-----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, TgjdnQ+8YQookTOSivxd9AmjK4VeZOxx1kGt6CZLsuNiHK+yBer5CsAf11IVRgfe t8tDl59Bh7I+STCLaAitmw== 0000009626-03-000165.txt : 20031112 0000009626-03-000165.hdr.sgml : 20031111 20031112084339 ACCESSION NUMBER: 0000009626-03-000165 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031112 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: 03990698 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 r3q0310q.txt 10-Q THE BANK OF NEW YORK COMPANY, INC. Quarterly Report on Form 10-Q For the quarterly period ended September 30, 2003 The Quarterly Report on Form 10-Q and cross reference index is on page 57. 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 - Introduction 2 - Overview 2 - Summary of Results 2 - Pershing 3 - Consolidated Income Statement Review 8 - Business Segments Review 12 - Consolidated Balance Sheet Review 23 - World Trade Center Disaster Update 31 - Critical Accounting Policies 32 - Liquidity 34 - Capital Resources 36 - Trading Activities 38 - Asset/Liability Management 39 - Statistical Information 41 - Forward Looking Statements 43 - Website Information 44 Consolidated Financial Statements - Consolidated Balance Sheets September 30, 2003 and December 31, 2002 45 - Consolidated Statements of Income For the Three Months and Nine Months Ended September 30, 2003 and 2002 46 - Consolidated Statement of Changes In Shareholders' Equity For the Nine Months Ended September 30, 2003 47 - Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2003 and 2002 48 - Notes to Consolidated Financial Statements 49 - 56 Form 10-Q - Cover 57 - Controls and Procedures 58 - Legal Proceedings 58 - Changes in Securities and Use of Proceeds 59 - Exhibits and Reports on Form 8-K 59 - Signature 60 1
THE BANK OF NEW YORK COMPANY, INC. Financial Highlights (Dollars in millions, except per share amounts) (Unaudited) September 30, June 30, September 30, 2003 2003 2002 --------------------- ------------------- ------------ Reported Operating Reported Operating Reported --------- --------- -------- --------- ------------ Quarter - ------- Net Income $ 260 $ 322 $ 295 $ 311 $ 79 Basic EPS 0.34 0.42 0.39 0.41 0.11 Diluted EPS 0.34 0.42 0.39 0.41 0.11 Cash Dividends Per Share 0.19 0.19 0.19 0.19 0.19 Return on Average Common Shareholders' Equity 12.82% 15.85% 15.56% 16.41% 4.73% Return on Average Assets 1.06 1.31 1.30 1.37 0.40 Efficiency Ratio 70.7 63.8 64.8 63.0 56.4 Year-To-Date - ------------ Net Income $ 850 $ 929 $ 590 $ 607 $ 802 Basic EPS 1.14 1.24 0.80 0.82 1.11 Diluted EPS 1.13 1.23 0.80 0.82 1.10 Cash Dividends Per Share 0.57 0.57 0.38 0.38 0.57 Return on Average Common Shareholders' Equity 15.23% 16.63% 16.61% 17.08% 16.74% Return on Average Assets 1.27 1.39 1.39 1.43 1.35 Efficiency Ratio 65.5 62.4 62.5 61.6 55.0 Assets $95,193 $99,604 $80,987 Loans 37,540 37,796 34,242 Securities 22,862 20,392 18,023 Deposits - Domestic 35,660 37,319 32,964 - Foreign 23,283 27,336 24,005 Long-Term Debt 6,298 6,515 5,528 Common Shareholders' Equity 8,223 8,113 6,633 Common Shareholders' Equity Per Share $ 10.63 $ 10.50 $ 9.15 Market Value Per Share of Common Stock 29.11 28.75 28.74 Allowance for Credit Losses as a Percent of Loans 2.18% 2.18% 1.99% Allowance for Credit Losses as a Percent of Non-Margin Loans 2.55 2.50 2.01 Tier 1 Capital Ratio 7.08 6.83 7.70 Total Capital Ratio 11.18 11.07 11.73 Leverage Ratio 5.64 5.85 6.77 Tangible Common Equity Ratio 4.66 4.33 5.38 Employees 22,926 23,106 18,905 Assets Under Custody (In trillions) Total Assets Under Custody $7.9 $7.8 $6.6 Cross-Border Assets 2.2 2.2 1.8 Equity Securities 32% 32% 26% Fixed Income Securities 68 68 74 Assets Under Administration (In billions) $32 $27 $27 Total Assets Under Management (In billions) 85 83 71 Equity Securities 31% 32% 29% Fixed Income Securities 22 23 26 Alternative Investments 10 9 9 Liquid Assets 37 36 36
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 third quarter diluted earnings per share were 34 cents and operating earnings were 42 cents per share, compared with reported earnings of 39 cents per share and operating earnings of 41 cents per share in the second quarter. Third quarter reported results include previously announced merger and integration costs associated with the acquisition of Pershing of 2 cents per share and the cost of the settlement of claims related to the Company's 1999 sale of BNY Financial Corporation to General Motors Acceptance Corporation ("GMAC") of 6 cents per share. Net income for the third quarter was $260 million, compared with $79 million or 11 cents per share a year ago, when the Company incurred credit charges and a valuation adjustment on its bank stock portfolio. Year-to-date net income was $850 million, or $1.13 per share, compared to $802 million, or $1.10 per share in 2002. The third quarter results showed continued improvement in the Company's primary businesses, including securities servicing and related foreign exchange, and private client services and asset management. The quarter also included a full quarter of results from Pershing, which closed on May 1, 2003. This contributed to record securities servicing fees of $657 million in the third quarter. Noninterest income grew to a new high of 72% of total revenues. 3 Excluding Pershing, securities servicing fees increased 1.2% over the second quarter, or 5% annualized, led by global custody, broker-dealer services and mutual fund services. Core noninterest expenses were essentially flat, as reductions in discretionary expenditures offset continued investments in strategic initiatives. Nonperforming assets declined by $49 million, or 11% in the third quarter, while the ratio of the allowance to non-performing assets improved from 188.6% to 210.5%. New business wins and the general improvement in market tone assisted the Company in achieving a second consecutive quarter of improving operating earnings, in spite of the normal seasonal slowdown in equity transaction volume. Combining top line growth with solid day-to-day expense control resulted in a restoration of positive operating leverage. The Company's program to enhance its credit risk profile advanced well as reflected by the decline in nonperforming assets as well as further reductions in corporate exposures. This quarter also marked the first full reporting period with Pershing, where the Company remains on track to achieve its stated goals for integration costs and synergy benefits. Overall, the continued firming of the global capital markets bodes well for the Company's business model. Pershing in particular is well positioned to benefit from the increased level of confidence shown by the retail investor. PERSHING Supplemental Financial Information - ---------------------------------- For the quarter and nine months ended September 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. - - Other non-operating expenses including merger and integration costs related to the Pershing acquisition and the settlement with GMAC. The Company believes that providing supplemental non-GAAP financial information is useful to investors in understanding the underlying operational performance of the Company and its businesses and performance trends and, therefore, facilitates comparisons with the performance of other financial service companies. Specifically, the Company believes that the exclusion of the merger and integration costs, and the settlement with GMAC, 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. Although the Company believes that the non-GAAP financial measures presented in this report enhance investors' understanding of the Company's business and performance, these non-GAAP measures should not be considered an alternative to GAAP. The following is a reconciliation of the Company's financial results for the quarter and nine months ended September 30, 2003: 4 THE BANK OF NEW YORK COMPANY, INC. Supplemental Information (In millions, except per share amounts) (Unaudited)
Income Statement Quarter ended September 30 SUPPLEMENTAL GAAP ----------------------------------- ----------------------- Operating 2003 2002 ------------ Reported Reported Core Pershing (a) Other(c) Results Results ---- -------- ----------- -------- -------- Net Interest Income $ 387 $ 20 $ - $ 407 $ 418 - ------------------- Provision for Credit Losses 40 - - 40 225 ----- ----- ----- ----- ----- Net Interest Income After Provision for Credit Losses 347 20 - 367 193 ----- ----- ----- ----- ----- Noninterest Income - ------------------ Servicing Fees Securities 495 162 - 657 480 Global Payment Services 80 - - 80 74 ----- ----- ----- ----- ----- 575 162 - 737 554 Private Client Services and Asset Management Fees 97 - - 97 85 Service Charges and Fees 88 1 - 89 90 Foreign Exchange and Other Trading Activities 80 12 - 92 49 Securities Gains 9 - - 9 (188) Other 35 4 - 39 46 ----- ----- ----- ----- ----- Total Noninterest Income 884 179 - 1,063 636 ----- ----- ----- ----- ----- Noninterest Expense - ------------------- Salaries and Employee Benefits 443 90 - 533 397 Net Occupancy 57 12 - 69 76 Furniture and Equipment 35 15 - 50 32 Clearing 28 14 - 42 32 Sub-custodian Expenses 18 - - 18 18 Software 36 9 - 45 29 Amortization of Intangibles 4 4 - 8 - Merger and Integration Costs - - 23 23 - Other 145 28 78 251 122 ----- ----- ----- ----- ----- Total Noninterest Expense 766 172 101 1,039 706 ----- ----- ----- ----- ----- Income Before Income Taxes 465 27 (101) 391 123 Income Taxes 159 11 (39) 131 44 ----- ----- ----- ----- ----- Net Income $ 306 $ 16 $ (62) $ 260 $ 79 - ---------- ===== ===== ===== ===== ===== Diluted Earnings Per Share $0.43 ($0.01)(b) ($0.08) $0.34 $0.11 Notes: Reported results agree with the Company's Consolidated Statement of Income (a) Includes $8 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. (c) Consists of merger and integration costs related to the Pershing acquisition and the settlement with GMAC of $78 million, net of reserves.
5 THE BANK OF NEW YORK COMPANY, INC. Supplemental Information (In millions, except per share amounts) (Unaudited)
Income Statement Nine Months ended September 30 SUPPLEMENTAL GAAP ----------------------------------- ----------------------- Operating 2003 2002 ------------ Reported Reported Core Pershing (a) Other(c) Results Results ---- -------- ----------- -------- -------- Net Interest Income $1,159 $ 31 $ - $1,190 $1,253 - ------------------- Provision for Credit Losses 120 - - 120 295 ------ ----- ----- ------ ------ Net Interest Income After Provision for Credit Losses 1,039 31 - 1,070 958 ------ ----- ----- ------ ------ Noninterest Income - ------------------ Servicing Fees Securities 1,457 271 - 1,728 1,411 Global Payment Services 238 - - 238 220 ------ ----- ----- ------ ------ 1,695 271 - 1,966 1,631 Private Client Services and Asset Management Fees 281 - - 281 256 Service Charges and Fees 277 1 - 278 264 Foreign Exchange and Other Trading Activities 224 22 - 246 183 Securities Gains 26 - - 26 (131) Other 100 7 - 107 106 ------ ----- ----- ------ ------ Total Noninterest Income 2,603 301 - 2,904 2,309 ------ ----- ----- ------ ------ Noninterest Expense - ------------------- Salaries and Employee Benefits 1,305 149 - 1,454 1,202 Net Occupancy 172 20 - 192 175 Furniture and Equipment 108 26 - 134 101 Clearing 89 22 - 111 91 Sub-custodian Expenses 53 - - 53 48 Software 107 16 - 123 84 Amortization of Intangibles 11 7 - 18 5 Merger and Integration Costs - - 48 48 - Other 423 47 78 548 345 ------ ----- ----- ------ ------ Total Noninterest Expense 2,268 287 126 2,681 2,051 ------ ----- ----- ------ ------ Income Before Income Taxes 1,374 45 (126) 1,293 1,216 Income Taxes 473 18 (48) 443 414 ------ ----- ----- ------ ------ Net Income $ 901 $ 27 $ (78) $ 850 $ 802 - ---------- ====== ===== ===== ====== ====== Diluted Earnings Per Share $1.25 ($0.02)(b) ($0.10) $1.13 $1.10 Notes: Reported results agree with the Company's Consolidated Statement of Income (a) Includes $14 million of net interest costs attributable to the Pershing acquisition financing. (b) The ($0.02) dilution is due to changes in shares outstanding attributable to the acquisition. (c) Consists of merger and integration costs related to the Pershing acquisition and the settlement with GMAC of $78 million, net of reserves.
6 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 September 30, 2003 GAAP SUPPLEMENTAL REPORTED ----------------------------------------- ------------------ Core Pershing Elimination September 30, September 30, Entries September 30, December 31, 2003 2003 2003 2002 ---- ---- ------- ---- ---- Assets - ------ Cash and Due from Banks $ 3,668 $ 62 $ - $ 3,730 $ 4,748 Interest-Bearing Deposits in Banks 4,873 448 - 5,321 5,104 Securities 22,845 17 - 22,862 18,300 Trading Assets at Fair Value 6,709 180 - 6,889 7,309 Federal Funds Sold and Securities Purchased Under Resale Agreements 2,832 3,851 - 6,683 1,385 Margin Loans 73 5,399 - 5,472 352 Loans (less allowance for credit losses of $817 in 2003 and $831 in 2002) 29,358 1,893 - 31,251 30,156 Premises and Equipment 963 125 - 1,088 975 Due from Customers on Acceptances 233 - - 233 351 Accrued Interest Receivable 271 8 - 279 204 Investment in/Advances to Pershing 3,542 - (3,542) Goodwill & Intangible Assets 2,645 1,327 - 3,972 2,575 Other Assets 6,256 1,157 - 7,413 6,105 ------- ------- ------- ------- ------- Total Assets $84,268 $14,467 $(3,542) $95,193 $77,564 ======= ======= ======= ======= ======= Liabilities and Shareholders' Equity - ------------------------------------ Deposits $58,943 $ - $ - $58,943 $55,387 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 622 337 - 959 636 Trading Liabilities 2,779 70 - 2,849 2,800 Payables to Customers and Broker-Dealers 1,419 8,751 - 10,170 870 Other Borrowed Funds 739 1,755 (1,507) 987 475 Acceptances Outstanding 235 - - 235 352 Accrued Taxes and Other Expenses 3,987 112 - 4,099 4,066 Accrued Interest Payable 122 3 - 125 101 Other Liabilities 901 1,404 - 2,305 753 Long-Term Debt 6,298 - - 6,298 5,440 ------ ------ ------ ------- ------- Total Liabilities 76,045 12,432 (1,507) 86,970 70,880 ------ ------ ------ ------- ------- Shareholders' Equity 8,223 2,035 (2,035) 8,223 6,684 ------- ------- ------- ------- ------- Total Liabilities and Shareholders' Equity $84,268 $14,467 $(3,542) $95,193 $77,564 ======= ======= ======= ======= ======= - -------------------------------------------------------------------------------------------------- Note: The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date.
7 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 and BNY Global Clearing onto the platform of Pershing. Conversions are proceeding on schedule with all domestic clients converted and all international conversions expected to be completed in the fourth quarter except for those clients acquired in the Tilney acquisition. See Notes to Consolidated Financial Statements. As expected, the Company's existing clearing clients have been overwhelmingly supportive of converting to the Pershing platform and the client retention levels will meet the Company's targets. The second priority is achieving projected cost and revenue synergies. Synergies were projected to be $22 million in 2003 and $115 million in 2004. The Company is on target for the $22 million of synergies in 2003, which is primarily achieved through cost synergies related to closing the Company's existing clearing operations. With respect to Pershing's results, total revenues were $207 million for the quarter, after adjusting net interest income for $8 million of financing costs. Third quarter monthly average revenue was equal to the monthly average in the second quarter despite equity trading volumes being lower in the third quarter. The current run rate is slightly less than the revenue run rate anticipated when the transaction was announced. However, the modest shortfall reflects more optimistic assumptions on trading volumes in the second half of 2003 than has occurred. The operating margin, excluding financing costs and amortization of intangibles, was 19% in the third quarter, which was flat with last quarter. 8 CONSOLIDATED INCOME STATEMENT REVIEW Noninterest Income - ------------------ Noninterest income for the third quarter of 2003 was $1,063 million, an increase of 7% sequentially and 67% from a year ago. Noninterest income for the nine months ended September 30, 2003 was $2,904 million, an increase of 26% over the comparable 2002 period. The increases are principally due to the acquisition of Pershing, improved performance in the core businesses, and the absence in 2003 of the negative valuation adjustment in the third quarter of 2002. Pershing's contribution to the Company's noninterest income was $179 million for the quarter and $301 million for the nine months ended September 30, 2003. 3rd 2nd 3rd Quarter Quarter Quarter Year-to-Date ------- ------- ------- ------------ (In millions) 2003 2003 2002 2003 2002 ----- ---- ---- ---- ---- Servicing Fees Securities $ 657 $598 $480 $1,728 $1,411 Global Payment Services 80 80 74 238 220 ------ ---- ---- ------ ------ 737 678 554 1,966 1,631 Private Client Services and Asset Management Fees 97 94 85 281 256 Service Charges and Fees 89 92 90 278 264 Foreign Exchange and Other Trading Activities 92 88 49 246 183 Securities Gains 9 9 (188) 26 (131) Other 39 35 46 107 106 ------ ---- ---- ------ ------ Total Noninterest Income $1,063 $996 $636 $2,904 $2,309 ====== ==== ==== ====== ====== Securities servicing fees were up 10% sequentially to a record $657 million, primarily reflecting a full quarter's results for Pershing which closed on May 1. Excluding Pershing, core securities servicing fees were up 1.2% sequentially, or 5% annualized, despite the seasonal slowdown in equity trading volumes. The primary growth drivers were the Company's investor services and broker-dealer services businesses, which combined were up a healthy 5% sequentially. Within these segments, custody and mutual fund services both grew from new business and the benefit of higher equity prices. Government securities clearance and global collateral management continued to generate good growth due to strength in fixed income trading volumes and new business wins in the broker-dealer community. Issuer services were roughly flat this quarter, as a pick up in corporate trust fees was offset by lower activity in depositary receipts, evidenced by light capital raising activity in the quarter. Execution and clearing services increased overall due to the addition of Pershing for the full quarter, but execution services businesses in particular were negatively impacted by the decrease in equity trading volumes in the quarter. Global payment services fees were flat compared with the prior quarter and increased 8% from the third quarter of 2002. Year-over-year growth is attributable to the build-out of multi-currency product capabilities and further penetration of the financial institutions market segment. 9 Private client services and asset management fees for the third quarter were up 3% from the prior quarter, and 14% from the third quarter of 2002. The sequential quarter and year-over-year increases reflect higher equity price levels as well as the continued strong demand for alternative investments from Ivy Asset Management and higher short-term money management fees, partially offset by higher seasonal tax-oriented fees in the second quarter. In addition, the year-over-year comparison also benefited from acquisitions. Total assets under management were $85 billion at September 30, 2003, up from $83 billion at June 30, 2003 and $71 billion a year ago. Service charges and fees have remained generally stable. The increase of 5% on a year-to-date basis over 2002 primarily reflects higher fees from loan syndication and underwriting fees. Foreign exchange and other trading revenues were up 5% compared with the prior quarter and up $43 million, or 88% from one year ago. The increase from the second quarter was primarily due to Pershing contributing for the full third quarter compared to only two months in the second quarter. Excluding Pershing, foreign exchange remained strong, increasing slightly from the second quarter as higher client activity levels and volatility in September offset the seasonal slowdown in August. Compared to a year ago, the significant increase resulted from increased client-driven foreign exchange and interest rate hedging activity and the Pershing acquisition. For the nine months ended September 30, 2003, foreign exchange and other trading revenues were up 34% over the nine months ended September 30, 2002. Securities gains in the third quarter were $9 million, flat with the prior quarter and up significantly from a loss of $188 million a year ago. Year-to-date securities gains were $157 million higher than the prior year period. Both year-to-year comparisons reflected a $210 million equity write- down in the third quarter of 2002. Other noninterest income increased $4 million from the second quarter of 2003 and decreased $7 million from the third quarter of 2002. Third quarter 2002 results included a $32 million Empire State Development Corporation ("ESDC") grant covering relocation and other costs. Net Interest Income - -------------------
3rd 2nd 3rd Quarter Quarter Quarter Year-to-Date (Dollars in millions) ------- ------- ------- ------------ 2003 2003 2002 2003 2002 ---- ---- ---- ---- ---- Net Interest Income $407 $398 $418 $1,190 $1,253 Tax Equivalent Adjustment 9 9 11 27 36 ---- ---- ---- ------ ------ Net Interest Income on a Tax Equivalent Basis $416 $407 $429 $1,217 $1,289 ==== ==== ==== ====== ====== Net Interest Rate Spread 1.87% 1.95% 2.32% 1.99% 2.31% Net Yield on Interest Earning Assets 2.10 2.22 2.66 2.24 2.65
Net interest income on a taxable equivalent basis was $416 million in the third quarter of 2003, compared with $407 million in the second quarter of 2003, and $429 million in the third quarter of 2002. The net interest rate spread was 1.87% in the third quarter of 2003, compared with 1.95% in the second quarter of 2003, and 2.32% in the third quarter of 2002. The net yield on interest earning assets was 2.10% in the third quarter of 2003, compared with 2.22% in the second quarter of 2003, and 2.66% in the third quarter of 2002. The increase in net interest income from the second quarter of 2003 is primarily due to the full quarter impact of Pershing and modest growth in the Company's investment securities portfolio. This was partially offset by the 10 impact of the Federal Reserve rate reduction in June. The decline in net interest income from the third quarter of 2002 reflects lower reinvestment yields on fixed income securities, planned decreases in loan balances, and the impact of Federal Reserve interest rate reductions in 2002 and 2003, which were partially offset by the Pershing acquisition and higher average balances of investment securities. For the first nine months of 2003, net interest income on a taxable equivalent basis amounted to $1,217 million compared with $1,289 million in the first nine months of 2002, reflecting the same factors that affected the comparison with last year's quarter. The year-to-date net interest spread was 1.99% in 2003 compared with 2.31% in 2002, while the net yield on interest earning assets was 2.24% in 2003 and 2.65% 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 - ------------------------------------ 3rd 2nd 3rd Quarter Quarter Quarter Year-to-date ------- ------- ------- ------------ (In millions) 2003 2003 2002 2003 2002 ---- ---- ---- ---- ---- Salaries and Employee Benefits $ 443 $439 $397 $1,305 $1,202 Net Occupancy 57 57 76 172 175 Furniture and Equipment 35 38 32 108 101 Clearing 28 31 32 89 91 Sub-custodian Expenses 18 19 18 53 48 Software 36 36 29 107 84 Amortization of Intangibles 4 4 - 11 5 Other 145 139 122 423 345 ------ ---- ---- ------ ------ Total Core 766 763 706 2,268 2,051 Merger and Integration Costs 23 25 - 48 - Pershing 172 115 - 287 - GMAC Settlement 78 - - 78 - ------ ---- ---- ------ ------ Total Noninterest Expense $1,039 $903 $706 $2,681 $2,051 ====== ==== ==== ====== ====== Noninterest expense for the third quarter of 2003 was $1,039 million, compared with $903 million in the prior quarter. The increase principally reflects the full quarter impact of Pershing and non-operating merger and integration expenses as well as net costs related to the GMAC settlement. Core noninterest expense was $766 million, essentially flat with the second quarter of 2003. On a core basis salaries and employee benefits were up only 1% from the second quarter. Core headcount decreased by 180 during the quarter bringing the year-to-date core headcount reductions to 385. Other expense categories also reflected the Company's focus on reducing discretionary spending. The business process reviews the Company has been conducting are also producing results and enabling the Company to absorb the cost of investments important to its future growth, such as technology spending, business continuity planning, quality programs, and marketing and branding initiatives within the overall expense base. The increase in core expenses compared with the third quarter and first nine months of 2002 primarily reflects the impact of acquisitions, the inception of stock option expensing in 2003, a lower pension credit, increased technology investments and higher business continuity spending. Reflecting the shift in the Company's business mix including the Pershing acquisition, the efficiency ratio, excluding non-operating expenses related to 11 the GMAC settlement and the Pershing's merger and integration costs, increased to 63.8% for the third quarter of 2003, compared with 63.0% in the previous quarter and 56.1% in the third quarter of 2002, excluding the impact of the ESDC grant and the associated sublease expense. The effective tax rate for the third quarter of 2003 was 33.4%, compared to 34.6% in the second quarter of 2003, and 35.9% in the third quarter 2002. The effective tax rate for the nine months ended September 30, 2003 was 34.3%, compared with 34.0% for the nine months ended September 30, 2002. The decrease in the effective tax rate reflects the tax benefit on the GMAC settlement and lower state and local taxes. Credit Loss Provision and Net Charge-Offs - ----------------------------------------- 3rd 2nd 3rd Quarter Quarter Quarter Year-to-Date ------- ------- ------- ------------ (In millions) 2003 2003 2002 2003 2002 ---- ---- ---- ---- ---- Provision $ 40 $ 40 $225 $120 $295 ==== ==== ==== ==== ==== Net Charge-offs: Commercial $ (25) $ (34) $(150) $ (85) $(197) Foreign (12) (7) (5) (18) (5) Other (4) - - (15) (14) Consumer (6) (5) (5) (16) (14) ------ ------ ------ ----- ------ Total $ (47) $ (46) $(160) $(134) $(230) ====== ====== ====== ===== ====== Other Real Estate Expenses $ - $ - $ - $ - $ - The provision for credit losses was $40 million in the third quarter of 2003, flat with $40 million in the second quarter of 2003 and down significantly from $225 million in the third quarter of 2002. The larger provision in 2002 was attributable to the deterioration in the loan portfolio particularly in a limited number of borrowers in the telecommunications portfolio. On a year-to-date basis, the provision was $120 million in 2003 compared with $295 million in 2002. The allowance for credit losses was $817 million at September 30, 2003, $824 million at June 30, 2003, and $681 million at September 30, 2002. The allowance for credit losses as a percent of non-margin loans was 2.55% at September 30, 2003, compared with 2.50% at June 30, 2003, and 2.01% at September 30, 2002. The ratio of the allowance to nonperforming assets was 210.5% at September 30, 2003, compared with 188.6% at June 30, 2003, and 123.5% at September 30, 2002. 12 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 fund services, government securities clearance, collateral management, 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. 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. 13 The Company's strategy is to be a market leader in these businesses and continue to build out its product and service capabilities and add new clients. The Company has completed 51 acquisitions since 1998 in this segment, has made significant investments in technology to maintain its industry-leading position, and has continued the development of new products and services to 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 the 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. 14 Servicing and Fiduciary Businesses - ----------------------------------
(In Millions) 3rd 2nd 3rd Quarter Quarter Quarter Year to date 2003 2003 2002 2003 2002 ------- ------- ------- ---- ---- Net Interest Income $ 132 $ 120 $ 118 $ 357 $ 362 Provision for Credit Losses - - - - - Noninterest Income 904 838 685 2,430 2,035 Noninterest Expense 709 650 488 1,882 1,434 Income Before Taxes 327 308 315 905 963 Average Assets $21,385 $15,724 $ 8,086 $14,959 $ 8,507 Average Deposits 34,039 33,499 32,008 32,899 30,846 Nonperforming Assets 16 16 16 16 16 (In billions) Assets Under Custody $ 7,878 $ 7,787 $ 6,609 $ 7,878 $ 6,609 Assets Under Management 85 83 71 85 71 S&P 500 Index (Period End) 996 975 815 996 815 NASDAQ Index (Period End) 1,787 1,623 1,172 1,787 1,172 NYSE Volume (In billions) 87.3 93.0 99.2 266.9 269.8 NASDAQ Volume (In billions) 110.7 112.5 107.4 312.0 330.3
The third quarter results showed continued improvement in the Company's primary businesses, including securities servicing and related foreign exchange, and private client services and asset management. The quarter also included a full quarter of results from Pershing, which closed on May 1, 2003. This contributed to record securities servicing fees of $657 million in the third quarter. For the first nine months of 2003, securities servicing fees were $1,728 million, an increase of $317 million from $1,411 million for the first nine months of 2002, principally due to Pershing and other acquisitions. Pershing's securities servicing fees included in the quarter and nine months ended September 30, 2003 were $162 million and $271 million, respectively. Earnings were strong in business areas that benefited from rising equity prices in the capital markets during the quarter. At the same time, areas that are dependent on equity trading volumes, particularly execution services businesses, had a more challenging quarter, due to the seasonal declines in trading volumes that normally occur in August. In addition, the depositary receipts business continued to be challenged by the lower level of corporate actions, such as new equity issues and cross-border acquisitions that drive client demand for the Company's services. As of September 30, 2003, assets under custody rose to $7.9 trillion, from $7.8 trillion at June 30, 2003 and $6.6 trillion at September 30, 2002. The modest sequential quarter increase in assets under custody reflects higher equity market values as well as net new business converted, however, as nearly two-thirds of the Company's custody assets are in fixed income assets, these were negatively impacted by higher interest rates and this mitigated the impact of new business wins and higher equity prices. Cross-border custody assets were $2.2 trillion at September 30, 2003. The acquisition of Pershing added approximately $557 billion to custody assets at September 30, 2003. Equity securities composed 32% of the assets under custody at September 30, 2003, while fixed income securities were 68%. Strong new business momentum in global custody and higher equity prices drove investor services fees higher on both a sequential quarter and year- over-year basis. The higher fees compared to last year were also due to strong performance in securities lending. 15 Global issuer services fees were essentially flat on a sequential quarter basis and down from a year ago. Corporate trust fees were up modestly from the second quarter, while depositary receipts (DRs) decreased on a sequential quarter basis due to a lack of equity market activity in August and fewer corporate actions during the quarter. The decline versus a year ago was also related to DRs. Broker-dealer services fees also increased significantly both sequentially and year-over-year driven by strong performance in government securities clearance and collateral management services. These businesses continue to benefit from new business wins and higher fixed income transaction volumes. Mutual fund servicing also increased in the third quarter due to higher equity price levels. Execution and clearing services fees increased both sequentially and in comparison with last year due to the full quarter impact of Pershing. Execution services decreased sequentially and in comparison with last year due to lower equity market trading volumes. Average daily combined third quarter NYSE and NASDAQ trading volume was down 5% from the second quarter of 2003 and 4% from the third quarter of 2002. Average monthly fees from Pershing remained flat with last quarter despite the lower trading volumes due to relative strength in retail investor activity. Pershing's operating margin, excluding financing costs and amortization of intangibles, was 19% in the third quarter, which was flat with last quarter. Global payment services fees were flat compared with the prior quarter and increased 8% from the third quarter of 2002. Year-over-year growth is attributable to the build-out of multi-currency product capabilities and further penetration of the financial institutions market segment. Private client services and asset management fees for the third quarter were up 3% from the prior quarter, and 14% from the third quarter of 2002. The sequential quarter and year-over-year increases reflect higher equity price levels as well as the continued strong demand for alternative investments from Ivy Asset Management and higher short-term money management fees, partially offset by higher seasonal tax-oriented fees in the second quarter. In addition, the year-over-year comparison also benefited from acquisitions. Ivy Asset Management has grown assets under management from $2.4 billion when it was acquired in 2000 to $8 billion at September 30, 2003. Assets under management ("AUM") were $85 billion at September 30, 2003, up from $83 billion at June 30, 2003 and $71 billion at September 30, 2002. Assets under administration were $32 billion compared with $27 billion at June 30, 2003 and September 30, 2002. The increase in assets under management since June 30, 2003 reflects growth in the Company's alternative investments business, and a rise in asset values. The increase in AUM since September 30, 2002 reflects acquisitions, growth in the Company's alternative investment business, and a rise in equity market values. Institutional clients represent 66% of AUM while individual clients equal 34%. AUM at September 30, 2003, are 31% invested in equities, 22% in fixed income, 10% in alternative investments and the remainder in liquid assets. Client-driven foreign exchange remained robust as September was one of the Company's strongest months ever due to exchange rate movements and increased activity from equity fund managers offsetting the seasonally slow August. Net interest income in the Servicing and Fiduciary businesses segment was $132 million for the third quarter of 2003 compared with $120 million for the second quarter of 2003 and $118 million in the third quarter of 2002. The increase in net interest income on a sequential quarter basis is primarily attributable to the full quarter impact of the Pershing acquisition. The increase in net interest income from the third quarter of 2002 is primarily due to the Pershing acquisition partially offset by the decline in interest rates. Net interest income for the nine months ended September 30, 2003 was $357 million compared with $362 million in the first nine months 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 16 assets for the quarter ended September 30, 2003 were $21.4 billion compared with $15.7 billion in the second quarter of 2003 and $8.1 billion in the third quarter of 2002. Average assets for the nine months ended September 30, 2003 were $15.0 billion compared with $8.5 billion in the first nine months of 2002. The increase in assets in 2003 compared with 2002 is attributable to the Pershing acquisition. The third quarter of 2003 average deposits were $34.0 billion compared with $33.5 billion in the second quarter of 2003 and $32.0 billion in the third quarter of 2002. Average deposits for the first nine months of 2003 were $32.9 billion compared with $30.8 billion for the first nine 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 in each of the relevant periods. Noninterest expense for the third quarter of 2003 was $709 million, compared with $650 million in the second quarter of 2003 and $488 million in the third quarter of 2002. The rise in noninterest expense from the second quarter reflects the full quarter impact of the Pershing acquisition. For the first nine months of 2003, noninterest expense was $1,882 million compared with $1,434 million in 2002. The rise in noninterest expense from 2002 was primarily due to the Pershing acquisition, 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) 3rd 2nd 3rd Quarter Quarter Quarter Year to date 2003 2003 2002 2003 2002 ------- ------- ------- ---- ---- Net Interest Income $ 95 $ 95 $ 105 $282 $ 319 Provision for Credit Losses 27 30 35 87 105 Noninterest Income 72 86 74 233 216 Noninterest Expense 52 53 52 155 148 Income Before Taxes 88 98 92 273 282 Average Assets $18,900 $19,858 $22,250 $19,760 $23,029 Average Deposits 6,699 6,583 6,802 6,832 6,904 Nonperforming Assets 368 410 526 368 526 Net Charge-offs 41 42 155 118 215
The Corporate Banking segment's net interest income was $95 million in the third quarter of 2003, flat with the second quarter of 2003 and down from $105 million in the third quarter of 2002. On a year-to-date basis, net interest income for 2003 was $282 million compared with $319 million in 2002. The decrease from the 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 $18.9 billion compared with $19.9 billion in the second quarter of 2003 and $22.3 billion in the third quarter of last year. Average deposits in the corporate bank were $6.7 billion versus $6.6 billion in the second quarter of 2003 and $6.8 billion in 2002. For the nine months ended September 30, 2003, average assets were $19.8 billion compared to $23.0 billion for the first nine months of 2002. For the first nine months of 2003 and 2002, average deposits were $6.8 billion and $6.9 billion. The third quarter 2003 provision for credit losses was $27 million compared with $30 million in the second quarter of 2003 and $35 million last year. On a year-to-date basis, the provision for credit losses was $87 million for 2003 and $105 million for 2002. The lower provision primarily reflects the benefits of the Company's corporate loan exposure reduction program. Net charge-offs in the Corporate Banking segment were $41 million in the third quarter of 2003, $42 million in the second quarter of 2003, and $155 million 17 in the third quarter of 2002. The charge-offs in 2003 primarily relate to loans to corporate borrowers. The charge-offs in 2002 primarily reflects deterioration in the Company's portfolio of telecom credits. Net charge-offs for the first nine months of 2003 were $118 million compared with $215 million in 2002. Nonperforming assets were $368 million at September 30, 2003, down from $410 million at June 30, 2003 and $526 million in the third quarter of 2002. The decrease in nonperforming assets from the third quarter of 2002 primarily reflects reductions in the levels of nonperforming cable and telecom credits. Noninterest income was $72 million in the current quarter, compared with $86 million in the second quarter of 2003 and $74 million in the third quarter a year ago. The second quarter of 2003 benefited from unusually high volumes of standby letters of credit and increased capital markets activity. For the first nine months of 2003, noninterest income was $233 million compared with $216 million for the first nine months of 2002. Noninterest expense in the third quarter were $52 million, compared with $53 million in the second quarter of 2003 and $52 million in the third quarter of 2002. For the first nine months of 2003, noninterest expense was $155 million compared with $148 million in 2002. The increases over 2002 reflect higher compensation costs due in part to a reduced pension credit. Retail Banking - --------------
(In Millions) 3rd 2nd 3rd Quarter Quarter Quarter Year to date 2003 2003 2002 2003 2002 ------- ------- ------- ---- ---- Net Interest Income $ 120 $ 118 $ 121 $354 $ 359 Provision for Credit Losses 5 5 2 14 8 Noninterest Income 30 33 30 92 88 Noninterest Expense 88 90 79 265 238 Income Before Taxes 57 56 70 167 201 Average Assets $ 5,018 $ 5,329 $ 5,245 $5,242 $ 5,056 Average Noninterest Bearing Deposits 4,738 4,565 4,109 4,711 4,040 Average Deposits 14,585 14,252 13,224 14,321 13,161 Nonperforming Assets 4 11 9 4 9 Net Charge-offs 6 5 5 16 15 Number of Branches 341 341 342 341 342 Total Deposit Accounts (In Thousands) 1,170 1,183 1,222 1,170 1,222
Net interest income in the third quarter of 2003 was $120 million, compared with $118 million in the second quarter of 2003 and $121 million in the third quarter of 2002. Net interest income on a year-to-date basis for 2003 and 2002 was $354 million and $359 million. Net interest income has been essentially flat as spread compression on deposits has been offset by higher levels of noninterest bearing deposits. Noninterest income was $30 million for the quarter compared with $33 million on a sequential quarter basis and $30 million last year. Noninterest income for the first nine months of 2003 was $92 million compared with $88 million in the first nine months of 2002. The sequential quarter decline in noninterest income as well as the year-to-date increase from 2002 reflects a gain on the sale of $230 million of mortgage loans in the second quarter of 2003. Noninterest expense in the third quarter of 2003 was $88 million, compared with $90 million in the second quarter of 2003 and $79 million last 18 year. Noninterest expense for the first nine months of 2003 was $265 million compared with $238 million in the first nine months of 2002. The year-over- year change reflects a reduced pension credit and higher medical benefit expenses. Net charge-offs were $6 million in the third quarter of 2003, compared with $5 million in the second quarter of 2003 and third quarter of 2002. Net charge-offs were $16 million and $15 million for the nine months ending September 30, 2003 and September 30, 2002. Nonperforming assets were $4 million in the third quarter of 2003 compared with $11 million at June 30, 2003 and $9 million at September 30, 2002 reflecting a reduction in the level of nonperforming small business loans. Average deposits generated by the Retail Banking segment were $14.6 billion in the third quarter of 2003, compared with $14.3 billion in the second quarter of 2003 and $13.2 billion in the third quarter of 2002. For the first nine months of 2003, average deposits were $14.3 billion as compared to $13.2 billion in the first nine months of 2002. Noninterest bearing deposits were $4.7 billion this quarter, compared with $4.6 billion in the second quarter of 2003 and $4.1 billion in the third 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 nine months of 2003 were $4.7 billion compared with $4.0 billion in the first nine months of 2002. Average assets in the retail banking sector were $5.0 billion, compared with $5.3 billion in the second quarter of 2003 and $5.2 billion in the third quarter of 2002. On a year-to- date basis, average assets were $5.2 billion for 2003 and $5.1 billion for 2002. 19 Financial Markets - -----------------
(In Millions) 3rd 2nd 3rd Quarter Quarter Quarter Year to date 2003 2003 2002 2003 2002 ------- ------- ------- ---- ---- Net Interest Income $ 80 $ 80 $ 84 $237 $245 Provision for Credit Losses 5 6 5 16 15 Noninterest Income 53 33 37 136 154 Noninterest Expense 26 25 20 75 63 Income Before Taxes 102 82 96 282 321 Average Assets $47,920 $46,463 $40,850 $46,252 $40,481 Average Deposits 4,355 4,153 1,593 4,473 1,800 Average Investment Securities 20,604 18,720 16,798 19,110 14,747 Net Charge-offs - - - - -
Net interest income for the third quarter was $80 million compared with $80 million on a sequential quarter basis and $84 million a year ago. Net interest income was $237 million in the first nine months of 2003 compared to $245 million in the first nine months of 2002. The declines from 2002 reflect lower reinvestment yields partially offset by an increase in assets, primarily highly-rated mortgage-backed securities. Average third quarter 2003 assets in the Financial Markets segment composed primarily of short-term liquid assets and investment securities were $47.9 billion, up from $46.5 billion on a sequential quarter basis and $40.9 billion last year. Average assets for the first nine months of 2003 were $46.3 billion compared to $40.5 billion for the first nine months 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 $53 million in the third quarter of 2003, compared with $33 million in the second quarter of 2003 and $37 million in the third quarter of 2002. On a year-to-date basis, noninterest income was $136 million in 2003 and $154 million in 2002. The positive variance versus the second quarter of 2003 reflects higher trading related revenues related both to foreign exchange and fixed income activities as well as improved hedging of foreign currency investments. 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 $26 million in the third quarter of 2003, compared with $25 million in the second quarter of 2003 but up from $20 million in last year's third quarter. Noninterest expense for the nine months ended September 30, 2003 was $75 million, compared with $63 million for the nine months ended September 30, 2002 reflecting higher compensation costs. 20 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 September 30, 2003 Businesses Banking Banking Markets Items Total - --------------------- ---------- --------- ------- --------- ----------- ------------ (In Millions) Net Interest Income $ 132 $ 95 $ 120 $ 80 $ (20) $ 407 Provision for Credit Losses - 27 5 5 3 40 Noninterest Income 904 72 30 53 4 1,063 Noninterest Expense 709 52 88 26 164 1,039 ----- ---- ----- ---- ----- ------ Income Before Taxes $ 327 $ 88 $ 57 $102 $(183) $ 391 ===== ==== ===== ==== ===== ====== Contribution Percentage 57% 15% 10% 18% Average Assets $21,385 $18,900 $5,018 $47,920 $ 3,930 $97,153
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 September 30, 2002 Businesses Banking Banking Markets Items Total - --------------------- ---------- --------- ------- --------- ----------- ------------ Net Interest Income $ 118 $105 $ 121 $ 84 $ (10) $ 418 Provision for Credit Losses - 35 2 5 183 225 Noninterest Income 685 74 30 37 (190) 636 Noninterest Expense 488 52 79 20 67 706 ----- ---- ----- ---- ----- ----- Income Before Taxes $ 315 $ 92 $ 70 $ 96 $(450) $ 123 ===== ==== ===== ==== ===== ===== Contribution Percentage 55% 16% 12% 17% Average Assets $ 8,086 $22,250 $5,245 $40,850 $ 2,379 $78,810
21
In Millions Servicing and For the Nine Months Ended Fiduciary Corporate Retail Financial Reconciling Consolidated September 30, 2003 Businesses Banking Banking Markets Items Total - ----------------------- ---------- --------- ------- --------- ----------- ------------ Net Interest Income $ 357 $ 282 $ 354 $ 237 $ (40) $1,190 Provision for Credit Losses - 87 14 16 3 120 Noninterest Income 2,430 233 92 136 13 2,904 Noninterest Expense 1,882 155 265 75 304 2,681 ------ ----- ----- ----- ----- ------ Income Before Taxes $ 905 $ 273 $ 167 $ 282 $(334) $1,293 ====== ===== ===== ===== ===== ====== Contribution Percentage 56% 17% 10% 17% Average Assets $14,959 $19,760 $ 5,242 $46,252 $ 3,366 $89,579
In Millions Servicing and For the Nine Months Ended Fiduciary Corporate Retail Financial Reconciling Consolidated September 30, 2002 Businesses Banking Banking Markets Items Total - ----------------------- ---------- --------- ------- --------- ----------- ------------ Net Interest Income $ 362 $ 319 $ 359 $ 245 $ (32) $1,253 Provision for Credit Losses - 105 8 15 167 295 Noninterest Income 2,035 216 88 154 (184) 2,309 Noninterest Expense 1,434 148 238 63 168 2,051 ------ ----- ----- ----- ----- ------ Income Before Taxes $ 963 $ 282 $ 201 $ 321 $(551) $1,216 ====== ===== ===== ===== ===== ====== Contribution Percentage 55% 16% 11% 18% Average Assets $ 8,507 $23,029 $ 5,056 $40,481 $ 2,293 $79,366
22 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 and third quarter of 2003, merger and integration costs associated with Pershing and in the third quarter of 2003 the GMAC settlement are also reconciling items. In the third quarter of 2002 the loss on a sublease was also a reconciling item. 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. 3rd 2nd 3rd Quarter Quarter Quarter Year to date (In millions) 2003 2003 2002 2003 2002 ------- ------- ------- ------ ----- Segments' revenue $ 1,486 $1,403 $1,254 $4,121 $3,778 Adjustments: Earnings associated with assignment of capital (33) (28) (24) (81) (74) Securities gains - - (215) - (213) Other gains 4 6 25 13 29 Taxable equivalent basis and other tax-related items 13 13 14 41 42 ------- ------ ------ ------ ------ Subtotal-revenue adjustments (16) (9) (200) (27) (216) ------- ------ ------ ------ ------ Consolidated revenue $1,470 $1,394 $1,054 $4,094 $3,562 ======= ====== ====== ====== ====== Segments' income before tax $ 574 $ 544 $ 573 $1,627 $1,767 Adjustments: Revenue adjustments (above) (16) (9) (200) (27) (216) Provision for credit losses different than GAAP (3) 1 (183) (3) (167) Severance (2) (4) (1) (8) (15) Goodwill and intangible amortization (8) (7) - (18) (4) Pershing-related integration expenses (23) (25) - (48) - GMAC settlement (78) - - (78) - Loss on sublease - - (22) - (22) Corporate overhead (53) (49) (44) (152) (127) ------- ------- ------ ------ ------ Consolidated income before tax $ 391 $ 451 $ 123 $1,293 $1,216 ======= ======= ====== ====== ====== Segments' total average assets $93,223 $87,374 $76,431 $86,213 $77,073 Adjustments: Goodwill and intangibles 3,930 3,550 2,379 3,366 2,293 ------- ------- ------- ------- ------- Consolidated average assets $97,153 $90,924 $78,810 $89,579 $79,366 ======= ======= ======= ======= ======= 23 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. Other gains in 2002 include a $32 million ESDC grant. 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. The GMAC settlement would be allocated to Corporate Banking. CONSOLIDATED BALANCE SHEET REVIEW Total assets were $95.2 billion at September 30, 2003, compared with $99.6 billion at June 30, 2003, and $77.6 billion at December 31, 2002. The decrease in total assets on a sequential quarter basis reflects lower client deposit levels given a more orderly securities settlement process across the industry relative to the June quarter end. Within the asset composition of the balance sheet, while loans continue to be reduced, average investment securities, largely high quality short duration mortgage-backed securities, were up $2.3 billion, continuing a strategic shift to enhance the liquidity and risk profile of the Company's balance sheet. The increase versus a year ago mainly reflects the Pershing acquisition. Total shareholders' equity was $8.2 billion at September 30, 2003, compared with $8.1 billion at June 30, 2003, and $6.7 billion at December 31, 2002. The major reasons for the increase in shareholders' equity from a year ago are the issuance of approximately $1 billion of common stock to fund the Pershing acquisition and the retention of earnings. Return on average common equity on a reported basis for the third quarter of 2003 was 12.82%, compared with 15.56% in the second quarter of 2003, and 4.73% in the third quarter of 2002. On an operating basis, return on average common equity for the third quarter of 2003 was 15.85%, compared with 16.41% in the second quarter of 2003. For the first nine months of 2003, the reported return on average common equity was 15.23% compared with 16.74% in 2002 and the return on average assets was 1.27% for the first nine months of 2003 compared with 1.35% in 2002. On an operating basis, return on average common equity was 16.63% and the return on average assets was 1.39% for the first nine months of 2003. On a reported basis, return on average assets for the third quarter of 2003 was 1.06%, compared with 1.30% in the second quarter of 2003, and 0.40% in the third quarter of 2002. On an operating basis, return on average assets for the third quarter of 2003 was 1.31%, compared with 1.37% in the second quarter of 2003. 24 Investment Securities - --------------------- The table below shows the distribution of the Company's securities portfolio: Investment Securities (at Fair Value) (In millions) 09/30/03 12/31/02 -------- -------- Fixed Income: Mortgage-Backed Securities $18,497 $13,084 Asset-Backed Securities 96 37 Corporate Debt 1,339 1,112 Short-Term Money Market Instruments 1,156 1,999 U.S. Treasury Securities 456 537 U.S. Government Agencies 207 469 State and Political Subdivisions 306 403 Emerging Market Debt 111 114 Other Foreign Debt 516 273 ------- ------- Subtotal Fixed Income 22,684 18,028 Equity Securities: Money Market Funds 53 91 Bank Stocks - 91 Federal Reserve Bank Stock 96 66 Other 27 22 ------- ------- Subtotal Equity Securities 176 270 ------- ------- Total Securities $22,860 $18,298 ======= ======= Total investment securities were $22.9 billion at September 30, 2003, compared with $20.4 billion at June 30, 2003, and $18.3 billion at December 31, 2002. Average investment securities were $20.6 billion in the third quarter of 2003, compared with $18.7 billion in the second quarter of 2003 and $16.8 billion in the third quarter of last year. Average investment securities were $19.1 billion in the nine months ended September 30, 2003, compared with $14.7 billion in the nine months ended September 30, 2002. The increases were primarily due to growth in the Company's portfolio of highly rated mortgage-backed securities which are 97% rated AAA, 1% AA, and 2% A. Since December 31, 2002, the Company has added approximately $5.4 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 2.3 years on its mortgage 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 $245 million at September 30, 2003, compared with $338 million at December 31, 2002. As interest rates rise, the Company expects the unrealized gains will decline, which will lower shareholders' equity and adversely impact the Company's tangible common equity ratio. Loans - ----- Total loans were $37.5 billion at September 30, 2003, compared with $37.8 billion at June 30, 2003, and $31.3 billion at December 31, 2002. The increase in total loans since year-end 2002 primarily reflects the addition of margin loans from the Pershing acquisition, which were partially offset by a reduction in Corporate exposures. Non-margin loans were $32.1 billion at September 30, 2003, compared with $32.9 billion at June 30, 2003, and $33.8 billion at December 31, 2002. The decrease reflects the Company's strategy of reducing non-strategic and outsized corporate loan exposures to improve its credit risk profile. Average total loans were $37.4 billion in the third 25 quarter of 2003, compared with $35.7 billion in the second quarter of 2003 and $33.7 billion at September 30, 2002. Pershing contributed $6.6 billion to the increase in average loans from September 30, 2002. Excluding Pershing, average loans were $30.8 billion in the third quarter of 2003 and $32.7 billion in the second quarter of 2003. 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 third quarter. Corporate exposures were reduced by over $1 billion, bringing the total reductions to date to $6.7 billion. Telecom industry exposures were reduced to approximately $0.9 billion at September 30, 2003, down from $1.5 billion at December 31, 2002. The Company's $9 billion corporate exposure reduction program is ahead of schedule with the Company 74% towards its targeted goal with five quarters remaining. The improvement in credit spreads in 2003 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 following tables provide additional details on the Company's loan exposures and outstandings at September 30, 2003 in comparison to December 31, 2002.
Overall Loan Portfolio Unfunded Total Unfunded Total (dollars in billions) Loans Commitments Exposure Loans Commitments Exposure ----------------------------- ------------------------------ 9/30/03 9/30/03 9/30/03 12/31/02 12/31/02 12/31/02 -------- ------- ------- -------- -------- -------- Financial Institutions(4) $10.7 $21.1 $31.8 $ 6.6 $24.1 $30.7 Corporate(4) 5.3 21.0 26.3 8.2 23.4 31.6 ----- ----- ----- ----- ----- ---- 16.0 42.1 58.1 14.8 47.5 62.3 ----- ----- ----- ----- ----- ---- Consumer & Middle Market 8.0 4.0 12.0 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 5.5 - 5.5 0.4 - 0.4 ----- ----- ----- ----- ----- ----- Total $37.5 $47.0 $84.5 $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.
26 Financial Institutions - ---------------------- The financial institutions portfolio exposure was $31.8 billion at September 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 76% expiring within one year and are frequently secured. For example, mortgage banking, securities industry, and investment 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) 09/30/03 12/31/02 ------------------------------ ----------------------------- Unfunded Total %Inv %due Unfunded Total Lending Division Loans Commitments Exposures Grade <1 Yr Loans Commitments Exposures - ---------------- ------ ----------- --------- ----- ------ ------ ----------- --------- Banks $ 3.4 $ 3.1 $ 6.5 71% 82% $2.9 $ 4.5 $ 7.4 Securities Industry 2.6 3.5 6.1 93 96 1.3 3.9 5.2 Insurance 0.3 4.8 5.1 96 61 0.4 5.5 5.9 Government 0.1 5.3 5.4 99 57 0.2 5.5 5.7 Asset Managers 3.7 3.4 7.1 86 79 1.2 3.9 5.1 Mortgage Banks 0.4 0.5 0.9 87 78 0.4 0.5 0.9 Endowments 0.2 0.5 0.7 98 87 0.2 0.3 0.5 ----- ----- ----- --- ---- ---- ----- ----- Total $10.7 $21.1 $31.8 88% 76% $6.6 $24.1 $30.7 ===== ===== ===== === ==== ==== ===== =====
Corporate - --------- The corporate portfolio exposure declined to $26.3 billion at September 30, 2003 from $31.6 billion at year-end 2002. Approximately 74% of the portfolio is investment grade while 34% of the portfolio matures within one year. In December 2002, the Company announced its intention to reduce its corporate exposure by $9 billion to $24 billion by the end of 2004. Since that time, corporate credit exposures have been reduced by $6.7 billion of the $9 billion target. Reductions have been achieved through loan run-offs and reduced rollover commitments, as well as loans sales which have taken advantage of improved liquidity in the secondary loan market.
(Dollars in billions) 09/30/03 12/31/02 ----------------------------- ----------------------------- Unfunded Total %Inv %due Unfunded Total Lending Division Loans Commitments Exposures Grade <1 Yr Loans Commitments Exposures - ---------------- ------ ----------- --------- ----- ------ ------ ----------- --------- Media $ 1.5 $ 2.3 $ 3.8 68% 18% $1.9 $ 2.4 $4.3 Cable 0.7 0.6 1.3 36 4 1.0 0.6 1.6 Telecom 0.3 0.6 0.9 60 29 0.7 0.8 1.5 ----- ----- ----- -- -- ---- ----- ----- Subtotal 2.5 3.5 6.0 59% 17% 3.6 3.8 7.4 Utilities 0.2 2.8 3.0 87 67 0.7 3.0 3.7 Retailing 0.1 2.4 2.5 75 46 0.2 2.6 2.8 Automotive 0.2 2.1 2.3 77 39 0.2 2.6 2.8 Oil & Gas 0.2 1.5 1.7 81 36 0.4 1.7 2.1 Healthcare 0.3 1.4 1.7 84 35 0.4 1.5 1.9 Other* 1.8 7.3 9.1 75 29 2.7 8.2 10.9 ----- ----- ----- -- -- ---- ----- ----- Total $ 5.3 $21.0 $26.3 74% 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 27 the first nine months of 2003, the Company reduced telecom exposure by $0.6 billion. The percentage of investment grade borrowers in the telecom portfolio has increased to 60% from 54% at year-end 2002, due to reductions in lower rated exposures. The Company's exposure to the airline industry consists of a $635 million leasing portfolio as well as $48 million of direct lending. The airline leasing portfolio consists of $286 million to major U.S. carriers, $254 million to foreign airlines and $95 million to U.S. regionals. During 2003, the domestic airline industry witnessed structural improvements, including favorable labor developments, continued cost containment, and increased liquidity due to government aid. Notwithstanding the recent improvements, the industry faces sustained challenges from a tepid recovery in air travel, 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 9/30/03 vs. 9/30/03 vs. (Dollars in millions) 9/30/03 6/30/03 6/30/03 12/31/02 12/31/02 -------- -------- -------- -------- -------- Category of Loans: Commercial $265 $312 $(47) $321 $(56) Foreign 79 84 (5) 84 (5) Other 44 41 3 34 10 ---- ---- ---- ---- ---- Total Nonperforming Loans 388 437 (49) 439 (51) Other Real Estate - - - 1 (1) ---- ---- ---- ---- ---- Total Nonperforming Assets $388 $437 $(49) $440 $(52) ==== ==== ===== ==== ==== Nonperforming Assets Ratio 1.2% 1.3% 1.4% Allowance/Nonperforming Loans 210.5 188.6 189.1 Allowance/Nonperforming Assets 210.5 188.6 188.7
Nonperforming assets declined $49 million during the third quarter to $388 million from $437 million at June 30, 2003. The decrease primarily reflects sales and charge-offs of commercial loans. Interest income would have been increased by $4 million and $8 million for the third quarters of 2003 and 2002 if loans on nonaccrual status at September 30, 2003 and 2002 had been performing for the entire period. Interest income would have been increased by $12 million and $15 million for the nine months ended September 30, 2003 and 2002 if loans on nonaccrual status at September 30, 2003 and 2002 had been performing for the entire period. 28 Impaired Loans - -------------- The table below sets forth information about the Company's impaired loans. The Company uses the discounted cash flow, collateral value, or market price methods for valuing its impaired loans: September 30 June 30 December 31 (Dollars in millions) 2003 2003 2002 ------------ ------- ----------- Impaired Loans with an Allowance $352 $393 $376 Impaired Loans without an Allowance(1) - 4 27 ---- ---- ---- Total Impaired Loans $352 $397 $403 ==== ==== ==== Allowance for Impaired Loans(2) $150 $189 $167 Average Balance of Impaired Loans during the Quarter $387 $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 - --------- September 30 June 30 September 30 (Dollars in millions) 2003 2003 2002 ------- -------- ------- Total Loans $37,540 $37,796 $34,242 Margin Loans 5,472 4,877 407 Non-Margin Loans 32,068 32,919 33,835 Allowance 817 824 681 Allowance for Loan Losses As a Percent of Loans 2.18% 2.18% 1.99% Allowance for Loan Losses As a Percent of Non-Margin Loans 2.55 2.50 2.01 The allowance for credit losses to total loans was $817 million, or 2.18% of loans at September 30, 2003, compared with $824 million, or 2.18% of loans at June 30, 2003, and $831 million, or 2.65% of loans at December 31, 2002. The ratio of the allowance for credit losses to non-margin loans was 2.55% for September 30, 2003, compared with 2.50% for June 30, 2003 and 2.68% at December 31, 2002, reflecting stability in credit quality in the first nine months of 2003. The May 1 acquisition of Pershing added $5.4 billion of secured margin loans to the Company's balance sheet at September 30, 2003. The Company has rarely suffered a loss on these types of loans and doesn't allocate any of its allowance for credit losses to these loans. The Company believes the ratio of allowance for credit losses to non-margin loans 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 210.5% at September 30, 2003, up from 188.6% at June 30, 2003, and 188.7% at December 31, 2002. Included in the Company's allowance for credit losses at September 30, 2003 is an allocated transfer risk reserve related to Argentina of $20 million. The allowance for credit losses consists of four elements: (1) an allowance for impaired credits (nonaccrual commercial credits over $1 million), (2) an allowance for higher risk rated credits, (3) an allowance for 29 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 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 30 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: September 30 December 31 2003 2002 ------------ ----------- 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 $58.9 billion at September 30, 2003, compared with $64.7 billion at June 30, 2003 and $55.4 billion at December 31, 2002. The decrease on a sequential quarter basis was primarily due to lower cash balances from securities processing customers. At June 30, 2003, high securities settlement volumes resulted in a higher than normal level of uncompleted trades across the industry, which added to the cash levels in customer accounts. The settlement process across the industry was more orderly at September 30, 2003. Noninterest-bearing deposits were $16.4 billion at September 30, 2003, compared with $13.3 billion at December 31, 2002. Interest-bearing deposits were $42.6 billion at September 30, 2003, compared with $42.1 billion at December 31, 2002. 31 WORLD TRADE CENTER DISASTER UPDATE During the first nine months of 2003, the Company incurred $34 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 September 30, 2003, the Company had terminated or sublet 1,000,000 square feet and had 300,000 square feet remaining to sublet. The Company has recorded a liability for its sublease loss as of September 30, 2003 of $173 million. At September 30, 2003, the Company had reserved for approximately 57% 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 $ 34 Insurance Recovery 34 ----- Pre-tax Impact $ - ===== Cumulative Insurance Recovery $ 678 Cumulative Cash Advances from Insurance Companies (600) ----- Receivable from Insurance Companies at September 30, 2003 $ 78 ===== 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 $678 million as it completes the move of its data centers from interim locations to final locations. 32 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 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 September 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 $57 million, while if each pass credit were rated one grade worse, the allowance would have increased by $71 million. For non pass rated credits, if the loss given default were 10% worse, the allowance would have increased by $43 million, while if the loss given default were 10% better, the allowance would have decreased by $54 million. For impaired credits, if the fair value of the loans were 10% higher or lower, the allowance would have increased or decreased by $20 million, respectively. 33 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 judgement 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 sharp 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 September 30, 2003, approximately $2.8 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 $69 million. 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 ($3,156 million at September 30, 2003) and indefinite-lived intangible assets ($370 million at September 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 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 their fair value to their carrying value. Other identifiable intangible assets ($446 million at September 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 34 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 September 30, 2003. The impact of a 5% impairment charge would result in a change of pre-tax income of approximately $200 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 $14.9 billion and $13.8 billion on an average basis for the first nine months of 2003 and 2002. Stable foreign deposits, primarily from the Company's European based securities servicing business, were $24.1 billion and $24.3 billion at September 30, 2003 and 2002. Savings and other time deposits were $10.2 billion on a year-to-date average basis at September 30, 2003 compared to $9.7 billion at September 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 September 30, 2003, the amount of dividends the Bank could pay to the Parent without prior regulatory approval and remain in compliance with federal bank regulatory requirements was $588 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 $382 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 September 30, 2003, the Parent could use the subsidiaries' liquid securities as collateral to allow it to borrow $39 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 September 30, 2003. For the quarter ended September 30, 2003, the Parent's quarterly average commercial paper borrowings were $74 million compared with $88 million in 2002. At September 30, 2003, the Parent had cash of $479 million compared with cash of $691 million at June 30, 2003 and $398 million at December 31, 2002. Net of commercial paper outstanding, the Parent's cash position at September 30, 2003 was up $132 million compared with December 31, 2002. 35 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 September 30, 2003 and September 30, 2002. The Parent also has the ability to access the capital markets. At October 31, 2003, the Parent had a shelf registration statement with a capacity of $782 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 October 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 Stable Fitch F1+ A+ AA- AA Stable In the third quarter of 2003, Moody's changed the Company's outlook from negative to 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 September 30, 2003 and $300 million of long-term debt that is due in 2004. In addition, at September 30, 2003, the Parent has the option to call $95 million of subordinated debt in 2003 and $175 million in 2004, which it will call and refinance if market conditions are favorable. In the third quarter and first nine months of 2003, the Company redeemed $175 million and $730 million of debt. In October 2003, the Company called for redemption $95 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 September 30, 2003 and 2002 was 101.96% and 99.31%. 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 September 30, 2003, compared with $1.6 billion provided by operating activities through September 30, 2002. The sources of cash flows from operations in 2003 and 2002 were principally the result of net income. In the first nine months of 2003, cash used by investing activities was $7.4 billion as compared to cash provided by investing activities in the first nine months of 2002 of $0.7 billion. In the first nine 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, securities purchased under resale agreements and acquisitions. 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 nine months of 2003, cash provided by financing activities was $5.4 billion as compared to cash used by financing activities in the first 36 nine months of 2002 of $1.7 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 cash was repayment of other borrowed funds. 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, among other things, 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 September 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:
September 30, 2003 September 30, 2002 --------------------- --------------------- Well Adequately Company Capitalized Capitalized Company Bank Company Bank Targets Guidelines Guidelines ------- ---- ------- ------ ------- ----------- ----------- Tier 1* 7.08% 7.19% 7.70% 7.64% 7.75% 6% 4% Total Capital** 11.18 11.45 11.73 11.80 11.75 10 8 Leverage 5.64 5.71 6.77 6.70 6.50 5 3-5 Tangible Common Equity 4.66 5.43 5.38 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 regulatory Tier 1 capital and Total capital ratios were 7.08% and 11.18% at September 30, 2003, compared with 6.83% and 11.07% at June 30, 2003, and 7.70% and 11.73% at September 30, 2002. The regulatory leverage ratio was 5.64% at September 30, 2003, compared with 5.85% at June 30, 2003, and 6.77% at September 30, 2002. The Company's tangible common equity as a percentage of total assets was 4.66% at September 30, 2003, compared with 4.33% at June 30, 2003, and 5.38% at September 30, 2002. The improvement in the Company's capital ratios versus June 30, 2003 reflects the retention of equity during the quarter as well as the decrease in balance sheet assets. The Company's capital ratios at September 30, 2003 and 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 balances 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. See Accounting Changes and New Accounting Pronouncements in the Notes to Consolidated Financial Statements for discussion of possible change in capital treatment of trust preferred securities. 37 The following table presents the components of the Company's risk-based capital at September 30, 2003 and 2002: (in millions) 2003 2002 ---- ---- Common Stock $8,223 $6,633 Preferred Stock - - Preferred Trust Securities 1,150 1,100 Adjustments: Intangibles (3,967) (2,396) Securities Valuation Allowance (161) (176) Merchant Banking Investments (5) (2) ------ ------ Tier 1 Capital 5,240 5,159 ------ ------ Qualifying Unrealized Equity Security Gains - - Qualifying Subordinated Debt 2,239 2,053 Qualifying Allowance for Loan Losses 797 650 ------ ------ Tier 2 Capital 3,036 2,703 ------ ------ Total Risk-based Capital $8,276 $7,862 ====== ====== Risk-Adjusted Assets $74,013 $67,016 ======= ======= 38 TRADING ACTIVITIES The fair value and notional amounts of the Company's financial instruments held for trading purposes at September 30, 2003 and September 30, 2002 are as follows: 2003 September 30, 2003 Average ---------------------------- ------------------- (In millions) Fair Value Fair Value ------------------ ------------------- Notional Trading Account Amount Assets Liabilities Assets Liabilities - --------------- -------- ------ ----------- ------ ----------- Interest Rate Contracts: Futures and Forward Contracts $ 74,988 $ 122 $ - $ - $ 41 Swaps 174,255 1,737 421 1,668 341 Written Options 136,286 - 1,465 - 1,314 Purchased Options 61,330 228 - 205 - Foreign Exchange Contracts: Swaps 2,973 - - - - Written Options 11,939 - 73 - 71 Purchased Options 15,173 57 - 44 - Commitments to Purchase and Sell Foreign Exchange 59,797 553 621 342 392 Debt Securities - 4,164 257 4,345 162 Credit Derivatives 1,692 5 4 5 7 Equity Derivatives 102 23 8 9 7 ------ ------ ------ ------ Total Trading Account $6,889 $2,849 $6,618 $2,335 ====== ====== ====== ====== 2002 September 30, 2002 Average ---------------------------- ------------------- (In millions) Fair Value Fair Value ------------------ ------------------- Notional Trading Account Amount Assets Liabilities Assets Liabilities - --------------- -------- ------ ----------- ------ ----------- Interest Rate Contracts: Futures and Forward Contracts $ 31,141 $ 91 $ - $ 115 $ - Swaps 149,431 1,847 612 2,981 1,281 Written Options 125,020 - 1,662 - 1,371 Purchased Options 48,881 272 - 329 - Foreign Exchange Contracts: Swaps 1,891 - - - - Written Options 14,287 - 104 - 141 Purchased Options 17,145 84 - 87 - Commitments to Purchase and Sell Foreign Exchange 60,121 441 471 731 743 Debt Securities - 6,653 197 6,822 154 Credit Derivatives 1,943 23 8 14 11 Equity Derivatives - 17 - 17 1 ------ ------ ------- ------ Total Trading Account $9,428 $3,054 $11,096 $3,702 ====== ====== ======= ====== 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 39 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) 3rd Quarter 2003 Year-to-Date 2003 ------------------------------ ------------------------------------- Average Minimum Maximum Average Minimum Maximum 9/30/03 -------- -------- -------- ------- ------- ------- ------- Interest rate $7.2 $1.9 $13.8 $6.1 $1.9 $13.8 $1.9 Foreign Exchange 0.9 0.6 1.4 0.8 0.5 1.9 1.0 Equity 0.4 0.1 1.0 0.2 - 1.0 0.6 Credit Derivatives 2.2 2.1 2.3 2.0 1.4 2.8 2.1 Diversification (1.8) NM NM (1.6) NM NM (0.5) Overall Portfolio 8.9 5.1 14.7 7.5 3.4 14.7 5.1 (In millions) 3rd Quarter 2002 Year-to-Date 2002 ------------------------------ ------------------------------------- Average Minimum Maximum Average Minimum Maximum 9/30/02 -------- -------- -------- ------- ------- ------- ------- Interest rate $4.1 $2.6 $5.8 $4.7 $2.6 $9.2 $4.1 Foreign Exchange 1.1 0.6 2.5 1.2 0.6 3.8 0.9 Equity 0.1 - 0.9 - - 1.1 - Credit Derivatives - - - - - - - Diversification (1.4) NM NM (1.7) NM NM (1.2) Overall Portfolio 3.9 2.5 5.7 4.2 2.5 8.3 3.8 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 nine months of 2003, interest rate risk generated approximately 67% of average VAR, credit derivatives generated 22% of average VAR, foreign exchange accounted for 9% of average VAR, and equity generated 2% of average VAR. During the third quarter and first nine months of 2003, the Company's daily trading loss did not exceed the Company's 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. 40 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: (Dollars in millions) September 30, 2003 $ % ---- ---- +200 bp Ramp vs. Stable Rate $ (17) (1.04)% +100 bp Ramp vs. Stable Rate - - -25 bp Shock vs. Stable Rate (11) (0.67) 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 September 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. 41
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 September 30, 2003 ended September 30, 2002 ------------------------------ ------------------------------ Average Average Average Average Balance Interest Rate Balance Interest Rate ------- -------- ------- ------- -------- ------- ASSETS - ------ Interest-Bearing Deposits in Banks (primarily foreign) $ 7,085 $ 38 2.12% $ 4,029 $ 28 2.76% Federal Funds Sold and Securities Purchased Under Resale Agreements 9,200 22 0.96 2,736 11 1.64 Margin Loans 5,419 31 2.25 434 3 2.84 Loans Domestic Offices 21,409 208 3.86 18,954 237 4.92 Foreign Offices 10,571 76 2.85 14,360 122 3.40 ------- ----- ------- ----- Total Loans 31,980 284 3.52 33,314 359 4.26 ------- ----- ------- ----- Securities U.S. Government Obligations 313 2 3.00 521 7 5.14 U.S. Government Agency Obligations 3,464 30 3.44 3,741 47 5.07 Obligations of States and Political Subdivisions 311 6 7.17 504 8 6.55 Other Securities 16,516 144 3.49 12,032 139 4.63 Trading Securities 4,357 27 2.47 6,792 58 3.38 ------- ----- ------- ----- Total Securities 24,961 209 3.35 23,590 259 4.39 ------- ----- ------- ----- Total Interest-Earning Assets 78,645 584 2.94% 64,103 660 4.09% ----- ----- Allowance for Credit Losses (822) (616) Cash and Due from Banks 2,914 2,601 Other Assets 16,416 12,722 ------- ------- TOTAL ASSETS $97,153 $78,810 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Interest-Bearing Deposits Money Market Rate Accounts $ 7,657 $ 13 0.67% $ 6,661 $ 22 1.32% Savings 9,281 17 0.72 8,144 22 1.07 Certificates of Deposit $100,000 & Over 3,840 14 1.47 3,322 18 2.14 Other Time Deposits 1,183 4 1.49 1,475 8 2.17 Foreign Offices 24,452 65 1.06 23,234 95 1.63 ------- ----- ------- ----- Total Interest-Bearing Deposits 46,413 113 0.97 42,836 165 1.53 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 1,687 3 0.68 2,040 8 1.51 Other Borrowed Funds 2,464 6 1.00 1,155 7 2.25 Payables to Customers and Broker-Dealers 5,407 10 0.72 145 1 1.47 Long-Term Debt 6,310 36 2.27 5,467 50 3.59 ------- ----- ------- ----- Total Interest-Bearing Liabilities 62,281 168 1.07% 51,643 231 1.77% ----- ----- Noninterest-Bearing Deposits 13,266 10,792 Other Liabilities 13,555 9,760 Common Shareholders' Equity 8,051 6,615 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $97,153 $78,810 ======= ======= Net Interest Earnings and Interest Rate Spread $ 416 1.87% $ 429 2.32% ===== ==== ===== ==== Net Yield on Interest-Earning Assets 2.10% 2.66% ==== ====
42
THE BANK OF NEW YORK COMPANY, INC. Average Balances and Rates on a Taxable Equivalent Basis (Dollars in millions) For the nine months For the nine months ended September 30, 2003 ended September 30, 2002 ------------------------------ ------------------------------ Average Average Average Average Balance Interest Rate Balance Interest Rate ------- -------- ------- ------- -------- ------- ASSETS - ------ Interest-Bearing Deposits in Banks (primarily foreign) $ 6,381 $ 109 2.28% $ 4,992 $ 106 2.85% Federal Funds Sold and Securities Purchased Under Resale Agreements 7,394 61 1.11 2,957 38 1.70 Margin Loans 3,133 54 2.33 446 9 2.66 Loans Domestic Offices 20,124 642 4.27 18,824 716 5.09 Foreign Offices 11,799 262 2.97 15,361 392 3.41 ------- ----- ------- ----- Total Loans 31,923 904 3.79 34,185 1,108 4.34 ------- ----- ------- ----- Securities U.S. Government Obligations 282 8 3.55 663 26 5.31 U.S. Government Agency Obligations 3,246 93 3.82 3,299 134 5.43 Obligations of States and Political Subdivisions 348 19 7.10 550 27 6.57 Other Securities 15,234 421 3.69 10,235 370 4.82 Trading Securities 4,802 103 2.88 7,882 199 3.38 ------- ----- ------- ----- Total Securities 23,912 644 3.59 22,629 756 4.46 ------- ----- ------- ----- Total Interest-Earning Assets 72,743 1,772 3.26% 65,209 2,017 4.14% ----- ----- Allowance for Credit Losses (826) (616) Cash and Due from Banks 2,825 2,656 Other Assets 14,837 12,117 ------- ------- TOTAL ASSETS $89,579 $79,366 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Interest-Bearing Deposits Money Market Rate Accounts $ 7,493 $ 48 0.86% $ 6,661 $ 66 1.33% Savings 8,971 54 0.81 8,124 70 1.15 Certificates of Deposit $100,000 & Over 4,402 54 1.62 1,701 30 2.35 Other Time Deposits 1,268 16 1.62 1,548 27 2.32 Foreign Offices 24,051 225 1.25 24,283 291 1.60 ------- ----- ------- ----- Total Interest-Bearing Deposits 46,185 397 1.15 42,317 484 1.53 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 1,470 10 0.90 2,148 24 1.48 Other Borrowed Funds 1,510 13 1.17 3,286 60 2.43 Payables to Customers and Broker-Dealers 3,160 19 0.79 179 1 1.07 Long-Term Debt 6,077 116 2.54 5,316 159 3.96 ------- ----- ------- ----- Total Interest-Bearing Liabilities 58,402 555 1.27% 53,246 728 1.83% ----- ----- Noninterest-Bearing Deposits 12,341 10,394 Other Liabilities 11,370 9,321 Common Shareholders' Equity 7,466 6,405 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $89,579 $79,366 ======= ======= Net Interest Earnings and Interest Rate Spread $1,217 1.99% $1,289 2.31% ====== ==== ====== ==== Net Yield on Interest-Earning Assets 2.24% 2.65% ==== ====
43 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 further 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 subsequent U.S. military actions, 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. 44 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. In addition, the Company's earnings releases and management conference calls and presentations are available through the website. 45 THE BANK OF NEW YORK COMPANY, INC. Consolidated Balance Sheets (Dollars in millions, except per share amounts) (Unaudited)
September 30, December 31, 2003 2002 ---- ---- Assets - ------ Cash and Due from Banks $ 3,730 $ 4,748 Interest-Bearing Deposits in Banks 5,321 5,104 Securities Held-to-Maturity (fair value of $268 in 2003 and $952 in 2002) 270 954 Available-for-Sale 22,592 17,346 ------- ------- Total Securities 22,862 18,300 Trading Assets at Fair Value 6,889 7,309 Federal Funds Sold and Securities Purchased Under Resale Agreements 6,683 1,385 Loans (less allowance for credit losses of $817 in 2003 and $831 in 2002) 36,723 30,508 Premises and Equipment 1,088 975 Due from Customers on Acceptances 233 351 Accrued Interest Receivable 279 204 Goodwill 3,156 2,497 Intangible Assets 816 78 Other Assets 7,413 6,105 ------- ------- Total Assets $95,193 $77,564 ======= ======= Liabilities and Shareholders' Equity - ------------------------------------ Deposits Noninterest-Bearing (principally domestic offices) $16,385 $13,301 Interest-Bearing Domestic Offices 19,874 19,997 Foreign Offices 22,684 22,089 ------- ------- Total Deposits 58,943 55,387 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 959 636 Trading Liabilities 2,849 2,800 Payables to Customers and Broker-Dealers 10,170 870 Other Borrowed Funds 987 475 Acceptances Outstanding 235 352 Accrued Taxes and Other Expenses 4,099 4,066 Accrued Interest Payable 125 101 Other Liabilities 2,305 753 Long-Term Debt 6,298 5,440 ------- ------- Total Liabilities 86,970 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 1,039,086,738 shares in 2003 and 993,697,297 shares in 2002 7,793 7,453 Additional Capital 1,594 847 Retained Earnings 5,168 4,736 Accumulated Other Comprehensive Income 105 134 ------- ------- 14,660 13,170 Less: Treasury Stock (265,248,941 shares in 2003 and 267,240,854 shares in 2002), at cost 6,434 6,483 Loan to ESOP (485,533 shares in 2003 and in 2002), at cost 3 3 ------- ------- Total Shareholders' Equity 8,223 6,684 ------- ------- Total Liabilities and Shareholders' Equity $95,193 $77,564 ======= ======= - ---------------------------------------------------------------------------------------- Note: The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date.
46
THE BANK OF NEW YORK COMPANY, INC. Consolidated Statements of Income (In millions, except per share amounts) (Unaudited) For the three For the nine months ended months ended September 30, September 30, 2003 2002 2003 2002 ---- ---- ---- ---- Interest Income - --------------- Loans $ 284 $ 359 $ 904 $1,108 Margin loans 31 3 54 9 Securities Taxable 162 175 477 474 Exempt from Federal Income Taxes 11 15 37 47 ------ ----- ------ ------ 173 190 514 521 Deposits in Banks 38 28 109 106 Federal Funds Sold and Securities Purchased Under Resale Agreements 22 11 61 38 Trading Assets 27 58 103 199 ------ ----- ------ ------ Total Interest Income 575 649 1,745 1,981 ------ ----- ------ ------ Interest Expense - ---------------- Deposits 113 165 397 484 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 3 8 10 24 Other Borrowed Funds 6 7 13 60 Customer Payables 10 1 19 1 Long-Term Debt 36 50 116 159 ------ ----- ------ ------ Total Interest Expense 168 231 555 728 ------ ----- ------ ------ Net Interest Income 407 418 1,190 1,253 - ------------------- Provision for Credit Losses 40 225 120 295 ------ ----- ------ ------ Net Interest Income After Provision for Credit Losses 367 193 1,070 958 ------ ----- ------ ------ Noninterest Income - ------------------ Servicing Fees Securities 657 480 1,728 1,411 Global Payment Services 80 74 238 220 ------ ----- ------ ------ 737 554 1,966 1,631 Private Client Services and Asset Management Fees 97 85 281 256 Service Charges and Fees 89 90 278 264 Foreign Exchange and Other Trading Activities 92 49 246 183 Securities Gains 9 (188) 26 (131) Other 39 46 107 106 ------ ----- ------ ------ Total Noninterest Income 1,063 636 2,904 2,309 ------ ----- ------ ------ Noninterest Expense - ------------------- Salaries and Employee Benefits 533 397 1,454 1,202 Net Occupancy 69 76 192 175 Furniture and Equipment 50 32 134 101 Other 364 201 853 573 Merger and Integration Costs 23 - 48 - ------ ----- ------ ------ Total Noninterest Expense 1,039 706 2,681 2,051 ------ ----- ------ ------ Income Before Income Taxes 391 123 1,293 1,216 Income Taxes 131 44 443 414 ------ ----- ------ ------ Net Income $ 260 $ 79 $ 850 $ 802 - ---------- ====== ===== ====== ====== Per Common Share Data: - ---------------------- Basic Earnings $0.34 $0.11 $1.14 $1.11 Diluted Earnings 0.34 0.11 1.13 1.10 Cash Dividends Paid 0.19 0.19 0.57 0.57 Diluted Shares Outstanding 774 727 753 729 - ------------------------------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements.
47
THE BANK OF NEW YORK COMPANY, INC. Consolidated Statement of Changes in Shareholders' Equity For the nine months ended September 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 40 ------- Balance, September 30 7,793 ------- Additional Capital Balance, January 1 847 Issuance of Common Stock related to Pershing 696 Issuances in Connection with Employee Benefit Plans 51 ------- Balance, September 30 1,594 ------- Retained Earnings Balance, January 1 4,736 Net Income $ 850 850 Cash Dividends on Common Stock (418) ------- Balance, September 30 5,168 ------- Accumulated Other Comprehensive Income Securities Valuation Allowance Balance, January 1 155 Change in Fair Value of Securities Available-for-Sale, Net of Taxes of ($43) Million (55) (55) Reclassification Adjustment, Net of Taxes of $22 Million 29 29 ------- Balance, September 30 129 ------- Foreign Currency Items Balance, January 1 (47) Foreign Currency Translation Adjustment, Net of Taxes of $(7) Million (4) (4) ------- Balance, September 30 (51) ------- Unrealized Derivative Gains Balance, January 1 26 Net Unrealized Derivative Gains on Cash Flow Hedges, Net of Taxes of $- Million 1 1 ------ ------ Balance, September 30 27 ------ Total Comprehensive Income $ 821 ====== Less Treasury Stock Balance, January 1 6,483 Issued (66) Acquired 17 ------- Balance, September 30 6,434 ------- Less Loan to ESOP Balance, January 1 3 ------- Balance, September 30 3 ------- Total Shareholders' Equity, September 30 $ 8,223 ======= - ------------------------------------------------------------------------------------------ Comprehensive Income for the three months ended September 30, 2003 and 2002 was $207 million and $170 million. Comprehensive Income for the nine months ended September 30, 2003 and 2002 was $821 million and $845 million. See accompanying Notes to Consolidated Financial Statements.
48 THE BANK OF NEW YORK COMPANY, INC. Consolidated Statements of Cash Flows (In millions) (Unaudited)
For the nine months ended September 30, 2003 2002 ---- ---- Operating Activities Net Income $ 850 $ 802 Adjustments to Determine Net Cash Attributable to Operating Activities Provision for Losses on Loans and Other Real Estate 120 295 Depreciation and Amortization 307 147 Deferred Income Taxes 314 195 Securities Gains (26) 131 Change in Trading Activities 501 (295) Change in Accruals and Other, Net (1,086) 333 ------ ------ Net Cash Provided by Operating Activities 980 1,608 ------ ------ Investing Activities Change in Interest-Bearing Deposits in Banks (16) 2,537 Change in Margin Loans (734) 45 Purchases of Securities Held-to-Maturity - (60) Paydowns of Securities Held-to-Maturity 670 107 Maturities of Securities Held-to-Maturity 10 18 Purchases of Securities Available-for-Sale (22,408) (15,433) Sales of Securities Available-for-Sale 5,047 4,471 Paydowns of Securities Available-for-Sale 7,406 2,182 Maturities of Securities Available-for-Sale 4,642 3,632 Net Principal Received (Disbursed) on Loans to Customers (434) 1,370 Sales of Loans and Other Real Estate 542 244 Change in Federal Funds Sold and Securities Purchased Under Resale Agreements (1,100) 2,385 Purchases of Premises and Equipment (98) (165) Acquisitions, Net of Cash Acquired (1,773) (348) Proceeds from the Sale of Premises and Equipment 7 1 Other, Net 826 (267) ------ ------ Net Cash (Used) Provided by Investing Activities (7,413) 719 ------ ------ Financing Activities Change in Deposits 2,961 417 Change in Federal Funds Purchased and Securities Sold Under Repurchase Agreements (310) (500) Change in Payables to Customers and Broker-Dealers 1,689 (220) Change in Other Borrowed Funds (530) (1,195) Proceeds from the Issuance of Long-Term Debt 1,915 1,325 Repayments of Long-Term Debt (1,029) (1,005) Issuance of Common Stock 1,153 163 Treasury Stock Acquired (17) (280) Cash Dividends Paid (418) (412) ------ ------ Net Cash Provided (Used) by Financing Activities 5,414 (1,707) ------ ------ Effect of Exchange Rate Changes on Cash 1 (89) ------ ------ Change in Cash and Due From Banks (1,018) 531 Cash and Due from Banks at Beginning of Period 4,748 3,222 ------ ------ Cash and Due from Banks at End of Period $3,730 $3,753 ====== ====== - ---------------------------------------------------------------------------- Supplemental Disclosure of Cash Flow Information Cash Paid During the Period for: Interest $ 531 $ 702 Income Taxes 386 222 Noncash Investing Activity (Primarily Foreclosure of Real Estate) - 1 - ---------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements.
49 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 ---------------------------------------------------- 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. On January 1, 2003, the Company adopted the fair value method of accounting for its options under 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. For the nine months ended September 30, 2003, approximately 18 million options were granted. In the first nine months of 2003, the Company recorded $19 million of stock option expense. 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, 3rd Quarter Year-to-date except per share amounts) 2003 2002 2003 2002 ----- ----- ---- ---- Reported net income $260 $ 79 $850 $802 Stock based employee compensation costs, using prospective method, net of tax 6 - 13 - Stock based employee compensation costs, using retroactive restatement method, net of tax (22) (24) (62) (64) ---- ---- ---- ---- Pro forma net income $244 $ 55 $801 $738 ==== ==== ==== ==== Reported diluted earnings per share $0.34 $0.11 $1.13 $1.10 Impact on diluted earnings per share (0.02) (0.03) (0.05) (0.08) ----- ----- ----- ----- Pro forma diluted earnings per share $0.32 $0.08 $1.08 $1.02 ===== ===== ===== ===== 50 The fair value of options granted in 2003 and 2002 were estimated at the grant date using the following weighted average assumptions: Third Quarter Year to date 2003 2002 2003 2002 ---- ---- ---- ---- Dividend yield 3.00% 3.00% 3.00% 3.00% Expected volatility 33.92 30.40 32.79 29.78 Risk free interest rates 3.25 3.12 3.49 4.35 Expected options lives 5 5 5 5 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. On October 1, 2002, the Company adopted 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. On July 1, 2003, the Company adopted SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS 149). SFAS 149 amends and clarifies accounting for derivative instruments. The adoption of SFAS 149 did not have an impact on the Company's results of operations or financial condition. On July 1, 2003, the Company adopted SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". The provisions of this 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 adoption of SFAS 150 did not have an impact on the Company's results of operations or financial condition. On January 1, 2003, the Company adopted 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. On February 1, 2003, the Company adopted 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 51 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. The consolidation requirements of FIN 46 applied immediately to VIEs created after January 31, 2003 and apply to previously established entities effective October 1, 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 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 fourth 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. 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 third quarter of 2003, there were no businesses acquired. During the first nine months of 2003, 5 businesses were acquired for the total cost of $2,045 million, primarily paid in cash. The principal acquisition was Pershing. 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. Goodwill related to third quarter and first nine months of 2003 acquisition transactions was zero and $622 million, respectively. The tax deductible portion of goodwill for the third quarter and first nine months of 2003 is zero and $614 million. All of the goodwill was assigned to the Company's Servicing and Fiduciary Business segment. At September 30, 2003, the Company was liable for potential contingent payments related to acquisitions in the amount of $693 million. During the third quarter and first nine months of 2003, the Company paid zero and $26 million for contingent payments related 52 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 approximately 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 $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 September 30, 2003. The Company expects the acquisition to be dilutive to its earnings by approximately $0.02 per share in 2003 (not including dilution in 2003 of approximately $0.07 per share from merger and integration charges associated with the acquisition), and accretive by $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 added new clients in execution services and improves market coverage in the Chicago area/Midwest. It was 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, expanded 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. 53 4. Goodwill and Intangibles ------------------------ Goodwill by segment as of September 30, 2003 is as follows: Servicing and Fiduciary Corporate Retail Financial Consolidated (In millions) Businesses Banking Banking Markets Total ---------- --------- ------- --------- ----------- Balance as of September 30, 2003 $3,016 $31 $109 $ - $3,156 ====== === ==== === ====== The Company's business segments are tested annually for goodwill impairment. 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 (51) 446 16 The aggregate amortization expense of intangibles was $8 million and $0.4 million for the quarters ended September 30, 2003 and 2002, respectively. The aggregate amortization expense of intangibles was $18 million and $5 million for the nine months ended September 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 $27 2004 33 2005 33 2006 33 2007 33 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 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. 54 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:
Nine months ended September 30, (In millions) 2003 2002 ---- ---- Balance, Beginning of Period $831 $616 Charge-Offs (147) (242) Recoveries 13 12 ---- ---- Net Charge-Offs (134) (230) Provision 120 295 ---- ---- Balance, End of Period $817 $681 ==== ====
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 $54 million of subordinated debt in the third quarter of 2003 and $584 million for the first nine 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 Trust Preferred Securities. At October 31, 2003, the Company has a registration statement with a remaining capacity of approximately $782 million of debt, preferred stock, preferred trust securities, or common stock. 55 7. Earnings Per Share ------------------ The following table illustrates the computations of basic and diluted earnings per share:
Three Months Ended Nine Months Ended September 30, September 30, (In millions, except per share amounts) 2003 2002 2003 2002 ---- ---- ---- ---- Net Income (1) $260 $ 79 $850 $802 ==== ==== ==== ==== Basic Weighted Average Shares Outstanding 766 721 746 722 Shares Issuable on Exercise of Employee Stock Options 8 6 7 7 ---- ---- ---- ---- Diluted Weighted Average Shares Outstanding 774 727 753 729 ==== ==== ==== ==== Basic Earnings Per Share: $0.34 $0.11 $1.14 $1.11 Diluted Earnings Per Share: 0.34 0.11 1.13 1.10 (1) Net Income, net income available to common shareholders and diluted net income are the same for all periods presented.
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 September 30, 2003 and December 31, 2002 follows: Off-Balance-Sheet Credit Risks - ------------------------------ September 30, December 31, In millions 2003 2002 - ----------- ------------ ------------ Lending Commitments $ 35,824 $ 40,330 Standby Letters of Credit, net 9,654 9,577 Commercial Letters of Credit 1,050 1,052 Securities Lending Indemnifications 175,330 138,264 Standby Bond Purchase Agreements 1,507 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 September 30, 2003 and December 31, 2002 was $89 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 September 30, 2003 and December 31, 2002, securities lending indemnifications were secured by collateral of $183.9 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. 56 Standby letters of credit principally support corporate obligations and include $0.8 billion and $0.5 billion that were collateralized with cash and securities on September 30, 2003 and December 31, 2002. At September 30, 2003, approximately $6.7 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 September 30, 2003 and December 31, 2002 were $38 million and $40 million. At September 30, 2003, the notional amounts and credit exposures for the Company's credit derivatives swaps were $1,692 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 or 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. The IRS recently issued internal guidance reiterating its intent to challenge these transactions, but, at the same time, also indicated that it may consider settlement discussions with taxpayers. It is not known at this time whether the IRS would consider settling on terms that would be acceptable to the Company. 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. Earlier this year, the IRS has publicly indicated that it planned 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. In October, however, the IRS announced that it had completed its review and concluded that the test procedures and results are scientifically valid if applied in a consistent and unbiased manner. As a result, the IRS will resume issuing private letter rulings on the same basis as the rulings issued in respect of the Company's investments. 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. 57 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 September 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 October 31, 2003, The Bank of New York Company, Inc. had 773,582,157 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 September 30, 2003 and December 31, 2002 45 Consolidated Statements of Income for the three months and nine months ended September 30, 2003 and 2002 46 Consolidated Statement of Changes in Shareholders' Equity for the nine months Ended September 30, 2003 47 Consolidated Statement of Cash Flows for the nine months ended September 30, 2003 and 2002 48 Notes to Consolidated Financial Statements 49 - 56 Consolidated Average Balance Sheet and Net Interest Analysis 41 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 2 - 44 Item 3 Quantitative and Qualitative Disclosures About Market Risk 38 - 40 58 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) and 15d-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. 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 the Bank. Plaintiffs have sought leave to appeal to the New York State Court of Appeals. On September 16, 2003, that request was denied. The Company does not expect that any of the foregoing civil actions will have a material impact on the Company's consolidated financial statements. On September 29, 2003, the Company announced that it had agreed to a settlement regarding GMAC's claims relating to the Company's 1999 sale to GMAC of BNY Financial Corporation, the Company's factoring and asset-based finance business. The settlement resolved claims between the parties with a payment of $110 million by the Company to GMAC. After accounting for a previously established reserve for this matter, the net impact of the settlement was approximately 6 cents per fully diluted share, recorded by the Company as a non-operating charge in the third quarter of 2003. The Bank of New York sold BNY Financial Corporation to GMAC for $1.8 billion in cash in 1999. 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 59 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. The Company is broadly involved with the mutual fund industry, and various governmental and self-regulatory agencies have sought information from it in connection with investigations relating to that industry. 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 2. Changes in Securities and Use of Proceeds Shares of the Company's common stock were issued in the following transactions exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) thereof: (a) On June 16, 2003, 9,600 shares of common stock were issued to serving non-employee directors as part of their annual retainer. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) The exhibits filed as part of this report are as follows: Exhibit 10 - Severance Agreement dated August 20, 2003. Exhibit 12 - Statement Re: Ratio of Earnings to Fixed Charges for the Three Months and Nine Months Ended September 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 June 30, 2003: 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. On October 22, 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 third quarter of 2003 contained in the Company's press release dated October 22, 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: November 12, 2003 By: /s/ Thomas J. Mastro ------------------------- Name: Thomas J. Mastro Title: Comptroller 61 EXHIBIT INDEX ------------- Exhibit Description - ------- ----------- 10 Severance Agreement dated August 20, 2003. 12 Ratio of Earnings to Fixed Charges for the Three Months and Nine Months Ended September 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-10 3 r3q03ex10.txt EX-10 Exhibit 10 1 July 8, 2003 Kurt D. Woetzel The Bank of New York One Wall Street New York, New York 10286 Dear Mr. Woetzel: The Bank of New York Company, Inc., a New York corporation (the "Company"), considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of the Company and its shareholders. In this connection, the Company recognizes that, as is the case with many publicly held corporations, the possibility of a change in control may arise and that such possibility, and the uncertainty and questions which it may raise among management of the Company and its principal subsidiary, The Bank of New York (the "Bank"), may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders. Accordingly, the Board of Directors of the Company (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of management of the Company and the Bank to their assigned duties without distraction in circumstances arising from the possibility of a change in control of the Company. In particular, the Board believes it important, should the Company or its shareholders receive a proposal for transfer of control of the Company, that you be able to assess and advise the Board whether such proposal would be in the best interests of the Company and its shareholders and to take such other action regarding such proposal as the Board might determine to be appropriate, without being influenced by the uncertainties of your own situation. In order to induce you to remain in the employ of the Company, this letter agreement sets forth the severance benefits which the Company agrees will be provided to you in the event your employment with the Company or the Bank is terminated subsequent to a "change in control" of the Company under the circumstances described below. 1. Agreement to Provide Services; Right to Terminate. (i) Except as otherwise provided in paragraph (ii) below, the Company, the Bank or you may terminate your employment at any time, subject to the Company's providing the benefits hereinafter specified in accordance with the terms hereof. (ii) In the event a tender offer or exchange offer is made by a Person (as hereinafter defined) for more than 25% of the combined voting 2 power of the Company's outstanding securities ordinarily having the right to vote at elections of directors ("Voting Securities"), including shares of the common stock of the Company, you agree that you will not leave the employ of the Company or the Bank (other than as a result of Disability or upon Retirement, as such terms are hereinafter defined) and will render the services contemplated in the recitals to this Agreement until such tender offer or exchange offer has been abandoned or terminated or a change in control of the Company, as defined in Section 3 hereof, has occurred. For purposes of this Agreement, the term "Person" shall mean and include any individual, corporation, partnership, group, association or other "person", as such term is used in Section 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), other than the Company, the Bank, any other subsidiary of the Company or any employee benefit plan(s) sponsored by the Company, the Bank or any other subsidiary of the Company. 2. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until December 31, 2005; provided, however, that commencing on January 1, 2006 and each January 1 thereafter, the term of this Agreement shall automatically be extended for one additional year unless at least 90 days prior to such January 1st date, the Company or you shall have given notice that this Agreement shall not be extended; and provided, further, that, notwithstanding the delivery of any such notice, this Agreement shall continue in effect for a period of twenty-four (24) months after a change in control of the Company, as defined in Section 3 hereof, if such change in control shall have occurred during the term of this Agreement, as it may be extended by the first proviso set forth above. Notwithstanding anything in this Section 2 to the contrary, this Agreement shall terminate if you or the Company or the Bank terminate your employment prior to a change in control of the Company. 3. Change in Control. For purposes of this Agreement, a "change in control" of the Company shall be deemed to occur if (A) any "person" (as such term is defined in Section 3(a)(9) and as used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), excluding the Company or any of its subsidiaries, a trustee or any fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, an underwriter temporarily holding securities pursuant to an offering of such securities or a corporation owned, directly or indirectly, by stockholders of the Company in substantially the same proportion as their ownership of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities ("Voting Securities"); provided, however, that the event described in this clause (A) shall not be deemed to be a change in control if (x) it involves the acquisition of the Company's Voting Securities from the Company in connection with the acquisition by the Company of a business or operations of or controlled by such person, (y) a majority of the Incumbent Directors (as defined below) approve a resolution providing expressly that such acquisition does not constitute a change in control under this Section 3 and (z) such person does not become the beneficial owner of 35% or more of the Company's Voting Securities; or (B) during any period of not more than two years, individuals who constitute the Board as of the beginning of 3 the period (the "Incumbent Directors") and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (A) or (C) of this sentence) whose election by the Board or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds of the Incumbent Directors then on the Board, either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination (each such new director shall also be deemed to be an Incumbent Director) cease for any reason to constitute a majority of the Board; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest with respect to directors, as a result of any other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board or as a result of an actual or threatened acquisition of 25% or more of the Company's Voting Securities shall be deemed to be an Incumbent Director; or (C) there occurs the consummation of a merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or any of its subsidiaries that requires the approval of the Company's shareholders, whether for such transaction or the issuance of securities in the transaction (a "Business Combination"), unless immediately following such Business Combination: (i) at least 60% of the total voting power of (x) the corporation resulting from such Business Combination (the "Surviving Corporation"), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 95% or more of the voting securities eligible to elect directors of the Surviving Corporation (the "Parent Corporation"), is represented by the Company's Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, is represented by shares into which such Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of the Company's Voting Securities among the holders thereof immediately prior to the Business Combination and (ii) after giving effect to the Business Combination, at least (I) a majority of the members of the board of directors of the Surviving Corporation and of any corporation that owns 25% or more but less than 50% of the Voting Securities of the Surviving Corporation or (II) a majority of the members of the board of directors of any corporation that owns at least 50% of the Voting Securities of the Surviving Corporation, were Incumbent Directors at the time of the Board's approval of the execution of the initial agreement providing for such Business Combination; or (D) the shareholders of the Company approve a plan of complete liquidation of the Company; or (E) the consummation of the sale or disposition by the Company of all or substantially all of the Company's assets. 4. Termination Following Change in Control. If any of the events described in Section 3 hereof constituting a change in control of the Company shall have occurred, you shall be entitled to the benefits provided in Section 5 hereof upon the termination of your employment with the Company or the Bank within twenty-four (24) months after such event, unless such termination is (a) because of your death or Retirement, (b) by the Company for Cause or Disability or (c) by you other than for Good Reason (as all such capitalized terms are hereinafter defined). 4 (i) Disability. Termination by the Company of your employment based on "Disability" shall mean your absence from your duties with the Company on a full time basis for one hundred eighty (180) consecutive days as a result of your incapacity due to physical or mental illness, unless within thirty (30) days after Notice of Termination (as hereinafter defined) is given to you following such absence you shall have returned to the full time performance of your duties. (ii) Retirement. Termination by you or by the Company of your employment based on "Retirement" shall mean termination on or after your attainment of age sixty-five (65). (iii) Cause. Termination by the Company or the Bank of your employment for "Cause" shall mean termination upon (a) the willful and continued failure by you to perform substantially your duties with the Company or the Bank (other than any such failure resulting from your incapacity due to physical or mental illness) after a demand for substantial performance is delivered to you by the Chairman of the Board or President of the Company or the Chief Executive Officer of the Bank, as appropriate, which specifically identifies the manner in which such executive believes that you have not substantially performed your duties, or (b) the willful engaging by you in illegal conduct which is materially and demonstrably injurious to the Company or the Bank. For purposes of this paragraph (iii), no act, or failure to act, on your part shall be considered "willful" unless done, or omitted to be done, by you in bad faith and without reasonable belief that your action or omission was in, or not opposed to, the best interests of the Company or the Bank. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company or the Bank shall be conclusively presumed to be done, or omitted to be done, by you in good faith and in the best interests of the Company and the Bank. It is also expressly understood that your attention to matters not directly related to the business of the Company or the Bank shall not provide a basis for termination for Cause so long as the Board has approved your engagement in such activities. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of the conduct set forth above in (a) or (b) of this paragraph (iii) and specifying the particulars thereof in detail. (iv) Good Reason. Termination by you of your employment for "Good Reason" shall mean termination based on: (A) a determination by you, in your reasonable judgment, that there has been an adverse change in your status or position(s) as an executive officer of the Company or the Bank as in effect immediately prior to the change in control, including, without limitation, any adverse change in your status or position as a result of a diminution in your duties or responsibilities (other than, if applicable, any such change directly attributable to the fact that the Company is no longer 5 publicly owned) or the assignment to you of any duties or responsibilities which are inconsistent with such status or position(s), or any removal of you from or any failure to reappoint or reelect you to such position(s) (except in connection with the termination of your employment for Cause, Disability or Retirement or as a result of your death or by you other than for Good Reason); (B) a reduction by the Company or the Bank in your base salary as in effect immediately prior to the change in control; (C) the failure by the Company or the Bank to continue in effect any Plan (as hereinafter defined) in which you are participating at the time of the change in control of the Company (or Plans providing you with at least substantially similar benefits) other than as a result of the normal expiration of any such Plan in accordance with its terms as in effect at the time of the change in control, or the taking of any action, or the failure to act, by the Company or the Bank which would adversely affect your continued participation in any of such Plans on at least as favorable a basis to you as is the case on the date of the change in control or which would materially reduce your benefits in the future under any of such Plans or deprive you of any material benefit enjoyed by you at the time of the change in control; (D) the failure by the Company or the Bank to provide and credit you with the number of paid vacation days to which you are then entitled in accordance with its normal vacation policy as in effect immediately prior to the change in control; (E) the requirement by the Company or the Bank that you be based at an office that is greater than 35 miles from where your office is located immediately prior to the change in control except for required travel on the business of the Company or the Bank to an extent substantially consistent with the business travel obligations which you undertook on behalf of the Company or the Bank prior to the change in control; (F) the failure by the Company to obtain from any Successor (as hereinafter defined) the assent to this Agreement contemplated by Section 6 hereof; (G) any purported termination by the Company or the Bank of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of paragraph (v) below (and, if applicable, paragraph (iii) above); and for purposes of this Agreement, no such purported termination shall be effective; or (H) any refusal by the Company or the Bank to continue to allow you to attend to matters or engage in activities not directly related to the business of the Company or the Bank which, prior to the change in control, you were permitted by the Board to attend to or engage in. For purposes of this Agreement, "Plan" shall mean any compensation plan such as an incentive, stock option or restricted stock plan or any employee benefit plan such as a thrift, pension, profit sharing, medical, 6 disability, accident, life insurance plan or a relocation plan or policy or any other plan, program or policy of the Company or the Bank intended to benefit employees. (v) Notice of Termination. Any purported termination by the Company or the Bank or by you following a change in control shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon. (vi) Date of Termination. "Date of Termination" following a change in control shall mean (a) if your employment is to be terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the performance of your duties on a full-time basis during such thirty (30) day period), (b) if your employment is to be terminated by the Company or the Bank for Cause or by you pursuant to Sections 4(iv)(F) and 6 hereof or for any other Good Reason, the date specified in the Notice of Termination, or (c) if your employment is to be terminated by the Company or the Bank for any reason other than Cause, the date specified in the Notice of Termination, which in no event shall be a date earlier than ninety (90) days after the date on which a Notice of Termination is given, unless an earlier date has been expressly agreed to by you in writing either in advance of, or after, receiving such Notice of Termination. In the case of termination by the Company or the Bank of your employment for Cause, if you have not previously expressly agreed in writing to the termination, then within thirty (30) days after receipt by you of the Notice of Termination with respect thereto, you may notify the Company that a dispute exists concerning the termination, in which event the Date of Termination shall be the date set either by mutual written agreement of the parties or by the arbitrators in a proceeding as provided in Section 13 hereof. During the pendency of any such dispute, the Company or the Bank will continue to pay you your full compensation in effect just prior to the time the Notice of Termination is given and until the dispute is resolved in accordance with Section 13. 5. Compensation Upon Termination or During Disability; Other Agreements. (i) During any period following a change in control of the Company that you fail to perform your duties as a result of incapacity due to physical or mental illness, you shall continue to receive your salary at the rate then in effect and any benefits or awards under any Plans shall continue to accrue during such period, to the extent not inconsistent with such Plans, until your employment is terminated pursuant to and in accordance with Sections 4(i) and 4(vi) hereof. Thereafter, your benefits shall be determined in accordance with the Plans then in effect. (ii) If your employment shall be terminated for Cause following a change in control of the Company, the Company or the Bank shall pay you your salary through the Date of Termination at the rate in effect just prior to the time a Notice of Termination is given plus any benefits or awards (including both the cash and stock components) which 7 pursuant to the terms of any Plans have been earned and are otherwise payable, but which have not yet been paid to you. Thereupon the Company and the Bank shall have no further obligations to you under this Agreement. (iii) If, within twenty-four (24) months after a change in control of the Company shall have occurred, your employment by the Company or the Bank shall be terminated (a) by the Company or the Bank other than for Cause, Disability or Retirement or (b) by you for Good Reason, then the Company shall pay or cause the Bank to pay to you, no later than the fifth business day following the Date of Termination, without regard to any contrary provisions of any Plan, the following: (A) (x) your salary through the Date of Termination at the rate in effect just prior to the time a Notice of Termination is given, (y) any benefits or awards (including both the cash and stock components) which pursuant to the terms of any Plans have been earned and otherwise payable, but which have not yet been paid to you and (z) a pro rata portion of your annual bonus for the fiscal year in which the Date of Termination occurs in an amount equal to the result of multiplying (1) the greater of (I)(aa) the bonus payable to you for the prior fiscal year pursuant to the terms of the Company's 1994 Management Incentive Compensation Plan (the "MICP")(or any successor plan) and (bb) one plus the average percentage increase (if any) of (i) the bonus payable under the MICP (or any successor plan) for the fiscal year in which your Date of Termination occurs, determined based on performance through your Date of Termination, to each of the officers of the Company who is both (w) a named executive officer (within the meaning of Item 402 of Regulation S-K under the Exchange Act) of the Company for the last complete fiscal year which ended prior to the date of the change in control of the Company and (v) is a Covered Employee as such term is defined in the 1994 MICP (or a successor plan) for the fiscal year in which the change in control of the Company occurs over (ii) the bonus payable to each of such named executive officers for the fiscal year immediately prior to your Date of Termination and (II) the bonus payable to you under the MICP (or any successor plan) for the fiscal year ended prior to your Date of Termination, and (2) a fraction, the numerator of which is the number of days in the fiscal year in which the Date of Termination occurs through the Date of Termination and the denominator of which is three hundred sixty-five (365); and (B) as severance pay a lump sum in cash equal to the sum of the following amounts: (1) two times the sum of (x) your annual rate of salary in effect just prior to the time a Notice of Termination is given or, if higher, the annual salary in effect immediately prior to the change in control of the Company and (y) the highest annual bonus earned by you from the Company and its affiliates during the last three (3) completed fiscal years of the Company immediately preceding your Date of Termination, annualized in the event you were not employed by the Company or its affiliates for the whole of any such fiscal year (the "Bonus Amount"); and 8 (2) the lump sum actuarial equivalent (utilizing actuarial assumptions no less favorable to you than those in effect under the Company's Retirement Plan immediately prior to the change in control) of the excess of the (A) benefits under the Company's Retirement Plan, Excess Benefit Plan and Supplemental Executive Retirement Plan (collectively, the "Defined Benefit Plans") which you would receive if your employment continued for two years after the Date of Termination (and that your age was increased by two years from your age at the Date of Termination), assuming for this purpose that (x) your accrued benefits under the Defined Benefit Plans were fully vested, (y) in each of the two years you received (a) salary at the annual rate in effect immediately prior to the change in control and (b) bonus compensation equal to the Bonus Amount and (z) there were no reduction or offset under the Defined Benefit Plans for the actuarial value of your account under the Employee Stock Ownership Plan of The Bank of New York Company, Inc. (the "ESOP"), over (B) the vested accrued benefits payable under the Defined Benefit Plans as of the Date of Termination if there were no reduction or offset thereunder for the actuarial value of your ESOP account. (iv) If, within twenty-four (24) months after a change in control of the Company, as defined in Section 3 above, shall have occurred, your employment by the Company or the Bank shall be terminated (a) by the Company or the Bank other than for Cause, Disability or Retirement or (b) by you for Good Reason, then the Company shall maintain or cause the Bank to maintain in full force and effect, for the continued benefit of you and your dependents for a period terminating on the earliest of (a) two years after the Date of Termination, (b) the commencement date of equivalent benefits from a new employer or (c) your attainment of age sixty-five (65), all insured and self-insured employee welfare benefit Plans in which you were entitled to participate immediately prior to the Date of Termination, provided that your continued participation is possible under the general terms and provisions of such Plans (and any applicable funding media) and you continue to pay an amount equal to your regular contribution under such plans for such participation. If, at the end of two years after the Termination Date, you have not reached your sixty-fifth birthday and you have not previously received or are not then receiving equivalent benefits from a new employer, the Company shall or cause the Bank to arrange, at its sole cost and expense, to enable you to convert your and your dependents' coverage under such Plans to individual policies or programs upon the same terms as employees of the Company and the Bank may apply for such conversions. In the event that your participation in any such Plan is barred, the Company shall or cause the Bank, at its sole cost and expense, to arrange to have issued for the benefit of you and your dependents individual policies of insurance providing benefits substantially similar (on an after-tax basis) to those which you otherwise would have been entitled to receive under such Plans pursuant to this paragraph (iv) or, if such insurance is not available at a reasonable cost to the Company or the Bank, the Company shall or cause the Bank to otherwise provide you and your dependents with equivalent benefits (on an after-tax basis). You shall not be required to pay any premiums or other charges in an amount greater than that which you would have paid in order to participate in such Plans. (v) In the event it shall be determined that any payment, award, benefit or distribution (or any acceleration of any payment, 9 award, benefit or distribution) by the Company (or any of its affiliated entities) or any entity which effectuates a change in control (or any of its affiliated entities) to or for your benefit, whether pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 5 (the "Payments"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties are incurred by you with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Company shall pay you an additional payment (a "Gross-Up Payment") in an amount such that after payment by you of all taxes (including any Excise Tax) imposed upon the Gross-Up Payment, you retain an amount of the Gross-Up Payment equal to the sum of (x) the Excise Tax imposed upon the Payments and (y) the product of any deductions disallowed because of the inclusion of the Gross-up Payment in your adjusted gross income and the highest applicable marginal rate of federal income taxation for the calendar year in which the Gross-up Payment is to be made. For purposes of determining the amount of the Gross-up Payment, you shall be deemed to (i) pay federal income taxes at the highest marginal rates of federal income taxation for the calendar year in which the Gross-up Payment is to be made, (ii) pay applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes and (iii) have otherwise allowable deductions for federal income tax purposes at least equal to those which could be disallowed because of the inclusion of the Gross-up Payment in the Executive's adjusted gross income. The Gross-up Payment under this paragraph (v) with respect to any Payment shall be made no later than thirty (30) days following such Payment. Notwithstanding the foregoing, if it shall be determined that you are entitled to a Gross-Up Payment, but that the Payments would not be subject to the Excise Tax if the Payments were reduced by an amount that is less than 10% of the portion of the Payments that would be treated as "parachute payments" under Section 280G of the Code, then the amounts payable to you under this Agreement shall be reduced (but not below zero) to the maximum amount that could be paid to you without giving rise to the Excise Tax (the "Safe Harbor Cap"), and no Gross-Up Payment shall be made to you. The reduction of the amounts payable hereunder, if applicable, shall be made by reducing first the payments under Section 5(iii)(B)(1), unless an alternative method of reduction is elected by you. For purposes of reducing the Payments to the Safe Harbor Cap, only amounts payable under this Agreement (and no other Payments) shall be reduced. If the reduction of the amounts payable hereunder would not result in a reduction of the Payments to the Safe Harbor Cap, no amounts payable under this Agreement shall be reduced pursuant to this provision. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the Determination, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment") or Gross-up Payments are made by the Company which should not have been made ("Overpayment"), consistent with the calculations required to be made hereunder. In the event that 10 you are thereafter required to make payment of any Excise Tax or additional Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) shall be promptly paid by the Company to or for your benefit. In the event the amount of the Gross-up Payment exceeds the amount necessary to reimburse you for your Excise Tax, the Accounting Firm shall determine the amount of the Overpayment that has been made and any such Overpayment (together with interest at the rate provided in Section 1274(b)(2) of the Code) shall be promptly paid by you (to the extent you have received a refund if the applicable Excise Tax has been paid to the Internal Revenue Service) to or for the benefit of the Company. You shall cooperate, to the extent your expenses are reimbursed by the Company, with any reasonable requests by the Company in connection with any contests or disputes with the Internal Revenue Service in connection with the Excise Tax. (vi) All determinations required to be made under paragraph (v) of this Section, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment or the reduction of the Payments to the Safe Harbor Cap, as well as the assumptions to be utilized in arriving at such determinations, shall be made by the public accounting firm that is retained by the Company as of the date immediately prior to the change in control (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and you within fifteen (15) business days of the receipt of notice from the Company or you that there has been a Payment, or such earlier time as is requested by the Company (collectively, the "Determination"). In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the change in control, you may appoint another nationally recognized public accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company and the Company shall enter into any agreement requested by the Accounting Firm in connection with the performance of the services hereunder. If the Accounting Firm determines that no Excise Tax is payable by you, it shall furnish you with a written opinion to such effect, and to the effect that failure to report the Excise Tax, if any, on your applicable federal income tax return will not result in the imposition of a negligence or similar penalty. In the event the Accounting Firm determines that the Payments shall be reduced to the Safe Harbor Cap, it shall furnish you with a written opinion to such effect. The Determination by the Accounting Firm shall be binding upon the Company and you. (vii) Except as specifically provided in paragraph (iv) above, the amount of any payment provided for in this Section 5 shall not be reduced, offset or subject to recovery by the Company or the Bank by reason of any compensation earned by you as the result of employment by another employer after the Date of Termination, or otherwise. 6. Successors; Binding Agreement. 11 (i) The Company will seek, by written request at least five business days prior to the time a Person becomes a Successor (as hereinafter defined), to have such Person by agreement in form and substance satisfactory to you, assent to the fulfillment of the Company's obligations under this Agreement. Failure of such Person to furnish such assent by the later of (A) three business days prior to the time such Person becomes a Successor or (B) two business days after such Person receives a written request to so assent shall constitute Good Reason for termination by you of your employment if a change in control of the Company occurs or has occurred. For purposes of this Agreement, "Successor" shall mean any Person that succeeds to, or has the practical ability to control (either immediately or with the passage of time), the Company's business directly, by merger or consolidation, or indirectly, by purchase of the Company's Voting Securities or otherwise. (ii) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devisee, legatee or other designee or, if there be no such designee, to your estate. (iii) For purposes of this Agreement, the "Company" shall include any corporation or other entity which is the surviving or continuing entity in respect of any merger, consolidation or form of business combination in which the Company ceases to exist. 7. Fees, Expenses and Interest; Mitigation. (i) The Company shall, or cause the Bank to, reimburse you, on a current basis, for all reasonable legal fees and related expenses incurred by you in connection with the Agreement following a change in control of the Company, including, without limitation, (a) all such fees and expenses, if any, incurred in contesting or disputing any termination of your employment or incurred by you in seeking advice with respect to the matters set forth in Section 8 hereof or (b) your seeking to obtain or enforce any right or benefit provided by this Agreement, in each case, regardless of whether or not your claim is upheld by a court of competent jurisdiction; provided, however, you shall be required to repay any such amounts to the Company to the extent that a court issues a final and non- appealable order setting forth the determination that the position taken by you was frivolous or advanced by you in bad faith. In addition to the fees and expenses provided herein, you shall also be paid interest on any disputed amount ultimately paid to you at the prime rate announced by the Bank from time to time from the date payment should have been made until paid in full. (ii) You shall not be required to mitigate the amount of any payment the Company or the Bank becomes obligated to make to you in connection with this Agreement, by seeking other employment or otherwise. 12 8. Taxes. All payments to be made to you under this Agreement will be subject to required withholding of federal, state and local income and employment taxes. 9. Survival. The respective obligations of, and benefits afforded to, the Company and you as provided in Sections 5, 6(ii), 7, 8, 13 and 14 of this Agreement shall survive termination of this Agreement. 10. Notice. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid and addressed, in the case of the Company, to the address set forth on the first page of this Agreement or, in the case of the undersigned employee, to the address set forth below his signature, provided that all notices to the Company shall be directed to the attention of the Chairman of the Board or President of the Company, with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in a writing signed by you and the Chairman of the Board or President of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York applied without regard to conflict of laws principles. 12. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in New York City by three arbitrators in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrators' award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. The Company shall bear all costs and expenses arising in connection with any arbitration proceeding pursuant to this Section 13. 14. Employee's Commitment. You agree that subsequent to your period of employment with the Company and the Bank, you will not at any 13 time communicate or disclose to any unauthorized person, without the written consent of the Company, any proprietary processes of the Company or any subsidiary or other confidential information concerning their business, affairs, products, suppliers or customers which, if disclosed, would have a material adverse effect upon the business or operations of the Company and its subsidiaries, taken as a whole; it being understood, however, that the obligations of this Section 14 shall not apply to the extent that the aforesaid matters (a) are disclosed in circumstances where you are legally required to do so or (b) become generally known to and available for use by the public otherwise than by your wrongful act or omission. 15. Related Agreements. To the extent that any provision of any other agreement between the Company, the Bank or any of the Company's other subsidiaries and you shall limit, qualify or be inconsistent with any provision of this Agreement, then for purposes of this Agreement, while the same shall remain in force, the provision of this Agreement shall control and such provision of such other agreement shall be deemed to have been superseded, and to be of no force or effect, as if such other agreement had been formally amended to the extent necessary to accomplish such purpose. 16. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, THE BANK OF NEW YORK COMPANY, INC. By /s/ J. Michael Shepherd ----------------------- Name: J. Michael Shepherd Title: Executive Vice President General Counsel & Secretary Agreed to this 20th day of August, 2003. /s/ Kurt D. Woetzel - ------------------- Kurt D. Woetzel Address: EX-12 4 r3q03ex12.txt EX-12 EXHIBIT 12 THE BANK OF NEW YORK COMPANY, INC. Ratios of Earnings to Fixed Charges (Dollars in millions)
Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 ---- ---- ---- ---- EARNINGS - -------- Income Before Income Taxes $ 391 $ 123 $1,293 $1,216 Fixed Charges, Excluding Interest on Deposits 69 82 196 278 ------ ------ ------ ------ Income Before Income Taxes and Fixed Charges Excluding Interest on Deposits 460 205 1,489 1,494 Interest on Deposits 113 165 397 484 ------ ------ ------ ------ Income Before Income Taxes and Fixed Charges, Including Interest on Deposits $ 573 $ 370 $1,886 $1,978 ====== ====== ====== ====== FIXED CHARGES - ------------- Interest Expense, Excluding Interest on Deposits $ 55 $ 66 $ 158 $ 244 One-Third Net Rental Expense* 14 16 38 34 ------ ------ ------ ------ Total Fixed Charges, Excluding Interest on Deposits 69 82 196 278 Interest on Deposits 113 165 397 484 ------ ------ ------ ------ Total Fixed Charges, Including Interest on Deposits $ 182 $ 247 $ 593 $ 762 ====== ====== ====== ====== EARNINGS TO FIXED CHARGES RATIOS - -------------------------------- Excluding Interest on Deposits 6.67x 2.50x 7.60x 5.37x Including Interest on Deposits 3.15 1.50 3.18 2.60 *The proportion deemed representative of the interest factor.
EX-31 5 r3q03ex31.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: November 12, 2003 /s/ Thomas A. Renyi ------------------- Thomas A. Renyi Chief Executive Officer EX-31 6 r3q03ex311.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: November 12, 2003 /s/ Bruce W. Van Saun --------------------- Bruce W. Van Saun Chief Financial Officer EX-32 7 r3q03ex32.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 September 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: November 12, 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 r3q03ex321.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 September 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: November 12, 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-----