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THE BANK OF NEW YORK COMPANY, INC.
Quarterly Report on Form 10-Q
For the quarterly period ended March 31, 2003
The Quarterly Report on Form 10-Q and cross reference index is on page 44.
THE BANK OF NEW YORK COMPANY, INC.
FINANCIAL REVIEW
TABLE OF CONTENTS
Consolidated Financial Highlights 1
Management's Discussion and Analysis of Financial
Condition and Results of Operations
- Overview 2
- Summary of Results 2
- Consolidated Income Statement Review 3
- Business Segments Review 7
- Consolidated Balance Sheet Review 16
- World Trade Center Disaster Update 22
- Critical Accounting Policies 22
- Liquidity 24
- Capital Resources 26
- Statistical Information 31
- Forward Looking Statements 32
Consolidated Financial Statements
- Consolidated Balance Sheets
March 31, 2003 and December 31, 2002 34
- Consolidated Statements of Income
For the Three Months
Ended March 31, 2003 and 2002 35
- Consolidated Statement of Changes In
Shareholders' Equity For the Three
Months Ended March 31, 2003 36
- Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2003 and 2002 37
- Notes to Consolidated Financial Statements 38 - 43
Form 10-Q
- Cover 44
- Controls and Procedures 45
- Legal Proceedings 45
- Exhibits and Reports on Form 8-K 46
- Signature 48
- Certifications 49
1
THE BANK OF NEW YORK COMPANY, INC.
Financial Highlights
(Dollars in millions, except per share amounts)
(Unaudited)
1st 4th 1st
Quarter Quarter Quarter
2003 2002 2002
---- ---- ----
Net Income $ 295 $ 100 $ 362
Per Common Share:
Basic 0.41 0.14 0.50
Diluted 0.41 0.14 0.50
Cash Dividends Paid 0.19 0.19 0.19
Return on Average Common Shareholders'
Equity 17.80% 5.99% 23.76%
Return on Average Assets 1.49 0.49 1.84
Assets $79,548 $77,564 $76,779
Loans 31,735 31,339 35,433
Securities 19,599 18,300 13,670
Deposits - Domestic 33,280 33,094 29,217
- Foreign 23,664 22,293 24,458
Long-Term Debt 5,685 5,440 5,271
Common Shareholders' Equity 6,874 6,684 6,354
Common Shareholders' Equity Per Share 9.41 9.21 8.73
Market Value Per Share of Common Stock 20.50 23.96 42.02
Allowance for Credit Losses as a Percent
of Loans 2.62% 2.65% 1.74%
Tier 1 Capital Ratio 7.92 7.58 8.43
Total Capital Ratio 12.72 11.96 12.56
Leverage Ratio 6.68 6.48 7.19
Tangible Common Equity Ratio 5.51 5.48 5.51
Employees 19,491 19,435 19,153
Efficiency ratio 60.0% 56.3% 53.3%
Assets Under Custody (In trillions)
Total Assets Under Custody $6.8 $6.8 $6.9
Equity Securities 25% 26% 30%
Fixed Income Securities 75% 74% 70%
Cross-Border Assets 1.9 $1.9 $1.9
Assets Under Management (In billions)
Total Assets Under Management $76 $76 $71
Equity Securities 29% 29% 39%
Fixed Income Securities 24% 25% 16%
Alternative Investments 9% 8% 8%
Liquid Assets 38% 38% 37%
Assets Under Administration (In billions) $27 $28 $33
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". When used in this report, the
words "estimate," "forecast," "project," "anticipate," "expect," "intend,"
"believe," "plan," "goal," "should," "may," "strategy," and words of similar
meaning are intended to identify forward looking statements in addition to
statements specifically identified as forward looking statements.
OVERVIEW
The Bank of New York Company, Inc., is a financial holding company and
together with its consolidated subsidiaries (the "Company") (NYSE: BK), is a
global leader in securities servicing for issuers, investors and financial
intermediaries. The Company plays an integral role in the infrastructure of
the capital markets, servicing securities in more than 100 markets worldwide.
The Company provides quality solutions through leading technology for global
corporations, financial institutions, asset managers, governments, non-profit
organizations, and individuals. Its principal subsidiary, The Bank of New
York, founded in 1784, is the oldest bank in the United States and has a
distinguished history of serving clients around the world through its five
primary businesses: Securities Servicing and Global Payment Services, Private
Client Services and Asset Management, Corporate Banking, Global Market
Services, and Retail Banking. Additional information on the Company is
available at www.bankofny.com.
The Company has focused its strategy on high-growth, fee-based businesses
that have transformed the Company from a traditional commercial bank into a
premier global securities servicing provider. The Company's breadth of
products and services allow it to build client relationships with investors,
issuers and financial intermediaries through many different avenues in major
markets and regions throughout the world. The Company's well-diversified
franchise has become an integral part of the infrastructure of the global
capital markets.
SUMMARY OF RESULTS
The Company reported first quarter diluted earnings per share of 41
cents, compared with 14 cents earned in the fourth quarter of 2002 and 50
cents in the first quarter of 2002. Net income was $295 million for the first
quarter, compared with $100 million in the fourth quarter of 2002 and $362
million in the first quarter of 2002. Net income for the fourth quarter of
2002 included a higher loan loss provision, primarily for airline leasing
exposures, that reduced fourth quarter net income by $230 million or 32 cents
per share.
The first quarter was adversely impacted by global economic weakness and
geopolitical developments that resulted in declines in equity prices and
trading volumes, as well as in capital markets activity. In addition,
expenses were higher given revised pension assumptions and the expensing of
stock options.
Despite the difficult environment, the Company's securities servicing
businesses were stable in the first quarter of 2003 versus the fourth quarter
of 2002 except for execution and clearing services, which were most directly
impacted by lower trading volumes. Overall, strong results in the Company's
fixed income-linked businesses largely offset continued weakness in the
equity-linked businesses, in particular execution services and depositary
receipts. New business wins, market share gains, and expanded product
offerings also helped to offset the weak environment. The Company's other
3
major fee categories increased on a sequential quarter basis, including
private client services and asset management, which was up 3%, foreign
exchange and other trading, which increased 27%, and global payment services,
which was up 3%. Overall, noninterest income was up $11 million, or 1.4%,
over the fourth quarter of 2002.
The Company's securities servicing revenues increased in the first
quarter of 2003 versus the first quarter of 2002 by 5%, primarily as a result
of acquisitions. The Company's other major fee categories increased versus
the first quarter of 2002, including private client services and asset
management fees, which was up 8%, and service charges and fees, which was up
18%. The increase in service charges and fees reflects new business wins and
higher fees from capital markets and structured products.
Despite the challenging operating environment, the Company remains
focused on executing its strategy and meeting its long-term financial goals.
The Company continues to improve its credit risk profile and enhance its
strategic positioning by prudently investing in its businesses.
RECENT DEVELOPMENTS
On May 1, 2003, the Company acquired Credit Suisse First Boston's
Pershing unit. Headquartered in Jersey City, New Jersey, Pershing is a leading
global provider of correspondent clearing services and outsourcing solutions
for broker-dealers, asset managers and other financial intermediaries.
Pershing has approximately 4,000 employees worldwide at 13 locations in the
U.S., Europe and Asia. The Company paid a purchase price of $2 billion in
cash, which may be adjusted upwards by $50 million if certain revenue targets
are met in 2003.
Also on May 1, 2003, in connection with the acquisition of Pershing, the
Company settled its forward sale of 40 million common shares in exchange for
approximately $1 billion.
See also updates in "Capital Resources" and Footnote 3, "Acquisitions and
Dispositions."
CONSOLIDATED INCOME STATEMENT REVIEW
- ------------------------------------
SECURITIES SERVICING FEES
The diversification of the Company's business model provided stability
through a difficult market environment. On a sequential quarter basis, total
securities servicing fees decreased slightly to $474 million in the first
quarter from $484 million in the fourth quarter. Total securities servicing
fees were up $21 million, or 5%, from a year ago, primarily due to
acquisitions in 2002.
Fees from global issuer services were flat in comparison with the fourth
quarter of 2002 and the first quarter of 2002. In both cases, continued
strong performance in corporate trust, which benefited from new debt issuance,
largely offset decreased fees in depositary receipts resulting from the
slowdown in cross-border investing and new capital raisings.
Fees from investor services were stable, with a slight increase on both a
sequential quarter basis and on last year's first quarter. Strong performers
on a sequential quarter basis included global custody and wholesale
distribution services (formerly global liquidity services). Global custody
benefited from the phase-in of new client wins, increased transaction volumes,
and a weaker dollar. Wholesale distribution services benefited from the
current uncertain market environment, which drove demand for the Company's
cash sweep products. These areas largely offset the loss of a domestic
outsourcing client. Year-over-year growth is primarily attributable to
wholesale distribution services and an acquisition. As of March 31, 2003,
assets under custody were $6.8 trillion, unchanged from December 31, 2002 and
down from $6.9 trillion at March 31, 2002.
4
Broker-dealer services was the strongest performer for the quarter in
terms of both sequential quarter and year-over-year fee growth. Government
securities clearance and global collateral management benefited in comparison
with both periods from increased fixed income trading volumes, new clients,
and expanded product offerings. Strong performers on a sequential quarter
basis included mutual fund services, government securities clearance and
global collateral management. Mutual fund services benefited from the strong
fixed income environment and a weaker dollar. Broker-dealer services also
benefited from an acquisition that closed in the first quarter.
Execution and clearing services decreased on a sequential quarter basis,
reflecting the decline in market trading volumes in the first quarter. Fees
in execution and clearing services increased over last year, primarily due to
several acquisitions in 2002. Total combined first quarter NYSE and NASDAQ
trading volume was down 11% from the fourth quarter of 2002 and down 8% from
the first quarter of 2002.
NONINTEREST INCOME
Total noninterest income for the first quarter of 2003 was $844 million,
an increase of 1.4% on a sequential quarter basis and 3.4% from a year ago.
Total noninterest income increased to 69% of total revenues.
1st 4th 1st
Quarter Quarter Quarter
------- ------- -------
(In millions) 2003 2002 2002
----- ---- ----
Servicing Fees
Securities $474 $484 $453
Global Payment Services 77 75 73
---- ---- ----
551 559 526
Private Client Services
and Asset Management Fees 90 88 83
Service Charges and Fees 98 93 83
Foreign Exchange and
Other Trading Activities 65 51 63
Securities Gains 7 13 31
Other 33 29 31
---- ---- ----
Total Noninterest Income $844 $833 $817
==== ==== ====
Global payment services fees increased by 3% from the prior quarter and
5% from the first quarter of 2002. The increased revenues over both periods
reflect higher funds transfer volumes, better product penetration, and
increased multi-currency activity. This offset continued weakness in global
trade services.
Private client services and asset management fees for the first quarter
were up 3% from the prior quarter and 8% from the first quarter of 2002. The
sequential quarter increase reflects the continued strong demand for retail
investment products such as annuities and mutual funds. The increase from the
first quarter of 2002 was due to two acquisitions in 2002 and strong
performance from Ivy Asset Management. Total assets under management were $76
billion at March 31, 2003, unchanged from December 31, 2002 and up from $71
billion a year ago.
Service charges and fees were up 5% from the prior quarter and 18% from
one year ago. These increases reflect new business wins and higher fees from
capital markets and structured products.
Foreign exchange and other trading revenues were up 27% compared with the
prior quarter and up 5% from one year ago. Foreign exchange activity
recovered modestly in the quarter as a result of increased volatility, but
client flows from equity fund managers still remained weak by historical
5
standards. Other trading revenues benefited from increased client-related
interest rate hedging activity as clients continued to refinance in the low
interest rate environment, as well as from overall strength in fixed income
trading.
Securities gains were generated from the Company's fixed income
securities portfolio. As anticipated, first quarter gains were $7 million,
down $6 million from the prior quarter and $24 million from a year ago. The
decline from the first quarter of 2002 reflects the Company's reduction in its
equity investing activities.
NET INTEREST INCOME
1st 4th 1st
Quarter Quarter Quarter
-------- ------- -------
(Dollars in millions) 2003 2002 2002
---- ---- ----
Net Interest Income $386 $413 $412
Tax Equivalent Adjustment 9 10 13
---- ---- ----
Net Interest Income on a
Tax Equivalent Basis $395 $423 $425
==== ==== ====
Net Interest Rate
Spread 2.18% 2.25% 2.30%
Net Yield on Interest
Earning Assets 2.44 2.54 2.63
Net interest income on a taxable equivalent basis was $395 million in the
first quarter of 2003, compared with $423 million in the fourth quarter of
2002 and $425 million in the first quarter of 2002. The net interest rate
spread was 2.18% in the first quarter of 2003, compared with 2.25% in the
fourth quarter of 2002 and 2.30% in the first quarter of 2002. The net yield
on interest earning assets was 2.44% in the first quarter of 2003, compared
with 2.54% in the fourth quarter of 2002 and 2.63% in the first quarter of
2002.
The decrease in net interest income from the fourth quarter of 2002 is
primarily due to the full impact of the November 2002 Federal Reserve interest
rate reduction which continued to result in spread compression on retail and
institutional deposits, lower yields on the Company's floating rate commercial
loan portfolio, and lower reinvestment yields in the fixed income securities
portfolio. In addition, there were two less days in the first quarter. The
decline in net interest income from the first quarter of 2002 reflects the
impact of Federal Reserve interest rate reductions in 2002 and late in 2001,
higher nonperforming loans, and lower reinvestment yields on fixed income
securities.
Interest income would have been increased by $5 million and $4 million
for the first quarters of 2003 and 2002 if loans on nonaccrual status at March
31, 2003 and 2002 had been performing for the entire period.
6
NONINTEREST EXPENSE AND INCOME TAXES
1st 4th 1st
Quarter Quarter Quarter
------- ------- -------
(In millions) 2003 2002 2002
---- ---- ----
Salaries and Employee Benefits $423 $379 $388
Net Occupancy 58 56 49
Furniture and Equipment 36 37 34
Clearing 29 33 26
Sub-custodian Expenses 16 22 15
Software 35 31 27
Amortization of Goodwill and Intangibles 3 3 2
Other 139 139 107
---- ---- ----
Total Noninterest Expense $739 $700 $648
==== ==== ====
Noninterest expense for the first quarter of 2003 was $739 million,
compared with $700 million in the fourth quarter of 2002 and $648 million in
the first quarter of 2002. Salaries and employee benefits increased by $44
million and $35 million, respectively, over the fourth quarter of 2002 and the
first quarter of 2002 primarily due to a reduction in the credit on the
Company's overfunded pension plan, the inception of stock option expensing in
the first quarter of 2003, incentive compensation adjustments in the fourth
quarter, higher medical costs and acquisitions. Excluding these items, salary
and benefits were up $3 million, or 1%, from the fourth quarter, as strict
control over employee headcount resulted in a staff decrease in excess of 125
persons for the first quarter of 2003, excluding acquisitions. The increase
in noninterest expense compared with the first quarter of 2002 reflects
investments in technology, business continuity, and acquisitions.
The efficiency ratio for the first quarter was 60.0%, compared to 56.3%
in the previous quarter and 53.3% in 2002.
The effective tax rate for the first quarter of 2003 was 34.6%, compared
with 35.9% in the fourth quarter of 2002 and 33.7% in the first quarter 2002.
The effective tax rate was higher in the fourth quarter of 2002 due to the
credit charges taken in the fourth quarter of 2002. The increase in the rate
versus the first quarter of 2002 is attributable to lower tax credits and a
decline in tax exempt income.
CREDIT LOSS PROVISION AND NET CHARGE-OFFS
1st 4th 1st
Quarter Quarter Quarter
------- ------- -------
(In millions) 2003 2002 2002
---- ---- ----
Provision $ 40 $390 $ 35
==== ==== ====
Net Charge-offs:
Commercial $ (21) $(210) $ (30)
Foreign - (18) 1
Other (14) (7) -
Consumer (5) (5) (6)
------ ------ ------
Total $ (40) $(240) $ (35)
====== ====== ======
Other Real Estate Expenses $ - $ - $ -
The allowance for credit losses was $830 million, or 2.62% of loans at
March 31, 2003, compared with $831 million, or 2.65% of loans at December 31,
2002 and $616 million, or 1.74% of loans at March 31, 2002. The ratio of the
7
allowance to nonperforming assets was 190.4% at March 31, 2003, compared with
188.7% at December 31, 2002 and 223.8% at March 31, 2002.
Business Segments Review
Segment Data
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.
The measure of revenues and profit or loss by operating segment has been
adjusted to present segment data on a taxable equivalent basis. The provision
for credit losses allocated to each reportable segment is based on
management's judgment as to average credit losses that will be incurred in the
operations of the segment over a credit cycle of a period of years.
Management's judgment includes the following factors among others: historical
charge-off experience and the volume, composition, and size of the loan
portfolio. This method is different from that required under generally
accepted accounting principles as it anticipates future losses which are not
yet probable and therefore not recognizable under generally accepted
accounting principles. Assets and liabilities are match funded. Support and
other indirect expenses are allocated to segments based on general internal
guidelines.
Description of Business Segments
- --------------------------------
The Company reports data for the following four business segments:
Servicing and Fiduciary businesses comprise 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 stable earnings streams; and the businesses are scalable, which
result in higher margins as revenues grow. Long-term trends that favor these
businesses include the growth of financial assets worldwide, the globalization
of investment activity, heightened demand for financial servicing outsourcing,
and continuing structural changes in financial markets.
Securities servicing provides financial institutions, corporations and
financial intermediaries with a broad array of products and customized
services for every step of the investment lifecycle. The Company facilitates
the movement, settlement, recordkeeping and accounting of financial assets
around the world by delivering timely and accurate information to issuers,
investors and broker-dealers. The Company groups its securities servicing
businesses into four categories, each comprised of separate, but related
businesses. These are: issuer services, which include corporate trust,
depositary receipts and stock transfer; investor services, which include
global custody, securities lending and separate account services; broker-
dealer services, which include mutual funds, government securities clearance,
hedge fund servicing, exchange traded funds and UITs; and execution and
clearing services, which include all of the activities in BNY Securities
Group. This segment also includes customer-related foreign exchange trading.
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.
8
The Company is a market leader in many of these businesses and has
aggressively expanded to both enhance and expand its product and service
offerings and to add new clients. The Company has completed 48 acquisitions
since 1998 in these core services, has made significant investments in
technology to maintain its industry-leading position, and has continued the
development of new products and services that meet its clients' needs.
Corporate Banking 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.
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 and by
leveraging existing relationships to create new business opportunities.
The Company believes that credit is an important product for many of its
customers to execute their business strategies. Since provision of the credit
product by the Company offers lower returns on capital and potentially higher
volatility of earnings, the Company has continued to reduce its credit
exposures in recent years by culling its loan portfolio of non-strategic
exposures, focusing on total relationship return measures and limiting the
size of its individual credit exposures and industry concentrations.
Retail Banking includes retail deposit services, branch banking, consumer
and residential mortgage lending. The Company operates 341 branches in 22
counties in the Tri-State region. The retail network is a stable source of low
cost funding and provides a platform to cross-sell core services from the
Servicing and Fiduciary businesses to both individuals and companies in the
New York metropolitan area.
Financial Markets includes trading of foreign exchange and interest rate
risk management products, investing and leasing activities, and treasury
services to other business segments. The segment offers a comprehensive array
of multi-currency hedging and yield enhancement strategies, and complements
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.
9
Business Review
Servicing and Fiduciary Businesses
- ----------------------------------
(In Millions)
For the Quarter Ended 3/31/03 12/31/02 3/31/02
- --------------------- ------- ------- -------
Net Interest Income $ 109 $ 116 $ 121
Provision for
Credit Losses - - -
Noninterest Income 687 693 658
Noninterest Expense 523 499 459
Income Before Taxes 273 310 320
Average Assets $ 7,317 $ 7,817 $ 8,970
Average Deposits 31,589 31,139 30,214
Nonperforming Assets 16 16 -
(In billions)
Assets Under Custody 6,783 6,775 6,857
Assets Under Management 76 76 71
S&P 500 Index 848 880 1,147
NASDAQ Index 1,341 1,336 1,845
NYSE Volume (In billions) 86.6 93.3 82.9
NASDAQ Volume (In billions) 88.8 103.5 107.7
The Servicing and Fiduciary Services businesses are affected by market
conditions which remained difficult throughout the first quarter of 2003.
The S&P 500 Index was down 26% in the first quarter of 2003 from the
first quarter of 2002, with average daily price levels off 24% from 2002.
Performance for the NASDAQ Index in the first quarter of 2003 was even weaker,
declining 27% from the first quarter of 2002 with average daily prices down by
28%.
Daily average trading volumes for the New York Stock Exchange decreased
by 7% in the first quarter of 2003 and average NASDAQ volumes declined by 14%,
resulting in a total combined first quarter NYSE and NASDAQ trading volume
down 11% from the fourth quarter.
Global merger and acquisition activity was particularly weak, with
completed transactions down 50% from the fourth quarter 2002. Equity issuance
proceeds were off by 28% from the fourth quarter 2002.
The diversification of the Company's business model provided stability
through this difficult market environment. Overall, strong results in the
Company's fixed income-linked businesses largely offset continued weakness in
the equity-linked businesses, in particular execution services and depositary
receipts. In the first quarter of 2003, noninterest income was $687 million
compared with $693 million in the fourth quarter of 2002, and $658 million in
the first quarter of 2002. Total securities servicing fees were up $21
million, or 5%, from a year ago, primarily due to acquisitions in 2002. Total
securities servicing fees decreased slightly to $474 million in the first
quarter of 2003 compared to $484 million in the fourth quarter of 2002 and
$453 million in the first quarter of 2002.
Fees from global issuer services were flat in comparison with the first
quarter of 2002 and on a sequential quarter basis. Continued strong
performance in corporate trust, which benefited from new debt issuance,
largely offset decreased fees in depositary receipts resulting from the
slowdown in cross-border investing and new capital raisings.
Fees from investor services were relatively stable, with a slight increase
on a sequential basis and over last year's first quarter. Strong performers
10
on a sequential quarter basis included global custody and wholesale
distribution services (formerly global liquidity services). Global custody
benefited from the phase-in of new client wins, increased transaction volumes,
and a weaker dollar. Wholesale distribution services benefited from the
current uncertain market environment, which drove demand for the Company's
cash sweep products. These areas largely offset the loss of a domestic
outsourcing client. Year-over-year growth is primarily attributable to
wholesale distribution services and an acquisition.
Broker-dealer services was the strongest performer for the quarter in
terms of sequential quarter and year-over-year fee growth. Strong performers
on a sequential quarter basis included mutual fund services, government
securities clearance and global collateral management. Mutual fund services
benefited from the strong fixed income environment and a weaker dollar.
Government securities clearance and global collateral management benefited in
comparison with both periods from increased fixed income trading volumes, new
clients, and expanded product offerings. Broker-dealer services also
benefited from an acquisition that closed in the first quarter.
Execution and clearing services decreased on a sequential quarter basis,
reflecting the decline in market trading volumes in the first quarter.
Execution and clearing services increased over last year, which is primarily
due to several acquisitions in 2002.
As of March 31, 2003, the Company had assets under custody of $6.8
trillion, including $1.9 trillion of cross-border custody assets. Despite the
decline in equity asset price levels during the quarter, assets under custody
were unchanged from December 31, 2002, reflective of the diversity of clients
and assets serviced. Equity securities composed 25% of the assets under
custody at March 31, 2003, while fixed income securities were 75%.
Global payment services fees increased by 3% from the prior quarter, and
increased by 5% from the first quarter of 2002. The increased revenues over
both periods reflect higher funds transfer volumes, better product
penetration, and increased multi-currency activity. This offset continued
weakness in global trade services.
Private client services and asset management fees for the first quarter
were up 3% from the prior quarter and 8% from the first quarter of 2002. The
sequential quarter increase reflects the continued strong demand for retail
investment products such as annuities and mutual funds. The increase from the
first quarter of 2002 was due to two acquisitions in 2002 and strong
performance from Ivy Asset Management.
Assets under management ("AUM") were $76 billion at March 31, 2003
compared with $71 billion at March 31, 2002, while assets under administration
were $27 billion compared with $32.5 billion at March 31, 2002. The increase
in assets under management reflects acquisitions and growth in the Company's
alternative investments business, partially offset by a decline in asset
values. The decline in assets under administration primarily reflects declines
in market values. Institutional clients represent 65% of AUM while individual
clients equal 35%. AUM at March 31, 2003, are 29% invested in equities, 24% in
fixed income, 9% in alternative investments and the remainder in liquid
assets.
Net interest income in the Servicing and Fiduciary businesses segment was
$109 million for the first quarter of 2003 compared with $116 million in the
fourth quarter of 2002 and $121 million in the first quarter of 2002. The
decrease in net interest income is primarily due to the decline in interest
rates. Average assets for the quarter ended March 31, 2003 were $7.3 billion
compared with $7.8 billion in the fourth quarter of 2002 and $9.0 billion in
the first quarter of 2002. The first quarter of 2003 average deposits were
$31.6 billion compared with $31.1 billion in the fourth quarter of 2002 and
$30.2 billion in the first quarter of 2002.
Net charge-offs in the Servicing and Fiduciary Businesses segment were
zero in the first quarter of 2003 and the fourth and first quarters of 2002.
11
Nonperforming assets were $16 million at March 31, 2003 and December 31, 2002,
compared with zero at March 31, 2002.
Noninterest expense for the first quarter of 2003 was $523 million,
compared with $499 million in the fourth quarter of 2002 and $459 million in
the first quarter of 2002. The rise in noninterest expense from 2002 was
primarily due to acquisitions, the Company's continued investment in
technology, a reduced pension credit and higher insurance expense.
Corporate Banking
- -----------------
(In Millions)
For the Quarter Ended 3/31/03 12/31/02 3/31/02
- --------------------- ------- -------- -------
Net Interest Income $ 89 $ 97 $ 105
Provision for
Credit Losses 30 34 35
Noninterest Income 75 67 69
Noninterest Expense 50 46 46
Income Before Taxes 84 84 93
Average Assets $20,540 $21,601 $23,875
Average Deposits 7,158 7,469 6,901
Nonperforming Assets 409 414 268
Net Charge-offs 35 109 29
The Corporate Banking segment's net interest income was $89 million in
the first quarter of 2003, down from $97 million in the fourth quarter of 2002
and $105 million in the first quarter of 2002. The decreases reflect the
continued reduction of average loans outstanding as well as a decline in the
value of low cost short-term deposits given the lower interest rate
environment. Average assets for the quarter were $20.5 billion compared with
$21.6 billion in the fourth quarter of 2002 and $23.9 billion in the first
quarter of last year. Average deposits in the corporate bank were $7.2 billion
versus $7.5 billion in the fourth quarter of 2002 and $6.9 billion in 2002.
The first quarter 2003 provision for credit losses was $30 million
compared with $34 million in the fourth quarter of 2002 and $35 million last
year. Net charge-offs in the Corporate Banking segment were $35 million in the
first quarter of 2003, $109 million in the fourth quarter of 2002, and $29
million in the first quarter of 2002. The charge-offs in 2003 primarily relate
to loans to corporate borrowers. Nonperforming assets were $409 million at
March 31, 2003, essentially flat compared with $414 million in the fourth
quarter of 2002 and up from $268 million in the first quarter of 2002. The
increase in nonperforming assets from the first quarter of 2002 primarily
reflects exposures to the operating subsidiaries of a large cable operator.
Noninterest income was $75 million in the current quarter, compared with
$67 million in the fourth quarter of 2002 and $69 million in the first quarter
a year ago reflecting higher volumes of standby letters of credit and
increased capital markets activity. Noninterest expense in the first quarter
increased to $50 million from $46 million in both the fourth quarter and first
quarter of 2002 reflecting higher compensation expense, partially due to a
reduced pension credit.
12
Retail Banking
- --------------
(In Millions)
For the Quarter Ended 3/31/03 12/31/02 3/31/02
- --------------------- ---------- -------- -------
Net Interest Income $ 111 $ 113 $ 113
Provision for
Credit Losses 4 4 3
Noninterest Income 29 30 30
Noninterest Expense 86 81 81
Income Before Taxes 50 58 59
Average Assets $ 5,382 $ 5,262 $ 4,810
Average Noninterest-Bearing Deposits 4,430 4,480 4,154
Average Deposits 13,722 13,598 13,247
Nonperforming Assets 10 10 7
Net Charge-offs 5 5 6
Number of Branches 341 341 343
Total Deposit Accounts (In thousands) 1,192 1,207 1,236
Net interest income in the first quarter of 2003 was $111 million,
compared with $113 million in the fourth quarter of 2002 and $113 million in
the first quarter of 2002, reflecting spread compression on deposits.
Noninterest income was $29 million for the quarter compared with $30 million
last year and on a sequential quarter basis. The decrease reflects lower
service charges on deposit accounts as a result of promotional programs.
Noninterest expense in the first quarter of 2003 was $86 million compared with
$81 million in each of the previous year's periods. These increases reflect
higher branch automation expense, a reduced pension credit, and higher
insurance expense.
Net charge-offs were $5 million in the first quarter of 2003, $5 million
in the fourth quarter of 2002 and $6 million in the first quarter of 2002.
Nonperforming assets were $10 million in the first quarter of 2003 compared
with $10 million at December 31, 2002 and $7 million at March 31, 2002
reflecting modest deterioration in the Company's small business loan
portfolio.
Average deposits generated by the Retail Banking segment were $13.7
billion in the first quarter of 2003, compared with $13.6 billion in the
fourth quarter of 2002 and $13.2 billion in the first quarter of 2002.
Noninterest bearing deposits were $4.4 billion this quarter, compared with
$4.5 billion in the fourth quarter of 2002 and $4.2 billion in the first
quarter of 2002. The increase in deposits reflects current consumer
preferences for the safety of bank deposits versus the volatility of the
equity markets. Average assets in the retail banking sector were $5.4 billion,
compared with $5.3 billion in the fourth quarter of 2002 and $4.8 billion in
the first quarter of 2002. The increases reflect strong demand for home equity
loans, as well as increased small business lending.
13
Financial Markets
- -----------------
(In Millions)
For the Quarter Ended 3/31/03 12/31/02 3/31/02
- --------------------- ---------- --------- -------
Net Interest Income $ 79 $ 93 $ 85
Provision for
Credit Losses 5 5 5
Noninterest Income 50 40 53
Noninterest Expense 24 22 22
Income Before Taxes 100 106 111
Average Assets $44,632 $43,281 $39,758
Average Deposits 4,917 4,806 2,018
Average Investment Securities 17,977 17,259 12,789
Net Charge-offs - 127 -
Net interest income for the first quarter was $79 million compared with
2002's $93 million on a sequential quarter basis and $85 million a year ago
reflecting lower reinvestment yields offset by an increase in assets,
primarily highly-rated mortgage-backed securities. Average first quarter 2003
assets in the Financial Markets segment were $44.6 billion, up from $43.3
billion on a sequential quarter basis and $39.8 billion last year. The
increase in assets reflects the Company's continuing strategy to reduce
investment in higher risk corporate loans and increase holdings of highly-
rated, more liquid investment securities.
Noninterest income was $50 million in the first quarter of 2003, compared
with $40 million in the fourth quarter of 2002 and $53 million in the first
quarter of 2002. The positive variance versus the fourth quarter of 2002
reflects higher trading related revenues, as client-related hedging activity
increased given the low interest rate environment. The decrease versus a year
ago was caused by a decline in securities gains. Net charge-offs were zero in
the first quarters of 2003 and 2002 and $127 million in the fourth quarter of
2002. Fourth quarter 2002 charge-offs were related to aircraft leasing.
Noninterest expense was essentially flat at $24 million in the first quarter
of 2003, compared with $22 million in last year's fourth quarter and first
quarter.
14
The consolidating schedule below shows the contribution of the Company's
segments to its overall profitability.
In Millions
Servicing
and
For the Quarter Ended Fiduciary Corporate Retail Financial Reconciling Consolidated
March 31, 2003 Businesses Banking Banking Markets Items Total
- --------------------- ---------- --------- ------- --------- ----------- ------------
(In Millions)
Net Interest Income $ 109 $ 89 $ 111 $ 79 $ (2) $ 386
Provision for
Credit Losses - 30 4 5 1 40
Noninterest Income 687 75 29 50 3 844
Noninterest Expense 523 50 86 24 56 739
----- ---- ----- ---- ----- -----
Income Before Taxes $ 273 $ 84 $ 50 $100 $ (56) $ 451
===== ==== ===== ==== ===== =====
Contribution Percentage 54% 16% 10% 20%
Average Assets $7,317 $20,540 $5,382 $44,632 $ 2,605 $80,476
In Millions
Servicing
and
For the Quarter Ended Fiduciary Corporate Retail Financial Reconciling Consolidated
December 31, 2002 Businesses Banking Banking Markets Items Total
- --------------------- ---------- --------- ------- --------- ----------- ------------
Net Interest Income $ 116 $ 97 $ 113 $ 93 $ (6) $ 413
Provision for
Credit Losses - 34 4 5 347 390
Noninterest Income 693 67 30 40 3 833
Noninterest Expense 499 46 81 22 52 700
----- ----- ----- ---- ----- -----
Income Before Taxes $ 310 $ 84 $ 58 $106 $(402) $ 156
===== ===== ===== ==== ===== =====
Contribution Percentage 56% 15% 10% 19%
Average Assets $7,817 $21,601 $5,262 $43,281 $ 2,554 $80,515
In Millions
Servicing
and
For the Quarter Ended Fiduciary Corporate Retail Financial Reconciling Consolidated
March 31, 2002 Businesses Banking Banking Markets Items Total
- --------------------- ---------- --------- ------- --------- ----------- ------------
Net Interest Income $ 121 $ 105 $ 113 $ 85 $ (12) $ 412
Provision for
Credit Losses - 35 3 5 (8) 35
Noninterest Income 658 69 30 53 7 817
Noninterest Expense 459 46 81 22 40 648
----- ----- ----- ---- ----- -----
Income Before Taxes $ 320 $ 93 $ 59 $111 $ (37) $ 546
===== ===== ===== ==== ===== =====
Contribution Percentage 55% 16% 10% 19%
Average Assets $8,970 $23,875 $4,810 $39,758 $ 2,194 $79,607
15
Reconciling Items
- -----------------
Description - Reconciling items for net interest income primarily relate to
the recording of interest income on a taxable equivalent basis, reallocation
of capital and the funding of goodwill and intangibles. Reconciling items for
noninterest income primarily relate to the sale of certain securities and
certain other gains. Reconciling items for noninterest expense primarily
reflects corporate overhead as well as amortization of intangibles and
severance. The adjustment to the provision for credit losses reflects the
difference between the aggregate of the credit provision over a credit cycle
for the reportable segments and the Company's recorded provision. The
reconciling items for average assets consist of goodwill and other intangible
assets.
First Fourth First
Quarter Quarter Quarter
(In millions) 2003 2002 2002
------- ------- -------
Segment's revenue $1,229 $1,249 $1,234
Adjustments:
Earnings associated with
assignment of capital (18) (22) (26)
Securities gains - - 4
Other gains 4 5 4
Taxable equivalent basis and
other tax-related items 16 15 15
Other (1) (1) (2)
------ ------ ------
Subtotal-revenue adjustments 1 (3) (5)
------ ------ ------
Consolidated revenue $1,230 $1,246 $1,229
====== ====== ======
Segment's income before tax $ 507 $ 558 $ 583
Adjustments:
Revenue adjustments (above) 1 (3) (5)
Provision for credit losses
different than GAAP (1) (347) 8
Severance costs (2) (4) (3)
Goodwill and
intangible amortization (3) (3) (2)
Corporate overhead (51) (45) (35)
------ ------ ------
Consolidated income before tax $ 451 $ 156 $ 546
====== ====== ======
Segments' total average assets $77,871 $77,961 $77,413
Adjustments:
Goodwill and intangibles 2,605 2,554 2,194
------- ------- -------
Consolidated average assets $80,476 $80,515 $79,607
======= ======= =======
16
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.
The reconciling item for the provision for loan losses primarily relates
to Corporate Banking and in 2003 to aircraft leases in Financial Markets.
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.
CONSOLIDATED BALANCE SHEET REVIEW
- ---------------------------------
The Company's assets were $79.5 billion at March 31, 2003, compared with
$77.6 billion at December 31, 2002, and $76.8 billion at March 31, 2002. The
increase in assets at March 31, 2003 compared to December 31, 2002 reflects
the investment of higher levels of customer deposits. Investment securities
as a percent of the Company's quarter-end assets increased to 25% at March 31,
2003, compared with 18% at March 31, 2002. Loans as a percentage of assets
declined to 39% at March 31, 2003, versus 45% at March 31, 2002. These changes
reflect the Company's continuing strategy to reduce its asset investment in
higher risk corporate loans and to increase its investment in highly-rated
investment securities, thereby improving both its credit and liquidity
profile.
Return on average common equity for the first quarter of 2003 was 17.80%,
compared with 5.99% in the fourth quarter of 2002, and 23.76% in the first
quarter of 2002. Return on average assets for the first quarter of 2003 was
1.49%, compared with 0.49% in the fourth quarter of 2002, and 1.84% in the
first quarter of 2002. The Company's performance ratios for the fourth
quarter of 2002 were impacted by the higher fourth quarter provision for
credit losses.
INVESTMENT SECURITIES
Total investment securities were $19.6 billion at March 31, 2003,
compared with $18.3 billion at December 31, 2002, and $13.7 billion at March
31, 2002. The increases were primarily due to growth in the Company's
portfolio of highly rated mortgage-backed securities. Since December 31, 2002,
the Company has added approximately $1.5 billion of mortgage-backed securities
to its investment portfolio. Average investment securities were $18.0 billion
in the first quarter of 2003, compared with $17.3 billion in the fourth
quarter of 2002 and $12.8 billion in the first quarter of last year.
Net unrealized gains for securities available-for-sale were $325 million
at March 31, 2003, compared with $338 million at December 31, 2002.
17
LOANS
Total loans were $31.7 billion at March 31, 2003, compared with $31.3
billion at December 31, 2002, and $35.4 billion last year. Average loans were
$32.0 billion in the first quarter of 2003, compared with $33.3 billion in the
fourth quarter of 2002 and $35.5 billion at March 31, 2002. The decrease on a
sequential quarter basis reflects the Company's continued reduction of
corporate loan exposures, as it reallocates capital towards its fee-based
businesses.
The Company has made steady progress in reducing its exposure to higher
risk credits and will continue its intensive efforts to do so in the telecom
segment as well as throughout the loan portfolio. The Company continued to
make progress in its risk reduction efforts during the quarter. Total
exposures to corporate clients were reduced by $2.0 billion, with telecom
exposures reduced by $108 million. The following tables provide additional
details on the Company's loan exposures and outstandings at March 31, 2003 in
comparison to December 31, 2002.
Overall Loan Portfolio
- ----------------------
Unfunded Total Unfunded Total
(dollars in billions) Loans Commitments Exposure Loans Commitments Exposure
----------------------------- ------------------------------
3/31/03 3/31/03 3/31/03 12/31/02 12/31/02 12/31/02
-------- ------- ------- -------- -------- --------
Financial Institutions $ 8.5 $21.4 $29.9 $ 7.0 $23.0 $30.0
Corporate 7.1 23.6 30.7 8.2 24.5 32.7
----- ----- ----- ----- ----- ----
15.6 45.0 60.6 15.2 47.5 62.7
----- ----- ----- ----- ----- ----
Consumer & Middle Market 8.0 4.1 12.1 8.0 4.1 12.1
Leasing Financings 5.6 0.1 5.7 5.6 0.1 5.7
Commercial Real Estate 2.5 0.8 3.3 2.5 0.8 3.3
----- ----- ----- ----- ----- -----
Total $31.7 $50.0 $81.7 $31.3 $52.5 $83.8
===== ===== ===== ===== ===== =====
(1) Includes assets held for sale.
(2) Unfunded commitments include letters of credit.
(3) Excludes acceptances due from customers.
18
Financial Institutions
- ----------------------
The financial institutions portfolio exposure was virtually unchanged at $29.9
billion at March 31, 2003 compared to $30.0 billion at December 31, 2002.
These exposures are of high quality, with 89% meeting the investment grade
criteria of the Company's rating system. The exposures are generally short-
term, with 75% expiring within one year and are frequently secured. For
example, mortgage banking, securities industry, and investment managers often
borrow against marketable securities held in custody at the Company. The
diversity of the portfolio is shown in the accompanying table.
(Dollars in billions)
03/31/03 12/31/02
------------------------------ -----------------------------
Unfunded Total %Inv %due Unfunded Total
Lending Division Loans Commitments Exposures Grade <1 Yr Loans Commitments Exposures
- ---------------- ------ ----------- --------- ----- ------ ------ ----------- ---------
Banks $ 2.9 $ 3.9 $ 6.8 74% 81% $2.9 $ 4.5 $ 7.4
Securities
Industry 3.2 4.0 7.2 95 97 1.7 3.9 5.6
Insurance 0.4 5.2 5.6 95 63 0.4 5.5 5.9
Government 0.2 4.8 5.0 98 50 0.2 5.5 5.7
Asset Managers 1.3 2.4 3.7 85 74 1.2 2.8 4.0
Mortgage Banks 0.3 0.6 0.9 91 78 0.4 0.5 0.9
Endowments 0.2 0.5 0.7 99 80 0.2 0.3 0.5
----- ----- ----- --- ---- ---- ----- -----
Total $ 8.5 $21.4 $29.9 89% 75% $7.0 $23.0 $30.0
===== ===== ===== === ==== ==== ===== =====
Corporate
- ---------
The corporate portfolio exposure declined to $30.7 billion at March 31, 2003
from $32.7 billion at year-end 2002. Approximately 71% of the portfolio is
investment grade. On average, 35% of the portfolio matures each year. In 2002,
the Company announced it expects to reduce its corporate exposure by $9
billion to $25 billion by the end of 2004. At March 31, 2003, this portfolio
had been reduced by $3.3 billion of the $9 billion target.
(Dollars in billions)
03/31/03 12/31/02
----------------------------- -----------------------------
Unfunded Total %Inv %due Unfunded Total
Lending Division Loans Commitments Exposures Grade <1 Yr Loans Commitments Exposures
- ---------------- ------ ----------- --------- ----- ------ ------ ----------- ---------
Media $ 1.7 $ 2.2 $ 3.9 57% 9% $1.9 $ 2.4 $4.3
Cable 0.9 0.7 1.6 36 5 1.0 0.6 1.6
Telecom 0.6 0.8 1.4 43 33 0.7 0.8 1.5
----- ----- ----- -- -- ---- ----- -----
Subtotal 3.2 3.7 6.9 49% 13% 3.6 3.8 7.4
Utilities 0.4 2.9 3.3 87 73 0.7 3.0 3.7
Retailing 0.1 2.4 2.5 73 41 0.2 2.6 2.8
Automotive 0.2 2.5 2.7 78 39 0.2 2.6 2.8
Oil & Gas 0.4 1.7 2.1 75 39 0.4 1.7 2.1
Healthcare 0.3 1.4 1.7 83 32 0.4 1.5 1.9
Other* 2.5 9.0 11.5 76 34 2.7 9.3 12.0
----- ----- ----- -- -- ---- ----- -----
Total $ 7.1 $23.6 $30.7 71% 35% $8.2 $24.5 $32.7
===== ===== ===== == == ==== ===== =====
* Diversified portfolio of industries and geographies
Media, cable, and telecommunications has been a significant industry
specialization of the Company historically. The Company has specifically
targeted the telecom portfolio for continued reduction in exposure with a goal
of reducing the telecom portfolio below $750 million by December 31, 2004. In
the first quarter, the Company reduced telecom exposure by $108 million.
19
The Company's exposure to the airline industry consists of a $631 million
aircraft leasing portfolio as well as $55 million of direct lending. The
aircraft leasing portfolio consists of $285 million to major U.S. carriers,
$251 million to foreign airlines and $95 million to U.S. regionals. The
Company's exposure to foreign airlines includes a $13 million real estate
lease exposure to a Canadian airline which declared bankruptcy in April of
2003.
Given the bankruptcies of two major domestic airlines in 2002 and the
current operating environment, the Company has been carefully monitoring its
airline exposure. Industry fundamentals are not strong, and the industry has
limited access to the capital markets. The airline industry's excess capacity,
caused in part by the World Trade Center Disaster (the "WTC Disaster"), the
war in Iraq, other geopolitical events, and more recently the SARS epidemic,
have significantly reduced the value of aircraft in the secondary market.
In 2002, the Company recorded a $225 million provision for its airline
exposure and charged-off $125 million of its $130 million exposure to a
bankrupt airline. During the first quarter, the situation at a bankrupt
airline improved while the conditions at another airline engaged in labor
negotiations deteriorated. The Company reallocated its reserves to reflect
that, with the overall reserves related to airlines increasing modestly.
NONPERFORMING ASSETS
Change
3/31/03 vs.
(Dollars in millions) 3/31/03 12/31/02 12/31/02
-------- -------- --------
Category of Loans:
Commercial $327 $321 $ 6
Foreign 75 84 (9)
Other 34 34 -
---- ---- ---
Total Nonperforming Loans 436 439 (3)
Other Real Estate - 1 (1)
---- ---- ----
Total Nonperforming Assets $436 $440 $(4)
==== ==== ====
Nonperforming Assets Ratio 1.4% 1.4%
Allowance/Nonperforming Loans 190.4 189.1
Allowance/Nonperforming Assets 190.4 188.7
Nonperforming assets totaled $436 million at March 31, 2003, compared
with $440 million at December 31, 2002, and $275 million at March 31, 2002. In
the first quarter of 2003, paydowns and the sales of nonperforming loans were
partially offset by the addition of a $52 million loan to a retailer. The
level of nonperforming assets prospectively will depend upon the strength and
pace of the U.S. economic recovery.
20
IMPAIRED LOANS
The table below sets forth information about the Company's impaired loans. The
Company uses the discounted cash flow method as its primary method for valuing
its impaired loans:
(Dollars in millions) 3/31/03 12/31/02
-------- --------
Impaired Loans with an Allowance $371 $376
Impaired Loans without an Allowance(1) 40 27
---- ----
Total Impaired Loans $411 $403
==== ====
Allowance for Impaired Loans(2) $183 $167
Average Balance of Impaired Loans
during the Quarter $407 $343
Interest Income Recognized on
Impaired Loans during the Quarter $1.0 $0.1
(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
The allowance for credit losses was $830 million, or 2.62% of loans at
March 31, 2003, compared with $831 million, or 2.65% of loans at December 31,
2002 reflecting stability in credit quality in the first quarter of 2003.
During the quarter, credit quality related to certain corporate credits
improved which offset a continued decline in credit quality related to airline
exposures. The ratio of the allowance to nonperforming assets was 190.4% at
March 31, 2003, compared with 188.7% at December 31, 2002. Included in the
Company's allowance for credit losses at March 31, 2003 is an allocated
transfer risk reserve related to Argentina of $26 million.
The allowance for credit losses consists of four elements: (1) an
allowance for impaired credits (nonaccrual commercial credits over $1
million), (2) an allowance for higher risk rated credits, (3) an allowance for
pass rated credits, and (4) an unallocated allowance based on general economic
conditions and risk factors in the Company's individual markets.
The first element - impaired credits - is based on individual analysis of
all nonperforming commercial credits over $1 million. The allowance is
measured by the difference between the recorded value of impaired loans and
their fair value. Fair value is either the present value of the expected
future cash flows from borrowers, the market value of the loan, or the fair
value of the collateral.
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
21
credit rating, loss given default rating, estimated exposure at default, and
maturity. The credit rating is judgmental and is dependent upon the borrower's
estimated probability of default. The loss given default incorporates a
recovery expectation based on historical experience, collateral, and
structure. Borrower and loss given default ratings are reviewed semi-annually
at 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. All current consumer loans are included in the
pass rated consumer pools.
The fourth element - an unallocated allowance - is based on management's
judgment regarding the following factors:
- Economic conditions including duration of the current economic cycle
- Past experience including recent loss experience
- Credit quality trends
- Collateral values
- Volume, composition, and growth of the loan portfolio
- Specific credits and industry conditions
- Results of bank regulatory and internal credit exams
- Actions by the Federal Reserve Board
- Delay in receipt of information to evaluate loans or confirm
existing credit deterioration
- Geopolitical issues and their impact on the economy
Based on an evaluation of these four elements, including individual
credits, historical credit losses, and global economic factors, the Company
has allocated its allowance for credit losses as follows:
3/31/03 12/31/02
------- -------
Domestic
Real Estate 3% 3%
Commercial 75 75
Consumer 1 1
Foreign 9 9
Unallocated 12 12
--- ---
100% 100%
=== ===
Such an allocation is inherently judgmental, and the entire allowance for
credit losses is available to absorb credit losses regardless of the nature of
the loss.
DEPOSITS
- --------
Total deposits were $56.9 billion at March 31, 2003, compared with $55.4
billion at December 31, 2002. The increase was primarily due to additional
deposits from global payment services clients that invested their excess cash
positions with the Company. Noninterest-bearing deposits were $13.6 billion
at March 31, 2003, compared with $13.3 billion at December 31, 2002. Interest-
bearing deposits were $43.3 billion at March 31, 2003, compared with $42.1
billion at December 31, 2002.
22
WORLD TRADE CENTER DISASTER UPDATE
During the first quarter of 2003, the Company incurred $13 million in
expenses associated with interim space, business interruption, and the
restoration of facilities, which was offset by an insurance recovery.
The Company is actively engaged in subletting its interim operating
facilities. Through March 31, 2003, the Company had terminated or sublet
652,000 square feet and had 648,000 square feet remaining to sublet. The
Company's estimate of its sublease loss as of March 31, 2003 was $299 million.
At March 31, 2003, the Company had reserved for approximately 51% of the
future costs associated with the subleases. The Company expects the remainder
of the costs to be covered by income from subletting these properties.
The financial statement impact of the WTC disaster is shown in the table
below:
(In millions) 2003
----
WTC Expenses $ 13
Insurance Recovery 13
-----
Pre-tax Impact $ -
=====
Cumulative Insurance Recovery $ 657
Cumulative Cash Advances from
Insurance Companies (400)
-----
Receivable from Insurance Companies
at March 31, 2003 $ 257
=====
Future cash advances will largely relate to the sublease loss and
business interruption costs. The Company expects to record modest additional
insurance recoveries in 2003 and 2004 as it completes the move of its data
centers from interim locations to final locations.
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 2002 Annual Report on Form 10-K. Two
of the Company's more critical accounting policies are those related to the
allowance for credit losses and to the valuation of derivatives and securities
where quoted market prices are not available.
ALLOWANCE FOR CREDIT LOSSES
- ----------------------------
The 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. Probability of default
ratings are assigned after analyzing the credit quality of each
borrower/counterparty and the Company's internal rating are consistent with
external rating agency default databases. Loss given default ratings are
driven by the collateral, structure, and seniority of each individual asset
and are consistent with external loss given default/recovery databases. The
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.
The Company's unallocated allowance is established via a process that
begins with estimates of probable loss inherent in the portfolio, based upon
the following factors:
- Economic conditions, including duration of the current cycle
- Past experience, including recent loss experience
- Credit quality trends
23
- Collateral values
- Volume, composition, and growth of the loan portfolio
- Specific credits and industry conditions
- Results of bank regulatory and internal credit exams
- Actions by the Federal Reserve Board
- Delay in receipt of information to evaluate loans or confirm existing
credit deterioration
- Geopolitical issues and their impact on the economy
To the extent actual results differ from forecasts or management's
judgment the allowance for credit losses may be greater or less than future
charge-offs.
The Company considers it difficult to quantify the impact of changes in
forecast on its allowance for credit losses. Nevertheless, the Company
believes the following discussion may enable investors to better understand
the variables that drive the allowance for credit losses.
One key variable in determining the allowance is management's judgment in
determining the size of the unallocated allowance. At March 31, 2003, the
unallocated allowance was 12% of the total allowance. If the unallocated
allowance were five percent higher or lower, the allowance would have
increased or decreased by $42 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 lower, the allowance would have increased by $91 million, while if each
pass credit were rated one grade higher, the allowance would have declined by
$72 million.
For non pass rated credits, if the loss given default were 10% higher,
the allowance would have increased by $40 million, while if the loss given
default were 10% lower, the allowance would have decreased by $46 million.
For impaired credits, if the fair value of the loans were 10% higher or
lower, the allowance would have increased or decreased by $23 million,
respectively.
24
VALUATION OF DERIVATIVES AND SECURITIES WHERE QUOTED MARKET PRICES ARE NOT
- --------------------------------------------------------------------------
AVAILABLE
----------
When quoted market prices are not available for derivatives and securities
values, such values are determined at fair value, which is defined as the
value at which positions could be closed out or sold in a transaction with a
willing counterparty over a period of time consistent with the Company's
trading or investment strategy. Fair value for these instruments is determined
based on discounted cash flow analysis, comparison to similar instruments, and
the use of financial models. Financial models use as their basis independently
sourced market parameters including, for example, interest rate yield curves,
option volatilities, and currency rates. Discounted cash flow analysis is
dependent upon estimated future cash flows and the level of interest rates.
Model-based pricing uses inputs of observable prices for interest rates,
foreign exchange rates, option volatilities and other factors. Models are
benchmarked and validated by external parties. The Company's valuation process
takes into consideration factors such as counterparty credit quality,
liquidity and concentration concerns. The Company applies judgement in the
application of these factors. In addition, the Company must apply judgment
when no external parameters exist. Finally, other factors can affect the
Company's estimate of fair value including market dislocations, incorrect
model assumptions, and unexpected correlations.
These valuation methods could expose the Company to materially different
results should the models used or underlying assumptions be inaccurate. See
"Use of Estimates" in the footnote 1 "Summary of Significant Accounting and
Reporting Policies" in the Company's 2002 Annual Report on Form 10-K.
To assist in assessing the impact of a change in valuation, at March 31,
2003, approximately $3.1 billion of the Company's portfolio of securities and
derivatives is not priced based on quoted market prices. A change of 2.5% in
the valuation of these securities and derivatives would result in a change in
pre-tax income of $78 million.
LIQUIDITY
The Company maintains its liquidity through the management of its assets
and liabilities, utilizing worldwide financial markets. The diversification of
liabilities reflects the Company's efforts to maintain flexibility of funding
sources under changing market conditions. Stable core deposits, including
demand, retail time, and trust deposits from processing businesses, are
generated through the Company's diversified network and managed with the use
of trend studies and deposit pricing. The use of derivative products such as
interest rate swaps and financial futures enhances liquidity by enabling the
Company to issue long-term liabilities with limited exposure to interest rate
risk. Liquidity also results from the maintenance of a portfolio of assets
which can be easily sold and the monitoring of unfunded loan commitments,
thereby reducing unanticipated funding requirements. Liquidity is managed on
both a consolidated basis and also at The Bank of New York Company, Inc.
parent company ("Parent").
On a consolidated basis, non-core sources of funds such as money market
rate accounts, certificates of deposits greater than $100,000, federal funds
purchased and other borrowings were $14.5 billion and $14.3 billion on an
average basis for the first three months of 2003 and 2002. Stable foreign
deposits, primarily from the Company's European based securities servicing
business, were $23.9 billion and $25.2 billion for the first three months of
2003 and 2002. Savings and other time deposits were $9.8 billion on a year-to-
date average basis at March 31, 2003 compared to $9.7 billion at March 31,
2002. A significant reduction in the Company's securities businesses would
reduce its access to foreign deposits.
The Parent has five major sources of liquidity: dividends from its
subsidiaries, a collateralized line of credit with the Bank, the commercial
paper market, a revolving credit agreement with third party financial
institutions, and access to the capital markets.
At March 31, 2003, the amount of dividends the Bank could pay to the
Parent and remain in compliance with federal bank regulatory requirements was
25
$159 million. This dividend capacity would increase in the remainder of 2003
to the extent of net income, less dividends. Nonbank subsidiaries of the
Parent have liquid assets of approximately $434 million. These assets could be
liquidated and the proceeds delivered by dividend or loan to the Parent.
The Parent has a line of credit with the Bank, which is subject to limits
imposed by federal banking law. At March 31, 2003, the Parent could use the
subsidiaries' liquid securities as collateral to allow it to borrow $104
million rather than liquidate the securities and loan or dividend the proceeds
to the Parent and remain in compliance with federal banking regulations. The
Parent had no borrowings from the Bank at March 31, 2003.
For the quarter ended March 31, 2003, the Parent's quarterly average
commercial paper borrowings were $161 million compared with $235 million in
2002. Commercial paper outstandings were $131 million, $136 million, and $87
million at March 31, 2003, December 31, 2002, and March 31, 2002. At March 31,
2003, the Parent had cash of $518 million compared with cash of $398 million
at December 31, 2002 and $429 million at March 31, 2002. Net of commercial
paper outstanding, the Parent's cash position at March 31, 2003 was up $125
million compared with December 31, 2002. The increase was in anticipation of
funding the Pershing acquisition.
The Parent has back-up lines of credit of $275 million at financial
institutions. This line of credit matures in October 2006. There were no
borrowings under the line of credit at March 31, 2003 and March 31, 2002.
The Parent also has the ability to access the capital markets. At May 6,
2003, the Parent has a shelf registration statement with a capacity of $1,347
million of debt, preferred stock, preferred trust securities, or common stock.
Access to the capital markets is partially dependent on the Company's credit
ratings, which as of April 30, 2003 were as follows:
The Bank of
Parent Parent Parent Senior New York
Commercial Subordinated Long-Term Long-Term
Paper Long-Term Debt Debt Deposits
----------- --------------- --------------- ------------
Standard & A-1 A A+ AA-
Poor's
Moody's P-1 A1 Aa3 Aa2
Fitch F1+ A+ AA- AA
The Parent's major uses of funds are payment of principal and interest on
its borrowings, acquisitions, and additional investment in its subsidiaries.
The Parent has approximately $710 million of long-term debt that becomes
due in 2003 subsequent to March 31, 2003. In addition, at March 31, 2003, the
Parent has the option to call $330 million of subordinated debt in 2003 which
it will call and refinance if market conditions are favorable. In the first
quarter of 2003, the Company redeemed $195 million of debt. In April 2003, the
Company called for redemption $300 million of its 7.05% Series D trust
preferred securities as well as $10 million of subordinated debt. The Parent
expects to refinance any debt it repays by issuing a combination of trust
preferred securities and senior and subordinated debt.
In April 2003, the Parent issued $750 million of extendible securities
due in May 2004. Holders of these securities have the option to extend the
maturity each month. If the maturity is not extended, the securities become
due in one year. See Capital for discussion of changes in common stock, trust
preferred securities, and subordinated debt of the Parent.
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, 2003 and 2002 was 100.82% and 98.39%. 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
26
important constraint on the Company's ability to invest in its subsidiaries to
expand its businesses.
The following comments relate to the information disclosed in the
Consolidated Statements of Cash Flows.
Earnings and other operating activities used $0.5 billion in cash flows
at March 31, 2003, compared with $0.6 billion used by operating activities at
March 31, 2002. The changes in cash flows from operations in 2003 and 2002
were principally the result of changes in trading activities and changes in
accruals.
In the first quarter of 2003, cash used by investing activities was $1.7
billion as compared to cash provided by investing activities in the first
quarter of 2002 of $3.7 billion. In the first quarter of 2003, purchases of
securities available-for-sale was a significant use of funds. In the first
quarters of 2003 and 2002, cash was used to increase the Company's investment
securities portfolio, which is part of an ongoing strategy to shift the
Company's asset mix from loans towards highly rated investment securities and
short-term liquid assets. In 2002, this was offset by reductions in interest
bearing deposits in banks and federal funds sold and securities purchased
under resale agreements.
In the first quarter of 2003, cash provided by financing activities was
$1.9 billion as compared to cash used by financing activities in the first
quarter of 2002 of $2.6 billion. The Company used deposits to finance its
investing activities in the first quarter of 2003 while in 2002 deposits were
a net use of funds. In the first quarter of 2002, financing activities used
cash to buy back the Company's common shares and pay dividends.
CAPITAL RESOURCES
Regulators establish certain levels of capital for bank holding companies
and banks, including the Company and The Bank of New York ("the Bank"), in
accordance with established quantitative measurements. In order for the
Company to maintain its status as a financial holding company, the Bank must
qualify as well capitalized. In addition, major bank holding companies such as
the Company are expected by the regulators to be well capitalized. As of March
31, 2003 and 2002, the Company and the Bank were considered well capitalized
on the basis of the ratios (defined by regulation) of Total and Tier 1 capital
to risk-weighted assets and leverage (Tier 1 capital to average assets). If a
bank holding company or bank fails to qualify as "adequately capitalized",
regulatory sanctions and limitations are imposed. The Company's and the Bank's
capital ratios are as follows:
March 31, 2003 March 31, 2002
--------------------- --------------------- Well Adequately
Company Capitalized Capitalized
Company Bank Company Bank Targets Guidelines Guidelines
------- ---- ------- ------ ------- ----------- -----------
Tier 1* 7.92% 7.92% 8.43% 8.03% 7.75% 6% 4%
Total Capital** 12.72 12.34 12.56 12.03 11.75 10 8
Leverage 6.68 6.63 7.19 6.82 6.50 5 3-5
Tangible Common
Equity 5.51 6.27 5.51 6.41 5.25-6.00 N.A. N.A.
* Tier 1 capital consists, generally, of common equity and certain qualifying preferred
stock, less goodwill.
**Total Capital consists of Tier 1 capital plus Tier 2 capital. Tier 2 capital consists,
generally, of certain qualifying preferred stock and subordinated debt and a portion of the
loan loss allowance.
27
The following table presents the components of the Company's risk-based
capital at March 31, 2003 and 2002:
(in millions) 2003 2002
---- ----
Common Stock $6,874 $6,354
Preferred Stock - -
Preferred Trust Securities 1,100 1,500
Adjustments: Intangibles (2,612) (2,241)
Securities Valuation Allowance (179) (63)
Merchant Banking Investments (3) -
------ ------
Tier 1 Capital 5,180 5,550
------ ------
Qualifying Unrealized Equity Security Gains - 26
Qualifying Subordinated Debt 2,330 2,078
Qualifying Allowance for Loan Losses 804 613
------ ------
Tier 2 Capital 3,134 2,717
------ ------
Total Risk-based Capital $8,314 $8,267
====== ======
Risk-Adjusted Assets $65,378 $65,828
======= =======
On May 1, 2003, in connection with the acquisition of Pershing, the
Company settled its forward sale of 40 million common shares in exchange for
approximately $1 billion. In April 2003, the Company called for redemption
its $300 million 7.05% Series D Trust Preferred securities effective June 1,
2003. The Company issued $350 million 5.95% Series F Trust Preferred
securities in April 2003. These securities mature on May 1, 2033 and are
callable starting May 1, 2008. The Company issued $400 million of
subordinated debt in 2003. Through May 5, 2003, the Company issued an
additional $55 million of subordinated debt.
The Company expects the Pershing acquisition to reduce its Tangible
Common Equity ratio to 4.65% at the June 30, 2003 reporting date. The Company
expects this ratio to recover to its targeted range in approximately one year.
Other capital ratios will decline comparably. As a result, the Company has
suspended the stock buyback program announced in November 2002. The Company
has 17 million shares remaining to repurchase under its share buyback
programs.
28
TRADING ACTIVITIES
The fair value and notional amounts of the Company's financial
instruments held for trading purposes at March 31, 2003 and March 31, 2002 are
as follows:
1st Quarter 2003
March 31, 2003 Average
---------------------------- -------------------
(In millions) Fair Value Fair Value
------------------ -------------------
Notional
Trading Account Amount Assets Liabilities Assets Liabilities
- --------------- -------- ------ ----------- ------ -----------
Interest Rate Contracts:
Futures and Forward
Contracts $ 53,723 $ 63 $ - $ 87 $ -
Swaps 153,355 1,883 576 1,627 441
Written Options 118,467 - 1,495 - 1,387
Purchased Options 54,614 254 - 225 -
Foreign Exchange Contracts:
Swaps 2,455 - - - -
Written Options 13,205 - 64 - 71
Purchased Options 16,845 72 - 58 -
Commitments to Purchase
and Sell Foreign Exchange 51,863 283 324 425 399
Debt Securities - 5,190 1 5,712 2
Credit Derivatives 1,808 6 2 6 2
Equity Derivatives - 16 - 23 7
------ ------ ------ ------
Total Trading Account $7,767 $2,462 $8,163 $2,309
====== ====== ====== ======
1st Quarter 2002
March 31, 2002 Average
---------------------------- -------------------
(In millions) Fair Value Fair Value
------------------ -------------------
Notional
Trading Account Amount Assets Liabilities Assets Liabilities
- --------------- -------- ------ ----------- ------ -----------
Interest Rate Contracts:
Futures and Forward
Contracts $ 1,922 $ - $ - $ 27 $ -
Swaps 136,416 1,224 647 1,363 671
Written Options 103,842 - 927 - 967
Purchased Options 38,993 124 - 158 -
Foreign Exchange Contracts:
Swaps 1,639 - - - -
Written Options 10,617 - 74 - 21
Purchased Options 13,605 98 - 79 -
Commitments to Purchase
and Sell Foreign Exchange 53,514 330 331 452 461
Debt Securities - 6,532 - 8,750 -
Credit Derivatives 1,969 31 23 26 48
Equity Derivatives - 18 - 45 22
------ ------ ------- ------
Total Trading Account $8,357 $2,002 $10,900 $2,190
====== ====== ======= ======
The Company's trading activities are focused on acting as a market maker
for the Company's customers. The risk from these market making activities and
from the Company's own positions is managed by the Company's traders and
limited in total exposure as described below.
The Company manages trading risk through a system of position limits, a
value at risk (VAR) methodology, based on a Monte Carlo simulation, stop loss
advisory triggers, and other market sensitivity measures. Risk is monitored
and reported to senior management by an independent unit on a daily basis. The
VAR methodology captures, based on certain assumptions, the potential
29
overnight pre-tax dollar loss from adverse changes in fair values of all
trading positions. The calculation assumes a one day holding period for most
instruments, utilizes a 99% confidence level, and incorporates the non-linear
characteristics of options. The VAR model is used to calculate economic
capital which is allocated to the business units for computing risk-adjusted
performance. As the VAR methodology does not evaluate risk attributable to
extraordinary financial, economic or other occurrences, the risk assessment
process includes a number of stress scenarios based upon the risk factors in
the portfolio and management's assessment of market conditions. Additional
stress scenarios based upon historic market events are also tested.
The following table indicates the calculated VAR amounts for the trading
portfolio for the periods indicated.
(In millions) 1st Quarter 2003
------------------------------------------
Average Minimum Maximum 3/31/03
-------- -------- -------- --------
Interest Rate $4.8 $2.3 $11.4 $7.8
Foreign Exchange 0.8 0.5 1.3 0.8
Equity 0.1 - 0.4 -
Diversification (1.2) NM NM (1.0)
Overall Portfolio 4.5 2.0 11.4 7.6
(In millions) 1st Quarter 2002
------------------------------------------
Average Minimum Maximum 3/31/02
-------- -------- -------- ---------
Interest Rate $5.2 $3.4 $9.2 $5.6
Foreign Exchange 1.0 0.6 2.0 1.2
Equity - - - -
Diversification (1.6) NM NM (1.7)
Overall Portfolio 4.6 3.0 8.3 5.1
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 2003, interest rate risk generated
approximately 84% of average VAR while foreign exchange accounted for 14% VAR.
During the first quarter of 2003, the daily trading loss did not exceed the
calculated VAR amounts on any given day.
ASSET/LIABILITY MANAGEMENT
The Company's asset/liability management activities include lending, investing
in securities, accepting deposits, raising money as needed to fund assets, and
processing securities and other transactions. The market risks that arise from
these activities are interest rate risk, and to a lesser degree, foreign
exchange risk. The Company's primary market risk is exposure to movements in
US dollar interest rates. Exposure to movements in foreign currency interest
rates also exists, but to a significantly lower degree. The Company actively
manages interest rate sensitivity. In addition to gap analysis, the Company
uses earnings simulation and discounted cash flow models to identify interest
rate exposures.
An earnings simulation model is the primary tool used to assess changes
in pre-tax net interest income. The model incorporates management's
assumptions regarding interest rates, balance changes on core deposits, and
changes in the prepayment behavior of loans and securities. These assumptions
have been developed through a combination of historical analysis and future
expected pricing behavior. Derivative financial instruments used for interest
rate risk management purposes are also included in this model.
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
30
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:
(In millions) 2003 %
---- ----
+200 bp Ramp vs. Stable Rate $(35.2) (2.2)%
+100 bp Ramp vs. Stable Rate (16.2) (1.0)
-50 bp Ramp vs. Stable Rate (2.3) (0.1)
These scenarios do not include the 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. For example, based on
the level of interest rates at December 31, 2002, the Company does not believe
it would be able to reduce rates on all its deposit products if there are
further declines in interest rates. In addition, if interest rates rise, the
Company's portfolio of mortgage related assets would have reduced returns if
the owners of the underlying mortgages pay off their mortgages later than
anticipated. To the extent that actual behavior is different from that assumed
in the models, there could be a change in interest rate sensitivity.
31
STATISTICAL INFORMATION
- -----------------------
THE BANK OF NEW YORK COMPANY, INC.
Average Balances and Rates on a Taxable Equivalent Basis
(Dollars in millions)
For the three months For the three months
ended March 31, 2003 ended March 31, 2002
------------------------------ ------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
ASSETS
- ------
Interest-Bearing Deposits
in Banks (primarily foreign) $ 4,987 $ 30 2.40% $ 5,221 $ 35 2.72%
Federal Funds Sold and Securities
Purchased Under Resale Agreements 5,003 15 1.24 3,308 14 1.75
Loans
Domestic Offices 19,084 217 4.63 19,355 245 5.14
Foreign Offices 12,888 97 3.04 16,175 138 3.46
------- ----- ------- -----
Total Loans 31,972 314 3.99 35,530 383 4.38
------- ----- ------- -----
Securities
U.S. Government Obligations 325 3 3.70 804 11 5.34
U.S. Government Agency Obligations 3,253 34 4.19 2,894 42 5.80
Obligations of States and
Political Subdivisions 381 7 6.85 567 9 6.59
Other Securities 14,018 138 3.95 8,524 108 5.04
Trading Securities 5,712 44 3.13 8,751 73 3.39
------- ----- ------- -----
Total Securities 23,689 226 3.83 21,540 243 4.52
------- ----- ------- -----
Total Interest-Earning Assets 65,651 585 3.62% 65,599 675 4.17%
----- -----
Allowance for Credit Losses (830) (616)
Cash and Due from Banks 2,811 2,640
Other Assets 12,844 11,984
------- -------
TOTAL ASSETS $80,476 $79,607
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Interest-Bearing Deposits
Money Market Rate Accounts $ 7,678 $ 19 0.99% $ 6,920 $ 23 1.36%
Savings 8,490 18 0.92 8,057 25 1.27
Certificates of Deposit
$100,000 & Over 4,726 20 1.75 498 4 3.35
Other Time Deposits 1,272 6 1.82 1,603 10 2.50
Foreign Offices 23,867 83 1.39 25,176 99 1.58
------- ----- ------- -----
Total Interest-Bearing Deposits 46,033 146 1.29 42,254 161 1.54
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 1,291 3 0.96 2,105 8 1.46
Other Borrowed Funds 788 2 1.34 4,740 28 2.45
Long-Term Debt 5,441 39 2.85 5,026 53 4.25
------- ----- ------- -----
Total Interest-Bearing Liabilities 53,553 190 1.44% 54,125 250 1.87%
----- -----
Noninterest-Bearing Deposits 11,353 10,126
Other Liabilities 8,846 9,178
Shareholders' Equity 6,724 6,178
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $80,476 $79,607
======= =======
Net Interest Earnings and
Interest Rate Spread $ 395 2.18% $ 425 2.30%
===== ==== ===== ====
Net Yield on Interest-Earning Assets 2.44% 2.63%
==== ====
32
FORWARD LOOKING STATEMENTS
The information presented with respect to, among other things, earnings
outlook, projected business growth, the outcome of legal, regulatory and
investigatory proceedings, the Company's plans, objectives and strategies
reallocating assets and moving into fee-based businesses, and future loan
losses, is forward looking information. Forward looking statements are the
Company's current estimates or expectations of future events or future
results.
The Company or its executive officers and directors on behalf of the
Company, may from time to time make forward looking statements. When used in
this report, any press release or oral statements, the words "estimate,"
"forecast," "project," "anticipate," "expect," "intend," "believe," "plan,"
"goal," "should," "may," "strategy," and words of 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 that the
Company is necessarily unable to predict with accuracy, including disruptions
in general economic activity, the economic and other effects of the WTC
disaster and the subsequent U.S. military action, lower than expected
performance or higher than expected costs in connection with acquisitions and
integration of acquired businesses, changes in relationships with customers,
the ability to satisfy customer requirements, investor sentiment, variations
in management projections, methodologies used by management to evaluate risk
or market forecasts and the actions that management could take in response to
these changes, management's ability to achieve efficiency goals, changes in
customer credit quality, future changes in interest rates, general credit
quality, the levels of economic, capital market, and merger and acquisition
activity, consumer behavior, government monetary policy, domestic and foreign
legislation, regulation and investigation, competition, credit, market and
operating risk, and loan demand, as well as the pace of recovery of the
domestic economy, market demand for the Company's products and services and
future global political, economic, business, market, competitive and
regulatory conditions. This is not an exhaustive list and as a result of
variations in any of these factors actual results may differ materially from
any forward looking statements.
Forward looking statements speak only as of the date they are made. The
Company will not update forward looking statements to reflect facts,
assumptions, circumstances or events which have changed after a forward
looking statement was made.
GOVERNMENT MONETARY POLICIES
The Federal Reserve Board has the primary responsibility for United
States monetary policy. Its actions, and, to a lesser extent, the actions of
monetary policy authorities of other major countries, have an important
influence on the demand for credit and investments and the level of interest
rates and thus on the earnings of the Company.
COMPETITION
The businesses in which the Company operates are very competitive.
Competition is provided by both unregulated and regulated financial services
organizations, whose products and services span the local, national, and
global markets in which the Company conducts operations.
International, national, and regional commercial banks, trust banks,
investment banks, specialized processing companies, outsourcing companies,
33
data processing companies, stock exchanges, and other business firms offer
active competition for securities servicing and global payment services.
Commercial banks, savings banks, savings and loan associations, and credit
unions actively compete for deposits, and money market funds and brokerage
houses offer deposit-like services. These institutions, as well as consumer
and commercial finance companies, national retail chains, factors, insurance
companies and pension trusts, are important competitors for various types of
loans. Issuers of commercial paper compete actively for funds and reduce
demand for bank loans. In the private client services and asset management
markets, international, national, and regional commercial banks, standalone
asset management companies, mutual funds, securities brokerage firms,
insurance companies, investment counseling firms, and other business firms and
individuals actively compete for business.
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.
34
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Balance Sheets
(Dollars in millions, except per share amounts)
(Unaudited)
March 31, December 31,
2003 2002
---- ----
Assets
- ------
Cash and Due from Banks $ 4,453 $ 4,748
Interest-Bearing Deposits in Banks 4,060 5,104
Securities
Held-to-Maturity (fair value of $649 in 2003 655 954
and $952 in 2002)
Available-for-Sale 18,944 17,346
------- -------
Total Securities 19,599 18,300
Trading Assets at Fair Value 7,767 7,309
Federal Funds Sold and Securities Purchased Under Resale
Agreements 2,765 1,385
Loans (less allowance for credit losses of $830 in 2003
and $831 in 2002) 30,905 30,508
Premises and Equipment 977 975
Due from Customers on Acceptances 256 351
Accrued Interest Receivable 244 204
Goodwill 2,540 2,497
Intangible Assets 80 78
Other Assets 5,902 6,105
------- -------
Total Assets $79,548 $77,564
======= =======
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits
Noninterest-Bea