated statement of cash flows,
which appears on page 5.
Cash and due from banks increased by $188 million during the first six
months of 1997 as the sum of the net cash provided by financing activities and
operating activities exceeded the net cash used in investing activities. The
increase in cash provided by financing activities was primarily due to the net
changes in deposits ($7.9 billion) and the issuance of long-term debt ($3.2
billion), partially offset by repayments of long-term debt ($2.3 billion).
Within net cash provided by operating activities, cash inflows from other
operating assets and liabilities, net ($877 million), net changes in receivables
and payables from securities transactions ($644 million) and net changes in
trading assets ($530 million), was mostly offset by cash outflows from net
changes in trading liabilities ($2.1 billion). The $8.5 billion of net cash
used in investing activities was primarily the result of cash outflows from the
net changes in securities purchased under resale agreements ($7.8 billion) and
loans ($4.0 billion) and from purchases of securities available for sale ($2.8
billion), partially offset by cash inflows from the net change in securities
borrowed ($3.7 billion) and maturities and other redemptions of securities
available for sale ($1.9 billion).
Cash and due from banks decreased $709 million during the first six months
of 1996, as the net cash used in investing activities exceeded the sum of the
net cash provided by financing and operating activities. The $16.4 billion of
net cash used in investing activities was largely the result of cash outflows
from net changes in securities purchased under resale agreements ($12.0
billion), purchases of securities available for sale ($2.9 billion) and net
changes in securities borrowed ($2.6 billion) partially offset by cash inflows
from maturities and other redemptions of securities available for sale ($1.8
billion). The $10.0 billion of net cash provided by financing activities was
primarily the result of an increase in the net change in securities loaned and
securities sold under repurchase agreements ($9.0 billion) and from issuances of
long-term debt ($2.0 billion), offset in part by a decrease in the net change in
deposits ($517 million) and repayments of long-term debt ($366 million). The
increase in net cash provided by operating activities was mostly due to an
increase in net changes in trading assets ($3.7 billion) and net changes in
receivables and payables from securities transactions ($1.3 billion).
<PAGE>
31
LIQUIDITY (continued)
Interest Rate Sensitivity
Condensed interest rate sensitivity data for the Corporation at June 30,
1997 is presented in the table below. For purposes of this presentation, the
interest-earning/bearing components of trading assets and trading liabilities
are assumed to reprice within three months.
The interest rate gaps reported in the table arise when assets are funded
with liabilities having different repricing intervals, after considering the
effect of off-balance sheet hedging instruments. Since these gaps are actively
managed and change daily as adjustments are made in interest rate views and
market outlook, positions at the end of any period may not be reflective of the
Corporation's interest rate view in subsequent periods. Active management
dictates that longer-term economic views are balanced against prospects of
short-term interest rate changes in all repricing intervals.
<TABLE>
<CAPTION>
By Repricing Interval Non-
interest-
Within 1 - 5 After bearing
(in billions) June 30, 1997 1 year years 5 years funds Total
- ------------------------------- ------ ------ ----- ------ -------
<S> <C> <C> <C> <C> <C>
Assets $ 94.3 $ 4.0 $ 3.1 $ 30.2 $ 131.6
Liabilities and preferred
stock (82.8) (7.6) (5.0) (30.9) (126.3)
Common stockholders' equity - - - (5.3) (5.3)
Effect of off-balance sheet
hedging instruments (15.5) 10.7 4.8 - -
------ ------ ----- ------ -------
Interest rate sensitivity gap $ (4.0) $ 7.1 $ 2.9 $ (6.0) $ -
====== ====== ===== ====== =======
</TABLE>
<PAGE>
32
NONPERFORMING ASSETS
The components of cash basis loans, renegotiated loans, other real estate
and other nonperforming assets are shown below ($ in millions).
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----- -----
<S> <C> <C>
CASH BASIS LOANS
Domestic
Commercial and industrial $ 105 $ 117
Secured by real estate 124 233
- ------------------------------------------------ ----- -----
Total domestic 229 350
- ------------------------------------------------ ----- -----
International
Commercial and industrial 37 57
Secured by real estate 32 39
Financial institutions 2 4
Other 5 2
- ------------------------------------------------ ----- -----
Total international 76 102
- ------------------------------------------------ ----- -----
Total cash basis loans $ 305 $ 452
================================================ ===== =====
Ratio of cash basis loans to total gross loans 1.5% 2.9%
================================================ ===== =====
Ratio of allowance for credit losses to cash
basis loans (1) 251% 171%
================================================ ===== =====
RENEGOTIATED LOANS
Secured by real estate $ 37 $ 37
- ------------------------------------------------ ----- -----
Total renegotiated loans $ 37 $ 37
================================================ ===== =====
OTHER REAL ESTATE $ 196 $ 213
================================================ ===== =====
OTHER NONPERFORMING ASSETS
Assets acquired in credit workouts $ 8 $ 10
- ------------------------------------------------ ----- -----
Total other nonperforming assets $ 8 $ 10
================================================ ===== =====
Loans 90 days or more past due and still
accruing interest $ - $ -
================================================ ===== =====
<FN>
(1) Ratio was computed using the allowance for credit losses that has been
allocated to loans of $767 million and $773 million at June 30, 1997 and
December 31, 1996, respectively.
</TABLE>
<PAGE>
33
NONPERFORMING ASSETS (continued)
An analysis of the changes in the Corporation's total cash basis loans
during the first six months of 1997 follows (in millions).
<TABLE>
<CAPTION>
<S> <C>
Balance, December 31, 1996 $452
Net transfers to cash basis loans 18
Net paydowns (87)
Charge-offs (36)
Transfers to other real estate (10)
Other (32)
- ----------------------------------- ----
Balance, June 30, 1997 $305
=================================== ====
</TABLE>
The Corporation's total cash basis loans amounted to $305 million at June
30, 1997, down $147 million, or 33 percent, from December 31, 1996.
This decline is primarily attributable to decreases in loans secured by real
estate ($116 million) and highly leveraged loans ($41 million). Within cash
basis loans, loans secured by real estate were $156 million and $272 million at
June 30, 1997 and December 31, 1996, respectively. Commercial and industrial
loans to highly leveraged borrowers were $76 million and $117 million at June
30, 1997 and December 31, 1996, respectively.
The following table sets forth the approximate effect on interest revenue of
cash basis loans and renegotiated loans. This disclosure reflects the interest
on loans which were carried on the balance sheet and classified as either cash
basis or renegotiated at June 30 of each year. The rates used in determining
the gross amount of interest which would have been recorded at the original rate
were not necessarily representative of current market rates.
<PAGE>
34
NONPERFORMING ASSETS (continued)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------
(in millions) 1997 1996
- ----------------------------------------------- ----- -----
<S> <C> <C>
Domestic Loans
Gross amount of interest that would have
been recorded at original rate $ 12 $ 24
Less, interest, net of reversals, recognized
in interest revenue 2 4
- ----------------------------------------------- ----- -----
Reduction of interest revenue 10 20
- ----------------------------------------------- ----- -----
International Loans
Gross amount of interest that would have
been recorded at original rate 4 6
Less, interest, net of reversals, recognized
in interest revenue - -
- ----------------------------------------------- ----- -----
Reduction of interest revenue 4 6
- ----------------------------------------------- ----- -----
Total reduction of interest revenue $ 14 $ 26
=============================================== ===== =====
</TABLE>
HIGHLY LEVERAGED TRANSACTIONS
Amounts included in the table and discussion which follow generally reflect
the definition that the Corporation uses in order to monitor the extent of its
exposure to highly leveraged transactions ("HLTs"). See page 41 of Exhibit 99.1
to this Current Report on Form 8-K for a detailed discussion of the definition.
<TABLE>
<CAPTION>
Highly Leveraged Transactions
June 30, December 31,
(in millions) 1997 1996
- ------------------------------- ------ ------
<S> <C> <C>
Loans
Senior debt $1,894 $1,587
Subordinated debt 59 76
- ------------------------------- ------ ------
Total loans $1,953 $1,663
=============================== ====== ======
Unfunded commitments
Commitments to lend $ 900 $ 875
Letters of credit 239 128
- ------------------------------- ------ ------
Total unfunded commitments $1,139 $1,003
=============================== ====== ======
Equity investments $ 801 $ 665
=============================== ====== ======
Commitments to invest $ 604 $ 425
=============================== ====== ======
</TABLE>
<PAGE>
35
HIGHLY LEVERAGED TRANSACTIONS (continued)
The Corporation's outstanding loans were to 156 separate borrowers in 44
separate industry groups at June 30, 1997, compared to 127 separate borrowers in
43 separate industry groups at December 31, 1996. There were no industry
concentrations which exceeded 10 percent of total HLT loans outstanding at June
30, 1997.
In addition to the amounts shown in the table above, at June 30, 1997, the
Corporation had issued commitment letters which had been accepted, subject to
documentation and certain other conditions, of $1.77 billion (which were in
various stages of syndication) and had additional HLTs in various stages of
discussion and negotiation.
During the first half of 1997, the Corporation originated $2.2 billion of
HLT commitments. It should be noted that the Corporation's loans and
commitments in connection with HLTs fluctuate as new loans and commitments are
made and as loans and commitments are syndicated, participated or paid.
All loans and commitments to finance HLTs are reviewed and approved by
senior credit officers of the Corporation. In addition to a strict
transactional and credit approval process, the portfolio of leveraged loans and
commitments is actively monitored and managed to minimize risk through
diversification among borrowers and industries. As part of this strategy, sell
and hold targets are regularly updated in connection with market opportunities
and the addition of new HLTs. Retention by the Corporation after syndication
and sales of loan participations has typically been less than $50 million, and
the average outstanding per borrower for the portfolio at June 30, 1997 was less
than $13 million. However, at June 30, 1997, the Corporation had total exposure
(loans outstanding plus unfunded commitments) in excess of $50 million to 11
separate highly leveraged borrowers.
At June 30, 1997, $76 million of the HLT loan portfolio was on a cash basis.
In addition, $4 million of the equity investments in HLT companies represented
assets acquired in credit workouts, which are reported as other nonperforming
assets. Net charge-offs of $16 million of HLT loans were recorded in the first
half of 1997. In addition, the Corporation recorded a net gain of $26.5 million
in connection with the sales and/or write-offs of certain equity investments in
highly leveraged companies during the first six months of 1997.
Generally, fees (typically 2 to 4 percent of the principal amount committed)
and interest charged (typically LIBOR plus 1.5 to 3 percent) on HLT loans are
higher than on other credits. The Corporation does not account for revenue or
expenses from HLTs separately from its other corporate lending activities.
However, it is estimated that transaction fees recognized for lending activities
relating to HLTs were approximately $77 million during the first half of 1997
and that as of June 30, 1997, approximately $19 million of fees were deferred
and will be recognized as future revenue.
<PAGE>
36
ACCOUNTING DEVELOPMENTS
In February, 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128
establishes standards for computing and presenting earnings per share ("EPS").
SFAS No. 128 replaces the presentation of primary EPS with basic EPS and fully
diluted EPS with diluted EPS. Basic EPS excludes dilution and is calculated by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted EPS is computed similarly
to fully diluted EPS.
SFAS No. 128 is effective for financial statement periods ending after
December 15, 1997, and requires restatement of all prior period EPS data. The
adoption of SFAS No. 128 is not expected to have a material impact on the
Corporation's fully diluted EPS computations.
