-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CpiZokYyBS4KtIVjey2H43Q6PHfsCVW8slDZzhOCzCgxIvHq45UK1Z8TD57A3qca HzF7uXyQ9YRhMu1QvRx9kA== 0000009626-04-000097.txt : 20040806 0000009626-04-000097.hdr.sgml : 20040806 20040806102323 ACCESSION NUMBER: 0000009626-04-000097 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANK OF NEW YORK CO INC CENTRAL INDEX KEY: 0000009626 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 132614959 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06152 FILM NUMBER: 04956471 BUSINESS ADDRESS: STREET 1: ONE WALL ST 10TH FL CITY: NEW YORK STATE: NY ZIP: 10286 BUSINESS PHONE: 212-495-1784 MAIL ADDRESS: STREET 1: ONE WALL STREET 31ST FLOOR CITY: NEW YORK STATE: NY ZIP: 10286 10-Q 1 r2q0410q.txt 10-Q THE BANK OF NEW YORK COMPANY, INC. Quarterly Report on Form 10-Q For the quarterly period ended June 30, 2004 The Quarterly Report on Form 10-Q and cross reference index is on page 55. 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 - Second Quarter 2004 Highlights 3 - Consolidated Income Statement Review 4 - Other Developments 8 - Business Segments Review 9 - Consolidated Balance Sheet Review 21 - Critical Accounting Policies 29 - Liquidity 31 - Capital Resources 33 - Trading Activities 35 - Asset/Liability Management 37 - Statistical Information 39 - Forward Looking Statements and Factors That Could Affect Future Results 41 - Website Information 42 Consolidated Financial Statements - Consolidated Balance Sheets June 30, 2004 and December 31, 2003 43 - Consolidated Statements of Income For the Three Months and Six Months Ended June 30, 2004 and 2003 44 - Consolidated Statement of Changes In Shareholders' Equity for the Six Months Ended June 30, 2004 45 - Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2004 and 2003 46 - Notes to Consolidated Financial Statements 47 Form 10-Q - Cover 55 - Controls and Procedures 56 - Legal Proceedings 56 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 56 - Submission of Matters to Vote of Security Holders 57 - Exhibits and Reports on Form 8-K 59 - Signature 60 1
THE BANK OF NEW YORK COMPANY, INC. Financial Highlights (Dollars in millions, except per share amounts) (Unaudited) June 30, March 31, June 30, 2004 2004 2003 ---------- ---------- ---------- Quarter ------- Revenue (tax equivalent basis) $ 1,775 $ 1,677 $ 1,601 Net Income 371 364 295 Basic EPS 0.48 0.47 0.39 Diluted EPS 0.48 0.47 0.39 Cash Dividends Per Share 0.20 0.19 0.19 Return on Average Common Shareholders' Equity 17.14% 17.17% 15.56% Return on Average Assets 1.49 1.47 1.30 Efficiency Ratio 63.93 68.90 64.80 Year-to-date ------------ Revenue (tax equivalent basis) $ 3,450 $ 1,677 $ 3,031 Net Income 735 364 590 Basic EPS 0.95 0.47 0.80 Diluted EPS 0.94 0.47 0.80 Cash Dividends Per Share 0.39 0.19 0.38 Return on Average Common Shareholders' Equity 17.15% 17.17% 16.61% Return on Average Assets 1.48 1.47 1.39 Efficiency Ratio 66.30 68.90 62.50 Assets $ 97,536 $ 92,652 $ 99,759 Loans 38,205 36,070 37,796 Securities 22,986 24,083 20,392 Deposits - Domestic 36,279 33,639 37,319 - Foreign 24,781 22,443 27,336 Long-Term Debt 6,025 6,276 6,515 Common Shareholders' Equity 8,785 8,760 8,113 Common Shareholders' Equity Per Share $ 11.29 $ 11.27 $ 10.50 Market Value Per Share of Common Stock 29.48 31.50 28.75 Allowance for Credit Losses as a Percent of Total Loans 2.03% 2.19% 2.18% Allowance for Credit Losses as a Percent of Non-Margin Loans 2.42 2.64 2.50 Allowance for Loan Losses as a Percent of Total Loans 1.57 1.75 1.77 Allowance for Loan Losses as a Percent of Non-Margin Loans 1.86 2.11 2.03 Tier 1 Capital Ratio 7.70 7.60 6.83 Total Capital Ratio 11.63 11.70 11.07 Leverage Ratio 6.00 5.83 5.85 Tangible Common Equity Ratio 4.95 5.22 4.32 Employees 23,001 22,820 23,106 Assets Under Custody (In trillions) Total Assets Under Custody $ 8.7 $ 8.6 $ 7.8 Equity Securities 34% 33% 32% Fixed Income Securities 66 67 68 Cross-Border Assets Under Custody $ 2.4 $ 2.4 $ 2.2 Assets Under Administration (In billions) $ 32 $ 33 $ 27 Assets Under Management (In billions) Total Assets Under Management 93 92 83 Equity Securities 36% 36% 32% Fixed Income Securities 22 22 23 Alternative Investments 14 13 9 Liquid Assets 28 29 36
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 three 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 has grown both through internal reinvestment as well as execution of strategic acquisitions to expand product offerings and increase market share in its scale businesses. Internal reinvestment occurs through increased technology spending, staffing levels, marketing/branding initiatives, quality programs, and product development. The Company consistently invests in technology to improve the breadth and quality of its product offerings, and to increase economies of scale. With respect to acquisitions, the Company has acquired 57 businesses since 1998, almost exclusively in its securities servicing and fiduciary segment. 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. 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 3 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. SECOND QUARTER 2004 HIGHLIGHTS After a strong overall market environment in the first quarter, the equity markets fell off in the second quarter, as equity trading volumes and volatility declined. Fixed income activity levels and foreign exchange activity and volatility remained high, providing an offset. Against this back drop, the Company's diversified business model performed well, achieving its fifth consecutive quarter of sequential core earnings growth. The Company reported second quarter net income of $371 million and diluted earnings per share of 48 cents compared with net income of $364 million and diluted earnings per share of 47 cents in the first quarter of 2004, and net income of $295 million and diluted earnings per share of 39 cents in the second quarter of 2003. Year-to-date net income was $735 million, or 94 cents of diluted earnings per share, compared to $590 million, or 80 cents of diluted earnings per share in 2003. Second quarter and year-to-date 2003 results included dilution of 2 cents per share from merger and integration costs associated with the Pershing acquisition. Securities servicing fees held steady at $717 million for the second quarter. Securities servicing fees were up $119 million or 20% over the second quarter of 2003. While the noticeable drop in equity market trading volumes impacted the Company's execution and clearing business, its fixed-income linked businesses, including securities lending, corporate trust and global collateral management, generated strong revenue growth. In addition, the Company's depositary receipts ("DR") business continues to build momentum, driven by seasonal dividend activity and higher levels of capital raisings. Continued new business wins across the board further supported growth in revenues and assets under custody. At June 30, 2004 assets under custody rose to $8.7 trillion, from $8.6 trillion at March 31, 2004 and $7.8 trillion at June 30, 2003. Cross-border custody assets were $2.4 trillion at June 30, 2004. Equity securities composed 34% of the assets under custody at June 30, 2004, while fixed income securities were 66%. The Company's asset management business continues to perform well, responding to growing institutional investor interest in alternative investments. Private client services and asset management fees increased 5% on a sequential quarter basis. In addition, foreign exchange results continued to benefit from currency volatility and increased cross-border investing. Foreign exchange and other trading revenues declined by 6% relative to the first quarter to $100 million, but remained at historically high levels, up 14% versus a year ago. Net interest income, excluding the first quarter impact of the leveraged lease adjustment, was up 2% sequentially, reflecting modest growth in liquid earning assets. On a year-over-year basis, net interest income for the quarter increased 6%, reflecting the full impact of the Pershing acquisition and an increase in investment securities. The Company remains very focused on managing its expense base and continuing to implement reengineering and profitability programs. Credit quality remains strong, reflecting the success of the Company's risk management program as well as the improved economic environment. As a result, the loan loss provision came in at $10 million in the second quarter, slightly better than the $12 million provision in the first quarter. 4 During the second quarter of 2004, the Company continued to invest in enhancing its service offerings, critical to sustaining top line growth through all types of markets, while maintaining its commitment to expense discipline to ensure a competitive cost base. Service offerings enhancements were the result of both internal development and acquisitions. In investor services, the Company rolled out major enhancements to INFORM, the primary day to day electronic interface between clients and the Company. In execution and clearing, the Company acquired a leading electronic trading platform from Sonic Financial which offers clients access to sophisticated trading tools and smart routing capabilities. At Pershing, the Company introduced enhancements to its platform for introducing broker-dealers enabling them to more effectively manage and sell to their clients. The results of these investments were demonstrated by consistent new business wins, which were key drivers for growth in revenues and assets under custody in the quarter. CONSOLIDATED INCOME STATEMENT REVIEW Noninterest Income - ------------------ 2nd 1st 2nd Quarter Quarter Quarter Year-to-Date (Dollars in millions) 2004 2004 2003 2004 2003 ------- ------- ------- ------- ------- Servicing Fees Securities $ 717 $ 716 $ 598 $ 1,433 $ 1,071 Global Payment Services 81 79 80 160 158 ------- ------- ------- ------- ------- 798 795 678 1,593 1,229 Private Client Services and Asset Management Fees 113 108 94 221 184 Service Charges and Fees 94 96 92 190 189 Foreign Exchange and Other Trading Activities 100 106 88 206 154 Securities Gains 12 33 9 45 16 Other 49 92 35 141 69 ------- ------- ------- ------- ------- Total Noninterest Income $ 1,166 $ 1,230 $ 996 $ 2,396 $ 1,841 ======= ======= ======= ======= ======= Total noninterest income for the second quarter of 2004 was $1,166 million. Excluding the $48 million pre-tax gain on sale of a portion of the Company's investment in Wing Hang Bank, Ltd. and the $19 million gain on four sponsor fund investments in the first quarter of 2004, noninterest income increased by $3 million. Total noninterest income for the second quarter was up 17% over the second quarter of last year reflecting the full quarter impact of the Pershing acquisition as well as strong performance in private client services and asset management and improved results from foreign exchange and other trading activities. Excluding the aforementioned gains in the first quarter of 2004, noninterest income for the six months ended June 30, 2004 was $2,329 million, an increase of 27% over the comparable 2003 period, reflecting the impact of the Pershing acquisition and organic growth. Notwithstanding the noticeable drop in sequential equity trading volumes, the diversity of the securities servicing businesses allowed fees to hold steady at $717 million for the second quarter. Securities servicing fees were up $119 million or 20% over the second quarter of 2003. For the first six months of 2004, securities servicing fees were $1,433 million, an increase of $362 million from $1,071 million for the first six months of 2003. The principal reason for the increase over last year is the inclusion of Pershing for full periods in 2004 compared with two months in the 2003 periods. Execution and clearing services fees decreased $23 million sequentially, or 8%, to $280 million in the second quarter. The execution business was impacted by lower equity market trading volumes in the second quarter, as combined NYSE and NASDAQ trading volumes, excluding program trading, were down 15% from the first quarter. Pershing's correspondent clearing business was also impacted by lower retail activity in May and June which reduced billable trades. 5 Investor services fees were up slightly to $229 million, reflecting higher securities lending, domestic custody, and global funds services fees driven by new business wins, partially offset by slightly lower average asset price levels over the quarter. As of June 30, 2004, assets under custody rose to $8.7 trillion, from $8.6 trillion at March 31, 2004 and $7.8 trillion at June 30, 2003. Issuer services fees recorded a strong quarter, increasing 13% sequentially reflecting good growth in depositary receipts and corporate trust and stable results in stock transfer. Depositary receipts benefited from an increase in seasonal dividend activity, continued active cross-border investing, and an increase in new capital issuances. Corporate trust activity benefited from strength in issuance of global securities. Broker-dealer services fees also showed good growth, increasing $3 million, or 6%, on a sequential quarter basis, as a result of higher volumes due to new business wins in the collateral management businesses and higher levels of mortgage backed and government trading activity. Global payment services fees were up $2 million, or 3%, compared with the prior quarter and up $1 million or 1% from a year ago resulting from higher volumes and conversion of new business. Global payment services fees increased by 1% on a year-to-date basis over 2003. Private client services and asset management fees for the second quarter were up 5% from the prior quarter and 20% from the second quarter of 2003. The sequential quarter increase reflects continued strong growth at Ivy Asset Management and seasonally higher private client fees related to tax services. The increase from the second quarter of 2003 and on a year-to-date basis reflects growth in Ivy Asset Management as well as higher equity price levels. Total assets under management were $93 billion at June 30, 2004, up from $92 billion at March 31, 2004 and $83 billion a year ago. Service charges and fees were down 2% from the prior quarter, as higher retail service fees were offset by weaker demand for capital market services. Compared to 2003, service charges and fees were up 2% on a quarterly basis and up 1% on a year-to-date basis, reflecting higher retail services fees. Foreign exchange and other trading revenues decreased $6 million from the record first quarter but increased $12 million, or 14%, from a year ago. The continued strong performance this quarter in foreign exchange reflects high levels of client activity, tied to cross-border investing and hedging against currency volatility. For the six months ended June 30, 2004, foreign exchange and other trading activities were up 34% over the six months ended June 30, 2003, reflecting the same factors outlined for the second quarter. Securities gains in the second quarter were $12 million, compared with $33 million in the first quarter of 2004 and $9 million in the second quarter of 2003. In the first quarter of 2004, securities gains included realized gains of $19 million on four sponsor fund investments. For the six months ended June 30, 2004, securities gains were $45 million, up $29 million from the six months ended June 30, 2003. Other noninterest income was $49 million in the second quarter, compared with $92 million in the first quarter of 2004 when other noninterest income included a pre-tax gain of $48 million from the sale of a portion of the Company's investment in Wing Hang Bank Limited. Compared to the second quarter of 2003, other noninterest income was $49 million up from $35 million last year. In the six months ended June 30, 2004, other noninterest income was $141 million, up from $69 million in the six months ended June 30, 2003 primarily reflecting the gain on the sale of a portion of its investment in Wing Hang Bank Limited. 6 Net Interest Income - -------------------
2nd 1st 1st 2nd Quarter Quarter Quarter Quarter Year-to-Date -------- -------- ------- -------- ------------------------- Reported Reported Core** Reported Reported Core** Reported (Dollars in millions) -------- -------- ------- -------- -------- ------- -------- 2004 2004 2004 2003 2004 2004 2003 -------- -------- ------- -------- -------- ------- -------- Net Interest Income $ 421 $ 268 $ 413 $ 398 $ 689 $ 834 $ 784 Tax Equivalent Adjustment* 8 6 6 9 14 14 19 -------- -------- ------- -------- -------- ------- -------- Net Interest Income on a Tax Equivalent Basis $ 429 $ 274 $ 419 $ 407 $ 703 $ 848 $ 803 ======== ======== ======= ======== ======== ======= ======== Net Interest Rate Spread 1.84% 1.13% 1.85% 1.96% 1.49% 1.84% 2.06% Net Yield on Interest Earning Assets 2.08 1.36 2.08 2.21 1.72 2.08 2.32 * 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 $429 million in the second quarter of 2004, compared with $274 million reported in the first quarter of 2004, and $407 million in the second quarter of 2003. The net interest income rate spread was 1.84% in the second quarter of 2004, compared with 1.13% reported in the first quarter of 2004, and 1.96% in the second quarter of 2003. The net yield on interest earning assets was 2.08% in the second quarter of 2004, compared with 1.36% reported in the first quarter of 2004, and 2.21% in the second quarter of 2003. In the first quarter of 2004, net interest income included a pre-tax charge of $145 million resulting from a cumulative adjustment to the leasing portfolio, which was triggered under Statement of Financial Accounting Standards No. 13 ("SFAS 13") "Accounting for Leases". Excluding the SFAS 13 adjustment, net interest income on a taxable equivalent basis was $419 million in the first quarter of 2004, which reflected a net interest rate spread of 1.85% and a net yield on interest earning assets of 2.08%. The increase in net interest income from the core first quarter of 2004 results is primarily due to a slightly higher level of liquid earning assets, which resulted from the greater deposit flows from servicing customers, as well as a modest shift from fixed rate investment securities to short-term floating assets to better position for higher rates. The increase in net interest income from the second quarter of 2003 reflects the full quarter impact of the Pershing acquisition. For the first six months of 2004, net interest income on a taxable equivalent basis was $703 million, compared with $803 million in the first half of 2003, reflecting the SFAS 13 adjustment partially offset by the full impact of the Pershing acquisition. The year-to-date net interest income spread was 1.49% in 2004 (core of 1.84%) compared with 2.06% in 2003, while the net yield on interest earning assets was 1.72% in 2004 (core of 2.08%) and 2.32% in 2003. 7 Noninterest Expense and Income Taxes - ------------------------------------ 2nd 1st 2nd Quarter Quarter Quarter Year-to-date (Dollars in million) 2004 2004 2003 2004 2003 ------- ------- ------- ------- ------- Salaries and Employee Benefits $ 570 $ 574 $ 498 $ 1,144 $ 921 Net Occupancy 72 81 64 153 122 Furniture and Equipment 51 51 49 102 85 Clearing 44 48 40 92 69 Sub-custodian Expenses 22 22 19 44 35 Software 50 49 43 99 78 Communications 23 24 23 47 44 Amortization of Intangibles 8 8 7 16 10 Merger and Integration Costs - - 25 - 25 Other 172 156 135 328 253 ------- ------- ------- ------- ------- Total Noninterest Expense $ 1,012 $ 1,013 $ 903 $ 2,025 $ 1,642 ======= ======= ======= ======= ======= Noninterest expense for the second quarter of 2004 was $1,012 million, compared with $1,013 million in the prior quarter, and $903 million in the second quarter of 2003. Noninterest expense in the first quarter included $18 million related to cost reduction initiatives, including lease terminations, severance and relocation expenses. After adjusting for the $4 million step-up in stock option expensing this quarter as well as $10 million in severance and $8 million in lease termination costs in the first quarter, sequential expense growth was only 1.3%. Salaries and employee benefits were well controlled increasing just $2 million, or 0.4%, after the aforementioned adjustments. Headcount was up 181 for the quarter increasing by only 85 excluding acquisitions. Option expense levels will not increase in the third and fourth quarter of 2004 with the last step-up in option expensing coming in the second quarter of 2005, reflecting the completion of the three year phase-in period. Clearing expenses in the second quarter, which are tied to transaction volumes, were down $4 million sequentially to $44 million while sub-custodian expenses, which are also tied to volumes, held steady at $22 million due to stronger activity trends in Europe. The increase in other operating expenses of $16 million on a sequential quarter basis was driven largely by higher legal costs, increased use of consultants in connection with cost restructuring programs, and seasonal travel and entertainment. Second quarter of 2003 included $25 million of merger and integration costs related to the Pershing acquisition. After excluding merger and integration costs, noninterest expense for the second quarter of 2004 was $1,012 million compared with $878 million in the second quarter of 2003. On the same basis, noninterest expense for the first six months of 2004 was $2,025 million compared with $1,617 million last year. The increases mainly reflect higher business activity and the full impact of the Pershing acquisition in the second quarter and first half of 2004. The effective tax rate for the second quarter of 2004 was 34.2%, compared to 23.1% in the first quarter and 34.6% in the second quarter of 2003. The effective tax rate for the six months period ended June 30, 2004 was 29.2%, compared with 34.6% for the six months period ended June 30, 2003. The year- over-year decreases reflect the benefit associated with the SFAS 13 adjustment in the first quarter of 2004. 8 Credit Loss Provision and Net Charge-offs - ----------------------------------------- 2nd 1st 2nd Quarter Quarter Quarter Year-to-Date (Dollars in millions) 2004 2004 2003 2004 2003 ------- ------- ------- ------- ------- Provision $ 10 $ 12 $ 40 $ 22 $ 80 ======= ======= ======= ======= ======= Net Charge-offs: Commercial $ (11) $ (5) $ (34) $ (16) $ (59) Foreign (8) (10) (7) (18) (7) Other - - - - (10) Consumer (6) (11) (5) (17) (10) ------- ------- ------- ------- ------- Total $ (25) $ (26) $ (46) $ (51) $ (86) ======= ======= ======= ======= ======= Other Real Estate Expenses $ - $ - $ - $ - $ - The provision was $10 million in the second quarter of 2004 compared to $12 million in the first quarter of 2004 and $40 million in the second quarter of 2003. For the first six months of 2004, the provision was $22 million compared with $80 million in 2003. The lower provision compared with the second quarter of 2003 reflects the Company's improved risk profile as well as improvements in the U.S. economy. Declines in nonperforming and criticized assets, improved borrower ratings, and reductions in large exposures are indicative of the Company's reduced credit risk. Net charge-offs were $25 million in the second quarter of 2004 versus $26 million and $46 million in the first quarter of 2004 and second quarter of 2003. These represent 0.26% of total loans in the most recent quarter, down from 0.29% and 0.49% in the prior periods, respectively. OTHER DEVELOPMENTS In May 2004, the Company made a strategic investment in London-based Netik, LLC. Netik provides market-leading data management and consolidated reporting capabilities that leverage its data warehouse for portfolio and investment information, reference data, and analytics. The Company uses Netik products as part of its BNY SmartSource(service mark) outsourcing solution, and will also partner with Netik to make the product available to other financial institutions. Late in the second quarter of 2004, the Company acquired a unit investment trust business that services approximately $20 billion in assets for over 4,200 different series of unit investment trusts. During the second quarter of 2004, the Company agreed to acquire Osprey Partners LLC's portfolio accounting technology to broaden its managed account services offering. The acquisition will allow the Company to integrate the portfolio accounting function within its proprietary managed account services offering and fully support the comprehensive portfolio view created by unified managed account platforms. In July 2004, the Company's new $2 billion shelf registration became effective. Combined with the existing shelf registration the Company now has the capacity to issue approximately $2.5 billion of debt, preferred stock, preferred trust securities, or common stock. 9 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 Businesses, 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 Businesses segment also includes customer-related foreign exchange. 10 In issuer services, the Company's American and global depositary receipt ("DR") business has over 1,180 programs representing 60 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 $8.7 trillion of assets at June 30, 2004. The Company is the second largest mutual fund custodian with $1.4 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 approximately 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 largest institutional electronic broker for non-U.S. dollar equity execution. The Company provides execution and clearing services in over 80 markets, executing trades for more than 600 million shares and clearing 650,000 trades daily. The Company has 21 seats on the New York Stock Exchange. Pershing services nearly 1,100 introducing brokerage firms and registered investment advisors who collectively represent more than 5 million individual investors. 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 57 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. 11 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 - ----------------------------------
2nd 1st 2nd Quarter Quarter Quarter Year-to-date (Dollars in millions) 2004 2004 2003 2004 2003 --------- --------- --------- --------- --------- Net Interest Income $ 144 $ 140 $ 120 $ 284 $ 225 Provision for Credit Losses 1 - - 1 - Noninterest Income 994 990 843 1,984 1,534 Noninterest Expense 764 757 651 1,521 1,176 Income Before Taxes 373 373 312 746 583 Average Assets $ 22,891 $ 22,771 $ 15,727 $ 22,831 $ 11,695 Average Deposits 35,520 35,138 33,499 35,329 32,320 Nonperforming Assets 3 3 16 3 16 (In billions) Assets Under Custody $ 8,662 $ 8,577 $ 7,787 $ 8,662 $ 7,787 Equity Securities 34% 33% 32% 34% 32% Fixed Income Securities 66 67 68 66 68 Cross-Border Assets $ 2,425 $ 2,401 $ 2,180 $ 2,425 $ 2,180 (In billions) Assets Under Administration $ 32 $ 33 $ 27 $ 32 $ 27 Assets Under Management 93 92 83 93 83 Equity Securities 36% 36% 32% 36% 32% Fixed Income Securities 22 22 23 22 23 Alternative investments 14 13 9 14 9 Liquid Assets 28 29 36 28 36 S&P 500 Index (Period End) 1,141 1,126 975 1,141 975 NASDAQ Index (Period End) 2,048 1,994 1,623 2,048 1,623 NYSE Volume (In billions) 90.8 95.4 93.0 186.2 179.6 NASDAQ Volume (In billions) 108.3 126.3 112.5 234.6 201.3
Second quarter results showed continued strength in the Company's primary businesses, including securities servicing and private client services and asset management. In the second quarter of 2004, pre-tax income was $373 million, compared with $373 million in the first quarter of 2004 and $312 million a year ago. On a year-to-date basis, pre-tax income was $746 million, up 28% from $583 million in 2003. Noninterest income increased to $994 million from $990 million in the first quarter of 2004 and $843 million in the second quarter of 2003. Notwithstanding the noticeable drop in sequential equity trading volumes, fees held steady at $717 million for the second quarter given the diversity of the securities servicing businesses. Second quarter securities servicing fees increased $119 million, or 20%, over the second quarter of 2003, and on a year- to-date basis, securities servicing fees were $1,433 million, up 34% over the comparable 2003 period principally due to the inclusion of Pershing for six months in 2004 compared with two months in the first half of 2003. 12 Securities Servicing Fees - ------------------------- 2nd 1st 4th 3rd Quarter Quarter Quarter Quarter (Dollars in millions) 2004 2004 2003 2003 ------- ------- ------- ------- Execution and Clearing Services $ 280 $ 303 $ 290 $ 271 Investor Services 229 226 210 212 Issuer Services 155 137 136 127 Broker-Dealer Services 53 50 48 47 ------- ------- ------- ------- Securities Servicing Fees $ 717 $ 716 $ 684 $ 657 ======= ======= ======= ======= Execution and clearing services fees decreased $23 million sequentially, or 8%, to $280 million in the second quarter. The execution business was impacted by lower equity market trading volumes in the second quarter, as combined NYSE and NASDAQ trading volumes, excluding program trading, were down 15% from the first quarter. BNY Brokerage, B-Trade, and G-Trade volumes were down, but less than the overall market decline. The execution business also experienced a slowdown in transition management activity from the robust first and fourth quarter levels consistent with overall trends in the fund industry. The impact of lower trading volumes was partly offset by new business wins across the Company's product lines and several significant wins with existing public fund clients. The Company has received a favorable response to Sonic, the electronic trading portal it acquired in March. Since the acquisition, the Company has installed 30 money managers on the platform that are responsible for $700 billion in assets under management. Lower trading volumes had a more muted impact on Pershing which generates the majority of its revenues from non- transactional activities like asset gathering and technology services. Pershing's correspondent clearing business was impacted by lower retail activity in May and June which reduced billable trades. Margin loans held steady at $6.1 billion which indicates that retail investor sentiment remains positive. In addition, as a result of new business wins and organic growth, other key metrics like total active accounts, retirement accounts, and client assets were all up for the quarter and year-to-date. Investor services fees were up slightly to $229 million, reflecting higher securities lending, domestic custody, and global funds services fees driven by new business wins, partially offset by slightly lower average asset price levels over the quarter. As of June 30, 2004, assets under custody rose to $8.7 trillion, from $8.6 trillion at March 31, 2004 and $7.8 trillion at June 30, 2003. The sequential quarter increase in assets under custody primarily reflects new business wins. Cross-border custody assets were $2.4 trillion at June 30, 2004. Equity securities composed 34% of the assets under custody at June 30, 2004 compared with 32% at June 30, 2003, while fixed income securities were 66% compared with 68% last year. Securities lending fees showed good growth relative to the first quarter benefiting from increased loan assets due to new business wins and slightly higher spreads due to seasonal factors. Issuer services fees recorded a strong quarter, increasing 13% sequentially reflecting good growth in depositary receipts and corporate trust and stable results in stock transfer. Depositary receipts benefited from an increase in seasonal dividend activity, continued active cross-border investing, and an increase in new capital issuances. Net DR issuance has occurred for ten straight months and in 15 of the last 18 months, demonstrating the continued strengthened interest in cross-border investing activity. Corporate trust activity benefited from strength in issuance of international securities which more than offset flat performance on the municipal side. 13 Broker-dealer services fees increased $3 million, or 6%, on a sequential quarter basis, as a result of higher volumes due to new business wins in the collateral management businesses and higher levels of mortgage backed and government trading activity. The Company now processes approximately $850 billion of financing for the Company's broker-dealer clients daily through tri- party collateralized financing agreements, up 26% from a year ago. Global payment services fees were up $2 million, or 3%, compared with the prior quarter and up $1 million, or 1% from a year ago, resulting from higher volumes and conversion of new business. Global payment services increased by 1% on a year-to-date basis over 2003. Private client services and asset management fees for the second quarter were up 5% from the prior quarter and 20% from the second quarter of 2003. The sequential quarter increase reflects continued strong growth at Ivy Asset Management and seasonally higher private client fees related to tax services. The increase from the second quarter of 2003 and on a year-to-date basis reflects growth in Ivy Asset Management as well as higher equity price levels. Assets under management ("AUM") were $93 billion at June 30, 2004, up from $92 billion at March 31, 2004 and $83 billion at June 30, 2003. Assets under administration were $32 billion compared with $33 billion at March 31, 2004 and $27 billion at June 30, 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 67% of AUM while individual clients equal 33%. AUM at June 30, 2004, are 36% invested in equities, 22% in fixed income, 14% in alternative investments and the remainder in liquid assets. At Ivy, AUM climbed to $13.2 billion at June 30, 2004 from $11.7 billion at March 31, 2003 and $7.3 billion at June 30, 2003 reflecting continued strong demand from institutional and foreign investors. Foreign exchange and other trading revenues decreased $6 million from the prior quarter and increased $12 million, or 14%, from one year ago. The continued strong performance this quarter in foreign exchange reflects high levels of client activity, tied to cross-border investing and hedging against currency volatility. Other trading was down sequentially due to a slowdown in client driven activity at Pershing which acts as a riskless principal taker to facilitate customer order flow. For the six months ended June 30, 2004, foreign exchange and other trading activities were up 34% over the six months ended June 30, 2003, reflecting the same factors outlined for the second quarter. Net interest income in the Servicing and Fiduciary Businesses segment was $144 million for the second quarter of 2004 compared with $140 million for the first quarter of 2004 and $120 million in the second 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 assets and deposits. The increase in net interest income from the second quarter of 2003 is primarily due to the Pershing acquisition. Net interest income for the six months ended June 30, 2004 was $284 million compared with $225 million in the first half of 2003, mainly due to the Pershing acquisition. Average assets for the quarter ended June 30, 2004 were $22.9 billion compared with $22.8 billion in the first quarter of 2004 and $15.7 billion in the second quarter of 2003. Average assets for the six months ended June 30, 2004 were $22.8 billion compared with $11.7 billion in the first six months of 2003. The increase in assets in 2004 compared with 2003 is primarily attributable to the Pershing acquisition. The second quarter of 2004 average deposits were $35.5 billion compared with $35.1 billion in the first quarter of 2004 and $33.5 billion in the second quarter of 2003. Average deposits for the first half of 2004 were $35.3 billion compared with $32.3 billion for the first half of 2003. 14 Net charge-offs in the Servicing and Fiduciary Businesses segment were zero in the second quarter of 2004, compared with $5 million in the first quarter of 2004 and zero in the second quarter of 2003. Nonperforming assets were $3 million at June 30, 2004, compared with $3 million at March 31, 2004 and $16 million at June 30, 2003. Noninterest expense for the second quarter of 2004 was $764 million, compared with $757 million in the first quarter of 2004 and $651 million in the second quarter of 2003. The rise in noninterest expense from first quarter of 2004 was primarily due to the Company's continued investment in technology, as well as higher volume-related expenses related to revenue growth. Noninterest expense for the first six months of 2004 was $1,521 million, compared with $1,176 million for the same period in 2003. The increase over last year's quarter and year-to-date periods reflects the Pershing acquisition. Corporate Banking - ----------------- 2nd 1st 2nd Quarter Quarter Quarter Year-to-date (Dollars in millions) 2004 2004 2003 2004 2003 -------- -------- -------- -------- -------- Net Interest Income $ 87 $ 89 $ 95 $ 176 $ 187 Provision for Credit Losses 15 20 30 35 60 Noninterest Income 84 80 82 164 153 Noninterest Expense 54 53 51 107 99 Income Before Taxes 102 96 96 198 181 Average Assets $ 17,308 $ 17,358 $ 19,851 $ 17,333 $ 20,189 Average Deposits 6,345 6,800 6,583 6,573 6,899 Nonperforming Assets 293 325 410 293 410 Net Charge-offs 9 11 42 20 77 In the second quarter of 2004, pre-tax income was $102 million, compared with $96 million in the first quarter of 2004 and the second quarter of 2003. On a year-to-date basis, pre-tax income was $198 million, up 9% from $181 million in 2003. The improvement in all periods is primarily attributable to a reduction in credit risk, resulting in a lower provision for credit losses. The Company has achieved its principal risk management objectives, and assets are now flat to slightly growing. The Corporate Banking segment's net interest income was $87 million in the second quarter of 2004, compared with $89 million in the first quarter of 2004 and $95 million in the second quarter of 2003. The decline from both the first quarter of 2004 and second quarter of 2003 reflects continued reduction in lending to corporate borrowers as well as a decline in deposits. On a year-to- date basis, net interest income for 2004 was $176 million compared with $187 million in 2003. Average assets for the quarter were $17.3 billion compared with $17.4 billion in the first quarter of 2004 and $19.9 billion in the second quarter of last year. Average deposits in the corporate bank were $6.3 billion versus $6.8 billion in the first quarter of 2004 and $6.6 billion in 2003. For the six months ended June 30, 2004, average assets were $17.3 billion compared to $20.2 billion for the first six months of 2003. For the first half of 2004 and 2003, average deposits were $6.6 billion and $6.9 billion. The second quarter of 2004 provision for credit losses was $15 million compared with $20 million in the first quarter of 2004 and $30 million last year. On a year-to-year basis, the provision for credit losses was $35 million for 2004 and $60 million for 2003. The decline in the provision from the second quarter and year-to-date 2003 reflects reduced credit exposures and an improvement in overall asset quality. Net charge-offs in the Corporate Banking segment were $9 million in the second quarter of 2004, $11 million in the first quarter of 2004, and $42 million in the second quarter of 2003. Net charge- offs for the first six months of 2004 were $20 million compared with $77 million in 2003. The charge-offs for the first six months of 2004 primarily relate to loans to media and foreign borrowers. Nonperforming assets were $293 15 million at June 30, 2004, down from $325 million at March 31, 2004 and $410 million at June 30, 2003. The decrease in nonperforming assets from the second quarter of 2003 primarily reflects paydowns and charge-offs of commercial and foreign loans. Noninterest income was $84 million in the current quarter, compared with $80 million in the first quarter of 2004 and $82 million in the second quarter of 2003. On a sequential quarter basis, the increase reflects higher syndication fees. The increase year-over-year reflects higher income from unconsolidated subsidiaries. On a year-to-date basis, noninterest income was $164 million, up $11 million from $153 million in 2003, reflecting higher income from the Company's investment in Wing Hang Bank as well as higher capital markets fees and trading income. Noninterest expense in the second quarter was $54 million, compared with $53 million in the first quarter of 2004 and $51 million in the second quarter of 2003. The increase over 2003 reflects higher compensation costs due in part to a reduced pension credit and higher stock option expense. On a year-to-date basis, noninterest expense was $107 million, compared with $99 million in 2003, reflecting higher compensation and medical costs. Retail Banking - -------------- 2nd 1st 2nd Quarter Quarter Quarter Year-to-date (Dollars in millions) 2004 2004 2003 2004 2003 ------- ------- ------- ------- ------- Net Interest Income $ 126 $ 123 $ 118 $ 249 $ 234 Provision for Credit Losses 5 5 5 10 9 Noninterest Income 28 29 33 57 62 Noninterest Expense 95 93 91 188 178 Income Before Taxes 54 54 55 108 109 Average Assets $ 5,317 $ 5,377 $ 5,333 $ 5,347 $ 5,360 Average Noninterest Bearing Deposits 5,209 5,028 4,565 5,118 4,697 Average Deposits 15,162 14,807 14,252 14,985 14,187 Nonperforming Assets 15 15 11 15 11 Net Charge-offs 5 6 5 11 10 Number of Branches 341 341 341 341 341 Total Deposit Accounts (In Thousands) 1,129 1,133 1,183 1,129 1,183 Number of ATMS 379 378 371 379 371 The Retail Banking segment continues to demonstrate stable results in spite of increased competition in the New York metropolitan area. In the second quarter of 2004, pre-tax income was $54 million, compared with $54 million in the first quarter of 2004 and $55 million a year ago. On a year-to- date basis, pre-tax income was $108 million, compared with $109 million in 2003. The Company has been able to steadily grow its deposit balances, with average deposits reaching $15.2 billion during the quarter. Net interest income in the second quarter of 2004 was $126 million, compared with $123 million in the first quarter of 2004 and $118 million in the second quarter of 2003. On a sequential quarter basis, net interest income increased slightly reflecting higher levels of deposits. Net interest income on a year-to-year basis for 2004 and 2003 was $249 million and $234 million. The increases from 2003 reflect increased noninterest bearing deposits and interest bearing deposits from municipalities in the retail bank's service area as well as increased asset yield. The rise in deposits reflects the segment's focus on small business owners and professionals such as lawyers, doctors and certified public accountants. In addition, product offerings such as BNY On- Line and the debit card along with promotional campaigns have helped build deposit volumes. 16 Noninterest income was $28 million for the quarter compared with $29 million on a sequential quarter basis and $33 million in last year's second quarter. Noninterest income for the first six months of 2004 was $57 million compared with $62 million in the first six months of 2003. The decreases in noninterest income reflect lower monthly service fees and lower debit card fees. Monthly service charges are down as a result of promotional offerings made in response to the competitive environment. Other deposit service fees increased over 2003. Although the average size of a debit card transaction and the number of transactions are up, debit card fees are down due to an industry wide settlement that reduced intercharge income by 30%. The second quarter of 2003 included a gain on the sale of $230 million of mortgage loans. Noninterest expense in the second quarter of 2004 was $95 million, compared with $93 million in the first quarter of 2004 and $91 million last year. The increase from the second quarter of 2003 reflects higher compensation and marketing costs. Noninterest expense for the first half of 2004 was $188 million compared with $178 million in the first half of 2003. The year-over-year change reflects the same factors influencing the quarterly increase as well as higher legal expenses. Net charge-offs were $5 million in the second quarter of 2004, compared with $6 million in the first quarter of 2004 and $5 million in the second quarter of 2003. Nonperforming assets were $15 million at June 30, 2004, compared with $15 million at March 31, 2004, and $11 million at June 30, 2003. The rise over the second quarter of 2003 is attributable to an increase in the level of nonperforming small business loans. For the first six months of 2004, net charge-offs were $11 million, up $1 million from $10 million for the first six months of 2003. Average deposits generated by the Retail Banking segment were $15.2 billion in the second quarter of 2004, compared with $14.8 billion in the first quarter of 2004 and $14.3 billion in the second quarter of 2003. For the first half of 2004 average deposits were $15.0 billion compared to $14.2 billion in the first half of 2003. Average noninterest bearing deposits for the first six months of 2004 were $5.1 billion compared with $4.7 billion in the first six months of 2003. Average assets in the Retail Banking sector were $5.3 billion, compared with $5.4 billion in the first quarter of 2004 and $5.3 billion in the second quarter of 2003. On a year-to-year basis, average assets were $5.3 billion for 2004 and $5.4 billion in 2003. Financial Markets - ----------------- 2nd 1st 2nd Quarter Quarter Quarter Year-to-date (Dollars in millions) 2004 2004 2003 2004 2003 -------- -------- -------- -------- -------- Net Interest Income $ 83 $ 80 $ 80 $ 163 $ 157 Provision for Credit Losses 5 5 6 10 11 Noninterest Income 43 50 33 93 83 Noninterest Expense 28 27 25 55 49 Income Before Taxes 93 98 82 191 180 Average Assets $ 50,728 $ 50,051 $ 46,463 $ 50,390 $ 45,404 Average Deposits 5,460 3,864 4,153 4,662 4,533 Average Investment Securities 22,982 22,997 18,720 22,989 18,351 Net Charge-offs 10 4 - 14 - In the second quarter of 2004, pre-tax income was $93 million, compared with $98 million in the first quarter of 2004 and $82 million in the second quarter of 2003. The sequential quarter decline is due to a drop in trading revenue. On a year-to-date basis, pre-tax income was $191 million, up 6% from $180 million in 2003. The increases over the second quarter and year-to-date 2003 periods are primarily due to a rise in both trading income and net interest income. 17 Net interest income for the second quarter was $83 million compared with $80 million on a sequential quarter and year-over-year basis. The increase from the first quarter of 2004 reflects a slightly higher level of liquid earning assets, which resulted from greater deposit flows from servicing customers as well as a modest shift from fixed rate investment securities to short-term floating assets to better position for higher rates. The increase from the second quarter of 2003 reflects higher average balances of investment securities partially offset by lower yields. Net interest income was $163 million in the first six months of 2004 compared to $157 million in the first six months of 2003. Average second quarter 2004 assets in the Financial Markets segment composed primarily of short-term liquid assets and investment securities were $50.7 billion, up from $50.1 billion on a sequential quarter basis and $46.5 billion last year. Average assets for the first half of 2004 were $50.4 billion compared to $45.4 billion for the first half of 2003. 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 durations. Noninterest income was $43 million in the second quarter of 2004, compared with $50 million in the first quarter of 2004 and $33 million in the second quarter of 2003. On a year-to-date basis, noninterest income was $93 million in 2004 and $83 million in 2003. The negative variance versus the first quarter of 2004 reflects a slowdown in client driven activity in fixed income trading. Net charge-offs were $10 million in the second quarter of 2004, compared with $4 million in the first quarter of 2004 and zero a year ago. Net charge- offs for the first six months of 2004 and 2003 were $14 million and zero, respectively. Charge-offs in 2004 are primarily related to the Company's airline exposure. Noninterest expense was $28 million in the second quarter of 2004, compared with $27 million in the first quarter of 2004 and $25 million in last year's second quarter. The increase from last year's second quarter is attributable to higher employee incentive and other compensation. Noninterest expense for the six months ended June 30, 2004 was $55 million, compared with $49 million for the first six months ended June 30, 2003. 18 The consolidating schedule below shows the contribution of the Company's segments to its overall profitability.
(Dollars in millions) Servicing and For the Quarter Ended Fiduciary Corporate Retail Financial Reconciling Consolidated June 30, 2004 Businesses Banking Banking Markets Items Total - ------------------------ ---------- --------- --------- --------- ----------- ------------ Net Interest Income $ 144 $ 87 $ 126 $ 83 $ (19) $ 421 Provision for Credit Losses 1 15 5 5 (16) 10 Noninterest Income 994 84 28 43 17 1,166 Noninterest Expense 764 54 95 28 71 1,012 ---------- --------- --------- --------- ----------- ------------ Income Before Taxes $ 373 $ 102 $ 54 $ 93 $ (57) $ 565 ========== ========= ========= ========= =========== ============ Contribution Percentage 60% 16% 9% 15% Average Assets $ 22,891 $ 17,308 $ 5,317 $ 50,728 $ 4,129 $ 100,373
(Dollars in millions) Servicing and For the Quarter Ended Fiduciary Corporate Retail Financial Reconciling Consolidated March 31, 2004 Businesses Banking Banking Markets Items Total - ------------------------- ---------- --------- --------- --------- ----------- ------------ 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
(Dollars in millions) Servicing and For the Quarter Ended Fiduciary Corporate Retail Financial Reconciling Consolidated June 30, 2003 Businesses Banking Banking Markets Items Total - ------------------------- ---------- --------- --------- --------- ----------- ------------ Net Interest Income $ 120 $ 95 $ 118 $ 80 $ (15) $ 398 Provision for Credit Losses - 30 5 6 (1) 40 Noninterest Income 843 82 33 33 5 996 Noninterest Expense 651 51 91 25 85 903 ---------- --------- --------- --------- ----------- ------------ Income Before Taxes $ 312 $ 96 $ 55 $ 82 $ (94) $ 451 ========== ========= ========= ========= =========== ============ Contribution Percentage 57% 18% 10% 15% Average Assets $ 15,727 $ 19,851 $ 5,333 $ 46,463 $ 3,550 $ 90,924
19
(Dollars in millions) Servicing and For the Six Months Ended Fiduciary Corporate Retail Financial Reconciling Consolidated June 30, 2004 Businesses Banking Banking Markets Items Total - ------------------------- ---------- --------- --------- --------- ----------- ------------ Net Interest Income $ 284 $ 176 $ 249 $ 163 $ (183) $ 689 Provision for Credit Losses 1 35 10 10 (34) 22 Noninterest Income 1,984 164 57 93 98 2,396 Noninterest Expense 1,521 107 188 55 154 2,025 ---------- --------- --------- --------- ----------- ------------ Income Before Taxes $ 746 $ 198 $ 108 $ 191 $ (205) $ 1,038 ========== ========= ========= ========= =========== ============ Contribution Percentage 60% 16% 9% 15% Average Assets $ 22,831 $ 17,333 $ 5,347 $ 50,390 $ 4,125 $ 100,026
(Dollars in millions) Servicing and For the Six Months Ended Fiduciary Corporate Retail Financial Reconciling Consolidated June 30, 2003 Businesses Banking Banking Markets Items Total - ------------------------- ---------- --------- --------- --------- ----------- ------------ Net Interest Income $ 225 $ 187 $ 234 $ 157 $ (19) $ 784 Provision for Credit Losses - 60 9 11 - 80 Noninterest Income 1,534 153 62 83 9 1,841 Noninterest Expense 1,176 99 178 49 140 1,642 ---------- --------- --------- --------- ----------- ------------ Income Before Taxes $ 583 $ 181 $ 109 $ 180 $ (150) $ 903 ========== ========= ========= ========= =========== ============ Contribution Percentage 56% 17% 10% 17% Average Assets $ 11,695 $ 20,189 $ 5,360 $ 45,404 $ 3,080 $ 85,728
20 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 and first half of 2004, the following adjustments 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. 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.
2nd 1st 2nd Quarter Quarter Quarter Year-to-date (Dollars in millions) 2004 2004 2003 2004 2003 --------- --------- --------- --------- --------- Segment's revenue $ 1,589 $ 1,581 $ 1,404 $ 3,170 $ 2,635 Adjustments: Earnings associated with assignment of capital (23) (29) (29) (52) (49) Securities gains - 19 - 19 - SFAS 13 cumulative lease adjustment - (145) - (145) - Taxable equivalent basis and other tax-related items 3 10 13 13 30 Other 18 62 6 80 9 --------- --------- --------- --------- --------- Subtotal-revenue adjustments (2) (83) (10) (85) (10) --------- --------- --------- --------- --------- Consolidated revenue $ 1,587 $ 1,498 $ 1,394 $ 3,085 $ 2,625 ========= ========= ========= ========= ========= Segment's income before tax $ 623 $ 621 $ 545 $ 1,244 $ 1,053 Adjustments: Revenue adjustments (above) (2) (83) (10) (85) (10) Provision for credit losses different than GAAP 15 18 1 33 - Severance - (11) (4) (11) (6) Goodwill and intangible amortization (8) (8) (7) (16) (10) Pershing-related integration expenses - - (25) - (25) Lease termination - (8) - (8) - Corporate overhead (63) (56) (49) (119) (99) --------- --------- --------- --------- --------- Consolidated income before tax $ 565 $ 473 $ 451 $ 1,038 $ 903 ========= ========= ========= ========= ========= Segments' total average assets $ 96,244 $ 95,557 $ 87,374 $ 95,901 $ 82,648 Adjustments: Goodwill and intangibles 4,129 4,121 3,550 4,125 3,080 --------- --------- --------- --------- --------- Consolidated average assets $ 100,373 $ 99,678 $ 90,924 $ 100,026 $ 85,728 ========= ========= ========= ========= =========
21 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 the first quarter of 2004, the $145 million reconciling item related to SFAS 13 cumulative lease adjustment would be attributable to the Financial Markets segment. In addition, the first quarter $48 million gain on the sale of Wing Hang recorded in Other 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 the first quarter of 2004, the $18 million of severance and lease termination would be allocated primarily to the Servicing and Fiduciary Businesses segment. Merger and integration charges would be allocated to the Securities and Fiduciary Businesses segment. CONSOLIDATED BALANCE SHEET REVIEW Total assets were $97.5 billion at June 30, 2004, compared with $92.7 billion at March 31, 2004, and $99.8 billion at June 30, 2003. The increase in assets from March 31, 2004 reflects the significant liquidity in the markets at June 30, 2004 which the Company's clients left on deposit rather than invested in the equity and fixed income markets. Total shareholders' equity was $8.8 billion at June 30, 2004, compared with $8.8 billion at March 31, 2004, and $8.1 billion at June 30, 2003. Shareholders' equity at June 30, 2004 compared to March 31, 2004 reflects a decline in the securities valuation allowance offset by the retention of earnings. The decline in the securities valuation allowance reflects the recent rise in interest rates. The major reason for the increase in shareholders' equity from a year ago is the retention of earnings. Return on average common equity for the second quarter of 2004 was 17.14%, compared with 17.17% in the first quarter of 2004, and 15.56% in the second quarter of 2003. For the first six months of 2004, return on average common equity was 17.15% compared with 16.61% in 2003. Return on average assets for the second quarter of 2004 was 1.49%, compared with 1.47% in the first quarter of 2004, and 1.30% in the second quarter of 2003. For the first six months of 2004, return on average assets was 1.48% compared with 1.39% in 2003. 22 Investment Securities - --------------------- The table below shows the distribution of the Company's securities portfolio: Investment Securities (at Fair Value) (Dollars in millions) 06/30/04 12/31/03 -------- -------- Fixed Income: Mortgage-Backed Securities $ 18,782 $ 18,703 Asset-Backed Securities - 20 Corporate Debt 1,267 1,326 Short-Term Money Market Instruments 786 917 U.S. Treasury Securities 470 505 U.S. Government Agencies 241 241 State and Political Subdivisions 229 251 Emerging Market Debt 112 109 Other Foreign Debt 512 518 -------- -------- Subtotal Fixed Income 22,399 22,590 Equity Securities: Money Market Funds 432 200 Federal Reserve Bank Stock 99 96 Other 20 12 -------- -------- Subtotal Equity Securities 551 308 -------- -------- Total Securities $ 22,950 $ 22,898 ======== ======== Total investment securities were $23.0 billion at June 30, 2004, compared with $24.1 billion at March 31, 2004, and $22.9 billion at December 31, 2003. Average investment securities were $23.0 billion in the second quarter of 2004, compared with $23.0 billion in the first quarter of 2004 and $18.7 billion in the second quarter of last year. Average investment securities were $23.0 billion in the six months ended June 30, 2004, compared with $18.4 billion in the six months ended June 30, 2003. On a year-to-date basis, the increase was primarily due to growth in the Company's portfolio of highly rated mortgage- backed securities which are 92% rated AAA, 3% AA, and 5% A. Since December 31, 2002, the Company has added approximately $5.7 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 durations. The Company has maintained an effective duration of approximately 2.2 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 $14 million at June 30, 2004, compared with $359 million at March 31, 2004 and $201 million at December 31, 2003. The decline in unrealized gains reflects the rise in interest rates in the second quarter. The asymmetrical accounting treatment of the impact of a change in interest rates on the Company's balance sheet may create a situation in which an increase in interest rates can adversely affect reported equity and regulatory capital, even though economically there may be no impact on the economic capital position of the Company. For example, an increase in rates will result in a decline in the value of the fixed rate portion of the Company's fixed income investment portfolio, which will be reflected through a reduction in other comprehensive income in the Company's shareholders' equity, thereby affecting the tangible common equity ("TCE") ratio. Under current accounting rules, there is no corresponding change in value of the Company's fixed rate liabilities, even though economically these liabilities are more valuable as rates rise. 23 Loans - -----
(Dollars in billions) Quarterly Year-to-date Period End Average Average ------------------------- ------------------------- ------------------------- Total Non-Margin Margin Total Non-Margin Margin Total Non-Margin Margin ----- ---------- ------ ----- ---------- ------ ----- ---------- ------ June 30, 2004 $38.2 $ 32.1 $ 6.1 $37.7 $ 31.2 $ 6.5 $37.0 $ 30.7 $ 6.3 December 31, 2003 35.3 29.6 5.7 37.3 31.5 5.8 35.6 31.8 3.8 June 30, 2003 37.8 32.9 4.9 35.7 32.2 3.5 33.9 31.9 2.0
Total loans were $38.2 billion at June 30, 2004, compared with $35.3 billion at December 31, 2003. The rise in total loans primarily reflects an increase in overdrafts, securities industry loans, and margin loans. The Company continues to focus on its strategy of reducing non-strategic and outsized corporate loan exposures to improve its credit risk profile. Average total loans were $37.7 billion in the second quarter of 2004, compared with $35.7 billion in the second quarter of 2003 while for the six months ended June 30, 2004, average loans were $37.0 billion compared with $33.9 billion for 2003. The increase in average loans in both periods results from higher margin loans due to the Pershing acquisition. The following tables provide additional details on the Company's loan exposures and outstandings at June 30, 2004 in comparison to December 31, 2003. Overall Loan Portfolio - ----------------------
Unfunded Total Unfunded Total (Dollars in billions) Loans Commitments Exposure Loans Commitments Exposure ---------------------------- ---------------------------- 06/30/04 06/30/04 06/30/04 12/31/03 12/31/03 12/31/03 -------- -------- -------- -------- -------- -------- Financial Institutions $ 12.3 $ 21.2 $ 33.5 $ 9.2 $ 21.8 $ 31.0 Corporate 3.5 19.8 23.3 4.0 20.5 24.5 -------- ------- ------- -------- -------- -------- 15.8 41.0 56.8 13.2 42.3 55.5 -------- ------- ------- -------- -------- -------- Consumer & Middle Market 8.5 4.4 12.9 8.2 4.1 12.3 Leasing Financings 5.6 0.1 5.7 5.8 - 5.8 Commercial Real Estate 2.2 0.9 3.1 2.4 0.8 3.2 Margin Loans 6.1 - 6.1 5.7 - 5.7 -------- -------- -------- -------- -------- -------- Total $ 38.2 $ 46.4 $ 84.6 $ 35.3 $ 47.2 $ 82.5 ======== ======== ======== ======== ======== ========
Financial Institutions - ---------------------- The financial institutions portfolio exposure was $33.5 billion June 30, 2004 compared to $31.0 billion at December 31, 2003. These exposures are of high quality, with 86% meeting the investment grade criteria of the Company's rating system. The exposures are generally short-term, with 77% 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 following table. 24
(Dollars in billions) 06/30/04 12/31/03 ---------------------------- ---------------------------- Unfunded Total %Inv %due Unfunded Total Lending Division Loans Commitments Exposures Grade <1 Yr Loans Commitments Exposures - ---------------- ------ ----------- --------- ----- ------ ------ ----------- --------- Banks $ 4.7 $ 3.2 $ 7.9 69% 88% $ 2.6 $ 3.1 $ 5.7 Securities Industry 2.5 3.0 5.5 87 95 1.9 3.5 5.4 Insurance 0.4 4.8 5.2 96 64 0.3 5.0 5.3 Government 0.1 5.4 5.5 100 57 0.2 5.6 5.8 Asset Managers 4.1 3.6 7.7 85 81 3.6 3.5 7.1 Mortgage Banks 0.4 0.5 0.9 86 73 0.4 0.5 0.9 Endowments 0.1 0.7 0.8 98 58 0.2 0.6 0.8 ------ ----------- --------- ----- ------ ------ ----------- --------- Total $ 12.3 $ 21.2 $ 33.5 86% 77% $ 9.2 $ 21.8 $ 31.0 ====== =========== ========= ===== ====== ====== =========== =========
Corporate - --------- The corporate portfolio exposure declined to $23.3 billion at June 30, 2004 from $24.5 billion at year-end 2003. Approximately 77% of the portfolio is investment grade while 29% of the portfolio matures within one year.
(Dollars in billions) 06/30/04 12/31/03 ---------------------------- ---------------------------- Unfunded Total %Inv %due Unfunded Total Lending Division Loans Commitments Exposures Grade <1 Yr Loans Commitments Exposures - ---------------- ------ ----------- --------- ----- ------ ------ ----------- --------- Media $ 0.8 $ 2.1 $ 2.9 66% 13% $ 0.9 $ 2.3 $ 3.2 Cable 0.6 0.5 1.1 29 1 0.7 0.7 1.4 Telecom 0.1 0.5 0.6 72 13 0.3 0.6 0.9 ------ ----------- --------- ------ ----- ------ ----------- --------- Subtotal 1.5 3.1 4.6 58% 10% 1.9 3.6 5.5 Energy 0.3 4.3 4.6 85 33 0.4 4.2 4.6 Retailing 0.2 2.4 2.6 82 46 0.1 2.3 2.4 Automotive 0.1 1.9 2.0 72 50 0.1 2.1 2.2 Healthcare 0.2 1.4 1.6 90 20 0.2 1.3 1.5 Other* 1.2 6.7 7.9 80 29 1.3 7.0 8.3 ------ ---------- ---------- ------ ----- ------ ----------- --------- Total $ 3.5 $ 19.8 $ 23.3 77% 29% $ 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 and exposures have since declined to $559 million. The percentage of investment grade borrowers in the telecom portfolio has increased to 72% from 52% at year-end 2003. 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 $556 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, $202 million to foreign airlines and $89 million to U.S. regionals. During the second quarter of 2004, the industry continued to face the dilemma of an increasingly uncompetitive cost structure, weak demand and strong competition from the regionals. The industry's stagnant demand and considerable excess capacity have negatively impacted the valuations 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. 25 Nonperforming Assets - -------------------------
Change Change 06/30/04 vs. 06/30/04 vs. (Dollars in millions) 06/30/04 03/31/04 03/31/04 12/31/03 12/31/03 -------- -------- ----------- -------- ------------ Loans: Commercial $ 208 $ 231 $ (23) $ 219 $ (11) Foreign 53 66 (13) 79 (26) Other 50 46 4 51 (1) -------- -------- ----------- -------- ------------ Total Nonperforming Loans 311 343 (32) 349 (38) Other Real Estate - - - - - -------- -------- ----------- -------- ------------ Total Nonperforming Assets $ 311 $ 343 $ (32) $ 349 $ (38) ======== ======== =========== ======== ============ Nonperforming Assets Ratio 1.0% 1.1% 1.2% Allowance for Loan Losses/Nonperforming Loans 192.2 184.4 191.2 Allowance for Loan Losses/Nonperforming Assets 192.2 184.4 191.2 Allowance for Credit Losses/Nonperforming Loans 249.1 230.5 230.2 Allowance for Credit Losses/Nonperforming Assets 249.1 230.5 230.2
Nonperforming assets declined by $32 million, or 9% during the second quarter of 2004 to $311 million and are down 29% from a year ago. The sequential quarter decrease primarily reflects paydowns and charge-offs of commercial and foreign loans. The ratio of the allowance for credit losses to nonperforming assets increased to 249.1% at June 30, 2004, compared with 230.5% at March 31, 2004, and 188.6% at June 30, 2003. Activity in Nonperforming Assets (Dollars in millions) Quarter End Year-to-Date June 30, 2004 June 30, 2004 ------------- -------------- Balance at Beginning of Period $ 343 $ 349 Additions 45 79 Charge-offs (21) (40) Paydowns/Sales (56) (77) ------------- -------------- Balance at End of Period $ 311 $ 311 ============= ============== Interest income would have been increased by $3 million for the second quarters of 2004 and 2003 if loans on nonaccrual status at June 30, 2004 and 2003 had been performing for the entire period. Interest income would have been increased by $7 million and $8 million for the six months ended June 30, 2004 and 2003 if loans on nonaccrual status at June 30, 2004 and 2003 had been performing for the entire period. 26 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: June 30, March 31, June 30, (Dollars in millions) 2004 2004 2003 ---------- ----------- ---------- Impaired Loans with an Allowance $ 168 $ 197 $ 393 Impaired Loans without an Allowance(1) 121 124 4 ---------- ----------- ---------- Total Impaired Loans $ 289 $ 321 $ 397 ========== =========== ========== Allowance for Impaired Loans(2) $ 69 $ 88 $ 189 Average Balance of Impaired Loans during the Quarter $ 305 $ 306 $ 404 Interest Income Recognized on Impaired Loans during the Quarter $ 0.6 $ 0.9 $ 0.4 (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 - --------- June 30, March 31, June 30, (Dollars in millions) 2004 2004 2003 ---------- ----------- ---------- Margin Loans $ 6,114 $ 6,130 $ 4,877 Non-Margin Loans 32,091 29,940 32,919 Total Loans 38,205 36,070 37,796 Allowance for Loan Losses 598 632 669 Allowance for Lending-Related Commitments 177 158 155 Total Allowance for Credit Losses 775 790 824 Allowance for Credit Losses As a Percent of Total Loans 2.03% 2.19% 2.18% Allowance for Credit Losses As a Percent of Non-Margin Loans 2.42 2.64 2.50 Allowance for Loan Losses As a Percent of Total Loans 1.57 1.75 1.77 Allowance for Loan Losses As a Percent of Non-Margin Loans 1.86 2.11 2.03 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. 27 The allowance for credit losses was $775 million, or 2.03% of total loans at June 30, 2004, compared with $790 million, or 2.19% of total loans at March 31, 2004, and $824 million, or 2.18% of total loans at June 30, 2003. The Company has $6.1 billion of secured margin loans on its balance sheet at June 30, 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 2.42% at June 30, 2004, compared with 2.64% at March 31, 2004 and 2.50% at June 30, 2003, reflecting continued improvement in the credit quality in the second 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 9% this quarter, and have declined by 29% from a year ago. The Company's criticized and classified loans experienced a mid-teens decline from the first quarter of 2004 and are down by over a third from a year ago. The ratio of the allowance for loan losses to nonperforming assets was 192.2% at June 30, 2004, up from 184.4% at March 31, 2004, and 153.09% at June 30, 2003. Included in the Company's allowance for credit losses at June 30, 2004 is an allocated transfer risk reserve related to Argentina of $13 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 28 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. 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: June 30, 2004 December 31, 2003 ------------- ----------------- Domestic Real Estate 2% 2% Commercial 75 74 Consumer 1 1 Foreign 7 9 Unallocated 15 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 $61.1 billion at June 30, 2004, compared with $56.1 billion at March 31, 2004 and $64.7 billion at June 30, 2003. The increase on a sequential quarter basis was primarily due to the significant liquidity in the markets at June 30, 2004 which the Company's clients left on deposit rather than invested in the equity and fixed income markets. Noninterest-bearing deposits were $16.1 billion at June 30, 2004, compared with $14.8 billion at December 31, 2003. Interest-bearing deposits were $45.0 billion at June 30, 2004, compared with $41.6 billion at December 31, 2003. 29 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 June 30, 2004, the unallocated allowance was 15% of the total allowance. If the unallocated allowance were five percent higher or lower, the allowance would have increased or decreased by $39 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 $51 million, while if each pass credit were rated one grade worse, the allowance would have increased by $99 million. 30 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 $22 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 June 30, 2004, approximately $2.2 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 $56 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 ($3,373 million at June 30, 2004) and indefinite-lived intangible assets ($370 million at June 30, 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. 31 Other identifiable intangible assets ($422 million at June 30, 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 $4.2 billion of goodwill and intangible assets at June 30, 2004. The impact of a 5% impairment charge would result in a change of pre-tax income of approximately $208 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 $14.7 billion and $14.3 billion on an average basis for the six months of 2004 and 2003. Average foreign deposits, primarily from the Company's European based securities servicing business, were $26.2 billion and $23.8 billion at June 30, 2004 and 2003. Savings and other time deposits were $10.2 billion on a year-to-date average basis at June 30, 2004 compared to $10.1 billion at June 30, 2003. Average payables to customers and broker-dealers rose to $6.9 billion from $2.2 billion and long-term debt increased to $6.2 billion from $6.0 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 June 30, 2004, the Bank could pay dividends of approximately $867 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 $302 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. The Parent had no borrowings from the Bank at June 30, 2004. 32 For the quarter ended June 30, 2004, the Parent's quarterly average commercial paper borrowings were $75 million compared with $118 million in 2003. At June 30, 2004, the Parent had cash of $631 million compared with cash of $585 million at March 31, 2004 and $691 million at June 30, 2003. Net of commercial paper outstanding, the Parent's cash position at June 30, 2004 was down $44 million compared with June 30, 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 June 30, 2004 and June 30, 2003. The Parent also has the ability to access the capital markets. At July 31, 2004, the Parent had shelf registration statements with a capacity of $2.5 billion of debt, preferred stock, preferred trust securities, or common stock. Access to the capital markets is partially dependent on the Company's credit ratings, which as of June 30, 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 June 30, 2004 and $100 million of long-term debt that is due in 2005. In addition, at June 30, 2004, the Parent has the option to call $75 million of subordinated debt in 2004 and $94 million in 2005, which it will call and refinance if market conditions are favorable. The Company did not redeem any long-term debt in the month of July. 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 June 30, 2004 and 2003 was 98.63% and 101.19%. 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 $3.4 billion in cash flows through June 30, 2004, compared with $1.0 billion provided by operating activities through June 30, 2003. The sources of cash flows from operations in 2004 and 2003 were principally the result of changes in trading activities and net income. In the first six months of 2004, cash used by investing activities was $8.4 billion as compared to cash used by investing activities in the first six months of 2003 of $12.1 billion. In the first six months of 2004 and 2003, purchases of securities available-for-sale were a significant use of funds. In the first six months of 2004, cash provided by financing activities was $4.4 billion as compared to cash provided by financing activities in the first six months of 2003 of $10.6 billion. Sources of funds in 2004 include deposits and other borrowed funds. Deposits were the primary source of funds in 2003. 33 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 June 30, 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:
June 30, 2004 June 30, 2003 --------------------- -------------------- Well Adequately Company Capitalized Capitalized Company Bank Company Bank Targets Guidelines Guidelines ---------- -------- --------- -------- -------- ----------- ----------- Tier 1* 7.70% 7.32% 6.83% 6.91% 7.75% 6% 4% Total Capital** 11.63 11.36 11.07 11.17 11.75 10 8 Leverage 6.00 5.70 5.85 5.90 6.50 5 3-5 Tangible Common Equity ("TCE") 4.95 5.31 4.32 5.01 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 regulatory Tier 1 capital and Total capital ratios were 7.70% and 11.63% at June 30, 2004, compared with 7.60% and 11.70% at March 31, 2004, and 6.83% and 11.07% at June 30, 2003. The regulatory leverage ratio was 6.00% at June 30, 2004, compared with 5.83% at March 31, 2004, and 5.85% at June 30, 2003. The improvement in the Company's regulatory capital ratios versus March 31, 2004 reflects the retention of earnings during the quarter. The Company's tangible common equity as a percentage of total assets was 4.95% at June 30, 2004, down from 5.22% at March 31, 2004 reflecting a decline in the securities valuation allowance and an increase in short-term high quality assets. 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. A billion dollar change in assets changes the TCE ratio 6 basis points while a $100 million change in common equity changes the TCE ratio 11 basis points. Given the Company's improving capital ratios and consistent capital generation it expects to repurchase 2-3 million shares of common stock in the second half of this year. 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. 34 The following table presents the components of the Company's risk-based capital at June 30, 2004 and 2003: (Dollars in millions) 2004 2003 ---------- ---------- - ---------------- Common Stock $ 8,777 $ 8,113 Preferred Stock - - Preferred Trust Securities 1,150 1,150 Adjustments: Intangibles (4,159) (3,966) Securities Valuation Allowance - (214) Merchant Banking Investments (5) (5) ---------- ---------- Tier 1 Capital 5,763 5,078 ---------- ---------- Qualifying Unrealized Equity Security Gains - - Qualifying Subordinated Debt 2,174 2,356 Qualifying Allowance for Loan Losses 763 800 ---------- ---------- Tier 2 Capital 2,937 3,156 ---------- ---------- Total Risk-based Capital $ 8,700 $ 8,234 ========== ========== Risk-Adjusted Assets $ 74,809 $ 74,378 ========== ========== 35 TRADING ACTIVITIES The fair value and notional amounts of the Company's financial instruments held for trading purposes at June 30, 2004 and June 30, 2003 are as follows: June 30, 2004 2004 Average ------------------------------ ------------------- (Dollars in millions) Fair Value Fair Value Notional ------------------- ------------------- Trading Account Amount Assets Liabilities Assets Liabilities - --------------- -------- ------ ----------- ------ ----------- Interest Rate Contracts: Futures and Forward Contracts $ 58,295 $ - $ 15 $ - $ 39 Swaps 208,624 1,816 853 1,282 201 Written Options 169,638 - 1,178 - 1,183 Purchased Options 100,969 206 - 99 - Foreign Exchange Contracts: Swaps 2,806 - - - - Written Options 8,732 - 15 - 21 Purchased Options 10,783 50 - 51 - Commitments to Purchase and Sell Foreign Exchange 67,333 286 316 206 242 Debt Securities - 952 74 2,064 83 Credit Derivatives 1,562 2 3 2 7 Equity Derivatives 1,602 150 122 158 112 ------ ----------- ------ ----------- Total Trading Account $3,462 $ 2,576 $3,862 $ 1,888 ====== =========== ====== =========== June 30, 2003 2003 Average ------------------------------ ------------------- (Dollars in millions) Fair Value Fair Value Notional ------------------- ------------------- Trading Account Amount Assets Liabilities Assets Liabilities - --------------- -------- ------ ----------- ------ ----------- Interest Rate Contracts: Futures and Forward Contracts $ 62,181 $ 43 $ - $ 86 $ - Swaps 158,635 1,952 537 2,089 698 Written Options 119,304 - 1,502 - 1,432 Purchased Options 63,197 268 - 271 - Foreign Exchange Contracts: Swaps 2,791 - - - - Written Options 16,387 - 96 - 79 Purchased Options 18,912 73 - 520 - Commitments to Purchase and Sell Foreign Exchange 63,020 407 456 374 489 Debt Securities - 3,488 26 4,360 35 Credit Derivatives 1,801 5 4 6 4 Equity Derivatives - 16 - 22 17 ------ ----------- ------ ----------- Total Trading Account $6,252 $ 2,621 $7,728 $ 2,754 ====== =========== ====== =========== 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 overnight 36 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.
(Dollars in millions) 2nd Quarter 2004 Year-to-Date 2004 --------------------------- ------------------------------------- Average Minimum Maximum Average Minimum Maximum 6/30/04 ------- ------- ------- ------- ------- ------- ------- Interest rate $ 5.2 $ 3.0 $ 7.8 $ 4.8 $ 2.2 $ 7.8 $ 3.0 Foreign Exchange 1.0 0.4 3.1 1.0 0.4 3.1 2.3 Equity 1.6 1.4 2.4 1.4 0.6 2.4 1.6 Credit Derivatives 1.7 1.6 2.1 1.9 1.6 2.1 1.7 Diversification (1.9) NM NM (1.3) NM NM (3.0) Overall Portfolio 7.6 5.6 12.8 7.8 4.9 12.8 5.6
(Dollars in millions) 2nd Quarter 2003 Year-to-Date 2003 --------------------------- ------------------------------------- Average Minimum Maximum Average Minimum Maximum 6/30/03 ------- ------- ------- ------- ------- ------- ------- Interest rate $ 6.4 $ 3.2 $ 10.4 $ 5.6 $ 2.2 $ 11.2 $ 9.7 Foreign Exchange 0.9 0.5 1.9 0.8 0.5 1.9 0.9 Equity 0.1 - 0.3 0.1 - 0.4 0.3 Credit Derivatives 2.0 1.6 2.8 1.0 - 2.8 1.8 Diversification (1.9) NM NM (0.6) NM NM (1.2) Overall Portfolio 7.5 5.1 14.7 6.9 2.0 14.7 11.5 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 six months of 2004, interest rate risk generated approximately 53% of average VAR, credit derivatives generated 21% of average VAR, foreign exchange accounted for 11% of average VAR, and equity generated 15% of average VAR. During the second quarter and first six months of 2004, the Company's daily trading loss did not exceed the Company's calculated VAR amounts on any given day. The following table of total daily revenue or loss captures trading volatility and shows the number of days in which the Company's trading revenues fell within particular ranges during the past year. Distribution of Revenues - ------------------------ For the Quarter Ended ------------------------------------------------ Revenue Range 6/30/04 3/31/04 12/31/03 9/30/03 6/30/03 ------------------------------------------------ (Dollars in millions) Number of Occurrences - ---------------------- -------- --------- ---------- --------- -------- Less than $(2.5) 1 0 0 1 1 $(2.5)~ $ 0 11 2 5 11 8 $ 0 ~ $ 2.5 32 48 46 33 40 $ 2.5 ~ $ 5.0 17 10 15 17 15 More than $5.0 3 2 0 4 1 37 Counterparty Risk Ratings Profile - --------------------------------- The table below summarizes the risk ratings of the Company's foreign exchange and interest rate derivative counterparty credit exposure for the past year. For the Quarter Ended ------------------------------------------------ Rating (1) 6/30/04 3/31/04 12/31/03 9/30/03 6/30/03 - --------------------- ------------------------------------------------ AAA to AA- 70% 61% 59% 60% 67% A+ to A- 16 24 25 23 19 BBB+ to BBB- 11 12 12 13 9 Noninvestment Grade 3 3 4 4 5 ------- ------- -------- ------- ------- Total 100% 100% 100% 100% 100% ======= ======= ======== ======= ======= (1) Represents credit rating agency equivalent of internal credit ratings. 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. 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) June 30, 2004 $ % --------- --------- +200 bp Ramp vs. Stable Rate $ 26 1.48% +100 bp Ramp vs. Stable Rate 17 0.95 -50 bp Shock vs. Stable Rate (2) (0.11) The 100+ basis point ramp scenario assumes short-term rates rise 25 basis points in each of the next four quarters, while the 200+ ramp scenario assumes a 50 basis point per quarter increase. The scenarios assume a flattening of the yield curve with 10 year rates rising only 70 basis points in the 100+ basis point scenario and 82 basis points in the 200+ basis point scenario. These scenarios do not reflect strategies that management could employ to limit the impact as interest rate expectations change. 38 The Company's interest rate positioning has been slightly asset sensitive over the past two quarters and is expected to become more so over time. The Company's current positioning assumes a gradual rise in rates which should be beneficial to earnings. 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 June 30, 2004, the Company believes it has a limited ability to reduce rates on its deposit products if there are 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. 39 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 June 30, 2004 ended June 30, 2003 ---------------------------------- ---------------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate --------- ---------- --------- --------- ---------- --------- ASSETS - ------ Interest-Bearing Deposits in Banks (primarily foreign) $ 12,779 $ 78 2.47% $ 7,049 $ 41 2.37% Federal Funds Sold and Securities Purchased Under Resale Agreements 7,340 17 0.92 7,931 24 1.20 Margin Loans 6,495 35 2.18 3,492 21 2.42 Loans Domestic Offices 22,236 209 3.79 20,281 220 4.35 Foreign Offices 8,947 62 2.80 11,964 90 3.01 --------- ---------- --------- ---------- Non-Margin Loans 31,183 271 3.50 32,245 310 3.85 --------- ---------- --------- ---------- Securities U.S. Government Obligations 479 3 2.46 209 2 4.16 U.S. Government Agency Obligations 4,008 33 3.27 3,019 29 3.84 Obligations of States and Political Subdivisions 235 5 7.96 352 6 7.30 Other Securities 18,260 158 3.44 15,140 140 3.67 Trading Securities 2,082 9 1.69 4,346 32 2.95 --------- ---------- --------- ---------- Total Securities 25,064 208 3.29 23,066 209 3.62 --------- ---------- --------- ---------- Total Interest-Earning Assets 82,861 609 2.95% 73,783 605 3.29% ---------- ---------- Allowance for Credit Losses (629) (826) Cash and Due from Banks 2,842 2,748 Other Assets 15,299 15,219 --------- --------- TOTAL ASSETS $ 100,373 $ 90,924 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Interest-Bearing Deposits Money Market Rate Accounts $ 6,864 $ 12 0.68% $ 7,239 $ 17 0.94% Savings 9,357 15 0.66 9,039 18 0.81 Certificates of Deposit $100,000 & Over 3,917 12 1.21 4,649 19 1.63 Other Time Deposits 953 4 1.60 1,350 5 1.55 Foreign Offices 26,568 83 1.26 23,827 79 1.32 --------- ---------- --------- ---------- Total Interest-Bearing Deposits 47,659 126 1.06 46,104 138 1.20 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 1,612 3 0.68 1,428 4 1.10 Payables to Customers and Broker-Dealers 6,813 12 0.69 3,886 9 0.88 Other Borrowed Funds 2,387 9 1.51 1,386 5 1.57 Long-Term Debt 6,139 30 1.92 6,469 42 2.53 --------- ---------- --------- ---------- Total Interest-Bearing Liabilities 64,610 180 1.11% 59,273 198 1.33% ---------- ---------- Noninterest-Bearing Deposits 14,803 12,383 Other Liabilities 12,256 11,661 Common Shareholders' Equity 8,704 7,607 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 100,373 $ 90,924 ========= ========= Net Interest Earnings and Interest Rate Spread $ 429 1.84% $ 407 1.96% ========== ========= ========== ========= Net Yield on Interest-Earning Assets 2.08% 2.21% ========= =========
40
THE BANK OF NEW YORK COMPANY, INC. Average Balances and Rates on a Taxable Equivalent Basis (Dollars in millions) For the six months For the six months ended June 30, 2004 ended June 30, 2003 ---------------------------------- ---------------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate --------- ---------- --------- --------- ---------- --------- ASSETS - ------ Interest-Bearing Deposits in Banks (primarily foreign) $ 12,235 $ 147 2.41% $ 6,024 $ 71 2.38% Federal Funds Sold and Securities Purchased Under Resale Agreements 7,228 33 0.93 6,475 39 1.21 Margin Loans 6,337 69 2.18 1,970 24 2.43 Loans Domestic Offices 21,655 264 2.46 19,471 435 4.50 Foreign Offices 9,074 125 2.77 12,424 186 3.03 --------- ---------- --------- ---------- Non-Margin Loans 30,729 389 2.55 31,895 621 3.93 --------- ---------- --------- ---------- Securities U.S. Government Obligations 459 5 2.39 267 5 3.88 U.S. Government Agency Obligations 4,154 68 3.25 3,135 63 4.02 Obligations of States and Political Subdivisions 241 8 6.73 367 13 7.07 Other Securities 18,135 311 3.44 14,582 278 3.80 Trading Securities 2,417 24 1.95 5,025 76 3.05 --------- ---------- --------- ---------- Total Securities 25,406 416 3.28 23,376 435 3.72 --------- ---------- --------- ---------- Total Interest-Earning Assets 81,935 1,054 2.59% 69,740 1,190 3.44% ---------- ---------- Allowance for Credit Losses (654) (828) Cash and Due from Banks 2,907 2,780 Other Assets 15,838 14,036 --------- --------- TOTAL ASSETS $ 100,026 $ 85,728 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Interest-Bearing Deposits Money Market Rate Accounts $ 6,736 $ 23 0.68% $ 7,409 $ 35 0.97% Savings 9,253 31 0.66 8,814 38 0.86 Certificates of Deposit $100,000 & Over 3,952 24 1.23 4,687 39 1.69 Other Time Deposits 984 7 1.53 1,311 11 1.68 Foreign Offices 26,201 159 1.22 23,847 161 1.36 --------- ---------- --------- ---------- Total Interest-Bearing Deposits 47,126 244 1.04 46,068 284 1.24 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 1,612 5 0.67 1,360 7 1.04 Payables to Customers and Broker-Dealers 6,893 24 0.71 2,219 9 0.80 Other Borrowed Funds 2,393 18 1.50 823 7 1.73 Long-Term Debt 6,174 60 1.94 5,958 80 2.68 --------- ---------- --------- ---------- Total Interest-Bearing Liabilities 64,198 351 1.10% 56,428 387 1.38% ---------- ---------- Noninterest-Bearing Deposits 14,410 11,871 Other Liabilities 12,805 10,261 Common Shareholders' Equity 8,613 7,168 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 100,026 $ 85,728 ========= ========= Net Interest Earnings and Interest Rate Spread $ 703 1.49% $ 803 2.06% ========== ========= ========== ========= Net Yield on Interest-Earning Assets 1.72% 2.32% ========= =========
41 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 acquisitions, 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 level of cross-border investing, investor sentiment, the level of debt issuance and currency exchange rate volatility all impact our revenues. 42 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. 43
THE BANK OF NEW YORK COMPANY, INC. Consolidated Balance Sheets (Dollars in millions, except per share amounts) (Unaudited) June 30, 2004 December 31, 2003 -------------- ----------------- Assets - ------ Cash and Due from Banks $ 3,102 $ 3,843 Interest-Bearing Deposits in Banks 9,846 8,286 Securities Held-to-Maturity (Fair value of $1,402 in 2004 and $256 in 2003) 1,438 261 Available-for-Sale 21,548 22,642 ------------- ----------------- Total Securities 22,986 22,903 Trading Assets at Fair Value 3,462 5,406 Federal Funds Sold and Securities Purchased Under Resale Agreements 8,091 4,829 Loans (less allowance for loan losses of $598 in 2004 and $668 in 2003) 37,607 34,615 Premises and Equipment 1,404 1,398 Due from Customers on Acceptances 311 170 Accrued Interest Receivable 277 214 Goodwill 3,373 3,276 Intangible Assets 792 816 Other Assets 6,285 6,641 ------------- ----------------- Total Assets $ 97,536 $ 92,397 ============= ================= Liabilities and Shareholders' Equity - ------------------------------------ Deposits Noninterest-Bearing (principally domestic offices) $ 16,119 $ 14,789 Interest-Bearing Domestic Offices 20,574 19,282 Foreign Offices 24,367 22,335 ------------- ----------------- Total Deposits 61,060 56,406 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 1,315 1,039 Trading Liabilities 2,576 2,519 Payables to Customers and Broker-Dealers 9,439 10,192 Other Borrowed Funds 1,100 834 Acceptances Outstanding 313 172 Accrued Taxes and Other Expenses 4,037 4,256 Accrued Interest Payable 136 82 Other Liabilities (including allowance for lending-related commitments of $177 in 2004 and $136 in 2003) 2,750 2,348 Long-Term Debt 6,025 6,121 ------------- ----------------- Total Liabilities 88,751 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 3,000 shares in 2003 - - Common Stock-par value $7.50 per share authorized 2,400,000,000 shares, issued 1,043,348,210 shares in 2004 and 1,039,968,482 shares in 2003 7,825 7,800 Additional Capital 1,696 1,647 Retained Earnings 5,764 5,330 Accumulated Other Comprehensive Income (53) 72 ------------- ----------------- 15,232 14,849 Less: Treasury Stock (265,321,337 shares in 2004 and 264,649,827 shares in 2003), at cost 6,446 6,420 Loan to ESOP (126,960 shares in 2004 and 126,960 shares in 2003), at cost 1 1 ------------- ----------------- Total Shareholders' Equity 8,785 8,428 ------------- ----------------- Total Liabilities and Shareholders' Equity $ 97,536 $ 92,397 ============= ================= - --------------------------------------------------------------------------------------------- Note: The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date.
44 THE BANK OF NEW YORK COMPANY, INC. Consolidated Statements of Income (Dollars in millions, except per share amounts) (Unaudited)
For the three months For the six months ended June 30, ended June 30, 2004 2003 2004 2003 -------- -------- -------- -------- Interest Income - --------------- Loans $ 272 $ 310 $ 389 $ 620 Margin loans 35 21 69 24 Securities Taxable 180 155 360 315 Exempt from Federal Income Taxes 10 13 19 26 -------- -------- -------- -------- 190 168 379 341 Deposits in Banks 78 41 147 71 Federal Funds Sold and Securities Purchased Under Resale Agreements 17 24 33 39 Trading Assets 9 32 23 76 -------- -------- -------- -------- Total Interest Income 601 596 1,040 1,171 -------- -------- -------- -------- Interest Expense - ---------------- Deposits 126 138 244 284 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 3 4 5 7 Other Borrowed Funds 9 5 18 7 Customer Payables 12 9 24 9 Long-Term Debt 30 42 60 80 -------- -------- -------- -------- Total Interest Expense 180 198 351 387 -------- -------- -------- -------- Net Interest Income 421 398 689 784 - ------------------- Provision for Credit Losses 10 40 22 80 -------- -------- -------- -------- Net Interest Income After Provision for Credit Losses 411 358 667 704 -------- -------- -------- -------- Noninterest Income - ------------------ Servicing Fees Securities 717 598 1,433 1,071 Global Payment Services 81 80 160 158 -------- -------- -------- -------- 798 678 1,593 1,229 Private Client Services and Asset Management Fees 113 94 221 184 Service Charges and Fees 94 92 190 189 Foreign Exchange and Other Trading Activities 100 88 206 154 Securities Gains 12 9 45 16 Other 49 35 141 69 -------- -------- -------- -------- Total Noninterest Income 1,166 996 2,396 1,841 -------- -------- -------- -------- Noninterest Expense - ------------------- Salaries and Employee Benefits 570 498 1,144 921 Net Occupancy 72 64 153 122 Furniture and Equipment 51 49 102 85 Clearing 44 40 92 69 Sub-custodian Expenses 22 19 44 35 Software 50 43 99 78 Communications 23 23 47 44 Amortization of Intangibles 8 7 16 10 Merger and Integration Costs - 25 - 25 Other 172 135 328 253 -------- -------- -------- -------- Total Noninterest Expense 1,012 903 2,025 1,642 -------- -------- -------- -------- Income Before Income Taxes 565 451 1,038 903 Income Taxes 194 156 303 313 -------- -------- -------- -------- Net Income $ 371 $ 295 $ 735 $ 590 - ---------- ======== ======== ======== ======== Per Common Share Data: - ----------------------------- Basic Earnings $ 0.48 $ 0.39 $ 0.95 $ 0.80 Diluted Earnings 0.48 0.39 0.94 0.80 Cash Dividends Paid 0.20 0.19 0.39 0.38 Diluted Shares Outstanding 779 757 778 742
45
THE BANK OF NEW YORK COMPANY, INC. Consolidated Statement of Changes in Shareholders' Equity For the six months ended June 30, 2004 (Dollars in millions) (Unaudited) Common Stock Balance, January 1 $ 7,800 Issuances in Connection with Employee Benefit Plans 25 ------- Balance, June 30 7,825 ------- Additional Capital Balance, January 1 1,647 Issuances in Connection with Employee Benefit Plans 49 ------- Balance, June 30 1,696 ------- Retained Earnings Balance, January 1 5,330 Net Income $ 735 735 Cash Dividends on Common Stock (301) ------- Balance, June 30 5,764 ------- Accumulated Other Comprehensive Income Balance, January 1 72 Change in Fair Value of Securities Available-for-Sale, Net of Taxes of $(63) Million (112) (112) Reclassification Adjustment, Net of Taxes of $(1) Million (1) (1) Foreign Currency Translation Adjustment, Net of Taxes of $(2) Million (6) (6) Net Unrealized Derivative Gains on Cash Flow Hedges, Net of Taxes of $(4) Million (4) (4) Minimum Pension Liability Adjustment, Net of Taxes of $(1) Million (2) (2) ------- ------- Balance, June 30 (53) ------- Total Comprehensive Income $ 610 ======= Less Treasury Stock Balance, January 1 6,420 Issued (21) Acquired 47 ------- Balance, June 30 6,446 ------- Less Loan to ESOP Balance, January 1 1 ------- Balance, June 30 1 ------- Total Shareholders' Equity, June 30, 2004 $ 8,785 ======= - -------------------------------------------------------------------------------------- Comprehensive Income for the three months ended June 30, 2004 and 2003 was $160 million and $331 million. Comprehensive Income for the six months ended June 30, 2004 and 2003 was $610 million and $614 million. See accompanying Notes to Consolidated Financial Statements.
46 THE BANK OF NEW YORK COMPANY, INC. Consolidated Statements of Cash Flows (Dollars in millions) (Unaudited)
For the six months ended June 30, 2004 2003 -------- -------- Operating Activities Net Income $ 735 $ 590 Adjustments to Determine Net Cash Attributable to Operating Activities: Provision for Credit Losses and Losses on Other Real Estate 22 80 Depreciation and Amortization 234 194 Deferred Income Taxes 41 210 Securities Gains (45) (16) Change in Trading Activities 2,049 891 Change in Accruals and Other, Net 411 (979) -------- -------- Net Cash Provided by Operating Activities 3,447 970 -------- -------- Investing Activities Change in Interest-Bearing Deposits in Banks (2,377) (1,386) Change in Margin Loans (402) (249) Purchases of Securities Held-to-Maturity (946) - Paydowns of Securities Held-to-Maturity 105 567 Maturities of Securities Held-to-Maturity - 10 Purchases of Securities Available-for-Sale (7,377) (13,273) Sales of Securities Available-for-Sale 2,318 2,556 Paydowns of Securities Available-for-Sale 4,446 4,202 Maturities of Securities Available-for-Sale 1,162 3,880 Net Principal Disbursed on Loans to Customers (1,949) (1,128) Sales of Loans and Other Real Estate 51 410 Change in Federal Funds Sold and Securities Purchased Under Resale Agreements (3,262) (6,492) Purchases of Premises and Equipment (130) (69) Acquisitions, Net of Cash Acquired (87) (1,769) Proceeds from the Sale of Premises and Equipment 6 2 Other, Net 8 626 -------- -------- Net Cash Used in Investing Activities (8,434) (12,113) -------- -------- Financing Activities Change in Deposits 4,770 8,856 Change in Federal Funds Purchased and Securities Sold Under Repurchase Agreements 276 (234) Change in Payables to Customers and Broker-Dealers (753) 942 Change in Other Borrowed Funds 365 (803) Proceeds from the Issuance of Long-Term Debt 107 1,811 Repayments of Long-Term Debt (101) (804) Issuance of Common Stock 95 1,105 Treasury Stock Acquired (47) (15) Cash Dividends Paid (301) (273) -------- -------- Net Cash Provided by Financing Activities 4,411 10,585 -------- -------- Effect of Exchange Rate Changes on Cash (165) 133 -------- -------- Change in Cash and Due From Banks (741) (425) Cash and Due from Banks at Beginning of Period 3,843 4,748 -------- -------- Cash and Due from Banks at End of Period $ 3,102 $ 4,323 ======== ======== - ----------------------------------------------------------------------------- Supplemental Disclosure of Cash Flow Information Cash Paid During the Period for: Interest $ 298 $ 347 Income Taxes 257 292 Noncash Investing Activity (Primarily Foreclosure of Real Estate) - - - ----------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements.
47 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. During the first six months ended June 30, 2004, approximately 7 million options were granted. In the second quarter and first six months of 2004, the Company recorded $11 million and $18 million of stock option expense, respectively. 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. (Dollars in millions, Second Quarter Year to date except per share amounts) 2004 2003 2004 2003 ------ ------ ------ ------ Reported net income $ 371 $ 295 $ 735 $ 590 Stock based employee compensation costs, using prospective method, net of tax 6 5 11 7 Stock based employee compensation costs, using retroactive restatement method, net of tax (14) (21) (30) (40) ------ ------ ------ ------ Pro forma net income $ 363 $ 279 $ 716 $ 557 ====== ====== ====== ====== Reported diluted earnings per share $ 0.48 $ 0.39 $ 0.94 $ 0.80 Impact on diluted earnings per share (0.01) (0.02) (0.02) (0.04) ------ ------ ------ ------ Pro forma diluted earnings per share $ 0.47 $ 0.37 $ 0.92 $ 0.76 ====== ====== ====== ====== 48 The fair value of options granted in 2004 and 2003 were estimated at the grant date using the following weighted average assumptions: Second Quarter Year to date 2004 2003 2004 2003 ------ ------ ------ ------ Dividend yield 2.50% 3.00% 2.50% 3.00% Expected volatility 25.10 33.54 25.00 32.78 Risk free interest rates 3.73 2.22 2.60 2.66 Expected options lives 5 5 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 entity (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 on the Company 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. 49 3. Acquisitions and Dispositions ----------------------------- The Company continues to be an active acquirer of securities servicing and asset management businesses. During the second quarter of 2004, 2 businesses were acquired for the total cost of $35 million, primarily paid in cash. During the first six months of 2004, 4 businesses were acquired for the total cost of $52 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 acquisitions in the second quarter and first six months of 2004 was $21 million and $31 million, respectively. The tax deductible portion of goodwill for the second quarter and first six months of 2004 is $21 million and $31 million. All of the goodwill was assigned to the Company's Servicing and Fiduciary Businesses segment. At June 30, 2004, the Company was liable for potential contingent payments related to acquisitions in the amount of $654 million. During the second quarter and first six months of 2004, the Company paid $8 million and $8 million for contingent payments related to acquisitions made in prior years. The pro forma effect of the 2004 acquisitions is not material to year-to-date 2004 net income. 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. In May 2004, the Company made a strategic investment in London-based Netik, LLC. Netik provides market-leading data management and consolidated reporting capabilities that leverage its data warehouse for portfolio and investment information, reference data, and analytics. The Company uses Netik products as part of its BNY SmartSourceSM outsourcing solution, and will also partner with Netik to make the product available to other financial institutions. Late in the second quarter of 2004, the Company acquired a unit investment trust business that services approximately $20 billion in assets for over 4,200 different series of unit investment trusts. During the second quarter of 2004, the Company agreed to acquire Osprey Partners LLC's portfolio accounting technology to broaden its managed account services offering. The acquisition will allow the Company to integrate the portfolio accounting function within its proprietary managed account services offering and fully support the comprehensive portfolio view created by unified managed account platforms. 50 4. Goodwill and Intangibles ------------------------ Goodwill by business segment is as follows: (Dollars in millions) June 30, 2004 December 31, 2003 --------------- ------------------- Servicing and Fiduciary Businesses $ 3,233 $ 3,136 Corporate Banking 31 31 Retail Banking 109 109 Financial Markets - - ---------------- ------------------ Consolidated Total $ 3,373 $ 3,276 ================ ================== The Company's business segments are tested annually for goodwill impairment. Intangible Assets - ---------------------
June 30, 2004 December 31, 2003 ---------------------------------------------- ------------------------------ Weighted Gross Net Average Gross Net Carrying Accumulated Carrying Amortization Carrying Accumulated Carrying (Dollars in millions) Amount Amortization Amount Period in Years Amount Amortization Amount -------- ------------ -------- --------------- -------- ------------ -------- Trade Names $ 370 $ - $ 370 Indefinite Life $ 370 $ - $ 370 Customer Relationships 457 (51) 406 17 461 (39) 422 Other Intangible Assets 40 (24) 16 7 43 (19) 24
The aggregate amortization expense of intangibles was $8 million and $7 million for the quarters ended June 30, 2004 and 2003, respectively. The aggregate amortization expense of intangibles was $16 million and $10 million for the six months ended June 30, 2004 and 2003, respectively. Estimated amortization expense for the next five years is as follows: For the Year Ended Amortization (Dollars in millions) December 31, Expense -------------------- ---------------- 2004 $ 32 2005 35 2006 35 2007 33 2008 32 51 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 (Dollars in millions) June 30, 2004 June 30, 2003 --------------------------------------------- ----------------- Allowance for Allowance for Lending-Related Allowance for Allowance for Loan Losses Commitments Credit Losses Credit Losses ------------- --------------- ------------- ----------------- Balance, Beginning of Period $ 632 $ 158 $ 790 $ 830 Charge-Offs (27) - (27) (49) Recoveries 2 - 2 3 ------------- --------------- ------------- ----------------- Net Charge-Offs (25) - (25) (46) Provision (9) 19 10 40 ------------- --------------- ------------- ----------------- Balance, End of Period $ 598 $ 177 $ 775 $ 824 ============= =============== ============= ================= Allowance for Loan Losses $ 669 Allowance for Lending-Related Commitments $ 155
Six Months Ended Six Months Ended (Dollars in millions) June 30, 2004 June 30, 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 (56) - (56) (93) Recoveries 5 - 5 6 ------------- --------------- ------------- ----------------- Net Charge-Offs (51) - (51) (87) Provision (19) 41 22 80 ------------- --------------- ------------- ----------------- Balance, End of Period $ 598 $ 177 $ 775 $ 824 ============= =============== ============= ================= Allowance for Loan Losses $ 669 Allowance for Lending-Related Commitments $ 155
6. Capital Transactions -------------------- At July 31, 2004, the Company had registration statements with a remaining capacity of approximately $2.5 billion of debt, preferred stock, preferred trust securities, or common stock. 52 7. Earnings Per Share ------------------ The following table illustrates the computations of basic and diluted earnings per share:
(Dollars in millions, Three Months Ended Six Months Ended except per share amounts) June 30, June 30, ------------------ ------------------ 2004 2003 2004 2003 -------- -------- -------- -------- Net Income (1) $ 371 $ 295 $ 735 $ 590 ======== ======== ======== ======== Basic Weighted Average Shares Outstanding 772 751 771 736 Shares Issuable on Exercise of Employee Stock Options 7 6 7 6 -------- -------- -------- -------- Diluted Weighted Average Shares Outstanding 779 757 778 742 ======== ======== ======== ======== Basic Earnings Per Share: $ 0.48 $ 0.39 $ 0.95 $ 0.80 Diluted Earnings Per Share: 0.48 0.39 0.94 0.80 (1) Net Income, net income available to common shareholders and diluted net income are the same for all periods presented.
8. Employee Benefit Plans ---------------------- The components of net periodic benefit cost are as follows:
Pension Pension Healthcare Healthcare Benefits Benefits Benefits Benefits ------------------ ---------------- ------------------ ---------------- Three Months Ended Six Months Ended Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, ------------------ ---------------- ------------------ ---------------- (Dollars in millions) 2004 2003 2004 2003 2004 2003 2004 2003 - -------------------- --------- -------- -------- ------- --------- -------- -------- ------- Net Periodic Cost (Income) Service Cost $ 14 $ 11 $ 28 $ 22 $ - $ 1 $ - $ 2 Interest Cost 15 12 30 24 3 2 6 4 Expected Return on Asset (35) (34) (70) (68) (2) (2) (4) (4) Other 2 1 4 2 2 2 4 4 --------- -------- -------- ------- --------- -------- -------- ------- Net Periodic Cost (Income) $ (4)$ (10)$ (8)$ (20)$ 3 $ 3 $ 6 $ 6 ========= ========= ======= ======= ========= ======== ======== =======
53 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 June 30, 2004 and December 31, 2003 follows: Off-Balance-Sheet Credit Risks - ------------------------------ June 30, December 31, (Dollars in millions) 2004 2003 - ---------------------- ------------ ------------ Lending Commitments $ 34,615 $ 35,576 Standby Letters of Credit, net 9,713 10,168 Commercial Letters of Credit 1,231 1,013 Securities Lending Indemnifications 229,539 173,974 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 June 30, 2004 and December 31, 2003 was $177 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 June 30, 2004 and December 31, 2003, securities lending indemnifications were secured by collateral of $230.1 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 June 30, 2004 and December 31, 2003. At June 30, 2004, approximately $6.9 billion of the standbys will expire within one year, and the balance between one to five years. At June 30, 2004, the notional amounts and credit exposures for the Company's credit derivatives swaps were $1,562 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 IRS has recently proposed adjustments to the Company's tax treatment of these transactions. The Company believes that its tax position related to these transactions was proper based upon applicable statutes, regulations and case law in effect at the time the transactions were entered into and intends to defend its position vigorously in accordance with its view of the law controlling these investments. However, a court or other judicial or administrative authority, if presented with the transactions, could 54 disagree. The IRS has indicated that it may consider settlement with taxpayers in such cases, and the Company has begun discussions with the IRS concerning possible settlement of this particular tax issue. It is not known whether a settlement could be reached that would be acceptable to the Company. The Company currently believes it has adequate tax reserves to cover this and any other potential tax exposures the IRS could raise, based on a probability assessment of various potential outcomes. Probabilities and outcomes are reviewed as events unfold, and adjustments to the reserves are made when necessary. 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. 55 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 June 30, 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 July 31, 2004, The Bank of New York Company, Inc. had 778,306,085 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 June 30, 2004 and December 31, 2003 43 Consolidated Statements of Income for the three months and six months ended 44 June 30,2004 and 2003 Consolidated Statement of Changes in Shareholders' Equity for the six months ended June 30, 2004 45 Consolidated Statement of Cash Flows for the six months ended June 30, 2004 and 2003 46 Notes to Consolidated Financial Statements 47 - 54 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 2 - 42 Item 3 Quantitative and Qualitative Disclosures About Market Risk 35 - 38 56 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. 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 second quarter of 2004. Total Number of Average Price Maximum Shares Month Shares Acquired Per Share That May be Repurchased - ----- --------------- ------------- ----------------------- April 1-30 14,109 $ 32.26 15,953,186 May 1-31 819 29.41 15,952,367 June 1-30 874,846 29.33 15,077,521 57 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. In June, 850,000 shares were repurchased in open market transactions. All other shares repurchased in the second quarter resulted from transaction related to employee benefit plans. Shares of the Company's common stock were issued in the following transactions exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) thereof: (a) On June 15, 2004, 9,600 shares of common stock were issued to serving non-employee directors as part of their annual retainer. Item 4. Submission of Matters to Vote of Security Holders - ---------------------------------------------------------- The Company held its annual meeting on April 13, 2004 at The Bank of New York at 101 Barclay St. in New York, New York. The shareholders: (1) elected fifteen persons to serve as directors of the Company; (2) ratified the appointment of Ernst & Young LLP as the Company's independent public accountants for 2004; (3) approved a proposal with respect to an amendment to the Company's 2004 Management Incentive Compensation Plan; (4) defeated a shareholder proposal with respect to political contributions; (5) defeated a shareholder proposal with respect to executive compensation; (6) defeated a shareholder proposal with respect to the composition of the Risk Committee; and (7) approved a shareholder proposal with respect to the Company' Rights Plan. 58 The number of votes cast for, against or withheld, and the number of abstentions with respect to each such matter is set forth below, as are the number of broker non-votes, where applicable. Pursuant to New York law, abstentions and broker non-votes are not counted toward the election of directors.
AGAINST/ BROKER FOR WITHHELD ABSTAINED NON-VOTES - ---------------------------- ----------- ---------- ----------- ------------ (1) Election of Directors: Frank J. Biondi, Jr. 620,512,458 67,793,702 Nicholas M. Donofrio 631,620,376 56,685,784 Alan R. Griffith 638,192,770 50,113,390 Gerald L. Hassell 638,233,619 50,072,541 Richard J. Kogan 620,782,205 67,523,955 Michael J. Kowalski 631,446,786 56,859,374 John A. Luke, Jr. 620,099,337 68,206,823 John C. Malone 579,590,917 108,715,243 Paul Myners 634,703,169 53,602,991 Robert C. Pozen 636,362,165 51,943,995 Catherine A. Rein 629,673,074 58,633,086 Thomas A. Renyi 632,009,763 56,296,397 William C. Richardson 631,599,016 56,707,144 Brian L. Roberts 628,982,396 59,323,764 Samuel C. Scott III 639,137,131 49,169,029 (2) Ratification of Auditors 663,844,194 19,707,567 4,754,399 (3) Approval of Proposal With Respect to an Amendment to the 2004 Management Incentive Compensation Plan 618,864,949 62,234,717 7,206,494 (4) Approval of Shareholder Proposal With Respect to Political Contributions 32,618,281 516,178,607 43,797,712 95,711,560 (5) Approval of Shareholder Proposal With Respect to Executive Compensation 34,532,101 548,882,846 9,179,653 95,711,560 (6) Approval of Shareholder Proposal With Respect to the Composition of the Risk Committee 54,585,308 526,324,686 11,684,606 95,711,560 (7) Approval of Shareholder Proposal With Respect to the Company's Rights Plan 399,067,915 185,009,346 8,517,339 95,711,560
59 Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) The exhibits filed as part of this report are as follows: Exhibit 4(i) - First Supplemental Indenture, dated as of August 2, 2004 between the registrant and J.P. Morgan Trust Company, National Association, (successor to Bank One, National Association), as Trustee, to the Junior Subordinated Indenture. Exhibit 12 - Statement Re: Ratio of Earnings to Fixed Charges for the Three Months and Six months Ended June 30,2004 and June 30, 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 March 31, 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. On July 21, 2004, the Company filed a Form 8-K Current report (Item 5 and 12), which report included unaudited interim financial information and accompanying discussion for the second quarter of 2004 contained in the Company's press release dated July 21, 2004. 60 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. THE BANK OF NEW YORK COMPANY, INC. ---------------------------------- (Registrant) Date: August 6, 2004 By: /s/ Bruce W. Van Saun ------------------------- Name: Bruce W. Van Saun Title: Chief Financial Officer 61 EXHIBIT INDEX ------------- Exhibit Description - ------- ----------- 4(i) Exhibit 4(i) - First Supplemental Indenture, dated as of August 2, 2004 between the registrant and J.P. Morgan Trust Company, National Association, (successor to Bank One, National Association), as Trustee, to the Junior Subordinated Indenture. 12 Ratio of Earnings to Fixed Charges for the Three Months and Six Months Ended June 30, 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. EX-4 2 r2q2exh4.txt EX-4 1 Exhibit 4(i) FIRST SUPPLEMENTAL INDENTURE Dated as of August 2, 2004 between THE BANK OF NEW YORK COMPANY, INC. and J.P. MORGAN TRUST COMPANY, NATIONAL ASSOCIATION, as Trustee to JUNIOR SUBORDINATED INDENTURE Dated as of December 25, 1996 between THE BANK OF NEW YORK COMPANY, INC. and J.P. MORGAN TRUST COMPANY, NATIONAL ASSOCIATION (as successor in interest to The First National Bank of Chicago), as Trustee 2 FIRST SUPPLEMENTAL INDENTURE, dated as of August 2, 2004 (this "First Supplemental Indenture") between THE BANK OF NEW YORK COMPANY, INC., a New York corporation (the "Corporation"), having its principal office at One Wall Street, New York, New York 10286, and J.P. Morgan Trust Company, National Association (as successor in interest to The First National Bank of Chicago), a national banking association, as trustee (the "Trustee"), to the Junior Subordinated Indenture dated as of December 25, 1996, between the Corporation and the Trustee (the "Indenture"). All capitalized terms used in this First Supplemental Indenture and not otherwise defined herein have the meanings given such terms in the Indenture. RECITALS OF THE CORPORATION WHEREAS, the Corporation and the Trustee entered into the Indenture, pursuant to which one or more series of unsecured junior subordinated debt securities of the Corporation (the "Securities") may be issued from time to time; and WHEREAS, Section 9.1 of the Indenture provides, among other things, that without the consent of the Holders of any Securities, the Corporation, when authorized by a Board Resolution, and the Trustee may enter into an indenture supplemental to the Indenture in form satisfactory to the Trustee in order to change or eliminate any provision of the Indenture provided that any such change or elimination shall (a) become effective only when there is no Security Outstanding of any series created prior to the execution of such supplemental indenture that is entitled to the benefit of such provision or (b) not apply to any Outstanding Securities; and WHEREAS, the Corporation wishes to amend the Indenture as provided herein, but only with respect to any series of Securities issued on or after the date of this First Supplemental Indenture; and WHEREAS, all things necessary to make this First Supplemental Indenture a valid agreement of the Corporation, in accordance with its terms, have been done. NOW, THEREFORE, in consideration of the foregoing recitals and other valuable consideration, the receipt whereof is hereby acknowledged, the Corporation agrees with the Trustee, as follows: ARTICLE I AMENDMENTS Section 1.1. Events of Default. For any series of Securities issued on or after the date of this First Supplemental Indenture, Section 5.1 of the Indenture shall not apply and shall be replaced with Section 5.1 below: "Section 5.1. Events of Default. "Event of Default", wherever used herein with respect to the Securities of any series, means any one of the following events (whatever the reason for such Event of Default and whether it shall be occasioned by the provisions of Article Thirteen or be 3 voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body) except as may be specified pursuant to Section 3.1: (1) default in the payment of any interest upon any Security of that series, including any Additional Interest in respect thereof, when it becomes due and payable, and continuance of such default for a period of 30 days (subject to the deferral of any due date in the case of an Extension Period); or (2) the entry of a decree or order by a court having jurisdiction in the premises adjudging the Corporation a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization of the Corporation under the Bankruptcy Code or any other similar applicable Federal or State law, which decree or order shall have continued undischarged and unstayed for a period of 60 days; or the entry of a decree or order of a court having jurisdiction in the premises for the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of the Corporation or of its property, or for the winding up or liquidation of its affairs, which decree or order shall have continued undischarged and unstayed for a period of 60 days; or (3) the commencement by the Corporation of voluntary proceedings to be adjudicated a bankrupt, or consent by the Corporation to the filing of a bankruptcy proceeding against it, or the filing by the Corporation of a petition or answer or consent seeking reorganization under the Bankruptcy Code or any other similar Federal or State law, or consent by the Corporation to the filing of any such petition, or the consent by the Corporation to the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of it or of its property, or the making by the Corporation of an assignment for the benefit of creditors, or the admission by the Corporation in writing of its inability to pay its debts generally as they become due; or (4) any other Event of Default provided with respect to Securities of that series." Section 1.2. Acceleration of Maturity; Rescission and Annulment. For any series of Securities issued on or after the date of this First Supplemental Indenture, Section 5.2 of the Indenture shall not apply and shall be replaced with Section 5.2 below: "Section 5.2. Acceleration of Maturity; Rescission and Annulment. If an Event of Default (other than an Event of Default specified in Section 5.1(2) or 5.1(3)) with respect to Securities of any series at the time Outstanding occurs and is continuing, then and in every such case the Trustee or the Holders of not less than 25% in aggregate principal amount of the Outstanding Securities of that series may declare the principal amount (or, if the Securities of that series are Discount Securities, such portion of the principal amount as may be specified in the terms of that series) of all the Securities of that series to be due and payable immediately, by a notice in writing to the 4 Corporation (and to the Trustee if given by Holders), provided that, in the case of the Securities of a series issued to an Issuer Trust, if, upon such an Event of Default, the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities of such series fail to declare the principal of all the Outstanding Securities of such series to be immediately due and payable, the holders of at least 25% in aggregate Liquidation Amount (as defined in the related Trust Agreement) of the related series of Capital Securities issued by such Issuer Trust then outstanding shall have the right to make such declaration by a notice in writing to the Corporation and the Trustee; and upon any such declaration such principal amount (or specified portion thereof) of and the accrued interest (including any Additional Interest) on all the Securities of such series shall become immediately due and payable. If an Event of Default specified in Section 5.1(2) or 5.1(3) with respect to Securities of any series at the time Outstanding occurs, the principal amount of all the Securities of such series (or, if the Securities of such series are Discount Securities, such portion of the principal amount of such Securities as may be specified by the terms of that series) shall automatically, and without any declaration or other action on the part of the Trustee or any Holder, become immediately due and payable. Payment of principal and interest (including any Additional Interest) on such Securities shall remain subordinated to the extent provided in Article XIII notwithstanding that such amount shall become immediately due and payable as herein provided. At any time after such a declaration of acceleration with respect to Securities of any series has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in aggregate principal amount of the Outstanding Securities of that series, by written notice to the Corporation and the Trustee, may rescind and annul such declaration and its consequences if: (1) the Corporation has paid or deposited with the Trustee a sum sufficient to pay: (A) all overdue installments of interest on all Securities of such series, (B) any accrued Additional Interest on all Securities of such series, (C) the principal of (and premium, if any, on) any Securities of such series that have become due otherwise than by such declaration of acceleration and interest and Additional Interest thereon at the rate borne by the Securities, and (D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (2) all Events of Default with respect to Securities of that series, other than the non-payment of the principal of Securities of that series that has become due solely by such acceleration, have been cured or waived as provided in Section 5.13. In the case of Securities of a series initially issued to an Issuer Trust, if the Holders of such Securities fail to annul such declaration and waive such default, the 5 holders of a majority in aggregate Liquidation Amount (as defined in the related Trust Agreement) of the related series of Capital Securities issued by such Issuer Trust then outstanding shall also have the right to rescind and annul such declaration and its consequences by written notice to the Corporation and the Trustee, subject to the satisfaction of the conditions set forth in Clauses (1) and (2) above of this Section 5.2. No such rescission shall affect any subsequent default or impair any right consequent thereon." Section 1.3. Collection of Indebtedness and Suits for Enforcement by Trustee. For any series of Securities issued on or after the date of this First Supplemental Indenture, Section 5.3 of the Indenture shall not apply and shall be replaced with Section 5.3 below: "Section 5.3. Collection of Indebtedness and Suits for Enforcement by Trustee. The Corporation covenants that if: (1) default is made in the payment of any installment of interest (including any Additional Interest) on any Security of any series when such interest becomes due and payable and such default continues for a period of 30 days (subject to the deferral of any due date in the case of an Extension Period), or (2) default is made in the payment of the principal of (or premium, if any, on) any Security at the Maturity thereof; the Corporation will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities the whole amount then due and payable on such Securities for principal, including any sinking fund payment or analogous obligations (and premium, if any) and interest (including any Additional Interest) and, in addition thereto, all amounts owing to the Trustee under Section 6.7. If the Corporation fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Corporation or any other obligor upon such Security or Securities and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Corporation or any other obligor upon such Security or Securities, wherever situated. "Default", wherever used herein with respect to Securities of any series, means any one of the following events (whatever the reason for such Default and whether it shall be occasioned by the provisions of Article Thirteen or be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation or any administrative or governmental body) except as may be specified pursuant to Section 3.1: 6 (A) an Event of Default with respect to Securities of that series specified in Section 5.1; or (B) default in the payment of the principal of (or premium, if any, on) any Security of that series at its Maturity; or (C) failure on the part of the Corporation duly to observe or perform any other of the covenants or agreements on the part of the Corporation in the Securities of that series or in this Indenture for a period of 90 days after the date on which written notice of such failure, requiring the Corporation to remedy the same, shall have been given to the Corporation by the Trustee by registered or certified mail or to the Corporation and the Trustee by the Holders of at least 25% in aggregate principal amount of the Outstanding Securities of that series; or (D) any other Default provided with respect to Securities of that series. If a Default with respect to Securities of any series occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities of such series by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy." Section 1.4. Unconditional Right of Holders to Receive Principal, Premium and Interest; Direct Action by Holders of Capital Securities. For any series of Securities issued on or after the date of this First Supplemental Indenture, the phrase "upon the occurrence of an Event of Default described in Section 5.1(1) or 5.1(2)" contained in Section 5.8 of the Indenture shall be deleted and replaced by the phrase "upon the occurrence of an Event of Default described in Section 5.1(1) or a Default described in Section 5.3(B)". Section 1.5. Delay or Omission Not Waiver. For any series of Securities issued on or after the date of this First Supplemental Indenture, the two references to "Event of Default" contained in the first paragraph of Section 5.11 of the Indenture shall be deleted and replaced by "Default". Section 1.6. Waiver of Past Defaults. For any series of Securities issued on or after the date of this First Supplemental Indenture, the reference to "Event of Default" contained in the last paragraph of Section 5.13 of the Indenture shall be deleted and replaced by "Default". 6 Section 1.7. Certain Duties and Responsibilities. For any series of Securities issued on or after the date of this First Supplemental Indenture, the references to "Event of Default" contained in Sections 6.1(a) and (b) of the Indenture shall be deleted and replaced by "Default". Section 1.8. Notice of Defaults. For any series of Securities issued on or after the date of this First Supplemental Indenture, the reference to "Event of Default" contained in the last sentence of Section 6.2 of the Indenture shall be deleted and replaced by "Default". Section 1.9. Additional Sums. For any series of Securities issued on or after the date of this First Supplemental Indenture, the phrase "so long as no Event of Default has occurred and is continuing and" contained in Section 10.6 of the Indenture shall be deleted. ARTICLE II MISCELLANEOUS Section 2.1. Effect of First Supplemental Indenture on Indenture. This First Supplemental Indenture is a supplement to the Indenture. As supplemented by this First Supplemental Indenture, the Indenture is in all respects ratified, approved and confirmed, and the Indenture and this First Supplemental Indenture shall together constitute one and the same instrument. Section 2.2. Effective Date. The modifications to the Indenture set forth in this First Supplemental Indenture shall become effective on the date first written above. Section 2.3. Counterparts. This First Supplemental Indenture may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. Section 2.4. Governing Law. This First Supplemental Indenture shall be governed by and construed in accordance with the laws of the jurisdiction that govern the Indenture and its construction. 7 IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental Indenture to be duly executed by their respective officers duly authorized, as of the date and year first above written. THE BANK OF NEW YORK COMPANY, INC. /s/ Bruce W. Van Saun By: ____________________________ Name: Bruce W. Van Saun Title: Senior Executive Vice President and Chief Financial Officer J.P. MORGAN TRUST COMPANY, NATIONAL ASSOCIATION, as Trustee /s/ E.D. Renn By: _____________________________ Name: E.D. Renn Title: Vice President [Signature Page to First Supplemental Indenture] EX-12 3 r2q04ex12.txt EX-12 EXHIBIT 12 THE BANK OF NEW YORK COMPANY, INC. Ratios of Earnings to Fixed Charges (Dollars in millions)
Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 2004 2003 2004 2003 -------- -------- -------- -------- EARNINGS - -------- Income Before Income Taxes $ 565 $ 451 $ 1,038 $ 903 Fixed Charges, Excluding Interest on Deposits 70 74 138 127 -------- -------- -------- -------- Income Before Income Taxes and Fixed Charges, Excluding Interest on Deposits 635 525 1,176 1,030 Interest on Deposits 126 138 244 284 -------- -------- -------- -------- Income Before Income Taxes and Fixed Charges, Including Interest on Deposits $ 761 $ 663 $ 1,420 $ 1,314 ======== ======== ======== ======== FIXED CHARGES - ------------- Interest Expense, Excluding Interest on Deposits $ 54 $ 60 $ 107 $ 103 One-Third Net Rental Expense* 16 14 31 24 -------- -------- -------- -------- Total Fixed Charges, Excluding Interest on Deposits 70 74 138 127 Interest on Deposits 126 138 244 284 -------- -------- -------- -------- Total Fixed Charges, Including Interest on Deposits $ 196 $ 212 $ 382 $ 411 ======== ======== ======== ======== EARNINGS TO FIXED CHARGES RATIOS - -------------------------------- Excluding Interest on Deposits 9.07x 7.09x 8.52x 8.11x Including Interest on Deposits 3.88 3.13 3.72 3.20 *The proportion deemed representative of the interest factor.
EX-31 4 r2q4ex31.txt EX-31 Exhibit 31 CERTIFICATION OF CHAIRMAN AND CHIEF EXECUTIVE OFFICER - ------------------------------------------------------ I, Thomas A. Renyi, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Bank of New York Company, Inc.(the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 6, 2004 /s/ Thomas A. Renyi ------------------- Thomas A. Renyi Chief Executive Officer EX-31 5 r2q04ex311.txt EX-31.1 Exhibit 31.1 CERTIFICATION OF CHIEF FINANCIAL OFFICER - ---------------------------------------- I, Bruce W. Van Saun, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Bank of New York Company, Inc.(the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 6, 2004 /s/ Bruce W. Van Saun --------------------- Bruce W. Van Saun Chief Financial Officer EX-32 6 r2q04ex32.txt EX-32 Exhibit 32 Certification Pursuant to 18 U.S.C. Section 1350, the undersigned officer of The Bank of New York Company, Inc. (the "Company"), hereby certifies, that the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 6, 2004 /s/ Thomas A. Renyi ------------------- Thomas A. Renyi Chief Executive Officer The foregoing certification is being furnished solely pursuant to 18 U.S.C Section 1350 and is not being filed as part of the Report or as a separate disclosure document. EX-32 7 r2q04ex321.txt EX-32.1 Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, the undersigned officer of The Bank of New York Company, Inc. (the "Company"), hereby certifies, that the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 6, 2004 /s/ Bruce W. Van Saun --------------------- Bruce W. Van Saun Chief Financial Officer The foregoing certification is being furnished solely pursuant to 18 U.S.C Section 1350 and is not being filed as part of the Report or as a separate disclosure document. -----END PRIVACY-ENHANCED MESSAGE-----