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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 8,27