<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-5920
BANKERS TRUST CORPORATION
(Exact name of registrant as specified in its charter)
New York 13-6180473
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
130 Liberty Street
New York, New York 10006
(Address of principal executive offices) (Zip code)
(212) 250-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No _______
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of October 31, 1998: Common Stock, $1 par value,
95,304,919 shares.
<PAGE> 1
BANKERS TRUST CORPORATION
SEPTEMBER 30, 1998 FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Income
Three Months Ended September 30, 1998 and 1997 2
Nine Months Ended September 30, 1998 and 1997 3
Consolidated Statement of Comprehensive Income
Three Months Ended September 30, 1998 and 1997 4
Nine Months Ended September 30, 1998 and 1997 5
Consolidated Balance Sheet
At September 30, 1998 and December 31, 1997 6
Consolidated Statement of Changes in Stockholders'
Equity
Nine Months Ended September 30, 1998 and 1997 7
Consolidated Statement of Cash Flows
Nine Months Ended September 30, 1998 and 1997 8
Consolidated Schedule of Net Interest Revenue
Three Months and Nine Months Ended
September 30, 1998 and 1997 9
In the opinion of management, all material adjustments
necessary for a fair presentation of the financial position
and results of operations for the interim periods presented
have been made. All such adjustments were of a normal
recurring nature. The results of operations for the three
months and nine months ended September 30, 1998 are not
necessarily indicative of the results of operations for the
full year or any other interim period.
The financial statements included in this Form 10-Q
should be read with reference to the Bankers Trust
Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 as supplemented by the first quarter
and second quarter 1998 Form 10-Q.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 41
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 42
SIGNATURE 43
<PAGE> 2
PART I. FINANCIAL INFORMATION
BANKERS TRUST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Increase
THREE MONTHS ENDED SEPTEMBER 30, 1998 1997 (Decrease)
<S> <C> <C> <C>
NET INTEREST REVENUE
Interest revenue $2,281 $1,789 $ 492
Interest expense 1,945 1,474 471
Net interest revenue 336 315 21
Credit loss provision-loans (20) - (20)
Net interest revenue after credit
loss provision-loans 316 315 1
NONINTEREST REVENUE
Trading (401) 387 (788)
Credit loss provision-trading (90) (10) (80)
Fiduciary and funds management 273 277 (4)
Corporate finance fees 242 305 (63)
Other fees and commissions 218 158 60
Net revenue from equity investments (1) 73 (74)
Securities available for sale gains (losses) (125) 18 (143)
Insurance premiums 74 76 (2)
Other (35) 171 (206)
Total noninterest revenue 155 1,455 (1,300)
NONINTEREST EXPENSES
Salaries and commissions 366 333 33
Incentive compensation and employee benefits 286 543 (257)
Agency and other professional service fees 122 105 17
Communication and data services 65 58 7
Occupancy, net 56 45 11
Furniture and equipment 65 55 10
Travel and entertainment 44 36 8
Provision for policyholder benefits 92 90 2
Other 82 97 (15)
Restructuring charges - 57 (57)
Total noninterest expenses 1,178 1,419 (241)
Income (loss) before income taxes (707) 351 (1,058)
Income taxes (benefit) (219) 105 (324)
NET INCOME (LOSS) $ (488) $ 246 $ (734)
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ (494) $ 235 $ (729)
Cash dividends declared per common share $1.00 $1.00 $-
EARNINGS (LOSS) PER COMMON SHARE:
BASIC $(4.98) $2.33 $(7.31)
DILUTED $(4.98) $2.19 $(7.17)
<FN>
Certain prior period amounts have been reclassified to conform to the
current presentation.
</TABLE>
<PAGE> 3
BANKERS TRUST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(in millions, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Increase
NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 (Decrease)
<S> <C> <C> <C>
NET INTEREST REVENUE
Interest revenue $6,575 $5,200 $ 1,375
Interest expense 5,471 4,214 1,257
Net interest revenue 1,104 986 118
Credit loss provision-loans (20) - (20)
Net interest revenue after credit
loss provision-loans 1,084 986 98
NONINTEREST REVENUE
Trading (53) 1,013 (1,066)
Credit loss provision-trading (210) (10) (200)
Fiduciary and funds management 819 775 44
Corporate finance fees 965 789 176
Other fees and commissions 584 439 145
Net revenue from equity investments 203 129 74
Securities available for sale gains (losses) (81) 100 (181)
Insurance premiums 202 203 (1)
Other 139 277 (138)
Total noninterest revenue 2,568 3,715 (1,147)
NONINTEREST EXPENSES
Salaries and commissions 1,063 941 122
Incentive compensation and employee benefits 1,200 1,362 (162)
Agency and other professional service fees 374 296 78
Communication and data services 180 173 7
Occupancy, net 156 132 24
Furniture and equipment 175 163 12
Travel and entertainment 123 101 22
Provision for policyholder benefits 251 231 20
Other 301 292 9
Restructuring charges - 57 (57)
Total noninterest expenses 3,823 3,748 75
Income (loss) before income taxes (171) 953 (1,124)
Income taxes (benefit) (69) 294 (363)
NET INCOME (LOSS) $ (102) $ 659 $ (761)
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ (128) $ 622 $ (750)
Cash dividends declared per common share $3.00 $3.00 $-
EARNINGS (LOSS) PER COMMON SHARE:
BASIC $(1.28) $6.20 $(7.48)
DILUTED $(1.28) $5.85 $(7.13)
<FN>
Certain prior period amounts have been reclassified to conform to the
current presentation.
</TABLE>
<PAGE> 4
BANKERS TRUST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998 1997
<S> <C> <C>
NET INCOME (LOSS) $(488) $246
Other comprehensive income (loss) net of tax:
Foreign currency translation adjustments, net of tax* (1) 4
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during
period, net of tax** (104) 77
Reclassification adjustment for realized (gains)
losses in net income, net of tax*** 83 (23)
Other comprehensive income (loss) (22) 58
COMPREHENSIVE INCOME (LOSS) $(510) $304
<FN>
* Amounts are net of income tax expense of $1 million and $18 million for
the three months ended September 30, 1998 and September 30, 1997,
respectively.
** Amounts are net of an income tax benefit of $55 million and income tax
expense of $15 million for the three months ended September 30, 1998
and September 30, 1997, respectively.
*** Amounts are net of an income tax benefit of $42 million and $5 million
for the three months ended September 30, 1998 and September 30, 1997,
respectively.
</TABLE>
<PAGE> 5
BANKERS TRUST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998 1997
<S> <C> <C>
NET INCOME (LOSS) $(102) $659
Other comprehensive income (loss) net of tax:
Foreign currency translation adjustments, net of tax* (19) 7
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during
period, net of tax** (108) 107
Reclassification adjustment for realized (gains)
losses in net income, net of tax*** 53 (78)
Other comprehensive income (loss) (74) 36
COMPREHENSIVE INCOME (LOSS) $(176) $695
<FN>
* Amounts are net of income tax expense of $9 million and $41 million for
the nine months ended September 30, 1998 and September 30, 1997,
respectively.
** Amounts are net of an income tax benefit of $57 million and income tax
expense of $30 million for the nine months ended September 30, 1998
and September 30,1997, respectively.
*** Amounts are net of an income tax benefit of $28 million and income tax
expense of $22 million for the nine months ended September 30, 1998
and September 30, 1997, respectively.
</TABLE>
<PAGE> 6
BANKERS TRUST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
($ in millions, except par value)
<TABLE>
<CAPTION>
September 30, December 31,
1998* 1997
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,405 $ 2,188
Interest-bearing deposits with banks 2,208 4,272
Federal funds sold 4,662 1,382
Securities purchased under resale
agreements 21,752 19,163
Securities borrowed 19,692 16,751
Trading assets:
Government securities 9,398 11,397
Corporate debt securities 7,626 8,128
Equity securities 7,408 7,914
Swaps, options and other derivatives, net of
allowance for credit losses of $295 at
September 30, 1998 and $285 at December 31, 1997 19,083 17,673
Other trading assets 14,867 11,460
Total trading assets 58,382 56,572
Securities available for sale 11,421 8,081
Loans, net of allowance for credit losses
of $667 at September 30, 1998 and $699
at December 31, 1997 21,723 19,106
Customer receivables 1,709 1,547
Accounts receivable and accrued interest 5,542 4,785
Other assets 6,771 6,255
Total $156,267 $140,102
LIABILITIES
Noninterest-bearing deposits
Domestic offices $ 2,885 $ 2,776
Foreign offices 2,330 1,952
Interest-bearing deposits
Domestic offices 20,022 22,353
Foreign offices 16,054 15,749
Total deposits 41,291 42,830
Trading liabilities:
Securities sold, not yet purchased
Government securities 8,640 4,389
Equity securities 8,814 5,273
Other trading liabilities 969 519
Swaps, options and other derivatives 16,731 17,065
Total trading liabilities 35,154 27,246
Securities loaned and securities sold under
repurchase agreements 22,973 17,896
Other short-term borrowings 20,264 19,577
Accounts payable and accrued expenses 5,289 6,536
Other liabilities, including allowance for
credit losses of $13 at September 30, 1998
and December 31, 1997 6,011 4,250
Long-term debt not included in risk-based capital 15,631 11,275
Long-term debt included in risk-based capital 3,221 3,312
Mandatorily redeemable capital securities of
subsidiary trusts holding solely junior
subordinated deferrable interest debentures
included in risk-based capital 1,419 1,472
Total liabilities 151,253 134,394
PREFERRED STOCK OF SUBSIDIARY 304 -
STOCKHOLDERS' EQUITY
Preferred stock 394 658
Common stock, $1 par value
Authorized, 300,000,000 shares
Issued, 105,380,175 shares at September 30, 1998
and 105,378,741 at December 31, 1997 105 105
Capital surplus 1,610 1,563
Retained earnings 3,614 4,202
Common stock in treasury, at cost:
1998, 10,176,874 shares;
1997, 8,422,401 shares (1,118) (889)
Other stockholders' equity 573 463
Accumulated other comprehensive income:
Net unrealized losses on securities available for
sale, net of taxes (87) (32)
Foreign currency translation, net of taxes (381) (362)
Total stockholders' equity 4,710 5,708
Total $156,267 $140,102
<FN>
* Unaudited
Certain prior period amounts have been reclassified to conform to the
current presentation.
</TABLE>
<PAGE> 7
BANKERS TRUST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in millions)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998 1997
<S> <C> <C>
PREFERRED STOCK
Balance, January 1 $ 658 $ 810
Preferred stock redeemed (248) (100)
Preferred stock repurchased (16) (7)
Balance, September 30 394 703
COMMON STOCK
Balance, January 1 105 104
Issuance of common stock - 1
Balance, September 30 105 105
CAPITAL SURPLUS
Balance, January 1 1,563 1,437
Issuance of common stock - 59
Repurchase and retirement of common stock - (6)
Common stock distributed under employee
benefit plans 47 51
Balance, September 30 1,610 1,541
RETAINED EARNINGS
Balance, January 1 4,202 3,988
Net income (loss) (102) 659
Cash dividends declared
Preferred stock (29) (38)
Common stock (289) (268)
Treasury stock distributed under employee
benefit plans (168) (165)
Balance, September 30 3,614 4,176
COMMON STOCK IN TREASURY, AT COST
Balance, January 1 (889) (372)
Purchases of stock (601) (563)
Restricted stock (cancelled), net - (9)
Treasury stock distributed under employee
benefit plans 372 399
Balance, September 30 (1,118) (545)
COMMON STOCK ISSUABLE - STOCK AWARDS
Balance, January 1 901 526
Deferred stock awards granted (cancelled), net (20) 167
Restricted stock awards granted, net 71 -
Deferred stock distributed (98) (18)
Balance, September 30 854 675
DEFERRED COMPENSATION - STOCK AWARDS
Balance, January 1 (438) (308)
Deferred stock awards (granted) cancelled, net 17 (168)
Restricted stock (granted) cancelled, net (69) 8
Amortization of deferred compensation, net 209 215
Balance, September 30 (281) (253)
CUMULATIVE TRANSLATION ADJUSTMENTS
Balance, January 1 (362) (364)
Translation adjustments (10) 48
Income taxes applicable to translation adjustments (9) (41)
Balance, September 30 (381) (357)
SECURITIES VALUATION ALLOWANCE
Balance, January 1 (32) 57
Change in unrealized net gains (losses) after applicable
income taxes and minority interest (55) 29
Balance, September 30 (87) 86
TOTAL STOCKHOLDERS' EQUITY, SEPTEMBER 30 $4,710 $6,131
</TABLE>
<PAGE> 8
BANKERS TRUST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (102) $ 659
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Credit loss provision-trading 210 10
Credit loss provision-loans 20 -
Provision for policyholder benefits 251 231
Restructuring charges - 57
Deferred income taxes (159) (133)
Depreciation and other amortization
and accretion 250 308
Other, net 32 1
Earnings adjusted for noncash charges and credits 502 1,133
Net change in:
Trading assets (2,025) (3,153)
Trading liabilities 8,457 2,730
Receivables and payables from securities
transactions (950) (253)
Customer receivables (162) (182)
Other operating assets and liabilities, net (1,358) 343
Securities available for sale (gains) losses 81 (100)
Net cash provided by operating activities 4,545 518
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in:
Interest-bearing deposits with banks 2,065 (365)
Federal funds sold (3,280) (557)
Securities purchased under resale agreements (2,589) (6,899)
Securities borrowed (2,941) 868
Loans (2,759) (5,694)
Securities available for sale:
Purchases (18,711) (4,388)
Maturities and other redemptions 1,996 2,437
Sales 12,527 999
Acquisitions of premises and equipment (298) (184)
Other, net 1,188 729
Net cash used in investing activities (12,802) (13,054)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in:
Deposits (1,401) 15,682
Securities loaned and securities sold under
repurchase agreements 5,338 (3,220)
Other short-term borrowings 1,194 496
Issuances of long-term debt* 5,483 5,474
Repayments of long-term debt** (1,400) (4,876)
Issuances of common stock - 48
Repurchase and retirement of common stock - (6)
Issuance of preferred stock of subsidiary 304 -
Redemption of preferred stock of subsidiary - (250)
Redemptions and repurchases of preferred stock (264) (107)
Purchases of treasury stock (601) (563)
Cash dividends paid (320) (285)
Other, net 123 248
Net cash provided by financing activities 8,456 12,641
Net effect of exchange rate changes on cash 18 (48)
NET INCREASE IN CASH AND DUE FROM BANKS 217 57
Cash and due from banks, beginning of period 2,188 1,568
Cash and due from banks, end of period $ 2,405 $1,625
Interest paid $5,226 $3,729
Income taxes paid, net $189 $170
Noncash investing activities $7 $97
Noncash financing activities:
Conversion of debt to equity $14 $41
<FN>
* Includes $739 million for the nine months ended September 30, 1997,
related to mandatorily redeemable capital securities of subsidiary trusts
holding solely junior subordinated deferrable interest debentures included
in risk-based capital ("trust preferred capital securities").
** Includes $57 million for the nine months ended September 30, 1998,
related to mandatorily redeemable capital securities of subsidiary trusts
holding solely junior subordinated deferrable interest debentures
included in risk-based capital ("trust preferred capital securities").
Certain prior period amounts have been reclassified to conform to the
current presentation.
</TABLE>
<PAGE> 9
BANKERS TRUST CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF NET INTEREST REVENUE
(in millions)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
INTEREST REVENUE
Interest-bearing deposits with banks $ 70 $ 106 $ 253 $ 253
Federal funds sold 55 86 167 196
Securities purchased under
resale agreements 494 339 1,283 983
Securities borrowed 350 173 1,014 532
Trading assets 655 568 1,960 1,817
Securities available for sale
Taxable 165 108 483 314
Exempt from federal income taxes 13 7 33 23
Loans 443 369 1,275 985
Customer receivables 36 33 107 97
Total interest revenue 2,281 1,789 6,575 5,200
INTEREST EXPENSE
Interest-bearing deposits
Domestic offices 300 250 946 596
Foreign offices 252 301 797 810
Trading liabilities 139 94 373 371
Securities loaned and securities sold
under repurchase agreements 579 343 1,534 1,016
Other short-term borrowings 392 305 1,022 872
Long-term debt 254 151 710 465
Trust preferred capital securities 29 30 89 84
Total interest expense 1,945 1,474 5,471 4,214
NET INTEREST REVENUE $ 336 $ 315 $1,104 $ 986
</TABLE>
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Bankers Trust Corporation (the "Parent Company") and subsidiaries
(collectively, the "Corporation", or the "Firm") reported a loss of $488
million for the three months ended September 30, 1998, or $4.98 loss per
share. In the third quarter of 1997, the Corporation earned $246 million,
or $2.19 diluted earnings per share.
For the first nine months of 1998, the Corporation reported a loss of
$102 million, or $1.28 loss per share. For the first nine months of 1997,
the Corporation earned $659 million, or $5.85 diluted earnings per share.
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 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> 11
ORGANIZATIONAL UNIT RESULTS (continued)
The following tables present results by Organizational Unit:
<TABLE>
<CAPTION> Total Non- Pretax Net
Three Months Ended September 30, 1998 Total Net interest Income/ Income/
(in millions) Revenue Expenses (Loss) (Loss)
<S> <C> <C> <C> <C>
Investment Banking $ 153 $ 358 $(205) $(142)
Trading & Sales 7 147 (140) (97)
Global Institutional Services 256 216 40 28
Private Client Services Group 165 136 29 20
Australia/New Zealand/International
Funds Management 163 108 55 38
Emerging Markets Group:
Latin America 49 131 (82) (56)
Emerging Europe, Middle East & Africa (198) 16 (214) (148)
Asia (122) 30 (152) (105)
Corporate/Other (2) 36 (38) (26)
Total $ 471 $1,178 $(707) $(488)
</TABLE>
<TABLE>
<CAPTION> Total Non- Pretax Net
Three Months Ended September 30, 1997 Total Net interest Income/ Income/
(in millions) Revenue Expenses (Loss) (Loss)
<S> <C> <C> <C> <C>
Investment Banking $ 650 $ 428 $222 $157
Trading & Sales 132 119 13 9
Global Institutional Services 243 229 14 10
Private Client Services Group 177 158 19 13
Australia/New Zealand/International
Funds Management 140 116 24 17
Emerging Markets Group:
Latin America 204 141 63 44
Emerging Europe, Middle East & Africa 42 32 10 7
Asia 39 50 (11) (8)
Corporate/Other 143 146 (3) (3)
Total $1,770 $1,419 $351 $246
</TABLE>
<TABLE>
<CAPTION> Total Non- Pretax Net
Nine Months Ended September 30, 1998 Total Net interest Income/ Income/
(in millions) Revenue Expenses (Loss) (Loss)
<S> <C> <C> <C> <C>
Investment Banking $1,383 $1,215 $168 $126
Trading & Sales 466 419 47 38
Global Institutional Services 772 677 95 68
Private Client Services Group 529 440 89 63
Australia/New Zealand/International
Funds Management 470 330 140 99
Emerging Markets Group:
Latin America 300 403 (103) (70)
Emerging Europe, Middle East & Africa (135) 67 (202) (139)
Asia (165) 121 (286) (202)
Corporate/Other 32 151 (119) (85)
Total $3,652 $3,823 $(171) $(102)
</TABLE>
<PAGE> 12
ORGANIZATIONAL UNIT RESULTS (continued)
<TABLE>
<CAPTION> Total Non- Pretax Net
Nine Months Ended September 30, 1997 Total Net interest Income/ Income/
(in millions) Revenue Expenses (Loss) (Loss)
<S> <C> <C> <C> <C>
Investment Banking $1,643 $1,095 $ 548 $380
Trading & Sales 501 367 134 93
Global Institutional Services 689 650 39 27
Private Client Services Group 481 418 63 43
Australia/New Zealand/International
Funds Management 429 313 116 80
Emerging Markets Group:
Latin America 523 392 131 91
Emerging Europe, Middle East & Africa 110 77 33 23
Asia 129 150 (21) (15)
Corporate/Other 196 286 (90) (63)
Total $4,701 $3,748 $953 $659
</TABLE>
Organizational Unit Results
The Investment Banking business recorded a net loss of $142 million in
the third quarter of 1998 compared to net income of $157 million in the
prior year quarter. The current quarter included losses related to
widening credit spreads on high-yield debt securities and mark-to-market
losses on investments in the unit's private equity portfolio. For the
first nine months of 1998, net income was $126 million as compared to $380
million in the prior year period. The first nine months of 1998 also
included charges related to repositioning of European equity businesses,
consisting of valuation adjustments to the Corporation's trading assets and
integration costs associated with the acquisition of NatWest Markets'
European equities business. The year-to-date decrease was partially offset
by higher corporate finance fees.
Trading & Sales recorded a net loss of $97 million in the third
quarter of 1998, compared to net income of $9 million in the 1997 third
quarter. Despite the difficult market environment, this unit produced
positive revenue during the third quarter of 1998 primarily due to strong
client-related activities. The current quarter also reflected losses
attributable to widening credit spreads and increased market volatility in
global equity markets. Net income was $38 million for the first nine
months of 1998 versus $93 million in the year-ago period. The year-to-date
decrease was largely due to the current quarter's losses offset by higher
revenue from client-related activities.
Global Institutional Services contributed $28 million of net income in
the third quarter of 1998, up $18 million from the 1997 third quarter. As
compared to the prior year quarter, the third quarter of 1998 included
improved revenue from corporate trust and agency services and cash
management services. Net income was $68 million for the first nine months
of 1998 versus $27 million for the first nine months of 1997. Improved
revenue from corporate trust and agency services, cash management services,
and securities lending contributed to this increase. Year-over-year
operating results also improved due to the sale of the Corporation's
defined contribution recordkeeping and participant services business in the
fourth quarter of 1997.
The Corporation's Private Client Services Group business recorded net
income of $20 million for the current quarter, up $7 million from the prior
year quarter. For the first nine months of 1998, net income was $63
million as compared to $43 million in the prior year period. Higher global
private banking commissions and improved funds management revenue
contributed to the year-over-year increase.
<PAGE> 13
ORGANIZATIONAL UNIT RESULTS (continued)
Net income of the Australia/New Zealand/International Funds Management
business was $38 million in the third quarter of 1998, up $21 million from
the third quarter of 1997. The current quarter's improvement was largely
due to a strong performance by the Australian and New Zealand Sales and
Trading group. Net income for the first nine months of 1998 was $99
million versus $80 million in the prior year period. The increase was due
to the current quarter's strong sales and trading performance and improved
revenue from funds management activities. If the effects of Australian
dollar depreciation are excluded, performance would be better by an
additional $3 million when compared to the third quarter of 1997 and $13
million when compared to the first nine months of 1997.
Emerging Markets Group net loss was $309 million in the current
quarter, compared to net income of $43 million in the prior year quarter.
Net loss was $411 million for the first nine months of 1998 compared to net
income of $99 million in the prior year period. The net loss for the
current quarter and year-to-date period was primarily attributable to
Russia and deteriorating credit conditions in Asia.
Latin America - Trading losses and losses on securities available for
sale negatively impacted the current quarter and year-to-date period. The
prior year's quarter included the remaining gain resulting from the
completion of the final stage on the sale of 50 percent of the
Corporation's stake in Consorcio, a Chilean insurance company. The 1997
year-to-date results included the total gain on the sale of 50 percent of
the Corporation's stake in Consorcio.
Emerging Europe, Middle East & Africa - The current quarter included
charges to reduce the carrying amount of exposure to Russian Federation
securities to 10 percent of face value. This unit also recorded a $20
million provision for credit losses in the third quarter of 1998.
Asia - A $90 million and $210 million provision for credit losses was
included in the current quarter and year-to-date period, respectively. The
current quarter and first nine months of 1998 also included losses on
securities available for sale and lower trading revenue as compared to the
prior year periods. The first nine months of 1998 also included valuation
adjustments to trading assets for widening counterparty credit spreads.
During the first nine months of 1997, the Corporation recognized a decline
in value for certain investments in Southeast Asia and took other credit-
related charges.
Corporate/Other - includes the income and expenses of smaller
businesses that are not included in the main organizational units as well
as some activities not associated with specific business lines. It also
includes the funding benefit attributed to the Corporation's capital
related to these areas. Corporate/Other net loss was $26 million in the
third quarter of 1998, compared with a net loss of $3 million in the third
quarter of 1997. For the first nine months of 1998, the net loss was $85
million as compared to a net loss of $63 million in the prior year period.
<PAGE> 14
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 Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
NET INTEREST REVENUE (in millions)
Book basis $336 $315 $1,104 $ 986
Tax equivalent adjustment 7 7 23 20
Fully taxable basis $343 $322 $1,127 $1,006
AVERAGE BALANCES (in millions)
Interest-earning assets $131,309 $105,676 $125,973 $101,961
Interest-bearing liabilities 128,926 102,225 123,102 97,768
Earning assets financed by
noninterest-bearing funds $ 2,383 $ 3,451 $ 2,871 $ 4,193
AVERAGE RATES (fully taxable basis)
Yield on interest-earning assets 6.91% 6.74% 7.00% 6.84%
Cost of interest-bearing liabilities 5.99 5.72 5.94 5.76
Interest rate spread .92 1.02 1.06 1.08
Contribution of noninterest-bearing
funds .12 .19 .14 .24
Net interest margin 1.04% 1.21% 1.20% 1.32%
</TABLE>
Net interest revenue for the third quarter of 1998 totaled $336
million, up $21 million, or 7 percent, from the third quarter of 1997. The
$21 million increase in net interest revenue was primarily due to a $12
million increase in trading-related net interest revenue, which totaled
$117 million for the third quarter of 1998. Nontrading-related net
interest revenue totaled $219 million for the third quarter of 1998 versus
$210 million for the comparable period in 1997.
Net interest revenue for the first nine months of 1998 totaled $1.104
billion, up $118 million, or 12 percent, from the first nine months of
1997. The $118 million increase in net interest revenue was primarily due
to a $66 million increase in trading-related net interest revenue, which
totaled $461 million for the first nine months of 1998. Nontrading-related
net interest revenue totaled $643 million for the first nine months of 1998
versus $591 million for the comparable period in 1997.
In the third quarter of 1998, the interest rate spread was .92 percent
compared to 1.02 percent in the prior year period. Net interest margin
decreased to 1.04 percent from 1.21 percent. The yield on interest-earning
assets increased by 17 basis points and the cost of interest-bearing
liabilities increased by 27 basis points. Average interest-earning assets
totaled $131.3 billion for the third quarter of 1998, up $25.6 billion from
the same period in 1997. The increase was primarily attributable to
increases in securities borrowed and in securities available for sale.
Average interest-bearing liabilities totaled $128.9 billion for the third
quarter of 1998, up $26.7 billion from the same period in 1997. The
increase was primarily attributable to a rise in securities sold under
repurchase agreements and long-term debt.
<PAGE> 15
REVENUE (continued)
In the first nine months of 1998, the interest rate spread was 1.06
percent compared to 1.08 percent in the prior year period. Net interest
margin fell to 1.20 percent from 1.32 percent. The yield on interest-
earning assets increased by 16 basis points and the cost of interest-
bearing liabilities rose by 18 basis points. Average interest-earning
assets totaled $126.0 billion for the first nine months of 1998, up $24.0
billion from the same period in 1997. The increase was primarily
attributable to an increase in securities borrowed, securities available
for sale and growth in the loan portfolio. Average interest-bearing
liabilities totaled $123.1 billion for the first nine months of 1998, up
$25.3 billion from the same period in 1997. The increase was primarily
attributable to a rise in securities sold under repurchase agreements,
interest-bearing deposits, and long-term debt.
Trading Revenue
The Firm's trading and risk management activities include significant
transactions 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
before the provision for trading-related credit losses for the third
quarter of 1998 was a loss of $284 million, down $776 million from the
third quarter of 1997. The decline is primarily attributable to mark-to-
market losses on high-yield securities, losses in global proprietary equity
portfolios and Russian-related trading losses.
Combined trading revenue and trading-related net interest revenue
before the provision for trading-related credit losses for the first nine
months of 1998 totaled $408 million, down $1.0 billion from the first nine
months of 1997. The decline is primarily attributable to mark-to-market
losses on high-yield securities, losses in global proprietary equity
portfolios, Russian-related trading losses and valuation adjustments to
trading assets for widening counterparty credit spreads.
<PAGE> 16
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>
Three Months ended September 30, 1998
Interest rate risk $(249) $151 $ (98)
Foreign exchange risk 70 - 70
Equity and commodity risk (222) (34) (256)
Total $(401) $117 $(284)
Three Months ended September 30, 1997
Interest rate risk $135 $126 $261
Foreign exchange risk 119 - 119
Equity and commodity risk 133 (21) 112
Total $387 $105 $492
Nine Months ended September 30, 1998
Interest rate risk $(195) $513 $ 318
Foreign exchange risk 330 - 330
Equity and commodity risk (188) (52) (240)
Total $ (53) $461 $ 408
Nine Months ended September 30, 1997
Interest rate risk $ 426 $457 $ 883
Foreign exchange risk 205 - 205
Equity and commodity risk 382 (62) 320
Total $1,013 $395 $1,408
</TABLE>
Third Quarter 1998 vs. Third Quarter 1997
Interest Rate Risk - The decrease reflects mark-to-market losses on
high yield securities reflecting widening credit spreads and adverse
conditions in the emerging markets in Latin America and Russia.
Foreign Exchange Risk - The decrease in foreign exchange revenue is
primarily related to losses in the Asian and Eastern European markets.
These losses were partially offset by gains generated in the Australian
market.
Equity and Commodity Risk - Total trading revenue and trading-related
net interest revenue decreased $368 million from the same period last year.
This change is primarily attributable to losses in global proprietary
equity portfolios caused by increased market volatility and decreased
activity in the equity derivatives books.
<PAGE> 17
REVENUE (continued)
Nine Months 1998 vs. Nine Months 1997
Interest Rate Risk - The decrease is primarily attributable to losses
on high yield securities, adverse conditions in the Latin American and
Asian markets and valuation adjustments to trading assets for widening
counterparty credit spreads.
Foreign Exchange Risk - The increase compared to the same period last
year is principally due to gains in the Australian and Asian markets.
Equity and Commodity Risk - The decrease is primarily attributable to
losses in global proprietary equity portfolios caused by increased market
volatility, valuation adjustments related to the Corporation's European
Equity business as well as decreased activity in the equity derivative
books.
Noninterest Revenue (Excluding Trading)
Third Quarter 1998 vs. Third Quarter 1997
Fiduciary and funds management revenue was $273 million in the third
quarter of 1998, down $4 million from the prior year period. The current
quarter reflected lower client processing fees and lower performance-based
fees offset partly by higher global private banking commissions. At
September 30, 1998, assets under management were $338 billion compared to
$302 billion at September 30, 1997.
Difficult market conditions affected corporate finance fees, which
were down 21 percent from the third quarter of 1997. Lower underwriting
and loan syndication fees were offset partly by higher merger and
acquisition fees.
Other fees and commissions of $218 million increased $60 million from
the prior year quarter. Increased customer trading activity primarily due
to the acquisition of NatWest Markets' European equities business resulted
in higher fees for brokerage services.
Net revenue from equity investments decreased $74 million from the
prior year period resulting from the poor market environment.
Securities available for sale losses totaled $125 million compared to
securities available for sale gains of $18 million in the prior year
period. The current quarter included other-than-temporary impairment
writedowns on Russian, Asian and Latin American debt securities.
Other noninterest revenue was a negative $35 million compared to $171
million in the prior year period. The current quarter included losses from
mark-to-market adjustments on venture capital equity securities. Included
in the results of the third quarter of 1997 was a pre-tax gain of $76
million on the sale of 280 Park Avenue, a midtown Manhattan office
building, as well as the remaining gain resulting from the completion of
the final stage in the sale of 50 percent of the Corporation's stake in
Consorcio.
<PAGE> 18
REVENUE (continued)
Nine Months 1998 vs. Nine Months 1997
Fiduciary and funds management revenue of $819 million earned during
the first nine months of 1998 increased $44 million from the $775 million
earned during the first nine months of 1997. Higher global private banking
commissions and improved funds management revenue contributed to this
increase.
Corporate finance fees of $965 million increased $176 million from the
first nine months of 1997, primarily due to higher merger and acquisition
fees and higher underwriting fees.
Other fees and commissions of $584 million increased by $145 million
from the $439 million earned in the first nine months of 1997 primarily due
to higher fees for brokerage services primarily as a result of the
acquisition of NatWest Markets' European equities business.
Net revenue from equity investments was $203 million for the first
nine months of 1998 as compared with $129 million for the first nine months
of 1997. The current period included higher gains on direct equity
investments.
Securities available for sale losses totaled $81 million compared to
securities available for sale gains of $100 million in the prior year
period. The current period reflected other-than-temporary impairment
writedowns on Russian, Asian, and Latin American debt securities.
Other noninterest revenue of $139 million decreased $138 million, or
50 percent, from the prior year period. The prior year period included a
pre-tax gain of $76 million on the sale of 280 Park Avenue, a midtown
Manhattan office building, and the total gain on the sale of 50 percent of
the Corporation's stake in Consorcio.
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
The total credit loss provision 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.
The Corporation has allocated its total allowance for credit losses as
presented below; however, the Corporation believes 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
allowance for credit losses may be adjusted as risk factors change.
<PAGE> 19
PROVISION AND ALLOWANCE FOR CREDIT LOSSES (continued)
The total credit loss provision and the other changes in the allowance
for credit losses are shown below (in millions).
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
Total allowance for credit losses 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Balance, beginning of period $1,011 $973 $997 $973
Net charge-offs
Charge-offs
Loans 37 17 67 51
Trading assets 115 13 200 15
Total charge-offs 152 30 267 66
Recoveries
Loans 6 3 15 20
Trading assets - 16 - 18
Total recoveries 6 19 15 38
Total net charge-offs 146 11 252 28
Allowance related to acquisition
of affiliate - - - 17
Credit loss provision-loans 20 - 20 -
Credit loss provision-trading 90 10 210 10
Total credit loss provision 110 10 230 10
Balance, end of period (a) $975 $972 $975 $972
(a) Allocation of allowance for credit losses:
Loans $667 $759
Trading assets* 295 200
Other liabilities 13 13
Balance, end of period $975 $972
<FN>
* The allowance allocated to trading assets relates to over-the-counter
forward, swap and option contracts and other financial instruments with
similar characteristics.
</TABLE>
The allowance for credit losses that has been allocated to loans was
$667 million at September 30, 1998 compared to $699 million at December 31,
1997. This allowance was equal to 260 percent and 291 percent of total
cash basis loans at September 30, 1998 and December 31, 1997, respectively.
These ratios were computed using the amounts that were allocated to loans.
Impaired loans, which consisted of total cash basis loans and
renegotiated loans, were $283 million and $265 million at September 30,
1998 and December 31, 1997, respectively. Included in these amounts were
$166 million and $78 million of loans which required a valuation allowance
of $30 million and $13 million at those same dates, respectively.
<PAGE> 20
EXPENSES
Third Quarter 1998 vs. Third Quarter 1997
Management is implementing a cost-reduction program across the Firm
with the goal of achieving a $300 million reduction in annual base
operating expenses. Base operating expenses exclude performance-based
incentives and provisions for policyholder benefits. The program will
target all costs, but will focus primarily on personnel and agency and
professional service costs. The program should be fully phased in within
12 months with most actions taken by the 1999 first quarter. In order to
accomplish these expense reductions, it is expected that a restructuring
charge will be incurred in the 1998 fourth quarter.
As compared to the third quarter of 1997, salaries and commissions
expense increased $33 million, or 10 percent, primarily due to an increase
in the average number of employees.
Incentive compensation and employee benefits decreased $257 million,
or 47 percent, from the prior year quarter due to the decline in financial
performance.
During the third quarter of 1997, the Corporation recognized $57
million in pre-tax restructuring charges associated with the merger with
Alex. Brown, such as severance, lease terminations and direct costs of
completing the merger.
Nine Months 1998 vs. Nine Months 1997
Salaries and commissions expense of $1.063 billion in the first nine
months of 1998 increased by $122 million from the first nine months of
1997, primarily due to an increase in the average number of employees.
Incentive compensation and employee benefits decreased by $162 million
during the first nine months of 1998 due to the decline in financial
performance, partly offset by employee stock awards granted in 1997.
Agency and other professional service fees of $374 million increased
by $78 million during the first nine months of 1998 primarily due to costs
associated with the integration of NatWest Markets' European equities
business .
During the first nine months of 1997, the Corporation recognized $57
million in pre-tax restructuring charges associated with the merger with
Alex. Brown, such as severance, lease terminations and direct costs of
completing the merger.
INCOME TAXES
The income tax benefit for the third quarter of 1998 amounted to $219
million, compared to income tax expense of $105 million in the third
quarter of 1997. For the first nine months of 1998, the income tax benefit
was $69 million compared with income tax expense of $294 million for the
first nine months of 1997. The effective tax rate was 31 percent and 40
percent for the current quarter and nine months ended September 30, 1998,
respectively, and 30 percent and 31 percent for the prior year quarter and
nine months ended September 30, 1997, respectively.
YEAR 2000 READINESS DISCLOSURE
As discussed on page 16 in the Corporation's 1997 Annual Report on
Form 10-K, the Corporation initiated a firm-wide program (the "Year 2000
Program") to prepare its computer systems, applications and infrastructure
for properly processing dates after December 31, 1999. The Corporation's
Year 2000 Program is proceeding on schedule and it is the Corporation's
expectation that it will have its firm-wide Year 2000 solution
substantially in place by December 31, 1998, in accordance with regulatory
guidelines.
<PAGE> 21
YEAR 2000 READINESS DISCLOSURE (continued)
Based on the Federal Financial Institutions Examination Council
("FFIEC") guidelines, the Corporation's Year 2000 Program consists of the
following phases related to technology:
1) Awareness Phase - A strategic approach was developed to address the
Year 2000 problem in mid 1996.
2) Assessment Phase - Detailed plans and target dates were developed.
3) Renovation Phase - This phase includes code enhancements, hardware and
software upgrades, system replacements, vendor certification, and other
associated changes.
4) Validation Phase - This phase includes testing and conversion of
system applications.
5) Implementation Phase - This phase includes a review of Year 2000
compliance and user acceptance.
The Awareness Phase and Assessment Phase have been completed. As of
September 30, 1998, the Renovation Phase and Validation Phase are
substantially complete. Completion of the Renovation Phase is expected by
the end of the fourth quarter of 1998. The Corporation expects the
Validation and Implementation phases to continue through the first quarter
of 1999. Although the priority given to Year 2000 issues may cause other
technology projects to be deferred, the deferral of these other projects is
not expected to have a material impact on the Corporation's business or
operational controls.
The Corporation's Year 2000 Program includes a Business Support Group
that addresses Year 2000 issues not directly related to technology. This
group, which includes representatives from various areas of the
Corporation, has subgroups and task forces working on the following
programs.
Facilities Program - This program deals with infrastructure
components, including all applicable embedded systems, that are used
in a facility (e.g. elevators, HVAC, generators, security systems,
etc.) and third party provided facilities or services (utilities,
landlord services, etc.). The facilities assessment and inventory
phases were completed in 1997. Third party service provider assessment
was begun in mid 1998. The Corporation expects to be substantially
complete, including independent testing by qualified third party
specialists, with the remediation and testing of critical facility
systems by the end of 1998. The remaining remediation and testing of
critical facility systems and the assessment of critical service
providers will be complete by the end of the first quarter 1999.
Counterparty Assessment Program - This program addresses the Year 2000
readiness of counterparties. Counterparty Year 2000 assessment has
been incorporated into the standard credit process. At September 30,
1998, the Corporation had substantially completed its initial
assessment of the Year 2000 readiness of its material customers in
accordance with FFIEC guidelines. The counterparty assessment program
is an ongoing process, which will continue for the balance of 1998,
throughout 1999, and for as long as necessary thereafter.
Critical Vendor/Service Provider Program - This program assesses the
Year 2000 readiness of the Corporation's critical vendors and service
providers, as well as contractual issues. These third parties are
providers in such areas as telecommunications, hardware and software,
office equipment and market data as well as correspondent financial
services. Risk mitigation actions are in the process of being
identified for any critical vendor/service provider deficient in its
Year 2000 readiness.
The Corporation is continuing to communicate with its significant
obligors, counterparties, other credit clients, vendors and entities in
which the Corporation holds a significant interest to determine the likely
extent to which the Corporation may be affected by third parties' Year 2000
plans and target dates. In this regard, while the Corporation does not now
expect a material loss as a result of the Year 2000 problem, there can be
no guarantee that the systems of other companies and counterparties on
which the Corporation relies will be remediated on a timely basis, or that
a failure to remediate by another party, or a remediation or conversion
that is incompatible with the Corporation's systems, would not have a
material adverse effect on the Corporation.
<PAGE> 22
YEAR 2000 READINESS DISCLOSURE (continued)
The Corporation is developing contingency plans in the event that
external parties fail to achieve their Year 2000 plans by the targeted
dates. The Corporation anticipates that beginning on January 1, 2000, Year
2000 related failures may result in sporadic disruption of communications,
power, public transportation, or other external infrastructure worldwide
that could compromise the timely performance of specific business functions
and/or limit the flow of business opportunities across the organization.
It is unclear how long the period of disruption might last; there are
likely to be considerable differences among various global locations. We
intend to have contingency plans and crisis management teams in place to
coordinate the Corporation's response to those events likely to present
material risks to the Corporation, whether they occur in an isolated manner
or on a country or more widespread basis. The Corporation plans to
identify significant Year 2000 risks in the context of its core businesses
from both internal and external failures, assess their probability of
occurrence and take the necessary actions to mitigate the risks. This
process is currently underway, but there can be no assurance that any such
contingency plans will fully mitigate the effects of any third-party
failure.
Based on information currently available, the Corporation expects its
Year 2000 expenditures for 1998 and over the next two years to be
approximately $220 million to $260 million. The Corporation previously
estimated the expenditures to be approximately $180 million to $230
million. The principal reasons for the increase are the greater cost than
originally anticipated of achieving the desired rigor of testing in 1998
and 1999, and an expanded focus on Year 2000 risk management efforts across
the entire Corporation. A significant portion of these expenditures are
not likely to be incremental costs to the Corporation, but rather will
represent the redeployment of existing information technology resources.
The Corporation incurred approximately $33 million for the third quarter of
1998 and $108 million for the nine months ended September 30, 1998 for Year
2000 expenditures.
The costs of the Year 2000 Program and the date on which the
Corporation plans to complete the Year 2000 modifications are based on
management's current estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of
certain resources, third party modification plans and other factors.
However, there can be no guarantee that these estimates will be achieved
and actual results could differ materially from those plans.
EUROPEAN ECONOMIC & MONETARY UNION ("EMU")
The Corporation is also engaged in a global effort to manage
operational and other business issues potentially arising from the
introduction of the Economic & Monetary Union (EMU). EMU is scheduled to
start on January 1, 1999 and will result in the creation of a new single
currency, the euro, for eleven countries in the European Community. A
global EMU program was set up in 1997 to manage, track and report on the
Corporation's worldwide effort with the goal of ensuring a smooth
transition across the full range of products and services offered by the
Corporation.
Based on information currently available, the Corporation expects its
EMU expenditures for 1998-2000 to be in the range of $93 million to $115
million. The Corporation incurred approximately $19 million for the third
quarter of 1998 and $37 million for the nine months ended September 30,
1998 for EMU expenditures. A significant portion of these costs are not
likely to be incremental costs to the Corporation, but rather represent the
redeployment of existing operations and information technology resources.
The work necessary to prepare for the transition to the euro is
currently on schedule for timely completion. The Corporation has performed
significant remediation to its IT systems and will implement changes in
operating practice. The Corporation has undertaken substantial testing of
systems and procedures and is undergoing several bankwide conversion dress
rehearsals as part of its preparation for the conversion weekend of January
1-3, 1999. The Corporation is also participating in industry-wide testing
initiatives.
<PAGE> 23
EUROPEAN ECONOMIC & MONETARY UNION ("EMU") (continued)
Success in the conversion to the euro is vital to ensure that the
Corporation can provide a full set of products and services in January
1999. In this regard, while the Corporation does not have a current
expectation of any material loss as a result of EMU, there can be no
guarantee that third parties on which the Corporation relies will achieve
full EMU readiness. Such third parties include software developers,
information providers, exchanges, correspondent banks and securities
depositories, clients and other counterparties.
In order to mitigate these risks, the Corporation is monitoring
progress of external parties and developing contingency plans in the event
that external parties fail to achieve EMU readiness, but there can be no
assurance that any such contingency plans will fully mitigate the effects
of any such failure.
EARNINGS PER COMMON SHARE
Basic earnings per common share amounts were computed by subtracting
from net income the dividend requirements on preferred stock to arrive at
net income applicable to common stockholders and dividing this amount by
the average number of common shares outstanding during the period. The
average number of common shares outstanding is the sum of the average
number of shares of common stock outstanding and undistributed vested
shares awarded under deferred stock plans.
Diluted earnings per share amounts were calculated by adding back to
net income applicable to common stockholders the interest expense on the
convertible subordinated debentures and dividing this amount by the average
number of common shares and dilutive potential common shares outstanding
during the period.
Diluted earnings per share assumes the conversion into common stock of
outstanding stock options, deferred stock awards (including restricted
stock awards) and convertible subordinated debentures, as computed under
the treasury stock method, if dilutive. Under the treasury stock method,
the number of incremental shares is determined by assuming the issuance of
the outstanding stock options, deferred stock awards, and shares from
convertible subordinated debentures, reduced by the number of shares
assumed to be repurchased from the issuance proceeds, using the average
market price for the period of the Parent Company's common stock.
<PAGE> 24
EARNINGS PER COMMON SHARE (continued)
The following table sets forth the computation of basic and diluted
earnings per share (in millions, except per share amounts):
Three Months Ended Nine Months Ended
<TABLE> September 30, September 30,
<CAPTION> 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Numerator
Net income (loss) $(488) $246 $(102) $659
Preferred stock dividends (6) (11) (26) (37)
Numerator for basic earnings (loss)
per share - net income (loss)
applicable to common stockholders (494) 235 (128) 622
Effect of dilutive securities
Convertible subordinated debentures - - - 2
Numerator for diluted earnings
(loss) per share - net income (loss)
applicable to common stockholders
after assumed conversions $(494) $235 $(128) $624
Denominator
Denominator for basic earnings (loss)
per share - weighted average shares
outstanding 99.299 100.773 100.529 100.420
Effect of dilutive securities (1)
Options - 1.495 - 1.455
Convertible subordinated debentures - 2.482 - 2.862
Deferred stock - 2.699 - 2.108
Dilutive potential common shares - 6.676 - 6.425
Denominator for diluted earnings
(loss) per share - adjusted weighted
-average shares after assumed
conversions 99.299 107.449 100.529 106.845
Basic earnings (loss) per share $(4.98) $2.33 $(1.28) $6.20
Diluted earnings (loss) per share $(4.98) $2.19 $(1.28) $5.85
<FN>
(1) Due to a loss for the three month and nine month periods ended
September 30, 1998, no incremental shares are included in the diluted EPS
calculation because the effect would be antidilutive.
</TABLE>
<PAGE> 25
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)
3rd Qtr 2nd Qtr 4th Qtr
1998 1998 1997
<S> <C> <C> <C>
ASSETS
Interest-earning
Interest-bearing deposits with banks $ 2,734 $ 4,112 $ 6,211
Federal funds sold 3,883 4,237 4,950
Securities purchased under resale
agreements 27,911 26,501 23,074
Securities borrowed 26,582 28,660 16,588
Trading assets 32,570 32,228 30,447
Securities available for sale
Taxable 10,790 11,778 6,876
Exempt from federal income taxes 1,955 1,739 1,237
Total securities available for sale 12,745 13,517 8,113
Loans
Domestic offices 12,151 11,474 10,800
Foreign offices 11,021 11,023 9,580
Total loans 23,172 22,497 20,380
Customer receivables 1,712 1,612 1,612
Total interest-earning assets 131,309 133,364 111,375
Noninterest-earning
Cash and due from banks 2,682 2,475 1,476
Noninterest-earning trading assets 30,669 27,670 25,356
All other assets 11,927 11,373 10,694
Allowance for credit losses (1,032) (1,004) (979)
Total $175,555 $173,878 $147,922
LIABILITIES
Interest-bearing
Interest-bearing deposits
Domestic offices $ 21,840 $24,811 $ 21,881
Foreign offices 18,685 20,339 20,966
Total interest-bearing deposits 40,525 45,150 42,847
Trading liabilities 9,660 8,754 5,587
Securities loaned and securities sold
under repurchase agreements 34,481 34,834 24,200
Other short-term borrowings 24,230 22,873 20,078
Long-term debt 18,567 16,830 13,050
Trust preferred capital securities 1,463 1,474 1,472
Total interest-bearing liabilities 128,926 129,915 107,234
Noninterest-bearing
Noninterest-bearing deposits 4,730 4,310 3,366
Noninterest-bearing trading liabilities 25,790 22,753 20,803
All other liabilities 10,652 10,862 10,591
Total liabilities 170,098 167,840 141,994
PREFERRED STOCK OF SUBSIDIARY 304 304 -
STOCKHOLDERS' EQUITY
Preferred stock 445 593 688
Common stockholders' equity 4,708 5,141 5,240
Total stockholders' equity 5,153 5,734 5,928
Total $175,555 $173,878 $147,922
</TABLE>
<PAGE> 26
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, which includes
minority interest, are as follows.
<TABLE>
<CAPTION> September 30, June 30, December 31,
(in millions) 1998 1998 1997
<S> <C> <C> <C>
Fair value $11,421 $12,105 $8,081
Amortized cost 11,685 12,238 8,128
Excess of amortized cost over
fair value* $ (264) $ (133) $ (47)
* Components:
Unrealized gains $ 135 $ 126 $ 128
Unrealized losses (399) (259) (175)
$ (264) $ (133) $ (47)
</TABLE>
Preferred Stock
On August 17, 1998, the Corporation redeemed all 3,967,397 depositary
shares of its 7.50% Cumulative Preferred Stock, Series P. The shares
were redeemed at a redemption price of $25 per depositary share plus
accrued and unpaid dividends to the redemption date.
<PAGE> 27
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 September 30, Average During
1998 3rd Qtr. 1998
(Liabil- (Liabil-
(in millions) Assets ities) Assets ities)
<S> <C> <C> <C> <C>
OTC Financial Instruments
Interest Rate and Currency
Swap Contracts $ 28,932 $(26,536) $ 24,063 $(21,498)
Interest Rate Contracts
Forwards 269 (261) 309 (300)
Options purchased 2,273 1,440
Options written (2,318) (1,524)
Foreign Exchange Rate Contracts
Spot and Forwards 15,235 (14,964) 13,098 (13,485)
Options purchased 1,406 1,649
Options written (1,205) (1,382)
Equity-related contracts 4,624 (5,109) 4,958 (6,022)
Commodity-related and other contracts 679 (641) 898 (871)
Exchange-Traded Options
Interest Rate 7 (9) 7 (10)
Foreign Exchange 35 (26) 36 (30)
Commodity - - 4 (2)
Equity 744 (488) 749 (471)
Total Gross Fair Values 54,204 (51,557) 47,211 (45,595)
Impact of Netting Agreements (34,826) 34,826 (28,989) 28,989
Less Allowance for Credit Losses (295) - (357) -
$ 19,083(1) $17,865
$(16,731)(1) $(16,606)
<FN>
(1) As reflected on the balance sheet in "Trading Assets" and "Trading
Liabilities."
</TABLE>
<PAGE> 28
TRADING DERIVATIVES (continued)
<TABLE>
<CAPTION>
At December 31, Average During
1997 4th Qtr. 1997
(Liabil- (Liabil-
(in millions) Assets ities) Assets ities)
<S> <C> <C> <C> <C>
OTC Financial Instruments
Interest Rate and Currency
Swap Contracts $ 20,793 $(19,103) $19,730 $(18,138)
Interest Rate Contracts
Forwards 48 (40) 46 (48)
Options purchased 1,147 1,149
Options written (1,355) (1,309)
Foreign Exchange Rate Contracts
Spot and Forwards 17,846 (18,031) 14,694 (14,416)
Options purchased 1,299 1,187
Options written (1,192) (1,075)
Equity-related contracts 4,082 (4,607) 3,919 (4,294)
Commodity-related and other contracts 597 (680) 742 (785)
Exchange-Traded Options
Interest Rate 4 (3) 8 (1)
Foreign Exchange (5) (4)
Equity 411 (318) 436 (330)
Total Gross Fair Values 46,227 (45,334) 41,911 (40,400)
Impact of Netting Agreements (28,269) 28,269 (25,249) 25,249
Less Allowance for Credit Losses (285) - (200) -
$17,673(1) $16,462
$(17,065)(1) $(15,151)
<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 and currency swaps) to manage the
interest rate, currency and other market risks associated with certain
liabilities and assets such as interest-bearing deposits, short-term
borrowings and long-term debt, as well as securities available for sale,
loans, investments in non-marketable equity instruments and net investments
in foreign entities. Revenue or expense pertaining to management of
interest rate exposure is predominantly recognized over the life of the
contract as an adjustment to interest revenue or expense.
Total net end-user derivative unrealized gains were $530 million at
September 30, 1998 compared with an unrealized gain of $223 million at
December 1997. The $307 million increase was primarily due to a decrease
in interest rates.
<PAGE> 29
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-
Sept 30, 1998 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 $ 32 $ 10 $ 1 $ 237 $ 33 $ 770 $ - $1,083
Unrealized (Loss) - (10) - (33) (21) (40) - (104)
Pay Variable Net 32 - 1 204 12 730 - 979
Pay Fixed
Unrealized Gain 2 1 - 2 - - - 5
Unrealized (Loss) (144)(120) (3) (79) (17) (69) - (432)
Pay Fixed Net (142) (119) (3) (77) (17) (69) - (427)
Total Unrealized
Gain 34 11 1 239 33 770 - 1,088
Total Unrealized
(Loss) (144) (130) (3) (112) (38) (109) - (536)
Total Net $(110) $(119) $(2) $127 $ (5) $ 661 $ - $552
Forward Rate Agreements
Unrealized Gain $ - $ - $ - $ - $ - $ - $ - $ -
Unrealized (Loss) - - - (1) - - - (1)
Net $ - $ - $ - $(1) $ - $ - $ - $(1)
Currency Swaps and Forwards
Unrealized Gain $ - $ - $ - $ 5 $ 5 $ 51 $ 20 $ 81
Unrealized (Loss) (15) - (2) (2) (1) (29) (49) (98)
Net $(15) $ - $(2) $ 3 $ 4 $ 22 $(29) $(17)
Other Contracts (2)
Unrealized Gain $ - $ - $ - $1 $ - $ - $ - $ 1
Unrealized (Loss) (3) - (2) - - - - (5)
Net $(3) $- $(2) $1 $ - $ - $ - $(4)
Total Unrealized
Gain $ 34 $ 11 $ 1 $ 245 $ 38 $ 821 $ 20 $1,170
Total Unrealized
(Loss) (162) (130) (7) (115) (39) (138) (49) (640)
Total Net $(128) $(119) $(6) $130 $ (1) $ 683 $(29) $ 530
<FN>
(1) Includes trust preferred capital securities.
(2) Other contracts are principally equity swaps and collars.
</TABLE>
<PAGE> 30
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-
Dec 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 $ 3 $ 8 $ - $ 61 $ 20 $ 524 $ - $ 616
Unrealized (Loss) - (3) - (13) (27) (94) - (137)
Pay Variable Net 3 5 - 48 (7) 430 - 479
Pay Fixed
Unrealized Gain 2 1 - 32 11 3 - 49
Unrealized (Loss)(51) (184) - (42) (30) (25) - (332)
Pay Fixed Net (49) (183) - (10) (19) (22) - (283)
Total Unrealized
Gain 5 9 - 93 31 527 - 665
Total Unrealized
(Loss) (51) (187) - (55) (57) (119) - (469)
Total Net $(46) $(178) $ - $38 $(26) $ 408 $ - $ 196
Forward Rate Agreements
Unrealized Gain $ - $ - $ - $ - $ - $ - $ - $ -
Unrealized (Loss) - - - (1) - - - (1)
Net $ - $ - $ - $ (1) $ - $ - $ - $ (1)
Currency Swaps and Forwards
Unrealized Gain $ 14 $ 6 $ 2 $ 25 $ 34 $ 36 $ 40 $ 157
Unrealized (Loss) - - - - (16) (63) (46) (125)
Net $ 14 $ 6 $ 2 $ 25 $ 18 $ (27) $ (6) $ 32
Other Contracts (2)
Unrealized Gain $ - $ 1 $ - $ - $ - $ - $ - $ 1
Unrealized (Loss) (4) - (1) - - - - (5)
Net $(4) $ 1 $(1) $ - $ - $ - $ - $ (4)
Total Unrealized
Gain $ 19 $ 16 $ 2 $118 $65 $ 563 $ 40 $ 823
Total Unrealized
(Loss) (55) (187) (1) (56) (73) (182) (46) (600)
Total Net $(36) $(171) $ 1 $ 62 $ (8) $ 381 $ (6) $ 223
<FN>
(1) Includes trust preferred capital securities.
(2) Other contracts are principally equity swaps and collars.
</TABLE>
<PAGE> 31
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 September 30, 1998
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>
1998 $34,335 5.63% 5.81% $2,727 5.84% 5.87% $37,062
1999-2000 40,214 5.82 5.65 7,525 5.59 6.12 47,739
2001-2002 4,003 6.02 5.27 1,783 4.65 6.98 5,786
2003 and
thereafter 9,419 6.52 5.22 2,628 4.82 5.73 12,047
Total $87,971 $14,663 $102,634
</TABLE>
All rates were those in effect at September 30, 1998. Variable rates
are primarily based on LIBOR and may change significantly, affecting future
cash flows.
<TABLE>
<CAPTION>
At December 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>
1998 $74,471 5.79% 5.84% $6,799 5.83% 6.00% $81,270
1999-2000 11,222 5.97 5.72 3,006 5.04 5.62 14,228
2001-2002 3,282 6.56 5.75 1,437 5.32 9.66 4,719
2003 and
thereafter 6,730 6.89 5.43 1,106 5.75 7.26 7,836
Total $95,705 $12,348 $108,053
</TABLE>
All rates were those in effect at December 31, 1997. Variable rates
are primarily based on LIBOR and may change significantly, affecting future
cash flows.
<PAGE> 32
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 address the capital adequacy of bank holding companies and banks
(collectively, "banking organizations"). These guidelines include a
definition of capital, a framework for calculating risk-weighted assets,
and minimum risk-based capital ratios to be maintained by banking
organizations. A banking organization's risk-based capital ratios are
calculated by dividing its qualified capital by its risk-weighted assets.
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. The Leverage ratio is calculated by dividing Tier 1 Capital
by adjusted quarterly average assets. The Corporation's 1997 Annual Report
on Form 10-K, on pages 20 and 59, provide a detailed discussion of these
guidelines and regulations.
Based on their respective regulatory capital ratios as of September
30, 1998, both the Corporation and Bankers Trust Company ("BTCo") are well
capitalized, as defined in the applicable regulations.
The capital ratios for the Corporation and BTCo are presented below:
<TABLE>
<CAPTION>
FRB
Minimum To Be Well
for Capitalized
Actual as of Actual as of Capital Under
September 30, December 31, Adequacy Regulatory
1998 1997 Purposes Guidelines
<S> <C> <C> <C> <C>
Corporation
Risk-Based Capital Ratios
Tier 1 Capital 7.09% 8.27% 4.00% 6.00%
Total Capital 13.32% 14.11% 8.00% 10.00%
Leverage Ratio 2.95% 4.41% 3.00% N/A
BTCo
Risk-Based Capital Ratios
Tier 1 Capital 10.44% 8.96% 4.00% 6.00%
Total Capital 14.56% 12.33% 8.00% 10.00%
Leverage Ratio 5.32% 5.39% 3.00%-5.00% 5.00%
<FN>
N/A - Not applicable
</TABLE>
<PAGE> 33
REGULATORY CAPITAL (continued)
The following are the essential components of the risk-based capital
ratios for the Corporation and BTCo.
<TABLE>
<CAPTION>
Actual as of Actual as of
September 30, December 31,
(in millions) 1998 1997
<S> <C> <C>
Corporation
Tier 1 Capital $ 5,105 $ 6,431
Tier 2 Capital 4,089 4,138
Tier 3 Capital 400 400
Total Capital $9,594 $10,969
Total risk-weighted assets $72,018 $77,726
BTCo
Tier 1 Capital $6,834 $ 5,999
Tier 2 Capital 2,697 2,262
Total Capital $9,531 $ 8,261
Total risk-weighted assets $65,449 $66,975
</TABLE>
Comparing September 30, 1998 to December 31, 1997, the Tier 1 and
Total Capital ratios for the Corporation decreased 118 basis points and 79
basis points, respectively. These declines were driven primarily by the
impact on Tier 1 Capital of the third quarter net loss and the increase in
goodwill related to the acquisition of the NatWest Markets' European
equities business, with Total Capital also impacted by preferred stock
redemptions. This decline in Tier 1 and Total Capital was partially offset
by a significant reduction in risk-weighted assets.
The Leverage ratio for the Corporation decreased by 146 basis points
due to the aforementioned decline in Tier 1 Capital and an increase in
adjusted quarterly average assets. The September 30, 1998 adjusted
quarterly average asset figure includes the effects of higher balances that
were in place earlier in the quarter. Using period-end total assets, which
represents the starting point going into the fourth quarter, the Leverage
ratio was 3.32%.
Tier 1 and Total Capital ratios for BTCo increased 148 basis points
and 223 basis points, respectively, as a result of an increase in Tier 1
Capital of $835 million and Total Capital of $1.3 billion, and a decrease
in risk-weighted assets of $1.5 billion. The increase in Tier 1 and Total
Capital was primarily due to the issuance of common and preferred stock,
partially offset by the third quarter net loss and the increase in goodwill
related to the acquisition of NatWest Markets' European equities business.
The Leverage ratio for BTCo decreased by 7 basis points as a result of an
increase in adjusted quarterly average assets partly offset by the increase
in Tier 1 Capital.
<PAGE> 34
RISK MANAGEMENT
Market risk is the risk of losses in the value of the Corporation's
portfolio due to movements in market prices and rates. Market risk arises
from the Corporation's investment, trading, and client activities. This
section discusses changes in the Corporation's market-risk profile as
characterized by the quantitative information presented on pages 22 to 25
of the Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 ("Annual Report").
The effective management of market risk continues to be a key focus
for the Firm. In addition to regular stress tests and scenario analyses,
an important component of this process for managing market risk is the
probabilistic assessment of potential losses. The Corporation uses a Value
at Risk methodology based on Monte Carlo simulation to make this
assessment. One output of this probabilistic model is the ten-day value at
risk with the Monte Carlo model calibrated to regulatory standards. Under
this calibration, the ten-day value at risk is the potential loss in fair
value that would be exceeded one percent of the time if that portfolio were
held unchanged for ten days. Table 1 shows how this summary measure of
risk has changed since 1997 for the set of financial assets and liabilities
whose values are functions of market traded variables irrespective of
accounting intention. Table 2 shows the same information for the subset of
these positions that appear as Trading Assets on the Corporation's balance
sheet.
Table 1
BT Corporation Total Ten-day Value at Risk
(in millions)
<TABLE>
<CAPTION>
Nine Months
1997 1998 December 31, September 30,
Risk Class Average* Average 1997 1998
<S> <C> <C> <C> <C>
Interest Rate $104.0 $108.7 $ 94.3 $ 65.4
Currency 28.1 39.0 33.1 21.6
Equity 66.1 86.3 87.1 73.3
Commodity 5.2 4.2 6.0 2.5
Diversification (46.6) (69.6) (61.1) (50.4)
Overall Portfolio $156.8 $168.6 $159.4 $112.4
<FN>
* The positions of Alex. Brown are included commencing September 1, 1997.
Prior to September 1, 1997, detailed risk information in the format
required for the computation of the one-day value at risk is not available.
</TABLE>
Table 2
BT Corporation Trading Ten-Day Value at Risk
(in millions)
<TABLE>
<CAPTION>
Nine Months
1997 1998 December 31, September 30,
Risk Class Average* Average 1997 1998
<S> <C> <C> <C> <C>
Interest Rate $ 54.5 $ 61.9 $ 62.9 $ 33.5
Currency 25.8 38.7 32.4 19.1
Equity 39.0 61.2 67.3 29.2
Commodity 5.2 4.2 6.0 2.5
Diversification (41.1) (54.0) (53.0) (34.4)
Overall Portfolio $ 83.4 $112.0 $115.6 $ 49.9
<FN>
* The positions of Alex. Brown are included commencing September 1, 1997.
Prior to September 1, 1997, detailed risk information in the format
required for the computation of the one-day value at risk is not available.
</TABLE>
<PAGE> 35
RISK MANAGEMENT (continued)
Table 1 shows that, on average, the Corporation had maintained a
relatively consistent overall exposure to market risk for the 21 months
ending in September 1998. Table 2, which presents the portion of market
risk that is related to trading activities, shows that the average ten-day
value at risk during 1998 had remained almost unchanged from 1997 year-end
levels. However, in response to recent market turbulence, the Corporation
quickly and significantly reduced its exposure to market risk from these
average levels and 1997 year-end levels. By September 30, 1998 the
Corporation had reduced its total ten-day value at risk by 33 percent from
average levels for the nine months ended September 30, 1998. Furthermore,
the reduction for trading-related market risk was 55 percent from average
levels for the nine months ended September 30, 1998. The reductions in
trading-related market risk occurred in all risk classes (interest rate,
currency, equity, and commodity) and illustrate the Corporation's ability
to change its risk profile quickly in response to changing market
conditions.
Recent market disturbances have resulted in several extreme market
moves. On five days during the quarter ended September 30, 1998, the
Corporation experienced losses that exceeded its one-day, one-percent,
value-at-risk statistic for trading account positions. However, over a
three-year period, the number of occasions on which daily losses exceeded
the one-day value at risk was one percent, as would be expected for this
statistic. On no occasions did the daily losses exceed the ten-day value
at risk estimates, which are used for calculating regulatory capital. The
statistical data reported above provide useful summary measures of the
Corporation's market-related risk profile and changes in that profile.
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 policy is to maintain conservative
levels of liquidity designed to ensure that the Firm has the ability to
meet its obligations under reasonably foreseeable circumstances. The
fundamental objective is to ensure that, even in the event of a complete
loss of market access, the Corporation will be able to fund those assets
that cannot be liquidated on a timely basis. While the Corporation manages
its liquidity position on a day-to-day basis to meet its ongoing funding
needs at the lowest possible cost, the Firm's planning and management
process also encompasses contingency planning to address even the most
severe liquidity events.
One of the Corporation's principal liquidity strengths is its stock of
highly liquid assets. An important component of these liquid assets is the
"liquidity warehouse" and the aggregate warehouse size relative to maturing
liabilities. The "liquidity warehouse" is defined as liquid assets which
are under the direct control of the Treasury/Funding area and which can be
liquidated immediately at current market value.
<PAGE> 36
LIQUIDITY (continued)
Interest Rate Sensitivity
Condensed interest rate sensitivity data for the Corporation at
September 30, 1998 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-
(in billions) Within 1 - 5 After bearing
September 30, 1998 1 year years 5 years funds Total
<S> <C> <C> <C> <C> <C>
Assets $ 100.9 $ 6.1 $ 6.9 $ 42.4 $ 156.3
Liabilities, preferred
stock of subsidiary and
preferred stock (94.0) (8.6) (7.2) (42.2) (152.0)
Common stockholders'
equity - - - (4.3) (4.3)
Effect of off-balance sheet
hedging instruments (4.7) 3.0 1.7 - -
Interest rate sensitivity
gap $ 2.2 $ 0.5 $ 1.4 $ (4.1) $ -
</TABLE>
<PAGE> 37
NONPERFORMING ASSETS
The components of cash basis loans, renegotiated loans, other real
estate and other nonperforming assets are shown below ($ in millions).
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
<S> <C> <C>
CASH BASIS LOANS
Domestic
Commercial and industrial $ 59 $ 49
Secured by real estate 78 92
Total domestic 137 141
International
Commercial and industrial 88 65
Secured by real estate 18 25
Other 14 9
Total international 120 99
Total cash basis loans $257 $240
Ratio of cash basis loans to total gross loans 1.1% 1.2%
Ratio of allowance for credit losses to cash
basis loans (1) 260% 291%
RENEGOTIATED LOANS $26 $25
OTHER REAL ESTATE $122 $194
OTHER NONPERFORMING ASSETS (primarily trading) $375 $38
Loans 90 days or more past due and still
accruing interest $- $-
<FN>
(1) Ratio was computed using the allowance for credit losses that had been
allocated to loans of $667 million and $699 million at September 30, 1998
and December 31, 1997, respectively.
</TABLE>
<PAGE> 38
NONPERFORMING ASSETS (continued)
An analysis of the changes in the Corporation's total cash basis loans
during the first nine months of 1998 follows (in millions).
<TABLE>
<CAPTION>
<S> <C>
Balance, December 31, 1997 $ 240
Net transfers to cash basis loans 166
Net transfers to other real estate (2)
Net paydowns (50)
Charge-offs (81)
Other (16)
Balance, September 30, 1998 $257
</TABLE>
The Corporation's total cash basis loans amounted to $257 million at
September 30, 1998, up $17 million, or 7 percent, from December 31, 1997.
Within cash basis loans, loans secured by real estate were $96 million
and $117 million at September 30, 1998 and December 31, 1997, respectively.
Commercial and industrial loans to highly leveraged borrowers were $57
million and $41 million at September 30, 1998 and December 31, 1997,
respectively.
Other nonperforming assets (excluding other real estate and
renegotiated loans) at September 30, 1998 were $375 million, up from $38
million at December 31, 1997. This increase is mainly due to swaps with
Asian counterparties, primarily Indonesian. Other nonperforming assets
decreased $72 million from the June 30, 1998 level of $447 million. The
decrease in the current quarter was primarily due to charge-offs.
The following table sets forth the approximate effect on interest
revenue of cash basis loans and renegotiated loans. This disclosure
reflects the interest on loans which were carried on the balance sheet and
classified as either cash basis or renegotiated at September 30 of each
year. The rates used in determining the gross amount of interest which
would have been recorded at the original rate were not necessarily
representative of current market rates.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(in millions) 1998 1997
<S> <C> <C>
Domestic Loans
Gross amount of interest that would have
been recorded at original rate $7 $14
Less, interest, net of reversals, recognized
in interest revenue 2 3
Reduction of interest revenue 5 11
International Loans
Gross amount of interest that would have
been recorded at original rate 7 4
Less, interest, net of reversals, recognized
in interest revenue 3 -
Reduction of interest revenue 4 4
Total reduction of interest revenue $9 $15
</TABLE>
<PAGE> 39
HEDGE FUND EXPOSURES
In light of recent public attention surrounding hedge funds, the
Corporation is providing the following information about its hedge fund
activities. The amount owed to the Firm by hedge funds under foreign
exchange and derivative contracts was $834 million at September 30, 1998.
This entire amount is under daily mark-to-market agreements that require
cash or U.S. Treasury securities as collateral. All collateral calls under
these agreements have been met. In addition, outstanding loans and
commitments to hedge funds not covered by collateral agreements were
approximately $40 million. In September 1998, the Corporation made a $300
million equity investment in Long-Term Capital Management, L.P. in
connection with the recapitalization of that entity. In addition, as of
September 30, 1998 the Corporation had approximately $225 million of
proprietary equity investments in approximately 50 other hedge funds with
no single investment larger than $20 million. The Corporation also
finances trading positions for hedge funds through reverse repurchase
agreements, all of which are fully collateralized. Also the Corporation
structures for other clients, principally large pension funds, certain
transactions that facilitate their investments in hedge funds. The
Corporation's credit risk in these structures lies with the client investor
and not with the hedge fund.
EMERGING MARKETS CROSS-BORDER EXPOSURES(1)
<TABLE>
<CAPTION>
% Change from
September 30, December 31, December 31,
($ in billions) 1998 1997 1997
<S> <C> <C> <C>
Korea, Republic of $1.0 $1.6 (38)%
Indonesia 0.6 1.3 (54)%
Hong Kong 0.3 1.0 (70)%
Thailand 0.3 0.6 (50)%
Malaysia 0.1 0.3 (67)%
Other(2) 1.0 1.1 (9)%
Total Emerging Asia $3.3 $5.9 (44)%
Brazil $0.9 $1.9 (53)%
Mexico 0.8 1.0 (20)%
Argentina 0.6 0.8 (25)%
Venezuela 0.1 0.3 (67)%
Other(3) 0.6 0.8 (25)%
Total Latin America $3.0 $4.8 (38)%
Russian Federation $0.3 $1.1 (73)%
Total $6.6 $11.8 (44)%
As % of Total Assets 4.2% 8.4%
<FN>
(1) Based on FFIEC instructions. Shown by country of ultimate risk.
Excludes local country claims on local residents.
(2) Includes Peoples Republic of China, Republic of Taiwan, India,
Philippines, Singapore and Sri Lanka.
(3) Includes Chile, Colombia, Peru, Ecuador, Nicaragua, Panama and Uruguay.
</TABLE>
At September 30, 1998, the Corporation's Emerging Markets cross-border
exposures to Asia, Latin America and Russia were $6.6 billion, down 44
percent from $11.8 billion at December 31, 1997.
<PAGE> 40
ACCOUNTING DEVELOPMENTS
As of January 1, 1998, the Corporation adopted Statement of Financial
Acounting Standards ("SFAS") 127 which had deferred for one year the
effective date of some portions of SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The
deferred provisions related to collateral, repurchase agreements, dollar-
rolls, securities lending and similar transactions. The adoption as of
January 1, 1998 of the deferred portions of SFAS 125 did not have a
material impact on the Corporation's net income, stockholders' equity or
total assets.
On January 1, 1998, the Corporation adopted SFAS 130, "Reporting
Comprehensive Income." SFAS 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general-purpose financial statements.
SFAS 130 requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS 130 also requires that a company classify items
of other comprehensive income by their nature in a financial statement, and
display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the stockholders'
equity section of a statement of financial position. All periods presented
have been restated to conform with SFAS 130.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS 131 establishes standards for
the way that public enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. SFAS 131 is effective for financial statement periods beginning
after December 15, 1997. Comparative information for earlier years is to
be restated. SFAS 131 need not be applied to interim financial statements
in the initial year of its application.
In February 1998, the FASB issued SFAS 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which revises and
standardizes pension and other postretirement benefit plan disclosures that
are to be included in the employers' financial statements. It does not
change the measurement or recognition rules for pensions and other
postretirement benefit plans. SFAS 132 is effective for financial
statement periods beginning after December 15, 1997.
In March 1998, the Accounting Standards Executive Committee of the
AICPA issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" (SOP 98-1), which
provides guidance as to when it is or is not appropriate to capitalize the
cost of software developed or obtained for internal use. SOP 98-1 is
effective for financial statements for fiscal years beginning after
December 15, 1998. The Corporation is in the process of evaluating the
potential impact of the new standard.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging
activities. It requires companies to recognize all derivatives on the
balance sheet as assets or liabilities measured at fair value. SFAS 133 is
effective on January 1, 2000 for calendar year companies. Depending on the
underlying risk management strategy, the accounting for these products
under the new standard could affect reported earnings and balance sheet
accounts. The Corporation is in the process of evaluating the potential
impact of the new standard.
<PAGE> 41
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Risk Management" on page 34 for Quantitative and
Qualitative Disclosures About Market Risk.
FORWARD LOOKING STATEMENTS
Certain sections of this report contain forward looking statements and
can be identified by the use of such words as "anticipates," "expects," and
"estimates," and similar expressions. See "Year 2000 Readiness Disclosure"
and "European Economic & Monetary Union." These statements are subject to
certain risks and uncertainties. These risks and uncertainties could cause
actual results to differ materially from the current statements. See also
"Important Factors Relating to Forward Looking Statements" contained in the
Corporation's Annual Report.
<PAGE> 42
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(4) Instruments Defining the Rights of Security Holders,
Including Indentures
(v) - The Corporation hereby agrees to furnish to the
Commission, upon request, a copy of any instru-
ments defining the rights of security holders
issued by Bankers Trust Corporation or its
subsidiaries.
(12) Statement re Computation of Ratios
(27) Financial Data Schedule
(b) Reports on Form 8-K - Bankers Trust Corporation filed four reports
on Form 8-K during the quarter ended September 30, 1998.
- The report filed July 24, 1998, filed the Corporation's Press
Release dated July 23, 1998, which announced earnings for the
quarter ending June 30, 1998.
- The report dated and filed September 1, 1998, announced certain
financial information with respect to its 1998 third quarter-to
-date trading results.
- The report dated and filed on September 16, 1998, announced
certain financial information with respect to certain of its
Cross-Border outstandings at August 31, 1998.
- The report filed October 1, 1998, filed the Corporation's
announcement dated September 30, 1998 regarding amounts owed to
it by hedge funds under foreign exchange and derivative contracts.
<PAGE> 43
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, on November 16, 1998.
BANKERS TRUST CORPORATION
BY: /S/ DAVID C. FISHER
DAVID C. FISHER
Controller and Principal
Accounting Officer
<PAGE>
BANKERS TRUST CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
EXHIBIT INDEX
(4) Instruments Defining the Rights of Security
Holders, Including Indentures
(v) - Long-Term Debt Indentures (a)
(12) Statement re Computation of Ratios
(a) - Computation of Consolidated Ratios of
Earnings to Fixed Charges
(b) - Computation of Consolidated Ratios of
Earnings to Combined Fixed Charges and
Preferred Stock Dividend Requirements
(27) Financial Data Schedule
[FN]
(a) The Corporation hereby agrees to furnish to the Commission, upon
request, a copy of any instruments defining the rights of holders of
long-term debt issued by Bankers Trust Corporation or its subsidiaries.
<PAGE>
EXHIBIT 12(a)
BANKERS TRUST CORPORATION AND SUBSIDIARIES
COMPUTATION OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
(dollars in millions)
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, Sept. 30,
1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
Earnings:
1. Income (loss) before
income taxes and
cumulative effects
of accounting
changes $1,698 $ 987 $ 469 $1,131 $1,239 $ (171)
2. Add: Fixed charges
excluding
capitalized
interest
(Line 10) 3,168 3,911 5,138 5,483 5,959 5,498
3. Less: Equity in undistri-
buted income of
unconsolidated
subsidiaries and
affiliates 30 45 28 30 (117) 6
4. Earnings including
interest on deposits 4,836 4,853 5,579 6,584 7,315 5,321
5. Less: Interest on
deposits 1,013 965 1,360 1,355 2,076 1,743
6. Earnings excluding
interest on deposits $3,823 $3,888 $4,219 $5,229 $5,239 $3,578
Fixed Charges:
7. Interest Expense $3,137 $3,880 $5,105 $5,451 $5,926 $5,471
8. Estimated interest
component of net
rental expense 31 31 33 32 33 27
9. Amortization of debt
issuance expense - - - - - -
10. Total fixed charges
including interest on
deposits and excluding
capitalized interest 3,168 3,911 5,138 5,483 5,959 5,498
11. Add: Capitalized
interest - - - - - -
12. Total fixed charges 3,168 3,911 5,138 5,483 5,959 5,498
13. Less: Interest on
deposits
(Line 5) 1,013 965 1,360 1,355 2,076 1,743
14. Fixed charges
excluding interest
on deposits $2,155 $2,946 $3,778 $4,128 $3,883 $3,755
Consolidated Ratios of Earnings
to Fixed Charges:
Including interest on
deposits
(Line 4/Line 12) 1.53 1.24 1.09 1.20 1.23 .97
Excluding interest on
deposits
(Line 6/Line 14) 1.77 1.32 1.12 1.27 1.35 .95
<FN>
For the nine months ended September 30, 1998, earnings, as defined, did not
cover fixed charges, including and excluding interest on deposits, by $177
million, as a result of a net loss recorded during the period.
</TABLE>
<PAGE>
EXHIBIT 12(b)
BANKERS TRUST CORPORATION AND SUBSIDIARIES
COMPUTATION OF CONSOLIDATED RATIOS OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS
(dollars in millions)
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, Sept. 30,
1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
Earnings:
1. Income (loss) before
income taxes and
cumulative effect
of accounting
changes $1,698 $ 987 $ 469 $1,131 $1,239 $ (171)
2. Add: Fixed charges
excluding
capitalized
interest
(Line 13) 3,168 3,911 5,138 5,483 5,959 5,498
3. Less: Equity in
undistributed income
of unconsolidated
subsidiaries and
affiliates 30 45 28 30 (117) 6
4. Earnings including
interest on deposits 4,836 4,853 5,579 6,584 7,315 5,321
5. Less: Interest on
deposits 1,013 965 1,360 1,355 2,076 1,743
6. Earnings excluding
interest on deposits $3,823 $3,888 $4,219 $5,229 $5,239 $3,578
Preferred Stock Dividend Requirements:
7. Preferred stock dividend
requirements $ 23 $ 28 $ 51 $ 51 $ 49 $ 26
8. Ratio of income (loss) from
continuing operations
before income taxes to
income (loss) from
continuing operations
after income taxes 147% 144% 151% 148% 143% 168%
9. Preferred stock dividend
requirements on a
pretax basis $ 34 $ 40 $ 77 $ 75 $ 70 $ 44
Fixed Charges:
10. Interest Expense $3,137 $3,880 $5,105 $5,451 $5,926 $5,471
11. Estimated interest
component of net
rental expense 31 31 33 32 33 27
12. Amortization of debt
issuance expense - - - - - -
13. Total fixed charges
including interest on
deposits and excluding
capitalized interest 3,168 3,911 5,138 5,483 5,959 5,498
14. Add: Capitalized
interest - - - - - -
15. Total fixed charges 3,168 3,911 5,138 5,483 5,959 5,498
<PAGE>
16. Add: Preferred stock
dividend require-
ments - pretax
(Line 9) 34 40 77 75 70 44
17. Total combined fixed
charges and preferred
stock dividend require-
ments on a pretax
basis 3,202 3,951 5,215 5,558 6,029 5,542
18. Less: Interest on
deposits
(Line 5) 1,013 965 1,360 1,355 2,076 1,743
19. Combined fixed charges
and preferred stock
dividend requirements
on a pretax basis
excluding interest on
deposits $2,189 $2,986 $3,855 $4,203 $3,953 $3,799
Consolidated Ratios of Earnings
to Combined Fixed Charges
and Preferred Stock
Dividend Requirements:
Including interest on
deposits
(Line 4/Line 17) 1.51 1.23 1.07 1.18 1.21 .96
Excluding interest on
deposits
(Line 6/Line 19) 1.75 1.30 1.09 1.24 1.32 .94
<FN>
For the nine months ended September 30, 1998, earnings, as defined, did not
cover combined fixed charges and preferred stock dividend requirements,
including and excluding interest on deposits, by $221 million, as a result
of a net loss recorded during the period.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the Bankers
Trust Corporation and Subsidiaries consolidated statement of condition at
September 30, 1998 and the consolidated statement of income for the nine months
ended September 30, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2405
<INT-BEARING-DEPOSITS> 2208
<FED-FUNDS-SOLD> 4662
<TRADING-ASSETS> 58382<F1>
<INVESTMENTS-HELD-FOR-SALE> 11421
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 22390
<ALLOWANCE> 667
<TOTAL-ASSETS> 156267
<DEPOSITS> 41291
<SHORT-TERM> 43237<F2>
<LIABILITIES-OTHER> 11300<F3>
<LONG-TERM> 20271
0
394
<COMMON> 105
<OTHER-SE> 4211
<TOTAL-LIABILITIES-AND-EQUITY> 156267
<INTEREST-LOAN> 1275
<INTEREST-INVEST> 516
<INTEREST-OTHER> 2824<F4>
<INTEREST-TOTAL> 6575
<INTEREST-DEPOSIT> 1743
<INTEREST-EXPENSE> 5471
<INTEREST-INCOME-NET> 1104
<LOAN-LOSSES> 230<F5>
<SECURITIES-GAINS> (81)
<EXPENSE-OTHER> 3823
<INCOME-PRETAX> (171)
<INCOME-PRE-EXTRAORDINARY> (171)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (102)
<EPS-PRIMARY> (1.28)
<EPS-DILUTED> (1.28)
<YIELD-ACTUAL> 1.20
<LOANS-NON> 257
<LOANS-PAST> 0
<LOANS-TROUBLED> 26
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 997
<CHARGE-OFFS> 267
<RECOVERIES> 15
<ALLOWANCE-CLOSE> 975<F6>
<ALLOWANCE-DOMESTIC> 160<F7>
<ALLOWANCE-FOREIGN> 419<F7>
<ALLOWANCE-UNALLOCATED> 88<F7>
<FN>
<F1>Trading assets are net of allowance of 295.
<F2>Short-term borrowings include the following:
Securities loaned and securities sold under
repurchase agreements 22973
Other short-term borrowings 20264
Total 43237
<F3>Other liablities include the following:
Accounts payable and accrued expenses 5289
Other liabilities 5619
Acceptances outstanding 392
Total 11300
<F4>Other interest income includes the following:
Interest-bearing deposits with banks 253
Federal funds sold 167
Securities purchased under resale agreements 1283
Securities borrowed 1014
Customer receivables 107
Total 2824
<F5>Amount represents credit loss provision-trading
of 210 and credit loss provision-loans of 20.
<F6>The Corporation has allocated its total allowance for credit losses
as follows: 667 as a reduction of loans, 295 as a reduction of trading
assets, and 13 as other liabilities related to all other credit related items.
<F7>Amounts pertain to the allowance allocated to loans.
</FN>
</TABLE>
