-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FnNxDeZRUTkdACrDgIRDD7eIUvhM/fImR0s+9eF7kT6iDWqXFM6n4RbM/FXzX9X1 5nzUzRgNAyJGrEoDRIrNyA== 0000950123-96-001039.txt : 19960308 0000950123-96-001039.hdr.sgml : 19960308 ACCESSION NUMBER: 0000950123-96-001039 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960307 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANKERS TRUST NEW YORK CORP CENTRAL INDEX KEY: 0000009749 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 136180473 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-05920 FILM NUMBER: 96532237 BUSINESS ADDRESS: STREET 1: 280 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2122502500 MAIL ADDRESS: STREET 1: 280 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10017 FORMER COMPANY: FORMER CONFORMED NAME: BT NEW YORK CORP DATE OF NAME CHANGE: 19671107 10-K 1 FORM 10-K 1 BANKERS TRUST NEW YORK CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 Pages 1-31 represent portions of the 1995 Annual Report to Stockholders which are not required by the Form 10-K report and are not "filed" as part of the Form 10-K. The Form 10-K cover page and cross reference index are on pages 107 and 108, respectively. 2 TABLE 1 FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
- -------------------------------------------------------------------------------------------------------------- ($ in millions, except per share data) 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------------------------------------------- FOR THE YEAR Net interest revenue (book basis) $ 817 $ 1,172 $ 1,314 $ 1,147 $ 737 Noninterest revenue 2,423 2,473 3,364 2,331 2,522 Income before cumulative effects of accounting changes $ 215 $ 615 $ 1,070 $ 639 $ 667 Cumulative effects of accounting changes -- -- (75) 446 -- - -------------------------------------------------------------------------------------------------------------- Net income $ 215 $ 615 $ 995 $ 1,085 $ 667 - -------------------------------------------------------------------------------------------------------------- PER COMMON SHARE Primary Earnings Per Share Income before cumulative effects of accounting changes $ 2.03 $ 7.17 $ 12.40 $ 7.23 $ 7.65 Cumulative effects of accounting changes -- -- (.89) 5.30 -- - -------------------------------------------------------------------------------------------------------------- Net income $ 2.03 $ 7.17 $ 11.51 $ 12.53 $ 7.65 - -------------------------------------------------------------------------------------------------------------- Fully Diluted Earnings Per Share Income before cumulative effects of accounting changes $ 2.02 $ 7.17 $ 12.29 $ 7.22 $ 7.65 Cumulative effects of accounting changes -- -- (.88) 5.29 -- - -------------------------------------------------------------------------------------------------------------- Net income $ 2.02 $ 7.17 $ 11.41 $ 12.51 $ 7.65 - -------------------------------------------------------------------------------------------------------------- Cash dividends declared $ 4.00 $ 3.70 $ 3.24 $ 2.88 $ 2.605 --as a percentage of net income (1) 198% 52% 26% 40% 34% Book value, end of year (2) 50.58 53.67 51.90 43.23 34.93 Market price High 72 84 5/8 83 1/2 70 1/8 68 Low 49 3/4 54 3/4 65 3/4 50 39 1/2 End of year 66 1/2 55 3/8 79 1/8 68 1/2 63 3/4 Price/earnings ratio, end of year (1) 32.8x 7.7x 6.4x 9.5x 8.3x Cash dividend yield, end of year 6.0% 7.2% 4.5% 4.6% 4.4% AT YEAR END Total assets $104,002 $97,016 $92,082 $72,886 $63,959 Long-term debt 9,294 6,455 5,597 3,992 3,081 Preferred stock of subsidiary 250 250 250 -- -- Preferred stock (Corporation) 865 395 250 500 500 Common stockholders' equity 4,119 4,309 4,284 3,621 2,912 Total stockholders' equity 4,984 4,704 4,534 4,121 3,412 PROFITABILITY RATIOS Return on average common stockholders' equity (1) 3.98% 13.48% 26.33% 19.52% 23.10% Return on average total stockholders' equity (1) 4.43% 12.97% 25.01% 17.65% 20.59% Return on average total assets (1) .20% .59% 1.25% .86% 1.09% CAPITAL RATIOS Common stockholders' equity to total assets, end of year 3.96% 4.44% 4.65% 4.97% 4.55% Total stockholders' equity to total assets, end of year 4.79% 4.85% 4.92% 5.65% 5.33% Average total stockholders' equity to average total assets 4.42% 4.52% 4.91% 5.44% 5.29% Bankers Trust New York Corporation: Risk-Based Capital Ratios (1992 year-end guidelines) Tier 1 Capital (3) 8.51% 9.05% 8.50% 7.75% 6.11% Total Capital (3) 13.90% 14.77% 14.46% 13.64% 10.86% Leverage Ratio (3) 5.12% 5.26% 6.28% 6.05% 5.15% Bankers Trust Company: Risk-Based Capital Ratios (1992 year-end guidelines) Tier 1 Capital (3) 9.47% 9.92% 9.38% 7.99% 5.58% Total Capital (3) 12.78% 12.90% 12.96% 12.01% 9.07% Leverage Ratio (3) 5.14% 5.91% 6.01% 5.59% 4.41% EMPLOYEES, AT DECEMBER 31 In domestic offices 7,760 8,258 8,300 8,096 7,745 In foreign offices 6,309 6,271 5,271 4,821 4,343 - -------------------------------------------------------------------------------------------------------------- Total 14,069 14,529 13,571 12,917 12,088 - -------------------------------------------------------------------------------------------------------------- (1) These figures exclude the cumulative effects of accounting changes recorded in 1993 and 1992. (2) This calculation includes the effect of the vested portion of common shares issuable under deferred stock awards. (3) In accordance with regulatory guidelines the figures at December 31, 1995, 1994 and 1993, exclude any benefit from the adoption of SFAS 115. In addition, regulatory capital ratios at December 31, 1992 were not restated in connection with the adoption, retroactive to January 1, 1992, of SFAS 109.
32 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 3 FINANCIAL REVIEW ================================================================================ Management's discussion and analysis of Bankers Trust New York Corporation's results of operations and financial condition appears on pages 33 through 59. The discussion and analysis should be read in conjunction with the financial statements and supplemental financial data, which begin on page 62. RESULTS OF OPERATIONS SUMMARY OF 1995 RESULTS For the year 1995 Bankers Trust New York Corporation and subsidiaries (the "Corporation", or the "Firm") earned $215 million, or $2.03 primary earnings per share. For the year 1994, the Corporation earned $615 million, or $7.17 primary earnings per share. The 1995 results reflected significant declines in trading and trading-related net interest revenue from the results achieved in 1994, as well as special charges related to restructuring and settlement of leveraged derivative transaction-related matters. BUSINESS FUNCTIONS In addition to the reported income statement categories, the Corporation breaks down and analyzes its businesses on the basis of five interrelated business functions, which represent its core business activities. Their definitions and respective shares of income before cumulative effects of accounting changes are presented below: --Client Finance: Meeting the credit and capital needs of clients. --Client Advisory: Providing advice and structuring transactions designed to implement client financial strategies. --Client Financial Risk Management: Helping clients manage their financial exposure. --Client Transaction Processing: Providing operating and administrative services to clients. --Trading and Positioning: Proprietary activity involving securities, derivatives, currency, commodity and funding transactions, as well as positions assumed as part of client risk management activities. Because the Corporation's business is complex in nature and its operations are highly integrated, it is impractical to segregate the respective contributions of the business functions with precision. For example, the Client Advisory function is difficult to split from the Client Finance function, since most complex financings include both an element of advice and the arrangement of credit for the client. Further, transactions undertaken for purposes of Client Financial Risk Management may contain an element of Client Finance or Trading and Positioning. Finally, the Trading and Positioning function serves as an element of support for client-based activities. As a result, estimates and subjective judgments have been made to apportion revenue and expenses among the business functions. In addition, certain revenue and expenses have been segregated and reported in other (unallocated) because, in the opinion of management, they could not be reasonably allocated or because their attribution to a particular function would be distortive. Despite these important qualifications concerning the precision of the allocation of income before cumulative effects of accounting changes among the functions, the Corporation believes that the categories and the amounts presented help provide reasonable insight into the sources of its income. Subject to the foregoing limitations, estimates and assumptions, a discussion of significant factors affecting the results is presented below. BUSINESS FUNCTIONS PROFITABILITY
(in millions) Year Ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------------- Client Finance $ 141 $140 $ 76 Client Advisory 67 87 63 Client Financial Risk Management (202) 259 336 Client Transaction Processing 76 99 60 Trading and Positioning 250 71 594 Other (unallocated) (117) (41) (59) - -------------------------------------------------------------------------------- Income Before Cumulative Effects $ 215 $615 $1,070 - --------------------------------------------------------------------------------
Client Finance--Client Finance activities generate net interest revenue and corporate finance fees from the following major products: debt and equity underwriting, commercial paper, lending, loan syndication, leasing, structured finance and private placements. Client Finance income in 1995 of $141 million remained comparable with the prior year's results, as volumes and profitability from loan syndications, private placements and underwritings continued to be relatively consistent with those achieved in 1994. Credit costs also remained comparable in relation to those in the prior year. Client Finance income in 1994 rose 84 percent, to $140 million, up from $76 million in 1993, mainly as a result of increased volumes of loan syndications throughout the year and lower credit costs attributable to the continuing improvement in the Corporation's loan portfolio. Client Advisory--Client Advisory activities include asset management, trust advisory, mergers and acquisition, strategic risk management, insurance and other specialized advisory services. These activities principally give rise to fiduciary and funds management revenue, and fees and commissions. Client Advisory income in 1995 declined 23 percent, to $67 million, down from $87 million in 1994. This decline was principally attributable to lower revenues from mergers and acquisition and other advisory activities, and higher expenses in the Firm's funds management activities. Client Advisory income rose to $87 million in 1994 from $63 million in 1993, an increase of 38 percent. This increase was principally attributable to an overall increase in assets under management at the Corporation's Australian subsidiary, improved profitability in the insurance business conducted by the Corporation's Chilean subsidiary, Consorcio Nacional de Seguros S.A., and higher merger and acquisition fees. These positive factors in 1994 were somewhat offset by lower levels of performance-based funds management fees. Client Financial Risk Management--Primary risk management products include derivatives contracts related to interest rates, currencies, equities and commodities (or indices thereof), and credit. These products generate both trading and net interest revenue. Client Financial Risk Management posted a loss of $202 million in BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 33 4 - -------------------------------------------------------------------------------- 1995, compared to income of $259 million in 1994. This decline was principally attributable to losses sustained during the first quarter in connection with Latin American derivatives positions, during which time these markets experienced a lack of liquidity and extreme volatility. Also contributing to this decline were lower average margins on risk management products throughout the year, as a result of lower market demand for more complex transactions. However, overall transaction volumes remained consistent with those seen in the prior year. Client Financial Risk Management income fell 23 percent in 1994 to $259 million, from a record $336 million in 1993. Uncertain market conditions and an overall slowdown in transaction volumes in the marketplace contributed to this decline in profitability. In addition, $35 million of trading revenue related to leveraged derivative transactions was not recognized due to credit concerns. Client Transaction Processing--This business function produces net interest revenue, fiduciary and funds management revenue, and fees and commissions from money transfer, securities custody and clearance, securities lending, and retirement plan recordkeeping and administrative services. Client Transaction Processing income in 1995 fell to $76 million, down from $99 million in 1994, a decline of 23 percent. This is principally attributable to lower processing volumes during the first half of the year, and higher costs during the first quarter. In 1994, Client Transaction Processing income rose 65 percent, to $99 million, from $60 million in 1993. Key contributors to this increase were improved money transfer volumes and increased participation in securitized trust arrangements involving collateralized mortgages and other types of asset-backed financings. Trading and Positioning--Trading and positioning activities involve U.S. government and agency securities, foreign government securities, various derivative positions (including those assumed on behalf of clients), currencies, equities (including private equities which are generally held for the intermediate- to long-term) and commodities. Trading and Positioning income of $250 million in 1995 increased $179 million over the 1994 results of $71 million. This increase was largely attributable to net revenue from equity investment transactions, including pre-tax gains totaling $207 million on the sale of a substantial portion of the Corporation's investment in Northwest Airlines Corporation. Trading and Positioning income in 1994 dropped 88 percent, to $71 million, from the record $594 million in 1993 as a result of the persistently difficult trading year. Other (Unallocated)--In 1995, 1994 and 1993 approximately $117 million, $41 million and $59 million, respectively, of corporate expenses were not allocated or attributed to business functions. The corporate expenses in all years included items such as premises costs for temporarily unoccupied space. In 1995, these expenses also included a $50 million pre-tax severance-related charge taken in the first quarter and $86 million of pre-tax charges taken in the fourth quarter related to the settlement of leveraged derivative transactions and related exceptional legal costs. In 1994, these expenses also included a charge of $10 million with respect to a settlement with the Securities and Exchange Commission and the Commodity Futures Trading Commission. Change in Functional Analysis The Corporation is considering changes to this financial analysis to reflect more closely its new organizational structure as described on page 102. These changes will be disclosed in future quarterly filings. FINANCIAL REPORTING MATTERS On January 1, 1995, the Corporation adopted Statement of Financial Accounting Standards ("SFAS") 114, "Accounting by Creditors for Impairment of a Loan" as amended by SFAS 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures." SFAS 114 requires the creation of a valuation allowance for impaired loans based on one of the following: the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Under SFAS 114, a loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the loan's contractual terms. At December 31, 1995, adoption of this standard resulted in a $90 million allocation of the existing allowance for credit losses to a specific valuation allowance for impaired loans. During the fourth quarter of 1994, the Corporation adopted Financial Accounting Standards Board ("FASB") Interpretation No. 41 ("FIN 41"), "Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements." FIN 41 allows the netting, under certain circumstances, of certain repurchase and reverse repurchase agreements. It was the Corporation's former policy to record such transactions on a gross basis on the balance sheet. As the result of this adoption, at December 31, 1994, the Corporation's consolidated total assets and total liabilities each decreased by approximately $500 million. On January 1, 1994, the Corporation adopted FASB Interpretation No. 39 ("FIN 39"), "Offsetting of Amounts Related to Certain Contracts." FIN 39 requires that unrealized gains and losses on swaps, forwards, options and similar contracts be recognized as assets and liabilities, except where such gains and losses arise from contracts covered by qualifying master netting agreements. It was the Corporation's former policy to record such unrealized gains and losses on a net basis on the balance sheet. As the result of this adoption, at December 31, 1994 the Corporation's consolidated total assets and total liabilities each increased by approximately $12 billion. 34 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 5 - -------------------------------------------------------------------------------- Effective December 31, 1993, the Corporation adopted SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." This accounting standard mandates that affected securities which are neither trading securities nor held to maturity be designated as available for sale and reported at fair value, with unrealized gains and losses recorded directly to a separate component of stockholders' equity. At December 31, 1993, the Corporation recorded a credit of $145 million ($88 million on an after-tax basis) in the securities valuation allowance component of stockholders' equity, representing the net unrealized gains on securities available for sale. The adoption of SFAS 115 had no effect on net income. On January 1, 1993, the Corporation adopted SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" and SFAS 112, "Employers' Accounting for Postemployment Benefits." In adopting SFAS 106 and SFAS 112, the Corporation recorded charges to earnings of $100 million and $7 million, respectively, (or $70 million and $5 million, respectively, net of income taxes) as the cumulative effects of these changes in accounting principles. As used throughout this Annual Report, the term "International" signifies information based on the domicile of the customer, whereas the term "Foreign Office" refers to the location in which the transaction is recorded. STATEMENT OF INCOME ANALYSIS NET INTEREST REVENUE Net interest revenue for 1995 was $817 million, down $355 million, or 30 percent, from 1994. Net interest revenue of $1.172 billion in 1994 decreased by $142 million, or 11 percent, from the amount earned in 1993. The $355 million decrease in net interest revenue during 1995 was due to a $369 million, or 80 percent, decrease in trading-related net interest revenue, which totaled $91 million for 1995. A significant portion of the Firm's trading and risk management activities involve positions in interest rate instruments and related derivatives. The revenue from these activities can periodically shift between trading and net interest, depending on a variety of factors, including risk management strategies. Therefore, the Corporation views trading revenue and trading-related net interest revenue together, which is discussed in the trading revenue section below. The Firm's non-trading-related net interest revenue, considered to be historically a more stable component of overall net interest revenue, was $726 million in 1995, compared to $712 million in 1994. For the 1994 versus 1993 comparison, net interest revenue decreased by $142 million due to a $141 million, or 23 percent, decrease in trading-related net interest revenue, which totaled $460 million for 1994. Total non-trading-related net interest revenue was $712 million for 1994, virtually unchanged compared TABLE 2 NET INTEREST REVENUE ANALYSIS The table below presents the Corporation's trend of net interest revenue, average balances and rates. For further details on these statistics, see pages 98 through 100.
- ---------------------------------------------------------------------------------------- ($ in millions) Year Ended December 31, 1995 1994 1993 - ---------------------------------------------------------------------------------------- Net interest revenue Book basis $ 817 $ 1,172 $ 1,314 Tax equivalent adjustment* 41 83 82 - ---------------------------------------------------------------------------------------- Fully taxable basis $ 858 $ 1,255 $ 1,396 - ---------------------------------------------------------------------------------------- Average balances Interest-earning assets $82,078 $76,300 $76,798 Interest-bearing liabilities 78,850 73,748 69,676 - ---------------------------------------------------------------------------------------- Earning assets financed by noninterest-bearing funds $ 3,228 $ 2,552 $ 7,122 - ---------------------------------------------------------------------------------------- Average rates (fully taxable basis) Yield on interest-earning assets 7.22% 6.70% 5.88% Cost of interest-bearing liabilities 6.43 5.23 4.48 - ---------------------------------------------------------------------------------------- Interest rate spread .79 1.47 1.40 Contribution of noninterest-bearing funds .26 .17 .42 - ---------------------------------------------------------------------------------------- Net interest margin 1.05% 1.64% 1.82% - ---------------------------------------------------------------------------------------- * The applicable combined federal, state and local incremental tax rate used to determine the amounts of the tax equivalent adjustments (which recognize the income tax savings on tax-exempt assets) was 42 percent for 1995, 1994 and 1993.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 35 6 - -------------------------------------------------------------------------------- to 1993. The average balances of non-trading-related interest-earning assets and interest-bearing liabilities were virtually unchanged from 1993. The average interest rate spread also remained relatively constant in 1994 versus 1993. PROVISION FOR CREDIT LOSSES The provision for credit losses amounted to $31 million for 1995, compared with $25 million for 1994 and $93 million in 1993. A discussion of the Corporation's summary of credit loss experience, including charge-off procedures and the adequacy of the allowance for credit losses, appears on page 51. TRADING REVENUE The Corporation conducts its global trading of debt and equity securities, money market instruments, derivative products and foreign exchange as an integrated business because of the dynamic interplay between worldwide interest rates, exchange rates and equity and commodity indices. Trading revenue is generated by proprietary activities and client-related activities. Proprietary activities include the trading of U.S. government and agency securities, foreign sovereign securities, foreign exchange and currency options and commodities, as well as the intermediate and longer-term proprietary trading of liquid securities, foreign exchange and derivative products. The Firm also trades restructured loans, bonds, equities and other instruments of Latin American and other emerging markets issuers. Trading activities also encompass the Firm's dealer business of providing risk management products for clients, including derivatives such as swaps, options, forwards and other similar types of contracts. Trading-related net interest revenue represents interest earned on cash instruments held in the trading positions for either proprietary trading or risk management purposes, less the cost to fund both cash and derivatives positions. For the year 1995, trading revenue was $341 million, down $124 million, or 27 percent, from the $465 million reported in 1994. The trading revenue in 1994 was down $1.166 billion from the results reported in 1993. Trading-related net interest revenue decreased to $91 million, down $369 million, or 80 percent, from $460 million reported in 1994. The trading-related net interest in 1994 was down $141 million from 1993 results. The table below quantifies the Firm's trading revenue and trading-related net interest revenue by major category of market risk. These categories are based on management's view of the predominant underlying risk exposure of each of the Firm's trading positions.
Trading- Related Net Trading Interest (in millions) Revenue Revenue Total - -------------------------------------------------------------------------------- Year Ended December 31, 1995 Interest rate risk $ 87 $156 $ 243 Foreign exchange risk 36 -- 36 Equity and commodity risk 218 (65) 153 - -------------------------------------------------------------------------------- Total $ 341 $ 91 $ 432 - -------------------------------------------------------------------------------- Year Ended December 31, 1994 Interest rate risk $ 278 $495 $ 773 Foreign exchange risk (54) -- (54) Equity and commodity risk 241 (35) 206 - -------------------------------------------------------------------------------- Total $ 465 $460 $ 925 - -------------------------------------------------------------------------------- Year Ended December 31, 1993 Interest rate risk $1,066 $642 $1,708 Foreign exchange risk 191 -- 191 Equity and commodity risk 374 (41) 333 - -------------------------------------------------------------------------------- Total $1,631 $601 $2,232 - --------------------------------------------------------------------------------
Interest Rate Risk As indicated above, a significant portion of the Firm's trading and risk management activities involve positions in interest rate instruments and related derivatives. The revenue from these activities can periodically shift between trading and trading-related net interest revenue, depending on a variety of factors, including risk management activities. The decrease in trading and trading-related net interest revenue in this category was affected by the general volatility in interest rates that occurred in the first quarter of 1995 coupled with unusual fluctuations and associated liquidity problems in the emerging markets of Latin America. As a result, total trading revenue and trading-related net interest revenue associated with interest rate positions declined by 69 percent to $243 million in 1995. Total trading revenue and trading-related net interest revenue related to interest rate risk positions fell over 50 percent to $773 million in 1994 from $1.7 billion in 1993. This decrease was due primarily to the sharp, global increase in interest rates that occurred during the first quarter of 1994, which adversely affected the full range of the Firm's positions in these interest-rate-sensitive instruments; those most significantly affected involved European, Japanese and emerging market sovereign debt. Foreign Exchange Risk The Firm's trading and risk management strategies also involve positions in foreign exchange and currency related derivatives such as swaps, options, forwards and other similar types of contracts. The general decline in global interest rates favorably impacted positions as trading revenue in this category increased $90 million compared to 1994, due principally to a rebound in the Firm's proprietary trading business. 36 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 7 - -------------------------------------------------------------------------------- Trading revenue related to foreign exchange risk resulted in a loss of $54 million in 1994, compared to a gain of $191 million in 1993. This decrease was due to the global increase in interest rates that occurred during the first quarter of 1994, which had a considerable effect on foreign currency prices, adversely impacting positions. Equity and Commodity Risk The Firm's trading and risk management activities also include positions in equity securities and commodities and related derivatives. Total trading and trading-related net interest revenue decreased $53 million compared to 1994. This decrease included a decline in equity-related derivative products which was reflective of the lower average margin on derivative products as a whole. The volatility in the Latin American markets that occurred in 1995 had a ripple effect on equity prices which was also a factor in the overall performance in this category. Total trading revenue and trading-related net interest revenue related to equity and commodity risk was $206 million in 1994, down $127 million, or approximately 40 percent, from the $333 million in 1993. The decline was principally attributable to lower total trading revenue during 1994 from equity securities positions in issuers from the emerging markets of Asia and Latin America. FIDUCIARY AND FUNDS MANAGEMENT REVENUE Fiduciary and funds management revenue was $697 million in 1995, down $43 million, or 6 percent, from the record $740 million earned in 1994, which was $37 million higher than the $703 million recorded in 1993. The decrease in 1995 was primarily due to a decline in transaction volumes in global fiduciary services, as well as a decline in brokerage fee income at the Corporation's Australian subsidiary as a result of lower fund growth as compared to 1994. Partially offsetting these factors was an increase in custodian fees due to a higher level of global custody assets under management. The increase in 1994 compared to 1993 was primarily due to a higher level of assets under management, particularly in the global private banking activities in Australia, as well as increased revenue from custodian and global fiduciary services, offset in part by a decline in performance-based funds management fees. FEES AND COMMISSIONS Fees and commissions totaled $712 million for 1995, which represented a decrease of $44 million, or 6 percent, from the record $756 million earned in 1994. Corporate finance fees decreased $33 million, or 8 percent, during 1995. Lower revenue from securities underwriting and merger and acquisition fees were partially offset by higher revenue from private placement fees. Fees and commissions totaled $756 million in 1994 which was $46 million higher than the $710 million earned in 1993. Corporate finance fees increased $24 million, or 6 percent, during 1994 to their highest level in five years. This increase was due to higher revenue from loan syndication fees, offset in part by lower fees from securities underwriting and leasing syndication fees. SECURITIES AVAILABLE FOR SALE GAINS Securities available for sale gains totaled $180 million for 1995, an increase of $108 million from the $72 million earned in 1994. The 1995 results included a $145 million pre-tax gain on the sale of most of the Corporation's merchant banking investment in Northwest Airlines Corporation. The gain on the sale of the portion of the Corporation's investment in Northwest Airlines Corporation that had not been classified as available for sale was recorded in other noninterest revenue as discussed below. OTHER NONINTEREST REVENUE Other noninterest revenue totaled $493 million for 1995, an increase of $53 million, or 12 percent, from 1994. The largest factor of this increase was higher insurance premium revenue from the Corporation's Chilean subsidiaries primarily as a result of an increase in its annuity business. Also contributing to the year-to-year increase in other noninterest revenue was an increase in net gains from equity investments as 1995 included a $62 million gain on sale of a portion of the Corporation's merchant banking investment in Northwest Airlines Corporation. Partially offsetting these factors was a lower level of equity income from affiliates. Other noninterest revenue totaled $440 million for 1994, an increase of $133 million, or 43 percent, from 1993. This increase was due to several factors, including a $59 million increase in insurance premium revenue, a lower level of losses from the revaluation of non-trading foreign currency investments, the impact of an insurance settlement related to the January 1993 fire at the Corporation's headquarters at 280 Park Avenue and unrealized gains related to certain venture capital assets. These results were offset in part by charges related to the funds management business. BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 37 8 - -------------------------------------------------------------------------------- NONINTEREST EXPENSES In response to the lower revenue and reduced market activity in certain businesses, management, as previously announced, implemented expense reduction programs over the course of 1995. These programs have achieved reductions in base operating expenses (principally, noninterest expenses before bonus, policyholder benefits, minority interest and exceptional legal costs related to leveraged derivative transactions) of $200 million in 1995 as compared to the annualized fourth quarter 1994 levels. In order to accomplish these expense reductions, it was anticipated that total staffing would be reduced by approximately 1,400, comprised of 1,000 regular staff and 400 temporary employees. In order to provide for an appropriate cost of severance, the Corporation recorded a provision for severance-related costs of $50 million, pre-tax, in the first quarter of 1995. While the targeted staff reductions were achieved as of December 31, 1995, the expansion of certain key businesses necessitated the hiring of additional staff. The number of full time staff at December 31, 1995 was 14,069, a net decrease of 460 from December 31, 1994. Although the savings achieved from the expense reduction programs will continue into 1996, their impact will be offset by decisions made as part of the Corporation's planning process at the end of 1995 to expand a number of key businesses and to make selected investments in areas that are showing profitable growth. Total noninterest expenses were $2.898 billion for 1995, an increase of $147 million, or 5 percent, from the $2.751 billion recorded in 1994. Excluding the provision for severance-related costs of $50 million, noninterest expenses were $2.848 billion, an increase of $97 million, or 4 percent, from 1994. Incentive compensation and employee benefits expense decreased $84 million, or 12 percent, due to lower bonus expense reflecting the reduced earnings. Salaries expense increased $30 million, or 4 percent, in 1995. All other noninterest expenses, excluding the provision for severance-related costs, totaled $1.404 billion for 1995, which was $151 million, or 12 percent, higher than in 1994. This increase was primarily due to an increase in the provision for policyholder benefits as well as an increase in professional fees, which included exceptional legal costs related to leveraged derivative transactions. Total noninterest expenses were $2.751 billion for 1994, a decrease of $284 million, or 9 percent, from the $3.035 billion recorded in 1993. Incentive compensation and employee benefits expense decreased $448 million, or 38 percent, primarily due to lower bonus expense reflecting the reduced earnings. Salaries expense increased $87 million, or 13 percent, in 1994. The average number of employees increased by 5 percent from 1993, to 14,005. All other noninterest expenses totaled $1.253 billion for 1994, up $77 million, or 7 percent, from 1993. Increases in the provision for policyholder benefits, service bureaus, agency personnel fees and minority interest were offset in part by a decrease in other real estate expenses, primarily resulting from a gain on the sale of a foreclosed property as well as a lower level of contribution expenses. INCOME TAXES Income tax expense for 1995 amounted to $96 million, compared with $254 million for 1994. The effective tax rate for 1995 was 31 percent, while the 1994 effective tax rate was 29 percent. The effective tax rate for 1993 was 31 percent, the calculation of which excluded the income taxes associated with the reported cumulative effects of accounting changes for SFAS 106 and SFAS 112. 38 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 9 - -------------------------------------------------------------------------------- INTERNATIONAL OPERATIONS International operations have made a significant contribution to consolidated results, consistent with the emphasis the Corporation has placed on foreign markets. The Corporation's assets and summarized results of operations for 1995, 1994 and 1993 have been segregated between domestic and international operations in Note 21 of Notes to Financial Statements. This analysis, which is based on the domicile of the customer, incorporates numerous subjective assumptions. International net income totaled $67 million for 1995, compared with $368 million for 1994. International operations contributed 31 percent and 60 percent of the Corporation's net income in 1995 and 1994, respectively. The decrease in 1995 international net income, as compared to 1994, was primarily due to a decline in income for the Corporation as a whole. The decrease in international operations' income in proportion to domestic income (31 percent in 1995 as compared to 60 percent in 1994) is primarily due to trading losses incurred in the United Kingdom and Australia/New Zealand. The United Kingdom had a net loss (after Corporate expense allocations) of $134 million, a decrease of $239 million, which was caused by trading losses from Latin American products. The decrease in net income for Australia/New Zealand (to $47 million from $151 million) was primarily due to first quarter trading losses and an overall increase in other expenses. Domestic net income decreased by $99 million, to $148 million in 1995 due to a decline in interest earned caused by a reduction in interest-bearing trading assets, decreases in fees and commissions and increases in interest expense and other noninterest expense. International total assets were $51.5 billion at December 31, 1995, compared with $36.1 billion at December 31, 1994 and represented 50 percent and 37 percent of total consolidated assets, respectively. The $15.4 billion increase was primarily due to an increase in United Kingdom assets of $3.2 billion, an increase in Western Hemisphere assets of $1.5 billion and a decrease in intersegment activity of $10 billion. Assets for both regions rose due to increases in trading assets. Domestic total assets decreased $8.4 billion to $52.5 billion primarily due to reductions in federal funds sold, domestic trading assets and intersegment balances. These decreases were partially offset by an increase in securities sold under repurchase agreements. International net income totaled $368 million for 1994, compared with $865 million for 1993. International operations contributed 60 percent and 87 percent of the Corporation's net income in 1994 and 1993, respectively. The decrease in 1994 international net income as compared to 1993 was primarily due to reduced net income in the United Kingdom and Asia. United Kingdom's net income decreased by $366 million in 1994, as trading revenue decreased significantly. Asia net income decreased by $143 million primarily due to lower trading revenue in Hong Kong, Singapore, and Tokyo and an increase in noninterest expenses. Domestic net income increased by $117 million to $247 million in 1994, primarily due to higher fees and commissions, decreases in the provision for credit losses and noninterest expenses, partially offset by lower trading revenue. International total assets were $36.1 billion at December 31, 1994, compared with $35.4 billion at December 31, 1993, which represented 37 percent and 38 percent of total consolidated assets, respectively. The regional changes primarily consisted of an increase in United Kingdom assets of $10.9 billion and an increase in Australia/New Zealand assets of $2.4 billion, and a $5.6 billion decrease in Europe assets. United Kingdom assets increased primarily due to an increase in trading assets, federal funds sold and securities purchased under resale agreements. Australia/New Zealand assets increased primarily due to an increase in trading assets. Europe assets decreased primarily due to a decrease in trading assets. Domestic total assets increased $4.2 billion to $60.9 billion primarily due to an increase in federal funds sold and securities purchased under resale agreements, partially offset by a decrease in net loans and lease financing. BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 39 10 - -------------------------------------------------------------------------------- CHANGES IN FINANCIAL CONDITION BALANCE SHEET ANALYSIS Table 3 below highlights the trends in the balance sheet over the past two years. Because annual averages may tend to conceal trends and year-end balances can be distorted by one-day fluctuations, fourth quarter averages for each year are provided to give a better indication of trends in the balance sheet. TABLE 3 CONDENSED BALANCE SHEETS--FOURTH QUARTER AVERAGES
- ------------------------------------------------------------------------------------- (in millions) 1995 1994 1993 - ------------------------------------------------------------------------------------- ASSETS Interest-earning Interest-bearing deposits with banks $ 3,624 $ 2,139 $ 2,042 Federal funds sold 2,387 1,497 488 Securities purchased under resale agreements 19,126 14,380 8,791 Securities borrowed 9,858 6,494 2,343 Trading assets 31,926 33,106 41,942 Securities available for sale Taxable 5,206 5,240 -- Exempt from federal income taxes 1,365 2,238 -- - ------------------------------------------------------------------------------------- Total securities available for sale 6,571 7,478 -- Investment securities Taxable -- -- 5,541 Exempt from federal income taxes -- -- 1,030 - ------------------------------------------------------------------------------------- Total investment securities -- -- 6,571 Loans In domestic offices 7,199 6,750 8,446 In foreign offices 5,624 5,798 5,765 - ------------------------------------------------------------------------------------- Total loans 12,823 12,548 14,211 - ------------------------------------------------------------------------------------- Total interest-earning assets 86,315 77,642 76,388 Noninterest-earning Cash and due from banks 1,972 1,835 1,971 Noninterest-earning trading assets 17,858 19,778 3,772 All other assets 9,736 8,081 6,528 Allowance for credit losses (1,028) (1,327) (1,494) - ------------------------------------------------------------------------------------- Total $114,853 $106,009 $ 87,165 - ------------------------------------------------------------------------------------- LIABILITIES Interest-bearing Interest-bearing deposits In domestic offices $ 5,788 $ 5,584 $ 8,511 In foreign offices 18,404 15,611 12,410 - ------------------------------------------------------------------------------------- Total interest-bearing deposits 24,192 21,195 20,921 Trading liabilities 12,599 8,856 7,430 Securities sold under repurchase agreements 22,680 20,833 21,671 Other short-term borrowings 15,960 18,327 14,504 Long-term debt 8,904 6,310 5,450 - ------------------------------------------------------------------------------------- Total interest-bearing liabilities 84,335 75,521 69,976 Noninterest-bearing Noninterest-bearing deposits 3,606 3,728 3,932 Noninterest-bearing trading liabilities 15,392 15,539 1,694 All other liabilities 6,240 6,212 6,883 - ------------------------------------------------------------------------------------- Total Liabilities 109,573 101,000 82,485 PREFERRED STOCK OF SUBSIDIARY 250 250 250 - ------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock 865 395 250 Common stockholders' equity 4,165 4,364 4,180 - ------------------------------------------------------------------------------------- Total Stockholders' Equity 5,030 4,759 4,430 - ------------------------------------------------------------------------------------- Total $114,853 $106,009 $ 87,165 - ------------------------------------------------------------------------------------- The condensed average balance sheets are presented on a slightly different basis than the balance sheets presented in the Financial Statements section of this report, in that the various categories of interest-earning assets and interest-bearing liabilities exclude certain noninterest-earning/bearing components included in the balance sheet captions. These components, excluding noninterest-earning/bearing trading assets/liabilities, are included in "all other assets" and "all other liabilities" in the condensed average balance sheets.
40 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 11 - -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES Management believes that the Corporation has sufficient resources to meet the present and foreseeable needs of its business operations for liquidity and capital resources, which are discussed separately below. Liquidity Liquidity is the ability to have the funds available at all times to meet the commitments of the Corporation. The Corporation has a formal process for managing liquidity on a global basis for the Firm as a whole as well as for each of its significant subsidiaries. Management's guiding policy is to maintain conservative levels of liquidity designed to ensure that the Firm has the ability to meet its obligations under all conceivable circumstances. Management maintains a dual focus to ensure a conservative liquidity position by promoting asset liquidity and actively managing liability/capital levels, maturities and diversification. The fundamental objective in this regard is to ensure that, even in the event of a complete loss of access to the liability markets, the Corporation will be able to continue to fund those assets that cannot be liquidated in a timely manner. The Corporation has a strong global funding presence. The Corporation maintains a centralized funding organizational unit while retaining a funding presence in local markets globally. A consolidated funding function provides for central coordination and control of pricing and global information and strategy, while the proximity to local markets allows for greater customer diversity and the flexibility to respond quickly to market opportunities. In addition, the Corporation assesses its liquidity profile, such as asset marketability, asset-to-liability repayment/maturity characteristics and funding diversification, under various stress scenarios. Management believes that the Corporation has the ability to withstand severe and prolonged liquidity shocks, both systemic and institution-specific. Most of the Corporation's assets are highly liquid and of high credit quality. The Corporation maintains excess liquidity through its base of liquid assets. Liquid assets consist of cash and due from banks, interest-bearing deposits with banks, federal funds sold, securities purchased under resale agreements, securities borrowed, trading assets, and securities available for sale. Securities purchased under resale agreements and securities borrowed are virtually all short-term in nature and are collateralized with U.S. government or other marketable securities, or cash equivalents. Trading assets are marked to market daily and primarily consist of U.S. government and agency securities, state and municipal securities, foreign government obligations, and money market instruments. The Corporation's liquid assets amounted to $83.5 billion as of December 31, 1995, and $79.0 billion as of December 31, 1994, both of which equaled 80 percent of gross total assets. The Corporation continues to focus on extending and diversifying its funding base by geography, investor segment, legal vehicle issuer, and type of instrument. This is done by strengthening secured funding capabilities and issuing a substantial amount of long-term debt and preferred stock in various markets. The Corporation places particular emphasis on a large and diverse base of stable customer deposits, which are generated incidentally from other transactions or services provided in its Client Transaction Processing business. Also, the Corporation has a relatively high proportion of active unsecured funding which is provided by capital and long-term debt. The Corporation's total stockholders' equity and long-term debt, taken together, have increased by 41 percent since the end of 1993. One of the Corporation's principal sources of day-to-day funding is provided by securities sold under repurchase agreements, generally involving U.S. government and agency securities and other OECD sovereign bonds. Short-term financing is also available to the Corporation under various commercial paper programs. The Corporation maintains its own funding team and sales force which obtains directly from investors the majority of its purchased funds. This enables the Corporation to develop and maintain ongoing relationships with a diverse group of investors. The Corporation had available $500 million of unused committed bank lines at December 31, 1995, which could be used as back-up facilities for the Parent Company's commercial paper program or for general purposes. The remainder of the Corporation's short-term borrowings and its deposits are provided by a broadly diversified investor/depositor base in various markets throughout the world. The Corporation's consolidated long-term debt at December 31, 1995 totaled $9.3 billion, substantially all of which was unsecured, and consisted of $6.1 billion in senior borrowings and $3.2 billion of subordinated debt, issued principally by the Parent Company and Bankers Trust Company ("BTCo"), the Corporation's principal banking subsidiary. These borrowings mature between 1996 and 2033, as detailed in Note 9 of Notes to Financial Statements. The following information should be read in conjunction with the consolidated statement of cash flows, which appears on page 65. Cash and due from banks increased $352 million as the net cash provided by operating activities and financing activities exceeded the net cash used in investing activities. The $3.5 billion of net cash provided by operating activities primarily resulted from a $3.4 billion net change in trading assets and liabilities, and receivables and payables from securities transactions. Within investing activities, cash outflows from securities purchased under resale agreements ($8.0 billion) and purchases of securities available for sale ($4.2 billion), were offset in part by cash inflows from sales, maturities and other redemptions of securities available for sale ($5.7 billion), federal funds sold ($1.7 billion) and interest-bearing deposits with banks ($1.2 billion). Within financing activities, cash inflows from the issuances of long-term debt ($4.7 billion) were partially offset by cash outflows from other short-term borrowings ($2.3 billion) and repayments of long-term debt ($1.6 billion). For the year ended December 31, 1994, cash and due from banks increased $235 million, as the net cash provided by operating activities exceeded the net cash used in investing and financing activities. The $12.2 billion of net cash provided by operating activities primarily resulted from a $12.2 billion net change in trading assets and liabilities. Within investing activities, cash outflows from purchases of securities available for sale ($5.8 billion), increases in securities BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 41 12 - -------------------------------------------------------------------------------- borrowed ($3.3 billion), federal funds sold ($2.2 billion) and interest-bearing deposits with banks ($1.8 billion), were partially offset by cash inflows from sales, maturities and other redemptions of securities available for sale ($5.1 billion) and a decrease in loans ($3.2 billion). Within financing activities, cash outflows from a net change in securities sold under repurchase agreements ($8.3 billion) and repayments of long-term debt ($1.6 billion) were offset in part by issuances of long-term debt ($2.4 billion) and an increase in deposits ($1.4 billion). Capital Resources The Corporation pursues capital management with the objective of enhancing its ability to execute its global strategic business plans while retaining financial flexibility. Management believes that a strong capital base is critical to achieving these objectives. Combined total stockholders' equity and preferred stock of subsidiary totaled $5.234 billion on December 31, 1995, up $280 million, or 6 percent, from year end 1994, which was up $170 million, or 4 percent, from year end 1993. The increase in 1995 was primarily due to the issuance of preferred stock and to net income, partially offset by $361 million of dividends declared on common and preferred stock. The increase in 1994 was due primarily to net income and the net issuance of preferred stock, partially offset by $319 million of dividends declared. The Corporation's primary measure of capital strength is the RAROC(TM) framework (see page 46 for further discussion), which quantifies and assigns capital to business activities based upon their credit, interest rate, foreign currency, equity, commodity, liquidity and operating risks. Changes in the Corporation's global balance sheet are monitored centrally on a regular basis. In addition, the Corporation actively monitors compliance with bank regulatory capital requirements, focusing primarily on the risk-based capital guidelines. The Corporation manages its capital base and on- and off-balance sheet items to ensure that it remains strongly capitalized. The Federal Reserve Board's risk-based capital guidelines addressing the capital adequacy of bank holding companies and banks (collectively, "banking organizations") include a definition of capital and a framework for calculating risk-weighted assets by assigning assets and off-balance sheet items to broad risk categories, as well as minimum ratios to be maintained by banking organizations. A banking organization's risk-based capital ratios are calculated by dividing its qualifying capital by its risk-weighted assets. Under the risk-based capital guidelines, there are two categories of capital: core capital ("Tier 1") and supplemental capital ("Tier 2"), collectively referred to as Total Capital. Tier 1 Capital includes common stockholders' equity, qualifying perpetual preferred stock and minority interest in equity accounts of consolidated subsidiaries. Tier 2 Capital includes perpetual preferred stock (to the extent ineligible for Tier 1), hybrid capital instruments (i.e., perpetual debt and mandatory convertible securities) and limited amounts of subordinated debt, intermediate-term preferred stock and a portion of the allowance for credit losses. The Federal Reserve Board's leverage constraint guidelines establish a minimum ratio of Tier 1 Capital to adjusted quarterly average total assets ("Leverage Ratio"). In accordance with Federal Reserve Board guidelines, the stockholder's equity ($376 million at December 31, 1995 and $426 million at December 31, 1994) and risk assets of BT Securities Corporation are excluded from the calculation of the regulatory capital ratios. In computing these ratios, 50 percent of BT Securities stockholder's equity is deducted from the Corporation's Tier 1 Capital, and 50 percent is deducted from Tier 2 Capital. Similar treatment is accorded the stockholder's equity and risk assets of certain foreign insurance subsidiaries of the Corporation. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") established five capital tiers for banks. Pursuant to that statute, the federal bank regulatory agencies have defined the five capital tiers for banks. Under these regulations, a bank is defined to be well capitalized, the highest tier, if it maintains a Tier 1 Capital ratio of at least 6 percent, a Total Capital ratio of at least 10 percent and a Leverage Ratio of at least 5 percent. Based on their respective regulatory capital ratios at December 31, 1995, both BTCo and Bankers Trust (Delaware) are well capitalized, following the definitions in the regulations issued by the Federal Reserve Board and the other federal bank regulatory agencies setting forth the general capital requirements mandated by FDICIA. All three regulatory capital ratios, at both December 31, 1995 and 1994, excluded any benefit from the adoption of SFAS 115. During 1995, each of the Corporation's three regulatory capital ratios declined. The Tier 1 Capital and Total Capital ratios declined by 54 basis points and 87 basis points, respectively, as the net increase in capital was more than offset by the increase in total risk-weighted assets. The Corporation's total risk-weighted assets at December 31, 1995 were $4.736 billion higher than at year end 1994. The Leverage Ratio decreased by 14 basis points as a result of a 6 percent increase in adjusted quarterly average total assets. The $140 million increase in Tier 1 Capital was primarily attributable to the issuance of preferred stock. BTCo's three regulatory capital ratios declined during 1995. The Tier 1 Capital and Total Capital ratios declined by 45 basis points and 12 basis points, respectively. The Leverage Ratio decreased by 77 basis points. Total risk-weighted assets at December 31, 1995 were $3.413 billion higher than at year end 1994. Adjusted quarterly average total assets at December 31, 1995 were 18 percent higher than at year end 1994. The increase in assets was partially offset by the $383 million increase in Total Capital. Tier 1 Capital increased by $131 million due primarily to the issuance of preferred stock. The increase in Tier 2 Capital resulted primarily from an increase in qualifying subordinated debt. Table 4 indicates the regulatory capital ratios of the Corporation and BTCo at December 31, 1995 and 1994 and the minimum regulatory guidelines. 42 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 13 - -------------------------------------------------------------------------------- TABLE 4 REGULATORY CAPITAL RATIOS
FRB Minimum December 31, December 31, Regulatory 1995 1994 Guidelines - -------------------------------------------------------------------------------- Corporation Risk-Based Ratios Tier 1 Capital 8.51% 9.05% 4.0% Total Capital 13.90% 14.77% 8.0% Leverage Ratio 5.12% 5.26% 3.0% BTCo Risk-Based Ratios Tier 1 Capital 9.47% 9.92% 4.0% Total Capital 12.78% 12.90% 8.0% Leverage Ratio 5.14% 5.91% 3.0%
The following were the essential components of the Corporation's and BTCo's risk-based capital ratios at the end of the two most recent years:
(in millions) December 31, 1995 1994 - -------------------------------------------------------------------------------- Corporation Tier 1 Capital $ 4,512 $ 4,372 Tier 2 Capital 2,858 2,760 - -------------------------------------------------------------------------------- Total Capital $ 7,370 $ 7,132 - -------------------------------------------------------------------------------- Total risk-weighted assets $53,021 $48,285 - -------------------------------------------------------------------------------- BTCo Tier 1 Capital $ 4,394 $ 4,263 Tier 2 Capital 1,532 1,280 - -------------------------------------------------------------------------------- Total Capital $ 5,926 $ 5,543 - -------------------------------------------------------------------------------- Total risk-weighted assets $46,389 $42,976 - --------------------------------------------------------------------------------
TABLE 5 RISK-WEIGHTED ASSETS
- ----------------------------------------------------------------------------------------------------------------------- (in billions) December 31, 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- Balance Balance sheet/ Risk- sheet/ Risk- notional weighted notional weighted amount amounts amount amounts - ----------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks and interest-bearing deposits with banks $ 4.4 $ .7 $ 5.4 $ .9 Federal funds sold and securities purchased under resale agreements 18.8 2.0 12.5 2.5 Securities borrowed 6.2 2.9 6.2 2.5 Trading assets 47.9 15.9 47.5 11.2 Securities available for sale 6.3 4.6 7.5 4.4 Loans 12.6 11.0 12.5 10.0 Allowance for credit losses (1.0) -- (1.3) -- All other assets 8.8 4.9 6.7 4.5 - ----------------------------------------------------------------------------------------------------------------------- Total assets 104.0 42.0 97.0 36.0 Less: applicable assets of BT Securities Corporation (1) 18.7 4.3 15.7 1.8 - ----------------------------------------------------------------------------------------------------------------------- ASSETS $ 85.3 $37.7 $ 81.3 $34.2 - ----------------------------------------------------------------------------------------------------------------------- OFF-BALANCE SHEET EXPOSURES Derivatives $1,767.0 $ 7.4 $1,981.7 $ 8.1 Credit-related arrangements 13.9 7.0 13.2 5.6 Securities lending indemnifications 29.0 .9 21.0 .3 When-issued securities and other 10.2 .3 10.0 .5 - ----------------------------------------------------------------------------------------------------------------------- Total off-balance sheet exposures 1,820.1 15.6 2,025.9 14.5 Less: applicable off-balance sheet exposures of BT Securities Corporation (1) 2.2 -- (87.2) (.2) - ----------------------------------------------------------------------------------------------------------------------- OFF-BALANCE SHEET EXPOSURES $1,817.9 15.6 $2,113.1 14.7 - ----------------------------------------------------------------------------------------------------------------------- Less: allowance for credit losses limitation adjustment .3 .6 - ----------------------------------------------------------------------------------------------------------------------- TOTAL RISK-WEIGHTED ASSETS $53.0 $48.3 - ----------------------------------------------------------------------------------------------------------------------- (1) As well as certain foreign insurance subsidiaries
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 43 14 - -------------------------------------------------------------------------------- RISK MANAGEMENT Risk management is a core competency from which the Corporation derives many of its competitive advantages. The ability to measure and manage risk is a prime concern in all of the Corporation's business decisions, and sensitivity to risk-management innovations and issues is an integral part of its culture. Four overarching principles guide the Corporation's management of risk: - a firm-wide commitment to effective risk management starts at the senior-management level; - a strong, centralized and independent control function for risk management operating in conjunction with decentralized business activities enables the Corporation to be agile and efficient in its business activities yet prudent in its overall risk-taking; - diversification is an efficient mechanism for managing risk; - returns earned must be commensurate with the marginal risk associated with each business activity. The Corporation has made substantial investments in both information technology and human capital to support its risk management processes. Proprietary systems allow a team of dedicated risk management professionals to track the Corporation's global portfolio from its offices worldwide. This team of risk management professionals is independent of the Corporation's business lines and reports directly to senior management. Market Risk Each day the Corporation's risk management process assembles position and risk information on financial instruments of the Firm whose economic (fair) value is a function of market-determined variables: interest rates, currency exchange rates, equity prices, and commodity prices. This information is consolidated into daily risk and limits reports for the Corporation and business lines. These reports are reviewed by the Corporation's senior risk-managers and provide them with a consistent set of information upon which to base their business judgments. One summary measure of market risk that is produced by this process is Daily Price Volatility. The Daily Price Volatility of a portfolio is the potential loss in fair value that would be exceeded less than 1 percent of the time if that portfolio were held unchanged for one day. The Daily Price Volatility information in the tables and diagrams reported below reflect the market risk for virtually all of the Corporation's financial assets and liabilities irrespective of accounting classification. The positions captured by the Daily Price Volatility include both derivative and cash positions which are reported as trading assets and liabilities, repurchase and resale agreements, funding assets and liabilities, deposits, assets held for sale and end-user derivatives. The Daily Price Volatility is based upon proprietary simulation and risk modeling techniques and incorporates the nonlinear payoffs, or convexity, and the volatility risk stemming from options in the Corporation's portfolio. Figure 1 shows the frequency distribution of Daily Price Volatility for 1995 business days for the overall Corporation. The diagram illustrates that the Daily Price Volatility for the Corporation overall was approximately uniformly distributed between $20 million and $40 million during 1995. The magnitude and variation in the Corporation's market risk were driven largely by the Corporation's Trading and Positioning activities. These positions are discretionary exposures undertaken by the Corporation and reflect changes in the Corporation's trading and positioning as market conditions and opportunities vary. FIGURE 1 1995 BTNY DPV FREQUENCY DISTRIBUTION The Figure displays a histogram. Daily price volatility (DPV) amounts ranging from $19 million to $44 million appear on the horizontal axis and Frequency amounts ranging from 0 to 25 observations are displayed on the vertical axis. The frequencies approximate a uniform distribution for DPV's between $20 million and $40 million. If the distribution were exactly uniformly distributed, the frequency would be about 12 at each DPV amount. In the diagram, the frequency exceeds 12 in two ranges: it equals about 22 between DPV's of $22 million and $25 million, and it equals about 16 observations for DPV's of $38 million and $39 million. In the middle of the range (i.e., between DPV's of $26 million and $37 million), there is an oscillating pattern above and below a frequency of 10 observations, with an average of approximately 10 observations. The frequencies are much lower (approximately 2 or 3) for DPV's of $19 million, $43 million and $44 million. 44 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 15 - -------------------------------------------------------------------------------- Table 6 shows the sensitivity of the Corporation's market-risk profile by risk class in 1995 and 1994. The Corporation's portfolio, on average, in 1995 was most sensitive to changes in interest rates and equity prices. Note that the impact of diversification across all risk classes reduced total risk by $16 million on average in 1995. As this illustrates, diversification is an effective method for managing risk. The risk-reducing effect of diversification has been recognized by the Bank for International Settlements in its recent proposal for measuring the market risk of the trading accounts of financial institutions. Table 6 also shows that in 1995 the Corporation reduced both the average level and the variability of market risk from 1994. The reduction in variability is illustrated by the substantial decrease in the range between the minimum and maximum values of the Daily Price Volatility across these years. TABLE 6 BTNY DAILY PRICE VOLATILITY STATISTICS
- -------------------------------------------------------------------------------- 1995 1995 1995 December 31, Market Risk (in millions) Average Minimum Maximum 1995 - -------------------------------------------------------------------------------- Interest rate $ 20 $12 $32 $ 24 Currency 10 5 26 10 Equity 13 7 21 17 Commodity 3 1 5 4 Diversification (16) -- -- (15) - -------------------------------------------------------------------------------- Overall portfolio $ 30 * * $ 40 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1994 1994 1994 December 31, Market Risk (in millions) Average Minimum Maximum 1994 - -------------------------------------------------------------------------------- Interest rate $ 29 $17 $60 $ 18 Currency 10 4 30 12 Equity 15 10 20 14 Commodity 2 1 5 2 Diversification (21) -- -- (18) - -------------------------------------------------------------------------------- Overall portfolio $ 35 * * $ 28 - -------------------------------------------------------------------------------- * The minimum (maximum) for each risk category occurred on different days so it is not meaningful to total the amounts presented above. During 1995 and 1994, respectively, the minimum Daily Price Volatilities for the overall portfolio were $19 million and $25 million, and the maximum Daily Price Volatilities were $44 million and $76 million.
The methodology underlying these Daily Price Volatility calculations and the risk-adjusted return on capital ("RAROC(TM)") calculations described below relies on established asset pricing and statistical models. A question that naturally arises is the validity of this risk measurement process. Figure 2 attempts to shed some light on this question by comparing Daily Price Volatility to accounting profit/loss flows for each business day. In particular, Figure 2 plots for each day the Daily Price Volatility (horizontal axis) against the absolute value of the corresponding accounting profit/loss flow. Observations that lie above the diagonal line that bisects the diagram indicate days when the absolute value of the profit or loss exceeded the Daily Price Volatility, which occurs when the accounting profit or loss lies outside the confidence interval implied by the Daily Price Volatility. Although Daily Price Volatility represents a loss figure that should occur or be exceeded less than 1 percent of the time, there is also approximately a 1 percent chance that profits on any given day would exceed the absolute value of this number. Thus, the statistical specification underlying the Daily Price Volatility methodology implies that approximately 2 percent (or approximately five) of the observations should lie above the diagonal in the diagram. It is important to note that Daily Price Volatility measures the risk of a static portfolio, but the profits and losses occurring in any given day reflect a changing portfolio. Furthermore, because Daily Price Volatility measures the potential economic variation in the Corporation's market sensitive positions, it includes the risk of certain positions BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 45 16 - -------------------------------------------------------------------------------- that are not marked-to-market daily in accordance with accounting standards and that are omitted from the portion of the Corporation's daily profit/loss flows reported in these diagrams. Despite this lack of exact comparability, these diagrams indicate that the methodology provides a reasonable statistical measure of the Corporation's exposure to market risk. FIGURE 2 BTNY 1995 DAILY PRICE VOLATILITY VS. DAILY P&L The Figure displays a scatter diagram of Daily Price Volatility and P&L pairs that occurred during the year for BTNY. The diagram is square in shape with a diagonal line that slopes upward from the left bottom corner to the right upper corner of the diagram. The horizontal axis shows the Daily Price Volatility with a range of $0 million to $50 million. The vertical axis shows the absolute values of daily P&L, also with a range of $0 million to $50 million. The scatter plot shows that all but 2 points lie below the diagonal, meaning the Daily Price Volatility is more than the absolute value of that day's P&L for all but two points. These two points lie approximately $2 million and $5 million above the diagonal and occur at $21 million and $23 million of DPV, respectively. Most points are substantially below the diagonal. Three points are each about $2 million to $3 million below the diagonal at DPV values of $20 million, $24 million, and $40 million. There are two concentrations of points, with both lying near the horizontal axis. The first occurs at Daily Price Volatilities of approximately $20 million to $25 million and contains more points than the second concentration. The second concentration occurs at a Daily Price Volatility of approximately $38 million to $42 million. Two points lie above the diagonal in the diagram. One is due to profits that exceeded the Daily Price Volatility on a given day. The other is due to a loss. Both of these points were produced by unusual volatility in emerging markets, and in the case of the profit point, the changes in the values of emerging market financial instruments were reinforced by large profit flows from new deals on that day. The Daily Price Volatility, as a statistical measure of potential loss, provides an objective benchmark of portfolio risk which complements, but does not substitute for, management's judgment of the appropriate level and mix of risk taken by the Corporation. Furthermore, the methodology employed in the calculation of Daily Price Volatility will change due to enhancements in risk-assessment and information-processing technologies and as new risks are undertaken by the Corporation. Daily Price Volatility is supplemented by the statistical measures of risk and return provided by the RAROC(TM) system (discussed below), by scenario analyses performed periodically by the risk management group, and by a formal limits process that monitors excess concentration or exposure to liquidity risk in the portfolio. The RAROC(TM) system provides information on the potential effect of large changes in interest rates, currency, equity and commodity prices, and volatilities. As such, it produces a stress test of the Corporation's positions each business day. Taken together, all of these measures and reports provide the Corporation's senior management with timely and relevant risk information. RAROC(TM)--Performance Measurement and Capital Adequacy The Corporation pioneered the development of risk-based capital attribution processes. The Corporation's risk capital model, RAROC,(TM) is integral to management's conceptual framework for strategic decision making. This framework has as its objective maximizing return on risk capital, where risk capital is attributed to a business activity according to the level of risk it assumes. Risk capital calculated by the RAROC(TM) framework is used to support decisions on the allocation of human and financial resources. In addition, the disciplined assessment of risk in RAROC(TM) produces a benchmark for assessing capital adequacy both for the Corporation and for its major businesses. The definition of risk capital produced by the RAROC(TM) process is the amount of funds required 99 percent of the time to cover a potential after-tax loss over a one year holding period. Specifically, if the Corporation maintained an absolutely static portfolio for one year, there would be less than a 1 percent chance that the portfolio would decline in value by more than the RAROC(TM) risk capital amount after adjusting for taxes. RAROC(TM) is designed to assess the following general classes of risk: market risk, credit risk and operational risk. Market risk is the potential loss in economic (fair) value due to changes in interest rates, currency, equity and commodity prices, and volatilities. Financial instruments of the Corporation whose fair values are functions of these market variables are included in the assessment of market risk irrespective of accounting designation. Credit risk is defined as potential loss in fair value of all extensions of credit, on and off balance sheet, by the Corporation. Operational risk is defined by the Corporation in the context of five risk classes: Employee, Technology, Relationship/Liability, Physical Assets, and Other External. Losses that are characterized as operational include but are not limited to the following examples: losses due to personnel unavailability or injury, natural disasters, the failure of external systems such as an exchange, or a failure of internal controls. By their nature, these risks are difficult to measure or quantify and are therefore handled judgementally and with less precision than other types of risks. 46 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 17 - -------------------------------------------------------------------------------- CREDIT RISK MANAGEMENT The Credit Policy Department, headed by the Chief Credit Officer, is responsible for developing credit policies, as well as for monitoring and managing overall credit risk. The department evaluates the creditworthiness of each borrower/issuer/counterparty and assigns a rating for each. Credit limits are established at the portfolio level by borrower/issuer/counterparty and by other categories. One credit officer is responsible for reviewing the entire credit risk portfolio of a borrower/issuer/counterparty regardless of the nature of the exposure (e.g. loans, securities, derivatives). Credit officers also monitor the usage of credit risk by entity versus the limits at the product and business activity level. The Credit Policy Department monitors country exposures and assigns country risk ratings. It also monitors country, industry, borrower/issuer/counterparty, product and regional risk concentrations in order to evaluate the degree of diversification in the portfolio. RAROC(TM) credit capital represents the translation into potential losses of the exposure of the overall portfolio of the Corporation to default risk. This translation is accomplished using proprietary statistical models. These statistical models incorporate information on the duration of the exposure, the potential magnitude of the exposure, and the creditworthiness of the borrower/ issuer/counterparty. The Corporation's senior risk managers regularly review and actively manage the credit risks at the portfolio level to ensure that the risk characteristics and degree of diversification as reflected in RAROC(TM) capital calculations conform with the Corporation's policies. DERIVATIVES Derivatives are swaps, futures, forwards, options and other similar types of contracts based on interest rates, foreign exchange rates and the prices of equities and commodities (or related indices). Derivatives are generally either privately-negotiated over-the-counter ("OTC") contracts or standard contracts transacted through regulated exchanges. OTC contracts generally consist of swaps, forwards and options. In the normal course of business, with the agreement of the original customer, OTC derivatives may be terminated or assigned to another customer. Exchange-traded derivatives include futures and options. These capital markets products are described further in Note 22 of Notes to Financial Statements. Derivatives may be used for either trading or end-user purposes. Trading Derivatives The Corporation holds derivatives in connection with its activities as a dealer acting as principal for particular transactions with clients, as a market maker quoting bid and offer prices to provide liquidity and regular availability of derivatives for clients, as a risk manager of its own trading positions resulting from these client-driven transactions and, finally, as a position taker in the expectation of profiting from favorable movements in prices or rates. As a result, the Corporation may build up sizable positions in derivatives. The risks of derivative positions are managed in accordance with the Corporation's risk management policies. Substantially all of the Corporation's derivative positions at December 31, 1995 were trading-related, with gains and losses included in trading revenue as they occur. Contracts with positive fair values are recorded as assets and contracts with negative fair values are recorded as liabilities, after application of qualifying master netting agreements. These positions may vary in size from period to period, similar to the positions in cash instruments also carried in the Corporation's trading account. Average trading assets and trading liabilities related to derivatives during 1995 were $13.7 billion and $13.2 billion, respectively. The notional amounts, which are not recorded on the balance sheet, of trading derivatives totaled $1,702 billion at December 31, 1995 and indicate the volume of activity but do not represent the Corporation's exposure to market or credit risk. End-User Derivatives The Corporation utilizes end-user derivatives to manage exposures to interest rate, foreign currency and equity market risks associated with certain liabilities and assets such as interest-bearing deposits, short-term borrowings and long-term debt as well as securities available for sale, investments in non-marketable equity securities and net investments in foreign subsidiaries. For example, the Corporation's Treasury Department, which manages the majority of the Corporation's end-user derivatives, utilizes certain instruments (principally interest rate swaps) to transform fixed-rate-paying liabilities into variable-rate-paying liabilities. See Note 24 and Note 22 of Notes to Financial Statements for the fair value of end-user derivatives and related financial instruments and additional end-user information. The notional amounts, which are not recorded on the balance sheet, of end-user derivatives totaled $65 billion at December 31, 1995 and indicate the volume of activity but do not represent the Corporation's exposure to market or credit risk. These contracts represent less than 4 percent of the aggregate notional amounts of all derivatives outstanding at year end. BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 47 18 - -------------------------------------------------------------------------------- Market Risk The market risk of derivatives arises principally from the potential for changes in interest rates, foreign exchange rates, and equity and commodity prices and is generally similar to the market risk of the cash instruments underlying the contracts. The market risk to the Corporation is not measured by the price sensitivity of the individual contracts, but by the net price sensitivity of the relevant portfolio, including cash instruments. The Corporation generally manages its exposures by taking risk-offsetting positions. Therefore, the Corporation believes it is not meaningful to view the market risk of derivatives in isolation. Market exposures arising from derivatives are monitored in the Corporation's RAROC(TM) system and are included in the Daily Price Volatility amounts discussed in the preceding Risk Management section. Liquidity Risk In times of stress, sharp price movements or volatility shocks may reduce liquidity in certain derivatives positions, as well as in cash instruments. The liquidity risk of derivatives is substantially based on the liquidity of the underlying cash instrument, which affects the ability of the Corporation to alter the risk profile of its positions rapidly and at a reasonable cost. The Corporation's mark-to-market practices for derivatives include adjustments in consideration of liquidity risks, when appropriate. These practices are consistent with those applied to the Corporation's trading positions in cash instruments. Derivatives-Related Credit Risk Derivative transactions create dynamic credit exposure which changes as markets move. The credit risk of derivatives arises from the potential for a customer to default on its contractual obligations. Accordingly, credit risk related to derivatives depends on the following: the current fair value of the contracts with the customer; the potential credit exposure over time; the extent to which legally enforceable netting arrangements allow the fair value of offsetting contracts with that customer to be netted against each other; the extent to which collateral held against the contracts reduces credit risk exposure; and the likelihood of default by the customer. The Corporation monitors and manages the credit risk associated with derivatives by applying a uniform credit process for all credit exposures. The credit risk of derivatives is included in the Corporation's centralized credit management and RAROC(TM) systems. In order to reduce derivatives-related credit risk, the Corporation enters into master netting agreements that provide for offsetting of all contracts under each such agreement and obtains collateral where appropriate. Such master netting agreements contemplate payment netting as well as the net settlement of all covered contracts through a single payment in a single currency with the same counterparty in the event that a default (including insolvency) under the agreement occurs. The Corporation monitors credit risk exposure on a gross and a net basis and on a collateralized and an uncollateralized basis, as appropriate. 48 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 19 - -------------------------------------------------------------------------------- Table 7 summarizes the Corporation's derivatives-related credit risk. It displays, by internal rating, the Corporation's current credit risk to customers. The majority of the Corporation's derivative transactions are with foreign and U.S. commercial banks, as well as corporations, governments and their agencies, securities firms and other financial institutions. Current credit risk is calculated based on the current replacement cost of outstanding positions with customers in OTC derivative financial instruments. The gross replacement cost of a derivative portfolio with a customer is the positive mark-to-market value of all transactions with that customer without the effects of netting or collateral arrangements. The replacement costs, after netting and collateral, of $8.683 billion more accurately portray the credit risk associated with the Corporation's derivatives activities with external customers at December 31, 1995 than do the gross replacement costs. The significant decrease from 1994 in replacement costs after netting and collateral is primarily attributable to an increase in the impact of netting agreements with customers rated 1 to 4 (investment-grade customers), rather than to a decrease in the related gross replacement costs. Approximately 92 percent of the derivatives-related credit risk at December 31, 1995 was to investment-grade customers. The weighted average remaining maturity of the OTC trading derivatives portfolio was approximately 2 2/3 years for customers rated 1 to 4, 2 1/2 years for customers rated 5, and 1 1/3 years for customers rated 6 to 8. Internal ratings are based upon the Corporation's assessment of the customer's creditworthiness. Ratings of 1 to 4 generally equate to investment-grade ratings (BBB/Baa and higher) from rating agencies in the U.S. markets. A rating of 5 usually approximates long-term debt ratings of BB/Ba. Ratings of 6 to 8 are generally equivalent to B/B and below. Customers in the 6 to 8 category may be internally designated for special monitoring by the Credit Audit Department. Factors such as guarantors and collateral held, as well as the impact of country risk on private foreign companies, may differentiate the Corporation's ratings from those of the rating agencies. The Corporation applies netting based upon the criteria prescribed by FIN 39, which provides that offsetting is appropriate where the available evidence indicates that there are reasonable assurances that the right of setoff contained in a master netting agreement governing derivatives contracts would be upheld after default, including in the event of the customer's bankruptcy. Collateral also reduces credit risk. The Corporation generally accepts collateral in the form of cash, U.S. Treasuries, and other approved securities (generally, only liquid, marketable, publicly-traded securities are acceptable). TABLE 7 DERIVATIVES-RELATED CREDIT RISK(1)
- ------------------------------------------------------------------------------------------------------------------- Internal Rating For Customer ---------------------------------------------- (in millions) December 31, 1995 1 to 4 5 6 to 8 Total - ------------------------------------------------------------------------------------------------------------------- Replacement costs (gross) $ 25,461 $ 2,259 $186 $ 27,906 Impact of netting agreements (17,082) (1,371) (11) (18,464) - ------------------------------------------------------------------------------------------------------------------- Replacement costs (after netting agreements) 8,379 888 175 9,442 Collateral held and applied (433) (282) (44) (759) - ------------------------------------------------------------------------------------------------------------------- Replacement costs after netting and collateral $ 7,946 $ 606 $131 $ 8,683 - ------------------------------------------------------------------------------------------------------------------- Replacement costs after netting and collateral, December 31, 1994 $ 10,144 $ 661 $132 $ 10,937 - ------------------------------------------------------------------------------------------------------------------- (1) End-user derivatives and exchange-traded contracts are not included.
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 49 20 - -------------------------------------------------------------------------------- The Corporation's allowance for credit losses is available for credit losses related to derivatives contracts. Derivatives are considered by the Credit Audit Department when it reviews both general and specific credit risks in the Corporation's portfolio. Net charge-offs to the allowance that were related to derivative contracts totaled $240 million during 1995 and $77 million during 1994 (see Leveraged Derivative Transactions section below). The international bank regulatory standards for risk-based capital consider the credit risk arising from derivatives in the assessment of capital adequacy. These standards were issued under the Basle Capital Accord of July 1988 and adopted in 1989 by the U.S. bank regulators, including the Federal Reserve Board. These standards use a formula-based assessment of customer credit risk which, as amended at year-end 1995, reflect the credit-risk-reducing impact of legally enforceable master netting agreements. These standards include a calculation for estimating the potential future credit exposure caused by potential price volatility (the "add-on"). At December 31, 1995, this add-on was $10.2 billion before application of risk weightings, of which 91 percent, 8 percent, and 1 percent related to customers internally rated 1 to 4, 5, and 6 to 8, respectively. At December 31, 1995, the risk-weighted amounts (reflecting both current and potential future credit exposure) that were calculated based on these international standards for derivative financial instruments aggregated to $7.4 billion. Presented in Table 8 below is a maturity profile of the Corporation's trading derivative products. This profile indicates the extent of the Corporation's involvement in derivative transactions of specific maturities and also provides the basis for calculating the estimate of potential future credit exposure (the add-on) under the international bank regulatory standards. The percentages in Table 8 are based on notional amounts which do not necessarily represent cash flows and do not represent a quantification of the market risk or credit risk of these positions. TABLE 8 MATURITY PROFILE OF TRADING DERIVATIVES(1)(2)
- -------------------------------------------------------------------------------------------------- Interest Foreign Equity- Commodity Rate Exchange Related and Other Remaining Maturity at December 31, 1995 Total Contracts Contracts Contracts Contracts - -------------------------------------------------------------------------------------------------- Within 12 months 60% 25% 33% 1% 1% After 1 but within 5 years 32% 28% 4% --% --% After 5 years 8% 7% 1% --% --% - -------------------------------------------------------------------------------------------------- Total 100% 60% 38% 1% 1% - -------------------------------------------------------------------------------------------------- (1) Based on notional amounts. Includes both purchase and sale contracts and contracts for which the fair values are recorded as trading assets and as trading liabilities. The leveraging effects of leveraged derivative transactions are reflected above. (2) Presented in accordance with the risk-based capital standards, this maturity profile does not include futures contracts, spot foreign exchange contracts, or options written. These types of contracts are considered in the Corporation's market and credit risk management processes.
Leveraged Derivative Transactions A leveraged derivative transaction is a specific type of derivative financial instrument containing a formula or multiplier which, for any given change in market prices, could cause the change in the transaction's fair value to be significantly different from the change in fair value that would occur for a similar transaction without the formula or multiplier. Cash instruments (including structured notes) with embedded forward or option features and all former leveraged derivative transactions that are now included in the loan portfolio are excluded from the foregoing definition. The Corporation's leveraged derivative transactions are carried at fair value in the trading portfolio on the consolidated balance sheet and changes in fair value are reported in trading revenue as they occur. The Corporation's leveraged derivative transactions are affected by the same general market risks as the trading portfolio as a whole and are subject to the risk management policies outlined in the preceding section. 50 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 21 - -------------------------------------------------------------------------------- During 1995 $33 million of leveraged derivative transactions were reclassified to the loan portfolio at amounts equal to or less than the contractual amounts due, compared to $520 million in 1994. These transactions are not included in Tables 7 and 8. In 1995, $245 million of these leveraged derivative loans were charged-off to the allowance for credit losses, compared to $72 million in 1994. An additional $90 million was charged to trading revenue in 1995 resulting from settlements of leveraged derivative transactions remaining in the trading portfolio. At December 31, 1995 the balance included in loans after charge-offs and cash collections was $120 million of which $104 million was classified as cash basis loans. Based on an analysis of the potential outcome of outstanding issues relating to leveraged derivative transactions, management believes that the expected potential financial impact should be covered by existing reserves. For further information regarding regulatory and legal matters, refer to "Supervision and Regulation" and "Legal Proceedings" on pages 103 and 105, respectively. Further information applicable to derivatives in general may be found in the following sections:
Relevant Information Page Title - -------------------------------------------------------------------------------- Risk-weighted amounts 42 Capital Resources Revenue by risk category 36 Trading Revenue Daily Price Volatility, RAROC(TM) and credit management 44 Risk Management Credit losses 51 Summary of Credit Loss Experience Nonperforming amounts 54 Nonperforming Assets Accounting 66 Significant Accounting Policies Balance sheet amounts 68 Trading Assets and Trading Liabilities Product descriptions, fair values Derivatives and Financial and notional amounts 83 Instruments With Off-Balance Sheet Risk Significant counterparties 87 Concentrations of Credit Risk End-user derivatives 88 Fair Value of Financial Instruments
SUMMARY OF CREDIT LOSS EXPERIENCE Charge-Off Procedures and Adequacy of the Allowance for Credit Losses As part of the Corporation's overall management and control process, the Credit Audit Department is charged with the responsibility for performing an ongoing independent examination of the portfolio. Counterparty risk exposure is analyzed across all product lines including loans, credit-related commitments, derivatives and other financial instruments. All significant items in the portfolio are reviewed annually; those under special supervision, such as cash basis loans and renegotiated loans, are reviewed quarterly. In addition, all levels of management are required to bring to the attention of the Credit Audit Department any credit risk where an additional review of the counterparty's financial position is believed to be warranted. The Credit Audit Department reports at least quarterly to the Audit Committee of the Board of Directors which, in turn, reports to the full Board of Directors, with recommendations for charge-offs. The Board has the final decision-making responsibility in authorizing charge-offs. In addition to the above procedures, federal and State of New York bank examiners perform examinations of the Corporation's credit risks. The reports on these examinations are reviewed by the Credit Audit Department with the Audit Committee. The provision for credit losses is dependent upon management's evaluation as to the amount needed to maintain the allowance for credit losses at a level considered appropriate in relation to the risk of losses inherent in the portfolio. Various factors are collectively weighed by management in determining the adequacy of the allowance. The Credit Audit Department and bank regulatory authorities assess and issue reports on the quality of the portfolio and on the adequacy of the allowance. As part of their annual audit, the Corporation's independent auditors assess the adequacy of the allowance and the provision for credit losses. Their procedures include discussions with management, a review of selected credit files and an evaluation of the periodic reports issued by the Credit Audit Department and regulatory examiners. In the opinion of management, the allowance, when taken as a whole, is adequate to absorb reasonably estimated credit losses inherent in the Corporation's portfolio. BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 51 22 - --------------------------------------------------------------------------------
TABLE 9 ANALYSIS OF THE ALLOWANCE FOR CREDIT LOSSES The following table analyzes the changes in the allowance for credit losses. - -------------------------------------------------------------------------------- ($ in millions) Year Ended December 31, 1995 1994 1993 1992 1991 - ----------------------------------------------------------------------------------------------------------------------- ALLOWANCE FOR CREDIT LOSSES, BEGINNING OF YEAR $1,252 $1,324 $1,620 $1,806 $2,169 - ----------------------------------------------------------------------------------------------------------------------- CHARGE-OFFS Domestic (nonrefinancing country) Commercial and industrial 177 55 64 164 89 Financial institutions -- 11 4 -- 2 Real estate Construction 10 1 6 3 1 Mortgage 22 23 51 35 22 Other -- -- 1 -- 1 International Nonrefinancing country 121 77 302 98 152 Refinancing country -- 1 32 43 220 - ----------------------------------------------------------------------------------------------------------------------- Total charge-offs 330 168 460 343 487 - ----------------------------------------------------------------------------------------------------------------------- RECOVERIES Domestic (nonrefinancing country) Commercial and industrial 11 24 19 7 24 Financial institutions -- -- -- -- -- Real estate Construction -- 1 -- -- -- Mortgage 4 -- 1 1 -- Other -- -- 2 2 -- International Nonrefinancing country 15 8 7 16 5 Refinancing country 9 38 42 23 20 - ----------------------------------------------------------------------------------------------------------------------- Total recoveries 39 71 71 49 49 - ----------------------------------------------------------------------------------------------------------------------- TOTAL NET CHARGE-OFFS (1) 291 97 389 294 438 LOSSES ON SALES AND SWAPS OF REFINANCING COUNTRY LOANS -- -- -- 117 163 - ----------------------------------------------------------------------------------------------------------------------- TOTAL NET CHARGES TO THE ALLOWANCE 291 97 389 411 601 PROVISION FOR CREDIT LOSSES 31 25 93 225 238 - ----------------------------------------------------------------------------------------------------------------------- ALLOWANCE FOR CREDIT LOSSES, END OF YEAR $ 992 $1,252 $1,324 $1,620 $1,806 - ----------------------------------------------------------------------------------------------------------------------- PERCENTAGE OF TOTAL NET CHARGES TO AVERAGE LOANS FOR THE YEAR 2.48% .78% 2.54% 2.45% 3.15% - ----------------------------------------------------------------------------------------------------------------------- (1) Components: Secured by real estate $ 23 $ 24 $ 116 $ 71 $ 61 Real estate related 2 23 3 27 40 Highly leveraged 30 (5) 15 117 63 Other * 245 92 265 59 74 Refinancing country (9) (37) (10) 20 200 - ----------------------------------------------------------------------------------------------------------------------- Total $ 291 $ 97 $ 389 $ 294 $ 438 - -----------------------------------------------------------------------------------------------------------------------
* The 1995 and 1994 amounts included net charge-offs of $240 million and $72 million, respectively, related to leveraged derivative transactions. 52 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 23 - -------------------------------------------------------------------------------- Provision and Allowance for Credit Losses The provision for credit losses amounted to $31 million for 1995, compared with $25 million for 1994 and $93 million in 1993. Total net charge-offs for 1995 were $291 million, compared with $97 million in the prior year and $389 million during 1993. The current year net charge-offs included $240 million of cash basis leveraged derivatives, compared to $72 million in 1994. Nonrefinancing country net charge-offs in 1995 and 1994 included $25 million and $47 million of real estate loans, respectively. Net charge-offs of highly leveraged borrowers were $30 million in 1995 compared to $5 million of net recoveries reported in 1994. Refinancing net recoveries in 1995 and 1994 were $9 million and $37 million, respectively. The allowance for credit losses decreased to $992 million at December 31, 1995, from $1.252 billion at year-end 1994 and $1.324 billion at December 31, 1993. The allowance was equal to 133 percent, 126 percent and 136 percent of total cash basis loans at December 31, 1995, 1994 and 1993, respectively. Pursuant to a regulatory requirement, the table below provides the components of the allowance for credit losses by category. This breakdown of the allowance at each year end reflects management's best estimate of possible credit losses and may not necessarily be indicative of actual future charge-offs. The allowance for credit losses is available for credit losses in the entire portfolio, which is comprised of loans, credit-related commitments, derivatives and other financial instruments. Therefore, the Corporation believes that the allowance must be viewed in its entirety.
(in millions) December 31, 1995 1994 1993 1992 1991 - ----------------------------------------------------------------------- Domestic Commercial and industrial $165 $ 133 $ 115 $ 162 $ 147 Financial institutions 20 20 8 19 32 Real estate Construction 8 5 15 10 10 Mortgage 70 54 65 50 60 Other 3 2 1 4 12 - ----------------------------------------------------------------------- Total domestic 266 214 204 245 261 International 222 266 190 403 599 - ----------------------------------------------------------------------- Total allocated 488 480 394 648 860 Unallocated portion* Domestic 306 402 599 368 347 International 198 370 331 604 599 - ----------------------------------------------------------------------- Total allowance for credit losses $992 $1,252 $1,324 $1,620 $1,806 ----------------------------------------------------------------------
* This amount and any unabsorbed portion of the allocated allowance is also available for credit losses in the entire portfolio.
For purposes of providing information required by regulatory authorities and subject to the above limitations, the following table presents an analysis of the changes in the international component of the allowance for credit losses: (in millions) Year Ended December 31, 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------- Balance, beginning of year $636 $521 $1,007 $1,198 $1,748 - ------------------------------------------------------------------------- Net charge-offs Charge-offs 121 78 334 141 372 Recoveries 24 46 49 39 25 - ------------------------------------------------------------------------- Total net charge-offs 97 32 285 102 347 Losses on sales and swaps of refinancing country loans -- -- -- 117 163 - ------------------------------------------------------------------------- Total net charges to the allowance 97 32 285 219 510 Provision for credit losses 9 11 40 61 148 Reallocation (to) from domestic allowance (128) 136 (241) (33) (188) - ------------------------------------------------------------------------- Balance, end of year $420 $636 $ 521 $1,007 $1,198 - -------------------------------------------------------------------------
The $128 million reallocation during 1995 from the international to the domestic component of the allowance for credit losses, as well as the 1994 reallocation of $136 million from the domestic to the international component of the allowance for credit losses, was based on the continuing evaluation of the Corporation's overall credit portfolio. BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 53 24 - --------------------------------------------------------------------------------
NONPERFORMING ASSETS Table 10 shows the Corporation's trend of cash basis loans, renegotiated loans, other real estate and other nonperforming assets. TABLE 10 NONPERFORMING ASSETS - ---------------------------------------------------------------------------------------------------------------------- ($ in millions) December 31, 1995 1994 1993 1992 1991 - ---------------------------------------------------------------------------------------------------------------------- Cash basis loans (nonrefinancing country) Domestic Commercial and industrial $263 $316 $285 $ 481 $ 588 Secured by real estate 297 277 306 349 403 Financial institutions 10 25 30 2 3 Lease financing -- -- -- 1 3 - ---------------------------------------------------------------------------------------------------------------------- Total domestic 570 618 621 833 997 - ---------------------------------------------------------------------------------------------------------------------- International Commercial and industrial 106 247 84 167 288 Secured by real estate 65 79 149 148 172 Financial institutions 3 48 -- -- 5 Other -- 2 2 8 9 - ---------------------------------------------------------------------------------------------------------------------- Total international 174 376 235 323 474 - ---------------------------------------------------------------------------------------------------------------------- Total cash basis loans (nonrefinancing country) 744 994 856 1,156 1,471 Cash basis loans (refinancing country) International -- 2 118 221 279 - ---------------------------------------------------------------------------------------------------------------------- Total cash basis loans $744 $996 $974 $1,377 $1,750 - ---------------------------------------------------------------------------------------------------------------------- Ratio of cash basis loans to total loans 5.9% 8.0% 6.4% 8.0% 10.3% - ---------------------------------------------------------------------------------------------------------------------- Ratio of allowance for credit losses to cash basis loans 133% 126% 136% 118% 103% - ---------------------------------------------------------------------------------------------------------------------- Renegotiated loans Venezuelan government Par Bonds $ -- $ -- $ -- $ -- $ 249 Mexican government Par Bonds (1) -- -- -- 611 611 Highly leveraged -- -- 6 27 31 Secured by real estate 88 65 14 20 -- Other 12 1 1 1 -- - ---------------------------------------------------------------------------------------------------------------------- Total renegotiated loans $100 $ 66 $ 21 $ 659 $ 891 - ---------------------------------------------------------------------------------------------------------------------- Other real estate $259 $301 $287 $ 315 $ 255 - ---------------------------------------------------------------------------------------------------------------------- Other nonperforming assets Assets acquired in credit workouts $ 66 $ 61 $ 85 $ 73 $ 34 Other 1 2 16 32 28 - ---------------------------------------------------------------------------------------------------------------------- Total other nonperforming assets $ 67 $ 63 $101 $ 105 $ 62 - ---------------------------------------------------------------------------------------------------------------------- Loans 90 days or more past due and still accruing interest (2) $ 26 $ -- $ 40 $ 86 $ 15 - ----------------------------------------------------------------------------------------------------------------------
(1) During 1991, the Corporation reclassified its Mexican outstandings to nonrefinancing country status. (2) Represents loans 90 days or more past due with respect to interest or principal. These loans were considered to be well secured and were in the process of collection. The December 31, 1993 and 1992 balances includes $15 million and $66 million of international loans, respectively. 54 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 25 Each quarter an extensive review is performed by the Credit Audit Department and senior credit management of all cash basis loans and classified assets. Each borrower/counterparty is examined to determine whether it represents a potential loss. Whenever the probability of loss is believed to be greater than 50 percent, a charge-off of the amount deemed uncollectible is recommended to the Audit Committee of the Board. Once a charge-off is taken the remaining portion, if any, is immediately placed on a cash basis. If the probability of loss is believed to be less than 50 percent, but collection or liquidation in full is questionable if present trends continue, the asset is classified as doubtful. It is the Corporation's policy to place all assets classified as doubtful on a cash basis, even if the borrower is still making required payments. In addition, it is generally the Corporation's policy that loans be immediately placed on a cash basis when they become 90 days past due with respect to interest or principal. The Corporation's total cash basis loans amounted to $744 million at December 31, 1995, a decrease of $252 million, or 25 percent, from 1994, which had increased $22 million, or 2 percent, from 1993. Cash basis loans decreased $252 million during 1995, primarily due to charge-offs of $245 million and payments of $81 million on cash basis leveraged derivative contracts. These were partially offset by additional transfers of leveraged derivative contracts to cash basis loans of $79 million. Based on an analysis of the potential outcome of outstanding issues relating to leveraged derivative transactions, management believes that the expected potential financial impact should be covered by existing reserves. Within total nonrefinancing country cash basis loans, loans secured by real estate increased by $6 million, to $362 million. Also included in total nonrefinancing country cash basis loans were commercial and industrial loans to highly leveraged borrowers which increased $3 million, to $153 million at December 31, 1995. An analysis of the changes in the Corporation's total cash basis loans follows:
(in millions) Year Ended December 31, 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------ Balance, beginning of year $ 996 $ 974 $1,377 $1,750 $1,764 Net transfers to cash basis loans 314 520 230 312 849 Net paydowns (221) (130) (140) (112) (182) Charge-offs (330) (163) (232) (322) (479) Net transfers from (to) other real estate 13 (72) (10) (87) (159) Transfers to other nonperforming assets -- (7) (58) (45) (4) Loan sales (1) (49) (153) (50) (26) Other (27) (77) (40) (69) (13) - ------------------------------------------------------------------------------ Balance, end of year $ 744 $ 996 $ 974 $1,377 $1,750 - ------------------------------------------------------------------------------
The $22 million increase in total cash basis loans during 1994 reflected a $138 million increase in nonrefinancing country cash basis loans and a $116 million decrease in refinancing country cash basis loans. Nonrefinancing country cash basis loans increased during 1994, primarily due to $423 million of leveraged derivative contracts that were reclassified as receivables to the loan portfolio and placed on a cash basis. Of this amount, $72 million was subsequently charged-off to the allowance for credit losses. Approximately one half of the remainder related to transactions with Procter & Gamble. Within total nonrefinancing country cash basis loans, loans secured by real estate decreased $99 million, to $356 million and real estate related loans (included within the domestic commercial and industrial category in Table 10) decreased by $29 million, to $29 million. Also included in total nonrefinancing country cash basis loans were commercial and industrial loans to highly leveraged borrowers which decreased $43 million, to $150 million at December 31, 1994. The decrease in refinancing country cash basis loans was primarily due to the conversion of loans to Brady bonds when a debt exchange took place between the Brazilian government and its commercial bank creditors, including the Corporation, which completed the long-awaited refinancing of Brazil's medium- and long-term debt. The Corporation's renegotiated loans increased $34 million and $45 million during 1995 and 1994, respectively, primarily due to increases in loans secured by real estate of $23 million and $51 million, respectively. Other real estate decreased $42 million during 1995 primarily as a result of the adoption of SFAS 114 during the first quarter of 1995. SFAS 114 required the transfer of in-substance foreclosed properties, where the Corporation had not taken possession of the collateral, to cash basis loans. SPECIAL PORTFOLIO SEGMENTS REAL ESTATE PORTFOLIO The global real estate loan portfolio totaled $1.802 billion at December 31, 1995. This included domestic loans secured by real estate of $1.430 billion, international loans secured by real estate of $178 million, and total real estate related loans of $194 million. The largest geographic concentration within loans secured by real estate was in properties in the Mid-Atlantic region, at 39 percent, of which New York City and its suburbs comprised approximately 49 percent. The next largest geographic concentrations were loans secured by properties in the Midwest region and California, each of which comprised 14% of the total. The largest product-type concentrations were loans secured by mixed-use properties, apartments, office buildings, and 1-4 family residential properties at 20 percent, 17 percent, 16 percent and 15 percent, respectively. All BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 55 26 other concentrations were individually less than 10 percent of total loans secured by real estate. Approximately 30 percent of the loans secured by real estate were purchased in the secondary market during 1995. These are comprised primarily of domestic multifamily residential loans. Real estate related loans consist of loans made for any purpose to organizations or individuals, 80 percent of whose revenues or assets are derived from or consist of real estate ventures or holdings, that are not collateralized by cash or marketable securities and are not secured by real estate. The Corporation was also obligated under $308 million of standby letters of credit and $135 million of unused commitments to extend credit in connection with its commercial real estate financing activities at December 31, 1995. Because of the diversity of the portfolio, the risks of real estate lending reflect both general and local economic conditions. Management closely monitors the portfolio, and formal reviews are conducted at least annually, with many exposures reviewed quarterly. Table 11 details the global real estate portfolio at December 31, 1995.
TABLE 11 REAL ESTATE LOANS AND OTHER REAL ESTATE - -------------------------------------------------------------------------------------------------- Outstanding Balance --------------------------------- Inter- Cash Basis ($ in millions) December 31, 1995 Domestic national Total Balance - -------------------------------------------------------------------------------------------------- Loans secured by real estate Land under development $ 26 $ 2 $ 28 $ 21 Construction Under construction 8 -- 8 2 In lease-up (1) 120 -- 120 17 Standing (2) 1-4 family residential 212 29 241 4 Multifamily residential 373 2 375 36 Commercial 691 145 836(3) 282 - -------------------------------------------------------------------------------------------------- Total loans secured by real estate 1,430 178 1,608 362 Real estate related loans 153 41 194 23 - -------------------------------------------------------------------------------------------------- Total real estate loans $1,583 $219 $1,802 $385 - -------------------------------------------------------------------------------------------------- Other real estate $ 156 $103 $ 259 - --------------------------------------------------------------------------------------
(1) In lease-up are completed properties that are less than 85 percent leased-up. (2) Standing properties have been built, developed and leased-up such that the project is considered stabilized. (3) Includes $88 million of renegotiated loans. 56 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 27 HIGHLY LEVERAGED TRANSACTIONS For purposes of monitoring the extent of its exposure to highly leveraged transactions ("HLTs"), the Corporation utilizes the following definition. HLTs are financing transactions the purpose of which involves a buyout, acquisition or recapitalization and which (i) doubles the subject company's liabilities and results in a leverage ratio higher than 50 percent or (ii) results in a leverage ratio higher than 75 percent or (iii) is designated an HLT by a syndication agent. Borrowers are delisted from HLT status when (1) cash flow tests, relative to their industry or peer group, are met, or (2) they are no longer highly leveraged upon emergence from Chapter 11 bankruptcy or similar proceeding. In addition, certain loans which are fully collateralized by cash or cash equivalent securities are excluded from HLT reporting. Amounts included in the table and discussion which follow generally reflect the above definition.
TABLE 12 HIGHLY LEVERAGED TRANSACTIONS (in millions) December 31, 1995 1994 - -------------------------------------------------------------- Loans Senior debt $1,105 $ 959 Subordinated debt 68 101 - -------------------------------------------------------------- Total loans $1,173 $1,060 - -------------------------------------------------------------- Unfunded commitments Commitments to lend $ 539 $ 311 Letters of credit 263 198 - -------------------------------------------------------------- Total unfunded commitments $ 802 $ 509 - -------------------------------------------------------------- Equity investments $ 648 $ 413 - -------------------------------------------------------------- Commitments to invest $ 289 $ 313 - --------------------------------------------------------------
The Corporation's outstanding loans were to 97 separate borrowers in 38 separate industry groups at December 31, 1995, compared to 76 separate borrowers in 30 separate industry groups at December 31, 1994. The wholesale and retail food group and the motor vehicles (tires and parts) group, both at 11 percent, were the only industry concentrations which exceeded 10 percent of total HLT loans outstanding at December 31, 1995. In addition to the amounts shown in Table 12, at December 31, 1995, the Corporation had issued commitment letters which had been accepted, subject to documentation and certain other conditions, of $2.2 billion (which were in various stages of syndication) and had additional HLTs in various stages of discussion and negotiation. During 1995, the Corporation originated $1.9 billion of HLT commitments. It should be noted that the Corporation's loans and commitments in connection with HLTs fluctuate as new loans and commitments are made and as loans and commitments are syndicated, participated or paid. All loans and commitments to finance HLTs are reviewed and approved by senior credit officers of the Corporation. In addition to a strict transactional and credit approval process, the portfolio of leveraged loans and commitments is actively monitored and managed to minimize risk through diversification among borrowers and industries. As part of this strategy, sell and hold targets are regularly updated in connection with market opportunities and the addition of new HLTs. Retention by the Corporation after syndication and sales of loan participations has typically been less than $50 million, and the average outstanding per borrower for the portfolio at December 31, 1995 was less than $13 million. However, at December 31, 1995, the Corporation had total exposure (loans outstanding plus unfunded commitments) in excess of $50 million to 9 separate highly leveraged borrowers. At December 31, 1995, $153 million of the HLT loan portfolio was on a cash basis. In addition, $6 million of the equity investments in HLT companies represented assets acquired in credit workouts, which are reported as other nonperforming assets. Net charge-offs of $30 million of HLT loans were recorded in 1995. In addition, the Corporation recorded a net gain of $269 million in connection with the sales and/or write-offs of certain equity investments in highly leveraged companies during 1995. Included in this amount was a $207 million gain on sale of most of the Corporation's merchant banking investment in Northwest Airlines Corporation. Generally, fees (typically 2 to 4 percent of the principal amount committed) and interest charged (typically LIBOR plus 1.5 to 3 percent) on HLT loans are higher than on other credits. The Corporation does not account for revenue or expenses from HLTs separately from its other corporate lending activities. However, it is estimated that transaction fees recognized for lending activities relating to highly leveraged transactions were approximately $119 million during 1995 and that as of December 31, 1995, approximately $17 million of fees were deferred and will be recognized as future revenue. CROSS-BORDER OUTSTANDINGS The Corporation's cross-border outstandings reflect certain additional economic and political risks beyond those associated with its domestic outstandings. These risks include those arising from exchange rate fluctuations, restrictions on the transfer of funds and balance-of-payments issues. Set forth in Table 13 are the Corporation's cross-border outstandings at December 31, 1995, 1994 and 1993, for each foreign country where such outstandings exceeded one percent of total assets. The cross-border outstandings were compiled based upon category and domicile of ultimate risk and are comprised of balances with banks, trading securities, securities available for sale, securities purchased under resale agreements, loans, accrued interest receivable, acceptances outstanding and investments with foreign entities. The amounts outstanding for each country exclude local currency outstandings. The Corporation does not have significant local currency outstandings to the individual countries listed in the following table that are not hedged or are not funded by local currency borrowings. BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 57 28
TABLE 13 CROSS-BORDER OUTSTANDINGS - ---------------------------------------------------------------------------------------------------------------- Governments Banks and % of and Other Commercial Total Total Official Financial and ($ in millions) Outstandings Assets Institutions Institutions Industrial Other - ---------------------------------------------------------------------------------------------------------------- At December 31, 1995 Japan (1) $2,844 2.73% $ 456 $1,393 $987 $ 8 France 2,150 2.07 291 1,615 244 -- United Kingdom 1,945 1.87 19 1,448 478 -- Spain 1,877 1.80 1,338 494 44 1 Italy 1,522 1.46 1,265 209 48 -- Brazil (2) 1,120 1.08 475 494 151 -- - ---------------------------------------------------------------------------------------------------------------- At December 31, 1994 Japan $4,661 4.80% $1,911 $2,267 $483 $ -- United Kingdom 1,960 2.02 26 1,787 145 2 Italy 1,574 1.62 1,039 449 86 -- France 1,559 1.61 105 1,091 363 -- Germany 1,424 1.47 585 698 140 1 Mexico (2) 1,416 1.46 509 801 106 -- Argentina (2) 1,072 1.10 912 22 138 -- Spain 1,035 1.07 628 374 32 1 - ---------------------------------------------------------------------------------------------------------------- At December 31, 1993 Japan $3,986 4.33% $1,368 $1,920 $698 $ -- France 2,630 2.86 1,248 1,167 215 -- United Kingdom 2,585 2.81 32 2,396 153 4 Italy 2,178 2.37 1,807 299 72 -- Mexico (2) 1,641 1.78 1,226 314 101 -- Germany 1,623 1.76 981 348 294 -- Spain 1,135 1.23 849 195 90 1 - ----------------------------------------------------------------------------------------------------------------
(1) At December 31, 1995, the Corporation's cross-border outstandings with Japanese banks and other financial institutions primarily consisted of interest bearing deposits with banks and trading assets carried at fair value. (2) The Corporation's cross-border outstandings as presented above for Brazil and Argentina primarily consisted of trading assets which are carried at fair value. The cross-border outstandings for Mexico primarily consisted of trading assets carried at fair value and securities purchased under resale agreements. 58 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 29 Governments and official institutions are comprised of foreign governments and their agencies; state, provincial and local governments and their agencies; and central banks. Banks and other financial institutions are comprised of commercial and savings banks and other similar institutions accepting short-term deposits, including government-owned banks which do not function as central banks, and nonbank credit and financial companies. The following table details the cash basis loans and renegotiated loans components of the outstandings included in Table 13.
Cash Basis Renegotiated (in millions) Loans Loans - ------------------------------------------------------------------- At December 31, 1995 Italy $16 $ -- Other -- -- - ------------------------------------------------------------------- Total $16 $ -- - ------------------------------------------------------------------- At December 31, 1994 United Kingdom $11 $ -- Other 27 -- - ------------------------------------------------------------------- Total $38 $ -- - ------------------------------------------------------------------- At December 31, 1993 United Kingdom $10 $ -- Other 10 -- - ------------------------------------------------------------------- Total $20 $ -- - -------------------------------------------------------------------
At December 31, 1995, total cross-border commitments to borrowers or counterparties domiciled in the countries presented in Table 13 were: Japan, $47 million; France, $130 million; United Kingdom, $472 million; Spain, $27 million; Italy, $7 million; and Brazil, $18 million. Mexico, Germany and Belgium were the only countries whose cross-border outstanding was between .75 percent and 1.00 percent of total assets at December 31, 1995. The aggregate cross-border outstandings for these countries amounted to $1.0 billion, or .98 percent of total assets for Mexico (a majority of which consisted of trading assets carried at fair value), $939 million, or .90 percent of total assets for Germany, and $840 million, or .81 percent of total assets for Belgium. Switzerland was the only country whose cross-border out-standing was between .75 percent and 1.00 percent of total assets at December 31, 1994. The aggregate cross-border outstandings for this country amounted to $963 million, or .99 percent of total assets. Argentina was the only country whose cross-border outstanding was between .75 and 1.00 percent of total assets at December 31, 1993. The aggregate cross-border outstandings for this country amounted to $845 million, or .92 percent of total assets. ACCOUNTING DEVELOPMENTS The following is a summary of accounting developments. Stock-Based Compensation In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based Compensation." SFAS 123 defines a fair value based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award. However, SFAS 123 also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock. Entities electing to remain with the accounting in Opinion 25 must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied. The pro forma disclosure requirements are effective for financial statements for fiscal years beginning after December 15, 1995. The Corporation intends to continue to measure compensation cost under Opinion 25 with pro forma disclosures to be made as required by SFAS 123 for financial statements for fiscal years beginning after December 15, 1995. Thus, adoption of SFAS 123 will not have an impact on the Corporation's net income, stockholders' equity or total assets. Valuation of Derivative Portfolios In the first quarter of 1996, the Corporation will change the method of adjusting valuation-model-derived values in its derivative portfolios. The Corporation will adopt an approach based on mid-market less specific adjustments as recommended by the Global Derivatives Study Group ("G-30") and contained in its July, 1993 report entitled "Derivatives: Practices and Principles." This change will not have a material impact on the Corporation's net income, stockholders' equity or total assets. BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 59 30 FINANCIAL STATEMENTS -------------------- 62 CONSOLIDATED STATEMENT OF INCOME 63 CONSOLIDATED BALANCE SHEET 64 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY 65 CONSOLIDATED STATEMENT OF CASH FLOWS 66 NOTES TO FINANCIAL STATEMENTS 95 MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING 96 REPORT OF INDEPENDENT AUDITORS SUPPLEMENTAL FINANCIAL DATA --------------------------- 97 CONDENSED QUARTERLY CONSOLIDATED STATEMENT OF INCOME 97 STOCKHOLDER DATA 98 AVERAGE BALANCES, INTEREST AND AVERAGE RATES 100 VOLUME/RATE ANALYSIS OF CHANGES IN NET INTEREST REVENUE 101 INTEREST RATE SENSITIVITY 101 DEPOSITS 10-K REPORT ----------- This Annual Report includes the Corporation's SEC Report on Form 10-K. However, portions of the Annual Report, such as pages 2-31, are not required by the Form 10-K report and are not part of the Corporation's Form 10-K. Only those sections of the Annual Report referenced in the cross-reference index on page 108 are incorporated in the Form 10-K. BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 61 31
CONSOLIDATED STATEMENT OF INCOME (in millions, except per share data) - ---------------------------------------------------------------------------------------------------- Year Ended December 31, 1995 1994 1993 - ---------------------------------------------------------------------------------------------------- NET INTEREST REVENUE Interest revenue $5,886 $5,030 $4,436 Interest expense 5,069 3,858 3,122 - ---------------------------------------------------------------------------------------------------- NET INTEREST REVENUE 817 1,172 1,314 Provision for credit losses 31 25 93 - ---------------------------------------------------------------------------------------------------- NET INTEREST REVENUE AFTER PROVISION FOR CREDIT LOSSES 786 1,147 1,221 - ---------------------------------------------------------------------------------------------------- NONINTEREST REVENUE Trading 341 465 1,631 Fiduciary and funds management 697 740 703 Fees and commissions 712 756 710 Securities available for sale gains 180 72 -- Investment securities gains -- -- 13 Other 493 440 307 - ---------------------------------------------------------------------------------------------------- Total noninterest revenue 2,423 2,473 3,364 - ---------------------------------------------------------------------------------------------------- NONINTEREST EXPENSES Salaries 804 774 687 Incentive compensation and employee benefits 640 724 1,172 Occupancy, net 152 146 155 Furniture and equipment 162 163 144 Provision for severance-related costs 50 -- -- Other 1,090 944 877 - ---------------------------------------------------------------------------------------------------- Total noninterest expenses 2,898 2,751 3,035 - ---------------------------------------------------------------------------------------------------- Income before income taxes and cumulative effects of accounting changes 311 869 1,550 Income taxes 96 254 480 - ---------------------------------------------------------------------------------------------------- INCOME BEFORE CUMULATIVE EFFECTS OF ACCOUNTING CHANGES 215 615 1,070 Cumulative effects of accounting changes -- -- (75) - ---------------------------------------------------------------------------------------------------- NET INCOME $ 215 $ 615 $ 995 - ---------------------------------------------------------------------------------------------------- NET INCOME APPLICABLE TO COMMON STOCK $ 164 $ 587 $ 972 - ---------------------------------------------------------------------------------------------------- PRIMARY EARNINGS PER COMMON SHARE: INCOME BEFORE CUMULATIVE EFFECTS OF ACCOUNTING CHANGES $ 2.03 $ 7.17 $12.40 Cumulative effects of accounting changes -- -- (.89) - ---------------------------------------------------------------------------------------------------- NET INCOME $ 2.03 $ 7.17 $11.51 - ---------------------------------------------------------------------------------------------------- FULLY DILUTED EARNINGS PER COMMON SHARE: INCOME BEFORE CUMULATIVE EFFECTS OF ACCOUNTING CHANGES $ 2.02 $ 7.17 $12.29 Cumulative effects of accounting changes -- -- (.88) - ---------------------------------------------------------------------------------------------------- NET INCOME $ 2.02 $ 7.17 $11.41 - ---------------------------------------------------------------------------------------------------- Cash dividends declared per common share $ 4.00 $ 3.70 $ 3.24 - ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 62 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 32
CONSOLIDATED BALANCE SHEET ($ IN MILLIONS, EXCEPT PAR VALUE) - ---------------------------------------------------------------------------------------------------- December 31, 1995 1994 - ---------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 2,337 $1,985 Interest-bearing deposits with banks 2,023 3,390 Federal funds sold 854 2,544 Securities purchased under resale agreements 17,958 9,943 Securities borrowed 6,199 6,197 Trading assets 47,893 47,514 Securities available for sale 6,283 7,475 Loans 12,633 12,501 Allowance for credit losses (992) (1,252) Premises and equipment, net 896 915 Due from customers on acceptances 500 378 Accounts receivable and accrued interest 4,220 2,356 Other assets 3,198 3,070 - ---------------------------------------------------------------------------------------------------- Total $104,002 $97,016 - ---------------------------------------------------------------------------------------------------- LIABILITIES Deposits Noninterest-bearing In domestic offices $ 2,687 $3,285 In foreign offices 605 541 Interest-bearing In domestic offices 5,402 5,769 In foreign offices 17,014 15,344 - ---------------------------------------------------------------------------------------------------- Total deposits 25,708 24,939 Trading liabilities 26,091 20,949 Securities sold under repurchase agreements 15,247 15,617 Other short-term borrowings 15,761 18,222 Acceptances outstanding 500 378 Accounts payable and accrued expenses 3,931 3,174 Other liabilities 2,236 2,328 Long-term debt 9,294 6,455 - ---------------------------------------------------------------------------------------------------- Total liabilities 98,768 92,062 - ---------------------------------------------------------------------------------------------------- Commitments and contingent liabilities (Notes 7 and 22) PREFERRED STOCK OF SUBSIDIARY 250 250 - ---------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock 865 395 Common stock, $1 par value Authorized, 300,000,000 shares Issued 83,678,973 shares 84 84 Capital surplus 1,302 1,317 Retained earnings 3,316 3,494 Common stock in treasury, at cost: 1995, 4,602,855 shares; 1994, 5,609,707 shares (336) (416) Other (247) (170) - ---------------------------------------------------------------------------------------------------- Total stockholders' equity 4,984 4,704 - ---------------------------------------------------------------------------------------------------- Total $104,002 $97,016 - ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 63 33
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (IN MILLIONS) - --------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------- PREFERRED STOCK Balance, beginning of year $ 395 $ 250 $ 500 Preferred stock issued 470 350 -- Preferred stock redeemed -- (205) (250) - --------------------------------------------------------------------------------------------------------------- Balance, end of year 865 395 250 - --------------------------------------------------------------------------------------------------------------- COMMON STOCK Balance, beginning and end of year 84 84 84 - --------------------------------------------------------------------------------------------------------------- CAPITAL SURPLUS Balance, beginning of year 1,317 1,321 1,306 Preferred stock issuance and conversion costs (17) (8) -- Common stock distributed under employee benefit plans 2 4 15 - --------------------------------------------------------------------------------------------------------------- Balance, end of year 1,302 1,317 1,321 - --------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS Balance, beginning of year 3,494 3,226 2,552 Net income 215 615 995 Cash dividends declared Preferred stock (47) (28) (22) Common stock (314) (291) (265) Treasury stock distributed under employee benefit plans (32) (28) (34) - --------------------------------------------------------------------------------------------------------------- Balance, end of year 3,316 3,494 3,226 - --------------------------------------------------------------------------------------------------------------- COMMON STOCK IN TREASURY, AT COST Balance, beginning of year (416) (233) (52) Purchases of stock (38) (267) (313) Restricted stock granted, net 54 50 16 Treasury stock distributed under employee benefit plans 64 34 116 - --------------------------------------------------------------------------------------------------------------- Balance, end of year (336) (416) (233) - --------------------------------------------------------------------------------------------------------------- COMMON STOCK ISSUABLE -- STOCK AWARDS Balance, beginning of year 160 143 53 Deferred stock awards granted, net 89 18 100 Deferred stock distributed (16) (1) (10) - --------------------------------------------------------------------------------------------------------------- Balance, end of year 233 160 143 - --------------------------------------------------------------------------------------------------------------- DEFERRED COMPENSATION -- STOCK AWARDS Balance, beginning of year (63) (47) (54) Deferred stock awards granted, net (88) (17) (99) Restricted stock granted, net (48) (40) (18) Amortization of deferred compensation, net 48 41 124 - --------------------------------------------------------------------------------------------------------------- Balance, end of year (151) (63) (47) - --------------------------------------------------------------------------------------------------------------- CUMULATIVE TRANSLATION ADJUSTMENTS Balance, beginning of year (336) (319) (288) Translation adjustments (3) (76) (36) Income taxes applicable to translation adjustments (9) 59 5 - --------------------------------------------------------------------------------------------------------------- Balance, end of year (348) (336) (319) - --------------------------------------------------------------------------------------------------------------- SECURITIES VALUATION ALLOWANCE Balance, beginning of year 69 109 20 Change in unrealized net gains, after applicable income taxes and minority interest (50) (40) 1 Unrealized net gain, net of applicable income taxes, on securities available for sale upon adoption of SFAS 115 -- -- 88 - --------------------------------------------------------------------------------------------------------------- Balance, end of year 19 69 109 - --------------------------------------------------------------------------------------------------------------- Total stockholders' equity, end of year $4,984 $4,704 $4,534 - ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. 64 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 34
CONSOLIDATED STATEMENT OF CASH FLOWS (IN MILLIONS) - --------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 215 $ 615 $ 995 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Cumulative effects of accounting changes -- -- 75 Provision for credit losses 31 25 93 Provision for severance-related costs 50 -- -- Provision for policyholder benefits 271 205 140 Deferred income taxes (259) (141) (37) Depreciation and amortization of premises and equipment 134 128 107 Other, net (60) (86) 111 - --------------------------------------------------------------------------------------------------------------------------------- Earnings adjusted for noncash charges and credits 382 746 1,484 Net change in: Trading assets (1,375) 1,003 (18,904) Trading liabilities 5,829 11,220 4,342 Receivables and payables from securities transactions (1,079) (516) 1,096 Other operating assets and liabilities, net (35) (150) 100 Securities available for sale gains (180) (72) -- Investment securities gains -- -- (13) - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 3,542 12,231 (11,895) - --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net change in: Interest-bearing deposits with banks 1,194 (1,791) 1,422 Federal funds sold 1,690 (2,183) 77 Securities purchased under resale agreements (7,952) (127) (2,909) Securities borrowed (2) (3,260) 229 Loans (279) 3,225 1,191 Securities available for sale: Purchases (4,164) (5,830) -- Maturities and other redemptions 3,875 2,947 -- Sales 1,871 2,201 -- Investment securities: Purchases -- -- (8,128) Maturities and other redemptions -- -- 6,462 Sales -- -- 1,134 Acquisitions of premises and equipment (124) (292) (179) Other, net (93) (68) (65) - --------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (3,984) (5,178) (766) - --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in: Deposits 833 1,426 (2,059) Securities sold under repurchase agreements (678) (8,297) 6,416 Other short-term borrowings (2,260) (393) 7,555 Issuances of long-term debt 4,677 2,411 2,220 Repayments of long-term debt (1,627) (1,615) (711) Issuance of preferred stock of subsidiary -- -- 247 Issuances of preferred stock 221 342 -- Redemptions of preferred stock -- (205) (250) Purchases of treasury stock (38) (267) (313) Cash dividends paid (361) (322) (281) Other, net 34 23 200 - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 801 (6,897) 13,024 - --------------------------------------------------------------------------------------------------------------------------------- Net effect of exchange rate changes on cash (7) 79 3 - --------------------------------------------------------------------------------------------------------------------------------- NET INCREASE IN CASH AND DUE FROM BANKS 352 235 366 Cash and due from banks, beginning of year 1,985 1,750 1,384 - --------------------------------------------------------------------------------------------------------------------------------- Cash and due from banks, end of year $ 2,337 $ 1,985 $ 1,750 - --------------------------------------------------------------------------------------------------------------------------------- Interest paid $ 5,078 $ 3,737 $ 3,098 - --------------------------------------------------------------------------------------------------------------------------------- Income taxes paid, net $ 217 $ 216 $ 144 - --------------------------------------------------------------------------------------------------------------------------------- Noncash investing activities: Conversions of loans to other real estate and assets acquired in credit workouts $ 24 $ 73 $ 68 Exchanges of Chilean government bonds for annuity contracts 88 91 89 Other -- 32 -- - --------------------------------------------------------------------------------------------------------------------------------- Total noncash investing activities $ 112 $ 196 $ 157 - --------------------------------------------------------------------------------------------------------------------------------- Noncash financing activity: conversion of debt to preferred stock $ 245 $ -- $ -- - ---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements. BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 65 35 NOTES TO FINANCIAL STATEMENTS NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES Bankers Trust New York Corporation together with its subsidiaries (the "Corporation") is a global provider of a wide range of financial services. The accounting policies of the Corporation conform with generally accepted accounting principles and prevailing industry practices. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from management's estimates. The following is a description of the significant accounting policies of the Corporation. Principles of Consolidation The consolidated financial statements of the Corporation include Bankers Trust New York Corporation (the "Parent Company"), Bankers Trust Company and its subsidiaries ("BTCo") and all other significant, majority-owned subsidiaries, after elimination of material intercompany transactions and accounts. Other companies in which there is at least 20 percent ownership are accounted for in accordance with the equity method of accounting. These investments are reported in other assets and the related equity income or loss, as well as disposition gains and losses, is included in other noninterest revenue. Resale and Repurchase Agreements; Securities Borrowed Resale and repurchase agreements are generally treated as collateralized financing transactions and are carried at the amounts at which the securities were initially acquired or sold. The Corporation generally takes possession of securities purchased under resale agreements, which are primarily U.S. government and federal agency securities, and other OECD country sovereign bonds, monitors their fair value and requests additional collateral when deemed appropriate. Securities borrowed that are cash collateralized are recorded at the amount of cash collateral deposited with the lender. The Corporation monitors its market exposure with respect to securities borrowed transactions daily and requests the return of excess collateral as required. Trading Securities; Securities Available for Sale The Corporation designates securities as either trading or available for sale at the date of acquisition. Debt and marketable equity securities and money market instruments which are classified as trading assets and short trading positions which are classified as trading liabilities are carried at their fair values with the resulting gains and losses included in trading revenue. Securities available for sale, including applicable hedges, are valued at fair value with the resulting net unrealized gains or losses recorded in stockholders' equity as securities valuation allowance. Realized gains and losses, as well as the amortization of premiums and accretion of discounts, are recorded in earnings. The specific identification method is used to determine the cost of securities sold. Fair value is generally based on quoted market prices or broker or dealer price quotations. Derivatives Swaps, futures contracts, forward commitments, options and other similar types of contracts and commitments based on either interest rates or foreign exchange rates, as well as equity and commodity derivatives, are traded by the Corporation and are carried at their fair values as either trading assets or trading liabilities. Fair values for derivatives are based on quoted market prices or pricing models which take into account current market and contractual prices of the underlying instruments, as well as time value and yield curve or volatility factors underlying the positions. Gains and losses resulting from these positions are included in trading revenue. In addition to its trading activities, the Corporation, as an end user, utilizes various types of derivative products (principally interest rate and currency swaps) to manage the interest rate, currency and other market risks arising from a number of categories of its assets and liabilities. Derivatives used to manage such risks must be designated as a hedge at their inception and must remain effective as a hedge throughout the hedge period. Revenue or expense pertaining to management of interest rate exposure is predominantly recognized over the life of the contract as an adjustment to interest revenue or expense. Realized gains and losses on hedges of equities classified as other assets are included in the carrying amounts of those assets and are ultimately recognized in income when those assets are sold. Derivatives are also used to manage the risks associated with securities available for sale. These derivatives are carried at fair value with the resulting net unrealized gains and losses recorded in stockholders' equity as securities valuation allowance. The discount or premium on foreign exchange forward contracts and the interest on swaps used as hedges of net investments in foreign entities, as well as the net unrealized gains and losses from revaluing these contracts to the spot exchange rates, are recorded in stockholders' equity as cumulative translation adjustments. Loans, Other Real Estate and Other Nonperforming Assets Loans generally are stated at their outstanding unpaid principal balances net of any deferred fees on originated loans, or unamortized premiums or discounts on purchased loans. Interest income is accrued on the unpaid principal balance. Loan origination fees are deferred and recognized as an adjustment of the yield (interest income) of the related loans. Generally, when a loan is in default as to payment of principal or interest for 90 days or when, in the judgment of management, 66 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 36 the accrual of interest should be ceased before 90 days, it is the Corporation's policy to place such a loan on a "cash basis." In addition, all loans classified as doubtful and all partially charged-off loans are placed on a cash basis, even if the borrower is still making required payments. Any accrued but unpaid interest previously recorded on cash basis loans is reversed against current period interest revenue. Cash receipts of interest on cash basis loans are recorded as either revenue or a reduction of principal, according to management's judgment as to the collectibility of principal. Renegotiated loans are those which have been renegotiated to an effective interest rate lower than the then-current market rate because of a deterioration in the financial position of the borrower. Interest on such loans is accrued at the renegotiated rate. Other real estate and other assets acquired in credit work-outs, are recorded at the lower of fair value or the recorded investment in the related loan and are classified as other assets. Any excess of the recorded investment in the loan over the fair value of the asset acquired is accounted for as a charge to the allowance for credit losses. On January 1, 1995, the Corporation adopted Statement of Financial Accounting Standards ("SFAS") 114, "Accounting by Creditors for Impairment of a Loan" as amended by SFAS 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures." Under SFAS 114, a loan is classified as in-substance foreclosure when physical possession of the collateral has been taken regardless of whether formal foreclosure proceedings have taken place. As a result, during the first quarter of 1995, loans previously classified as other real estate but for which the Corporation had not taken possession of the collateral were transferred to cash basis loans. This reclassification did not impact the Corporation's financial condition or results of operations. Allowance For Credit Losses The allowance for credit losses is available for credit losses arising from the Corporation's portfolio which is comprised of loans, credit-related commitments, derivatives and other financial instruments. Whenever the Credit Audit Department determines that the probability of loss is greater than 50 percent, a charge-off of the amount deemed uncollectible is recommended to the Audit Committee of the Board. Subsequent recoveries, if any, are credited to the allowance. Included in the allowance for credit losses is a valuation allowance for impaired loans as required by SFAS 114. Under SFAS 114, a loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the loan's contractual terms. Impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, or the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. A multitude of complex and changing factors are collectively weighed by management in determining the adequacy of the allowance. These factors include management's review of the extent of existing risks in the portfolio and of prevailing economic conditions, regular examinations and evaluations of the quality of the portfolio by the Credit Audit Department and by the bank regulatory authorities, and the actual loss experience and the level of the allowance. Assessing the adequacy of the allowance for credit losses is inherently subjective as it requires making material estimates, including the amount and timing of future cash flows expected to be received on impaired loans, that may be susceptible to significant change. In the opinion of management, the allowance, when taken as a whole, is adequate to absorb reasonably estimated credit losses inherent in the Corporation's entire portfolio. Premises and Equipment Premises and equipment owned are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the terms of the leases or the estimated useful lives of the improvements, whichever are shorter. Maintenance and repairs are charged to expense and improvements are capitalized. Gains and losses on dispositions are generally reflected in earnings. Leased properties meeting certain criteria are capitalized and amortized using the straight-line method over the terms of the leases. Insurance Revenue and Expense For the Corporation's life insurance subsidiaries, premiums are recognized as revenue over the premium paying period of the related disability, annuity and other life insurance policies and are included in other noninterest revenue. Liabilities for future insurance benefits and the related provision for policyholder benefits reflect the present value of actuarially determined obligations net of future premiums. The liabilities for future benefits are included in other liabilities and the provision for benefits is included in other noninterest expenses. Income Taxes The Corporation recognizes the current and deferred tax consequences of all transactions that have been recognized in the financial statements using the provisions of the enacted tax laws. Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences. The amount of deferred tax assets is reduced, if necessary, to the amount that, based on available evidence, will more likely than not be realized. Deferred Stock Awards The Corporation records its obligations under outstanding deferred stock awards in stockholders' equity as common stock issuable-stock awards. The related deferred compensation is also included BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 67 37 in stockholders' equity. These classifications are based upon the Corporation's intent to settle these awards with its common stock. Statement of Cash Flows For purposes of the consolidated statement of cash flows, the Corporation's cash and cash equivalents are cash and due from banks. Net cash flows from instruments such as futures, forwards, options and swaps used to hedge assets or liabilities are classified as cash flows from operating activities. The Corporation reports the cash flows from loans made to customers and principal collected on loans, as well as from interest-bearing deposits accepted and repaid by its bank subsidiaries, on a net basis. Since the gross cash flows from the Corporation's nonbank subsidiaries' loans and interest-bearing deposits are not significant to the consolidated statement, such cash flows are also reported on a net basis. Reclassifications Certain prior period amounts have been reclassified to conform to the current presentation. NOTE 2 -- CHANGES IN ACCOUNTING PRINCIPLES Loan Impairment On January 1, 1995, the Corporation adopted SFAS 114. This statement, as amended by SFAS 118, requires the creation of a valuation allowance for impaired loans based on one of the following: the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Under SFAS 114, a loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the loan's contractual terms. At December 31, 1995, adoption of this standard resulted in a $90 million allocation of the existing allowance for credit losses to a specific valuation allowance for impaired loans. Additionally, under SFAS 114, a loan is classified as in-substance foreclosure when physical possession of the collateral has been taken regardless of whether formal foreclosure proceedings have taken place. As a result, during the first quarter of 1995, loans previously classified as other real estate but for which the Corporation had not taken possession of the collateral have been transferred to cash basis loans. Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements During the fourth quarter of 1994, the Corporation adopted FIN 41, "Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements." FIN 41 allows the netting, under certain circumstances, of certain repurchase and reverse repurchase agreements. It was the Corporation's former policy to record such transactions on a gross basis on the balance sheet. As the result of this adoption, at December 31, 1994, the Corporation's consolidated total assets and total liabilities each decreased by approximately $500 million. Offsetting of Amounts Related to Certain Contracts On January 1, 1994, the Corporation adopted FIN 39, "Offsetting of Amounts Related to Certain Contracts." FIN 39 requires that unrealized gains and losses on swaps, forwards, options and similar contracts be recognized as assets and liabilities, except where such gains and losses arise from contracts covered by qualifying master netting agreements. It was the Corporation's former policy to record such unrealized gains and losses on a net basis on the balance sheet. As the result of this adoption, at December 31, 1994, the Corporation's consolidated total assets and total liabilities each increased by approximately $12 billion. Securities Available for Sale Effective December 31, 1993, the Corporation adopted SFAS 115, "Accounting For Certain Investments in Debt and Equity Securities." As the result of this adoption, the Corporation recorded a credit of $145 million ($88 million on an after-tax basis) in stockholders' equity as securities valuation allowance. The adoption of SFAS 115 had no effect on net income. Postretirement and Postemployment Benefits On January 1, 1993, the Corporation adopted SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" and SFAS 112, "Employers' Accounting for Postemployment Benefits." As the result of this adoption, the Corporation recorded charges of $100 million and $7 million, respectively, (or $70 million and $5 million, respectively, net of income taxes) as the cumulative effects of these changes in accounting principles. NOTE 3 -- TRADING ASSETS AND TRADING LIABILITIES The components of these accounts, which are carried at fair value, were as follows:
(in millions) December 31, 1995 1994 ------------------------------------------------------------------------------ TRADING ASSETS U.S. government and agency securities $10,630 $10,974 Obligations of U.S. states and political subdivisions 393 179 Foreign government securities 9,681 8,359 Corporate debt securities 5,648 5,571 Equity securities 5,098 3,850 Bankers acceptances and certificates of deposit 1,572 1,316 Swaps, options and other derivative contracts (1) 10,555 14,071 Other 4,316 3,194 ------------------------------------------------------------------------------ Total trading assets $47,893 $47,514 ============================================================================== TRADING LIABILITIES Securities sold, not yet purchased U.S. government and agency securities $ 7,987 $ 4,159 Obligations of U.S. states and political subdivisions 7 -- Foreign government securities 3,098 2,751 Equity securities 3,262 2,298 Other 473 174 Swaps, options and other derivative contracts (1) 11,264 11,567 ------------------------------------------------------------------------------ Total trading liabilities $26,091 $20,949 ==============================================================================
(1) Comprised of fair values of interest rate instruments, foreign exchange rate instruments, and equity and commodity instruments, reduced by the effects of master netting agreements, in accordance with FIN 39. 68 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 38 Securities sold, not yet purchased are recorded as liabilities on the balance sheet and have off-balance sheet market risk to the extent that the Corporation, in satisfying this obligation, may have to purchase securities at a higher market price than that recorded on the balance sheet. NOTE 4 -- SECURITIES AVAILABLE FOR SALE; INVESTMENT SECURITIES The fair value, amortized cost, and gross unrealized holding gains and losses for the Corporation's securities available for sale follow:
(in millions) December 31, 1995 --------------------------------------------------------------------------------------------- Gross Unrealized Holding Fair ------------------ Amortized Value Gains (Losses) Cost --------------------------------------------------------------------------------------------- Debt securities U.S. government and agencies $ 431 $ 2 $ (5) $ 434 States of the U.S. and political subdivisions 1,387 66 (56) 1,377 Asset-backed 1,198 4 (6) 1,200 Foreign governments 1,669 14 (11) 1,666 Corporate debt 1,179 13 (17) 1,183 Mortgage-backed 9 -- -- 9 Equity securities 410 83 (8) 335 --------------------------------------------------------------------------------------------- Total securities available for sale $6,283 $ 182 $ (103) $ 6,204 =============================================================================================
(in millions) December 31, 1994 --------------------------------------------------------------------------------------------- Gross Unrealized Holding Fair ------------------ Amortized Value Gains (Losses) Cost --------------------------------------------------------------------------------------------- Debt securities U.S. government and agencies $ 893 $ 8 $ (19) $ 904 States of the U.S. and political subdivisions 2,249 75 (46) 2,220 Asset-backed 1,447 4 (4) 1,447 Foreign governments 1,469 37 (11) 1,443 Corporate debt 1,000 21 (14) 993 Mortgage-backed -- -- -- -- Equity securities 417 125 (7) 299 --------------------------------------------------------------------------------------------- Total securities available for sale $ 7,475 $ 270 $ (101) $ 7,306 =============================================================================================
(in millions) December 31, 1993 --------------------------------------------------------------------------------------------- Gross Unrealized Holding Fair ------------------ Amortized Value Gains (Losses) Cost --------------------------------------------------------------------------------------------- Debt securities U.S. government and agencies $1,091 $ 33 $ (36) $ 1,094 States of the U.S. and political subdivisions 1,561 125 (59) 1,495 Asset-backed 1,105 3 -- 1,102 Foreign governments 1,305 17 -- 1,288 Corporate debt 1,667 32 (30) 1,665 Equity securities 344 98 (8) 254 --------------------------------------------------------------------------------------------- Total securities available for sale $7,073 $ 308 $ (133) $ 6,898 =============================================================================================
Except for U.S. government and agencies, there were no securities of any individual issuer included in securities available for sale that exceeded 10 percent of the Corporation's total stockholders' equity at December 31, 1995. The components of securities available for sale gains as reported in the consolidated statement of income follow:
(in millions) Year Ended December 31, 1995 1994 ----------------------------------------------------------------------------- Debt securities -- gross realized gains $ 28 $ 43 Debt securities -- gross realized losses (27) (39) Equity securities -- net realized gains 179 68 ----------------------------------------------------------------------------- Total securities available for sale gains $ 180 $ 72 =============================================================================
The components of investment securities gains as reported in the consolidated statement of income follow:
(in millions) Year Ended December 31, 1993 ------------------------------------------------------------------------------ Debt securities -- gross realized gains $ 7 Debt securities -- gross realized losses (5) Equity securities -- net realized gains 11 ----------------------------------------------------------------------------- Total investment securities gains $ 13 =============================================================================
The following table shows the fair value, remaining maturities, approximate weighted average yields (based on amortized cost) and total amortized cost by maturity distribution of the debt components of the Corporation's securities available for sale at December 31, 1995.
-------------------------------------------------------------------------------------------------------------------------------- Maturity Distribution ---------------------------------------------------------------------------------------------- After One After Five Within But Within But Within After Mortgage One Year Five Years Ten Years Ten Years Backed Total -------------------------------------------------------------------------------------------------------------------------------- ($ in millions) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield -------------------------------------------------------------------------------------------------------------------------------- U.S. government and agencies $ 85 5.47% $ 330 5.52% $ -- --% $ 16 9.82% $ -- --% $ 431 5.67% States of the U.S. and political subdivisions 492 5.90 278 4.38 400 5.60 217 6.34 -- -- 1,387 5.56 Asset-backed securities 10 6.87 557 5.98 283 5.89 348 6.57 -- -- 1,198 6.13 Foreign government securities 635 10.94 575 7.09 268 7.61 191 7.69 -- -- 1,669 8.71 Corporate debt 250 5.94 719 5.93 119 7.14 91 7.50 -- -- 1,179 6.18 Mortgage-backed -- -- -- -- -- -- -- -- 9 13.56 9 13.56 -------------------------------------------------------------------------------------------------------------------------------- Total fair value $1,472 $2,459 $1,070 $863 $ 9 $5,873 ======================================== ====== ====== ==== ==== ====== Total amortized cost $1,472 $2,475 $1,065 $848 $ 9 $5,869 ======================================== ====== ====== ==== ==== ======
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 69 39 NOTE 5 -- LOANS The following table summarizes the composition of loans at the end of each of the last five years:
------------------------------------------------------------------------------------------------------------------------------- ($ in millions) December 31, 1995 1994 1993 1992 1991 ------------------------------------------------------------------------------------------------------------------------------- Domestic Commercial and industrial $ 2,520 20% $ 2,218 18% $ 2,794 18% $ 3,727 21% $ 4,074 24% Financial institutions 1,778 14 2,221 17 3,210 21 4,544 26 3,020 18 Real estate Construction 154 1 234 2 245 2 261 2 405 2 Mortgage 1,276 10 1,126 9 1,550 10 1,625 9 1,499 9 Other 1,442 11 1,044 8 1,780 12 1,312 8 1,247 7 ------------------------------------------------------------------------------------------------------------------------------- Total domestic 7,170 56 6,843 54 9,579 63 11,469 66 10,245 60 ------------------------------------------------------------------------------------------------------------------------------- International Governments and official institutions 227 2 184 2 456 3 1,316 8 1,709 10 Banks and other financial institutions 1,543 13 2,994 24 1,935 12 1,076 6 973 5 Commercial and industrial 1,934 15 1,428 11 1,721 11 1,930 11 2,409 14 Real estate Construction 2 -- 2 -- 2 -- 18 -- 161 1 Mortgage 176 1 138 1 261 2 394 2 465 3 Other 1,701 13 1,014 8 1,346 9 1,212 7 1,175 7 ------------------------------------------------------------------------------------------------------------------------------- Total international 5,583 44 5,760 46 5,721 37 5,946 34 6,892 40 ------------------------------------------------------------------------------------------------------------------------------- Gross loans 12,753 100% 12,603 100% 15,300 100% 17,415 100% 17,137 100% --- --- --- --- --- Less: unearned income 120 102 100 97 90 ----------------------------------------- ------- ------- ------- ------- Total loans $12,633 $12,501 $15,200 $17,318 $17,047 ========================================= ======= ======= ======= =======
On a global basis, the commercial and industrial category and the "other" category included no single industry group with aggregate borrowings from the Corporation in excess of 10 percent of the total loan portfolio at December 31, 1995. The following table shows certain maturity information for the Corporation's loans at December 31, 1995, excluding 1-4 family mortgages, installment loans and lease financing:
Remaining Maturity ------------------------------------------------------------------------------ Within After One After One But Within Five (in millions) Year Five Years Years Total ------------------------------------------------------------------------------ Domestic Commercial and industrial $ 682 $1,192 $ 646 $ 2,520 Financial institutions 1,498 263 17 1,778 Real estate Construction 33 121 -- 154 Mortgage 340 437 289 1,066 Other 1,082 143 3 1,228 ------------------------------------------------------------------------------ Total domestic 3,635 2,156 955 6,746 International 4,112 430 840 5,382 ------------------------------------------------------------------------------ Total $7,747 $2,586 $1,795 $12,128 ------------------------------------------------------------------------------ Loans due after one year With predetermined interest rates $ 618 $ 987 ------------------------------------------------------------------------------ With floating or adjustable interest rates $1,968 $ 808 ==============================================================================
Cash Basis Loans and Renegotiated Loans The Corporation's cash basis loans and renegotiated loans are summarized as follows:
(in millions) December 31, 1995 1994 ------------------------------------------------------------------------------ Cash basis loans Domestic $570 $618 International 174 378 ------------------------------------------------------------------------------ Total cash basis loans $744 $996 ------------------------------------------------------------------------------ Renegotiated loans Domestic $100 $ 66 International -- -- ------------------------------------------------------------------------------ Total renegotiated loans $100 $ 66 ==============================================================================
At December 31, 1995 and 1994, the Corporation had commitments to make additional loans to borrowers on a cash basis or renegotiated status of $27 million and $4 million, respectively. 70 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 40 The following table sets forth the approximate effect on interest revenue of cash basis loans and renegotiated loans. This disclosure reflects the interest on loans which were carried on the balance sheet and classified as either cash basis or renegotiated at December 31 of each year. The rates used in determining the gross amount of interest which would have been recorded at the original rate were not necessarily representative of current market rates.
(in millions) Year Ended December 31, 1995 1994 1993 ------------------------------------------------------------------------------ Domestic loans Gross amount of interest that would have been recorded at original rate $64 $52 $56 Less, interest, net of reversals, recognized in interest revenue 13 3 8 ------------------------------------------------------------------------------ Reduction of interest revenue 51 49 48 ------------------------------------------------------------------------------ International loans Gross amount of interest that would have been recorded at original rate 15 27 29 Less, interest, net of reversals, recognized in interest revenue -- 4 22 ------------------------------------------------------------------------------ Reduction of interest revenue 15 23 7 ------------------------------------------------------------------------------ Total reduction of interest revenue $66 $72 $55 ==============================================================================
On January 1, 1995, the Corporation adopted SFAS 114. This statement, as amended by SFAS 118, requires the creation of a valuation allowance for impaired loans. A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the loan's contractual terms. At December 31, 1995, the recorded investment in loans that was considered to be impaired under SFAS 114 was $844 million which consisted of total cash basis loans and renegotiated loans. Included in this amount was $458 million of loans which required a valuation allowance of $90 million. The average recorded investment in impaired loans during the year ended December 31, 1995 was approximately $951 million. For the year ended December 31, 1995, the Corporation recognized interest income on impaired loans of $13 million, using the cash basis method of income recognition described above and in Note 1. Also as a result of the adoption of SFAS 114, $35 million of in-substance foreclosed properties were transferred from other real estate to cash basis loans. NOTE 6 -- ALLOWANCE FOR CREDIT LOSSES An analysis of the changes in the Corporation's allowance for credit losses follows:
(in millions) Year Ended December 31, 1995 1994 1993 ------------------------------------------------------------------------------ Balance, beginning of year $1,252 $1,324 $1,620 ------------------------------------------------------------------------------ Net charge-offs Charge-offs 330 168 460 Recoveries 39 71 71 ------------------------------------------------------------------------------ Total net charge-offs 291 97 389 Provision for credit losses 31 25 93 ------------------------------------------------------------------------------ Balance, end of year $ 992 $1,252 $1,324 ==============================================================================
NOTE 7 -- PREMISES AND EQUIPMENT; LEASES An analysis of premises and equipment follows:
(in millions) December 31, 1995 1994 ------------------------------------------------------------------------------ Land $ 73 $ 73 Buildings 321 313 Leasehold improvements 342 311 Furniture and equipment 974 908 Property leased under capital leases Land and buildings 76 76 Equipment 3 3 Construction-in-progress 14 24 ------------------------------------------------------------------------------ Total 1,803 1,708 Less, accumulated depreciation and amortization 907 793 ------------------------------------------------------------------------------ Net book value $ 896 $ 915 ==============================================================================
Included in accumulated depreciation and amortization was accumulated amortization related to capital leases of $28 million and $26 million at December 31, 1995 and 1994, respectively. The Corporation is a lessee under lease agreements covering real property and equipment. Certain leases contain purchase or bargain renewal options. On January 24, 1996, BTCo closed on the purchase of One Bankers Trust Plaza which, at December 31, 1995, was classified as property leased under capital leases. Due to this purchase the future minimum lease payments under the Corporation's capital leases are minimal. The future minimum lease payments required under the Corporation's noncancelable operating leases at the end of 1995 were as follows:
(in millions) December 31, 1995 ----------------------------------------------------------------------------- 1996 $ 65 1997 61 1998 55 1999 54 2000 52 2001 and later 191 ----------------------------------------------------------------------------- Total minimum lease payments $478* -----------------------------------------------------------------------------
* Net minimum lease payments were $459 million after deducting minimum noncancelable sublease rentals of $19 million. The following shows the net rental expense for all operating leases:
(in millions) Year Ended December 31, 1995 1994 1993 ------------------------------------------------------------------------------ Gross rental expense $81 $87 $87 Less, sublease rental income 3 9 9 ------------------------------------------------------------------------------ Net rental expense $78 $78 $78 ==============================================================================
For additional information on commitments and contingencies see "Legal Proceedings" on page 105. BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 71 41 NOTE 8 -- SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER SHORT-TERM BORROWINGS Short-term borrowings are borrowed funds generally with an original maturity of one year or less. Debt instruments which contain a provision for early redemption, exercisable at the option of the security holder, are classified on the basis of the earliest possible redemption date. Securities sold under repurchase agreements and federal funds purchased generally mature in one day; commercial paper generally matures within 90 days. The details of these borrowings for the years 1995, 1994 and 1993 are presented below:
($ in millions) 1995 1994 1993 ----------------------------------------------------------------------------- Securities sold under repurchase agreements Balance at year end $15,247 $15,617 $23,834 Average amount outstanding 21,543 21,814 23,772 Maximum amount outstanding at any month end 28,212 28,409 28,575 Average interest rate for the year 5.44% 4.20% 3.64% Average interest rate on year-end balance 6.23% 5.34% 3.59% Federal funds purchased Balance at year end $ 4,658 $ 3,463 $ 5,242 Average amount outstanding 3,623 2,908 2,674 Maximum amount outstanding at any month end 6,313 6,742 5,719 Average interest rate for the year 5.47% 3.37% 2.49% Average interest rate on year-end balance 5.07% 4.60% 2.50% Commercial paper Balance at year end $ 6,860 $ 8,009 $ 7,156 Average amount outstanding 7,022 7,387 5,415 Maximum amount outstanding at any month end 8,239 9,378 7,156 Average interest rate for the year 6.25% 4.59% 3.65% Average interest rate on year-end balance 5.81% 5.38% 3.47% Other Balance at year end $ 4,243 $ 6,750 $ 6,594 Average amount outstanding 5,694 6,961 4,628 Maximum amount outstanding at any month end 6,918 7,832 6,594 Average interest rate for the year 6.95% 6.57% 7.39% Average interest rate on year-end balance 7.45% 6.27% 5.76% -----------------------------------------------------------------------------
The Parent Company had standby lines of credit amounting to $500 million at December 31, 1995 with banks other than its subsidiaries to support its commercial paper outstanding. It has never been necessary for the Parent Company to activate these lines of credit. NOTE 9 -- LONG-TERM DEBT Long-term debt is summarized as follows, based on the contractual terms of each issue:
Fixed Rate Floating Rate Dec. 31, Dec. 31, -------------------- --------------------- 1995 1994 (in millions) Senior Subordinated Senior Subordinated Total Total ------------------------------------------------------------------------------------ Parent Company Due in 1995 $ -- $ -- $ -- $ -- $ -- $ 455 Due in 1996 580 150 14 -- 744 759 Due in 1997 -- 198 24 -- 222 410 Due in 1998 100 -- 442 -- 542 167 Due in 1999 -- 100 40 150 290 309 Due in 2000 -- 216 478 -- 694 207 Due in 2001-2005 15 1,065 16 458 1,554 1,293 Thereafter -- 414 -- -- 414 388 ------------------------------------------------------------------------------------ Total $695 $2,143 $1,014 $608 $4,460 $3,988 ------------------------------------------------------------------------------------ BTCo Due in 1995 $ -- $ -- $ -- $ -- $ -- $ 488 Due in 1996 -- -- 564 -- 564 845 Due in 1997 -- 25 1,099 -- 1,124 287 Due in 1998 -- 28 280 -- 308 97 Due in 1999 -- 7 92 -- 99 115 Due in 2000 -- 7 1,464 -- 1,471 18 Due in 2001-2005 -- 30 508 -- 538 153 Thereafter -- -- 168 -- 168 70 ------------------------------------------------------------------------------------ Total $ -- $ 97 $4,175 $ -- $4,272 $2,073 ------------------------------------------------------------------------------------ BT Securities Corporation Subordinated Notes due Feb. 1997 to Nov. 1999 ($63 million at fixed rate at Dec. 1995) $ 320 $ 319 Senior Floating Rate Note due Sept. 1998 200 -- Bankers Trust (Delaware) Zero Coupon Bank Notes due Dec. 1996 42 75 ------------------------------------------------------------------------------------ Total long-term debt $9,294 $6,455 ====================================================================================
Based solely on the contractual terms of the debt issues, at December 31, 1995 and 1994 the Corporation's total fixed rate long-term debt had a weighted average interest rate of 7.53 percent and 7.26 percent, respectively. The Corporation has entered into interest rate and currency swap agreements for many of its long-term debt issues, in order to manage its interest rate and currency risks. The interest rates for the floating rate debt issues and the fixed rate debt issues effectively converted to floating are generally based on LIBOR, although in certain instances they are subject to minimum interest rates as specified in the agreements governing the respective issues. The weighted average effective interest rates for total long-term debt, including the effects of the related swap agreements, were 6.39 percent and 6.23 percent at December 31, 1995 and 1994, respectively. Certain debt securities include covenants requiring the Parent Company, from time to time or at maturity, as appropriate, to issue common stock or other securities in an amount equal to the principal amount of the debt securities, in order to comply with bank regulations governing capital adequacy. In this regard, at December 31, 1995 and 1994, the Parent Company had dedicated $598 million of net proceeds from such issuances. 72 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 42 At December 31, 1995 and 1994, certain subsidiaries of Bankers Trust Company had outstanding $2.94 billion and $626 million, respectively of mandatory redeemable preference securities as included in the table above. Maturities at December 31, 1995 range from September 1996 to December 2003 and maturities at December 31, 1994 range from September 1996 to December 1996. NOTE 10 -- PREFERRED STOCK OF SUBSIDIARY On January 22, 1993, BT Overseas Finance N. V. ("BTOF"), an indirect, wholly-owned subsidiary of the Parent Company authorized to issue 10,000 preferred shares, $.01 par value, issued $250 million, or 2,500 shares, of Auction Rate Cumulative Preferred Stock in four series of 625 shares each -- Series A-D ("BTOF Preferred"). The BTOF Preferred has contingent voting rights and a liquidation preference of $100,000 per share, plus accrued and unpaid dividends. Each of the four series is identical, except that dividend rates and dividend payment dates vary and separate auctions on different auction dates are held for each series. The shares of each series of BTOF Preferred are redeemable, in whole but not in part, except under certain circumstances, at the option of BTOF at a redemption price of $100,000 per share, plus accrued and unpaid dividends to the date of redemption. Dividends on each series of BTOF Preferred are cumulative and payable generally every 28 days at a rate per annum determined by auction. The rate for any dividend period is subject to a minimum rate, in certain circumstances, based upon the "AA" Corporate Commercial Paper Rate and a maximum rate based upon selected short and long-term U.S. Treasury securities as determined at the particular auction date. For the years ended December 31, 1995 and 1994, the composite average dividend rates on the four series of BTOF Preferred were 6.14 percent and 4.32 percent, respectively. At December 31, 1995 and 1994, the composite average dividend rates were 6.06 percent and 6.44 percent, respectively. In addition, BTOF and the Parent Company entered into an agreement pursuant to which the Parent Company agreed to sell to BTOF, upon BTOF's exercise of its right to purchase, 2,500 shares (in four series of 625 shares) of the Parent Company's Auction Rate Cumulative Preferred Stock, Series K-N ("Exchange Preferred"). BTOF and the Parent Company also agreed that BTOF will purchase and exchange the Exchange Preferred for BTOF Preferred, upon the Parent Company's exercise of its right to cause such for one or more series, or upon the occurrence of certain other events, in whole but not in part. The purchase price of the Exchange Preferred in either case is $100,000 per share. The Exchange Preferred Stock has terms identical to the BTOF Preferred, except that the Parent Company can redeem the Exchange Preferred in whole or in part, the dividend periods are generally 49 days and the maximum rate for any dividend period under no circumstances will exceed 24 percent per annum. NOTE 11 -- PREFERRED STOCK SERIES PREFERRED STOCK The Parent Company is authorized to issue 10 million shares of Series Preferred Stock, without par value. All shares of Series Preferred Stock constitute one and the same class and have equal rank and priority over common stockholders as to dividends and in the event of liquidation. Each series of Series Preferred Stock has a liquidation preference per share (as indicated below), plus accrued and unpaid dividends, as well as contingent voting rights. The Series Preferred Stock outstandings were as follows:
($ in millions) December 31, 1995 1994 ------------------------------------------------------------------------------ Series J, Outstanding: 447,225 shares $ 45 $ 45 Series Q, Outstanding: 80,000 shares 200 200 Series R, Outstanding: 60,000 shares 150 150 Series I, Outstanding: 1,000,000 shares 100 -- Series O, Outstanding: 589,268 shares 147 -- Series P, Outstanding: 98,320 shares 98 -- Series S, Outstanding: 50,000 shares 125 -- ------------------------------------------------------------------------------ Total preferred stock $865 $395 ==============================================================================
Series C Junior Participating Preferred Stock The Parent Company has designated 1 million shares of the Series Preferred Stock as Series C Junior Participating Preferred Stock ("Series C"), which are issuable on the exercise of Preferred Share Purchase Rights pursuant to a Rights Agreement adopted by the Corporation in February 1988. See Note 12 for a more detailed discussion of this agreement. No Series C shares have ever been issued. Fixed/Adjustable Rate Cumulative Preferred Stock, Series D and J On August 31, 1989, the Parent Company issued $250 million, or 5 million shares, of Fixed/Adjustable Rate Cumulative Preferred Stock, Series D (Liquidation Preference -- $50 per share) ("Series D"). On October 28, 1992, the Parent Company exchanged 447,225 shares of Fixed/Adjustable Rate Cumulative Preferred Stock, Series J (Liquidation Preference -- $100 per share) ("Series J") for 894,450 shares of its Series D amounting to $44,722,500 liquidation value. On September 1, 1994, the Corporation redeemed its remaining outstanding 4,105,550 shares, or $205,277,500 liquidation value, of the Series D Fixed/Adjustable Rate Cumulative Preferred Stock. At the option of the Parent Company, the Series J may be redeemed, in whole or in part, on or after December 1, 1995 and prior to December 1, 1997 at $103.00 per share and thereafter at $100.00 per share, plus accrued and unpaid dividends to the redemption date. However, these shares may be redeemed in whole earlier if the dividend rate is adjusted upwards as a result of an amendment to effect a change in the dividends exclusion percentage provisions of the Internal Revenue Code. Any optional redemption shall be with the approval of the Federal Reserve Board unless at that time that body should determine that its approval is not required. BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 73 43 Dividends on the Series J are cumulative and payable quarterly on March 1, June 1, September 1 and December 1 of each year. The Series J dividend rate is fixed at 7.375 percent per annum prior to December 1, 1997. Thereafter, the dividend rate is determined by a formula that considers the interest rates of selected short- and long-term U.S. Treasury securities at the time the rate is set plus an incremental increase based on a relationship of the Parent Company's then current quarterly cash dividend declared on common stock and the last quarterly cash dividend paid on common stock prior to September 1, 1997. The Series J adjustable rate in no event will be less than 7 percent or greater than 17 percent per annum. Both the fixed and adjustable rates may be subject to adjustment in the event of enactment of an amendment to effect a change in the dividends exclusion percentage provisions of the Internal Revenue Code. The dividend rate for the Series D was fixed at 8.72 percent per annum prior to redemption and the dividend payment dates were identical to Series J. 8.55% Cumulative Preferred Stock, Series I On March 23, 1992, Bankers Trust Company issued $100 million of 6.90% Subordinated Notes due March 1995 (the "Notes"). The Notes, which were guaranteed on a subordinated basis by the Parent Company, were issued as part of 4 million Preferred Purchase Units ("Units"). Each Unit consisted of a Note with a $25 principal amount, a subordinated guaranty by the Parent Company of such Note, and a preferred stock purchase contract (the "Purchase Contract") issued by the Parent Company. Holders of the Units were entitled to receive 8.55 percent per annum with respect to each Unit, payable quarterly, which consisted of the interest on the Notes and a contract fee in respect of the Purchase Contracts. On March 1, 1995, the Notes matured and, in accordance with the original terms of the Purchase Contracts, the holders of the Units were required to purchase 4 million depositary shares, at $25 per share, each representing a one-fourth interest in a share of the Parent Company's 8.55% Cumulative Preferred Stock, Series I (Liquidation Preference -- $100 per share) ("Series I"). Dividends on the Series I are cumulative and payable quarterly on March 1, June 1, September 1 and December 1 of each year, commencing on June 1, 1995, at a fixed rate of 8.55 percent of the liquidation preference per annum. Shares of the Series I are not redeemable prior to March 1, 1997, when they will become redeemable at the Parent Company's option at $100 per share, plus an amount equal to accrued and unpaid dividends. Any optional redemption shall be with the approval of the Federal Reserve Board unless at that time that body should determine that its approval is not required. Auction Rate Cumulative Preferred Stock, Series K, L, M and N The Parent Company, as part of an agreement with BTOF, holds in treasury Auction Rate Cumulative Preferred Stock in four series of 625 shares each -- Series K, Series L, Series M and Series N (Liquidation Preference -- $100,000 per share). See Note 10 for a more detailed discussion of this agreement. 7 5/8% Cumulative Preferred Stock, Series O On June 2, 1993, the Parent Company issued $150 million of 7 5/8% Convertible Capital Securities due June 2033. These debt securities were subordinated and could only be redeemed in whole but not in part, on or after June 1, 1998 at par, plus accrued and unpaid interest to the redemption date. On March 1, 1995, the Parent Company reset the interest rate on the 7 5/8% Convertible Capital Securities to a rate of 6 1/8 percent per annum giving holders of this issue the right, at any time prior to redemption or maturity, to convert the debt securities into depositary shares, at $25 per share, each representing a one-tenth interest in a share of the Parent Company's 7 5/8% Cumulative Preferred Stock, Series O (Liquidation Preference -- $250 per share) ("Series O"). During 1995, holders of the Convertible Capital Securities converted their securities for approximately 5.9 million depositary receipts, each evidencing a depositary share representing a one-tenth interest in a share of the Corporation's Series O for a total amount of approximately $147 million. Dividends on the Series O are cumulative and payable quarterly on each March 1, June 1, September 1 and December 1, commencing with the date succeeding original issuance. Shares of Series O are redeemable at the Parent Company's option, in whole or in part, at $300 per share (or $30 per depositary share) on or before June 1, 1998 and thereafter at $250 per share (or $25 per depositary share), plus, in each case, accrued and unpaid dividends to the redemption date. Any optional redemption shall be with the approval of the Federal Reserve Board unless at that time that body should determine that its approval is not required. 7.50% Cumulative Preferred Stock, Series P On August 19, 1993, the Parent Company issued $100 million of 7.50% Convertible Capital Securities due August 2033. These debt securities were subordinated and could only be redeemed, in whole but not in part, on or after August 15, 1998 at par, plus accrued and unpaid interest to the redemption date. On May 15, 1995, the Parent Company reset the interest rate on the 7.50% Convertible Capital Securities to a rate of 6.00 percent per annum giving holders of this issue the right, at any time prior to redemption or maturity, to convert the debt securities into depositary shares, at $25 per share, each representing a one-fortieth interest in a share of the Parent Company's 7.50% Cumulative Preferred Stock, Series P (Liquidation Preference -- $1,000 per share) ("Series P"). During 1995, holders of the Convertible Capital Securities converted their securities for approximately 3.9 million depositary receipts, each evidencing a depositary share representing a one-fortieth interest in a share of the Corporation's Series P for a total amount of approximately $98 million. 74 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 44 Dividends on the Series P are cumulative and payable quarterly on February 15, May 15, August 15 and November 15, commencing with the date succeeding original issuance. Shares of Series P are redeemable at the Parent Company's option, in whole or in part, at $1,200 per share (or $30 per depositary share) on or before August 15, 1998 and thereafter at $1,000 per share (or $25 per depositary share), plus, in each case, accrued and unpaid dividends to the redemption date. Any optional redemption shall be with the approval of the Federal Reserve Board unless at that time that body should determine that its approval is not required. Adjustable Rate Cumulative Preferred Stock, Series Q On March 28, 1994, the Parent Company issued $200 million, or 8 million depositary shares at $25 per share, each representing a one-hundredth interest in a share of Adjustable Rate Cumulative Preferred Stock, Series Q (Liquidation Preference -- $2,500 per share) ("Series Q"). At the option of the Parent Company, the Series Q may be redeemed, in whole or in part, on or after March 1, 1999, at $2,500 per share (or $25 per depositary share), plus, in each case, accrued and unpaid dividends to the redemption date. Any optional redemption shall be with the approval of the Federal Reserve Board unless at that time that body should determine that its approval is not required. Dividends on the Series Q are cumulative and payable quarterly on March 1, June 1, September 1 and December 1 of each year. The initial dividend rate was 5.90 percent per annum for the dividend period ending on May 31, 1994. Thereafter, the dividend rate is determined by a formula that considers the interest rates of selected short- and long-term U.S. Treasury securities at the time the rate is set. In no event will the dividend rate be less than 4 1/2 percent or more than 10 1/2 percent per annum. Adjustable Rate Cumulative Preferred Stock, Series R On August 22, 1994, the Parent Company issued $150 million, or 6 million depositary shares at $25 per share, each representing a one-hundredth interest in a share of Adjustable Rate Cumulative Preferred Stock, Series R (Liquidation Preference -- $2,500 per share) ("Series R"). At the option of the Parent Company, the Series R may be redeemed, in whole or in part, on or after September 1, 1999, at $2,500 per share (or $25 per depositary share), plus, in each case, accrued and unpaid dividends to the redemption date. Any optional redemption shall be with the approval of the Federal Reserve Board unless at that time that body should determine that its approval is not required. Dividends on the Series R are cumulative and payable quarterly on March 1, June 1, September 1 and December 1 of each year. The initial dividend rate was 6.42 percent per annum for the dividend period ending on November 30, 1994. Thereafter, the dividend rate is determined by a formula that considers the interest rates of selected short- and long-term U.S. Treasury securities at the time the rate is set. In no event will the dividend rate be less than 4 1/2 percent or more than 10 1/2 percent per annum. 7.75% Cumulative Preferred Stock, Series S On June 30, 1995, the Corporation issued $125 million, or 5 million depositary shares at $25 per share, each representing a one-hundredth interest in a share of the Corporation's 7 3/4% Cumulative Preferred Stock, Series S (Liquidation Preference -- $2,500 per share) ("Series S"). Dividends on the Series S are cumulative and payable quarterly on March 1, June 1, September 1 and December 1 of each year, commencing with the date succeeding original issuance. At the option of the Corporation, the Series S may be redeemed, in whole or in part, on or after June 1, 2000, at $2,500 per share (or $25 per depositary share), plus, in each case, accrued and unpaid dividends to the redemption date. Any optional redemption shall be with the approval of the Federal Reserve Board unless at that time that body should determine that its approval is not required. SERIAL PREFERRED STOCK In 1990, stockholders voted in favor of an amendment to the Restated Certificate of Incorporation of Bankers Trust New York Corporation to increase the number of shares of authorized preferred stock from 10 million to 20 million and created a new class of preferred stock called Serial Preferred Stock which would have equal rank as the Series Preferred Stock as well as priority over common stockholders as to dividends and in the event of liquidation. The Parent Company has decided to defer action on implementing this approved amendment at this time. NOTE 12 -- PREFERRED SHARE PURCHASE RIGHTS On February 16, 1988, the Board of Directors of the Parent Company declared a dividend distribution of one Preferred Share Purchase Right ("Right") for each share of common stock held, payable February 26, 1988 to stockholders of record on that date. Rights also automatically attach to each share of common stock issued after February 26, 1988. Each Right entitles the record holder to purchase from the Parent Company a one-hundredth interest in a share of the Parent Company's Series C Junior Participating Preferred Stock at an exercise price of $140, subject to certain adjustments. The Rights will not be exercisable or transferable apart from the common stock until the 10th day after either a public announcement that a person or group (an "Acquiring Person") has acquired beneficial ownership of 20 percent or more of the common stock, or the announcement or commencement of a tender offer for 20 percent or more of the common stock. If the Corporation is acquired or 50 percent or more of its consolidated assets or earning power are sold, each holder of a Right will have the right to receive, upon the exercise at the then current exercise price of the Right, that number of shares of common stock of the acquiring company which have a market value of two times the exercise price of the Right. If any person becomes an Acquiring Person (unless such person first acquires 20 percent or more of the outstanding common shares by a purchase pursuant to a tender offer for all of the common shares for cash, which purchase increases such person's BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 75 45 beneficial ownership to 80 percent or more of the outstanding common shares), each holder of a Right other than Rights beneficially owned by the Acquiring Person (which will be void), will have the right to receive upon exercise that number of common shares having a market value of two times the exercise price of the Right. The Rights will expire on February 26, 1998, but may be redeemed at any time prior to a person or group acquiring the beneficial ownership of 20 percent or more of the common stock. Until a Right is exercised, the holder will have no rights as a stockholder of the Parent Company. After the acquisition by a person or group of beneficial ownership of 20 percent or more of the outstanding common shares and prior to the acquisition by such person or group of 50 percent or more of the outstanding common shares, the Board of Directors of the Parent Company may exchange the Rights (other than Rights owned by such person or group), in whole or in part, at an exchange ratio of one common share, or a one-hundredth interest in a share of Series C Junior Participating Preferred Stock (or a share of a class or series of the Parent Company's preferred stock having equivalent rights, preferences and privileges), per Right (subject to adjustment). If issued, each share of Series C Junior Participating Preferred Stock will be entitled, subject to adjustment, to (i) a quarterly dividend of the greater of $1 per share or 100 times the quarterly dividend declared on each share of common stock, (ii) in the event of liquidation, dissolution or winding up, a preferential liquidation payment of the greater of $100 per share or 100 times the liquidation payment made per share of common stock, and (iii) 100 votes per share voting together with the holders of the Parent Company's common stock on all matters. Under certain conditions, the Rights will also be redeemed in connection with an acquisition of all of the Parent Company's common stock for cash in a transaction approved by the Parent Company's stockholders. Subject to certain specified conditions, a special meeting of the Parent Company's stockholders to vote on such a transaction will be called upon the request of a potential acquiror. These statements are qualified in their entirety by reference to the Rights Agreement, a copy of which was filed with the Securities and Exchange Commission. NOTE 13 -- COMMON STOCK The purposes and number of shares of common stock issued, distributed from treasury and purchased for treasury during 1995, 1994 and 1993 were as follows:
Year Ended December 31, 1995 1994 1993 ----------------------------------------------------------------------------- Common shares outstanding, beginning of year 78,069,266 80,602,534 82,873,988 ----------------------------------------------------------------------------- Shares issued or distributed under Employee Benefit Plans: 1976 Stock Option Plan -- 3,000 9,376 1985 Stock Option and Stock Award Plan Stock options 260,993 144,769 869,966 Restricted stock awards, net -- (12,619) (25,664) Deferred stock awards -- 15,829 204,827 1991 Stock Option and Stock Award Plan Stock options 367,728 274,864 591,776 Restricted stock awards, net (84,539) (5,298) 231,671 Deferred stock awards 242,264 7,459 -- 1994 Stock Option and Stock Award Plan Stock options 7,000 -- -- Restricted stock awards, net 813,901 661,400 -- Deferred stock awards -- -- -- ----------------------------------------------------------------------------- Total shares issued or distributed 1,607,347 1,089,404 1,881,952 Shares purchased for treasury (600,495) (3,622,672) (4,153,406) ----------------------------------------------------------------------------- Common shares outstanding, end of year 79,076,118 78,069,266 80,602,534 =============================================================================
At December 31, 1995, common stock was reserved for issuance or distribution as follows: ----------------------------------------------------------------------------- Dividend Reinvestment and Common Stock Purchase Plan 2,512,549 Employee Benefit Plans PartnerShare (including ESOP shares) 2,274,330 1994 Stock Option and Stock Award Plan 13,517,699 1991 Stock Option and Stock Award Plan 6,445,837 1985 Stock Option and Stock Award Plan 2,243,578 ----------------------------------------------------------------------------- Total 26,993,993 =============================================================================
At the Annual Meeting of Stockholders on April 19, 1994, the stockholders approved the 1994 Stock Option and Stock Award Plan (the "1994 Plan") which made available for grant, until April 21, 1998, 15 million common shares. The 1994 Plan permits the granting of nonqualified and incentive stock options, restricted stock, deferred stock and other common stock-based awards (collectively, the "Awards"). Awards are still outstanding under the 1991 Stock Option and Stock Award Plan (the "1991 Plan") and the 1985 Stock Option and Stock Award Plan (the "1985 Plan"). No further Awards will be granted under either the 1991 Plan, as of April 19, 1994 or the 1985 Plan, as of April 16, 1991 or the 1976 Stock Option Plan. These plans are administered by a Committee of the Board of Directors (the "Committee"), none of whom is eligible to participate therein. The Committee determines whether, to what extent and under what circumstances the Awards may be settled in cash. Awards granted under these plans may be satisfied through the use of the Parent Company's authorized but 76 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 46 unissued shares or shares held in the Parent Company's treasury. The Corporation currently intends to satisfy the awards to be granted under the 1994 Stock Option and Stock Award Plan and prior Stock Option and Stock Award Plans with treasury shares acquired through open market purchases and may purchase up to approximately 2 million shares during the remainder of 1996 for this purpose. Stock options are granted to purchase stock at a price not less than the fair market value on the date of grant and may be outstanding for any period up to 10 years and one day from the date of grant. Generally, no stock option may be exercised until the employee has remained in the continuous employ of the Corporation for one year after the option is granted. Stock Appreciation Rights ("SARs") entitled their holders, at the discretion of the Committee, to receive cash or stock equal to the excess of the fair market value on the date of exercise over the related option price. The exercise of SARs reduced the stock options otherwise exercisable; similarly, the exercise of stock options canceled the corresponding SARs. The Committee may permit delivery of the Parent Company's common shares already owned by the optionee in payment for the exercise of a stock option. The following is a summary of stock option and SAR transactions which occurred during 1993, 1994 and 1995:
Option Price Options SARs Per Share ------------------------------------------------------------------------------ December 31, 1992 5,471,043 6,364 $19.75 -$64.2813 Granted 2,132,000 -- 70.4375 - 80.75 Exercised (1,471,118) (2,491) 19.75 - 56.75 Cancelled (39,991) (3,873) --------------------------------------------------- December 31, 1993 6,091,934 -- 19.75 - 80.75 --------------------------------------------------- Granted 2,448,000 -- 67.0625 - 70.25 Exercised (422,633) -- 19.75 - 70.4375 Cancelled (314,653) -- --------------------------------------------------- December 31, 1994 7,802,648 -- 27.0625 - 80.75 --------------------------------------------------- Granted 2,648,500 -- 62.1875 - 69.0625 Exercised (635,721) -- 27.0625 - 68.625 Cancelled (816,636) -- --------------------------------------------------- December 31, 1995 8,998,791 -- 27.0625 - 80.75 --------------------------------------------------- Exercisable at: December 31, 1994 5,358,148 -- --------------------------------------------------- December 31, 1995 6,350,291 -- ---------------------------------------------------
For options outstanding at December 31, 1995 and 1994, the average option price per share was $62.74 and $62.34, respectively, and the range of expiration dates was 1996 through 2005 and 1995 through 2004, respectively. Recipients of restricted stock have all the rights of a stockholder of the Corporation, except for limitations on sale or use of shares during the restriction period, generally three years. Restricted stock must be issued from treasury shares. The Committee determines all conditions of the awards, including whether to permit or require cash dividends to be deferred or reinvested. Deferred stock awards are the right to receive common stock of the Corporation at a specified future date. The awards vest from one to three years from the date of the award. For deferred stock awards, shares of stock are not distributed until after a specified deferral period extending up to five years from the vesting date. Prior to distribution, awards may earn amounts equivalent to quarterly dividends declared by the Corporation and may also earn the equivalent of the excess of quarterly earnings per common share over the cash dividends. At December 31, 1995 and 1994, there were deferred stock awards outstanding of 3,334,674 shares and 2,223,232 shares, respectively. After providing for stock options granted, restricted stock awards and deferred stock awards, there were 7,073,010 and 11,601,183 shares available for future grant under the 1994 Plan at December 31, 1995 and 1994, respectively. NOTE 14 -- ASSET AND DIVIDEND RESTRICTIONS The Federal Reserve Act, as amended by the Monetary Control Act of 1980, requires that reserve balances on certain deposits of depository institutions be maintained at the Federal Reserve Bank. The reserve balances of the Corporation's subsidiary banks were $633 million and $622 million at December 31, 1995 and 1994, respectively. For the years 1995 and 1994, the average reserve balances of these banks amounted to $199 million and $243 million, respectively. Assets, principally trading assets and securities available for sale, of approximately $5.394 billion at December 31, 1995 were pledged as collateral to secure public and trust deposits, for borrowings, and for other purposes. Federal law also requires that "covered transactions," as defined, engaged in by insured banks and their subsidiaries with certain affiliates, including the Parent Company, be at arm's length and limited to 20 percent of capital and surplus, as defined, and "covered transactions" with any one such affiliate be limited to 10 percent of capital and surplus. Covered transactions are defined to include, among other things, loans and other extensions of credit to such an affiliate and guarantees, acceptances and letters of credit issued on behalf of such an affiliate. Such loans, other extensions of credit, guarantees, acceptances and letters of credit must be secured. Other restrictions also apply to inter-affiliate transactions. Limitations exist on the availability of BTCo's undistributed earnings for the payment of dividends to the Parent Company without prior approval of the bank regulatory authorities. In this regard, BTCo can declare dividends in 1996 without approval of the regulatory authorities of $66 million of its retained earnings at December 31, 1995, plus an additional amount equal to net profits, as defined, for 1996 up to the date of any such dividend declaration. The Federal Reserve Board may prohibit the payment of dividends if it determines that circumstances relating to the financial condition of a bank are such that the payment of dividends would be an unsafe and unsound practice. BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 77 47 Certain other subsidiaries are subject to various regulatory and other restrictions which may limit cash dividends and advances to the Parent Company. NOTE 15 -- INTEREST REVENUE AND INTEREST EXPENSE The following are the components of interest revenue and interest expense:
(in millions) Year Ended December 31, 1995 1994 1993 ------------------------------------------------------------------------------ INTEREST REVENUE Trading assets $2,676 $2,930 $2,413 Loans 941 876 884 Interest-bearing deposits with banks 207 124 214 Federal funds sold 104 31 22 Securities purchased under resale agreements 1,057 468 381 Securities borrowed 509 211 127 Securities available for sale Taxable 344 312 -- Exempt from federal income taxes 48 78 -- Investment securities Taxable -- -- 329 Exempt from federal income taxes -- -- 66 ------------------------------------------------------------------------------ Total interest revenue 5,886 5,030 4,436 ------------------------------------------------------------------------------ INTEREST EXPENSE Deposits In domestic offices 376 268 218 In foreign offices 984 696 795 Trading liabilities 1,053 807 424 Securities sold under repurchase agreements 1,173 917 865 Other short-term borrowings 1,033 894 606 Long-term debt 450 276 214 ------------------------------------------------------------------------------ Total interest expense 5,069 3,858 3,122 ------------------------------------------------------------------------------ Net interest revenue $ 817 $1,172 $1,314 ==============================================================================
NOTE 16 -- TRADING REVENUE; FEES AND COMMISSIONS; OTHER NONINTEREST REVENUE The following are the components of trading revenue, fees and commissions and other noninterest revenue:
(in millions) Year Ended December 31, 1995 1994 1993 ------------------------------------------------------------------------------ TRADING REVENUE Interest rate risk $ 87 $ 278 $1,066 Foreign exchange risk 36 (54) 191 Equity and commodity risk 218 241 374 ------------------------------------------------------------------------------ Total trading revenue $ 341 $ 465 $1,631 ============================================================================== FEES AND COMMISSIONS Corporate finance fees $ 398 $ 431 $ 407 Service charges on deposit accounts 70 84 90 Acceptances and letters of credit commissions 42 44 50 Other 202 197 163 ------------------------------------------------------------------------------ Total fees and commissions $ 712 $ 756 $ 710 ============================================================================== OTHER NONINTEREST REVENUE Insurance premiums $ 234 $ 183 $ 124 Net revenue from equity investment transactions, including write-offs 146 109 126 Other 113 148 57 ------------------------------------------------------------------------------ Total other noninterest revenue $ 493 $ 440 $ 307 ==============================================================================
NOTE 17 -- OTHER NONINTEREST EXPENSES The following are the components of other noninterest expenses:
(in millions) Year Ended December 31, 1995 1994 1993 ------------------------------------------------------------------------------ Provision for policyholder benefits $271 $205 $140 Fees for professional services 205 151 149 Telecommunications 114 114 91 Agency personnel fees 112 117 88 Service bureaus 86 76 40 Travel and entertainment 79 99 85 Other 223 182 284 ------------------------------------------------------------------------------ Total other noninterest expenses $1,090 $944 $877 ==============================================================================
NOTE 18 -- PENSION AND OTHER EMPLOYEE BENEFIT PLANS Pension Plans The Corporation has a trusteed, noncontributory, defined benefit pension plan covering substantially all domestic employees. The pension plan benefit formula is based upon years of service and average compensation over the final years of service. For this principal domestic pension plan, the Corporation's policy is to fund amounts which are actuarially determined in accordance with the applicable provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). Pension plan assets for this plan primarily consist of equity and debt securities managed by BTCo. The Corporation also has a domestic, unfunded defined contribution plan, as well as both defined benefit and defined contribution retirement and similar plans covering the majority of its foreign employees. Contributions to defined contribution plans are based upon a percentage of salary. 78 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 48 Effective June 30, 1994, a foreign defined benefit plan was changed to a defined contribution plan. As a result of this change, the Corporation recognized a $7 million curtailment/settlement gain in other noninterest revenue. Pension expense for 1995, 1994 and 1993 included the following components:
(in millions) 1995 1994 1993 ----------------------------------------------------------------------------- Principal defined benefit plans (domestic and foreign) Service cost -- benefits earned $ 17 $ 23 $ 20 Interest cost on projected benefit obligations 38 37 33 Actual return on plan assets (151) 6 (89) Net amortization and deferral 83 (73) 23 ----------------------------------------------------------------------------- Total (13) (7) (13) Defined contribution plans 20 10 12 Other plans 5 2 4 ----------------------------------------------------------------------------- Pension expense $ 12 $ 5 $ 3 =============================================================================
The actuarial assumptions used for the principal domestic defined benefit plan were as follows:
1995 1994 1993 ----------------------------------------------------------------------------- Discount rate in determining expense 8.75% 7.25% 8.00% Discount rate in determining benefit obligations at year end 7.00% 8.75% 7.25% Rate of increase in future compensation levels for determining expense 5.00% 5.00% 5.00% Rate of increase in future compensation levels for determining benefit obligations at year end 5.00% 5.00% 5.00% Expected long-term rate of return on assets 9.00% 9.00% 9.00%
At year end 1995, the effect of changing the discount rate from 8.75% to 7.00% was to increase the projected benefit obligation, accumulated benefit obligation and vested benefit obligation by $96 million, $73 million and $70 million, respectively. At year end 1994, the effect of changing the discount rate from 7.25% to 8.75% was to decrease the projected benefit obligation, accumulated benefit obligation and vested benefit obligation by $85 million, $64 million and $62 million, respectively. Effective January 1, 1994, several plan changes were implemented, principally a change in early retirement benefits for certain vested employees. The effect of the plan changes was to increase the projected benefit obligation, accumulated benefit obligation and vested benefit obligation by $13 million, $9 million and $8 million, respectively. The assumptions used for the other domestic and the principal foreign defined benefit plans were substantially similar to those used for the principal domestic plan, given local economic conditions in the cases of the principal foreign plans. The following table sets forth the funded status and amounts recognized in the Corporation's balance sheet for its principal domestic and foreign defined benefit pension plans:
December 31, 1995 December 31, 1994 ----------------------------- ----------------------------- Assets Exceed Accumulated Assets Exceed Accumulated Accumulated Benefits Accumulated Benefits (in millions) Benefits Exceed Assets Benefits Exceed Assets --------------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefit obligations $(445) $(22) $(339) $(19) --------------------------------------------------------------------------------------------------------------- Accumulated benefit obligations $(460) $(22) $(351) $(20) --------------------------------------------------------------------------------------------------------------- Projected benefit obligations $(544) $(23) $(418) $(21) Plan assets at fair value 795 1 674 1 --------------------------------------------------------------------------------------------------------------- Funded status 251 (22) 256 (20) Unrecognized net (assets) obligations (28) 1 (35) 2 Unrecognized prior service cost 17 -- 20 -- Unrecognized net (gain) loss (92) 4 (106) 3 Additional minimum liability -- (5) -- (4) --------------------------------------------------------------------------------------------------------------- Prepaid (accrued) pension cost $ 148 $(22) $ 135 $(19) ---------------------------------------------------------------------------------------------------------------
Postretirement Benefits The Corporation provides health care benefits to employees (retirees) who met specific age and/or service requirements on January 1, 1990 provided that they retire (retired) under the principal domestic pension plan with at least ten years of service. This plan is contributory for participating retirees and also requires them to absorb deductibles and coinsurance. The Corporation funds the cost of postretirement health care as benefits are paid. The Corporation also provides noncontributory life insurance benefits for substantially all domestic retirees with at least ten years of service. The Corporation's policy with respect to this plan is to make contributions up to the limits specified by Section 419 of the U.S. Internal Revenue Code. On January 1, 1993, the Corporation adopted SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" and immediately recognized its entire net transition obligation, by recording a charge of $100 million ($70 million on an after-tax basis) as the cumulative effect of this change in accounting principle. SFAS 106 requires the use of actuarial-basis accrual accounting for all employer-provided postretirement benefits other than pensions. The Corporation's postretirement benefits expense for the year ended December 31, 1995 was $9 million. This consisted of $8 million of interest cost on accumulated postretirement benefit obligations and $1 million of service cost attributable to service during the year. For the year ended December 31, 1994 postretirement benefits expense was $10 million. This consisted of $9 million of interest cost on accumulated postretirement benefit obligations and $1 million of service cost attributable to service during the year. For the year ended December 31, 1993, postretirement benefits expense was $11 million. This consisted of $9 million of interest cost on accumulated postretirement benefit BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 79 49 obligations and $2 million of service cost attributable to service during the year. The actuarial assumptions used for the Corporation's postretirement benefit plans were as follows:
December 31, 1995 December 31, 1994 ------------------------------------------------------------------------------ Retiree Retiree Retiree Retiree Health Life Health Life ($ in millions) Care Insurance Care Insurance ------------------------------------------------------------------------------ Health care cost trend rate: First year 11.00% N/A 12.00% N/A ------------------------------------------------------------------------------ Ultimate rate after 6 years (1995) and 7 years (1994) (based on roughly equal annual decreases) 5.50% N/A 5.50% N/A Discount rate in determining expense 8.75% 8.75% 7.25% 7.25% ------------------------------------------------------------------------------ Discount rate in determining benefit obligations at year-end 7.00% 7.00% 8.75% 8.75% ------------------------------------------------------------------------------ Rate of increase in future compensation levels for determining benefit obligation at both beginning and end of the year N/A 5.00% N/A 5.00% ------------------------------------------------------------------------------ Expected long-term rate of return on plan assets N/A 9.00% N/A 9.00% Effect of a one-percentage-point increase in the health care cost trend rates on the accumulated postretirement benefit obligation $6 N/A $6 N/A The effect of a one-percentage- point increase in the assumed health care cost trend rates on the aggregate of the service and interest cost components of net periodic postretirement expense for the year ended $1 N/A $1 N/A ------------------------------------------------------------------------------
N/A Not applicable. At year end 1995, the effect of changing the discount rate from 8.75% to 7.00% was to increase the accumulated postretirement benefit obligation for the retiree health care plan and the retiree life insurance plan by $2 million and $1 million, respectively. At year end 1994, the effect of changing the discount rate from 7.25% to 8.75% was to decrease the accumulated postretirement benefit obligation for the retiree health care plan and the retiree life insurance plan by $16 million and $3 million, respectively. Effective January 1, 1994 the plan was amended regarding retiree deductibles. The effect of the plan amendment was to increase the accumulated postretirement benefit obligation by $9 million. The following table sets forth the funded status and amounts recognized in the Corporation's balance sheet:
December 31, 1995 December 31, 1994 ------------------------------------------------------------------------------ Retiree Retiree Retiree Retiree Health Life Health Life ($ in millions) Care Insurance Care Insurance ------------------------------------------------------------------------------ Accumulated postretirement benefit obligation: Retirees $ (62) $ (5) $ (63) $(4) Fully eligible plan participants (16) -- (15) -- Other active plan participants (18) (5) (16) (4) ------------------------------------------------------------------------------ (96) (10) (94) (8) Plan assets at fair value -- 5 -- 4 ------------------------------------------------------------------------------ Funded status (96) (5) (94) (4) Unrecognized prior service cost 8 -- 9 -- Unrecognized net (gain) loss (23) 1 (26) -- ------------------------------------------------------------------------------ Accrued postretirement benefit cost $(111) $ (4) $(111) $(4) ==============================================================================
Profit Sharing Plans The Corporation maintains a noncontributory profit sharing plan, called PartnerShare, covering substantially all domestic employees. The Corporation's contribution consists of a fixed contribution equal to six percent of eligible domestic employees' annual salary (the "Fixed Contribution") as well as an additional contribution of from zero to nine percent of eligible employees' annual salary, which percentage is calculated using a formula based on the Corporation's consolidated income before income taxes (the "Profit-Driven Contribution"). The Profit-Driven Contribution was 1.69 percent, 4.73 percent and 9.00 percent for 1995, 1994 and 1993, respectively. The sum of the Fixed Contribution and the Profit-Driven Contribution amounted to $29 million, $41 million and $53 million for the years 1995, 1994 and 1993, respectively. The Corporation also has a profit sharing plan (called the "Share and Discretionary Cash Scheme") covering its employees in the United Kingdom. The Corporation's contributions to this plan range from zero to 14 percent of eligible employees' annual salary, which percentage is calculated using a formula based on the Corporation's consolidated income before income taxes. The contribution for 1995, 1994 and 1993 was 3.11 percent, 8.69 percent and 10.00 percent, respectively. The amount of expense recognized for the Share and Discretionary Cash Scheme was $2 million, $8 million and $5 million for 1995, 1994 and 1993, respectively. Postemployment Benefits On January 1, 1993, the Corporation adopted SFAS 112 "Employers' Accounting for Postemployment Benefits" by recording a charge of $7 million ($5 million on an after-tax basis) as the cumulative effect of this change in accounting principle. SFAS 112 establishes accounting standards for employer-provided benefits which cover former or inactive employees after employment but before retirement ("postemployment benefits"). Postemployment benefits include severance benefits, short- and long-term disability benefits, workers' compensation and the continuation of health care and life insurance coverage. SFAS 112 requires employers to recognize the probable and reasonably estimable costs of postemployment benefits on an accrual basis. 80 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 50 NOTE 19 -- INCOME TAXES The Corporation files consolidated income tax returns which include all significant domestic subsidiaries. The domestic and foreign components of consolidated income before income taxes and cumulative effects of accounting changes follow:
(in millions) Year Ended December 31, 1995 1994 1993 ------------------------------------------------------------------------------ Domestic $ (89) $139 $ (101) Foreign 400 730 1,651 ------------------------------------------------------------------------------ Total $311 $869 $1,550 ==============================================================================
For purposes of determining the above amounts, foreign income is defined as income recorded by operations located outside of the U.S. Undistributed earnings of certain foreign subsidiaries amounted to approximately $1.1 billion at December 31, 1995. Federal taxes which would have approximated $190 million, assuming utilization of foreign tax credits, have not been provided on these earnings, as they are permanently reinvested outside the U.S. Deferred income taxes result from differences in the timing of revenue and expense recognition for income tax and financial reporting purposes. An analysis of consolidated income taxes, excluding the cumulative effects of accounting changes, follows:
(in millions) Year Ended December 31, 1995 1994 1993 ------------------------------------------------------------------------------ Income taxes applicable to: Income before income taxes* $ 96 $254 $480 Capital surplus 3 (5) (16) Cumulative translation adjustments 9 (59) (5) Securities valuation allowance (26) (16) 56 ------------------------------------------------------------------------------ Total $ 82 $174 $515 ==============================================================================
* Includes income tax expense related to securities available for sale transactions of $74 million and $26 million in 1995 and 1994, respectively and includes income tax expense related to investment securities transactions of $5 million in 1993. The components of consolidated income taxes, excluding the cumulative effects of accounting changes, follow:
(in millions) Year Ended December 31, 1995 1994 1993 ------------------------------------------------------------------------------ Current Federal $ 5 $ 5 $ 5 Foreign 317 294 524 State and local 19 16 23 ------------------------------------------------------------------------------ Total current 341 315 552 ------------------------------------------------------------------------------ Deferred Federal (123) (102) 70 Foreign (141) (61) (114) State and local 5 22 7 ------------------------------------------------------------------------------ Total deferred (259) (141) (37) ------------------------------------------------------------------------------ Total $ 82 $ 174 $ 515 ==============================================================================
The following is an analysis of the difference between the U.S. federal statutory income tax rate and the effective tax rate on consolidated income before income taxes and cumulative effects of accounting changes:
Year Ended December 31, 1995 1994 1993 ------------------------------------------------------------------------------ U.S. federal statutory income tax rate 35% 35% 35% State and local income taxes 5 2 1 Tax-exempt income (8) (6) (2) Foreign subsidiary earnings 3 (1) (1) Other items, net (4) (1) (2) ------------------------------------------------------------------------------ Effective income tax rate 31% 29% 31% ==============================================================================
The following is an analysis of the Corporation's net deferred tax assets:
(in millions) December 31, 1995 1994 ------------------------------------------------------------------------------ Deferred tax assets $1,087 $1,053 Valuation allowance 227 227 ------------------------------------------------------------------------------ Deferred tax assets net of valuation allowance 860 826 Deferred tax liabilities 392 617 ------------------------------------------------------------------------------ Net deferred tax assets $ 468 $ 209 ==============================================================================
At December 31, 1995, the Corporation's deferred tax assets were primarily related to credit losses ($533 million), foreign tax credit carryforwards ($140 million) that will expire in 1999 and 2000, and a net operating loss carryforward ($41 million) which expires in 2009. Deferred tax liabilities were primarily related to certain trading activities ($62 million) and lease financing activities ($155 million). At December 31, 1994, the Corporation's deferred tax assets were primarily related to credit losses ($633 million) and deferred tax liabilities were primarily related to certain trading activities ($179 million) and lease financing activities ($221 million). NOTE 20 -- EARNINGS PER COMMON SHARE Primary and fully diluted earnings per common share amounts were computed by subtracting from the applicable earnings the dividend requirements on preferred stock to arrive at earnings applicable to common stock and dividing this amount by the average number of common and common equivalent shares outstanding during the year. For both primary and fully diluted earnings per share, the average number of common and common equivalent shares outstanding was the sum of the average number of shares of common stock outstanding and the incremental number of shares issuable under outstanding stock options and deferred stock awards that had a dilutive effect as computed under the treasury stock method. Under this method, the number of incremental shares is determined by assuming the issuance of the outstanding stock options and deferred stock awards reduced by the number of shares assumed to be repurchased from the issuance proceeds, using the market price of the Parent Company's common stock. For primary earnings per share, this market price is the average market price for the period, while for fully diluted earnings per share, it is the BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 81 51 period-end market price, if it is higher than the average price. At no time during the three-year period ended December 31, 1995 did the Corporation have outstanding any securities which were convertible to the Parent Company's common stock. The earnings applicable to common stock and number of shares used for primary and fully diluted earnings per share were as follows:
(in millions) Year Ended December 31, 1995 1994 1993 ------------------------------------------------------------------------------ Earnings applicable to common stock: Income before cumulative effects of accounting changes $164 $587 $1,047 Cumulative effects of accounting changes -- -- (75) ------------------------------------------------------------------------------ Net income $164 $587 $ 972 ------------------------------------------------------------------------------ Average number of common shares outstanding 78.458 79.012 82.249 Primary earnings per share Average number of common and common equivalent shares outstanding 80.923 81.825 84.456 Fully diluted earnings per share Average number of common and common equivalent shares outstanding -- assuming full dilution 81.095 81.865 85.183 ==============================================================================
NOTE 21 -- INTERNATIONAL OPERATIONS In order to comply with the financial reporting regulations of the Securities and Exchange Commission, the Corporation is required to report international operations on the basis of the domicile of the customer. Pursuant to these regulations, any business transacted with a customer who is domiciled outside the U.S. is reported as international operations. Due to the complex nature of the Corporation's businesses and because its revenue from customers domiciled outside the U.S. is recorded in both domestic and foreign offices, it is impossible to segregate with precision the respective contributions to income from the domestic and international operations. As these operations are highly integrated, estimates and subjective assumptions have been made to apportion revenue and expenses between domestic and international operations. These estimates and assumptions include: interest revenue and interest expense are apportioned to geographic areas based upon the geographic distribution of average assets, which reflects the domicile of the customer; charges for funds transferred from domestic to international locations are based upon the cost of short-term funds; allocation of the provision for credit losses is based upon total net charges to the allowance for credit losses and adjusted to reflect management's assessment of the risks associated with the domestic and international portfolios; noninterest revenue is generally distributed based on the location of the office recording the revenue; noninterest expenses are generally apportioned to the geographic area based on the geographical distribution of operating income (net interest revenue plus noninterest revenue); and adjustments are made for the difference between foreign and U.S. tax rates. Subject to the above limitations, estimates and assumptions, the following tables present information attributable to international operations:
Income Total Total Total before Net ($ in millions) assets revenue* expenses* taxes income ------------------------------------------------------------------------------ 1995 ------------------------------------------------------------------------------ International operations Asia $ 7,565 $ 710 $ 616 $ 94 $ 71 Australia/New Zealand 7,658 803 741 62 47 Western Hemisphere 10,245 1,201 1,151 50 38 Europe 8,001 818 758 60 46 United Kingdom 28,850 599 777 (178) (134) Middle East/Africa 302 15 16 (1) (1) Intersegment eliminations (11,119) (751) (751) -- -- ------------------------------------------------------------------------------ Total international 51,502 3,395 3,308 87 67 Domestic operations 52,500 4,914 4,690 224 148 ------------------------------------------------------------------------------ Total $104,002 $8,309 $7,998 $311 $215 ------------------------------------------------------------------------------ International percentage of total 50% 41% 41% 28% 31% ==============================================================================
Income Total Total Total before Net ($ in millions) assets revenue* expenses* taxes income ------------------------------------------------------------------------------- 1994 ------------------------------------------------------------------------------- International operations Asia $ 7,867 $ 434 $ 423 $ 11 $ 8 Australia/New Zealand 8,086 733 526 207 151 Western Hemisphere 8,775 896 793 103 75 Europe 6,746 581 544 37 27 United Kingdom 25,645 1,546 1,402 144 105 Middle East/Africa 123 16 13 3 2 Intersegment eliminations (21,109) (913) (913) -- -- ------------------------------------------------------------------------------- Total international 36,133 3,293 2,788 505 368 Domestic operations 60,883 4,210 3,846 364 247 ------------------------------------------------------------------------------- Total $ 97,016 $7,503 $6,634 $869 $615 ------------------------------------------------------------------------------- International percentage of total 37% 44% 42% 58% 60% ===============================================================================
* Total revenue includes interest revenue and noninterest revenue. Total expenses includes interest expense and noninterest expenses. 82 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 52
Income Total Total Total before Net ($ in millions) assets revenue* expenses* taxes(1) income -------------------------------------------------------------------------------- 1993 -------------------------------------------------------------------------------- International operations Asia $ 6,942 $ 678 $ 454 $ 224 $151 Australia/New Zealand 5,730 637 428 209 141 Western Hemisphere 7,683 562 462 100 68 Europe 12,351 686 639 47 32 United Kingdom 14,791 2,266 1,570 696 471 Middle East/Africa 307 29 26 3 2 Intersegment eliminations (12,356) (773) (773) -- -- -------------------------------------------------------------------------------- Total international 35,448 4,085 2,806 1,279 865 Domestic operations 56,634 3,715 3,444 271 130 -------------------------------------------------------------------------------- Total $ 92,082 $7,800 $6,250 $1,550 $995 -------------------------------------------------------------------------------- International percentage of total 38% 52% 45% 83% 87% ================================================================================
(1) Excludes cumulative effect of accounting changes. * Total revenue includes interest revenue and noninterest revenue. Total expenses includes interest expense and noninterest expenses. NOTE 22 -- DERIVATIVE FINANCIAL INSTRUMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK In the normal course of business, the Corporation is a party to a variety of derivative and off-balance sheet financial instruments to meet the needs of its customers, to manage its exposure to interest rate and other risks, and to take trading positions. These financial instruments consist of derivatives (such as swaps and options), when-issued securities, securities lending indemnifications, and credit-related arrangements and involve varying degrees of credit risk and market risk. Credit risk, as defined by SFAS 105, represents the maximum potential accounting loss due to possible non-performance by obligors and counterparties under the terms of their contracts. Market risk represents the potential loss due to the decrease in the value of a financial instrument caused primarily by changes in interest rates or foreign exchange rates, or the prices of equities or commodities (or related indices). The Corporation manages the credit risk of its derivative and off-balance sheet portfolios by limiting the total amount of arrangements outstanding with individual customers; by monitoring the size and maturity structure of the portfolios; by obtaining collateral based on management's credit assessment of the customer; and by applying a uniform credit process for all credit exposures. Collateral held generally includes cash and U.S. government and federal agency securities. In order to reduce derivatives-related credit risk, the Corporation enters into master netting agreements which incorporate the right of setoff to provide for the net settlement of covered contracts with the same customer in the event of default or other cancellation of the agreement. In addition, management evaluates these portfolios periodically to determine whether the allowance for credit losses is adequate to absorb potential losses in such portfolios. For a further discussion of derivative financial instruments (including leveraged derivative transactions) the related market and credit risks, and controls used to monitor such risks, which is not included as part of these audited financial statements, see "Risk Management" on page 44, "Derivatives" on page 47, "Summary of Credit Loss Experience" on page 51 and "Nonperforming Assets" on page 54. For the risk-based capital equivalent amounts of the Corporation's derivative and off-balance sheet exposures, which also are not included as part of these audited financial statements, see "Capital Resources" on page 42. Trading Derivative Financial Instruments The Corporation actively manages trading positions in a variety of derivative contracts. Many of the Corporation's trading positions are established as a result of providing derivative products to meet customers' demands. To anticipate customer demand for such transactions, the Corporation also carries an inventory of capital markets instruments and maintains its access to market liquidity by quoting bid and offer prices to, and trading with, other market makers. These two activities are essential to provide customers with capital market products at competitive prices. All positions are reported at fair value and changes in fair values are reflected in trading revenue as they occur. As required by SFAS 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," the amounts disclosed below represent the end-of-period fair values of trading derivatives and their average aggregate fair values during the year. These amounts are presented gross before the impact of master netting agreements and collateral. The gross fair values of trading derivatives do not represent the amount of market or credit risk of derivatives in the trading portfolio. Rather, they indicate the extent of involvement in the over-the-counter (OTC) markets for interest rate, foreign exchange rate, equity and commodity price derivatives, and exchange traded options during the year. Any measurement of risk is meaningful only when all related factors are identified, such as risk-offsetting transactions, master netting agreements, and the value of any related collateral. The Corporation considers such factors in its RAROC(TM) system and in other internal risk analyses. The accounting impact of netting agreements, which is applied on a cross-product basis in accordance with the terms of each master agreement and which is calculated based on the criteria prescribed by FIN 39, is provided below in order to display how these amounts are reflected in trading assets and trading liabilities in the consolidated balance sheet. Contracts with positive fair values are recorded as assets and contracts with negative fair values are recorded as liabilities after application of master netting agreements. The following table reflects the gross fair values and balance sheet amounts of trading derivative financial instruments: BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 83 53 - --------------------------------------------------------------------------------
At December 31, 1995 Average during 1995 --------------------------- ----------------------- (in millions) Assets (Liabilities) Assets (Liabilities) - ---------------------------------------------------------------------------------------- OTC Financial Instruments Interest Rate and Currency Swap Contracts $ 15,858 $(15,471) $ 15,901 $(15,288) Interest Rate Contracts Forwards 83 (81) 114 (116) Options purchased 1,426 1,139 Options written (1,312) (1,727) Foreign Exchange Rate Contracts Spot and Forwards 7,931 (8,937) 12,041 (11,795) Options purchased 999 1,462 Options written (941) (1,269) Equity-related contracts 2,011 (2,359) 1,549 (1,756) Commodity-related and other contracts 541 (531) 607 (472) Exchange-Traded Options Interest Rate 33 (16) 106 (62) Foreign Exchange -- -- 1 (11) Equity 137 (80) 131 (69) Commodity -- -- 7 (5) - ---------------------------------------------------------------------------------------- Total Gross Fair Values 29,019 (29,728) 33,058 (32,570) - ---------------------------------------------------------------------------------------- Impact of Netting Agreements (18,464) 18,464 (19,389) 19,389 - ---------------------------------------------------------------------------------------- $ 10,555(1) $ 13,669 -------- $(11,264)(1) -------- $(13,181) -------- -------- (1) As reflected on the balance sheet in "Trading Assets" and "Trading Liabilities."
At December 31, 1994 Average during 1994 -------------------------- ----------------------- (in millions) Assets (Liabilities) Assets (Liabilities) - --------------------------------------------------------------------------------------- OTC Financial Instruments Interest Rate and Currency Swap Contracts $ 15,055 $(11,388) $ 15,646 $(12,589) Interest Rate Contracts Forwards 91 (127) 66 (74) Options purchased 1,211 1,131 Options written (2,330) (1,707) Foreign Exchange Rate Contracts Spot and Forwards 8,127 (7,988) 9,544 (9,715) Options purchased 1,504 1,420 Options written (1,522) (1,276) Equity-related contracts 1,005 (1,316) 1,499 (1,788) Commodity-related and other contracts 578 (451) 464 (398) Exchange-Traded Options Interest Rate 191 (113) 77 (50) Foreign Exchange -- (62) 21 (32) Equity 82 (43) 86 (69) Commodity -- -- -- -- - --------------------------------------------------------------------------------------- Total Gross Fair Values 27,844 (25,340) 29,954 (27,698) - --------------------------------------------------------------------------------------- Impact of Netting Agreements (13,773) 13,773 (14,511) 14,511 - --------------------------------------------------------------------------------------- $ 14,071(1) $ 15,443 -------- $(11,567)(1) -------- $(13,187) -------- -------- (1) As reflected on the balance sheet in "Trading Assets" and "Trading Liabilities."
Derivative contracts are generally either privately-negotiated OTC contracts or standard contracts transacted through regulated exchanges. For information as to the credit risk of OTC trading derivatives, which is not included as part of these audited financial statements, see "Derivatives" on page 47. Fair values of futures contracts are not included above due to cash margining requirements of regulated exchanges. Monthly averages are used in the table above. End-User Derivative Financial Instruments The Corporation, as an end user, utilizes various types of derivative products (principally interest rate swaps) to manage the interest rate, currency and other market risks associated with certain liabilities and assets such as interest-bearing deposits, short-term borrowings and long-term debt as well as investments in non-marketable equity instruments and net investments in foreign entities. Revenue or expense pertaining to management of interest rate exposure is predominantly recognized over the life of the contract as an adjustment to interest revenue or expense. When the Corporation purchases assets and issues liabilities at fixed interest rates it subjects itself to fair value fluctuations as market interest rates change. These fluctuations in fair value are managed by entering into interest rate contracts which change the fixed rate instrument into a variable rate instrument. When the Corporation purchases foreign currency denominated assets, issues foreign currency denominated debt or has foreign net investments, it subjects itself to changes in value as exchange rates move. These fluctuations are managed by entering into currency swaps and forwards. The Corporation's investments in nonmarketable and restricted equity instruments classified in other assets are subject to changes in market values. These changes are managed by entering into equity swaps and options. The fair values and other information related to end-user derivatives are disclosed in Note 24. Notional Amounts of Trading and End-User Derivative Financial Instruments Notional amounts indicate the extent of the Corporation's involvement in the various types and uses of derivative financial instruments and do not measure the Corporation's exposure to credit or market risks and do not necessarily represent the amounts exchanged by the parties to the instruments. The amounts exchanged are based on the contractual notional amounts and the other terms of the instruments. Notional amounts are not included in the consolidated balance sheet and generally exceed the future cash requirements relating to the instruments. The leveraging effects of leveraged derivative transactions are reflected in the table below. 84 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 54 - --------------------------------------------------------------------------------
Notional Amounts (in millions) December 31, 1995 December 31, 1994 - -------------------------------------------------------------------------------- End End Trading User(1) Trading(2) User(1) - -------------------------------------------------------------------------------- Interest rate contracts Swaps $ 540,124 $59,104 $ 464,702 $34,448 Futures 118,822 -- 231,319 -- Forwards 74,247 2,213 85,810 5,725 Options purchased Exchange traded 52,020 -- 138,370 -- OTC 97,461 104 65,807 194 Options written Exchange traded 41,833 -- 121,362 -- OTC 111,706 -- 115,973 -- - -------------------------------------------------------------------------------- Total $1,036,213 $61,421 $1,223,343 $40,367 - -------------------------------------------------------------------------------- Foreign exchange rate contracts Spot, forwards, futures $ 475,435 $ 1,990 $ 553,763 $ 1,919 Swaps 59,360 1,557 57,355 1,575 OTC options purchased 22,345 -- 27,851 -- OTC options written 23,791 -- 31,332 -- - -------------------------------------------------------------------------------- Total $ 580,931 $ 3,547 $ 670,301 $ 3,494 - -------------------------------------------------------------------------------- Equity derivative contracts Swaps $ 5,681 $ 22 $ 2,148 $ 150 Futures and forwards 23,253 -- 6,814 -- Options purchased Exchange traded 2,726 -- 3,333 -- OTC 12,801 69 11,402 69 Options written Exchange traded 6,808 -- 12,809 -- OTC 11,334 -- 4,720 -- - -------------------------------------------------------------------------------- Total $ 62,603 $ 91 $ 41,226 $ 219 - -------------------------------------------------------------------------------- Commodity and other contracts(3) Swaps $ 4,003 $ -- $ 6,371$ -- Futures 1,622 -- 2,777 -- Forwards 2,098 -- 1,720 -- Options purchased Exchange traded 1,755 -- 3,107 -- OTC 5,040 -- 3,993 -- Options written Exchange traded 2,207 -- 2,389 -- OTC 5,213 -- 1,915 -- - -------------------------------------------------------------------------------- Total $ 21,938 $ -- $ 22,272$ -- - --------------------------------------------------------------------------------
(1) These are hedges of securities available for sale, other assets, interest-bearing deposits, other short-term borrowings, long-term debt and net investments in foreign subsidiaries. These are transacted with derivatives traders within the Corporation who are intermediaries to external markets. (2) Amounts at December 31, 1994 have been restated in accordance with regulatory reporting standards adopted March 1995. Certain items represent allocations of previously reported amounts. (3) Excluded from the notional amounts above were benefit-responsive contracts reflecting actuarial-related risk, minimal market risk and no credit risk, for which the notional values totaled $12.1 billion and $11.0 billion at December 31, 1995 and 1994, respectively. SWAPS Interest rate swap contracts generally represent the contractual exchange of fixed and floating rate payments of a single currency, based on a notional amount and an interest reference rate. Cross-currency interest rate swap contracts generally involve the exchange of payments which are based on the interest reference rates available at the inception of the contract on two different currency principal balances that are exchanged. The principal balances are re-exchanged at an agreed upon rate at a specified future date. Equity swap contracts typically involve the payment of an amount equal to the total return of a U.S. or international equity index, basket of equities, or an individual equity over a fixed time period in exchange for receiving a floating interest rate, both based upon the same notional amount. FUTURES AND FORWARDS Futures and forward contracts represent commitments to purchase or sell securities, money market instruments, foreign currencies or commodities at a future date and at a specified price. Futures contracts are traded on regulated U.S. and international exchanges. The Corporation intends to close out most open positions in futures contracts prior to maturity, therefore future cash receipts or payments are generally limited to the change in fair value of the underlying instruments. Since futures contracts generally entail daily net cash margining with regulated exchanges, the credit risk is generally minimized to a one-day receivable. Included in this category of contracts are spot foreign currency contracts, cash-settled index contracts, and forward rate agreements (agreements to exchange amounts at a specified future date for interest rate differentials between an agreed interest rate and a reference rate, computed on a notional amount). OPTIONS Option contracts are either deliverable or cash-settled. Deliverable contracts convey to the purchaser (holder) the right to buy (call) or sell (put) securities, money market instruments, foreign currencies or commodities at or before a specified date for a contracted price from the seller (writer) of the contract. Cash-settled contracts convey to the purchaser the right to the monetary equivalent of the increase (call) or decrease (put), or a percentage thereof, in a specified reference rate or index, computed on a notional amount, from the writer. The initial price of an option contract is equal to the premium paid by the purchaser and is significantly less than the contract or notional amount. Included in these contracts are: (i) interest rate caps, floors and collars, which are agreements to make periodic payments for interest rate differentials between an agreed upon interest rate and a reference rate and (ii) purchased options to enter into future (or cancel existing) interest rate swap contracts ("swap options"). The Corporation is subject to credit risk as a purchaser of an option contract, and is subject to market risk to the extent of the purchase price of the option. The Corporation is subject to market risk on its written option contracts, but not to credit risk, except as noted below, since the customer has already performed according to the terms of the contract by paying a cash premium BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 85 55 - -------------------------------------------------------------------------------- up front. However, for SFAS 105 purposes, credit risk arises to the extent that the option contract requires or permits settlement in the underlying instrument, and that instrument is subject to credit risk. Such amounts related to certain written put option contracts on debt securities and certain forward contracts to purchase debt securities were $4.469 billion and $1.917 billion at December 31, 1995 and 1994, respectively. The underlying debt securities were primarily obligations of the U.S. and foreign central and local governments and U.S. federal agencies. Financial Instruments with Off-Balance Sheet Credit Risk As required by SFAS 105, off-balance sheet credit risk amounts are determined without consideration of the value of any related collateral and reflect the total potential loss on commitments to purchase when-issued securities for all obligors (including governments); securities lending indemnifications; and undrawn commitments, standby letters of credit and similar arrangements. SECURITIES AND MONEY MARKET ACTIVITIES
(in millions) December 31, 1995 December 31, 1994 - -------------------------------------------------------------------------------- Contract Credit Risk Contract Credit Risk Amount Amount Amount Amount - -------------------------------------------------------------------------------- When-issued securities and other Commitments to sell $ 6,682 $ 1 $ 3,956 $ 10 Commitments to purchase (1) 3,509 3,511 6,093 6,101 Securities lending indemnifications 28,761 28,761 21,018 21,018 - --------------------------------------------------------------------------------
(1) Includes $.6 billion and $1.5 billion of forward-dated money market assets at December 31, 1995 and 1994, respectively. When-issued securities normally begin trading when the U.S. Treasury or some other issuer of securities announces a forth-coming issue. (In some cases, trading may begin in anticipation of such an announcement.) Such transactions are contingent upon the actual issuance of the security. Since the exact price and terms of the security are unknown before the issue date, trading prior to that date is on a "yield" basis. On the issue date the exact terms and price of the security become known and when-issued trading continues until settlement date, when the securities are delivered and the issuer is paid. On settlement date, the securities purchased by the Corporation are reported on the balance sheet. Securities lending indemnifications represent the market value of customers' securities lent to third parties. The Corporation indemnifies customers to the extent of the replacement cost and/or the market value of the securities in the event of a failure by a third party to return the securities lent. The market value of collateral, primarily cash, received for customers' securities lent was in excess of the contract amounts and was approximately $30 billion at December 31, 1995 and $23 billion at December 31, 1994. CREDIT-RELATED ARRANGEMENTS
(in millions) December 31, 1995 December 31, 1994 - -------------------------------------------------------------------------------- Contract Credit Risk Contract Credit Risk Amount Amount Amount Amount - -------------------------------------------------------------------------------- Commitments to extend credit (1) $9,370 $9,370 $8,808 $8,808 Standby letters of credit and similar arrangements (2) 4,562 4,562 4,413 4,413
(1) Includes participations to other entities of approximately $2 billion at both December 31, 1995 and 1994. Of the non-participated amount, approximately $3 billion expire in one year or less at both December 31, 1995 and 1994. Both the contract amount and the credit risk amount include commitments to enter into securities resale agreements of $.8 billion at December 31, 1995. (2) Includes participations to other entities of approximately $1 billion and $2 billion at December 31, 1995 and 1994, respectively. Commitments to extend credit represent contractual commitments to make loans and revolving credits. Commitments generally have fixed expiration dates or other termination clauses and require the payment of a fee. Since commitments may expire without being drawn upon, the total contract amounts do not necessarily represent future cash requirements. Included in the amounts above are unused commitments to extend credit that are related to loans held for trading purposes. Information regarding the Corporation's credit risk with respect to real estate financing activities and highly leveraged transactions, which is not included as part of the audited financial statements, is disclosed on pages 55 through 57. Standby letters of credit and similar arrangements ("standbys"), issued primarily to support corporate obligations, commit the Corporation to make payments on behalf of customers contingent upon the failure of the customer to perform under the terms of the contract. Standbys outstanding related to customer obligations, such as commercial paper, medium- and long-term notes and debentures (including industrial revenue obligations), as well as other financial and performance related obligations. At December 31, 1995, $3.428 billion will expire within one year, $953 million from one to four years and $181 million after four years. For standbys, commitments to extend credit and securities lending indemnifications, the credit risk amount represents the contractual amount. Standbys and commitments to extend credit would have market risk if issued or extended at a fixed rate of interest. However, these contracts are primarily made at a floating rate. Fees received are generally recognized as revenue over the life of the commitment. 86 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 56 - -------------------------------------------------------------------------------- NOTE 23 -- CONCENTRATIONS OF CREDIT RISK The Corporation, as required by SFAS 105, has identified two significant concentrations of credit risk: OECD country banks and OECD country central governments, their agencies and central banks. Together they represented 36 percent and 40 percent of total credit risk at December 31, 1995 and 1994, respectively. The Organization for Economic Cooperation and Development (OECD) is an international organization of countries which are committed to market-oriented economic policies, including the promotion of private enterprise and free market prices, liberal trade policies, and the absence of exchange controls. The OECD consists of 26 industrialized nations, primarily the countries of Western Europe, North America, Japan, Australia and New Zealand. For risk-based capital purposes, domestic and foreign bank regulators generally assign OECD country central governments, their agencies and their central banks a credit risk weighting of zero percent, which means that no capital is required to support their financial instruments. OECD country banks are assigned the next lowest credit risk weighting (20 percent) by these regulators. The largest counterparty concentration was the U.S. government and its related entities, which comprised approximately 49 percent of the OECD country governments category. Within all other counterparties, the amount collateralized by cash and U.S. government securities represented 27 percent of total credit risk. The following table reflects the aggregate credit risk by groups of counterparties, as defined by SFAS 105, relating to on- and off-balance sheet financial instruments, including derivatives, at December 31, 1995 and 1994. CREDIT RISK
- -------------------------------------------------------------------------------- On-Balance Off-Balance (in millions) Sheet Sheet Total - -------------------------------------------------------------------------------- 1995 - -------------------------------------------------------------------------------- Significant concentrations (1) OECD country banks (2) $21,553 $ 3,894 $ 25,447 OECD country governments 19,862 6,567 26,429 - -------------------------------------------------------------------------------- Total significant concentrations 41,415 10,461 51,876 All other (3)(4) 52,023 40,210 92,233 - -------------------------------------------------------------------------------- Total $93,438 $50,671 $144,109 - -------------------------------------------------------------------------------- 1994 - -------------------------------------------------------------------------------- Significant concentrations (1) OECD country banks (2) $21,949 $ 4,556 $ 26,505 OECD country governments 19,968 5,934 25,902 - -------------------------------------------------------------------------------- Total significant concentrations 41,917 10,490 52,407 All other (3)(4) 47,253 31,674 78,927 - -------------------------------------------------------------------------------- Total $89,170 $42,164 $131,334 - --------------------------------------------------------------------------------
(1) For these purposes, the Czech Republic and Mexico have been excluded from the OECD categories. (2) Included in the on-balance sheet component of this category was approximately $5 billion and $6 billion at December 31, 1995 and 1994, respectively, that was collateralized by U.S. government securities. (3) The "all other" category of credit risk is diversified with respect to type of obligor and counterparty. Included in the on-balance sheet component of this category was approximately $10 billion and $5 billion at December 31, 1995 and 1994, respectively, that was collateralized by cash and U.S. government securities. Included in the off- balance sheet component of this category at December 31, 1995 was approximately $28 billion that was collateralized by cash and U.S. government securities and approximately $6 billion of unused commitments to extend credit, approximately $3 billion of which expire in one year or less. The corresponding amounts for December 31, 1994 were $20 billion, $6 billion and $3 billion, respectively. (4) Includes: CREDIT RISK
- -------------------------------------------------------------------------------- On-Balance Off-Balance (in millions) Sheet Sheet Total - -------------------------------------------------------------------------------- 1995 - -------------------------------------------------------------------------------- Real estate $1,802 $443 $2,245 Highly leveraged 1,173 802 1,975 1994 - -------------------------------------------------------------------------------- Real estate $1,700 $550 $2,250 Highly leveraged 1,060 509 1,569
Information regarding the Corporation's credit risk with respect to real estate financing activities and highly leveraged transactions, which is not included as part of the audited financial statements, appears on pages 55 through 57. BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 87 57 - -------------------------------------------------------------------------------- NOTE 24 -- FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS 107, "Disclosures about Fair Value of Financial Instruments," requires the disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Quoted market prices, when available, are used as the measure of fair value. In cases where quoted market prices are not available, fair values are based on present value estimates or other valuation techniques. These derived fair values are significantly affected by assumptions used, principally the timing of future cash flows and the discount rate. Because assumptions are inherently subjective in nature, the estimated fair values cannot be substantiated by comparison to independent market quotes and, in many cases, the estimated fair values would not necessarily be realized in an immediate sale or settlement of the instrument. The disclosure requirements of SFAS 107 exclude certain financial instruments and all nonfinancial instruments (e.g., franchise value of businesses). Accordingly, the aggregate fair value amounts presented do not represent management's estimation of the underlying value of the Corporation. SFAS 119 amended SFAS 107 disclosure requirements as of December 31, 1994. The amendments, among others, require that the disclosures distinguish between financial instruments held for trading purposes, measured at fair value with gains and losses recognized in earnings, and financial instruments held or issued for purposes other than trading. The fair value of derivative financial instruments must be disclosed separately from nonderivative financial instruments. Additionally, the fair value of derivative financial instruments may not be netted with the fair value of other derivative financial instruments, except as allowed by FIN 39. 88 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 58 The following are the estimated fair values of the Corporation's financial instruments followed by a general description of the methods and assumptions used to estimate such fair values. FAIR VALUE OF FINANCIAL INSTRUMENTS
-------------------------------------------------------------------------------------------------------------------------------- Underlying Effect of Total Fair Value Over (in millions) December 31, 1995 Book Value Fair Value End-User Derivative Fair Value (Under) Book Value -------------------------------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS, INCLUDING HEDGES Cash and due from banks $ 2,337 $ 2,337 $ -- $ 2,337 $ -- Interest-bearing deposits with banks 2,023 2,027 -- 2,027 4 Federal funds sold 854 854 -- 854 -- Securities purchased under resale agreements 17,958 17,959 -- 17,959 1 Securities borrowed 6,199 6,199 -- 6,199 -- Trading assets (see Notes 3 and 22) 47,893 47,893 -- 47,893 -- Securities available for sale (see Note 4) 6,283 6,376 (93) 6,283 -- Loans (excluding leases), commitments to extend credit and standby letters of credit 12,352 12,093 -- 12,093 (259) Allowance for credit losses (992) -- -- -- 992 Due from customers on acceptances 500 500 -- 500 -- Accounts receivable and accrued interest 4,220 4,220 -- 4,220 -- Other financial assets 1,775 1,949 (14) 1,935 160 FINANCIAL LIABILITIES, INCLUDING HEDGES Noninterest-bearing deposits 3,292 3,292 -- 3,292 -- Interest-bearing deposits 22,416 22,440 (54) 22,386 (30) Trading liabilities (see Notes 3 and 22) 26,091 26,091 -- 26,091 -- Securities sold under repurchase agreements 15,247 15,253 -- 15,253 6 Other short-term borrowings 15,761 15,779 (1) 15,778 17 Acceptances outstanding 500 500 -- 500 -- Other financial liabilities 4,166 4,166 -- 4,166 -- Long-term debt 9,294 9,631 (280) 9,351 57 Net investments in foreign subsidiaries -- -- (16) (16) (16) -------------------------------------------------------------------------------------------------------------------------------- (in millions) December 31, 1994 -------------------------------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS, INCLUDING HEDGES Cash and due from banks $ 1,985 $ 1,985 $ -- $ 1,985 $ -- Interest-bearing deposits with banks 3,390 3,390 -- 3,390 -- Federal funds sold 2,544 2,544 -- 2,544 -- Securities purchased under resale agreements 9,943 9,943 -- 9,943 -- Securities borrowed 6,197 6,197 -- 6,197 -- Trading assets (see Notes 3 and 22) 47,514 47,514 -- 47,514 -- Securities available for sale (see Note 4) 7,475 7,442 33 7,475 -- Loans (excluding leases), commitments to extend credit and standby letters of credit 12,181 11,807 -- 11,807 (374) Allowance for credit losses (1,252) -- -- -- 1,252 Due from customers on acceptances 378 378 -- 378 -- Accounts receivable and accrued interest 2,356 2,356 -- 2,356 -- Other financial assets 1,669 1,893 (51) 1,842 173 FINANCIAL LIABILITIES, INCLUDING HEDGES Noninterest-bearing deposits 3,826 3,826 -- 3,826 -- Interest-bearing deposits 21,113 21,089 94 21,183 70 Trading liabilities (see Notes 3 and 22) 20,949 20,949 -- 20,949 -- Securities sold under repurchase agreements 15,617 15,614 -- 15,614 (3) Other short-term borrowings 18,222 18,220 1 18,221 (1) Acceptances outstanding 378 378 -- 378 -- Other financial liabilities 3,574 3,574 -- 3,574 -- Long-term debt 6,455 6,287 195 6,482 27 Net investments in foreign subsidiaries -- -- (22) (22) (22) --------------------------------------------------------------------------------------------------------------------------------
A discussion of the nature, objectives and strategies for using end- user derivatives can be found in Note 22. The following table provides the gross unrealized gains and losses for end-user derivatives. Gross unrealized gains and losses for hedges of securities available for sale are recognized in the financial statements with the offset as an adjustment to securities valuation allowance in stockholders' equity. Gross unrealized gains and losses for hedges of other assets, interest-bearing deposits, other short-term borrowings, long-term debt and net investments in foreign subsidiaries are not yet recognized in the financial statements. BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 89 59
- ------------------------------------------------------------------------------------------------------------------------------- Net Securities Interest- Other Long- investments available Other bearing short-term term in foreign (in millions) December 31, 1995 for sale assets deposits borrowings debt subsidiaries Total - ------------------------------------------------------------------------------------------------------------------------------- INTEREST RATE SWAPS Pay Variable Unrealized Gain $ -- $ -- $ 132 $ 4 $ 339 $ -- $ 475 Pay Variable Unrealized (Loss) -- -- (12) (1) (24) -- (37) - ------------------------------------------------------------------------------------------------------------------------------- Pay Variable Net -- -- 120 3 315 -- 438 - ------------------------------------------------------------------------------------------------------------------------------- Pay Fixed Unrealized Gain -- -- 11 -- 14 -- 25 Pay Fixed Unrealized (Loss) (88) -- (82) (1) (21) -- (192) - ------------------------------------------------------------------------------------------------------------------------------- Pay Fixed Net (88) -- (71) (1) (7) -- (167) - ------------------------------------------------------------------------------------------------------------------------------- Total Unrealized Gain -- -- 143 4 353 -- 500 - ------------------------------------------------------------------------------------------------------------------------------- Total Unrealized (Loss) (88) -- (94) (2) (45) -- (229) - ------------------------------------------------------------------------------------------------------------------------------- Total Net $ (88) $ -- $ 49 $ 2 $ 308 $ -- $ 271 - ------------------------------------------------------------------------------------------------------------------------------- FORWARD RATE AGREEMENTS Unrealized Gain $ -- $ -- $ 1 $-- $ -- $ -- $ 1 Unrealized (Loss) -- -- (1) -- -- -- (1) - ------------------------------------------------------------------------------------------------------------------------------- Net $ -- $ -- $ -- $-- $ -- $ -- $ -- - ------------------------------------------------------------------------------------------------------------------------------- CURRENCY SWAPS AND FORWARDS Unrealized Gain $ -- $ 1 $ 17 $-- $ 20 $ 14 $ 52 Unrealized (Loss) -- -- (12) (1) (48) (30) (91) - ------------------------------------------------------------------------------------------------------------------------------- Net $ -- $ 1 $ 5 $(1) $ (28) $(16) $ (39) - ------------------------------------------------------------------------------------------------------------------------------- OTHER CONTRACTS (1) Unrealized Gain $ -- $ 1 $ -- $-- $ -- $ -- $ 1 Unrealized (Loss) (5) (16) -- -- -- -- (21) - ------------------------------------------------------------------------------------------------------------------------------- Net $ (5) $(15) $ -- $-- $ -- $ -- $ (20) - ------------------------------------------------------------------------------------------------------------------------------- Total Unrealized Gain $ -- $ 2 $ 161 $ 4 $ 373 $ 14 $ 554 Total Unrealized (Loss) (93) (16) (107) (3) (93) (30) (342) - ------------------------------------------------------------------------------------------------------------------------------- Total Net $ (93) $(14) $ 54 $ 1 $ 280 $(16) $ 212 - ------------------------------------------------------------------------------------------------------------------------------- (in millions) December 31, 1994 - ------------------------------------------------------------------------------------------------------------------------------- INTEREST RATE SWAPS Pay Variable Unrealized Gain $ -- $ -- $ 17 $ 4 $ 62 $ -- $83 Pay Variable Unrealized (Loss) (1) -- (191) (4) (200) -- (396) - ------------------------------------------------------------------------------------------------------------------------------- Pay Variable Net (1) -- (174) -- (138) -- (313) - ------------------------------------------------------------------------------------------------------------------------------- Pay Fixed Unrealized Gain 48 -- 105 -- 28 -- 181 Pay Fixed Unrealized (Loss) (19) -- (31) -- (15) -- (65) - ------------------------------------------------------------------------------------------------------------------------------- Pay Fixed Net 29 -- 74 -- 13 -- 116 - ------------------------------------------------------------------------------------------------------------------------------- Total Unrealized Gain 48 -- 122 4 90 -- 264 - ------------------------------------------------------------------------------------------------------------------------------- Total Unrealized (Loss) (20) -- (222) (4) (215) -- (461) - ------------------------------------------------------------------------------------------------------------------------------- Total Net $ 28 $ -- $(100) $-- $(125) $ -- $(197) - ------------------------------------------------------------------------------------------------------------------------------- FORWARD RATE AGREEMENTS Unrealized Gain $ -- $ -- $ 4 $-- $ -- $ -- $ 4 Unrealized (Loss) -- -- (5) -- -- -- (5) - ------------------------------------------------------------------------------------------------------------------------------- Net $ -- $ -- $ (1) $-- $ -- $ -- $ (1) - ------------------------------------------------------------------------------------------------------------------------------- CURRENCY SWAPS Unrealized Gain $ -- $ -- $ 9 $-- $ 4 $ -- $ 13 Unrealized (Loss) -- -- (2) (1) (74) (22) (99) - ------------------------------------------------------------------------------------------------------------------------------- Net $ -- $ -- $ 7 $(1) $ (70) $(22) $ (86) - ------------------------------------------------------------------------------------------------------------------------------- OTHER CONTRACTS (1) Unrealized Gain $ 5 $ 2 $ -- $-- $ -- $ -- $ 7 Unrealized (Loss) -- (53) -- -- -- -- (53) - ------------------------------------------------------------------------------------------------------------------------------- Net $ 5 $(51) $ -- $-- $ -- $ -- $ (46) - ------------------------------------------------------------------------------------------------------------------------------- Total Unrealized Gain $ 53 $ 2 $ 135 $ 4 $ 94 $ -- $ 288 Total Unrealized (Loss) (20) (53) (229) (5) (289) (22) (618) - ------------------------------------------------------------------------------------------------------------------------------- Total Net $ 33 $(51) $ (94) $(1) $(195) $(22) $(330) - -------------------------------------------------------------------------------------------------------------------------------
(1) Other contracts are principally equity swaps and collars. BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 90 60 The unrealized gains and losses on these hedges were determined on the basis of valuation pricing models which take into account current market and contractual prices of the underlying instruments, as well as time value and yield curve or volatility factors underlying the positions. The remaining maturities of the notional amounts of end-user derivatives at December 31, 1995 were as follows:
Interest Foreign Total (in millions) Rate Currency Equity Notional Notional Amount Maturing in: Risk Risk* Risk Amount - -------------------------------------------------------------------------------- 1996 $41,825 $ 667 $91 $42,583 1997-1998 10,218 2,305 -- 12,523 1999-2000 4,821 466 -- 5,287 2001 and thereafter 4,557 109 -- 4,666 - -------------------------------------------------------------------------------- Total $61,421 $3,547 $91 $65,059 - --------------------------------------------------------------------------------
*Currency swaps and currency forwards are primarily based upon Australian dollar/U.S. dollar and Japanese yen/U.S. dollar contracts. For pay variable and pay fixed interest rate swaps entered into as an end user, the weighted average receive rate and pay rate (interest rates were based on the weighted averages of both U.S. and non-U.S. currencies) by maturity and corresponding notional amounts at December 31, 1995 were as follows:
- ------------------------------------------------------------------------------------------------------------------------------ Paying Variable Paying Fixed --------------------------------- -------------------------------- ($ in millions) Notional Receive Pay Notional Receive Pay Total Notional Amount Maturing in: Amount Rate Rate Amount Rate Rate Notional - ------------------------------------------------------------------------------------------------------------------------------ 1996 $30,770 5.97% 5.87% $ 8,742 6.00% 6.21% $39,512 1997-1998 6,558 5.99 5.84 3,657 5.33 5.76 10,215 1999-2000 3,448 6.57 6.34 1,373 3.86 4.99 4,821 2001 and thereafter 3,927 6.64 5.93 629 5.91 7.34 4,556 - ------------------------------------------------------------------------------------------------------------------------------ Total $44,703 $14,401 $59,104 - ------------------------------------------------------------------------------------------------------------------------------
All rates were those in effect at December 31, 1995. Variable rates are primarily based on LIBOR and may change significantly, affecting future cash flows. The remaining maturities of the notional amounts of end-user derivatives at December 31, 1994 were as follows:
Interest Foreign Total (in millions) Rate Currency Equity Notional Notional Amount Maturing in: Risk Risk* Risk Amount - -------------------------------------------------------------------------------- 1995 $19,934 $2,341 $146 $22,421 1996-1997 11,153 449 73 11,675 1998-1999 3,437 340 -- 3,777 2000 and thereafter 5,843 364 -- 6,207 - -------------------------------------------------------------------------------- Total $40,367 $3,494 $219 $44,080 - --------------------------------------------------------------------------------
*Currency swaps and currency forwards are primarily based upon Australian dollar/U.S. dollar and Japanese yen/U.S. dollar contracts. For pay variable and pay fixed interest rate swaps entered into as end user, the weighted average receive rate and pay rate (interest rates were based on the weighted averages of both U.S. and non-U.S. currencies) by maturity and corresponding notional amounts at December 31, 1994 were as follows:
- ------------------------------------------------------------------------------------------------------------------------------ Paying Variable Paying Fixed --------------------------------- -------------------------------- ($ in millions) Notional Receive Pay Notional Receive Pay Total Notional Amount Maturing in: Amount Rate Rate Amount Rate Rate Notional - ------------------------------------------------------------------------------------------------------------------------------ 1995 $11,211 5.88% 6.09% $2,908 5.90% 6.00% $14,119 1996-1997 7,830 6.03 5.77 3,219 5.92 5.78 11,049 1998-1999 2,444 5.81 5.83 993 5.34 5.38 3,437 2000 and thereafter 4,113 6.79 5.72 1,730 5.83 8.13 5,843 - ------------------------------------------------------------------------------------------------------------------------------ Total $25,598 $8,850 $34,448 - ------------------------------------------------------------------------------------------------------------------------------
All rates were those in effect at December 31, 1994. Variable rates are primarily based on LIBOR and may change significantly, affecting future cash flows. BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 91 61 The effect of these end-user derivatives was a net increase in revenue of $22 million and $102 million, respectively, for the years ended December 31, 1995 and 1994. The Corporation has reviewed its other categories of off-balance sheet instruments (forward-dated assets and liabilities, securities lending indemnifications and securities borrowed) accounted for at cost and has determined that, in the case of each such category, the unrealized gain or loss on such instruments at both December 31, 1995 and 1994 was not material. Methods and Assumptions For short-term financial instruments, defined as those with remaining maturities of 90 days or less, the carrying amount was considered to be a reasonable estimate of fair value. The following instruments were predominantly short-term:
Assets Liabilities - -------------------------------------------------------------------------------- Cash and due from banks Interest-bearing deposits Interest-bearing deposits Securities sold under with banks repurchase agreements Federal funds sold Other short-term borrowings Securities purchased under Acceptances outstanding resale agreements Other financial liabilities Securities borrowed Due from customers on acceptances Accounts receivable and accrued interest
For those components of the above-listed financial instruments with remaining maturities greater than 90 days, fair value was determined by discounting contractual cash flows using rates which could be earned for assets with similar remaining maturities and, in the case of liabilities, rates at which the liabilities with similar remaining maturities could be issued as of the balance sheet date. As indicated in Note 1, trading assets (including derivatives), trading liabilities and securities available for sale are carried at their fair values. For short-term loans and variable rate loans which reprice within 90 days, the carrying value was considered to be a reasonable estimate of fair value. For those loans for which quoted market prices were available, fair value was based on such prices. For other types of loans, fair value was estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. In addition, for loans secured by real estate, appraisal values for the collateral were considered in the fair value determination. The fair value estimate of commitments to extend credit and standby letters of credit represented the unrealized gains and losses on those off-balance sheet positions and was generally determined in the same manner as loans. Other financial assets consisted primarily of investments in equity instruments (excluding, in accordance with SFAS 107, investments accounted for under the equity method) and cash and cash margins with brokers. The fair value of non-marketable equity instruments was determined by matrix pricing utilizing market prices for comparable publicly traded instruments, adjusted for liquidity and contractual arrangements. Noninterest-bearing deposits do not have defined maturities. In accordance with SFAS 107, fair value represented the amount payable on demand as of the balance sheet date. Other financial liabilities consisted primarily of accounts payable and accrued expenses at both December 31, 1995 and 1994. The fair value of long-term debt was estimated by using market quotes as well as discounting the remaining contractual cash flows using a rate at which the Corporation could issue debt with a similar remaining maturity as of the balance sheet date. BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 92 62 NOTE 25 -- CONDENSED PARENT COMPANY FINANCIAL STATEMENTS Condensed Statement of Income
(in millions) Year Ended December 31, 1995 1994 1993 ----------------------------------------------------------------------------- REVENUE Dividends Banks $ 75 $ 320 $ 112 Nonbanks 86 264 71 Interest from subsidiaries 551 367 191 Other interest 150 209 119 Trading 44 (81) 4 Securities available for sale gains (losses) 114 17 (2) Other 85 (17) 40 ----------------------------------------------------------------------------- Total revenue 1,105 1,079 535 ----------------------------------------------------------------------------- EXPENSES Interest to subsidiaries 71 40 23 Other interest 714 566 310 Other -- 20 36 ----------------------------------------------------------------------------- Total expenses 785 626 369 ----------------------------------------------------------------------------- Income before income taxes and equity in undistributed income of subsidiaries and affiliates 320 453 166 Income taxes (benefit) 25 (99) (13) ----------------------------------------------------------------------------- Income before equity in undistributed income of subsidiaries and affiliates 295 552 179 Equity in undistributed (loss) income of subsidiaries and affiliates before cumulative effects of accounting changes (80) 63 891 ----------------------------------------------------------------------------- INCOME BEFORE CUMULATIVE EFFECTS OF ACCOUNTING CHANGES 215 615 1,070 Equity in cumulative effects of accounting changes of subsidiary -- -- (75) ----------------------------------------------------------------------------- NET INCOME $ 215 $ 615 $ 995 -----------------------------------------------------------------------------
Condensed Balance Sheet
(in millions) December 31, 1995 1994 ------------------------------------------------------------------------------ ASSETS Cash and due from banks $ 8 $ 72 Interest-bearing deposits with bank subsidiaries 2,540 1,509 Securities purchased under resale agreements with nonbank subsidiary 2,213 1,104 Securities purchased under resale agreements with third party 48 -- Trading assets 1,475 1,579 Securities available for sale 1,301 2,023 Loans 24 21 Investments in subsidiaries and affiliates Banks 4,641 4,453 Nonbanks 946 1,017 Receivables from subsidiaries and affiliates Banks 1,418 1,512 Nonbanks 3,190 5,672 Accounts receivable and accrued interest 348 379 Other assets 148 313 ------------------------------------------------------------------------------ Total assets $18,300 $19,654 ------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Trading liabilities $ 348 $ 128 Commercial paper 5,306 6,320 Other short-term borrowings 960 3,250 Payables to subsidiaries and affiliates Banks 170 126 Nonbanks 1,794 826 Other liabilities 278 312 Long-term debt 4,460 3,988 ------------------------------------------------------------------------------ Total liabilities 13,316 14,950 ------------------------------------------------------------------------------ Total stockholders' equity 4,984 4,704 ------------------------------------------------------------------------------ Total liabilities and stockholders' equity $18,300 $19,654 ------------------------------------------------------------------------------
Condensed Statement of Cash Flows
(in millions) Year Ended December 31, 1995 1994 1993 -------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 215 $ 615 $ 995 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in undistributed loss (income) of subsidiaries and affiliates, before cumulative effects of accounting changes 80 (63) (891) Equity in cumulative effects of accounting changes of subsidiary -- -- 75 Deferred income taxes 3 (59) 42 Net change in trading assets 104 342 (1,390) Net change in trading liabilities 220 (42) 168 Securities available for sale (gains) losses (114) (17) 2 Other, net 282 107 111 -------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 790 883 (888) -------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net change in: Interest-bearing deposits with bank subsidiaries (1,031) (847) (140) Securities purchased under resale agreements with nonbank subsidiary (1,109) (784) 888 Securities purchased under resale agreements with third party (48) -- -- Short-term notes receivable from subsidiaries and affiliates 1,591 745 (361) Securities available for sale: Purchases (388) (2,304) -- Maturities and other redemptions 360 396 -- Sales 876 501 -- Investment securities: Purchases -- -- (3,309) Maturities and other redemptions -- -- 3,427 Sales -- -- 47 Increases in long-term notes receivable from subsidiaries (484) (2,133) (2,322) Decreases in long-term notes receivable from subsidiaries 1,379 640 89 Capital contributed to subsidiaries and affiliates (290) (152) (7) Return of capital from subsidiaries and affiliates -- 2 -- Other, net 22 34 (8) -------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 878 (3,902) (1,696) -------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in: Commercial paper and other short-term borrowings (3,304) 3,327 2,073 Short-term notes payable to subsidiaries 1,012 133 156 Issuance of long-term debt 1,496 421 1,338 Repayments of long-term debt (791) (370) (205) Issuance of preferred stock 221 342 -- Redemption of preferred stock -- (205) (250) Issuance to subsidiary of preferred stock -- -- 247 Redemption from subsidiary of preferred stock -- -- (247) Purchases of treasury stock (38) (267) (313) Cash dividends paid (361) (322) (281) Other, net 33 22 74 -------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (1,732) 3,081 2,592 -------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (64) 62 8 Cash and due from banks, beginning of year 72 10 2 -------------------------------------------------------------------------------------------------- Cash and due from banks, end of year $ 8 $ 72 $ 10 -------------------------------------------------------------------------------------------------- Interest paid $ 772 $ 587 $ 326 -------------------------------------------------------------------------------------------------- Income taxes paid $ 9 $ 7 $ -- -------------------------------------------------------------------------------------------------- Noncash financing activity: Conversion of debt to preferred stock $ 245 $ -- $ -- --------------------------------------------------------------------------------------------------
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 93 63 NOTE 26 -- BANKERS TRUST COMPANY CONSOLIDATED SUMMARIZED FINANCIAL INFORMATION Consolidated Statement of Income
(in millions) Year Ended December 31, 1995 1994 1993 ------------------------------------------------------------------------------ NET INTEREST REVENUE Interest revenue $3,917 $2,900 $2,812 Interest expense 3,330 2,271 2,072 ------------------------------------------------------------------------------ NET INTEREST REVENUE 587 629 740 Provision for credit losses (31) (3) 96 ------------------------------------------------------------------------------ NET INTEREST REVENUE AFTER PROVISION FOR CREDIT LOSSES 618 632 644 ------------------------------------------------------------------------------ NONINTEREST REVENUE Trading 279 786 1,875 Fiduciary and funds management 642 698 661 Fees and commissions 484 541 477 Securities available for sale gains (losses) (4) 13 -- Investment securities gains -- -- 4 Other 163 213 107 ------------------------------------------------------------------------------ Total noninterest revenue 1,564 2,251 3,124 ------------------------------------------------------------------------------ NONINTEREST EXPENSES Salaries 683 656 570 Incentive compensation and employee benefits 524 563 943 Occupancy, net 141 134 142 Furniture and equipment 146 149 131 Provision for severance related costs 43 -- -- Other 736 823 911 ------------------------------------------------------------------------------ Total noninterest expenses 2,273 2,325 2,697 ------------------------------------------------------------------------------ Income (Loss) before income taxes and cumulative effects of accounting changes (91) 558 1,071 Income taxes (benefit) (53) 166 327 ------------------------------------------------------------------------------ INCOME (LOSS) BEFORE CUMULATIVE EFFECTS OF ACCOUNTING CHANGES (38) 392 744 Cumulative effects of accounting changes -- -- (75) ------------------------------------------------------------------------------ NET INCOME (LOSS) $ (38) $ 392 $ 669 ------------------------------------------------------------------------------
In the normal course of business, BTCo enters into various transactions with the Parent Company and the Parent Company's other subsidiaries. Included in the above financial statements were the following transactions and balances with such affiliates.
(in millions) Year Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------- Interest revenue $129 $ 97 $ 45 Interest expense 276 185 143 Noninterest revenue 65 18 5 Noninterest expenses 203 289 326 (in millions) December 31, 1995 1994 - ------------------------------------------------------------------------------- Interest-earning assets $1,357 $1,433 Noninterest-earning assets 554 1,348 Interest-bearing liabilities 4,778 4,566 Noninterest-bearing liabilities 495 1,757
Consolidated Balance Sheet
($ in millions, except par values) December 31, 1995 1994 ----------------------------------------------------------------------------- ASSETS Cash and due from banks $ 2,305 $ 2,023 Interest-bearing deposits with banks 1,982 3,680 Federal funds sold 854 2,544 Securities purchased under resale agreements 14,597 8,006 Trading assets 35,142 34,364 Securities available for sale 3,280 3,858 Loans 11,393 12,035 Allowance for credit losses (941) (1,179) Premises and equipment, net 834 872 Due from customers on acceptances 500 378 Accounts receivable and accrued interest 3,790 1,429 Other assets 2,141 2,898 ----------------------------------------------------------------------------- Total assets $75,877 $70,908 ----------------------------------------------------------------------------- LIABILITIES Deposits Noninterest-bearing In domestic offices $ 2,815 $ 3,454 In foreign offices 645 555 Interest-bearing In domestic offices 4,615 4,837 In foreign offices 20,018 17,590 ----------------------------------------------------------------------------- Total deposits 28,093 26,436 Trading liabilities 19,087 20,461 Securities sold under repurchase agreements 7,275 4,263 Other short-term borrowings 8,342 8,910 Acceptances outstanding 500 378 Accounts payable and accrued expenses 1,810 1,686 Other liabilities 1,006 1,394 Long-term debt 5,428 3,230 ----------------------------------------------------------------------------- Total liabilities 71,541 66,758 ----------------------------------------------------------------------------- STOCKHOLDER'S EQUITY Floating rate non-cumulative preferred stock -- Series A, $1 million par value Authorized, issued and outstanding: 1995, 500 shares; 1994, 250 shares 500 250 Common stock, $10 par value Authorized, issued and outstanding: 85,166,667 shares 852 852 Capital surplus 528 498 Retained earnings 2,822 2,875 Cumulative translation adjustments (365) (344) Securities valuation allowance (1) 19 ----------------------------------------------------------------------------- Total stockholder's equity 4,336 4,150 ----------------------------------------------------------------------------- Total liabilities and stockholder's equity $75,877 $70,908 -----------------------------------------------------------------------------
See Note 9 for details of BTCo's long-term debt issued to nonaffiliates. Note 2 discusses the effects of the Corporation's adoption of SFAS 114 effective January 1, 1995, SFAS 115 effective December 31, 1993, SFAS 106 and SFAS 112 effective January 1, 1993. The cumulative effects of accounting changes as a result of the adoption of SFAS 106 and SFAS 112, as presented in Note 2, were recorded by BTCo. BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 94 64 - -------------------------------------------------------------------------------- MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING - -------------------------------------------------------------------------------- The management of Bankers Trust New York Corporation and its subsidiaries (the "Corporation") is responsible for preparing the accompanying financial statements. The financial statements were prepared in accordance with generally accepted accounting principles and prevailing industry practices, as applicable to the Corporation. The financial statements include amounts that are based on management's best estimates and judgments. Management also prepared the other information in the Annual Report and is responsible for its accuracy and consistency with the financial statements. The management of the Corporation has established and maintains an internal control structure and monitors that structure for compliance with established policies and procedures. The objectives of an internal control structure are to provide reasonable, but not absolute, assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition, and that transactions are executed in accordance with management's authorization. The Corporation maintains an Internal Audit Department that independently monitors and assesses the effectiveness of the internal controls and recommends possible improvements thereto. The Corporation also maintains a Credit Policy Department which develops and administers procedures to measure, monitor and control credit risks across all businesses and recommends to management specific measures for portfolio restructuring designed to reduce the risk of loss. In addition, management recognizes its responsibility to foster a strong ethical environment within the Corporation to ensure that its business affairs are conducted with integrity and in accordance with high standards of personal and corporate conduct. This responsibility is characterized and reflected in the Corporation's Rules for Business Conduct, which are distributed to all employees of the Corporation. As part of the monitoring system, the Corporation maintains a Corporate Compliance Department having oversight responsibilities for administering and coordinating the application of these standards of conduct. The Corporation's Board of Directors appoints an Audit Committee composed solely of outside directors. The function of the Audit Committee is to oversee the accounting, reporting, audit and internal control policies and procedures established by the Corporation's management. The Committee meets regularly with management and the internal, credit and independent auditors. The auditors have free access to the Audit Committee without the presence of management. The Committee reports regularly to the Board of Directors on its activities, and such other matters as it deems necessary. The Corporation's annual financial statements have been audited by Ernst & Young LLP, independent auditors, whose appointment by the Board of Directors was approved by the stockholders. Management has made available to Ernst & Young LLP all the Corporation's financial records and related data, as well as the minutes of stockholders' and directors' meetings. Furthermore, management believes that all its representations to Ernst & Young LLP are valid and appropriate. In addition, Ernst & Young LLP, in determining the nature and extent of their auditing procedures, evaluated the Corporation's accounting procedures and policies and the effectiveness of the related internal control structure. Management believes that, as of December 31, 1995, the Corporation's internal control structure was adequate to accomplish the objectives discussed herein. Charles S. Sanford, Jr. Chairman of the Board Frank N. Newman President and Chief Executive Officer Richard H. Daniel Executive Vice President, Chief Financial Officer and Controller March 7, 1996 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 95 65 - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- To the Board of Directors and Stockholders of Bankers Trust New York Corporation We have audited the accompanying consolidated balance sheet of Bankers Trust New York Corporation and Subsidiaries (the "Corporation") at December 31, 1995 and 1994, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bankers Trust New York Corporation and Subsidiaries at December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 2 to the financial statements, in 1993 the Corporation adopted, as of December 31, 1993, Statement of Financial Accounting Standards ("SFAS") 115, "Accounting for Certain Investments in Debt and Equity Securities," and as of January 1, 1993, SFAS 106, "Employers' Accounting for Postemployment Benefits Other than Pensions," and SFAS 112, "Employers' Accounting for Postemployment Benefits." ERNST & YOUNG LLP New York, New York January 25, 1996 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 96 66 SUPPLEMENTAL FINANCIAL DATA The statistical data on pages 97 through 101 should be read in conjunction with the Financial Review and the financial statements included elsewhere in this Annual Report. In the opinion of management, all material adjustments necessary for a fair presentation of the results of operations for the interim periods have been made. All such adjustments were of a normal recurring nature. CONDENSED QUARTERLY CONSOLIDATED STATEMENT OF INCOME (in millions, except per share data)
- ------------------------------------------------------------------------------------------------------------------------------------ 1995 1994 ---------------------------------------------- ---------------------------------------------- Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------------------ Interest revenue $1,457 $1,556 $1,520 $1,353 $1,357 $1,207 $1,255 $1,211 Interest expense 1,248 1,352 1,298 1,171 1,128 943 946 841 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest revenue 209 204 222 182 229 264 309 370 Provision for credit losses 10 7 -- 14 8 17 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Net interest revenue after provision for credit losses 199 197 222 168 221 247 309 370 Total noninterest revenue 739 755 587 342 624 707 637 505 Total noninterest expenses 758 728 678 734 709 713 688 641 - ------------------------------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes 180 224 131 (224) 136 241 258 234 Income taxes (benefit) 54 69 40 (67) 35 72 77 70 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME (LOSS) $ 126 $ 155 $ 91 $ (157) $ 101 $ 169 $ 181 $ 164 - ------------------------------------------------------------------------------------------------------------------------------------ Net income (loss) applicable to common stock $ 111 $ 139 $ 79 $ (165) $ 95 $ 161 $ 172 $ 159 - ------------------------------------------------------------------------------------------------------------------------------------ EARNINGS (LOSS) PER COMMON SHARE: Primary $ 1.36 $ 1.72 $ .98 $(2.11) $ 1.19 $ 1.98 $ 2.09 $ 1.90 Fully diluted $ 1.36 $ 1.71 $ .98 $(2.11) $ 1.18 $ 1.98 $ 2.09 $ 1.90 - ------------------------------------------------------------------------------------------------------------------------------------ Cash dividends declared per common share $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ .90 $ .90 $ .90 - ------------------------------------------------------------------------------------------------------------------------------------ STOCKHOLDER DATA - ------------------------------------------------------------------------------------------------------------------------------------ Market price (1) High $ 71 $ 72 $ 64 3/4 $ 64 7/8 $ 67 5/8 $ 74 $ 74 $ 84 5/8 Low 60 1/4 60 3/4 52 49 3/4 54 3/4 63 1/2 64 1/2 69 1/8 End of quarter 66 1/2 70 1/4 62 52 1/4 55 3/8 66 3/4 66 5/8 71 - ------------------------------------------------------------------------------------------------------------------------------------
(1) Based on the Composite Tape. Market prices at January 31, 1996 for common stock were as follows: High, $64 7/8; Low, $63; Close, $64 7/8. DIVIDENDS Cash dividends on common stock were paid quarterly in 1995 on the 25th of January, April, July and October. NUMBER OF SECURITY HOLDERS At January 31, 1996, the approximate number of holders of record of common stock was 21,978. STOCK LISTINGS The principal markets on which the common stock is traded are the New York Stock Exchange (Symbol: BT) and the London Stock Exchange. BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 97 67 AVERAGE BALANCES, INTEREST AND AVERAGE RATES The following table shows the major consolidated assets and liabilities, together with their respective interest amounts and rates earned or paid by the Corporation. Cash basis and renegotiated loans are included in the averages to determine an effective yield on all loans. The average balances are principally daily averages.
- --------------------------------------------------------------------------------------------------------- 1995 1994 ----------------------------- ----------------------------- Average Average Average Average ($ in millions) Balance Interest Rate Balance Interest Rate - --------------------------------------------------------------------------------------------------------- ASSETS Interest-bearing deposits with banks (primarily in foreign offices) $ 2,777 $ 207 7.45% $ 1,523 $ 124 8.14% Federal funds sold (in domestic offices) 1,726 104 6.03% 634 31 4.89% Securities purchased under resale agreements (primarily in domestic offices) 19,808 1,057 5.34% 13,260 468 3.53% Securities borrowed (in domestic offices) 8,952 509 5.69% 5,018 211 4.20% Trading assets In domestic offices (1) 14,555 1,370 9.41% 20,739 1,911 9.21% In foreign offices 16,058 1,320 8.22% 15,787 1,054 6.68% - --------------------------------------------------------------- ------------------- Total trading assets (1) 30,613 2,690 8.79% 36,526 2,965 8.12% Securities available for sale In domestic offices Taxable 1,891 160 8.46% 2,043 134 6.56% Exempt from federal income taxes (1) 1,340 56 4.18% 1,374 75 5.46% In foreign offices Taxable 2,899 167 5.76% 3,042 178 5.85% Exempt from federal income taxes (1) 320 35 10.94% 410 49 11.95% - --------------------------------------------------------------- ------------------- Total securities available for sale (1) 6,450 418 6.48% 6,869 436 6.35% Investment securities In domestic offices Taxable -- -- -- -- -- -- Exempt from federal income taxes (1) -- -- -- -- -- -- In foreign offices Taxable -- -- -- -- -- -- Exempt from federal income taxes (1) -- -- -- -- -- -- - --------------------------------------------------------------- ------------------- Total investment securities (1) -- -- -- -- -- -- Loans In domestic offices Commercial and industrial 2,178 160 7.35% 2,123 141 6.64% Financial institutions 620 51 8.23% 920 49 5.33% Secured by real estate 1,398 95 6.80% 1,503 82 5.46% Other (1) 2,293 131 5.71% 2,311 147 6.36% - --------------------------------------------------------------- ------------------- Total in domestic offices (1) 6,489 437 6.73% 6,857 419 6.11% In foreign offices 5,263 487 9.25% 5,613 444 7.91% - --------------------------------------------------------------- ------------------- Total loans, excluding fees (1) 11,752 924 7.86% 12,470 863 6.92% Loan fees 18 15 - --------------------------------------------------------------- ------------------- Total loans, including fees (1) 11,752 942 8.02% 12,470 878 7.04% - --------------------------------------------------------------- ------------------- TOTAL INTEREST-EARNING ASSETS(1) 82,078 $5,927 7.22% 76,300 $5,113 6.70% ====== ====== Cash and due from banks 1,767 1,912 Noninterest-earning trading assets 18,999 19,992 Due from customers on acceptances 434 348 All other assets 7,567 7,618 Allowance for credit losses (1,196) (1,342) - ----------------------------------------------------- -------- TOTAL ASSETS $109,649 $104,828 - ----------------------------------------------------- -------- % of assets attributable to foreign offices 54% 51%
- -------------------------------------------------------------------------------------------------------- 1993 ---------------------------- Average Average ($ in millions) Balance Interest Rate - -------------------------------------------------------------------------------------------------------- ASSETS Interest-bearing deposits with banks (primarily in foreign offices) $ 2,698 $ 214 7.93% Federal funds sold (in domestic offices) 708 22 3.11% Securities purchased under resale agreements (primarily in domestic offices) 9,969 381 3.82% Securities borrowed (in domestic offices) 4,216 127 3.01% Trading assets In domestic offices (1) 20,810 1,414 6.79% In foreign offices 16,490 1,033 6.26% - -------------------------------------------------------------------------------------------------------- Total trading assets (1) 37,300 2,447 6.56% Securities available for sale In domestic offices Taxable -- -- -- Exempt from federal income taxes (1) -- -- -- In foreign offices Taxable -- -- -- Exempt from federal income taxes (1) -- -- -- - -------------------------------------------------------------------------------------------------------- Total securities available for sale (1) -- -- -- Investment securities In domestic offices Taxable 2,644 129 4.88% Exempt from federal income taxes (1) 598 59 9.87% In foreign offices Taxable 2,959 200 6.76% Exempt from federal income taxes (1) 396 50 12.63% - -------------------------------------------------------------------------------------------------------- Total investment securities (1) 6,597 438 6.64% Loans In domestic offices Commercial and industrial 3,065 157 5.12% Financial institutions 1,635 81 4.95% Secured by real estate 1,787 89 4.98% Other (1) 2,986 121 4.05% - -------------------------------------------------------------------------------------------------------- Total in domestic offices (1) 9,473 448 4.73% In foreign offices 5,837 430 7.37% - -------------------------------------------------------------------------------------------------------- Total loans, excluding fees (1) 15,310 878 5.73% Loan fees 11 - -------------------------------------------------------------------------------------------------------- Total loans, including fees (1) 15,310 889 5.81% - -------------------------------------------------------------------------------------------------------- TOTAL INTEREST-EARNING ASSETS(1) 76,798 $4,518 5.88% ====== Cash and due from banks 1,767 Noninterest-earning trading assets 2,377 Due from customers on acceptances 372 All other assets 5,844 Allowance for credit losses (1,535) - ------------------------------------------------------------------------------------ TOTAL ASSETS $85,623 - ------------------------------------------------------------------------------------ % of assets attributable to foreign offices 45%
The average balance sheets are presented on a slightly different basis than the balance sheets presented in the Financial Statements section of this report, in that the various categories of interest-earning assets and interest-bearing liabilities exclude certain noninterest-earning/bearing components included in the balance sheet captions. These components, excluding noninterest-earning/bearing trading assets/liabilities, are included in "all other assets" and "all other liabilities" in the average balance sheets. (1) Interest and average rates are presented on a fully taxable basis. The applicable combined federal, state and local incremental tax rate used to determine the amounts of the tax equivalent adjustments to interest revenue (which recognize the income tax savings on tax-exempt assets) was 42 percent for 1995, 1994 and 1993. 98 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 68
- --------------------------------------------------------------------------------------------------------- 1995 1994 ----------------------------- ----------------------------- Average Average Average Average ($ in millions) Balance Interest Rate Balance Interest Rate - --------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits In domestic offices Time deposits $ 1,384 $ 99 7.15% $ 700 $ 50 7.14% Other 4,338 277 6.39% 5,519 218 3.95% - ---------------------------------------------------------------- ------------------- Total in domestic offices 5,722 376 6.57% 6,219 268 4.31% In foreign offices Deposits from banks in foreign countries 7,432 496 6.67% 5,248 296 5.64% Other time and savings deposits 7,370 408 5.54% 6,027 345 5.72% Other 1,513 80 5.29% 1,221 55 4.50% - ---------------------------------------------------------------- ------------------- Total in foreign offices 16,315 984 6.03% 12,496 696 5.57% - ---------------------------------------------------------------- ------------------- Total interest-bearing deposits 22,037 1,360 6.17% 18,715 964 5.15% Trading liabilities In domestic offices 6,293 622 9.88% 4,453 486 10.91% In foreign offices 4,922 431 8.76% 5,682 321 5.65% - ---------------------------------------------------------------- ------------------- Total trading liabilities 11,215 1,053 9.39% 10,135 807 7.96% Securities sold under repurchase agreements In domestic offices 16,951 987 5.82% 20,009 797 3.98% In foreign offices 4,592 186 4.05% 1,805 120 6.65% - ---------------------------------------------------------------- ------------------- Total securities sold under repurchase agreements 21,543 1,173 5.44% 21,814 917 4.20% Other short-term borrowings In domestic offices 11,943 707 5.92% 12,768 582 4.56% In foreign offices 4,396 326 7.42% 4,488 312 6.95% - ---------------------------------------------------------------- ------------------- Total other short-term borrowings 16,339 1,033 6.32% 17,256 894 5.18% Long-term debt In domestic offices 5,120 333 6.50% 4,985 243 4.87% In foreign offices 2,596 117 4.51% 843 33 3.91% - ---------------------------------------------------------------- ------------------- Total long-term debt 7,716 450 5.83% 5,828 276 4.74% - ---------------------------------------------------------------- ------------------- TOTAL INTEREST-BEARING LIABILITIES 78,850 $5,069 6.43% 73,748 $3,858 5.23% ====== ====== Noninterest-bearing deposits In domestic offices 2,921 3,210 In foreign offices 509 587 - ---------------------------------------------------- -------- Total noninterest-bearing deposits 3,430 3,797 Noninterest-bearing trading liabilities 16,200 15,680 Acceptances outstanding 441 363 All other liabilities 5,628 6,247 Preferred stock of subsidiary 250 250 Stockholders' Equity Preferred stock 726 388 Common stockholders' equity 4,124 4,355 - ---------------------------------------------------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $109,649 $104,828 - ---------------------------------------------------- -------- % of liabilities attributable to foreign offices 54% 42% Rate spread .79% 1.47% Net interest margin (net interest revenue to total interest- earning assets) In domestic offices $ 46,876 $ 371 .79% $ 45,722 $ 728 1.59% In foreign offices 35,202 487 1.38% 30,578 527 1.72% - ---------------------------------------------------------------- ------------------- Total $ 82,078 $ 858 1.05% $ 76,300 $1,255 1.64% - ---------------------------------------------------------------- -------------------
- -------------------------------------------------------------------------------------------------------- 1993 ---------------------------- Average Average ($ in millions) Balance Interest Rate - -------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits In domestic offices Time deposits $ 2,425 $ 115 4.74% Other 5,835 103 1.77% - -------------------------------------------------------------------------------------------------------- Total in domestic offices 8,260 218 2.64% In foreign offices Deposits from banks in foreign countries 5,937 398 6.70% Other time and savings deposits 6,259 319 5.10% Other 1,405 78 5.55% - -------------------------------------------------------------------------------------------------------- Total in foreign offices 13,601 795 5.85% - -------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 21,861 1,013 4.63% Trading liabilities In domestic offices 3,947 250 6.33% In foreign offices 2,522 174 6.90% - -------------------------------------------------------------------------------------------------------- Total trading liabilities 6,469 424 6.55% Securities sold under repurchase agreements In domestic offices 21,748 675 3.10% In foreign offices 2,024 190 9.39% - -------------------------------------------------------------------------------------------------------- Total securities sold under repurchase agreements 23,772 865 3.64% Other short-term borrowings In domestic offices 8,506 330 3.88% In foreign offices 4,211 276 6.55% - -------------------------------------------------------------------------------------------------------- Total other short-term borrowings 12,717 606 4.77% Long-term debt In domestic offices 4,425 185 4.18% In foreign offices 432 29 6.71% - -------------------------------------------------------------------------------------------------------- Total long-term debt 4,857 214 4.41% - -------------------------------------------------------------------------------------------------------- TOTAL INTEREST-BEARING LIABILITIES 69,676 $3,122 4.48% ====== Noninterest-bearing deposits In domestic offices 3,315 In foreign offices 539 - -------------------------------------------------------------------------------------------------------- Total noninterest-bearing deposits 3,854 Noninterest-bearing trading liabilities 1,542 Acceptances outstanding 387 All other liabilities 5,725 Preferred stock of subsidiary 236 Stockholders' Equity Preferred stock 302 Common stockholders' equity 3,901 - --------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 85,623 - --------------------------------------------------------------------------------------------------------- % of liabilities attributable to foreign offices 38% Rate spread 1.40% Net interest margin (net interest revenue to total interest- earning assets) In domestic offices $46,227 $ 862 1.86% In foreign offices 30,571 534 1.75% - --------------------------------------------------------------------------------------------------------- Total $76,798 $1,396 1.82% - ---------------------------------------------------------------------------------------------------------
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 99 69 - -------------------------------------------------------------------------------- VOLUME/RATE ANALYSIS OF CHANGES IN NET INTEREST REVENUE The following table attributes changes in fully taxable net interest revenue to changes in either average daily balances or average rates for both interest-earning assets and interest-bearing sources of funds. Because of the numerous simultaneous balance and rate changes during any period, it is not possible to precisely allocate such changes between balances and rates. For purposes of this table, changes which are not due solely to balance or rate changes are allocated to such categories based on the respective percentage changes in average daily balances and average rates.
- ----------------------------------------------------------------------------------------------------- 1995/94 1994/93 -------------------------- -------------------------- Increase (decrease) due to Increase (decrease) due to change in: change in: -------------------------- -------------------------- Average Average Average Average (in millions) Balance Rate Total Balance Rate Total - ------------------------------------------------------------------------ -------------------------- CONSOLIDATED INTEREST REVENUE Interest-bearing deposits with banks $ 94 $ (11) $ 83 $ (96) $ 6 $ (90) Federal funds sold 64 9 73 (3) 12 9 Securities purchased under resale agreements 289 300 589 118 (31) 87 Securities borrowed 206 92 298 27 57 84 Trading assets (506) 231 (275) (52) 570 518 Securities available for sale (27) 9 (18) 218 218 436 Investment securities -- -- -- (219) (219) (438) Loans (53) 117 64 (181) 170 (11) - ----------------------------------------------------------------------------------------------------- Total interest revenue 67 747 814 (188) 783 595 - ----------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest-bearing deposits 187 209 396 (155) 106 (49) Trading liabilities 92 154 246 278 105 383 Securities sold under repurchase agreements (12) 268 256 (75) 127 52 Other short-term borrowings (50) 189 139 231 57 288 Long-term debt 101 73 174 45 17 62 - ----------------------------------------------------------------------------------------------------- Total interest expense 318 893 1,211 324 412 736 - ----------------------------------------------------------------------------------------------------- Net change in net interest revenue $(251) $(146) $ (397) $(512) $ 371 $(141) - ----------------------------------------------------------------------------------------------------- DOMESTIC OFFICES INTEREST REVENUE Interest-bearing deposits with banks $ 17 $ 15 $ 32 $ (8) $ 13 $ 5 Federal funds sold 64 9 73 (3) 12 9 Securities purchased under resale agreements 110 292 402 40 5 45 Securities borrowed 206 92 298 27 57 84 Trading assets (581) 40 (541) (5) 502 497 Securities available for sale (12) 19 7 104 105 209 Investment securities -- -- -- (94) (94) (188) Loans (24) 46 22 (144) 120 (24) - ----------------------------------------------------------------------------------------------------- Total interest revenue (220) 513 293 (83) 720 637 - ----------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest-bearing deposits (23) 131 108 (63) 113 50 Trading liabilities 185 (49) 136 36 200 236 Securities sold under repurchase agreements (136) 326 190 (57) 179 122 Other short-term borrowings (40) 165 125 187 65 252 Long-term debt 7 83 90 25 33 58 Funds provided to foreign offices 7 22 29 227 (276) (49) Funds provided by foreign offices 127 (26) 101 (95) 216 121 - ----------------------------------------------------------------------------------------------------- Total interest expense 127 652 779 260 530 790 - ----------------------------------------------------------------------------------------------------- Net change in net interest revenue $(347) $(139) $ (486) $(343) $ 190 $(153) - ----------------------------------------------------------------------------------------------------- FOREIGN OFFICES INTEREST REVENUE Interest-bearing deposits with banks $ 71 $ (20) $ 51 $ (79) $ (16) $ (95) Securities purchased under resale agreements 172 15 187 97 (55) 42 Trading assets 18 248 266 (45) 66 21 Securities available for sale (15) (10) (25) 113 114 227 Investment securities -- -- -- (125) (125) (250) Loans (29) 71 42 (17) 30 13 - ----------------------------------------------------------------------------------------------------- Total interest revenue 217 304 521 (56) 14 (42) - ----------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest-bearing deposits 227 61 288 (63) (36) (99) Trading liabilities (48) 158 110 184 (37) 147 Securities sold under repurchase agreements 128 (62) 66 (19) (51) (70) Other short-term borrowings (6) 20 14 19 17 36 Long-term debt 78 6 84 20 (16) 4 Funds provided by domestic offices (7) (22) (29) (227) 276 49 Funds provided to domestic offices (127) 26 (101) 95 (216) (121) - ----------------------------------------------------------------------------------------------------- Total interest expense 245 187 432 9 (63) (54) - ----------------------------------------------------------------------------------------------------- Net change in net interest revenue $ (28) $ 117 $ 89 $ (65) $ 77 $ 12 - -----------------------------------------------------------------------------------------------------
100 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 70 - -------------------------------------------------------------------------------- INTEREST RATE SENSITIVITY Interest rate sensitivity data for the Corporation at December 31, 1995 is presented in the table below. For purposes of this presentation, the interest-earning/bearing components of trading assets and trading liabilities are assumed to reprice within three months. The interest rate gaps reported in the table arise when assets are funded with liabilities having different repricing intervals, after considering the effect of off-balance sheet hedging instruments. Since these gaps are actively managed and change daily as adjustments are made in interest rate views and market outlook, positions at the end of any period may not be reflective of the Corporation's interest rate view in subsequent periods. Active management dictates that longer-term economic views are balanced against prospects of short-term interest rate changes in all repricing intervals.
- ------------------------------------------------------------------------------------------------------------------------- By Repricing Interval ------------------------------------------------------ After three After six After Within months months one year After three but within but within but within five (in millions) December 31, 1995 months six months one year five years years - ------------------------------------------------------------------------------------------------------------------------- ASSETS Interest-bearing deposits with banks $ 1,799 $ 109 $ 108 $ 7 $ -- Federal funds sold 854 -- -- -- -- Securities purchased under resale agreements 17,774 184 -- -- -- Securities borrowed 6,199 -- -- -- -- Trading assets 31,992 -- -- -- -- Securities available for sale 2,338 601 216 1,457 1,671 Loans 9,333 1,137 166 683 1,314 Noninterest-earning assets and allowance for credit losses -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- Total 70,289 2,031 490 2,147 2,985 - ------------------------------------------------------------------------------------------------------------------------- LIABILITIES, PREFERRED STOCK OF SUBSIDIARY AND STOCKHOLDERS' EQUITY Interest-bearing deposits 17,319 2,251 1,677 956 213 Trading liabilities 11,552 -- -- -- -- Securities sold under repurchase agreements 14,759 488 -- -- -- Other short-term borrowings 14,019 880 414 194 254 Long-term debt 1,908 845 1,270 3,237 2,034 Preferred stock of subsidiary 250 -- -- -- -- Preferred stock -- -- -- 620 245 Noninterest-bearing liabilities and common stockholders' equity -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- Total 59,807 4,464 3,361 5,007 2,746 - ------------------------------------------------------------------------------------------------------------------------- Effect of off-balance sheet hedging instruments (13,420) 2,024 5,793 3,630 1,973 - ------------------------------------------------------------------------------------------------------------------------- INTEREST RATE SENSITIVITY GAP $ (2,938) $ (409) $2,922 $ 770 $2,212 - ------------------------------------------------------------------------------------------------------------------------- CUMULATIVE INTEREST RATE SENSITIVITY GAP $ (2,938) $(3,347) $ (425) $ 345 $2,557 - -------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------- Non- interest- bearing (in millions) December 31, 1995 funds Total - ------------------------------------------------------------------------------------------------------------------------- ASSETS Interest-bearing deposits with banks $ -- $ 2,023 Federal funds sold -- 854 Securities purchased under resale agreements -- 17,958 Securities borrowed -- 6,199 Trading assets 15,901 47,893 Securities available for sale -- 6,283 Loans -- 12,633 Noninterest-earning assets and allowance for credit losses 10,159 10,159 - ------------------------------------------------------------------------------------------------------------------------- Total 26,060 104,002 - ------------------------------------------------------------------------------------------------------------------------- LIABILITIES, PREFERRED STOCK OF SUBSIDIARY AND STOCKHOLDERS' EQUITY Interest-bearing deposits -- 22,416 Trading liabilities 14,539 26,091 Securities sold under repurchase agreements -- 15,247 Other short-term borrowings -- 15,761 Long-term debt -- 9,294 Preferred stock of subsidiary -- 250 Preferred stock -- 865 Noninterest-bearing liabilities and common stockholders' equity 14,078 14,078 - ------------------------------------------------------------------------------------------------------------------------- Total 28,617 104,002 - ------------------------------------------------------------------------------------------------------------------------- Effect of off-balance sheet hedging instruments -- -- - ------------------------------------------------------------------------------------------------------------------------- INTEREST RATE SENSITIVITY GAP $(2,557) $ -- - ------------------------------------------------------------------------------------------------------------------------- CUMULATIVE INTEREST RATE SENSITIVITY GAP $ -- $ -- - -------------------------------------------------------------------------------------------------------------------------
DEPOSITS The Corporation's certificates of deposit and other time deposits issued by domestic and foreign offices in amounts of $100,000 or more, together with their remaining maturities, and other interest-bearing deposits at December 31, 1995 were as follows:
- -------------------------------------------------------------------------------- (in millions) Domestic Foreign Total - -------------------------------------------------------------------------------- Certificates of deposit of $100,000 or more 3 months or less $ 58 $ 1,710 $ 1,768 Over 3 through 6 months 163 508 671 Over 6 through 12 months 527 317 844 Over 12 months 261 160 421 - -------------------------------------------------------------------------------- Total 1,009 2,695 3,704 - -------------------------------------------------------------------------------- Other time deposits of $100,000 or more 3 months or less 132 9,892 10,024 Over 3 through 6 months 9 1,486 1,495 Over 6 through 12 months 1 777 778 Over 12 months 1 135 136 - -------------------------------------------------------------------------------- Total 143 12,290 12,433 - -------------------------------------------------------------------------------- Other 4,250 2,029 6,279 - -------------------------------------------------------------------------------- Total interest-bearing deposits $5,402 $17,014 $22,416 - --------------------------------------------------------------------------------
Deposits by foreign depositors in domestic offices amounted to $1.0 billion, $1.0 billion and $1.1 billion at December 31, 1995, 1994 and 1993, respectively. BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 101 71 DESCRIPTION OF BUSINESS ================================================================================ BANKERS TRUST NEW YORK CORPORATION Bankers Trust New York Corporation is a registered bank holding company which was incorporated in 1965. The Parent Company, which accounted for 3 percent of consolidated assets at December 31, 1995, supplies Bankers Trust Company, BT Securities Corporation and its other subsidiaries with various advisory services and coordinates their general policies and activities. The Parent Company is a legal entity separate and distinct from its subsidiaries. The rights of the Parent Company to participate in any distribution of assets of any subsidiary upon its liquidation or reorganization or otherwise are subject to the prior claims of creditors of that subsidiary, except to the extent that the Parent Company may itself be a creditor of that subsidiary and its claims are recognized. Claims on the Parent Company's subsidiaries by creditors other than the Parent Company include long-term debt and substantial obligations with respect to deposit liabilities, trading liabilities, commercial paper, securities sold under repurchase agreements and federal funds purchased, as well as various other liabilities. ORGANIZATIONAL UNITS The Corporation concentrates its financial and managerial resources on selected markets and services its clients by meeting their needs for financing, advisory, processing and sophisticated risk management solutions. The Firm also conducts its own proprietary operations. At the beginning of 1996 the Corporation realigned its personnel into the following organizational units. Investment Banking delivers the Firm's full range of financing, advisory and research products and services to its corporate, financial institution and investor clients in the United States, Canada and Europe. These include the underwriting, distribution and trading of public equity and debt (both investment grade and high-yield), private placements and structured finance, as well as merger and acquisition advisory services. The unit is also responsible for the Firm's private equity investments. Risk Management Products and Services is comprised of businesses that assist clients in the management of risk. Products and services include interest rate, currency, equity, commodity and credit derivatives, as well as risk management advisory. This business is also responsible for managing the Corporation's risk from client derivatives transactions. Trading and Positioning provides market-related products and services to the Corporation's clients and enters into securities, currency, commodity, derivatives and funding transactions on a proprietary basis. The unit is responsible for funding of the Corporation worldwide; capital and liquidity management; and the management of the Corporation's securities available for sale portfolio. Investment Management is responsible for the Firm's investment management business for pension funds, corporations and other institutional investors worldwide.* The services they provide include both the active and passive management of equities, fixed income securities and other financial instruments in many of the world's major financial markets. Client Transaction Processing is engaged in the gathering, moving and managing of assets for institutional clients throughout the world. It delivers many of the Corporation's processing, fiduciary and trust services, such as cash management, custody and clearance and deposit and credit services, to corporations, financial institutions and governments and their agencies around the world. It also provides to sponsors of U.S. defined benefit and defined contribution plans the Corporation's full range of services, including recordkeeping and administrative services and portfolio measurement. Geographically-Based Businesses provides many of the products and services referred to above, principally to clients in Asia, Australia/New Zealand and Latin America. Prominent among these are financial advisory services to governments and both state-owned and privatized businesses. This group also sells, trades and distributes restructured loans, bonds, equities and other instruments of Latin American and other emerging markets issuers. Private Bank/Asset-Based Lending/Portfolio is a group of diverse businesses. The Private Bank provides asset management, banking and fiduciary services to high net worth individuals. Asset-Based Lending provides collateralized credit to medium-sized companies in the U.S. Portfolio manages a portion of the Firm's loans to clients. *Australian funds management financials are reported in the results of Bankers Trust Australia Limited. Insurance Activities The Corporation has two majority-owned Chilean subsidiaries, known as Consorcio and Compensa. Consorcio underwrites pension-related life and disability insurance, and both companies sell pension-related life annuities. BUSINESS FUNCTIONS Because of the close interrelationship among its organizational units, the Corporation breaks down and analyzes its business on the basis of five business functions, which represent the Firm's core business activities. A business function is often common to two or more of the organizational units described above. Descriptions of each of the Firm's five business functions appear on page 33. BANKERS TRUST COMPANY The Parent Company's principal banking subsidiary is Bankers Trust Company, which, along with its subsidiaries ("BTCo"), accounted for 70 percent of the Corporation's consolidated assets at December 31, 1995. BTCo, founded in 1903, is among the largest commercial banks in New York City and the United States, based on total assets. BTCo originates loans and other forms of credit, accepts deposits, arranges financings and provides numerous other commercial banking and financial services. BTCo provides a broad range of financial advisory services to its clients. 102 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 72 - -------------------------------------------------------------------------------- It also engages in the trading of currencies, securities, derivatives and commodities. BT SECURITIES CORPORATION BT Securities Corporation ("BT Securities"), a wholly-owned subsidiary of the Parent Company, accounted for 21 percent of the Corporation's consolidated assets at December 31, 1995. BT Securities is a primary dealer in U.S. Government securities. It also structures, underwrites and deals in money market instruments, commercial paper, and municipal, asset-backed and corporate debt and equity securities. BT Securities also provides advisory and private placement services and structures a broad range of derivative transactions for clients. In addition, BT Securities acts as agent for BTCo in the origination and sale of loans. BANKERS TRUST (DELAWARE) Bankers Trust (Delaware) is a state bank chartered under the laws of Delaware, which, along with its subsidiaries, accounted for 1 percent of the Corporation's consolidated assets at December 31, 1995. Bankers Trust (Delaware) engages in commercial banking activities, with an emphasis on lending, funding and corporate finance. BT Commercial Corporation, its wholly-owned subsidiary, is a commercial finance company. SUPERVISION AND REGULATION BT Securities entered into a settlement agreement with the Securities and Exchange Commission (the "SEC") and the Commodity Futures Trading Commission (the "CFTC") concerning all investigations of the Corporation and its subsidiaries by those agencies with respect to the conduct of its business in privately negotiated over-the-counter derivatives (the "Derivatives"). As part of that settlement entered into on December 22, 1994, the SEC and the CFTC agreed not to pursue further Bankers Trust related entities concerning Derivatives matters prior to the settlement date (although they did reserve the right to pursue individuals), and BT Securities paid $10 million in civil penalties and agreed to and has retained independent consultants to examine its conduct of the Derivatives business. The Corporation also has agreed to implement such consultants' recommendations. The Corporation, BTCo and BT Securities have also entered into a Written Agreement with the Federal Reserve Bank of New York and a Memorandum of Understanding with the New York State Banking Department concerning the Corporation's leveraged derivative transaction business, each of which call for an independent counsel review and the establishment of a Compliance Committee of the Board of Directors of the Corporation to monitor compliance with the Written Agreement and the Memorandum of Understanding. The Corporation cannot predict the effect on the derivative business in general, or the Corporation's derivative business in particular, of these events or of the current legislative, regulatory and media attention being given to the derivatives industry. Details with respect to the foregoing are set forth in the Corporation's Current Reports on Form 8-K dated December 4, 1994, December 22, 1994 and January 19, 1995 which have been filed with the SEC. The Parent Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, and as such is required to register with the Federal Reserve Board. As a registered bank holding company, the Parent Company is required to file with the Federal Reserve Board certain reports and information and is restricted in its acquisitions, certain of which are subject to approval by the Federal Reserve Board. In addition, the Parent Company would be required to obtain the approval of the New York State Banking Department in order for it to acquire certain bank and nonbank subsidiaries. The Parent Company and its nonbank subsidiaries are affiliates of BTCo and Bankers Trust (Delaware) within the meaning of applicable federal statutes, and such banks are therefore subject to restrictions on loans and other extensions of credit to the Parent Company and certain other affiliates and on certain other types of transactions with them or involving their securities. BTCo is subject to the supervision of, and to examination by, the New York State Banking Department, the Federal Reserve Board and the Federal Deposit Insurance Corporation. Bankers Trust (Delaware) is subject to regulation by the Office of the State Bank Commissioner of the State of Delaware and by the Federal Deposit Insurance Corporation. See Note 14 of Notes to Financial Statements for the required reserve balances maintained by the Corporation's subsidiary banks at a Federal Reserve Bank and limitations on the availability of BTCo's undistributed earnings for the payment of dividends. BT Securities is registered as a broker-dealer in all 50 states, the District of Columbia and Puerto Rico and with the Securities and Exchange Commission, and is a member of the National Association of Securities Dealers, Inc. and is therefore subject to supervision by those regulators. As a bank securities affiliate, BT Securities is subject to the supervision of the Federal Reserve Board, which has imposed limitations on the gross revenue from certain activities of such affiliates and certain other conditions governing their operations. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") provides for cross-guarantees of the liabilities of insured depository institutions pursuant to which any bank or savings association subsidiary of a holding company may be required to reimburse the FDIC for any loss or anticipated loss to the FDIC that arises from a default of any of such holding company's other subsidiary banks or savings associations or assistance provided to such an institution in danger of default. In December 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was enacted. FDICIA substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and revised several other federal banking statutes. FDICIA establishes five capital tiers, ranging from "well capitalized," to "critically undercapitalized." A depository institution is well capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure. Under BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 103 73 - -------------------------------------------------------------------------------- FDICIA, an institution that is not well capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market; in addition, "pass through" insurance coverage may not be available for certain employee benefit accounts. FDICIA also requires an undercapitalized depository institution to submit an acceptable capital restoration plan to the appropriate federal bank regulatory agency. One requisite element of such a plan is that the institution's parent holding company must guarantee compliance by the institution with the plan, subject to certain limitations. In the event of the parent holding company's bankruptcy, the guarantee, and any other commitments that the parent holding company has made to federal bank regulators to maintain the capital of its depository institution subsidiaries, would be assumed by the bankruptcy trustee and entitled to priority in payment. Based on their respective regulatory capital ratios at December 31, 1995, both BTCo and Bankers Trust (Delaware) are well capitalized, based on the definitions in the regulations issued by the Federal Reserve Board and the other federal bank regulatory agencies setting forth the general capital requirements mandated by FDICIA. See "Capital Resources" on page 42 for information regarding the Corporation's and BTCo's regulatory capital ratios. FDICIA contains numerous other provisions, including new reporting requirements, termination of the "too big to fail" doctrine except for special cases, limitations on the FDIC's payment of deposits at foreign branches and revised regulatory standards for, among other things, real estate lending and capital adequacy. A federal depositor preference statute was enacted in 1993 providing that deposits and certain claims for administrative expenses and employee compensation against an insured depository institution would be afforded a priority over other general claims against such an institution, including federal funds and letters of credit, in the "liquidation or other resolution" of such an institution by any receiver. In addition to banking and securities laws, regulations and regulatory agencies governing the Corporation worldwide, the Corporation also is subject to various other laws, regulations and regulatory agencies throughout the United States and in other countries. Furthermore, various proposals, bills and regulations have been and are being considered in the United States Congress, the New York State Legislature and various other governmental regulatory and legislative bodies, which could result in changes in the profitability and governance of the Corporation. It cannot be predicted whether new legislation or regulations will be adopted and, if so, how they would affect the Corporation. References under the caption "Supervision and Regulation" to applicable statutes, regulations and orders are brief summaries of portions thereof which do not purport to be complete and which are qualified in their entirety by reference thereto. FORWARD LOOKING STATEMENT AND COMPETITION The Corporation is continuing to refine its different business lines, and as part of that exercise, management of these business lines, working with senior management of the Corporation, has developed a business plan which has as one of its goals the return of the Corporation's net income for 1996 to a level that is more comparable with net income seen in 1994 rather than the lower level of net income seen in 1995. Actual results could differ materially for the reasons set forth in "Important Factors Relating to Forward Looking Statements" hereinafter set forth, and the goals set by management might not be met. The establishment of rational goals for each business organization of the Firm and accountability during the year by each such organization for performance measured against those goals are an essential element of the Corporation's strategy. The banking and securities businesses are intensely competitive and the Corporation competes for business with other financial services organizations, including major commercial and investment banks and finance and investment advisory companies, located in principal cities throughout the world. IMPORTANT FACTORS RELATING TO FORWARD LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements. In connection with certain statements made in this report and those that may be made in the future by or on behalf of the Corporation which are identified as forward-looking statements, the Corporation notes that the following important factors, among others, could cause actual results to differ materially from those set forth in any such forward-looking statements. Further, such forward-looking statements speak only as of the date on which such statement or statements are made, and the Corporation undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. The business and profitability of a large financial services organization such as the Corporation is influenced by prevailing economic conditions and governmental policies, both foreign and domestic. The actions and policy directives of the Federal Reserve Board determine to a significant degree the cost and the availability of funds obtained from money market sources for lending and investing. Federal Reserve Board policies and regulations also influence, directly and indirectly, the rates of interest paid by commercial 104 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 74 - -------------------------------------------------------------------------------- banks on their interest-bearing deposits and may also impact the value of financial instruments held by the Corporation. The nature and impact on the Corporation of future changes in economic and market conditions and monetary and fiscal policies, both foreign and domestic, are not predictable and are beyond the Corporation's control. In addition, these conditions and policies can impact the Corporation's customers and counterparties which may increase the risk of default on their obligations to the Corporation and its affiliates. They can also affect the competitive conditions in the markets and products within which the Corporation operates, which can have an adverse impact of the Corporation's ability to maintain its revenue streams. As part of its ongoing business, the Corporation assumes financial exposures to interest rates, currencies, equities and other financial products. In doing so, the Corporation is subject to unforeseen events which may not have been anticipated or which may have effects which exceed those assumed within its risk management processes. This risk can be accentuated by volatility and reduction in liquidity in those markets which in turn can impact the Corporation's ability to hedge and trade the positions concerned. In addition, the Corporation is dependent on its ability to access the financial markets for its funding needs. The Corporation's international operations, which are widely diversified geographically and vary from country to country, involve certain economic, political and legal risks which differ from those associated with its domestic operations. These risks include, among others, the possibility of expropriation of assets, exchange rate fluctuations, severe reductions in business levels, restrictions on the withdrawal of funds, balance-of-payments problems and changes in laws and regulations. In addition, in certain jurisdictions the Corporation's operations may involve legal uncertainties. Further, certain domestic, as well as foreign, financial institutions with which the Corporation competes may not be subject to the same regulatory restrictions as the Corporation which may make it more difficult for the Corporation to compete with those institutions for business. As noted in "Supervision and Regulation" on page 103, the Corporation is regulated by and subject to various domestic and international regulators. The actions of these regulators can have an impact on the profitability and governance of the Corporation. Increases by regulatory authorities of minimum capital, reserve, deposit insurance and other financial viability requirements can also affect the Corporation's profitability. The Corporation is subject to operational and control risk which is the potential for loss caused by a breakdown in communication, information, processing and settlement systems or processes or a lack of compliance with the procedures on which they rely either within the Corporation or within the broader financial systems infrastructure. As with any large financial institution, the Corporation is also subject to the risk of litigation and to an unexpected or adverse outcome in such litigation. Competitive pressures in the marketplace and unfavorable or adverse publicity and news coverage can have the effect of lessening customer demand for the Corporation's services. Ultimately, the Corporation's businesses and their success are dependent on the Corporation's ability to attract and retain high quality employees. PROPERTIES BTCo owns a 42-story office building located at 280 Park Avenue, a 10-story office building at 4 Albany Street and a 39-story building known as One Bankers Trust Plaza, all in Manhattan, and a 998-year leasehold interest in an eight-story office building in the Broadgate complex in London, England. The other principal office premises leased are seven stories of a 37-story building at 14-16 Wall Street in Manhattan, an eight-story building in Jersey City, New Jersey and a three-story building in Nashville, Tennessee and a significant portion of a 42-story office building in Sydney, Australia. Portions of certain of these properties are leased to tenants or subtenants. In addition to the offices referred to above, branch offices and locations for other activities are occupied in cities throughout the world under various types of ownership and leaseholds. See Note 7 of Notes to Financial Statements for additional information concerning lease commitments. LEGAL PROCEEDINGS In the fourth quarter of 1994, Procter & Gamble brought a lawsuit against BTCo. In the first quarter of 1995 the suit was amended to include BT Securities Corporation, and in the third quarter of 1995, the suit was further amended to add claims under Title IX of the Organized Crime Control Act of 1970. The suit seeks to void and rescind two interest rate swap transactions entered into with BTCo and claims $195.5 million in compensatory damages and unspecified punitive damages. Management believes that the expected potential financial impact should be covered by existing reserves. Various other actions and proceedings involving the Parent Company and various of its subsidiaries are currently pending. Management, after discussions with counsel, does not anticipate that losses, if any, resulting from such other actions and proceedings would be material. BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 105 75 - -------------------------------------------------------------------------------- EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the names and ages of the executive officers of the Parent Company, positions held and the year from which held. These officers are elected annually by the Board of Directors. There are no family relationships among such persons. ----------------------------------------------------------------------------- *Charles S. Sanford, Jr., 59(1) Chairman of the Board Chairman of the Board of the Parent Company and of BTCo since 1996; Chairman of the Board and Chief Executive Officer since 1987, and Director since 1982; Deputy Chairman 1986-1987; President of the Parent Company and of BTCo 1983-1986; Executive Vice President in charge of the Resources Management Department of BTCo 1974-1983. *Frank N. Newman, 53 President and Chief Executive Officer Mr. Newman joined the Parent Company and BTCo as Senior Vice Chairman and a Director on September 21, 1995. On October 19, 1995 he was elected President, and to the additional office of Chief Executive Officer effective January 1, 1996. Mr. Newman, former Deputy Secretary of the United States Treasury, joined the Treasury in 1993 after six years with BankAmerica Corporation where he was the chief financial officer and vice chairman of the board. Mark Bieler, 50 Executive Vice President Executive Vice President of the Parent Company since 1987 and Managing Director of BTCo since 1992; Executive Vice President of BTCo 1987-1992; Senior Vice President and head of the Human Resources Department in 1985. Mr. Bieler is in charge of the Human Resources Department. *Richard H. Daniel, 49 Executive Vice President, Chief Financial Officer and Controller Effective on February 5, 1996, Mr. Daniel joined the Parent Company as Executive Vice President, Chief Financial Officer (Principal Financial Officer) and Controller, and BTCo as Managing Director, Chief Financial Officer (Principal Financial Officer) and Controller. He formerly held the positions of chief financial officer of Federal Home Loan Mortgage Corporation from 1994 to 1996, and executive vice president and director of financial analysis and planning at BankAmerica Corporation from 1987 to 1994. Joseph A. Manganello, Jr., 60 Executive Vice President and Chief Credit Officer Executive Vice President and Chief Credit Officer of the Parent Company since 1988; Managing Director of BTCo since 1992 and Chief Credit Officer since 1984; Executive Vice President of BTCo 1982-1992; Department Head of the United States Department of BTCo prior to 1984. He is in charge of the Credit Policy Department. *George J. Vojta, 60 Vice Chairman Vice Chairman and Director of the Parent Company and BTCo since January 1992; Executive Vice President 1984-1992. He is a member of various operating committees that oversee the Private Bank, Asset-Based Lending and Portfolio. Melvin A. Yellin, 53 Executive Vice President and General Counsel Executive Vice President and General Counsel of the Parent Company and Managing Director and General Counsel of BTCo effective January 1, 1996; Senior Vice President (Chief Legal Officer) of the Parent Company and Managing Director (Chief Legal Officer) of BTCo effective September 28, 1995; Managing Director and Deputy General Counsel of BTCo 1992-1995. Vice President and Counsel 1981-1992. He is in charge of the Legal Department. * Management Committee (1) Mr. Sanford announced his intention to retire as Chairman and Director effective April 16, 1996. 106 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 76 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-5920 BANKERS TRUST NEW YORK CORPORATION (Exact name of registrant as specified in its charter) NEW YORK 13-6180473 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 280 PARK AVENUE NEW YORK, NY 10017 (Address of principal (Zip code) executive offices) (212) 250-2500 (Registrant's telephone number, including area code) Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange on Title of each class which registered - ------------------------------------------------------------------------------------------------------------- Common Stock, $1 par value New York Stock Exchange Preferred Share Purchase Rights New York Stock Exchange 8.55% Cumulative Preferred Stock, Series I ($250 Liquidation Preference) New York Stock Exchange Depositary Shares representing a one-fourth interest in a share of 8.55% Cumulative Preferred Stock, Series I ($100 Liquidation Preference) New York Stock Exchange 7 5/8% Cumulative Preferred Stock, Series O American Stock Exchange Depositary Shares representing a one-tenth interest in a share of 7 5/8% Cumulative Preferred Stock, Series O ($250 Liquidation Preference) American Stock Exchange 7.50% Cumulative Preferred Stock, Series P American Stock Exchange Depositary Shares representing a one-fortieth interest in a share of 7.50% Cumulative Preferred Stock, Series P ($1,000 Liquidation Preference) American Stock Exchange Adjustable Rate Cumulative Preferred Stock, Series Q New York Stock Exchange Depositary Shares representing a one-hundredth interest in a share of Adjustable Rate Cumulative Preferred Stock, Series Q ($2,500 Liquidation Preference) New York Stock Exchange Adjustable Rate Cumulative Preferred Stock, Series R New York Stock Exchange Depositary Shares representing a one-hundredth interest in a share of Adjustable Rate Cumulative Preferred Stock, Series R ($2,500 Liquidation Preference) New York Stock Exchange 7 3/4% Cumulative Preferred Stock, Series S ($2,500 Liquidation Preference) New York Stock Exchange Depository Shares representing a one-hundredth interest in a share of 7 3/4% Cumulative Preferred Stock, Series S ($2,500 Liquidation Preference) New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting stock held by non-affiliates of the registrant as of January 31, 1996: Common Stock, $1 par value, $5,105,271,563. Indicate the number of shares outstanding of each of the registrant's classes of common stock as of January 31, 1996: Common Stock, $1 par value, 79,241,268 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 1996 Annual Meeting of Stockholders are incorporated by reference into Part III. BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 107 77
- -------------------------------------------------------------------------------- FORM 10-K CROSS-REFERENCE INDEX Part I Item No. Pages 1. Business Description of Business 102 Supplemental Financial Data International Operations 82 Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential 98 Investment Portfolio 69 Loan Portfolio 54, 55, 56, 57, 58, 59, 66, 67, 70 Summary of Credit Loss Experience 51, 70 Deposits 99, 101 Return on Equity and Assets 32 Short-Term Borrowings 71 2. Properties 105 3. Legal Proceedings 105 4. Submission of Matters to a Vote of Security Holders * - Executive Officers of the Registrant 106 Part II 5. Market for Registrant's Common Equity and Related Stockholder Matters 77, 97 6. Selected Financial Data 32 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 33 8. Financial Statements and Supplementary Data Bankers Trust New York Corporation and Subsidiaries (Consolidated) 62-65 Notes to Financial Statements 66 Report of Independent Auditors 96 Selected Quarterly Financial Data 97 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure * Part III The information required by Items 10 through 13 in this part is omitted pursuant to Instruction G of Form 10-K since the Corporation intends to file with the Commission a definitive Proxy Statement, pursuant to Regulation 14A, not later than 120 days after December 31, 1995. Part IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) (1) Financial Statements-See Item 8. (2) Financial Statement Schedules All schedules normally required by Form 10-K are omitted since they are either not applicable or the required information is shown in the financial statements or the notes thereto. (3) Exhibits 3. Articles of Incorporation and By-laws, as amended ** 4. Instruments Defining the Rights of Security Holders, Including Indentures (ii) Long-Term Debt Indentures *** 10. Material Contracts (ii) (D) Leases for Principal Premises described on page 104 ** (iii) (A) Management Contracts and Compensation Plans ** 12. Statements Re Computation of Ratios ** 21. Subsidiaries of the Registrant ** 23. Consent of Experts ** 24. Power of Attorney ** 27. Financial Data Schedule 99. Additional Exhibits (i) Preferred Share Purchase Rights ** (ii) Written Agreement dated December 4, 1994 among Bankers Trust New York Corporation, Bankers Trust Company, BT Securities Corporation and the Federal Reserve Bank of New York. ** (iii) BT Securities offers of settlement to the Securities and Exchange Commission (the "SEC") and the Commodity Futures Trading Commission (the "CFTC"), the SEC's Order Instituting Proceedings and its Findings and Order and the CFTC's Complaint and its Opinion and Order. ** (b) Reports on Form 8-K-The Corporation filed three reports on Form 8-K during the quarter ended December 31, 1995. -- The report dated October 19, 1995 filed the Corporation's Press Release dated October 19, 1995, which announced earnings for the quarter ended September 30, 1995, and announced that Frank N. Newman had been elected president of Bankers Trust New York Corporation. -- The report dated November 6, 1995 filed an underwriting agreement covering the issuance and sale by Bankers Trust New York Corporation of 7 1/8% Subordinated Notes due 2010 and various other exhibits related to the issuance. -- The reported dated November 10, 1995 filed the By-laws, as amended, of Bankers Trust New York Corporation, and filed an underwriting agreement covering the issuance and sale by Bankers Trust New York Corporation of 7 1/2% Subordinated Notes due 2015 and various other exhibits related to the issuance.
- -------------------------------------------------------------------------------- * Not applicable. ** A copy of any exhibit not contained herein may be obtained by writing to James T. Byrne, Jr., Office of the Secretary, Bankers Trust New York Corporation, One Bankers Trust Plaza, 130 Liberty Street, Mail Stop 2310, New York, NY 10006. *** The Corporation hereby agrees to furnish to the Commission, upon request, a copy of any instruments defining the rights of holders of long-term debt issued by the Parent Company or its subsidiaries. This report on Form 10-K has not been approved or disapproved by the Securities and Exchange Commission nor has the Commission passed upon the accuracy or adequacy of this report. Portions of the 1995 Annual Report to the Corporation's stockholders are not required by the Form 10-K report and are not "filed" as part of the Form 10-K. Only those sections of the Annual Report referenced in the above index are incorporated in the Form 10-K. 108 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 78 - -------------------------------------------------------------------------------- FORM 10-K SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 7, 1996. Bankers Trust New York Corporation By /s/ JAMES T. BYRNE, JR. ---------------------------------------------------------- (James T. Byrne, Jr., Senior Vice President and Secretary) - -------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 7, 1996. CHARLES S. SANFORD, JR.* Chairman of the Board - ------------------------- and Director (Charles S. Sanford, Jr.) FRANK N. NEWMAN* President, Chief - ------------------------- Executive Officer and (Frank N. Newman) Director (Principal Executive Officer) RICHARD H. DANIEL* Executive Vice President, - ------------------------- Chief Financial Officer (Richard H. Daniel) and Controller (Principal Financial Officer) GEOFFREY M. FLETCHER* Senior Vice President - ------------------------- (Principal Accounting (Geoffrey M. Fletcher) Officer) GEORGE B. BEITZEL* Director - ------------------------- (George B. Beitzel) PHILLIP A. GRIFFITHS* Director - ------------------------- (Phillip A. Griffiths) WILLIAM R. HOWELL* Director - ------------------------- (William R. Howell) JON M. HUNTSMAN* Director - ------------------------- (Jon M. Huntsman) VERNON E. JORDAN, JR.* Director - ------------------------- (Vernon E. Jordan, Jr.) HAMISH MAXWELL* Director - ------------------------- (Hamish Maxwell) DONALD F. McCULLOUGH* Director - ------------------------- (Donald F. McCullough) N. J. NICHOLAS JR.* Director - ------------------------- (N. J. Nicholas Jr.) RUSSELL E. PALMER* Director - ------------------------- (Russell E. Palmer) PATRICIA CARRY STEWART* Director - ------------------------- (Patricia Carry Stewart) GEORGE J. VOJTA* Vice Chairman - ------------------------- and Director (George J. Vojta) *By /s/ JAMES T. BYRNE, JR. --------------------------------------- (James T. Byrne, Jr., Attorney-in-Fact) BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 109 79 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 EXHIBITS TO FORM 10-K Filed Under THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 BANKERS TRUST NEW YORK CORPORATION 110 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 80 BANKERS TRUST NEW YORK CORPORATION EXHIBIT INDEX TO FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 3. Articles of Incorporation and By-laws, as amended Restated Certificate of Incorporation of the Registrant filed with the State of New York on June 9, 1988 (1) Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant filed with the State of New York on August 30, 1989 (1) Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant filed with the State of New York on June 14, 1990 (1) Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant filed with the State of New York on March 20, 1992 (1) Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant filed with the State of New York on October 27, 1992 (1) Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant filed with the State of New York on January 21, 1993 (1) Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant filed with the State of New York on June 1, 1993 (1) Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant filed with the State of New York on August 18, 1993 (2) Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant filed with the State of New York on March 25, 1994 (3) Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant filed with the State of New York on August 22, 1994 (4) Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant filed with the State of New York on June 29, 1995 (5) By-laws as in effect October 19, 1995 (6) 4. Instruments Defining the Rights of Security Holders, Including Indentures (ii) Long-Term Debt Indentures 108 10. Material Contracts (ii) (D) Leases for Principal Premises Described on Page 105 Lease Agreement relating to the seven stories of a 37-story building located at 14-16 Wall Street (7) Lease Agreement relating to the eight-story building located in Jersey City, New Jersey (8) Lease Agreement relating to the eight-story building located in London, England (9) Lease Agreement relating to the three-story building in Nashville, Tennessee (10) Synopsis of the Agreement for Sub-Lease and the Sub-Lease relating to the 42-story building located in Sydney, Australia (11) (iii) (A) Management Contracts and Compensation Plans (1) Employment Contract for Frank N. Newman 113 (2) Severance Agreement with Eugene B. Shanks 117 1994 Stock Option and Stock Award Plan (12) 1991 Stock Option and Stock Award Plan (13) 1985 Stock Option and Stock Award Plan (14) January, 1989 amendments thereto (11) Additional Capital Accumulation Plan (15) The Supplemental Executive Retirement Plan (9) Deferred Compensation Plan for Directors (6) January, 1989 amendments to the Deferred Compensation Plan for Directors and The Supplemental Executive Retirement Plan (12) 12. Statements Re Computation of Ratios Computation of Consolidated Ratios of Earnings to Fixed Charges 135 Computation of Consolidated Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends Requirements 136 21. Subsidiaries of the Registrant 137 23. Consent of Experts 138 24. Power of Attorney 139 27. Financial Data Schedule 141 99. Additional Exhibits (i) Rights Agreement dated as of February 22, 1988 describing the terms of the Preferred Share Purchase Rights (9) (ii) Written Agreement dated December 4, 1994, among Bankers Trust New York Corporation, Bankers Trust Company, BT Securities Corporation and the Federal Reserve Bank of New York (17) (iii) (1) Offer of Settlement of BT Securities Corporation before the Securities and Exchange Commission, dated December 21, 1994 (16) (2) Offer of Settlement of Respondent BT Securities Corporation before the Commodity Futures Trading Commission, dated December 21, 1994 (16) (3) Order Instituting Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Sections 15(b) and 21c of the Securities Act of 1934, and Findings and Order Imposing Remedial Sanctions. In re BT Securities Corporation, Securities Act of 1933 Release No. 7124 (Dec. 22, 1994) (16) (4) Complaint Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act and Opinion and Order Accepting Offer of Settlement, Making Findings and Imposing Remedial Sanctions, in re BT Securities Corporation, CFTC Docket No. 95-2 (Dec. 22, 1994) (16)
(NOTE: FOOTNOTE REFERENCES FOR THIS INDEX APPEAR ON THE NEXT PAGE.) BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 111 81 BANKERS TRUST NEW YORK CORPORATION EXHIBIT INDEX TO FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 FOOTNOTE REFERENCES (1) This document is incorporated by reference from Bankers Trust New York Corporation's Form 8-K dated September 24, 1993, file number 1-5920. (2) This document is incorporated by reference from Bankers Trust New York Corporation's Form 8-K dated August 6, 1993, file number 1-5920. (3) This document is incorporated by reference from Bankers Trust New York Corporation's Form 8-K dated March 21, 1994, file number 1-5920. (4) This document is incorporated by reference from Bankers Trust New York Corporation's Form 8-K dated August 12, 1994, file number 1-5920. (5) This document is incorporated by reference from Bankers Trust New York Corporation's Form 8-K dated June 29, 1995, file number 1-5920. (6) This document is incorporated by reference from Bankers Trust New York Corporation's Form 8-K dated November 10, 1995, file number 1-5920. (7) This document is incorporated by reference from Bankers Trust New York Corporation's Form 10-K for the year ended December 31, 1986, file number 1-5920. (8) This document is incorporated by reference from Bankers Trust New York Corporation's Form 10-K for the year ended December 31, 1983, file number 1-5920. (9) This document is incorporated by reference from Bankers Trust New York Corporation's Form 10-K for the year ended December 31, 1987, file number 1-5920. (10) This document is incorporated by reference from Bankers Trust New York Corporation's Form 10-K for the year ended December 31, 1992, file number 1-5920. (11) This document is incorporated by reference from Bankers Trust New York Corporation's Form 10-K for the year ended December 31, 1993, file number 1-5920. (12) This document is incorporated by reference from Bankers Trust New York Corporation's Registration Statement on Form S-8 (No. 33-54971) as filed on August 9, 1994. (13) This document is incorporated by reference from Bankers Trust New York Corporation's Registration Statement on Form (No. 33-41014) as filed on June 10, 1991. (14) This document is incorporated by reference from Bankers Trust New York Corporation's Proxy Statement dated as of March 21, 1988, file number 1-5920. (15) This document is incorporated by reference from Bankers Trust New York Corporation's Form 10-K for the year ended December 31, 1989, file number 1-5920. (16) This document is incorporated by reference from Bankers Trust New York Corporation's Form 8-K dated December 22, 1994, file number 1-5920. (17) This document is incorporated by reference from Bankers Trust New York Corporation's Form 10-K for the year ended December 31, 1994, file number 1-5920. 112 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES EX-10.III.A1 2 MANAGEMENT CONTRACTS AND COMPENSATION PLANS 1 EXHIBIT 10(iii)(A)(1) Bankers Trust Company 130 Liberty Street, New York, New York 10006 Mark Bieler Mailing Address: Director of Human Resources P.O. Box 318, Church Street Station Tel: 212-250-9680 New York, New York 10008 Fax: 212-250-7808 September 21, 1995 Mr. Frank N. Newman 3030 K Street Apt. 113 Washington, D. C. 20007 Dear Frank, On behalf of the Board of Directors of Bankers Trust, Charlie Sanford and Gene Shanks, it gives me great pleasure to extend to you the following offer of employment. Your title will be Senior Vice Chairman and you will be a Director of both the Holding Company and the Bank. In this capacity, you will be the third ranking officer in the Firm. As Senior Vice Chairman you will be responsible for the Chief Financial and Administrative Officer functions which include Finance, Administration, Corporate Tax, Real Estate Management, Investor Relations, Corporate Affairs, Audit, Legal, Compliance and Control, Human Resources and Corporate Technology. Upon the retirement of the Chairman you will become the second ranking officer in the Firm, with appropriate line business responsibilities added to your role as determined by the then Chairman. Your minimum annual salary will be $500,000, paid monthly. For the years 1995-1997 you will also receive the following: 1995 - A $500,000 payment on your start date (less mandatory deductions) and 100,000 stock options granted on your start date. 50,000 will vest on your first anniversary and the other 50,000 on your second anniversary. The price of the option will be the average of the high and low trading prices on the date of the award, 10,000 shares of stock will be awarded under the Partnership Equity Plan (PEP) to you on December 29, 1995, and 113 2 Page 2/... Mr. Frank N. Newman September 21, 1995 You will be eligible for the ADCAP Plan on your start date and $100,000 will be credited to your account on December 29, 1995. This Plan is in lieu of any Section 415 excess pension plan. 1996 - A minimum guaranteed bonus of $2,000,000 (less mandatory deductions), $1,500,000 of which will be paid in cash in early January and the balance paid in December. 50,000 stock options which are usually awarded in June. 60,000 PEP units. 1997 - A minimum guaranteed bonus of $2,500,000 (less mandatory deductions) paid in December. 50,000 stock options which are usually awarded in June. 60,000 PEP units. The 1997 bonus (and, to the extent possible consistent with the above, the 1996 bonus) will be paid in accordance with the terms of the Equity Participation Plan which means each will be paid approximately 70% in cash and 30% in equity. The Firm will provide you with a car and driver. You will be responsible for any personal income tax resulting from the related imputed income under tax rules. All of your interests in BT's compensation plans (e.g., Guaranteed Bonuses, PEP, Stock Options, EPS Shares and ADCAP) will be protected in the event of a Change of Control. In brief, all deferred compensation paid or awarded to you will vest to the extent unvested and be immediately paid out upon a Change of Control triggering occurrence. Your Change of Control rights are included in all awarded agreements you receive. A complete description of Change of Control triggering events and related terms are provided in Section 5 of the Bankers Trust New York Corporation 1994 Stock Option and Stock Award Plan (attached). You will receive relocation assistance as follows: - Temporary living accommodations for one year. - Movement of household goods (the Bank will arrange for the shipment of your household affects). 114 3 Page 3/... Mr. Frank N. Newman September 21, 1995 - Usual and customary closing costs on the sale of your existing home and usual and customary costs on the acquisition of a primary residence in the NY area including 2 points on purchase. - Lump sum of $10,000 (net of taxes) relocation allowance for miscellaneous relocation expenses. - Payment of an amount which on an after-tax basis will be sufficient to cover any tax liability on the above relocation benefits. - If you elect, you will be eligible for a home-buyout of your existing residence based on the average of two independent appraisals. Our offer is contingent upon your completing the enclosed employment package. The package includes an employment application, a security data sheet, a personal information form, and confirmation of employment authorization (which includes completing the Immigration and Naturalization Services Form I-9). You will also have to read and sign a Substance Abuse Policy Employee Acknowledgment Form which is enclosed in the envelope marked "Medical Evaluation." In addition, it will be necessary for you to successfully complete a medical evaluation, background investigation, including but not limited to a credit investigation, and all other components of the Bank's pre-employment screening process to the Bank's satisfaction. You may schedule an appointment for your medical evaluation either at our office at BT Plaza or if you wish in Washington, D.C. by calling me. Please complete and bring the forms in the envelope marked "Medical Evaluation" to your appointment. You will be eligible to start employment once you have received notification of the successful completion of your medical evaluation and credit investigation which we estimate will take 48 hours. The Corporation recently reviewed its policies and procedures as they relate to the handling of information of a proprietary or confidential nature. Included in this policy is a requirement that all employee and related accounts be maintained in designated accounts from Brokerage firms approved by Bankers Trust; currently, BT Brokerage, NatWest Investor Corporation and Smith Barney Inc. Additional information pertaining to this policy can be found in the enclosed booklet entitled "Confidential Information, Insider Trading and Related Matters." 115 4 Page 4/... Mr. Frank N. Newman September 21, 1995 You will be entitled to receive all compensation and benefits specified in this letter unless your employment is terminated prior to 12/31/97 for gross misconduct. Needless to say we all are very enthusiastic at the prospect of your joining Bankers Trust. Please call me if you have any questions regarding our offer. Sincerely, /s/MARK BIELER --------------------------- Mark Bieler Director of Human Resources September 21, 1995 Agreed to /s/FRANK N. NEWMAN - ------------------ Frank N. Newman September 21, 1995 116 EX-10.III.A2 3 SEVERANCE AGREEMENT WITH EUGENE B. SHANKS 1 EXHIBIT 10(iii)(A)(2) SETTLEMENT AND NON-DISCLOSURE AGREEMENT EUGENE B. SHANKS, JR., on his own behalf and on behalf of his heirs, executors, administrators, attorneys, successors and assigns (hereinafter collectively referred to as "Shanks"), and BANKERS TRUST NEW YORK CORPORATION, on its own behalf and on behalf of its subsidiaries, divisions, affiliates, successors and assigns, and its and their respective officers, directors, agents, representatives and employees (hereinafter collectively referred to as "Bankers Trust" or the "Company"), have reached the within agreement ("Agreement") in settlement of any and all issues related to Shanks's employment with, and separation from the employ of, Bankers Trust, such Agreement being reached on the following terms and conditions: 1. Shanks has resigned his positions as President and Director of Bankers Trust effective October 19, 1995. Shanks will continue as an employee of Bankers Trust until October 31, 1996, and will receive the compensation and benefits set forth in paragraph 2 below. 2. In full and complete satisfaction of all known and unknown claims against Bankers Trust, and in consideration for 117 2 executing this Agreement, Shanks will be entitled to the following: a. Bankers Trust shall provide Shanks with base salary continuation, payable monthly through Shanks' off-payroll date of October 31, 1996. b. Bankers Trust will make a lump-sum payment to Shanks of $500,000, payable on or about the eighth day after Shanks executes this Agreement. c. Bankers Trust shall pay Shanks a bonus for the 1995 performance year, consistent with bonuses for other senior executives of the Company on or about the eighth day after Shanks executes this Agreement. d. Shanks' outstanding Employee Stock Options shall continue to become exercisable in accordance with their terms and, notwithstanding any provisions of such options to the contrary, shall remain exercisable for the original terms under which they have been granted. That is, options which have previously been granted to Shanks and are currently outstanding may be exercised for the remainder of the original ten year exercise period. Any options remaining unexercised at the end of the respective periods will be forfeited. Shanks understands that upon approval of this Agreement by the Human Resources Committee, any Incentive Stock 118 3 Options outstanding will be deemed "Modified" and thereby lose their tax qualified status. e. Bankers Trust acknowledges that Shanks has a Restricted Stock award outstanding of 31,000 shares. Shanks' 31,000 shares award, granted on January 17, 1995, will vest and be distributed to him on the first day of January 1996 that executive officers of the Company may sell shares of Bankers Trust stock pursuant to the Company's quarterly "window period" policy. f. Shanks' shares awarded under the Partnership Equity Plan ("PEP") will continue to be deferred until the fifth anniversary following the end of each related performance year. That is, Shanks' 1992, 1993, 1994 and 1995 Awards will be distributable to him in December of 1997, 1998, 1999 and 2000, respectively. Shares acquired by net EPS reinvestments through Shanks' off-payroll date will immediately vest. For the remainder of their respective deferral periods, shares in Shanks' PEP account will continue to earn and pay out quarterly dividends. The 75% floor protection on the original shares awarded to Shanks (not shares acquired through reinvested net EPS credits) remains intact until distribution. g. Bankers Trust acknowledges that all salary paid to Shanks through October 31, 1995 (subject to applicable tax limits) qualifies under the formula to compute Shanks' benefits 119 4 under the PartnerShare Plan. In addition, on or about the eighth day after Shanks executes this Agreement, Shanks will receive a cash payment of $15,000 in lieu of Plan contributions based on Shanks' monthly severance allowance. h. To the extent Shanks receives a bonus for the 1995 performance year, Bankers Trust will make a contribution to Shanks' ADCAP account equal to 10% of such bonus (up to twice Shanks' salary) effective on or about the eighth day after Shanks executes this Agreement. In addition, Bankers Trust will add $1.5 million to Shanks' ADCAP account on or about the eighth day after he executes this Agreement. The amount in Shanks' ADCAP account following the addition of such $1.5 million will be distributed to him promptly following such addition and the balance in his ADCAP account will be distributed to him promptly following the contribution in respect of his bonus for the 1995 performance year. i. Shanks' ESOP account balance will continue to have dividends reinvested until distribution following his off-payroll date. Shanks' election to receive his PartnerShare account will govern the distribution of his ESOP account. Shanks may receive the value of his ESOP account in either shares of Bankers Trust stock or cash. 120 5 j. All salary paid to Shanks through his off-payroll date (subject to tax limits) will qualify under the formula to compute Shanks' benefit under the terms of the Company's qualified Pension Plan. k. Shanks shall be eligible to receive additional pension benefits from his grandfathered rights in the Supplemental Retirement Plan, or "SERP", pursuant to the terms of said Plan. Shanks shall receive the actuarial value of his entitlements under the SERP as a lump sum payment of $256,600 on or about the eighth day after he executes this Agreement. l. Shanks' coverage in the Company's group medical and dental plans shall continue through his off-payroll date. Thereafter, Shanks may voluntarily continue coverage for himself and his eligible dependents at his own expense for a period of up to eighteen (18) months consistent with applicable federal law. m. Shanks' coverage in the Company's life and disability plans shall continue through October 31, 1996, pursuant to the terms of said plans, and will end on such date. n. On October 31, 1996, Shanks' off-payroll date, he will receive the cash equivalent of his unused vacation days for the 1995 calendar year. 121 6 Shanks acknowledges that the payments and benefits set forth above shall be subject to applicable federal, state and local taxes, and all other deductions as required by law and Bankers Trust policy. Shanks shall have no duty to seek other employment or to become self-employed to mitigate any payments or benefits to which he is entitled pursuant to this Agreement nor shall there be any offset against such payments or benefits in the event of such employment or self-employment. If Shanks dies prior to the payment of any of the amounts set forth in this paragraph, Shanks' estate or his designated beneficiary shall be paid such amounts. 3. Shanks agrees that he will not publicly or privately disparage Bankers Trust or any of the Company's products, services, divisions, affiliates, related companies or current or former officers, directors, trustees, employees, agents, administrators, representatives or fiduciaries. The Company agrees that it will not publicly or privately disparage Shanks. Notwithstanding the foregoing, neither Shanks nor the Company will be restricted from providing information about the other as required by a court or governmental agency or by applicable law. Further, the Company shall not be restricted from reporting information regarding Shanks' performance while employed by the Company to internal or external auditors, special counsel 122 7 or investigators, any applicable enforcement agencies, regulatory agencies, insurance carriers or in litigation involving Shanks or the Company. Shanks hereby acknowledges and further agrees that the payments and benefits described herein will be forfeited (including the right to exercise any outstanding stock options), if he materially violates any material provisions of this Agreement. In any such instances, Shanks also agrees to tender back all amounts he received from Bankers Trust pursuant to paragraph 2 of this Agreement which is over and above that to which he is normally entitled under standard Bankers Trust policy, within thirty days of his being advised by Bankers Trust of the conduct or behavior which the Company believes to be a material violation of a material provision of this Agreement. Should Shanks not tender back such consideration as set forth above and, as a result, should Bankers Trust be forced to take legal action to recover such amounts, and should Bankers Trust be the prevailing party in such litigation, Shanks shall be responsible to Bankers Trust for all costs incurred in bringing such action, including but not limited to, its reasonable attorneys' fees. Nothing set forth herein should be construed as preventing Bankers Trust from seeking any additional rights or remedies it may have 123 8 at law or in equity in the event of a material violation of a material provision of this Agreement. 4. In exchange for the consideration described in Paragraph 2, Shanks hereby releases Bankers Trust from any and all liability arising from any and all acts including, but not limited to, those arising out of his employment relationship with the Company or under any contract, tort, federal, state, or local fair employment practices or civil rights law including, but not limited to, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967, the Older Worker Benefits Protection Act of 1990, the Civil Rights Act of 1866, the Americans With Disabilities Act of 1990, the Employee Retirement Income Security Act of 1974, the New York State and New York City Civil Rights Laws, or any claim for physical or emotional distress or injuries, or any other duty or obligation of any kind or description. This release shall apply to all known, unknown, unsuspected and unanticipated claims, liens, injuries and damages including, but not limited to, claims of employment discrimination, indemnity for discharge, or claims sounding in tort or in contract, express or implied, as of the date of the execution of this Agreement. Notwithstanding the foregoing, Shanks does not release his right to have the Company 124 9 perform its obligations under this Agreement, including without limitation, his right to (i) indemnification pursuant to this paragraph 4, or any other right to indemnification by the Company, (ii) any compensation or benefits pursuant to any plan or program that is part of the subject matter of this Agreement, (iii) pension, health or similar benefits under the Company's retirement programs. Shanks also agrees not to initiate any legal action, charges or complaints against Bankers Trust in any forum whatsoever, in connection with the claims released by him pursuant to this paragraph 4. In the event any such actions, charges or complaints are asserted in the future by or on behalf of Shanks, other than a shareholders' derivative action not initiated by Shanks, or initiated without his direct or indirect involvement, a material violation of a material provision of this Agreement shall be deemed to have occurred, entitling Bankers Trust to the return of the consideration set forth in this Agreement which is over and above that to which Shanks is normally entitled under standard Company policy, as well as the attorneys' fees incurred by Bankers Trust in defending such action, charge or complaint. Bankers Trust expressly denies that it has violated any such law, statute, ordinance, contract, duty or obligation whatsoever, or that it committed any tort or engaged in any 125 10 wrongful conduct with respect to Shanks. Shanks acknowledges that the consideration described in this Agreement is in excess of that to which he was otherwise entitled upon his termination under either applicable law, Company policy, or pursuant to any contractual agreement he may have with Bankers Trust. Bankers Trust agrees that Shanks is entitled to indemnification to the fullest extent provided by the Company for Directors and Officers as set forth in the Company's bylaws as may exist from time to time, but in no event less favorable than available to other Directors and Officers. Shanks shall also be entitled to directors' and officers' liability insurance in accordance with the terms of the policy provided by the Company for its directors and officers as amended from time to time. Subject to the terms of such bylaws, Shanks shall have the right to choose his own counsel in connection with any investigatory or legal proceedings, in which Shanks may be or become involved, and shall be reimbursed for reasonable attorneys' fees in connection with any such investigation or litigation. Additionally, Shanks shall be given reasonable access to Company books and records relevant to such investigatory or legal proceedings to the extent permitted by the Company's bylaws or applicable rules, regulations or law. 126 11 5. The terms of this Agreement, the claims that have been or could have been raised against Bankers Trust as of the date of this Agreement, and the facts and circumstances underlying any such claim shall not be admissible by Shanks in any litigation or proceeding in any forum, except as required by law, for any purpose other than to secure enforcement of the terms and conditions of this Agreement. 6. Neither Shanks nor the Company will publish, publicize, or disseminate or cause to be published, publicized or disseminated or permit to be published, publicized or disseminated, directly or indirectly, and will keep entirely confidential any information, data or documents (1) relating to Shanks' employment with and separation from Bankers Trust, except that either party may discuss the fact that he was employed by Bankers Trust, his title, salary, compensation, responsibilities and that he resigned his position; or (2) relating to the terms of this Agreement or the fact that this Agreement exists, except for (a) the purpose of enforcing this Agreement should that ever become necessary; or (b) disclosures required by a court or governmental agency or by applicable law, or to any investigatory or regulatory agency with authority over the Company. Shanks may disclose the terms of this Agreement to his spouse, accountants, 127 12 attorneys or tax preparers, or prospective employers, provided that disclosures to prospective employers shall be limited to the provisions of paragraphs 6 and 7, and, the Company may disclose the terms of this Agreement to its accountants, attorneys, tax preparers, its employees who have a need to know such terms, and as otherwise set forth above. In the event this Agreement is disclosed publicly pursuant to applicable law, the provisions of this nondisclosure paragraph, with respect to disclosing the terms of this Agreement, shall no longer be applicable. Shanks further agrees that he will not publish, publicize or disseminate, or cause to be published, publicized or disseminated or permit to be published, publicized or disseminated, directly or indirectly, and will keep entirely confidential any confidential information, data or documents relating to the operations of the Company, including any trade secrets or other proprietary information, except as may be required by a court or governmental agency. Confidential information shall mean all information that is not known or available to the public concerning the business of the Company relating to its financial products, product development, trade secrets, customers, suppliers, finances, and business plans and strategies, including know-how, financial information concerning the Company and its customers and specifications, programs, 128 13 documentation and manuals relating to all financial models, telecommunications and computer systems, software, hardware and applications developed or used by Bankers Trust. Confidential information shall include information that is, or becomes, known to the public as a result of a breach by Shanks of the provisions of this paragraph 6. Bankers Trust reserves the right to seek appropriate damages, including attorneys' fees and injunctive relief, should Shanks violate this Agreement. 7. Shanks agrees that during the one-year period following the execution of this Agreement, he will not, directly or indirectly, personally solicit or induce or cause any third party to solicit or induce any Bankers Trust employees to work for him or any competitor of the Company, it being understood that if any such employee contacts Shanks on his or her own initiative, Shanks may thereafter discuss with such employee his or her working for him or a competitor, provided that in such situations, Shanks agrees to notify the Chief Legal or Human Resources Officer of Bankers Trust and advise either executive of such contact and of the employee(s) making such contact, before extending any offer of employment to such individual(s). 8. The failure of either party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver thereof or deprive such party of the right 129 14 thereafter to insist upon strict adherence to that term or any other term of the Agreement. Any waiver must be in writing and signed by Shanks or any authorized officer of the Company, as the case may be. 9. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to its conflicts of laws provisions. 10. If any of the provisions, terms, clauses, or waivers or releases of claims or rights contained in this Agreement are declared illegal, unenforceable, or ineffective in a legal forum, such provisions, terms, clauses, waivers, releases or claims or rights shall be deemed severable, such that all other provisions, terms, clauses, waivers, releases of claims and rights contained in this Agreement shall remain valid and binding upon both parties. 11. Shanks agrees to voluntarily cooperate with the independent counsel's investigation of Bankers Trust's derivatives business, and with the Company in connection with any threatened, actual or future litigation or investigations by federal, state or local agencies involving the Company, whether administrative, civil or criminal in nature, in which and to the extent his cooperation is deemed necessary by the Company in its discretion. The Company shall reimburse Shanks for all reasonable out-of- 130 15 pocket travel expenses incurred by him in connection with his voluntary cooperation under this paragraph 11. Such expenses shall be reimbursed after his submission to the Company of statements in such reasonable detail as the Company may require. Shanks shall be entitled to a fee of $2,500 per day (pro-rated for a portion of a day) for furnishing such voluntary cooperation, such fee to be paid promptly following his submission of a statement therefor. Shanks shall not, however, be entitled to any per diem fee during any period he is receiving salary continuation payments pursuant to paragraph 2 of this Agreement. If Shanks reasonably determines after being asked to voluntarily cooperate by Bankers Trust in connection with any such litigation or threatened litigation, that he requires independent legal representation, he and the Chief Legal Officer of Bankers Trust will reasonably endeavor to decide if such counsel is necessary subject to the terms of the bylaws of the Company. Should Bankers Trust and Shanks agree that counsel is necessary, Bankers Trust, subject to the bylaws of the Company, will reimburse Shanks for his reasonable attorneys' fees in connection with such representation. 12. Shanks acknowledges that he has had up to twenty-one (21) days from the date he received this Agreement to consider the terms of this Agreement and further, acknowledges that he is 131 16 fully aware of its contents and of its legal effects. Shanks is also hereby advised in writing by Bankers Trust to consult with an attorney regarding this Agreement. 13. This Agreement has been executed freely, knowingly and voluntarily by Shanks without duress, coercion, or undue influence, with a full and free understanding of its terms. This Agreement is revocable by either party for seven (7) days following its execution, after which time it shall become effective and enforceable. Notice of revocation must be sent in writing to the other party prior to the eighth day after this Agreement is signed by the party seeking revocation. If Shanks wishes to revoke his agreement, his written notice of revocation must be received within the seven (7) day revocation period by Peter Gurney, Managing Director, at the following address: Bankers Trust New York Corporation, 130 Liberty Street, New York, New York. 14. This Agreement supersedes all prior oral and written agreements, if any, with respect to the subject matter hereof 132 17 between the parties. This Agreement may not be changed except by a writing signed by Shanks and an authorized management representative of Bankers Trust. AGREED: AGREED: BANKERS TRUST NEW YORK CORPORATION on behalf of Bankers Trust /s/EUGENE B. SHANKS, JR. /s/MARK BIELER - ------------------------ -------------- EUGENE B. SHANKS, JR. MARK BIELER January 19, 1996 January 23, 1996 - ---------------- ---------------- Date Date On this 19 day of January, 1996, before me personally came Eugene B. Shanks, Jr. to me known to be the individual described in and who executed the foregoing Settlement and Nondisclosure Agreement, and duly acknowledged to me that he executed the same. /s/RICHARD CORAZZA - ------------------ Notary Public On this 23 day of January, 1996, before me personally came Mark Bieler, authorized representative for Bankers Trust New York Corporation, to me known to be the individual described in and who executed the foregoing Settlement and Non-disclosure Agreement, and duly acknowledged to me that he executed the same. /s/PERRY V. CAPITANI - -------------------- Notary Public 133 EX-12.A 4 COMPUTATION OF CONSOLIDATED RATIOS OF EARNINGS 1 EXHIBIT 12(a) BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES COMPUTATION OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES ($ in millions)
YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------------------------ 1991 1992 1993 1994 1995 - ------------------------------------------------------------------------------------------------------------------------------------ EARNINGS: 1. Income (loss) before income taxes and cumulative effects of accounting changes $ 834 $ 906 $1,550 $ 869 $ 215 2. Add: Fixed charges excluding capitalized interest (Line 10) 3,614 3,099 3,148 3,884 5,356 3. Less: Equity in undistributed income of unconsolidated subsidiaries and affiliates 31 40 30 45 28 - ------------------------------------------------------------------------------------------------------------------------------------ 4. Earnings including interest on deposits 4,417 3,965 4,668 4,708 5,543 5. Less: Interest on deposits 1,589 1,119 1,013 965 1,359 - ------------------------------------------------------------------------------------------------------------------------------------ 6. Earnings excluding interest on deposits $2,828 $2,846 $3,655 $3,743 $4,184 - ------------------------------------------------------------------------------------------------------------------------------------ FIXED CHARGES: 7. Interest expense $3,585 $3,072 $3,122 $3,858 $5,330 8. Estimated interest component of net rental expense 29 27 26 26 26 9. Amortization of debt issuance expense -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ 10. Total fixed charges including interest on deposits and excluding capitalized interest 3,614 3,099 3,148 3,884 5,356 11. Add: Capitalized interest -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ 12. Total fixed charges 3,614 3,099 3,148 3,884 5,356 13. Less: Interest on deposits (Line 5) 1,589 1,119 1,013 965 1,359 - ------------------------------------------------------------------------------------------------------------------------------------ 14. Fixed charges excluding interest on deposits $2,025 $1,980 $2,135 $2,919 $3,997 - ------------------------------------------------------------------------------------------------------------------------------------ CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES: Including interest on deposits (Line 4/Line 12) 1.22 1.28 1.48 1.21 1.03 - ------------------------------------------------------------------------------------------------------------------------------------ Excluding interest on deposits (Line 6/Line 14) 1.40 1.44 1.71 1.28 1.05 - ------------------------------------------------------------------------------------------------------------------------------------
BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 135 EX-12.B 5 COMPUTATION OF CONSOL. RATIOS OF EARNINGS TO COMB. 1 EXHIBIT 12(b) BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES COMPUTATION OF CONSOLIDATED RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENTS ($ in millions)
Year Ended December 31, - ----------------------------------------------------------------------------------------------------------------------------------- 1991 1992 1993 1994 1995 - ----------------------------------------------------------------------------------------------------------------------------------- EARNINGS: 1. Income before income taxes and cumulative effects of accounting changes $ 834 $ 906 $1,550 $ 869 $ 215 2. Add: Fixed charges excluding capitalized interest (Line 13) 3,614 3,099 3,148 3,884 5,356 3. Less: Equity in undistributed income of unconsolidated subsidiaries and affiliates 31 40 30 45 28 - ----------------------------------------------------------------------------------------------------------------------------------- 4. Earnings including interest on deposits 4,417 3,965 4,668 4,708 5,543 5. Less: Interest on deposits 1,589 1,119 1,013 965 1,359 - ----------------------------------------------------------------------------------------------------------------------------------- 6. Earnings excluding interest on deposits $2,828 $2,846 $3,655 $3,743 $4,184 - ----------------------------------------------------------------------------------------------------------------------------------- PREFERRED STOCK DIVIDEND REQUIREMENTS: 7. Preferred stock dividend requirements $ 34 $ 30 $ 23 $ 28 $51 8. Ratio of income from continuing operations before income taxes to income from continuing operations after income taxes 125% 142% 145% 141% 145% - ----------------------------------------------------------------------------------------------------------------------------------- 9. Preferred stock dividend requirements on a pretax basis $ 43 $ 43 $ 33 $ 39 $ 74 - ----------------------------------------------------------------------------------------------------------------------------------- FIXED CHARGES: 10. Interest Expense $3,585 $3,072 $3,122 $3,858 $5,330 11. Estimated interest component of net rental expense 29 27 26 26 26 12. Amortization of debt issuance expense -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- 13. Total fixed charges including interest on deposits and excluding capitalized interest 3,614 3,099 3,148 3,884 5,356 14. Add: Capitalized interest -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- 15. Total fixed charges 3,614 3,099 3,148 3,884 5,356 16. Add: Preferred stock dividend requirements--pretax (Line 9) 43 43 33 39 74 - ----------------------------------------------------------------------------------------------------------------------------------- 17. Total combined fixed charges and preferred stock dividend requirements on a pretax basis 3,657 3,142 3,181 3,923 5,430 18. Less: Interest on deposits (Line 5) 1,589 1,119 1,013 965 1,359 - ----------------------------------------------------------------------------------------------------------------------------------- 19. Combined fixed charges and preferred stock dividend requirements on a pretax basis excluding interest on deposits $2,068 $2,023 $2,168 $2,958 $4,071 - ----------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENTS: Including interest on deposits (Line 4/Line 17) 1.21 1.26 1.47 1.20 1.02 - ----------------------------------------------------------------------------------------------------------------------------------- Excluding interest on deposits (Line 6/Line 19) 1.37 1.41 1.69 1.27 1.03 - -----------------------------------------------------------------------------------------------------------------------------------
136 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES EX-21 6 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 BANKERS TRUST NEW YORK CORPORATION SUBSIDIARIES OF THE REGISTRANT DECEMBER 31, 1995
Subsidiary(1) State of Incorporation ------------- ---------------------- Bankers Trust Company New York BT Securities Corporation Delaware BT Holdings (NY) Inc. New York Bankers Trust (Delaware) Delaware
All other subsidiaries of the Corporation, in the aggregate, would not constitute a significant subsidiary, as defined. (1) Subsidiaries' names listed hereon are names under which such subsidiaries do business. BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 137 EX-23 7 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-3 Nos. 2-96104, 33-13278, 33-27498, 33-45699, 33-58340, 33-50395, 33-51615 and 33-65301, and Form S-8 Nos. 2-67517, 2-97972, 33-20693, 33-21564, 33-41014, 33-52329 and 33-54971) and in the related Prospectuses of Bankers Trust New York Corporation of our report dated January 25, 1996, with respect to the consolidated financial statements of Bankers Trust New York Corporation included in this Annual Report (Form 10-K) for the year ended December 31, 1995. /S/ ERNST & YOUNG LLP --------------------- Ernst & Young LLP New York, New York March 7, 1996 138 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES EX-24 8 POWER OF ATTORNEY 1 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors and officers of Bankers Trust New York Corporation hereby constitute and appoint Charles S. Sanford, Jr., Frank N. Newman, George J. Vojta, Melvin A. Yellin, Richard H. Daniel and James T. Byrne, Jr., or any one of them, their true and lawful attorney or attorneys and agent or agents, with the power and authority to sign the names of the undersigned to the Annual Report for the year 1995 of Bankers Trust New York Corporation on Form 10-K pursuant to Section 13 of the Securities and Exchange Act of 1934 and each of the undersigned does hereby ratify and confirm all that said attorney or attorneys and agent or agents or any one of them shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has subscribed these presents. February 20, 1996 Bankers Trust New York Corporation By /S/ CHARLES S. SANFORD, JR. ------------------------------- Charles S. Sanford, Jr. Chairman of the Board /s/ CHARLES S. SANFORD, JR. - ------------------------------------------ Charles S. Sanford, Jr. Chairman of the Board and Director /s/ FRANK N. NEWMAN - ------------------------------------------ Frank N. Newman President, Chief Executive Officer and Director (Principal Executive Officer) /s/ RICHARD H. DANIEL - ------------------------------------------ Richard H. Daniel Executive Vice President, Chief Financial Officer and Controller (Principal Financial Officer) /s/ GEOFFREY M. FLETCHER - ------------------------------------------ Geoffrey M. Fletcher Senior Vice President (Principal Accounting Officer) BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES 139 2 February 20, 1996 /s/ GEORGE B. BEITZEL - ------------------------------------------ George B. Beitzel Director /s/ PHILLIP A. GRIFFITHS - ------------------------------------------ Phillip A. Griffiths Director /s/ WILLIAM R. HOWELL - ------------------------------------------ William R. Howell Director /s/ JON M. HUNTSMAN - ------------------------------------------ Jon M. Huntsman Director /s/ VERNON E. JORDAN, JR. - ------------------------------------------ Vernon E. Jordan, Jr. Director /s/ HAMISH MAXWELL - ------------------------------------------ Hamish Maxwell Director /s/ DONALD F. McCULLOUGH - ------------------------------------------ Donald F. McCullough Director /s/ N.J. NICHOLAS JR. - ------------------------------------------ N.J. Nicholas Jr. Director /s/ RUSSELL E. PALMER - ------------------------------------------ Russell E. Palmer Director /s/ PATRICIA C. STEWART - ------------------------------------------ Patricia C. Stewart Director /s/ GEORGE J. VOJTA - ------------------------------------------ George J. Vojta Director 140 BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES EX-27 9 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE BANKERS TRUST NEW YORK CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CONDITION AT DECEMBER 31, 1995 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 2,337 2,023 854 47,893 6,283 0 0 12,633 992 104,002 25,708 31,008 6,167 9,294 0 865 84 4,035 104,002 941 392 1,877 5,886 1,360 5,069 817 31 180 2,898 311 311 0 0 215 2.03 2.02 1.05 744 26 100 0 1,252 330 39 992 266 222 504 Short-Term borrowings include the following: Securities sold under repurchase agreements 15,247 Other short-term borrowings 15,761 Total 31,008 Other liabilities include the following: Accounts payable and accrued expenses 3,931 Other liabilities 2,236 Total 6,167 Other interest income includes the following: Interest-bearing deposits with banks 207 Federal funds sold 104 Securities purchased under resale agreements 1,057 Securities borrowed 509 Total 1,877
-----END PRIVACY-ENHANCED MESSAGE-----