Back to GetFilings.com
THE BANK OF NEW YORK COMPANY, INC.
Quarterly Report on Form 10-Q
For the quarterly period ended March 31, 2004
The Quarterly Report on Form 10-Q and cross reference index is on page 52.
THE BANK OF NEW YORK COMPANY, INC.
FINANCIAL REVIEW
TABLE OF CONTENTS
Consolidated Financial Highlights 1
Management's Discussion and Analysis of Financial
Condition and Results of Operations
- Introduction 2
- Overview 2
- Summary of Results 3
- Other First Quarter Developments 5
- Consolidated Income Statement Review 6
- Business Segments Review 10
- Consolidated Balance Sheet Review 20
- Critical Accounting Policies 28
- Liquidity 30
- Capital Resources 32
- Trading Activities 34
- Asset/Liability Management 35
- Statistical Information 37
- Forward Looking Statements and
Factors That Could Affect Future Results 38
- Website Information 39
Consolidated Financial Statements
- Consolidated Balance Sheets
March 31, 2004 and December 31, 2003 40
- Consolidated Statements of Income
For the Three Months Ended March 31, 2004 and 2003 41
- Consolidated Statement of Changes In
Shareholders' Equity for the Three
Months Ended March 31, 2004 42
- Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2004 and 2003 43
- Notes to Consolidated Financial Statements 44
Form 10-Q
- Cover 52
- Controls and Procedures 53
- Legal Proceedings 53
- Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities 54
- Exhibits and Reports on Form 8-K 54
- Signature 55
1
THE BANK OF NEW YORK COMPANY, INC.
Financial Highlights
(Dollars in millions, except per share amounts)
(Unaudited)
March 31, December 31, March 31,
2004 2003 2003
------------ ------------- ----------
Revenue (tax equivalent basis) $1,677 $1,694 $1,429
Net Income 364 307 295
Basic EPS 0.47 0.40 0.41
Diluted EPS 0.47 0.40 0.41
Cash Dividends Per Share 0.19 0.19 0.19
Return on Average Common
Shareholders' Equity 17.17% 14.81% 17.80%
Return on Average Assets 1.47 1.26 1.49
Efficiency Ratio 68.9 66.9 60.0
Assets $92,652 $92,397 $79,710
Loans 36,070 35,283 31,573
Securities 24,083 22,903 19,599
Deposits - Domestic 33,639 33,730 33,280
- Foreign 22,443 22,676 23,664
Long-Term Debt 6,276 6,121 5,685
Common Shareholders' Equity 8,760 8,428 6,874
Common Shareholders'
Equity Per Share $11.27 $10.85 $ 9.41
Market Value Per Share
of Common Stock 31.50 33.12 20.50
Allowance for Credit Losses
as a Percent of Total Loans 2.19% 2.28% 2.63%
Allowance for Credit Losses as
a Percent of Non-Margin Loans 2.64 2.72 2.67
Allowance for Loan Losses as
a Percent of Total Loans 1.75 1.89 2.12
Allowance for Loan Losses as
a Percent of Non-Margin Loans 2.11 2.26 2.14
Tier 1 Capital Ratio 7.52 7.44 7.92
Total Capital Ratio 11.57 11.49 12.72
Leverage Ratio 5.83 5.82 6.68
Tangible Common Equity Ratio 5.22 4.91 5.52
Employees 22,820 22,901 19,491
Assets Under Custody (In trillions)
Total Assets Under Custody $8.6 $8.3 $6.8
Equity Securities 33% 34% 25%
Fixed Income Securities 67 66 75
Cross-Border Assets Under Custody $2.4 $2.3 $1.9
Assets Under Administration
(In billions) 33 32 27
Assets Under Management (In billions)
Total Assets Under Management 92 89 76
Equity Securities 36% 34% 29%
Fixed Income Securities 22 22 24
Alternative Investments 13 10 9
Liquid Assets 29 34 38
2
Management's Discussion and Analysis of Financial Condition and
- ---------------------------------------------------------------
Results of Operations
- ---------------------
INTRODUCTION
The Bank of New York Company, Inc.'s (the "Company") actual results of future
operations may differ from those estimated or anticipated in certain forward-
looking statements contained herein for reasons which are discussed below and
under the heading "Forward Looking Statements and Factors That Could Affect
Future Results." When used in this report, the words "estimate," "forecast,"
"project," "anticipate," "expect," "intend," "believe," "plan," "goal,"
"should," "may," "strategy," and words of similar meaning are intended to
identify forward looking statements in addition to statements specifically
identified as forward looking statements.
OVERVIEW
The Bank of New York Company, Inc. (NYSE: BK) is a global leader in
securities servicing for investors, financial intermediaries and issuers. The
Company plays an integral role in the infrastructure of the capital markets,
servicing securities in more than 100 markets worldwide. The Company provides
services based on leading technology for global financial institutions, asset
managers, governments, non-profit organizations, corporations, and
individuals. Its principal subsidiary, The Bank of New York, founded in 1784,
is the oldest bank in the United States and has a distinguished history of
serving clients around the world through its five primary businesses:
Securities Servicing and Global Payment Services, Private Client Services and
Asset Management, Corporate Banking, Global Market Services, and Retail
Banking.
The Company has executed a consistent strategy over the past decade by
focusing on highly scalable, fee-based securities servicing and fiduciary
businesses, with top 3 market share in most of its major product lines. The
Company distinguishes itself competitively by offering the broadest array of
products and services around the investment lifecycle. These include:
advisory and asset management services to support the investment decision;
extensive trade execution, clearance and settlement capabilities; custody,
securities lending, accounting and administrative services for investment
portfolios; and sophisticated risk and performance measurement tools for
analyzing portfolios. The Company also provides services for issuers of both
equity and debt securities. By providing integrated solutions for clients'
needs, the Company strives to be the preferred partner in helping its clients
succeed in the world's rapidly evolving financial markets.
The Company consistently invests in technology to improve the breadth
and quality of its product offerings, and to increase economies of scale. The
Company believes the extent to which it is able to invest in technology is a
key long-term competitive advantage.
The Company also actively pursues strategic acquisitions to expand
product offerings and increase market share in its scale businesses. The
Company has made over 80 acquisitions since 1995, almost exclusively in its
securities servicing and fiduciary businesses. The acquisition of Pershing in
2003 for $2 billion was the largest of these acquisitions.
As part of the transformation to a leading securities servicing
provider, the Company has also de-emphasized or exited its slower growth
traditional banking businesses over the past decade. The Company's more
significant actions include selling its credit card business in 1997 and its
factoring business in 1999, and most recently, significantly reducing non-
financial corporate credit exposures by 44% from December 31, 2000 to December
31, 2003. Capital generated by these actions has been reallocated to the
Company's higher growth businesses.
3
The Company's business model is well positioned to benefit from a number
of long-term secular trends. These include the growth of worldwide financial
assets, globalization of investment activity, structural market changes, and
increased outsourcing. These trends benefit the Company by driving higher
levels of financial asset trading volume and other transactional activity, as
well as higher asset price levels and growth in client assets, all factors by
which the Company prices its services. In addition, international markets
offer excellent growth opportunities.
The start of the year exceeded the Company's expectations in several
respects. Trading volumes were strong, particularly for equities in January,
and remained at healthy levels throughout the quarter. As of March 31, 2004,
assets under custody rose to $8.6 trillion, from $8.3 trillion at December 31,
2003 and $6.8 trillion at March 31, 2003. The sequential quarter increase in
assets under custody primarily reflects new business wins. Cross-border
custody assets were $2.4 trillion at March 31, 2004. Equity securities
composed 33% of the assets under custody at March 31, 2004, while fixed income
securities were 67%. Cross-border investing and currency volatility picked up
significantly. While equity price levels ended flat for the quarter, average
daily prices were up sequentially. Average daily combined first quarter NYSE
and NASDAQ trading volume increased 13% from the fourth quarter of 2003 and
27% from the first quarter of 2003. The S&P 500 index rose 1% during the
quarter while the NASDAQ index was flat. These better business conditions
supported strong results in the Company's securities servicing businesses, led
by the investor services and execution and clearing businesses. Higher volumes
and average equity values benefited investor services on a global basis, while
Pershing responded well to strengthening retail investor activity.
The Company's asset management business continued to perform well,
responding to growing institutional investor interest in alternative
investments. In addition, record foreign exchange results benefited from
currency volatility and increased cross-border investing.
The actions the Company has taken over the past several years with
respect to reducing risk in the credit portfolio, through absolute reductions
and greater granularity, are now generating tangible results. In addition, the
strengthening economy has helped the financial condition of corporate
borrowers, leading to improved risk ratings in the Company's loan portfolio.
Credit spreads have also tightened, allowing the Company to liquidate impaired
credits or reduce the allowance allocated to these credits. These factors led
to a reduced provision for credit losses in the quarter.
The Company continued to focus on improving productivity, which resulted
in positive operating leverage for the third consecutive quarter while also
maintaining strategic spending priorities.
SUMMARY OF RESULTS
The Company reported first quarter net income of $364 million and diluted
earnings per share of 47 cents compared with net income of $295 million and
diluted earnings per share of 41 cents in the first quarter of 2003. In the
fourth quarter of 2003, the Company reported net income of $307 million and
diluted earnings per share of 40 cents, which included 4 cents of merger and
integration costs associated with the acquisition of Pershing.
The Company achieved solid organic growth in earnings this quarter
reflecting strength in nearly all major business lines. In particular, the
investor services and execution and clearing businesses benefited from
improving market conditions, higher global equity trading volumes and
increased activity by retail investors. Greater cross-border investing
activity and exchange rate volatility also drove foreign exchange revenues to
historically high levels. In addition, proactive management of the Company's
expense base resulted in the third consecutive quarter of positive operating
leverage.
The Company's credit risk reduction program continues to deliver tangible
results. These efforts, combined with the stronger economy, have led to
4
significant improvement in the Company's asset quality metrics and a lower
quarterly loan loss provision. The Company expects credit costs to remain at
lower levels through the remainder of the year.
Looking ahead, the sustainability of the improving market fundamentals
will be key for the balance of 2004. In addition, debates over market
structure as well as increased regulatory rules and oversight in industries
the Company serves have not abated and will not for the foreseeable future.
The Company is confident, however, that the breadth of its business model
enables the Company to benefit as the market evolves, and positions the
Company to meet its long-term financial goals.
First quarter highlights include record securities servicing fees of $716
million, an increase of $32 million, or 5%, over the fourth quarter of 2003.
Investor services, execution and clearing, and broker-dealer services were
strong during the quarter benefiting from active equity markets and the
conversion of new business wins. Foreign exchange and other trading increased
sequentially by $25 million, or 31%, due to higher exchange rate volatility
and significantly increased cross-border investment flows. Private client
services and asset management fees increased sequentially by $5 million, or
5%, principally due to continued strong performance by Ivy Asset Management
("Ivy"), the Company's fund of funds hedge fund manager. Nonperforming assets
and charge-offs continued to decline, reflecting continued improvement in
credit quality. As a result of this and other factors, the Company lowered
its provision for credit losses from $35 million in the fourth quarter to $12
million in the first quarter of 2004.
Reflecting this strong first quarter performance and expectations for the
future, the Company's Board of Directors increased the dividend for the
Company's common stock by 5.3% to 20 cents per quarter (80 cents on an annual
basis) on April 13, 2004.
5
OTHER FIRST QUARTER DEVELOPMENTS
During the first quarter, the Company recorded several gains and charges
that in the aggregate did not influence reported earnings per share. These
items are described in the following table:
(In millions)
Income
Statement Pre-tax After-Tax
Item Caption Income Tax Income
- ---- ------------ ------- --- ---------
SFAS 13 cumulative Net Interest
lease adjustment Income $(145) $113 $(32)
Severance Salaries and
Employee Benefits (10) 4 (6)
Lease terminations Net Occupancy (8) 3 (5)
Gain on sale of
Wing Hang Other Income 48 (21) 27
Gain on sponsor Securities
fund investments Gains 19 (7) 12
----- ---- ----
Total $ (96) $ 92 $ (4)
===== ==== ====
The first item relates to an after-tax charge of $32 million resulting
from a cumulative adjustment to the leasing portfolio, which was triggered
under Statement of Financial Accounting Standards No. 13 "Accounting for
Leases" ("SFAS 13") by the combination of a reduction in state and local taxes
and a restructuring of the lease portfolio completed this quarter. The SFAS
13 adjustment impacts the timing of lease income reported by the Company, and
resulted in a reduction in net interest income of $145 million, offset by tax
benefits of $113 million. The Company estimates that the reduction in state
and local taxes will reduce its overall effective tax rate by approximately 1%
prospectively to 34.25% for the balance of the year.
The Company also took several actions in the first quarter which were
associated with its long-term cost reduction initiatives. These actions
included an after-tax severance charge of $6 million related to staff
reductions tied to job relocations and a $5 million after-tax charge for
terminating high cost leases associated with staff redeployments.
Offsetting these charges were a $27 million after-tax gain on the
previously reported sale of a portion of the Company's interest in Wing Hang
Bank Limited ("Wing Hang"), a Hong Kong based bank, which was recorded in
other income, and $19 million ($12 million after-tax) of higher than
anticipated securities gains in the quarter resulting from realized gains on
sponsor fund investments in Kinkos, Inc., Bristol West Holdings, Inc., Willis
Group Holdings, Ltd., and True Temper Sports, Inc.
6
CONSOLIDATED INCOME STATEMENT REVIEW
Noninterest Income
- ------------------
1st 4th 1st
Quarter Quarter Quarter
------- ------- -------
(In millions) 2004 2003 2003
---- ---- ----
Servicing Fees
Securities $ 716 $ 684 $474
Global Payment Services 79 76 78
------ ------ ----
795 760 552
Private Client Services
and Asset Management Fees 108 103 90
Service Charges and Fees 96 97 97
Foreign Exchange and
Other Trading Activities 106 81 65
Securities Gains 33 9 7
Other 92 52 33
------ ------ ----
Total Noninterest Income $1,230 $1,102 $844
====== ====== ====
Noninterest income for the first quarter of 2004 was $1,230 million, an
increase of 12% sequentially and 46% from a year ago. Excluding the
previously mentioned gains on sale of Wing Hang and sponsor fund investments,
the sequential quarter increase in noninterest income was 6%.
Securities servicing fees were a record $716 million in the first
quarter, an increase of $32 million, or 5%, from the fourth quarter.
Execution and clearing services fees increased $13 million sequentially,
or 4%, to $303 million in the first quarter. These businesses benefited from
higher equity trading volumes in the first quarter although equity price
levels were essentially flat by the end of the quarter. This increased level
of market activity more than offset an anticipated decline in soft-dollar
related execution activities. Pershing also benefited from strong retail
investor activity, especially in January, which contributed to increased
billable trades.
Investor services fees recorded a strong quarter, increasing 8%
sequentially as a result of higher transaction volumes and average asset price
levels, the conversion of new business wins and favorable exchange rates.
Investor services include custody, global fund services, securities lending,
global liquidity services and outsourcing. As of March 31, 2004, assets under
custody rose to $8.6 trillion, from $8.3 trillion at December 31, 2003 and
$6.8 trillion at March 31, 2003.
Issuer services fees were up slightly from the fourth quarter, reflecting
a solid quarter in corporate trust and stock transfer, offset by a modest
decline in depositary receipts. While there was increased interest in cross-
border investing during the quarter, reflected in the 21% growth in DR share
trading compared to the fourth quarter of 2003, there were fewer corporate
actions in the quarter.
Broker-dealer services fees increased $2 million, or 4%, on a sequential
quarter basis, as a result of continued strong performance in global
collateral management services and securities clearance. Expanded use of the
Company's tri-party repo product by clients to fund their activities drove
revenue growth during the quarter.
Global payment services fees were up $3 million, or 4%, compared with the
prior quarter and up $1 million from the first quarter of 2003, resulting from
higher volumes and improved pricing.
7
Private client services and asset management fees for the first quarter
were up 5% from the prior quarter and 20% from the first quarter of 2003. The
sequential quarter increase reflects continued strong growth at Ivy Asset
Management and new business wins. The increase from 2003 reflects the same
factors involved in the sequential quarter increase as well as higher equity
price levels. Total assets under management were $92 billion at March 31,
2004, up from $89 billion at December 31, 2003 and $76 billion a year ago.
Service charges and fees were down marginally from the prior quarter and
one year ago, as higher service and transaction fees were offset by lower
capital market fees.
Foreign exchange and other trading revenues increased $25 million from
the prior quarter and $41 million, or 63%, from one year ago. The strong
performance this quarter in foreign exchange reflects higher levels of client
activity, resulting from several factors including hedging against currency
volatility, renewed interest in cross-border investing, and asset
reallocations into equities. The increase from a year ago was also positively
impacted by the acquisition of Pershing and new business wins.
Securities gains in the first quarter were $33 million, up from both the
prior quarter and a year ago primarily due to the realization of significant
gains in the Company's private equity portfolio, which included $19 million in
realized gains on four sponsor fund investments.
Other noninterest income was $92 million, compared with $52 million in
the prior quarter and $33 million in the first quarter of 2003. In January
2004, the Company sold 20% of its investment in Wing Hang, which generated a
pre-tax gain of $48 million. The sale was part of the Company's continuing
plan to reduce capital invested in non-strategic areas. The Company continues
to own approximately 20% of Wing Hang's outstanding shares, which are
accounted for on the equity method.
Net Interest Income
- -------------------
(Dollars in millions) 1st 1st 4th 1st
Quarter Quarter Quarter Quarter
2004 2004 2003 2003
-------- ------ -------- --------
Reported Core** Reported Reported
-------- ------ -------- --------
Net Interest Income $268 $413 $418 $386
Tax Equivalent Adjustment* 6 6 8 9
---- ---- ---- ----
Net Interest Income on a
Tax Equivalent Basis $274 $419 $426 $395
==== ==== ==== ====
Net Interest Rate Spread 1.13% 1.85% 1.92% 2.18%
Net Yield on Interest
Earning Assets 1.36 2.08 2.15 2.44
* A number of amounts related to net interest income are presented on a
"taxable equivalent basis." The Company believes that this presentation provides
comparability of net interest income arising from both taxable and tax-exempt
sources and is consistent with industry standards.
** Excludes SFAS 13 adjustment
Net interest income on a taxable equivalent basis was $274 million in the
first quarter of 2004, which reflects a net interest rate spread of 1.13% and
a net yield on interest earning assets of 1.36%. Excluding the impact of the
SFAS 13 leasing adjustment on the leveraged lease portfolio, net interest
income was down on a sequential quarter to $419 million in the first quarter
of 2004, compared with $426 million in the fourth quarter of 2003, and up from
$395 million in the first quarter of 2003. On the same basis, the net
interest rate spread was 1.85% in the first quarter of 2004, compared with
8
1.92% in the fourth quarter of 2003, and 2.18% in the first quarter of 2003,
while the net yield on interest earning assets was 2.08% in the first quarter
of 2004, compared with 2.15% in the fourth quarter of 2003, and 2.44% in the
first quarter of 2003.
Excluding the impact of the SFAS 13 leasing adjustment on the leveraged
lease portfolio, the decrease in net interest income from the fourth quarter
of 2003 is primarily due to a day variance versus the fourth quarter, as well
as higher loan breakage fees in the fourth quarter. The increase in net
interest income from the first quarter of 2003 reflects the Pershing
acquisition and higher average balances of investment securities, which were
partially offset by lower reinvestment yields on the investment securities
portfolio and lower loan balances.
Noninterest Expense and Income Taxes
- ------------------------------------
1st 4th 1st
Quarter Quarter Quarter
------- ------- -------
(In millions) 2004 2003 2003
---- ---- ----
Salaries and Employee Benefits $ 574 $ 548 $423
Net Occupancy 81 70 58
Furniture and Equipment 51 49 36
Clearing 48 43 29
Sub-custodian Expenses 22 21 16
Software 49 46 35
Communications 24 23 20
Amortization of Intangibles 8 7 3
Merger and Integration Costs - 48 -
Other 156 161 119
------ ------ ----
Total Noninterest Expense $1,013 $1,016 $739
====== ====== ====
Noninterest expense for the first quarter of 2004 was $1,013 million,
compared with $1,016 million in the prior quarter. Noninterest expense in the
first quarter included $18 million related to cost reduction initiatives,
including lease terminations, severance and relocation expenses. Of this
amount, $10 million was in salaries and employee benefits and $8 million was
in net occupancy.
On a sequential quarter basis, after excluding $48 million of fourth
quarter merger and integration costs, and the $18 million associated with the
cost reduction initiatives, expenses increased by $27 million or 3%. Driving
this increase were higher performance related incentives and benefits, a lower
pension credit, and higher variable expenses associated with revenue growth.
Compared to a year ago, noninterest expenses were up 37% primarily due to
Pershing and higher variable costs associated with revenue growth.
The effective tax rate for the first quarter of 2004 was 23.1%, compared
to 34.6% in the fourth quarter and 34.6% in the first quarter of 2003. The
decrease reflects the benefit associated with the SFAS 13 adjustment as
described in "Other First Quarter Developments."
9
Credit Loss Provision and Net Charge-Offs
- -----------------------------------------
1st 4th 1st
Quarter Quarter Quarter
------- ------- -------
(In millions) 2004 2003 2003
---- ---- ----
Provision $ 12 $ 35 $ 40
==== ==== ====
Net Charge-offs:
Commercial $ (5) $ (24) $ (21)
Foreign (10) (7) -
Other - (5) (14)
Consumer (11) (12) (5)
------ ------ ------
Total $ (26) $ (48) $ (40)
====== ====== ======
Other Real Estate Expenses $ - $ - $ -
The provision for credit losses was $12 million in the first quarter of
2004 compared to $35 million in the fourth quarter of 2003 and $40 million in
the first quarter of 2003. The lower provision reflects the Company's
improved risk profile and its strong asset quality metrics including improved
borrower ratings, lower levels of expected losses, declining nonperforming
assets, and the planned reductions in the large sub-investment grade
exposures. Furthermore, continued improvements in the U.S. economy as
reflected in recent government statistics, tightening of corporate credit
spreads and lower corporate defaults all led to the reduced level of
provisioning.
Net charge-offs were $26 million in the first quarter of 2004 versus $48
million and $40 million in the fourth and first quarters of 2003. These
represent 0.29% of total loans in the most recent quarter, down from 0.54% and
0.51% in the prior periods, respectively.
10
BUSINESS SEGMENTS REVIEW
The Company has an internal information system that produces performance
data for its four business segments along product and service lines.
Business Segments Accounting Principles
- ---------------------------------------
The Company's segment data has been determined on an internal management
basis of accounting, rather than the generally accepted accounting principles
used for consolidated financial reporting. These measurement principles are
designed so that reported results of the segments will track their economic
performance. Segment results are subject to restatement whenever improvements
are made in the measurement principles or organizational changes are made. In
the first quarter of 2004, the Company changed its methodology for allocating
its pension credit to the segments. Prior periods have been restated.
The measure of revenues and profit or loss by operating segment has been
adjusted to present segment data on a taxable equivalent basis. The provision
for credit losses allocated to each reportable segment is based on
management's judgment as to average credit losses that will be incurred in the
operations of the segment over a credit cycle of a period of years.
Management's judgment includes the following factors among others: historical
charge-off experience and the volume, composition, and size of the loan
portfolio. This method is different from that required under generally
accepted accounting principles as it anticipates future losses, which are not
yet probable, and therefore not recognizable under generally accepted
accounting principles. Assets and liabilities are match funded. Support and
other indirect expenses are allocated to segments based on general internal
guidelines.
Description of Business Segments
- --------------------------------
The results of individual business segments exclude unusual items such as
the GMAC settlement and the Pershing related merger and integration costs of
2003, which are included with reconciling amounts.
The Company reports data for the four business segments: Servicing and
Fiduciary, Corporate Banking, Retail Banking, and Financial Markets.
The Servicing and Fiduciary businesses segment comprises the Company's
core services, including securities servicing, global payment services, and
private client services and asset management. These businesses all share
certain favorable attributes: they are well diversified and fee-based; the
Company serves the role of an intermediary rather than principal, thereby
limiting risk and generating more stable earnings streams; and the businesses
are scalable, which result in higher margins as revenues grow. Long-term
trends that favor these businesses include the growth of financial assets
worldwide, the globalization of investment activity, heightened demand for
financial servicing outsourcing, and continuing structural changes in
financial markets.
Securities servicing provides financial institutions, corporations and
financial intermediaries with a broad array of products and customized
services for every step of the investment lifecycle. The Company facilitates
the movement, settlement, recordkeeping and accounting of financial assets
around the world by delivering timely and accurate information to issuers,
investors and broker-dealers. The Company groups its securities servicing
businesses into four categories, each comprised of separate, but related
businesses. Issuer services include corporate trust, depositary receipts and
stock transfer. Investor services include global fund services, global
custody, securities lending, global liquidity services and outsourcing.
Broker-dealer services include government securities clearance and collateral
management. Execution and clearing services include in the execution area
institutional agency brokerage, electronic trading, transition management
services, and independent research. Through Pershing, the clearing part of
the business provides clearing, execution, financing, and custody for
introducing brokers/dealers. The Servicing and Fiduciary segment also includes
customer-related foreign exchange.
11
In Issuer Services, the Company's ADR business has over 1,300 programs
representing 65 countries. As a trustee, the Company provides diverse services
for corporate, municipal, mortgage-backed, asset-backed, derivative and
international debt securities. Over 90,000 appointments for more than 30,000
worldwide clients have resulted in the Company being trustee for more than $1
trillion in outstanding debt securities. The Company is the third largest
stock transfer agent representing over 1,950 publicly traded companies with
over 19 million shareholder accounts.
In investor services, the Company is the second largest custodian with
$8.6 trillion of assets at March 31, 2004. The Company is the second largest
mutual fund custodian with $1.3 trillion in assets. The Company is the largest
U.K. custodian. The Company services over 25% of total exchange traded fund
industry assets. In securities lending, the Company is the largest lender of
U.S. Treasury securities and depositary receipts.
The Company's broker-dealer services business clears over 50% of U.S.
Government securities. With over $800 billion in tri-party balances worldwide,
the Company is the world's largest collateral management agent.
The Company's execution and clearing services business is the largest
global institutional agency brokerage organization. In addition, it is the
world's largest institutional elective broker for global execution. The
Company provides execution and clearing services in over 80 global markets,
clearing over 600,000 trades daily. The Company has 26 seats on the New York
Stock Exchange. Pershing services over 1,100 introducing brokers and
registered investment advisors who employ approximately 100,000 investment
professionals.
Global payment services facilitate the flow of funds between the
Company's customers and their clients through such business lines as funds
transfer, cash management and trade services. Private client services and
asset management includes traditional banking and trust services to affluent
clients and investment management services for institutional and high net
worth clients.
The Company's strategy is to be a market leader in these businesses and
continue to build out its product and service capabilities and add new
clients. The Company has completed 55 acquisitions since 1998 in this
segment, has made significant investments in technology to maintain its
industry-leading position, and has continued the development of new products
and services to meet its clients' needs.
The Corporate Banking segment provides lending and credit-related
services to large public and private financial institutions and corporations
nationwide, as well as to public and private mid-size businesses in the New
York metropolitan area. Special industry groups focus on industry segments
such as banks, broker-dealers, insurance, media and telecommunications,
energy, real estate, retailing, and government banking institutions. Through
BNY Capital Markets, Inc., the Company provides syndicated loans, bond
underwriting, private placements of corporate debt and equity securities, and
merger, acquisition, and advisory services.
Corporate Banking coordinates delivery of all of the Company's services
to customers through its global relationship managers. The two main client
bases served are financial institution clients and corporate clients. The
Company's strategy is to focus on those clients and industries that are major
users of securities servicing and global payment services.
The Company believes that credit is an important product for many of its
customers to execute their business strategies. However, the Company has
continued to reduce its credit exposures in recent years by culling its loan
portfolio of non-strategic exposures, focusing on increasing total
relationship returns through cross-selling and limiting the size of its
individual credit exposures and industry concentrations to reduce earnings
volatility.
The Retail Banking segment includes retail deposit services, branch
banking, and consumer and residential mortgage lending. The Company operates
341 branches in 23 counties in the Tri-State region. The retail network is a
stable source of low cost funding and provides a platform to cross-sell core
services from the Servicing and Fiduciary businesses to both individuals and
small businesses in the New York metropolitan area.
12
The Financial Markets segment includes trading of foreign exchange and
interest rate risk management products, investing and leasing activities, and
treasury services to other business segments. The segment offers a
comprehensive array of multi-currency hedging and yield enhancement
strategies, and complements the other business segments. The Financial
Markets segment centralizes interest rate risk management for the Company.
There were no major customers from whom revenues were individually
material to the Company's performance.
Servicing and Fiduciary Businesses
- ----------------------------------
(In Millions)
1st 4th 1st
Quarter Quarter Quarter
2004 2003 2003
------- ------- -------
Net Interest Income $ 140 $ 138 $ 105
Provision for Credit Losses - - -
Noninterest Income 990 944 691
Noninterest Expense 757 732 525
Income Before Taxes 373 350 271
Average Assets 22,771 22,733 7,617
Average Deposits 35,138 34,503 31,128
Nonperforming Assets 3 9 16
Assets Under Custody (In billions)
Total Assets Under Custody 8,577 8,297 6,783
Equity Securities 33% 34% 25%
Fixed Income Securities 67 66 75
Cross-Border Assets $ 2,401 $ 2,323 $ 1,899
Assets Under Administration (In billions) 33 32 27
Assets Under Management (In billions) 92 89 76
Equity Securities 36% 34% 29%
Fixed Income Securities 22 22 24
Alternative Investments 13 10 9
Liquid Assets 29 34 38
S&P 500 Index (Period End) 1,126 1,112 848
NASDAQ Index (Period End) 1,994 2,003 1,341
NYSE Volume (In billions) 95.4 85.5 86.6
NASDAQ Volume (In billions) 128.2 112.6 88.8
The first quarter results showed continued improvement in the Company's
primary businesses, including securities servicing and related foreign
exchange, and private client services and asset management. Noninterest income
increased to $990 million from $944 million in the fourth quarter of 2003 and
$691 million in the first quarter of 2003. First quarter highlights include
record securities servicing fees of $716 million, an increase of $32 million,
or 5%, over the fourth quarter of 2003. Investor services, execution and
clearing, and broker-dealer services were strong during the quarter benefiting
from active equity markets and the conversion of new business wins.
Average daily combined first quarter NYSE and NASDAQ trading volume
increased 13% from the fourth quarter of 2003 and 27% from the first quarter
of 2003. The S&P 500 index rose 1% during the quarter while the NASDAQ index
was flat.
13
Securities Servicing Fees
- -------------------------
1st 4th 3rd
Quarter Quarter Quarter
------- ------- -------
(In millions) 2004 2003 2003
---- ---- ----
Execution and Clearing Services $ 303 $ 290 $ 271
Investor Services 226 210 212
Issuer Services 137 136 127
Broker-Dealer Services 50 48 47
------ ------ ------
Securities Servicing Fees $ 716 $ 684 $ 657
====== ====== ======
Securities servicing fees were a record $716 million in the first
quarter, an increase of $32 million, or 5%, from the fourth quarter.
Execution and clearing services fees increased $13 million sequentially,
or 4%, to $303 million in the first quarter. These businesses benefited from
higher equity trading volumes in the first quarter although equity price
levels were essentially flat by the end of the quarter. This increased level
of market activity more than offset an anticipated decline in soft-dollar
related execution activities. Pershing also benefited from strong retail
investor activity, especially in January, which contributed to increased
billable trades. Other metrics such as customer accounts, money fund and
mutual fund balance were all higher than the fourth quarter and stayed strong
throughout the quarter. In comparison to a year ago, execution and clearing
services were up significantly as a result of the Pershing acquisition.
Investor services fees recorded a strong quarter, increasing 8%
sequentially as a result of higher transaction volumes and average asset price
levels, the conversion of new business wins and favorable exchange rates.
Investor services include custody, global fund services, securities lending,
global liquidity services and outsourcing. Investor services were also up
significantly over the first quarter of 2003 reflecting strength in custody,
global fund services, and securities lending. As of March 31, 2004, assets
under custody rose to $8.6 trillion, from $8.3 trillion at December 31, 2003
and $6.8 trillion at March 31, 2003. The sequential quarter increase in assets
under custody primarily reflects new business wins. Cross-border custody
assets were $2.4 trillion at March 31, 2004. Equity securities composed 33%
of the assets under custody at March 31, 2004, while fixed income securities
were 67%.
Issuer services fees were up slightly from the fourth quarter, reflecting
a solid quarter in corporate trust and stock transfer, offset by a modest
decline in depositary receipts. While there was increased interest in cross-
border investing during the quarter, reflected in the 21% growth in DR share
trading compared to the fourth quarter of 2003, there were fewer corporate
actions in the quarter. Issuer services were up modestly over the first
quarter of 2003 led by depositary receipts and stock transfer.
Broker-dealer services fees increased $2 million, or 4%, on a sequential
quarter basis, as a result of continued strong performance in global
collateral management services and securities clearance. Expanded use of the
Company's tri-party repo product by clients to fund their activities drove
revenue growth during the quarter. In comparison to a year ago, broker-dealer
service fees were up strongly driven by the same factors that impacted
sequential quarter growth.
Global payment services fees were up $3 million, or 4%, compared with the
prior quarter and up $1 million from the first quarter of 2003, resulting from
higher volumes and improved pricing.
14
Private client services and asset management fees for the first quarter
were up 5% from the prior quarter and 20% from the first quarter of 2003. The
sequential quarter increase reflects continued strong growth at Ivy Asset
Management and new business wins. The increase from 2003 reflects the same
factors involved in the sequential quarter increase as well as higher equity
price levels.
Assets under management ("AUM") were $92 billion at March 31, 2004, up
from $89 billion at December 31, 2003 and $76 billion at March 31, 2003.
Assets under administration were $33 billion compared with $32 billion at
December 31, 2003 and $27 billion at March 31, 2003. The sequential quarter
and year-over-year increases in assets under management reflect growth in the
Company's alternative investments business and a rise in equity market value.
Institutional clients represent 66% of AUM while individual clients equal 34%.
AUM at March 31, 2004, are 36% invested in equities, 22% in fixed income, 13%
in alternative investments and the remainder in liquid assets. At Ivy, AUM
climbed to $11.7 billion at March 31, 2004 from $9.1 billion at December 31,
2003 and $6.5 billion at March 31, 2003.
Foreign exchange and other trading revenues increased $25 million from
the prior quarter and $41 million, or 63%, from one year ago. The strong
performance this quarter in foreign exchange reflects higher levels of client
activity, resulting from several factors including hedging against currency
volatility, renewed interest in cross-border investing, and asset
reallocations into equities. The increase from a year ago was also positively
impacted by the acquisition of Pershing and new business wins.
Net interest income in the Servicing and Fiduciary businesses segment was
$140 million for the first quarter of 2004 compared with $138 million for the
fourth quarter of 2003 and $105 million in the first quarter of 2003. The
increase in net interest income on a sequential quarter basis is primarily
attributable to higher levels of client activity which led to an increase in
the average level of deposits. The increase in net interest income from the
first quarter of 2003 is primarily due to the Pershing acquisition partially
offset by the decline in interest rates. Average assets for the quarter ended
March 31, 2004 were $22.8 billion compared with $22.7 billion in the fourth
quarter of 2003 and $7.6 billion in the first quarter of 2003. The increase in
assets in 2004 compared with 2003 is primarily attributable to the Pershing
acquisition. The first quarter of 2004 average deposits were $35.1 billion
compared with $34.5 billion in the fourth quarter of 2003 and $31.1 billion in
the first quarter of 2003.
Net charge-offs in the Servicing and Fiduciary Businesses segment were $5
million in the first quarter of 2004, compared with $7 million in the fourth
quarter of 2003 and zero in the first quarter of 2003. Nonperforming assets
were $3 million in the first quarter of 2004, compared with $9 million in the
fourth quarter of 2003 and $16 million in the first quarter of 2003.
Noninterest expense for the first quarter of 2004 was $757 million,
compared with $732 million in the fourth quarter of 2003 and $525 million in
the first quarter of 2003. The rise in noninterest expense from fourth quarter
of 2003 was primarily due to the Company's continued investment in technology,
a reduced pension credit, as well as higher volume-related expenses related to
revenue growth. In addition to the above factors, the increase from the first
quarter of 2003 also reflects the Pershing acquisition.
15
Corporate Banking
- -----------------
(In Millions)
1st 4th 1st
Quarter Quarter Quarter
2004 2003 2003
------- ------- -------
Net Interest Income $ 89 $ 94 $ 92
Provision for Credit Losses 20 26 30
Noninterest Income 80 73 71
Noninterest Expense 53 52 48
Income Before Taxes 96 89 85
Average Assets $17,358 $18,685 $20,708
Average Deposits 6,800 6,049 7,219
Nonperforming Assets 325 327 409
Net Charge-offs 11 30 35
The Corporate Banking segment's net interest income was $89 million in the
first quarter of 2004, compared with $94 million in the fourth quarter of 2003
and $92 million in the first quarter of 2003. The decline from both the first
and fourth quarters of 2003 reflects continued reduction in lending to
corporate borrowers. Average assets for the quarter were $17.4 billion
compared with $18.7 billion in the fourth quarter of 2003 and $20.7 billion in
the first quarter of last year. Average deposits in the corporate bank were
$6.8 billion versus $6.0 billion in the fourth quarter of 2003 and $7.2
billion in 2003.
The first quarter 2004 provision for credit losses was $20 million
compared with $26 million in the fourth quarter of 2003 and $30 million last
year. The decline in the provision from the fourth and first quarters of 2003
reflects reduced credit exposures. Net charge-offs in the Corporate Banking
segment were $11 million in the first quarter of 2004, $30 million in the
fourth quarter of 2003, and $35 million in the first quarter of 2003. The
charge-offs in 2004 primarily relate to loans to media and foreign borrowers.
Nonperforming assets were $325 million at March 31, 2004, down from $327
million at December 31, 2003 and $409 million in the first quarter of 2003.
The decrease in nonperforming assets from the first quarter of 2003 primarily
reflects paydowns and charge-offs of commercial and foreign loans.
Noninterest income was $80 million in the current quarter, compared with
$73 million in the fourth quarter and $71 million in the first quarter of
2003. The increase on a sequential quarter basis and year-over-year reflects
higher income from unconsolidated subsidiaries and better results from credit
derivatives.
Noninterest expense in the first quarter was $53 million, compared with
$52 million in the fourth quarter of 2003 and $48 million in the first quarter
of 2003. The increases over 2003 reflect higher compensation costs due in part
to a reduced pension credit and higher stock option expense.
16
Retail Banking
- --------------
(In Millions)
1st 4th 1st
Quarter Quarter Quarter
2004 2003 2003
------- ------- -------
Net Interest Income $ 123 $ 123 $ 116
Provision for Credit Losses 5 5 4
Noninterest Income 29 28 29
Noninterest Expense 93 93 87
Income Before Taxes 54 53 54
Average Assets $ 5,377 $ 5,752 $ 5,387
Average Noninterest Bearing Deposits 5,028 4,955 4,830
Average Deposits 14,807 14,761 14,122
Nonperforming Assets 15 13 10
Net Charge-offs 6 5 5
Number of Branches 341 341 341
Total Deposit Accounts (In Thousands) 1,133 1,163 1,192
Number of ATMS 378 378 370
Net interest income in the first quarter of 2004 was $123 million,
compared with $123 million in the fourth quarter of 2003 and $116 million in
the first quarter of 2003. On a sequential quarter basis, net interest income
was flat as spread compression on deposits was offset by higher levels of
noninterest bearing deposits. The increase from the first quarter of 2003
reflects higher levels of deposits primarily from municipalities in the retail
bank's service area.
Noninterest income was $29 million for the quarter compared with $28
million on a sequential quarter basis and $29 million in last year's first
quarter.
Noninterest expense in the first quarter of 2004 was $93 million,
compared with $93 million in the fourth quarter of 2003 and $87 million last
year. The increase from the first quarter of 2003 reflects higher advertising,
legal, and occupancy expenses.
Net charge-offs were $6 million in the first quarter of 2004, compared
with $5 million in the fourth quarter and first quarter of 2003. Nonperforming
assets were $15 million in the first quarter of 2004 compared with $13 million
at December 31, 2003 and $10 million at March 31, 2003 reflecting an increase
in the level of nonperforming small business loans.
Average deposits generated by the Retail Banking segment were $14.8
billion in the first quarter of 2004, compared with $14.8 billion in the
fourth quarter of 2003 and $14.1 billion in the first quarter of 2003.
Noninterest bearing deposits were $5.0 billion this quarter, compared with
$5.0 billion in the fourth quarter of 2003 and $4.8 billion in the first
quarter of 2003. Average assets in the retail banking sector were $5.4
billion, compared with $5.8 billion in the fourth quarter of 2003 and $5.4
billion in the first quarter of 2003.
17
Financial Markets
- -----------------
(In Millions)
1st 4th 1st
Quarter Quarter Quarter
2004 2003 2003
------- ------- -------
Net Interest Income $ 80 $ 85 $ 77
Provision for Credit Losses 5 5 5
Noninterest Income 50 41 50
Noninterest Expense 27 28 24
Income Before Taxes 98 93 98
Average Assets $50,051 $45,476 $44,334
Average Deposits 3,864 3,568 4,917
Average Investment Securities 22,997 22,352 17,977
Net Charge-offs 4 5 -
Net interest income for the first quarter was $80 million compared with
$85 million on a sequential quarter basis and $77 million a year ago. The
decrease from the fourth quarter of 2003 reflects a slightly lower yield on
the investment portfolio, one less day in the quarter as well as higher loan
breakage fees in the fourth quarter. The increase from the first quarter of
2003 reflects higher average balances of investment securities partially
offset by lower reinvestment yields. Average first quarter 2004 assets in the
Financial Markets segment composed primarily of short-term liquid assets and
investment securities were $50.1 billion, up from $45.5 billion on a
sequential quarter basis and $44.3 billion last year. The increase in assets
reflects the Company's continuing strategy to reduce investment in higher risk
corporate loans and increase holdings of highly rated, more liquid investment
securities. The Company continues to invest in adjustable or short life
classes of structured mortgage-backed securities, both of which have short
average lives.
Noninterest income was $50 million in the first quarter of 2004, compared
with $41 million in the fourth quarter of 2003 and $50 million in the first
quarter of 2003. The positive variance versus the fourth quarter of 2003
reflects higher trading-related revenues in both foreign exchange and fixed
income as well as improved hedging of foreign currency investments.
Net charge-offs were $4 million in the first quarter of 2004, compared
with $5 million in the fourth quarter of 2003 and zero a year ago.
Noninterest expense was $27 million in the first quarter of 2004, essentially
flat compared with $28 million in the fourth quarter of 2003 and up from $24
million in last year's first quarter. The increase from last year's first
quarter is attributable to higher employee incentive and other compensation.
18
The consolidating schedule below shows the contribution of the Company's
segments to its overall profitability.
In Millions
Servicing
and
For the Quarter Ended Fiduciary Corporate Retail Financial Reconciling Consolidated
March 31, 2004 Businesses Banking Banking Markets Items Total
- --------------------- ---------- --------- ------- --------- ----------- ------------
(In Millions)
Net Interest Income $ 140 $ 89 $ 123 $ 80 $(164) $ 268
Provision for
Credit Losses - 20 5 5 (18) 12
Noninterest Income 990 80 29 50 81 1,230
Noninterest Expense 757 53 93 27 83 1,013
----- ---- ----- ---- ----- ------
Income Before Taxes $ 373 $ 96 $ 54 $ 98 $(148) $ 473
===== ==== ===== ==== ===== ======
Contribution Percentage 60% 15% 9% 16%
Average Assets $22,771 $17,358 $5,377 $50,051 $4,121 $99,678
In Millions
Servicing
and
For the Quarter Ended Fiduciary Corporate Retail Financial Reconciling Consolidated
December 31, 2003 Businesses Banking Banking Markets Items Total
- --------------------- ---------- --------- ------- --------- ----------- ------------
Net Interest Income $ 138 $ 94 $ 123 $ 85 $ (22) $ 418
Provision for
Credit Losses - 26 5 5 (1) 35
Noninterest Income 944 73 28 41 16 1,102
Noninterest Expense 732 52 93 28 111 1,016
----- ---- ----- ---- ----- ------
Income Before Taxes $ 350 $ 89 $ 53 $ 93 $(116) $ 469
===== ==== ===== ==== ===== ======
Contribution Percentage 60% 15% 9% 16%
Average Assets $22,733 $18,685 $5,752 $45,476 $ 3,975 $96,621
In Millions
Servicing
and
For the Quarter Ended Fiduciary Corporate Retail Financial Reconciling Consolidated
March 31, 2003 Businesses Banking Banking Markets Items Total
- --------------------- ---------- --------- ------- --------- ----------- ------------
Net Interest Income $ 105 $ 92 $ 116 $ 77 $ (4) $ 386
Provision for
Credit Losses - 30 4 5 1 40
Noninterest Income 691 71 29 50 3 844
Noninterest Expense 525 48 87 24 55 739
----- ---- ----- ---- ----- -----
Income Before Taxes $ 271 $ 85 $ 54 $ 98 $ (57) $ 451
===== ==== ===== ==== ===== =====
Contribution Percentage 53% 17% 11% 19%
Average Assets $ 7,617 $20,708 $5,387 $44,334 $2,605 $80,651
19
Reconciling Items
- -----------------
Description - Reconciling items for net interest income primarily relate to
the recording of interest income on a taxable equivalent basis, reallocation
of capital and the funding of goodwill and intangibles. Reconciling items for
noninterest income primarily relate to the sale of certain securities and
certain other gains. Reconciling items for noninterest expense primarily
reflects corporate overhead as well as amortization of intangibles and
severance.
In the first quarter of 2004, the following adjustments (see "Other First
Quarter Developments") were included in reconciling items: (i) SFAS 13
cumulative adjustment to the leasing portfolio, which impacted net interest
income by $145 million, (ii) four large securities gains and the gain on sale
of Wing Hang Bank, which impacted noninterest income by $67 million, and (iii)
severance and lease termination expense, which impacted noninterest expense by
$18 million.
In the fourth quarter of 2003, merger and integration costs associated
with Pershing were a reconciling item. The adjustment to the provision for
credit losses reflects the difference between the aggregate of the credit
provision over a credit cycle for the reportable segments and the Company's
recorded provision. The reconciling items for average assets consist of
goodwill and other intangible assets.
1st 4th 1st
Quarter Quarter Quarter
(In millions) 2004 2003 2003
------- ------- -------
Segments' revenue $1,581 $1,526 $1,231
Adjustments:
Earnings associated with
assignment of capital (29) (30) (20)
Securities gains 19 - -
Other gains 62 16 3
SFAS 13 cumulative lease adjustment (145) - -
Taxable equivalent basis and
other tax-related items 10 8 16
------- ------ ------
Subtotal-revenue adjustments (83) (6) (1)
------- ------ ------
Consolidated revenue $1,498 $1,520 $1,230
======= ====== ======
Segments' income before tax $ 621 $ 585 $ 508
Adjustments:
Revenue adjustments (above) (83) (6) (1)
Provision for credit losses
different than GAAP 18 1 (1)
Severance (11) (2) (2)
Goodwill and
intangible amortization (8) (7) (3)
Pershing-related
integration expenses - (48) -
Lease termination (8) - -
Corporate overhead (56) (54) (50)
------- ------- ------
Consolidated income
before tax $ 473 $ 469 $ 451
======= ======= ======
Segments' total
average assets $95,557 $92,646 $78,046
Adjustments:
Goodwill and intangibles 4,121 3,975 2,605
------- ------- -------
Consolidated average assets $99,678 $96,621 $80,651
======= ======= =======
20
Allocation to Segments - Earnings associated with the assignment of capital
relate to preferred trust securities which are assigned as capital to
segments. Since the Company considers these issues to be capital, it does not
allocate the interest expense associated with these securities to individual
segments. If this interest expense were allocated to segments, it could be
assigned based on segment capital, assets, risks, or some other basis.
The reconciling item for securities gains relates to the Financial
Markets business. 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. In 2004,
the $145 million reconciling item related to SFAS 13 cumulative lease
adjustment would be attributable to the Financial Markets segment. In
addition, the gain on the sale of Wing Hang would be attributable to the
Corporate Banking segment.
The reconciling item for the provision for loan losses primarily relates
to Corporate Banking. 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. In 2004, the
$18 million of severance and lease termination would be allocated primarily to
the Servicing and Fiduciary segment. Merger and integration charges would be
allocated to the Securities and Fiduciary businesses segment.
CONSOLIDATED BALANCE SHEET REVIEW
Total assets were $92.7 billion at March 31, 2004, compared with $92.4
billion at December 31, 2003, and $79.7 billion at March 31, 2003. The
increase versus a year ago mainly reflects the Pershing acquisition. Total
shareholders' equity was $8.8 billion at March 31, 2004, compared with $8.4
billion at December 31, 2003, and $6.9 billion at March 31, 2003. The major
reasons for the increase in shareholders' equity from a year ago are the
issuance of common stock to finance the Pershing acquisition, the retention of
earnings, and an increase in the securities valuation allowance.
Return on average common equity for the first quarter of 2004 was 17.17%,
compared with 14.81% in the fourth quarter of 2003, and 17.80% in the first
quarter of 2003.
Return on average assets for the first quarter of 2004 was 1.47%,
compared with 1.26% in the fourth quarter of 2003, and 1.49% in the first
quarter of 2003.
21
Investment Securities
- ---------------------
The table below shows the distribution of the Company's securities portfolio:
Investment Securities (at Fair Value)
(In millions) 03/31/04 12/31/03
-------- --------
Fixed Income:
Mortgage-Backed Securities $19,942 $18,703
Asset-Backed Securities 20 20
Corporate Debt 1,294 1,326
Short-Term Money Market Instruments 855 917
U.S. Treasury Securities 440 505
U.S. Government Agencies 305 241
State and Political Subdivisions 241 251
Emerging Market Debt 111 109
Other Foreign Debt 525 518
------- -------
Subtotal Fixed Income 23,733 22,590
Equity Securities:
Money Market Funds 248 200
Federal Reserve Bank Stock 96 96
Other 12 12
------- -------
Subtotal Equity Securities 356 308
------- -------
Total Securities $24,089 $22,898
======= =======
Total investment securities were $24.1 billion at March 31, 2004,
compared with $22.9 billion at December 31, 2003. Average investment
securities were $23.0 billion in the first quarter of 2004, compared with
$18.0 billion in the first quarter of 2003. The increases were primarily due
to growth in the Company's portfolio of highly rated mortgage-backed
securities which are 94% rated AAA, 2% AA, and 4% A. Since December 31, 2002,
the Company has added approximately $6.8 billion of mortgage-backed securities
to its investment portfolio. The Company has been adding either adjustable or
short life classes of structured mortgage-backed securities, both of which
have short average lives. The Company has maintained an effective duration of
approximately 1.7 years on its mortgage portfolio to better match its
liabilities and reduce the adverse impact from a rise in interest rates.
Net unrealized gains for securities available-for-sale were $359 million
at March 31, 2004, compared with $201 million at December 31, 2003. As
interest rates rise, the Company expects the unrealized gains will decline,
which will lower shareholders' equity and adversely impact the Company's
tangible common equity ratio.
Loans
- -----
(In billions) Period End Average
--------------------------- ---------------------------
Total Non-Margin Margin Total Non-Margin Margin
----- ---------- ------ ----- ---------- ------
March 31, 2004 $36.1 $30.0 $6.1 $36.5 $30.3 $6.2
December 31, 2003 35.3 29.6 5.7 37.3 31.5 5.8
March 31, 2003 31.6 31.1 0.5 32.0 31.6 0.4
Total loans were $36.1 billion at March 31, 2004, compared with $35.3
billion at December 31, 2003. The increase in total loans primarily reflects
higher loans to the securities industry and higher margin loans. Non-margin
loans were $30.0 billion at March 31, 2004, compared with $29.6 billion at
December 31, 2003. The Company continues to focus on its strategy of reducing
22
non-strategic and outsized corporate loan exposures to improve its credit risk
profile. Average total loans were $36.5 billion in the first quarter of 2004,
compared with $32.0 billion in the first quarter of 2003 reflecting the
Pershing acquisition.
During the quarter, the Company achieved two previously announced goals
in its credit portfolio: to reduce corporate exposure below $24 billion and
telcom exposure below $750 million by year-end 2004. The following tables
provide additional details on the Company's loan exposures and outstandings at
March 31, 2004 in comparison to December 31, 2003.
Overall Loan Portfolio
Unfunded Total Unfunded Total
(In billions) Loans Commitments Exposure Loans Commitments Exposure
----------------------------- ------------------------------
3/31/04 3/31/04 3/31/04 12/31/03 12/31/03 12/31/03
-------- ------- ------- -------- -------- --------
Financial Institutions $10.1 $22.0 $32.1 $ 9.2 $21.8 $31.0
Corporate 3.7 20.0 23.7 4.0 20.5 24.5
----- ----- ----- ----- ----- -----
13.8 42.0 55.8 13.2 42.3 55.5
----- ----- ----- ----- ----- -----
Consumer & Middle Market 8.3 4.2 12.5 8.2 4.1 12.3
Leasing Financings 5.6 0.1 5.7 5.8 - 5.8
Commercial Real Estate 2.3 0.8 3.1 2.4 0.8 3.2
Margin Loans 6.1 - 6.1 5.7 - 5.7
----- ----- ----- ----- ----- -----
Total $36.1 $47.1 $83.2 $35.3 $47.2 $82.5
===== ===== ===== ===== ===== =====
Financial Institutions
- ----------------------
The financial institutions portfolio exposure was $32.1 billion March 31, 2004
compared to $31.0 billion at December 31, 2003. These exposures are of high
quality, with 88% meeting the investment grade criteria of the Company's
rating system. The exposures are generally short-term, with 67% expiring
within one year and are frequently secured. For example, mortgage banking,
securities industry, and investment managers often borrow against marketable
securities held in custody at the Company. The diversity of the portfolio is
shown in the accompanying table.
(Dollars in billions)
03/31/04 12/31/03
------------------------------ -----------------------------
Unfunded Total %Inv %due Unfunded Total
Lending Division Loans Commitments Exposures Grade <1 Yr Loans Commitments Exposures
- ---------------- ------ ----------- --------- ----- ------ ------ ----------- ---------
Banks $ 3.0 $ 3.6 $ 6.6 73% 83% $2.6 $ 3.1 $ 5.7
Securities
Industry 2.5 3.0 5.5 87 85 1.9 3.5 5.4
Insurance 0.3 5.0 5.3 97 52 0.3 5.0 5.3
Government 0.1 5.8 5.9 99 41 0.2 5.6 5.8
Asset Managers 3.7 3.4 7.1 85 73 3.6 3.5 7.1
Mortgage Banks 0.3 0.6 0.9 88 59 0.4 0.5 0.9
Endowments 0.2 0.6 0.8 98 56 0.2 0.6 0.8
----- ----- ----- --- ---- ---- ----- -----
Total $10.1 $22.0 $32.1 88% 67% $9.2 $21.8 $31.0
===== ===== ===== === ==== ==== ===== =====
23
Corporate
- ---------
The corporate portfolio exposure declined to $23.7 billion at March 31,
2004 from $24.5 billion at year-end 2003. The Company has reached its goal of
reducing corporate exposure below $24.0 billion. Approximately 75% of the
portfolio is investment grade while 22% of the portfolio matures within one
year.
(Dollars in billions)
03/31/04 12/31/03
----------------------------- -----------------------------
Unfunded Total %Inv %due Unfunded Total
Lending Division Loans Commitments Exposures Grade <1 Yr Loans Commitments Exposures
- ---------------- ------ ----------- --------- ----- ------ ------ ----------- ---------
Media $ 0.9 $ 2.2 $ 3.1 66% 13% $0.9 $ 2.3 $ 3.2
Cable 0.8 0.5 1.3 30 1 0.7 0.7 1.4
Telecom 0.2 0.5 0.7 56 17 0.3 0.6 0.9
----- ----- ----- -- -- ---- ----- -----
Subtotal 1.9 3.2 5.1 55% 11% 1.9 3.6 5.5
Energy 0.3 4.4 4.7 85 30 0.4 4.2 4.6
Retailing 0.1 2.2 2.3 79 32 0.1 2.3 2.4
Automotive 0.1 2.0 2.1 77 37 0.1 2.1 2.2
Healthcare 0.2 1.3 1.5 88 13 0.2 1.3 1.5
Other* 1.1 6.9 8.0 76 19 1.3 7.0 8.3
----- ----- ----- -- -- ---- ----- -----
Total $ 3.7 $20.0 $23.7 75% 22% $4.0 $20.5 $24.5
===== ===== ===== == == ==== ===== =====
* Diversified portfolio of industries and geographies
The Company had previously targeted the telecom exposure for reduction to
a total of $750 million by December 31, 2004. This goal was accomplished in
the first quarter as exposures were reduced to $730 million with the
percentage of investment grade borrowers rising from 52% at year-end 2003 to
56% at March 31, 2004. The improved quality of the portfolio is largely due to
reductions in lower rated credits.
The Company's exposure to the airline industry consists of a $579 million
leasing portfolio (including a $14 million real estate lease exposure) as well
as $23 million of direct lending. The airline leasing portfolio consists of
$265 million to major U.S. carriers, $225 million to foreign airlines and $89
million to U.S. regionals.
During the first quarter of 2004, the industry continued to face the
dilemma of strong competition from the regionals, a relatively high cost
structure, and weak demand. The industry's stagnant demand and considerable
excess capacity has negatively impacted valuation of the industry's aircraft
in the secondary market. Because of these factors, the Company continues to
maintain a sizable allowance for loan losses against these exposures and to
closely monitor the portfolio.
24
Nonperforming Assets
- --------------------
Change
3/31/04 vs.
(Dollars in millions) 3/31/04 12/31/03 12/31/03
-------- -------- ------------
Loans:
Commercial $231 $219 $ 12
Foreign 66 79 (13)
Other 46 51 (5)
---- ---- ----
Total Nonperforming Loans 343 349 (6)
Other Real Estate - - -
---- ---- ----
Total Nonperforming Assets $343 $349 $ (6)
==== ==== ====
Nonperforming Assets Ratio 1.2% 1.2%
Allowance for Loan
Losses/Nonperforming Loans 184.4 191.2
Allowance for Loan
Losses/Nonperforming Assets 184.4 191.2
Allowance for Credit
Losses/Nonperforming Loans 230.5 230.2
Allowance for Credit
Losses/Nonperforming Assets 230.5 230.2
Nonperforming assets declined by $6 million, or 2% during the first
quarter of 2004 to $343 million and are down 21% from a year ago. The
decrease primarily reflects paydowns, sales of assets and charge-offs of
commercial and foreign loans. The improved quality of the portfolio is
largely due to reductions in lower rated credits. A loan to a bankrupt
cable operator accounts for 33% of the total of nonperforming assets.
The ratio of the allowance for credit losses to nonperforming
assets increased to 230.5% at March 31, 2004, compared with 230.2% at
December 31, 2003 and 190.4% at March 31, 2003.
Activity in Nonperforming Assets
(In millions) Quarter Quarter
End End
March 31, December 31,
2004 2003
--------- -----------
Balance at Beginning of Period $ 349 $ 388
Additions 34 50
Charge-offs (19) (42)
Paydowns/Sales (21) (47)
Other - -
----- -----
Balance at End of Period $ 343 $ 349
===== =====
Interest income would have been increased by $4 million and $5 million
for the first quarters of 2004 and 2003 if loans on nonaccrual status at March
31, 2004 and 2003 had been performing for the entire period.
25
Impaired Loans
- --------------
The table below sets forth information about the Company's impaired loans. The
Company uses the discounted cash flow, collateral value, or market price
methods for valuing its impaired loans:
March 31 December 31 March 31
(Dollars in millions) 2004 2003 2003
---------- ----------- ----------
Impaired Loans with an Allowance $197 $287 $371
Impaired Loans without an Allowance(1) 124 41 40
---- ---- ----
Total Impaired Loans $321 $328 $411
==== ==== ====
Allowance for Impaired Loans(2) $ 88 $106 $183
Average Balance of Impaired Loans
during the Quarter $306 $373 $407
Interest Income Recognized on
Impaired Loans during the Quarter $0.9 $0.7 $1.0
(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 loan losses.
Allowance
- ---------
March 31 December 31 March 31
(Dollars in millions) 2004 2003 2003
-------- ----------- --------
Margin Loans $ 6,130 $ 5,712 $ 467
Non-Margin Loans 29,940 29,571 31,106
Total Loans 36,070 35,283 31,573
Allowance for Loan Losses 632 668 668
Allowance for Lending-Related
Commitments 158 136 162
Total Allowance for Credit Losses 790 804 830
Allowance for Credit Losses
As a Percent of Total Loans 2.19% 2.28% 2.63%
Allowance for Credit Losses As a
Percent of Non-Margin Loans 2.64 2.72 2.67
Allowance for Loan Losses
As a Percent of Total Loans 1.75 1.89 2.12
Allowance for Loan Losses
As a Percent of Non-Margin Loans 2.11 2.26 2.14
The Company adopts new accounting policies as they become accepted as
a best practice or required by generally accepted accounting principles.
Accordingly, at December 31, 2003, the Company split its allowance for credit
losses into an allowance for loan losses and an allowance for lending-related
commitments such as unfunded loan commitments, and standby letters of credit.
This resulted in a decrease in the allowance for loan losses of $136 million
and a corresponding increase in other liabilities (which includes the allowance
for lending-related commitments). Prior period balance sheets have been
restated. Credit expenses related to the allowance for loan losses and the
allowance for lending-related commitments are reported in the provision for
credit losses in the income statement. To aid in the comparison of the
Company's results with other companies that have not yet adopted this practice,
the Company provides various credit ratios based both on the allowance for
credit losses and the allowance for loan losses.
The allowance for credit losses to total loans was $790 million, or
2.19% of total loans at March 31, 2004, compared with $804 million, or
2.28% of total loans at December 31, 2003, and $830 million, or 2.63% of
total loans at March 31, 2003.
26
The acquisition of Pershing added $6.1 billion of secured margin loans to
the Company's balance sheet at March 31, 2004. The Company has rarely
suffered a loss on these types of loans and doesn't allocate any of its
allowance for credit losses to these loans. As a result, the Company believes
the ratio of allowance for credit losses to non-margin loans is a more
appropriate metric to measure the adequacy of the reserve.
The ratio of the allowance for credit losses to non-margin loans
decreased to 2.64% at March 31, 2004, compared with 2.72% at December 31, 2003
and 2.67% at March 31, 2003, reflecting continued improvement in the credit
quality in the first quarter of 2004. The Company expects credit costs to
remain at lower levels through the remainder of the year as both external and
internal credit metrics continue to improve.
Nonperforming assets declined another 2% this quarter, but have declined
by over 20% from a year ago, and the Company's criticized and classified loans
experienced a mid-teens decline from the fourth quarter of 2003 and are down
by over a third from a year ago.
The ratio of the allowance to nonperforming assets was 184.4% at March
31, 2004, down from 191.2% at December 31, 2003, and 190.4% at March 31, 2003.
Included in the Company's allowance for credit losses at March 31, 2004 is an
allocated transfer risk reserve related to Argentina of $20 million.
The allowance for loan losses and the allowance for lending-related
commitments consist of four elements: (1) an allowance for impaired credits,
(2) an allowance for higher risk rated loans and exposures, (3) an allowance
for pass rated loans and exposures, and (4) an unallocated allowance based on
general economic conditions and certain risk factors in the Company's
individual portfolio and markets.
The first element (impaired credits) is based on individual analyses 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 in accordance with FASB 114. Fair value is either the
present value of the expected future cash flows from borrowers, the market
value of the loan, or the fair value of the collateral securing the
obligation.
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 risk rates each credit in its portfolio that exceeds $1 million and
assigns the credits to specific pools. A potential loss factor is assigned to
each pool, and an amount is included in the allowance equal to the multiple of
the amount of the loan in the pool times a risk factor. Reviews of higher
risk rated loans and exposures are conducted at least quarterly and each
loan's rating is reaffirmed or updated, as necessary. The Company maintains
and updates loss migration analysis by comparing actual loss experiences to
the loss factors assigned to each exposure pool. Past due consumer
obligations are included in specific risk categories based on the length of
time the loan is past due.
The third element (pass rated credits) is based on the Company's expected
loss model. Borrowers are assigned to pools based on their credit rating, the
maturity of the loan, the estimated exposure at default, and the loss given a
default. The credit rating is derived from the borrower's probability of
default. The loss given default incorporates an analysis of structure and
collateral. These ratings are frequently reviewed by the relationship
managers and their respective division portfolio managers and more formally on
a semi-annual basis. The ratings are mapped to independent parties, including
the rating agencies in order to ensure consistency and validity. At the time
of approval, loans are individually analyzed and assigned a risk rating and
loss given default rating. Performing consumer loans are included in the pass
rated consumer pools. The Company uses an exposure at default estimate as a
way of quantifying the amount the Company will lose in case of default. This
estimate varies depending on the level of commitment, the type of exposure,
and the credit rating of the borrower.
27
The fourth element (the 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
- Geopolitical issues and their impact on the economy
Based on an evaluation of these four elements, including individual
credits, historical credit losses, and global economic factors, the Company
has allocated its allowance for credit losses as follows:
March 31 December 31
2004 2003
------------ -----------
Domestic
Real Estate 2% 2%
Commercial 75 74
Consumer 1 1
Foreign 8 9
Unallocated 14 14
--- ---
100% 100%
=== ===
Such an allocation is inherently judgmental, and the entire allowance for
credit losses is available to absorb credit losses regardless of the nature of
the loss.
Deposits
- --------
Total deposits were $56.1 billion at March 31, 2004, compared with $56.4
billion at December 31, 2003 and $56.9 billion at March 31, 2003. Noninterest-
bearing deposits were $14.4 billion at March 31, 2004, compared with $14.8
billion at December 31, 2003. Interest-bearing deposits were $41.7 billion at
March 31, 2004, compared with $41.6 billion at December 31, 2003.
28
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 2003 Annual Report on Form 10-K.
Three of the Company's more critical accounting policies are those related to
the allowance for credit losses, to the valuation of derivatives and
securities where quoted market prices are not available, and goodwill and
other intangibles.
Allowance for Credit Losses
- ---------------------------
The allowance for credit losses represents management's estimate of
probable losses inherent in the Company's loan portfolio. This evaluation
process is subject to numerous estimates and judgments. Probabilities of
default/borrower ratings are assigned after analyzing the credit quality of
each borrower/counterparty and the Company's internal ratings are consistent
with external rating agency default databases. Loss given default ratings are
driven by the collateral, structure, and seniority of each individual asset
and are consistent with external loss given default/recovery databases. The
Company uses an exposure at default estimate as a way of quantifying the
amount the Company could lose in case of default. This estimate varies
depending on the level of commitment, the type of exposure, and the credit
rating of the borrower. The portion of the allowance related to impaired
credits is based on the present value of future cash flows, market prices, or
collateral values. Changes in the estimates of probability of default, risk
ratings, loss given default/recovery rates, and cash flows could have a direct
impact on the allocated allowance for loan losses.
The Company's unallocated allowance is established via a process that
begins with estimates of probable loss inherent in the portfolio, based upon
the following factors:
- Economic conditions, including duration of the current cycle
- Past experience, including recent loss experience
- Credit quality trends
- Collateral values
- Volume, composition, and growth of the loan portfolio
- Specific credits and industry conditions
- Results of bank regulatory and internal credit exams
- Actions by the Federal Reserve Board
- Delay in receipt of information to evaluate loans or confirm existing
credit deterioration
- Geopolitical issues and their impact on the economy
To the extent actual results differ from forecasts or management's
judgment the allowance for credit losses may be greater or less than future
charge-offs.
The Company considers it difficult to quantify the impact of changes in
forecast on its allowance for credit losses. Nevertheless, the Company
believes the following discussion may enable investors to better understand
the variables that drive the allowance for credit losses.
One key variable in determining the allowance is management's judgment
around the size of the unallocated portion of the allowance. At March 31,
2004, the unallocated allowance was 14% of the total allowance. If the
unallocated allowance were five percent higher or lower, the allowance would
have increased or decreased by $40 million, respectively.
The credit rating assigned to each pass credit is another significant
variable in determining the allowance. If each pass credit were rated one
grade better, the allowance would have decreased by $67 million, while if each
pass credit were rated one grade worse, the allowance would have increased by
$96 million.
29
For higher risk rated credits, if the loss given default were 10% worse,
the allowance would have increased by $19 million, while if the loss given
default were 10% better, the allowance would have decreased by $25 million.
For impaired credits, if the fair value of the loans were 10% higher or
lower, the allowance would have increased or decreased by $23 million,
respectively.
Valuation of Derivatives and Securities Where Quoted Market Prices Are Not
- --------------------------------------------------------------------------
Available
----------
When quoted market prices are not available for derivatives and securities
values, such values are determined at fair value, which is defined as the
value at which positions could be closed out or sold in a transaction with a
willing counterparty over a period of time consistent with the Company's
trading or investment strategy. Fair value for these instruments is determined
based on discounted cash flow analysis, comparison to similar instruments, and
the use of financial models. Financial models use as their basis independently
sourced market parameters including, for example, interest rate yield curves,
option volatilities, and currency rates. Discounted cash flow analysis is
dependent upon estimated future cash flows and the level of interest rates.
Model-based pricing uses inputs of observable prices for interest rates,
foreign exchange rates, option volatilities and other factors. Models are
benchmarked and validated by external parties. The Company's valuation process
takes into consideration factors such as counterparty credit quality,
liquidity and concentration concerns. The Company applies judgment in the
application of these factors. In addition, the Company must apply judgment
when no external parameters exist. Finally, other factors can affect the
Company's estimate of fair value including market dislocations, incorrect
model assumptions, and unexpected correlations.
These valuation methods could expose the Company to materially different
results should the models used or underlying assumptions be inaccurate. See
"Use of Estimates" in the footnote 1 "Summary of Significant Accounting and
Reporting Policies" in the Company's 2003 Annual Report on Form 10-K.
To assist in assessing the impact of a change in valuation, at March 31,
2004, approximately $3.1 billion of the Company's portfolio of securities and
derivatives is not priced based on quoted market prices. A change of 2.5% in
the valuation of these securities and derivatives would result in a change in
pre-tax income of $76 million.
Goodwill and Other Intangibles
- ------------------------------
The Company records all assets and liabilities acquired in purchase
acquisitions, including goodwill, indefinite-lived intangibles, and other
intangibles, at fair value as required by SFAS 141. Goodwill ($3,355 million
at March 31, 2004) and indefinite-lived intangible assets ($370 million at
March 31, 2004) are not amortized but are subject to annual tests for
impairment or more often if events or circumstances indicate they may be
impaired. Other intangible assets are amortized over their estimated useful
lives and are subject to impairment if events or circumstances indicate a
possible inability to realize the carrying amount. The initial recording of
goodwill and other intangibles requires subjective judgments concerning
estimates of the acquired assets fair value. The goodwill impairment test is
performed in two phases. The first step of the goodwill impairment test
compares the fair value of the reporting unit with its carrying amount,
including goodwill. If the fair value of the reporting unit exceeds its
carrying amount, goodwill of the reporting unit is considered not impaired;
however, if the carrying amount of the reporting unit exceeds its fair value,
an additional procedure must be performed. That additional procedure compares
the implied fair value of the reporting unit's goodwill with the carrying
amount of that goodwill. An impairment loss is recorded to the extent that the
carrying amount of goodwill exceeds its implied fair value. Indefinite-lived
intangible assets are evaluated for impairment at least annually by comparing
its fair value to its carrying value.
30
Other identifiable intangible assets ($417 million at March 31, 2004) are
evaluated for impairment if events and circumstances indicate a possible
impairment. Such evaluation of other intangible assets is based on
undiscounted cash flow projections. Fair value may be determined using: market
prices, comparison to similar assets, market multiples, discounted cash flow
analysis and other determinates. Estimated cash flows may extend far into the
future and, by their nature, are difficult to determine over an extended
timeframe. Factors that may significantly affect the estimates include, among
others, competitive forces, customer behaviors and attrition, changes in
revenue growth trends, cost structures and technology, and changes in discount
rates and specific industry or market sector conditions. Other key judgments
in accounting for intangibles include useful life and classification between
goodwill and indefinite lived intangibles or other intangibles which require
amortization. See Note 4 of the Notes to Consolidated Financial Statements
for additional information regarding intangible assets.
The following discussion may assist investors in assessing the impact of
a goodwill or intangible asset impairment charge. The Company has $4.1
billion of goodwill and intangible assets at March 31, 2004. The impact of a
5% impairment charge would result in a change of pre-tax income of
approximately $205 million.
LIQUIDITY
The Company maintains its liquidity through the management of its assets
and liabilities, utilizing worldwide financial markets. The diversification of
liabilities reflects the Company's efforts to maintain flexibility of funding
sources under changing market conditions. Stable core deposits, including
demand, retail time, and trust deposits from processing businesses, are
generated through the Company's diversified network and managed with the use
of trend studies and deposit pricing. The use of derivative products such as
interest rate swaps and financial futures enhances liquidity by enabling the
Company to issue long-term liabilities with limited exposure to interest rate
risk. Liquidity also results from the maintenance of a portfolio of assets
which can be easily sold and the monitoring of unfunded loan commitments,
thereby reducing unanticipated funding requirements. Liquidity is managed on
both a consolidated basis and also at The Bank of New York Company, Inc.
parent company ("Parent").
On a consolidated basis, non-core sources of funds such as money market
rate accounts, certificates of deposits greater than $100,000, federal funds
purchased and other borrowings were $14.6 billion and $14.4 billion on an
average basis for the first three months of 2004 and 2003. Average foreign
deposits, primarily from the Company's European based securities servicing
business, were $25.8 billion and $23.9 billion at March 31, 2004 and 2003.
Savings and other time deposits were $10.2 billion on an average basis at
March 31, 2004 compared to $9.8 billion at March 31, 2003. Average payables to
customers and broker-dealers rose to $7.0 billion from $0.1 billion and long-
term debt increased to $6.2 billion from $5.4 billion reflecting the Pershing
acquisition.
The Parent has five major sources of liquidity: dividends from its
subsidiaries, a line of credit with the Bank, the commercial paper market, a
revolving credit agreement with third party financial institutions, and access
to the capital markets.
At March 31, 2004, the Bank could pay dividends of approximately $761
million to the Parent without the need for regulatory wavier. This dividend
capacity would increase in the remainder of 2004 to the extent of the Bank's
net income less dividends. Nonbank subsidiaries of the Parent have liquid
assets of approximately $264 million. These assets could be liquidated and the
proceeds delivered by dividend or loan to the Parent.
The Parent has a $300 million line of credit with the Bank, which is
subject to limits imposed by federal banking law. At March 31, 2004, the
Parent could use the subsidiaries' liquid securities as collateral to allow it
to borrow $47 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 March 31,
2004.
31
For the quarter ended March 31, 2004, the Parent's quarterly average
commercial paper borrowings were $77 million compared with $161 million in
2003. At March 31, 2004, the Parent had cash of $585 million compared with
cash of $434 million at December 31, 2003 and $518 million at March 31, 2003.
Net of commercial paper outstanding, the Parent's cash position at March 31,
2004 was up $151 million compared with March 31, 2003.
The Parent has a back-up line of credit of $275 million with 15 financial
institutions. This line of credit matures in October 2006. There were no
borrowings under the line of credit at March 31, 2004 and March 31, 2003.
The Parent also has the ability to access the capital markets. At March
31, 2004, the Parent had a shelf registration statement with a capacity of
$591 million of debt, preferred stock, preferred trust securities, or common
stock. Access to the capital markets is partially dependent on the Company's
credit ratings, which as of March 31, 2004 were as follows:
The Bank of
Parent Parent Parent Senior New York
Commercial Subordinated Long-Term Long-Term
Paper Long-Term Debt Debt Deposits Outlook
---------- -------------- ------------- ------------ -------
Standard &
Poor's A-1 A A+ AA- Stable
Moody's P-1 A1 Aa3 Aa2 Stable
Fitch F1+ A+ AA- AA Stable
The Parent's major uses of funds are payment of principal and interest on
its borrowings, acquisitions, and additional investment in its subsidiaries.
The Parent has $300 million of long-term debt that becomes due in 2004
subsequent to March 31, 2004 and $100 million of long-term debt that is due in
2005. In addition, at March 31, 2004, the Parent has the option to call $175
million of subordinated debt in 2004 and $93 million in 2005, which it will
call and refinance if market conditions are favorable. As of April 30, 2004,
the Company redeemed $20 million of debt. The Parent expects to refinance any
debt it repays by issuing a combination of senior and subordinated debt.
Double leverage is the ratio of investment in subsidiaries divided by the
Company's consolidated equity plus trust preferred securities. The Company's
double leverage ratio at March 31, 2004 and 2003 was 99.28% and 100.82%. The
Company's target double leverage ratio is a maximum of 120%. The double
leverage ratio is monitored by regulators and rating agencies and is an
important constraint on the Company's ability to invest in its subsidiaries to
expand its businesses.
The following comments relate to the information disclosed in the
Consolidated Statements of Cash Flows.
Earnings and other operating activities provided $2.1 billion in cash
flows through March 31, 2004, compared with $0.8 billion used by operating
activities through March 31, 2003. The sources of cash flows from operations
in 2004 were principally the result of changes in trading activities and net
income.
In the first quarter of 2004, cash used by investing activities was $2.5
billion as compared to cash used by investing activities in the first quarter
of 2003 of $1.7 billion. In the first quarter of 2004 and 2003, purchases of
securities available-for-sale were a significant use of funds.
In the first quarter of 2004, cash used by financing activities was $0.9
billion as compared to cash provided by financing activities in the first
quarter of 2003 of $2.2 billion. Sources of funds in 2004 include other
borrowed funds, the issuance of long-term debt and common stock. In first
quarter of 2004, deposits and payables to customers and broker-dealers were a
net use of funds, while these items were a source of funds the Company used to
finance its investing activities in the first quarter of 2003.
32
CAPITAL RESOURCES
Regulators establish certain levels of capital for bank holding companies
and banks, including the Company and 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 March 31, 2004 and 2003, 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), which are shown as follows:
March 31, 2004 March 31, 2003
--------------------- --------------------- Well Adequately
Company Capitalized Capitalized
Company Bank Company Bank Targets Guidelines Guidelines
------- ---- ------- ------ ------- ----------- -----------
Tier 1* 7.52% 7.35% 7.92% 7.92% 7.75% 6% 4%
Total Capital** 11.57 11.51 12.72 12.34 11.75 10 8
Leverage 5.83 5.66 6.68 6.63 6.50 5 3-5
Tangible Common
Equity 5.22 5.77 5.52 6.26 5.25-6.00 N.A. N.A.
* Tier 1 capital consists, generally, of common equity, preferred trust securities, and
certain qualifying preferred stock, less goodwill and most other intangibles.
**Total Capital consists of Tier 1 capital plus Tier 2 capital. Tier 2 capital consists,
generally, of certain qualifying preferred stock and subordinated debt and a portion of the
loan loss allowance.
The Company's estimated regulatory Tier 1 capital and Total capital
ratios were 7.52% and 11.57% at March 31, 2004, compared with 7.44% and
11.49% at December 31, 2003, and 7.92% and 12.72% at March 31, 2003. The
regulatory leverage ratio was 5.83% at March 31, 2004, compared with 5.82% at
December 31, 2003, and 6.68% at March 31, 2003. The Company's tangible common
equity as a percentage of total assets was 5.22% at March 31, 2004, up from
4.91% at December 31, 2003, and close to the Company's target of 5.25%. This
ratio varies depending on the size of the balance sheet at quarter-end and
the impact of interest rates on unrealized gains and losses among other
things. The Company expects to repurchase 3 million shares of common stock
later this year. The improvement in the Company's capital ratios versus
December 31, 2003 reflects the retention of earnings during the quarter as
well as an increase in the securities valuation allowance. The decline
from March 31, 2003 primarily reflects the Pershing acquisition.
The Federal Reserve has indicated that it is reviewing the continued
treatment of preferred trust securities as Tier 1 Capital. See "Accounting
Changes and New Accounting Pronouncements" in the Footnotes to the
Consolidated Financial Statements.
33
The following table presents the components of the Company's risk-based
capital at March 31, 2004 and 2003:
(in millions) 2004 2003
---- ----
Common Stock $8,760 $6,874
Preferred Stock - -
Preferred Trust Securities 1,150 1,100
Adjustments:
Intangibles (4,136) (2,612)
Securities Valuation Allowance (212) (179)
Merchant Banking Investments (6) (3)
------ ------
Tier 1 Capital 5,556 5,180
------ ------
Qualifying Unrealized Equity Security Gains - -
Qualifying Subordinated Debt 2,227 2,330
Qualifying Allowance for Loan Losses 770 804
------ ------
Tier 2 Capital 2,997 3,134
------ ------
Total Risk-based Capital $8,553 $8,314
====== ======
Risk-Adjusted Assets $73,904 $65,378
======= =======
34
TRADING ACTIVITIES
The fair value and notional amounts of the Company's financial
instruments held for trading purposes at March 31, 2004 and March 31, 2003 are
as follows:
1st Quarter 2004
March 31, 2004 Average
---------------------------- -------------------
(In millions) Fair Value Fair Value
------------------ -------------------
Notional
Trading Account Amount Assets Liabilities Assets Liabilities
- --------------- -------- ------ ----------- ------ -----------
Interest Rate Contracts:
Futures and Forward
Contracts $ 63,241 $ 93 $ - $ 101 $ -
Swaps 194,504 1,286 80 1,451 171
Written Options 149,946 - 1,442 - 1,400
Purchased Options 94,357 215 - 214 -
Foreign Exchange Contracts:
Swaps 3,080 - - - -
Written Options 10,623 - 84 - 69
Purchased Options 12,767 86 - 79 -
Commitments to Purchase
and Sell Foreign Exchange 71,165 862 934 916 978
Debt Securities - 1,598 42 2,168 39
Credit Derivatives 1,325 3 4 3 8
Equity Derivatives 401 166 127 90 73
------ ------ ------ ------
Total Trading Account $4,309 $2,713 $5,022 $2,738
====== ====== ====== ======
1st Quarter 2003
March 31, 2003 Average
---------------------------- -------------------
(In millions) Fair Value Fair Value
------------------ -------------------
Notional
Trading Account Amount Assets Liabilities Assets Liabilities
- --------------- -------- ------ ----------- ------ -----------
Interest Rate Contracts:
Futures and Forward
Contracts $ 53,723 $ 63 $ - $ 87 $ -
Swaps 153,355 1,883 576 1,627 441
Written Options 118,467 - 1,495 - 1,387
Purchased Options 54,614 254 - 225 -
Foreign Exchange Contracts:
Swaps 2,455 - - - -
Written Options 13,205 - 64 - 71
Purchased Options 16,845 72 - 58 -
Commitments to Purchase
and Sell Foreign Exchange 51,863 283 324 425 399
Debt Securities - 5,190 1 5,712 2
Credit Derivatives 1,808 6 2 6 2
Equity Derivatives - 16 - 23 7
------ ------ ------ ------
Total Trading Account $7,767 $2,462 $8,163 $2,309
====== ====== ====== ======
The Company's trading activities are focused on acting as a market maker
for the Company's customers. The risk from these market making activities and
from the Company's own positions is managed by the Company's traders and
limited in total exposure as described below.
The Company manages trading risk through a system of position limits, a
value at risk (VAR) methodology, based on a Monte Carlo simulation, stop loss
advisory triggers, and other market sensitivity measures. Risk is monitored
and reported to senior management by an independent unit on a daily basis. The
VAR methodology captures, based on certain assumptions, the potential
35
overnight pre-tax dollar loss from adverse changes in fair values of all
trading positions. The calculation assumes a one day holding period for most
instruments, utilizes a 99% confidence level, and incorporates the non-linear
characteristics of options. The VAR model is used to calculate economic
capital, which is allocated to the business units for computing risk-adjusted
performance. As the VAR methodology does not evaluate risk attributable to
extraordinary financial, economic or other occurrences, the risk assessment
process includes a number of stress scenarios based upon the risk factors in
the portfolio and management's assessment of market conditions. Additional
stress scenarios based upon historic market events are also tested.
The following table indicates the calculated VAR amounts for the trading
portfolio for the periods indicated.
(In millions) 1st Quarter 2004
-----------------------------------------
Average Minimum Maximum 3/31/04
-------- -------- -------- --------
Interest Rate $4.4 $2.2 $ 6.2 $4.9
Foreign Exchange 1.0 0.5 1.5 1.2
Equity 1.2 0.6 1.9 1.9
Credit Derivatives 2.0 1.9 2.1 2.1
Diversification (0.7) NM NM (1.0)
Overall Portfolio 7.9 4.9 10.5 9.1
(In millions) 1st Quarter 2003
-----------------------------------------
Average Minimum Maximum 3/31/03
-------- -------- -------- --------
Interest Rate $4.8 $2.3 $11.4 $7.8
Foreign Exchange 0.8 0.5 1.3 0.8
Equity 0.1 - 0.4 -
Credit Derivatives - - - -
Diversification (1.2) NM NM (1.0)
Overall Portfolio 4.5 2.0 11.4 7.6
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.
During the first quarter of 2004, interest rate risk generated
approximately 51% of average VAR, credit derivatives generated 23% of average
VAR, foreign exchange accounted for 12% of average VAR, and equity generated
14% of average VAR. During the first quarter of 2004, the Company's daily
trading loss did not exceed the Company's calculated VAR amounts on any given
day.
ASSET/LIABILITY MANAGEMENT
The Company's asset/liability management activities include lending, investing
in securities, accepting deposits, raising money as needed to fund assets, and
processing securities and other transactions. The market risks that arise from
these activities are interest rate risk, and to a lesser degree, foreign
exchange risk. The Company's primary market risk is exposure to movements in
US dollar interest rates. Exposure to movements in foreign currency interest
rates also exists, but to a significantly lower degree. The Company actively
manages interest rate sensitivity. In addition to gap analysis, the Company
uses earnings simulation and discounted cash flow models to identify interest
rate exposures.
An earnings simulation model is the primary tool used to assess changes
in pre-tax net interest income. The model incorporates management's
assumptions regarding interest rates, balance changes on core deposits, and
changes in the prepayment behavior of loans and securities. These assumptions
have been developed through a combination of historical analysis and future
expected pricing behavior. Derivative financial instruments used for interest
rate risk management purposes are also included in this model.
36
The Company evaluates the effect on earnings by running various interest
rate ramp scenarios up and down from a baseline scenario, which assumes no
changes in interest rates. These scenarios are reviewed to examine the impact
of large interest rate movements. Interest rate sensitivity is quantified by
calculating the change in pre-tax net interest income between the scenarios
over a 12 month measurement period. The measurement of interest rate
sensitivity is the percentage change in net interest income as shown in the
following table:
(Dollars in millions) March 31, 2004
$ %
---- ----
+200 bp Ramp vs. Stable Rate $ (4) (0.22)%
+100 bp Ramp vs. Stable Rate 7 0.39
-25 bp Shock vs. Stable Rate - -
These scenarios do not include the strategies that management could
employ to limit the impact as interest rate expectations change. The Company's
interest rate positioning continues to be relatively neutral to changes in
interest rates in either direction.
The above table relies on certain critical assumptions including
depositors' behavior related to interest rate fluctuations and the prepayment
and extension risk in certain of the Company's assets. For example, based on
the level of interest rates at March 31, 2004, the Company does not believe it
would be able to reduce rates on all its deposit products if there are further
declines in interest rates. In addition, if interest rates decline, the
Company's portfolio of mortgage-related assets would have reduced returns if
the borrowers pay off their mortgages earlier than anticipated. To the extent
that actual behavior is different from that assumed in the models, there could
be a change in interest rate sensitivity.
37
STATISTICAL INFORMATION
THE BANK OF NEW YORK COMPANY, INC.
Average Balances and Rates on a Taxable Equivalent Basis
(Dollars in millions)
For the three months For the three months
ended March 31, 2004 ended March 31, 2003
------------------------------ ------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
ASSETS
- ------
Interest-Bearing
Deposits in Banks
(primarily foreign) $11,692 $ 68 2.35% $ 4,987 $ 30 2.40%
Federal Funds Sold and Securities
Purchased Under Resale Agreements 7,115 16 0.93 5,003 15 1.24
Margin Loans 6,179 34 2.18 432 3 2.51
Loans
Domestic Offices 21,074 55 1.05 18,652 214 4.68
Foreign Offices 9,201 63 2.74 12,888 97 3.04
------- ----- ------- -----
Non-Margin Loans 30,275 118 1.56 31,540 311 4.01
------- ----- ------- -----
Securities
U.S. Government Obligations 440 3 2.31 325 3 3.70
U.S. Government Agency Obligations 4,300 35 3.23 3,253 34 4.19
Obligations of States and
Political Subdivisions 247 3 5.56 381 7 6.85
Other Securities 18,010 155 3.44 14,018 138 3.95
Trading Securities 2,753 15 2.15 5,712 44 3.13
------- ----- ------- -----
Total Securities 25,750 211 3.27 23,689 226 3.83
------- ----- ------- -----
Total Interest-Earning Assets 81,011 447 2.22% 65,651 585 3.62%
----- -----
Allowance for Credit Losses (679) (655)
Cash and Due from Banks 2,971 2,811
Other Assets 16,375 12,844
------- -------
TOTAL ASSETS $99,678 $80,651
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Interest-Bearing Deposits
Money Market Rate Accounts $ 6,607 $ 11 0.68% $ 7,678 $ 19 0.99%
Savings 9,149 15 0.67 8,490 18 0.92
Certificates of Deposit
$100,000 & Over 3,987 12 1.24 4,726 20 1.75
Other Time Deposits 1,016 4 1.46 1,272 6 1.82
Foreign Offices 25,834 76 1.18 23,867 83 1.39
------- ----- ------- -----
Total Interest-Bearing Deposits 46,593 118 1.02 46,033 146 1.29
Federal Funds Purchased and
Securities Sold Under Repurchase
Agreements 1,612 3 0.66 1,291 3 0.96
Other Borrowed Funds 2,398 9 1.49 660 2 1.44
Payables to Customers and Broker-Dealers 6,973 13 0.73 128 - 0.84
Long-Term Debt 6,209 30 1.95 5,441 39 2.85
------- ----- ------- -----
Total Interest-Bearing Liabilities 63,785 173 1.09% 53,553 190 1.44%
----- -----
Noninterest-Bearing Deposits 14,016 11,353
Other Liabilities 13,355 9,021
Common Shareholders' Equity 8,522 6,724
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $99,678 $80,651
======= =======
Net Interest Earnings
and Interest Rate Spread $ 274 1.13% $ 395 2.18%
===== ==== ===== ====
Net Yield on Interest-Earning Assets 1.36% 2.44%
==== ====
Excluding SFAS 13 Leveraged Lease adjustment, the rates on Domestic Office Loans and Non-Margin Loans would have
been 3.82% and 3.49%, respectively. The Net Interest Rate Spread and Net Yield on Interest-Earning Assets would
have been 1.85% and 2.08%, respectively.
38
FORWARD LOOKING STATEMENTS AND FACTORS THAT COULD AFFECT FUTURE RESULTS
The information presented with respect to, among other things, earnings
and revenue outlook, projected business growth, the outcome of legal,
regulatory and investigatory proceedings, the Company's plans, objectives and
strategies for reallocating assets and moving further into fee-based
businesses, and future nonperforming loans and 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," "target," "expect," "intend," "think,"
"continue," "seek," "believe," "plan," "goal," "could," "should," "may,"
"will," "strategy," and words of similar meaning are intended to identify
forward looking statements in addition to statements specifically identified
as forward looking statements.
Forward looking statements, including the Company's discussions and
projections of future results of operations and discussions of future plans
contained in Management's Discussion and Analysis and elsewhere in this Form
10-Q, are based on management's current expectations and assumptions and are
subject to risks and uncertainties, some of which are discussed herein, that
could cause actual results to differ materially from projected results.
Forward looking statements could be affected by a number of factors, some of
which by their nature are dynamic and subject to rapid and possibly abrupt
changes which the Company is necessarily unable to predict with accuracy,
including:
General business and economic conditions-Disruptions in general economic
activity in the United States or abroad, to the Company's operational
functions or to financial market settlement functions. The economic and other
effects of the continuing threat of terrorist activity following the WTC
disaster and subsequent U.S. military actions. Changes in customer credit
quality, future changes in interest rates, inflation, general credit quality,
the levels of economic, capital market, and merger and acquisition activity,
consumer behavior, government monetary policy, competition, credit, market and
operating risk, and loan demand. The pace of recovery of the domestic economy,
technological change in our industry, market demand for the Company's products
and services, the savings rate of individuals and future global political,
economic, business and market conditions. Variations in management
projections, methodologies used by management to set adequate reserve levels
for contingent liabilities, evaluate risk or market forecasts and the actions
that management could take in response to these changes.
Acquisitions-Lower than expected performance or higher than expected costs in
connection with acquisitions and integration of acquired businesses, changes
in relationships with customers, entering new and unfamiliar markets,
incurring undiscovered liabilities, incorrectly valuing acquisition
candidates, the ability to satisfy customer requirements, retain customers and
realize the growth opportunities of acquired businesses and management's
ability to achieve efficiency goals.
Competition-Increased competition from other domestic and international banks
and financial service companies such as trading firms, broker dealers and
asset managers as well as from unregulated financial services organizations.
Rapid technological changes require significant and ongoing investments in
technology to develop competitive new products and services or adopt new
technologies.
Dependence on fee based business-Revenues reflect changes in the volume of
financial transactions in the United States and abroad, the level of capital
market activity affects processing revenues, changes in asset values affect
fees which are based on the value of assets under custody and management, the
39
level of cross-border investing, investor sentiment, the level of debt
issuance and currency exchange rate volatility all impact our revenues.
Reputational and legal risk-Adverse publicity and damage to our reputation
arising from the failure or perceived failure to comply with legal and
regulatory requirements, financial reporting irregularities involving other
large and well known companies and regulatory investigations of the mutual
fund industry could affect our ability to attract and retain customers,
maintain access to the capital markets or result in suits, enforcement
actions, fines and penalties.
Legislative and regulatory environment-Changes or potential changes in
domestic and international legislation and regulation as well as domestic or
international regulatory investigations impose compliance and response costs
and may allow additional competition, facilitate consolidation of competitors,
or attract new competitors into the Company's businesses.
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. For securities servicing and global payment services, international,
national, and regional commercial banks, trust banks, investment banks,
specialized processing companies, outsourcing companies, data processing
companies, stock exchanges, and other business firms offer active competition.
In the private client services and asset management markets, international,
national, and regional commercial banks, standalone asset management
companies, mutual funds, securities brokerage firms, insurance companies,
investment counseling firms, and other business firms and individuals actively
compete for business. 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.
WEBSITE INFORMATION
The Company makes available, on its website: www.bankofny.com its annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and all amendments to these reports as soon as reasonably practicable
after such material is electronically filed with or furnished to the SEC. In
addition, the Company's earnings releases and management conference calls and
presentations are available through the website.
40
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Balance Sheets
(Dollars in millions, except per share amounts)
(Unaudited)
March 31, December 31,
2004 2003
---- ----
Assets
- ------
Cash and Due from Banks $ 2,615 $ 3,843
Interest-Bearing Deposits in Banks 9,903 8,286
Securities
Held-to-Maturity (fair value of $1,388 in 2004
and $256 in 2003) 1,382 261
Available-for-Sale 22,701 22,642
------- -------
Total Securities 24,083 22,903
Trading Assets at Fair Value 4,309 5,406
Federal Funds Sold and Securities Purchased
Under Resale Agreements 3,775 4,829
Loans (less allowance for loan losses of $632 in 2004
and $668 in 2003) 35,438 34,615
Premises and Equipment 1,388 1,398
Due from Customers on Acceptances 263 170
Accrued Interest Receivable 309 214
Goodwill 3,355 3,276
Intangible Assets 787 816
Other Assets 6,427 6,641
------- -------
Total Assets $92,652 $92,397
======= =======
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits
Noninterest-Bearing (principally domestic offices) $14,390 $14,789
Interest-Bearing
Domestic Offices 19,696 19,282
Foreign Offices 21,996 22,335
------- -------
Total Deposits 56,082 56,406
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 869 1,039
Trading Liabilities 2,713 2,519
Payables to Customers and Broker-Dealers 9,934 10,192
Other Borrowed Funds 855 834
Acceptances Outstanding 265 172
Accrued Taxes and Other Expenses 4,116 4,256
Accrued Interest Payable 158 82
Other Liabilities (including allowance for
lending-related commitments of
$158 in 2004 and $136 in 2003) 2,624 2,348
Long-Term Debt 6,276 6,121
------- -------
Total Liabilities 83,892 83,969
------- -------
Shareholders' Equity
Class A Preferred Stock - par value $2.00 per share,
authorized 5,000,000 shares, outstanding 3,000 shares
in 2004 and in 2003 - -
Common Stock-par value $7.50 per share,
authorized 2,400,000,000 shares, issued
1,042,425,158 shares in 2004 and
1,039,968,482 shares in 2003 7,818 7,800
Additional Capital 1,668 1,647
Retained Earnings 5,548 5,330
Accumulated Other Comprehensive Income 158 72
------- -------
15,192 14,849
Less: Treasury Stock (264,891,643 shares in 2004
and 264,649,827 shares in 2003), at cost 6,431 6,420
Loan to ESOP (126,960 shares in 2004
and in 2003), at cost 1 1
------- -------
Total Shareholders' Equity 8,760 8,428
------- -------
Total Liabilities and Shareholders' Equity $92,652 $92,397
======= =======
- ----------------------------------------------------------------------------------------
Note: The balance sheet at December 31, 2003 has been derived from the audited financial
statements at that date.
41
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,
2004 2003
---- ----
Interest Income
- ---------------
Loans $ 118 $ 311
Margin loans 34 3
Securities
Taxable 181 160
Exempt from Federal Income Taxes 10 13
------ -----
191 173
Deposits in Banks 68 30
Federal Funds Sold and Securities Purchased
Under Resale Agreements 16 15
Trading Assets 14 44
------ -----
Total Interest Income 441 576
------ -----
Interest Expense
- ----------------
Deposits 118 146
Federal Funds Purchased and Securities Sold
Under Repurchase Agreements 3 3
Other Borrowed Funds 9 2
Customer Payables 13 -
Long-Term Debt 30 39
------ -----
Total Interest Expense 173 190
------ -----
Net Interest Income 268 386
- -------------------
Provision for Credit Losses 12 40
------ -----
Net Interest Income After Provision for Credit Losses 256 346
------ -----
Noninterest Income
- ------------------
Servicing Fees
Securities 716 474
Global Payment Services 79 78
------ -----
795 552
Private Client Services and Asset Management Fees 108 90
Service Charges and Fees 96 97
Foreign Exchange and Other Trading Activities 106 65
Securities Gains 33 7
Other 92 33
------ -----
Total Noninterest Income 1,230 844
------ -----
Noninterest Expense
- -------------------
Salaries and Employee Benefits 574 423
Net Occupancy 81 58
Furniture and Equipment 51 36
Clearing 48 29
Sub-custodian Expenses 22 16
Software 49 35
Communications 24 20
Amortization of Intangibles 8 3
Other 156 119
------ ------
Total Noninterest Expense 1,013 739
------ -----
Income Before Income Taxes 473 451
Income Taxes 109 156
------ -----
Net Income $ 364 $ 295
- ---------- ====== =====
Per Common Share Data:
- ----------------------
Basic Earnings $0.47 $0.41
Diluted Earnings 0.47 0.41
Cash Dividends Paid 0.19 0.19
Diluted Shares Outstanding 778 726
- -------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
42
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Statement of Changes in Shareholders' Equity
For the three months ended March 31, 2004
(In millions)
(Unaudited)
Common Stock
Balance, January 1 $ 7,800
Issuances in Connection with Employee Benefit Plans 18
-------
Balance, March 31 7,818
-------
Additional Capital
Balance, January 1 1,647
Issuances in Connection with Employee Benefit Plans 21
-------
Balance, March 31 1,668
-------
Retained Earnings
Balance, January 1 5,330
Net Income $ 364 364
Cash Dividends on Common Stock (146)
-------
Balance, March 31 5,548
-------
Accumulated Other Comprehensive Income
Balance, January 1 72
Change in Fair Value of Securities Available-for-Sale,
Net of Taxes of $68 Million 83 83
Reclassification Adjustment, Net of Taxes of ($1) Million (1) (1)
Foreign Currency Translation Adjustment,
Net of Taxes of $- Million - -
Net Unrealized Derivative Gains on Cash Flow Hedges,
Net of Taxes of $4 Million 6 6
Minimum Pension Liability Adjustment,
Net of Taxes of ($1) Million (2) (2)
------ ------
Balance, March 31 158
------
Total Comprehensive Income $ 450
======
Less Treasury Stock
Balance, January 1 6,420
Issued (10)
Acquired 21
-------
Balance, March 31 6,431
-------
Less Loan to ESOP
Balance, January 1 1
-------
Balance, March 31 1
-------
Total Shareholders' Equity, March 31, 2004 $ 8,760
=======
- ------------------------------------------------------------------------------------------
Comprehensive Income for the three months ended March 31, 2004 and 2003 was $450 million and
$283 million.
See accompanying Notes to Consolidated Financial Statements.
43
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
For the three months
ended March 31,
2004 2003
---- ----
Operating Activities
Net Income $ 364 $ 295
Adjustments to Determine Net Cash Attributable to
Operating Activities
Provision for Credit Losses and Losses on Other Real Estate 12 40
Depreciation and Amortization 119 89
Deferred Income Taxes (63) 106
Securities Gains (33) (7)
Change in Trading Activities 1,313 (871)
Change in Accruals and Other, Net 419 (489)
------ ------
Net Cash Provided (Used) by Operating Activities 2,131 (837)
------ ------
Investing Activities
Change in Interest-Bearing Deposits in Banks (1,568) 1,070
Change in Margin Loans (418) (115)
Purchases of Securities Held-to-Maturity (809) -
Paydowns of Securities Held-to-Maturity 24 295
Maturities of Securities Held-to-Maturity - 1
Purchases of Securities Available-for-Sale (3,879) (7,289)
Sales of Securities Available-for-Sale 1,341 965
Paydowns of Securities Available-for-Sale 1,688 1,837
Maturities of Securities Available-for-Sale 641 2,844
Net Principal Received (Disbursed) on Loans to Customers (578) (547)
Sales of Loans and Other Real Estate 1 233
Change in Federal Funds Sold and Securities
Purchased Under Resale Agreements 1,054 (1,380)
Purchases of Premises and Equipment (46) (31)
Acquisitions, Net of Cash Acquired (46) (53)
Proceeds from the Sale of Premises and Equipment 4 1
Other, Net 104 465
------ ------
Net Cash Provided (Used) by Investing Activities (2,487) (1,704)
------ ------
Financing Activities
Change in Deposits (399) 1,602
Change in Federal Funds Purchased and Securities
Sold Under Repurchase Agreements (170) (184)
Change in Payables to Customers and Broker-Dealers (446) 501
Change in Other Borrowed Funds 205 176
Proceeds from the Issuance of Long-Term Debt 63 420
Repayments of Long-Term Debt - (194)
Issuance of Common Stock 49 58
Treasury Stock Acquired (21) (14)
Cash Dividends Paid (146) (137)
------ ------
Net Cash Provided (Used) by Financing Activities (865) 2,228
------ ------
Effect of Exchange Rate Changes on Cash (7) 18
------ ------
Change in Cash and Due From Banks (1,228) (295)
Cash and Due from Banks at Beginning of Period 3,843 4,748
------ ------
Cash and Due from Banks at End of Period $2,615 $4,453
====== ======
- ----------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Cash Paid During the Period for:
Interest $ 97 $ 177
Income Taxes 72 212
Noncash Investing Activity
(Primarily Foreclosure of Real Estate) - -
- ----------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
44
THE BANK OF NEW YORK COMPANY, INC.
Notes to Consolidated Financial Statements
1. General
-------
The accounting and reporting policies of The Bank of New York Company,
Inc., a financial holding company, and its consolidated subsidiaries (the
"Company") conform with generally accepted accounting principles and general
practice within the banking industry. Such policies are consistent with those
applied in the preparation of the Company's annual financial statements.
The accompanying consolidated financial statements are unaudited. In the
opinion of management, all adjustments necessary for a fair presentation of
financial position, results of operations and cash flows for the interim
periods have been made.
2. Accounting Changes and New Accounting Pronouncements
----------------------------------------------------
The Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," in 1995. At that time, as permitted by the standard, the
Company elected to continue to apply the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
accounted for the options granted to employees using the intrinsic value
method, under which no expense is recognized for stock options because they
were granted at the stock price on the grant date and therefore have no
intrinsic value.
On January 1, 2003, the Company adopted the fair value method of
accounting for its options under SFAS 123 as amended by SFAS 148 "Accounting
for Stock-Based Compensation- Transition and Disclosure". SFAS 148 permits
three different methods of adopting fair value: (1) the prospective method,
(2) the modified prospective method, and (3) the retroactive restatement
method. Under the prospective method, options issued after January 1, 2003 are
expensed while all options granted prior to January 1, 2003 are accounted for
under APB 25 using the intrinsic value method. Consistent with industry
practice, the Company elected the prospective method of adopting fair value
accounting.
For the first quarter of 2004, approximately 7 million options were
granted. In the first three months of 2004, the Company recorded $7 million
of stock option expense.
The retroactive restatement method requires the Company's financial
statements to be restated as if fair value accounting had been adopted in
1995. The following table discloses the pro forma effects on the Company's
net income and earnings per share as if the retroactive restatement method had
been adopted.
(In millions, 1st Quarter
except per share amounts) 2004 2003
----- -----
Reported net income $364 $295
Stock based employee compensation costs,
using prospective method, net of tax 5 2
Stock based employee compensation costs,
using retroactive restatement method,
net of tax (17) (19)
---- ----
Pro forma net income $352 $278
==== ====
Reported diluted earnings per share $0.47 $0.41
Impact on diluted earnings per share (0.01) (0.02)
----- -----
Pro forma diluted earnings per share $0.46 $0.39
===== =====
45
The fair value of options granted in 2004 and 2003 were estimated at the
grant date using the following weighted average assumptions:
First Quarter
2004 2003
---- ----
Dividend yield 2.50% 3.00%
Expected volatility 25.00 33.00
Risk free interest rates 2.60 2.66
Expected options lives 5 5
On February 1, 2003, the Company adopted FASB Interpretation No. 46 (FIN
46), "Consolidation of Variable Interest Entities". This interpretation
requires a company that holds a variable interest in an entity to consolidate
the entity if the company's interest in the variable interest entities (VIE)
is such that the company will absorb a majority of the VIE's expected losses
and/or receives a majority of the entity's expected residual returns. FIN 46
also requires additional disclosures by primary beneficiaries and other
significant variable interest holders. The consolidation requirements of FIN
46 applied immediately to VIEs created after January 31, 2003. Various
amendments to FIN 46 delayed the effective date for certain previously
established entities until the first quarter of 2004. The adoption of FIN 46
did not have a significant impact on the Company's results of operations or
financial condition.
As of December 31, 2003, the Company had variable interests in 9
securitization trusts. These trusts are qualifying special-purpose entities,
which are exempt from the consolidation requirements of FIN 46. See Footnote
"Securitizations" in the 2003 Annual Report.
The most significant impact of FIN 46 was to require that the trusts used
to issue trust preferred securities be deconsolidated. As a result, the trust
preferred securities no longer represent a minority interest. Under regulatory
capital rules, minority interests count as Tier 1 Capital. The Company has
$1,150 million of trust preferred securities outstanding. On July 2, 2003, the
Board of Governors of the Federal Reserve issued a letter, SR 03-13, stating
that notwithstanding FIN 46, trust preferred securities will continue to be
included in Tier 1 capital until notice is given to the contrary. On May 6,
2004, the Board of Governors of the Federal Reserve issued a Notice of
Proposed Rulemaking which would be more restrictive as to the amount of trust
preferred securities that could be included in Tier 1. While the Company is
currently reviewing the impact of the proposed rule, both the Company and the
Bank are expected to remain "well capitalized" under the proposed rule.
In January 2004, the FASB issued Staff Position No. 106-1, "Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003" ("FSP 106-1"). FSP 106-1 permits a
sponsor of a postretirement health care plan that provides a prescription drug
benefit to make a one-time election to defer accounting for the effects of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the
Act"). The guidance in FSP 106-1 is effective for interim or annual financial
statements of fiscal years ending after December 7, 2003. The Company has
elected to defer accounting for any effect of the Act until specific
authoritative accounting guidance is issued. Therefore, the amounts included
in the financial statements related to the Company's postretirement benefit
plans do not reflect the effects of the Act. The Company is currently
assessing the provisions of FSP 106-1 and the Act and is unable to estimate
their impact on the Company's consolidated financial statements.
Certain other prior year information has been reclassified to conform its
presentation with the 2004 financial statements.
46
3. Acquisitions and Dispositions
-----------------------------
The Company continues to be an active acquirer of securities servicing and
asset management businesses.
During the first three months of 2004, 2 businesses were acquired for the
total cost of $16.7 million, primarily paid in cash. The Company frequently
structures its acquisitions with both an initial payment and a later
contingent payment tied to post-closing revenue or income growth. The Company
records the fair value of contingent payments as an additional cost of the
entity acquired in the period that the payment becomes probable.
Goodwill related to first quarter was $10.1 million. The tax deductible
portion of goodwill for the first quarter is $10.1 million. All of the
goodwill was assigned to the Company's Servicing and Fiduciary Business
segment. At March 31, 2004, the Company was liable for potential contingent
payments related to acquisitions in the amount of $628 million. During the
first quarter of 2004, the Company paid $0.3 million for contingent payments
related to acquisitions made in prior years.
2004
- ----
In February 2004, the Company acquired the corporate trust business of
The Bank of Hawaii. The transaction includes 80 bond trust and agency
agreements representing approximately $3 billion of principal debt outstanding
to BNY Western Trust Company.
In March 2004, the Company acquired software and other assets of Sonic
Financial Technologies LLC, a leading provider of direct access electronic
trading solutions. The acquisition brings in-house advanced electronic trading
capabilities that will enhance the trading platforms of Pershing and BNY
Brokerage.
47
4. Goodwill and Intangibles
------------------------
Goodwill by business segment is as follows:
(In millions)
March 31 December 31
2004 2003
-------- -----------
Servicing and
Fiduciary Businesses $ 3,215 $ 3,136
Corporate Banking 31 31
Retail Banking 109 109
Financial Markets - -
------- -------
Consolidated Total $ 3,355 $ 3,276
======= =======
The Company's business segments are tested annually for goodwill
impairment.
Intangible Assets
- -----------------
March 31, 2004 December 31, 2003
---------------------------------------------- -------------------------------
Weighted
Gross Net Average Gross Net
(In millions) Carrying Accumulated Carrying Amortization Carrying Accumulated Carrying
Amount Amortization Amount Period in Years Amount Amortization Amount
-------- ------------ -------- --------------- -------- ------------ --------
Trade Names $370 $ - $370 Indefinite Life $370 $ - $370
Customer Relationships 447 (43) 404 17 461 (39) 422
Other Intangible Assets 36 (23) 13 7 43 (19) 24
The aggregate amortization expense of intangibles was $8 million and $3
million for the quarters ended March 31, 2004 and 2003, respectively.
Estimated amortization expense for the next five years is as follows:
For the Year Ended Amortization
(In millions) December 31, Expense
---------------------- ----------------
2004 $25
2005 33
2006 33
2007 31
2008 31
48
5. Allowance for Credit Losses
---------------------------
The allowance for credit losses is maintained at a level that, in
management's judgment, is adequate to absorb probable losses associated with
specifically identified loans, as well as estimated probable credit losses
inherent in the remainder of the loan portfolio at the balance sheet date.
Management's judgment includes the following factors, among others: risks of
individual credits; past experience; the volume, composition, and growth of
the loan portfolio; and economic conditions.
The Company conducts a quarterly portfolio review to determine the
adequacy of its allowance for credit losses. All commercial loans over $1
million are assigned to specific risk categories. Smaller commercial and
consumer loans are evaluated on a pooled basis and assigned to specific risk
categories. Following this review, senior management of the Company analyzes
the results and determines the allowance for credit losses. The Risk Committee
of the Company's Board of Directors reviews the allowance at the end of each
quarter.
The portion of the allowance for credit losses allocated to impaired
loans (nonaccrual commercial loans over $1 million) is measured by the
difference between their recorded value and fair value. Fair value is the
present value of the expected future cash flows from borrowers, the market
value of the loan, or the fair value of the collateral.
Commercial loans are placed on nonaccrual status when collateral is
insufficient and principal or interest is past due 90 days or more, or when
there is reasonable doubt that interest or principal will be collected.
Accrued interest is usually reversed when a loan is placed on nonaccrual
status. Interest payments received on nonaccrual loans may be recognized as
income or applied to principal depending upon management's judgment.
Nonaccrual loans are restored to accrual status when principal and interest
are current or they become fully collateralized. Consumer loans are not
classified as nonperforming assets, but are charged off and interest accrued
is suspended based upon an established delinquency schedule determined by
product. Real estate acquired in satisfaction of loans is carried in other
assets at the lower of the recorded investment in the property or fair value
minus estimated costs to sell.
Transactions in the allowance for credit losses are summarized as
follows:
Three Months Ended Three Months Ended
March 31, March 31,
(In millions) 2004 2003
---------------------------------------------------- ------------------
Allowance for
Allowance for Lending-Related Allowance for Allowance for
Loan Losses Commitments Credit Losses Credit Losses
----------- ------------ ----------- -------------
Balance, Beginning of Period $ 668 $ 136 $ 804 $ 831
Charge-Offs (29) - (29) (44)
Recoveries 3 - 3 3
----- ----- ------ -----
Net Charge-Offs (26) - (26) (41)
Provision (10) 22 12 40
----- ----- ------ -----
Balance, End of Period $ 632 $ 158 $ 790 $ 830
====== ===== ====== =====
Allowance for Loan Losses $668
Allowance for Lending-Related
Commitments 162
49
6. Capital Transactions
--------------------
At March 31, 2004, the Company has a registration statement with a
remaining capacity of approximately $591 million of debt, preferred stock,
preferred trust securities, or common stock.
7. Earnings Per Share
------------------
The following table illustrates the computations of basic and diluted
earnings per share:
Three Months Ended
March 31,
(In millions, except per share amounts)
2004 2003
---- ----
Net Income (1) $364 $295
==== ====
Basic Weighted Average
Shares Outstanding 771 722
Shares Issuable on Exercise of
Employee Stock Options 7 4
---- ----
Diluted Weighted Average Shares Outstanding 778 726
==== ====
Basic Earnings Per Share: $0.47 $0.41
Diluted Earnings Per Share: 0.47 0.41
(1) Net Income, net income available to common shareholders and diluted net
income are the same for all periods presented.
50
8. Employee Benefit Plans
----------------------
The components of net periodic benefit cost are as follows:
Pension Benefits Healthcare Benefits
----------------- -------------------
Three Months Ended Three Months Ended
March 31, March 31,
----------- -----------
(Dollars in millions) 2004 2003 2004 2003
- -------------------- ---- ---- ---- ----
Net Periodic Cost (Income):
Service Cost $ 14 $ 11 $ - $ 1
Interest Cost 15 12 3 2
Expected Return on Asset (35) (34) (2) (2)
Other 2 1 2 2
---- ---- ---- ----
Net Periodic Cost (Income) $ (4) $(10) $ 3 $ 3
==== ==== ==== ====
9. Commitments and Contingent Liabilities
--------------------------------------
In the normal course of business, various commitments and contingent
liabilities are outstanding which are not reflected in the accompanying
consolidated balance sheets. Management does not expect any material losses to
result from these matters.
A summary of the notional amount of the Company's off-balance-sheet
credit transactions, net of participations, at March 31, 2004 and December 31,
2003 follows:
Off-Balance-Sheet Credit Risks
- ------------------------------
March 31, December 31,
In millions 2004 2003
- ----------- ------------ ------------
Lending Commitments $ 35,556 $ 35,576
Standby Letters of Credit, net 9,968 10,168
Commercial Letters of Credit 1,094 1,013
Securities Lending Indemnifications 197,246 173,974
The total potential loss on undrawn commitments, standby and commercial
letters of credit, and securities lending indemnifications is equal to the
total notional amount if drawn upon, which does not consider the value of any
collateral. Since many of the commitments are expected to expire without being
drawn upon, the total amount does not necessarily represent future cash
requirements. The allowance for lending-related commitments at March 31, 2004
and December 31, 2003 was $158 million and $136 million.
In securities lending transactions, the Company generally requires the
borrower to provide 102% cash collateral which is monitored on a daily basis,
thus reducing credit risk. Security lending transactions are generally entered
into only with highly-rated counterparties. At March 31, 2004 and December 31,
2003, securities lending indemnifications were secured by collateral of $200.8
billion and $177.1 billion.
The notional amounts for other off-balance-sheet risks express the dollar
volume of the transactions; however, credit risk is much smaller. The Company
performs credit reviews and enters into netting agreements to minimize the
credit risk of foreign currency and interest rate risk management products.
The Company enters into offsetting positions to reduce exposure to foreign
exchange and interest rate risk.
Standby letters of credit principally support corporate obligations and
include $0.7 billion that were collateralized with cash and securities on
March 31, 2004 and December 31, 2003. At March 31, 2004, approximately $6.7
billion of the standbys will expire within one year, and the balance between
one to five years.
51
At March 31, 2004, the notional amounts and credit exposures for the
Company's credit derivatives swaps were $1,326 million and $2 million,
compared to $1,413 million and $3 million at December 31, 2003.
Other
- -----
In the ordinary course of business, the Company makes certain investments
that have tax consequences. From time to time, the IRS may question or
challenge the tax position taken by the Company. The Company engaged in
certain types of structured leasing transactions prior to mid-1999 that the
IRS has challenged. The Company believes that its tax position related to
these transactions was proper based upon applicable statutes, regulations and
case law and that it should prevail with respect to such challenge. However, a
court or other judicial or administrative authority, if presented with the
transactions, could disagree. The Company intends to defend its position
vigorously in accordance with its view of the law controlling these
investments. The IRS has recently indicated that it may consider settlement
with taxpayers in such cases, but it is not known whether settlements could be
reached that would be acceptable to the Company.
The Company currently believes it has adequate tax reserves to cover
these and other potential tax exposures the IRS could raise.
In the ordinary course of business, there are various 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 upon the Company's consolidated financial statements. See
"Legal Proceedings" under Part II, Item 1 for further details.
52
QUARTERLY REPORT ON FORM 10-Q
THE BANK OF NEW YORK COMPANY, INC.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period March 31, 2004
Commission file number 1-6152
THE BANK OF NEW YORK COMPANY, INC.
Incorporated in the State of New York
I.R.S. Employer Identification No. 13-2614959
Address: One Wall Street
New York, New York 10286
Telephone: (212) 495-1784
As of April 30, 2004, The Bank of New York Company, Inc. had
777,541,966 shares of common stock ($7.50 par value) outstanding.
The Bank of New York Company, Inc. (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
The registrant is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
The following sections of the Financial Review set forth in the cross-
reference index are incorporated in the Quarterly Report on Form 10-Q.
Cross-reference Page(s)
- ----------------------------------------------------------------------
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets as of
March 31, 2004 and December 31, 2003 40
Consolidated Statements of Income for
the three months ended March 31, 2004 and 2003 41
Consolidated Statement of Changes in
Shareholders' Equity for the three months
Ended March 31, 2004 42
Consolidated Statement of Cash Flows for the
three months ended March 31, 2004 and 2003 43
Notes to Consolidated Financial Statements 44 - 51
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 2 - 39
Item 3 Quantitative and Qualitative Disclosures
About Market Risk 34 - 36
53
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an
evaluation was carried out under the supervision and with the participation of
the Company's management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the design and operation of these disclosure controls and procedures were
effective. No significant changes were made in the Company's internal controls
or in other factors that could significantly affect these controls subsequent
to the date of their evaluation.
PART 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 the Bank,
principally involving wire transfers from Russian and other sources in Eastern
Europe, as well as certain other matters involving the Bank and its
affiliates. The funds transfer investigations center around accounts
controlled by Peter Berlin, his wife, Lucy Edwards (until discharged in
September 1999, an officer of the Bank), and companies and persons associated
with them. Berlin and Edwards pled guilty to various federal criminal charges.
The Company cannot predict when or on what basis the investigations will
conclude or their effect, if any, on the Company.
As previously disclosed, the U.S. Attorney's Office for the Eastern
District of New York (the "Office") is conducting an investigation of an
alleged fraudulent scheme by RW Professional Leasing Services Corp. ("RW"), a
former customer of a Long Island branch of the Company's principal banking
subsidiary, The Bank of New York (the "Bank"). The Bank has been notified that
it and certain of its employees are subjects of the ongoing investigation.
Criminal charges have been filed against RW, certain of its principals and
other individuals including a former employee who had served as a branch
manager of the Bank. The Bank is cooperating fully in the investigation.
The Company is broadly involved with the mutual fund industry, and
various governmental and self-regulatory agencies have sought information from
it in connection with investigations relating to that industry.
In the ordinary course of business, there are various legal claims
pending against the Company and its subsidiaries. In the opinion of
management, liabilities arising from such claims, if any, would not have a
material effect on the Company's consolidated financial statements.
54
Item 2. Changes in Securities, Use of Proceeds and
Issuer Purchases of Equity Securities
- --------------------------------------------------
Under its stock repurchase program, the Company buys back shares from
time to time. The following table discloses the Company's repurchases of the
Company's common stock made during the first quarter of 2004.
Total Number of Average Price Maximum Shares
Month Shares Acquired Per Share That May be Repurchased
- ----- --------------- ------------- -----------------------
January 1-31 2,955 $33.24 16,628,335
February 1-29 252,901 32.18 16,375,434
March 1-31 408,139 32.76 15,967,295
All shares were repurchased through the Company's stock repurchase
programs, which were announced on December 11, 2001 and November 12, 2002.
Each plan permits the repurchase of 16 million shares. The December 11, 2001
plan has been completed. Shares repurchased in the first quarter result from
transaction related to employee benefit plans.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) The exhibits filed as part of this report are as follows:
Exhibit 10(a) - 2004 Management Incentive Compensation Plan of The Bank
of New York Company, Inc. as amended and restated
Exhibit 12 - Statement Re: Ratio of Earnings to Fixed Charges March 31,
2004 and March 31, 2003.
Exhibit 31 - Certification of Chairman and Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.1 - Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32 - Certification of Chairman and Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1 - Certification of Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) The Company filed the following reports on Form 8-K since
December 31, 2003:
On January 21, 2004: the Company filed a Form 8-K Current report (Item 5,
7 and 12), which report included unaudited interim financial information and
accompanying discussion for the fourth quarter of 2003 contained in the
Company's press release dated January 21, 2004.
On January, 26 2004: the Company filed a Form 8-K Current Report (Items 5
and 7), which report included projections and earnings estimates presented to
financial analysts on January 26, 2004.
On April 21, 2004, the Company filed a Form 8-K Current report (Item 5, 7
and 12), which report included unaudited interim financial information and
accompanying discussion for the first quarter of 2004 contained in the
Company's press release dated April 21, 2004.
55
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: May 7, 2004 By: /s/ Thomas J. Mastro
-------------------------
Name: Thomas J. Mastro
Title: Comptroller
56
EXHIBIT INDEX
-------------
Exhibit Description
- ------- -----------
10 (a) 2004 Management Incentive Compensation Plan of
The Bank of New York Company, Inc. as amended and restated
12 Ratio of Earnings to Fixed Charges for the
Three Months Ended March 31, 2004 and 2003.
31 Certification of Chairman and Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.1 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chairman and Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.