EX-13 8 0008.txt EXHIBIT 13 1 EXHIBIT 13 2000 Annual Report to Shareholders 2 SELECTED FINANCIAL DATA
Dollars in millions, except per share amounts 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Net Interest Income $ 1,870 $ 1,701 $ 1,651 $ 1,855 $ 1,961 Noninterest Income 3,109 3,493 2,283 2,137 2,130 Provision for Credit Losses 105 135 20 280 600 Noninterest Expense 2,510 2,107 1,928 1,874 1,835 Net Income 1,429 1,739* 1,192 1,104 1,020 Net Income Available to Common Shareholders 1,429 1,739* 1,192 1,095 1,010 Return on Average Assets 1.85% 2.60%* 1.89% 1.86% 1.90% Return on Average Common Shareholders' Equity 26.08 34.00* 24.25 22.13 19.98 Common Dividend Payout Ratio 33.87 25.03* 33.84 34.13 32.50 Per Common Share Basic Earnings $ 1.95 $ 2.31* $ 1.59 $ 1.44 $ 1.30 Diluted Earnings 1.92 2.27* 1.53 1.36 1.20 Cash Dividends Paid 0.66 0.58 0.54 0.49 0.42 Market Value at Year-End 55.19 40.00 40.25 28.91 16.88 Averages Securities $15,764 $ 7,545 $ 7,154 $ 5,722 $ 5,343 Loans 39,262 38,881 38,340 36,577 36,698 Total Assets 77,241 66,777 63,141 59,242 53,649 Deposits 54,755 46,564 42,262 39,910 36,599 Long-Term Debt 2,884 2,306 1,972 1,815 1,870 Minority Interest - Preferred Securities 1,500 1,487 1,233 830 26 Shareholders' Equity: Preferred 1 1 1 103 113 Common 5,479 5,113 4,915 4,947 5,055 At Year-End Allowance for Credit Losses as a Percent of Loans 1.70% 1.58% 1.66% 1.82% 2.44% Tier 1 Capital Ratio 8.60 7.51 7.89 7.92 8.34 Total Capital Ratio 12.92 11.67 11.90 11.97 12.78 Leverage Ratio 7.49 7.20 7.46 7.59 8.70 Common Equity to Assets Ratio 7.98 6.88 8.58 8.34 8.99 Total Equity to Assets Ratio 7.98 6.88 8.58 8.34 9.19 Common Shares Outstanding (in millions) 739.926 738.770 771.318 747.670 770.544 Employees 18,861 17,735 17,157 16,494 16,158 The per common share amounts and common shares outstanding have been restated to reflect the 2-for-1 common stock splits effective July 24, 1998 and July 19, 1996. * These results reflect the $1,020 million gain on the sale of BNY Financial Corporation ("BNYFC"), as well as the $124 million liquidity charge related to the sale of loans. On a normalized basis, 1999 results were: Net Income of $1,243 million, Net Income Available to Common Shareholders of $1,243 million, Return on Average Assets of 1.92%, Return on Average Common Shareholders' Equity of 25.50%, Common Dividend Payout Ratio of 35.01%, Basic Earnings Per Share of $1.69 per share and Diluted Earnings Per Share of $1.66 per share. See Normalized Earnings.
3 Management's Discussion and Analysis of the Company's Financial Condition and Results of Operations ------------------------------------------------------------------------------ SUMMARY OF RESULTS The Bank of New York Company, Inc.'s (the "Company") actual results of future operations may differ from those estimated or anticipated in certain forward- looking statements contained herein. When used in this report, the words "plan", "expected", "estimated", "anticipated", "believe", and similar expressions identify forward looking statements. Readers are cautioned that forward looking statements should be read in conjunction with the Company's Form 10-K disclosure under the heading "Forward Looking Statements". For the year 2000, the Company reported net income of $1,429 million or $1.92 per diluted share, compared with $1,243 million or $1.66 per diluted share on a normalized basis in 1999 and $1,192 million or $1.53 per diluted share in 1998. For 1999, actual net income was $1,739 million or $2.27 per diluted share. The 1999 actual results reflect an after-tax gain of $573 million or 75 cents per share on the sale of BNY Financial Corporation ("BNYFC"), and certain charges related to the decision to exit a portfolio of credits on an accelerated basis. For further discussion of the normalized results of 1999, see Normalized Earnings. For the year 2000, the Company continued to differentiate itself through consistent and sustainable revenue and earnings growth. These results are driven by the Company's long-term strategic focus on high-growth, fee-based businesses and leading technologies. The Company's continued focus on fee- based businesses resulted in noninterest income growing to 62% of total revenue, up from 61% last year. Securities servicing fee revenues were up 33% to a record $1,650 million in 2000 compared with $1,245 million in 1999. Fee revenue was strong across all product lines with particular strength in global custody, depositary receipts ("DRs"), unit investment trust ("UIT"), and mutual funds as well as global execution and clearing services. Fee revenue also benefited from the acquisition of the Royal Bank of Scotland Trust Bank ("RBSTB") on October 31, 1999. The Company continues to be the world's leading custodian with assets of over $7 trillion, including $2 trillion of cross- border custody assets at year-end. Private client services and asset management fees were up 21% to $296 million in 2000, led by strong business flows in the BNY Hamilton Funds, as well as by the acquisitions of Ivy Asset Management Corp. and Estabrook Capital Management, Inc. Increased cross- selling within the securities servicing client franchise and rapid growth in the Company's foreign exchange e-commerce initiative drove foreign exchange and other trading revenues up 38% to $261 million this year compared with $189 million last year. In 2000, net interest income on a taxable equivalent basis was $1,924 million compared with $1,745 million in 1999, benefiting from the acquisition of RBSTB, which brought approximately $10 billion in highly liquid, short-term assets and liabilities. The provision for credit losses decreased to $105 million from $135 million in 1999. In 2000, return on average common equity was 26.08% compared with 25.50% on a normalized basis in 1999 and 24.25% in 1998, while return on average assets was 1.85% compared with 1.92% on a normalized basis in 1999 and 1.89% in 1998. For 1999, actual return on average common equity was 34.00% and return on average assets was 2.60%. The 1999 ratios reflect the gain on the sale of BNYFC. Tangible diluted earnings per share (earnings before the amortization of goodwill and intangibles) were $2.03 per share in 2000 compared with $1.75 per share on a normalized basis in 1999 and $1.62 per share in 1998. For 1999, actual tangible earnings per share were $2.37 per share. Tangible return on average assets was 2.00% in 2000 compared with 2.08% on a normalized basis in 1999 and 2.06% in 1998. Tangible return on average common equity was 40.00% in 2000 compared with 36.76% on a normalized basis in 1999 and 37.13% in 1998. For 1999, actual tangible return on average assets was 2.78% and tangible return on average common equity was 50.23%. 4 In 1999, securities servicing revenues were up 24% reaching $1,245 million, reflecting particular strength in global custody, mutual funds, securities lending, DRs, and execution services. Market share gains from new business wins, as well as the RBSTB acquisition, resulted in assets under custody reaching $6.3 trillion at year-end. Private client services and asset management fees were up 17% to $244 million in 1999, led by strong results from personal trust, personal asset management, and retail investment products. Higher transaction flows in the Company's European securities servicing business drove foreign exchange and other trading revenues up 12% to $189 million this year compared with $170 million in 1998. In 1999, net interest income on a taxable equivalent basis was $1,745 million compared with $1,709 million in 1998. The provision for credit losses increased to $135 million from $20 million and the Company recorded a liquidity charge to noninterest income of $124 million associated with the decision to exit a portfolio of credits on an accelerated basis. In 1998, securities servicing fee revenues grew by 27% reaching $1 billion for the year which, when combined with 15% growth in private client services and asset management fees, pushed noninterest income to 58% of revenues. Principal drivers for securities servicing were continued strong growth in securities transaction volumes, augmented by record new business wins and the introduction of new products. Revenue growth was led by DRs, domestic and global custody, securities lending, corporate trust, UIT, and execution services. Private client services and asset management fees were $208 million for 1998, an increase of 15% over 1997, as a result of focused and aggressive new business efforts. Keeping pace with the substantial increase in the Company's processing businesses, foreign exchange and other trading revenues grew to $170 million for 1998 compared with $125 million in 1997, reflecting the customer driven nature of this business. In 1998, net interest income on a taxable equivalent basis was $1,709 million compared with $1,890 million in 1997 and the provision for credit losses was $20 million. NONINTEREST INCOME Noninterest income is provided by a wide range of securities servicing, global payment services, private client services and asset management, other fee- based services, and trading activities. Revenues from these activities were $3,109 million in 2000, compared with $3,493 million in 1999 and $2,283 million in 1998. On a proforma basis, reflecting the sale of BNYFC and excluding the liquidity charge on the accelerated disposition of loans, noninterest income for 1999 was $2,532 million. Securities servicing fees were $1,650 million, $1,245 million, and $1,000 million in 2000, 1999, and 1998. The 33% increase in securities servicing fees from 1999 reflects strong internal growth and the acquisition of RBSTB. Cash servicing fees, principally funds transfer, cash management, and trade finance, were $261 million in 2000, $274 million in 1999, and $256 million in 1998. The decline in cash servicing fees reflects both lower trade finance fees as well as lower cash management and funds transfer fees due to customers' use of compensating balances in lieu of fees in a rising rate environment. Within global payment services, cash management and funds transfer revenues were up 8% in 2000. This growth was primarily due to strong increases in funds transfer with domestic financial service companies, increased cash management revenue associated with CA$H-Register PlusTM, and new U.S. dollar clearing outsourcing contracts. Revenues from the trade finance business were down compared to 1999 primarily due to the sale of BNYFC and reduced pricing, driven by the improved risk profiles of select Asian and Latin American markets. Private client services and asset management fees were $296 million in 2000, $244 million in 1999, and $208 million in 1998. The 21% increase in private client services and asset management from 1999 reflects strong business flows in the BNY Hamilton Funds, as well as the acquisitions of Ivy Asset Management Corp. and Estabrook Capital Management, Inc. 5 Service charges and fees were $364 million in 2000, compared with $338 million in 1999 and $326 million in 1998. For further discussion of fee revenue, see Segment Profitability. Securities gains totaled $150 million, $199 million, and $175 million in 2000, 1999, and 1998. Other noninterest income was $388 million in 2000, $1,193 million in 1999, and $318 million in 1998. Profits from foreign exchange and other trading activities were $261 million, $189 million, and $170 million in 2000, 1999, and 1998. In 2000, other income includes a $26 million payment associated with the termination of a securities clearing contract. In 1999, other noninterest income included a $1,020 million pre-tax gain on the sale of BNYFC and $124 million liquidity charge on loans available-for-sale. In 1998, other noninterest income included a $29 million pre-tax gain on the sale of the Company's property at 48 Wall Street. NET INTEREST INCOME Dollars in millions 2000 1999 1998 ------------------- ---- ---- ---- Net Interest Income on a Taxable Equivalent Basis $1,924 $1,745 $1,709 Net Interest Rate Spread 1.93% 2.19% 2.22% Net Yield on Interest Earning Assets 2.96 3.11 3.24 For 2000, net interest income on a taxable equivalent basis amounted to $1,924 million compared with $1,745 million in 1999. Average earning assets were $64.9 billion up from $56.2 billion in 1999. The increase in average assets is primarily attributable to the acquisition of RBSTB. Average loans were $39.3 billion in 2000 compared with $38.9 billion in 1999. The net interest rate spread was 1.93% in 2000 compared with 2.19% in 1999, while the net yield on interest earning assets was 2.96% in 2000 and 3.11% in 1999. The expansion of the Company's securities servicing, global payment services, and asset management businesses continues to generate increased levels of deposits. These additional deposits were invested in high quality liquid assets which increased net interest income, although lowering the net interest rate spread and net yield. For 1999, net interest income on a taxable equivalent basis amounted to $1,745 million compared with $1,709 million in 1998. Average earning assets were $56.2 billion up from $52.8 billion in 1998 reflecting growth in highly liquid, lower yielding assets generated by the Company's securities servicing businesses and the acquisition of RBSTB. Average loans were $38.9 billion in 1999 compared with $38.3 billion in 1998. Growth in the loan portfolio in 1999 was partially offset by the sale of BNYFC. The net interest rate spread was 2.19% in 1999 compared with 2.22% in 1998, while the net yield on interest earning assets was 3.11% in 1999 and 3.24% in 1998. The increase in net interest income and the decline in spread and yield from 1998 were principally caused by growth in highly liquid but lower yielding assets. The yield was also impacted by the Company's stock buyback program. In 1998, net interest income on a taxable equivalent basis amounted to $1,709 million compared with $1,890 million in 1997. Average earning assets were $52.8 billion up from $48.5 billion in 1997 reflecting the investment of increased customer driven deposits from the Company's securities servicing businesses as well as increased corporate lending. Average loans were $38.3 billion in 1998 compared with $36.6 billion in 1997. The increase in loans was primarily in the special industries lending divisions and asset based lending. The net interest rate spread and yield were 2.22% and 3.24% in 1998 compared with 2.88% and 3.89% in 1997. The decrease in net interest income, net interest rate spread, and yield from 1997 reflect the impact of the sale of the Company's credit card operations and the financing of the stock buyback program. 6 Interest income would have been increased by $9 million, $8 million, and $10 million if loans on nonaccrual status at December 31, 2000, 1999, and 1998 had been performing for the entire year. NONINTEREST EXPENSE AND INCOME TAXES Total noninterest expense was $2,510 million in 2000, $2,107 million in 1999, and $1,928 million in 1998. Salaries and employee benefits increased 19% to $1,488 million in 2000. Net occupancy and furniture and fixture expenses increased by a combined $31 million to $292 million. Other expenses increased by 23% in 2000 to $730 million. The increase in expenses in 2000 was attributable to acquisitions, technology investment, and variable costs associated with increased trading volumes. Technology spending was $493 million in the year 2000, up 23% from $400 million in 1999 and $360 million in 1998. Total noninterest expense increased 9% in 1999 compared with 1998. The increase in expenses in 1999 was attributable to acquisitions, particularly RBSTB, growth in the Company's fee-based businesses and increased investment in technology. Offsetting these factors was the sale of BNYFC. On a proforma basis, reflecting the sale of BNYFC, noninterest expense for 1999 was $2,054 million. Salaries and employee benefits increased 6% to $1,251 million in 1999. Net occupancy and furniture and fixture expenses increased by a combined $9 million to $261 million in 1999. Other expenses increased by 19% in 1999 to $595 million. Noninterest expense for 1999 includes $20 million related to making computer systems Year 2000 compliant. The efficiency ratio was 51.3% in 2000 compared with 50.8% in 1999 and 50.5% in 1998. The computation of the efficiency ratio excludes the gain on the sale of BNYFC in 1999. The Company's consolidated effective tax rates for 2000, 1999, and 1998 were 34.8%, 37.3%, and 35.2%. The 2000 rate reflects lower state and local taxes compared to 1999 and higher tax exempt income. The 1999 rate reflects fewer tax benefits from leasing activities and the impact of the sale of BNYFC. The 1998 rate reflects higher non-taxable income and larger deductions for preferred trust securities partially offset by higher state and local taxes. 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 with limited 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. Non-core sources of funds such as money market rate accounts, certificate of deposits greater than $100,000, federal funds purchased and other borrowings were $11.0 billion on an average basis in 2000 and 1999. Stable foreign deposits primarily from the Company's European based securities servicing business increased on average to $27.6 billion from $20.2 billion in 1999 due to the full year impact of the acquisition of RBSTB. Savings and other time deposits declined to $9.6 billion on an average basis from $10.0 billion in 1999. In 2000, the Company's average commercial paper borrowings were $218 million compared with $690 million in 1999. The Company has backup lines of credit of $350 million at financial institutions supporting these borrowings. 7 The following comments relate to the information disclosed in the Consolidated Statements of Cash Flows. Earnings and other operating activities used $2.2 billion in 2000, compared with $1.0 billion in 1999 and were a source of $1.6 billion of cash inflows in 1998. The changes in cash flows from operations in 2000 and 1999 were principally the result of changes in trading activities. In 2000, cash provided by investing activities was $1.4 billion as compared to $1.1 billion and $5.2 billion used by investing activities in 1999 and 1998. The cash provided in 2000 came from fewer deposits in banks as well as a decline in loans. In 1999, additions to loans, interest-bearing deposits in banks, and federal funds sold and securities purchased under resale agreements were partially offset by the sale of BNYFC. In 1998, additions to commercial loans and interest-bearing deposits were partially offset by sales of securities. Cash provided by financing activities was $0.6 billion, $1.3 billion, and $1.9 billion in 2000, 1999, and 1998 as the Company used deposits to finance its investing activities. In 2000, 1999, and 1998, financing activities used cash to buy back the Company's common shares, and provided cash through the issuance of long-term debt. Federal funds purchased and securities sold under repurchase agreements were a net use of funds in 2000, 1999 and 1998. Restrictions on the ability of the Company to obtain funds from its subsidiaries are discussed in Note 10 to the Consolidated Financial Statements. CAPITAL RESOURCES Shareholders' equity was $6,152 million at December 31, 2000, compared with $5,143 million at December 31, 1999 and $5,448 million at December 31, 1998. During 2000, the Company retained $946 million of earnings and issued $265 million of medium-term notes, increasing long-term debt to $3,036 million from $2,811 million. The increased long-term debt replaces subordinated debt ceasing to qualify as Tier 2 capital. The Company also repurchased 10 million common shares for $454 million. In October 2000, the Company increased its quarterly common stock dividend to 18 cents per share, up 13% from the beginning of 2000. The Company has a shelf registration statement with a remaining capacity of $104 million of debt, preferred stock, preferred trust securities, or common stock. In 1999, the Company retained $1,302 million of earnings and issued $200 million of preferred trust securities. The Company also issued $300 million of subordinated notes and $631 million of medium-term notes, increasing long-term debt to $2,811 million from $2,086 million. The increased long-term debt supports assets acquired in the RBSTB acquisition and replaces subordinated debt ceasing to qualify as Tier 2 capital. The Company also repurchased 44 million common shares for $1.6 billion. In October 1999, the Company increased its quarterly common stock dividend to 16 cents per share, up 14% from the beginning of 1999. In 1998, the Company retained $789 million of earnings and issued $300 million of preferred trust securities and $335 million of medium-term notes. In July 1998, the Company increased its quarterly common stock dividend to 14 cents per share, up 17% from the beginning of 1997. In addition, the conversion of warrants provided $333 million in capital. The Company also repurchased 33 million common shares for $976 million. 8 ASSET QUALITY AND ALLOWANCE FOR CREDIT LOSSES The Company has proactively managed asset quality. Over the past five years, the Company has attempted to improve its risk profile through sharper strategic focus on non-lending activities, with a de-emphasis on broad-based loan growth. - Since 1994 the Company has exited exposures aggregating $9 billion, including in 1999 $4 billion in asset based lending and $1 billion of non-strategic relationships. The Company regularly culls its loan portfolio of credit exposures that no longer meet risk/return criteria, including an assessment of overall relationship profitability. - As part of the Company's consistent, long-term strategy to emphasize fiduciary, securities servicing and cash processing services, the Company's credit exposure to the financial services sector, a big user of these services, has increased. These exposures tend to be lower-risk secured liquidity facilities to investment grade companies. As a result, financial company outstandings have grown from 14% of the portfolio in 1994 to 25% in 2000. This shift has helped increase the percentage of credits with a rating equivalent to investment grade. These credits have increased from 52% of the total in 1997 to 60% at December 31, 2000. In the non-investment grade portfolio, 48% of the credits mature in less than one year. The Company's most significant concentrations of credit risk are to the financial services sector and the media and telecommunications sector. Within the Company's specialized group that focuses on the domestic financial services sector, the primary exposures are to the securities firms, investment companies, the insurance industry, fund managers, mutual funds, banks, and others. Loans outstanding to domestic financial service companies were $5.1 billion at December 31, 2000 compared with $5.7 billion in 1999. While the financial service exposures have been increasing, the drop in financial service outstandings at December 31, 2000 reflects reduced borrowings by securities firms. The media and telecommunications sector is the second largest specialized group in terms of outstandings and consists of loans to the telecommunications industry, cable television companies, publishing, entertainment and four other media and telecommunication sub-sectors. No one individual sub-sector of media and telecommunications comprises over 40% of the total media and telecommunications outstandings. The Company is active in the international markets, particularly in areas associated with securities servicing and trade finance. These activities result in outstandings to foreign financial service companies of $3.9 billion at December 31, 2000. The Company's modest cross-border exposure to emerging markets is detailed in its Form 10-K. No significant changes in trends occurred in the foreign portfolio in 2000. The Company's outstandings to consumers, including residential real estate loans, its leasing assets, and its real estate lending each exceed 5% of the loan portfolio. These outstandings are detailed later under "Loans". In addition, the Company's retail, community, and regional commercial banking operations in the New York metropolitan area create a significant geographic concentration. In 1999, as part of its continuing strategy to align credit products with fiduciary and servicing businesses, the Company reviewed its credit portfolio and decided to accelerate the disposition of certain loans based, in part, on cross-sell potential and overall profitability. As a result, in 1999 the Company categorized over $1 billion of credit exposure as available-for-sale and recorded a liquidity charge of $124 million. At December 31, 2000, sales of the $1 billion of credits categorized as available-for-sale in 1999 have 9 been substantially completed and no longer represent a material exposure to the Company. Nonperforming assets increased by $35 million or 22% to $193 million at December 31, 2000. The increase in nonperforming assets during 2000 is attributable to a gradual deterioration in credit quality which resulted in moving $254 million of loans to nonperforming status. The increase was largely offset by charge-offs and writedowns of $86 million and paydowns, sales, and returns to accrual status of $133 million. The following table shows the distribution of nonperforming assets at December 31, 2000 and 1999: Dollars in millions 2000 1999 Change ------------------- ---- ---- ------ Category of Loans: Other Commercial $113 $ 53 $60 Foreign 48 63 (15) Regional Commercial 28 30 (2) ---- ---- ---- Total Nonperforming Loans 189 146 43 Other Real Estate 4 12 (8) ---- ---- ---- Total Nonperforming Assets $193 $158 $35 ==== ==== ==== Nonperforming Asset Ratio 0.5% 0.4% Allowance/Nonperforming Loans 325.6 407.7 Allowance/Nonperforming Assets 319.6 376.9 Nonperforming loans are expected to rise given likely economic softness in 2001. The Company expects this will result in a modest increase in provision and charge-offs. Net charge-offs were $84 million in 2000, $137 million in 1999, and $29 million in 1998. In 2000 and 1998, net charge-offs were primarily related to commercial loans. Net charge-offs in 1999 were primarily related to the decision to accelerate the disposition of certain loans, as well as higher charge-offs in the Company's asset based lending businesses. The provision for credit losses was $105 million in 2000, compared with $135 million in 1999 and $20 million in 1998. The decline in the provision in 2000 reflects several factors. First, the 1999 decision to accelerate the disposition of $1 billion of credit exposures as well as the sale of BNYFC, which had almost $4 billion of credit exposure, helped reduce the Company's exposure to deteriorating credits in 2000. Second, the 1999 provision reflected higher charge-offs in the Company's asset based lending businesses. And lastly, 2000 reflects a decrease in total loans as well as the continuing growth of the financial services component of credit exposure. The total allowance for credit losses was $616 million and $595 million at year-end 2000 and 1999. The ratio of the total allowance for credit losses to year-end loans was 1.70% and 1.58% at December 31, 2000 and 1999. Loans at December 31, 2000 were $36.3 billion compared with $37.5 billion at the prior year-end. Average loans increased only 1.0% to $39.3 billion in 2000 from $38.9 billion in 1999. The growth in the allowance in 2000 is attributable to gradually deteriorating asset quality, as evidenced by increasing nonperforming loans and higher risk rated credits, partially offset by the shift in the composition of credit exposure towards the financial services sector and away from more risky general corporate lending. The Company's allowance at year-end equated to approximately 3.0 times the average charge-offs for the last three years and 3.6 times the average net charge-offs for the same three year period. Because historical charge-offs are not necessarily indicative of future charge-off levels, the Company also gives consideration to other risk indicators when determining the appropriate allowance level. 10 The allowance for credit losses consists of four elements: (1) an allowance for impaired credits (nonaccrual commercial credits over $1 million), (2) an allowance for higher risk rated credits, (3) an allowance for pass rated credits, and (4) an unallocated allowance based on general economic conditions and risk factors in the Company's individual markets. The first element - impaired credits - is based on individual analysis of all nonperforming commercial credits over $1 million. The allowance is measured by the difference between the recorded value of impaired loans and their fair value. Fair value is either the present value of the expected future cash flows from borrowers, the market value of the loan, or the fair value of the collateral. The second element - higher risk rated credits - is based on the assignment of loss factors for each specific risk category of higher risk credits. The Company rates each credit in its portfolio that exceeds $1 million and assigns the credits to specific risk pools. A potential loss factor is assigned to each pool and an amount is included in the allowance equal to the product of the amount of the loan in the pool and the risk factor. Reviews of higher risk rated loans are conducted quarterly and the loan's rating is updated as necessary. The Company prepares a loss migration analysis and compares its actual loss experience to the loss factors on an annual basis to attempt to ensure the accuracy of the loss factors assigned to each pool. Pools of past due consumer loans are included in specific risk categories based on their length of time past due. The third element - pass rated credits - is based on the assignment of loss factors to the remaining pools of credit exposure. The loss factors are based on the expected average credit losses. Loss factors are periodically compared to rating agency and other default data bases to determine their validity. Commercial loans over $1 million are individually analyzed before being assigned to a risk pool. All current consumer loans are included in the pass rated consumer pools. The fourth element - the unallocated allowance - is based on management's judgement regarding the following factors: - Economic conditions including duration of the current cycle - Past experience including recent loss experience - Credit quality trends - Collateral values - Volume, composition, and growth of the loan portfolio - Specific credits and industry conditions - Results of bank regulatory and internal credit exams - Actions by the Federal Reserve Board - Delay in receipt of information to evaluate loans or confirm existing credit deterioration The allowance at December 31, 2000 was not impacted by any significant changes in estimation methods or assumptions. 11 Based on an evaluation of these four elements, including individual credits, historical credit losses, and global economic factors, the Company has allocated its allowance for credit losses as follows: 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Domestic Real Estate 3% 4% 3% 4% 5% Commercial 76 78 74 64 40 Consumer 1 - 1 1 1 Credit Card - - - - 29 Foreign 11 12 11 7 4 Unallocated 9 6 11 24 21 ---- ---- ---- ---- ---- 100% 100% 100% 100% 100% ==== ==== ==== ==== ==== In 2000, the unallocated allowance increased as well as the allowance allocated to impaired and higher risk rated loans. This was partially offset by a decline in the allowance for pass rated credits. The increase in the allowance for impaired and higher risk credits reflects an increase in the loans in these categories. The increase in the unallocated allowance is attributable to the deterioration in the economy and negative credit quality trends. Such an allocation is inherently judgmental, and the entire allowance for credit losses is available to absorb credit losses regardless of the nature of the loss. 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. The Company's market risks are primarily interest rate and foreign exchange risk, as well as credit risk. The Company's risk management process begins with oversight by the Board of Directors, who periodically review risk management policies and controls and approve aggregate levels of risk. The Company's market risk governance structure includes two committees comprised of senior executives who review market risk activities, risk measurement methodologies and risk limits, approve new products, and provide direction for the Company's market risk profile. The Asset/Liability Management Committee oversees the market risk management process for interest rate risk related to asset/liability management activities. The Market Risk Management Committee oversees the market risk management process for trading activities including foreign exchange risk. Both committees are supported by a comprehensive risk management process that is designed to identify, measure, and manage market risk. TRADING ACTIVITIES AND RISK MANAGEMENT The Company's trading activities are primarily oriented towards acting as a market maker for the Company's customers. The risk from these market making activities and from the Company's own positions is managed by the Company's traders and limited in total exposure as described below. The Company manages trading risk through a system of position limits, a value at risk (VAR) methodology, based on a Monte Carlo simulation, stop loss advisory triggers, and other market sensitivity measures. Risk is monitored and reported to senior management by an independent unit on a daily basis. The VAR methodology captures, based on certain assumptions, the potential overnight pre-tax dollar loss from adverse changes in fair values of all trading positions. The calculation assumes a one day holding period for most instruments, utilizes a 99% confidence level, and incorporates the non-linear characteristics of options. As the VAR methodology does not evaluate risk 12 attributable to extraordinary financial, economic or other occurrences, the risk assessment process includes a number of stress scenarios based upon the risk factors in the portfolio and management's assessment of market conditions. Additional stress scenarios based upon historic market events are also tested. Average trading assets increased significantly in 2000 due to the full year effect of the acquisition of RBSTB and an increase in the trading of short-term money market instruments. The following table indicates the calculated VAR amounts for the trading portfolio for the years ending December 31, 2000 and 1999. During these periods, the daily trading loss did not exceed the calculated VAR amounts on any given day.
(In millions) 2000 1999 ----------------------------------- ----------------------------------- Market Risk Average Minimum Maximum 12/31/00 Average Minimum Maximum 12/31/99 ----------- ------- ------- ------- -------- ------- ------- ------- -------- Interest Rate $4.4 $2.7 $ 6.6 $3.3 $5.4 $2.5 $12.6 $4.5 Foreign Exchange 1.6 0.9 3.8 1.2 1.7 0.7 4.0 1.8 Overall Portfolio 5.5 2.5 8.8 2.9 7.1 3.9 13.7 6.3
ASSET/LIABILITY MANAGEMENT The Company's asset/liability management activities include lending, investing in securities, accepting deposits, raising money as needed to fund assets, and processing securities and other transactions. The market risks that arise from these activities are interest rate risk, and to a lesser degree, foreign exchange risk. The Company's primary market risk is exposure to movements in US dollar interest rates. Exposure to movements in foreign currency interest rates also exists, but to a significantly lower degree. The Company actively manages interest rate sensitivity (the exposure of net interest income to interest rate movements). In addition to gap analysis, the Company uses earnings simulation and discounted cash flow models to identify interest rate exposures. An earnings simulation model is the primary tool used to assess changes in pre-tax net interest income. The model incorporates management's assumptions regarding interest rates, balance changes on core deposits, and changes in the prepayment behavior of loans. These assumptions have been developed through a combination of historical analysis and future expected pricing behavior. Derivative financial instruments used for interest rate risk management purposes are also included in this model. The Company evaluates the effect on earnings by running scenarios with interest rates shocked 200 basis points up and down from a baseline scenario which assumes no changes in interest rates. These scenarios are reviewed to examine the impact of large interest rate movements. Interest rate sensitivity is quantified by calculating the change in pre-tax net interest income between the scenarios over a 12 month measurement period. The measurement of interest rate sensitivity is the percentage change in net interest income calculated by the model under the shock up 200 basis points versus the baseline scenario and under the shock down 200 basis point scenario versus the baseline scenario. Under these shock scenarios, pre-tax net interest income would be positively affected by 3.45% from the baseline scenario for a 200 basis point increase in rates and negatively affected by 5.95% for a 200 basis point decline. These scenarios do not include the strategies that management could employ as interest rate expectations change. 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. The foreign exchange risk related to the 13 interest rate spread on foreign currency-denominated asset/liability positions is managed as part of the Company's trading activities. The Company uses forward foreign exchange contracts to protect the value of its net investment in foreign operations. At December 31, 2000, net investments in foreign operations approximated $937 million and were spread across 15 foreign currencies. The Company's equity investments of $1.8 billion at December 31, 2000 primarily consisted of venture capital investments, equity positions from debts previously contracted, equity positions in other financial institutions, and minority interests in various subsidiaries. Venture capital activities consist of investments in private equity funds, mezzanine financings, and direct equity investments. The carrying value of the Company's venture capital investments was $485 million at December 31, 2000. The majority of these equity investments are of a long-term nature and accordingly the Company does not view fluctuations in the market prices of these securities as having a material impact on the Company's operations. Changes in prices for marketable equity securities are reflected in the Statements of Changes in Shareholders' Equity. All equity investments are evaluated on a regular basis for permanent impairment. SEGMENT PROFITABILITY Segment Data The Company has an internal information system that produces performance data for its four business segments along product and service lines. The Servicing and Fiduciary businesses segment provides a broad array of fee-based services. This segment includes the Company's securities servicing, global payment services, and private client services and asset management businesses. Securities servicing includes global custody, securities clearance, mutual funds, UIT, securities lending, DRs, corporate trust, stock transfer and execution services. Global payment services products primarily relate to funds transfer, cash management and trade finance. Private client services and asset management provide traditional banking and trust services to affluent clients and asset management to institutional and private clients. The Corporate Banking segment focuses on providing lending services, such as term loans, lines of credit, asset based financings, and commercial mortgages, to the largest public and private corporations nationwide, as well as public and private mid-size businesses in the New York metropolitan area. Special industry groups focus on financial institutions, media and telecommunications, energy, real estate, retailing, automotive, and government banking institutions. Through BNY Capital Markets, the Company provides syndicated loans, bond underwriting, private placements of corporate debt and equity securities, and merger, acquisition, and advisory services. The Retail Banking segment includes consumer lending, residential mortgage lending, and retail deposit services. The Company operates 349 branches in 22 counties in three states. The Financial Markets segment includes trading of foreign exchange and interest rate products, investing and leasing activities, and treasury services to other segments. This segment offers a comprehensive array of multi-currency hedging and yield enhancement strategies. Offices in New York, London, Brussels, Tokyo, Frankfurt, Hong Kong, Seoul and Taipei provide clients a 24-hour trading capability. 14 The segments contributed to the Company's profitability as follows:
In Millions Servicing and For the Year Ended Fiduciary Corporate Retail Financial Reconciling Consolidated December 31, 2000 Businesses Banking Banking Markets Items Total ------------------ ---------- --------- ------- --------- ----------- ------------ Net Interest Income $ 672 $543 $510 $122 $ 23 $1,870 Provision for Credit Losses - 127 6 (1) (27) 105 Noninterest Income 2,443 290 99 249 28 3,109 Noninterest Expense 1,629 213 305 64 299 2,510 ----- ---- ---- ---- ----- ------ Income Before Taxes $1,486 $493 $298 $308 $(221) $2,364 ====== ==== ==== ==== ===== ====== Average Assets $8,636 $29,812 $4,420 $32,693 $1,680 $77,241
In Millions Servicing and For the Year Ended Fiduciary Corporate Retail Financial Reconciling Consolidated December 31, 1999 Businesses Banking Banking Markets Items Total ------------------ ---------- --------- ------- --------- ----------- ------------ Net Interest Income $ 474 $600 $468 $121 $ 38 $1,701 Provision for Credit Losses - 110 5 (2) 22 135 Noninterest Income 1,910 315 92 216 960 3,493 Noninterest Expense 1,233 248 306 55 265 2,107 ----- ---- ---- ---- ---- ------ Income Before Taxes $1,151 $557 $249 $284 $711 $2,952 ====== ==== ==== ==== ==== ====== Average Assets $7,692 $31,219 $4,572 $21,821 $1,473 $66,777
In Millions Servicing and For the Year Ended Fiduciary Corporate Retail Financial Reconciling Consolidated December 31, 1998 Businesses Banking Banking Markets Items Total ------------------ ---------- --------- ------- --------- ----------- ------------ Net Interest Income $ 394 $663 $506 $ 95 $ (7) $1,651 Provision for Credit Losses - 114 7 7 (108) 20 Noninterest Income 1,579 305 73 252 74 2,283 Noninterest Expense 1,033 262 310 59 264 1,928 ----- ---- ---- ---- ---- ------ Income Before Taxes $ 940 $592 $262 $281 $(89) $1,986 ====== ==== ==== ==== ==== ====== Average Assets $6,016 $33,783 $4,527 $17,286 $1,529 $63,141
Segment Highlights Servicing and Fiduciary Businesses ---------------------------------- In the Servicing and Fiduciary businesses segment, net interest income increased to $672 million in 2000 from $474 million in 1999 and $394 million in 1998. The increase reflects the investment of the additional funds generated by the Company's Servicing and Fiduciary businesses. Noninterest income was $2,443 million in 2000 compared with $1,910 million in 1999 and $1,579 million in 1998. Securities servicing fees increased to $1,650 million in 2000 as compared with $1,245 million in 1999 and $1,000 million in 1998. Strong internal growth and the acquisition of RBSTB drove fee revenue up 33% in 2000. Fee revenue was strong across all product lines with particular strength in global custody, DRs, UIT, mutual funds, as well as global execution and clearing services. The Company's DR business benefited from record depositary receipt dollar trading volume on US exchanges which grew 78% in 2000. In addition, the Company was named as agent on 114 programs from 33 countries. Market share gains from new business wins and strong markets 15 resulted in assets under custody reaching $7.0 trillion in 2000, up from $6.3 trillion in 1999 and $5.1 trillion in 1998. The RBSTB acquisition drove custody assets up in 1999. Fees from global payment services in 2000 were $261 million compared with 1999's $274 million and 1998's $256 million. Cash management revenue was particularly strong in 2000, growing by 9% to $107 million, with fund transfer revenue ahead of the prior year by 2%, reaching $152 million. Trade finance fees were down in 2000 reflecting the sale of BNYFC and reduced pricing driven by the improved risk profile of selected Asian and Latin American markets. Fees from private client services and asset management grew to $296 million in 2000, as compared with $244 million in 1999 and $208 million in 1998, reflecting strong investment performance which continues to attract new customers and generally strong markets. The acquisition of Ivy Asset Management Corp. and Estabrook Capital Management, Inc. also contributed to the increase. Assets under management were $66.2 billion, $60.4 billion and $48.4 billion in 2000, 1999, and 1998. Assets under administration were $36.4 billion, up from $30.2 billion in 1999 and $25.8 billion in 1998. Net charge-offs in the Servicing and Fiduciary businesses segment were zero in 2000, 1999, and 1998. Noninterest expense was $1,629 million compared with $1,233 million in 1999 and $1,033 million in 1998. The rise in noninterest expense is consistent with the significant increase in business volumes which produced higher fee revenue, as well as the Company's continued investment in technology. Corporate Banking ----------------- The Corporate Banking segment's net interest income was $543 million in 2000 compared with $600 million in 1999 and $663 million in 1998. The decrease in 2000 reflects the sale of BNYFC. The provision for credit losses was $127 million in 2000 compared with $110 million and $114 million in 1999 and 1998. The increase in 2000 principally reflects deterioration in the economy. Net charge-offs in the Corporate Banking segment were $78 million, $135 million, and $16 million in 2000, 1999, and 1998. The decrease in noninterest income to $290 million in the current year was due to increased capital markets fees offset by the sale of BNYFC. Capital markets fees in 2000 increased 13% over 1999. In 2000, the Company was the co-manager on 60 underwritings, up from 51 in 1999. Income from the Company's offshore banking subsidiaries in Hong Kong also increased in 2000. Noninterest expense declined in 2000 and 1999 reflecting the sale of BNYFC. Retail Banking -------------- Net interest income in the Retail Banking sector was $510 million in 2000 compared with $468 million in 1999 and $506 million in 1998. Net interest income in the branch banking network in 2000 was positively impacted by the increase in the value of noninterest-bearing sources of funds in a higher rate environment. Noninterest income was $99 million in 2000 compared with $92 million in 1999 and $73 million in 1998. The increase in 2000 reflects new product introductions, and selective price increases. Operating expenses were $305 million in 2000 compared with $306 million in 1999 and $310 million in 1998. Net charge-offs were $7 million, $4 million and $5 million in 2000, 1999, and 1998. Financial Markets ----------------- In the Financial Markets segment, net interest income was $122 million in 2000 compared with 1999's $121 million and 1998's $95 million. Noninterest income was $249 million in 2000 compared with $216 million in 1999 and $252 million in 1998. Strong equity markets resulted in a significant and relatively consistent level of securities gains included in noninterest income in 2000, 1999, and 1998. Revenues from foreign exchange proprietary trading activities and foreign exchange advisory fees increased in 2000. Net charge- offs were a recovery of $1 million in 2000 and a recovery of $2 million in 16 1999 and charge-offs of $7 million in 1998. The increase in expenses in 2000 reflects the acquisition of RBSTB. Segment Accounting Principles ----------------------------- The Company's segment data has been determined on an internal management basis of accounting, rather than the generally accepted accounting principles used for consolidated financial reporting. These measurement principles are designed so that reported results of the segments will track their economic performance. Segment results are subject to restatement whenever improvements are made in the measurement principles or organizational changes are made. In 2000, the Company changed certain assumptions related to the duration of sector assets and liabilities and the related interest rates. As a result, sector results for 1999 and 1998 have been restated. The measure of revenues and profit or loss by operating segment has been adjusted to present segment data on a taxable equivalent basis. The provision for credit losses allocated to each reportable segment is based on management's judgment as to average credit losses that will be incurred in the operations of the segment over a credit cycle of a period of years. Management's judgment includes the following factors among others: historical charge-off experience and the volume, composition and growth of the loan portfolio. This method is different from that required under generally accepted accounting principles as it anticipates future losses which are not yet probable and therefore not recognizable under generally accepted accounting principles. Assets and liabilities are match funded. Support and other indirect expenses are allocated to segments based on general guidelines. Reconciling Items ----------------- Reconciling items for net interest income primarily relate to the recording of interest income on a taxable equivalent basis, reallocation of capital and the funding of goodwill. Reconciling items for noninterest income primarily relate to the payment associated with the termination of a securities clearing contract, the liquidity charge on the sale of loans, and the gains on the sale of BNYFC, the sale of a building and the sale of certain securities. Reconciling items for noninterest expense include $115 million, $102 million and $101 million of amortization of intangibles in 2000, 1999, and 1998, Year 2000 expenses, and corporate overhead. The adjustment to the provision for credit losses reflects the difference between the aggregate of the credit provision over a credit cycle for the reportable segments and the Company's recorded provision. The reconciling items for average assets consist of goodwill and other intangible assets. 17 Foreign Operations The Company's foreign activities consist of banking, trust, and securities and global payment services provided to customers domiciled outside of the United States, principally in Europe and Asia. The 1999 acquisition of RBSTB, which was renamed The Bank of New York (Europe) ("BNYE"), significantly expanded the Company's presence in Europe. In addition to BNYE, which is based in London, the Company operates through 29 branches and representative offices in 26 countries. There were no major customers from whom revenues were individually material to the Company's performance.
2000 1999 1998 ---------------------------------- --------------------------------- --------------------------------- In millions Income Income Income Before Before Before Geographic Income Net Total Income Net Total Income Net Total Data Revenues Taxes Income Assets Revenues Taxes Income Assets Revenues Taxes Income Assets ---------- -------- ------ ------ ------- -------- ------ ------ ------- -------- ------- ------ ------- Domestic $5,146 $2,044 $1,220 $49,829 $5,245 $2,530 $1,474 $49,913 $4,620 $1,806 $1,076 $49,564 Europe 1,788 285 186 19,673 1,098 325 204 16,639 662 101 65 6,912 Asia 256 17 11 3,794 227 16 10 3,744 239 22 14 3,349 Other 296 18 12 3,818 396 81 51 4,460 272 57 37 3,678 ------- ------ ------ ------- ------ ------ ------ ------- ------ ------ ------ ------- Total $7,486 $2,364 $1,429 $77,114 $6,966 $2,952 $1,739 $74,756 $5,793 $1,986 $1,192 $63,503 ------- ------ ------ ------- ------ ------ ------ ------- ------ ------ ------ ------- ------- ------ ------ ------- ------ ------ ------ ------- ------ ------ ------ -------
Normalized Earnings Normalized earnings for 1999 reflect net income adjusted for the results of BNYFC, the $1,020 million gain on the sale of BNYFC, the related investment of proceeds, and repurchase of 25 million shares of Company common stock on a pro forma basis as of December 31, 1998; the $124 million liquidity charge related to the sale of loans; a provision normalization of $75 million; and related tax effects. These adjustments are shown in the table below: (In millions, except per share amounts) 1999 ---- Net Income $1,739 Adjustments: Pre-tax Gain on Sale of BNYFC (1,020) BNYFC Income Before Tax (104) Liquidity Charge - Loans Available- For-Sale 124 Provision Normalization 75 Interest on Proceeds 36 Tax Effects 393 ------ Normalized Net Income $1,243 ====== Fully Diluted Shares 765 Share Adjustment (14) ------ Adjusted Shares 751 ==== Normalized Diluted Earnings Per Share $ 1.66 18 LOANS The following table shows the Company's loan distribution at the end of each of the last five years:
In millions 2000 1999 1998 1997 1996 ----------- ---- ---- ---- ---- ---- Domestic Commercial and Industrial Loans(1) $13,803 $14,400 $13,626 $12,585 $11,780 Less: Unearned Income on Commercial and Industrial Loans (18) (14) (26) (36) (49) Real Estate Loans Construction and Land Development 357 275 271 208 139 Other, Principally Commercial Mortgages 2,664 2,771 2,691 2,669 2,645 Collateralized by Residential Properties 3,049 2,999 3,010 3,091 2,905 Banks and Other Financial Institutions 2,014 1,788 1,788 1,899 1,650 Loans for Purchasing or Carrying Securities 2,697 3,865 3,612 3,479 3,695 Lease Financings 3,092 2,870 2,566 1,953 1,688 Less: Unearned Income on Lease Financings (880) (880) (856) (651) (483) Consumer Loans 1,792 1,610 1,243 1,197 6,605 Less: Unearned Income on Consumer Loans (18) (18) (13) (16) (25) Asset Based Lending - - 2,007 1,844 1,064 Other 448 606 420 341 249 ------- ------- ------- ------- ------- Total Domestic 29,000 30,272 30,339 28,563 31,863 ------- ------- ------- ------- ------- Foreign Commercial and Industrial Loans(1) 3,025 3,451 3,349 2,872 2,465 Less: Unearned Income on Commercial and Industrial Loans (2) (5) (3) (7) (6) Banks and Other Financial Institutions 1,761 1,703 1,476 1,756 1,060 Lease Financings 4,827 3,483 3,174 2,488 1,917 Less: Unearned Income on Lease Financings (2,520) (1,550) (1,472) (1,205) (915) Government and Official Institutions 134 153 192 110 414 Asset Based Lending - - 1,310 453 129 Other 36 40 21 97 79 ------- ------- ------- ------- ------- Total Foreign 7,261 7,275 8,047 6,564 5,143 ------- ------- ------- ------- ------- Less: Allowance for Credit Losses 616 595 636 641 901 ------- ------- ------- ------- ------- Net Loans $35,645 $36,952 $37,750 $34,486 $36,105 ======= ======= ======= ======= ======= (1) The commercial and industrial loan portfolio does not contain any industry concentration which exceeds 10% of loans.
19 QUARTERLY DATA UNAUDITED
2000 1999 ------------------------------- ------------------------------ Dollars in millions, Fourth Third Second First Fourth Third Second First except per share amounts Interest Income $1,129 $1,107 $1,107 $1,033 $ 943 $ 834 $ 839 $ 857 Interest Expense 647 628 644 586 502 417 423 430 ----- ----- ----- ----- ----- ----- ----- ----- Net Interest Income 482 479 463 447 441 417 416 427 ----- ----- ----- ----- ----- ----- ----- ----- Provision for Credit Losses 35 25 25 20 15 90 15 15 Noninterest Income 805 785 780 737 686 1,531 651 625 Noninterest Expense 644 635 628 602 570 515 513 509 ----- ----- ----- ----- ----- ----- ----- ----- Income Before Income Taxes 608 604 590 562 542 1,343 539 528 Income Taxes 208 213 206 196 187 542 188 184 Distribution on Preferred Trust Securities 28 28 28 28 28 28 28 28 ----- ----- ----- ----- ----- ----- ----- ----- Net Income $ 372 $ 363 $ 356 $ 338 $ 327 $ 773 $ 323 $ 316 ===== ===== ===== ===== ===== ===== ===== ===== Net Income Available to Common Shareholders $ 372 $ 363 $ 356 $ 338 $ 327 $ 773 $ 323 $ 316 ===== ===== ===== ===== ===== ===== ===== ===== Per Common Share Data: Basic Earnings $0.51 $0.50 $0.49 $0.46 $0.44 $1.04 $0.42 $0.41 Diluted Earnings 0.50 0.49 0.48 0.46 0.44 1.02 0.42 0.41 Cash Dividend 0.18 0.16 0.16 0.16 0.16 0.14 0.14 0.14 Stock Price High 59.25 57.31 48.63 41.56 44.81 39.56 40.63 39.56 Low 48.56 46.38 39.44 31.00 32.44 32.31 33.88 32.75 Ratios: Return on Average Common Shareholders' Equity 24.82% 25.75% 26.93% 27.07% 25.98% 61.23% 24.82% 24.48% Return on Average Assets 1.92 1.89 1.81 1.78 1.84 4.78 1.95 1.94
20 Consolidated Balance Sheets
---------------------------------------------------------------------------------------- Dollars in millions, except per share amounts December 31, 2000 1999 ---------------------------------------------------------------------------------------- Assets Cash and Due from Banks $ 3,125 $ 3,276 Interest-Bearing Deposits in Banks 5,337 6,850 Securities Held-to-Maturity (fair value of $719 in 2000 and $839 in 1999) 752 871 Available-for-Sale 6,649 6,028 ------- ------- Total Securities 7,401 6,899 Trading Assets 12,051 8,715 Federal Funds Sold and Securities Purchased Under Resale Agreements 5,790 5,383 Loans (less allowance for credit losses of $616 in 2000 and $595 in 1999) 35,645 36,952 Premises and Equipment 924 893 Due from Customers on Acceptances 447 739 Accrued Interest Receivable 354 319 Other Assets 6,040 4,730 ------- ------- Total Assets $77,114 $74,756 ======= ======= Liabilities and Shareholders' Equity Deposits Noninterest-Bearing (principally domestic offices) $13,255 $12,162 Interest-Bearing Domestic Offices 15,774 16,319 Foreign Offices 27,347 27,270 ------- ------- Total Deposits 56,376 55,751 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 1,108 1,318 Trading Liabilities 2,070 2,353 Other Borrowed Funds 1,687 1,472 Acceptances Outstanding 450 740 Accrued Taxes and Other Expenses 3,283 2,644 Accrued Interest Payable 127 131 Other Liabilities 1,325 893 Long-Term Debt 3,036 2,811 ------- ------- Total Liabilities 69,462 68,113 ------- ------- Company-Obligated Mandatory Redeemable Preferred Trust Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures 1,500 1,500 ------- ------- Shareholders' Equity Class A Preferred Stock-par value $2.00 per share, authorized 5,000,000 shares, outstanding 16,320 shares in 2000 and 16,787 shares in 1999 1 1 Common Stock-par value $7.50 per share, authorized 1,600,000,000 shares, issued 985,528,475 shares in 2000 and 977,961,165 shares in 1999 7,391 7,335 Additional Capital 521 315 Retained Earnings 3,566 2,620 Accumulated Other Comprehensive Income 207 30 ------- ------- 11,686 10,301 Less: Treasury Stock (244,460,032 shares in 2000 and 237,747,242 shares in 1999), at cost 5,526 5,148 Loan to ESOP (1,142,939 shares in 2000 and 1,444,005 shares in 1999), at cost 8 10 ------- ------- Total Shareholders' Equity 6,152 5,143 ------- ------- Total Liabilities and Shareholders' Equity $77,114 $74,756 ======= ======= See accompanying Notes to Consolidated Financial Statements.
21 Consolidated Statements of Income
----------------------------------------------------------------------------------------- In millions, except per share amounts For the years ended December 31, 2000 1999 1998 ----------------------------------------------------------------------------------------- Interest Income Loans $2,910 $2,636 $2,770 Securities Taxable 323 257 271 Exempt from Federal Income Taxes 63 50 61 ------ ------ ------ 386 307 332 Deposits in Banks 273 247 184 Federal Funds Sold and Securities Purchased Under Resale Agreements 277 205 203 Trading Assets 531 78 21 ------ ------ ------ Total Interest Income 4,377 3,473 3,510 ------ ------ ------ Interest Expense Deposits 2,011 1,363 1,374 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 153 131 145 Other Borrowed Funds 139 126 204 Long-Term Debt 204 152 136 ------ ------ ------ Total Interest Expense 2,507 1,772 1,859 ------ ------ ------ Net Interest Income 1,870 1,701 1,651 Provision for Credit Losses 105 135 20 ------ ------ ------ Net Interest Income After Provision for Credit Losses 1,765 1,566 1,631 ------ ------ ------ Noninterest Income Servicing Fees Securities 1,650 1,245 1,000 Cash 261 274 256 ------ ------ ------ 1,911 1,519 1,256 Private Client Services and Asset Management Fees 296 244 208 Service Charges and Fees 364 338 326 Securities Gains 150 199 175 Other 388 1,193 318 ------ ------ ------ Total Noninterest Income 3,109 3,493 2,283 ------ ------ ------ Noninterest Expense Salaries and Employee Benefits 1,488 1,251 1,178 Net Occupancy 184 165 166 Furniture and Equipment 108 96 86 Other 730 595 498 ------ ------ ------ Total Noninterest Expense 2,510 2,107 1,928 ------ ------ ------ Income Before Income Taxes 2,364 2,952 1,986 Income Taxes 822 1,101 699 Distribution on Preferred Trust Securities 113 112 95 ------ ------ ------ Net Income $1,429 $1,739 $1,192 ====== ====== ====== Net Income Available to Common Shareholders $1,429 $1,739 $1,192 ====== ====== ====== Per Common Share Basic Earnings $ 1.95 $ 2.31 $ 1.59 Diluted Earnings 1.92 2.27 1.53 Cash Dividends Paid 0.66 0.58 0.54 Diluted Shares 745 765 781 See accompanying Notes to Consolidated Financial Statements.
22 Consolidated Statements of Changes in Shareholders' Equity
------------------------------------------------------------------------------------------------------------------------ In millions For the years ended December 31, 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------ Preferred Stock Balance, January 1 $ 1 $ 1 $ 1 ------ ------ ------ Balance, December 31 1 1 1 ------ ------ ------ Common Stock Balance, January 1 7,335 7,281 6,904 Exercise of Warrants (shares: 42,930,224 in 1998) - - 322 Common Stock Issued in Connection with Employee Benefit Plans (shares: 7,567,310 in 2000, and 7,193,398 in 1999, and 7,412,305 in 1998 56 54 55 ------ ------ ------ Balance, December 31 7,391 7,335 7,281 ------ ------ ------ Additional Capital Balance, January 1 315 142 12 Exercise of Warrants - - 11 Other, Primarily Common Stock issued in Connection with Employee Benefit Plans 206 173 119 ------ ------ ------ Balance, December 31 521 315 142 ------ ------ ------ Retained Earnings Balance, January 1 2,620 1,318 529 Net Income $1,429 1,429 $1,739 1,739 $1,192 1,192 Cash Dividends on Common Stock (483) (437) (403) ------ ------ ------ Balance, December 31 3,566 2,620 1,318 Accumulated Other Comprehensive Income Securities Valuation Allowance Balance, January 1 58 340 320 Change in Fair Value of Securities Available-for-Sale, Net of Taxes of $135 in 2000, ($103) in 1999, and $90 in 1998 229 229 (147) (147) 145 145 Reclassification Adjustment, Net of Taxes of $23 in 2000, $74 in 1999, and $69 in 1998 (43) (43) (135) (135) (125) (125) ------ ------ ------ Balance, December 31 244 58 340 Foreign Currency Items Balance, January 1 (28) (28) (35) Foreign Currency Translation Adjustment Net of Taxes of $(6) in 2000 and $5 in 1998 (9) (9) - - 7 7 ------ ------ ------ Balance, December 31 (37) (28) (28) ------ ------ ------ Total Comprehensive Income $1,606 $1,457 $1,219 ====== ====== ====== Less Treasury Stock Balance, January 1 5,148 3,593 2,714 Issued (shares: 3,426,777 in 2000, 3,673,172 in 1999, and 5,507,044 in 1998) (76) (71) (97) Acquired (shares: 10,139,567 in 2000, 43,771,955 in 1999, and 32,514,495 in 1998) 454 1,626 976 ------ ------ ------ Balance, December 31 5,526 5,148 3,593 ------ ------ ------ Less Loan to ESOP Balance, January 1 10 13 15 Released (shares: 301,066 in 2000, 356,998 in 1999, and 312,655 in 1998) (2) (3) (2) ------ ------ ------ Balance, December 31 8 10 13 ------ ------ ------ Total Shareholders' Equity, December 31 $6,152 $5,143 $5,448 ====== ====== ======= See accompanying Notes to Consolidated Financial Statements.
23 Consolidated Statements of Cash Flows
---------------------------------------------------------------------------------------- In millions For the years ended December 31, 2000 1999 1998 ---------------------------------------------------------------------------------------- Operating Activities Net Income $1,429 $1,739 $1,192 Adjustments to Determine Net Cash Attributable to Operating Activities: Provision for Losses on Loans and Other Real Estate 109 135 21 Gain on Sale of BNYFC - (1,020) - Depreciation and Amortization 247 215 187 Deferred Income Taxes 530 454 260 Securities Gains (150) (199) (175) Change in Trading Activities (3,872) (1,899) 1,102 Change in Accruals and Other, Net (459) (409) (1,021) ------ ------ ------ Net Cash (Used) Provided by Operating Activities (2,166) (984) 1,566 ------ ------ ------ Investing Activities Change in Interest-Bearing Deposits in Banks 1,414 (739) (2,256) Purchases of Securities Held-to-Maturity (323) (422) (631) Maturities of Securities Held-to-Maturity 384 460 814 Purchases of Securities Available-for-Sale (3,687) (2,992) (2,481) Sales of Securities Available-for-Sale 1,681 865 1,767 Maturities of Securities Available-for-Sale 1,920 1,036 849 Net Principal Received (Disbursed) on Loans to Customers 529 (2,008) (2,561) Sales of Loans and Other Real Estate 468 367 258 Change in Federal Funds Sold and Securities Purchased Under Resale Agreements (146) (2,102) (461) Purchases of Premises and Equipment (106) (97) (88) Acquisitions, Net of Cash Acquired (286) (490) (166) Disposition, Net of Cash Included 46 4,867 - Proceeds from the Sale of Premises and Equipment 3 10 50 Other, Net (487) 179 (268) ------ ------ ------ Net Cash Provided (Used) by Investing Activities 1,410 (1,066) (5,174) ------ ------ ------ Financing Activities Change in Deposits 1,750 2,215 3,199 Change in Federal Funds Purchased and Securities Sold Under Repurchase Agreements (441) (253) (758) Change in Other Borrowed Funds (276) 202 (323) Proceeds from the Issuance of Preferred Trust Securities - 200 300 Proceeds from the Issuance of Long-Term Debt 265 731 315 Repayments of Long-Term Debt (53) (21) (44) Issuance of Common Stock 341 301 606 Treasury Stock Acquired (454) (1,626) (976) Cash Dividends Paid (484) (435) (403) ------ ------ ------ Net Cash Provided by Financing Activities 648 1,314 1,916 ------ ------ ------ Effect of Exchange Rate Changes on Cash (43) 13 (78) ------ ------ ------ Change in Cash and Due From Banks (151) (723) (1,770) Cash and Due from Banks at Beginning of Year 3,276 3,999 5,769 ------ ------ ------ Cash and Due from Banks at End of Year $3,125 $3,276 $3,999 ====== ====== ====== Supplemental Disclosure of Cash Flow Information Cash Paid During the Year for: Interest $2,511 $1,829 $1,853 Income Taxes 258 542 404 Noncash Investing Activity (Primarily Foreclosure of Real Estate) 2 4 8 See accompanying Notes to Consolidated Financial Statements.
24 Notes to Consolidated Financial Statements 1. Summary of Significant Accounting and Reporting Policies The Bank of New York Company, Inc. (the "Company") provides a complete range of banking and other financial services to corporations and individuals worldwide through its business segments: Servicing and Fiduciary Businesses; Corporate Banking; Retail Banking; and Financial Markets. Use of Estimates - 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 credit losses, pension and postretirement obligations, and the fair value of financial instruments. Actual results could differ from these estimates. 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 accreted 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 Credit Losses - The allowance for credit losses is maintained at a level that, in management's judgment, is adequate to absorb probable losses associated with specifically identified loans, as well as estimated probable credit losses inherent in the remainder of the loan portfolio at the balance sheet date. Management's judgment includes the following factors, among others: risks of individual credits; past experience; the volume, composition, and growth of the loan portfolio; and economic conditions. The Company conducts a quarterly portfolio review to determine the adequacy of its allowance for credit losses. All commercial loans over $1 million are assigned to specific risk categories. Smaller commercial and consumer loans are evaluated on a pooled basis and assigned to specific risk categories. Following this review, senior management of the Company analyzes the results and determines the allowance for credit losses. The Audit and Examining Committee of the Company's Board of Directors reviews the allowance at the end of each quarter. The portion of the allowance for credit losses allocated to impaired loans (nonaccrual commercial loans over $1 million) is measured by the difference between their recorded value and fair value. Fair value is either the present value of the expected future cash flows from borrowers, the market value of the loan, or the fair value of the collateral. 25 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 restored to accrual status when principal and interest are current or they become fully collateralized. Consumer loans are not classified as nonperforming assets, but are charged off and interest accrued is suspended based upon an established delinquency schedule determined by product. Real estate acquired in satisfaction of loans is carried in other assets at the lower of the recorded investment in the property or fair value minus estimated costs to sell. 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 value changes of balance sheet and derivative items are reported in shareholders' equity net of tax. 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. Recent Accounting Developments - Effective January 1, 2001, the Company adopted a new accounting standard related to derivatives and hedging activities. The new standard requires that all derivatives be included as assets or liabilities in the balance sheet and that such instruments be carried at fair market value through adjustments to either other comprehensive income or current earnings or both, as appropriate. The adoption of the new standard resulted in zero impact on 2001 net income and a credit of $10 million to accumulated other comprehensive income. In connection with the adoption of the new standard, the Company transferred 26 investment securities with a carrying value of $0.6 billion and an unrealized loss of $5 million from its held-to-maturity to its available-for-sale and trading portfolios. Reclassifications - Certain prior year information has been reclassified to conform its presentation with the 2000 financial statements. 2. Acquisitions and Dispositions The Company continues to be an active acquirer of securities servicing and asset management businesses. In March 2000, the Company completed the acquisition of the correspondent clearing business of SG Cowen Securities Corporation. This transaction supports the Company's ongoing strategy of growth in the correspondent clearing business. In July 2000, the Company completed the acquisition of BHF Securities Corporation, a leading provider of domestic and international correspondent clearing services. In January 2001, the Company acquired the correspondent clearing business of Schroder & Co. Inc, from Salomon Smith Barney Inc. This transaction provides the Company with the opportunity to establish new client relationships and add valuable product capabilities to its securities servicing businesses. In March 2000, the Company acquired the corporate trust business of Harris Trust and Savings Bank located in Chicago, Illinois. The transaction involved the transfer of approximately 1,700 trustee and agency appointments for corporate and municipal issues of debt securities. In May 2000, the Company completed its purchase of the issuer, agency and depository services business of Barclays Bank PLC. This transaction involves the transfer of several hundred fiscal, principal paying agent and sub-agent appointments as well as depository holdings on behalf of Euroclear and Clearstream Banking SA. In July 2000, the Company acquired the corporate trust business of Sakura Trust Company. In September 2000, the Company acquired the corporate trust business of Dai-Ichi Kangyo Bank of California, a wholly-owned subsidiary of the Dai-Ichi Kangyo Bank Ltd. In September 2000, the Company signed a definitive agreement to acquire the corporate trust business of The Trust Company of Bank of Montreal located in Toronto, Canada. The Trust Company's corporate trust business comprises approximately 300 bond trustee and agency appointments for Canadian and U.S. companies, which issue debt securities into the Canadian market. In October 2000, the Company acquired Ivy Asset Management Corp., a privately-held asset management firm, based in Garden City, New York. Ivy offers clients hedge fund products and advisory services utilizing multiple managers engaged in niche styles and sophisticated strategies not typically available to the investing public. Also, in October 2000, the Company completed the acquisition of approximately $9 billion in custodial accounts administered by the Bank of America Private Bank in Los Angeles. The acquisition of this book of business expands the Advisory Custody services for investment advisors and their high net worth clients. This is an integral part of the Private Client Services business which currently administers $36 billion in custody assets for private clients, consultants, investment advisors, and family offices. In January 2000, the Company completed the acquisition of certain assets of Institutional Securities Trading LLC ("IST"). IST is a commission recapture and third-party services firm primarily serving Taft-Hartley organizations and other plan sponsors. In May 2000, the Company completed the acquisition of certain assets of Global Execution Network Associates, Inc. ("GENA"). GENA is a U.S. based broker-dealer, specializing in quantitative and program equity trading in 52 markets globally. GENA's clients are both U.S. and 27 U.K. institutional investors. The acquisition will enhance the Company's non-dollar trading capabilities for the Company's institutional clients worldwide and furthers the Company's strategy to be a recognized leader in global institutional agency brokerage. In April 2000, the Company completed the sale of its interest in Banco Credibanco S.A. to Unibanco-Uniao de Bancos Brasileiros S.A. On October 31,1999, the Company acquired RBS Trust Bank Limited ("RBSTB") from the Royal Bank of Scotland plc. At acquisition, RBSTB had assets of $9.5billion. RBSTB is the largest provider of investor services to pension funds in the United Kingdom, and holds a leading position in the fund manager market, offering retail funds services, trustee and depositary services, as well as pension, banking, and treasury products. The acquisition continued the Company's expansion in the European market. On November 15, 1999, the Company acquired Estabrook Capital Management Inc., an asset management firm based in New York with approximately $2.5 billion in assets under management in 2000. Also in 1999, the Company acquired a planned giving service, a eurobond paying agency and depositary business, asset servicing businesses, and the corporate trust businesses of other financial service companies. In the third quarter of 1999, the Company sold BNY Financial Corporation ("BNYFC")to General Motors Acceptance Corporation. Net income includes a pre-tax gain of $1,020 million ($573 million after-tax) or 75 cents per share from this sale. During 1998, the Company acquired a merger and advisory firm, a correspondent securities clearing organization and a directed brokerage services firm. The Company also acquired the corporate trust businesses of several smaller banks in 1998 as well as a firm specializing in the research and trading of high yield securities. In 1998, the Company acquired International Factors, Ltd. which was subsequently sold as part of the BNYFC transaction. The proforma effect of the above acquisitions and dispositions is not material. 28 3. Securities The following table sets forth the amortized cost and the fair values of securities at the end of the last two years: 2000 --------------------------------------------- Gross Unrealized In millions Amortized ---------------- Fair Cost Gains Losses Value --------- ----- ------ ----- Securities Held-to-Maturity US Government Obligations $ 18 $ - $ - $ 18 US Government Agency Obligations 4 - - 4 Obligations of States and Political Subdivisions 237 1 - 238 Mortgage-Backed Securities 100 2 - 102 Emerging Markets 311 - 37 274 Other Debt Securities 82 2 1 83 ------ ---- --- ------ Total Securities Held-to-Maturity 752 5 38 719 ------ ---- --- ------ Securities Available-for-Sale US Government Obligations 1,459 15 6 1,468 US Government Agency Obligations 1,210 19 5 1,224 Obligations of States and Political Subdivisions 438 10 - 448 Other Debt Securities 1,540 2 2 1,540 Asset/Mortgage-Backed Securities 835 4 - 839 Equity Securities 790 370 30 1,130 ------ ---- --- ------ Total Securities Available-for-Sale 6,272 420 43 6,649 ------ ---- --- ------ Total Securities $7,024 $425 $81 $7,368 ====== ==== === ====== 1999 --------------------------------------------- Gross Unrealized In millions Amortized ---------------- Fair Cost Gains Losses Value --------- ----- ------ ----- Securities Held-to-Maturity US Government Obligations $ 12 $ - $ - $ 12 US Government Agency Obligations 4 - - 4 Obligations of States and Political Subdivisions 275 1 - 276 Mortgage-Backed Securities 114 - 2 112 Emerging Markets 304 - 32 272 Other Debt Securities 162 1 - 163 ------ ---- ---- ------ Total Securities Held-to-Maturity 871 2 34 839 ------ ---- ---- ------ Securities Available-for-Sale US Government Obligations 2,767 - 50 2,717 US Government Agency Obligations 768 - 36 732 Obligations of States and Political Subdivisions 315 3 1 317 Other Debt Securities 843 4 3 844 Asset/Mortgage-Backed Securities 354 - - 354 Equity Securities 900 221 57 1,064 ------ ---- ---- ------ Total Securities Available-for-Sale 5,947 228 147 6,028 ------ ---- ---- ------ Total Securities $6,818 $230 $181 $6,867 ====== ==== ==== ====== 29 The amortized cost and fair values of securities at December 31, 2000, 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 $218 $218 $1,081 $1,081 Due After One Year Through Five Years 115 114 2,369 2,404 Due After Five Years Through Ten Years 26 26 559 558 Due After Ten Years 293 259 638 637 Asset/Mortgage-Backed Securities 100 102 835 839 Equity Securities - - 790 1,130 ---- ---- ------ ------ Total $752 $719 $6,272 $6,649 ==== ==== ====== ====== Realized gross gains on the sale of securities available-for-sale were $130 million and $175 million in 2000 and 1999. There were $13 million of realized gross losses in 2000 and $1 million of realized gross losses in 1999. At December 31, 2000, assets amounting to $16 billion were pledged primarily for potential borrowing at the Federal Reserve Discount Window. The significant components of pledged assets were as follows: $4.4 billion were securities, $11.3 billion were loans, and the remaining $0.3 billion were primarily trading assets. Included in these pledged assets were securities available-for-sale of $669 million which were pledged as collateral for actual borrowings. The lenders in these borrowings have the right to repledge or sell these securities. The Company obtains securities under resale, securities borrowed and custody agreements on terms which permit it to repledge or resell the securities to others. At December 31, 2000, the Company had pledged $93 million of such securities in connection with the Company's financing activities. 4. Loans The Company's loan distribution and industry concentrations of credit risk at December 31, 2000 and 1999 are incorporated by reference from "Loans" in the Management's Discussion and Analysis Section of this report. The Company's retail, community, and regional commercial 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 $881 million, $432 million, and $1,057 million at December 31, 2000, 1999, and 1998. These loans are primarily with related entities under revolving lines of credit. During 2000, these loans averaged $551 million, and ranged from $378 million to $881 million. All loans were fully performing during this period. 30 Transactions in the allowance for credit losses are summarized as follows: In millions 2000 1999 1998 ----------- ------ ------ ------ Balance, January 1 $595 $636 $641 Charge-Offs (100) (154) (51) Recoveries 16 17 22 ----- ----- ----- Net Charge-Offs (84) (137) (29) Provision 105 135 20 Other (1) - (39) 4 ----- ----- ----- Balance, December 31 $616 $595 $636 ==== ==== ==== (1) In 1999, $39 million was allocated to BNYFC loans sold. Nonaccrual and reduced rate loans outstanding at December 31, 2000, 1999, and 1998 were $189 million, $146 million, and $179 million. At December 31, 2000, commitments to borrowers whose loans were classified as nonaccrual or reduced rate were not material. At December 31, 2000 and 1999, impaired loans aggregated $129 million and $88 million, of which $107 million and $65 million exceeded their fair value by $25 million and $21 million. For 2000 and 1999, the average amount of impaired loans was $114 million and $130 million and interest income recognized on them (limited to cash received) was $1.9 million and $0.2 million in 2000 and 1999. Interest income recognized on total nonaccrual and reduced rate loans exceeded reversals by $2 million in 2000, $1 million in 1999, and $3 million in 1998. Interest income would have been increased by $9 million, $8 million, and $10 million if loans on nonaccrual status at December 31, 2000, 1999, and 1998 had been performing for the entire year. At year-end, foreign loans on nonperforming status were $48 million in 2000, $63 million in 1999, and $53 million in 1998. Interest income received on foreign nonperforming loans equaled reversals in 2000, 1999, and 1998. If foreign loans on nonaccrual status at December 31, 2000, 1999, and 1998 had been performing for the entire year, interest income would have been increased by $1 million for 2000 and 1999 and $2 million for 1998. Other real estate was $4 million, $12 million, and $14 million at December 31, 2000, 1999, and 1998. Writedowns of and expenses related to other real estate included in noninterest expense were $4 million, $1 million, and $2 million in 2000, 1999, and 1998. 31 5. Long-Term Debt The following is a summary of the contractual maturity and sinking fund requirements of long-term debt at December 31, 2000 and totals for 1999: 2000 1999 --------------------------------------- ------ After 5 Years Under Through After In millions 5 Years(1) 10 Years 10 Years Total Total ----------- ------- -------- -------- ------ ------ Fixed $1,467 $700 $838 $3,005 $2,730 Variable - - 31 31 81 ------ ---- ---- ------ ------ Total $1,467 $700 $869 $3,036(2) $2,811 ====== ==== ==== ====== ====== (1) The under five years category above includes $0.3 million of fixed rate debt with scheduled maturity of under one year. (2) At December 31, 2000, long-term debt aggregating $1,085 million is redeemable at the option of the Company as follows: $370 million in 2001; $280 million in 2002; and $435 million in 2003. Fixed rate debt at December 31, 2000 had interest rates ranging from 6.10% to 8.50%. The weighted average interest rates on fixed rate debt at December 31, 2000 and 1999 were 6.67% and 7.32%. The weighted average interest rates on variable rate debt at December 31, 2000 and 1999 were 6.62% and 5.69%. 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. 6. Company-Obligated Mandatory Redeemable Preferred Trust Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures Wholly owned subsidiaries of the Company ("the Trusts") have issued cumulative Preferred Trust Securities. The sole assets of each trust are junior subordinated deferrable interest debentures of the Company, whose maturities and interest rates match the Preferred Trust Securities. The Company's obligations under the agreements that relate to the Preferred Trust Securities, the Trusts and the debentures constitute a full and unconditional guarantee by the Company of the Trusts' obligations under the Preferred Trust Securities. The following table sets forth a summary of the Preferred Trust Securities issued by the Company as of December 31, 2000: Preferred Trust Securities -------------------------- Dollars Interest Assets Due Call Call in millions Amount Rate of Trust Date Date Price ----------- ------ -------- -------- ---- ---- ------- BNY Institutional Capital Trust A $300 7.78% $309 2026 2006 103.89% BNY Capital I 300 7.97 309 2026 2006 103.99 BNY Capital II 400 7.80 412 2027 2002 Par BNY Capital III 300 7.05 309 2028 2003 Par BNY Capital IV 200 6.88 206 2028 2004 Par 32 The Company has the option to shorten the maturity of BNY Capital II, III and IV to 2012, 2013 and 2013 or extend the maturity to 2046, 2047 and 2047. 7. Shareholders' Equity The Company currently plans to buy back up to 14 million shares of its common stock in 2001. In 1998, the Company's shareholders authorized an increase in the Company's common stock from 800 million common shares to 1.6 billion common shares. The common stock was split two-for-one as of July 24, 1998. Prior period financial statements have been restated to reflect the stock split. The Company's warrants expired in November 1998. In addition to the Class A preferred stock, the Company has 5 million authorized shares of preferred stock having no par value, with no shares outstanding at either December 31, 2000 or 1999. The Company's preferred stock purchase rights 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 $200 in market value of the Company's common stock for $100. 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. At December 31, 2000, the Company had reserved for issuance 47 million common shares pursuant to the terms of securities and employee benefit plans. Basic and diluted earnings per share are calculated as follows: In millions, except per share amounts 2000 1999 1998 ------------------------------------- ------ ------ ------ Net Income (1) $1,429 $1,739 $1,192 Basic Weighted Average Shares Outstanding 733 751 751 Shares Issuable upon Conversion: Warrants - - 18 Employee Stock Options 12 14 12 ------ ------ ------ Diluted Weighted Average Shares Outstanding 745 765 781 ====== ====== ====== Basic Earnings per Share $ 1.95 $ 2.31 $ 1.59 Diluted Earnings per Share $ 1.92 $ 2.27 $ 1.53 (1) For purposes of calculating earnings per share, net income available to common shareholders and diluted net income are the same for all years presented. 33 8. Income Taxes Income taxes included in the consolidated statements of income consist of the following:
2000 1999 1998 ---------------------- ---------------------- ---------------------- In millions Current Deferred Total Current Deferred Total Current Deferred Total ------- -------- ----- ------- -------- ----- ------- -------- ----- Federal $132 $397 $529 $422 $342 $ 764 $280 $185 $465 Foreign 129 - 129 101 - 101 75 - 75 State and Local 32 132 164 124 112 236 84 75 159 ---- ---- ---- ---- ---- ------ ---- ---- ---- Income Taxes $293 $529 $822 $647 $454 $1,101 $439 $260 $699 ==== ==== ==== ==== ==== ====== ==== ==== ====
The components of income before taxes are as follows: In millions 2000 1999 1998 ----------- ------ ------ ------ Domestic $1,981 $2,691 $1,751 Foreign 383 261 235 ------ ------ ------ Income Before Taxes $2,364 $2,952 $1,986 ====== ====== ====== The Company's net deferred tax liability (included in accrued taxes) at December 31 consisted of the following: In millions 2000 1999 1998 ----------- ------ ------ ------ Lease Financings $2,548 $2,108 $1,696 Depreciation and Amortization 257 239 202 Credit Losses on Loans (321) (322) (317) Other Assets (217) (151) (97) Other Liabilities 467 278 334 ------ ------ ------ Net Deferred Tax Liability $2,734 $2,152 $1,818 ====== ====== ====== The Company has not recorded a valuation allowance because it expects to realize all of its deferred tax assets. The statutory federal income tax rate is reconciled to the Company's effective income tax rate below: 2000 1999 1998 ------ ------ ------ Federal Rate 35.0% 35.0% 35.0% Tax-Exempt Income (1.5) (1.0) (1.2) Foreign Operations (0.3) (0.1) (0.2) Leveraged Lease Portfolio (0.2) (0.1) (0.8) Preferred Trust Securities (1.7) (1.3) (1.7) State and Local Income Taxes, Net of Federal Income Tax Benefit 4.4 5.0 5.0 Nondeductible Expenses 0.7 0.5 0.8 Other (1.6) (0.7) (1.7) ----- ----- ----- Effective Rate 34.8% 37.3% 35.2% ===== ===== ===== 34 9. Employee Benefit Plans The Company has defined benefit and contribution retirement plans covering substantially all full-time and eligible part-time employees and also provides health care benefits for certain retired employees. Pension Benefits Healthcare Benefits ------------------ --------------------- Dollars in millions 2000 1999 2000 1999 ------------------- ---- ---- ---- ---- Change in Benefit Obligation Obligation at Beginning of Period $(496) $(450) $(115) $(125) Service Cost (25) (22) (1) (1) Interest Cost (36) (31) (9) (9) Employee Contributions - - (2) (1) Actuarial Gain 26 39 4 11 Benefits Paid 34 47 11 10 Net (Acquisitions) Dispositions 30 (79) - - ----- ----- ----- ----- Obligation at End of Period (467) (496) (112) (115) ----- ----- ----- ----- Change in Plan Assets Fair Value at Beginning of Period 1,375 1,073 59 57 Actual Return on Plan Assets 558 263 6 2 Net Acquisitions (Dispositions) (31) 80 - - Employer Contributions 7 6 - - Benefit Payments (34) (47) - - ------ ----- ----- ----- Fair Value at End of Period 1,875 1,375 65 59 ------ ----- ----- ----- Funded Status 1,408 879 (47) (56) Unrecognized Net Transition (Asset) Obligation (7) (9) 74 81 Unrecognized Prior Service Cost (5) (10) - - Unrecognized Net Gain (821) (353) (19) (16) ------ ----- ----- ----- Prepaid Benefit Cost $ 575 $ 507 $ 8 $ 9 ====== ===== ===== ===== Weighted Average Assumptions Discount Rate 8.25% 8.00% 8.00% 7.75% Expected Rate of Return on Plan Assets 10.5 10.5 8.3 8.3 Rate of Compensation Increase 4.5 4.3 35 The Company uses September 30 as the measurement date for plan assets and obligations. Pension Benefits Healthcare Benefits ------------------- ------------------- Dollars in millions 2000 1999 1998 2000 1999 1998 ------------------- ---- ---- ---- ---- ---- ---- Net Periodic Cost (Income): Service Cost $ 25 $ 22 $ 17 $ 1 $ 1 $ 1 Interest Cost 36 31 28 9 9 9 Expected Return on Assets (117) (96) (86) (5) (5) (3) Other (6) (1) (3) 5 5 5 ---- ---- ---- ---- ---- ---- Net Periodic Cost (Income) $(62) $(44) $(44) $ 10 $ 10 $ 12 ==== ==== ==== ==== ==== ==== The assumed health care cost trend rate used in determining benefit expense for 2000 is 7.5% decreasing to 5.0% in 2005 and thereafter. An increase in this rate of one percentage point for each year would increase the benefit obligation and the sum of the service and interest costs by 9%. A decrease in this rate of one percentage point for each year would decrease the benefit obligation by 7% and the sum of the service and interest costs by 8%. The Company has an Employee Stock Ownership Plan ("ESOP") covering substantially all full-time employees with more than one year of service. The ESOP may provide additional retirement benefits. Contributions are made equal to required principal and interest payments on borrowings by the ESOP. Contributions were approximately $0.5 million in each of 2000, 1999 and 1998. The Company has defined contribution plans for which it recognized a cost of $101 million in 2000, $94 million in 1999 and $82 million in 1998. 10. Company Financial Information The Bank of New York (the "Bank"), the Company's primary banking subsidiary, 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 excess of undivided profits. Under the first and more significant of these limitations, in 2001 the Bank could declare dividends of $749 million plus net profits earned in 2001. The Federal Reserve Board can prohibit a dividend if payment would constitute an unsafe or unsound banking practice. The Federal Reserve Board generally considers that a bank's dividends should not exceed earnings from continuing operations. 36 Regulators require the Company and the Bank to maintain minimum levels of capital in accordance with established quantitative measurements. As of December 31, 2000 and 1999, the Company and the Bank were considered well capitalized on the basis of the ratios (defined by regulation) of Total and Tier 1 capital to risk-weighted assets and leverage (Tier 1 capital to average assets), which are shown as follows: December 31, 2000 December 31, 1999 --------------------- --------------------- Well Capitalized Company Bank Company Bank Guidelines ------- ------ ------- ------ ----------- Tier 1 8.60% 8.03% 7.51% 7.14% 6% Total Capital 12.92 11.60 11.67 10.50 10 Leverage 7.49 6.91 7.20 6.85 5 Tangible Common Equity 5.78 6.96 4.79 6.36 The Federal Reserve Act limits and requires collateral for extensions of credit by the Company's banks to the Company and certain of its non-bank 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 regulatory capital, 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 $401 million and $489 million for the years 2000 and 1999. 37 The Company's condensed financial statements are as follows: Balance Sheets
In millions December 31, 2000 1999 ------------------------------------------------- ------- ------- Assets Cash and Due from Banks $ 1 $ 1 Securities 321 2 Loans 12 9 Investment in and Advances to Subsidiaries and Associated Companies Banks 8,549 7,889 Other 3,721 3,370 ------- ------- 12,270 11,259 Other Assets 72 97 ------- ------- Total Assets $12,676 $11,368 ======= ======= Liabilities and Shareholders' Equity Other Borrowed Funds $ 310 $ 450 Due to Non-Bank Subsidiaries 3,042 2,945 Due to Bank Subsidiaries 50 - Other Liabilities 118 50 Long-Term Debt 3,004 2,780 ------- ------- Total Liabilities 6,524 6,225 ------- ------- Shareholders' Equity* Preferred 1 1 Common 6,151 5,142 ------- ------- Total Liabilities and Shareholders' Equity $12,676 $11,368 ======= ======= *See Consolidated Statements of Changes in Shareholders' Equity.
38 Statements of Income
In millions For the years ended December 31, 2000 1999 1998 ----------------------------------------------- ------- ------ ------ Operating Income Dividends from Subsidiaries Banks $ 852 $1,364 $ 564 Other 101 1,322 52 Interest from Subsidiaries Banks 116 99 88 Other 45 31 24 Other 6 54 56 ------ ------ ------ Total 1,120 2,870 784 ------ ------ ------ Operating Expenses Interest (including $208 in 2000, $186 in 1999, and $169 in 1998 to Subsidiaries) 428 379 367 Other 31 19 10 ------ ------ ------ Total 459 398 377 ------ ------ ------ Income Before Income Taxes and Equity in Undistributed Earnings of Subsidiaries 661 2,472 407 Income Tax Benefit (96) (98) (116) ------ ------ ------ Income Before Equity in Undistributed Earnings of Subsidiaries 757 2,570 523 ------ ------ ------ Equity in Undistributed Earnings of Subsidiaries Banks 480 187 411 Other 192 (1,018) 258 ------ ------ ------ Total 672 (831) 669 ------ ------ ------ Net Income $1,429 $1,739 $1,192 ====== ====== ======
39 Statements of Cash Flows
In millions For the years ended December 31, 2000 1999 1998 -------------------------------------------------- ------ ------ ------ Operating Activities Net Income $1,429 $1,739 $1,192 Adjustments to Determine Net Cash Attributable to Operating Activities: Amortization 15 16 11 Equity in Undistributed Earnings of Subsidiaries (672) 831 (669) Securities Gains 8 (19) (1) Change in Interest Receivable 6 (21) (16) Change in Interest Payable (1) 8 4 Change in Taxes Payable 74 (44) (51) Other, Net 5 11 (26) ------ ------ ------ Net Cash Provided by Operating Activities 864 2,521 444 ------ ------ ------ Investing Activities Purchases of Securities (418) (18) (25) Sales of Securities 84 - 1 Maturities of Securities 2 4 22 Change in Loans (3) 465 (151) Acquisition of, Investment in, and Advances to Subsidiaries (151) (1,736) (286) Other, Net - - (6) ------ ------ ------ Net Cash Used by Investing Activities (486) (1,285) (445) ------ ------ ------ Financing Activities Change in Other Borrowed Funds (140) (364) (66) Proceeds from the Issuance of Long-Term Debt 265 731 286 Repayments of Long-Term Debt (53) (20) (17) Change in Advances from Subsidiaries 147 168 579 Issuance of Common Stock 341 301 606 Treasury Stock Acquired (454) (1,626) (976) Cash Dividends Paid (484) (437) (403) ------ ------ ------ Net Cash (Used) Provided by Financing Activities (378) (1,247) 9 ------ ------ ------ Change in Cash and Due from Banks - (11) 8 Cash and Due from Banks at Beginning of Year 1 12 4 ------ ------ ------ Cash and Due from Banks at End of Year $ 1 $ 1 $ 12 ====== ====== ====== Supplemental Disclosure of Cash Flow Information Cash Paid During the Year for: Interest $ 428 $ 369 $ 361 Income Taxes 139 435 339
40 11. Other Noninterest Income and Expense Other noninterest income includes equity in earnings of unconsolidated subsidiaries of $35 million, $20 million, and $22 million in 2000, 1999, and 1998. In 1999, other noninterest income included a pre-tax gain of $1,020 million on the sale of BNYFC and a liquidity charge of $124 million on the accelerated disposition of certain loans. Other noninterest expense includes amortization of intangibles of $115 million, $102 million, and $101 million in 2000, 1999, and 1998. Included in other assets at December 31, 2000, 1999, and 1998 were intangible assets of $1,800 million, $1,640 million, and $1,580 million. 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 5% to 10% at December 31, 2000 and 6% to 9% at December 31, 1999. 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. 41 The carrying amount and estimated fair value of the Company's financial instruments are as follows: In millions December 31, 2000 1999 ---------------------------- -------------------- -------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- ------- -------- ------- Assets Securities $ 7,940 $ 7,936 $ 7,250 $ 7,299 Trading Assets 12,051 12,051 8,715 8,715 Loans and Commitments 31,126 31,305 33,030 32,934 Derivatives Used for ALM 34 5 17 15 Other Financial Assets 15,141 15,141 16,421 16,421 ------- ------- ------- ------- Total Financial Assets 66,292 $66,438 65,433 $65,384 ======= ======= Non-Financial Assets 10,822 9,323 ------- ------- Total Assets $77,114 $74,756 ======= ======= Liabilities Noninterest-Bearing Deposits $13,255 $13,255 $12,162 $12,162 Interest-Bearing Deposits 43,121 43,150 43,589 43,607 Borrowings 2,916 2,916 2,913 2,914 Long-Term Debt 3,036 3,042 2,811 2,653 Trading Liabilities 2,070 2,070 2,353 2,353 Preferred Trust Securities 1,500 1,435 1,500 1,307 Derivatives Used for ALM 6 (24) 8 98 ------- ------- ------- ------- Total Financial Liabilities 65,904 $65,844 65,336 $65,094 ======= ======= Non-Financial Liabilities 5,058 4,277 ------- ------- Total Liabilities and Preferred Trust Securities $70,962 $69,613 ======= ======= Commitments and contingent items reduced the fair value of loans and commitments by $20 million in 2000 and $11 million in 1999. 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: ALM Interest Rate Swaps ----------------------- Carrying Notional Unrealized In millions Amount Amount Gain (Loss) ----------- -------- -------- ---- ---- At December 31, 2000 -------------------- Loans $ 614 $ 614 $ 3 $(12) Securities Held-for-Sale 200 200 14 - Deposits 155 155 2 (2) Borrowings 860 860 23 - Long-Term Debt 1,440 1,440 26 (25) At December 31, 1999 -------------------- Loans $ 505 $ 505 $16 $ (1) Deposits 290 290 1 (11) Borrowings 218 218 - (2) Long-Term Debt 1,465 1,465 2 (88) 42 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 ---------------------------------------- Dollars in millions 12/31/00 2001 2002 2003 2004 2005 ----------------------------------------------------------------------------------------- Receive Fixed Interest Rate Swaps: Notional Amount $2,325 $1,325 $1,090 $ 655 $ 645 $ 645 Weighted Average Rate 7.14% 7.23% 7.19% 7.15% 7.14% 7.14% Pay Fixed Interest Rate Swaps: Notional Amount $ 614 $ 548 $ 495 $ 462 $ 374 $ 325 Weighted Average Rate 6.35% 6.36% 6.36% 6.36% 6.35% 6.30% Basis Interest Rate Swaps: Notional Amount $ 330 $ - $ - $ - $ - $ - Forward LIBOR Rate (1) 6.43% 5.53% 5.82% 5.98% 6.11% 6.11% (1) The forward LIBOR rate shown above reflects the implied forward yield curve for that index at December 31, 2000. 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 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 the cumulative translation adjustment included in shareholders' equity. At December 31, 2000 and 1999, $749 million and $571 million in notional amount of foreign exchange contracts, with fair values of $(21) million and $8 million, hedged corresponding amounts of foreign investments. These foreign exchange contracts had a maturity of less than 2 months at December 31, 2000. At December 31, 2000, $145 million in notional amount of forward foreign exchange contracts, with a fair value of $1 million, hedged planned noninterest expenses denominated in foreign currencies. These foreign exchange contracts had maturity of less than 1 year at December 31, 2000. Deferred net gains or losses on ALM derivative financial instruments at December 31, 2000 and 1999 were $2 million debit and $27 million credit. Net interest income increased by $6 million in 2000, $5 million in 1999, and $4 million in 1998 as a result of ALM derivative financial instruments. A discussion of the credit, market, and liquidity risks inherent in financial instruments is presented under "Liquidity", "Market Risk Management", "Trading Activities and Risk Management", and "Asset/Liability Management" in the unaudited Management's Discussion and Analysis Section of this report and Note 13 to the Consolidated Financial Statements. 43 13. Trading Activities The following table shows the fair value of the Company's financial instruments that are held for trading purposes:
2000 1999 ---------------------------- --------------------------- In millions 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 $ 10 $ 7 $ - $ - $ 2 $ 9 $ - $ - Swaps 613 1,128 343 891 1,104 692 729 543 Written Options - - 761 710 - - 760 567 Purchased Options 75 66 - - 60 69 - - Foreign Exchange Contracts: Written Options - - 106 56 - - 164 224 Purchased Options 128 108 - - 254 240 - - Commitments to Purchase and Sell Foreign Exchange 869 875 835 849 600 560 577 535 Debt Securities 10,349 9,044 23 25 6,695 1,367 123 165 Credit Derivatives 7 4 2 - - - - - ------- ------- ------ ------ ------ ------ ------ ------ Total Trading Account $12,051 $11,232 $2,070 $2,531 $8,715 $2,937 $2,353 $2,034 ======= ======= ====== ====== ====== ====== ====== ======
Other noninterest income included the following income related to trading activities: In millions 2000 1999 1998 ----------- ----- ----- ----- Foreign Exchange $215 $137 $126 Interest Rate Contracts 29 20 26 Debt and Other Securities 14 32 18 Credit Derivatives 3 - - ----- ----- ----- $261 $189 $170 ==== ==== ==== Foreign exchange includes income from purchasing and selling foreign exchange, futures, and options. Interest rate contracts reflect results from futures and forward contracts, interest rate swaps, foreign currency swaps, and options. Debt and other securities primarily reflect income from debt securities. 44 14. Commitments and Contingent Liabilities In the normal course of business, various commitments and contingent liabilities are outstanding which are not reflected in the accompanying consolidated balance sheets. Management does not expect any material losses to result from these matters. The Company's significant trading and off-balance-sheet risks are securities, foreign currency and interest rate risk management products, commercial lending commitments, letters of credit, and securities lending indemnifications. The Company assumes these risks to reduce interest rate and foreign currency risks, to provide customers with the ability to meet credit and liquidity needs, to hedge foreign currency and interest rate risks, and to trade for its own account. These items involve, to varying degrees, credit, foreign exchange, and interest rate risk not recognized in the balance sheet. The Company's off-balance-sheet risks are managed and monitored in manners similar to those used for on-balance-sheet risks. There are no significant industry concentrations of such risks. A summary of the notional amount of the Company's off-balance-sheet credit transactions, net of participations, at December 31, 2000 and 1999 follows: Off-Balance-Sheet Credit Risks In millions 2000 1999 ----------- ------- ------- Commercial Lending Commitments $ 47,688 $50,721 Standby Letters of Credit 7,743 8,257 Commercial Letters of Credit 1,230 1,329 Securities Lending Indemnifications 106,560 61,378 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. 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. The Company enters into offsetting positions to reduce exposure to foreign exchange and interest rate risk. Standby letters of credit principally support corporate obligations and include $0.4 billion that were collateralized with cash and securities at December 31, 2000 and 1999. At December 31, 2000 and 1999, securities lending indemnifications were secured by collateral of $106.6 billion and $61.4 billion. At December 31, 2000, approximately $6.3 billion of the standbys will expire within one year, and the balance between one to five years. At December 31, 2000, approximately $100.4 billion of interest rate contracts will mature within one year, $137.3 billion between one and five years, and the balance after five years. At December 31, 2000, approximately $74.7 billion of foreign exchange contracts will mature within one year and $1.5 billion between one and five years. There were no derivative financial instruments on nonperforming status at year-end 2000. Use of derivative financial instruments involves reliance on counterparties. Failure of a counterparty to honor its obligation under a derivative contract is a risk the Company assumes whenever it engages in a derivative contract. 45 A summary of the notional amount and credit exposure of the Company's derivative financial instruments at December 31, 2000 and 1999 follows: Derivative Financial Instruments Notional Amount Credit Exposure --------------- --------------- In millions 2000 1999 2000 1999 ----------- ------ ------- ----- ------ Interest Rate Contracts: Futures and Forward Contracts $ 36,614 $20,537 $ 1 $ 2 Swaps 109,525 86,341 1,327 1,124 Written Options 87,979 70,009 - - Purchased Options 40,749 36,766 352 287 Foreign Exchange Contracts: Swaps 235 147 18 16 Written Options 14,172 24,639 40 28 Purchased Options 16,545 27,968 189 287 Commitments to Purchase and Sell Foreign Exchange 45,400 50,196 1,022 694 Equity Derivatives: Purchased Options - 3 - - Credit Derivatives: Swaps 1,643 325 7 83 ------ ------ 2,956 2,521 Effect of Master Netting Agreements (1,567) (1,558) ------ ------ Total Credit Exposure $1,389 $ 963 ====== ====== Operating Leases Net rent expense for premises and equipment was $113 million in 2000, $100 million in 1999, and $101 million in 1998. At December 31, 2000, the Company and its subsidiaries were obligated under various noncancelable lease agreements, some 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, 2000 are as follows: Year ending December 31, In millions ----------------------------------------------------- 2001 $ 90 2002 77 2003 63 2004 55 2005 52 Thereafter 234 ----- Total Minimum Lease Payments $ 571 ===== In the ordinary course of business, there are various legal claims pending against the Company and its subsidiaries. In the opinion of management, liabilities arising from such claims, if any, would not have a material effect upon the Company's consolidated financial statements. 46 15. 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 plan, options to acquire common stock may be granted in amounts that do not exceed 70 million shares. 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 $37 million in 2000, $31 million in 1999, and $24 million in 1998. Also, diluted earnings per share would have been reduced by 5 cents per share in 2000, 4 cents per share in 1999, and 3 cents per share in 1998. The assumptions used in the Black-Scholes Model for determining the impact of accounting for the Option Plans at fair value for 2000 are as follows: dividend yield of 3%; expected volatility of 29%; risk free interest rate of 6.70%; and expected option lives of 5 years. A summary of the status of the Company's Option Plans as of December 31, 2000, 1999, and 1998, and changes during the years ending on those dates is presented below:
2000 1999 1998 --------------------- ---------------------- --------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Shares Price Shares Price Shares Price ------- --------- --------- --------- --------- --------- --------- Outstanding at Beginning of Year 30,340,627 $22.04 28,195,178 $16.72 24,662,436 $10.31 Granted 9,489,700 39.65 7,322,850 35.60 9,206,000 29.37 Exercised (5,619,925) 15.62 (4,579,044) 10.12 (5,273,966) 8.34 Canceled (717,382) 37.18 (598,357) 28.64 (399,292) 22.68 ---------- ---------- ---------- Outstanding at End of Year 33,493,020 27.78 30,340,627 22.04 28,195,178 16.72 ========== ========== ========== Options Exercisable at Year-end 16,539,056 18.57 16,223,731 13.38 16,414,092 10.09 Weighted Average Fair Value of Options Granted During the Year $10.93 $8.18 $6.24
The following table summarizes information about stock options outstanding at December 31, 2000:
Options Outstanding Options Exercisable --------------------------------- --------------------- Weighted Average Weighted Weighted Number Remaining Average Number Average Range of Outstanding Contractual Exercise Exercisable Exercise Exercise Prices at 12/31/00 Life Price at 12/31/00 Price --------------- ----------- ----------- -------- ----------- -------- $ 3 to 7 4,384,043 3.0 Years $ 6.70 4,384,043 $ 6.70 11 to 17 6,273,441 5.6 15.09 5,989,459 14.99 20 to 25 43,984 6.4 21.51 34,536 21.61 27 to 30 5,818,009 7.0 27.48 3,782,035 27.48 31 to 42 16,646,493 8.6 37.80 2,348,983 35.49 43 to 57 327,050 9.6 50.21 - - ----------- ----------- 3 to 57 33,493,020 7.0 27.78 16,539,056 18.57 =========== ===========
47 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 sheets of The Bank of New York Company, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the United States. 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 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, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /S/ Ernst & Young LLP NEW YORK, NEW YORK JANUARY 26, 2001 48 Securities Servicing and Global Payment Services We are the world's premier asset servicer and global payments provider. Our array of products exceeds those of our competitors, and we rank as the number one or two provider in most of the markets we serve. Growth across business lines accelerated in 2000, produced by strong sales momentum, revenues from strategic acquisitions, and expansion of global financial markets. Aggressive investment in leading-edge technology helped us capitalize on a rapidly changing global market. 2000 fee revenue from these businesses grew to $1.91 billion, a 26% increase. We are well positioned to take advantage of the growth in financial assets and trading activity occurring around the globe. This expansion is driven by increased cross-border investments, substantial growth of overseas pension and mutual funds, and the opening of new investment markets. Investor Services ----------------- By focusing on specific industries, we are able to provide consultative expertise and tailored solutions to mutual funds, fund managers, insurance companies, banks, government agencies, endowments, corporate pension funds, central banks, and broker/dealers. We serve as a partner to these key client segments, leveraging our core strengths to enable them to build their own competitive advantage. Our commitment to ongoing product innovation enables us to deliver an expanded range of services designed to help our clients mitigate risk, maximize performance, and manage costs. Escalating financial and competitive pressures are compelling many institutional investors and broker/dealers to outsource middle- and back- office functions at an accelerating rate. As a leading outsourcing provider, The Bank of New York allows clients to use our expertise and infrastructure, and to deploy their resources to compete more effectively in their core businesses. During 2000 the Bank was appointed as an outsourcing partner by Julius Baer International, the London-based private client asset management arm of Julius Baer, to provide administration and custody services. This was the first outsource transaction of its kind involving a Continental European institution and represents the beginning of a trend that we expect to continue in 2001 and beyond. Strategic investment, partnership and product innovation in 2000 resulted in the following: - BNY Clearing's acquisitions of BHF Securities Corporation, certain assets of SG Cowen Securities Corporation, and Schroder & Co. Inc. expanded our capabilities in the correspondent clearing business. These services help brokers package and process a range of investments for their customers, while providing our institutional clients an opportunity to distribute their asset management products to brokers; - A strategic alliance with RiskMetrics expanded our analytic capabilities to our pension clients by enhancing value-at-risk services; - The establishment of EnergyClear, which is the first industry-sponsored clearinghouse to offer comparison, netting and settlement of wholesale energy 49 contracts for the over-the-counter (OTC) marketplace. These financial services will ultimately increase the market depth and liquidity of the OTC energy markets by reducing the credit, legal, operational, and liquidity risks; - The formation of an alliance between Agricultural Bank of China and The Bank of New York to provide consultancy services covering technology, fund operations and training while Agricultural Bank prepares to launch open-end mutual funds in China; and - The ranking of AIB/BNY Fund Management (Ireland) Limited as the fastest- growing fund administrator in Dublin, validating our commitment to offshore administrative services. These developments are testament to the success of our ongoing approach - to leverage technology, create alliances and make acquisitions to extend our product and market reach. As the needs of global investors and broker/dealers grow increasingly sophisticated, our ability to consistently deliver innovative services that anticipate evolving client needs will continue to distinguish us in the marketplace and position us for sustained growth. Issuer Services --------------- Depositary Receipts (DRs) enable individuals worldwide to invest in dollar- denominated securities of non-U.S. companies and provide the issuers of these securities access to the U.S. and European capital markets. 2000 was another record year for the depositary receipt industry with trading volume reaching a high of 29 billion shares valued at $1.2 trillion. Continuing our leadership, we achieved a 64% share of all new public sponsored programs by adding 114 new clients from 33 countries including 50 programs that listed on a U.S. exchange for the first time. Among the new listings were Pearson, BASF, VSNL and China Unicom. Also 17 clients named the Bank as successor depositary, including Zurich Financial Services and Compania Anonima Nacional Telefonos de Venezuela (CANTV). We are the world leader with a market share of 65% of all DR programs with more than 1,400 clients from 69 countries. DR revenues grew largely due to an increase in cross-border mergers, acquisitions and trading activity. We launched 12 new HOLDRs(service mark) Trusts , which are exchange-traded equity basket securities. The trusts issue depositary receipts, which represent common shares of specified companies as well as depositary receipts. Basket securities offer flexibility, diversification and reduced investment costs. We also introduced DR Alert(service mark) our daily on-line notification system for depositary receipt clients. DR Alert tracks price and share activity, and reports activity, outside of predetermined parameters, directly to the issuer on a daily basis. DR Alert is delivered through our internet-based, client-reporting platform INFORM. Currently, INFORM is used by 450 depositary receipt clients from 50 countries. We acted as tender and exchange agent in some of the largest cross-border acquisitions using depositary receipts, including Vivendi, Seagram and Canal 50 Plus, which merged to form Vivendi Universal as well as Glaxo Wellcome and SmithKline Beecham, which merged to form GlaxoSmithKline. We remain the world market leader for innovative, high-quality corporate trust services. Our portfolio grew to more than 75,000 trust and agency appointments representing more than $750 billion in outstanding securities for issuers globally. Our diversified strategy continues to provide excellent core growth, with most products generating revenue growth of more than 15% and with several producing more than 30%. Corporate Trust products include global finance, structured finance, and dealing and trading services. Three strategic acquisitions were completed in 2000 adding new products and improved market penetration. Most notable was the Harris Trust and Savings Bank transaction in March 2000. The 1,700 appointments in the Chicago-based portfolio added both new structured products and an improved access to the U.S. Midwest markets - an important complement to our portfolio. We continued to enhance and differentiate our services for sophisticated asset-backed, collateralized debt obligations (CDOs) and other complex structured debt products. Our unique ability to integrate customized asset servicing through BNY Asset Solutions, advanced web-based analytic and reporting services, and some of the most advanced trust services available provides our clients with a comprehensive, one-stop solution for their complex financings. The success of our strategy is also reflected in the robust growth of our Global Trust Services Division, which maintained its position as the fastest growing global trust group in the industry. Record core growth, combined with the successful integration of two acquisitions completed in late 1999, produced impressive revenue growth in 2000. As one of the world's largest stock transfer agents, we provide a full range of technology enhanced services such as recordkeeping, dividend payment and reinvestment, proxy tabulation and exchange agent services to over 14.5 million shareholders representing 550 issuers. In 2000 our shareholder accounts grew by more than 25%, testament to our reputation for quality, service and new business efforts. Our ability to empower our clients and shareholders with access to their records on a real-time basis and to perform financial transactions on the internet is at the core of our strategy. We further enhanced our straight- through-processing capabilities through our imaging platform by deploying image-enabled workstations to all of our customer service representatives and operational personnel. BNY ESI & CO., our equity brokerage business, had another year of superior performance. Growth was fueled by the expansion of corporate, asset management, mutual fund, and plan sponsor client segments. Another important factor was the cross-sell of trade execution to a large number of the Bank's key client segments as well as other bank services. To strengthen BNY ESI's international capabilities, we acquired an institutional agency broker specializing in program trading of non-dollar equity securities. This new trading capability has been integrated into the Bank's non-dollar clearing services and global custody, creating an institutional Straight Through Execution and Processing (STEP) product. This 51 product allows clients to execute trades in most of the world's capital markets and have their trades automatically posted to their custody accounts. Global Payment Services ----------------------- We are a global market leader in payment services, offering solutions that optimize cash flow, integrate systems and increase investment returns to financial institutions and corporations. CA$H-Register Plus(trademark), an innovative internet-based, cash management delivery system, offers a broad range of services on a browser-based platform. It enables customers to conduct a growing range of transactions, including wire transfers, ACH payments and collections, letters of credit, information reporting and the retrieval of check images. The Bank is the second leading provider of funds transfer services in the U.S. and the only Bank that has consistently increased its market share over the past five years, growing from 7.9% to 12.8%. We process over 140,000 transactions daily with an aggregate value of $800 billion. The underlying business activity reflects global trade, securities and foreign exchange transactions. We deliver trade services that facilitate global trade, including letters of credit, documentary collections, reimbursements, automated inquiry and reporting as well as outsourcing trade services. Our customers include import and export corporations and banks that deliver trade services around the world. In 2000 we completed a large-scale trade services outsourcing arrangement for Canadian Imperial Bank of Commerce, which included both back-office processing and a suite of front-office internet enabled products. This outsourcing leverages our advanced internet technology, our imaging capabilities and expertise in global trade processing. We offer deposit services to corporate and institutional customers designed to facilitate the receipt and disbursement of cash and provide sophisticated reporting capabilities. Our services range from traditional check processing to an image-based, nationwide wholesale lockbox system. BNY Asset Management And Private Client Services BNY Asset Management and Private Client Services provide a comprehensive range of investment products and capabilities designed to meet the current and emerging needs of institutions and high-net-worth individuals worldwide. In 2000 superior long-term investment performance, aggressive new business development, expanded investment capabilities and favorable growth trends resulted in record fee revenue of $296 million, 21% more than last year. BNY Asset Management is a premier investment manager offering client- specific solutions and exceptional results. We are one of the largest investment managers in the United States with over $66 billion in assets under management, and growth last year of $6 billion. Despite substantial market volatility in 2000, BNY Asset Management delivered another year of solid returns. 52 The acquisition of Ivy Asset Management and the integration of Estabrook Capital Management, a 1999 acquisition, further supported our strategy of delivering innovative investment solutions. Ivy Asset Management is one of the nation's leading multi-manager, alternative investment specialists offering hedge fund products and customized portfolio solutions. Ivy has $3.1 billion in assets under management for institutions and private clients in 15 countries. Reflecting our commitment to client-specific investment solutions, we introduced new proprietary funds: the domestic BNY Partners Multi-Manager Hedge Fund LLC and the offshore BNY Partners Multi-Manager Hedge Fund Ltd. We also marked the first full year of our inaugural private equity fund, the BNY Partners Fund. While expanding our alternative and value-investing capabilities, we continue to offer equity, fixed income, and balanced portfolio management as well as short-term money management, index funds, BNY Hamilton Funds and special investment products. Our investment strategy and portfolio allocations are determined by following a core growth orientation and a disciplined investment approach. Capitalizing on proprietary research, our investment strategy is based on fundamental analysis, relative value, and high quality. This rigorous and sustained investment approach once again provided our clients with another year of strong returns. Private client services provides clients with objective, value-added advice, supported by highly complementary services. Our individually tailored solutions are designed to help clients grow and protect their wealth while addressing key generational planning issues. We are well positioned to deliver investment services to this market, which has grown 12% over the past decade. Our primary target market consists of high-net-worth individuals and families, corporate executives, entrepreneurs and business owners. Domestically, private client services are delivered via a network of 12 offices in the tri-state area and by an affiliate in Florida. Our Private Client Special Industries Division is designed to meet the unique needs of clients within the real estate, non-profit and media industries as well as private equity sponsor firms. In 2000 International Private Client Services focused on delivery of global wealth management services to high-net-worth individuals, their families and related entities in the Middle East, Europe, Asia and Latin America. Our emphasis is on long-term relationships, drawing on our world-class expertise in asset management, fiduciary services, global custody and related banking services. Our fully integrated wealth management solutions are derived from a key set of core competencies which include financial planning, personal trust and estate administration, customized finance and banking services, personal portfolio management, alternative asset classes, and personal and advisory custody. Our custody business had outstanding growth in 2000 with assets under administration increasing 19% from 1999. This business benefited from the strategic acquisition of the Bank of America's private client advisory custody activity. 53 Corporate Banking Corporate Banking is responsible for the worldwide management of commercial and institutional relationships. Experienced relationship managers oversee the delivery of the full range of the Bank's credit and non-credit products and focus on cross-selling the Bank's fee-based services. We are focused on maintaining strong asset quality and balancing the risks and profitability of every client relationship. An important result of this strategy is that our credit-only exposures have declined from 45% of the portfolio in 1994 to only 8% in 2000, as our risk profile improved. Financial companies services provides sophisticated, company-specific solutions to meet the securities services, cash management and financing needs of our clients. Financial companies - mutual funds, insurance companies, banks, investment managers, government agencies and broker/dealers - remain the Bank's largest and fastest growing market and are the largest users of our securities services infrastructure. As a leader in special industries banking, we provide banking services and financing to such key industry sectors as media and telecommunications, energy, retailing, real estate, automotive and healthcare. In U.S. commmercial banking we target major domestic companies from traditional manufacturers to leading distribution and service companies. This diverse client base provides a foundation for cross-selling our fee-based services. Regional commercial banking offers a wide range of banking services, including traditional lending, cash management, leasing, trade finance, capital markets and corporate finance to mid-sized companies in the metropolitan New York area. Additionally, we offer a full range of private banking and asset management services to the principals as well as retirement plan services for the employees of these companies. BNY Capital Markets, Inc., a subsidiary, provides its clients with a broad range of capital markets and investment banking services including the structuring and syndication of credit facilities, the underwriting and distribution of corporate bonds and investment grade tax-exempt securities and the private placement of debt, mezzanine and equity securities. The group also provides merger, acquisition, valuation, fairness opinions and other advisory services and invests as a principal in junior capital including debt, equity and hybrid securities through its affiliate BNY Capital Partners, LP. BNY Capital Funding LLC, one of the largest bank-owned leasing companies in the United States, develops innovative structuring to meet the tax-oriented equipment financing needs of domestic and international customers. BNY Capital Resources Corporation provides financing for corporate banking clients. Our BNY Leasing Edge(service mark) product provides leasing alternatives to our retail and middle-market clients. International Banking includes 29 international branches and representative offices in 26 countries and a network of over 2,300 correspondent banks. Our international bankers are focused on the securities servicing, global payment and trade finance needs of our clients. We are among the top five U.S. issuers of import-trade letters of credit and a major player in facilitating export-trade transactions. 54 Global Markets Global Markets encompasses the Bank's foreign exchange and interest rate risk management businesses including our global trading and sales activities. Successful cross-selling of our growing global securities servicing client base, combined with the sale of new products and solutions, led to record revenues of $261 million for 2000. The Bank is a premier Foreign Exchange (FX) provider, trading in over 100 currency markets around the world. In 2000 we expanded our global investment manager customer base by 20% and increased trading activity by 32%. Our global risk management services include a suite of risk management alternatives, supplemented by unique proprietary research, which is available through e-commerce channels and traditional media. As these services are focused on relationships, we tailor our products and services to provide value to the Bank's core clients. iFX MANAGER(service mark) is the Bank's internet-based FX trade-order management and execution system, offering institutional clients true end-to-end straight-through processing. iFX Manager automates all aspects of FX trading for clients. FX Week, an industry magazine, voted iFX Manager one of the top three bank-offered FX trading systems. In November 2000 the Bank joined FXall(trademark), the global currency trading and research platform, as an equity participant. FXall allows clients to have a single point of access to all participating FX providers with whom they have a business relationship. In joining FXall, the Bank contributed the advanced technical functionality of iFX Manager to help FXall provide a robust trading platform for the benefit of clients and providers worldwide. The Bank is a premier provider of interest rate and currency derivatives, including currency and interest rate options. Our derivatives business is client-driven, and complemented by sophisticated risk management systems. Broader product capabilities and focused relationship management were key drivers of revenue growth as business increased by 30% in 2000. European business expansion initiatives resulted in revenue growth for that region. In addition, we solidified our leading market position with U.S. government agencies while increasing our derivative presence with corporate, financial institution and investment manager clients. Our strategy and research professionals publish in-depth fundamental and technical analyses of foreign exchange and interest rate markets on the Bank's website: www.bankofny.com. We also provide a proprietary model that monitors cross-border investment flows among the international equity and fixed-income markets. BNY Overlay Associates is the Bank's specialist currency overlay manager, providing investment advisory services to institutional investors. Existing client currency exposures are managed to mitigate risk and achieve increased portfolio returns. 55 Retail Banking We operate a network of 349 full-service branches, establishing us as a leader in the suburban metropolitan New York market. Our branches offer a combination of traditional banking and alternative banking services including financial planning and insurance products to approximately three quarters of a million individual households and businesses. With over $14 billion in core deposits, retail banking continues to provide a stable, low-cost funding source that supports lending activities throughout the Bank. 2000 produced exceptional results with mutual fund swept balances and total non-interest income increasing by 27% and 15%, respectively. Our strategy of offering third-party, non-traditional products increases our range of products, deepens and strengthens client relationships, and increases non-interest income. The BNY Investment Center, Inc. (BNYIC) operates throughout our extensive branch network and business centers. BNYIC focuses on meeting the planning and investment needs of both personal and business customers. BNYIC increased sales by 18% and revenue by 15% in 2000. Our new CheckInvest Select product, a personal cash management tool, is similar to business CheckInvest(registered trademark), which automatically sweeps excess balances from a traditional checking account to a third-party mutual fund. Since its April 2000 introduction, CheckInvest Select mutual fund balances grew to over $100 million. The Direct 24(service mark) Debit Card increases the utility of checking accounts while building fee income. The card is actively used by over a third of our personal customers. Card-derived fee income increased 66% over 1999. In June of 2000, we expanded the debit card program to include small business customers. Consumer loan balance growth in 2000 was over 17%. We focused on building relationships with creditworthy homeowners with premier products like EquityLink(registered trademark) and Homeowners Edge(registered trademark). Additionally, our Credit Options program provides alternatives to certain loan applicants. Participation in the Group Banking Program, which offers a package of preferred rates and banking services to employees of our corporate customers, grew by 13%. In 2000 we launched 12 new Business Centers throughout our branch network. We also introduced new fee-income-generating services including the Business Tax Payment Service, Direct24(service mark) Debit BusinessCard and Business Checking Edge(service mark), a customized checking account for companies that have low transaction volume and limited cash balances. We added additional fund options to CheckInvest, our innovative business checking account that allows businesses to earn dividends on balances swept into a mutual fund. Product sales exceeded expectations with fee income growing in excess of 30% since 1999. For small business customers, we lowered loan minimums to $5,000, introduced a simplified "express" application for credit requests up to $100,000 and streamlined the approval process. Lending activity grew by 18% led by Business Creditlinksm, a revolving line of credit, which grew by 45% in 2000.