-----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, E9QZI6IcBQMDRqPsN+mDrZv4OS3KTVJzeYTMar7+Yix8zDhaGEWITuW1QIR0cmYL O34M6waz27aDo9Y7QvbAug== 0000009626-03-000108.txt : 20030814 0000009626-03-000108.hdr.sgml : 20030814 20030813184210 ACCESSION NUMBER: 0000009626-03-000108 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANK OF NEW YORK CO INC CENTRAL INDEX KEY: 0000009626 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 132614959 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06152 FILM NUMBER: 03842901 BUSINESS ADDRESS: STREET 1: ONE WALL ST 10TH FL CITY: NEW YORK STATE: NY ZIP: 10286 BUSINESS PHONE: 212-495-1784 MAIL ADDRESS: STREET 1: ONE WALL STREET 31ST FLOOR CITY: NEW YORK STATE: NY ZIP: 10286 10-Q 1 r2q0310q.txt 10-Q THE BANK OF NEW YORK COMPANY, INC. Quarterly Report on Form 10-Q For the quarterly period ended June 30, 2003 The Quarterly Report on Form 10-Q and cross reference index is on page 55. THE BANK OF NEW YORK COMPANY, INC. FINANCIAL REVIEW TABLE OF CONTENTS Consolidated Financial Highlights 1 Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview 2 - Summary of Results 2 - Pershing 3 - Consolidated Income Statement Review 6 - Business Segments Review 11 - Consolidated Balance Sheet Review 21 - World Trade Center Disaster Update 29 - Critical Accounting Policies 30 - Liquidity 32 - Capital Resources 34 - Trading Activities 36 - Asset/Liability Management 37 - Statistical Information 39 - Forward Looking Statements 41 - Website Information 42 Consolidated Financial Statements - Consolidated Balance Sheets June 30, 2003 and December 31, 2002 43 - Consolidated Statements of Income For the Three Months and Six Months Ended June 30, 2003 and 2002 44 - Consolidated Statement of Changes In Shareholders' Equity For the Six Months Ended June 30, 2003 45 - Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2003 and 2002 46 - Notes to Consolidated Financial Statements 47 - 54 Form 10-Q - Cover 55 - Controls and Procedures 56 - Legal Proceedings 56 - Submission of Matters to Vote of Security Holders 57 - Exhibits and Reports on Form 8-K 58 - Signature 60 1 THE BANK OF NEW YORK COMPANY, INC. Financial Highlights (Dollars in millions, except per share amounts) (Unaudited)
June 30, March 31, June 30, 2003 2003 2002 -------- --------- -------- Quarter - ------- Net Income $ 295 $ 295 $ 361 Basic EPS 0.39 0.41 0.50 Diluted EPS 0.39 0.41 0.50 Cash Dividends Per Share 0.19 0.19 0.19 Return on Average Common Shareholders' Equity 15.56% 17.80% 22.59% Return on Average Assets 1.30 1.49 1.82 Year-To-Date - ------------ Net Income $ 590 $ 295 $ 723 Basic EPS 0.80 0.41 1.00 Diluted EPS 0.80 0.41 0.99 Cash Dividends Per Share 0.38 0.19 0.38 Return on Average Common Shareholders' Equity 16.61% 17.80% 23.16% Return on Average Assets 1.39 1.49 1.83 Assets $99,604 $79,548 $80,805 Loans 37,796 31,735 35,998 Securities 20,392 19,599 16,377 Deposits - Domestic 37,319 33,280 29,423 - Foreign 27,336 23,664 25,868 Long-Term Debt 6,515 5,685 5,668 Common Shareholders' Equity 8,113 6,874 6,610 Common Shareholders' Equity Per Share 10.50 9.41 9.09 Market Value Per Share of Common Stock 28.75 20.50 33.75 Allowance for Credit Losses as a Percent of Loans 2.18% 2.62% 1.71% Allowance for Credit Losses as a Percent of Non-Margin loans 2.58 2.65 1.73 Tier 1 Capital Ratio 6.83 7.92 7.70 Total Capital Ratio 11.07 12.72 11.48 Leverage Ratio 5.85 6.68 6.82 Tangible Common Equity Ratio 4.33 5.53 5.41 Employees 23,106 19,491 19,010 Efficiency Ratio 64.8% 60.0% 55.0% Assets Under Custody (In trillions) Total Assets Under Custody $7.8 $6.8 $6.6 Equity Securities 32% 25% 29% Fixed Income Securities 68 75 71 Cross-Border Assets $2.2 $1.9 $1.8 Assets Under Management (In billions) Total Assets Under Management $83 $76 $75 Equity Securities 32% 29% 34% Fixed Income Securities 23 24 23 Alternative Investments 9 9 8 Liquid Assets 36 38 35 Assets Under Administration (In billions) $27 $27 $30
2 Management's Discussion and Analysis of 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". 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. OVERVIEW The Bank of New York Company, Inc. (NYSE: BK) is a global leader in securities servicing for issuers, investors and financial intermediaries. The Company plays an integral role in the infrastructure of the capital markets, servicing securities in more than 100 markets worldwide. The Company provides quality solutions through leading technology for global corporations, financial institutions, asset managers, governments, non-profit organizations, and individuals. Its principal subsidiary, The Bank of New York (the "Bank"), founded in 1784, is the oldest bank in the United States and has a distinguished history of serving clients around the world through its five primary businesses: Securities Servicing and Global Payment Services, Private Client Services and Asset Management, Corporate Banking, Global Market Services, and Retail Banking. Additional information on the Company is available at www.bankofny.com. The Company has focused its strategy on historically high-growth, fee- based businesses that have transformed the Company from a traditional commercial bank into a premier global securities servicing provider. The Company's breadth of products and services allows it to build client relationships with investors, issuers and financial intermediaries through many different avenues in major markets and regions throughout the world. The Company's well-diversified franchise has become an integral part of the infrastructure of the global capital markets. SUMMARY OF RESULTS The Company's second quarter earnings per diluted share on a reported basis were 39 cents and excluding the impact of the Pershing acquisition, 42 cents per share. The Company reported earnings of 41 cents in the first quarter of 2003. The reported results include previously announced dilution from Pershing, which closed May 1, 2003, of 1 cent on operating earnings and an additional 2 cents from merger and integration costs associated with the acquisition. With Pershing, the Company earned 41 cents on an operating basis in the second quarter. Net income for the second quarter was $295 million compared with $361 million, or 50 cents per share a year ago. Year-to-date net income was $590 million, or 80 cents per share, compared to $723 million, or 99 cents per share in 2002. The second quarter results showed sequential quarter improvement in the Company's key businesses, including securities servicing and associated foreign exchange, global payment services, private client services and asset management. The main reason for the improvement was the acquisition of Pershing in May 2003, and improvement in core businesses. Including Pershing, noninterest income was up $152 million, or 18%, over the first quarter of 2003 and increased to a record 71% of total revenue. Excluding Pershing, securities servicing fees increased 3% over the first quarter, or 13% annualized, as the Company's equity-linked businesses rebounded from first quarter levels. Foreign exchange and other trading increased 22% excluding 3 Pershing. The Company's other major fee categories also showed growth on a sequential quarter basis, including private client services and asset management, which was up 5%, and global payment services, which was up 3%. The second quarter results showed improvement over the second quarter of 2002 in the Company's key businesses, including securities servicing and associated foreign exchange, global payment services, private client services and asset management. The main reason for the improvement was the acquisition of Pershing in 2003 and the acquisition of other securities servicing and asset management businesses in 2002. Including Pershing, noninterest income was up $141 million, or 16%, over the second quarter of 2002 and increased to a record 71% of total revenue. Excluding Pershing, securities servicing fees increased 3% over the second quarter of 2002. Foreign exchange and other trading increased 10% excluding Pershing. Private client services and asset management fees increased by 7% and global payment service fees increased by 11%. The Company's diversified business model responded well to the recent improved conditions in the equity markets, and the Company is well positioned to benefit from further strengthening in the capital markets. At the same time, credit costs remain stable and the Company continues to make significant progress in its corporate credit exposure reduction program. The second quarter also marked the successful closing of Pershing, and the Company continues to be on target with all of its major integration milestones, particularly client retention. The Company is confident of its ability to realize the projected synergies and expects this acquisition to be accretive in early 2004. PERSHING Supplemental Financial Information - ---------------------------------- For the quarter ended June 30, 2003, the Company has prepared information in four categories: - Reported results which are in accordance with Generally Accepted Accounting Principles (GAAP). - Core operating results which exclude the Pershing acquisition. - Pershing results which reflect the revenues and expenses since the May 1 acquisition of Pershing but excluding the merger and integration costs. - Merger and integration costs. The Company believes that providing supplemental non-GAAP financial information is useful to investors in understanding the underlying operational performance of the Company, its businesses and performance trends and, therefore, facilitates comparisons with the performance of other financial service companies and other periods. Specifically, the Company believes that the exclusion of the transaction-related and restructuring expenses permits evaluation and a comparison of results for ongoing business operations, and it is on this basis that the Company's management internally assesses performance. These non-operating items are excluded from the Company's segment measures used internally to evaluate segment performance because management does not consider them particularly relevant or useful in evaluating the operating performance of our business segments. The following is a reconciliation of the Company's financial results for the three months ended June 30, 2003: 4 THE BANK OF NEW YORK COMPANY, INC. Supplemental Information (In millions, except per share amounts) (Unaudited)
Income Statement Quarter ended June 30 SUPPLEMENTAL GAAP ----------------------------------- ----------------------- Operating Merger 2003 2002 ------------ and Reported Reported Core Pershing (a) Integration Results Results ---- -------- ----------- -------- -------- Net Interest Income $ 387 $ 11 $ - $ 398 $ 423 - ------------------- Provision for Credit Losses 40 - - 40 35 ----- ----- ----- ----- ----- Net Interest Income After Provision for Credit Losses 347 11 - 358 388 ----- ----- ----- ----- ----- Noninterest Income - ------------------ Servicing Fees Securities 489 109 - 598 478 Global Payment Services 79 - - 79 71 ----- ----- ----- ----- ----- 568 109 - 677 549 Private Client Services and Asset Management Fees 94 - - 94 88 Service Charges and Fees 93 - - 93 93 Foreign Exchange and Other Trading Activities 79 9 - 88 72 Securities Gains 9 - - 9 25 Other 32 3 - 35 28 ----- ----- ----- ----- ----- Total Noninterest Income 875 121 - 996 855 ----- ----- ----- ----- ----- Noninterest Expense - ------------------- Salaries and Employee Benefits 439 59 - 498 418 Net Occupancy 57 7 - 64 49 Furniture and Equipment 38 11 - 49 35 Clearing 31 9 - 40 33 Sub-custodian Expenses 19 - - 19 15 Software 36 7 - 43 29 Amortization of Intangibles 4 3 - 7 2 Merger and Integration Cost - - 25 25 - Other 142 16 - 158 115 ----- ----- ----- ----- ----- Total Noninterest Expense 766 112 25 903 696 ----- ----- ----- ----- ----- Income Before Income Taxes 456 20 (25) 451 547 Income Taxes 156 9 (9) 156 186 ----- ----- ----- ----- ----- Net Income $ 300 $ 11 $ (16) $ 295 $ 361 - ---------- ===== ===== ===== ===== ===== Diluted Earnings Per Share $0.42 ($0.01)(b) ($0.02) $0.39 $0.50 Notes: Reported results agree with the Company's Consolidated Statement of Income (a) Includes $5 million of net interest costs attributable to the Pershing acquisition financing. (b) The ($0.01) dilution is due to changes in shares outstanding attributable to the acquisition.
5 The following is a supplemental balance sheet showing the impact of the Pershing acquisition. THE BANK OF NEW YORK COMPANY, INC. Supplemental Information (In millions) (Unaudited)
Balance Sheet June 30, 2003 GAAP SUPPLEMENTAL REPORTED ----------------------------------------- ------------------ Core Pershing Elimination June 30, June 30, Entries June 30, December 31, 2003 2003 2003 2002 ---- ---- ---------- ---- ---- Assets - ------ Cash and Due from Banks $ 4,067 $ 256 $ 4,323 $ 4,748 Interest-Bearing Deposits in Banks 6,706 38 6,744 5,104 Securities 20,377 15 20,392 18,300 Trading Assets at Fair Value 6,080 172 6,252 7,309 Federal Funds Sold and Securities Purchased Under Resale Agreements 8,095 3,981 12,076 1,385 Margin Loans 406 5,505 5,911 352 Loans (less allowance for credit losses of $824 in 2003 and $831 in 2002) 31,061 31,061 30,156 Premises and Equipment 975 133 1,108 975 Due from Customers on Acceptances 191 191 351 Accrued Interest Receivable 237 7 244 204 Investment in/Advances to Pershing 2,891 $(2,891) Goodwill & Intangible Assets 2,653 1,320 3,973 2,575 Other Assets 6,625 704 7,329 6,105 ------- ------- ------- ------- ------- Total Assets $90,364 $12,131 $(2,891) $99,604 $77,564 ======= ======= ======= ======= ======= Liabilities and Shareholders' Equity - ------------------------------------ Deposits $64,655 $64,655 $55,387 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 699 336 1,035 636 Trading Liabilities 2,569 52 2,621 2,800 Payables to Customers and Broker-Dealers 1,684 7,723 9,407 870 Other Borrowed Funds 706 1,081 $ (871) 916 475 Acceptances Outstanding 194 194 352 Accrued Taxes and Other Expenses 4,014 19 4,033 4,066 Accrued Interest Payable 139 3 142 101 Other Liabilities 1,076 897 1,973 753 Long-Term Debt 6,515 6,515 5,440 ------ ------ ------ ------- ------- Total Liabilities 82,251 10,111 (871) 91,491 70,880 ------ ------ ------ ------- ------- Shareholders' Equity 8,113 2,020 (2,020) 8,113 6,684 ------- ------- ------- ------- ------- Total Liabilities and Shareholders' Equity $90,364 $12,131 $(2,891) $99,604 $77,564 ======= ======= ======= ======= ======= - -------------------------------------------------------------------------------------------------- Note: The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date.
Although the Company believes that the non-GAAP financial measures presented in this report enhance investors' understanding of its businesses and performance, these non-GAAP measures should not be considered an alternative to GAAP. 6 Pershing Integration Plan - ------------------------- The Company's integration plan related to Pershing has two main priorities. First is the successful conversion of the clients of BNY Clearing onto the platform of Pershing. Conversions are proceeding on schedule with over half the domestic clients already converted and all conversions expected to be completed early in the fourth quarter except for those clients acquired in the Tilney acquisition. See Notes to Consolidated Financial Statements. As expected, BNY Clearing clients have been overwhelmingly supportive of converting to the Pershing platform and the Company expects that client retention levels will meet the Company's targets. The second priority is achieving projected synergies for this year and next. Related to cost savings, planned closings of domestic and international facilities are proceeding on schedule and are related to the client conversions. In addition, the number of potential revenue synergies is growing. The Company has already moved Pershing's government clearance business to the Company's platform and has converted Lockwood, the Company's managed account business, to the Pershing platform. The Company is also beginning to leverage Pershing's technology facilities in India for applications development work. On the revenue side, as projected, the Company is gaining more transaction business in foreign exchange and execution services. In addition, Pershing and Lockwood have begun working more closely together to service the registered investment advisor market. CONSOLIDATED INCOME STATEMENT REVIEW Noninterest Income - ------------------ Noninterest income for the second quarter of 2003 was $996 million, an increase of 18% sequentially and 16% from a year ago. Noninterest income was 71% of total revenues. Noninterest income for the six months ended June 30, 2003 was $1,841 million, an increase of 10% over the comparable 2002 period. The increases are principally due to the Pershing acquisition and improved performance in the core business. Pershing's contribution to the Company's noninterest income was $121 million for the quarter and six months ended June 30, 2003.
2nd 1st 2nd Quarter Quarter Quarter Year-to-Date ------- ------- ------- ------------ (In millions) 2003 2003 2002 2003 2002 ----- ---- ---- ---- ---- Servicing Fees Securities $598 $474 $478 $1,071 $ 932 Global Payment Services 79 77 71 156 144 ---- ---- ---- ------ ------ 677 551 549 1,227 1,076 Private Client Services and Asset Management Fees 94 90 88 184 171 Service Charges and Fees 93 98 93 191 176 Foreign Exchange and Other Trading Activities 88 65 72 154 134 Securities Gains 9 7 25 16 56 Other 35 33 28 69 60 ---- ---- ---- ------ ------ Total Noninterest Income $996 $844 $855 $1,841 $1,673 ==== ==== ==== ====== ======
Securities servicing fees were a record $598 million in the second quarter, an increase of $124 million or 26% over the first quarter, and $120 million or 25% over the second quarter of 2002, primarily due to the Pershing acquisition. For the first six months of 2003, securities servicing fees were $1,071 million, an increase of $139 million from $932 million for the first six months of 2002, principally due to Pershing and other acquisitions. Pershing securities servicing fees in May and June included in the quarter and six months ended June 30, 2003 were $109 million. Excluding Pershing, core 7 securities servicing fees were up 3% from the first quarter, or 13% annualized, as a result of improved performance in the Company's equity-linked businesses. The Company groups its securities servicing businesses into four categories, each comprised of separate, but related businesses. These are: issuer services, which include corporate trust, depositary receipts and stock transfer; investor services, which include global custody, securities lending and separate account services; broker-dealer services, which include mutual funds, government securities clearance, hedge fund servicing, exchange traded funds and UITs; and execution and clearing services, which include all of the activities in BNY Securities Group including Pershing. Fees from investor services increased both on a sequential quarter basis and over last year's second quarter. Strong performers on a sequential quarter basis included global custody and securities lending. Wholesale distribution services and securities lending were up over last year's second quarter. Global custody benefited from the phase-in of new client wins, higher equity prices, and increased transaction volumes. As of June 30, 2003, assets under custody were $7.8 trillion, up from $6.8 trillion at March 31, 2003, and up from $6.6 trillion at June 30, 2002. Approximately half of the increase in custody assets from March 31, 2003 is attributable to Pershing, another third came from higher asset price levels, and the remainder from the conversion of recent new business wins. At March 31, 2003, only 25% of the custody assets were equities. As markets rose in the second quarter, the portion in equities increased to 32%. Securities lending benefited from seasonal factors compared to the first quarter and higher loan volume and new business wins compared to last year. Global issuer services declined on a sequential quarter basis and in comparison to the second quarter of 2002. Corporate trust fees declined from the record level attained in the first quarter of 2003. Depositary receipts showed improved performance on a sequential quarter basis as a result of the improved equity markets as well as seasonal corporate actions like dividends and the completion of a major cross-border acquisition, which created strong issue/cancel activity in this depositary receipt during the quarter. Fees from broker-dealer services increased for the quarter in terms of both sequential quarter and year-over-year comparisons. Strong performers included government securities clearance and domestic and global collateral management services, which benefited from new business wins and higher fixed income transaction volumes driven by refinancing activity. Execution and clearing services increased on both a sequential quarter and year-over-year basis, reflecting the acquisition of Pershing as well as an increase in market trading volumes in the second quarter of 2003. Total combined second quarter NYSE and NASDAQ trading volume was up 17% from the first quarter of 2003. Excluding Pershing, sequential quarter fee growth for these services was strong across all business units, in particular BNY Brokerage, B-Trade, and G-Trade. Global payment services fees increased by 3% from the prior quarter and 11% from the second quarter of 2002. The increased revenues over both periods reflect greater funds transfer activity, particularly multi-currency payments, and new business wins in key client segments, such as U.S. and international banks and mortgage banks. Global payment services fees increased by 8% on a year-to-date basis over 2002. Private client services and asset management fees for the second quarter were up 5% from the prior quarter, and 7% from the second quarter of 2002. The sequential quarter increase reflects the continued strong demand for alternative investments from Ivy Asset Management as well as higher fees from the private client services business. The increase from the second quarter of 2002 and on a year-to-date basis was due to strong performance from Ivy Asset Management and acquisitions. Total assets under management were $83 billion at June 30, 2003, up from $76 billion at March 31, 2003 and $75 billion a year ago. Service charges and fees were down $5 million from the prior quarter, and flat with one year ago. The decrease from the prior quarter reflects lower fees from structured products. Service charges and fees were up 9% on a year- to-date basis over 2002, reflecting higher fees from capital markets and structured products. 8 Foreign exchange and other trading revenues were up $23 million, or 35%, compared with the prior quarter, and $16 million, or 22%, from one year ago. The main reasons for the increase were higher foreign exchange activity and the addition of Pershing, which contributed $9 million to other trading revenues for the quarter and six months ended June 30, 2003. The strong foreign exchange performance in the second quarter reflects greater client activity resulting from increased cross-border investing. As conditions in the equity markets improved, equity fund managers became more active and more willing to enter into cross border investments. In addition, as activity picked up, currency volatility increased, and intraday trading ranges widened. Excluding Pershing, other trading revenues comprised primarily of fixed income execution and interest rate risk management products were down from the strong first quarter results but up from the quarter and six month period ending June 30, 2002. In the second quarter of 2003, the flatter yield curve and lower interest rates caused clients to delay their hedging activities. For the six months ended June 30, 2003, foreign exchange and other trading revenues were up 15% over the six months ended June 30, 2002. Securities gains in the second quarter were $9 million, up modestly from $7 million in the prior quarter and down significantly from $25 million a year ago. Gains were principally derived from the Company's fixed income securities portfolio. Year-to-date securities gains are down $40 million from the first six months of 2002. Comparisons with the prior year periods reflect the Company's reduction in its equity investing activities in 2002. Other noninterest income increased $2 million from the first quarter of 2003 and $7 million from the second quarter of 2002. Pershing contributed $3 million to other income for the quarter and six months ended June 30, 2003. Net Interest Income - -------------------
2nd 1st 2nd Quarter Quarter Quarter Year-to-Date (Dollars in millions) ------- ------- ------- ------------ 2003 2003 2002 2003 2002 ---- ---- ---- ---- ---- Net Interest Income $398 $386 $423 $784 $835 Tax Equivalent Adjustment 9 9 13 19 26 ---- ---- ---- ---- ---- Net Interest Income on a Tax Equivalent Basis $407 $395 $436 $803 $861 ==== ==== ==== ==== ==== Net Interest Rate Spread 1.95% 2.18% 2.31% 2.05% 2.31% Net Yield on Interest Earning Assets 2.22 2.44 2.65 2.32 2.64
Net interest income on a taxable equivalent basis was $407 million in the second quarter of 2003, compared with $395 million in the first quarter of 2003, and $436 million in the second quarter of 2002. Pershing contributed $11 million of net interest income for the second quarter of 2003. The net interest rate spread was 1.95% in the second quarter of 2003, compared with 2.18% in the first quarter of 2003, and 2.31% in the second quarter of 2002. The net yield on interest earning assets was 2.22% in the second quarter of 2003, compared with 2.44% in the first quarter of 2003, and 2.65% in the second quarter of 2002. The impact of Pershing assets was to depress the spread and yield by approximately 13 basis points, as Pershing added approximately $9 billion of high quality but relatively lower yielding assets, namely margin loans and reverse repurchase agreements. The increase in net interest income from the first quarter of 2003 is primarily due to the Pershing acquisition, higher earning assets arising from higher levels of client deposits, and a positive day count variance. This was partially offset by lower reinvestment yields in the fixed income securities portfolio. The decrease in net interest income from the second quarter of 2002 reflects lower reinvestment yields on fixed income securities, planned decreases in corporate loan balances, and the impact of Federal Reserve interest rate reductions in 2002 and 2003, partially offset by the Pershing acquisition. Barring any further rate cuts, going forward the Company will get a positive impact from a full quarter of Pershing as well as the full 9 quarter benefit of refinancing of trust preferred and long-term debt in the second quarter. For the first six months of 2003, net interest income on a taxable equivalent basis amounted to $803 million compared with $861 million in the first half of 2002, reflecting the same factors that affected the comparison with last year's quarter. The year-to-date net interest spread was 2.05% in 2003 compared with 2.31% in 2002, while the net yield on interest earning assets was 2.32% in 2003 and 2.64% in 2002. In this report a number of amounts related to net interest income are presented on a "taxable equivalent basis". The Company believes that this presentation provides comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry standards. Noninterest Expense and Income Taxes - ------------------------------------
2nd 1st 2nd Quarter Quarter Quarter Year-to-date ------- ------- ------- ------------ (In millions) 2003 2003 2002 2003 2002 ---- ---- ---- ---- ---- Salaries and Employee Benefits $498 $423 $418 $ 921 $ 805 Net Occupancy 64 58 49 122 98 Furniture and Equipment 49 36 35 85 70 Clearing 40 29 33 69 60 Sub-custodian Expenses 19 16 15 35 30 Software 43 35 29 78 55 Amortization of Intangibles 7 3 2 10 4 Merger and Integration Costs 25 - - 25 - Other 158 139 115 297 223 ---- ---- ---- ------ ------ Total Noninterest Expense $903 $739 $696 $1,642 $1,345 ==== ==== ==== ====== ======
Noninterest expense for the second quarter of 2003 was $903 million, compared with $739 million in the prior quarter. The increase principally reflects noninterest expense from Pershing of $112 million, as well as $25 million of merger and integration costs related to the Pershing acquisition. Core noninterest expense was $766 million, up $27 million from the first quarter of 2003, reflecting higher variable compensation and other revenue- related costs as well as the full quarter impact of stock option expense. The Company continues to focus on expense management while continuing to follow through on investment initiatives critical to the Company's long-term positioning and growth such as technology, business continuity, quality, training, and marketing. Salaries and employee benefits increased by $75 million on a sequential quarter basis primarily due to the Pershing acquisition, increased incentive compensation tied to revenues, and an increase in stock option expense of $6 million in the second quarter of 2003. Pershing salaries and employee benefits were $59 million for the quarter ended June 30, 2003. The increase from the second quarter of 2002 primarily reflects the impact of the Pershing acquisition, the inception of stock option expensing in 2003, a lower pension credit, increased technology investments, and higher business continuity spending. Excluding acquisitions, headcount is down by nearly 200 from the start of the year. Noninterest expense for the first six months of 2003 was $1,642 million compared with $1,345 million last year, mainly reflecting the same factors that explain the second quarter to second quarter increase. The efficiency ratio for the second quarter was 64.8%, compared to 60.0% in the previous quarter and 55.0% in 2002. For the first half of 2003, the efficiency ratio was 62.5% compared with 54.3% last year. The increase in the efficiency ratio is largely attributable to the Pershing acquisition. The Company's continued focus on cost control was obscured by factors such as the Pershing acquisition and the full phase-in of stock option expensing. The Company continues to take proactive steps to keep its cost basis competitive, such as moving staff to lower cost environments, implementing enhanced 10 procurement practices, and gaining efficiencies through six sigma and process reengineering efforts. The Company has been relocating staff to lower cost areas such as upstate New York, Orlando, Florida, and Liverpool, England. In addition, approximately a third of the Pershing technology staff is based in India and the Company has begun to leverage off this base for other technology projects. The effective tax rate for the second quarter of 2003 was 34.6%, unchanged from the first quarter of 2003, and up from 34.0% in the second quarter 2002. The effective tax rate for the six month period ended June 30, 2003 was 34.6%, compared with 33.8% for the six month period ended June 30, 2002. The increase in the effective tax rate reflects fewer tax credits. Credit Loss Provision and Net Charge-Offs - -----------------------------------------
2nd 1st 2nd Quarter Quarter Quarter Year-to-Date ------- ------- ------- ------------ (In millions) 2003 2003 2002 2003 2002 ---- ---- ---- ---- ---- Provision $ 40 $ 40 $ 35 $ 80 $ 70 ==== ==== ==== ==== ==== Net Charge-offs: Commercial $ (34) $ (25) $(17) $(59) $(47) Foreign (7) - - (7) 1 Other - (10) (14) (10) (14) Consumer (5) (5) (4) (10) (10) ------ ------ ----- ----- ---- Total $ (46) $ (40) $(35) $(86) $(70) ====== ====== ===== ===== ==== Other Real Estate Expenses $ - $ - $ - $ - $ -
The provision for credit losses was $40 million in the second quarter of 2003, flat with $40 million in the first quarter of 2003 and up from $35 million in the second quarter of 2002. On a year to date basis, the provision was $80 million in 2003 compared with $70 million in 2002. The allowance for credit losses was $824 million at June 30, 2003, $830 million at March 31, 2003, and $616 million at June 30, 2002. The excess of charge-offs over provision of $6 million reflects the Company's proactive steps to reduce exposure in the secondary market. The allowance for credit losses as a percent of non-margin loans was 2.58% at June 30, 2003, compared with 2.65% at March 31, 2003, and 1.73% at June 30, 2002. See "Loans - Allowance". 11 BUSINESS SEGMENTS REVIEW The Company has an internal information system that produces performance data for its four business segments along product and service lines. Business Segments Accounting Principles - --------------------------------------- The Company's segment data has been determined on an internal management basis of accounting, rather than the generally accepted accounting principles used for consolidated financial reporting. These measurement principles are designed so that reported results of the segments will track their economic performance. Segment results are subject to restatement whenever improvements are made in the measurement principles or organizational changes are made. In the second quarter of 2003 the Company modified the funds transfer rates based on an updated analysis of the duration of assets and liabilities. Prior periods have been restated. The measure of revenues and profit or loss by operating segment has been adjusted to present segment data on a taxable equivalent basis. The provision for credit losses allocated to each reportable segment is based on management's judgment as to average credit losses that will be incurred in the operations of the segment over a credit cycle of a period of years. Management's judgment includes the following factors among others: historical charge-off experience and the volume, composition, and size 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. Description of Business Segments - -------------------------------- The Company reports data for the four business segments: Servicing and Fiduciary, Corporate Banking, Retail Banking, and Financial Markets. The Servicing and Fiduciary businesses segment comprises the Company's core services, including securities servicing, global payment services, and private client services and asset management. These businesses all share certain favorable attributes: they are well diversified and fee-based; the Company serves the role of an intermediary rather than principal, thereby limiting risk and generating more stable earnings streams; and the businesses are scalable, which result in higher margins as revenues grow. Long-term trends that favor these businesses include the growth of financial assets worldwide, the globalization of investment activity, heightened demand for financial servicing outsourcing, and continuing structural changes in financial markets. Securities servicing provides financial institutions, corporations and financial intermediaries with a broad array of products and customized services for every step of the investment lifecycle. The Company facilitates the movement, settlement, recordkeeping and accounting of financial assets around the world by delivering timely and accurate information to issuers, investors and broker-dealers. The Company groups its securities servicing businesses into four categories, each comprised of separate, but related businesses. These are: issuer services, which include corporate trust, depositary receipts and stock transfer; investor services, which include global custody, securities lending and separate account services; broker- dealer services, which include mutual funds, government securities clearance, hedge fund servicing, exchange traded funds and UITs; and execution and clearing services, which include all of the activities in BNY Securities Group including Pershing. This segment also includes customer-related foreign exchange trading. Global payment services facilitates the flow of funds between the Company's customers and their clients through such business lines as funds transfer, cash management and trade services. Private client services and asset management includes traditional banking and trust services to affluent clients and investment management services for institutional and high net worth clients. 12 The Company is a market leader in many of these businesses and has aggressively expanded to both enhance and expand its product and service offerings and to add new clients. The Company has completed 51 acquisitions since 1998 in these core services, has made significant investments in technology to maintain its industry-leading position, and has continued the development of new products and services that meet its clients' needs. The Corporate Banking segment provides lending and credit-related services to large public and private financial institutions and corporations nationwide, as well as to public and private mid-size businesses in the New York metropolitan area. Special industry groups focus on industry segments such as banks, broker-dealers, insurance, media and telecommunications, energy, real estate, retailing, and government banking institutions. Through BNY Capital Markets, Inc., the Company provides syndicated loans, bond underwriting, private placements of corporate debt and equity securities, and merger, acquisition, and advisory services. Corporate Banking coordinates delivery of all of the Company's services to customers through its global relationship managers. The two main client bases served are financial institution clients and corporate clients. The Company's strategy is to focus on those clients and industries that are major users of securities servicing and global payment services and by leveraging existing relationships to create new business opportunities. The Company believes that credit is an important product for many of its customers to execute their business strategies. However, the Company has continued to reduce its credit exposures in recent years by culling its loan portfolio of non-strategic exposures, focusing on increasing total relationship returns through cross-selling and limiting the size of its individual credit exposures and industry concentrations to reduce earnings volatility. The Retail Banking segment includes retail deposit services, branch banking, and consumer and residential mortgage lending. The Company operates 341 branches in 23 counties in the Tri-State region. The retail network is a stable source of low cost funding and provides a platform to cross-sell core services from the Servicing and Fiduciary businesses to both individuals and small businesses in the New York metropolitan area. The Financial Markets segment includes trading of foreign exchange and interest rate risk management products, investing and leasing activities, and treasury services to other business segments. The segment offers a comprehensive array of multi-currency hedging and yield enhancement strategies, and complements other business segments. The Financial Markets segment centralizes interest rate risk management for the Company. There were no major customers from whom revenues were individually material to the Company's performance. 13 Servicing and Fiduciary Businesses - ---------------------------------- (In Millions) 2nd 1st 2nd Quarter Quarter Quarter Year-to-date 2003 2003 2002 2003 2002 ------- ------- ------- ----- ----- Net Interest Income $ 120 $ 105 $ 122 $ 225 $ 244 Provision for Credit Losses - - - - - Noninterest Income 838 688 691 1,526 1,350 Noninterest Expense 650 523 486 1,173 946 Income Before Taxes 308 270 327 578 648 Average Assets $15,724 $ 7,615 $ 8,475 $11,692 $ 8,721 Average Deposits 33,499 31,128 30,295 32,320 30,255 Nonperforming Assets 16 16 16 16 16 (In billions) Assets Under Custody $ 7,787 $ 6,783 $ 6,613 $ 7,787 $ 6,613 Assets Under Management 83 76 75 83 75 S&P 500 Index (Period End) 975 848 990 975 990 NASDAQ Index (Period End) 1,623 1,341 1,463 1,623 1,463 NYSE Volume (In billions) 93.0 86.6 87.7 179.6 170.6 NASDAQ Volume (In billions) 112.5 88.8 115.2 201.3 222.9 The Servicing and Fiduciary Services businesses are affected by market conditions which improved in May and June, and were characterized by higher equity trading volumes, improved equity price levels, and increased foreign exchange volume and volatility. The S&P 500 Index was down 2% at the end of the second quarter of 2003 from the second quarter of 2002, with average daily price levels off 12% from 2002. Total combined second quarter NYSE and NASDAQ trading volume was up 17% from the first quarter of 2003 and 1% from the second quarter of 2002. Excluding Pershing, in securities servicing, sequential quarter fee growth was strong across all the business units except global issuer services. The Company's diversified business model responded well to the recent improved conditions in the equity markets, and it is well positioned to benefit from further strengthening in the capital markets. The second quarter results showed sequential quarter improvement in the Company's key businesses, including securities servicing and associated foreign exchange, global payment services, private client services and asset management. Noninterest income for the second quarter of 2003 and the six months ending June 30, 2003 was $838 million and $1,526 million. This is an increase of 22% sequentially and 21% from a year ago quarter. Excluding Pershing, noninterest income was $717 million in the second quarter of 2003, which represents growth of 4% over the first quarter of 2003 and second quarter of 2002. Noninterest income for the first six months increased 13% over the comparable 2002 period, 4% excluding the impact of Pershing. As of June 30, 2003, the Company had assets under custody of $7.8 trillion up from $6.8 trillion at March 31, 2003 and $6.6 trillion at June 30, 2002. Cross-border custody assets were $2.2 trillion at June 30, 2003. The acquisition of Pershing added approximately $500 billion to custody assets at June 30, 2003. Equity securities composed 32% of the assets under custody at June 30, 2003, while fixed income securities were 68%. Fees from investor services increased both on a sequential quarter basis and over last year's second quarter. Strong performers on a sequential quarter basis included global custody and securities lending. Typically dividends are paid on foreign equities in the second quarter which creates global equity lending opportunities related to dividend arbitrage business. Wholesale distribution services and securities lending were up over last 14 year's second quarter. Global custody benefited from the phase-in of new client wins, higher equity prices, and increased transaction volumes. Global issuer services declined on a sequential quarter basis and in comparison to the second quarter of 2002. Corporate trust fees declined from the record level attained in the first quarter of 2003. Depositary receipts showed improved performance on a sequential quarter basis as a result of the improved equity markets as well as seasonal corporate actions, but remain below year ago levels. Fees from broker-dealer services increased for the quarter in terms of both sequential quarter and year-over-year comparisons. Strong performers included government securities clearance and domestic and global collateral management services, which benefited from new business wins and higher fixed income transaction volumes driven by refinancing activity. Execution and clearing services increased on both a sequential quarter and on a year-over-year basis, reflecting the acquisition of Pershing as well as an increase in market trading volumes in the second quarter of 2003. Total combined second quarter NYSE and NASDAQ trading volume was up 17% from the first quarter of 2003. Excluding Pershing, sequential quarter fee growth for these services was strong across all the business units, in particular BNY Brokerage, B-Trade, and G-Trade. Global payment services fees were $79 million at June 30, 2003 and $156 million for the six months ending June 30, 2003. This is an increase of 3% from the prior quarter and 11% from the second quarter of 2002. The increased revenues over both periods reflect greater funds transfer activity, particularly multi-currency payments, and new business wins in key client segments, such as U.S. and international banks and mortgage banks. Global payment services fees increased by 8% on a year-to-date basis over 2002. Private client services and asset management fees for the second quarter were $94 million and $184 million for the six months ending June 30, 2003. This is an increase of 5% from the prior quarter, and 7% from the second quarter of 2002. The sequential quarter increase reflects the continued strong demand for alternative investments from Ivy Asset Management as well as higher fees from the private client services business. The increase from the second quarter of 2002 and on a year-to-date basis was due to strong performance from Ivy Asset Management and acquisitions. Assets under management ("AUM") were $83 billion at June 30, 2003 compared with $76 billion at March 31, 2003 and $75 billion at June 30, 2002. Assets under administration were $27 billion unchanged as compared with March 31, 2003 and down from $30 billion at June 30, 2002. The increase in assets under management since March 31, 2003 reflects acquisitions, growth in the Company's alternative investments business, and a rise in asset values. The increase in AUM since June 30, 2002 reflects acquisitions and growth in the Company's alternative investment business. Institutional clients represent 66% of AUM while individual clients equal 34%. AUM at June 30, 2003, are 32% invested in equities, 23% in fixed income, 9% in alternative investments and the remainder in liquid assets. Net interest income in the Servicing and Fiduciary businesses segment was $120 million for the second quarter of 2003 compared with $105 million in the first quarter of 2003 and $122 million in the second quarter of 2002. The increase in net interest income on a sequential quarter basis is primarily attributable to the Pershing acquisition. The decrease in net interest income from the second quarter of 2002 is primarily due to the decline in interest rates partially offset by the Pershing acquisition. Net interest income for the six months ended June 30, 2003 was $225 million compared with $244 million in the first half of 2002. The decline in net interest income mainly reflects the Federal Reserve rate cuts in 2003 and 2002, partially offset by the Pershing acquisition. Average assets for the quarter ended June 30, 2003 were $15.7 billion compared with $7.6 billion in the first quarter of 2003 and $8.5 billion in the second quarter of 2002. Average assets for the six months ended June 30, 2003 were $11.7 billion compared with $8.7 billion in the first six months of 2002. These increases reflect the Pershing acquisition. The second 15 quarter of 2003 average deposits were $33.5 billion compared with $31.1 billion in the first quarter of 2003 and $30.3 billion in the second quarter of 2002. Average deposits for the first half of 2003 were $32.3 billion compared with $30.3 billion for the first half of 2002. Net charge-offs in the Servicing and Fiduciary Businesses segment were zero in each of the relevant periods. Nonperforming assets were $16 million at June 30, 2003, March 31, 2003 and June 30, 2002. The increase in nonperforming loans since June 30, 2002 is attributable to the Company's private client services business. Noninterest expense for the second quarter of 2003 was $650 million, compared with $523 million in the first quarter of 2003 and $486 million in the second quarter of 2002. The rise in noninterest expense from the first quarter reflects the Pershing acquisition. For the first half of 2003, noninterest expense was $1,173 million compared with $946 million in 2002. The rise in noninterest expense from 2002 was primarily due to acquisitions, the Company's continued investment in technology, a reduced pension credit, higher insurance expense, as well as higher volume-related sub-custodian expenses and higher variable compensation related to revenue growth. Corporate Banking - ----------------- (In Millions) 2nd 1st 2nd Quarter Quarter Quarter Year-to-date 2003 2003 2002 2003 2002 ------- ------- ------- ------- ----- Net Interest Income $ 95 $ 92 $ 106 $ 187 $ 214 Provision for Credit Losses 30 30 35 60 70 Noninterest Income 86 75 73 161 142 Noninterest Expense 53 50 50 103 96 Income Before Taxes 98 87 94 185 190 Average Assets $19,858 $20,540 $22,979 $20,197 $23,424 Average Deposits 6,583 7,219 7,011 6,899 6,956 Nonperforming Assets 410 409 292 410 292 Net Charge-offs 42 35 30 77 60 The Corporate Banking segment's net interest income was $95 million in the second quarter of 2003, up from $92 million in the first quarter of 2003 and down from $106 million in the second quarter of 2002. On a year-to-date basis, net interest income for 2003 was $187 million compared with $214 million in 2002. The decreases from the quarter and year-to-date 2002 periods reflect the continued reduction of average loans outstanding as well as a decline in the value of low cost short-term deposits given the lower interest rate environment. Average assets for the quarter were $19.9 billion compared with $20.5 billion in the first quarter of 2003 and $23.0 billion in the second quarter of last year. Average deposits in the corporate bank were $6.6 billion versus $7.2 billion in the first quarter of 2003 and $7.0 billion in 2002. For the six months ended June 30, 2003, average assets were $20.2 billion compared to $23.4 billion for the first six months of 2002. For the first half of 2003 and 2002, average deposits were $6.9 billion and $7.0 billion. The second quarter 2003 provision for credit losses was $30 million compared with $30 million in the first quarter of 2003 and $35 million last year. On a year-to-date basis the provision for credit losses was $60 million for 2003 and $70 million for 2002. Net charge-offs in the Corporate Banking segment were $42 million in the second quarter of 2003, $35 million in the first quarter of 2003, and $30 million in the second quarter of 2002. The charge-offs in 2003 primarily relate to loans to corporate borrowers. Net charge-offs for the first six months of 2003 were $77 million compared with $60 million in 2002. Nonperforming assets were $410 million at June 30, 2003, essentially flat compared with $409 million in the first quarter of 2003 and up from $292 million in the second quarter of 2002. The increase in 16 nonperforming assets from the second quarter of 2002 primarily reflects exposures to the operating subsidiaries of a large cable operator. Noninterest income was $86 million in the current quarter, compared with $75 million in the first quarter of 2003 and $73 million in the second quarter a year ago reflecting higher volumes of standby letters of credit and increased capital markets activity. For the first half of 2003, noninterest income was $161 million compared with $142 million for the first half of 2002. Noninterest expense in the second quarter increased to $53 million from $50 million in both the first quarter of 2003 and second quarter of 2002. For the first six months of 2003 noninterest expense was $103 million compared with $96 million in 2002. The increases over 2002 reflect higher compensation costs due in part to a reduced pension credit. Retail Banking - -------------- (In Millions) 2nd 1st 2nd Quarter Quarter Quarter Year-to-date 2003 2003 2002 2003 2002 ------- ------- ------- ------- ----- Net Interest Income $ 118 $ 116 $ 122 $234 $238 Provision for Credit Losses 5 4 3 9 6 Noninterest Income 33 29 28 62 58 Noninterest Expense 90 87 78 177 159 Income Before Taxes 56 54 69 110 131 Average Assets $ 5,329 $ 5,382 $ 5,108 $5,355 $ 4,959 Average Noninterest Bearing Deposits 4,565 4,830 3,858 4,697 4,005 Average Deposits 14,252 14,122 13,011 14,187 13,128 Nonperforming Assets 11 10 7 11 7 Net Charge-offs 5 5 5 10 10 Number of Branches 341 341 342 341 342 Total Deposit Accounts (In Thousands) 1,183 1,192 1,231 1,183 1,231 Net interest income in the second quarter of 2003 was $118 million, compared with $116 million in the first quarter of 2003 and $122 million in the second quarter of 2002. Net interest income on a year-to-date basis for 2003 and 2002 was $234 million and $238 million. The decline in net interest income reflects spread compression on deposits. Noninterest income was $33 million for the quarter compared with $29 million on a sequential quarter basis and $28 million last year. Noninterest income for the first six months of 2003 was $62 million compared with $58 million in the first six months of 2002. The increase in noninterest income reflects a gain on the sale of $230 million of mortgage loans as well as higher fee-based customer activity. Noninterest expense in the second quarter of 2003 was $90 million compared with $87 million in the first quarter of 2003 and $78 million last year. These increases reflect a reduced pension credit, and higher medical benefit expense. Noninterest expense for the first half of 2003 was $177 million compared with $159 million in the first half of 2002. The year-over- year change reflects a reduced pension credit, higher occupancy, advertising, and medical benefit expenses. Net charge-offs were $5 million in the second quarter of 2003, $5 million in the first quarter of 2003 and $5 million in the second quarter of 2002. Net charge-offs were $10 million for the six months ending June 30, 2003 and June 30, 2002. Nonperforming assets were $11 million in the second quarter of 2003 compared with $10 million at March 31, 2003 and $7 million at June 30, 2002 17 reflecting modest deterioration in the Company's small business loan portfolio. Average deposits generated by the Retail Banking segment were $14.3 billion in the second quarter of 2003, compared with $14.1 billion in the first quarter of 2003 and $13.0 billion in the second quarter of 2002. For the first half of 2003 average deposits were $14.2 billion as compared to $13.1 billion in the first half of 2002. Noninterest bearing deposits were $4.6 billion this quarter, compared with $4.8 billion in the first quarter of 2003 and $3.9 billion in the second quarter of 2002. The increase in total deposits reflects current consumer preferences for the safety of bank deposits versus the volatility of the equity markets as well as the low interest rates offered on other investment choices. Noninterest bearing deposits for the first six months of 2003 were $4.7 billion compared with $4.0 billion in the first six months of 2002. Average assets in the retail banking sector were $5.3 billion, compared with $5.4 billion in the first quarter of 2003 and $5.1 billion in the second quarter of 2002. On a year-to-date basis, average assets were $5.4 billion for 2003 and $5.0 billion for 2002. The increases over 2002 reflect strong demand for home equity loans, as well as increased small business lending. Financial Markets - ----------------- (In Millions) 2nd 1st 2nd Quarter Quarter Quarter Year-to-date 2003 2003 2002 2003 2002 ------- ------- ------- ------- ----- Net Interest Income $ 80 $ 77 $ 85 $ 157 $ 161 Provision for Credit Losses 6 5 5 11 10 Noninterest Income 33 50 64 83 117 Noninterest Expense 25 24 21 49 43 Income Before Taxes 82 98 123 180 225 Average Assets $46,463 $44,334 $40,822 $45,404 $40,295 Average Deposits 4,153 4,917 1,792 4,533 1,905 Average Investment Securities 18,720 17,977 14,614 18,351 13,707 Net Charge-offs - - - - - Net interest income for the second quarter was $80 million compared with $77 million on a sequential quarter basis and $85 million a year ago. The sequential quarter increase reflects higher average assets, and an additional day in the quarter, offset in part by lower investment yields. The declines from 2002 reflect lower reinvestment yields partially offset by an increase in assets, primarily highly-rated mortgage-backed securities. Net interest income was $157 million in the first six months of 2003 compared to $161 million in the first six months of 2002. Average second quarter 2003 assets in the Financial Markets segment were $46.5 billion, up from $44.3 billion on a sequential quarter basis and $40.8 billion last year. Average assets for the first half of 2003 were $45.4 billion compared to $40.3 billion for the first half of 2002. The increase in assets reflects the Company's continuing strategy to reduce investment in higher risk corporate loans and increase holdings of highly rated, more liquid investment securities. Noninterest income was $33 million in the second quarter of 2003, compared with $50 million in the first quarter of 2003 and $64 million in the second quarter of 2002. On a year-to-date basis, noninterest income was $83 million in 2003 and $117 million in 2002. The negative variance versus the first quarter of 2003 reflects lower structured product fees and lower trading related revenues, as the flatter yield curve and lower interest rates caused clients to reduce or delay their hedging activities. The decrease versus a year ago was caused by declines in securities gains and structured product fees. Net charge-offs were zero in each of the relevant periods. Noninterest expense was essentially flat at $25 million in the second quarter of 2003, compared with $24 million in the first quarter of 2003 but up from $21 million 18 in last year's second quarter. Noninterest expense for the six months ended June 30, 2003 was $49 million, compared with $43 million for the six months ended June 30, 2002 reflecting higher compensation costs. The consolidating schedule below shows the contribution of the Company's segments to its overall profitability.
In Millions Servicing and For the Quarter Ended Fiduciary Corporate Retail Financial Reconciling Consolidated June 30, 2003 Businesses Banking Banking Markets Items Total - --------------------- ---------- --------- ------- --------- ----------- ------------ (In Millions) Net Interest Income $ 120 $ 95 $ 118 $ 80 $ (15) $ 398 Provision for Credit Losses - 30 5 6 (1) 40 Noninterest Income 838 86 33 33 6 996 Noninterest Expense 650 53 90 25 85 903 ----- ---- ----- ---- ----- ----- Income Before Taxes $ 308 $ 98 $ 56 $ 82 $ (93) $ 451 ===== ==== ===== ==== ===== ===== Contribution Percentage 57% 18% 10% 15% Average Assets $15,724 $19,858 $5,329 $46,463 $ 3,550 $90,924
In Millions Servicing and For the Quarter Ended Fiduciary Corporate Retail Financial Reconciling Consolidated March 31, 2003 Businesses Banking Banking Markets Items Total - --------------------- ---------- --------- ------- --------- ----------- ------------ (In Millions) Net Interest Income $ 105 $ 92 $ 116 $ 77 $ (4) $ 386 Provision for Credit Losses - 30 4 5 1 40 Noninterest Income 688 75 29 50 2 844 Noninterest Expense 523 50 87 24 55 739 ----- ---- ----- ---- ----- ----- Income Before Taxes $ 270 $ 87 $ 54 $ 98 $ (58) $ 451 ===== ==== ===== ==== ===== ===== Contribution Percentage 53% 17% 11% 19% Average Assets $ 7,615 $20,540 $5,382 $44,334 $ 2,605 $80,476
In Millions Servicing and For the Quarter Ended Fiduciary Corporate Retail Financial Reconciling Consolidated June 30, 2002 Businesses Banking Banking Markets Items Total - --------------------- ---------- --------- ------- --------- ----------- ------------ Net Interest Income $ 122 $106 $ 122 $ 85 $ (12) $ 423 Provision for Credit Losses - 35 3 5 (8) 35 Noninterest Income 691 73 28 64 (1) 855 Noninterest Expense 486 50 78 21 61 696 ----- ---- ----- ---- ----- ----- Income Before Taxes $ 327 $ 94 $ 69 $123 $ (66) $ 547 ===== ==== ===== ==== ===== ===== Contribution Percentage 54% 15% 11% 20% Average Assets $8,475 $22,979 $5,108 $40,822 $ 2,303 $79,687
19
In Millions Servicing and For the Six Months Ended Fiduciary Corporate Retail Financial Reconciling Consolidated June 30, 2003 Businesses Banking Banking Markets Items Total - ----------------------- ---------- --------- ------- --------- ----------- ------------ Net Interest Income $ 225 $187 $ 234 $157 $ (19) $ 784 Provision for Credit Losses - 60 9 11 - 80 Noninterest Income 1,526 161 62 83 9 1,841 Noninterest Expense 1,173 103 177 49 140 1,642 ----- ---- ----- ---- ----- ----- Income Before Taxes $ 578 $185 $ 110 $180 $(150) $ 903 ===== ==== ===== ==== ===== ===== Contribution Percentage 55% 18% 10% 17% Average Assets $11,692 $20,197 $5,355 $45,404 $ 3,080 $85,728
In Millions Servicing and For the Six Months Ended Fiduciary Corporate Retail Financial Reconciling Consolidated June 30, 2002 Businesses Banking Banking Markets Items Total - ----------------------- ---------- --------- ------- --------- ----------- ------------ Net Interest Income $ 244 $214 $ 238 $161 $ (22) $ 835 Provision for Credit Losses - 70 6 10 (16) 70 Noninterest Income 1,350 142 58 117 6 1,673 Noninterest Expense 946 96 159 43 101 1,345 ----- ---- ----- ---- ----- ----- Income Before Taxes $ 648 $190 $ 131 $225 $(101) $1,093 ===== ==== ===== ==== ===== ===== Contribution Percentage 54% 16% 11% 19% Average Assets $8,721 $23,424 $4,959 $40,295 $ 2,249 $79,648
20 Reconciling Items - ----------------- Description - 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 and intangibles. Reconciling items for noninterest income primarily relate to the sale of certain securities and certain other gains. Reconciling items for noninterest expense primarily reflects corporate overhead as well as amortization of intangibles and severance. In the second quarter of 2003, merger and integration costs associated with Pershing are also reconciling items. 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 and other intangible assets. 2nd 1st 2nd Quarter Quarter Quarter Year-to-date (In millions) 2003 2003 2002 2003 2002 ------- ------- ------- ------ ----- Segment's revenue $1,403 $1,232 $1,291 $2,635 $2,524 Adjustments: Earnings associated with assignment of capital (28) (21) (24) (48) (50) Securities gains - - (2) - 2 Other gains 6 4 - 10 4 Taxable equivalent basis and other tax-related items 13 15 13 28 28 ------- ------ ------ ------ ------ Subtotal-revenue adjustments (9) (2) (13) (10) (16) ------- ------ ------ ------ ------ Consolidated revenue $1,394 $1,230 $1,278 $2,625 $2,508 ======= ====== ====== ====== ====== Segment's income before tax $ 544 $ 509 $ 613 $1,053 $1,194 Adjustments: Revenue adjustments (above) (9) (2) (13) (10) (16) Provision for credit losses different than GAAP 1 (1) 8 - 16 Severance (4) (2) (11) (6) (14) Goodwill and intangible amortization (7) (3) (2) (10) (4) Pershing-related integration expenses (25) - - (25) - Corporate overhead (49) (50) (48) (99) (83) ------ ------ ------ ------ ------ Consolidated income before tax $ 451 $ 451 $ 547 $ 903 $1,093 ====== ====== ====== ====== ====== Segments' total average assets $87,374 $77,871 $77,384 $82,648 $77,399 Adjustments: Goodwill and intangibles 3,550 2,605 2,303 3,080 2,249 ------- ------- ------- ------ ------ Consolidated average assets $90,924 $80,476 $79,687 $85,728 $79,648 ======= ======= ======= ======= ======= 21 Allocation to Segments - Earnings associated with the assignment of capital relate to preferred trust securities which are assigned as capital to segments. Since the Company considers these issues to be capital, it does not allocate the interest expense associated with these securities to individual segments. If this interest expense were allocated to segments, it could be assigned based on segment capital, assets, risks, or some other basis. The reconciling item for securities gains relates to the Financial Markets business. The taxable equivalent adjustment is not allocated to segments because all segments contribute to the Company's taxable income and the Company believes it is arbitrary to assign the tax savings to any particular segment. Most of the assets that are attributable to the tax equivalent adjustment are recorded in the Financial Markets segment. The reconciling item for the provision for loan losses primarily relates to Corporate Banking and in 2003 to aircraft leases in Financial Markets. Goodwill and intangible amortization primarily relates to the Securities Servicing and Fiduciary segment. Corporate overhead is difficult to specifically identify with any particular segment. Approaches to allocating corporate overhead to segments could be based on revenues, expenses, number of employees, or a variety of other measures. Merger and integration charges would be allocated to the securities and fiduciary businesses segment. CONSOLIDATED BALANCE SHEET REVIEW Total assets were $99.6 billion at June 30, 2003, compared with $79.5 billion at March 31, 2003, and $77.6 billion at December 31, 2002. The increase in total assets reflects $12.1 billion in assets related to Pershing as well as an increase of $8 billion in liquid assets primarily related to the Company's securities servicing business. As a result, federal funds sold and securities purchased under resale agreements were $12.1 billion at June 30, 2003 compared with $1.4 billion at December 31, 2002. In addition, overdrafts were $3.5 billion at June 30, 2003 compared with $1.8 billion at December 31, 2002. Customers have left higher cash balances with the Company in the low interest rate environment due to a lack of favorable overnight investment alternatives. In addition, high securities settlement volumes at quarter end resulted in a higher than normal level of uncompleted trades across the industry, which added to the cash levels in customer accounts. Historically, the balance in certain customer accounts at the Company tend to increase at period end compared to daily average balances in these accounts, resulting in distortion in the Company's period-end balance sheets. To minimize these distortions, the Company plans to enter into agreements with certain customers to manage the level of excess balances. Total shareholders' equity was $8.1 billion at June 30, 2003, compared with $6.9 billion at March 31, 2003, and $6.7 billion at December 31, 2002. The increase in shareholders' equity is primarily attributable to the issuance of approximately $1 billion of common stock related to the Pershing acquisition, as well as the retention of earnings. Return on average common equity on a reported basis for the second quarter of 2003 was 15.56%, compared with 17.80% in the first quarter of 2003, and 22.59% in the second quarter of 2002. On a reported basis, return on average assets for the second quarter of 2003 was 1.30%, compared with 1.49% in the first quarter of 2003, and 1.82% in the second quarter of 2002. Excluding the merger-related costs of $25 million, return on average common equity for the second quarter of 2003 was 16.41%, while return on average assets was 1.37%. For the first six months of 2003, return on average common equity was 16.61% compared with 23.16% in 2002. On a reported basis, return on average assets was 1.39% for the first six months of 2003 compared with 1.83% in 2002 on a reported basis. Excluding the merger-related costs of $25 million, return on average common equity for the first six months of 2003 was 17.08%, while return on average assets was 1.43%. 22 Investment Securities - --------------------- The table below shows the distribution of the Company's securities portfolio: Investment Securities (at Fair Value) (In millions) 06/30/03 12/31/02 -------- -------- Fixed Income: Mortgage-Backed Securities $16,216 $13,084 Asset-Backed Securities 36 37 Corporate Debt 1,286 1,112 Short-Term Money Market Instruments 1,149 1,999 U.S. Treasury Securities 245 537 U.S. Government Agencies 344 469 State and Political Subdivisions 324 403 Emerging Market Debt 111 114 Other Foreign Debt 542 273 ------- ------- Subtotal Fixed Income 20,253 18,028 Equity Securities: Money Market Funds 52 91 Bank Stocks - 91 Federal Reserve Bank Stock 66 66 Other 22 22 ------- ------- Subtotal Equity Securities 140 270 ------- ------- Total Securities $20,393 $18,298 ======= ======= Total investment securities were $20.4 billion at June 30, 2003, compared with $19.6 billion at March 31, 2003, and $18.3 billion at December 31, 2002. Average investment securities were $18.7 billion in the second quarter of 2003, compared with $18.0 billion in the first quarter of 2003 and $14.6 billion in the second quarter of last year. Average investment securities were $18.4 billion in the six months ended June 30, 2003, compared with $13.7 billion in the six months ended June 30, 2002. The increases were primarily due to growth in the Company's portfolio of highly rated mortgage-backed securities which are 98% rated AAA, 1% AA, and 1% A. Since December 31, 2002, the Company has added approximately $3 billion of mortgage-backed securities to its investment portfolio. The Company has been adding either adjustable or short life classes of structured mortgage-backed securities, both of which have short average lives. The Company has maintained a duration of approximately 2.2 years on its overall fixed income portfolio to best match its liabilities and reduce the adverse impact from a rise in interest rates. Net unrealized gains for securities available-for-sale were $363 million at June 30, 2003, compared with $338 million at December 31, 2002. As interest rates rise, the Company expects the unrealized gains will decline. Loans - ----- Total loans including margin loans were $37.8 billion at June 30, 2003, compared with $31.7 billion at March 31, 2003, and $31.3 billion at December 31, 2002. Average loans were $35.7 billion in the second quarter of 2003, compared with $32.0 billion in the first quarter of 2003 and $34.2 billion in the second quarter of 2002. Pershing contributed $3.0 billion to the increase in average loans. Excluding Pershing, average loans were $32.7 billion in the second quarter of 2003, $32.0 billion in the first quarter of 2003, and $34.2 billion in the second quarter of 2002. The increase on a sequential quarter basis reflects overdrafts related to uncompleted securities trades. The decrease from 2002 reflects the Company's continued reduction of corporate loan exposures, as it reallocates capital towards its fee-based businesses. 23 The Company has made steady progress in reducing its exposure to higher risk credits and will continue its intensive efforts to do so in the telecom segment as well as throughout the loan portfolio. The Company continued to make progress in its risk reduction efforts during the second quarter. Total exposures to corporate clients were reduced by $2.0 billion, with telecom exposures reduced by approximately $244 million. The Company's $9 billion corporate exposure reduction program is ahead of schedule with the Company over halfway to its targeted goal with six quarters remaining. The improvement in credit spreads in the second quarter and resulting price improvement and greater liquidity in the secondary loan market created favorable conditions for the Company to reduce non-strategic exposure and certain large credits. The increase in margin loans reflects the acquisition of Pershing. The following tables provide additional details on the Company's loan exposures and outstandings at June 30, 2003 in comparison to December 31, 2002.
Overall Loan Portfolio Unfunded Total Unfunded Total (dollars in billions) Loans Commitments Exposure Loans Commitments Exposure ----------------------------- ------------------------------ 6/30/03 6/30/03 6/30/03 12/31/02 12/31/02 12/31/02 -------- ------- ------- -------- -------- -------- Financial Institutions(4) $ 9.7 $21.7 $31.4 $ 6.6 $24.1 $30.7 Corporate(4) 6.2 21.5 27.7 8.2 23.4 31.6 ----- ----- ----- ----- ----- ---- 15.9 43.2 59.1 14.8 47.5 62.3 ----- ----- ----- ----- ----- ---- Consumer & Middle Market 8.0 4.1 12.1 8.0 4.1 12.1 Leasing Financings 5.6 0.1 5.7 5.6 0.1 5.7 Commercial Real Estate 2.4 0.8 3.2 2.5 0.8 3.3 Margin loans 5.9 - 5.9 0.4 - 0.4 ----- ----- ----- ----- ----- ----- Total $37.8 $48.2 $86.0 $31.3 $52.5 $83.8 ===== ===== ===== ===== ===== ===== (1) Includes assets held for sale. (2) Unfunded commitments include letters of credit. (3) Excludes acceptances due from customers. (4) The Company reclassified $0.9 billion of exposures from Corporate to Financial Institutions to better reflect the underlying nature of the credit. Prior periods have been restated.
24 Financial Institutions - ---------------------- The financial institutions portfolio exposure was $31.4 billion at June 30, 2003 compared to $30.7 billion at December 31, 2002. These exposures are of high quality, with 88% meeting the investment grade criteria of the Company's rating system. The exposures are generally short-term, with 74% expiring within one year and are frequently secured. For example, mortgage banks, securities firms, and asset managers often borrow against marketable securities held in custody at the Company. The diversity of the portfolio is shown in the accompanying table.
(Dollars in billions) 06/30/03 12/31/02 ------------------------------ ----------------------------- Unfunded Total %Inv %due Unfunded Total Lending Division Loans Commitments Exposures Grade <1 Yr Loans Commitments Exposures - ---------------- ------ ----------- --------- ----- ------ ------ ----------- --------- Banks $ 3.4 $ 3.4 $ 6.8 74% 80% $2.9 $ 4.5 $ 7.4 Securities Industry 3.3 3.5 6.8 88 97 1.3 3.9 5.2 Insurance 0.4 5.1 5.5 96 65 0.4 5.5 5.9 Government 0.1 5.3 5.4 98 52 0.2 5.5 5.7 Asset Managers 1.9 3.3 5.2 86 69 1.2 3.9 5.1 Mortgage Banks 0.4 0.6 1.0 87 77 0.4 0.5 0.9 Endowments 0.2 0.5 0.7 99 84 0.2 0.3 0.5 ----- ----- ----- --- ---- ---- ----- ----- Total $ 9.7 $21.7 $31.4 88% 74% $6.6 $24.1 $30.7 ===== ===== ===== === ==== ==== ===== =====
Corporate - --------- The corporate portfolio exposure declined to $27.7 billion at June 30, 2003 from $31.6 billion at year-end 2002. Approximately 73% of the portfolio is investment grade, with 34% of the portfolio maturing in one year. In 2002, the Company announced it expects to reduce its corporate exposure by $9 billion to $24 billion by the end of 2004. At June 30, 2003, this portfolio had been reduced by $5.3 billion of the $9 billion target.
(Dollars in billions) 06/30/03 12/31/02 ----------------------------- ----------------------------- Unfunded Total %Inv %due Unfunded Total Lending Division Loans Commitments Exposures Grade <1 Yr Loans Commitments Exposures - ---------------- ------ ----------- --------- ----- ------ ------ ----------- --------- Media $ 1.7 $ 2.3 $ 4.0 66% 14% $1.9 $ 2.4 $4.3 Cable 0.8 0.6 1.4 36 4 1.0 0.6 1.6 Telecom 0.5 0.7 1.2 57 30 0.7 0.8 1.5 ----- ----- ----- -- -- ---- ----- ----- Subtotal 3.0 3.6 6.6 58% 15% 3.6 3.8 7.4 Utilities 0.3 2.6 2.9 87 67 0.7 3.0 3.7 Retailing 0.1 2.5 2.6 75 44 0.2 2.6 2.8 Automotive 0.2 2.1 2.3 76 41 0.2 2.6 2.8 Oil & Gas 0.3 1.6 1.9 79 37 0.4 1.7 2.1 Healthcare 0.3 1.3 1.6 85 31 0.4 1.5 1.9 Other* 2.0 7.8 9.8 73 32 2.7 8.2 10.9 ----- ----- ----- -- -- ---- ----- ----- Total $ 6.2 $21.5 $27.7 73% 34% $8.2 $23.4 $31.6 ===== ===== ===== == == ==== ===== ===== * Diversified portfolio of industries and geographies
Media, cable, and telecommunications has been a significant industry specialization of the Company historically. The Company has specifically targeted the telecom portfolio for continued reduction in exposure with a goal of reducing the telecom portfolio below $750 million by December 31, 2004. In the first six months of 2003, the Company reduced telecom exposure by $344 million. The percentage of investment grade borrowers in the telecom 25 portfolio has increased to 57% from 54% at year end 2002, due to reductions in lower rated exposures. The Company's exposure to the airline industry consists of a $632 million aircraft leasing portfolio as well as $55 million of direct lending. The aircraft leasing portfolio consists of $284 million to major U.S. carriers, $253 million to foreign airlines and $95 million to U.S. regionals. During the second quarter, the domestic airline industry witnessed structural improvements, including favorable labor developments, continued cost containment, and increased liquidity due to government aid. Notwithstanding the quarter's improvements, the industry faces sustained challenges from a tepid economic recovery, ongoing tension in labor relations, intense domestic competition, future pension funding requirements, and geopolitical uncertainty. Because of these factors, the Company continues to carefully monitor its airline exposure. Nonperforming Assets - --------------------
Change Change 6/30/03 vs. 6/30/03 vs. (Dollars in millions) 6/30/03 3/31/03 3/31/03 12/31/02 12/31/02 -------- -------- -------- -------- -------- Category of Loans: Commercial $312 $327 $(15) $321 $(9) Foreign 84 75 9 84 - Other 41 34 7 34 7 ---- ---- --- --- --- Total Nonperforming Loans 437 436 1 439 (2) Other Real Estate - - - 1 (1) ---- ---- ---- ---- ---- Total Nonperforming Assets $437 $436 $ 1 $440 $(3) ==== ==== ==== ==== ==== Nonperforming Assets Ratio 1.4% 1.4% 1.4% Allowance/Nonperforming Loans 188.6 190.4 189.1 Allowance/Nonperforming Assets 188.6 190.4 188.7
Nonperforming assets totaled $437 million at June 30, 2003, essentially unchanged from $436 million at March 31, 2003. The level of nonperforming assets prospectively will depend upon the strength and pace of the U.S. economic recovery. Interest income would have been increased by $3 million and $4 million for the second quarters of 2003 and 2002 if loans on nonaccrual status at June 30, 2003 and 2002 had been performing for the entire period. Interest income would have been increased by $8 million for the six months ended June 30, 2003 and 2002 if loans on nonaccrual status at June 30, 2003 and 2002 had been performing for the entire period. 26 Impaired Loans - -------------- The table below sets forth information about the Company's impaired loans. The Company uses the discounted cash flow method as its primary method for valuing its impaired loans: (Dollars in millions) 6/30/03 12/31/02 -------- -------- Impaired Loans with an Allowance $393 $376 Impaired Loans without an Allowance(1) 4 27 ---- ---- Total Impaired Loans $397 $403 ==== ==== Allowance for Impaired Loans(2) $189 $167 Average Balance of Impaired Loans during the Quarter $404 $343 Interest Income Recognized on Impaired Loans during the Quarter $0.4 $0.1 (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. Allowance - --------- June 30 March 31 June 30 (Dollars in millions) 2003 2003 2002 ------- -------- ------- Loans $37,796 $31,735 $35,998 Margin Loans 5,911 467 487 Non-Margin Loans 31,885 31,268 35,511 Allowance 824 830 616 Allowance for Loan Losses As a Percent of Loans 2.18% 2.62% 1.71% Allowance for Loan Losses As a Percent of Non-Margin Loans 2.58 2.65 1.73 The allowance for credit losses to total loans was $824 million, or 2.18% of loans at June 30, 2003, compared with $830 million, or 2.62% at March 31, 2003 and $616 million, or 1.71% of loans at June 30, 2002. The ratio of the allowance for credit losses to non-margin loans was 2.58% for June 30, 2003, compared with 2.65% at March 31, 2003 and 1.73% at June 30, 2002, reflecting stability in credit quality in the first six months of 2003. The Pershing acquisition added $5.5 billion of secured margin loans to the Company's balance sheet at June 30, 2003. The Company has rarely suffered a loss on these types of loans and does not allocate any of its allowance for credit losses to these credits. The Company believes the ratio of allowance for credit losses to non-margin loan is a more appropriate metric for the allowance for credit losses than the ratio of allowance for loan losses to total loans. The ratio of the allowance to nonperforming assets was 188.6% at June 30, 2003, compared with 190.4% at March 31, 2003, and 194.9% at June 30, 2002. The ratio of the allowance to nonperforming loans was 188.6% at June 30, 2003, compared with 190.4% at March 31, 2003, and 195.7% at June 30, 2002. Included in the Company's allowance for credit losses at June 30, 2003 is an allocated transfer risk reserve related to Argentina of $23 million. The allowance for credit losses consists of four elements: (1) an allowance for impaired credits (nonaccrual commercial credits over $1 27 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, estimated exposure at default, and maturity. The credit rating is judgmental and is dependent upon the borrower's estimated probability of default. The loss given default incorporates a recovery expectation based on historical experience, collateral, and structure. 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. The fourth element - an unallocated allowance - is based on management's judgment regarding the following factors: - Economic conditions including duration of the current economic 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 - Geopolitical issues and their impact on the economy 28 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: 6/30/03 12/31/02 ------- ------- Domestic Real Estate 2% 3% Commercial 75 75 Consumer 1 1 Foreign 9 9 Unallocated 13 12 --- --- 100% 100% === === Such an allocation is inherently judgmental, and the entire allowance for credit losses is available to absorb credit losses regardless of the nature of the loss. Deposits - -------- Total deposits were $64.7 billion at June 30, 2003, compared with $55.4 billion at December 31, 2002. The increase was primarily due to additional deposits from customers who have left higher cash balances with the Company in the low interest rate environment due to a lack of favorable overnight investment alternatives. In addition, high securities settlement volumes at quarter end resulted in a higher than normal level of uncompleted trades across the industry, which added to the cash levels in customer accounts. Noninterest-bearing deposits were $16.4 billion at June 30, 2003, compared with $13.3 billion at December 31, 2002. Interest-bearing deposits were $48.2 billion at June 30, 2003, compared with $42.1 billion at December 31, 2002. 29 WORLD TRADE CENTER DISASTER UPDATE During the first six months of 2003, the Company incurred $20 million in expenses associated with interim space, business interruption, and the restoration of facilities, which was offset by an insurance recovery. The Company is actively engaged in subletting its interim operating facilities. Through June 30, 2003, the Company had terminated or sublet 700,000 square feet and had 600,000 square feet remaining to sublet. The Company has recorded a liability for its sublease loss as of June 30, 2003 of $216 million. At June 30, 2003, the Company had reserved for approximately 53% of the future costs associated with the subleases. The Company expects the remainder of the costs to be covered by income from subletting these properties. The financial statement impact of the WTC disaster is shown in the table below: (In millions) 2003 ---- WTC Expenses $ 20 Insurance Recovery 20 ----- Pre-tax Impact $ - ===== Cumulative Insurance Recovery $ 673 Cumulative Cash Advances from Insurance Companies (600) ----- Receivable from Insurance Companies at July 31, 2003 $ 73 ===== Future cash advances will largely relate to business interruption costs. The Company expects to record modest additional insurance recoveries in 2003 and 2004 above the current $673 million as it completes the move of its data centers from interim locations to final locations. 30 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" in the Company's 2002 Annual Report on Form 10-K. Three of the Company's more critical accounting policies are those related to the allowance for credit losses, to the valuation of derivatives and securities where quoted market prices are not available, and to the valuation of goodwill and other intangibles. Allowance for Credit Losses - --------------------------- The allowance for credit losses represents management's estimate of probable losses inherent in the Company's loan portfolio. This evaluation process is subject to numerous estimates and judgments. Probabilities of default ratings are assigned after analyzing the credit quality of each borrower/counterparty and the Company's internal ratings are consistent with external rating agency default databases. Loss given default ratings are driven by the collateral, structure, and seniority of each individual asset and are consistent with external loss given default/recovery databases. The portion of the allowance related to impaired credits is based on the present value of future cash flows. Changes in the estimates of probability of default, risk ratings, loss given default/recovery rates, and cash flows could have a direct impact on the allocated allowance for loan losses. The Company's unallocated allowance is established via a process that begins with estimates of probable loss inherent in the portfolio, based upon 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 - Geopolitical issues and their impact on the economy 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. The Company considers it difficult to quantify the impact of changes in forecast on its allowance for credit losses. Nevertheless, the Company believes the following discussion may enable investors to better understand the variables that drive the allowance for credit losses. One key variable in determining the allowance is management's judgment in determining the size of the unallocated allowance. At June 30, 2003, the unallocated allowance was 13% of the total allowance. If the unallocated allowance were five percent higher or lower, the allowance would have increased or decreased by $41 million, respectively. The credit rating assigned to each pass credit is another significant variable in determining the allowance. If each pass credit were rated one grade better, the allowance would have decreased by $62 million, while if each pass credit were rated one grade worse, the allowance would have increased by $84 million. For non pass rated credits, if the loss given default were 10% worse, the allowance would have increased by $34 million, while if the loss given default were 10% better, the allowance would have decreased by $51 million. For impaired credits, if the fair value of the loans were 10% higher or lower, the allowance would have decreased or increased by $21 million, respectively. 31 Valuation of Derivatives and Securities Where Quoted Market Prices Are Not - -------------------------------------------------------------------------- Available ---------- When quoted market prices are not available for derivatives and securities values, such values are determined at fair value, which is defined as the value at which positions could be closed out or sold in a transaction with a willing counterparty over a period of time consistent with the Company's trading or investment strategy. Fair value for these instruments is determined based on discounted cash flow analysis, comparison to similar instruments, and the use of financial models. Financial models use as their basis independently sourced market parameters including, for example, interest rate yield curves, option volatilities, and currency rates. 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. The Company's valuation process takes into consideration factors such as counterparty credit quality, liquidity and concentration concerns. The Company applies judgment in the application of these factors. In addition, the Company must apply judgment when no external parameters exist. Finally, other factors can affect the Company's estimate of fair value including market dislocations, incorrect model assumptions, and unexpected correlations. 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 1 "Summary of Significant Accounting and Reporting Policies" in the Company's 2002 Annual Report on Form 10-K. To assist in assessing the impact of a change in valuation, at June 30, 2003, approximately $3.2 billion of the Company's portfolio of securities and derivatives is not priced based on quoted market prices. A change of 2.5% in the valuation of these securities and derivatives would result in a change in pre-tax income of $79 million. Valuation of Goodwill and Other Intangibles - ------------------------------------------- The Company records all assets and liabilities acquired in purchase acquisitions, including goodwill, indefinite-lived intangibles, and other intangibles, at fair value as required by SFAS 141. Goodwill ($3,149 million at June 30, 2003) and indefinite-lived intangible assets ($370 million at June 30, 2003) are not amortized but are subject to annual tests for impairment or more often if events or circumstances indicate they may be impaired. Other intangible assets are amortized over their estimated useful lives and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. The initial recording of goodwill and other intangibles requires subjective judgments concerning estimates of the acquired assets fair value. The goodwill impairment test is performed in two phases. The first step of the goodwill impairment test compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit equals or exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, an additional procedure must be performed. That additional procedure compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. An impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied fair value. Indefinite lived intangible assets are evaluated for impairment at least annually by comparing its fair value to its carrying value. Other identifiable intangible assets ($454 million at June 30, 2003) are evaluated for impairment if events and circumstances indicate a possible impairment. Such evaluation of other intangible assets is based on undiscounted cash flow projections. Fair value may be determined using: market prices, comparison to similar assets, market multiples, discounted cash flow analysis and other determinates. Estimated cash flows may extend far into the future and, by their nature, are difficult to determine over an extended 32 timeframe. Factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures and technology, and changes in discount rates and specific industry or market sector conditions. Other key judgments in accounting for intangibles include useful life and classification between goodwill and indefinite lived intangibles or other intangibles which require amortization. See Note 4 of the Notes to Consolidated Financial Statements for additional information regarding intangible assets. The following discussion may assist investors in assessing the impact of a goodwill or intangible asset impairment charge. The Company has $4.0 billion of goodwill and intangible assets at June 30, 2003. The impact of a 5% impairment charge would result in a change of pre-tax income of approximately $199 million. 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 $14.3 billion and $14.1 billion on an average basis for the first six months of 2003 and 2002. Stable foreign deposits, primarily from the Company's European based securities servicing business, were $23.8 billion and $24.8 billion at June 30, 2003 and 2002. Savings and other time deposits were $10.1 billion on a year-to-date average basis at June 30, 2003 compared to $9.7 billion at June 30, 2002. A significant reduction in the Company's securities businesses would reduce its access to foreign deposits. The Parent has five major sources of liquidity: dividends from its subsidiaries, a collateralized line of credit with the Bank, the commercial paper market, a revolving credit agreement with third party financial institutions, and access to the capital markets. At June 30, 2003, the amount of dividends the Bank could pay to the Parent and remain in compliance with federal bank regulatory requirements was $390 million. This dividend capacity would increase in the remainder of 2003 to the extent of net income, less dividends. Nonbank subsidiaries of the Parent have liquid assets of approximately $423 million. These assets could be liquidated and the proceeds delivered by dividend or loan to the Parent. The Parent has a line of credit with the Bank, which is subject to limits imposed by federal banking law. At June 30, 2003, the Parent could use the subsidiaries' liquid securities as collateral to allow it to borrow $53 million rather than liquidate the securities and loan or dividend the proceeds to the Parent and remain in compliance with federal banking regulations. The Parent had no borrowings from the Bank at June 30, 2003. For the quarter ended June 30, 2003, the Parent's quarterly average commercial paper borrowings were $118 million compared with $66 million in 2002. At June 30, 2003, the Parent had cash of $691 million compared with cash of $398 million at December 31, 2002 and $866 million at June 30, 2002. Net of commercial paper outstanding, the Parent's cash position at June 30, 2003 was up $345 million compared with December 31, 2002. 33 The Parent has back-up lines of credit of $275 million at financial institutions. This line of credit matures in October 2006. There were no borrowings under the line of credit at June 30, 2003 and June 30, 2002. The Parent also has the ability to access the capital markets. At July 31, 2003, the Parent has a shelf registration statement with a capacity of $1,055 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 July 31, 2003 were as follows: The Bank of Parent Parent Parent Senior New York Commercial Subordinated Long-Term Long-Term Paper Long-Term Debt Debt Deposits Outlook ----------- --------------- ------------- ------------ -------- Standard & Poor's A-1 A A+ AA- Stable Moody's P-1 A1 Aa3 Aa2 Negative Fitch F1+ A+ AA- AA Stable 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 approximately $410 million of long-term debt that becomes due in 2003 subsequent to June 30, 2003. In addition, at June 30, 2003, the Parent has the option to call $270 million of subordinated debt in 2003 which it will call and refinance if market conditions are favorable. In the second quarter of 2003, the Company redeemed $360 million of debt. In July 2003, the Company called for redemption $50 million of subordinated debt. The Parent expects to refinance any debt it repays by issuing a combination of senior and 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 June 30, 2003 and 2002 was 101.19% and 101.58%. 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. The following comments relate to the information disclosed in the Consolidated Statements of Cash Flows. Earnings and other operating activities provided $1.0 billion in cash flows through June 30, 2003, compared with $4.0 billion provided by operating activities through June 30, 2002. The sources of cash flows from operations in 2003 and 2002 were principally the result of changes in trading activities and net income. In the first six months of 2003, cash used by investing activities was $12.1 billion as compared to cash used by investing activities in the first six months of 2002 of $2.8 billion. In the first six months of 2003 and 2002, 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. In addition, there was a significant increase in federal funds sold and securities purchased under resale agreements. In 2002, the increase in securities was offset by reductions in interest bearing deposits in banks and federal funds sold and securities purchased under resale agreements. In the first six months of 2003, cash provided by financing activities was $10.6 billion as compared to cash used by financing activities in the first six months of 2002 of $1.5 billion. Sources of funds in 2003 include deposits, payables to customers and broker-dealers and the issuance of long- term debt and common stock. In 2002 the major use of funds was deposits. 34 CAPITAL RESOURCES Regulators establish certain levels of capital for bank holding companies and banks, including the Company and The Bank of New York ("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 June 30, 2003 and 2002, 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). If a bank holding company or bank fails to qualify as "adequately capitalized", regulatory sanctions and limitations are imposed. The Company's and the Bank's capital ratios are as follows:
June 30, 2003 June 30, 2002 --------------------- --------------------- Well Adequately Company Capitalized Capitalized Company Bank Company Bank Targets Guidelines Guidelines ------- ---- ------- ------ ------- ----------- ----------- Tier 1* 6.83% 6.91% 7.70% 7.57% 7.75% 6% 4% Total Capital** 11.07 11.17 11.48 11.17 11.75 10 8 Leverage 5.85 5.90 6.82 6.70 6.50 5 3-5 Tangible Common Equity 4.33 5.01 5.41 6.07 5.25-6.00 N.A. N.A. * 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 subordinated debt and a portion of the loan loss allowance.
The Company's estimated regulatory Tier 1 capital and Total capital ratios were 6.83% and 11.07% at June 30, 2003, compared with 7.92% and 12.72% at March 31, 2003, and 7.70% and 11.48% at June 30, 2002. The regulatory leverage ratio was 5.85% at June 30, 2003, compared with 6.68% at March 31, 2003, and 6.82% at June 30, 2002. The Company's tangible common equity as a percentage of total assets was 4.33% at June 30, 2003, compared with 5.53% at March 31, 2003, and 5.41% at June 30, 2002. The Company's capital ratios at June 30, 2003 reflect the increased size of the balance sheet as well as an additional $1.3 billion of intangible assets (which are deducted from regulatory capital) related to Pershing. The Company remains well capitalized. Historically, the balance in certain customer accounts at the Company tend to increase at period end compared to daily average balances in those accounts, resulting in distortions in the Company's period-end balance sheets. To minimize these distortions, the Company plans to enter into agreements with certain customers to manage the level of excess balances. In addition, the Company is active in addressing industry settlement issues. The Company expects its capital ratios to return to their targeted ranges over the next year. 35 The following table presents the components of the Company's risk-based capital at June 30, 2003 and 2002: (in millions) 2003 2002 ---- ---- Common Stock $8,113 $6,610 Preferred Stock - - Preferred Trust Securities 1,150 1,100 Adjustments: Intangibles (3,966) (2,364) Securities Valuation Allowance (214) (84) Merchant Banking Investments (5) (2) ------ ------ Tier 1 Capital 5,078 5,260 ------ ------ Qualifying Unrealized Equity Security Gains - - Qualifying Subordinated Debt 2,356 1,996 Qualifying Allowance for Loan Losses 800 583 ------ ------ Tier 2 Capital 3,156 2,579 ------ ------ Total Risk-based Capital $8,234 $7,839 ====== ====== Risk-Adjusted Assets $74,378 $68,271 ======= ======= 36 TRADING ACTIVITIES The fair value and notional amounts of the Company's financial instruments held for trading purposes at June 30, 2003 and June 30, 2002 are as follows: 2003 June 30, 2003 Average ---------------------------- ------------------- (In millions) Fair Value Fair Value ------------------ ------------------- Notional Trading Account Amount Assets Liabilities Assets Liabilities - --------------- -------- ------ ----------- ------ ----------- Interest Rate Contracts: Futures and Forward Contracts $ 62,181 $ 43 $ - $ 86 $ - Swaps 158,635 1,952 537 2,089 698 Written Options 119,304 - 1,502 - 1,432 Purchased Options 63,197 268 - 271 - Foreign Exchange Contracts: Swaps 2,791 - - - - Written Options 16,387 - 96 - 79 Purchased Options 18,912 73 - 520 - Commitments to Purchase and Sell Foreign Exchange 63,020 407 456 374 489 Debt Securities - 3,488 26 4,360 35 Credit Derivatives 1,801 5 4 6 4 Equity Derivatives - 16 - 22 17 ------ ------ ------ ------ Total Trading Account $6,252 $2,621 $7,728 $2,754 ====== ====== ====== ====== 2002 June 30, 2002 Average ---------------------------- ------------------- (In millions) Fair Value Fair Value ------------------ ------------------- Notional Trading Account Amount Assets Liabilities Assets Liabilities - --------------- -------- ------ ----------- ------ ----------- Interest Rate Contracts: Futures and Forward Contracts $ 43,100 $ 98 $ - $ 81 $ - Swaps 144,429 1,423 811 1,448 881 Written Options 123,597 - 1,066 - 1,023 Purchased Options 44,083 188 - 174 - Foreign Exchange Contracts: Swaps 1,969 - - - - Written Options 15,278 - 166 - 83 Purchased Options 17,611 68 - 79 - Commitments to Purchase and Sell Foreign Exchange 59,371 825 835 437 463 Debt Securities - 3,938 142 4,473 37 Credit Derivatives 2,075 8 1 17 7 Equity Derivatives - 29 12 27 7 ------ ------ ------- ------ Total Trading Account $6,577 $3,033 $ 6,736 $2,501 ====== ====== ======= ====== The Company's trading activities are focused on 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 37 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. The VAR model is used to calculate economic capital which is allocated to the business units for computing risk-adjusted performance. As the VAR methodology does not evaluate risk attributable to extraordinary financial, economic or other occurrences, the risk assessment process includes a number of stress scenarios based upon the risk factors in the portfolio and management's assessment of market conditions. Additional stress scenarios based upon historic market events are also tested. The following table indicates the calculated VAR amounts for the trading portfolio for the periods indicated.
(In millions) 2nd Quarter 2003 Year-to-Date 2003 ------------------------------ ------------------------------------- Average Minimum Maximum Average Minimum Maximum 6/30/03 -------- -------- -------- ------- ------- ------- ------- Interest rate $6.4 $3.2 $10.4 $5.6 $2.2 $11.2 $9.7 Foreign Exchange 0.9 0.5 1.9 0.8 0.5 1.9 0.9 Equity 0.1 - 0.3 0.1 - 0.4 0.3 Credit Derivatives 2.0 1.6 2.8 1.0 - 2.8 1.8 Diversification (1.9) NM NM (0.6) NM NM (1.2) Overall Portfolio 7.5 5.1 14.7 6.9 2.0 14.7 11.5
(In millions) 2nd Quarter 2002 Year-to-Date 2002 ------------------------------ ------------------------------------- Average Minimum Maximum Average Minimum Maximum 6/30/02 -------- -------- -------- ------- ------- ------- ------- Interest rate $4.8 $3.5 $6.6 $5.0 $3.4 $9.2 $4.6 Foreign Exchange 1.5 0.7 3.8 1.2 0.6 3.8 0.9 Equity - - 1.1 - - 1.1 0.8 Credit Derivatives - - - - - - - Diversification (2.1) NM NM (1.8) NM NM (1.8) Overall Portfolio 4.2 3.0 7.2 4.4 3.0 8.3 4.5 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.
During the first six months of 2003, interest rate risk generated approximately 75% of average VAR, credit derivatives generated 13% of average VAR, foreign exchange generated 11% of average VAR, and equity generated 1% of average VAR. During the second quarter and first six months of 2003, the daily trading loss did not exceed the calculated VAR amounts on any given day. 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. 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 and securities. 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. 38 The Company evaluates the effect on earnings by running various interest rate ramp 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 as shown in the following table: (In millions) 2003 % ---- ---- +200 bp Ramp vs. Stable Rate $(12.0) (0.71)% +100 bp Ramp vs. Stable Rate 10.6 0.63 -25 bp Shock vs. Stable Rate (13.9) (0.82) These scenarios do not include the strategies that management could employ to limit the impact as interest rate expectations change. The Company's interest rate positioning continues to be relatively neutral to changes in interest rates in either direction with Pershing not having a material impact. The above table relies on certain critical assumptions including depositors' behavior related to interest rate fluctuations and the prepayment and extension risk in certain of the Company's assets. For example, based on the level of interest rates at June 30, 2003, the Company does not believe it would be able to reduce rates on all its deposit products if there are further declines in interest rates. In addition, if interest rates rise, the Company's portfolio of mortgage related assets would have reduced returns if the owners of the underlying mortgages pay off their mortgages later than anticipated. To the extent that actual behavior is different from that assumed in the models, there could be a change in interest rate sensitivity. The Company earns substantial distribution fee income from investing customer funds in various liquid investments as directed by the customer. Declines in interest rates have reduced the return available to be shared by investors, asset managers and the Company. Further cuts in interest rates may cause a reduction in noninterest income as the returns from these investments are no longer adequate to compensate all of the parties involved in the transaction. The actual impact on the Company will depend on negotiations with the parties engaged in these transactions. 39 STATISTICAL INFORMATION THE BANK OF NEW YORK COMPANY, INC. Average Balances and Rates on a Taxable Equivalent Basis (Dollars in millions)
For the three months For the three months ended June 30, 2003 ended June 30, 2002 ------------------------------ ------------------------------ Average Average Average Average Balance Interest Rate Balance Interest Rate ------- -------- ------- ------- -------- ------- ASSETS - ------ Interest-Bearing Deposits in Banks (primarily foreign) $ 7,049 $ 41 2.37% $ 5,737 $ 44 3.03% Federal Funds Sold and Securities Purchased Under Resale Agreements 7,931 24 1.20 2,834 12 1.69 Margin Loans 3,492 21 2.42 449 3 3.01 Loans Domestic Offices 20,281 219 4.34 18,619 240 5.17 Foreign Offices 11,964 90 3.01 15,566 132 3.40 ------- ----- ------- ----- Total Loans 32,245 309 3.84 34,185 372 4.37 ------- ----- ------- ----- Securities U.S. Government Obligations 209 2 4.16 669 9 5.40 U.S. Government Agency Obligations 3,019 29 3.84 3,253 45 5.54 Obligations of States and Political Subdivisions 352 6 7.30 580 9 6.54 Other Securities 15,140 140 3.67 10,112 124 4.89 Trading Securities 4,346 32 2.95 8,124 68 3.36 ------- ----- ------- ----- Total Securities 23,066 209 3.62 22,738 255 4.49 ------- ----- ------- ----- Total Interest-Earning Assets 73,783 604 3.28% 65,943 686 4.18% ----- ----- Allowance for Credit Losses (826) (616) Cash and Due from Banks 2,748 2,726 Other Assets 15,219 11,634 ------- ------- TOTAL ASSETS $90,924 $79,687 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Interest-Bearing Deposits Money Market Rate Accounts $ 7,239 $ 17 0.94% $ 6,405 $ 21 1.33% Savings 9,039 18 0.81 8,171 22 1.10 Certificates of Deposit $100,000 & Over 4,649 19 1.63 1,252 8 2.50 Other Time Deposits 1,350 5 1.55 1,567 9 2.27 Foreign Offices 23,827 79 1.32 24,459 98 1.60 ------- ----- ------- ----- Total Interest-Bearing Deposits 46,104 138 1.20 41,854 158 1.51 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 1,428 4 1.10 2,299 8 1.47 Payables to Customers and Broker-Dealers 4,289 8 0.80 195 1 0.53 Other Borrowed Funds 983 5 1.90 4,199 27 2.66 Long-Term Debt 6,469 42 2.53 5,450 56 4.06 ------- ----- ------- ----- Total Interest-Bearing Liabilities 59,273 197 1.33% 53,997 250 1.87% ----- ----- Noninterest-Bearing Deposits 12,383 10,257 Other Liabilities 11,661 9,017 Common Shareholders' Equity 7,607 6,416 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $90,924 $79,687 ======= ======= Net Interest Earnings and Interest Rate Spread $ 407 1.95% $ 436 2.31% ===== ==== ===== ==== Net Yield on Interest-Earning Assets 2.22% 2.65% ==== ====
40 THE BANK OF NEW YORK COMPANY, INC. Average Balances and Rates on a Taxable Equivalent Basis (Dollars in millions)
For the six months For the six months ended June 30, 2003 ended June 30, 2002 ------------------------------ ------------------------------ Average Average Average Average Balance Interest Rate Balance Interest Rate ------- -------- ------- ------- -------- ------- ASSETS - ------ Interest-Bearing Deposits in Banks (primarily foreign) $ 6,024 $ 71 2.38% $ 5,481 $ 79 2.88% Federal Funds Sold and Securities Purchased Under Resale Agreements 6,475 39 1.21 3,069 26 1.72 Margin Loans 1,970 24 2.43 452 6 2.57 Loans Domestic Offices 19,471 433 4.48 18,759 480 5.16 Foreign Offices 12,424 186 3.03 15,869 270 3.43 ------- ----- ------- ----- Total Loans 31,895 619 3.91 34,628 750 4.37 ------- ----- ------- ----- Securities U.S. Government Obligations 267 5 3.88 736 20 5.37 U.S. Government Agency Obligations 3,135 63 4.02 3,075 87 5.66 Obligations of States and Political Subdivisions 367 13 7.07 574 19 6.57 Other Securities 14,582 278 3.80 9,322 231 4.96 Trading Securities 5,025 76 3.06 8,435 141 3.38 ------- ----- ------- ----- Total Securities 23,376 435 3.73 22,142 498 4.51 ------- ----- ------- ----- Total Interest-Earning Assets 69,740 1,188 3.43% 65,772 1,359 4.18% ----- ----- Allowance for Credit Losses (828) (616) Cash and Due from Banks 2,780 2,683 Other Assets 14,036 11,809 ------- ------- TOTAL ASSETS $85,728 $79,648 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Interest-Bearing Deposits Money Market Rate Accounts $ 7,457 $ 35 0.96% $ 6,661 $ 44 1.34% Savings 8,766 38 0.87 8,114 48 1.18 Certificates of Deposit $100,000 & Over 4,687 39 1.69 877 12 2.74 Other Time Deposits 1,311 11 1.68 1,585 19 2.38 Foreign Offices 23,847 161 1.36 24,816 195 1.59 ------- ----- ------- ----- Total Interest-Bearing Deposits 46,068 284 1.24 42,053 318 1.53 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 1,360 7 1.04 2,203 16 1.47 Payables to Customers and Broker-Dealers 2,219 9 0.80 196 1 0.94 Other Borrowed Funds 823 5 1.30 4,370 54 2.45 Long-Term Debt 5,958 80 2.68 5,239 109 4.15 ------- ----- ------- ----- Total Interest-Bearing Liabilities 56,428 385 1.38% 54,061 498 1.87% ----- ----- Noninterest-Bearing Deposits 11,871 10,192 Other Liabilities 10,261 9,097 Common Shareholders' Equity 7,168 6,298 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $85,728 $79,648 ======= ======= Net Interest Earnings and Interest Rate Spread $ 803 2.05% $ 861 2.31% ===== ==== ===== ==== Net Yield on Interest-Earning Assets 2.32% 2.64% ==== ====
41 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 for 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-Q, 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 and set adequate reserve levels for contingent liabilities, 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. Government Monetary Policies - ---------------------------- The Federal Reserve Board has the primary responsibility for United States monetary policy. Its actions, and, to a lesser extent, the actions of monetary policy authorities of other major countries, 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. 42 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. International, national, and regional commercial banks, trust banks, investment banks, specialized processing companies, outsourcing companies, data processing companies, stock exchanges, and other business firms offer active competition for securities servicing and global payment services. Commercial banks, savings banks, savings and loan associations, and credit unions actively compete for deposits, and money market funds and brokerage houses offer deposit-like services. These institutions, as well as consumer and commercial finance companies, national retail chains, factors, insurance companies and pension trusts, are important competitors for various types of loans. Issuers of commercial paper compete actively for funds and reduce demand for bank loans. In the private client services and asset management markets, international, national, and regional commercial banks, standalone asset management companies, mutual funds, securities brokerage firms, insurance companies, investment counseling firms, and other business firms and individuals actively compete for business. WEBSITE INFORMATION The Company makes available, on its website: www.bankofny.com its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. 43 THE BANK OF NEW YORK COMPANY, INC. Consolidated Balance Sheets (Dollars in millions, except per share amounts) (Unaudited)
June 30, December 31, 2003 2002 ---- ---- Assets - ------ Cash and Due from Banks $ 4,323 $ 4,748 Interest-Bearing Deposits in Banks 6,744 5,104 Securities Held-to-Maturity (fair value of $375 in 2003 374 954 and $952 in 2002) Available-for-Sale 20,018 17,346 ------- ------- Total Securities 20,392 18,300 Trading Assets at Fair Value 6,252 7,309 Federal Funds Sold and Securities Purchased Under Resale Agreements 12,076 1,385 Loans (less allowance for credit losses of $824 in 2003 and $831 in 2002) 36,972 30,508 Premises and Equipment 1,108 975 Due from Customers on Acceptances 191 351 Accrued Interest Receivable 244 204 Goodwill 3,149 2,497 Intangible Assets 824 78 Other Assets 7,329 6,105 ------- ------- Total Assets $99,604 $77,564 ======= ======= Liabilities and Shareholders' Equity - ------------------------------------ Deposits Noninterest-Bearing (principally domestic offices) $16,406 $13,301 Interest-Bearing Domestic Offices 21,940 19,997 Foreign Offices 26,309 22,089 ------- ------- Total Deposits 64,655 55,387 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 1,035 636 Trading Liabilities 2,621 2,800 Payables to Customers and Broker-Dealers 9,407 870 Other Borrowed Funds 916 475 Acceptances Outstanding 194 352 Accrued Taxes and Other Expenses 4,033 4,066 Accrued Interest Payable 142 101 Other Liabilities 1,973 753 Long-Term Debt 6,515 5,440 ------- ------- Total Liabilities 91,491 70,880 ------- ------- Shareholders' Equity Class A Preferred Stock - par value $2.00 per share, authorized 5,000,000 shares, outstanding 3,000 shares in 2003 and in 2002 - - Common Stock-par value $7.50 per share, authorized 2,400,000,000 shares, issued 1,038,852,034 shares in 2003 and 993,697,297 shares in 2002 7,791 7,453 Additional Capital 1,564 847 Retained Earnings 5,053 4,736 Accumulated Other Comprehensive Income 158 134 ------- ------- 14,566 13,170 Less: Treasury Stock (265,946,234 shares in 2003 and 267,240,854 shares in 2002), at cost 6,450 6,483 Loan to ESOP (485,533 shares in 2003 and in 2002), at cost 3 3 ------- ------- Total Shareholders' Equity 8,113 6,684 ------- ------- Total Liabilities and Shareholders' Equity $99,604 $77,564 ======= ======= - ---------------------------------------------------------------------------------------- Note: The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date.
44 THE BANK OF NEW YORK COMPANY, INC. Consolidated Statements of Income (In millions, except per share amounts) (Unaudited)
For the three For the six months ended months ended June 30, June 30, 2003 2002 2003 2002 ---- ---- ---- ---- Interest Income - --------------- Loans $ 330 $ 375 $642 $756 Securities Taxable 155 158 315 299 Exempt from Federal Income Taxes 13 16 26 32 ----- ----- ----- ----- 168 174 341 331 Deposits in Banks 41 44 71 79 Federal Funds Sold and Securities Purchased Under Resale Agreements 24 12 39 26 Trading Assets 32 68 76 141 ----- ----- ----- ----- Total Interest Income 595 673 1,169 1,333 ----- ----- ----- ----- Interest Expense - ---------------- Deposits 138 158 284 318 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 4 8 7 16 Other Borrowed Funds 13 28 14 55 Long-Term Debt 42 56 80 109 ----- ----- ----- ----- Total Interest Expense 197 250 385 498 ----- ----- ----- ----- Net Interest Income 398 423 784 835 - ------------------- Provision for Credit Losses 40 35 80 70 ----- ----- ----- ----- Net Interest Income After Provision for Credit Losses 358 388 704 765 ----- ----- ----- ----- Noninterest Income - ------------------ Servicing Fees Securities 598 478 1,071 932 Global Payment Services 79 71 156 144 ----- ----- ----- ----- 677 549 1,227 1,076 Private Client Services and Asset Management Fees 94 88 184 171 Service Charges and Fees 93 93 191 176 Foreign Exchange and Other Trading Activities 88 72 154 134 Securities Gains 9 25 16 56 Other 35 28 69 60 ----- ----- ----- ----- Total Noninterest Income 996 855 1,841 1,673 ----- ----- ----- ----- Noninterest Expense - ------------------- Salaries and Employee Benefits 498 418 921 805 Net Occupancy 64 49 122 98 Furniture and Equipment 49 35 85 70 Other 267 194 489 372 Merger and Integration Costs 25 - 25 - ----- ----- ----- ----- Total Noninterest Expense 903 696 1,642 1,345 ----- ----- ----- ----- Income Before Income Taxes 451 547 903 1,093 Income Taxes 156 186 313 370 ----- ----- ----- ----- Net Income $ 295 $ 361 $ 590 $ 723 - ---------- ===== ===== ===== ===== Per Common Share Data: - ---------------------- Basic Earnings $0.39 $0.50 $0.80 $1.00 Diluted Earnings 0.39 0.50 0.80 0.99 Cash Dividends Paid 0.19 0.19 0.38 0.38 Diluted Shares Outstanding 757 729 742 729 - ------------------------------------------------------------------------------------------------ See accompanying Notes to Consolidated Financial Statements.
45
THE BANK OF NEW YORK COMPANY, INC. Consolidated Statement of Changes in Shareholders' Equity For the six months ended June 30, 2003 (In millions) (Unaudited) Common Stock Balance, January 1 $ 7,453 Issuance of Common Stock related to Pershing 300 Issuances in Connection with Employee Benefit Plans 38 ------- Balance, June 30 7,791 ------- Additional Capital Balance, January 1 847 Issuance of Common Stock related to Pershing 696 Issuances in Connection with Employee Benefit Plans 21 ------- Balance, June 30 1,564 ------- Retained Earnings Balance, January 1 4,736 Net Income $ 590 590 Cash Dividends on Common Stock (273) ------- Balance, June 30 5,053 ------- Accumulated Other Comprehensive Income Securities Valuation Allowance Balance, January 1 155 Change in Fair Value of Securities Available-for-Sale, Net of Taxes of $30 Million 50 50 Reclassification Adjustment, Net of Taxes of $(21) Million (27) (27) ------- Balance, June 30 178 ------- Foreign Currency Items Balance, January 1 (47) Foreign Currency Translation Adjustment, Net of Taxes of $(2) Million (5) (5) ------- Balance, June 30 (52) ------- Unrealized Derivative Gains Balance, January 1 26 Net Unrealized Derivative Gains on Cash Flow Hedges, Net of Taxes of $5 Million 6 6 ------ ------ Balance, June 30 32 ------ Total Comprehensive Income $ 614 ====== Less Treasury Stock Balance, January 1 6,483 Issued (48) Acquired 15 ------- Balance, June 30 6,450 ------- Less Loan to ESOP Balance, January 1 3 ------- Balance, June 30 3 ------- Total Shareholders' Equity, June 30 $ 8,113 ======= - ------------------------------------------------------------------------------------------ Comprehensive Income for the three months ended June 30, 2003 and 2002 was $331 million and $387 million. Comprehensive Income for the six months ended June 30, 2003 and 2002 was $614 million and $675 million. See accompanying Notes to Consolidated Financial Statements.
46 THE BANK OF NEW YORK COMPANY, INC. Consolidated Statements of Cash Flows (In millions) (Unaudited)
For the six months ended June 30, 2003 2002 ---- ---- Operating Activities Net Income $ 590 $ 723 Adjustments to Determine Net Cash Attributable to Operating Activities Provision for Losses on Loans and Other Real Estate 80 70 Depreciation and Amortization 194 91 Deferred Income Taxes 210 329 Securities Gains (16) (56) Change in Trading Activities 891 2,464 Change in Accruals and Other, Net (979) 427 ------ ------ Net Cash Provided by Operating Activities 970 4,048 ------ ------ Investing Activities Change in Interest-Bearing Deposits in Banks (1,386) (831) Change in Margin Loans (249) (34) Purchases of Securities Held-to-Maturity - (60) Paydowns of Securities Held-to-Maturity 567 51 Maturities of Securities Held-to-Maturity 10 18 Purchases of Securities Available-for-Sale (13,273) (10,353) Sales of Securities Available-for-Sale 2,556 2,818 Paydowns of Securities Available-for-Sale 4,202 1,161 Maturities of Securities Available-for-Sale 3,880 2,888 Net Principal Disbursed on Loans to Customers (1,128) (474) Sales of Loans and Other Real Estate 410 205 Change in Federal Funds Sold and Securities Purchased Under Resale Agreements (6,492) 2,150 Purchases of Premises and Equipment (69) (126) Acquisitions, Net of Cash Acquired (1,769) (323) Proceeds from the Sale of Premises and Equipment 2 - Other, Net 626 66 ------ ------ Net Cash Used by Investing Activities (12,113) (2,844) ------ ------ Financing Activities Change in Deposits 8,856 (1,073) Change in Federal Funds Purchased and Securities Sold Under Repurchase Agreements (234) (69) Change in Payables to Customers and Broker-Dealers 942 (301) Change in Other Borrowed Funds (803) (315) Proceeds from the Issuance of Long-Term Debt 1,811 675 Repayments of Long-Term Debt (804) (60) Issuance of Common Stock 1,105 128 Treasury Stock Acquired (15) (235) Cash Dividends Paid (273) (275) ------ ------ Net Cash Provided (Used) by Financing Activities 10,585 (1,525) ------ ------ Effect of Exchange Rate Changes on Cash 133 (16) ------ ------ Change in Cash and Due From Banks (425) (337) Cash and Due from Banks at Beginning of Period 4,748 3,222 ------ ------ Cash and Due from Banks at End of Period $4,323 $2,885 ====== ====== - ---------------------------------------------------------------------------- Supplemental Disclosure of Cash Flow Information Cash Paid During the Period for: Interest $ 347 $ 541 Income Taxes 292 24 Noncash Investing Activity (Primarily Foreclosure of Real Estate) - 1 - ---------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements.
47 THE BANK OF NEW YORK COMPANY, INC. Notes to Consolidated Financial Statements 1. General ------- The accounting and reporting policies of The Bank of New York Company, Inc., a financial holding company, and its consolidated subsidiaries (the "Company") conform with generally accepted accounting principles and general practice within the banking industry. Such policies are consistent with those applied in the preparation of the Company's annual financial statements. The accompanying consolidated financial statements are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods have been made. 2. Accounting Changes and New Accounting Pronouncements ---------------------------------------------------- On January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of this pronouncement did not have an impact on the Company's results of operations or financial condition. On January 1, 2003, the Company adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". The standard requires costs associated with exit or disposal activities to be recognized when they are incurred rather than at the date of a commitment to an exit or disposal plan. The adoption of this pronouncement did not have an impact on the Company's results of operations or financial condition. In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain Financial Institutions." This standard eliminates specialized accounting guidance related to certain acquisitions. The adoption of this pronouncement did not have an impact on the Company's results of operations or financial condition. The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," in 1995. At that time, as permitted by the standard, the Company elected to continue to apply the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and accounted for the options granted to employees using the intrinsic value method, under which no expense is recognized for stock options because they were granted at the stock price on the grant date and therefore have no intrinsic value. Effective January 1, 2003, the Company began accounting for its options under the fair value method of SFAS 123 as amended by SFAS 148 "Accounting for Stock-Based Compensation- Transition and Disclosure". SFAS 148 permits three different methods of adopting fair value: (1) the prospective method, (2) the modified prospective method, and (3) the retroactive restatement method. Under the prospective method, options issued after January 1, 2003 are expensed while all options granted prior to January 1, 2003 are accounted for under APB 25 using the intrinsic value method. Consistent with industry practice, the Company elected the prospective method of adopting fair value accounting. During the quarter and six months ended June 30, 2003, approximately 18 million options were granted with a weighted average fair value of $5.35 per share. In the second quarter and first six months of 2003, the Company recorded $8 million and $11 million of stock option expense. 48 The retroactive restatement method requires the Company's financial statements to be restated as if fair value accounting had been adopted in 1995. The following table discloses the pro forma effects on the Company's net income and earnings per share as if the retroactive restatement method had been adopted. (In millions, 2nd Quarter Year to date except per share amounts) 2003 2002 2003 2002 ----- ----- ---- ---- Reported net income $295 $361 $590 $723 Stock based employee compensation costs, using prospective method, net of tax 5 - 7 - Stock based employee compensation costs, using retroactive restatement method, net of tax (21) (24) (40) (40) ---- ---- ---- ---- Pro forma net income $279 $337 $557 $683 ==== ==== ==== ==== Reported diluted earnings per share $0.39 $0.50 $0.80 $1.00 Impact on diluted earnings per share (0.02) (0.03) (0.04) (0.04) ----- ----- ----- ----- Pro forma diluted earnings per share $0.37 $0.47 $0.76 $0.96 ===== ===== ===== ===== The fair value of options granted in 2003 and 2002 were estimated at the grant date using the following weighted average assumptions: Second Quarter Year to date 2003 2002 2003 2002 ---- ---- ---- ---- Dividend yield 3.00% 2.50% 3.00% 2.50% Expected volatility 33.54 29.71 32.78 29.77 Risk free interest rates 2.22 3.87 2.66 4.36 Expected options lives 5 5 5 5 In January 2003, the FASB issued FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". This interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. The disclosure requirements of FIN 45 are effective for the Company as of December 31, 2002, and require disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantor's obligations under the guarantee. The recognition requirements of FIN 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002. Significant guarantees that have been entered into by the Company are disclosed in footnote 8. The adoption of FIN 45 did not have an impact on the Company's results of operations or financial condition. In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities". This interpretation requires a company that holds a variable interest in an entity to consolidate the entity if the company's interest in the variable interest entities (VIE) is such that the company will absorb a majority of the VIE's expected losses and/or receives a majority of the entity's expected residual returns. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. The provisions of this interpretation became effective upon issuance. The consolidation requirements of FIN 46 applied immediately to VIEs created after January 31, 2003 and apply to previously established entities in the third quarter of 2003. As of December 31, 2002, the Company had variable interests in 7 securitization trusts, which are discussed in footnote 8 of the Company's 2002 Annual Report. These trusts are qualifying special-purpose entities, which 49 are exempt from the consolidation requirements of FIN 46. FIN 46 may require the Company to consolidate a modest amount of assets currently held off- balance sheet in asset management investment vehicles. If necessary, the Company will attempt to restructure these entities so that consolidation is not required. FIN 46 has also raised questions about whether variable interest entities similar to the trusts used to issue trust preferred securities should be treated as a consolidated subsidiary. The Company has $1,150 million of trust preferred securities outstanding. Traditionally, issuer trusts used for issuing trust preferred securities have been consolidated by their parent companies and trust preferred securities have been treated as eligible for "Tier 1" regulatory capital treatment by bank holding companies under Federal Reserve Board rules and regulations. Accordingly, the Company has consolidated its existing issuer trusts in preparing its consolidated financial statements in the past and its outstanding trust preferred securities have been treated as Tier 1 regulatory capital by the Company. This is consistent with the approach taken by similarly situated financial institutions. The industry is currently assessing, in dialogue with its independent accountants and regulators, whether or not the issuer trusts should continue to be consolidated. If the answer is no, the Company would be required to make certain adjustments to its financial statements during the third quarter of 2003 to reflect the deconsolidation. Moreover, if deconsolidation is required under FIN 46, then it is possible that the Federal Reserve Board may conclude that trust preferred securities should no longer be treated as Tier 1 regulatory capital. On July 2, 2003, the Board of Governors of the Federal Reserve issued a letter, SR 03-13, stating that notwithstanding FIN 46, trust preferred securities will continue to be included in Tier 1 capital until notice is given to the contrary. In the event of a disallowance, there would be a reduction in the Company's consolidated capital ratios. However, the Company believes that the Bank would remain "well capitalized" under Federal Reserve Board guidelines. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and clarifies accounting for derivative instruments. This Statement is generally effective after June 30, 2003 and is not expected to have a material impact on the Company's financial statements. The Company does not expect the adoption of this pronouncement to have an impact on its results of operations or financial condition. In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". The provisions of SFAS 150 are effective for financial instruments entered into or modified after May 31, 2003, and otherwise are effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not expect the adoption of the provisions of this Statement to have a material effect on the Company's operating results or financial position. Certain other prior year information has been reclassified to conform its presentation with the 2003 financial statements. 3. Acquisitions and Dispositions ----------------------------- The Company continues to be an active acquirer of securities servicing and asset management businesses. During the second quarter of 2003, 3 businesses were acquired for the total cost of $2,013 million, primarily paid in cash. During the first six months of 2003, 5 businesses were acquired for the total cost of $2,045 million, primarily paid in cash. The Company frequently structures its acquisitions with both an initial payment and a later contingent payment tied to post-closing revenue or income growth. 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. 50 Goodwill related to second quarter and first six months of 2003 acquisition transactions was $583 million and $610 million, respectively. The tax deductible portion of goodwill for the second quarter and first six months of 2003 is $583 million and $603 million. All of the goodwill was assigned to the Company's Servicing and Fiduciary Business segment. At June 30, 2003, the Company was liable for potential contingent payments related to acquisitions in the amount of $693 million. During the second quarter and first six months of 2003, the Company paid $5 million and $26 million for contingent payments related to acquisitions made in prior years. The pro forma effect of the 2003 acquisitions is not material to year to date 2003 net income. 2003 - ---- On May 1, 2003, the Company acquired Credit Suisse First Boston's Pershing unit, headquartered in Jersey City, New Jersey. Pershing is a leading global provider of correspondent clearing services and outsourcing solutions for broker-dealers, asset managers and other financial intermediaries. Pershing had 3,677 employees worldwide at 13 locations in the U.S., Europe and Asia on June 30, 2003. The Company paid a purchase price of $2 billion in cash, with the premium to book value of $1.3 billion, which may be adjusted upwards by up to $50 million if certain revenue targets are met in 2003. The Company financed the purchase price through settlement of its forward sale of 40 million common shares in exchange for approximately $1 billion. The remainder of the purchase price was financed using long-term debt. The acquisition was accounted for under the purchase method of accounting in accordance with SFAS 141,"Business Combinations". The purchase price of $2 billion was allocated as follows: goodwill $0.6 billion, customer relationships $0.4 billion, trademarks $0.4 billion, and other tangible assets $0.6 billion. The results of Pershing are included in the accompanying statement of income for the period from May 1, 2003 through June 30, 2003. The Company expects the acquisition to be dilutive to its earnings by approximately $0.02 per share in 2003 (not including dilution of approximately $0.07 per share from a 2003 integration charge associated with the acquisition), and accretive by at least $0.02 to $0.03 per share in 2004. In the second quarter 2003, the Company acquired Capital Resource Financial Services, LLC (CRFS), a Chicago-based provider of commission recapture, transition management and third-party services to plan sponsors and investment managers. This acquisition adds new clients in execution services and improves market coverage in the Chicago area/Midwest. It will be folded into BNY Brokerage, part of BNY Securities Group. In the second quarter 2003, the Company acquired the corporate trust business of INTRUST Bank, N.A., headquartered in Wichita, Kansas. The transaction involves the transfer of more than 300 bond trust and agency appointments for corporations and municipalities in Kansas and the surrounding states. Two other transactions announced in 2002 closed in early 2003. In January 2003, the Company acquired the back-office clearance and settlement capabilities of Tilney Investment Management through the acquisition of certain assets. This acquisition based in Liverpool, England, expands the Company's United Kingdom correspondent clearing capability. In February 2003, the Company acquired the stock of International Fund Administration Ltd. (IFA), a Bermuda-based, alternative investment fund administrator. IFA offers service solutions for alternative investments, including hedge funds, and will offer services to funds domiciled in Bermuda, Cayman Islands, Ireland, Jersey, Luxembourg and the United States. 4. Goodwill and Intangibles ------------------------ Goodwill by segment as of June 30, 2003 is as follows: 51 Servicing and Fiduciary Corporate Retail Financial Consolidated (In millions) Businesses Banking Banking Markets Total ---------- --------- ------- --------- ----------- Balance as of June 30, 2003 $3,009 $31 $109 $ - $3,149 ====== === ==== === ====== The Company's business segments are tested annually for goodwill impairment. The Company completed its initial evaluation of goodwill for impairment in 2002 and its annual evaluation in 2003 and 2002 and determined that no impairment loss was required. Intangible Assets - --------------------- Weighted Gross Net Average (In millions) Carrying Accumulated Carrying Amortization Amount Amortization Amount Period in Years -------- ------------ -------- --------------- Trade Names $370 $ - $370 Indefinite Life Other Intangible Assets 497 43 454 16 The aggregate amortization expense of intangibles was $6 million and $2 million for the quarters ended June 30, 2003 and 2002, respectively. The aggregate amortization expense of intangibles was $9 million and $4 million for the six months ended June 30, 2003 and 2002, respectively. Estimated amortization expense for the next five years is as follows: For the Year Ended Amortization (In millions) December 31, Expense ------------------ ------------ 2003 $28 2004 35 2005 35 2006 35 2007 35 5. 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, in conjunction with the Risk 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 the present value of the expected future cash flows from borrowers, the market value of the loan, or the fair value of the collateral. 52 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. Transactions in the allowance for credit losses are summarized as follows:
Six months ended June 30, (In millions) 2003 2002 ---- ---- Balance, Beginning of Period $831 $616 Charge-Offs (93) (76) Recoveries 6 6 ---- ---- Net Charge-Offs (87) (70) Provision 80 70 ---- ---- Balance, End of Period $824 $616 ==== ====
6. Capital Transactions -------------------- In connection with the acquisition of Pershing on May 1, 2003, the Company settled its forward sale of 40 million common shares in exchange for approximately $1 billion. The Company issued $108 million of subordinated debt in the second quarter of 2003 and $530 million for the first six months of 2003. In April 2003, the Company sold $350 million of 5.95% trust preferred securities and called for redemption its $300 million 7.05% Series D Fund Preferred Securities. At July 31, 2003, the Company has a registration statement with a remaining capacity of approximately $1,055 million of debt, preferred stock, preferred trust securities, or common stock. 7. Earnings Per Share ------------------ The following table illustrates the computations of basic and diluted earnings per share:
Three Months Ended Six Months Ended June 30, June 30, (In millions, except per share amounts) 2003 2002 2003 2002 ---- ---- ---- ---- Net Income (1) $295 $361 $590 $723 ==== ==== ==== ==== Basic Weighted Average Shares Outstanding 751 722 736 722 Shares Issuable on Exercise of Employee Stock Options 6 7 6 7 ---- ---- ---- ---- Diluted Weighted Average Shares Outstanding 757 729 742 729 ==== ==== ==== ==== Basic Earnings Per Share: $0.39 $0.50 $0.80 $1.00 Diluted Earnings Per Share: 0.39 0.50 0.80 0.99 (1) Net Income, net income available to common shareholders and diluted net income are the same for all periods presented.
53 8. 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. A summary of the notional amount of the Company's off-balance-sheet credit transactions, net of participations, at June 30, 2003 and December 31, 2002 follows: Off-Balance-Sheet Credit Risks June 30, December 31, In millions 2003 2002 - ----------- --------- ------------ Lending Commitments $ 36,203 $ 40,330 Standby Letters of Credit, net 10,044 9,577 Commercial Letters of Credit 1,168 1,052 Securities Lending Indemnifications 161,911 138,264 Standby Bond Purchase Agreements 1,531 2,587 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. The allowance for credit losses allocated to undrawn commitments at June 30, 2003 and December 31, 2002 was $100 million and $117 million. In securities lending transactions, the Company generally requires the borrower to provide 102% cash collateral which is monitored on a daily basis, thus reducing credit risk. Security lending transactions are generally entered into only with highly rated counterparties. At June 30, 2003 and December 31, 2002, securities lending indemnifications were secured by collateral of $165.1 billion and $142.5 billion. 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 $0.6 billion and $0.5 billion that were collateralized with cash and securities at June 30, 2003 and December 31, 2002. At June 30, 2003, approximately $6.9 billion of the standbys will expire within one year, and the balance between one to five years. The allowance for credit losses allocated to letters of credit at June 30, 2003 and December 31, 2002 was $40 million. At June 30, 2003, the notional amounts and credit exposures for the Company's credit derivatives swaps were $1,801 million and $4 million, compared to $1,818 million and $6 million at December 31, 2002. Other In the ordinary course of business, the Company makes certain investments that have tax consequences. From time to time, the IRS may question or challenge the tax position taken by the Company. 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 its tax position related to these transactions was proper based upon applicable statutes, regulations and case law and that it should prevail with respect to these challenges. However, a court, other judicial or administrative authority, if presented with the transactions could disagree. The Company intends to defend its position vigorously in accordance with its view of the law controlling these investments. 54 The Company has also entered into two investments that produce synthetic fuel from coal byproducts. Section 29 of the Internal Revenue Code provides a tax credit for these types of transactions. Recently the IRS has publicly indicated that it plans to conduct independent research at several leading sponsors of these investments to verify that the chemical changes required to achieve the tax credit are in fact taking place. Both the Company's investments have an ongoing program for testing production in order to verify that the required chemical change occurs, and an independent testing laboratory provides documentation attesting to this result. In addition, both investments were reviewed by the IRS and were issued favorable private letter rulings as to the investments' qualification for Section 29 credit purposes. Accordingly, the Company believes its tax position is proper as it relates to these investments and that it should prevail if challenged. The Company currently believes it has adequate tax reserves to cover these and other potential tax exposures the IRS could raise. In the ordinary course of business, there are various claims pending against the Company and its subsidiaries. In the opinion of management, liabilities arising from such claims, if any, would not have a material effect upon the Company's consolidated financial statements. See "Legal Proceedings" under Part 2, Item 1 for further details. 55 QUARTERLY REPORT ON FORM 10-Q THE BANK OF NEW YORK COMPANY, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2003 Commission file number 1-6152 THE BANK OF NEW YORK COMPANY, INC. Incorporated in the State of New York I.R.S. Employer Identification No. 13-2614959 Address: One Wall Street New York, New York 10286 Telephone: (212) 495-1784 As of July 31, 2003, The Bank of New York Company, Inc. had 772,585,506 shares of common stock ($7.50 par value) outstanding. The Bank of New York Company, Inc. (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months(or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. The registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). The following sections of the Financial Review set forth in the cross- reference index are incorporated in the Quarterly Report on Form 10-Q. Cross-reference Page(s) - ---------------------------------------------------------------------- PART I FINANCIAL INFORMATION Item 1 Financial Statements Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002 43 Consolidated Statements of Income for the three months and six months ended June 30, 2003 and 2002 44 Consolidated Statement of Changes in Shareholders' Equity for the six months ended June 30, 2003 45 Consolidated Statement of Cash Flows for the six months ended June 30, 2003 and 2002 46 Notes to Consolidated Financial Statements 47 - 54 Consolidated Average Balance Sheet and Net Interest Analysis 39 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 2 - 42 Item 3 Quantitative and Qualitative Disclosures About Market Risk 36 - 38 56 ITEM 4. CONTROLS AND PROCEDURES Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. No significant changes were made in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. PART 2. OTHER INFORMATION Item 1. Legal Proceedings - -------------------------- The Company continues to cooperate with investigations by federal and state law enforcement and bank regulatory authorities. The investigations focus on funds transfer activities in certain accounts at the Bank, principally involving wire transfers from Russian and other sources in Eastern Europe, as well as certain other matters involving the Bank 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 the Bank), 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. Two consolidated shareholder derivative actions were filed (one in United States District Court for the Southern District of New York and one in New York Supreme Court, County of New York) against certain current and former directors and officers of the Company and the Bank. Both actions alleged that the defendants breached their fiduciary duties of due care and loyalty by (i) aggressively pursuing business with Russian banks and other business entities without implementing sufficient safeguards, and (ii) failing to supervise properly those responsible for that business. In addition, the federal complaint included allegations that certain current and former officers of the Bank and the Company participated in an improper scheme to transfer cash from Russia to off-shore accounts. The federal district court dismissed the consolidated federal action in November 2001; the Court of Appeals for the Second Circuit affirmed the district court's dismissal on February 12, 2003, and plaintiffs have not appealed. The parties in the state derivative action reached a settlement of the consolidated action providing for payment of $26.5 million by defendants' insurance carriers to the Company and requiring the Company and the Bank to undertake certain prophylactic measures. The state court approved the settlement on April 30, 2003, and that decision is now final. On October 24, 2000, three alleged shareholders of Inkombank, Morgenthow & Latham, New York International Insurance Group, and Oriental XL Funds, filed an action in the New York Supreme Court, New York County. The complaint alleges that (i) Bank representatives fraudulently induced plaintiffs to maintain their $40 million investment in Inkombank by concealing from the plaintiffs information about Inkombank's true financial state and the corruptness of Inkombank's senior management, and (ii) Bank representatives, including senior management, were involved in a complex scheme to loot Inkombank assets. The complaint states a cause of action for fraud, seeks $40 million, interest, costs, attorneys' fees, and unspecified punitive damages. On May 20, 2003, the Appellate Division, First Department reversed the trial court's denial of the Company and the Bank's motion to dismiss the Complaint, and entered judgment dismissing the complaint as to the Company and 57 the Bank. Plaintiffs have sought leave to appeal to the New York State Court of Appeals. The request is pending. The Company does not expect that any of the foregoing civil actions will have a material impact on the Company's consolidated financial statements. General Motors Acceptance Corporation ("GMAC") has informed the Company of claims it believes entitle it to adjustment of the purchase price it paid to the Company in the 1999 sale of BNY Financial Corporation ("BNYFC"), a factoring and asset-based finance business. These claims assert, among other things, misrepresentations with respect to certain asset valuations and income items. Although the Company and GMAC are engaged in discussions that could lead to a settlement, it is possible that GMAC will assert sizable claims against the Company if no settlement is reached. The Company believes that either a settlement will be reached soon or GMAC will commence litigation. The Company believes it has meritorious defenses to GMAC's potential claims and that a material purchase price adjustment is not warranted, and would vigorously defend its position if GMAC were to proceed against the Company. The Company has a reserve that it believes is adequate to cover the expected outcome of the case in litigation, based on probabilities of various potential outcomes. The probabilities and outcomes will be reviewed as events unfold, and it may be necessary to make future adjustments to the reserve. The Company's principal banking subsidiary, The Bank of New York (the "Bank"), is currently a defendant in two civil actions relating to RW Professional Leasing Services Corp. ("RW"), a former customer of a Long Island branch of the Bank. These actions, which arise from the conduct of an alleged fraudulent scheme by RW, allege that the Bank breached certain obligations and engaged in certain misrepresentations. The actions seek damages of approximately $46 million. The Bank believes it has meritorious defenses to these actions. Several federal criminal charges have been filed against RW, certain of its principals and other individuals. The U.S. Attorney's Office for the Eastern District of New York (the "Office") has informed the Bank that it and certain of its employees are subjects of the Office's ongoing investigation relating to RW. The Bank is cooperating fully in that investigation. 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 Vote of Security Holders - ---------------------------------------------------------- The Company held its annual meeting on May 13, 2003 at The Bank of New York at 101 Barclay St. in New York, New York. The shareholders: (1) elected thirteen persons to serve as directors of the Company; (2) ratified the appointment of Ernst & Young LLP as the Company's independent public accountants for 2004; (3) approved a proposal with respect to the Company's 2003 Long-Term Incentive Plan; (4) approved a proposal with respect to the Company's 2004 Management Incentive Compensation Plan; and (5) defeated a shareholder proposal with respect to political contributions. 58 The number of votes cast for, against or withheld, and the number of abstentions with respect to each such matter is set forth below, as are the number of broker non-votes, where applicable. Pursuant to New York law, abstentions and broker non-votes are not counted toward the election of directors.
FOR AGAINST/WITHHELD ABSTAINED BROKER NON-VOTES (1) Election of Directors: Frank J. Biondi, Jr. 617,282,026 28,705,462 Nicholas M. Donofrio 625,853,458 20,134,030 Alan R. Griffith 632,733,819 13,253,669 Gerald L. Hassell 631,998,438 13,989,050 Richard J. Kogan 616,264,979 29,722,509 Michael J. Kowalski 633,250,680 12,736,808 John A. Luke, Jr. 624,715,135 21,272,353 John C. Malone 609,836,239 36,151,249 Paul Myners 624,766,020 21,221,468 Catherine A. Rein 625,774,497 20,212,991 Thomas A. Renyi 628,943,041 17,044,447 William C. Richardson 625,714,502 20,272,986 Brian L. Roberts 629,323,190 16,664,298 (2) Ratification of Auditors 617,797,820 23,133,382 5,056,286 (3) Approval of Proposal With Respect to 2003 Long-Term Incentive Plan 402,649,864 135,881,379 7,942,349 99,513,896 (4) Approval of Proposal With Respect to 2004 Management Incentive Compensation Plan 589,707,207 46,504,836 9,775,445 (5) Approval of Shareholder Proposal With Respect to Political Contributions 25,147,921 481,513,447 39,812,224 99,513,896
Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) The exhibits filed as part of this report are as follows: Exhibit 3(ii) - By-laws of the registrant. Exhibit 12 - Statement Re: Ratio of Earnings to Fixed Charges for the Three Months and Six Months Ended June 30, 2003 and 2002. Exhibit 31 - Certification of Chairman and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.1 - Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32 - Certification of Chairman and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 32.1 - Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) The Company filed the following reports on Form 8-K since March 31, 2003: On April 1, 2003, the Company filed a Form 8-K Current Report (Item 5 and 7), which report included ten exhibits in connection with the Registration Statement on Form S-3 (File Nos. 333-103003, 333-103003-01, 333-103003-02, 333-103003-03, 333-103003-04) covering the Company's Senior Subordinated Medium-Term Notes, Series F and Senior Medium-Term Notes Series E, issuable under an Indenture, dated as of October 1, 1993 between the Company and J.P.Morgan Trust Company, National Association and an Indenture, dated as of July 18, 1991 between the Company and Deutsche Bank Trust Company Americas, respectively. The exhibits consist of a Distribution Agreement dated June 26, 2002; a Distribution Agreement dated March 28, 2003; Form of the Company's Global Medium Term Fixed Rate Note; Form of the Company's Global Medium Term Floating Rate Note; Officers' Certificate dated June 26, 2002 pursuant to Sections 201 and 301 of the Senior Subordinated Indenture; Officers' 59 Certificate dated June 26, 2002 pursuant to Sections 201 and 301 of the Senior Indenture; Officers' Certificate dated March 28, 2003 pursuant to Section 301 of the Senior Subordinated Indenture; Officers' Certificate dated March 28, 2003 pursuant to Section 301 of the Senior Indenture; Opinion of counsel as to the legality of the Notes; and Consent of counsel. On April 16, 2003, the Company filed a Form 8-K Current report (Item 5, 9 and 12), which report included unaudited interim financial information and accompanying discussion for the first quarter of 2003 contained in the Company's press release dated April 16, 2003 and the Definitive agreement between Credit Suisse First Boston (USA),Inc. and The Bank of New York Company, Inc. for the acquisition of the Pershing unit of Credit Suisse First Boston (USA), Inc. On May 2, 2003, the Company filed a Form 8-K Current report (Item 5 and 7), which report included eight exhibits in connection with the issuance by BNY Capital V (the "Trust") of 14,000,000 of its 5.95% Trust Preferred Securities, Series F, which represent beneficial interests in the Trust, in a public offering registered under the Securities Act of 1933, as amended (Registration Statement Nos. 333-103003, 333-103003-1, 333-103003-02, 333- 103003-03, 333-103003-04). The exhibits consist of the Pricing agreement dated April 22, 2003; Letter Agreement dated April 30, 2003; Junior Subordinated Indenture dated December 26, 1996; Specimen of the 5.95% Junior Subordinated Deferrable Interest Debentures, Series F; Amended and Restated Trust Agreement dated April 30, 2003; Specimen of the 5.95% Trust Preferred Securities, Series F, of BNY Capital V; Guarantee Agreement dated April 30, 2003; and Agreement as to Expenses and Liabilities dated April 30, 2003. On May 14, 2003, the Company filed a Form 8-K Current report (Item 9), which report included the certifications required by the Securities and Exchange Commission pursuant to 18 U.S.C. Section 1350. On June 18, 2003, the Company filed a Form 8-K Current report (Item 9), which report included a press release dated June 18, 2003, providing an update with respect to its acquisition of Pershing LLC. On July 17, 2003, the Company filed a Form 8-K Current report (Item 5, 7 and 12), which report included unaudited interim financial information and accompanying discussion for the second quarter of 2003 contained in the Company's press release dated July 17, 2003. 60 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. THE BANK OF NEW YORK COMPANY, INC. ---------------------------------- (Registrant) Date: August 13, 2003 By: /s/ Thomas J. Mastro --------------------------------- Name: Thomas J. Mastro Title: Comptroller 61 EXHIBIT INDEX ------------- Exhibit Description - ------- ----------- 3(ii) By-laws of the registrant. 12 Ratio of Earnings to Fixed Charges for the Three Months and Six Months Ended June 30, 2003 and 2002. 31 Certification of Chairman and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.1 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certification of Chairman and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. EX-3 3 r2q03ex3ii.txt EX-3 Exhibit 3(ii) BY-LAWS THE BANK OF NEW YORK COMPANY, INC. BY-LAWS of The Bank of New York Company, Inc. As amended through May 13, 2003 Table of Contents Page No. ARTICLE I Offices 1 SECTION 1.1 Principal Office 1 SECTION 1.2. Other Offices 1 ARTICLE II Meetings of Shareholders SECTION 2.1. Place of Meeting 1 SECTION 2.2. Annual Meetings 1 SECTION 2.3. Special Meetings 1 SECTION 2.4. Notice of Meetings 1 SECTION 2.5. Waiver of Notice 2 SECTION 2.6. Quorum 2 SECTION 2.7. Organization 2 SECTION 2.8. Voting and Proxies 2 SECTION 2.9. Inspectors 4 SECTION 2.10. Stockholder Proposals and Nominations 4 ARTICLE III Board of Directors SECTION 3.1. General Powers 6 SECTION 3.2. Number 6 SECTION 3.3. Qualifications 6 SECTION 3.4. Election and Term 6 SECTION 3.5. Resignations 6 SECTION 3.6. Removal 7 SECTION 3.7. Newly Created Directorships and Vacancies 7 SECTION 3.8. Time and Place of Meetings; Content of Notice, if any 7 SECTION 3.9. Annual Meeting 7 SECTION 3.10. Regular Meetings 7 SECTION 3.11. Special Meetings 7 SECTION 3.12. Quorum and Manner of Acting 8 SECTION 3.13. Organization 8 SECTION 3.14. Compensation 8 SECTION 3.15. Interest of Directors and Officers in Transactions 9 ARTICLE IV Executive Committee SECTION 4.1. How Constituted 10 SECTION 4.2. Term of Office 10 SECTION 4.3. Vacancies 10 SECTION 4.4. Powers 10 SECTION 4.5. Resignations 11 SECTION 4.6. Removal 11 SECTION 4.7. Quorum and Manner of Acting 11 SECTION 4.8. Alternate Members 11 ARTICLE V Other Committees SECTION 5.1. Other Committees of Directors 11 SECTION 5.2. Other Committees of Directors, Officers and/or Other Persons 12 ARTICLE VI Officers SECTION 6.1. Number and Qualifications 12 SECTION 6.2. Annually Elected Officers 12 SECTION 6.3. Additional Officers 12 SECTION 6.4. Removal 12 SECTION 6.5. Resignations 13 SECTION 6.6. Vacancies 13 SECTION 6.7. Salaries 13 SECTION 6.8. Powers and Duties 13 ARTICLE VII Indemnification of Directors and Officers SECTION 7.1. Indemnification 13 ARTICLE VIII Contracts, Checks, Drafts, etc. SECTION 8.1. Contracts, etc. 16 SECTION 8.2. Checks, Drafts, etc. 16 SECTION 8.3. Securities of Other Corporations 16 ARTICLE IX Shares of Stock SECTION 9 1. Certificates for Shares of Stock 16 SECTION 9.2. Transfer of Shares of Stock 17 SECTION 9.3. Registered Holders 17 SECTION 9.4. Lost, Stolen or Destroyed Share Certificates 17 SECTION 9.5. Record Date 18 SECTION 9.6. Regulations, Transfer Agents and Registrars 18 ARTICLE X Seal SECTION 10.1. Seal 18 ARTICLE XI Fiscal Year SECTION 11.1. Fiscal Year 18 ARTICLE XII Books SECTION 12.1. Books 18 ARTICLE XIII Amendments SECTION 13.1. Amendments 19 1 BY-LAWS of The Bank of New York Company, Inc. As Amended through May 13, 2003 ARTICLE I OFFICES SECTION 1.1. Principal Office. The principal office of The Bank of New York Company, Inc. (hereinafter called the Company) shall be in the City and County of New York. SECTION 1.2. Other Offices. The Company may have other offices at such other places as the Board of Directors of the Company (hereinafter called the Board) may from time to time determine and as shall be legally authorized. ARTICLE II MEETINGS OF SHAREHOLDERS SECTION 2.1. Place of Meeting. Each meeting of the shareholders of the Company (hereinafter called the shareholders) shall be held at the principal office of the Company or at such other place, within or without the State of New York, as shall be specified in the notice of such meeting. SECTION 2.2. Annual Meetings. The annual meeting of the shareholders for the election of directors and the transaction of such other business as properly may be brought before such meeting shall be held on such date as may be designated by the Board from time to time, at such hour as may be specified in the notice of such meeting. SECTION 2.3. Special Meetings. A special meeting of the shareholders for any purpose or purposes may be called at any time by order of the Board or by the Chairman of the Board (hereinafter called the Chairman) or, in his absence, the President. SECTION 2.4. Notice of Meetings. Notice of each meeting of the shareholders shall be in writing and signed by the Chairman, the President or the Secretary. Such notice shall state the purpose or purposes for which such meeting is called and the place, date and hour of the meeting, and, unless it is the annual meeting, shall indicate that it is being issued by or at the direction of the person or persons calling the meeting. If, at any meeting, action is proposed to be taken which would, if taken, entitle shareholders who comply with applicable requirements of law to receive payment for their shares, the notice of such meeting shall include a statement of that purpose and to that effect. Except as otherwise provided by law, a copy of the notice of any meeting shall be given, personally or by mail, not less than ten nor more than fifty days before such meeting, to each shareholder entitled to vote at such meeting. If mailed, such notice shall be deemed to have been given when deposited in the United States mail, with postage thereon prepaid, directed to the shareholder at his address as it appears on the record of shareholders of the Company, or, if he shall have filed with the Secretary a written request that notices to him be mailed to some other address, then directed to him at such other address. Unless the Board fixes a new record date for an adjourned meeting of the shareholders, notice thereof need not be given if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken. Any previously scheduled meeting of the shareholders may be postponed, and (unless the Certificate of Incorporation otherwise provides) any special meeting of the shareholders may be canceled, by resolution of the Board of Directors upon public notice given prior to the time previously scheduled for such meeting of shareholders. 2 SECTION 2.5. Waiver of Notice. Notice of any meeting of the shareholders need not be given to any shareholder who submits a signed waiver of notice, in person or by proxy, whether before or after the meeting, and the attendance of any shareholder at a meeting, in person or by proxy, without protesting prior to the conclusion thereof the lack of notice of such meeting, shall constitute a waiver of notice thereof by him. SECTION 2.6. Quorum. Except as otherwise provided by law, at all meetings of the shareholders the presence, in person or by proxy, of the holders of a majority of the shares of the Company entitled to vote thereat shall be necessary to constitute, and shall constitute, a quorum for the transaction of business. When a quorum is once present to organize a meeting, it is not broken by the subsequent withdrawal of any shareholder. In the absence of a quorum at any such meeting or any adjournment or adjournments thereof, a majority in voting interest of the shareholders present in person or by proxy and entitled to vote at such meeting may adjourn such meeting from time to time and from place to place until a quorum shall be present thereat. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally called if a quorum then had been present. SECTION 2.7. Organization. At each meeting of the shareholders, the Chairman or, in his absence, the President or, in his absence, such person as may be designated by the Board or, in the absence of any of the foregoing, a person chosen for the purpose by a majority in voting interest of the shareholders present in person or by proxy and entitled to vote at such meeting, shall act as chairman thereof and preside thereat; and the Secretary or, in his absence, the person whom the chairman of such meeting shall appoint, shall act as secretary of such meeting and keep the minutes thereof. The person presiding at the meeting shall establish the rules for the conduct of the meeting, including, without limitation, the order of consideration of matters to be voted upon by the shareholders. Except as otherwise provided by law, the Certificate of Incorporation or these By-laws, the person presiding at the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in these By-laws and, if any proposed nomination or business is not in compliance with these By-laws, to declare that such proposal or nomination shall be disregarded. SECTION 2.8. Voting and Proxies. Subject to the provisions of Section 9.5 of these By-laws and except as otherwise provided in this Section or by law, every shareholder of record of the Company shall be entitled at every meeting of the shareholders to one vote in person or by proxy for every share of stock of the Company standing in his name on the record of shareholders. The person presiding at the meeting shall fix and announce at the meeting the date and time of the opening and the closing of the polls for each matter upon which shareholders will vote at the meeting. Treasury shares as of the record date and shares held as of the record date by another domestic or foreign corporation of any type or kind, if a majority of the shares entitled to vote in the election of directors of such other corporation is held as of the record date by the Company, shall not be shares entitled to vote or to be counted in determining the total number of outstanding shares. Shares held by an administrator, executor, guardian, conservator, committee or other fiduciary, except a trustee, may be voted by him or it, either in person or by proxy, without transfer of such shares into his or its name. Shares held by a trustee may be voted by him or it, either in person or 3 by proxy, only after the shares have been transferred into his or its name as trustee or into the name of his or its nominee. Shares standing in the name of another domestic or foreign corporation of any type or kind may be voted by such officer, agent or proxy as the by-laws of such corporation may provide, or, in the absence of such provision, as the board of directors of such corporation may determine. A shareholder shall not sell his vote or issue a proxy to vote to any person for any sum of money or anything of value except as permitted by law. Every proxy must be signed by the shareholder or by his duly authorized attorney-in-fact. No proxy shall be valid after the expiration of eleven months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the shareholder executing it, except as otherwise provided by law. The authority of the holder of a proxy to act shall not be revoked by the incompetence or death of the shareholder who executed the proxy unless, before the authority is exercised, written notice of an adjudication of such incompetence or of such death is received by the Secretary or any Assistant Secretary. At all meetings of the shareholders, a quorum being present, all matters, except as otherwise provided by law, the Certificate of Incorporation of the Company or Section 3.4 of these By-laws, shall be authorized by a majority of the votes cast at the meeting by the shareholders present in person or by proxy and entitled to vote thereon. Unless demanded by a shareholder or shareholders present in person or by proxy at any meeting of the shareholders and owning not less than ten percent in voting interest of the outstanding stock of the Company entitled to be voted thereat, or unless so directed by the chairman of the meeting, the vote thereat on any question need not be by ballot, except in the case of the election of directors. A list of shareholders as of the record date for the meeting, certified by the Secretary or an Assistant Secretary responsible for its preparation or by a transfer agent for the stock of the Company, shall be produced at any meeting of the shareholders upon the request thereat or prior thereto of any shareholder. If the right to vote at any meeting is challenged, the inspectors appointed pursuant to Section 2.9 of these By-laws, or the person presiding thereat, shall require such list of shareholders to be produced as evidence of the right of the persons challenged to vote at such meeting, and all persons who appear from such list to be shareholders entitled to vote thereat may vote at such meeting. SECTION 2.9. Inspectors. The Board, in advance of any meeting of the shareholders, may appoint one or more persons to act as inspectors (with respect to any election to be held, or otherwise) at the meeting or any adjournment thereof. If inspectors are not so appointed, the person presiding at the meeting of the shareholders may, and if so requested by a shareholder entitled to vote thereat shall, appoint one or more persons to act as inspectors. In case any person appointed as an inspector fails to appear or act, the vacancy may be filled by appointment made by the Board in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. At such meeting the inspectors shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum and the validity and effect of proxies, and 4 shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such other acts as are proper to conduct the election or vote with fairness to all shareholders. On request of the person presiding at the meeting or any shareholder entitled to vote thereat, the inspectors shall make a report in writing of any challenge, question or matter determined by them and execute a certificate of any fact found by them. Any report or certificate made by them shall be prima facie evidence of the facts stated and of the vote as certified by them. SECTION 2.10. Stockholder Proposals and Nominations. (a) Annual or Special Meetings of Shareholders. At any annual or special meeting of shareholders, proposals by shareholders and persons nominated for election as directors by shareholders shall be considered only if advance notice thereof has been timely given as provided herein and such proposals or nominations are otherwise proper for consideration under applicable law and the Certificate of Incorporation and By-laws of the Company. Notice of any proposal to be presented by any shareholder or of the name of any person to be nominated by any shareholder for election as a director of the Company at any meeting of shareholders shall be delivered to the Secretary of the Company at its principal executive office (i) in the case of an annual meeting, not fewer than 90 nor more than 120 days prior to the anniversary date of the immediately preceding meeting, provided that in the event that the annual meeting is called on a date that is not within thirty days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later that the close of business on the fifteenth day following the earlier of the day on which notice of the date of the annual meeting was mailed or public disclosure of the date of the annual meeting was made; and (ii) in the case of a special meeting at which directors are to be elected, not later than the close of business on the tenth day following the earlier of the day on which notice of the date of the meeting was mailed and public announcement was made. Any shareholder who gives notice of any such proposal shall deliver therewith the text of the proposal to be presented and a brief written statement of the reasons why such shareholder favors the proposal and setting forth such shareholder's name and address, the number and class of all shares of each class of stock of the Company beneficially owned by such shareholder and any material interest of such shareholder in the proposal (other than as a shareholder generally) and whether such person has received any financial assistance, funding or other consideration from any other person in respect of the proposal (and the details thereof). Any shareholder desiring to nominate any person for election as a director of the Company shall deliver with such notice (i) a statement in writing setting forth the name of the person to be nominated, the number and class of all shares of each class of stock of the Company beneficially owned by such person, the information regarding such person required by paragraphs (a), (e) and (f) of Item 401 of Regulation S-K adopted by the Securities and Exchange Commission (or the corresponding provisions of any regulation subsequently adopted by the Securities and Exchange Commission applicable to the Company), (ii) such person's signed consent to serve as a director of the Company if elected, (iii) such shareholder's name and address, (iv) a confirmation of the number and class of all shares of each class of stock of the Company beneficially owned by such shareholder, (v) a confirmation that any governmental approvals required in connection with such person's nomination, election or taking office as a director of the Company have been obtained by such stockholder and/or nominee, as applicable, and are in full force and effect as of the date of submission of such notice of nomination and (vi) a statement as to whether such person or shareholder received any financial assistance, funding or consideration from any other person in respect of the nomination (and the details thereof). As used herein, shares "beneficially 5 owned" shall include all shares that such person, together with such person's affiliates and associates (as defined in Rule 12b-2 under the Securities Exchange Act of 1934), may be deemed to beneficially own pursuant to Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, as well as all shares of which such person, together with such person's affiliates and associates, has the right to become the beneficial owner pursuant to any agreement or understanding, or upon the exercise of warrants, options or rights to convert or exchange (whether such rights are exercisable immediately or only after the passage of time or the occurrence of conditions). The person presiding at the meeting, in addition to making any other determinations that may be appropriate to the conduct of the meeting, shall determine whether such notice has been duly given and shall direct that proposals and nominees not be considered if such notice has not been given. In no event shall the public announcement of an adjournment of an annual or special meeting commence a new time period for the giving of shareholders notice as described above. (b) Eligibility of Directors. Only such persons who are nominated in accordance with the procedures set forth in this By-law shall be eligible to serve as directors and only such business shall be conducted at a meeting of shareholders as shall have been brought before a meeting in accordance with the procedures set forth in this By-law. (c) Public Announcement Defined. For purposes of this By-law, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Company with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (d) Exchange Act Matters. Notwithstanding the foregoing provisions of this By-law, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-law. Nothing in this By-law shall be deemed to affect any rights (i) of shareholders to request inclusion of proposals in the Company's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders of any series of preferred stock of the Company, if any, to elect directors under specified circumstances. ARTICLE III BOARD OF DIRECTORS SECTION 3.1. General Powers. The business and affairs of the Company shall be managed by the Board. SECTION 3.2. Number. The Board shall consist of such number of directors, not less than nine, as shall be fixed from time to time by resolution adopted by a majority of the total number of directors which the Company would have, prior to any increase or decrease, if there were no vacancies on the Board. The tenure of office of a director shall not be affected by any decrease in the number of directors so made by the Board. SECTION 3.3. Qualifications. No person shall be eligible to serve as a director unless, when his term commences, he is not less than eighteen years of age nor (except in the case of those persons who were named as directors in the Statement of Organization of the Company or who were members of the Board of Trustees of The Bank of New York prior to April 30, 1957) more than seventy years of age. Directors need not be shareholders. 6 SECTION 3.4. Election and Term. At each annual meeting of the shareholders, directors shall be elected to hold office until the next annual meeting. Subject to the provisions of these By-laws, each director shall hold office until the expiration of the term for which he is elected and until his successor has been elected and qualified. Directors shall be elected by the shareholders, except as otherwise provided by law or the Certificate of Incorporation of the Company or these By-laws. In order to be elected as a director by the shareholders, a person must, except as otherwise provided by law, receive a plurality of the votes cast by the holders of shares entitled to vote thereon at a meeting of the shareholders for the election of directors at which a quorum shall be present. SECTION 3.5. Resignations. Any director of the Company may resign at any time by giving written notice to the Chairman, the President or the Secretary. Such resignation shall take effect at the date of receipt of such notice, or at any later time specified therein, and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 3.6. Removal. Any or all of the directors may be removed for cause by vote of the shareholders or by action of the Board. SECTION 3.7. Newly Created Directorships and Vacancies. Newly created directorships resulting from an increase in the number of directors and vacancies occurring in the Board for any reason, shall be filled by election by the affirmative vote of a majority of the directors then in office, even though less than a quorum exists. A director elected to fill a vacancy, or to fill a newly created directorship, shall be elected to hold office until the next annual meeting of the shareholders and until his successor has been elected and qualified. SECTION 3.8. Time and Place of Meetings; Content of Notice, if any. Except as otherwise provided in these By-laws, the Board may hold any meeting within or without the State of New York at such place, and at such time, as from time to time may be designated by resolution of the Board or as shall be specified in the notice of such meeting or in the waivers of notice thereof signed by the directors at the time in office (other than any director who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice thereof to him). Except as otherwise specifically provided by law or in these By-laws, any notice or waiver of notice of any meeting of the Board need not contain any statement of the purpose or purposes of the meeting or any specification of the business to be transacted thereat, but shall specify the time and place thereof. SECTION 3.9. Annual Meeting. Following each annual meeting of the shareholders for the election of directors, the Board shall meet for the purposes, without limitation, of organization and the annual election and appointment of officers. The meeting of the Board to be held for such purposes shall be the regular meeting of the Board next following each such annual meeting of the shareholders, unless a special meeting of the Board shall in the meantime have been duly called and held for such purposes. SECTION 3.10. Regular Meetings. Regular meetings of the Board may be held at such time and place as shall from time to time be specified in a resolution of the Board, and no notice thereof need be given. SECTION 3.11. Special Meetings. A special meeting of the Board may be called at any time by the Chairman or, in his absence, by the President and 7 shall be called by the Chairman, the President or the Secretary upon the written request of any two directors. Except as otherwise provided by law, notice of each such meeting shall be given to each director by mail, addressed to him at his residence or usual place of business, not later than noon, New York time, on the third day prior to the day on which the meeting is to be held, or shall be given to him, so addressed, by telegram or cable or radiogram, or given to him personally by messenger or telephone, not later than noon, New York time, on the day before the day on which such meeting is to be held. Notices are deemed to have been given by mail, when deposited in the United States mail, by telegram or cable or radiogram at the time of filing, by messenger at the time of delivery, and by telephone at the time of the telephone call. Notice of such meeting need not be given to any director who submits a signed waiver of notice whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to him. SECTION 3.12. Quorum and Manner of Acting. At all meetings of the Board the presence of one-third of the entire Board shall be necessary to constitute a quorum for the transaction of business thereat, and an act taken by vote of a majority of the directors present at the time of the vote, if a quorum is present at such time, shall be the act of the Board, except as otherwise provided by law or these By-laws. Members of the Board may participate in a meeting of the Board by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. Any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents by the members of the Board shall be filed with the minutes of the proceedings of the Board. A majority of the directors present, whether or not a quorum shall be present, may adjourn any meeting from time to time and from place to place. Notice of any adjournment of a meeting to another time or place shall be given in the manner described in Section 3.11 of these By-laws to the directors who were not present at the time of the adjournment and, unless such time and place are announced at the meeting, to the other directors. At any such adjourned meeting at which a quorum shall be present any business may be transacted which might have been transacted at the meeting as originally called if a quorum then had been present. The directors shall act only as a Board and the individual directors shall have no power as such. SECTION 3.13. Organization. At each meeting of the Board, the Chairman or, in his absence, the President or, in his absence, such person as may be designated by the Board or, in the absence of any of the foregoing, a director chosen by a majority of the directors present, shall act as chairman thereof and preside thereat; and the Secretary or, in his absence, the person whom the chairman of such meeting shall appoint, shall act as secretary of such meeting and keep the minutes thereof. SECTION 3.14. Compensation. Each director, other than officers of the Company or any of its subsidiaries, shall be paid such compensation as the Board from time to time may determine for his services as director or as a member of any committee appointed by or pursuant to the authorization of the Board, and shall, in addition, be reimbursed for such transportation and other 8 expenses as shall be incurred by him in the performance of his duties. Nothing in this Section shall preclude any director from serving the Company in any other capacity and receiving compensation therefor. SECTION 3.15. Interest of Directors and Officers in Transactions. In the absence of fraud, no contract or other transaction between the Company and one or more of its directors, or between the Company and any other corporation, firm, association or other entity in which one or more of its directors or officers are directors, or have a substantial financial interest, shall be either void or voidable, irrespective of whether such interested director or directors are present at the meeting of the Board, or of a committee thereof, which approves such contract or transaction and irrespective of whether his or their votes are counted for such purpose: (a) if the material facts as to such director's interest in such contract or transaction and as to any such common directorship, officership or financial interest are disclosed in good faith or known to the Board, or a committee thereof, and the Board or committee approves such contract or transaction by a vote sufficient for such purpose without counting the vote of such interested director or, if the votes of the disinterested directors are insufficient to constitute an act of the Board under Section 3.12 of these By- laws, by unanimous vote of the disinterested directors; or (b) if the material facts as to such director's interest in such contract or transaction and as to any such common directorship, officership or financial interest are disclosed in good faith or known to the shareholders entitled to vote thereon, and such contract or transaction is approved by vote of such shareholders. If there was no such disclosure or knowledge, or if the vote of such interested director was necessary for the approval of such contract or transaction at a meeting of the Board or committee at which it was approved, the Company may avoid the contract or transaction unless the party or parties thereto shall establish affirmatively that the contract or transaction was fair and reasonable as to the Company at the time it was approved by the Board, a committee or the shareholders. Notwithstanding the foregoing, no loan, except advances in connection with indemnification, shall be made by the Company to any director unless it is authorized by vote of the shareholders without counting any shares of the director who would be the borrower. 9 ARTICLE IV EXECUTIVE COMMITTEE SECTION 4.1. How Constituted. The Board, by resolution adopted by a majority of the entire Board, may appoint an Executive Committee, which shall consist of the Chairman, the President, and not less than one other director. The Executive Committee shall serve at the pleasure of the Board. SECTION 4.2. Term of Office. Each member of the Executive Committee, provided he continues to be a director, shall, subject to the provisions of this Article, continue in office as such member until the next annual meeting of the Board and until his successor, if any, shall have been appointed, or until he shall resign or shall have been removed in the manner hereinafter provided. SECTION 4.3. Vacancies. In case any vacancy shall exist in the Executive Committee resulting from any cause whatsoever, the Board may fill such vacancy by resolution adopted by a majority of the entire Board. SECTION 4.4. Powers. While the Board is not in session, the Executive Committee shall have and may exercise (unless the Board shall otherwise determine) all the authority and powers of the Board in the management of the business and affairs of the Company, including generally and without limitation all powers conferred upon or vested in the Board by law, by the Certificate of Incorporation of the Company, by these By-laws or otherwise, excepting the powers conferred upon the Board by this Article, and except that the Executive Committee shall not have authority as to the following matters: (a) the submission to shareholders of any action for which shareholders' authorization is required; (b) the filling of vacancies in the Board or in the Executive Committee or any other committee having any of the authority of the Board; (c) the fixing of compensation of the directors for serving on the Board or on the Executive Committee or any other committee; (d) the amendment or repeal of these By-laws, or the adoption of new By- laws; (e) the amendment or repeal of any resolution of the Board which by its terms is not amendable or repealable; (f) the removal or indemnification of directors; or (g) the taking of action which is expressly required by law to be taken at a meeting of the Board or by a specified proportion of the directors. SECTION 4.5. Resignations. Any member of the Executive Committee may resign at any time by giving written notice to the Board, the Chairman, the President or the Secretary. Such resignation shall take effect at the time of receipt of such notice or at any later time specified therein, and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 4.6. Removal. Any member of the Executive Committee, other than a member who shall at the time be the Chairman or the President, may be removed by the Board with or without cause at any time. SECTION 4.7. Quorum and Manner of Acting. A majority of the members of the Executive Committee shall be necessary to constitute a quorum, and an act 10 taken by vote of a majority of the members of the Committee present at the time of the vote, if a quorum is present at such time, shall be the act of the Committee. Members of the Executive Committee may participate in a meeting of the Committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. Any action required or permitted to be taken by the Executive Committee may be taken without a meeting if all members of the Committee consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents by the members of the Committee shall be filed with the minutes of the proceedings of the Committee. Subject to the foregoing, and unless the Board shall otherwise decide, the Executive Committee shall fix its rules of procedure, determine its action and fix the time and place of its meetings. The Executive Committee shall keep a record of its proceedings, which shall be at all times available to the directors. All action taken by the Executive Committee shall be reported to the Board at its next meeting. SECTION 4.8. Alternate Members. The Board, by resolution adopted by a majority of the entire Board, may appoint one or more directors as alternate members of the Executive Committee, to serve, in accordance with the terms of such resolution, as replacements for, and with the authority and powers of, any members of that Committee absent from any meeting thereof. ARTICLE V OTHER COMMITTEES SECTION 5.1. Other Committees of Directors. The Board, by resolution adopted by a majority of the entire Board, may from time to time designate from among its members such other committees consisting of one or more directors as it may deem advisable and grant to any such committee, to the extent provided in the resolution creating it, authority of the Board; provided, however, that no such committee shall be granted any power or authority withheld from the Executive Committee by Section 4.4 of these By- laws. Each such committee shall serve at the pleasure of the Board. All provisions of Sections 4.2, 4.3, 4.5, 4.6, 4.7 and 4.8 of these By-laws shall apply to each such committee and the members thereof with the same force and effect as if such committee were referred to in the text of such provisions in each instance in which the Executive Committee is so referred to. SECTION 5.2. Other Committees of Directors, Officers and/or Other Persons. The Board may appoint, or authorize the Chairman or, in his absence, the President to appoint, from time to time, such other committees consisting of directors, officers and/or other persons and having such powers, duties and functions in or relating to the business and affairs of the Company as the Board may determine. Each such committee and each member thereof shall serve at the pleasure of the Board and, in the case of any committee appointed by the Chairman or the President, at the pleasure of the Chairman or, in his absence, of the President. A majority of all the members of any such committee, or, in the case of any committee appointed by the Chairman or the President, the Chairman or, in his absence, the President, may determine the rules of order and procedure of such committee and the time and place of its meetings, unless the Board shall otherwise provide. ARTICLE VI OFFICERS SECTION 6.1. Number and Qualifications. The officers of the Company shall be a Chairman, a President, one or more Vice Chairmen of the Board (herein called Vice Chairman or Vice Chairmen), a Secretary, a Treasurer, and such other officers, including but not by way of limitation Vice Presidents 11 (who may include one or more Executive Vice Presidents and Senior Vice Presidents), a Comptroller and an Auditor, as may be elected or appointed in accordance with the provisions of these By-laws. The Chairman, the President and any Vice Chairmen shall be elected, and the other officers may, but need not be, elected or appointed, from among the directors. One person may hold any two or more offices and perform the duties thereof except those of President and Secretary. SECTION 6.2. Annually Elected Officers. The Chairman, the President, any Vice Chairmen, any Vice Presidents, the Secretary, the Treasurer and such other officers, if any, as the Board may determine, shall be elected by the Board at each annual meeting. Each such officer shall hold office until the next annual meeting of the Board and until his successor, if any, shall have been elected and shall have qualified, or until his death, or until he shall resign or shall be removed in the manner hereinafter provided. SECTION 6.3. Additional Officers. The Board may from time to time elect such additional officers (including Vice Chairmen and Vice Presidents) as it shall deem advisable. The Board may also delegate to the Chairman or, in his absence, the President the power to appoint such further officers as the Board shall deem advisable. Each such officer shall serve at the pleasure of the Board and, in the case of an officer appointed by the Chairman or the President, also at the pleasure of the Chairman or, in his absence, of the President. SECTION 6.4. Removal. Any officer may be removed by the Board, and an officer appointed by the Chairman or the President may be removed by the Chairman or, in his absence, the President, at any time, or his authority may be suspended by the Board or the Chairman or, in his absence, the President, with or without cause (in the latter case without prejudice to his contract rights, if any). The election or appointment of an officer shall not be deemed of itself to create contract rights. SECTION 6.5. Resignations. Any officer may resign at any time by giving written notice to the Board, the Chairman, the President or the Secretary. Such resignation shall take effect at the date of the receipt of such notice or any later date specified therein, and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 6.6. Vacancies. A vacancy from any cause in any office referred to above may be filled at any time for the unexpired portion of the term, if any, in the manner prescribed in these By-laws for regular election or appointment to such office. SECTION 6.7. Salaries. The salaries of the officers elected by the Board shall be fixed from time to time by the Board or a committee thereof designated by the Board. The salaries of the officers appointed by the Chairman or the President shall be fixed from time to time by the Board or the Chairman or, in his absence, the President. No officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the Company. SECTION 6.8. Powers and Duties. The officers of the Company shall have such authority and perform such duties in the management of the Company as may be prescribed by these By-laws or by the Board and, to the extent not so prescribed, they shall have such authority and perform such duties in the management of the Company, subject to the control of the Board, as generally pertain to their respective offices. The Chairman shall be the chief executive officer of the Company. 12 The Board may require any officer, agent or employee to give security for the faithful performance of his duties. ARTICLE VII INDEMNIFICATION OF DIRECTORS AND OFFICERS SECTION 7.1. Indemnification. Except to the extent expressly prohibited by the New York Business Corporation Law, the Company shall indemnify any person made or threatened to be made a party to any action or proceeding, whether civil or criminal, by reason of the fact that such person or such person's testator or intestate is or was a director or officer of the Company, or serves or served at the request of the Company any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity, against judgments, fines, penalties, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred in connection with such action or proceeding, or any appeal therein; provided that no such indemnification shall be made if a judgment or other final adjudication adverse to such person established that his or her acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated, or that he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled; and provided further that no such indemnification shall be required with respect to any settlement or other nonadjudicated disposition of any threatened or pending action or proceeding unless the Company has given its prior consent to such settlement or other disposition. The Company may advance or promptly reimburse upon request any person entitled to indemnification hereunder for all expenses, including attorneys' fees, reasonably incurred in defending any action or proceeding in advance of the final disposition thereof upon receipt of an undertaking by or on behalf of such person to repay such amount if such person is ultimately found not to be entitled to indemnification or, where indemnification is granted, to the extent the expenses so advanced or reimbursed exceed the amount to which such person is entitled; provided, however, that such person shall cooperate in good faith with any request by the Company that common counsel be utilized by the parties to an action or proceeding who are similarly situated unless to do so would be inappropriate due to actual or potential differing interests between or among such parties. Nothing herein shall limit or affect any right of any person otherwise than hereunder to indemnification or expenses, including attorneys' fees, under any statute, rule, regulation, certificate of incorporation, by-law, insurance policy, contract or otherwise. Anything in these By-laws to the contrary notwithstanding, no elimination of this By-law, and no amendment to this By-law adversely affecting the right of any person to indemnification or advancement of expenses hereunder, shall be effective until the 60th day following notice to such person of such action, and no elimination of or amendment to this By-law shall deprive any person of his or her rights hereunder arising out of alleged or actual occurrences, acts or failures to act prior to such 60th day. The Company shall not, except by elimination of or amendment to this By- law in a manner consistent with the preceding paragraph, take any corporate action or enter into any agreement which prohibits, or otherwise limits the rights of any person to, indemnification in accordance with the provisions of this By-law. The indemnification of any person provided by this By-law shall continue after such person has ceased to be a director or officer of the 13 Company and shall inure to the benefit of such person's heirs, executors, administrators and legal representatives. The Company is authorized to enter into agreements with any of its directors or officers extending rights to indemnification and advancement of expenses to such person to the fullest extent permitted by applicable law, but the failure to enter into any such agreement shall not affect or limit the rights of such person pursuant to this By-law, it being expressly recognized hereby that all directors or officers of the Company by serving as such after the adoption hereof, are acting in reliance hereon and that the Company is estopped to contend otherwise. In case any provision in this By-law shall be determined at any time to be unenforceable in any respect, the other provisions shall not in any way be affected or impaired thereby, and the affected provision shall be given the fullest possible enforcement in the circumstances, it being the intention of the Company to afford indemnification and advancement of expenses to its directors and officers, acting in such capacities or in the other capacities mentioned herein, to the fullest extent permitted by law. For purposes of this By-law, the Company shall be deemed to have requested a person to serve an employee benefit plan where the performance by such person of his or her duties to the Company also imposes duties on, or otherwise involves services by, such person to the plan or participants or beneficiaries of the plan, and excise taxes assessed on a person with respect to any employee benefit plan pursuant to applicable law shall be considered indemnifiable expenses. For purposes of this By-law, the terms "Company" shall include any legal successor to the Company, including any corporation which acquires all or substantially all of the assets of the Company in one or more transactions. A person who has been successful, on the merits or otherwise, in the defense of a civil or criminal action or proceeding of the character described in the first paragraph of this By-law shall be indemnified as authorized in such paragraph. Except as provided in the preceding sentence and unless ordered by a court, indemnification under this By-law shall be made by the Company if, and only if, authorized in the specific case: (1) By the Board of Directors acting by a quorum consisting of directors who are not parties to such action or proceeding upon a finding that the director or officer has met the standard of conduct set forth in the first paragraph of this By-law, or, (2) If such a quorum is not obtainable or, even if obtainable, a quorum of disinterested directors so directs; (a) by the Board of Directors upon the opinion in writing of independent legal counsel that indemnification is proper in the circumstances because the standard of conduct set forth in the first paragraph of this By-law has been met by such director or officer; or (b) by the shareholders upon a finding that the director or officer has met the applicable standard of conduct set fourth in such paragraph. If any action with respect to indemnification of directors and officers is taken by way of amendment of these By-laws, resolution of directors, or by agreement, the Company shall, not later than the next annual meeting of shareholders, unless such meeting is held within three months from the date of such action and, in any event, within fifteen months from the date of such 14 action, mail to its shareholders of record at the time entitled to vote for the election of directors a statement specifying the action taken. ARTICLE VIII CONTRACTS, CHECKS, DRAFTS, ETC. SECTION 8.1. Contracts, etc. Except as otherwise provided in these By- laws or by law, all deeds, bonds, mortgages, contracts and other instruments to be executed in the name and on behalf of the Company, either for its own account or in a fiduciary or other capacity, shall be signed by the Chairman, the President, a Vice Chairman, an Executive Vice President, a Senior Vice President, a Vice President, the Treasurer, or the Comptroller, or any other officer or officers or agent or agents of the Company designated for that purpose by the Board or by the Chairman, the President, a Vice Chairman, an Executive Vice President, a Senior Vice President or a Vice President, and the seal of the Company shall if appropriate be affixed hereto by any of such officers or the Secretary or any Assistant Secretary. SECTION 8.2. Checks, Drafts, etc. Except as otherwise provided in these By-laws or by law, all checks, drafts, bills of exchange and other orders for the payment of money, and all letters of credit, promissory notes and other instruments obligating the Company for the payment of money, shall be signed on behalf of the Company in such manner and by such person or persons as from time to time shall be determined by the Board. Except as the Board may otherwise prescribe, the Chairman, the President, a Vice Chairman, an Executive Vice President, a Senior Vice President, a Vice President, the Treasurer, the Secretary, the Comptroller, an Assistant Vice President if any, any Assistant Treasurer or any Assistant Secretary, or any other officer or officers or agent or agents to whom such power may be delegated by the Board or by the Chairman, the President, a Vice Chairman, an Executive Vice President, a Senior Vice President or a Vice President, may sign on behalf of the Company all checks, drafts, bills of exchange, letters of credit, promissory notes and other instruments obligating the Company for the payment of money, and endorse and deliver for deposit, collection or credit for account of the Company any bill of exchange, draft, check or other order for the payment of money, or any note or other instrument for the payment of money, or any bill of lading, warehouse receipt, insurance policy or other commercial document requiring endorsement for collection or endorsement on behalf of the Company. SECTION 8.3. Securities of 0ther Corporations. Securities of other corporations held by the Company may be voted by any officer designated by the Board and, in the absence of any such designation, by the Chairman, the President, a Vice Chairman, a Vice President, the Secretary, the Treasurer or the Comptroller. ARTICLE IX SHARES OF STOCK SECTION 9.1. Certificates for Shares of Stock. Each certificate for a share or shares of stock of the Company shall be in such form as shall be approved by the Board, shall be signed by the Chairman, the President, a Vice Chairman, or a Vice President, and by the Secretary, the Treasurer, an Assistant Secretary or an Assistant Treasurer, and shall be sealed with the seal of the Company or a facsimile thereof. The signatures of the officers upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar other than the Company itself or its employee. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may nevertheless be issued by the Company with the same effect as if he were such officer at the date of its issue. 15 If the Company is authorized to issue shares of more than one class, each certificate representing shares issued by the Company shall set forth upon the face or back of the certificate, or shall state that the Company will furnish to any shareholder upon request and without charge, a full statement of the designation, relative rights, preferences and limitations of the shares of each class of shares authorized to be issued and the designation, relative rights, preferences and limitations of each series of any class of preferred shares authorized to be issued so far as the same have been fixed and the authority of the Board to designate and fix the relative rights, preferences and limitations of other series. Each certificate representing shares shall state upon the face thereof: (a) that the Company is formed under the laws of the State of New York; (b) the name of the person or persons to whom issued; and (c) the number and class of shares, and the designation of the series, if any, which such certificate represents. SECTION 9.2. Transfer of Shares of Stock. A transfer of shares of stock of the Company shall be made on the record of shareholders of the Company after satisfaction of all legal prerequisites to the Company's duty to register such transfer, including the surrender of the certificate therefor which shall be canceled when the new certificate is issued. SECTION 9.3. Registered Holders. The Company shall be entitled to treat and shall be protected in treating the persons in whose names shares or any warrants, rights or options stand on the record of shareholders, warrant holders, rights holders or option holders, as the case may be, as the owners thereof for all purposes and shall not be bound to recognize any equitable or other claim to, or interest in, any such share, warrant, right or option on the part of any other person, whether or not the Company shall have notice thereof, except as expressly provided otherwise by the statutes of the State of New York. SECTION 9.4. Lost, Stolen or Destroyed Share Certificates. No certificate for shares of the Company shall be issued in place of any certificate alleged to have been lost, destroyed or wrongfully taken, except, if and to the extent required by the Board, upon: (a) production of evidence of loss, destruction or wrongful taking; (b) delivery of a bond indemnifying the Company and its agents against any claim that may be made against it or them on account of the alleged loss, destruction or wrongful taking of the replaced certificate or the issuance of the new certificate; (c) payment of the expenses of the Company and its agents incurred in connection with the issuance of the new certificate; and (d) compliance with such other reasonable requirements as may be imposed. SECTION 9.5. Record Date. For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of the shareholders or any adjournment thereof, or to express consent to or dissent from any proposal without a meeting, or for the purpose of determining 16 shareholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action, the Board may fix, in advance, a date not more than fifty days and not less than ten days before the date of such meeting, and not more than fifty days prior to any other action, as the record date for any such determination of shareholders. Upon adjournment of any meeting, the Board may but shall not be required to fix a new record date. If a record date for any such determination of shareholders is not fixed by the Board, then, the record date for such determination shall be as provided by law. SECTION 9.6. Regulations, Transfer Agents and Registrars. The Board may make such further rules and regulations as it may deem expedient, not inconsistent with these By-laws or with the Certificate of Incorporation of the Company, concerning the issue, transfer and registration of certificates for shares of stock of the Company. It may appoint one or more transfer agents and one or more registrars of transfers, and may require all certificates of stock to bear the signature of either or both. ARTICLE X SEAL SECTION 10.1. Seal. The Board may adopt a corporate seal, alter such seal at pleasure, and authorize it to be used by causing it or a facsimile to be affixed or impressed or reproduced in any other manner. ARTICLE XI FISCAL YEAR SECTION 11.1. Fiscal Year. The fiscal year of the Company shall be the calendar year. ARTICLE XII BOOKS SECTION 12.1. Books. The Company shall keep correct and complete books and records of account and shall keep minutes of the proceedings of its shareholders, the Board and the Executive Committee if any. There shall be kept at the principal office of the Company or at the office of its transfer agent or registrar, if any, in the State of New York, a record containing the names and addresses of all shareholders of the Company, the number of shares held by each and the dates when they respectively became the owners of record thereof. Any of the foregoing books, records or minutes may be in legible form or in any other form capable of being converted into legible form within a reasonable time. The Board shall have power to determine from time to time, subject to the laws of the State of New York, whether and to what extent and at what times and places and under what conditions and regulations the accounts, books, records or other documents of the Company, or any of them, shall be open to inspection, and no creditor, security holder or other person shall have any right to inspect any account, book, record or other document of the Company, except as conferred by the laws of the State of New York or these By-laws, unless and until authorized to do so by resolution of the Board or of the shareholders. 17 ARTICLE XIII AMENDMENTS SECTION 13.1. Amendments. By-laws of the Company may be adopted, amended or repealed by vote of the holders of the shares at the time entitled to vote in the election of any directors. By-laws may also be adopted, amended or repealed by the Board, by resolution adopted by a majority of the entire Board, but any By-law adopted by the Board may be amended or repealed by the shareholders entitled to vote thereon as hereinabove provided. If any By-law regulating an impending election of directors is adopted, amended or repealed by the Board, there shall be set forth in the notice of the next meeting of shareholders for the election of directors the By-law so adopted, amended or repealed, together with a concise statement of the changes made. EX-12 4 r2q02ex12.txt EX-12 EXHIBIT 12 THE BANK OF NEW YORK COMPANY, INC. Ratios of Earnings to Fixed Charges (Dollars in millions)
Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 ---- ---- ---- ---- EARNINGS - -------- Income Before Income Taxes $ 451 $ 547 $ 903 $1,093 Fixed Charges, Excluding Interest on Deposits 73 101 125 198 ------ ------ ------ ------ Income Before Income Taxes and Fixed Charges Excluding Interest on Deposits 524 648 1,028 1,291 Interest on Deposits 138 158 284 318 ------ ------ ------ ------ Income Before Income Taxes and Fixed Charges, Including Interest on Deposits $ 662 $ 806 $1,312 $1,609 ====== ====== ====== ====== FIXED CHARGES - ------------- Interest Expense, Excluding Interest on Deposits $ 59 $ 92 $ 101 $ 180 One-Third Net Rental Expense* 14 9 24 18 ------ ------ ------ ------ Total Fixed Charges, Excluding Interest on Deposits 73 101 125 198 Interest on Deposits 138 158 284 318 ------ ------ ------ ------ Total Fixed Charges, Including Interest on Deposits $ 211 $ 259 $ 409 $ 516 ====== ====== ====== ====== EARNINGS TO FIXED CHARGES RATIOS - -------------------------------- Excluding Interest on Deposits 7.18x 6.42x 8.22x 6.52x Including Interest on Deposits 3.14 3.11 3.21 3.12 *The proportion deemed representative of the interest factor.
EX-31 5 r2q03ex31.txt EX-31 Exhibit 31 CERTIFICATION OF CHAIRMAN AND CHIEF EXECUTIVE OFFICER - ------------------------------------------------------ I, Thomas A. Renyi, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Bank of New York Company, Inc.(the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2003 /s/ Thomas A. Renyi ------------------- Thomas A. Renyi Chief Executive Officer EX-31 6 r2q03ex311.txt EX-31.1 Exhibit 31.1 CERTIFICATION OF CHIEF FINANCIAL OFFICER - ---------------------------------------- I, Bruce W. Van Saun, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Bank of New York Company, Inc.(the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2003 /s/ Bruce W. Van Saun --------------------- Bruce W. Van Saun Chief Financial Officer EX-32 7 r2q03ex32.txt EX-32 Exhibit 32 Certification Pursuant to 18 U.S.C. Section 1350, the undersigned officer of The Bank of New York Company, Inc. (the "Company"), hereby certifies, that the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 13, 2003 /s/ Thomas A. Renyi ------------------- Thomas A. Renyi Chief Executive Officer The foregoing certification is being furnished solely pursuant to 18 U.S.C Section 1350 and is not being filed as part of the Report or as a separate disclosure document. EX-32 8 r2q03ex321.txt EX-32.1 Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, the undersigned officer of The Bank of New York Company, Inc. (the "Company"), hereby certifies, that the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 13, 2003 /s/ Bruce W. Van Saun --------------------- Bruce W. Van Saun Chief Financial Officer The foregoing certification is being furnished solely pursuant to 18 U.S.C Section 1350 and is not being filed as part of the Report or as a separate disclosure document. -----END PRIVACY-ENHANCED MESSAGE-----