-----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, JCzZz92TOguoVDHc870fmTH+RBFLyaNXKgvyxPVfVvm3Sk766Rbn5qjrpQ+/oA3k PT8eP3wKD7atQpuR26ftPw== 0000009626-05-000128.txt : 20050504 0000009626-05-000128.hdr.sgml : 20050504 20050504152508 ACCESSION NUMBER: 0000009626-05-000128 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050504 DATE AS OF CHANGE: 20050504 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: 05798835 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 r1q0510q.txt 10-Q THE BANK OF NEW YORK COMPANY, INC. Quarterly Report on Form 10-Q For the quarterly period ended March 31, 2005 The Quarterly Report on Form 10-Q and cross reference index is on page 60. 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 - First Quarter 2005 Highlights 3 - Consolidated Income Statement Review 4 - Business Segments Review 8 - Critical Accounting Policies 20 - Consolidated Balance Sheet Review 24 - Liquidity 30 - Capital Resources 32 - Trading Activities 34 - Asset/Liability Management 36 - Statistical Information 37 - Other Developments 38 - Forward Looking Statements and Factors That Could Affect Future Results 43 - Website Information 46 Consolidated Financial Statements - Consolidated Balance Sheets March 31, 2005 and December 31, 2004 47 - Consolidated Statements of Income For the Three Months Ended March 31, 2005 and 2004 48 - Consolidated Statement of Changes In Shareholders' Equity For the Three Months Ended March 31, 2005 49 - Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2005 and 2004 50 - Notes to Consolidated Financial Statements 51 - 59 Form 10-Q - Cover 60 - Controls and Procedures 61 - Legal Proceedings 61 - Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities 62 - Exhibits 63 - Signature 64 1
THE BANK OF NEW YORK COMPANY, INC. Financial Highlights (Dollars in millions, except per share amounts) (Unaudited) March 31, December 31, March 31, 2005 2004 2004 ------------ ------------ ------------ Quarter ------- Revenue (tax equivalent basis) $ 1,917 $ 1,967 $ 1,667 Net Income 379 351 364 Basic EPS 0.49 0.45 0.47 Diluted EPS 0.49 0.45 0.47 Cash Dividends Per Share 0.20 0.20 0.19 Return on Average Common Shareholders' Equity 16.52% 15.34% 17.17% Return on Average Assets 1.55 1.40 1.47 Efficiency Ratio 66.2 64.8 69.3 Assets $ 96,537 $ 94,529 $ 92,652 Loans 38,764 35,781 36,070 Securities 23,907 23,802 24,083 Deposits - Domestic 33,634 35,558 33,639 - Foreign 25,328 23,163 22,443 Long-Term Debt 7,389 6,121 6,276 Common Shareholders' Equity 9,335 9,290 8,760 Common Shareholders' Equity Per Share $ 12.02 $ 11.94 $ 11.27 Market Value Per Share of Common Stock 29.05 33.42 31.50 Allowance for Loan Losses as a Percent of Total Loans 1.50% 1.65% 1.75% Allowance for Loan Losses as a Percent of Non-Margin Loans 1.78 1.99 2.11 Total Allowance for Credit Losses as a Percent of Total Loans 1.85 2.06 2.19 Total Allowance for Credit Losses as a Percent of Non-Margin Loans 2.19 2.48 2.64 Tier 1 Capital Ratio 8.13 8.31 7.60 Total Capital Ratio 12.54 12.21 11.70 Leverage Ratio 6.56 6.41 5.83 Tangible Common Equity Ratio 5.48 5.56 5.22 Employees 23,160 23,363 22,820 Assets Under Custody (In trillions) Total Assets Under Custody $ 9.9 $ 9.7 $ 8.6 Equity Securities 34% 35% 33% Fixed Income Securities 66 65 67 Cross-Border Assets Under Custody $ 2.8 $ 2.7 $ 2.4 Assets Under Administration (In billions) $ 33 $ 33 $ 33 Assets Under Management (In billions) Total Assets Under Management 104 102 92 Equity Securities 34% 36% 36% Fixed Income Securities 21 21 22 Alternative Investments 15 15 13 Liquid Assets 30 28 29
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," "target, " 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 providing a comprehensive array of services that enable institutions and individuals to move and manage their financial assets in more than 100 markets worldwide. The Company has a long tradition of collaborating with clients to deliver innovative solutions through its core competencies: securities servicing, treasury management, investment management, and individual & regional banking services. The Company's extensive global client base includes a broad range of leading financial institutions, corporations, government entities, endowments and foundations. Its principal subsidiary, The Bank of New York, founded in 1784, is the oldest bank in the United States and has consistently played a prominent role in the evolution of financial markets worldwide. 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 93 businesses since 1995, 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 47% from December 31, 2000 to December 31, 2004. Capital generated by these actions has been reallocated to the Company's higher growth businesses. 3 The Company's business model is well positioned to benefit from a number of long-term secular trends. These include the growth of worldwide financial assets, globalization of investment activity, structural market changes, and increased outsourcing. These trends benefit the Company by driving higher levels of financial asset trading volume and other transactional activity, as well as higher asset price levels and growth in client assets, all factors by which the Company prices its services. In addition, international markets offer excellent growth opportunities. FIRST QUARTER 2005 HIGHLIGHTS The Company reported first quarter net income of $379 million and diluted earnings per share of 49 cents, compared with net income of $351 million and diluted earnings per share of 45 cents in the fourth quarter of 2004, and net income of $364 million and diluted earnings per share of 47 cents in the first quarter of 2004. In the fourth quarter of 2004, the Company recorded several gains and charges that in aggregate reduced reported earnings by 3 cents per share. See "Other Developments". First quarter 2005 highlights include solid performance in securities servicing, asset management, and foreign exchange and other trading, continued excellent credit performance, and good expense control. Securities servicing fees increased 1% sequentially from the seasonally robust fourth quarter to $751 million, reflecting strong growth in investor services and broker-dealer services. Private client services and asset management increased 5% sequentially, reflecting continued growth in Ivy Asset Management's ("Ivy") international business. Foreign exchange and other trading revenues increased 7% sequentially, reflecting continued strong customer flows in foreign exchange and improved results in interest rate derivatives. Partially offsetting this revenue growth were lower capital markets related income, fewer securities gains, and lower other income. On a year-over-year basis, securities servicing and asset management increased by 5% and 12%, respectively. The increase in securities servicing fees primarily reflects strong performance in investor services and broker- dealer services. The increase in asset management was driven by the continued growth in Ivy as well as higher fees from BNY Hamilton Funds. Offsetting this revenue growth were lower capital markets related income, lower foreign exchange and other trading, fewer securities gains and a decline in other income. Additional highlights for the quarter include continued growth in net interest income of 2% sequentially and 10% year-over-year, reflecting widening spreads as interest rates continue to rise. Asset quality remains strong, as the provision improved to a credit of $10 million and NPA's declined by 10% from December 31, 2004. Total expenses declined by 2% from the fourth quarter. After adjusting for legal reserves taken in the fourth quarter, expense growth was 1%, reflecting the Company's expense control efforts. The Company's securities servicing businesses maintained good revenue momentum following the very strong results in the fourth quarter of 2004. The balance sheet remained well positioned for growth in net interest income, and the Company's credit risk improvement efforts continue to deliver results. The Company's intensified focus on expense management was also effective, as total expenses were essentially unchanged sequentially. During the first quarter of 2005, the Company continued to invest in enhancing its service offerings, critical to sustaining revenue 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. New business momentum remains strong as the Company is gaining traction with growth initiatives such as hedge fund servicing, Pershing's registered investment advisor ("RIA") offering and independent research. The outlook for Ivy continues to be very positive, given increased allocations by institutions to alternative investments, including hedge funds, as an asset class. 4 The key factors impacting growth going forward remain the sustainability of a favorable investment environment and consistent focus on expense control. CONSOLIDATED INCOME STATEMENT REVIEW Noninterest Income - ------------------ 1st 4th 1st Quarter Quarter Quarter ------- ------- ------- (In millions) 2005 2004 2004 ------- ------- ------- Servicing Fees Securities $ 751 $ 742 $ 716 Global Payment Services 75 71 79 ------- ------- ------- 826 813 795 Private Client Services and Asset Management Fees 121 115 108 Service Charges and Fees 92 98 96 Foreign Exchange and Other Trading Activities 96 90 106 Securities Gains 12 18 33 Other* 31 42 82 ------- ------- ------- Total Noninterest Income $ 1,178 $ 1,176 $ 1,220 ======= ======= ======= * See "Other Developments." Total noninterest income for the first quarter of 2005 was $1,178 million, essentially flat on a sequential quarter basis and a decrease of 3% from the first quarter of 2004. The first quarter of 2005 reflects stronger performance in securities servicing and asset management versus both prior periods offset by decreases in service charges and fees, securities gains and other noninterest income. The first quarter of 2004 included a $48 million gain on the sale of a portion of the Company's investment in Wing Hang Bank Limited, recorded in other noninterest income, as well as securities gains of $19 million related to four sponsor fund investments. Securities servicing fees were up $9 million, or 1%, sequentially and $35 million, or 5%, from a year ago. For a discussion of securities servicing fees see "Securities Servicing Fees" in the segment results section under "Servicing and Fiduciary Businesses." Global payment services fees increased $4 million, or 6%, compared with the fourth quarter of 2004 and decreased $4 million, or 5%, from the first quarter of 2004. The sequential increase reflects strength in cash management due to new business wins which offset lower revenue from trade finance. The decline versus the first quarter of 2004 reflects lower fees due to customers choosing to pay with higher compensating balances partially offset by new business. Private client services and asset management fees for the first quarter were up 5% from the prior quarter and 12% from the first quarter of 2004. The sequential quarter increase reflects continued growth at Ivy and higher fees in institutional equity and retail investment products. The increase from the first quarter of 2004 is primarily due to growth at Ivy as well as higher fees from BNY Hamilton Funds. Total assets under management were $104 billion at March 31, 2005, up from $102 billion at December 31, 2004 and $92 billion a year ago. Service charges and fees were down 6% from the fourth quarter of 2004 and 4% from the first quarter of 2004. The sequential and year-over-year decreases reflect lower capital markets fees due to reduced activity in loan syndications and bond underwriting. As a result of its credit risk reduction efforts, the Company has narrowed its capital markets focus to selective 5 industry segments, such as utilities and media, which were less active this quarter. Foreign exchange and other trading revenues were $96 million, up $6 million, or 7%, sequentially and down $10 million, or 9%, from the first quarter of 2004. The strong sequential quarter performance reflects improved results in interest rate derivatives, while the decrease from the record first quarter of 2004 performance resulted from lower foreign exchange revenues. Securities gains in the first quarter were $12 million, compared with $18 million in the fourth quarter of 2004 and $33 million in the first quarter of 2004. Securities gains in the first quarter of 2005 primarily derived from the Company's leveraged buy-out sponsor portfolio. In the first quarter of 2004, securities gains included $19 million of realized gains on four sponsor fund investments. Other noninterest income was $31 million, compared with $42 million in the prior quarter and $82 million in the first quarter of 2004. The sequential quarter decline reflects lower event-driven revenue such as gains on asset dispositions. Other noninterest income in the first quarter of 2004 included a pre-tax gain of $48 million on the sale of a portion of the Company's investment in Wing Hang Bank Limited ("Wing Hang"). Net Interest Income - -------------------
1st 4th 4th 1st 1st Quarter Quarter Quarter Quarter Quarter (Dollars in millions) -------- -------- -------- -------- -------- Reported Reported Core** Reported Core** -------- -------- -------- -------- -------- 2005 2004 2004 2004 2004 -------- -------- -------- -------- -------- Net Interest Income $ 455 $ 527 $ 448 $ 268 $ 413 Tax Equivalent Adjustment* 7 9 9 6 6 -------- -------- -------- -------- -------- Net Interest Income on a Tax Equivalent Basis $ 462 $ 536 $ 457 $ 274 $ 419 ======== ======== ======== ======== ======== Net Interest Rate Spread 1.93% 2.26% 1.87% 1.13% 1.85% Net Yield on Interest Earning Assets 2.36 2.64 2.25 1.36 2.08 * 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 adjustments. See "Other Developments."
Net interest income on a taxable equivalent basis was $462 million in the first quarter of 2005, compared with $536 million in the fourth quarter of 2004, and $274 million in the first quarter of 2004. The net interest rate spread was 1.93% in the first quarter of 2005, compared with 2.26% in the fourth quarter of 2004, and 1.13% in the first quarter of 2004. The net yield on interest earning assets was 2.36% in the first quarter of 2005, compared with 2.64% in the fourth quarter of 2004, and 1.36% in the first quarter of 2004. Excluding the impact of the SFAS 13 leasing adjustments on the leveraged lease portfolio in 2004, net interest income on a taxable equivalent basis was up on a sequential quarter basis to $462 million, compared with $457 million in the fourth quarter of 2004 and $419 million in the first quarter of 2004. 6 On the same basis, the net interest rate spread was 1.93% in the first quarter of 2005, compared with 1.87% in the fourth quarter of 2004, and 1.85% in the first quarter of 2004 while the net yield on interest earning assets was 2.36% in the first quarter of 2005, compared with 2.25% in the fourth quarter of 2004 and 2.08% in the first quarter of 2004. The increase in net interest income from the fourth and first quarters of 2004 core results is primarily due to the repricing of the Company's assets at a faster rate than its liabilities and higher volume and values of interest free deposits given the rise in short term rates. These improvements were partially offset by a slight decline in average assets and fewer days in the quarter. The Company's asset sensitivity is becoming more neutral relative to year-end as the higher rate environment is beginning to limit its ability to lag deposit repricing as rates increase further. In comparison to the first quarter of 2004, net interest income was also impacted by customers making greater use of compensating balances to pay for services. Noninterest Expense and Income Taxes - ------------------------------------ 1st 4th 1st Quarter Quarter Quarter ------- ------- ------- (In millions) 2005 2004 2004 ------- ------- ------- Salaries and Employee Benefits $ 618 $ 617 $ 574 Net Occupancy 78 75 81 Furniture and Equipment 52 51 51 Clearing 46 45 48 Sub-custodian Expenses 23 22 22 Software 53 43 49 Communications 23 23 24 Amortization of Intangibles 8 9 8 Other 176 212 156 ------- ------- ------- Total Noninterest Expense $ 1,077 $ 1,097 $ 1,013 ======= ======= ======= Noninterest expense for the first quarter of 2005 was $1,077 million, compared with $1,097 million in the prior quarter and $1,013 million in the first quarter of 2004. The fourth quarter of 2004 included $30 million legal reserves in other noninterest expense while the first quarter of 2004 results included $18 million related to cost reduction initiatives, including lease terminations, severance and relocation expenses. Salaries and employee benefits expense for the first quarter was essentially unchanged on a sequential quarter basis, reflecting higher pension and seasonal social security expenses tied to bonuses, offset by lower new business conversion costs and lower restricted stock expense. In addition, incentive compensation and outside help were down compared with a seasonally high fourth quarter. On a sequential quarter basis, pension expense increased by $11 million. In the first quarter of 2005, the number of employees declined by approximately 200 reflecting strict cost control. Relative to the first quarter of 2004, salaries and employee benefits expense increased by $44 million, or 8%, reflecting higher pension and stock option expense as well as higher staffing levels associated with growth in investor services and expansion of certain staff functions. 7 Occupancy expenses were up $3 million sequentially, reflecting higher energy costs and higher depreciation associated with a back up data center. First quarter 2004 occupancy expense included lease termination expenses of $8 million. Clearing and sub-custodian expenses, which are tied to transaction volumes, were up slightly sequentially on a combined basis to $69 million. The increase reflects a higher level of business activity. Other expenses in the fourth quarter of 2004 included $30 million of expenses associated with legal reserves. Excluding the legal reserves, other expenses declined by $6 million sequentially, reflecting lower travel expenses and professional fees. The effective tax rate for the first quarter of 2005 was 33.1%, compared to 42.8% in the fourth quarter of 2004 and 21.5% in the first quarter of 2004. The effective tax rate in the fourth quarter of 2004 reflects the net of the increase in the tax reserve related to LILO exposures and the impact of the SFAS 13 leasing adjustments related to cross-border rail equipment leases and aircraft leases. The effective tax rate in the first quarter of 2004 reflects the SFAS 13 leasing adjustment related to the Company's leasing portfolio. The effective tax rates in all periods reflect a reclassification related to Section 42 tax credits. See "Other Developments". Credit Loss Provision and Net Charge-Offs - ----------------------------------------- 1st 4th 1st Quarter Quarter Quarter ------- ------- ------- (In millions) 2005 2004 2004 ------- ------- ------- Provision $ (10) $ (7) $ 12 ======= ======= ======= Net Charge-offs: Commercial $ (3) $ (1) $ (5) Foreign - 2 (10) Regional Commercial (2) (8) - Consumer (5) (5) (11) ------- ------- ------- Total $ (10) $ (12) $ (26) ======= ======= ======= The Company recorded a $10 million credit to the provision in the first quarter of 2005, compared to $7 million credit to the provision in the fourth quarter of 2004 and $12 million provision in the first quarter of 2004. The lower provision in 2005 reflects the Company's improved asset quality and a continued strong credit environment. The Company expects the provision to be less favorable in the second quarter of 2005. The first quarter results reflected unanticipated favorable outcomes on a couple of specific credits. The total allowance for credit losses was $716 million at March 31, 2005, $736 million at December 31, 2004, and $790 million at March 31, 2004. The total allowance for credit losses as a percent of non-margin loans was 2.19% at March 31, 2005, compared with 2.48% at December 31, 2004, and 2.64% at March 31, 2004. Net charge-offs were $10 million in the first quarter of 2005 versus $12 million in the fourth quarter of 2004 and $26 million in the first quarter of 2004. These represent 0.10% of total loans in the most recent quarter, down from 0.13% and 0.29% in the respective prior periods. 8 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 2004, the Company made several methodology changes. These include a modification to the method for allocating its pension expense to the segments; changes to the method used to allocate earnings on capital, which caused a slight reallocation from reconciling items to the individual segments; and greater allocations of corporate expenses previously included in reconciling items to the individual segments. See "Reconciling Items." 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 two factors among others: historical charge-off experience and the volume, composition, and size of the credit 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. Balance sheet assets and liabilities and their related income or expense are specifically assigned to each segment. Funds transfer- pricing methods are used to allocate a cost of funds used or credit for funds provided to all segment assets or liabilities using a matched funding concept. 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 SFAS 13 lease adjustments and the RW Matter in 2004, which are included within reconciling amounts. The Company reports data for the four business segments: Servicing and Fiduciary, Corporate Banking, Retail Banking, and Financial Markets. The Servicing and Fiduciary businesses segment comprises the Company's core services, including securities servicing, global payment services, and private client services and asset management. These businesses all share certain favorable attributes: they are well diversified and fee-based; the Company serves the role of an intermediary rather than principal, thereby limiting risk and generating more stable earnings streams; and the businesses are scalable, which result in higher margins as revenues grow. Long-term trends that should 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 9 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. In issuer services, the Company's American and global depositary receipt business has over 1,190 programs representing over 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 $2.75 trillion in outstanding debt securities. The Company is the third largest stock transfer agent representing over 550 publicly traded companies with over 19 million shareholder accounts maintained on its recordkeeping system. In investor services, the Company is the largest custodian with $9.9 trillion of assets under custody and administration at March 31, 2005. The Company is the second largest mutual fund custodian for U.S. funds and one of the largest providers of fund services in the world with over $1.6 trillion in total assets. The Company is the largest U.K. custodian. 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 $1 trillion in tri-party balances worldwide, the Company is the world's largest collateral management agent. The Company's execution and clearing services business is the largest global institutional agency brokerage organization. In addition, it is the world's largest institutional electronic broker for non-U.S. dollar equity execution. The Company provides execution, clearing and financial services outsourcing solutions in over 80 global markets, executing trades for 650 million shares and clearing more than 600,000 trades daily. The Company has 21 seats on the New York Stock Exchange. Pershing services more than 1,100 institutional and retail financial organizations and independent investment advisors who collectively represent nearly 6 million individual investors. Global payment services facilitates 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 on its product and service capabilities and add new clients. The Company has completed 93 acquisitions since 1995 primarily 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. 10 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, branch banking, and consumer and residential mortgage lending. The Company's retail franchise includes more than 610,800 customer relationships and 77,400 business relationships. The Company operates 341 branches in 23 counties in the Tri-State region. The Company has 241 branches in New York, 92 in New Jersey and 8 in Connecticut. The New York branches are primarily suburban based with 118 in upstate New York, 85 on Long Island and 38 in New York City. The retail network is a growing 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. The branches are a meaningful source of private client referrals. Small business and investment centers are set up in the largest 100 branches. The Financial Markets segment includes non-client related trading of foreign exchange, trading of 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 - ---------------------------------- 1st 4th 1st Quarter Quarter Quarter ------- ------- ------- (In millions) 2005 2004 2004 ------- ------- ------- Net Interest Income $ 168 $ 167 $ 132 Provision for Credit Losses 1 1 - Noninterest Income 1,025 1,010 990 Noninterest Expense 847 848 779 Income Before Taxes 345 328 343 Average Assets $22,987 $23,209 $22,771 Average Deposits 36,072 36,299 35,138 Nonperforming Assets 1 1 3 (Dollars in billions) Assets Under Custody $ 9,859 $ 9,657 $ 8,577 Equity Securities 34% 35% 33% Fixed Income Securities 66 65 67 Cross-Border Assets Under Custody $ 2,761 $ 2,704 $ 2,401 Assets Under Administration $ 33 $ 33 $ 33 Assets Under Management 104 102 92 Equity Securities 34% 36% 36% Fixed Income Securities 21 21 22 Alternative Investments 15 15 13 Liquid Assets 30 28 29 S&P(Registered Mark) 500 Index (Period End) 1,181 1,212 1,126 NASDAQ(Registered Mark) Index (Period End) 1,999 2,175 1,994 Lehman Brothers Aggregate Bond(Service Mark) Index 214.0 220.6 199.3 MSCI(Registered Mark) EAFE Index 1,503.9 1,515.5 1,337.1 NYSE(Registered Mark) Volume (In billions) 99.4 96.0 95.4 NASDAQ(Registered Mark) Volume (In billions) 121.2 119.7 128.2 11 The S&P 500 Index was down 3% for the first quarter of 2005, with average daily price levels up 2.5% from the fourth quarter of 2004. The NASDAQ Index also decreased by 8% for the first quarter of 2005, with average daily prices remained flat compared with the fourth quarter of 2004. Globally, the MSCI EAFE index was down 1%. Combined NYSE and NASDAQ non-program trading volumes were up only 1% during the first quarter of 2005. As the Company's business model is more volume than price sensitive, this created a drag on the Company's equity-linked businesses. The Lehman Brothers Aggregate Bond index was down 3% for the first quarter of 2005. Average fixed income trading volume was up 13% offsetting some of the weakness in equities. First quarter results showed continued strength in several of the Company's primary businesses, including investor services, broker-dealer services, asset management, and foreign exchange and other trading. Offsetting this strength were volume related declines in the Company's execution and clearing services businesses. In the first quarter of 2005, pre-tax income was $345 million, compared with $328 million in the fourth quarter of 2004 and $343 million a year ago. Noninterest income for the first quarter of 2005 increased $15 million to $1,025 million on a sequential quarter basis and $35 million from a year ago. Securities Servicing Fees - ------------------------- 1st 4th 1st Quarter Quarter Quarter ------- ------- ------- (In millions) 2005 2004 2004 ------- ------- ------- Execution and Clearing Services $ 293 $ 302 $ 303 Investor Services 263 239 226 Issuer Services 139 149 137 Broker-Dealer Services 56 52 50 ------- ------- ------- Securities Servicing Fees $ 751 $ 742 $ 716 ======= ======= ======= Securities servicing fees were $751 million in the first quarter, an increase of $9 million, or 1%, from the fourth quarter of 2004 and $35 million, or 5%, from the first quarter of 2004. Execution and clearing services fees decreased $9 million, or 3%, from the fourth quarter of 2004 and $10 million, or 3%, from the first quarter of 2004. In the first quarter of 2005 in execution services, transition business was relatively soft following particularly robust fourth quarter levels. Transition activity can vary significantly from quarter to quarter and has no correlation to market volumes. Execution services was also impacted by a decrease in portfolio rebalancing activity from the seasonally high fourth quarter levels as well as three fewer trading days in the first quarter compared with the fourth quarter of 2004. While average daily non-program volumes for the market increased by 6%, after adjusting for fewer trading days, total non-program market volumes increased by only 1%. The sequential decline in execution and clearing services is slightly below the total non- program market volumes. Pershing's fees were essentially flat compared with the fourth quarter of 2004 and down from a year ago. The year-over-year decrease reflects growth in non-transactional fees offset by lower transaction-based revenue. Total retail market volumes decreased approximately 3% sequentially. Although average billable trades for Pershing increased by 7%, total trades increased by only 2% due to a lower day count. The majority of Pershing's revenues is generated from non-transactional activities, such as asset gathering and technology services to broker-dealers, with revenues tied to both assets under administration and services provided. Despite a 3% sequential decline in the S&P 500 Index, Pershing's assets under administration were $708 billion at quarter-end, compared with $706 billion at December 31, 2004. As of March 31, 2005, margin loans remained flat compared with the fourth quarter of 2004, reflecting the current lack of direction in the equity markets. 12 Investor services fees were up $24 million, or 10%, over the fourth quarter of 2004, and $37 million, or 16%, from the first quarter of 2004. Sequential and year-over-year results reflect strong performance across all business lines. New business wins drove performance in global fund services and securities lending in the first quarter of 2005. Global fund services was also favorably impacted by stronger levels of client activity, new business conversions in the U.S. and continued expansion of the Company's hedge fund servicing client base. At quarter-end, hedge fund assets under administration totaled $56 billion up 17% from $48 billion at year-end 2004. The Company expects the pipeline for new business from domestic and offshore funds to continue to be strong. Global custody also experienced higher activity levels and asset inflows from new and existing clients. Securities lending fees increased sequentially reflecting strong demand for U.S. treasuries as well as the beginning of the European dividend season in March. The year-over-year results reflect the same factors influencing the sequential quarter increase as well as new business wins. Outsourcing benefited relative to both the fourth and first quarters of 2004 from the conversion of new business wins. At March 31, 2005, assets under custody rose to $9.9 trillion, from $9.7 trillion at December 31, 2004 and $8.6 trillion at March 31, 2004. Cross- border custody assets were $2.8 trillion at March 31, 2005 up from $2.7 trillion at December 31, 2004 and $2.4 trillion at March 31, 2004. A substantial portion of the increase in assets under custody since year-end 2004 was due to new business and business line growth. Issuer services fees were $139 million in the first quarter, down $10 million, or 7%, sequentially but up $2 million, or 1%, from the first quarter of 2004. The sequential decrease in the first quarter of 2005 reflects reduced depositary receipts ("DR") fees and a decline in corporate trust fees due to lower municipal issuance volumes. DR revenues decreased sequentially due to seasonally lower dividend-related activity, and were essentially flat compared with the first quarter of 2004. While capital raising activity increased sequentially and year-over-year, mergers and acquisitions activity remained soft in the first quarter of 2005. The increase in issuer services fees versus the first quarter of 2004 primarily reflects higher corporate trust fees due to continued strength in international issuance and corporate specialty products. Broker-dealer services fees increased to $56 million from $52 million in the fourth quarter of 2004 and $50 million in the first quarter of 2004. The sequential and year-over-year results reflect increased collateral management activity and higher volumes in securities clearance. Both the U.S. and European markets contributed to the strong growth in collateral management. The Company continues to attract new business to its collateral management services. In addition, the Company has grown by helping accelerate the trend toward utilizing non-traditional securities such as equities, corporate bonds and municipal securities. In the first quarter of 2005, the Company's average tri-party balances exceeded $1 trillion, which represents an increase of over 33% for the last 15 months. The Company expects sustained future growth since the use of tri-party structure in the German and Japanese markets is still at a very early stage. Global payment services fees increased $4 million, or 6%, from the fourth quarter of 2004, and decreased $4 million, or 5%, from the first quarter of 2004. The sequential increase reflects strength in cash management due to new business wins, which offset lower revenue from trade finance. The decline versus the first quarter of 2004 reflects customers choosing to pay with higher compensating balances rather than fees, partially offset by new business. Private client services and asset management revenues continue to demonstrate solid performance with fees up 5% sequentially and 12% compared with the first quarter of 2004. The sequential quarter increase reflects continued growth at Ivy and higher fees in institutional equity and retail investment products. The increase from the first quarter of 2004 primarily reflects growth at Ivy as well as higher fees from BNY Hamilton Funds. 13 Assets under management ("AUM") were $104 billion at March 31, 2005, up from $102 billion at December 31, 2004 and $92 billion at March 31, 2004. The sequential increase in AUM was driven by growth in money market and alternative classes, offsetting the impact of lower equity prices. Ivy continued its solid growth with AUM increasing by 5% to $15.6 billion, compared with $14.8 billion at year-end and $11.7 billion at March 31, 2004. The increase in Ivy's AUM reflects strong growth in the Europe and Asia markets. To better leverage the growth opportunities in Europe and Asia, Ivy opened a new office in Tokyo in January and is expanding its presence in London. In addition, the growth in AUM reflects an inflow of funds into personal trust assets and short-term money market product for institutional/corporate investors. Institutional clients represent 69% of AUM while individual clients equal 31%. AUM at March 31, 2005, are 34% invested in equities, 21% in fixed income, 15% in alternative investments and the remainder in liquid assets. In the first quarter of 2005, noninterest income attributable to foreign exchange and other trading activities was $47 million, down from $52 million in the fourth quarter of 2004 and $59 million in the first quarter of 2004. The sequential and year-over-year declines reflect lower levels of client activity, continued low volatility, and lower fixed income trading. Net interest income in the Servicing and Fiduciary businesses segment was $168 million for the first quarter of 2005, compared with $167 million for the fourth quarter of 2004 and $132 million in the first quarter of 2004. The increase in net interest income from the first quarter of 2004 is primarily due to the rise in interest rates and customers' increased use of compensating balances to pay for services. Average assets for the quarter ended March 31, 2005 were $23.0 billion, compared with $23.2 billion in the fourth quarter of 2004 and $22.8 billion in the first quarter of 2004. The first quarter of 2005 average deposits were $36.1 billion, compared with $36.3 billion in the fourth quarter of 2004 and $35.1 billion in the first quarter of 2004. The sequential quarter decline in deposits reflects a decline in activity from customers in issuer services. Net charge-offs in the Servicing and Fiduciary Businesses segment were zero in the first quarter of 2005, compared with $5 million in the fourth quarter of 2004 and $5 million in the first quarter of 2004. Nonperforming assets were $1 million at March 31, 2005, compared with $1 million at December 31, 2004 and $3 million at March 31, 2004. Noninterest expense for the first quarter of 2005 was $847 million, compared with $848 million in the fourth quarter of 2004 and $779 million in the first quarter of 2004. The increase in noninterest expense from first quarter of 2004 reflects the impact of several 2004 acquisitions as well as the Company's continued investment in technology and business continuity, and increased pension and stock option expense. Corporate Banking - ----------------- 1st 4th 1st Quarter Quarter Quarter ------- ------- ------- (In millions) 2005 2004 2004 ------- ------- ------- Net Interest Income $ 87 $ 88 $ 88 Provision for Credit Losses 18 20 20 Noninterest Income 76 66 71 Noninterest Expense 57 58 57 Income Before Taxes 88 76 82 Average Assets $17,534 $17,774 $17,666 Average Deposits 5,528 5,323 6,800 Nonperforming Assets 177 198 325 Net Charge-offs 5 8 11 14 The Corporate Banking segment coordinates all banking and credit-related 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. Over the past several years, the Company has been seeking to improve its overall risk profile by reducing its credit exposures through elimination of non-strategic exposures, cutting back large individual exposures and avoiding outsized industry concentrations. In 2002, the Company set a goal of reducing corporate credit exposure to $24 billion by December 31, 2004. This goal was accomplished in early 2004 and exposures have since declined to $22.7 billion. In the first quarter of 2005, pre-tax income was $87 million, compared with $76 million in the fourth quarter of 2004 and $82 million in the first quarter of 2004. The improvement in results versus both periods primarily reflects lower credit costs and higher noninterest income. The Corporate Banking segment's net interest income was $87 million in the first quarter of 2005, compared with $88 million in the fourth and first quarters of 2004. Average assets for the quarter were $17.5 billion, compared with $17.8 billion in the fourth quarter of 2004 and $17.7 billion in the first quarter of last year. Average deposits in the Corporate Banking segment were $5.5 billion versus $5.3 billion in the fourth quarter of 2004 and $6.8 billion in first quarter of 2004. The first quarter of 2005 provision for credit losses was $18 million compared with $20 million in the fourth quarter of 2004 and $20 million in the first quarter of last year. The decline in the provision from the fourth and first quarters of 2004 reflects reduced credit exposures and an improvement in overall asset quality. Net charge-offs in the Corporate Banking segment were $5 million in the first quarter of 2005, $8 million in the fourth quarter of 2004, and $11 million in the first quarter of 2004. Nonperforming assets were $177 million at March 31, 2005, down from $198 million at December 31, 2004 and $325 million at March 31, 2004. The decrease in nonperforming assets from the first quarter of 2004 primarily reflects paydowns and charge-offs of commercial loans. Noninterest income was $76 million in the current quarter, compared with $66 million in the fourth quarter of 2004 and $71 million in the first quarter of 2004. On a sequential quarter basis, the increase reflects higher foreign exchange and other trading revenues and gains on asset dispositions partially offset by lower capital markets fees. The increase year-over-year reflects the same factors influencing the quarterly increase. Noninterest expense in the first quarter was $57 million, compared with $58 million in the fourth quarter of 2004 and $57 million in the first quarter of 2004. 15 Retail Banking - -------------- 1st 4th 1st Quarter Quarter Quarter ------- ------- ------- (Dollars in millions) 2005 2004 2004 ------- ------- ------- Net Interest Income $ 128 $ 125 $ 117 Provision for Credit Losses 5 4 5 Noninterest Income 26 29 29 Noninterest Expense 98 98 93 Income Before Taxes 51 52 48 Average Assets $ 6,105 $ 6,241 $ 5,377 Average Noninterest Bearing Deposits 5,499 5,585 5,028 Average Deposits 15,015 15,301 14,807 Nonperforming Assets 14 15 15 Net Charge-offs 5 5 6 Number of Branches 341 341 341 Number of ATMs 375 378 378 The Retail Banking segment provides the Company with a stable source of core deposits. The segment represents an attractive distribution channel, and the Company has continued to expand the products offered through the retail branch system. The branch system is focused on the suburban Tri-State New York metropolitan area. The Retail Banking segment continues to demonstrate stable results in spite of increased competition in the New York metropolitan area. In the first quarter of 2005, pre-tax income was $51 million, compared with $52 million in the fourth quarter of 2004 and $48 million a year ago. The Company continues to enhance the services offered through the branch system. This includes leveraging its retail client base to distribute BNY Asset Management and third party investment products. Currently, investment products are cross sold to over 10% of the client base. The Company is also seeking selective expansion opportunities within its current branch footprint. Net interest income in the first quarter of 2005 was $128 million, compared with $125 million in the fourth quarter of 2004 and $117 million in the first quarter of 2004. Net interest income has increased on a sequential quarter basis and over the first quarter of last year as rates have risen, benefiting spreads. The increase in average assets and deposits since the first quarter of 2004 has also contributed to the increase in net interest income. Noninterest income was $26 million for the quarter compared with $29 million in the fourth quarter and $29 million in the first quarter of last year. The decreases in noninterest income compared to the fourth quarter of 2004 reflect lower monthly service fees and lower debit card fees. This is partially attributable to the lower day count in the first quarter. Noninterest expense in the first quarter of 2005 was $98 million, compared with $98 million in the fourth quarter of 2004 and $93 million last year. The increase from the first quarter of 2004 reflects higher compensation and marketing costs. Net charge-offs were $5 million in the first quarter of 2005, compared with $5 million in the fourth quarter of 2004 and $6 million in the first quarter of 2004. Nonperforming assets were $14 million at March 31, 2005, compared with $15 million at December 31, 2004, and $15 million at March 31, 2004. Average deposits generated by the Retail Banking segment were $15.0 billion in the first quarter of 2005, compared with $15.3 billion in the fourth quarter of 2004 and $14.8 billion in the first quarter of 2004. Average assets in the Retail Banking sector were $6.1 billion, compared with 16 $6.2 billion in the fourth quarter of 2004 and $5.4 billion in the first quarter of 2004. Financial Markets - ----------------- 1st 4th 1st Quarter Quarter Quarter ------- ------- ------- (In millions) 2005 2004 2004 ------- ------- ------- Net Interest Income $ 68 $ 71 $ 81 Provision for Credit Losses 5 5 5 Noninterest Income 46 65 49 Noninterest Expense 33 33 27 Income Before Taxes 76 98 98 Average Assets $48,370 $48,547 $49,743 Average Deposits 3,964 3,795 3,864 Average Investment Securities 23,540 23,358 22,901 Net Charge-offs - - 4 In the first quarter of 2005, pre-tax income was $76 million, compared with $98 million in the fourth quarter of 2004 and $98 million a year ago. The sequential quarter decrease is due to a decline in trading revenue. The decrease over the first quarter of 2004 is primarily due to a decline in net interest income and in trading income. Net interest income for the first quarter was $68 million compared with $71 million for the fourth quarter of 2004 and $81 million a year ago. The decrease from the fourth quarter of 2004 primarily reflects fewer days in the quarter. The decrease from the first quarter of 2004 reflects the rising rate environment which increased funding costs. Average first quarter 2005 assets in the Financial Markets segment, composed primarily of short-term liquid assets and investment securities, were $48.4 billion, down from $48.5 billion on a sequential quarter basis and $49.7 billion in the first quarter last year. The decrease in assets from first quarter of 2004 reflects a decline in liquidity from securities servicing customers which reduced the overall size of the Company's balance sheet resulting in a decline in liquid assets. Average investment securities increased as 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 $46 million in the first quarter of 2005, compared with $65 million in the fourth quarter of 2004 and $49 million in the first quarter of 2004. The negative variance compared with the fourth quarter of 2004 reflects weaker trading results, lower securities gains, and lower gains on disposals of lease assets. Net charge-offs were zero in the first quarter of 2005, compared with zero in the fourth quarter of 2004 and $4 million a year ago. Noninterest expense was $33 million in the first quarter of 2005, compared with $33 million in the fourth quarter of 2004 and $27 million in last year's first quarter. The increase from last year's first quarter is attributable to higher employee incentive compensation and technology expenses. 17 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 March 31, 2005 Businesses Banking Banking Markets Items Total - -------------------------- ---------- --------- --------- --------- ----------- ------------ Net Interest Income $ 168 $ 87 $ 128 $ 68 $ 4 $ 455 Provision for Credit Losses 1 18 5 5 (39) (10) Noninterest Income 1,025 76 26 46 5 1,178 Noninterest Expense 847 57 98 33 42 1,077 ---------- --------- --------- --------- ----------- ------------ Income Before Taxes $ 345 $ 88 $ 51 $ 76 $ 6 $ 566 ========== ========= ========= ========= =========== ============ Contribution Percentage 62% 15% 9% 14% Average Assets $ 22,987 $ 17,534 $ 6,105 $ 48,370 $ 4,246 $ 99,242
Servicing and For the Quarter Ended Fiduciary Corporate Retail Financial Reconciling Consolidated December 31, 2004 Businesses Banking Banking Markets Items Total - -------------------------- ---------- --------- --------- --------- ----------- ------------ Net Interest Income $ 167 $ 88 $ 125 $ 71 $ 76 $ 527 Provision for Credit Losses 1 20 4 5 (37) (7) Noninterest Income 1,010 66 29 65 6 1,176 Noninterest Expense 848 58 98 33 60 1,097 ---------- --------- --------- --------- ----------- ------------ Income Before Taxes $ 328 $ 76 $ 52 $ 98 $ 59 $ 613 ========== ========= ========= ========= =========== ============ Contribution Percentage 59% 14% 9% 18% Average Assets $ 23,209 $ 17,774 $ 6,241 $ 48,547 $ 4,196 $ 99,967
Servicing and For the Quarter Ended Fiduciary Corporate Retail Financial Reconciling Consolidated March 31, 2004 Businesses Banking Banking Markets Items Total - -------------------------- ---------- --------- --------- --------- ----------- ------------ Net Interest Income $ 132 $ 88 $ 117 $ 81 $ (150) $ 268 Provision for Credit Losses - 20 5 5 (18) 12 Noninterest Income 990 71 29 49 81 1,220 Noninterest Expense 779 57 93 27 57 1,013 ---------- --------- --------- --------- ----------- ------------ Income Before Taxes $ 343 $ 82 $ 48 $ 98 $ (108) $ 463 ========== ========= ========= ========= =========== ============ Contribution Percentage 60% 14% 9% 17% Average Assets $ 22,771 $ 17,666 $ 5,377 $ 49,743 $ 4,121 $ 99,678
18 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. 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 Company's approach to acquisitions is highly centralized and controlled by senior management. Accordingly, the resulting goodwill and other intangible assets are reconciling items for average assets. The related amortization is a reconciling item for noninterest expense. Other reconciling items for noninterest expense primarily reflect corporate overhead and severance. To assess as accurately as possible the performance of its segments in 2004, the Company analyzed reconciling items related to corporate overhead. As a result of this analysis, the Company reclassified from reconciling items to the individual segments certain items related to insurance, compliance, and incentive compensation expenses. In addition, a minor modification was made to the method used to allocate earnings on capital. The impact of these changes was a decline in pre-tax income of the segments and a reduction in the amount of reconciling items as shown below: 1st 4th Segment Quarter Quarter --------- --------- (In millions) 2004 2004 - ----------------------- --------- --------- Servicing and Fiduciary $ (30)$ (25) Corporate Banking (5) (4) Retail Banking (6) (3) Financial Markets 1 (3) --------- --------- Subtotal (40) (35) Reconciling 40 35 --------- --------- Total $ - $ - ========= ========= 19 The detail of reconciling items for the first quarter of 2005 and fourth and first quarters of 2004 is presented in the following table. 1st 4th 1st Quarter Quarter Quarter --------- --------- --------- (In millions) 2005 2004 2004 --------- --------- --------- Segments' Revenue $ 1,624 $ 1,621 $ 1,557 Adjustments: Earnings Associated with Assignment of Capital (9) (13) (20) Securities Gains - - 19 SFAS 13 Cumulative Lease Adjustment - 79 (145) Taxable Equivalent Basis and Other Tax-Related Items 13 10 15 Other 5 6 62 --------- --------- --------- Subtotal-Revenue Adjustments 9 82 (69) --------- --------- --------- Consolidated Revenue $ 1,633 $ 1,703 $ 1,488 ========= ========= ========= Segments' Income Before Tax $ 560 $ 554 $ 571 Adjustments: Revenue Adjustments (Above) 9 82 (69) Provision for Credit Losses Different than GAAP 39 37 18 Severance (1) (4) (11) Goodwill and Intangible Amortization (8) (9) (8) Lease Termination - - (8) RW Matter - (30) - Corporate Overhead (33) (17) (30) --------- --------- --------- Consolidated Income Before Tax $ 566 $ 613 $ 463 ========= ========= ========= Segments' Total Average Assets $ 94,996 $ 95,771 $ 95,557 Adjustments: Goodwill and Intangibles 4,246 4,196 4,121 --------- --------- --------- Consolidated Average Assets $ 99,242 $ 99,967 $ 99,678 ========= ========= ========= In addition to the recurring items discussed above, other significant items may be included as reconciling items. In the fourth quarter of 2004, SFAS 13 cumulative adjustments to the leasing portfolio and RW Matter were reconciling items. In the first quarter of 2004, SFAS 13 cumulative adjustments to the leasing portfolio, securities gains on four large sponsor funds, gains on sale on Wing Hang Bank, and severance and lease termination expenses were reconciling items. 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 and the $19 million gain on sponsor fund investments would be attributable to the Financial Markets segment. In 20 addition, the $48 million gain on the sale of Wing Hang recorded in Other would be attributable to the Corporate Banking segment. The charge for the RW Matter in the fourth quarter of 2004 would be attributable to the Retail Banking segment. The reconciling item for the provision for loan losses primarily relates to Corporate Banking. Severance and lease termination costs primarily relate to the Servicing and Fiduciary segment, the Corporate Banking segment, and to staff areas that cut across all business lines. Goodwill and intangible amortization primarily relates to the Securities Servicing and Fiduciary segment. Corporate overhead is difficult to specifically identify with any particular segment. Approaches to allocating corporate overhead to segments could be based on revenues, expenses, number of employees, or a variety of other measures. 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 2004 Annual Report on Form 10-K. Four of the Company's more critical accounting policies are those related to the allowance for credit losses, the valuation of derivatives and securities where quoted market prices are not available, goodwill and other intangibles, and pension accounting. 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 ratings are assigned after analyzing the credit quality of each borrower/counterparty and the Company's internal ratings are generally consistent with external rating agencies' 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 portion of the allowance related to impaired credits is based on the present value of future cash flows. 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. 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. Another key variable in determining the allowance is management's judgment in determining the size of the unallocated allowance. At March 31, 2005, the unallocated allowance was 16% of the total allowance. If the unallocated allowance were five percent higher or lower, the allowance would have increased or decreased by $36 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 $52 million, while if each pass credit were rated one grade worse, the allowance would have increased by $82 million. For higher risk rated credits, if the loss given default were 10% worse, the allowance would have increased by $20 million, while if the loss given default were 10% better, the allowance would have decreased by $14 million. For impaired credits, if the fair value of the loans were 10% higher or lower, the allowance would have increased or decreased by $14 million, respectively. 21 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 independent 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 footnote 1 "Summary of Significant Accounting and Reporting Policies" in the Company's 2004 Annual Report on Form 10-K. To assist in assessing the impact of a change in valuation, at March 31, 2005, approximately $2.5 billion of the Company's portfolio of securities and derivatives is not priced based on quoted market prices because no such quoted market prices are available. A change of 2.5% in the valuation of these securities and derivatives would result in a change in pre-tax income of $62 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 ($3,487 million at March 31, 2005) and indefinite-lived intangible assets ($370 million at March 31, 2005) 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 fair value of acquired assets. 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 their implied fair value. Indefinite- lived intangible assets are evaluated for impairment at least annually by comparing their fair value to their carrying value. Other identifiable intangible assets ($423 million at March 31, 2005) 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 22 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 $4.3 billion of goodwill and intangible assets at March 31, 2005. The impact of a 5% impairment charge would result in a change of pre-tax income of approximately $214 million. Pension Accounting - ------------------ The Company has defined benefit plans covering approximately 14,700 U.S. employees and approximately 2,400 non-U.S. employees at September 30, 2004. The Company has three defined benefit pension plans in the U.S. and six overseas. At December 31, 2004, the U.S. plans account for 86% of the projected benefit obligation. Pension credits were $24 million, $39 million, and $95 million in 2004, 2003 and 2002. In addition to its pension plans, the Company also has an Employee Stock Ownership Plan ("ESOP") which may provide additional benefits to certain employees. Upon retirement, covered employees are entitled to the higher of their benefit under the ESOP or the defined benefit plan. If the benefit is higher under the defined benefit plan, the employees' ESOP account is contributed to the pension plan. A number of key assumption and measurement date values determine pension expense. The key elements include the long-term rate of return on plan assets, the discount rate, the market-related value of plan assets, and for the primary U.S. plan the price used to value stock in the ESOP. Since 2002, these key elements have varied as follows: 2005 2004 2003 2002 Domestic Plans: -------- -------- -------- -------- Long-Term Rate of Return on Plan Assets 8.25% 8.75% 9.00% 10.50% Discount Rate 6.00 6.25 6.50 7.25 Market-Related Value of Plan Assets(1) (in millions) $ 1,502 $ 1,523 $ 1,483 $ 1,449 ESOP Stock Price(1) 30.67 27.88 33.30 42.58 Net U.S Pension Credit/(Expense) $ 31 $ 46 $ 100 All other Pension Credit/(Expense) (7) (7) (5) -------- -------- -------- Total Pension Credit $ 24 $ 39 $ 95 ======== ======== ======== - ------------ (1) Actuarially smoothed data. See "Critical Accounting Policies" in the MD&A section of the Company's 2004 Annual Report on Form 10-K. The discount rate for U.S. pension and postretirement plans is based on, among other factors, a spread over the Lehman AA Long-Term Corporate Bond Index Yield. At September 30, 2004 and 2003, the Lehman AA Long-Term Corporate Bond Index Yields were 5.36% and 5.35%, and the discount rates were 6.00% and 6.25%, respectively. The discount rates for foreign pension plans are based on high quality corporate bonds rates in countries that have an active corporate bond market. In those countries with no active corporate bond market, discount rates are based on local government bond rates plus a credit spread. 23 The Company's expected long-term rate of return on plan assets is based on anticipated returns for each asset class. For 2005 and 2004, the assumptions for the long-term rates of return on plan assets were 8.25% and 8.75%, respectively. Anticipated returns are weighted for the target allocation for each asset class. Anticipated returns are based on forecasts for prospective returns in the equity and fixed income markets, which should track the long-term historical returns for these markets. The Company also considers the growth outlook for U.S. and global economies, as well as current and prospective interest rates. The market-related value of plan assets also influences the level of pension expense. Differences between expected and actual returns are recognized over five years to compute an actuarially derived market-related value of plan assets. In 2005, the Company expects the market-related value of plan assets to decline as the extraordinary actual return in 2000 is replaced with a more modest return. Unrecognized actuarial gains and losses are amortized over the future service period (11 years) of active employees if they exceed a threshold amount. The Company currently has unrecognized losses which are being amortized. In 2005, based on the Company's review of changes in prospective assumptions, the amortization of unrecognized pension losses and the anticipated decline in the market-related value of plan assets, the pre-tax U.S. pension credit is expected to decline by approximately $48 million. The annual impact on the primary U.S. plan of hypothetical changes in the key elements on the pension credit are shown in the table below. (Dollars in millions) Increase in Decrease in Pension Expense 2005 Base Pension Expense --------------- ------------- --------------- Long-Term Rate of Return on Plan Assets 7.25% 7.75% 8.25% 8.75% 9.25% Change in Pension Expense $ 14.6 $ 7.3 $ - $ 7.3 $ 14.6 Discount Rate 5.50% 5.75% 6.00% 6.25% 6.50% Change in Pension Expense $ 7.4 $ 3.7 $ - $ 3.6 $ 7.2 Market-Related Value of Plan Assets -20.00% -10.00% $1,502 +10.00% +20.00% Change in Pension Expense $ 58.2 $ 29.1 - $ 27.2 $ 39.6 ESOP Stock Price $20.67 $25.67 $30.67 $35.67 $40.67 Change in Pension Expense $ 14.6 $ 7.0 $ - $ 6.5 $ 12.6 24 CONSOLIDATED BALANCE SHEET REVIEW Total assets were $96.5 billion at March 31, 2005, compared with $94.5 billion at December 31, 2004, and $92.7 billion at March 31, 2004. The increase in assets from December 31, 2004 reflects increased loans to securities industry customers. Total shareholders' equity was $9.3 billion at March 31, 2005, compared with $9.3 billion at December 31, 2004, and $8.8 billion at March 31, 2004. In comparison to the fourth quarter of 2004, shareholders' equity reflects the retention of earnings offset by a decline in the securities valuation allowance and the repurchase of common stock. 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 first quarter of 2005 was 16.52%, compared with 15.34% in the fourth quarter of 2004, and 17.17% in the first quarter of 2004. Return on average assets for the first quarter of 2005 was 1.55%, compared with 1.40% in the fourth quarter of 2004, and 1.47% in the first quarter of 2004. Investment Securities - --------------------- The table below shows the distribution of the Company's securities portfolio: Investment Securities (at Fair Value) (In millions) 03/31/05 12/31/04 ---------- ---------- Fixed Income: Mortgage-Backed Securities $ 19,799 $ 19,393 Asset-Backed Securities 25 - Corporate Debt 1,243 1,259 Short-Term Money Market Instruments 809 982 U.S. Treasury Securities 445 403 U.S. Government Agencies 484 505 State and Political Subdivisions 203 197 Emerging Market Debt (Collateralized By U.S. Treasury Zero Coupon Obligations) 112 107 Other Foreign Debt 525 545 ---------- ---------- Subtotal Fixed Income 23,645 23,391 Equity Securities: Money Market Funds 224 388 Other 11 10 ---------- ---------- Subtotal Equity Securities 235 398 ---------- ---------- Total Securities $ 23,880 $ 23,789 ========== ========== Total investment securities were $23.9 billion at March 31, 2005, compared with $23.8 billion at December 31, 2004. Average investment securities were $23.5 billion in the first quarter of 2005, compared with $23.4 billion in the fourth quarter of 2004 and $22.9 billion in the first quarter of last year. The increases were primarily due to growth in the Company's portfolio of highly rated mortgage-backed securities which are 89% rated AAA, 7% AA, and 4% A. The Company has been adding either adjustable or short life classes of structured mortgage-backed securities, both of which have short durations. The effective duration of the Company's mortgage portfolio at March 31, 2005 was approximately 1.8 years. Net unrealized losses for securities available-for-sale were $51 million at March 31, 2005 compared with net unrealized gains of $75 million at December 31, 2004. Net unrealized losses at March 31, 2005 reflects the rise in long-term interest rates over the 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 25 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. Loans - ----- (In billions) Period End Quarterly Average ------------------------- ------------------------- Total Non-Margin Margin Total Non-Margin Margin ----- ---------- ------ ----- ---------- ------ March 31, 2005 $38.8 $ 32.8 $ 6.0 $38.8 $ 32.4 $ 6.4 December 31, 2004 35.8 29.7 6.1 39.4 33.0 6.4 March 31, 2004 36.1 30.0 6.1 36.5 30.3 6.2 Total loans were $38.8 billion at March 31, 2005 compared with $35.8 billion at December 31, 2004. The increase in total loans from December 31, 2004 primarily reflects an increase in overdrafts and securities industry 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 $38.8 billion in the first quarter of 2005, compared with $36.5 billion in the first quarter of 2004. The increase in average loans from March 31, 2004 results from increased lending to financial institutions. The following tables provide additional details on the Company's credit exposures and outstandings at March 31, 2005 in comparison to December 31, 2004. Overall Loan Portfolio - ----------------------
Unfunded Total Unfunded Total (In billions) Loans Commitments Exposure Loans Commitments Exposure ---------------------------- ---------------------------- 03/31/05 03/31/05 03/31/05 12/31/04 12/31/04 12/31/04 -------- -------- -------- -------- -------- -------- Financial Institutions $ 12.4 $ 21.9 $ 34.3 $ 9.5 $ 21.6 $ 31.1 Corporate 3.5 19.2 22.7 3.6 19.4 23.0 -------- -------- -------- -------- -------- -------- 15.9 41.1 57.0 13.1 41.0 54.1 -------- -------- -------- -------- -------- -------- Consumer & Middle Market 9.1 4.4 13.5 8.9 4.5 13.4 Leasing Financings 5.6 - 5.6 5.6 - 5.6 Commercial Real Estate 2.2 1.2 3.4 2.1 1.2 3.3 Margin loans 6.0 - 6.0 6.1 - 6.1 -------- -------- -------- -------- -------- -------- Total $ 38.8 $ 46.7 $ 85.5 $ 35.8 $ 46.7 $ 82.5 ======== ======== ======== ======== ======== ========
26 Financial Institutions - ---------------------- The financial institutions portfolio exposure was $34.3 billion at March 31, 2005 compared to $31.1 billion at December 31, 2004. These exposures are of high quality, with 85% meeting the investment grade criteria of the Company's rating system. These exposures are generally short-term, with 78% expiring within one year and are frequently secured. For example, mortgage banking, securities industry, and investment managers often borrow against marketable securities held in custody at the Company. The diversity of the portfolio is shown in the accompanying table.
(In billions) March 31, 2005 December 31, 2004 --------------------------- ----- ----- --------------------------- Unfunded Total %Inv %due Unfunded Total Lending Division Loans Commitments Exposures Grade <1 Yr Loans Commitments Exposures - ------------------- ----- ----------- --------- ----- ----- ----- ----------- --------- Banks $ 4.5 $ 4.0 $ 8.5 71% 90% $ 4.2 $ 3.5 $ 7.7 Securities Industry 3.3 2.7 6.0 85 96 1.5 3.0 4.5 Insurance 0.4 4.8 5.2 94 47 0.5 4.8 5.3 Government 0.1 4.9 5.0 100 73 - 5.0 5.0 Asset Managers 3.8 3.7 7.5 85 80 3.0 3.8 6.8 Mortgage Banks 0.2 0.7 0.9 86 69 0.2 0.7 0.9 Endowments 0.1 1.1 1.2 99 47 0.1 0.8 0.9 ----- ----------- --------- ----- ----- ----- ----------- --------- Total $12.4 $ 21.9 $ 34.3 85% 78% $ 9.5 $ 21.6 $ 31.1 ===== =========== ========= ===== ===== ===== =========== =========
Corporate - --------- The corporate portfolio exposure declined to $22.7 billion at March 31, 2005 from $23.0 billion at year-end 2004. Approximately 76% of the portfolio is investment grade while 23% of the portfolio matures within one year.
(In billions) March 31, 2005 December 31, 2004 --------------------------- ----- ----- --------------------------- Unfunded Total %Inv %due Unfunded Total Lending Division Loans Commitments Exposures Grade <1 Yr Loans Commitments Exposures - ------------------- ----- ----------- --------- ----- ----- ----- ----------- --------- Media $ 1.0 $ 2.1 $ 3.1 64% 14% $ 0.9 $ 2.2 $ 3.1 Cable 0.5 0.5 1.0 34 - 0.6 0.4 1.0 Telecom 0.1 0.5 0.6 77 27 0.1 0.5 0.6 ----- ----------- --------- ----- ----- ----- ----------- --------- Subtotal 1.6 3.1 4.7 59% 13% 1.6 3.1 4.7 Energy 0.3 4.6 4.9 86 19 0.4 4.4 4.8 Retailing 0.2 2.0 2.2 80 32 0.1 2.1 2.2 Automotive 0.1 1.7 1.8 66 51 0.1 1.7 1.8 Healthcare 0.2 1.5 1.7 88 19 0.3 1.5 1.8 Other* 1.1 6.3 7.4 80 23 1.1 6.6 7.7 ----- ----------- --------- ----- ----- ----- ----------- --------- Total $ 3.5 $ 19.2 $ 22.7 76% 23% $ 3.6 $ 19.4 $ 23.0 ===== =========== ========= ===== ===== ===== =========== ========= * 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 of 2004 and exposures have since declined to $582 million. The percentage of investment grade borrowers in the telecom portfolio remained steady at 77% the same as at year-end 2004. The Company's exposure to the airline industry consists of a $471 million leasing portfolio (including a $15 million real estate lease exposure). The airline leasing portfolio consists of $249 million to major U.S. carriers, $133 million to foreign airlines and $89 million to U.S. regionals. The Company's exposure to foreign airlines declined by $47 million during the quarter. During the first quarter of 2005, the airline industry continued to face liquidity issues driven by persistently high fuel prices and the inability to implement meaningful fare increases. The industry's considerable excess capacity and higher oil prices continue to negatively impact the valuations of 27 aircraft, especially the less fuel efficient models, 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. 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) 3/31/05 12/31/04 9/30/04 6/30/04 3/31/04 - --------------------- -------------------------------------------------- AAA to AA- 74% 68% 68% 70% 61% A+ to A- 13 19 21 16 24 BBB+ to BBB- 10 10 8 11 12 Noninvestment Grade 3 3 3 3 3 -------- --------- ---------- --------- ---------- Total 100% 100% 100% 100% 100% ======== ========= ========== ========= ========== (1) Represents credit rating agency equivalent of internal credit ratings. Nonperforming Assets - --------------------
Change 03/31/05 vs. (Dollars in millions) 03/31/05 12/31/04 12/31/04 -------- -------- ---------- Category of Loans: Commercial $ 124 $ 132 $ (8) Foreign 19 28 (9) Regional Commercial 49 53 (4) -------- -------- ---------- Total Nonperforming Loans 192 213 (21) Other Real Estate - 1 (1) -------- -------- ---------- Total Nonperforming Assets $ 192 $ 214 $ (22) ======== ======== ========== Nonperforming Assets Ratio 0.6% 0.7% Allowance for Loan Losses/Nonperforming Loans 304.0 277.5 Allowance for Loan Losses/Nonperforming Assets 304.0 276.5 Total Allowance for Credit Losses/Nonperforming Loans 373.4 345.6 Total Allowance for Credit Losses/Nonperforming Assets 373.4 344.3
Nonperforming assets declined by $22 million, or 10%, during the first quarter of 2005 to $192 million and are down 44% from a year ago. The sequential quarter decrease primarily reflects paydowns and sales of $19 million and charge-offs of $6 million. The ratio of the total allowance for credit losses to nonperforming assets increased to 373.4% at March 31, 2005, compared with 344.3% at December 31, 2004, and 230.5% at March 31, 2004. Activity in Nonperforming Assets (In millions) Quarter End Quarter End March 31, 2005 December 31, 2004 ------------------ ------------------ Balance at Beginning of Period $ 214 $ 287 Additions 3 13 Charge-offs (6) (11) Paydowns/Sales (19) (65) Other - (10) ------------------ ------------------ Balance at End of Period $ 192 $ 214 ================== ================== 28 Interest income would have been increased by $1 million and $4 million for the first quarters of 2005 and 2004 if loans on nonaccrual status at March 31, 2005 and 2004 had been performing for the entire period. Impaired Loans - -------------- The table below sets forth information about the Company's impaired loans. The Company uses the discounted cash flow, collateral value, or market price methods for valuing its impaired loans: March 31, December 31, March 31, (In millions) 2005 2004 2004 ------------ ----------- ---------- Impaired Loans with an Allowance $ 68 $ 128 $ 197 Impaired Loans without an Allowance(1) 103 65 124 ------------ ----------- ---------- Total Impaired Loans $ 171 $ 193 $ 321 ============ =========== ========== Allowance for Impaired Loans(2) $ 34 $ 52 $ 88 Average Balance of Impaired Loans during the Quarter $ 182 $ 268 $ 306 Interest Income Recognized on Impaired Loans during the Quarter $ 2.2 $ 2.3 $ 0.9 (1) When the discounted cash flows, collateral value or market price equals or exceeds the carrying value of the loan, then the loan does not require an allowance under the accounting standard related to impaired loans. (2) The allowance for impaired loans is included in the Company's allowance for credit losses. Allowance - --------- March 31, December 31, March 31, (Dollars in millions) 2005 2004 2004 ------------ ----------- ---------- Margin Loans $ 6,038 $ 6,059 $ 6,130 Non-Margin Loans 32,726 29,722 29,940 ------------ ----------- ---------- Total Loans $ 38,764 $ 35,781 $ 36,070 ============ =========== ========== Allowance for Loan Losses $ 583 $ 591 $ 632 Allowance for Lending-Related Commitments 133 145 158 ------------ ----------- ---------- Total Allowance for Credit Losses $ 716 $ 736 $ 790 ============ =========== ========== Allowance for Loan Losses As a Percent of Total Loans 1.50% 1.65% 1.75% Allowance for Loan Losses As a Percent of Non-Margin Loans 1.78 1.99 2.11 Total Allowance for Credit Losses As a Percent of Total Loans 1.85 2.06 2.19 Total Allowance for Credit Losses As a Percent of Non-Margin Loans 2.19 2.48 2.64 The total allowance for credit losses was $716 million, or 1.85% of total loans at March 31, 2005, compared with $736 million, or 2.06% of total loans at December 31, 2004, and $790 million, or 2.19% of total loans at March 31, 2004. The Company has $6.0 billion of secured margin loans on its balance sheet at March 31, 2005. 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 total allowance for credit losses to non-margin loans is a more appropriate metric to measure the adequacy of the reserve. The ratio of the total allowance for credit losses to non-margin loans decreased to 2.19% at March 31, 2005, compared with 2.48% at December 31, 2004 29 and 2.64% at March 31, 2004, reflecting continued improvement in the credit quality in the first quarter of 2005. Nonperforming assets declined another 10% this quarter, and have declined by 44% from a year ago. The Company's criticized and classified exposures continued to show improvement on a risk weighted basis versus the fourth quarter of 2004 and a year ago. The ratio of the allowance for loan losses to nonperforming assets was 304.0% at March 31, 2005, up from 276.5% at December 31, 2004, and 184.4% at March 31, 2004. The allowance for loan losses and the allowance for lending related commitments consists of four elements: (1) an allowance for impaired credits (nonaccrual commercial credits over $1 million), (2) an allowance for higher risk rated credits, (3) an allowance for pass rated credits, and (4) an unallocated allowance based on general economic conditions and risk factors in the Company's individual markets. The first element: impaired credits, is based on individual analysis of all nonperforming commercial credits over $1 million. The allowance is measured by the difference between the recorded value of impaired loans and their fair value. Fair value is either the present value of the expected future cash flows from borrower, the market value of the loan, or the fair value of the collateral. The second element: higher risk rated credits, is based on the assignment of loss factors for each specific risk category of higher risk credits. The Company rates each credit in its portfolio that exceeds $1 million and assigns the credits to specific risk pools. A potential loss factor is assigned to each pool, and an amount is included in the allowance equal to the product of the amount of the loan in the pool and the risk factor. Reviews of higher risk rated loans are conducted quarterly and the loan's rating is updated as necessary. The Company prepares a loss migration analysis and compares its actual loss experience to the loss factors on an annual basis to attempt to ensure the accuracy of the loss factors assigned to each pool. Pools of past due consumer loans are included in specific risk categories based on their length of time past due. The third element: pass rated credits, is based on the Company's expected loss model. Borrowers are assigned to pools based on their credit ratings. The expected loss for each loan in a pool incorporates the borrower's credit rating, loss given default rating and maturity. The credit rating is dependent upon the borrower's probability of default. The loss given default incorporates a recovery expectation. Borrower and loss given default ratings are reviewed semi-annually at a minimum and are periodically mapped to third party, including rating agency, default and recovery data bases to ensure ongoing consistency and validity. Commercial loans over $1 million are individually analyzed before being assigned a credit rating. The Company also applies this technique to its leasing and consumer portfolios. All current consumer loans are included in the pass rated consumer pools. 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; 30 * 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; and * Geopolitical issues and their impact on the economy. Based on an evaluation of these four elements, including individual credits, historical credit losses, and global economic factors, the Company has allocated its allowance for credit losses as follows: March 31, December 31, 2005 2004 ------------ ----------- Domestic Real Estate 2% 2% Commercial 72 75 Consumer 8 3 Foreign 2 4 Unallocated 16 16 ------------ ----------- 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 $59.0 billion at March 31, 2005, compared with $58.7 billion at December 31, 2004 and $56.1 billion at March 31, 2004. The increase on a sequential quarter basis was primarily due to higher market activity levels, which resulted in a higher level of customer deposits at quarter end. Noninterest-bearing deposits were $15.6 billion at March 31, 2005, compared with $17.4 billion at December 31, 2004. Interest-bearing deposits were $43.4 billion at March 31, 2005, compared with $41.3 billion at December 31, 2004. 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 $13.0 billion and $14.6 billion on an average basis for the first three months of 2005 and 2004. Average foreign deposits, primarily from the Company's European based securities servicing business, were $25.5 billion and $25.8 billion at March 31, 2005 and 2004. Domestic savings and other time deposits were $9.8 billion on an average basis at March 31, 2005 compared to $10.2 billion at March 31, 2004. Average payables to customers and broker-dealers decreased to $6.4 billion from $7.0 billion. Long-term debt averaged $6.6 billion and $6.2 billion at March 31, 2005 and 2004. A significant reduction in the Company's securities servicing businesses would reduce its access to foreign deposits. 31 The Parent has four major sources of liquidity: dividends from its subsidiaries, the commercial paper market, a revolving credit agreement with third party financial institutions, and access to the capital markets. At March 31, 2005, the Bank can pay dividends of approximately $451 million to the Parent without the need for regulatory waiver. This dividend capacity would increase in the remainder of 2005 to the extent of the Bank's net income less dividends. Nonbank subsidiaries of the Parent have liquid assets of approximately $277 million. These assets could be liquidated and the proceeds delivered by dividend or loan to the Parent. For the quarter ended March 31, 2005, the Parent's quarterly average commercial paper borrowings were $234 million compared with $77 million in 2004. At March 31, 2005, the Parent had cash of $739 million compared with cash of $1,195 million at December 31, 2004 and $585 million at March 31, 2004. Net of commercial paper outstanding, the Parent's cash position at March 31, 2005 was up $62 million compared with March 31, 2004. The Parent has a back-up line of credit of $275 million with 15 financial institutions. This line of credit matures in October 2006. There were no borrowings under the line of credit at March 31, 2005 and March 31, 2004. The Parent also has the ability to access the capital markets. At March 31, 2005, the Parent had a shelf registration statement with a capacity of $1.8 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 March 31, 2005 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 $100 million of long-term debt that becomes due in 2005 subsequent to March 31, 2005 and $225 million of long-term debt that is due in 2006. In addition, at March 31, 2005, the Parent has the option to call $232 million of subordinated debt in 2006, which it will call and refinance if market conditions are favorable. The Parent expects to refinance any debt it repays by issuing a combination of senior and subordinated debt. The Company has $200 million of preferred trust securities that are callable in 2005. These securities qualify as Tier 1 Capital. The Company has not yet decided if it will call these securities. The decision to call will be based on interest rates, the availability of cash and capital, and regulatory conditions. If the Company calls the preferred trust securities, it expects to replace them with new preferred trust securities or senior or subordinated debt. Double leverage is the ratio of investment in subsidiaries divided by the Company's consolidated equity plus trust preferred securities. The Company's double leverage ratio at March 31, 2005 and 2004 was 101.15% and 99.28%. 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. 32 Cash used for other operating activities was $0.4 billion in the first quarter of 2005, compared with $1.8 billion provided by operating activities through March 31, 2004. The use of funds from operations in 2005 were principally the result of changes in accruals and other. The sources of cash flows from operations in 2004 were principally the result of changes in trading and net income. In the first quarter of 2005, cash used for investing activities was $2.5 billion as compared to cash used for investing activities in the first three months of 2004 of $2.2 billion. In the first quarter of 2005, purchases of securities available-for-sale and principal disbursed on loans to customers were a significant use of funds. In the first quarter of 2004, purchases of securities available-for-sale were a significant use of funds. In the first quarter of 2005, cash provided by financing activities was $1.7 billion as compared to cash used for financing activities in the first quarter of 2004 of $0.9 billion. Sources of funds in 2005 include deposits, other borrowed funds, and the issuance of long-term debt. Deposits and payables to customers and broker-dealers were the primary use of funds in 2004. 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 Parent 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 Parent are expected by the regulators to be well capitalized. As of March 31, 2005 and 2004, the Company and the Bank were considered well capitalized on the basis of the ratios (defined by regulation) of Total and Tier 1 capital to risk-weighted assets and leverage (Tier 1 capital to average assets), which are shown as follows:
March 31, 2005 March 31, 2004 Well Adequately ------------------ ------------------ Company Capitalized Capitalized Company Bank Company Bank Targets Guidelines Guidelines --------- ------- --------- ------- ---------- ----------- ----------- Tier 1* 8.13% 8.46% 7.60% 7.41% 7.75% 6% 4% Total Capital** 12.54 11.76 11.70 11.62 11.75 10 8 Leverage 6.56 6.98 5.83 5.66 5 3-5 Tangible Common Equity ("TCE") 5.48 6.47 5.22 5.76 5.25+ 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.
During the first quarter of 2005 the Company retained $212 million of earnings. The Company paid $39 million to redeem rights outstanding under its preferred stock purchase rights plan. Also in the quarter the Company issued $1.2 billion of debt of which $603 million was subordinated debt qualifying as Tier II capital. In April 2005, the Company declared a quarterly common stock dividend of 20 cents per share. The Company's regulatory Tier 1 capital and Total capital ratios were 8.13% and 12.54% at March 31, 2005, compared with 8.31% and 12.21% at December 31, 2004, and 7.60% and 11.70% at March 31, 2004. The regulatory leverage ratio was 6.56% at March 31, 2005, compared with 6.41% at December 31, 2004, and 5.83% at March 31, 2004. The Company's tangible common equity as a percentage of total assets was 5.48% at March 31, 2005, compared with 5.56% at December 31, 2004, and 5.22% at March 31, 2004. This ratio varies depending on the size of the balance sheet at quarter-end and the impact of interest rates on unrealized gains and losses among other things. The balance sheet size fluctuates from quarter to quarter based on levels of market activity. In general, when servicing clients are more actively trading securities, deposit balances are higher to finance these activities. 33 A billion dollar change in assets changes the TCE ratio by 6 basis points while a $100 million change in common equity changes the TCE ratio by 11 basis points. On March 1, 2005, the Board of Governors of the Federal Reserve System (the "FRB") adopted a final rule that allows the continued limited inclusion of trust preferred securities in the Tier 1 capital of bank holding companies (BHCs). See "Accounting Changes and New Accounting Pronouncements" in the Footnotes to the Consolidated Financial Statements. The following table presents the components of the Company's risk-based capital at March 31, 2005 and 2004: (In millions) 2005 2004 ------- ------- Common Stock $ 9,335 $ 8,760 Preferred Stock - - Preferred Trust Securities 1,150 1,150 Adjustments: Intangibles (4,275) (4,136) Securities Valuation Allowance 21 (212) Merchant Banking Investments (5) (6) ------- ------- Tier 1 Capital 6,226 5,556 ------- ------- Qualifying Unrealized Equity Security Gains - - Qualifying Subordinated Debt 2,659 2,227 Qualifying Allowance for Loan Losses 716 770 ------- ------- Tier 2 Capital 3,375 2,997 ------- ------- Total Risk-based Capital $ 9,601 $ 8,553 ======= ======= Risk-Adjusted Assets $76,567 $73,904 ======= ======= 34 TRADING ACTIVITIES The fair value and notional amounts of the Company's financial instruments held for trading purposes at March 31, 2005 and March 31, 2004 are as follows: 1st Quarter 2005 March 31, 2005 Average --------------------------- ------------------ (In millions) Notional Fair Value Fair Value ------------------ ------------------ Trading Account Amount Assets Liabilities Assets Liabilities - --------------- -------- ------ ----------- ------ ----------- Interest Rate Contracts: Futures and Forward Contracts $ 27,907 $ - $ - $ - $ - Swaps 241,377 1,768 978 1,680 782 Written Options 181,754 - 1,260 - 1,266 Purchased Options 135,809 188 - 147 - Foreign Exchange Contracts: Swaps 3,650 - - - - Written Options 5,485 - 13 - 16 Purchased Options 7,472 58 - 85 - Commitments to Purchase and Sell Foreign Exchange 72,715 323 378 279 277 Debt Securities - 2,687 183 2,405 152 Credit Derivatives 1,634 2 5 2 9 Equities 2,409 97 85 161 95 ------ ----------- ------ ----------- Total Trading Account $5,123 $ 2,902 $4,759 $ 2,597 ====== =========== ====== =========== 1st Quarter 2004 March 31, 2004 Average --------------------------- ------------------ Notional Fair Value Fair Value ------------------ ------------------ Trading Account Amount Assets Liabilities Assets Liabilities - --------------- -------- ------ ----------- ------ ----------- Interest Rate Contracts: Futures and Forward Contracts $ 63,241 $ 93 $ - $ 101 $ - Swaps 194,504 1,286 80 1,451 171 Written Options 149,946 - 1,442 - 1,400 Purchased Options 94,357 215 - 214 - Foreign Exchange Contracts: Swaps 3,080 - - - - Written Options 10,623 - 84 - 69 Purchased Options 12,767 86 - 79 - Commitments to Purchase and Sell Foreign Exchange 71,165 862 934 916 978 Debt Securities - 1,598 42 2,168 39 Credit Derivatives 1,325 3 4 3 8 Equities 401 166 127 90 73 ------ ----------- ------ ----------- Total Trading Account $4,309 $ 2,713 $5,022 $ 2,738 ====== =========== ====== =========== 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. Based on certain assumptions, the VAR methodology is designed to capture the potential overnight pre-tax dollar loss from adverse changes in fair values of all trading positions. The calculation assumes a one-day holding period for most instruments, utilizes a 99% confidence level, and incorporates the non- linear characteristics of options. The VAR model is used to calculate economic capital which is allocated to the business units for computing risk- adjusted performance. 35 As 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. Stress tests by their design incorporate the impact of reduced liquidity and the breakdown of observed correlations. The results of these stress tests are reviewed weekly with senior management. The following table indicates the calculated VAR amounts for the trading portfolio for the periods indicated. (In millions) 1st Quarter 2005 ------------------------------- Average Minimum Maximum 3/31/05 ------- ------- ------- ------- Interest Rate $ 2.8 $ 2.0 $ 4.3 $ 4.3 Foreign Exchange 1.0 0.4 3.3 2.2 Equity 0.8 0.5 1.1 0.9 Credit Derivatives 1.7 1.5 2.1 2.1 Diversification (1.4) NM NM (3.0) Overall Portfolio 4.9 3.7 7.5 6.5 1st Quarter 2004 ------------------------------- Average Minimum Maximum 3/31/04 ------- ------- ------- ------- Interest Rate $ 4.4 $ 2.2 $ 6.2 $ 4.9 Foreign Exchange 1.0 0.5 1.5 1.2 Equity 1.2 0.6 1.9 1.9 Credit Derivatives 2.0 1.9 2.1 2.1 Diversification (0.7) NM NM (1.0) Overall Portfolio 7.9 4.9 10.5 9.1 NM - Because the minimum and maximum may occur on different days for different risk components, it is not meaningful to compute a portfolio diversification effect. During the first quarter of 2005, interest rate risk generated approximately 45% of average VAR, credit derivatives generated 27% of average VAR, foreign exchange accounted for 16% of average VAR, and equity generated 12% of average VAR. During the first quarter of 2005, 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 3/31/05 12/31/04 9/30/04 6/30/04 3/31/04 -------------------------------------------------- (Dollars in millions) Number of Occurrences - ---------------------- --------- --------- --------- ---------- --------- Less than $(2.5) 0 0 0 1 0 $(2.5)~ $ 0 1 6 11 11 2 $ 0 ~ $ 2.5 50 49 48 32 48 $ 2.5 ~ $ 5.0 11 8 5 17 10 More than $5.0 0 0 0 3 2 36 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 U.S. 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 and the impact of derivative financial instruments used for interest rate risk management. These assumptions have been developed through a combination of historical analysis and future expected pricing behavior. These assumptions are inherently uncertain, and, as a result, the earnings simulation model cannot precisely estimate net interest income or the impact of higher or lower interest rates on net interest income. Actual results may differ from projected results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management's strategies, among other factors. The Company evaluates the effect on earnings by running various interest rate ramp scenarios up and down from a baseline scenario, which assumes no changes in interest rates. These scenarios are reviewed to examine the impact of large interest rate movements. Interest rate sensitivity is quantified by calculating the change in pre-tax net interest income between the scenarios over a 12-month measurement period. The measurement of interest rate sensitivity is the percentage change in net interest income as shown in the following table: (Dollars in millions) March 31, 2005 $ % --------- -------- +200 bp Ramp vs. Stable Rate $ 5 0.26% +100 bp Ramp vs. Stable Rate 10 0.50 -100 bp Ramp vs. Stable Rate (25) (1.30) 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 76 basis points in the 100+ basis point scenario and 117 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. 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. To the extent that actual behavior is different from that assumed in the models, there could be a change in interest rate sensitivity. 37 STATISTICAL INFORMATION
THE BANK OF NEW YORK COMPANY, INC. Average Balances and Rates on a Taxable Equivalent Basis (Dollars in millions) For the three months ended For the three months ended March 31, 2005 March 31, 2004 -------------------------- -------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate ------- -------- ------- ------- -------- ------- ASSETS - ------ Interest-Bearing Deposits in Banks (primarily foreign) $ 9,824 $ 71 2.95% $11,692 $ 68 2.35% Federal Funds Sold and Securities Purchased Under Resale Agreements 4,816 27 2.31 7,115 16 0.93 Margin Loans 6,407 55 3.46 6,179 34 2.18 Loans: Domestic Offices 22,135 245 4.49 21,074 55 1.05 Foreign Offices 10,302 96 3.76 9,201 63 2.74 ------- -------- ------- -------- Non-Margin Loans 32,437 341 4.26 30,275 118 1.56 ------- -------- ------- -------- Securities U.S. Government Obligations 358 3 3.04 440 3 2.31 U.S. Government Agency Obligations 3,302 31 3.74 4,300 35 3.23 Obligations of States and Political Subdivisions 199 4 7.34 247 3 5.56 Other Securities 19,681 185 3.77 17,914 155 3.46 Trading Securities 2,464 22 3.60 2,753 15 2.15 ------- -------- ------- -------- Total Securities 26,004 245 3.77 25,654 211 3.28 ------- -------- ------- -------- Total Interest-Earning Assets 79,488 739 3.77% 80,915 447 2.22% ------- -------- ------- -------- Allowance for Credit Losses (589) (679) Cash and Due from Banks 4,166 2,971 Other Assets 16,177 16,471 ------- ------- TOTAL ASSETS $99,242 $99,678 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Interest-Bearing Deposits Money Market Rate Accounts $ 6,915 $ 21 1.25% $ 6,607 $ 11 0.68% Savings 8,901 21 0.94 9,149 15 0.67 Certificates of Deposit $100,000 & Over 2,880 18 2.57 3,987 12 1.24 Other Time Deposits 899 4 1.76 1,016 4 1.46 Foreign Offices 25,464 120 1.92 25,834 76 1.18 ------- -------- ------- -------- Total Interest-Bearing Deposits 45,059 184 1.66 46,593 118 1.02 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 1,390 6 1.84 1,612 3 0.66 Other Borrowed Funds 1,825 13 2.87 2,398 9 1.49 Payables to Customers and Broker-Dealers 6,385 25 1.57 6,973 13 0.73 Long-Term Debt 6,605 49 2.98 6,209 30 1.95 ------- -------- ------- -------- Total Interest-Bearing Liabilities 61,264 277 1.84% 63,785 173 1.09% ------- -------- ------- -------- Noninterest-Bearing Deposits 15,520 14,016 Other Liabilities 13,158 13,355 Common Shareholders' Equity 9,300 8,522 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $99,242 $99,678 ======= ======= Net Interest Earnings and Interest Rate Spread $ 462 1.93% $ 274 1.13% ======= ======= ======== ======= Net Yield on Interest-Earning Assets 2.36% 1.36% ======= ======= In 2004, excluding SFAS 13 Leveraged Lease adjustment, the rates on Domestic Office Loan and Non- Margin Loans would have been 3.82% and 3.49%, respectively. The Net Interest Rate Spread and Net Yield on Interest-Earning Assets would have been 1.85% and 2.08%, respectively.
38 OTHER DEVELOPMENTS Other First Quarter 2005 Developments In January 2005, the Company acquired certain of the assets and liabilities of Standard & Poor's Securities, Inc. (SPSI), the institutional brokerage subsidiary of Standard & Poor's. The Company will assume SPSI's client relationships and Standard & Poor's research clients will have access to BNY Securities Group's diverse set of execution management platforms and commission management services. The acquisition demonstrates the Company's strategy to align with leading independent providers of research and other financial services. In March 2005, the Company agreed to acquire the execution and commission management services of Boston Institutional Services ("BIS"). Under the term of the agreement, the Company will assume BIS's client relationships for its execution and commission management business. In April 2005, the Company agreed to acquire Lynch, Jones & Ryan, Inc. ("LJR"), a subsidiary of Instinet Group. LJR is the pioneer and premier provider of commission recapture programs, with over 30 years experience in providing value-added trading services to institutional investors who comprise 1,400 plan sponsor funds, with more than $2.2 trillion in assets. The Company's headquarters are in New York, with regional offices in Chicago, Dallas, San Francisco and a presence in London, Tokyo and Sydney. The acquisition of LJR bolsters the Company's position as the leading provider of agency brokerage and commission management services, and reinforces its long- standing commitment to the plan sponsor and institutional fund community around the world. On March 1, 2005, the Board of Governors of the Federal Reserve System (the "FRB") adopted a final rule that allows the continued limited inclusion of trust preferred securities in the Tier 1 capital of bank holding companies (BHCs). Under the final rule, the Company will be subject to a 15 percent limit in the amount of trust preferred securities that can be included in Tier 1 capital, net of goodwill, less any related deferred tax liability. Amounts in excess of these limits will continue to be included in Tier 2 capital. The final rule provides a five-year transition period, ending March 31, 2009, for application of quantitative limits. Under the transition rules, the Company expects all its trust preferred securities to continue to qualify as Tier 1 capital. Both the Company and the Bank are expected to remain "well capitalized" under the final rule. At the end of the transition period, the Company expects all its current trust preferred securities will continue to qualify as Tier 1 capital. In the first quarter of 2005, ownership of Pershing was transferred from The Bank of New York to the parent company, The Bank of New York Company, Inc. In connection with the transfer, the Company issued $1.1 billion of debt of which $500 million qualified as Tier 2 capital. The Company participates in unconsolidated investments that own real estate qualifying for low income housing tax credits based on Section 42 of the Internal Revenue Code. The Company's share of operating losses generated by these investments is recorded as other income. The Company has historically netted the tax credits generated by these investments against the related operating losses. The Company has reviewed this accounting method and has decided to record these tax credits as a reduction of income tax expense. To provide comparable historical information, the tables below show the restated prior period results. The resulting adjustments did not have an impact on net income. 39
THE BANK OF NEW YORK COMPANY, INC. Consolidated Statements of Income (Dollars in millions, except per share amounts) (Unaudited) For the three months ended -------------------------------------------- March 31, June 30, September 30, December 31, Year 2004 2004 2004 2004 2004 --------- -------- ------------- ----------- ------ Interest Income - --------------- Loans $ 118 $ 272 $ 290 $ 401 $1,080 Margin loans 34 35 40 48 156 Securities Taxable 181 180 181 197 741 Exempt from Federal Income Taxes 10 10 10 11 40 --------- -------- ------------- ----------- ------ 191 190 191 208 781 Deposits in Banks 68 78 77 81 305 Federal Funds Sold and Securities Purchased Under Resale Agreements 16 17 20 27 80 Trading Assets 14 9 11 17 51 --------- -------- ------------- ----------- ------ Total Interest Income 441 601 629 782 2,453 --------- -------- ------------- ----------- ------ Interest Expense - ---------------- Deposits 118 126 139 164 548 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 3 3 4 6 15 Other Borrowed Funds 9 9 9 25 52 Customer Payables 13 12 14 19 57 Long-Term Debt 30 30 35 41 136 --------- -------- ------------- ----------- ------ Total Interest Expense 173 180 201 255 808 --------- -------- ------------- ----------- ------ Net Interest Income 268 421 428 527 1,645 - ------------------- Provision for Credit Losses 12 10 - (7) 15 --------- -------- ------------- ----------- ------ Net Interest Income After Provision for Credit Losses 256 411 428 534 1,630 --------- -------- ------------- ----------- ------ Noninterest Income - ------------------ Servicing Fees Securities 716 717 685 742 2,858 Global Payment Services 79 81 84 71 317 --------- -------- ------------- ----------- ------ 795 798 769 813 3,175 Private Client Services and Asset Management Fees 108 113 113 115 448 Service Charges and Fees 96 94 98 98 385 Foreign Exchange and Other Trading Activities 106 100 67 90 364 Securities Gains 33 12 14 18 78 Other 82 39 38 42 200 --------- -------- ------------- ----------- ------ Total Noninterest Income 1,220 1,156 1,099 1,176 4,650 --------- -------- ------------- ----------- ------ Noninterest Expense - ------------------- Salaries and Employee Benefits 574 570 564 617 2,324 Net Occupancy 81 72 77 75 305 Furniture and Equipment 51 51 51 51 204 Clearing 48 44 39 45 176 Sub-custodian Expenses 22 22 21 22 87 Software 49 50 52 43 193 Communications 24 23 22 23 93 Amortization of Intangibles 8 8 9 9 34 Other 156 172 164 212 706 --------- -------- ------------- ----------- ------ Total Noninterest Expense 1,013 1,012 999 1,097 4,122 --------- -------- ------------- ----------- ------ Income Before Income Taxes 463 555 528 613 2,158 Income Taxes 99 184 174 262 718 --------- -------- ------------- ----------- ------ Net Income $ 364 $ 371 $ 354 $ 351 $1,440 - ---------- ========= ======== ============= =========== ====== Per Common Share Data: - ---------------------- Basic Earnings $ 0.47 $ 0.48 $ 0.46 $ 0.45 $ 1.87 Diluted Earnings 0.47 0.48 0.46 0.45 1.85 Cash Dividends Paid 0.19 0.20 0.20 0.20 0.79 Diluted Shares Outstanding 778 779 778 780 778 - ------------------------------------------------------------------------------------------------
40
THE BANK OF NEW YORK COMPANY, INC. Consolidated Statements of Income (Dollars in millions, except per share amounts) (Unaudited) For the year Ended December 31, ------------------------------------------------- 2004 2003 2002 2001 2000 --------- --------- --------- --------- --------- Interest Income - --------------- Loans $ 1,080 $ 1,187 $ 1,452 $ 2,239 $ 2,889 Margin loans 156 86 12 32 21 Securities Taxable 741 651 639 463 323 Exempt from Federal Income Taxes 40 48 61 74 63 --------- --------- --------- --------- --------- 781 699 700 537 386 Deposits in Banks 305 150 133 252 273 Federal Funds Sold and Securities Purchased Under Resale Agreements 80 79 51 159 277 Trading Assets 51 129 259 401 531 --------- --------- --------- --------- --------- Total Interest Income 2,453 2,330 2,607 3,620 4,377 --------- --------- --------- --------- --------- Interest Expense - ---------------- Deposits 548 507 644 1,392 2,011 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 15 13 29 103 153 Other Borrowed Funds 52 21 65 163 139 Customer Payables 57 30 2 4 - Long-Term Debt 136 150 202 277 317 --------- --------- --------- --------- --------- Total Interest Expense 808 721 942 1,939 2,620 --------- --------- --------- --------- --------- Net Interest Income 1,645 1,609 1,665 1,681 1,757 - ------------------- Provision for Credit Losses 15 155 685 375 105 --------- --------- --------- --------- --------- Net Interest Income After Provision for Credit Losses 1,630 1,454 980 1,306 1,652 --------- --------- --------- --------- --------- Noninterest Income - ------------------ Servicing Fees Securities 2,858 2,412 1,896 1,775 1,650 Global Payment Services 317 314 296 291 265 --------- --------- --------- --------- --------- 3,175 2,726 2,192 2,066 1,915 Private Client Services and Asset Management Fees 448 384 344 314 296 Service Charges and Fees 385 375 357 352 360 Foreign Exchange and Other Trading Activities 364 327 234 338 261 Securities Gains 78 35 (118) 154 150 Other 200 149 124 337 120 --------- --------- --------- --------- --------- Total Noninterest Income 4,650 3,996 3,133 3,561 3,102 --------- --------- --------- --------- --------- Noninterest Expense - ------------------- Salaries and Employee Benefits 2,324 2,002 1,581 1,593 1,493 Net Occupancy 305 261 230 233 184 Furniture and Equipment 204 185 138 178 108 Clearing 176 154 124 61 36 Sub-custodian Expenses 87 74 70 62 68 Software 193 170 115 90 66 Communications 93 92 65 86 56 Amortization of Goodwill and Intangibles 34 25 8 112 115 Merger and Integration Costs - 96 - - - Other 706 639 420 404 384 --------- --------- --------- --------- --------- Total Noninterest Expense 4,122 3,698 2,751 2,819 2,510 --------- --------- --------- --------- --------- Income Before Income Taxes 2,158 1,752 1,362 2,048 2,244 Income Taxes 718 595 460 705 815 --------- --------- --------- --------- --------- Net Income $ 1,440 $ 1,157 $ 902 $ 1,343 $ 1,429 - ---------- ========= ========= ========= ========= ========= Per Common Share Data: - ---------------------- Basic Earnings $ 1.87 $ 1.54 $ 1.25 $ 1.84 $ 1.95 Diluted Earnings 1.85 1.52 1.24 1.81 1.92 Cash Dividends Paid 0.79 0.76 0.76 0.72 0.66 Diluted Shares Outstanding 778 759 728 741 745 - ------------------------------------------------------------------------------------------------
41 Other 2004 Developments Other First & Fourth Quarter Developments in 2004 are summarized in the following tables: (In millions) Applicable Income Statement Pre-Tax After-Tax Item Quarter Caption Income Tax Income - -------------------- ---------- ---------------- ------- ----- --------- Net Interest Income - --------------------- SFAS 13 cumulative lease adjustment- First Net Interest (leasing portfolio) Income $ (145) $ 113 $ (32) Noninterest Income - -------------------- Gain on sale of Wing Hang First Other Income 48 (21) 27 Gain on sponsor First Securities fund investments Gains 19 (7) 12 Subtotal-Noninterest ------- ----- -------- Income 67 (28) 39 Noninterest Expense - --------------------- Severance tied to First Salaries and relocations Employee Benefits (10) 4 (6) Lease terminations First Net Occupancy (8) 3 (5) Subtotal-Noninterest ------- ----- -------- Expense (18) 7 (11) ------- ----- -------- Total $ (96) $ 92 $ (4) ======= ===== ======== Net interest income in the first quarter of 2004 included an after-tax charge of $32 million resulting from a cumulative adjustment to the leasing portfolio, which was triggered under Statement of Financial Accounting Standards No. 13 "Accounting for Leases" ("SFAS 13") by the combination of a reduction in state and local taxes and a restructuring of the lease portfolio completed in the first quarter. The SFAS 13 adjustment impacts the timing of lease income reported by the Company, and resulted in a reduction in net interest income of $145 million, offset by tax benefits of $113 million. Noninterest income in the first quarter of 2004 included a $27 million after-tax gain on the sale of a portion of the Company's interest in Wing Hang Bank Limited ("Wing Hang"), a Hong Kong based bank, which was recorded in other income, and $19 million ($12 million after-tax) of higher than anticipated securities gains in the first quarter resulting from realized gains on sponsor fund investments in Kinkos, Inc., Bristol West Holdings, Inc., Willis Group Holdings, Ltd., and True Temper Sports, Inc. The Company took several actions in the first quarter of 2004 associated with its long-term cost reduction initiatives impacting noninterest expense. These actions included an after-tax severance charge of $6 million related to staff reductions tied to job relocations and a $5 million after-tax charge for terminating high cost leases associated with the staff redeployments. 42 (In millions) Applicable Income Statement Pre-Tax After-Tax Item Quarter Caption Income Tax Income - -------------------- ---------- ---------------- ------- ----- --------- Net Interest Income - --------------------- SFAS 13 cumulative lease adjustment - (cross-border Fourth Net Interest rail equipment leases) Income $ 89 $ (37) $ 52 lease adjustment - Fourth Net Interest (aircraft leases) Income (10) 4 (6) ------- ----- -------- Subtotal-Net Interest Income 79 (33) 46 Aircraft leases/other Fourth Provision for Credit Losses 7 (3) 4 Subtotal-Net Interest Income After Provision ------- ----- -------- for Credit Losses 86 (36) 50 Noninterest Income - -------------------- Aircraft leases Fourth Other Income 3 (1) 2 Subtotal-Noninterest ------- ----- -------- Income 3 (1) 2 Noninterest Expense - --------------------- Charge for the RW Matter Fourth Other Expense (30) 8 (22) Subtotal-Noninterest ------- ----- -------- Expense (30) 8 (22) Federal tax reserve adjustment related to LILO exposure Fourth Income Tax - (50) (50) ------- ----- -------- Total $ 59 $ (79) $ (20) ======= ===== ======== Net interest income in the fourth quarter of 2004 included an after-tax benefit of $52 million resulting from a SFAS 13 cumulative adjustment to the leasing portfolio for customers exercising their early buy-out ("EBO") options. The Company's leasing portfolio contains a number of large cross- border leveraged leases where the lessee has an EBO option to purchase the leased assets, generally railcars and related assets. Given a confluence of economic factors, the value of the leased equipment currently exceeds the exercise price of the EBO option. The Company offered financial incentives to these lessees to accelerate the exercise of their EBO options. As a result, several lessees agreed to this proposal, triggering the after-tax $52 million gain. The gain results from the recognition of lease income over a shorter time frame, since the term of the lease has been shortened to the EBO date. In addition, the Company's net investment in aircraft leases was impacted by a $6 million after-tax adjustment related to aircraft leased to two airlines. The Company recorded a $7 million reduction in the provision for credit losses which largely reflects release of reserves on the aircraft leases. Noninterest income in the fourth quarter of 2004 included an after-tax gain of $2 million on the sale of a leased aircraft. Noninterest expense in the fourth quarter of 2004 included an after-tax expense of $22 million in connection with the anticipated settlement of the RW Professional Leasing Services Corp. matter ("RW Matter"). 43 In December of 2004 and January 2005, the Company had several appellate conferences with the IRS related to the Company's cross-border leveraged lease transactions. Based on these conferences, the Company believes it may be possible to settle the proposed IRS tax adjustments related to the portfolio. However, negotiations are continuing and the matter may still be litigated. Based on a revision to the probabilities and costs assigned to litigation and settlement outcomes, the Company recorded a $50 million expense associated with increasing the tax reserve on these transactions. 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, future loan losses, the Company's plans, objectives and strategies 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 and Internal Operations - 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, actual and assumed rates of return on pension assets, inflation, rising employee benefit expenses, the effectiveness of management's efforts to control expenses, 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 performance of the domestic economy, international economic markets, technological, regulatory and structural changes in the Company's industry, market demand for the Company's products and services, continuation of the trend to investment management outsourcing, the savings rate of individuals, growth of worldwide financial assets, continued globalization of investment activity, and future global political, economic, business and market conditions. Variations in management projections, methodologies used by management to set adequate reserve levels for expected and contingent liabilities, evaluate risk or market forecasts and the actions that management could take in response to these changes. Continuation of favorable global trends - The Company's businesses benefit from certain global trends, such as the growth of financial assets, creation of new securities, financial services industry consolidation, rapid technological change, globalization of investment activities, structural changes to financial markets, shortened settlement cycles, straight-through processing requirements, and increased demand for outsourcing. These long- term trends all increase the demand for the Company's products and services 44 around the world. However, in the near term, uncertainty surrounding recently enacted legislation and regulation, the potential legislative and regulatory changes under consideration in the securities industry, as well as investigations by various federal and state regulatory agencies, the Department of Justice and state attorney generals, could have an adverse effect on investment activity and the Company. Acquisitions - Lower than expected performance or higher than expected costs in connection with acquisitions and integration of acquired businesses, acquisitions of businesses with expensive technology components, changes in relationships with customers, entering new and unfamiliar markets, incurring undiscovered liabilities, incorrectly valuing acquisition candidates, the ability to satisfy customer requirements, retain customers and realize the growth opportunities of acquired businesses and management's ability to achieve efficiency goals. Competition - Increased competition from other domestic and international banks and financial service companies such as trading firms, broker-dealers and asset managers as well as from unregulated financial services organizations. Rapid technological changes requiring significant and ongoing investments in technology to develop competitive new products and services or adopt new technologies. Interest rates - The levels of market interest rates, the shape of the yield curve and the direction of interest rate changes all affect net interest income that the Company earns in many different businesses. Volatility of currency markets - The degree of volatility in foreign exchange rates can affect the amount of foreign exchange trading revenue. While most of the Company's foreign exchange revenue is derived from its securities servicing client base, activity levels are generally higher when there is more volatility. Therefore, the Company benefits from currency volatility. 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 pace of worldwide pension reform and the concomitant creation of new pools of pension assets, the level of debt issuance and currency exchange rate volatility all impact the Company's revenues. Access to liquidity - If the Company should experience limited access to the funds markets, arising from a loss of confidence of debt purchasers or counterparties in the funds markets in general or the Company in particular, this would adversely affect the Company. Operational risk and business continuity - The Company continually assesses and monitors operational risk in its businesses. Operational risk is mitigated by formal risk management oversight within the Company as well as by automation, standardized operating procedures, segregation of duties and controls, timely confirmation and reconciliation procedures and insurance. In addition, the Company provides for disaster and business recovery planning for events that could damage the Company's physical facilities, cause delay or disruptions to operational functions, including telecommunications networks, or impair the Company's clients, vendors and counterparties. Events beyond those contemplated in the plans could negatively affect the Company's results of operations. Reputational and legal risk - Adverse publicity and damage to the Company's 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 the Company's ability to attract and retain customers, maintain access to the capital markets or result in suits, enforcement actions, fines and penalties. 45 Legislative and regulatory environment - Heightened regulatory scrutiny and increased sanctions, changes or potential changes in domestic and international legislation and regulation as well as domestic or international regulatory investigations impose compliance, legal, review and response costs and may allow additional competition, facilitate consolidation of competitors, or attract new competitors into the Company's businesses. The cost of geographically diversifying the Company's facilities to comply with regulatory mandates. The nature of any new capital accords to be adopted by the Basel Committee on Banking Supervision and implemented by the Federal Reserve. Taxes - The U.S. Treasury and Internal Revenue Service have taken increasingly aggressive positions against certain corporate investment programs that either reduce or defer taxes. The Company believes that its historic investments have been carefully structured to comply with then current tax law, and received external legal and tax advice confirming the Company's treatment of the investments. Going forward, there may be fewer opportunities to participate in lease investing, tax credit programs and similar transactions that have benefited the Company in the past. This may adversely impact the Company's net interest income and effective tax rate. The Company has entered into investments that produce synthetic fuel from coal byproducts. Section 29 of the Internal Revenue code provides a tax credit for these types of transactions. The amount of the credit is dependent on the amount of coal produced by these investments. Coal production can be impacted by mine, workforce, transportation, and weather conditions among other factors. Section 29 credits are phased out when calendar year average oil prices reach certain levels. The Company estimates that the 2005 phase- out would begin if the entire calendar year 2005 wellhead prices averages above $52 (which corresponds to popularly published spot prices of $56) and the credit would be fully phased out at $65 (which corresponds to popularly published spot prices of $69). Acts of terrorism - Acts of terrorism could have a significant impact on the Company's business and operations. While the Company has in place business continuity and disaster recovery plans, acts of terrorism could still damage the Company's facilities and disrupt or delay normal operations, and have a similar impact on the Company's clients, suppliers, and counterparties. Acts of terrorism could also negatively impact the purchase of the Company's products and services to the extent they resulted in reduced capital markets activity or lower asset price levels. Accounting Principles - Changes in generally accepted accounting principles in the United States which are applicable to the Company could have an impact on the Company's reported results of operations even though they do not have an economic impact on the Company's business. 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. 46 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, stand alone 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, * Its earnings releases and management conference calls and presentations, and * Its corporate governance guidelines and the charters of the audit and examining, compensation and organization, and nominating and governance committees of its Board of Directors. The corporate governance guidelines and committee charters are available in print to any shareholder who requests it. Requests should be sent to The Bank of New York Company, Inc., Corporate Communications, One Wall Street, NY, NY 10286. 47
THE BANK OF NEW YORK COMPANY, INC. Consolidated Balance Sheets (Dollars in millions, except per share amounts) (Unaudited) March 31, 2005 December 31, 2004 ------------------ ----------------- Assets - ------ Cash and Due from Banks $ 2,597 $ 3,886 Interest-Bearing Deposits in Banks 8,802 8,192 Securities Held-to-Maturity (fair value of $1,804 in 2005 and $1,873 in 2004) 1,831 1,886 Available-for-Sale 22,076 21,916 ------------------ ----------------- Total Securities 23,907 23,802 Trading Assets at Fair Value 5,123 4,627 Federal Funds Sold and Securities Purchased Under Resale Agreements 4,085 5,708 Loans (less allowance for loan losses of $583 in 2005 and $591 in 2004) 38,181 35,190 Premises and Equipment 1,070 1,097 Due from Customers on Acceptances 138 137 Accrued Interest Receivable 313 285 Goodwill 3,487 3,477 Intangible Assets 793 793 Other Assets 8,041 7,335 ------------------ ----------------- Total Assets $ 96,537 $ 94,529 ================== ================= Liabilities and Shareholders' Equity - ------------------------------------ Deposits Noninterest-Bearing (principally domestic offices) $ 15,574 $ 17,442 Interest-Bearing Domestic Offices 18,608 18,692 Foreign Offices 24,781 22,587 ------------------ ----------------- Total Deposits 58,963 58,721 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 879 1,205 Trading Liabilities 2,902 2,873 Payables to Customers and Broker-Dealers 8,684 8,664 Other Borrowed Funds 906 533 Acceptances Outstanding 140 139 Accrued Taxes and Other Expenses 4,192 4,452 Accrued Interest Payable 114 113 Other Liabilities (including allowance for lending-related commitments of $133 in 2005 and $145 in 2004) 3,033 2,418 Long-Term Debt 7,389 6,121 ------------------ ----------------- Total Liabilities 87,202 85,239 ------------------ ----------------- Shareholders' Equity Common Stock-par value $7.50 per share, authorized 2,400,000,000 shares, issued 1,046,300,569 shares in 2005 and 1,044,841,603 shares in 2004 7,847 7,836 Additional Capital 1,790 1,790 Retained Earnings 6,374 6,162 Accumulated Other Comprehensive Income (87) (6) ------------------ ----------------- 15,924 15,782 Less: Treasury Stock (269,413,566 shares in 2005 and 266,720,629 shares in 2004), at cost 6,579 6,492 Loan to ESOP (305,261 shares in 2005 and 126,960 shares in 2004), at cost 10 - ------------------ ----------------- Total Shareholders' Equity 9,335 9,290 ------------------ ----------------- Total Liabilities and Shareholders' Equity $ 96,537 $ 94,529 ================== ================= - ------------------------------------------------------------------------------------------------ Note: The balance sheet at December 31, 2004 has been derived from the audited financial statements at that date. See accompanying Notes to Consolidated Financial Statements.
48
THE BANK OF NEW YORK COMPANY, INC. Consolidated Statements of Income (Dollars in millions, except per share amounts) (Unaudited) For the three months ended March 31, -------------------- 2005 2004 --------- -------- Interest Income - --------------- Loans $ 341 $ 118 Margin loans 55 34 Securities Taxable 207 181 Exempt from Federal Income Taxes 9 10 --------- -------- 216 191 Deposits in Banks 71 68 Federal Funds Sold and Securities Purchased Under Resale Agreements 27 16 Trading Assets 22 14 --------- -------- Total Interest Income 732 441 --------- -------- Interest Expense - ---------------- Deposits 184 118 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 6 3 Other Borrowed Funds 13 9 Customer Payables 25 13 Long-Term Debt 49 30 --------- -------- Total Interest Expense 277 173 --------- -------- Net Interest Income 455 268 - ------------------- Provision for Credit Losses (10) 12 --------- -------- Net Interest Income After Provision for Credit Losses 465 256 --------- -------- Noninterest Income - ------------------ Servicing Fees Securities 751 716 Global Payment Services 75 79 --------- -------- 826 795 Private Client Services and Asset Management Fees 121 108 Service Charges and Fees 92 96 Foreign Exchange and Other Trading Activities 96 106 Securities Gains 12 33 Other 31 82 --------- -------- Total Noninterest Income 1,178 1,220 --------- -------- Noninterest Expense - ------------------- Salaries and Employee Benefits 618 574 Net Occupancy 78 81 Furniture and Equipment 52 51 Clearing 46 48 Sub-custodian Expenses 23 22 Software 53 49 Communications 23 24 Amortization of Intangibles 8 8 Other 176 156 --------- -------- Total Noninterest Expense 1,077 1,013 --------- -------- Income Before Income Taxes 566 463 Income Taxes 187 99 --------- -------- Net Income $ 379 $ 364 - ---------- ========= ======== Per Common Share Data: - ---------------------- Basic Earnings $ 0.49 $ 0.47 Diluted Earnings 0.49 0.47 Cash Dividends Paid 0.20 0.19 Diluted Shares Outstanding 779 778
See accompanying Notes to Consolidated Financial Statements. 49
THE BANK OF NEW YORK COMPANY, INC. Consolidated Statement of Changes in Shareholders' Equity For the three months ended March 31, 2005 (Dollars in millions) (Unaudited) Common Stock Balance, January 1 $ 7,836 Issuances in Connection with Employee Benefit Plans 11 ------------- Balance, March 31 7,847 ------------- Additional Capital Balance, January 1 1,790 Issuances in Connection with Employee Benefit Plans 39 Stock Rights Redemption (39) ------------- Balance, March 31 1,790 ------------- Retained Earnings Balance, January 1 6,162 Net Income $ 379 379 Cash Dividends on Common Stock (167) ------------- Balance, March 31 6,374 ------------- Accumulated Other Comprehensive Income Balance, January 1 (6) Change in Fair Value of Securities Available-for-Sale, Net of Taxes of $(43) million (68) (68) Reclassification Adjustment, Net of Taxes of $(2) million (2) (2) Foreign Currency Translation Adjustment, Net of Taxes of $(3) million (9) (9) Net Unrealized Derivative Gains on Cash Flow Hedges, Net of Taxes of $(1) million (2) (2) ----------- ------------- Balance, March 31 (87) Total Comprehensive Income $ 298 =========== Less Treasury Stock Balance, January 1 6,492 Issued (20) Acquired 107 ------------- Balance, March 31 6,579 ------------- Less Loan to ESOP Balance, January 1 - Loan to ESOP 10 ------------- Balance, March 31 10 ------------- Total Shareholders' Equity, March 31 2005 $ 9,335 ============= - ------------------------------------------------------------------------------------------- Comprehensive Income for the three months ended March 31, 2005 and 2004 was $298 million and $450 million. See accompanying Notes to Consolidated Financial Statements.
50
THE BANK OF NEW YORK COMPANY, INC. Consolidated Statements of Cash Flows (Dollars in millions) (Unaudited) For the three months ended March 31, 2005 2004 -------- -------- Operating Activities Net Income $ 379 $ 364 Adjustments to Determine Net Cash Attributable to Operating Activities: Provision for Credit Losses and Losses on Other Real Estate (10) 12 Depreciation and Amortization 178 119 Deferred Income Taxes 89 (73) Securities Gains (12) (33) Change in Trading Activities (358) 1,313 Change in Accruals and Other, Net (696) 138 -------- -------- Net Cash (Used for) Provided by Operating Activities (430) 1,840 -------- -------- Investing Activities Change in Interest-Bearing Deposits in Banks (793) (1,568) Change in Margin Loans 21 (418) Purchases of Securities Held-to-Maturity (26) (809) Paydowns of Securities Held-to-Maturity 73 24 Maturities of Securities Held-to-Maturity 6 - Purchases of Securities Available-for-Sale (3,835) (3,879) Sales of Securities Available-for-Sale 1,352 1,341 Paydowns of Securities Available-for-Sale 1,468 1,688 Maturities of Securities Available-for-Sale 680 641 Net Principal Received (Disbursed) on Loans to Customers (3,135) (578) Sales of Loans and Other Real Estate 105 1 Change in Federal Funds Sold and Securities Purchased Under Resale Agreements 1,623 1,054 Purchases of Premises and Equipment (16) (46) Acquisitions, Net of Cash Acquired (31) (46) Proceeds from the Sale of Premises and Equipment - 4 Other, Net 23 395 -------- -------- Net Cash Used for Investing Activities (2,485) (2,196) -------- -------- Financing Activities Change in Deposits 560 (399) Change in Federal Funds Purchased and Securities Sold Under Repurchase Agreements (326) (170) Change in Payables to Customers and Broker-Dealers 20 (446) Change in Other Borrowed Funds 353 205 Proceeds from the Issuance of Long-Term Debt 1,453 63 Repayments of Long-Term Debt (99) - Issuance of Common Stock 31 49 Treasury Stock Acquired (117) (21) Cash Dividends Paid (167) (146) -------- -------- Net Cash Provided by (Used for) Financing Activities 1,708 (865) -------- -------- Effect of Exchange Rate Changes on Cash (82) (7) -------- -------- Change in Cash and Due From Banks (1,289) (1,228) Cash and Due from Banks at Beginning of Period 3,886 3,843 -------- -------- Cash and Due from Banks at End of Period $ 2,597 $ 2,615 ======== ======== - ------------------------------------------------------------------------------- Supplemental Disclosure of Cash Flow Information Cash Paid During the Period for: Interest $ 277 $ 97 Income Taxes 81 59 Noncash Investing Activity (Primarily Foreclosure of Real Estate) - - - ------------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements.
51 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 quarter of 2005, approximately 7 million options were granted. In the first three months of 2005, the Company recorded $10 million of stock option expense. The retroactive restatement method requires the Company's financial statements to be restated as if fair value accounting had been adopted in 1995. The following table discloses the pro forma effects on the Company's net income and earnings per share as if the retroactive restatement method had been adopted. (Dollars in millions, 1st Quarter except per share amounts) 2005 2004 - ---------------------------------------- ------ ------ Reported net income $ 379 $ 364 Stock based employee compensation costs, using prospective method, net of tax 6 5 Stock based employee compensation costs, using retroactive restatement method, net of tax (13) (17) ------ ------ Pro forma net income $ 372 $ 352 ------ ------ Reported diluted earnings per share $ 0.49 $ 0.47 Impact on diluted earnings per share (0.01) (0.01) ------ ------ Pro forma diluted earnings per share $ 0.48 $ 0.46 ====== ====== 52 The fair value of options granted in 2005 and 2004 were estimated at the grant date using the following weighted average assumptions: 1st Quarter 2005 2004 ------ ------ Dividend yield 2.77% 2.50% Expected volatility 25.05 25.00 Risk free interest rates 4.15 2.60 Expected options lives 5 5 On February 1, 2003, the Company adopted FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities". This interpretation requires a company that holds a variable interest in an entity to consolidate the entity if the company's interest in the variable interest 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, including FIN 46(R), delayed the effective date for certain previously established entities until the first quarter of 2004. The adoption of FIN 46 and FIN 46(R) did not have a significant impact on the Company's results of operations or financial condition. As of December 31, 2004, the Company had variable interests in 5 securitization trusts. These trusts are qualifying special-purpose entities, which are exempt from the consolidation requirements of FIN 46. See Footnote "Securitizations" in the 2004 Annual Report. The most significant impact of FIN 46 and FIN 46(R) 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. On March 1, 2005, the Board of Governors of the Federal Reserve System (the "FRB") adopted a final rule that allows the continued limited inclusion of trust preferred securities in the Tier 1 capital of bank holding companies (BHCs). Under the final rule, the Company will be subject to a 15 percent limit in the amount of trust preferred securities that can be included in Tier 1 capital, net of goodwill, less any related deferred tax liability. Amounts in excess of these limits will continue to be included in Tier 2 capital. The final rule provides a five-year transition period, ending March 31, 2009, for application of quantitative limits. Under the transition rules, the Company expects all its trust preferred securities to continue to qualify as Tier 1 capital. Both the Company and the Bank are expected to remain "well capitalized" under the final rule. At the end of the transition period, the Company expects all its current trust preferred securities will continue to qualify as Tier 1 capital. In May 2004, FASB issued FASB Staff Position No. 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" ("FSP FAS 106-2"), which supersedes FSP FAS 106-1, in response to the December 2003 enactment of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the Act"). FSP FAS 106-2 provides guidance on the accounting for the effects of the Act for employers that sponsor postretirement health care plans that provide prescription drug benefits. The Company believes that its plans are eligible for the subsidy provided by the Act and adopted FSP FAS 106-2 in the third quarter of 2004 retroactive to January 1, 2004. The adoption of FSP FAS 106-2 did not have a 53 significant impact on the Company's results of operations or financial position. In September 2004, the FASB issued FASB Staff Position (FSP) EITF 03-1-1, which delays the recognition and measurement provisions of EITF 03-1 pending the issuance of further implementation guidance. The delay applies to both debt and equity securities and specifically applies to impairments caused by interest rate and sector spreads. In addition, the provisions of EITF 03-1 that have been delayed relate to the requirements that a company declare its intent to hold the security to recovery and designate a recovery period in order to avoid recognizing an other-than-temporary impairment charge through earnings. The FASB will be issuing implementation guidance related to this topic. Once issued, the Company will evaluate the impact of adopting EITF 03-1. The FASB is currently reviewing the accounting guidance under SFAS 13 surrounding leveraged leases. If FASB modifies existing interpretations of SFAS 13 and associated industry practice, a settlement of the tax matters associated with the Company's structured leasing investments (see "Commitments and Contingencies" footnote) could result in a material one-time charge to earnings related to a change in the timing of the lease cash flows. However, an amount approximating this one-time charge would be recognized into income over the remaining term of the affected leases. It is anticipated that FASB will issue an exposure draft on this topic in the second quarter of 2005, with an appropriate time period available to receive industry comments, before any final pronouncement would become effective. In December 2004, the FASB issued FASB Statement No. 123 (revised 2004) ("SFAS 123(R)"), "Share-Based Payment", which is a revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation." FASB 123(R) eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 and requires that such transactions be accounted for using a fair value-based method. Statement 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. In April 2005, the Securities and Exchange Commission ("SEC") issued a release that amends the compliance dates for SFAS 123(R). Under the SEC's new rule, the Company will be required to apply SFAS 123(R) as of January 1, 2006. Statement 123(R) may be adopted using one of two methods: (1) A "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date. (2) A "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. The Company adopted the fair value method of accounting for stock-based compensation prospectively as of January 1, 2003. By January 1, 2006, the Company will be amortizing all of its unvested stock option grants. The Company is currently evaluating the impact of adopting FASB 123(R). The Company participates in unconsolidated investments that own real estate qualifying for low income housing tax credits based on Section 42 of the Internal Revenue Code. The Company's share of operating losses generated by these investments is recorded as other income. The Company has historically netted the tax credits generated by these investments against the related operating losses. In the first quarter of 2005, the Company reviewed this accounting method and determined it was more appropriate to record these tax credits as a reduction of income tax expense. Prior period results for other income and income tax expense have been reclassified and did not have an impact on net income. See "Other Developments." Certain other prior year information has been reclassified to conform its presentation with the 2005 financial statements. 54 3. Acquisitions and Dispositions ----------------------------- The Company continues to be an active acquirer of securities servicing and asset management businesses. The Company has announced three acquisitions in 2005. The total acquisition cost in the first quarter was $7.5 million, 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 and the tax deductible portion of goodwill related to acquisitions in the first quarter was zero. At March 31, 2005, the Company was liable for potential contingent payments related to acquisitions in the amount of $217 million. During the first quarter of 2005, the Company paid $9 million for contingent payments related to acquisitions made in prior years. 2005 - ---- In January 2005, the Company acquired certain of the assets and liabilities of Standard & Poor's Securities, Inc. (SPSI), the institutional brokerage subsidiary of Standard & Poor's. The Company will assume SPSI's client relationships and Standard & Poor's research clients will have access to BNY Securities Group's diverse set of execution management platforms and commission management services. The acquisition demonstrates the Company's strategy to work with leading independent providers of research and other financial services. In March 2005, the Company agreed to acquire the execution and commission management services of Boston Institutional Services ("BIS"). Under the term of the agreement, the Company will assume BIS's client relationships for its execution and commission management business. In April 2005, the Company agreed to acquire Lynch, Jones & Ryan, Inc ("LJR"), a subsidiary of Instinet Group. LJR is the pioneer and premier provider of commission recapture programs, with over 30 years experience in providing value-added trading services to institutional investors who comprise 1,400 plan sponsor funds, with more than $2.2 trillion in assets. The Company's headquarters are in New York, with regional offices in Chicago, Dallas, San Francisco and a presence in London, Tokyo and Sydney. The acquisition of LJR bolsters the Company's position as the leading provider of agency brokerage and commission management services, and reinforces its long- standing commitment to the plan sponsor and institutional fund community around the world. 4. Goodwill and Intangibles ------------------------ Goodwill by business segment is as follows: (In millions) March 31, 2005 December 31, 2004 ------------------ ----------------- Servicing and Fiduciary Businesses $ 3,347 $ 3,337 Corporate Banking 31 31 Retail Banking 109 109 Financial Markets - - ------------------ ----------------- Consolidated Total $ 3,487 $ 3,477 ================== ================= The Company's business segments are tested annually for goodwill impairment. 55 Intangible Assets - ----------------- March 31, 2005 December 31, 2004 ---------------------------------------------- ------------------------------ 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 483 (72) 411 17 474 (65) 409 Other Intangible Assets 41 (29) 12 7 41 (27) 14
The aggregate amortization expense of intangibles was $8 million and $8 million for the quarters ended March 31, 2005 and 2004, respectively. Estimated amortization expense for the next five years is as follows: For the Year Ended Amortization (In millions) December 31, Expense ------------------ ------------ 2005 $38 2006 38 2007 35 2008 35 2009 31 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. 56 Transactions in the allowance for credit losses are summarized as follows: (In millions) Three Months Ended March 31, 2005 ---------------------------------------------- Allowance for Allowance for Lending-Related Allowance for Loan Losses Commitments Credit Losses -------------- --------------- ------------- Balance, Beginning of Period $ 591 $ 145 $ 736 Charge-Offs (11) - (11) Recoveries 1 - 1 -------------- --------------- ------------- Net Charge-Offs (10) - (10) Provision 2 (12) (10) -------------- --------------- ------------- Balance, End of Period $ 583 $ 133 $ 716 ============== =============== ============= Three Months Ended March 31, 2004 ---------------------------------------------- Allowance for Allowance for Lending-Related Allowance for Loan Losses Commitments Credit Losses -------------- --------------- ------------- Balance, Beginning of Period $ 668 $ 136 $ 804 Charge-Offs (29) - (29) Recoveries 3 - 3 -------------- --------------- ------------- Net Charge-Offs (26) - (26) Provision (10) 22 12 -------------- --------------- ------------- Balance, End of Period $ 632 $ 158 $ 790 ============== =============== ============= 6. Capital Transactions -------------------- The Company has 5 million authorized shares of Class A preferred stock having a par value of $2.00 per share. At March 31, 2005 and December 31, 2004, 3,000 shares were outstanding. In February 2005, the Company's board of directors voted unanimously to terminate the Company's Preferred Stock Purchase Rights Plan ("Rights Plan") and to institute parameters regarding adoption of a shareholder rights plan in the future. Each share of the Company's common stock also represented one right under the Rights Plan. On March 25, 2005, the Company paid $39 million, or 5 cents per right, to redeem the rights from shareholders of record as of March 11, 2005. During the quarter ended March 31, 2005 the Company issued $1.2 billion of debt of which $603 million was subordinated debt qualifying as Tier II capital. At March 31, 2005, the Company had registration statements with a remaining capacity of approximately $1.8 billion of debt, preferred stock, preferred trust securities, or common stock. 57 7. Earnings Per Share ------------------ The following table illustrates the computations of basic and diluted earnings per share: Three Months Ended March 31, (In millions, ------------------ except per share amounts) 2005 2004 - ---------------------------------- -------- -------- Net Income(1) $ 379 $ 364 ======== ======== Basic Weighted Average Shares Outstanding 771 771 Shares Issuable on Exercise of Employee Stock Options 8 7 -------- -------- Diluted Weighted Average Shares Outstanding 779 778 ======== ======== Basic Earnings Per Share: $ 0.49 $ 0.47 Diluted Earnings Per Share: 0.49 0.47 (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 Benefits Healthcare Benefits ------------------- ------------------- Three Months Ended Three Months Ended March 31, March 31, ------------------- ------------------- Domestic Foreign --------- --------- (In millions) 2005 2004 2005 2004 2005 2004 - --------------------- ---- ---- ---- ---- -------- ---------- Net Periodic Cost (Income) Service Cost $ 16 $ 12 $ 2 $ 2 $ - $ - Interest Cost 14 13 2 2 2 3 Expected Return on Assets (30) (33) (3) (2) (2) (2) Other 4 1 1 1 2 2 ---- ---- ---- ---- -------- ---------- Net Periodic Cost (Income) $ 4 $ (7)$ 2 $ 3 $ 2 $ 3 ==== ==== ==== ==== ======== ========== 9. Commitments and Contingent Liabilities -------------------------------------- In the normal course of business, various commitments and contingent liabilities are outstanding which are not reflected in the accompanying consolidated balance sheets. Management does not expect any material losses to result from these matters. A summary of the notional amount of the Company's off-balance-sheet credit transactions, net of participations, at March 31, 2005 and December 31, 2004 follows: Off-Balance-Sheet Credit Risks - ------------------------------ March 31, December 31, (In millions) 2005 2004 - ----------------------------------- ------------ ----------- Lending Commitments $ 35,741 $ 34,834 Standby Letters of Credit, net 9,502 9,507 Commercial Letters of Credit 1,206 1,264 Securities Lending Indemnifications 252,863 232,025 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 58 being drawn upon, the total amount does not necessarily represent future cash requirements. In securities lending transactions, the Company generally requires the borrower to provide 102% cash collateral which is monitored on a daily basis, thus reducing credit risk. Security lending transactions are generally entered into only with highly-rated counterparties. At March 31, 2005 and December 31, 2004, securities lending indemnifications were secured by collateral of $256.2 billion and $233.0 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 and $0.5 billion that were collateralized with cash and securities on March 31, 2005 and December 31, 2004. At March 31, 2005, approximately $6.7 billion of the standbys will expire within one year, and the balance between one to five years. 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 investments, referred to as "LILOs", prior to mid-1999 that the IRS has challenged. In 2004, the IRS 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. However, a court or other judicial or administrative authority, if presented with the transactions, could disagree. Beginning in the fourth quarter of 2004, the Company had several appellate conferences with the IRS related to the Company's cross-border leveraged lease transactions. Based on these conferences, the Company believes it is likely it will settle the proposed IRS tax adjustments relating to transactions closed in 1996 and 1997. However, negotiations are not final and it remains possible that the matter will be litigated. The Company's 1998 leveraged lease transactions are in a later audit cycle and thus are unlikely to be part of any settlement of the 1996 and 1997 leases. However, the Company believes that a comparable settlement for 1998 will ultimately be possible given the similarity between these leases and the earlier leases. On February 11, 2005, the IRS released Notice 2005-13 which identified certain lease investments known as "SILOs" as potentially subject to IRS challenge. The Company believes that certain of its lease investments entered into between 1999 and 2003 may be consistent with transactions described in the notice. In response the Company is reviewing its lease portfolio and evaluating the technical merits of the IRS' position. At this time, it is unknown whether the IRS will ultimately challenge these investments, but the Company remains confident that its leases complied with statutory, administration and judicial authority existing at that time. The Company currently believes it has adequate tax reserves to cover its LILO exposure for all years 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. See discussion of contingent legal matters in the "Legal Proceedings" section. In the ordinary course of business, the Company and its subsidiaries are routinely defendants in or parties to a number of pending and potential legal 59 actions, including actions brought on behalf of various classes of claimants, and regulatory matters. Claims for significant monetary damages are asserted in certain of these actions and proceedings. Due to the inherent difficulty of predicting the outcome of such matters, the Company cannot ascertain what the eventual outcome of these matters will be; however, based on current knowledge and after consultation with legal counsel, the Company does not believe that judgments or settlements, if any, arising from pending or potential legal actions or regulatory matters, either individually or in the aggregate, will have a material adverse effect on the consolidated financial position or liquidity of the Company although they could have a material effect on net income for a given period. The Company intends to defend itself vigorously against all of the claims asserted in these matters. 60 QUARTERLY REPORT ON FORM 10-Q THE BANK OF NEW YORK COMPANY, INC. UNITED STATES 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 ended March 31, 2005 Commission file number 001-06152 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 March 31, 2005, The Bank of New York Company, Inc. had 776,581,742 shares of common stock ($7.50 par value) outstanding. The Bank of New York Company, Inc. (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months(or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. The registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). The following sections of the Financial Review set forth in the cross- reference index are incorporated in the Quarterly Report on Form 10-Q. Cross-reference Page(s) - ------------------------------------------------------------------------------ PART I FINANCIAL INFORMATION Item 1 Financial Statements Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004 47 Consolidated Statements of Income for the three months ended March 31, 2005 and 2004 48 Consolidated Statement of Changes in Shareholders' Equity for the three months ended March 31, 2005 49 Consolidated Statement of Cash Flows for the three months ended March 31, 2005 and 2004 50 Notes to Consolidated Financial Statements 51 - 59 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 2 - 46 Item 3 Quantitative and Qualitative Disclosures About Market Risk 34 - 36 61 ITEM 4. CONTROLS AND PROCEDURES Disclosure Controls and Procedures The Company's Disclosure Committee has responsibility for ensuring that there is an adequate and effective process for establishing, maintaining, and evaluating disclosure controls and procedures for the Company in connection with its external disclosures. In addition, the Company has established a Code of Conduct designed to provide a statement of the values and ethical standards to which the Company requires its employees and directors to adhere. The Code of Conduct provides the framework for maintaining the highest possible standards of professional conduct. The Company has an ethics hotline for employees. 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 Company's disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report. PART II. OTHER INFORMATION Item 1. Legal Proceedings - -------------------------- In the ordinary course of business, the Company and its subsidiaries are routinely defendants in or parties to a number of pending and potential legal actions, including actions brought on behalf of various classes of claimants, and regulatory matters. Claims for significant monetary damages are asserted in certain of these actions and proceedings. In regulatory enforcement matters, claims for disgorgement and the imposition of penalties and/or other remedial sanctions are possible. Due to the inherent difficulty of predicting the outcome of such matters, the Company cannot ascertain what the eventual outcome of these matters will be; however, based on current knowledge and after consultation with legal counsel, the Company does not believe that judgments or settlements, if any, arising from pending or potential legal actions or regulatory matters, either individually or in the aggregate, will have a material adverse effect on the consolidated financial position or liquidity of the Company although they could have a material effect on net income for a given period. The Company intends to defend itself vigorously against all of the claims asserted in these matters. The Company continues to cooperate with the previously discussed investigations by law enforcement authorities into 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 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 Office has proposed to resolve its investigation through an agreement between the Bank and the Office. The Bank is reviewing the Office's proposal. Since the potential settlement of this matter is probable and can be reasonably estimated, the Company recorded a $30 million pre-tax ($22 million after-tax) liability for fines, restitution and legal costs 62 associated with this matter in the fourth quarter of 2004. There can be no assurance that an agreement will be reached. The Company is broadly involved in the mutual fund industry, and various governmental and self-regulatory agencies have sought documents and other information from it in connection with investigations relating to that industry. The Company is cooperating with these investigations. One of these investigations, by the U.S. Securities and Exchange Commission ("SEC") concerns the relationship among: (1) the BNY Hamilton Funds, Inc., a family of mutual funds; (2) the Company, which acts as the investment adviser to the Hamilton Funds and provides certain other services; and (3) a third-party service provider that acts as administrator and principal underwriter of the Hamilton Funds. This investigation principally concerns the appropriateness of certain expenditures made in connection with marketing and distribution of the Hamilton Funds. Another SEC investigation has focused on possible market- timing transactions cleared by Pershing LLC ("Pershing"), a wholly owned subsidiary of the Company, for Mutuals.com and other introducing brokers. Pershing, which was acquired from Credit Suisse First Boston (USA), Inc. ("CSFB") in May 2003, is defending three putative class action lawsuits filed against CSFB seeking unspecified damages relating to mutual fund market-timing transactions that were cleared through Pershing's facilities. Because the conduct at issue is alleged to have occurred largely during the period that Pershing was owned by CSFB, the Company had made a claim for indemnification against CSFB relating to these lawsuits under the agreement relating to the acquisition of Pershing. CSFB is disputing this claim for indemnification. The Company provides an array of issuer services, and the SEC has sought documents and other information from it in connection with investigations relating to that business. The Company is cooperating with these investigations. Those investigations have focused primarily on (i) the Company's role as transfer agent on behalf of equity issuers in the United States and the process used by the Company's stock transfer division to search for lost security holders of its issuer clients; and (ii) the Company's role as auction agent in connection with auction rate securities issued by various issuers. ITEM 2. Changes in Securities, Use of Proceeds, and - ---------------------------------------------------- Issuer Purchases of Equity Securities ------------------------------------ Under its stock repurchase program, the Company buys back shares from time to time. The following table discloses the Company's repurchases of the Company's common stock made during the first quarter of 2005. Issuer Purchases of Equity Securities - ------------------------------------- Total Number Maximum Total Average of Shares Number of Shares Number Price Purchased as That May be Period of Shares Paid Part of Repurchased Purchased Per Share Publicly Under the Plans Announced Plans or Programs or Programs - -------------- ---------- ---------- --------------- ------------------ January 1-31 7,303 $ 33.02 7,303 12,623,001 February 1-28 241,937 30.09 241,937 12,381,064 March 1-31 3,249,289 30.56 3,249,289 9,131,775 ---------- --------------- Total 3,498,529 3,498,529 All shares were repurchased through the Company's stock repurchase program, which was announced on November 12, 2002 and permits the repurchase of 16 million shares. The shares repurchased in the first quarter primarily resulted from open market purchases. 63 Item 6. Exhibits - ----------------- Exhibit 3(ii) - Amendment to the By-laws of The Bank of New York Company. Inc.; Exhibit 12 - Ratio of Earnings to Fixed Charges for the Three Months Ended March 31, 2005 and 2004; 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; and Exhibit 32.1 - Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 64 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. THE BANK OF NEW YORK COMPANY, INC. ---------------------------------- (Registrant) Date: May 4, 2005 By: /s/ Thomas J. Mastro --------------------------------- Name: Thomas J. Mastro Title: Comptroller EXHIBIT INDEX ------------- Exhibit Description - ------- ----------- 3(ii) Amendment to the By-laws of The Bank of New York Company, Inc. 12 Ratio of Earnings to Fixed Charges for the Three Months Ended March 31, 2005 and 2004. 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-3 2 r1q05ex3ii.txt EX-3(II) 1 EXHIBIT 3(ii) BY-LAWS of The Bank of New York Company, Inc. As Amended through April 12, 2005 ARTICLE I OFFICES SECTION 1.1. Principal Office. The principal office of The Bank of New York Company, Inc. (hereinafter called the Company) shall be in the City and County of New York. SECTION 1.2. Other Offices. The Company may have other offices at such other places as the Board of Directors of the Company (hereinafter called the Board) may from time to time determine and as shall be legally authorized. ARTICLE II MEETINGS OF SHAREHOLDERS SECTION 2.1. Place of Meeting. Each meeting of the shareholders of the Company (hereinafter called the shareholders) shall be held at the principal office of the Company or at such other place, within or without the State of New York, as shall be specified in the notice of such meeting. SECTION 2.2. Annual Meetings. The annual meeting of the shareholders for the election of directors and the transaction of such other business as properly may be brought before such meeting shall be held on such date as may be designated by the Board from time to time, at such hour as may be specified in the notice of such meeting. SECTION 2.3. Special Meetings. A special meeting of the shareholders for any purpose or purposes may be called at any time by order of the Board or by the Chairman of the Board (hereinafter called the Chairman) or, in his absence, the President. SECTION 2.4. Notice of Meetings. Notice of each meeting of the shareholders shall be in writing and signed by the Chairman, the President or the Secretary. Such notice shall state the purpose or purposes for which such meeting is called and the place, date and hour of the meeting, and, unless it is the annual meeting, shall indicate that it is being issued by or at the direction of the person or persons calling the meeting. If, at any meeting, action is proposed to be taken which would, if taken, entitle shareholders who comply with applicable requirements of law to receive payment for their shares, the notice of such meeting shall include a statement of that purpose and to that effect. Except as otherwise provided by law, a copy of the notice of any meeting shall be given, personally or by mail, not less than ten nor more than fifty days before such meeting, to each shareholder entitled to vote at such meeting. If mailed, such notice shall be deemed to have been given when deposited in the United States mail, with postage thereon 2 prepaid,directed to the shareholder at his address as it appears on the record of shareholders of the Company, or, if he shall have filed with the Secretary a written request that notices to him be mailed to some other address, then directed to him at such other address. Unless the Board fixes a new record date for an adjourned meeting of the shareholders, notice thereof need not be given if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken. Any previously scheduled meeting of the shareholders may be postponed, and (unless the Certificate of Incorporation otherwise provides) any special meeting of the shareholders may be canceled, by resolution of the Board of Directors upon public notice given prior to the time previously scheduled for such meeting of shareholders. SECTION 2.5. Waiver of Notice. Notice of any meeting of the shareholders need not be given to any shareholder who submits a signed waiver of notice, in person or by proxy, whether before or after the meeting, and the attendance of any shareholder at a meeting, in person or by proxy, without protesting prior to the conclusion thereof the lack of notice of such meeting, shall constitute a waiver of notice thereof by him. SECTION 2.6. Quorum. Except as otherwise provided by law, at all meetings of the shareholders the presence, in person or by proxy, of the holders of a majority of the shares of the Company entitled to vote thereat shall be necessary to constitute, and shall constitute, a quorum for the transaction of business. When a quorum is once present to organize a meeting, it is not broken by the subsequent withdrawal of any shareholder. In the absence of a quorum at any such meeting or any adjournment or adjournments thereof, a majority in voting interest of the shareholders present in person or by proxy and entitled to vote at such meeting may adjourn such meeting from time to time and from place to place until a quorum shall be present thereat. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally called if a quorum then had been present. SECTION 2.7. Organization. At each meeting of the shareholders, the Chairman or, in his absence, the President or, in his absence, such person as may be designated by the Board or, in the absence of any of the foregoing, a person chosen for the purpose by a majority in voting interest of the shareholders present in person or by proxy and entitled to vote at such meeting, shall act as chairman thereof and preside thereat; and the Secretary or, in his absence, the person whom the chairman of such meeting shall appoint, shall act as secretary of such meeting and keep the minutes thereof. The person presiding at the meeting shall establish the rules for the conduct of the meeting, including, without limitation, the order of consideration of matters to be voted upon by the shareholders. Except as otherwise provided by law, the Certificate of Incorporation or these By-laws,the person presiding at the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in these By-laws and, if any proposed nomination or business is not in compliance with these By-laws, to declare that such proposal or nomination shall be disregarded. 3 SECTION 2.8. Voting and Proxies. Subject to the provisions of Section 9.5 of these By-laws and except as otherwise provided in this Section or by law, every shareholder of record of the Company shall be entitled at every meeting of the shareholders to one vote in person or by proxy for every share of stock of the Company standing in his name on the record of shareholders. The person presiding at the meeting shall fix and announce at the meeting the date and time of the opening and the closing of the polls for each matter upon which shareholders will vote at the meeting. Treasury shares as of the record date and shares held as of the record date by another domestic or foreign corporation of any type or kind, if a majority of the shares entitled to vote in the election of directors of such other corporation is held as of the record date by the Company, shall not be shares entitled to vote or to be counted in determining the total number of outstanding shares. Shares held by an administrator, executor, guardian, conservator, committee or other fiduciary, except a trustee, may be voted by him or it, either in person or by proxy, without transfer of such shares into his or its name. Shares held by a trustee may be voted by him or it, either in person or by proxy, only after the shares have been transferred into his or its name as trustee or into the name of his or its nominee. Shares standing in the name of another domestic or foreign corporation of any type or kind may be voted by such officer, agent or proxy as the by-laws of such corporation may provide, or, in the absence of such provision, as the board of directors of such corporation may determine. A shareholder shall not sell his vote or issue a proxy to vote to any person for any sum of money or anything of value except as permitted by law. Every proxy must be signed by the shareholder or by his duly authorized attorney-in-fact. No proxy shall be valid after the expiration of eleven months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the shareholder executing it, except as otherwise provided by law. The authority of the holder of a proxy to act shall not be revoked by the incompetence or death of the shareholder who executed the proxy unless, before the authority is exercised, written notice of an adjudication of such incompetence or of such death is received by the Secretary or any Assistant Secretary. At all meetings of the shareholders, a quorum being present, all matters, except as otherwise provided by law, the Certificate of Incorporation of the Company or Section 3.4 of these By-laws, shall be authorized by a majority of the votes cast at the meeting by the shareholders present in person or by proxy and entitled to vote thereon. Unless demanded by a shareholder or shareholders present in person or by proxy at any meeting of the shareholders and owning not less than ten percent in voting interest of the outstanding stock of the Company entitled to be voted thereat, or unless so directed 4 by the chairman of the meeting, the vote thereat on any question need not be by ballot, except in the case of the election of directors. A list of shareholders as of the record date for the meeting, certified by the Secretary or an Assistant Secretary responsible for its preparation or by a transfer agent for the stock of the Company, shall be produced at any meeting of the shareholders upon the request thereat or prior thereto of any shareholder. If the right to vote at any meeting is challenged, the inspectors appointed pursuant to Section 2.9 of these By-laws, or the person presiding thereat, shall require such list of shareholders to be produced as evidence of the right of the persons challenged to vote at such meeting, and all persons who appear from such list to be shareholders entitled to vote thereat may vote at such meeting. SECTION 2.9. Inspectors. The Board, in advance of any meeting of the shareholders, may appoint one or more persons to act as inspectors (with respect to any election to be held, or otherwise) at the meeting or any adjournment thereof. If inspectors are not so appointed, the person presiding at the meeting of the shareholders may, and if so requested by a shareholder entitled to vote thereat shall, appoint one or more persons to act as inspectors. In case any person appointed as an inspector fails to appear or act, the vacancy may be filled by appointment made by the Board in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. At such meeting the inspectors shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum and the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such other acts as are proper to conduct the election or vote with fairness to all shareholders. On request of the person presiding at the meeting or any shareholder entitled to vote thereat, the inspectors shall make a report in writing of any challenge, question or matter determined by them and execute a certificate of any fact found by them. Any report or certificate made by them shall be prima facie evidence of the facts stated and of the vote as certified by them. SECTION 2.10. Stockholder Proposals and Nominations. (a) Annual or Special Meetings of Shareholders. At any annual or special meeting of shareholders, proposals by shareholders and persons nominated for election as directors by shareholders shall be considered only if advance notice thereof has been timely given as provided herein and such proposals or nominations are otherwise proper for consideration under applicable law and the Certificate of Incorporation and By-laws of the Company. Notice of any proposal to be presented by any shareholder or of the 5 name of any person to be nominated by any shareholder for election as a director of the Company at any meeting of shareholders shall be delivered to the Secretary of the Company at its principal executive office (i) in the case of an annual meeting, not fewer than 90 nor more than 120 days prior to the anniversary date of the immediately preceding meeting, provided that in the event that the annual meeting is called on a date that is not within thirty days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later that the close of business on the fifteenth day following the earlier of the day on which notice of the date of the annual meeting was mailed or public disclosure of the date of the annual meeting was made; and (ii) in the case of a special meeting at which directors are to be elected, not later than the close of business on the tenth day following the earlier of the day on which notice of the date of the meeting was mailed and public announcement was made. Any shareholder who gives notice of any such proposal shall deliver therewith the text of the proposal to be presented and a brief written statement of the reasons why such shareholder favors the proposal and setting forth such shareholder's name and address, the number and class of all shares of each class of stock of the Company beneficially owned by such shareholder and any material interest of such shareholder in the proposal (other than as a shareholder generally) and whether such person has received any financial assistance, funding or other consideration from any other person in respect of the proposal (and the details thereof). Any shareholder desiring to nominate any person for election as a director of the Company shall deliver with such notice (i) a statement in writing setting forth the name of the person to be nominated, the number and class of all shares of each class of stock of the Company beneficially owned by such person, the information regarding such person required by paragraphs (a), (e) and (f) of Item 401 of Regulation S-K adopted by the Securities and Exchange Commission (or the corresponding provisions of any regulation subsequently adopted by the Securities and Exchange Commission applicable to the Company), (ii) such person's signed consent to serve as a director of the Company if elected, (iii) such shareholder's name and address, (iv) a confirmation of the number and class of all shares of each class of stock of the Company beneficially owned by such shareholder, (v) a confirmation that any governmental approvals required in connection with such person's nomination, election or taking office as a director of the Company have been obtained by such stockholder and/or nominee, as applicable, and are in full force and effect as of the date of submission of such notice of nomination and (vi) a statement as to whether such person or shareholder received any financial assistance, funding or consideration from any other person in respect of the nomination (and the details thereof). As used herein, shares "beneficially owned" shall include all shares that such person, together with such person's affiliates and associates (as defined in Rule 12b-2 under the Securities Exchange Act of 1934), may be deemed to beneficially own pursuant to Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, as well as all shares of which such person, together with such person's affiliates and associates, has the right to become the beneficial owner pursuant to any agreement or understanding, or upon the exercise of warrants, options or rights to convert or exchange (whether such rights are exercisable immediately or only after the passage of time or the occurrence of conditions). The person presiding at the meeting, in addition to making any other determinations that may be appropriate to the conduct of the meeting, shall determine 6 whether such notice has been duly given and shall direct that proposals and nominees not be considered if such notice has not been given. In no event shall the public announcement of an adjournment of an annual or special meeting commence a new time period for the giving of shareholders notice as described above. (b) Eligibility of Directors. Only such persons who are nominated in accordance with the procedures set forth in this By-law shall be eligible to serve as directors and only such business shall be conducted at a meeting of shareholders as shall have been brought before a meeting in accordance with the procedures set forth in this By-law. (c) Public Announcement Defined. For purposes of this By-law, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Company with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (d) Exchange Act Matters. Notwithstanding the foregoing provisions of this By-law, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-law. Nothing in this By-law shall be deemed to affect any rights (i) of shareholders to request inclusion of proposals in the Company's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders of any series of preferred stock of the Company, if any, to elect directors under specified circumstances. ARTICLE III BOARD OF DIRECTORS SECTION 3.1. General Powers. The business and affairs of the Company shall be managed by the Board. SECTION 3.2. Number. The Board shall consist of such number of directors, not less than nine, as shall be fixed from time to time by resolution adopted by a majority of the total number of directors which the Company would have, prior to any increase or decrease, if there were no vacancies on the Board. The tenure of office of a director shall not be affected by any decrease in the number of directors so made by the Board. SECTION 3.3. Qualifications. No person shall be eligible to serve as a director unless, when his term commences, he is not less than eighteen years of age nor (except in the case of those persons who were named as directors in the Statement of Organization of the Company or who were members of the Board of Trustees of The Bank of New York prior to April 30, 1957) more than seventy years of age. Directors need not be shareholders. 7 SECTION 3.4. Election and Term. At each annual meeting of the shareholders, directors shall be elected to hold office until the next annual meeting. Subject to the provisions of these By-laws, each director shall hold office until the expiration of the term for which he is elected and until his successor has been elected and qualified. Directors shall be elected by the shareholders, except as otherwise provided by law or the Certificate of Incorporation of the Company or these By-laws. In order to be elected as a director by the shareholders, a person must, except as otherwise provided by law, receive a plurality of the votes cast by the holders of shares entitled to vote thereon at a meeting of the shareholders for the election of directors at which a quorum shall be present. SECTION 3.5. Resignations. Any director of the Company may resign at any time by giving written notice to the Chairman, the President or the Secretary. Such resignation shall take effect at the date of receipt of such notice, or at any later time specified therein, and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 3.6. Removal. Any or all of the directors may be removed for cause by vote of the shareholders or by action of the Board. SECTION 3.7. Newly Created Directorships and Vacancies. Newly created directorships resulting from an increase in the number of directors and vacancies occurring in the Board for any reason, shall be filled by election by the affirmative vote of a majority of the directors then in office, even though less than a quorum exists. A director elected to fill a vacancy, or to fill a newly created directorship, shall be elected to hold office until the next annual meeting of the shareholders and until his successor has been elected and qualified. SECTION 3.8. Time and Place of Meetings; Content of Notice, if any. Except as otherwise provided in these By-laws, the Board may hold any meeting within or without the State of New York at such place, and at such time, as from time to time may be designated by resolution of the Board or as shall be specified in the notice of such meeting or in the waivers of notice thereof signed by the directors at the time in office (other than any director who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice thereof to him). Except as otherwise specifically provided by law or in these By-laws, any notice or waiver of notice of any meeting of the Board need not contain any statement of the purpose or purposes of the meeting or any specification of the business to be transacted thereat, but shall specify the time and place thereof. SECTION 3.9. Annual Meeting. Following each annual meeting of the shareholders for the election of directors, the Board shall meet for the purposes, without 8 limitation, of organization and the annual election and appointment of officers. The meeting of the Board to be held for such purposes shall be the regular meeting of the Board next following each such annual meeting of the shareholders, unless a special meeting of the Board shall in the meantime have been duly called and held for such purposes. SECTION 3.10. Regular Meetings. Regular meetings of the Board may be held at such time and place as shall from time to time be specified in a resolution of the Board, and no notice thereof need be given. SECTION 3.11. Special Meetings. A special meeting of the Board may be called at any time by the Chairman or, in his absence, by the President and shall be called by the Chairman, the President or the Secretary upon the written request of any two directors. Except as otherwise provided by law, notice of each such meeting shall be given to each director by mail, addressed to him at his residence or usual place of business, not later than noon, New York time, on the third day prior to the day on which the meeting is to be held, or shall be given to him, so addressed, by telegram or cable or radiogram, or given to him personally by messenger or telephone, not later than noon, New York time, on the day before the day on which such meeting is to be held. Notices are deemed to have been given by mail, when deposited in the United States mail, by telegram or cable or radiogram at the time of filing, by messenger at the time of delivery, and by telephone at the time of the telephone call. Notice of such meeting need not be given to any director who submits a signed waiver of notice whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to him. SECTION 3.12. Quorum and Manner of Acting. At all meetings of the Board the presence of one-third of the entire Board shall be necessary to constitute a quorum for the transaction of business thereat, and an act taken by vote of a majority of the directors present at the time of the vote, if a quorum is present at such time, shall be the act of the Board, except as otherwise provided by law or these By-laws. Members of the Board may participate in a meeting of the Board by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. Any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents by the members of the Board shall be filed with the minutes of the proceedings of the Board. 9 A majority of the directors present, whether or not a quorum shall be present, may adjourn any meeting from time to time and from place to place. Notice of any adjournment of a meeting to another time or place shall be given in the manner described in Section 3.11 of these By-laws to the directors who were not present at the time of the adjournment and, unless such time and place are announced at the meeting, to the other directors. At any such adjourned meeting at which a quorum shall be present any business may be transacted which might have been transacted at the meeting as originally called if a quorum then had been present. The directors shall act only as a Board and the individual directors shall have no power as such. SECTION 3.13. Organization. At each meeting of the Board, the Chairman or, in his absence, the President or, in his absence, such person as may be designated by the Board or, in the absence of any of the foregoing, a director chosen by a majority of the directors present, shall act as chairman thereof and preside thereat; and the Secretary or, in his absence, the person whom the chairman of such meeting shall appoint, shall act as secretary of such meeting and keep the minutes thereof. SECTION 3.14. Compensation. Each director, other than officers of the Company or any of its subsidiaries, shall be paid such compensation as the Board from time to time may determine for his services as director or as a member of any committee appointed by or pursuant to the authorization of the Board, and shall, in addition, be reimbursed for such transportation and other expenses as shall be incurred by him in the performance of his duties. Nothing in this Section shall preclude any director from serving the Company in any other capacity and receiving compensation therefor. SECTION 3.15. Interest of Directors and Officers in Transactions. In the absence of fraud, no contract or other transaction between the Company and one or more of its directors, or between the Company and any other corporation, firm, association or other entity in which one or more of its directors or officers are directors, or have a substantial financial interest, shall be either void or voidable, irrespective of whether such interested director or directors are present at the meeting of the Board, or of a committee thereof, which approves such contract or transaction and irrespective of whether his or their votes are counted for such purpose: (a) if the material facts as to such director's interest in such contract or transaction and as to any such common directorship, officership or financial interest are disclosed in good faith or known to the Board, or a committee thereof, and the Board or committee approves such contract or transaction by a vote sufficient for such purpose without counting the vote of such interested director or, if the votes of the disinterested directors are insufficient to constitute an act of the Board under Section 3.12 of these By-laws, by unanimous vote of the disinterested directors; or (b) if the material facts as to such director's interest in such contract or transaction and as to any such common directorship, officership or financial 10 interest are disclosed in good faith or known to the shareholders entitled to vote thereon, and such contract or transaction is approved by vote of such shareholders. If there was no such disclosure or knowledge, or if the vote of such interested director was necessary for the approval of such contract or transaction at a meeting of the Board or committee at which it was approved, the Company may avoid the contract or transaction unless the party or parties thereto shall establish affirmatively that the contract or transaction was fair and reasonable as to the Company at the time it was approved by the Board, a committee or the shareholders. Notwithstanding the foregoing, no loan, except advances in connection with indemnification, shall be made by the Company to any director unless it is authorized by vote of the shareholders without counting any shares of the director who would be the borrower. 11 ARTICLE IV EXECUTIVE COMMITTEE SECTION 4.1. How Constituted. The Board, by resolution adopted by a majority of the entire Board, may appoint an Executive Committee, which shall consist of the Chairman, the President, and not less than one other director. The Executive Committee shall serve at the pleasure of the Board. SECTION 4.2. Term of Office. Each member of the Executive Committee, provided he continues to be a director, shall, subject to the provisions of this Article, continue in office as such member until the next annual meeting of the Board and until his successor, if any, shall have been appointed, or until he shall resign or shall have been removed in the manner hereinafter provided. SECTION 4.3. Vacancies. In case any vacancy shall exist in the Executive Committee resulting from any cause whatsoever, the Board may fill such vacancy by resolution adopted by a majority of the entire Board. SECTION 4.4. Powers. While the Board is not in session, the Executive Committee shall have and may exercise (unless the Board shall otherwise determine) all the authority and powers of the Board in the management of the business and affairs of the Company, including generally and without limitation all powers conferred upon or vested in the Board by law, by the Certificate of Incorporation of the Company, by these By-laws or otherwise, excepting the powers conferred upon the Board by this Article, and except that the Executive Committee shall not have authority as to the following matters: (a) the submission to shareholders of any action for which shareholders' authorization is required; (b) the filling of vacancies in the Board or in the Executive Committee or any other committee having any of the authority of the Board; (c) the fixing of compensation of the directors for serving on the Board or on the Executive Committee or any other committee; (d) the amendment or repeal of these By-laws, or the adoption of new By- laws; (e) the amendment or repeal of any resolution of the Board which by its terms is not amendable or repealable; (f) the removal or indemnification of directors; or (g) the taking of action which is expressly required by law to be taken at a meeting of the Board or by a specified proportion of the directors. 12 SECTION 4.5. Resignations. Any member of the Executive Committee may resign at any time by giving written notice to the Board, the Chairman, the President or the Secretary. Such resignation shall take effect at the time of receipt of such notice or at any later time specified therein, and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 4.6. Removal. Any member of the Executive Committee, other than a member who shall at the time be the Chairman or the President, may be removed by the Board with or without cause at any time. SECTION 4.7. Quorum and Manner of Acting. A majority of the members of the Executive Committee shall be necessary to constitute a quorum, and an act taken by vote of a majority of the members of the Committee present at the time of the vote, if a quorum is present at such time, shall be the act of the Committee. Members of the Executive Committee may participate in a meeting of the Committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at a meeting. Any action required or permitted to be taken by the Executive Committee may be taken without a meeting if all members of the Committee consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents by the members of the Committee shall be filed with the minutes of the proceedings of the Committee. Subject to the foregoing, and unless the Board shall otherwise decide, the Executive Committee shall fix its rules of procedure, determine its action and fix the time and place of its meetings. The Executive Committee shall keep a record of its proceedings, which shall be at all times available to the directors. All action taken by the Executive Committee shall be reported to the Board at its next meeting. SECTION 4.8. Alternate Members. The Board, by resolution adopted by a majority of the entire Board, may appoint one or more directors as alternate members of the Executive Committee, to serve, in accordance with the terms of such resolution, as replacements for, and with the authority and powers of, any members of that Committee absent from any meeting thereof. ARTICLE V OTHER COMMITTEES SECTION 5.1. Other Committees of Directors. The Board, by resolution adopted by a majority of the entire Board, may from time to time designate from among its members such other committees consisting of one or more directors as it may deem advisable and grant to any such committee, to the extent provided in the resolution creating it, authority of the Board; provided, however, that no such committee shall be granted any power or authority withheld from the Executive Committee by Section 4.4 of these By-laws. Each such committee shall serve at the pleasure of the Board. All 13 provisions of Sections 4.2, 4.3, 4.5, 4.6, 4.7 and 4.8 of these By-laws shall apply to each such committee and the members thereof with the same force and effect as if such committee were referred to in the text of such provisions in each instance in which the Executive Committee is so referred to. SECTION 5.2. Other Committees of Directors, Officers and/or Other Persons. The Board may appoint, or authorize the Chairman or, in his absence, the President to appoint, from time to time, such other committees consisting of directors, officers and/or other persons and having such powers, duties and functions in or relating to the business and affairs of the Company as the Board may determine. Each such committee and each member thereof shall serve at the pleasure of the Board and, in the case of any committee appointed by the Chairman or the President, at the pleasure of the Chairman or, in his absence, of the President. A majority of all the members of any such committee, or, in the case of any committee appointed by the Chairman or the President, the Chairman or, in his absence, the President, may determine the rules of order and procedure of such committee and the time and place of its meetings, unless the Board shall otherwise provide. ARTICLE VI OFFICERS SECTION 6.1. Number and Qualifications. The officers of the Company shall be a Chairman, a President, one or more Vice Chairmen (herein called Vice Chairman or Vice Chairmen), a Secretary, a Treasurer, and such other officers, including but not by way of limitation Vice Presidents (who may include one or more Executive Vice Presidents and Senior Vice Presidents), a Comptroller and an Auditor, as may be elected or appointed in accordance with the provisions of these By-laws. The Chairman and the President shall be elected, and the other officers may, but need not be, elected or appointed, from among the directors. One person may hold any two or more offices and perform the duties thereof. SECTION 6.2. Annually Elected Officers. The Chairman, the President, any Vice Chairmen, any Vice Presidents, the Secretary, the Treasurer and such other officers, if any, as the Board may determine, shall be elected by the Board at each annual meeting. Each such officer shall hold office until the next annual meeting of the Board and until his successor, if any, shall have been elected and shall have qualified, or until his death, or until he shall resign or shall be removed in the manner hereinafter provided. SECTION 6.3. Additional Officers. The Board may from time to time elect such additional officers (including Vice Chairmen and Vice Presidents) as it shall deem advisable. The Board may also delegate to the Chairman or, in his absence, the President the power to appoint such further officers as the Board shall deem advisable. Each such officer shall serve at the pleasure of the Board and, in the case of an officer appointed by the Chairman or the President, also at the pleasure of the Chairman or, in his absence, of the President. 14 SECTION 6.4. Removal. Any officer may be removed by the Board, and an officer appointed by the Chairman or the President may be removed by the Chairman or, in his absence, the President, at any time, or his authority may be suspended by the Board or the Chairman or, in his absence, the President, with or without cause (in the latter case without prejudice to his contract rights, if any). The election or appointment of an officer shall not be deemed of itself to create contract rights. SECTION 6.5. Resignations. Any officer may resign at any time by giving written notice to the Board, the Chairman, the President or the Secretary. Such resignation shall take effect at the date of the receipt of such notice or any later date specified therein, and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 6.6. Vacancies. A vacancy from any cause in any office referred to above may be filled at any time for the unexpired portion of the term, if any, in the manner prescribed in these By-laws for regular election or appointment to such office. SECTION 6.7. Salaries. The salaries of the officers elected by the Board shall be fixed from time to time by the Board or a committee thereof designated by the Board. The salaries of the officers appointed by the Chairman or the President shall be fixed from time to time by the Board or the Chairman or, in his absence, the President. No officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the Company. SECTION 6.8. Powers and Duties. The officers of the Company shall have such authority and perform such duties in the management of the Company as may be prescribed by these By-laws or by the Board and, to the extent not so prescribed, they shall have such authority and perform such duties in the management of the Company, subject to the control of the Board, as generally pertain to their respective offices. The Chairman shall be the chief executive officer of the Company. The Board may require any officer, agent or employee to give security for the faithful performance of his duties. ARTICLE VII INDEMNIFICATION OF DIRECTORS AND OFFICERS SECTION 7.1. Indemnification. Except to the extent expressly prohibited by the New York Business Corporation Law, the Company shall indemnify any person made or threatened to be made a party to any action or proceeding, whether civil or criminal, by reason of the fact that such person or such person's testator or intestate is or was a director or officer of the Company, or serves or served at the request of the Company any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in 15 any capacity, against judgments, fines, penalties, amounts paid in settlement and reasonable expenses, including attorneys' fees, incurred in connection with such action or proceeding, or any appeal therein; provided that no such indemnification shall be made if a judgment or other final adjudication adverse to such person established that his or her acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated, or that he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled; and provided further that no such indemnification shall be required with respect to any settlement or other nonadjudicated disposition of any threatened or pending action or proceeding unless the Company has given its prior consent to such settlement or other disposition. The Company may advance or promptly reimburse upon request any person entitled to indemnification hereunder for all expenses, including attorneys' fees, reasonably incurred in defending any action or proceeding in advance of the final disposition thereof upon receipt of an undertaking by or on behalf of such person to repay such amount if such person is ultimately found not to be entitled to indemnification or, where indemnification is granted, to the extent the expenses so advanced or reimbursed exceed the amount to which such person is entitled; provided, however, that such person shall cooperate in good faith with any request by the Company that common counsel be utilized by the parties to an action or proceeding who are similarly situated unless to do so would be inappropriate due to actual or potential differing interests between or among such parties. Nothing herein shall limit or affect any right of any person otherwise than hereunder to indemnification or expenses, including attorneys' fees, under any statute, rule, regulation, certificate of incorporation, by-law, insurance policy, contract or otherwise. Anything in these By-laws to the contrary notwithstanding, no elimination of this By-law, and no amendment to this By-law adversely affecting the right of any person to indemnification or advancement of expenses hereunder, shall be effective until the 60th day following notice to such person of such action, and no elimination of or amendment to this By-law shall deprive any person of his or her rights hereunder arising out of alleged or actual occurrences, acts or failures to act prior to such 60th day. The Company shall not, except by elimination of or amendment to this By-law in a manner consistent with the preceding paragraph, take any corporate action or enter into any agreement which prohibits, or otherwise limits the rights of any person to, indemnification in accordance with the provisions of this By-law. The indemnification of any person provided by this By-law shall continue after such person has ceased to be a director or officer of the Company and shall inure to the benefit of such person's heirs, executors, administrators and legal representatives. 16 The Company is authorized to enter into agreements with any of its directors or officers extending rights to indemnification and advancement of expenses to such person to the fullest extent permitted by applicable law, but the failure to enter into any such agreement shall not affect or limit the rights of such person pursuant to this By-law, it being expressly recognized hereby that all directors or officers of the Company by serving as such after the adoption hereof, are acting in reliance hereon and that the Company is estopped to contend otherwise. In case any provision in this By-law shall be determined at any time to be unenforceable in any respect, the other provisions shall not in any way be affected or impaired thereby, and the affected provision shall be given the fullest possible enforcement in the circumstances, it being the intention of the Company to afford indemnification and advancement of expenses to its directors and officers, acting in such capacities or in the other capacities mentioned herein, to the fullest extent permitted by law. For purposes of this By-law, the Company shall be deemed to have requested a person to serve an employee benefit plan where the performance by such person of his or her duties to the Company also imposes duties on, or otherwise involves services by, such person to the plan or participants or beneficiaries of the plan, and excise taxes assessed on a person with respect to any employee benefit plan pursuant to applicable law shall be considered indemnifiable expenses. For purposes of this By-law, the terms "Company" shall include any legal successor to the Company, including any corporation which acquires all or substantially all of the assets of the Company in one or more transactions. A person who has been successful, on the merits or otherwise, in the defense of a civil or criminal action or proceeding of the character described in the first paragraph of this By-law shall be indemnified as authorized in such paragraph. Except as provided in the preceding sentence and unless ordered by a court, indemnification under this By-law shall be made by the Company if, and only if, authorized in the specific case: (1) By the Board of Directors acting by a quorum consisting of directors who are not parties to such action or proceeding upon a finding that the director or officer has met the standard of conduct set forth in the first paragraph of this By-law, or, (2) If such a quorum is not obtainable or, even if obtainable, a quorum of disinterested directors so directs; (a) by the Board of Directors upon the opinion in writing of independent legal counsel that indemnification is proper in the circumstances because the standard of conduct set forth in the first paragraph of this By-law has been met by such director or officer; or 17 (b) by the shareholders upon a finding that the director or officer has met the applicable standard of conduct set forth in such paragraph. If any action with respect to indemnification of directors and officers is taken by way of amendment of these By-laws, resolution of directors, or by agreement, the Company shall, not later than the next annual meeting of shareholders, unless such meeting is held within three months from the date of such action and, in any event, within fifteen months from the date of such action, mail to its shareholders of record at the time entitled to vote for the election of directors a statement specifying the action taken. 18 ARTICLE VIII CONTRACTS, CHECKS, DRAFTS, ETC. SECTION 8.1. Contracts, etc. Except as otherwise provided in these By-laws or by law, all deeds, bonds, mortgages, contracts and other instruments to be executed in the name and on behalf of the Company, either for its own account or in a fiduciary or other capacity, shall be signed by the Chairman, the President, a Vice Chairman, an Executive Vice President, a Senior Vice President, a Vice President, the Treasurer, or the Comptroller, or any other officer or officers or agent or agents of the Company designated for that purpose by the Board or by the Chairman, the President, a Vice Chairman, an Executive Vice President, a Senior Vice President or a Vice President, and the seal of the Company shall if appropriate be affixed hereto by any of such officers or the Secretary or any Assistant Secretary. SECTION 8.2. Checks, Drafts, etc. Except as otherwise provided in these By-laws or by law, all checks, drafts, bills of exchange and other orders for the payment of money, and all letters of credit, promissory notes and other instruments obligating the Company for the payment of money, shall be signed on behalf of the Company in such manner and by such person or persons as from time to time shall be determined by the Board. Except as the Board may otherwise prescribe, the Chairman, the President, a Vice Chairman, an Executive Vice President, a Senior Vice President, a Vice President, the Treasurer, the Secretary, the Comptroller, an Assistant Vice President if any, any Assistant Treasurer or any Assistant Secretary, or any other officer or officers or agent or agents to whom such power may be delegated by the Board or by the Chairman, the President, a Vice Chairman, an Executive Vice President, a Senior Vice President or a Vice President, may sign on behalf of the Company all checks, drafts, bills of exchange, letters of credit, promissory notes and other instruments obligating the Company for the payment of money, and endorse and deliver for deposit, collection or credit for account of the Company any bill of exchange, draft, check or other order for the payment of money, or any note or other instrument for the payment of money, or any bill of lading, warehouse receipt, insurance policy or other commercial document requiring endorsement for collection or endorsement on behalf of the Company. SECTION 8.3. Securities of 0ther Corporations. Securities of other corporations held by the Company may be voted by any officer designated by the Board and, in the absence of any such designation, by the Chairman, the President, a Vice Chairman, a Vice President, the Secretary, the Treasurer or the Comptroller. ARTICLE IX SHARES OF STOCK SECTION 9.1. Certificates for Shares of Stock. Each certificate for a share or shares of stock of the Company shall be in such form as shall be approved by the Board, shall be signed by the Chairman, the President, a Vice Chairman, or a Vice President, and by the Secretary, the Treasurer, an Assistant Secretary or an Assistant Treasurer, and shall 19 be sealed with the seal of the Company or a facsimile thereof. The signatures of the officers upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar other than the Company itself or its employee. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may nevertheless be issued by the Company with the same effect as if he were such officer at the date of its issue. If the Company is authorized to issue shares of more than one class, each certificate representing shares issued by the Company shall set forth upon the face or back of the certificate, or shall state that the Company will furnish to any shareholder upon request and without charge, a full statement of the designation, relative rights, preferences and limitations of the shares of each class of shares authorized to be issued and the designation, relative rights, preferences and limitations of each series of any class of preferred shares authorized to be issued so far as the same have been fixed and the authority of the Board to designate and fix the relative rights, preferences and limitations of other series. Each certificate representing shares shall state upon the face thereof: (a) that the Company is formed under the laws of the State of New York; (b) the name of the person or persons to whom issued; and (c) the number and class of shares, and the designation of the series, if any, which such certificate represents. SECTION 9.2. Transfer of Shares of Stock. A transfer of shares of stock of the Company shall be made on the record of shareholders of the Company after satisfaction of all legal prerequisites to the Company's duty to register such transfer, including the surrender of the certificate therefor which shall be canceled when the new certificate is issued. SECTION 9.3. Registered Holders. The Company shall be entitled to treat and shall be protected in treating the persons in whose names shares or any warrants, rights or options stand on the record of shareholders, warrant holders, rights holders or option holders, as the case may be, as the owners thereof for all purposes and shall not be bound to recognize any equitable or other claim to, or interest in, any such share, warrant, right or option on the part of any other person, whether or not the Company shall have notice thereof, except as expressly provided otherwise by the statutes of the State of New York. 20 SECTION 9.4. Lost, Stolen or Destroyed Share Certificates. No certificate for shares of the Company shall be issued in place of any certificate alleged to have been lost, destroyed or wrongfully taken, except, if and to the extent required by the Board, upon: (a) production of evidence of loss, destruction or wrongful taking; (b) delivery of a bond indemnifying the Company and its agents against any claim that may be made against it or them on account of the alleged loss, destruction or wrongful taking of the replaced certificate or the issuance of the new certificate; (c) payment of the expenses of the Company and its agents incurred in connection with the issuance of the new certificate; and (d) compliance with such other reasonable requirements as may be imposed. SECTION 9.5. Record Date. For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of the shareholders or any adjournment thereof, or to express consent to or dissent from any proposal without a meeting, or for the purpose of determining shareholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action, the Board may fix, in advance, a date not more than fifty days and not less than ten days before the date of such meeting, and not more than fifty days prior to any other action, as the record date for any such determination of shareholders. Upon adjournment of any meeting, the Board may but shall not be required to fix a new record date. If a record date for any such determination of shareholders is not fixed by the Board, then, the record date for such determination shall be as provided by law. SECTION 9.6. Regulations, Transfer Agents and Registrars. The Board may make such further rules and regulations as it may deem expedient, not inconsistent with these By-laws or with the Certificate of Incorporation of the Company, concerning the issue, transfer and registration of certificates for shares of stock of the Company. It may appoint one or more transfer agents and one or more registrars of transfers, and may require all certificates of stock to bear the signature of either or both. ARTICLE X SEAL SECTION 10.1. Seal. The Board may adopt a corporate seal, alter such seal at pleasure, and authorize it to be used by causing it or a facsimile to be affixed or impressed or reproduced in any other manner. ARTICLE XI 21 FISCAL YEAR SECTION 11.1. Fiscal Year. The fiscal year of the Company shall be the calendar year. ARTICLE XII BOOKS SECTION 12.1. Books. The Company shall keep correct and complete books and records of account and shall keep minutes of the proceedings of its shareholders, the Board and the Executive Committee if any. There shall be kept at the principal office of the Company or at the office of its transfer agent or registrar, if any, in the State of New York, a record containing the names and addresses of all shareholders of the Company, the number of shares held by each and the dates when they respectively became the owners of record thereof. Any of the foregoing books, records or minutes may be in legible form or in any other form capable of being converted into legible form within a reasonable time. The Board shall have power to determine from time to time, subject to the laws of the State of New York, whether and to what extent and at what times and places and under what conditions and regulations the accounts, books, records or other documents of the Company, or any of them, shall be open to inspection, and no creditor, security holder or other person shall have any right to inspect any account, book, record or other document of the Company, except as conferred by the laws of the State of New York or these By-laws, unless and until authorized to do so by resolution of the Board or of the shareholders. ARTICLE XIII AMENDMENTS SECTION 13.1. Amendments. By-laws of the Company may be adopted, amended or repealed by vote of the holders of the shares at the time entitled to vote in the election of any directors. By-laws may also be adopted, amended or repealed by the Board, by resolution adopted by a majority of the entire Board, but any By-law adopted by the Board may be amended or repealed by the shareholders entitled to vote thereon as hereinabove provided. If any By-law regulating an impending election of directors is adopted, amended or repealed by the Board, there shall be set forth in the notice of the next meeting of shareholders for the election of directors the By-law so adopted, amended or repealed, together with a concise statement of the changes made. EX-12 3 r1q05ex12.txt EX-12 EXHIBIT 12
THE BANK OF NEW YORK COMPANY, INC. Ratios of Earnings to Fixed Charges (Dollars in millions) Three Months Ended March 31, - ------------------------------------ ------------------ 2005 2004 -------- -------- EARNINGS - -------- Income Before Income Taxes $ 566 $ 463 Fixed Charges, Excluding Interest on Deposits 111 70 -------- -------- Income Before Income Taxes and Fixed Charges, Excluding Interest on Deposits 677 533 Interest on Deposits 184 118 -------- -------- Income Before Income Taxes and Fixed Charges, Including Interest on Deposits $ 861 $ 651 ======== ======== FIXED CHARGES - ------------- Interest Expense, Excluding Interest on Deposits $ 93 $ 55 One-Third Net Rental Expense* 18 15 -------- -------- Total Fixed Charges, Excluding Interest on Deposits 111 70 Interest on Deposits 184 118 -------- -------- Total Fixed Charges, Including Interest on Deposits $ 295 $ 188 ======== ======== EARNINGS TO FIXED CHARGES RATIOS - -------------------------------- Excluding Interest on Deposits 6.10x 7.61x Including Interest on Deposits 2.92 3.46 *The proportion deemed representative of the interest factor.
EX-31 4 r1q05ex31.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)) and internal control over financial reporting (as defined in 1934 Act 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) 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 (d) 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: May 4, 2005 /s/ Thomas A. Renyi ----------------------- Thomas A. Renyi Chief Executive Officer EX-31 5 r1q05ex311.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)) and internal control over financial reporting (as defined in Exchange Act 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) 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 (d) 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: May 4, 2005 /s/ Bruce W. Van Saun --------------------- Bruce W. Van Saun Chief Financial Officer EX-32 6 r1q05ex32.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 March 31, 2005 (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: May 4, 2005 /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 r1q05ex321.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 March 31, 2005 (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: May 4, 2005 /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-----