THE BANK OF NEW YORK COMPANY, INC.
Quarterly Report on Form 10-Q
For the quarterly period ended June 30, 2006
The Quarterly Report on Form 10-Q and cross reference index is on page 92.
THE BANK OF NEW YORK COMPANY, INC.
FINANCIAL REVIEW
TABLE OF CONTENTS
Consolidated Financial Highlights 1
Management's Discussion and Analysis of Financial
Condition and Results of Operations
- Introduction 5
- Overview 5
- Second Quarter 2006 Highlights 6
- Supplemental Financial Information 8
- Consolidated Income Statement Review 11
- Business Segment Review 18
- Critical Accounting Policies 35
- Consolidated Balance Sheet Review 39
- Liquidity 48
- Capital Resources 51
- Trading Activities 53
- Asset/Liability Management 55
- Statistical Information 56
- Supplemental Data 59
- Other Developments 68
- Forward-Looking Statements and
Risk Factors That Could Affect Future Results 69
- Government Monetary Policies and Competition 69
- Website Information 70
Consolidated Financial Statements
- Consolidated Balance Sheets
June 30, 2006 and December 31, 2005 71
- Consolidated Statements of Income
for the Three Months and Six Months Ended
June 30, 2006 and 2005 72
- Consolidated Statement of Changes In
Shareholders' Equity for the Six
Months Ended June 30, 2006 74
- Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2006 and 2005 75
- Notes to Consolidated Financial Statements 76
Form 10-Q
- Cover 92
- Controls and Procedures 93
- Legal and Regulatory Proceedings 93
- Risk Factors 94
- Unregistered Sales of Equity Securities
and Use of Proceeds 95
- Submission of Matters to Vote of Security Holders 96
- Exhibits 97
- Signature 98
1
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Financial Highlights
(Dollars in millions, except per share amounts)
(Unaudited)
June 30, March 31, June 30,
Continuing Operations(1) 2006 2006 2005
------------------------ ------------ ------------- ------------
Quarter
-------
Net Interest Income $ 358 $ 339 $ 329
Noninterest Income 1,366 1,261 1,194
------------ ------------- ------------
1,724 1,600 1,523
Tax Equivalent Adjustment 7 7 6
------------ ------------- ------------
Revenue (tax equivalent basis) $ 1,731 $ 1,607 $ 1,529
============ ============= ============
Income from Continuing Operations
Before Income Taxes $ 591 $ 535 $ 505
Income Taxes 200 175 162
------------ ------------- ------------
Income from Continuing Operations 391 360 343
Income from Discontinued Operations,
Net of Taxes 57 62 55
------------ ------------- ------------
Net Income $ 448 $ 422 $ 398
============ ============= ============
Basic EPS:
Income from Continuing Operations $ 0.52 $ 0.47 $ 0.45
Income from Discontinued Operations, Net 0.07 0.08 0.07
Net Income 0.59 0.55 0.52
Diluted EPS:
Income from Continuing Operations 0.52 0.47 0.45
Income from Discontinued Operations, Net 0.07 0.08 0.07
Net Income 0.59 0.55 0.52
Cash Dividends Per Share 0.21 0.21 0.20
Return on Average Common
Shareholders' Equity 15.85% 14.75% 14.74%
Return on Average Assets 1.54 1.50 1.49
Efficiency Ratio 66.4 67.0 67.8
(1) Discontinued operations includes the Company's retail and regional middle market banking businesses expected to be sold
to JPMorgan Chase & Co. in the fourth quarter of 2006 in connection with the definitive agreement the Company entered into
with JPMorgan Chase & Co. on April 8, 2006.
2
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Financial Highlights
(Dollars in millions, except per share amounts)
(Unaudited)
June 30, March 31, June 30,
2006 2006 2005
Continuing Operations(1) ------------- ------------- ------------
------------------------
Year-to-date
------------
Net Interest Income $ 697 $ 339 $ 650
Noninterest Income 2,627 1,261 2,310
------------ ------------- ------------
3,324 1,600 2,960
Tax Equivalent Adjustment 14 7 13
------------ ------------- ------------
Revenue (tax equivalent basis) $ 3,338 $ 1,607 $ 2,973
============ ============= ============
Income from Continuing Operations
Before Income Taxes $ 1,126 $ 535 $ 988
Income Taxes 375 175 317
------------ ------------- ------------
Income from Continuing Operations 751 360 671
Income from Discontinued Operations,
Net of Taxes 119 62 106
------------ ------------- ------------
Net Income $ 870 $ 422 $ 777
============ ============= ============
Basic EPS:
Income from Continuing Operations $ 0.99 $ 0.47 $ 0.87
Income from Discontinued Operations, Net 0.15 0.08 0.14
Net Income 1.14 0.55 1.01
Diluted EPS:
Income from Continuing Operations 0.98 0.47 0.86
Income from Discontinued Operations, Net 0.15 0.08 0.14
Net Income 1.13 0.55 1.00
Cash Dividends Per Share 0.42 0.21 0.40
Return on Average Common
Shareholders' Equity 15.30% 14.75% 14.52%
Return on Average Assets 1.52 1.50 1.48
Efficiency Ratio 66.7 67.0 67.8
Assets $ 99,935 $ 94,851 $ 94,370
Loans 35,650 32,191 32,950
Securities 27,355 27,190 25,691
Deposits - Domestic 25,602 20,751 22,611
- Foreign 31,139 30,049 26,076
Long-Term Debt 8,207 8,309 7,586
Common Shareholders' Equity 10,056 10,101 9,471
Employees 20,109 19,989 19,506
Allowance for Loan Losses as
a Percent of Total Loans 0.95% 1.04% 1.41%
Allowance for Loan Losses as
a Percent of Non-Margin Loans 1.10 1.24 1.72
Total Allowance for Credit Losses as
a Percent of Total Loans 1.35 1.47 1.82
Total Allowance for Credit Losses as
a Percent of Non-Margin Loans 1.57 1.76 2.23
(1) Discontinued operations includes the Company's retail and regional middle market banking businesses expected to be sold
to JPMorgan Chase & Co. in the fourth quarter of 2006 in connection with the definitive agreement the Company entered into
with JPMorgan Chase & Co. on April 8, 2006.
3
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Financial Highlights - Supplemental Information
(Dollars in millions, except per share amounts)
(Unaudited)
June 30, March 31, June 30,
2006 2006 2005
Adjusted Results (1) ------------ ------------- ------------
--------------------
Quarter
-------
Net Interest Income $ 512 $ 488 $ 470
Noninterest Income 1,426 1,332 1,256
------------ ------------- ------------
1,938 1,820 1,726
Tax Equivalent Adjustment 9 7 7
------------ ------------- ------------
Revenue (tax equivalent basis) $ 1,947 $ 1,827 $ 1,733
============ ============= ============
Net Income $ 448 $ 422 $ 398
Basic EPS 0.59 0.55 0.52
Diluted EPS 0.59 0.55 0.52
Cash Dividends Per Share 0.21 0.21 0.20
Efficiency Ratio 64.9% 65.1% 65.7%
Year-to-date
------------
Net Interest Income $ 1,000 $ 488 $ 925
Noninterest Income 2,758 1,332 2,434
------------ ------------- ------------
3,758 1,820 3,359
Tax Equivalent Adjustment 15 7 14
------------ ------------- ------------
Revenue (tax equivalent basis) $ 3,773 $ 1,827 $ 3,373
============ ============= ============
Net Income $ 870 $ 422 $ 777
Basic EPS 1.14 0.55 1.01
Diluted EPS 1.13 0.55 1.00
Cash Dividends Per Share 0.42 0.21 0.40
Efficiency Ratio 65.0% 65.1% 65.9%
Assets $ 108,881 $ 103,611 $ 103,063
Loans 43,622 40,054 40,681
Securities 27,459 27,288 25,779
Deposits - Domestic 39,280 35,175 37,921
- Foreign 31,139 30,049 26,077
Long-Term Debt 8,207 8,309 7,586
Common Shareholders' Equity 10,056 10,101 9,471
Allowance for Loan Losses as
a Percent of Total Loans 0.96% 1.05% 1.38%
Allowance for Loan Losses as
a Percent of Non-Margin Loans 1.08 1.21 1.62
Total Allowance for Credit Losses as
a Percent of Total Loans 1.30 1.41 1.75
Total Allowance for Credit Losses as
a Percent of Non-Margin Loans 1.47 1.63 2.05
Employees 23,575 23,500 22,993
(1) Adjusted results combine continuing and discontinued operations to provide continuity with historical
results. See "Supplemental Financial Information."
4
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Financial Highlights
(Dollars in millions, except per share amounts)
(Unaudited)
June 30, March 31, June 30,
2006 2006 2005
------------ ------------- ------------
Assets Under Custody
--------------------
(In trillions) - Estimated
Assets Under Custody $ 12.0 $ 11.3 $ 10.3
Equity Securities 32% 33% 35%
Fixed Income Securities 68 67 65
Cross-Border Assets Under Custody $ 4.1 $ 3.7 $ 2.9
Assets Under Management
-----------------------
(In billions)- Estimated
Asset Management Sector $ 116 $ 113 $ 105
Equity Securities 36 37 36
Fixed Income Securities 21 21 22
Alternative Investments 28 26 15
Liquid Assets 31 29 32
Foreign Exchange Overlay 11 11 8
Securities Lending Short-term
Investment Funds 43 49 39
------------ ------------- ------------
Total Assets Under Management $ 170 $ 173 $ 152
============ ============= ============
Capital Ratios
--------------
Tier 1 Capital Ratio 7.96% 8.28% 8.07%
Total Capital Ratio 12.06 12.44 12.49
Leverage Ratio 6.22 6.51 6.55
Tangible Common Equity Ratio 5.07 5.42 5.26
Performance Ratios
------------------
Quarter
-------
Return on Average Common
Shareholders' Equity 18.17% 17.31% 17.12%
Return on Average Assets 1.63 1.61 1.59
Year-to-date
------------
Return on Average Common
Shareholders' Equity 17.74% 17.31% 16.82%
Return on Average Assets 1.62 1.61 1.57
Other Data
----------
Common Shareholders'
Equity Per Share $ 14.15 $ 13.09 $ 12.29
Market Value Per Share
of Common Stock 32.20 36.04 28.78
5
Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations ("MD&A")
------------------------------
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 that are discussed
below and under the heading "Forward-Looking Statements and Risk Factors That
Could Affect Future Results." When used in this report, the words "estimate,"
"forecast," "project," "anticipate," "expect," "intend," "believe," "plan,"
"goal," "should," "may," "strategy," "target," and words of similar meaning are
intended to identify forward-looking statements in addition to statements
specifically identified as forward-looking statements. In addition, certain
business terms used in this document are defined in the Company's 2005 Annual
Report on Form 10-K.
OVERVIEW
The Bank of New York Company, Inc. (NYSE: BK) is a global leader in
providing a comprehensive array of services that enable institutions and
individuals to move and manage their financial assets in more than 100 markets
worldwide. The Company has a long tradition of collaborating with clients to
deliver innovative solutions through its core competencies: securities
servicing, treasury management, private banking, and asset management. The
Company's extensive global client base includes a broad range of leading
financial institutions, corporations, government entities, endowments, and
foundations. Its principal subsidiary, The Bank of New York ("The Bank"),
founded in 1784, is the oldest bank in the United States and has consistently
played a prominent role in the evolution of financial markets worldwide.
The Company's strategy over the past decade has been to focus on highly
scalable, fee-based securities servicing and fiduciary businesses, and it has
achieved top three market share in most of its major product lines. The
Company distinguishes itself competitively by offering one of the industry's
broadest arrays of products and services around the investment lifecycle. These
include:
* advisory and asset management services to support the investment
decision;
* extensive trade execution, clearance and settlement capabilities;
* custody, securities lending, accounting, and administrative services for
investment portfolios;
* sophisticated risk and performance measurement tools for analyzing
portfolios; and
* services for issuers of both equity and debt securities.
By providing integrated solutions for clients' needs, the Company
strives to be the preferred partner in helping its clients succeed
in the world's rapidly evolving financial markets.
The Company's key objectives include:
* achieving positive operating leverage on an annual basis; and
* sustaining top-line growth by expanding client relationships
and winning new ones.
To achieve its key objectives, the Company has grown both through internal
reinvestment as well as execution of strategic acquisitions to expand product
offerings and increase market share in its scale businesses. Internal
reinvestment occurs through increased technology spending, staffing levels,
6
marketing/branding initiatives, quality programs, and product development. The
Company consistently invests in technology to improve the breadth and quality
of its product offerings, and to increase economies of scale. The Company has
acquired over 90 businesses over the past ten years, almost exclusively in its
securities servicing and asset management areas. The acquisition of Pershing
LLC ("Pershing") in 2003 for $2 billion was the largest of these acquisitions
completed to date. The acquisition of the corporate trust business of JPMorgan
Chase & Co. ("JPMorgan Chase"), announced in April 2006, and the formation of
BNY ConvergEx Group, announced in June 2006, should also contribute to the
Company's ability to achieve its key objectives.
As part of the transformation to a leading securities servicing provider,
the Company has also de-emphasized or exited several of its slower growth
traditional banking businesses over the past decade. The Company's more
significant actions include selling its credit card business in 1997 and its
factoring business in 1999, significantly reducing non-financial corporate
credit exposures by 41% from December 31, 2001 to December 31, 2005, and, most
recently, announcing an agreement to sell retail and regional middle market
banking businesses to JPMorgan Chase. To the extent these actions generated
capital, the capital has been reallocated to the Company's higher-growth
businesses or used to repurchase shares.
The Company's business model is well positioned to benefit from a number
of long-term secular trends. These include:
* growth of worldwide financial assets,
* globalization of investment activity,
* structural market changes, and
* increased outsourcing.
These trends benefit the Company by driving higher levels of financial
asset trading volume and other transactional activity, as well as higher asset
price levels and growth in client assets, all factors by which the Company
prices its services. In addition, international markets offer excellent growth
opportunities.
SECOND QUARTER 2006 HIGHLIGHTS
The Company reported one of its most successful quarters ever, not simply
in terms of the strength and quality of its financial results but also in terms
of the significant actions taken in sharpening its focus, strengthening its
business mix and improving the earnings potential of the franchise. The
Company is moving toward a "pure" trust and custody business model with the
JPMorgan Chase transaction. Subsequently, the Company has made its business
model even stronger and more focused by repositioning its execution services
business through the formation of BNY ConvergEx Group.
The Company was also successful in winning new business. This was
reflected in the Company's revenue growth, which was strong across all areas of
securities servicing, as well as in asset management and private banking - the
Company's primary areas of focus. This revenue growth drove strong performance
in other key operating measures, such as operating leverage, EPS growth, and
return on equity.
The Company reported second quarter net income of $448 million and diluted
earnings per share of 59 cents, compared with net income of $398 million and
diluted earnings per share of 52 cents in the second quarter of 2005, up 13%,
and net income of $422 million and diluted earnings per share of 55 cents in
the first quarter of 2006. Year-to-date net income was $870 million, or $1.13
of diluted earnings per share, compared to $777 million, or $1.00 of diluted
earnings per share in 2005.
On April 8, 2006, the Company entered into a definitive agreement with
JPMorgan Chase to acquire its corporate trust business, with JPMorgan Chase
7
acquiring the Company's retail and regional middle market banking businesses.
In the second quarter of 2006, the Company adopted discontinued operations
accounting for its retail and regional middle market banking business. The
results from continuing operations exclude its retail and regional middle
market banking business and do not include the operations of JPMorgan Chase's
corporate trust business expected to be acquired in the fourth quarter and
therefore are of limited value in projecting future results. Adjusted
financial statements combining continuing and discontinued operations are
presented in "Supplemental Financial Information."
Second quarter 2006 income from continuing operations increased to $391
million, or 52 cents of diluted earnings per share. This compares to income
from continuing operations of $343 million, or 45 cents of diluted earnings per
share in the second quarter of 2005, up 16%, and $360 million, or 47 cents of
diluted earnings per share in the first quarter of 2006. On a year-to-date
basis, income from continuing operations was $751 million, or 98 cents of
diluted earnings per share, compared to $671 million, or 86 cents of diluted
earnings per share in 2005, up 14%.
Performance highlights for the quarter include:
* Significant positive operating leverage over year ago and sequential
periods.
* Return on average common shareholders' equity of 18.2%.
* Securities servicing fees up 17% versus the year ago quarter. The growth
was led by strong performance in issuer services, broker-dealer services,
investor services, and execution and clearing services.
* Net interest income up 9% over last year's second quarter reflecting
growth in deposits, particularly from the Company's corporate trust
and custody businesses.
* Foreign exchange and other trading revenues up 29% from the year ago
quarter.
* Private banking and asset management revenues up 23% from the year ago
quarter, reflecting both acquisitions and growth at Ivy Asset
Management.
* Two major strategic transactions announced: the swap transaction with
JPMorgan Chase and the formation of BNY ConvergEx Group to better position
the Company's execution business for future growth.
8
SUPPLEMENTAL FINANCIAL INFORMATION
On April 8, 2006, the Company entered into a definitive agreement with
JPMorgan Chase to acquire its corporate trust business, with JPMorgan Chase
acquiring the Company's retail and regional middle market banking businesses.
The transaction further increases the Company's focus on the securities
services and asset management and private banking businesses that are at the
core of its long-term business strategy. The transaction has been approved by
each company's board of directors and is expected to be completed in the
fourth quarter of 2006, subject to regulatory approvals.
For the quarters and six months ended June 30, 2006 and 2005, the Company
has prepared supplemental financial information as follows:
* Full income statement and balance sheet for continuing operations, which
excludes the results of substantially all of Retail & Regional Middle
Market Banking Business
* Full income statement and balance sheet for the Retail & Regional Middle
Market Banking Business, which is reflected as discontinued operations
* Adjusted results, which combine the continuing and discontinued
operations to provide continuity with historical results
The Company believes that providing supplemental adjusted non-GAAP
financial information is useful to investors in understanding the underlying
operational performance of the Company and its businesses and performance
trends. Specifically, the Company believes that the results of continuing
operations are of limited value in projecting future results because they do
not include the net income associated with the acquisition of the JPMorgan
Chase corporate trust business, planned to close in the fourth quarter of
2006. By combining the results of continuing and discontinued operations and
comparing the results with prior periods, the Company believes investors can
obtain greater insight into the current performance of the Company in relation
to historical results. Although the Company believes that the non-GAAP
financial measures presented in this report enhance investors' understanding of
the Company's business and performance, these non-GAAP measures should not be
considered an alternative to GAAP. A reconciliation of the Company's adjusted
and GAAP financial results for the quarters and six-month periods ended June
30, 2006 and 2005 are included in "Supplemental Data".
Income statements for both continuing operations and for adjusted results
is provided on the following two pages. In addition, see "Consolidated
Financial Highlights - Supplemental Information" and "Supplemental Data."
9
THE BANK OF NEW YORK COMPANY, INC.
Income Statement - Supplemental Information
(In millions, except per share amounts)
(Unaudited)
Continuing Operations
---------------------------------------------------------------
Quarter Ended Six Months Ended
June 30, March 31, June 30, June 30,
2006 2006 2005 2006 2005
---------- ---------- --------- ---------- ---------
Net Interest Income $ 358 $ 339 $ 329 $ 697 $ 650
-------------------
Provision for Credit Losses (1) - (3) (1) (20)
----- ----- ----- ----- -----
Net Interest Income After
Provision for
Credit Losses 359 339 332 698 670
----- ----- ----- ----- -----
Noninterest Income
------------------
Servicing Fees
Securities 909 831 775 1,740 1,525
Global Payment Services 63 62 67 125 133
----- ----- ----- ----- -----
972 893 842 1,865 1,658
Private Banking and
Asset Management Fees 138 130 112 268 224
Service Charges and Fees 53 52 64 105 118
Foreign Exchange and Other
Trading Activities 130 113 101 243 193
Securities Gains 23 17 23 40 35
Other 50 56 52 106 82
----- ----- ----- ----- -----
Total Noninterest Income 1,366 1,261 1,194 2,627 2,310
----- ----- ----- ----- -----
Noninterest Expense
-------------------
Salaries and Employee Benefits 656 604 581 1,260 1,138
Net Occupancy 68 68 65 136 124
Furniture and Equipment 48 51 49 99 98
Clearing 53 50 42 103 88
Sub-custodian Expenses 36 34 24 70 47
Software 53 55 55 108 107
Communications 22 26 21 48 43
Amortization of Intangibles 15 13 10 28 18
Other 183 164 174 347 329
----- ----- ----- ----- -----
Total Noninterest Expense 1,134 1,065 1,021 2,199 1,992
----- ----- ----- ----- -----
Income Before Income Taxes 591 535 505 1,126 988
Income Taxes 200 175 162 375 317
----- ----- ----- ----- -----
Net Income $ 391 $ 360 $ 343 $ 751 $ 671
---------- ===== ===== ===== ===== =====
Diluted Earnings Per Share $0.52 $0.47 $0.45 $0.98 $0.86
Diluted earnings per share from continuing operations for the second
quarter of 2006 were 52 cents, up 16% from 45 cents a year ago. For the year-
to-date period, diluted earnings per share grew 14% to 98 cents from a year
ago.
10
THE BANK OF NEW YORK COMPANY, INC.
Income Statement - Supplemental Information
(In millions, except per share amounts)
(Unaudited)
Adjusted Income Statement (1)
------------------------------------------------------------------
Quarter Ended Six Months Ended
June 30, March 31, June 30, June 30,
2006 2006 2005 2006 2005
---------- ------------ -------- ---------- ---------
Net Interest Income $ 512 $ 488 $ 470 $1,000 $ 925
-------------------
Provision for Credit Losses - 5 5 5 (5)
----- ----- ----- ------ -----
Net Interest Income After
Provision for
Credit Losses 512 483 465 995 930
----- ----- ----- ------ -----
Noninterest Income
------------------
Servicing Fees
Securities 909 831 775 1,740 1,525
Global Payment Services 70 70 76 140 151
----- ----- ----- ------ -----
979 901 851 1,880 1,676
Private Banking and
Asset Management Fees 150 141 123 291 245
Service Charges and Fees 91 89 103 180 195
Foreign Exchange and Other
Trading Activities 132 115 103 247 199
Securities Gains 23 17 23 40 35
Other 51 69 53 120 84
----- ----- ----- ------ -----
Total Noninterest Income 1,426 1,332 1,256 2,758 2,434
----- ----- ----- ------ -----
Noninterest Expense
-------------------
Salaries and Employee Benefits 723 668 640 1,391 1,258
Net Occupancy 86 88 82 174 160
Furniture and Equipment 50 53 51 103 103
Clearing 53 50 42 103 88
Sub-custodian Expenses 36 34 24 70 47
Software 53 56 55 109 108
Communications 23 27 22 50 45
Amortization of Intangibles 15 13 10 28 18
Other 209 189 197 398 373
----- ----- ----- ------ -----
Total Noninterest Expense 1,248 1,178 1,123 2,426 2,200
----- ----- ----- ------ -----
Income Before Income Taxes 690 637 598 1,327 1,164
Income Taxes 242 215 200 457 387
----- ----- ----- ------ -----
Net Income $ 448 $ 422 $ 398 $ 870 $ 777
---------- ===== ===== ===== ====== =====
Diluted Earnings Per Share $0.59 $0.55 $0.52 $ 1.13 $1.00
(1) Adjusted results combine continuing and discontinued operations to provide
continuity with historical results.
Diluted earnings per share from adjusted results for the second quarter of
2006 were 59 cents, up 13% from 52 cents a year ago. For the year-to-date
period, diluted earnings per share grew 13% to $1.13 from a year ago.
11
CONSOLIDATED INCOME STATEMENT REVIEW
Noninterest Income
------------------
Continuing Operations
---------------------
Percent Inc/(Dec)
----------------- Year-to-date Percent
2Q06 vs. 2Q06 vs. -------------- Inc/
(In millions) 2Q06 1Q06 2Q05 1Q06 2Q05 2006 2005 (Dec)
------ ------ ------ -------- ------- ------ ------ -------
Servicing Fees
Securities $ 909 $ 831 $ 775 9% 17% $1,740 $1,525 14%
Global Payment
Services 63 62 67 2 (6) 125 133 (6)
------ ------ ------ ------ ------
972 893 842 9 15 1,865 1,658 12
Private Banking
and Asset
Management Fees 138 130 112 6 23 268 224 20
Service Charges
and Fees 53 52 64 2 (17) 105 118 (11)
Foreign Exchange and
Other Trading Activities 130 113 101 15 29 243 193 26
Securities Gains 23 17 23 35 - 40 35 14
Other 50 56 52 (11) (4) 106 82 29
------ ------ ------ ------ ------
Total Noninterest
Income $1,366 $1,261 $1,194 8 14 $2,627 $2,310 14
====== ====== ====== ====== ======
Adjusted
--------
Percent Inc/(Dec)
----------------- Year-to-date Percent
2Q06 vs. 2Q06 vs. -------------- Inc/
(In millions) 2Q06 1Q06 2Q05 1Q06 2Q05 2006 2005 (Dec)
------ ------ ------ -------- ------- ------ ------ -------
Servicing Fees
Securities $ 909 $ 831 $ 775 9% 17% $1,740 $1,525 14%
Global Payment
Services 70 70 76 - (8) 140 151 (7)
------ ------ ------ ------ ------
979 901 851 9 15 1,880 1,676 12
Private Banking
and Asset
Management Fees 150 141 123 6 22 291 245 19
Service Charges
and Fees 91 89 103 2 (12) 180 195 (8)
Foreign Exchange and
Other Trading Activities 132 115 103 15 28 247 199 24
Securities Gains 23 17 23 35 - 40 35 14
Other 51 69 53 (26) (4) 120 84 43
------ ------ ------ ------ ------
Total Noninterest
Income $1,426 $1,332 $1,256 7 14 $2,758 $2,434 13
====== ====== ====== ====== ======
Unless otherwise indicated, the discussion below refers to noninterest
income on both a continuing operations basis and on an adjusted basis.
The increase in noninterest income versus the second quarter of 2005 and
the prior quarter reflects positive revenue trends in securities servicing,
foreign exchange and other trading, and private banking and asset management.
The increase on a year-to-date basis in noninterest income primarily reflects
increases in securities servicing, foreign exchange and other trading, private
banking and asset management, securities gains, and other income.
12
The following table provides the breakdown of securities servicing fees.
Percent Inc/(Dec)
----------------- Year-to-date Percent
2Q06 vs. 2Q06 vs. -------------- Inc/
(In millions) 2Q06 1Q06 2Q05 1Q06 2Q05 2006 2005 (Dec)
------ ------ ------ -------- -------- ------ ------ -------
>
Execution and
Clearing Services $ 334 $ 339 $ 294 (1)% 14% $ 673 $ 587 15%
Issuer Services 207 154 159 34 30 361 298 21
Investor Services 302 277 265 9 14 579 528 10
Broker-Dealer Services 66 61 57 8 16 127 112 13
------ ------ ------ ------- -------
Securities
Servicing Fees $ 909 $ 831 $ 775 9 17 $1,740 $1,525 14
====== ====== ====== ======= =======
Double-digit securities servicing fee growth over the second quarter and
year-to-date periods of 2005 reflects strong performance in all securities
servicing businesses. On a sequential-quarter basis, fees were up
significantly, reflecting seasonally strong issuer services and good growth in
broker-dealer services and investor services. See "Institutional Services
Segment" in "Business Segment Review" for additional details.
On a continuing operations basis, global payment services fees decreased
from the second quarter and year-to-date periods of 2005 but increased slightly
on a sequential-quarter basis. The decline from last year reflects customers
paying with higher compensating balances in lieu of fees. The sequential
quarter increase primarily reflects growth from U.S. financial institutions. On
an invoiced services basis, total revenue was up 6% over the second quarter of
2005 and 5% on a sequential-quarter basis. Performance trends on an adjusted
basis were relatively consistent with the continuing operations basis.
Private banking and asset management fees increased significantly from the
second quarter and year-to-date periods of 2005 primarily due to acquisitions
and higher fees in private banking. On a sequential-quarter basis, growth is
attributable to higher fees at Ivy Asset Management and Alcentra as well as the
full quarter impact of the Urdang acquisition, which closed on March 2, 2006.
Total assets under management for private banking and asset management were
$116 billion, up from $105 billion at June 30, 2005 and $113 billion at March
31, 2006.
Service charges and fees were down from the second quarter and year-to-
date periods of 2005 reflecting lower capital markets activity. On a
sequential-quarter basis, service charges and fees were up reflecting higher
underwriting fees.
Foreign exchange and other trading revenues were up significantly from the
second quarter and year-to-date periods of 2005. Foreign exchange was up from
the 2005 periods and sequentially due to higher customer volumes driven by
cross-border investment flows, good new business activity, and increased
volatility. Other trading was up from the 2005 periods and sequentially
primarily due to stronger results in equity and interest rate derivatives, and
in fixed income trading.
Securities gains in the second quarter were flat with the year-ago quarter
and up significantly on a sequential-quarter basis. The gains in the quarter
were primarily attributable to exceptionally strong returns on investments in
the sponsor fund portfolio. Securities gains were up in the first six months
of 2006 versus a year ago reflecting favorable market conditions and liquidity
in the private equity markets.
Other noninterest income is attributable to asset-related gains, equity
investments, and other transactions. Asset-related gains include gains on
lease residuals, as well as loan and real estate dispositions. Equity
13
investment income primarily reflects the Company's proportionate share of the
income from its investment in Wing Hang Bank Limited, AIB/BNY Securities
Services (Ireland) Limited, and RBSI Securities Services (Holdings) Limited.
Other income primarily includes income or loss from insurance contracts, low
income housing and other investments as well as various miscellaneous revenues.
The breakdown among these three categories is shown below:
Other Noninterest Income
Year-to-date
------------
(In millions) 2Q06 1Q06 2Q05 2006 2005
------------------------------- ------- ------- ------- ---- ----
Asset-Related Gains $ 18 $ 34 $ 35 $ 52 $ 49
Equity Investment Income 14 11 10 25 22
Other 18 11 7 29 11
Other Noninterest Income from ------ ------- ------- ----- -----
Continuing Operations 50 56 52 106 82
Other Noninterest Income from
Discontinued Operations 1 13 1 14 2
------- ------- ------- ----- -----
Adjusted Other Noninterest Income $ 51 $ 69 $ 53 $ 120 $ 84
======= ======= ======= ===== =====
Other noninterest income on an adjusted basis decreased slightly versus
the second quarter of 2005 and was down significantly from the first quarter of
2006. The first quarter of 2006 includes a pre-tax gain of $31 million related
to the conversion of the Company's New York Stock Exchange ("NYSE") seats into
cash and shares of NYSE Group, Inc. common stock. The year-to-date period of
2005 includes a $17 million gain on the sale of the Company's interest in
Financial Models Company, Inc.
14
Net Interest Income
-------------------
Continuing Operations
---------------------
Percent Inc/(Dec) Year-to-date
----------------- ------------ Percent
(Dollars in millions) 2Q06 vs. 2Q06 vs. 2006 2005 Inc/
2Q06 1Q06 2Q05 1Q06 2Q05 (Dec)
---- ---- ---- ------- ------- ------ ------ -------
Net Interest Income $ 358 $339 $329 6% 9% $ 697 $ 650 7%
Tax Equivalent
Adjustment(1) 7 7 6 14 13
---- ---- ---- ------ ------
Net Interest Income
on a Tax Equivalent
Basis $ 365 $346 $335 5 9 $ 711 $ 663 7
==== ==== ==== ====== ======
Net Interest Rate
Spread 1.29% 1.37% 1.54% 1.33% 1.60%
Net Yield on Interest
Earning Assets 1.95 1.95 2.01 1.95 2.03
Adjusted
--------
Percent Inc/(Dec) Year-to-date
----------------- ------------ Percent
(Dollars in millions) 2Q06 vs. 2Q06 vs. 2006 2005 Inc/
2Q06 1Q06 2Q05 1Q06 2Q05 (Dec)
---- ---- ---- ------- ------- ------ ------ -------
Net Interest Income $512 $488 $470 5% 9% $1,000 $ 925 8%
Tax Equivalent
Adjustment(1) 9 7 7 15 14
---- ---- ---- ------ ------
Net Interest Income
on a Tax Equivalent
Basis $521 $495 $477 5 9 $1,015 $ 939 8
==== ==== ==== ====== ======
Net Interest Rate
Spread 1.65% 1.73% 1.86% 1.70% 1.90%
Net Yield on Interest
Earning Assets 2.36 2.35 2.34 2.35 2.35
(1) A number of amounts related to net interest income are presented on a "tax equivalent basis"
for better comparability. To calculate the tax equivalent revenues and profit or loss, the Company
adjusts tax-exempt revenues and the income or loss from such tax-exempt revenues to show these
items as if they were taxable, applying an assumed tax rate of 35 percent. The Company believes
that this presentation provides comparability of net interest income arising from both taxable and
tax-exempt sources and is consistent with industry standards.
Net interest income on a continuing operations basis and on an adjusted
basis increased from the year ago quarter reflecting higher interest earning
assets and the higher value of interest-free balances in a rising rate
environment. Average earning assets increased to $75.3 billion in the second
quarter of 2006 from $66.7 billion in last year's second quarter. Net interest
income increased on a sequential-quarter basis reflecting an increase in
interest earning assets due to higher foreign deposits, principally in the
Company's corporate trust and custody businesses, one additional day in the
quarter, and a $6 million impact of a cumulative adjustment in the Company's
reserve position with the Federal Reserve in the first quarter of 2006. On a
year-to-date basis, net interest income increased reflecting the same factors
impacting the quarterly results.
On a continuing operations basis, the net interest income rate spread was
1.29% in the second quarter of 2006, compared with 1.54% in the second quarter
of 2005 and 1.37% in the first quarter of 2006. The net yield on interest
earning assets was 1.95% in the second quarter of 2006, compared with 2.01% in
the second quarter of 2005 and 1.95% in the first quarter of 2006.
On a continuing operations basis, the year-to-date net interest income
spread was 1.33% in 2006 compared with 1.60% in 2005, while the net yield on
interest earning assets was 1.95% in 2006 and 2.03% in 2005.
15
Noninterest Expense and Income Taxes
------------------------------------
Continuing Operations
---------------------
Percent Inc/(Dec)
----------------- Year-to-date Percent
2Q06 vs. 2Q06 vs. -------------- Inc/
(Dollars in millions) 2Q06 1Q06 2Q05 1Q06 2Q05 2006 2005 (Dec)
------ ------ ------ -------- -------- ------ ------ -------
Salaries and
Employee Benefits $ 656 $ 604 $ 581 9% 13% $1,260 $1,138 11%
Net Occupancy 68 68 65 - 5 136 124 10
Furniture and Equipment 48 51 49 (6) (2) 99 98 1
Clearing 53 50 42 6 26 103 88 17
Sub-custodian Expenses 36 34 24 6 50 70 47 49
Software 53 55 55 (4) (4) 108 107 1
Communications 22 26 21 (15) 5 48 43 12
Amortization
of Intangibles 15 13 10 15 50 28 18 56
Other 183 164 174 12 5 347 329 5
------ ------ ------ ------ ------
Total Noninterest
Expense $1,134 $1,065 $1,021 6 11 $2,199 $1,992 10
====== ====== ====== ====== ======
Adjusted
--------
Percent Inc/(Dec)
----------------- Year-to-date Percent
2Q06 vs. 2Q06 vs. -------------- Inc/
(Dollars in millions) 2Q06 1Q06 2Q05 1Q06 2Q05 2006 2005 (Dec)
------ ------ ------ -------- -------- ------ ------ -------
Salaries and
Employee Benefits $ 723 $ 668 $ 640 8% 13% $1,391 $1,258 11%
Net Occupancy 86 88 82 (2) 5 174 160 9
Furniture and Equipment 50 53 51 (6) (2) 103 103 -
Clearing 53 50 42 6 26 103 88 17
Sub-custodian Expenses 36 34 24 6 50 70 47 49
Software 53 56 55 (5) (4) 109 108 1
Communications 23 27 22 (15) 5 50 45 11
Amortization
of Intangibles 15 13 10 15 50 28 18 56
Other 209 189 197 11 6 398 373 7
------ ------ ------ ------ ------
Total Noninterest
Expense $1,248 $1,178 $1,123 6 11 $2,426 $2,200 10
====== ====== ====== ====== ======
Unless otherwise indicated, the discussion below refers to noninterest
expense on both a continuing operations basis and on an adjusted basis.
Noninterest expense was up compared with the second quarter of 2005 and
the first quarter of 2006. The increase versus the year-ago quarter reflects
increased staffing costs associated with new business and acquisitions, and
higher incentive compensation as well as higher pension expenses.
Relative to the year-ago periods and sequentially, salaries and benefits
rose as a result of: a charge of $12 million associated with the implementation
of SFAS 123(R) related to the retirement provisions of equity compensation
programs; higher incentive compensation related to revenue growth;
acquisitions; and increased severance, temporary help, and medical costs.
Pension expense was also higher on a year-over-year basis. Severance expense
in the second quarter of 2006 included $5 million related to the businesses
being sold as part of the transaction with JPMorgan Chase.
Clearing and sub-custodian expenses were higher year-over-year and on a
sequential-quarter basis reflecting increased transaction volumes.
16
Other noninterest expense is attributable to vendor services, business
development, legal expenses, settlements and claims, and other. Vendor services
include professional fees, computer services, market data, courier, and other
services. Business development includes advertising, charitable contributions,
travel, and entertainment expenses. The breakdown among these four categories
is shown below:
Other Noninterest Expense
Year-to-date
------------
(In millions) 2Q06 1Q06 2Q05 2006 2005
------------------------------- ------- ------- ----- ---- ----
Vendor Services $ 88 $ 71 $ 75 $159 $145
Business Development 28 23 24 51 44
Legal Fees, Settlements and Claims 13 22 30 35 49
Other 54 48 45 102 91
Other Noninterest Expense from ------ ------- ----- ---- ----
Continuing Operations 183 164 174 347 329
Other Noninterest Expense from
Discontinued Operations 26 25 23 51 44
------- ------- ----- ---- ----
Adjusted Other Noninterest Expense $ 209 $ 189 $ 197 $398 $373
======= ======= ===== ==== ====
Other expenses were higher compared with the second quarter and year-to-
date periods of 2005 reflecting higher costs for advertising, travel and
entertainment, and employment agency fees, as well as vendor services related
expenses associated with business growth. On a sequential-quarter basis, the
increase in vendor services was due to higher Depository Trust Company and
consulting expenses. The sequential increase in business development primarily
reflects seasonally higher travel and entertainment expenses. The decline in
legal fees, settlements and claims reflects the settlement of certain
regulatory matters over the past year.
The effective tax rate for the second quarter of 2006 on a continuing
operations basis was 33.8%, compared to 32.1% in the second quarter of 2005 and
32.7% in the first quarter of 2006. The effective tax rate for the six-month
period ended June 30, 2006 was 33.3% compared with 32.1% for the six-month
period ended June 30, 2005. The effective tax rate for the second quarter of
2006 on an adjusted basis was 35.1%, compared to 33.4% in the second quarter of
2005 and 33.8% in the first quarter of 2006. The effective tax rate for the
six-month period ended June 30, 2006 was 34.4% compared with 33.2% for the six-
month period ended June 30, 2005. The increases on a year-over-year basis
primarily reflect lower expected Section 29 tax credits related to synthetic
fuels. The sequential quarter increase also reflects a non-recurring $5
million negative impact from the loss of foreign sales corporation benefits on
certain leveraged leases as a result of recent legislation.
The Company's effective tax rate in the future is expected to be impacted
by the price of oil, which determines the amount of synthetic fuel tax credits
it will receive.
17
At June 30, 2006, the Company assumed a $72 average price per barrel
after June 30, 2006 to estimate the 2006 benefit from synthetic fuel credits.
To the extent the average oil price differs from this assumption, the table
below shows the effect on earnings per share ("EPS") for 2006.
Avg. Price
Per Barrel
June 30, 2006 - Phase- Net EPS
December 31, 2006 out % Benefit Effect
----------------- -------- --------- --------
$ 66 34.01% $ 33.1 $ 0.01
69 44.88 27.7 0.01
***************************************************
* 72 55.00 22.6 - * (1)
***************************************************
75 66.61 16.8 (0.01)
78 77.48 11.3 (0.02)
(1) June 30, 2006 assumption used to compute effective tax rate.
Credit Loss Provision and Net Charge-Offs
-----------------------------------------
Year-to-date
-----------------
(In millions) 2Q06 1Q06 2Q05 2006 2005
------- ------- ------- ------- -------
Provision
Continuing Operations $ (1) $ - $ (3) $ (1) $ (20)
Discontinued Operations 1 5 8 6 15
------- ------- ------- ------- -------
Adjusted Total Provision $ - $ 5 $ 5 $ 5 $ (5)
======= ======= ======= ======= =======
Net (Charge-offs)/Recoveries:
Commercial $ 2 $ 1 $ (2) $ 3 $ (2)
Foreign 4 2 (4) 6 (4)
Other 1 - - 1 -
------- ------- ------- ------- -------
Total Continuing Operations 7 3 (6) 10 (6)
------- ------- ------- ------- -------
Discontinued Operations (6) (7) (5) (13) (15)
------- ------- ------- ------- -------
Adjusted Total
Net (Charge-offs)/Recoveries $ 1 $ (4) $ (11) $ (3) $ (21)
======= ======= ======= ======= =======
The sequential increase in the credit to the provision for continuing
operations reflects a continued strong credit environment. During the second
quarter of 2006, nonperforming loans on a continuing operations basis declined
and credit loss recoveries increased.
18
BUSINESS SEGMENT REVIEW
Segment Data
The Company has an internal information system that produces performance
data for its three 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 when organizational changes are made.
In 2005, the Company determined that it was appropriate to modify its
segment presentation in order to provide more transparency into its results of
operations and to better reflect modifications in the management structure that
the Company implemented during the fourth quarter of 2005. All prior periods
have been restated to reflect this realignment.
On April 8, 2006, the Company entered into a definitive agreement to sell
to JPMorgan Chase substantially all of the assets of the Company's retail and
regional middle market banking businesses. The business segment information is
reported on a continuing operations basis for all periods presented, but do not
include the operations of the JPMorgan Chase corporate trust business, which is
expected to be acquired in the fourth quarter. As a result, information related
to the Company's retail and regional middle market banking businesses is no
longer included in the segment data. See "Discontinued Operations" in the Notes
to the Consolidated Financial Statements for a discussion of discontinued
operations. The Company currently reports results for three segments, with the
Institutional Services Segment being further subdivided into four business
groupings. These segments are shown below:
* Institutional Services Segment
o Investor & Broker-Dealer Services Business
o Execution & Clearing Services Business
o Issuer Services Business
o Treasury Services Business
* Private Bank & BNY Asset Management Segment
* Corporate and Other Segment
Other specific segment accounting principles employed include:
* The measure of revenues and profit or loss by a segment has been adjusted
to present segment data on a tax equivalent basis.
* The provision for credit losses allocated to each 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 credit portfolio. This method is different from that required under
generally accepted accounting principles as it anticipates future losses
which are not yet probable and therefore not recognizable under generally
accepted accounting principles.
* Balance sheet assets and liabilities and their related income or expense
are specifically assigned to each segment.
* Net interest income is allocated to segments based on the yields on the
assets and liabilities generated by each segment. Assets and liabilities
generated by credit-related activities are allocated to businesses based
on borrower usage of those businesses' products or services. Credit-only
relationships and borrowers using both credit and payment services remain
in Treasury Services Business. Segments with a net liability position
are allocated assets primarily from the securities portfolio.
19
* Revenues and expenses associated with specific client bases are included
in those segments. For example, foreign exchange activity associated
with clients using custody products is allocated to Investor & Broker-
Dealer Services Business (which includes the Company's custody
operations.)
* Noninterest income associated with Treasury-related services (global
payment services for corporate customers, as well as lending and credit-
related services) is similarly allocated back to the other Institutional
Services businesses.
* Support and other indirect expenses are allocated to segments based on
internally-developed methodologies.
20
DESCRIPTION OF BUSINESS SEGMENTS
The activities within each business segment are described below.
Institutional Services Segment
------------------------------
Investor & Broker-Dealer Services Business
------------------------------------------
Investor & Broker-Dealer Services includes global custody, global fund
services, securities lending, global liquidity services, outsourcing,
government securities clearance, collateral management, credit-related
services, and other linked revenues, principally foreign exchange and execution
and clearing revenues.
In Investor Services, the Company is one of the leading custodians with
$12.0 trillion of assets under custody at June 30, 2006. The Company is one of
the largest mutual fund custodians for U.S. funds and one of the largest
providers of fund services in the world with over $1.7 trillion in total
assets. The Company also services more than 16% of the total industry assets
for exchange-traded funds, and is a leading U.K. custodian. In securities
lending, the Company is the largest lender of U.S. Treasury securities and
depositary receipts with a lending pool of approximately $1.7 trillion in 27
markets around the world.
The Company's Broker-Dealer Services business clears approximately 50% of
transactions in U.S. Government securities. The Company is a leader in global
clearance, clearing equity and fixed income transactions in 101 markets. With
over $1.2 trillion in tri-party balances worldwide, the Company is the world's
largest collateral management agent.
Execution & Clearing Services Business
--------------------------------------
The Company provides execution, clearing and financial services
outsourcing solutions in over 80 global markets, executing trades for 691
million shares and clearing one million trades daily. In Execution Services,
the Company provides broker-assisted and electronic trading services,
transition management, and independent research services. The Company's
Execution Services business is one of the largest global institutional agency
brokerage organizations. In addition, it is one of the leading institutional
electronic brokers for non-U.S. dollar equity execution. The Company announced
on June 30, 2006 that it agreed to join forces with Eze Castle Software and
GTCR Golder Ruaner, LLC, a private equity firm, to form a new company called
BNY ConvergEx Group. BNY ConvergEx Group will bring together BNY Securities
Group's trade execution, commission management, independent research and
transition management business with Eze Castle Software, a leading provider
of trade order management and related investment technologies.
The Company's Pershing subsidiary provides clearing, execution, financing,
and custody for introducing broker-dealers and registered investment advisors.
Pershing services more than 1,100 retail and institutional financial
organizations and independent investment advisors who collectively represent
nearly six million individual investors.
Issuer Services Business
------------------------
Issuer Services includes corporate trust, depositary receipts, employee
investment plan services, stock transfer, and credit-related services.
In Issuer Services, the Company is depositary for more than 1,255 American
and global depositary receipt programs, with a 64% market share, servicing
leading companies from 61 countries. As a trustee, the Company provides
diverse services for corporate, municipal, structured, and international debt
securities. Over 90,000 appointments for more than 30,000 worldwide clients
have resulted in the Company being trustee for more than $3 trillion in
outstanding debt securities. The Company is the third largest stock transfer
agent in the United States, servicing more than 17 million shareowners.
21
Employee Investment Plan Services has more than 124 clients with 650,000
employees in over 54 countries.
Treasury Services Business
--------------------------
Treasury Services includes global payment services for corporate customers
as well as lending and credit-related services.
Corporate Global Payment Services offers leading-edge technology,
innovative products, and industry expertise to help its clients optimize cash
flow, manage liquidity, and make payments around the world in more than 90
different countries. The Company maintains a global network of branches,
representative offices and correspondent banks to provide comprehensive payment
services including funds transfer, cash management, trade services and
liquidity management. The Company is one of the largest funds transfer banks
in the U.S. transferring over $1.18 trillion daily via more than 150,000 wire
transfers.
The Company provides lending and credit-related services to large public
and private corporations nationwide. Special industry groups focus on industry
segments such as media, telecommunications, cable, energy, real estate,
retailing, and healthcare. Credit-related revenues are allocated to businesses
other than Treasury Services to the extent the borrower uses that businesses'
products or services. Credit-only relationships and borrowers using both
credit and payment services remain in Treasury Services. Through BNY Capital
Markets, Inc., the Company provides a broad range of capital markets and
investment banking services including syndicated loans, bond underwriting,
private placements of corporate debt and equity securities, and merger,
acquisition, and advisory services. The Company is an active arranger or agent
of syndicated financings for clients in the U.S., having completed 56
transactions totaling in excess of $43 billion during the first half of 2006.
For its credit services business overall, the Company's corporate lending
strategy is to focus on those clients and industries that are major users of
securities servicing and global payment services.
Private Bank & BNY Asset Management Segment
-------------------------------------------
The Private Bank & BNY Asset Management Segment includes traditional
banking and trust services for wealthy clients and investment management
services for institutional and high-net-worth clients. In private banking, the
Company offers a full array of wealth management services to help individuals
plan, invest, and arrange intergenerational wealth transition, which includes
financial and estate planning, trust and fiduciary services, customized banking
services, brokerage and investment solutions.
BNY Asset Management provides investment solutions for some of the
wealthiest individuals, largest corporations and most prestigious organizations
around the world applying a broad spectrum of investment strategies and wealth
management solutions. BNY Asset Management's alternative strategies have
expanded to include funds of hedge funds, private equity, alternative fixed
income, and real estate.
The Company's asset management subsidiaries include:
* Ivy Asset Management Corporation, one of the country's leading fund of
hedge funds firms, offers a comprehensive range of multi-manager hedge
fund products and customized portfolio solutions.
* Alcentra offers sophisticated alternative credit investments, including
leveraged loans and subordinated and distressed debt.
22
* Urdang, a real estate investment firm, offers the opportunity to invest
in real estate through separate accounts, a closed-end commingled fund
that invests directly in properties, and a separate account that invests
in publicly-traded REITs.
* Estabrook Capital Management LLC offers value-oriented investment
management strategies, including socially responsible investing.
* Gannett Welsh & Kotler specializes in tax-exempt securities management
and equity portfolio strategies.
The Company also provides investment management services directly to
institutions and manages the "Hamilton" family of mutual funds.
Corporate and Other Segment
---------------------------
The Corporate and Other Segment primarily includes the Company's leasing
operations and corporate overhead. Net interest income in this segment
primarily reflects the funding cost of goodwill and intangibles. The tax
equivalent adjustment on net interest income is eliminated in this segment.
Provision for credit losses reflects the difference between the aggregate of
the credit provision over a credit cycle for the other two reportable segments
and the Company's recorded provision. The Company's approach to acquisitions is
highly centralized and controlled by senior management. Accordingly, the
resulting goodwill and other intangible assets are included in this segment's
assets. Noninterest expense includes the related amortization. Noninterest
income primarily reflects leasing, securities gains, and income from the sale
of other corporate assets. Noninterest expenses include direct expenses
supporting the leasing activities as well as certain corporate overhead not
directly attributable to the operations of the other segments.
In addition, this segment includes the difference between amounts
previously reported in the Company's Retail and Middle Market Banking Segment
and the discontinued operations of the Company's retail and regional middle
market banking business, which is being sold to JPMorgan Chase.
23
Segment Analysis
Institutional Services Segment
------------------------------
Inc/(Dec)
----------------- Year-to-date
2Q06 vs. 2Q06 vs. ---------------- Inc/
(In millions) 2Q06 1Q06 2Q05 1Q06 2Q05 2006 2005 (Dec)
------- ------- ------- -------- -------- ------- ------- -------
Net Interest Income $ 337 $ 315 $ 292 $ 22 $ 45 $ 652 $ 572 $ 80
Noninterest Income 1,196 1,122 1,045 74 151 2,318 2,046 272
Total Revenue 1,533 1,437 1,337 96 196 2,970 2,618 352
Provision for
Credit Losses 16 16 16 - - 32 32 -
Noninterest Expense 947 906 856 41 91 1,853 1,689 164
Income Before Taxes 570 515 465 55 105 1,085 897 188
Average Assets 82,666 79,032 74,792 3,634 7,874 80,859 74,314 6,545
Average Deposits 51,680 49,608 44,271 2,072 7,409 50,651 43,791 6,860
The Company's Institutional Services business is conducted in four
business groupings: Investor & Broker-Dealer Services, Execution & Clearing
Services, Issuer Services, and Treasury Services. Income before taxes was up
23% to $570 million for the second quarter of 2006 from $465 million in the
second quarter of 2005, and up 11% from $515 million in the first quarter of
2006. For the first six months of 2006, income before taxes was up 21% to
$1,085 million compared with 2005.
Equity volumes and values were up modestly during the most recent quarter
compared with the second quarter of 2005, and cross-border activity levels were
strong. As a result, the Company's equity-linked businesses performed well.
The depositary receipts businesses had its best quarter ever powered by cross-
border activity and seasonally strong dividend payments. After excluding the
previously disclosed loss of a significant customer, Pershing had good revenue
growth and the execution business benefited from high levels of international
activity. The Company's global custody and global fund services businesses
also had a robust quarter. The fixed income markets were stable, and as a
result, the Company's securities lending, broker-dealer services and corporate
trust businesses all improved on a year-over-year basis. Other areas
demonstrating strong growth include foreign exchange and alternative investment
servicing.
Market Data
-----------
Percent Inc/(Dec)
----------------- Year-to-date Percent
2Q06 vs. 2Q06 vs. ---------------- Inc/
2Q06 1Q06 2Q05 1Q06 2Q05 2006 2005 (Dec)
----- ---- ---- ----------------- ---------------- ------
S&P 500 (registered
trademark) Index (1) 1,270 1,295 1,191 (2)% 7% 1,270 1,191 7%
NASDAQ (registered
trademark)
Composite Index (1) 2,172 2,340 2,057 (7) 6 2,172 2,057 6
Lehman Brothers
Aggregate Bond
(service mark)
Index (1) 213.2 205.9 212.4 4 - 213.2 212.4 -
MSCI (registered
trademark) EAFE
Index (1) 1,822.9 1,827.7 1,473.7 - 24 1,822.9 1,473.7 24
NYSE Volume
(In billions) 121.6 113.7 103.0 7 18 235.3 204.0 15
NASDAQ (registered
trademark) Volume
(In billions) 134.2 130.7 112.5 3 19 264.9 233.7 13
(1) Period End
The S&P 500 (registered trademark) Index was down 2% sequentially for
the quarter, with average daily price levels essentially flat compared with
the first quarter of 2006. Performance for the NASDAQ (registered trademark)
Composite Index was down 7% sequentially for the second quarter of 2006, with
average daily prices down by 2% from the first quarter of 2006. The S&P 500
(registered trademark) Index and the NASDAQ (registered trademark) Composite
Index were up 7% and 6% respectively over the second quarter of 2005.
Globally, the MSCI (registered trademark) EAFE index was flat sequentially
but up 24% over the second quarter of 2005. On a sequential-quarter basis,
24
combined NYSE and NASDAQ (registered trademark) non-program trading volumes
were down an estimated 2%. Average fixed-income trading volume was down 3%
sequentially.
As of June 30, 2006, assets under custody rose to $12.0 trillion, from
$10.3 trillion at June 30, 2005 and $11.3 trillion at March 31, 2006. The
increase in assets under custody relative to June 30, 2005 primarily reflects
rising equity prices and new business wins. Equity securities comprised 32% of
the assets under custody at June 30, 2006 compared with 33% at March 31, 2006,
while fixed income securities were 68% compared with 67% at March 31, 2006.
Assets under custody in the second quarter of 2006 consisted of assets related
to the custody and mutual funds businesses of $7.6 trillion, broker-dealer
services assets of $2.4 trillion, and all other assets of $2.0 trillion.
The results for the businesses in the Institutional Services Segment are
discussed below.
Investor & Broker-Dealer Services Business
------------------------------------------
Inc/(Dec)
----------------- Year-to-date
2Q06 vs. 2Q06 vs. ---------------- Inc/
(In millions) 2Q06 1Q06 2Q05 1Q06 2Q05 2006 2005 (Dec)
------- ------- ------- -------- -------- ------- ------- -------
Net Interest Income $ 155 $ 149 $ 138 $ 6 $ 17 $ 304 $ 277 $ 27
Noninterest Income 524 490 461 34 63 1,014 902 112
Total Revenue 679 639 599 40 80 1,318 1,179 139
Provision for
Credit Losses 3 3 2 - 1 6 4 2
Noninterest Expense 458 438 410 20 48 896 803 93
Income Before Taxes 218 198 187 20 31 416 372 44
Average Assets 39,839 38,163 36,446 1,676 3,393 39,006 36,411 2,595
Average Deposits 32,907 31,844 27,072 1,063 5,835 32,379 27,515 4,864
Nonperforming Assets 3 4 15 (1) (12) 3 15 (12)
Net Charge-offs - 1 - (1) - 1 - 1
In the second quarter of 2006, income before taxes in the Investor &
Broker-Dealer Services business increased to $218 million from $187 million in
the second quarter of 2005 and $198 million in the first quarter of 2006. For
the first six months of 2006, income before taxes was $416 million compared
with $372 million in 2005. The year-over-year and sequential quarter increases
reflect improvements in both net interest income and noninterest income.
Noninterest income was $524 million in the second quarter of 2006,
compared with $461 million in the second quarter of 2005 and $490 million in
the first quarter of 2006. The increase in noninterest income in the second
quarter of 2006 relative to both time periods is attributable to an increase in
both investor and broker-dealer service fees as well as foreign exchange and
other trading revenue generated by clients in this segment. On a year-to-date
basis, noninterest income increased to $1,014 million from $902 million,
reflecting the same factors impacting the quarterly results.
Investor services fees increased from the year-ago quarter because of
higher volumes within securities lending and higher custody fees, reflecting
improvements in cross-border transaction volumes and market price levels as
well as new business. Sequential performance reflects improved securities
lending fees, and higher global fund services and custody fees. On a year-to-
date basis, investor services fees increased compared with 2005, reflecting the
same factors driving the year-over-year quarterly increase.
Broker-dealer services fees improved versus the year-ago and sequential
periods as a result of strong performance in domestic and global collateral
management fees, an increase in transaction volumes and good net new business
flows. The Company now handles approximately $1.2 trillion of financing for
the Company's broker-dealer clients daily through collaterized financing
agreements, up approximately 17% from a year ago.
25
Net interest income in the Investor & Broker-Dealer Services business was
$155 million in the second quarter of 2006, compared with $138 million in the
second quarter of 2005 and $149 million in the first quarter of 2006. On a
year-over-year basis, net interest income growth in the second quarter reflects
increased deposit flows from customers in both businesses and higher rates.
Average deposits generated by the Investor & Broker-Dealer Services business
were $32.9 billion in the second quarter of 2006, compared with $27.1 billion
in the second quarter of 2005 and $31.8 billion in the first quarter of 2006.
Average assets in the business were $39.8 billion in the second quarter of
2006, compared with $36.4 billion in the second quarter of 2005 and $38.2
billion in the first quarter of 2006. For the first six months of 2006,
average deposits were $32.4 billion compared with $27.5 billion in 2005. On
the same basis, average assets in the business were $39.0 billion in 2006
compared with $36.4 billion in 2005.
Noninterest expense was $458 million in the second quarter of 2006,
compared with $410 million in the second quarter of 2005 and $438 million in
the first quarter of 2006. The year-over-year increase in noninterest expense
was due to higher costs tied to increased activity levels and higher
technology, pension, and occupancy expense. The sequential rise in noninterest
expense in the second quarter was attributable primarily to higher salaries,
benefits, and sub-custody expenses associated with revenue growth. For the
first six months of 2006, noninterest expense increased to $896 million
compared with $803 million in 2005, reflecting costs associated with revenue
growth and higher technology and pension costs.
Net charge-offs were zero in the second quarter of 2006, compared with
zero in the second quarter of 2005 and $1 million in the first quarter of 2006.
On a year-to-date basis, net charge-offs were $1 million compared with zero in
2005. Nonperforming assets were $3 million at June 30, 2006, compared with $15
million at June 30, 2005 and $4 million at March 31, 2006.
Execution & Clearing Services Business
--------------------------------------
Inc/(Dec)
----------------- Year-to-date
2Q06 vs. 2Q06 vs. ---------------- Inc/
(In millions) 2Q06 1Q06 2Q05 1Q06 2Q05 2006 2005 (Dec)
------- ------- ------- -------- -------- ------- ------- -------
Net Interest Income $ 66 $ 61 $ 52 $ 5 $ 14 $ 127 $ 97 $ 30
Noninterest Income 359 390 319 (31) 40 749 636 113
Total Revenue 425 451 371 (26) 54 876 733 143
Provision for
Credit Losses - - - - - - - -
Noninterest Expense 302 297 277 5 25 599 557 42
Income Before Taxes 123 154 94 (31) 29 277 176 101
Average Assets 15,092 14,980 14,253 112 839 15,036 14,232 804
Average Deposits 205 178 190 27 15 192 175 17
Average Payables to
Customers and
Broker-Dealers 5,034 5,231 5,984 (197) (950) 5,132 6,184 (1,052)
Nonperforming Assets - - 1 - (1) - 1 (1)
Net Charge-offs/
(Recoveries) (4) (2) 5 (2) (9) (6) 5 (11)
In the second quarter of 2006, income before taxes in the Execution &
Clearing Services Business increased to $123 million from $94 million a year
ago and decreased from $154 million in the first quarter of 2006. The increase
over the second quarter of 2005 reflects strong growth in net interest income,
higher fees for value added services at Pershing, and the acquisition of Lynch,
Jones & Ryan ("LJR"), Inc. in July 2005. The sequential quarter decrease
reflects the $31 million gain on New York Stock Exchange seats in the first
quarter and the full second quarter impact of the previously disclosed loss of
a significant customer at Pershing partially offset by good organic growth at
Pershing. On a year-to-date basis, income before taxes increased to $277
million from $176 million in 2005. The increase from a year-ago reflects the
same factors impacting the quarterly year-over-year increase as well as the $31
million gain on the sale of New York Stock Exchange seats.
26
Noninterest income was $359 million in the second quarter of 2006,
compared with $319 million in the second quarter of 2005 and $390 million in
the first quarter of 2006. For the first six months of 2006, noninterest income
increased to $749 million from $636 million in 2005.
Execution and clearing fees increased from the second quarter and year-to-
date periods of 2005, reflecting growth in value-added fees at Pershing and
stronger global transition management and cross-border trading activity in
execution services. On a sequential basis, execution and clearing fees were
down slightly, as good organic growth in fees at Pershing largely offset the
full quarter impact of the previously disclosed loss of a significant customer.
Excluding the impact of this customer, total active accounts and customer
assets at Pershing increased sequentially by 4% and 3%, respectively.
Net interest income in the Execution & Clearing Services business was $66
million in the second quarter of 2006, compared with $52 million in the second
quarter of 2005 and $61 million in the first quarter of 2006. On a year-to-
date basis, net interest income was $127 million, up from $97 million in 2005.
The increase in net interest income reflect the benefit of rising interest
rates on spreads at Pershing, partially offset by the recent loss of a customer
discussed above.
Average assets in the business were $15.1 billion in the second quarter of
2006, compared with $14.3 billion in the second quarter of 2005 and $15.0
billion in the first quarter of 2006. For the first six months of 2006, average
assets were $15.0 billion compared with $14.2 billion in 2005. Average
payables to customers and broker-dealers were $5.0 billion in the second
quarter of 2006, compared with $6.0 billion in the second quarter of 2005 and
$5.2 billion in the first quarter of 2006. The decrease in second quarter
balances reflects the previously disclosed loss of a significant customer. For
the first six months of 2006, average payables to customers and broker-dealers
were $5.1 billion compared with $6.2 billion in 2005.
Noninterest expense was $302 million in the second quarter of 2006,
compared with $277 million in the second quarter of 2005 and $297 million in
the first quarter of 2006. The increase in noninterest expense on a year-over-
year basis was due to stronger business activity, higher technology expenses
and the addition of expenses of LJR. The increase in noninterest expense
sequentially was attributable to increased business activity partially offset
by lower expenses due to the loss of a significant customer at Pershing and
lower legal expense. For the first six months of 2006, noninterest expense was
$599 million compared with $557 million in 2005. The increase reflects the same
factors impacting the quarterly year-over-year increase.
Net charge-offs were a recovery of $4 million in the second quarter of
2006, charge-offs of $5 million in the second quarter of 2005 and a recovery of
$2 million in the first quarter of 2006, respectively. On a year-to-date basis,
net charge-offs were a recovery of $6 million compared with charge-offs of $5
million in 2005. Nonperforming assets were zero at June 30, 2006, compared with
$1 million at June 30, 2005 and zero at March 31, 2006.
27
Issuer Services Business
------------------------
Inc/(Dec)
----------------- Year-to-date
2Q06 vs. 2Q06 vs. ---------------- Inc/
(In millions) 2Q06 1Q06 2Q05 1Q06 2Q05 2006 2005 (Dec)
------- ------- ------- -------- -------- ------- ------- -------
Net Interest Income $ 74 $ 67 $ 57 $ 7 $ 17 $ 141 $ 110 $ 31
Noninterest Income 240 179 194 61 46 419 361 58
Total Revenue 314 246 251 68 63 560 471 89
Provision for
Credit Losses 4 4 3 - 1 8 6 2
Noninterest Expense 135 122 114 13 21 257 226 31
Income Before Taxes 175 120 134 55 41 295 239 56
Average Assets 15,549 14,588 13,410 961 2,139 15,071 13,356 1,715
Average Deposits 9,584 8,444 8,607 1,140 977 9,017 8,123 894
Nonperforming Assets 3 4 16 (1) (13) 3 16 (13)
Net Charge-offs - 1 - (1) - 1 - 1
In the second quarter of 2006, income before taxes in the Issuer Services
Business increased to $175 million from $134 million in the second quarter of
2005 and $120 million in the first quarter of 2006. For the first six months of
2006, income before taxes increased to $295 million from $239 million in 2005.
The year-over-year increases in 2006 reflect growth in net interest income and
higher corporate trust and depositary receipt fees. The sequential quarter
increase reflects seasonally higher depositary receipt fees.
Noninterest income was $240 million in the second quarter of 2006,
compared with $194 million in the second quarter of 2005 and $179 million in
the first quarter of 2006. For the first six months of 2006, noninterest
income was $419 million compared with $361 million in 2005. Issuer services
fees increased substantially versus the year-ago periods and on a sequential
quarter basis. This quarter's results were the best ever for the depositary
receipt business, which is typically strong in the second quarter due to the
timing of foreign dividend payments. This quarter further benefited from both
a higher level of net issuance, reflecting the continued growth in cross-border
investing activity, as well as increased corporate actions related to mergers,
acquisitions and spin-offs. Growth in corporate trust revenues was primarily
attributable to activity in structured and global trust products.
Net interest income in the Issuer Services business was $74 million in the
second quarter of 2006, compared with $57 million in the second quarter of 2005
and $67 million in the first quarter of 2005. For the first six months of
2006, net interest income was $141 million compared with $110 million in 2005.
The increases in net interest income year-over-year and sequentially were
driven primarily by the increase in interest rates and higher average assets.
Average deposits generated by the Issuer Services business were $9.6
billion in the second quarter of 2006, compared with $8.6 billion in the second
quarter of 2005 and $8.4 billion in the first quarter of 2006 reflecting
increased liquidity from the Company's issuer services customers. On a year-to-
date basis, average deposits were $9.0 billion compared with $8.1 billion in
2005. Average assets in the business were $15.5 billion in the second quarter
of 2006, compared with $13.4 billion in the second quarter of 2005 and $14.6
billion in the first quarter of 2006. On a year-to-date basis, average assets
were $15.1 billion compared with $13.4 billion in 2005.
Noninterest expense was $135 million in the second quarter of 2006,
compared with $114 million in the second quarter of 2005 and $122 million in
the first quarter of 2006. For the first six months of 2006, noninterest
expense was $257 million compared with $226 million in 2005. The rise in
noninterest expense year-over-year and sequentially was attributable to higher
salaries and benefits and subcustodian expense reflecting increased activity.
Net charge-offs were zero in the second quarter of 2006, unchanged from
the second quarter of 2005 and down from $1 million in the first quarter of
2006. For the first six months of 2006, net charge-offs were $1 million
28
compared with zero in 2005. Nonperforming assets were $3 million at June 30,
2006, compared with $16 million at June 30, 2005 and $4 million at March 31,
2006.
Treasury Services Business
--------------------------
Inc/(Dec)
----------------- Year-to-date
2Q06 vs. 2Q06 vs. ---------------- Inc/
(In millions) 2Q06 1Q06 2Q05 1Q06 2Q05 2006 2005 (Dec)
------- ------- ------- -------- -------- ------- ------- -------
Net Interest Income $ 42 $ 38 $ 45 $ 4 $ (3) $ 80 $ 88 $ (8)
Noninterest Income 73 63 71 10 2 136 147 (11)
Total Revenue 115 101 116 14 (1) 216 235 (19)
Provision for
Credit Losses 9 9 11 - (2) 18 22 (4)
Noninterest Expense 52 49 55 3 (3) 101 103 (2)
Income Before Taxes 54 43 50 11 4 97 110 (13)
Average Assets 12,186 11,301 10,683 885 1,503 11,746 10,315 1,431
Average Deposits 8,984 9,142 8,402 (158) 582 9,063 7,978 1,085
Nonperforming Assets 11 12 48 (1) (37) 11 48 (37)
Net Charge-offs/
(Recoveries) (2) 1 1 (3) (3) (1) 1 (2)
In the second quarter of 2006, income before taxes in the Treasury
Services Business was $54 million, compared with $50 million in the second
quarter of 2005 and $43 million in the first quarter of 2006. The increase
versus a year ago reflects higher asset-related gains in the current quarter.
On a year-to-date basis, income before taxes was $97 million compared with $110
million in 2005.
The increase in noninterest income to $73 million in the current period
from $71 million in the second quarter of 2005 was due to higher asset-related
gains, partially offset by lower underwriting fees from clients in this segment
and lower global payments fees as more clients used compensating balances to
pay for services. The sequential quarter increase in noninterest income
reflects higher foreign exchange related income, underwriting fees, and asset-
related gains. For the first six months of 2006, noninterest income decreased
to $136 million from $147 million in 2005.
Net interest income was $42 million in the second quarter of 2006,
compared with $45 million in the second quarter of 2005 and $38 million in the
first quarter of 2006. On a year-over-year basis, the decrease reflects lower
credit spreads due to the higher asset quality of the portfolio partially
offset by customers using compensating balances to pay for global payment
services. For the first six months of 2006, net interest income was $80 million
compared with $88 million in 2005. Average assets for the second quarter of
2006 were $12.2 billion, compared with $10.7 billion in the second quarter of
2005 and $11.3 billion in the first quarter of 2006. For the first six months
of 2006, average assets were $11.7 billion compared with $10.3 billion in 2005.
Average deposits were $9.0 billion in the second quarter of 2006, compared with
$8.4 billion in the second quarter of 2005 and $9.1 billion in the first
quarter of 2006. For the first six months of 2006, average deposits were $9.1
billion compared with $8.0 billion in 2005.
The provision for credit losses, which is assessed on a long-term credit
cycle basis (see "Business Segments Accounting Principles"), was $9 million in
the second quarter of 2006, compared with $11 million in the second quarter of
2005 and $9 million in the first quarter of 2006. For the first six months
of 2006, provision for credit losses was $18 million compared with $22 million
in 2005. The year-over-year decrease reflects improved credit quality.
Net charge-offs in the Treasury Services business were a recovery of $2
million in the second quarter of 2006, compared with a charge-off of $1 million
in both the second quarter of 2005 and the first quarter of 2006. For the first
six months of 2006, net charge-offs were a recovery of $1 million compared with
29
a charge-off of $1 million in 2005. Nonperforming assets were $11 million at
June 30, 2006, compared with $48 million at June 30, 2005, and $12 million at
March 31, 2006.
Noninterest expense in the second quarter of 2006 was $52 million,
compared to $55 million in the second quarter of 2005 and $49 million in the
first quarter of 2006. For the first six months of 2006, noninterest expense
was $101 million compared with $103 million in 2005. The decrease in
noninterest expense year-over-year was due in part to lower compensation
expenses.
Private Bank & BNY Asset Management Segment
-------------------------------------------
Inc/(Dec)
----------------- Year-to-date
2Q06 vs. 2Q06 vs. ---------------- Inc/
(In millions) 2Q06 1Q06 2Q05 1Q06 2Q05 2006 2005 (Dec)
------- ------- ------- -------- -------- ------- ------- -------
Net Interest Income $ 16 $ 17 $ 16 $ (1) $ - $ 33 $ 33 $ -
Noninterest Income 137 129 114 8 23 266 226 40
Total Revenue 153 146 130 7 23 299 259 40
Provision for
Credit Losses - - 1 - (1) - 2 (2)
Noninterest Expense 99 90 78 9 21 189 157 32
Income Before Taxes 54 56 51 (2) 3 110 100 10
Average Assets 2,448 2,543 2,317 (95) 131 2,495 2,212 283
Average Deposits 2,205 1,772 1,851 433 354 1,990 1,817 173
Nonperforming Assets - 1 1 (1) (1) - 1 (1)
Net Charge-offs/
(Recoveries) (1) - - (1) (1) (1) - (1)
In the second quarter of 2006, income before taxes in the Private Bank &
BNY Asset Management Segment was $54 million, compared with $51 million in the
second quarter of 2005 and $56 million in the first quarter of 2006. The
improvement year-over-year is attributable to the acquisitions of Alcentra and
Urdang as well as higher fee levels in Private Banking.
Noninterest income was $137 million in the second quarter of 2006,
compared with $114 million in the second quarter of 2005 and $129 million in
the first quarter of 2006. Private bank and asset management revenues in the
second quarter of 2006 were up sequentially and year-over-year. The year-over-
year growth reflects the acquisitions of Alcentra and Urdang as well as mid-
single digit organic growth. On a sequential quarter basis, growth is
attributable to higher fees at Ivy Asset Management and Alcentra as well as the
full quarter impact of Urdang. The S&P 500 (registered trademark) Index was
down 2% from March 31, 2006, with average daily price levels essentially flat
from March 31, 2006. Performance for the NASDAQ (registered trademark)
Composite Index was down 7% for the quarter, with average daily prices down
by 2% from the first quarter of 2006.
Assets Under Management - Asset Management Sector
-------------------------------------------------
(In billions)- Estimated 2Q06 1Q06 2Q05
------ ------ ------
Equity Securities $ 36 $ 37 $ 36
Fixed Income Securities 21 21 22
Alternative Investments 28 26 15
Liquid Assets 31 29 32
---- ---- ----
Total Assets Under Management $116 $113 $105
==== ==== ====
30
Assets under management ("AUM") were $116 billion at June 30, 2006,
compared with $105 billion at June 30, 2005, and $113 billion at March 31,
2006. The year-over-year increases in AUM primarily reflect the acquisition of
Alcentra and Urdang. The sequential quarter growth reflects growth in
alternative investments. Institutional clients represent 72% of AUM while
individual clients equal 28%. At June 30, 2006, such assets were invested 31%
in equities, 18% in fixed income, and 24% in alternative investments, with the
remaining amount invested in liquid assets.
Net interest income in the Private Bank & BNY Asset Management Segment was
$16 million in the second quarter of 2006, essentially flat in comparison to
the second quarter of 2005 and the first quarter of 2006. For the first six
months of 2006 and 2005, net interest income was $33 million. Average deposits
generated by the Private Bank & BNY Asset Management Segment were $2.2 billion
in second quarter of 2006, compared with $1.9 billion in the second quarter of
2005 and $1.8 billion in the first quarter of 2006. For the first six months of
2006, average deposits were $2.0 billion compared with $1.8 billion in 2005.
Average assets in the segment were $2.4 billion in the second quarter of 2006,
compared with $2.3 billion in the second quarter of 2005 and $2.5 billion in
the first quarter of 2006. For the first six months of 2006, average assets
were $2.5 billion compared with $2.2 billion in the first six months of 2005.
Noninterest expense was $99 million in the second quarter of 2006,
compared with $78 million in the second quarter of 2005 and $90 million in the
first quarter of 2006. For the first six months of 2006, noninterest expense
was $189 million compared with $157 million in 2005. Relative to a year ago,
the increase reflects the acquisitions of Alcentra and Urdang as well as higher
compensation, technology, and legal staffing costs. The increase in
noninterest expense on a sequential basis was primarily attributable to higher
compensation costs.
Net charge-offs were a recovery of $1 million in the second quarter of
2006, and zero in the second quarter of 2005 and the first quarter of 2006,
respectively. On a year-to-date basis, net charge-offs were a recovery of $1
million in 2006 compared with zero in 2005. Nonperforming assets were zero at
June 30, 2006, compared with $1 million at June 30, 2005, and $1 million at
March 31, 2006.
Corporate and Other Segment
---------------------------
Inc/(Dec)
----------------- Year-to-date
2Q06 vs. 2Q06 vs. ---------------- Inc/
(In millions) 2Q06 1Q06 2Q05 1Q06 2Q05 2006 2005 (Dec)
------- ------- ------- -------- -------- ------- ------- -------
Net Interest Income $ 5 $ 7 $ 21 $ (2) $ (16) $ 12 $ 45 $ (33)
Noninterest Income 33 10 35 23 (2) 43 38 5
Total Revenue 38 17 56 21 (18) 55 83 (28)
Provision for
Credit Losses (17) (16) (20) (1) 3 (33) (54) 21
Noninterest Expense 88 69 87 19 1 157 146 11
Income Before Taxes (33) (36) (11) 3 (22) (69) (9) (60)
Average Assets 11,279 10,256 7,890 1,023 3,389 10,770 7,827 2,943
Nonperforming Assets 15 4 6 11 9 15 6 9
Net Charge-offs/
(Recoveries) - (4) - 4 - (4) - (4)
In the second quarter of 2006, income before taxes in the Corporate and
Other Segment was a loss of $33 million, compared with a loss of $11 million in
the second quarter of 2005 and a loss of $36 million in the first quarter of
2006.
Net interest income in the Corporate and Other Segment was $5 million in
the second quarter of 2006, compared with $21 million in the second quarter of
2005 and $7 million in the first quarter of 2006. For the first six months of
2006, net interest income was $12 million compared with $45 million in 2005.
The decrease in net interest income over the second quarter of 2005 reflects
31
lower leasing income and the impact of accounting for the retail and regional
middle market banking business as discontinued operations.
Noninterest income was $33 million in the second quarter of 2006, compared
with $35 million in the second quarter of 2005 and $10 million in the first
quarter of 2006. The increase in noninterest income in the second quarter of
2006 over the first quarter of 2006 is attributable to higher securities and
other investment gains. For the first six months of 2006, noninterest income
was $43 million compared with $38 million in 2005. Securities gains were $23
million in the second quarter of 2006, compared with $23 million in the second
quarter of 2005 and $17 million in the first quarter of 2006. Securities gains
on a year-to-date basis were $40 million in 2006 compared with $35 million in
2005.
Provision for credit losses was a credit of $17 million in the second
quarter of 2006, compared with a $20 million credit in the second quarter of
2005 and a $16 million credit in the first quarter of 2006. For the first six
months of 2006, provision for credit losses was a $33 million credit compared
with a credit of $54 million in 2005. The provision for credit losses reflects
the difference between the aggregate of the credit provision over a credit
cycle assigned to the other segments and the Company's recorded provision. As
such, the favorable credit environment has currently resulted in the business
segments absorbing more than the Company's aggregate reported credit provision.
Noninterest expense includes unallocated corporate overhead, amortization
of goodwill, nonrecurring items, and certain expenses previously allocated to
the Retail and Middle Market Banking Segment that are not included in the
businesses sold to JPMorgan Chase. Noninterest expense was $88 million in the
second quarter of 2006, compared with $87 million in the second quarter of 2005
and $69 million in the first quarter of 2006. For the first six months of
2006, noninterest expense was $157 million compared with $146 million in 2005.
The year-over-year growth includes higher intangible amortization. The Company
expects certain costs previously allocated to the Retail and Middle Market
Banking Segment now included with Corporate and Other Segment will be
reallocated to the Institutional Services Segment when JPMorgan Chase's
corporate trust business is acquired.
Net charge-offs were zero in the second quarter of 2006, compared with
zero in the second quarter of 2005 and a recovery of $4 million in the first
quarter of 2006. On a year-to-date basis, net charge-offs were a recovery of $4
million in 2006 compared with zero in 2005. Nonperforming assets were $15
million at June 30, 2006, compared with $6 million at June 30, 2005, and $4
million at March 31, 2006. The increase in nonperforming assets at June 30,
2006 reflects the buyout of debt associated with a lease on an aircraft that is
being positioned for sale as part of a workout strategy.
32
Significant other items related to the Corporate and Other Segment are
presented in the following table.
Year-to-date
------------------
(In millions) 2Q06 1Q06 2Q05 2006 2005
------------------------------- ---------- ---------- ---------- -------------------
Items impacting net interest income:
------------------------------------
Cost to Carry Goodwill
and Intangibles $ (25) $ (25) $ (25) $ (50) $ (50)
Tax Equivalent Basis (8) (7) (7) (15) (14)
Items impacting noninterest expense:
------------------------------------
Goodwill and
Intangibles Amortization $ 15 $ 13 $ 10 $ 28 $ 18
Other items - Acquisitions are the responsibility of corporate management.
Accordingly, goodwill and the funding cost of goodwill are assigned to the
Corporate and Other Segment. If the funding cost of goodwill were allocated to
the other two segments, it would be assigned on the basis of the goodwill
attributable to each segment.
The tax equivalent adjustment is eliminated in the Corporate and Other
Segment. Certain revenue and expense items have been driven by corporate
decisions and have been included in the Corporate and Other Segment. In the
second quarter of 2006, these included a charge of $12 million associated with
the implementation of SFAS 123(R) related to the retirement provisions of
equity compensation programs. In the first quarter of 2006, these included the
impact of the $6 million cumulative adjustment in the Company's reserve
position with the Federal Reserve Bank. Alternatively, this item could be
allocated to the Institutional Services Segment.
33
The consolidating schedule below shows the contribution of the Company's
businesses to its overall profitability.
(Dollars in millions) Execution Private
Investor & & Sub-total Bank & Corporate Total
For the Quarter Ended Broker-Dealer Clearing Issuer Treasury Institutional BNY Asset and Continuing
June 30, 2006 Services Services Services Services Services Management Other Operations
------------------- -------- -------- --------- --------- ------------- ---------- -------- ----------
Net Interest Income $ 155 $ 66 $ 74 $ 42 $ 337 $ 16 $ 5 $ 358
Noninterest Income 524 359 240 73 1,196 137 33 1,366
Total Revenue 679 425 314 115 1,533 153 38 1,724
Provision for
Credit Losses 3 - 4 9 16 - (17) (1)
Noninterest Expense 458 302 135 52 947 99 88 1,134
-------- -------- -------- -------- ------- --------- ------ -------
Income Before Taxes $ 218 $ 123 $ 175 $ 54 $ 570 $ 54 $ (33) $ 591
======== ======== ======== ======== ======= ========= ====== =======
Contribution
Percentage (1) 35% 20% 28% 8% 91% 9%
Average Assets $ 39,839 $ 15,092 $ 15,549 $ 12,186 $82,666 $ 2,448 $11,279 $96,393
(Dollars in millions) Execution Private
Investor & & Sub-total Bank & Corporate Total
For the Quarter Ended Broker-Dealer Clearing Issuer Treasury Institutional BNY Asset and Continuing
March 31, 2006 Services Services Services Services Services Management Other Operations
------------------- -------- -------- --------- --------- ------------- ---------- -------- ----------
Net Interest Income $ 149 $ 61 $ 67 $ 38 $ 315 $ 17 $ 7 $ 339
Noninterest Income 490 390 179 63 1,122 129 10 1,261
Total Revenue 639 451 246 101 1,437 146 17 1,600
Provision for
Credit Losses 3 - 4 9 16 - (16) -
Noninterest Expense 438 297 122 49 906 90 69 1,065
-------- -------- -------- -------- ------- --------- ------- -------
Income Before Taxes $ 198 $ 154 $ 120 $ 43 $ 515 $ 56 $ (36) $ 535
======== ======== ======== ======== ======= ========= ====== =======
Contribution
Percentage (1) 35% 27% 21% 7% 90% 10%
Average Assets $ 38,163 $ 14,980 $ 14,588 $ 11,301 $79,032 $ 2,543 $10,256 $91,831
(Dollars in millions) Execution Private
Investor & & Sub-total Bank & Corporate Total
For the Quarter Ended Broker-Dealer Clearing Issuer Treasury Institutional BNY Asset and Continuing
June 30, 2005 Services Services Services Services Services Management Other Operations
------------------- -------- -------- --------- --------- ------------- ---------- -------- ----------
Net Interest Income $ 138 $ 52 $ 57 $ 45 $ 292 $ 16 $ 21 $ 329
Noninterest Income 461 319 194 71 1,045 114 35 1,194
Total Revenue 599 371 251 116 1,337 130 56 1,523
Provision for
Credit Losses 2 - 3 11 16 1 (20) (3)
Noninterest Expense 410 277 114 55 856 78 87 1,021
-------- -------- -------- -------- ------- --------- ------- -------
Income Before Taxes $ 187 $ 94 $ 134 $ 50 $ 465 $ 51 $ (11) $ 505
======== ======== ======== ======== ======= ========= ====== =======
Contribution
Percentage (1) 36% 18% 26% 10% 90% 10%
Average Assets $ 36,446 $ 14,253 $ 13,410 $ 10,683 $74,792 $ 2,317 $7,890 $84,999
(1) As a percent of total income before tax excluding Corporate and Other.
34
(Dollars in millions) Execution Private
Investor & & Sub-total Bank & Corporate Total
For the Six Months Broker-Dealer Clearing Issuer Treasury Institutional BNY Asset and Continuing
Ended June 30, 2006 Services Services Services Services Services Management Other Operations
------------------- -------- -------- --------- --------- ------------- ---------- -------- ----------
Net Interest Income $ 304 $ 127 $ 141 $ 80 $ 652 $ 33 $ 12 $ 697
Noninterest Income 1,014 749 419 136 2,318 266 43 2,627
Total Revenue 1,318 876 560 216 2,970 299 55 3,324
Provision for
Credit Losses 6 - 8 18 32 - (33) (1)
Noninterest Expense 896 599 257 101 1,853 189 157 2,199
-------- -------- -------- -------- ------- --------- ------ -------
Income Before Taxes $ 416 $ 277 $ 295 $ 97 $ 1,085 $ 110 $ (69) $ 1,126
======== ======== ======== ======== ======= ========= ====== =======
Contribution
Percentage (1) 35% 23% 25% 8% 91% 9%
Average Assets $ 39,006 $ 15,036 $ 15,071 $ 11,746 $80,859 $ 2,495 $10,770 $94,124
(Dollars in millions) Execution Private
Investor & & Sub-total Bank & Corporate Total
For the Six Months Broker-Dealer Clearing Issuer Treasury Institutional BNY Asset and Continuing
Ended June 30, 2005 Services Services Services Services Services Management Other Operations
------------------- -------- -------- --------- --------- ------------- ---------- -------- ----------
Net Interest Income $ 277 $ 97 $ 110 $ 88 $ 572 $ 33 $ 45 $ 650
Noninterest Income 902 636 361 147 2,046 226 38 2,310
Total Revenue 1,179 733 471 235 2,618 259 83 2,960
Provision for
Credit Losses 4 - 6 22 32 2 (54) (20)
Noninterest Expense 803 557 226 103 1,689 157 146 1,992
-------- -------- -------- -------- ------- --------- ------- -------
Income Before Taxes $ 372 $ 176 $ 239 $ 110 $ 897 $ 100 $ (9) $ 988
======== ======== ======== ======== ======= ========= ====== =======
Contribution
Percentage (1) 37% 18% 24% 11% 90% 10%
Average Assets $ 36,411 $ 14,232 $ 13,356 $ 10,315 $74,314 $ 2,212 $ 7,827 $84,353
(1) As a percent of total income before tax excluding Corporate and Other.
35
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 2005 Annual Report on Form 10-K. Four
of the Company's more critical accounting policies are those related to the
allowance for credit losses, the valuation of derivatives and securities where
quoted market prices are not available, goodwill and other intangibles, and
pension accounting.
Allowance for Credit Losses
---------------------------
The allowance for credit losses and allowance for lending-related
commitments consist of four elements: (1) an allowance for impaired credits;
(2) an allowance for higher risk rated loans and exposures; (3) an allowance
for pass rated loans and exposures; and (4) an unallocated allowance based on
general economic conditions and certain risk factors in the Company's
individual portfolio and markets. Further discussion on the four elements can
be found under "Consolidated Balance Sheet Review" in the MD&A section.
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 generally
consistent with external ratings agency's default databases. Loss given
default ratings are driven by the collateral, structure, and seniority of each
individual asset and are consistent with external loss given default/recovery
databases. The portion of the allowance related to impaired credits is based
on the present value of future cash flows. Changes in the estimates of
probability of default, risk ratings, loss given default/recovery rates, and
cash flows could have a direct impact on the allocated allowance for loan
losses.
To the extent actual results differ from forecasts or management's
judgment, the allowance for credit losses may be greater or less than future
charge-offs.
The Company considers it difficult to quantify the impact of changes in
forecast on its allowance for credit losses. Nevertheless, the Company
believes the following discussion may enable investors to better understand the
variables that drive the allowance for credit losses.
A key variable in determining the allowance is management's judgment in
determining the size of the unallocated allowance. At June 30, 2006, the
unallocated allowance was 23% of the total allowance. If the unallocated
allowance were five percent higher or lower, the allowance would have increased
or decreased by $24 million, respectively.
The credit rating assigned to each credit is another significant variable
in determining the allowance. If each credit were rated one grade better, the
allowance would have decreased by $75 million, while if each credit were rated
one grade worse, the allowance would have increased by $134 million.
Similarly, if the loss given default were one rating worse, the allowance
would have increased by $47 million, while if the loss given default were one
rating better, the allowance would have decreased by $41 million.
For impaired credits, if the fair value of the loans were 10% higher or
lower, the allowance would have decreased or increased by $1 million,
respectively.
36
Valuation of Derivatives and Securities Where Quoted Market Prices Are Not
--------------------------------------------------------------------------
Available
---------
When quoted market prices are not available for derivatives and securities
values, such values are determined at fair value, which is defined as the value
at which positions could be closed out or sold in a transaction with a willing
counterparty over a period of time consistent with the Company's trading or
investment strategy. Fair value for these instruments is determined based on
discounted cash flow analysis, comparison to similar instruments, and the use
of financial models. Financial models use as their basis independently sourced
market parameters including, for example, interest rate yield curves, option
volatilities, and currency rates. Discounted cash flow analysis is dependent
upon estimated future cash flows and the level of interest rates. Model-based
pricing uses inputs of observable prices for interest rates, foreign exchange
rates, option volatilities and other factors. Models are benchmarked and
validated by independent parties. The Company's valuation process takes into
consideration factors such as counterparty credit quality, liquidity and
concentration concerns. The Company applies judgment in the application of
these factors. In addition, the Company must apply judgment when no external
parameters exist. Finally, other factors can affect the Company's estimate of
fair value including market dislocations, incorrect model assumptions, and
unexpected correlations.
These valuation methods could expose the Company to materially different
results should the models used or underlying assumptions be inaccurate. See
"Use of Estimates" in "Summary of Significant Accounting and Reporting
Policies" of the Notes to Consolidated Financial Statement in the Company's
2005 Annual Report on Form 10-K.
To assist in assessing the impact of a change in valuation, at June 30,
2006, approximately $2.5 billion of the Company's portfolio of securities and
derivatives is not priced based on quoted market prices because no such quoted
market prices are available. A change of 2.5% in the valuation of these
securities and derivatives would result in a change in pre-tax income of $62
million.
Goodwill and Other Intangibles
------------------------------
The Company records all assets and liabilities acquired in purchase
acquisitions, including goodwill, indefinite-lived intangibles, and other
intangibles, at fair value as required by FASB Statement No. 141 ("SFAS 141"),
"Business Combinations". Goodwill ($3,784 million at June 30, 2006) and
indefinite-lived intangible assets ($378 million at June 30, 2006) are not
amortized but are subject to annual tests for impairment or more often if
events or circumstances indicate they may be impaired. Other intangible assets
are amortized over their estimated useful lives and are subject to impairment
if events or circumstances indicate a possible inability to realize the
carrying amount. The initial recording of goodwill, indefinite-lived
intangibles, and other intangibles requires subjective judgments concerning
estimates of the fair value of acquired assets. The goodwill impairment test
is performed in two phases. The first step of the goodwill impairment test
compares the fair value of the reporting unit with its carrying amount,
including goodwill. If the fair value of the reporting unit exceeds its
carrying amount, goodwill of the reporting unit is considered not impaired;
however, if the carrying amount of the reporting unit exceeds its fair value,
an additional procedure must be performed. That additional procedure compares
the implied fair value of the reporting unit's goodwill with the carrying
amount of that goodwill. An impairment loss is recorded to the extent that the
carrying amount of goodwill exceeds its implied fair value. Indefinite-lived
intangible assets are evaluated for impairment at least annually by comparing
their fair value to their carrying value.
Other intangible assets ($507 million at June 30, 2006) are evaluated for
impairment if events and circumstances indicate a possible impairment. Such
evaluation of other intangible assets is based on undiscounted cash flow
projections. Fair value may be determined using: market prices, comparison to
37
similar assets, market multiples, discounted cash flow analysis and other
determinates. Estimated cash flows may extend far into the future and, by
their nature, are difficult to determine over an extended timeframe. Factors
that may significantly affect the estimates include, among others, competitive
forces, customer behaviors and attrition, changes in revenue growth trends,
cost structures and technology, and changes in discount rates and specific
industry or market sector conditions. Other key judgments in accounting for
intangibles include useful life and classification between goodwill and
indefinite-lived intangibles or other intangibles that require amortization.
See Note "Goodwill and Intangibles" in the Notes to Consolidated Financial
Statements for additional information regarding intangible assets.
To assist in assessing the impact of a goodwill, indefinite-lived
intangibles, or other intangible asset impairment charge, at June 30, 2006,
the Company has $4.7 billion of goodwill, indefinite-lived intangibles, and
other intangible assets. The impact of a 5% impairment charge would result in
reduction in pre-tax income of approximately $233 million.
Pension Accounting
------------------
The Company has defined benefit plans covering approximately 13,900 U.S.
employees and approximately 3,175 non-U.S. employees at September 30, 2005.
The Company has three defined benefit pension plans in the U.S. and six
overseas. The U.S. plans account for 82% of the projected benefit obligation.
Pension expense was $26 million in 2005 while there were pension credits in
2004 and 2003 of $24 million and $39 million. In addition to its pension
plans, the Company also has an Employee Stock Ownership Plan ("ESOP") which may
provide additional benefits to certain employees. Upon retirement, covered
employees are entitled to the higher of their benefit under the ESOP or the
defined benefit plan. If the benefit is higher under the defined benefit plan,
the employees' ESOP account is contributed to the pension plan.
A number of key assumption and measurement date values determine pension
expense. The key elements include the long-term rate of return on plan assets,
the discount rate, the market-related value of plan assets, and for the primary
U.S. plan the price used to value stock in the ESOP. Since 2003, these key
elements have varied as follows:
(Dollars in millions, 2006 2005 2004 2003
except per share amounts) -------- -------- -------- --------
Domestic Plans:
Long-Term Rate of Return
on Plan Assets 7.88% 8.25% 8.75% 9.00%
Discount Rate 5.88 6.00 6.25 6.50
Market-Related Value of
Plan Assets(1) $ 1,324 $ 1,502 $ 1,523 $ 1,483
ESOP Stock Price(1) 30.46 30.67 27.88 33.30
Net U.S Pension Credit/(Expense) $ (17) $ 31 $ 46
All other Pension Credit/(Expense) (9) (7) (7)
-------- -------- --------
Total Pension Credit/(Expense)(2) $ (26) $ 24 $ 39
======== ======== ========
(1) Actuarially smoothed data. See "Summary of Significant Accounting and
Reporting Policies" in Notes to the Consolidated Financial Statements
in the 2005 Annual Report on Form 10-K.
(2) Includes discontinued operations expense. Pension benefits expense
is estimated to include discontinued operations expense of $6 million
for both 2006 and 2005.
The discount rate for U.S. pension plans was determined after reviewing a
number of high quality long-term bond indices whose yields were adjusted to
match the duration of the Company's pension liability. The Company also
38
reviewed the results of several models that matched bonds to the Company's
pension cash flows. The various indices and models produced discount rates
ranging from 5.68% to 6.2%. After reviewing the various indices and models,
the Company selected a discount rate of 5.875%. The discount rates for foreign
pension plans are based on high quality corporate bonds rates in countries that
have an active corporate bond market. In those countries with no active
corporate bond market, discount rates are based on local government bond rates
plus a credit spread.
The Company's expected long-term rate of return on plan assets is based on
anticipated returns for each asset class. At September 30, 2005 and 2004, the
assumptions for the long-term rates of return on plan assets were 7.88% and
8.25%, respectively. Anticipated returns are weighted for the target
allocation for each asset class. Anticipated returns are based on forecasts
for prospective returns in the equity and fixed income markets, which should
track the long-term historical returns for these markets. The Company also
considers the growth outlook for U.S. and global economies, as well as current
and prospective interest rates.
The market-related value of plan assets also influences the level of
pension expense. Differences between expected and actual returns are recognized
over five years to compute an actuarially derived market-related value of plan
assets. In 2005, the market-related value of plan assets declined as the
extraordinary actual return in 2000 was replaced with a more modest return.
Unrecognized actuarial gains and losses are amortized over the future
service period (11 years) of active employees if they exceed a threshold
amount. The Company currently has unrecognized losses which are being
amortized.
For 2005, U.S. pension expense increased by $48 million reflecting changes
in assumptions, the amortization of unrecognized pension losses and a decline
in the market-related value of plan assets. These same factors are expected to
further increase pension expense in 2006. To reduce the impact of these
factors, the Company changed certain of its domestic defined benefit pension
plans during the third quarter of 2005. The primary change was to switch the
computation of the benefits from final average pay to career average pay
effective January 1, 2006. As a result U.S. pension expense is expected to
increase by approximately $21 million.
The annual impacts on the primary U.S. plan of hypothetical changes in
the key elements on the pension expense are shown in the tables below.
(Dollars in millions) Increase in Decrease in
Pension Expense 2006 Base Pension Expense
--------------- ------------- ---------------
Long-Term Rate of Return
on Plan Assets 6.88% 7.38% 7.88% 8.38% 8.88%
Change in Pension Expense $ 16.0 $ 7.9 N/A $ 7.9 $ 15.7
Discount Rate 5.38% 5.63% 5.88% 6.13% 6.38%
Change in Pension Expense $ 14.9 $ 7.2 N/A $ 6.9 $ 13.4
Market-Related Value of
Plan Assets -20.00% -10.00% $1,324 +10.00% +20.00%
Change in Pension Expense $ 50.8 $ 25.4 N/A $ 25.4 $ 50.8
ESOP Stock Price $20.46 $25.46 $30.46 $35.46 $40.46
Change in Pension Expense $ 15.2 $ 7.3 N/A $ 6.7 $ 12.9
39
CONSOLIDATED BALANCE SHEET REVIEW
Total assets were $108.9 billion at June 30, 2006, compared with $103.1
billion at June 30, 2005 and $103.6 billion at March 31, 2006. The increase in
assets from March 31, 2006 reflects increases in short-term high quality
interest bearing deposits at banks as well as loans to the Company's securites
servicing customers. Total shareholders' equity was $10.1 billion at June 30,
2006, compared with $9.5 billion at June 30, 2005 and $10.1 billion at March
31, 2006. The retention of earnings in the second quarter of 2006 was offset
by the repurchase of common stock.
Return on average common equity for the second quarter of 2006 was 18.17%,
compared with 17.12% in the second quarter of 2005 and 17.31% in the first
quarter of 2006.
Return on average assets for the second quarter of 2006 was 1.63%,
compared with 1.59% in the second quarter of 2005 and 1.61% in the first
quarter of 2006.
Investment Securities
---------------------
The table below shows the distribution of the Company's securities
portfolio:
Investment Securities (at Fair Value)
(In millions) 6/30/06 12/31/05
---------- ----------
Fixed Income:
Mortgage-Backed Securities $ 23,397 $ 22,484
Asset-Backed Securities 382 305
Corporate Debt 1,287 1,034
Short-Term Money Market Instruments 771 975
U.S. Treasury Securities 221 226
U.S. Government Agencies 646 620
State and Political Subdivisions 206 224
Emerging Market Debt (Collateralized
By U.S. Treasury Zero Coupon Obligations) 117 117
Other Foreign Debt 10 363
---------- ----------
Subtotal Fixed Income 27,037 26,348
Equity Securities:
Money Market Funds 333 922
Other 30 31
---------- ----------
Subtotal Equity Securities 363 953
---------- ----------
Adjusted Securities 27,400 27,301
Securities of Discontinued Operations (1) (104) (108)
---------- ----------
Securities from Continuing Operations $ 27,296 $ 27,193
========== ==========
(1) Securities of State and Political Subdivisions.
Total investment securities were $27.3 billion at June 30, 2006, compared
with $25.7 billion at June 30, 2005, and $27.2 billion at March 31, 2006.
Average adjusted investment securities were $27.3 billion in the second quarter
of 2006, compared with $24.7 billion in the second quarter of last year and
$27.1 billion in the first quarter of 2006. The Company's portfolio of highly
rated mortgage-backed securities, are 89% rated AAA, 8% AA, and 3% A. In
replacing securities that mature or are paid off, the Company has been adding
either adjustable or short life classes of structured mortgage-backed
securities, both of which have short durations. The effective duration of the
Company's mortgage portfolio at June 30, 2006 was approximately 2.1 years.
40
Net unrealized losses for securities available-for-sale was $274 million
at June 30, 2006, compared with net unrealized gains of $60 million at June 30,
2005, and net unrealized losses of $195 million at March 31, 2006. The change
in the value of available-for-sale securities at June 30, 2006 from March 31,
2006 reflects the increase in long-term interest rates over the quarter. The
asymmetrical accounting treatment of the impact of a change in interest rates
on the Company's balance sheet may create a situation in which an increase in
interest rates can adversely affect reported equity and regulatory capital,
even though economically there may be no impact on the economic capital
position of the Company. For example, an increase in rates will result in a
decline in the value of the fixed rate portion of the Company's fixed income
investment portfolio, which will be reflected through a reduction in other
comprehensive income in the Company's shareholders' equity, thereby affecting
the tangible common equity ("TCE") ratio. Under current accounting rules,
there is no corresponding change in value of the Company's fixed rate
liabilities, even though economically these liabilities are more valuable as
rates rise.
Loans
-----
(Dollars in billions)
Quarterly Year-to-date
Continuing Operations Period End Average Average
-------------------------- ------------------------- -------------------------
Total Non-Margin Margin Total Non-Margin Margin Total Non-Margin Margin
----- ---------- ------ ----- ---------- ------ ----- ---------- ------
June 30, 2006 $35.7 $ 30.6 $ 5.1 $33.6 $ 28.1 $ 5.5 $32.7 $ 27.1 $ 5.6
December 31, 2005 32.9 26.8 6.1 33.0 26.5 6.5 32.0 25.6 6.4
June 30, 2005 33.0 26.9 6.1 31.6 25.3 6.3 31.5 25.1 6.4
Total loans were $35.7 billion at June 30, 2006, compared with $32.9
billion at December 31, 2005. The increase in total loans from December 31,
2005 primarily reflects increased lending to securities servicing customers
partially offset by a decrease in margin loans reflecting the loss of a
significant customer at Pershing. Average total loans were $33.6 billion in
the second quarter of 2006, compared with $31.6 billion in the second quarter
of 2005. The increase in average loans from June 30, 2005 results from
increased lending to financial institutions.
The following tables provide additional details on the Company's credit
exposures and outstandings for continuing operations at June 30, 2006 in
comparison to December 31, 2005.
Overall Loan Portfolio
----------------------
June 30, 2006 December 31, 2005
----------------------------------------------------------
Unfunded Total Unfunded Total
(In billions) Loans Commitments Exposure Loans Commitments Exposure
---------------------------- ----------------------------
Financial Institutions $ 15.8 $ 24.6 $ 40.4 $ 13.0 $ 22.4 $ 35.4
Corporate 4.1 19.8 23.9 3.7 19.6 23.3
-------- -------- -------- -------- -------- --------
19.9 44.4 64.3 16.7 42.0 58.7
-------- -------- -------- -------- -------- --------
Consumer & Middle Market 3.8 0.3 4.1 3.2 0.3 3.5
Leasing Financings 5.5 0.1 5.6 5.5 0.1 5.6
Commercial Real Estate 1.4 1.3 2.7 1.4 1.2 2.6
Margin loans 5.1 - 5.1 6.1 - 6.1
-------- -------- -------- -------- -------- --------
Total $ 35.7 $ 46.1 $ 81.8 $ 32.9 $ 43.6 $ 76.5
======== ======== ======== ======== ======== ========
41
Financial Institutions
----------------------
The financial institutions portfolio exposure was $40.4 billion at June
30, 2006, compared to $35.4 billion at December 31, 2005. The increase in
exposure from year-end 2005 reflects greater activity in the capital markets in
the second quarter of 2006, which drove increased demands for credit from
financial institutions. These exposures are of high quality with 86% meeting
the investment grade criteria of the Company's rating system. These exposures
are generally short-term, with 76% expiring within one year and are frequently
secured. For example, mortgage banking, securities industry, and investment
managers often borrow against marketable securities held in custody at the
Company. The diversity of the portfolio is shown in the accompanying table.
(In billions)
June 30, 2006 December 31, 2005
--------------------------------------- ---------------------------
Unfunded Total %Inv %due Unfunded Total
Lending Division Loans Commitments Exposures Grade <1 Yr Loans Commitments Exposures
------------------- ----- ----------- --------- ----- ----- ----- ----------- ---------
Banks $ 5.6 $ 3.8 $ 9.4 65% 88% $ 5.0 $ 3.8 $ 8.8
Securities Industry 4.6 4.8 9.4 88 97 3.4 3.6 7.0
Insurance 0.4 5.2 5.6 100 43 0.4 4.9 5.3
Government 0.1 5.6 5.7 99 59 0.1 4.7 4.8
Asset Managers 4.8 3.2 8.0 88 79 3.8 3.6 7.4
Mortgage Banks 0.2 0.7 0.9 73 50 0.2 0.7 0.9
Endowments 0.1 1.3 1.4 100 62 0.1 1.1 1.2
----- ----------- --------- ----- ----- ----- ----------- ---------
Total $15.8 $ 24.6 $ 40.4 86% 76% $13.0 $ 22.4 $ 35.4
===== =========== ========= ===== ===== ===== =========== =========
Corporate
---------
The corporate portfolio exposure increased to $23.9 billion at June 30,
2006 from $23.3 billion at year-end 2005. Approximately 75% of the portfolio
is investment grade while 18% of the portfolio matures within one year.
(In billions)
June 30, 2006 December 31, 2005
--------------------------------------- ---------------------------
Unfunded Total %Inv %due Unfunded Total
Lending Division Loans Commitments Exposures Grade <1 Yr Loans Commitments Exposures
------------------- ----- ----------- --------- ----- ----- ----- ----------- ---------
Media $ 1.1 $ 2.0 $ 3.1 63% 8% $ 1.0 $ 2.1 $ 3.1
Cable 0.2 0.4 0.6 49 8 0.4 0.5 0.9
Telecom 0.1 0.4 0.5 78 1 0.1 0.4 0.5
----- ----------- --------- ----- ----- ----- ----------- ---------
Subtotal 1.4 2.8 4.2 63% 7% 1.5 3.0 4.5
Energy 0.4 5.0 5.4 81 13 0.4 4.9 5.3
Retailing 0.2 2.6 2.8 83 38 0.1 2.1 2.2
Automotive (1) 0.1 1.0 1.1 58 32 0.1 1.2 1.3
Healthcare 0.4 1.6 2.0 79 9 0.3 1.7 2.0
Other (2) 1.6 6.8 8.4 75 19 1.3 6.7 8.0
----- ----------- --------- ----- ----- ----- ----------- ---------
Total $ 4.1 $ 19.8 $ 23.9 75% 18% $ 3.7 $ 19.6 $ 23.3
===== =========== ========= ===== ===== ===== =========== =========
(1) During the third quarter of 2005, the Company eliminated the Automotive division and
transferred the customers to the other geographic lending divisions. The amounts in the
table were reconstructed for analytical purposes.
(2) Diversified portfolio of industries and geographies
Included in the Company's corporate exposures are automotive and airline
exposures. The Company continues to seek to selectively reduce automotive
exposures given ongoing weakness in the domestic automotive industry. Total
exposures reported in the Automotive Division were down $229 million at June
30, 2006 compared with December 31, 2005. At June 30, 2006, this broadly
defined industry portfolio consists of exposures of $156 million to Big Three
automotive manufacturing, $189 million to finance subsidiaries, $378 million to
highly rated asset-backed securitization vehicles, $209 million to suppliers,
and $140 million of other.
The Company's exposure to the airline industry consists of a $326 million
leasing portfolio (including a $16 million real estate lease exposure). The
42
airline-leasing portfolio consists of $127 million to major U.S. carriers, $136
million to foreign airlines and $63 million to U.S. regionals.
During the second quarter of 2006, the airline industry continued to face
liquidity issues driven by persistently high fuel prices and the inability to
implement meaningful fare increases. The industry's considerable excess
capacity and higher oil prices continue to negatively impact the valuations of
aircraft, especially the less fuel-efficient models, in the secondary market.
Because of these factors, the Company continues to maintain a sizable allowance
for loan losses against these exposures and to closely monitor the portfolio.
Counterparty Risk Ratings Profile
---------------------------------
The table below summarizes the risk ratings of the Company's foreign
exchange and interest rate derivative counterparty credit exposure for the past
year.
For the Quarter Ended
--------------------------------------------------
Rating(1) 6/30/06 3/31/06 12/31/05 9/30/05 6/30/05
--------------------- --------------------------------------------------
AAA to AA- 77% 77% 74% 71% 68%
A+ to A- 10 8 13 13 15
BBB+ to BBB- 6 9 9 13 14
Noninvestment Grade 7 6 4 3 3
-------- --------- ---------- --------- ----------
Total 100% 100% 100% 100% 100%
======== ========= ========== ========= ==========
(1) Represents credit rating agency equivalent of internal credit ratings.
43
Nonperforming Assets
--------------------
Change Percent
6/30/2006 vs. Inc/
(Dollars in millions) 6/30/2006 3/31/2006 3/31/2006 (Dec)
--------- --------- ----------- --------
Loans:
Commercial $ 10 $ 12 $ (2) (17)%
Foreign 10 13 (3) (23)
--------- --------- -----------
Total Nonperforming Loans 20 25 (5) (20)
Other Assets Owned 12 - 12 -
--------- --------- -----------
Nonperforming Assets on a
Continuing Operations Basis 32 25 7 28
--------- --------- -----------
Nonperforming Assets Related to
Discontinued Operations 42 41 1 2
--------- --------- -----------
Adjusted Total
Nonperforming Assets $ 74 $ 66 $ 8 12
========= ========= ===========
Continuing Operations
---------------------
Nonperforming Assets Ratio 0.1% 0.1%
Allowance for Loan
Losses/Nonperforming Loans 1,685 1,336
Allowance for Loan
Losses/Nonperforming Assets 1,053 1,336
Total Allowance for Credit
Losses/Nonperforming Loans 2,400 1,896
Total Allowance for Credit
Losses/Nonperforming Assets 1,500 1,896
Adjusted
--------
Nonperforming Assets Ratio 0.2% 0.2%
Allowance for Loan
Losses/Nonperforming Loans 673 635
Allowance for Loan
Losses/Nonperforming Assets 564 635
Total Allowance for Credit
Losses/Nonperforming Loans 915 858
Total Allowance for Credit
Losses/Nonperforming Assets 766 858
The sequential quarter increase in nonperforming assets primarily reflects
the buyout of debt associated with a lease on an aircraft that is being
positioned for sale as part of a workout strategy.
44
Activity in Nonperforming Assets
(In millions) Quarter End Year-to-date
June 30, 2006 June 30, 2006
------------------ ------------------
Balance at Beginning of Period $ 25 $ 39
Additions 12 12
Charge-offs - -
Paydowns/Sales (5) (19)
------------------ ------------------
Balance at End of Period $ 32 $ 32
================== ==================
On a continuing operations basis, interest income would have been
increased by $0.3 million and $0.1 million for the second quarters of 2006 and
2005 if loans on nonaccrual status at June 30, 2006 and 2005 had been
performing for the entire period. On a year-to-date basis, interest income
would have increased by $0.7 million and $1.1 million for 2006 and 2005 had
loans on nonaccrual status at June 30, 2006 and 2005 been performing for the
entire period.
Impaired Loans
--------------
The table below sets forth information about the Company's impaired loans.
The Company uses the discounted cash flow, collateral value, or market price
methods for valuing its impaired loans:
June 30, March 31, June 30,
(In millions) 2006 2006 2005
---------- ------------ ---------
Impaired Loans with an Allowance $ 12 $ 17 $ 20
Impaired Loans without an Allowance(1) - - 64
---------- ------------ ---------
Impaired Loans on a
Continuing Operations basis 12 17 84
Impaired Loans related to
Discontinued Operations 27 28 35
---------- ------------ ---------
Adjusted Total Impaired Loans $ 39 $ 45 $ 119
========== ============ =========
Continuing Operations
---------------------
Allowance for Impaired Loans(2) $ 3 $ 4 $ 7
Average Balance of Impaired Loans
during the Quarter 15 17 109
Interest Income Recognized on
Impaired Loans during the Quarter - - 1.1
Adjusted
--------
Allowance for Impaired Loans(2) $ 10 $ 15 $ 30
Average Balance of Impaired Loans
during the Quarter 42 43 145
Interest Income Recognized on
Impaired Loans during the Quarter 0.5 0.4 1.6
(1) When the discounted cash flows, collateral value or market price equals
or exceeds the carrying value of the loan, then the loan does not require
an allowance under the accounting standard related to impaired loans.
(2) The allowance for impaired loans is included in the Company's allowance
for credit losses.
45
Allowance
---------
June 30, March 31, June 30,
(Dollars in millions) 2006 2006 2005
------------ ------------ ------------
Margin Loans $ 5,096 $ 5,312 $ 6,055
Non-Margin Loans 30,554 26,879 26,895
------------ ------------ ------------
Loans on a Continuing
Operations Basis 35,650 32,191 32,950
Margin Loans - - -
Non-Margin Loans 7,972 7,863 7,731
------------ ------------ ------------
Loans Related to Discontinued
Operations 7,972 7,863 7,731
------------ ------------ ------------
Adjusted Total Loans $ 43,622 $ 40,054 $ 40,681
============ ============ ============
Allowance for Loan Losses $ 337 $ 334 $ 463
Allowance for Lending-Related
Commitments 143 140 138
------------ ------------ ------------
Allowance for Credit Losses
on a Continuing Operations Basis 480 474 601
------------ ------------ ------------
Allowance for Loan Losses 80 85 99
Allowance for Lending-Related
Commitments 7 7 10
------------ ------------ ------------
Allowance for Credit Losses Related
to Discontinued Operations 87 92 109
------------ ------------ ------------
Adjusted Total Allowance for
Credit Losses $ 567 $ 566 $ 710
============ ============ ============
Continuing Operations
---------------------
Allowance for Loan Losses
As a Percent of Total Loans 0.95% 1.04% 1.41%
Allowance for Loan Losses
As a Percent of Non-Margin Loans 1.10 1.24 1.72
Total Allowance for Credit Losses
As a Percent of Total Loans 1.35 1.47 1.82
Total Allowance for Credit Losses
As a Percent of Non-Margin Loans 1.57 1.76 2.23
Adjusted
--------
Allowance for Loan Losses
As a Percent of Total Loans 0.96% 1.05% 1.38%
Allowance for Loan Losses
As a Percent of Non-Margin Loans 1.08 1.21 1.62
Total Allowance for Credit Losses
As a Percent of Total Loans 1.30 1.41 1.75
Total Allowance for Credit Losses
As a Percent of Non-Margin Loans 1.47 1.63 2.05
On a continuing operations basis, the total allowance for credit losses
was $480 million, or 1.35% of total loans at June 30, 2006, compared with $601
million, or 1.82% of total loans at June 30, 2005 and $474 million, or 1.47% of
total loans at March 31, 2006. The decline from the second quarter of 2005
reflects the charge-off of aircraft leases in the fourth quarter of 2005.
46
The Company has $5.1 billion of secured margin loans on its balance sheet
at June 30, 2006. The Company has rarely suffered a loss on these types of
loans and does not allocate any of its allowance for credit losses to these
loans. As a result, the Company believes the ratio of total allowance for
credit losses to non-margin loans is a more appropriate metric to measure the
adequacy of the reserve.
On a continuing operations basis, the ratio of the total allowance for
credit losses to non-margin loans was 1.57% at June 30, 2006, compared with
2.23% at June 30, 2005 and 1.76% at March 31, 2006, reflecting improvement in
the credit quality since the second quarter of 2005. The ratio of the allowance
for loan losses to nonperforming assets was 1,053% at June 30, 2006, compared
with 532% at June 30, 2005, and 1,336% at March 31, 2006.
The allowance for loan losses and the allowance for lending-related
commitments consists of four elements: (1) an allowance for impaired credits
(nonaccrual commercial credits over $1 million), (2) an allowance for higher
risk rated credits, (3) an allowance for pass rated credits, and (4) an
unallocated allowance based on general economic conditions and risk factors in
the Company's individual markets.
The first element, impaired credits, is based on individual analysis of
all nonperforming commercial credits over $1 million. The allowance is measured
by the difference between the recorded value of impaired loans and their fair
value. Fair value is either the present value of the expected future cash flows
from borrower, the market value of the loan, or the fair value of the
collateral.
The second element, higher risk rated credits, is based on the assignment
of loss factors for each specific risk category of higher risk credits. The
Company rates each credit in its portfolio that exceeds $1 million and assigns
the credits to specific risk pools. A potential loss factor is assigned to
each pool, and an amount is included in the allowance equal to the product of
the amount of the loan in the pool and the risk factor. Reviews of higher risk
rated loans are conducted quarterly and the loan's rating is updated as
necessary. The Company prepares a loss migration analysis and compares its
actual loss experience to the loss factors on an annual basis to attempt to
ensure the accuracy of the loss factors assigned to each pool. Pools of past
due consumer loans are included in specific risk categories based on their
length of time past due.
The third element, pass rated credits, is based on the Company's expected
loss model. Borrowers are assigned to pools based on their credit ratings. The
expected loss for each loan in a pool incorporates the borrower's credit
rating, loss given default rating and maturity. The credit rating is dependent
upon the borrower's probability of default. The loss given default
incorporates a recovery expectation. Borrower and loss given default ratings
are reviewed semi-annually at a minimum and are periodically mapped to third
party, including rating agency, default and recovery data bases to ensure
ongoing consistency and validity. Commercial loans over $1 million are
individually analyzed before being assigned a credit rating. The Company also
applies this technique to its leasing and consumer portfolios. All current
consumer loans are included in the pass rated consumer pools.
The fourth element, the unallocated allowance, is based on management's
judgment regarding the following factors:
* Economic conditions including duration of the current cycle;
* Past experience including recent loss experience;
* Credit quality trends;
* Collateral values;
* Volume, composition, and growth of the loan portfolio;
47
* 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; and
* Geopolitical issues and their impact on the economy.
Based on an evaluation of these four elements, including individual
credits, historical credit losses, and global economic factors, the Company has
allocated its allowance for credit losses on a continuing operations basis as
follows:
June 30, December 31,
2006 2005
------------ -----------
Domestic
Real Estate 1% 1%
Commercial 69 72
Consumer 5 4
Foreign 2 3
Unallocated 23 20
------------ -----------
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
--------
On a continuing operations basis, total deposits were $56.7 billion at
June 30, 2006, compared with $48.7 billion at June 30, 2005, and $50.8 billion
at March 31, 2006. The increase from June 30, 2005 was primarily due to
increased market activity levels, which resulted in higher levels of customer
deposits, and global payments services customers' increased use of compensating
balances. Sequential quarter growth was primarily due to higher foreign
deposits, principally in the Company's corporate trust and custody business.
Noninterest-bearing deposits were $15.9 billion at June 30, 2006, compared with
$12.7 billion at December 31, 2005. Interest-bearing deposits were $40.8
billion at June 30, 2006, compared with $37.1 billion at December 31, 2005.
48
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 from the
Company's securities servicing businesses and private banking and asset
management 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 at The Bank of New York
Company, Inc. parent company ("Parent").
On a continuing operations 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 $14.1 billion and $12.4 billion on
an average basis for the first six months of 2006 and 2005. Average foreign
deposits, primarily from the Company's European based securities servicing
business, were $31.4 billion and $25.9 billion for the first six months of 2006
and 2005. The increase in foreign deposits reflects greater liquidity from the
Company's corporate trust and custody business. Domestic savings and other
time deposits were $1.3 billion on an average basis for the first six months of
2006 compared to $0.8 billion in 2005. On a year-to-date basis, average
payables to customers and broker-dealers decreased to $5.1 billion from $6.2
billion in 2005. The decline in payables to customers and broker-dealers
reflects the loss of a significant customer at Pershing. Long-term debt
averaged $8.1 billion and $7.0 billion for the first six months of 2006 and
2005, respectively. The increase in long-term debt reflects the movement of
Pershing from a subsidiary of the Bank to a subsidiary of the Parent and the
building of liquidity to pay debt maturing in 2007. A significant reduction in
the Company's securities servicing businesses would reduce its access to
foreign deposits.
The Company's pending transaction with JPMorgan Chase will slightly alter
the composition of the balance sheet. Approximately $15 billion of U.S. dollar
retail deposits will be replaced with approximately $13 billion of
institutional corporate trust deposits. On the asset side of the balance
sheet, approximately $8 billion of retail and middle market loans sold to
JPMorgan Chase will be replaced with liquid assets and securities. Goodwill and
intangibles are expected to increase approximately $2.1 billion. As a result
of the transaction, the Company expects its balance sheet footings to decline
slightly.
The Parent has four major sources of liquidity: dividends from its
subsidiaries, the commercial paper market, a revolving credit agreement with
third party financial institutions, and access to the capital markets.
At June 30, 2006, the Bank can pay dividends of approximately $467 million
to the Parent without the need for regulatory waiver. This dividend capacity
would increase in the remainder of 2006 to the extent of the Bank's net income
less dividends. Nonbank subsidiaries of the Parent have liquid assets of
approximately $247 million. These assets could be liquidated and the proceeds
delivered by dividend or loan to the Parent.
For the quarter ended June 30, 2006, the Parent's quarterly average
commercial paper borrowings were $510 million compared with $222 million in
2005. At June 30, 2006, the Parent had cash of $515 million compared with $858
million at June 30, 2005 and $685 million at March 31, 2006. Net of commercial
paper outstanding, the Parent's cash position at June 30, 2006 was down $14
million compared with June 30, 2005.
The Parent has a back-up line of credit of $275 million with 14 financial
institutions. This line of credit matures in October 2006. There were no
borrowings under the line of credit at June 30, 2006 and June 30, 2005.
49
The Parent also has the ability to access the capital markets. On June 5,
2006, the Company filed a new S-3 automatic shelf registration statement with
the SEC covering its existing debt, preferred stock, trust preferred
securities, and common stock.
Access to the capital markets is partially dependent on the Company's
credit ratings, which as of June 30, 2006 were as follows:
The Bank of
Parent Parent Parent Senior New York
Commercial Subordinated Long-Term Long-Term
Paper Long-Term Debt Debt Deposits Outlook
---------- -------------- ------------- ----------- -------
Standard &
Poor's A-1 A A+ AA- Stable
Moody's P-1 A1 Aa3 Aa2 Stable
Fitch F1+ A+ AA- AA Stable
Dominion Bond
Rating Service R-1(middle) A(high) AA(low) AA Stable
The Parent's major uses of funds are payment of dividends, principal,
interest on its borrowings, acquisitions, and additional investment in its
subsidiaries.
The Parent does not have any long-term debt that becomes due in 2006
subsequent to June 30, 2006. The Parent has $700 million of long-term debt that
is due in 2007. In addition, the Parent periodically has the option to call
$227 million of subordinated debt in the remainder of 2006, which it will call
and refinance if market conditions are favorable. The Parent expects to
refinance any debt it repays by issuing a combination of senior and
subordinated debt.
The Company has $800 million of trust preferred securities that are
callable in 2006. These securities qualify as Tier 1 Capital. The Company has
not yet decided if it will call these securities. The decision to call will be
based on interest rates, the availability of cash and capital, and regulatory
conditions. If the Company calls the trust preferred securities, it expects to
replace them with new trust preferred securities or senior or subordinated
debt.
Double leverage is the ratio of investment in subsidiaries divided by the
Company's consolidated equity plus trust preferred securities. The Company's
double leverage ratio at June 30, 2006 and 2005 was 105.7% and 102.3%,
respectively. The Company's target double leverage ratio is a maximum of 120%.
The double leverage ratio is monitored by regulators and rating agencies and is
an important constraint on the Company's ability to invest in its subsidiaries
to expand its businesses.
Pershing LLC, an indirect subsidiary of the Company, has committed and
uncommitted lines of credit in place for liquidity purposes. The committed
line of credit of $500 million with five financial institutions matures in
March 2007. There were no borrowings against this line of credit during the
second quarter of 2006. Pershing LLC has three separate uncommitted lines of
credit amounting to $1 billion in aggregate. Average daily borrowing under
these lines was $3 million, in aggregate, during the second quarter of 2006.
Pershing Limited, an indirect subsidiary of the Company, has committed and
uncommitted lines in place for liquidity purposes. The committed lines of
credit of $275 million with four financial institutions mature in March 2007.
Average daily borrowings under these lines were $75 million, in aggregate,
during the second quarter of 2006. Pershing Limited has three separate
uncommitted lines of credit amounting to $300 million in aggregate. Average
50
daily borrowing under these lines was $118 million, in aggregate, during the
second quarter of 2006.
The following comments relate to the information disclosed in the
Consolidated Statements of Cash Flows.
Cash provided by operating activities was $2.6 billion for the six months
of 2006, compared with $0.7 billion used by operating activities through June
30, 2005. The source of funds in 2006 was principally due to the changes in
trading activities, changes in accruals and other, and net income. The use of
funds from operations in 2005 was principally the result of changes in trading
activities partially offset by net income.
In the first six months of 2006, cash used for investing activities was
$6.3 billion as compared to cash used for investing activities in the first six
months of 2005 of $8.3 billion. In the first six months of 2006, purchases of
securities available-for-sale, principal disbursed on loans to customers, and
change in interest-bearing deposits were a significant use of funds.
Purchases of securities available-for-sale and principal disbursed on loans to
customers were a significant use of funds in 2005.
Through June 30, 2006, cash provided by financing activities was $3.8
billion, compared to $7.8 billion in the first six months of 2005. Primary
sources of funds in 2006 include deposits and long-term debt. Sources of funds
in 2005 include deposits, other borrowed funds, and proceeds from the issuance
of long-term debt.
51
CAPITAL RESOURCES
Shareholders' equity was $10,056 million at June 30, 2006, compared with
$10,101 million at March 31, 2006, and $9,876 million at December 31, 2005.
During the second quarter of 2006, the Company retained $289 million of
earnings. The Company repurchased 10.3 million shares during the quarter. The
Company expects to repurchase 14 million shares upon the closing of the BNY
CovergEx transaction. In July 2006, the Company increased the quarterly common
stock dividend to 22 cents per share, an increase of 5% over the first quarter
of 2006. Accumulated other comprehensive income declined $97 million from
December 31, 2005 primarily reflecting higher unrealized mark-to-market losses
in the securities available-for-sale portfolio.
In the second quarter of 2006, the Company issued $102 million of callable
medium-term subordinated notes bearing interest at rates from 6.05% to 6.40%.
The notes are due in 2021 and 2031 and are callable by the Company after three
to five years. The notes qualify as Tier 2 capital.
Regulators establish certain levels of capital for bank holding companies
and banks, including the Company and the Bank, in accordance with established
quantitative measurements. For the Parent to maintain its status as a financial
holding company, the Bank must, among other things, qualify as well
capitalized. In addition, major bank holding companies such as the Parent are
expected by the regulators to be well capitalized. As of June 30, 2006 and
2005, the Company and the Bank were considered well capitalized on the basis of
the ratios (defined by regulation) of Total and Tier 1 capital to risk-weighted
assets and leverage (Tier 1 capital to average assets), which are shown as
follows:
June 30, 2006 June 30, 2005 Well Adequately
------------------ ------------------ Company Capitalized Capitalized
Company Bank Company Bank Targets Guidelines Guidelines
--------- ------- --------- ------- ---------- ----------- -----------
Tier 1 (1) 7.96% 8.60% 8.07% 8.48% 7.75% 6% 4%
Total Capital (2) 12.06 11.39 12.49 11.74 11.75 10 8
Leverage 6.22 6.82 6.55 6.92 5 3-5
Tangible Common
Equity ("TCE") 5.07 6.11 5.26 6.19 5.00-5.25 N.A. N.A.
(1) Tier 1 capital consists, generally, of common equity, trust preferred securities (subject to
limitations in 2009), and certain qualifying preferred stock, less goodwill and most other
intangibles.
(2) Total Capital consists of Tier 1 capital plus Tier 2 capital. Tier 2 capital consists,
generally, of certain qualifying preferred stock and subordinated debt and a portion of the
loan loss allowance.
The Company's Tier 1 capital and Total Capital ratios were 7.96% and
12.06% at June 30, 2006, compared with 8.07% and 12.49% at June 30, 2005, and
8.28% and 12.44% at March 31, 2006. The leverage ratio was 6.22% at June 30,
2006, compared with 6.55% at June 30, 2005, and 6.51% at March 31, 2006. The
Company's tangible common equity as a percentage of total assets was 5.07% at
June 30, 2006, compared with 5.26% at June 30, 2005, and 5.42% at March 31,
2006. The Company's pending transaction with JPMorgan Chase is expected to
reduce its TCE ratio to approximately 4.67% primarily due to the intangibles
associated with the transaction. The tangible common equity ratio varies
depending on the size of the balance sheet at quarter-end and the impact of
interest rates on unrealized gains and losses among other things. The balance
sheet size fluctuates from quarter to quarter based on levels of market
activity. In general, when servicing clients are more actively trading
securities, deposit balances and the balance sheet as a whole, are higher to
finance these activities.
A billion dollar change in assets changes the TCE ratio by 5 basis points
while a $100 million change in common equity changes the TCE ratio by 10 basis
points.
52
On April 4, 2006, pursuant to a 10b5-1 plan, the Company repurchased 10
million shares of its common stock at an initial price of $35.85 from a broker-
dealer counterparty who borrowed the shares, as part of an accelerated share
repurchase program. The repurchase was triggered by the non-issuance of a
specified FSP for lease accounting for calendar year 2006 or prior periods.
See "Accounting Changes and New Accounting Pronouncements" in the Notes to the
Consolidated Financial Statements. The initial price is subject to a purchase
price adjustment based on the price the counterparty pays for the Company's
shares it purchases over time in the open market to cover the borrowed shares.
On March 1, 2005, the Board of Governors of the Federal Reserve System
(the "FRB") adopted a final rule that allows the continued limited inclusion of
trust preferred securities in the Tier 1 capital of bank holding companies
(BHCs). Under the final rule, the Company will be subject to a 15 percent limit
in the amount of trust preferred securities that can be included in Tier 1
capital, net of goodwill, less any related deferred tax liability. Amounts in
excess of these limits will continue to be included in Tier 2 capital. The
final rule provides a five-year transition period, ending March 31, 2009, for
application of quantitative limits. Under the transition rules, the Company
expects all its trust preferred securities to continue to qualify as Tier 1
capital. Both the Company and the Bank are expected to remain "well
capitalized" under the final rule. At the end of the transition period, the
Company expects all its current trust preferred securities will continue to
qualify as Tier 1 capital.
The following table presents the components of the Company's risk-based
capital at June 30, 2006 and 2005:
June 30,
-----------------
(In millions) 2006 2005
------- -------
Shareholders' Equity $10,056 $ 9,471
Securities Valuation Allowance 155 (49)
Trust Preferred Securities 1,150 1,150
Adjustments: Intangibles (4,775) (4,273)
Merchant Banking Investments (19) (6)
------- -------
Tier 1 Capital 6,567 6,293
------- -------
Qualifying Subordinated Debt 2,821 2,743
Qualifying Allowance for Loan Losses 569 709
------- -------
Tier 2 Capital 3,390 3,452
------- -------
Total Risk-Based Capital $ 9,957 $ 9,745
======= =======
Risk-Adjusted Assets $82,544 $78,003
======= =======
53
TRADING ACTIVITIES
The fair value and notional amounts of the Company's financial instruments
held for trading purposes at June 30, 2006 and 2005 are as follows:
June 30, 2006 2006 Average
--------------------------- ------------------
(In millions) Notional Fair Value Fair Value
------------------ ------------------
Trading Account Amount Assets Liabilities Assets Liabilities
--------------- -------- ------ ----------- ------ -----------
Interest Rate Contracts:
Futures and Forward
Contracts $ 93,353 $ 57 $ - $ 44 $ -
Swaps 283,612 1,709 1,208 2,045 1,488
Written Options 214,899 - 1,011 - 1,016
Purchased Options 185,068 203 - 199 -
Foreign Exchange Contracts:
Swaps 2,640 - - - -
Written Options 10,137 - 84 - 77
Purchased Options 12,801 237 - 198 -
Commitments to Purchase
and Sell Foreign Exchange 90,948 202 303 209 334
Debt Securities - 3,638 295 4,452 233
Credit Derivatives 1,394 3 8 2 8
Equities 11,459 16 29 81 62
------ ----------- ------ -----------
Total Trading Account $6,065 $ 2,938 $7,230 $ 3,218
====== =========== ====== ===========
June 30, 2005 2005 Average
--------------------------- ------------------
(In millions) Notional Fair Value Fair Value
------------------ ------------------
Trading Account Amount Assets Liabilities Assets Liabilities
--------------- -------- ------ ----------- ------ -----------
Interest Rate Contracts:
Futures and Forward
Contracts $ 32,949 $ - $ - $ - $ 5
Swaps 249,997 1,809 923 1,677 831
Written Options 182,793 - 1,425 - 1,337
Purchased Options 143,793 274 - 229 -
Foreign Exchange Contracts:
Swaps 3,520 - - - -
Written Options 5,732 - 18 - 24
Purchased Options 7,214 32 - 70 -
Commitments to Purchase
and Sell Foreign Exchange 75,276 582 545 515 546
Debt Securities - 3,824 83 3,372 245
Credit Derivatives 1,708 1 4 2 7
Equities 2,023 110 90 126 116
------ ----------- ------ -----------
Total Trading Account $6,632 $ 3,088 $5,991 $ 3,111
====== =========== ====== ===========
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 a separate unit on a daily basis. Based
on certain assumptions, the VAR methodology is designed to capture the
potential overnight pre-tax dollar loss from adverse changes in fair values of
all trading positions. The calculation assumes a one-day holding period for
most instruments, utilizes a 99% confidence level, and incorporates the non-
linear characteristics of options. The VAR model is used to calculate economic
capital, which is allocated to the business units for computing risk-adjusted
performance.
54
As VAR methodology does not evaluate risk attributable to extraordinary
financial, economic or other occurrences, the risk assessment process includes
a number of stress scenarios based upon the risk factors in the portfolio and
management's assessment of market conditions. Additional stress scenarios based
upon historic market events are also tested. Stress tests by their design
incorporate the impact of reduced liquidity and the breakdown of observed
correlations. The results of these stress tests are reviewed weekly with senior
management.
The following table indicates the calculated VAR amounts for the trading
portfolio for the periods indicated.
(Dollars in millions) 2nd Quarter 2006 Year-to-date 2006
--------------------------- --------------------------- -------
Average Minimum Maximum Average Minimum Maximum 6/30/06
------- ------- ------- ------- ------- ------- -------
Interest rate $ 3.3 $ 2.1 $ 7.6 $ 3.0 $ 2.0 $ 7.6 $ 3.0
Foreign Exchange 1.1 0.6 1.8 1.1 0.6 1.8 1.2
Equity 1.0 0.5 3.7 0.9 0.5 3.7 2.3
Credit Derivatives 1.3 0.9 1.6 1.1 0.6 1.6 1.5
Diversification (1.7) NM NM (1.5) NM NM (2.9)
Overall Portfolio 5.0 3.9 6.7 4.6 3.3 6.7 5.1
(Dollars in millions) 2nd Quarter 2005 Year-to-date 2005
--------------------------- --------------------------- -------
Average Minimum Maximum Average Minimum Maximum 6/30/05
------- ------- ------- ------- ------- ------- -------
Interest rate $ 2.7 $ 1.9 $ 4.6 $ 2.8 $ 1.9 $ 4.6 $ 2.3
Foreign Exchange 2.8 1.6 4.1 1.9 0.4 4.1 2.3
Equity 0.6 0.3 1.0 0.7 0.3 1.1 0.4
Credit Derivatives 1.8 1.5 2.1 1.7 1.5 2.1 1.8
Diversification (1.4) NM NM (1.4) NM NM (1.0)
Overall Portfolio 6.5 3.8 9.1 5.7 3.7 9.1 5.8
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 second quarter of 2006, interest rate risk generated
approximately 44% of average VAR, credit derivatives generated 27% of average
VAR, foreign exchange accounted for 16% of average VAR, and equity generated
13% of average VAR. During the second quarter and first six months of 2006,
the Company's daily trading loss did not exceed the Company's calculated VAR
amounts on any given day.
The following table of total daily revenue or loss captures trading
volatility and shows the number of days on which the Company's trading revenues
fell within particular ranges during the past year.
Distribution of Revenues(1)
--------------------------
For the Quarter Ended
--------------------------------------------------
Revenue Range 6/30/06 3/31/06 12/31/05 9/30/05 6/30/05
--------------------------------------------------
(Dollars in millions) Number of Occurrences
---------------------- --------- --------- --------- ---------- ---------
Less than $(2.5) 0 0 0 0 0
$(2.5)~ $ 0 2 4 3 3 6
$ 0 ~ $ 2.5 39 40 44 51 40
$ 2.5 ~ $ 5.0 21 18 14 8 16
More than $5.0 2 0 0 2 2
(1) Based on revenues before deducting share of joint venture partner,
Susquehanna Trading.
55
ASSET/LIABILITY MANAGEMENT
The Company's asset/liability management activities include lending,
investing in securities, accepting deposits, raising money as needed to fund
assets, and processing securities and other transactions. The market risks
that arise from these activities are interest rate risk, and to a lesser
degree, foreign exchange risk. The Company's primary market risk is exposure
to movements in U.S. dollar interest rates. Exposure to movements in foreign
currency interest rates also exists, but to a significantly lower degree. The
Company actively manages interest rate sensitivity. In addition to gap
analysis, the Company uses earnings simulation and discounted cash flow models
to identify interest rate exposures.
An earnings simulation model is the primary tool used to assess changes in
pre-tax net interest income. The model incorporates management's assumptions
regarding interest rates, balance changes on core deposits, and changes in the
prepayment behavior of loans and securities, and the impact of derivative
financial instruments used for interest rate risk management purposes. These
assumptions have been developed through a combination of historical analysis
and future expected pricing behavior. These assumptions are inherently
uncertain, and, as a result, the earnings simulation model cannot precisely
estimate net interest income or the impact of higher or lower interest rates on
net interest income. Actual results may differ from projected results due to
timing, magnitude and frequency of interest rate changes and changes in market
conditions and management's strategies, among other factors.
The Company evaluates the effect on earnings by running various interest
rate ramp scenarios up and down from a baseline scenario, which assumes no
changes in interest rates. These scenarios are reviewed to examine the impact
of large interest rate movements. Interest rate sensitivity is quantified by
calculating the change in pre-tax net interest income between the scenarios
over a 12-month measurement period. The measurement of interest rate
sensitivity is the percentage change in net interest income as shown in the
following table:
(Dollars in millions) Adjusted Estimated Changes
in Net Interest Income
--------------------------------------
June 30, 2006 March 31, 2006
$ % $ %
--------- -------- ---------- ------
+200 Basis Point Ramp vs. Stable Rate $ (62) (3.0)% $ (64) (3.1)%
+100 Basis Point Ramp vs. Stable Rate (28) (1.3) (28) (1.3)
-100 Basis Point Ramp vs. Stable Rate 15 0.7 (1) -
-200 Basis Point Ramp vs. Stable Rate 9 0.5 (15) (0.7)
The base case scenario Fed Funds rate in the June 30, 2006 analysis was
5.25% versus 4.75% for the March 31, 2006 analysis. The 100 basis point ramp
scenarios assumes short-term rates change 25 basis points in each of the next
four quarters, while the 200 basis point ramp scenarios assumes a 50 basis
point per quarter change. The +100 basis point June 30, 2006 scenario assumes
a flattening of the yield curve with 10-year rates rising 80 basis points. The
+200 basis point June 30, 2006 scenario assumes a flattening of the yield curve
with 10-year rates rising 160 basis points. These scenarios do not reflect
strategies that management could employ to limit the impact as interest rate
expectations change.
The above table relies on certain critical assumptions including
depositors' behavior related to interest rate fluctuations and the prepayment
and extension risk in certain of the Company's assets. To the extent that
actual behavior is different from that assumed in the models, there could be a
change in interest rate sensitivity. The Company's pending transaction with
JPMorgan Chase will initially result in a more liability-sensitive balance
because corporate trust liabilities reprice more quickly than retail deposits.
The Company is in the process of evaluating various alternatives to readjust
its interest rate sensitivity.
56
STATISTICAL INFORMATION
Operating Leverage
------------------
Operating leverage is measured by comparing the rate of increase in
revenue to the rate of increase in expenses. The chart below shows the
computation of operating leverage. The operating column for 2006 excludes one-
time costs associated with SFAS 123(R) and certain costs resulting from the
application of discontinued operations accounting. The Company believes
excluding these costs provides the reader with supplemental information with
which to assess the Company's future performance.
Continuing Operations Adjusted (1)
----------------------------------------------------- --------------------------------------------------
(Dollars in millions) Operating Operating Operating Operating
2Q 2006 2Q 2006(2) 2Q 2005 % Change % Change(2) 2Q2006 2Q2006(3) 2Q 2005 % Change % Change(3)
------- --------- ------- -------- ---------- ------- -------- -------- -------- ----------
Noninterest Income $ 1,366 $ 1,366 $ 1,194 14.4% 14.4% $ 1,426 $ 1,426 $ 1,256 13.5% 13.5%
Net Interest Income 358 358 329 8.8 8.8 512 512 470 8.9 8.9
Total Revenue 1,724 1,724 1,523 13.2 13.2 1,938 1,938 1,726 12.3 12.3
Total Expense 1,134 1,122 1,021 11.1 9.9 1,248 1,231 1,123 11.1 9.6
Operating Leverage 2.1% 3.3% 1.2% 2.7%
===== ===== ===== =====
Continuing Operations Adjusted (1)
----------------------------------------------------- --------------------------------------------------
(Dollars in millions) Operating Operating Operating Operating
2Q 2006 2Q 2006(2) 1Q 2006 % Change % Change(2) 2Q2006 2Q2006(3) 1Q 2006 % Change % Change(3)
------- --------- ------- -------- ---------- ------- -------- -------- -------- ----------
Noninterest Income $ 1,366 $ 1,366 $ 1,261 8.3% 8.3% $ 1,426 $ 1,426 $ 1,332 7.1% 7.1%
Net Interest Income 358 358 339 5.6 5.6 512 512 488 4.9 4.9
Total Revenue 1,724 1,724 1,600 7.8 7.8 1,938 1,938 1,820 6.5 6.5
Total Expense 1,134 1,122 1,065 6.5 5.4 1,248 1,231 1,178 5.9 4.5
Operating Leverage 1.3% 2.4% 0.6% 2.0%
===== ===== ===== =====
Continuing Operations Adjusted (1)
----------------------------------------------------- ---------------------------------------------------
(Dollars in millions) Operating Operating Operating Operating
YTD2006 YTD2006(2) YTD2005 % Change % Change(2) YTD2006 YTD2006(3) YTD2005 % Change % Change(3)
------- --------- ------- -------- ---------- ------- -------- -------- -------- ----------
Noninterest Income $ 2,627 $ 2,627 $ 2,310 13.7% 13.7% $ 2,758 $ 2,758 $ 2,434 13.3% 13.3%
Net Interest Income 697 697 650 7.2 7.2 1,000 1,000 925 8.1 8.1
Total Revenue 3,324 3,324 2,960 12.3 12.3 3,758 3,758 3,359 11.9 11.9
Total Expense 2,199 2,187 1,992 10.4 9.8 2,426 2,409 2,200 10.3 9.5
Operating Leverage 1.9% 2.5% 1.6% 2.4%
===== ===== ===== =====
(1) Adjusted combines continuing and discontinued operations.
(2) Operating excludes the $12 million impact related to SFAS 123(R).
(3) Operating excludes the $12 million impact related to SFAS 123(R)
and charges and accounting changes resulting from the JPMorgan
Chase transaction.
The Company's record operating results in the second quarter of 2006
reflect net income of $448 million. The Company reported net income of $773
million in the third quarter of 1999. However, after excluding the $573
million gain on the sale of BNY Financial Corporation, operating net income in
the third quarter of 1999 was $200 million.
57
Average Balances and Rates on a Taxable Equivalent Basis
--------------------------------------------------------
THE BANK OF NEW YORK COMPANY, INC.
Average Balances and Rates on a Taxable Equivalent Basis
(Dollars in millions)
For the three months For the three months
ended June 30, 2006 ended June 30, 2005
---------------------------- ---------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
-------- -------- ------- ------- -------- -------
ASSETS
------
Interest-Bearing
Deposits in Banks
(primarily foreign) $ 12,432 $ 120 3.88% $ 9,182 $ 67 2.91%
Federal Funds Sold and Securities
Purchased Under Resale Agreements 1,565 15 3.98 2,789 20 2.72
Margin Loans 5,506 85 6.20 6,341 62 3.93
Loans
Domestic Offices 16,786 193 4.59 15,133 137 3.64
Foreign Offices 11,317 157 5.56 10,141 106 4.19
--------- -------- --------- -------
Non-Margin Loans 28,103 350 4.98 25,274 243 3.86
--------- -------- --------- -------
Securities
U.S. Government Obligations 216 3 4.24 282 2 3.21
U.S. Government Agency Obligations 4,009 46 4.60 3,804 38 3.95
Obligations of States and
Political Subdivisions 109 2 8.13 148 3 8.52
Other Securities 18,848 245 5.21 15,499 166 4.29
Trading Securities 4,469 51 4.61 3,416 39 4.62
--------- -------- --------- -------
Total Securities 27,651 347 5.03 23,149 248 4.26
--------- -------- --------- -------
Total Interest-Earning Assets 75,257 917 4.88 66,735 640 3.83
-------- -------
Allowance for Credit Losses (344) (463)
Cash and Due from Banks 3,089 2,282
Other Assets 18,391 16,445
Assets of Discontinued Operations
Held for Sale 13,993 191 5.47 15,462 169 4.40
--------- -------- --------- -------
TOTAL ASSETS $ 110,386 $ 1,108 $ 100,461 $ 809
========= ======== ========= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Interest-Bearing Deposits
Money Market Rate Accounts $ 5,213 $ 34 2.60% $ 6,363 $ 25 1.57%
Savings 456 2 2.01 666 1 0.92
Certificates of Deposit
$100,000 & Over 4,105 52 5.05 3,054 24 3.10
Other Time Deposits 697 8 4.79 127 1 2.30
Foreign Offices 32,544 252 3.10 26,332 141 2.14
--------- -------- --------- -------
Total Interest-Bearing Deposits 43,015 348 3.24 36,542 192 2.10
Federal Funds Purchased and
Securities Sold Under Repurchase
Agreements 2,893 34 4.62 1,152 8 2.58
Other Borrowed Funds 2,323 22 3.82 1,954 13 2.65
Payables to Customers and Broker-Dealers 5,034 42 3.34 5,984 28 1.90
Long-Term Debt 8,146 106 5.15 7,485 64 3.41
--------- -------- --------- -------
Total Interest-Bearing Liabilities 61,411 552 3.59 53,117 305 2.29
-------- -------
Noninterest-Bearing Deposits 10,869 9,581
Other Liabilities 14,231 12,976
Common Shareholders' Equity 9,882 9,325
Liabilities of Discontinued Operations
Held for Sale 13,993 37 1.07 15,462 28 0.73
--------- -------- --------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 110,386 $ 589 $ 100,461 $ 333
========= ======== ========= =======
Net Interest Earnings
and Interest Rate Spread $ 365 1.29% $ 335 1.54%
======== ======= ======= =======
Net Yield on Interest-Earning Assets 1.95% 2.01%
======= =======
(1) Average balances and rates have been impacted by allocations made to match assets of discontinued
operations held for sale with liabilities of discontinued operations held for sale.
58
THE BANK OF NEW YORK COMPANY, INC.
Average Balances and Rates on a Taxable Equivalent Basis
(Dollars in millions)
For the six months For the six months
ended June 30, 2006 ended June 30, 2005
-------------------------- --------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
ASSETS
------
Interest-Bearing
Deposits in Banks
(primarily foreign) $ 11,036 $ 206 3.76% $ 9,502 $ 138 2.93%
Federal Funds Sold and Securities
Purchased Under Resale Agreements 1,625 30 3.81 2,619 33 2.48
Margin Loans 5,580 162 5.87 6,374 117 3.70
Loans
Domestic Offices 15,983 360 4.51 14,933 275 3.69
Foreign Offices 11,142 300 5.44 10,221 201 3.97
-------- -------- ------- --------
Non-Margin Loans 27,125 660 4.89 25,154 476 3.81
-------- -------- ------- --------
Securities
U.S. Government Obligations 220 5 4.23 320 5 3.12
U.S. Government Agency Obligations 3,981 90 4.53 3,554 69 3.85
Obligations of States and
Political Subdivisions 113 5 8.09 153 6 8.36
Other Securities 18,963 477 5.03 15,009 310 4.14
Trading Securities 4,591 102 4.51 2,943 61 4.20
-------- -------- ------- --------
Total Securities 27,868 679 4.88 21,979 451 4.11
-------- -------- ------- --------
Total Interest-Earning Assets 73,234 1,737 4.77 65,628 1,215 3.72
-------- --------
Allowance for Credit Losses (339) (474)
Cash and Due from Banks 3,676 2,918
Other Assets 17,553 16,281
Assets of Discontinued Operations
Held for Sale 14,147 376 5.36 15,503 327 4.26
-------- -------- -------- --------
TOTAL ASSETS $108,271 $ 2,113 $ 99,856 $ 1,542
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Interest-Bearing Deposits
Money Market Rate Accounts $ 5,319 $ 65 2.45% $ 6,291 $ 44 1.44%
Savings 462 3 1.56 629 3 0.88
Certificates of Deposit
$100,000 & Over 4,176 100 4.83 2,961 42 2.85
Other Time Deposits 799 18 4.56 133 2 2.07
Foreign Offices 31,388 460 2.96 25,900 261 2.03
-------- -------- ------- --------
Total Interest-Bearing Deposits 42,144 646 3.09 35,914 352 1.98
Federal Funds Purchased and
Securities Sold Under Repurchase
Agreements 2,432 54 4.45 1,270 14 2.18
Other Borrowed Funds 2,153 42 3.91 1,890 20 2.12
Payables to Customers and Broker-Dealers 5,132 82 3.22 6,184 53 1.73
Long-Term Debt 8,079 202 4.98 7,047 113 3.21
-------- -------- ------- --------
Total Interest-Bearing Liabilities 59,940 1,026 3.44 52,305 552 2.12
-------- --------
Noninterest-Bearing Deposits 10,496 9,694
Other Liabilities 13,803 13,041
Common Shareholders' Equity 9,885 9,313
Liabilities of Discontinued Operations
Held for Sale 14,147 73 1.04 15,503 52 0.68
-------- -------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $108,271 $ 1,099 $ 99,856 $ 604
======== ======== ======== ========
Net Interest Earnings
and Interest Rate Spread $ 711 1.33% $ 663 1.60%
======== ======= ======== =======
Net Yield on Interest-Earning Assets 1.95% 2.03%
======= =======
(1) Average balances and rates have been impacted by allocations made to match assets of discontinued
operations held for sale with liabilities of discontinued operations held for sale.
59
SUPPLEMENTAL DATA
THE BANK OF NEW YORK COMPANY, INC.
Adjusted(1) Average Balances and Rates on a Taxable Equivalent Basis - Supplemental Data
(Dollars in millions)
For the three months For the three months
ended June 30, 2006 ended June 30, 2005
-------------------------- --------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
ASSETS
------
Interest-Bearing
Deposits in Banks
(primarily foreign) $ 12,432 $ 120 3.88% $ 9,182 $ 67 2.91%
Federal Funds Sold and Securities
Purchased Under Resale Agreements 2,774 30 4.38 5,160 36 2.81
Margin Loans 5,506 85 6.20 6,341 62 3.93
Loans
Domestic Offices 24,745 331 5.36 22,719 249 4.41
Foreign Offices 11,317 157 5.56 10,141 106 4.19
-------- -------- ------- --------
Non-Margin Loans 36,062 488 5.42 32,860 355 4.34
-------- -------- ------- --------
Securities
U.S. Government Obligations 216 2 4.24 282 2 3.21
U.S. Government Agency Obligations 4,009 46 4.60 3,804 38 3.95
Obligations of States and
Political Subdivisions 212 4 6.90 211 4 7.24
Other Securities 22,904 283 4.93 20,422 206 4.04
Trading Securities 4,469 51 4.61 3,416 39 4.62
-------- -------- ------- --------
Total Securities 31,810 386 4.85 28,135 289 4.12
-------- -------- ------- --------
Total Interest-Earning Assets 88,584 1,109 5.01 81,678 809 3.98
-------- --------
Allowance for Credit Losses (421) (584)
Cash and Due from Banks 3,716 2,898
Other Assets 18,509 16,469
-------- --------
TOTAL ASSETS $110,388 $100,461
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Interest-Bearing Deposits
Money Market Rate Accounts $ 5,777 $ 35 2.43% $ 7,049 $ 26 1.49%
Savings 7,864 32 1.64 8,939 24 1.10
Certificates of Deposit
$100,000 & Over 4,118 52 5.05 3,065 24 3.10
Other Time Deposits 1,462 14 3.91 893 5 2.12
Foreign Offices 32,544 252 3.10 26,332 141 2.14
-------- -------- ------- --------
Total Interest-Bearing Deposits 51,765 385 2.98 46,278 220 1.91
Federal Funds Purchased and
Securities Sold Under Repurchase
Agreements 2,894 33 4.62 1,152 7 2.58
Other Borrowed Funds 2,323 22 3.82 1,954 13 2.65
Payables to Customers and Broker-Dealers 5,034 42 3.34 5,984 28 1.90
Long-Term Debt 8,147 106 5.15 7,485 64 3.41
-------- -------- ------- --------
Total Interest-Bearing Liabilities 70,163 588 3.36 62,853 332 2.12
-------- --------
Noninterest-Bearing Deposits 16,059 15,260
Other Liabilities 14,284 13,023
Common Shareholders' Equity 9,882 9,325
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $110,388 $100,461
======== ========
Net Interest Earnings
and Interest Rate Spread $ 521 1.65% $ 477 1.86%
======== ======= ======== =======
Net Yield on Interest-Earning Assets 2.36% 2.34%
======= =======
Note:
(1) Adjusted results combine continuing and discontinued operations to provide continuity
with historical results.
60
THE BANK OF NEW YORK COMPANY, INC.
Adjusted (1) Average Balances and Rates on a Taxable Equivalent Basis - Supplemental Data
(Dollars in millions)
For the six months For the six months
ended June 30, 2006 ended June 30, 2005
-------------------------- --------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
ASSETS
------
Interest-Bearing
Deposits in Banks
(primarily foreign) $ 11,036 $ 206 3.76% $ 9,502 $ 138 2.93%
Federal Funds Sold and Securities
Purchased Under Resale Agreements 3,144 65 4.19 4,989 64 2.57
Margin Loans 5,580 162 5.87 6,374 117 3.70
Loans
Domestic Offices 23,869 629 5.31 22,429 489 4.40
Foreign Offices 11,142 300 5.44 10,221 201 3.97
-------- -------- ------- --------
Non-Margin Loans 35,011 929 5.35 32,650 690 4.26
-------- -------- ------- --------
Securities
U.S. Government Obligations 220 5 4.23 320 5 3.12
U.S. Government Agency Obligations 3,981 90 4.53 3,554 69 3.85
Obligations of States and
Political Subdivisions 219 7 6.78 205 7 7.29
Other Securities 22,791 547 4.80 20,054 392 3.91
Trading Securities 4,591 103 4.51 2,943 61 4.20
-------- -------- ------- --------
Total Securities 31,802 752 4.73 27,076 534 3.95
-------- -------- ------- --------
Total Interest-Earning Assets 86,573 2,114 4.91 80,591 1,543 3.86
-------- --------
Allowance for Credit Losses (418) (586)
Cash and Due from Banks 4,295 3,528
Other Assets 17,822 16,323
-------- -------
TOTAL ASSETS $108,272 $99,856
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Interest-Bearing Deposits
Money Market Rate Accounts $ 5,901 $ 67 2.28% $ 6,984 $ 47 1.37%
Savings 7,993 63 1.60 8,920 45 1.02
Certificates of Deposit
$100,000 & Over 4,188 100 4.81 2,973 42 2.85
Other Time Deposits 1,542 29 3.78 896 9 1.94
Foreign Offices 31,388 460 2.96 25,900 261 2.03
-------- -------- ------- --------
Total Interest-Bearing Deposits 51,012 719 2.84 45,673 404 1.78
Federal Funds Purchased and
Securities Sold Under Repurchase
Agreements 2,432 54 4.45 1,270 14 2.18
Other Borrowed Funds 2,153 42 3.91 1,890 20 2.12
Payables to Customers and Broker-Dealers 5,132 82 3.22 6,184 53 1.73
Long-Term Debt 8,079 202 4.98 7,047 113 3.21
-------- -------- ------- --------
Total Interest-Bearing Liabilities 68,808 1,099 3.21 62,064 604 1.96
-------- --------
Noninterest-Bearing Deposits 15,727 15,389
Other Liabilities 13,852 13,090
Common Shareholders' Equity 9,885 9,313
-------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $108,272 $99,856
======== =======
Net Interest Earnings
and Interest Rate Spread $ 1,015 1.70% $ 939 1.90%
======== ======= ======== =======
Net Yield on Interest-Earning Assets 2.35% 2.35%
======= =======
Note:
(1) Adjusted results combine continuing and discontinued operations to provide continuity
with historical results.
61
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Statements of Income- Supplemental Data
(Dollars in millions, except per share amounts)
(Unaudited)
Quarter Ended June 30, 2006
---------------------------------------------
Continuing Discontinued Adjusted
Operations Operations Results(1)
---------- ------------ ----------
Net Interest Income $ 358 $ 154 $ 512
-------------------
Provision for Credit Losses (1) 1 -
----- ----- -----
Net Interest Income After
Provision for
Credit Losses 359 153 512
----- ----- -----
Noninterest Income
------------------
Servicing Fees
Securities 909 - 909
Global Payment Services 63 7 70
----- ----- -----
972 7 979
Private Banking and
Asset Management Fees 138 12 150
Service Charges and Fees 53 38 91
Trading Activities 130 2 132
Securities Gains 23 - 23
Other 50 1 51
----- ----- -----
Total Noninterest Income 1,366 60 1,426
----- ----- -----
Noninterest Expense
-------------------
Salaries and Employee Benefits 656 67 723
Net Occupancy 68 18 86
Furniture and Equipment 48 2 50
Clearing 53 - 53
Sub-custodian Expenses 36 - 36
Software 53 - 53
Communications 22 1 23
Amortization of Intangibles 15 - 15
Other 183 26 209
----- ----- -----
Total Noninterest Expense 1,134 114 1,248
----- ----- -----
Income Before Income Taxes 591 99 690
Income Taxes 200 42 242
----- ----- -----
Net Income $ 391 $ 57 $ 448
---------- ===== ===== =====
Diluted Earnings Per Share $0.52 $0.07 $0.59
Note:
(1) Adjusted results combine continuing and discontinued operations to provide continuity
with historical results.
62
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Statements of Income- Supplemental Data
(Dollars in millions, except per share amounts)
(Unaudited)
Quarter Ended June 30, 2005
--------------------------------------------
Continuing Discontinued Adjusted
Operations Operations Results(1)
---------- ------------ ----------
Net Interest Income $ 329 $ 141 $ 470
-------------------
Provision for Credit Losses (3) 8 5
----- ----- -----
Net Interest Income After
Provision for
Credit Losses 332 133 465
----- ----- -----
Noninterest Income
------------------
Servicing Fees
Securities 775 - 775
Global Payment Services 67 9 76
----- ----- -----
842 9 851
Private Banking and
Asset Management Fees 112 11 123
Service Charges and Fees 64 39 103
Foreign Exchange and Other
Trading Activities 101 2 103
Securities Gains 23 - 23
Other 52 1 53
----- ----- -----
Total Noninterest Income 1,194 62 1,256
----- ----- -----
Noninterest Expense
-------------------
Salaries and Employee Benefits 581 59 640
Net Occupancy 65 17 82
Furniture and Equipment 49 2 51
Clearing 42 - 42
Sub-custodian Expenses 24 - 24
Software 55 - 55
Communications 21 1 22
Amortization of Intangibles 10 - 10
Other 174 23 197
----- ----- -----
Total Noninterest Expense 1,021 102 1,123
----- ----- -----
Income Before Income Taxes 505 93 598
Income Taxes 162 38 200
----- ----- -----
Net Income $ 343 $ 55 $ 398
---------- ===== ===== =====
Diluted Earnings Per Share $0.45 $0.07 $0.52
Note:
(1) Adjusted results combine continuing and discontinued operations to provide continuity
with historical results.
63
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Statements of Income- Supplemental Data
(Dollars in millions, except per share amounts)
(Unaudited)
Quarter Ended March 31, 2006
--------------------------------------------
Continuing Discontinued Adjusted
Operations Operations Results(1)
---------- ------------ ----------
Net Interest Income $ 339 $ 149 $ 488
-------------------
Provision for Credit Losses - 5 5
----- ----- -----
Net Interest Income After
Provision for
Credit Losses 339 144 483
----- ----- -----
Noninterest Income
------------------
Servicing Fees
Securities 831 - 831
Global Payment Services 62 8 70
----- ----- -----
893 8 901
Private Banking and
Asset Management Fees 130 11 141
Service Charges and Fees 52 37 89
Foreign Exchange and Other
Trading Activities 113 2 115
Securities Gains 17 - 17
Other 56 13 69
----- ----- -----
Total Noninterest Income 1,261 71 1,332
----- ----- -----
Noninterest Expense
-------------------
Salaries and Employee Benefits 604 64 668
Net Occupancy 68 20 88
Furniture and Equipment 51 2 53
Clearing 50 - 50
Sub-custodian Expenses 34 - 34
Software 55 1 56
Communications 26 1 27
Amortization of Intangibles 13 - 13
Other 164 25 189
----- ----- -----
Total Noninterest Expense 1,065 113 1,178
----- ----- -----
Income Before Income Taxes 535 102 637
Income Taxes 175 40 215
----- ----- -----
Net Income $ 360 $ 62 $ 422
---------- ===== ===== =====
Diluted Earnings Per Share $0.47 $0.08 $0.55
Note:
(1) Adjusted results combine continuing and discontinued operations to provide continuity
with historical results.
64
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Statements of Income- Supplemental Data
(Dollars in millions, except per share amounts)
(Unaudited)
Adjusted Results(1)
---------------------------------------------------------------------
Quarter Ended 6/30/06 6/30/06
June 30, June 30, March 31, vs. vs.
2006 2005 2006 6/30/05 3/31/06
-------- -------- --------- ------- -------
Net Interest Income $ 512 $ 470 $ 488 9% 5%
-------------------
Provision for Credit Losses - 5 5
----- ----- -----
Net Interest Income After
Provision for
Credit Losses 512 465 483 10 6
----- ----- -----
Noninterest Income
------------------
Servicing Fees
Securities 909 775 831 17 9
Global Payment Services 70 76 70 (8) -
----- ----- -----
979 851 901 15 9
Private Banking and
Asset Management Fees 150 123 141 22 6
Service Charges and Fees 91 103 89 (12) 2
Foreign Exchange and Other
Trading Activities 132 103 115 28 15
Securities Gains 23 23 17 - 35
Other 51 53 69 (4) (26)
----- ----- -----
Total Noninterest Income 1,426 1,256 1,332 14 7
----- ----- -----
Noninterest Expense
-------------------
Salaries and Employee Benefits 723 640 668 13 8
Net Occupancy 86 82 88 5 (2)
Furniture and Equipment 50 51 53 (2) (6)
Clearing 53 42 50 26 6
Sub-custodian Expenses 36 24 34 50 6
Software 53 55 56 (4) (5)
Communications 23 22 27 5 (15)
Amortization of Intangibles 15 10 13 50 15
Other 209 197 189 6 11
----- ----- -----
Total Noninterest Expense 1,248 1,123 1,178 11 6
----- ----- -----
Income Before Income Taxes 690 598 637 15 8
Income Taxes 242 200 215 21 13
----- ----- -----
Net Income $ 448 $ 398 $ 422 13 6
---------- ===== ===== =====
Diluted Earnings Per Share $0.59 $0.52 $0.55 13 7
Note:
(1) Adjusted results combine continuing and discontinued operations to provide continuity
with historical results.
65
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Statements of Income- Supplemental Data
(Dollars in millions, except per share amounts)
(Unaudited)
Six Months Ended June 30,
----------------------------------------------------------------------
2006 2005 6/30/06
Continuing Discontinued Adjusted Adjusted vs.
Operations Operations Results(1) Results(1) 6/30/05
---------- ------------ ---------- ---------- -------
Net Interest Income $ 697 $ 303 $1,000 $ 925 8%
-------------------
Provision for Credit Losses (1) 6 5 (5) (200)
------ ----- ------ -----
Net Interest Income After
Provision for
Credit Losses 698 297 995 930 7
------ ----- ------ -----
Noninterest Income
------------------
Servicing Fees
Securities 1,740 - 1,740 1,525 14
Global Payment Services 125 15 140 151 (7)
----- ----- ------ -----
1,865 15 1,880 1,676 12
Private Banking and
Asset Management Fees 268 23 291 245 19
Service Charges and Fees 105 75 180 195 (8)
Foreign Exchange and Other
Trading Activities 243 4 247 199 24
Securities Gains 40 - 40 35 14
Other 106 14 120 84 43
----- ----- ----- -----
Total Noninterest Income 2,627 131 2,758 2,434 13
----- ----- ----- -----
Noninterest Expense
-------------------
Salaries and Employee Benefits 1,260 131 1,391 1,258 11
Net Occupancy 136 38 174 160 9
Furniture and Equipment 99 4 103 103 -
Clearing 103 - 103 88 17
Sub-custodian Expenses 70 - 70 47 49
Software 108 1 109 108 1
Communications 48 2 50 45 11
Amortization of Intangibles 28 - 28 18 56
Other 347 51 398 373 7
----- ----- ----- -----
Total Noninterest Expense 2,199 227 2,426 2,200 10
----- ----- ----- -----
Income Before Income Taxes 1,126 201 1,327 1,164 14
Income Taxes 375 82 457 387 18
----- ----- ----- -----
Net Income $ 751 $ 119 $ 870 $ 777 12
---------- ===== ===== ===== =====
Diluted Earnings Per Share $0.98 $0.15 $1.13 $1.00 13
Note:
(1) Adjusted results combine continuing and discontinued operations to provide continuity
with historical results.
66
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Statements of Income- Supplemental Data
(Dollars in millions, except per share amounts)
(Unaudited)
Six Months Ended June 30, 2005
--------------------------------------------
2005
Continuing Discontinued Adjusted
Operations Operations Results(1)
---------- ------------ ----------
Net Interest Income $ 650 $ 275 $ 925
-------------------
Provision for Credit Losses (20) 15 (5)
----- ----- -----
Net Interest Income After
Provision for
Credit Losses 670 260 930
----- ----- -----
Noninterest Income
------------------
Servicing Fees
Securities 1,525 - 1,525
Global Payment Services 133 18 151
----- ----- -----
1,658 18 1,676
Private Banking and
Asset Management Fees 224 21 245
Service Charges and Fees 118 77 195
Foreign Exchange and Other
Trading Activities 193 6 199
Securities Gains 35 - 35
Other 82 2 84
----- ----- -----
Total Noninterest Income 2,310 124 2,434
----- ----- -----
Noninterest Expense
-------------------
Salaries and Employee Benefits 1,138 120 1,258
Net Occupancy 124 36 160
Furniture and Equipment 98 5 103
Clearing 88 - 88
Sub-custodian Expenses 47 - 47
Software 107 1 108
Communications 43 2 45
Amortization of Intangibles 18 - 18
Other 329 44 373
----- ----- -----
Total Noninterest Expense 1,992 208 2,200
----- ----- -----
Income Before Income Taxes 988 176 1,164
Income Taxes 317 70 387
----- ----- -----
Net Income $ 671 $ 106 $ 777
---------- ===== ===== =====
Diluted Earnings Per Share $0.86 $0.14 $1.00
Note:
(1) Adjusted results combine continuing and discontinued operations to provide continuity
with historical results.
67
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Balance Sheet - Supplemental Data
(In millions)
(Unaudited)
June 30, 2006 December 31, 2005
------------------------------------- -------------------------------------
Continuing Discontinued Continuing Discontinued
Operations Operations Adjusted Operations Operations Adjusted
---------- ------------ -------- ---------- ------------ --------
Assets
------
Cash and Due from Banks $ 3,010 $ 609 $ 3,619 $ 2,882 $ 633 $ 3,515
Interest-Bearing
Deposits in Banks 11,978 - 11,978 8,644 - 8,644
Securities 27,355 104 27,459 27,218 108 27,326
Trading Assets
at Fair Value 6,065 - 6,065 5,930 - 5,930
Federal Funds Sold and
Securities Purchased
Under Resale Agreements 2,235 - 2,235 2,425 - 2,425
Loans 35,313 7,892 43,205 32,601 7,714 40,315
Premises and Equipment 963 112 1,075 960 100 1,060
Due from Customers
on Acceptances 210 23 233 212 21 233
Accrued Interest Receivable 394 32 426 363 28 391
Goodwill 3,784 109 3,893 3,510 109 3,619
Intangible Assets 885 - 885 811 - 811
Other Assets 7,743 65 7,808 7,710 95 7,805
-------- ------- -------- -------- ---------- ----------
Total Assets $ 99,935 $ 8,946 $108,881 $ 93,266 $ 8,808 $ 102,074
======== ======= ======== ======== ========== ==========
Liabilities and
Shareholders' Equity
----------------------
Deposits $ 56,741 $13,678 $ 70,419 $ 49,787 $ 14,637 $ 64,424
Federal Funds Purchased
and Securities Sold Under
Repurchase Agreements 1,177 - 1,177 834 - 834
Trading Liabilities 2,938 - 2,938 2,401 - 2,401
Payables to Customers
and Broker-Dealers 6,638 - 6,638 8,623 - 8,623
Other Borrowed Funds 1,026 - 1,026 860 - 860
Acceptances Outstanding 210 26 236 212 23 235
Accrued Taxes
and Other Expenses 3,864 8 3,872 4,123 1 4,124
Accrued Interest Payable 192 11 203 172 - 172
Other Liabilities 4,101 8 4,109 2,697 11 2,708
Long-Term Debt 8,207 - 8,207 7,817 - 7,817
-------- ------- -------- -------- ---------- ----------
Total Liabilities 85,094 13,731 98,825 77,526 14,672 92,198
-------- ------- -------- -------- ---------- ----------
Shareholders' Equity 10,056 - 10,056 9,876 - 9,876
-------- ------- -------- -------- ---------- ----------
Total Liabilities and
Shareholders' Equity $ 95,150 $13,731 $108,881 $ 87,402 $ 14,672 $ 102,074
======== ======= ======== ======== ========== ==========
Note: The balance sheet at December 31, 2005 has been derived from the audited financial statements
at that date.
68
OTHER DEVELOPMENTS
On July 11, 2006, the Board of Directors raised the quarterly dividend by
5% to 22 cents per share payable August 4, 2006 to shareholders of record on
July 26, 2006.
The Company was active in redeploying capital during the quarter to
sharpen its focus, strengthen its business mix and enhance its long-term
growth prospects. In addition to the swap transaction with JPMorgan Chase, the
Company announced on June 30, 2006 that it agreed to join forces with Eze
Castle Software and GTCR Golder Rauner, LLC, a private equity firm, to form a
new company called BNY ConvergEx Group. BNY ConvergEx Group will bring
together BNY Securities Group's trade execution, commission management,
independent research and transition management business with Eze Castle
Software, a leading provider of trade order management and related investment
technologies. This transaction enables the Company to achieve several
objectives including repositioning its execution services business for faster
growth and enhancing the product offering for the Company's client base, while
allowing the Company to withdraw capital committed to the business. The new
firm is expected to be established by September or October, pending regulatory
approval. The Bank of New York Company's Pershing subsidiary, a leading global
provider of clearing and financial services outsourcing, is not included in
this transaction. For further details see "Acquisitions and Dispositions" in
the Notes to the Consolidated Financial Statements and "Capital Resources".
On June 12, 2006, the Company acquired the bond administration business
of TD Banknorth, N.A. The TD Banknorth portfolio includes bond trustee,
paying/fiscal agent, master trustee, transfer agent and registrar
appointments. The transaction involves the purchase of approximately 350 bond
trusteeships and agency appointments, representing $5.2 billion of principal
debt outstanding for an estimated 230 clients.
69
FORWARD-LOOKING STATEMENTS AND RISK FACTORS THAT COULD AFFECT FUTURE RESULTS
Much of the information in this document is forward-looking. This
includes all statements about the Company's earnings and revenue outlook,
projected business growth, the expected outcome of legal, regulatory and
investigatory proceedings, predicted loan losses, and the Company's plans,
objectives and strategies. Forward-looking statements represent the Company's
current estimates or expectations of future events or results.
The Company, or its executive officers and directors on its behalf, may
make additional forward-looking statements from time to time. When used in
this report, any press release or any such oral statement, words such as
"estimate," "forecast," "project," "anticipate," "confident," "target,"
"expect," "intend," "think," "continue," "seek," "believe," "plan," "goal,"
"could," "should," "may," "will," "strategy," and words of similar meaning,
signify forward-looking statements.
Forward-looking statements are based on management's current expectations
and assumptions and are subject to risks and uncertainties, some of which are
discussed herein, that could cause actual results to differ materially from
projected results. Forward-looking statements could be affected by a number of
factors, some of which by their nature are dynamic and subject to rapid and
possibly abrupt changes that the Company is necessarily unable to predict
accurately, including the Risk Factors set forth in the section "Forward-
Looking Statements and Risk Factors That Could Affect Future Results" in Part
I, Item 1A of the Company's Annual Report on Form 10-K for the year ended
December 31, 2005 and Quarterly Report on Form 10-Q for the quarter ended
March 31, 2006.
Forward-looking statements speak only as of the date they are made. The
Company will not update forward-looking statements to reflect new facts,
changes in assumptions or circumstances, or subsequent events.
GOVERNEMENT MONETARY POLICIES AND COMPETITION
Government Monetary Policies
----------------------------
The Federal Reserve Board has the primary responsibility for United States
monetary policy. Its actions have an important influence on the demand for
credit and investments and the level of interest rates, and thus on the
earnings of the Company.
Competition
-----------
The businesses in which the Company operates are very competitive.
Competition is provided by both unregulated and regulated financial services
organizations, whose products and services span the local, national, and global
markets in which the Company conducts operations.
A wide variety of domestic and foreign companies compete for processing
services. For securities servicing and global payment services, international,
national, and regional commercial banks, trust banks, investment banks,
specialized processing companies, outsourcing companies, data processing
companies, stock exchanges, and other business firms offer active competition.
In the private banking and asset management markets, international, national,
and regional commercial banks, standalone asset management companies, mutual
funds, securities brokerage firms, insurance companies, investment counseling
firms, and other business firms and individuals actively compete for business.
Commercial banks, savings banks, savings and loan associations, and credit
unions actively compete for deposits, and money market funds and brokerage
houses offer deposit-like services. These institutions, as well as consumer
and commercial finance companies, national retail chains, factors, insurance
companies and pension trusts, are important competitors for various types of
loans. Issuers of commercial paper compete actively for funds and reduce demand
for bank loans.
70
WEBSITE INFORMATION
The Company makes available on its website, www.bankofny.com:
* All of its SEC filings, including annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and
all amendments to these reports, SEC Forms 3, 4 and 5 and its
proxy statement as soon as reasonably practicable after such
material is electronically filed with or furnished to the SEC;
* Its earnings releases and management conference calls and
presentations; and
* Its corporate governance guidelines and the charters of the Audit
and Examining, Compensation and Organization, and Nominating and
Governance Committees of its Board of Directors.
The corporate governance guidelines and committee charters are available
in print to any shareholder who requests them. Requests should be sent to The
Bank of New York Company, Inc., Corporate Communications, One Wall Street, NY,
NY 10286.
71
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Balance Sheets
(Dollars in millions, except per share amounts)
(Unaudited)
June 30, 2006 December 31, 2005
------------------ -----------------
Assets
------
Cash and Due from Banks $ 3,010 $ 2,882
Interest-Bearing Deposits in Banks 11,978 8,644
Securities
Held-to-Maturity (fair value of $2,108 in 2006
and $1,847 in 2005) 2,167 1,872
Available-for-Sale 25,188 25,346
------------------ -----------------
Total Securities 27,355 27,218
Trading Assets at Fair Value 6,065 5,930
Federal Funds Sold and Securities Purchased
Under Resale Agreements 2,235 2,425
Loans (less allowance for loan losses of $337 in 2006
and $326 in 2005) 35,313 32,601
Premises and Equipment 963 960
Due from Customers on Acceptances 210 212
Accrued Interest Receivable 394 363
Goodwill 3,784 3,510
Intangible Assets 885 811
Other Assets 7,743 7,710
Assets of Discontinued Operations Held for Sale 8,946 8,808
------------------ -----------------
Total Assets $ 108,881 $ 102,074
================== =================
Liabilities and Shareholders' Equity
------------------------------------
Deposits
Noninterest-Bearing (principally domestic offices) $ 15,930 $ 12,706
Interest-Bearing
Domestic Offices 9,958 10,415
Foreign Offices 30,853 26,666
------------------ -----------------
Total Deposits 56,741 49,787
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 1,177 834
Trading Liabilities 2,938 2,401
Payables to Customers and Broker-Dealers 6,638 8,623
Other Borrowed Funds 1,026 860
Acceptances Outstanding 210 212
Accrued Taxes and Other Expenses 3,864 4,123
Accrued Interest Payable 192 172
Other Liabilities (including allowance for
lending-related commitments of
$143 in 2006 and $144 in 2005) 4,101 2,697
Long-Term Debt 8,207 7,817
Liabilities of Discontinued Operations Held for Sale 13,731 14,672
------------------ -----------------
Total Liabilities 98,825 92,198
------------------ -----------------
Shareholders' Equity
Common Stock-par value $7.50 per share,
authorized 2,400,000,000 shares, issued
1,048,879,688 shares in 2006 and
1,044,994,517 shares in 2005 7,867 7,838
Additional Capital 1,965 1,826
Retained Earnings 7,636 7,089
Accumulated Other Comprehensive Income (231) (134)
------------------ -----------------
17,237 16,619
Less: Treasury Stock (285,896,449 shares in 2006
and 273,662,218 shares in 2005), at cost 7,174 6,736
Loan to ESOP (203,507 shares in 2006
and 203,507 shares in 2005), at cost 7 7
------------------ -----------------
Total Shareholders' Equity 10,056 9,876
------------------ -----------------
Total Liabilities and Shareholders' Equity $ 108,881 $ 102,074
================== =================
------------------------------------------------------------------------------------------------
Note: The balance sheet at December 31, 2005 has been derived from the audited financial statements at
that date.
See Accompanying Notes to Consolidated Financial Statements.
72
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Statements of Income
(In millions, except per share amounts)
(Unaudited)
For the three For the six Percent Inc/(Dec)
-----------------
months ended months ended 2Q06 YTD 2006
June 30, June 30, vs. vs.
2006 2005 2006 2005 2Q05 YTD 2005
----- ------ ------ ------ ------ --------
Interest Income
---------------
Loans $ 350 $ 243 $ 660 $ 476 44% 39%
Margin loans 85 62 162 117 37 38
Securities
Taxable 280 193 545 359 45 52
Exempt from Federal Income Taxes 9 10 18 18 (10) -
------ ------ ------ ------
289 203 563 377 42 49
Deposits in Banks 120 67 206 138 79 49
Federal Funds Sold and Securities Purchased
Under Resale Agreements 15 20 30 33 (25) (9)
Trading Assets 51 39 102 61 31 67
------ ------ ------ ------
Total Interest Income 910 634 1,723 1,202 44 43
------ ------ ------ ------
Interest Expense
----------------
Deposits 348 192 646 352 81 84
Federal Funds Purchased and Securities Sold
Under Repurchase Agreements 34 8 54 14 325 286
Other Borrowed Funds 22 13 42 20 69 110
Customer Payables 42 28 82 53 50 55
Long-Term Debt 106 64 202 113 66 79
------ ------ ------ ------
Total Interest Expense 552 305 1,026 552 81 86
------ ------ ------ ------
Net Interest Income
------------------- 358 329 697 650 9 7
Provision for Credit Losses (1) (3) (1) (20) (67) (95)
------ ------ ------ ------
Net Interest Income After Provision for Credit Losses 359 332 698 670 8 4
------ ------ ------ ------
Noninterest Income
------------------
Servicing Fees
Securities 909 775 1,740 1,525 17 14
Global Payment Services 63 67 125 133 (6) (6)
------ ------ ------ ------
972 842 1,865 1,658 15 12
Private Banking and Asset Management Fees 138 112 268 224 23 20
Service Charges and Fees 53 64 105 118 (17) (11)
Foreign Exchange and Other Trading Activities 130 101 243 193 29 26
Securities Gains 23 23 40 35 - 14
Other 50 52 106 82 (4) 29
------ ------ ------ ------
Total Noninterest Income 1,366 1,194 2,627 2,310 14 14
------ ------ ------ ------
Noninterest Expense
-------------------
Salaries and Employee Benefits 656 581 1,260 1,138 13 11
Net Occupancy 68 65 136 124 5 10
Furniture and Equipment 48 49 99 98 (2) 1
Clearing 53 42 103 88 26 17
Sub-custodian Expenses 36 24 70 47 50 49
Software 53 55 108 107 (4) 1
Communications 22 21 48 43 5 12
Amortization of Intangibles 15 10 28 18 50 56
Other 183 174 347 329 5 5
------ ------ ------ ------
Total Noninterest Expense 1,134 1,021 2,199 1,992 11 10
------ ------ ------ ------
Income from Continuing Operations before Income Taxes 591 505 1,126 988 17 14
Income Taxes 200 162 375 317 23 18
------ ------ ------ ------
Income from Continuing Operations 391 343 751 671 14 12
------ ------ ------ ------
--------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements.
73
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Statements of Income
(In millions, except per share amounts)
(Unaudited)
For the three For the six Percent Inc/(Dec)
months ended months ended 2Q06 YTD 2006
June 30, June 30, vs. vs.
2006 2005 2006 2005 2Q05 YTD 2005
------ ------ ------ ------ ------ --------
Discontinued Operations
Income from Discontinued Operations 99 93 201 176 6% 14%
Income Taxes 42 38 82 70 11 17
------ ------ ------ ------
Discontinued Operations, net 57 55 119 106 4 12
------ ------ ------ ------
Net Income $ 448 $ 398 $ 870 $ 777 13 12
---------- ====== ====== ====== ======
Per Common Share Data:
----------------------
Basic Earnings
Income from Continuing Operations $ 0.52 $ 0.45 $ 0.99 $ 0.87 16 14
Income from Discontinued Operations, Net 0.07 0.07 0.15 0.14 - 7
Net Income 0.59 0.52 1.14 1.01 13 13
Diluted Earnings
Income from Continuing Operations $ 0.52 $ 0.45 $ 0.98 $ 0.86 16 14
Income from Discontinued Operations, Net 0.07 0.07 0.15 0.14 - 7
Net Income 0.59 0.52 1.13 1.00 13 13
Cash Dividends Paid 0.21 0.20 0.42 0.40 5 5
Diluted Shares Outstanding 765 772 769 775 (1) (1)
--------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements.
74
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Statement of Changes in Shareholders' Equity
For the six months ended June 30, 2006
(Dollars in millions)
(Unaudited)
Common Stock
Balance, January 1 $ 7,838
Issuances in Connection with Employee Benefit Plans 29
-------------
Balance, June 30 7,867
-------------
Additional Capital
Balance, January 1 1,826
Issuances in Connection with Employee Benefit Plans 139
-------------
Balance, June 30 1,965
-------------
Retained Earnings
Balance, January 1 7,089
Net Income $ 870 870
Cash Dividends on Common Stock (323)
-------------
Balance, June 30 7,636
-------------
Accumulated Other Comprehensive Income
Balance, January 1 (134)
Change in Fair Value of Securities Available-for-Sale,
Net of Taxes of $(57) (88) (88)
Reclassification Adjustment, Net of Taxes of $(3) (4) (4)
Foreign Currency Translation Adjustment,
Net of Taxes of $1 6 6
Net Unrealized Derivative loss on Cash Flow Hedges,
Net of Taxes of $(4) (6) (6)
Minimum Pension Liability Adjustment,
Net of Taxes of $(3) (5) (5)
----------- -------------
(97)
Balance, June 30 (231)
-------------
Total Comprehensive Income $ 773
===========
Less Treasury Stock
Balance, January 1 6,736
Issued (14)
Acquired 452
-------------
Balance, June 30 7,174
-------------
Less Loan to ESOP
Balance, January 1 7
Loan to ESOP -
-------------
Balance, June 30 7
-------------
Total Shareholders' Equity, June 30 , 2006 $ 10,056
=============
-------------------------------------------------------------------------------------------
Comprehensive Income for the three months ended June 30, 2006 and 2005 was $406 and $461.
Comprehensive Income for the six months ended June 30, 2006 and 2005 was $773 and $759.
See accompanying Notes to Consolidated Financial Statements.
75
THE BANK OF NEW YORK COMPANY, INC.
Consolidated Statements of Cash Flows
(Dollars in millions)
(Unaudited)
For the six months
ended June 30,
2006 2005
-------- --------
Operating Activities
Net Income $ 870 $ 777
Adjustments to Determine Net Cash Attributable to
Operating Activities:
Provision for Credit Losses
and Losses on Other Real Estate 5 (5)
Depreciation and Amortization 219 248
Deferred Income Taxes 98 131
Securities Gains (40) (35)
Change in Trading Activities 484 (1,977)
Change in Accruals and Other, Net 971 143
-------- --------
Net Cash Provided by (Used for) Operating Activities 2,607 (718)
-------- --------
Investing Activities
Change in Interest-Bearing Deposits in Banks (2,981) 623
Change in Margin Loans 992 4
Purchases of Securities Held-to-Maturity (506) (480)
Paydowns of Securities Held-to-Maturity 140 155
Maturities of Securities Held-to-Maturity 81 23
Purchases of Securities Available-for-Sale (6,331) (8,402)
Sales of Securities Available-for-Sale 1,780 2,083
Paydowns of Securities Available-for-Sale 2,471 3,160
Maturities of Securities Available-for-Sale 2,312 1,315
Net Principal Disbursed on Loans to Customers (3,915) (5,376)
Sales of Loans and Other Real Estate 97 126
Change in Federal Funds Sold and Securities
Purchased Under Resale Agreements 190 (1,486)
Purchases of Premises and Equipment (86) (42)
Acquisitions, Net of Cash Acquired (349) (70)
Proceeds from the Sale of Premises and Equipment 3 -
Other, Net (159) 19
-------- --------
Net Cash Used for Investing Activities (6,261) (8,348)
-------- --------
Financing Activities
Change in Deposits 5,135 6,243
Change in Federal Funds Purchased and Securities
Sold Under Repurchase Agreements 343 210
Change in Payables to Customers and Broker-Dealers (1,986) (17)
Change in Other Borrowed Funds 337 536
Proceeds from the Issuance of Long-Term Debt 1,114 1,538
Repayments of Long-Term Debt (545) (102)
Issuance of Common Stock 182 81
Treasury Stock Acquired (452) (338)
Cash Dividends Paid (323) (321)
-------- --------
Net Cash Provided by Financing Activities 3,805 7,830
-------- --------
Effect of Exchange Rate Changes on Cash (47) 307
-------- --------
Change in Cash and Due From Banks 104 (929)
Cash and Due from Banks at Beginning of Period 3,515 3,886
Cash Related to Discontinued Operations (609) (616)
-------- --------
Cash and Due from Banks at End of Period $ 3,010 $ 2,341
======== ========
-------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Cash Paid During the Period for:
Interest $ 1,066 $ 594
Income Taxes 386 140
Noncash Investing Activity
(Primarily Foreclosure of Real Estate) - -
-------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
76
THE BANK OF NEW YORK COMPANY, INC.
Notes to Consolidated Financial Statements
1. General
-------
The accounting and reporting policies of The Bank of New York Company,
Inc., a financial holding company, and its consolidated subsidiaries (the
"Company") conform with generally accepted accounting principles and general
practice within the banking industry. Such policies are consistent with those
applied in the preparation of the Company's annual financial statements.
The accompanying consolidated financial statements are unaudited. In the
opinion of management, all adjustments necessary for a fair presentation of
financial position, results of operations and cash flows for the interim
periods have been made. Certain other reclassifications have been made to
prior periods to place them on a basis comparable with current period
presentation.
2. Accounting Changes and New Accounting Pronouncements
----------------------------------------------------
The Company adopted SFAS No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," in 1995. At that time, as permitted by the standard, the
Company elected to continue to apply the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and accounted
for the options granted to employees using the intrinsic value method, under
which no expense is recognized for stock options because they were granted at
the stock price on the grant date and therefore have no intrinsic value.
On January 1, 2003, the Company adopted the fair value method of
accounting for its options under SFAS 123 as amended by SFAS No. 148 ("SFAS
148"), "Accounting for Stock-Based Compensation-Transition and Disclosure."
SFAS 148 permitted three different methods of adopting fair value: (1) the
prospective method, (2) the modified prospective method, and (3) the
retroactive restatement method. Under the prospective method, options issued
after January 1, 2003 are expensed while all options granted prior to January
1, 2003 are accounted for under APB 25 using the intrinsic value method.
Consistent with industry practice, the Company elected the prospective method
of adopting fair value accounting.
During the first six months ended June 30, 2006, approximately 6.2 million
options were granted. In the second quarter and first six months of 2006, the
Company recorded $14 million and $24 million of stock option expense.
The retroactive restatement method requires the Company's financial
statements to be restated as if fair value accounting had been adopted in 1995.
The following table discloses the pro forma effects on the Company's net income
and earnings per share as if the retroactive restatement method had been
adopted.
(Dollars in millions, Second Quarter Year-to-date
except per share amounts) 2006 2005 2006 2005
------ ------ ------ ------
Reported net income $ 448 $ 398 $ 870 $ 777
Stock based employee compensation costs,
using prospective method, net of tax 8 8 14 14
Stock based employee compensation costs,
using retroactive restatement method,
net of tax (8) (11) (14) (21)
------ ------ ------ ------
Pro forma net income $ 448 $ 395 $ 870 $ 770
====== ====== ====== ======
Reported diluted earnings per share $ 0.59 $ 0.52 $ 1.13 $ 1.00
Impact on diluted earnings per share - - - (0.01)
------ ------ ------ ------
Pro forma diluted earnings per share $ 0.59 $ 0.52 $ 1.13 $ 0.99
====== ====== ====== ======
77
The fair value of options granted in 2006 and 2005 were estimated at the
grant date using the following weighted average assumptions:
Second Quarter Year-to-date
2006 2005 2006 2005
----- ----- ---- ----
Dividend yield 2.77% 2.95% 2.77% 2.77%
Expected volatility 22.43 25.00 22.43 25.21
Risk free interest rates 4.72 3.94 4.72 4.18
Expected options lives 6 5 6 5
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004)
("SFAS 123(R)"), "Share-Based Payment," which is a revision of FASB Statement
No. 123, "Accounting for Stock-Based Compensation." SFAS 123(R) eliminates the
ability to account for share-based compensation transactions using Accounting
Principles Board Opinion No. 25 and requires that such transactions be
accounted for using a fair value-based method. SFAS 123(R) covers a wide range
of share-based compensation arrangements including share options, restricted
share plans, performance-based awards, share appreciation rights, and employee
share purchase plans. The Company adopted SFAS 123(R) on January 1, 2006 using
the "modified prospective" method. Under this method, compensation cost is
recognized beginning with the effective date (a) based on the requirements of
SFAS 123(R) for all share-based payments granted after the effective date and
(b) based on the requirements of SFAS 123 for all awards granted to employees
prior to the effective date of SFAS 123(R) that remain unvested on the
effective date.
The Company adopted the fair value method of accounting for stock-based
compensation prospectively as of January 1, 2003. As of January 1, 2006, the
Company was amortizing all of its unvested stock option grants.
Certain of the Company's stock compensation grants vest when the employee
retires. SFAS 123(R) requires the completion of expensing of new grants with
this feature by the first date the employee is eligible to retire. For grants
prior to January 1, 2006, the Company will continue to expense them over their
stated vesting period. The adoption of SFAS 123(R) increased pre-tax expense
in 2006 by $12 million, which was recorded in the second quarter of 2006.
In June 2004, the FASB issued an Exposure Draft of a proposed Statement,
"Fair Value Measurements". The Exposure Draft, if adopted, will standardize
fair value guidance by creating a comprehensive framework for measuring the
fair value of most financial and nonfinancial assets and liabilities. The
proposed Statement also requires expanded quantitative and qualitative
disclosures about the use of fair value to remeasure assets and liabilities
recognized in the statement of financial position. A final standard is
expected to be issued in the third quarter of 2006. The final standard is
expected to be effective for the Company's financial statements issued for
2008, and interim periods within that year. Upon issuance of the final
standard, the Company will assess the impact of the new standard on the
Company's consolidated financial statements.
In June 2005, the FASB ratified the consensus in EITF Issue No. 04-5("EITF
04-5"), "Determining Whether a General Partner, or the General Partners as a
Group, Controls a Limited Partnership or Similar Entity When the Limited
Partners Have Certain Rights", which provides guidance in determining whether a
general partner controls a limited partnership. The adoption of EITF 04-5 did
not have a significant impact on the Company's financial condition or results
of operations.
In February 2006, the FASB issued FASB Statement No. 155 ("SFAS 155"),
"Accounting for Certain Hybrid Financial Instruments", an amendment of SFAS 140
and SFAS 133. SFAS 155 permits the Company to elect to measure any hybrid
financial instrument at fair value if the hybrid instrument contains an
embedded derivative that otherwise would require bifurcation and be accounted
for separately under SFAS 133. This statement clarifies which interest-only
strips and principal-only strips are not subject to the requirements of SFAS
78
133 and that concentrations of credit risk in the form of subordination are not
embedded derivatives. SFAS 155 is effective for all financial instruments
acquired, issued, or subject to a remeasurement event after December 31, 2006.
The Company does not expect the adoption of the standard will have a
significant impact on its financial condition or results of operations.
In March 2006, the FASB issued an Exposure Draft, "Employer's Accounting
for Defined Benefit Pension and Other Postretirement Plans." The proposed
standard would recognize as a component of other comprehensive income, net of
tax, the actuarial gains and losses and prior service costs and credits that
are not currently recognized as components of net period benefit cost pursuant
to SFAS 87 or 106. The standard would also recognize, as an adjustment to the
opening balance of retained earnings, any transition asset or obligation, net
of tax, arising from the initial application of SFAS 87 or 106. The FASB has
indicated it expects to issue a final statement in the third quarter of 2006.
The Exposure Draft indicates that the new standard would be applicable to the
Company for year-end 2006. The Company anticipates that the adoption of this
statement will result in a material charge to equity, the amount of which is
under assessment.
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes." The Interpretation clarifies the accounting for
uncertain tax positions in accordance with FASB Statement No. 109, "Accounting
for Income Taxes." The Interpretation requires that a tax position meet a
"more-likely-than-not threshold" for the benefit of the uncertain tax position
to be recognized in the financial statements. A tax position that fails to meet
a more-likely-than-not recognition threshold will result in either reduction of
current or deferred tax assets, and/or recording of current or deferred tax
liabilities. The proposed Interpretation also provides guidance on measurement,
derecognition of tax benefits, classification, interim period accounting
disclosure, and transition requirements in accounting for uncertain tax
positions. The Company is assessing the impact of adopting the new
pronouncement, which will become effective January 1, 2007, but it is not
expected to have a material impact.
In July 2006, the FASB issued FSP FAS 13-2, "Accounting for a Change or
Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated
by a Leverage Lease Transaction," revising the accounting guidance under SFAS
No. 13 ("SFAS 13"), "Accounting for Leases," for leveraged leases. This FSP
modifies existing interpretations of SFAS 13 and associated industry practice.
As a result, in January 2007, the Company expects to recognize a one-time
after-tax charge to capital of $340 to $385 million related to a change in the
timing of its lease cash flows due to the LILO settlement. See Note
"Commitments and Contingent Liabilities". However, an amount approximating
this one-time charge will be taken into income over the remaining term of the
affected leases.
Certain other prior year information has been reclassified to conform its
presentation with the 2006 financial statements.
3. Acquisitions and Dispositions
-----------------------------
The Company continues to be an active acquirer of securities servicing and
asset management businesses.
The Company announced four acquisitions in 2006. The total cost of
completed acquisitions in the second quarter and six months of 2006 was $2
million and $325 million, primarily paid in cash. The Company frequently
structures its acquisitions with both an initial payment and a later contingent
payment tied to post-closing revenue or income growth. The Company records the
fair value of contingent payments as an additional cost of the entity acquired
in the period that the payment becomes probable.
Goodwill related to acquisitions in the second quarter of 2006 and first
six months of 2006 was $2 million and $214 million, respectively. The tax-
deductible portion of goodwill related to acquisitions in the second quarter
and first six months of 2006 was $2 million and $75 million, respectively. At
79
June 30, 2006, the Company was liable for potential contingent payments related
to acquisitions in the amount of $193 million. During the second quarter and
the first six months of 2006, the Company paid or accrued $5 million and $22
million for contingent payments related to acquisitions made in prior years.
2006
----
On January 3, 2006, the Company acquired Alcentra, an international asset
management group focused on managing funds that invest in non-investment grade
debt. Alcentra's management team retained a 20 percent interest. Alcentra has
operations in London and Los Angeles and currently manages 15 different
investment funds with over $6.2 billion of assets.
On March 2, 2006, the Company acquired Urdang, a real estate investment
management firm that manages approximately $3.0 billion in direct investments
and portfolios of REIT securities.
On April 8, 2006, the Company announced a definitive agreement to sell its
retail and regional middle market banking businesses to JPMorgan Chase for $3.1
billion with a premium of $2.3 billion. For further details, see "Discontinued
Operations" Note. JPMorgan Chase will sell its corporate trust business to the
Company for $2.8 billion with a premium of $2.15 billion. The difference in
premiums results in a net cash payment of $150 million to the Company. There is
also a contingent payment of up to $50 million to the Company tied to customer
retention.
The transaction further increases the Company's focus on the securities
services and wealth management businesses that have fueled the Company's growth
in recent years and that are at the core of its long-term business strategy.
The transaction has been approved by each company's board of directors and
is expected to be completed in the fourth quarter of 2006, subject to
regulatory approvals. The Company expects to record an after-tax gain of $1.3
billion on the businesses to be sold. The Company also expects to incur after-
tax charges of $90-120 million related to the acquisition. The transaction is
expected to be dilutive to GAAP earnings per share through 2009 (4.5 percent in
2007 to 1.5 percent in 2009), but to be accretive to cash earnings per share in
2009 when cost savings are fully phased in.
JPMorgan Chase's corporate trust business comprises issues representing $5
trillion in total debt outstanding. It has 2,400 employees in more than 40
locations globally. The Company's corporate trust business comprises issues
representing $3 trillion in total debt outstanding. It has 1,300 employees in
25 locations globally.
The Company's retail bank consists of 341 branches in the tri-state
region, serving approximately 700,000 consumer households and small businesses
with $14.5 billion in deposits and $15.4 billion in assets. The Company's
regional middle market businesses provide financing, banking and treasury
services for middle market clients, serving more than 2,000 clients in the tri-
state region. Together, the units have 4,000 employees located in New York,
New Jersey, Connecticut and Delaware.
On June 12, 2006, the Company acquired the bond administration business
of TD Banknorth, N.A. The TD Banknorth portfolio includes bond trustee,
paying/fiscal agent, master trustee, transfer agent and registrar
appointments. The transaction involves the purchase of approximately 350 bond
trusteeships and agency appointments, representing $5.2 billion of principal
debt outstanding for an estimated 230 clients.
On June 30, 2006, the Company announced that it agreed to join forces with
Eze Castle Software and GTCR Golder Rauner, LLC, a private equity firm, to form
a new company called BNY ConvergEx Group. BNY ConvergEx Group will bring
together BNY Securities Group's trade execution, commission management,
independent research and transition management business with Eze Castle
Software, a leading provider of trade order management and related investment
technologies. This transaction enables the Company to achieve several
80
objectives including repositioning its execution services business for faster
growth and enhancing the product offering for the Company's client base, while
allowing the Company to withdraw capital committed to the business. The new
firm is expected to be established by September or October, pending regulatory
approval.
BNY ConvergEx Group will be a leading global agency brokerage and
technology company offering a complete spectrum of pre-trade, trade, and post-
trade solutions for traditional money managers, hedge funds, broker-dealers,
corporations and plan sponsors. BNY ConvergEx Group will have a global presence
in New York, Boston, San Francisco, Chicago, Dallas, Stamford, London, Bermuda,
Tokyo, Hong Kong, and Sydney.
Once the transaction is complete, the Company and GTCR Golder Rauner, LLC
will each hold a 35.4 percent stake in BNY ConvergEx Group, with the balance
held by Eze Castle Software's investors and BNY ConvergEx Group's management
team. BNY ConvergEx Group, with proforma 2005 revenues of approximately $340
million, will be an affiliate of The Bank of New York and will be reflected on
the Company's financial statements as an equity investment. The transaction
is not expected to result in any net gain or loss for The Bank of New York and
is expected to be neutral to earnings per share.
The BNY Securities Group businesses to be included in BNY ConvergEx Group
will be BNY Brokerage, Lynch, Jones, & Ryan, G-Port, Westminster Research and
BNY Jaywalk. Each business will retain its respective brand name and continue
to operate as it does today, while taking advantage of the combined
capabilities of BNY ConvergEx Group. In addition, The Bank of New York's B-
Trade and G-Trade businesses are expected to become part of BNY ConvergEx Group
in 2008, although in the interim they will continue to be owned by The Bank of
New York. The Bank of New York Company's Pershing subsidiary, a leading global
provider of clearing and financial services outsourcing, is not included in
this transaction. See "Other Developments" in the MD&A section for additional
information.
81
4. Discontinued Operations
In the second quarter of 2006, the Company adopted discontinued operations
accounting for its retail and regional middle market banking businesses to be
sold to JPMorgan Chase.
Results for all the retail and regional middle market banking businesses
are reported separately as discontinued operations for all periods presented.
The assets and liabilities of the businesses being sold are included in assets
of discontinued operations held for sale and liabilities of discontinued
operations held for sale on the consolidated balance sheet. Net interest
income has been computed by allocating investment securities and federal funds
sold and related interest income to discontinued operations to match the amount
and duration of the assets sold with the amount and duration of the liabilities
sold.
Also included in the sales agreement between the Company and JPMorgan
Chase are provisions related to transitional services that will be provided for
a period of up to 8 months after closing, subject to extensions.
Summarized financial information for discontinued operations related to
the sale of the retail and regional middle market banking businesses is as
follows:
Year-to-date
(In millions) 2Q06 1Q06 2Q05 2006 2005
---- ---- ---- ---------------
Net Interest Income $ 154 $ 149 $ 141 $ 303 $ 275
Noninterest Income 60 71 62 131 124
------ ----- ----- ------ -----
Total Revenues,
Net of Interest Expenses $ 214 $ 220 $ 203 $ 434 $ 399
====== ===== ===== ====== =====
Income from
Discontinued Operations $ 99 $ 102 $ 93 $ 201 $ 176
Income Taxes 42 40 38 82 70
------ ----- ----- ------ -----
Income from Discontinued
Operations, Net of Taxes $ 57 $ 62 $ 55 $ 119 $ 106
====== ===== ===== ====== =====
The following is a summary of the assets and liabilities of discontinued
operations held for sale as of June 30, 2006 and December 31, 2005:
June 30, December 31,
(In millions) 2006 2005
--------- ------------
Assets
------
Cash and Due from Banks $ 609 $ 633
Securities 104 108
Loans 7,892 7,714
Goodwill 109 109
Other Assets 232 244
------- -------
Total Assets $ 8,946 $ 8,808
======= =======
Liabilities
-----------
Deposits $13,678 $14,637
Other Liabilities 53 35
------- -------
Total Liabilities $13,731 $14,672
======= =======
82
5. Goodwill and Intangibles
------------------------
Goodwill by reportable segment is as follows:
(In millions)
June 30, 2006 December 31, 2005
------------------ -----------------
Institutional Services $ 3,180 $ 3,121
Private Bank &
BNY Asset Management 604 389
Corporate & Other - -
------------------ -----------------
Consolidated Total $ 3,784 $ 3,510
================== =================
The Company's reporting units are tested annually for goodwill impairment.
Intangible Assets
-----------------
June 30, 2006 December 31, 2005
---------------------------------------------- ------------------------------
Weighted
Gross Net Average Gross Net
Carrying Accumulated Carrying Amortization Carrying Accumulated Carrying
(Dollars in millions) Amount Amortization Amount Period in Years Amount Amortization Amount
-------- ------------ -------- --------------- -------- ------------ --------
Trade Names $ 378 $ - $ 378 Indefinite Life $ 370 $ - $ 370
Customer Relationships 628 (125) 503 15 531 (99) 432
Other Intangible
Assets 25 (21) 4 6 28 (19) 9
The aggregate amortization expense of intangibles was $15 million and $10
million for the quarters ended June 30, 2006 and 2005, respectively. The
aggregate amortization expense of intangibles was $28 million and $18 million
for the six months ended June 30, 2006 and 2005. Estimated amortization
expense for current intangibles for the next five years is as follows:
For the Year Ended Amortization
(In millions) December 31, Expense
------------------ ------------
2006 $57
2007 53
2008 52
2009 50
2010 48
6. Allowance for Credit Losses
---------------------------
The allowance for credit losses is maintained at a level that, in
management's judgment, is adequate to absorb probable losses associated with
specifically identified loans, as well as estimated probable credit losses
inherent in the remainder of the loan portfolio at the balance sheet date.
Management's judgment includes the following factors, among others: risks of
individual credits; past experience; the volume, composition, and growth of the
loan portfolio; and economic conditions.
The Company conducts a quarterly portfolio review to determine the
adequacy of its allowance for credit losses. All commercial loans over $1
million are assigned to specific risk categories. Smaller commercial and
consumer loans are evaluated on a pooled basis and assigned to specific risk
categories. Following this review, senior management of the Company analyzes
the results and determines the allowance for credit losses. The Risk Committee
of the Company's Board of Directors reviews the allowance at the end of each
quarter.
The portion of the allowance for credit losses allocated to impaired loans
(nonaccrual commercial loans over $1 million) is measured by the difference
between their recorded value and fair value. Fair value is the present value
83
of the expected future cash flows from borrowers, the market value of the loan,
or the fair value of the collateral.
Commercial loans are placed on nonaccrual status when collateral is
insufficient and principal or interest is past due 90 days or more, or when
there is reasonable doubt that interest or principal will be collected.
Accrued interest is usually reversed when a loan is placed on nonaccrual
status. Interest payments received on nonaccrual loans may be recognized as
income or applied to principal depending upon management's judgment.
Nonaccrual loans are restored to accrual status when principal and interest are
current or they become fully collateralized. Consumer loans are not classified
as nonperforming assets, but are charged off and interest accrued is suspended
based upon an established delinquency schedule determined by product. Real
estate acquired in satisfaction of loans is carried in other assets at the
lower of the recorded investment in the property or fair value minus estimated
costs to sell.
Transactions in the allowance for credit losses are summarized as follows:
Continuing Operations
---------------------
(In millions) Three Months Ended June 30, 2006
----------------------------------------------
Allowance for
Allowance for Lending-Related Allowance for
Loan Losses Commitments Credit Losses
-------------- --------------- -------------
Balance, Beginning of Period $ 334 $ 140 $ 474
Charge-Offs (1) - (1)
Recoveries 8 - 8
-------------- --------------- -------------
Net Charge-Offs 7 - 7
Provision (4) 3 (1)
-------------- --------------- -------------
Balance, End of Period $ 337 $ 143 $ 480
============== =============== =============
(In millions) Three Months Ended June 30, 2005
----------------------------------------------
Allowance for
Allowance for Lending-Related Allowance for
Loan Losses Commitments Credit Losses
-------------- --------------- -------------
Balance, Beginning of Period $ 486 $ 124 $ 610
Charge-Offs (7) - (7)
Recoveries 1 - 1
-------------- --------------- -------------
Net Charge-Offs (6) - (6)
Provision (17) 14 (3)
-------------- --------------- -------------
Balance, End of Period $ 463 $ 138 $ 601
============== =============== =============
84
(In millions) Six Months Ended June 30, 2006
----------------------------------------------
Allowance for
Allowance for Lending-Related Allowance for
Loan Losses Commitments Credit Losses
-------------- --------------- -------------
Balance, Beginning of Period $ 326 $ 145 $ 471
Charge-Offs (4) - (4)
Recoveries 14 - 14
-------------- --------------- -------------
Net Charge-Offs 10 - 10
Provision 1 (2) (1)
-------------- --------------- -------------
Balance, End of Period $ 337 $ 143 $ 480
============== =============== =============
(In millions) Six Months Ended June 30, 2005
----------------------------------------------
Allowance for
Allowance for Lending-Related Allowance for
Loan Losses Commitments Credit Losses
-------------- --------------- -------------
Balance, Beginning of Period $ 491 $ 136 $ 627
Charge-Offs (7) - (7)
Recoveries 1 - 1
-------------- --------------- -------------
Net Charge-Offs (6) - (6)
Provision (22) 2 (20)
-------------- --------------- -------------
Balance, End of Period $ 463 $ 138 $ 601
============== =============== =============
7. Capital Transactions
--------------------
The Company has 5 million authorized shares of Class A preferred stock
having a par value of $2.00 per share. At June 30, 2006 and December 31, 2005,
3,000 shares were outstanding.
In addition to the Class A preferred stock, the Company has 5 million
authorized shares of preferred stock having no par value, with no shares
outstanding at June 30, 2006 and December 31, 2005, respectively.
On July 11, 2006, the Board of Directors raised the quarterly dividend by
5% to 22 cents per share payable August 4, 2006 to shareholders of record on
July 26, 2006.
The Company repurchased 10.3 million shares in the second quarter of 2006.
Included in the buyback were 10.0 million shares that were repurchased on April
3, 2006 through the previously disclosed accelerated share repurchase program.
85
8. Earnings Per Share
------------------
The following table illustrates the computations of basic and diluted
earnings per share:
(Dollars in millions, Three Months Ended Six Months Ended
except per share amounts) June 30, June 30,
------------------ ----------------
2006 2005 2006 2005
-------- -------- -------- --------
Income from Continuing Operations $ 391 $ 343 $ 751 $ 671
Income from Discontinued Operations 57 55 119 106
-------- -------- -------- --------
Net Income (1) $ 448 $ 398 $ 870 $ 777
======== ======== ======== ========
Basic Weighted Average
Shares Outstanding 756 765 760 768
Shares Issuable Upon Conversion
of Employee Stock Options 9 7 9 7
-------- -------- -------- --------
Diluted Weighted Average
Shares Outstanding 765 772 769 775
======== ======== ======== ========
Basic Earnings Per Share:
Income from Continuing Operations $ 0.52 $ 0.45 $ 0.99 $ 0.87
Income from Discontinued Operations 0.07 0.07 0.15 0.14
Net Income 0.59 0.52 1.14 1.01
Diluted Earnings Per Share:
Income from Continuing Operations $ 0.52 $ 0.45 $ 0.98 $ 0.86
Income from Discontinued Operations 0.07 0.07 0.15 0.14
Net Income 0.59 0.52 1.13 1.00
(1) Net income, net income available to common shareholders and diluted net income are the same
for all periods presented.
9. Employee Benefit Plans
----------------------
The components of net periodic benefit cost are as follows:
Pension Benefits Healthcare Benefits
-------------------------------------- ------------------------------------
Three Months Ended Six Months Ended Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
--------------------------------------- ------------------ ----------------
Domestic Foreign Domestic Foreign Domestic Domestic
--------- --------- --------- --------- ------------------ ----------------
(In millions) 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005
--------------------- ---- ---- ---- ---- ---- ---- ---- ---- -------- -------- -------- ------
Net Periodic Cost (Income)
Service Cost $ 13 $ 16 $ 3 $ 2 $ 25 $ 32 $ 5 $ 4 $ - $ - $ - $ -
Interest Cost 13 14 3 2 26 28 6 5 2 2 4 4
Expected Return on Assets (25) (30) (4) (3) (50) (60) (7) (6) (1) (2) (2) (4)
Other 9 4 1 1 18 9 2 1 3 2 6 4
---- ---- ---- ---- ---- ---- ---- ---- ------- -------- ------- ------
Net Periodic Cost (Income)(1)$ 10 $ 4 $ 3 $ 2 $ 19 $ 9 $ 6 $ 4 $ 4 $ 2 $ 8 $ 4
==== ==== ==== ==== ==== ==== ==== ==== ======= ======== ======= ======
(1) Includes discontinued operations expense. Pension benefits expense includes discontinued
operations expense of $1.5 million for the three months ended June 30 2006 and 2005, and $3.0 million
for the six months ended June 30, 2006 and 2005.
86
10. Income Taxes
------------
The statutory federal income tax rate is reconciled to the Company's
effective income tax rate on a continuing operations basis below:
Six Months Ended
June 30,
-----------------
2006 2005
---- ----
Federal Rate 35.0% 35.0%
State and Local Income Taxes,
Net of Federal Income Tax Benefit 1.9 3.3
Nondeductible Expenses 0.2 0.3
Credit for Synthetic Fuel Investments (1.2) (2.0)
Credit for Low-Income Housing Investments (1.7) (2.3)
Tax-Exempt Income From Municipal Securities (0.1) (0.2)
Other Tax-Exempt Income (1.2) (1.3)
Foreign Operations (0.7) 0.2
Other - Net 1.1 (0.9)
------ ------
Effective Rate 33.3% 32.1%
====== ======
87
11. Derivatives and Hedging Relationships
-------------------------------------
Derivative contracts, such as futures contracts, forwards, interest rate
swaps, foreign currency swaps and options and similar products used in trading
activities, are recorded at fair value. The Company does not recognize gains
or losses at the inception of derivative transactions if the fair value is not
determined based upon observable market transactions and market data. Gains
and losses are included in foreign exchange and other trading activities in
non-interest income. Unrealized gains and losses are reported on a gross basis
in trading account assets and trading liabilities, after taking into
consideration master netting agreements.
The Company enters into various derivative financial instruments for non-
trading purposes primarily as part of its asset/liability management ("ALM")
process. These derivatives are designated as fair value and cash flow hedges
of certain assets and liabilities when the Company enters into the derivative
contracts. Gains and losses associated with fair value hedges are recorded in
income as well as any change in the value of the related hedged item. Gains and
losses on cash flow hedges are recorded in other comprehensive income. If a
derivative used in ALM does not qualify as a hedge it is marked to market and
the gain or loss is included in net interest income.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objectives and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as fair value hedges to specific
assets or liabilities on the balance sheet.
The Company formally assesses both at the hedge's inception and on an
ongoing basis whether the derivatives that are used in hedging transactions are
highly effective and whether those derivatives are expected to remain highly
effective in future periods. The Company evaluates ineffectiveness in terms of
amounts that could impact a hedge's ability to qualify for hedge accounting and
the risk that the hedge could result in more than a de minimus amount of
ineffectiveness. At inception, the potential causes of ineffectiveness related
to each of its hedges is assessed to determine if the Company can expect the
hedge to be highly effective over the life of the transaction and to determine
the method for evaluating effectiveness on an ongoing basis. Recognizing that
changes in the value of derivatives used for hedging or the value of hedged
items could result in significant ineffectiveness, the Company has processes
in place designed to identify and evaluate such changes when they occur.
Quarterly, the Company performs a quantitative effectiveness assessment and
records any ineffectiveness.
The Company utilizes interest rate swap agreements to manage its exposure
to interest rate fluctuations. For hedges of fixed rate loans, asset-backed
securities, deposits and long term debt, the hedge documentation specifies the
terms of the hedged items and interest rate swaps and indicates that the
derivative is hedging a fixed rate item and is a fair value hedge, that the
hedge exposure is to the changes in the fair value of the hedged item due to
changes in benchmark interest rates, and that the strategy is to eliminate fair
value variability by converting fixed rate interest payments to LIBOR.
The fixed rate loans hedged generally have a maturity of 1 to 10 years and
are not callable. These loans are hedged with "pay fixed rate, receive
variable rate" swaps with similar notional amounts, maturities, and fixed rate
coupons. The swaps are not callable. At June 30, 2006, $163 million of loans
were hedged with interest rate swaps which had notional values of $163 million.
The securities hedged generally have a weighted average life of 10 years
and are callable six months prior to maturity. These securities are hedged
with pay fixed rate, receive variable rate swaps of like maturity, repricing
and fixed rate coupon. The swaps are callable six months prior to maturity.
At June 30, 2006, $231 million of securities were hedged with interest rate
swaps which had notional values of $231 million.
88
The fixed rate deposits hedged generally have original maturities of 1 to
12 years (65% are one year deposits) and, except for three deposits, are not
callable. These deposits are hedged with receive fixed rate, pay variable rate
swaps of similar maturity, repricing and fixed rate coupon. The swaps are not
callable except for the three that hedge the callable deposits. At June 30,
2006, $2,018 million of deposits were hedged with interest rate swaps which had
notional values of $2,018 million.
The fixed rate long-term debt hedged generally has an original maturity of
5 to 30 years. The Company issues both callable and non-callable debt. The
non-callable debt is hedged with simple interest rate swaps similar to those
described for deposits. Callable debt is hedged with callable swaps where the
call dates of the swaps exactly match the call dates of the debt. At June 30,
2006, $5,566 million of debt was hedged with interest rate swaps which had
notional values of $5,587 million.
In addition to the fair value hedges discussed above, the Company has
three cash flow hedges utilizing interest rate swaps to hedge the variability
in expected future cash flows attributable to floating rates on an interest-
only strip, a deposit and a long-term debt issue. The hedge documentation
specifies the terms of the hedged items and interest rate swaps and indicates
that the derivative is hedging future variable interest payments and is a cash
flow hedge, that the hedge exposure is the variability in interest payments,
and that the strategy is to eliminate variability by converting floating rate
interest payments to fixed payments. For cash flow hedges the interest rate
swap is marked to market with the changes in value recorded in other
comprehensive income. The amount recognized as other comprehensive income for
the cash flow hedge is reclassified to net interest income as interest is
realized on the hedged item.
The Company has a $273 million interest-only strip of which $200 million
is hedged with a $200 million receive fixed rate, pay variable rate interest
rate swaps to remove the variability in the cash flows received from the
security. Payments on the interest-only strip are related to a money market
fund. During the next twelve months, net gains of $3 million (pre-tax) included
in other comprehensive income are expected to be reclassified to income.
The deposit hedged has a principal amount of $275 million and has a LIBOR
based floating rate and an 18 month maturity. The deposit is hedged with a
receive LIBOR, pay fixed rate swap with the same maturity and interest payment
dates as the deposit to eliminate the variability in interest payment received
on the deposit. During the next twelve months, net gains of less than $1
million (pre-tax) included in other comprehensive income are expected to be
reclassified to income.
The long term debt hedged has a principal amount of $400 million and has a
LIBOR based floating rate and a 2 year maturity. The debt is hedged with a
receive LIBOR, pay fixed rate swap with the same maturity and interest payment
dates as the debt to eliminate the variability in interest payment received on
the debt. During the next twelve months, net gains of less than $1 million
(pre-tax) included in other comprehensive income are expected to be
reclassified to income.
In addition, the Company enters into foreign exchange hedges. The Company
uses forward foreign exchange contracts with maturities of 12 months or less to
hedge its Sterling and Euro foreign exchange exposure with respect to
forecasted expense transactions in non-U.S. entities which have the US dollar
as their functional currency. As of June 30, 2006, the hedged forecasted
foreign currency transactions and linked forwards were $83 million with $3
million gains recorded in other comprehensive income. These gains are expected
to be reclassified to expense over the next twelve months.
Forward foreign exchange contracts are also used to hedge the value of the
Company's investments in foreign subsidiaries. These forward contracts have a
maturity of less than six months. The derivatives employed are designated as
net investment hedges of changes in value of the Company's foreign investment
due to exchange rates, such that changes in value of the forward exchange
89
contracts offset the changes in value of the foreign investments due to changes
in foreign exchange rates. The change in fair market value of these contracts
is deferred and reported within accumulated translation adjustments in
shareholders' equity, net of tax effects. At June 30, 2006, foreign exchange
contracts, with notional amounts totaling $1,658 million, were designated as
hedges of corresponding amounts of net investments.
The Company discontinues hedge accounting prospectively when it determines
that a derivative is no longer an effective hedge, the derivative expires or is
sold, or management discontinues the derivative's hedge designation.
Ineffectiveness related to derivatives and hedging relationships was
recorded in income as follows:
(In millions) Quarter End Year-to-date
Hedges June 30, 2006 June 30, 2006
------------------------- ------------------ -----------------
Fair Value Hedge of Loans $ (0.1) $ 0.1
Fair Value Hedge
of Securities (0.1) (0.1)
Fair Value Hedge of Deposits
and Long-Term Debt (1.2) (0.7)
Cash Flow Hedges (0.2) (0.4)
Other 0.2 (0.1)
------------------ -----------------
Total $ (1.4) $ (1.2)
================== =================
Other includes ineffectiveness recorded on foreign exchange hedges.
12. Commitments and Contingent Liabilities
--------------------------------------
In the normal course of business, various commitments and contingent
liabilities are outstanding which are not reflected in the accompanying
consolidated balance sheets. Management does not expect any material losses to
result from these matters.
The Company's significant trading and off-balance-sheet risks are
securities, foreign currency and interest rate risk management products,
commercial lending commitments, letters of credit, and securities lending
indemnifications. The Company assumes these risks to reduce interest rate and
foreign currency risks, to provide customers with the ability to meet credit
and liquidity needs, to hedge foreign currency and interest rate risks, and to
trade for its own account. These items involve, to varying degrees, credit,
foreign exchange, and interest rate risk not recognized in the balance sheet.
The Company's off-balance-sheet risks are managed and monitored in manners
similar to those used for on-balance-sheet risks. There are no significant
industry concentrations of such risks.
A summary of the notional amount of the Company's off-balance-sheet credit
transactions, net of participations, at June 30, 2006 and December 31, 2005 for
continuing operations follows:
Off-Balance-Sheet Credit Risks
------------------------------
June 30, December 31,
(In millions) 2006 2005
----------------------------------- ------------ -----------
Lending Commitments $ 34,730 $ 33,407
Standby Letters of Credit 10,603 9,873
Commercial Letters of Credit 1,002 1,122
Securities Lending Indemnifications 379,563 310,970
The total potential loss on undrawn commitments, standby and commercial
letters of credit, and securities lending indemnifications is equal to the
total notional amount if drawn upon, which does not consider the value of any
90
collateral. Since many of the commitments are expected to expire without being
drawn upon, the total amount does not necessarily represent future cash
requirements. The allowance for lending-related commitments at June 30, 2006
and December 31, 2005 was $143 million and $144 million.
A securities lending transaction is a fully collateralized transaction in
which the owner of a security agrees to lend the security through an agent (the
Company) to a borrower, usually a broker/dealer or bank, on an open, overnight
or term basis, under the terms of a prearranged contract, which generally
matures in less than 90 days. The Company generally lends securities with
indemnification against broker default. The Company generally requires the
borrower to provide 102% cash collateral which is monitored on a daily basis,
thus reducing credit risk. Security lending transactions are generally entered
into only with highly-rated counterparties. At June 30, 2006 and December 31,
2005, securities lending indemnifications were secured by collateral of $389.9
billion and $317.4 billion, respectively.
Standby letters of credit principally support corporate obligations and
include $0.1 billion that were collateralized with cash and securities on June
30, 2006 and $0.6 billion on December 31, 2005. At June 30, 2006,
approximately $7.1 billion of the standbys will expire within one year, and the
balance between one to five years.
The notional amounts for other off-balance-sheet risks (See "Trading
Activities" in the MD&A section) express the dollar volume of the transactions;
however, credit risk is much smaller. The Company performs credit reviews and
enters into netting agreements to minimize the credit risk of foreign currency
and interest rate risk management products. The Company enters into offsetting
positions to reduce exposure to foreign exchange and interest rate risk.
Other
-----
The Company has provided standard representations for underwriting
agreements, acquisition and divestiture agreements, sales of loans and
commitments, and other similar types of arrangements and customary
indemnification for claims and legal proceedings related to its provision of
financial services. Insurance has been purchased to mitigate certain of these
risks. The Company is a minority equity investor in, and member of, several
industry clearing or settlement exchanges through which foreign exchange,
securities, or other transactions settle. Certain of these industry clearing
or settlement exchanges require their members to guarantee their obligations
and liabilities or to provide financial support in the event other partners do
not honor their obligations. It is not possible to estimate a maximum
potential amount of payments that could be required with such agreements.
In the ordinary course of business, the Company makes certain investments
that have tax consequences. From time to time, the IRS may question or
challenge the tax position taken by the Company. The Company engaged in
certain types of structured cross-border leveraged leasing investments,
referred to as "LILOs", prior to mid-1999 that the IRS has challenged. In
2004, the IRS proposed adjustments to the Company's tax treatment of these
transactions. As previously disclosed, beginning in the fourth quarter of
2004, the Company had several appellate conferences with the IRS in an attempt
to settle the proposed adjustments related to these LILO transactions.
On February 28, 2006, the Company settled this matter with the IRS
relating to LILO transactions closed in 1996 and 1997. The settlement does not
affect 2006 net income, as the impact of the settlement was fully reserved.
The Company's 1998 leveraged lease transactions are in a subsequent audit
cycle and were not part of the settlement. The Company believes that a
comparable settlement for 1998 will ultimately be possible, given the
similarity between these leases and the settled leases. However, negotiations
are not complete and the treatment of the 1998 leases may still be litigated.
Under current generally accepted accounting principles, if the 1998 leases are
settled on a basis comparable to the 1996 and 1997 leases, the Company would
91
not expect the settlement of the 1998 leases to have an impact on net income,
based on existing reserves.
In the fourth quarter of 2005 the Company deposited funds with the IRS in
anticipation of reaching a settlement on all of its LILO investments.
On February 11, 2005, the IRS released Notice 2005-13, which identified
certain lease investments known as "SILOs" as potentially subject to IRS
challenge. The Company believes that certain of its lease investments entered
into prior to 2004 may be consistent with transactions described in the notice.
In response, the Company is reviewing its lease portfolio and evaluating the
technical merits of the IRS' position. Although it is likely the IRS will
challenge the tax benefits associated with these leases, the Company remains
confident that its tax treatment of the leases complied with statutory,
administrative and judicial authority existing at the time they were entered
into.
The Company currently believes it has adequate tax reserves to cover its
LILO exposure and any other potential tax exposures, based on a probability
assessment of various potential outcomes. Probabilities and outcomes are
reviewed as events unfold, and adjustments to the reserves are made when
appropriate.
In the ordinary course of business, the Company and its subsidiaries are
routinely defendants in or parties to a number of pending and potential legal
actions, including actions brought on behalf of various classes of claimants,
and regulatory matters. Claims for significant monetary damages are asserted
in certain of these actions and proceedings. Due to the inherent difficulty of
predicting the outcome of such matters, the Company cannot ascertain what the
eventual outcome of these matters will be; however, based on current knowledge
and after consultation with legal counsel, the Company does not believe that
judgments or settlements, if any, arising from pending or potential legal
actions or regulatory matters, either individually or in the aggregate, after
giving effect to applicable reserves, will have a material adverse effect on
the consolidated financial position or liquidity of the Company although they
could have a material effect on net income for a given period. The Company
intends to defend itself vigorously against all of the claims asserted in these
legal actions.
See discussion of contingent legal matters in the "Legal and Regulatory
Proceedings" section.
92
QUARTERLY REPORT ON FORM 10-Q
THE BANK OF NEW YORK COMPANY, INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 2006
Commission file number 001-06152
THE BANK OF NEW YORK COMPANY, INC.
Incorporated in the State of New York
I.R.S. Employer Identification No. 13-2614959
Address: One Wall Street
New York, New York 10286
Telephone: (212) 495-1784
As of July 31, 2006, The Bank of New York Company, Inc. had
763,130,829 shares of common stock ($7.50 par value) outstanding.
The Bank of New York Company, Inc. (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months(or such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
The registrant is a large accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
The registrant is not a shell company (as defined in Rule 12b-2 of the
Exchange Act).
The following sections of the Financial Review set forth in the cross-
reference index are incorporated in the Quarterly Report on Form 10-Q.
Cross-reference Page(s)
-----------------------------------------------------------------------------
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets as of
June 30, 2006 and December 31, 2005 71
Consolidated Statements of Income for
the Three Months and Six Months Ended
June 30, 2006 and 2005 72
Consolidated Statement of Changes in
Shareholders' Equity for the Six Months
Ended June 30, 2006 74
Consolidated Statement of Cash Flows
for the Six Months Ended June 30, 2006 and 2005 75
Notes to Consolidated Financial Statements 76 - 91
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 5 - 70
Item 3 Quantitative and Qualitative Disclosures
About Market Risk 53 - 55
93
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company's Disclosure Committee, whose members include the Chief
Executive Officer and Chief Financial Officer, has responsibility for ensuring
that there is an adequate and effective process for establishing, maintaining,
and evaluating disclosure controls and procedures that are designed to ensure
that information required to be disclosed by the Company in its SEC reports is
timely recorded, processed, summarized and reported. In addition, the Company
has established a Code of Conduct designed to provide a statement of the values
and ethical standards to which the Company requires its employees and directors
to adhere. The Code of Conduct provides the framework for maintaining the
highest possible standards of professional conduct. The Company also maintains
an ethics hotline for employees.
As of the end of the period covered by this report, an evaluation was
carried out under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the Company's disclosure controls and procedures as
defined in Exchange Act Rule 13a-15(e) and 15d-15(e). Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
In the ordinary course of business, the Company may routinely modify,
upgrade and enhance its internal controls and procedures for financial
reporting. However, there have not been any changes in the Company's internal
controls over financial reporting as defined in Exchange Act Rule 13a-15(f) and
15d-15(f) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL AND REGULATORY PROCEEDINGS
-----------------------------------------
In the ordinary course of business, the Company and its subsidiaries are
routinely defendants in or parties to a number of pending and potential legal
actions, including actions brought on behalf of various classes of claimants,
and regulatory matters. Claims for significant monetary damages are asserted
in certain of these actions and proceedings. In regulatory enforcement
matters, claims for disgorgement and the imposition of penalties and/or other
remedial sanctions are possible. Due to the inherent difficulty of predicting
the outcome of such matters, the Company cannot ascertain what the eventual
outcome of these matters will be; however, on the basis of current knowledge
and after consultation with legal counsel, the Company does not believe that
judgments or settlements, if any, arising from pending or potential legal
actions or regulatory matters, either individually or in the aggregate, after
giving effect to applicable reserves, will have a material adverse effect on
the consolidated financial position or liquidity of the Company, although they
could have a material effect on net income for a given period. The Company
intends to defend itself vigorously against all of the claims asserted in these
legal actions.
As previously disclosed in the Company's 2005 Annual Report on Form 10-K,
the U.S. Securities and Exchange Commission ("SEC") is investigating 1) the
appropriateness of certain expenditures made in connection with marketing and
distribution of the Hamilton Funds; 2) possible market-timing transactions
cleared by Pershing LLC ("Pershing"); and 3) the trading activities of Pershing
Trading Company LP, a floor specialist, on two regional exchanges from 1999 to
2004.
94
Because the conduct at issue in the Pershing market timing and floor
specialist investigations is alleged to have occurred largely during the period
when Pershing was owned by Credit Suisse First Boston (USA), Inc. ("CSFB"), the
Company has made claims for indemnification against CSFB relating to these
matters under the agreement relating to the acquisition of Pershing. CSFB is
disputing these claims for indemnification.
As previously disclosed, the SEC has been investigating the Company's role
as auction agent in connection with certain auction rate securities. The
Company has entered into settlement negotiations with the SEC staff concerning
the auction agent investigation. There can be no assurance that a settlement
will be reached.
As disclosed in a report filed on Form 8-K, the Company entered into a
written agreement with the Federal Reserve Bank of New York and the New York
State Banking Department on April 21, 2006. The agreement outlines a series of
steps to strengthen and enhance the Bank's compliance practices, systems,
controls, and procedures.
ITEM 1A. RISK FACTORS
----------------------
See "Forward-Looking Statements and Risk Factors That Could Affect Future
Results" in "Management's Discussion and Analysis of Financial Condition and
Results of Operations." There have been no material changes to the risk
factors discussed in the Company's Annual Report on Form 10-K for the year
ended December 31, 2005 and the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2006.
95
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
------------------------------------------------
AND USE OF PROCEEDS
-------------------
Shares of the Company's common stock were issued in the following
transactions exempt from registration under the Securities Act of 1933 pursuant
to Section 4(2) thereof:
(a) Shares of common stock were issued to former directors who had deferred
receipt of such common stock pursuant to the Deferred Compensation Plan
for Non-Employee Directors of The Bank of New York Company, Inc. These
issuances amounted to 15,705 shares on June 15, 2006.
Under its stock repurchase program, the Company buys back shares from time
to time. The following table discloses the Company's repurchases of the
Company's common stock made during the second quarter of 2006.
Issuer Purchases of Equity Securities
-------------------------------------
Total Number Maximum
Total Average of Shares Number of Shares
Number Price Purchased as That May be
Period of Shares Paid Part of Repurchased
Purchased Per Share Publicly Under the Plans
Announced Plans or Programs
or Programs
-------------- ---------- ---------- --------------- ------------------
April 1-30 10,111,833 $ 35.84 10,111,833 6,462,285
May 1-31 20,880 35.50 20,880 6,441,405
June 1-30 164,891 32.25 164,891 6,276,514
---------- ---------------
Total 10,297,604 10,297,604
========== ===============
Shares were repurchased through the Company's stock repurchase programs
announced on July 12, 2005, which permits the repurchase of 20 million shares.
Ten million shares were repurchased in April at an initial price of $35.85 from
a broker-dealer counterparty who borrowed the shares, as part of an accelerated
share repurchase program. The initial price is subject to a purchase price
adjustment based on the price the counterparty actually pays for the shares.
The remaining shares repurchased were from employee benefit plans.
96
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
----------------------------------------------------------
The Company held its annual meeting on April 11, 2006 at The Bank of New
York at 101 Barclay St. in New York, New York. The shareholders:
(1) elected fourteen persons to serve as directors of the Company;
(2) ratified the appointment of Ernst & Young LLP as the Company's
independent public accountants for 2006;
(3) approved a shareholder proposal with respect to cumulative voting;
(4) defeated a shareholder proposal with respect to reimbursement of
expenses of opposition candidates for the Board of Directors.
The number of votes cast for, against or withheld, and the number of
abstentions with respect to each such matter is set forth below, as are the
number of broker non-votes, where applicable. Pursuant to New York law,
abstentions and broker non-votes are not counted toward the election of
directors.
AGAINST/ BROKER
FOR WITHHELD ABSTAINED NON-VOTES
(1) Election of Directors:
Frank J. Biondi, Jr. 651,288,484 29,018,295
Nicholas M. Donofrio 661,517,468 18,789,311
Gerald L. Hassell 657,148,383 23,158,396
Richard J. Kogan 661,030,467 19,276,312
Michael J. Kowalski 660,633,031 19,673,748
John A. Luke, Jr. 658,679,806 21,626,973
John C. Malone 487,773,215 192,533,564
Paul Myners 661,144,688 19,162,091
Catherine A. Rein 657,196,611 23,110,168
Thomas A. Renyi 655,636,055 24,670,724
William C. Richardson 660,802,992 19,503,787
Brian L. Roberts 661,022,419 19,284,360
Samuel C. Scott III 661,410,608 18,896,171
Richard C. Vaughan 661,311,547 18,995,232
(2) Ratification of Auditors 662,073,994 12,975,110 5,257,673
(3) Approval of Shareholder
Proposal With Respect to
Cumulative Voting 293,349,783 280,461,065 26,258,595 101,238,256
(4) Defeat of Shareholder
Proposal With Respect to
Reimbursement of Expenses
of Opposition Candidates
for the Board 25,161,012 554,572,946 20,335,485 95,315,146
97
ITEM 6. EXHIBITS
-----------------
3.1 The By-Laws of The Bank of New York Company, Inc. as amended
through April 12, 2005, incorporated by reference to Exhibit
3(ii) to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2005.
3.2 Restated Certificate of Incorporation of The Bank of New York
Company, Inc. dated May 8, 2001, incorporated by reference
to Exhibit 4 to the Company's Registration Statement on
Form S-3 filed June 7, 2001 (File No. 333-62516, 333-62516-01,
333-62516-02, 333-62516-03 and 333-62516-04).
4 None of the outstanding instruments defining the rights of holders
of long-term debt of the Company represent long-term debt in excess
of 10% of the total assets of the Company. The Company hereby
agrees to furnish to the Commission, upon request, a copy of
any of such instrument.
10.1 Letter Agreement with Releases, dated June 30, 2006, between The
Bank of New York Company, Inc. and Joseph M. Velli,
incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K as filed with the Commission on June 30, 2006.
10.2 Employee Severance Agreement, dated July 11, 2000, between The
Bank of New York Company, Inc. and Joseph M. Velli, incorporated
by reference to Exhibit 10.2 to the Company's Current Report on
Form 8-K as filed with the Commission on June 30, 2006.
10.3 Form of Stock Option Agreement under the Registrant's 2003
Long-Term Incentive Plan.
10.4 Form of Performance Share Agreement under the Registrant's
2003 Long-Term Incentive Plan.
10.5 Form of Restricted Stock Agreement under the Registrant's
2003 Long-Term Incentive Plan.
12 Ratio of Earnings to Fixed Charges for the Three Months and Six
Months Ended June 30, 2006 and 2005.
31 Certification of Chairman and Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.1 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chairman and Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
98
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE BANK OF NEW YORK COMPANY, INC.
----------------------------------
(Registrant)
Date: August 3, 2006 By: /s/ Thomas J. Mastro
---------------------------------
Name: Thomas J. Mastro
Title: Comptroller
99
EXHIBIT INDEX
-------------
Exhibit Description
------- -----------
3.1 The By-Laws of The Bank of New York Company, Inc. as amended
through April 12, 2005, incorporated by reference to Exhibit
3(ii) to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2005.
3.2 Restated Certificate of Incorporation of The Bank of New York
Company, Inc. dated May 8, 2001, incorporated by reference
to Exhibit 4 to the Company's Registration Statement on
Form S-3 filed June 7, 2001 (File No. 333-62516, 333-62516-01,
333-62516-02, 333-62516-03 and 333-62516-04).
4 None of the outstanding instruments defining the rights of
holders of long-term debt of the Company represent long-term
debt in excess of 10% of the total assets of the Company. The
Company hereby agrees to furnish to the Commission, upon
request, a copy of any such instrument.
10.1 Letter Agreement with Releases, dated June 30, 2006, between The
Bank of New York Company, Inc. and Joseph M. Velli, incorporated
by reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K as filed with the Commission on June 30, 2006.
10.2 Employee Severance Agreement, dated July 11, 2000, between The
Bank of New York Company, Inc. and Joseph M. Velli, incorporated
by reference to Exhibit 10.2 to the Company's Current Report on
Form 8-K as filed with the Commission on June 30, 2006.
10.3 Form of Stock Option Agreement under the Registrant's 2003
Long-Term Incentive Plan.
10.4 Form of Performance Share Agreement under the Registrant's
2003 Long-Term Incentive Plan.
10.5 Form of Restricted Stock Agreement under the Registrant's
2003 Long-Term Incentive Plan.
12 Ratio of Earnings to Fixed Charges for the Three Months and Six
Months Ended June 30, 2006 and 2005.
31 Certification of Chairman and Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.1 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chairman and Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.