-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VKX8/jpM6cQNZ9tkAxr1W7M6esw78T3ULN6vjViujnMT257QDbHV7SvjeDYvjdGt DAcPVfP9Lxunrvjujxah9A== 0001005477-01-002519.txt : 20010409 0001005477-01-002519.hdr.sgml : 20010409 ACCESSION NUMBER: 0001005477-01-002519 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANKERS TRUST CORP CENTRAL INDEX KEY: 0000009749 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 136180473 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-05920 FILM NUMBER: 1591251 BUSINESS ADDRESS: STREET 1: 130 LIBERTY ST CITY: NEW YORK STATE: NY ZIP: 10006 BUSINESS PHONE: 2122502500 MAIL ADDRESS: STREET 1: 130 LIBERTY STREET CITY: NEW YORK STATE: NY ZIP: 10006 FORMER COMPANY: FORMER CONFORMED NAME: BANKERS TRUST NEW YORK CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: BT NEW YORK CORP DATE OF NAME CHANGE: 19671107 10-K 1 0001.txt FORM 10-K - -------------------------------------------------------------------------------- United States Securities and Exchange Commission Washington, D.C. 20549 Form 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 or |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-5920 Bankers Trust Corporation (Exact Name of Registrant as Specified in its Charter) New York 13-6180473 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 130 Liberty Street New York, NY 10006 (Address of Principal (Zip Code) Executive Offices) (212) 250-2500 (Registrant's Telephone Number, Including Area Code) Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| Because the registrant is a wholly-owned subsidiary of Deutsche Bank AG, none of the registrant's outstanding voting stock is held by non-affiliates of the registrant. As of the date hereof, 1 share of the registrant's common stock, $1 par value, was issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE None - -------------------------------------------------------------------------------- Form 10-K Cross-Reference Index Part I Item No. Pages 1. Business Description of Business 65 Supplemental Financial Data International Operations 9, 47 Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential 61-63 Investment Portfolio 32-33 Loan Portfolio 19-23, 31, 33-34 Summary of Credit Loss Experience 15-18, 31, 35 Deposits 64 Return on Equity and Assets 2 Short-Term Borrowings 35 2. Properties 68 3. Legal Proceedings 68 4. Submission of Matters to a Vote of Security Holders * Part II 5. Market for Registrant's Common Equity and Related Stockholder Matters 38-39 6. Selected Financial Data 2 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 3 7a. Quantitative and Qualitative Disclosures About Market Risk 12-13 8. Financial Statements and Supplementary Data Bankers Trust Corporation and Subsidiaries (Consolidated) 24-28 Notes to Financial Statements 29-59 Independent Auditors' Report 60 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure * Part III 10. Directors and Executive Officers of the Registrant Directors 69 Executive Officers 70 Section 16(a) Beneficial Ownership Reporting Compliance * 11. Executive Compensation 73-75 12. Security Ownership of Certain Beneficial Owners and Management * 13. Certain Relationships and Related Transactions 71 Part IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a)(1) Financial Statements--See Item 8. (2) Financial Statement Schedules All schedules normally required by Form 10-K are omitted since they are either not applicable or the required information is shown in the financial statements or the notes thereto. (3) Exhibits 3. Articles of Incorporation and By-laws, as amended ** 4. Instruments Defining the Rights of Security Holders, Including Indentures (i) Long-Term Debt Indentures *** 10. Material Contracts (i) Contracts not made in the ordinary course of business ** (ii) (C) Acquisition or Sale of any Property, Plant or Equipment ** (ii) (D) Leases for Principal Premises described on page 68 ** (iii) (A) Management Contracts and Compensation Plans ** 12. Statements Re Computation of Ratios ** 21. Subsidiaries of the Registrant ** 23. Consent of Experts ** 24. Power of Attorney ** 99. Additional Exhibits (i) Unaudited Pro Forma Condensed Financial Statements for the year ended December 31, 2000 ** (b) Reports on Form 8-K--The Corporation filed one report on Form 8-K during the quarter ended December 31, 2000. The report dated September 29, 2000 and filed October 16, 2000 reported: under Item 2 thereof that the Corporation transferred BT Holdings (New York), Inc., a wholly-owned subsidiary, to DB U.S. Financial Markets Holding Corporation and Taunus Corporation, which are an indirect and direct subsidiary, respectively, of Deutsche Bank AG. - -------------------------------------------------------------------------------- * Not applicable. ** A copy of any exhibit not contained herein may be obtained by writing to James T. Byrne, Jr., Office of the Secretary, Bankers Trust Corporation, 130 Liberty Street, Mail Stop 2310, New York, NY 10006. *** The Corporation hereby agrees to furnish to the Commission, upon request, a copy of any instruments defining the rights of holders of long-term debt issued by Bankers Trust Corporation or its subsidiaries. This report on Form 10-K has not been approved or disapproved by the Securities and Exchange Commission nor has the Commission passed upon the accuracy or adequacy of this report. Bankers Trust Corporation and its Subsidiaries 1 Table 1 Five-Year Summary of Selected Financial Data*
- -------------------------------------------------------------------------------------------------------------------------------- ($ in millions, except per share data) 2000 1999 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- For the Year Net interest revenue $ 647 $ 807 $ 1,372 $ 1,359 $ 1,057 Noninterest revenue 2,186 3,500 3,757 4,861 4,117 Net income (loss) $ 512 $(1,603) $ (73) $ 866 $ 766 ================================================================================================================================ Per Common Share Basic Earnings (Loss) Per Share N/A N/A $ (1.05) $ 8.15 $ 7.12 Diluted Earnings (Loss) Per Share N/A N/A $ (1.05) $ 7.66 $ 6.76 Cash dividends declared N/A $1.00 $ 4.00 $ 4.00 $ 4.00 --as a percentage of net income N/A N/M N/M 52% 59% Book value, end of year N/A N/A 42.66 49.06 49.21 Market price High N/A N/A 136 7/16 133 5/8 90 7/8 Low N/A N/A 45 74 61 End of year N/A N/A 85 7/16 112 7/16 86 1/4 Price/earnings ratio, end of year N/A N/A N/M 13.8x 12.1x Cash dividend yield, end of year N/A N/A 4.7% 3.6% 4.6% At Year End Total assets $62,763 $68,157 $133,115 $140,102 $122,543 Long-term debt not included in risk-based capital 9,270 12,582 14,890 11,275 8,732 Long-term debt included in risk-based capital 2,073 2,424 3,113 3,312 2,576 Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital 1,307 1,428 1,420 1,472 730 Preferred stock of subsidiary -- -- -- -- 250 Preferred stock (Corporation) -- 376 394 658 810 Common stockholders' equity 4,382 3,974 4,302 5,050 5,068 Total stockholders' equity 4,382 4,350 4,696 5,708 5,878 Profitability Ratios Return on average common stockholders' equity 12.1% N/M N/M 15.6% 14.5% Return on average total stockholders' equity 11.8% N/M N/M 14.6% 13.3% Return on average total assets 0.80% N/M N/M 0.63% 0.63% Capital Ratios Common stockholders' equity to total assets, end of year 7.0% 5.8% 3.2% 3.6% 4.1% Total stockholders' equity to total assets, end of year 7.0% 6.4% 3.5% 4.1% 4.8% Average total stockholders' equity to average total assets 6.8% 4.6% 3.3% 4.4% 4.7% Bankers Trust Corporation: Risk-Based Capital Ratios Tier 1 Capital 12.5% 10.4% 7.5% 8.3% 9.3% Total Capital 18.8% 18.4% 13.6% 14.1% 13.8% Leverage Ratio 9.1% 7.3% 3.5% 4.4% 5.9% Bankers Trust Company: Risk-Based Capital Ratios Tier 1 Capital 24.0% 16.5% 10.5% 9.0% 9.3% Total Capital 26.5% 18.9% 13.4% 12.3% 12.9% Leverage Ratio 16.0% 12.3% 5.7% 5.4% 5.3% Employees, at December 31 In domestic offices 5,486 6,342 11,005 10,585 11,055 In foreign offices 682 1,433 9,536 8,070 6,881 - -------------------------------------------------------------------------------------------------------------------------------- Total 6,168 7,775 20,541 18,655 17,936 ================================================================================================================================
* Certain 2000 and 1999 amounts are not comparable to prior year periods due to significant business and net financial asset transfers to Deutsche Bank entities, charges reflecting changes in management intent and responsibility regarding certain assets and the sale of Bankers Trust Australia Limited in 1999. N/M Not Meaningful. N/A--Information is not applicable as Deutsche Bank AG acquired all outstanding shares of common stock of Bankers Trust Corporation from its shareholders at a price of $93.00 per share on June 4, 1999. 2 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- FINANCIAL REVIEW - -------------------------------------------------------------------------------- Management's discussion and analysis of Bankers Trust Corporation's results of operations and financial condition appears on pages 3 through 23. The discussion and analysis should be read in conjunction with the financial statements and supplemental financial data, which begin on page 24. Acquisition by Deutsche Bank AG Change in Control On June 4, 1999, the change-in-control ("COC") date, pursuant to an agreement dated as of November 30, 1998, between Deutsche Bank AG ("Deutsche Bank") and Bankers Trust Corporation ("Bankers Trust"), Deutsche Bank, through its U.S. holding corporation, Taunus Corporation ("Taunus"), acquired all of the outstanding shares of common stock of Bankers Trust from its shareholders at a price of $93.00 per share (the "Acquisition"). Deutsche Bank accounted for the Acquisition as a purchase. No purchase accounting adjustments were pushed down to Bankers Trust. On June 4, 1999, all Bankers Trust employee deferred compensation amounts vested in full. Employer contributions to individual employee retirement accounts also vested. In addition, all bonus-eligible employees on the date of COC became entitled to a pro rata bonus which was paid in cash on July 2, 1999 for that portion of the 1999 performance year ending on the COC date. The pro rata bonus was based on the greater of an employee's total (cash and deferred stock) 1998 performance bonus or the employee's average total 1996, 1997 and 1998 performance bonus awards. In conjunction with the Acquisition, during the second quarter of 1999 Bankers Trust Corporation together with its subsidiaries (the "Corporation" or the "Firm") incurred pre-tax charges of approximately $1.1 billion in COC-related costs, principally due to the aforementioned vesting of all employee deferred compensation amounts and related pro-rata bonus awards as well as a pre-tax restructuring charge of $459 million. Also, in connection with the Acquisition, the Corporation incurred other charges reflecting a change in management's intention regarding certain assets as a result of integrating the Corporation into Deutsche Bank, a change in certain pricing methodologies in order to conform to those of Deutsche Bank, and the transfer of certain available for sale securities to Deutsche Bank related entities based on changes in management responsibility. These one-time charges are included in Deutsche Bank's consolidated financial statements as of June 30, 1999 as part of the goodwill associated with the Acquisition. The goodwill is being amortized over 15 years. Prior to the Acquisition, the Corporation was a global financial institution, providing products and services to its clients worldwide. Subsequent to the Acquisition and associated reorganization activities, the Corporation and its subsidiaries conduct their business primarily in the Americas, focusing their activities principally in the asset management, lending, institutional services, and private banking businesses. Disposition of Assets On June 5, 1999, Bankers Trust transferred its wholly-owned subsidiary BT Alex. Brown Incorporated ("BTAB") and substantially all of its interest in Bankers Trust International PLC ("BTI") to Deutsche Bank Securities Inc. ("DBSI") and Deutsche Holdings (BTI) Ltd., respectively, which are wholly-owned subsidiaries of Deutsche Bank. The transfer of BTAB to DBSI took the form of an exchange of stock pursuant to which BTAB became a wholly-owned subsidiary of DBSI and Bankers Trust received shares of DB U.S. Financial Markets Holding Corporation ("DBUSH"), the parent of DBSI. In the third quarter of 1999, the Corporation sold its shares of DBUSH to Taunus for approximately $800 million. The transfer of substantially all of Bankers Trust's interest in BTI was for cash in the amount of approximately $1.7 billion. On August 31, 1999, the Corporation completed the sale of Bankers Trust Australia Limited ("BTAL"), a wholly-owned subsidiary, to the Principal Financial Group for a price of approximately $1.3 billion. Prior to the sale, BTAL remitted to the Corporation a dividend for accumulated retained earnings that included proceeds from BTAL's sale of its investment banking division to Macquarie Bank. The Corporation also received cash for the assumption of certain BTAL long-term debt. In addition, according to the sale agreement, the Corporation is entitled to receive an additional payment. The amount and timing of such payment is not known at this time. The Corporation recognized a pre-tax gain of approximately $779 million in the third quarter of 1999 on the sale of BTAL. On September 29, 2000, Bankers Trust transferred its wholly-owned subsidiary BT Holdings (New York), Inc. ("BTH") to DBUSH and Taunus. The transfer of BTH to DBUSH took the form of an exchange of stock pursuant to which BTH became a wholly-owned subsidiary of DBUSH. The Corporation received shares of DBUSH equal to the fair market value of BTH's net assets, substantially all of which were financial assets, on the date of transfer. The Corporation recognized a pre-tax gain of approximately $561 million for the year ended December 31, 2000. In connection with the Acquisition, and in addition to the foregoing transactions, the Corporation has transferred and will continue to transfer certain entities/businesses and financial assets and liabilities to 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. Bankers Trust Corporation and its Subsidiaries 3 - -------------------------------------------------------------------------------- Capital Contribution In conjunction with the Acquisition and to strengthen the Corporation's capital base, Deutsche Bank made a capital contribution of $1.4 billion in the second quarter of 1999. Results of Operations Summary of 2000 Results For the year 2000, the Corporation reported net income of $512 million, compared to a net loss of $1,603 million in 1999. For the year, total net revenue (net interest revenue after provision for credit losses-loans plus noninterest revenue) of $2.852 billion was down $1.513 billion, from 1999 revenue of $4.365 billion. The decrease in revenue is partly due to the transfer of BTAB and the sale of BTAL in 1999. The current year included a pre-tax gain of $561 million on the transfer of BTH while the prior year included a pre-tax gain of approximately $779 million on the sale of BTAL. Total noninterest expenses for the year decreased $3.828 billion, or 66 percent, from 1999. The prior year included pre-tax charges of approximately $1.1 billion in COC-related costs and pre-tax charges of $633 million related to restructuring and other related activities. In addition, salaries and commissions, and incentive compensation and employee benefits decreased in 2000 by $1.253 billion from 1999, or 59 percent, primarily due to a decrease in the average number of employees resulting from the transfers and sale of certain entities in 2000 and 1999 and staff reductions resulting from the Acquisition. At December 31, 2000, total cash basis loans amounted to $840 million, up from $737 million at December 31, 1999. Because of the significant business changes previously mentioned, the Corporation's historical financial statements are not fully comparable for all periods presented. Business Segments Business segments results, which are presented in accordance with accounting principles generally accepted in the United States of America, are derived from internal management reports. In conjunction with the Acquisition, the Corporation realigned its business activities to conform to Deutsche Bank's historical management structure. In this regard, Retail and Private Banking focuses on the Corporation's private banking activities. The Asset Management division combines the Corporation's institutional asset management and retail investment fund businesses. Global Corporates and Institutions includes the Corporation's commercial banking and investment banking activities as well as trading activities. This business segment also includes credit business, trade finance, structured finance and cash management. Global Technology and Services includes four product groups: payments, securities processing, custody services and electronic banking services. Refer to Note 21 of Notes to Financial Statements for further discussion of the business segments' activities. Corporate Items include revenue and expenses that have not been allocated to business segments. Prior period results have been restated for changes in management structure. The information presented below reflects the results by business segment (in millions): Total Non- Pretax Year Ended Total Net interest Income December 31, 2000 Revenue Expenses (Loss) - ------------------------------------------------------------------------------- Retail and Private Banking $ 160 $ 153 $ 7 Asset Management 303 295 8 Global Corporates and Institutions 869 701 168 Global Technology and Services 899 891 8 - ------------------------------------------------------------------------------- Total Business Segments 2,231 2,040 191 - ------------------------------------------------------------------------------- Corporate Items 621 (88) 709 - ------------------------------------------------------------------------------- Total $ 2,852 $ 1,952 $ 900 =============================================================================== Total Non- Pretax Year Ended Total Net interest Income December 31, 1999 Revenue Expenses (Loss) - ------------------------------------------------------------------------------- Retail and Private Banking $ 169 $ 189 $ (20) Asset Management 241 221 20 Global Corporates and Institutions 1,370 2,666 (1,296) Global Technology and Services 945 998 (53) - ------------------------------------------------------------------------------- Total Business Segments 2,725 4,074 (1,349) - ------------------------------------------------------------------------------- Corporate Items 1,640 1,706 (66) - ------------------------------------------------------------------------------- Total $ 4,365 $ 5,780 $(1,415) =============================================================================== Total Non- Pretax Year Ended Total Net interest Income December 31, 1998 Revenue Expenses (Loss) - ------------------------------------------------------------------------------- Retail and Private Banking $ 187 $ 175 $ 12 Asset Management 253 155 98 Global Corporates and Institutions 2,568 3,092 (524) Global Technology and Services 964 885 79 - ------------------------------------------------------------------------------- Total Business Segments 3,972 4,307 (335) - ------------------------------------------------------------------------------- Corporate Items 1,117 859 258 - ------------------------------------------------------------------------------- Total $ 5,089 $ 5,166 $ (77) =============================================================================== 4 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- The Retail and Private Banking business recorded pre-tax income of $7 million in 2000, compared to a pre-tax loss of $20 million in 1999. The 1999 results contain COC-related costs of approximately $21 million and higher personnel-related costs. In 1999, Retail and Private Banking reported a pre-tax loss of $20 million, down $32 million from 1998. The decrease reflected COC-related costs of approximately $21 million and lower revenue from commissions. Asset Management recorded pre-tax income of $8 million in 2000, compared to pre-tax income of $20 million in 1999. The 2000 results reflect higher revenue from fiduciary and funds management activities, which was more than offset by higher personnel-related costs. Asset Management pre-tax income of $20 million in 1999 decreased $78 million from 1998. The 1999 results contain COC-related costs of approximately $18 million and higher personnel-related costs. The Global Corporates and Institutions business recorded pre-tax income of $168 million in 2000, compared to a pre-tax loss of $1,296 million in 1999. The decrease in total net revenue from the prior year was mainly attributable to lower revenue from corporate finance fees and private equity investments. The decrease in expenses is mainly due to lower personnel-related expenses in the current year and COC-related costs in 1999 of approximately $848 million. Global Corporates and Institutions recorded a pre-tax loss of $1,296 million in 1999 compared to a pre-tax loss of $524 million in 1998. The 1999 results contain COC-related costs of approximately $848 million. Trading losses also negatively impacted the 1999 results. Total net revenue for 1999 includes the impact of a change in management's intention regarding certain assets as a result of integrating the Corporation into Deutsche Bank, as well as the transfer of certain securities available for sale to Deutsche Bank related entities. The 1998 results included losses related to widening credit spreads on high-yield debt securities, mark-to-market losses on investments in the unit's private equity portfolio and losses on securities available for sale resulting from the economic turmoil experienced in the third quarter of 1998. The Corporation's Global Technology and Services business recorded pre-tax income of $8 million for 2000 compared to a pre-tax loss of $53 million in 1999. The 1999 results contain COC-related costs of approximately $86 million. Global Technology and Services recorded a pre-tax loss of $53 million in 1999, down $132 million from 1998. Corporate Items include revenue and expenses that have not been allocated to business segments, the operating income and expenses of BTAL and Consorcio, and the results of smaller businesses that are not included in the main business segments. Due to the sale of BTAL in the third quarter of 1999, its results are not included as a reportable segment. Corporate Items also includes charges of $633 million for restructuring and other related activities for the year ended December 31, 1999. The Corporation intends to realign its client-focused businesses into two principal business groups: the Corporate and Investment Bank Group and the Private Clients and Asset Management Group to correspond to the reorganization currently being implemented in Deutsche Bank generally. The financial results have not been restated for this reorganization, as it was not announced until February 1, 2001. Financial Reporting Matters As used throughout this Annual Report, the term "International" signifies information based on the domicile of the customer, whereas the term "Foreign Office" refers to the location in which the transaction is recorded. Statement of Income Analysis Net Interest Revenue Net interest revenue for 2000 was $647 million, down $160 million from 1999. Net interest revenue for 1999 was $807 million, down $565 million from 1998. The significant transfers of entities and other financial assets and liabilities to Deutsche Bank in the second half of 1999 negatively impacted net interest revenue and levels of average interest-bearing assets and average interest-bearing liabilities for the year ended December 31, 1999 as compared to prior periods. The Firm's trading and risk management businesses include the use of interest rate instruments and related derivatives. These activities can periodically shift revenue between trading and net interest, depending on a variety of factors, including risk management strategies. Therefore, the Corporation views trading revenue and trading-related net interest revenue together, which is discussed in the trading revenue section below. The Firm's nontrading-related net interest revenue, generally a more stable component of overall net interest revenue than trading-related net interest revenue, was $527 million in 2000, compared to $564 million in 1999. This decrease was primarily due to the decrease in securities borrowed and securities purchased under resale agreements. Nontrading-related net interest revenue was $564 million in 1999 compared to $907 million in 1998. Prior period non-trading related net interest revenue has been restated to reflect certain reclassifications of business lines from trading-related net interest to non-trading related net interest. In 2000, the interest rate spread was 0.81 percent compared to 1.06 percent in 1999. Net interest margin increased to 1.32 percent from 1.18 percent in 1999. The yield on interest-earning assets increased by 100 basis points. The cost of interest-bearing liabilities increased by 125 basis points. Average interest-earning assets totaled $49.2 billion at December 31, 2000, down $20.2 billion from December 31, 1999. The decrease was primarily attributable to the decrease in securities available for sale and securities borrowed and securities purchased under resale agreements. Average interest-bearing liabilities totaled $45.4 billion at December 31, 2000, down $22.4 billion from December 31, 1999. The decrease was primarily attributable to the decrease in securities sold under repurchase agreements and interest-bearing deposits. Bankers Trust Corporation and its Subsidiaries 5 - -------------------------------------------------------------------------------- In 1999, the interest rate spread was 1.06 percent compared to 1.02 percent in 1998. Net interest margin increased to 1.18 percent from 1.16 percent in 1998. The yield on interest-earning assets declined by 51 basis points. The cost of interest-bearing liabilities declined by 55 basis points. Average interest-earning assets totaled $69.4 billion at December 31, 1999, down $51.2 billion from December 31, 1998. The decrease was primarily attributable to the decrease in trading account assets, securities borrowed and securities purchased under resale agreements. Average interest-bearing liabilities totaled $67.8 billion at December 31, 1999, down $49.8 billion from December 31, 1998. The decrease was primarily attributable to the decrease in securities sold under repurchase agreements and interest-bearing deposits. Table 2 Net Interest Revenue Analysis The table below presents the Corporation's trend of net interest revenue, average balances and rates. For further details on these statistics, see pages 61 through 63.
- ------------------------------------------------------------------------------------- ($ in millions) Year Ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------------- Net interest revenue Book basis $ 647 $ 807 $ 1,372 Tax equivalent adjustment* 3 15 31 - ------------------------------------------------------------------------------------- Fully taxable basis $ 650 $ 822 $ 1,403 ===================================================================================== Average balances Interest-earning assets $49,236 $69,411 $120,650 Interest-bearing liabilities 45,407 67,803 117,637 - ------------------------------------------------------------------------------------- Earning assets financed by noninterest-bearing funds $ 3,829 $ 1,608 $ 3,013 ===================================================================================== Average rates (fully taxable basis) Yield on interest-earning assets 7.39% 6.39% 6.90% Cost of interest-bearing liabilities 6.58 5.33 5.88 - ------------------------------------------------------------------------------------- Interest rate spread 0.81 1.06 1.02 Contribution of noninterest-bearing funds 0.51 0.12 0.14 - ------------------------------------------------------------------------------------- Net interest margin 1.32% 1.18% 1.16% =====================================================================================
* The applicable combined federal, state and local incremental tax rate used to determine the amounts of the tax equivalent adjustments (which recognize the income tax savings on tax-exempt assets) was 44 percent for 2000, and 41 percent for 1999 and 1998. Provision for Credit Losses--Loans The Corporation recorded a negative provision for credit losses--loans of $19 million for the year ended December 31, 2000. The negative provision for credit losses--loans amounted to $58 million in 1999 as compared with a provision of $40 million in 1998. A discussion of the Corporation's allowance for credit losses--loans appears on page 15. Trading Revenue Trading-related net interest revenue represents interest earned on cash instruments held in the trading accounts less the cost to fund both cash and derivatives positions. 6 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- The table below presents the Firm's trading revenue and trading-related net interest revenue by major category of market risk. These categories are based on management's view of the predominant underlying risk exposure of each of the Firm's trading positions. (in millions) Year Ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------- Interest rate risk $ 49 $(165) $(427) Foreign exchange risk 30 139 426 Equity and commodity risk 57 68 (183) - ------------------------------------------------------------------------------- Total trading revenue 136 42 (184) Trading-related net interest revenue 120 243 465 - ------------------------------------------------------------------------------- Combined total $ 256 $ 285 $ 281 =============================================================================== Interest Rate Risk Trading revenue related to interest rate risk for 2000 increased from 1999. The prior year period reflected the integration of Bankers Trust trading assets into Deutsche Bank. The prior period also included post-merger risk reduction initiatives and the impact of a change in management's intention regarding certain trading and trading related assets. 1999 trading revenue related to interest rate risk increased from 1998. The increase was primarily attributable to 1998 losses on high-yield securities, adverse market conditions in Latin America and Asia, valuation adjustments to trading assets for widening counterparty credit spreads, and Russian-related trading losses. Foreign Exchange Risk The decrease in trading revenue related to foreign exchange risk for 2000 as compared to the prior year period is primarily attributed to the overall reduction of the trading portfolio in addition to the sale of BTAL in the third quarter of 1999, which in the prior year was responsible for a significant portion of foreign exchange trading revenue. 1999 trading revenue related to foreign exchange risk decreased from 1998. The decrease is primarily related to reduced revenue in Australian markets in the first six months of 1999 coupled with the sale of BTAL in the third quarter of 1999. Equity and Commodity Risk The decrease in trading revenue related to equity and commodity risk for 2000 as compared to 1999 is reflective of prior year risk reduction initiatives consistent with the Corporation's overall curtailment of trading activities. 1999 trading revenue related to equity and commodity risk increased from 1998. The third quarter of 1998 included losses in global proprietary equity portfolios caused by increased market volatility, valuation adjustments related to the Corporation's European Equity business as well as decreased activity in the equity derivative books. Noninterest Revenue (Excluding Trading) The following table presents noninterest revenue (in millions): Year Ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------- Fiduciary and funds management $ 798 $ 1,017 $ 1,108 Corporate finance fees 142 542 1,255 Other fees and commissions 306 538 817 Securities available for sale gains (losses) 45 (89) (56) Insurance premiums -- 86 256 Other 759 1,364 561 - ------------------------------------------------------------------------------- Total $ 2,050 $ 3,458 $ 3,941 =============================================================================== Fiduciary and funds management revenue was down $219 million, or 22 percent, from 1999, which was down $91 million from 1998. The decreases in 2000 and 1999 were due primarily to the sale of BTAL in the third quarter of 1999. Corporate finance fees were down $400 million, or 74 percent, from 1999, which were down $713 million from 1998. Lower underwriting fees, loan syndication fees and merger and acquisition activities, which are primarily attributable to the transfer of BTAB to DBSI in June 1999, contributed to the declines in 2000 and 1999. Other fees and commissions were down $232 million, or 43 percent, from 1999, which were down $279 million from 1998. The declines in 2000 and 1999 were primarily due to lower fees for brokerage services resulting from the transfer of BTAB and BTI to Deutsche Bank related entities. Bankers Trust Corporation and its Subsidiaries 7 - -------------------------------------------------------------------------------- Securities available for sale gains were $45 million compared to securities available for sale losses of $89 million in 1999. The 1999 results reflect third party sale activity and the transfer of certain Latin American debt securities to Deutsche Bank related entities based on changes in management responsibility related to such securities following the COC date. Securities available for sale losses in 1999 increased $33 million from 1998. Insurance premiums decreased $86 million from 1999 which decreased $170 million, or 66 percent, from 1998. The Corporation exited the insurance business with the sale of its remaining stake in Consorcio, the Corporation's 50 percent owned Chilean insurance company, in the second quarter of 1999. Other noninterest revenue was $759 million in 2000, a decrease of $605 million from 1999 which increased $803 million, or 143 percent, from 1998. Revenue from equity investments, partially attributable to the transfer of BTH at the end of the third quarter of 2000, contributed to the decrease in 2000. Also, the current year included a pre-tax gain of $561 million on the transfer of BTH while the prior year included a pre-tax gain of approximately $779 million on the sale of BTAL. Noninterest Expenses The following table presents noninterest expenses (in millions): Year Ended December 31, 2000 1999 1998 - -------------------------------------------------------------------------------- Salaries and commissions $ 459 $ 1,039 $ 1,421 Incentive compensation and employee benefits 415 1,088 1,530 Change in control related incentive compensation and employee benefits -- 1,101 -- Agency and other professional service fees 220 430 501 Communication and data services 84 206 252 Occupancy, net 106 198 218 Furniture and equipment 136 221 252 Travel and entertainment 45 114 171 Provision for policyholder benefits -- 114 322 Other 535 636 499 Restructuring and other related activities (48) 633 -- - -------------------------------------------------------------------------------- Total $ 1,952 $ 5,780 $ 5,166 ================================================================================ Total noninterest expenses for 2000 decreased $3.828 billion, or 66 percent, from 1999. The 1999 results included $1.1 billion of change-in-control related incentive compensation and employee benefits, primarily as a result of accelerated amortization of deferred compensation amounts as of the COC date. During 1999, the Corporation recorded pre-tax charges for restructuring and other related activities totaling $633 million. Of this amount, $459 million related to a restructuring charge recorded in the second quarter in conjunction with the Acquisition. This charge reflected $394 million of severance and other termination-related costs as well as $65 million of other costs primarily related to lease terminations and write-offs of fixed assets and leasehold improvements. During the fourth quarter of 1999, the Corporation recorded additional charges related to restructuring and other related activities of $174 million in connection with its continuing efforts to streamline support functions and realign certain business activities. These charges reflected $116 million of severance and other termination-related costs, as well as $58 million of other costs primarily related to the intended liquidation of certain financial assets. Salaries and commissions expense decreased by $580 million, or 56 percent, in 2000, primarily due to a decrease in the average number of employees resulting from the transfer of BTAB and BTI to a Deutsche Bank entity in the second quarter of 1999, the sale of BTAL in the third quarter of 1999 and staff reductions resulting from the Acquisition. Incentive compensation and employee benefits decreased $673 million, or 62 percent, from 1999, resulting from a decrease in the average number of employees. The number of full-time staff at December 31, 2000 was 6,168 compared to 7,775 at December 31, 1999. In addition, 1999 included amortization expense for deferred compensation plans prior to the Acquisition. The provision for policyholder benefits decreased $114 million from 1999. The Corporation exited the insurance business with the sale of its remaining stake in Consorcio in the second quarter of 1999. 8 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Total noninterest expenses for 1999 increased $614 million, or 12 percent, from 1998. Salaries and commissions expense decreased by $382 million, or 27 percent, in 1999, primarily due to a decrease in the average number of employees resulting from the transfer of BTAB and BTI in the second quarter of 1999, the sale of BTAL in the third quarter of 1999 and staff reductions resulting from the Acquisition. Incentive compensation and employee benefits decreased by $442 million, or 29 percent, primarily due to the decrease in the average number of employees. The number of full-time staff at December 31, 1999 was 7,775 compared to 20,541 at December 31, 1998. As previously mentioned, 1999 included pre-tax charges for restructuring and other related activities totaling $633 million and $1.1 billion of COC-related incentive compensation and employee benefits. Taxes Income tax expense for 2000 amounted to $388 million, compared to income tax expense of $188 million in 1999 and an income tax benefit of $4 million in 1998. The effective tax rate for 2000 was 43 percent, while the 1999 and 1998 effective tax rates were (13) percent and 5 percent, respectively. International Operations The Corporation's assets and results of operations for 2000, 1999 and 1998 have been allocated between domestic and international operations in Note 22 of Notes to Financial Statements. This analysis, which is based on the domicile of the customer, incorporates numerous subjective assumptions and, as a result, is different from legal entity and segment results shown elsewhere in this report. Management views the operation of the Corporation on a segment basis, as disclosed on page 4. International net loss for 2000, 1999 and 1998 totaled $19 million, $1,134 million, and $211 million, respectively. Net income from domestic operations was $531 million, a negative $469 million, and $138 million for 2000, 1999, and 1998, respectively. The ratio of international to total net income is not meaningful. The net loss from international operations in 1999 was primarily due to the allocation of a significant portion of the COC-related and restructuring charges to international operations. The overall losses during 1998 from international operations were primarily losses in Asia and the Western Hemisphere. During 1998, the Asian regions suffered a loss of $210 million primarily due to trading activity. In 1998, the Western Hemisphere had a loss of $96 million attributable to losses on trading assets and losses on securities available for sale. International total assets were $11.0 billion, $18.6 billion, and $63.1 billion at December 31, 2000, 1999, and 1998 respectively. This represented 17 percent, 27 percent and 47 percent of total consolidated assets for these same periods, respectively. The $7.6 billion decrease in 2000 was primarily due to the continuing transfer of the Corporation's international operations of Deutsche Bank. The reduction of total international assets in 1999 was due to the transfer of international assets to Deutsche Bank which began after COC. Bankers Trust Corporation and its Subsidiaries 9 - -------------------------------------------------------------------------------- Changes in Financial Condition Balance Sheet Analysis Table 3 below highlights the trends in the balance sheet over the past two years. Because annual averages may tend to conceal trends and year-end balances can be distorted by one-day fluctuations, fourth quarter averages for each year are provided to give a better indication of trends in the balance sheet. Table 3 Condensed Balance Sheets--Fourth Quarter Averages
- ------------------------------------------------------------------------------------------------------------ (in millions) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------ Assets Interest-earning Interest-bearing deposits with banks $ 5,743 $ 3,867 $ 2,370 Federal funds sold 1,785 3,608 3,445 Securities purchased under resale agreements 1,305 5,478 19,316 Securities borrowed -- -- 17,903 Trading assets 11,591 6,221 25,206 Securities available for sale Taxable 261 3,412 10,038 Exempt from federal income taxes 16 16 1,692 - ------------------------------------------------------------------------------------------------------------ Total securities available for sale 277 3,428 11,730 Loans Domestic offices 25,258 16,132 12,847 Foreign offices 33 4,613 10,417 - ------------------------------------------------------------------------------------------------------------ Total loans 25,291 20,745 23,264 Customer receivables 383 569 1,622 - ------------------------------------------------------------------------------------------------------------ Total interest-earning assets 46,375 43,916 104,856 Noninterest-earning Cash and due from banks 2,090 1,745 2,721 Noninterest-earning trading assets 2,001 8,541 29,650 All other assets 6,401 8,774 11,853 Allowance for credit losses--loans (394) (508) (665) - ------------------------------------------------------------------------------------------------------------ Total $ 56,473 $ 62,468 $ 148,415 ============================================================================================================ Liabilities Interest-bearing Interest-bearing deposits Domestic offices $ 8,906 $ 12,200 $ 18,891 Foreign offices 3,042 7,659 16,650 - ------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 11,948 19,859 35,541 Trading liabilities 55 39 5,918 Securities loaned and securities sold under repurchase agreements 84 210 20,650 Other short-term borrowings 15,030 7,691 19,247 Long-term debt 11,697 13,915 18,645 Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures 1,316 1,427 1,419 - ------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 40,130 43,141 101,420 Noninterest-bearing Noninterest-bearing deposits 3,859 4,724 4,362 Noninterest-bearing trading liabilities 2,582 4,516 26,454 All other liabilities 5,560 5,542 11,271 - ------------------------------------------------------------------------------------------------------------ Total Liabilities 52,131 57,923 143,507 Preferred Stock of Subsidiary -- -- 144 - ------------------------------------------------------------------------------------------------------------ Stockholders' Equity Preferred stock -- 392 394 Common stockholders' equity 4,342 4,153 4,370 - ------------------------------------------------------------------------------------------------------------ Total Stockholders' Equity 4,342 4,545 4,764 - ------------------------------------------------------------------------------------------------------------ Total $ 56,473 $ 62,468 $ 148,415 ============================================================================================================
10 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Liquidity and Capital Resources Management believes that the Corporation has sufficient liquidity and capital resources to meet the needs of its business operations. 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 December 31, 2000, this credit line totaled approximately $4.7 billion. Of this amount, approximately $2.6 billion was drawn. In addition, the Corporation has received unsecured financing from Deutsche Bank via its indirect subsidiaries in the amount of $2.8 billion. The Corporation's consolidated long-term debt and mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital ("trust preferred capital securities"), at December 31, 2000 totaled $12.6 billion, most of which was unsecured, and consisted of $8.1 billion in senior borrowings, $3.2 billion of subordinated debt, and $1.3 billion of trust preferred capital securities. These liabilities mature between 2001 and 2037, as detailed in Notes 9 and 10 of Notes to Financial Statements. Capital Resources The Corporation pursues capital management with the objective of enhancing its ability to execute its global strategic business plans while retaining financial flexibility. Management believes that a strong capital base is critical to achieving these objectives. Consolidated total stockholders' equity totaled $4.382 billion on December 31, 2000, up $32 million from year-end 1999, which was down $346 million, or 7 percent, from year-end 1998. The current year's increase was primarily due to net income partially offset by the repurchase of preferred stock. The decrease in 1999 was primarily due to the net operating loss of $1.6 billion offset in part by a capital contribution from Deutsche Bank of $1.4 billion. The Corporation actively monitors compliance with bank regulatory capital requirements, focusing primarily on the risk-based capital guidelines. The Corporation manages its capital base and on- and off-balance sheet items to ensure that it remains strongly capitalized. The Federal Reserve Board's risk-based capital guidelines address the capital adequacy of bank holding companies and banks (collectively "banking organizations"). These guidelines include a definition of capital, a framework for calculating risk-weighted assets and minimum risk-based capital ratios to be maintained by banking organizations. A banking organization's risk-based capital ratios are calculated by dividing its qualifying capital by its risk-weighted assets. The Federal Reserve Board also has a minimum Leverage ratio that is used as a supplement to the risk-based capital ratios in evaluating the capital adequacy of banks and bank holding companies. The Leverage ratio is calculated by dividing Tier 1 Capital by adjusted quarterly average assets. The Corporation had previously adopted the market risk amendment to the risk-based capital guidelines issued by the Federal Reserve, which requires the use of internal models to measure market risk in the calculation of the risk-weighted assets for trading accounts. This amendment is consistent with the amendment to the Basle Capital Accord adopted by the Basle Committee on Banking Supervision at the Bank for International Settlements ("the BIS"). The following discussion of the risk-based capital and leverage ratios should be read in conjunction with Note 14 of the Notes to Financial Statements, which defines the components of Tier 1, Tier 2 and Tier 3 Capital, as well as the regulatory guidelines for well-capitalized banks and bank holding companies. The Corporation's and BTCo's regulatory capital ratios are presented in Table 4. During 2000, the Corporation's Tier 1 Capital ratio increased 210 basis points which is attributable to the increase in Tier 1 Capital of $586 million, along with the decrease in risk-weighted assets of $2.6 billion. The Tier 1 Capital increase was primarily caused by the 2000 net operating income of $512 million. Risk-weighted assets decreased principally because positions were liquidated or transferred to other Deutsche Bank affiliates. The Total Capital ratio increased 40 basis points as the decrease in risk-weighted assets more than offset the decline of $305 million in Total Capital. The Leverage ratio increased 180 basis points due to the increase in Tier 1 Capital and a decrease of $6.0 billion in adjusted quarterly average assets. The positive effects of the aforementioned operating income, asset liquidations and transfers were also the main reasons for comparative variances in BTCo's ratios. During 2000, BTCo's Tier 1 Capital ratio increased 750 basis points due to the increase in Tier 1 Capital of $451 million along with a reduction of $9 billion in risk-weighted assets. Total Capital ratio increased 760 basis points due also to the effects of income and the reduction in assets. The Leverage ratio increased 370 basis points due primarily to the reduction of $8.1 billion in quarterly average assets. Table 4 presents the regulatory capital ratios of the Corporation and BTCo at December 31, 2000 and 1999 and the well-capitalized guidelines. Bankers Trust Corporation and its Subsidiaries 11 - -------------------------------------------------------------------------------- Table 4 Regulatory Capital Ratios Well December 31, December 31, Capitalized 2000 1999 Guidelines - ------------------------------------------------------------------------------- Corporation Risk-Based Ratios Tier 1 Capital 12.5% 10.4% 6.0% Total Capital 18.8% 18.4% 10.0% Leverage Ratio 9.1% 7.3% N/A BTCo Risk-Based Ratios Tier 1 Capital 24.0% 16.5% 6.0% Total Capital 26.5% 18.9% 10.0% Leverage Ratio 16.0% 12.3% 5.0% N/A Not Applicable. The following were the essential components used in calculating the Corporation's and BTCo's risk-based capital ratios: (in millions) December 31, 2000 1999 - -------------------------------------------------------------------------------- Corporation Tier 1 Capital $ 5,048 $ 4,462 Tier 2 Capital 2,508 3,399 - -------------------------------------------------------------------------------- Total Capital $ 7,556 $ 7,861 ================================================================================ Total risk-weighted assets $40,232 $42,823 ================================================================================ BTCo Tier 1 Capital $ 6,161 $ 5,710 Tier 2 Capital 651 851 - -------------------------------------------------------------------------------- Total Capital $ 6,812 $ 6,561 ================================================================================ Total risk-weighted assets $25,683 $34,657 ================================================================================ Risk Management Market Risk 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. One summary measure of market risk is Daily Price Volatility. The Daily Price Volatility of a portfolio is the potential loss in fair value that statistically would be exceeded only 1 percent of the time if that portfolio were held unchanged for one day. As such, Daily Price Volatility falls within a general class of risk measures that are referred to as Value at Risk ("VaR"). The Corporation's Daily Price Volatility is calculated using proprietary simulation and risk modeling techniques. Tables 5 and 6 provide information on the Daily Price Volatility associated with the Corporation's market risk positions that are reported as trading assets and liabilities. Effective October 1, 1999 the Corporation adopted the market risk VaR models and methodologies that are used throughout the Deutsche Bank Group for various purposes, including regulatory capital. Although the methodologies employed by the former and current models differ in some respects, both models meet the regulatory requirements and have been approved by the banking regulators in the United States for use in risk-based capital. Data presented for 2000 are not comparable to those presented for 1999 due to the significant business and net financial asset transfers to Deutsche Bank entities, as well as continued risk reduction efforts begun in the third quarter of 1998. Tables 5 and 6 show that the Corporation's trading account market risk as measured by Daily Price Volatility declined in 2000 on an average and spot basis by 58 percent and 30 percent, respectively. These reductions reflect the continuing effects of integrating the Corporation into the Deutsche Bank Group. The significant reduction in equity risk at December 31, 2000 is primarily related to private equity investments held by BTH which were transferred to DBUSH effective September 29, 2000. As a result of this transfer and other factors, the market risk in the non-trading portfolios is immaterial at December 31, 2000. The primary trading account market risks remaining at December 31, 2000 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. Distressed debt is classified as equity risk after the implementation of Deutsche Bank models at the beginning of the fourth quarter 1999. 12 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Table 5 Trading Daily Price Volatility Statistics for 2000 (in millions) - ------------------------------------------------------------------------------- Average Minimum Maximum December 31, Risk Class 2000 2000 2000 2000 - ------------------------------------------------------------------------------- Interest Rate $ 3.9 $ 1.9 $ 6.1 $ 5.3 Currency 1.1 0.2 3.1 0.2 Equity 4.4 0.7 23.6 0.8 Commodity -- -- -- -- Diversification (2.8) -- -- (0.9) - ------------------------------------------------------------------------------- Overall Portfolio $ 6.6 * * $ 5.4 =============================================================================== Table 6 Trading Daily Price Volatility Statistics for 1999 (in millions) - ------------------------------------------------------------------------------- Average Minimum Maximum December 31, Risk Class 1999 1999 1999 1999 - ------------------------------------------------------------------------------- Interest Rate $ 11.1 $ 4.2 $ 18.4 $ 5.0 Currency 2.3 0.1 7.8 0.6 Equity 8.7 3.4 18.8 5.8 Commodity 0.6 -- 1.8 -- Diversification (7.0) -- -- (3.7) - ------------------------------------------------------------------------------- Overall Portfolio $ 15.7 * * $ 7.7 =============================================================================== * The minimum (maximum) for each risk category occurred on different days so it is not meaningful to sum the risk class amounts presented above. For example, during 2000 the minimum Trading Daily Price Volatility was $2.1 million and the maximum Trading Daily Price Volatility was $24.2 million. Credit Risk Management In conformity with Deutsche Bank policies, the Credit Risk Management Department, headed by the Chief Credit Officer, is responsible for developing credit policies, as well as for monitoring and managing overall credit risk. The department evaluates the creditworthiness of each borrower/issuer/counterparty and assigns a rating for each. Credit limits are established at the portfolio level by borrower/issuer/counterparty and by other categories. A credit officer is responsible for reviewing the entire credit risk portfolio of a borrower/issuer/counterparty regardless of the nature of the exposure (e.g., loans, securities, and derivatives). Credit officers also monitor the usage of credit risk by entity versus the limits at the product and business activity level. The Credit Risk Management Department monitors country exposures and industry, borrower/issuer/counterparty, product and regional risk concentrations in order to evaluate the degree of diversification in the portfolio. Derivatives Derivatives are swaps, futures, forwards, options and other similar types of contracts based on interest rates, foreign exchange rates and the prices of equities and commodities (or related indices). Derivatives are generally either privately-negotiated over-the-counter ("OTC") contracts or standard contracts transacted through regulated exchanges. OTC contracts generally consist of swaps, forwards and options. In the normal course of business, with the agreement of the original customer, OTC derivatives may be terminated or assigned to another customer. Exchange-traded derivatives include futures and options. These capital markets products are described further in Note 23 of Notes to Financial Statements. Derivatives may be used for either trading or end-user purposes. Bankers Trust Corporation and its Subsidiaries 13 - -------------------------------------------------------------------------------- Trading Derivatives The Corporation holds derivatives in connection with its activities as a dealer acting as principal for particular transactions with clients, as a market maker quoting bid and offer prices to provide liquidity and regular availability of derivatives for clients and as a risk manager of its own trading positions resulting from these client-driven transactions. The risks of derivative positions are managed in accordance with Deutsche Bank's risk management policies. As part of the ongoing integration into Deutsche Bank, the Corporation's former derivatives activities have been largely transferred to Deutsche Bank entities, and it is anticipated that the existing positions at December 31, 2000 will be reduced further over time. Gains and losses from trading derivatives are included in trading revenue as they occur. Contracts with positive fair values are recorded as assets and contracts with negative fair values are recorded as liabilities, after application of qualifying master netting agreements. These positions may vary in size from period to period, similar to the positions in cash instruments also carried in the Corporation's trading account. Average trading assets and trading liabilities related to derivatives during 2000 were $3.4 billion and $2.1 billion, respectively. The notional amounts, which are not recorded on the balance sheet, of trading derivatives totaled $56 billion at December 31, 2000 and indicate the volume of activity but do not represent the Corporation's exposure to market or credit risk. End-User Derivatives The Corporation utilizes end-user derivatives to manage exposures to interest rate and foreign currency risks associated with certain liabilities such as interest-bearing deposits, short-term borrowings and long-term debt. For example, the majority of the Corporation's end-user derivatives involve certain instruments (principally interest rate and currency swaps) used to transform fixed-rate-paying liabilities into variable-rate-paying liabilities. See Note 23 and Note 25 of Notes to Financial Statements for additional end-user information and for the fair value of end-user derivatives and related financial instruments. The notional amounts, which are not recorded on the balance sheet, of end-user derivatives totaled $20 billion at December 31, 2000 and indicate the volume of activity but do not represent the Corporation's exposure to market or credit risk. End-user derivative contracts represent approximately 26 percent of the aggregate notional amounts of all derivatives outstanding at year-end. Market Risk The market risk of derivatives arises principally from the potential for changes in interest rates, foreign exchange rates, and equity and commodity prices and is generally similar to the market risk of the cash instruments underlying the contracts. The market risk to the Corporation is not measured by the price sensitivity of the individual contracts, but by the net price sensitivity of the relevant portfolio, including cash instruments. Exposures are generally managed by taking risk-offsetting positions. Therefore, the Corporation believes it is not meaningful to view the market risk of derivatives in isolation. Market exposures arising from derivatives are monitored and are included in the Daily Price Volatility amounts discussed in the preceding Risk Management section. Liquidity Risk In times of stress, sharp price movements or volatility shocks may reduce liquidity in certain derivatives positions, as well as in cash instruments. The liquidity risk of derivatives is substantially based on the liquidity of the underlying cash instrument, which affects the ability of the Corporation to alter the risk profile of its positions rapidly and at a reasonable cost. The Corporation's mark-to-market practices for derivatives include adjustments in consideration of liquidity risks, when appropriate. These practices are consistent with those applied to the Corporation's trading positions in cash instruments. Derivatives-Related Credit Risk Derivative transactions create dynamic credit exposure which changes as markets move. The credit risk of derivatives arises from the potential for a customer to default on its contractual obligations. Accordingly, credit risk related to derivatives depends on the following: the current fair value of the contracts with the customer; the potential credit exposure over time; the extent to which legally enforceable netting arrangements allow the fair value of offsetting contracts with that customer to be netted against each other; the extent to which collateral held against the contracts reduces credit risk exposure; and the likelihood of default by the customer. 14 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- The Corporation monitors and manages the credit risk associated with derivatives by applying a uniform credit process for all credit exposures. The credit risk of derivatives is included in Deutsche Bank's credit risk management systems. In order to reduce derivatives-related credit risk, the Corporation enters into master netting agreements that provide for offsetting of all contracts under each such agreement and obtains collateral where appropriate. Such master netting agreements contemplate payment netting as well as the net settlement of all covered contracts through a single payment in a single currency with the same counterparty in the event that a default (including insolvency) under the agreement occurs. Credit risk exposure is monitored on a gross and a net basis and on a collateralized and an uncollateralized basis, as appropriate. Current credit risk is calculated based on the current replacement cost of outstanding positions with customers in OTC derivative financial instruments. The gross replacement cost of a derivative portfolio with a customer is the positive mark-to-market value of all transactions with that customer without the effects of netting or collateral arrangements. The replacement costs, after netting, of $2.0 billion more accurately portray the credit risk associated with the Corporation's derivatives activities at December 31, 2000 than do the gross replacement costs. The Corporation applies netting based upon the criteria prescribed by Financial Accounting Standards Board ("FASB") Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts," ("FIN 39") which provides that offsetting is appropriate where the available evidence indicates that there are reasonable assurances that the right of setoff contained in a master netting agreement governing derivatives contracts would be upheld after default, including in the event of the customer's bankruptcy. Collateral also reduces credit risk. The Corporation generally accepts collateral in the form of cash, U.S. Treasuries, and other approved securities (generally, only liquid, marketable, publicly-traded securities are acceptable). The international bank regulatory standards for risk-based capital consider the credit risk arising from derivatives in the assessment of capital adequacy. These standards were issued under the Basle Capital Accord of July 1988 and adopted in 1989 by the U.S. bank regulators, including the Federal Reserve Board. These standards use a formula-based assessment of customer credit risk which, as amended at year-end 1995, reflect the credit-risk-reducing impact of legally enforceable master netting agreements. These standards include a calculation for estimating the potential future credit exposure caused by potential price volatility (the "add-on"). At December 31, 2000, the risk-weighted amounts (reflecting both current and potential future credit exposure) that were calculated based on these international standards for derivative financial instruments aggregated to $739 million after application of risk weightings. Allowance for Credit Losses--Loans Overview The Corporation's loan portfolio primarily consists of commercial lending transactions to a diverse customer and geographic base. As such, the Corporation's commercial loans tend to be individually large in size and are non-homogeneous. As part of the Corporation's overall management and control process, the Asset Quality Review Department is responsible for performing an ongoing independent examination of the loan portfolio. The review program is designed to identify, at the earliest possible stage, counterparties who might be facing financial difficulties. All significant counterparty relationships are reviewed on a periodic basis, meaning that individual loans to a particular counterparty are grouped together in evaluating the credit risk to such counterparty. Loans under special supervision, such as cash basis and renegotiated loans, as well as loans criticized by the Asset Quality Review Department under regulatory guidelines (i.e., those loans classified as Special Mention, Substandard and Doubtful) are also reviewed on a periodic basis. In addition, all levels of management are required to bring to the attention of the Asset Quality Review Department any credit risk where an additional review of the counterparty's financial position is believed to be warranted. The Asset Quality Review Department reports at least quarterly on the portfolio to the Audit and Fiduciary Committee of the Board of Directors. In addition to the above procedures, Federal Reserve and State of New York bank examiners (the "Bank regulatory authorities") perform periodic examinations of the Corporation's credit risks, including the loan portfolio. The reports on these examinations are also reviewed by the Asset Quality Review Department with the Audit and Fiduciary Committee of the Board of Directors. Bankers Trust Corporation and its Subsidiaries 15 - -------------------------------------------------------------------------------- Determination of the Allowance for Credit Losses--Loans The allowance for credit losses--loans represents management's estimate of probable loan losses that have occurred as of the date of the financial statements. In 1999, the Corporation's policies and procedures were revised and improved to ensure a systematic and adequately documented process for the estimation of credit losses and related charge-offs. As a result, the Corporation recorded a $49 million reversal of the allowance for credit losses--loans in the third quarter of 1999. As noted above, all significant counterparty relationships and criticized loans are reviewed periodically to allow management to determine the level of the allowance for credit losses--loans. This process results in the following three components of the allowance for credit losses--loans: Specific Allowance--The specific allowance component is the amount required for impaired loans as calculated under SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). The specific component of the overall allowance is determined through a loan-by-loan analysis of impaired loans that considers expected future cash flows, the value of collateral and other factors that may impact the borrowers' ability to pay. During 1999, the population of loans that were individually evaluated for impairment under the SFAS 114 methodology was significantly broadened to include all loans rated Substandard and Doubtful in the Corporation's internal class system. Country Risk--The country risk component is the amount provided for exposures in countries experiencing financial stress, excluding those exposures already identified and evaluated as impaired loans. The Deutsche Bank Group Board approves the countries that warrant risk provisioning together with the percentages to be applied to the exposures in these countries. The determination of countries to be included considers both historical loss experience and market data such as economic, political and other relevant factors affecting a country's financial condition. The list of countries and associated percentages are periodically reviewed and changed as necessary. Expected Loss--The expected loss component is an estimate of the remaining probable losses inherent in the loan portfolio. This component is determined by using a statistical model that utilizes a loan-type, risk-rated stratified approach. Loss factors are derived by analyzing historical charge-offs and recent economic events and applied to categories of loans by type and risk rating. In calculating the loss factors, the Corporation utilizes the historical loss experience of its portfolios and the actual amounts outstanding of the portfolios segregated by borrower/counterparty ratings and several broad classes of obligors. These ratings are internally determined mathematical expressions of credit quality for individual obligors. 16 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Amounts deemed uncollectible are charged to the allowance. Subsequent recoveries, if any, are credited to the allowance. Actual losses may vary from current estimates and the amount of the actual credit loss provision may be either greater than or less than actual net charge-offs. The related provision for credit losses--loans, which is charged to income, is the amount necessary to adjust the allowance to the level determined through the process described above. Bank regulatory authorities also assess and issue reports on the quality of the portfolio and on the adequacy of the allowance and related provision activity. Further, as part of their annual audit, the Corporation's independent auditors review the process surrounding the determination of the allowance for credit losses--loans and the level thereof. Their procedures include discussions with management, a review of selected credit files and an evaluation of the periodic reports issued by the Asset Quality Review Department and regulatory examiners. In the opinion of management, the allowance for credit losses--loans is fairly stated in accordance with generally accepted accounting principles. The tables below provide the components of the allowance for credit losses--loans by category. This breakdown of the allowance at each year-end reflects management's best estimate of probable credit losses and may not necessarily be indicative of actual future charge-offs. (in millions) December 31, 2000* 1999* - ------------------------------------------------------------------------------- Domestic Specific Commercial and industrial $320 $200 Financial institutions 11 -- Real estate and real-estate related 6 12 - ------------------------------------------------------------------------------- Total specific 337 212 Expected loss 69 127 - ------------------------------------------------------------------------------- Total domestic 406 339 International Specific 7 56 Country risk 4 56 Expected loss 7 40 - ------------------------------------------------------------------------------- Total international 18 152 - ------------------------------------------------------------------------------- Total allowance for credit losses--loans $424 $491 =============================================================================== * Not comparable to prior years due to revised policies and procedures for determining the allowance for credit losses implemented in 1999. (in millions) December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- Domestic Commercial and industrial $162 $117 $153 Financial institutions 20 38 20 Real estate and real-estate related 84 89 107 - -------------------------------------------------------------------------------- Total domestic 266 244 280 International 380 391 212 - -------------------------------------------------------------------------------- Total allocated* 646 635 492 Unallocated portion 6 64 281 - -------------------------------------------------------------------------------- Total allowance for credit losses--loans $652 $699 $773 ================================================================================ * The specific allowance component was $61 million, $13 million, and $57 million at December 31, 1998, 1997, and 1996, respectively. The general allowance component was $585 million, $622 million, and $435 million at December 31, 1998, 1997, and 1996, respectively. The allowance for credit losses--loans decreased to $424 million at December 31, 2000, from $491 million at year-end 1999 and $652 million at December 31, 1998. The 2000 decrease of $67 million was primarily due to net charge-offs of $42 million and a negative provision for credit losses--loans of $19 million. The decrease of $161 million in 1999 from 1998 was primarily due to a negative provision for credit losses--loans of $58 million, reductions in the allowance for credit losses--loans related to entities sold/transferred and net charge-offs of $64 million. Such decrease reflects the significant decline in the international component of the Corporation's loan portfolio during 1999. The following table presents an analysis of the changes in the international component of the allowance for credit losses--loans: (in millions) Year Ended December 31, 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------- Balance, beginning of year $ 152 $ 380 $ 391 $ 212 $ 377 - ------------------------------------------------------------------------------- Net charge-offs Charge-offs 51 63 83 46 22 Recoveries 3 12 6 7 26 - ------------------------------------------------------------------------------- Total net charge-offs (recoveries) to the allowance 48 51 77 39 (4) Allowance related to acquisition -- -- -- 17 -- Provision and increases (decreases) in the international portion of allowance (86) (138) 66 258 (10) Allowance related to BTAL and transferred entities(1) -- (39) -- -- -- Reclassifications -- -- -- (57) (159) - ------------------------------------------------------------------------------- Balance, end of year $ 18 $ 152 $ 380 $ 391 $ 212 =============================================================================== (1) Reflects the allowance for credit losses--loans of certain legal entities transferred to Deutsche Bank on the date of transfer and the allowance for credit losses--loans of BTAL on the date of sale. Bankers Trust Corporation and its Subsidiaries 17 - -------------------------------------------------------------------------------- Table 7 Analysis of the Allowances for Credit Losses
- ----------------------------------------------------------------------------------------------------------------- ($ in millions) Year Ended December 31, 2000 1999 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------- Loans Allowance, beginning of year $ 491 $ 652 $ 699 $ 773 $ 992 - ----------------------------------------------------------------------------------------------------------------- Charge-offs Domestic Commercial and industrial 2 28 24 19 46 Real estate Construction -- -- -- 11 3 Mortgage 1 -- -- 2 18 International 51 63 83 46 22 - ----------------------------------------------------------------------------------------------------------------- Total charge-offs 54 91 107 78 89 - ----------------------------------------------------------------------------------------------------------------- Recoveries Domestic Commercial and industrial 1 13 5 23 32 Real estate Construction -- -- 1 1 -- Mortgage -- 2 8 13 7 Other 8 -- -- -- -- International 3 12 6 7 26 - ----------------------------------------------------------------------------------------------------------------- Total recoveries 12 27 20 44 65 - ----------------------------------------------------------------------------------------------------------------- Total net charge-offs(1) 42 64 87 34 24 Allowance related to acquisition -- -- -- 17 -- Provision for credit losses (19) (58) 40 -- 5 Allowance related to BTAL and transferred entities(2) (6) (39) -- -- -- Reclassification -- -- -- (57) (200) - ----------------------------------------------------------------------------------------------------------------- Allowance, end of year $ 424 $ 491 $ 652 $ 699 $ 773 ================================================================================================================= Percentage of total net charge-offs to average loans for the year 0.19% 0.30% 0.39% 0.19% 0.18% ================================================================================================================= Other Liabilities Allowance, beginning of year $ 24 $ 18 $ 13 $ 10 $ -- Provision for credit losses (2) 6 5 -- -- Reclassification -- -- -- 3 10 - ----------------------------------------------------------------------------------------------------------------- Allowance, end of year $ 22 $ 24 $ 18 $ 13 $ 10 ================================================================================================================= (1) Components: Secured by real estate $ -- $ (8) $ (13) $ 5 $ 14 Real estate related -- (4) 8 (2) 3 Other 42 76 92 31 7 - ----------------------------------------------------------------------------------------------------------------- Total $ 42 $ 64 $ 87 $ 34 $ 24 =================================================================================================================
(2) Reflects the allowance for credit losses--loans of certain legal entities transferred to Deutsche Bank on the date of transfer and the allowance for credit losses--loans of BTAL on the date of sale. 18 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Loans The following table summarizes the composition of the loan portfolio at the end of each of the last five years: (in millions) December 31, 2000 1999 1998 1997 1996 - -------------------------------------------------------------------------------- Domestic Commercial and industrial $ 8,370 $ 8,125 $ 6,448 $ 4,244 $ 3,422 Financial institutions 1,779 2,788 2,441 2,148 1,631 Real estate 1,233 1,471 1,449 2,196 1,695 Other 8,621 4,028 3,558 1,427 1,436 - -------------------------------------------------------------------------------- Total domestic 20,003 16,412 13,896 10,015 8,184 - -------------------------------------------------------------------------------- International Governments and official institutions 24 120 190 252 237 Banks and other financial institutions 1,746 690 3,599 3,175 3,482 Commercial and industrial 544 1,765 3,931 4,931 2,759 Real estate 2 31 166 195 130 Other 305 1,167 1,813 1,402 1,290 - -------------------------------------------------------------------------------- Total international 2,621 3,773 9,699 9,955 7,898 - -------------------------------------------------------------------------------- Gross loans 22,624 20,185 23,595 19,970 16,082 Less: unearned income 184 223 310 165 202 - -------------------------------------------------------------------------------- Total loans $22,440 $19,962 $23,285 $19,805 $15,880 ================================================================================ Total loans increased to $22.4 billion at December 31, 2000 up from $20.0 billion at year-end 1999 and down from $23.3 billion at December 31, 1998. The 2000 increase of $2.4 billion primarily related to the domestic loan portfolio which increased $3.6 billion, or 22 percent, to $20.0 billion at December 31, 2000, offset by a decrease in the international component of the loan portfolio. This domestic increase is primarily due to related party loans to BTH. The decline in the international loan portfolio during 2000 and 1999 reflects the de-emphasizing of lending in certain emerging markets and the consolidation of business conducted by both Deutsche Bank and Bankers Trust into Deutsche Bank legal entities. The decline during 1999 also reflects the sale of BTAL as well as the transfer of BTI. During 1998, the loan portfolio increased $3.5 billion to $23.3 billion at December 31, 1998 from $19.8 billion at December 31, 1997. The 1998 increase related to the domestic loan portfolio which increased $3.9 billion, or 39 percent, to $13.9 billion at December 31, 1998, offset by a slight decline in the international component of the loan portfolio. Within the domestic loan portfolio, commercial and industrial loans increased $2.2 billion in 1998, reflecting increased business volumes as well as higher targeted hold amounts in relation to loan syndication activity. Domestic loans secured by real estate declined $0.7 billion, or 34 percent, in 1998 reflecting a decrease in the volume of direct real estate loans held. Other domestic loans increased to $3.6 billion at December 31, 1998 from $1.4 billion at December 31, 1997. The increase was primarily related to an increase in real estate related loans, including loans to real estate investment trusts ("REIT"), as well as to increases in Private Client loans and in overnight overdrafts arising as a matter of course from depository business. The international component of the loan portfolio totaled $9.7 billion at December 31, 1998 down slightly from $10.0 billion at December 31, 1997. Within the international portfolio, commercial and industrial loans decreased 20 percent in 1998 to $3.9 billion, reflecting the Corporation's efforts to reduce exposure in this segment of the portfolio, particularly in the emerging markets, following a significant increase in commercial and industrial lending beginning in 1995. This reduction in exposure was primarily effected through pay-downs of outstanding loans. The decline in commercial and industrial lending was offset by increases in loans to banks and other financial institutions and in other international loans which includes margin related lending. At year-end 1998, the Corporation's international loan portfolio was primarily concentrated in Australia/New Zealand, Western Europe, Latin America, and non-Japan Asia. Bankers Trust Corporation and its Subsidiaries 19 - -------------------------------------------------------------------------------- Nonperforming Assets Table 8 Nonperforming Assets
- ------------------------------------------------------------------------------------------------------ ($ in millions) December 31, 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------ Cash basis loans Domestic Commercial and industrial $766 $495 $ 91 $ 49 $117 Secured by real estate 28 67 86 92 233 Financial institutions 20 11 15 -- -- - ------------------------------------------------------------------------------------------------------ Total domestic 814 573 192 141 350 - ------------------------------------------------------------------------------------------------------ International Commercial and industrial 10 132 135 65 57 Secured by real estate 1 10 18 25 39 Foreign governments -- -- 23 -- -- Other 15 22 24 9 6 - ------------------------------------------------------------------------------------------------------ Total international 26 164 200 99 102 - ------------------------------------------------------------------------------------------------------ Total cash basis loans $840 $737 $392 $240 $452 ====================================================================================================== Ratio of cash basis loans to total gross loans 3.7% 3.7% 1.7% 1.2% 2.8% ====================================================================================================== Ratio of allowance for credit losses--loans to cash basis loans 50% 67% 166% 291% 171% ====================================================================================================== Renegotiated loans Secured by real estate $ -- $ -- $ 25 $ 25 $ 37 Other -- 11 1 -- -- - ------------------------------------------------------------------------------------------------------ Total renegotiated loans $ -- $ 11 $ 26 $ 25 $ 37 ====================================================================================================== Other real estate $109 $ 88 $ 87 $194 $213 ====================================================================================================== Other nonperforming assets $ -- $ 8 $ 8 $ 4 $ 10 ======================================================================================================
There were no loans 90 days or more past due with respect to interest or principal for all periods presented. 20 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- The Corporation's credit review procedures are designed to promote early identification of counterparty, country, and industry exposures that require a higher-than normal degree of scrutiny. Each quarter a review is performed by the Asset Quality Review Department and senior credit management of cash basis loans and criticized assets (i.e. those assets internally classified as Special Mention, Substandard and Doubtful). Individual borrower balances are evaluated and a charge-off of amounts deemed uncollectible is recommended. Factors considered in this evaluation include the credit quality of the counterparties, the amount and duration of the exposure, collateral values, the Corporation's ability to reduce exposure in situations of deteriorating creditworthiness and loss probabilities. Once a charge-off is taken, the remaining portion, if any, is immediately placed on a cash basis. If the collection or liquidation in full is questionable, the asset is classified as doubtful and placed on a cash basis. In addition, it is generally the Corporation's policy that loans be immediately placed on a cash basis when they become 90 days past due with respect to interest or principal. The Corporation's total cash basis loans amounted to $840 million at December 31, 2000, an increase of $103 million, or 14 percent, from 1999, which had increased $345 million, or 88 percent, from 1998. The 2000 increase was significantly impacted by a rise in domestic commercial and industrial loans. New cash basis loans were related to borrowers in the manufacturing, marketing, distribution and service sectors. Cash basis loans increased $103 million during 2000, primarily due to impaired loans which were transferred to cash basis. The specific allowance related to impaired loans amounted to $344 million at December 31, 2000, an increase of $76 million from 1999 which had increased $207 million from 1998. An analysis of the changes in the Corporation's total cash basis loans follows: (in millions) Year Ended December 31, 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------- Balance, beginning of year $ 737 $ 392 $ 240 $ 452 $ 744 Net transfers to cash basis loans 411 622 365 111 96 Net paydowns (142) (91) (64) (146) (241) Charge-offs (54) (91) (107) (78) (87) Net transfers to other real estate (27) (13) (2) (16) (14) Loan sales (4) (19) (24) (47) (38) Transfers to Deutsche Bank* (46) (15) -- -- -- Other (35) (48) (16) (36) (8) - ------------------------------------------------------------------------------- Balance, end of year $ 840 $ 737 $ 392 $ 240 $ 452 =============================================================================== * Reflects the cash basis loans of certain legal entities transferred to Deutsche Bank on date of the transfer. Cross-Border Outstandings The cross-border claims outstandings in Table 9 were compiled based upon category and domicile of ultimate risk and are comprised of balances with banks, trading account assets (including net revaluation gains on foreign exchange and derivative products), securities available for sale, securities purchased under resale agreements, loans, accrued interest receivable and acceptances outstanding. The Corporation's cross-border outstandings reflect certain additional economic and political risks beyond those associated with its domestic outstandings, such as risks arising from funds transfer restrictions and balance-of-payments issues, as well as risks arising from operating in different legal and regulatory jurisdictions. The following table presents the Corporation's cross-border outstandings at December 31, 2000, 1999 and 1998 for each foreign country where such outstandings exceeded 0.75 percent of the Corporation's total assets. The outstanding balances are presented in accordance with the reporting guidelines adopted by the Federal Financial Institutions Examination Council (FFIEC). Bankers Trust Corporation and its Subsidiaries 21 - -------------------------------------------------------------------------------- Table 9 Cross-Border Outstandings
- ------------------------------------------------------------------------------------------------------------------------------ Governments Banks and % of and Other Commercial Total Total Official Financial and ($ in millions) Outstandings Assets Institutions Institutions Industrial Other - ------------------------------------------------------------------------------------------------------------------------------ At December 31, 2000 Germany $15,750 25.09% $ 101 $15,169 $ 480 $-- United Kingdom 1,210 1.93 -- 519 691 -- All other cross-border outstandings 3,402 5.42 44 1,445 1,896 17 - ------------------------------------------------------------------------------------------------------------------------------ Total cross-border outstandings $20,362 32.44% $ 145 $17,133 $3,067 $17 ============================================================================================================================== At December 31, 1999 Germany $ 4,993 7.32% $ 1 $ 4,471 $ 521 $-- International(1) 516 0.76 516 -- -- -- Cayman Islands 315 0.46 -- 271 44 -- All other cross-border outstandings 4,067 5.97 128 1,885 1,976 78 - ------------------------------------------------------------------------------------------------------------------------------ Total cross-border outstandings $ 9,891 14.51% $ 645 $ 6,627 $2,541 $78 ============================================================================================================================== At December 31, 1998 France $ 5,600 4.21% $ 373 $ 4,639 $ 588 $-- Germany 3,651 2.74 162 3,226 263 -- United Kingdom 3,093 2.32 47 2,218 824 4 Japan(2) 2,705 2.03 1,122 1,184 399 -- Australia 2,097 1.58 408 1,199 490 -- Canada 1,898 1.43 649 915 331 3 Switzerland 1,839 1.38 -- 1,754 85 -- Netherlands 1,778 1.34 106 1,448 224 -- Italy 1,705 1.28 293 917 495 -- All other cross-border outstandings 12,364 9.29 1,738 6,212 4,412 2 - ------------------------------------------------------------------------------------------------------------------------------ Total cross-border outstandings $36,730 27.60% $4,898 $23,712 $8,111 $ 9 ==============================================================================================================================
(1) The Corporation's cross-border outstandings with International primarily consisted of revaluation gains from the marking to market of interest rate and foreign exchange contracts held for trading purposes with multilateral development banks. (2) The Corporation's cross-border outstandings with Japan primarily consisted of trading account assets and securities available for sale which are carried at fair value. 22 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Governments and official institutions comprise foreign governments and their agencies; state, provincial and local governments and their agencies; and central banks. Banks and other financial institutions are comprised of commercial and savings banks and other similar institutions accepting short-term deposits, including government-owned banks which do not function as central banks, and nonbank credit and financial companies. The amounts outstanding for each country listed in Table 9 exclude local country claims. Local country claims, as defined by the FFIEC's reporting guidelines, include claims on residents of the same country in which the booking office is domiciled. Such claims are generally funded with borrowings that represent liabilities of that office or are hedged with foreign exchange and derivative products. At December 31, 2000, total cross-border commitments to borrowers or counterparties domiciled in the countries presented in Table 9 were: Germany $120 million and United Kingdom $61 million. There were no cash basis loans outstanding for the countries presented in Table 9 as of December 31, 2000 and 1999. The following table details the cash basis loans of the outstandings at December 31, 1998 for those countries presented in Table 9. Cash Basis (in millions) Loans - -------------------------------------------------------------------------------- At December 31, 1998 United Kingdom $36 Canada 16 Italy 3 - -------------------------------------------------------------------------------- Total $55 ================================================================================ There were no cross-border renegotiated loans for the years ended December 31, 2000, 1999 and 1998. Accounting Developments In September 2000, the FASB issued SFAS No. 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. The primary impacts at December 31, 2000 relate to the collateral provisions: SFAS 140 eliminates the prior requirement to record collateral received under certain securities financing transactions and requires separation on the balance sheet of assets pledged under certain conditions. Management believes that the adoption of SFAS 140 will not have a material impact on the Corporation's net income, stockholder's equity or total assets. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which was amended by SFAS 138 in June 2000 (collectively "SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires companies to recognize all derivatives on the balance sheet as assets or liabilities measured at fair value. SFAS 137 deferred the effective date of SFAS 133 until January 1, 2001 for calendar year companies. The Corporation engages in derivative activities both for trading purposes and for hedging purposes. The adoption of SFAS 133 will not impact those derivatives held for trading purposes, as these derivatives are already reported at fair value with changes in fair value recognized in the income statement. The adoption of SFAS 133 will require that derivatives used for hedging purposes (i.e., end-user derivatives) be accounted for at fair value effective January 1, 2001. SFAS 133 also requires that certain embedded derivatives, which had previously not been recognized separately from their host instruments, be separated and reported on the balance sheet at fair value. The adoption of SFAS 133 on January 1, 2001 did not have a material impact on the Corporation's results of operations or financial position. However, 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. Recent Developments On February 1, 2001, Deutsche Bank AG, the ultimate parent of the Corporation, announced that it was reorganizing its client-focused businesses into two groups: the Corporate and Investment Bank Group ("CIB") and the Private Clients and Asset Management Group ("PCAM"). The business segments employed by Deutsche Bank prior to the reorganization will, accordingly, be realigned and included in CIB or PCAM. The Corporation intends to align its business segments in conformity with the reorganization. In connection with the reorganization, on February 12, 2001, Deutsche Bank announced that Yves C. de Balmann, Vice Chairman of the Corporation had resigned his position with the Corporation effective March 12, 2001. Bankers Trust Corporation and its Subsidiaries 23 Consolidated Statement of Income (in millions, except per share data) - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------- Year Ended December 31, 2000 1999 1998 - --------------------------------------------------------------------------------------------------------- Net Interest Revenue Interest revenue $ 3,635 $ 4,419 $ 8,291 Interest expense 2,988 3,612 6,919 - --------------------------------------------------------------------------------------------------------- Net Interest Revenue 647 807 1,372 Provision for credit losses--loans (19) (58) 40 - --------------------------------------------------------------------------------------------------------- Net Interest Revenue after Provision for Credit Losses--Loans 666 865 1,332 - --------------------------------------------------------------------------------------------------------- Noninterest Revenue Trading 136 42 (184) Fiduciary and funds management 798 1,017 1,108 Corporate finance fees 142 542 1,255 Other fees and commissions 306 538 817 Securities available for sale gains (losses) 45 (89) (56) Insurance premiums -- 86 256 Other 759 1,364 561 - --------------------------------------------------------------------------------------------------------- Total noninterest revenue 2,186 3,500 3,757 - --------------------------------------------------------------------------------------------------------- Noninterest Expenses Salaries and commissions 459 1,039 1,421 Incentive compensation and employee benefits 415 1,088 1,530 Change in control related incentive compensation and employee benefits -- 1,101 -- Agency and other professional service fees 220 430 501 Communication and data services 84 206 252 Occupancy, net 106 198 218 Furniture and equipment 136 221 252 Travel and entertainment 45 114 171 Provision for policyholder benefits -- 114 322 Other 535 636 499 Restructuring and other related activities (48) 633 -- - --------------------------------------------------------------------------------------------------------- Total noninterest expenses 1,952 5,780 5,166 - --------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 900 (1,415) (77) Income taxes (benefit) 388 188 (4) - --------------------------------------------------------------------------------------------------------- Net Income (Loss) $ 512 $(1,603) $ (73) ========================================================================================================= Net Income (Loss) Applicable to Common Stock** * * $ (105) ========================================================================================================= Earnings (Loss) per Common Share: Basic * * $ (1.05) ========================================================================================================= Diluted * * $ (1.05) ========================================================================================================= Cash dividends declared per common share * $ 1.00* $ 4.00 =========================================================================================================
* Amounts for net income (loss) applicable to common stock and earnings (loss) per common share are not meaningful due to Deutsche Bank AG acquiring all of the outstanding shares of common stock of Bankers Trust Corporation on June 4, 1999. There were no cash dividends declared subsequent to June 4, 1999. ** Amount shown is used to calculate basic earnings per common share for the year ended December 31, 1998. The accompanying notes are an integral part of the financial statements. 24 Bankers Trust Corporation and its Subsidiaries Consolidated Statement of Comprehensive Income (in millions) - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) $ 512 $(1,603) $ (73) - ------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments: Unrealized foreign currency translation losses arising during the year, net of tax* (94) (17) (36) Reclassification adjustment for realized foreign currency translation losses, net of tax** 24 369 -- Unrealized gains (losses) on securities available for sale: Unrealized holding gains (losses) arising during the year, net of tax*** 10 (1) (90) Reclassification adjustment for realized (gains) losses, net of tax**** (26) 82 57 - ------------------------------------------------------------------------------------------------------------------------------- Total other comprehensive income (loss) (86) 433 (69) - ------------------------------------------------------------------------------------------------------------------------------- Comprehensive Income (Loss) $ 426 $(1,170) $ (142) ===============================================================================================================================
* Amounts are net of income tax benefits of $53 million, $13 million and $10 million for the years ended December 31, 2000, 1999 and 1998, respectively. ** Realized foreign currency translation losses result from the transfer of certain foreign subsidiaries to Deutsche Bank in 2000 and 1999 and the sale of BTAL in 1999. Amounts are net of income tax benefits of $9 million and $54 million for the years ended December 31, 2000 and 1999, respectively. *** Amounts are net of income tax expense (benefit) of $17 million, $21 million and $(12) million for the years ended December 31, 2000, 1999 and 1998, respectively. **** Amounts are net of income tax expense (benefit) of $19 million, $(7) million and $1 million for the years ended December 31, 2000, 1999 and 1998, respectively. The accompanying notes are an integral part of the financial statements. Bankers Trust Corporation and its Subsidiaries 25 Consolidated Balance Sheet ($ in millions, except par value) - --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------- December 31, 2000 1999 - ----------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 1,921 $ 3,212 Interest-bearing deposits with banks 8,905 4,693 Federal funds sold -- 2,472 Securities purchased under resale agreements 8,310 6,764 Trading assets: Government securities 135 2,296 Corporate debt securities 556 1,367 Equity securities 9,255 7,144 Swaps, options and other derivatives 1,995 4,807 Other trading assets 1,449 3,403 - ----------------------------------------------------------------------------------------------------------- Total trading assets 13,390 19,017 Securities available for sale 252 3,252 Loans, net 22,016 19,471 Customer receivables 308 306 Due from customers on acceptances 254 262 Accounts receivable and accrued interest 2,954 2,307 Other assets 4,453 6,401 - ----------------------------------------------------------------------------------------------------------- Total $ 62,763 $ 68,157 =========================================================================================================== Liabilities Noninterest-bearing deposits Domestic offices $ 3,263 $ 2,690 Foreign offices 968 2,299 Interest-bearing deposits Domestic offices 8,649 12,118 Foreign offices 2,874 6,362 - ----------------------------------------------------------------------------------------------------------- Total deposits 15,754 23,469 Trading liabilities: Securities sold, not yet purchased Government securities 56 53 Equity securities -- 21 Swaps, options and other derivatives 1,892 5,183 Other trading liabilities 1,133 9 - ----------------------------------------------------------------------------------------------------------- Total trading liabilities 3,081 5,266 Securities loaned and securities sold under repurchase agreements 109 56 Other short-term borrowings 18,498 11,540 Acceptances outstanding 254 266 Accounts payable and accrued expenses 2,603 3,314 Other liabilities 5,432 3,462 Long-term debt not included in risk-based capital 9,270 12,582 Long-term debt included in risk-based capital 2,073 2,424 Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital 1,307 1,428 - ----------------------------------------------------------------------------------------------------------- Total liabilities 58,381 63,807 =========================================================================================================== Commitments and contingent liabilities (Notes 7, 23 and 29) Stockholders' Equity Preferred stock -- 376 Common stock, $1 par value Authorized: 200 shares; Issued: 1 share -- -- Capital surplus 2,319 2,318 Retained earnings 2,179 1,686 Accumulated other comprehensive income: Net unrealized gains on securities available for sale, net of taxes -- 16 Foreign currency translation, net of taxes (116) (46) - ----------------------------------------------------------------------------------------------------------- Total stockholders' equity 4,382 4,350 - ----------------------------------------------------------------------------------------------------------- Total $ 62,763 $ 68,157 ===========================================================================================================
The accompanying notes are an integral part of the financial statements. 26 Bankers Trust Corporation and its Subsidiaries Consolidated Statement of Changes in Stockholders' Equity (in millions) - --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------- Year Ended December 31, 2000 1999 1998 - ----------------------------------------------------------------------------------------- Preferred Stock Balance, beginning of year $ 376 $ 394 $ 658 Preferred stock repurchased (12) (18) (16) Preferred stock redeemed (364) -- (248) - ----------------------------------------------------------------------------------------- Balance, end of year -- 376 394 - ----------------------------------------------------------------------------------------- Common Stock Balance, beginning of year --* 105 105 Retirement of common stock -- (105) -- - ----------------------------------------------------------------------------------------- Balance, end of year --* --* 105 - ----------------------------------------------------------------------------------------- Capital Surplus Balance, beginning of year 2,318 1,613 1,563 Preferred stock repurchased 1 -- -- Common stock distributed under employee benefit plans -- 4 50 Capital transactions related to change in control -- (699) -- Capital contribution from parent -- 1,400 -- - ----------------------------------------------------------------------------------------- Balance, end of year 2,319 2,318 1,613 - ----------------------------------------------------------------------------------------- Retained Earnings Balance, beginning of year 1,686 3,504 4,202 Net income (loss) 512 (1,603) (73) Cash dividends declared Preferred stock (19) (22) (35) Common stock -- (98) (384) Treasury stock distributed under employee benefit plans -- (95) (206) - ----------------------------------------------------------------------------------------- Balance, end of year 2,179 1,686 3,504 - ----------------------------------------------------------------------------------------- Common Stock in Treasury, at cost Balance, beginning of year -- (1,056) (889) Purchases of stock -- (71) (618) Treasury stock distributed under employee benefit plans -- 322 451 Capital transactions related to change in control -- 805 -- - ----------------------------------------------------------------------------------------- Balance, end of year -- -- (1,056) - ----------------------------------------------------------------------------------------- Common Stock Issuable--Stock Awards Balance, beginning of year -- 817 901 Deferred stock awards granted, net -- 557 54 Deferred stock distributed -- (216) (138) Capital transactions related to change in control -- (1,158) -- - ----------------------------------------------------------------------------------------- Balance, end of year -- -- 817 - ----------------------------------------------------------------------------------------- Deferred Compensation--Stock Awards Balance, beginning of year -- (218) (438) Deferred stock awards granted, net -- (556) (55) Amortization of deferred compensation, net -- 749 275 Other -- 25 -- - ----------------------------------------------------------------------------------------- Balance, end of year -- -- (218) - ----------------------------------------------------------------------------------------- Cumulative Translation Adjustments Balance, beginning of year (46) (398) (362) Translation adjustments/entity transfers and sales (114) 393 (46) Income taxes 44 (41) 10 - ----------------------------------------------------------------------------------------- Balance, end of year (116) (46) (398) - ----------------------------------------------------------------------------------------- Securities Valuation Allowance Balance, beginning of year 16 (65) (32) Change in unrealized net gains (losses), after applicable income taxes and minority interest (16) 81 (33) - ----------------------------------------------------------------------------------------- Balance, end of year -- 16 (65) - ----------------------------------------------------------------------------------------- Total stockholders' equity, end of year $ 4,382 $ 4,350 $ 4,696 =========================================================================================
*1 share, $1 par value. The accompanying notes are an integral part of the financial statements. Bankers Trust Corporation and its Subsidiaries 27 Consolidated Statement of Cash Flows (in millions) - --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net income (loss) $ 512 $ (1,603) $ (73) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for credit losses--loans (19) (58) 40 Provision for credit losses--other (2) 6 5 Provision for policyholder benefits -- 114 322 Restructuring and other related activities (48) 633 -- Deferred income taxes, net (27) (395) (276) Depreciation and other amortization and accretion 42 879 379 Other, net (1) 153 13 Gain on transfer of BT Holdings (New York), Inc. (561) -- -- Gain on sale of Bankers Trust Australia Limited -- (779) -- - ----------------------------------------------------------------------------------------------------------------------------------- Earnings adjusted for noncash charges, credits and other items (104) (1,050) 410 Net change in: Trading assets (1,932) (14,995) 8,554 Trading liabilities (1,124) 20,602 245 Receivables and payables from securities transactions 408 875 (528) Customer receivables (2) (1,110) 23 Other operating assets and liabilities, net (547) 42 (1,724) Securities available for sale losses (gains) (45) 89 56 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by operating activities (3,346) 4,453 7,036 - ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Net change in: Interest-bearing deposits with banks (4,093) (3,764) 1,886 Federal funds sold 2,472 (39) (1,102) Securities purchased under resale agreements (1,546) (4,268) 2,110 Securities borrowed -- (8,716) 2,042 Loans 4,756 89 (1,906) Securities available for sale: Purchases (263) (6,190) (22,041) Maturities and other redemptions 2,250 1,024 2,794 Sales and other transfers to affiliates 596 8,412 15,102 Acquisitions of premises and equipment (165) (102) (447) Other, net 19 (501) 1,183 Proceeds from transfer of legal entities 71 3,062 -- Proceeds from sale of Bankers Trust Australia Limited -- 1,313 -- - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 4,097 (9,680) (379) - ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Net change in: Deposits (8,064) (6,284) (5,474) Securities loaned and securities sold under repurchase agreements 53 12,465 (277) Other short-term borrowings 5,904 (1,886) (2,879) Issuances of long-term debt 2,692 4,966 7,746 Repayments of long-term debt* (2,187) (4,791) (3,973) Issuance of preferred stock of subsidiary -- -- 304 Redemptions of preferred stock of subsidiary -- -- (304) Redemptions and repurchases of preferred stock (375) (18) (264) Purchases of treasury stock -- (71) (618) Cash dividends paid (19) (216) (421) Capital contribution from parent -- 1,400 -- Other, net (29) 18 128 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (2,025) 5,583 (6,032) - ----------------------------------------------------------------------------------------------------------------------------------- Net effect of exchange rate changes on cash (17) 19 24 - ----------------------------------------------------------------------------------------------------------------------------------- Net (Decrease) Increase in Cash and Due from Banks (1,291) 375 649 Cash and due from banks, beginning of year 3,212 2,837 2,188 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and due from banks, end of year $ 1,921 $ 3,212 $ 2,837 =================================================================================================================================== Interest paid $ 4,319 $ 4,730 $ 6,868 =================================================================================================================================== Income taxes paid, net $ 7 $ 39 $ 76 =================================================================================================================================== Noncash investing activities: Transfer of legal entity in exchange for shares in affiliate $ 1,122 $ 852 $ -- Conversions of loans to other real estate 28 21 6 Exchanges of Chilean government bonds for annuity contracts -- 9 9 - ----------------------------------------------------------------------------------------------------------------------------------- Total noncash investing activities $ 1,150 $ 882 $ 15 =================================================================================================================================== Noncash financing activity: conversion of debt to equity $ -- $ -- $ 15 ===================================================================================================================================
* Includes $129 million, $0 and $57 million for the years ended December 31, 2000, December 31, 1999 and December 31, 1998, respectively, related to mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital. The accompanying notes are an integral part of the financial statements. 28 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Note 1--Acquisition by Deutsche Bank AG Change of Control On June 4, 1999, the change-of-control ("COC") date, pursuant to an agreement dated as of November 30, 1998, between Deutsche Bank AG ("Deutsche Bank") and Bankers Trust Corporation ("Bankers Trust"), Deutsche Bank, through its U.S. holding corporation, Taunus Corporation ("Taunus"), acquired all of the outstanding shares of common stock of Bankers Trust from its shareholders at a price of $93.00 per share (the "Acquisition"). Deutsche Bank accounted for the Acquisition as a purchase. No purchase accounting adjustments were pushed down to Bankers Trust. On June 4, 1999, all Bankers Trust employee deferred compensation amounts vested in full. Employer contributions to individual employee retirement accounts also vested. In addition, all bonus-eligible employees on the date of COC became entitled to a pro rata bonus which was paid in cash on July 2, 1999 for that portion of the 1999 performance year ending on the COC date. The pro rata bonus was based on the greater of an employee's total (cash and deferred stock) 1998 performance bonus or the employee's average total 1996, 1997 and 1998 performance bonus awards. In conjunction with the Acquisition, during the second quarter of 1999 Bankers Trust Corporation, together with its subsidiaries (the "Corporation" or the "Firm") incurred pre-tax charges of approximately $1.1 billion in COC-related costs, principally due to the aforementioned vesting of all employee deferred compensation amounts and related pro-rata bonus awards as well as a pre-tax restructuring charge of $459 million. Also, in connection with the Acquisition, the Corporation incurred other charges reflecting a change in management's intention regarding certain assets as a result of integrating the Corporation into Deutsche Bank, a change in certain pricing methodologies in order to conform to those of Deutsche Bank, and the transfer of certain available for sale securities to Deutsche Bank related entities based on changes in management responsibility. These one-time charges are included in Deutsche Bank's consolidated financial statements as of June 30, 1999 as part of the goodwill associated with the Acquisition. The goodwill is being amortized over 15 years. Prior to the Acquisition, the Corporation was a global financial institution, providing products and services to its clients worldwide. Subsequent to the Acquisition and associated reorganization activities, the Corporation and its subsidiaries conduct their business primarily in the Americas, focusing their activities principally in the asset management, lending, institutional services and private banking businesses. The Corporation anticipates further reorganizations of its business as a result of the reorganization of Deutsche Bank. Disposition of Assets On June 5, 1999, Bankers Trust transferred its wholly-owned subsidiary BT Alex. Brown Incorporated ("BTAB") and substantially all of its interest in Bankers Trust International PLC ("BTI") to Deutsche Bank Securities Inc. ("DBSI") and Deutsche Holdings (BTI) Ltd., respectively, which are wholly-owned subsidiaries of Deutsche Bank. The transfer of BTAB to DBSI took the form of an exchange of stock pursuant to which BTAB became a wholly-owned subsidiary of DBSI and Bankers Trust received shares of DB U.S. Financial Markets Holding Corporation ("DBUSH"), the parent of DBSI. In the third quarter of 1999, the Corporation sold its shares of DBUSH to Taunus for approximately $800 million. The transfer of substantially all of Bankers Trust's interest in BTI was for cash in the amount of approximately $1.7 billion. On August 31, 1999, the Corporation completed the sale of Bankers Trust Australia Limited ("BTAL"), a wholly-owned subsidiary, to the Principal Financial Group for a price of approximately $1.3 billion. Prior to the sale, BTAL remitted to the Corporation a dividend for accumulated retained earnings that included proceeds from BTAL's sale of its investment banking division to Macquarie Bank. The Corporation also received cash for the assumption of certain BTAL long-term debt. In addition, according to the sale agreement, the Corporation is entitled to receive an additional payment. The amount and timing of such payment is not known at this time. The Corporation recognized a pre-tax gain of approximately $779 million in the third quarter of 1999 on the sale of BTAL. On September 29, 2000, Bankers Trust transferred its wholly-owned subsidiary BT Holdings (New York), Inc. ("BTH") to DBUSH and Taunus. The transfer of BTH to DBUSH took the form of an exchange of stock pursuant to which BTH became a wholly-owned subsidiary of DBUSH. The Corporation received shares of DBUSH equal to the fair market value of BTH's net assets, substantially all of which were financial assets, on the date of transfer. The Corporation recognized a pre-tax gain of approximately $561 million for the year ended December 31, 2000. As a result of the transfer of BTH to DBUSH, certain equity positions of subsidiaries of the Corporation that were issued to subsidiaries of BTH amounting to approximately $1.5 billion, previously eliminated in the consolidation process, are now classified in other liabilities as minority interest, including $500 million of preferred stock of subsidiary. These amounts are included in the related party balances in Note 28. In connection with the Acquisition, and in addition to the foregoing transactions, the Corporation has transferred and will continue to transfer certain entities/businesses and financial assets and liabilities to 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. Because of the significant business changes previously mentioned, the Corporation's historical financial statements are not fully comparable for all periods presented. Capital Contribution In conjunction with the Acquisition and to strengthen the Corporation's capital base, Deutsche Bank made a capital contribution of $1.4 billion in the second quarter of 1999. Bankers Trust Corporation and its Subsidiaries 29 - -------------------------------------------------------------------------------- Note 2--Significant Accounting Policies The accounting policies of the Corporation conform with accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from management's estimates. The following is a description of the significant accounting policies of the Corporation. Principles of Consolidation The consolidated financial statements of the Corporation include Bankers Trust, Bankers Trust Company and its subsidiaries ("BTCo") and all other significant, majority-owned subsidiaries, after elimination of material intercompany transactions and accounts. Investments in other companies over which the Corporation has significant influence are accounted for using the equity method of accounting. These investments are reported in other assets and the related equity income or loss, as well as disposition gains and losses, is included in noninterest revenue. Investments within designated Small Business Investment Company subsidiaries are carried at fair value. Changes in fair value are included in noninterest revenue. Foreign Currency Translation Assets and liabilities denominated in currencies other than an entity's functional currency are translated into its functional currency using the current exchange rates and the resulting translation gains and losses are reported in noninterest revenue. Assets and liabilities of entities whose functional currency is not the U.S. dollar are translated into U.S. dollars using the current exchange rates and the translation gains and losses, net of tax effects, are reported in other comprehensive income. Resale and Repurchase Agreements Resale and repurchase agreements are generally treated as collateralized financings and are carried at the amount of cash disbursed or received. The Corporation offsets resale and repurchase agreements which meet the applicable netting criteria. Generally, the party disbursing the cash takes possession of the securities serving as collateral for the financing. Securities purchased under resale agreements consist primarily of U.S. government and federal agency securities. The Corporation monitors the fair value of the securities received or sent. For securities purchased under resale agreements, the Corporation requests additional securities or the return of a portion of the cash disbursed when appropriate in response to a decline in the market value of the securities received. Similarly, the return of excess securities or additional cash is requested when appropriate in response to an increase in the market value of securities sold under repurchase agreements. Securities provided as collateral under repurchase agreements in which the counterparty has the right by contract or custom to sell or repledge the collateral are disclosed separately on the statement of condition from securities not so encumbered, where material, in accordance with SFAS 140. Trading Securities; Securities Available for Sale The Corporation designates debt and marketable equity securities as either held for trading purposes or available for sale at the date of acquisition. Debt and marketable equity securities, loans and money market instruments that are classified as trading assets, as well as short trading positions which are classified as trading liabilities, are carried at their fair values and related gains and losses are included in trading revenue. Securities available for sale are carried at fair value with the changes in fair value, net of applicable deferred income taxes, reported in other comprehensive income. The amortization of premiums and accretion of discounts are recorded in interest revenue, and realized gains and losses are recorded in noninterest revenue. The specific identification method is used to determine the cost of securities sold. Fair value is generally based on quoted market prices, price quotes from brokers or dealers or discounted expected cash flows. Declines in fair value of securities available for sale below their amortized cost that are deemed to be other than temporary are reflected in the Consolidated Statement of Income as realized losses. Derivatives The Corporation enters into swaps, futures contracts, forward commitments, options and other similar types of contracts and commitments based on interest and foreign exchange rates, and equity and commodity prices, for trading purposes. Such positions are carried at their fair values as either trading assets or trading liabilities. Fair values for derivatives are based on quoted market prices or pricing models which take into account current market and contractual prices of the underlying instruments as well as time value and yield curve or volatility factors underlying the positions. Fair values also take into account expected market risks, modeling risks, administrative costs and credit considerations. Unrealized gains and losses are reported as assets and liabilities, respectively, and those arising from contracts covered by qualifying master netting agreements are reported on a net basis. Gains and losses resulting from trading positions are included in trading revenue. In addition to its trading activities, the Corporation, as an end user, enters into various types of derivative transactions (principally interest rate and currency swaps) to manage the interest rate, currency and other market risks arising from a number of categories of its assets and liabilities. Hedge accounting, as described below, is applied to derivatives used to manage such risks. To qualify for hedge accounting, the derivative contract must be designated as a hedge at its inception and must remain effective as a hedge throughout its term. A derivative is considered to be an effective hedge when its terms correlate highly with the hedged item. The accounting for end-user derivatives follows that of the underlying item being hedged. Thus, net interest revenue is accrued or amortized for interest rate contracts, and in addition, hedges of 30 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- securities available for sale are carried at fair value with changes in fair value due to market price changes reported in other comprehensive income. Foreign exchange rate contracts used to hedge foreign-currency-denominated assets and liabilities are translated at spot rates with the resulting gains and losses reported in noninterest revenue or other comprehensive income, and the discounts or premiums on these contracts are accrued to net interest revenue. Translation gains and losses, as well as the accretion of discount and amortization of premium on foreign exchange rate contracts used to hedge net investments in foreign entities are reported in other comprehensive income. The book values of end-user derivatives are reported in other assets or other liabilities. Realized gains and losses on terminated hedges where the underlying hedged items are still outstanding are deferred and amortized to net interest revenue over the remaining term of the hedge or hedged item, whichever is shorter. Any time the underlying item is also terminated, the remaining deferred amounts related to the terminated hedge are recognized and reported consistently with the realized gain or loss on the underlying item. Derivatives that do not qualify for hedge accounting are considered to be trading positions and are accounted for as such. Loans, Other Real Estate and Other Nonperforming Assets Loans generally are stated at their outstanding unpaid principal balances net of any deferred fees on originated loans, and net of any unamortized premiums or discounts on purchased loans. Interest revenue is accrued on the unpaid principal balance. Net deferred fees and premiums or discounts are recognized as an adjustment of the yield (interest revenue) over the lives of the related loans. Loans are accounted for on a cash basis once principal or interest payments are past due 90 days or earlier if considered appropriate by management. In addition, all loans classified as doubtful and all partially charged-off loans are accounted for on a cash basis even if the borrower is still making required payments. Any accrued but unpaid interest previously recorded on cash basis loans is reversed against current period interest revenue. Cash receipts of interest on cash basis loans are recorded as either revenue or a reduction of principal according to management's judgment as to the collectibility of principal. Renegotiated loans are those which have been renegotiated to an effective interest rate lower than the then-current market rate because of a deterioration in the financial position of the borrower. Interest on such loans is accrued at the renegotiated rate. Assets acquired in credit work-outs, including real estate, are recorded at the lower of fair value less costs to sell or the recorded investment in the related loan and are classified as other assets. Any excess of the recorded investment in the loan over the fair value of the asset acquired is charged against the allowance for credit losses-loans. Allowance For Credit Losses The allowance 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. To allow management to determine the appropriate level of the allowance for credit losses-loans, all significant counterparty relationships are reviewed periodically, as are loans under special supervision, such as criticized, cash basis and renegotiated loans. This management process results in three components of the overall allowance for credit losses-loans: a specific allowance component, a country risk component and an expected loss component. The specific allowance component is the amount required for impaired loans as calculated under SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." The country risk component is the amount provided for exposures in countries experiencing financial stress, excluding those exposures already identified and evaluated as impaired loans. The expected loss component is an estimate of the remaining probable losses inherent in the loan portfolio. This component is determined by using a statistical model that utilizes a loan-type, risk-rated stratified approach. Loss factors are derived by analyzing historical charge-offs and recent economic events and applied to categories of loans by type and risk rating. Amounts deemed uncollectible are charged to the allowance. Subsequent recoveries, if any, are credited to the allowance. Actual losses may vary from current estimates and the amount of the actual credit loss provision may be either greater than or less than actual net charge-offs. The related provision for credit losses--loans, which is charged to income, is the amount necessary to adjust the allowance to the level determined through the process described above. Customer Receivables Customer receivables include amounts due on uncompleted transactions and margin balances. Securities owned by customers and held as collateral for these receivables are not reflected in the financial statements. Premises and Equipment Premises and equipment owned are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the terms of the leases or the estimated useful lives of the improvements, whichever are shorter. Maintenance and repairs are charged to expense and improvements are capitalized. Gains and losses on dispositions are reflected in earnings. Leased properties meeting certain criteria are capitalized and amortized using the straight-line method over the terms of the leases. Income Taxes The Corporation recognizes the current and deferred tax consequences of all transactions that have been recognized in the financial statements using the provisions of enacted tax laws. Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences. The amount of deferred tax assets is reduced, if necessary, to the amount that, based on available evidence, will more likely than not be realized. Bankers Trust Corporation and its Subsidiaries 31 - -------------------------------------------------------------------------------- Stock-Based Compensation Prior to the Acquisition in 1999, the Corporation accounted for its stock option awards under the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Corporation made pro forma disclosures of net income and earnings per share as if the fair value-based method of accounting had been applied under SFAS No. 123, "Accounting for Stock-Based Compensation." On the COC date, all outstanding stock options were settled in cash equaling a price of $93.00 per option less the exercise price. Prior to the Acquisition, the Corporation also recorded its obligations under outstanding deferred stock awards in stockholders' equity as common stock issuable-stock awards. The related deferred compensation was also included in stockholders' equity. These classifications were based upon the Corporation's intent to settle these awards with its common stock. On the COC date, all outstanding awards were settled in cash. Comprehensive Income Comprehensive income is defined as the change in equity of an entity excluding such transactions with stockholders as the issuance of common or preferred stock, payment of dividends, and purchase of treasury shares. Comprehensive income has two major components: net income, as reported in the "Consolidated Statement of Income," and other comprehensive income as reported in the "Consolidated Statement of Comprehensive Income." Other comprehensive income includes such items as unrealized gains and losses, net of applicable deferred income taxes, on securities available for sale and foreign currency translation adjustments. Comprehensive income does not include changes in the fair value of non-marketable securities, traditional credit products, and other assets generally carried at cost. Statement of Cash Flows For purposes of the consolidated statement of cash flows, the Corporation's cash and cash equivalents are cash and due from banks. Net cash flows from instruments such as futures, forwards, options and swaps used to hedge assets or liabilities are classified as cash flows from operating activities. Reclassifications Certain prior period amounts have been reclassified to conform to the current presentation. Note 3--Trading Assets and Trading Liabilities The components of these accounts, which are carried at fair value, were as follows: (in millions) December 31, 2000 1999 - -------------------------------------------------------------------------------- Trading assets U.S. government and agency securities $ -- $ 2,101 Obligations of U.S. states and political subdivisions 79 81 Foreign government securities 56 114 Corporate debt securities 556 1,367 Equity securities 9,255 7,144 Swaps, options and other derivative contracts(1) 1,995 4,807 Bankers acceptances and certificates of deposit 14 53 Other 1,435 3,350 - -------------------------------------------------------------------------------- Total trading assets $13,390 $19,017 ================================================================================ Trading liabilities Securities sold, not yet purchased U.S. government and agency securities $ 56 $ 53 Equity securities -- 21 Swaps, options and other derivative contracts(1) 1,892 5,183 Other 1,133 9 - -------------------------------------------------------------------------------- Total trading liabilities $ 3,081 $ 5,266 ================================================================================ (1) Comprised of fair values of interest rate instruments, foreign exchange rate instruments, and equity and commodity instruments, reduced by the effects of master netting agreements, in accordance with Financial Accounting Standards Board ("FASB") Interpretation No. 39 ("FIN 39"), "Offsetting of Amounts Related to Certain Contracts." Following are certain disclosures as required by SFAS 140. At December 31, 2000, the Corporation has accepted collateral in the form of securities with a fair value of approximately $9.1 billion arising from securities purchased under resale agreements and receivables under derivatives contracts which allow the Corporation to sell or re-pledge the collateral. Of this amount, $255 million has been re-pledged as collateral for payables under derivatives contracts and to cover short sales. Note 4--Securities Available for Sale The fair value, amortized cost, and gross unrealized holding gains and losses for the Corporation's securities available for sale follow:
(in millions) December 31, 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ Gross Gross Unrealized Holding Unrealized Holding Fair ------------------ Amortized Fair ------------------ Amortized Value Gains (Losses) Cost Value Gains (Losses) Cost - ------------------------------------------------------------------------------------------------------------------------ Debt securities U.S. government and agencies $112 $-- $(1) $113 $ 348 $-- $ (9) $ 357 States of the U.S. and political subdivisions 16 -- -- 16 16 -- -- 16 Asset-backed 1 -- -- 1 5 -- -- 5 Certificates of deposit -- -- -- -- -- -- -- -- Foreign governments 4 1 -- 3 480 -- -- 480 Corporate debt 25 1 (1) 25 2,226 -- (1) 2,227 Mortgage-backed 80 2 -- 78 94 -- (2) 96 Equity securities 14 1 (1) 14 83 45 (8) 46 - ------------------------------------------------------------------------------------------------------------------------ Total securities available for sale $252 $ 5 $(3) $250 $3,252 $45 $(20) $3,227 ======================================================================================================================== (in millions) December 31, 1998 - ----------------------------------------------------------------------------------- Gross Unrealized Holding Fair ------------------ Amortized Value Gains (Losses) Cost - ----------------------------------------------------------------------------------- Debt securities U.S. government and agencies $ 1,431 $ 14 $ (11) $ 1,428 States of the U.S. and political subdivisions 1,770 91 (72) 1,751 Asset-backed 107 8 (1) 100 Certificates of deposit 108 1 -- 107 Foreign governments 3,182 23 (114) 3,273 Corporate debt 2,431 6 (81) 2,506 Mortgage-backed 3,125 52 (69) 3,142 Equity securities 594 69 (71) 596 - ----------------------------------------------------------------------------------- Total securities available for sale $12,748 $264 $(419) $12,903 ===================================================================================
32 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- There were no securities of any individual issuer included in securities available for sale that exceeded 10 percent of the Corporation's total stockholder's equity at December 31, 2000. The components of securities available for sale gains (losses) as reported in the consolidated statement of income follow: (in millions) Year Ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------- Debt securities--gross realized gains $ 3 $ 81 $ 163 Debt securities--gross realized losses (4) (234) (248) Equity securities--net realized gains 46 64 29 - ------------------------------------------------------------------------------- Total securities available for sale gains (losses) $ 45 $ (89) $ (56) =============================================================================== The following table shows the fair value, remaining maturities, approximate weighted-average yields (based on amortized cost) and total amortized cost by maturity distribution of the debt components of the Corporation's securities available for sale at December 31, 2000.
- ----------------------------------------------------------------------------------------------------------------------------------- Maturity Distribution -------------------------------------------------------------------------------------------------- After One After Five Within But Within But Within After One Year Five Years Ten Years Ten Years Total - ----------------------------------------------------------------------------------------------------------------------------------- ($ in millions) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield - ----------------------------------------------------------------------------------------------------------------------------------- U.S. government and agencies $ 111 7.15% $ 1 6.32% $ -- --% $ -- --% $ 112 7.14% States of the U.S. and political subdivisions 8 6.66 6 5.83 -- -- 2 5.31 16 6.17 Asset-backed securities -- -- 1 9.02 -- -- -- -- 1 9.02 Foreign government securities -- -- 4 2.31 -- -- -- -- 4 2.31 Corporate debt securities -- -- -- -- -- -- 25 5.04 25 5.04 Mortgage-backed securities -- -- 23 13.24 -- -- 57 9.60 80 10.67 - ----------------------------------------------------------------------------------------------------------------------------------- Total fair value $ 119 $ 35 $ -- $ 84 $ 238 ======================================= ===== ===== ===== ===== Total amortized cost $ 119 $ 34 $ -- $ 83 $ 236 ======================================= ===== ===== ===== =====
Note 5--Loans The following table summarizes the composition of loans at the end of each of the last five years:
- --------------------------------------------------------------------------------------------------------------- ($ in millions) December 31, 2000 1999 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------- Domestic Commercial and industrial $ 8,370 37% $ 8,125 40% $ 6,448 27% $ 4,244 21% $ 3,422 21% Financial institutions 1,779 8 2,788 14 2,441 10 2,148 11 1,631 10 Real estate Construction 95 1 128 1 134 1 108 1 133 1 Mortgage 1,138 5 1,343 6 1,315 6 2,088 10 1,562 10 Other 8,621 38 4,028 20 3,558 15 1,427 7 1,436 9 - --------------------------------------------------------------------------------------------------------------- Total domestic 20,003 89 16,412 81 13,896 59 10,015 50 8,184 51 - --------------------------------------------------------------------------------------------------------------- International Governments and official institutions 24 -- 120 1 190 1 252 1 237 1 Banks and other financial institutions 1,746 8 690 3 3,599 15 3,175 16 3,482 22 Commercial and industrial 544 2 1,765 9 3,931 17 4,931 25 2,759 17 Real estate Construction -- -- -- -- 71 -- -- -- -- -- Mortgage 2 -- 31 -- 95 -- 195 1 130 1 Other 305 1 1,167 6 1,813 8 1,402 7 1,290 8 - --------------------------------------------------------------------------------------------------------------- Total international 2,621 11 3,773 19 9,699 41 9,955 50 7,898 49 - --------------------------------------------------------------------------------------------------------------- Gross loans 22,624 100% 20,185 100% 23,595 100% 19,970 100% 16,082 100% === === === === === Less: unearned income 184 223 310 165 202 - ------------------------------------- ------- ------- ------- ------- Total loans $22,440 $19,962 $23,285 $19,805 $15,880 ===================================== ======= ======= ======= =======
On a global basis, the commercial and industrial category and the "other" category included no single industry group with aggregate borrowings from the Corporation in excess of 10 percent of the total loan portfolio at December 31, 2000. Bankers Trust Corporation and its Subsidiaries 33 - -------------------------------------------------------------------------------- Certain contractual maturity information for the Corporation's loans at December 31, 2000, excluding 1-4 family mortgages, installment loans and lease financing is summarized below. Actual maturities may differ from contractual maturities since borrowers may have the right to prepay obligations with or without prepayment penalties. Remaining Maturity - -------------------------------------------------------------------------------- Within After One After One But Within Five (in millions) Year Five Years Years Total - -------------------------------------------------------------------------------- Domestic Commercial and industrial $ 1,388 $4,586 $2,396 $ 8,370 Financial institutions 1,499 212 68 1,779 Real estate Construction 19 76 -- 95 Mortgage 560 250 47 857 Other 5,880 1,414 172 7,466 - -------------------------------------------------------------------------------- Total domestic 9,346 6,538 2,683 18,567 International 1,732 744 81 2,557 - -------------------------------------------------------------------------------- Total $11,078 $7,282 $2,764 $21,124 ================================================================================ Loans due after one year With predetermined interest rates $ 280 $ 151 ====================================================================== With floating or adjustable interest rates $7,002 $2,613 ====================================================================== In prior periods, the Corporation has sold commercial real estate mortgage loans in securitization transactions. The investors and the securitization trusts have no recourse to the Corporation's other assets for failure of debtors to pay when due. The Corporation has retained interests in these securitizations that, in some instances, are subordinate to investors' interests. The value of all of the interests retained are subject to credit, prepayment and interest rate risks on the transferred loans. Such assets are carried at fair value, with security interests in securities available for sale and servicing rights in other assets. The Corporation estimates fair value based upon the present value of future expected cash flows, using management's best estimates of such key assumptions as--credit losses, prepayment speeds, forward yield curves, and discount rates commensurate with the risks involved. As required by SFAS 140, following are certain disclosures relating to retained interests from such securitizations. At December 31, 2000, the fair value of the Corporation's retained interests totaled $65.7 million, based upon an assumed weighted-average life of 1.23 years (which reflects estimated prepayments) and utilizing a residual cash flows discount rate of 14.22%. The weighted-average actual and projected credit losses, at December 31, 2000, were zero percent. The sensitivity of the current fair value of these retained interests to immediate 10 percent and 20 percent adverse changes in the following assumptions are: residual cash flows discount rate--$1.1 million and $2.1 million; and expected credit losses--$2.7 million and $3.9 million, respectively. At December 31, 2000, the total principal amount outstanding of commercial real estate mortgage loans managed or securitized totaled $294 million; of which, none are 90 days or more past due and none are held in portfolio. Cash Basis Loans and Renegotiated Loans The Corporation's cash basis loans and renegotiated loans are summarized as follows: (in millions) December 31, 2000 1999 1998 - -------------------------------------------------------------------------------- Cash basis loans Domestic $814 $573 $192 International 26 164 200 - -------------------------------------------------------------------------------- Total cash basis loans $840 $737 $392 ================================================================================ Renegotiated loans Domestic $ -- $ 11 $ 25 International -- -- 1 - -------------------------------------------------------------------------------- Total renegotiated loans $ -- $ 11 $ 26 ================================================================================ At December 31, 2000 and 1999, borrowers on a cash basis or renegotiated status had undrawn commitments with the Corporation of $100 million and $38 million, respectively. Such 2000 amounts, if drawn, will be classified as cash basis or renegotiated loans. The following table sets forth the approximate effect on interest revenue of cash basis loans and renegotiated loans. This disclosure reflects the interest on loans that were carried on the balance sheet and classified as either cash basis or renegotiated at December 31 of each year. The rates used in determining the gross amount of interest that would have been recorded at the original rate were not necessarily representative of current market rates. (in millions) Year Ended December 31, 2000 1999 1998 - -------------------------------------------------------------------------------- Domestic loans Gross amount of interest that would have been recorded at original rate $80 $27 $16 Less, interest, net of reversals, recognized in interest revenue 51 18 8 - -------------------------------------------------------------------------------- Reduction of interest revenue 29 9 8 - -------------------------------------------------------------------------------- International loans Gross amount of interest that would have been recorded at original rate -- 3 16 Less, interest, net of reversals, recognized in interest revenue -- 1 11 - -------------------------------------------------------------------------------- Reduction of interest revenue -- 2 5 - -------------------------------------------------------------------------------- Total reduction of interest revenue $29 $11 $13 ================================================================================ At December 31, 2000 and 1999, the recorded investment in loans that was considered to be impaired under SFAS 114 was $858 million and $889 million, respectively. Included in these amounts were $725 million and $718 million of loans that required a valuation allowance of $344 million and $268 million at those same dates, respectively. The average recorded investment in impaired loans during the years ended December 31, 2000 and December 31, 1999 was approximately $805 million and $502 million, respectively. For the years ended December 31, 2000, 1999 and 1998, the Corporation recognized interest income on impaired loans of $40 million, $12 million and $19 million, respectively. 34 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Note 6--Allowances for Credit Losses An analysis of the changes in the Corporation's allowances for credit losses follows: (in millions) Year Ended December 31, 2000 1999 1998 - -------------------------------------------------------------------------------- Loans Balance, beginning of year $ 491 $ 652 $699 Provision for credit losses (19) (58) 40 Allowance related to BTAL and transferred entities* (6) (39) -- Net charge-offs Charge-offs 54 91 107 Recoveries 12 27 20 - -------------------------------------------------------------------------------- Total net charge-offs 42 64 87 - -------------------------------------------------------------------------------- Balance, end of year $ 424 $ 491 $652 ================================================================================ Other liabilities Balance, beginning of year $ 24 $ 18 $ 13 Provision for credit losses (2) 6 5 - -------------------------------------------------------------------------------- Balance, end of year $ 22 $ 24 $ 18 ================================================================================ * Reflects the allowance for credit losses--loans of certain legal entities transferred to Deutsche Bank on the date of transfer and the allowance for credit losses--loans of BTAL on the date of sale. Note 7--Premises and Equipment; Leases An analysis of premises and equipment follows: (in millions) December 31, 2000 1999 - -------------------------------------------------------------------------------- Land $ 68 $ 71 Buildings 258 265 Leasehold improvements 321 330 Furniture and equipment 843 816 Construction-in-progress 41 21 - -------------------------------------------------------------------------------- Total 1,531 1,503 Less accumulated depreciation and amortization 907 842 - -------------------------------------------------------------------------------- Net book value $ 624 $ 661 ================================================================================ The Corporation is a lessee under lease agreements covering real property and equipment. The future minimum lease payments required under the Corporation's noncancelable operating leases at the end of 2000 were as follows: (in millions) Year Ended December 31, - -------------------------------------------------------------------------------- 2001 $ 44 2002 45 2003 44 2004 46 2005 35 2006 and later 212 - -------------------------------------------------------------------------------- Total minimum lease payments 426 Less minimum noncancelable sublease rentals 4 - -------------------------------------------------------------------------------- Net minimum lease payments $422 ================================================================================ The following shows the net rental expense for all operating leases: (in millions) Year Ended December 31, 2000 1999 1998 - -------------------------------------------------------------------------------- Gross rental expense $65 $124 $131 Less sublease rental income 17 6 4 - -------------------------------------------------------------------------------- Net rental expense $48 $118 $127 ================================================================================ Note 8--Securities Loaned and Securities Sold Under Repurchase Agreements and Other Short-term Borrowings Short-term borrowings are borrowed funds generally with an original maturity of one year or less. Debt instruments which contain a provision for early redemption, exercisable at the option of the security holder, are classified on the basis of the earliest possible redemption date. Securities loaned and securities sold under repurchase agreements and federal funds purchased generally mature in one day; commercial paper generally matures within 90 days. The details of these borrowings for the years 2000, 1999 and 1998 are presented below: ($ in millions) 2000 1999 1998 - ------------------------------------------------------------------------------- Securities loaned and securities sold under repurchase agreements Balance at year end $ 109 $ 56 $17,420 Average amount outstanding 66 8,261 28,732 Maximum amount outstanding at any month end 109 23,383 37,140 Average interest rate for the year 9.09% 6.52% 6.60% Average interest rate on year-end balance 8.74% 6.89% 5.06% Federal funds purchased Balance at year end $ 5,971 $ 5,270 $ 3,686 Average amount outstanding 3,984 3,226 3,840 Maximum amount outstanding at any month end 7,066 5,968 10,036 Average interest rate for the year 5.16% 4.48% 4.83% Average interest rate on year-end balance 5.56% 3.45% 3.90% Commercial paper Balance at year end $ -- $ -- $ 5,110 Average amount outstanding -- 3,615 9,708 Maximum amount outstanding at any month end -- 9,458 15,293 Average interest rate for the year --% 6.98% 5.98% Average interest rate on year-end balance --% --% 5.41% Other Balance at year end $12,527 $ 6,270 $ 7,517 Average amount outstanding 8,269 6,044 8,049 Maximum amount outstanding at any month end 12,527 8,854 8,885 Average interest rate for the year 8.94% 6.61% 6.97% Average interest rate on year-end balance 4.48% 9.74% 5.54% =============================================================================== Bankers Trust Corporation and its Subsidiaries 35 - -------------------------------------------------------------------------------- Note 9--Long-Term Debt In accordance with the Federal Reserve Board's Capital Adequacy Guidelines, long-term debt included in risk-based capital must meet specific criteria. Generally, qualifying debt must be unsecured, subordinated and have an original weighted-average maturity of at least five years. Additionally, the outstanding amount of long-term debt included in risk-based capital is reduced as these issues approach maturity. That is, one-fifth of the original issue is amortized each year during the last five years before maturity. Long-term debt included in risk-based capital and other long-term debt are summarized as follows, based on the contractual terms of each issue: Long-term debt included in risk-based capital Dec. 31, Dec. 31, Subordinated Subordinated 2000 1999 (in millions) Fixed Rate Floating Rate Total Total - ------------------------------------------------------------------------------- Bankers Trust Due in 2000 $ -- $ -- $ -- $ 197 Due in 2001 213 -- 213 214 Due in 2002 616 80 696 697 Due in 2003 102 195 297 296 Due in 2004 15 23 38 41 Due in 2005 150 69 219 221 Due in 2006-2010 737 -- 737 736 Thereafter 764 -- 764 760 - ------------------------------------------------------------------------------- Total $ 2,597 $ 367 $ 2,964 $ 3,162 - ------------------------------------------------------------------------------- BTCo Due in 2000 $ -- $ -- $ -- $ 9 Due in 2001 9 -- 9 9 Due in 2002 9 -- 9 8 Due in 2003 8 -- 8 7 Due in 2004 7 -- 7 7 Due in 2005 7 -- 7 6 Due in 2006-2010 6 238 244 252 Thereafter -- -- -- -- - ------------------------------------------------------------------------------- Total $ 46 $ 238 $ 284 $ 298 - ------------------------------------------------------------------------------- Total long-term debt $ 2,643 $ 605 $ 3,248 $ 3,460 Less: Amortization for risk-based capital purposes (1,175) (1,036) - ------------------------------------------------------------------------------- Total long-term debt included in risk-based capital $ 2,073 $ 2,424 =============================================================================== Long-term debt not included in risk-based capital Senior Senior Dec. 31, Dec. 31, Fixed Floating 2000 1999 (in millions) Rate Rate Total Total - -------------------------------------------------------------------------------- Bankers Trust Due in 2000 $ -- $ -- $ -- $ 736 Due in 2001 250 332 582 1,118 Due in 2002 -- 249 249 555 Due in 2003 -- 481 481 499 Due in 2004 -- 7 7 7 Due in 2005 113 5 118 118 Due in 2006-2010 -- 415 415 438 Thereafter -- -- -- -- - -------------------------------------------------------------------------------- Total $ 363 $ 1,489 $1,852 $ 3,471 - -------------------------------------------------------------------------------- BTCo Due in 2000 $ -- $ -- $ -- $ 1,113 Due in 2001 6 507 513 539 Due in 2002 345 297 642 1,257 Due in 2003 20 -- 20 36 Due in 2004 2 -- 2 10 Due in 2005 1 -- 1 1 Due in 2006-2010 21 -- 21 57 Thereafter -- -- -- 3 - -------------------------------------------------------------------------------- Total $ 395 $ 804 $1,199 $ 3,016 - -------------------------------------------------------------------------------- Other Other (fixed rate) $1,393 $ 828 Other (floating rate) 3,651 4,231 - -------------------------------------------------------------------------------- Total long-term debt $8,095 $11,546 Add: Amortization for risk-based capital purposes 1,175 1,036 - -------------------------------------------------------------------------------- Total long-term debt not included in risk-based capital $9,270 $12,582 ================================================================================ Based solely on the contractual terms of the debt issues, at December 31, 2000 and 1999 the Corporation's total fixed rate long-term debt had a weighted-average interest rate of 6.25 percent and 6.41 percent, respectively. The Corporation has entered into interest rate and currency swap agreements for many of its long-term debt issues, in order to manage its interest rate and currency risks. The interest rates for the floating rate debt issues and the fixed rate debt issues effectively converted to floating are generally based on LIBOR, although in certain instances they are subject to minimum interest rates as specified in the agreements governing the respective issues. The weighted-average effective interest rates for total long-term debt, including the effects of the related swap agreements, were 6.46 percent and 5.38 percent at December 31, 2000 and 1999, respectively. At December 31, 2000 and 1999, certain subsidiaries of Bankers Trust Company had outstanding $351 million and $1.2 billion, respectively of mandatorily redeemable preference securities included in the table above which are not included in risk-based capital. Maturities at December 31, 2000 range from February 2001 to May 2002 and maturities at December 31, 1999 ranged from April 2000 to May 2002. 36 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Note 10--Mandatorily Redeemable Capital Securities of Subsidiary Trusts Holding Solely Junior Subordinated Deferrable Interest Debentures Included in Risk-Based Capital ("Trust Preferred Capital Securities") The trust preferred capital securities are issued by trusts all of whose outstanding common securities are owned by either Bankers Trust or BTCo. The trust preferred capital securities represent preferred undivided beneficial interests in the assets of the trusts. The trusts exist for the sole purpose of issuing the trust preferred capital securities and investing the proceeds thereof in junior subordinated deferrable interest debentures issued by Bankers Trust or BTCo, as applicable (the "debentures"). The debentures are unsecured and subordinated to all senior indebtedness of Bankers Trust or BTCo, as applicable, and are the sole assets of the trusts. Payments under the debentures by either Bankers Trust or BTCo are the same as those for the trust preferred capital securities. The debentures are redeemable prior to stated maturity at the option of Bankers Trust or BTCo during the redemption periods described below. The trust preferred capital securities are subject to mandatory redemption upon repayment of the related debentures at their stated maturity dates or their earlier redemption at a redemption price equal to their liquidation amount plus accrued distributions to the date fixed for redemption and the premium, if any, paid by Bankers Trust or BTCo upon concurrent repayment of the related debentures. Bankers Trust and BTCo, as applicable, have issued guarantees for the payment of distributions and payments on liquidation or redemption of the trust preferred capital securities, but only to the extent of funds held by the relevant trust. The appropriate obligations of Bankers Trust or BTCo under each series of debentures, the relevant indenture and trust agreement, the relevant guarantee and certain other related agreements, in the aggregate, constitute a full and unconditional guarantee by Bankers Trust or BTCo, as applicable, of each trust's obligations under the relevant trust preferred capital securities. The Corporation is required by the Federal Reserve to maintain certain levels of capital. The Federal Reserve has announced that certain cumulative preferred securities having the characteristics of trust preferred capital securities qualify as minority interest, which is included in Tier 1 Capital for bank holding companies. Such Tier 1 Capital treatment, together with Bankers Trust's ability to deduct, for federal income tax purposes, interest expense on the corresponding debentures, provides Bankers Trust with a cost-effective means of obtaining capital for regulatory purposes. The following is a summary of the outstanding trust preferred capital securities and debentures:
Aggregate Aggregate Liquidation Liquidation Per Annum Amount of Amount of Interest Stated Trust Trust Rate of Maturity of Preferred Preferred Debentures Debentures Capital Capital and Trust and Trust Securities at Securities at Preferred Interest Preferred Earlier Redemption December 31, December 31, Capital Payment Capital Maturity Period of ($ in millions) 2000 1999 Securities Dates Securities Date(2) Debentures - ------------------------------------------------------------------------------------------------------------------------------------ Bankers Trust--Obligated BT Institutional Capital Trust A(3) $ 275 $ 290 8.09% 6/1, 12/1 12/1/26 -- On or after 12/1/06 BT Institutional Capital Trust B(3) 159 200 7.75 6/1, 12/1 12/1/26 -- On or after 12/1/06 BT Capital Trust B(3) 205 250 7.90 1/15, 7/15 1/15/27 1/15/17 On or after 1/15/07 BT Preferred Capital Trust I 250 250 8 1/8 3/31, 6/30 2/1/37 2/1/02 On or after 9/30, 12/31 2/1/02 BT Preferred Capital Trust II 203 203 7.875 2/25, 8/25 2/25/27 2/25/12 On or after 2/25/07 BTCo--Obligated BTC Capital Trust I(3) 222 250 3-Month 3/30, 6/30 12/30/26 -- On or after LIBOR 9/30, 12/30 12/30/06 plus 0.75% - ------------------------------------------------------------------------------------------------------------------------------------ Total(1) $1,314 $1,443 ====================================================================================================================================
(1) Excludes deferred issuance costs and unamortized discount. (2) The maturity dates may be shortened under certain circumstances. (3) During 2000, the Corporation repurchased $15 million, $41 million, $45 million and $28 million of BT Institutional Capital Trust A, BT Institutional Capital Trust B, BT Capital Trust B and BTC Capital Trust I securities, respectively. Bankers Trust Corporation and its Subsidiaries 37 - -------------------------------------------------------------------------------- Note 11--Preferred Stock The number of shares of Series Preferred Stock repurchased and redeemed during 1998, 1999 and 2000 was as follows (number of shares in thousands):
Adjustable Adjustable 7 5/8% 7.50% Rate Rate 7.75% Cumulative Cumulative Cumulative Cumulative Cumulative Preferred Preferred Preferred Preferred Preferred Shares of Series Stock, Stock, Stock, Stock, Stock, Preferred Stock Series O Series P Series Q(1) Series R(1) Series S(1) - ---------------------------------------------------------------------------------------------------- December 31, 1997 595 99 64 50 50 - ---------------------------------------------------------------------------------------------------- Repurchased -- -- -- (6) -- Redeemed (595) (99) -- -- -- - ---------------------------------------------------------------------------------------------------- December 31, 1998 -- -- 64 44 50 - ---------------------------------------------------------------------------------------------------- Repurchased -- -- (4) (4) -- - ---------------------------------------------------------------------------------------------------- December 31, 1999 -- -- 60 40 50 - ---------------------------------------------------------------------------------------------------- Repurchased -- -- (4) -- -- Redeemed -- -- (56) (40) (50) - ---------------------------------------------------------------------------------------------------- December 31, 2000 -- -- -- -- -- ====================================================================================================
(1) Series Q, Series R and Series S are represented by depositary shares at $25 per depositary share, each representing a one-hundredth interest of a share. On September 28, 2000, the Corporation redeemed all 55,739 shares, 40,022 shares and 50,000 shares of its Adjustable Rate Cumulative Preferred Stock, Series Q, Adjustable Rate Cumulative Preferred Stock, Series R, and 7.75% Cumulative Preferred Stock, Series S, respectively. All shares were redeemed at a redemption price of $2,500 per share plus accrued and unpaid dividends to the redemption date. Note 12--Common Stock and Stock-Based Compensation Plans Common stock activity during 2000, 1999 and 1998 was as follows: Year Ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------- Common shares outstanding, beginning of year 1 95,714,120 96,956,340 - ------------------------------------------------------------------------------- Shares issued or distributed under employee benefit plans - 2,974,125 4,192,633 Conversion of 5 3/4% Convertible Subordinated Debentures - -- 1,434 Shares purchased for treasury - (837,410) (5,436,287) Shares purchased and retired - (97,850,834)(1) -- - ------------------------------------------------------------------------------- Common shares outstanding, end of year 1 1 95,714,120 =============================================================================== (1) Amount represents shares purchased and retired in connection with Acquisition. Prior to the Acquisition, stock options were granted to purchase stock at a price not less than the fair market value of the stock on the date of grant. As of the Acquisition date, all unvested options vested and became immediately exercisable. The Corporation paid $93.00 less the exercise price for each option outstanding on the Acquisition date. No stock options were granted in 2000 or 1999. There were no stock options outstanding at December 31, 2000 and 1999. The following is a summary of stock option transactions that occurred during 1998, 1999 and 2000 (number of shares in thousands): Weighted-Average Exercise Price Exercise Price Options Per Option Per Option - -------------------------------------------------------------------------------- December 31, 1997 12,478 $16.81-111.75 $ 80.76 ==================================== Granted 959 56.25-134.50 112.88 Exercised (1,970) 16.81-102.6625 65.37 Cancelled (671) 98.87 - ------------------------------------ December 31, 1998 10,796 21.59-134.50 85.29 ==================================== Exercised (442) 21.59-90.75 57.74 Cancelled (297) 92.61 Settled due to COC (10,057) - ------------------------------------ December 31, 1999 -- -- -- ==================================== ===== December 31, 2000 -- -- -- ==================================== ===== Deferred stock awards, which entitled certain employees to receive common stock of the Corporation at a specified future date, were also granted prior to the Acquisition. On the COC date, all deferred compensation amounts vested in full. There were no deferred stock awards outstanding at December 31, 2000 and 1999. At December 31, 1998, there were deferred stock awards outstanding of 8,698,216 shares. In January 1999, 6,548,524 deferred stock awards were granted related to the 1998 performance year. Compensation expense recognized for deferred stock awards was $0, $749 million and $275 million in 2000, 1999 and 1998, respectively. The increase in 1999 is due to the vesting of all deferred stock awards on the COC date. All deferred stock awards granted during 1999 were paid out at $93.00 per share on the COC date. 38 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- SFAS 123 Pro Forma Information In conjunction with the Acquisition, compensation expense related to all options outstanding as of the Acquisition date was recognized reflecting the buyout of such options. For each option outstanding, this expense was equal to $93.00 less the exercise price resulting in total expense of $118 million. Prior to the Acquisition, the Corporation applied Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Corporation's employee stock options equaled the market price of the underlying stock on the date of grant, no compensation expense was recognized for the year ended December 31, 1998. Pro forma information regarding net income and earnings per share is required by SFAS 123, and was determined for the year ended December 31, 1998 as if the Corporation had accounted for its employee stock options under the fair value method of SFAS 123. For purposes of pro forma disclosure, the estimated fair value of the options was amortized to expense over the options' vesting period. (in millions except loss per share) 1998 - ------------------------------------------------------------------------------- Net loss: As reported $ (73) Pro forma $ (129) Basic loss per share: As reported $(1.05) Pro forma $(1.61) Diluted loss per share: As reported $(1.05) Pro forma $(1.61) =============================================================================== Note 13--Assets Pledged to Creditors and other Asset and Dividend Restrictions The Federal Reserve Act, as amended by the Monetary Control Act of 1980, requires that reserve balances on certain deposits of depository institutions be maintained at the Federal Reserve Bank. The required reserve balances of the Corporation's subsidiary banks were $141 million and $189 million at December 31, 2000 and 1999, respectively. For the years 2000 and 1999, the average reserve balances of these banks amounted to $147 million and $132 million, respectively. In accordance with SFAS 140, at December 31, 2000, the carrying amount of assets that were pledged as collateral in transactions in which the secured party did not have the right to sell or re-pledge the collateral provided by the Corporation was as follows: (in millions) December 31, 2000 - ----------------------------------------------------------------------------- Trading assets--debt securities $ 13 Securities available for sale 25 Loans 5,624 - ----------------------------------------------------------------------------- Total $5,662(1) ============================================================================= (1) These were pledged to secure public and trust deposits, for borrowings, and for other purposes. Federal law also requires that "covered transactions," as defined, engaged in by insured banks and their subsidiaries with certain affiliates, including Bankers Trust, be at arm's length and limited to 20 percent of capital surplus. The Federal Reserve Board defines capital surplus as Tier 1 Capital and Tier 2 Capital plus the balance of the institution's allowance for loan and lease losses not included in Tier 2 Capital. Additionally, "covered transactions" with any one such affiliate is limited to 10 percent of capital and surplus. Covered transactions are defined to include, among other things, loans and other extensions of credit to such an affiliate and guarantees, acceptances and letters of credit issued on behalf of such an affiliate. Such loans, other extensions of credit, guarantees, acceptances and letters of credit must be secured. Other restrictions also apply to inter-affiliate transactions. Limitations exist on the availability of BTCo's undistributed earnings for the payment of dividends to Bankers Trust without prior approval of the bank regulatory authorities. In this regard, BTCo cannot declare dividends in 2001 without approval of the regulatory authorities. The Federal Reserve Board may prohibit the payment of dividends if it determines that circumstances relating to the financial condition of a bank are such that the payment of dividends would be an unsafe and unsound practice. Certain other subsidiaries are subject to various regulatory and other restrictions that may limit cash dividends and advances to Bankers Trust. Note 14--Regulatory Capital The Corporation and its banking subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. The Federal Reserve Board's risk-based capital guidelines address the capital adequacy of bank holding companies and banks (collectively, "banking organizations"). These guidelines include a definition of capital, a framework for calculating risk-weighted assets, and minimum risk-based capital ratios to be maintained by banking organizations. A banking organization's risk-based capital ratios are calculated by dividing its qualifying capital by its risk-weighted assets. The Federal Reserve Board also has a minimum Leverage ratio that is used as a supplement to the risk-based capital ratios in evaluating the capital adequacy of banks and bank holding companies. The Leverage ratio is calculated by dividing Tier 1 Capital by adjusted quarterly average assets. Failure to meet minimum capital requirements can initiate certain mandates, and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on the consolidated financial statements of the Corporation and BTCo. Bankers Trust Corporation and its Subsidiaries 39 - -------------------------------------------------------------------------------- Under the risk-based capital guidelines, there are two categories of capital: core capital ("Tier 1 Capital") and supplemental capital ("Tier 2 Capital"), collectively referred to as Total Capital. Tier 1 Capital includes common stockholders' equity, qualifying perpetual preferred stock, qualifying trust preferred capital securities and minority interest in equity accounts of consolidated subsidiaries. Tier 2 Capital includes perpetual preferred stock and trust preferred capital securities (to the extent ineligible for Tier 1 Capital), hybrid capital instruments (i.e., perpetual debt and mandatory convertible securities), limited amounts of subordinated debt, intermediate-term preferred stock, and a portion of the allowance for credit losses. Risk-weighted assets are calculated by assigning nontrading account assets and off-balance sheet items to broad risk categories. The Corporation had previously adopted the market risk amendment to the risk-based capital guidelines issued by the Federal Reserve Board and the Bank for International Settlements (BIS). The amendment changed the calculation of the risk-weighted assets for trading accounts from assigning trading assets to broad risk categories to the use of internal models to measure market risk. The market risk amendment also provides for the inclusion of Tier 3 Capital, which is defined to be subordinated debt that is unsecured; has an original maturity of a minimum of two years; is not redeemable before maturity without prior approval from the Federal Reserve; and includes a lock-in clause precluding payment of either interest or principal if the payment would cause the issuing organization's risk-based capital ratio to fall below the minimum required level. In addition, under the prompt corrective action provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), five capital categories were established for banks. Pursuant to that statute, the federal bank regulatory agencies have specifically defined these categories by determining that a bank is well capitalized if it maintains a Tier 1 Capital ratio of at least 6.0 percent, a Total Capital ratio of at least 10.0 percent and a Leverage ratio of at least 5.0 percent. The Federal Reserve Board has also adopted these same thresholds for the Tier 1 Capital ratio and Total Capital ratio in defining a well-capitalized bank holding company. The well-capitalized threshold for the Leverage ratio is not applicable at the bank holding company level. Based on their respective regulatory capital ratios at December 31, 2000 and December 31, 1999, both the Corporation and BTCo are well capitalized. There are no conditions or events that management believes have changed the Corporation's and BTCo's well-capitalized status. The Corporation's and BTCo's actual capital amounts and ratios are presented in the table below.
FRB Minimum To Be Well For Capitalized Capital Under Actual as of Actual as of Adequacy Regulatory 12/31/00 12/31/99 Purposes: Guidelines: - ----------------------------------------------------------------------------------------------------------------------------------- ($ in millions) Amount Ratio Amount Ratio Ratio Ratio - ----------------------------------------------------------------------------------------------------------------------------------- Corporation Risk-Based Capital Ratios Tier 1 Capital(1) $5,048 12.5% $4,462 10.4% 4.0% 6.0% Total Capital(1) 7,556 18.8% 7,861 18.4% 8.0% 10.0% Leverage Ratio(2) $5,048 9.1% $4,462 7.3% 3.0% N/A BTCo Risk-Based Capital Ratios Tier 1 Capital(1) $6,161 24.0% $5,710 16.5% 4.0% 6.0% Total Capital(1) 6,812 26.5% 6,561 18.9% 8.0% 10.0% Leverage Ratio(2) $6,161 16.0% $5,710 12.3% 3.0% 5.0%
(1) Ratios are calculated on Tier 1 Capital and Total Capital as a percentage of risk-weighted assets. (2) Ratio is calculated on Tier 1 Capital as a percentage of adjusted quarterly average assets. N/A Not Applicable. 40 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Note 15--Interest Revenue and Interest Expense The following are the components of interest revenue and interest expense: (in millions) Year Ended December 31, 2000 1999 1998 - -------------------------------------------------------------------------------- Interest Revenue Interest-bearing deposits with banks $ 619 $ 309 $ 310 Federal funds sold 100 160 211 Securities purchased under resale agreements 129 675 1,635 Securities borrowed -- 383 1,222 Trading assets 918 916 2,388 Securities available for sale Taxable 69 362 633 Exempt from federal income taxes 1 22 43 Loans 1,772 1,522 1,711 Customer receivables 27 70 138 - -------------------------------------------------------------------------------- Total interest revenue 3,635 4,419 8,291 - -------------------------------------------------------------------------------- Interest Expense Interest-bearing deposits Domestic offices 558 694 1,183 Foreign offices 440 730 1,012 Trading liabilities 2 131 462 Securities loaned and securities sold under repurchase agreements 6 539 1,897 Other short-term borrowings 946 796 1,327 Long-term debt 921 608 921 Mandatorily redeemable capital securities of subsidiary trusts holding solely junior subordinated deferrable interest debentures included in risk-based capital 115 114 117 - -------------------------------------------------------------------------------- Total interest expense 2,988 3,612 6,919 - -------------------------------------------------------------------------------- Net interest revenue $ 647 $ 807 $1,372 ================================================================================ Note 16--Trading Revenue The following are the components of trading revenue: (in millions) Year Ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------- Interest rate risk $ 49 $(165) $(427) Foreign exchange risk 30 139 426 Equity and commodity risk 57 68 (183) - ------------------------------------------------------------------------------- Total trading revenue $136 $ 42 $(184) =============================================================================== Note 17--Pension and Other Employee Benefit Plans In 2000, the Corporation's trusteed noncontributory, domestic defined benefit pension plan merged with Deutsche Bank Americas Holding Corp's ("DBAH") pension plan. The value of a participant's accrued benefit, which is expressed using a cash balance account approach (a type of defined benefit plan), did not change as a result of this transaction. During 1998, the Corporation maintained a noncontributory profit sharing plan, called Partnershare, covering certain domestic employees. The Corporation's contribution consisted of a fixed contribution equal to six percent of eligible domestic employees' annual salary as well as an additional contribution of from zero to nine percent of eligible employees' annual salary, which percentage was calculated using a formula based on the Corporation's consolidated income before income taxes. Expense recognized for this plan amounted to $27 million for the year ended December 31, 1998. Effective January 1, 1999, the Corporation implemented a 401(k) Savings Plan covering substantially all domestic employees, which replaced the Partnershare Plan and the Corporation's prior 401(k) plan. Employees are permitted within limitations imposed by tax laws to make pretax contributions to the 401(k) Savings Plan. The Corporation makes fixed contributions equaling three percent of eligible domestic employees' annual salary and will also match employees' contributions up to three percent of eligible salary. The Corporation may, solely at its discretion, match an additional zero percent to 200 percent of the employees' contribution up to 3 percent of eligible salary, which discretionary contribution it chose not to make for the years ended December 31, 2000 and 1999. Accordingly, expense recognized for this plan amounted to $25 million and $27 million for the years ended December 31, 2000 and 1999, respectively. The Corporation also provides health care benefits to employees (retirees) who met specific age and/or service requirements on January 1, 1990 provided that they retire (retired) under the principal domestic pension plan with at least ten years of service. This plan is contributory for participating retirees and also requires them to absorb deductibles and coinsurance. The Corporation also provided noncontributory life insurance benefits for substantially all domestic retirees who retired before January 1, 1999 with at least ten years of service. During 2000, the Corporation purchased an insurance contract which settled its primary responsibility for its benefits obligation for domestic retirees currently receiving benefits. Bankers Trust Corporation and its Subsidiaries 41 - -------------------------------------------------------------------------------- The following tables provide a reconciliation of the changes in the postretirement plans' benefit obligations and fair value of assets over the two-year period ended December 31, 2000 and a statement of the funded status as of December 31 of both years. The table also provides a reconciliation of the changes in the pension plans' benefit obligations and fair value of assets for the period ended December 31, 1999 and a statement of the funded status as of December 31, 1999 (the period prior to the merger with DBAH's pension plan).
Postretirement Benefits Pension Benefits - ------------------------------------------------------------------------------------------- (in millions) 2000 1999 1999 - ------------------------------------------------------------------------------------------- Change in benefit obligation Benefit obligation at beginning of year $ 94 $ 101 $ 803 Service cost 1 1 33 Interest cost 5 6 52 Plan amendments 13 -- -- Actuarial gain (17) (10) (111) Benefits paid (6) (4) (50) Curtailment/settlement (7) -- (12) Foreign currency exchange rate changes -- -- (5) - ------------------------------------------------------------------------------------------- Benefit obligation at end of year $ 83 $ 94 $ 710 =========================================================================================== Change in plan assets Fair value of plan assets at beginning of year $ 4 $ 4 $ 1,107 Actual return on plan assets -- -- 172 Employer contributions 11 4 6 Benefits paid (6) (4) (50) Curtailment/settlement (9) -- (7) Foreign currency exchange rate changes -- -- (4) - ------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $ -- $ 4 $ 1,224 =========================================================================================== Funded Status $ (83) $ (90) $ 514 Unrecognized net (gain) loss (31) (34) (315) Unrecognized prior service cost -- 5 18 Unrecognized net (assets) obligations -- -- (7) - ------------------------------------------------------------------------------------------- Prepaid (accrued) benefit cost at end of year* $(114) $(119) $ 210 ===========================================================================================
* Prepaid pension costs totaled $229 million at December 31, 1999. No prepaid postretirement costs were recognized at December 31, 2000 and 1999. Benefits expense for 2000, 1999 and 1998 included the following components:
Postretirement Benefits Pension Benefits - --------------------------------------------------------------------------------------- (in millions) Year Ended December 31, 2000 1999 1998 1999 1998 - --------------------------------------------------------------------------------------- Service cost $ 1 $ 1 $ 1 $ 33 $ 23 Interest cost 6 6 7 52 48 Expected return on plan assets -- -- -- (94) (84) Net amortization and deferral (1) (3) (3) (5) (6) - --------------------------------------------------------------------------------------- Total defined benefit plans 6 4 5 (14) (19) ======================================================================================= Defined contribution plans -- -- -- 43 79 Other plans -- -- -- 5 4 - --------------------------------------------------------------------------------------- Net periodic benefit expense $ 6 $ 4 $ 5 $ 34 $ 64 =======================================================================================
Expense related to defined benefit plans, including costs associated with the Corporation's participation in the DBAH pension plan, amounted to $4 million for the year ended December 31, 2000. Expense related to defined contribution plans, primarily the Corporation's 401(k) Savings Plan, amounted to $25 million for the same period. The actuarial assumptions used for the principal domestic defined benefit plan and postretirement benefit plan were as follows:
Postretirement Pension Benefits Benefits - ---------------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- Discount rate in determining expense 7.75% 6.75% 7.00% 6.75% 7.00% Discount rate in determining benefit obligations at year end 7.75% 7.75% 6.75% 7.75% 6.75% Rate of increase in future compensation levels for determining expense 5.00% 5.00% 5.00% 5.00% 5.00% Rate of increase in future compensation levels for determining benefit obligations at year end 5.00% 5.00% 5.00% 5.00% 5.00% Expected long-term rate of return on assets 9.00% 9.00% 9.00% 9.00% 9.00%
42 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- In determining postretirement benefits expense, a 7.00 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 2001. The rate was assumed to decrease to 5.50 percent by 2002 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the retiree health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects on the Corporation's retiree health care plan: One-Percentage One-Percentage Point Increase Point Decrease - ------------------------------------------------------------------------------- (in millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------- Effect on total of service and interest cost components $ 1 $-- $ (1) $-- Effect on accumulated postretirement benefit obligation $12 $ 5 $(10) $(5) Note 18--Restructuring and Other Related Activities During 1999, the Corporation recorded pre-tax charges for restructuring and other related activities totaling $633 million. Of this amount, $459 million related to a restructuring charge recorded in the second quarter in conjunction with the Acquisition ("Plan 1"). This charge reflected $394 million of severance and other termination-related costs as well as $65 million of other costs primarily related to lease terminations and write-offs of fixed assets and leasehold improvements. During the fourth quarter of 1999, the Corporation recorded additional charges related to restructuring and other related activities of $174 million in connection with its continuing efforts to streamline support functions and realign certain business activities ("Plan 2"). These charges reflected $116 million of severance and other termination-related costs, as well as $58 million of other costs primarily related to the intended liquidation of certain financial assets. As of December 31, 2000, all significant restructuring initiatives contemplated in Plan 1 and Plan 2 had been completed. The remaining reserve balance of $21 million related to Plan 1 was reversed during the second quarter of 2000. The cost to complete Plan 2 was reduced by $25 million resulting from certain management changes in the Global Institutional Services business and a higher than anticipated level of employee attrition. Such amount was reversed in the second quarter of 2000. The additional remaining reserve balance related to Plan 2 of $2 million was reversed in the fourth quarter of 2000. Note 19--Income Taxes The Corporation's 2000 results of operations are included in the consolidated tax returns of Taunus. The domestic and foreign components of consolidated income (loss) before income taxes (benefit) follow: (in millions) Year Ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------- Domestic $622 $(1,104) $(83) Foreign 278 (311) 6 - ------------------------------------------------------------------------------- Total $900 $(1,415) $(77) =============================================================================== For purposes of determining the above amounts, foreign income is defined as income recorded by operations located outside of the U.S. Deferred income taxes result from differences in the timing of revenue and expense recognition for income tax and financial reporting purposes. An analysis of consolidated income tax expense (benefit) follows: (in millions) Year Ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------- Income tax expense (benefit) applicable to: Income (loss) before income tax expense (benefit)* $ 388 $ 188 $ (4) Capital surplus -- (5) (50) Cumulative translation adjustments (44) 41 (10) Securities valuation allowance (2) 28 (13) - ------------------------------------------------------------------------------- Total $ 342 $ 252 $(77) =============================================================================== * Includes income tax expense (benefit) related to securities available for sale transactions of $19 million, $4 million and $(7) million in 2000, 1999 and 1998, respectively. Bankers Trust Corporation and its Subsidiaries 43 - -------------------------------------------------------------------------------- The components of consolidated income taxes (benefit) follow: (in millions) Year Ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------- Current Federal $ 179 $ 290 $ (9) Foreign 94 237 175 State and local 96 120 33 - ------------------------------------------------------------------------------- Total current 369 647 199 - ------------------------------------------------------------------------------- Deferred Federal 11 (122) (229) Foreign (68) (171) 10 State and local 30 (102) (57) - ------------------------------------------------------------------------------- Total deferred (27) (395) (276) - ------------------------------------------------------------------------------- Total $ 342 $ 252 $ (77) =============================================================================== The following is an analysis of the difference between the U.S. federal statutory income tax (benefit) and the effective tax (benefit) on consolidated income (loss) before income taxes: (in millions) Year Ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------- Computed expected tax expense (benefit) $ 315 $(495) $(27) State and local income taxes (benefit) 87 7 (15) Tax-exempt income (7) (11) (17) Foreign subsidiary earnings 12 428 54 Valuation allowance (58) 211 -- Nondeductible penalty -- -- 22 Other 39 48 (21) - ------------------------------------------------------------------------------- Effective income tax (benefit) $ 388 $ 188 $ (4) =============================================================================== The following is an analysis of the Corporation's net deferred tax assets: (in millions) December 31, 2000 1999 - -------------------------------------------------------------------------------- Deferred tax assets $2,028 $1,943 Valuation allowance 358 418 - -------------------------------------------------------------------------------- Deferred tax assets net of valuation allowance 1,670 1,525 Deferred tax liabilities 275 158 - -------------------------------------------------------------------------------- Net deferred tax assets $1,395 $1,367 ================================================================================ At December 31, 2000, the Corporation's deferred tax assets were primarily related to foreign tax credit carryovers that will expire in 2003 through 2005 ($454 million), deferred interest expense ($352 million), international operations ($218 million), credit losses ($215 million), net operating loss carryovers that primarily will start to expire in 2018 ($81 million) and tax credit carryovers ($68 million). Deferred tax liabilities were primarily related to deferred intercompany sales ($203 million) and lease financing activities ($57 million). At December 31, 1999, the Corporation's deferred tax assets were primarily related to foreign tax credit carryovers that will expire in 2003 and 2004 ($545 million), credit losses ($299 million), net operating loss carryovers that primarily will start to expire in 2018 ($133 million), and international operations ($81 million). Deferred tax liabilities were primarily related to certain trading activities ($49 million) and lease financing activities ($46 million). Note 20--Earnings (Loss) per Common Share Due to the Acquisition, earnings per common share are not meaningful for the years ended December 31, 2000 and 1999. The following table sets forth the computation of basic and diluted loss per share for the year ended December 31, 1998 (in millions, except per share amounts): Year Ended December 31, 1998 - ------------------------------------------------------------------------------- Numerator Net loss $ (73) Preferred stock dividends (32) - ------------------------------------------------------------------------------- Numerator for basic loss per share--net loss applicable to common stockholders (105) Effect of dilutive securities -- Numerator for diluted loss per share--net loss applicable to common stockholders after assumed conversions $ (105) =============================================================================== Denominator Denominator for basic loss per share--weighted-average shares outstanding 100.152 Effect of dilutive securities* -- Denominator for diluted loss per share--adjusted weighted- average shares after assumed conversions 100.152 =============================================================================== Basic loss per share $ (1.05) =============================================================================== Diluted loss per share $ (1.05) =============================================================================== * Due to a loss for the year, no incremental shares are included in the loss per share calculation because the effect would be antidilutive. Note 21--Business Segments and Related Information SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," redefines operating segments and establishes standards for reporting information about operating segments and related disclosures about products and services, geographic areas, and major customers. In order to conform to Deutsche Bank's management structure, the Corporation has realigned its business activities into the following business segments: Retail and Private Banking, Asset Management, Global Corporates and Institutions, and Global Technology and Services. All prior periods have been restated to conform with the Deutsche Bank reporting format. 44 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Business segments results are determined based on the Corporation's internal management accounting process, which allocates revenue and expenses among the business segments. Because the Corporation's business is diverse in nature and its operations are integrated, certain estimates and judgments have been made to apportion revenue and expense items. The internal management accounting process, unlike financial accounting in accordance with generally accepted accounting principles, is based on the way management views its business and is not necessarily comparable with similar information disclosed by other financial institutions. The accounting policies of the business segments are generally the same as those described in Note 2. Segments that hold net asset positions are allocated interest expense to reflect their net use of funds and segments that have net liability positions are allocated interest income to reflect their net contribution of funds. The Retail and Private Banking division provides 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. The Asset Management division combines the institutional asset management and retail investment fund businesses. The Global Corporates and Institutions division integrates long-standing relationship and credit-oriented commercial banking with the product and transactional orientation of investment banking for corporate clients and financial institutions. This business segment also includes credit business, trade finance, structured finance and cash management in addition to the Corporation's private equity business, until the fourth quarter of 2000, and trading activities. Global Technology and Services comprises custody services, payment settlement, securities settlement, and electronic banking services.
Year Ended Global Global Total December 31, 2000 Retail and Asset Corporates and Technology and Business (in millions) Private Banking Management Institutions Services Segments - ----------------------------------------------------------------------------------------------------------------------------- Net revenues from external customers* $ 160 $303 $ 869 $ 899 $ 2,231 Net interest revenue 47 (2) 239 246 530 Credit quality expense--loans -- -- (11) (2) (13) Pre-tax income (loss) 7 8 168 8 191 Total assets* 2,288 191 50,926 5,301 58,706
* There were no material intersegment revenues or intersegment assets among the business segments
Year Ended Global Global Total December 31, 1999 Retail and Asset Corporates and Technology and Business (in millions) Private Banking Management Institutions Services Segments - ----------------------------------------------------------------------------------------------------------------------------- Net revenues from external customers* $ 169 $241 $ 1,370 $ 945 $ 2,725 Net interest revenue 39 (3) 366 203 605 Credit quality expense--loans -- -- 64 2 66 Pre-tax income (loss) (20) 20 (1,296) (53) (1,349) Total assets* 2,589 227 55,867 7,229 65,912
* There were no material intersegment revenues or intersegment assets among the business segments.
Year Ended Global Global Total December 31, 1998 Retail and Asset Corporates and Technology and Business (in millions) Private Banking Management Institutions Services Segments - ----------------------------------------------------------------------------------------------------------------------------- Net revenues from external customers* $ 187 $253 $ 2,568 $ 964 $ 3,972 Net interest revenue 40 (3) 648 217 902 Credit quality expense--loans 2 -- 85 1 88 Pre-tax income (loss) 12 98 (524) 79 (335)
* There were no material intersegment revenues among the business segments. Bankers Trust Corporation and its Subsidiaries 45 - -------------------------------------------------------------------------------- The following table reconciles total net revenue for business segments to consolidated net revenue (in millions): Year Ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------- Total net revenue reported for business segments $ 2,231 $2,725 $ 3,972 Earnings associated with unassigned capital 213 195 317 Gain on transfer of BTH 561 -- -- Net revenue of entities sold -- 366 855 Gain on sale of BTAL* -- 779 -- Credit quality adjustment 6 124 48 Other (159) 176 (103) - ------------------------------------------------------------------------------- Consolidated net revenue(1) $ 2,852 $4,365 $ 5,089 =============================================================================== (1) Consolidated net revenue includes net interest revenue after provision for credit losses--loans and noninterest revenue. * Gain is net of foreign currency translation losses realized on the sale. The following table reconciles total pre-tax income (loss) for business segments to consolidated pre-tax income (loss) (in millions): Year Ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------- Total pre-tax income (loss) reported for business segments $ 191 $(1,349) $(335) Gain on transfer of BTH 561 -- -- Pre-tax income (loss) of entities sold -- (76) 188 Gain on sale of BTAL* -- 779 -- Restructuring and other related activities 48 (633) -- Realized foreign currency translation losses** (28) (257) -- Earnings associated with unassigned capital 213 195 317 Credit quality adjustment 6 124 48 Legal settlement -- -- (69) Other unallocated amounts (91) (198) (226) - ------------------------------------------------------------------------------- Consolidated pre-tax income (loss) $ 900 $(1,415) $ (77) =============================================================================== * Gain is net of foreign currency translation losses realized on the sale. ** Excluding realized foreign currency translation losses related to BTAL. The following table reconciles total assets for business segments to consolidated assets (in millions): December 31, 2000 1999 - -------------------------------------------------------------------------------- Total assets reported for business segments $58,706 $65,912 Investments in unconsolidated companies accounted for at cost 1,190* 68 Premises and equipment 323 358 Goodwill not allocated to business segments 69 22 Investments in unconsolidated companies accounted for at equity 24 3 Other unallocated amounts 2,451 1,794 - -------------------------------------------------------------------------------- Consolidated assets $62,763 $68,157 ================================================================================ * Amount primarily represents the Corporation's investment related to the transfer of BTH. The following table reconciles the other significant items reported for the business segments to the consolidated financial statements:
(in millions) Year Ended December 31, 2000 1999 - --------------------------------------------------------------------------------------------------------------------- Total Total Business Total Business Total Segments Adjustments Consolidated Segments Adjustments Consolidated - --------------------------------------------------------------------------------------------------------------------- Net interest revenue(1) $530 $117 $647 $605 $ 202 $807 Credit quality expense--loans (13) (6) (19) 66 (124) (58) ===================================================================================================================== (in millions) Year Ended December 31, 1998 - ---------------------------------------------------------------------------- Total Business Total Segments Adjustments Consolidated - ---------------------------------------------------------------------------- Net interest revenue(1) $902 $470 $1,372 Credit quality expense--loans 88 (48) 40 ============================================================================
(1) Adjustments primarily represent earnings associated with unassigned capital partially offset by unallocated funding costs. 46 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- The following table presents net revenue by geographical location (in millions): Year Ended December 31, 2000 1999 1998 - -------------------------------------------------------------------------------- United States $2,461 $3,385 $2,827 United Kingdom 81 390 989 Australia 11 284 603 Chile 13 153 375 Other foreign countries 286 153 295 - -------------------------------------------------------------------------------- Consolidated net revenue(1) $2,852 $4,365 $5,089 ================================================================================ (1) Consolidated net revenue includes net interest revenue after provision for credit losses--loans and noninterest revenue. Revenue is attributed to countries based on the location in which entities are incorporated. The following table presents net revenue of the Corporation organized around specific products and services (in millions): Year Ended December 31, 2000 1999 1998 - -------------------------------------------------------------------------------- Corporate Finance $ 520 $ 1,163 $1,460 Debt Investments 6 35 44 Private Equity 92 521 452 Trading and Risk Management 272 (127) 471 Processing Services 897 1,030 1,176 Investment Management 335 427 496 Private Banking 186 381 596 Insurance -- 128 331 Other 544** 807* 63 - -------------------------------------------------------------------------------- Consolidated net revenue $2,852 $ 4,365 $5,089 ================================================================================ * Amount includes the gain on the sale of BTAL. ** Amount includes the gain on the transfer of BTH. Note 22--International Operations Management views the operations of the Corporation on a business segment basis, as disclosed in Note 21. However, in order to comply with the financial reporting regulations of the Securities and Exchange Commission, the Corporation is required to report international operations on the basis of the domicile of the customer. Pursuant to these regulations, any business transacted with a customer who is domiciled outside the U.S. is reported as international operations. Due to the complex nature of the Corporation's businesses and because its revenue from customers domiciled outside the U.S. is recorded in both domestic and foreign offices, it is impossible to segregate with precision the respective contributions to income from the domestic and international operations. As these operations are highly integrated, estimates and subjective assumptions have been made to apportion revenue and expenses between domestic and international operations. These estimates and assumptions include the following: interest revenue and interest expense are apportioned to geographic areas based on the geographic distribution of average interest-earning assets. The geographic location of the assets is determined by the domicile of the customer, or for interest-earning securities, by the domicile of the issuer. Trading gains and losses are primarily allocated based on the geographic distribution of average trading assets as determined by the domicile of the issuer. All other noninterest revenue is allocated based on the geographic location of the office recording the income. Noninterest expense is basically apportioned geographically based on the geographical distribution of operating income (net interest revenue plus noninterest revenue). Corporate overhead expenses are allocated based upon average assets by geographic region. International offices are assessed a cost of funds charge based on a short-term funding rate. Allocation of the provisions for credit losses is based on the geographical distribution of net charges to the allowances for credit losses and management's assessment of the risks associated with the domestic and international portfolios. International taxes are calculated based on the foreign tax rate for each foreign office. Earning assets are allocated by the domicile of the customer. All other assets are allocated based on the location of the office recording the assets. Subject to the above limitations, estimates and assumptions, the following tables present information attributable to international operations ($ in millions):
Income (loss) Net Total Total Total before income assets revenue(1) expenses(1) taxes (loss) - ----------------------------------------------------------------------------------------- 2000 - ----------------------------------------------------------------------------------------- International operations Asia $ 498 $ 188 $ 158 $ 30 $ 17 Australia/New Zealand 155 17 16 1 1 Western Hemisphere 19,484 752 758 (6) (3) Europe 13,640 683 681 2 1 United Kingdom 6,177 701 773 (72) (41) Middle East/Africa 54 30 19 11 6 Eliminations (29,052) (1,315) (1,315) -- -- - ----------------------------------------------------------------------------------------- Total international 10,956 1,056 1,090 (34) (19) Domestic operations 51,807 4,765 3,831 934 531 - ----------------------------------------------------------------------------------------- Total $ 62,763 $ 5,821 $ 4,921 $ 900 $ 512 ========================================================================================= International as a percentage of total 17% 18% 22% N/M N/M =========================================================================================
(1) Total revenue includes interest revenue and noninterest revenue. Total expenses includes interest expense, noninterest expenses and provision for credit losses--loans. N/M Not meaningful.
Income (loss) Net Total Total Total before income assets revenue(1) expenses(1) taxes (loss) - ----------------------------------------------------------------------------------------- 1999 - ----------------------------------------------------------------------------------------- International operations Asia $ 1,131 $ 222 $ 402 $ (180) $ (145) Australia/New Zealand 60 474 624 (150) (120) Western Hemisphere 8,712 802 1,057 (255) (206) Europe 18,159 684 933 (249) (201) United Kingdom 10,885 704 1,269 (565) (453) Middle East/Africa 801 58 69 (11) (9) Eliminations (21,135) (278) (278) -- -- - ----------------------------------------------------------------------------------------- Total international 18,613 2,666 4,076 (1,410) (1,134) Domestic operations 49,544 5,253 5,258 (5) (469) - ----------------------------------------------------------------------------------------- Total $ 68,157 $ 7,919 $ 9,334 $(1,415) $(1,603) ========================================================================================= International as a percentage of total 27% 34% 44% N/M N/M =========================================================================================
(1) Total revenue includes interest revenue and noninterest revenue. Total expenses includes interest expense, noninterest expenses and provision for credit losses--loans. N/M Not meaningful. Bankers Trust Corporation and its Subsidiaries 47 - --------------------------------------------------------------------------------
Income (loss) Net Total Total Total before income assets revenue(1) expenses(1) taxes (loss) - -------------------------------------------------------------------------------------------- 1998 - -------------------------------------------------------------------------------------------- International operations Asia $ 11,362 $ 493 $ 811 $(318) $(210) Australia/New Zealand 12,095 1,062 899 163 107 Western Hemisphere 16,568 1,625 1,771 (146) (96) Europe 19,363 963 1,010 (47) (30) United Kingdom 29,097 1,377 1,349 28 18 Middle East/Africa 414 30 30 -- -- Eliminations (25,839) (1,228) (1,228) -- -- - -------------------------------------------------------------------------------------------- Total international 63,060 4,322 4,642 (320) (211) Domestic operations 70,055 7,726 7,483 243 138 - -------------------------------------------------------------------------------------------- Total $ 133,115 $ 12,048 $ 12,125 $ (77) $ (73) ============================================================================================ International as a percentage of total 47% 36% 38% N/M N/M ============================================================================================
(1) Total revenue includes interest revenue and noninterest revenue. Total expenses includes interest expense, noninterest expenses and provision for credit losses--loans. N/M Not Meaningful. Note 23--Derivative Financial Instruments and Financial Instruments with Off-Balance Sheet Risk In the normal course of business, the Corporation is a party to a variety of derivative and off-balance sheet financial instruments to meet the needs of its customers and to manage its exposure to interest rate and other risks. These financial instruments consist of derivatives (such as swaps, forwards and options), securities lending indemnifications, and credit-related arrangements and involve varying degrees of credit risk and market risk. Credit risk, as defined by SFAS 105, represents the maximum potential accounting loss due to possible non-performance by obligors and counterparties under the terms of their contracts. Market risk represents the potential loss due to the decrease in the value of a financial instrument caused primarily by changes in interest rates or foreign exchange rates, or the prices of equities or commodities (or related indices). The Corporation manages the credit risk of its derivative and off-balance sheet portfolios by limiting the total amount of arrangements outstanding with individual customers; by monitoring the size and maturity structure of the portfolios; by obtaining collateral based on management's credit assessment of the customer; and by applying a uniform credit process for all credit exposures. Collateral held generally includes cash and U.S. government and federal agency securities. In order to reduce derivatives-related credit risk, the Corporation enters into master netting agreements which incorporate the right of setoff to provide for the net settlement of covered contracts with the same customer in the event of default or other cancellation of the agreement. Trading Derivative Financial Instruments 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. As a result of the Acquisition, the Corporation's former derivatives activities have been largely transferred to Deutsche Bank entities, and it is anticipated that the existing positions at December 31, 2000 will be reduced further over time. As required by SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," the amounts disclosed below represent the end-of-period fair values of trading derivatives and their average aggregate fair values during the year. These amounts are presented gross before the impact of master netting agreements. The gross fair values of trading derivatives do not represent the amount of market or credit risk of derivatives in the trading portfolio. Rather, they indicate the extent of involvement in the over-the-counter (OTC) markets for interest rate, foreign exchange rate, equity and commodity price derivatives, and exchange traded options during the year. Any measurement of risk is meaningful only when all related factors are identified, such as risk-offsetting transactions, master netting agreements, and the value of any related collateral. These factors are considered in internal risk analyses. The accounting impact of netting agreements, which is applied on a cross-product basis in accordance with the terms of each master agreement and which is calculated based on the criteria prescribed by FIN 39, is provided below in order to display how these amounts are reflected in trading assets and trading liabilities in the consolidated balance sheet. 48 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Contracts with positive fair values are recorded as assets and contracts with negative fair values are recorded as liabilities after application of master netting agreements. The following table reflects the gross fair values and balance sheet amounts of trading derivative financial instruments:
At December 31, 2000 Average during 2000 -------------------- ------------------- (in millions) Assets (Liabilities) Assets (Liabilities) - ------------------------------------------------------------------------------------- OTC Financial Instruments Interest Rate and Currency Swap Contracts $ 999 $ (949) $ 750 $ (644) Interest Rate Contracts Options purchased 104 100 Options written (82) (70) Foreign Exchange Rate Contracts Spot and Forwards 95 (3) 1,165 (6) Options purchased 5 4 Options written (5) (4) Equity-related contracts 901 (933) 1,076 (1,005) Commodity-related and other contracts 1,885 (1,914) 1,865 (1,908) Exchange-Traded Options Equity -- -- -- 2 - ------------------------------------------------------------------------------------- Total Gross Fair Values 3,989 (3,886) 4,960 (3,635) - ------------------------------------------------------------------------------------- Impact of Netting Agreements (1,994) 1,994 (1,520) 1,520 - ------------------------------------------------------------------------------------- $ 1,995(1) $ (1,892)(1) $ 3,440 $ (2,115) ======= ======== ======== ========
At December 31, 1999 Average during 1999 -------------------- ------------------- (in millions) Assets (Liabilities) Assets (Liabilities) - ------------------------------------------------------------------------------------- OTC Financial Instruments Interest Rate and Currency Swap Contracts $ 6,400 $ (6,570) $ 12,295 $(11,966) Interest Rate Contracts Forwards -- -- 205 (249) Options purchased 519 771 Options written (614) (834) Foreign Exchange Rate Contracts Spot and Forwards 11 (3) 7,228 (7,081) Options purchased 351 1,043 Options written (350) (946) Equity-related contracts 1,760 (1,865) 4,323 (4,685) Commodity-related and other contracts 853 (852) 693 (682) Exchange-Traded Options Interest Rate -- -- 3 (1) Foreign Exchange -- -- 2 (1) Commodity -- -- 2 (3) Equity -- (16) 136 -- - ------------------------------------------------------------------------------------- Total Gross Fair Values 9,894 (10,270) 26,701 (26,448) - ------------------------------------------------------------------------------------- Impact of Netting Agreements (5,087) 5,087 (17,024) 17,024 - ------------------------------------------------------------------------------------- $ 4,807(1) $ (5,183)(1) $ 9,677 $ (9,424) ======= ======== ======== ========
(1) As reflected on the balance sheet in "Trading Assets" and "Trading Liabilities." Derivative contracts are generally either privately-negotiated OTC contracts or standard contracts transacted through regulated exchanges. Fair values of futures contracts are not included above due to cash margining requirements of regulated exchanges. Monthly averages are used in the table above. End-User Derivative Financial Instruments The Corporation, as an end user, utilizes various types of derivative products (principally interest rate and currency swaps) to manage the interest rate, currency and other market risks associated with certain liabilities such as interest-bearing deposits, short-term borrowings and long-term debt, as well as loans and other assets. Revenue or expense pertaining to management of interest rate exposure is predominantly recognized over the life of the contract as an adjustment to interest revenue or expense. When the Corporation issues liabilities at fixed interest rates it subjects itself to risk as market interest rates change. This risk is managed by entering into interest rate contracts which change the fixed rate cash flows into variable rate cash flows. When the Corporation purchases foreign currency denominated assets or issues foreign currency denominated debt, it subjects itself to risk as exchange rates move. This risk is managed by entering into currency swaps and forwards. The fair values and other information related to end-user derivatives are disclosed in Note 25. Bankers Trust Corporation and its Subsidiaries 49 - -------------------------------------------------------------------------------- Notional Amounts of Trading and End-User Derivative Financial Instruments Notional amounts indicate the extent of the Corporation's involvement in the various types and uses of derivative financial instruments and do not measure the Corporation's exposure to credit or market risks and do not necessarily represent the amounts exchanged by the parties to the instruments. The amounts exchanged are based on the contractual notional amounts and the other terms of the instruments. Notional amounts are not included in the consolidated balance sheet and generally exceed the future cash requirements relating to the instruments. Notional Amounts (in millions) December 31, 2000 December 31, 1999 - ----------------------------------------------------------------------------- End End Trading User(1) Trading User(1) - ----------------------------------------------------------------------------- Interest rate contracts Swaps $26,495 $19,253 $172,778 $38,404 Forwards -- -- 4,151 -- Options purchased OTC 9,732 -- 29,068 13 Options written OTC 5,029 -- 18,378 -- - ----------------------------------------------------------------------------- Total $41,256 $19,253 $224,375 $38,417 ============================================================================= Foreign exchange rate contracts Spot, forwards, futures $ -- $ -- $ 2,309 $ 4 Swaps 1,540 885 15,351 2,736 OTC options purchased -- -- 8,990 -- OTC options written -- -- 8,792 -- - ----------------------------------------------------------------------------- Total $ 1,540 $ 885 $ 35,442 $ 2,740 ============================================================================= Equity derivative contracts Swaps $ 9,055 $ -- $ 3,134 $ -- Futures and forwards -- -- 470 -- Options purchased OTC 425 -- 3,899 -- Options written OTC -- -- 1,493 -- - ----------------------------------------------------------------------------- Total $ 9,480 $ -- $ 8,996 $ -- ============================================================================= Commodity and other contracts(2) Swaps $ 1,884 $ -- $ 9,693 $ -- Options purchased OTC 1,105 -- 1,815 -- Options written OTC 1,105 -- 1,749 -- - ----------------------------------------------------------------------------- Total $ 4,094 $ -- $ 13,257 $ -- ============================================================================= (1) These are hedges of interest-bearing deposits, other short-term borrowings and long-term debt, as well as loans and other assets. (2) Excluded from the notional amounts above were benefit-responsive contracts reflecting actuarial-related risk, minimal market risk and no credit risk, for which the notional values totaled $3.2 billion and $7.6 billion at December 31, 2000 and 1999, respectively. Swaps Interest rate swap contracts generally represent the contractual exchange of fixed and floating rate payments of a single currency, based on a notional amount and an interest reference rate. Cross-currency interest rate swap contracts generally involve the exchange of payments which are based on the interest reference rates available at the inception of the contract on two different currency principal balances that are exchanged. The principal balances are re-exchanged at an agreed upon rate at a specified future date. Equity swap contracts typically involve the payment of an amount equal to the total return of a U.S. or international equity index, basket of equities, or an individual equity over a fixed time period in exchange for receiving a floating interest rate, both based upon the same notional amount. Futures and Forwards Futures and forward contracts represent commitments to purchase or sell securities, money market instruments, foreign currencies or commodities at a future date and at a specified price. Futures contracts are traded on regulated U.S. and international exchanges. The Corporation intends to close out most open positions in futures contracts prior to maturity; therefore, future cash receipts or payments are generally limited to the change in fair value of the underlying instruments. Since futures contracts generally entail daily net cash margining with regulated exchanges, the credit risk is generally minimized to a one-day receivable. Included in this category of contracts are spot foreign currency contracts, cash-settled index contracts, and forward rate agreements (agreements to exchange amounts at a specified future date for interest rate differentials between an agreed interest rate and a reference rate, computed on a notional amount). Options Option contracts are either deliverable or cash-settled. Deliverable contracts convey to the purchaser (holder) the right to buy (call) or sell (put) securities, money market instruments, foreign currencies or commodities at or before a specified date for a contracted price from the seller (writer) of the contract. Cash-settled contracts convey to the purchaser the right to the monetary equivalent of the increase (call) or decrease (put), or a percentage thereof, in a specified reference rate or index, computed on a notional amount, from the writer. The initial price of an option contract is equal to the premium paid by the purchaser and is significantly less than the contract or notional amount. Included in these contracts are: (i) interest rate caps, floors and collars, which are agreements to make periodic payments for interest rate differentials between an agreed upon interest rate and a reference rate and (ii) purchased options to enter into future (or cancel existing) interest rate swap contracts ("swap options"). The Corporation is subject to credit risk as a purchaser of an option contract, and is subject to market risk to the extent of the purchase price of the option. The Corporation is subject to market risk on its written option contracts, but not to credit risk since the customer has already performed according to the terms of the contract by paying a cash premium up front. 50 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Financial Instruments with Off-Balance Sheet Credit Risk As required by SFAS 105, off-balance sheet credit risk amounts are determined without consideration of the value of any related collateral and reflect the total potential loss on commitments to purchase securities for all obligors (including governments); securities lending indemnifications; and undrawn commitments, standby letters of credit and similar arrangements. Securities and Money Market Activities (in millions) December 31, 2000 December 31, 1999 - -------------------------------------------------------------------------------- Contract Credit Risk Contract Credit Risk Amount Amount Amount Amount - -------------------------------------------------------------------------------- Commitments to purchase(1) $ -- $ -- $ 57 $ 57 Securities lending indemnifications 43,791 43,791 37,553 37,553 - -------------------------------------------------------------------------------- (1) Includes $57 million of forward-dated money market assets at December 31, 1999. Securities lending indemnifications represent the market value of customers' securities lent to third parties. The Corporation indemnifies customers to the extent of the replacement cost and/or the market value of the securities in the event of a failure by a third party to return the securities lent. The market value of collateral, primarily cash, received for customers' securities lent was in excess of the contract amounts and was approximately $46 billion at December 31, 2000 and $39 billion at December 31, 1999. Credit-Related Arrangements (in millions) December 31, 2000 December 31, 1999 - -------------------------------------------------------------------------------- Credit Credit Contract Risk Contract Risk Amount Amount Amount Amount - -------------------------------------------------------------------------------- Commitments to extend credit(1) $12,874 $12,874 $19,073 $19,073 Standby letters of credit and similar arrangements(2) 7,102 7,102 4,700 4,700 - -------------------------------------------------------------------------------- (1) Includes participations to other entities of approximately $873 million and $1 billion at December 31, 2000 and 1999, respectively. Of the non-participated amount, approximately $4 billion and $7 billion expire in one year or less at December 31, 2000 and 1999, respectively. (2) Includes participations to other entities of approximately $784 million and $1 billion at December 31, 2000 and 1999, respectively. At December 31, 2000, this balance includes $4.8 billion of guarantees related to BTH. Commitments to extend credit represent contractual commitments to make loans and revolving credits. Commitments generally have fixed expiration dates or other termination clauses and require the payment of a fee. Because commitments may expire without being drawn upon, the total contract amounts do not necessarily represent future cash requirements. Included in the amounts above are unused commitments to extend credit that are related to loans held for trading purposes. Standby letters of credit and similar arrangements ("standbys"), issued primarily to support corporate obligations, commit the Corporation to make payments on behalf of customers contingent upon the failure of the customer to perform under the terms of the contract. Standbys at December 31, 2000 related to customer obligations such as commercial paper, medium- and long-term notes and debentures (including industrial revenue obligations), as well as other financial and performance-related obligations. At December 31, 2000, excluding related party guarantees of $4.752 billion, $1.815 billion will expire within one year, $367 million from one to four years and $168 million after four years. For standbys, commitments to extend credit and securities lending indemnifications, the credit risk amount represents the contractual amount. Standbys and commitments to extend credit would have market risk if issued or extended at a fixed rate of interest. However, these contracts are primarily made at a floating rate. Fees received are generally recognized as revenue over the life of the commitment. Note 24--Concentrations of Credit Risk The Corporation, as required by SFAS 105, has identified three significant concentrations of credit risk: (1) Deutsche Bank entities, (2) OECD country banks and (3) OECD country central governments, their agencies and central banks. Together they represented 50 percent and 39 percent of total credit risk (after exclusion of securities lending indemnifications for customers) at December 31, 2000 and 1999, respectively. The Deutsche Bank concentration is comprised of related party transactions which the Corporation has entered into with Deutsche Bank and its affiliated entities. Refer to Note 28 for a detailed discussion of related party transactions. The Organization for Economic Cooperation and Development (OECD) is an international organization of countries which are committed to market-oriented economic policies, including the promotion of private enterprise and free market prices, liberal trade policies, and the absence of exchange controls. The OECD consists of 29 industrialized countries that are located primarily in Western Europe and North America, as well as Australia, Japan, New Zealand and South Korea. For regulatory capital purposes, domestic and foreign bank regulators generally assign OECD country central governments, their agencies and their central banks a credit risk weighting of zero percent, which means that no credit risk capital is required to support their financial instruments. OECD country banks are assigned the next lowest credit risk weighting (20 percent) by these regulators. Within all other counterparties, approximately 55 percent was collateralized by cash and U.S. government securities. Bankers Trust Corporation and its Subsidiaries 51 - -------------------------------------------------------------------------------- The following table reflects the aggregate credit risk by groups of counterparties, as defined by SFAS 105, relating to on- and off-balance sheet financial instruments, including derivatives, at December 31, 2000 and 1999. Credit Risk On-Balance Off-Balance (in millions) Sheet Sheet Total - -------------------------------------------------------------------------------- 2000 - -------------------------------------------------------------------------------- Significant concentrations(1) Deutsche Bank entities(2) $25,033 $ 4,752 $ 29,785 OECD country banks 2,230 1,541 3,771 OECD country governments 730 -- 730 - -------------------------------------------------------------------------------- Total significant concentrations 27,993 6,293 34,286 All other(3) 20,473 57,467 77,940 - -------------------------------------------------------------------------------- Total $48,466 $63,760 $112,226 ================================================================================ 1999 - -------------------------------------------------------------------------------- Significant concentrations(1) Deutsche Bank entities(2) $11,990 $ -- $ 11,990 OECD country banks 9,752 3,541 13,293 OECD country governments 4,975 -- 4,975 - -------------------------------------------------------------------------------- Total significant concentrations 26,717 3,541 30,258 All other(3) 27,370 57,842 85,212 - -------------------------------------------------------------------------------- Total $54,087 $61,383 $115,470 ================================================================================ (1) For these purposes, Poland has been excluded from the OECD categories. (2) Included in the on-balance sheet component of this category was approximately $8 billion and $5 billion at December 31, 2000 and 1999, respectively, that was collateralized by cash and U.S. government securities. (3) The "all other" category of credit risk is diversified with respect to type of obligor and counterparty. Included in the off-balance sheet component of this category at December 31, 2000 was approximately $43 billion that was collateralized by cash and U.S. government securities and approximately $12 billion of unused commitments to extend credit, approximately $4 billion of which expire in one year or less. The corresponding amounts for December 31, 1999 were $36 billion, $18 billion and $7 billion, respectively. Note 25--Fair Value of Financial Instruments SFAS 107, "Disclosures about Fair Value of Financial Instruments," requires the disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Quoted market prices, when available, are used as the measure of fair value. In cases where quoted market prices are not available, fair values are based on present value estimates or other valuation techniques. These derived fair values are significantly affected by assumptions used, principally the timing of future cash flows and the discount rate. Because assumptions are inherently subjective in nature, the estimated fair values cannot be substantiated by comparison to independent market quotes and, in many cases, the estimated fair values would not necessarily be realized in an immediate sale or settlement of the instrument. The disclosure requirements of SFAS 107 exclude certain financial instruments and all nonfinancial instruments (e.g., franchise value of businesses). Accordingly, the aggregate fair value amounts presented do not represent management's estimation of the underlying value of the Corporation. The disclosures distinguish between financial instruments held for trading purposes, measured at fair value with gains and losses recognized in earnings, and financial instruments held or issued for purposes other than trading. The fair value of derivative financial instruments must be disclosed separately from nonderivative financial instruments. Additionally, the fair value of derivative financial instruments may not be netted with the fair value of other derivative financial instruments, except as allowed by FIN 39. 52 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- The following are the estimated fair values of the Corporation's financial instruments followed by a general description of the methods and assumptions used to estimate such fair values.
Fair Value of Financial Instruments - ---------------------------------------------------------------------------------------------------------------------------------- Underlying Effect of Total Fair Value Over (in millions) December 31, 2000 Book Value Fair Value End-User Derivative Fair Value (Under) Book Value - ---------------------------------------------------------------------------------------------------------------------------------- Financial Assets, Including Hedges Cash and due from banks $ 1,921 $ 1,921 $ -- $ 1,921 $ -- Interest-bearing deposits with banks 8,905 8,905 -- 8,905 -- Securities purchased under resale agreements 8,310 8,310 -- 8,310 -- Trading assets (see Notes 3 and 23) 13,390 13,390 -- 13,390 -- Securities available for sale (see Note 4) 252 252 -- 252 -- Loans (excluding leases), commitments to extend credit and standby letters of credit, net 21,956 21,951 -- 21,951 (5) Customer receivables 308 308 -- 308 -- Due from customers on acceptances 254 254 -- 254 -- Accounts receivable and accrued interest 2,954 2,954 -- 2,954 -- Other financial assets 1,477 1,476 -- 1,476 (1) Financial Liabilities, Including Hedges Noninterest-bearing deposits 4,231 4,231 -- 4,231 -- Interest-bearing deposits 11,523 11,588 (268) 11,320 (203) Trading liabilities (see Notes 3 and 23) 3,081 3,081 -- 3,081 -- Securities loaned and securities sold under repurchase agreements 109 109 -- 109 -- Other short-term borrowings 18,498 18,498 (2) 18,496 (2) Acceptances outstanding 254 254 -- 254 -- Other financial liabilities 527 527 -- 527 -- Long-term debt* 12,650 12,711 (163) 12,548 (102) - ---------------------------------------------------------------------------------------------------------------------------------- (in millions) December 31, 1999 - ---------------------------------------------------------------------------------------------------------------------------------- Financial Assets, Including Hedges Cash and due from banks $ 3,212 $ 3,212 $ -- $ 3,212 $ -- Interest-bearing deposits with banks 4,693 4,693 -- 4,693 -- Federal funds sold 2,472 2,472 -- 2,472 -- Securities purchased under resale agreements 6,764 6,766 -- 6,766 2 Trading assets (see Notes 3 and 23) 19,017 19,017 -- 19,017 -- Securities available for sale (see Note 4) 3,252 3,238 14 3,252 -- Loans (excluding leases), commitments to extend credit and standby letters of credit, net 18,602 18,813 (3) 18,810 208 Customer receivables 306 306 -- 306 -- Due from customers on acceptances 262 262 -- 262 -- Accounts receivable and accrued interest 2,307 2,307 -- 2,307 -- Other financial assets 3,030 3,175 -- 3,175 145 Financial Liabilities, Including Hedges Noninterest-bearing deposits 4,989 4,989 -- 4,989 -- Interest-bearing deposits 18,480 18,217 171 18,388 (92) Trading liabilities (see Notes 3 and 23) 5,266 5,266 -- 5,266 -- Securities loaned and securities sold under repurchase agreements 56 56 -- 56 -- Other short-term borrowings 11,540 11,542 -- 11,542 2 Acceptances outstanding 266 266 -- 266 -- Other financial liabilities 5,208 5,208 -- 5,208 -- Long-term debt* 16,434 16,329 109 16,438 4 ==================================================================================================================================
* Includes trust preferred capital securities. A discussion of the nature, objectives and strategies for using end-user derivatives can be found in Note 23. Bankers Trust Corporation and its Subsidiaries 53 - -------------------------------------------------------------------------------- The following table provides the gross unrealized gains and losses for end-user derivatives. Gross unrealized gains and losses for hedges of securities available for sale are recognized in the financial statements with the offset as an adjustment to securities valuation allowance in stockholders' equity. Gross unrealized gains and losses for hedges of loans, interest-bearing deposits, other short-term borrowings and long-term debt are not yet recognized in the financial statements.
- ----------------------------------------------------------------------------------------------------------------- Securities Interest- Other available bearing short-term Long- (in millions) December 31, 2000 for sale Loans deposits borrowings term debt(1) Total - ----------------------------------------------------------------------------------------------------------------- Interest Rate Swaps(2) Pay Variable Unrealized Gain $-- $-- $ 273 $ 2 $ 309 $ 584 Unrealized (Loss) -- -- (14) -- (166) (180) - ----------------------------------------------------------------------------------------------------------------- Pay Variable Net -- -- 259 2 143 404 - ----------------------------------------------------------------------------------------------------------------- Pay Fixed Unrealized Gain -- -- 20 -- -- 20 Unrealized (Loss) -- -- (10) -- (5) (15) - ----------------------------------------------------------------------------------------------------------------- Pay Fixed Net -- -- 10 -- (5) 5 - ----------------------------------------------------------------------------------------------------------------- Total Unrealized Gain -- -- 293 2 309 604 Total Unrealized (Loss) -- -- (24) -- (171) (195) - ----------------------------------------------------------------------------------------------------------------- Total Net $-- $-- $ 269 $ 2 $ 138 $ 409 ================================================================================================================= Forward Rate Agreements Unrealized Gain $-- $-- $ -- $-- $ -- $ -- Unrealized (Loss) -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------- Net $-- $-- $ -- $-- $ -- $ -- ================================================================================================================= Currency Swaps and Forwards Unrealized Gain $-- $-- $ -- $-- $ 58 $ 58 Unrealized (Loss) -- -- (1) -- (33) (34) - ----------------------------------------------------------------------------------------------------------------- Net $-- $-- $ (1) $-- $ 25 $ 24 ================================================================================================================= Total Unrealized Gain $-- $-- $ 293 $ 2 $ 367 $ 662 Total Unrealized (Loss) -- -- (25) -- (204) (229) - ----------------------------------------------------------------------------------------------------------------- Total Net $-- $-- $ 268 $ 2 $ 163 $ 433 ================================================================================================================= (in millions) December 31, 1999 - ----------------------------------------------------------------------------------------------------------------- Interest Rate Swaps(2) Pay Variable Unrealized Gain $-- $-- $ 44 $ 3 $ 25 $ 72 Unrealized (Loss) -- (2) (256) (3) (171) (432) - ----------------------------------------------------------------------------------------------------------------- Pay Variable Net -- (2) (212) -- (146) (360) - ----------------------------------------------------------------------------------------------------------------- Pay Fixed Unrealized Gain 1 -- 58 -- 7 66 Unrealized (Loss) -- -- (17) -- -- (17) - ----------------------------------------------------------------------------------------------------------------- Pay Fixed Net 1 -- 41 -- 7 49 - ----------------------------------------------------------------------------------------------------------------- Total Unrealized Gain 1 -- 102 3 32 138 Total Unrealized (Loss) -- (2) (273) (3) (171) (449) - ----------------------------------------------------------------------------------------------------------------- Total Net $ 1 $(2) $(171) $-- $(139) $(311) ================================================================================================================= Forward Rate Agreements Unrealized Gain $ 1 $-- $ -- $-- $ -- $ 1 Unrealized (Loss) -- -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------- Net $ 1 $-- $ -- $-- $ -- $ 1 ================================================================================================================= Currency Swaps and Forwards Unrealized Gain $12 $-- $ -- $-- $ 54 $ 66 Unrealized (Loss) -- (1) -- -- (24) (25) - ----------------------------------------------------------------------------------------------------------------- Net $12 $(1) $ -- $-- $ 30 $ 41 ================================================================================================================= Total Unrealized Gain $14 $-- $ 102 $ 3 $ 86 $ 205 Total Unrealized (Loss) -- (3) (273) (3) (195) (474) - ----------------------------------------------------------------------------------------------------------------- Total Net $14 $(3) $(171) $-- $(109) $(269) =================================================================================================================
(1) Includes trust preferred capital securities. (2) Includes swaps with embedded options to cancel. 54 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- The unrealized gains and losses on these hedges were determined on the basis of valuation pricing models which take into account current market and contractual prices of the underlying instruments, as well as time value and yield curve or volatility factors underlying the positions. The remaining maturities of the notional amounts of end-user derivatives at December 31, 2000 and December 31, 1999 were as follows: December 31, 2000 Interest Foreign Total (in millions) Rate Currency Equity Notional Notional Amount Maturing In: Risk Risk* Risk Amount - -------------------------------------------------------------------------------- 2001 $ 9,016 $333 $-- $ 9,349 2002-2003 3,358 405 -- 3,763 2004-2005 499 68 -- 567 2006 and thereafter 6,380 79 -- 6,459 - -------------------------------------------------------------------------------- Total $19,253 $885 $-- $20,138 ================================================================================ December 31, 1999 Interest Foreign Total (in millions) Rate Currency Equity Notional Notional Amount Maturing In: Risk Risk* Risk Amount ================================================================================ 2000 $26,641 $1,956 $-- $28,597 2001-2002 3,518 628 -- 4,146 2003-2004 1,470 57 -- 1,527 2005 and thereafter 6,788 99 -- 6,887 - -------------------------------------------------------------------------------- Total $38,417 $2,740 $-- $41,157 ================================================================================ * Currency swaps and currency forwards are primarily based upon EURO/U.S. dollar contracts. For pay variable and pay fixed interest rate swaps entered into as an end user, the weighted average receive rate and pay rate (interest rates were based on the weighted averages of both U.S. and non-U.S. currencies) by maturity and corresponding notional amounts at December 31, 2000 and December 31, 1999 were as follows:
- ------------------------------------------------------------------------------------------------------------------------------------ December 31, 2000 Paying Variable Paying Fixed --------------- ------------ (in millions) Notional Receive Pay Notional Receive Pay Total Notional Amount Maturing In: Amount Rate Rate Amount Rate Rate Notional - ------------------------------------------------------------------------------------------------------------------------------------ 2001 $ 8,625 6.53% 5.70% $ 391 6.71% 6.68% $ 9,016 2002-2003 2,864 6.81 6.68 494 6.72 6.80 3,358 2004-2005 491 6.82 6.69 8 6.61 7.78 499 2006 and thereafter 5,907 6.85 6.62 473 6.64 6.51 6,380 - ------------------------------------------------------------------------------------------------------------------------------------ Total $17,887 $1,366 $19,253 ====================================================================================================================================
All rates were those in effect at December 31, 2000. Variable rates are primarily based on LIBOR or Federal funds rate and may change significantly, affecting future cash flows.
- ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1999 Paying Variable Paying Fixed --------------- ------------ (in millions) Notional Receive Pay Notional Receive Pay Total Notional Amount Maturing In: Amount Rate Rate Amount Rate Rate Notional - ------------------------------------------------------------------------------------------------------------------------------------ 2000 $23,569 5.79% 5.78% $3,066 6.09% 5.82% $26,635 2001-2002 3,194 6.45 5.96 316 6.46 6.16 3,510 2003-2004 1,301 6.26 5.98 168 6.33 6.23 1,469 2005 and thereafter 6,240 6.36 6.26 550 6.24 6.24 6,790 - ------------------------------------------------------------------------------------------------------------------------------------ Total $34,304 $4,100 $38,404 ====================================================================================================================================
All rates were those in effect at December 31, 1999. Variable rates are primarily based on LIBOR or Federal funds rate and may change significantly, affecting future cash flows. The effect of these end-user derivatives was a net decrease in revenue of $53 million for the year ended December 31, 2000 and a net increase in revenue of $206 million for the year ended December 31, 1999. The Corporation has reviewed its other categories of off-balance sheet instruments (forward-dated assets and liabilities, securities lending indemnifications and securities borrowed) accounted for at cost and has determined that, in the case of each such category, the unrealized gain or loss on such instruments at both December 31, 2000 and 1999 was not material. Methods and Assumptions For short-term financial instruments, defined as those with remaining maturities of 90 days or less, the carrying amount was considered to be a reasonable estimate of fair value. The following instruments were predominantly short-term: Assets Liabilities - -------------------------------------------------------------------------------- Cash and due from banks Interest-bearing deposits Interest-bearing deposits Securities loaned and securities with banks sold under repurchase agreements Federal funds sold Other short-term borrowings Securities purchased under Acceptances outstanding resale agreements Other financial liabilities Securities borrowed Customer receivables Due from customers on acceptances Accounts receivable and accrued interest For those components of the above-listed financial instruments with remaining maturities greater than 90 days, fair value was determined by discounting contractual cash flows using rates which could be earned for assets with similar remaining maturities and, in the case of liabilities, rates at which the liabilities with similar remaining maturities could be issued as of the balance sheet date. Bankers Trust Corporation and its Subsidiaries 55 - -------------------------------------------------------------------------------- As indicated in Note 2, trading assets (including derivatives), trading liabilities and securities available for sale are carried at their fair values. For short-term loans and variable rate loans which reprice within 90 days, the carrying value was considered to be a reasonable estimate of fair value. For those loans for which quoted market prices were available, fair value was based on such prices. For other types of loans, fair value was estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. In addition, for loans secured by real estate, appraisal values for the collateral were considered in the fair value determination. The fair value estimate of commitments to extend credit and standby letters of credit represented the unrealized gains and losses on those off-balance sheet positions and was generally determined in the same manner as loans. Other financial assets consisted primarily of investments in equity instruments (excluding, in accordance with SFAS 107, investments accounted for under the equity method) and cash and cash margins with brokers. The fair value of non-marketable equity instruments was determined by matrix pricing utilizing market prices for comparable publicly traded instruments, adjusted for liquidity and contractual arrangements. Noninterest-bearing deposits do not have defined maturities. In accordance with SFAS 107, fair value represented the amount payable on demand as of the balance sheet date. Other financial liabilities consisted primarily of accounts payable and accrued expenses at both December 31, 2000 and 1999. The fair value of long-term debt was estimated by using market quotes as well as discounting the remaining contractual cash flows using a rate at which the Corporation could issue debt with a similar remaining maturity as of the balance sheet date. Note 26--Condensed Bankers Trust Financial Statements Condensed Statement of Income (in millions) Year Ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------- Revenue Dividends Banks $ -- $ -- $ 502 Nonbanks 74 118 537 Interest from subsidiaries 660 498 816 Other interest -- 118 314 Trading 55 (205) (535) Securities available for sale gains -- -- 39 Other 773 (154) 40 - ------------------------------------------------------------------------------- Total revenue 1,562 375 1,713 - ------------------------------------------------------------------------------- Expenses Interest to subsidiaries 557 253 362 Other interest 503 696 1,017 Other 176 271 175 - -------------------------------------------------------------------------------- Total expenses 1,236 1,220 1,554 - -------------------------------------------------------------------------------- Income before income taxes and equity in undistributed income of subsidiaries and affiliates 326 (845) 159 Income taxes (benefit) 164 (409) (465) Income before equity in undistributed income of subsidiaries and affiliates 162 (436) 624 Equity in undistributed (loss) income of subsidiaries and affiliates 350 (1,167) (697) - ------------------------------------------------------------------------------- Net Income (Loss) $ 512 $(1,603) $ (73) =============================================================================== Condensed Balance Sheet (in millions) December 31, 2000 1999 - -------------------------------------------------------------------------------- Assets Cash and due from banks $ 4 $ 3 Interest-bearing deposits with bank subsidiaries 7,575 3,219 Trading assets 179 187 Securities available for sale -- 4 Loans 27 153 Investments in subsidiaries and affiliates Banks 6,265 5,840 Nonbanks 1,037 1,387 Receivables from subsidiaries and affiliates Banks 202 468 Nonbanks 5,883 9,320 Accounts receivable and accrued interest 53 215 Other assets 2,799 1,336 - -------------------------------------------------------------------------------- Total assets $24,024 $22,132 ================================================================================ Liabilities and Stockholder's Equity Trading liabilities $ 104 $ 29 Other short-term borrowings 8,927 4,806 Payables to subsidiaries and affiliates Banks 67 51 Nonbanks 5,524 5,977 Other liabilities 214 296 Long-term debt 4,806 6,623 - -------------------------------------------------------------------------------- Total liabilities 19,642 17,782 - -------------------------------------------------------------------------------- Total stockholder's equity 4,382 4,350 - -------------------------------------------------------------------------------- Total liabilities and stockholder's equity $24,024 $22,132 ================================================================================ 56 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Condensed Statement of Cash Flows (in millions) Year Ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------- Cash Flows From Operating Activities Net income (loss) $ 512 $(1,603) $ (73) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Equity in undistributed loss (income) of subsidiaries and affiliates (350) 1,167 697 Deferred income taxes 303 (235) (165) Net change in trading assets 8 770 4,816 Net change in trading liabilities 75 (43) (240) Securities available for sale gains -- -- (39) Other, net (911) (375) (29) - ------------------------------------------------------------------------------- Net cash (used in) provided by operating activities (363) (319) 4,967 - ------------------------------------------------------------------------------- Cash Flows From Investing Activities Net change in: Interest-bearing deposits with bank subsidiaries (4,356) 17 (1,033) Securities purchased under resale agreements with nonbank subsidiary -- (17) (475) Short-term notes receivable from subsidiaries and affiliates 634 737 2,304 Securities available for sale: Purchases -- (434) (5,627) Maturities and other redemptions -- 161 268 Sales 4 2,431 4,924 Increases in long-term notes receivable from subsidiaries (1,445) (1,440) (9,843) Decreases in long-term notes receivable from subsidiaries 4,738 2,196 7,607 Capital contributed to subsidiaries and affiliates (455) (501) (1,158) Return of capital from subsidiaries and affiliates 43 884 25 Other, net 299 (78) 90 - ------------------------------------------------------------------------------- Net cash (used in) provided by investing activities (538) 3,956 (2,918) - ------------------------------------------------------------------------------- Cash Flows From Financing Activities Net change in: Commercial paper and other short-term borrowings (1,509) (3,663) (1,609) Short-term notes payable to subsidiaries 4,596 216 (618) Issuance of long-term notes payable to subsidiaries -- (10) (1) Issuance of long-term debt 5 -- 2,078 Repayments of long-term debt (1,822) (1,326) (792) Redemption/repurchase of preferred stock (375) (18) (264) Purchases of treasury stock -- (71) (618) Cash dividends paid (19) (216) (421) Capital contribution from Taunus -- 1,400 -- Other, net 26 25 128 - ------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 902 (3,663) (2,117) - ------------------------------------------------------------------------------- Net Increase (Decrease) In Cash and Due From Banks 1 (26) (68) Cash and due from banks, beginning of year 3 29 97 - ------------------------------------------------------------------------------- Cash and due from banks, end of year $ 4 $ 3 $ 29 =============================================================================== Interest paid $ 759 $ 975 $ 1,388 =============================================================================== Income taxes paid $ -- $ 15 $ 81 =============================================================================== Noncash financing activity: Conversion of debt to equity $ -- $ -- $ 15 =============================================================================== Note 27--Bankers Trust Company Consolidated Summarized Financial Information Consolidated Statement of Income (in millions) Year Ended December 31, 2000 1999 1998 - ------------------------------------------------------------------------------- Net Interest Revenue Interest revenue $ 2,620 $ 3,399 $ 5,727 Interest expense 1,715 2,429 4,371 - ------------------------------------------------------------------------------- Net Interest Revenue 905 970 1,356 Provision for credit losses--loans (21) (41) 40 - ------------------------------------------------------------------------------- Net Interest Revenue After Provision For Credit Losses--Loans 926 1,011 1,316 - ------------------------------------------------------------------------------- Noninterest Revenue Trading 46 (50) -- Fiduciary and funds management 659 882 919 Corporate finance fees 128 292 473 Other fees and commissions 264 383 480 Securities available for sale losses (2) (153) (141) Other 233 1,294 427 - ------------------------------------------------------------------------------- Total noninterest revenue 1,328 2,648 2,158 - ------------------------------------------------------------------------------- Noninterest Expenses Salaries and commissions 394 788 947 Incentive compensation and employee benefits* 373 1,451 950 Agency and other professional service fees 194 363 549 Communication and data services 75 155 164 Occupancy, net 98 178 183 Furniture and equipment 123 197 213 Travel and entertainment 39 76 112 Other 400 347 393 Restructuring and other related activities (41) 606 -- - ------------------------------------------------------------------------------- Total noninterest expenses 1,655 4,161 3,511 - ------------------------------------------------------------------------------- Income (loss) before income taxes 599 (502) (37) Income taxes 186 579 41 - ------------------------------------------------------------------------------- Net Income (Loss) $ 413 $(1,081) $ (78) =============================================================================== * 1999 includes change-of-control related costs. In the normal course of business, BTCo enters into various transactions with Bankers Trust and Bankers Trust's other subsidiaries. Included in the above financial statements were the following transactions and balances with such affiliates. (in millions) Year Ended December 31, 2000 1999 1998 - -------------------------------------------------------------------------------- Interest revenue $ 20 $246 $824 Interest expense 208 213 346 Noninterest revenue 239 500 343 Noninterest expenses 77 151 321 (in millions) December 31, 2000 1999 - -------------------------------------------------------------------------------- Interest-earning assets $ 483 $ 93 Noninterest-earning assets 67 313 Interest-bearing liabilities 6,164 3,785 Noninterest-bearing liabilities 69 616 Bankers Trust Corporation and its Subsidiaries 57 - -------------------------------------------------------------------------------- Consolidated Balance Sheet ($ in millions, except par values) December 31, 2000 1999 - ------------------------------------------------------------------------------- Assets Cash and due from banks $ 1,419 $ 3,205 Interest-bearing deposits with banks 1,423 1,850 Federal funds sold 229 2,545 Securities purchased under resale agreements 8,296 6,694 Trading assets 12,779 12,551 Securities available for sale 110 3,017 Loans, net of allowance for credit losses of $405 at December 31, 2000 and $477 at December 31, 1999 15,891 17,014 Due from customers on acceptances 254 262 Accounts receivable and accrued interest 1,245 1,233 Other assets 2,677 2,785 - ------------------------------------------------------------------------------- Total assets $ 44,323 $ 51,156 =============================================================================== Liabilities Noninterest-bearing deposits Domestic offices $ 3,195 $ 2,815 Foreign offices 1,043 2,404 Interest-bearing deposits Domestic offices 9,775 10,719 Foreign offices 5,146 10,351 - ------------------------------------------------------------------------------- Total deposits 19,159 26,289 Trading liabilities 1,814 2,950 Securities loaned and securities sold under repurchase agreements 93 50 Other short-term borrowings 10,940 7,162 Acceptances outstanding 254 266 Accounts payable and accrued expenses 1,700 2,396 Other liabilities, including allowance for credit losses of $22 at December 31, 2000 and $24 at December 31, 1999 1,550 2,243 Long-term debt not included in risk-based capital 1,882 3,192 Long-term debt included in risk-based capital 116 174 Mandatorily redeemable capital securities of subsidiary trust holding solely junior subordinated deferrable interest debentures included in risk-based capital 218 245 - ------------------------------------------------------------------------------- Total liabilities 37,726 44,967 - ------------------------------------------------------------------------------- Stockholders' Equity Floating rate non-cumulative preferred stock-- Series A, $1 million par value Authorized, issued and outstanding: 1,500 shares 1,500 1,500 Common stock, $10 par value; Authorized, issued and outstanding: 212,730,867 shares 2,127 2,127 Capital surplus 584 542 Retained earnings 2,467 2,055 Accumulated other comprehensive income: Net unrealized gains (losses) on securities available for sale, net of taxes 5 (2) Foreign currency translation, net of taxes (86) (33) - ------------------------------------------------------------------------------- Total stockholders' equity 6,597 6,189 - ------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 44,323 $ 51,156 =============================================================================== See Note 9 for details of BTCo's long-term debt issued to nonaffiliates. Note 28--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. As previously mentioned, the Corporation transferred BTH on September 29, 2000 and BTAB and substantially all of its interest in BTI on June 5, 1999, to Deutsche Bank entities. This resulted in the transfer of approximately $1.1 billion and $2.5 billion of net assets, respectively. In addition, the Corporation has transferred at fair market value certain other entities and financial assets and liabilities to Deutsche Bank entities. In order to realign the Corporation's businesses with the Deutsche Bank management structure, the Corporation will continue to transfer other financial assets and liabilities and entities as necessary. In connection with the sale of BTAL to the Principal Financial Group ("Principal"), Deutsche Bank provided various representations and warranties to Principal. 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 borrowed, 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) December 31, 2000 December 31, 1999 - -------------------------------------------------------------------------------- Interest-earning assets $22,230 $10,843 Noninterest-earning assets 2,803 1,147 Interest-bearing liabilities 14,507 6,568 Noninterest-bearing liabilities 4,815 139 58 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Note 29--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. In January 2001, Bankers Trust Company, or affiliates of Bankers Trust Company, were named as defendant in six actions (three of which are brought as class actions) filed in the Superior Court of the State of California, County of Los Angeles (Stuber, et al. v. Merrill Lynch, Pierce, Fenner & Smith, et al.; Walls, et al. v. Stanwich Financial Services Corp., et al.; Schultz, et al. v. Stanwich Financial Services Corp., et al.; Havlik, et al. v. Morgan Stanley Dean Witter & Co., et al.; Gomes, et al. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., et al.; Rodriguez v. Tuftco Corp., et al.). The complaints allege, among other things, fraud, conversion, negligence and breach of contract against numerous defendants (including Bankers Trust Company) in connection with the alleged misuse of certain funds established in connection with certain structured settlement agreements entered into pursuant to settlements between insurers and accident victims. Bankers Trust Company acted as a nominal "trustee" under these agreements, as did certain of the other defendants. The complaints seek unspecified compensatory and punitive damages and certain other relief. The Corporation believes 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. Bankers Trust Corporation and its Subsidiaries 59 - -------------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- The Board of Directors and Stockholder of Bankers Trust Corporation: We have audited the accompanying consolidated balance sheet of Bankers Trust Corporation (formerly Bankers Trust New York Corporation) and Subsidiaries (the "Corporation," a wholly owned indirect subsidiary of Deutsche Bank AG) as of December 31, 2000 and 1999, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bankers Trust Corporation and Subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /S/ KPMG LLP KPMG LLP New York, New York January 31, 2001 60 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- SUPPLEMENTAL FINANCIAL DATA - -------------------------------------------------------------------------------- The statistical data on pages 61 through 64 should be read in conjunction with the Financial Review and the financial statements included elsewhere in this Annual Report. In the opinion of management, all material adjustments necessary for a fair presentation of the results of operations for the interim periods have been made. - -------------------------------------------------------------------------------- Average Balances, Interest and Average Rates The following table shows the major consolidated assets and liabilities, together with their respective interest amounts and rates earned or paid by the Corporation. Cash basis and renegotiated loans are included in the averages to determine an effective yield on all loans. The average balances are principally daily averages.
- --------------------------------------------------------------------------------------------------------------- 2000 1999 ------------------------------ ------------------------------ Average Average Average Average ($ in millions) Balance Interest Rate Balance Interest Rate - --------------------------------------------------------------------------------------------------------------- Assets Interest-bearing deposits with banks In domestic offices $ 6,068 $ 434 7.15% $ 1,211 $ 56 4.62% In foreign offices 1,514 185 12.22% 3,254 253 7.78% Federal funds sold (in domestic offices) 1,589 100 6.29% 3,146 160 5.09% Securities purchased under resale agreements In domestic offices 1,296 115 8.87% 8,386 545 6.50% In foreign offices 625 14 2.24% 3,270 130 3.98% - ---------------------------------------------------------------- ------------------ Total securities purchased under resale agreements 1,921 129 6.72% 11,656 675 5.79% Securities borrowed In domestic offices -- -- 7,254 312 4.30% In foreign offices -- -- 691 71 10.27% - ---------------------------------------------------------------- ------------------ Total securities borrowed -- -- 7,945 383 4.82% Trading assets In domestic offices (1) 4,741 369 7.78% 6,118 489 7.99% In foreign offices 9,342 552 5.91% 7,006 431 6.15% - ---------------------------------------------------------------- ------------------ Total trading assets (1) 14,083 921 6.54% 13,124 920 7.01% Securities available for sale In domestic offices Taxable 472 44 9.32% 2,398 171 7.13% Exempt from federal income taxes (1) 16 1 6.25% 676 25 3.70% In foreign offices Taxable 527 25 4.74% 3,460 191 5.52% Exempt from federal income taxes (1) -- -- 35 8 22.86% - ---------------------------------------------------------------- ------------------ Total securities available for sale (1) 1,015 70 6.90% 6,569 395 6.01% Loans In domestic offices Commercial and industrial 8,215 706 8.59% 6,674 492 7.37% Financial institutions 1,950 115 5.90% 1,467 106 7.23% Secured by real estate 1,359 118 8.68% 1,344 113 8.41% Other (1) 8,685 630 7.25% 4,720 298 6.31% - ---------------------------------------------------------------- ------------------ Total in domestic offices (1) 20,209 1,569 7.76% 14,205 1,009 7.10% In foreign offices 2,486 161 6.48% 7,346 482 6.56% - ---------------------------------------------------------------- ------------------ Total loans, excluding fees (1) 22,695 1,730 7.62% 21,551 1,491 6.92% Loan fees -- 42 -- 31 - ---------------------------------------------------------------- ------------------ Total loans, including fees (1) 22,695 1,772 7.81% 21,551 1,522 7.06% - ---------------------------------------------------------------- ------------------ Customer receivables (in domestic offices) 351 27 7.69% 955 70 7.33% - ---------------------------------------------------------------- ------------------ Total Interest-Earning Assets(1) 49,236 $3,638 7.39% 69,411 $4,434 6.39% ====== ====== Cash and due from banks 1,996 2,264 Noninterest-earning trading assets 4,157 15,008 Due from customers on acceptances 260 253 All other assets 8,400 10,266 Allowance for credit losses--loans (415) (564) - ---------------------------------------------------- ------- Total Assets $63,634 $96,638 ==================================================== ======= % of assets attributable to foreign offices 23% 41% - -------------------------------------------------------------------------- 1998 ---------------------------- Average Average ($ in millions) Balance Interest Rate - -------------------------------------------------------------------------- Assets Interest-bearing deposits with banks In domestic offices $ 121 $ 46 38.02% In foreign offices 3,195 264 8.26% Federal funds sold (in domestic offices) 3,865 211 5.46% Securities purchased under resale agreements In domestic offices 15,254 1,200 7.87% In foreign offices 8,175 435 5.32% - --------------------------------------------------------------- Total securities purchased under resale agreements 23,429 1,635 6.98% Securities borrowed In domestic offices 21,080 1,096 5.20% In foreign offices 2,640 126 4.77% - --------------------------------------------------------------- Total securities borrowed 23,720 1,222 5.15% Trading assets In domestic offices (1) 10,334 973 9.42% In foreign offices 19,685 1,423 7.23% - --------------------------------------------------------------- Total trading assets (1) 30,019 2,396 7.98% Securities available for sale In domestic offices Taxable 6,090 403 6.62% Exempt from federal income taxes (1) 1,602 56 3.50% In foreign offices Taxable 4,319 230 5.33% Exempt from federal income taxes (1) 84 10 11.90% - --------------------------------------------------------------- Total securities available for sale (1) 12,095 699 5.78% Loans In domestic offices Commercial and industrial 5,182 386 7.45% Financial institutions 1,306 89 6.81% Secured by real estate 1,650 132 8.00% Other (1) 3,651 230 6.30% - --------------------------------------------------------------- Total in domestic offices (1) 11,789 837 7.10% In foreign offices 10,789 844 7.82% - --------------------------------------------------------------- Total loans, excluding fees (1) 22,578 1,681 7.45% Loan fees -- 30 - --------------------------------------------------------------- Total loans, including fees (1) 22,578 1,711 7.58% - --------------------------------------------------------------- Customer receivables (in domestic offices) 1,628 138 8.48% - --------------------------------------------------------------- Total Interest-Earning Assets(1) 120,650 $8,322 6.90% ====== Cash and due from banks 2,448 Noninterest-earning trading assets 28,233 Due from customers on acceptances 485 All other assets 10,741 Allowance for credit losses--loans (686) - ----------------------------------------------------- Total Assets $161,871 ===================================================== % of assets attributable to foreign offices 46%
(1) Interest and average rates are presented on a fully taxable basis. The applicable combined federal, state and local incremental tax rate used to determine the amounts of the tax equivalent adjustments to interest revenue (which recognize the income tax savings on tax-exempt assets) was 44 percent for 2000, and 41 percent for 1999 and 1998. Bankers Trust Corporation and its Subsidiaries 61 - --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 -------------------------- -------------------------- ----------------------------- Average Average Average Average Average Average ($ in millions) Balance Interest Rate Balance Interest Rate Balance Interest Rate - ----------------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Interest-bearing deposits In domestic offices Time deposits $ 3,646 $ 207 5.68% $ 8,006 $ 431 5.38% $ 15,203 $ 879 5.78% Other 6,238 351 5.63% 6,658 263 3.95% 6,993 304 4.35% - ----------------------------------------------------------- ----------------- -------------------- Total in domestic offices 9,884 558 5.65% 14,664 694 4.73% 22,196 1,183 5.33% In foreign offices Deposits from banks in foreign countries 327 28 8.56% 3,283 256 7.80% 6,430 471 7.33% Other time and savings deposits 4,785 403 8.42% 9,021 428 4.74% 10,474 458 4.37% Other 105 9 8.57% 388 46 11.86% 1,694 83 4.90% - ----------------------------------------------------------- ----------------- -------------------- Total in foreign offices 5,217 440 8.43% 12,692 730 5.75% 18,598 1,012 5.44% - ----------------------------------------------------------- ----------------- -------------------- Total interest-bearing deposits 15,101 998 6.61% 27,356 1,424 5.21% 40,794 2,195 5.38% Trading liabilities In domestic offices 54 2 3.70% 286 33 11.54% 1,957 147 7.51% In foreign offices -- -- -- 2,294 98 4.27% 5,762 315 5.47% - ----------------------------------------------------------- ----------------- -------------------- Total trading liabilities 54 2 3.70% 2,580 131 5.08% 7,719 462 5.99% Securities loaned and securities sold under repurchase agreements In domestic offices 58 5 8.62% 5,944 415 6.98% 19,881 1,458 7.33% In foreign offices 8 1 12.50% 2,317 124 5.35% 8,851 439 4.96% - ----------------------------------------------------------- ----------------- -------------------- Total securities loaned and securities sold under repurchase agreements 66 6 9.09% 8,261 539 6.52% 28,732 1,897 6.60% Other short-term borrowings In domestic offices 11,801 946 8.02% 9,889 556 5.62% 16,488 961 5.83% In foreign offices 452 -- -- 2,996 240 8.01% 5,109 366 7.16% - ----------------------------------------------------------- ----------------- -------------------- Total other short-term borrowings 12,253 946 7.72% 12,885 796 6.18% 21,597 1,327 6.14% Long-term debt In domestic offices 14,197 839 5.91% 9,375 545 5.81% 10,056 581 5.78% In foreign offices 2,363 82 3.47% 5,922 63 1.06% 7,284 340 4.67% - ----------------------------------------------------------- ----------------- -------------------- Total long-term debt 16,560 921 5.56% 15,297 608 3.97% 17,340 921 5.31% - ----------------------------------------------------------- ----------------- -------------------- Trust preferred capital securities 1,373 115 8.38% 1,424 114 8.01% 1,455 117 8.04% - ----------------------------------------------------------- ----------------- -------------------- Total Interest-Bearing Liabilities 45,407 $2,988 6.58% 67,803 $3,612 5.33% 117,637 $6,919 5.88% ====== ====== ====== Noninterest-bearing deposits In domestic offices 2,804 2,578 2,766 In foreign offices 1,059 1,597 1,497 - ------------------------------------------------- ------- -------- Total noninterest-bearing deposits 3,863 4,175 4,263 Noninterest-bearing trading liabilities 3,902 12,097 23,706 Acceptances outstanding 260 218 471 All other liabilities 5,853 7,856 10,183 Preferred stock of subsidiary -- -- 253 Stockholders' equity Preferred stock 271 393 522 Common stockholders' equity 4,078 4,096 4,836 - ------------------------------------------------- ------- -------- Total Liabilities and Stockholders' Equity $63,634 $96,638 $161,871 ================================================= ======= ======== % of liabilities attributable to foreign offices 14% 43% 46% Rate spread .81% 1.06% 1.02% Net interest margin (net interest revenue to total interest- earning assets) In domestic offices $34,742 $ 236 0.68% $44,350 $ 509 1.15% $ 71,763 $ 545 0.76% In foreign offices 14,494 414 2.86% 25,061 313 1.25% 48,887 858 1.76% - ----------------------------------------------------------- ----------------- -------------------- Total $49,236 $ 650 1.32% $69,411 $ 822 1.18% $120,650 $1,403 1.16% =========================================================== ================= ====================
62 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Volume/Rate Analysis of Changes in Net Interest Revenue The following table attributes changes in fully taxable net interest revenue to changes in either average daily balances or average rates for both interest-earning assets and interest-bearing sources of funds. Because of the numerous simultaneous balance and rate changes during any period, it is not possible to precisely allocate such changes between balances and rates. For purposes of this table, changes that are not due solely to balance or rate changes are allocated to such categories based on the respective percentage changes in average daily balances and average rates.
- ---------------------------------------------------------------------------------------------------------------------------- 2000/99 1999/98 ------------------------- --------------------------- Increase (decrease) Increase (decrease) due to change in: due to change in: ------------------------- --------------------------- Average Average Average Average (in millions) Balance Rate Total Balance Rate Total - ---------------------------------------------------------------------------------------------------------------------------- Consolidated Interest Revenue Interest-bearing deposits with banks $ 247 $ 63 $ 310 $ 91 $ (92) $ (1) Federal funds sold (92) 32 (60) (37) (14) (51) Securities purchased under resale agreements (639) 93 (546) (717) (243) (960) Securities borrowed (383) -- (383) (765) (74) (839) Trading assets 65 (64) 1 (1,214) (262) (1,476) Securities available for sale (376) 51 (325) (331) 27 (304) Loans 84 166 250 (76) (113) (189) Customer receivables (46) 3 (43) (51) (17) (68) - ---------------------------------------------------------------------------------------------------------------------------- Total interest revenue (1,140) 344 (796) (3,100) (788) (3,888) - ---------------------------------------------------------------------------------------------------------------------------- Interest Expense Interest-bearing deposits (745) 319 (426) (702) (69) (771) Trading liabilities (101) (28) (129) (270) (61) (331) Securities loaned and securities sold under repurchase agreements (685) 152 (533) (1,336) (22) (1,358) Other short-term borrowings (41) 191 150 (538) 7 (531) Long-term debt 54 259 313 (100) (213) (313) Trust preferred capital securities (4) 5 1 (2) (1) (3) - ---------------------------------------------------------------------------------------------------------------------------- Total interest expense (1,522) 898 (624) (2,948) (359) (3,307) - ---------------------------------------------------------------------------------------------------------------------------- Net change in net interest revenue $ 382 $(554) $(172) $ (152) $(429) $ (581) ============================================================================================================================ Domestic Offices Interest Revenue Interest-bearing deposits with banks $ 333 $ 45 $ 378 $ 83 $ (73) $ 10 Federal funds sold (92) 32 (60) (37) (14) (51) Securities purchased under resale agreements (578) 149 (429) (472) (184) (656) Securities borrowed (312) -- (312) (621) (163) (784) Trading assets (107) (13) (120) (353) (131) (484) Securities available for sale (213) 62 (151) (293) 30 (263) Loans 467 132 599 173 (23) 150 Customer receivables (46) 3 (43) (51) (17) (68) - ---------------------------------------------------------------------------------------------------------------------------- Total interest revenue (548) 410 (138) (1,571) (575) (2,146) - ---------------------------------------------------------------------------------------------------------------------------- Interest Expense Interest-bearing deposits (254) 118 (136) (368) (121) (489) Trading liabilities (17) (14) (31) (167) 53 (114) Securities loaned and securities sold under repurchase agreements (489) 79 (410) (976) (67) (1,043) Other short-term borrowings 122 268 390 (372) (33) (405) Long-term debt 285 9 294 (40) 4 (36) Trust preferred capital securities (4) 5 1 (2) (1) (3) Funds provided to foreign offices 174 (307) (133) (137) 418 281 Funds provided by foreign offices (146) 79 (67) (62) (389) (451) - ---------------------------------------------------------------------------------------------------------------------------- Total interest expense (329) 237 (92) (2,124) (136) (2,260) - ---------------------------------------------------------------------------------------------------------------------------- Net change in net interest revenue $ (219) $ 173 $ (46) $ 553 $(439) $ 114 ============================================================================================================================ Foreign Offices Interest Revenue Interest-bearing deposits with banks $ (173) $ 105 $ (68) $ 5 $ (16) $ (11) Securities purchased under resale agreements (76) (41) (117) (215) (89) (304) Securities borrowed (71) -- (71) (135) 80 (55) Trading assets 139 (18) 121 (806) (186) (992) Securities available for sale (145) (29) (174) (51) 10 (41) Loans (317) (32) (349) (248) (91) (339) - ---------------------------------------------------------------------------------------------------------------------------- Total interest revenue (643) (15) (658) (1,450) (292) (1,742) - ---------------------------------------------------------------------------------------------------------------------------- Interest Expense Interest-bearing deposits (542) 252 (290) (337) 55 (282) Trading liabilities (98) -- (98) (159) (58) (217) Securities loaned and securities sold under repurchase agreements (194) 71 (123) (347) 32 (315) Other short-term borrowings (110) (130) (240) (165) 39 (126) Long-term debt (56) 75 19 (54) (223) (277) Funds provided by domestic offices (174) 307 133 137 (418) (281) Funds provided to domestic offices 146 (79) 67 62 389 451 - ---------------------------------------------------------------------------------------------------------------------------- Total interest expense (1,028) 496 (532) (863) (184) (1,047) - ---------------------------------------------------------------------------------------------------------------------------- Net change in net interest revenue $ 385 $(511) $(126) $ (587) $(108) $ (695) ============================================================================================================================
Bankers Trust Corporation and its Subsidiaries 63 - -------------------------------------------------------------------------------- Deposits The Corporation's certificates of deposit and other time deposits issued by domestic and foreign offices in amounts of $100,000 or more, together with their remaining maturities, and other interest-bearing deposits at December 31, 2000 were as follows: - -------------------------------------------------------------------------------- (in millions) Domestic Foreign Total - -------------------------------------------------------------------------------- Certificates of deposit of $100,000 or more 3 months or less $ 196 $ 2 $ 198 Over 3 through 6 months 16 -- 16 Over 6 through 12 months 3 -- 3 Over 12 months 944 -- 944 - -------------------------------------------------------------------------------- Total 1,159 2 1,161 - -------------------------------------------------------------------------------- Other time deposits of $100,000 or more 3 months or less -- 882 882 Over 3 through 6 months 16 6 22 Over 6 through 12 months -- -- -- Over 12 months -- -- -- - -------------------------------------------------------------------------------- Total 16 888 904 - -------------------------------------------------------------------------------- Other 7,474 1,984 9,458 - -------------------------------------------------------------------------------- Total interest-bearing deposits $8,649 $2,874 $11,523 ================================================================================ Deposits by foreign depositors in domestic offices amounted to $1.1 billion, $1.5 billion and $1.4 billion at December 31, 2000, 1999 and 1998, respectively. 64 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- DESCRIPTION OF BUSINESS - -------------------------------------------------------------------------------- Acquisition by Deutsche Bank AG On June 4, 1999, the change-in-control ("COC") date, pursuant to an agreement dated as of November 30, 1998, between Deutsche Bank AG ("Deutsche Bank") and Bankers Trust Corporation ("Bankers Trust"), Deutsche Bank, through its U.S. holding corporation, Taunus Corporation ("Taunus"), acquired all of the outstanding shares of common stock of Bankers Trust from its shareholders at a price of $93.00 per share (the "Acquisition"). On June 5, 1999, Bankers Trust transferred its wholly-owned subsidiary BT Alex. Brown Incorporated ("BTAB") and substantially all of its interest in Bankers Trust International PLC ("BTI") to Deutsche Bank Securities Inc. ("DBSI") and Deutsche Holdings (BTI) Ltd., respectively, which are wholly-owned subsidiaries of Deutsche Bank. The transfer of BTAB to DBSI took the form of an exchange of stock pursuant to which BTAB became a wholly-owned subsidiary of DBSI and Bankers Trust received shares of DB U.S. Financial Markets Holding Corporation ("DBUSH"), the parent of DBSI. In the third quarter of 1999, Bankers Trust sold its shares of DBUSH to Taunus for approximately $800 million. The transfer of substantially all of Bankers Trust's interest in BTI was for cash in the amount of approximately $1.7 billion. On August 31, 1999, Bankers Trust Corporation completed the sale of Bankers Trust Australia Limited ("BTAL"), a wholly-owned subsidiary, to the Principal Financial Group for a price of approximately $1.3 billion. Prior to the sale, BTAL remitted to Bankers Trust Corporation a dividend for accumulated retained earnings that included proceeds from BTAL's sale of its investment banking division to Macquarie Bank. Bankers Trust Corporation also received cash for the assumption of certain BTAL long-term debt. In addition, according to the sale agreement Bankers Trust Corporation is entitled to receive an additional payment. The amount and timing of such payment is not known at this time. Bankers Trust Corporation recognized a pre-tax gain of approximately $779 million in the third quarter of 1999 on the sale of BTAL. In connection with the Acquisition, and in addition to the foregoing transactions, the Corporation has transferred and will continue to transfer certain entities/businesses and financial assets and liabilities to 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. In conjunction with the Acquisition and to strengthen the Corporation's capital base, Deutsche Bank made a capital contribution of $1.4 billion in the second quarter of 1999. See Note 1 of Notes to Financial Statements for more information on the Acquisition by Deutsche Bank. Prior to the Acquisition, the Corporation was a global financial institution, providing products and services to its clients worldwide. Subsequent to the Acquisition and associated reorganization activities, the Corporation and its subsidiaries conduct their business primarily in the Americas, focusing their activities principally in the asset management, lending, institutional services and private banking businesses. Bankers Trust Corporation Bankers Trust Corporation is a registered bank holding company that was incorporated in 1965. Bankers Trust, which accounted for 18 percent of consolidated assets at December 31, 2000, is the parent of Bankers Trust Company ("BTCo" or the "Bank") and its other subsidiaries. Bankers Trust is a legal entity separate and distinct from its subsidiaries, including BTCo. There are various legal limitations governing the extent to which certain of Bankers Trust's subsidiaries may extend credit, pay dividends or otherwise supply funds to, or engage in transactions with, Bankers Trust or certain of its other subsidiaries. The rights of Bankers Trust to participate in any distribution of assets of any subsidiary upon its dissolution, winding-up, liquidation or reorganization or otherwise are subject to the prior claims of creditors of that subsidiary, except to the extent that Bankers Trust may itself be a creditor of that subsidiary and its claims are recognized. Claims on Bankers Trust's subsidiaries by creditors other than Bankers Trust include long-term debt and substantial obligations with respect to deposit liabilities, trading liabilities, federal funds purchased, securities sold under repurchase agreements and commercial paper, as well as short-term borrowings and accounts payable. Disposition of Assets On September 29, 2000, Bankers Trust transferred its wholly-owned subsidiary BT Holdings (New York), Inc. ("BTH") to DBUSH and Taunus. The transfer of BTH to DBUSH took the form of an exchange of stock pursuant to which BTH became a wholly-owned subsidiary of DBUSH. The Corporation received shares of DBUSH equal to the fair market value of BTH's net assets, substantially all of which were financial assets, on the date of transfer. The Corporation recognized a pre-tax gain of approximately $561 million for the year ended December 31, 2000. Refer to the Corporation's report on Form 8-K dated September 29, 2000. Business Segments In conjunction with the Acquisition, the Corporation realigned its business activities to conform to Deutsche Bank's management structure. In this regard, the Retail and Private Banking division provides 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. The Asset Management division combines the institutional asset management and retail investment fund businesses. The Global Corporates and Institutions division integrates long-standing relationship and credit-oriented commercial banking with the product and transactional orientation of investment banking for corporate Bankers Trust Corporation and its Subsidiaries 65 - -------------------------------------------------------------------------------- clients and financial institutions. This business segment also includes credit business, trade finance, structured finance and cash management in addition to the Corporation's private equity business, until the fourth quarter of 2000, and trading activities. Global Technology and Services comprises custody services, payment settlement, securities settlement, and electronic banking services. Corporate Items include revenue and expenses that have not been allocated to business segments, the operating income and expenses of BTAL and Consorcio, and the results of smaller businesses that are not included in the main business segments. See Note 21 of Notes to Financial Statements for a description of these Business Segments. The Corporation intends to realign its business into two principal business units, Corporate and Investment Bank and Private Clients and Asset Management, in the future to correspond to the reorganization currently being implemented in Deutsche Bank generally. Bankers Trust Company Bankers Trust's principal banking subsidiary is Bankers Trust Company, which, along with its subsidiaries accounted for 70 percent of the Corporation's consolidated assets at December 31, 2000. BTCo, founded in 1903, originates loans and other forms of credit, accepts deposits, arranges financings and provides numerous other commercial banking and financial services. Bankers Trust (Delaware) Bankers Trust (Delaware) is a state bank chartered under the laws of Delaware, which, along with its subsidiaries, accounted for 1 percent of the Corporation's consolidated assets at December 31, 2000. Bankers Trust (Delaware) engages in commercial banking activities, with an emphasis on lending, funding and corporate finance. Supervision and Regulation Bankers Trust is a bank holding company within the meaning of the Bank Holding Company Act of 1956, and as such is required to register with the Federal Reserve Board. As a registered bank holding company, Bankers Trust is required to file with the Federal Reserve Board certain reports and information and is restricted in certain of its acquisitions, some of which are subject to approval by the Federal Reserve Board. In addition, Bankers Trust may be required to obtain the approval of the New York State Banking Department in order for it to acquire certain bank and non-bank subsidiaries. Bankers Trust, its nonbank subsidiaries and certain of its affiliates, including Deutsche Bank, New York branch, are affiliates of BTCo and Bankers Trust (Delaware) within the meaning of applicable federal statutes, and such banks are therefore subject to restrictions on loans and other extensions of credit to Bankers Trust and certain other affiliates and on certain other types of transactions with them or involving their securities. BTCo is subject to the supervision of, and to examination by, the New York State Banking Department, the Federal Reserve Board and the Federal Deposit Insurance Corporation. Bankers Trust (Delaware) is subject to regulation by the Office of the State Bank Commissioner of the State of Delaware and by the Federal Deposit Insurance Corporation. See Note 13 of Notes to Financial Statements for the required reserve balances maintained by the Corporation's subsidiary banks at a Federal Reserve Bank and limitations on the availability of BTCo's undistributed earnings for the payment of dividends. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") provides for cross-guarantees of the liabilities of insured depository institutions pursuant to which any bank or savings association subsidiary of a holding company may be required to reimburse the FDIC for any loss or anticipated loss to the FDIC that arises from a default of any other subsidiary bank or savings association of the parent holding company or assistance provided to such an institution in danger of default. In December 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was enacted. FDICIA substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and revised several other federal banking statutes. FDICIA establishes five capital categories, ranging from "well capitalized," to "critically undercapitalized." A depository institution is well capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure. Under FDICIA, an institution that is not well capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market; in addition, "pass through" insurance coverage may not be available for certain employee benefit accounts. FDICIA also requires an undercapitalized depository institution to submit an acceptable capital restoration plan to the appropriate federal bank regulatory agency. One requisite element of such a plan is that the institution's parent holding company must guarantee compliance by the institution with the plan, subject to certain limitations. In the event of the parent holding company's bankruptcy, the guarantee, and any other commitments that the parent holding company has made to federal bank regulators to maintain the capital of its depository institution subsidiaries, would be assumed by the bankruptcy trustee and entitled to priority in payment. Based on their respective regulatory capital ratios at December 31, 2000, both BTCo and Bankers Trust (Delaware) are well capitalized, based on the definitions in the regulations issued by the Federal Reserve Board and the other federal bank regulatory agencies setting forth the general capital requirements mandated by FDICIA. See Note 14 of Notes to Financial Statements for information regarding the Corporation's and BTCo's regulatory capital ratios. FDICIA contains numerous other provisions, including reporting requirements, termination of the "too big to fail" doctrine except for special cases, limitations on the FDIC's payment of deposits at foreign branches and revised regulatory standards for, among other things, real estate lending and capital adequacy. A federal depositor preference statute was enacted in 1993 providing that deposits and certain claims for administrative expenses and employee compensation against an insured depository institution would be afforded a priority over other general claims against such an institution, including federal funds and letters of credit, in the "liquidation or other resolution" of such an institution by any receiver. 66 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- In November 1999 federal financial modernization legislation was enacted which allows qualifying banks and bank holding companies to elect to be treated as financial holding companies ("FHCs"). FHCs may engage in a broader range of activity than non-FHCs, which are limited to the activities traditionally permissible for bank holding companies. Although bank regulatory authorities have issued interim and proposed regulations, as well as some final regulations, the full scope of the new powers available to FHCs will only become clear after all regulatory authorities adopt final implementing regulations. The expanded activities include insurance underwriting and agency activities, and expanded securities, mutual fund and merchant banking activities. The ability to engage in information technology and data processing related businesses has also been expanded. The expanded scope of activities permits the affiliation of firms, such as banks and insurance companies, not permissible under prior law. Certain of these activities, including activities presently included in Bankers Trust Company, must be "pushed out" to affiliates of the Corporation which are Deutsche Bank entities. In order to qualify to make the FHC election, the electing foreign bank or the bank subsidiaries of the electing bank holding company, as the case may be, must be "well capitalized," "well managed," and, if subject to the CRA, have at least a "satisfactory" CRA rating. In the case of Bankers Trust, Deutsche Bank, BTCo and Bankers Trust (Delaware) are all required to meet the standards (or their equivalent) for it to maintain FHC status. The modernization legislation also modifies current law related to financial privacy and community reinvestment. The new financial privacy provisions generally prohibit financial institutions, including the Corporation, from disclosing nonpublic personal financial information to third parties unless customers have the opportunity to "opt out" of the disclosure. Although Deutsche Bank has received FHC status, the Corporation at this time is unable to predict the impact the modernization legislation may have on it and its affiliates. In addition to banking and securities laws, regulations and regulatory agencies governing the Corporation worldwide, the Corporation also is subject to various other laws, regulations and regulatory agencies throughout the United States and in other countries, including Germany. Furthermore, various proposals, bills and regulations have been, and may in the future be, considered in the United States Congress, the New York State Legislature and various other governmental regulatory and legislative bodies, which could result in changes in the profitability and governance of the Corporation. Changes in German laws and regulations would also affect the profitability and governance of the Corporation. References under the caption "Supervision and Regulation" to applicable statutes, regulations and orders are brief summaries of portions thereof which do not purport to be complete and which are qualified in their entirety by reference thereto. Important Factors Relating to Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements. In connection with certain statements made in this report and those that may be made in the future by or on behalf of the Corporation which are identified as forward-looking statements, the Corporation notes that the following important factors, among others, could cause actual results to differ materially from those set forth in any such forward-looking statements. Further, such forward-looking statements speak only as of the date on which such statement or statements are made, and the Corporation undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. The business and profitability of a large financial services organization such as the Corporation is influenced by prevailing economic conditions and governmental policies, both foreign and domestic. The actions and policy directives of the Federal Reserve Board determine to a significant degree the cost and the availability of funds obtained from money market sources for lending and investing. Federal Reserve Board policies and regulations also influence, directly and indirectly, the rates of interest paid by commercial banks on their interest-bearing deposits and may also impact the value of financial instruments held by the Corporation. The nature and impact on the Corporation of future changes in economic and market conditions and monetary and fiscal policies, both foreign and domestic, are not predictable and are beyond the Corporation's control. In addition, these conditions and policies can impact the Corporation's customers and counterparties which may increase the risk of default on their obligations to the Corporation and its affiliates. They can also affect the competitive conditions in the markets and products within which the Corporation operates, which can have an adverse impact on the Corporation's ability to maintain its revenue streams. As part of its ongoing business, the Corporation assumes financial exposures to interest rates, currencies, equities and other financial products. In doing so, the Corporation is subject to unforeseen events which may not have been anticipated or which may have effects which exceed those assumed within its risk management processes. This risk can be accentuated by volatility and reduction in liquidity in those markets which in turn can impact the Corporation's ability to hedge and trade the positions concerned. In addition, the Corporation is dependent on the ability of Deutsche Bank to access the financial markets for its funding needs. The operations of the Corporation and its affiliates, which are widely diversified geographically and vary from country to country, involve certain economic, political and legal risks which differ from those associated with their U.S. operations. These risks include, among others, the possibility of expropriation of assets, exchange rate fluctuations, severe reductions in business levels, restrictions on the withdrawal of funds, balance-of-payments problems and changes in laws and regulations. In addition, in certain jurisdictions the operations of the Corporation and its affiliates may involve legal uncertainties. See "Cross-Border Outstandings" on page 21. Further, certain financial institutions with which the Corporation Bankers Trust Corporation and its Subsidiaries 67 - -------------------------------------------------------------------------------- competes may not be subject to the same regulatory restrictions as the Corporation and its affiliates which may make it more difficult for the Corporation to compete with those institutions for business. As noted in "Supervision and Regulation" on page 66, the Corporation is regulated by and subject to various domestic and international regulators. The actions of these regulators can have an impact on the profitability and governance of the Corporation. Increases by regulatory authorities of minimum capital, reserve, deposit insurance and other financial viability requirements can also affect the Corporation's profitability. The Corporation is subject to operational and control risk which is the potential for loss caused by a breakdown in communication, information, processing and settlement systems or processes or a lack of compliance with the procedures on which they rely either within the Corporation and its affiliates or within the broader financial systems infrastructure. As with any large financial institution, the Corporation is also subject to the risk of litigation and to an unexpected or adverse outcome in such litigation. Competitive pressures in the marketplace and unfavorable or adverse publicity and news coverage can have the effect of lessening customer demand for the Corporation's services. Ultimately, the Corporation's businesses and their success are dependent on the Corporation's ability to attract and retain high quality employees. Properties BTCo owns a 39-story building at 130 Liberty Street and a 10-story office building at 4 Albany Street, both in Manhattan. The principal office premises leased are a portion of a 42-story office building located at 280 Park Avenue, seven stories of a 37-story building at 14-16 Wall Street, four stories of the office complex at the World Trade Center, all in Manhattan, an eight-story building in Jersey City, New Jersey, and a three-story building in Nashville, Tennessee. Portions of certain of these properties are leased to tenants or subtenants. In addition to the offices referred to above, branch offices and locations for other activities are occupied in cities throughout the world under various types of ownership and leaseholds. The majority of the properties above support all of the Corporation's business segments. See Note 7 of Notes to Financial Statements for additional information concerning lease commitments. Litigation and Related Matters 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. In January 2001, Bankers Trust Company, or affiliates of Bankers Trust Company, were named as defendant in six actions (three of which are brought as class actions) filed in the Superior Court of the State of California, County of Los Angeles (Stuber, et al. v. Merrill Lynch, Pierce, Fenner & Smith, et al.; Walls, et al. v. Stanwich Financial Services Corp., et al.; Schultz, et al. v. Stanwich Financial Services Corp., et al.; Havlik, et al. v. Morgan Stanley Dean Witter & Co., et al.; Gomes, et al. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., et al.; Rodriguez v. Tuftco Corp., et al.). The complaints allege, among other things, fraud, conversion, negligence and breach of contract against numerous defendants (including Bankers Trust Company) in connection with the alleged misuse of certain funds established in connection with certain structured settlement agreements entered into pursuant to settlements between insurers and accident victims. Bankers Trust Company acted as a nominal "trustee" under these agreements, as did certain of the other defendants. The complaints seek unspecified compensatory and punitive damages and certain other relief. The Corporation believes 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. 68 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Directors of the Registrant Dr. Josef Ackermann Director since 1999 Member of the Group Board of Deutsche Bank AG Chairman of the Board and Chief Executive Officer of the Corporation and Bankers Trust Company Chairman of the Supervisory Board of Deutsche Bank Luxembourg S.A, and a member of the Supervisory Boards of Eurex Frankfurt AG, Eurex Zurich AG, Linde AG, Stora Enso Oyj and a member of the Board of Vodafone Group plc. Age 53. Robert B. Allardice III Director since 2000 Director of the Corporation and Bankers Trust Company. Advisory Director of Deutsche Bank Americas Holding Corp. Also a Board member of Deutsche Bank Canada. Age 54. Hans H. Angermueller Director since 1999 Director of the Corporation and Bankers Trust Company. Counsel, Shearman & Sterling. Also a Director of the Wharton Financial Institutions Center. Age 76. George B. Beitzel Director since 1977 Director of Various Corporations Director of the Corporation and Bankers Trust Company. Retired Senior Vice President and Director of International Business Machines Corporation. Also a Director of ACTUATE, Bitstream, Inc., Computer Task Group, Inc. and Staff Leasing, Inc. Age 72. Jessica P. Einhorn Director since 2000 Director of the Corporation and Bankers Trust Company. Also a Director of Council on Foreign Relations, Institute for International Economics, Pitney Bowes, a Trustee of Rockefeller Brothers Fund, a member of the Executive Committee of Trilateral Commission, Chair of International Advisory Board of J.E. Robert Companies, and an employee (part-time) of Clark & Weinstock. Age 53. William R. Howell Director since 1986 Retired Chief Executive Officer and Chairman of the Board of J.C. Penney Company, Inc. Director of the Corporation and Bankers Trust Company. Also a Director of American Electric Power, Exxon Mobil Corporation, Halliburton Company, Pfizer, Inc. and The Williams Companies, Inc. Age 65. Hermann-Josef Lamberti Director since 1999 Member of the Group Board of Deutsche Bank AG Executive Vice President of Deutsche Bank AG Director of the Corporation and Bankers Trust Company. A Vice Chairman of the Corporation since August 19, 1999 and of Bankers Trust Company from August 19, 1999 to January 24, 2000. Board member of Euroclear plc (London), Advisory Council member of Carl Zeiss Stiftung (Oberkochen) and Otto A. Wipprecht--Stiftung, Supervisory Board member of European Transaction Bank (e.t.b.), Moneyshelf AG, DB 24 AG and SupplyOn AG, and non-executive Board member of Euroclear Bank S.A. Age 45. John A. Ross Director since 1999 Corporate Chief Operating Officer of Deutsche Bank AG as of March 2001 President and Chief Executive Officer of Deutsche Bank Americas Holding Corp. Director of the Corporation and Bankers Trust Company. President of the Corporation and Bankers Trust Company since January 1, 2000. Also President and Chief Executive Officer of Taunus Corporation and DB U.S. Financial Markets Holding Corporation, Chair of Civic Capital Corp. and a Board member of Deutsche Banc Alex. Brown Inc., German Marshall Fund, The Jewish Museum, LISC (Local Initiatives Support Group) and New York City Investment Fund. Treasurer of Institute of International Bankers, Advisory Director of Metropolitan Opera, and Advisory Board member of Singapore Technologies. Age 56. Bankers Trust Corporation and its Subsidiaries 69 - -------------------------------------------------------------------------------- EXECUTIVE OFFICERS OF THE REGISTRANT - -------------------------------------------------------------------------------- Set forth below are the names and ages of the executive officers of Bankers Trust, positions held and the year from which held. These officers are elected annually by the Board of Directors. There are no family relationships among such persons.* Dr. Josef Ackermann, 53 Chairman of the Board and Chief Executive Officer Chairman of the Board and Chief Executive Officer of Bankers Trust and BTCo since July 1, 1999. President of Bankers Trust and BTCo from July 1, 1999 to January 1, 2000. Member of the Group Board of Deutsche Bank AG. Also, Chairman of the Supervisory Board of Deutsche Bank Luxembourg S.A. Dr. Ackermann formerly held the position of President of the Executive Board of Credit Suisse from 1993 to 1996, of which he was a member since 1990. Yves C. de Balmann, 54 Vice Chairman Vice Chairman of Bankers Trust since April 1997. Senior Vice President of Bankers Trust 1995-1997. Managing Director of BTCo from 1988 to September 1997. He is Co-Chairman and Co-Chief Executive Officer of Deutsche Banc Alex. Brown Inc. and Co-Head of Global Investment Banking for Deutsche Bank. Mr. de Balmann has resigned his position with the Corporation effective March 12, 2001. Hermann-Josef Lamberti, 45 Vice Chairman Vice Chairman of Bankers Trust since August 19, 1999. Vice Chairman of BTCo from August 19, 1999 to January 1, 2000. Executive Vice President of Deutsche Bank AG since December 1998. Member of the Group Board of Deutsche Bank AG. Mr. Lamberti formerly held the position of General Manager of IBM, Germany from 1997 to 1998 and Vice President Marketing and Brand Management from 1995 to 1996. Troland S. Link, 64 General Counsel General Counsel of Bankers Trust and Managing Director and General Counsel of BTCo since July 21, 1999. Also, General Counsel of Deutsche Bank Americas since 1997. Mr. Link was formerly a Partner at Davis Polk & Wardwell. John A. Ross, 56 President President of Bankers Trust and BTCo since January 1, 2000. Corporate Chief Operating Officer of Deutsche Bank AG as of March 2001. President and Chief Executive Officer of Deutsche Bank Americas Holding Corp. since October 25, 1999. Mr. Ross formerly held senior management positions in his 21-year career at The Bank of New York, including Executive Vice President, Head of Global Asset and Liability Management. Mayo A. Shattuck III, 46 Vice Chairman Vice Chairman of Bankers Trust since September 1997. He formerly held the positions of President, Chief Operating Officer and Director of Alex. Brown Incorporated from 1991 to September 1997. He is Co-Chairman and Co-Chief Executive Officer of Deutsche Banc Alex. Brown Inc. and Co-Head of Global Investment Banking for Deutsche Bank. Effective March 19, 2001, Mr. Shattuck resigned his position as a Vice Chairman of Bankers Trust and Co-Chairman and Co-Chief Executive Officer of Deutsche Bank Alex. Brown Inc. ("DBAB") and Co-Head of Global Investment Banking to assume the position of Global Co-Head of the Private Banking Division of the Private Clients and Asset Management Group ("PCAM") of Deutsche Bank AG and Chief Executive Officer for PCAM operations in the Americas. He remains Chairman of the Board of DBAB. * Certain of the executive officers held the Senior Managing Director title for a portion of 1996 and 1997. BTCo eliminated the title effective January 1, 1998 and reverted to the use of the Managing Director title as the most senior title below that of a Vice Chairman. 70 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- Interest of Directors and Executive Officers and Their Associates in Transactions with the Corporation Some of the Corporation's directors and executive officers and their associates, including affiliates and related interests, are customers of the Corporation and/or subsidiaries of the Corporation, and some of the Corporation's directors and executive officers and their associates, including affiliates and related interests, from time to time are directors or officers of, or investors in, corporations or members of partnerships or have an interest in other entities which are customers of the Corporation and/or such subsidiaries. As such customers, they have had transactions in the ordinary course of business with the Corporation and/or such subsidiaries, including borrowings, all of which were on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than normal risk of collectibility or present other unfavorable features. Extension of Directors and Officers Liability Insurance Program Deutsche Bank maintains Directors & Officers Liability Insurance, under which Bankers Trust Corporation is co-insured. This program will reimburse Bankers Trust and/or any of its subsidiaries for certain payments they may be required to make in indemnifying their directors and officers, and covers directors and officers against certain liabilities and expenses for which they may not or cannot be indemnified by Bankers Trust and/or any of its subsidiaries. The program also includes coverage for a director or an officer who serves as a director of a non-subsidiary corporation at the request of the Corporation. This program is written by Zurich Insurance and other major insurance companies. Committees of the Board of Directors Following is a description of each of the Board Committees maintained by the Corporation and the Bank. Included with the description is the number of times each Committee met and a list of the current members of each such Committee: Executive Committee--2 Meetings The Executive Committee acts for the Board of Directors when the Board is not in session, subject to certain statutory limitations on its authority. The Committee also considers and acts on matters which do not require full Board consideration and approval and, upon the request of Management, it considers some matters on a preliminary basis before their submission for full Board consideration and approval. Current Members: Josef Ackermann, Chair; Robert B. Allardice III; Hans H. Angermueller; George B. Beitzel; and John A. Ross. Audit and Fiduciary Committee--6 Meetings The Audit and Fiduciary Committee is comprised entirely of independent outside directors (including as defined by FDICIA) and is appointed annually by the Board of Directors to oversee the accounting, reporting and audit practices established by Management. The function of the Committee, which meets at least quarterly, is twofold. It monitors the effectiveness and quality of the system of internal accounting policies, standards and controls designed to insure the accurate and efficient reporting of financial activities, safeguarding of assets, proper exercise of fiduciary powers and compliance with laws and regulations. The Committee meets regularly with Management, the internal auditors, the internal credit auditors and the independent external auditors (the "Auditors"). The Auditors have free access to the Committee without the presence of Management. The Committee also reviews the quality and effectiveness of the organizational structure of the trust and fiduciary business units of the Corporation and the Bank and its subsidiaries to ensure the proper exercise of fiduciary policies. In addition, the Committee monitors the activities of management fiduciary committees appointed from time to time by the Board of Directors, reviews the effective implementation of policies, practices and procedures to prevent conflicts of interest or improper interrelation between the administration of the fiduciary and banking functions of the Bank. The Committee reports regularly to the Board of Directors on its activities and such other matters as it deems necessary. Current Members: Hans H. Angermueller, Chair; George B. Beitzel; and William R. Howell. Bankers Trust Corporation and its Subsidiaries 71 - -------------------------------------------------------------------------------- Committee on Public Responsibility and Concern--2 Meetings The Committee on Public Responsibility and Concern, which is appointed annually by the Board of Directors, reviews policy and audits the performance of the Corporation in the discharge of its social responsibilities, which include, but are not limited to, the Corporation's Equal Opportunity and Vendor Outreach programs, community reinvestment activities, contributions program and compliance with labor and employment laws and regulations. Current Members: John A. Ross, Chair; George B. Beitzel; Jessica P. Einhorn; William R. Howell; and Hermann-Josef Lamberti. Transaction Authorization Committee--No Meetings The Transaction Authorization Committee, which is comprised of at least two directors appointed annually by the Board of Directors, acts for the Board to approve certain transactions, including rated securitization transactions. Current Members: John A. Ross, Chair; and Josef Ackermann. Compensation of Non-Officer Directors Each director who is not also an employee of the Corporation, the Bank or Deutsche Bank AG (each, a "non-officer director") receives an annual cash retainer of $32,000. For each Board, Executive Committee and Committee on Public Responsibility and Concern meeting he/she attends, a non-officer director receives a fee of $1,000. The Chairman of the Committee on Public Responsibility and Concern receives an additional annual fee of $3,000. Members of the Audit and Fiduciary Committee receive a fee of $5,000 for each meeting he/she attends and the Chairman of the Committee receives an additional annual fee of $5,000. No fees are paid to members of the Transaction Authorization Committee. Travel and out-of-pocket expenses of the directors in connection with their attendance at Board or Committee meetings are either paid for or reimbursed by the Committee. 72 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- I. Summary Compensation Table ($000 omitted)
Annual Compensation -------------------------------------------------------------- Bonus ------------------------------------- Total Other Annual Named Executive Officer Year Salary Cash(a) + Stock(b) = Bonus Compensation(c) - ----------------------------------------------------------------------------------------------------- Dr. Josef Ackermann(f) 2000 $ -- $ -- $ -- $ -- $ -- Chairman and 1999 -- -- -- -- -- Chief Executive Officer Yves C. de Balmann(g) 2000 350.0 5,005.0 2,145.0 7,150.0 6,027.0 Vice Chairman 1999 350.0 5,005.0 2,145.0 7,150.0 2,827.2 1998 350.0 1,012.0 4,048.0 5,060.0 923.2 Hermann-Josef Lamberti(h) 2000 -- -- -- -- -- Vice Chairman 1999 -- -- -- -- -- Troland S. Link(i) 2000 -- -- -- -- -- General Counsel 1999 -- -- -- -- -- John A. Ross(j) 2000 -- -- -- -- -- President Mayo A. Shattuck III(k) 2000 350.0 5,005.0 2,145.0 7,150.0 3,695.9 Vice Chairman 1999 350.0 5,005.0 2,145.0 7,150.0 2,825.7 1998 350.0 1,012.0 4,048.0 5,060.0 -- Mary Cirillo(l) 2000 58.3 -- -- -- 17,000.0 Executive Vice President 1999 350.0 3,650.0 -- 3,650.0 -- 1998 350.0 580.0 2,320.0 2,900.0 44.6 Rodney A. McLauchlan(m) 2000 350.0 2,650.0 -- 2,650.0 3,000.0 Executive Vice President 1999 350.0 2,650.0 -- 2,650.0 7,500.0 1998 350.0 500.0 2,000.0 2,500.0 -- Long-Term Compensation -------------------------------------- Awards Payouts ------------------------- --------- Shares Restricted Underlying LTIP All Other Named Executive Officer Year Stock Awards Options Payouts(d) Compensation(e) - ----------------------------------------------------------------------------------------------- Dr. Josef Ackermann(f) 2000 -- -- $ -- $ -- Chairman and 1999 -- -- -- -- Chief Executive Officer Yves C. de Balmann(g) 2000 -- -- -- 10.2 Vice Chairman 1999 -- -- 22,542.7 9.6 1998 -- -- 2,391.7 1,077.5 Hermann-Josef Lamberti(h) 2000 -- -- -- -- Vice Chairman 1999 -- -- -- -- Troland S. Link(i) 2000 -- -- -- -- General Counsel 1999 -- -- -- -- John A. Ross(j) 2000 -- -- -- -- President Mayo A. Shattuck III(k) 2000 -- -- -- 10.2 Vice Chairman 1999 -- -- 6,965.9 9.6 1998 -- 60,000 -- 79.7 Mary Cirillo(l) 2000 -- -- -- 3.6 Executive Vice President 1999 -- -- 5,941.9 9.6 1998 -- -- -- 102.1 Rodney A. McLauchlan(m) 2000 -- -- -- 10.2 Executive Vice President 1999 -- -- 15,059.1 9.6 1998 -- -- -- --
(a) Includes discretionary and guaranteed cash. (b) 2000 and 1999 include the value of shares under Deutsche Bank's Share Scheme Plan. Under this Plan, shares are deferred and vest in equal installments for three years. For 2000 and 1999, Messrs. de Balmann and Shattuck were each awarded shares under the Share Scheme Plan valued at $2,145,000. (c) Other Annual Compensation reflects amounts as follows: de Balmann--$34,767 and $27,207, for 2000 and 1999, respectively, for ground transportation; and Shattuck--$29,859 and $25,697, for 2000 and 1999, respectively, for ground transportation. Other Annual Compensation also reflects the value of Deutsche Bank stock appreciation rights. For 2000 and 1999, Mr. de Balmann was awarded stock appreciation rights valued at $5,992,250 and $2,799,976, respectively. Mr. Shattuck was awarded stock appreciation rights valued at $3,666,000 and $2,799,976 for 2000 and 1999, respectively. Other Annual Compensation for Mr. McLauchlan for 2000 includes the payment made pursuant to the Non-Solicitation and Consulting Agreement described below. Other Annual Compensation for 1999 for Mr. McLauchlan represents a retention payment from the Corporation. Other Annual Compensation for 2000 for Ms. Cirillo includes the payment made pursuant to the Non-Solicitation and Consulting Agreement described below. (d) Includes LTIP payouts for all deferred compensation amounts, awarded in prior years, which vested in full on June 4, 1999, the change-of-control ("COC") date. Also, includes payment for unexercised options outstanding on the COC date at $93.00 per option less the exercise price. Total COC payouts (excluding pro rata bonus included in bonus column) were as follows: de Balmann--$22,542,695; Shattuck--$6,965,877; McLauchlan--$15,059,068; and Cirillo--$5,941,861. Messrs. de Balmann, Shattuck, and Ms. Cirillo received one-third of the payout in July 1999. The remaining two-thirds was deferred over the next two years pursuant to the Employment Agreements described below. (e) Includes company contributions to defined contribution plans. (f) Dr. Ackermann received no compensation for acting as Chairman and Chief Executive Officer of the Corporation in 2000 and for acting as President and Chief Executive Officer of the Corporation in 1999. Compensation is paid to Dr. Ackermann by Deutsche Bank for services performed by Dr. Ackermann for Deutsche Bank and its affiliates other than the Corporation and its subsidiaries. (g) Mr. de Balmann resigned as Vice Chairman effective March 12, 2001. (h) Mr. Lamberti received no compensation for acting as Vice Chairman of the Corporation subsequent to the Acquisition. Compensation is paid to Mr. Lamberti for services performed by Mr. Lamberti for Deutsche Bank and its affiliates other than the Corporation and its subsidiaries. (i) Mr. Link received no compensation for acting as General Counsel of the Corporation subsequent to the Acquisition. Compensation is paid to Mr. Link for services performed by Mr. Link for Deutsche Bank and its affiliates other than the Corporation and its subsidiaries. (j) Mr. Ross received no compensation for acting as President of the Corporation. Compensation is paid to Mr. Ross for services performed by Mr. Ross for Deutsche Bank and its affiliates other than the Corporation and its subsidiaries. (k) Mr. Shattuck resigned as Vice Chairman effective March 19, 2001. (l) Ms. Cirillo resigned as Executive Vice President effective March 1, 2000. (m) Mr. McLauchlan resigned as Executive Vice President effective December 31, 2000. Bankers Trust Corporation and its Subsidiaries 73 - -------------------------------------------------------------------------------- Employment Agreements In connection with the Acquisition of the Corporation by Deutsche Bank, the Corporation entered into agreements with Yves C. de Balmann, Mayo A. Shattuck III, Mary Cirillo and Rodney A. McLauchlan (the "Employment Agreements"). Each Employment Agreement was generally for a three-year term expiring on the third anniversary of the date of the Acquisition. Each Employment Agreement provided for an annual base salary (the "Base Salary") of at least $350,000 and an annual bonus (the "Annual Bonus") of at least $7.15 million (in the case of Messrs. de Balmann and Shattuck), $3.65 million (in the case of Ms. Cirillo) and $2.65 million (in the case of Mr. McLauchlan). A portion of each executive's Annual Bonus was payable in cash, with the balance payable in, or based on the value of, Deutsche Bank common stock (the "Equity Bonus Portion"). The Equity Bonus Portion of the Annual Bonus vests in three equal installments on the first, second and third anniversaries of the date of the Acquisition (in the case of awards made in respect of 1999), in two equal installments on each of the second and third anniversaries of the date of the Acquisition (in the case of awards made in respect of 2000) and in full on the third anniversary of the date of the Acquisition (in the case of awards made in respect of 2001). Certain of the Employment Agreements provided for the deferral of certain amounts otherwise due to the executives under incentive compensation plans of the Corporation. Each Employment Agreement also provided for a retention bonus (the "Retention Bonus"), 50% of the value of which was payable in cash and 50% of the value of which may be paid in, or based on the value of, Deutsche Bank common stock. The Retention Bonus is payable in two equal installments on each of the second and third anniversaries of the Acquisition date. The initial values of the Retention Bonuses were $8 million in the case of Ms. Cirillo, $15 million in the case of each of Messrs. de Balmann and Shattuck and $7.5 million, in the case of Mr. McLauchlan. Mr. McLauchlan subsequently entered into an agreement pursuant to which his Retention Bonus was paid to him in cash in 1999. During the employment period, each executive is eligible to participate in the employee benefit plans of the Corporation and its affiliates and generally receives service credit for all prior service with the Corporation and its affiliates. If, during the employment period, the employment of an executive is terminated by the Corporation without Cause (as such term is defined in the Employment Agreements) or such executive terminates his or her employment for Good Reason (as such term is defined in the Employment Agreements), such executive will be entitled to receive (i) any unpaid Base Salary and Annual Bonus for the remainder of the employment period, (ii) any unvested Equity Bonus Portion of the Annual Bonus will become vested and payable based on the prevailing value of Deutsche Bank common stock, and (iii) any unpaid Retention Bonus will become vested and payable. The termination benefits payable under the Employment Agreements generally supercede and replace any benefits due the executive under the Bankers Trust Change of Control Severance Plan I described below. If an amount payable to an executive under the Employment Agreement or otherwise would subject such executive to the excise tax under Section 4999 of the Code, the Corporation will make an additional payment to such executive such that after the payment of all income and excise taxes, the executive will be in the same after-tax position as if no excise tax under Section 4999 of the Code had been imposed. In February 2000, Mary Cirillo resigned, effective March 1, 2000. In connection with such resignation, Ms. Cirillo entered into a Non-Solicitation and Consulting Agreement with Deutsche Bank, the principal terms of which provided for a payment of $17 million (the total of the annual payments remaining due under the Employment Agreement) and the continued deferral of certain other amounts payable pursuant to her Employment Agreement described above. Deutsche Bank also agreed to continue certain health and welfare benefits for a period of time. Ms. Cirillo agreed to act as a consultant for a twelve-month period following the termination date. In November 2000, Rodney A. McLauchlan resigned, effective December 31, 2000. In connection with such resignation, Mr. McLauchlan entered into an arrangement with Deutsche Bank, the principal terms of which provided for a payment of $5.65 million. Deutsche Bank also agreed to continue certain health and welfare benefits for a period of time. In March 2001, Yves C. de Balmann resigned his position with the Corporation effective March 12, 2001. In connection with such resignation, Mr. de Balmann entered into an agreement with Deutsche Bank Alex. Brown, Inc., the principal terms of which provide for a payment of $15 million, and the deferral of certain other amounts payable under his Employment Agreement. Mr. de Balmann also agreed to act as an advisor to Dr. Josef Ackermann. Change of Control Agreements Pursuant to the Corporation's Change of Control Severance Plan I, upon termination of employment by the Corporation without "Cause" or by the executive officer for "Good Reason" (as such terms are defined in the Change of Control Severance Plan) during the two-year period immediately following a "Change of Control" of the Corporation (as defined below), each of the named executive officers would be entitled to receive a severance benefit equal to three times the sum of his base salary and the greater of average 74 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- annual bonus paid during the three-year period immediately preceding the Change of Control or annual bonus paid in the year immediately preceding the Change of Control. Such severance benefits may not exceed $7.5 million per employee. Under the Corporation's stock option and stock award plans, upon a Change of Control, all Stock Options become exercisable and all deferred stock, restricted stock and other stock-based awards become vested and immediately payable. Similarly, upon a Change of Control, the POP I and POP II units become vested and immediately payable. A Change of Control is defined generally as (i) the acquisition of 20% or more of the outstanding voting securities of the Corporation by an individual, entity, or group, other than from the Corporation; (ii) a change in the majority of the board of directors of the Corporation that is not approved by at least a majority of the current directors and those directors similarly approved ("incumbent directors"); (iii) the consummation of a merger, consolidation, or similar transaction involving the Corporation, unless immediately following such transaction: (a) more than 60% of the voting power of the resulting corporation's voting securities are represented by the Corporation's voting securities that were outstanding immediately prior to the transaction, (b) no person becomes the beneficial owner of 20% or more of the outstanding voting securities of the resulting corporation and (c) at least a majority of the board of directors of the resulting corporation were incumbent directors of the Corporation at the time of the approval of the transaction by the Corporation's board of directors; or (iv) the sale or disposition of all or substantially all of the assets of the Corporation or a liquidation of the Corporation. In the event any of the named executive officers is subject to the 20% excise tax under Section 4999 of the Code, such individual would be reimbursed in an amount sufficient to offset such excise tax unless such reimbursement could be avoided by reducing the severance payments received by the named executive officer by an amount that is less than 10% of his severance payments. The Change of Control Severance Policy also provides that, contingent on a Change of Control, the named executive officers would be entitled to certain welfare benefits for up to three years following termination. The foregoing benefits were generally replaced by, and certain amounts payable thereunder were deferred pursuant to, the Employment Agreements referred to above. Pension Plan In 2000, the Corporation's trusteed noncontributory, domestic defined benefit pension plan merged with Deutsche Bank Americas Holding Corp's pension plan. The value of a participant's accrued benefit, which is expressed using a cash balance account approach (a type of defined benefit plan), did not change as a result of this transaction. Participant cash balance accounts increase through annual Pay Credits (a percentage of base pay, up to the IRS limit, based on age) and monthly Interest Credits (based on the one (1) year Treasury bill rate for the November of the prior year plus 1 percent). Participants vest 25 percent after three (3) years, 50 percent after four (4) years and 100 percent after five (5) years of service. At December 31, 2000, cash balances for Messrs. de Balmann, Shattuck, McLauchlan and Ms. Cirillo were $277,679, $23,852, $357,334 and $31,382, respectively. Bankers Trust Corporation and its Subsidiaries 75 - -------------------------------------------------------------------------------- Form 10-K Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on April 2, 2001. Bankers Trust Corporation By /S/ JAMES T. BYRNE, JR. ---------------------------------------------------------- (James T. Byrne, Jr., Senior Vice President and Secretary) - -------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on April 2, 2001. DR. JOSEF ACKERMANN* Chairman of the Board, - ----------------------------------- Chief Executive Officer (Dr. Josef Ackermann) and Director (Principal Executive Officer) DOUGLAS R. BARNARD* Chief Financial Officer - ----------------------------------- (Principal Financial Officer) (Douglas R. Barnard) RONALD HASSEN* Senior Vice President and - ----------------------------------- Controller (Principal (Ronald Hassen) Accounting Officer) ROBERT B. ALLARDICE III* Director - ----------------------------------- (Robert B. Allardice III) HANS H. ANGERMUELLER* Director - ----------------------------------- (Hans H. Angermueller) GEORGE B. BEITZEL* Director - ----------------------------------- (George B. Beitzel) JESSICA P. EINHORN* Director - ----------------------------------- (Jessica P. Einhorn) WILLIAM R. HOWELL* Director - ----------------------------------- (William R. Howell) HERMANN-JOSEF LAMBERTI* Director - ----------------------------------- (Hermann-Josef Lamberti) JOHN A. ROSS* President and Director - ----------------------------------- (John A. Ross) *By /S/ JAMES T. BYRNE, JR. --------------------------------- (James T. Byrne, Jr., Attorney-in-Fact) 76 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 EXHIBITS TO FORM 10-K Filed Under THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 BANKERS TRUST CORPORATION Bankers Trust Corporation and its Subsidiaries 77 - -------------------------------------------------------------------------------- BANKERS TRUST CORPORATION EXHIBIT INDEX TO FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 3. Articles of Incorporation and By-laws, as amended (i) Restated Certificate of Incorporation of the Registrant filed with the State of New York on June 4, 1999 (18) (ii) By-laws as in effect June 22, 1999 (18) 4. Instruments Defining the Rights of Security Holders, Including Indentures (ii) Long-Term Debt Indentures (1) 10. Material Contracts (ii) (D) Leases for Principal Premises Described on Page 68 Lease Agreement relating to the seven stories of a 37-story building located at 14-16 Wall Street (2) Lease Agreement relating to the eight-story building located in Jersey City, New Jersey (3) Lease Agreement relating to the eight-story building located in London, England (4) Lease Agreement relating to the three-story building in Nashville, Tennessee (5) Lease abstract relating to Four World Trade Center, New York (16) (iii)(A) Management Contracts and Compensation Plans (1) Employment Contract for Frank N. Newman (11) (2) Severance agreement with B.J. Kingdon (12) (3) Employment agreements in connection with the Agreement and Plan of Merger between Bankers Trust and Deutsche Bank (a) Frank N. Newman (16) (b) Mary Cirillo (16) (c) Mayo A. Shattuck III (16) (d) Yves C. de Balmann (16) (4) 1994 Stock Option and Stock Award Plan (7) (5) 1991 Stock Option and Stock Award Plan (8) (6) 1985 Stock Option and Stock Award Plan (9) January, 1989 amendments thereto (6) (7) Additional Capital Accumulation Plan (10) (8) The Supplemental Executive Retirement Plan (4) (9) Deferred Compensation Plan for Directors (1) (10) January, 1989 amendments to the Deferred Compensation Plan for Directors and The Supplemental Executive Retirement Plan (7) (11) Partnership for One-Hundred Plan II (13) (12) Bankers Trust New York Corporation (16) Change in Control Severance Plan I (13) Split Dollar Insurance Agreement (14) (14) Alex. Brown Incorporated 1996 Equity Incentive Plan (14) (15) Stock Option Agreement, dated as of November 30, 1998 between Bankers Trust Corporation and Deutsche Bank A.G. (15) (16) Severance Agreement with Frank N. Newman (17) (17) Severance Agreement with Richard H. Daniel (17) (18) Severance Agreement with Yves C. de Balmann * (19) Severance Agreement with Rodney A. McLauchlan *
78 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- 12. Statements Re Computation of Ratios Computation of Consolidated Ratios of Earnings to Fixed Charges * 21. Subsidiaries of the Registrant * 23. Consents of Experts * 24. Power of Attorney * 99. Additional Exhibits Unaudited Pro Forma Condensed Financial Statements for the year ended December 31, 2000 *
* Filed herewith. (NOTE: FOOTNOTE REFERENCES FOR THIS INDEX APPEAR ON THE NEXT PAGE.) Bankers Trust Corporation and its Subsidiaries 79 - -------------------------------------------------------------------------------- BANKERS TRUST CORPORATION EXHIBIT INDEX TO FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 FOOTNOTE REFERENCES (1) This document is incorporated by reference from Bankers Trust Corporation's Form 8-K dated November 10, 1995, file number 1-5920. (2) This document is incorporated by reference from Bankers Trust Corporation's Form 10-K for the year ended December 31, 1986, file number 1-5920. (3) This document is incorporated by reference from Bankers Trust Corporation's Form 10-K for the year ended December 31, 1983, file number 1-5920. (4) This document is incorporated by reference from Bankers Trust Corporation's Form 10-K for the year ended December 31, 1987, file number 1-5920. (5) This document is incorporated by reference from Bankers Trust Corporation's Form 10-K for the year ended December 31, 1992, file number 1-5920. (6) This document is incorporated by reference from Bankers Trust Corporation's Form 10-K for the year ended December 31, 1993, file number 1-5920. (7) This document is incorporated by reference from Bankers Trust Corporation's Registration Statement on Form S-8 (No. 33-54971) as filed on August 9, 1994. (8) This document is incorporated by reference from Bankers Trust Corporation's Registration Statement on Form S-8 (No. 33-41014) as filed on June 10, 1991. (9) This document is incorporated by reference from Bankers Trust Corporation's Proxy Statement dated as of March 21, 1988, file number 1-5920. (10) This document is incorporated by reference from Bankers Trust Corporation's Form 10-K for the year ended December 31, 1989, file number 1-5920. (11) This document is incorporated by reference from Bankers Trust Corporation's Form 10-K for the year ended December 31, 1995, file number 1-5920. (12) This document is incorporated by reference from Bankers Trust Corporation's Form 10-Q dated May 15, 1997, file number 1-5920. (13) This document is incorporated by reference from Bankers Trust Corporation's Form 10-Q dated August 14, 1997, file number 1-5920. (14) This document is incorporated by reference from Bankers Trust Corporation's Form 10-Q dated November 14, 1997, file number 1-5920. (15) This document is incorporated by reference from Bankers Trust Corporation's Form 8-K dated November 30, 1998, file number 1-5920. (16) This document is incorporated by reference from Bankers Trust Corporation's Form 10-K for the year ended December 31, 1998, file number 1-5920. (17) This document is incorporated by reference from Bankers Trust Corporation's Form 10-Q dated August 16, 1999, file number 1-5920. (18) This document is incorporated by reference from Bankers Trust Corporation's Form 10-K for the year ended December 31, 1999, file number 1-5920. 80 Bankers Trust Corporation and its Subsidiaries EX-10.3(A)(18) 2 0002.txt SEVERANCE AGREEMENT - YVES C. DE BALMANN PERSONAL AND CONFIDENTIAL As of March 12, 2001 Yves C. de Balmann c/o Deutsche Banc Alex. Brown Inc. 130 Liberty Street New York, NY 10005 Re: Your Employment with the Deutsche Bank Group Dear Yves: You have asserted that Good Reason exists under the retention letter between you and Bankers Trust Corporation ("BT"), a copy of which is attached as Exhibit A (the "Retention Letter"). To avoid any dispute and to define the terms of your employment, you and Deutsche Banc Alex. Brown Inc. ("DBAB") have reached the following agreement concerning your continued employment with DBAB. The terms used in this letter agreement (the "Agreement") will be defined the same as in the Retention Letter unless otherwise noted. 1. Retention Letter As of the effective date of this Agreement which is the date on which you and DBAB have executed this Agreement (the "Effective Date"), the amounts and interests provided to you under the Retention Letter will either be payable in cash or vest. Specifically: (a) Retention Bonus - you will vest in the Retention Bonus; i.e., your right to receive $7,500,000 in cash and 136,963 shares of Deutsche Bank is irrevocable. You have elected to defer the cash portion of the Retention Bonus into an agreed upon deferred compensation scheme (the "Deferral Plan"). The cash portion will be credited to the Deferral Plan as soon as administratively practicable, but not later than 90 days after the Effective Date. (b) Pay Guarantee - you will vest in the unpaid portion of your Pay Guarantee; i.e., (i) you will continue to receive your annual base salary at the annualized rate of $350,000 and (ii) you have elected to defer the Annual Bonus for 2001 of $7,150,000 into the Deferral Plan. The Annual Bonus will be credited to the Deferral Plan as soon as administratively practicable, but not later than 90 days after the Effective Date. If your employment ends before December 31, 2001, you will receive the balance of your 2001 salary in cash. (c) Deferral - you deferred certain amounts due to you as a result of the Merger pursuant to BT stock option plans and other programs (the "BT Deferral"). You Mr. Yves C. de Balmann As of March 12, 2001 Page 2 currently are entitled to $14,941,803.00 under the BT Deferral. This amount will be paid to you in cash. (d) Titles - your title will change to Senior Advisor. By signing this Agreement, you resign all of your other positions with DBAB, BT and any affiliate of DBAB or BT (collectively "Deutsche Bank"). (e) Indemnification - You will also continue to be indemnified with respect to your state tax filing position on the same basis as immediately prior to the Merger. You will be paid the excise tax gross-up payment described in Section 4 of the Bankers Trust New York Corporation Change in Control Severance Plan I, to the extent you become subject to that tax. (f) Continuing Effect of Retention Letter - the terms of this Agreement fulfill and replace all of DBAB and BT's obligations under the Retention Letter. 2. Ongoing Employment (a) Employee at Will - as of the Effective Date, you will become an employee at will of DBAB subject to all applicable DBAB policies and procedures. You will continue to receive a base salary at an annualized rate of $350,000. In addition, you will be considered for an annual discretionary incentive compensation payment. For 2001, in addition to the Annual Bonus under the Retention Letter, DBAB will pay you an incentive compensation payment of no less than $1,787,500 (the "Additional Bonus"). If DBAB terminates your employment prior to December 31, 2001 other than for Cause (as defined in Exhibit B) or you resign, you will receive a pro rata portion of the Additional Bonus in cash, determined from the Effective Date. Thus, if you resign or DB terminates you without Cause within one month of the Effective Date, you will receive an amount equal to the Additional Bonus divided by a fraction, the numerator of which is the amount of days you were employed by DBAB after the Effective Date and the denominator is the number of days left in 2001 after the Effective Date. The composition of any incentive compensation payment (including the Additional Bonus and any equity or performance based portion) will be at the discretion of the Vorstand member to whom you report, provided that the portion of cash versus noncash payments shall be no less favorable than that provided to senior executives of DBAB. Nothing in this section will limit your rights under Section 1 of this Agreement. As a Senior Advisor, you will not be expected to work full time. Rather, it is estimated that such services will not require more than 25 percent of any working week. You will be permitted to engage in other work during the term of this Agreement, to the extent not inconsistent with your obligations hereunder and pursuant to Compliance Department Guidelines. (b) Benefits - you will continue to receive and participate in the benefits in which you are currently enrolled. Upon your termination, you will receive retiree medical 2 Mr. Yves C. de Balmann As of March 12, 2001 Page 3 coverage at the level that has been offered by BT to your BT peer executives. Attached as Exhibit C is a description of the retiree medical benefit. You are fully vested in your accrued Pension Plan benefit and in the value of your Matched Savings Plan (401k) account. (c) Office/Secretary - from the Effective Date through the later of December 31, 2001, or the date on which you terminate employment with DBAB, Deutsche Bank will continue to provide you with (i) a car and driver for your personal use, (ii) an office that is reasonably acceptable to you and Deutsche Bank and (iii) a secretary, who may be your current secretary or another secretary of your choosing. (d) Notice - If you terminate your employment with Deutsche Bank for any reason, you will provide Deutsche Bank with a minimum of 60 days prior written notice and if Deutsche Bank terminates your employment for any reason, Deutsche Bank will provide you with a minimum of 30 days prior written notice (the "Notice Period"). During the Notice Period, (i) Deutsche Bank will continue to pay you your base salary and vest Equity Awards in conformity with this agreement and (ii) you will continue to devote the same level of business time as required by this Agreement to any duties directed by Deutsche Bank. Deutsche Bank may chose to place you on paid leave during the Notice Period or terminate your employment. You may not perform any services for any other employer engaged in a business competitive to Deutsche Bank during the Notice Period unless Deutsche Bank agrees in writing or terminates your employment. (e) Non-Solicitation - You agree that during your employment and for 90 days thereafter, you will not, directly or indirectly, personally solicit, induce, cause or assist any third party to solicit any employees of DBAB to work for you or any competitor, as defined in the DB Share Scheme. (f) Inventions - Any Inventions (meaning discoveries, concepts and ideas, whether or not patentable, including, but not limited to, processes, methods, formulas, and techniques as well as improvements or know-how related to them) will be Deutsche Bank's property (or its designees). At Deutsche Bank's request (and at its expense), without additional compensation, you will, as needed, (i) make application for United States letters patent and foreign letters patent on such Inventions, (ii) assign to Deutsche Bank all your right, title, and interest in such Inventions, (iii) execute any and all instruments, (iv) do any and all acts necessary or desirable in connection with any such application for letters patent or in order to establish and perfect in Deutsche Bank the entire right, title, and interest in such Inventions, patent applications, or patents, and (v) execute any instrument necessary or desirable in connection with any continuations, renewals or reissues thereof in the conduct of any related proceedings or litigation. 3 Mr. Yves C. de Balmann As of March 12, 2001 Page 4 3. DB Shares/SARs/Co-Investment/Global Equity Plan (a) DB Shares/SARs - you will vest in all of your DB Share Awards and your SAR Awards (which total 178,207 DB Shares - 136,963 under your Retention Bonus and 41,244 in other awards). Your DB Share Award will be settled under the terms of the applicable DB Share Scheme in cash (which totals 17,464,286 Euro using 98 Euro/DB Share). You have elected to defer this settlement amount into the Deferral Plan, which Deutsche Bank will credit to the Deferral Plan as soon as administratively practicable, but not later than 90 days after the Effective Date. The SARs (which total 308,077 SARs) will remain in effect and be subject to the SAR Scheme as if you remained employed through their entire term; i.e., they are not subject to revocation or defeasment. A description of your DB Shares and SARs is attached as Exhibit C. (b) Global Equity Plan - you are entitled to convert your 31,000 convertibles from the Global Equity Plan (GEP) into Deutsche Bank AG shares in accordance with the GEP plan provisions. All awards under the GEP are fully vested and nonforfeitable. (c) Co-Investment -You will vest in your rights under the 2000 GCI Co-Investment Plan and all prior Co-Investment Plans. 4. Release (a) By You - In consideration of the payments and benefits described above and for other good and valuable consideration, you hereby release and forever discharge, and by this instrument release and forever discharge, DBAB, all of Deutsche Bank, including Deutsche Bank AG and its subsidiaries, affiliates, officers, employees, directors (including Vorstand members) and agents, from all obligations, promises, covenants, agreements, contracts, endorsements, bonds, controversies, suits, actions, causes of action, judgments, damages, expenses, claims or demands, in law or in equity, which you ever had, now have, or which may arise in the future, regarding any matter arising on or before the date of your execution of this Agreement, including but not limited to all claims (whether known or unknown) regarding your employment at or termination of employment from DBAB or any of Deutsche Bank, including BT and its subsidiaries, any claim for separation or severance benefits or allowances, any claim for bonus, incentive or other compensation, any contract (express or implied), any claim under your Retention Letter, any claim for equitable relief or recovery of punitive, compensatory, or other damages or monies, attorneys' fees, any tort, and all claims for alleged discrimination based upon age, race, color, sex, sexual orientation, marital status, religion, national origin, handicap, disability, or retaliation, including any claim, asserted or unasserted, which could arise under Title VII of the Civil Rights Act of 1964, the Equal Pay Act of 1963, the Age Discrimination in Employment Act of 1967 ("ADEA"), the Older Workers Benefit Protection Act of 1990, the Americans With 4 Mr. Yves C. de Balmann As of March 12, 2001 Page 5 Disabilities Act of 1990, the Civil Rights Act of 1866, 42 U.S.C.ss.1981, the Employee Retirement Income Security Act of 1974, the Family and Medical Leave Act of 1993, the Civil Rights Act of 1991, the Worker Adjustment and Retraining Notification Act of 1988, the New York State Human Rights Law, the New York City Human Rights Law, and any other federal, state or local laws, rules or regulations, whether equal employment opportunity laws, rules or regulations or otherwise, or any right under any DB pension, welfare, or stock plans, except as provided for in this Agreement, provided however, that the foregoing is not a waiver of any obligations under this Agreement. This Agreement may not be cited as, and does not constitute any admission by any of Deutsche Bank of, any violation of any such law or legal obligation with respect to any aspect of your employment or termination of it. You acknowledge that the agreements of Deutsche Bank under this Agreement are being provided in consideration of the foregoing release and that you may not otherwise be entitled to certain of the benefits described in this Agreement. You agree not to make any claim or take any position inconsistent with the preceding sentence. (b) By Deutsche Bank - In consideration of the payments and benefits described above and for other good and valuable consideration, all of Deutsche Bank hereby releases and forever discharges, and by this instrument releases and forever discharges you from all obligations, promises, covenants, agreements, contracts, endorsements, bonds, controversies, suits, actions, causes of action, judgments, damages, expenses, claims or demands, in law or in equity, which Deutsche Bank ever had, now have, or which may arise in the future, regarding any matter arising on or before the date of your execution of this Agreement, including but not limited to all claims (whether known or unknown) regarding your employment by DBAB or any of Deutsche Bank, including BT and its subsidiaries, any contract (express or implied), any claim under your Retention Letter, any claim for equitable relief or recovery of punitive, compensatory, or other damages or monies, attorneys' fees, any tort, and any other federal, state or local laws, rules or regulations, whether equal employment opportunity laws, rules or regulations or otherwise, or any right under any DB pension, welfare, or stock plans, except as provided for in this Agreement, provided however, that the foregoing is not a waiver of any obligations under this Agreement or any act that is determined to be a willful violation of law. This Agreement may not be cited as, and does not constitute any admission by Deutsche Bank of, any violation of any such law or legal obligation with respect to any aspect of your employment or termination of it. 5. Other Obligations/Representations and Warranties (a) No Lawsuits - you represent and agree that you have not filed any lawsuits against any of Deutsche Bank, or filed or caused to be filed any charges or complaints against or about any of Deutsche Bank with any municipal, state or federal agency charged with the enforcement of any law. You also agree, to the extent consistent with applicable law, not to initiate any legal action, complaint, statement of claim or demand 5 Mr. Yves C. de Balmann As of March 12, 2001 Page 6 for arbitration against Deutsche Bank in any forum whatsoever, in connection with the claims released by you (except with respect to any claim under the ADEA, which you expressly agree you do not have at the time you sign this document). In addition, to the extent any such action may be brought, you expressly waive any claim to any form of monetary or other damages, or any other form of recovery or relief in connection with any such action, or in connection with any action brought by a third party. (b) DBAB's Right to Recover and Sue - You acknowledge and agree that if you break any of your promises in this Agreement, for example, by filing or prosecuting a lawsuit based on claims that you have released herein, such conduct would cause great damage and injury to any of Deutsche Bank and that such promises provide a material element of DBAB's consideration for and inducement to enter into this Agreement. Accordingly, except for a claim made under the ADEA (which claim you represent you do not have) you (a) must, if DBAB so demands, immediately repay to DBAB the value of all benefits previously received by you under this Agreement as liquidated damages; and (b) will not be entitled to any benefits not yet received under this Agreement, it being agreed that DBAB's monetary damages in the event of such breach would be difficult to calculate, and that this amount represents a fair approximation of such damages. You further agree that DBAB may, in addition to these liquidated damages and in addition to pursuing any other remedies that it may have in law or in equity, obtain an injunction against you from any court having jurisdiction over this matter, restraining any further violations of this Agreement. You also agree to pay all costs and expenses of any of Deutsche Bank in defending against such claims or actions brought by you or on your behalf, including reasonable attorneys' fees. (c) No Other Amounts Due - You represent, warrant and acknowledge that no part of Deutsche Bank owes you wages, commissions, bonuses, incentive pay, sick pay, personal leave pay, severance pay, separation allowance, vacation pay or other compensation, benefits or payments or form of remuneration of any kind or nature, other than that specifically provided for in this Agreement. (d) Non-Disparagement - You shall not intentionally make any public statements, encourage others to make statements or release information intended to disparage or defame the Company, any of its affiliates or any of their respective directors or officers. Deutsche Bank shall cause its senior executives and the senior executives and directors of Deutsche Bank AG and DBAB not to intentionally make, or cause or encourage others to make, any public statements or release information intended to disparage or defame your reputation, and Deutsche Bank shall not take any such action on its own behalf. Notwithstanding the foregoing, nothing in this Section 5(d) shall prohibit any person from making truthful statements when required by order of a court or other body having jurisdiction or as required by law. In the event Deutsche Bank or its affiliates breach this Section 5(d), they shall reimburse you for any fees and expenses incurred in retaining a public relations firm on your behalf to respond. 6 Mr. Yves C. de Balmann As of March 12, 2001 Page 7 (e) Confidentiality - you agree not to disclose the terms, contents or execution of this Agreement, the claims that have been or could have been raised against any of Deutsche Bank, or the facts and circumstances underlying this Agreement, except in the following circumstances: i. You may disclose the terms of this Agreement to your spouse, so long as such spouse agrees to be bound by the confidential nature of this Agreement; ii. You may disclose the terms of this Agreement to (x) your tax advisors so long as such tax advisors agree in writing to be bound by the confidential nature of this Agreement (y) taxing authorities if requested by such authorities and so long as they are advised in writing of the confidential nature of this Agreement or (z) your legal counsel; iii. Pursuant to the order of a court or governmental agency of competent jurisdiction, or for purposes of securing enforcement of the terms and conditions of this Agreement; and. iv. Any non-disclosure provision in this Agreement does not prohibit or restrict you (or your attorney) from responding to any inquiry about this Agreement or its underlying facts and circumstances by the Securities and Exchange Commission, the National Association of Securities Dealers, Inc. or any other self regulatory organizations. 6. Other Provisions (a) Payments - All payments immediately payable under this Agreement are due 7 days after both parties have executed this Agreement and will be subject to all applicable withholdings. Interest will accrue at the 3 month treasury bill rate on any amounts you elect to defer from the effective date of this Agreement until the time the Deferral Plan is effective. (b) Service/Notice - upon service on you, or anyone acting on your behalf, of any subpoena, order, directive or other legal process requiring you to engage in conduct encompassed within this Agreement, you or your attorney shall immediately notify the undersigned representative of DBAB of such service and of the content of any testimony or information to be provided pursuant to such subpoena, order, directive or other legal process and within two (2) business days send to the undersigned representative of DBAB via overnight delivery (at DBAB's expense) a copy of said documents served upon you. 7 Mr. Yves C. de Balmann As of March 12, 2001 Page 8 (c) Cooperation - You agree that you will assist and cooperate with DBAB or any entity it designates in writing, in connection with the defense or prosecution of any claim that may be made against or by any of Deutsche Bank, or in connection with any ongoing or future investigation or dispute or claim of any kind involving any of Deutsche Bank, including any proceeding (civil or criminal) before any arbitral, administrative, judicial, legislative, or other body or agency, including testifying in any proceeding to the extent such claims, investigations or proceedings relate to services performed or required to be performed by you, pertinent knowledge possessed by you, or any act or omission by you. You further agree to perform all acts and execute and deliver any documents that may be reasonably necessary to carry out the provisions of this paragraph. (d) Entire Agreement - This Agreement constitutes the entire agreement between DBAB and you, and supersedes and cancels all prior written and oral agreements, if any, between any of Deutsche Bank and you. You affirm that, in entering into this Agreement, you are not relying upon any oral or written promise or statement made by anyone at any time on behalf of any of Deutsche Bank. (e) Successors - this Agreement is binding upon the parties and their successors, assigns, heirs, executors, administrators and legal representatives. (f) Severability - If any of the provisions, terms or clauses of this Agreement are declared illegal, unenforceable or ineffective in a legal forum, those provisions, terms and clauses shall be deemed severable, such that all other provisions, terms and clauses of this Agreement shall remain valid and binding upon both parties. However, the illegality or unenforceability of any such provision shall have no effect upon, and shall not impair the enforceability of the release language set forth in paragraph 4 provided that, upon a finding by a court of competent jurisdiction that the release language found in paragraph 4 is unenforceable, Deutsche Bank shall rewrite paragraph 4 to cure the defect and you shall reexecute the release upon request and you shall not be entitled to any additional monies, benefits and/or compensation therefor. (g) Waiver - without detracting in any respect from any other provision of this Agreement: i. You, in consideration of the benefits provided to you in this Agreement, agree and acknowledge that this Agreement constitutes a knowing and voluntary waiver of all rights or claims you have or may have Deutsche Bank as set forth herein, including, but not limited to, all rights or claims arising under the Age Discrimination in Employment Act of 1967, as amended ("ADEA"), including, but not limited to, all claims of age discrimination in employment and all claims of retaliation in violation of the ADEA; and you have no physical or mental impairment of any kind 8 Mr. Yves C. de Balmann As of March 12, 2001 Page 9 that has interfered with your ability to read and understand the meaning of this Agreement or its terms, and that you are not acting under the influence of any medication or mind-altering chemical of any type in entering into this Agreement. ii. You understand that, by entering into this Agreement, you do not waive rights or claims that may arise after the date of your execution of this Agreement, including without limitation any rights or claims that you may have to secure enforcement of the terms and conditions of this Agreement. iii. You agree and acknowledge that the consideration provided to you under this Agreement is in addition to anything of value to which you are already entitled. iv. DBAB has advised you to consult with an attorney or any personal advisor of your choice prior to executing this Agreement. Upon demand, DBAB will reimburse you for the actual and reasonable cost of the legal and tax advice you incur in negotiating this Agreement. v. You acknowledge that you were informed that you had at least twenty-one (21) days in which to review and consider this Agreement, and to consult with an attorney or other personal advisor regarding the terms and effect of this Agreement. vi. You may revoke this Agreement within seven (7) days from the date you sign this Agreement, in which case this Agreement shall be null and void and of no force or effect on either DBAB or you. Any revocation must be in writing and received by DBAB by 5:00 p.m. on or before the seventh day after you execute this Agreement. Your must send any revocation: Robert J. Dibble, Managing Director Human Resources Department Deutsche Banc Alex. Brown Inc. 130 Liberty Street New York, NY 10005 (h) Modification - This Agreement may not be changed or altered, except by writing signed by DBAB and you. This Agreement is entered into in the State of New York, and the laws of the State of New York will apply to any dispute concerning it, excluding the conflict-of-law principles thereof. (i) Governing Law\Venue\Jury Waiver - This Agreement shall be construed, enforced and interpreted in accordance with and governed by the laws of the State of New York. DBAB and you irrevocably and unconditionally submit to the exclusive jurisdiction of 9 Mr. Yves C. de Balmann As of March 12, 2001 Page 10 the United States District Court for the Southern District of New York located in the borough of Manhattan in the City of New York or the Supreme Court of the State of New York County for the purposes of any suit, action or other proceeding arising out of or relating to this Agreement and each party agrees that any such suit, action or other proceeding shall be heard without a jury and hereby waives any right to a trial by jury in connection therewith. (j) Construction - The parties hereto acknowledge and agree that each party has reviewed and negotiated the terms and provisions of this Agreement and has had the opportunity to contribute to its revision. Accordingly, the rule of construction to the effect that ambiguities are resolved against the drafting party shall not be employed in the interpretation of this Agreement. Rather, the terms of this Agreement shall be construed fairly as to both parties hereto and not in favor or against either party. (k) Counterparts - This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which counterpart, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute one and the same Agreement. (l) Notices - All notices, requests, demands or other communications under this Agreement shall be in writing and shall be deemed to have been duly given when delivered in person or when received by facsimile or overnight express to the party to whom such notice is being given as follows: As to you: Yves de Balmann 10 Gracie Square, PHS New York, NY 10028 As to Deutsche Bank: Robert J. Dibble Deutsche Banc Alex. Brown Inc. 130 Liberty Street New York, NY 10005 Either party may change his or its address or the name of the person to whose attention the notice or other communication shall be directed from time to time by serving notice thereof upon the other party as provided herein. (m) Valid Agreement - DBAB represents and warrants to you that the execution, delivery and performance of this Agreement and the consummation of the transactions contemplate hereby have been duly and validly authorized and that all corporate action 10 Mr. Yves C. de Balmann As of March 12, 2001 Page 11 required to be taken by DBAB for the execution, delivery and performance of this Agreement has been duly and effectively taken. DBAB acknowledges that you have relied upon such representations and warranties in entering into this Agreement. (n) Default - No party will be in default of this agreement unless and until the party asserting default notifies the other of a default and the notified party does not remedy the default within 10 days of receipt of the notice. YOU EXPRESSLY ACKNOWLEDGE, REPRESENT, AND WARRANT THAT YOU HAVE READ THIS AGREEMENT CAREFULLY; THAT YOU FULLY UNDERSTAND THE TERMS, CONDITIONS, AND SIGNIFICANCE OF THIS AGREEMENT; THAT DBAB HAS ADVISED YOU TO CONSULT WITH AN ATTORNEY CONCERNING THIS AGREEMENT; THAT YOU HAVE HAD AT LEAST 21 DAYS TO REVIEW THIS AGREEMENT WITH AN ATTORNEY; THAT YOU UNDERSTAND THAT THIS AGREEMENT HAS BINDING LEGAL EFFECT; AND THAT YOU HAVE EXECUTED THIS AGREEMENT FREELY, KNOWINGLY AND VOLUNTARILY. Date: _____________________ _____________________________________ Yves de Balmann On this ____ day of ________ 2001, before me personally came Yves de Balmann, to me known to be the individual described in the foregoing instrument, who executed the foregoing instrument in my presence, and who duly acknowledged to me that he executed the same. ___________________________________________ Notary Public Deutsche Banc Alex. Brown Inc. Date: __________________ By: ___________________________________________ Name: Title: 11 Mr. Yves C. de Balmann As of March 12, 2001 Page 12 Date: __________________ By: _______________________________________ Name: Title: 12 Mr. Yves C. de Balmann As of March 12, 2001 Page 13 EXHIBIT B "Cause" means: (i) any act, or a series of acts or omissions, that constitute a material breach by you of the terms of this letter agreement, the Deutsche Bank Code of Professional Conduct or Deutsche Bank's published personnel or compliance policies applicable to you; (ii) your willful violation of specific, lawful written directions from Deutsche Bank or its successor, (iii) your intentional, willful failure to perform a substantial part of your duties or (iv) your conviction of a crime that causes substantial damage to any of Deutsche Bank. You will receive written notice of an event that we consider to be Cause and you will have a reasonable opportunity to cure it (if curable). 13 EX-10.3(A)(19) 3 0003.txt SEVERANCE AGREEMENT - MR. RODNEY A. MCLAUCHLAN January 8, 2001 Mr. Rodney A. McLauchlan 831 Ponte Vedra Boulevard Ponte Vedra Beach, Florida 32082 Dear Rodney: The following letter details your final settlement regarding the termination of your employment contract with Deutsche Bank Securities dated July 23, 1999. o Your contract is terminated effective December 31, 2000. o You will receive a payment in the amount of $2,650,000 (less all applicable statutory withholdings) on or about January 5, 2001. In addition, in accordance with the letter agreement dated January 5, 2001 you will receive a payment in the amount of $3,000,000 (less all applicable statutory withholdings) on or about January 5, 2001. o You will also be paid for 10 days of unused accrued vacation days for the year 2000, at this time. o You are vested in the 1999 Co-Investment Plan. You are entitled to participate in the 2000 Co-Investment Plan and as per your instructions a pre-tax payment of $100,000 will be deducted from your 2000 bonus payment. o Your benefits will be continued in accordance with the Severance Benefit Information Document that is attached until December 31, 2003. o As per your contract, in the event that the payment outlined above may be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code, you shall be entitled to receive an additional cash payment (a "Gross-Up Payment") in an amount sufficient itself net of Federal, State, and Local taxes on such Gross-Up Payment to cover any Section 4999 excise taxes. o The firm agrees to pay for any tax and audit related expenses pertaining to years 1997-2001. o The firm agrees to pay for shipment expenses of office and apartment goods from New York to your residence in Florida in accordance with our current relocation policies. o Deutsche Bank agrees to reimburse you for any business related expenses incurred on the firm's behalf through December 31, 2000. o The firm also agrees to assist in any reasonable way the facilitation of the transfer of your securities licenses. o As per your contract you will not directly or indirectly solicit or induce or cause any third party to solicit or induce any Bankers Trust (or its successors') employees to work for you or any competitor of the firm, through June 30, 2001. However, it is understood that if any firm employee contacts you on his or her own initiative, you may thereafter discuss employment opportunities with such employee, provided that in such situation you agree to notify the Chief Legal or Human Resources Officer of the firm before any offer of employment is extended to any such individual. We wish you much success, Rodney, in your future endeavors. Please feel free to contact me at any time if you have any questions or require any further assistance. Regards, Linda Landsman Managing Director Human Resources January 8, 2001 Mr. Rodney A. McLauchlan 831 Ponte Vedra Boulevard Ponte Vedra Beach, Florida 32082 Dear Rodney: This Agreement dated January 5, 2001 between Rodney McLauchlan and Deutsche Bank Securities Inc. (the "Bank") shall be in effect from January 1, 2001 through December 31, 2001. The terms and conditions are as follows: i) During the term of this Agreement, Mr. McLauchlan agrees to provide such services as requested by John Ross, CEO Americas, or his successor. In consideration for the services provided pursuant to this Agreement, the Bank agrees to pay to Mr. McLauchlan the amount of $3,000,000, less applicable withholdings, on January 5, 2001. ii) The parties agree that Mr. McLauchlan is not required to perform job duties which would require that his principal office or residence be maintained in the City of New York, New York, or its vicinity. Mr. McLauchlan may perform job duties outside of New York, if he so desires. Sincerely yours, - ----------------------------- Linda Landsman Managing Director Human Resources Agreed and Accepted: - ----------------------------- Rodney McLauchlan Date July 23, 1999 Mr. Rodney A. McLauchlan 831 Ponte Vedra Boulevard Ponte Vedra Beach, Florida 32082 Dear Rodney: This agreement (the Agreement) will confirm the arrangements that have been made regarding the terms of your continued employment following the merger between Bankers Trust and Deutsche Bank (the "Merger"). For purposes of this Agreement, the term "Bankers Trust" shall include its successors, which may include any company within the Deutsche Bank Group, and the term "Effective Date" shall mean June 4, 1999, the date of consummation of the Merger. Title: You shall have the title of Managing Director, and you shall serve the functional role referred to as "Chief Executive Officer for Latin America". You will continue to serve as Executive Vice President of Bankers Trust Company, and will become an officer of Deutsche Bank Securities, Inc. (DBSI). Your primary office shall be located in Manhattan, New York. However, Bankers Trust acknowledges that the nature of your employment and responsibilities will require extensive travel overseas and, in particular, to Latin America. Bankers Trust also acknowledges that you will maintain your primary residence in Florida. Minimum Compensation Guarantee: Your annual total compensation ("Minimum TC") for 1999, 2000 and 2001 (the "Guarantee Period"), will not be less than $3,000,000 respectively. Your minimum discretionary bonus ("Minimum Bonus") will be equal to the excess of your Minimum TC over your annual base salary of $350,0000. For 1999, your Minimum Bonus will be paid to you as current cash compensation. Any 1999 pro-rata bonus paid to you for the period prior to the Effective Date will count towards your Minimum Bonus for 1999. Any bonus awarded in excess of the Minimum Bonus for 1999 may be granted as one or more forms of equity in Bankers Trust or a division thereof under the same terms and conditions applicable to other employees of Bankers Trust at a comparable level, all at the sole discretion of Bankers Trust. The cash to equity ratio of the combined Minimum Bonus and excess, if any, is not to exceed the cash to equity ratio of comparable bonus awards given to other employees at comparable levels to you. Each of the aforementioned Minimum Bonuses will be awarded on the condition that no notice of separation has been given by you prior to the respective payout date(s) and no separation of your employment for "Cause" has occurred (as defined in Appendix A). If you have a termination after the effective date and on or prior to December 31, 2001, (other than by "Cause" or by notice of separation given by you) then you will be paid in cash, within 30 business days of the date of termination, any unpaid compensation for the remainder of the guarantee period at the guaranteed level (whether or not originally payable in cash or stock) as if you had continued your employment through the end of such period. Any deferred portion of the Minimum Bonus or any excess bonus thereon, relating to a year during the guarantee period prior to the year of termination will also vest and be paid based on the value as of the date of termination whether such termination occurs before or after December 31, 2001. Current Payment: Upon execution of this Agreement, you will receive a lump sum payment ("Current Payment") of $7,500,000 in lieu of any claims under the Bankers Trust Change of Control Severance Plan 1. Such payment is to be made within thirty (30) days following the date of execution of this Agreement. In the event that the Current Payment outlined above may be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code, you shall be entitled to receive an additional cash payment (a "Gross-Up Payment") in an amount sufficient itself net of Federal, State and Local taxes on such Gross-Up Payment to cover any Section 4999 excise taxes, if applicable, on any of the payments or distributions outlined above. In exchange for the Current Payment outlined above, you acknowledge and agree to waive all rights and claims to any further severance compensation of any kind or description from either Bankers Trust or Deutsche Bank should your employment with either Bankers Trust or Deutsche Bank terminate after the Effective Date but prior to December 31, 2001 other than the unpaid portion of the guaranteed annual compensation through the date of the guarantee period. In addition, you will be provided with the continuation of health and welfare benefits equivalent to those in effect prior to termination until the earlier of (a) a period of up to three (3) years from the Effective Date or (b) your subsequent employment and eligibility to receive the health and welfare benefits of similar coverage from your subsequent employer. Benefits: You shall be provided with the service credit you currently enjoy for all purposes (other than benefit accruals) in all benefits plans in which you participate and shall be provided with employee benefits (retirement, welfare, etc.) no less favorable than those provided to your peer executives at Bankers Trust. Miscellaneous: Bankers Trust's obligation to make the payments provided for in this Agreement and otherwise to perform obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which Bankers Trust or its affiliates may have against you or others. Notwithstanding the above, Bankers Trust may withhold from any amounts payable to you under this Agreement all deductions and taxes that are required to be withheld pursuant to any applicable law. In the event there is a dispute between you and Bankers Trust about these commitments, then Bankers Trust will pay your reasonable legal fees if you prevail in a substantial way in the dispute. If your employment is terminated for any reason prior to the third anniversary of the Effective Date, you agree that you will not directly or indirectly solicit or induce or cause any third party to solicit or induce any Bankers Trust (or its successors) employees to work for you or any competitor of Bankers Trust/The Firm for a period of six months following your date of termination. However, it is understood that if any Bankers Trust/The Firm employee contacts you on his or her own initiative, you may thereafter discuss employment opportunities with such employee, provided that in such situation you agree to notify the Chief Legal or Human Resources Officer of Bankers Trust/The Firm before any offer of employment is extended to any such individual. By entering into this letter agreement, the parties agree that any and all disputes arising from this letter agreement or otherwise will be governed by federal law, to the extent applicable, or, if not so applicable, by the laws of the State of New York without regard to its conflict of law provisions. In offering you this package, Bankers Trust is recognizing you as an important part of our future success with Deutsche Bank. By your signature below accepting the terms hereof, you are indicating your personal commitment to the effort. If you have not accepted this offer within ten business days from the date of this letter (by returning your executed copy to Bankers Trust), Bankers Trust reserves the right to withdraw this offer letter. We are very excited about the opportunities ahead. Sincerely, Donald J. Jones Doreen L. Kennedy Managing Director Director Human Resources - Americas I accept the terms of this offer made to me dated July 23, 1999. In accepting this offer, I agree that I did not rely on any promises or representations other than those made in this letter. - ------------------------------ Rodney A. McLauchlan APPENDIX A "Cause" shall mean in respect to the termination of your employment by DBSI (i) any act or a series of acts when taken together of omission which constitutes a material breach by you of the terms of this letter or your employment, (ii) the conviction of a felony or commission of any act which would rise to the level of a felony, (iii) the conviction or commission of a lesser crime or offense that adversely impacts upon the business or reputation of DBSI, its parent and/or affiliates and subsidiaries in a material way, (iv) your willful violation of specific lawful written directions from DBSI, (v) commission of a dishonest or wrongful act involving fraud misrepresentation or moral turpitude causing damage or potential damage to DBSI, its parent and/or affiliates and subsidiaries, (vi) the willful failure to perform a substantial part of your duties, (vii) breach of fiduciary duty, or (viii) the issuance of any final consent decree, cease-and-desist or similar order against you by a regulatory agency relating to violations of alleged violations of any federal or state securities laws governing the conduct of the business of DBSI (other than acts of judgment) which materially impairs the financial condition or business reputation of DBSI, its parent and/or affiliates and subsidiaries. EX-12.(A) 4 0004.txt STATEMENT RE: COMPUTATION OF RATIOS EXHIBIT 12(a) BANKERS TRUST CORPORATION AND SUBSIDIARIES COMPUTATION OF CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES (dollars in millions)
Year Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1997 1998 1999 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings: 1. Income (loss) before income taxes $1,131 $1,239 $ (77) $(1,415) $ 900 2. Add: Fixed charges excluding capitalized interest (Line 10) 5,483 5,959 6,954 3,654 3,027 3. Less: Equity in undistributed income of unconsolidated subsidiaries and affiliates 30 (117) 15 75 42 - ------------------------------------------------------------------------------------------------------------------------------------ 4. Earnings including interest on deposits 6,584 7,315 6,862 2,164 3,885 5. Less: Interest on deposits 1,355 2,076 2,195 1,424 998 - ------------------------------------------------------------------------------------------------------------------------------------ 6. Earnings excluding interest on deposits $5,229 $5,239 $4,667 $ 740 $2,887 ==================================================================================================================================== Fixed Charges: 7. Interest expense $5,451 $5,926 $6,919 $ 3,612 $2,988 8. Estimated interest component of net rental expense 32 33 35 42 39 9. Amortization of debt issuance expense -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ 10. Total fixed charges including interest on deposits and excluding capitalized interest 5,483 5,959 6,954 3,654 3,027 11. Add: Capitalized interest -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ 12. Total fixed charges 5,483 5,959 6,954 3,654 3,027 13. Less: Interest on deposits (Line 5) 1,355 2,076 2,195 1,424 998 - ------------------------------------------------------------------------------------------------------------------------------------ 14. Fixed charges excluding interest on deposits $4,128 $3,883 $4,759 $ 2,230 $2,029 ==================================================================================================================================== Consolidated Ratios of Earnings to Fixed Charges: Including interest on deposits (Line 4/Line 12) 1.20 1.23 .99 N/A 1.28 ==================================================================================================================================== Excluding interest on deposits (Line 6/Line 14) 1.27 1.35 .98 N/A 1.42 ====================================================================================================================================
For the years ended December 31, 1999 and 1998, earnings, as defined, did not cover fixed charges, including and excluding interest on deposits by $1,490 million and $92 million, respectively, as a result of a net loss recorded during the period. N/A--Not Applicable. Bankers Trust Corporation and its Subsidiaries 81 EX-21 5 0005.txt SUBSIDIARIES OF THE REGISTRANT - -------------------------------------------------------------------------------- EXHIBIT 21 BANKERS TRUST CORPORATION SUBSIDIARIES OF THE REGISTRANT DECEMBER 31, 2000 Subsidiary(1) State of Incorporation ------------- ---------------------- Bankers Trust Company New York All other subsidiaries of the Corporation, in the aggregate, would not constitute a significant subsidiary, as defined. (1) Subsidiaries' names listed hereon are names under which such subsidiaries do business. 82 Bankers Trust Corporation and its Subsidiaries EX-23.1 6 0006.txt CONSENT OF INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-3 Nos. 33-13278, 33-58340, 33-50395, 33-51615, 33-65301, 333-15089, 333-15089-01 through -04, 333-32909, Form S-4 Nos. 333-22733, 333-22733-01 and Form S-8 Nos. 333-12181, 333-19963, 333-57427 and 333-74999) of our report dated January 31, 2001, with respect to the consolidated balance sheet of Bankers Trust Corporation and Subsidiaries (a wholly owned indirect subsidiary of Deutsche Bank AG) as of December 31, 2000 and 1999, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2000, which report appears in the December 31, 2000 Annual Report on Form 10-K of Bankers Trust Corporation. /S/ KPMG LLP -------- KPMG LLP New York, New York March 30, 2001 Bankers Trust Corporation and its Subsidiaries 83 EX-24 7 0007.txt POWER OF ATTORNEY - -------------------------------------------------------------------------------- EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors and officers of Bankers Trust Corporation hereby constitute and appoint Dr. Josef Ackermann, John A. Ross, Douglas R. Barnard, James T. Byrne, Jr. and Troland S. Link, or any one of them, their true and lawful attorney or attorneys and agent or agents, with the power and authority to sign the names of the undersigned to the Annual Report on Form 10-K for the year 2000 of Bankers Trust Corporation pursuant to Section 13 of the Securities and Exchange Act of 1934 and any amendments thereto and each of the undersigned does hereby ratify and confirm all that said attorney or attorneys and agent or agents or any one of them shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has subscribed these presents. March 21, 2001 Bankers Trust Corporation By /S/ DR. JOSEF ACKERMANN -------------------------------- Dr. Josef Ackermann Chairman of the Board /S/ DR. JOSEF ACKERMANN ------------------------------------- Dr. Josef Ackermann Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) /S/ DOUGLAS R. BARNARD ------------------------------------- Douglas R. Barnard Chief Financial Officer (Principal Financial Officer) /S/ RONALD HASSEN ------------------------------------- Ronald Hassen Senior Vice President and Controller (Principal Accounting Officer) 84 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- March 21, 2001 /S/ ROBERT B. ALLARDICE III ------------------------------------------------------------ Robert B. Allardice III Director (elected a Director effective 7/01/00) /S/ HANS H. ANGERMUELLER ------------------------------------------------------------ Hans H. Angermueller Director /S/ GEORGE B. BEITZEL ------------------------------------------------------------ George B. Beitzel Director /S/ JESSICA P. EINHORN ------------------------------------------------------------ Jessica P. Einhorn Director (elected a Director effective 10/20/00) /S/ WILLIAM R. HOWELL ------------------------------------------------------------ William R. Howell Director /S/ HERMANN-JOSEF LAMBERTI ------------------------------------------------------------ Hermann-Josef Lamberti Director /S/ JOHN A. ROSS ------------------------------------------------------------ John A. Ross President and Director Bankers Trust Corporation and its Subsidiaries 85 EX-99.1 8 0008.txt UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- EXHIBIT 99.1 BANKERS TRUST CORPORATION UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (in millions) The following Unaudited Pro Forma Condensed Statements of Income for the years ended December 31, 2000 and 1999 give effect to Bankers Trust Corporation's ("BT" or the "Corporation") transfer of its wholly-owned subsidiary BT Holdings (New York), Inc. ("BTH") to DB U.S. Financial Markets Holding Corporation ("DBUSH"), a subsidiary of Deutsche Bank Americas Holding Corp. ("DBAH") and Taunus Corporation ("Taunus"), which are an indirect and direct subsidiary, respectively, of Deutsche Bank AG. The transfer of BTH to DBUSH took the form of an exchange of stock pursuant to which BTH became a wholly-owned subsidiary of DBUSH. The Corporation received shares of DBUSH equal to the fair market value of BTH's net assets, substantially all of which were financial assets, on the date of transfer. The Corporation, as part of an ongoing reorganization, intends to transfer, by dividend or otherwise, the shares received to Taunus. The Corporation recognized a pre-tax gain of approximately $561 million for the year ended December 31, 2000. In addition, the following Unaudited Pro Forma Condensed Statement of Income for the year ended December 31, 1999 gives effect to the Corporation's transfer on June 5, 1999 of its wholly-owned subsidiary BT Alex. Brown Incorporated ("BTAB") and substantially all of its interest in Bankers Trust International PLC ("BTI") to Deutsche Bank Securities Inc. and Deutsche Holdings (BTI) Ltd., respectively, which are wholly-owned subsidiaries of Deutsche Bank AG and to the Corporation's sale, on August 31, 1999, of its wholly-owned subsidiary Bankers Trust Australia Limited ("BTAL") to the Principal Financial Group for a price of approximately $1.4 billion. For more information on the transfer of BTAB and BTI and the sale of BTAL, see the Corporation's Annual Report on Form 10-K for the year ended December 31, 1999. The pro forma information is based on the historical consolidated financial statements of BT after giving effect to the pro forma adjustments described in the Notes to the Unaudited Pro Forma Condensed Financial Statements. The pro forma financial data are not necessarily indicative of the results that actually would have occurred had the transfer of BTH, BTAB, and BTI and the sale of BTAL been consummated on the dates indicated or that may be obtained in the future. 86 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- BANKERS TRUST CORPORATION UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME (in millions)
For the Year Ended December 31, 2000 ------------------------------------------------------------------- BT Pro Forma Consolidated BTH(a) Adjustments(b) Pro Forma(d) - --------------------------------------------------------------------------------------------------------------------------------- Net Interest Revenue Interest revenue $3,635 $(544) $ 81 $3,172 Interest expense 2,988 (429) (125) 2,434 - --------------------------------------------------------------------------------------------------------------------------------- Net Interest Revenue 647 (115) 206 738 Provision for credit losses--loans (19) (1) -- (20) - --------------------------------------------------------------------------------------------------------------------------------- Net Interest Revenue After Provision for Credit Losses--Loans 666 (114) 206 758 - --------------------------------------------------------------------------------------------------------------------------------- Noninterest Revenue Trading 136 (65) 55 126 Fiduciary and funds management 798 -- -- 798 Corporate finance fees 142 (4) -- 138 Other fees and commissions 306 (8) -- 298 Securities available for sale gains (losses) 45 (25) -- 20 Other 759 (65) 91 785 - --------------------------------------------------------------------------------------------------------------------------------- Total noninterest revenue 2,186 (167) 146 2,165 - --------------------------------------------------------------------------------------------------------------------------------- Noninterest Expenses Salaries and commissions 459 (3) -- 456 Incentive compensation employee benefits 415 (12) -- 403 Agency and other professional service fees 220 (4) -- 216 Communication and data services 84 -- -- 84 Occupancy, net 106 -- -- 106 Furniture and equipment 136 (2) -- 134 Travel and entertainment 45 (1) -- 44 Other 535 (70) 3 468 Restructuring charge (48) -- -- (48) - --------------------------------------------------------------------------------------------------------------------------------- Total noninterest expenses 1,952 (92) 3 1,863 - --------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 900 (189) 349 1,060 Income taxes 388 437 - -------------------------------------------------------------------------- ------ Net Income $ 512 $ 623 ========================================================================== ======
See Notes to Unaudited Pro Forma Condensed Financial Statements. Bankers Trust Corporation and its Subsidiaries 87 - -------------------------------------------------------------------------------- BANKERS TRUST CORPORATION UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME (in millions)
For the Year Ended December 31, 1999 ---------------------------------------------------------------------------------- BT BTAB, BTI Pro Forma Consolidated and BTAL**(c) BTH(a) Adjustments(b) Pro Forma(d) - --------------------------------------------------------------------------------------------------------------------------------- Net Interest Revenue Interest revenue $ 4,419 $ (740) $(213) $309 $3,775 Interest expense 3,612 (521) (120) 149 3,120 - --------------------------------------------------------------------------------------------------------------------------------- Net Interest Revenue 807 (219) (93) 160 655 Provision for credit losses--loans (58) 26 (4) -- (36) Net interest revenue after provision for credit losses--loans 865 (245) (89) 160 691 - --------------------------------------------------------------------------------------------------------------------------------- Noninterest Revenue Trading 42 258 3 (224) 79 Fiduciary and funds management 1,017 (178) -- -- 839 Corporate finance fees 542 (304) -- -- 238 Other fees and commissions 538 (186) (4) -- 348 Securities available for sale gains (losses) (89) 108 (56) -- (37) Insurance premiums 86 -- -- -- 86 Other 1,364 319 (703) 228 1,208 - --------------------------------------------------------------------------------------------------------------------------------- Total noninterest revenue 3,500 17 (760) 4 2,761 - --------------------------------------------------------------------------------------------------------------------------------- Noninterest Expenses Salaries and commissions 1,039 (310) (3) -- 726 Incentive compensation and employee benefits* 2,189 (919) (57) -- 1,213 Agency and other professional service fees 430 -- (4) -- 426 Communication and data services 206 (53) -- -- 153 Occupancy, net 198 (35) -- -- 163 Furniture and equipment 221 (33) -- -- 188 Travel and entertainment 114 (48) -- -- 66 Provision for policyholder benefits 114 -- -- -- 114 Other 636 259 (218) (11) 666 Restructuring charge 633 -- (13) -- 620 - --------------------------------------------------------------------------------------------------------------------------------- Total noninterest expenses 5,780 (1,139) (295) (11) 4,335 - --------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (1,415) 911 (554) 175 (883) Income taxes 188 275 - ----------------------------------------------------------- ------- Net Income (Loss) $(1,603) $(1,158) =========================================================== =======
* Includes charges of approximately $1.1 billion in change-in-control related costs. ** Includes results of operations of BTAB and BTI through the transfer date, June 5, 1999 and includes results of operations of BTAL through the sale date, August 31, 1999. See Notes to Unaudited Pro Forma Condensed Financial Statements. 88 Bankers Trust Corporation and its Subsidiaries - -------------------------------------------------------------------------------- BANKERS TRUST CORPORATION NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (a) Elimination of BTH's third-party amounts from BT's historical consolidated financial statements. (b) Adjustment to record BTH intercompany amounts as revenue or expense, as applicable. Intercompany amounts were eliminated in BT's historical consolidated financial statements. (c) Amounts represent the elimination of BTAB's, BTI's and BTAL's third-party amounts from BT's historical consolidated financial statements and adjustments to record BTAB, BTI and BTAL intercompany amounts as third-party revenue or expense, as applicable. Intercompany amounts were eliminated in BT's historical consolidated financial statements. (d) Pro forma amounts reflect the gain on the transfer of BTH and the gain on the sale of BTAL, as applicable. Bankers Trust Corporation and its Subsidiaries 89 -----END PRIVACY-ENHANCED MESSAGE-----