-----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, Ve6uRBjaXJ+TJHEiqUqZWiI37shq373wOkA8rj1YSORHq21hs2O9tT8TxU8XDsC/ zaPJwYUGHInMVJ+Q63NYBg== 0000009626-01-500047.txt : 20020410 0000009626-01-500047.hdr.sgml : 20020410 ACCESSION NUMBER: 0000009626-01-500047 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANK OF NEW YORK CO INC CENTRAL INDEX KEY: 0000009626 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 132614959 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06152 FILM NUMBER: 1788987 BUSINESS ADDRESS: STREET 1: ONE WALL ST 10TH FL CITY: NEW YORK STATE: NY ZIP: 10286 BUSINESS PHONE: 212-495-1784 MAIL ADDRESS: STREET 1: ONE WALL STREET 31ST FLOOR CITY: NEW YORK STATE: NY ZIP: 10286 10-Q 1 r10q3q01.txt 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-6152 THE BANK OF NEW YORK COMPANY, INC. (Exact name of registrant as specified in its charter) NEW YORK 13-2614959 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) One Wall Street, New York, New York 10286 (Address of principal executive offices) (Zip code) (212) 495-1784 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months(or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares outstanding of the issuer's Common Stock, $7.50 par value, was 736,464,166 shares as of October 31, 2001 2 THE BANK OF NEW YORK COMPANY, INC. FORM 10-Q TABLE OF CONTENTS PART I. FINANCIAL INFORMATION - ------------------------------ Item 1. Financial Statements Consolidated Balance Sheets September 30, 2001 and December 31, 2000 3 Consolidated Statements of Income For the Three Months and Nine Months Ended September 30, 2001 and 2000 4 Consolidated Statement of Changes In Shareholders' Equity For the Nine Months Ended September 30, 2001 5 Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2001 and 2000 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Supplemental Financial Information 30 Item 3. Quantitative and Qualitative Disclosures about Market Risk. (See "Trading Activities") 15 PART II. OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings 35 Item 6. Exhibits and Reports on Form 8-K 36 SIGNATURE 37 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements - ----------------------------- THE BANK OF NEW YORK COMPANY, INC. Consolidated Balance Sheets (Dollars in millions, except per share amounts) (Unaudited)
September 30, December 31, 2001 2000 ---- ---- Assets - ------ Cash and Due from Banks $ 3,289 $ 3,125 Interest-Bearing Deposits in Banks 5,961 5,337 Securities Held-to-Maturity (fair value of $74 in 2001 127 752 and $719 in 2000) Available-for-Sale 13,243 6,649 ------- ------- Total Securities 13,370 7,401 Trading Assets at Fair Value 9,301 12,051 Federal Funds Sold and Securities Purchased Under Resale Agreements 338 5,790 Loans (less allowance for credit losses of $616 in 2001 and $616 in 2000) 44,920 35,645 Premises and Equipment 940 924 Due from Customers on Acceptances 338 447 Accrued Interest Receivable 334 354 Other Assets 10,886 6,040 ------- ------- Total Assets $89,677 $77,114 ======= ======= Liabilities and Shareholders' Equity - ------------------------------------ Deposits Noninterest-Bearing (principally domestic offices) $11,926 $13,255 Interest-Bearing Domestic Offices 17,477 15,774 Foreign Offices 30,858 27,347 ------- ------- Total Deposits 60,261 56,376 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 5,719 1,108 Trading Liabilities 2,370 2,070 Other Borrowed Funds 2,074 1,687 Acceptances Outstanding 467 450 Accrued Taxes and Other Expenses 3,913 3,283 Accrued Interest Payable 124 127 Other Liabilities 3,655 1,325 Long-Term Debt 3,127 3,036 ------- ------- Total Liabilities 81,710 69,462 ------- ------- Company-Obligated Mandatory Redeemable Preferred Trust Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures 1,500 1,500 ------- ------- Shareholders' Equity Class A Preferred Stock - par value $2.00 per share, authorized 5,000,000 shares, outstanding 16,320 shares in 2001 and 16,320 shares in 2000 1 1 Common Stock-par value $7.50 per share, authorized 2,400,000,000 shares, issued 990,468,650 shares in 2001 and 985,528,475 shares in 2000 7,429 7,391 Additional Capital 703 521 Retained Earnings 4,181 3,566 Accumulated Other Comprehensive Income 152 207 ------- ------- 12,466 11,686 Less: Treasury Stock (252,743,041 shares in 2001 and 244,460,032 shares in 2000), at cost 5,991 5,526 Loan to ESOP (1,142,939 shares in 2001 and 1,142,939 in 2000), at cost 8 8 ------- ------- Total Shareholders' Equity 6,467 6,152 ------- ------- Total Liabilities and Shareholders' Equity $89,677 $77,114 ======= ======= - ---------------------------------------------------------------------------------------------------------------- Note: The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date. See accompanying Notes to Consolidated Financial Statements.
4 THE BANK OF NEW YORK COMPANY, INC. Consolidated Statements of Income (In millions, except per share amounts) (Unaudited)
For the three For the nine months ended months ended September 30, September 30, 2001 2000 2001 2000 ---- ---- ---- ---- Interest Income - --------------- Loans $ 555 $ 732 $1,827 $2,183 Securities Taxable 143 79 320 236 Exempt from Federal Income Taxes 19 16 56 47 ----- ----- ----- ----- 162 95 376 283 Deposits in Banks 68 67 200 203 Federal Funds Sold and Securities Purchased Under Resale Agreements 53 80 142 198 Trading Assets 84 133 334 380 ----- ----- ----- ----- Total Interest Income 922 1,107 2,879 3,247 ----- ----- ----- ----- Interest Expense - ---------------- Deposits 351 501 1,185 1,494 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 27 38 82 107 Other Borrowed Funds 92 37 151 108 Long-Term Debt 41 52 139 149 ----- ----- ----- ----- Total Interest Expense 511 628 1,557 1,858 ----- ----- ----- ----- Net Interest Income 411 479 1,322 1,389 - ------------------- Provision for Credit Losses 40 25 100 70 ----- ----- ----- ----- Net Interest Income After Provision for Credit Losses 371 454 1,222 1,319 ----- ----- ----- ----- Noninterest Income - ------------------ Servicing Fees Securities 416 427 1,309 1,202 Global Payment Services 75 65 216 196 ----- ----- ----- ----- 491 492 1,525 1,398 Private Client Services and Asset Management Fees 74 77 231 219 Service Charges and Fees 81 84 267 278 Foreign Exchange and Other Trading Activities 79 59 260 206 Securities Gains 22 20 113 105 Other 76 53 140 96 ----- ----- ----- ----- Total Noninterest Income 823 785 2,536 2,302 ----- ----- ----- ----- Noninterest Expense - ------------------- Salaries and Employee Benefits 418 371 1,202 1,097 Net Occupancy 87 47 184 137 Furniture and Equipment 87 27 148 80 Other 222 190 587 551 ----- ----- ----- ----- Total Noninterest Expense 814 635 2,121 1,865 ----- ----- ----- ----- Income Before Income Taxes 380 604 1,637 1,756 Income Taxes 113 213 546 614 Distribution on Preferred Trust Securities 24 28 79 85 ----- ----- ------ ------ Net Income $ 243 $ 363 $1,012 $1,057 - ---------- ===== ===== ====== ====== Net Income Available to Common Shareholders $ 243 $ 363 $1,012 $1,057 - ------------------------------------------- ===== ===== ====== ====== Per Common Share Data: - ---------------------- Basic Earnings $0.33 $0.50 $1.38 $1.44 Diluted Earnings 0.33 0.49 1.36 1.42 Cash Dividends Paid 0.18 0.16 0.54 0.48 Diluted Shares Outstanding 741 747 742 744 - ------------------------------------------------------------------------------------------------ See accompanying Notes to Consolidated Financial Statements.
5
THE BANK OF NEW YORK COMPANY, INC. Consolidated Statement of Changes in Shareholders' Equity For the nine months ended September 30, 2001 (In millions) (Unaudited) Preferred Stock Balance, January 1 $ 1 ------- Balance, September 30 1 ------- Common Stock Balance, January 1 7,391 Issuances in Connection with Employee Benefit Plans 38 ------- Balance, September 30 7,429 ------- Additional Capital Balance, January 1 521 Issuances in Connection with Employee Benefit Plans 182 ------- Balance, September 30 703 ------- Retained Earnings Balance, January 1 3,566 Net Income $1,012 1,012 Cash Dividends on Common Stock (397) ------- Balance, September 30 4,181 ------- Accumulated Other Comprehensive Income Securities Valuation Allowance Balance, January 1 244 Change in Fair Value of Securities Available-for-Sale, Net of Taxes of $1 Million 10 10 Reclassification Adjustment, Net of Taxes of $(42) Million (78) (78) ------- Balance, September 30 176 ------- Foreign Currency Items Balance, January 1 (37) Foreign Currency Translation Adjustment, Net of Taxes of $(3) Million (4) (4) ------- Balance, September 30 (41) ------- Unrealized Derivative Gains Balance, January 1 - Cumulative Effect of Change in Accounting Principle, Net of Taxes of $7 Million 10 10 Net Unrealized Derivative Gains on Cash Flow Hedges, Net of Taxes of $5 Million 6 6 Reclassification to Earnings, Net of Taxes of $0.5 Million 1 1 ------- ------ Balance, September 30 17 ------ Total Comprehensive Income $ 957 ======= Less Treasury Stock Balance, January 1 5,526 Issued (54) Acquired 519 ------- Balance, September 30 5,991 ------- Less Loan to ESOP Balance, January 1 8 ------- Balance, September 30 8 ------- Total Shareholders' Equity, September 30 $ 6,467 ======= - ------------------------------------------------------------------------------------------------ Comprehensive Income for the three months ended September 30, 2001 and 2000 was $269 million and $495 million. Comprehensive income for the nine months ended September 30, 2001 and 2000 was $957 million and $1,216 million. See accompanying Notes to Consolidated Financial Statements.
6 THE BANK OF NEW YORK COMPANY, INC. Consolidated Statements of Cash Flows (In millions) (Unaudited)
For the nine months ended September 30, 2001 2000 ---- ---- Operating Activities Net Income $1,012 $1,057 Adjustments to Determine Net Cash Attributable to Operating Activities Provision for Losses on Loans and Other Real Estate 102 73 Depreciation and Amortization 202 184 Deferred Income Taxes 385 382 Securities Gains (113) (105) Change in Trading Activities 3,008 (2,475) Change in Accruals and Other, Net (1,813) (1,124) ------ ------ Net Cash Provided (Used) by Operating Activities 2,783 (2,008) ------ ------ Investing Activities Change in Interest-Bearing Deposits in Banks (651) 1,639 Purchases of Securities Held-to-Maturity - (264) Maturities of Securities Held-to-Maturity 20 222 Purchases of Securities Available-for-Sale (10,375) (2,312) Sales of Securities Available-for-Sale 2,118 1,340 Maturities of Securities Available-for-Sale 2,085 1,355 Net Principal Disbursed on Loans to Customers (9,355) (407) Sales of Loans and Other Real Estate 316 263 Change in Federal Funds Sold and Securities Purchased Under Resale Agreements 5,459 2,460 Purchases of Premises and Equipment (86) (64) Acquisitions, Net of Cash Acquired (547) (158) Disposition, Net of Cash Included - 46 Proceeds from the Sale of Premises and Equipment 4 2 Other, Net (112) (169) ------ ------ Net Cash (Used) Provided by Investing Activities (11,124) 3,953 ------ ------ Financing Activities Change in Deposits 4,040 (1,176) Change in Federal Funds Purchased and Securities Sold Under Repurchase Agreements 4,611 (71) Change in Other Borrowed Funds 402 533 Proceeds from the Issuance of Long-Term Debt 100 190 Repayments of Long-Term Debt (155) (53) Issuance of Common Stock 274 248 Treasury Stock Acquired (519) (337) Cash Dividends Paid (397) (351) ------ ------ Net Cash Provided (Used) by Financing Activities 8,356 (1,017) ------ ------ Effect of Exchange Rate Changes on Cash 149 18 ------ ------ Change in Cash and Due From Banks 164 946 Cash and Due from Banks at Beginning of Period 3,125 3,276 ------ ------ Cash and Due from Banks at End of Period $3,289 $4,222 ====== ====== - ---------------------------------------------------------------------------- Supplemental Disclosure of Cash Flow Information Cash Paid During the Period for: Interest $1,560 $1,840 Income Taxes 54 200 Noncash Investing Activity (Primarily Foreclosure of Real Estate) 1 2 - ---------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements.
7 THE BANK OF NEW YORK COMPANY, INC. Notes to Consolidated Financial Statements 1. General ------- The accounting and reporting policies of The Bank of New York Company, Inc. (the Company), a financial holding company, and its subsidiaries conform with generally accepted accounting principles and general practice within the banking industry. Such policies are consistent with those applied in the preparation of the Company's annual financial statements. The accompanying consolidated financial statements are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods have been made. Excluding adjustments related to the World Trade Center disaster ("WTC disaster"), such adjustments are of a normal recurring nature. 2. Recently Issued Accounting Standards ------------------------------------ Effective January 1, 2002, a new accounting standard will require the Company to test goodwill and indefinite lived intangible assets for impairment rather than amortize them. The financial statement impact of the new standard is still being analyzed. However, if none of the Company's goodwill had been amortized, net income for the nine months ended September 30, 2001 would have increased approximately $55 million. Cash flows will not be impacted. 3. Acquisitions and Dispositions ----------------------------- In January 2001, the Company acquired the correspondent clearing business of Schroder & Co, Inc. from Salomon Smith Barney Inc. This transaction provides the Company with the opportunity to establish new client relationships and add broader product capabilities to its equity clearing business. In March 2001, the Company acquired the corporate trust business of Summit Bancorp, headquartered in Princeton, New Jersey. The acquisition involves the transfer of nearly 800 bond trustee and agency relationships, representing approximately $15.7 billion in outstanding securities for state and local government issuers, colleges, universities and health care institutions, as well as for a number of corporate clients. In May 2001, the Company acquired the institutional custody and administration business of NatWest Bank, a unit of the Royal Bank of Scotland. The acquisition continues the Company's strategic commitment to expanding its European-based investor services capabilities. In June 2001, the Company acquired the corporate trust business of U.S. Trust Corporation, a subsidiary of The Charles Schwab Corporation. The acquisition involves the transfer of more than 5,000 bond trust and agency appointments representing more than $330 billion in outstanding debt securities. The U.S. Trust business is a diversified portfolio with a significant market position in several specialty products and services, including the structured finance and municipal finance market segments. In July 2001, the Company acquired the indenture trust business of The Trust Company of the Bank of Montreal, a subsidiary of the Bank of Montreal. The transaction comprises over 300 appointments for Canadian and U.S. companies, issuing a variety of bonds, medium-term notes, commercial paper, securitized and escrow issues into the Canadian markets. In August 2001, the Company acquired Greenwich Advisory Associates, Inc., a privately-held investment advisory firm, based in Greenwich, Connecticut. Greenwich Advisory Associates provides customized planning, investment management and supervisory services primarily to individuals, trusts, foundations and charitable organizations. 8 In August 2001, the Company purchased certain assets of MAVRICC Management Systems, Inc., a leading provider of employee stock plan and equity-based compensation plan services. The acquisition will complement and enhance the Company's existing stock purchase and stock option plan capabilities, as well as provide transfer agency services for direct investment partnerships. In October 2001, the Company acquired Westminster Research Associates, Inc., a leading provider of independent research products and services to the investment community. This acquisition will provide the Company's clients with third-party research products, along with an innovative trading strategy allowing investment managers the ability to execute through a network of top- tier institutional trading desks, while consolidating all of the administrative, servicing, and reporting functions of their soft dollar business with one firm. In November 2001, the Company announced that it had signed a definitive agreement to acquire the corporate trust business of Central Trust Bank, headquartered in Jefferson City, Missouri. The acquisition, which is expected to close in the fourth quarter of 2001, will involve the transfer of more than 130 bond trustee and agency relationships, representing approximately $250 million in outstanding securities for state and local governmental issuers throughout Missouri. 4. Allowance for Credit Losses --------------------------- The allowance for credit losses is maintained at a level that, in management's judgment, is adequate to absorb probable losses associated with specifically identified loans, as well as estimated probable credit losses inherent in the remainder of the loan portfolio at the balance sheet date. Management's judgment includes the following factors, among others: risks of individual credits; past experience; the volume, composition, and growth of the loan portfolio; and economic conditions. The Company conducts a quarterly portfolio review to determine the adequacy of its allowance for credit losses. All commercial loans over $1 million are assigned to specific risk categories. Smaller commercial and consumer loans are evaluated on a pooled basis and assigned to specific risk categories. Following this review, senior management of the Company analyzes the results and determines the allowance for credit losses. The Audit and Examining Committee of the Company's Board of Directors reviews the allowance at the end of each quarter. The portion of the allowance for credit losses allocated to impaired loans (nonaccrual commercial loans over $1 million) is measured by the difference between their recorded value and fair value. Fair value is either the present value of the expected future cash flows from borrowers, the market value of the loan, or the fair value of the collateral. Commercial loans are placed on nonaccrual status when collateral is insufficient and principal or interest is past due 90 days or more, or when there is reasonable doubt that interest or principal will be collected. Accrued interest is usually reversed when a loan is placed on nonaccrual status. Interest payments received on nonaccrual loans may be recognized as income or applied to principal depending upon management's judgment. Nonaccrual loans are restored to accrual status when principal and interest are current or they become fully collateralized. Consumer loans are not classified as nonperforming assets, but are charged off and interest accrued is suspended based upon an established delinquency schedule determined by product. Real estate acquired in satisfaction of loans is carried in other assets at the lower of the recorded investment in the property or fair value minus estimated costs to sell. 9 Transactions in the allowance for credit losses are summarized as follows:
Nine months ended September 30, (In millions) 2001 2000 ---- ---- Balance, Beginning of Period $616 $595 Charge-Offs (107) (62) Recoveries 7 14 ---- ---- Net Charge-Offs (100) (48) Provision 100 70 ---- ---- Balance, End of Period $616 $617 ==== ====
5. Capital Transactions -------------------- As of October 31, 2001, the Company has approximately 3 million common shares remaining to repurchase under its 14 million share buyback programs. During the second quarter of 2001, the Company filed a new shelf registration statement. At October 31, 2001, the registration statement has a remaining capacity of approximately $1.1 billion of debt, preferred stock, preferred trust securities, or common stock. 6. Derivatives and Hedging ----------------------- Effective January 1, 2001, the Company adopted a new accounting standard related to derivatives and hedging activities. The new standard requires all derivatives to be included as assets or liabilities in the balance sheet and that such instruments be carried at fair value through adjustments to either other comprehensive income or current earnings, or both, as appropriate. The adoption of the new standard as of January 1, 2001 resulted in zero impact on 2001 net income and a credit of $10 million to accumulated other comprehensive income. In connection with the adoption of the new standard, the Company transferred investment securities with a carrying value of $0.6 billion and an unrealized loss of $5 million from its held-to-maturity to its available-for-sale and trading portfolios. The Company enters into various derivative financial instruments such as interest rate swaps, foreign currency swaps, futures contracts and forward rate agreements for non-trading purposes, which are designated and qualify as fair value and cash flow hedges of certain assets and liabilities in accordance with the new standard. The Company utilizes interest rate swap agreements to manage its exposure to interest rate fluctuations. Interest rate swaps are used to convert fixed rate loans, deposits and long-term debt to floating rates, and to hedge interest rate resets of variable rate cash flows. Basis swaps are used to convert various variable rate borrowings to LIBOR which better matches the assets funded by the borrowings. Cross-currency swaps are used to hedge exposure to exchange rate fluctuations on principal and interest payments for borrowings denominated in foreign currencies. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair-value hedges to specific assets or liabilities on the balance sheet. The Company also formally assesses (both at the hedge's inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value of hedged items and whether those derivatives may be expected to remain highly effective in future periods. The 10 Company will discontinue hedge accounting prospectively when it determines that the derivative is no longer an effective hedge, the derivative expires or is sold, or management discontinues the derivative's hedge designation. For the nine months ended September 30, 2001, the Company recorded ineffectiveness of $1.3 million related to fair value and cash flow hedges in other income. Also during the same period, the Company recorded a credit of $6 million to other comprehensive income arising from the change in value of cash flow hedges. In addition, it reclassified a deferred loss on expired interest rate futures contracts of $1 million from accumulated other comprehensive income to a charge to interest expense. The Company also utilizes foreign exchange forward contracts to manage currency exposure relating to its net investments in non-U.S. dollar functional currency operations. The change in fair market value of these contracts is deferred and reported within cumulative translation adjustments in shareholders' equity, net of tax effects. Interest elements (forward points) on these foreign exchange forward contracts are recorded in other comprehensive income, net of tax effects. All of the Company's derivative financial instruments not designated as hedges were recorded in the Company's trading account at fair value. The amounts recognized as other comprehensive income for cash flow hedges are reclassified to net interest income as interest is realized on the hedging derivative. Assuming interest rates remain stable, a minimal amount is expected to be reclassified to income over the next twelve months. 7. Earnings Per Share ------------------ The following table illustrates the computations of basic and diluted earnings per share:
Three Months Ended Nine Months Ended September 30, September 30, (In millions, except per share amounts) 2001 2000 2001 2000 ---- ---- ---- ---- Net Income (1) $243 $363 $1,012 $1,057 ==== ==== ====== ====== Basic Weighted Average Shares Outstanding 731 734 731 733 Shares Issuable on Exercise of Employee Stock Options 10 13 11 11 ---- ---- ---- ---- Diluted Weighted Average Shares Outstanding 741 747 742 744 ==== ==== ==== ==== Basic Earnings Per Share: $ 0.33 $ 0.50 $ 1.38 $ 1.44 Diluted Earnings Per Share: 0.33 0.49 1.36 1.42 (1) For purpose of calculating earnings per share, diluted net income and net income available to common shareholders equal net income for all periods presented.
8. Commitments and Contingent Liabilities -------------------------------------- In the ordinary course of business, there are various claims pending against the Company and its subsidiaries. In the opinion of management, liabilities arising from such claims, if any, would not have a material effect upon the Company's consolidated financial statements. 11 Item 2. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------ Results of Operations - --------------------- The Company's actual results of future operations may differ from those set forth in certain forward looking statements contained herein. Refer to further discussion under the heading "Forward Looking Statements". The WTC disaster on September 11, 2001 had a significant adverse impact on the Company. Four of the Company's major facilities as well as several smaller facilities in the downtown New York City area containing over 8,300 employees were rendered temporarily unusable, including the Company's principal operations and data center at 101 Barclay St. The two businesses most significantly impacted by the WTC disaster were Funds Transfer and Broker-Dealer Services due to significant disruptions in the telecommunications infrastructure supporting market participants. Transaction backlogs were processed within a week of the disaster and systems have been current since that time. Reconciliations with the Federal Reserve, depositaries, broker-dealers, and clients are substantially complete as of the date of this filing. Two of the Company's facilities near the World Trade Center, including 101 Barclay St., remain disabled. These facilities contain 1.4 million square feet of space and accommodate 5,500 employees. The Company expects these facilities will become available for use during 2002 although it is unable to project the exact timing. Such availability is dependent upon the full extent of the damage, the speed of repair work, and the actions of civil authorities. Immediately after the WTC disaster displaced employees worked out of contingency recovery sites in Northern New Jersey, Westchester County, N.Y. and Greenwich, CT. In subsequent weeks, the Company leased 1.3 million square feet of temporary space for these employees to work in. The terms of these leases run from 1 to 18 years. The Company may terminate the lease for 400,000 square feet of this space at any time. The Company expects to sublet excess space when it is able to reoccupy its disabled facilities. The Company expects the costs incurred in connection with these temporary facilities to be covered by insurance. The Company expects to incur capital expenditures related to the WTC disaster in a range of approximately $150 million to $250 million. These expenditures will cover, among other things, the repair of damaged facilities, replacement equipment, replacement furniture and fixtures and the outfitting of new leased space. The Company expects substantial portions of these capital expenditures to be covered by insurance. Given the extent of impact on the Company's financial results resulting from the WTC disaster, this filing will first review the Company's reported results and will then provide a "normalized" estimate of operating results, segregating the impact of the disaster. Management believes that the additional normalized disclosure assists the reader in making comparisons with prior periods to determine trends in the business. Reported Results SUMMARY OF REPORTED RESULTS The Company reported net income of $243 million or 33 cents per share for the third quarter of 2001 compared with $363 million or 49 cents per share earned in the third quarter of 2000. The third quarter results include the 19 cents per share impact of the WTC disaster. Net income was $1,012 million or $1.36 per share for the first nine months of 2001 compared with $1,057 million or $1.42 per share earned last year. In the Company's securities servicing businesses, fee revenues were 12 $416 million in the third quarter compared with $427 million last year. For the first nine months of 2001, fees from these businesses totaled $1,309 million, a 9% increase, compared with $1,202 million in 2000. Securities servicing fees were adversely impacted by the slowdown in global capital markets as well as the WTC disaster. Despite the slowdown in the global capital markets, the Company recorded strong results in execution services, corporate trust, broker dealer services and global liquidity services. The Company continues to be the world's leading custodian with quarter- end assets of $6.4 trillion, including $1.8 trillion of cross-border custody assets. Foreign exchange and other trading revenues were $79 million for the quarter, up 34% from $59 million last year. In the first nine months of 2001, foreign exchange and other trading revenues were $260 million, up 26% from $206 million last year. Third quarter results reflect continued strong foreign exchange transaction flows from the Company's securities servicing clients and market share gains through e-commerce products such as iFX Manager(servicemark). In addition, strong demand for interest rate risk management products were driven by higher volatility and declining interest rates. Global payment services fees were $75 million for the quarter, up 15% over last year. Fees increased as a result of customers electing to pay for services in fees rather than maintaining higher compensating balances in a declining rate environment. In addition, this growth reflects higher cash management and trade service fees. New cash management business wins continued among the Company's regional commercial and corporate banking clients driven, in part, by the continued success of CA$H-Register Plus (registered trademark), the Company's internet-based electronic banking service. Private client services and asset management fees were $74 million for the quarter, down slightly from last year. Lower asset price levels have been partially offset by strength in alternative investment and short-term money market product lines. The Company's noninterest income grew to 67% of total revenue in the third quarter compared with 62% in last year's third quarter. Net interest income on a taxable equivalent basis was $426 million in the third quarter of 2001 compared with $492 million in the third quarter of 2000. For the first nine months of 2001, net interest income on a taxable equivalent basis was $1,366 million compared with $1,429 million in 2000. The decrease in reported net interest income for the quarter and the nine months is primarily the result of the WTC disaster. The WTC disaster resulted in a disruption of the markets, including payment and securities processing, which affected both the Company and other market participants. In addition, significant levels of liquidity were injected into the markets immediately following the disaster. These factors resulted in excess liquidity which could not be invested and unsettled trades at the Company, causing a drop in net interest income and a temporary expansion of the Company's balance sheet. The Company's performance ratios and capital ratios reflect this temporary expansion. For the third quarter of 2001, return on average common equity was 15.11% compared with 25.75% last year. Return on average assets was 1.11% compared with 1.89% in the third quarter of 2000. For the first nine months of 2001, return on average common equity was 21.99% compared with 26.55% in 2000. Return on average assets was 1.69% compared with 1.83% in 2000. For the third quarter of 2001, tangible diluted earnings per share (earnings before the amortization of goodwill and intangibles) were 35 cents compared with 52 cents per share in 2000. On the same basis, tangible return on average common equity was 24.45% in the third quarter of 2001 compared with 38.89% in 2000; and tangible return on average assets was 13 1.22% in the third quarter of 2001 compared with 2.05% in 2000. For the first nine months of 2001, tangible diluted earnings per share were $1.44 compared with $1.50 in 2000. On the same basis, tangible return on average common equity was 34.76% compared with 41.11% in 2000; and tangible return on average assets was 1.82% compared with 1.98% last year. Amortization of intangibles for the third quarter and the first nine months of 2001 was $29 million and $83 million compared with $29 million and $85 million in 2000. On a per share basis, after-tax amortization of intangibles was 3 cents per share in the third quarters of 2001 and 2000 and 7 cents per share in the first nine months of 2001 and 2000. CAPITAL The Company's Tier 1 capital and Total capital ratios were 7.50% and 11.07% at September 30, 2001, compared with 8.07% and 12.07% at June 30, 2001, and 8.29% and 12.67% at September 30, 2000. The leverage ratio was 6.78% at September 30, 2001, compared with 7.40% at June 30, 2001, and 7.42% one year ago. Tangible common equity as a percent of total assets was 4.94% at September 30, 2001, compared with 5.56% at June 30, 2001, and 5.75% one year ago. In the first nine months of 2001, the Company repurchased 11 million shares under its common stock repurchase programs. LIQUIDITY The Company maintains its liquidity through the management of its assets and liabilities, utilizing worldwide financial markets. The diversification of liabilities reflects the flexibility of the Company's funding sources under changing market conditions. Stable core deposits, including demand, retail time, and trust deposits from processing businesses, are generated through the Company's diversified business operations and managed with the use of trend studies and deposit pricing. The use of derivative products such as interest rate swaps and financial futures is designed to enhance liquidity through the issue of long-term liabilities with limited exposure to interest rate risk. Liquidity also results from the maintenance of a portfolio of assets, which can be easily reduced, and the monitoring of unfunded loan commitments, thereby reducing unanticipated funding requirements. At September 30, 2001 and 2000, the parent company had commercial paper outstandings of $415 million and $58 million. The parent company has back-up lines of credit of $350 million at financial institutions supporting these borrowings. At September 30, 2001, the Company had not borrowed under this line of credit. NONINTEREST INCOME
3rd 2nd 3rd Quarter Quarter Quarter Year-to-date ------- ------- ------- ----------------- 2001 2001 (In millions) Reported 2001 2000 Reported 2000 -------- ---- ---- -------- ---- Servicing Fees Securities $416 $436 $427 $1,309 $1,202 Global Payment Services 75 72 65 216 196 ---- ---- ---- ------ ------ 491 508 492 1,525 1,398 Private Client Services and Asset Management Fees 74 78 77 231 219 Service Charges and Fees 81 95 84 267 278 Foreign Exchange and Other Trading Activities 79 98 59 260 206 Securities Gains 22 46 20 113 105 Other 76 31 53 140 96 ---- ---- ---- ------ ------ Total Noninterest Income $823 $856 $785 $2,536 $2,302 ==== ==== ==== ====== ======
Total noninterest income reached $823 million for the third quarter of 2001 compared with $785 million in last year's third quarter. Securities servicing fees were $416 million for the third quarter compared with 14 $427 million last year. Global payment services fees were $75 million for the third quarter, up 15% over last year. Private client services and asset management fees for the quarter were $74 million, down slightly from last year. Service charges and fees were $81 million in the third quarter of 2001, down from $84 million last year. Servicing fees and service charges and fees declined in the third quarter primarily reflecting the impact of the WTC disaster. Foreign exchange and other trading revenues were $79 million in the third quarter, up 34% from $59 million in last year's third quarter. Securities gains were $22 million for the quarter, which were up slightly from last year but down from $46 million in the prior quarter. Other income in the third quarter of 2001 includes a $43 million gain that the Company recognized from the sale of its interest in the New York Cash Exchange ("NYCE"). Other income in the third quarter of 2000 includes a $26 million payment associated with the termination of a securities clearing contract entered into in conjunction with the acquisition of Everen Clearing Corporation. NET INTEREST INCOME
3rd 2nd 3rd Quarter Quarter Quarter Year-to-date -------- ------- ------- ---------------- (Dollars in millions on 2001 2001 a tax equivalent basis) Reported 2001 2000 Reported 2000 -------- ---- ---- -------- ---- Net Interest Income $426 $472 $492 $1,366 $1,429 Net Interest Rate Spread 1.60% 2.10% 1.93% 1.84% 1.94% Net Yield on Interest Earning Assets 2.37 2.96 3.05 2.74 2.95
Net interest income on a taxable equivalent basis was $426 million in the third quarter of 2001 compared with $472 million in the second quarter of 2001 and $492 million in the third quarter of 2000. Net interest income declined in the quarter primarily due to the WTC disaster which resulted in higher than normal levels of excess liquidity which could not be invested and unsettled trades resulting from the disruption of the markets and payments processing immediately following the disaster. The net interest rate spread was 1.60% in the third quarter of 2001 compared with 2.10% in the second quarter of 2001 and 1.93% one year ago. The net yield on interest earning assets was 2.37% in the third quarter of 2001 compared with 2.96% in the second quarter of 2001 and 3.05% in last year's third quarter. For the first nine months of 2001, net interest income on a taxable equivalent basis was $1,366 million compared with $1,429 million in the first nine months of 2000. The year-to-date net interest rate spread was 1.84% compared with 1.94% in 2000, while the net yield on interest earning assets was 2.74% in 2001 and 2.95% in 2000. Interest income would have been increased by $1 million for the third quarters of 2001 and 2000 and $6 million and $5 million for the first nine months of 2001 and 2000 if loans on nonaccrual status at September 30, 2001 and 2000 had been performing for the entire period. NONINTEREST EXPENSE AND INCOME TAXES Noninterest expense for the third quarter of 2001 was $814 million compared with $655 million in the second quarter and $635 million in 2000. The increase reflects $168 million of expense associated with the WTC disaster. This increase was partially offset by lower operating expenses associated with continued control of staffing levels and other related expenses, as well as lower variable expenses such as clearing, sub-custody and incentive compensation. Reflecting the WTC disaster related expenses, the efficiency ratio for the third quarter of 2001 was 68.7% compared with 51.2% in the second quarter 15 of 2001 and 50.4% in the third quarter of 2000. For the first nine months of 2001, the efficiency ratio was 56.6% compared with 51.4% last year. The effective tax rate was 29.7% for the third quarter and 33.4% for the first nine months of 2001 compared with 35.1% and 35.0% in the third quarter and the first nine months of 2000. The decline in the effective tax rates reflects the tax benefits associated with the WTC disaster. TRADING ACTIVITIES The fair value and notional amounts of the Company's financial instruments held for trading purposes at September 30, 2001 and September 30, 2000 are as follows: 3rd Quarter 2001 September 30, 2001 Average ---------------------------- ------------------- (In millions) Fair Value Fair Value ------------------ ------------------- Notional Trading Account Amount Assets Liabilities Assets Liabilities - --------------- -------- ------ ----------- ------ ----------- Interest Rate Contracts: Futures and Forward Contracts $ 32,732 $ 41 $ - $ 13 $ - Swaps 116,704 1,664 758 1,261 630 Written Options 89,307 - 1,165 - 1,021 Purchased Options 46,603 193 - 198 - Foreign Exchange Contracts: Swaps 1,593 - - - - Written Options 11,256 - 49 - 30 Purchased Options 14,754 78 - 75 - Commitments to Purchase and Sell Foreign Exchange 52,215 338 368 476 477 Debt Securities - 6,957 27 7,404 10 Credit Derivatives 1,643 9 3 9 2 Equity Derivatives - 21 - 122 121 ------ ------ ------ ------ Total Trading Account $9,301 $2,370 $9,558 $2,291 ====== ====== ====== ====== 3rd Quarter 2000 September 30, 2000 Average ---------------------------- ------------------- (In millions) Fair Value Fair Value ------------------ ------------------- Notional Trading Account Amount Assets Liabilities Assets Liabilities - --------------- -------- ------ ----------- ------ ----------- Interest Rate Contracts: Futures and Forward Contracts $ 23,909 $ 4 $ - $ 2 $ - Swaps 111,779 1,063 912 1,056 928 Written Options 84,259 - 616 - 617 Purchased Options 45,506 52 - 55 - Foreign Exchange Contracts: Swaps 338 - - - - Written Options 19,254 - 50 - 105 Purchased Options 22,300 125 - 175 - Commitments to Purchase and Sell Foreign Exchange 51,673 854 744 845 705 Debt Securities - 8,059 141 8,790 151 ------- ------ ------- ------ Total Trading Account $10,157 $2,463 $10,923 $2,506 ======= ====== ======= ====== The Company manages trading risk through a system of position limits, a value at risk (VAR) methodology, based on a Monte Carlo simulation, stop loss advisory triggers, and other market sensitivity measures. Risk is monitored and reported to senior management by an independent unit on a daily basis. The VAR methodology captures, based on certain assumptions, the potential overnight pre-tax dollar loss from adverse changes in fair 16 values of all trading positions. The calculation assumes a one day holding period for most instruments, utilizes a 99% confidence level, and incorporates the non-linear characteristics of options. As the VAR methodology does not evaluate risk attributable to extraordinary financial, economic or other occurrences, the risk assessment process includes a number of stress scenarios based upon the risk factors in the portfolio and management's assessment of market conditions. Additional stress scenarios based upon historic market events are also tested. The following table indicates the calculated VAR amounts for the trading portfolio for the periods indicated. During these periods, the daily trading loss did not exceed the calculated VAR amounts on any given day.
(In millions) 3rd Quarter 2001 Year-to-Date 2001 ------------------------------ ------------------------------------- Average Minimum Maximum Average Minimum Maximum 9/30/01 -------- -------- -------- ------- ------- ------- ------- Interest Rate $5.6 $3.8 $7.7 $4.9 $2.6 $7.7 $5.4 Foreign Exchange 1.6 0.7 3.1 1.3 0.6 3.1 2.3 Diversification (2.1) NM NM (2.0) NM NM (3.1) Overall Portfolio 5.1 3.4 7.1 4.2 2.3 7.1 4.6 (In millions) 3rd Quarter 2000 Year-to-Date 2000 ------------------------------ ------------------------------------- Average Minimum Maximum Average Minimum Maximum 9/30/00 -------- -------- -------- ------- ------- ------- ------- Interest Rate $4.1 $2.9 $5.6 $4.5 $2.7 $6.6 $3.7 Foreign Exchange 1.5 0.9 2.7 1.7 0.9 3.8 1.5 Overall Portfolio 5.6 4.3 7.1 6.2 4.3 8.8 5.2 NM - Because the minimum and maximum may occur on different days for different risk components, it is not meaningful to compute a portfolio diversification effect.
NONPERFORMING ASSETS
Change 9/30/01 vs. (Dollars in millions) 9/30/01 6/30/01 6/30/01 -------- -------- -------- Category of Loans: Other Commercial $214 $190 $24 Foreign 42 34 8 Regional Commercial 20 19 1 ---- ---- --- Total Nonperforming Loans 276 243 33 Other Real Estate 2 2 - ---- ---- --- Total Nonperforming Assets $278 $245 $33 ==== ==== === Nonperforming Assets Ratio 0.7% 0.7% Allowance/Nonperforming Loans 223.3 252.9 Allowance/Nonperforming Assets 222.0 251.0
Nonperforming assets totaled $278 million at September 30, 2001, compared with $245 million at June 30, 2001. The increase in nonperforming loans primarily reflects a loan to a customer in the emerging telecommunications industry. Given the uncertain economic climate, the Company anticipates further deterioration in the creditworthiness of corporate borrowers. In particular, the Company continues to closely assess its emerging telecommunications portfolio. 17 IMPAIRED LOANS The table below sets forth information about the Company's impaired loans. The Company uses the discounted cash flow method as its primary method for valuing its impaired loans: (Dollars in millions) 9/30/01 6/30/01 9/30/00 -------- -------- -------- Impaired Loans with an Allowance $231 $203 $ 98 Impaired Loans without an Allowance(1) 36 35 24 ---- ---- ---- Total Impaired Loans $267 $238 $122 ==== ==== ==== Allowance for Impaired Loans(2) $ 93 $ 82 $ 36 Average Balance of Impaired Loans during the Quarter 253 192 116 Interest Income Recognized on Impaired Loans during the Quarter 0.2 0.2 1.0 (1) When the discounted cash flows, collateral value or market price equals or exceeds the carrying value of the loan, then the loan does not require an allowance under the accounting standard related to impaired loans. (2) The allowance for impaired loans is included in the Company's allowance for credit losses. 18 CREDIT LOSS PROVISION AND NET CHARGE-OFFS
3rd 2nd 3rd Quarter Quarter Quarter Year-to-date ------- ------- ------- ------------ (In millions) 2001 2001 2000 2001 2000 ---- ---- ---- ---- ---- Provision $ 40 $ 30 $ 25 $100 $ 70 ==== ==== ==== ==== ==== Net Charge-offs: Other Commercial (35) (26) (14) (89) (39) Consumer (4) (3) (1) (9) (3) Foreign - - (3) - (3) Other (1) (1) - (2) (3) ----- ----- ----- ------ ----- Total $(40) $(30) $(18) $(100) $(48) ===== ===== ===== ====== ===== Other Real Estate Expenses $ - $ - $ 1 $ 2 $ 3
The allowance for credit losses consists of four elements: (1) an allowance for impaired credits (nonaccrual commercial credits over $1 million), (2) an allowance for higher risk rated credits, (3) an allowance for pass rated credits, and (4) an unallocated allowance based on general economic conditions and risk factors in the Company's individual markets. The first element - impaired credits - is based on individual analysis of all nonperforming commercial credits over $1 million. The allowance is measured by the difference between the recorded value of impaired loans and their fair value. Fair value is either the present value of the expected future cash flows from borrowers, the market value of the loan, or the fair value of the collateral. The second element - higher risk rated credits - is based on the assignment of loss factors for each specific risk category of higher risk credits. The Company rates each credit in its portfolio that exceeds $1 million and assigns the credits to specific risk pools. A potential loss factor is assigned to each pool and an amount is included in the allowance equal to the product of the amount of the loan in the pool and the risk factor. Reviews of higher risk rated loans are conducted quarterly and the loan's rating is updated as necessary. The Company prepares a loss migration analysis and compares its actual loss experience to the loss factors on an annual basis to attempt to ensure the accuracy of the loss factors assigned to each pool. Pools of past due consumer loans are included in specific risk categories based on their length of time past due. The third element - pass rated credits - is based on the assignment of loss factors to the remaining pools of credit exposure. The loss factors are based on the expected average credit losses. Loss factors are periodically compared to rating agency and other default data bases to determine their validity. Commercial loans over $1 million are individually analyzed before being assigned to a risk pool. All current consumer loans are included in the pass rated consumer pools. 19 The fourth element - an unallocated allowance - is based on management's judgement regarding the following factors: - Economic conditions including duration of the current cycle - Past experience including recent loss experience - Credit quality trends - Collateral values - Volume, composition, and growth of the loan portfolio - Specific credits and industry conditions - Results of bank regulatory and internal credit exams - Actions by the Federal Reserve Board - Delay in receipt of information to evaluate loans or confirm existing credit deterioration Based on a review of these elements, the allowance for credit losses was $616 million, or 1.35% of loans at September 30, 2001, compared with $616 million, or 1.68% of loans at June 30, 2001, and $617 million, or 1.65% of loans at September 30, 2000. The decrease in the ratio at September 30, 2001 reflects the increase in loans, particularly broker-dealer loans and overdrafts, resulting from events associated with the WTC disaster. The ratio of the allowance to nonperforming assets was 222.0% at September 30, 2001, compared with 251.0% at June 30, 2001, and 367.5% at September 30, 2000. Applying the four elements to the various segments of the loan portfolio results in an allocation of the allowance for credit losses as follows: 9/30/01 ------- Domestic Real Estate 6% Commercial 88 Consumer 1 Foreign 5 ---- 100% ==== Such an allocation is inherently judgmental, and the entire allowance for credit losses is available to absorb credit losses regardless of the nature of the loss. 20 Normalized Results SUMMARY OF NORMALIZED RESULTS A summary of reported and normalized Consolidated Statements of Income for the three months ended September 30, 2001 are presented below. The normalization reflects the Company's results excluding the impact of the WTC disaster. The estimated impact of the WTC disaster reduced third quarter net income by approximately $140 million reflecting one time costs, reductions in revenue and other related expenses. (See the Supplemental Financial Information for additional analysis of the WTC disaster impact.) THE BANK OF NEW YORK COMPANY, INC. Consolidated Statements of Income (In millions, except per share amounts)
For the three months ended September 30, 2001 ------------------------------------- Disaster Reported Normalized Impact -------- ---------- -------- Net Interest Income After Provision for Credit Losses $ 371 $ 416 $ (45) Total Noninterest Income 823 852 (29) Total Noninterest Expense 814 646 168 ------ ------ ------ Income Before Income Taxes 380 622 (242) Income Taxes 113 215 (102) Distribution on Preferred Trust Securities 24 24 - ------ ------ ------ Net Income Available to Common Shareholders $ 243 $ 383 $(140) ====== ====== ====== Per Common Share Data: - --------------------- Basic Earnings $0.33 $0.52 $(0.19) Diluted Earnings 0.33 0.52 (0.19) Cash Dividends Paid 0.18 0.18 - Diluted Shares Outstanding 741 741 -
Comparing reported to normalized results, the decrease in reported net interest income for the quarter primarily results from higher than normal levels of excess liquidity which could not be invested and financing of overdrafts and unsettled trades resulting from the disruption of markets and payments processing immediately following the WTC disaster. The normalized balance sheet excludes the uninvested balances as well as the overdrafts and securities fails. The decrease in reported noninterest income for the quarter is principally due to a reduction in securities servicing and related revenues during the temporary closure of markets following the WTC disaster. The increase in reported noninterest expense for the quarter reflects certain additional costs associated with: the disabling of two facilities close to the World Trade Center; full outfitting of contingency locations and associated infrastructure links; reoccupying its headquarters building at One Wall Street; and other expenses, including overtime, professional services, outside vendors, and additional security. 21 The Company believes that a substantial portion of the impact of the disaster is covered under its insurance policies which cover both physical damage to facilities and personal property and losses resulting from business interruption. These insurance recoveries are expected to be received in future quarters. The tragic events of September 11th resulted in one of the most challenging operating environments that the Company has ever experienced. Notwithstanding a difficult market environment made worse by the WTC disaster, the Company achieved a 6% normalized EPS increase for the quarter and a 9% increase year-to-date. Given the uncertain economic environment, the Company's near-term outlook remains cautious. The Company continues to be highly confident in its business strategy and in its longer-term earnings outlook. On a normalized basis, net income was $383 million or 52 cents per share, up 6% from $363 million or 49 cents per share earned in the third quarter of 2000. The third quarter normalized results exclude the 19 cents per share impact of the WTC disaster. On a normalized basis, net income for the first nine months was $1,152 million or $1.55 per share, up 9% from the $1,057 million or $1.42 per share earned last year. The following discussion of income statement trends and comparisons through the segment profitability section relates to the 2001 normalized results. In the Company's securities servicing businesses fee revenues were $430 million, up slightly from $427 million last year. For the first nine months, fee revenues were $1,323 million, a 10% increase compared with $1,202 million in 2000. Despite the slowdown in the global capital markets, the Company recorded strong results in execution services, corporate trust, broker dealer services and global liquidity services. Foreign exchange and other trading revenues were $84 million, up 42% from $59 million last year's third quarter. In the first nine months, foreign exchange and other trading revenues were $265 million, up from $206 million last year. Third quarter results reflect continued strong foreign exchange transaction flows from the Company's securities servicing clients and market share gains through e-commerce products such as iFX Manager(servicemark). In addition, strong demand for interest rate risk management products were driven by higher volatility and declining interest rates. Global payment services fees were $78 million, up 20% over last year. Fees increased as a result of customers electing to pay for services in fees rather than maintaining higher compensating balances in a declining rate environment. In addition, this growth reflects higher cash management and trade service fees. New cash management business wins continued among the Company's regional commercial and corporate banking clients driven, in part, by the continued success of CA$H-Register Plus(registered trademark), the Company's internet-based electronic banking service. Private client services and asset management fees were $75 million for the quarter, down slightly from last year. Lower asset price levels have been partially offset by strength in alternative investment and short-term money market product lines. Noninterest income grew to 65% of total third quarter revenue, up from 62% last year. The WTC disaster resulted in a disruption of the markets, including payment and securities processing, which affected both the Company and other market participants. In addition, significant levels of liquidity were injected into the markets immediately following the disaster. These factors 22 resulted in excess liquidity and unsettled trades at the Company, causing a temporary expansion of the Company's balance sheet. Normalized return measures have been computed using both normalized net income and balance sheet. (See Supplemental Financial Information for normalized balance sheet.) Return on average common equity for the third quarter of 2001 was 23.83% compared with 25.75% in the third quarter of 2000. Return on average assets for the third quarter of 2001 was 1.96% compared with 1.89% in the third quarter of 2000. For the first nine months of 2001, return on average common equity was 25.03% compared with 26.55% in 2000. Return on average assets was 2.00% for the first nine months of 2001 compared with 1.83% in 2000. On a normalized basis, tangible diluted earnings per share (earnings before the amortization of goodwill and intangibles) were 54 cents per share in the third quarter of 2001, up 4% from 52 cents per share in the third quarter of 2000. On the same basis, tangible return on average common equity was 37.56% in the third quarter of 2001 compared with 38.89% in 2000; and tangible return on average assets was 2.11% in the third quarter of 2001 compared with 2.05% in 2000. Tangible diluted earnings per share were $1.62 per share for the first nine months of 2001, up 8%, compared with $1.50 per share in 2000. Tangible return on average common equity was 39.30% in 2001 compared with 41.11% in 2000; and tangible return on average assets was 2.15% in the first nine months of 2001 compared with 1.98% last year. NONINTEREST INCOME
3rd Quarter 2nd 3rd Normalized Quarter Quarter Year-to-date ---------- ------- ------- -------------------- 2001 (In millions) 2001 2001 2000 Normalized 2000 ---- ---- ---- ---------- ---- Servicing Fees Securities $430 $436 $427 $1,323 $1,202 Global Payment Services 78 72 65 219 196 ---- ---- ---- ------ ------ 508 508 492 1,542 1,398 Private Client Services and Asset Management Fees 75 78 77 232 219 Service Charges and Fees 87 95 84 273 278 Foreign Exchange and Other Trading Activities 84 98 59 265 206 Securities Gains 22 46 20 113 105 Other 76 31 53 140 96 ---- ---- ---- ------ ------ Total Noninterest Income $852 $856 $785 $2,565 $2,302 ==== ==== ==== ====== ======
Noninterest income was $852 million, up 9% from $785 million in last year's third quarter, and grew to 65% of total revenue, up from 62% in last year's third quarter. Securities servicing fees were $430 million compared with $427 million last year. Global payment services fees were $78 million, up 20% over last year. Private client services and asset management fees were $75 million, down slightly from last year. Foreign exchange and other trading revenues were $84 million for the quarter, up 42% from $59 million last year's third quarter. Securities gains were $22 million for the quarter, which were up slightly from last year but down from $46 million in the prior quarter. Other income in the third quarter of 2001 includes a $43 million gain that the Company recognized from the sale of its interest in the New York Cash Exchange ("NYCE"). Other income in the third quarter of 2000 includes a $26 million payment associated with the termination of a securities clearing contract entered into in conjunction with the acquisition of Everen Clearing Corporation. 23 NET INTEREST INCOME
3rd Quarter 2nd 3rd Normalized Quarter Quarter Year-to-date ---------- ------- ------- ------------------ (Dollars in millions on 2001 a tax equivalent basis) 2001 2001 2000 Normalized 2000 ---- ---- ---- ---------- ----- Net Interest Income $471 $472 $492 $1,411 $1,429 Net Interest Rate Spread 2.10% 2.10% 1.93% 2.02% 1.94% Net Yield on Interest Earning Assets 2.86 2.96 3.05 2.91 2.95
Net interest income on a taxable equivalent basis was $471 million compared with $472 million in the second quarter of 2001 and $492 million in the third quarter of 2000. In the third quarter of 2001, the negative effect of the lower interest rate environment as well as customers electing to pay fees for services rather than maintaining higher compensating balances in a declining rate environment was largely offset by an increase in the Company's investment securities portfolio. This increase is part of an ongoing strategy to shift the Company's asset mix from loans towards highly rated investment securities and short-term liquid assets. The net interest rate spread was 2.10% compared with 2.10% in the second quarter of 2001 and 1.93% one year ago. The net yield on interest earning assets was 2.86% compared with 2.96% in the second quarter of 2001 and 3.05% in last year's third quarter. Net interest income on a taxable equivalent basis amounted to $1,411 million compared with $1,429 million in the first nine months of 2000. The net interest rate spread was 2.02% in 2001 compared with 1.94% in 2000, while the net yield on interest earning assets was 2.91% in 2001 and 2.95% in 2000. Interest income would have been increased by $1 million for the third quarters of 2001 and 2000 and $6 million and $5 million for the first nine months of 2001 and 2000 if loans on nonaccrual status at September 30, 2001 and 2000 had been performing for the entire period. NONINTEREST EXPENSE AND INCOME TAXES Noninterest expense for the quarter was $646 million compared with $655 million in the second quarter and $635 million in 2000. The decrease versus the prior quarter reflects continued control of staffing levels and other related expenses, as well as lower variable expenses such as clearing, sub-custody and incentive compensation. The efficiency ratio for the quarter was 51.4% compared with 51.2% in the second quarter of 2001 and 50.4% in the third quarter of 2000. For the first nine months of 2001, the efficiency ratio was 51.1% compared with 51.4% last year. The effective tax rate for the third quarter and the first nine months of 2001 was 34.5%, compared with 35.1% and 35.0% in the third quarter and the first nine months of 2000, respectively. 24 SEGMENT PROFITABILITY Segment Data The Company has an internal information system that produces performance data for its four business segments along product and service lines. The results of individual business segments are shown on a normalized basis. The reconciling amounts include the impact of the WTC disaster. The Servicing and Fiduciary businesses segment provides a broad array of fee-based services. This segment includes the Company's securities servicing, global payment services, and private client services and asset management businesses. Securities servicing includes global custody, securities clearance, mutual funds, unit investment trust, securities lending, depositary receipts, corporate trust, stock transfer and associated execution services. Global payment services products primarily relate to funds transfer, cash management and trade finance. Private client services and asset management provide traditional banking and trust services to affluent clients and asset management to institutional and private clients. The Corporate Banking segment focuses on providing lending services, such as term loans, lines of credit, asset based financings, and commercial mortgages, to the large public and private corporations nationwide, as well as public and private mid-size businesses in the New York metropolitan area. Special industry groups focus on financial institutions, securities, insurance, media and telecommunications, energy, real estate, retailing, automotive, and government banking institutions. Through BNY Capital Markets, the Company provides syndicated loans, bond underwriting, private placements of corporate debt and equity securities, and merger, acquisition, and advisory services. The Retail Banking segment includes consumer lending, residential mortgage lending, and retail deposit services. The Company operates 345 branches in 23 counties in three states. The Financial Markets segment includes trading of foreign exchange and interest rate products, investing and leasing activities, and treasury services to other segments. This segment offers a comprehensive array of multi-currency hedging and yield enhancement strategies. 25 The segments contributed to the Company's profitability as follows:
In Millions Servicing and For the Quarter Ended Fiduciary Corporate Retail Financial Reconciling Consolidated September 30, 2001 Businesses Banking Banking Markets Items* Total - --------------------- ---------- --------- ------- --------- ----------- ------------ Net Interest Income $ 140 $ 122 $ 123 $ 69 $ (43) $ 411 Provision for Credit Losses - 34 2 - 4 40 Noninterest Income 638 71 32 74 8 823 Noninterest Expense 433 50 78 15 238 814 ----- ----- ----- ---- ----- ----- Income Before Taxes $ 345 $ 109 $ 75 $128 $(277) $ 380 ===== ===== ===== ==== ===== ===== Average Assets $8,794 $26,673 $4,448 $35,401 $11,724 $87,040 ====== ======= ====== ======= ======= =======
In Millions Servicing and For the Quarter Ended Fiduciary Corporate Retail Financial Reconciling Consolidated September 30, 2000 Businesses Banking Banking Markets Items Total - --------------------- ---------- --------- ------- --------- ----------- ------------ Net Interest Income $ 177 $ 135 $ 128 $ 31 $ 8 $ 479 Provision for Credit Losses - 30 2 (1) (6) 25 Noninterest Income 621 66 26 52 20 785 Noninterest Expense 414 54 79 16 72 635 ----- ----- ----- ---- ------ ----- Income Before Taxes $ 384 $ 117 $ 73 $ 68 $ (38) $ 604 ===== ===== ===== ==== ====== ===== Average Assets $8,880 $28,687 $4,529 $32,737 $1,682 $76,515 ====== ======= ====== ======= ====== =======
In Millions Servicing For the Nine and Months Ended Fiduciary Corporate Retail Financial Reconciling Consolidated September 30, 2001 Businesses Banking Banking Markets Items* Total - --------------------- ---------- --------- ------- --------- ----------- ------------ Net Interest Income $ 443 $ 377 $ 375 $ 159 $ (32) $1,322 Provision for Credit Losses - 95 5 - - 100 Noninterest Income 1,976 226 87 218 29 2,536 Noninterest Expense 1,290 165 229 50 387 2,121 ------ ----- ----- ----- ----- ------ Income Before Taxes $1,129 $ 343 $ 228 $ 327 $(390) $1,637 ====== ===== ===== ===== ===== ====== Average Assets $8,822 $27,124 $4,446 $34,620 $5,170 $80,182 ====== ======= ====== ======= ====== =======
In Millions Servicing For the Nine and Months Ended Fiduciary Corporate Retail Financial Reconciling Consolidated September 30, 2000 Businesses Banking Banking Markets Items Total - --------------------- ---------- --------- ------- --------- ----------- ------------ Net Interest Income $ 493 $ 415 $ 381 $ 85 $ 15 $1,389 Provision for Credit Losses - 96 4 (1) (29) 70 Noninterest Income 1,804 228 74 174 22 2,302 Noninterest Expense 1,199 159 231 50 226 1,865 ----- ----- ----- ----- ----- ------ Income Before Taxes $1,098 $ 388 $ 220 $ 210 $(160) $1,756 ====== ===== ===== ===== ===== ====== Average Assets $8,837 $30,533 $4,366 $31,920 $1,674 $77,330 ====== ======= ====== ======= ====== =======
* Includes the impact of WTC disaster. 26 Segment Highlights Servicing and Fiduciary Businesses - ---------------------------------- In the third quarter of 2001, noninterest income was $638 million compared with $621 million in 2000. In the Company's securities servicing businesses, fee revenues were $430 million in the third quarter, up slightly from $427 million last year. For the first nine months of 2001, fees from these businesses totaled $1,323 million, a 10% increase compared with $1,202 million in 2000. Despite the slowdown in the global capital markets, the Company recorded strong results in execution services, corporate trust, broker dealer services and global liquidity services. Third quarter results reflect continued strong foreign exchange transaction flows from the Company's securities servicing clients and market share gains through e-commerce products such as iFX Manager(servicemark). The Company continues to be the world's leading custodian with quarter- end assets of $6.4 trillion, including $1.8 trillion of cross-border custody assets. Global payment services fees were $78 million, up 20% over last year. Fees increased as a result of customers electing to pay for services in fees rather than maintaining higher compensating balances in a declining rate environment. In addition, this growth reflects higher cash management and trade service fees. New cash management business wins continued among the Company's regional commercial and corporate banking clients driven, in part, by the continued success of CA$H-Register Plus(registered trademark), the Company's internet-based electronic banking service. Private client services and asset management fees were $75 million for the quarter, down slightly from last year. Lower asset price levels have been partially offset by strength in alternative investment and short-term money market product lines. Assets under management were $61 billion at September 30, 2001 compared with $64 billion at September 30, 2000, while assets under administration were $31 billion compared with $33 billion at September 30, 2000. Net interest income in the Servicing and Fiduciary businesses segment was $140 million for the third quarter of 2001 compared with $177 million in 2000. The decrease in net interest income is primarily due to the decline in interest rates. Net charge-offs in the Servicing and Fiduciary Businesses segment were zero in the third quarters of 2001 and 2000. Noninterest expense for the third quarter of 2001 was $433 million compared with $414 million in 2000. The rise in noninterest expense was primarily due to acquisitions as well as the Company's continued investment in technology. Corporate Banking - ----------------- The Corporate Banking segment's net interest income was $122 million in the third quarter of 2001, down from last year's $135 million. The decrease reflects the decline in assets, principally broker dealer loans, as well as a decline in both the volume and the value of low cost short-term deposits. The third quarter of 2001 provision for credit losses was $34 million compared with $30 million last year. Net charge-offs in the Corporate Banking segment were $36 million and $17 million in the third quarters of 2001 and 2000. Noninterest income was $71 million in the current year compared with $66 million last year reflecting strength in the Company's fixed income businesses. Noninterest expense decreased to $50 million from $54 million reflecting lower compensation and other real estate expense. 27 Retail Banking - -------------- Net interest income in the third quarter of 2001 was $123 million compared with $128 million in 2000. Noninterest income was $32 million for the quarter compared with $26 million last year. The increase reflects better penetration of the customer base and improved pricing. Noninterest expense in the third quarter of 2001 was $78 million compared with $79 million in the previous year's period. Net charge-offs were $4 million in the third quarter of 2001 and $2 million in the third quarter of 2000. Financial Markets - ----------------- Net interest income for the quarter was $69 million compared with 2000's $31 million reflecting lower funding costs and an increase in assets, primarily U.S. government agency obligations and highly-rated asset-backed securities. Noninterest income was $74 million in the third quarter of 2001 compared with $52 million in the third quarter of 2000 because of stronger trading performance, particularly in interest rate derivatives. Net charge- offs were zero in the third quarter of 2001 and a recovery of $1 million in the third quarter of 2000. Segment Accounting Principles - ----------------------------- The Company's segment data has been determined on an internal management basis of accounting, rather than the generally accepted accounting principles used for consolidated financial reporting. These measurement principles are designed so that reported results of the segments will track their economic performance. Segment results are subject to restatement whenever improvements are made in the measurement principles or organizational changes are made. In the third quarter of 2000, the Company changed certain assumptions related to the duration of sector assets and liabilities and the related interest rates. As a result, sector results for 2000 were restated. The measure of revenues and profit or loss by operating segment has been adjusted to present segment data on a taxable equivalent basis. The provision for credit losses allocated to each reportable segment is based on management's judgment as to average credit losses that will be incurred in the operations of the segment over a credit cycle of a period of years. Management's judgment includes the following factors among others: historical charge-off experience and the volume, composition and growth of the loan portfolio. This method is different from that required under generally accepted accounting principles as it anticipates future losses which are not yet probable and therefore not recognizable under generally accepted accounting principles. Assets and liabilities are match funded. Support and other indirect expenses are allocated to segments based on general guidelines. 28 Reconciling Items - ----------------- The impact of the WTC disaster is a reconciling item in 2001. Other reconciling items for net interest income primarily relate to the recording of interest income on a taxable equivalent basis, reallocation of capital and the funding of goodwill. Other reconciling items for noninterest income include a $43 million gain on the sale of the Company's interest in NYCE in 2001, a $26 million payment associated with the termination of a securities clearing contract in 2000 as well as the sale of certain securities in 2001 and 2000. Other reconciling items for noninterest expense include $29 million of amortization of intangibles in the third quarters of 2001 and 2000, and corporate overhead. The adjustment to the provision for credit losses reflects the difference between the aggregate of the credit provision over a credit cycle for the reportable segments and the Company's recorded provision. The other reconciling items for average assets consist of goodwill and other intangible assets. FORWARD LOOKING STATEMENTS The information presented with respect to, among other things, earnings outlook, projected business strategy, the outcome of legal and investigatory proceedings, the Company's plans, objectives and strategies reallocating assets and moving into fee-based businesses, and future loan losses, is forward looking information. Forward looking statements are the Company's current estimates or expectations of future events or future results. The Company or its executive officers and directors on behalf of the Company, may from time to time make forward looking statements. When used in this report, any press release or oral statements, the words "estimate", "forecast", "project", "anticipate", "expect", "intend", "believe", "plan", "goal", "should", "may", "strategy", and words of like import are intended to identify forward looking statements in addition to statements specifically identified as forward looking statements. Forward looking statements, including the Company's future results of operations and discussions of future plans contained in Management's Discussion and Analysis and elsewhere in this Form 10-Q, are subject to risks and uncertainties, some of which are discussed herein, that could cause actual results to differ materially from projected results. Forward looking statements, projections or future plans, could be affected by a number of factors that the Company is necessarily unable to predict with accuracy, including the economic and other effects of the WTC disaster and the subsequent U.S. military action, lower than expected performance or higher than expected costs in connection with acquisitions and integration of acquired businesses, changes in relationships with customers, variations in management projections or market forecasts and the actions that management could take in response to these changes, management's ability to achieve efficiency goals, changes in customer credit quality, future changes in interest rates, general credit quality, the levels of economic, capital market, and merger and acquisition activity, consumer behavior, government monetary policy, domestic and foreign legislation, regulation and investigation, competition, credit, market and operating risk, and loan demand, as well as the pace of recovery of the domestic economy, market demand for the Company's products and services and future global economic conditions. This is not an exhaustive list and as a result of variations in any of these factors actual results may differ materially from any forward looking statements. Forward looking statements speak only as of the date they are made. The Company will not update forward looking statements to reflect facts, assumptions, circumstances or events which have changed after a forward looking statement was made. 29 Government Monetary Policies The Federal Reserve Board has the primary responsibility for United States monetary policy. Its actions have an important influence on the demand for credit and investments and the level of interest rates and thus on the earnings of the Company. Competition The businesses in which the Company operates are very competitive. Competition is provided by both unregulated and regulated financial services organizations, whose products and services span the local, national, and global markets in which the Company conducts operations. A wide variety of domestic and foreign companies compete for processing services. Commercial banks, savings banks, savings and loan associations, and credit unions actively compete for deposits, and money market funds and brokerage houses offer deposit-like services. These institutions, as well as consumer and commercial finance companies, national retail chains, factors, insurance companies and pension trusts, are important competitors for various types of loans. Issuers of commercial paper compete actively for funds and reduce demand for bank loans. For personal and corporate trust services and investment counseling services, insurance companies, investment counseling firms, and other business firms and individuals offer active competition. Recent Legislation On October 25, 2001, the International Money Laundering and Anti- Terrorist Funding Act was enacted. This statute will generally increase the responsibilities of financial institutions to counter money laundering, particularly in the areas of correspondent banking and private banking, but the actual impact on financial institutions in general and the Company in particular, will be largely dependent upon implementing regulations. 30 Supplemental Financial Information THE BANK OF NEW YORK COMPANY, INC. Consolidated Statements of Income (In millions, except per share amounts)
For the three months ended September 30, 2001 ------------------------------------- Disaster Reported Normalized Impact -------- ---------- -------- Net Interest Income $ 411 $ 456 $ (45) Provision for Credit Losses 40 40 - ----- ----- ------ Net Interest Income After Provision for Credit Losses 371 416 (45) Noninterest Income - ------------------ Servicing Fees Securities 416 430 (14) Global Payment Services 75 78 (3) Private Client Services and Asset Management Fees 74 75 (1) Service Charges and Fees 81 87 (6) Foreign Exchange and Other Trading 79 84 (5) Securities Gains 22 22 - Other 76 76 - ----- ----- ------ Total Noninterest Income 823 852 (29) Noninterest Expense - ------------------- Salaries and Employee Benefits 418 384 34 Net Occupancy 87 49 38 Furniture and Equipment 87 32 55 Other 222 181 41 ----- ----- ------ Total Noninterest Expense 814 646 168 ----- ----- ------ Income Before Income Taxes 380 622 (242) Income Taxes 113 215 (102) Distribution on Preferred Trust Securities 24 24 - ----- ----- ------ Net Income Available to Common Shareholders $ 243 $ 383 $(140) ===== ===== ====== Per Common Share Data: - --------------------- Basic Earnings $0.33 $0.52 $(0.19) Diluted Earnings 0.33 0.52 (0.19) Cash Dividends Paid 0.18 0.18 - Diluted Shares Outstanding 741 741 -
31 Supplemental Financial Information THE BANK OF NEW YORK COMPANY, INC. Consolidated Statements of Income (In millions, except per share amounts)
For the nine months ended September 30, 2001 ------------------------------------- Disaster Reported Normalized Impact -------- ---------- -------- Net Interest Income $1,322 $1,367 $ (45) Provision for Credit Losses 100 100 - ------ ------ ------ Net Interest Income After Provision for Credit Losses 1,222 1,267 (45) Noninterest Income - ------------------ Servicing Fees Securities 1,309 1,323 (14) Global Payment Services 216 219 (3) Private Client Services and Asset Management Fees 231 232 (1) Service Charges and Fees 267 273 (6) Foreign Exchange and Other Trading 260 265 (5) Securities Gains 113 113 - Other 140 140 - ------ ------ ------ Total Noninterest Income 2,536 2,565 (29) Noninterest Expense - ------------------- Salaries and Employee Benefits 1,202 1,168 34 Net Occupancy 184 146 38 Furniture and Equipment 148 93 55 Other 587 546 41 ------ ------ ------ Total Noninterest Expense 2,121 1,953 168 ------ ------ ------ Income Before Income Taxes 1,637 1,879 (242) Income Taxes 546 648 (102) Distribution on Preferred Trust Securities 79 79 - ------ ------ ------ Net Income Available to Common Shareholders $1,012 $1,152 $(140) ====== ====== ====== Per Common Share Data: - --------------------- Basic Earnings $1.38 $1.58 $(0.20) Diluted Earnings 1.36 1.55 (0.19) Cash Dividends Paid 0.54 0.54 - Diluted Shares Outstanding 742 742 -
32 Supplemental Financial Information THE BANK OF NEW YORK COMPANY, INC. Consolidated Balance Sheets (Dollars in millions)
September 30, 2001 ------------------------ Reported Normalized -------- ---------- Assets - ------ Cash and Due from Banks $ 3,289 $ 3,289 Interest-Bearing Deposits in Banks 5,961 5,961 Securities 13,370 13,370 Trading Assets at Fair Value 9,301 9,301 Federal Funds Sold and Securities Purchased Under Resale Agreements 338 338 Loans (less allowance for credit losses of $616) 44,920 39,356 Other Assets 12,498 8,498 ------- ------- Total Assets $89,677 $80,113 ======= ======= Liabilities and Shareholders' Equity - ------------------------------------ Total Deposits $60,261 $55,598 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 5,719 2,419 Other Borrowed Funds 4,444 4,444 Other Liabilities 11,286 9,685 ------- ------- Total Liabilities 81,710 72,146 Company-Obligated Mandatory Redeemable Preferred Trust Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures 1,500 1,500 Total Shareholders' Equity 6,467 6,467 ------- ------- Total Liabilities and Shareholders' Equity $89,677 $80,113 ======= =======
33 THE BANK OF NEW YORK COMPANY, INC. Average Balances and Rates on a Taxable Equivalent Basis (Dollars in millions)
Normalized for the three months For the three months ended September 30, 2001 ended September 30, 2000 ------------------------------- ------------------------------ Average Average Average Average Balance Interest Rate Balance Interest Rate ------- -------- -------- ------- -------- ------- ASSETS - ------ Interest-Bearing Deposits in Banks (primarily foreign) $ 6,417 $ 68 4.20% $ 4,941 $ 67 5.36% Federal Funds Sold and Securities Purchased Under Resale Agreements 2,779 25 3.47 4,863 80 6.55 Loans Domestic Offices 19,976 306 6.08 18,862 355 7.49 Foreign Offices 17,139 226 5.23 19,676 377 7.62 ------- ----- ------- ----- Total Loans 37,115 532 5.69 38,538 732 7.56 ------- ----- ------- ----- Securities U.S. Government Obligations 951 13 5.24 1,604 24 5.90 U.S. Government Agency Obligations 3,772 58 6.14 1,614 28 6.92 Obligations of States and Political Subdivisions 686 12 7.24 629 13 8.12 Other Securities 6,390 94 5.85 2,838 44 6.16 Trading Securities 7,415 84 4.49 8,941 132 5.94 ------- ----- ------- ----- Total Securities 19,214 261 5.40 15,626 241 6.16 ------- ----- ------- ----- Total Interest-Earning Assets 65,525 886 5.36% 63,968 1,120 6.97% ----- ----- Allowance for Credit Losses (612) (609) Cash and Due from Banks 2,056 3,003 Other Assets 10,573 10,153 ------- ------- NORMALIZED ASSETS 77,542 76,515 Impact of WTC Disaster 9,498 - ------- ------- TOTAL ASSETS $87,040 $76,515 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Interest-Bearing Deposits Money Market Rate Accounts $ 6,132 $ 48 3.08% $ 5,879 $ 73 4.96% Savings 7,639 36 1.88 7,566 52 2.73 Certificates of Deposit $100,000 & Over 402 5 4.74 442 7 6.01 Other Time Deposits 1,831 19 4.06 1,877 25 5.23 Foreign Offices 26,201 220 3.33 26,411 344 5.20 ------- ----- ------- ----- Total Interest-Bearing Deposits 42,205 328 3.08 42,175 501 4.73 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 3,150 27 3.37 2,517 38 6.06 Other Borrowed Funds 1,987 19 3.71 2,154 37 6.91 Long-Term Debt 3,060 41 5.31 2,872 52 7.13 ------- ----- ------- ----- Total Interest-Bearing Liabilities 50,402 415 3.26% 49,718 628 5.04% ----- ----- Noninterest-Bearing Deposits 10,131 11,232 Other Liabilities 9,138 8,448 Minority Interest-Preferred Securities 1,500 1,500 Shareholders' Equity 6,371 5,617 ------- ------- NORMALIZED LIABILITIES AND SHAREHOLDERS' EQUITY 77,542 76,515 Normalized Net Interest Earnings and Interest Rate Spread 471 2.10% ==== Normalized Yield on Interest-Earning Assets 2.86% ==== Impact of WTC Disaster 9,498 (45) - ------- ------ ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $87,040 $76,515 ======= ======= Net Interest Earnings and Interest Rate Spread $ 426 1.60% $ 492 1.93% ===== ==== ===== ==== Net Yield on Interest-Earning Assets 2.37% 3.05% ==== ====
34 THE BANK OF NEW YORK COMPANY, INC. Average Balances and Rates on a Taxable Equivalent Basis (Dollars in millions)
Normalized for the nine months For the nine months ended September 30, 2001 ended September 30, 2000 ------------------------------ ------------------------------ Average Average Average Average Balance Interest Rate Balance Interest Rate ------- -------- ------- ------- -------- ------- ASSETS - ------ Interest-Bearing Deposits in Banks (primarily foreign) $ 5,940 $ 200 4.49% $ 5,499 $ 203 4.94% Federal Funds Sold and Securities Purchased Under Resale Agreements 3,367 114 4.52 4,310 198 6.15 Loans Domestic Offices 19,347 966 6.68 19,477 1,075 7.37 Foreign Offices 18,152 838 6.17 20,039 1,109 7.39 ------- ------ ------- ----- Total Loans 37,499 1,804 6.43 39,516 2,184 7.38 ------- ------ ------- ----- Securities U.S. Government Obligations 1,081 45 5.57 2,165 97 6.01 U.S. Government Agency Obligations 2,823 135 6.36 1,192 61 6.82 Obligations of States and Political Subdivisions 668 38 7.67 612 37 8.04 Other Securities 4,595 202 5.89 2,785 127 6.09 Trading Securities 8,861 334 5.05 8,597 380 5.90 ------- ------ ------- ----- Total Securities 18,028 754 5.60 15,351 702 6.11 ------- ------ ------- ----- Total Interest-Earning Assets 64,834 2,872 5.92% 64,676 3,287 6.79% ------ ----- Allowance for Credit Losses (613) (606) Cash and Due from Banks 2,491 3,239 Other Assets 10,269 10,021 ------- ------- NORMALIZED ASSETS 76,981 77,330 Impact of WTC Disaster 3,201 - ------- ------- TOTAL ASSETS $80,182 $77,330 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Interest-Bearing Deposits Money Market Rate Accounts $ 6,175 $ 171 3.70% $ 5,733 $ 210 4.89% Savings 7,594 126 2.22 7,630 146 2.56 Certificates of Deposit $100,000 & Over 395 16 5.43 443 19 5.59 Other Time Deposits 1,903 64 4.50 2,023 76 5.00 Foreign Offices 26,315 785 3.99 27,755 1,043 5.02 ------- ------ ------- ----- Total Interest-Bearing Deposits 42,382 1,162 3.67 43,584 1,494 4.58 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 2,637 82 4.14 2,569 107 5.57 Other Borrowed Funds 2,015 78 5.13 2,197 108 6.54 Long-Term Debt 3,027 139 6.09 2,839 149 6.97 ------- ------ ------- ----- Total Interest-Bearing Liabilities 50,061 1,461 3.90% 51,189 1,858 4.85% ------ ----- Noninterest-Bearing Deposits 10,609 11,249 Other Liabilities 8,659 8,073 Minority Interest-Preferred Securities 1,500 1,500 Shareholders' Equity 6,152 5,319 ------- ------- NORMALIZED LIABILITIES AND SHAREHOLDERS' EQUITY 76,981 77,330 Normalized Net Interest Earnings and Interest Rate Spread 1,411 2.02% ==== Normalized Yield on Interest-Earning Assets 2.91% ==== Impact of WTC Disaster 3,201 (45) - ------- ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $80,182 $77,330 ======= ======= Net Interest Earnings and Interest Rate Spread $1,366 1.84% $1,429 1.94% ====== ==== ====== ==== Net Yield on Interest-Earning Assets 2.74% 2.95% ==== ====
35 PART II. OTHER INFORMATION Item 1. Legal Proceedings - -------------------------- The Company continues to cooperate with investigations by federal and state law enforcement and bank regulatory authorities. The investigations focus on funds transfer activities in certain accounts at BNY, principally involving wire transfers from Russian and other sources in Eastern Europe, as well as certain other matters involving BNY and its affiliates. The funds transfer investigations center around accounts controlled by Peter Berlin, his wife, Lucy Edwards (until discharged in September 1999, an officer of BNY), and companies and persons associated with them. Berlin and Edwards pled guilty to various federal criminal charges. The Company cannot predict when or on what basis the investigations will conclude or their effect, if any, on the Company. On February 8, 2000, BNY entered into a written agreement with both the Federal Reserve Bank of New York and the New York State Banking Department, which imposed a number of reporting requirements and controls. Substantially all of these reporting requirements and controls are now in place. Four purported shareholder derivative actions have been filed in connection with these Russian related matters - - two in the United States District Court for the Southern District of New York and two in the New York Supreme Court, New York County - - against certain directors and officers of the Company and BNY alleging that the defendants have breached their fiduciary duties of due care and loyalty by aggressively pursuing business with Russian banks and entities without implementing sufficient safeguards and failing to supervise properly those responsible for that business. The actions seek, on behalf of the Company and BNY, monetary damages from the defendants, corrective action and attorneys' fees. On September 1, 2000, plaintiffs in the two federal actions filed an amended, consolidated complaint that names all of the directors and certain officers of BNY and the Company as defendants, repeats the allegations of the original complaints and adds allegations that certain officers of BNY and the Company participated in a scheme to transfer cash improperly from Russia to various off-shore accounts and to avoid Russian customs, currency and tax laws. Management believes that the allegations of both the original complaints and the amended complaint are without merit. On September 12, 2000, the boards of directors of BNY and the Company authorized a Special Litigation Committee ("SLC") to consider the response of BNY and the Company to the state and federal court shareholder derivative actions. The SLC issued an Interim Report dated May 21, 2001 which concluded that there was "no credible evidence" to support the allegations of personal misconduct against Mr. Renyi and "credible evidence" that contradicts "critical allegations" in the amended complaint in the federal action. Additionally, on October 7, 1999, six alleged depositors of Joint Stock Bank Inkombank ("Inkombank"), a Russian bank, filed a purported class action in the United States District Court for the Southern District of New York on behalf of all depositors of Inkombank who lost their deposits when that bank collapsed in 1998. The complaint, as subsequently amended twice, alleges that the Company and BNY and their senior officers knew about, and aided and abetted the looting of Inkombank by its principals and participated in a scheme to transfer cash improperly from Russia to various off-shore accounts and to avoid Russian customs, currency and tax laws. The amended complaint asserts causes of action for conversion and aiding and abetting conversion under New York law. In addition, the amended complaint states a claim under the Racketeer Influenced and Corrupt Organizations Act ("RICO"). On March 21, 2001, the court dismissed the second amended complaint without leave to replead. On April 16, 2001, plaintiffs filed a Notice of Appeal of that decision. Argument is currently expected on that appeal in November-December 2001. On October 24, 2000, three alleged shareholders of Inkombank filed an action in the Supreme Court, New York County against the Company, BNY and Inkombank. The complaint alleges that the defendants fraudulently induced the 36 plaintiffs to refrain from redeeming their alleged $40 million investment in Inkombank. The complaint asserts a single cause of action for fraud, seeking $40 million plus 12% interest from January 1994, punitive damages, costs, interest and attorney fees. The Company and BNY have moved to dismiss the amended complaint. That motion is pending. The Company and BNY believe that the allegations of the complaint are without merit and intend to defend the action vigorously. The Company does not expect that any of the foregoing civil actions will have a material impact on the Company's consolidated financial statements. In the ordinary course of business, there are various legal claims pending against the Company and its subsidiaries. In the opinion of management, liabilities arising from such claims, if any, would not have a material effect on the Company's consolidated financial statements. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) The exhibits filed as part of this report are as follows: Exhibit 12 - Statement Re: Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Distributions on Preferred Trust Securities for the Three Months and Nine Months Ended September 30, 2001 and 2000. (b) The Company filed the following reports on Form 8-K since June 30, 2001: On July 16, 2001, the Company filed a Form 8-K Current Report (Items 5 and 7), which report included unaudited interim financial information and accompanying discussion for the second quarter of 2001 contained in the Company's press release dated July 16, 2001. On July 23, 2001, the Company filed a Form 8-K Current Report (Item 5 and 7), which report included seven exhibits in connection with the Registration Statement on Form S-3 (File Nos. 333-62516, 333-62516-01, 333- 62516-02, 333-62516-03 and 333-62516-04) covering the Company's Senior Subordinated Medium-Term Notes, Series E and Senior Medium-Term Notes, Series D, issuable under an Indenture, dated as of October 1, 1993 between the Company and Chase Manhattan Trust Company National Association and an Indenture, dated as of July 18, 1991 between the Company and Bankers Trust Company, respectively. The exhibits consist of the Distribution Agreement, dated July 20, 2001; the Forms of Notes; Officers' Certificates pursuant to Section 301 of the Indentures; and the opinion of counsel as to the legality of the Notes. On October 18, 2001, the Company filed a Form 8-K Current Report (Items 5 and 7), which report included unaudited interim financial information and accompanying discussion for the third quarter of 2001 contained in the Company's press release dated October 18, 2001. 37 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. THE BANK OF NEW YORK COMPANY, INC. ---------------------------------- (Registrant) Date: November 14, 2001 By: \s\ Thomas J. Mastro --------------------------------- Name: Thomas J. Mastro Title: Comptroller 38 EXHIBIT INDEX ------------- Exhibit Description - ------- ----------- 12 Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Distributions on Preferred Trust Securities for the Three and Nine Months Ended September 30, 2001 and 2000. EX-12 3 r3q01ex12.txt EX-12 EXHIBIT 12 THE BANK OF NEW YORK COMPANY, INC. Ratios of Earnings to Fixed Charges and Ratios of Earnings to Combined Fixed Charges, and Distributions on Preferred Trust Securities (Dollars in millions)
Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ---- ---- ---- ---- EARNINGS - -------- Income Before Income Taxes $ 380 $ 604 $1,637 $1,756 Fixed Charges, Excluding Interest on Deposits 187 137 417 392 ------ ------ ------ ------ Income Before Income Taxes and Fixed Charges Excluding Interest on Deposits 567 741 2,054 2,148 Interest on Deposits 351 501 1,185 1,494 ------ ------ ------ ------ Income Before Income Taxes and Fixed Charges, Including Interest on Deposits $ 918 $1,242 $3,239 $3,642 ====== ====== ====== ====== FIXED CHARGES - ------------- Interest Expense, Excluding Interest on Deposits $ 160 $ 127 $ 372 $ 364 One-Third Net Rental Expense* 27 10 45 28 ------ ------ ------ ------ Total Fixed Charges, Excluding Interest on Deposits 187 137 417 392 Interest on Deposits 351 501 1,185 1,494 ------ ------ ------ ------ Total Fixed Charges, Including Interest on Deposits $ 538 $ 638 $1,602 $1,886 ====== ====== ====== ====== DISTRIBUTION ON PREFERRED TRUST SECURITIES, PRE-TAX BASIS - ------------------------------- $ 24 $ 28 $ 79 $ 85 ====== ====== ====== ====== EARNINGS TO FIXED CHARGES RATIOS - -------------------------------- Excluding Interest on Deposits 3.03x 5.41x 4.93x 5.48x Including Interest on Deposits 1.71 1.95 2.02 1.93 EARNINGS TO COMBINED FIXED CHARGES, DISTRIBUTION ON PREFERRED TRUST SECURITIES, & PREFERRED STOCK DIVIDENDS RATIOS - ------------------------------------------- Excluding Interest on Deposits 2.69 4.49 4.14 4.50 Including Interest on Deposits 1.63 1.86 1.93 1.85 *The proportion deemed representative of the interest factor.
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