-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T5+q2JRe9ZVpDRDgswTceZ/PquIQOQsXLGGxv2VoqbCKbbvBNXjw2awi2wJmeJIr PhRPagm5vy2fH3WaTP3a8g== 0000009626-97-000003.txt : 19970401 0000009626-97-000003.hdr.sgml : 19970401 ACCESSION NUMBER: 0000009626-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANK OF NEW YORK CO INC CENTRAL INDEX KEY: 0000009626 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 132614959 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06152 FILM NUMBER: 97568849 BUSINESS ADDRESS: STREET 1: 48 WALL ST 15TH FL CITY: NEW YORK STATE: NY ZIP: 10296 BUSINESS PHONE: 2124951784 10-K 1 1996 FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For The Fiscal Year Ended December 31, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] Commission file number 1-6152 THE BANK OF NEW YORK COMPANY, INC. (Exact name of registrant as specified in its charter) NEW YORK 13-2614959 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 48 Wall Street, New York, New York 10286 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (212) 495-1784 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ----------------------- Common Stock, $7.50 par value NEW YORK STOCK EXCHANGE 8.60% Cumulative Preferred Stock NEW YORK STOCK EXCHANGE Preferred Stock Purchase Rights NEW YORK STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: Title of each class ------------------- Warrants to Purchase Common Stock Class A, 7.75% Cumulative Convertible Preferred Stock 7.97% Capital Securities, Series B Indicate by check mark whether the registrant (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 for 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 Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by nonaffiliates of the registrant at February 28, 1997 consisted of: Common Stock ($7.50 par value) $14,950,812,315 (based on closing price on New York Stock Exchange) The number of shares outstanding of the registrant's common Stock $7.50 par value was 387,076,047 shares on February 28, 1997. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1996 Annual Report to Shareholders are incorporated by reference into Parts I, II, and IV. Portions of the definitive Proxy Statement pursuant to Regulation 14A for the 1997 Annual Meeting of Shareholders are incorporated by reference into Part III. 2 PART I - ------ ITEM 1. BUSINESS - ----------------- INTRODUCTION The business of The Bank of New York Company, Inc. (the "Company") and its subsidiaries is described in the "Business Review" section of the Company's 1996 Annual Report to Shareholders which description is included in Exhibit 13 to this report and incorporated herein by reference. Also, the "Management's Discussion and Analysis" section included in Exhibit 13 contains financial and statistical information on the operations of the Company. Such information is herein incorporated by reference. CERTAIN REGULATORY CONSIDERATIONS General As a bank holding company, the Company is subject to the regulation and supervision of the Federal Reserve Board under the Bank Holding Company Act ("BHC Act"). The Company is also subject to regulation by the New York State Department of Banking. Under the BHC Act, bank holding companies may not directly or indirectly acquire the ownership or control of more than 5% of the voting shares or substantially all of the assets of any company, including a bank, without the prior approval of the Federal Reserve Board. In addition, bank holding companies are generally prohibited under the BHC Act from engaging in nonbanking activities, subject to certain exceptions. The Company's subsidiary banks are subject to supervision and examination by applicable federal and state banking agencies. In the fourth quarter of 1996, The Bank of New York (NJ) and The Putnam Trust Company were combined into The Bank of New York ("BNY"), a New York chartered banking corporation. BNY is a member of the Federal Reserve System and consequently is subject to regulation and supervision by the Federal Reserve Board. As a bank insured by the FDIC, BNY is also subject to examination by that agency. The Bank of New York (Delaware) ("BNY Del."), chartered in Delaware, is an FDIC-insured non-member bank and is therefore subject to regulation and supervision by the FDIC. BNY and BNY (Del.)are also subject to supervision and examination by their respective state regulators, the New York Banking Department and the Office of State Bank Commissioner of the State of Delaware. Both federal and state laws extensively regulate various aspects of the banking business, such as permissible types and amounts of loans and investments, permissible activities, and reserve requirements. These regulations are intended primarily for the protection of depositors rather than the Company's stockholders. Capital Adequacy Bank regulators have adopted risk-based capital guidelines for bank holding companies and banks. The minimum ratio of qualifying total capital to risk-weighted assets and certain off-balance sheet items ("Total Capital Ratio") is 8%. At least half of the total capital is to be comprised of common stock, retained earnings, noncumulative perpetual preferred stock, minority interests (and, for bank holding companies, a limited amount of qualifying cumulative perpetual preferred stock), less most intangibles including goodwill ("Tier 1 capital"). The remainder ("Tier 2 capital") may consist of other preferred stock, certain other instruments, and limited amounts of subordinated debt and allowance for loan losses. In addition, the Federal Reserve Board has established minimum Leverage Ratio (Tier 1 capital to average total assets) guidelines for bank holding companies and banks, and the FDIC has established substantially identical minimum leverage requirements for state chartered FDIC-insured, nonmember banks. The Federal Reserve Board's guidelines provide for a minimum Leverage Ratio of 3% for bank holding companies and banks that meet certain specified criteria, including those having the highest regulatory rating. All other banking organizations will be required to maintain a Leverage Ratio of at least 3% plus an 3 additional cushion of 100 to 200 basis points. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Federal Reserve Board will continue to consider a "Tangible Tier 1 Leverage Ratio" in evaluating proposals for expansion or new activities. The Tangible Tier 1 Leverage Ratio is the ratio of Tier 1 capital, less intangibles not deducted from Tier 1 capital, to average total assets. The Federal Reserve Board has not advised the Company of any specific minimum Leverage Ratio applicable to it. See "FDICIA" below. Federal banking agencies have issued regulations, which become effective in 1998, that modify existing rules related to capital ratios with respect to various areas of risk including interest rate exposure and other market risk. The Company does not believe that the aggregate impact of these modifications would have a significant impact on its capital position. FDICIA The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), substantially revised the depository institution regulatory and funding provisions of the Federal Deposit Insurance Act ("FDIA") and made revisions to several other federal banking statutes. Among other things, FDICIA requires the federal banking regulators to take prompt corrective action in respect of FDIC-insured depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." Under applicable regulations, an FDIC-insured bank is defined to be well capitalized if it maintains a Leverage Ratio of at least 5%, a Tier 1 Capital Ratio (Tier 1 Capital to risk-weighted assets and certain off-balance sheet items) of at least 6% and a Total Capital Ratio of at least 10% and is not otherwise in a "troubled condition" as specified by its appropriate federal regulatory agency. A bank is generally considered to be adequately capitalized if it is not defined to be well capitalized but meets all of its minimum capital requirements, i.e., if it has a Total Capital Ratio of 8% or greater, a Tier 1 Capital Ratio of 4% or greater and a Leverage Ratio of 4% or greater. A bank will be considered undercapitalized if it fails to meet any minimum required measure, significantly undercapitalized if it is significantly below any such measure and critically undercapitalized if it maintains a level of tangible equity capital equal to or less than 2% of total assets. A bank may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating. FDICIA generally prohibits an FDIC-insured depository institution from making any capital distribution (including payment of dividends) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. For an undercapitalized depository institution's capital restoration plan to be acceptable, its holding company must guarantee the capital plan up to an amount equal to the lesser of 5% of the depository institution's assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. In the event of the parent holding company's bankruptcy, such guarantee would take priority over the parent's general unsecured creditors. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions 4 are subject to appointment of a receiver or conservator. A discussion of the Company's capital position and capital adequacy is incorporated by reference from "Capital Resources" in the "Management's Discussion and Analysis" Section and Note 10 to the Consolidated Financial Statements of Exhibit 13. As of December 31, 1996 and 1995, capital ratios for the Company, the Bank, and BNYDEL were categorized as well capitalized as set forth in the table below. December 31, 1996 December 31, 1995 ---------------------- ------------------------ Well BNY BNY Capitalized Company Bank DEL Company Bank DEL Guidelines ------- ---- ---- ------- ---- ---- ---------- Tier I 8.34% 7.03% 9.35% 8.42% 7.84% 7.87% 6% Total Capital 12.78 10.26 14.47 13.08 11.61 11.55 10 Leverage 8.87 6.89 9.28 8.46 7.63 8.48 5 Tangible Common Equity 6.99 6.68 8.87 8.00 7.71 7.78 At December 31, 1996, the amounts of capital by which the Company and its major banking subsidiaries exceed the well capitalized guidelines are as follows: BNY Company BNY Del. (in millions) ------- --- ---- Tier 1 $1,293 $503 $181 Total Capital 1,541 129 242 Leverage 2,012 946 233 5 The following table presents the components of the Company's risk-based capital at December 31, 1996 and 1995: (in millions) 1996 1995 ---- ---- Common Stock $5,015 $5,119 Preferred Stock 112 113 Minority Interest 600 - Adjustments: Intangibles (1,003) (672) Securities Valuation Allowance (82) (58) 50% Investment in Section 20 Subsidiary (29) - ------ ------ Tier 1 Capital 4,613 4,502 Qualifying Long-term Debt 1,796 1,827 Qualifying Allowance for Loan Losses 695 670 Adjustment: 50% Investment in Section 20 Subsidiary (29) - ------ ------ Tier 2 Capital 2,462 2,497 ------ ------ Total Risk-based Capital $7,075 $6,999 ====== ====== The following table presents the components of the Company's risk adjusted assets at December 31, 1996 and 1995: 1996 1995 ------------------- ------------------- Balance Balance (in millions) sheet/ Risk sheet/ Risk notional adjusted notional adjusted Assets amount balance amount balance - ------ -------- -------- -------- -------- Cash, Due From Banks and Interest- Bearing Deposits in Banks $ 7,419 $ 758 $ 5,693 $ 731 Securities 5,053 904 4,870 819 Trading Assets 1,547 67 816 60 Fed Funds Sold and Securities Purchased Under Resale Agreements 562 65 936 17 Loans 37,006 33,518 37,687 34,826 Allowance for Loan Losses (901) - (756) - Other Assets 5,079 3,600 4,474 3,441 ------- ------- -------- ------- Total Assets $55,765 38,912 $ 53,720 39,894 ======= ------- ======== ------- Off-Balance Sheet Exposures - --------------------------- Commitments to Extend Credit $ 47,111 11,612 $ 54,274 9,220 Securities Lending Indemnifications 23,881 - 15,068 - Standby Letters of Credit and Other Guarantees 6,447 4,610 6,081 4,228 Interest Rate Contracts 29,518 69 27,800 96 Foreign Exchange Contracts 101,527 401 28,005 140 -------- ------- -------- ------- Total Off-Balance Sheet Exposures $208,484 16,692 $131,228 13,684 ======== ------- ======== ------- Gross Risk Adjusted Assets 55,604 53,578 Less: Allowance for Loan Losses not Qualifying as Risk Based Capital 206 86 Investment in Section 20 Subsidiary 58 - ------- ------- Risk Adjusted Assets $55,340 $53,492 ======= ======= 6 FDIC Insurance Assessments BNY and BNY Del. are subject to FDIC deposit insurance assessments. As required by FDICIA, the FDIC adopted a risk-based premium schedule to determine the assessment rates for most FDIC-insured depository institutions. Effective January 1, 1996, under the schedule, the premiums range from zero to $.27 for every $100 of deposits. Each financial institution is assigned to one of nine categories based on the institutions capital ratios and supervisory evaluations, and the premium paid by the institution is based on the category. Under the present schedule institutions in the highest of the three capital categories and the highest of three supervisory categories pay no premium and institutions in the lowest of these categories pay $.27 per $100 of deposits. In addition, the Deposit Insurance Funds Act provides for assessments at all insured depository institutions to pay for the cost of the Financing Corporation (a governmental agency) funding. The assessment will be based on deposit levels and will be approximately .325 basis points. The FDIC is authorized to raise insurance premiums in certain circumstances. Any increase in premiums would have an adverse effect on the Company's earnings. Under the FDIA, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order, or condition imposed by a bank's federal regulatory agency. Depositor Preference The Omnibus Budget Reconciliation Act of 1993 provides for a national depositor preference on amounts realized from the liquidation or other resolution of any depository institution insured by the FDIC. Acquisitions The BHC Act generally limits acquisitions by the Company to commercial banks and companies engaged in activities that the Federal Reserve Board has determined to be so closely related to banking as to be a proper incident thereto. The Company's direct activities are generally limited to furnishing services to its subsidiaries and activities that qualify under the "closely related" and "proper incident" tests. Prior Federal Reserve Board approval is required under the BHC Act for new activities and acquisitions of most nonbanking companies. The BHC Act, the Federal Bank Merger Act, and the New York Banking Law regulate the acquisition of commercial banks. The BHC Act requires the prior approval of the Federal Reserve Board for the direct or indirect acquisition of more than 5% of the voting shares of a commercial bank. Effective September 29, 1995, The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA") permits bank holding companies, with Federal Reserve Board approval, to acquire banks located in states other than the bank holding company's home state without regard to whether the transaction is permitted under state law. In addition, IBBEA provides that, commencing June 1, 1997, national banks and state banks with different home states will be permitted to merge across state lines, with the approval of the appropriate federal banking agency, unless the home state of a participating bank passes legislation between the date of enactment of IBBEA and May 31, 1997 expressly prohibiting interstate mergers. IBBEA further provides that states may enact laws permitting interstate bank merger transactions prior to June 1, 1997 (opt-in statutes). New York, New Jersey and Connecticut have enacted opt-in statutes. A bank may also establish and operate a de novo branch in a state in which the bank does not maintain a branch if that state expressly permits de novo branching. Once a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where any bank involved in the interstate merger transaction could have established or acquired branches under applicable federal or state law. A bank that has established a branch in a state through de novo branching may establish and acquire additional branches in such state in the same manner 7 and to the same extent as a bank having a branch in such state as a result of an interstate merger. The merger of BNY with another bank would require the approval of the Federal Reserve Board or other federal bank regulatory authority and, if the surviving bank is a New York state bank, the New York Superintendent of Banks. In reviewing bank acquisition and merger applications, the bank regulatory authorities will consider, among other things, the competitive effect of the transaction, financial and managerial issues including the capital position of the combined organization, and convenience and needs factors, including the applicant's record under the Community Reinvestment Act. Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to its banks and to commit resources to support such banks in circumstances where it might not do so absent such policy. In addition, any loans by the Company to its banks would be subordinate in right of payment to depositors and to certain other indebtedness of its banks. Restrictions on Transfer of Funds Restrictions on the transfer of funds to the Company and subsidiary bank dividend limitations are discussed in Note 10 to the Consolidated Financial Statements included in Exhibit 13. Such discussion is incorporated herein by reference. Cross Guarantees Under FDIA, a financial institution insured by the FDIC that is under common control with a failed or failing FDIC-insured institution can be required to indemnify the FDIC for losses resulting from the insolvency of the failed institution, even if this causes the affiliated institution also to become insolvent. Any obligation or liability owed by a subsidiary depository institution to its parent company is subordinate to the subsidiary's cross-guarantee liability with respect to commonly controlled insured depository institutions and to the rights of depositors. 8 ADDITIONAL FINANCIAL INFORMATION - ------------------------------------------------------------------------------ Average Balances and Rates on a Taxable Equivalent Basis (dollars in millions) 1996 1995 1994 ================================================================================ Aver- Aver- Aver- Average Int- age Average Int- age Average Int- age Balance erest Rate Balance erest Rate Balance erest Rate ----------------------------------------------------------------- Assets - ------ Interest- Bearing Deposits in Banks (Primarily Foreign) $ 1,585 $ 91 5.71% $ 1,682 $ 106 6.28% $ 1,266 $ 68 5.33% Federal Funds Sold and Securities Purchased Under Resale Agreements 2,356 126 5.35 3,280 193 5.89 3,653 161 4.39 Loans Domestic Offices Credit Card 6,905 886 12.83 7,637 989 12.96 5,830 646 11.08 Other Consumer 3,567 362 10.16 3,514 392 11.14 3,719 369 9.91 Commercial 13,945 1,023 7.34 13,215 1,047 7.92 12,340 833 6.76 Foreign Offices 12,281 810 6.59 11,055 805 7.28 10,140 564 5.56 ------- ------ ------- ------ ------- ------ Total Loans 36,698 3,081* 8.40 35,421 3,233* 9.13 32,029 2,412* 7.53 ------- ------ ------- ------ ------- ------ Securities U.S. Government Obligations 3,365 197 5.84 3,301 191 5.78 3,516 197 5.61 Obligations of States and Political Subdivisions 656 58 8.91 650 68 10.50 893 89 10.02 Other Securities, including Trading Securities Domestic Offices 811 37 4.56 1,076 65 6.10 1,341 70 5.25 Foreign Offices 511 31 6.11 233 14 6.31 191 11 5.64 ------- ------ ------- ------ ------- ------ Total Other Securities 1,322 68 5.16 1,309 79 6.13 1,532 81 5.30 ------- ------ ------- ------ ------- ------ Total Securities 5,343 323 6.05 5,260 338 6.45 5,941 367 6.19 ------- ------ ------- ------ ------- ------ Total Inter- est Earning Assets 45,982 $3,621 7.88% 45,643 $3,870 8.48% 42,889 $3,008 7.01% ====== ====== ====== Allowance for Loan Losses (837) (739) (906) Cash and Due from Banks 2,805 2,971 2,827 Other Assets 5,699 5,178 5,470 ------- ------- ------- Total Assets $53,649 $53,053 $50,280 ======= ======= ======= Assets Attributable to Foreign Offices 28.50% 25.73% 24.30% ===== ===== ===== *Includes fees of $139 million in 1996, $134 million in 1995, and $118 million in 1994. Nonaccrual loans are included in the average loan balance; the associated income, recognized on the cash basis, is included in interest. Taxable equivalent adjustments were $38 million in 1996, $39 million in 1995, and $46 million in 1994, and are based on the federal statutory tax rate (35%) and applicable state and local taxes. Continued on page 9 9 Average Balances and Rates on a Taxable Equivalent Basis (dollars in millions) 1996 1995 1994 ================================================================================ Aver- Aver- Aver- Average Int- age Average Int- age Average Int- age Balance erest Rate Balance erest Rate Balance erest Rate -------------------------------------------------------------- Liabilities and Shareholders' Equity - --------------- Interest-Bearing Deposits Domestic Offices Money Market Rate Accounts $ 3,855 $ 166 4.30% $ 3,451 $ 153 4.44% $ 3,593 $ 108 3.01% Savings 8,188 223 2.72 7,909 243 3.07 8,166 190 2.32 Certificates of Deposit of $100,000 or More 895 48 5.32 1,673 95 5.68 1,041 42 4.03 Other Time Deposits 2,547 121 4.75 2,560 143 5.60 2,296 97 4.24 ------- ------ ------- ------ ------- ------ Total Domestic Offices 15,485 558 3.60 15,593 634 4.07 15,096 437 2.90 ------- ------ ------- ------ ------- ------ Foreign Offices Banks in Foreign Countries 4,645 225 4.85 3,968 218 5.48 2,917 125 4.30 Government and Official Institutions 1,236 62 5.05 1,394 81 5.78 1,384 60 4.37 Other Time and Savings 6,351 307 4.85 6,041 332 5.52 5,689 220 3.84 ------- ------ ------- ------ ------- ------ Total Foreign Offices 12,232 594 4.87 11,403 631 5.54 9,990 405 4.05 ------- ------ ------- ------ ------- ------ Total Interest- Bearing Deposits 27,717 1,152 4.16 26,996 1,265 4.69 25,086 842 3.35 ------- ------ ------- ------ ------- ------ Federal Funds Purchased and Securities Sold Under Repurchase Agreements 2,957 155 5.23 2,804 161 5.75 2,843 106 3.73 Other Borrowed Funds 3,406 186 5.47 3,962 246 6.22 4,135 191 4.63 Long-Term Debt 1,870 129 6.90 1,773 130 7.30 1,530 106 6.93 ------- ------ ------- ------ ------- ------ Total Interest- Bearing Liabilities 35,950 $1,622 4.51% 35,535 $1,802 5.07% 33,594 $1,245 3.71% ====== ====== ====== Noninterest- Bearing Deposits Domestic Offices 8,838 9,012 8,897 Foreign Offices 44 53 58 ------- ------- ------- Total Noninterest- Bearing Deposits 8,882 9,065 8,955 ------- ------- ------- Other Liabilities 3,621 3,685 3,594 Minority Interest - Preferred Securities 26 - - Preferred Stock 113 115 157 Common Shareholders' Equity 5,055 4,653 3,980 ------- ------- ------- Total Liabilities and Share- holders' Equity $53,647 $53,053 $50,280 ======= ======= ======= Net Interest Earnings and Interest Rate Spread $1,999 3.37% $2,068 3.41% $1,763 3.30% ====== ====== ====== Net Yield on Interest-Earning Assets 4.35% 4.53% 4.11% ==== ==== ==== Liabilities Attributable to Foreign Offices 26.69% 24.94% 22.79% ===== ===== ===== 10 Rate/Volume Analysis on a Taxable Equivalent Basis (in millions) - ---------------------------------------------------------------- 1996 vs. 1995 1995 vs. 1994 ------------------------------------------------------ Increase (Decrease) Increase (Decrease) due to change in: due to change in: ------------------ Total ------------------ Total Average Average Increase Average Average Increase Balance Rate (Decrease) Balance Rate (Decrease) ------- ------- ---------- ------- ------- --------- Interest Income - --------------- Interest-Bearing Deposits in Banks $ (6) $ (9) $ (15) $ 25 $ 13 $ 38 Federal Funds Sold and Securities Purchased Under Resale Agreements (51) (16) (67) (18) 50 32 Loans Domestic Offices Credit Card (94) (9) (103) 222 121 343 Other Consumer 6 (36) (30) (21) 44 23 Commercial 56 (80) (24) 62 152 214 Foreign Offices 85 (80) 5 54 187 241 ----- ----- ----- ----- ----- ------ Total Loans 53 (205) (152) 317 504 821 Securities U.S. Government Obligations 4 2 6 (12) 6 (6) Obligations of States and Political Subdivisions 1 (11) (10) (25) 4 (21) Other Securities, including Trading Assets Domestic Offices (14) (14) (28) (15) 10 (5) Foreign Offices 17 - 17 2 1 3 ----- ----- ----- ----- ----- ------ Total Other Securities 3 (14) (11) (13) 11 (2) ----- ----- ----- ----- ----- ------ Total Securities 8 (23) (15) (50) 21 (29) ----- ----- ----- ----- ----- ------ Total Interest Income 4 (253) (249) 274 588 862 ----- ----- ----- ----- ----- ------ Interest Expense - ---------------- Interest-Bearing Deposits Domestic Offices Money Market Rate Accounts 17 (4) 13 (4) 49 45 Savings 8 (28) (20) (6) 59 53 Certificate of Deposits of $100,000 or More (42) (5) (47) 32 21 53 Other Time Deposits (1) (21) (22) 12 34 46 ----- ----- ----- ----- ----- ----- Total Domestic Offices (18) (58) (76) 34 163 197 ----- ----- ----- ----- ----- ----- Foreign Offices Banks in Foreign Countries 35 (28) 7 52 41 93 Government and Official Institutions (9) (10) (19) - 21 21 Other Time and Savings 17 (42) (25) 14 98 112 ----- ----- ----- ----- ----- ----- Total Foreign Offices 43 (80) (37) 66 160 226 ----- ----- ----- ----- ----- ----- Total Interest- Bearing Deposits 25 (138) (113) 100 323 423 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 9 (15) (6) (1) 56 55 Other Borrowed Funds (32) (28) (60) (8) 63 55 Long-Term Debt 7 (8) (1) 18 6 24 ----- ----- ----- ----- ----- ----- Total Interest Expense 9 (189) (180) 109 448 557 ----- ----- ----- ----- ----- ----- Change in Net Interest Income $ (5) $ (64) $ (69) $ 165 $ 140 $ 305 ===== ===== ===== ===== ===== ===== Changes which are not solely due to balance changes or rate changes are allocated to such categories on the basis of the respective percentage changes in average balances and average rates. 11 Market Risk Management - ---------------------- Market risk is the risk of loss due to adverse changes in the financial markets. Market risk arises from derivative financial instruments, such as futures, forwards, swaps and options, and other financial instruments, such as loans, securities, deposits and other borrowings. These instruments expose the Company primarily to interest rate and foreign exchange risk, but they also involve credit risk. Market risk associated with the Company's trading activities and asset/liability management activities is managed and controlled as discussed under "Trading Activities" and, "Asset/Liability Management" in the Management's Discussion and Analysis section of Exhibit 13. Such discussion is incorporated herein by reference. Interest-Rate Sensitivity - ------------------------- A discussion of the Company's interest rate sensitivity management activities is incorporated by reference from "Asset/Liability Management" in the Management's Discussion and Analysis section of Exhibit 13. The following table reflects the year-end position of the Company's interest-earning assets and interest-bearing liabilities that either reprice or mature within the designated time periods. The interest sensitivity indicated by this table is not necessarily indicative of the Company's interest sensitivity models (discussed under "Asset/Liability Management" in the Managements' Discussion and Analysis section of Exhibit 13) because within each time period, assets and liabilities reprice on different dates and at different levels, and interest sensitivity gaps change daily. A positive interest sensitivity gap, for a particular time period, is one in which more assets reprice or mature than liabilities. A negative interest sensitivity gap results from a greater amount of liabilities repricing or maturing. A positive gap implies that there are more rate sensitive assets than liabilities which suggests that as interest rates rise, the return on assets will rise faster than the funding costs. Conversely, a negative gap indicates more rate sensitive liabilities than assets. In such case, if interest rates rise, then funding costs will rise at a faster rate than the return on assets. The cumulative gap is the sum of the dollar gap for sequential time periods. 12 December 31, 1996 ----------------------------------------------------- Within Within Within Within Greater 2-3 4-6 7-12 Than 1 Mo. Mos. Mos. Mos. 12 Mos. Total ------ ------ ------ ------ ------- ------- (in millions) Interest-Earning Assets - ----------------------- Foreign Offices $ 8,284 $ 4,781 $ 2,182 $ 331 $ 122 $15,700 Domestic Offices Loans 16,353 793 414 571 5,304 23,435 Securities 127 184 134 503 2,981 3,929 Trading Assets 1,238 - - - - 1,238 Federal Funds Sold and Securities Purchased Under Resale Agreement 562 - - - - 562 ------- ------- ------- ------ ------- ------- Total 26,564 5,758 2,730 1,405 8,407 $44,864 ------- ------- ------- ------ ------- ======= Interest-Bearing Liabilities - ---------------- Foreign Offices 11,536 950 209 53 - 12,748 Domestic Offices Interest-Bearing Deposits Money Market Rate Accounts 4,167 - - - - 4,167 Savings 6,953 - - 13 1,221 8,187 Certificates of Deposit of $100,000 or More 416 252 175 99 526 1,468 Other Time Deposits 325 244 331 263 284 1,447 ------- ------- ------- ------ ------- ------- 23,397 1,446 715 428 2,031 28,017 ------- ------- ------- ------ ------- ------- Federal Funds Purchased and Other Borrowed Funds 3,817 980 505 41 53 5,396 Long-Term Debt - 9 54 - 1,753 1,816 Trust Preferred Securities - - - - 600 600 ------- ------- ------- ------ ------- ------- Noninterest-Bearing Sources of Funds 3,722 146 219 438 4,510 9,035 - ------------------- ------- ------- ------- ------ ------- ------- Total 30,936 2,581 1,493 907 8,947 $44,864 ======= Effect of Financial Futures and Swaps 385 (459) (164) 24 214 - ------------------- ------- ------- ------- ------ ------- Interest-Sensitive Gap $(3,987) $ 2,718 $ 1,073 $ 522 $ (326) - ---------------------- ======= ======= ======= ====== ======= Cumulative Interest- Sensitivity Gap $(3,987) $(1,269) $ (196) $ 326 $ - - -------------------- ======= ======= ======= ====== ======= 13 CREDIT RISK MANAGEMENT - ---------------------- Credit risk represents the possibility that the Company would suffer a loss if a borrower or other counterparty were to default on its obligations to the Company. Credit risk exposure arises primarily from lending activities, as well as from interest rate, foreign exchange, and securities processing products. For derivative financial instruments, total credit exposure consists of current and potential exposure. Current credit exposure represents the replacement cost of the transaction. Potential credit exposure is a statistically based estimate of the future replacement cost of the transaction. The Company has established policies and procedures to manage the level and composition of its credit risk on both a transaction and a portfolio basis. In managing the aggregate credit extension to individual customers, the Company measures the amount at risk on derivative financial instruments as the total of current and potential credit exposure. The Credit Policy Committee is responsible for developing and maintaining credit risk policies, as well as for overseeing and reviewing credit guidelines. Through the use of a credit approval process and established credit limits, the Company evaluates the credit quality of counterparties, industries, products, and countries. The Company seeks to reduce both on and off-balance-sheet credit risk through portfolio diversification, loan participations, syndications, asset sales, credit enhancements, risk reduction arrangements, and netting agreements. LOANS AND PROVISION AND ALLOWANCE FOR LOAN LOSSES - ------------------------------------------------- The provision for loan losses was $600 million in 1996, compared with $330 million in 1995 and $162 million in 1994. The increase in the provision compared with 1995 was principally related to the credit card portfolio. In 1996, the Company continued to experience improvement in the asset quality of business loans as nonperforming loans dropped. At December 31, 1996, the domestic commercial real estate portfolio had approximately 80% of its loans in New York and New Jersey, 3% in Pennsylvania, and 2% in both California and Connecticut; no other state accounts for more than 1% of the portfolio. This portfolio consists of the following types of properties: Business loans secured by real estate 37% Offices 28 Retail 11 Mixed-Used 3 Hotels 6 Condominiums and cooperatives 5 Industrial/Warehouse 2 Land 1 Other 7 ---- 100% ==== At December 31, 1996 and 1995, the Company's nonperforming real estate loans and real estate acquired in satisfaction of loans aggregated $61 million and $114 million, respectively. Net charge-offs of real estate loans were $11 million in 1996 and $16 million in 1995. In addition, other real estate charges were $1 million and $5 million in 1996 and 1995. At December 31, 1996 the Company's LDC exposures consisted of $55 million in medium-term loans (and no material commitments), $721 million in short-term loans, $8 million in accrued interest, and $148 million in equity investments. In addition, the Company has $314 million of debt securities to emerging market countries, including $267 million (book value) of bonds whose principal payments are collateralized by U.S. Treasury zero coupon obligations and whose interest payments are partially collateralized. 14 The Company's consumer loan portfolio is comprised principally of credit card, other installment, and residential loans. Residential and auto loans are collateralized, thereby reducing the risk. Credit card delinquencies and charge-offs increased compared to last year. A further discussion of the Company's credit card portfolio is incorporated by reference from "Provision and Allowance for Loan Losses" and "Sector Profitability" in the Management's Discussion and Analysis Section of Exhibit 13. The Company's loans to the energy industry primarily consist of credits with investor-owned electric and gas utilities, and oil, gas and mining companies. There were no nonperforming loans to borrowers in this industry at year-end 1996. Nonperforming loans to borrowers in the energy industry amounted to $11 million at year-end 1995. Charge-offs in this industry were $1 million in 1996 and zero in 1995. The Company's loans to the communications, entertainment, and publishing industries primarily consist of credits with cable television operators, broadcasters, magazine and newspaper publishers, motion picture theaters and regional telephone companies. At December 31, 1996 nonperforming loans in these industries amounted to $23 million and represented loans to a single borrower in the entertainment industry. There were no nonperforming loans in these industries at December 31, 1995, and no charge-offs in 1996 and 1995. The Company's portfolio of loans for purchasing or carrying securities is comprised largely of overnight loans which are fully collateralized, with appropriate margins, by marketable securities. Throughout its many years of experience in this area, the Company has rarely experienced a loss. The Company makes short-term, collateralized loans to mortgage bankers to fund mortgages sold to investors. There were no nonperforming loans at December 31, 1996 and 1995, and no charge-offs in 1996 and 1995. Based on an evaluation of individual credits, historical loan losses, and global economic factors, the Company has allocated its allowance for loan losses as follows: 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Real Estate Loans 5% 7% 9% 8% 9% Domestic Commercial and Industrial Loans 40 36 40 40 40 Consumer Loans 1 2 - - 1 Credit Card Loans 29 23 16 10 8 Foreign Loans 4 11 19 18 18 Unallocated 21 21 16 24 24 ---- ---- ---- ---- ---- 100% 100% 100% 100% 100% ==== ==== ==== ==== ==== Such an allocation is inherently judgmental, and the entire allowance for loan losses is available to absorb loan losses regardless of the nature of the loan. 15 The following table details changes in the Company's allowance for loan losses for the last five years. (dollars in millions) 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Loans Outstanding, December 31, $37,006 $37,687 $33,083 $30,570 $29,497 Average Loans Outstanding 36,698 35,421 32,029 30,427 30,345 Allowance for Loan Losses - ------------------------- Balance, January 1 Domestic $ 515 $ 509 $ 558 $ 624 $ 766 Foreign 82 155 176 194 195 Unallocated 159 128 236 254 123 ----- ----- ----- ------ ------ Total, January 1 756 792 970 1,072 1,084 ----- ----- ----- ------ ------ Acquisitions and Securitizations - 11 14 1 56 Charge-Offs Domestic Commercial and Industrial (46) (56) (158) (142) (311) Real Estate & Construction (11) (19) (6) (71) (103) Credit Card (503) (294) (169) (136) (131) Other Consumer (16) (15) (22) (37) (50) Foreign (4) (48) (56) (63) (33) ----- ----- ----- ------ ------ Total (580) (432) (411) (449) (628) ----- ----- ----- ------ ------ Recoveries Domestic Commercial and Industrial 15 14 14 28 66 Real Estate & Construction - 3 - 2 13 Credit Card 62 27 21 15 13 Other Consumer 7 10 14 14 13 Foreign 41 1 8 3 12 ----- ----- ----- ------ ------ Total 125 55 57 62 117 Net Charge-Offs (455) (377) (354) (387) (511) ----- ----- ----- ------ ------ Provision Domestic 600 356 135 242 423 Foreign - (26) 27 42 20 ----- ----- ----- ------ ------ Total 600 330 162 284 443 ----- ----- ----- ------ ------ Balance, December 31, Domestic 670 515 509 558 624 Foreign 38 82 155 176 194 Unallocated 193 159 128 236 254 ----- ----- ----- ------ ------ Total, December 31, $ 901 $ 756 $ 792 $ 970 $1,072 ===== ===== ===== ====== ====== Ratios - ------ Net Charge-Offs to Average Loans Outstandings 1.24% 1.06% 1.11% 1.27% 1.68% ===== ===== ===== ===== ===== Net Charge-Offs to Total Allowance 50.50% 49.87% 44.70% 39.90% 47.67% ===== ===== ===== ===== ===== Total Allowance to Year-End Loans Outstanding 2.43% 2.01% 2.40% 3.17% 3.63% ===== ===== ===== ===== ===== 16 Nonperforming Assets - -------------------- A summary of nonperforming assets is presented in the following table. (in millions) December 31, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Nonaccrual - ---------- Domestic $175 $184 $220 $408 $ 581 Foreign 38 41 77 130 198 ---- ---- ---- ---- ------ 213 225 297 538 779 Reduced Rate (Domestic) - - - 2 9 - ------------ ---- ---- ---- ---- ------ 213 225 297 540 788 Real Estate Acquired in Satisfaction of Loans 41 72 56 99 268 - --------------------- ---- ---- ---- ---- ------ $254 $297 $353 $639 $1,056 ==== ==== ==== ==== ====== Past Due 90 Days or More and Still Accruing Interest - --------------------------- Domestic Credit Card $215 $214 $ 97 $ 65 $ 56 Other Consumer 2 5 2 3 9 Commercial 30 51 64 88 153 ---- ---- ---- ---- ------ $247 $270 $163 $156 $ 218 ==== ==== ==== ==== ====== 17 Securities - ---------- The following table shows the maturity distribution by carrying amount and yield (not on a taxable equivalent basis) of the Company's securities portfolio at December 31, 1996. States and U.S. Government Political U.S. Government Agency Subdivisions --------------- --------------- ------------ Amount Yield Amount Yield Amount Yield ------ ----- ------ ----- ------ ----- (dollars in millions) Securities Held- - ---------------- to-Maturity ----------- One Year or Less $ 9 5.06% $ 18 5.57% $ 187 4.01% Over 1 through 5 Years 2 5.64 157 5.59 59 5.66 Over 5 through 10 Years - - 2 7.24 46 6.35 Over 10 years - - - - 85 6.65 Mortgage-Backed Securities - - - - - - ------ ----- ------ $ 11 5.18% $ 177 5.60% $ 377 5.15% ====== ===== ====== Securities Available- - -------------------- for-Sale - ---------- One Year or Less $ 569 5.58% $ 50 5.21% $ 3 5.22% Over 1 through 5 Years 1,288 5.36 3 6.01 39 6.57 Over 5 through 10 Years 920 5.96 - - 54 6.05 Over 10 years 7 8.05 - - 184 5.91 Equity Securities - - - - - - ------ ----- ----- $2,784 5.61% $ 53 5.26% $ 280 6.02% ====== ===== ===== Other Bonds, Mortgage-Backed Notes and and Equity Debentures Securities --------------- --------------- Amount Yield Amount Yield Total ------ ----- ------ ----- ----- (dollars in millions) Securities Held- - ---------------- to-Maturity ----------- One Year or Less $ 20 4.22% $ - -% $ 234 Over 1 through 5 Years 53 6.35 - - 271 Over 5 through 10 Years 57 3.94 - - 105 Over 10 years 273 5.77 - - 358 Mortgage-Backed Securities - - 202 7.32 202 ---- ---- ------ $403 5.98% $202 7.32% $1,170 ==== ==== ====== Securities Available- - -------------------- for-Sale - ---------- One Year or Less $ 35 4.92% $ - -% $ 657 Over 1 through 5 Years 2 6.23 - - 1,332 Over 5 through 10 Years 46 5.24 - - 1,020 Over 10 years 5 5.40 - - 196 Equity Securities - - 678 2.64 678 ----- ---- ------ $ 88 5.15% $678 2.64% $3,883 ===== ==== ====== Loans - ----- The following table shows the maturity structure of the Company's commercial loan portfolio at December 31, 1996. Over 1 Year 1 Year Through Over or Less 5 Years 5 Years Total ------- ----------- ------- ----- (in millions) Domestic - -------- Real Estate, Excluding Loans Collateralized by 1-4 Family Residential Properties $ 483 $1,386 $ 915 $ 2,784 Commercial and Industrial Loans 4,927 5,282 2,635 12,844 Other, Excluding Loans to Individuals and those Collateralized by 1-4 Family Residential Properties 4,671 800 123 5,594 ------- ------ ------ ------- 10,081 7,468 3,673 21,222 Foreign 2,716 1,024 2,324 6,064 - ------- ------- ------ ------ ------- Total $12,797 $8,492 $5,997 $27,286 ======= ====== ====== ======= Loans with: Predetermined Interest Rates $ 990 $1,156 $2,276 $ 4,422 Floating Interest Rates 11,807 7,336 3,721 22,864 ------- ------ ------ ------- Total $12,797 $8,492 $5,997 $27,286 ======= ====== ====== ======= 18 Deposits - -------- The aggregate amount of deposits by foreign customers in domestic offices was $4.5 billion, $4.0 billion, and $3.2 billion at December 31, 1996, 1995, and 1994. The following table shows the maturity breakdown of domestic time deposits of $100,000 or more at December 31, 1996. Time (in millions) Certificates Deposits- of Deposits Other Total ------------------------------------------------ 3 Months or Less $ 598 $1,757 $2,355 Over 3 Through 6 Months 160 8 168 Over 6 Through 12 Months 102 8 110 Over 12 Months 567 19 586 ------ ------ ------ Total $1,427 $1,792 $3,219 ====== ====== ====== The majority of deposits in foreign offices are time deposits in denominations of $100,000 or more. Other Borrowed Funds - --------------------- Information related to other borrowed funds in 1996, 1995, and 1994 is presented in the table below. 1996 1995 1994 --------------- --------------- --------------- (dollars in millions) Average Average Average Amount Rate Amount Rate Amount Rate ------ ------- ------ ------- ------ ------- Federal Funds Purchased and Securities Sold Under Repurchase Agreements - -------------------------- At December 31 $1,737 5.31% $3,933 4.61% $1,502 4.91% Average During Year 2,957 5.23 2,804 5.75 2,843 3.73 Maximum Month-End Balance During Year 4,460 4.85 3,991 5.96 6,415 3.36 Other* - ----- At December 31 $2,707 5.34% $3,106 5.73% $4,176 5.79% Average During Year 3,406 5.47 3,962 6.22 4,135 4.63 Maximum Month-End Balance During Year 4,341 5.40 5,025 5.74 5,639 4.57 *Other borrowings consist primarily of commercial paper, bank notes, extended federal funds purchased, and amounts owed to the U.S. Treasury. Foreign Assets - -------------- At December 31, 1996, the Company had assets in excess of 1% of year end total assets in the United Kingdom, totaling $1,100 million; and consisting of $529 million attributable to banks and other financial institutions, and $571 million attributable to commercial, industrial and other companies. At December 31, 1996, the Company had assets in excess of .75% of year end total assets in Greece, South Korea and Brazil aggregating $1,515 million. At December 31, 1995, the Company had assets in excess of .75% of year end total assets in Greece and South Korea, aggregating $1,007 million. 19 ITEM 2. PROPERTIES - ------------------- In New York City, the Company owns the thirty story building housing its executive headquarters at 48 Wall Street, a forty-nine story office building at One Wall Street, and an operations center at 101 Barclay Street. In addition, the Company owns and/or leases administrative and operations facilities in New York City; various locations in New Jersey and Connecticut; Harrison, New York; Newark, Delaware; Brussels, Belgium; London, England; and Utica, New York. Other real properties owned or leased by the Company, when considered in the aggregate, are not material to its operations. ITEM 3. LEGAL PROCEEDINGS - -------------------------- There are no material legal proceedings pending against the Company or its subsidiaries. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ There were no matters submitted to a vote of security holders of the registrant during the fourth quarter of 1996. PART II - ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ------------------------------------------------------------------------------ Information with respect to the market for the Company's common equity and related stockholder matters is incorporated herein by reference from the "Quarterly Data" section included in Exhibit 13. The Company's securities that are listed on the New York Stock Exchange (NYSE), are indicated as such on the front cover of this report. The NYSE symbol for the Company's Common Stock is BK. The Warrants (to purchase the Company's Common Stock) are traded over the counter. All of the Company's other securities are not currently listed. The Company had 24,014 common shareholders of record at February 28, 1997. ITEM 6. SELECTED FINANCIAL DATA - -------------------------------- Selected financial data are incorporated herein by reference from the "Financial Highlights" section included in Exhibit 13. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL - ---------------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- Management's discussion and analysis of financial condition and results of operations is incorporated herein by reference from the corresponding section of Exhibit 13. CAUTIONARY STATEMENT The Company or its executive officers and directors on behalf of the Company, may from time to time make forward looking statements. To the extent that any forward looking statements are made, the Company is necessarily unable to predict future changes in interest rates, economic activity, consumer behavior, government monetary policy, legislation and regulation, competition, and loan demand. In addition, the Company's future results of operations and other forward looking statements contained in Management's Discussion and Analysis and elsewhere in this Form 10-K involve a number of risks and uncertainties. As a result of variations in such factors, actual results may differ materially from any forward looking statements. Some of these factors are described below. The Company disclaims any obligation to update forward looking statements. Government Monetary Policies The Federal Reserve Board has the primary responsibility for monetary policy; accordingly, its actions have an important influence on the demand for credit and 20 investments and the level of interest rates and thus on the earnings of the Company. Legislation and Regulation Proposals to change the laws and regulations governing the banking industry are frequently introduced in Congress, in the state legislatures and before the various bank regulatory agencies. Regulatory changes could increase the Company's overhead costs, restrict access to profitable markets or force participation in unprofitable markets. The likelihood and timing of any such changes and the impact such changes might have on the Company and its subsidiaries, however, cannot be determined at this time. 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. 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. For personal and corporate trust services and investment counseling services, insurance companies, investment counseling firms, and other business firms and individuals offer active competition. A wide variety of domestic and foreign companies compete for processing services. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- Consolidated financial statements and notes and the independent auditors' reports are incorporated herein by reference from Exhibits 13 and 99 to this Report. Supplementary financial information is incorporated herein by reference from the "Quarterly Data" section included in Exhibit 13. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------------------------------------------------------------------------ FINANCIAL DISCLOSURE -------------------- On March 12, 1996, the Company's Board of Directors, acting upon the recommendation of the Audit Committee of the Company's Board of Directors dismissed Deloitte & Touche LLP as the Company's independent public accountants and appointed Ernst & Young LLP to serve as the Company's independent public accountants for the year 1996. Deloitte & Touche LLP's report on the Company's financial statements for the fiscal year ended December 31, 1995 did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principles. During the fiscal year ended December 31, 1995 and during the period from December 31, 1995 through March 12, 1996, there were no disagreements between the Company and Deloitte & Touche LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements would have caused Deloitte & Touche LLP to make reference to the subject matter of such disagreements in connection with its reports. There have been no other events which require disclosure under Item 304 of Regulation S-K. 21 PART III - -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------ The directors of the registrant are identified on pages 24 and 25 of this report. Additional material responsive to this item is contained in the Company's definitive Proxy Statement for its 1997 Annual Meeting of Shareholders, which information is incorporated herein by reference. EXECUTIVE OFFICERS OF THE REGISTRANT AND BUSINESS EXPERIENCE DURING THE PAST - ----------------------------------------------------------------------------- FIVE YEARS ---------- Company Officer Name Office and Experience Age Since ---- --------------------- --- ----- J. Carter Bacot 1995-1997 Chairman and Chief Executive 64 1975 Officer of the Company, Chairman of the Bank 1992-1995 Chairman and Chief Executive Officer of the Company and the Bank Thomas A. Renyi 1995-1997 President of the Company and 51 1992 President and Chief Executive Officer of the Bank 1994-1995 President of the Company and President and Chief Operating Officer of the Bank 1992-1994 President of the Company and Vice Chairman of the Bank 1992 Senior Executive Vice President and Chief Credit Officer of the Bank Alan R. Griffith 1994-1997 Vice Chairman of the Company 55 1990 and the Bank 1992-1994 Senior Executive Vice President of the Company, and President and Chief Operating Officer of the Bank Deno D. Papageorge 1992-1997 Senior Executive Vice President 58 1980 of the Company, Senior Executive Vice President and Chief Financial Officer of the Bank Richard D. Field 1992-1997 Executive Vice President of the 56 1987 Company, Senior Executive Vice President of the Bank Robert E. Keilman 1992-1997 Comptroller of the Company and 51 1984 the Bank, Senior Vice President of the Bank Phebe C. Miller 1995-1997 Secretary and Chief Legal 47 1995 Officer of the Company, Senior Vice President and Chief Legal Officer of the Bank 1994-1995 Senior Vice President of the Bank 1992-1994 Managing Director, General Counsel and Secretary, Discount Corporation of New York Robert J. Goebert 1992-1997 Auditor of the Company, Senior 55 1982 Vice President of the Bank 22 Officers of BNY who perform major policy making functions: Bank Executive Officer Name Office and Experience Age Since ---- --------------------- --- ------ Gerald L. Hassell 1994-1997 Senior Executive Vice President 45 1990 and Chief Commercial Banking Officer 1992-1994 Executive Vice President - Special Industries Banking Robert J. Mueller 1992-1997 Senior Executive Vice President - 55 1989 Chief Credit Policy Officer 1992 Executive Vice President - Mortgage & Construction Lending Newton P.S. Merrill 1994-1997 Senior Executive Vice President - 57 1994 Trust, Investment Management and Private Banking 1992-1993 Senior Executive Vice President - The Bank of Boston Donald R. Monks 1996-1997 Senior Executive Vice President - 48 1996 Operations and Technology 1996 Executive Vice President - Product Management, Bank Operations, Banking Technology 1995-1996 Executive Vice President - Product Management, Banking Technology 1993-1995 Executive Vice President - Product Management, Stock Transfer Business Unit 1992-1993 Executive Vice President - Product Management Richard A. Pace 1992-1997 Executive Vice President and Chief 51 1989 Technologist There are no family relationships between the executive officers of the Company. The terms of office of the executive officers of the Company extend until the annual organizational meeting of the Board of Directors. ITEM 11. EXECUTIVE COMPENSATION - -------------------------------- The material responsive to such item in the Company's definitive Proxy Statement for its 1997 Annual Meeting of Shareholders is incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------ The material responsive to such item in the Company's definitive Proxy Statement for its 1997 Annual Meeting of Shareholders is incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- The material responsive to such item in the Company's definitive Proxy Statement for its 1997 Annual Meeting of Shareholders is incorporated by reference. 23 PART IV - ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------- (a) 1 Financial Statements: See Item 8. (a) 2 Financial Statement Schedules: Financial statement schedules are omitted since the required information is either not applicable, not deemed material, or is shown in the respective financial statements or in the notes thereto. (a) 3 Listing of Exhibits: A list of the exhibits filed or incorporated by reference appears following page 25 of this Report, which information is incorporated by reference. (b) Reports on Form 8-K: October 15, 1996: Unaudited interim financial information and accompanying discussion for the third quarter of 1996. December 10, 1996: Announcement of the approval by the Board of Directors of a plan to buy back, through the end of 1997, up to 30 million common shares. December 19, 1996: Pricing Agreement, a Certificate Representing the Company's 7.97% Junior Subordinated Deferrable Interest Debentures, Series B, and a Form of Certificate Representing BNY Capital I's 7.97% Capital Securities, Series B; related to the issuance by BNY Capital I of 300,000 of its 7.97% Capital Securities, Series B. January 16, 1997: Unaudited interim financial information and accompanying discussion for the fourth quarter of 1996. (c) Exhibits: Submitted as a separate section of this report. (d) Financial Statements Schedules: None 24 SIGNATURES - ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in New York, New York, on the 11th day of March, 1997. THE BANK OF NEW YORK COMPANY, INC. By: \s\ Deno D. Papageorge ------------------------------------- (Deno D. Papageorge, Senior Executive Vice President) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the registrant and in the capacities indicated on the 11th day of March, 1997. Signature Title --------- ----- \s\J. Carter Bacot Chairman and - ----------------------------------- Chief Executive Officer (J. Carter Bacot) (principal executive officer) \s\ Deno D. Papageorge Senior Executive Vice President - ----------------------------------- and Director (Deno D. Papageorge) (principal financial officer) \s\ Robert E. Keilman Comptroller - ------------------------------------ (principal accounting officer) (Robert E. Keilman) \s\ Richard Barth Director - ------------------------------------ (Richard Barth) \s\ Frank J. Biondi, Jr. Director - ------------------------------------ (Frank J. Biondi, Jr.) \s\ William R. Chaney Director - ------------------------------------ (William R. Chaney) \s\ Ralph E. Gomory Director - ------------------------------------ (Ralph E. Gomory) \s\ Alan R. Griffith Vice Chairman - ------------------------------------ and Director (Alan R. Griffith) 25 \s\ Edward L. Hennessy, Jr. Director - ------------------------------------ (Edward L. Hennessy, Jr.) \s\ Richard J. Kogan Director - ------------------------------------ (Richard J. Kogan) \s\ John A. Luke, Jr. Director - ------------------------------------ (John A. Luke, Jr.) Director - ------------------------------------ (John C. Malone) \s\ Donald L. Miller Director - ------------------------------------ (Donald L. Miller) \s\ H. Barclay Morley Director - ------------------------------------ (H. Barclay Morley) \s\ Martha T. Muse Director - ------------------------------------ (Martha T. Muse) \s\ Catherine A. Rein Director - ------------------------------------ (Catherine A. Rein) \s\ Thomas A. Renyi President and - ------------------------------------ Director (Thomas A. Renyi) \s\ Harold E. Sells Director - ------------------------------------ (Harold E. Sells) \s\ W. S. White, Jr. Director - ------------------------------------ (W. S. White, Jr.) 26 INDEX TO EXHIBITS Exhibit No. - ------------ The Bank of New York Company, Inc.'s Restated Certificicate of Incorporation, as amended, By-Laws, Instruments Defining the Rights of Securities Holders, and certain other material contracts, including employee benefit plans and indentures and constituent instruments, have been previously filed with the Securities and Exchange Commission as exhibits to various registration statements and periodic reports of the Company. 4 (a) 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 (a) Amendment to The Bank of New York Company, Inc. Supplemental Executive Retirement Plan dated June 11, 1996. (b) Amendment to The Bank of New York Company, Inc. Supplemental Executive Retirement Plan dated November 12, 1996. (c) Amendment dated January 31, 1997 to the Trust Agreement dated April 19, 1988 related to executive compensation agreements. (d) Amendment dated January 14, 1997 to the Trust Agreement dated November 16, 1993 related to executive compensation agreements. (e) Amendment dated January 31, 1997 to the Trust Agreement dated November 16, 1993 related to executive compensation agreements. (f) Amendment dated January 31, 1997 to the Trust Agreement dated December 15, 1994 related to certain executive compensation plans and agreements. (g) Amendment to the 1993 Long-Term Incentive Plan of The Bank of New York Company, Inc. dated December 10, 1996. (h) Amendment to the 1993 Long-Term Incentive Plan of The Bank of New York Company, Inc. dated January 14, 1997. (i) Amendment to the 1993 Long-Term Incentive Plan of The Bank of New York Company, Inc. dated March 11, 1997. (j) Amendment to the Directors' Deferred Compensation Plan of The Bank of New York Company, Inc. dated February 11, 1997. 11 Statement - Re: Computation of Per Common Share Earnings 12 Statement - Re: Computation of Earnings to Fixed Charges Ratios 13 Portions of the 1996 Annual Report to Shareholders 21 Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP 23.2 Consent of Deloitte & Touche LLP 27 Financial Data Schedule 99 Opinion of Deloitte & Touche LLP EX-10 2 EXHIBIT 10A 1 Exhibit 10(a) AMENDMENT TO THE BANK OF NEW YORK COMPANY, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN WHEREAS, The Bank of New York Company, Inc. Supplemental Executive Retirement Plan (the "Plan") was adopted by the Board of Directors of The Bank of New York Company, Inc., effective as of June 9, 1992; and WHEREAS, Section 9 of the Plan provides that the Compensation Committee of the Board of Directors may amend the Plan at any time, except in certain respects not material hereto; and WHEREAS, the Compensation Committee desires to amend the Plan; NOW, THEREFORE, the Plan is hereby amended in the following respects, effective as of July 1, 1996: 1. Section 3 of the Plan is amended by amending the first sentence thereof to read as follows: The Committee shall determine in its sole discretion which employees of the Company who are members of the Retirement Plan shall become Participants in the Plan. 2. Section 4 of the Plan is amended by amending the second paragraph thereof to read as follows: The spouse of a Participant whose death occurs while an active employee of the Company shall be entitled to the Benefit provided under the Plan if such spouse is entitled to a benefit under the Retirement Plan. 3. Section 5(b) of the Plan is amended by amending the second sentence thereof to read as follows: 2 If the Committee determines that any other Participant whose employment terminates prior to attaining age 60, other than by reason of death, is entitled to a Benefit under the Plan, the amount thereof shall in the discretion of the Committee be equal to: (i) the amount provided in paragraph (a) of this Section, subject to reduction (if any) in accordance with the provisions of the Retirement Plan for payment as of such date as determined by the Committee; or (ii) the difference between (x) the sum of (1) 1.5% of the Participant's Average Final Salary multiplied by his years of Credited Service prior to January 1, 1976 and (2)(A) 1.65% of the Participant's Average Final Salary multiplied by his years of Credited Service after December 31, 1975, reduced by (B) an amount equal to 1.25% of the Participant's Primary Social Security Benefit multiplied by his years of Credited Service after December 31, 1975 not in excess of 40 years and (y) the sum of (1) the annual retirement benefit payable to the Participant under the Retirement Plan at age 60 and (2) the equivalent actuarial value of the Participant's account under the Employee Stock Ownership Plan of The Bank of New York Company, Inc.; based on the date of payment (or commencement of payment) pursuant to paragraph of this Section, such difference shall be subject to reduction (if any) in accordance with the provisions of the Retirement Plan as if the Participant had retired thereunder on or after attaining age 55 and, if so determined by the Committee, as if the Participant had completed at least 20 years of Continuous Service. 4. Section 5(c) of the Plan is amended in its entirety to read as follows: (c) Payment of the Benefit to a Participant shall be made in the form of a lump sum, unless the Participant elects in writing in accordance with rules established by the Committee to receive payment in eleven annual installments. Unless the Committee, in its discretion, directs payment at a different time, payment shall be made or commenced within 30 days after: 3 (i) the Participant's termination of employment with the Company, if his employment terminates on or after the date he attains age 60, other than by reason of death, (ii) the first day of the month coinciding with or following the later of the date the Participant attains age 55 or the date of the Participant's termination of employment, if the Participant is listed on Exhibit A and his employment terminates prior to attaining age 60, other than by reason of death, or (iii) as of such date as determined by the Committee, if the Committee determines that a Participant who is not listed on Exhibit A and whose employment terminates prior to attaining age 60, other than by reason of death, is entitled to a Benefit under the Plan. A Participant's election must be made prior to the beginning of the year before the year in which the Participant's employment terminates, unless the election is made no later than November 15, 1996. In the event of the Participant's death after installment payments have commenced, the remaining value of the Participant's Benefit shall be paid in a lump sum to the beneficiary or beneficiaries designated by him (or, if no beneficiary is designated or survives the Participant, to the Participant's estate) within 90 days after his death. In the event of the Participant's death while an active employee of the Company, payment of a Benefit to a Participant's spouse shall, unless the Committee, in its discretion, directs payment in a different form or at a different time, be made in a lump sum within 30 days after the latest of: (i) the date of the Participant's death, or (ii) the date on which benefits are payable to the Participant's spouse under the Retirement Plan. Lump sum payments under this paragraph (c) shall be the actuarial equivalent of the Benefit, as determined based on the actuarial assumptions in effect under the Retirement Plan as of the date of payment. Installment payments under this paragraph (c) shall be actuarially equivalent to the lump sum payment of a Benefit, as 4 determined based on the actuarial assumptions referred to in the preceding sentence. Notwithstanding anything contained herein to the contrary, in the event of a change of control of the Company (as defined below) (i) the Benefit to a Participant (including any remaining installments) shall be paid in a lump sum and the Committee may not direct that payment be made at a different time and (ii) the Committee may not direct payment of a Benefit to a Participant's spouse in a different form or at a different time. For purposes of this Section, a "change of control" of the Company shall mean a change in control of a nature that would be required to be reported in response to Item 1(a) of the Current Report on Form 8-K, as in effect on March 9, 1993, pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934; provided that, without limitation, such change of control shall be deemed to occur if (A) any "person" (as such term is defined in Section 3(a)(9) and as used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), excluding The Bank of New York Company, Inc. or any of its sub- sidiaries, a trustee or any fiduciary holding securities under an employee benefit plan of The Bank of New York Company, Inc. or any of its subsidiaries, an underwriter temporarily holding securities pursuant to an offering of such securities or a corporation owned, directly or indirectly, by stockholders of The Bank of New York Company, Inc. in substantially the same proportion as their ownership of The Bank of New York Company, Inc., is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of The Bank of New York Company, Inc. representing 25% or more of the combined voting power of the then outstanding securities of The Bank of New York Company, Inc. ("Voting Securities"); or (B) during any period of not more than two years, individuals who constitute the Board of Directors of The Bank of New York Company, Inc. as of the beginning of the period and any new director (other than a director designated by a person who has entered into an agreement with The Bank of New York Company, Inc. to effect a transaction described in clause (A) or (C) of this sentence) whose election by the Board of Directors of The Bank of New York Company, Inc. or nomination for election by the shareholders of The Bank of New York Company, Inc. was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at such time or whose election or nomination for election was previously so approved, cease for any 5 reason to constitute a majority thereof; or the shareholders of The Bank of New York Company, Inc. approve a merger or consolidation of The Bank of New York Company, Inc. with any other corporation, other than a merger or consolidation which would result in the Voting Securities of The Bank of New York Company, Inc. outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 60% of the combined voting power of the Voting Securities of The Bank of New York Company, Inc. or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of The Bank of New York Company, Inc. approve a plan of complete liquidation of The Bank of New York Company, Inc. or any agreement for the sale or disposition by The Bank of New York Company, Inc. or all or substantially all of the assets of The Bank of New York Company, Inc. IN WITNESS WHEREOF, The Bank of New York Company, Inc. has caused this Amendment to be executed by its duly authorized officers this 11th day of June, 1996. ---- ---- /s/ Thomas A. Renyi ------------------- ATTEST: /s/ Jacqueline R. McSwiggan - ---------------------------- Assistant Secretary EX-10 3 EXHIBIT 10B 1 Exhibit 10(b) AMENDMENT TO THE BANK OF NEW YORK COMPANY, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN WHEREAS, The Bank of New York Company, Inc. Supplemental Executive Retirement Plan (the "Plan") was adopted by the Board of Directors of The Bank of New York Company, Inc., effective as of June 9, 1992; and WHEREAS, Section 9 of the Plan provides that the Board of Directors may amend the Plan at any time, except in certain respects not material hereto; and WHEREAS, the Board of Directors desires to amend the Plan; NOW, THEREFORE, the Plan is hereby amended in the following respects, effective as of November 12, 1996, except as otherwise provided herein: 1. Sections 2(c) and (d) of the Plan are redesignated as Sections 2(d) and (e), respectively, and a new Section 2(c) is added to the Plan to read as follows: (c) "Beneficiary" means the person or persons designated by the Participant on a form approved by the Committee which is filed with the Committee prior to the Participant's death. Such designation may be revoked or changed by the Participant by filing a new form with the Committee prior to the Participant's death. In the event of the death of a Participant who has not designated a Beneficiary, or if no Beneficiary survives the Participant, then the Participant's Beneficiary shall be (I) the spouse of the Participant, if he is married on the date of his death or (ii) the estate of the Participant if he is not married on his death. 2. Section 4 of the Plan is amended by amending the second and third paragraphs thereof to read as follows: 2 The Beneficiary of a Participant whose death occurs while an active employee of the Company shall be entitled to the Benefit provided under the Plan. The Benefit provided under this Plan is in addition to any other retirement benefits provided by the Company to a Participant or, if applicable, his Beneficiary. 3. Section 5(b) of the Plan is amended by deleting the third sentence thereof in its entirety. 4. Section 5(c) of the Plan is amended by deleting the last sentence of the first paragraph thereof and substituting therefor the following: In the event of the Participant's death after installment payments have commenced, the remaining value of the Participant's Benefit shall be paid in a lump sum, within 90 days after the Participant's death, to his Beneficiary. 5. Section 5(c) of the Plan is amended by amending the second paragraph thereof to read as follows: In the event of the Participant's death while an active employee of the Company, payment of a Benefit to the Participant's Beneficiary shall, unless the Committee in its discretion directs payment in a different form or a different time, be made in a lump sum within 90 days after the Participant's death. 6. Exhibit A of the Plan is amended, effective as of April 25, 1994, by adding the following Participant: Newton P. S. Merrill 7. Exhibit A of the Plan is amended, effective as of April 11, 1995, by adding the following Participant: Gerald L. Hassell 3 IN WITNESS WHEREOF, The Bank of New York Company, Inc. has caused this Amendment to be executed by its duly authorized officers this 12th day of November, 1996. ---- -------- /s/ Thomas A. Renyi ------------------------- ATTEST: /s/ Jacqueline R. McSwiggan - ---------------------------- Assistant Secretary EX-10 4 EXHIBIT 10C 1 Exhibit 10(c) AMENDMENT NUMBER TWO TO GRANTOR TRUST AGREEMENT THIS AGREEMENT, made as the thirty-first of January, 1997, by and between THE BANK OF NEW YORK, INC., a corporation organized and existing under the laws of State of New York (hereinafter referred to as the "Company"), and THE CHASE MANHATTAN BANK (successor by merger to United States Trust Company of New York), a corporation organized and existing under the laws of the New York (hereinafter referred to as the "Trustee"), W I T N E S S E T H : WHEREAS, the Company and the United States Trust Company of New York entered into a Grantor Trust Agreement dated as of April 19, 1988 (as amended from time to time, the "Agreement"); WHEREAS, United States Trust Company of New York merged into The Chase Manhattan Bank, N.A. on September 2, 1995 and assumed by operation of law the obligations of United States Trust Company of New York under the Agreement; WHEREAS, The Chase Manhattan Bank, N.A. merged into Chemical Bank on July 1, 1996 and Chemical Bank was renamed The Chase Manhattan Bank and assumed by operation of law the obligations of The Chase Manhattan Bank, N.A. under the Agreement; WHEREAS, Article TWELFTH of the Agreement provides that the Company may amend the Agreement; and WHEREAS, the Company desires to amend the agreement; NOW, THEREFORE, the Company and the Trustee agree as follows, effective February 1, 1997: 1. The Agreement and exhibits thereto are amended by deleting the name "United States Trust Company of New York" each time it appears therein and substituting therefor the name "The Chase Manhattan Bank". 2. Exhibit I to the Agreement is amended by deleting Exhibit I in its entirety and substituting therefor Exhibit I in the form attached hereto. IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed in their respective names by their duly 2 authorized officers under their corporate seals as of the day and year first above written. ATTEST: THE BANK OF NEW YORK COMPANY, INC. /s/ Thomas E. Angers By: /s/ Deno D. Papageorge - ----------------------- -------------------------------- Deno D. Papageorge Senior Executive Vice President ATTEST: THE CHASE MANHATTAN BANK By: /s/ Martha C. Dolan -------------------------------- Name: MARTHA C. DOLAN Title: VICE PRESIDENT 3 EXHIBIT I --------- 1. The Bank of New York Company, Inc. Excess Benefit Plan 2. Severance Agreements between The Bank of New York Company, Inc. and the following individuals: Individual Date of Agreement ---------- ----------------- J. Carter Bacot May 17, 1982 Deno D. Papageorge May 17, 1982 EX-10 5 EXHIBIT 10D 1 Exhibit 10(d) AMENDMENT NUMBER FIVE TO GRANTOR TRUST AGREEMENT THIS AGREEMENT, made as of the fourteenth of January, 1997, by and between THE BANK OF NEW YORK COMPANY, INC., a corporation organized under the laws of the State of New York (hereinafter referred to as the "Company"), and THE CHASE MANHATTAN BANK, a corporation organized and existing under the laws of the New York (hereinafter referred to as the "Trustee"), W I T N E S S E T H: WHEREAS, the Company and the Trustee entered into a Grantor Trust Agreement dated as of November 16, 1993 (as amended from time to time, the "Agreement"); WHEREAS, The Chase Manhattan Bank, N.A. has merged into Chemical Bank which was renamed The Chase Manhattan Bank and which has assumed The Chase Manhattan Bank, N.A.'s obligations under the Agreement by operation of law; WHEREAS, Article TWELFTH of the Agreement provides that the Company may amend the Agreement; and WHEREAS, the Company desires to amend Exhibit I to the Agreement; NOW, THEREFORE, the Company and the Trustee agree that the Agreement is amended as follows, effective January 14, 1997: Exhibit I to the Agreement is hereby amended by deleting Exhibit I in its entirety and substituting therefor Exhibit I in the form attached hereto. IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed in their respective names by their duly authorized officers under their corporate seals as of the day and year first written above. ATTEST: THE BANK OF NEW YORK COMPANY, INC. \s\ Thomas E. Angers \s\ Deno D. Papageorge - --------------------- ----------------------------------- Deno D. Papageorge Senior Executive Vice President 2 ATTEST: THE CHASE MANHATTAN BANK \s\ Peter Coghill AVP By: \s\ Martha C. Dolan - --------------------- ----------------------- Vice President 3 EXHIBIT I --------- 1. The Bank of New York Company, Inc. Excess Benefit Plan 2. The Bank of New York Company, Inc. Supplemental Executive Retirement Plan 3. Agreements between The Bank of New York Company, Inc. and the following persons: Individual Date of Agreement ---------- ----------------- Samuel F. Chevalier October 11, 1994 Richard D. Field October 11, 1994 Alan R. Griffith October 11, 1994 Joseph A. Grimaldi April 11, 1995 Gerald L. Hassell April 11, 1995 Newton P.S. Merrill October 11, 1994 Donald R. Monks January 14, 1997 Robert J. Mueller October 11, 1994 Richard A. Pace October 11, 1994 Thomas A. Renyi October, 11, 1994 EX-10 6 EXHIBIT 10E 1 Exhibit 10(e) AMENDMENT NUMBER SIX TO GRANTOR TRUST AGREEMENT THIS AGREEMENT, made as the thirty-first of January, 1997, by and between THE BANK OF NEW YORK, INC., a corporation organized and existing under the laws of State of New York (hereinafter referred to as the "Company"), and THE CHASE MANHATTAN BANK (successor by merger to United States Trust Company of New York), a corporation organized and existing under the laws of the New York (hereinafter referred to as the "Trustee"), W I T N E S S E T H : WHEREAS, the Company and the United States Trust Company of New York entered into a Grantor Trust Agreement dated as of November 16, 1993 (as amended from time to time, the "Agreement"); WHEREAS, United States Trust Company of New York merged into The Chase Manhattan Bank, N.A. on September 2, 1995 and assumed by operation of law the obligations of United States Trust Company of New York under the Agreement; WHEREAS, The Chase Manhattan Bank, N.A. merged into Chemical Bank on July 1, 1996 and Chemical Bank was renamed The Chase Manhattan Bank and assumed by operation of law the obligations of The Chase Manhattan Bank, N.A. under the Agreement; WHEREAS, Article TWELFTH of the Agreement provides that the Company may amend the Agreement; and WHEREAS, the Company desires to amend the agreement; NOW, THEREFORE, the Company and the Trustee agree as follows, effective February 1, 1997: 1. The Agreement and exhibits thereto are amended by deleting the name "United States Trust Company of New York" each time it appears therein and substituting therefor the name "The Chase Manhattan Bank". 2. Exhibit I to the Agreement is amended by deleting Exhibit I in its entirety and substituting therefor Exhibit I in the form attached hereto. IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed in their respective names by their duly 2 authorized officers under their corporate seals as of the day and year first above written. ATTEST: THE BANK OF NEW YORK COMPANY, INC. /s/ Thomas E. Angers By: /s/ Deno D. Papageorge - ----------------------- -------------------------------- Deno D. Papageorge Senior Executive Vice President ATTEST: THE CHASE MANHATTAN BANK By: /s/ Martha C. Dolan -------------------------------- Name: MARTHA C. DOLAN Title: VICE PRESIDENT 3 EXHIBIT I --------- 1. The Bank of New York Company, Inc. Excess Benefit Plan 2. The Bank of New York Company, Inc. Supplemental Executive Retirement Plan 3. Agreements between The Bank of New York Company, Inc. and the following persons: Individual Date of Agreement ---------- ----------------- Richard D. Field October 11, 1994 Alan R. Griffith October 11, 1994 Joseph A. Grimaldi April 11, 1995 Gerald L. Hassell April 11, 1995 Newton P.S. Merrill October 11, 1994 Donald R. Monks January 14, 1997 Robert J. Mueller October 11, 1994 Richard A. Pace October 11, 1994 Thomas A. Renyi October 11, 1994 EX-10 7 EXHIBIT 10F 1 Exhibit 10(f) AMENDMENT NUMBER ONE TO GRANTOR TRUST AGREEMENT THIS AGREEMENT, made as of the thirty-first of January, 1997, by and between THE BANK OF NEW YORK COMPANY, INC., a corporation organized under the laws of the State of New York (hereinafter referred to as the "Company"), and THE CHASE MANHATTAN BANK (successor by merger to United States Trust Company of New York), a corporation organized and existing under the laws of the New York (hereinafter referred to as the "Trustee"), W I T N E S S E T H: WHEREAS, the Company and the United States Trust Company of New York entered into a Grantor Trust Agreement dated as of December 15, 1994 (as amended from time to time, the "Agreement"); WHEREAS, United States Trust Company of New York merged into The Chase Manhattan Bank, N.A. on September 2, 1995 and assumed by operation of law the obligations of United States Trust Company of New York under the Agreement; WHEREAS, The Chase Manhattan Bank, N.A. merged into Chemical Bank on July 1, 1996 and Chemical Bank was renamed The Chase Manhattan Bank and assumed by operation of law the obligations of The Chase Manhattan Bank, N.A. under the Agreement; WHEREAS, Article TWELFTH of the Agreement provides that the Company may amend the Agreement; and WHEREAS, the Company desires to amend the Agreement; NOW, THEREFORE, the Company and the Trustee agree as follows, effective February 1, 1997: 1. The Agreement and the exhibits thereto are amended by deleting the name"United States Trust Company of New York" each time it appears therein and substituting therefor the name "The Chase Manhattan Bank". IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed in their respective names by their duly 2 authorized officers under their corporate seals as of the day and year first written above. ATTEST: THE BANK OF NEW YORK COMPANY, INC \s\ Thomas E. Angers By: \s\ Deno D. Papageorge - --------------------- ------------------------------- Deno D. Papageorge Senior Executive Vice President ATTEST: THE CHASE MANHATTAN BANK By: \s\ Martha C. Dolan ----------------------- Name: Martha C. Dolan Title: Vice President EX-10 8 EXHIBIT 10G Exhibit 10(g) AMENDMENT TO THE 1993 LONG-TERM INCENTIVE PLAN OF ------------------------------------------------- THE BANK OF NEW YORK COMPANY, INC. ---------------------------------- WHEREAS, the 1993 Long-Term Incentive Plan of The Bank of New York Company, Inc. (the "Plan") was established, effective as of January 1, 1993; and WHEREAS, Section 17 of the Plan provides that the Board of Directors of The Bank of New York Company, Inc. may amend the Plan at any time; and WHEREAS, the Board of Directors desires to amend the Plan. NOW, THEREFORE, IT IS RESOLVED that the Plan is hereby amended, effective as of December 10, 1996, by the addition of a sentence at the end of Section 5 therein to read as follows: In addition, the Committee may from time to time deem other employees of the Company or its subsidiaries eligible to participate in the Plan to receive awards of nonstatutory stock options. AND IT IS FURTHER RESOLVED, that the appropriate officers of the Company are authorized and directed to deliver such documents and to perform such other acts as may, in the opinion of the officer or officers so acting, be deemed necessary or desirable to carry out the foregoing resolution. IN WITNESS WHEREOF, The Bank of New York Company, Inc. has caused this Amendment to be executed by its duly authorized officers this 10 day of December, 1996. -- -------- - /s/ Alan R. Griffith ATTEST: -------------------- /s/ Jacqueline R. McSwiggan - ---------------------------- Assistant Secretary EX-10 9 EXHIBIT 10H 1 Exhibit 10(h) AMENDMENT TO THE 1993 LONG-TERM INCENTIVE PLAN OF ------------------------------------------------- THE BANK OF NEW YORK COMPANY, INC. ---------------------------------- WHEREAS, the 1993 Long-Term Incentive Plan of The Bank of New York Company, Inc. (the "Plan") was adopted by the Board of Directors of The Bank of New York Company, Inc. (the "Company"), effective as of January 1, 1993; and WHEREAS, Section 17 of the Plan provides that the Board of Directors of the Company may amend the Plan at any time; and WHEREAS, the Board of Directors of the Company desires to adopt an amendment to the Plan. NOW, THEREFORE, IT IS RESOLVED that the Plan is hereby amended in the following respects, effective as of January 14, 1997: 1. Section 2 of the Plan is amended by the addition of the following prior to the definition of "Exchange Act": "Covered Employee" means, at the time of an Award (or such other time as required or permitted by Section 162(m) of the Internal Revenue Code) (i) the Company's Chief Executive Officer (or an individual acting in such capacity), (ii) any employee of the Company or its subsidiaries who, in the discretion of the Committee for purposes of determining those employees who are "covered employees" under Section 162(m) of the Internal Revenue Code, is likely to be among the four other highest compensated officers of the Company for the year in which an Award is made or payable, and (iii) any other employee of the Company or its subsidiaries designated by the Committee in its discretion. 2. Section 3 of the Plan is amended by amending the second paragraph thereof to read as follows: Shares of Stock subject to an Award that, in whole or in part, expires unexercised or that is forfeited, terminated or canceled or is paid in cash in lieu of Stock, and shares of Common Stock owned by the Participant that are tendered to pay for the exercise of a stock option in accordance with Section 7 shall thereafter again be available for grant under the Plan. 3. Section 6 of the Plan is amended by inserting the words "stock awards," immediately preceding the words "stock options" in the first sentence thereof. 2 4. Sections 7 through 18 of the Plan are renumbered as Sections 8 through 19, respectively, and a new Section 7 is added to the Plan to read as follows: 7. STOCK AWARDS. Awards of Stock may be granted in the form of actual shares of Common Stock. At the discretion of the Committee, a stock certificate may be issued in respect of Stock Awards or a book entry of the Stock Award may be made. If a certificate is issued, such certificate shall be registered in the name of and be delivered to the Participant. Full ownership of such shares, whether issued in the form of a certificate or in book entry, including the right to vote and receive dividends, shall immediately vest in such Participant. 5. Section 8 (as renumbered) is amended by the addition of the following at the end thereof: In no event may any Participant receive stock options with respect to more than 500,000 shares of Stock in any calendar year beginning after December 31, 1996, increased in each subsequent calendar year by the difference between 500,000 and the number of shares subject to stock options granted to the Participant under the Plan in each calendar year after December 31, 1996. 6. Section 10 (as renumbered) is amended by the addition of the following at the end thereof: Awards of performance shares to a Covered Employee shall (unless the Committee determines otherwise) be subject to performance conditions based on the achievement (i) by the Company or a business unit of a specified target operating or net income or return on assets, (ii) by the Company or a business unit of specified target earnings per share or return on equity, (iii) of a targeted total shareholder return or (iv) any combination of the conditions set forth in (i) and (ii) above. If an Award of performance shares is made on such basis, the Committee shall establish the relevant performance conditions within 90 days after the commencement of the performance period (or such later date as may be required or permitted by Section 162 (m) of the Internal Revenue Code). The Committee may, in its discretion, reduce or eliminate the amount of payment with respect to an Award of performance shares to a Covered Employee, notwithstanding the achievement of a specified performance condition. The maximum number of performance shares subject to any Award to a Covered Employee is 300,000 for each 12 months during the performance period (or, to the extent the Award is paid in cash, the maximum dollar amount of any such Award is the equivalent cash value of such number of Shares at the closing price on the last trading day of the performance period). For purposes of the immediately preceding sentence, "trading day" shall mean a day in which the Shares are traded on the New York Stock Exchange. An Award of performance shares to a Participant who is a Covered Employee shall (unless the Committee determines otherwise) provide that in the event of the Participant's termination of employment prior to the end of 3 the performance period for any reason, such Award will be payable only (A) if the applicable performance conditions are achieved and (B) to the extent, if any, as the Committee shall determine. 7. Section 15 of the Plan (as renumbered) is amended by the addition of the following at the end thereof: Notwithstanding the immediately preceding sentence, the Committee may, subject to the terms and conditions it may specify, permit a Participant to transfer any nonstatutory stock options granted to him pursuant to the Plan to one or more of his immediate family members or to trusts established in whole or in part for the benefit of the Participant and/or one or more of such immediate family members. During the lifetime of the Participant, a nonstatutory stock option shall be exercisable only by the Participant or by the immediate family member or trust to whom such stock option has been transferred pursuant to the immediately preceding sentence. For purposes of the Plan, (i) the term "immediate family" shall mean the Participant's spouse and issue (including adopted and step children) and (ii) the phrase "immediate family members and trusts established in whole or in part for the benefit of the Participant and/or one or more of such immediate family members" shall be further limited, if necessary, so that neither the transfer of a nonstatutory stock option to such immediate family member or trust, nor the ability of a Participant to make such a transfer shall have adverse consequences to the Company or the Participant by reason of Section 162(m) of the Internal Revenue Code. IN WITNESS WHEREOF, The Bank of New York Company, Inc. has caused this Amendment to be executed by its duly authorized officers this 14th day of January, 1997. ----- ------- /s/ Alan R. Griffith --------------------- ATTEST: /s/ Jacqueline R. McSwiggan - ---------------------------- Assistant Secretary EX-10 10 EXHIBIT 10I Exhibit 10(i) AMENDMENT TO THE 1993 LONG-TERM INCENTIVE PLAN OF ------------------------------------------------- THE BANK OF NEW YORK COMPANY, INC. ---------------------------------- WHEREAS, the 1993 Long-Term Incentive Plan of The Bank of New York Company, Inc. (the "Plan") was established, effective as of January 1, 1993; and WHEREAS, Section 17 of the Plan provides that the Board of Directors of The Bank of New York Company, Inc. may amend the Plan at any time; and WHEREAS, the Board of Directors desires to amend the Plan. NOW, THEREFORE, IT IS RESOLVED that the Plan is hereby amended, effective as of March 11, 1997, by replacing the last sentence of Section 8 therein with the following: In no event may any Participant receive stock options with respect to more than 750,000 shares of Stock in any calendar year beginning after December 31, 1996. AND IT IS FURTHER RESOLVED, that the appropriate officers of the Company are authorized and directed to deliver such documents and to perform such other acts as may, in the opinion of the officer or officers so acting, be deemed necessary or desirable to carry out the foregoing resolution. IN WITNESS WHEREOF, The Bank of New York Company, Inc. has caused this Amendment to be executed by its duly authorized officers this 11 day of March, 1997. -- /s/ Alan R. Griffith --------------------- ATTEST: /s/ Jacqueline R. McSwiggan - --------------------------- Assistant Secretary EX-10 11 EXHIBIT 10J 1 Exhibit 10(j) AMENDMENT TO THE DIRECTORS' DEFERRED COMPENSATION PLAN OF THE BANK OF NEW YORK COMPANY, INC. WHEREAS, the Deferred Compensation Plan for Non- Employee Directors of The Bank of New York Company, Inc. (the "Directors' Deferred Compensation Plan") was adopted by the Board of Directors of The Bank of New York Company, Inc. (the "Company"), effective as of December 1, 1993; and WHEREAS, Section 7(a) of the Directors' Deferred Compensation Plan provides that the Board of Directors of the Company may amend the Plan at any time; and WHEREAS, the Board of Directors of the Company desires to adopt an amendment to the Directors' Deferred Compensation Plan; NOW, THEREFORE, the Directors' Deferred Compensation Plan is hereby amended in the following respects: 1. Section 1(b) is amended in its entirety, effective as of February 11, 1997, to read as follows: (b) "Committee" means the Nominating Committee of the Board. 2. Section 5(a) of the Plan is amended in its entirety, effective as of January 1, 1996, to read as follows: (a) Payment of a Participant's Deferral Account shall be made or commenced within 60 days after the Participant's retirement, death, or other termination of service as a Director (other than by reason of Disability), unless the Participant elects, prior to the beginning of the year before the year in which such retirement, death or termination of service occurs, that payment shall be made during January of the year following the year of such retirement, death or other termination of service. Payment of the Deferral Account shall be made in a lump sum or in substantially equal installments over a period not to exceed ten years in accordance with the Participant's election made prior to the beginning of the year before the year in which such retirement or termination of service occurs. IN WITNESS WHEREOF, The Bank of New York Company, Inc. has caused this Amendment to be executed by its duly authorized officers this 11 day of February, 1997. /s/ Alan R. Griffith --------------------- ATTEST: /s/ Jacqueline R. McSwiggan - ---------------------------- Assistant Secretary EX-11 12 EXHIBIT 11 EXHIBIT 11 THE BANK OF NEW YORK COMPANY, INC. Computation of Earnings Per Common Share For the Years Ended December 31, 1996 1995 1994 ---- ---- ---- (in millions, except per share amounts) Weighted Average Number of Shares 388 385 376 Shares Assumed to be Issued on Conversion: Warrants 21 11 - ----- ----- ----- Weighted Average Number of Shares of Common Stock for Primary Computation 409 396 376 Shares Assumed to be Issued on Conversion: Debentures 7 18 24 Warrants 4 10 - Cumulative Preferred Stock - - 4 ----- ----- ----- Weighted Average Number of Shares of Common Stock Assuming Full Dilution 420 424 404 ===== ===== ===== Net Income $1,020 $ 914 $ 749 Dividend Requirements on Preferred Stock 10 10 13 ------ ----- ----- Net Income Available to Common Shareholders 1,010 904 736 Interest On Convertible Debentures, Net of Tax 2 7 10 Dividends on Convertible Preferred Stock - - 2 ------ ----- ----- Net Income Available to Common Shareholders, Assuming Full Dilution $1,012 $ 911 $ 748 ====== ===== ===== Earnings Per Share: Primary $2.47 $2.29 $1.96 Fully Diluted 2.41 2.15 1.85 EX-12 13 EXHIBIT 12 THE BANK OF NEW YORK COMPANY, INC. Ratios of Earnings to Fixed Charges and Ratios of Earnings to Combined Fixed Charges, Distribution on Trust Preferred Securities, and Preferred Stock Dividends For The Years Ended December 31, EARNINGS 1996 1995 1994 1993 1992 - -------- ---- ---- ---- ---- ---- (Dollars in millions) Income Before Income Taxes $1,656 $1,482 $ 1,198 $ 886 $ 588 Fixed Charges, Excluding Interest on Deposits 502 568 436 340 346 ------ ------ ------ ------ ------ Income Before Income Taxes and Fixed Charges Excluding Interest on Deposits 2,158 2,050 1,634 1,226 934 Interest on Deposits 1,152 1,265 842 701 1,005 ------ ------- ------ ------ ------ Income Before Income Taxes and Fixed Charges, Including Interest on Deposits $3,310 $3,315 $2,476 $1,927 $1,939 ====== ======= ====== ====== ====== FIXED CHARGES - ------------- Interest Expense, Excluding Interest on Deposits $ 470 $ 537 $ 403 $ 305 $ 315 One-Third Net Rental Expense* 32 31 33 35 31 ------ ------ ------ ------ ------ Total Fixed Charges, Excluding Interest on Deposits 502 568 436 340 346 Interest on Deposits 1,152 1,265 842 701 1,005 ------ ------ ------ ------ ------ Total Fixed Charges, Including Interest on Deposits $1,654 $1,833 $1,278 $1,041 $1,351 ====== ====== ====== ====== ====== DISTRIBUTION ON TRUST PREFERRED SECURITIES, PRE-TAX BASIS $ 2 $ - $ - $ - $ - - ------------------------------- ====== ====== ====== ====== ====== PREFERRED STOCK DIVIDENDS, PRE-TAX BASIS $ 16 $ 16 $ 21 $ 40 $ 50 - -------------------------- ====== ====== ====== ====== ====== EARNINGS TO FIXED CHARGES RATIOS - -------------------------------- Excluding Interest on Deposits 4.30x 3.61x 3.75x 3.61x 2.70x Including Interest on Deposits 2.00 1.81 1.94 1.85 1.44 EARNINGS TO COMBINED FIXED CHARGES, DISTRIBUTION ON TRUST PREFERRED SECURITIES, & PREFERRED STOCK DIVIDENDS RATIOS - ----------------------------------- Excluding Interest on Deposits 4.15 3.51 3.58 3.23 2.36 Including Interest on Deposits 1.98 1.79 1.91 1.78 1.38 *The proportion deemed representative of the interest factor. EX-13 14 1996 ANNUAL REPORT EXHIBIT 13 1996 Annual Report to Shareholders 1 FINANCIAL HIGHLIGHTS Dollars in millions, except per share amounts 1996 1995 1994 1993 1992 Net Interest Income $ 1,961 $ 2,029 $ 1,717 $ 1,497 $ 1,367 Noninterest Income 2,130 1,491 1,289 1,319 1,183 Provision for Loan Losses 600 330 162 284 443 Noninterest Expense 1,835 1,708 1,646 1,646 1,519 Net Income 1,020 914 749 559 393 Net Income Available to Common Shareholders 1,010 904 736 534 360 Return on Average Assets 1.90% 1.72% 1.49% 1.20% 0.85% Return on Average Common Shareholders' Equity 19.98 19.42 18.49 14.98 12.00 Common Dividend Payout Ratio 32.50 28.84 27.88 27.99 33.89 Per Common Share Primary Earnings $ 2.47 $ 2.29 $ 1.96 $ 1.43 $ 1.05 Fully Diluted Earnings 2.41 2.15 1.85 1.36 1.00 Cash Dividends 0.84 0.68 0.55 0.43 0.38 Market Value at Year End 33.75 24.38 14.89 14.25 13.47 Averages Securities $ 5,343 $ 5,260 $ 5,941 $ 6,352 $ 6,202 Loans 36,698 35,421 32,029 30,427 30,345 Total Assets 53,649 53,053 50,280 46,644 46,227 Deposits 36,599 36,061 34,041 32,837 33,237 Long-Term Debt 1,870 1,773 1,530 1,729 1,386 Shareholders' Equity: Preferred 113 115 157 334 409 Common 5,055 4,653 3,980 3,563 2,996 At Year End Allowance for Loan Losses as a Percent of Loans 2.43% 2.01% 2.40% 3.17% 3.63% Tier 1 Capital Ratio 8.34 8.42 8.45 8.87 7.59 Total Capital Ratio 12.78 13.08 13.43 13.65 12.30 Leverage Ratio 8.87 8.46 7.89 7.99 7.11 Common Equity to Assets Ratio 8.99 9.53 8.55 8.29 7.30 Total Equity to Assets Ratio 9.19 9.74 8.79 8.94 8.24 Common Shares Outstanding (in millions) 385.272 394.956 373.870 374.456 364.262 Employees 16,158 15,810 15,477 15,621 16,167 The per common share amounts and common shares outstanding have been restated to reflect the 2-for-1 common stock splits effective July 19, 1996 and April 22, 1994. 2 Consolidated Balance Sheets - ------------------------------------------------------------------------------ Dollars in millions, except per share amounts December 31, 1996 1995 - ------------------------------------------------------------------------------ Assets Cash and Due from Banks $ 6,032 $ 4,711 Interest-Bearing Deposits in Banks 1,387 982 Securities: Held-to-Maturity (fair value $1,127 in 1996 and $1,164 in 1995) 1,170 1,252 Available-for-Sale 3,883 3,618 ------- ------- Total Securities 5,053 4,870 Trading Assets 1,547 816 Federal Funds Sold and Securities Purchased Under Resale Agreements 562 936 Loans (less allowance for loan losses of $901 in 1996 and $756 in 1995) 36,105 36,931 Premises and Equipment 875 902 Due from Customers on Acceptances 985 918 Accrued Interest Receivable 315 270 Other Assets 2,904 2,384 ------- ------- Total Assets $55,765 $53,720 ======= ======= Liabilities and Shareholders' Equity Deposits: Noninterest-Bearing (principally domestic offices) $11,812 $10,465 Interest-Bearing Domestic Offices 15,268 16,005 Foreign Offices 12,263 9,448 ------- ------- Total Deposits 39,343 35,918 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 1,737 3,933 Other Borrowed Funds 4,144 3,737 Acceptances Outstanding 1,015 928 Accrued Taxes and Other Expenses 1,417 1,378 Accrued Interest Payable 167 190 Other Liabilities 399 556 Long-Term Debt 1,816 1,848 ------- ------- Total Liabilities 50,038 48,488 ------- ------- Guaranteed Preferred Beneficial Interests in the Company's Junior Subordinated Deferrable Interest Debentures 600 - ------- ------- Shareholders' Equity Preferred Stock-no par value, authorized 5,000,000 shares, outstanding 184,000 shares 111 111 Class A Preferred Stock-par value $2.00 per share, authorized 5,000,000 shares, outstanding 40,429 shares in 1996 and 49,504 shares in 1995 1 2 Common Stock-par value $7.50 per share, authorized 800,000,000 shares, issued 444,317,786 shares in 1996 and 408,324,810 shares in 1995 3,332 3,062 Additional Capital 344 125 Retained Earnings 2,798 2,120 Securities Valuation Allowance 82 58 ------- ------- 6,668 5,478 Less: Treasury Stock (57,849,845 shares in 1996 and 12,052,096 shares in 1995), at cost 1,524 228 Loan to ESOP (1,195,719 shares in 1996 and 1,317,060 shares in 1995), at cost 17 18 ------- ------- Total Shareholders' Equity 5,127 5,232 ------- ------- Total Liabilities and Shareholders' Equity $55,765 $53,720 ======= ======= See accompanying Notes to Consolidated Financial Statements. 3 Consolidated Statements of Income - ------------------------------------------------------------------------------ In millions, except per share amounts For the years ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------ Interest Income Loans $3,073 $3,226 $2,405 Securities Taxable 240 235 227 Exempt from Federal Income Taxes 37 43 56 ------ ------ ------ 277 278 283 Deposits in Banks 90 106 68 Federal Funds Sold and Securities Purchased Under Resale Agreements 126 193 161 Trading Assets 17 28 45 ------ ------ ------ Total Interest Income 3,583 3,831 2,962 ------ ------ ------ Interest Expense Deposits 1,152 1,265 842 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 155 161 106 Other Borrowed Funds 186 246 191 Long-Term Debt 129 130 106 ------ ------ ------ Total Interest Expense 1,622 1,802 1,245 ------ ------ ------ Net Interest Income 1,961 2,029 1,717 Provision for Loan Losses 600 330 162 ------ ------ ------ Net Interest Income After Provision for Loan Losses 1,361 1,699 1,555 ------ ------ ------ Noninterest Income Processing Fees Securities 655 411 359 Other 206 189 171 ------ ------ ------ 861 600 530 Trust and Investment Fees 161 136 126 Service Charges and Fees 424 423 465 Securities Gains 97 115 15 Other 587 217 153 ------ ------ ------ Total Noninterest Income 2,130 1,491 1,289 ------ ------ ------ Noninterest Expense Salaries and Employee Benefits 1,014 913 852 Net Occupancy 167 175 178 Furniture and Equipment 93 87 88 Other 561 533 528 ------ ------ ------ Total Noninterest Expense 1,835 1,708 1,646 ------ ------ ------ Income Before Income Taxes 1,656 1,482 1,198 Income Taxes 634 568 449 Distribution on Trust Preferred Securities 2 - - ------ ------ ------ Net Income $1,020 $ 914 $ 749 ====== ====== ====== Net Income Available to Common Shareholders $1,010 $ 904 $ 736 ====== ====== ====== Per Common Share: Primary Earnings $ 2.47 $ 2.29 $ 1.96 Fully Diluted Earnings 2.41 2.15 1.85 Cash Dividends 0.84 0.68 0.55 Fully Diluted Shares Outstanding 420 424 404 See accompanying Notes to Consolidated Financial Statements. 4 Consolidated Statements of Changes in Shareholders' Equity - ------------------------------------------------------------------------------ Dollars in millions For the years ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------ Preferred Stock Balance, January 1 $ 113 $ 119 $ 294 Redemption (shares: 3,464,100 in 1994) - - (156) Conversion of Preferred Stock (shares: 9,075 in 1996, 272,600 in 1995, and 763,311 in 1994) (1) (6) (19) ------ ------ ------ Balance, December 31 112 113 119 ------ ------ ------ Common Stock Balance, January 1 3,062 2,854 2,812 Issuance in Acquisition (shares: 8,879,026 in 1995) - 66 - Conversion of Debentures (shares: 11,643,011 in 1996, 13,876,640 in 1995, and 47,050 in 1994) 87 104 - Conversion of Preferred Stock (shares: 33,566 in 1996, 1,008,874 in 1995, and 2,824,152 in 1994) 1 8 22 Exercise of Warrants (shares: 21,001,648 in 1996, 136,972 in 1995, and 8,024 in 1994) 157 1 - Other Issuances (shares: 3,314,751 in 1996, 3,996,654 in 1995, and 2,745,494 in 1994) 25 29 20 ------ ------ ------ Balance, December 31 3,332 3,062 2,854 ------ ------ ------ Additional Capital Balance, January 1 125 - - Acquisition - 76 - Conversion of Debentures 27 32 - Exercise of Warrants 168 1 - Other 24 16 - ------ ------ ------ Balance, December 31 344 125 - ------ ------ ------ Retained Earnings Balance, January 1 2,120 1,479 967 Net Income 1,020 914 749 Cash Dividends Common Stock (328) (261) (205) Preferred Stock (10) (11) (14) Redemption of Preferred Stock - - (17) Change in Accumulated Foreign Currency Translation Adjustment (4) (1) (1) ------ ------ ------ Balance, December 31 2,798 2,120 1,479 ----- ------ ------ Securities Valuation Allowance Balance, January 1 58 (58) 1 Net Change in Fair Value of Securities Available-for-Sale 24 116 (59) ------ ------ ------ Balance, December 31 82 58 (58) ------ ------ ------ Less Treasury Stock Balance, January 1 228 78 5 Issued (shares: 1,878,924 in 1996, 2,523,744 in 1995, and 2,663,468 in 1994) (36) (37) (39) Acquired (shares: 47,676,673 in 1996, 9,443,698 in 1995, and 7,449,214 in 1994) 1,332 187 112 ------ ------ ------ Balance, December 31 1,524 228 78 ------ ------ ------ Less Loan to ESOP Balance, January 1 18 20 - New Loan (shares: 1,425,390 in 1994) - - 20 Released (shares: 121,341 in 1996 and 108,330 in 1995) (1) (2) - ------ ------ ------ Balance, December 31 17 18 20 ------ ------ ------ Total Shareholders' Equity, December 31 $5,127 $5,232 $4,296 ====== ====== ====== See accompanying Notes to Consolidated Financial Statements. 5 Consolidated Statements of Cash Flows - ------------------------------------------------------------------------------ In millions For the years ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------ Operating Activities Net Income $1,020 $ 914 $ 749 Adjustments to Determine Net Cash Attributable to Operating Activities: Provision for Losses on Loans and Other Real Estate 611 334 169 Gain on Sale of Loans (400) - - Depreciation and Amortization 237 198 200 Deferred Income Taxes 100 237 271 Securities Gains (97) (115) (15) Change in Trading Activities 52 270 947 Change in Accruals and Other, Net (611) 82 (232) ------ ------ ------ Net Cash Provided by Operating Activities 912 1,920 2,089 ------ ------ ------ Investing Activities Change in Interest-Bearing Deposits in Banks (427) 18 (711) Purchases of Securities Held-to-Maturity (284) (493) (367) Maturities of Securities Held-to-Maturity 347 760 684 Purchases of Securities Available-for-Sale (1,377) (923) (1,177) Sales of Securities Available-for-Sale 603 932 1,985 Maturities of Securities Available-for-Sale 597 48 8 Net Principal Disbursed on Loans to Customers (3,411) (5,174) (3,039) Sales of Loans and Other Real Estate 4,136 438 356 Change in Federal Funds Sold and Securities Purchased Under Resale Agreements 373 2,120 (2,983) Purchases of Premises and Equipment (47) (54) (43) Proceeds from the Sale of Premises and Equipment 3 3 11 Acquisitions, Net of Cash Acquired (400) (168) (161) Partial Sale of Unconsolidated Subsidiary 45 - 37 Other, Net (91) 89 (30) ------ ------ ------ Net Cash Provided (Used) by Investing Activities 67 (2,404) (5,430) ------ ------ ------ Financing Activities Change In Deposits 3,522 1,148 1,814 Change in Federal Funds Purchased and Securities Sold Under Repurchase Agreements (2,196) 2,431 (1,209) Change in Other Borrowed Funds (376) (1,104) 1,352 Proceeds from the Issuance of Trust Preferred Securities 600 - - Proceeds from the Issuance of Long-Term Debt 100 203 297 Repayments of Long-Term Debt (16) (16) (115) Redemption and Repurchases of Preferred Stock and Warrants - - (177) Issuance of Common Stock 410 87 42 Treasury Stock Acquired (1,332) (180) (112) Cash Dividends Paid (338) (272) (219) ------ ------ ------ Net Cash Provided by Financing Activities 374 2,297 1,673 ------ ------ ------ Effect of Exchange Rate Changes on Cash (32) (5) 60 ------ ------ ------ Change in Cash and Due From Banks 1,321 1,808 (1,608) Cash and Due from Banks at Beginning of Year 4,711 2,903 4,511 ------ ------ ------ Cash and Due from Banks at End of Year $6,032 $4,711 $2,903 ====== ====== ====== Supplemental Disclosure of Cash Flow Information Cash Paid During the Year for: Interest $1,634 $1,825 $1,143 Income Taxes 628 338 155 Noncash Investing Activity (Primarily Foreclosure of Real Estate) 53 58 43 Reclassification of Assets to Securities Available-for-Sale - 1,599 1,390 See accompanying Notes to Consolidated Financial Statements. 6 Notes to Consolidated Financial Statements 1. Summary of Significant Accounting and Reporting Policies The Company provides a complete range of banking and other financial services to corporations and individuals worldwide through its business sectors: Trust, and Securities and Other Processing; Retail Banking; Corporate Banking; and Other. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements. Amounts subject to significant estimates and assumptions are items such as the allowance for loan losses, pension and postretirement obligations, and the fair value of financial instruments. Actual results could differ from these estimates. The following is a summary of the Company's more significant accounting and reporting policies. Securities - Debt and equity securities classified as available-for-sale are carried at fair value, except for those equity securities whose fair value cannot be readily determined. These securities are carried at cost. Equity investments of less than a majority but at least 20% ownership are accounted for by the equity method and classified as other assets. For securities carried at fair value the after tax effect of net unrealized gains and losses is reported as a separate component of shareholders' equity. Securities classified as trading assets are carried at fair value, with net unrealized holding gains and losses recognized currently in income. Debt securities, which the Company has the ability and intent to hold until maturity, are classified as held-to-maturity and stated at cost, adjusted for discount accrued and premium amortized. Realized gains and losses on the sale of debt and equity securities are determined by the specific identification and average cost methods, respectively. Allowance for Loan Losses - The allowance for loan losses is maintained at a level that, in management's judgment, is adequate to absorb probable losses. Management's judgment is based on an evaluation of existing risks of individual credits; past loan loss experience; the volume, composition, and growth of the loan portfolio; current and projected economic conditions; and other relevant factors. The portion of the allowance for loan losses allocated to nonaccrual commercial loans over $1 million (impaired loans) is measured by the difference between their recorded value and fair value. Fair value is either the present value of the expected future cash flows from borrowers, market value of the loan, or the fair value of the collateral. Nonperforming Assets - 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 not restored to accruing status until principal and interest are current or they become fully collateralized. Consumer loans are not classified as nonperforming assets, but are charged off based upon an established delinquency schedule determined by product. Interest accrual on consumer loans is suspended based upon a 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. PAGE <7> Derivative Financial Instruments - Derivative contracts, such as futures, forwards, swaps, options, and similar products used in trading activities are recorded at market value; gains and losses are included in other noninterest income. Unrealized gains and losses are reported on a gross basis in trading account assets and other borrowed funds, after taking into consideration master netting agreements. Derivative contracts are designated as an element of the Company's asset and liability management (ALM) process when they alter the Company's interest rate and foreign currency exposures. Contracts used in the ALM process are linked to specific or groups of similar assets or liabilities where there is a high correlation between the derivative contract and the item altered, both at inception and throughout the contract period. ALM derivative contracts are accounted for on the deferral, accrual, or mark-to-market basis, as noted below. Under the deferral or accrual method, gains and losses on terminated derivative contracts are deferred and amortized over the remaining life of the linked assets or liabilities. Gains and losses on derivative contracts linked to assets or liabilities that are sold are recognized as an adjustment to the gain or loss of the balance sheet item. Deferral Accounting - This method relates principally to futures and forwards. Deferred gains and losses are reported as adjustments to the carrying value of the linked items. The amortization of deferred gains and losses is reported as interest income or expense related to the linked item. Accrual Accounting - Interest rate swap and purchased option contracts are accounted for on an accrual basis as an adjustment to interest income or expense related to the linked item. Mark-to-Market Accounting - This method relates to derivative contracts linked to balance sheet items recorded at fair value. The fair values of balance sheet and derivative items are reported in shareholders' equity on a net-of-tax basis. Interest accruals for derivative contracts are reported as interest income related to balance sheet items. Fair value changes in derivative contracts are recorded in earnings when the linked balance sheet item's fair value changes are recorded in earnings. Other - Certain prior year information has been reclassified to conform its presentation with the 1996 financial statements. 2. Acquisitions and Dispositions The Company has agreed to acquire the corporate and municipal trust business of Wells Fargo & Company. The acquisition involves approximately 5,000 bond trustee and agency appointments, representing more than $85 billion in outstanding securities for municipal and corporate issuers primarily in the western United States. The Company made acquisitions related to its factoring and corporate trust businesses during 1996 and 1994, and its unit investment trust business in 1996. During 1995, the Company acquired several securities processing businesses. The major acquisitions included the securities lending, U.S. and global custody, securities clearance, and master trust business of BankAmerica, the securities lending and U.S. and global custody business of J.P. Morgan, and the corporate trust business of NationsBank. Securities processing revenues in 1995 did not include any revenue related to the J.P. Morgan and BankAmerica acquisitions. On September 1, 1995, the Company purchased The Putnam Trust Company of Greenwich, headquartered in Greenwich, Connecticut. In 1996, the Company sold its AFL-CIO Union Privilege affinity credit card portfolio to Household International, Inc. for $575 million. After settling its obligations to its marketing agent and other transaction costs, the Company recorded a pre-tax gain of $400 million. The transaction related to approximately $3.4 billion in outstandings and included 2.2 million cards. 8 In 1995, the Company sold its mortgage servicing portfolio, recording a pre-tax gain of $58 million. In 1996 and 1994, the Company sold portions of its interest in Wing Hang Bank, Ltd. for pre-tax gains of $21 million and $22 million. The pro forma effect of the above acquisitions and dispositions is not material. 3. Securities The following table sets forth the amortized cost and the fair values of securities at the end of the last two years: 1996 -------------------------------------------- Gross Unrealized In millions Amortized ---------------- Fair Cost Gains Losses Value --------- ------ ------ ----- Securities Held-to- Maturity U.S. Government Obligations $ 11 $ - $ - $ 11 U.S. Government Agency Obligations 379 - 2 377 Obligations of States and Political Subdivisions 377 3 - 380 Emerging Markets 292 - 48 244 Other Debt Securities 111 4 - 115 ------ ---- --- ------ Total Securities Held-to-Maturity 1,170 7 50 1,127 ------ ---- --- ------ Securities Available-for-Sale U.S. Government Obligations 2,868 3 34 2,837 Obligations of States and Political Subdivisions 268 12 - 280 Emerging Markets 22 - - 22 Other Debt Securities 65 1 - 66 Equity Securities 532 146 - 678 ------ ---- --- ------ Total Securities Available-for-Sale 3,755 162 34 3,883 ------ ---- --- ------ Total Securities $4,925 $169 $84 $5,010 ====== ==== === ====== 9 1995 -------------------------------------------- Gross Unrealized In millions Amortized ---------------- Fair Cost Gains Losses Value --------- ------ ------ ----- Securities Held-to- Maturity U.S. Government Obligations $ 16 $ - $ - $ 16 U.S. Government Agency Obligations 445 6 1 450 Obligations of States and Political Subdivisions 367 1 6 362 Emerging Markets 293 - 92 201 Other Debt Securities 131 4 - 135 ------ --- ---- ------ Total Securities Held-to-Maturity 1,252 11 99 1,164 ------ --- ---- ------ Securities Available-for-Sale U.S. Government Obligations 2,814 27 4 2,837 Obligations of States and Political Subdivisions 254 7 - 261 Emerging Markets 22 4 3 23 Other Debt Securities 27 - - 27 Equity Securities 421 49 - 470 ------ --- ---- ------ Total Securities Available-for-Sale 3,538 87 7 3,618 ------ --- ---- ------ Total Securities $4,790 $98 $106 $4,782 ====== === ==== ====== The amortized cost and fair values of securities at December 31, 1996, by contractual maturity, are as follows: Held-to-Maturity Available-for-Sale -------------------- ------------------- Amortized Fair Amortized Fair In millions Cost Value Cost Value --------- ------- --------- ------- Due in One Year or Less $ 234 $ 234 $ 657 $ 657 Due After One Year Through Five Years 271 273 1,343 1,332 Due After Five Years Through Ten Years 105 107 1,037 1,020 Due After Ten Years 358 312 186 196 Mortgage-Backed Securities 202 201 - - Equity Securities - - 532 678 ------ ------ ------ ------ $1,170 $1,127 $3,755 $3,883 ====== ====== ====== ====== Realized gross gains on the sale of securities available-for-sale were $59 million and $98 million in 1996 and 1995. There were no realized gross losses in 1996 and 1995. Assets, including securities sold under repurchase agreements, carried at $2 billion, $3 billion, and $2 billion at December 31, 1996, 1995, and 1994 were pledged for various purposes as required or permitted by law. 10 4. Loans The Company's loan distribution and industry concentrations of credit risk at December 31, 1996 and 1995 are incorporated by reference from "Loans" in the Management's Discussion and Analysis Section of this Report. The Company's retail, community, and middle market banking operations in the New York metropolitan area create a significant geographic concentration. In the ordinary course of business, the Company and its banking subsidiaries have made loans at prevailing interest rates and terms to directors and executive officers of the Company and to certain entities to which these individuals are related. The aggregate dollar amount of these loans was $755 million, $720 million, and $663 million at December 31, 1996, 1995, and 1994. These loans are primarily with related entities under revolving lines of credit. During 1996 these loans averaged $680 million, and ranged from $605 million to $862 million. All loans were fully performing during this period. Transactions in the allowance for loan losses are summarized as follows: - ------------------------------------------------------------- In millions 1996 1995 1994 - ------------------------------------------------------------- Balance, January 1 $ 756 $ 792 $ 970 Charge-Offs (580) (432) (411) Recoveries 125 55 57 ----- ------ ------ Net Charge-Offs (455) (377) (354) Provision 600 330 162 Other - 11 14 ----- ------ ------ Balance, December 31 $ 901 $ 756 $ 792 ===== ====== ====== Nonaccrual and reduced rate loans outstanding at December 31, 1996, 1995, and 1994 were $213 million, $225 million, and $297 million. At December 31, 1996, commitments to borrowers whose loans were classified as nonaccrual or reduced rate were not material. At December 31, 1996 and 1995, impaired loans aggregated $154 million and $159 million, of which $122 million and $95 million exceeded their fair value by $28 million and $22 million. For 1996 and 1995, the average amount of impaired loans was $151 million and $182 million and interest income recognized on them (limited to cash received) was $0.4 million and $0.7 million. Interest income recognized on total nonaccrual and reduced rate loans exceeded reversals by $3 million in 1996, $2 million in 1995, and $3 million in 1994. Interest income would have been increased by $11 million, $19 million, and $17 million if loans on nonaccrual status at December 31, 1996, 1995, and 1994 had been performing for the entire year. At year end, foreign loans on nonperforming status were $38 million in 1996, $41 million in 1995, and $77 million in 1994. Interest income received on foreign nonperforming loans equaled reversals in 1996, 1995, and 1994. If foreign loans on nonaccrual status at December 31, 1996, 1995, and 1994 had been performing for the entire year, interest income would have been increased by $2 million for each year. Other real estate was $41 million, $72 million, and $56 million at December 31, 1996, 1995, and 1994. Writedowns of and expenses related to other real estate included in noninterest expense were $1 million, $5 million, and $11 million in 1996, 1995, and 1994. 11 5. Long-Term Debt The following is a summary of the contractual maturity and sinking fund requirements of long-term debt at December 31, 1996 and totals for 1995: 1996 1995 ------------------------------------------------ ------ After After After 1 Year 5 Years 10 Years Under Through Through Through In millions 1 Year 5 Years 10 Years 20 Years Total Total ------ ------- -------- -------- ------ ------ Fixed $3 $ 8 $1,465 $280 $1,756 $1,776 Variable - 24 36 - 60 72 -- --- ------ ---- ------ ------ Total $3 $32 $1,501 $280 $1,816 $1,848 == === ====== ==== ====== ====== Fixed-rate debt at December 31, 1996 had interest rates ranging from 6.50% to 8.50%. The weighted average interest rates on fixed-rate debt at December 31, 1996 and 1995 were 7.60% and 7.61%. The weighted average interest rates on variable-rate debt at December 31, 1996 and 1995 were 6.21% and 6.27%. Exposure to interest rate movements is reduced by interest rate swap agreements. As a result of these agreements, the effective interest rates differ from those stated. In 1996, $114 million of 7.50% convertible subordinated debentures due 2001 converted into 12 million shares of common stock. 6. Guaranteed Preferred Beneficial Interests in the Company's Junior Subordinated Deferrable Interest Debentures In December 1996, BNY Institutional Capital Trust A (7.78%) and BNY Capital I (7.97%) (the "Trust(s)"), wholly-owned subsidiaries of the Company, each issued $300 million of cumulative Capital Securities ("Capital Securities") due 2026. The sole assets of each trust are $309 million of junior subordinated deferrable interest debentures of the Company, whose maturities and interest rates match the Capital Securities. The Company's obligations under the agreements that relate to the Capital Securities, the Trusts and the debentures constitute a full and unconditional guarantee by the Company of the Trusts' obligations under the Capital Securities. The Capital Securities are callable in 2006 at prices of 103.89 and 103.985, which decline ratably to par in the year 2016. 12 7. Shareholders' Equity The Company's $111 million no par value 8.60% cumulative preferred stock has a liquidation preference and stated value of $625 per share, and is redeemable at the option of the Company on and after December 1, 1997 at $625 per share, plus cumulative and unpaid dividends. Holders of cumulative preferred stock have cumulative dividend rights in preference to holders of common stock. At December 31, 1996, 8.4 million warrants expiring in 1998 (exercise price $15.50 per share) to purchase 33.5 million shares of the Company's common stock were outstanding. During 1996, warrant holders converted 5.3 million warrants into 21.0 million common shares, providing the Company with $325 million in capital. At December 31, 1996, the Company had reserved for issuance 58 million common shares pursuant to the terms of securities and employee benefit plans. The Company has a preferred stock purchase rights plan. The plan provides that if any person or group becomes the beneficial owner of 20% or more of the Company's common stock (an "acquiring person"), then on and after the tenth day thereafter, each right would entitle the holder (other than the acquiring person) to purchase $400 in market value of the Company's common stock for $200. In addition, if there is a business combination between the Company and an acquiring person, or in certain other circumstances, each right (if not previously exercised) would entitle the holder (other than the acquiring person) to purchase $200 in market value of the common stock of the acquiring person for $100. The rights are redeemable by the Company at $0.05 per right until they are exercisable, and will expire in 2004. Warrants diluted earnings per share in 1996. Fully diluted earnings per share also give effect to the assumed conversion of convertible debentures and convertible preferred stock. In 1996, primary earnings per share would have decreased by $.03 if the conversion of the 7.50% convertible debentures had occurred at the beginning of the year. During 1996, the Company bought back 48 million shares of its common stock at a cost of $1,332 million. The Company plans to buy back through the end of 1997 up to 30 million additional shares. 13 8. Income Taxes Income taxes included in the consolidated statements of income consist of the following: 1996 1995 1994 In ---------------------- ---------------------- ---------------------- millions Current Deferred Total Current Deferred Total Current Deferred Total ------- -------- ----- ------- -------- ----- ------- -------- ----- Federal $431 $ 54 $485 $254 $169 $423 $146 $177 $323 Foreign 19 - 19 13 - 13 13 - 13 State and Local 84 46 130 58 74 132 30 83 113 ---- ---- ---- ---- ---- ---- ---- ---- ---- $534 $100 $634 $325 $243 $568 $189 $260 $449 ==== ==== ==== ==== ==== ==== ==== ==== ==== The components of income before taxes for the computation of taxes are as follows: - ------------------------------------------ In millions 1996 1995 1994 - ------------------------------------------ Domestic $1,548 $1,390 $1,149 Foreign 108 92 49 ------ ------ ------ $1,656 $1,482 $1,198 ====== ====== ====== The Company's net deferred tax liability (included in accrued taxes) at December 31 consisted of the following: - ------------------------------------------------------------ In millions 1996 1995 1994 - ------------------------------------------------------------ Lease Financings $1,162 $1,027 $886 Depreciation and Amortization 221 309 303 Credit Losses on Loans (384) (318) (375) Other Assets (42) (31) (93) Other Liabilities 217 228 175 ------ ------ ------ Net Deferred Tax Liability $1,174 $1,215 $896 ====== ====== ====== The Company has not recorded a valuation allowance because it expects to realize all of its deferred tax assets. A reconciliation of the statutory federal income tax rate to the Company's effective income tax rate is shown in the following table: 1996 1995 1994 ---- ---- ---- Federal Rate 35.0% 35.0% 35.0% Tax-Exempt Interest (0.7) (1.0) (1.6) Foreign Operations (0.5) (1.1) (1.3) State and Local Income Taxes, Net of Federal Income Tax Benefit 4.8 5.4 5.8 Nondeductible Expenses 0.9 1.0 1.3 Leveraged Lease Portfolio (0.2) (0.2) (0.5) Other (1.0) (0.8) (1.2) ----- ----- ----- Effective Rate 38.3% 38.3% 37.5% ===== ===== ===== 14 9. Employee Benefit Plans In 1996, for both pension and postretirement plans, the Company elected to change the measurement date for plan assets and liabilities from December 31 to September 30. This change did not have a material effect on 1996 benefit expense. Pension Plans - ------------- The Company has defined benefit retirement plans covering substantially all full-time employees. The Company's Employee Stock Ownership Plan (ESOP) may provide additional benefits. The Company's funding policy is to contribute annually an amount necessary to satisfy the Internal Revenue Service's funding standards. The following table presents the income (expense) components included in net pension income: In millions 1996 1995 1994 ---- ---- ---- Service Cost - Benefits Earned $(18) $(13) $(17) Interest Cost on Projected Benefit Obligation (26) (23) (23) Actual Return on Plan Assets 74 177 (16) Net Amortization and Deferral - (112) 82 ---- ---- ---- Net Pension Income $ 30 $ 29 $ 26 ==== ==== ==== The expected long-term rate of return on plan assets used in computing pension income was 10.0% in both 1996 and 1995, and 10.5% in 1994. The ESOP provision was $4 million, $3 million, and $1 million in 1996, 1995, and 1994. The following table sets forth the retirement plans' funded status: In millions December 31, 1996 1995 ---- ---- Present Value of Accumulated Benefit Obligation, Including Vested Benefits of $304 in 1996 and $309 in 1995 $322 $319 ==== ==== Present Value of Projected Benefit Obligation $342 $328 Plan Assets at Fair Value, Primarily Short-Term Investments, Fixed-Income and Equity Securities 788 737 ---- ---- Excess of Plan Assets over the Projected Benefit Obligation 446 409 Unrecognized Prior Service Cost (19) (22) Unrecognized Net Gain from Past Differences and Effects of Changes in Assumptions (45) (33) Unrecognized Net Asset Being Amortized over 16.2 Years (18) (21) ---- ---- Prepaid Pension Cost Included in Other Assets $364 $333 ==== ==== Assumptions Used in Computing the Benefit Obligation: Weighted Average Discount Rate 8.25% 7.75% Rate of Increase in Future Compensation Level 4.25 4.13 15 Other Postretirement Benefits - ----------------------------- The Company provides health care and life insurance benefits for certain retired employees. The cost of these benefits consisted of the following components: In millions 1996 1995 1994 ---- ---- ---- Service Cost - Benefits Earned $ 2 $ 2 $ 2 Accumulated Benefit Obligation: Interest 9 10 10 Amortization 4 4 7 ---- ---- ---- Total $ 15 $ 16 $ 19 ==== ==== ==== The assumed health care cost trend rate used in determining benefit expense for 1996 is 8%, decreasing to 5% in 2005 and thereafter. A change of one percentage point in this rate for each year would change the benefit obligation by 9% and benefit expense by 7%. The following table sets forth the funded status of the Company's other postretirement benefit obligation: In millions December 31, 1996 1995 ----- ---- Accumulated Postretirement Benefit Obligation: Retirees $ 74 $ 77 Fully Eligible Active Plan Participants 19 21 Other Active Plan Participants 21 34 ----- ----- Total Obligation 114 132 Unrecognized Net Gain from Past Differences and Effects of Changes in Assumptions 28 12 Unrecognized Net Liability Being Amortized Over 20 Years (104) (110) ----- ----- Accrued Postretirement Benefit Obligation Included in Other Liabilities $ 38 $ 34 ===== ===== The assumed discount rates used in determining the accumulated benefit obligation were 8.25% and 7.75% in 1996 and 1995. 16 10. Company Financial Information The Company's condensed financial statements are as follows: Balance Sheets In millions December 31, 1996 1995 - -------------------------------------------------------------------- Assets Cash and Due from Banks $ 2 $ 4 Securities 19 12 Loans 402 319 Investment in and Advances to Subsidiaries Banks 5,479 5,180 Other 2,655 2,370 ------ ------ 8,134 7,550 ------ ------ Other Assets 59 143 ------ ------ Total Assets $8,616 $8,028 ====== ====== Liabilities and Shareholders' Equity Other Borrowed Funds $ 510 $ 648 Due to Non-Bank Subsidiaries 378 124 Other Liabilities 187 197 Long-Term Debt 2,414 1,827 ------ ------ Total Liabilities 3,489 2,796 ------ ------ Shareholders' Equity* Preferred 112 113 Common 5,015 5,119 ------ ------ Total Liabilities and Shareholders' Equity $8,616 $8,028 ====== ====== *See Consolidated Statements of Changes in Shareholders' Equity. 17 Statements of Income In millions For the years ended December 31, 1996 1995 1994 - ----------------------------------------------------------------------------- Operating Income Dividends from Subsidiaries Banks $ 545 $300 $238 Other 502 2 2 Interest from Subsidiaries Banks 86 92 88 Other 9 17 10 Other 45 127 24 ------ ---- ---- Total 1,187 538 362 ------ ---- ---- Operating Expenses Interest (including $14 in 1996 and $1 in each of 1995 and 1994 to nonbank subsidiaries) 177 168 122 Other 17 35 15 ------ ---- ---- Total 194 203 137 ------ ---- ---- Income Before Income Taxes and Equity in Undistributed Earnings of Subsidiaries 993 335 225 Income Tax Expense (Benefit) (49) 11 (8) ------ ---- ---- Income Before Equity in Undistributed Earnings of Subsidiaries 1,042 324 233 ------ ---- ---- Equity in Undistributed Earnings of Subsidiaries Banks 147 315 275 Other (169) 275 241 ------ ---- ---- Total (22) 590 516 ------ ---- ---- Net Income $1,020 $914 $749 ====== ==== ==== 18 Statements of Cash Flows In millions For the years ended December 31, 1996 1995 1994 - ----------------------------------------------------------------------------- Operating Activities Net Income $1,020 $ 914 $ 749 Adjustments to Determine Net Cash Attributable to Operating Activities Amortization 6 7 3 Equity in Undistributed Earnings of Subsidiaries 22 (590) (517) Securities Gains (4) (95) (13) Change in Interest Receivable 1 (1) (4) Change in Interest Payable (1) (3) 1 Change in Taxes Payable (23) 13 (78) Other, Net 19 5 9 ------ ----- ----- Net Cash Provided by Operating Activities 1,040 250 150 ------ ----- ----- Investing Activities Purchase of Securities (15) (277) (142) Sales of Securities - 492 89 Maturities of Securities 12 9 1 Change in Loans (82) (123) (196) Acquisition of, Investment in, and Advances to Subsidiaries (501) (466) 367 Other, Net (11) - - ------ ----- ----- Net Cash Provided (Used) by Investing Activities (597) (365) 119 ------ ----- ----- Financing Activities Change in Other Borrowed Funds (138) 221 20 Proceeds from the Issuance of Long-Term Debt 716 203 297 Repayments of Long-Term Debt (17) (16) (115) Change in Advances from Subsidiaries 254 76 (7) Redemption and Repurchases of Preferred Stock and Warrants - - (177) Issuance of Common Stock 410 87 42 Treasury Stock Acquired (1,332) (180) (112) Cash Dividends Paid (338) (272) (219) ------ ----- ----- Net Cash Provided (Used) by Financing Activities (445) 119 (271) ------ ----- ----- Change in Cash and Due from Banks (2) 4 (2) Cash and Due from Banks at Beginning of Year 4 - 2 ------ ----- ----- Cash and Due from Banks at End of Year $ 2 $ 4 $ - ====== ===== ===== Supplemental Disclosure of Cash Flow Information Cash Paid During the Year for: Interest $ 178 $ 171 $ 122 Income Taxes 587 306 118 In 1995, the Company contributed $361 million of available-for-sale securities to a subsidiary. Gains of $16 million and $79 million were recorded in 1996 and 1995. 19 In the fourth quarter of 1996, the Company combined two of its banking subsidiaries, The Bank of New York (NJ) and The Putnam Trust Co., into The Bank of New York ("Bank"), a significant subsidiary. The Bank is subject to dividend limitations under the Federal Reserve Act and state banking laws. Under these statutes, prior regulatory approval is required for dividends in any year that would exceed the Bank's net profits for such year combined with retained net profits for the prior two years. The Bank is also prohibited from paying a dividend in an amount greater than "undivided profits then on hand" less "bad debts" (generally loans six months or more past due). Under the first of these limitations, in 1997 the Bank could declare dividends of $454 million plus net profits earned in 1997. The Bank is not restrained from paying dividends under the second limitation. The dividend policy of The Bank of New York (Delaware) ("BNYDEL"), a significant subsidiary, is to declare dividends that, at a minimum, allow it to meet capital guidelines established by the Federal Deposit Insurance Corporation ("FDIC"). In addition to these statutory tests, the primary federal regulators of the banks (the Federal Reserve Board in the case of the Bank and the FDIC in the case of BNYDEL) could prohibit a dividend if they determined that the payment would constitute an unsafe or unsound banking practice. Bank regulators have indicated that, generally, dividends should be paid by banks only to the extent of earnings from continuing operations. Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). As of December 31, 1996 and 1995, capital ratios for the Company, the Bank, and BNYDEL were categorized as well capitalized as set forth in the table below. December 31, 1996 December 31, 1995 ----------------------- ----------------------- Well BNY BNY Capitalized Company Bank DEL Company Bank DEL Guidelines ------- ---- ---- ------- ---- ---- ----------- Tier I 8.34% 7.03% 9.35% 8.42% 7.84% 7.87% 6% Total Capital 12.78 10.26 14.47 13.08 11.61 11.55 10 Leverage 8.87 6.89 9.28 8.46 7.63 8.48 5 Tangible Common Equity 6.99 6.68 8.87 8.00 7.71 7.78 The Federal Reserve Act limits and requires collateral for extensions of credit by the Company's banks to the Company and certain of its nonbank affiliates; also, there are restrictions on the amounts of investments by such banks in stock and other securities of the Company and such affiliates, and restrictions on the acceptance of their securities as collateral for loans by such banks. Extensions of credit by the banks to each of the Company and such affiliates are limited to 10% of such bank's capital and surplus, and in the aggregate for the Company and all such affiliates to 20%. The subsidiary banks of the Company are required to maintain reserve balances with Federal Reserve Banks under the Federal Reserve Act and Regulation D. Required balances averaged $783 million and $770 million for the years 1996 and 1995. 20 11. Other Noninterest Income and Expense Other noninterest income includes equity in earnings of unconsolidated subsidiaries of $46 million, $62 million, and $34 million in 1996, 1995, and 1994. In 1996, other noninterest income also includes a $400 million pre-tax gain on the sale of the Company's AFL-CIO Union Privilege affinity credit card portfolio. Other noninterest expense includes deposit insurance premiums of $2 million, $32 million, and $52 million in 1996, 1995, and 1994 and amortization of intangibles of $105 million, $74 million, and $86 million in 1996, 1995, and 1994. 12. Fair Value of Financial Instruments The carrying amounts of the Company's financial instruments (i.e., monetary assets and liabilities) are determined under different accounting methods-see Note 1. The following disclosure discusses these instruments on a uniform basis - fair value. However, active markets do not exist for a significant portion of these instruments, principally loans and commitments. As a result, fair value determinations require significant subjective judgments regarding future cash flows. Other judgments would result in different fair values. Among the assumptions used by the Company are discount rates ranging principally from 6% to 9% at December 31, 1996 and 6% to 8% at December 31, 1995. The fair value information supplements the basic financial statements and other traditional financial data presented throughout this Report. A summary of the practices used for determining fair value is as follows: Securities, Trading Activities, and Derivatives Used for ALM - ------------------------------------------------------------ The fair value of securities and trading assets and liabilities is based on quoted market prices, dealer quotes, or pricing models. Fair value amounts for derivative instruments, such as options, futures and forward rate contracts, commitments to purchase and sell foreign exchange, and foreign currency swaps, are similarly determined. The fair value of interest rate swaps is the amount that would be received or paid to terminate the agreement. Loans and Commitments - --------------------- For certain categories of consumer loans, fair value includes consideration of the quoted market prices for securities backed by similar loans. Discounted future cash flows and secondary market values are used to determine the fair value of other types of loans. The fair value of commitments to extend credit, standby letters of credit, and commercial letters of credit is based upon the cost to settle the commitment. Other Financial Assets - ---------------------- Fair value is assumed to equal carrying value for these assets due to their short maturity. Deposits, Borrowings, and Long-Term Debt - ---------------------------------------- The fair value of noninterest-bearing deposits is assumed to be their carrying amount. The fair value of interest-bearing deposits, borrowings, and long-term debt is based upon current rates for instruments of the same remaining maturity or quoted market prices for the same or similar issues. 21 The carrying amount and estimated fair value of the Company's financial instruments are as follows: December 31, 1996 1995 -------------------- ------------------- Carrying Fair Carrying Fair In millions Amount Value Amount Value -------- ----- -------- ------- Assets Securities $ 5,206 $ 5,224 $ 5,003 $ 4,979 Trading Assets 1,547 1,547 816 816 Loans and Commitments 33,917 34,178 35,099 35,501 Derivatives Used for ALM 81 (27) 42 (61) Other Financial Assets 8,250 8,250 6,815 6,815 ------- ------- ------- ------- Total Financial Assets 49,001 $49,172 47,775 $48,050 ======= ======= Non-Financial Assets 6,764 5,945 ------- ------- Total Assets $55,765 $53,720 ======= ======= Liabilities Noninterest-Bearing Deposits $11,812 $11,812 $10,465 $10,465 Interest-Bearing Deposits 27,531 27,538 25,453 25,478 Borrowings 4,569 4,570 7,220 7,223 Long-Term Debt 1,816 1,832 1,848 2,145 Trading Liabilities 1,437 1,437 651 651 Derivatives Used for ALM 42 (69) 21 (72) ------- ------- ------- ------- Total Financial Liabilities 47,207 $47,120 45,658 $45,890 ======= ======= Non-Financial Liabilities 2,831 2,830 ------- ------- Total Liabilities $50,038 $48,488 ======= ======= Commitments and contingent items reduced the fair value of loans and commitments by $14 million in 1996 and $58 million in 1995. A discussion of the credit, market, and liquidity risks inherent in financial instruments is presented under "Liquidity", "Trading Activities", and "Asset/Liability Management" in the Management's Discussion and Analysis Section of this Report and Note 15 to the Consolidated Financial Statements. 22 The table below summarizes the carrying amount of the financial instruments and the related notional amount and estimated fair value (unrealized gain/loss) of ALM interest rate swaps that were linked to these items: In millions ALM Interest Rate Swaps Financial ------------ Instruments - ----------- Carrying Notional Unrealized Amount Amount Gain (Loss) -------- -------- ---- ---- At December 31, 1996 - -------------------- Loans $1,610 $1,610 $ - $(27) Deposits 1,930 1,930 68 (1) Borrowings 250 250 3 - Long-Term Debt 925 925 15 (16) At December 31, 1995 - -------------------- Loans $1,480 $1,480 $ - $(62) Deposits 2,212 2,212 32 (1) Borrowings 590 590 1 - Long-Term Debt 825 825 41 (1) The following table illustrates the notional amount, remaining contracts outstanding, and weighted average rates for ALM interest rate contracts: Remaining Contracts Outstanding at December 31, Total ----------------------------------- In millions 12/31/96 1997 1998 1999 2000 2001 - ------------------------------------------------------------------------------ Receive Fixed Interest Rate Swaps: Notional Amount $2,795 $1,535 $1,302 $ 990 $ 955 $ 895 Weighted Average Rate 6.55% 7.18% 7.21% 7.27% 7.21% 7.21% Pay Fixed Interest Rate Swaps: Notional Amount $1,720 $1,357 $1,199 $1,028 $ 685 $ 378 Weighted Average Rate 6.77% 6.87% 6.99% 6.90% 6.78% 6.72% Basis Interest Rate Swaps: Notional Amount $ 200 $ 100 $ 75 $ 20 $ 20 $ 20 Forward LIBOR Rate (1) 5.79% 6.35% 6.68% 6.92% 7.10% 7.28% (1) The forward LIBOR rate shown above reflects the implied forward yield curve for that index at December 31, 1996. However, actual repricings for ALM interest rate swaps are generally based on 3 month LIBOR. The Company's financial assets and liabilities are primarily variable rate instruments. Fixed rate loans and deposits are issued to satisfy customer and investor needs. Derivative financial instruments are utilized to manage exposure to the effect of interest rate changes on fixed rate assets and liabilities, and to enhance liquidity. The Company matches the duration of derivatives to that of the assets and liabilities being hedged, so that changes in fair value resulting from changes in interest rates will be offset. The Company uses receive fixed and pay fixed interest rate swaps, futures contracts, and forward rate agreements to convert fixed rate loans, deposits, and long term debt to floating rates. Basis swaps are used to convert various variable rate borrowings to LIBOR which better matches the assets funded by the borrowings. The Company uses forward foreign exchange contracts to protect the value of its investments in foreign subsidiaries. The after-tax effects are shown in 23 the cumulative translation adjustment included in shareholders' equity. At December 31, 1996 and 1995, $228 million and $237 million in notional amount of foreign exchange contracts, with fair values of $0.4 million and $0.9 million, hedged corresponding amounts of foreign investments. These foreign exchange contracts had a maturity of less than three months at December 31, 1996. Deferred net gains on ALM derivative financial instruments amounted to zero and $1 million at December 31, 1996 and 1995. Net interest income increased by $17 million, $17 million, and $24 million in 1996, 1995, and 1994 as a result of ALM derivative financial instruments. 13. Trading Activities The fair value of the Company's financial instruments that are held for trading purposes are: In millions 1996 1995 Assets Liabilities Assets Liabilities ------------- -------------- ------------- ------------- Trading Account 12/31 Average 12/31 Average 12/31 Average 12/31 Average - --------------- ---------------------------- --------------------------- Interest Rate Contracts: Futures and Forward Contracts $ 2 $ 5 $ 1 $ 1 $ 3 $ 4 $ 1 $ 2 Swaps 99 128 115 129 210 123 220 121 Written Options - - 6 6 - - 4 8 Purchased Options 5 5 - - 4 7 - - Foreign Exchange Contracts: Swaps 3 4 1 3 6 9 2 6 Written Options - - 642 166 - - 72 70 Purchased Options 645 185 - - 111 91 - - Commitments to Purchase and Sell Foreign Exchange 615 359 590 380 309 540 332 544 Debt Securities 73 193 82 117 14 229 20 - Other Securities 105 103 - - 159 145 - - ------ ------ ------ ---- ---- ------ ---- ---- Total Trading Account $1,547 $ 982 $1,437 $802 $816 $1,148 $651 $751 ====== ====== ====== ==== ==== ====== ==== ==== Other noninterest income included the following income related to trading activities: In millions - ------------------------------------------------------------------------------- 1996 1995 1994 ---- ---- ---- Foreign Exchange $57 $42 $27 Interest Rate Contracts 7 11 13 Debt and Other Securities 3 7 4 --- --- --- $67 $60 $44 === === === Foreign exchange includes income from trading commitments to purchase and sell foreign exchange, futures, and options. Interest rate contracts reflect the results of trading futures and forward contracts, interest rate swaps, foreign currency swaps, and options. Debt and other securities primarily reflect income from trading debt and equity securities. 24 14. Foreign Operations The Company's foreign activities consist of banking, trust, and processing services provided to customers domiciled outside of the United States, principally in Europe and Asia. The following financial information concerning such activities reflects direct attributions and charges for funds employed, based upon average costs of interest-bearing funds: In millions 1996 --------------------------------------- Income Before Total Income Net Total Revenue Taxes Income Assets ------- ------ ------ ------- Europe $ 230 $ 66 $ 37 $ 3,413 Asia 239 76 43 2,835 Other Foreign 311 62 35 3,011 Domestic 4,933 1,452 905 46,506 ------ ------ ------ ------- Total $5,713 $1,656 $1,020 $55,765 ====== ====== ====== ======= 1995 --------------------------------------- Income Before Total Income Net Total Revenue Taxes Income Assets ------- ------ ------ ------- Europe $ 148 $ 11 $ 6 $ 1,918 Asia 226 73 41 2,913 Other Foreign 252 21 12 2,842 Domestic 4,696 1,377 855 46,047 ------ ------ ---- ------- Total $5,322 $1,482 $914 $53,720 ====== ====== ==== ======= 1994 --------------------------------------- Income Before Total Income Net Total Revenue Taxes Income Assets ------- ------ ------ ------- Europe $ 124 $ 6 $ 3 $ 1,939 Asia 211 94 53 2,179 Other Foreign 181 9 5 2,785 Domestic 3,735 1,089 688 41,976 ------ ------ ---- ------- Total $4,251 $1,198 $749 $48,879 ====== ====== ==== ======= 25 15. 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 trade for its own account, to reduce interest rate and foreign currency risks, and to provide customers with the ability to meet credit and liquidity needs and to hedge foreign currency and interest rate risks. 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 December 31, 1996 and 1995 follows: Off-Balance-Sheet Credit Risks In millions 1996 1995 - ------------------------------ ---- ---- Commercial Lending Commitments $31,604 $26,606 Credit Card Commitments 14,998 18,874 Standby Letters of Credit 4,664 4,257 Commercial Letters of Credit 1,711 1,728 Securities Lending Indemnifications 23,881 15,068 The total potential loss on undrawn commitments, standby and commercial letters of credit, and securities lending indemnifications is equal to the total notional amount if drawn upon, which does not consider the value of any collateral. Since many of the commitments are expected to expire without being drawn upon, the total amount does not necessarily represent future cash requirements. The Company does not anticipate the use of all of its unused credit lines available to credit card holders by individual customers at one time. These credit lines are contingent upon customers maintaining specific credit standards, and the Company has the right to reduce or cancel them at anytime. In securities lending transactions, the Company requires the borrower to provide collateral, thus reducing credit risk. The notional amounts for other off-balance-sheet risks express the dollar volume of the transactions; however, credit risk is much smaller. The Company performs credit reviews and enters into netting agreements to minimize the credit risk of foreign currency and interest rate risk management products. Exposure to foreign exchange and interest rate risk is reduced by entering into offsetting positions. Standby letters of credit principally support corporate obligations and include $1.3 billion and $1.5 billion that were collateralized with cash and securities at December 31, 1996 and 1995. At December 31, 1996 and 1995, securities lending indemnifications were secured by collateral of $23.9 billion and $15.1 billion. At December 31, 1996, approximately $3.5 billion of the standbys will expire within one year, $1.1 billion between one to five years, and the balance after five years. At December 31, 1996, approximately $14.9 billion of interest rate contracts will mature within one year, $12.7 billion between one and five years, and the balance after five years. At December 31, 1996, approximately $100.6 billion of foreign exchange contracts will mature within one year and $0.9 billion between one and five years. There were no derivative financial instruments on nonperforming status at year end 1996. 26 A summary of the notional amount and credit exposure of the Company's derivative financial instruments at December 31, 1996 and 1995 follows: Derivative Financial Instruments Notional Amount Credit Exposure In millions 1996 1995 1996 1995 ---- ---- ---- ---- Interest Rate Contracts: Futures and Forward Contracts $ 6,451 $ 6,012 $ 1 $ 2 Swaps 9,318 8,728 180 234 Written Options 7,056 7,072 - - Purchased Options 6,693 4,777 6 5 Foreign Exchange Contracts: Swaps 126 308 3 6 Written Options 28,551 2,089 - - Purchased Options 28,581 1,603 154 32 Commitments to Purchase and Sell Foreign Exchange 44,269 24,005 893 463 ---- ---- 1,237 742 Effect of Master Netting Agreements (328) (223) ---- ---- Total Credit Exposure $909 $519 ==== ==== Net rent expense for premises and equipment was $91 million in 1996, $94 million in 1995, and $96 million in 1994. At December 31, 1996, the Company and its subsidiaries were obligated under various noncancelable lease agreements, certain of which provide for additional rents based upon real estate taxes, insurance, and maintenance and for various renewal options. The minimum rental commitments under noncancelable operating leases for premises and equipment having a term of more than one year from December 31, 1996 are as follows: - --------------------------------------------------------------------------- Year ending December 31, In millions - --------------------------------------------------------------------------- 1997 $ 70 1998 57 1999 41 2000 33 2001 28 Subsequent to 2001 105 ---- Total Minimum Lease Payments $334 ==== In the ordinary course of business, there are various claims pending against the Company and its subsidiaries. In the opinion of management, liabilities arising from such claims, if any, would not have a material effect upon the Company's consolidated financial statements. 27 16. Stock Option Plans The Company's stock option plans (the Option Plans) provide for the issuance of stock options at fair market value at the date of grant to officers and employees of the Company and its subsidiaries. Under the Company's 1993 Plan, options to acquire common stock may be granted in amounts that do not exceed, on a cumulative basis, 1% of the outstanding shares of common stock per year, and, subject to adjustment, options covering no more than approximately 19 million shares in the aggregate may be granted during the first five years. Generally, each option granted under the Option Plans is exercisable between one and ten years from the date of grant. The Company accounts for its Option Plans under Accounting Principles Board Opinion 25. As a result, compensation cost is not recorded. If compensation cost for these plans had been based on fair value, net income would have been reduced by $9 million in 1996 and $7 million in 1995. Also, earnings per share would have been reduced by 2 cents per share in 1996 and 1995. The assumptions used in determining the impact of accounting for the Option Plans at fair value for 1996 are as follows: dividend yield of 3%; expected volatility of 27%; risk free interest rate of 5.40%; and expected option lives of 5 years. A summary of the status of the Company's Option Plans as of December 31, 1996, 1995, and 1994, and changes during the years ending on those dates is presented below: 1996 1995 1994 - ------------------------------------------------------------------------------- Weighted Weighted Weighted -Average -Average -Average Exercise Exercise Exercise Options Shares Price Shares Price Shares Price - ------------------------------------------------------------------------------- Outstanding at beginning of year 12,701,360 $11.87 13,433,492 $11.04 13,219,704 $10.43 Granted 2,592,700 22.57 2,618,608 14.30 2,025,600 13.03 Exercised (2,802,402) 11.23 (3,259,324) 10.38 (1,694,772) 8.52 Canceled (22,444) 18.83 (91,416) 13.25 (117,040) 12.29 ---------- ---------- ---------- Outstanding at end of year 12,469,214 14.23 12,701,360 11.87 13,433,492 11.04 ========== ========== ========== Options exercisable at year-end 8,901,526 11.86 9,186,618 11.07 9,918,268 10.71 Weighted- average fair value of options granted during the year $5.24 $4.44 N/A The following table summarizes information about stock options outstanding at December 31, 1996: Options Outstanding Options Exercisable ----------------------------------- ---------------------- Weighted -Average Weighted Weighted Number Remaining -Average Number -Average Range of Outstanding Contractual Exercise Exercisable Exercise Exercise Prices at 12/31/96 Life Price at 12/31/96 Price - --------------- ----------- ----------- -------- ----------- -------- $ 5 to 7 833,800 4.2 years $ 6.66 823,192 $ 6.68 8 to 11 2,974,512 3.6 9.80 2,974,512 9.80 13 to 15 6,084,602 7.1 13.90 5,103,822 13.89 22 to 30 2,576,300 9.0 22.57 - - ----------- ---------- 5 to 30 12,469,214 6.4 14.23 8,901,526 11.86 =========== ========== 28 Report of Independent Auditors To the Board of Directors and Shareholders of The Bank of New York Company, Inc. New York, New York We have audited the accompanying consolidated balance sheet of The Bank of New York Company, Inc. and subsidiaries (the "Company") as of December 31, 1996, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of the Company as of December 31, 1995 and for the two years then ended, were audited by other auditors whose report dated February 26, 1996, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Bank of New York Company, Inc. and subsidiaries at December 31, 1996, and the consolidated results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. \s\ Ernst & Young LLP New York, New York January 27, 1997 29 Management's Discussion and Analysis of the Company's Financial Condition and Results of Operations - ----------------------------------------------------------------------------- SUMMARY OF RESULTS For 1996, The Bank of New York Company, Inc. (the "Company") reported record net income of $1,020 million or a record $2.41 per fully diluted share, compared with $914 million or $2.15 per fully diluted share in 1995 and $749 million or $1.85 per fully diluted share in 1994. For 1996, the net effect of the conversion of warrants, the remaining outstanding warrants, and the stock buyback was to dilute fully diluted earnings per share 10 cents. Revenues from the Company's securities processing business continued their strong advance, growing 59% for the full year to $655 million. This significant increase reflected strong internal growth as well as the acquisition of the corporate trust business of NationsBank and the custody businesses of BankAmerica and J.P. Morgan. All areas of securities processing contributed to an internal growth rate of 14% with ADRs, corporate trust, and government securities clearance particularly strong. Fees from other processing were up 9% for the year to $206 million. Trust and investment management continued its strong performance in 1996 with fees growing 18% over last year to $161 million reflecting new business and generally strong markets. In 1996, net interest income on a taxable equivalent basis declined to $1,999 million reflecting the sale of the $3.4 billion AFL-CIO Union Privilege affinity credit card portfolio. The provision for loan losses increased to $600 million due largely to a deterioration in the Company's credit card portfolio. Operating expenses continued to remain under good control. In 1996, return on average common equity was a record 19.98% compared with 19.42% in 1995 and 18.49% in 1994, while return on average assets was a record 1.90% compared with 1.72% in 1995 and 1.49% in 1994. Tangible fully diluted earnings per share (earnings before the amortization of goodwill and intangibles) were $2.61 per share in 1996 compared with $2.29 per share in 1995. Tangible return on average assets was 2.10% in 1996 and 1.86% in 1995; and tangible return on average common equity was 27.94% in 1996 compared with 24.14% in 1995. In 1995, net interest income, the net interest rate spread, and net yield on interest earning assets reached record levels. Loan demand was strong in 1995, particularly in corporate lending across the United States, and in all of the special industry lending areas. Revenues from the Company's securities processing business grew 14% in 1995. All areas of securities processing increased, led by ADRs, corporate trust, and master trust. Other processing fees grew 11% over the previous year led by increases in funds transfer and trade finance revenues. The provision for loan losses increased to $330 million. Operating expenses were strictly controlled. In 1994, net interest income on a taxable equivalent basis increased to $1,763 million as the net interest spread increased to 3.30% and the net yield on interest earning assets was 4.11%. These increases reflect a continued shift in the asset mix toward higher yielding assets, including strong growth in credit cards. A reduction in nonperforming assets also contributed to the increase in net interest income. Revenues from the Company's securities and other processing businesses remained strong. A lower provision for loan losses and continued control of operating expenses contributed to higher earnings. 30 NET INTEREST INCOME Dollars in millions 1996 1995 1994 ---- ---- ---- Net Interest Income on a Taxable Equivalent Basis $1,999 $2,068 $1,763 Net Interest Rate Spread 3.37% 3.41% 3.30% Net Yield on Interest-Earning Assets 4.35% 4.53% 4.11% On a taxable equivalent basis, net interest income was $1,999 million in 1996 compared with $2,068 million in 1995. Average loans grew to $36.7 billion in 1996 up from $35.4 billion in 1995. Year end 1996 loans were $36.1 billion down from $36.9 billion in 1995 reflecting the sale of $3.4 billion of credit card receivables in the second quarter of 1996. The net interest rate spread and yield were 3.37% and 4.35% in 1996 compared with 3.41% and 4.53% in 1995. These declines are primarily attributable to the sale of credit card receivables partially offset by the expiration of promotional rates on credit cards, and the repricing of certain segments of the credit card portfolio. The decline in the net yield also reflects the financing of the stock buyback program. Net interest income on a taxable equivalent basis increased 17% in 1995 to $2,068 million. Continuing growth in the loan portfolio and wider interest rate spreads contributed to the increase during 1995. Average loans grew 11% to $35.4 billion in 1995 from $32.0 billion in 1994. Managed credit card outstandings were up 13% to $8.7 billion. Other loan growth was attributable to strong demand in corporate lending across the United States and in all of the special industries lending areas. The increase in the yield also reflected an increase in the volume of interest-free sources of funds by $813 million (a portion attributable to compensating balances in lieu of servicing fees), and higher returns on these funds. On a taxable equivalent basis, net interest income increased 14% in 1994. Credit card growth, the large decline in nonperforming loans, and wider interest rate spreads contributed to this growth during 1994. Average loans grew 5% to $32.0 billion in 1994. The net interest rate spread and net yield on interest-earning assets increased by 6% and 7% in 1994. The credit card securitizations reduced net interest income by $5 million in 1995 and $87 million in 1994. Interest income would have been increased by $11 million, $19 million, and $17 million if loans on nonaccrual status at December 31, 1996, 1995, and 1994 had been performing for the entire year. 31 NONINTEREST INCOME Noninterest income is provided by a wide range of fiduciary and processing services, other fee-based services, and trading activities. Revenues from these activities were $2,130 million in 1996, compared with $1,491 million in 1995 and $1,289 million in 1994. Securities processing fees were $655 million, $411 million, and $359 million in 1996, 1995, and 1994. Internal growth in all areas and acquisitions contributed to the significant increase in revenue in 1996. Other processing fees, principally funds transfer, deposit services, and trade finance, were $206 million in 1996, $189 million in 1995, and $171 million in 1994. Trust and investment management fees were $161 million in 1996, $136 million in 1995, and $126 million in 1994. Service charges and fees were $424 million in 1996, compared with $423 million in 1995 and $465 million in 1994. For further discussion of fee revenue see Sector Profitability. Securities gains totaled $97 million, $115 million, and $15 million in 1996, 1995, and 1994, including gains on equity securities of $87 million in 1996 and $97 million in 1995. There were no net equity security gains recorded in 1994. Other noninterest income was $587 million in 1996, $217 million in 1995, and $153 million in 1994. A $400 million pre-tax gain was recorded in 1996 on the sale of the Union credit card portfolio. Profits from foreign exchange and other trading activities were $67 million, $60 million, and $44 million in 1996, 1995, and 1994. Other noninterest income for 1996 and 1994 included gains of $21 million and $22 million related to the sale of portions of the Company's interest in Wing Hang Bank, Ltd. A gain of $58 million on the sale of the Company's mortgage servicing portfolio was recorded in 1995. Noninterest income attributable to credit card securitizations decreased to $3 million in 1995 from $38 million in 1994 primarily due to maturities. NONINTEREST EXPENSE AND INCOME TAXES Total noninterest expense was $1,835 million in 1996, $1,708 million in 1995, and $1,646 in 1994. The rise in expenses in 1996 was principally due to salary and other expenses related to acquisitions of securities processing businesses from J.P. Morgan, BankAmerica, and NationsBank as well as the acquisition of the Putnam Trust Company. Salaries and employee benefits increased 11% to $1,014 million in 1996. Net occupancy and furniture and fixture expenses fell by a combined $2 million to $260 million. Other expenses were up 5% in 1996 to $561 million. Total noninterest expense increased 4% in 1995 compared with 1994. In 1995, expenses related to the settlement of litigation with Northeast Bancorp were $15 million. Net occupancy and furniture and fixture expenses fell by a combined $4 million to $262 million in 1995. Salaries and employee benefits increased 7% in 1995. Deposit insurance premiums were $2 million in 1996 compared with $32 million and $52 million in 1995 and 1994. The FDIC substantially reduced the assessment rate for deposit insurance premiums in 1996. The efficiency ratio was 50.5% in 1996 compared with 50.0% in 1995 and 53.8% in 1994. The efficiency ratios exclude the gain on the sale of the credit card portfolio in 1996, and the settlement with Northeast Bancorp and the gain on the sale of the ARCS mortgage servicing in 1995. The Company's consolidated effective tax rates for 1996, 1995, and 1994 were 38.3%, 38.3%, and 37.5%. The 1996 rate reflects higher taxes on foreign operations offset by the reduced impact of state and local taxes. The 1995 rate increased primarily from the reduced impact of tax-exempt income partially offset by the reduced impact of state and local taxes. 32 LIQUIDITY The Company maintains its liquidity through the management of its assets and liabilities, utilizing worldwide financial markets. The diversification of liabilities reflects the flexibility of the Company's funding sources under changing market conditions. Stable core deposits, including demand, retail time, and trust deposits from processing businesses, are generated through the Company's diversified network and managed with the use of trend studies and deposit pricing. The use of derivative products such as interest rate swaps and financial futures enhances liquidity through the issue of long-term liabilities without exposure to interest rate risk. Liquidity also results from the maintenance of a portfolio of assets which can be easily reduced and the monitoring of unfunded loan commitments, thereby reducing unanticipated funding requirements. Average savings, time, and noninterest-bearing deposits declined slightly by $333 million in 1996. Medium-term notes declined $416 million and foreign deposits increased by $829 million. More volatile sources of interest-bearing deposits and borrowings decreased by $361 million. In 1996, the Company's average commercial paper borrowings were $605 million compared with $656 million in 1995. The Company has backup lines of credit of $350 million at financial institutions supporting these borrowings. The following comments relate to the information disclosed in the Consolidated Statements of Cash Flows. Cash flows from earnings and other operating activities were $0.9 billion in 1996, compared with $1.9 billion and $2.1 billion in 1995 and 1994. The decrease in 1996 is primarily attributable to changes in accruals and other. The decrease in 1995 reflects a larger decline in trading activities in 1994 compared to 1995. In 1996, cash provided by investing activities was $0.1 billion, reflecting the sale of credit card loans which was offset by additions to loans, securities and interest bearing deposits. The 1995 cash flows used by investing activities were $2.4 billion, reflecting additions to loans and securities partially offset by a decline in federal funds sold and securities purchased under resale agreements. The 1994 cash flows used by investing activities were $5.4 billion reflecting additions to loans and an increase in federal funds sold and securities purchased under resale agreements. Cash provided by financing activities was $0.4 billion, $2.3 billion, and $1.7 billion in 1996, 1995, and 1994 as the Company used deposits to finance its investing activities. In 1996, financing activities used cash to buy back the Company's common shares, and provided cash through the issuance of trust preferred securities. Federal funds purchased and securities sold under repurchase agreements were a source of funds in 1995 and a use of funds in 1996 and 1994. Restrictions on the ability of the Company to obtain funds from its subsidiaries are discussed in Note 10 to the Consolidated Financial Statements. 33 CAPITAL RESOURCES Shareholders' equity was $5,127 million at December 31, 1996, compared with $5,232 million at December 31, 1995 and $4,296 million at December 31, 1994. In January 1997, the Company increased its quarterly common stock dividend to 24 cents per share, up 20% from the beginning of 1996. During 1996, the Company retained $682 million of earnings and issued $600 million of trust preferred securities and $100 million of subordinated debt. Warrant holders converted 5 million warrants into 21 million common shares, providing $325 million in capital, and $114 million of subordinated debentures converted into common stock. In addition, 48 million common shares were repurchased for $1.3 billion. The Company plans to buy back through the end of 1997 up to 30 million additional shares. In 1995, the Company retained $641 million of earnings and issued $200 million of subordinated debt. Subordinated debentures totaling $136 million were converted to common stock. Also in 1995, 9 million common shares were repurchased. In 1994, the Company increased its quarterly stock dividend to 16 cents per share, a 42% increase. Seven million shares of common stock were repurchased. The Company retained $512 million of earnings and issued $300 million of subordinated debt. Two issues of preferred stock were redeemed in 1994, reducing preferred stock by $156 million and retained earnings by $17 million. The Company can issue up to $1.2 billion of debt and preferred stock (including convertible preferred stock) and $400 million of trust preferred securities pursuant to shelf registration statements. PROVISION AND ALLOWANCE FOR LOAN LOSSES The provision for loan losses was $600 million in 1996, compared with $330 million in 1995 and $162 million in 1994. The increase in the provision compared with 1995 principally relates to a higher level of anticipated losses on certain Consumers Edge (registered trademark) credit card accounts opened in 1994 and 1995, and on the credit card portfolio generally. The increased provision also covered $78 million of net charge-offs of Union receivables that were not sold. In 1996, the Company continued to experience improvement in the asset quality of business loans as nonperforming loans declined. Net charge-offs were $455 million in 1996, $377 million in 1995, and $354 million in 1994. In 1996 and 1995, net charge-offs were primarily attributable to credit card loans while in 1994 net charge-offs primarily related to credit card and other commercial loans. The total allowance for loan losses was $901 million and $756 million at year-end 1996 and 1995. The $145 million increase in the allowance for loan losses in 1996 is mainly attributable to an increased provision for credit card loans. The $36 million decrease in the allowance for loan losses in 1995 resulted primarily from net charge-offs exceeding the provision for loan losses and the decline in the level of nonaccrual loans. The ratio of the total allowance for loan losses to year-end loans was 2.43% and 2.01% at December 31, 1996 and 1995. Credit card securitization reduced the provision for loan losses by approximately $2 million and $32 million in 1995 and 1994. 34 TRADING ACTIVITIES The Company expanded its offering of foreign exchange risk management products in 1996 as a result of an agreement it entered into with Susquehanna Trading, a firm with significant expertise in foreign exchange options. Activity related to this agreement is the primary reason for the increase in the notional amounts and trading account balances for foreign exchange option contracts and commitments to purchase and sell foreign exchange in 1996. The Company manages trading risk through a system of position limits, an earnings at risk methodology, stop loss advisory limits, and other market sensitivity measures. Earnings at risk is designed to measure with 95% certainty the Company's exposure to changes in earnings resulting from price fluctuations in the trading portfolio over a 24 hour period. The trading portfolio's average pre-tax earnings at risk amounted to approximately $2.4 million and represented the combination of interest rate risk of $1.5 million and foreign exchange risk of $0.9 million. During 1996, pre-tax earnings at risk ranged from approximately $1.1 million to $4.5 million, consisting of a range of $0.6 million to $2.9 million for the interest rate risk component and a range of $0.2 million to $1.8 million for the foreign exchange risk component. During 1996, daily trading revenue averaged approximately $0.3 million, and ranged from a gain of approximately $2.5 million to a loss of approximately $1.9 million. During this period, daily trading revenue did not exceed the Company's earnings at risk estimates on any given day. ASSET/LIABILITY MANAGEMENT The Company's activities other than trading include lending, investing in securities, accepting deposits, raising money as needed to fund assets, and processing securities and other transactions. The market risk that arises from these activities is interest rate risk, and to a lesser degree foreign exchange risk. The Company actively manages interest-rate sensitivity (the exposure of net interest income to interest rate movements). The Company uses complex simulation models to adjust the structure of its assets and liabilities in response to interest rate exposures. The Company considers base line, high rate, and low rate scenarios to model interest rate sensitivity. The base line scenario is the estimated most likely path for future short-term interest rates. The base line scenario forecast in January 1997 assumes rates will rise. The "high rate" scenario assumes a 77 basis point increase from the base line scenario. The "low rate" scenario assumes the average rate declines 125 basis points under the base line scenario. Other scenarios are also reviewed to examine the impact of various interest rate shocks. The Company quantifies interest rate sensitivity by calculating the change in net interest income between the three scenarios over a 12 month measurement period. Net interest income as calculated by the earnings simulation model under the base line scenario becomes the standard. The measurement of interest rate sensitivity is the percentage change in net interest income calculated by the model under high rate versus base-line scenario and under low rate versus base-line scenario. The scenarios do not include the adjustments that management would make as rate expectations change. The Company's policy limit for fluctuations in net interest income resulting from either the high rate or low rate scenario is 6 percent. Based upon the January 1997 outlook, if interest rates were to rise to follow the high rate scenario, then net interest income during the policy measurement period would be positively affected by 0.93 percent. If interest rates were to follow the low rate scenario, then net interest income would be negatively affected by 2.75 percent (assuming management took no actions.) To manage foreign exchange risk, the Company funds foreign currency- denominated assets with liability instruments denominated in the same currency. The Company utilizes various foreign exchange contracts if a liability denominated in the same currency is not available or desired, and to minimize the earnings impact of translation gains or losses created by investments in overseas markets. 35 LOANS The following table shows the Company's loan distribution at the end of each of the last five years: 1996 1995 1994 1993 1992 In millions ---- ---- ---- ---- ---- Domestic Credit Card* $ 5,414 $ 8,727 $ 7,475 $ 5,024 $ 3,871 Other Consumer Loans 716 718 765 972 1,329 Commercial and Industrial Loans** 12,844 12,025 11,149 9,781 10,495 Real Estate Loans Construction and Land Development 139 118 125 160 188 Other, Principally Commercial Mortgages 2,645 2,741 2,743 2,626 2,822 Collateralized by Residential Properties 3,380 3,229 3,036 3,203 3,423 Banks and Other Financial Institutions 1,650 1,953 1,289 1,893 1,521 Loans for Purchasing or Carrying Securities 3,695 3,068 2,339 2,275 1,098 Lease Financings 1,688 1,503 1,308 1,038 1,033 Other 249 235 74 97 155 ------- ------- ------- ------- ------- Total Domestic 32,420 34,317 30,303 27,069 25,935 ------- ------- ------- ------- ------- Foreign Commercial and Industrial Loans 2,594 1,906 1,605 1,775 1,928 Banks and Other Financial Institutions 1,060 828 672 810 997 Government and Official Institutions 414 227 212 565 535 Other 1,996 1,383 1,161 1,188 947 ------- ------- ------- ------- ------- Total Foreign 6,064 4,344 3,650 4,338 4,407 ------- ------- ------- ------- ------- Total Loans 38,484 38,661 33,953 31,407 30,342 Less: Unearned Income 1,478 974 870 837 845 Allowance for Loan Losses 901 756 792 970 1,072 ------- ------- ------- ------- ------- Net Loans $36,105 $36,931 $32,291 $29,600 $28,425 ======= ======= ======= ======= ======= * Includes $3,636 million for 1995, $3,813 million for 1994, $3,529 million for 1993, and $2,737 million for 1992 related to the Union portfolio sold in 1996. ** The commercial and industrial loan portfolio does not contain any industry concentration which exceeds 10% of loans. 36 NONPERFORMING ASSETS The following table shows the distribution of nonperforming assets at December 31, 1996 and 1995: Dollars in millions 1996 1995 Change ----------------------------------- Category of Loans: Commercial Real Estate $ 20 $ 42 (52)% Other Commercial 90 75 20 Foreign 38 41 (7) Community Banking 65 67 (3) ---- ---- Total Nonperforming Loans 213 225 (5) Other Real Estate 41 72 (43) ---- ---- Total Nonperforming Assets $254 $297 (14) ==== ==== Nonperforming Asset Ratio 0.7% 0.8% Allowance/Nonperforming Loans 423.7 336.0 Allowance/Nonperforming Assets 355.3 254.5 Nonperforming assets declined to $254 million at December 31, 1996. The decrease in nonperforming assets during 1996 is attributable to charge-offs and writedowns of $27 million and paydowns, sales, and returns to accrual status of $175 million. The decrease was partially offset by $159 million of loans placed on nonperforming status. Credit card loans are not placed on nonperforming status, but are charged off when they become past due for certain periods. Additional information regarding the credit quality of the Company's credit card portfolio is provided in the sections "Provision and Allowance for Loan Losses" and "Sector Profitability". SECTOR PROFITABILITY The Company has an internal information system used for management purposes that produces sector performance data for Trust, and Securities and Other Processing, Retail Banking, Corporate Banking, and Other Sectors. A set of measurement principles has been developed to help ensure that reported results of the sectors track their economic performance. Sector results are subject to restatement whenever improvements are made in the measurement principles or organizational changes are made. Prior year results have been restated to reflect the transfer of custom banking from the Retail Sector to the Trust, and Securities and Other Processing Sector and middle market and certain real estate lending from the Retail Sector to the Corporate Sector. Changes were also made in the allocation of long-term debt and certain foreign branch costs. Net interest income is computed on a taxable equivalent basis. Support and other indirect expenses are allocated to sectors based on general guidelines. The provision for loan losses is based on net charge-offs incurred by each sector. Assets and liabilities are match funded. The Trust, and Securities and Other Processing Sector provides a broad array of fee based services. Trust includes personal trust and investment management. Securities processing includes services to both institutional issuers and investors. The Retail Banking Sector includes credit card financing, consumer lending, and residential mortgage lending. The Corporate Banking Sector is divided into special industries banking, U.S. commercial banking, middle market banking, international banking, and factoring. The Other Sector includes trading and investing activities, treasury services to other sectors, general administration, and the difference between 37 the recorded provision for loan losses and that allocated to the other sectors. The sectors contributed to the Company's profitability as follows: Trust, and Securities and Corporate Other Processing Retail Banking Banking ------------------ -------------------- ---------------- In millions 1996 1995 1994 1996 1995 1994 1996 1995 1994 ------------------ -------------------- ---------------- Net Interest Income on a Taxable Equivalent Basis $ 218 $196 $178 $1,136 $1,212 $967 $521 $527 $438 Provision for Loan Losses 1 1 1 461 290 202 (7) 62 126 Noninterest Income 1,148 849 760 170 163 214 251 266 240 Noninterest Expense 828 636 619 647 684 682 199 211 200 ------------------ -------------------- ---------------- Income before Taxes $ 537 $408 $318 $ 198 $ 401 $297 $580 $520 $352 ================== ==================== ================ Other Total ----------------- ---------------------- 1996 1995 1994 1996 1995 1994 ----------------- ---------------------- Net Interest Income on a Taxable Equivalent Basis $ 124 $133 $180 $1,999 $2,068 $1,763 Provision for Loan Losses 145 (23) (167) 600 330 162 Noninterest Income 561 213 75 2,130 1,491 1,289 Noninterest Expense 161 177 145 1,835 1,708 1,646 ----------------- ---------------------- Income before Taxes $ 379 $192 $277 $1,694 $1,521 $1,244 ================= ====================== In the Trust, and Securities and Other Processing Sector, securities processing fees increased 59% over last year to $655 million compared with $411 million in 1995 and $359 million in 1994. The increase in revenue reflects continued internal growth as well as the acquisition of the corporate trust business of NationsBank and the custody businesses of BankAmerica and J.P. Morgan. Internally generated growth was 14% led by ADRs, corporate trust, and government securities clearance. In 1996, fee revenue from issuer services, custody, and securities industry products was $223 million, $240 million, and $191 million compared with $154 million, $119 million, and $136 million in 1995. Fees from other processing increased 9% over last year to $206 million. Fees from trust and investment management grew 18% to $161 million, reflecting new business and generally strong markets. The rise in noninterest expense was principally due to salary and other expenses related to the acquisitions from J.P. Morgan, BankAmerica, and NationsBank. In 1995, all areas of securities processing increased led by ADRs, corporate trust, and master trust. Fees from the acquisition of NationsBank's corporate trust business were included in securities processing revenue for the month of December. In other processing, fees grew by 11% led by increases in funds transfer and trade finance revenues. Trust and investment management fees increased to $136 million in 1995 from $126 million in 1994 primarily due to higher market valuation of assets under management and the acquisition of Putnam. The decrease in net interest income in the Retail Banking Sector principally reflects the sale of approximately $3.4 billion in credit card receivables in the second quarter of 1996. The decrease in net interest income is also attributable to the decline in value of noninterest bearing sources of funds in a declining rate environment. Lower FDIC insurance premiums contributed to the decline in noninterest expense in the Retail Sector. The provision for loan losses in the Retail Banking Sector reflects increased charge-offs on Consumers Edge (registered trademark) accounts opened in 1994 and 1995. The 1996 provision also reflects $78 million of net charge-offs related to past due and bankrupt Union credit card accounts not sold. The table and discussion below provide information relating to the Company's credit card portfolio based on managed outstandings and excluding the Union portfolio: 38 1996 1995 1994 In millions ---- ---- ---- Number of Accounts 4.537 4.234 3.668 New Account Originations .658 1.124 1.071 Period End Balance $5,414 $5,078 $3,843 Loans Delinquent: 30-59 Days $ 93 $ 68 $ 48 60-89 Days 71 52 31 90 or More Days 214 145 61 ---- ---- ---- Total Loans Delinquent $378 $265 $140 Net Charge-offs $311 $174 $109 As a Percent of Average Loans Outstanding: Net Charge-offs 5.89% 4.18% 3.44% Accounts Delinquent More Than 30 Days 7.16 6.36 4.42 As a Percent of Period End Balances: Net Charge-offs 5.75 3.43 2.84 Accounts Delinquent More Than 30 Days 6.99 5.22 3.65 During 1996, the Company's credit card portfolio experienced rising delinquencies and charge-offs. Loans delinquent more than 30 days increased to $378 million from $265 million in 1995. Loans past due more than 90 days increased to $214 million from $145 million in 1995. Credit card loans delinquent more than 90 days have a significant risk of loss. This adverse trend in credit quality reflects an industry-wide deterioration in consumer credit performance as well as increased losses attributable to bankruptcies resulting from a 1994 change in the bankruptcy laws. Bankrupt accounts at December 31, 1996 were 78% higher than at December 31, 1995. At December 31, 1996 bankrupt accounts included $5 million that were not yet 30 days past due, up more than 56% from 1995. As a result of rising delinquencies related to its Consumers Edge (registered trademark) accounts, the Company reduced Consumers Edge (registered trademark) new account originations to 330 thousand in 1996 down from 851 thousand accounts in 1995 and 1.029 million accounts in 1994. Future levels of charge-offs are difficult to predict because they depend upon future economic trends, consumer behavior, growth in the portfolio, competition, and other factors. Some of these factors are beyond the control of the Company. The rising trend in credit card delinquencies and personal bankruptcies may result in future charge-offs exceeding historic levels. In 1995, the increase in net interest income in the Retail Sector principally reflected growth in the credit card business and the higher value of noninterest-bearing balances. Charge-offs increased in 1995 and net credit card charge-offs as a percentage of average managed outstandings excluding the Union portfolio increased to 4.18% from 3.44% in 1994. Maturities in the credit card securitization program shifted revenue from noninterest income to net interest income in 1995. Net interest income declined in the Corporate Banking Sector in 1996. The Special Industries and U.S. Commercial Banking sectors demonstrated growth with average outstandings increasing 8% from last year. The decrease in the provision reflects a net recovery primarily due to the settlement with the Republics of Croatia and Slovenia related to Yugoslavian debt in 1996. Income from the Company's offshore banking subsidiaries was lower in 1996 compared to 1995. In 1995, the increase in net interest income in the Corporate Banking Sector was attributable to increased loan demand, higher yields, and a decline in nonperforming assets. Loan demand was strong in 1995, particularly in corporate lending across the United States, in the middle market, and in all of the special industry lending areas. 39 The Other Sector reflects the difference between the total provision for loan losses and that charged off by the sectors. Noninterest income for 1996 includes a $400 million pre-tax gain on the sale of credit card loans. Pre-tax gains of $21 million and $22 million related to the sale of portions of the Company's interest in Wing Hang Bank, Ltd. were included in noninterest income in 1996 and 1994. Securities gains and foreign exchange and other trading activities decreased $10 million from 1995. In 1995, the Other Sector had an increase in revenues from trading and investing. Included in noninterest income for 1995 was a pre-tax gain of $58 million on the sale of the ARCS mortgage servicing. 40 QUARTERLY DATA UNAUDITED 1996 1995 --------------------------- --------------------------- Dollars in millions, Fourth Third Second First Fourth Third Second First except per share amounts Interest Income $ 883 $ 856 $ 910 $ 928 $ 969 $ 946 $ 981 $ 936 Interest Expense 393 389 422 419 446 435 477 445 ----- ----- ----- ----- ----- ----- ----- ----- Net Interest Income 490 467 488 509 523 511 504 491 ----- ----- ----- ----- ----- ----- ----- ----- Provision for Loan Losses 45 40 425 90 105 113 62 50 Noninterest Income 441 432 846 420 419 405 349 318 Noninterest Expense 480 455 457 444 446 423 424 415 ----- ----- ----- ----- ----- ----- ----- ----- Income Before Income Taxes 406 404 452 395 391 380 367 344 Income Taxes 154 155 174 152 150 146 141 131 Distribution on Trust Preferred Securities 2 - - - - - - - ----- ----- ----- ----- ----- ----- ----- ----- Net Income $ 250 $ 249 $ 278 $ 243 $ 241 $ 234 $ 226 $ 213 ===== ===== ===== ===== ===== ===== ===== ===== Net Income Available to Common Shareholders $ 247 $ 246 $ 276 $ 241 $ 239 $ 232 $ 223 $ 210 ===== ===== ===== ===== ===== ===== ===== ===== Per Common Share Data: Primary Earnings $0.61 $0.60 $0.68 $0.58 $0.58 $0.58 $0.57 $0.56 Fully Diluted Earnings 0.61 0.60 0.66 0.57 0.56 0.55 0.54 0.53 Cash Dividends 0.22 0.22 0.20 0.20 0.18 0.18 0.16 0.16 Stock Price High 35.88 30.13 26.94 27.31 24.38 23.25 21.69 16.75 Low 29.00 24.56 23.31 22.00 20.94 19.00 15.94 14.50 Ratios: Return on Average Common Shareholders' Equity 19.48% 19.63% 21.97% 18.86% 18.87% 19.28% 19.85% 19.98% Return on Average Assets 1.84 1.92 2.05 1.79 1.77 1.78 1.68 1.65 41 The Businesses of The Bank of New York SECURITIES AND OTHER PROCESSING The Bank of New York is the largest overall processor of securities offering a complete range of processing and operating services. These businesses are presented through nine securities processing product lines within the broader categories of: shareholder services, custody and the related securities lending activities, and broker/dealers and investment companies. Record keeping and reporting are common functions to each of these. Our other processing businesses include funds transfer, trade services and cash management. We have become a much larger global participant in both custody and corporate trust and operate these businesses from a single platform around the world with processing centers in New York, London, Brussels and Singapore. We are the number one provider of American Depositary Receipts, corporate trust and government securities clearance services and a market leader in our remaining businesses, including stock transfer, domestic and international custody, securities lending, unit investment trusts and mutual funds custody. We experienced internal growth in 1996 in all of these products, most in excess of 10%. High growth rates in these businesses are expected to continue with American Depositary Receipts, stock transfer, corporate trust and government securities clearance being particularly strong. We have also grown through acquisitions. In 1996 we agreed to acquire the corporate and municipal trust businesses of Riggs Bank and Wells Fargo & Company. We also successfully completed the conversion process for our acquisitions of the custody businesses of BankAmerica and J.P. Morgan, both announced in 1995. We have built the critical mass and invested in the technology that will enable us to maintain growth in all of our processing businesses. As the consolidation trend continues, we are well positioned to take advantage of strategic acquisitions as opportunities arise. SHAREHOLDER SERVICES American Depositary Receipts: Depositary receipts enable U.S. investors to invest in dollar-denominated equity and debt securities of foreign companies and government agencies, and provide the issuers of these securities access to the U.S. capital markets. Growth in this business has been very strong, driven by the increased globalization of the capital markets. Trading volume for listed depositary receipts has been growing at a compound annual rate of 22% since 1990 and this growth rate reached 24% in 1996. Trading volume on U.S. exchanges totaled 10.8 billion depositary receipts in 1996, valued at $341 billion. We continue to lead the industry, establishing 161 sponsored programs for companies in 35 countries in 1996, over 62% of all new public sponsored depositary receipt programs. For the last five years our share of all new programs has averaged over 60%. We now issue depositary receipts for more than 1,000 non-U.S. companies in over 50 countries, representing 57% of total sponsored programs. We believe that our leadership position is the result of four strategies: our ability to open and develop new markets, diversify our client base by market and by industry, win business from competitors and focus on service quality. Fees increased over 20% in 1996 and, with our backlog at a record level, we expect strong growth in the future. 42 Corporate Trust: As corporate trustee, the Bank provides registrar, custodial, escrow and paying agent services to corporate and government issuers of debt securities. Our corporate trust services include eight businesses providing a balanced platform for growth. We are capable of serving any customer needs. - -Asset-backed and mortgage-backed finance - -International finance - -Bankruptcy administration - -Corporate and municipal finance - -Derivative products - -Escrow services The Bank is a leading supplier of corporate trust services, handling approximately 40,000 issues with over $500 billion in principal amount outstanding. The number of issues increased 18% in 1996 while principal grew 11%. Growth in our existing book of business was strong with fees up over 20% in 1996. We achieved a leading position among our competitors being named trustee on over 1,600 corporate and municipal issues in 1996 amounting to more than $150 billion. In October we announced the acquisition of the corporate trust business of Riggs Bank and in December the corporate and municipal trust business of Wells Fargo & Company. These transactions will add 6,000 issues and $90 billion in principal. Overall fees grew 105% for the year. Stock Transfer: As stock transfer agent, we provide shareholder record keeping, dividend paying and reinvestment, proxy tabulation, and exchange services to corporate issuers of equity securities. Demand for individual record keeping services is increasing with numerous spin-offs creating new public equities. Also, many companies that had performed these services in-house are turning to outsourcing. Add-on services such as stock option plans, dividend reinvestment plans, employee stock purchase plans, odd-lot buybacks, tenders, and exchange offers have expanded and diversified our revenue stream. Quality is now a key driver of revenue growth in stock transfer. In 1996 we incorporated image processing into our operations, a technology which increased processing speed, improved service quality and added to our capacity. We are the only transfer agent with three investor relations phone centers, in New York, New Jersey and Texas. We also have the largest mailing operation in the stock transfer industry, located in New Jersey. Based upon customer surveys, an independent study ranked the quality of our services number one among the leading stock transfer agents in 1996. This is the second consecutive year that we have achieved this recognition. During 1996 our client base grew 28% in both the number of companies and the number of shareholder accounts. We now perform these services for more than 450 companies with over 10 million shareholders. Fees grew 12% in 1996 with the expanded customer base providing a solid platform for future growth. THE BANK IS AN INTERNATIONALLY RECOGNIZED SECURITIES CUSTODIAN We offer a comprehensive array of services through a worldwide settlement network. Our services for a diversified client base include custody, settlement of trades, income collection, corporate action processing, proxy management, pricing and performance analysis for securities portfolios. Our reporting systems allow us to tailor information to meet the specific requirements of our custody customers. In addition, we provide our custody clients with securities lending, cash management, foreign exchange and credit services. 43 Custody: We are a leading custodian, both in the U.S. and around the world, and serve a variety of customers including insurance companies, central banks, commercial banks and government agencies. We also provide custody and trustee services to clients with multiple investment portfolios such as public funds, corporate pension funds, Taft-Hartley funds, foundations and endowments. Services for these clients include daily portfolio valuations, enhanced regulatory compliance reporting and on-line portfolio performance analysis. In U.S. Custody, we serve our domestic clients from strategic locations across the country. In 1996 we introduced a variety of custody related functions to the Bank's Office Manager (registered trademark), an interactive communications system that uses the latest technology to deliver integrated trade communication, reporting and portfolio analytic capabilities. Early in 1996 we completed the conversion of the BankAmerica custody business which was primarily domestic but included some global clients. This acquisition added significantly to our size. Already a leader in International Custody, we enhanced our capabilities further through the acquisition of the custody business of J.P. Morgan, greatly expanding our presence in Europe and Asia. The conversion of these clients to our systems was completed ahead of schedule in December. Through the J.P. Morgan transaction we acquired its Brussels operations center which has become our primary point of operations in Europe. We now service all the major international markets from processing centers in New York, London, Brussels and Singapore and are one of the few organizations that operates from a single processing system worldwide. We have one of the largest networks of subcustodians in the world enabling us to serve 81 markets; 15 of which were added in 1996. Total cross-border assets now exceed $350 billion. On a combined basis, internal growth in our custody businesses was strong as we added 84 new clients in 1996 unrelated to acquisitions. At year end, total assets under custody exceeded $3 trillion. Fees from these businesses more than doubled in 1996, increasing 123%. Securities Lending: In conjunction with its custody businesses, the Bank operates one of the largest securities lending programs in the world. Lending securities that are held in custody, or that are otherwise available to us, increases the yield on customers' portfolios by investing the cash collateral exchanged for those securities. Our services include loan solicitation, negotiation of terms, transaction settlement, loan administration, credit analysis of borrowers, and receipt and investment of cash collateral. We operate this business through our offices in New York, London and Hong Kong. Fees increased 56% in 1996. WE ARE A LEADING PROVIDER OF SERVICES TO BROKER/DEALERS AND INVESTMENT COMPANIES Government Securities Clearance: We continue to be the market leader in the clearance of U.S. government and certain other government agency securities as well as in the administration of tri-party repurchase agreements. In the former role we serve as the agent for the movement of securities from the U.S. Treasury and other government agency issuers to the dealer community and for the movement of securities among dealers. In tri-party repurchase programs, the Bank acts as an intermediary between dealers and investors, holding the securities in custody until the termination of the repurchase agreement. We provide valuation and segregation services as long as the securities held as collateral are under our custody management. In 1996 we processed 9,000 tri-party contracts, an increase of 12% over 1995. We continued to see significant growth in our global collateral management service for international investors. On an average day we cleared over 60,000 transactions representing approximately $600 billion of securities and held $180 billion of tri-party collateral under management. 44 Revenue growth in our core business continued strong at over 14%. With the J.P. Morgan and BankAmerica acquisitions included, fees increased 68% in 1996. Unit Investment Trust: We are the second largest provider of trustee services for unit investment trusts, which are passive securities portfolios created by broker/dealer sponsors. Our role as trustee is to provide portfolio custody, accounting and administration services as well as transfer agency and unit-holder relations services. In March 1996 we acquired 580 unit investment trusts sponsored by Everen Securities, Inc. Overall, at year end we were trustee for approximately 4,500 trusts with assets of over $32 billion. Fees rose 9% in 1996. Mutual Funds Custody: We are one of the largest custodians for mutual fund management companies, providing domestic and global custody, portfolio accounting and pricing, and fund administration services. In total, we act as custodian for well over 1,000 mutual funds for 83 management companies. We have an office in Dublin, Ireland for servicing non-U.S. registered mutual funds which are sold to non-U.S. citizens. We also provide our stock transfer service for closed end mutual funds. During 1996 we achieved 11 new fund manager appointments and increased the number of portfolios by 279. Total assets under custody rose 18% to $531 billion at year end. Fees increased 23% in 1996. OTHER PROCESSING Our other processing products serve financial institutions and corporations around the world as well as middle market companies and small businesses located in the greater New York metropolitan area. Funds Transfer: This service involves the electronic payment of U.S. dollars within the U.S. and around the world on behalf of our customers for the settlement of financial transactions. On an average day we clear over 80,000 transactions with a dollar volume of $300 billion for domestic and foreign financial institutions, corporations and individuals. Primarily an international business, we interface with financial institutions throughout the world, including our network of over 2,300 correspondent banks. Our level of activity among U.S. commercial banks has risen steadily over the past several years. We have become a leading funds transfer bank in the United States. Fees increased 15% in 1996. Trade Services: The Bank provides a broad range of trade services for financial institutions and corporations through its global network of branches and representative offices. Our major product is letters of credit, which expedite payment for customers' imports and exports. Asia, Latin America, the Middle East and Europe are our primary foreign markets and are serviced through ten processing centers around the world. Traditionally, our involvement in trade finance transactions has been with U.S. imports and exports. We now act as an intermediary for correspondents in non-U.S. trade with over 40% of our 1996 revenues coming from trade transactions between foreign countries. Fees were down slightly in 1996 due to market conditions. We expect improving conditions will lead to a rebound in fees in 1997. 45 Cash Management: We offer a full range of cash management services to corporate and institutional customers, primarily located in the United States. This business includes the receipt and disbursement of cash along with sophisticated reporting. The Bank's position is particularly strong among middle market companies and small businesses in the greater New York metropolitan area, financial institutions of all types and large corporations for which we serve as a lead bank. We have seen strong growth in electronic payment and information reporting. In 1996 we launched a series of new products employing the most sophisticated technology available in the market today. The Bank of New York Office Manager (registered trademark) is a Windows (registered trademark) based family of services providing the customer with integrated access to the Bank's electronic payment, information reporting, and check imaging services. This product has proven to be highly popular. We also enhanced our electronic data interchange capabilities and developed a PC-based remote banking product designed to meet the needs of small businesses. Revenues increased 8% for the year. TRUST, INVESTMENT AND PRIVATE BANKING The Bank of New York has provided private banking services since it was founded. Today, we offer individuals and institutions a broad range of investment management, custody, estate and financial planning, trust and estate settlement, and income tax preparation services, provided through offices in New York, New Jersey, Connecticut and Florida. We work with some of the nation's largest corporations to manage liquidity and with their senior executives to manage their personal financial situations. We are among the largest bank managers of discretionary assets in the nation. Total assets under management grew by 17% during 1996 and now exceed $54 billion, the result of a very successful investment strategy, generally strong stock and bond markets, and an effective new business effort. The Bank's Private Banking, International Private Banking, Personal Trust and Personal Asset Management divisions provide high net worth individuals in the U.S. and around the world with a full range of services in banking, investment management, trust and estate, and personal financial planning. We have also developed a family of customized mortgage products for these clients. A key strategy is the interaction within the Bank to leverage existing relationships with other areas. For instance, we have private banking groups that address the needs of executives of corporations we serve in our Special Industries and U.S. Corporate Banking areas. Our Tax-Exempt Bond Management service assists individuals and corporations in maximizing after-tax returns on their municipal bond portfolios. This service is delivered by a dedicated team who combine the disciplines of municipal bond research, trading and portfolio management to provide better returns by taking advantage of inefficiencies that exist in the tax-exempt bond market. Fees again reached a record level in 1996. The full range of Institutional Investment services we provide includes active management for fixed income, equity and balanced accounts, passive investment products, commingled funds for ERISA accounts and short-term money management. Our customers include corporations, public funds, Taft-Hartley clients, foundations and endowments and other domestic and international institutions. A highlight in 1996 was the outstanding performance of the Bank's Collective Trust Emerging Growth Fund which returned over 30%. Our Short-Term Money Management service provides institutional clients with a liquidity management vehicle that maximizes returns on short-term funds on a cost effective basis. We customize this product to meet each client's specific needs. Fees from this service rose 30% in 1996. Overall, fees from our trust, investment and private banking activities were up a strong 18%. 46 CORPORATE BANKING The Bank of New York serves the global banking needs of domestic and multinational corporations and institutions. We focus on lending relationships with companies where we can position ourselves as a lead bank. Our leadership position in securities and other processing provides a unique niche enabling us to meet our corporate customers' securities processing, cash management, trade finance, foreign exchange, and other banking and transactional needs. CORPORATE BANKING TARGETS THESE MARKET SEGMENTS Special Industries Banking: The Bank of New York is a leading provider of credit and operating services to the following industries. - -Media and entertainment - -Telecommunications - -Securities - -Energy and public utilities - -Financial institutions - -Insurance - -Marine transportation - -Real estate - -Retailing - -Mortgage banking - -Government banking We bring a depth of experience and expertise to these industries that provides added value for our clients. We are a primary lender, arranger and syndicator of bank loans to the rapidly expanding media, entertainment and telecommunications industries. Here, we experienced our highest volume ever in 1996, underwriting 29 credits as agent totaling $24.5 billion. We currently act as agent or co-agent in these areas on 92 transactions aggregating $100 billion. Our energy division also performed well with average loan increasing by 15%. Overall, Special Industries average loan volume grew a strong 9%. U.S. Commercial Banking: This area remains a key strategic focus of the Bank as we pursue a targeted marketing effort to the nation's largest corporations, primarily located in nine major urban markets. Credit is an important part of our efforts here and did well in 1996 with average loan volume expanding by 8%. Importantly, these corporations are major existing and future users of all of our securities processing, funds transfer, trade finance, foreign exchange, and cash management services. The establishment of broad ranging and integrated relationships with this pool of customers is essential to our continued overall success. Middle Market Banking: We offer middle market customers throughout the New York metropolitan area, Connecticut and New Jersey a broad range of sophisticated banking services including traditional lending, asset-based finance, cash management, securities processing, trade finance, leasing and investment banking. Average loan volume grew 7% in 1996. International Banking: The Bank of New York has a network of 29 branches and representative offices in 26 foreign countries in addition to the network of over 2,300 foreign correspondent banks. This international franchise provides us with a marketing platform for all our processing businesses including American Depositary Receipts, global custody, funds transfer, trade finance, foreign exchange and securities lending. We continue to benefit from the increased globalization of the capital markets and are well positioned for a continuation of this trend. 47 Factoring: BNY Financial Corporation is the second largest factor in the U.S. and the largest in Canada. In addition to factoring, we provide accounts receivable management and secured lending services. Major customer diversification has been accomplished in this business in recent years. The apparel industry, historically two-thirds of our volume, today accounts for 43% as a result of our diversifying into other industries. Operating from offices in New York, Boston, Atlanta, Charlotte, Los Angeles, Toronto and Montreal we have achieved a geographic diversification in our client base as well. In March 1996 we acquired the factoring business of Midlantic Bank. Factoring volume was $11.2 billion in 1996, similar to the volume in 1995. Earnings from this operation continued the strong growth trend of the last several years, rising 12%. Asset Based Lending: The Bank of New York Commercial Corporation provides secured lending to mid-size companies. Our customers include retailers, distributors, manufacturers and service companies. Net income in 1996 was down slightly. Capital Markets: BNY Capital Markets, Inc., established in 1996 under Section 20 of the Glass-Steagall Act, provides a wide array of financial services to corporate clients. Services include the structuring and syndication of credit facilities, private placement of debt and equity securities, merger, acquisition and restructuring advisory services, fairness opinions and valuations. In 1996 we ranked seventh among major banks in acting as agent or co-agent on credit facilities. We currently act as administrative agent on 182 broadly syndicated loans, of which 24 were new appointments in 1996. In addition, the company has a Municipal Securities Group which specializes in underwriting and dealing in investment grade tax-exempt securities for both high net worth individuals and institutional investors. RETAIL BANKING The Bank of New York is the leading retail bank in the suburban New York area and is a source of stable deposits for the Bank as a whole. Through our extensive branch network we offer a broad range of products and services for consumers and small businesses. Our branch network comprises 375 offices serving 25 counties of New York, New Jersey and Connecticut. In 1996 the strongest segment of our consumer loan portfolio was EquityLink, the Bank's home equity credit line. As a result of the highly successful promotion of our Prime for Life pricing, sales of this product increased sharply. This special pricing continues in 1997. Approximately 40% of our personal checking households now take advantage of our Priority Value Banking service which, by linking accounts, enables them to receive our most favorable loan and savings rates and offset account service charges. We continue to streamline our lending process for small businesses and offer credit approvals on most applications in under three days. We have increased our direct marketing efforts to small businesses both through the branch system and a small business telephone sales unit. In an effort to reach as many customers and prospects as possible and to provide the convenient banking that consumers demand we will establish two new alternative service delivery methods. Our first full service branches located in supermarkets will open in the second quarter of 1997 with more in the near future. In 1997 we will introduce Direct 24 PC banking enabling consumers and small businesses to access account information, transfer balances and pay bills through their personal computers. The Bank's 24 hour telephone service will also provide the ability to pay bills by telephone. In 1996 our Personal Investment Centers had increased sales volume of over 48 50%, and the service was expanded into Connecticut. Each center is staffed with licensed investment representatives and offers a wide variety of mutual funds as well as fixed rate and variable rate annuities. Among their product offerings are our own BNY Hamilton Funds. BNY Mortgage Company provides financing for one to four family homes, condominiums and cooperative apartments through ten loan production offices in New York, New Jersey and Connecticut. The company offers a broad range of programs serving all market segments from the first time home buyer to the large mortgage borrower. We are the leading originator of New York State-backed loans for first-time home buyers and we provide other affordable lending products to meet housing finance needs within the New York metropolitan region. CREDIT CARDS The Bank of New York (Delaware) services over 4.5 million credit card accounts with managed credit card receivables outstanding of $5.4 billion at the end of 1996. These balances were down from a year ago as in June the contract we had to issue and manage the AFL-CIO Union Privilege Card was terminated and the portfolio was sold. We received a gain of $400 million from the sale. At the same time we established a loan loss reserve of $350 million as a conservative measure to offset the rising delinquencies and charge-offs in the remaining portfolio. We continue to be pleased with the growth of our highly successful co-branded cards issued in partnership with Toys-R-Us (registered trademark) and Stop & Shop (registered trademark). The Toy-R-Us Visa (registered trademark) card is a no annual fee credit card that rewards customers with free toys and free clothes. Customers can also earn points toward discounted cruises, airline tickets and hotel stays. The Stop & Shop (registered trademark) SupeRewards Master Card (registered trademark), with no annual fee, was the first credit card issued by a leading supermarket chain enabling customers to earn free airline tickets and vacation rewards. We continue to look for additional co-branding partnerships. The MasterCard (registered trademark) Business Card provides small businesses with a valuable cash management tool. This card affords managers greater control over purchasing by allowing them to pre-authorize employee spending limits and to pre-approve vendors. The Consumers Edge (registered trademark) product line, our primary offering, consists of a variety of cards, all with no annual fees and lower interest rates. FINANCIAL MARKET SERVICES Financial Market Services represents the Bank's trading and investing activities and our foreign exchange and interest-rate management products. We conduct these activities for customers as well as for the Bank's own account. Global Risk Management Services: In foreign exchange, we offer a broad array of services in over 80 currencies through our global network of trading rooms in New York, Europe, and Asia. Revenues rose 36% in 1996. In February we signed an agreement with Susquehanna Partners to provide a variety of foreign exchange risk management products allowing us to offer a multi-disciplinary approach to currency risk management. We provide a full range of hedging and yield-enhancement strategies tailored to the needs of clients. In 1997 we expanded the agreement to include interest rate hedging products to help corporate treasurers and investment managers control and reduce their exposure to interest rate risk. These products can be transacted in U.S. dollars as well as selected foreign currencies. Through BNY Overlay Associates we offer an effective hedging tool assisting internationally-diversified portfolio managers in identifying and managing currency risk as a separate asset class. EX-21 15 EXHIBIT 21 EXHIBIT 21 Subsidiaries Of The Registrant Significant subsidiaries of The Bank of New York Company, Inc. are as follows: The Bank of New York, a New York State Chartered Bank BNY Holdings (Delaware) Corporation, a Delaware Corporation The Bank of New York (Delaware)*, a Delaware State Chartered Bank - ------------------------------- * Subsidiary of BNY Holdings (Delaware) Corporation EX-23 16 EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the following Registration Statements, or most recent post-effective amendments thereto, filed prior to March 26, 1997, of our report dated January 27, 1997, with respect to the consolidated financial statements of The Bank of New York Company, Inc. included in the 1996 Annual Report to Shareholders incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1996. On Form S-3: On Form S-8: No. 33-50333 No. 33-56863 No. 33-61957 No. 33-57670 No. 333-03811 No. 33-62267 No. 333-15951 No. 2-95764 No. 333-15951-01 No. 33-20999 No. 333-15951-02 No. 33-33460 No. 333-15951-03 No. 333-15951-04 No. 333-15951-05 On Form S-4: No. 33-59225 No. 33-25805 \s\ Ernst & Young LLP New York, New York March 26, 1997 EX-23 17 EXHIBIT 23.2 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statements of The Bank of New York Company, Inc. listed below of our report dated February 26, 1996, appearing in the 1995 Annual Report to Shareholders which is incorporated by reference in this Annual Report on Form 10-K of The Bank of New York Company, Inc. for the year ended December 31, 1995. On Form S-3: No. 33-50333 No. 33-61957 No. 333-03811 No. 333-15951 No. 333-15951-01 No. 333-15951-02 No. 333-15951-03 No. 333-15951-04 No. 333-15951-05 On Form S-4: No. 33-59225 No. 33-25805 On Form S-8: No. 33-56863 No. 33-57670 No. 33-62267 No. 2-95764 No. 33-20999 No. 33-33460 \s\ Deloitte & Touche LLP New York, New York March 27, 1997 EX-99 18 EXHIBIT 99 EXHIBIT 99 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of The Bank of New York Company, Inc. New York, New York We have audited the accompanying consolidated balance sheets of The Bank of New York Company, Inc. and subsidiaries (the "Company") as of December 31, 1995, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the two years in the period then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Bank of New York Company, Inc. and subsidiaries as of December 31, 1995, and the results of their operations and their cash flows for each of the two years in the period then ended in conformity with generally accepted accounting principles. \s\ Deloitte & Touche LLP New York, New York February 26, 1996 EX-27 19 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from the Bank of New York Company, Inc.'s Form 10-K for the period ended December 31, 1996 and is qualified entirely by reference to such Form 10-K. 0000009626 THE BANK OF NEW YORK COMPANY, INC. 1,000,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 6,032 1,387 562 1,547 3,883 1,170 1,127 37,006 901 55,765 39,343 5,881 1,983 1,816 0 112 3,332 1,683 55,765 3,073 277 233 3,583 1,152 1,622 1,961 600 97 1,835 1,656 1,020 0 0 1,020 2.47 2.41 4.35 213 247 0 0 756 580 125 901 656 38 207 Per common share data has been adjusted to reflect the effect of the 2-for-1 common stock split effective July 19, 1996. Prior Financial Data Schedules have not been restated for this stock split.
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