10-Q 1 d25691_10-q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-5920 BANKERS TRUST CORPORATION (Exact name of registrant as specified in its charter) New York 13-6180473 (State or other jurisdiction of (IRS employer incorporation or organization) identification no.) 130 Liberty Street New York, New York 10006 (Address of principal executive offices) (Zip code) (212) 250-2500 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] The registrant is a wholly-owned subsidiary of Deutsche Bank AG. As of the date hereof, 1 share of the registrant's Common Stock par value $1 per share, was issued and outstanding. BANKERS TRUST CORPORATION March 31, 2001 FORM 10-Q TABLE OF CONTENTS

2 PART I. FINANCIAL INFORMATION BANKERS TRUST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (in millions) (unaudited)

3 BANKERS TRUST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (in millions) (unaudited)

(a) Amounts are net of income tax benefits of $29 million and $19 million for the three months ended March 31, 2001 and 2000, respectively. (b) Amounts are net of income tax (benefit) expense of $(1) million and $2 million for the three months ended March 31, 2001 and 2000, respectively. (c) Amount is net of income tax expense of $10 million for the three months ended March 31, 2000. 4 BANKERS TRUST CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ($ in millions, except par value)

* Unaudited. 5 BANKERS TRUST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY (in millions, except par value) (unaudited)

* 1 share, $1 par value. 6 BANKERS TRUST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (in millions) (unaudited)

7 BANKERS TRUST CORPORATION AND SUBSIDIARIES CONSOLIDATED SCHEDULE OF NET INTEREST REVENUE (in millions) (unaudited)

8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS CHANGES On June 4 1999, Deutsche Bank AG ("Deutsche Bank"), through its U.S. holding corporation, Taunus Corporation ("Taunus"), acquired all of the outstanding shares of common stock of Bankers Trust Corporation ("Bankers Trust") from its shareholders (the "Acquisition"). For further discussion of the Acquisition and related disposition of assets, see pages 3 and 29 of Bankers Trust Corporation's Annual Report on Form 10-K for the year ended December 31, 2000. In connection with the Acquisition, and in addition to the foregoing transactions, Bankers Trust Corporation together with its subsidiaries (the "Corporation" or the "Firm") has transferred and will continue to transfer certain entities/businesses and financial assets and liabilities to other Deutsche Bank related entities. The consideration received and to be received for such transactions was and will be fair market value of the financial assets and liabilities at and on the date of transfer. The Corporation anticipates further curtailment of certain of its activities as a result of its ongoing reorganization and integration into Deutsche Bank. 9 RESULTS OF OPERATIONS The Corporation reported income of $110 million for the three months ended March 30, 2001 as compared to $25 million for the first three months of 2000. The Corporation's historical financial statements are not fully comparable for all periods presented due to the transfer of certain assets to Deutsche Bank entities, including the transfer of the Corporation's wholly-owned subsidiary, BT Holdings (New York), Inc. ("BTH") to DB U.S. Financial Markets Holding Corporation ("DBUSH") on September 29, 2000. BUSINESS SEGMENT RESULTS Business segment results, which are presented in accordance with accounting principles generally accepted in the United States of America, are derived from internal management reports. The Corporation realigned its businesses into two client-focused groups: the Corporate and Investment Bank Group and the Private Clients and Asset Management Group to correspond to the reorganization implemented by Deutsche Bank during the first quarter of 2001. Corporate and Investment Bank Group includes the business segments Corporate Banking and Securities and Transaction Banking. Corporate Banking and Securities includes sales, trading and corporate finance activities. Transaction Banking consists of trade services, cash management, custody and corporate trust and agency services. Private Clients and Asset Management Group includes the business segments Private Banking and Asset Management. Private Banking consists of banking services to private clients, self-employed individuals as well as to smaller business clients, and offers a wide variety of banking products to these clients including financial planning services and market research and investment strategies for high net worth individuals. Asset Management consists of the institutional asset management and retail investment fund businesses. The reorganization by Deutsche Bank also involved the transfer of its principal investing business to an ancillary business unit, Corporate Investments. Corporate Investments includes venture capital and private equity investments prior to the transfer of BTH at the end of the third quarter of 2000 and the corresponding cessation of most principal investment activities by the Corporation. Prior period results have been restated for the changes in management structure discussed above. 10 The following tables present results by Business Segment:

* There were no material intersegment revenues among the business segments.

* There were no material intersegment revenues among the business segments. 11 BUSINESS SEGMENT RESULTS (continued) The Corporate and Investment Bank Group recorded pretax income of $97 million in the first quarter of 2001, compared to pretax income of $2 million in the prior year quarter. Corporate Banking and Securities recorded pretax income of $114 million in the first quarter of 2001, compared to pretax income of $43 million in the prior year quarter. The decrease in total net revenue from the prior year quarter is mainly due to lower revenue from corporate finance fees. The decrease in expenses is mainly due to lower accruals for performance-based pay in the current period due to reduced market activity. Transaction Banking recorded a pretax loss of $17 million in the first quarter of 2001, compared to a pretax loss of $41 million in the prior year quarter. The current quarter included lower revenue from fiduciary and funds management activities and commissions. The prior year period included severance expenses related to certain senior management changes. The Private Clients and Asset Management Group recorded a pretax loss of $15 million in the first quarter of 2001, compared to pretax income of $21 million in the 2000 first quarter. Private Banking recorded pretax income of $10 million in the first quarter of 2001, compared to a pretax loss of $2 million in the prior year quarter. The increase in pretax income from the prior year period is mainly due to higher revenue from commissions and lower funding costs. Asset Management recorded a pretax loss of $25 million in the first quarter of 2001, compared to pretax income of $23 million in the prior year quarter. The decrease in pretax income from the prior year period is mainly due to lower revenue from fiduciary and funds management activities and higher personnel-related expenses. Corporate Investments recorded no activity in the first quarter of 2001 due to the transfer of BTH at the end of the third quarter of 2000. This segment recorded pretax income of $57 million in the prior year period. Other generally includes revenue and expenses that have not been allocated to business segments and the results of smaller businesses that are not included in the main business segments. 12 BUSINESS SEGMENT RESULTS (continued) The following table reconciles total pretax income for business segments to consolidated pretax income (in millions): THREE MONTHS ENDED MARCH 31, 2001 2000 ------------------------------------------------------------------------------- Total pretax income reported for business segments $ 82 $ 80 Earnings associated with unassigned capital 65 69 SFAS 133 transition adjustment 13 -- Other unallocated amounts (32) (41) ------------------------------------------------------------------------------- Consolidated pretax income $ 128 $ 108 =============================================================================== REVENUE Net Interest Revenue The table below presents net interest revenue, average balances and average rates. The tax equivalent adjustment is made to present the revenue and yields on certain assets, primarily tax-exempt securities and loans, as if such revenue were taxable.

Net interest revenue for the first quarter of 2001 totaled $188 million, up $72 million, or 62 percent, from the first quarter of 2000. In the first quarter of 2001, the interest rate spread was 1.15 percent compared to 0.41 percent in the prior year period. Net interest margin increased to 1.68 percent from 0.98 percent. The yield on interest-earning assets increased by 59 basis points and the cost of interest-bearing liabilities decreased by 15 basis points. Average interest-earning assets totaled $45.4 billion for the first quarter of 2001, down $2.8 billion from the same period in 2000. The decrease was primarily attributable to a decrease in trading assets. Average interest-bearing liabilities totaled $41.5 billion for the first quarter of 2001, down $2.5 billion from the same period in 2000. The decrease was primarily attributable to a decrease in interest-bearing deposits. 13 Revenue (continued) Noninterest Revenue Trading revenue was down $10 million from the first quarter of 2000. The decrease is primarily attributable to the transfer of BTH in the third quarter of 2000. Fiduciary and funds management revenue was down $31 million, or 15 percent, from the first quarter of 2000. The decrease is due primarily to lower revenues from custodian fees and incentive/performance fees due principally to declining asset prices and reduced levels of market activity. Corporate finance fees of $22 million decreased $15 million from the $37 million earned in the first quarter of 2000. The decline is primarily attributable to lower revenue for syndication, commitment and financial advisory fees reflecting lower levels of market activity. Other fees and commissions of $59 million decreased $21 million from the prior year quarter primarily due to lower revenue for fees in lieu of compensating balances, guarantee fees and brokers' commissions. Other noninterest revenue totaled $107 million compared to $191 million in the prior year period. The current quarter reflected lower revenue from mark-to-market adjustments on equity securities due to the transfer of BTH in the third quarter of 2000. Provision and allowances for credit losses The allowances for credit losses represents management's estimate of probable losses that have occurred as of the date of the financial statements. The allowance for credit losses-loans is reported as a reduction of loans and the allowance for credit losses for other credit-related items is reported in other liabilities. 14 The provisions for credit losses and the other changes in the allowances for credit losses are shown below (in millions).

(a) Reflects the allowance for credit losses-loans of legal entities transferred to Deutsche Bank on the date of transfer and of legal entities sold on the date of sale. (b) Comprised of the following components: Specific allowance $ 356 $ 235 Inherent loss* 90 187 ---------------- -------------- $ 446 $ 422 ================ ============== *Includes country risk

15 Expenses As compared to the first quarter of 2000, salaries and commissions expense decreased $12 million, or 10 percent, primarily due to a decrease in the average number of employees due to staff reductions throughout 2000. Incentive compensation and employee benefits decreased $27 million, or 23 percent from the prior year quarter, resulting from the previously mentioned decrease in the average number of employees. In addition, there was a decrease in outplacement and counseling services resulting from the termination of employees in connection with the Acquisition. Other noninterest expense decreased $158 million from the prior year period. The prior year quarter included charges payable to a Deutsche Bank affiliated company relating to compensation arrangements. INCOME TAXES Income tax expense for the first quarter of 2001 amounted to $18 million, compared to income tax expense of $83 million in the first quarter of 2000. The effective tax rate was 14 percent for the current quarter and 77 percent for the prior year quarter. The decrease in the effective tax rate is primarily due to a decrease in state and local income taxes. In addition, the prior year quarter included a deferred tax valuation allowance. 16 Balance sheet analysis The following table highlights the changes in the balance sheet. Since quarter-end balances can be distorted by one-day fluctuations, an analysis of changes in the quarterly averages is provided to give a better indication of balance sheet trends.

17 TRADING DERIVATIVES The Corporation manages trading positions in a variety of derivative contracts. All positions are reported at fair value and changes in fair values are reflected in trading revenue as they occur. The following table reflects the gross fair values and balance sheet amounts of trading derivative financial instruments:

(a) As reflected on the balance sheet in "Trading Assets" and "Trading Liabilities." 18 DERIVATIVES USED FOR HEDGING PURPOSES On January 1, 2001, the Corporation adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as further amended by SFAS 138, established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires companies to recognize all derivatives on the balance sheet as assets or liabilities measured at fair value. The transition adjustment related to SFAS 133 on January 1, 2001 resulted in an increase in net income of $8 million (net of tax of $5 million.) This amount was due to the adjustment required to bring certain hedging derivatives to fair value at January 1, 2001, offset by the adjustment required to bring the related hedged items to fair value, pursuant to the SFAS 133 transition provisions for past hedging relationships characterized as fair value hedges. The Corporation uses derivatives for hedging purposes to manage exposures to interest rate risk associated with certain liabilities, primarily long-term debt. For example, the majority of the Corporation's derivatives used for hedging purposes involve interest rate swaps used to transform fixed-rate-paying liabilities into variable-rate-paying liabilities. These hedging relationships are designated as fair value hedges under SFAS 133 and accordingly, the changes in the fair value of the derivatives used as hedges are generally offset by the changes in the fair value of the hedged liabilities. Any hedge ineffectiveness, that is, the difference between the change in fair value of the derivative and the change in fair value of the hedged liabilities, is recognized primarily in other noninterest revenue in the consolidated statement of income. The ineffective portion of the fair value hedges was immaterial for the three months ended March 31, 2001. The adoption of SFAS 133 may cause volatility in the Corporation's earnings, comprehensive income and stockholder's equity. The FASB continues to deliberate potential changes to the new rules, the effects of which cannot be presently anticipated. 19 Regulatory capital The Corporation's banking subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. The Federal Reserve Board's ("FRB") risk-based capital guidelines address the capital adequacy for a bank. These guidelines include a definition of capital, a framework for calculating risk-weighted assets, and minimum risk-based capital ratios to be maintained by a bank. A bank's risk-based capital ratios are calculated by dividing its qualifying capital by its risk-weighted assets. The FRB also has a minimum Leverage ratio that is used as a supplement to the risk-based capital ratios in evaluating the capital adequacy of a bank. The Leverage ratio is calculated by dividing Tier 1 Capital by adjusted quarterly average assets. Based on its respective regulatory capital ratios at March 31, 2001, the Corporation's principal banking subsidiary, Bankers Trust Company ("BTCo"), is well capitalized, as defined in the applicable regulations. BTCo's ratios are presented in the table below.

The following are the essential components used in calculating BTCo's risk-based capital ratios:

Both BTCo's Tier 1 and Total Capital ratios decreased by 110 basis points because of an increase in risk-weighted assets of $1.1 billion. The Leverage ratio decreased by 20 basis points primarily due to an increase of $0.5 billion in quarterly average assets. As permitted by the FRB's Supervisory Letter SR 01-1, the Corporation is no longer required to comply with the FRB's capital adequacy guidelines since it is owned and controlled by a foreign bank that is a financial holding company that the FRB has determined to be well capitalized and well managed. 20 Risk management Market risk is the risk of losses in the value of the Corporation's portfolio due to movements in market prices and rates. Market risk arises from the Corporation's trading and client activities. This section discusses changes in the Corporation's market-risk profile as characterized by the quantitative information presented on page 13 of the Corporation's Annual Report on Form 10-K for the year ended December 31, 2000. The table below shows the results of statistical measures of loss for the first three months of 2001 and all of 2000 for the set of financial assets and liabilities whose values are functions of market traded variables irrespective of accounting intention. This measure shows the 99th percentile loss potential of the Firm assuming the Firm's positions are held unchanged for 1 day. Trading Value at Risk (in millions)

The table shows that the Corporation's Trading Risk level decreased by 70 percent from $5.4 million on December 31, 2000 to $1.6 million on March 31, 2001. The primary trading account market risks remaining at March 31, 2001 are interest rate risk and equity risk. The interest rate risk stems primarily from the loan trading, loan syndication and loan securitization businesses. The equity risk is primarily from high yield distressed debt positions. As a result of the transfer of BTH and other factors, the market risk in the non-trading portfolios at March 31, 2001 is immaterial. 21 Liquidity Liquidity is the ability to have funds available at all times to meet the commitments of the Corporation. The Corporation's liquidity process has become an integral part of Deutsche Bank's global liquidity process. Management's policy is designed to maintain Deutsche Bank's ability to fund assets and meet any contractual financial obligations on a timely basis at a fair market cost under any market conditions. While Deutsche Bank and the Corporation manage their liquidity positions on a day-to-day basis to meet ongoing funding needs, the planning and management process also encompasses contingency planning to address even the most severe liquidity events. Short-term unsecured financing for the Corporation is available under an uncommitted credit line with its parent, Deutsche Bank. At March 31, 2001, this credit line totaled approximately $4.5 billion. Of this amount, approximately $3.8 billion was drawn. In addition, the Corporation has received unsecured financing from Deutsche Bank via its indirect subsidiaries in the amount of $2.3 billion. NONPERFORMING ASSETS The components of cash basis loans and other real estate are shown below ($ in millions).

There were no loans 90 days or more past due and still accruing interest at March 31, 2001 and December 31, 2000. 22 NONPERFORMING ASSETS (continued) An analysis of the changes in the Corporation's total cash basis loans during the first three months of 2001 follows (in millions): Balance, December 31, 2000 $ 840 Net transfers to cash basis loans 75 Net paydowns (5) Charge-offs (5) Transfers out of Bankers Trust Corporation* (38) ------------------------------------------------------------------------------- Balance, March 31, 2001 $ 867 =============================================================================== * Reflects the cash basis loans of certain legal entities transferred to Deutsche Bank or sold. The Corporation's total cash basis loans amounted to $867 million at March 31, 2001, up $27 million, or 3 percent, from December 31, 2000. Impaired loans under SFAS 114 were $899 million and $858 million at March 31, 2001 and December 31, 2000, respectively. Included in these amounts were $732 million and $725 million of loans that required a specific allowance of $356 million and $344 million at those same dates, respectively. The following table sets forth the approximate effect on interest revenue of cash basis loans. This disclosure reflects the interest on loans that were carried on the balance sheet and classified as cash basis at March 31 of each year. The rates used in determining the gross amount of interest, which would have been recorded at the original rate, were not necessarily representative of current market rates.

23 RELATED PARTY TRANSACTIONS In conjunction with the Acquisition and subsequent integration of the Corporation into Deutsche Bank's management structure, the Corporation has entered into various related party transactions with Deutsche Bank and its affiliated entities. For further discussion, see page 58 of the Corporation's 2000 Annual Report on Form 10-K. The Corporation also has related party balances with Deutsche Bank or affiliated companies. These balances generally include interest-bearing deposits with banks, securities purchased under resale agreements, securities loaned and securities sold under repurchase agreements, other short-term borrowings, and derivative contracts. The Corporation's results from operations may not necessarily be indicative of results that would have existed had the Corporation operated as an unaffiliated entity. These transactions are entered into in the ordinary course of business. Included in the Corporation's financial statements were the following balances with such affiliates: (in millions) March 31, 2001 December 31, 2000 ------------------------------------------------------------------------------ Interest-earning assets $ 18,036 $ 22,230 Noninterest-earning assets 1,472 2,803 Interest-bearing liabilities 15,759 14,507 Noninterest-bearing liabilities 7,990 4,815 ACCOUNTING DEVELOPMENTS In September 2000, the FASB issued SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement No. 125" ("SFAS 140"). SFAS 140 is effective for transfers occurring after March 31, 2001 and for disclosures relating to securitization transactions, retained interests in securitizations, and certain collateral received in reverse repurchase agreements and certain collateral pledged for fiscal years ending after December 15, 2000. SFAS 140 carries forward most of the provisions of SFAS 125. New criteria for nonconsolidation of qualifying special purpose entities will apply prospectively effective for the quarter commencing April 1, 2001 and therefore do not impact previously reported transactions. Management believes the adoption of SFAS 140 will not have a material impact on the Corporation's net income, stockholder's equity or total assets. 24 LITIGATION On September 25, 2000, litigation was commenced in the District Court in Geneva, Switzerland (Torras Hostench London Limited and Grupo Torras S.A. v. Bonsai Investment S.A. (formerly Bankers Trust AG) and Bankers Trust Corporation), against the Corporation and one of its subsidiaries. The litigation alleges the Corporation and its subsidiary are liable to the plaintiffs for breach of contract, breach of fiduciary duty and fraud in connection with a number of financial transactions occurring during 1990 and 1991. The plaintiffs seek damages of approximately $1 billion. The Corporation believes it and its subsidiary have meritorious defenses and intends to vigorously defend this matter. Since January 2001, Bankers Trust Company has been named as one of numerous defendants in more than a dozen actions (four of which are brought as class actions) filed in the Superior Court of the State of California, County of Los Angeles, all of which have been or are in the process of being assigned to a single judge. Pursuant to the Court's orders, plaintiffs have served two amended model complaints, one denominated as a class action (Stuber, et al. v. Merrill Lynch Pierce Fenner & Smith, Inc., et al) and the other denominated as an individual action (Gomes, et al. v. Merrill Lynch Pierce Fenner & Smith, Inc., et al). The actions allege claims of breach of contract, breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing, tortious interference with contract, negligence, fraudulent conveyance, constructive fraud, reformation, unfair business practices, and unjust enrichment as well as specific performance and declaratory relief in connection with certain individual and master structured settlement trusts established for the most part in the early 1980s in connection with the settlement of personal injury litigation. Bankers Trust Company served as trustee of certain of these trusts during a portion of the period 1994-1998. The complaints seek unspecified compensatory and punitive damages and certain other relief. The Corporation believes that it has meritorious defenses and intends to defend these matters vigorously. In addition to the matters described above, various legal actions and proceedings involving Bankers Trust and various of its subsidiaries are currently pending. Management, after discussions with counsel, does not anticipate that losses, if any, resulting from such actions and proceedings would be material. 25 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Management" on page 20 for Quantitative and Qualitative Disclosures About Market Risk. Forward-looking statements Certain sections of this report contain forward-looking statements and can be identified by the use of such words as "anticipates," "expects," and "estimates," and similar expressions. These statements are subject to certain risks and uncertainties. These risks and uncertainties could cause actual results to differ materially from the current statements. See also "Important Factors Relating to Forward-Looking Statements" contained in the Corporation's Annual Report. 26 Part II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (4) Instruments Defining the Rights of Security Holders, Including Indentures (v) - The Corporation hereby agrees to furnish to the Commission, upon request, a copy of any instruments defining the rights of security holders issued by Bankers Trust Corporation or its subsidiaries. (12) Statement re Computation of Ratios (b) Reports on Form 8-K - Bankers Trust Corporation did not file any reports on Form 8-K for the quarter ended March 31, 2001. 27 Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned; thereunto duly authorized, on May 15, 2001. Bankers Trust Corporation By:/s/ RONALD HASSEN -------------- RONALD HASSEN Senior Vice President, Controller and Principal Accounting Officer 28 BANKERS TRUST CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001 EXHIBIT INDEX (4) Instruments Defining the Rights of Security Holders, Including Indentures (v) - Long-term Debt Indentures (a) (12) Statement re computation of ratios (a) Computation of Consolidated Ratios of Earnings to Fixed Charges (a) The Corporation hereby agrees to furnish to the Commission, upon request, a copy of any instruments defining the rights of holders of long-term debt issued by Bankers Trust Corporation or its subsidiaries.

BANKERS TRUST CORP 10-Q