10-Q 1 r10q2q01.txt 10-Q 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.