10-Q 1 d26512_10q.txt QUARTERLY REPORT 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 June 30, 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 June 30, 2001 FORM 10-Q TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Page ---- Item 1. Financial Statements Consolidated Statement of Income Three Months Ended June 30, 2001 and 2000 2 Six Months Ended June 30, 2001 and 2000 3 Consolidated Statement of Comprehensive Income Three Months Ended June 30, 2001 and 2000 Six Months Ended June 30, 2001 and 2000 4 Consolidated Balance Sheet At June 30, 2001 and December 31, 2000 5 Consolidated Statement of Changes in Stockholder's Equity Six Months Ended June 30, 2001 and 2000 6 Consolidated Statement of Cash Flows Six Months Ended June 30, 2001 and 2000 7 Consolidated Schedule of Net Interest Revenue Three Months and Six Months Ended June 30, 2001 and 2000 8 In the opinion of management, all material adjustments necessary for a fair presentation of the financial position and results of operations for the interim periods presented have been made. All such adjustments were of a normal recurring nature. The results of operations for the three months and six months ended June 30, 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 fiscal year ended December 31, 2000 as supplemented by the first quarter 2001 Form 10-Q. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk 29 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 30 SIGNATURE 31 2 PART I. FINANCIAL INFORMATION BANKERS TRUST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (in millions) (unaudited) Increase THREE MONTHS ENDED JUNE 30, 2001 2000 (Decrease) -------------------------------------------------------------------------------- NET INTEREST REVENUE Interest revenue $659 $ 889 $(230) Interest expense 482 749 (267) -------------------------------------------------------------------------------- Net interest revenue 177 140 37 Provision for credit losses-loans 54 (2) 56 -------------------------------------------------------------------------------- Net interest revenue after provision for credit losses-loans 123 142 (19) -------------------------------------------------------------------------------- NONINTEREST REVENUE Trading 17 31 (14) Fiduciary and funds management 173 208 (35) Corporate finance fees 28 45 (17) Other fees and commissions 72 82 (10) Securities available for sale gains -- 31 (31) Other 80 (40) 120 -------------------------------------------------------------------------------- Total noninterest revenue 370 357 13 -------------------------------------------------------------------------------- NONINTEREST EXPENSES Salaries and commissions 108 121 (13) Incentive compensation and employee benefits 82 100 (18) Agency and other professional service fees 59 55 4 Communication and data services 11 20 (9) Occupancy, net 25 26 (1) Furniture and equipment 34 30 4 Travel and entertainment 9 11 (2) Other 108 163 (55) Restructuring charge -- (46) 46 -------------------------------------------------------------------------------- Total noninterest expenses 436 480 (44) -------------------------------------------------------------------------------- Income before income taxes 57 19 38 Income taxes 10 36 (26) -------------------------------------------------------------------------------- NET INCOME (LOSS) $ 47 $ (17) $ 64 ================================================================================ 3 BANKERS TRUST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME (in millions) (unaudited)
Increase SIX MONTHS ENDED JUNE 30, 2001 2000 (Decrease) ------------------------------------------------------------------------------------------------------ NET INTEREST REVENUE Interest revenue $1,487 $ 1,705 $(218) Interest expense 1,122 1,449 (327) ------------------------------------------------------------------------------------------------------ Net interest revenue 365 256 109 Provision for credit losses-loans 104 (40) 144 ------------------------------------------------------------------------------------------------------ Net interest revenue after provision for credit losses-loans 261 296 (35) ------------------------------------------------------------------------------------------------------ NONINTEREST REVENUE Trading 70 94 (24) Fiduciary and funds management 347 413 (66) Corporate finance fees 50 82 (32) Other fees and commissions 131 162 (31) Securities available for sale gains -- 31 (31) Other 187 151 36 ------------------------------------------------------------------------------------------------------ Total noninterest revenue 785 933 (148) ------------------------------------------------------------------------------------------------------ NONINTEREST EXPENSES Salaries and commissions 219 244 (25) Incentive compensation and employee benefits 173 218 (45) Agency and other professional service fees 109 97 12 Communication and data services 27 46 (19) Occupancy, net 51 51 -- Furniture and equipment 66 61 5 Travel and entertainment 19 21 (2) Other 197 410 (213) Restructuring charge -- (46) 46 ------------------------------------------------------------------------------------------------------ Total noninterest expenses 861 1,102 (241) ------------------------------------------------------------------------------------------------------ Income before income taxes 185 127 58 Income taxes 28 119 (91) ------------------------------------------------------------------------------------------------------ NET INCOME $ 157 $ 8 $ 149 ======================================================================================================
4 BANKERS TRUST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (in millions) (unaudited)
Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 2001 2000 2001 2000 ----------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $47 $(17) $ 157 $ 8 ----------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments: Unrealized foreign currency translation gains (losses) arising during period (a) 8 (17) (46) (53) Reclassification adjustment for realized foreign currency translation losses (b) 9 -- 10 4 Unrealized gains (losses) on securities available for sale: Unrealized holding gains arising during period (c) 4 67 4 83 Reclassification adjustment for realized gains (d) -- (18) -- (18) ----------------------------------------------------------------------------------------------------------------- Total other comprehensive income (loss) 21 32 (32) 16 ----------------------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME $68 $ 15 $ 125 $ 24 =================================================================================================================
(a) Amounts are net of income tax benefits of $2 million and $11 million for the three months ended June 30, 2001 and 2000, respectively and $31 million and $30 million for the six months ended June 30, 2001 and 2000, respectively. (b) Amounts are net of income tax expense (benefit) of $(18) million for the three months ended June 30, 2001 and $(19) million and $2 million for the six months ended June 30, 2001 and 2000, respectively. (c) Amounts are net of income tax expense of $2 million and $3 million for the three months ended June 30, 2001 and 2000, respectively and $2 million and $13 million for the six months ended June 30, 2001 and 2000, respectively. (d) Amounts are net of income tax expense of $13 million for the three months ended June 30, 2000 and $13 million for the six months ended June 30, 2000. 5 BANKERS TRUST CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ($ in millions, except par value) June 30, December 31, 2001* 2000 -------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 1,471 $ 1,921 Interest-bearing deposits with banks 7,995 8,905 Securities purchased under resale agreements 4,616 8,310 Trading assets: Government securities 121 135 Corporate debt securities 424 556 Equity securities 9,680 9,255 Swaps, options and other derivatives 2,362 1,995 Other trading assets 1,142 1,449 -------------------------------------------------------------------------------- Total trading assets 13,729 13,390 Securities available for sale 281 252 Loans, net 22,207 22,016 Customer receivables 189 308 Due from customers on acceptances 163 254 Accounts receivable and accrued interest 1,686 2,954 Other assets 7,187 4,453 -------------------------------------------------------------------------------- Total $ 59,524 $ 62,763 ================================================================================ LIABILITIES Noninterest-bearing deposits Domestic offices $ 2,753 $ 3,263 Foreign offices 1,126 968 Interest-bearing deposits Domestic offices 12,183 8,649 Foreign offices 2,443 2,874 -------------------------------------------------------------------------------- Total deposits 18,505 15,754 Trading liabilities: Securities sold, not yet purchased Government securities 56 56 Swaps, options and other derivatives 1,256 1,892 Other trading liabilities 1,133 1,133 -------------------------------------------------------------------------------- Total trading liabilities 2,445 3,081 Securities loaned and securities sold under repurchase agreements 7 109 Other short-term borrowings 15,831 18,498 Acceptances outstanding 163 254 Accounts payable and accrued expenses 1,270 2,603 Other liabilities 4,855 5,432 Long-term debt not included in risk-based capital 8,992 9,270 Long-term debt included in risk-based capital 1,653 2,073 Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital 1,296 1,307 -------------------------------------------------------------------------------- Total liabilities 55,017 58,381 -------------------------------------------------------------------------------- STOCKHOLDER'S EQUITY Common stock, $1 par value Authorized: 200 shares; Issued: 1 share -- -- Capital surplus 2,319 2,319 Retained earnings 2,336 2,179 Accumulated other comprehensive income: Net unrealized gains on securities available for sale, net of taxes 4 -- Foreign currency translation, net of taxes (152) (116) -------------------------------------------------------------------------------- Total stockholder's equity 4,507 4,382 -------------------------------------------------------------------------------- Total $ 59,524 $ 62,763 ================================================================================ * Unaudited. 6 BANKERS TRUST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY (in millions, except par value) (unaudited) SIX MONTHS ENDED JUNE 30, 2001 2000 -------------------------------------------------------------------------------- PREFERRED STOCK Balance, January 1 $ -- $ 376 Preferred stock repurchased -- (12) -------------------------------------------------------------------------------- Balance, June 30 -- 364 -------------------------------------------------------------------------------- COMMON STOCK Balance, January 1 and June 30 --* --* -------------------------------------------------------------------------------- CAPITAL SURPLUS Balance, January 1 2,319 2,318 Preferred stock repurchased -- 1 -------------------------------------------------------------------------------- Balance, June 30 2,319 2,319 -------------------------------------------------------------------------------- RETAINED EARNINGS Balance, January 1 2,179 1,686 Net income 157 8 Preferred stock cash dividends declared -- (11) -------------------------------------------------------------------------------- Balance, June 30 2,336 1,683 -------------------------------------------------------------------------------- CUMULATIVE TRANSLATION ADJUSTMENTS Balance, January 1 (116) (46) Translation adjustments/entity transfers and sales (48) (81) Income taxes 12 32 -------------------------------------------------------------------------------- Balance, June 30 (152) (95) -------------------------------------------------------------------------------- SECURITIES VALUATION ALLOWANCE Balance, January 1 -- 16 Change in unrealized net gains, after applicable income taxes 4 65 -------------------------------------------------------------------------------- Balance, June 30 4 81 -------------------------------------------------------------------------------- TOTAL STOCKHOLDER'S EQUITY, JUNE 30 $ 4,507 $ 4,352 ================================================================================ * 1 share, $1 par value. 7 BANKERS TRUST CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (in millions) (unaudited) SIX MONTHS ENDED JUNE 30, 2001 2000 -------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 157 $ 8 Adjustments to reconcile net income to net cash used in operating activities: Provision for credit losses - loans 104 (40) Provision for credit losses - other (6) (20) Restructuring charge (release) -- (46) Deferred income taxes, net 178 51 Depreciation and other amortization and accretion 29 18 Other, net (180) 6 -------------------------------------------------------------------------------- Earnings adjusted for noncash charges and credits 282 (23) Net change in: Trading assets (1,313) (2,437) Trading liabilities (635) (1,502) Receivables and payables from securities transactions (523) 87 Customer receivables 119 24 Other operating assets and liabilities, net (2,122) (606) Securities available for sale gains -- (31) -------------------------------------------------------------------------------- Net cash used in operating activities (4,192) (4,488) -------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net change in: Interest-bearing deposits with banks 907 (6,122) Federal funds sold - 2,469 Securities purchased under resale agreements 3,693 2,417 Loans (370) (1,874) Securities available for sale: Purchases (23) (260) Maturities and other redemptions 23 2,238 Sales 12 500 Acquisitions of premises and equipment (51) (69) Other, net 5 10 Proceeds from transfer of legal entities -- 71 -------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 4,196 (620) -------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in: Deposits 2,752 (4,208) Securities loaned and securities sold under repurchase agreements (100) (2) Other short-term borrowings (2,668) 2,344 Issuances of long-term debt 364 7,383 Repayments of long-term debt (801) (1,245) Redemptions and repurchases of preferred stock -- (11) Cash dividends paid -- (11) Other, net -- (30) -------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (453) 4,220 -------------------------------------------------------------------------------- Net effect of exchange rate changes on cash (1) (15) -------------------------------------------------------------------------------- Net decrease in cash and due from banks (450) (903) Cash and due from banks, beginning of period 1,921 3,212 -------------------------------------------------------------------------------- Cash and due from banks, end of period $ 1,471 $ 2,309 ================================================================================ Interest paid $ 1,538 $ 2,128 =============================================================================== Income taxes paid, net $ 4 $ 4 ================================================================================ Noncash investing activities $ 9 $ 27 ================================================================================ 8 BANKERS TRUST CORPORATION AND SUBSIDIARIES CONSOLIDATED SCHEDULE OF NET INTEREST REVENUE (in millions) (unaudited)
Three Months Ended Six Months Ended June 30, June 30, --------------------------------------- 2001 2000 2001 2000 -------------------------------------------------------------------------------------------------------- INTEREST REVENUE Interest-bearing deposits with banks $136 $183 $ 326 $ 238 Federal funds sold 11 19 36 52 Securities purchased under resale agreements 8 41 20 84 Trading assets 142 253 328 445 Securities available for sale Taxable 3 11 9 44 Exempt from federal income taxes 1 2 2 4 Loans 356 374 760 823 Customer receivables 2 6 6 15 -------------------------------------------------------------------------------------------------------- Total interest revenue 659 889 1,487 1,705 -------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest-bearing deposits Domestic offices 96 138 219 285 Foreign offices 36 129 87 266 Trading liabilities 1 -- 3 -- Securities loaned and securities sold under repurchase agreements -- 1 -- 2 Other short-term borrowings 192 210 471 394 Long-term debt 131 243 287 445 Trust preferred capital securities 26 28 55 57 -------------------------------------------------------------------------------------------------------- Total interest expense 482 749 1,122 1,449 -------------------------------------------------------------------------------------------------------- NET INTEREST REVENUE $177 $140 $ 365 $ 256 ========================================================================================================
9 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. RESULTS OF OPERATIONS The Corporation reported income of $47 million for the three months ended June 30, 2001 and income of $157 million for the first six months of 2001. The Corporation reported a loss of $17 million for the three months ended June 30, 2000 and income of $8 million for the first six 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. 10 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. 11 BUSINESS SEGMENT RESULTS (continued) The following tables present results by Business Segment:
Three months ended June 30, 2001 ---------------------------------------- Total Total Net Noninterest Pretax (in millions) Revenue* Expenses Income(Loss) ------------------------------------------------------------------------------------------ Corporate and Investment Bank Corporate Banking and Securities $ 132 $ 52 $ 80 Transaction Banking 167 188 (21) ------------------------------------------------------------------------------------------ Total Corporate and Investment Bank 299 240 59 Private Clients and Asset Management Private Banking 39 44 (5) Asset Management 69 90 (21) ------------------------------------------------------------------------------------------ Total Private Clients and Asset Management 108 134 (26) Corporate Investments (2) 4 (6) ------------------------------------------------------------------------------------------ Total Business Segments 405 378 27 ------------------------------------------------------------------------------------------ Other 88 58 30 ------------------------------------------------------------------------------------------ Total $ 493 $436 $ 57 ==========================================================================================
* There were no material intersegment revenues among the business segments.
Three months ended June 30, 2000 ---------------------------------------- Total Total Net Noninterest Pretax (in millions) Revenue* Expenses Income(Loss) ------------------------------------------------------------------------------------------ Corporate and Investment Bank Corporate Banking and Securities $ 163 $ 192 $(29) Transaction Banking 243 246 (3) ------------------------------------------------------------------------------------------ Total Corporate and Investment Bank 406 438 (32) Private Clients and Asset Management Private Banking 43 40 3 Asset Management 66 64 2 ------------------------------------------------------------------------------------------ Total Private Clients and Asset Management 109 104 5 Corporate Investments (28) (7) (21) ------------------------------------------------------------------------------------------ Total Business Segments 487 535 (48) ------------------------------------------------------------------------------------------ Other 12 (55) 67 ------------------------------------------------------------------------------------------ Total $ 499 $ 480 $ 19 ==========================================================================================
* There were no material intersegment revenues among the business segments. 12 BUSINESS SEGMENT RESULTS (continued)
Six months ended June 30, 2001 --------------------------------------- Total Total Net Noninterest Pretax (in millions) Revenue* Expenses Income(Loss) ------------------------------------------------------------------------------------------ Corporate and Investment Bank Corporate Banking and Securities $ 306 $118 $ 188 Transaction Banking 382 415 (33) ------------------------------------------------------------------------------------------ Total Corporate and Investment Bank 688 533 155 Private Clients and Asset Management Private Banking 86 81 5 Asset Management 145 184 (39) ------------------------------------------------------------------------------------------ Total Private Clients and Asset Management 231 265 (34) Corporate Investments 3 8 (5) ------------------------------------------------------------------------------------------ Total Business Segments 922 806 116 ------------------------------------------------------------------------------------------ Other 124 55 69 ------------------------------------------------------------------------------------------ Total $1,046 $861 $ 185 ==========================================================================================
* There were no material intersegment revenues among the business segments.
Six months ended June 30, 2000 --------------------------------------- Total Total Net Noninterest Pretax (in millions) Revenue* Expenses Income(Loss) ------------------------------------------------------------------------------------------ Corporate and Investment Bank Corporate Banking and Securities $ 393 $ 370 $ 23 Transaction Banking 470 513 (43) --------------------------------------------------------------------------------------- Total Corporate and Investment Bank 863 883 (20) Private Clients and Asset Management Private Banking 82 82 -- Asset Management 154 122 32 --------------------------------------------------------------------------------------- Total Private Clients and Asset Management 236 204 32 Corporate Investments 119 83 36 --------------------------------------------------------------------------------------- Total Business Segments 1,218 1,170 48 --------------------------------------------------------------------------------------- Other 11 (68) 79 --------------------------------------------------------------------------------------- Total $1,229 $ 1,102 $ 127 =======================================================================================
* There were no material intersegment revenues among the business segments. 13 BUSINESS SEGMENT RESULTS (continued) The Corporate and Investment Bank Group ("CIB") recorded pretax income of $59 million in the second quarter of 2001, compared to a pretax loss of $32 million in the prior year quarter. For the first six months of 2001, CIB recorded pretax income of $155 million as compared to a pretax loss of $20 million in the prior year period. Corporate Banking and Securities recorded pretax income of $80 million in the second quarter of 2001, compared to a pretax loss of $29 million in the prior year quarter. The decrease in total net revenue from the prior year quarter is mainly due to lower results from trading activities, lower corporate finance fees and higher provisions for credit losses. The decrease in expenses is mainly due to lower accruals for performance-based pay in the current quarter due to reduced market activity. For the first six months of 2001, this business segment recorded pretax income of $188 million as compared to pretax income of $23 million in the prior year period. Transaction Banking recorded a pretax loss of $21 million in the second quarter of 2001, compared to a pretax loss of $3 million in the prior year quarter. The current quarter included lower net interest revenue, as well as lower revenue from fiduciary and funds management activities. The decrease in expenses is partly due to lower personnel-related expenses. For the first six months of 2001, this business segment recorded a pretax loss of $33 million as compared to a pretax loss of $43 in the prior year period. The Private Clients and Asset Management Group ("PCAM") recorded a pretax loss of $26 million in the second quarter of 2001, compared to pretax income of $5 million in the 2000 second quarter. For the first six months of 2001, PCAM recorded a pretax loss of $34 million as compared to pretax income of $32 million in the prior year period. Private Banking recorded a pretax loss of $5 million in the second quarter of 2001, compared to pretax income of $3 million in the prior year quarter. The decrease in pretax income from the prior year quarter is mainly due to lower net interest revenue and higher personnel-related costs. For the first six months of 2001, this business segment recorded pretax income of $5 million as compared to pretax income of $0 in the prior year period. Asset Management recorded a pretax loss of $21 million in the second quarter of 2001, compared to pretax income of $2 million in the prior year quarter. The decrease in pretax income from the prior year quarter is mainly due to higher personnel-related expenses. For the first six months of 2001, this business segment recorded a pretax loss of $39 million as compared to pretax income of $32 million in the prior year period. Corporate Investments recorded minimal activity in the second quarter 2001, and in the six months ended June 30, 2001, due to the transfer of BTH at the end of the third quarter of 2000. This segment recorded a pretax loss of $21 million in the prior year quarter and pretax income in the prior year-to-date period of $36 million. 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. 14 BUSINESS SEGMENT RESULTS (continued) The following table reconciles total pretax income for business segments to consolidated pretax income (in millions): SIX MONTHS ENDED JUNE 30, 2001 2000 -------------------------------------------------------------------------------- Total pretax income reported for business segments $ 116 $ 48 Earnings associated with unassigned capital 118 140 SFAS 133 transition adjustment 13 -- Restructuring release -- 46 Other unallocated amounts (62) (107) -------------------------------------------------------------------------------- Consolidated pretax income $ 185 $ 127 ================================================================================ 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 Six Months Ended June 30, June 30, ------------------ ------------------- 2001 2000 2001 2000 --------------------------------------------------------------------------------------------------- NET INTEREST REVENUE (in millions) Book basis $ 177 $ 140 $ 365 $ 256 Tax equivalent adjustment 1 1 2 2 --------------------------------------------------------------------------------------------------- Fully taxable basis $ 178 $ 141 $ 367 $ 258 =================================================================================================== AVERAGE BALANCES (in millions) Interest-earning assets $44,429 $47,777 $44,896 $47,448 Interest-bearing liabilities 40,889 44,796 41,170 44,355 --------------------------------------------------------------------------------------------------- Earning assets financed by noninterest-bearing funds $ 3,540 $ 2,981 $ 3,726 $ 3,093 =================================================================================================== AVERAGE RATES (fully taxable basis) Yield on interest-earning assets 5.96% 7.49% 6.69% 7.23% Cost of interest-bearing liabilities 4.73 6.72 5.50 6.57 --------------------------------------------------------------------------------------------------- Interest rate spread 1.23 0.77 1.19 0.66 Contribution of noninterest-bearing funds 0.38 0.42 0.46 0.43 --------------------------------------------------------------------------------------------------- Net interest margin 1.61% 1.19% 1.65% 1.09% ===================================================================================================
Net interest revenue for the second quarter of 2001 totaled $177 million, up $37 million, or 26 percent, from the second quarter of 2000. Net interest revenue for the first half of 2001 totaled $365, up $109 million or 43 percent, from the first half of 2000. 15 REVENUE (continued) In the second quarter of 2001, the interest rate spread was 1.23 percent compared to 0.77 percent in the prior year period. Net interest margin increased to 1.61 percent from 1.19 percent. The yield on interest-earning assets decreased by 153 basis points and the cost of interest-bearing liabilities decreased by 199 basis points. Average interest-earning assets totaled $44.4 billion for the second quarter of 2001, down $3.3 billion from the same period in 2000. The decrease was primarily attributable to a decline in average interest-earning trading assets. Average interest-bearing liabilities totaled $40.9 billion for the second quarter of 2001, down $3.9 billion from the same period in 2000. The decrease was primarily attributable to a decline in average interest-bearing deposits. In the first six months of 2001, the interest rate spread was 1.19 percent compared to 0.66 percent in the prior period. Net interest margin increased from 1.09 percent to 1.65 percent. The yield on interest-earning assets decreased by 54 basis points and the cost of interest-bearing liabilities decreased by 107 basis points. Average interest-earning assets totaled $44.9 billion for the first six months of 2001, down $2.6 billion from the same period in 2000. The decrease was primarily attributable to a decline in average interest-earning trading assets. Average interest-bearing liabilities totaled $41.2 billion for the first six months of 2001, down $3.2 billion from the same period in 2000. The decrease was primarily attributable to a decline in average interest-bearing deposits. Noninterest Revenue Trading revenue in the second quarter of 2001 was down $14 million from the second quarter of 2000. The decrease is due primarily to the implementation of SFAS 133 and the transfer of BTH in the third quarter of 2000. Trading revenue for the first six months of 2001 was down $24 million from the first six months of 2000. The decrease is primarily attributable to the transfer of BTH in the third quarter of 2000. Fiduciary and funds management revenue in the second quarter of 2001 was down $35 million, or 17 percent, from the second quarter of 2000. The decrease is due primarily to lower revenues from custodian fees as well as a reduction in employee benefit plan revenues. Fiduciary and funds management revenue for the first half of 2001 was down $66 million, or 16 percent, from the $413 million earned in the first half of 2000. The decrease is due primarily to lower revenues from custodian fees, employee benefit plan fees and incentive performance fees due principally to declining asset prices and reduced levels of market activity. Corporate finance fees of $28 million in the second quarter of 2001 decreased $17 million from the $45 million earned in the second quarter of 2000. The decline is primarily attributable to lower revenue for syndication, commitment 16 REVENUE (continued) and securities underwriting fees, reflecting lower levels of market activity. Corporate finance fees of $50 million for the first half of 2001 decreased $32 million from the $82 million earned in the first half of 2000. The decline is primarily attributable to lower revenues for syndication and commitment fees, reflecting lower levels of market activity. Other fees and commissions of $72 million in the second quarter of 2001 decreased $10 million from the prior year quarter primarily due to lower revenue for fees from deposit account service charges, as well as brokerage commissions. Other fees and commissions of $131 million for the first half of 2001 decreased $31 million from the prior year period primarily due to lower revenues from fees in lieu of compensating balances, brokers commissions and deposit account service charges. Other noninterest revenue in the second quarter of 2001 increased $120 million from the prior year period. Prior to May 2001, the Corporation accounted for servicing agreements with its affiliates on a net basis and included the net amount in other noninterest expenses in the consolidated statement of income. Beginning in May 2001, revenue from services provided to affiliates are included in other noninterest revenue while expenses incurred from services provided by affiliates are included in other noninterest expenses. Business segment results, as discussed on pages 10 to 14, will continue to reflect charges for servicing agreements on a net basis. As a result, the current quarter includes revenue from these servicing agreements, as well as prior year quarter mark-to-market losses on equity securities. Other noninterest revenue totaled $187 million for the first half of 2001 compared to $151 million in the prior year period. The increase in the first half of 2001 is due to the aforementioned servicing agreements as well as increases in equity income of subsidiaries and affiliates. These increases were partially offset by lower revenue from both realized and unrealized equity securities due to the transfer of BTH in the third quarter of 2000. PROVISIONS AND ALLOWANCES FOR CREDIT LOSSES The allowances for credit losses represent 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. In the second quarter of 2001 and for the first half of 2001, the Corporation recorded a provision for credit losses - loans of $54 million and $104 million, respectively. Given the current economic conditions, the Corporation has seen a decline in the credit quality of its portfolio and anticipates this trend to continue into the second half of 2001. 17 The provisions for credit losses and the other changes in the allowances for credit losses are shown below (in millions). Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------ Total allowances for credit losses 2001 2000 2001 2000 -------------------------------------------------------------------------------- LOANS Balance, beginning of period $ 446 $ 422 $ 424 $ 491 Provision for credit losses 54 (2) 104 (40) Allowance related to entities sold/transferred(a) -- -- (23) -- Net charge-offs Charge-offs 65 3 70 43 Recoveries -- 2 -- 11 -------------------------------------------------------------------------------- Total net charge-offs 65 1 70 32 -------------------------------------------------------------------------------- Balance, end of period(b) $ 435 $ 419 $ 435 $ 419 ================================================================================ OTHER LIABILITIES Balance, beginning of period $ 18 $ 18 $ 22 $ 24 Provision for credit losses (2) (14) (6) (20) -------------------------------------------------------------------------------- Balance, end of period $ 16 $ 4 $ 16 $ 4 ================================================================================ (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 $340 $299 Inherent loss* 95 120 --------------------- $435 $419 ===================== *Includes country risk 18 EXPENSES As compared to the second quarter of 2000, salaries and commissions expense decreased $13 million, or 11 percent. As compared to the first half of 2000, salaries and commissions expense decreased $25 million, or 10 percent. The decrease in both periods is primarily due to a decrease in the average number of employees due to staff reductions throughout 2000. Incentive compensation and employee benefits decreased $18 million, or 18 percent from the prior year quarter. Incentive compensation and employee benefits decreased $45 million, or 21 percent from the prior year-to-date period. The decrease in both periods is a result of the previously mentioned decrease in the average number of employees. In addition, there was a decrease in outplacement and counseling expense resulting from termination of employees. Other noninterest expense decreased $55 million from the prior year quarter and $213 million from the prior year-to-date period. The decrease in both periods is due to the Corporation's servicing agreements with its affiliates. Prior to May 2001, the Corporation accounted for servicing agreements with its affiliates on a net basis and included the net amount in other noninterest expenses in the consolidated statement of income. Beginning in May 2001, revenue from services provided to affiliates are included in other noninterest revenue while expenses incurred from services provided by affiliates are included in other noninterest expenses. Business segment results, as discussed on pages 10 to 14, will continue to reflect charges for servicing agreements on a net basis. During the second quarter of 2000, the Corporation reversed $46 million related to restructuring reserves in the Consolidated Statement of Income. For a further discussion of these charges, refer to page 43 of the Corporation's Annual Report on form 10-K. INCOME TAXES Income tax expense for the second quarter of 2001 amounted to $10 million, compared to income tax expense of $36 million in the second quarter of 2000. For the first six months of 2001, the income tax expense was $28 million, compared with income tax expense of $119 million in the first half of 2000. The effective tax rate was 18 percent for the current quarter and 15 percent for the six months ended June 30, 2001, and 189 percent for the prior year quarter and 94 percent for the six months ended June 30, 2000. The decrease in the effective tax rate is primarily due to a decrease in state and local income taxes. In addition, the prior year periods included a deferred tax valuation allowance. 19 BALANCE SHEET ANALYSIS The following table highlights the changes in the balance sheet. Since quarter-end balances can be distorted by one-day fluctuations, an analysis of changes in the quarterly averages is provided to give a better indication of balance sheet trends.
CONDENSED AVERAGE BALANCE SHEETS ------------------------------------------------- (in millions) 2nd Qtr. 2001 1st Qtr. 2001 4th Qtr. 2000 --------------------------------------------------------------------------------------------------------------------- ASSETS Interest-earning Interest-bearing deposits with banks $ 8,095 $ 8,327 $ 5,743 Federal funds sold 987 1,710 1,785 Securities purchased under resale agreements 737 857 1,305 Trading assets 11,574 12,015 11,591 Securities available for sale Taxable 221 229 261 Exempt from federal income taxes 16 16 16 --------------------------------------------------------------------------------------------------------------------- Total securities available for sale 237 245 277 Loans Domestic offices 22,526 21,792 25,258 Foreign offices 3 4 33 --------------------------------------------------------------------------------------------------------------------- Total loans 22,529 21,796 25,291 Customer receivables 270 417 383 --------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 44,429 45,367 46,375 Noninterest-earning Cash and due from banks 1,633 1,833 2,090 Noninterest-earning trading assets 2,119 1,132 2,001 All other assets 8,672 9,180 6,401 Less: Allowance for credit losses-loans (432) (411) (394) --------------------------------------------------------------------------------------------------------------------- Total $ 56,421 $ 57,101 $ 56,473 ===================================================================================================================== LIABILITIES Interest-bearing Interest-bearing deposits Domestic offices $ 9,603 $ 9,829 $ 8,906 Foreign offices 2,302 2,447 3,042 --------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 11,905 12,276 11,948 Trading liabilities 57 56 55 Securities loaned and securities sold under repurchase agreements 1 12 84 Other short-term borrowings 16,684 17,122 15,030 Long-term debt 10,946 10,680 11,697 Trust preferred capital securities 1,296 1,308 1,316 --------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 40,889 41,454 40,130 Noninterest-bearing Noninterest-bearing deposits 3,623 4,068 3,859 Noninterest-bearing trading liabilities 2,146 1,167 2,582 All other liabilities 5,244 5,968 5,560 --------------------------------------------------------------------------------------------------------------------- Total liabilities 51,902 52,657 52,131 --------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDER'S EQUITY 4,519 4,444 4,342 --------------------------------------------------------------------------------------------------------------------- Total $ 56,421 $ 57,101 $ 56,473 =====================================================================================================================
20 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 tables reflect the gross fair values and balance sheet amounts of trading derivative financial instruments:
June 30, 2001 At December 31, 2000 ---------------------------------------------------- (in millions) Assets (Liabilities) Assets (Liabilities) ---------------------------------------------------------------------------------------------- OTC FINANCIAL INSTRUMENTS Interest Rate and Currency Swap contracts $ 648 $ (628) $ 999 $ (949) Interest Rate Contracts Options purchased 60 104 Options written (41) (82) Foreign Exchange Rate Contracts Spot and forwards 1,391 (302) 95 (3) Options purchased -- 5 Options written -- (5) Equity-related contracts 417 (440) 901 (933) Commodity-related and other contracts 1,129 (1,128) 1,885 (1,914) ---------------------------------------------------------------------------------------------- Total Gross Fair Values 3,645 (2,539) 3,989 (3,886) Impact of Netting Agreements (1,283) 1,283 (1,994) 1,994 ---------------------------------------------------------------------------------------------- TOTAL FAIR VALUE(a) $ 2,362 $(1,256) $ 1,995 $(1,892) ==============================================================================================
(a) As reflected on the balance sheet in "Trading Assets" and "Trading Liabilities." 21 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 type 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 and six months ended June 30, 2001. 22 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 June 30, 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.
To Be Well FRB Capitalized Under Actual as of June Actual as of Minimum for Capital Regulatory 30, 2001 December 31, 2000 Adequacy Purposes Guidelines ------------------------------------------------------------------------------------------------------------------ Risk-based capital ratios Tier 1 capital 24.2% 24.0% 4.0% 6.0% Total capital 26.4% 26.5% 8.0% 10.0% Leverage ratio 16.2% 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) June 30, 2001 December 31, 2000 ------------------------------------------------------------------------------------------------------------------ Tier 1 Capital $ 6,181 $ 6,161 Tier 2 Capital 584 651 ------------------------------------------------------------------------------------------------------------------ Total Capital $ 6,765 $ 6,812 ================================================================================================================== Total risk-weighted assets $25,590 $25,683 ==================================================================================================================
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 which has been determined by the FRB to be well-capitalized and well-managed. 23 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 Value at Risk for the first six months of 2001 and all of 2000 for trading account portfolios. 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 Six Months December 31, June 30, Risk class Average 2001 Average 2000 2001 -------------------------------------------------------------------------------- Interest rate $ 3.9 $ 1.8 $ 5.3 $ 0.8 Currency 1.1 0.1 0.2 -- Equity 4.4 0.9 0.8 1.2 Diversification (2.8) (0.6) (0.9) (0.6) -------------------------------------------------------------------------------- Overall Portfolio $ 6.6 $ 2.2 $ 5.4 $ 1.4 ================================================================================ The table shows that the Corporation's Trading Value at Risk level decreased by 74 percent from $5.4 million on December 31, 2000 to $1.4 million on June 30, 2001. The primary trading account market risks remaining at June 30, 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, the market risk in the non-trading portfolios at June 30, 2001 is immaterial. 24 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 June 30, 2001, this credit line totaled approximately $4.2 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 $2.6 billion. NONPERFORMING ASSETS The components of cash basis loans and other real estate are shown below ($ in millions).
June 30, 2001 December 31, 2000 --------------------------------------------------------------------------------------------------- CASH BASIS LOANS Domestic Commercial and industrial $846 $766 Secured by real estate 17 28 Financial institutions 20 20 --------------------------------------------------------------------------------------------------- Total domestic 883 814 --------------------------------------------------------------------------------------------------- International Commercial and industrial 27 10 Secured by real estate -- 1 Other -- 15 --------------------------------------------------------------------------------------------------- Total international 27 26 --------------------------------------------------------------------------------------------------- Total cash basis loans $910 $840 =================================================================================================== Ratio of cash basis loans to total gross loans 4.0% 3.7% =================================================================================================== Ratio of allowance for credit losses-loans to cash basis loans 48% 50% =================================================================================================== OTHER REAL ESTATE $113 $109 ===================================================================================================
There were no loans 90 days or more past due and still accruing interest at June 30, 2001 and December 31, 2000. 25 NONPERFORMING ASSETS (continued) An analysis of the changes in the Corporation's total cash basis loans during the first six months of 2001 follows (in millions): Balance, December 31, 2000 $840 Net transfers to cash basis loans 303 Net transfers to other real estate (7) Net paydowns (40) Charge-offs (70) Loan sales (28) Other (50) Transfers out of Bankers Trust Corporation* (38) -------------------------------------------------------------------------------- Balance, June 30, 2001 $910 ================================================================================ *Reflects the cash basis loans of certain legal entities transferred to Deutsche Bank or sold. The Corporation's total cash basis loans amounted to $910 million at June 30, 2001, up $70 million, or 8 percent, from December 31, 2000. Impaired loans under SFAS 114, were $1,011 million and $858 million at June 30, 2001 and December 31, 2000, respectively. Included in these amounts were $826 million and $725 million of loans that required a specific allowance of $340 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 June 30 of each year. The rates used in determining the gross amount of interest that would have been recorded at the original rate were not necessarily representative of current market rates.
Six Months Ended June 30, ----------------- (in millions) 2001 2000 ---------------------------------------------------------------------------------------------------- Domestic Loans Gross amount of interest that would have been recorded at original rate $46 $35 Less, interest, net of reversals, recognized in interest revenue 10 20 ---------------------------------------------------------------------------------------------------- Reduction of interest revenue 36 15 ---------------------------------------------------------------------------------------------------- International Loans Gross amount of interest that would have been recorded at original rate 1 2 Less, interest, net of reversals, recognized in interest revenue -- -- ---------------------------------------------------------------------------------------------------- Reduction of interest revenue 1 2 ---------------------------------------------------------------------------------------------------- Total reduction of interest revenue $37 $17 ====================================================================================================
26 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. 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) June 30, 2001 December 31, 2000 -------------------------------------------------------------------------------- Interest-earning assets $20,305 $22,230 Noninterest-earning assets 3,116 2,803 Interest-bearing liabilities 18,545 14,507 Noninterest-bearing liabilities 4,317 4,815 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. ACCOUNTING DEVELOPMENTS In July 2001, the FASB issued SFAS 141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets." SFAS 141 requires that all business combinations initiated after June 30, 2001 be accounted for by the purchase method and eliminates the use of the pooling-of-interests method. This requirement will have no impact on the Corporation since, as a subsidiary, it could not meet the requirements for the pooling-of-interests method. Other provisions of SFAS 141 and SFAS 142 require that, as of January 1, 2002, goodwill no longer be amortized, reclassifications between goodwill and other intangible assets be made based upon certain criteria, and that tests for impairment of goodwill be performed. The Corporation is in the process of evaluating the potential impact of the new standards on its consolidated financial statements as plans for implementation proceed. 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 carries forward most of the provisions of SFAS 125. It includes provisions for additional disclosure requirements, which were effective for fiscal years ending after December 15, 2000, as well as new criteria to be applied prospectively, effective for the 27 quarter commencing April 1, 2001, for nonconsolidation of qualifying special purpose entities. The adoption of SFAS 140 for financial assets transferred after March 31, 2001 does not impact previously reported transactions and did not have a material impact on the Corporation's net income, stockholder's equity or total assets in the second quarter of 2001. 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 1980's 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. On July 17, 2001, the California Superior Court, County of Los Angeles, in which are pending Stuber, et al. v. Merrill Lynch Pierce Fenner & Smith, Inc., et al. and Gomes, et al. v. Merrill Lynch Pierce Fenner & Smith, Inc., et al., sustained demurrers by the Corporation to the model complaints in these actions. The plaintiffs were given 30 days to replead. Two other individual actions were brought in Montana state court. The actions have been removed to federal district court in Montana. 28 The Corporation believes that it has meritorious defenses in these actions 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. 29 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 23 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. 30 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 filed one report on Form 8-K for the quarter ended June 30, 2001. - The report dated May, 18, 2001 and filed June 7, 2001 reported under Item 5 thereof that three Directors of the Corporation submitted resignations and a new Chairman of the Board, Chief Executive Officer and Director were elected; under Item 7 thereof the By-Laws, as amended. 31 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 August 14, 2001. Bankers Trust Corporation By:/s/ RONALD HASSEN ------------- RONALD HASSEN Senior Vice President, Controller and Principal Accounting Officer 32 BANKERS TRUST CORPORATION FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 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.