1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-6152
THE BANK OF NEW YORK COMPANY, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 13-2614959
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
One Wall Street, New York, New York 10286
(Address of principal executive offices) (Zip code)
(212) 495-1784
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months(or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the issuer's Common Stock,
$7.50 par value, was 736,606,915 shares as of July 31, 2001
2
THE BANK OF NEW YORK COMPANY, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2001 and December 31, 2000 3
Consolidated Statements of Income
For the Three Months and Six Months
Ended June 30, 2001 and 2000 4
Consolidated Statement of Changes In
Shareholders' Equity For the Six
Months Ended June 30, 2001 5
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2001 and 2000 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market
Risk. (See "Trading Activities") 14
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 26
Item 2. Sales of Unregistered Common Stock 27
Item 4. Submission of Matters to Vote of Security Holders 27
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURE 29
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
-----------------------------
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Balance Sheets
(Dollars in millions, except per share amounts)
(Unaudited)
June 30, December 31,
2001 2000
---- ----
Assets
------
Cash and Due from Banks $ 3,995 $ 3,125
Interest-Bearing Deposits in Banks 6,014 5,337
Securities
Held-to-Maturity (fair value of $107 in 2001
and $719 in 2000) 127 752
Available-for-Sale 9,575 6,649
------- -------
Total Securities 9,702 7,401
Trading Assets at Fair Value 9,904 12,051
Federal Funds Sold and Securities Purchased Under Resale
Agreements 2,639 5,790
Loans (less allowance for credit losses of $616 in 2001
and $616 in 2000) 36,089 35,645
Premises and Equipment 935 924
Due from Customers on Acceptances 712 447
Accrued Interest Receivable 277 354
Other Assets 6,564 6,040
------- -------
Total Assets $76,831 $77,114
======= =======
Liabilities and Shareholders' Equity
------------------------------------
Deposits
Noninterest-Bearing (principally domestic offices) $12,123 $13,255
Interest-Bearing
Domestic Offices 15,702 15,774
Foreign Offices 25,883 27,347
------- -------
Total Deposits 53,708 56,376
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 2,201 1,108
Trading Liabilities 1,763 2,070
Other Borrowed Funds 2,044 1,687
Acceptances Outstanding 716 450
Accrued Taxes and Other Expenses 3,388 3,283
Accrued Interest Payable 90 127
Other Liabilities 2,080 1,325
Long-Term Debt 3,055 3,036
------- -------
Total Liabilities 69,045 69,462
------- -------
Company-Obligated Mandatory Redeemable Preferred
Trust Securities of Subsidiary Trust Holding Solely
Junior Subordinated Debentures 1,500 1,500
------- ------
Shareholders' Equity
Class A Preferred Stock - par value $2.00 per share,
authorized 5,000,000 shares, outstanding 16,320 shares
in 2001 and 16,320 shares in 2000 1 1
Common Stock-par value $7.50 per share,
authorized 2,400,000,000 shares, issued
990,360,261 shares in 2001 and
985,528,475 shares in 2000 7,428 7,391
Additional Capital 674 521
Retained Earnings 4,071 3,566
Accumulated Other Comprehensive Income 126 207
------- -------
12,300 11,686
Less: Treasury Stock (252,617,170 shares in 2001
and 244,460,032 shares in 2000), at cost 6,006 5,526
Loan to ESOP (1,142,939 shares in 2001
and 1,142,939 in 2000), at cost 8 8
------- -------
Total Shareholders' Equity 6,286 6,152
------- -------
Total Liabilities and Shareholders' Equity $76,831 $77,114
======= =======
----------------------------------------------------------------------------------------
Note: The balance sheet at December 31, 2000 has been derived from the audited financial
statements at that date.
See accompanying Notes to Consolidated Financial Statements.
4
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Statements of Income
(In millions, except per share amounts)
(Unaudited)
For the three For the six
months ended months ended
June 30, June 30,
2001 2000 2001 2000
---- ---- ---- ----
Interest Income
---------------
Loans $ 595 $ 735 $1,271 $1,451
Securities
Taxable 100 78 178 157
Exempt from Federal Income Taxes 20 15 37 31
----- ----- ----- -----
120 93 215 188
Deposits in Banks 62 66 132 137
Federal Funds Sold and Securities Purchased
Under Resale Agreements 38 69 89 118
Trading Assets 110 144 251 246
----- ----- ----- -----
Total Interest Income 925 1,107 1,958 2,140
----- ----- ----- -----
Interest Expense
----------------
Deposits 373 521 835 992
Federal Funds Purchased and Securities Sold
Under Repurchase Agreements 23 32 55 69
Other Borrowed Funds 28 42 59 70
Long-Term Debt 45 49 98 98
----- ----- ----- -----
Total Interest Expense 469 644 1,047 1,229
----- ----- ----- -----
Net Interest Income 456 463 911 911
-------------------
Provision for Credit Losses 30 25 60 45
----- ----- ----- -----
Net Interest Income After Provision for
Credit Losses 426 438 851 866
----- ----- ----- -----
Noninterest Income
------------------
Servicing Fees
Securities 436 403 893 775
Global Payment Services 72 65 141 131
----- ----- ----- -----
508 468 1,034 906
Private Client Services and
Asset Management Fees 78 72 158 142
Service Charges and Fees 95 104 185 194
Securities Gains 46 45 92 85
Other 129 91 245 190
----- ----- ----- -----
Total Noninterest Income 856 780 1,714 1,517
----- ----- ----- -----
Noninterest Expense
-------------------
Salaries and Employee Benefits 391 366 785 725
Net Occupancy 47 45 97 89
Furniture and Equipment 31 27 62 53
Other 186 190 364 364
----- ----- ----- -----
Total Noninterest Expense 655 628 1,308 1,231
----- ----- ----- -----
Income Before Income Taxes 627 590 1,257 1,152
Income Taxes 216 206 434 401
Distribution on Preferred Trust Securities 26 28 54 57
----- ----- ------ ------
Net Income $ 385 $ 356 $ 769 $ 694
---------- ===== ===== ====== ======
Net Income Available to Common Shareholders $ 385 $ 356 $ 769 $ 694
------------------------------------------- ===== ===== ====== ======
Per Common Share Data
---------------------
Basic Earnings $0.53 $0.49 $1.05 $0.95
Diluted Earnings 0.52 0.48 1.03 0.93
Cash Dividends Paid 0.18 0.16 0.36 0.32
Diluted Shares Outstanding 742 745 743 743
-------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
5
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Statement of Changes in Shareholders' Equity
For the six months ended June 30, 2001
(In millions)
(Unaudited)
Preferred Stock
Balance, January 1 $ 1
-------
Balance, June 30 1
-------
Common Stock
Balance, January 1 7,391
Issuances in Connection with Employee Benefit Plans 37
-------
Balance, June 30 7,428
-------
Additional Capital
Balance, January 1 521
Issuances in Connection with Employee Benefit Plans 153
-------
Balance, June 30 674
-------
Retained Earnings
Balance, January 1 3,566
Net Income $769 769
Cash Dividends on Common Stock (264)
-------
Balance, June 30 4,071
-------
Accumulated Other Comprehensive Income
Securities Valuation Allowance
Balance, January 1 244
Change in Fair Value of Securities Available-for-Sale,
Net of Taxes of $(37) Million (18) (18)
Reclassification Adjustment, Net of Taxes of $(34) Million (63) (63)
-------
Balance, June 30 163
-------
Foreign Currency Items
Balance, January 1 (37)
Foreign Currency Translation Adjustment,
Net of Taxes of $(6) Million (7) (7)
-------
Balance, June 30 (44)
-------
Unrealized Derivative Gains
Balance, January 1 -
Cumulative Effect of Change in Accounting Principle,
Net of Taxes of $7 Million 10 10
Net Unrealized Derivative Gains on Cash Flow Hedges,
Net of Taxes of $(3) Million (4) (4)
Reclassification to Earnings, Net of Taxes of $0.5 Million 1 1
----- -------
Balance, June 30 7
-------
Total Comprehensive Income $688
====
Less Treasury Stock
Balance, January 1 5,526
Issued (42)
Acquired 522
-------
Balance, June 30 6,006
-------
Less Loan to ESOP
Balance, January 1 8
-------
Balance, June 30 8
-------
Total Shareholders' Equity, June 30 $ 6,286
=======
-------------------------------------------------------------------------------------------
Comprehensive Income for the three months ended June 30, 2001 and 2000 was $381 million and
$382 million.
Comprehensive income for the six months ended June 30, 2001 and 2000 was $688 million and
$721 million.
See accompanying Notes to Consolidated Financial Statements.
6
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
For the six months
ended June 30,
2001 2000
---- ----
Operating Activities
Net Income $ 769 $ 694
Adjustments to Determine Net Cash Attributable to
Operating Activities:
Provision for Losses on Loans and Other Real Estate 62 46
Depreciation and Amortization 127 122
Deferred Income Taxes 319 256
Securities Gains (92) (85)
Change in Trading Activities 1,549 (3,042)
Change in Accruals and Other, Net 99 (207)
------ ------
Net Cash Provided (Used) by Operating Activities 2,833 (2,216)
------ ------
Investing Activities
Change in Interest-Bearing Deposits in Banks (868) 2,057
Purchases of Securities Held-to-Maturity - (207)
Maturities of Securities Held-to-Maturity 20 145
Purchases of Securities Available-for-Sale (5,060) (1,766)
Sales of Securities Available-for-Sale 1,575 1,312
Maturities of Securities Available-for-Sale 928 778
Net Principal Disbursed on Loans to Customers (545) (1,031)
Sales of Loans and Other Real Estate 276 232
Change in Federal Funds Sold and Securities
Purchased Under Resale Agreements 3,158 829
Purchases of Premises and Equipment (59) (28)
Acquisitions, Net of Cash Acquired (520) (104)
Proceeds from the Sale of Premises and Equipment 3 1
Other, Net (20) (132)
------ ------
Net Cash (Used) Provided by Investing Activities (1,112) 2,086
------ ------
Financing Activities
Change in Deposits (2,035) 372
Change in Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 1,093 137
Change in Other Borrowed Funds 361 873
Proceeds from the Issuance of Long-Term Debt 100 40
Repayments of Long-Term Debt (60) (28)
Issuance of Common Stock 232 170
Treasury Stock Acquired (522) (292)
Cash Dividends Paid (264) (235)
------ ------
Net Cash (Used) Provided by Financing Activities (1,095) 1,037
------ ------
Effect of Exchange Rate Changes on Cash 244 (16)
------ ------
Change in Cash and Due From Banks 870 891
Cash and Due from Banks at Beginning of Period 3,125 3,276
------ ------
Cash and Due from Banks at End of Period $3,995 $4,167
====== ======
----------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Cash Paid During the Period for:
Interest $1,083 $1,249
Income Taxes 72 89
Noncash Investing Activity
(Primarily Foreclosure of Real Estate) 1 1
----------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
7
THE BANK OF NEW YORK COMPANY, INC.
Notes to Consolidated Financial Statements
1. General
-------
The accounting and reporting policies of The Bank of New York Company,
Inc. (the Company), a financial holding company, and its subsidiaries conform
with generally accepted accounting principles and general practice within the
banking industry. Such policies are consistent with those applied in the
preparation of the Company's annual financial statements.
The accompanying consolidated financial statements are unaudited. In the
opinion of management, all adjustments necessary for a fair presentation of
financial position, results of operations and cash flows for the interim
periods have been made. Such adjustments are of a normal recurring nature.
2. Recently Issued Accounting Standards
------------------------------------
Effective January 1, 2002, a new accounting standard will require the
Company to test goodwill and indefinite lived intangible assets for impairment
rather than amortize them. The financial statement impact of the new standard
is still being analyzed. However, if none of the Company's goodwill had
been amortized, net income for the six months ended June 30, 2001 would have
increased approximately $35 million. Cash flows will not be impacted.
3. Acquisitions and Dispositions
-----------------------------
In January 2001, the Company acquired the correspondent clearing
business of Schroder & Co, Inc. from Salomon Smith Barney Inc. This
transaction provides the Company with the opportunity to establish new client
relationships and add broader product capabilities to its equity clearing
business.
In March 2001, the Company acquired the corporate trust business of
Summit Bancorp, headquartered in Princeton, New Jersey. The acquisition
involves the transfer of nearly 800 bond trustee and agency relationships,
representing approximately $15.7 billion in outstanding securities for state
and local government issuers, colleges, universities and health care
institutions, as well as for a number of corporate clients.
In May 2001, the Company acquired the institutional custody and
administration business of NatWest Bank, a unit of the Royal Bank of Scotland.
The acquisition continues the Company's strategic commitment to expanding its
European-based investor services capabilities.
In June 2001, the Company acquired the corporate trust business of U.S.
Trust Corporation, a subsidiary of The Charles Schwab Corporation. The
acquisition involves the transfer of more than 5,000 bond trust and agency
appointments representing more than $330 billion in outstanding debt
securities. The U.S. Trust business is a diversified portfolio with
significant market position in several specialty products and services,
including the structured finance and municipal finance market segments.
In July 2001, the Company acquired the indenture trust business of The
Trust Company of Bank of Montreal, a subsidiary of the Bank of Montreal. The
transaction comprises over 300 appointments for Canadian and U.S. companies,
issuing a variety of bonds, medium-term notes, commercial paper, securitized
and escrow issues into the Canadian markets.
In August 2001, the Company acquired Greenwich Advisory Associates, Inc.,
a privately-held investment advisory firm, based in Greenwich, Connecticut.
Greenwich Advisory Associates provides customized planning, investment
management and supervisory services primarily to individuals, trusts,
foundations and charitable organizations.
8
In August 2001, the Company purchased certain assets of MAVRICC
Management Systems, Inc., a leading provider of employee stock plan and
equity-based compensation plan services. The acquisition will complement and
enhance the Bank's existing stock purchase and stock option plan capabilities,
as well as provide transfer agency services for direct investment
partnerships.
4. Allowance for Credit Losses
---------------------------
Transactions in the allowance for credit losses are summarized as
follows:
Six months ended
June 30,
(In millions) 2001 2000
---- ----
Balance, Beginning of Period $616 $595
Charge-Offs (64) (42)
Recoveries 4 12
---- ----
Net Charge-Offs (60) (30)
Provision 60 45
---- ----
Balance, End of Period $616 $610
==== ====
5. Capital Transactions
--------------------
As of July 31, 2001, the Company has approximately 4 million common
shares remaining to repurchase under its 14 million share buyback programs.
During the quarter the Company filed a new shelf registration statement. At
June 30, 2001, the registration statement has a remaining capacity of
approximately $1.6 billion of debt, preferred stock, preferred trust
securities, or common stock.
6. Derivatives and Hedging
-----------------------
Effective January 1, 2001, the Company adopted a new accounting standard
related to derivatives and hedging activities. The new standard requires all
derivatives to be included as assets or liabilities in the balance sheet and
that such instruments be carried at fair value through adjustments to either
other comprehensive income or current earnings, or both, as appropriate.
The adoption of the new standard as of January 1, 2001 resulted in zero
impact on 2001 net income and a credit of $10 million to accumulated other
comprehensive income. In connection with the adoption of the new standard,
the Company transferred investment securities with a carrying value of $0.6
billion and an unrealized loss of $5 million from its held-to-maturity to its
available-for-sale and trading portfolios.
The Company enters into various derivative financial instruments such as
interest rate swaps, foreign currency swaps, futures contracts and forward
rate agreements for non-trading purposes, which are designated and qualify as
fair value and cash flow hedges of certain assets and liabilities in
accordance with the new standard.
The Company utilizes interest rate swap agreements to manage its exposure
to interest rate fluctuations. Interest rate swaps are used to convert fixed
rate loans, deposits and long-term debt to floating rates, and to hedge
interest rate resets of variable rate cash flows. Basis swaps are used to
convert various variable rate borrowings to LIBOR which better matches the
assets funded by the borrowings. Cross-currency swaps are used to hedge
exposure to exchange rate fluctuations on principal and interest payments for
borrowings denominated in foreign currencies.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
9
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as fair-value hedges to specific
assets or liabilities on the balance sheet. The Company also formally
assesses (both at the hedge's inception and on an ongoing basis) whether the
derivatives that are used in hedging transactions have been highly effective
in offsetting changes in the fair value of hedged items and whether those
derivatives may be expected to remain highly effective in future periods. The
Company will discontinue hedge accounting prospectively when it determines
that the derivative is no longer an effective hedge, the derivative expires or
is sold, or management discontinues the derivative's hedge designation.
For the six months ended June 30, 2001, the Company recorded
ineffectiveness of $.4 million related to fair value and cash flow hedges in
other income. Also during the same period, the Company recorded a debit of $3
million to other comprehensive income arising from the change in value of cash
flow hedges. In addition, it reclassified a deferred loss on expired interest
rate futures contracts of $1 million from accumulated other comprehensive
income to a charge to interest expense.
The Company also utilizes foreign exchange forward contracts to manage
currency exposure relating to its net investments in non-U.S. dollar
functional currency operations. The change in fair market value of these
contracts is deferred and reported within cumulative translation adjustments
in shareholders' equity, net of tax effects. Interest elements (forward
points) on these foreign exchange forward contracts are recorded in other
comprehensive income, net of tax effects.
All of the Company's derivative financial instruments not designated as
hedges were recorded in the Company's trading account at fair value.
The amounts recognized as other comprehensive income for cash flow hedges
are reclassified to net interest income as interest is realized on the hedging
derivative. Assuming interest rates remain stable, a minimal amount is
expected to be reclassified to income over the next twelve months.
7. Earnings Per Share
------------------
The following table illustrates the computations of basic and diluted
earnings per share:
Three Months Ended Six Months Ended
June 30, June 30,
(In millions, except per share amounts)
2001 2000 2001 2000
---- ---- ---- ----
Net Income (1) $385 $356 $769 $694
==== ==== ==== ====
Basic Weighted Average
Shares Outstanding 731 733 731 732
Shares Issuable on Exercise of
Employee Stock Options 11 12 12 11
---- ---- ---- ----
Diluted Weighted Average Shares Outstanding 742 745 743 743
==== ==== ==== ====
Basic Earnings Per Share: $ 0.53 $ 0.49 $ 1.05 $ 0.95
Diluted Earnings Per Share: 0.52 0.48 1.03 0.93
(1) For purpose of calculating earnings per share, diluted net income and net income available
to common shareholders equal net income for all periods presented.
8. Commitments and Contingent Liabilities
--------------------------------------
In the ordinary course of business, there are various claims pending
against the Company and its subsidiaries. In the opinion of management,
liabilities arising from such claims, if any, would not have a material effect
upon the Company's consolidated financial statements.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
------------------------------------------------------------------------
Results of Operations
---------------------
The Company's actual results of future operations may differ from those
set forth in certain forward looking statements contained herein. Refer to
further discussion under the heading "Forward Looking Statements".
The Company reported second quarter diluted earnings per share of
52 cents, up 8% from the 48 cents earned in the second quarter of 2000. Net
income for the second quarter reached a new high of $385 million, up 8% from
the $356 million earned in the same period last year. Diluted earnings per
share were $1.03 per share for the first half of 2001, up 11% from the
93 cents earned last year. Net income for the first six months was
$769 million, an increase of 11% over last year's $694 million.
The second quarter proved more challenging than the first as the
continued slowdown in the global capital markets adversely impacted several of
the Company's international securities servicing businesses. Notwithstanding
this environment, certain of the Company's businesses performed quite well
and, coupled with the customary attention to cost control, the Company was
able to record an 8% EPS increase in the quarter and 11% for the six months.
The Company's near-term outlook, however, is cautious given the current
weakness in the global economy and market environment and the uncertain
prospects for the balance of 2001. A continuation of these current market
conditions would provide for earnings growth more in line with that of the
current quarter. Overall, the Company remains confident that its consistent
strategy positions itself to achieve its long-term financial targets. In
securities servicing, fee revenues increased to $436 million, up 8% from the
second quarter of last year. Private client services and asset management fees
grew 9% in the quarter. Foreign exchange and other trading revenues were
$98 million compared with $71 million in the second quarter of 2000. The
Company's continued focus on fee-based businesses resulted in noninterest
income growing to 65% of total revenue in the second quarter, up from 63% last
year.
Return on average common equity for the second quarter of 2001 was 25.44%
compared with 26.93% in the second quarter of 2000. Return on average assets
for the second quarter of 2001 was 2.01% compared with 1.81% in the second
quarter of 2000. For the first six months of 2001, return on average common
equity was 25.68% compared with 27.00% in 2000. Return on average assets was
2.02% for the first six months of 2001 compared with 1.79% in 2000.
Fees from the Company's securities servicing businesses reached
$436 million for the second quarter compared with $403 million last year. For
the first six months of 2001, fees from the Company's securities servicing
businesses totaled a record $893 million, growing 15% compared with
$775 million in 2000. Compared with the first quarter of 2001, securities
servicing revenue declined reflecting the slowdown in global capital markets
and in securities transaction volumes. The two businesses most impacted were
depositary receipts ("DR") and international custody. The DR business was
adversely impacted by the marked declines in cross-border merger and
acquisition activity as well as foreign capital raising. Notwithstanding the
slowdown in market activity, the mandate pipeline continues to build while
clients wait for improved market conditions. The Company's market share
remained strong winning 71% of all new public sponsored DR appointments in the
first half of 2001. The international custody business was also negatively
impacted by slowing global transactions combined with lost business volumes
associated with client service issues inherited from the acquisition of the
former Royal Bank of Scotland Trust Bank. The technology integration related
to the acquisition is near completion and customer conversions are well
underway with the acquired business now positioned for future growth.
11
Areas of strength for the quarter included corporate trust, securities
lending, broker dealer services, and global liquidity services reflecting
active fixed income markets and a falling rate environment.
The Company continues to be the world's leading custodian with
quarter-end assets reaching $6.9 trillion, including $2 trillion of
cross-border custody assets. With respect to global liquidity services,
average funds invested off-balance-sheet were $39 billion in the second
quarter of 2001, compared with $38 billion in the first quarter and up 35%
compared with last year's second quarter.
Private client services and asset management fees were $78 million for
the quarter, up 9% from $72 million last year, led by alternative investment
and short-term money market product lines.
Global payment services fees were $72 million, up 11% over last year.
This growth reflects new cash management business wins among the Company's
regional commercial and corporate banking clients as well as the continued
success of CA$H-Register Plus(Registered Trademark), the Company's
internet-based electronic banking service.
Foreign exchange and other trading revenues were $98 million for the
quarter, up from $71 million last year. In the first six months of 2001,
foreign exchange and other trading revenues were $181 million, up from
$147 million last year. Second quarter results reflect continued strong
foreign exchange transaction flows from the Company's securities servicing
client franchise. The Company also benefited from strong demand for hedging
products driven by the strength of the U.S. dollar and volatility in global
interest rates. In addition, the Company profited from seasonal arbitrage
opportunities which naturally arise out of the securities lending business.
Net interest income on a taxable equivalent basis for the second quarter
was $472 million, essentially flat compared with the first quarter of 2001 and
the second quarter of 2000. For the first six months of 2001, net interest
income on a taxable equivalent basis was $941 million compared with
$937 million in the first half of 2000.
Tangible diluted earnings per share (earnings before the amortization of
goodwill and intangibles) were 54 cents per share in the second quarter of
2001, up 6% from 51 cents per share in the second quarter of 2000. On the same
basis, tangible return on average common equity was 39.60% in the second
quarter of 2001 compared with 41.77% in 2000; and tangible return on average
assets was 2.15% in the second quarter of 2001 compared with 1.96% in 2000.
Tangible diluted earnings per share were $1.08 per share for the first six
months of 2001, up 9%, compared with 99 cents per share in 2000. Tangible
return on average common equity was 39.44% in 2001 compared with 42.37% in
2000; and tangible return on average assets was 2.17% in the first six months
of 2001 compared with 1.94% last year. Amortization of intangibles for the
second quarter and the first six months of 2001 was $25 million and
$54 million compared with $28 million and $56 million in 2000.
CAPITAL
The Company's Tier 1 capital and Total capital ratios were 8.07% and
12.07% at June 30, 2001, compared with 8.39% and 12.51% at March 31, 2001, and
8.03% and 12.24% at June 30, 2000. The leverage ratio was 7.40% at June 30,
2001, compared with 7.41% at March 31, 2001, and 6.80% one year ago. Tangible
common equity as a percent of total assets was 5.56% at June 30, 2001,
compared with 5.87% at March 31, 2001, and 5.11% one year ago.
In the first six months of 2001, the Company repurchased 10 million shares
under its common stock repurchase programs.
12
LIQUIDITY
The Company maintains its liquidity through the management of its assets
and liabilities, utilizing worldwide financial markets. The diversification of
liabilities reflects the flexibility of the Company's funding sources under
changing market conditions. Stable core deposits, including demand, retail
time, and trust deposits from processing businesses, are generated through the
Company's diversified business operations and managed with the use of trend
studies and deposit pricing. The use of derivative products such as interest
rate swaps and financial futures is designed to enhance liquidity through the
issue of long-term liabilities with limited exposure to interest rate risk.
Liquidity also results from the maintenance of a portfolio of assets, which
can be easily reduced, and the monitoring of unfunded loan commitments,
thereby reducing unanticipated funding requirements.
At June 30, 2001 and 2000, the parent company had commercial paper
outstandings of $320 million and $421 million. The parent company has back-up
lines of credit of $350 million at financial institutions supporting these
borrowings. At June 30, 2001, the parent company had no outstanding balance
under this line of credit.
NONINTEREST INCOME
2nd 1st 2nd
Quarter Quarter Quarter Year-to-Date
------- ------- ------- ------------
(In millions) 2001 2001 2000 2001 2000
---- ---- ---- ---- ----
Servicing Fees
Securities $436 $458 $403 $ 893 $ 775
Global Payment Services 72 69 65 141 131
---- ---- ---- ------ ------
508 527 468 1,034 906
Private Client Services and
Asset Management Fees 78 79 72 158 142
Service Charges and Fees 95 90 104 185 194
Foreign Exchange and
Other Trading Activities 98 83 71 181 147
Securities Gains 46 45 45 92 85
Other 31 34 20 64 43
---- ---- ---- ------ ------
Total Noninterest Income $856 $858 $780 $1,714 $1,517
==== ==== ==== ====== ======
Total noninterest income reached $856 million, up 10% from $780 million
in last year's second quarter. Securities servicing fees grew 8% reaching
$436 million compared with $403 million from a year ago. Global payment
services fees for the quarter were $72 million reflecting higher cash
management and funds transfer fees which grew 14% over last year's second
quarter. Fees from private client services and asset management were
$78 million, up 9% from the second quarter of 2000. Securities gains were
$46 million compared with $45 million in the first quarter of 2001 and second
quarter of 2000.
13
NET INTEREST INCOME
2nd 1st 2nd
Quarter Quarter Quarter Year-to-Date
(Dollars in millions on ------- ------- ------- --------------
a tax equivalent basis) 2001 2001 2000 2001 2000
---- ---- ---- ---- ----
Net Interest Income $472 $469 $477 $941 $937
Net Interest Rate
Spread 2.10% 1.88% 1.93% 1.98% 1.94%
Net Yield on Interest
Earning Assets 2.96 2.93 2.91 2.94 2.90
Net interest income on a taxable equivalent basis was $472 million in the
second quarter of 2001 compared with $469 million in the first quarter of 2001
and $477 million in the second quarter of 2000. The net interest rate spread
was 2.10% in the second quarter of 2001, compared with 1.88% in the first
quarter of 2001 and 1.93% one year ago. The net yield on interest earning
assets was 2.96% compared with 2.93% in the first quarter of 2001 and 2.91% in
last year's second quarter.
For the first six months of 2001, net interest income on a taxable
equivalent basis amounted to $941 million compared with $937 million in the
first half of 2000. The year-to-date net interest rate spread was 1.98% in
2001 compared with 1.94% in 2000, while the net yield on interest earning
assets was 2.94% in 2001 and 2.90% in 2000.
Notwithstanding the lower interest rate environment and the Company's
ongoing strategy to shift its asset mix from loans towards highly rated
investment securities and short-term liquid assets, the Company has been able
to maintain its net interest income and net yield. Since December 31, 2000,
the Company has increased its securities portfolio by $2.3 billion reflecting
increased holdings of U.S. government agency obligations and asset backed
securities partially offset by a reduction in U.S. government obligations.
Interest income would have been increased by $2 million and $1 million
for the second quarters of 2001 and 2000 and $5 million and $4 million for the
first six months of 2001 and 2000 if loans on nonaccrual status at
June 30, 2001 and 2000 had been performing for the entire period.
14
TRADING ACTIVITIES
The fair value and notional amounts of the Company's financial
instruments held for trading purposes at June 30, 2001 and June 30, 2000 are
as follows:
2nd Quarter 2001
June 30, 2001 Average
---------------------------- -------------------
(In millions) Fair Value Fair Value
------------------ -------------------
Notional
Trading Account Amount Assets Liabilities Assets Liabilities
--------------- -------- ------ ----------- ------ -----------
Interest Rate Contracts:
Futures and Forward
Contracts $ 39,741 $ 2 $ - $ - $ -
Swaps 113,972 842 342 986 467
Written Options 92,828 - 845 - 887
Purchased Options 39,917 125 - 135 -
Foreign Exchange Contracts:
Swaps 1,297 - - - -
Written Options 10,953 - 24 - 76
Purchased Options 14,563 68 - 109 -
Commitments to Purchase
and Sell Foreign Exchange 54,974 538 540 599 596
Debt Securities - 8,302 9 8,992 10
Credit Derivatives 1,860 9 3 6 3
Equity Derivatives - 18 - 292 312
------ ------ ------- ------
Total Trading Account $9,904 $1,763 $11,119 $2,351
====== ====== ======= ======
2nd Quarter 2000
June 30, 2000 Average
---------------------------- -------------------
(In millions) Fair Value Fair Value
------------------ -------------------
Notional
Trading Account Amount Assets Liabilities Assets Liabilities
--------------- -------- ------ ----------- ------ -----------
Interest Rate Contracts:
Futures and Forward
Contracts $ 22,334 $ 1 $ - $ 3 $ -
Swaps 104,466 1,159 984 1,360 1,083
Written Options 79,720 - 638 - 741
Purchased Options 46,541 60 - 52 -
Foreign Exchange Contracts:
Swaps 346 - - - -
Written Options 21,500 - 88 - 8
Purchased Options 23,735 148 - 7 -
Commitments to Purchase
and Sell Foreign Exchange 60,262 629 511 905 702
Debt Securities 9,171 135 9,671 166
------- ------ ------ ------
Total Trading Account $11,168 $2,356 $11,998 $2,700
======= ====== ======= ======
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
15
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) 2nd Quarter 2001 Year-to-Date 2001
------------------------------ -------------------------------------
Average Minimum Maximum Average Minimum Maximum 6/30/01
-------- -------- -------- ------- ------- ------- -------
Interest rate $4.4 $2.9 $6.4 $4.5 $2.6 $6.4 $5.8
Foreign Exchange 1.2 0.7 1.9 1.2 0.6 2.7 0.8
Diversification (2.0) NM NM (2.0) NM NM (2.2)
Overall Portfolio 3.6 2.3 5.9 3.7 2.3 6.1 4.4
(In millions) 2nd Quarter 2000 Year-to-Date 2000
------------------------------ -------------------------------------
Average Minimum Maximum Average Minimum Maximum 6/30/00
-------- -------- -------- ------- ------- ------- -------
Interest rate $5.0 $4.1 $6.6 $4.7 $2.7 $6.6 $4.2
Foreign Exchange 1.6 1.0 2.6 1.8 1.0 3.8 2.0
Overall Portfolio 6.6 5.3 8.2 6.5 4.4 8.8 6.2
NM - Because the minimum and maximum may occur on different days for different risk components,
it is not meaningful to compute a portfolio diversification effect.
NONINTEREST EXPENSE AND INCOME TAXES
Noninterest expense for the second quarter of 2001 was $655 million
compared with $628 million in 2000. The rise was principally due to
acquisitions and the Company's ongoing technology investment program. In
comparison to the first quarter, noninterest expense was flat. This reflects
continued substantial investment in new technology offset by reductions in
variable costs associated with lower transaction volumes as well as the
Company's strict control of discretionary spending.
The efficiency ratio for the second quarter of 2001 was 51.2% compared
with 50.8% in the first quarter of 2001 and 51.9% in the second quarter of
2000. For the first half of 2001, the efficiency ratio was 50.9% compared
with 52.0% last year.
The effective tax rate for the second quarter and the first six months of
2001 was 34.5% compared with 34.9% in the second quarter and the first six
months of 2000.
16
NONPERFORMING ASSETS
Change
6/30/01 vs.
(Dollars in millions) 6/30/01 3/31/01 3/31/01
-------- -------- --------
Category of Loans:
Other Commercial $190 $139 $51
Foreign 34 46 (12)
Regional Commercial 19 21 (2)
---- ---- ---
Total Nonperforming Loans 243 206 37
Other Real Estate 2 2 -
---- ---- ---
Total Nonperforming Assets $245 $208 $37
==== ==== ===
Nonperforming Assets Ratio 0.7% 0.6%
Allowance/Nonperforming Loans 252.9 298.2
Allowance/Nonperforming Assets 251.0 295.7
Nonperforming assets totaled $245 million at June 30, 2001, compared with
$208 million at March 31, 2001 and $162 million at June 30, 2000. The
increase in nonperforming loans from March 31, 2001 primarily reflects a loan
to a customer in the apparel industry and loans to two customers in the
emerging telecommunications industry. The Company anticipates further upward
pressure on nonperforming assets, including emerging telecommunications
credits.
IMPAIRED LOANS
The table below sets forth information about the Company's impaired loans. The
Company uses the discounted cash flow method as its primary method for valuing
its impaired loans:
(Dollars in millions) 6/30/01 3/31/01 6/30/00
-------- -------- --------
Impaired Loans with an Allowance $203 $120 $ 83
Impaired Loans without an Allowance(1) 35 26 27
---- ---- ----
Total Impaired Loans $238 $146 $110
==== ==== ====
Allowance for Impaired Loans(2) $ 82 $ 34 $ 25
Average Balance of Impaired Loans
during the Quarter 192 146 103
Interest Income Recognized on
Impaired Loans during the Quarter 0.2 0.9 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.
17
CREDIT LOSS PROVISION AND NET CHARGE-OFFS
2nd 1st 2nd
Quarter Quarter Quarter Year-to-date
------- ------- ------- -------------
(In millions) 2001 2001 2000 2001 2000
---- ---- ---- ---- ----
Provision $ 30 $ 30 $ 25 $ 60 $ 45
==== ==== ==== ==== ====
Net Charge-offs:
Other Commercial (26) (28) (12) (54) (25)
Consumer (3) (2) (1) (5) (2)
Other (1) - (2) (1) (3)
----- ----- ----- ----- -----
Total $(30) $(30) $(15) $(60) $(30)
===== ===== ===== ===== =====
Other Real Estate Expenses $ - $ 2 $ 1 $ 2 $ 2
The allowance for credit losses was $616 million, or 1.68% of loans at
June 30, 2001, compared with $616 million, or 1.66% of loans at March 31,
2001, and $610 million, or 1.60% of loans at June 30, 2000. The ratio of the
allowance to nonperforming assets was 251.0% at June 30, 2001, compared with
295.7% at March 31, 2001, and 376.4% at June 30, 2000. Loans declined
$1.4 billion to $36.1 billion at June 30, 2001 from $37.5 billion at June 30,
2000. Average loans declined $2.6 billion to $37.2 billion in the second
quarter of 2001 from $39.8 billion in the second quarter of 2000. The
increase in the allowance from the second quarter of 2000 reflects
deteriorating asset quality, as evidenced by increasing nonperforming loans
partially offset by a decline in loans.
Based on an evaluation of individual credits, historical credit losses,
and global economic factors, the Company has allocated its allowance for
credit losses as follows:
6/30/01 3/31/01 12/31/00
------- -------- --------
Domestic
Real Estate 5% 3% 3%
Commercial 84 80 76
Consumer 1 1 1
Foreign 6 11 11
Unallocated 4 5 9
--- --- ---
100% 100% 100%
=== === ===
The increase in the allowance associated with commercial loans reflects
higher expected losses on emerging telecommunications credits. The reduction
in the allowance associated with foreign loans reflects a reduction in the
expected losses associated with higher rated bank and trade credits.
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.
18
SEGMENT PROFITABILITY
Segment Data
The Company has an internal information system that produces performance
data for its four business segments along product and service lines.
The Servicing and Fiduciary businesses segment provides a broad array of
fee-based services. This segment includes the Company's securities servicing,
global payment services, and private client services and asset management
businesses. Securities servicing includes global custody, securities
clearance, mutual funds, unit investment trust, securities lending, Depositary
Receipts, corporate trust, stock transfer and associated execution services.
Global payment services products primarily relate to funds transfer, cash
management and trade finance. Private client services and asset management
provide traditional banking and trust services to affluent clients and asset
management to institutional and private clients.
The Corporate Banking segment focuses on providing lending services, such
as term loans, lines of credit, asset based financings, and commercial
mortgages, to the large public and private corporations nationwide, as well as
public and private mid-size businesses in the New York metropolitan area.
Special industry groups focus on financial institutions, securities,
insurance, media and telecommunications, energy, real estate, retailing,
automotive, and government banking institutions. Through BNY Capital Markets,
the Company provides syndicated loans, bond underwriting, private placements
of corporate debt and equity securities, and merger, acquisition, and advisory
services.
The Retail Banking segment includes consumer lending, residential
mortgage lending, and retail deposit services. The Company operates 345
branches in 23 counties in three states.
The Financial Markets segment includes trading of foreign exchange and
interest rate products, investing and leasing activities, and treasury
services to other segments. This segment offers a comprehensive array of
multi-currency hedging and yield enhancement strategies. Offices in New York,
London, Brussels, Tokyo, Frankfurt, Hong Kong, Seoul and Taipei provide
clients a 24-hour trading capability.
19
The segments contributed to the Company's profitability as follows:
In Millions Servicing
and
For the Quarter Ended Fiduciary Corporate Retail Financial Reconciling Consolidated
June 30, 2001 Businesses Banking Banking Markets Items Total
--------------------- ---------- --------- ------- --------- ----------- ------------
Net Interest Income $136 $127 $124 $ 68 $ 1 $456
Provision for
Credit Losses - 30 2 1 (3) 30
Noninterest Income 666 78 28 70 14 856
Noninterest Expense 425 56 74 19 81 655
---- ---- ----- ---- ------ ----
Income Before Taxes $377 $119 $ 76 $118 $(63) $627
==== ==== ===== ==== ===== ====
Average Assets $9,067 $26,997 $4,422 $34,327 $1,898 $76,711
====== ======= ====== ======= ====== =======
In Millions Servicing
and
For the Quarter Ended Fiduciary Corporate Retail Financial Reconciling Consolidated
June 30, 2000 Businesses Banking Banking Markets Items Total
--------------------- ---------- --------- ------- --------- ----------- ------------
Net Interest Income $160 $142 $127 $30 $ 4 $463
Provision for
Credit Losses - 33 1 - (9) 25
Noninterest Income 610 87 24 59 - 780
Noninterest Expense 400 52 79 16 81 628
---- ---- ---- --- ----- ----
Income Before Taxes $370 $144 $ 71 $73 $(68) $590
==== ==== ==== === ===== ====
Average Assets $9,239 $31,529 $4,199 $32,288 $1,691 $78,946
====== ======= ====== ======= ====== =======
In Millions Servicing
For the Six and
Months Ended Fiduciary Corporate Retail Financial Reconciling Consolidated
June 30, 2001 Businesses Banking Banking Markets Items Total
--------------------- ---------- --------- ------- --------- ----------- ------------
Net Interest Income $ 295 $255 $252 $ 98 $ 11 $ 911
Provision for
Credit Losses - 61 3 - (4) 60
Noninterest Income 1,338 155 55 144 22 1,714
Noninterest Expense 857 115 151 35 150 1,308
------ ---- ---- ---- ------ -----
Income Before Taxes $ 776 $234 $153 $207 $(113) $1,257
====== ==== ==== ==== ====== =====
Average Assets $8,836 $27,353 $4,445 $34,223 $1,839 $76,696
====== ======= ====== ======= ====== =======
In Millions Servicing
For the Six and
Months Ended Fiduciary Corporate Retail Financial Reconciling Consolidated
June 30, 2000 Businesses Banking Banking Markets Items Total
--------------------- ---------- --------- ------- --------- ----------- ------------
Net Interest Income $ 316 $280 $253 $ 54 $ 8 $ 911
Provision for
Credit Losses - 66 2 - (23) 45
Noninterest Income 1,183 162 48 122 2 1,517
Noninterest Expense 785 105 152 34 155 1,231
----- ---- ---- ---- ------ -------
Income Before Taxes $ 714 $271 $147 $142 $(122) $1,152
====== ==== ==== ==== ====== ======
Average Assets $8,816 $31,466 $4,283 $31,507 $1,670 $77,742
====== ======= ====== ======= ====== =======
20
Segment Highlights
Servicing and Fiduciary Businesses
----------------------------------
In the second quarter of 2001, noninterest income was $666 million
compared with $610 million in 2000.
Fees from the Company's securities servicing businesses reached
$436 million for the second quarter compared with $403 million last year. For
the first six months of 2001, fees from the Company's securities servicing
businesses totaled a record $893 million, growing 15% compared with
$775 million in 2000. Compared with the first quarter of 2001, securities
servicing revenue declined reflecting the slowdown in global capital markets
and in securities transaction volumes. The two businesses most impacted were
depositary receipts ("DR") and international custody. The DR business was
adversely impacted by the marked declines in cross-border merger and
acquisition activity as well as foreign capital raising. Notwithstanding the
slowdown in market activity, the mandate pipeline continues to build while
clients wait for improved market conditions. The Company's market share
remained strong winning 71% of all new public sponsored DR appointments in the
first half of 2001. The international custody business was also negatively
impacted by slowing global transactions combined with lost business volumes
associated with client service issues inherited from the acquisition of the
former Royal Bank of Scotland Trust Bank. The technology integration related
to the acquisition is near completion and customer conversions are well
underway with the acquired business now positioned for future growth.
Areas of strength for the quarter included corporate trust, securities
lending, broker dealer services, and global liquidity services reflecting
active fixed income markets and a falling rate environment.
The Company continues to be the world's leading custodian with
quarter-end assets reaching $6.9 trillion, including $2 trillion of
cross-border custody assets. With respect to global liquidity services,
average funds invested off-balance-sheet were $39 billion in the second
quarter of 2001, compared with $38 billion in the first quarter and up 35%
compared with last year's second quarter.
Private client services and asset management fees were $78 million for
the quarter, up 9% from $72 million last year, led by alternative investment
and short-term money market product lines. Assets under management were
$64 billion at June 30, 2001 compared with $63 billion at June 30, 2000, while
assets under administration were $33 billion at June 30, 2001 compared with
$32 billion at June 30, 2000.
Global payment services fees were $72 million, up 11% over last year
reflecting higher cash management and funds transfer fees which grew 14% over
last year's second quarter. This growth reflects new cash management business
wins among the Company's regional commercial and corporate banking clients as
well as the continued success of CA$H-Register Plus(Registered Trademark),
the Company's internet-based electronic banking service.
Net interest income in the Servicing and Fiduciary businesses segment
was $136 million for the second quarter of 2001 compared with $160 million in
2000. The decrease in net interest income is primarily due to the decline in
interest rates.
Net charge-offs in the Servicing and Fiduciary Businesses segment were
zero in the second quarter of 2001 and 2000, respectively. Noninterest expense
for the second quarter of 2001 was $425 million compared with $400 million in
2000. The rise in noninterest expense was primarily due to acquisitions and
the Company's continued investment in technology.
21
Corporate Banking
-----------------
The Corporate Banking segment's net interest income was $127 million in
the second quarter of 2001, down from last year's $142 million. The decrease
reflects the decline in assets, principally broker dealer loans, as well as a
decline in both the volume and the value of low cost short-term deposits.
The second quarter of 2001 provision for credit losses was $30 million
compared with $33 million last year. The decrease reflects the decline in the
loan portfolio. Net charge-offs in the Corporate Banking segment were
$27 million and $14 million in the second quarters of 2001 and 2000.
Noninterest income was $78 million in the current year compared with
$87 million last year reflecting a reduction in syndication fees. Noninterest
expense increased to $56 million from $52 million reflecting higher
compensation.
Retail Banking
--------------
In the Retail Banking segment, net interest income in the second quarter
of 2001 was $124 million compared with $127 million in 2000. Noninterest
income was $28 million for the quarter compared with $24 million last year.
The increase reflects better penetration of the customer base and improved
pricing. Noninterest expense in the second quarter of 2001 was $74 million
compared with $79 million in the previous year's period reflecting the
Company's strict attention to cost control. Net charge-offs were $3 million in
the second quarter of 2001 and $1 million in the second quarter of 2000. The
increase in charge-off principally reflects deterioration in the economy.
Financial Markets
-----------------
In the Financial Markets segment, net interest income for the quarter was
$68 million compared with 2000's $30 million reflecting lower funding costs
and an increase in assets, primarily U.S. government agency obligations and
asset backed securities. Noninterest income was $70 million in the second
quarter of 2001 compared with $59 million in the second quarter of 2000
reflecting strong performance in the interest rate derivatives and fixed
income businesses. The overall level of securities gains in the second quarter
of 2001 was consistent with the first quarter of 2001 and the second quarter
of 2000. Net charge-offs were zero in the second quarters of 2001 and 2000.
Segment Accounting Principles
-----------------------------
The Company's segment data has been determined on an internal management
basis of accounting, rather than the generally accepted accounting principles
used for consolidated financial reporting. These measurement principles are
designed so that reported results of the segments will track their economic
performance. Segment results are subject to restatement whenever improvements
are made in the measurement principles or organizational changes are made. In
the third quarter of 2000, the Company changed certain assumptions related to
the duration of sector assets and liabilities and the related interest rates.
As a result, sector results for 2000 were restated.
The measure of revenues and profit or loss by operating segment has been
adjusted to present segment data on a taxable equivalent basis. The provision
for credit losses allocated to each reportable segment is based on
management's judgment as to average credit losses that will be incurred in the
operations of the segment over a credit cycle of a period of years.
Management's judgment includes the following factors among others: historical
charge-off experience and the volume, composition and growth of the loan
portfolio. This method is different from that required under generally
accepted accounting principles as it anticipates future losses which are not
yet probable and therefore not recognizable under generally accepted
accounting principles. Assets and liabilities are match funded. Support and
other indirect expenses are allocated to segments based on general guidelines.
22
Reconciling Items
-----------------
Reconciling items for net interest income primarily relate to the
recording of interest income on a taxable equivalent basis, reallocation of
capital and the funding of goodwill. Reconciling items for noninterest income
primarily relate to the sale of certain securities. Reconciling items for
noninterest expense include $25 million and $28 million of amortization of
goodwill in the second quarters of 2001 and 2000 and $54 million and
$56 million in the first six months of 2001 and 2000, and corporate overhead.
The adjustment to the provision for credit losses reflects the difference
between the aggregate of the credit provision over a credit cycle for the
reportable segments and the Company's recorded provision. The reconciling
items for average assets consist of goodwill and other intangible assets.
FORWARD LOOKING STATEMENTS
The information presented with respect to, among other things, earnings
growth, projected business volume, the outcome of legal and investigatory
proceedings, the Company's plans and objectives in moving into fee-based
business, 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", 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, discussions of future plans and other forward looking statements
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 lower than expected performance or higher
than expected costs in connection with acquisitions and integration of
acquired businesses, changes in relationships with customers, variations in
management projections or market forecasts and the actions that management
could take in response to these changes, management's ability to achieve
efficiency goals, changes in customer credit quality, future changes in
interest rates, general credit quality, the level of capital market and merger
and acquisition activity, economic activity, consumer behavior, government
monetary policy, domestic and foreign legislation, regulation and
investigation, competition, credit, market and operating risk, and loan
demand, as well as the pace of recovery of the domestic economy, market demand
for the Company's products and services and future global economic conditions.
This is not an exhaustive list and as a result of variations in any of these
factors actual results may differ materially from any forward looking
statements.
Forward looking statements speak only as of the date they are made. The
Company will not update forward looking statements to reflect facts,
assumptions, circumstances or events which have changed after a forward
looking statement was made.
23
Government Monetary Policies
The Federal Reserve Board has the primary responsibility for United
States monetary policy. Its actions have an important influence on the demand
for credit and investments and the level of interest rates and thus on the
earnings of the Company.
Competition
The businesses in which the Company operates are very competitive.
Competition is provided by both unregulated and regulated financial services
organizations, whose products and services span the local, national, and
global markets in which the Company conducts operations.
A wide variety of domestic and foreign companies compete for processing
services. Commercial banks, savings banks, savings and loan associations, and
credit unions actively compete for deposits, and money market funds and
brokerage houses offer deposit-like services. These institutions, as well as
consumer and commercial finance companies, national retail chains, factors,
insurance companies and pension trusts, are important competitors for various
types of loans. Issuers of commercial paper compete actively for funds and
reduce demand for bank loans. For personal and corporate trust services and
investment counseling services, insurance companies, investment counseling
firms, and other business firms and individuals offer active competition.
24
THE BANK OF NEW YORK COMPANY, INC.
Average Balances and Rates on a Taxable Equivalent Basis
(Dollars in millions)
For the three months For the three months
ended June 30, 2001 ended June 30, 2000
------------------------------ ------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
ASSETS
------
Interest-Bearing
Deposits in Banks
(primarily foreign) $ 5,563 $ 62 4.46% $ 5,167 $ 66 5.11%
Federal Funds Sold and Securities
Purchased Under Resale Agreements 3,602 38 4.28 4,413 69 6.32
Loans
Domestic Offices 18,941 321 6.80 19,424 358 7.42
Foreign Offices 18,228 274 6.04 20,328 377 7.45
------- ----- ------- -----
Total Loans 37,169 595 6.43 39,752 735 7.44
------- ----- ------- -----
Securities
U.S. Government Obligations 1,019 14 5.68 2,123 32 6.00
U.S. Government Agency Obligations 2,880 47 6.43 1,132 19 6.85
Obligations of States and
Political Subdivisions 638 13 7.88 615 12 8.00
Other Securities 4,086 61 6.02 2,812 43 6.13
Trading Securities 9,003 111 4.91 9,937 145 5.85
------- ----- ------- -----
Total Securities 17,626 246 5.57 16,619 251 6.06
------- ----- ------- -----
Total Interest-Earning Assets 63,960 941 5.90% 65,951 1,121 6.84%
----- -----
Allowance for Credit Losses (612) (600)
Cash and Due from Banks 2,791 3,435
Other Assets 10,572 10,160
------- -------
TOTAL ASSETS $76,711 $78,946
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Interest-Bearing Deposits
Money Market Rate Accounts $ 6,190 $ 53 3.41% $ 5,797 $ 71 4.95%
Savings 7,650 41 2.14 7,678 48 2.50
Certificates of Deposit
$100,000 & Over 377 5 5.37 423 6 5.30
Other Time Deposits 1,975 22 4.48 1,991 25 5.09
Foreign Offices 25,935 252 3.91 29,176 371 5.12
------- ----- ------- -----
Total Interest-Bearing Deposits 42,127 373 3.55 45,065 521 4.65
Federal Funds Purchased and
Securities Sold Under Repurchase
Agreements 2,279 23 4.05 2,400 32 5.43
Other Borrowed Funds 2,031 28 5.43 2,442 42 6.81
Long-Term Debt 3,002 45 6.02 2,823 49 6.94
------- ----- ------- -----
Total Interest-Bearing Liabilities 49,439 469 3.80% 52,730 644 4.91%
----- -----
Noninterest-Bearing Deposits 10,696 11,224
Other Liabilities 9,011 8,175
Minority Interest-Preferred Securities 1,500 1,500
Common Shareholders' Equity 6,065 5,317
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $76,711 $78,946
======= =======
Net Interest Earnings
and Interest Rate Spread $ 472 2.10% $ 477 1.93%
===== ==== ===== ====
Net Yield on Interest-Earning Assets 2.96% 2.91%
==== ====
25
THE BANK OF NEW YORK COMPANY, INC.
Average Balances and Rates on a Taxable Equivalent Basis
(Dollars in millions)
For the six months For the six months
ended June 30, 2001 ended June 30, 2000
------------------------------ ------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
ASSETS
------
Interest-Bearing
Deposits in Banks
(primarily foreign) $ 5,697 $ 132 4.66% $ 5,781 $ 137 4.76%
Federal Funds Sold and Securities
Purchased Under Resale Agreements 3,666 89 4.92 4,030 118 5.90
Loans
Domestic Offices 19,028 661 6.99 19,768 720 7.32
Foreign Offices 18,667 611 6.61 20,242 731 7.27
------- ----- ------- -----
Total Loans 37,695 1,272 6.80 40,010 1,451 7.30
------- ----- ------- -----
Securities
U.S. Government Obligations 1,146 32 5.71 2,449 74 6.05
U.S. Government Agency Obligations 2,340 76 6.55 979 33 6.75
Obligations of States and
Political Subdivisions 660 26 7.90 603 24 8.01
Other Securities 3,682 108 5.93 2,758 83 6.05
Trading Securities 9,596 253 5.27 8,423 246 5.88
------- ----- ------- -----
Total Securities 17,424 495 5.72 15,212 460 6.08
------- ----- ------- -----
Total Interest-Earning Assets 64,482 1,988 6.21% 65,033 2,166 6.70%
----- -----
Allowance for Credit Losses (613) (604)
Cash and Due from Banks 2,712 3,359
Other Assets 10,115 9,954
------- -------
TOTAL ASSETS $76,696 $77,742
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Interest-Bearing Deposits
Money Market Rate Accounts $ 6,197 $ 123 4.01% $ 5,660 $ 137 4.85%
Savings 7,572 90 2.39 7,663 94 2.48
Certificates of Deposit
$100,000 & Over 392 11 5.79 444 12 5.38
Other Time Deposits 1,940 45 4.72 2,097 51 4.90
Foreign Offices 26,372 566 4.33 28,434 698 4.94
------- ----- ------- -----
Total Interest-Bearing Deposits 42,473 835 3.97 44,298 992 4.51
Federal Funds Purchased and
Securities Sold Under Repurchase
Agreements 2,375 55 4.66 2,596 69 5.33
Other Borrowed Funds 2,030 59 5.84 2,219 70 6.36
Long-Term Debt 3,010 98 6.48 2,823 98 6.89
------- ----- ------- -----
Total Interest-Bearing Liabilities 49,888 1,047 4.23% 51,936 1,229 4.76%
----- -----
Noninterest-Bearing Deposits 10,852 11,258
Other Liabilities 8,415 7,881
Minority Interest-Preferred Securities 1,500 1,500
Common Shareholders' Equity 6,041 5,167
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $76,696 $77,742
======= =======
Net Interest Earnings
and Interest Rate Spread $ 941 1.98% $ 937 1.94%
===== ==== ===== ====
Net Yield on Interest-Earning Assets 2.94% 2.90%
==== ====
26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
--------------------------
The Company continues to cooperate with investigations by federal and
state law enforcement and bank regulatory authorities. The investigations
focus on funds transfer activities in certain accounts at BNY, principally
involving wire transfers from Russian and other sources in Eastern Europe, as
well as certain other matters involving BNY and its affiliates. The funds
transfer investigations center around accounts controlled by Peter Berlin, his
wife, Lucy Edwards (until discharged in September 1999, an officer of BNY),
and companies and persons associated with them. Berlin and Edwards pled guilty
to various federal criminal charges. The Company cannot predict when or on
what basis the investigations will conclude or their effect, if any, on the
Company.
On February 8, 2000, BNY entered into a written agreement with both the
Federal Reserve Bank of New York and the New York State Banking Department,
which imposed a number of reporting requirements and controls. Substantially
all of these reporting requirements and controls are now in place.
Four purported shareholder derivative actions have been filed in
connection with these Russian related matters - - two in the United States
District Court for the Southern District of New York and two in the New York
Supreme Court, New York County - - against certain directors and officers of
the Company and BNY alleging that the defendants have breached their fiduciary
duties of due care and loyalty by aggressively pursuing business with Russian
banks and entities without implementing sufficient safeguards and failing to
supervise properly those responsible for that business. The actions seek, on
behalf of the Company and BNY, monetary damages from the defendants,
corrective action and attorneys' fees. On September 1, 2000, plaintiffs in the
two federal actions filed an amended, consolidated complaint that names all of
the directors and certain officers of BNY and the Company as defendants,
repeats the allegations of the original complaints and adds allegations that
certain officers of BNY and the Company participated in a scheme to transfer
cash improperly from Russia to various off-shore accounts and to avoid Russian
customs, currency and tax laws. Management believes that the allegations of
both the original complaints and the amended complaint are without merit. On
September 12, 2000, the boards of directors of BNY and the Company authorized
a Special Litigation Committee ("SLC") to consider the response of BNY and the
Company to the state and federal court shareholder derivative actions. The SLC
issued an Interim Report dated May 21, 2001 which concluded that there was "no
credible evidence" to support the allegations of personal misconduct against
Mr. Renyi and "credible evidence" that contradicts "critical allegations" in
the amended complaint in the federal action.
Additionally, on October 7, 1999, six alleged depositors of Joint Stock
Bank Inkombank ("Inkombank"), a Russian bank, filed a purported class action
in the United States District Court for the Southern District of New York on
behalf of all depositors of Inkombank who lost their deposits when that bank
collapsed in 1998. The complaint, as subsequently amended twice, alleges that
the Company and BNY and their senior officers knew about, and aided and
abetted the looting of Inkombank by its principals and participated in a
scheme to transfer cash improperly from Russia to various off-shore accounts
and to avoid Russian customs, currency and tax laws. The amended complaint
asserts causes of action for conversion and aiding and abetting conversion
under New York law. In addition, the amended complaint states a claim under
the Racketeer Influenced and Corrupt Organizations Act ("RICO"). On March 21,
2001, the court dismissed the second amended complaint without leave to
replead. On April 16, 2001, plaintiffs filed a Notice of Appeal of that
decision. Argument is currently expected on that appeal in September-October
2001.
On October 24, 2000, three alleged shareholders of Inkombank filed an
action in the Supreme Court, New York County against the Company, BNY and
Inkombank. The complaint alleges that the defendants fraudulently induced the
plaintiffs to refrain from redeeming their alleged $40 million investment in
Inkombank. The complaint asserts a single case of action for fraud, seeking
27
$40 million plus 12% interest from January 1994, punitive damages, costs,
interest and attorney fees. The Company and BNY have moved to dismiss the
amended complaint. That motion is pending. The Company and BNY believe that
the allegations of the complaint are without merit and intend to defend the
action vigorously.
The Company does not expect that any of the foregoing civil actions will
have a material impact on the Company's consolidated financial statements.
In the ordinary course of business, there are various legal claims
pending against the Company and its subsidiaries. In the opinion of
management, liabilities arising from such claims, if any, would not have a
material effect on the Company's consolidated financial statements.
Item 2. Sales of Unregistered Common Stock
-------------------------------------------
During the second quarter of 2001, shares of the Company's common stock
were issued in transactions exempt from registration under the Securities Act
of 1933 pursuant to Section 4(2) thereof. Shares of common stock were issued
to serving non-employee directors as part of their annual retainer as follows:
June 15, 2001 - 12,000 shares. Shares of common stock were issued to one
retired director as follows: June 15, 2001 - 2,400 shares.
Item 4. Submission of Matters to Vote of Security Holders
----------------------------------------------------------
The Company held its annual meeting on May 8, 2001 at The Bank of New
York at 101 Barclay St. in New York, New York. The shareholders:
(1) elected fifteen persons to serve as directors of the Company;
(2) ratified the appointment of Ernst & Young LLP as the Company's
independent public accountants for 2001;
(3) approved a proposal to increase the number of authorized shares of
common stock of the Company; and
(4) defeated a shareholder proposal regarding term limits for
directors.
The number of votes cast for, against or withheld, and the number of
abstentions with respect to each such matter is set forth below, as are the
number of broker non-votes, where applicable. Pursuant to New York law,
abstentions and broker non-votes are not counted toward the election of
directors.
FOR AGAINST/WITHHELD ABSTAINED BROKER NON-VOTES
(1) Election of Directors:
J. Carter Bacot 622,094,321 10,371,851
Richard Barth 627,663,800 4,802,372
Frank J. Biondi, Jr. 627,710,249 4,755,923
William R. Chaney 627,634,184 4,831,988
Nicholas M. Donofrio 627,732,271 4,733,901
Alan R. Griffith 627,676,255 4,789,917
Gerald L. Hassell 627,706,426 4,759,746
Richard J. Kogan 627,777,380 4,688,792
John A. Luke, Jr. 627,580,150 4,886,022
John C. Malone 524,155,751 108,310,421
Donald L. Miller 627,623,505 4,842,667
Catherine A. Rein 627,774,079 4,692,093
Thomas A. Renyi 627,545,284 4,920,888
William C. Richardson 627,727,792 4,738,380
Brian L. Roberts 627,767,887 4,698,285
(2) Ratification of Auditors 626,358,701 3,600,933 2,506,537
(3) Approval of Proposal to
Increase the Number of
Authorized Shares of Common
Stock of the Company 597,036,212 31,588,658 3,841,302
(4) Approval of Shareholder
Proposal Regarding Term
Limits for Directors 16,996,773 497,143,204 12,549,408 98,270,436
28
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) The exhibits filed as part of this report are as follows:
Exhibit 3(i) - Restated Certificate of Incorporation incorporated herein
by reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-3 (Nos. 333-62516, 333-62516-01, 333-62516-02, 333-62516-03 and
333-62516-04).
Exhibit 12 - Statement Re: Ratio of Earnings to Fixed Charges and Ratio
of Earnings to Combined Fixed Charges and Distributions on
Preferred Trust Securities for the Three Months and Six Months Ended
June 30, 2001 and 2000.
(b) The Company filed the following reports on Form 8-K since
March 31, 2001:
On April 16, 2001, the Company filed a Form 8-K Current Report (Items 5
and 7), which report included unaudited interim financial information and
accompanying discussion for the first quarter of 2001 contained in the
Company's press release dated April 16, 2001.
On July 16, 2001, the Company filed a Form 8-K Current Report (Items 5
and 7), which report included unaudited interim financial information and
accompanying discussion for the second quarter of 2001 contained in the
Company's press release dated July 16, 2001.
On July 23, 2001, the Company filed a Form 8-K Current Report (Item 5
and 7), which report included seven exhibits in connection with the
Registration Statement on Form S-3 (File Nos. 333-62516, 333-62516-01, 333-
62516-02, 333-62516-03 and 333-62516-04) covering the Company's Senior
Subordinated Medium-Term Notes, Series E and Senior Medium-Term Notes, Series
D, issuable under an Indenture, dated as of October 1, 1993 between the
Company and Chase Manhattan Trust Company National Association and an
Indenture, dated as of July 18, 1991 between the Company and Bankers Trust
Company, respectively. The exhibits consist of the Distribution Agreement,
dated July 20, 2001; the Forms of Notes; Officers' Certificates pursuant to
Section 301 of the Indentures; and the opinion of counsel as to the legality
of the Notes.
29
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE BANK OF NEW YORK COMPANY, INC.
----------------------------------
(Registrant)
Date: August 14, 2001 By: \s\ Thomas J. Mastro
---------------------------------
Name: Thomas J. Mastro
Title: Comptroller
30
EXHIBIT INDEX
-------------
Exhibit Description
------- -----------
3(i) Restated Certificate of Incorporation incorporated herein
by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-3 (Nos. 333-62516, 333-62516-01,
333-62516-02, 333-62516-03 and 333-62516-04).
12 Ratio of Earnings to Fixed Charges and Ratio of Earnings
to Combined Fixed Charges and Distributions on Preferred
Trust Securities for the Three and Six Months Ended
June 30, 2001 and 2000.