-----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, MAsoTiDoOhtUFKIaVyPoXE2d/hDRMe5rfxzMwnTwKJiXBiLKCnQcJo9XMGNl2XAM hsm5vdlpEq7jgNbzl/xaKg== 0000009626-02-000017.txt : 20020415 0000009626-02-000017.hdr.sgml : 20020415 ACCESSION NUMBER: 0000009626-02-000017 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020328 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06152 FILM NUMBER: 02591516 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-K 1 r10k2001.txt 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Fiscal Year Ended December 31, 2001 [ ] 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 no.) One Wall Street, New York, New York 10286 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (212) 495-1784 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- Common Stock, $7.50 par value NEW YORK STOCK EXCHANGE Preferred Stock Purchase Rights NEW YORK STOCK EXCHANGE 7.80% Preferred Trust Securities, Series C NEW YORK STOCK EXCHANGE 7.05% Preferred Securities, Series D NEW YORK STOCK EXCHANGE 6.88% Preferred Trust Securities, Series E NEW YORK STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: Title of each class ------------------- Class A, 7.75% Cumulative Convertible Preferred Stock 7.97% Capital Securities, Series B Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by nonaffiliates of the registrant at February 28, 2002 consisted of: Common Stock ($7.50 par value) $27,350,623,907 (based on closing price on New York Stock Exchange) The number of shares outstanding of the registrant's Common Stock $7.50 par value was 726,637,192 shares on February 28, 2002. 2 DOCUMENTS INCORPORATED BY REFERENCE Portions of the 2001 Annual Report to Shareholders are incorporated by reference into Parts I, II, and IV. Proxy Statement for the annual meeting of shareholders to be held May 14, 2002 (other than information included in the proxy statement pursuant to Item 402 (i), (k) and (l) of Regulation S-K) is incorporated by reference into Part III. PART I - ------ ITEM 1. BUSINESS - ----------------- INTRODUCTION The business of The Bank of New York Company, Inc. (the "Company") and its subsidiaries is described in the Company's 2001 Annual Report to Shareholders beginning under the heading "Global Vision with A Local Focus" and continuing through "Retail Banking" which description is included in Exhibit 13 to this report and incorporated herein by reference. Also, the "Management's Discussion and Analysis" section included in Exhibit 13 contains financial and statistical information on the operations of the Company. Such information is herein incorporated by reference. CERTAIN REGULATORY CONSIDERATIONS General As a bank holding company, the Company is subject to the regulation and supervision of the Federal Reserve Board under the Bank Holding Company Act of 1956 ("BHC Act"). The Company is also subject to regulation by the New York State Banking Department. Under the BHC Act, bank holding companies may not directly or indirectly acquire the ownership or control of more than 5% of the voting shares or substantially all of the assets of any bank or bank holding company, without the prior approval of the Federal Reserve Board. In addition, bank holding companies that are not financial holding companies are generally limited to engaging in the business of banking, managing or controlling banks, and other activities that the Federal Reserve Board has determined to be so closely related to banking as to be a proper incident thereto. Under the Gramm-Leach-Bliley Act (the "GLB Act"), which became effective on March 11, 2000 with respect to provisions relating to powers, bank holding companies, each of whose depository institution subsidiaries is "well capitalized" as defined under the Federal Deposit Insurance Act and "well managed" as defined under Regulation Y under the BHC Act and which obtain at least a "satisfactory" rating under the Community Reinvestment Act, have the ability to declare themselves to be financial holding companies and engage in a broader range of activities than those traditionally permissible for U.S. bank holding companies. The Company's declaration to become a financial holding company became effective on August 11, 2000. As a financial holding company, the Company may conduct, or acquire a company (other than a U.S. depository institution or foreign bank) engaged in, activities that are "financial in nature," as well as additional activities that the Federal Reserve Board determines (in the case of incidental activities, in conjunction with the Department of the Treasury) are incidental or complementary to financial activities, without the prior approval of the Federal Reserve Board. Under the GLB Act, activities that are financial in nature include insurance, securities underwriting and dealing, merchant banking, and lending activities. Under the new merchant banking authority added by the GLB Act, financial holding companies may invest in companies that engage in activities that are not otherwise permissible, subject to certain limitations, including that the financial holding company makes the investment with the intention of limiting 3 the investment in duration and does not manage the company on a day-to-day basis. Financial holding companies that do not continue to meet all of the requirements for financial holding company status will, depending on which requirement they fail to meet, lose the ability to undertake new activities or acquisitions that are financial in nature or to continue those activities that are not generally permissible for bank holding companies. The Company's subsidiary banks are subject to supervision and examination by applicable federal and state banking agencies. The Bank of New York ("BNY"), the Company's principal banking subsidiary, is a New York chartered banking corporation, a member of the Federal Reserve System and is subject to regulation, supervision and examination by the Federal Reserve Board and by the New York State Banking Department. Both federal and state laws extensively regulate various aspects of the banking business, such as permissible types and amounts of loans and investments, permissible activities, and reserve requirements. These regulations are intended primarily for the protection of depositors rather than the Company's stockholders. Capital Adequacy The Federal bank regulators have adopted risk-based capital guidelines for bank holding companies and banks. The minimum ratio of qualifying total capital ("Total Capital") to risk-weighted assets (including certain off- balance sheet items) is 8%. At least half of the Total Capital must consist of common stock, retained earnings, noncumulative perpetual preferred stock, minority interests (including preferred trust securities) and, for bank holding companies, a limited amount of qualifying cumulative perpetual preferred stock, less most intangibles including goodwill ("Tier 1 Capital"). The remainder ("Tier 2 Capital") may consist of other preferred stock, certain other instruments, and limited amounts of subordinated debt and the loan and lease allowance. Not more than 25% of qualifying Tier 1 Capital may consist of preferred trust securities. In addition, the Federal Reserve Board has established minimum Leverage Ratio (Tier 1 Capital to average total assets) guidelines for bank holding companies and banks. The Federal Reserve Board's guidelines provide for a minimum Leverage Ratio of 3% for bank holding companies and banks that meet certain specified criteria, including those having the highest regulatory rating. All other banking organizations will be required to maintain a Leverage Ratio of at least 3% plus an additional cushion of 100 to 200 basis points. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. At December 31, 2001, the Federal Reserve Board has not advised the Company of any specific minimum Leverage Ratio applicable to it. See "FDICIA" below. 4 Merchant Banking Capital Requirements The federal bank regulators have adopted rules, effective April 1, 2002, governing the regulatory capital treatment of equity investments by the Company in nonfinancial companies. Such equity investments, which are referred to as merchant banking investments, include investments made under the merchant banking authority conferred on financial holding companies under the GLB Act as well as pursuant to certain other authority. With certain exceptions, the federal rules require that the Company and its bank subsidiaries deduct from Tier 1 capital, on a marginal basis, a percentage of the carrying value of each merchant banking investment. Carrying value is generally the value of the merchant banking investment as shown on the Company's balance sheet. The applicable percentages are set forth below: Aggregate Carrying Value of Covered Required Deduction From Tier 1 Capital Nonfinancial Equity Investments as a as a percentage of percentage of Tier 1 Capital the Carrying Value of the Investments ------------------------------------ -------------------------------------- Less than 15% 8% At least 15% but Less than 25% 12% 25% or more 25% It is not anticipated that the new rule will have a material effect on the Company's capital requirements or strategic plans. Bank regulators on an international basis are reconsidering the current capital guidelines. One aspect of this reconsideration is the potential imposition of capital requirements for "operational risk". Such a capital requirement could have a relatively greater impact on banking organizations such as the Company and the Bank that have a high level of fee income, but, based on current proposals, the Company does not believe that the requirement would affect the qualification of the Company and the Bank as well capitalized. FDICIA The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") among other things, requires federal banking regulators to take prompt corrective action in respect of FDIC-insured depository institutions (such as BNY) that do not meet minimum capital requirements. FDICIA establishes five capital tiers: "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized", and "critically undercapitalized". A depository institution's capital tier will depend upon how its capital levels compare to various relevant capital measures and certain other factors, as established by regulation. Under applicable regulations, an FDIC-insured bank is deemed to be: (i) well capitalized if it maintains a Leverage Ratio of at least 5%, a Tier 1 Capital Ratio of at least 6% and a Total Capital Ratio of at least 10% and is not subject to an order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific level for any capital measure; (ii) adequately capitalized if it maintains a Leverage Ratio of at least 4% (or a Leverage Ratio of at least 3% if it is rated Composite 1 in its most recent report of examination, subject to appropriate federal banking agency guidelines), a Tier 1 Capital Ratio of 4% and a Total Capital Ratio of at least 8% and is not defined to be well capitalized but meets all of its minimum capital requirements; (iii) undercapitalized if it has a Leverage Ratio of less than 4% (or a Leverage Ratio that is less than 3% if it is rated Composite 1 in its most recent report of examination, subject to appropriate federal banking agency guidelines), a Tier 1 Capital Ratio less than 4% or a Total Capital Ratio of less than 8% and it does not meet the definition of a significantly undercapitalized or critically undercapitalized institution; (iv) significantly undercapitalized if it has a Leverage Ratio of less than 3%, a Tier 1 Capital Ratio less than 3% or a Total Capital Ratio of less than 8% and it does not meet the definition of critically undercapitalized; and (v) critically undercapitalized if it maintains a level of tangible equity capital 5 less than 2% of total assets. A bank may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the capital category in which an institution is classified. FDICIA generally prohibits an FDIC-insured depository institution from making any capital distribution (including payment of dividends) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit a capital restoration plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for an undercapitalized depository institution's capital restoration plan to be acceptable, its holding company must guarantee the capital plan up to an amount equal to the lesser of 5% of the depository institution's assets at the time it became undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. In the event of the parent holding company's bankruptcy, such guarantee would take priority over the parent's general unsecured creditors. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator. A depository institution that is not well capitalized is subject to certain limitations on brokered deposits. In addition, as indicated above, if a depository institution is not well capitalized, its parent holding company cannot become, and, subject to a capital restoration plan, cannot remain, a financial holding company. 6 As of December 31, 2001 and 2000, the capital ratios for the Company and BNY qualified them as well capitalized as set forth in the table below. December 31, 2001 December 31, 2000 ----------------- ----------------- Well Adequately Capitalized Capitalized Company BNY Company BNY Guidelines Guidelines ------- --- ------- --- ----------- ----------- Tier I 8.11% 7.94% 8.60% 8.03% 6% 4% Total Capital 11.57 11.75 12.92 11.60 10 8 Leverage 6.70 6.50 7.49 6.91 5 3-5 Tangible Common Equity 5.36 6.38 5.78 6.96 At December 31, 2001, the amounts of capital by which the Company and BNY exceed the well capitalized guidelines are as follows: (in millions) Company BNY ------- --- Tier 1 $1,459 $1,300 Total Capital 1,090 1,172 Leverage 1,424 1,227 The following table presents the components of the Company's risk-based capital at December 31, 2001 and 2000: (in millions) 2001 2000 ---- ---- Common Stock $6,317 $6,151 Preferred Stock - 1 Preferred Trust Securities 1,500 1,500 Adjustments: Intangibles (2,075) (1,785) Securities Valuation Allowance (126) (244) ------- ------- Tier 1 Capital 5,616 5,623 ------- ------- Qualifying Unrealized Equity Security Gains 38 153 Qualifying Subordinated Debt 1,751 2,073 Qualifying Allowance for Loan Losses 613 603 ------- ------- Tier 2 Capital 2,402 2,829 ------- ------- Total Risk-based Capital $8,018 $8,452 ======= ======= 7 The following table presents the components of the Company's risk adjusted assets at December 31, 2001 and 2000:
2001 2000 --------------------------------------------- Balance Balance sheet/ Risk sheet/ Risk notional adjusted notional adjusted (in millions) amount balance amount balance -------- -------- -------- -------- Assets - ------ Cash, Due From Banks and Interest- Bearing Deposits in Banks $ 9,841 $ 1,675 $ 8,462 $ 1,491 Securities 12,862 4,648 7,401 3,080 Trading Assets 8,270 - 12,051 - Fed Funds Sold and Securities Purchased Under Resale Agreements 4,795 832 5,790 1,003 Loans 35,747 32,585 36,261 32,119 Allowance for Credit Losses (616) - (616) - Other Assets 10,126 6,648 7,765 5,712 --------- ------- --------- ------- Total Assets $ 81,025 46,388 $ 77,114 43,405 ========= ------- ========= ------- Off-Balance Sheet Exposures - --------------------------- Commitments to Extend Credit $ 46,905 12,056 $ 48,625 12,887 Securities Lending Indemnifications 107,134 - 106,560 - Standby Letters of Credit and Other Guarantees 10,291 9,388 9,634 8,043 Interest Rate Contracts 303,097 875 274,867 534 Foreign Exchange Contracts 71,165 31 76,352 1 --------- ------- --------- ------- Total Off-Balance Sheet Exposures $538,592 22,350 $516,038 21,465 ========= ------- ========= ------- Market Risk Equivalent Assets 542 391 Unrealized Equity Security Gains Qualifying as Risk Based Capital - 153 ------- ------- Risk Adjusted Assets $69,280 $65,414 ======= =======
A further discussion of the Company's capital position and capital adequacy is incorporated by reference from "Capital Resources" in the "Management's Discussion and Analysis" Section and Note 10 to the Consolidated Financial Statements of Exhibit 13. 8 FDIC Insurance Assessments BNY is subject to FDIC deposit insurance assessments. As required by FDICIA, the FDIC adopted a risk-based premium schedule to determine the assessment rates for most FDIC-insured depository institutions. Effective January 1, 1997, under the schedule, the premiums range from zero to $.27 for every $100 of deposits. Each financial institution is assigned to one of nine categories based on the institution's capital ratios and supervisory evaluations, and the premium paid by the institution is based on the category. Under the present schedule, institutions in the highest of the three capital categories and the highest of three supervisory categories pay no premium and institutions in the lowest of these categories pay $.27 per $100 of deposits. BNY paid no FDIC insurance premiums in 2001. In addition, the Deposit Insurance Funds Act provides for assessments at all insured depository institutions to pay for the cost of the Financing Corporation (a governmental agency) funding. The assessment will be based on deposit levels and will be approximately 2.06 basis points. The FDIC is authorized to raise insurance premiums in certain circumstances. A number of factors suggest that as early as the second half of 2002, the bank deposit insurance fund could fall below its federally mandated minimum. If this happens, all FDIC insured banks, including BNY, will be required to pay premiums on deposit insurance. The amount of any such premiums will depend on the outcome of legislative and regulatory initiatives as well as the bank insurance fund's loss experience and other factors which the Company is necessarily unable to predict. Any increase in premiums would have an adverse effect on the Company's earnings. Under the FDICIA, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order, or condition imposed by a bank's federal regulatory agency. Depositor Preference The Omnibus Budget Reconciliation Act of 1993 provides for a domestic depositor preference on amounts realized from the liquidation or other resolution of any depository institution insured by the FDIC. Acquisitions The BHC Act generally limits acquisitions by bank holding companies that have not qualified as financial holding companies to commercial banks and companies engaged in activities that the Federal Reserve Board has determined to be so closely related to banking as to be a proper incident thereto. As a financial holding company, however, the Company is also permitted to acquire companies engaged in activities that are financial in nature and in activities that are incidental and complementary to financial activities without prior Federal Reserve Board approval. The BHC Act, the Federal Bank Merger Act, the New York Banking Law and other state statutes regulate the acquisition of commercial banks. The BHC Act requires the prior approval of the Federal Reserve Board for the direct or indirect acquisition of more than 5% of the voting shares of a commercial bank. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA") permits bank holding companies, with Federal Reserve Board approval, to acquire banks located in states other than the bank holding company's home state without regard to whether the transaction is permitted under state law. In addition, IBBEA provides that national banks and state banks with different home states are permitted to merge across state lines, with the approval of the appropriate federal banking agency, unless the home state of a participating bank passed legislation between the date of enactment of IBBEA and May 31, 1997 expressly prohibiting interstate mergers. Most states, 9 including New York, New Jersey and Connecticut have not passed legislation prohibiting interstate mergers. A bank may also establish and operate a de novo branch in a state in which the bank does not maintain a branch if that state expressly permits de novo branching. Once a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where any bank involved in the interstate merger transaction could have established or acquired branches under applicable federal or state law. A bank that has established a branch in a state through de novo branching may establish and acquire additional branches in such state in the same manner and to the same extent as a bank having a branch in such state as a result of an interstate merger. The merger of BNY with another bank would require the approval of the Federal Reserve Board or other federal bank regulatory authority and, if the surviving bank is a New York state bank, the New York Superintendent of Banks. In reviewing bank acquisition and merger applications, the bank regulatory authorities will consider, among other things, the competitive effect of the transaction, financial and managerial issues including the capital position of the combined organization, and convenience and needs factors, including the applicant's record under the Community Reinvestment Act. Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to its banks and to commit resources to support such banks in circumstances where it might not do so absent such policy. In addition, any loans by the Company to its banks would be subordinate in right of payment to depositors and to certain other indebtedness of its banks. Restrictions on Transfer of Funds Restrictions on the transfer of funds to the Company and subsidiary bank dividend limitations are discussed in Note 10 to the Consolidated Financial Statements included in Exhibit 13. Such discussion is incorporated herein by reference. Cross Guarantees Under FDICIA, a financial institution insured by the FDIC that is under common control with a failed or failing FDIC-insured institution can be required to indemnify the FDIC for losses resulting from the insolvency of the failed institution or from assistance to the failing institution, even if this causes the affiliated institution also to become insolvent. Any obligation or liability owed by a subsidiary depository institution to its parent company is subordinate to the subsidiary's cross-guarantee liability with respect to commonly controlled insured depository institutions and to the rights of depositors. USA Patriot Act The recently enacted USA Patriot Act imposes additional obligations on US financial institutions, including the Company's bank and broker dealer subsidiaries, to implement policies, procedures and controls which are reasonably designed to detect and report instances of money laundering and the financing of terrorism. Affected subsidiaries have started the process of compliance with these new requirements. The Secretary of the Treasury has also proposed additional regulations to further implement the provisions of the Title III of the USA Patriot Act. Although the Company is unable to predict when and in what form these regulations will be adopted, it is not anticipated that the cost of compliance will have a material impact on the Company's consolidated financial statements. 10 ADDITIONAL FINANCIAL INFORMATION - -------------------------------- Average Balances and Rates on a Taxable Equivalent Basis (dollars in millions) - ------------------------------------------------------------------------------
2001*** 2000 1999**** ------------------------- ------------------------- ------------------------ Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate ------------------------- ------------------------- ------------------------ Assets - ------ Interest-Bearing Deposits in Banks (Primarily Foreign) $ 6,105 $ 252 4.13% $ 5,385 $ 273 5.07% $ 5,500 $ 247 4.49% Federal Funds Sold and Securities Purchased Under Resale Agreements 4,260 159 3.72 4,468 277 6.20 4,236 205 4.83 Loans Domestic Offices Other Consumer 3,708 300 8.09 3,527 305 8.65 3,292 270 8.21 Commercial 17,194 957 5.56 15,815 1,125 7.11 16,415 1,148 6.99 Foreign Offices 17,868 1,016 5.68 19,920 1,482 7.44 19,174 1,219 6.36 -------- ------ -------- ------ -------- ------ Total Loans 38,770 2,273* 5.86 39,262 2,912* 7.41 38,881 2,637* 6.78 -------- ------ -------- ------ -------- ------ Securities U.S. Government Obligations 3,939 238 6.04 3,326 210 6.33 3,373 202 5.98 Obligations of States and Political Subdivisions 654 49 7.48 621 50 8.06 588 46 7.86 Other Securities, Domestic Offices 4,785 269 5.62 1,929 114 5.91 1,559 72 4.63 Foreign Offices 744 39 5.29 976 64 6.61 574 29 5.10 -------- ------ -------- ------ -------- ------ Total Other Securities 5,529 308 5.58 2,905 178 6.15 2,133 101 4.75 -------- ------ -------- ------ -------- ------ Trading Securities Domestic Offices 633 30 4.81 516 32 6.17 323 13 3.98 Foreign Offices 7,804 371 4.76 8,396 499 5.94 1,128 66 5.79 -------- ------ -------- ------ -------- ------ Total Trading Securities 8,437 401 4.76 8,912 531 5.95 1,451 79 5.38 -------- ------ -------- ------ -------- ------ Total Securities 18,559 996 5.37 15,764 969 6.15 7,545 428 5.67 -------- ------ -------- ------ -------- ------ Total Interest-Earning Assets 67,694 $3,680 5.44% 64,879 $4,431 6.83% 56,162 $3,517 6.26% ====== ====== ====== Allowance for Credit Losses (612) (608) (613) Cash and Due from Banks 3,289 3,181 3,174 Other Assets 11,329 9,789 8,054 -------- -------- -------- Total Assets 81,700 77,241 66,777 Normalization Impact (3,915) - (1,976) -------- -------- -------- Normalized Assets $77,785 $77,241 $64,801 ======== ======== ======== Assets Attributable to Foreign Offices ** 42.83% 47.41% 41.39% ===== ===== ===== Taxable equivalent adjustments were $60 million in 2001, $54 million in 2000, and $44 million in 1999 and are based on the federal statutory tax rate (35%) and applicable state and local taxes. *Includes fees of $117 million in 2001, $115 million in 2000, and $130 million in 1999. Nonaccrual loans are included in the average loan balance; the associated income, recognized on the cash basis, is included in interest. **Includes Cayman Islands branch office. ***2001 reported average balances include the impact of the World Trade Center disaster estimated to be $3.9 billion affecting loans and short-term deposits. ****1999 reported average balances include BNY Financial Corp. estimated to be $2 billion affecting loans and short-term deposits.
11 Average Balances and Rates on a Taxable Equivalent Basis (dollars in millions) - ------------------------------------------------------------------------------
2001 2000 1999 --------------------------- -------------------------- ------------------------- Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate --------------------------- -------------------------- ------------------------- Liabilities and Shareholders' Equity - -------------------- Interest-Bearing Deposits Domestic Offices Money Market Rate Accounts $ 6,750 $ 199 2.95% $ 5,827 $ 290 4.98% $ 5,142 $ 221 4.30% Savings 7,632 156 2.05 7,599 197 2.59 7,757 177 2.28 Certificates of Deposit of $100,000 or More 446 21 4.79 448 26 5.80 526 26 5.03 Other Time Deposits 1,884 79 4.18 1,998 101 5.07 2,238 99 4.42 ------- ------ ------- ------ ------- ------ Total Domestic Offices 16,712 455 2.73 15,872 614 3.87 15,663 523 3.34 ------- ------ ------- ------ ------- ------ Foreign Offices Banks in Foreign Countries 8,303 244 2.93 6,894 324 4.71 6,402 264 4.12 Government and Official Institutions 1,103 39 3.58 621 38 6.09 1,178 55 4.67 Other Time and Saving 18,516 668 3.60 20,091 1,035 5.15 12,613 521 4.13 ------- ------ ------- ------ ------- ------ Total Foreign Offices 27,922 951 3.40 27,606 1,397 5.06 20,193 840 4.16 ------- ------ ------- ------ ------- ------ Total Interest- Bearing Deposits 44,634 1,406 3.15 43,478 2,011 4.63 35,856 1,363 3.80 ------- ------ ------- ------ ------- ------ Federal Funds Purchased and Securities Sold Under Repurchase Agreements 3,183 103 3.24 2,673 153 5.73 2,940 131 4.45 Other Borrowed Funds 2,204 153 6.97 2,099 139 6.62 2,362 126 5.36 Long-Term Debt 4,609 277 6.00 4,384 317 7.23 3,793 264 6.96 ------- ------ ------- ------ ------- ------ Total Interest-Bearing Liabilities 54,630 1,939 3.55% 52,634 2,620 4.98% 44,951 1,884 4.19% ------ ------ ------ Noninterest-Bearing Deposits (Primarily Domestic) 11,644 11,277 10,708 Other Liabilities 9,201 7,850 6,004 Preferred Stock 1 1 1 Common Shareholders' Equity 6,224 5,479 5,113 ------- ------- ------- Total Liabilities and Shareholders' Equity 81,700 77,241 66,777 ------- ------ ------ Net Interest Earnings and Interest Rate Spread $1,741 1.89% $1,811 1.85% $1,633 2.07% ===== ====== ===== ===== Net Yield on Interest-Earning Assets 2.57% 2.79% 2.91% ===== ===== ===== Normalization Impact (3,915) 45 - (1,976) (55) ------- ------- ------- ------- ------- Normalized Total Liabilities and Shareholders' Equity $77,785 $77,241 $64,801 ======= ======= ======= Normalized Net Interest Earnings and Interest Rate Spread $1,786 2.00% $1,578 2.01% ====== ===== ====== ===== Normalized Net Yield on Interest-Earning Assets 2.74% 2.88% ===== ===== Liabilities Attributable to Foreign Offices 36.67% 38.37% 35.77% ====== ====== ======
12 Rate/Volume Analysis on a Taxable Equivalent Basis (in millions) - ----------------------------------------------------------------
2001 vs. 2000 2000 vs. 1999 ------------------------------------- ---------------------------------- Increase (Decrease) Increase (Decrease) due to change in: due to change in: --------------------- ------------------- Total Total Average Average Increase Average Average Increase Balance Rate (Decrease) Balance Rate (Decrease) ------- ------- ---------- ------- ------- ---------- Interest Income - --------------- Interest-Bearing Deposits in Banks $ 34 $(55) $(21) $ (5) $ 31 $ 26 Federal Funds Sold and Securities Purchased Under Resale Agreements (12) (106) (118) 12 60 72 Loans Domestic Offices Other Consumer 15 (20) (5) 20 15 35 Commercial 91 (259) (168) (41) 18 (23) Foreign Offices (142) (324) (466) 50 213 263 ----- ------ ------ ----- ----- ----- Total Loans (36) (603) (639) 29 246 275 Securities U.S. Government Obligations 38 (10) 28 (3) 11 8 Obligations of States and Political Subdivisions 3 (4) (1) 3 1 4 Other Securities Domestic Offices 161 (6) 155 19 23 42 Foreign Offices (14) (11) (25) 25 10 35 ----- ------ ------ ----- ----- ----- Total Other Securities 147 (17) 130 44 33 77 ----- ------ ------ ----- ----- ----- Trading Securities Domestic Offices 6 (8) (2) 10 9 19 Foreign Offices (34) (94) (128) 431 2 433 ----- ------ ------ ----- ----- ----- Total Trading Securities (28) (102) (130) 441 11 452 ----- ------ ------ ----- ----- ----- Total Securities 160 (133) 27 485 56 541 ----- ------ ------ ----- ----- ----- Total Interest Income 146 (897) (751) 521 393 914 ----- ------ ------ ----- ----- ----- Interest Expense - ---------------- Interest-Bearing Deposits Domestic Offices Money Market Rate Accounts 40 (131) (91) 32 37 69 Savings 1 (42) (41) (4) 24 20 Certificate of Deposits of $100,000 or More - (5) (5) (4) 4 - Other Time Deposits (6) (16) (22) (11) 13 2 ----- ------ ------ ----- ----- ----- Total Domestic Offices 35 (194) (159) 13 78 91 ----- ------ ------ ----- ----- ----- Foreign Offices Banks in Foreign Countries 58 (138) (80) 21 39 60 Government and Official Institutions 21 (20) 1 (31) 14 (17) Other Time and Savings (76) (291) (367) 362 152 514 ----- ------ ------ ----- ----- ----- Total Foreign Offices 3 (449) (446) 352 205 557 ----- ------ ------ ----- ----- ----- Total Interest-Bearing Deposits 38 (643) (605) 365 283 648 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 25 (75) (50) (13) 35 22 Other Borrowed Funds 7 7 14 (15) 28 13 Long-Term Debt 16 (56) (40) 42 11 53 ----- ------ ------ ----- ----- ----- Total Interest Expense 86 (767) (681) 379 357 736 ----- ------ ------ ----- ----- ----- Change in Net Interest Income $ 60 $(130) $ (70) $142 $ 36 $178 ===== ====== ===== ===== Normalization Impact 45 55 ------ ----- Normalized Change in Net Interest Income $ (25) $233 ====== ===== Changes which are not solely due to balance changes or rate changes are allocated to such categories on the basis of the respective percentage changes in average balances and average rates.
13 Normalized Data Normalized earnings for 2001 reflect net income adjusted for the pre-tax loss of $242 million associated with the World Trade Center disaster, the related initial pre-tax insurance recovery of $175 million, a $190 million pre-tax special provision associated with the creation of an accelerated loan disposition program for exposures to 24 emerging telecommunications companies and related tax effects. These adjustments are shown in the table below. THE BANK OF NEW YORK COMPANY, INC. Consolidated Statements of Income (In millions, except per share amounts)
For the year ended December 31, 2001 -------------------------------------------- Reported Normalized Adjustments Comments -------- ---------- ----------- --------- Net Interest Income $1,681 $1,726 $ (45) WTC Disaster Provision for Credit Losses 375 185 190 Special Provision ------ ------ ------ Net Interest Income After Provision for Credit Losses 1,306 1,541 (235) Noninterest Income - ------------------ Servicing Fees Securities 1,750 1,764 (14) WTC Disaster Global Payment Services 287 290 (3) WTC Disaster Private Client Services and Asset Management Fees 308 309 (1) WTC Disaster Service Charges and Fees 356 362 (6) WTC Disaster Foreign Exchange and Other Trading 338 343 (5) WTC Disaster Securities Gains 154 154 - Other 347 172 175 Insurance Recovery ------ ------ ------ Total Noninterest Income 3,540 3,394 146 Noninterest Expense - ------------------- Salaries and Employee Benefits 1,588 1,554 34 WTC Disaster Net Occupancy 232 194 38 WTC Disaster Furniture and Equipment 178 123 55 WTC Disaster Other 790 749 41 WTC Disaster ------ ------ ------ Total Noninterest Expense 2,788 2,620 168 ------ ------ ------ Income Before Income Taxes 2,058 2,315 (257) Income Taxes 715 823 (108) Tax Effects ------ ------ ------ Net Income Available to Common Shareholders $1,343 $1,492 $(149) ====== ====== ====== Per Common Share Data: - --------------------- Basic Earnings $1.84 $2.04 $(0.20) Diluted Earnings 1.81 2.01 (0.20) Cash Dividends Paid 0.72 0.72 - Diluted Shares Outstanding 741 741 -
14 Normalized Data Normalized earnings for 1999 reflect net income adjusted for the results of BNYFC, the $1,020 million gain on the sale of BNYFC, the related investment of proceeds, and repurchase of 25 million shares of Company common stock on a pro forma basis as of December 31, 1998; the $124 million liquidity charge related to the sale of loans; a provision normalization of $75 million; and related tax effects. These adjustments are shown in the table below. THE BANK OF NEW YORK COMPANY, INC. Consolidated Statements of Income (In millions, except per share amounts)
For the year ended December 31, 1999 -------------------------------------------- Reported Normalized Adjustments Comments -------- ---------- ----------- --------- Net Interest Income $1,589 $1,534 $ 55 BNYFC Provision for Credit Losses 135 60 75 Provision ------ ------ ------ Normalization Net Interest Income After Provision for Credit Losses 1,454 1,474 (20) Noninterest Income - ------------------ Servicing Fees Securities 1,245 1,245 - Global Payment Services 274 274 - Private Client Services and Asset Management Fees 244 244 - Service Charges and Fees 338 292 46 BNYFC Foreign Exchange and Other Trading 189 189 - Securities Gains 199 199 - Other 1,004 89 915 BNYFC & ------ ------ ------ Liquidity Charge Total Noninterest Income 3,493 2,532 961 Noninterest Expense - ------------------- Salaries and Employee Benefits 1,251 1,223 28 BNYFC Net Occupancy 165 160 5 BNYFC Furniture and Equipment 96 95 1 BNYFC Other 595 577 18 BNYFC ------ ------ ------ Total Noninterest Expense 2,107 2,055 52 ------ ------ ------ Income Before Income Taxes 2,840 1,951 889 Income Taxes 1,101 708 393 Tax Effects ------ ------ ------ Net Income Available to Common Shareholders $1,739 $1,243 $ 496 ====== ====== ====== Per Common Share Data: - --------------------- Basic Earnings $2.31 $1.69 $0.62 Diluted Earnings 2.27 1.66 0.61 Cash Dividends Paid 0.58 0.58 - Diluted Shares Outstanding 765 751 14
15 Market Risk Management - ---------------------- Market risk is the risk of loss due to adverse changes in the financial markets. Market risk arises from derivative financial instruments, such as futures, forwards, swaps and options, and other financial instruments, such as loans, securities, deposits and other borrowings. The Company's market risks are primarily interest rate and foreign exchange risk, as well as credit risk. Market risk associated with the Company's trading activities and asset/liability management activities is managed and controlled as discussed under "Market Risk Management", "Trading Activities and Risk Management" and, "Asset/Liability Management" in the "Management's Discussion and Analysis" section of Exhibit 13. Such discussion is incorporated herein by reference. The information presented with respect to market risk is forward looking information. As such it is subject to risks and uncertainties that could cause actual results to differ materially from projected results discussed in this Report. These include adverse changes in market conditions, the timing of such changes and the actions that management could take in response to these changes as well as the additional factors discussed under "Forward Looking Statements". Credit Risk Management - ---------------------- Credit risk represents the possibility that the Company would suffer a loss if a borrower or other counterparty were to default on its obligations to the Company. Credit risk exposure arises primarily from lending activities, as well as from interest rate, foreign exchange, and securities processing products. For derivative financial instruments, total credit exposure consists of current and potential exposure. Current credit exposure represents the replacement cost of the transaction. Potential credit exposure is a statistically based estimate of the future replacement cost of the transaction. The Company has established policies and procedures to manage the level and composition of its credit risk on both a transaction and a portfolio basis. In managing the aggregate credit extension to individual customers, the Company measures the amount at risk on derivative financial instruments as the total of current and potential credit exposure. The Risk Management Sector is responsible for developing and maintaining credit risk policies, as well as for overseeing and reviewing credit guidelines. After development, credit risk policies are reviewed and approved by the Board of Directors. Through the use of a credit approval process and established credit limits, the Company evaluates the credit quality of counterparties, industries, products, and countries. The Company seeks to reduce both on and off-balance-sheet credit risk through portfolio diversification, loan participations, syndications, asset sales, credit enhancements, risk reduction arrangements, and netting agreements. Although the Company attempts to minimize its exposure to credit risk, this risk is inherent in the banking industry and can increase as a result of general economic developments. 16 Nonperforming Assets - -------------------- A summary of nonperforming assets is presented in the following table.
(in millions) December 31, ---------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Nonaccrual - ---------- Domestic $156 $141 $ 83 $126 $159 Foreign 64 48 63 53 34 ---- ---- ---- ---- ---- 220 189 146 179 193 Real Estate Acquired in Satisfaction of Loans 2 4 12 14 15 - ------------------------ ---- ---- ---- ---- ---- $222 $193 $158 $193 $208 ==== ==== ==== ==== ==== Past Due 90 Days or More and Still Accruing Interest - --------------------------- Domestic: Credit Card $ - $ - $ - $ - $ 1 Other Consumer 3 3 3 3 2 Commercial 11 23 13 26 75 ---- ---- ---- ---- ---- 14 26 16 29 78 Foreign: Banks - - 3 - - ---- ---- ---- ---- ---- $ 14 $ 26 $ 19 $ 29 $ 78 ==== ==== ==== ==== ====
2001 2000 ---- ---- Nonperforming Asset Ratio 0.6% 0.5% Allowance/Nonperforming Loans 280.0 325.6 Allowance/Nonperforming Assets 277.6 319.6 During the first quarter of 2002 a sizable loan to a major retailer became nonperforming. Accordingly, the Company currently expects nonperforming assets at March 31, 2002 to increase in a range of approximately $45 million to $65 million. 17 Allowance for Credit Losses - --------------------------- The following table details changes in the Company's allowance for credit losses for the last five years.
(dollars in millions) 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Loans Outstanding, December 31, $35,744 $36,261 $37,547 $38,386 $35,127 Average Loans Outstanding 38,770 39,262 38,881 38,340 36,577 Allowance for Loan Losses - ------------------------- Balance, January 1 Domestic $ 491 $ 485 $ 498 $ 441 $ 670 Foreign 67 71 69 44 38 Unallocated 58 39 69 156 193 ------ ------ ------ ------ ------ Total, January 1 616 595 636 641 901 ------ ------ ------ ------ ------ Allocations and Acquisitions (1) - - (39) 4 (186) Charge-Offs Domestic Commercial and Industrial (356) (88) (104) (34) (89) Real Estate & Construction - - (5) - - Consumer (15) (9) (8) (10) (13) Credit Card - - - - (298) Foreign (17) (3) (37) (7) (3) ------ ------ ------ ------ ------ Total (388) (100) (154) (51) (403) ------ ------ ------ ------ ------ Recoveries Domestic Commercial and Industrial 5 11 10 7 9 Real Estate & Construction - 1 2 7 3 Consumer 3 3 4 5 8 Credit Card - - - - 23 Foreign 5 1 1 3 6 ------ ------ ------ ------ ------ Total 13 16 17 22 49 Net Charge-Offs (375) (84) (137) (29) (354) ------ ------ ------ ------ ------ Provision 375 105 135 20 280 Balance, December 31, Domestic 508 491 485 498 441 Foreign 43 67 71 69 44 Unallocated 65 58 39 69 156 ------ ------ ------ ------ ------ Total, December 31, $ 616 $ 616 $ 595 $ 636 $ 641 ====== ====== ====== ====== ====== Ratios - ------ Net Charge-Offs to Average Loans Outstandings 0.97% 0.21% 0.35% 0.08% 0.97% ====== ====== ====== ====== ====== Net Charge-Offs to Total Allowance 60.88% 13.64% 23.03% 4.56% 55.23% ====== ====== ====== ====== ====== Total Allowance to Year-End Loans Outstanding 1.72% 1.70% 1.58% 1.66% 1.82% ===== ===== ===== ===== ===== (1) In 1999, $39 million was allocated to BNYFC loans sold. In 1997, $186 million of the allowance was allocated to credit card loans sold in 1997.
At December 31, 2001, the Company's emerging markets exposures consisted of $100 million in medium-term loans, $1,475 million in short-term loans, primarily trade related, and $216 million in investments. In addition, the Company has $129 million of debt securities of emerging market countries, including $117 million (book value) of bonds whose principal payments are collateralized by U.S. Treasury zero coupon obligations and whose interest payments are partially collateralized. Emerging market countries where the Company has exposure include Argentina, Brazil, Bulgaria, China, Colombia, Costa Rica, Dominican Republic, Ecuador, Egypt, Honduras, Indonesia, Iraq, Jamaica, Malaysia, Mexico, Morocco, Panama, Peru, Philippines, Russia, Thailand, Uruguay, Venezuela, and Vietnam. 18 Securities - ---------- The following table shows the maturity distribution by carrying amount and yield (not on a taxable equivalent basis) of the Company's securities portfolio at December 31, 2001.
Mortgage/ U.S. States and Other Bonds, Asset-Backed U.S. Government Political Notes and and Equity Government Agency Subdivisions Debentures Securities ------------- ------------- ------------- ------------- ------------- (dollars in millions) Amount Yield* Amount Yield* Amount Yield* Amount Yield* Amount Yield* Total ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ----- Securities Held- - ---------------- to-Maturity - ------------ One Year or Less $ - -% $ - -% $ - -% $ 10 3.55% $ - -% $ 10 Over 1 through 5 Years - - - - - - - - - - - Over 5 through 10 Years - - - - - - - - - - - Over 10 years - - - - - - 117 6.32 - - 117 Mortgage-Backed Securities - - - - - - - - 1,084 5.85 1,084 --- --- --- ---- ------ ------ $ - -% $ - -% $ - -% $127 6.10% $1,084 5.85 $1,211 === === === ==== ====== ====== Securities Available- - --------------------- for-Sale - --------- One Year or Less $395 5.86% $ - -% $164 3.40% $2,066 3.33% $ - -% $ 2,625 Over 1 through 5 Years 421 5.11 483 6.48 124 5.03 220 4.92 - - 1,248 Over 5 through 10 Years - - 200 6.02 99 5.43 52 6.37 - - 351 Over 10 years - - - - 150 5.55 579 4.16 - - 729 Mortgage-Backed Securities - - - - - - - - 2,956 6.00 2,956 Asset-Backed Securities - - - - - - - - 2,721 5.79 2,721 Equity Securities - - - - - - - - 1,021 2.78 1,021 ---- ---- ---- ------ ------ ------- $816 5.47% $683 6.35% $537 4.75% $2,917 3.67% $6,698 5.42% $11,651 ==== ==== ==== ====== ====== ======= *Yields are based upon the amortized cost of securities.
Loans - ----- The following table shows the maturity structure of the Company's commercial loan portfolio at December 31, 2001.
Over 1 Year 1 Year Through Over (in millions) or Less 5 Years 5 Years Total ------- ----------- ------- ------ Domestic - -------- Real Estate, Excluding Loans Collateralized by 1-4 Family Residential Properties $ 496 $ 990 $1,449 $ 2,935 Commercial and Industrial Loans 3,318 6,546 1,785 11,649 Other, Excluding Loans to Individuals and those Collateralized by 1-4 Family Residential Properties 5,696 767 72 6,535 ------- ------ ------ ------- 9,510 8,303 3,306 21,119 Foreign 3,112 1,304 379 4,795 - ------- ------- ------ ------ ------- Total $12,622 $9,607 $3,685 $25,914 ======= ====== ====== ======= Loans with: Predetermined Interest Rates $ 3,680 $1,125 $1,299 $ 6,104 Floating Interest Rates 8,942 8,482 2,386 19,810 ------- ------ ------ ------- Total $12,622 $9,607 $3,685 $25,914 ======= ====== ====== =======
19 Deposits - -------- The aggregate amount of deposits by foreign customers in domestic offices was $6.2 billion, $5.2 billion, and $7.1 billion at December 31, 2001, 2000, and 1999. The following table shows the maturity breakdown of domestic time deposits of $100,000 or more at December 31, 2001.
Other Certificates Time (in millions) of Deposits Deposits Total -------------------------------------------- 3 Months or Less $328 $3,650 $3,978 Over 3 Through 6 Months 110 - 110 Over 6 Through 12 Months 54 - 54 Over 12 Months 150 34 184 ---- ------ ------ Total $642 $3,684 $4,326 ==== ====== ======
The majority of deposits in foreign offices are time deposits in denominations of $100,000 or more. Other Borrowed Funds - -------------------- Information related to other borrowed funds in 2001, 2000, and 1999 is presented in the table below.
2001 2000 1999 -------------------------------------------------------------- (dollars in millions) Average Average Average Amount Rate Amount Rate Amount Rate ------ ------- ------ ------- ------ -------- Federal Funds Purchased and Securities Sold Under Repurchase Agreements At December 31 $1,756 0.86% $1,108 4.12% $1,318 2.46% Average During Year 3,183** 3.24** 2,673 5.73 2,940 4.45 Maximum Month-End Balance During Year 5,719 2.38 3,698 6.45 3,639 2.58 Other* At December 31 $2,363 2.60% $1,687 5.14% $1,472 4.28% Average During Year 2,204** 8.42** 2,099 6.62 2,362 5.36 Maximum Month-End Balance During Year 3,126 2.53 2,385 5.02 3,476 4.70 *Other borrowings consist primarily of commercial paper, bank notes, extended federal funds purchased, and amounts owed to the U.S. Treasury. **Reported. On a normalized basis, average Federal Funds Purchased and Securities Sold Under Repurchase Agreement was $2,590 million and the average rate was 3.63%. On a normalized basis, average Other Borrowings was $1,960 million and the average rate was 4.55%.
Foreign Assets - -------------- Foreign assets are subject to general risks attendant to the conduct of business in each foreign country, including economic uncertainties and each foreign government's regulations. In addition, the Company's foreign assets may be affected by changes in demand or pricing resulting from fluctuations in currency exchange rates or other factors. At December 31, 2001, the Company had cross border exposure of more than 1% of its total assets in Germany, totaling $3.1 billion, in France, totaling $2.1 billion, and in the United Kingdom, totaling $1.9 billion. Assets in Germany consisted of $2.6 billion attributable to banks and other financial institutions, $154 million attributable to public sector entities, and $426 million attributable to commercial, industrial and other companies. Assets in France consisted of $1.6 billion attributable to banks and other financial institutions, and $509 million attributable to commercial, industrial and other companies. Assets in United Kingdom consisted of $1.2 billion attributable to banks and other financial institutions and $628 million attributable to commercial, industrial and other companies. At December 31, 2001, the Company had cross border exposure of more than .75% but less than 1% of its total assets in Netherlands and Italy aggregating $1.5 billion. 20
EXECUTIVE OFFICERS OF THE REGISTRANT AND BUSINESS EXPERIENCE DURING THE PAST FIVE YEARS - ------------------------------------------------------------------------------------------ Company Officer Name Office and Experience Age Since - ---- --------------------- --- ------- Thomas A. Renyi 1998-2002 Chairman and Chief Executive Officer 56 1992 of the Company and the Bank 1997-1998 President and Chief Executive Officer of the Company and the Bank Alan R. Griffith 1997-2002 Vice Chairman of the Company and the Bank 60 1990 Gerald L. Hassell 1998-2002 President of the Company and the Bank 50 1998 1998-1998 Senior Executive Vice President of the Company 1997-1998 Chief Commercial Banking Officer and Senior Executive Vice President of the Bank Bruce W. Van Saun 1998-2002 Senior Executive Vice President of the 44 1998 Company and Chief Financial Officer of the Company and the Bank 1997-1998 Executive Vice President and Chief Financial Officer of the Bank Robert J. Mueller 2000-2002 Senior Executive Vice President of the 60 2000 Company and the Bank 1998-2000 Senior Executive Vice President - Asset Based Lending Sector of the Bank 1997-1998 Senior Executive Vice President and Chief Credit Policy Officer of the Bank J. Michael Shepherd 2001-2002 Executive Vice President, General Counsel and 46 2001 Secretary of the Company and Executive Vice President and General Counsel of the Bank 1997-2001 Partner, Brobeck, Phleger and Harrison, LLP Thomas J. Mastro 1999-2002 Comptroller of the Company and the Bank 52 1999 1998-1999 Senior Vice President of the Bank 1997-1998 Vice President of the Bank Kevin C. Piccoli 2001-2002 Auditor of the Company, Senior Vice 45 2001 President and Chief Auditor of the Bank 1999-2001 Managing Director and Chief Financial Officer, Cantor Fitzgerald LP 1997-1999 Senior Vice President and Chief Financial Officer, Grunwick Capital Holdings, Inc. There are no family relationships between the executive officers of the Company. The terms of office of the executive officers of the Company extend until the annual organizational meeting of the Board of Directors.
21 ITEM 2. PROPERTIES - ------------------- At December 31, 2001 in New York City, the Company owned the forty-nine story building housing its executive headquarters at One Wall Street and an operations center at 101 Barclay Street. The Company leases the land at the 101 Barclay Street location under a lease expiring in 2080. In addition, the Company owns and/or leases administrative and operations facilities in New York City; various locations in New Jersey and Connecticut; Harrison, New York; Newark, Delaware; Brussels, Belgium; London, England; Orlando, Florida; Syracuse, New York; and Utica, New York. Other real properties owned or leased by the Company, when considered in the aggregate, are not material to its operations. See "World Trade Center Disaster" in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report for a discussion of the impact of the World Trade Center disaster on the Company's properties. ITEM 3. 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. On August 31, 2001, defendants moved to dismiss the two actions filed in the United States District Court for the Southern District of New York. On November 27, 2001, the federal district court granted defendants' motion and dismissed the two actions. On December 19, 2001, plaintiffs filed a Notice of Appeal to the United States Court of Appeals for the Second Circuit. The Court of Appeals has not yet set a briefing or argument schedule. 22 On February 1, 2002, counsel for plaintiffs in the two federal court actions filed a shareholder derivative action in New York Supreme Court, New York County that made allegations substantially similar to the two federal court actions that were dismissed. The Company and BNY requested that the New York State Supreme Court issue and order consolidating the new state court shareholder derivative action with the two shareholder derivative actions previously filed. Plaintiffs in the new shareholder derivative action have opposed consolidation. The two previously filed state court derivative actions, which do not include any allegations of personal misconduct, are still pending. The parties are currently undertaking court-appointed mediation. 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 January 14, 2002, the United States Court of Appeals for the Second Circuit vacated the dismissal of the Second Amended Complaint because it disagreed with one ground of the district court's dismissal, and remanded the case to the lower court to consider alternate bases for dismissal. The Company and BNY believe that the allegations made in this action are without merit, and intend to defend the action vigorously. 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 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. On January 8, 2001, the Company and BNY moved to dismiss the complaint as against them. On January 10, 2002, the Court denied that motion. On January 25, 2002, the Company and BNY filed their answer to plaintiffs' complaint. On February 14, 2002, the Company and BNY filed a motion asking the court for leave to reargue their motion to dismiss the complaint. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ There were no matters submitted to a vote of security holders of the registrant during the fourth quarter of 2001. PART II - ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ------------------------------------------------------------------------------ Information with respect to the market for the Company's common equity and related stockholder matters is incorporated herein by reference from the "Quarterly Data" section included in Exhibit 13. The Company's securities that are listed on the New York Stock Exchange (NYSE), are indicated as such 23 on the front cover of this report. The NYSE symbol for the Company's Common Stock is BK. All of the Company's other securities are not currently listed. The Company had 28,313 common shareholders of record at February 28, 2002. ITEM 6. SELECTED FINANCIAL DATA - -------------------------------- Reported selected financial data are incorporated herein by reference from the corresponding section included in Exhibit 13. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ---------------------------------------------------------- Management's discussion and analysis of financial condition and results of operations is incorporated herein by reference from the corresponding section of Exhibit 13. FORWARD LOOKING STATEMENTS The information presented with respect to, among other things, earnings outlook, projected business growth, the outcome of legal, regulatory 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 similar meaning are intended to identify forward looking statements in addition to statements specifically identified as forward looking statements. Forward looking statements, including the Company's discussions and projections of future results of operations and discussions of future plans contained in Management's Discussion and Analysis and elsewhere in this Form 10-K, are based on management's current expectations and assumptions and 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 could be affected by a number of factors that the Company is necessarily unable to predict with accuracy, including disruptions in general economic activity, 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, the ability to satisfy customer requirements, investor sentiment, variations in management projections, methodologies used by management to evaluate risk 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 political, economic, business, market, competitive and regulatory 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. 24 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. 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. A wide variety of domestic and foreign companies compete for processing services. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------- See page 15 "Market Risk Management". Quantitative and qualitative disclosure about market risk are incorporated herein by reference from the "Market Risk Management", "Trading Activities and Risk Management", and "Asset/Liability Management" sections included in Exhibit 13. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- Consolidated financial statements and notes and the independent auditors' report are incorporated herein by reference from Exhibit 13 to this Report. Supplementary financial information is incorporated herein by reference from the "Quarterly Data" section included in Exhibit 13. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ------------------------------------------------------------------------- There have been no events which require disclosure under Item 304 of Regulation S-K. PART III - -------- The material responsive to Items 10, 11, 12 and 13 is incorporated by reference to the Company's definitive proxy statement for its 2002 Annual Meeting, except for information as to Executive Officers set forth in Part I, Item 1. 25 PART IV - ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------- (a) 1. Financial Statements: See Item 8. (a) 2. Financial Statement Schedules: Financial statement schedules are omitted since the required information is either not applicable, not deemed material, or is shown in the respective financial statements or in the notes thereto. (a) 3. Listing of Exhibits: A list of the exhibits filed or incorporated by reference appears following page 27 of this report, which information is incorporated by reference. (b) Reports on Form 8-K: October 18, 2001: Unaudited interim financial information and accompanying discussion for the third quarter of 2001. January 17, 2002: Unaudited interim financial information and accompanying discussion for the fourth quarter of 2001. January 28, 2002: Projections and earnings estimates presented to the financial analysts on January 28, 2002. March 26, 2002: 6.375% Senior Subordinated Notes due 2012 with four exhibits: underwriting agreement, dated March 15, 2002; the Form of Note; an Officers' Certificate pursuant to Section 301 of the Indenture; and the opinion as to the legality of the Notes. (c) Exhibits: Submitted as a separate section of this report. (d) Financial Statements Schedules: None 26 SIGNATURES - ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized in New York, New York, on the 12th day of March, 2002. THE BANK OF NEW YORK COMPANY, INC. By: \s\ Thomas J. Mastro ------------------------------------- (Thomas J. Mastro, Comptroller) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the registrant and in the capacities indicated on the 12th day of March, 2002. Signature Title --------- ----- \s\ Thomas A. Renyi Chairman of the Board, Chief - ------------------------------------ Executive Officer (Principal (Thomas A. Renyi) Executive Officer), and Director \s\ Gerald L. Hassell President and Director - ------------------------------------ (Gerald L. Hassell) \s\ Alan R. Griffith Vice Chairman and Director - ------------------------------------ (Alan R. Griffith) \s\ Bruce W. Van Saun Senior Executive Vice President - ------------------------------------ and Chief Financial Officer (Bruce W. Van Saun) (Principal Financial Officer) \s\ Thomas J. Mastro Comptroller - ------------------------------------ (Principal Accounting Officer) (Thomas J. Mastro) \s\ J. Carter Bacot Director - ------------------------------------ (J. Carter Bacot) \s\ Richard Barth Director - ------------------------------------ (Richard Barth) \s\ Frank J. Biondi, Jr. Director - ------------------------------------ (Frank J. Biondi, Jr.) 27 \s\ William R. Chaney Director - ------------------------------------ (William R. Chaney) \s\ Nicholas M. Donofrio Director - ------------------------------------ (Nicholas M. Donofrio) \s\ Richard J. Kogan Director - ------------------------------------ (Richard J. Kogan) \s\ John A. Luke, Jr. Director - ------------------------------------ (John A. Luke, Jr.) \s\ John C. Malone Director - ------------------------------------ (John C. Malone) \s\ Donald L. Miller Director - ------------------------------------ (Donald L. Miller) \s\ Paul Myners Director - ------------------------------------ (Paul Myners) \s\ Catherine A. Rein Director - ------------------------------------ (Catherine A. Rein) \s\ William C. Richardson Director - ------------------------------------ (William C. Richardson) \s\ Brian L. Roberts Director - ------------------------------------ (Brian L. Roberts) 28 INDEX TO EXHIBITS Exhibit No. - ---------- 3 (a) The By-Laws of The Bank of New York Company, Inc. as amended through November 14, 2000 incorporated by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. (b) Restated Certificate of Incorporation of The Bank of New York Company, Inc. dated June 13, 2000, incorporated by reference to Exhibit 3(i) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. 4 (a) None of the outstanding instruments defining the rights of holders of long-term debt of the Company represent long-term debt in excess of 10% of the total assets of the Company. The Company hereby agrees to furnish to the Commission, upon request, a copy of any of such instrument. (b) Rights Agreement, including form of Preferred Stock Purchase Right, dated as of December 10, 1985 between The Bank of New York Company, Inc. and The Bank of New York, as Rights Agent, incorporated by reference to the Company's registration statement on Form 8-A dated December 18, 1985. (c) First Amendment, dated as of June 13, 1989, to the Rights Agreement, including form of Preferred Stock Purchase Right, dated as of December 10, 1985, between The Bank of New York Company, Inc. and The Bank of New York, as Rights Agent, incorporated by reference to the amendment on Form 8, dated June 14, 1989, to the Company's Registration Statement on Form 8-A, dated December 18, 1985. (File No. 1-6152) (d) Second Amendment, dated as of April 30, 1993, to the Rights Agreement, including form of Preferred Stock Purchase Right, dated as of December 10, 1985, between The Bank of New York Company, Inc. and The Bank of New York, as Rights Agent incorporated by reference to the amendment on Form 8-A/A, filed May 3, 1993, to the Company's Registration Statement on Form 8-A, dated December 18, 1985. (File No. 1-6152) (e) Third Amendment, dated as of March 8, 1994, to the Rights Agreement, dated as of December 10, 1985, between The Bank of New York Company, Inc. and The Bank of New York, as Rights Agent, incorporated by reference to the amendment on Form 8-A/A, filed March 24, 1994, to the Company's Registration Statement on Form 8-A, dated December 18, 1985. (File No. 1-6152) *10(a) Trust Agreement dated November 16, 1993 related to certain executive compensation plans and agreements, incorporated by reference to Exhibit 10(m) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. *(b) Amendment Number 1 dated May 13, 1994 to the Trust Agreement dated November 16, 1993 related to executive compensation agreements. *(c) Amendment Number 2 dated April 11, 1995 to the Trust Agreement dated November 16, 1993 related to executive compensation agreements. *(d) Amendment dated October 11, 1994 to Trust Agreement dated November 16, 1993, related to certain executive compensation plans and agreements, incorporated by reference to Exhibit 10(r) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. *(e) Amendment Number 4 dated January 31, 1996 to the Trust Agreement dated November 16, 1993 related to executive compensation agreements. *(f) Amendment Number 5 dated January 14, 1997 to the Trust Agreement dated November 16, 1993 related to executive compensation agreements, incorporated by reference to Exhibit 10(d) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 29 *(g) Amendment Number 6 dated January 31, 1997 to the Trust Agreement dated November 16, 1993 related to executive compensation agreements, incorporated by reference to Exhibit 10(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. *(h) Amendment Number 7 dated May 9, 1997 to the Trust Agreement dated November 16, 1993 related to executive compensation agreements. *(i) Amendment Number 8 dated July 8, 1997 to the Trust Agreement dated November 16, 1993 related to executive compensation agreements. *(j) Amendment Number 9 dated October 1, 1997 to the Trust Agreement dated November 16, 1993 related to executive compensation agreements, incorporated by reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. *(k) Amendment Number 10 dated September 11, 1998 to the Trust Agreement dated November 16, 1993 related to executive compensation agreements, Incorporated by reference to Exhibit 10(oo) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998. *(l) Amendment Number 11 dated December 23, 1999 to the Trust Agreement dated November 16, 1993 related to executive compensation, incorporated by reference to Exhibit 10(gg) to the Company's Annual Report on Form 10-K for the year ended December 31, 1999. *(m) Amendment Number 12 dated July 11, 2000 to the Trust Agreement dated November 16, 1993 related to executive compensation agreements, incorporated by reference to Exhibit 10(f) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. *(n) Amendment Number 13 dated January 22, 2001 to the Trust Agreement dated November 16, 1993 related to executive compensation agreements incorporated by reference to Exhibit 10(jjj) to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. *(o) Consulting Agreement dated November 5, 1997, incorporated by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. *(p) Compensation Agreement dated April 17, 1997, incorporated by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. *(q) 1984 Stock Option Plan of The Bank of New York Company, Inc. as amended through February 23, 1988, incorporated by reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1988. *(r) Amendment dated October 11, 1994 to 1984 Stock Option Plan of The Bank of New York Company, Inc., incorporated by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. *(s) The Bank of New York Company, Inc. Excess Contribution Plan as amended through July 10, 1990, incorporated by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990. *(t) Amendments dated February 23, 1994 and November 9, 1993 to The Bank of New York Company, Inc. Excess Contribution Plan, incorporated by reference to Exhibit 10(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. *(u) Amendment to The Bank of New York Company, Inc. Excess Contribution Plan dated November 14, 1995, incorporated by reference to Exhibit 10(l) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 30 *(v) The Bank of New York Company, Inc. Excess Benefit Plan as amended through December 8, 1992, incorporated by reference to Exhibit 10(d) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. *(w) Amendment dated May 10, 1994 to The Bank of New York Company, Inc. Excess Benefit Plan, incorporated by reference to Exhibit 10(g) to the Company's Annual report on Form 10-K for the year ended December 31, 1994. *(x) Amendment dated November 14, 1995 to The Bank of New Company, Inc. Excess Benefit Plan, incorporated by reference to Exhibit 10(i) to the Company's Annual report on Form 10-K for the year ended December 31, 1995. *(y) Amendment dated December 10, 1996 to The Bank of New York Company, Inc. Excess Benefit Plan, incorporated by reference to Exhibit 10(kk) to the Company's Annual Report on Form 10-K for the year ended December 31, 1999. *(z) 1994 Management Incentive Compensation Plan of The Bank of New York Company, Inc., incorporated by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. *(aa) Amendment dated January 12, 1999 to the 1994 Management Incentive Compensation Plan of The Bank of New York Company, Inc, incorporated by reference to exhibit 10(r) to the Company's annual report on Form 10-K for the year ended December 31, 1998. *(bb) 1988 Long-Term Incentive Plan as amended through December 8, 1992, incorporated by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. *(cc) Amendment dated October 11, 1994 to the 1988 Long-Term Incentive Plan of The Bank of New York Company, Inc., incorporated by reference to Exhibit 10(j) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. *(dd) The Bank of New York Company, Inc. 1993 Long-Term Incentive Plan, incorporated by reference to Exhibit 10(m) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. *(ee) Amendment dated October 11, 1994 to the 1993 Long-Term Incentive Plan of The Bank of New York Company, Inc., incorporated by reference to Exhibit 10(l) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. *(ff) Amendment dated December 10, 1996 to the 1993 Long-Term Incentive Plan of The Bank of New York Company, Inc., incorporated by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. *(gg) Amendment dated January 14, 1997 to the 1993 Long-Term Incentive Plan of The Bank of New York Company, Inc., incorporated by reference to Exhibit 10(h) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. *(hh) Amendment dated March 11, 1997 to the 1993 Long-Term Incentive Plan of The Bank of New York Company, Inc., incorporated by reference to Exhibit 10(i) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. *(ii) Amendment dated July 14, 1998 to the 1993 Long-Term Incentive Plan of The Bank of New York Company, Inc incorporated by reference to Exhibit 10(z) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998. *(jj) Amendment dated July 11, 2000 to The Bank of New York Company, Inc. 1993 Long-Term Incentive Plan, incorporated by reference to Exhibit 10(a) to 31 the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. *(kk) The Bank of New York Company, Inc. 1999 Long-Term Incentive Plan, incorporated by reference to Exhibit 10(aa) to the Company's Annual Report on Form 10-K for the year ended December 31, 1998. *(ll) Amendment dated July 11, 2000 to The Bank of New York Company, Inc. 1999 Long-Term Incentive Plan, incorporated by reference to Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. *(mm) The Bank of New York Company, Inc. Supplemental Executive Retirement Plan, incorporated by reference to Exhibit 10(n) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. *(nn) Amendment dated March 9, 1993 to The Bank of New York Company, Inc. Supplemental Executive Retirement Plan, incorporated by reference to Exhibit 10(k) to the Company's Annual Report On Form 10-K for the year ended December 31, 1993. *(oo) Amendment effective October 11, 1994 to The Bank of New York Company, Inc. Supplemental Executive Retirement Plan, incorporated by reference to Exhibit 10(o) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. *(pp) Amendment dated June 11, 1996 to The Bank of New York Company, Inc. Supplemental Executive Retirement Plan, incorporated by reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. *(qq) Amendment dated November 12, 1996 to The Bank of New York Company, Inc. Supplemental Executive Retirement Plan, incorporated by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. *(rr) Amendment dated July 11, 2000 to The Bank of New York Company, Inc. Supplemental Executive Retirement Plan, incorporated by reference to Exhibit 10(e) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. *(ss) Consulting Agreement dated June 18, 1999, incorporated by reference to Exhibit 10(nn) to the Company's Annual Report on Form 10-K for the year ended December 31, 1999. *(tt) Form of Remuneration Agreement dated October 11, 1994 between the Company and three of the five most highly compensated officers of the Company, incorporated by reference to Exhibit 10(v) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. *(uu) Deferred Compensation Plan for Non-Employee Directors of The Bank of New York Company, Inc., incorporated by reference to Exhibit 10(s) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. *(vv) Amendment dated November 8, 1994 to Deferred Compensation Plan for Non-Employee Directors of The Bank of New York Company, Inc., incorporated by reference to Exhibit 10(z) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. *(ww) Amendment dated February 11, 1997 to the Directors' Deferred Compensation Plan for The Bank of New York Company, Inc., incorporated by reference to Exhibit 10(j) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. *(xx) Amendment to Deferred Compensation Plan for Non-Employee Directors Of The Bank of New York Company, Inc, incorporated by reference to Exhibit 10(d) 32 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. *(yy) Enhanced Severance Agreement dated July 8, 1997, incorporated by reference to Exhibit 10(yy) to the Company's Annual Report on Form 10-K for the year ended December 31, 1999. *(zz) Employee Severance Agreement dated July 11, 2000, incorporated by reference to Exhibit 10(g) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. *(aaa) Employee Severance Agreement dated July 11, 2000, incorporated by reference to Exhibit 10(h) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. *(bbb) Employee Severance Agreement dated July 11, 2000, incorporated by reference to Exhibit 10(i) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. *(ccc) Employee Severance Agreement dated July 11, 2000, incorporated by reference to Exhibit 10(j) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. *(ddd) Employee Severance Agreement dated July 11, 2000, incorporated by reference to Exhibit 10(k) to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. *(eee) Amendment dated February 13, 2001 to The Bank of New York Company, Inc. Supplemental Executive Retirement Plan incorporated by reference to Exhibit 10(ggg) to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. *(fff) Employee Severance Agreement dated January 22, 2001 for an executive officer of the Company incorporated by reference to Exhibit 10(hhh) to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. *(ggg) Description of Remuneration Agreement dated December 13, 2000 between the Company and an executive office of the Company incorporated by reference to Exhibit 10(iii) to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 12 Statement - Re: Computation of Earnings to Fixed Charges Ratios 13 Portions of the 2001 Annual Report to Shareholders 21 Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP * Constitutes a Management Contract or Compensatory Plan or Arrangement EX-12 3 r10kex12.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, Distribution on Preferred Trust Securities, and Preferred Stock Dividends (Dollars in millions)
For The Years Ended December 31 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- EARNINGS - -------- Income Before Income Taxes $2,058 $2,251 $2,840 $1,891 $1,773 Fixed Charges, Excluding Interest on Deposits 588 647 554 614 511 ------ ------ ------ ------ ------ Income Before Income Taxes and Fixed Charges Excluding Interest on Deposits 2,646 2,898 3,394 2,505 2,284 Interest on Deposits 1,406 2,011 1,363 1,374 1,290 ------ ------ ------- ------ ------ Income Before Income Taxes and Fixed Charges, Including Interest on Deposits $4,052 $4,909 $4,757 $3,879 $3,574 ====== ====== ======= ====== ====== FIXED CHARGES - ------------- Interest Expense, Excluding Interest on Deposits $ 533 $ 609 $ 521 $ 580 $ 480 One-Third Net Rental Expense* 55 38 33 34 31 ------ ------ ------ ------ ------ Total Fixed Charges, Excluding Interest on Deposits 588 647 554 614 511 Interest on Deposits 1,406 2,011 1,363 1,374 1,290 ------ ------ ------ ------ ------ Total Fixed Charges, Including Interest on Deposits $1,994 $2,658 $1,917 $1,988 $1,801 ====== ====== ====== ====== ====== PREFERRED STOCK DIVIDENDS, PRE-TAX BASIS $ - $ - $ - $ - $ 14 - ---------------------------------------- ====== ====== ====== ====== ====== EARNINGS TO FIXED CHARGES RATIOS - -------------------------------- Excluding Interest on Deposits 4.50x 4.48x 6.13x 4.08x 4.47x Including Interest on Deposits 2.03 1.85 2.48 1.95 1.98 EARNINGS TO COMBINED FIXED CHARGES, DISTRIBUTION ON PREFERRED TRUST SECURITIES, & PREFERRED STOCK DIVIDENDS RATIOS - ------------------------------------------- Excluding Interest on Deposits 4.50 4.48 6.13 4.08 4.35 Including Interest on Deposits 2.03 1.85 2.48 1.95 1.97 *The proportion deemed representative of the interest factor.
EX-13 4 r10kex13.txt EX-13 1 EXHIBIT 13 2001 Annual Report to Shareholders 2 Management's Discussion and Analysis of the Company's Financial Condition and Results of Operations - ------------------------------------------------------------------------------ INTRODUCTION The Bank of New York Company, Inc.'s (the "Company") actual results of future operations may differ from those estimated or anticipated in certain forward- looking statements contained herein for reasons which are discussed below and under the heading "Forward Looking Statements" in the Company's Form 10-K. When used in this report, the words "estimate", "forecast", "project", "anticipate", "expect", "intend", "believe", "plan", "goal", "should", "may", "strategy", and words of similar meaning are intended to identify forward looking statements in addition to statements specifically identified as forward looking statements. WORLD TRADE CENTER DISASTER The World Trade Center Disaster ("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 have been completed. 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 relocate to on an interim basis. 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 to incur a loss on these subleases, but the amount of that loss will be dependent on the condition of the relevant real estate markets at the time of the subleases. The costs associated with operating from these interim facilities is estimated at approximately $20-25 million per quarter, and the anticipated loss on subleases could exceed $150 million. The Company expects the costs incurred in connection with these interim facilities to be covered by insurance, and accordingly will offset them with insurance receivables as those costs are incurred. The Company expects to incur capital expenditures related to the WTC disaster in a range of approximately $250 million to $350 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. 3 The Company estimated the 2001 impact of the WTC disaster to be $242 million and recorded a $175 million insurance offset in the fourth quarter. Additional recoveries are expected to be recorded in the future as the claim with insurers is processed. To date the Company has not suffered customer defections as a result of the disaster and any related service issues. The Company is engaged in an active communications program with its customer base involving senior management calling, updates on contingency plan developments and various quality of service initiatives. The Company anticipates some upward pressure on technology costs as a result of the spending associated with recovery and the need for heightened redundancy and diversification post September 11th. It intends to continue to manage expenses to help mitigate this impact. Given the extent of the impact on the Company's financial statements resulting from the WTC disaster, the related insurance recovery and the strategic action taken with respect to the emerging telecommunications companies portfolio, this discussion will first review the Company's reported results and will then provide a "normalized" estimate of operating results, segregating these items. Management believes that the additional normalized disclosure assists the reader in making comparisons with prior periods to determine trends in the business. In addition, the results for 1999 have been normalized for the sale of BNY Financial Corp. ("BNYFC"), as well as the liquidity charge associated with an accelerated disposition of loans. See "Summary of Normalized Results" for additional details. 4 SELECTED FINANCIAL DATA - AS REPORTED
Dollars in millions, except per share amounts 2001* 2000 1999** 1998 1997 ---- ---- ---- ---- ---- Net Interest Income $ 1,681 $ 1,757 $ 1,589 $ 1,556 $ 1,790 Noninterest Income 3,540 3,109 3,493 2,283 2,137 Provision for Credit Losses 375 105 135 20 280 Noninterest Expense 2,788 2,510 2,107 1,928 1,874 Net Income 1,343 1,429 1,739 1,192 1,104 Net Income Available to Common Shareholders 1,343 1,429 1,739 1,192 1,095 Return on Average Assets 1.64% 1.85% 2.60% 1.89% 1.86% Return on Average Common Shareholders' Equity 21.58 26.08 34.00 24.25 22.13 Common Dividend Payout Ratio 39.21 33.87 25.03 33.84 34.13 Per Common Share Basic Earnings $ 1.84 $ 1.95 $ 2.31 $ 1.59 $ 1.44 Diluted Earnings 1.81 1.92 2.27 1.53 1.36 Cash Dividends Paid 0.72 0.66 0.58 0.54 0.49 Market Value at Year-End 40.80 55.19 40.00 40.25 28.91 Averages Securities $18,559 $15,764 $ 7,545 $ 7,154 $ 5,722 Loans 38,770 39,262 38,881 38,340 36,577 Total Assets 81,700 77,241 66,777 63,141 59,242 Deposits 56,278 54,755 46,564 42,262 39,910 Long-Term Debt 4,609 4,384 3,793 3,205 2,645 Shareholders' Equity: Preferred 1 1 1 1 103 Common 6,224 5,479 5,113 4,915 4,947 At Year-End Allowance for Credit Losses as a Percent of Loans 1.72% 1.70% 1.58% 1.66% 1.82% Tier 1 Capital Ratio 8.11 8.60 7.51 7.89 7.92 Total Capital Ratio 11.57 12.92 11.67 11.90 11.97 Leverage Ratio 6.70 7.49 7.20 7.46 7.59 Common Equity to Assets Ratio 7.80 7.98 6.88 8.58 8.34 Total Equity to Assets Ratio 7.80 7.98 6.88 8.58 8.34 Common Shares Outstanding (in millions) 729.500 739.926 738.770 771.318 747.670 Employees 19,181 18,861 17,735 17,157 16,494 * The 2001 reported results reflect the $242 million impact of the World Trade Center disaster, the $175 million related initial insurance recovery, the $190 million special provision on the accelerated disposition of telecommunications loans and the related tax effects. See Summary of Normalized Results. **The 1999 reported results reflect the $1,020 million gain on the sale of BNY Financial Corporation ("BNYFC"), as well as the $124 million liquidity charge related to the sale of loans. See Summary of Normalized Results. The per common share amounts and common shares outstanding have been restated to reflect the 2-for-1 common stock split effective July 24, 1998.
5 SUMMARY OF REPORTED RESULTS For the year 2001, the Company reported net income of $1,343 million or $1.81 per diluted share, compared with $1,429 million or $1.92 per diluted share in 2000 and $1,739 million or $2.27 per diluted share in 1999. Securities servicing fees in 2001 were a record $1,750 million, a 6% increase, compared with $1,650 million in 2000. Areas leading the increase for the year included: execution services, corporate trust, broker-dealer services, and global liquidity services. The Company continues to be the world's leading custodian with year-end assets under custody of $6.9 trillion, including $1.9 trillion of cross-border custody assets. New business growth in cash management drove global payment services fees to $287 million, up 10%, reflecting continued success of CA$H-Register Plus(registered trademark), the Company's internet-based electronic banking service. Foreign exchange and other trading revenues were $338 million, up 30% from 2000, reflecting a strong demand for interest rate risk management products driven by declining interest rates and higher volatility in 2001. Private client services and asset management fees were $308 million, up 4% compared with $296 million in 2000. The Company's continued focus on fee-based businesses resulted in noninterest income growing to 68% of total revenue, up from 64% last year. In 2001, 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 2001 performance ratios reflect this temporary expansion. The 1999 ratios reflect the gain on the sale of BNYFC. In 2001, return on average common equity was 21.58% compared with 26.08% in 2000 and 34.00% in 1999, while return on average assets was 1.64% in 2001 compared with 1.85% in 2000 and 2.60% in 1999. Tangible diluted earnings per share (earnings before the amortization of goodwill and intangibles) were $1.91 per share in 2001 compared with $2.03 per share in 2000 and $2.37 per share in 1999. Tangible return on average assets was 1.78% in 2001 compared with 2.00% in 2000 and 2.78% in 1999. Tangible return on average common equity was 33.42% in 2001 compared with 40.00% in 2000 and 50.23% in 1999. The decreased tangible ratios in 2001 reflect the WTC impact and accelerated disposition program for emerging telecom credits. In 2000, securities servicing fee revenues were up 33% to $1,650 million reflecting particular strength in global custody, depositary receipts ("DRs"), unit investment trust ("UIT"), and mutual funds as well as global execution and clearing services. Fee revenue also benefited from the acquisition of the Royal Bank of Scotland Trust Bank ("RBSTB") on October 31, 1999. Private client services and asset management fees were up 21% to $296 million, led by strong business flows in the BNY Hamilton Funds, as well as by the acquisitions of Ivy Asset Management Corp. and Estabrook Capital Management, Inc. Increased cross-selling within the securities servicing client franchise and rapid growth in the Company's foreign exchange e-commerce initiative drove foreign exchange and other trading revenues up 38% to $261 million in 2000 compared with $189 million in 1999. Net interest income on a taxable equivalent basis was $1,811 million in 2000 compared with $1,633 million in 1999, benefiting from the acquisition of RBSTB, which brought approximately $10 billion in highly liquid, short-term assets and liabilities. The provision for credit losses decreased to $105 million from $135 million in 1999. In 1999, securities servicing revenues were up 24% reaching $1,245 million, reflecting particular strength in global custody, mutual funds, securities lending, DRs, and execution services. Private client services and asset management fees were up 17% to $244 million in 1999, led by strong results from personal trust, personal asset management, and retail investment products. Higher transaction flows in the Company's European securities servicing business drove foreign exchange and other trading revenues up 12% to $189 million in 1999 compared with $170 million in 1998. In 1999, net interest 6 income on a taxable equivalent basis was $1,633 million compared with $1,614 million in 1998. The provision for credit losses increased to $135 million from $20 million and the Company recorded a liquidity charge to noninterest income of $124 million associated with the decision to exit a portfolio of credits on an accelerated basis. NONINTEREST INCOME Noninterest income is provided by a wide range of securities servicing, global payment services, private client services and asset management, trading activities and other fee-based services. Revenues from these activities were $3,540 million in 2001, compared with $3,109 million in 2000 and $3,493 million in 1999. Securities servicing fees were $1,750 million, $1,650 million, and $1,245 million in 2001, 2000, and 1999. The 6% increase in securities servicing fees from 2000 reflects growth in execution services, corporate trust, broker- dealer services, and global liquidity services. Global payment services fees, principally funds transfer, cash management, and trade finance, were $287 million in 2001, $261 million in 2000, and $274 million in 1999. The increase in global payment services fees from 2000 reflects continued success of CA$H- Register Plus(registered trademark), the Company's internet-based electronic banking service, as well as customers electing to pay for services in fees rather than maintaining higher compensating balances in a declining interest rate environment. Private client services and asset management fees were $308 million in 2001, $296 million in 2000, and $244 million in 1999. The 4% increase from 2000 reflects strength in alternative investment and short-term money market product lines. Service charges and fees were $356 million in 2001, compared with $364 million in 2000 and $338 million in 1999. For further discussion of fee revenue, see Segment Profitability. Foreign exchange and other trading revenues were $338 million in 2001, $261 million in 2000, and $189 million in 1999. The 30% increase from the prior year reflects continued strong demand for interest rate risk management products driven by declining interest rates and higher volatility during 2001. Strong foreign exchange transaction flows from the Company's securities servicing clients also contributed to the increase. Securities gains totaled $154 million, $150 million, and $199 million in 2001, 2000, and 1999. Other noninterest income was $347 million in 2001, $127 million in 2000, and $1,004 million in 1999. In 2001, other income includes $175 million insurance recovery related to the WTC disaster and $43 million gain on the sale of the Company's interest in New York Cash Exchange ("NYCE"). In 2000, other income includes a $26 million payment associated with the termination of a securities clearing contract. In 1999, other noninterest income included a $1,020 million pre-tax gain on the sale of BNYFC and $124 million liquidity charge on loans available-for-sale. 7 NET INTEREST INCOME (Dollars in millions on a tax equivalent basis) 2001 2000 1999 - ---------------------- ---- ---- ---- Net Interest Income $1,741 $1,811 $1,633 Net Interest Rate Spread 1.89% 1.85% 2.07% Net Yield on Interest Earning Assets 2.57 2.79 2.91 For 2001, net interest income on a taxable equivalent basis amounted to $1,741 million compared with $1,811 million in 2000. The decline in net interest income in 2001 reflects several factors. First, the WTC disaster resulted in a disruption of 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. Second, the decline reflects the Company's ongoing strategy to shift the mix of its assets away from loans to highly rated investment securities and short- term liquid assets. Lastly, the decline also results from the lower value of free funds in a declining interest rate environment. Average earning assets were $67.7 billion up from $64.9 billion in 2000. Average loans were $38.8 billion in 2001 compared with $39.3 billion in 2000. Average securities were $18.6 billion in 2001 up from $15.8 billion in 2000. The Company added approximately $6 billion of mortgage and asset backed securities to its securities portfolio in 2001. Substantially all of these securities are rated AAA. The net interest rate spread was 1.89% in 2001 compared with 1.85% in 2000, while the net yield on interest earning assets was 2.57% in 2001 and 2.79% in 2000. For 2000, net interest income on a taxable equivalent basis amounted to $1,811 million compared with $1,633 million in 1999. Average earning assets were $64.9 billion up from $56.2 billion in 1999. The increase in average assets is primarily attributable to the acquisition of RBSTB. Average loans were $39.3 billion in 2000 compared with $38.9 billion in 1999. The net interest rate spread was 1.85% in 2000 compared with 2.07% in 1999, while the net yield on interest earning assets was 2.79% in 2000 and 2.91% in 1999. The expansion of the Company's securities servicing, global payment services, and asset management businesses continued to generate increased levels of deposits. These additional deposits were invested in high quality liquid assets which increased net interest income, although lowering the net interest rate spread and net yield. For 1999, net interest income on a taxable equivalent basis amounted to $1,633 million. Average earning assets were $56.2 billion, up from the prior year reflecting growth in highly liquid, lower yielding assets generated by the Company's securities servicing businesses and the acquisition of RBSTB. Average loans increased to $38.9 billion in 1999. Growth in the loan portfolio was partially offset by the sale of BNYFC. The net interest rate spread was 2.07% in 1999, while the net yield on interest earning assets was 2.91%. The increase in net interest income and the decline in the spread and yield from the prior year was principally caused by growth in highly liquid but lower yielding assets. The yield was also impacted by the Company's stock buyback program. Interest income would have been increased by $9 million, $9 million, and $8 million if loans on nonaccrual status at December 31, 2001, 2000, and 1999 had been performing for the entire year. NONINTEREST EXPENSE AND INCOME TAXES Total noninterest expense was $2,788 million in 2001, $2,510 million in 2000, and $2,107 million in 1999. Salaries and employee benefits increased 7% to $1,588 million in 2001. In 2001, net occupancy and furniture and fixture 8 expenses increased by a combined $118 million to $410 million. This increase primarily reflects the expenses associated with the WTC disaster including the repair of damaged facilities, replacement equipment, replacement furniture and fixtures and the outfitting of new leased space. Other expenses increased by 8% in 2001 to $790 million which reflects higher operating expenses associated with acquisitions, investments in technology, and volume-related expenses. Technology spending was $588 million in the year 2001, up 19% from $493 million in 2000 and $400 million in 1999. Technology spending was 21% of total expenses in 2001 compared with 20% in 2000 and 19% in 1999. Total noninterest expense increased 19% in 2000 compared with 1999. The increase in expenses in 2000 was attributable to acquisitions, technology investment, and variable costs associated with increased trading volumes. Salaries and employee benefits increased 19% to $1,488 million in 2000. Net occupancy and furniture and fixture expenses increased by a combined $31 million to $292 million. Other expenses increased by 23% in 2000 to $730 million. The efficiency ratio was 54.8% in 2001 compared with 52.5% in 2000 and 42.8% in 1999. The computation of the efficiency ratio includes the gain on the sale of BNYFC in 1999. The increase in the efficiency ratio reflects expenses associated with the WTC disaster. The Company's consolidated effective tax rates for 2001, 2000, and 1999 were 34.7%, 36.5%, and 38.7%. The 2001 rate reflects tax benefits associated with the WTC disaster. The 2000 rate reflects lower state and local taxes compared to 1999 and higher tax exempt income. The 1999 rate reflects fewer tax benefits from leasing activities and the impact of the sale of BNYFC. CRITICAL ACCOUNTING POLICIES The Company's significant accounting policies are described in the "Notes to Consolidated Financial Statements" under "Summary of Significant Accounting and Reporting Policies". Two of the Company's more critical accounting policies are those related to the allowance for credit losses and to the valuation of derivatives and securities where quoted market prices are not available. In addition to the "Summary of Significant Accounting and Reporting Policies" footnote, further information on policies related to the allowance for credit losses can be found under "Asset Quality and Allowance for Credit Losses" in the Management's Discussion and Analysis of the Company's Financial Condition and Results of Operations (MD&A). Further information on the valuation of derivatives and securities where quoted market prices are not available can be found under "Market Risk Management" and "Trading Activities and Risk Management" in the MD&A section and in "Fair Value of Financial Instruments" in the "Notes to Consolidated Financial Statements". ALLOWANCE FOR CREDIT LOSSES The allocated portion of the allowance for credit losses is principally determined using an expected loss model driven by Probability of Default and Loss Given Default ratings. Ratings are assigned after analyzing the credit quality of each Borrower and the collateral/structure of each individual asset. These ratings are periodically compared to internal company and external rating agency default and loss databases to ensure consistency. Other factors used in establishing the allocated portion of the allowance include forecasts of future cash flows and maturity. The Company's unallocated allowance is based on management's judgement. Factors that influence this judgement include: - 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 9 To the extent actual results differ from forecasts or management's judgment the allowance for credit losses may be greater or less than future charge-offs. VALUATION OF DERIVATIVES AND SECURITIES WHERE QUOTED MARKET PRICES ARE NOT AVAILABLE When quoted market prices are not available, derivatives and securities values are determined based on discounted cash flow analysis, comparison to similar instruments, and the use of financial models. Discounted cash flow analysis is dependent upon estimated future cash flows and the level of interest rates. Model-based pricing uses inputs of observable prices for interest rates, foreign exchange rates, option volatilities and other factors. Models are benchmarked and validated by external parties. These valuation methods could expose the Company to materially different results should the models used or underlying assumptions be inaccurate. See "Use of Estimates" in the footnote "Summary of Significant Accounting and Reporting Policies". LIQUIDITY The Company maintains its liquidity through the management of its assets and liabilities, utilizing worldwide financial markets. The diversification of liabilities reflects the Company's efforts to maintain flexibility of 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 network and managed with the use of trend studies and deposit pricing. The use of derivative products such as interest rate swaps and financial futures enhances liquidity by enabling the Company to issue 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 sold and the monitoring of unfunded loan commitments, thereby reducing unanticipated funding requirements. Liquidity is managed on both a consolidated basis and also at The Bank of New York Company, Inc. Parent Company ("Parent"). On a consolidated basis, non-core sources of funds such as money market rate accounts, certificates of deposits greater than $100,000, federal funds purchased and other borrowings were $12.6 billion and $11.0 billion on an average basis in 2001 and 2000. Stable foreign deposits, primarily from the Company's European based securities servicing business, increased on average to $27.9 billion from $27.6 billion in 2000. Savings and other time deposits were $9.5 billion on an average basis compared to $9.6 billion in 2000. A significant reduction in the Company's securities businesses would reduce its access to foreign deposits. The Company has entered into three modest securitization transactions. See Note 6 to the Consolidated Financial Statements. These transactions have not had a significant impact on the Company's liquidity or capital. The Parent has five major sources of liquidity: dividends from its subsidiaries, a line of credit with The Bank of New York ("The Bank"), the commercial paper market, a revolving credit agreement with third party financial institutions, and access to the capital markets. At January 1, 2002, the amount of dividends The Bank could pay to the Parent and remain in compliance with federal bank regulatory requirements was $483 million. This dividend capacity would increase in 2002 to the extent of net income less dividends. Nonbank subsidiaries of the Parent have liquid assets of approximately $1 billion. These assets could be liquidated and the proceeds delivered by dividend or loaned to the Parent. The Company has a line of credit with The Bank, which is subject to limits imposed by federal banking law. At December 31, 2001, the Parent could use the subsidiaries' liquid securities as collateral to allow it to borrow $533 million rather than liquidate the securities and loan or dividend the 10 proceeds to the Parent and remain in compliance with federal banking regulations. Borrowings at December 31, 2001 were $24 million. Restrictions on the ability of the Company to obtain funds from its subsidiaries are discussed in Note 10 to the Consolidated Financial Statements. In 2001, the Parent's average commercial paper borrowings were $331 million compared with $218 million in 2000. Commercial paper outstandings were $333 million and $266 million at December 31, 2001 and 2000. The Company has back-up lines of credit of $350 million at financial institutions. This line of credit matures in 2002. The Parent expects to enter into a replacement line of credit on or before the maturity. The Company also has the ability to access the capital markets. The Company has a shelf registration statement with a remaining capacity of $765 million of debt, preferred stock, preferred trust securities, or common stock. Access to the capital markets is partially dependent on the Company's credit ratings, which as of February 28, 2002 were as follows: The Bank of Parent Parent Parent Senior New York Commercial Subordinated Long-Term Long-Term Paper Long-Term Debt Debt Deposits ----------- --------------- --------------- ------------ Standard & A-1 A A+ AA- Poor's Moody's P1 A1 Aa3 Aa2 Fitch F1+ A+ AA- AA The Parent's major uses of funds are payment of principal and interest on its borrowings, acquisitions, and additional investment in its subsidiaries. The Parent has $932 million of long-term debt that becomes due in 2002. In addition, the Parent has the option to call $410 million of debt in 2002 and will call and refinance if market conditions are favorable. The Parent expects to refinance any debt it repays by issuing a combination of senior and subordinated debt. The Company has $400 million of trust preferred securities that are callable in 2002. These securities qualify as Tier 1 Capital. The Company has not yet decided if it will call these securities. The decision to call will be based on interest rates and the availability of cash and capital at the call date. If the Company calls the trust preferred securities, it expects to replace them with new trust preferred securities or senior or subordinated debt. Double leverage is the ratio of investment in subsidiaries divided by the Company's consolidated equity plus trust preferred securities. The Company's double leverage ratio at December 31, 2001 and 2000 was 99.23% and 99.11%. The Company's target double leverage ratio is a maximum of 120%. The double leverage ratio is monitored by regulators and rating agencies and is an important constraint on the Company's ability to invest in its subsidiaries to expand its businesses. 11 The following comments relate to the information disclosed in the Consolidated Statements of Cash Flows. Earnings and other operating activities provided $6.0 billion in 2001, compared with $2.2 billion used in 2000 and $1.0 billion used in 1999. The changes in cash flows from operations in 2001, 2000 and 1999 were principally the result of changes in trading activities. In 2001, cash used by investing activities was $6.5 billion as compared to $1.4 billion provided by investing activities in 2000 and $1.1 billion used by investing activities in 1999. In 2001, cash was used to increase the Company's investment securities portfolio, which 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 cash provided in 2000 came from fewer deposits in banks as well as a decline in loans. In 1999, additions to loans, interest-bearing deposits in banks, and federal funds sold and securities purchased under resale agreements were partially offset by the sale of BNYFC. Cash provided by financing activities was $0.4 billion, $0.6 billion, and $1.3 billion in 2001, 2000, and 1999. In 2001, 2000, and 1999, financing activities included cash to buy back the Company's common shares, and pay dividends, and provided cash through the issuance of long-term debt. Federal funds purchased and securities sold under repurchase agreements were a net source of funds in 2001 and a net use of funds in 2000 and 1999. The Company used deposits to finance its investing activities in 2000 and 1999. COMMITMENTS AND OBLIGATIONS The Company has contractual obligations to make cash payments as indicated in the table below. Excluded from the table are deposits, other borrowings, and trade payables which are primarily due within one year. (Dollars in millions) Payments Due by Period Contractual Less than 1-5 After Obligations Total 1 year years 5 Years - ---------------- ------ ---------- -------- ------- Long-Term Debt $4,976 $ 932 $1,008 $3,036 Operating Leases-Core 552 90 260 202 Operating Leases - WTC Disaster Related 419 43 138 238 ------ ------ ------ ------ Total Contractual Cash Obligations $5,947 $1,065 $1,406 $3,476 ====== ====== ====== ====== 12 In the aftermath of the WTC disaster, the Company leased temporary space for employees to use until their regular workplaces become available. In 2002, the Company anticipates all its facilities will return to use and temporary space will be sublet. The Company believes any loss on subleases will be covered by its insurance. The Company has issued commitments related to its various businesses as indicated in the table below: (Dollars in millions) Amount of Commitment Expiration Per Period Other Commercial Total Amounts Less Than 1-5 Over Commitments Committed 1 Year Years 5 Years - ----------------- -------------- ---------- ------- ------- Commercial Lending $ 45,773 $ 21,709 $18,697 $5,367 Commitments Standby Letters Of Credit 8,459 6,949 1,507 3 Commercial Letters Of Credit 946 873 70 3 Securities Lending Indemnifications 107,134 107,134 - - Standby Bond Purchase Agreements 2,800 2,800 - - Contingent Acquisitions Payments 176 51 125 - Venture Capital Commitments 239 26 205 8 -------- -------- ------- ------ Total Commitments $165,527 $139,542 $20,604 $5,381 ======== ======== ======= ====== The Company expects many of these commitments to expire without the need to advance any cash. Advances under securities lendings indemnification and standby bond purchase agreements would be secured by collateral. 13 CAPITAL RESOURCES Shareholders' equity was $6,317 million at December 31, 2001, compared with $6,152 million at December 31, 2000 and $5,143 million at December 31, 1999. During 2001, the Company retained $817 million of earnings, issued $175 million of medium-term notes qualifying as Tier 2 capital, increasing long- term debt to $4,976 million from $4,536 million. The increased long-term debt replaces subordinated debt ceasing to qualify as Tier 2 capital, and issued $460 million of senior debt. The Company called $240 million of medium-term notes in 2001. The Company also repurchased 19 million common shares for $854 million. In January 2002, the Company increased its quarterly common stock dividend to 19 cents per share, up 6% from the beginning of 2001. The Company has a shelf registration statement with a remaining capacity of $765 million of debt, preferred stock, preferred trust securities, or common stock. Regulators establish certain levels of capital for bank holding companies and banks, including the Company and the Bank, in accordance with established quantitative measurements. In order for the Company to maintain its status as a financial holding company, the Bank must qualify as well capitalized. In addition, major bank holding companies such as the Company are expected by the regulators to be well capitalized. As of December 31, 2001 and 2000, the Company and the Bank were considered well capitalized on the basis of the ratios (defined by regulation) of Total and Tier 1 capital to risk-weighted assets and leverage (Tier 1 capital to average assets), which are shown as follows:
December 31, 2001 December 31, 2000 --------------------- --------------------- Well Adequately Company Capitalized Capitalized Company Bank Company Bank Targets Guidelines Guidelines ------- ---- ------- ------ ------- ----------- ----------- Tier 1* 8.11% 7.94% 8.60% 8.03% 7.75% 6% 4% Total Capital** 11.57 11.75 12.92 11.60 11.75 10 8 Leverage 6.70 6.50 7.49 6.91 7.00 5 3-5 Tangible Common Equity 5.36 6.38 5.78 6.96 5.25-6.00 * Tier 1 capital consists, generally, of common equity and certain qualifying preferred stock, less goodwill. **Total Capital consists of Tier 1 capital plus Tier 2 capital. Tier 2 capital consists, generally, of certain qualifying preferred stock and long-term debt and a portion of the loan loss allowance.
If a bank holding company or bank fails to qualify as "adequately capitalized", regulatory sanctions and limitations are imposed. In 2000, the Company retained $946 million of earnings and issued $265 million of medium-term notes, increasing long-term debt to $4,536 million from $4,311 million. The increased long-term debt replaces subordinated debt ceasing to qualify as Tier 2 capital. The Company also repurchased 10 million common shares for $454 million. In October 2000, the Company increased its quarterly common stock dividend to 18 cents per share, up 13% from the beginning of 2000. In 1999, the Company retained $1,302 million of earnings and issued $200 million of preferred trust securities. The Company also issued $300 million of subordinated notes and $631 million of medium-term notes, increasing long-term debt to $4,311 million from $3,386 million. The increased long-term debt supports assets acquired in the RBSTB acquisition and replaces subordinated debt ceasing to qualify as Tier 2 capital. The Company also repurchased 44 million common shares for $1.6 billion. In October 1999, the Company increased its quarterly common stock dividend to 16 cents per share, up 14% from the beginning of 1999. 14 ASSET QUALITY AND ALLOWANCE FOR CREDIT LOSSES The Company has proactively managed asset quality. Over the past five years, the Company has attempted to improve its risk profile through sharper strategic focus on non-lending activities, with a de-emphasis on broad-based loan growth. The Company regularly culls its loan portfolio of credit exposures that no longer meet risk/return criteria, including an assessment of overall relationship profitability. - - In 1999, the Company exited $4 billion in asset based lending exposures and $1 billion of non-strategic credit exposures. - - In the last two years, credit commitments and loans outstandings to non- financial companies have been reduced by $8.2 billion and $3.5 billion, respectively. - - In 2001, the Company created an accelerated loan disposition program for 24 emerging telecommunications companies exposures and one energy trading company credit totaling $758 million with related outstandings of $488 million. - - As part of the Company's consistent, long-term strategy to emphasize fiduciary securities servicing and cash processing services, the Company's credit exposure to the financial services sector, a big user of these services, has increased. Financial services companies outstandings now represent 27% of the total portfolio. These exposures tend to be lower-risk secured liquidity facilities to investment grade companies. This shift has helped increase the percentage of credits with an investment grade-equivalent rating from 52% of the total in 1997 to 72% at December 31, 2001. - - Of the credits with a rating equivalent to non-investment grade, 44% of these credits mature in less than one year. Loan commitments were $45.8 billion at December 31, 2001 down from $47.7 billion at December 31, 2000. These unused commitments are primarily to high quality borrowers in the special industries, financial services companies, and U.S. geographic divisions. Total loans at year end 2001 were $35.7 billion down from $37.5 billion two years ago. The components of the loan portfolio are detailed below: Loan Portfolio - ---------------- (Dollars in billions) 12/31/01 12/31/00 12/31/99 --------- --------- --------- Retail/Private Banking $ 5.3 $ 5.1 $ 4.8 Large-ticket leasing 5.0 4.4 3.9 Commercial real estate 2.4 2.6 2.6 Financial services companies 9.6 27% 7.8 22% 9.3 25% Non-financial companies Media and telecom 4.1 4.8 4.2 Other special industries 3.4 4.2 4.7 U.S. geographic 3.3 4.5 5.1 Regional commercial 2.6 2.9 2.9 ------- ------ ------- Sub-total $ 13.4 38% $ 16.4 45% $ 16.9 45% ------- ------ ------- Total $ 35.7 $ 36.3 $ 37.5 ====== ====== ====== 15 The Company's most significant concentrations of credit risk are to the financial services sector and the media and telecommunications sector. Within the Company's specialized group that focuses on the financial services sector, the primary exposures are to the securities firms, investment companies, the insurance industry, fund managers, mutual funds, banks, and others. Loans outstanding to financial service companies were $9.6 billion at December 31, 2001 compared with $7.8 billion in 2000. The media and telecommunications sector is the second largest specialized group in terms of outstandings. Excluding loans available for sale, the portfolio is composed as follows: Media And Telecom Portfolio - --------------------------- (Dollars in millions) 12/31/01 Loans % # Borrowers --------------------------- Broadcasting and publishing $1,027 27% 69 Entertainment and programming 909 24% 30 Cable TV 851 22% 18 All other 213 6% 17 ------ ---- ---- Total Media $3,000 79% 134 Telecommunications 793 21% 37 ------ ---- ---- Total $3,793 100% 171 ====== ==== === Almost 80% of the Company's portfolio is in traditional media segments of broadcasting, publishing, programming, and cable TV. The balance is to established telecommunications companies. The portfolio is well diversified with a high degree of granularity across 171 borrowers. The Company's outstandings to retail and private banking customers, including residential real estate loans, its leasing assets, and its commercial real estate lending each exceed 5% of the loan portfolio. The Company's retail and private banking loans consist of $3.4 billion of secured loans backed by real estate, and $1.9 billion of unsecured credit lines to high quality borrowers. The Company has had limited loss experience and good returns in this area. The leasing portfolio consists of $5 billion of exposures backed by well- diversified assets, primarily large-ticket transportation equipment. The largest component is rail, consisting of both passenger and freight trains. Assets are both domestic and foreign-based, with primary concentrations in the United States and European countries. The Company utilizes this portfolio as part of its tax cash flow management and has generated attractive risk- adjusted after-tax returns. The Company engaged in certain types of structured leasing transactions prior to mid-1999 that the IRS has indicated it intends to challenge. The Company believes that it will prevail in any challenge to these transactions, based upon the statutes, regulations and case law in place at the time. The Company's commercial real estate lending includes $0.9 billion of office buildings, $0.8 billion of residential and $0.7 billion of retail and other. This portfolio is largely focused on the metropolitan New York area. The Company is active in the international markets, particularly in areas associated with securities servicing and trade finance. These activities result in outstandings to foreign institutions of $3.3 billion and $3.2 billion at December 31, 2001 and 2000. The Company's modest cross-border 16 exposure to emerging markets is detailed in its Form 10-K. No significant changes in trends occurred in the foreign portfolio in 2001. Further details of the Company's outstandings are detailed later under "Loans". In addition, the Company's retail, community, and regional commercial banking operations in the New York metropolitan area create a significant geographic concentration. In 2001, the Company created an accelerated loan disposition program for 24 emerging market telecommunications companies exposures and one energy trading credit totaling $758 million with related outstandings of $488 million. At December 31, 2001, loans available for sale had exposures of $445 million and outstandings of $197 million. The Company plans to substantially dispose of these assets in 2002. These assets are marked to the lower of cost or market with gains or losses reported in other income. Nonperforming assets increased by $29 million or 15% to $222 million at December 31, 2001. The increase in nonperforming assets during 2001 is attributable to deterioration in credit quality, particularly in emerging telecommunications companies credits, which resulted in moving $595 million of loans to nonperforming status. The increase was largely offset by charge-offs and writedowns of $327 million and paydowns, sales, and returns to accrual status of $240 million. The following table shows the distribution of nonperforming assets at December 31, 2001 and 2000: Dollars in millions 2001 2000 Change - ------------------- ---- ---- ------ Category of Loans: Other Commercial $138 $113 $ 25 Foreign 64 48 16 Regional Commercial 18 28 (10) ---- ---- ---- Total Nonperforming Loans 220 189 31 Other Real Estate 2 4 (2) ---- ---- ---- Total Nonperforming Assets $222 $193 $ 29 ==== ==== ==== Nonperforming Asset Ratio 0.6% 0.5% Allowance/Nonperforming Loans 280.0 325.6 Allowance/Nonperforming Assets 277.6 319.6 Nonperforming loans are expected to rise given likely economic softness in 2002. As a result, the Company anticipates that the allowance will not decline in 2002. Net charge-offs were $375 million in 2001, $84 million in 2000, and $137 million in 1999. Net charge-offs increased in 2001 primarily due to emerging telecommunications companies loans and an energy trading company loan. In 2000, net charge-offs were primarily related to commercial loans. Net charge- offs in 1999 were primarily related to the decision to accelerate the disposition of certain loans, as well as higher charge-offs in the Company's asset based lending businesses. The provision for credit losses was $375 million in 2001, compared with $105 million in 2000 and $135 million in 1999. The increase in the provision in 2001 primarily reflects the accelerated disposition program related to emerging telecommunications companies credits, the loss on the energy trading credit, and the general deterioration in credit quality in 2001. The decrease in the provision in 2000 compared with 1999 reflects the 1999 decision to accelerate the disposition of $1 billion of credit exposures as well as the sale of BNYFC, which had almost $4 billion of credit exposure, helped reduce the Company's exposure to deteriorating credits in 2000. Second, the 1999 provision reflects higher charge-offs in the Company's asset based lending businesses. And lastly, 2000 reflects a decrease in total loans. 17 The total allowance for credit losses was $616 million at year-end 2001 and 2000. The ratio of the total allowance for credit losses to year-end loans was 1.72% and 1.70% at December 31, 2001 and 2000. Loans at December 31, 2001 were $35.7 billion compared with $36.3 billion at the prior year-end. Average loans decreased to $38.8 billion in 2001 from $39.3 billion in 2000. The allowance remained flat in 2001 compared with 2000 reflecting deteriorating asset quality, as evidenced by increasing nonperforming assets offset by the decline in loans and the shift in the composition of credit exposure towards the financial services sector and away from higher risk general corporate lending. The Company's allowance at year-end equated to approximately 2.9 times the average charge-offs for the last three years and 3.1 times the average net charge-offs for the same three-year period. Because historical charge-offs are not necessarily indicative of future charge-off levels, the Company also gives consideration to other risk indicators when determining the appropriate allowance level. 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 Company's expected loss model. Borrowers are assigned to pools based on their credit ratings. The expected loss for each loan in a pool incorporates the borrower's credit rating, loss given default rating and maturity. The credit rating is dependent upon the borrower's probability of default. The loss given default incorporates a recovery expectation. Borrower and loss given default ratings are reviewed semi-annually at minimum and are periodically mapped to third party, including rating agency, default and recovery data bases to ensure ongoing consistency and validity. Commercial loans over $1 million are individually analyzed before being assigned a credit rating. All current consumer loans are included in the pass rated consumer pools. 18 The fourth element - the unallocated allowance - is based on management's judgment 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 During 2001, the Company significantly revised both its credit rating system and the loss factors assigned to specific risk pools. The prior credit rating system had 10 grades while the new system has 18 grades more closely aligning it with the rating systems used by the credit rating agencies. The new loss factors are based on publicly available data adjusted for management's judgment. The impact of the new loss factor was to increase the allowance associated with lower rated pass credits while decreasing the allowance associated with higher rated pass credits and commitments. Based on an evaluation of these four elements, including individual credits, historical credit losses, and global economic factors, the Company has allocated its allowance for credit losses as follows: 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Domestic Real Estate 6% 3% 4% 3% 4% Commercial 75 76 78 74 64 Consumer 1 1 - 1 1 Foreign 7 11 12 11 7 Unallocated 11 9 6 11 24 ---- ---- ---- ---- ---- 100% 100% 100% 100% 100% ==== ==== ==== ==== ==== In 2001, the allowance for impaired credits, the allowance for higher risk credits, and the unallocated allowance increased. This was offset by a decline in the allowance for pass rated credits. The increase in the allowance for impaired and higher risk credits reflects the increase in the amount of loans in these categories. The increase in the unallocated allowance is attributable to the deterioration in the economy and negative credit quality trends. The decrease in the allowance for pass rated credits reflects the decline in the loan portfolio as well as a shift in the loan portfolio towards the financial sector and away from higher risk general corporate lending. 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. 19 LOANS The following table shows the Company's loan distribution at the end of each of the last five years:
In millions 2001 2000 1999 1998 1997 - ----------- ---- ---- ---- ---- ---- Domestic Commercial and Industrial Loans(1) $11,649 $13,803 $14,400 $13,626 $12,585 Less: Unearned Income on Commercial and Industrial Loans (16) (18) (14) (26) (36) Real Estate Loans Construction and Land Development 434 357 275 271 208 Other, Principally Commercial Mortgages 2,501 2,664 2,771 2,691 2,669 Collateralized by Residential Properties 3,050 3,049 2,999 3,010 3,091 Banks and Other Financial Institutions 2,075 2,014 1,788 1,788 1,899 Loans for Purchasing or Carrying Securities 4,033 2,697 3,865 3,612 3,479 Lease Financings 3,576 3,092 2,870 2,566 1,953 Less: Unearned Income on Lease Financings (1,026) (880) (880) (856) (651) Consumer Loans 1,803 1,792 1,610 1,243 1,197 Less: Unearned Income on Consumer Loans (21) (18) (18) (13) (16) Asset Based Lending - - - 2,007 1,844 Other 427 448 606 420 341 ------- ------- ------- ------- ------- Total Domestic 28,485 29,000 30,272 30,339 28,563 ------- ------- ------- ------- ------- Foreign Commercial and Industrial Loans(1) 2,390 3,025 3,451 3,349 2,872 Less: Unearned Income on Commercial and Industrial Loans - (2) (5) (3) (7) Banks and Other Financial Institutions 2,060 1,761 1,703 1,476 1,756 Lease Financings 5,271 4,827 3,483 3,174 2,488 Less: Unearned Income on Lease Financings (2,810) (2,520) (1,550) (1,472) (1,205) Government and Official Institutions 224 134 153 192 110 Asset Based Lending - - - 1,310 453 Other 127 36 40 21 97 ------- ------- ------- ------- ------- Total Foreign 7,262 7,261 7,275 8,047 6,564 ------- ------- ------- ------- ------- Less: Allowance for Credit Losses (616) (616) (595) (636) (641) ------- ------- ------- ------- ------- Net Loans $35,131 $35,645 $36,952 $37,750 $34,486 ======= ======= ======= ======= ======= (1) The commercial and industrial loan portfolio does not contain any industry concentration which exceeds 10% of loans.
20 MARKET RISK MANAGEMENT Market risk is the risk of loss due to adverse changes in the financial markets. Market risk arises from derivative financial instruments, such as futures, forwards, swaps and options, and other financial instruments, such as loans, securities, deposits, and other borrowings. The Company's market risks are primarily interest rate and foreign exchange risk, as well as credit risk. The Company does not trade in non-exchange traded commodity contracts. The Company's risk management process begins with oversight by the Board of Directors, who periodically review risk management policies and controls and approve aggregate levels of risk. The Company's market risk governance structure includes two committees comprised of senior executives who review market risk activities, risk measurement methodologies and risk limits, approve new products, and provide direction for the Company's market risk profile. The Asset/Liability Management Committee oversees the market risk management process for interest rate risk related to asset/liability management activities. The Market Risk Management Committee oversees the market risk management process for trading activities including foreign exchange risk. Both committees are supported by a comprehensive risk management process that is designed to identify, measure, and manage market risk, as discussed under "Trading Activities and Risk Management" and "Asset/Liability Management" below and in footnote 12 to the Company's Consolidated Financial Statements. TRADING ACTIVITIES AND RISK MANAGEMENT The Company's trading activities are oriented primarily towards acting as a market maker for the Company's customers. The risk from these market making activities and from the Company's own positions is managed by the Company's traders and limited in total exposure as described below. 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 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 years ending December 31, 2001 and 2000. During 2001, the daily trading loss exceeded the calculated VAR amounts on 2 days.
(In millions) 2001 2000 ----------------------------------- ----------------------------------- Market Risk Average Minimum Maximum 12/31/01 Average Minimum Maximum 12/31/00 - ----------- ------- ------- ------- -------- ------- ------- ------- -------- Interest Rate $4.8 $2.6 $ 7.7 $5.0 $4.4 $2.7 $ 6.6 $3.3 Foreign Exchange 1.4 0.6 3.1 1.2 1.6 0.9 3.8 1.2 Diversification (2.0) NM NM (1.6) (0.5) NM NM (1.6) Overall Portfolio 4.2 2.3 7.1 4.6 5.5 2.5 8.8 2.9 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.
21 ASSET/LIABILITY MANAGEMENT The Company's asset/liability management activities include lending, investing in securities, accepting deposits, raising money as needed to fund assets, and processing securities and other transactions. The market risks that arise from these activities are interest rate risk, and to a lesser degree, foreign exchange risk. The Company's primary market risk is exposure to movements in US dollar interest rates. Exposure to movements in foreign currency interest rates also exists, but to a significantly lower degree. The Company actively manages interest rate sensitivity (the exposure of net interest income to interest rate movements). In addition to gap analysis, the Company uses earnings simulation and discounted cash flow models to identify interest rate exposures. An earnings simulation model is the primary tool used to assess changes in pre-tax net interest income. The model incorporates management's assumptions regarding interest rates, balance changes on core deposits, and changes in the prepayment behavior of loans. These assumptions have been developed through a combination of historical analysis and future expected pricing behavior. Derivative financial instruments used for interest rate risk management purposes are also included in this model. The Company evaluates the effect on earnings by running various interest rate shock scenarios up and down from a baseline scenario which assumes no changes in interest rates. These scenarios are reviewed to examine the impact of large interest rate movements. Interest rate sensitivity is quantified by calculating the change in pre-tax net interest income between the scenarios over a 12 month measurement period. The measurement of interest rate sensitivity is the percentage change in net interest income calculated by the model under the shock up 100 basis points in short-term rates and up 50 basis points in long-term rates versus the baseline scenario and under the shock down 100 basis points in both short and long-term rates versus the baseline scenario. Under these shock scenarios, pre-tax net interest income would be positively affected by 1.2% from the baseline scenario for an increase in rates and negatively affected by 5.3% for a decline. These scenarios do not include the strategies that management could employ to limit the impact as interest rate expectations change. To manage foreign exchange risk, the Company funds foreign currency- denominated assets with liability instruments denominated in the same currency. The Company utilizes various foreign exchange contracts if a liability denominated in the same currency is not available or desired, and to minimize the earnings impact of translation gains or losses created by investments in overseas markets. The foreign exchange risk related to the interest rate spread on foreign currency-denominated asset/liability positions is managed as part of the Company's trading activities. The Company uses forward foreign exchange contracts to protect the value of its net investment in foreign operations. At December 31, 2001, net investments in foreign operations approximated $931 million and were spread across 13 foreign currencies. 22 The Company's equity investments of $1.7 billion at December 31, 2001 primarily consisted of equity positions in other financial institutions, venture capital investments, minority interests in various subsidiaries, and equity positions from debts previously contracted. Venture capital activities consist of investments in private equity funds, mezzanine financings, and direct equity investments. The carrying and fair values of the Company's venture capital investments were $462 million at December 31, 2001, consisting of private equity funds of $362 million and mezzanine financings and direct equity investments of $100 million. Fair values for private equity funds are generally based upon values provided by fund sponsors while mezzanine financing and direct equity investments are based upon Company models. The majority of the Company's equity investments are of a long-term nature and accordingly, the Company does not view fluctuations in the market prices of these securities as having a material impact on the Company's operations. Changes in prices for marketable equity securities are reflected in the Statements of Changes in Shareholders' Equity. All equity investments are evaluated on a regular basis for other than temporary impairment. 23 QUARTERLY DATA UNAUDITED
2001 2000 ------------------------------- ------------------------------ Dollars in millions, Fourth Third Second First Fourth Third Second First except per share amounts Interest Income $ 773 $ 922 $ 925 $1,033 $1,129 $1,107 $1,107 $1,033 Interest Expense 335 535 495 606 675 656 672 614 ----- ----- ----- ----- ----- ----- ----- ----- Net Interest Income 438 387 430 427 454 451 435 419 ----- ----- ----- ----- ----- ----- ----- ----- Provision for Credit Losses 275 40 30 30 35 25 25 20 Noninterest Income 1,004 823 856 858 805 785 780 737 Noninterest Expense 667 814 655 653 644 635 628 602 ----- ----- ----- ----- ----- ----- ----- ----- Income Before Income Taxes 500 356 601 602 580 576 562 534 Income Taxes 169 113 216 218 208 213 206 196 ----- ----- ----- ------ ------ ------ ------ ------ Net Income $ 331 $ 243 $ 385 $ 384 $ 372 $ 363 $ 356 $ 338 ===== ===== ===== ====== ====== ====== ====== ====== Per Common Share Data: Basic Earnings $0.45 $0.33 $0.53 $0.53 $0.51 $0.50 $0.49 $0.46 Diluted Earnings 0.45 0.33 0.52 0.52 0.50 0.49 0.48 0.46 Cash Dividend 0.18 0.18 0.18 0.18 0.18 0.16 0.16 0.16 Stock Price High 41.66 49.40 55.35 56.25 59.25 57.31 48.63 41.56 Low 32.55 30.62 47.75 42.75 48.56 46.38 39.44 31.00 Ratios: Return on Average Common Shareholders' Equity 20.42% 15.11% 25.44% 25.92% 24.82% 25.75% 26.93% 27.07% Return on Average Assets 1.53 1.11 2.01 2.03 1.92 1.89 1.81 1.78
24 SELECTED FINANCIAL DATA - AS NORMALIZED
Dollars in millions, except per share amounts 2001* 2000 1999** 1998 1997 ---- ---- ---- ---- ---- Net Interest Income $ 1,726 $ 1,757 $ 1,534 $ 1,556 $ 1,790 Noninterest Income 3,394 3,109 2,532 2,283 2,137 Provision for Credit Losses 185 105 60 20 280 Noninterest Expense 2,620 2,510 2,055 1,928 1,874 Net Income 1,492 1,429 1,243 1,192 1,104 Net Income Available to Common Shareholders 1,492 1,429 1,243 1,192 1,095 Return on Average Assets 1.92% 1.85% 1.92% 1.89% 1.86% Return on Average Common Shareholders' Equity 23.84 26.08 25.50 24.25 22.13 Common Dividend Payout Ratio 35.29 33.87 35.01 33.84 34.13 Per Common Share Basic Earnings $ 2.04 $ 1.95 $ 1.69 $ 1.59 $ 1.44 Diluted Earnings 2.01 1.92 1.66 1.53 1.36 Cash Dividends Paid 0.72 0.66 0.58 0.54 0.49 Market Value at Year-End 40.80 55.19 40.00 40.25 28.91 Averages Securities $18,559 $15,764 $ 7,545 $ 7,154 $ 5,722 Loans 37,291 39,262 37,075 38,340 36,577 Total Assets 77,785 77,241 64,801 63,141 59,242 Deposits 53,418 54,755 45,190 42,262 39,910 Long-Term Debt 4,609 4,384 3,793 3,205 2,645 Shareholders' Equity: Preferred 1 1 1 1 103 Common 6,260 5,479 4,874 4,915 4,947 At Year-End Allowance for Credit Losses as a Percent of Loans 1.72% 1.70% 1.58% 1.66% 1.82% Tier 1 Capital Ratio 8.11 8.60 7.51 7.89 7.92 Total Capital Ratio 11.57 12.92 11.67 11.90 11.97 Leverage Ratio 6.70 7.49 7.20 7.46 7.59 Common Equity to Assets Ratio 7.80 7.98 6.88 8.58 8.34 Total Equity to Assets Ratio 7.80 7.98 6.88 8.58 8.34 Common Shares Outstanding (in millions) 729.500 739.926 738.770 771.318 747.670 Employees 19,181 18,861 17,735 17,157 16,494 * The 2001 normalized results exclude the $242 million impact of the World Trade Center disaster, the $175 million related initial insurance recovery, the $190 million special provision on the accelerated disposition of telecommunications loans and the related tax effects. See Summary of Reported Results. ** The 1999 normalized results exclude the $1,020 million gain on the sale of BNY Financial Corporation ("BNYFC"), as well as the $124 million liquidity charge related to the sale of loans. See Summary of Reported Results. The per common share amounts and common shares outstanding have been restated to reflect the 2-for-1 common stock split effective July 24, 1998.
25 NORMALIZED EARNINGS Normalized earnings for 2001 reflect net income adjusted for the pre-tax loss of $242 million associated with the World Trade Center disaster, the related initial pre-tax insurance recovery of $175 million, a $190 million pre-tax special provision associated with the creation of an accelerated loan disposition program for exposures to 24 emerging telecommunications companies and related tax effects. These adjustments are shown in the table below.
For the Year Ended (In millions, except December 31, 2001 per share amounts) ------------------ Reported Net Income $1,343 WTC Disaster Charge 242 WTC Insurance Recovery (175) Special Provision - Emerging Telecom Disposition 190 Tax Effects (108) ------- Normalized Net Income $1,492 ======= Per Common Share Data: - --------------------- Basic Earnings $2.04 Diluted Earnings 2.01 Diluted Shares Outstanding 741
Normalized earnings for 1999 reflect net income adjusted for the results of BNYFC, the $1,020 million gain on the sale of BNYFC, the related investment of proceeds, and repurchase of 25 million shares of Company common stock on a pro forma basis as of December 31, 1998; the $124 million liquidity charge related to the sale of loans; a provision normalization of $75 million; and related tax effects. These adjustments are shown in the table below.
For the Year Ended (In millions, except December 31, 1999 per share amounts) ------------------ Reported Net Income $1,739 Pre-tax Gain on Sale of BNYFC (1,020) BNYFC Income Before Tax (104) Liquidity Charge - Loans Available- For-Sale 124 Provision Normalization 75 Interest on Proceeds 36 Tax Effects 393 ------ Normalized Net Income $1,243 ====== Per Common Share Data: - --------------------- Basic Earnings $1.69 Diluted Earnings 1.66 Diluted Shares Outstanding 751
See "Normalized Data" in the Company's Form 10-K for further details. 26 SUMMARY OF NORMALIZED RESULTS The following discussion of income statement trends and comparisons through the segment profitability section relates to 2001 and 1999 normalized results. For the year 2001, the Company earned $1,492 million or $2.01 per diluted share, compared with $1,429 million or $1.92 per diluted share in 2000 and $1,243 million or $1.66 per diluted share in 1999. Securities servicing fees were $1,764 million, a 7% increase, compared with $1,650 million in 2000. Areas leading the increase for the year included: execution services, corporate trust, broker-dealer services, and global liquidity services. The Company continues to be the world's leading custodian with year-end assets under custody of $6.9 trillion, including $1.9 trillion of cross-border custody assets. New business growth in cash management drove global payment services fees to $290 million, up 11%, reflecting continued success of CA$H- Register Plus(registered trademark), the Company's internet-based electronic banking service. Foreign exchange and other trading revenues were $343 million, up 31% from 2000, reflecting a strong demand for interest rate risk management products driven by declining interest rates and higher volatility in 2001. Private client services and asset management fees were $309 million, up 4% compared with $296 million in 2000. The Company's continued focus on fee-based businesses resulted in noninterest income growing to 66% of total revenue, up from 64% last year. Normalized return measures have been computed using both normalized net income and balance sheets. In 2001, return on average common equity was 23.84% compared with 26.08% in 2000 and 25.50% in 1999, while return on average assets was 1.92% in 2001 compared with 1.85% in 2000 and 1.92% in 1999. Normalized tangible diluted earnings per share (earnings before the amortization of goodwill and intangibles) were $2.11 per share in 2001 compared with $2.03 per share in 2000 and $1.75 per share in 1999. Tangible return on average assets was 2.07% in 2001 compared with 2.00% in 2000 and 2.08% in 1999. Tangible return on average common equity was 36.63% in 2001 compared with 40.00% in 2000 and 36.76% in 1999. In 2000, securities servicing fee revenues were up 33% to $1,650 million reflecting particular strength in global custody, depositary receipts ("DRs"), unit investment trust ("UIT"), and mutual funds as well as global execution and clearing services. Fee revenue also benefited from the acquisition of the Royal Bank of Scotland Trust Bank ("RBSTB") on October 31, 1999. Private client services and asset management fees were up 21% to $296 million, led by strong business flows in the BNY Hamilton Funds, as well as by the acquisitions of Ivy Asset Management Corp. and Estabrook Capital Management, Inc. Increased cross-selling within the securities servicing client franchise and rapid growth in the Company's foreign exchange e-commerce initiative drove foreign exchange and other trading revenues up 38% to $261 million in 2000 compared with $189 million in 1999. Net interest income on a taxable equivalent basis was $1,811 million in 2000 compared with $1,578 million in 1999, benefiting from the acquisition of RBSTB, which brought approximately $10 billion in highly liquid, short-term assets and liabilities. The provision for credit losses increased to $105 million from $60 million on a normalized basis in 1999. In 1999, securities servicing revenues were up 24% reaching $1,245 million, reflecting particular strength in global custody, mutual funds, securities lending, DRs, and execution services. Private client services and asset management fees were up 17% to $244 million in 1999, led by strong results from personal trust, personal asset management, and retail investment products. Higher transaction flows in the Company's European securities servicing business drove foreign exchange and other trading revenues up 12% to $189 million in 1999. In 1999, net interest income on a taxable equivalent basis was $1,578 million and the provision for credit losses increased to $60 million on a normalized basis from the prior year. 27 NONINTEREST INCOME Noninterest income is provided by a wide range of securities servicing, global payment services, private client services and asset management, trading activities and other fee-based services. Revenues from these activities were $3,394 million in 2001, compared with $3,109 million in 2000 and $2,532 million in 1999. Securities servicing fees were $1,764 million, $1,650 million, and $1,245 million in 2001, 2000, and 1999. The 7% increase in securities servicing fees from 2000 reflects growth in execution services, corporate trust, broker- dealer services, and global liquidity services. Global payment services fees, principally funds transfer, cash management, and trade finance, were $290 million in 2001, $261 million in 2000, and $274 million in 1999. The increase in global payment services fees from 2000 reflects continued success of CA$H- Register Plus(registered trademark), the Company's internet-based electronic banking service, as well as customers electing to pay for services in fees rather than maintaining higher compensating balances in a declining interest rate environment. Private client services and asset management fees were $309 million in 2001, $296 million in 2000, and $244 million in 1999. The 4% increase from 2000 reflects strength in alternative investment and short-term money market product lines. Service charges and fees were $362 million in 2001, compared with $364 million in 2000 and $292 million in 1999. For further discussion of fee revenue, see Segment Profitability. Foreign exchange and other trading revenues were $343 million in 2001, $261 million in 2000, and $189 million in 1999. The 31% increase from the prior year reflects continued strong demand for interest rate risk management products driven by declining interest rates and higher volatility during 2001. Strong foreign exchange transaction flows continued from the Company's securities servicing clients also contributed to the increase. Securities gains totaled $154 million, $150 million, and $199 million in 2001, 2000, and 1999. Other noninterest income was $172 million in 2001, $127 million in 2000, and $89 million in 1999. In 2001, other income includes a $43 million gain on the sale of the Company's interest in NYCE. In 2000, other income includes a $26 million payment associated with the termination of a securities clearing contract. NET INTEREST INCOME (Dollars in millions on a tax equivalent basis) 2001 2000 1999 - ---------------------- ---- ---- ---- Net Interest Income $1,786 $1,811 $1,578 Net Interest Rate Spread 2.00% 1.85% 2.01% Net Yield on Interest Earning Assets 2.74 2.79 2.88 For 2001, net interest income on a taxable equivalent basis amounted to $1,786 million compared with $1,811 million in 2000. The effect of the lower interest rate environment in 2001 was partially offset by increases in the Company's investment securities portfolio which is part of the ongoing strategy to shift the Company's asset mix from loans towards highly rated investment securities and short-term liquid assets. Average earning assets were $65.2 billion up from $64.9 billion in 2000. Average loans were $37.3 billion in 2001 compared with $39.3 billion in 2000. The net interest rate spread was 2.00% in 2001 compared with 1.85% in 2000, while the net yield on interest earning assets was 2.74% in 2001 and 2.79% in 2000. For 2000, net interest income on a taxable equivalent basis amounted to $1,811 million compared with $1,578 million in 1999. Average earning assets were $64.9 billion up from $54.8 billion in 1999. The increase in average assets is primarily attributable to the acquisition of RBSTB. Average loans 28 were $39.3 billion in 2000 compared with $37 billion in 1999. The net interest rate spread was 1.85% in 2000 compared with 2.01% in 1999, while the net yield on interest earning assets was 2.79% in 2000 and 2.88% in 1999. The expansion of the Company's securities servicing, global payment services, and asset management businesses continued to generate increased levels of deposits. These additional deposits were invested in high quality liquid assets which increased net interest income, although lowering the net interest rate spread and net yield. NONINTEREST EXPENSE AND INCOME TAXES Total noninterest expense was $2,620 million in 2001, $2,510 million in 2000, and $2,055 million in 1999. Salaries and employee benefits increased 4% to $1,554 million in 2001. In 2001, net occupancy and furniture and fixture expenses increased by a combined $25 million to $317 million. Other expenses increased by 3% in 2001 to $749 million which reflects higher operating expenses associated with acquisitions, investments in technology and volume- related expenses. Technology spending was $588 million in the year 2001, up 19% from $493 million in 2000 and $400 million in 1999. Technology spending was 22% of total expenses in 2001 compared with 20% in 2000 and 19% in 1999. Total noninterest expense increased 22% in 2000 compared with 1999. The increase in expenses in 2000 was attributable to acquisitions, technology investment, and variable costs associated with increased trading volumes. Salaries and employee benefits increased 22% to $1,488 million in 2000. Net occupancy and furniture and fixture expenses increased by a combined $37 million to $292 million. Other expenses increased by 27% in 2000 to $730 million. The efficiency ratio was 52.5% in 2001, 2000 and 1999. The Company's consolidated effective tax rates for 2001, 2000, and 1999 were 35.6%, 36.5%, and 36.3%. The decline in the effective tax rate in 2001 reflects tax benefits associated with tax exempt income and earnings from foreign operations. 29 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 in 2001 and the sale of BNYFC in 1999. 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, UIT, securities lending, DRs, corporate trust, stock transfer and 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 largest 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. 30 The segments contributed to the Company's profitability as follows:
In Millions Servicing and For the Year Ended Fiduciary Corporate Retail Financial Reconciling Consolidated December 31, 2001 Businesses Banking Banking Markets Items Total - ------------------ ---------- --------- ------- --------- ----------- ------------ Net Interest Income $ 580 $491 $493 $240 $(123) $1,681 Provision for Credit Losses - 128 5 4 238 375 Noninterest Income 2,621 299 115 297 208 3,540 Noninterest Expense 1,735 217 312 69 455 2,788 ------ ---- ---- ---- ----- ------ Income Before Taxes $1,466 $445 $291 $464 $(608) $2,058 ====== ==== ==== ==== ===== ====== Average Assets $8,961 $26,865 $4,522 $35,343 $6,009 $81,700
In Millions Servicing and For the Year Ended Fiduciary Corporate Retail Financial Reconciling Consolidated December 31, 2000 Businesses Banking Banking Markets Items Total - ------------------ ---------- --------- ------- --------- ----------- ------------ Net Interest Income $ 672 $543 $510 $122 $ (90) $1,757 Provision for Credit Losses - 127 6 (1) (27) 105 Noninterest Income 2,443 290 99 249 28 3,109 Noninterest Expense 1,629 213 305 64 299 2,510 ------ ---- ---- ---- ------ ------ Income Before Taxes $1,486 $493 $298 $308 $(334) $2,251 ====== ==== ==== ==== ====== ====== Average Assets $8,636 $29,812 $4,420 $32,693 $1,680 $77,241
In Millions Servicing and For the Year Ended Fiduciary Corporate Retail Financial Reconciling Consolidated December 31, 1999 Businesses Banking Banking Markets Items Total - ------------------ ---------- --------- ------- --------- ----------- ------------ Net Interest Income $ 474 $600 $468 $121 $(74) $1,589 Provision for Credit Losses - 110 5 (2) 22 135 Noninterest Income 1,910 315 92 216 960 3,493 Noninterest Expense 1,233 248 306 55 265 2,107 ------ ---- ---- ---- ---- ------ Income Before Taxes $1,151 $557 $249 $284 $599 $2,840 ====== ==== ==== ==== ==== ====== Average Assets $7,692 $31,219 $4,572 $21,821 $1,473 $66,777
Segment Highlights Servicing and Fiduciary Businesses - ---------------------------------- In the Servicing and Fiduciary businesses segment, net interest income was $580 million in 2001 compared with $672 million in 2000 and $474 million in 1999. The decrease in net interest income in 2001 is primarily attributable to the decline in interest rates. Noninterest income was $2,621 million in 2001 compared with $2,443 million in 2000 and $1,910 million in 1999. Securities servicing fees increased to $1,764 million in 2001 as compared with $1,650 million in 2000 and $1,245 million in 1999. Areas leading the increase for the year included: execution services, corporate trust, broker-dealer services, and global liquidity services. In 2001, market share gains from new business wins were partially offset by weak markets resulted in assets under custody declining slightly to $6.9 trillion in 2001, from $7.0 trillion in 2000 but still up from $6.3 trillion in 1999. 31 Fees from global payment services in 2001 were $290 million compared with $261 million in 2000 and $274 million in 1999. Fees increased primarily as a result of customers electing to pay for services in fees rather than maintaining higher compensating balances in a declining interest rate environment, as well as new business growth in cash management, reflecting the continued success of Cash-Register Plus(registered trademark), the Company's internet-based electronic banking service. Fees from private client services and asset management grew to $309 million in 2001, as compared with $296 million in 2000 and $244 million in 1999. In 2001, strength in alternative investment and short-term money market product lines offset lower asset price levels. Assets under management were $66.7 billion, $66.2 billion and $60.4 billion in 2001, 2000, and 1999. Assets under administration were $33.3 billion, compared with $36.4 billion in 2000 and $30.2 billion in 1999. Net charge-offs in the Servicing and Fiduciary businesses segment were zero in 2001, 2000, and 1999. Noninterest expense was $1,735 million compared with $1,629 million in 2000 and $1,233 million in 1999. The rise in noninterest expense is attributable to acquisitions, as well as the Company's continued investment in technology. Corporate Banking - ----------------- The Corporate Banking segment's net interest income was $491 million in 2001 compared with $543 million in 2000 and $600 million in 1999. The decrease in 2001 reflects a decline in assets particularly from non-financial companies, as well as a decline in both the volume and value of low cost short-term deposits. The provision for credit losses was $128 million in 2001 compared with $127 million and $110 million in 2000 and 1999. The increase in 2001 principally reflects deterioration in the economy and an increase in nonperforming loans. Net charge-offs in the Corporate Banking segment were $356 million, $78 million, and $135 million in 2001, 2000, and 1999. The increase in noninterest income to $299 million in the current year was due to increased capital markets fees. In 2001, the Company was the co-manager on 132 underwritings, up from 60 in 2000. The increase in noninterest expense reflects higher compensation related to increased capital markets activity. Retail Banking - -------------- Net interest income in the Retail Banking sector was $493 million in 2001 compared with $510 million in 2000 and $468 million in 1999. Net interest income in the branch banking network in 2001 was adversely impacted by the decrease in the value of noninterest-bearing sources of funds in a lower interest rate environment. Noninterest income was $115 million in 2001 compared with $99 million in 2000 and $92 million in 1999. The increase in 2001 reflects better penetration of the customer base and improved pricing. Operating expenses were $312 million in 2001 compared with $305 million in 2000 and $306 million in 1999. Net charge-offs were $15 million, $7 million and $4 million in 2001, 2000, and 1999. Financial Markets - ----------------- In the Financial Markets segment, net interest income was $240 million in 2001 compared with $122 million in 2000 and $121 million in 1999. The increase in 2001 reflects lower funding costs and an increase in assets, primarily U.S. Government Agency Obligations and highly-rated asset-backed securities. Noninterest income was $297 million in 2001 compared with $249 million in 2000 and $216 million in 1999. The increase in noninterest income in 2001 reflects strong trading performance, particularly in interest rate derivatives and gains from the Company's equity arbitrage business. Net charge-offs were $4 million in 2001 and a recovery of $1 million and $2 million in 2000 and 1999. The increase in noninterest expenses in 2001 reflects higher compensation related to the 2001 increased revenues. 32 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. 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 internal guidelines. Reconciling Items - ----------------- 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. The impact of the WTC disaster is a reconciling item for net interest income, noninterest income and noninterest expense in 2001. Reconciling items for noninterest income also relate to, among other things, the sale of NYCE in 2001, the payment associated with the termination of a securities clearing contract in 2000, the liquidity charge on the sale of loans in 1999, and the gains on the sale of BNYFC in 1999, and the sale of certain securities. Reconciling items for noninterest expense include $112 million, $115 million and $102 million of amortization of intangibles in 2001, 2000, and 1999, Year 2000 expenses, 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 reconciling items for average assets consist of goodwill, other intangible assets and the impact of the WTC disaster. Foreign Operations On a reported basis, the Company's foreign activities consist of banking, trust, and securities and global payment services provided to customers domiciled outside of the United States, principally in Europe and Asia. The October 31, 1999 acquisition of RBSTB, which was renamed The Bank of New York (Europe) ("BNYE"), significantly expanded the Company's presence in Europe. In addition to BNYE, which is based in London, the Company operates through 28 branches and representative offices in 25 countries. There were no major customers from whom revenues were individually material to the Company's performance.
2001 2000 1999 ---------------------------------- --------------------------------- --------------------------------- In millions Income Income Income Before Before Before Geographic Income Net Total Income Net Total Income Net Total Data Revenues Taxes Income Assets Revenues Taxes Income Assets Revenues Taxes Income Assets - ---------- -------- ------ ------ ------- -------- ------ ------ ------- -------- ------- ------ ------- Domestic $4,217 $1,741 $1,137 $52,442 $3,758 $1,931 $1,226 $49,829 $4,188 $2,418 $1,482 $49,913 Europe 871 278 181 21,137 961 285 181 19,673 688 325 199 16,639 Asia 66 18 12 3,822 73 17 11 3,794 34 16 9 3,744 Other 67 21 13 3,624 74 18 11 3,818 172 81 49 4,460 ------ ------ ------ ------- ------ ------ ------ ------- ------ ------ ------ ------- Total $5,221 $2,058 $1,343 $81,025 $4,866 $2,251 $1,429 $77,114 $5,082 $2,840 $1,739 $74,756 ====== ====== ====== ======= ====== ====== ====== ======= ====== ====== ====== =======
33 Long-Term Financial Goals and Factors That May Affect Them The Company has several stated long-term financial goals by which it manages its business and measures its performance. These goals, which are reviewed and renewed annually, are currently as follows: 1) achieve a return on equity (ROE) of 25%+; 2) generate a return on assets (ROA) of 2%; 3) maintain an efficiency ratio of 49%; and 4) achieve earnings per share growth of 12-14%. The Company's ability to achieve these goals will be affected by the factors discussed under "Forward Looking Statements" in the Company's Annual Report on Form 10-K as well as the factors discussed below. Global and regional economic conditions - The Company's business mix is well- diversified among clients, products, markets and geographies. However, economic conditions in the United States and other regions of the world will impact the level of business activity which, in turn, affects the Company's financial results. Moreover, the economic environment directly impacts the creditworthiness of companies and consumers, affecting the Company's lending activities. Stresses on credit quality can lead to increased credit costs and a higher amount of nonperforming assets and related charge-offs and provisioning. Global capital markets activity - The Company's businesses generally benefit from increases in the volume of financial market transactions worldwide. Corporate actions, cross-border investing, global mergers and acquisitions activity, new debt and equity issuances, secondary trading volumes all contribute to revenues through the Company's business mix. Asset price levels are also important, in particular to the Company's asset management and global custody businesses. Continuation of favorable global trends - The Company's businesses benefit from certain global trends, such as the growth of financial assets, creation of new securities, financial services industry consolidation, rapid technological change, globalization of investment activities, structural changes to financial markets, shortened settlement cycles, straight-through processing requirements and increased demand for outsourcing. These long-term trends all increase the demand for the Company's products and services around the world. Pricing/competition - Future prices that the Company is able to obtain for its products may increase or decrease from current levels depending upon demand for its products, its competitors' activities and the introduction of new products into the marketplace. Interest rates - The levels of market interest rates, the shape of the yield curve and the direction of interest rate changes all affect net interest income that the Company earns in many different businesses. In general, the Company benefits short-term in a rising interest rate environment because its interest earning assets re-price sooner than interest-bearing liabilities, which include a significant amount of low-interest and interest-free deposits. The Company may take measures to moderate this impact, including investments in fixed income securities and various hedging strategies. Volatility of currency markets - The degree of volatility in foreign exchange rates can affect the amount of foreign exchange trading revenue. While most of the Company's foreign exchange revenue is derived from its securities servicing client base, activity levels are higher when there is more volatility. Therefore, the Company benefits from currency volatility. Acquisitions/joint ventures - An integral part of the Company's overall growth strategy is to make focused acquisitions. Since 1994, the Company has completed over 70 acquisitions, particularly in its securities servicing businesses and asset management. In addition, the Company enters into strategic joint ventures around the globe. While the level of transactions has been fairly consistent, acquisition activity by its very nature is not predictable. 34 Technology - Many of the Company's products and services depend on processing large volumes of information. The Company's technology platforms provide global capabilities and scale, which are significant competitive advantages and barriers to entry for competitors. However, the Company must continue to execute its technology strategy and deliver on its commitments to its clients. The Company has invested over $2 billion over the past five years in technology to establish and maintain a leadership position. Rapid technological change, lower-cost alternatives or competitive pressures, as well as the ongoing significant investments and technical expertise required all pose risks to the Company's future revenues from products and services that rely upon technology. Regulation - The Company is subject to regulation from many different government bodies, including the Board of Governors of the Federal Reserve System, the New York State Banking Department and the Federal Deposit Insurance Corporation. Regulations are imposed that involve quantitative measures of assets, liabilities and certain off-balance sheet items, subject to qualitative judgments by regulators about components, risk weightings and other factors. Failure to meet certain regulations could have a material effect on the Company's financial condition; failure to maintain the status of "well-capitalized" under the regulatory requirements would affect the Company's status as a financial holding company and eligibility for streamlined review process for acquisition proposals. In addition, failure to maintain the status of "well-capitalized" could affect the confidence of the Company's clients and would adversely affect its business. Liquidity - If the Company should experience limited access to the funds markets, arising from a loss of confidence of debt purchasers or counterparties in the funds markets in general or the Company in particular, this would adversely affect the Company. Operational risk and business continuity - The Company continually assesses and monitors operational risk in its businesses. Operational risk is mitigated by formal risk management oversight within the Company as well as by automation, standardized operating procedures, segregation of duties and controls, timely confirmation and reconciliation procedures and insurance. In addition, the Company provides for disaster and business recovery planning for events that could damage the Company's physical facilities, cause delay or disruptions to operational functions, including telecommunications networks, or impair the Company's clients, vendors and counterparties. Events beyond those contemplated in the plans could negatively affect the Company's results of operations. 35 Consolidated Balance Sheets
- ---------------------------------------------------------------------------------------- Dollars in millions, except per share amounts December 31, 2001 2000 - ---------------------------------------------------------------------------------------- Assets Cash and Due from Banks $ 3,222 $ 3,125 Interest-Bearing Deposits in Banks 6,619 5,337 Securities Held-to-Maturity (fair value of $1,178 in 2001 and $719 in 2000) 1,211 752 Available-for-Sale 11,651 6,649 ------- ------- Total Securities 12,862 7,401 Trading Assets 8,270 12,051 Federal Funds Sold and Securities Purchased Under Resale Agreements 4,795 5,790 Loans (less allowance for credit losses of $616 in 2001 and 2000) 35,131 35,645 Premises and Equipment 992 924 Due from Customers on Acceptances 313 447 Accrued Interest Receivable 236 354 Goodwill 2,065 1,700 Intangible Assets 19 10 Other Assets 6,501 4,330 ------- ------- Total Assets $81,025 $77,114 ======= ======= Liabilities and Shareholders' Equity Deposits Noninterest-Bearing (principally domestic offices) $12,635 $13,255 Interest-Bearing Domestic Offices 16,553 15,774 Foreign Offices 26,523 27,347 ------- ------- Total Deposits 55,711 56,376 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 1,756 1,108 Trading Liabilities 2,264 2,070 Other Borrowed Funds 2,363 1,687 Acceptances Outstanding 358 450 Accrued Taxes and Other Expenses 3,766 3,283 Accrued Interest Payable 92 127 Other Liabilities 3,422 1,325 Long-Term Debt 4,976 4,536 ------- ------- Total Liabilities 74,708 70,962 ------- ------- Shareholders' Equity Class A Preferred Stock-par value $2.00 per share, authorized 5,000,000 shares, outstanding 3,500 shares in 2001 and 16,320 shares in 2000 - 1 Common Stock-par value $7.50 per share, authorized 2,400,000,000 shares, issued 990,773,101 shares in 2001 and 985,528,475 shares in 2000 7,431 7,391 Additional Capital 741 521 Retained Earnings 4,383 3,566 Accumulated Other Comprehensive Income 80 207 ------- ------- 12,635 11,686 Less: Treasury Stock (260,449,527 shares in 2001 and 244,460,032 shares in 2000), at cost 6,312 5,526 Loan to ESOP (823,810 shares in 2001 and 1,142,939 shares in 2000), at cost 6 8 ------- ------- Total Shareholders' Equity 6,317 6,152 ------- ------- Total Liabilities and Shareholders' Equity $81,025 $77,114 ======= ======= See accompanying Notes to Consolidated Financial Statements.
36 Consolidated Statements of Income
- ----------------------------------------------------------------------------------------- In millions, except per share amounts For the years ended December 31, 2001 2000 1999 - ----------------------------------------------------------------------------------------- Interest Income Loans $2,271 $2,910 $2,636 Securities Taxable 463 323 257 Exempt from Federal Income Taxes 74 63 50 ------ ------ ------ 537 386 307 Deposits in Banks 252 273 247 Federal Funds Sold and Securities Purchased Under Resale Agreements 159 277 205 Trading Assets 401 531 78 ------ ------ ------ Total Interest Income 3,620 4,377 3,473 ------ ------ ------ Interest Expense Deposits 1,406 2,011 1,363 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 103 153 131 Other Borrowed Funds 153 139 126 Long-Term Debt 277 317 264 ------ ------ ------ Total Interest Expense 1,939 2,620 1,884 ------ ------ ------ Net Interest Income 1,681 1,757 1,589 Provision for Credit Losses 375 105 135 ------ ------ ------ Net Interest Income After Provision for Credit Losses 1,306 1,652 1,454 ------ ------ ------ Noninterest Income Servicing Fees Securities 1,750 1,650 1,245 Global Payment Services 287 261 274 ------ ------ ------ 2,037 1,911 1,519 Private Client Services and Asset Management Fees 308 296 244 Service Charges and Fees 356 364 338 Foreign Exchange and Other Trading Activities 338 261 189 Securities Gains 154 150 199 Other 347 127 1,004 ------ ------ ------ Total Noninterest Income 3,540 3,109 3,493 ------ ------ ------ Noninterest Expense Salaries and Employee Benefits 1,588 1,488 1,251 Net Occupancy 232 184 165 Furniture and Equipment 178 108 96 Other 790 730 595 ------ ------ ------ Total Noninterest Expense 2,788 2,510 2,107 ------ ------ ------ Income Before Income Taxes 2,058 2,251 2,840 Income Taxes 715 822 1,101 ------ ------ ------ Net Income $1,343 $1,429 $1,739 ====== ====== ====== Per Common Share: Basic Earnings $ 1.84 $ 1.95 $ 2.31 Diluted Earnings 1.81 1.92 2.27 Cash Dividends Paid 0.72 0.66 0.58 Diluted Shares 741 745 765 See accompanying Notes to Consolidated Financial Statements.
37 Consolidated Statements of Changes in Shareholders' Equity
- ------------------------------------------------------------------------------------------------------------------------ In millions For the years ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------ Preferred Stock Balance, January 1 $ 1 $ 1 $ 1 Conversion of Preferred Stock (1) - - ------ ------ ------ Balance, December 31 - 1 1 ------ ------ ------ Common Stock Balance, January 1 7,391 7,335 7,281 Common Stock Issued in Connection with Employee Benefit Plans (shares: 5,244,626 in 2001, 7,567,310 in 2000, and 7,193,398 in 1999) 40 56 54 ------ ------ ------ Balance, December 31 7,431 7,391 7,335 ------ ------ ------ Additional Capital Balance, January 1 521 315 142 Other, Primarily Common Stock issued in Connection with Employee Benefit Plans 220 206 173 ------ ------ ------ Balance, December 31 741 521 315 ------ ------ ------ Retained Earnings Balance, January 1 3,566 2,620 1,318 Net Income $1,343 1,343 $1,429 1,429 $1,739 1,739 Cash Dividends on Common Stock (526) (483) (437) ------ ------ ------ Balance, December 31 4,383 3,566 2,620 Accumulated Other Comprehensive Income Securities Valuation Allowance Balance, January 1 244 58 340 Change in Fair Value of Securities Available-for-Sale, Net of Taxes of $11 in 2001, $135 in 2000, and $(103) in 1999 20 20 229 229 (147) (147) Reclassification Adjustment, Net of Taxes of $81 in 2001, $23 in 2000, and $74 in 1999 (150) (150) (43) (43) (135) (135) ------ ------ ------ Balance, December 31 114 244 58 Foreign Currency Items Balance, January 1 (37) (28) (28) Foreign Currency Translation Adjustment, Net of Taxes of $(6) in 2001 and 2000 (9) (9) (9) (9) - - ------ ------ ------ Balance, December 31 (46) (37) (28) ------ ------ ------ Unrealized Derivative Gains Balance, January 1 - - - - - - Cumulative Effect of Change in Accounting Principle, Net of Taxes $7 in 2001 10 10 - - - - Net Unrealized Derivative Gains on Cash Flow Hedges, Net of Taxes $1 in 2001 1 1 - - - - Reclassification of Earnings, Net of Taxes $0.5 in 2001 1 1 - - - - ------ ------ ------ Balance, December 31 12 - - ------ ------ ------ ------ ------ ------ Total Comprehensive Income $1,216 $1,606 $1,457 ====== ====== ====== Less Treasury Stock Balance, January 1 5,526 5,148 3,593 Issued (shares: 2,875,393 in 2001, 3,426,777 in 2000, and 3,673,172 in 1999) (68) (76) (71) Acquired (shares: 18,864,888 in 2001, 10,139,567 in 2000, and 43,771,955 in 1999) 854 454 1,626 ------ ------ ------ Balance, December 31 6,312 5,526 5,148 ------ ------ ------ Less Loan to ESOP Balance, January 1 8 10 13 Released (shares: 319,129 in 2001, 301,066 in 2000, and 356,998 in 1999) (2) (2) (3) ------ ------ ------ Balance, December 31 6 8 10 ------ ------ ------ Total Shareholders' Equity, December 31 $6,317 $6,152 $5,143 ====== ====== ====== See accompanying Notes to Consolidated Financial Statements.
38 Consolidated Statements of Cash Flows
- ---------------------------------------------------------------------------------------- In millions For the years ended December 31, 2001 2000 1999 - ---------------------------------------------------------------------------------------- Operating Activities Net Income $1,343 $1,429 $1,739 Adjustments to Determine Net Cash Attributable to Operating Activities: Provision for Losses on Credit and Other Real Estate 377 109 135 Gain on Sale of BNYFC - - (1,020) Depreciation and Amortization 284 247 215 Deferred Income Taxes 453 530 454 Securities Gains (154) (150) (199) Change in Trading Activities 3,872 (3,872) (1,899) Change in Accruals and Other, Net (209) (459) (407) ------ ------ ------ Net Cash Provided (Used) by Operating Activities 5,966 (2,166) (982) ------ ------ ------ Investing Activities Change in Interest-Bearing Deposits in Banks (1,392) 1,414 (739) Purchases of Securities Held-to-Maturity (10) (323) (422) Maturities of Securities Held-to-Maturity 20 384 460 Purchases of Securities Available-for-Sale (12,866) (3,687) (2,992) Sales of Securities Available-for-Sale 4,350 1,681 865 Maturities of Securities Available-for-Sale 2,804 1,920 1,036 Net Principal Received (Disbursed) on Loans to Customers 316 529 (2,008) Sales of Loans and Other Real Estate 338 468 367 Change in Federal Funds Sold and Securities Purchased Under Resale Agreements 1,002 (146) (2,102) Purchases of Premises and Equipment (165) (106) (97) Acquisitions, Net of Cash Acquired (614) (286) (490) Disposition, Net of Cash Included - 46 4,867 Proceeds from the Sale of Premises and Equipment 5 3 10 Other, Net (254) (487) 179 ------ ------ ------ Net Cash (Used) Provided by Investing Activities (6,466) 1,410 (1,066) ------ ------ ------ Financing Activities Change in Deposits (244) 1,749 2,215 Change in Federal Funds Purchased and Securities Sold Under Repurchase Agreements 648 (441) (253) Change in Other Borrowed Funds 675 (276) 202 Proceeds from the Issuance of Long-Term Debt 560 265 931 Repayments of Long-Term Debt (165) (53) (21) Issuance of Common Stock 328 341 301 Treasury Stock Acquired (854) (454) (1,626) Cash Dividends Paid (526) (483) (437) ------ ------ ------ Net Cash Provided by Financing Activities 422 648 1,312 ------ ------ ------ Effect of Exchange Rate Changes on Cash 175 (43) 13 ------ ------ ------ Change in Cash and Due From Banks 97 (151) (723) Cash and Due from Banks at Beginning of Year 3,125 3,276 3,999 ------ ------ ------ Cash and Due from Banks at End of Year $3,222 $3,125 $3,276 ====== ====== ====== Supplemental Disclosure of Cash Flow Information Cash Paid During the Year for: Interest $1,973 $2,511 $1,829 Income Taxes 124 258 542 Noncash Investing Activity (Primarily Foreclosure of Real Estate) 1 2 4 See accompanying Notes to Consolidated Financial Statements.
39 Notes to Consolidated Financial Statements 1. Summary of Significant Accounting and Reporting Policies The Bank of New York Company, Inc. (the "Company") provides a complete range of banking and other financial services to corporations and individuals worldwide through its business segments: Servicing and Fiduciary Businesses; Corporate Banking; Retail Banking; and Financial Markets. Segment Data and Foreign Operations are incorporated from the Segment Profitability section of Management's Discussion and Analysis of the Company's Financial Condition and Results of Operations. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements. Amounts subject to significant estimates and assumptions are items such as the allowance for credit losses, pension and postretirement obligations, and the fair value of financial instruments. Actual results could differ from these estimates. Securities - Debt and equity securities classified as available-for-sale are carried at fair value, except for those equity securities whose fair value cannot be readily determined. These securities are carried at cost. Equity investments of less than a majority but at least 20% ownership are accounted for by the equity method and classified as other assets. For securities carried at fair value, the after-tax effect of net unrealized gains and losses is reported as a separate component of shareholders' equity. Securities classified as trading assets are carried at fair value, with net unrealized holding gains and losses recognized currently in income. Debt securities, which the Company has the ability and intent to hold until maturity, are classified as held-to-maturity and stated at cost, adjusted for discount accreted and premium amortized. Realized gains and losses on the sale of debt and equity securities are determined by the specific identification and average cost methods, respectively. 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 determined by one of the present value of the expected future cash flows from borrowers, the market value of the loan, or the fair value of the collateral. 40 Nonperforming Assets - 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. Leveraged Leases - Significant assumptions involving cash flows, residual values and income tax rates affect the level of revenue associated with leases. Gains and losses on residual values of leased equipment sold are included in other income. Derivative Financial Instruments - 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 on the balance sheet 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. Derivative contracts, such as futures contracts, forwards, interest rate swaps, foreign currency swaps and options and similar products used in trading activities, are recorded at market value. Gains and losses are included in other non-interest income. Unrealized gains and losses are reported on a gross basis in trading account assets and other borrowed funds, after taking into consideration master netting agreements. The Company enters into various derivative financial instruments for non- trading purposes primarily as part of its asset and liability management (ALM) process. These derivatives are designated and qualify as fair value and cash flow hedges of certain assets and liabilities in accordance with the new standard. Gains and losses associated with fair value hedges are recorded in income as well as any change in the value of the related hedged item. Gains and losses on cash flow hedges are recorded in other comprehensive income. If a derivative used in ALM does not qualify as a hedge it is marked to market and the gain or loss is included in net interest income. 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 41 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 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 year ended December 31, 2001, the Company recorded ineffectiveness of $1.5 million related to fair value and cash flow hedges in other income. Also during the same period, the Company recorded a credit of $1 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. 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. Prior to the adoption of the new standard, derivative contracts were either recorded in the trading account or designated as an element of the Company's asset and liability management (ALM) process when they altered the Company's interest rate and foreign currency exposures. Contracts used in the ALM process were linked to specific groups of similar assets or liabilities where there was a high correlation between the derivative contract and the item altered, both at inception and throughout the contract period. ALM derivative contracts were accounted for on the deferral, accrual, or mark-to- market basis. Under the deferral or accrual method, gains and losses on terminated derivative contracts were deferred and amortized over the remaining life of the linked assets or liabilities. Gains and losses on derivative contracts linked to assets and liabilities that were sold were recognized as an adjustment to the gain or loss of the balance sheet item. Under the mark- to-market method, all gains and losses were recognized in income immediately. Derivatives in the trading account were accounted for in the same manner as required under the new standard. Recent Accounting Developments - Effective January 1, 2002, new accounting standards related to acquisitions and goodwill will require the Company to stop amortizing goodwill. The Company estimates that the new standard will add 9 cents per share to earnings per share in 2002. The new standard will also require the Company to test goodwill for impairment at a reporting unit level. Based on current evaluations, the Company does not expect to record any impairment charge for goodwill in 2002. Prior to 2002, the Company periodically analyzed goodwill for impairment based on current operating performance and current expectations with respect to recoverability. Reclassifications - Company Obligated Mandatory Redeemable Preferred Trust Securities of Subsidiary Trusts Holding Solely Junior Subordinated Debentures 42 ("Preferred Trust Securities") have been reclassified to Long-Term Debt. Certain other prior year information has been reclassified to conform its presentation with the 2001 financial statements. 2. Acquisitions and Dispositions The Company continues to be an active acquirer of securities servicing and asset management businesses. During 2001, nine businesses were acquired for a total cost of $647 million, primarily paid in cash. The Company records the fair value of contingent payments as an additional cost of the entity acquired in the period that the payment becomes probable. Goodwill related to 2001 acquisition transactions was $452 million, substantially all of which is deductible for tax purposes. All of the goodwill was assigned to the Company's Servicing and Fiduciary Business segment. At December 31, 2001, the Company was liable for potential contingent payments related to its acquisitions in the amount of $176 million. The pro forma effect of the 2001 acquisitions is not material to the 2001 results. During 2001, the Company paid $41 million for contingent payments related to acquisitions made in prior years. 2001/2002 - --------- 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 expand 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 December 2001, the Company acquired the corporate trust business of Central Trust Bank, headquartered in Jefferson City, Missouri. The acquisition involved 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. In January 2001, the Company acquired the correspondent clearing business of Schroder & Co, Inc. from Salomon Smith Barney Inc. This transaction provided the Company with the opportunity to establish new client relationships and added broader product capabilities to its equity clearing business. In January 2002, the Company signed a definitive agreement to acquire the correspondent clearing business of Weiss, Peck & Greer, LLC adding approximately 70 new correspondent clearing clients. 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 43 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 February 2002, the Company acquired Autranet, Inc., a subsidiary of Credit Suisse First Boston (USA), Inc. This acquisition provides the Company with one of the largest providers of independently originated research services in the U.S. and maintains relationships with over 500 institutional investment managers. Autranet provides a full range of services covering every aspect of the third party research process including trade execution, operational and administrative support, research selection and procurement services and regulatory support. In February 2002, the Company acquired G-Trade Services, Ltd. and other related wholly-owned subsidiaries of the Credit Lyonnais SA Group. G-Trade, a leading provider of wholesale execution services including electronic direct access trading in 22 markets and basket trading capabilities in 65 markets worldwide, is the executing and clearing broker for non-U.S. equities executed through the Bloomberg Tradebook system. This acquisition will greatly expand the Company's non-dollar institutional trading capabilities and enhance the range of international services that the Company offers in the institutional brokerage and clearing services sector. 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. 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 February 2002, the Company acquired the Core International ADR and Domestic Equity Index institutional investment management businesses of Axe-Houghton Associates, Inc. based in Rye Brook, New York. This transaction will add approximately $2.6 billion in assets under management. 2000 - ---- In March 2000, the Company completed the acquisition of the correspondent clearing business of SG Cowen Securities Corporation. In July 2000, the Company completed the acquisition of BHF Securities Corporation, a leading provider of domestic and international correspondent clearing services. In March 2000, the Company acquired the corporate trust business of Harris Trust and Savings Bank located in Chicago, Illinois. In May 2000, the Company completed its purchase of the issuer, agency and depository services business of Barclays Bank PLC. In July 2000, the Company acquired the corporate trust business of Sakura Trust Company. In September 2000, the Company acquired the corporate trust business of Dai-Ichi Kangyo Bank of California, a wholly-owned subsidiary of the Dai-Ichi Kangyo Bank Ltd. In October 2000, the Company acquired Ivy Asset Management Corp., a privately-held asset management firm, based in Garden City, New York. Also, in October 2000, the Company completed the acquisition of approximately $9 billion in custodial accounts administered by the Bank of America Private Bank in Los Angeles. In January 2000, the Company completed the acquisition of certain assets of Institutional Securities Trading LLC ("IST"). In May 2000, the Company completed the acquisition of certain assets of Global Execution Network 44 Associates, Inc. ("GENA"). GENA is a U.S. based broker-dealer, specializing in quantitative and program equity trading in 52 markets globally. In April 2000, the Company completed the sale of its interest in Banco Credibanco S.A. to Unibanco-Uniao de Bancos Brasileiros S.A. 1999 - ---- On October 31,1999, the Company acquired RBS Trust Bank Limited ("RBSTB") from the Royal Bank of Scotland plc. At acquisition, RBSTB had assets of $9.5 billion. RBSTB is the largest provider of investor services to pension funds in the United Kingdom, and holds a leading position in the fund manager market, offering retail funds services, trustee and depositary services, as well as pension, banking, and treasury products. The acquisition continued the Company's expansion in the European market. On November 15, 1999, the Company acquired Estabrook Capital Management Inc., an asset management firm based in New York with approximately $2.5 billion in assets under management. Also in 1999, the Company acquired a planned giving service, a eurobond paying agency and depositary business, asset servicing businesses, and the corporate trust businesses of other financial service companies. In the third quarter of 1999, the Company sold BNY Financial Corporation ("BNYFC") to General Motors Acceptance Corporation. Net income includes a pre- tax gain of $1,020 million ($573 million after-tax) or 75 cents per share from this sale. 45 3. Securities The following table sets forth the amortized cost and the fair values of securities at the end of the last two years: 2001 --------------------------------------------- Gross Unrealized In millions Amortized ---------------- Fair Cost Gains Losses Value --------- ----- ------ ----- Securities Held-to-Maturity: US Government Obligations $ - $ - $ - $ - US Government Agency Obligations - - - - Obligations of States and Political Subdivisions - - - - Mortgage-Backed Securities 1,084 - - 1,084 Emerging Markets 127 - 33 94 ------- ---- --- ------- Total Securities Held-to-Maturity 1,211 - 33 1,178 ------- ---- --- ------- Securities Available-for-Sale: US Government Obligations 797 19 - 816 US Government Agency Obligations 665 18 - 683 Obligations of States and Political Subdivisions 524 13 - 537 Other Debt Securities 2,915 6 6 2,915 Mortgage-Backed Securities 2,928 28 - 2,956 Asset-Backed Securities 2,699 25 3 2,721 Emerging Markets 2 - - 2 Equity Securities 938 135 52 1,021 ------- ---- --- ------- Total Securities Available-for-Sale 11,468 244 61 11,651 ------- ---- --- ------- Total Securities $12,679 $244 $94 $12,829 ======= ==== === ======= 2000 --------------------------------------------- Gross Unrealized In millions Amortized ---------------- Fair Cost Gains Losses Value --------- ----- ------ ----- Securities Held-to-Maturity: US Government Obligations $ 18 $ - $ - $ 18 US Government Agency Obligations 4 - - 4 Obligations of States and Political Subdivisions 237 1 - 238 Mortgage-Backed Securities 100 2 - 102 Emerging Markets 311 - 37 274 Other Debt Securities 82 2 1 83 ------ ---- ---- ------ Total Securities Held-to-Maturity 752 5 38 719 ------ ---- ---- ------ Securities Available-for-Sale: US Government Obligations 1,459 15 6 1,468 US Government Agency Obligations 1,210 19 5 1,224 Obligations of States and Political Subdivisions 438 10 - 448 Other Debt Securities 1,540 2 2 1,540 Mortgage-Backed Securities 509 3 - 512 Asset-Backed Securities 326 1 - 327 Equity Securities 790 370 30 1,130 ------ ---- ---- ------ Total Securities Available-for-Sale 6,272 420 43 6,649 ------ ---- ---- ------ Total Securities $7,024 $425 $ 81 $7,368 ====== ==== ==== ====== 46 The amortized cost and fair values of securities at December 31, 2001, by contractual maturity, are as follows: Held-to-Maturity Available-for-Sale --------------------- --------------------- Amortized Fair Amortized Fair In millions Cost Value Cost Value --------- ------ --------- ------ Due in One Year or Less $ 10 $ 2 $ 2,614 $ 2,625 Due After One Year Through Five Years - - 1,214 1,248 Due After Five Years Through Ten Years - - 350 351 Due After Ten Years 117 92 725 729 Mortgage-Backed Securities 1,084 1,084 2,928 2,956 Asset-Backed Securities - - 2,699 2,721 Equity Securities - - 938 1,021 ------ ------ ------- ------- Total $1,211 $1,178 $11,468 $11,651 ====== ====== ======= ======= Realized gross gains on the sale of securities available-for-sale were $173 million and $130 million in 2001 and 2000. There were $4 million of realized gross losses in 2001 and $13 million of realized gross losses in 2000. At December 31, 2001, assets amounting to $14.3 billion were pledged primarily for potential borrowing at the Federal Reserve Discount Window. The significant components of pledged assets were as follows: $4.7 billion were securities, $9.1 billion were loans, and the remaining $0.5 billion were primarily trading assets. Included in these pledged assets were securities available-for-sale of $472 million which were pledged as collateral for actual borrowings. The lenders in these borrowings have the right to repledge or sell these securities. The Company obtains securities under resale, securities borrowed and custody agreements on terms which permit it to repledge or resell the securities to others. At December 31, 2001, the Company had pledged $79 million of such securities in connection with the Company's financing activities. 4. Loans The Company's loan distribution and industry concentrations of credit risk at December 31, 2001 and 2000 are incorporated by reference from "Loans" in the Management's Discussion and Analysis Section of this report. The Company's retail, community, and regional commercial banking operations in the New York metropolitan area create a significant geographic concentration. In the ordinary course of business, the Company and its banking subsidiaries have made loans at prevailing interest rates and terms to directors and executive officers of the Company and to certain entities to which these individuals are related. The aggregate dollar amount of these loans was $684 million, $881 million, and $432 million at December 31, 2001, 2000, and 1999. These loans are primarily with related entities under revolving lines of credit. During 2001, these loans averaged $702 million, and ranged from $570 million to $883 million. All loans were fully performing during this period. 47 Transactions in the allowance for credit losses are summarized as follows: In millions 2001 2000 1999 - ----------- ------ ------ ------ Balance, January 1 $616 $595 $636 Charge-Offs (388) (100) (154) Recoveries 13 16 17 ----- ----- ----- Net Charge-Offs (375) (84) (137) Provision 375 105 135 Allocated to BNYFC Loans Sold - - (39) ----- ----- ----- Balance, December 31 $616 $616 $595 ==== ==== ==== Nonaccrual and reduced rate loans outstanding at December 31, 2001, 2000, and 1999 were $220 million, $189 million, and $146 million. At December 31, 2001, commitments to borrowers whose loans were classified as nonaccrual or reduced rate were not material. The Company uses the discounted cash flow method as its primary method for valuing its impaired loans. The table below sets forth information about the Company's impaired loans at December 31,: (Dollars in millions) 2001 2000 1999 ---- ---- ---- Impaired Loans with an Allowance $147 $107 $65 Impaired Loans without an Allowance(1) 40 22 23 ---- ---- --- Total Impaired Loans $187 $129 $88 ==== ==== === Allowance for Impaired Loans(2) $ 42 $ 25 $ 21 Average Balance of Impaired Loans during the Year 210 114 130 Interest Income Recognized on Impaired Loans during the Year 2.5 1.9 0.2 (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. Interest income recognized on total nonaccrual and reduced rate loans exceeded reversals by $1 million in 2001, $2 million in 2000, and $1 million in 1999. Interest income would have been increased by $9 million, $9 million, and $8 million if loans on nonaccrual status at December 31, 2001, 2000, and 1999 had been performing for the entire year. At year-end, foreign loans on nonperforming status were $64 million in 2001, $48 million in 2000, and $63 million in 1999. Interest income received on foreign nonperforming loans equaled reversals in 2001, 2000, and 1999. If foreign loans on nonaccrual status at December 31, 2001, 2000, and 1999 had been performing for the entire year, interest income would not have been affected in 2001 and would have been increased by $1 million for 2000 and 1999. Other real estate was $2 million, $4 million, and $12 million at December 31, 2001, 2000, and 1999. Writedowns of and expenses related to other real estate included in noninterest expense were $2 million, $4 million, and $1 million in 2001, 2000, and 1999. 48 5. Long-Term Debt The following is a summary of the contractual maturity of long-term debt at December 31, 2001 and totals for 2000: 2001 2000 --------------------------------------- ------ After 5 Years Under Through After In millions 5 Years(1) 10 Years 10 Years Total Total - ----------- ------- -------- -------- ------ ------ Subordinated Debt Fixed $1,580 $590 $ 915 $3,085 $3,005 Variable 360 - 31 391 31 Preferred Trust Securities - - 1,500 1,500 1,500 ------ ---- ------ ------ ------ Total $1,940 $590 $2,446 $4,976(2) $4,536 ====== ==== ====== ====== ====== (1) The under five years category above includes $732 million of fixed rate debt with scheduled maturity of under one year. (2) At December 31, 2001, subordinated debt aggregating $1,020 million is redeemable at the option of the Company as follows: $410 million in 2002; $435 million in 2003; and $175 million in 2004. Fixed rate subordinated debt at December 31, 2001 had interest rates ranging from 2.53% to 8.50%. Preferred Trust Securities at December 31, 2001 had fixed interest rates ranging from 6.88% to 7.97%. The weighted average interest rates on fixed rate subordinated debt at December 31, 2001 and 2000 were 7.07% and 7.34%. The weighted average interest rates on variable rate subordinated debt at December 31, 2001 and 2000 were 2.20% and 6.62%. The weighted average interest rate on Preferred Trust Securities at December 31, 2001 and 2000 was 7.56%. Exposure to interest rate movements is reduced by interest rate swap agreements. As a result of these agreements, the effective interest rates differ from those stated. Wholly owned subsidiaries of the Company ("the Trusts") have issued cumulative Company-Obligated Mandatory Redeemable Preferred Trust Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures ("Preferred Trust Securities"). The sole assets of each trust are junior subordinated deferrable interest debentures of the Company, whose maturities and interest rates match the Preferred Trust Securities. The Company's obligations under the agreements that relate to the Preferred Trust Securities, the Trusts and the debentures constitute a full and unconditional guarantee by the Company of the Trusts' obligations under the Preferred Trust Securities. 49 The following table sets forth a summary of the Preferred Trust Securities issued by the Company as of December 31, 2001: Preferred Trust Securities - -------------------------- Dollars Interest Assets Due Call Call in millions Amount Rate of Trust Date Date Price - ----------- ------ -------- -------- ---- ---- ------- BNY Institutional Capital Trust A $300 7.78% $309 2026 2006 103.89% BNY Capital I 300 7.97 309 2026 2006 103.99 BNY Capital II 400 7.80 412 2027 2002 Par BNY Capital III 300 7.05 309 2028 2003 Par BNY Capital IV 200 6.88 206 2028 2004 Par The Company has the option to shorten the maturity of BNY Capital II, III and IV to 2012, 2013 and 2013 or extend the maturity to 2046, 2047 and 2047. 6. Securitizations The Company currently provides services to three qualified special purpose entities ("QSPE's") as of December 31, 2001. All of the Company's securitizations are QSPE's as defined in Statement of Financial Accounting Standards No. 140 which by design are passive investment vehicles. Total rate of return swaps entered into in connection with the securitization transactions are recorded in the trading account at fair value with the gain or loss included in net income. Since 2000, the Company sells and distributes securities for an asset backed commercial paper securitization program. The Company services the program and receives an annual fee of approximately 5 basis points. The Company provides liquidity and credit enhancement to the program through a total rate of return swap. Under the terms of the swap, the Company pays the funding cost of the program plus the expenses and receives the return on the assets. The $550 million of program assets at December 31, 2001 consist of 32% rated AAA, 55% rated AA2 and 13% rated A1+. The Company has not recognized any gain on the sale of assets to this program. The authorized size of the program is $5 billion. The purpose of the securitization is to hold highly rated low- risk medium-term customer obligations in a capital efficient manner. In 2000, the Company purchased BNY Hamilton Money Fund shares with a market value of $400 million. The Company then sold the right to receive the principal value of the shares in 2021 in a securitization transaction and retained the rights to receive on-going dividends from the shares. The Company did not recognize a gain on the sale. The purpose of this securitization is to achieve a favorable after-tax risk-adjusted investment return. The Company sponsors the BNY Hamilton Money Fund and receives an administrative fee for servicing the fund. The Company hedged a portion of the interest rate risk of the transaction by entering into a $200 million interest rate swap with a third party. The retained interest is recorded in available-for-sale securities in the consolidated balance sheet. The Company also sponsored a $53 million municipal bond securitization for which no gain was recognized. The Company provides liquidity and credit enhancement through a total rate of return swap. All of the bonds in the program are rated at least A2/VMIG1. The program's purpose is to achieve a favorable after-tax risk-adjusted investment return. The impact of these securitizations on the Company's fully diluted earnings per share is less than 1 cent. Furthermore, if these transactions were consolidated on the balance sheet, there would have been virtually no 50 impact on the Company's liquidity, and the Tier 1 and Total Capital ratios at December 31, 2001 would have been 8.03% and 11.49%, respectively vs. 8.11% and 11.57% as reported. The Company plans to start another asset backed commercial paper program in 2002. The objective of this program is to provide the Company's customers with an alternative investment vehicle. Institutional deposit customers may buy commercial paper of this program rather than leaving funds on deposit with the Company. The program will then invest the customers' funds primarily in short-term investments. The Company expects to enhance the credit worthiness of the program by entering into a total rate of return swap with it. The authorized size of this securitization is expected to be $5 billion. 7. Shareholders' Equity The Company currently plans to buy back up to 11 million shares of its common stock in 2002. In 2001, the Company's shareholders authorized an increase in the Company's common stock from 1.6 billion common shares to 2.4 billion common shares. In addition to the Class A preferred stock, the Company has 5 million authorized shares of preferred stock having no par value, with no shares outstanding at either December 31, 2001 or 2000. The Company's preferred stock purchase rights plan (each share of stock has one right) provides that if any person or group becomes the beneficial owner of 20% or more of the Company's common stock (an "acquiring person"), then on and after the tenth day thereafter, each right would entitle the holder (other than the acquiring person) to purchase $200 in market value of the Company's common stock for $100. In addition, if there is a business combination between the Company and an acquiring person, or in certain other circumstances, each right (if not previously exercised) would entitle the holder (other than the acquiring person) to purchase $200 in market value of the common stock of the acquiring person for $100. The rights are redeemable by the Company at $0.05 per right until they are exercisable, and will expire in 2004. At December 31, 2001, the Company had reserved for issuance approximately 54 million common shares pursuant to the terms of employee benefit plans and 30 million common shares pursuant to the terms of securities buyback programs. Basic and diluted earnings per share are calculated as follows: In millions, except per share amounts 2001 2000 1999 - ------------------------------------- ------ ------ ------ Net Income (1) $1,343 $1,429 $1,739 Basic Weighted Average Shares Outstanding 731 733 751 Shares Issuable upon Conversion: Employee Stock Options 10 12 14 ------ ------ ------ Diluted Weighted Average Shares Outstanding 741 745 765 ====== ====== ====== Basic Earnings per Share $ 1.84 $ 1.95 $ 2.31 Diluted Earnings per Share $ 1.81 $ 1.92 $ 2.27 (1) Net Income, net income available to common shareholders and diluted net income are the same for all years presented. 51 8. Income Taxes Income taxes included in the consolidated statements of income consist of the following:
2001 2000 1999 ---------------------- ---------------------- ---------------------- In millions Current Deferred Total Current Deferred Total Current Deferred Total ------- -------- ----- ------- -------- ----- ------- -------- ----- Federal $ 12 $373 $385 $132 $397 $529 $422 $342 $ 764 Foreign 169 - 169 129 - 129 101 - 101 State and Local 59 102 161 32 132 164 124 112 236 ---- ---- ---- ---- ---- ---- ---- ---- ------ Income Taxes $240 $475 $715 $293 $529 $822 $647 $454 $1,101 ==== ==== ==== ==== ==== ==== ==== ==== ======
The components of income before taxes are as follows: In millions 2001 2000 1999 - ----------- ------ ------ ------ Domestic $1,838 $1,868 $2,579 Foreign 220 383 261 ------ ------ ------ Income Before Taxes $2,058 $2,251 $2,840 ====== ====== ====== The Company's net deferred tax liability (included in accrued taxes) at December 31 consisted of the following: In millions 2001 2000 1999 - ----------- ------ ------ ------ Lease Financings $2,958 $2,548 $2,108 Depreciation and Amortization 292 257 239 Credit Losses on Loans (430) (321) (322) Other Assets (329) (217) (151) Other Liabilities 769 467 278 ------ ------ ------ Net Deferred Tax Liability $3,260 $2,734 $2,152 ====== ====== ====== The Company has not recorded a valuation allowance because it expects to realize all of its deferred tax assets. The statutory federal income tax rate is reconciled to the Company's effective income tax rate below: 2001 2000 1999 ------ ------ ------ Federal Rate 35.0% 35.0% 35.0% Tax-Exempt Income (2.0) (1.6) (1.0) Foreign Operations (0.8) (0.3) (0.1) Leveraged Lease Portfolio (0.2) (0.2) (0.1) State and Local Income Taxes, Net of Federal Income Tax Benefit 4.9 4.6 5.2 Nondeductible Expenses 0.4 0.7 0.6 Other (2.6) (1.7) (0.9) ----- ----- ----- Effective Rate 34.7% 36.5% 38.7% ===== ===== ===== 52 9. Employee Benefit Plans The Company has defined benefit and contribution retirement plans covering substantially all full-time and eligible part-time employees and also provides health care benefits for certain retired employees. Pension Benefits Healthcare Benefits ------------------ --------------------- Dollars in millions 2001 2000 2001 2000 - ------------------- ---- ---- ---- ---- Change in Benefit Obligation Obligation at Beginning of Period $(467) $(496) $(112) $(115) Service Cost (19) (25) (1) (1) Interest Cost (35) (36) (9) (9) Employee Contributions - - (3) (2) Actuarial Gain(Loss) (74) 26 (9) 4 Benefits Paid 33 34 14 11 Net Dispositions - 30 - - ----- ----- ----- ----- Obligation at End of Period (562) (467) (120) (112) ----- ----- ----- ----- Change in Plan Assets Fair Value at Beginning of Period 1,875 1,375 65 59 Actual Return on Plan Assets (593) 558 (9) 6 Net Dispositions - (31) - - Employer Contributions 4 7 - - Benefit Payments (33) (34) - - ------ ----- ----- ----- Fair Value at End of Period 1,253 1,875 56 65 ------ ----- ----- ----- Funded Status 691 1,408 (64) (47) Unrecognized Net Transition (Asset) Obligation (3) (7) 66 74 Unrecognized Prior Service Cost (3) (5) - - Unrecognized Net Gain (4) (821) 6 (19) ------ ----- ----- ----- Prepaid Benefit Cost $ 681 $ 575 $ 8 $ 8 ====== ===== ===== ===== Weighted Average Assumptions Discount Rate 7.25% 8.25% 7.25% 8.00% Expected Rate of Return on Plan Assets 10.5 10.5 8.3 8.3 Rate of Compensation Increase 4.5 4.5 53 The Company uses September 30 as the measurement date for plan assets and obligations. Pension Benefits Healthcare Benefits ------------------- ------------------- Dollars in millions 2001 2000 1999 2001 2000 1999 - ------------------- ---- ---- ---- ---- ---- ---- Net Periodic Cost (Income): Service Cost $ 19 $ 25 $ 22 $ 1 $ 1 $ 1 Interest Cost 35 36 31 9 9 9 Expected Return on Asset (140) (117) (96) (6) (5) (5) Other (12) (6) (1) 5 5 5 ---- ---- ---- ---- ---- ---- Net Periodic Cost (Income) $(98) $(62) $(44) $ 9 $ 10 $ 10 ==== ==== ==== ==== ==== ==== The assumed health care cost trend rate used in determining benefit expense for 2001 is 7.5% decreasing to 5.0% in 2005 and thereafter. An increase in this rate of one percentage point for each year would increase the benefit obligation by 9% and the sum of the service and interest costs by 9.5%. A decrease in this rate of one percentage point for each year would decrease the benefit obligation by 7.5% and the sum of the service and interest costs by 8%. The Company has an Employee Stock Ownership Plan ("ESOP") covering substantially all domestic full-time employees with more than one year of service. The ESOP may provide additional retirement benefits. Contributions are made equal to required principal and interest payments on borrowings by the ESOP. Contributions were approximately $1 million in 2001, $0.5 million in 2000 and 1999. The Company has defined contribution plans for which it recognized a cost of $96 million in 2001, $101 million in 2000 and $94 million in 1999. 10. Company Financial Information The Bank of New York (the "Bank"), the Company's primary banking subsidiary, is subject to dividend limitations under the Federal Reserve Act and state banking laws. Under these statutes, prior regulatory approval is required for dividends in any year that would exceed the Bank's net profits for such year combined with retained net profits for the prior two years. The Bank is also prohibited from paying a dividend in excess of undivided profits. Under the first and more significant of these limitations, in 2002 the Bank could declare dividends of $483 million plus net profits earned in 2002. The Federal Reserve Board can prohibit a dividend if payment would constitute an unsafe or unsound banking practice. The Federal Reserve Board generally considers that a bank's dividends should not exceed earnings from continuing operations. The Company's capital ratios and discussion of related regulatory requirements are incorporated by reference from the "Capital Resources" section of Management's Discussion & Analysis. The Federal Reserve Act limits and requires collateral for extensions of credit by the Company's banks to the Company and certain of its non-bank affiliates. Also, there are restrictions on the amounts of investments by such banks in stock and other securities of the Company and such affiliates, and restrictions on the acceptance of their securities as collateral for loans by such banks. Extensions of credit by the banks to each of the Company and such affiliates are limited to 10% of such bank's regulatory capital, and in the aggregate for the Company and all such affiliates to 20%, and collateral must be between 100% and 130% of the amount of the credit, depending on the type of collateral. 54 The subsidiary banks of the Company are required to maintain reserve balances with Federal Reserve Banks under the Federal Reserve Act and Regulation D. Required balances averaged $583 million and $401 million for the years 2001 and 2000. The Company's condensed financial statements are as follows: Balance Sheets
In millions December 31, 2001 2000 - ------------------------------------------------- ------- ------- Assets Cash and Due from Banks $ 16 $ 1 Securities 7 321 Loans 20 12 Investment in and Advances to Subsidiaries and Associated Companies Banks 9,333 8,552 Other 4,269 3,721 ------- ------- 13,602 12,273 Other Assets 215 69 ------- ------- Total Assets $13,860 $12,676 ======= ======= Liabilities and Shareholders' Equity Other Borrowed Funds $ 690 $ 310 Due to Non-Bank Subsidiaries 3,213 3,050 Due to Bank Subsidiaries 24 50 Other Liabilities 171 110 Long-Term Debt 3,445 3,004 ------- ------- Total Liabilities 7,543 6,524 ------- ------- Shareholders' Equity* Preferred - 1 Common 6,317 6,151 ------- ------- Total Liabilities and Shareholders' Equity $13,860 $12,676 ======= ======= *See Consolidated Statements of Changes in Shareholders' Equity.
55 Statements of Income
In millions For the years ended December 31, 2001 2000 1999 - ----------------------------------------------- ------- ------ ------ Operating Income Dividends from Subsidiaries Banks $1,102 $ 852 $1,364 Other 368 101 1,322 Interest from Subsidiaries Banks 126 116 99 Other 45 45 31 Other 245 6 54 ------ ------ ------ Total 1,886 1,120 2,870 ------ ------ ------ Operating Expenses Interest (including $189 in 2001, $208 in 2000, and $186 in 1999 to Subsidiaries) 364 428 379 Other 17 31 19 ------ ------ ------ Total 381 459 398 ------ ------ ------ Income Before Income Taxes and Equity in Undistributed Earnings of Subsidiaries 1,505 661 2,472 Income Tax Expense (Benefit) 35 (96) (98) ------ ------ ------ Income Before Equity in Undistributed Earnings of Subsidiaries 1,470 757 2,570 ------ ------ ------ Equity in Undistributed Earnings of Subsidiaries Banks (56) 480 187 Other (71) 192 (1,018) ------ ------ ------ Total (127) 672 (831) ------ ------ ------ Net Income $1,343 $1,429 $1,739 ====== ====== ======
56 Statements of Cash Flows
In millions For the years ended December 31, 2001 2000 1999 - -------------------------------------------------- ------ ------ ------ Operating Activities Net Income $1,343 $1,429 $1,739 Adjustments to Determine Net Cash Attributable to Operating Activities: Amortization 16 15 16 Equity in Undistributed Earnings of Subsidiaries 127 (672) 831 Securities Gains 8 8 (19) Change in Interest Receivable 4 6 (21) Change in Interest Payable (3) (1) 8 Change in Taxes Payable 108 74 (44) Other, Net (154) 3 11 ------ ------ ------ Net Cash Provided by Operating Activities 1,449 862 2,521 ------ ------ ------ Investing Activities Purchases of Securities (11) (418) (18) Sales of Securities - 84 - Maturities of Securities 10 2 4 Change in Loans (8) (3) 465 Acquisition of, Investment in, and Advances to Subsidiaries (1,285) (154) (1,736) ------ ------ ------ Net Cash Used by Investing Activities (1,294) (489) (1,285) ------ ------ ------ Financing Activities Change in Other Borrowed Funds 380 (141) (364) Proceeds from the Issuance of Long-Term Debt 560 265 731 Repayments of Long-Term Debt (165) (53) (20) Change in Advances from Subsidiaries 137 152 168 Issuance of Common Stock 328 341 301 Treasury Stock Acquired (854) (454) (1,626) Cash Dividends Paid (526) (483) (437) ------ ------ ------ Net Cash Used by Financing Activities (140) (373) (1,247) ------ ------ ------ Change in Cash and Due from Banks 15 - (11) Cash and Due from Banks at Beginning of Year 1 1 12 ------ ------ ------ Cash and Due from Banks at End of Year $ 16 $ 1 $ 1 ====== ====== ====== Supplemental Disclosure of Cash Flow Information Cash Paid During the Year for: Interest $ 368 $ 428 $ 369 Income Taxes (59) 139 435
57 11. Other Noninterest Income and Expense Other noninterest income includes equity in earnings of unconsolidated subsidiaries of $37 million, $35 million, and $20 million in 2001, 2000, and 1999. In 2001, other noninterest income included a $175 million insurance recovery. In 1999, other noninterest income included a pre-tax gain of $1,020 million on the sale of BNYFC and a liquidity charge of $124 million on the accelerated disposition of certain loans. Other noninterest expense includes amortization of goodwill and intangibles of $112 million, $115 million, and $102 million in 2001, 2000, and 1999. Noninterest expense in 2001 included $168 million of expenses associated with the WTC disaster. 12. Fair Value of Financial Instruments The carrying amounts of the Company's financial instruments (i.e., monetary assets and liabilities) are determined under different accounting methods-see Note 1. The following disclosure discusses these instruments on a uniform basis - fair value. However, active markets do not exist for a significant portion of these instruments, principally loans and commitments. As a result, fair value determinations require significant subjective judgments regarding future cash flows. Other judgments would result in different fair values. Among the assumptions used by the Company are discount rates ranging principally from 2% to 8% at December 31, 2001 and 5% to 10% at December 31, 2000. The fair value information supplements the basic financial statements and other traditional financial data presented throughout this report. A summary of the practices used for determining fair value is as follows: Securities, Trading Activities, and Derivatives Used for ALM - ------------------------------------------------------------ The fair value of securities and trading assets and liabilities is based on quoted market prices, dealer quotes, or pricing models. Fair value amounts for derivative instruments, such as options, futures and forward rate contracts, commitments to purchase and sell foreign exchange, and foreign currency swaps, are similarly determined. The fair value of interest rate swaps is the amount that would be received or paid to terminate the agreement. Loans and Commitments - --------------------- For certain categories of consumer loans, fair value includes consideration of the quoted market prices for securities backed by similar loans. Discounted future cash flows and secondary market values are used to determine the fair value of other types of loans. The fair value of commitments to extend credit, standby letters of credit, and commercial letters of credit is based upon the cost to settle the commitment. Other Financial Assets - ---------------------- Fair value is assumed to equal carrying value for these assets due to their short maturity. Deposits, Borrowings, and Long-Term Debt - ---------------------------------------- The fair value of noninterest-bearing deposits is assumed to be their carrying amount. The fair value of interest-bearing deposits, borrowings, and long-term debt is based upon current rates for instruments of the same remaining maturity or quoted market prices for the same or similar issues. 58 The carrying amount and estimated fair value of the Company's financial instruments are as follows: In millions December 31, 2001 2000 - ---------------------------- -------------------- -------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- ------- -------- ------- Assets Securities $13,402 $13,369 $ 7,940 $ 7,936 Trading Assets 8,270 8,270 12,051 12,051 Loans and Commitments 30,114 30,338 31,126 31,305 Derivatives Used for ALM 67 - 34 5 Other Financial Assets 16,715 16,715 15,141 15,141 ------- ------- ------- ------- Total Financial Assets 68,568 $68,692 66,292 $66,438 ======= ======= Non-Financial Assets 12,457 10,822 ------- ------- Total Assets $81,025 $77,114 ======= ======= Liabilities Noninterest-Bearing Deposits $12,635 $12,635 $13,255 $13,255 Interest-Bearing Deposits 43,076 43,095 43,121 43,150 Borrowings 4,209 4,209 2,916 2,916 Long-Term Debt 4,976 5,106 4,536 4,477 Trading Liabilities 2,264 2,264 2,070 2,070 Derivatives Used for ALM 2 (34) 6 (24) ------- ------- ------- ------- Total Financial Liabilities 67,162 $67,275 65,904 $65,844 ======= ======= Non-Financial Liabilities 7,546 5,058 ------- ------- Total Liabilities $74,708 $70,962 ======= ======= The table below summarizes the carrying amount of the financial instruments and the related notional amount and estimated fair value (unrealized gain/loss) of ALM interest rate swaps that were linked to these items: ALM Interest Rate Swaps ----------------------- Carrying Notional Unrealized In millions Amount Amount Gain (Loss) - ----------- -------- -------- ---- ---- At December 31, 2001 - -------------------- Loans $ 584 $ 559 $ 1 $(18) Securities Held-for-Sale 460 459 18 (1) Deposits 34 35 1 - Long-Term Debt 3,403 3,435 40 (7) At December 31, 2000 - -------------------- Loans $ 614 $ 614 $ 3 $(12) Securities Held-for-Sale 200 200 14 - Deposits 155 155 2 (2) Borrowings 860 860 23 - Long-Term Debt 1,440 1,440 26 (25) 59 The following table illustrates the notional amount, remaining contracts outstanding, and weighted average rates for ALM interest rate contracts: Remaining Contracts Outstanding at December 31,
Total ---------------------------------------- Dollars in millions 12/31/01 2002 2003 2004 2005 2006 - ----------------------------------------------------------------------------------------- Receive Fixed Interest Rate Swaps: Notional Amount $3,270 $3,160 $2,610 $2,300 $2,300 $2,300 Weighted Average Rate 7.20% 7.28% 7.43% 7.29% 7.29% 7.29% Pay Fixed Interest Rate Swaps: Notional Amount $1,218 $ 944 $ 707 $ 615 $ 559 $ 501 Weighted Average Rate 5.10% 5.64% 6.30% 6.30% 6.29% 6.30% Forward LIBOR Rate (1) 1.88% 3.74% 5.73% 6.16% 6.37% 6.41% (1) The forward LIBOR rate shown above reflects the implied forward yield curve for that index at December 31, 2001. However, actual repricings for ALM interest rate swaps are generally based on 3 month LIBOR.
The Company's financial assets and liabilities are primarily variable rate instruments. Fixed rate loans and deposits are issued to satisfy customer and investor needs. Derivative financial instruments are utilized to manage exposure to the effect of interest rate changes on fixed rate assets and liabilities, and to enhance liquidity. The Company matches the duration of derivatives to that of the assets and liabilities being hedged, so that changes in fair value resulting from changes in interest rates will be offset. The Company uses interest rate swaps, futures contracts, and forward rate agreements to convert fixed rate loans, deposits, and long-term debt to floating rates. Basis swaps are used to convert various variable rate borrowings to LIBOR which better matches the assets funded by the borrowings. The Company uses forward foreign exchange contracts to protect the value of its investments in foreign subsidiaries. The after-tax effects are shown in the cumulative translation adjustment included in shareholders' equity. At December 31, 2001 and 2000, $814 million and $749 million in notional amount of foreign exchange contracts, with fair values of $(12) million and $(21) million, hedged corresponding amounts of foreign investments. These foreign exchange contracts had a maturity of less than 6 months at December 31, 2001. Deferred net gains or losses on ALM derivative financial instruments at December 31, 2001 and 2000 were $1 million credit and $2 million debit. Net interest income increased by $50 million in 2001, $6 million in 2000, and $5 million in 1999 as a result of ALM derivative financial instruments. A discussion of the credit, market, and liquidity risks inherent in financial instruments is presented under "Liquidity", "Market Risk Management", "Trading Activities and Risk Management", and "Asset/Liability Management" in the unaudited Management's Discussion and Analysis Section of this report and Note 13 to the Consolidated Financial Statements. 60 13. Trading Activities The following table shows the fair value of the Company's financial instruments that are held for trading purposes:
2001 2000 ---------------------------- ---------------------------- In millions Assets Liabilities Assets Liabilities ------------- ------------- ------------- ------------- Trading Account 12/31 Average 12/31 Average 12/31 Average 12/31 Average - --------------- ----- ------- ----- ------- ----- ------- ----- ------- Interest Rate Contracts: Futures and Forward Contracts $ 11 $ 1 $ - $ - $ 10 $ 7 $ - $ - Swaps 1,576 1,121 698 502 613 1,128 343 891 Written Options - - 983 947 - - 761 710 Purchased Options 192 148 - - 75 66 - - Foreign Exchange Contracts: Written Options - - 16 68 - - 106 56 Purchased Options 67 105 - - 128 108 - - Commitments to Purchase and Sell Foreign Exchange 532 642 531 648 869 875 835 849 Debt Securities 5,850 7,827 - 14 10,349 9,044 23 25 Credit Derivatives 8 8 3 3 7 4 2 - Equity Derivatives 34 120 33 120 - - - - ------ ------ ------ ------ ------- ------- ------ ------ Total Trading Account $8,270 $9,972 $2,264 $2,302 $12,051 $11,232 $2,070 $2,531 ====== ====== ====== ====== ======= ======= ====== ======
Other noninterest income included the following income related to trading activities: In millions 2001 2000 1999 - ----------- ----- ----- ----- Foreign Exchange $206 $215 $137 Interest Rate Contracts 63 29 20 Debt and Other Securities 49 19 32 Credit Derivatives 3 3 - Equity Derivatives 17 (5) - ----- ----- ----- $338 $261 $189 ==== ==== ==== Foreign exchange includes income from purchasing and selling foreign exchange, futures, and options. Interest rate contracts reflect results from futures and forward contracts, interest rate swaps, foreign currency swaps, and options. Debt and other securities primarily reflect income from debt securities. 14. Commitments and Contingent Liabilities In the normal course of business, various commitments and contingent liabilities are outstanding which are not reflected in the accompanying consolidated balance sheets. Management does not expect any material losses to result from these matters. The Company's significant trading and off-balance-sheet risks are securities, foreign currency and interest rate risk management products, commercial lending commitments, letters of credit, and securities lending indemnifications. The Company assumes these risks to reduce interest rate and foreign currency risks, to provide customers with the ability to meet credit and liquidity needs, to hedge foreign currency and interest rate risks, and to trade for its own account. These items involve, to varying degrees, credit, foreign exchange, and interest rate risk not recognized in the balance sheet. The Company's off-balance-sheet risks are managed and monitored in manners 61 similar to those used for on-balance-sheet risks. There are no significant industry concentrations of such risks. A summary of the notional amount of the Company's off-balance-sheet credit transactions, net of participations, at December 31, 2001 and 2000 follows: Off-Balance-Sheet Credit Risks In millions 2001 2000 - ----------- ------- ------- Commercial Lending Commitments $ 45,773 $ 47,688 Standby Letters of Credit 8,459 7,743 Commercial Letters of Credit 946 1,230 Securities Lending Indemnifications 107,134 106,560 Standby Bond Purchase Agreements 2,800 - The total potential loss on undrawn commitments, standby and commercial letters of credit, and securities lending indemnifications is equal to the total notional amount if drawn upon, which does not consider the value of any collateral. Since many of the commitments are expected to expire without being drawn upon, the total amount does not necessarily represent future cash requirements. In securities lending transactions, the Company requires the borrower to provide collateral, thus reducing credit risk. The notional amounts for other off-balance-sheet risks express the dollar volume of the transactions; however, credit risk is much smaller. The Company performs credit reviews and enters into netting agreements to minimize the credit risk of foreign currency and interest rate risk management products. The Company enters into offsetting positions to reduce exposure to foreign exchange and interest rate risk. Standby letters of credit principally support corporate obligations and include $0.3 billion and $0.4 billion that were collateralized with cash and securities at December 31, 2001 and 2000. At December 31, 2001, approximately $6.9 billion of the standbys will expire within one year, and the balance between one to five years. At December 31, 2001 and 2000, securities lending indemnifications were secured by collateral of $107.1 billion and $106.6 billion. At December 31, 2001, approximately $87 billion of interest rate contracts will mature within one year, $168 billion between one and five years, and the balance after five years. At December 31, 2001, approximately $68 billion of foreign exchange contracts will mature within one year and $3 billion between one and five years. There were no derivative financial instruments on nonperforming status at year-end 2001. Use of derivative financial instruments involves reliance on counterparties. Failure of a counterparty to honor its obligation under a derivative contract is a risk the Company assumes whenever it engages in a derivative contract. 62 A summary of the notional amount and credit exposure of the Company's derivative financial instruments at December 31, 2001 and 2000 follows: Derivative Financial Instruments Notional Amount Credit Exposure --------------- --------------- In millions 2001 2000 2001 2000 - ----------- ------ ------- ----- ------ Interest Rate Contracts: Futures and Forward Contracts $ 50,371 $ 36,614 $ 14 $ 1 Swaps 129,264 109,525 3,079 1,327 Written Options 80,038 87,979 - - Purchased Options 43,423 40,749 815 352 Foreign Exchange Contracts: Swaps 1,487 235 24 18 Written Options 10,164 14,172 15 40 Purchased Options 13,626 16,545 261 189 Commitments to Purchase and Sell Foreign Exchange 45,888 45,400 596 1,022 Credit Derivatives: Swaps 1,636 1,643 8 7 ------ ------ 4,812 2,956 Effect of Master Netting Agreements (2,788) (1,567) ------ ------ Total Credit Exposure $2,024 $1,389 ====== ====== Operating Leases Net rent expense for premises and equipment was $165 million in 2001, $113 million in 2000, and $100 million in 1999. At December 31, 2001, the Company and its subsidiaries were obligated under various noncancelable lease agreements, some of which provide for additional rents based upon real estate taxes, insurance, and maintenance and for various renewal options. The minimum rental commitments under noncancelable operating leases for premises and equipment having a term of more than one year from December 31, 2001 are as follows: (In millions) Years ending December 31, Core WTC Total - ----------------------------------------- ---- --- ----- 2002 $ 90 $ 43 $133 2003 80 37 117 2004 65 36 101 2005 60 32 92 2006 55 33 88 Thereafter 202 238 440 ---- ---- ---- Total Minimum Lease Payments $552 $419 $971 ==== ==== ==== In the aftermath of the WTC disaster, the Company leased temporary space for employees to use until their regular workplaces become available. In 2002, the Company anticipates all its facilities will return to use and temporary space will be sublet. The Company believes any loss on subleases will be covered by its insurance. 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 upon the Company's consolidated financial statements. 63 15. Stock Option Plans The Company's stock option plans ("the Option Plans") provide for the issuance of stock options at fair market value at the date of grant to officers and employees of the Company and its subsidiaries. Under the Company's plan, options to acquire common stock may be granted in amounts that do not exceed 70 million shares. Generally, each option granted under the Option Plans is exercisable between one and ten years from the date of grant. The Company accounts for its Option Plans under Accounting Principles Board Opinion 25. As a result, compensation cost is not recorded. If compensation cost for these plans had been based on fair value, net income would have been reduced by $57 million in 2001, $37 million in 2000 and $31 million in 1999. Also, diluted earnings per share would have been reduced by 8 cents per share in 2001, 5 cents per share in 2000 and 4 cents per share in 1999. The assumptions used in the Black-Scholes Model for determining the impact of accounting for the Option Plans at fair value for 2001 are as follows: dividend yield of 3%; expected volatility of 28%; risk free interest rate of 4.83%; and expected option lives of 5 years. A summary of the status of the Company's Option Plans as of December 31, 2001, 2000, and 1999, and changes during the years ending on those dates is presented below:
2001 2000 1999 --------------------- ---------------------- --------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Shares Price Shares Price Shares Price - ------- --------- --------- --------- --------- --------- --------- Outstanding at Beginning of Year 33,493,020 $27.78 30,340,627 $22.04 28,195,178 $16.72 Granted 9,797,300 53.71 9,489,700 39.65 7,322,850 35.60 Exercised (3,631,368) 19.07 (5,619,925) 15.62 (4,579,044) 10.12 Canceled (357,519) 44.64 (717,382) 37.18 (598,357) 28.64 ---------- ---------- ---------- Outstanding at End of Year 39,301,433 34.90 33,493,020 27.78 30,340,627 22.04 ========== ========== ========== Options Exercisable at Year-end 20,584,688 24.67 16,539,056 18.57 16,223,731 13.38 Weighted Average Fair Value of Options Granted During the Year $12.40 $10.93 $8.18
64 The following table summarizes information about stock options outstanding at December 31, 2001:
Options Outstanding Options Exercisable --------------------------------- --------------------- Weighted Average Weighted Weighted Number Remaining Average Number Average Range of Outstanding Contractual Exercise Exercisable Exercise Exercise Prices at 12/31/01 Life Price at 12/31/01 Price - --------------- ----------- ----------- -------- ----------- -------- $ 4 to 7 3,092,830 2.2 Years $ 6.84 3,092,830 $ 6.84 11 to 17 5,345,340 4.6 15.10 5,345,340 15.10 20 to 25 34,048 5.4 21.92 34,048 21.92 27 to 30 5,165,128 6.0 27.48 4,860,778 27.48 31 to 42 15,847,087 7.6 37.75 7,132,647 37.25 43 to 57 9,817,000 9.1 53.85 119,045 50.40 ----------- ----------- 4 to 57 39,301,433 6.9 34.90 20,584,688 24.67 =========== ===========
65 Report of Independent Auditors TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF THE BANK OF NEW YORK COMPANY, INC. NEW YORK, NEW YORK We have audited the accompanying consolidated balance sheets of The Bank of New York Company, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Bank of New York Company, Inc. and subsidiaries at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /S/ Ernst & Young LLP NEW YORK, NEW YORK FEBRUARY 1, 2002 66 Global Vision with a Local Focus - --------------------------------- Headquartered at One Wall Street, in the heart of the U.S. financial center, The Bank of New York Company, Inc. has a strong presence throughout the global capital markets. The Company has maintained a consistent strategy of focusing on high-growth, fee-based businesses that has transformed the Bank from a traditional commercial bank into the world's premier financial asset servicer. Today, we are a market-leader in many businesses that focus on servicing securities issuers and all forms of investors and intermediaries. Our well-diversified franchise has become an integral part of the infrastructure for the global capital markets, and the breadth of our products and services allows us to build client relationships through many different avenues in all markets and regions throughout the world. This strategic transformation is evident in the increased earnings contribution from our fiduciary and securities servicing businesses. These high-growth, fee-based businesses now comprise 55% of total normalized earnings, up from 27% in 1995. Traditional banking activities, which comprised 73% of total earnings in 1995, now make up only 45% of normalized earnings. Our continued focus on fee-based businesses resulted in non-interest income growing to 66% of total normalized revenue in 2001, up from 64% the year before and 47% five years ago. Our businesses are well positioned to continue to benefit from attractive long-term trends. Trends such as the growth of financial assets worldwide; increased cross-border investing; regulatory reporting requirements in multiple domiciles; and the growing reliance on technology to deliver information on a "real-time" basis, all play to the strength of The Bank of New York's servicing model. Another growing trend that drives our business is that of outsourcing. In its most basic form, outsourcing is providing a suite of products that replace the back- or middle-office functions of the client, allowing the client to focus on its core competencies. For The Bank of New York, securities servicing has become a growth business, a scale business and a global business. A key to the success of our strategy is our commitment to maintaining our position as a technology leader in servicing major participants in the global financial markets. Our investment in technology, which increased from $308 million in 1997 to $588 million in 2001, provides a strong platform to meet client needs, improve productivity, integrate new businesses and develop new products. It also provides a competitive advantage in winning new business. We also continue to make acquisitions and announced nine in 2001. These focused acquisitions, which add both new customers and new products, continue to be an important factor in our strategy as we expand our fee-based businesses. We have completed more than 70 acquisitions since 1994, most of these related to our securities servicing businesses. Acquisitions are used to 67 enhance our product offering, expand our geographical reach, and consolidate scale businesses, such as corporate trust, clearing services and global custody. New international growth opportunities are arising from global trends, which require our client base to respond in increasingly complex ways. We have adapted our proven business model to meet those requirements and have extended it to various international markets, particularly in Europe and Asia. This is evidenced by our increasing non-U.S. revenues from 14% in 1996 to 30% in 2001. As clients' needs become increasingly global, our global relationship management team provides the key to expanding our business with corporate and institutional clients worldwide. Our relationship managers are the focal point for creating broad partnerships with our clients. They are responsible for coordinating with product specialists and executing the delivery of all of our products and services, from the sales process through continuing support. While the Bank's client base covers a range of industries, our global relationship managers are particularly focused on those clients that are major users of our securities servicing infrastructure, such as financial services firms. We provide a complete range of banking and other financial services to a wide variety of corporate, institutional and retail customers, and major financial institutions, both public and private, throughout the world. Our products and services are organized into five major business lines: Securities Servicing and Global Payment Services, Private Client Services and Asset Management, Corporate Banking, Global Markets and Retail Banking. SECURITIES SERVICING AND GLOBAL PAYMENT SERVICES Securities Servicing and Global Payment Services is our largest and fastest growing business segment, contributing 61% of total fee revenues in 2001. Fee revenues from these businesses grew to $2.05 billion in 2001 compared to $1.91 billion in the prior year. We are a market leader in many of the businesses in this segment, with specialized services and expertise required to help institutions worldwide mitigate risk, maximize performance, manage costs, and realize new opportunities. Through the infrastructure we provide to the capital markets, we support broker/dealers and other market participants with essential services such as securities clearance, securities lending, collateral management and liquidity. We provide critical back-office functions for issuers of securities, including all types of fixed-income securities, equities, American depositary receipts and exchange-traded funds. This is a scale business for us in terms of number of markets and clients served, combined with the breadth of products we offer. Our business is driven by growth in cross-border investing and asset managers' global expansion. To support our global business, we have a sub-custodian network located in more than 100 key markets. We continue to commit our substantial intellectual, financial and technological resources to help global issuers and investors meet the pressures of a changing and challenging marketplace. 68 As our clients and businesses expand globally, the Bank is adapting its strategy to the growing international markets and is well prepared to service those market participants. We have developed a leading global custodian position and now service $3 trillion in assets for European clients with regional operations in London and Brussels and with support from our Singapore operations center. We have also developed a leading position as an offshore mutual fund servicer with locations in Dublin, the Channel Islands and Luxembourg, and offer an integrated package of solutions including fund administration, fund accounting and trustee services. In the United Kingdom, the Bank is a leading provider of investor services, including trustee and depository, servicing more than 1,500 U.K. pension funds, or 20% of the assets belonging to that market. Our proprietary European transfer agency system services 25% of the U.K. retail administration marketplace. Throughout the U.K., we are a full-service local institution with global capabilities servicing both issuers and investors. We are also a leading European fund administrator delivering a pan-European service on a common technology platform through key service centers. INVESTOR SERVICES Through our Investor Services sector, we offer our clients integrated solutions for the full spectrum of global investing. Beginning with pre-trade analysis and portfolio modeling and carrying through to post-trade processing, we provide a single source for products and services that address all phases of the investment lifecycle. Leveraging our integrated browser-based client communication portal, INFORM, clients have access to a single gateway to our diverse products and services and their information resident on our systems. Industry specialization allows us to approach relationships from a client perspective while offering consultative expertise and tailored solutions to mutual funds, fund managers, banks, insurance companies, plan sponsors, government agencies, broker/dealers, and central banks. During 2001 we further solidified our position as the world's leading provider of investor services through the following: - - The establishment of a Belgian branch of The Bank of New York (Luxembourg) S.A. expands our global fund servicing capabilities to cater to the growing demand from mutual funds for depository and administration services within continental Europe. - - The opening of a fund accounting and administration office in Orlando, Florida, supports rapid business expansion. - - The expansion of our Irish joint venture - already the largest trustee of collective investment funds in Ireland - allows us to deliver integrated trustee, custody and fund administration to local Irish funds. - - Building on our position as a leading global provider of exchange-traded funds (ETF) services, we supported the launch of 13 Merrill Lynch-sponsored LDRS funds in Europe and were selected to provide administration services for the first ETF from a continental European fund manager. These developments demonstrate our continuing expansion as well as our commitment to offer asset managers a single source for their entire fund servicing needs worldwide. With the continued pressure on fund managers to control operating and capital expenses, combined with the post-September 11 focus on business recovery, 69 discussions regarding outsourcing have increased. We are positioned favorably in the marketplace through our experience as a pioneer in the outsourcing arena and our ability to offer a T+1-compliant outsourcing infrastructure. Our ability to help clients mitigate risk, maximize performance, and manage costs as well as provide quality service continues to distinguish us as a leading provider of services to investors worldwide. ISSUER SERVICES The Bank of New York is the world's premier provider of Issuer Services, offering the broadest array of products of any servicing company to financial institutions, corporations, and intermediaries around the world. We are widely recognized as the world's largest depositary and corporate trust provider, and our stock transfer services continue to leverage the most comprehensive technology available in the industry. We expanded our market leadership position in Depositary Receipts during 2001 by winning 68% of all new sponsored depositary receipt appointments, adding 92 programs from 26 countries. Notable names included the New York Stock Exchange listings of Nomura, Kookmin and Lloyds TSB banks, Vivendi Environnement, Van der Moolen, as well as the government privatizations of Statoil and Aluminum Corporation of China. We also assumed the depositary receipt business from HSBC Bank USA. We are the world leader in public sponsored depositary receipt programs, with a market share of 66%, representing 1,400 programs from 70 countries. We launched our enhanced depositary receipt web site, www.adrbny.com. This web site provides global issuers and advisors, as well as professional and retail investors, with a comprehensive, up-to-date source of depositary receipt market data. By combining proprietary depositary receipt data with publicly available market information, The Bank of New York has created a complete and useful set of analytics for users around the globe. Additionally, we launched our interactive depositary receipt event database, DR Calendar of Events, which provides information about web casts, conference calls and schedules, earnings release dates, and dividend and stock split information for non-U.S. companies with depositary receipt programs. We remain the world market leader for innovative, high-quality Corporate Trust services. The Bank was ranked as the number one trustee in the U.S., administering a portfolio of more than 80,000 trust and agency appointments, representing more than $1 trillion in outstanding securities for over 30,000 clients worldwide. We are a recognized leader in trust services for several debt products, including mortgage- and asset-backed securities, corporate and municipal debt, derivative securities and international debt offerings. We launched an enhanced web site, www.bnyinvestorreporting.com. This corporate trust site provides clients with access to detailed information on structured finance products including asset-backed securities, residential and commercial mortgage-backed securities, and collateralized debt obligations. We announced three corporate trust acquisitions in 2001. Most notable was the corporate trust business of U.S. Trust Corporation, which brought us 5,000 bond trust and agency appointments representing more than $330 billion in outstanding debt securities. This acquisition added significant market share in several specialty products and services, including the structured finance and municipal finance markets in New York State. 70 As one of the world's largest Stock Transfer agents, we provide a full range of technology-enhanced services such as record keeping, dividend payment and reinvestment, proxy tabulation and exchange-agent services to more than 15 million shareholders representing approximately 550 issuers. The Bank of New York also has one of the most sophisticated imaging platforms in the industry. This technology provides straight-through processing applications that reduce the need for manual intervention and results in higher quality services because it minimizes the possibility for error. As a bank-owned transfer agent, The Bank of New York experiences the tremendous synergies that exist between the stock transfer department and the larger banking institution. Relationship managers within the transfer agency are able to draw from the services of other Bank resources to provide all- encompassing solutions. BROKERAGE AND CLEARING SERVICES - -------------------------------- In 2001 we continued to enhance our leadership as a global agency brokerage and clearing organization by bringing together BNY ESI & CO., INC., BNY CLEARING SERVICES, LLC, and B-TRADE SERVICES, LLC. The group is focused on providing a broadly-diversified suite of value-added services and differentiated technologies that expand the Bank's offerings to institutions, broker/dealers and corporations. While last year's market conditions were challenging, BNY ESI had another year of increased growth fueled by cross selling to Bank clients as well as the introduction of two services that combined trade execution strategies with other Bank services: BNY Global Transition Management and ADR Direct. BNY Global Transition Management provides pension plan administrators and sponsors with a comprehensive service to expedite the large-scale transition or transfer of assets between asset classes and investment managers. Global Transition Management offers a single point of coordination, guaranteeing a seamless transition for the client from pre-trade analysis and setting the trading strategies through trade execution, clearing and post-transition reporting. ADR Direct, a trading platform for ADRs, enables institutional investors to access additional liquidity - on an agency basis - by purchasing shares in local trading markets and converting them into ADRs. ADR Direct also provides all foreign exchange, clearance and settlement services. We also established a new platform focused on commission management and third- party services through the acquisition of Westminster Research Associates, which provides services to institutional investors along with an innovative trading strategy. Westminster Research gives investment managers the ability to execute trades through a network of top-tier institutional trading desks, while consolidating all of the administrative, servicing and reporting functions of their soft-dollar business. BNY Clearing Services deepened its market penetration and product capabilities through the integration of Schroder & Co.'s correspondent clearing business; the acquisition of the correspondent clearing business of Weiss, Peck & Greer, LLC, which further expanded our client base to include alternative investment companies; and the commencement of service in London for U.K. and continental European brokers, through BNY Clearing International. BNY Clearing Services introduced an enhanced version of its non-discretionary, fee-based brokerage account called Individual Strategies. This allows retail 71 clients of BNY Clearing's broker/dealer correspondents to trade commission- free and gives the correspondent the ability to execute its clients' investment strategies without incurring ticket charges. Also introduced were enhanced annuity processing capabilities that allow correspondent firms to streamline the initial purchase and ongoing maintenance processes of annuities. B-Trade Services provides trade execution and clearing services for Bloomberg Tradebook, LLC, one of the premier alternative trading system platforms for the institutional investment community, through a strategic alliance with Bloomberg, LP. In 2001 we also enhanced our Global Liquidity Services through the launch of www.moneyfundsdirect.com. This web site was designed to help institutional investors manage their liquidity and short-term investing with increased efficiency. Investors have direct access to money market funds from over 15 well-known, non-proprietary fund families. Investors can conveniently research information on various funds, buy and sell securities, and download reports and account statements. www.moneyfundsdirect.com makes managing short-term investments a centralized, easy-to-use, electronic process. GLOBAL PAYMENT SERVICES - ----------------------- Global Payment Services provides payment and deposit services, including funds transfer and Internet-based cash management, and trade services to facilitate global trade. As a market leader, we offer solutions that optimize cash flow, integrate systems and increase investment returns to financial institutions and corporations. The Bank's CA$H-Register Plus(registered trademark), an innovative, cash management delivery system, offers a broad range of services on a browser-based platform to more than 12,000 users. It allows customers to conduct a growing range of transactions, including wire transfers, ACH payments and collections, letters of credit, information reporting and the retrieval of check images. The Bank is among the top three providers of Funds Transfer services in the U.S. We process more than 135,000 transactions daily with an aggregate value in excess of $900 billion. This activity is related to global trade, securities and foreign exchange transactions. We deliver Trade Services that facilitate global trade, including letters of credit, documentary collections, reimbursements and automated inquiry and reporting as well as outsourcing trade services. Our customers include major import and export corporations and banks that deliver trade services around the world. In 2001 we added new trade outsourcing clients, including two major banks in Asia. Through our offices in Hong Kong, we provided trade letter of credit issuance to a major government bank in Southeast Asia under their private label. Through The Bank of New York's Asian network, we also provided final letter of credit document examination to improve workflow for a major correspondent bank. These arrangements allow our clients to focus on their core competencies while enabling them to generate new revenues and improve their operating efficiency. Outsourcing our services enables us to leverage our advanced Internet technology, our imaging capabilities, our regional presence in Asia and our expertise in global trade processing. 72 The Bank offers Deposit and Disbursement Services designed to optimize cash flow to corporate and institutional customers. These services, which range from traditional checks to image-based controlled disbursements, include private labeling of the capabilities to U.S. banks through the Internet and are designed to enable our clients to manage cash by accelerating receipts, optimizing payments and reducing fraud. Installation of new image technology is enabling a future generation of services that will meet new Federal Reserve Bank and industry guidelines that are based on conversion of paper checks to electronic data and images. BNY ASSET MANAGEMENT AND PRIVATE CLIENT SERVICES BNY Asset Management and Private Client Services provide a comprehensive range of wealth management capabilities designed to meet the current and emerging needs of wealthy individuals, families, and institutions worldwide. Against the backdrop of a challenging investment year due to economic uncertainties, falling interest rates, and the onset of recession, we remained committed to our long-term core growth strategy for equities. We continued to grow our business through acquisitions, strengthened investment capabilities, enhanced product and service offerings, and expanded new business development. Private client services and asset management fees were $309 million for 2001, with growth primarily attributed to alternative investment and short-term money market product lines. BNY Asset Management, the investment management arm of The Bank of New York, offers customized portfolio management designed to meet our clients' specific investment goals. Our investment philosophy emphasizes meeting clients' objectives while minimizing risk. We grew assets under management to $67 billion and continued to be one of the leading specialty asset managers in the United States. The acquisition of Ivy Asset Management in October 2000 positioned us well in 2001 to meet the strong demand from investors for alternative investment opportunities. Since becoming a Bank of New York subsidiary, Ivy Asset has increased its assets under management by $2.4 billion to more than $4.9 billion, as of December 31, 2001. This growth makes Ivy one of the larger hedge fund-of-funds managers in the global marketplace. This growth in assets under management was fueled by demand both in the U.S. and abroad from institutions and wealthy individuals seeking alternative investments as a strategy to diversify portfolios in a volatile economic climate. The addition of Ivy Asset Management products to our comprehensive investment alternatives has enabled us to grow our earnings, strengthen our investment capabilities, and attract new investors. Ivy provides sub-advisory services and creates products to meet investor demand. As a provider of sub-advisory services to institutions and pension funds, we now offer, through Ivy Asset Management, back-office technology, due diligence services, and manager selection to institutional investors around the world. Furthering our commitment to new product innovation, we launched BNY Partners Fund II, raising $40 million in assets. This fund expanded our alternative investment products offered in the U.S. and abroad. In addition, we launched in late 2000, the BNY Multi-Manager Hedge Fund, which ended the year with approximately $103 million in capital and 170 partners. 73 The Bank was also appointed as the investment advisor for HSBC Funds, comprising seven portfolios, including equity, bond and money market funds. The Bank acquired Greenwich Advisors, a privately-held investment advisory firm, based in Greenwich, Connecticut. In addition, we signed a definitive agreement to acquire the Core International ADR and Domestic Equity Index institutional investment management businesses of Axe-Houghton Associates, Inc., a registered investment adviser. This acquisition will provide a new dimension in international investing and complements the Bank's industry- leading position in the ADR issuance marketplace. These focused acquisitions reinforce the Bank's strategic commitment to provide a wide range of investment services to institutions and individuals worldwide. Private Client Services provides wealth management and objective advisory services for wealthy individuals and families, corporate executives, entrepreneurs, and business owners. We customize our services to meet each client's short- and long-range financial objectives within the context of their time horizon, tax situation, risk tolerance and liquidity requirements. During the past year, we added Family Wealth Management Services to our offerings to serve families with assets greater than $50 million. In addition to our multi-disciplined team approach and state-of-the-art master custody capabilities, we also deliver an independent, objective and highly professional investment consulting service for clients utilizing multiple money managers. This includes advice on appropriate asset allocation, manager search and selection, performance analytics and ongoing monitoring of the managers. Our Private Client Special Industries group provides specialized services to meet the unique needs of clients within the real estate, non-profit, and media industries as well as private equity sponsor firms. Following the World Trade Center disaster, The Bank of New York was selected to manage the United Way's September 11th Fund. This fund is being managed on a pro-bono basis. CORPORATE BANKING Corporate Banking coordinates all banking and credit-related services to our clients. We are strategically focused on those clients and industries that are major users of our securities and global payment services. Our global relationship managers lead the Company's effort to cross-sell fee-based products by leveraging existing relationships into new business opportunities. We are focused on maintaining strong asset quality and balancing the risks and profitability of every client relationship. Risk measurement and return on capital models are used extensively to help mitigate credit risk and ensure overall client profitability. The result is a continued migration of the credit portfolio towards investment grade clients who use multiple Bank products. 74 Our Corporate Banking capabilities are organized along the following lines: Financial Companies Services specializes in providing company-specific securities services solutions to mutual funds companies, insurance companies, banks, investment managers, government agencies and broker/dealers. The financial company market comprises our largest and fastest growing segment. We have relationships with virtually all of the 100 top asset managers worldwide. Special Industries Banking focuses on the unique requirements in key industry sectors such as media and telecommunications, public utilities and energy, automotive, healthcare, retailing, and real estate. In 2001 the Bank formed a new specialty-banking group focused on endowments, foundations, and other major non--profit sector clients emphasizing our commitment to that important market. U.S. Commercial Banking targets major corporations throughout the United States, including leading manufacturers, distribution companies and service organizations. This provides a diverse client base for cross-selling the Bank's broad range of products and services. Regional Commercial Banking offers a wide range of banking services, including traditional lending, cash management, leasing, trade finance, capital markets and corporate finance to mid-sized companies in the metropolitan New York area. Additionally, we offer a full range of private banking and asset management services to the principals as well as retirement plan services for the employees of these companies. International Banking relationship managers focus on the securities servicing, global payment and trade finance needs of our clients through our international branches and representative offices worldwide. These relationships are also served through our network of more than 2,300 correspondent banks globally. The result is a unique combination of global reach and local expertise that delivers maximum benefit to our clients. By locating many of our offices in the world's most active financial centers, we provide quick access to the movement of capital worldwide as well as the reach, resources, and technology needed to compete effectively in the global marketplace. BNY Capital Funding LLC, one of the largest bank-owned Leasing companies in the United States, develops innovative structuring to meet the tax-oriented equipment financing needs of domestic and international customers. BNY Capital Funding has a broadly diversified portfolio with arrangements in 17 countries. BNY Capital Resources Corporation provides financing for corporate and regional commercial banking clients. BNY Capital Markets, Inc., a subsidiary, provides our clients with a broad range of capital markets and investment banking services including the structuring and underwriting of syndicated financings, the underwriting and distribution of corporate bonds and investment grade tax-exempt securities, and the private placement of debt, mezzanine and equity securities. The group also provides advisory services involving mergers and acquisitions, valuations and fairness opinions. GLOBAL MARKETS Global Markets encompasses our foreign exchange and interest-rate risk management businesses, including our global trading and sales activities. We 75 are a premier foreign exchange provider, trading in more than 100 currency markets with 24-hour trading capability throughout the world. Our execution, risk management and Internet capabilities in foreign exchange (FX) and interest rate and currency derivatives are used by U.S. government agencies, corporate, financial institution and global investment manager clients. Foreign exchange and other trading fee revenues reached a record $338 million in 2001. Our service offerings reach beyond Foreign Exchange trade execution to concentrate on relationship development. Our professionals develop a precise understanding of each client's business and work to tailor strategies that provide value to the Bank's core clients. We expanded our offering of online FX trading services by launching iFX Express(servicemark), a streamlined version of iFX Manager(servicemark), the Bank's industry-leading Internet-based FX trade order management and execution system for institutional clients. iFX Express is geared toward the needs of corporate and broker/dealer clients. The Bank also launched iFX B2B(servicemark), which permits companies that offer transactional services to its customers to link to the Bank for real-time FX quotation and payment services. iFX Manager was also enhanced throughout the year, with new post-trade messaging services added to the system's capabilities to aid clients in achieving a higher degree of straight-through processing. During 2001 client traffic via iFX Manager more than doubled over 2000, demonstrating the increased interest in online trading from the Bank's clients. The Bank is also a premier provider of Interest Rate and Currency Derivatives, including cross currency swaps and options. The Bank's derivatives business is client-driven, and complemented by sophisticated risk modeling, analysis and management systems. An enhanced global markets web site introduced in 2001 assisted our clients with risk management strategies and financial market updates. A dynamic interest rate environment, broader product capabilities and expanded customer relationships contributed to tripling our 2001 derivatives revenue from the prior year. Revenue increased from a sophisticated array of risk management products distributed to more geographically diverse clients. We expanded relationships with corporations, financial institutions, governments and supranational agencies across Europe and Asia. As a result of the world economic slowdown, interest rates fell globally. Lower rates increased investor use of yield enhancement products, while borrowers took advantage of lower rates to refinance debt. Both trends stimulated demand for interest rate derivatives. Our Strategy and Research professionals publish in-depth fundamental and technical analyses of FX and interest-rate markets on the Bank's web site: www.bankofny.com. Our interactive Portfolio Flow Monitor (iPFM) provides real- time illustrations of cross-border capital flows. These flows are categorized by investment classes, then mapped against published market data such as FX rates, equity-market indices, and fixed-income government benchmark issues. In today's volatile financial markets, our clients increasingly turn to our decision-support tools and services to help them manage risk. We continue to invest in FX research capabilities to meet our clients' expanding needs for research and technology solutions. BNY Overlay Associates is the Bank's specialist currency overlay manager, providing investment advisory services to institutional investors and major 76 corporations. Using proprietary techniques, we manage clients' existing currency exposures with the twin objectives of managing risk and increasing overall portfolio returns. RETAIL BANKING Our network of 345 branches, including 15 dedicated Business and Professional Financial Centers, establishes us as a leader in the suburban metropolitan New York market. We offer a combination of traditional banking and non-traditional fee-based services including leasing, investment products, insurance plans, and group banking services to nearly three-quarters of a million individuals and businesses. Retail Banking performed well in 2001 as a result of our continued strategic commitment to building long-term client relationships, diversifying and expanding our product and service offerings, and growing our fee-based businesses. Our growth in non-traditional fees of 23% was led by strong investment sales, debit card volumes and increases in our mutual fund sweep product, CheckInvest(registered trademark). We continue to expand our presence in the local business community. Our ability to service this segment with a wide range of innovative products was enhanced with the creation of a small business sales force. In March we opened a new Business and Professional Financial Center in Brooklyn Heights, New York, that offers customized financial and investment services to help business owners and professionals manage their business and long-range personal finances. BNY Investment Center, Inc. delivers investment products and advisory services to both personal and business customers. An effective product mix in a difficult rate environment, led by strong variable and fixed annuity sales, resulted in an increase in revenue of 25%. Our mutual fund sweep products, CheckInvest(registered trademark) Select for personal customers, and our traditional business CheckInvest (registered trademark), demonstrated continued strong growth in 2001, with fee revenue up 36%, led by growth in CheckInvest(registered trademark) Select mutual fund balances, increasing from $100 million to more than $300 million. The Direct 24(servicemark) Debit Card and Debit BusinessCard provide individualsand businesses with convenient access to their checking accounts and allow them to make purchases worldwide. Our newly introduced BNY Online(servicemark), an Internet banking and bill paying service for businesses and individuals, had in excess of 41,000 users enrolled by year-end. Small business loan balances were up 20%, and consumer loans, led by our secured EQUITYLINK(registered trademark) product were up 10%. 2001 was a highly successful year for asset growth, with strong demand in a low interest rate environment. With $14 billion in core deposits, retail banking continues to provide a stable, low-cost funding source that supports lending activities throughout the Bank. EX-21 5 r10kex21.txt EX-21 EXHIBIT 21 Subsidiaries Of The Registrant Significant subsidiaries of The Bank of New York Company, Inc. are as follows: The Bank of New York, a New York State Chartered Bank The Bank of New York Europe* BNY Holdings (Delaware) Corporation, a Delaware Corporation The Bank of New York (Delaware)**, a Delaware State Chartered Bank - ----------------------------------------- * Subsidiary of The Bank of New York. ** Subsidiary of BNY Holdings (Delaware) Corporation EX-23 6 r10kex231.txt EX-23.1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of The Bank of New York Company, Inc. of our report dated February 1, 2002, included in the 2001 Annual Report to Shareholders of The Bank of New York Company, Inc. We also consent to the incorporation by reference in the following Registration Statements of The Bank of New York Company, Inc. of our report dated February 1, 2002, with respect to the consolidated financial statements of The Bank of New York Company, Inc. incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 2001: Registration Statement Number Form Description - ----------------------------- ---- ----------- No. 333-03811 S-3 Dividend Reinvestment and Stock Purchase Plan No. 333-15951 S-3 Preferred Trust Securities in the No. 333-15951-01 amount of $700 million No. 333-15951-02 No. 333-15951-03 No. 333-15951-04 No. 333-15951-05 No. 333-40837 S-3 Preferred Trust Securities in the No. 333-40837-01 amount of $500 million No. 333-40837-02 No. 333-40837-03 No. 333-62516 S-3 Debt Securities, Preferred Stock, No. 333-62516-01 Common Stock, and Preferred Trust No. 333-62516-02 Securities in the amount of No. 333-62516-03 $1.6 billion No. 333-62516-04 No. 333-70187 S-3 Debt Securities, Preferred Stock, No. 333-70187-01 Common Stock, and Preferred Trust No. 333-70187-02 Securities in the amount of No. 333-70187-03 $1.3 billion No. 333-70187-04 No. 333-78685 S-8 Employees Stock Purchase Plan Employees Profit Sharing Plan 1993 Long-Term Incentive Plan 1999 Long-Term Incentive Plan No. 33-56863 S-8 Employee Stock Purchase Plan, Employee Preferred Stock Plan and 1993 Long-Term Incentive Plan No. 33-57670 S-8 Employee Stock Purchase Plan, Employee Preferred Stock Plan and 1993 Long-Term Incentive Plan No. 2-95764 S-8 1984 Stock Option Plan No. 33-20999 S-8 1988 Long-Term Incentive Plan No. 33-33460 S-8 Amendment to 1988 Long-Term Incentive Plan No. 33-62267 S-8 Putnam Stock Option Plan \s\ Ernst & Young LLP Ernst & Young LLP New York, New York March 25, 2002 -----END PRIVACY-ENHANCED MESSAGE-----