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THE BANK OF NEW YORK COMPANY, INC.
Quarterly Report on Form 10-Q
For the quarterly period ended September 30, 2002
The Quarterly Report on Form 10-Q and cross reference index is on page 44.
THE BANK OF NEW YORK COMPANY, INC.
FINANCIAL REVIEW
TABLE OF CONTENTS
Consolidated Financial Highlights 1
Management's Discussion and Analysis of Financial
Condition and Results of Operations
- Overview 2
- Summary of Results 2
- Business Segments Review 4
- Consolidated Income Statement Review 11
- Consolidated Balance Sheet Review 14
- Statistical Information 27
- Forward Looking Statements 31
Consolidated Financial Statements
- Consolidated Balance Sheets
September 30, 2002 and December 31, 2001 33
- Consolidated Statements of Income
For the Three and Nine Months
Ended September 30, 2002 and 2001 34
- Consolidated Statement of Changes In
Shareholders' Equity For the Nine
Months Ended September 30, 2002 35
- Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2002 and 2001 36
- Notes to Consolidated Financial Statements 37 - 43
Form 10-Q 44
- Controls and Procedures 45
- Legal Proceedings 45
- Exhibits and Reports on Form 8-K 47
- Signature 48
- Certifications 49
1
Consolidated Financial Highlights
(Dollars in millions, except per share amounts)
(Unaudited)
2002 2001 Change
---- ---- ------
For the Three Months Ended September 30:
- ----------------------------------------
Net Income $ 79 $ 243 (67.5)%
Per Common Share:
Basic $ 0.11 $ 0.33 (66.7)
Diluted 0.11 0.33 (66.7)
Cash Dividends Paid 0.19 0.18 5.6
Return on Average Common Shareholders'
Equity 4.73% 15.11%
Return on Average Assets 0.40 1.11
For the Nine Months Ended September 30:
- ---------------------------------------
Net Income $ 802 $ 1,012 (20.7)%
Per Common Share:
Basic $ 1.11 $ 1.38 (19.6)
Diluted 1.10 1.36 (19.1)
Cash Dividends Paid 0.57 0.54 5.6
Return on Average Common Shareholders'
Equity 16.74% 21.99%
Return on Average Assets 1.35 1.69
As of September 30:
- -------------------
Assets $80,987 $89,677 (9.7)%
Loans 34,242 45,536 (24.8)
Securities 18,023 13,370 34.8
Deposits - Domestic 32,964 28,398 16.1
- Foreign 24,005 31,863 (24.7)
Long-Term Debt 5,528 4,627 19.5
Common Shareholders' Equity 6,633 6,466 2.6
Common Shareholders' Equity Per Share 9.15 8.78 4.2
Market Value Per Share of Common Stock 28.74 35.00 (17.9)
Allowance for Credit Losses as a Percent
of Loans 1.99% 1.35%
Tier 1 Capital Ratio 7.69 7.51
Total Capital Ratio 11.72 11.02
Leverage Ratio 6.77 6.78
Tangible Common Equity Ratio 5.38 4.94
2
Management's Discussion and Analysis of Financial Condition and
- ---------------------------------------------------------------
Results of Operations
- ---------------------
OVERVIEW
The Bank of New York Company, Inc., is a financial holding company and
together with its consolidated subsidiaries (the "Company") (NYSE: BK), has
total assets of over $80 billion as of September 30, 2002. The Company
provides a complete range of banking and other financial services to
corporations and individuals worldwide through its basic businesses, namely,
Securities Servicing, Global Payment Services and BNY Asset Management and
Private Client Services, Retail Banking, Corporate Banking, and Global Market
Services.
The Company has maintained a consistent strategy of focusing on high-
growth, fee-based businesses that has transformed the Company from a
traditional commercial bank into one of the world's premier financial asset
servicers. Today, the Company is a market-leader in many businesses that focus
on servicing securities issuers and all forms of investors and intermediaries.
The Company's well-diversified franchise has become an integral part of the
infrastructure of the global capital markets. The Company's breadth of
products and services allows it to build client relationships through many
different avenues in major markets and regions throughout the world.
SUMMARY OF RESULTS
The Company's actual results of future operations may differ from those
set forth in certain forward looking statements contained herein. Refer to
further discussion under the heading "Forward Looking Statements".
The Company reported third quarter net income of $79 million or 11 cents
per fully diluted share compared with $243 million or 33 cents per fully
diluted share in the third quarter of 2001. Third quarter 2002 results include
a $225 million pre-tax credit loss provision of which $185 million related
primarily to deterioration in the telecommunications segment of the Company's
loan portfolio. Five credits in this portfolio were charged-off by $120
million and moved to an accelerated disposition portfolio. The third quarter
2002 also included a $210 million valuation adjustment charge against its
equity investment portfolios, primarily in its bank stock portfolio. The
combined charges of $395 million pre-tax, or $260 million after tax, reduced
fully diluted earnings by 36 cents. Third quarter 2001 results include the 19
cents per share impact of the World Trade Center disaster ("WTC disaster").
Net income for the first nine months was $802 million or $1.10 per fully
diluted share compared with $1,012 million or $1.36 per fully diluted share in
2001. Excluding these charges, the Company earned 47 cents per fully diluted
share for the third quarter of 2002 and $1.46 in the year-to-date period.
The Company's securities servicing businesses were up slightly in a
difficult global capital markets environment. Third quarter securities
servicing fee revenues were $480 million compared with $478 million last
quarter. Private client services and asset management fees were $85 million,
compared with $88 million in the second quarter. Revenues from foreign
exchange and other trading activities were $49 million in the third quarter of
2002 compared with $72 million in the second quarter of 2002, reflecting low
levels of client activity in both foreign exchange and interest rate
management products.
The market environment in the third quarter was particularly challenging.
The charges in the quarter were a reflection of this difficult market;
however, they relate to two areas that the Company previously announced were
being downsized.
Importantly, the Company's diversified core businesses continue to
exhibit resiliency and to generate significant cash flow, ensuring the
3
maintenance of strong capital ratios, and providing sufficient capital to
continue to execute its business strategy. The Company is continuing to
reinvest in its core businesses, positioning itself to maximize its
capabilities across all products and markets, enhancing its leverage to an
improved capital markets environment.
Fees from the Company's securities servicing businesses increased to
$480 million for the third quarter from $478 million in the second quarter.
Excluding the benefit of a small acquisition, revenues were essentially flat.
This is reflective of the strength of the Company's diversified securities
servicing business model, which served to offset the impact of very weak
global equity markets.
Private client services and asset management fees were $85 million for
the third quarter of 2002 compared with $88 million in the second quarter. The
negative impact of significant equity market price declines was partially
offset by continued strong flows into alternative investment funds offered by
the Company's Ivy Asset Management subsidiary and demand for the Company's
retail investment products.
Foreign exchange and other trading revenues were $49 million in the third
quarter of 2002, down significantly from $72 million in the second quarter.
Third quarter foreign exchange activity was negatively impacted by a sharp
decline in currency volatility, decreased client flows from equity fund
managers and narrower spreads. Other trading revenues decreased as a result of
less client-related interest rate hedging and smaller positioning given the
volatile interest rate markets.
Net interest income on a taxable equivalent basis for the third quarter
was $429 million, compared with $436 million in the second quarter, reflecting
declining revenue from its corporate loan portfolio, partially offset by
growth in the Company's portfolio of highly-rated fixed income investment
securities.
Return on average common equity for the third quarter of 2002 was 4.73%
compared with 22.59% in the second quarter of 2002 and 15.11% in the third
quarter of 2001. Return on average assets for the third quarter of 2002 was
0.40% compared with 1.82% in the second quarter of 2002 and 1.11% in the third
quarter of 2001. For the first nine months of 2002, return on average common
equity was 16.74% compared with 21.99% in 2001. Return on average assets was
1.35% for the first nine months of 2002 compared with 1.69% in 2001.
Excluding the $395 million of charges in the third quarter of 2002 and
the $242 million WTC disaster impact in the third quarter of 2001, return on
average common equity in the third quarter and year-to-date 2002 would have
been 20.31% and 22.17% compared with 23.83% and 25.03% in 2001. On the same
basis, return on average assets for the third quarter and year-to-date 2002
would have been 1.71% and 1.79% compared with 1.96% and 2.00% in 2001.
4
Business Segments Review
The Company has four main business segments: Servicing and Fiduciary
Businesses, Corporate Banking, Retail Banking, and Financial Markets.
The Servicing and Fiduciary Businesses segment provides a broad array of
fee-based services. This segment includes the Company's securities servicing,
global payment services, and private client services and asset management
businesses. Securities servicing includes global custody, securities
clearance, mutual funds, unit investment trust, securities lending, depositary
receipts, corporate trust, stock transfer and associated execution services.
Global payment services products primarily relate to funds transfer, cash
management and trade finance. Private client services and asset management
provide traditional banking and trust services to affluent clients and asset
management to institutional and private clients.
The Corporate Banking segment focuses on providing lending services, such
as term loans, lines of credit, asset based financings, and commercial
mortgages, to the large public and private corporations nationwide, as well as
public and private mid-size businesses in the New York metropolitan area.
Special industry groups focus on financial institutions, securities,
insurance, media and telecommunications, energy, real estate, retailing,
automotive, and government banking institutions. Through BNY Capital Markets,
the Company provides syndicated loans, bond underwriting, private placements
of corporate debt and equity securities, and merger, acquisition, and advisory
services.
The Retail Banking segment includes consumer lending, residential
mortgage lending, and retail deposit services. The Company operates 342
branches in 22 counties in three states.
The Financial Markets segment includes trading of foreign exchange and
interest rate products, investing and leasing activities, and treasury
services to other segments. This segment offers a comprehensive array of
multi-currency hedging and yield enhancement strategies.
5
Business Review
Servicing and Fiduciary Businesses
- ----------------------------------
In the third quarter of 2002, noninterest income was $685 million
compared with $645 million in 2001.
Fees from the Company's securities servicing businesses increased to $480
million for the third quarter from $478 million last quarter and $422 million
in the third quarter of 2001. For the first nine months of 2002, fees from
these businesses totaled $1,411 million, a 6% increase compared with $1,328
million in 2001. On a sequential quarter basis, excluding the benefit of a
small acquisition, revenues were essentially flat. This is reflective of the
strength of the Company's diversified securities servicing business model,
which served to offset the impact of very weak global equity markets. The
increase in fees from the third quarter of 2001 reflects acquisitions
partially offset by weakness in the global capital markets.
Corporate trust, broker-dealer services and execution services performed
well in the quarter. Corporate trust benefited from strong fixed-income
issuance in the structured and municipal markets. Broker-dealer services were
positively impacted by new business wins, active fixed income markets and the
continued expansion of the Company's global collateral management system.
Execution services benefited from strong client activity early in the quarter.
Areas where results were not as strong include international custody and
mutual funds due to soft overseas equity markets, as well as securities
lending, reflecting lower spreads.
As of September 30, 2002, the Company had assets under custody of
$6.6 trillion, including $1.8 trillion of cross-border custody assets.
Despite the decline in equity asset price levels during the quarter, assets
under custody were unchanged from June 30, 2002, again reflective of the
diversity of clients and assets serviced.
Global payment services fees increased to $73 million from $71 million in
the second quarter but were down from $75 million in the third quarter of
2001. The sequential quarter increase in global payment services fees reflects
higher funds transfer and cash management fees. The decline in global payment
services fees from the third quarter of 2001 reflects lower fees from trade-
related services.
Private client services and asset management fees were $85 million
compared with $88 million in the prior quarter and $75 million in the third
quarter of 2001. The negative impact of significant equity market price
declines was partially offset by strong flows into alternative investment
funds offered by the Company's Ivy Asset Management subsidiary and demand for
the Company's retail investment products.
Assets under management ("AUM") were $71 billion at September 30, 2002
compared with $61 billion at September 30, 2001, while assets under
administration were $27 billion compared with $31 billion at September 30,
2001. The increase in assets under management reflects acquisitions and growth
in the Company's alternative investments business partially offset by decline
in asset values. Institutional clients represent 61% of AUM while individual
clients equal 39%. AUM at September 30, 2002, are 29% invested in equities,
26% in fixed income, 9% in alternative investments and the remaining in liquid
assets.
The decrease in noninterest income also reflects lower foreign exchange
revenue during the quarter. Third quarter foreign exchange activity was
negatively impacted by a sharp decline in currency volatility, decreased
client flows from equity fund managers and narrower spreads.
Net interest income in the Servicing and Fiduciary businesses segment
was $115 million for the third quarter of 2002 compared with $140 million in
2001. The decrease in net interest income is primarily due to the decline in
6
interest rates. Average assets for the quarter ended September 30, 2002 were
$8.1 billion compared with $8.8 billion last year. The third quarter of 2002
average deposits were $32.0 billion compared with $32.9 billion in 2001.
Net charge-offs in the Servicing and Fiduciary Businesses segment were
zero in the third quarters of 2002 and 2001. Nonperforming assets were $15
million in 2002 compared with zero in 2001.
Noninterest expense for the third quarter of 2002 was $488 million
compared with $486 million in the second quarter of 2002 and $440 million in
2001. The rise in noninterest expense from 2001 was primarily due to
acquisitions as well as the Company's continued investment in technology.
Corporate Banking
- -----------------
The Corporate Banking segment's net interest income was $97 million in
the third quarter of 2002, down from last year's $122 million. The decrease
reflects 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 $22.3 billion compared
with $26.7 billion last year. Average deposits in the corporate bank were $6.8
billion versus $6.8 billion in 2001.
The third quarter 2002 provision for credit losses was $29 million
compared with $34 million last year. Net charge-offs in the Corporate Banking
segment were $155 million and $36 million in the third quarters of 2002 and
2001. The increase in charge-offs primarily reflects deterioration in the
Company's portfolio of telecom credits. Nonperforming assets were $527 million
at September 30, 2002, up from $270 million in 2001. The increase in
nonperforming assets primarily reflects higher levels of nonperforming cable
and telecom credits.
Noninterest income was $74 million in the current quarter compared with
$71 million in the third quarter a year ago reflecting improved pricing of
standby letters of credit. Noninterest expense in the third quarter increased
to $52 million from $50 million a year ago reflecting higher compensation
expense.
Retail Banking
- --------------
Net interest income in the third quarter of 2002 was $122 million
compared with $123 million in 2001. Noninterest income was $30 million for the
quarter compared with $32 million last year. The decrease reflects lower
account maintenance fees. Noninterest expense in the third quarter of 2002 was
$79 million compared with $78 million in the previous year's period.
Net charge-offs were $5 million in the third quarter of 2002 and $4
million in the third quarter of 2001 reflecting deterioration in consumer loan
portfolio. Nonperforming assets were $9 million in the third quarter of 2002
compared with $7 million last year.
Average deposits generated by the Retail Banking segment were $13.2
billion in the third quarter of 2002 compared with $12.6 billion in the third
quarter of 2001. Noninterest bearing deposits were $4.1 billion this quarter
compared with $3.9 billion in the third quarter of 2001. Average assets in the
retail banking sector were $5.2 billion compared with $4.4 billion in the
third quarter of 2001.
Financial Markets
- -----------------
Net interest income for the third quarter was $92 million compared with
2001's $65 million reflecting lower funding costs and an increase in assets,
primarily highly-rated mortgage-backed securities. Average third quarter 2002
assets in the Financial Markets segment were $40.9 billion, up from $35.4
billion last year.
Noninterest income was $37 million in the third quarter of 2002 compared
with $74 million in the third quarter of 2001. Trading related revenues
declined as a result of less client-related interest rate hedging and smaller
7
positioning given the volatile interest rate markets. Securities gains also
declined compared with last year's third quarter. Net charge-offs were zero in
the third quarters of 2002 and 2001. Noninterest expense increased to $20
million from $15 million in last year's third quarter primarily due to higher
compensation expense.
The segments contributed to the Company's profitability as follows:
In Millions
Servicing
and
For the Quarter Ended Fiduciary Corporate Retail Financial Reconciling Consolidated
September 30, 2002 Businesses Banking Banking Markets Items Total
- --------------------- ---------- --------- ------- --------- ----------- ------------
Net Interest Income $ 115 $ 97 $ 122 $ 92 $ (8) $ 418
Provision for
Credit Losses - 29 2 - 194 225
Noninterest Income 685 74 30 37 (190) 636
Noninterest Expense 488 52 79 20 67 706
----- ---- ----- ---- ----- -----
Income Before Taxes $ 312 $ 90 $ 71 $109 $(459) $ 123
===== ==== ===== ==== ===== =====
Average Assets $8,086 $22,250 $5,245 $40,850 $ 2,379 $78,810
====== ======= ====== ======= ======= =======
In Millions
Servicing
and
For the Quarter Ended Fiduciary Corporate Retail Financial Reconciling Consolidated
September 30, 2001 Businesses Banking Banking Markets Items* Total
- --------------------- ---------- --------- ------- --------- ----------- ------------
Net Interest Income $ 140 $ 122 $ 123 $ 65 $ (63) $ 387
Provision for
Credit Losses - 34 2 - 4 40
Noninterest Income 645 71 32 74 8 830
Noninterest Expense 440 50 78 15 238 821
----- ----- ----- ---- ----- -----
Income Before Taxes $ 345 $ 109 $ 75 $124 $(297) $ 356
===== ===== ===== ==== ===== =====
Average Assets $8,794 $26,673 $4,448 $35,401 $11,724 $87,040
====== ======= ====== ======= ======= =======
In Millions
Servicing
For the Nine and
Months Ended Fiduciary Corporate Retail Financial Reconciling Consolidated
September 30, 2002 Businesses Banking Banking Markets Items Total
- --------------------- ---------- --------- ------- --------- ----------- ------------
Net Interest Income $ 356 $ 304 $ 357 $ 268 $ (32) $1,253
Provision for
Credit Losses - 82 8 - 205 295
Noninterest Income 2,035 216 88 154 (184) 2,309
Noninterest Expense 1,434 148 238 63 168 2,051
----- ----- ----- ----- ----- ------
Income Before Taxes $ 957 $ 290 $ 199 $ 359 $(589) $1,216
===== ===== ===== ===== ===== ======
Average Assets $8,507 $23,029 $5,056 $40,481 $2,293 $79,366
====== ======= ====== ======= ====== =======
In Millions
Servicing
For the Nine and
Months Ended Fiduciary Corporate Retail Financial Reconciling Consolidated
September 30, 2001 Businesses Banking Banking Markets Items* Total
- --------------------- ---------- --------- ------- --------- ----------- ------------
Net Interest Income $ 443 $ 377 $ 375 $ 153 $(105) $1,243
Provision for
Credit Losses - 95 5 - - 100
Noninterest Income 1,999 226 87 218 29 2,559
Noninterest Expense 1,313 165 229 50 387 2,144
------ ----- ----- ----- ----- ------
Income Before Taxes $1,129 $ 343 $ 228 $ 321 $(463) $1,558
====== ===== ===== ===== ===== ======
Average Assets $8,822 $27,124 $4,446 $34,620 $5,170 $80,182
====== ======= ====== ======= ====== =======
* Includes the impact of WTC disaster.
8
Business Segments Accounting Principles
- ---------------------------------------
The Company's business 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 first quarter of 2002, the Company changed certain
assumptions related to the duration of segment assets and liabilities and the
related interest rates. As a result, segment results for 2001 were restated.
The measure of revenues and profit or loss by operating segment has been
adjusted to present segment data on a taxable equivalent basis. The provision
for credit losses allocated to each reportable segment is based on
management's judgment as to average credit losses that will be incurred in the
operations of the segment over a credit cycle of a period of years.
Management's judgment includes the following factors among others: historical
charge-off experience and the volume, composition and growth of the loan
portfolio. This method is different from that required under generally
accepted accounting principles as it anticipates future losses which are not
yet probable and therefore not recognizable under generally accepted
accounting principles. Assets and liabilities are match funded. Support and
other indirect expenses are allocated to business segments based on general
internal guidelines.
9
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 include
amortization of goodwill and intangibles, severance, and corporate overhead.
The adjustment to the provision for credit losses reflects the difference
between the aggregate of the credit provision over a credit cycle for the
reportable segments and the Company's recorded provision. The WTC disaster is
a reconciling item for 2001. The reconciling items for average assets consist
of goodwill and other intangible assets.
Third Third Year-to-Date
Quarter Quarter September 30,
(In millions) 2002 2001 2002 2001
------- ------- --------------
Segment's revenue $1,252 $1,272 $3,778 $3,878
Adjustments:
Earnings associated with
assignment of capital (21) (31) (74) (99)
Securities gains/losses (215) (19) (214) (7)
Other Gains 25 54 29 64
WTC disaster - (73) - (73)
Taxable equivalent basis and
other tax-related items 14 12 41 39
Other (1) 2 2 -
------ ------ ------ ------
Subtotal-revenue adjustments (198) (55) (216) (76)
------ ------ ------ ------
Consolidated revenue $1,054 $1,217 $3,562 $3,802
====== ====== ====== ======
Segment's income before tax $ 582 $ 653 $1,805 $2,021
Adjustments:
Revenue adjustments (above) (198) (55) (216) (76)
Provision for credit losses
different than GAAP (194) (4) (205) -
Severance costs (1) - (15) -
Goodwill and
intangible amortization (1) (27) (5) (77)
WTC disaster - (168) - (168)
Loss on sublease (22) - (22) -
Corporate overhead (43) (43) (126) (142)
------ ------ ------ ------
Consolidated income before tax $ 123 $ 356 $1,216 $1,558
====== ====== ====== ======
Segments' total average assets $76,431 $75,316 $77,073 $75,012
Adjustments:
Goodwill and Intangibles 2,379 2,226 2,293 1,969
WTC disaster - 9,498 - 3,201
------- ------- ------- -------
Consolidated average assets $78,810 $87,040 $79,366 $80,182
======= ======= ======= =======
10
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 segment 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 Empire State
Development Corporation ("ESDC") grant and in 2001 a $43 million gain on the
sale of the Company's interest in the New York Cash Exchange. 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. Severance costs primarily relate to the Securities
Servicing and Fiduciary segment, the Corporate Banking segment, and to staff
areas that cut across all business lines. 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. The
WTC disaster in 2001 affected all sectors. The Company does not believe it is
meaningful to allocate the disaster impact due to the wide scope of the
disaster, the interrelationships of the various effects, and its unprecedented
nature.
11
CONSOLIDATED INCOME STATEMENT REVIEW
- ------------------------------------
NONINTEREST INCOME
3rd 2nd 3rd
Quarter Quarter Quarter Year-to-date
------- ------- ------- -----------------
(In millions) 2002 2002 2001 2002 2001
----- ---- ---- ---- ----
Servicing Fees
Securities $480 $478 $422 $1,411 $1,328
Global Payment Services 73 71 75 217 216
---- ---- ---- ------ ------
553 549 497 1,628 1,544
Private Client Services
and Asset Management Fees 85 88 75 256 235
Service Charges and Fees 91 93 81 267 267
Foreign Exchange and
Other Trading Activities 49 72 79 183 260
Securities (Losses) Gains (188) 25 22 (131) 113
Other 46 28 76 106 140
---- ---- ---- ------ ------
Total Noninterest Income* $636 $855 $830 $2,309 $2,559
==== ==== ==== ====== ======
* See Accounting Changes and New Accounting Pronouncements in the Notes to
Consolidated Financial Statements.
Total noninterest income for the third quarter of 2002 was $636 million
compared with $855 million in the second quarter of 2002 and $830 million in
the third quarter of 2001. Excluding the $210 million securities valuation
adjustment, noninterest income would have been $846 million in the third
quarter of 2002. Noninterest income in 2001 was adversely impacted by the WTC
disaster.
Securities servicing fees were up slightly to $480 million compared with
$478 million in the prior quarter and $422 million one year ago. The increase
in securities servicing fees compared to 2001 is primarily related to
acquisitions. Global payment services fees increased to $73 million from $71
million last quarter but were down from $75 million in the third quarter of
2001. The sequential quarter increase in global payment services fees reflects
higher funds transfer and cash management fees. The decline in global payment
services from the third quarter of 2001 reflects lower fees from trade-related
services. Private client services and asset management fees were $85 million
compared with $88 million in the prior quarter and $75 million in the third
quarter of 2001. The increase in 2002 from 2001 reflects acquisitions as well
as the impact of the WTC disaster on 2001. Service charges and fees were down
2% from the prior quarter and up 12% from one year ago. The sequential quarter
decrease reflects a decline in loan syndication and capital markets fees from
the second quarter. Foreign exchange and other trading revenues were $49
million compared with $72 million in the prior quarter and $79 million one
year ago.
Securities losses were $188 million in the third quarter compared with a
$25 million gain in the prior quarter and a $22 million gain one year ago. The
third quarter of 2002 included a $210 million equity writedown as well as
$22 million of gains on fixed income investments.
12
The increase in other income to $46 million from $28 million reflects a
$32 million ESDC grant, partially offset by a $10 million charge for a
decrease in value of the available-for-sale loan portfolio. The ESDC grant
covers relocation and other costs associated with the Company's previously
announced decision to return to downtown Manhattan and to move 1,500 employees
to a new facility in Brooklyn. As part of the move, the Company recorded $22
million in occupancy expenses this quarter to reflect the estimated loss on a
sublease of a rented facility in Manhattan.
Other income of $76 million in the third quarter of 2001 includes a
$43 million gain related to the sale of the Company's interest in the New York
Cash Exchange.
NET INTEREST INCOME
3rd 2nd 3rd
Quarter Quarter Quarter Year-to-date
-------- ------- ------- ------------------
(Dollars in millions on
a tax equivalent basis) 2002 2002 2001 2002 2001
---- ---- ---- ---- ----
Net Interest Income* $429 $436 $402 $1,290 $1,287
Net Interest Rate
Spread* 2.32% 2.31% 1.53% 2.31% 1.77%
Net Yield on Interest
Earning Assets* 2.66 2.65 2.24 2.65 2.58
* See Accounting Changes and New Accounting Pronouncements in the Notes to
Consolidated Financial Statements.
Net interest income on a taxable equivalent basis was $429 million in the
third quarter of 2002 compared with $436 million in the second quarter of 2002
and $402 million in the third quarter of 2001. The net interest rate spread
was 2.32% in the third quarter of 2002, compared with 2.31% in the second
quarter of 2002 and 1.53% one year ago. The net yield on interest earning
assets was 2.66% compared with 2.65% in the second quarter of 2002 and 2.24%
in last year's third quarter.
The decrease in net interest income from the second quarter is primarily
due to a decline in average corporate loans and a rise in nonperforming loans,
partially offset by growth in the Company's portfolio of highly-rated fixed-
income investment securities. The increase from the third quarter a year ago
reflects the adverse impact last year of the WTC disaster.
For the first nine months of 2002, net interest income on a taxable
equivalent basis amounted to $1,290 million compared with $1,287 million in
the first nine months of 2001. The year-to-date net interest rate spread was
2.31% in 2002 compared with 1.77% in 2001, while the net yield on interest
earning assets was 2.65% in 2002 and 2.58% in 2001.
Interest income would have been increased by $8 million and $1 million
for the third quarters of 2002 and 2001 and $15 million and $6 million for the
first nine months of 2002 and 2001 if loans on nonaccrual status at September
30, 2002 and 2001 had been performing for the entire period.
13
NONINTEREST EXPENSE AND INCOME TAXES
Noninterest expense for the third quarter of 2002 was $706 million
compared with $696 million in the second quarter of 2002 and $821 million in
the third quarter of 2001. Excluding $22 million of lease termination costs in
the third quarter of 2002 and $16 million of severance costs in the second
quarter of 2002, sequential quarter expense growth was $4 million, or less
than 1%, reflecting acquisitions, lower incentive compensation, and tight
expense control.
As a result of new accounting standards related to goodwill and
intangibles, effective January 1, 2002, amortization in the third quarter and
the first nine months of 2002 declined to $0.4 million and $5 million compared
with $29 million and $83 million in 2001.
Excluding the impact of the ESDC grant and the associated sublease
expense, the efficiency ratios for the quarter and year-to-date 2002 periods
were 56.1% and 54.8%. The efficiency ratio for the second quarter of 2002 was
55.0%.
The effective tax rates for the third quarter and the first nine months
of 2002 were 35.9% and 34.0% compared with 31.7% in the third quarter and
35.1% in the first nine months of 2001. The effective tax rate for the second
quarter of 2002 was 34.0%. The increase in the sequential quarter tax rate
reflects the charges taken in the third quarter. The tax rate in 2001 was
impacted by the WTC disaster.
CREDIT LOSS PROVISION AND NET CHARGE-OFFS
3rd 2nd 3rd
Quarter Quarter Quarter Year-to-date
------- ------- ------- ------------
(In millions) 2002 2002 2001 2002 2001
---- ---- ---- ---- ----
Provision $225 $ 35 $ 40 $295 $100
==== ==== ==== ==== ====
Net Charge-offs:
Commercial $(150) $(17) $(35) $(197) $ (89)
Foreign (5) - - (5) -
Other - (14) (1) (14) (2)
Consumer (5) (4) (4) (14) (9)
------ ----- ----- ------ ------
Total $(160) $(35) $(40) $(230) $(100)
====== ===== ===== ====== ======
Other Real Estate Expenses $ - $ - $ - $ - $ 2
The provision for credit losses was $225 million in the third quarter of
2002 compared with $35 million in the second quarter of 2002 and $40 million
in the third quarter of 2001. The increases reflect deterioration in the loan
portfolio particularly in a limited number of borrowers in the
telecommunications portfolio.
14
CONSOLIDATED BALANCE SHEET REVIEW
- ---------------------------------
INVESTMENT SECURITIES
Total securities were $18.0 billion at September 30, 2002, compared with
$16.4 billion at June 30, 2002, and $13.4 billion last year. The increases
were primarily due to growth in the Company's portfolio of highly rated
mortgage-backed securities. Since December 31, 2001, the Company has added
approximately $6.8 billion of mortgage-backed securities to its investment
portfolio. Average investment securities were $16.8 billion in the third
quarter of 2002, compared with $14.6 billion in the second quarter of 2002 and
$11.8 billion last year. For the first nine months of 2002, average investment
securities were $14.7 billion compared with $9.2 billion last year.
During the third quarter of 2002, there was a sharp decline in equity
market values. As a result, the Company recorded a $210 million valuation
adjustment against its equity investment portfolio, largely reflecting what is
deemed to be other-than-temporary impairment of several holdings, principally
in its bank stock portfolio.
Investment Portfolio
- --------------------
Period
Ending
9/30/02 Unrealized
Number 6/30/02 9/30/02 Valuation Gain/(Loss)
of Holdings Fair Value Fair Value Adjustments 6/30/02 9/30/02
(dollars in millions) ----------- ---------- ---------- ----------- ------------------
Equity Investments(1)
Bank equity portfolio 11 $ 824 $ 668 $ 172 $(3) $ 18
Sponsor and direct
equity portfolio(2) 394 356 333 38 - -
--- ------ ------ ----- ---- ----
Total equities 405 $1,180 $1,001 $ 210 $(3) $ 18
=== ====== ===== ===== ==== ====
Fixed income investments
Available-for-sale $14,240 $16,123 $ - $204 $290
Held-to-maturity 1,198 1,137 - (3) (4)
------- ------- ----- ---- ----
Total fixed income $15,438 $17,260 $ - $201 $286
Investments ======= ======= ===== ==== ====
Percent
6/30/02 9/30/02 Change
------- ------- -------
S&P 500 Index 989.82 815.28 (18)%
BKX Bank Index 829.62 697.09 (16)%
(1) Excludes investments in money market mutual funds.
(2) Included in other assets.
As of November 8, 2002, the Company had disposed of approximately 41% of
its bank equity portfolio. The remaining book value of bank equities was
$382 million with a fair value of $399 million. Excluding the Company's
$204 million investment in Wing Hang Bank Limited, a Hong Kong based bank,
which is classified in other assets given that it represents a 25% ownership
interest, the remaining book value of bank equities was $178 million. On this
basis, the Company disposed of approximately 60% of its bank equity portfolio
through November 8, 2002.
15
LOANS
Total loans were $34.2 billion at September 30, 2002, compared with $36.0
billion at June 30, 2002, and $45.5 billion last year. Average loans were
$33.7 billion in the third quarter of 2002, compared with $34.6 billion in the
second quarter of 2002 and $39.5 billion last year. For the first nine months
of 2002, average loans were $34.6 billion compared with $38.3 billion last
year. The decrease on a sequential quarter basis reflects the Company's
continued reduction of corporate loan exposures, as it reallocates capital
towards its fee-based businesses. Credit exposures to non-financial companies
have been reduced by $5.5 billion through the third quarter, in line with the
Company's plan to reduce these exposures by $7 billion in 2002. The decrease
from 2001 also reflects that the 2001 loan balance had increased due to the
WTC disaster.
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 following tables provide
additional details on the Company's loan exposures and outstandings at
September 30, 2002 in comparison to December 31, 2001.
Overall Loan Portfolio
- ----------------------
(dollars in billions) Unfunded Commitments(1)(2) Loans Outstanding(1)(3)
--------------------------- ----------------------------
12/31/01 9/30/02 Change 12/31/01 9/30/02 Change
-------- ------- ------ -------- ------- ------
Retail/Private Banking $ 1.4 $ 1.4 $ 0.0 $ 5.3 $ 5.2 $(0.1)
Large-ticket Leasing 0.1 0.1 0.0 5.0 5.3 0.3
Commercial Real Estate 1.2 0.8 (0.4) 2.4 2.5 0.1
Financial Services Companies 21.9 22.2 0.3 9.6 9.6 -
Media & Telecommunications 5.5 4.2 (1.3) 4.1 3.7 (0.4)
Other Non-Financial Companies 25.2 22.8 (2.4) 9.3 7.9 (1.4)
----- ----- ------ ----- ----- ------
Total $55.3 $51.5 $(3.8) $35.7 $34.2 $(1.5)
===== ===== ====== ===== ===== ======
(1) Includes assets held for sale.
(2) Unfunded commitments include letters of credit.
(3) Excludes acceptances due from customers.
16
Media and Telecommunications Portfolio
- -----------------------------------------
Media and telecommunication has been a significant industry
specialization of the Company historically. The telecommunications segment has
deteriorated in 2001 and 2002 and the Company has been actively reducing the
size of its exposures in this area. Details of the portfolio are shown below:
Broadcasting Entertainment Cable All Total
(dollars in millions) & Publishing & Programming TV Other Media Telecom Total
------------ ------------- ----- ----- ------ ------- ------
Unfunded Commitments(1)(2)
12/31/01 $1,342 $1,491 $895 $304 $4,032 $1,354 $ 5,386
9/30/02 1,148 1,074 899 227 3,348 843 4,191
------- ------- ---- ----- ------- ------- --------
Change $ (194) $ (417) $ 4 $(77) $ (684) $ (511) $(1,195)
======= ======= ==== ===== ======= ======= ========
Loans Outstanding(1)
12/31/01 $1,027 $ 909 $851 $213 $3,000 $ 793 $3,793
9/30/02 1,027 788 875 231 2,921 733 3,654
------ ------- ---- ---- ------- ------- -------
Change $ - $ (121) $ 24 $ 18 $ (79) $ (60) $ (139)
====== ======= ==== ==== ======= ======= =======
Total Exposure(1)(2)
12/31/01 $2,369 $2,400 $1,746 $517 $7,032 $2,147 $ 9,179
9/30/02 2,175 1,862 1,774 458 6,269 1,576 7,845
------- ------- ------ ----- ------- ------- --------
Change $ (194) $ (538) $ 28 $(59) $ (763) $ (571) $(1,334)
======= ======= ====== ===== ======= ======= ========
# of Borrowers 73 33 24 25 155 29 184
% Investment Grade(3) 64% 67% 43% 28% 56% 53% 57%
% Secured(4) 40% 24% 57% 68% 42% 47% 43%
(1) Excludes assets held for sale.
(2) Unfunded commitments include letters of credit.
(3) Investment grade commitments are those where the borrower has a Moody's long-term
rating of Baa3 or better and/or a Standard & Poor's long-term rating of BBB- or better,
or if unrated, has been assigned an equivalent rating using the Company's internal risk
rating.
(4) Secured is defined as those credit facilities secured by the borrower's assets
and/or stock of its subsidiaries. 87% of the total media and telecom non-investment
grade exposures are secured.
17
Further Detail on Telecommunications Portfolio
- ----------------------------------------------
Long
(dollars in millions) Wireline Distance Towers Wireless Total
-------- -------- ------ -------- -----
Unfunded Commitments(1)(2)
12/31/01 $ 577 $ 119 $108 $ 550 $1,354
9/30/02 430 9 84 320 843
------ ------ ----- ------ -------
Change $(147) $(110) $(24) $(230) $ (511)
====== ====== ===== ====== =======
Loans Outstanding(1)
12/31/01 $ 297 $ 127 $115 $ 254 $ 793
9/30/02 396 27 133 178 734
----- ------ ---- ------ -------
Change $ 99 $(100) $ 18 $ (76) $ (59)
===== ====== ==== ====== =======
Total Exposure(1)(2)
12/31/01 $ 874 $ 246 $223 $ 804 $2,147
9/30/02 826 36 217 498 1,577
------ ------ ----- ------ -------
Change $ (48) $(210) $ (6) $(306) $ (570)
====== ====== ===== ====== =======
# of Borrowers 11 3 5 10 29
% Investment Grade(3) 63% 0% 0% 64% 53%
% Secured(4) 37% 100% 100% 36% 47%
(1) Excludes assets held for sale.
(2) Unfunded commitments include letters of credit.
(3) Investment grade commitments are those where the borrower has a Moody's long-term
rating of Baa3 or better and/or a Standard & Poor's long-term rating of BBB- or better,
or if unrated, has been assigned an equivalent rating using the Company's internal risk
rating.
(4) Secured is defined as those credit facilities secured by the borrower's assets
and/or stock of its subsidiaries. 100% of the telecom non-investment grade exposures
are secured.
Accelerated Loan Disposition Program
- ------------------------------------
The table below shows the status of the Company's fourth quarter 2001 and
third quarter 2002 accelerated loan disposition programs which are part of the
Company's risk reduction strategy.
Number of Total Total Exposure/ Outstanding/
(dollars in millions) Credits Exposure Outstanding Borrower Borrower
--------- -------- ----------- --------- ------------
Fourth Quarter 2001 Accelerated Loan
Disposition Program:
Original - Prior to Charge-Off 25 $758 $488 $30 $19
Subsequent to Charge-Off 523 253 21 10
Remaining at 6/30/02 10 63 53 6 5
Third Quarter 2002
Additions to Program:
Prior to Charge-Off 5 160 158 32 32
Subsequent to Charge-Off 40 38 8 8
Other Third Quarter Activity:
Net Reductions 4 (18) (18) - -
Remaining at 9/30/02 11 85 73 8 7
18
NONPERFORMING ASSETS
Change
9/30/02 vs.
(Dollars in millions) 9/30/02 6/30/02 6/30/02
-------- -------- --------
Category of Loans:
Commercial $427 $184 $243
Foreign 89 97 (8)
Other 34 34 -
---- ---- ----
Total Nonperforming Loans 550 315 235
Other Real Estate 1 1 -
---- ---- ----
Total Nonperforming Assets $551 $316 $235
==== ==== ====
Nonperforming Assets Ratio 1.6% 0.9%
Allowance/Nonperforming Loans 123.7 195.7
Allowance/Nonperforming Assets 123.5 194.9
Nonperforming assets totaled $551 million at September 30, 2002, compared
with $316 million at June 30, 2002, and $278 million at September 30, 2001.
The increase in commercial nonperforming loans primarily reflects the addition
of a large aggregate exposure to a cable operator. This exposure, representing
credit facilities to six different, but affiliated borrowing groups, is
secured and the Company believes that prospects for repayment continue to be
strong. Other increases in commercial nonperforming loans primarily reflect
telecommunications credits. Included in nonperforming loans at September 30,
2002 were $54 million of loans available-for-sale. The Company expects a loan
to a borrower in the insurance industry to become nonperforming in the fourth
quarter. As a result, the Company expects nonperforming loans to modestly
increase in the fourth quarter of 2002.
IMPAIRED LOANS
The table below sets forth information about the Company's impaired loans. The
Company uses the discounted cash flow method as its primary method for valuing
its impaired loans:
(Dollars in millions) 9/30/02 6/30/02
-------- --------
Impaired Loans with an Allowance $451 $246
Impaired Loans without an Allowance(1) 28 23
---- ----
Total Impaired Loans $479 $269
==== ====
Allowance for Impaired Loans(2) $138 $110
Average Balance of Impaired Loans
during the Quarter 323 245
Interest Income Recognized on
Impaired Loans during the Quarter 0.1 0.6
(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.
19
ALLOWANCE
The allowance for credit losses was $681 million, or 1.99% of loans at
September 30, 2002, compared with $616 million, or 1.71% of loans at June 30,
2002, and $616 million, or 1.35% of loans at September 30, 2001. The increase
in the allowance reflects deterioration in the credit quality of the loan
portfolio particularly in telecom related credits. The ratio of the allowance
to nonperforming assets was 123.5% at September 30, 2002, compared with 194.9%
at June 30, 2002, and 222.0% at September 30, 2001. Included in the Company's
allowance for credit losses at September 30, 2002 is an allocated transfer
risk reserve related to Argentina of $31 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
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 the present value of the expected future cash
flows from borrowers, the market value of the loan, or the fair value of the
collateral.
The second element - higher risk rated credits - is based on the
assignment of loss factors for each specific risk category of higher risk
credits. The Company rates each credit in its portfolio that exceeds $1
million and assigns the credits to specific risk pools. A potential loss
factor is assigned to each pool and an amount is included in the allowance
equal to the product of the amount of the loan in the pool and the risk
factor. Reviews of higher risk rated loans are conducted quarterly and the
loan's rating is updated as necessary. The Company prepares a loss migration
analysis and compares its actual loss experience to the loss factors on an
annual basis to attempt to ensure the accuracy of the loss factors assigned to
each pool. Pools of past due consumer loans are included in specific risk
categories based on their length of time past due.
The third element - pass rated credits - is based on the assignment of
loss factors to the remaining pools of credit exposure. The loss factors are
based on the expected average credit losses. Loss factors are periodically
compared to rating agency and other default data bases to determine their
validity. Commercial loans over $1 million are individually analyzed before
being assigned to a risk pool. All current consumer loans are included in the
pass rated consumer pools.
The fourth element - an unallocated allowance - is based on management's
judgment regarding the following factors:
- Economic conditions including duration of the current cycle
- Past experience including recent loss experience
- Credit quality trends
- Collateral values
- Volume, composition, and growth of the loan portfolio
- Specific credits and industry conditions
- Results of bank regulatory and internal credit exams
- Actions by the Federal Reserve Board
- Delay in receipt of information to evaluate loans or confirm
existing credit deterioration
20
Applying the four elements to the various segments of the loan portfolio
results in an allocation of the allowance for credit losses as follows:
9/30/02 6/30/02
------- -------
Domestic
Real Estate 3% 4%
Commercial 71 72
Consumer 1 1
Foreign 11 13
Unallocated 14 10
--- ---
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.
TRADING ACTIVITIES
The fair value and notional amounts of the Company's financial
instruments held for trading purposes at September 30, 2002 and September 30,
2001 are as follows:
3rd Quarter 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 $ 31,096 $ 91 $ - $ 115 $ -
Swaps 149,476 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
====== ====== ======= ======
21
3rd Quarter 2001
September 30, 2001 Average
---------------------------- -------------------
(In millions) Fair Value Fair Value
------------------ -------------------
Notional
Trading Account Amount Assets Liabilities Assets Liabilities
- --------------- -------- ------ ----------- ------ -----------
Interest Rate Contracts:
Futures and Forward
Contracts $ 32,732 $ 41 $ - $ 13 $ -
Swaps 116,704 1,664 758 1,261 630
Written Options 89,307 - 1,165 - 1,021
Purchased Options 46,603 193 - 198 -
Foreign Exchange Contracts:
Swaps 1,593 - - - -
Written Options 11,256 - 49 - 30
Purchased Options 14,754 78 - 75 -
Commitments to Purchase
and Sell Foreign Exchange 52,215 338 368 476 477
Debt Securities - 6,957 27 7,404 10
Credit Derivatives 1,643 9 3 9 2
Equity Derivatives - 21 - 122 121
------ ------ ------ ------
Total Trading Account $9,301 $2,370 $9,558 $2,291
====== ====== ====== ======
The Company manages trading risk through a system of position limits, a
value at risk (VAR) methodology, based on a Monte Carlo simulation, stop loss
advisory triggers, and other market sensitivity measures. Risk is monitored
and reported to senior management by an independent unit on a daily basis. The
VAR methodology captures, based on certain assumptions, the potential
overnight pre-tax dollar loss from adverse changes in fair values of all
trading positions. The calculation assumes a one day holding period for most
instruments, utilizes a 99% confidence level, and incorporates the non-linear
characteristics of options. As the VAR methodology does not evaluate risk
attributable to extraordinary financial, economic or other occurrences, the
risk assessment process includes a number of stress scenarios based upon the
risk factors in the portfolio and management's assessment of market
conditions. Additional stress scenarios based upon historic market events are
also tested.
The following table indicates the calculated VAR amounts for the trading
portfolio for the periods indicated. During these periods, the daily trading
loss did not exceed the calculated VAR amounts on any given day.
(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 -
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
(In millions) 3rd Quarter 2001 Year-to-Date 2001
------------------------------ -------------------------------------
Average Minimum Maximum Average Minimum Maximum 9/30/01
-------- -------- -------- ------- ------- ------- -------
Interest Rate $5.6 $3.8 $7.7 $4.9 $2.6 $7.7 $5.4
Foreign Exchange 1.6 0.7 3.1 1.3 0.6 3.1 2.3
Equity - - - - - 0.3 -
Diversification (2.1) NM NM (2.0) NM NM (3.1)
Overall Portfolio 5.1 3.4 7.1 4.2 2.3 7.1 4.6
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.
22
CAPITAL
Regulators establish certain levels of capital for bank holding companies
and banks, including the Company and The Bank of New York ("the Bank"), in
accordance with established quantitative measurements. In order for the
Company to maintain its status as a financial holding company, the Bank must
qualify as well capitalized. In addition, major bank holding companies such as
the Company are expected by the regulators to be well capitalized. As of
September 30, 2002 and 2001, 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 estimated capital ratios are as follows:
September 30, 2002 September 30, 2001
--------------------- --------------------- Well Adequately
Company Capitalized Capitalized
Company Bank Company Bank Targets Guidelines Guidelines
------- ---- ------- ------ ------- ----------- -----------
Tier 1* 7.69% 7.63% 7.51% 6.79% 7.75% 6% 4%
Total Capital** 11.72 11.80 11.02 10.57 11.75 10 8
Leverage 6.77 6.70 6.78 6.10 7.00 5 3-5
Tangible Common
Equity 5.38 6.07 4.94 5.63 5.25-6.00
* Tier 1 capital consists, generally, of common equity and certain qualifying preferred
stock, less goodwill.
**Total Capital consists of Tier 1 capital plus Tier 2 capital. Tier 2 capital consists,
generally, of certain qualifying preferred stock and subordinated debt and a portion of the
loan loss allowance.
The Company issued $250 million subordinated debt on November 5, 2002.
The Company's and the Bank's capital ratios were lower at September 30,
2001 due to increased assets resulting from the WTC disaster.
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 $14.0 billion and $11.8 billion on an
average basis for the first nine months of 2002 and 2001. Stable foreign
deposits, primarily from the Company's European based securities servicing
business, were $24.3 billion and $27.6 billion for the first nine months of
2002 and 2001. Savings and other time deposits were $9.7 billion on a year-to-
date average basis at September 30, 2002 compared to $9.5 billion at September
30, 2001. A significant reduction in the Company's securities businesses would
reduce its access to foreign deposits. The Company's average year-to-date 2001
balance sheet increased $3.2 billion due to the WTC disaster.
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.
23
At September 30, 2002, the amount of dividends the Bank could pay to the
Parent and remain in compliance with federal bank regulatory requirements was
$439 million. This dividend capacity would increase in the remainder of 2002
to the extent of net income, less dividends. Nonbank subsidiaries of the
Parent have liquid assets of approximately $781 million. These assets could be
liquidated and the proceeds delivered by dividend or loaned 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, 2002, the Parent could use
the subsidiaries' liquid securities as collateral to allow it to borrow $320
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, 2002.
At September 30, 2002, the Parent's quarterly average commercial paper
borrowings were $88 million compared with $464 million in 2001. Commercial
paper outstandings were $65 million and $415 million at September 30, 2002 and
2001. At September 30, 2002, the Parent had cash of $89 million.
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, 2002 and September 30,
2001.
The Parent also has the ability to access the capital markets. At
November 8, 2002, the Parent has a shelf registration statement with a
remaining capacity of $1.5 billion 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 November 8, 2002 were
as follows:
The Bank of
Parent Parent Parent Senior New York
Commercial Subordinated Long-Term Long-Term
Paper Long-Term Debt Debt Deposits
---------- --------------- -------------- ------------
Standard & A-1 A A+ AA-
Poor's
Moody's P1 A1 Aa3 Aa2
Fitch F1+ A+ AA- AA
The Parent's major uses of funds are payment of principal and interest on
its borrowings, acquisitions, dividends, repurchase of common stock, and
additional investment in its subsidiaries.
The Parent has approximately $550 million of long-term debt that becomes
due before December 31, 2002. In addition, at September 30, 2002 the Parent
has the option to call $105 million of debt in the remainder of 2002 and
expects to call and refinance if market conditions are favorable. The Parent
expects to refinance any debt it repays by issuing a combination of senior and
subordinated debt.
The Parent redeemed $400 million of trust preferred securities in the
third quarter of 2002.
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, 2002 and 2001 was 99.31% and 99.42%.
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.
24
ASSET/LIABILITY MANAGEMENT
The Company's asset/liability management activities include lending,
investing in securities, accepting deposits, raising money as needed to fund
assets, and processing securities and other transactions. The market risks
that arise from these activities are interest rate risk, and to a lesser
degree, foreign exchange risk. The Company's primary market risk is exposure
to movements in US dollar interest rates. Exposure to movements in foreign
currency interest rates also exists, but to a significantly lower degree. The
Company actively manages interest rate sensitivity (the exposure of net
interest income to interest rate movements). In addition to gap analysis, the
Company uses earnings simulation and discounted cash flow models to identify
interest rate exposures.
An earnings simulation model is the primary tool used to assess changes
in pre-tax net interest income. The model incorporates management's
assumptions regarding interest rates, balance changes on core deposits, and
changes in the prepayment behavior of loans 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.
The Company believes it has positioned its balance sheet to be neutral to
a change in interest rates. The Company evaluates the effect on earnings by
running various interest rate 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 estimating the change in pre-tax net interest income between
the scenarios over a 12-month measurement period. The measurement of interest
rate sensitivity is the percentage change in net interest income calculated by
the model under a 100 basis point ramp up or down in short-term and long-term
rates versus a baseline scenario. At September 30, 2002, under these ramp
scenarios, annualized pre-tax net interest income would be negatively affected
by 1.8% from the baseline scenario for an increase in rates and by 0.7% for a
decline. The change in net interest income in the ramp up scenario reflects
the impact of the Company's mortgage portfolio. The change in net interest
income in the ramp down scenario reflects compression on pricing of deposits
in a low interest rate environment. These scenarios do not include the
strategies that management could employ to limit the impact as interest
rate expectations change.
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 2001 Annual Report on Form 10-K. Two
of the Company's more critical accounting policies are those related to the
allowance for credit losses and to the valuation of derivatives and securities
where quoted market prices are not available.
ALLOWANCE FOR CREDIT LOSSES
The allocated portion of the allowance for credit losses is principally
determined using an expected loss model driven by Probability of Default and
Loss Given Default ratings. Ratings are assigned after analyzing the credit
quality of each borrower and the collateral/structure of each individual
asset. These ratings are periodically compared to internal company and
external rating agency default and loss databases to ensure consistency. Other
factors used in establishing the allocated portion of the allowance include
forecasts of future cash flows and maturity.
25
The Company's unallocated allowance is based on management's judgment.
Factors that influence this judgment include:
- Economic conditions, including duration of the current cycle
- Past experience, including recent loss experience
- Credit quality trends
- Collateral values
- Volume, composition, and growth of the loan portfolio
- Specific credits and industry conditions
- Results of bank regulatory and internal credit exams
- Actions by the Federal Reserve Board
- Delay in receipt of information to evaluate loans or confirm existing
credit deterioration
To the extent actual results differ from forecasts or management's
judgment, the allowance for credit losses may be greater or less than future
charge-offs.
VALUATION OF DERIVATIVES AND SECURITIES WHERE QUOTED MARKET PRICES ARE NOT
AVAILABLE
When quoted market prices are not available, derivatives and securities
values are determined based on discounted cash flow analysis, comparison to
similar instruments, and the use of financial models. Discounted cash flow
analysis is dependent upon estimated future cash flows and the level of
interest rates. Model-based pricing uses inputs of observable prices for
interest rates, foreign exchange rates, option volatilities and other factors.
Models are benchmarked and validated by external parties.
These valuation methods could expose the Company to materially different
results should the models used or underlying assumptions be inaccurate.
POTENTIAL IMPACT OF LOWER EQUITY PRICE LEVELS
As of the market close on November 8, the S&P 500 has declined by 22.1%
and the Dow Jones Industrial Average has declined by 14.8% from December 31,
2001 levels. The equity markets have been volatile over the course of the
year, but further declines could have several potential negative effects on
the Company.
The Company holds investments in portfolios of 1) equity securities of
other financial institutions, 2) sponsor-managed private equities and 3) fixed
income investment securities in part to generate securities gains. Although
the Company has made substantial progress in reducing its equity exposures,
further declines in the equity markets could negatively impact the Company's
results of operations.
The lower equity price levels also affect selected other revenue
categories of the Company, including private client services/asset management
fees, as well as fees of certain securities servicing business lines, such as
custody and mutual fund services. In general, however, the Company's overall
securities servicing business revenue generation is more dependent on market
volumes and volatility than asset price levels.
Lastly, the Company has an overfunded pension plan which has generated
sizable pension credits in recent years. Lower actual returns on assets,
combined with a projected lower rate of return on plan assets going forward,
could result in smaller pension credits in 2003 and beyond. The Company
expects a reduction in its pension credit to reduce net income in 2003 by $.04
to $.06 per share.
26
WORLD TRADE CENTER DISASTER UPDATE
The Company has substantially completed the reoccupation of its two major
facilities disabled by the WTC disaster. The Company incurred $21 million in
expenses associated with its interim space and move costs during the quarter.
The Company also estimated and recorded a $223 million loss associated with
the subletting of its interim operating facilities. These expenses were netted
against an offsetting insurance recovery. Since the WTC disaster, the Company
has recorded insurance recoveries of $511 million and received cash advances
on its claim of $275 million. Future cash advances will largely relate to the
sublease loss and business interruption costs.
COMPARISON WITH 2001 NORMALIZED RESULTS
The WTC disaster adversely impacted the Company's third quarter 2001
results as illustrated below:
For the three Months
ended September 30, 2001
(Dollars in millions,
except per share amounts) Net Income EPS
---------- ---
Reported $ 243 $0.33
WTC Disaster 140 0.19
----- -----
Normalized $ 383 $0.52
===== =====
Net income in the third quarter of 2002 declined to $79 million from $383
million on a normalized basis in the third quarter of 2001. Excluding the
charges related to credit losses and equity securities writedowns, net income
was $339 million in the third quarter of 2002. The decline in net income of
$44 million on this basis from a year ago primarily reflects lower trading and
other income. Trading revenues declined $35 million reflecting weaker capital
markets and fewer sales of interest rate hedging products. Other income
declined $30 million from the third quarter of 2001, which included a $43
million gain related to the sale of the Company's interest in the New York
Cash Exchange. The September 30, 2001 period end and average balance sheets
were significantly higher than the September 30, 2002, balance sheets due to
the WTC disaster.
STATISTICAL INFORMATION
- -----------------------
27
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, 2002 ended September 30, 2001
------------------------------ ------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
ASSETS
- ------------
Interest-Bearing Deposits
in Banks (primarily foreign) $ 4,029 $ 28 2.76% $ 6,417 $ 68 4.20%
Federal Funds Sold and Securities
Purchased Under Resale Agreements 2,736 11 1.64 6,161 53 3.39
Loans
Domestic Offices 19,388 240 4.92 22,381 329 5.85
Foreign Offices 14,360 122 3.37 17,139 226 5.23
------- ----- ------- -----
Total Loans 33,748 362 4.26 39,520 555 5.58
------- ----- ------- -----
Securities
U.S. Government Obligations 521 7 5.14 951 13 5.24
U.S. Government Agency Obligations 3,741 47 5.07 3,772 58 6.14
Obligations of States and
Political Subdivisions 504 8 6.55 686 12 7.24
Other Securities 12,032 139 4.63 6,390 94 5.85
Trading Securities 6,792 58 3.38 7,415 84 4.49
------- ----- ------- -----
Total Securities 23,590 259 4.39 19,214 261 5.40
------- ----- ------- -----
Total Interest-Earning Assets 64,103 660 4.09% 71,312 937 5.21%
----- -----
Allowance for Credit Losses (616) (612)
Cash and Due from Banks 2,601 4,462
Other Assets 12,722 11,878
------- -------
TOTAL ASSETS $78,810 $87,040
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Interest-Bearing Deposits
Money Market Rate Accounts $ 6,661 $ 22 1.32% $ 7,409 $ 48 2.55%
Savings 8,144 22 1.07 7,639 36 1.88
Certificates of Deposit
$100,000 & Over 3,322 18 2.14 402 5 4.74
Other Time Deposits 1,475 8 2.17 1,831 19 4.06
Foreign Offices 23,234 95 1.63 30,068 243 3.21
------- ----- ------- -----
Total Interest-Bearing Deposits 42,836 165 1.53 47,349 351 2.94
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 2,040 8 1.51 3,724 27 2.85
Other Borrowed Funds 1,300 8 2.47 1,987 92 18.37
Long-Term Debt 5,467 50 3.59 4,560 65 5.67
------- ----- ------- -----
Total Interest-Bearing Liabilities 51,643 231 1.77% 57,620 535 3.68%
----- -----
Noninterest-Bearing Deposits 10,792 13,585
Other Liabilities 9,760 9,464
Shareholders' Equity 6,615 6,371
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $78,810 $87,040
======= =======
Net Interest Earnings and
Interest Rate Spread $ 429 2.32% $ 402 1.53%
===== ==== ===== ====
Net Yield on Interest-Earning Assets 2.66% 2.24%
==== ====
28
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, 2002 ended September 30, 2001
------------------------------ ------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
ASSETS
- ------------
Interest-Bearing Deposits
in Banks (primarily foreign) $ 4,992 $ 106 2.85% $ 5,940 $ 200 4.49%
Federal Funds Sold and Securities
Purchased Under Resale Agreements 2,957 38 1.70 4,507 142 4.22
Loans
Domestic Offices 19,270 731 5.07 20,158 989 6.56
Foreign Offices 15,361 392 3.41 18,152 838 6.17
------- ------ ------- -----
Total Loans 34,631 1,123 4.33 38,310 1,827 6.38
------- ------ ------- -----
Securities
U.S. Government Obligations 663 26 5.31 1,081 45 5.57
U.S. Government Agency Obligations 3,299 134 5.43 2,823 135 6.36
Obligations of States and
Political Subdivisions 550 27 6.57 668 38 7.67
Other Securities 10,235 370 4.82 4,595 202 5.89
Trading Securities 7,882 199 3.38 8,861 334 5.05
------- ------ ------- -----
Total Securities 22,629 756 4.46 18,028 754 5.60
------- ------ ------- -----
Total Interest-Earning Assets 65,209 2,023 4.15% 66,785 2,923 5.86%
------ -----
Allowance for Credit Losses (616) (613)
Cash and Due from Banks 2,656 3,302
Other Assets 12,117 10,708
------- -------
TOTAL ASSETS $79,366 $80,182
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Interest-Bearing Deposits
Money Market Rate Accounts $ 6,661 $ 66 1.33% $ 6,606 $ 171 3.46%
Savings 8,124 70 1.15 7,594 126 2.22
Certificates of Deposit
$100,000 & Over 1,701 30 2.35 395 16 5.43
Other Time Deposits 1,548 27 2.32 1,903 64 4.50
Foreign Offices 24,283 291 1.60 27,618 808 3.92
------- ------ ------- -----
Total Interest-Bearing Deposits 42,317 484 1.53 44,116 1,185 3.59
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 2,148 24 1.48 2,830 82 3.86
Other Borrowed Funds 3,465 66 2.57 2,015 151 10.00
Long-Term Debt 5,316 159 3.96 4,527 218 6.39
------- ------ ------- -----
Total Interest-Bearing Liabilities 53,246 733 1.84% 53,488 1,636 4.09%
------ -----
Noninterest-Bearing Deposits 10,394 11,773
Other Liabilities 9,321 8,769
Shareholders' Equity 6,405 6,152
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $79,366 $80,182
======= =======
Net Interest Earnings and
Interest Rate Spread $1,290 2.31% $1,287 1.77%
====== ==== ====== ====
Net Yield on Interest-Earning Assets 2.65% 2.58%
==== ====
29
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Statements of Income
(In millions, except per share amounts)
(Unaudited)
For the three
months ended
----------------------------------
March 31, June 30, September 30,
2002 2002 2002
--------- ------- -------------
Interest Income
- ---------------
Loans $ 383 $ 377 $ 362
Securities
Taxable 141 158 175
Exempt from Federal Income Taxes 16 16 15
----- ----- -----
157 174 190
Deposits in Banks 35 44 28
Federal Funds Sold and Securities Purchased
Under Resale Agreements 14 12 11
Trading Assets 73 68 58
----- ----- -----
Total Interest Income 662 675 649
----- ----- -----
Interest Expense
- ----------------
Deposits 160 158 165
Federal Funds Purchased and Securities Sold
Under Repurchase Agreements 8 8 8
Other Borrowed Funds 29 30 8
Long-Term Debt 53 56 50
----- ----- -----
Total Interest Expense 250 252 231
----- ----- -----
Net Interest Income 412 423 418
- -------------------
Provision for Credit Losses 35 35 225
----- ----- -----
Net Interest Income After Provision
for Credit Losses 377 388 193
----- ----- -----
Noninterest Income
- ------------------
Servicing Fees
Securities 454 478 480
Global Payment Services 73 71 73
----- ----- -----
527 549 553
Private Client Services and
Asset Management Fees 83 88 85
Service Charges and Fees 83 93 91
Foreign Exchange and Other Trading Activities 62 72 49
Securities Gains 31 25 (188)
Other 32 28 46
----- ----- -----
Total Noninterest Income 818 855 636
----- ----- -----
Noninterest Expense
- -------------------
Salaries and Employee Benefits 387 418 397
Net Occupancy 49 49 76
Furniture and Equipment 35 35 32
Other 178 194 201
----- ----- -----
Total Noninterest Expense 649 696 706
----- ----- -----
Income Before Income Taxes 546 547 123
Income Taxes 184 186 44
----- ----- -----
Net Income $ 362 $ 361 $ 79
- ---------- ===== ===== =====
Per Common Share Data:
- ----------------------
Basic Earnings $0.50 $0.50 $0.11
Diluted Earnings 0.50 0.50 0.11
Cash Dividends Paid 0.19 0.19 0.19
Diluted Shares Outstanding 730 729 727
- -------------------------------------------------------------------------------------------------
See Note 2 to Consolidated Financial Statements regarding accounting changes.
30
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Statements of Income
(In millions, except per share amounts)
(Unaudited)
For the three
months ended
--------------------------------------------
March 31, June 30, September 30, December 31 Year
2001 2001 2001 2001 2001
-------- -------- ------------- ----------- ------
Interest Income
- ---------------
Loans $ 676 $ 595 $ 555 $ 445 $2,271
Securities
Taxable 78 100 143 143 463
Exempt from Federal Income Taxes 17 20 19 18 74
----- ----- ----- ----- ------
95 120 162 161 537
Deposits in Banks 70 62 68 53 252
Federal Funds Sold and Securities Purchased
Under Resale Agreements 51 38 53 16 159
Trading Assets 141 110 84 66 401
----- ----- ----- ----- ------
Total Interest Income 1,033 925 922 741 3,620
----- ----- ----- ----- ------
Interest Expense
- ----------------
Deposits 463 373 351 220 1,406
Federal Funds Purchased and Securities Sold
Under Repurchase Agreements 32 23 27 12 94
Other Borrowed Funds 31 28 92 12 162
Long-Term Debt 80 71 65 59 277
----- ----- ----- ----- ------
Total Interest Expense 606 495 535 303 1,939
----- ----- ----- ----- ------
Net Interest Income 427 430 387 438 1,681
- -------------------
Provision for Credit Losses 30 30 40 275 375
----- ----- ----- ----- ------
Net Interest Income After Provision
for Credit Losses 397 400 347 163 1,306
----- ----- ----- ----- ------
Noninterest Income
- ------------------
Servicing Fees
Securities 463 443 422 446 1,774
Global Payment Services 69 72 75 71 287
----- ----- ----- ----- ------
532 515 497 517 2,061
Private Client Services and
Asset Management Fees 81 80 75 78 314
Service Charges and Fees 90 95 81 89 355
Foreign Exchange and Other Trading Activities 83 98 79 78 338
Securities Gains 46 46 22 40 154
Other 33 31 76 208 348
----- ----- ----- ----- ------
Total Noninterest Income 865 865 830 1,010 3,570
----- ----- ----- ----- ------
Noninterest Expense
- -------------------
Salaries and Employee Benefits 395 393 419 386 1,593
Net Occupancy 50 47 87 48 232
Furniture and Equipment 31 31 87 30 179
Other 184 193 228 209 814
----- ----- ----- ----- ------
Total Noninterest Expense 660 664 821 673 2,818
----- ----- ----- ----- ------
Income Before Income Taxes 602 601 356 500 2,058
Income Taxes 218 216 113 169 715
----- ----- ----- ----- ------
Net Income $ 384 $ 385 $ 243 $ 331 $1,343
- ---------- ===== ===== ===== ===== ======
Per Common Share Data:
- ----------------------
Basic Earnings $0.53 $0.53 $0.33 $0.45 $1.84
Diluted Earnings 0.52 0.52 0.33 0.45 1.81
Cash Dividends Paid 0.18 0.18 0.18 0.18 0.72
Diluted Shares Outstanding 743 742 741 738 741
- ---------------------------------------------------------------------------------------------------------
See Note 2 to Consolidated Financial Statements regarding accounting changes.
31
FORWARD LOOKING STATEMENTS
The information presented with respect to, among other things, earnings
outlook, projected business strategy, the outcome of legal and investigatory
proceedings, the Company's plans, objectives and strategies reallocating
assets and moving into fee-based businesses, and future loan losses is forward
looking information. Forward looking statements are the Company's current
estimates or expectations of future events or future results.
The Company or its executive officers and directors on behalf of the
Company, may from time to time make forward looking statements. When used in
this report, any press release or oral statements, the words "estimate",
"forecast", "project", "anticipate", "expect", "intend", "believe", "plan",
"goal", "should", "may", "strategy", and words of like import are intended to
identify forward looking statements in addition to statements specifically
identified as forward looking statements.
Forward looking statements, including the Company's future results of
operations and discussions of future plans contained in Management's
Discussion and Analysis and elsewhere in this Form 10-Q, are subject to risks
and uncertainties, some of which are discussed herein, that could cause actual
results to differ materially from projected results. Forward looking
statements, projections or future plans, could be affected by a number of
factors that the Company is necessarily unable to predict with accuracy,
including the economic and other effects of the WTC disaster and subsequent
U.S. military action, lower than expected performance or higher than expected
costs in connection with acquisitions and integration of acquired businesses,
changes in relationships with customers, variations in management projections
or market forecasts and the actions that management could take in response to
these changes, management's ability to achieve efficiency goals, changes in
customer credit quality, the Company's access to the capital markets, future
changes in interest rates, general credit quality, the levels of economic,
capital market, cross-border investing and merger and acquisition activity,
consumer behavior, government monetary policy, domestic and foreign
legislation, regulation and investigation, competition, credit, market and
operating risk, and loan demand, as well as the pace of recovery of the
domestic economy, market demand for the Company's products and services and
future global economic, political and military 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 have an important influence on the demand
for credit and investments and the level of interest rates and thus on the
earnings of the Company.
COMPETITION
The businesses in which the Company operates are very competitive.
Competition is provided by both unregulated and regulated financial services
organizations, whose products and services span the local, national, and
global markets in which the Company conducts operations.
A wide variety of domestic and foreign companies compete for processing
services. Commercial banks, savings banks, savings and loan associations, and
credit unions actively compete for deposits, and money market funds and
brokerage houses offer deposit-like services. These institutions, as well as
consumer and commercial finance companies, national retail chains, factors,
32
insurance companies and pension trusts, are important competitors for various
types of loans. Issuers of commercial paper compete actively for funds and
reduce demand for bank loans. For personal and corporate trust services and
investment counseling services, insurance companies, investment counseling
firms, and other business firms and individuals offer active competition.
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.
33
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Balance Sheets
(Dollars in millions, except per share amounts)
(Unaudited)
September 30, December 31,
2002 2001
---- ----
Assets
- ------
Cash and Due from Banks $ 3,753 $ 3,222
Interest-Bearing Deposits in Banks 4,446 6,619
Securities
Held-to-Maturity (fair value of $1,137 in 2002 1,141 1,211
and $1,178 in 2001)
Available-for-Sale 16,882 11,651
------- -------
Total Securities 18,023 12,862
Trading Assets at Fair Value 9,428 8,270
Federal Funds Sold and Securities Purchased Under Resale
Agreements 2,410 4,795
Loans (less allowance for credit losses of $681 in 2002
and $616 in 2001) 33,561 35,131
Premises and Equipment 976 992
Due from Customers on Acceptances 299 313
Accrued Interest Receivable 267 236
Goodwill 2,345 2,065
Intangible Assets 58 19
Other Assets 5,421 6,501
------- -------
Total Assets $80,987 $81,025
======= =======
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits
Noninterest-Bearing (principally domestic offices) $13,208 $12,635
Interest-Bearing
Domestic Offices 20,201 16,553
Foreign Offices 23,560 26,523
------- -------
Total Deposits 56,969 55,711
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 1,256 1,756
Trading Liabilities 3,054 2,264
Other Borrowed Funds 1,687 2,363
Acceptances Outstanding 301 358
Accrued Taxes and Other Expenses 4,098 3,766
Accrued Interest Payable 123 92
Other Liabilities 1,338 3,422
Long-Term Debt 5,528 4,976
------- -------
Total Liabilities 74,354 74,708
------- -------
Shareholders' Equity
Class A Preferred Stock - par value $2.00 per share,
authorized 5,000,000 shares, outstanding 3,500 shares
in 2002 and in 2001 - -
Common Stock-par value $7.50 per share,
authorized 2,400,000,000 shares, issued
993,433,196 shares in 2002 and
990,773,101 shares in 2001 7,451 7,431
Additional Capital 831 741
Retained Earnings 4,773 4,383
Accumulated Other Comprehensive Income 123 80
------- -------
13,178 12,635
Less: Treasury Stock (267,379,292 shares in 2002
and 260,449,527 shares in 2001), at cost 6,539 6,312
Loan to ESOP (823,810 shares in
2002 and in 2001), at cost 6 6
------- -------
Total Shareholders' Equity 6,633 6,317
------- -------
Total Liabilities and Shareholders' Equity $80,987 $81,025
======= =======
- ----------------------------------------------------------------------------------------
Note: The balance sheet at December 31, 2001 has been derived from the audited financial
statements at that date.
See accompanying Notes to Consolidated Financial Statements.
34
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,
2002 2001 2002 2001
---- ---- ---- ----
Interest Income
- ---------------
Loans $ 362 $ 555 $1,122 $1,827
Securities
Taxable 175 143 474 320
Exempt from Federal Income Taxes 15 19 47 56
----- ----- ----- -----
190 162 521 376
Deposits in Banks 28 68 106 200
Federal Funds Sold and Securities Purchased
Under Resale Agreements 11 53 38 142
Trading Assets 58 84 199 334
----- ----- ----- -----
Total Interest Income 649 922 1,986 2,879
----- ----- ----- -----
Interest Expense
- ----------------
Deposits 165 351 484 1,185
Federal Funds Purchased and Securities Sold
Under Repurchase Agreements 8 27 24 82
Other Borrowed Funds 8 92 66 151
Long-Term Debt 50 65 159 218
----- ----- ----- -----
Total Interest Expense 231 535 733 1,636
----- ----- ----- -----
Net Interest Income 418 387 1,253 1,243
- -------------------
Provision for Credit Losses 225 40 295 100
----- ----- ----- -----
Net Interest Income After Provision
for Credit Losses 193 347 958 1,143
----- ----- ----- -----
Noninterest Income
- ------------------
Servicing Fees
Securities 480 422 1,411 1,328
Global Payment Services 73 75 217 216
----- ----- ----- -----
553 497 1,628 1,544
Private Client Services and
Asset Management Fees 85 75 256 235
Service Charges and Fees 91 81 267 267
Foreign Exchange and Other Trading Activities 49 79 183 260
Securities Gains (188) 22 (131) 113
Other 46 76 106 140
----- ----- ----- -----
Total Noninterest Income 636 830 2,309 2,559
----- ----- ----- -----
Noninterest Expense
- -------------------
Salaries and Employee Benefits 397 419 1,202 1,205
Net Occupancy 76 87 175 184
Furniture and Equipment 32 87 101 148
Other 201 228 573 607
----- ----- ----- -----
Total Noninterest Expense 706 821 2,051 2,144
----- ----- ----- -----
Income Before Income Taxes 123 356 1,216 1,558
Income Taxes 44 113 414 546
----- ----- ------ ------
Net Income $ 79 $ 243 $ 802 $1,012
- ---------- ===== ===== ====== ======
Per Common Share Data:
- ----------------------
Basic Earnings $0.11 $0.33 $1.11 $1.38
Diluted Earnings 0.11 0.33 1.10 1.36
Cash Dividends Paid 0.19 0.18 0.57 0.54
Diluted Shares Outstanding 727 741 729 742
- -------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
35
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Statement of Changes in Shareholders' Equity
For the nine months ended September 30, 2002
(In millions)
(Unaudited)
Common Stock
Balance, January 1 $ 7,431
Issuances in Connection with Employee Benefit Plans 20
-------
Balance, September 30 7,451
-------
Additional Capital
Balance, January 1 741
Issuances in Connection with Employee Benefit Plans 90
-------
Balance, September 30 831
-------
Retained Earnings
Balance, January 1 4,383
Net Income $ 802 802
Cash Dividends on Common Stock (412)
-------
Balance, September 30 4,773
-------
Accumulated Other Comprehensive Income
Securities Valuation Allowance
Balance, January 1 114
Change in Fair Value of Securities Available-for-Sale,
Net of Taxes of $85 Million 77 77
Reclassification Adjustment, Net of Taxes of $(34) Million (46) (46)
-------
Balance, September 30 145
-------
Foreign Currency Items
Balance, January 1 (46)
Foreign Currency Translation Adjustment,
Net of Taxes of $(5) Million (3) (3)
-------
Balance, September 30 (49)
-------
Unrealized Derivative Gains
Balance, January 1 12
Net Unrealized Derivative Gains on Cash Flow Hedges,
Net of Taxes of $14 Million 15 15
------- ------
Balance, September 30 27
------
Total Comprehensive Income $ 845
=======
Less Treasury Stock
Balance, January 1 6,312
Issued (53)
Acquired 280
-------
Balance, September 30 6,539
-------
Less Loan to ESOP
Balance, January 1 6
-------
Balance, September 30 6
-------
Total Shareholders' Equity, September 30 $ 6,633
=======
- ------------------------------------------------------------------------------------------
Comprehensive Income for the three months ended September 30, 2002 and 2001 was $170 million and
$269 million.
Comprehensive income for the nine months ended September 30, 2002 and 2001 was $845 million and
$957 million.
See accompanying Notes to Consolidated Financial Statements.
36
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
For the nine months
ended September 30,
2002 2001
---- ----
Operating Activities
Net Income $ 802 $1,012
Adjustments to Determine Net Cash Attributable to
Operating Activities
Provision for Losses on Loans and Other Real Estate 295 102
Depreciation and Amortization 147 202
Deferred Income Taxes 195 385
Securities Gains 131 (113)
Change in Trading Activities (295) 3,008
Change in Accruals and Other, Net (573) (1,813)
------ ------
Net Cash Provided by Operating Activities 702 2,783
------ ------
Investing Activities
Change in Interest-Bearing Deposits in Banks 2,537 (651)
Purchases of Securities Held-to-Maturity (60) -
Maturities of Securities Held-to-Maturity 125 20
Purchases of Securities Available-for-Sale (15,433) (10,375)
Sales of Securities Available-for-Sale 6,653 2,118
Maturities of Securities Available-for-Sale 3,632 2,085
Net Principal Received (Disbursed) on Loans to Customers 1,415 (9,355)
Sales of Loans and Other Real Estate 244 316
Change in Federal Funds Sold and Securities
Purchased Under Resale Agreements 2,385 5,459
Purchases of Premises and Equipment (165) (86)
Acquisitions, Net of Cash Acquired (348) (547)
Proceeds from the Sale of Premises and Equipment 1 4
Other, Net (267) (112)
------ ------
Net Cash Provided (Used) by Investing Activities 719 (11,124)
------ ------
Financing Activities
Change in Deposits 417 4,040
Change in Federal Funds Purchased and Securities
Sold Under Repurchase Agreements (500) 4,611
Change in Other Borrowed Funds (509) 402
Proceeds from the Issuance of Long-Term Debt 1,325 100
Repayments of Long-Term Debt (1,005) (155)
Issuance of Common Stock 163 274
Treasury Stock Acquired (280) (519)
Cash Dividends Paid (412) (397)
------ ------
Net Cash (Used) Provided by Financing Activities (801) 8,356
------ ------
Effect of Exchange Rate Changes on Cash (89) 149
------ ------
Change in Cash and Due From Banks 531 164
Cash and Due from Banks at Beginning of Period 3,222 3,125
------ ------
Cash and Due from Banks at End of Period $3,753 $3,289
====== ======
- ----------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Cash Paid During the Period for:
Interest $ 702 $1,639
Income Taxes 222 155
Noncash Investing Activity
(Primarily Foreclosure of Real Estate) 1 1
- ----------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
37
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. Excluding adjustments related to the World Trade
Center disaster ("WTC disaster"), such adjustments are of a normal recurring
nature.
2. Accounting Changes and New Accounting Pronouncements
----------------------------------------------------
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," in 1996. At the time, as permitted by the standard, the Company
elected not to adopt the fair value accounting provisions of the standard and
to continue to apply the provisions of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." However, during the third
quarter of 2002, the Company announced it would adopt the fair value
accounting provisions of SFAS No. 123 for 2003 grants. The Financial
Accounting Standards Board (the "FASB") is considering modifying SFAS No. 123
to allow alternative methods of adoption. The Company plans to use the
original method permitted under SFAS No. 123 which will require options
granted after January 1, 2003 to be expensed. This method is expected to
reduce diluted earnings per common share for 2003 by approximately $.03 per
share. In accordance with SFAS No. 123, options granted prior to January 1,
2003 will continue to be accounted for under APB Opinion No. 25.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143
is effective for financial statements issued for fiscal years beginning after
June 15, 2002. 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 Company does not expect the
adoption of this pronouncement to have an impact on its results of operations
or financial condition.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No.144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 was effective for financial statements issued
for fiscal years beginning after December 15, 2001. The standard addresses
financial accounting and reporting for the impairment or disposal of long-
lived assets. SFAS 144 became effective for the Company on January 1, 2002.
The adoption of this standard had no impact on the Company's results of
operations or financial condition.
See footnote 4 regarding the impact of Statement of Financial Accounting
Standards No.142 "Goodwill and Other Intangible Assets".
In November 2001, the FASB issued Emerging Issues Task Force ("EITF") No.
01-14, "Income Statement Characterization of Reimbursements Received for Out-
Of-Pocket Expenses Incurred." This guidance, effective January 1, 2002
requires companies to recognize the reimbursement of client-related expenses
as revenue and the costs as operating expense. Historically, the Company has
netted these reimbursements against the related operating expenses. Client
reimbursements for out-of-pocket expenses are reflected in securities
servicing and private client services and asset management fee revenue in the
accompanying financial statements. Prior periods have been restated. See pages
29 and 30.
38
In the fourth quarter of 2001, the Company reclassified Company-Obligated
Mandatory Redeemable Preferred Trust Securities of Subsidiary Trust Holding
Solely Junior Subordinated Debentures to Long-Term Debt. Prior periods have
been restated.
In May 2002, the FASB issued an exposure draft related to guarantees. The
new standard would require a guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of obligations it has undertaken in
issuing the guarantee. The Company does not believe that adoption of the new
standard will have a significant impact on its financial condition or results
of operations.
In June 2002, the FASB issued an exposure draft related to consolidation
of special-purpose entities ("SPEs") that may affect securitization
transactions. Since that time the FASB has discussed significant modifications
to the exposure draft. Information regarding the Company securitization
transactions is disclosed in footnote 6 "Securitizations" in the Company's
2001 Annual Report. The Company does not believe that adoption of a new
standard related to SPEs will have a significant impact on its financial
condition or results of operations.
On July 30, 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which is effective for exit or
disposal activities initiated after December 31, 2002. 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 Company does not believe that adoption of the new standard will have
a significant impact on its financial condition or results of operations.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain
Financial Institutions." This standard eliminates specialized accounting
guidance related to certain acquisitions. The Company does not believe that
adoption of the standard will have a significant impact on its financial
condition or results of operations.
3. Acquisitions and Dispositions
-----------------------------
The Company continues to be an active acquirer of securities servicing
and asset management businesses. During the third quarter of 2002, 2
businesses were acquired for a total cost of $7 million, primarily paid in
cash. The Company records the fair value of contingent payments as an
additional cost of the entity acquired in the period that the payment becomes
probable. Potential contingent payments related to third quarter acquisitions
are $16 million. During the first nine months of 2002, the Company acquired 9
businesses for $328 million, and is contingently liable for payments of $300
million.
Goodwill related to third quarter and year-to-date 2002 acquisition
transactions was $6 million and $234 million respectively. The tax deductible
portion of goodwill for the third quarter and year-to-date 2002 is zero and
$165 million. All of the goodwill was assigned to the Company's Servicing and
Fiduciary Business segment. At September 30, 2002, the Company was liable for
potential contingent payments related to acquisitions in the amount of $464
million. During the third quarter and first nine months of 2002, the Company
paid $2.6 million and $12.6 million for contingent payments related to
acquisitions made in prior years. The pro forma effect of the 2002
acquisitions is not material to third quarter 2002 net income.
In February 2002, the Company acquired Autranet, Inc., a subsidiary of
Credit Suisse First Boston (USA), Inc. This acquisition provided the Company
with one of the largest providers of independently originated research
services in the U.S. which maintains relationships with over 500 institutional
investment managers. Autranet provides a full range of services covering every
aspect of the third party research process including trade execution,
39
operational and administrative support, research selection and procurement
services and regulatory support.
In February 2002, the Company acquired G-Trade Services, Ltd. and other
related wholly-owned subsidiaries of the Credit Lyonnais SA Group. G-Trade, a
leading provider of wholesale execution services including electronic direct
access trading in 22 markets and basket trading capabilities in 65 markets
worldwide, is the executing and clearing broker for non-U.S. equities executed
through the Bloomberg Tradebook system. This acquisition expands the Company's
non-dollar institutional trading capabilities and enhances the range of
international services that the Company offers in the institutional brokerage
and clearing services sector.
In February 2002, the Company acquired the Core International ADR and
Domestic Equity Index institutional investment management businesses of Axe-
Houghton Associates, Inc. based in Rye Brook, New York. This transaction added
approximately $2.6 billion in assets under management.
In March 2002, the Company acquired Jaywalk, Inc., a third-party
aggregator of quality independent investment research. The acquisition offers
quantitative, fundamental, technical, sell strategy and intellectual property
analyses covering thousands of securities. Jaywalk brings together top
independent research providers on one platform, enabling institutional money
management clients to generate new investment ideas and strategies.
In May 2002, the Company acquired Gannet Welsh & Kotler, Inc ("GW&K"), a
privately held asset management firm based in Boston, Massachusetts. GW&K
manages approximately $5 billion offering both fixed income and equity
portfolio management services to high net worth individuals and small to mid-
size institutions located in the Boston area and nationwide.
In June 2002, the Company acquired Beacon Fiduciary Advisors, a privately
held asset management firm based in Chestnut Hill, Massachusetts which manages
in excess of $700 million for over 350 high-net-worth individuals nationwide.
In June 2002, the Company acquired Francis P. Maglio & Co., Inc., a
leading institutional trading firm. This acquisition complements the Company's
comprehensive suite of trading strategies and systems, which include: volume
weighted-average price, program and portfolio transitions trading to its core
block, and electronic trading capabilities.
In June 2002, the Company signed a definitive agreement to acquire the
back-office clearance and settlement capabilities of Tilney Investment
Management through the acquisition of certain assets. This acquisition expands
the Company's European correspondent clearing capability.
In July 2002, the Company acquired the correspondent clearing business of
Weiss, Peck & Greer, LLC adding approximately 50 new correspondent clearing
clients.
In August 2002, the Company acquired the Structured Investment Vehicle
(SIV) management business of Quadrant Capital Limited based in London,
England. Quadrant Capital provides investment management and administrative
services for SIV programs. This acquisition involves the transfer of Quadrant
Capital's administrative personnel, proprietary program documentation and a
specialized software tool known as Quasar that provides customized asset and
liability management reporting for SIV programs.
In October 2002, the Company acquired Lockwood Financial Group Inc.
("LFG") based in Malvern, Pennsylvania. LFG is the industry's largest
independent provider of individually managed account services to independent
financial advisors. LFG provides customized investment solutions to
individuals and institutions through independent financial advisors in the
separate account industry.
40
In October 2002, the Company acquired Electronic Managed Account
Technologies Inc. ("EMAT") based in Malvern, Pennsylvania. EMAT is the leading
independent provider of processing services for individually managed accounts.
This acquisition confirms the Company's commitment to provide a wide range of
customized investment processing solutions to its worldwide network of mutual
fund companies, banks and money managers.
In October 2002, the Company signed a definitive agreement to acquire the
assets 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. The Company expects this transaction to close by the end of
the year.
In October 2002, the Company and ING, a global financial institution of
Dutch origin, announced a global arrangement to outsource ING's international
cash equities clearance and settlements operations in London, New York, Hong
Kong and Singapore to the Company. This multi-market agreement adds to the
Company's existing institutional broker/dealer clearing operations in London
as well as its correspondent clearing operations in Asia and the United
States.
4. Goodwill and Intangibles
------------------------
Effective January 1, 2002, a new accounting standard requires the Company
to test goodwill and indefinite lived intangible assets for impairment rather
than amortize them. A reconciliation of previously reported net income and
earnings per share to the amounts adjusted for the exclusion of goodwill
amortization net of the related tax effect follows:
(In millions, except Nine Months Three Months
per share amounts) Ended September 30, Ended September 30,
2001 2000 1999 2001 2001
-------- -------- -------- ------------------- -------------------
Net Income $1,343 $1,429 $1,739 $1,012 $ 243
Add: Goodwill Amortization,
Net of Tax 73 85 77 55 18
------ ------ ------ ------ -----
Adjusted Net Income $1,416 $1,514 $1,816 $1,067 $ 261
====== ====== ====== ====== =====
Basic Earnings Per Common Share:
Net Income $1.84 $1.95 $2.31 $1.38 $0.33
Goodwill Amortization,
Net of Tax 0.10 0.12 0.10 0.08 0.02
----- ----- ----- ----- -----
Adjusted Net Income $1.94 $2.07 $2.41 $1.46 $0.35
===== ===== ===== ===== =====
Diluted Earnings Per Common Share:
Net Income $1.81 $1.92 $2.27 $1.36 $0.33
Goodwill Amortization,
Net of Tax 0.10 0.11 0.10 0.07 0.02
----- ----- ----- ----- -----
Adjusted Net Income $1.91 $2.03 $2.37 $1.43 $0.35
===== ===== ===== ===== =====
41
Goodwill by segment for the quarter ended September 30, 2002 is as follows:
Servicing
and
Fiduciary Corporate Retail Financial Consolidated
(In millions) Businesses Banking Banking Markets Total
---------- --------- ------- --------- -----------
Balance as of
September 30, 2002 $2,205 $31 $109 $ - $2,345
====== === ==== === ======
The Company's business segments are tested annually for goodwill
impairment. The Company completed its initial evaluation of goodwill for
impairment and determined that no impairment loss was required.
Intangible Assets
- ---------------------
Weighted
Gross Net Average
(In millions) Carrying Accumulated Carrying Amortization
Amount Amortization Amount Period in Years
-------- ------------ -------- ---------------
Intangible Assets $ 88 $(30) $58 10
The aggregate amortization expense of intangibles and goodwill was
$0.4 million and $29 million for the quarters ended September 30, 2002
(intangibles only) and 2001, respectively and $5 million and $83 million for
the nine months ended September 30, 2002 (intangibles only) and 2001,
respectively. Estimated amortization expense for the next five years is as
follows:
For the year ended Amortization
(In millions) December 31, Expense
------------------ -------------
2002 $ 7
2003 8
2004 7
2005 6
2006 6
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.
42
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) 2002 2001
---- ----
Balance, Beginning of Period $616 $616
Charge-Offs (242) (107)
Recoveries 12 7
---- ----
Net Charge-Offs (230) (100)
Provision 295 100
---- ----
Balance, End of Period $681 $616
==== ====
6. Capital Transactions
--------------------
On November 12, 2002, the Company announced a new 16 million share
buyback program. As of November 14, 2002, the Company has approximately 18
million common shares remaining to repurchase under its buyback programs.
The Company issued $250 million of subordinated debt on November 5, 2002.
During the second quarter of 2002, the Company filed a new shelf registration
statement. At November 14, 2002, the registration statement has a remaining
capacity of approximately $1.5 billion of debt, preferred stock, preferred
trust securities, or common stock.
43
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)
2002 2001 2002 2001
---- ---- ---- ----
Net Income (1) $ 79 $243 $802 $1,012
==== ==== ==== ======
Basic Weighted Average
Shares Outstanding 721 731 722 731
Shares Issuable on Exercise of
Employee Stock Options 6 10 7 11
---- ---- ---- ----
Diluted Weighted Average Shares Outstanding 727 741 729 742
==== ==== ==== ====
Basic Earnings Per Share: $ 0.11 $ 0.33 $ 1.11 $ 1.38
Diluted Earnings Per Share: 0.11 0.33 1.10 1.36
(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 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.
44
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, 2002
Commission file number 1-6152
THE BANK OF NEW YORK COMPANY, INC.
Incorporated in the Commonwealth 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, 2002, The Bank of New York Company, Inc. had
725,263,443 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 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, 2002 and December 31, 2001 33
Consolidated Statements of Income for
the three and nine months ended
September 30, 2002 and 2001 34
Consolidated Statement of Changes in
Shareholders' Equity for the nine months
Ended September 30, 2002 35
Consolidated Statement of Cash Flows for
the nine months ended September 30, 2002 and 2001 36
Notes to Consolidated Financial Statements 37 - 43
Consolidated Average Balance Sheet
and Net Interest Analysis 27 - 28
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 2 - 32
Item 3 Quantitative and Qualitative Disclosures
About Market Risk 20 - 21, 24
45
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-14(c)
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 our 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.
Four purported shareholder derivative actions have been filed in
connection with these Russian related matters - - two in the United States
District Court for the Southern District of New York and two in the New York
Supreme Court, New York County - - against certain directors and officers of
the Company and the Bank alleging that the defendants have breached their
fiduciary duties of due care and loyalty by aggressively pursuing business
with Russian banks and entities without implementing sufficient safeguards and
failing to supervise properly those responsible for that business. The actions
seek, on behalf of the Company and the Bank, monetary damages from the
defendants, corrective action and attorneys' fees. On September 1, 2000,
plaintiffs in the two federal actions filed an amended, consolidated complaint
that names all of the directors and certain officers of the Bank and the
Company as defendants, repeats the allegations of the original complaints and
adds allegations that certain officers of the Bank and the Company
participated in a scheme to transfer cash improperly from Russia to various
off-shore accounts and to avoid Russian customs, currency and tax laws.
Management believes that the allegations of both the original complaints and
the amended complaint are without merit. On September 12, 2000, the boards of
directors of the Bank and the Company authorized a Special Litigation
Committee ("SLC") to consider the response of the Bank and the Company to the
state and federal court shareholder derivative actions. The SLC issued an
Interim Report dated May 21, 2001 which concluded that there was "no credible
evidence" to support the allegations of personal misconduct against Mr. Renyi
and "credible evidence" that contradicts "critical allegations" in the amended
complaint in the federal action.
On August 31, 2001, defendants moved to dismiss the two actions filed in
the United States District Court for the Southern District of New York. On
November 27, 2001, the federal district court granted defendants' motion and
dismissed the two actions. On December 19, 2001, plaintiffs filed a Notice of
Appeal to the United States Court of Appeals for the Second Circuit. Argument
on that appeal was held on October 9, 2002.
46
On February 1, 2002, counsel for plaintiffs in the two federal court
actions filed a shareholder derivative action in New York Supreme Court, New
York County that made allegations substantially similar to the two federal
court actions that were dismissed. The Company and the Bank requested that
the New York State Supreme Court issue an order consolidating the new state
court shareholder derivative action with the two shareholder derivative
actions previously filed. Plaintiffs in the new shareholder derivative action
opposed consolidation. On July 15, 2002, the court ordered the consolidation
of the new action.
The two previously filed state court derivative actions, which do not
include any allegations of personal misconduct, are still pending. Lead
plaintiffs' counsel for all pending shareholder derivative actions and counsel
for defendants are currently undertaking court-appointed mediation.
Additionally, on October 7, 1999, six alleged depositors of Joint Stock
Bank Inkombank ("Inkombank"), a Russian bank, filed a purported class action
in the United States District Court for the Southern District of New York on
behalf of all depositors of Inkombank who lost their deposits when that bank
collapsed in 1998. The complaint, as subsequently amended twice, alleges that
the Company and the Bank and their senior officers knew about, and aided and
abetted the looting of Inkombank by its principals and participated in a
scheme to transfer cash improperly from Russia to various off-shore accounts
and to avoid Russian customs, currency and tax laws. The amended complaint
asserts causes of action for conversion and aiding and abetting conversion
under New York law. In addition, the amended complaint states a claim under
the Racketeer Influenced and Corrupt Organizations Act ("RICO"). On March 21,
2001, the court dismissed the second amended complaint without leave to
replead. On January 14, 2002, the United States Court of Appeals for the
Second Circuit vacated the dismissal of the Second Amended Complaint because
it disagreed with one ground of the district court's dismissal, and remanded
the case to the lower court to consider alternate bases for dismissal. On
October 16, 2002, the district court again dismissed the second amended
complaint without leave to replead; plaintiffs have until November 25, 2002 to
seek appellate review of the district court's dismissal. The Company and the
Bank believe that the allegations made in this action are without merit, and
intend to defend the action vigorously.
On October 24, 2000, three alleged shareholders of Inkombank filed an
action in the Supreme Court, New York County against the Company, the Bank and
Inkombank. The complaint alleges that the defendants fraudulently induced the
plaintiffs to refrain from redeeming their alleged $40 million investment in
Inkombank. The complaint asserts a single cause of action for fraud, seeking
$40 million plus 12% interest from January 1994, punitive damages, costs,
interest and attorney fees. The Court denied the Company and the Bank's motion
to dismiss the complaint on January 15, 2002 and motion for reargument on
September 6, 2002. Discovery is ongoing. The Company and the Bank believe that
the allegations of the complaint are without merit and intend to defend the
action vigorously.
The Company does not expect that any of the foregoing civil actions will
have a material impact on the Company's consolidated financial statements.
In the ordinary course of business, there are various legal claims
pending against the Company and its subsidiaries. In the opinion of
management, liabilities arising from such claims, if any, would not have a
material effect on the Company's consolidated financial statements.
47
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) The exhibits filed as part of this report are as follows:
Exhibit 12 - Statement Re: Ratio of Earnings to Fixed Charges
for the Three and Nine Months Ended September 30, 2002 and 2001.
(b) The Company filed the following reports on Form 8-K since
June 30, 2002:
On July 17, 2002, the Company filed a Form 8-K Current Report (Items 5
and 7), which report included unaudited interim financial information and
accompanying discussion for the second quarter of 2002 contained in the
Company's press release dated July 17, 2002.
On August 14, 2002, the Company filed a Form 8-K Current Report (Item 9),
which report included statements required by the Securities and Exchange
Commission order of June 27, 2002 and the certifications pursuant to 18 U.S.C.
Section 1350.
On September 4, 2002, the Company filed a Form 8-K Current Report dated
August 28, 2002 (Item 5 and 7), which report included five exhibits in
connection with the Registration Statement on Form S-3 (File Nos. 333-89586,
333-89586-01, 333-89586-02, 333-89586-03, 333-89586-04) covering the Company's
4.25% Fixed Rate/Floating Rate Senior Subordinated Notes due 2012, issuable
under an Indenture, dated as of October 1, 1993 between the Company and J.P.
Morgan Trust Company, National Association. The exhibits consist of the
Pricing agreement dated August 28, 2002; the Underwriting Agreement Standard
Provisions; the Form of Note; an Officers' Certificate pursuant to Section 301
of the Indenture; and the opinion of counsel as to the legality of the Notes.
On October 2, 2002, the Company filed a Form 8-K Current Report (Item 5
and 7), which report included a press release dated October 2, 2002, in
connection with the announcement of charges for loans and securities valuation
adjustments for the third quarter of 2002.
On October 16, 2002, the Company filed a Form 8-K Current Report (Items 5
and 7), which report included unaudited interim financial information and
accompanying discussion for the third quarter of 2002 contained in the
Company's press release dated October 16, 2002.
On November 13, 2002, the Company filed a Form 8-K Current Report dated
November 5, 2002 (Item 5 and 7), which report included four exhibits in
connection with the Registration Statement on Form S-3 (File Nos. 333-89586,
333-89586-01, 333-89586-02, 333-89586-03, 333-89586-04) covering the Company's
5.50% Senior Subordinated Notes due 2017, issuable under an Indenture, dated
as of October 1, 1993 between the Company and J.P. Morgan Trust Company,
National Association. The exhibits consist of the Pricing agreement dated
November 5, 2002; the Form of Note; an Officers' Certificate pursuant to
Section 201 and 301 of the Indenture; and the opinion of counsel as to the
legality of the Notes.
48
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE BANK OF NEW YORK COMPANY, INC.
----------------------------------
(Registrant)
Date: November 14, 2002 By: /s/ Thomas J. Mastro
---------------------------------
Name: Thomas J. Mastro
Title: Comptroller
49
CERTIFICATIONS
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.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures 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 quarterly report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Thomas A. Renyi
-------------------
Thomas A. Renyi
Chief Executive Officer
50
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.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) Designed such disclosure controls and procedures 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 quarterly report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Bruce W. Van Saun
---------------------
Bruce W. Van Saun
Chief Financial Officer
51
EXHIBIT INDEX
-------------
Exhibit Description
- ------- -----------
12 Ratio of Earnings to Fixed Charges for the
Three and Nine Months Ended September 30, 2002 and 2001.