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
PART 1. FINANCIAL INFORMATION Page ------- Item 1. Financial Statements Consolidated Statement of Income Three Months Ended March 31, 2001 and 2000 2 Consolidated Statement of Comprehensive Income Three Months Ended March 31, 2001 and 2000 3 Consolidated Balance Sheet At March 31, 2001 and December 31, 2000 4 Consolidated Statement of Changes in Stockholder's Equity Three Months Ended March 31, 2001 and 2000 5 Consolidated Statement of Cash Flows Three Months Ended March 31, 2001 and 2000 6 Consolidated Schedule of Net Interest Revenue Three Months Ended March 31, 2001 and 2000 7 In the opinion of management, all material adjustments necessary for a fair presentation of the financial position and results of operations for the interim periods presented have been made. All such adjustments were of a normal recurring nature. The results of operations for the three months ended March 31, 2001 are not necessarily indicative of the results of operations for the full year or any other interim period. The financial statements included in this Form 10-Q should be read with reference to the Bankers Trust Corporation's Annual Report on Form 10-K for the year ended December 31, 2000. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures about Market Risk 25 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 26 SIGNATURE 27
2 PART I. FINANCIAL INFORMATION BANKERS TRUST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (in millions) (unaudited)
Increase THREE MONTHS ENDED MARCH 31, 2001 2000 (Decrease) --------------------------------------------------------------------------------------------------------------------------- NET INTEREST REVENUE Interest revenue $ 828 $ 816 $ 12 Interest expense 640 700 (60) --------------------------------------------------------------------------------------------------------------------------- Net interest revenue 188 116 72 Provision for credit losses-loans 50 (38) 88 --------------------------------------------------------------------------------------------------------------------------- Net interest revenue after provision for credit losses-loans 138 154 (16) --------------------------------------------------------------------------------------------------------------------------- NONINTEREST REVENUE Trading 53 63 (10) Fiduciary and funds management 174 205 (31) Corporate finance fees 22 37 (15) Other fees and commissions 59 80 (21) Other 107 191 (84) --------------------------------------------------------------------------------------------------------------------------- Total noninterest revenue 415 576 (161) --------------------------------------------------------------------------------------------------------------------------- NONINTEREST EXPENSES Salaries and commissions 111 123 (12) Incentive compensation and employee benefits 91 118 (27) Agency and other professional service fees 50 42 8 Communication and data services 16 26 (10) Occupancy, net 26 25 1 Furniture and equipment 32 31 1 Travel and entertainment 10 10 -- Other 89 247 (158) --------------------------------------------------------------------------------------------------------------------------- Total noninterest expenses 425 622 (197) --------------------------------------------------------------------------------------------------------------------------- Income before income taxes 128 108 20 Income taxes 18 83 (65) --------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 110 $ 25 $ 85 ===========================================================================================================================
3 BANKERS TRUST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (in millions) (unaudited)
THREE MONTHS ENDED MARCH 31, 2001 2000 --------------------------------------------------------------------------------------------------------------------- NET INCOME $ 110 $ 25 --------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments: Unrealized foreign currency translation losses arising during period (a) (54) (36) Reclassification adjustment for realized foreign currency translation losses (b) 1 4 Unrealized gains (losses) on securities available for sale: Unrealized holding gains arising during period (c) -- 16 --------------------------------------------------------------------------------------------------------------------- Total other comprehensive income (loss) (53) (16) --------------------------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME $ 57 $ 9 =====================================================================================================================
(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)
March 31, December 31, 2001* 2000 ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 2,399 $ 1,921 Interest-bearing deposits with banks 8,156 8,905 Federal funds sold 20 -- Securities purchased under resale agreements 2,671 8,310 Trading assets: Government securities 151 135 Corporate debt securities 551 556 Equity securities 10,091 9,255 Swaps, options and other derivatives 1,623 1,995 Other trading assets 1,468 1,449 ----------------------------------------------------------------------------------------------------------------------------------- Total trading assets 13,884 13,390 Securities available for sale 238 252 Loans, net 22,178 22,016 Customer receivables 257 308 Due from customers on acceptances 237 254 Accounts receivable and accrued interest 2,802 2,954 Other assets 7,630 4,453 ----------------------------------------------------------------------------------------------------------------------------------- Total $ 60,472 $ 62,763 =================================================================================================================================== LIABILITIES Noninterest-bearing deposits Domestic offices $ 3,246 $ 3,263 Foreign offices 1,172 968 Interest-bearing deposits Domestic offices 9,230 8,649 Foreign offices 2,271 2,874 ----------------------------------------------------------------------------------------------------------------------------------- Total deposits 15,919 15,754 Trading liabilities: Securities sold, not yet purchased Government securities 57 56 Swaps, options and other derivatives 1,822 1,892 Other trading liabilities 1,133 1,133 ----------------------------------------------------------------------------------------------------------------------------------- Total trading liabilities 3,012 3,081 Securities loaned and securities sold under repurchase agreements 407 109 Other short-term borrowings 18,288 18,498 Acceptances outstanding 237 254 Accounts payable and accrued expenses 1,197 2,603 Other liabilities 4,691 5,432 Long-term debt not included in risk-based capital 9,016 9,270 Long-term debt included in risk-based capital 1,958 2,073 Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital 1,308 1,307 ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities 56,033 58,381 ----------------------------------------------------------------------------------------------------------------------------------- STOCKHOLDER'S EQUITY Common stock, $1 par value Authorized: 200 shares; Issued: 1 share -- -- Capital surplus 2,319 2,319 Retained earnings 2,289 2,179 Accumulated other comprehensive income: Foreign currency translation, net of taxes (169) (116) ----------------------------------------------------------------------------------------------------------------------------------- Total stockholder's equity 4,439 4,382 ----------------------------------------------------------------------------------------------------------------------------------- Total $ 60,472 $ 62,763 ===================================================================================================================================
* Unaudited. 5 BANKERS TRUST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY (in millions, except par value) (unaudited)
THREE MONTHS ENDED MARCH 31, 2001 2000 ---------------------------------------------------------------------------------------------------------------------------------- PREFERRED STOCK Balance, January 1 $ -- $ 376 Preferred stock repurchased -- (11) ---------------------------------------------------------------------------------------------------------------------------------- Balance, March 31, -- 365 ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK Balance, January 1 and March 31 --* --* ---------------------------------------------------------------------------------------------------------------------------------- CAPITAL SURPLUS Balance, January 1 2,319 2,318 Preferred stock repurchased -- 1 ---------------------------------------------------------------------------------------------------------------------------------- Balance, March 31 2,319 2,319 ---------------------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS Balance, January 1 2,179 1,686 Net income 110 25 Preferred stock cash dividends declared -- (6) ---------------------------------------------------------------------------------------------------------------------------------- Balance, March 31 2,289 1,705 ---------------------------------------------------------------------------------------------------------------------------------- CUMULATIVE TRANSLATION ADJUSTMENTS Balance, January 1 (116) (46) Translation adjustments/entity transfers and sales (81) (53) Income taxes 28 21 ---------------------------------------------------------------------------------------------------------------------------------- Balance, March 31 (169) (78) ---------------------------------------------------------------------------------------------------------------------------------- SECURITIES VALUATION ALLOWANCE Balance, January 1 -- 16 Change in unrealized net gains, after applicable income taxes -- 16 ---------------------------------------------------------------------------------------------------------------------------------- Balance, March 31, -- 32 ---------------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDER'S EQUITY, MARCH 31 $ 4,439 $ 4,343 ==================================================================================================================================
* 1 share, $1 par value. 6 BANKERS TRUST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (in millions) (unaudited)
THREE MONTHS ENDED MARCH 31, 2001 2000 --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 110 $ 25 Adjustments to reconcile net income to net cash used in operating activities: Provision for credit losses - loans 50 (38) Provision for credit losses - other (4) (6) Deferred income taxes, net 277 86 Depreciation and other amortization and accretion 17 12 Other, net (166) (11) --------------------------------------------------------------------------------------------------------------------------------- Earnings adjusted for noncash charges and credits 284 68 Net change in: Trading assets (1,177) (2,959) Trading liabilities (69) (121) Receivables and payables from securities transactions (477) -- Customer receivables 51 40 Other operating assets and liabilities, net (3,788) (455) --------------------------------------------------------------------------------------------------------------------------------- Net cash used in operating activities (5,176) (3,427) --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net change in: Interest-bearing deposits with banks 746 (407) Federal funds sold (20) 2,361 Securities purchased under resale agreements 5,638 788 Loans (274) (410) Securities available for sale: Purchases (19) (260) Maturities and other redemptions 16 2,237 Sales 12 9 Acquisitions of premises and equipment (17) (12) Other, net 9 32 --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by investing activities 6,091 4,338 --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in: Deposits 165 (2,222) Securities loaned and securities sold under repurchase agreements (107) 11 Other short-term borrowings (206) (62) Issuances of long-term debt 113 1,350 Repayments of long-term debt (401) (726) Redemptions and repurchases of preferred stock -- (11) Cash dividends paid -- (6) Other, net -- (30) --------------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (436) (1,696) --------------------------------------------------------------------------------------------------------------------------------- Net effect of exchange rate changes on cash (1) (11) --------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease)in cash and due from banks 478 (796) Cash and due from banks, beginning of period 1,921 3,212 --------------------------------------------------------------------------------------------------------------------------------- Cash and due from banks, end of period $ 2,399 $ 2,416 ================================================================================================================================= Interest paid $ 861 $ 1,039 ================================================================================================================================= Income taxes paid, net $ 2 $ 2 ================================================================================================================================= Noncash investing activities $ -- $ 2 =================================================================================================================================
7 BANKERS TRUST CORPORATION AND SUBSIDIARIES CONSOLIDATED SCHEDULE OF NET INTEREST REVENUE (in millions) (unaudited)
Three months ended March 31, --------------------------------- Increase 2001 2000 (Decrease) ------------------------------------------------------------------------------------------------------------------------------- INTEREST REVENUE Interest-bearing deposits with banks $ 190 $ 55 $ 135 Federal funds sold 25 33 (8) Securities purchased under resale agreements 12 43 (31) Trading assets 186 192 (6) Securities available for sale Taxable 6 33 (27) Exempt from federal income taxes 1 2 (1) Loans 404 449 (45) Customer receivables 4 9 (5) ------------------------------------------------------------------------------------------------------------------------------- Total interest revenue 828 816 12 ------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest-bearing deposits Domestic offices 123 147 (24) Foreign offices 51 137 (86) Trading liabilities 2 -- 2 Securities loaned and securities sold under repurchase agreements -- 1 (1) Other short-term borrowings 279 184 95 Long-term debt 156 202 (46) Trust preferred capital securities 29 29 -- ------------------------------------------------------------------------------------------------------------------------------- Total interest expense 640 700 (60) ------------------------------------------------------------------------------------------------------------------------------- NET INTEREST REVENUE $ 188 $ 116 $ 72 ===============================================================================================================================
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:
Three months ended March 31, 2001 ---------------------------------------------------- Total Total Net Noninterest Pretax (in millions) Revenue* Expenses Income(Loss) ---------------------------------------------------------------------------------------------------------------------------- Corporate and Investment Bank Corporate Banking and Securities $ 177 $ 63 $ 114 Transaction Banking 208 225 (17) ---------------------------------------------------------------------------------------------------------------------------- Total Corporate and Investment Bank 385 288 97 Private Clients and Asset Management Private Banking 47 37 10 Asset Management 73 98 (25) ---------------------------------------------------------------------------------------------------------------------------- Total Private Clients and Asset Management 120 135 (15) Corporate Investments -- -- -- ---------------------------------------------------------------------------------------------------------------------------- Total Business Segments 505 423 82 ---------------------------------------------------------------------------------------------------------------------------- Other 48 2 46 ---------------------------------------------------------------------------------------------------------------------------- Total $ 553 $ 425 $ 128 ============================================================================================================================
* There were no material intersegment revenues among the business segments.
Three months ended March 31, 2000 ---------------------------------------------------- Total Total Net Noninterest Pretax (in millions) Revenue* Expenses Income(Loss) ---------------------------------------------------------------------------------------------------------------------------- Corporate and Investment Bank Corporate Banking and Securities $ 215 $ 172 $ 43 Transaction Banking 231 272 (41) ---------------------------------------------------------------------------------------------------------------------------- Total Corporate and Investment Bank 446 444 2 Private Clients and Asset Management Private Banking 38 40 (2) Asset Management 82 59 23 ---------------------------------------------------------------------------------------------------------------------------- Total Private Clients and Asset Management 120 99 21 Corporate Investments 147 90 57 ---------------------------------------------------------------------------------------------------------------------------- Total Business Segments 713 633 80 ---------------------------------------------------------------------------------------------------------------------------- Other 17 (11) 28 ---------------------------------------------------------------------------------------------------------------------------- Total $ 730 $ 622 $ 108 ============================================================================================================================
* 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.
Three Months Ended March 31, ---------------------------------- Increase 2001 2000 (Decrease) ------------------------------------------------------ NET INTEREST REVENUE (in millions) Book basis $ 188 $ 116 $ 72 Tax equivalent adjustment -- 1 (1) ---------------------------------------------------------------------------------------------------------------------------- Fully taxable basis $ 188 $ 117 $ 71 ============================================================================================================================ AVERAGE BALANCES (in millions) Interest-earning assets $ 45,367 $ 48,197 $ (2,830) Interest-bearing liabilities 41,454 43,914 (2,460) ---------------------------------------------------------------------------------------------------------------------------- Earning assets financed by noninterest-bearing funds $ 3,913 $ 4,283 $ (370) ============================================================================================================================ AVERAGE RATES (fully taxable basis) Yield on interest-earning assets 7.41% 6.82% 0.59% Cost of interest-bearing liabilities 6.26 6.41 (0.15) ---------------------------------------------------------------------------------------------------------------------------- Interest rate spread 1.15 0.41 0.74 Contribution of noninterest-bearing funds 0.53 0.57 (0.04) ---------------------------------------------------------------------------------------------------------------------------- Net interest margin 1.68% 0.98% 0.70% ============================================================================================================================
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).
Three Months Ended March 31, ---------------------------------- Total allowances for credit losses 2001 2000 -------------------------------------------------------------------------------------------------- LOANS Balance, beginning of period $ 424 $ 491 Provision for credit losses 50 (38) Allowance related to entities sold/transferred(a) (23) -- Net charge-offs Charge-offs 5 40 Recoveries -- 9 -------------------------------------------------------------------------------------------------- Total net charge-offs 5 31 -------------------------------------------------------------------------------------------------- Balance, end of period(b) $ 446 $ 422 ================================================================================================== OTHER LIABILITIES Balance, beginning of period $ 22 $ 24 Provision for credit losses (4) (6) -------------------------------------------------------------------------------------------------- Balance, end of period $ 18 $ 18 ==================================================================================================
(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.
CONDENSED AVERAGE BALANCE SHEETS ------------------------------------------------------- (in millions) 1st Qtr. 2001 4th Qtr. 2000 Increase (Decrease) --------------------------------------------------------------------------------------------------------------------- ASSETS Interest-earning Interest-bearing deposits with banks $ 8,327 $ 5,743 $ 2,584 Federal funds sold 1,710 1,785 (75) Securities purchased under resale agreements 857 1,305 (448) Trading assets 12,015 11,591 424 Securities available for sale Taxable 229 261 (32) Exempt from federal income taxes 16 16 -- --------------------------------------------------------------------------------------------------------------------- Total securities available for sale 245 277 (32) Loans Domestic offices 21,792 25,258 (3,466) Foreign offices 4 33 (29) --------------------------------------------------------------------------------------------------------------------- Total loans 21,796 25,291 (3,495) Customer receivables 417 383 34 --------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 45,367 46,375 (1,008) Noninterest-earning Cash and due from banks 1,833 2,090 (257) Noninterest-earning trading assets 1,132 2,001 (869) All other assets 9,180 6,401 2,779 Less: Allowance for credit losses-loans (411) (394) (17) --------------------------------------------------------------------------------------------------------------------- Total $ 57,101 $ 56,473 $ 628 ===================================================================================================================== LIABILITIES Interest-bearing Interest-bearing deposits Domestic offices $ 9,829 $ 8,906 $ 923 Foreign offices 2,447 3,042 (595) --------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 12,276 11,948 328 Trading liabilities 56 55 1 Securities loaned and securities sold under repurchase agreements 12 84 (72) Other short-term borrowings 17,122 15,030 2,092 Long-term debt 10,680 11,697 (1,017) Trust preferred capital securities 1,308 1,316 (8) --------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 41,454 40,130 1,324 Noninterest-bearing Noninterest-bearing deposits 4,068 3,859 209 Noninterest-bearing trading liabilities 1,167 2,582 (1,415) All other liabilities 5,968 5,560 408 --------------------------------------------------------------------------------------------------------------------- Total liabilities 52,657 52,131 526 --------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDER'S EQUITY 4,444 4,342 102 --------------------------------------------------------------------------------------------------------------------- Total $ 57,101 $ 56,473 $ 628 =====================================================================================================================
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:
March 31, 2001 December 31, 2000 ---------------------------------- ---------------------------------- (in millions) Assets (Liabilities) Assets (Liabilities) ---------------------------------------------------------------------------------------------------------------------------- OTC FINANCIAL INSTRUMENTS Interest Rate and Currency Swap contracts $ 1,181 $ (1,142) $ 999 $ (949) Interest Rate Contracts Options purchased 104 104 Options written (86) (82) Foreign Exchange Rate Contracts Spot and forwards 6 (191) 95 (3) Options purchased -- 5 Options written -- (5) Equity-related contracts 425 (449) 901 (933) Commodity-related and other contracts 2,510 (2,557) 1,885 (1,914) ---------------------------------------------------------------------------------------------------------------------------- Total Gross Fair Values 4,226 (4,425) 3,989 (3,886) Impact of Netting Agreements (2,603) 2,603 (1,994) 1,994 ---------------------------------------------------------------------------------------------------------------------------- Total Fair Value (a) $ 1,623 $ (1,822) $ 1,995 $ (1,892) ============================================================================================================================
(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.
FRB To Be Well Minimum for Capitalized Actual as of Actual as of Capital Adequacy Under Regulatory March 31, 2001 December 31, 2000 Purposes Guidelines ------------------------------------------------------------------------------------------------------------------------- Risk-based capital ratios Tier 1 capital 22.9% 24.0% 4.0% 6.0% Total capital 25.4% 26.5% 8.0% 10.0% Leverage ratio 15.8% 16.0% 3.0% 5.0%
The following are the essential components used in calculating BTCo's risk-based capital ratios:
Actual as of Actual as of (in millions) March 31, 2001 December 31, 2000 ------------------------------------------------------------------------------- Tier 1 Capital $ 6,139 $ 6,161 Tier 2 Capital 670 651 ------------------------------------------------------------------------------- Total Capital $ 6,809 $ 6,812 =============================================================================== Total risk-weighted assets $ 26,786 $ 25,683 ===============================================================================
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)
2000 Three Months December 31, March 31, Risk class Average 2001 Average 2000 2001 ------------------------------------------------------------------------------------------------------------- Interest rate $ 3.9 $ 2.5 $ 5.3 $ 1.4 Currency 1.1 0.1 0.2 -- Equity 4.4 0.8 0.8 0.8 Commodity -- -- -- -- Diversification (2.8) (0.7) (0.9) (0.6) ------------------------------------------------------------------------------------------------------------- Overall Portfolio $ 6.6 $ 2.7 $ 5.4 $ 1.6 =============================================================================================================
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).
March 31, December 31, 2001 2000 ------------------------------------------------------------------------------------------------------------------ CASH BASIS LOANS Domestic Commercial and industrial $ 799 $ 766 Secured by real estate 30 28 Financial institutions 20 20 ------------------------------------------------------------------------------------------------------------------ Total domestic 849 814 ------------------------------------------------------------------------------------------------------------------ International Commercial and industrial 18 10 Secured by real estate -- 1 Other -- 15 Total international 18 26 ------------------------------------------------------------------------------------------------------------------ Total cash basis loans $ 867 $ 840 ================================================================================================================== Ratio of cash basis loans to total gross loans 3.8% 3.7% ================================================================================================================== Ratio of allowance for credit losses-loans to cash basis loans 51% 50% ================================================================================================================== OTHER REAL ESTATE $ 106 $ 109 ==================================================================================================================
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.
Three Months Ended March 31, --------------------------------- (in millions) 2001 2000 ----------------------------------------------------------------------------------------------------------------- Domestic Loans Gross amount of interest that would have been recorded at original rate $ 22 $ 13 Less, interest, net of reversals, recognized in interest revenue 4 8 ----------------------------------------------------------------------------------------------------------------- Reduction of interest revenue 18 5 ----------------------------------------------------------------------------------------------------------------- International Loans Gross amount of interest that would have been recorded at original rate -- 1 Less, interest, net of reversals, recognized in interest revenue -- 1 ----------------------------------------------------------------------------------------------------------------- Reduction of interest revenue -- -- ----------------------------------------------------------------------------------------------------------------- Total reduction of interest revenue $ 18 $ 5 =================================================================================================================
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.