-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GE6wsO4CJ8xfpt4YcsZVlAXSxMn/QjMTLP8bp8P+J1flxCuhQCbK6//UWEZSHNfl cr7qL043xMD/WGMTplyVBQ== 0000009626-99-000010.txt : 19990331 0000009626-99-000010.hdr.sgml : 19990331 ACCESSION NUMBER: 0000009626-99-000010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANK OF NEW YORK CO INC CENTRAL INDEX KEY: 0000009626 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 132614959 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-06152 FILM NUMBER: 99578752 BUSINESS ADDRESS: STREET 1: ONE WALL STREET 10TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10286 BUSINESS PHONE: 2124951784 MAIL ADDRESS: STREET 1: 100 CHURCH STREET 9TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10286 10-K 1 1998 FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Fiscal Year Ended December 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-6152 THE BANK OF NEW YORK COMPANY, INC. (Exact name of registrant as specified in its charter) NEW YORK 13-2614959 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) One Wall Street, New York, New York 10286 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (212) 495-1784 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- Common Stock, $7.50 par value NEW YORK STOCK EXCHANGE Preferred Stock Purchase Rights NEW YORK STOCK EXCHANGE 7.80% Trust Preferred Securities, Series C NEW YORK STOCK EXCHANGE 7.05% Preferred Securities, Series D NEW YORK STOCK EXCHANGE 6.88% Trust Preferred Securities, Series E NEW YORK STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: Title of each class ------------------- Class A, 7.75% Cumulative Convertible Preferred Stock 7.97% Capital Securities, Series B Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by nonaffiliates of the registrant at February 26, 1999 consisted of: Common Stock ($7.50 par value) $26,764,883,455 (based on closing price on New York Stock Exchange) The number of shares outstanding of the registrant's Common Stock $7.50 par value was 766,078,954 shares on February 26, 1999. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1998 Annual Report to Shareholders are incorporated by reference into Parts I, II, and IV 2 PART I - ------ ITEM 1. BUSINESS - ----------------- INTRODUCTION The business of The Bank of New York Company, Inc. (the "Company") and its subsidiaries is described in "The Businesses of The Bank of New York" section of the Company's 1998 Annual Report to Shareholders which description is included in Exhibit 13 to this report and incorporated herein by reference. Also, the "Management's Discussion and Analysis" section included in Exhibit 13 contains financial and statistical information on the operations of the Company. Such information is herein incorporated by reference. CERTAIN REGULATORY CONSIDERATIONS General As a bank holding company, the Company is subject to the regulation and supervision of the Federal Reserve Board under the Bank Holding Company Act ("BHC Act"). The Company is also subject to regulation by the New York State Department of Banking. Under the BHC Act, bank holding companies may not directly or indirectly acquire the ownership or control of more than 5% of the voting shares or substantially all of the assets of any company, including a bank, without the prior approval of the Federal Reserve Board. In addition, bank holding companies are generally prohibited under the BHC Act from engaging in nonbanking activities, subject to certain exceptions. The Company's subsidiary banks are subject to supervision and examination by applicable federal and state banking agencies. The Bank of New York ("BNY"), a New York chartered banking corporation, is a member of the Federal Reserve System and is subject to regulation, supervision and examination by the Federal Reserve Board. BNY is also subject to regulation, supervision and examination by the New York Banking Department. Both federal and state laws extensively regulate various aspects of the banking business, such as permissible types and amounts of loans and investments, permissible activities, and reserve requirements. These regulations are intended primarily for the protection of depositors rather than the Company's stockholders. Capital Adequacy The Federal bank regulators have adopted risk-based capital guidelines for bank holding companies and banks. The minimum ratio of qualifying total capital ("Total Capital") to risk-weighted assets (including certain off- balance sheet items) is 8%. At least half of the total capital is to consist of common stock, retained earnings, noncumulative perpetual preferred stock, minority interests (including trust preferred securities) and, for bank holding companies, a limited amount of qualifying cumulative perpetual preferred stock, less most intangibles including goodwill ("Tier 1 Capital"). The remainder ("Tier 2 Capital") may consist of other preferred stock, certain other instruments, and limited amounts of subordinated debt and the loan and lease allowance. Not more than 25% of qualifying Tier 1 Capital may consist of trust preferred securities. In addition, the Federal Reserve Board has established minimum Leverage Ratio (Tier 1 Capital to average total assets) guidelines for bank holding companies and banks. The Federal Reserve Board's guidelines provide for a minimum Leverage Ratio of 3% for bank holding companies and banks that meet certain specified criteria, including those having the highest regulatory rating. All other banking organizations will be required to maintain a Leverage Ratio of at least 3% plus an additional cushion of 100 to 200 basis points. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. At December 31, 1998, the Federal Reserve Board has not advised the Company of any specific minimum Leverage Ratio applicable to it. See "FDICIA" below. 3 Federal banking agencies have recently issued regulations that modify existing rules related to capital ratios with respect to various areas of risk including interest rate exposure and other market risk. The Company does not believe that the aggregate impact of these modifications would have a significant impact on its capital position. FDICIA The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") among other things, requires the federal banking regulators to take prompt corrective action in respect of FDIC-insured depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: "well capitalized", "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." An FDIC-insured bank is defined to be: (i) well capitalized if it maintains a Leverage Ratio of at least 5%, a Tier 1 Capital Ratio (Tier 1 Capital to risk-weighted assets and certain off-balance sheet items) of at least 6% and a Total Capital Ratio of at least 10%; (ii) adequately capitalized if it maintains a Leverage Ratio of at least 4% (or a Leverage Ratio of at least 3% if it is rated Composite 1 in its most recent report of examination, subject to appropriate federal banking agency guidelines), a Tier 1 Capital Ratio of 4% and a Total Capital Ratio of at least 8% and is not defined to be well capitalized; (iii) undercapitalized if it has a Leverage Ratio of less than 4% (or a Leverage Ratio that is less than 3% if it is rated Composite 1 in its most recent report of examination, subject to appropriate federal banking agency guidelines), a Tier 1 Capital Ratio less than 4% and a Total Capital Ratio of less than 8% and it does not meet the definition of a significantly undercapitalized or critically undercapitalized institution; (iv) significantly undercapitalized if it has a Leverage Ratio of less than 3%, a Tier 1 Capital Ratio less than 3% and a Total Capital Ratio of less than 6% and it does not meet the definition of critically undercapitalized; and (v) critically undercapitalized if it maintains a level of tangible equity capital equal to or less than 2% of total assets. A bank may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the capital category in which an institution is classified. FDICIA generally prohibits an FDIC-insured depository institution from making any capital distribution (including payment of dividends) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to growth limitations and are required to submit a capital restoration plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for an undercapitalized depository institution's capital restoration plan to be acceptable, its holding company must guarantee the capital plan up to an amount equal to the lesser of 5% of the depository institution's assets at the time it became undercapitalized and the amount of the capital deficiency when the institution fails to comply with the plan. In the event of the parent holding company's bankruptcy, such guarantee would take priority over the parent's general unsecured creditors. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator. A depository institution that is not well capitalized is subject to certain limitations on brokered deposits. A discussion of the Company's capital position and capital adequacy is incorporated by reference from "Capital Resources" in the "Management's 4 Discussion and Analysis" Section and Note 10 to the Consolidated Financial Statements of Exhibit 13. As of December 31, 1998 and 1997, capital ratios for the Company and BNY were categorized as well capitalized as set forth in the table below. December 31, 1998 December 31, 1997 ----------------- ----------------- Well Capitalized Company BNY Company BNY Guidelines ------- --- ------- --- ----------- Tier I 7.89% 7.39% 7.92% 7.70% 6% Total Capital 11.90 10.72 11.97 10.38 10 Leverage 7.46 6.95 7.59 7.42 5 Tangible Common Equity 6.25 7.43 6.47 7.57 At December 31, 1998, the amounts of capital by which the Company and BNY exceed the well capitalized guidelines are as follows: (in millions) Company BNY ------- --- Tier 1 $1,160 $ 808 Total Capital 1,169 418 Leverage 1,600 1,207 The following table presents the components of the Company's risk-based capital at December 31, 1998 and 1997: (in millions) 1998 1997 ---- ---- Common Stock $ 5,447 $ 5,001 Preferred Stock 1 1 Minority Interest - Preferred Securities 1,300 1,000 Adjustments: Intangibles (1,558) (1,175) Securities Valuation Allowance (340) (320) ------- ------- Tier 1 Capital 4,850 4,507 Qualifying Unrealized Equity Security Gains 181 - Qualifying Long-term Debt 1,655 1,662 Qualifying Allowance for Loan Losses 633 641 ------- ------- Tier 2 Capital 2,469 2,303 ------- ------- Total Risk-based Capital $ 7,319 $ 6,810 ======= ======= 5 The following table presents the components of the Company's risk adjusted assets at December 31, 1998 and 1997:
1998 1997 --------------------------------------------- Balance Balance sheet/ Risk sheet/ Risk notional adjusted notional adjusted (in millions) amount balance amount balance -------- -------- -------- -------- Assets - ------ Cash, Due From Banks and Interest- Bearing Deposits in Banks $ 8,503 $ 1,347 $ 7,895 $ 1,064 Securities 6,415 1,832 6,628 1,371 Trading Assets 1,637 - 2,616 142 Fed Funds Sold and Securities Purchased Under Resale Agreements 3,281 345 2,820 439 Loans 38,386 33,246 35,127 30,952 Allowance for Credit Losses (636) - (641) - Other Assets 5,917 3,732 5,516 3,469 -------- ------- -------- ------- Total Assets $ 63,503 40,502 $ 59,961 37,437 ======== ------- ======== ------- Off-Balance Sheet Exposures - --------------------------- Commitments to Extend Credit $ 44,767 13,497 $ 38,799 12,936 Securities Lending Indemnifications 47,839 - 41,041 - Standby Letters of Credit and Other Guarantees 8,738 6,404 8,503 5,863 Interest Rate Contracts 142,454 235 61,523 118 Foreign Exchange Contracts 132,129 1 142,204 558 -------- ------- -------- ------- Total Off-Balance Sheet Exposures $375,927 20,137 $292,043 19,475 ======== ------- ======== ------- Market Risk Equivalent Assets 683 - Unrealized Equity Security Gains Qualifying as Risk Based Capital 181 - ------- ------- Risk Adjusted Assets $61,503 $56,912 ======= =======
FDIC Insurance Assessments BNY is subject to FDIC deposit insurance assessments. As required by FDICIA, the FDIC adopted a risk-based premium schedule to determine the assessment rates for most FDIC-insured depository institutions. Effective January 1, 1997, under the schedule, the premiums range from zero to $.27 for every $100 of deposits. Each financial institution is assigned to one of nine categories based on the institutions capital ratios and supervisory evaluations, and the premium paid by the institution is based on the category. Under the present schedule institutions in the highest of the three capital categories and the highest of three supervisory categories pay no premium and institutions in the lowest of these categories pay $.27 per $100 of deposits. In addition, the Deposit Insurance Funds Act provides for assessments at all insured depository institutions to pay for the cost of the Financing Corporation (a governmental agency) funding. The assessment will be based on deposit levels and will be approximately 1.76 basis points. BNY paid no FDIC insurance premiums in 1998. The FDIC is authorized to raise insurance premiums in certain circumstances. Any increase in premiums would have an adverse effect on the Company's earnings. Under the FDIA, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order, or condition imposed by a bank's federal regulatory agency. Depositor Preference The Omnibus Budget Reconciliation Act of 1993 provides for a domestic depositor preference on amounts realized from the liquidation or other resolution of any depository institution insured by the FDIC. 6 Acquisitions The BHC Act generally limits acquisitions by the Company to commercial banks and companies engaged in activities that the Federal Reserve Board has determined to be so closely related to banking as to be a proper incident thereto. The Company's direct activities are generally limited to furnishing services to its subsidiaries and activities that qualify under the "closely related" and "proper incident" tests. Prior Federal Reserve Board approval is required under the BHC Act for new activities and acquisitions of most nonbanking companies. The BHC Act, the Federal Bank Merger Act, and the New York Banking Law regulate the acquisition of commercial banks. The BHC Act requires the prior approval of the Federal Reserve Board for the direct or indirect acquisition of more than 5% of the voting shares of a commercial bank. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA") permits bank holding companies, with Federal Reserve Board approval, to acquire banks located in states other than the bank holding company's home state without regard to whether the transaction is permitted under state law. In addition, IBBEA provides that national banks and state banks with different home states are permitted to merge across state lines, with the approval of the appropriate federal banking agency, unless the home state of a participating bank passed legislation between the date of enactment of IBBEA and May 31, 1997 expressly prohibiting interstate mergers. Most states, including New York, New Jersey and Connecticut have not passed legislation prohibiting interstate mergers. A bank may also establish and operate a de novo branch in a state in which the bank does not maintain a branch if that state expressly permits de novo branching. Once a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where any bank involved in the interstate merger transaction could have established or acquired branches under applicable federal or state law. A bank that has established a branch in a state through de novo branching may establish and acquire additional branches in such state in the same manner and to the same extent as a bank having a branch in such state as a result of an interstate merger. The merger of BNY with another bank would require the approval of the Federal Reserve Board or other federal bank regulatory authority and, if the surviving bank is a New York state bank, the New York Superintendent of Banks. In reviewing bank acquisition and merger applications, the bank regulatory authorities will consider, among other things, the competitive effect of the transaction, financial and managerial issues including the capital position of the combined organization, and convenience and needs factors, including the applicant's record under the Community Reinvestment Act. Under Federal Reserve Board policy, the Company is expected to act as a source of financial strength to its banks and to commit resources to support such banks in circumstances where it might not do so absent such policy. In addition, any loans by the Company to its banks would be subordinate in right of payment to depositors and to certain other indebtedness of its banks. Restrictions on Transfer of Funds Restrictions on the transfer of funds to the Company and subsidiary bank dividend limitations are discussed in Note 10 to the Consolidated Financial Statements included in Exhibit 13. Such discussion is incorporated herein by reference. Cross Guarantees Under FDIA, a financial institution insured by the FDIC that is under common control with a failed or failing FDIC-insured institution can be required to indemnify the FDIC for losses resulting from the insolvency of the failed institution, even if this causes the affiliated institution also to become insolvent. Any obligation or liability owed by a subsidiary depository 7 institution to its parent company is subordinate to the subsidiary's cross- guarantee liability with respect to commonly controlled insured depository institutions and to the rights of depositors. ADDITIONAL FINANCIAL INFORMATION - -------------------------------- Average Balances and Rates on a Taxable Equivalent Basis (dollars in millions) - ------------------------------------------------------------------------------
1998 1997 1996 ------------------------- ------------------------- ------------------------ Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate ------------------------- ------------------------- ------------------------ Assets - ------ Interest-Bearing Deposits in Banks (Primarily Foreign) $ 3,437 $ 184 5.35% $ 3,277 $ 188 5.75% $ 1,585 $ 91 5.71% Federal Funds Sold and Securities Purchased Under Resale Agreements 3,880 203 5.24 2,964 162 5.46 2,356 126 5.35 Loans Domestic Offices Credit Card - - - 3,329 496 14.90 6,905 934 13.53 Other Consumer 3,366 282 8.36 3,503 291 8.31 3,567 314 8.82 Commercial 16,407 1,229 7.49 14,744 1,143 7.75 13,945 1,023 7.34 Foreign Offices 18,567 1,264 6.81 15,001 984 6.56 12,281 810 6.59 ------- ------ ------- ------ ------- ------ Total Loans 38,340 2,775* 7.24 36,577 2,914* 7.97 36,698 3,081* 8.40 ------- ------ ------- ------ ------- ------ Securities U.S. Government Obligations 3,638 213 5.85 3,225 189 5.86 3,365 197 5.84 Obligations of States and Political Subdivisions 672 54 7.98 652 56 8.57 656 58 8.91 Other Securities, including Trading Securities Domestic Offices 2,051 108 5.23 1,360 52 3.81 811 37 4.56 Foreign Offices 793 31 3.93 485 34 6.92 511 31 6.11 ------- ------ ------- ------ ------- ------ Total Other Securities 2,844 139 4.87 1,845 86 4.63 1,322 68 5.16 ------- ------ ------- ------ ------- ------ Total Securities 7,154 406 5.66 5,722 331 5.77 5,343 323 6.05 ------- ------ ------- ------ ------- ------ Total Interest-Earning Assets 52,811 $3,568 6.76% 48,540 $3,595 7.40% 45,982 $3,621 7.88% ====== ====== ====== Allowance for Credit Losses (643) (784) (837) Cash and Due from Banks 3,237 3,798 2,805 Other Assets 7,736 7,688 5,699 ------- ------- ------- Total Assets $63,141 $59,242 $53,649 ======= ======= ======= Assets Attributable to Foreign Offices ** 38.79% 33.35% 28.50% ===== ===== ===== *Includes fees of $120 million in 1998, $154 million in 1997, and $139 million in 1996. Nonaccrual loans are included in the average loan balance; the associated income, recognized on the cash basis, is included in interest. Taxable equivalent adjustments were $58 million in 1998, $34 million in 1997, and $38 million in 1996 and are based on the federal statutory tax rate (35%) and applicable state and local taxes. **Includes Cayman Islands branch office.
Continued on page 8 8 Average Balances and Rates on a Taxable Equivalent Basis (dollars in millions) - ------------------------------------------------------------------------------
1998 1997 1996 --------------------------- -------------------------- ------------------------- Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate --------------------------- -------------------------- ------------------------- Liabilities and Shareholders' Equity - -------------------- Interest-Bearing Deposits Domestic Offices Money Market Rate Accounts $ 4,998 $ 232 4.65% $ 4,326 $ 196 4.54% $ 3,855 $ 166 4.30% Savings 7,682 193 2.51 7,921 202 2.55 8,188 223 2.72 Certificates of Deposit of $100,000 or More 687 37 5.41 675 37 5.48 895 48 5.32 Other Time Deposits 2,299 110 4.80 2,514 124 4.92 2,547 121 4.75 ------- ------ ------- ------ ------- ------ Total Domestic Offices 15,666 572 3.65 15,436 559 3.62 15,485 558 3.60 ------- ------ ------- ------ ------- ------ Foreign Offices Banks in Foreign Countries 5,422 246 4.53 5,304 225 4.25 4,645 225 4.85 Government and Official Institutions 1,205 65 5.39 1,290 69 5.33 1,236 62 5.05 Other Time and Saving 9,784 491 5.02 8,308 437 5.27 6,351 307 4.85 ------- ------ ------- ------ ------- ------ Total Foreign Offices 16,411 802 4.88 14,902 731 4.91 12,232 594 4.87 ------- ------ ------- ------ ------- ------ Total Interest- Bearing Deposits 32,077 1,374 4.28 30,338 1,290 4.25 27,717 1,152 4.16 ------- ------ ------- ------ ------- ------ Federal Funds Purchased and Securities Sold Under Repurchase Agreements 3,147 145 4.60 2,410 121 5.00 2,957 155 5.23 Other Borrowed Funds 3,761 204 5.42 3,177 168 5.27 3,406 186 5.47 Long-Term Debt 1,972 136 6.90 1,815 126 6.92 1,870 129 6.90 ------- ------ ------- ------ ------- ------ Total Interest-Bearing Liabilities 40,957 $1,859 4.54% 37,740 $1,705 4.52% 35,950 $1,622 4.51% ====== ====== ====== Noninterest-Bearing Deposits Domestic Offices 10,109 9,423 8,838 Foreign Offices 76 149 44 ------- ------- ------- Total Noninterest- Bearing Deposits 10,185 9,572 8,882 ------- ------- ------- Other Liabilities 5,850 6,050 3,623 Minority Interest - Preferred Securities 1,233 830 26 Preferred Stock 1 103 113 Common Shareholders' Equity 4,915 4,947 5,055 ------- ------- ------- Total Liabilities and Shareholders' Equity $63,141 $59,242 $53,649 ======= ======= ======= Net Interest Earnings and Interest Rate Spread $1,709 2.22% $1,890 2.88% $1,999 3.37% ====== ====== ====== Net Yield on Interest-Earning Assets 3.24% 3.89% 4.35% ==== ==== ==== Liabilities Attributable to Foreign Offices 31.53% 30.00% 26.69% ===== ===== =====
9 Rate/Volume Analysis on a Taxable Equivalent Basis (in millions) - ----------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996 ------------------------------------- ---------------------------------- Increase (Decrease) Increase (Decrease) due to change in: due to change in: --------------------- ------------------- Total Total Average Average Increase Average Average Increase Balance Rate (Decrease) Balance Rate (Decrease) ------- ------- ---------- ------- ------- ---------- Interest Income - --------------- Interest-Bearing Deposits in Banks $ 9 $ (13) $ (4) $ 96 $ 1 $ 97 Federal Funds Sold and Securities Purchased Under Resale Agreements 48 (7) 41 33 3 36 Loans Domestic Offices Credit Card (496) - (496) (524) 87 (437) Other Consumer (11) 2 (9) (4) (19) (23) Commercial 125 (39) 86 60 59 119 Foreign Offices 238 42 280 178 (4) 174 ----- ----- ----- ----- ----- ------ Total Loans (144) 5 (139) (290) 123 (167) Securities U.S. Government Obligations 24 - 24 (9) 1 (8) Obligations of States and Political Subdivisions 2 (4) (2) - (2) (2) Other Securities, including Trading Assets Domestic Offices 32 24 56 22 (7) 15 Foreign Offices 16 (19) (3) (2) 5 3 ----- ----- ----- ----- ----- ------ Total Other Securities 48 5 53 20 (2) 18 ----- ----- ----- ----- ----- ------ Total Securities 74 1 75 11 (3) 8 ----- ----- ----- ----- ----- ------ Total Interest Income (13) (14) (27) (151) 124 (27) ----- ----- ----- ----- ----- ------ Interest Expense - ---------------- Interest-Bearing Deposits Domestic Offices Money Market Rate Accounts 31 5 36 21 9 30 Savings (6) (3) (9) (7) (14) (21) Certificate of Deposits of $100,000 or More 1 (1) - (12) 1 (11) Other Time Deposits (10) (4) (14) (2) 5 3 ----- ----- ----- ----- ----- ------ Total Domestic Offices 16 (3) 13 - 1 1 ----- ----- ----- ----- ----- ------ Foreign Offices Banks in Foreign Countries 6 15 21 30 (30) - Government and Official Institutions (5) 1 (4) 3 4 7 Other Time and Savings 75 (21) 54 99 31 130 ----- ----- ----- ----- ----- ------ Total Foreign Offices 76 (5) 71 132 5 137 ----- ----- ----- ----- ----- ------ Total Interest-Bearing Deposits 92 (8) 84 132 6 138 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 34 (10) 24 (28) (6) (34) Other Borrowed Funds 31 5 36 (12) (6) (18) Long-Term Debt 11 (1) 10 (4) 1 (3) ----- ----- ----- ----- ----- ------ Total Interest Expense 168 (14) 154 88 (5) 83 ----- ----- ----- ----- ----- ------ Change in Net Interest Income $(181) $ - $ (181) $(239) $ 129 $ (110) ===== ===== ===== ===== ===== ====== Changes which are not solely due to balance changes or rate changes are allocated to such categories on the basis of the respective percentage changes in average balances and average rates.
10 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 market risks are primarily interest rate and foreign exchange risk, as well as credit risk. Market risk associated with the Company's trading activities and asset/liability management activities is managed and controlled as discussed under "Market Risk Management", "Trading Activities and Risk Management" and, "Asset/Liability Management" in the "Management's Discussion and Analysis" section of Exhibit 13. Such discussion is incorporated herein by reference. The information presented with respect to market risk is forward looking information. As such it is subject to risks and uncertainties that could cause actual results to differ materially from projected results discussed in this Report. These include adverse changes in market conditions and the actions that management could take in response to these changes. Interest Rate Sensitivity - ------------------------- A discussion of the Company's interest rate sensitivity management activities is incorporated by reference from "Asset/Liability Management" in the "Management's Discussion and Analysis" section of Exhibit 13. The following table reflects the year-end position of the Company's interest-earning assets and interest-bearing liabilities that either reprice or mature within the designated time periods. The interest sensitivity indicated by this table is not necessarily indicative of the Company's interest sensitivity models (discussed under "Asset/Liability Management" in the "Management's Discussion and Analysis" section of Exhibit 13) because within each time period, assets and liabilities reprice on different dates and at different levels, and interest sensitivity gaps change daily. A positive interest sensitivity gap, for a particular time period, is one in which more assets reprice or mature than liabilities. A negative interest sensitivity gap results from a greater amount of liabilities repricing or maturing. A positive gap implies that there are more rate sensitive assets than liabilities which suggests that as interest rates rise, the return on assets will rise faster than the funding costs. Conversely, a negative gap indicates more rate sensitive liabilities than assets. In such case, if interest rates rise, then funding costs will rise at a faster rate than the return on assets. The cumulative gap is the sum of the dollar gap for sequential time periods. 11
December 31, 1998 ----------------------------------------------------------------- Within Within Within Within Greater (in millions) 1 Mo. 2-3 Mos. 4-6 Mos. 7-12 Mos. Than 12 Mos. Total ------ -------- -------- -------- ----------- ----- Interest-Earning Assets: Foreign Offices $14,613 $ 6,436 $ 2,969 $ 637 $ 134 $24,789 Domestic Offices Loans 9,437 741 421 390 7,846 18,335 Securities 142 119 139 248 4,024 4,672 Trading Assets 1,356 - - - - 1,356 Federal Funds Sold and Securities Purchased Under Resale Agreement 3,279 - - - - 3,279 ------- ------- ------- ------ ------- ------- Total Interest-Earning Assets 28,827 7,296 3,529 1,275 12,004 $52,931 ------- ------- ------- ------ ------- ======= Interest-Bearing Liabilities: Foreign Offices 17,036 516 71 12 - $17,635 Domestic Offices Interest-Bearing Deposits Money Market Rate Accounts 5,488 - - - - 5,488 Savings 6,699 - - 13 1,076 7,788 Certificates of Deposit of $100,000 or More 534 284 188 154 423 1,583 Other Time Deposits 230 233 301 249 219 1,232 Federal Funds Purchased and Other Borrowed Funds 3,844 1,134 536 14 5 5,533 Long-Term Debt 50 31 15 - 1,990 2,086 Trust Preferred Securities - - - - 1,300 1,300 ------- ------- ------- ------ ------- ------- Total Interest-Bearing Liabilities 33,881 2,198 1,111 442 5,013 42,645 Noninterest-Bearing Sources of Funds 3,910 180 269 539 5,388 10,286 ------- ------- ------ ------- ------- ------- Total Sources of Funds Used to Support Earning Assets 37,791 2,378 1,380 981 10,401 $52,931 ======= Effect of Financial Futures and Swaps 2,251 (1,318) 361 (363) (931) ------- ------- ------- ------ ------- Interest-Sensitivity Gap $(6,713) $ 3,600 $ 2,510 $ (69) $ 672 ======= ======= ======= ====== ======= Cumulative Interest-Sensitivity Gap $(6,713) $(3,113) $ (603) $(672) $ - ======= ======= ======= ====== =======
Credit Risk Management - ---------------------- Credit risk represents the possibility that the Company would suffer a loss if a borrower or other counterparty were to default on its obligations to the Company. Credit risk exposure arises primarily from lending activities, as well as from interest rate, foreign exchange, and securities processing products. For derivative financial instruments, total credit exposure consists of current and potential exposure. Current credit exposure represents the replacement cost of the transaction. Potential credit exposure is a statistically based estimate of the future replacement cost of the transaction. The Company has established policies and procedures to manage the level and composition of its credit risk on both a transaction and a portfolio basis. In managing the aggregate credit extension to individual customers, the Company measures the amount at risk on derivative financial instruments as the total of current and potential credit exposure. The Credit Policy Committee is responsible for developing and maintaining credit risk policies, as well as for overseeing and reviewing credit guidelines. Through the use of a credit approval process and established credit limits, the Company evaluates the credit quality of counterparties, industries, products, and countries. The Company seeks to reduce both on and off-balance-sheet credit risk through portfolio diversification, loan participations, syndications, asset sales, credit enhancements, risk reduction arrangements, and netting agreements. 12 Although the Company attempts to minimize its exposure to credit risk, this risk is inherent in the banking industry and can increase as a result of general economic developments. Provision and Allowance for Credit Losses - ----------------------------------------- The provision for credit losses was $20 million in 1998, compared with $280 million in 1997 and $600 million in 1996. The decrease in the provision compared with 1997 and 1996 was primarily due to the sale of credit card receivables, continued low charge-offs in the remainder of the loan portfolio, and a further reduction in nonperforming loans Nonperforming assets declined by 7% to $193 million at December 31, 1998. The decrease in nonperforming assets during 1998 is attributable to charge- offs and writedowns of $18 million and paydowns, sales, and returns to accrual status of $79 million. The decrease was partially offset by $82 million of loans placed on nonperforming status. A summary of nonperforming assets is presented in the following table.
(in millions) December 31, ---------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Nonaccrual - ---------- Domestic $126 $159 $175 $184 $220 Foreign 53 34 38 41 77 ---- ---- ---- ---- ---- 179 193 213 225 297 Reduced Rate (Domestic) - - - - - - ------------ ---- ---- ---- ---- ---- 179 193 213 225 297 Real Estate Acquired in Satisfaction of Loans 14 15 41 72 56 - ------------------------ ---- ---- ---- ---- ---- $193 $208 $254 $297 $353 ==== ==== ==== ==== ==== Past Due 90 Days or More and Still Accruing Interest - --------------------------- Domestic Credit Card $ - $ 1 $215 $214 $ 97 Other Consumer 3 2 2 5 2 Commercial 26 75 30 51 64 ---- ---- ---- ---- ---- $ 29 $ 78 $247 $270 $163 ==== ==== ==== ==== ====
1998 1997 ---- ---- Nonperforming Asset Ratio 0.5% 0.6% Allowance/Nonperforming Loans 355.5 331.4 Allowance/Nonperforming Assets 328.9 307.2 Net charge-offs were $29 million in 1998, $354 million in 1997, and $455 million in 1996. In 1998, net charge-offs were mainly related to commercial loans, while net charge-offs were primarily attributable to credit card loans in 1997 and 1996. The total allowance for credit losses was $636 million and $641 million at year-end 1998 and 1997. The ratio of the total allowance for credit losses to year-end loans was 1.66% and 1.82% at December 31, 1998 and 1997 reflecting a $3.3 billion increase in loans in 1998. 13 The following table details changes in the Company's allowance for credit losses for the last five years.
(dollars in millions) 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Loans Outstanding, December 31, $38,386 $35,127 $37,006 $37,687 $33,083 Average Loans Outstanding 38,340 36,577 36,698 35,421 32,029 Allowance for Loan Losses - ------------------------- Balance, January 1 Domestic $ 441 $ 670 $ 515 $ 509 $ 558 Foreign 44 38 82 155 176 Unallocated 156 193 159 128 236 ----- ----- ----- ----- ----- Total, January 1 641 901 756 792 970 ----- ----- ----- ----- ----- Allocations and Acquisitions (1) 4 (186) - 11 14 Charge-Offs Domestic Commercial and Industrial (34) (89) (46) (56) (158) Real Estate & Construction - - (11) (19) (6) Consumer (10) (13) (16) (15) (22) Credit Card - (298) (503) (294) (169) Foreign (7) (3) (4) (48) (56) ----- ----- ----- ----- ----- Total (51) (403) (580) (432) (411) ----- ----- ----- ----- ----- Recoveries Domestic Commercial and Industrial 7 9 15 14 14 Real Estate & Construction 7 3 - 3 - Consumer 5 8 7 10 14 Credit Card - 23 62 27 21 Foreign 3 6 41 1 8 ----- ----- ----- ----- ----- Total 22 49 125 55 57 Net Charge-Offs (29) (354) (455) (377) (354) ----- ----- ----- ----- ----- Provision Domestic 20 280 600 356 135 Foreign - - - (26) 27 ----- ----- ----- ----- ----- Total 20 280 600 330 162 ----- ----- ----- ----- ----- Balance, December 31, Domestic 498 441 670 515 509 Foreign 69 44 38 82 155 Unallocated 69 156 193 159 128 ----- ----- ----- ----- ----- Total, December 31, $ 636 $ 641 $ 901 $ 756 $ 792 ===== ===== ===== ===== ===== Ratios - ------ Net Charge-Offs to Average Loans Outstandings 0.08% 0.97% 1.24% 1.06% 1.11% ===== ===== ===== ===== ===== Net Charge-Offs to Total Allowance 4.56% 55.23% 50.50% 49.87% 44.67% ===== ===== ===== ===== ===== Total Allowance to Year-End Loans Outstanding 1.66% 1.82% 2.44% 2.01% 2.40% ===== ===== ===== ===== ===== (1) In 1997, $186 million of the allowance was allocated to credit card loans sold in 1997.
14 At December 31, 1998, the domestic commercial real estate portfolio had approximately 86% of its loans in New York and New Jersey and 2% in Connecticut; no other state accounts for more than 1% of the portfolio. This portfolio consists of the following types of properties: Business loans secured by real estate 36% Offices 27 Retail 11 Mixed-Use 9 Hotels - Condominiums and Cooperatives 7 Industrial/Warehouse 2 Other 8 ---- 100% ==== At December 31, 1998 and 1997, the Company's nonperforming real estate loans and real estate acquired in satisfaction of loans aggregated $40 million and $50 million, respectively. Real estate loan net recoveries were $7 million in 1998 and $3 million in 1997. In addition, other real estate charges were $2 million and $11 million in 1998 and 1997. Other real estate charges in 1997 primarily relate to the sale of one property in Florida. At December 31, 1998, the Company's emerging markets exposures consisted of $70 million in medium-term loans (and no material commitments), $1,258 million in short-term loans, primarily trade related, and $113 million in investments. In addition, the Company has $313 million of debt securities of emerging market countries, including $219 million (book value) of bonds whose principal payments are collateralized by U.S. Treasury zero coupon obligations and whose interest payments are partially collateralized. Emerging market countries where the Company has exposure include Argentina, Brazil, Bulgaria, China, Colombia, Costa Rica, Dominican Republic, Ecuador, Egypt, Honduras, Indonesia, Iraq, Jamaica, Malaysia, Mexico, Morocco, Panama, Peru, Philippines, Russia, Thailand, Uruguay, Venezuela, and Vietnam. The Company's consumer loan portfolio is comprised principally of other installment and residential loans. Residential and auto loans are collateralized, thereby reducing the risk. The Company's loans to the energy industry primarily consist of credits with investor-owned electric and gas utilities, and oil, gas and mining companies. There were no nonperforming loans to borrowers in this industry at December 31, 1998 and 1997. There were no charge-offs in this industry in 1998 and there were $2 million charge-offs in 1997. The Company's loans to the media and telecommunications industries primarily consist of credits with cable television operators, broadcasters, magazine and newspaper publishers, motion picture theaters and regional telephone companies. There were no nonperforming loans to borrowers in these industries at December 31, 1998 and 1997. There were no charge-offs in these industries in 1998 and there were $6 million charge-offs in 1997. The Company's portfolio of loans for purchasing or carrying securities is comprised largely of overnight loans which are fully collateralized, with appropriate margins, by marketable securities. Throughout its many years of experience in this area, the Company has rarely experienced a loss. The Company makes loans to mortgage bankers to fund their operations and mortgages to be sold to investors. Frequently these loans are collateralized by the mortgages sold to investors. There were no nonperforming loans at December 31, 1998 and 1997, and no charge-offs in 1998 and 1997. A $44 million loan to a mortgage lender became nonperforming in the first quarter of 1999. 15 Based on an evaluation of individual credits, historical credit losses and global economic factors, the Company has allocated its allowance for credit losses as follows:
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Real Estate 3% 4% 5% 7% 9% Domestic Commercial And Industrial 74 64 40 36 40 Consumer 1 1 1 2 - Credit Card - - 29 23 16 Foreign 11 7 4 11 19 Unallocated 11 24 21 21 16 ----- ----- ----- ----- ----- 100% 100% 100% 100% 100% ===== ===== ===== ===== ===== Securities - ----------
The following table shows the maturity distribution by carrying amount and yield (not on a taxable equivalent basis) of the Company's securities portfolio at December 31, 1998.
U.S. States and Other Bonds, Mortgage-Backed U.S. Government Political Notes and and Equity Government Agency Subdivisions Debentures Securities ------------- ------------- ------------- ------------- --------------- (dollars in millions) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Total ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ----- Securities Held- - ---------------- to-Maturity - ------------ One Year or Less $ 31 4.35% $ 14 6.11% $ 233 3.91% $ 36 5.72% $ - -% $ 314 Over 1 through 5 Years - - 4 6.00 40 5.12 104 5.61 - - 148 Over 5 through 10 Years - - - - 32 6.57 21 5.63 - - 53 Over 10 years - - - - 31 6.61 272 6.02 - - 303 Mortgage-Backed Securities - - - - - - - - 146 7.27 146 ------ ----- ------ ---- ------ ------ $ 31 4.35% $ 18 6.09% $ 336 4.56% $433 5.88% $ 146 7.27% $ 964 ====== ===== ====== ==== ====== ====== Securities Available- - --------------------- for-Sale - --------- One Year or Less $ 207 5.89% $ - -% $ 8 5.67% $ 25 2.13% $ - -% $ 240 Over 1 through 5 Years 1,972 5.52 50 5.41 47 5.86 14 - - - 2,083 Over 5 through 10 Years 268 5.81 283 6.36 51 5.34 40 3.25 - - 642 Over 10 years 138 5.69 327 6.24 217 5.43 529 5.14 - - 1,211 Equity Securities - - - - - - - - 1,275 1.89 1,275 ----- ----- ------ ---- ------ ------ $2,585 5.59% $ 660 6.23% $ 323 5.48% $608 4.78% $1,275 1.89% $5,451 ====== ===== ====== ==== ====== ======
Loans - ----- The following table shows the maturity structure of the Company's commercial loan portfolio at December 31, 1998.
Over 1 Year 1 Year Through Over (in millions) or Less 5 Years 5 Years Total ------- ----------- ------- ----- Domestic - -------- Real Estate, Excluding Loans Collateralized by 1-4 Family Residential Properties $ 421 $ 1,126 $1,415 $ 2,962 Commercial and Industrial Loans 4,534 8,037 3,062 15,633 Other, Excluding Loans to Individuals and those Collateralized by 1-4 Family Residential Properties 4,529 984 307 5,820 ------- ------- ------ ------- 9,484 10,147 4,784 24,415 Foreign 3,858 1,300 1,191 6,349 - ------- ------- ------- ------ ------- Total $13,342 $11,447 $5,975 $30,764 ======= ======= ====== ======= Loans with: Predetermined Interest Rates $ 1,787 $ 1,021 $1,305 $ 4,113 Floating Interest Rates 11,555 10,426 4,670 26,651 ------- ------- ------ ------- Total $13,342 $11,447 $5,975 $30,764 ======= ======= ====== =======
16 Deposits - -------- The aggregate amount of deposits by foreign customers in domestic offices was $5.3 billion, $4.3 billion, and $4.5 billion at December 31, 1998, 1997, and 1996. The following table shows the maturity breakdown of domestic time deposits of $100,000 or more at December 31, 1998.
Time Certificates Deposits- (in millions) of Deposits Other Total --------------------------------------------- 3 Months or Less $ 762 $1,708 $2,470 Over 3 Through 6 Months 198 - 198 Over 6 Through 12 Months 193 - 193 Over 12 Months 354 68 422 ------ ------ ------ Total $1,507 $1,776 $3,283 ====== ====== ======
The majority of deposits in foreign offices are time deposits in denominations of $100,000 or more. Other Borrowed Funds - -------------------- Information related to other borrowed funds in 1998, 1997, and 1996 is presented in the table below.
1998 1997 1996 -------------------------------------------------------------- (dollars in millions) Average Average Average Amount Rate Amount Rate Amount Rate ------ ------- ------ ------- ------ -------- Federal Funds Purchased and Securities Sold Under Repurchase Agreements At December 31 $1,571 3.78% $2,329 4.32% $1,737 5.31% Average During Year 3,147 4.60 2,410 5.00 2,957 5.23 Maximum Month-End Balance During Year 4,684 4.65 3,805 5.45 4,460 4.85 Other* At December 31 $2,963 4.86% $2,960 5.69% $2,707 5.34% Average During Year 3,761 5.42 3,177 5.27 3,406 5.47 Maximum Month-End Balance During Year 3,467 5.07 3,439 5.12 4,341 5.40 *Other borrowings consist primarily of commercial paper, bank notes, extended federal funds purchased, and amounts owed to the U.S. Treasury.
Foreign Assets - -------------- At December 31, 1998, the Company had more than 1% of its total assets in Germany, totaling $1.2 billion, and in the United Kingdom, totaling $942 million. Germany's assets consisted of $785 million attributable to banks and other financial institutions, $124 million attributable to public sector entities, and $274 million attributable to commercial, industrial and other companies. The United Kingdom's assets consisted of $162 million attributable to banks and other financial institutions, $33 million attributable to public sector entities, and $747 million attributable to commercial, industrial and other companies. At December 31, 1997, the Company had more than 1% of its total assets in Brazil, totaling $778 million, and in Germany, totaling $641 million. Brazil's assets were all attributable to banks and other financial institutions. Germany's assets consisted of $381 million attributable to banks and other financial institutions, $126 million attributable to public sector entities, and $134 million attributable to commercial, industrial and other companies. At December 31, 1998, the Company had more than .75% of its total assets in France and Hong Kong, aggregating $1.1 billion. At December 31, 1997, the Company had more than.75% of its total assets in the United Kingdom, Japan, and Greece aggregating $1,544 million. 17 Introduction of the Euro - ------------------------ In January 1999, eleven European countries adopted the euro as their common legal currency. In the transition period from adoption through December 31, 2001, commerce may be conducted in either the euro or the former national currencies. The Company has adapted its information technology systems and business practices to accommodate euro-denominated transactions. The introduction of the euro currency may result in increased price transparency in the euro-area countries as well as a loss of cross-currency trading in the former national currencies, and may ultimately have profound political and financial implications. Based on its knowledge at this time, the Company does not anticipate that the introduction of the euro will have a material effect on the Company's financial condition or results of operations. 18 EXECUTIVE OFFICERS OF THE REGISTRANT AND BUSINESS EXPERIENCE DURING THE PAST FIVE YEARS - ---------------------------------------------------------------------------------------
Company Officer Name Office and Experience Age Since - ---- --------------------- --- ------- Thomas A. Renyi 1998-1999 Chairman and Chief Executive Officer 53 1992 of the Company and the Bank 1997-1998 President and Chief Executive Officer of the Company and the Bank 1996-1997 President of the Company and President and Chief Executive Officer of the Bank 1994-1995 President of the Company and President and Chief Operating Officer of the Bank 1994 President of the Company and Vice Chairman of the Bank Alan R. Griffith 1994-1999 Vice Chairman of the Company and the Bank 57 1990 1994 Senior Executive Vice President of the Company, and President and Chief Operating Officer of the Bank Gerald L. Hassell 1998-1999 President of the Company and the Bank and 47 1998 Senior Executive Vice President of the Company 1994-1998 Chief Commercial Banking Officer and Senior Executive Vice President of the Bank Deno D. Papageorge 1997-1999 Senior Executive Vice President of the 60 1980 Company and the Bank 1994-1997 Senior Executive Vice President of the Company, Senior Executive Vice President and Chief Financial Officer of the Bank Bruce W. Van Saun 1998-1999 Senior Executive Vice President of the 41 1998 Company and Chief Financial Officer of the Company and the Bank 1997-1998 Executive Vice President and Chief Financial Officer of the Bank 1994-1997 Chief Financial Officer Deutsche Bank U.S. Robert E. Keilman 1994-1999 Comptroller of the Company and the Bank, 53 1984 Senior Vice President of the Bank, retired January 1999 Thomas J. Mastro 1999 Comptroller of the Company and the Bank 49 1999 1998-1999 Senior Vice President of the Bank 1994-1998 Vice President of the Bank Phebe C. Miller 1995-1999 Secretary and Chief Legal Officer of the 49 1995 Company, Senior Vice President and Chief Legal Officer of the Bank 1994-1995 Senior Vice President of the Bank 1994 Managing Director, General Counsel and Secretary, Discount Corporation of New York Robert J. Goebert 1994-1999 Auditor of the Company, Senior Vice 57 1982 President of the Bank
ITEM 2. PROPERTIES - ------------------- At December 31, 1998 in New York City, the Company owned the forty-nine story building housing its executive headquarters at One Wall Street and an operations center at 101 Barclay Street. The Company leases the land at the 101 Barclay Street location under a lease expiring in 2080. In addition, the Company owns and/or leases administrative and operations facilities in New York City; various locations in New Jersey and Connecticut; Harrison, New York; Newark, Delaware; Brussels, Belgium; London, England; and Utica, New York. Other real properties owned or leased by the Company, when considered in the aggregate, are not material to its operations. 19 ITEM 3. LEGAL PROCEEDINGS - -------------------------- There are no material legal proceedings pending against the Company or its subsidiaries. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ There were no matters submitted to a vote of security holders of the registrant during the fourth quarter of 1998. PART II - ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ------------------------------------------------------------------------------ Information with respect to the market for the Company's common equity and related stockholder matters is incorporated herein by reference from the "Quarterly Data" section included in Exhibit 13. The Company's securities that are listed on the New York Stock Exchange (NYSE), are indicated as such on the front cover of this report. The NYSE symbol for the Company's Common Stock is BK. All of the Company's other securities are not currently listed. The Company had 24,245 common shareholders of record at February 26, 1999. ITEM 6. SELECTED FINANCIAL DATA - -------------------------------- Selected financial data are incorporated herein by reference from the "Financial Highlights" section included in Exhibit 13. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL - ---------------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- Management's discussion and analysis of financial condition and results of operations is incorporated herein by reference from the corresponding section of Exhibit 13. FORWARD LOOKING STATEMENTS The Company or its executive officers and directors on behalf of the Company, may from time to time make forward looking statements. To the extent that any forward looking statements are made, the Company is necessarily unable to predict future changes in interest rates, economic activity, consumer behavior, government monetary policy, legislation and regulation, competition, and loan demand. In addition, the Company's future results of operations and other forward looking statements contained in "Management's Discussion and Analysis" and elsewhere in this Form 10-K involve a number of risks and uncertainties, including risks relating to Year 2000 and the introduction of the Euro (in particular, the Year 2000 readiness of third parties with which the Company does business). As a result of variations in such factors, actual results may differ materially from any forward looking statements. Some of these factors are described below. References made to the Company's reports filed with the Securities and Exchange Commission for a further discussion of such factors. The Company disclaims any obligation to update forward looking statements. Government Monetary Policies The Federal Reserve Board has the primary responsibility for United States monetary policy. Its actions have an important influence on the demand for credit and investments and the level of interest rates and thus on the earnings of the Company. Legislation and Regulation Proposals to change the laws and regulations governing the banking industry are frequently introduced in Congress, in the state legislatures and before the various bank regulatory agencies. Such changes could, among other things, increase the Company's overhead and capital costs or reduce fees charged by the Company or increase competition for banks. The likelihood and timing of any such changes and the impact such changes might have on the Company and its subsidiaries, however, cannot be determined at this time. 20 Competition The businesses in which the Company operates are very competitive. Competition is provided by both unregulated and regulated financial services organizations, whose products and services span the local, national, and global markets in which the Company conducts operations. Savings banks, savings and loan associations, and credit unions actively compete for deposits, and money market funds and brokerage houses offer deposit-like services. These institutions, as well as consumer and commercial finance companies, national retail chains, factors, insurance companies and pension trusts, are important competitors for various types of loans. Issuers of commercial paper compete actively for funds and reduce demand for bank loans. For personal and corporate trust services and investment counseling services, insurance companies, investment counseling firms, and other business firms and individuals offer active competition. A wide variety of domestic and foreign companies compete for processing services. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------- See page 10 and 11 "Market Risk Management" and "Interest Rate Sensitivity". Quantitative and qualatative disclosure about market risk are incorporated herein by reference from the "Market Risk Management", "Trading Activities and Risk Management", and "Asset/Liability Mangement" sections included in Exhibit 13. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- Consolidated financial statements and notes and the independent auditors' report are incorporated herein by reference from Exhibits 13 to this Report. Supplementary financial information is incorporated herein by reference from the "Quarterly Data" section included in Exhibit 13. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ------------------------------------------------------------------------- There have been no events which require disclosure under Item 304 of Regulation S-K. PART III - -------- The material responsive to Items 10, 11, 12 and 13 is incorporated by reference to the Company's definitive proxy statement for its 1999 Annual Meeting, except for information as to Executive Officers set forth in Part I, Item 1. 21 PART IV - ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------- (a) 1. Financial Statements: See Item 8. (a) 2. Financial Statement Schedules: Financial statement schedules are omitted since the required information is either not applicable, not deemed material, or is shown in the respective financial statements or in the notes thereto. (a) 3. Listing of Exhibits: A list of the exhibits filed or incorporated by reference appears following page 23 of this Report, which information is incorporated by reference. (b) Reports on Form 8-K: October 19, 1998: Unaudited interim financial information and accompanying discussion for the third quarter of 1998. January 19, 1999: Unaudited interim financial information and accompanying discussion for the fourth quarter of 1998. January 29, 1999: Issuance by BNY Capital IV, a statutory business trust of 8,000,000,000 of its 6 7/8% Trust Preferred Securities, Series E (c) Exhibits: Submitted as a separate section of this report. (d) Financial Statements Schedules: Non 22 SIGNATURES - ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in New York, New York, on the 9th day of March, 1999. THE BANK OF NEW YORK COMPANY, INC. By: \s\ Thomas J. Mastro ------------------------------------- (Thomas J. Mastro, Comptroller) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been duly signed below by the following persons on behalf of the registrant and in the capacities indicated on the 9th day of March, 1999. Signature Title --------- ----- \s\ Thomas A. Renyi Chairman of the Board, Chief - ------------------------------------ Executive Officer (Principal (Thomas A. Renyi) Executive Officer), and Director \s\ Gerald L. Hassell President and Director - ------------------------------------ (Gerald L. Hassell) \s\ Alan R. Griffith Vice Chairman and Director - ------------------------------------ (Alan R. Griffith) \s\ Deno D. Papageorge Senior Executive Vice President - ------------------------------------ and Director (Deno D. Papageorge) \s\ Thomas J. Mastro Comptroller - ------------------------------------ (Principal Accounting Officer) (Thomas J. Mastro) \s\ J. Carter Bacot Director - ------------------------------------ (J. Carter Bacot) \s\ Richard Barth Director - ------------------------------------ (Richard Barth) \s\ Frank J. Biondi, Jr. Director - ------------------------------------ (Frank J. Biondi, Jr.) 23 \s\ William R. Chaney Director - ------------------------------------ (William R. Chaney) \s\ Ralph E. Gomory Director - ------------------------------------ (Ralph E. Gomory) \s\ Richard J. Kogan Director - ------------------------------------ (Richard J. Kogan) \s\ John A. Luke, Jr. Director - ------------------------------------ (John A. Luke, Jr.) \s\ John C. Malone Director - ------------------------------------ (John C. Malone) \s\ Donald L. Miller Director - ------------------------------------ (Donald L. Miller) \s\ H. Barclay Morley Director - ------------------------------------ (H. Barclay Morley) \s\ Catherine A. Rein Director - ------------------------------------ (Catherine A. Rein) \s\ William C. Richardson Director - ------------------------------------ (William C. Richardson) \s\ Harold E. Sells Director - ------------------------------------ (Harold E. Sells) \s\ Bruce W. Van Saun Senior Executive Vice President - ------------------------------------ and Chief Financial Officer (Bruce W. Van Saun) (Principal Financial Officer) 24 INDEX TO EXHIBITS Exhibit No. - ---------- 3 (a) The By-Laws of The Bank of New York Company, Inc. as amended through October 13, 1987- incorporated by reference to Exhibit 3(a) to the Company's 1987 Annual Report on Form 10-K. (b) Restated Certificate of Incorporation of The Bank of New York Company, Inc. dated July 20, 1994, incorporated by reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (c) Amendment to Certificate of Incorporation of The Bank of New York Company, Inc. dated July 9, 1996, incorporated by reference to Exhibit 4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. (d) Amendment to Certificate of Incorporation of The Bank of New York Company, Inc. dated July 16, 1998 incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-3 (Registration Statement No. 333-70187. 4 (a) None of the outstanding instruments defining the rights of holders of long-term debt of the Company represent long-term debt in excess of 10% of the total assets of the Company. The Company hereby agrees to furnish to the Commission, upon request, a copy of any of such instrument. (b) Rights Agreement, including form of Preferred Stock Purchase Right, dated as of December 10, 1985 between The Bank of New York Company, Inc. and The Bank of New York, as Rights Agent, incorporated by reference to the Company's registration statement on Form 8-A dated Dec. 18,1995. (c) First Amendment, dated as of June 13, 1989, to the Rights Agreement, including form of Preferred Stock Purchase Right, dated as of December 10, 1985, between The Bank of New York Company, Inc. and The Bank of New York, as Rights Agent, incorporated by reference to the amendment on Form 8, dated June 14, 1989, to the Company's Registration Statement on Form 8-A, dated December 18, 1985. (File No. 1-6152) (d) Second Amendment, dated as of April 30, 1993, to the Rights Agreement, including form of Preferred Stock Purchase Right, dated as of December 10, 1985, between The Bank of New York Company, Inc. and The Bank of New York, as Rights Agent incorporated by reference to the amendment on Form 8-A/A , filed May 3, 1993, to the Company's Registration Statement on Form 8-A, dated December 18, 1985. (File No. 1-6152) (e) Third Amendment, dated as of March 8, 1994, to the Rights Agreement, dated as of December 10, 1985, between The Bank of New York Company, Inc. and The Bank of New York, as Rights Agent, incorporated by reference to the amendment on Form 8-A/A, filed March 24, 1994, to the Company's Registration Statement on Form 8-A, dated December 18, 1985. (File No. 1-6152) *10(a) Amendment dated October 1, 1997 to the Trust Agreement dated November 16, 1993 related to executive compensation agreements, incorporated by reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. *(b) Enhanced Severance Agreement dated July 8, 1997, incorporated by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. *(c) Enhanced Severance Agreement dated July 8, 1997, incorporated by reference to Exhibit 10(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 25 *(d) Enhanced Severance Agreement dated July 8, 1997, incorporated by reference to Exhibit 10(d) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. *(e) Enhanced Severance Agreement dated July 8, 1997, incorporated by reference to Exhibit 10(e) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. *(f) Consulting Agreement dated November 5, 1997, incorporated by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. *(g) Compensation Agreement dated April 17, 1997, incorporated by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. *(h) 1984 Stock Option Plan of The Bank of New York Company, Inc. as amended through February 23, 1988, incorporated by reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1988. *(i) Amendment dated October 11, 1994 to 1984 Stock Option Plan of The Bank of New York Company, Inc., incorporated by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. *(j) The Bank of New York Company, Inc. Excess Contribution Plan as amended through July 10, 1990- incorporated by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990. *(k) Amendments dated February 23, 1994 and November 9, 1993 to The Bank of New York Company, Inc. Excess Contribution Plan, incorporated by reference to Exhibit 10(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. *(l) Amendment to The Bank of New York Company, Inc. Excess Contribution Plan dated November 14, 1995, incorporated by reference to Exhibit 10(l) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. *(m) The Bank of New York Company, Inc. Excess Benefit Plan as amended through December 8, 1992, incorporated by reference to Exhibit 10(d) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. *(n) Amendments dated February 23, 1994 and November 9, 1993 to The Bank of New York Company, Inc. Excess Benefit Plan, incorporated by reference to Exhibit 10(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. *(o) Amendment dated May 10, 1994 to The Bank of New York Company, Inc. Excess Benefit Plan, incorporated by reference to Exhibit 10(g) to the Company's Annual report on Form 10-K for the year ended December 31, 1994. *(p) Amendment dated November 14, 1995 to The Bank of New Company, Inc. Excess Benefit Plan, incorporated by reference to Exhibit 10(i) to the Company's Annual report on Form 10-K for the year ended December 31, 1995. *(q) 1994 Management Incentive Compensation Plan of The Bank of New York Company, Inc., incorporated by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. *(r) Amendment dated January 12, 1999 to the 1994 Management Incentive Compensation Plan of The Bank of New York Company, Inc. 26 *(s) 1988 Long-Term Incentive Plan as amended through December 8, 1992, incorporated by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. *(t) Amendment dated October 11, 1994 to the 1988 Long-Term Incentive Plan of The Bank of New York Company, Inc., incorporated by reference to Exhibit 10(j) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. *(u) The Bank of New York Company, Inc. 1993 Long-Term Incentive Plan, incorporated by reference to Exhibit 10(m) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. *(v) Amendment dated October 11, 1994 to the 1993 Long-Term Incentive Plan of The Bank of New York Company, Inc., incorporated by reference to Exhibit 10(l) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. *(w) Amendment dated December 10, 1996 to the 1993 Long-Term Incentive Plan of The Bank of New York Company, Inc., incorporated by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. *(x) Amendment dated January 14, 1997 to the 1993 Long-Term Incentive Plan of The Bank of New York Company, Inc., incorporated by reference to Exhibit 10(h) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. *(y) Amendment dated March 11, 1997 to the 1993 Long-Term Incentive Plan of The Bank of New York Company, Inc., incorporated by reference to Exhibit 10(i) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. *(z) Amendment dated July 14, 1998 to the 1993 Long-Term Incentive Plan of The Bank of New York Company, Inc. *(aa) The Bank of New York Company, Inc. 1999 Long-Term Incentive Plan. *(bb) The Bank of New York Company, Inc. Supplemental Executive Retirement Plan, incorporated by reference to Exhibit 10(n) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992. *(cc) Amendment dated March 9, 1993 to The Bank of New York Company, Inc. Supplemental Executive Retirement Plan, incorporated by reference to Exhibit 10(k) to the Company's Annual Report On Form 10-K for the year ended December 31, 1993. *(dd) Amendment effective October 11, 1994 to The Bank of New York Company, Inc. Supplemental Executive Retirement Plan, incorporated by reference to Exhibit 10(o) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. *(ee) Amendment dated June 11, 1996 to The Bank of New York Company, Inc. Supplemental Executive Retirement Plan, incorporated by reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. *(ff) Amendment dated November 12, 1996 to The Bank of New York Company, Inc. Supplemental Executive Retirement Plan, incorporated by reference to Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. *(gg) Trust Agreement dated April 19, 1988 related to certain executive compensation plans and agreements, incorporated by reference to Exhibit 10(h) to the Company's Annual Report on Form 10-K for the year ended December 31, 1988. 27 *(hh) Trust Agreement dated November 16, 1993 related to certain executive compensation plans and agreements, incorporated by reference to Exhibit 10(m) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. *(ii) Amendment dated October 11, 1994 to Trust Agreement dated November 16, 1993, related to certain executive compensation plans and agreements, incorporated by reference to Exhibit 10(r) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. *(jj) Trust Agreement dated December 15, 1994 related to certain executive compensation plans and agreements, incorporated by reference to Exhibit 10(s) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. *(kk) Amendment dated January 31, 1997 to the Trust Agreement dated April 19, 1988 related to executive compensation agreements, incorporated by reference to Exhibit 10(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. *(ll) Amendment dated January 14, 1997 to the Trust Agreement dated November 16, 1993 related to executive compensation agreements, incorporated by reference to Exhibit 10(d) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. *(mm) Amendment dated January 31, 1997 to the Trust Agreement dated November 16, 1993 related to executive compensation agreements, incorporated by reference to Exhibit 10(c) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. *(nn) Amendment dated January 31, 1997 to the Trust Agreement dated December 15, 1994 related to certain executive compensation plans and agreements, incorporated by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. *(oo) Amendment dated September 11, 1998 to the Trust Agreement dated November 16, 1993 related to executive compensation agreements. *(pp) Form of Remuneration Agreement between the Company and one of the five most highly compensated executive officers of the Company incorporated by reference to Exhibit 10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1982. *(qq) Form of Tax Reimbursement Agreement dated as of July 13, 1994 between the Company and two of the five most highly compensated executive officers of the Company, incorporated by reference to Exhibit 10(u) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. *(rr) Form of Remuneration Agreement dated October 11, 1994 between the Company and three of the five most highly compensated officers of the Company, incorporated by reference to Exhibit 10(v) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. *(ss) The Bank of New York Company, Inc. Retirement Plan for Non-Employee Directors- incorporated by reference to Exhibit 10(r) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994, *(tt) Amendment dated November 8, 1994 to The Bank of New York Company, Inc. Retirement Plan for Non-Employee Directors, incorporated by reference to Exhibit 10(x) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. *(uu) Amendment dated February 9, 1999 to The Bank of New York Company, Inc. Retirement Plan for Non-Employee Directors. 28 *(vv) Deferred Compensation Plan for Non-Employee Directors of The Bank of New York Company, Inc., incorporated by reference to Exhibit 10(s) to the Company's Annual Report on Form 10-K for the year ended December 31, 1993. *(ww) Amendment dated November 8, 1994 to Deferred Compensation Plan for Non-Employee Directors of The Bank of New York Company, Inc., incorporated by reference to Exhibit 10(z) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. *(xx) Amendment dated February 11, 1997 to the Directors' Deferred Compensation Plan for The Bank of New York Company, Inc., incorporated by reference to Exhibit 10(j) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 12 Statement - Re: Computation of Earnings to Fixed Charges Ratios 13 Portions of the 1998 Annual Report to Shareholders 21 Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP 27 Financial Data Schedule * Constitutes a Management Contract or Compensatory Plan or Arrangement EX-10 2 EXHBIT 10-R 1 EXHIBIT 10(r) AMENDMENT TO 1994 MANAGEMENT INCENTIVE COMPENSATION PLAN OF THE BANK OF NEW YORK COMPANY, INC. WHEREAS, the 1994 Management Incentive Compensation Plan of The Bank of New York Company, Inc. (the "1994 MICP") was adopted by the Board of Directors of The Bank of New York Company, Inc. (the "Company"), effective as of January 1, 1994; and WHEREAS, Section 13 of the 1994 MICP provides that the Board of Directors of the Company may amend the 1994 MICP at any time; and WHEREAS, the Board of Directors of the Company desires to adopt an amendment to the 1994 MICP; NOW, THEREFORE, the 1994 MICP is hereby amended, effective as of January 1, 1999, by amending the fourth sentence of Section 7 of the 1994 MICP to read as follows: Awards to each Covered Employee for each Plan Year will be limited to 0.2% of the Company's pre-tax net income for such Plan Year as reported to shareholders. IN WITNESS WHEREOF, The Bank of New York Company, Inc. has caused this amendment to be executed by its duly authorized officers this 12th day of January, 1999. \s\ Thomas A. Renyi --------------------------------- ATTEST: \s\ Jacqueline R. McSwiggan - -------------------------------- Assistant Secretary EX-10 3 EXHBIT 10-Z 1 EXHIBIT 10(z) AMENDMENT TO THE 1993 LONG-TERM INCENTIVE PLAN OF ------------------------------------------------- THE BANK OF NEW YORK COMPANY, INC. ---------------------------------- WHEREAS, the 1993 Long-Term Incentive Plan of The Bank of New York Company, Inc. (the "Plan") was established, effective as of January 1, 1993; and WHEREAS, Section 17 of the Plan provides that the Board of Directors of The Bank of New York Company, Inc. may amend the Plan at any time; and WHEREAS, the Board of Directors desires to amend the Plan. NOW, THEREFORE, IT IS RESOLVED that the Plan is hereby amended in the following respects, effective as of July 14, 1998: 1. Section 4 is amended by adding the following immediately after "(i)" in the second paragraph thereof: (or its delegate, within limits established by the Committee, with respect to non-Covered Employees and employees who are not subject to Section 16 of the Exchange Act) 2. Section 13 is amended by deleting the first paragraph thereof and substituting therefor the following: 13. CHANGE OF CONTROL. In the event of a Change of Control, as hereinafter defined, (i) all stock appreciation rights which have not been granted in tandem with stock options and which have been outstanding for at least six months shall become exercisable in full, (ii) the restrictions applicable to all shares of restricted stock shall lapse and such shares shall be deemed fully vested and all restricted stock granted in the form of share units shall be paid in cash, (iii) all performance shares shall be deemed to be earned in full and all performance shares granted in the form of share units shall be paid in cash, and (iv) any Participant who has been granted a stock option which is not exercisable in full shall be entitled, in lieu of the exercise of the portion of the stock option which is 2 not exercisable, to obtain a cash payment in an amount equal to the difference between the option price of such stock option and (A) in the event the Change of Control is the result of a tender offer or exchange offer for the Common Stock, the final offer price per share paid for the Common Stock, or such lower price as the Committee may determine with respect to any incentive stock option to preserve its incentive stock option status, multiplied by the number of shares of Common Stock covered by such portion of the stock option, or (B) in the event the Change of Control is the result of any other occurrence, the aggregate value of the Common Stock covered by such portion of the stock option, as determined by the Committee at such time. Notwithstanding the foregoing, if a Change of Control occurs under clause (C) of the definition thereof and (x) the Voting Securities of the Company outstanding immediately prior to such merger or consolidation would continue to represent more than 50% of the combined voting power of the Voting Securities of the Company or the surviving entity immediately after such merger or consolidation and (y) immediately after such merger or consolidation there would be no Change of Control under clause (B) of the definition thereof if the words "at least 50% thereof" were substituted for the words "a majority thereof", then no payment of cash shall be made pursuant to clause (iv) of the first sentence of this paragraph and in lieu thereof all stock options shall become exercisable in full. The Committee may, in its discretion, include such further provisions and limitations in any agreement documenting such Awards as it may deem equitable and in the best interests of the Company. IN WITNESS WHEREOF, The Bank of New York Company, Inc. has caused this Amendment to be executed by its duly authorized officers this 14th day of July, 1998. \s\Alan R. Griffith ------------------------------- ATTEST: \s\ Jacqueline R. Mc Swiggan - ---------------------------- Assistant Secretary EX-10 4 EXHBIT 10-AA 1 EXHIBIT 10(aa) THE BANK OF NEW YORK COMPANY, INC. 1999 LONG-TERM INCENTIVE PLAN 1. PURPOSE. The purpose of the 1999 Long-Term Incentive Plan of The Bank of New York Company, Inc. (the "Plan") is to promote the long term financial interests of The Bank of New York Company, Inc. (the "Company"), including its growth and performance, by encouraging employees of the Company and its subsidiaries to acquire an ownership position in the Company, enhancing the ability of the Company and its subsidiaries to attract and retain employees of outstanding ability, and providing employees with an interest in the Company parallel to that of the Company's stockholders. 2. DEFINITIONS. The following definitions are applicable to the Plan: "Award" shall mean an award determined in accordance with the terms of the Plan. "Board of Directors" shall mean the Board of Directors of the Company. "Committee" shall mean the Compensation and Organization Committee of the Board of Directors. "Common Stock" or "Stock" shall mean the common stock of the Company. "Covered Employee" means, at the time of an Award (or such other time as required or permitted by Section 162(m) of the Internal Revenue Code) (i) the Company's Chief Executive Officer (or an individual acting in such capacity), (ii) any employee of the Company or its subsidiaries who, in the discretion of the Committee for purposes of determining those employees who are "covered employees" under Section 162(m) of the Internal Revenue Code, is likely to be among the four other highest compensated officers of the Company for the year in which an Award is made or payable, and (iii) any other employee of the Company or its subsidiaries designated by the Committee in its discretion. "Exchange Act" shall mean the Securities Exchange Act of 1934. "Fair Market Value" shall mean, per share of Stock, the closing price of the Stock on the New York Stock Exchange (the "NYSE") on the applicable date, or, if there are no sales of Stock on the NYSE on such date, then the closing price of the Stock on the last previous day on which a sale on the NYSE is reported. "Participant" shall mean an employee of the Company or its subsidiaries who is selected by the Committee to participate in the Plan. 3. SHARES SUBJECT TO THE PLAN. Subject to adjustment as provided in Section 15 of this Plan, the number of shares of Stock which shall be available for the grant of Awards under the Plan shall not exceed 35,000,000. Notwithstanding anything contained 2 herein to the contrary, in no event shall more than 10,500,000 shares of Stock (subject to adjustment as provided in Section 15 of this Plan) be available in the aggregate for the issuance of Stock pursuant to performance shares or restricted stock granted under the Plan. The shares of Stock issued under the Plan may be authorized and unissued shares or treasury shares, as the Company may from time to time determine. Shares of Stock subject to an Award under the Plan that, in whole or in part, expires unexercised or that is forfeited, terminated or cancelled or is paid in cash in lieu of Stock, shares of Stock surrendered or withheld from any Award under the Plan to satisfy a Participant's income tax withholding obligation and shares of Stock owned by the Participant that are tendered to pay for the exercise of a stock option under the Plan shall thereafter again be available for grant under the Plan. 4. ADMINISTRATION. The Plan shall be administered by the Committee. A majority of the Committee shall constitute a quorum, and the acts of a majority shall be the acts of the Committee. Subject to the provisions of the Plan, the Committee (i) (or its delegate, within limits established by the Committee, with respect to non-Covered Employees and employees who are not subject to Section 16 of the Exchange Act) shall select the Participants, determine the type of Awards to be made to Participants, determine the shares or share units subject to Awards, and (ii) shall have the authority to interpret the Plan, to establish, amend, and rescind any rules and regulations relating to the Plan, to determine the terms and provisions of any agreements entered into hereunder, and to make all other determinations necessary or advisable for the administration of the Plan. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or in any Award in the manner and to the extent it shall deem desirable to carry it into effect. The determinations of the Committee in the administration of the Plan, as described herein, shall be final and conclusive. 5. ELIGIBILITY. All employees of the Company and its subsidiaries who have demonstrated significant management potential or who have the capacity for contributing in a substantial measure to the successful performance of the Company, as determined by the Committee, are eligible to be Participants in the Plan. In addition, the Committee may from time to time deem other employees of the Company or its subsidiaries eligible to participate in the Plan to receive awards of nonstatutory stock options. 6. AWARDS. Awards under the Plan may consist of: stock options (either incentive stock options within the meaning of Section 422 of the Internal Revenue Code or nonstatutory stock options), performance shares, and restricted stock grants. Awards of performance shares and restricted stock may provide the Participant with dividends or dividend equivalents and voting rights prior to vesting (whether based on a period of time or based on attainment of specified performance conditions). 7. STOCK OPTIONS. The Committee shall establish the option price at the time each stock option is granted, which price shall not be less than 100% of the Fair Market Value of the 3 Common Stock on the date of grant. Stock options shall be exercisable for such period as specified by the Committee, but in no event may options be exercisable for a period of more than ten years after their date of grant. The option price of each share as to which a stock option is exercised shall be paid in full at the time of such exercise. Such payment shall be made in cash, by tender of shares of Common Stock owned by the Participant valued at Fair Market Value as of the date of exercise, subject to such guidelines for the tender of Common Stock as the Committee may establish, in such other consideration as the Committee deems appropriate, or by a combination of cash, shares of Common Stock and such other consideration. In no event may any Participant receive stock options with respect to more than 750,000 shares of Stock in any calendar year. 8. PERFORMANCE SHARES. Performance shares may be granted in the form of actual shares of Stock or share units having a value equal to an identical number of shares of Stock. In the event that a stock certificate is issued in respect of performance shares, such certificate shall be registered in the name of the Participant but shall be held by the Company until the time the performance shares are earned. The performance conditions and the length of the performance period shall be determined by the Committee but in no event may a performance period be less than twelve months. The Committee shall determine in its sole discretion whether performance shares granted in the form of share units shall be paid in cash, Stock, or a combination of cash and Stock. Awards of performance shares to a Covered Employee shall (unless the Committee determines otherwise) be subject to performance conditions based on the achievement (i) by the Company or a business unit of a specified target operating or net income or return on assets, (ii) by the Company or a business unit of specified target earnings per share or return on equity, (iii) of a targeted total shareholder return or (iv) any combination of the conditions set forth in (i) and (ii) above. If an Award of performance shares is made on such basis, the Committee shall establish the relevant performance conditions within 90 days after the commencement of the performance period (or such later date as may be required or permitted by Section 162(m) of the Internal Revenue Code). The Committee may, in its discretion, reduce or eliminate the amount of payment with respect to an Award of performance shares to a Covered Employee, notwithstanding the achievement of a specified performance condition. The maximum number of performance shares subject to any Award to a Covered Employee is 300,000 for each 12 months during the performance period (or, to the extent the Award is paid in cash, the maximum dollar amount of any such Award is the equivalent cash value of such number of Shares at the closing price on the last trading day of the performance period). For purposes of the immediately preceding sentence, "trading day" shall mean a day in which the Shares are traded on the New York Stock Exchange. An Award of performance shares to a Participant who is a Covered Employee shall (unless the Committee determines otherwise) provide that in the event of the Participant's termination of employment prior to the end of the performance period for any reason, such Award will be payable only (A) if the applicable performance conditions are achieved and (B) to the extent, if any, as the Committee shall determine. 9. RESTRICTED STOCK. Restricted stock may be granted in the form of actual shares of Stock or share units having a value equal to an identical number of shares of Stock. In the 4 event that a stock certificate is issued in respect of restricted stock, such certificate shall be registered in the name of the Participant but shall be held by the Company until the end of the restricted period. The employment conditions and the length of the period for vesting of restricted stock shall be established by the Committee at time of grant. A restricted period of not less than three years shall apply to shares of Stock subject to restricted stock grants under the Plan, except that a restricted period of less than three years may apply to such grants with respect to up to ten percent (10%) of the total shares of Stock available for the grant of Awards under the Plan. The Committee shall determine in its sole discretion whether restricted stock granted in the form of share units shall be paid in cash, Stock, or a combination of cash and Stock. 10. AWARD AGREEMENTS. Each Award under the Plan shall be evidenced by an agreement setting forth the terms and conditions, as determined by the Committee, which shall apply to such Award, in addition to the terms and conditions specified in the Plan. 11. CHANGE IN CONTROL. In the event of a Change in Control, as hereinafter defined, (i) the restrictions applicable to all shares of restricted stock and restricted share units shall lapse and such shares and share units shall be deemed fully vested, (ii) all restricted stock granted in the form of share units shall be paid in cash, (iii) all performance shares granted in the form of shares of Stock or share units shall be deemed to be earned in full, (iv) all performance shares granted in the form of share units shall be paid in cash, and (v) each Participant who holds a stock option that is not exercisable in full shall be entitled to receive a cash payment as provided below with respect to the portion of the stock option which is not then exercisable. The amount of any cash payment in respect of a restricted share unit or performance share unit shall be equal to: (A) in the event the Change in Control is the result of a tender offer or exchange offer for Common Stock, the final offer price per share paid for the Common Stock or (B) in the event the Change in Control is the result of any other occurrence, the aggregate per share value of Common Stock as determined by the Committee at such time. The amount to be paid in respect of the portion of any stock option which is not exercisable shall be equal to the result of multiplying the number of shares of Common Stock covered by such portion of the stock option by the difference between (x) the per share value of Common Stock determined pursuant to the preceding sentence, or such lower price as the Committee may determine with respect to any incentive stock option to preserve its incentive stock option status, and (y) the per share exercise price of such stock option. Notwithstanding the foregoing, if a Change in Control occurs under clause (C) of the definition thereof and (x) the Voting Securities of the Company outstanding immediately prior to such merger or consolidation would continue to represent more than 50% of the combined voting power of the Voting Securities of the Company or the surviving entity immediately after such merger or consolidation and (y) immediately after such merger or consolidation there would be no Change in Control under clause (B) of the definition thereof if the words "at least 50% thereof" were substituted for the words "a majority thereof", then no payment of cash shall be made pursuant to clause (v) of the first sentence of this paragraph and in lieu thereof all stock options shall become exercisable in full. The Committee may, in its discretion, include such further provisions and limitations in any agreement documenting such Awards as it may deem equitable and in the best interests of the Company. 5 A "Change in Control" shall be deemed to occur if (A) any "person" (as such term is defined in Section 3(a)(9) and as used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), excluding the Company or any of its subsidiaries, a trustee or any fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, an underwriter temporarily holding securities pursuant to an offering of such securities or a corporation owned, directly or indirectly, by stockholders of the Company in substantially the same proportion as their ownership of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities ("Voting Securities"); or (B) during any period of not more than two years, individuals who constitute the Board of Directors of the Company as of the beginning of the period and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (A) or (C) of this sentence) whose election by the Board of Directors of the Company or nomination for election by the Company's shareholders was approved by a vote of at least two thirds ( 2/3) of the directors then still in office who either were directors at such time or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (C) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 60% of the combined voting power of the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of the Company approve a plan of complete liquidation of the Company or any agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. 12. WITHHOLDING. The Company shall have the right to deduct from any payment to be made pursuant to the Plan the amount of any taxes required by law to be withheld therefrom, or to require a Participant to pay to the Company such amount required to be withheld prior to the issuance or delivery of any shares of Stock or the payment of cash under the Plan. The Committee may, in its discretion, permit a Participant to elect to satisfy such withholding obligation by having the Company retain the number of shares of Stock whose Fair Market Value equals the amount required to be withheld. Any fraction of a share of Stock required to satisfy such obligation shall be disregarded and the amount due shall instead be paid in cash to the Participant. 13. NONTRANSFERABILITY. No Award shall be assignable or transferable, and no right or interest of any Participant shall be subject to any lien, obligation or liability of the Participant, except by will or the laws of descent and distribution. Notwithstanding the immediately preceding sentence, the Committee may, subject to the terms and conditions it may specify, permit a Participant to transfer any nonstatutory stock options granted to him pursuant to the Plan to one or more of his immediate family members or to trusts established in whole or in part for the benefit of the Participant and/or one or more of such immediate family members. During the lifetime of the Participant, a nonstatutory stock option shall be exercisable only by the Participant 6 or by the immediate family member or trust to whom such stock option has been transferred pursuant to the immediately preceding sentence. For purposes of the Plan, (i) the term "immediate family" shall mean the Participant's spouse and issue (including adopted and step children) and (ii) the phrase "immediate family members and trusts established in whole or in part for the benefit of the Participant and/or one or more of such immediate family members" shall be further limited, if necessary, so that neither the transfer of a nonstatutory stock option to such immediate family member or trust, nor the ability of a Participant to make such a transfer shall have adverse consequences to the Company or the Participant by reason of Section 162(m) of the Internal Revenue Code. 14. NO RIGHT TO EMPLOYMENT. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Company or its subsidiaries. Further, the Company and its subsidiaries expressly reserve the right at any time to dismiss a Participant free from any liability, or any claim under the Plan, except as provided herein or in any agreement entered into hereunder. 15. ADJUSTMENT OF AND CHANGES IN STOCK. In the event of any change in the outstanding shares of Common Stock by reason of any stock dividend or split, recapitalization, merger, consolidation, spinoff, combination or exchange of shares or other corporate change, or any distributions to common shareholders other than regular cash dividends, the Committee may make such substitution or adjustment, if any, as it deems to be equitable, as to the number or kind of shares of Common Stock or other securities issued or reserved for issuance pursuant to the Plan and to outstanding Awards. 16. AMENDMENT. The Board of Directors may amend, suspend or terminate the Plan or any portion thereof at anytime, provided that no amendment shall be made without stockholder approval if such approval is necessary in order for the Plan to continue to comply with Rule 16b-3 under the Exchange Act. 17. EFFECTIVE DATE. The Plan shall be effective as of January 1, 1999, subject to its approval by shareholders of the Company. Subject to earlier termination pursuant to Section 16 of this Plan, the Plan shall have a term of five years from its effective date. EX-10 5 EXHBIT 10-OO 1 EXHIBIT 10(oo) AMENDMENT NUMBER TEN TO GRANTOR TRUST AGREEMENT THIS AGREEMENT, made as of the 11th day of September, 1998, by and between THE BANK OF NEW YORK COMPANY, INC., a corporation organized and existing under the laws of the State of New York (hereinafter referred to as the "Company"), and THE CHASE MANHATTAN BANK, a corporation organized and existing under the laws of the New York (hereinafter referred to as the "Trustee"), W I T N E S S E T H : WHEREAS, the Company and the Trustee entered into a Grantor Trust Agreement dated as of November 16, 1993 (as amended from time to time, the "Agreement"); WHEREAS, Article TWELFTH of the Agreement provides that the Company may amend the Agreement; and WHEREAS, the Company desires to amend the Agreement; NOW, THEREFORE, the Company and the Trustee agree as follows, effective September 11, 1998: Exhibit I to the Agreement is amended by deleting Exhibit I in its entirety and substituting therefor Exhibit I in the form attached hereto. IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed in their respective names by their duly authorized officers under their corporate seals as of the day and year first above written. ATTEST: THE BANK OF NEW YORK COMPANY, INC. \s\ Russell P. Wellinger By: \s\ Deon D. Papageorge - ------------------------ ------------------------------------ Deno D. Papageorge Senior Executive Vice President ATTEST: THE CHASE MANHATTAN BANK \s\ James M. Rossi By: \s\ Gerard Stafford-Smith - ------------------------ ------------------------------------ Name: Gerard Stafford-Smith Title: Vice President 2 EXHIBIT I --------- 1. The Bank of New York Company, Inc. Excess Benefit Plan 2. The Bank of New York Company, Inc. Supplemental Executive Retirement Plan 3. Agreements between The Bank of New York Company, Inc. and the following persons: Individual Date of Agreement ---------- ----------------- Alan R. Griffith July 8, 1997 Joseph A. Grimaldi April 11, 1995 Gerald L. Hassell July 8, 1997 Newton P.S. Merrill October 11, 1994 Donald R. Monks January 14, 1997 Robert J. Mueller July 8, 1997 Richard A. Pace October 11, 1994 Thomas J. Perna September 11, 1998 Thomas A. Renyi July 8, 1997 Bruce W. Van Saun July 8, 1997 Joseph M. Velli September 11, 1998 EX-10 6 EXHBIT 10-UU 1 EXHIBIT 10(uu) AMENDMENT TO THE BANK OF NEW YORK COMPANY, INC. RETIREMENT PLAN FOR NON-EMPLOYEE DIRECTORS WHEREAS, The Bank of New York Company, Inc. Retirement Plan for Non- Employee Directors (the "Plan") was adopted by the Board of Directors of The Bank of New York Company, Inc. (the "Company"), effective as of May 11, 1993; and WHEREAS, Section 6 of the Plan provides that the Board of Directors of the Company may amend the Plan at any time except in certain respects not material hereto; and WHEREAS, the Board of Directors of the Company desires to adopt an amendment to the Plan; NOW THEREFORE, effective May 11, 1999 the Plan is hereby amended in the following respect: 1. A new Section 2(f) is added to the Plan to read as follows: (f)Notwithstanding anything contained herein to the contrary, (i) with respect to any member retiring from the Board after May 11, 1999, (x) no service on the Board after May 11, 1999 shall be considered in computing any retirement benefit provided under the Plan, and (y) the annual cash retainer used for purposes of computing a benefit under the Plan cannot be greater than $30,000, whether or not the current annual cash retainer exceeds such amount, and (ii) except for any Director who ceases to be a member of the Board within two years after a Change of Control, with respect to any member attaining age 70 after May 11, 1999, all retirement benefits 2 provided under the Plan shall be payable for a number of years following retirement equal to the number of years of service as a member of the Board prior to May 11, 1999. IN WITNESS WHEREOF, The Bank of New York Company, Inc. has caused this Amendment to be executed by its duly authorized officers this 9th day of February, 1999. \s\ Thomas A. Renyi ----------------------------------------- ATTEST: \s\ Jacqueline R. McSwiggan - --------------------------- Secretary EX-12 7 EXHIBIT 12 EXHIBIT 12 THE BANK OF NEW YORK COMPANY, INC. Ratios of Earnings to Fixed Charges and Ratios of Earnings to Combined Fixed Charges, Distribution on Trust Preferred Securities, and Preferred Stock Dividends (Dollars in millions)
For The Years Ended December 31 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- EARNINGS - -------- Income Before Income Taxes $1,986 $1,838 $1,656 $1,482 $1,198 Fixed Charges, Excluding Interest on Deposits 519 446 502 568 436 ------ ------ ------ ------ ------ Income Before Income Taxes and Fixed Charges Excluding Interest on Deposits 2,505 2,284 2,158 2,050 1,634 Interest on Deposits 1,374 1,290 1,152 1,265 842 ------ ------ ------- ------ ------ Income Before Income Taxes and Fixed Charges, Including Interest on Deposits $3,879 $3,574 $3,310 $3,315 $2,476 ====== ====== ======= ====== ====== FIXED CHARGES - ------------- Interest Expense, Excluding Interest on Deposits $ 485 $ 415 $ 470 $ 537 $ 403 One-Third Net Rental Expense* 34 31 32 31 33 ------ ------ ------ ------ ------ Total Fixed Charges, Excluding Interest on Deposits 519 446 502 568 436 Interest on Deposits 1,374 1,290 1,152 1,265 842 ------ ------ ------ ------ ------ Total Fixed Charges, Including Interest on Deposits $1,893 $1,736 $1,654 $1,833 $1,278 ====== ====== ====== ====== ====== DISTRIBUTION ON TRUST PREFERRED SECURITIES, PRE-TAX BASIS $ 95 $ 65 $ 2 $ - $ - - ------------------------------- ====== ====== ====== ====== ====== PREFERRED STOCK DIVIDENDS, PRE-TAX BASIS $ - $ 14 $ 16 $ 16 $ 21 - ---------------------------------------- ====== ====== ====== ====== ====== EARNINGS TO FIXED CHARGES RATIOS - -------------------------------- Excluding Interest on Deposits 4.83x 5.12x 4.30x 3.61x 3.75x Including Interest on Deposits 2.05 2.06 2.00 1.81 1.94 EARNINGS TO COMBINED FIXED CHARGES, DISTRIBUTION ON TRUST PREFERRED SECURITIES, & PREFERRED STOCK DIVIDENDS RATIOS - ------------------------------------------- Excluding Interest on Deposits 4.08 4.35 4.15 3.51 3.58 Including Interest on Deposits 1.95 1.97 1.98 1.79 1.91 *The proportion deemed representative of the interest factor.
EX-13 8 EXHIBIT 13 1 EXHIBIT 13 1998 Annual Report to Shareholders 2 FINANCIAL HIGHLIGHTS
Dollars in millions, except per share amounts 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Net Interest Income $1,651 $ 1,855 $ 1,961 $ 2,029 $ 1,717 Noninterest Income 2,283 2,137 2,130 1,491 1,289 Provision for Credit Losses 20 280 600 330 162 Noninterest Expense 1,928 1,874 1,835 1,708 1,646 Net Income 1,192 1,104 1,020 914 749 Net Income Available to Common Shareholders 1,192 1,095 1,010 904 736 Return on Average Assets 1.89% 1.86% 1.90% 1.72% 1.49% Return on Average Common Shareholders' Equity 24.25 22.13 19.98 19.42 18.49 Common Dividend Payout Ratio 33.84 34.13 32.50 28.84 27.88 Per Common Share Basic Earnings $ 1.59 $ 1.44 $ 1.30 $ 1.17 $ 0.98 Diluted Earnings 1.53 1.36 1.20 1.09 0.92 Cash Dividends Paid 0.54 0.49 0.42 0.34 0.28 Market Value at Year End 40.25 28.91 16.88 12.19 7.45 Averages Securities $7,154 $ 5,722 $ 5,343 $ 5,260 $ 5,941 Loans 38,340 36,577 36,698 35,421 32,029 Total Assets 63,141 59,242 53,649 53,053 50,280 Deposits 42,262 39,910 36,599 36,061 34,041 Long-Term Debt 1,972 1,815 1,870 1,773 1,530 Minority Interest - Preferred Securities 1,233 830 26 - - Shareholders' Equity: Preferred 1 103 113 115 157 Common 4,915 4,947 5,055 4,653 3,980 At Year End Allowance for Credit Losses as a Percent of Loans 1.66% 1.82% 2.44% 2.01% 2.40% Tier 1 Capital Ratio 7.89 7.92 8.34 8.42 8.45 Total Capital Ratio 11.90 11.97 12.78 13.08 13.43 Leverage Ratio 7.46 7.59 8.70 8.46 7.89 Common Equity to Assets Ratio 8.58 8.34 8.99 9.53 8.55 Total Equity to Assets Ratio 8.58 8.34 9.19 9.74 8.79 Common Shares Outstanding (in millions) 771.318 747.670 770.544 789.912 747.740 Employees 17,157 16,494 16,158 15,810 15,477 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, July 19, 1996 and April 22, 1994.
3 Consolidated Balance Sheets
- ---------------------------------------------------------------------------------------- Dollars in millions, except per share amounts December 31, 1998 1997 - ---------------------------------------------------------------------------------------- Assets Cash and Due from Banks $ 3,999 $ 5,769 Interest-Bearing Deposits in Banks 4,504 2,126 Securities: Held-to-Maturity (fair value of $923 in 1998 and $1,106 in 1997) 964 1,127 Available-for-Sale 5,451 5,501 ------- ------- Total Securities 6,415 6,628 Trading Assets 1,637 2,616 Federal Funds Sold and Securities Purchased Under Resale Agreements 3,281 2,820 Loans (less allowance for credit losses of $636 in 1998 and $641 in 1997) 37,750 34,486 Premises and Equipment 856 835 Due from Customers on Acceptances 946 1,187 Accrued Interest Receivable 355 356 Other Assets 3,760 3,138 ------- ------- Total Assets $63,503 $59,961 ======= ======= Liabilities and Shareholders' Equity Deposits: Noninterest-Bearing (principally domestic offices) $11,480 $12,561 Interest-Bearing Domestic Offices 16,091 15,607 Foreign Offices 17,061 13,189 ------- ------- Total Deposits 44,632 41,357 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 1,571 2,329 Other Borrowed Funds 4,536 4,673 Acceptances Outstanding 951 1,196 Accrued Taxes and Other Expenses 2,183 1,910 Accrued Interest Payable 188 182 Other Liabilities 608 503 Long-Term Debt 2,086 1,809 ------- ------- Total Liabilities 56,755 53,959 ------- ------- Guaranteed Preferred Beneficial Interests in the Company's Junior Subordinated Deferrable Interest Debentures 1,300 1,000 ------- ------- Shareholders' Equity Class A Preferred Stock-par value $2.00 per share, authorized 5,000,000 shares, outstanding 22,820 shares in 1998 and 23,844 shares in 1997 1 1 Common Stock-par value $7.50 per share, authorized 1,600,000,000 shares, issued 970,767,767 shares in 1998 and 920,425,238 shares in 1997 7,281 6,904 Additional Capital 142 12 Retained Earnings 1,318 529 Accumulated Other Comprehensive Income 312 285 ------- ------- 9,054 7,731 Less: Treasury Stock (197,648,459 shares in 1998 and 170,641,008 shares in 1997), at cost 3,593 2,714 Loan to ESOP (1,801,003 shares in 1998 and 2,113,658 shares in 1997), at cost 13 15 ------- ------- Total Shareholders' Equity 5,448 5,002 ------- ------- Total Liabilities and Shareholders' Equity $63,503 $59,961 ======= ======= See accompanying Notes to Consolidated Financial Statements.
4 Consolidated Statements of Income
- ----------------------------------------------------------------------------------------- In millions, except per share amounts For the years ended December 31, 1998 1997 1996 - ----------------------------------------------------------------------------------------- Interest Income Loans $2,770 $2,910 $3,073 Securities Taxable 271 244 240 Exempt from Federal Income Taxes 61 35 37 ------ ------ ------ 332 279 277 Deposits in Banks 184 188 90 Federal Funds Sold and Securities Purchased Under Resale Agreements 203 162 126 Trading Assets 21 21 17 ------ ------ ------ Total Interest Income 3,510 3,560 3,583 ------ ------ ------ Interest Expense Deposits 1,374 1,290 1,152 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 145 121 155 Other Borrowed Funds 204 168 186 Long-Term Debt 136 126 129 ------ ------ ------ Total Interest Expense 1,859 1,705 1,622 ------ ------ ------ Net Interest Income 1,651 1,855 1,961 Provision for Credit Losses 20 280 600 ------ ------ ------ Net Interest Income After Provision for Credit Losses 1,631 1,575 1,361 ------ ------ ------ Noninterest Income Processing Fees Securities 1,000 790 655 Cash 256 239 209 ------ ------ ------ 1,256 1,029 864 Trust and Investment Fees 208 181 161 Service Charges and Fees 326 354 421 Securities Gains 175 136 97 Other 318 437 587 ------ ------ ------ Total Noninterest Income 2,283 2,137 2,130 ------ ------ ------ Noninterest Expense Salaries and Employee Benefits 1,178 1,066 1,014 Net Occupancy 166 166 167 Furniture and Equipment 86 95 93 Other 498 547 561 ------ ------ ------ Total Noninterest Expense 1,928 1,874 1,835 ------ ------ ------ Income Before Income Taxes 1,986 1,838 1,656 Income Taxes 699 669 634 Distribution on Trust Preferred Securities 95 65 2 ------ ------ ------ Net Income $1,192 $1,104 $1,020 ====== ====== ====== Net Income Available to Common Shareholders $1,192 $1,095 $1,010 ====== ====== ====== Per Common Share Basic Earnings $ 1.59 $ 1.44 $ 1.30 Diluted Earnings 1.53 1.36 1.20 Cash Dividends Paid 0.54 0.49 0.42 Diluted Shares 781 807 844 See accompanying Notes to Consolidated Financial Statements.
5 Consolidated Statements of Changes in Shareholders' Equity
- ----------------------------------------------------------------------------------------------------------------------- Dollars in millions For the years ended December 31, 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- Preferred Stock Balance, January 1 $ 1 $ 112 $ 113 Redemption (shares: 184,000 in 1997) - (111) - Conversion of Preferred Stock (shares: 1,024 in 1998, 16,585 in 1997, and 9,075 in 1996) - - (1) ------ ------ ------ Balance, December 31 1 1 112 ------ ------ ------ Common Stock Balance, January 1 6,904 6,664 6,124 Conversion of Debentures (shares: 23,286,022 in 1996) - - 174 Conversion of Preferred Stock (shares: 7,579 in 1998, 122,664 in 1997 and 67,132 in 1996) - 2 2 Exercise of Warrants (shares: 42,930,224 in 1998, 21,845,256 in 1997, and 42,003,296 in 1996) 322 164 314 Other Issuances (shares: 7,404,726 in 1998, 9,821,746 in 1997, and 6,629,502 in 1996) 55 74 50 ------ ------ ------ Balance, December 31 7,281 6,904 6,664 ------ ------ ------ Additional Capital Balance, January 1 12 9 - Exercise of Warrants 11 5 9 Other, Primarily Common Stock Issued in Connection with Employee Benefit Plans 119 (2) - ------ ------ ------ Balance, December 31 142 12 9 ------ ------ ------ Retained Earnings Balance, January 1 529 (190) (811) Net Income $1,192 1,192 $1,104 1,104 $1,020 1,020 Cash Dividends Common Stock (403) (373) (328) Preferred Stock - (10) (10) Other, Primarily Conversion of Debentures - (2) (61) ------ ------ ------ Balance, December 31 1,318 529 (190) Accumulated Other Comprehensive Income Securities Valuation Allowance Balance, January 1 320 82 58 Change in Fair Value of Securities Available-for-Sale, Net of Taxes of $90 in 1998, $152 in 1997, and $30 in 1996 145 145 293 293 46 46 Reclassification Adjustment, Net of Taxes of $69 in 1998, $29 in 1997 and $13 in 1996 (125) (125) (55) (55) (22) (22) ------ ------ ------ Balance, December 31 340 320 82 Foreign Currency Items Balance, January 1 (35) (9) (5) Foreign Currency Translation Adjustment Net of Tax Expense(Benefit) of $5 in 1998, ($18) in 1997 and ($6) in 1996 7 7 (26) (26) (4) (4) ------ ------ ------ Balance, December 31 (28) (35) (9) ----- ------ ----- ------ ----- ------ Total Comprehensive Income $1,219 $1,316 $1,040 ====== ====== ====== Less Treasury Stock Balance, January 1 2,714 1,524 228 Issued (shares: 5,507,044 in 1998, 2,569,458 in 1997, and 3,757,848 in 1996) (97) (34) (36) Acquired (shares: 32,514,495 in 1998, 57,510,776 in 1997, and 95,353,346 in 1996) 976 1,224 1,332 ------ ------ ------ Balance, December 31 3,593 2,714 1,524 ------ ------ ------ Less Loan to ESOP Balance, January 1 15 17 18 Released (shares: 312,655 in 1998, 277,780 in 1997, and 242,682 in 1996) (2) (2) (1) ------ ------ ------ Balance, December 31 13 15 17 ------ ------ ------ Total Shareholders' Equity, December 31 $5,448 $5,002 $5,127 ====== ====== ====== See accompanying Notes to Consolidated Financial Statements.
6 Consolidated Statements of Cash Flows
- ---------------------------------------------------------------------------------------- In millions For the years ended December 31, 1998 1997 1996 - ---------------------------------------------------------------------------------------- Operating Activities Net Income $1,192 $1,104 $1,020 Adjustments to Determine Net Cash Attributable to Operating Activities: Provision for Losses on Loans and Other Real Estate 21 292 611 Sale of Credit Card Loans - (177) (400) Depreciation and Amortization 187 200 237 Deferred Income Taxes 260 271 98 Securities Gains (175) (136) (97) Change in Trading Activities 1,102 (786) 52 Change in Accruals and Other, Net (1,021) 58 (609) ------ ------ ------ Net Cash Provided by Operating Activities 1,566 826 912 ------ ------ ------ Investing Activities Change in Interest-Bearing Deposits in Banks (2,256) (833) (427) Purchases of Securities Held-to-Maturity (631) (318) (284) Maturities of Securities Held-to-Maturity 814 366 347 Purchases of Securities Available-for-Sale (2,481) (2,550) (1,377) Sales of Securities Available-for-Sale 1,767 453 603 Maturities of Securities Available-for-Sale 849 954 597 Net Principal Disbursed on Loans to Customers (2,561) (4,248) (3,411) Sales of Loans and Other Real Estate 258 5,680 4,136 Change in Federal Funds Sold and Securities Purchased Under Resale Agreements (461) (2,258) 373 Purchases of Premises and Equipment (88) (45) (47) Acquisitions, Net of Cash Acquired (166) (269) (400) Proceeds from the Sale of Premises and Equipment 50 10 3 Other, Net (268) (93) (46) ------ ------ ------ Net Cash Provided (Used) by Investing Activities (5,174) (3,151) 67 ------ ------ ------ Financing Activities Change in Deposits 3,199 2,204 3,522 Change in Federal Funds Purchased and Securities Sold Under Repurchase Agreements (758) 592 (2,196) Change in Other Borrowed Funds (323) 259 (376) Proceeds from the Issuance of Trust Preferred Securities 300 400 600 Proceeds from the Issuance of Long-Term Debt 315 25 100 Repayments of Long-Term Debt (44) (48) (16) Redemption and Repurchases of Preferred Stock - (115) - Issuance of Common Stock 606 278 410 Treasury Stock Acquired (976) (1,224) (1,332) Cash Dividends Paid (403) (383) (338) ------ ------ ------ Net Cash Provided by Financing Activities 1,916 1,988 374 ------ ------ ------ Effect of Exchange Rate Changes on Cash (78) 74 (32) ------ ------ ------ Change in Cash and Due From Banks (1,770) (263) 1,321 Cash and Due from Banks at Beginning of Year 5,769 6,032 4,711 ------ ------ ------ Cash and Due from Banks at End of Year $3,999 $5,769 $6,032 ====== ====== ====== Supplemental Disclosure of Cash Flow Information Cash Paid During the Year for: Interest $1,853 $1,701 $1,634 Income Taxes 404 381 628 Noncash Investing Activity (Primarily Foreclosure of Real Estate) 8 10 53 See accompanying Notes to Consolidated Financial Statements.
7 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: Trust, and Securities and Cash Processing; Corporate Banking; Retail Banking; and Financial Markets. 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. The following is a summary of the Company's more significant accounting and reporting policies. Securities - Debt and equity securities classified as available-for-sale are carried at fair value, except for those equity securities whose fair value cannot be readily determined. These securities are carried at cost. Equity investments of less than a majority but at least 20% ownership are accounted for by the equity method and classified as other assets. For securities carried at fair value, the after-tax effect of net unrealized gains and losses is reported as a separate component of shareholders' equity. Securities classified as trading assets are carried at fair value, with net unrealized holding gains and losses recognized currently in income. Debt securities, which the Company has the ability and intent to hold until maturity, are classified as held-to-maturity and stated at cost, adjusted for discount 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 significant commercial loans are assigned to specific risk categories. Smaller commercial and consumer loans are evaluated on a pooled basis. Following this review, senior management of the Company analyzes the results and determines the allowance for credit losses. The Audit, Examining and CRA 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 nonaccrual commercial loans over $1 million (impaired loans) is measured by the difference between their recorded value and fair value. Fair value is either the present value of the expected future cash flows from borrowers, the market value of the loan, or the fair value of the collateral. Nonperforming Assets - Commercial loans are placed on nonaccrual status when collateral is insufficient and principal or interest is past due 90 days or more, or when there is reasonable doubt that interest or principal will be collected. Accrued interest is usually reversed when a loan is placed on nonaccrual status. Interest payments received on nonaccrual loans may be recognized as income or applied to principal depending upon management's judgment. Nonaccrual loans are 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. 8 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. New Accounting Pronouncements - On January 1, 1998, a new accounting pronouncement related to comprehensive income was adopted. Unrealized gains or losses on available-for-sale securities and foreign currency translation adjustments, which were reported separately in shareholders' equity, are now included in other comprehensive income. Prior periods have been restated for these changes. The Company has adopted a new accounting standard for disclosure of its operating segments. The Company's segment disclosures, consisting of Segment Data and Foreign Operations, are incorporated from the Segment Profitability section of Management's Discussion and Analysis of the Company's Financial Condition and Results of Operations. Beginning in 1999, the Company will adopt new accounting guidance relating to the costs of internally-developed software. Upon adoption, the Company will capitalize certain costs incurred to develop or acquire software for internal use. Although the Company has not yet quantified the impact of capitalizing software development costs in 1999, it does not expect the impact to be significant. Effective January 1, 2000, a new accounting standard will require the Company to record all derivatives on the balance sheet at fair value and apply new accounting practices for hedging activities. The Company has not yet determined the impact of the new accounting standard. Other - Certain prior year information has been reclassified to conform its presentation with the 1998 financial statements. 9 2. Acquisitions and Dispositions In the fourth quarter of 1998, the Company acquired a merger and advisory firm, a correspondent securities clearing organization and a directed brokerage services firm. In the first quarter of 1998, the Company acquired International Factors, Ltd., an asset based lender located in England, which included assets of approximately $900 million as well as a firm specializing in the research and trading of high yield securities. The Company also acquired the corporate trust businesses of several smaller banks in 1998. During 1997, the Company acquired asset based lending and employee benefit recordkeeping businesses. Also in 1997, the Company acquired the corporate trust businesses of Wells Fargo & Company and Boatmen's Bancshares as well as those of several smaller banks. In addition, the Company acquired certain assets of BondNet, an information technology company. The Company also acquired ESI Securities Company and its affiliate, B-Trade Services. These companies deliver trading services to institutions. The Company acquired asset based lending, corporate trust, and unit investment trust businesses in 1996. In January 1997, the Company sold approximately $900 million in credit card receivables. In November 1997, the Company sold its remaining credit card operations ($4.4 billion in receivables) and recorded a pre-tax gain on this sale of approximately $177 million. In 1996, the Company sold its AFL-CIO Union Privilege affinity credit card portfolio ($3.4 billion in receivables) for $575 million. The Company recorded a pre-tax gain of $400 million on this transaction. In 1997 and 1996, the Company sold portions of its interest in Wing Hang Bank, Ltd. for pre-tax gains of $27 million and $21 million. The pro forma effect of the above acquisitions and dispositions is not material. 3. Securities The following table sets forth the amortized cost and the fair values of securities at the end of the last two years: 1998 --------------------------------------------- Gross Unrealized In millions Amortized ---------------- Fair Cost Gains Losses Value --------- ----- ------ ----- Securities Held-to-Maturity US Government Obligations $ 31 $ - $ - $ 31 US Government Agency Obligations 164 4 - 168 Obligations of States and Political Subdivisions 336 3 - 339 Emerging Markets 307 - 52 255 Other Debt Securities 126 4 - 130 ------ ---- ---- ------ Total Securities Held-to-Maturity 964 11 52 923 ------ ---- ---- ------ Securities Available-for-Sale US Government Obligations 3,157 89 1 3,245 Obligations of States and Political Subdivisions 306 17 - 323 Emerging Markets 6 2 - 8 Other Debt Securities 599 1 - 600 Equity Securities 872 403 - 1,275 ------ ---- ---- ------ Total Securities Available-for-Sale 4,940 512 1 5,451 ------ ---- ---- ------ Total Securities $5,904 $523 $ 53 $6,374 ====== ==== ==== ====== 10 1997 ---------------------------------------------- Gross Unrealized In millions Amortized ---------------- Fair Cost Gains Losses Value --------- ----- ------ ------ Securities Held-to- Maturity US Government Obligations $ 25 $ - $ - $ 25 US Government Agency Obligations 339 3 - 342 Obligations of States and Political Subdivisions 372 3 - 375 Emerging Markets 289 - 30 259 Other Debt Securities 102 3 - 105 ------ ---- ---- ------ Total Securities Held-to-Maturity 1,127 9 30 1,106 ------ ---- ---- ------ Securities Available-for-Sale US Government Obligations 3,654 6 2 3,658 Obligations of States and Political Subdivisions 287 16 - 303 Emerging Markets 22 1 1 22 Other Debt Securities 84 2 - 86 Equity Securities 954 478 - 1,432 ------ ---- ---- ------ Total Securities Available-for-Sale 5,001 503 3 5,501 ------ ---- ---- ------ Total Securities $6,128 $512 $33 $6,607 ====== ==== ==== ====== The amortized cost and fair values of securities at December 31, 1998, 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 $ 314 $ 312 $ 241 $ 240 Due After One Year Through Five Years 148 152 2,020 2,083 Due After Five Years Through Ten Years 53 51 619 642 Due After Ten Years 303 257 1,188 1,211 Mortgage-Backed Securities 146 151 - - Equity Securities - - 872 1,275 ------ ------ ------ ------ Total $ 964 $ 923 $4,940 $5,451 ====== ====== ====== ====== Realized gross gains on the sale of securities available-for-sale were $146 million and $109 million in 1998 and 1997. There were $3 million of realized gross losses in 1998 and no realized gross losses in 1997. Assets, including securities sold under repurchase agreements, carried at $4 billion, $3 billion, and $2 billion at December 31, 1998, 1997, and 1996, were pledged for various purposes as required or permitted by law. 11 4. Loans The Company's loan distribution and industry concentrations of credit risk at December 31, 1998 and 1997 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 $1,057 million, $767 million, and $755 million at December 31, 1998, 1997, and 1996. These loans are primarily with related entities under revolving lines of credit. During 1998, these loans averaged $904 million, and ranged from $694 million to $1,070 million. All loans were fully performing during this period. Transactions in the allowance for credit losses are summarized as follows: In millions 1998 1997 1996 - ----------- ------ ------ ------ Balance, January 1 $ 641 $ 901 $ 756 Charge-Offs (51) (403) (580) Recoveries 22 49 125 ----- ------ ------ Net Charge-Offs (29) (354) (455) Provision 20 280 600 Other (1) 4 (186) - ----- ------ ------ Balance, December 31 $ 636 $ 641 $ 901 ===== ====== ====== (1) In 1997, $186 million was allocated to credit card loans sold during the year. Nonaccrual and reduced rate loans outstanding at December 31, 1998, 1997, and 1996 were $179 million, $193 million, and $213 million. At December 31, 1998, commitments to borrowers whose loans were classified as nonaccrual or reduced rate were not material. At December 31, 1998 and 1997, impaired loans aggregated $145 million and $151 million, of which $116 million and $118 million exceeded their fair value by $35 million and $25 million. For 1998 and 1997, the average amount of impaired loans was $142 million and $149 million and interest income recognized on them (limited to cash received) was $1 million in each year. Interest income recognized on total nonaccrual and reduced rate loans exceeded reversals by $3 million in 1998, $2 million in 1997, and $3 million in 1996. Interest income would have been increased by $10 million, $10 million, and $11 million if loans on nonaccrual status at December 31, 1998, 1997, and 1996 had been performing for the entire year. At year end, foreign loans on nonperforming status were $53 million in 1998, $34 million in 1997, and $38 million in 1996. Interest income received on foreign nonperforming loans equaled reversals in 1998, 1997, and 1996. If foreign loans on nonaccrual status at December 31, 1998, 1997, and 1996 had been performing for the entire year, interest income would have been increased by $2 million for 1998, $3 million for 1997 and $2 million for 1996. Other real estate was $14 million, $15 million, and $41 million at December 31, 1998, 1997, and 1996. Writedowns of and expenses related to other real estate included in noninterest expense were $2 million, $11 million, and $1 million in 1998, 1997, and 1996. 12 5. Long-Term Debt The following is a summary of the contractual maturity and sinking fund requirements of long-term debt at December 31, 1998 and totals for 1997: 1998 1997 --------------------------------------- ------ After After 1 Year 5 Years 10 Years Through Through Through In millions 5 Years 10 Years 20 Years Total Total - ----------- ------- -------- -------- ------ ------ Fixed $1,149 $ 344 $ 496 $1,989 $1,754 Variable 50 16 31 97 55 ------ ------ ------ ------ ------ Total $1,199 $ 360 $ 527 $2,086 $1,809 ====== ====== ====== ====== ====== Fixed-rate debt at December 31, 1998 had interest rates ranging from 6.20% to 8.50%. The weighted average interest rates on fixed-rate debt at December 31, 1998 and 1997 were 7.50% and 7.59%. The weighted average interest rates on variable-rate debt at December 31, 1998 and 1997 were 5.41% and 6.23%. 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. Guaranteed Preferred Beneficial Interests in the Company's Junior Subordinated Deferrable Interest Debentures Wholly owned subsidiaries of the Company ("the Trusts") have issued cumulative Capital Securities ("Capital Securities"). The sole assets of each trust are junior subordinated deferrable interest debentures of the Company, whose maturities and interest rates match the Capital Securities. The Company's obligations under the agreements that relate to the Capital Securities, the Trusts and the debentures constitute a full and unconditional guarantee by the Company of the Trusts' obligations under the Capital Securities. The following table sets forth a summary of the Capital Securities issued by the Company as of December 31, 1998: Capital Securities - ------------------ Dollars Interest Assets Due Call Call in millions Issue 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 The Company has the option to shorten the maturity of BNY Capital II and III to 2012 and 2013 or extend the maturity to 2046 and 2047. 13 7. Shareholders' Equity The Company currently plans to buy back up to 18 million shares of its common stock through the end of 1999. 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, 1998 or 1997. 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 $400 in market value of the Company's common stock for $200. In addition, if there is a business combination between the Company and an acquiring person, or in certain other circumstances, each right (if not previously exercised) would entitle the holder (other than the acquiring person) to purchase $200 in market value of the common stock of the acquiring person for $100. The rights are redeemable by the Company at $0.05 per right until they are exercisable, and will expire in 2004. At December 31, 1998, the Company had reserved for issuance 26 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 1998 1997 1996 ------------------------------------- ------ ------ ------ Net Income $1,192 $1,104 $1,020 Net Income Available to Common Shareholders $1,192 $1,095 $1,010 Diluted Net Income $1,192 $1,095 $1,012 Basic Weighted Average Shares Outstanding 751 760 777 Shares Issuable upon Conversion: Debentures - - 13 Warrants 18 34 41 Employee Stock Options 12 13 13 ------ ------ ------ Diluted Weighted Average Shares Outstanding 781 807 844 ====== ====== ====== Basic Earnings per Share $ 1.59 $ 1.44 $ 1.30 Diluted Earnings per Share $ 1.53 $ 1.36 $ 1.20 14 8. Income Taxes Income taxes included in the consolidated statements of income consist of the following:
1998 1997 1996 ---------------------- ---------------------- ---------------------- In millions Current Deferred Total Current Deferred Total Current Deferred Total ------- -------- ----- ------- -------- ----- ------- -------- ----- Federal $280 $185 $465 $284 $217 $501 $434 $ 51 $485 Foreign 75 - 75 48 - 48 19 - 19 State and Local 84 75 159 66 54 120 83 47 130 ---- ---- ---- ---- ---- ---- ---- ---- ---- Income Taxes $439 $260 $699 $398 $271 $669 $536 $ 98 $634 ==== ==== ==== ==== ==== ==== ==== ==== ====
The components of income before taxes are as follows: In millions 1998 1997 1996 - ----------- ------ ------ ------ Domestic $1,751 $1,673 $1,548 Foreign 235 165 108 ------ ------ ------ Income Before Taxes $1,986 $1,838 $1,656 ====== ====== ====== The Company's net deferred tax liability (included in accrued taxes) at December 31 consisted of the following: In millions 1998 1997 1996 - ----------- ------ ------ ------ Lease Financings $1,696 $1,405 $1,171 Depreciation and Amortization 202 224 228 Credit Losses on Loans (317) (329) (361) Other Assets (97) (90) (76) Other Liabilities 334 326 212 ------ ------ ------ Net Deferred Tax Liability $1,818 $1,536 $1,174 ====== ====== ====== 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: 1998 1997 1996 ------ ------ ------ Federal Rate 35.0% 35.0% 35.0% Tax-Exempt Income (1.2) (0.6) (0.7) Foreign Operations (0.2) (0.7) (0.5) State and Local Income Taxes, Net of Federal Income Tax Benefit 5.0 4.0 4.8 Nondeductible Expenses 0.8 0.9 0.9 Leveraged Lease Portfolio (0.8) (0.2) (0.2) Trust Preferred Securities (1.7) (1.2) (0.1) Other (1.7) (0.8) (0.9) ----- ----- ----- Effective Rate 35.2% 36.4% 38.3% ===== ===== ===== 15 9. Employee Benefit Plans The Company has defined benefit retirement plans covering substantially all full-time employees and also provides health care benefits for certain retired employees. The Company's Employee Stock Ownership Plan may provide additional benefits. Pension Benefits Healthcare Benefits ------------------ --------------------- Dollars in millions 1998 1997 1998 1997 - ------------------- ---- ---- ---- ---- Change in Benefit Obligation Obligation at Beginning of Period $(375) $(361) $(120) $(114) Service Cost (17) (19) (1) (1) Interest Cost (28) (29) (9) (9) Actuarial Gain (Loss) (83) 1 (4) (4) Benefits Paid 53 33 9 9 ----- ----- ----- ----- Obligation at End of Period (450) (375) (125) (119) ----- ----- ----- ----- Change in Plan Assets Fair Value at Beginning of Period 1,027 788 1 1 Actual Return on Plan Assets 72 261 (2) - Employer Contributions 6 4 67 8 Benefit Payments (32) (26) (9) (9) ------ ----- ----- ----- Fair Value at End of Period 1,073 1,027 57 - ------ ----- ----- ----- Funded Status 623 652 (68) (119) Unrecognized Net Transition Asset (12) (15) 88 94 Unrecognized Prior Service Cost (12) (14) - - Unrecognized Net Gain (145) (235) (11) (21) ------ ----- ----- ----- Prepaid (Accrued) Benefit Cost $ 454 $ 388 $ 9 $ (46) ====== ===== ===== ===== Weighted-Average Assumptions Discount Rate 7.125% 7.750% 7.125% 7.750% Expected Rate of Return on Plan Assets 10.5 10.5 8.3 8.3 Rate of Compensation Increase 4.3 4.3 The Company uses September 30 as a measurement date for plan assets and obligations. Pension Benefits Healthcare Benefits ------------------- ------------------- Dollars in millions 1998 1997 1996 1998 1997 1996 - ------------------- ---- ---- ---- ---- ---- ---- Net Periodic Cost (Income): Service Cost $ 17 $ 19 $ 19 $ 1 $ 1 $ 2 Interest Cost 28 29 27 9 9 9 Expected Return on Assets (86) (78) (68) (3) - - Other (3) (4) (4) 5 4 4 ---- ---- ---- ---- ---- ---- Net Periodic Cost (Income) $(44) $(34) $(26) $ 12 $ 14 $ 15 ==== ==== ==== ==== ==== ==== The assumed health care cost trend rate used in determining benefit expense for 1998 is 8% decreasing to 5% in 2005 and thereafter. A change of one percentage point in this rate for each year would change the benefit obligation by 8% and the benefit expense by 9%. 16 The Company has defined contribution benefit plans for which it recognized a cost of $82 million in 1998, $78 million in 1997 and $77 million in 1996. The disclosures in this footnote have been made in accordance with a new accounting standard and prior periods have been restated as appropriate. 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 of these limitations, in 1999 the Bank could declare dividends of $1.3 billion plus net profits earned in 1999. The Bank is not restrained from paying dividends under the second limitation. 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. Regulators require the Company and the Bank to maintain minimum levels of capital in accordance with established quantitative measurements. As of December 31, 1998 and 1997, the Company and the Bank were considered well capitalized on the basis of the ratios (defined by regulation) of Total and Tier I capital to risk-weighted assets and Tier I capital to average assets, which are shown as follows: December 31, 1998 December 31, 1997 --------------------- --------------------- Well Capitalized Company Bank Company Bank Guidelines ------- ------ ------- ------ ----------- Tier I 7.89% 7.39% 7.92% 7.70% 6% Total Capital 11.90 10.72 11.97 10.38 10 Leverage 7.46 6.95 7.59 7.42 5 Tangible Common Equity 6.25 7.43 6.47 7.57 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 $468 million and $535 million for the years 1998 and 1997. 17 The Company's condensed financial statements are as follows: Balance Sheets
In millions December 31, 1998 1997 - ------------------------------------------------- ------- ------- Assets Cash and Due from Banks $ 12 $ 4 Securities 3 20 Loans 474 323 Investment in and Advances to Subsidiaries and Associated Companies Banks 7,211 6,436 Other 3,405 3,187 ------- ------- 10,616 9,623 Other Assets 59 51 ------- ------- Total Assets $11,164 $10,021 ======= ======= Liabilities and Shareholders' Equity Other Borrowed Funds $ 816 $ 882 Due to Non-Bank Subsidiaries 1,338 1,170 Due to Bank Subsidiaries 100 - Other Liabilities 67 155 Long-Term Debt 3,395 2,812 ------- ------- Total Liabilities 5,716 5,019 ------- ------- Shareholders' Equity* Preferred 1 1 Common 5,447 5,001 ------- ------- Total Liabilities and Shareholders' Equity $11,164 $10,021 ======= ======= *See Consolidated Statements of Changes in Shareholders' Equity.
18 Statements of Income
In millions For the years ended December 31, 1998 1997 1996 - ----------------------------------------------- ------- ------ ------ Operating Income Dividends from Subsidiaries Banks $ 564 $ 76 $ 545 Other 52 550 500 Interest from Subsidiaries Banks 88 85 86 Other 24 13 9 Other 56 17 45 ------ ------ ------ Total 784 741 1,185 ------ ------ ------ Operating Expenses Interest (including $70 in 1998, $23 in 1997, and $14 in 1996 to Subsidiaries) 367 248 170 Other 10 19 17 ------ ------ ------ Total 377 267 187 ------ ------ ------ Income Before Income Taxes and Equity in Undistributed Earnings of Subsidiaries 407 474 998 Income Tax Benefit (116) (88) (44) ------ ------ ------ Income Before Equity in Undistributed Earnings of Subsidiaries 523 562 1,042 ------ ------ ------ Equity in Undistributed Earnings of Subsidiaries Banks 411 698 149 Other 258 (156) (171) ------ ------ ------ Total 669 542 (22) ------ ------ ------ Net Income $1,192 $1,104 $1,020 ====== ====== ======
19 Statements of Cash Flows
In millions For the years ended December 31, 1998 1997 1996 - -------------------------------------------------- ------ ------ ------ Operating Activities Net Income $1,192 $1,104 $1,020 Adjustments to Determine Net Cash Attributable to Operating Activities: Amortization 11 5 6 Equity in Undistributed Earnings of Subsidiaries (669) (542) 22 Securities Gains (1) 2 (4) Change in Interest Receivable (16) (10) 1 Change in Interest Payable 6 4 (1) Change in Taxes Payable (51) (33) (23) Other, Net (26) 23 19 ------ ------ ------ Net Cash Provided by Operating Activities 446 553 1,040 ------ ------ ------ Investing Activities Purchases of Securities (25) (14) (15) Sales of Securities 1 - - Maturities of Securities 22 17 12 Change in Loans (151) 79 (82) Acquisition of, Investment in, and Advances to Subsidiaries (286) (925) (501) Other, Net (6) 1 (11) ------ ------ ------ Net Cash Used by Investing Activities (445) (842) (597) ------ ------ ------ Financing Activities Change in Other Borrowed Funds (66) 372 (138) Proceeds from the Issuance of Long-Term Debt 595 412 716 Repayments of Long-Term Debt (17) (17) (17) Change in Advances from Subsidiaries 268 968 254 Redemption and Repurchases of Preferred Stock - (115) - Issuance of Common Stock 606 278 410 Treasury Stock Acquired (976) (1,224) (1,332) Cash Dividends Paid (403) (383) (338) ------ ------ ------ Net Cash Provided (Used) by Financing Activities 7 291 (445) ------ ------ ------ Change in Cash and Due from Banks 8 2 (2) Cash and Due from Banks at Beginning of Year 4 2 4 ------ ------ ------ Cash and Due from Banks at End of Year $ 12 $ 4 $ 2 ====== ====== ====== Supplemental Disclosure of Cash Flow Information Cash Paid During the Year for: Interest $ 361 $ 244 $ 178 Income Taxes 339 333 587
11. Other Noninterest Income and Expense Other noninterest income includes equity in earnings of unconsolidated subsidiaries of $22 million, $36 million, and $46 million in 1998, 1997, and 1996. In 1997 and 1996, other noninterest income included a pre-tax gain of approximately $177 million and $400 million on the sale of the Company's credit card operations. Other noninterest expense includes amortization of intangibles of $101 million in 1998 and $105 million in 1997 and 1996. 20 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 8% at December 31, 1998 and 6% to 8% at December 31, 1997. The fair value information supplements the basic financial statements and other traditional financial data presented throughout this Report. A summary of the practices used for determining fair value is as follows: Securities, Trading Activities, and Derivatives Used for ALM - ------------------------------------------------------------ The fair value of securities and trading assets and liabilities is based on quoted market prices, dealer quotes, or pricing models. Fair value amounts for derivative instruments, such as options, futures and forward rate contracts, commitments to purchase and sell foreign exchange, and foreign currency swaps, are similarly determined. The fair value of interest rate swaps is the amount that would be received or paid to terminate the agreement. Loans and Commitments - --------------------- For certain categories of consumer loans, fair value includes consideration of the quoted market prices for securities backed by similar loans. Discounted future cash flows and secondary market values are used to determine the fair value of other types of loans. The fair value of commitments to extend credit, standby letters of credit, and commercial letters of credit is based upon the cost to settle the commitment. Other Financial Assets - ---------------------- Fair value is assumed to equal carrying value for these assets due to their short maturity. Deposits, Borrowings, and Long-Term Debt - ---------------------------------------- The fair value of noninterest-bearing deposits is assumed to be their carrying amount. The fair value of interest-bearing deposits, borrowings, and long-term debt is based upon current rates for instruments of the same remaining maturity or quoted market prices for the same or similar issues. 21 The carrying amount and estimated fair value of the Company's financial instruments are as follows: In millions December 31, 1998 1997 - ---------------------------- -------------------- -------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- ------- -------- ------- Assets Securities $ 6,646 $ 6,674 $ 6,794 $ 6,856 Trading Assets 1,637 1,637 2,616 2,616 Loans and Commitments 34,344 34,372 31,894 32,054 Derivatives Used for ALM 73 (117) 73 (38) Other Financial Assets 12,130 12,130 11,041 11,041 ------- ------- ------- ------- Total Financial Assets 54,830 $54,696 52,418 $52,529 ======= ======= Non-Financial Assets 8,673 7,543 ------- ------- Total Assets $63,503 $59,961 ======= ======= Liabilities Noninterest-Bearing Deposits $11,480 $11,480 $12,561 $12,561 Interest-Bearing Deposits 33,152 33,206 28,796 28,825 Borrowings 4,625 4,629 5,430 5,434 Long-Term Debt 2,086 2,178 1,809 1,878 Trading Liabilities 1,642 1,642 1,713 1,713 Derivatives Used for ALM 28 (121) 41 (91) ------- ------- ------- ------- Total Financial Liabilities 53,013 $53,014 50,350 $50,320 ======= ======= Non-Financial Liabilities 3,742 3,609 ------- ------- Total Liabilities $56,755 $53,959 ======= ======= Commitments and contingent items reduced the fair value of loans and commitments by $16 million in 1998 and $14 million in 1997. 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, 1998 - -------------------- Loans $3,054 $3,054 $ 1 $(118) Deposits 552 552 16 - Borrowings 1,478 1,478 42 - Long-Term Debt 1,150 1,150 63 - At December 31, 1997 - -------------------- Loans $2,219 $2,219 $ 9 $(47) Deposits 1,826 1,826 57 (3) Borrowings 329 329 4 (1) Long-Term Debt 925 925 36 (2) 22 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 12/31/98 1999 2000 2001 2002 2003 - ----------------------------------------------------------------------------------------- Receive Fixed Interest Rate Swaps: Notional Amount $ 3,100 $ 1,388 $ 1,085 $ 955 $ 955 $ 680 Weighted Average Rate 6.48% 6.96% 6.91% 6.94% 6.94% 7.23% Pay Fixed Interest Rate Swaps: Notional Amount $ 2,951 $ 2,288 $ 1,990 $ 1,542 $ 1,318 $ 1,085 Weighted Average Rate 6.19% 6.35% 6.34% 6.32% 6.29% 6.29% Basis Interest Rate Swaps: Notional Amount $ 80 $ - $ - $ - $ - $ - Forward LIBOR Rate (1) 5.08% 5.11% 5.25% 5.35% 5.49% 5.64% (1) The forward LIBOR rate shown above reflects the implied forward yield curve for that index at December 31, 1998. 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, 1998 and 1997, $360 million and $246 million in notional amount of foreign exchange contracts, with fair values of $(1.6) million and $0.8 million, hedged corresponding amounts of foreign investments. These foreign exchange contracts had a maturity of less than two months at December 31, 1998. There were no deferred net gainsor losses on ALM derivative financial instruments at December 31, 1998 and 1997. Net interest income increased by $4 million in 1998 and $8 million in 1997 and 1996 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. 23 13. Trading Activities The following table shows the fair value of the Company's financial instruments that are held for trading purposes:
In millions 1998 1997 - ----------- ---------------------------- ---------------------------- 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 $ 14 $ 14 $ - $ - $ 8 $ 4 $ - $ - Swaps 260 217 138 171 204 95 206 94 Written Options - - 339 172 - - 53 1 Purchased Options 83 47 - - 44 32 - - Foreign Exchange Contracts: Written Options - - 583 640 - - 783 936 Purchased Options 397 561 - - 645 909 - - Commitments to Purchase and Sell Foreign Exchange 537 767 513 762 649 831 653 827 Debt Securities 248 600 69 200 1,002 332 18 15 Other Securities 98 84 - - 64 118 - - ------ ------ ------ ------ ------ ------ ------ ------ Total Trading Account $1,637 $2,290 $1,642 $1,945 $2,616 $2,321 $1,713 $1,873 ====== ====== ====== ====== ====== ====== ====== ======
Other noninterest income included the following income related to trading activities: In millions 1998 1997 1996 - ----------- ----- ----- ---- Foreign Exchange $ 126 $ 109 $ 57 Interest Rate Contracts 26 9 7 Debt and Other Securities 18 7 3 ----- ----- ---- $ 170 $ 125 $ 67 ===== ===== ==== Foreign exchange includes income from trading commitments to purchase and sell foreign exchange, futures, and options. Interest rate contracts reflect the results of trading futures and forward contracts, interest rate swaps, foreign currency swaps, and options. Debt and other securities primarily reflect income from trading debt and equity securities. 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 trade for its own account, to reduce interest rate and foreign currency risks, and to provide customers with the ability to meet credit and liquidity needs and to hedge foreign currency and interest rate risks. These items involve, to varying degrees, credit, foreign exchange, and interest rate risk not recognized in the balance sheet. The Company's off-balance-sheet risks are managed and monitored in manners similar to those used for on-balance-sheet risks. There are no significant industry concentrations of such risks. 24 A summary of the notional amount of the Company's off-balance-sheet credit transactions, net of participations, at December 31, 1998 and 1997 follows: Off-Balance-Sheet Credit Risks In millions 1998 1997 - ----------- ------- ------- Commercial Lending Commitments $44,104 $38,254 Standby Letters of Credit 6,620 6,056 Commercial Letters of Credit 1,548 1,945 Securities Lending Indemnifications 47,839 41,041 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 $0.3 billion and $0.4 billion that were collateralized with cash and securities at December 31, 1998 and 1997. At December 31, 1998 and 1997, securities lending indemnifications were secured by collateral of $47.8 billion and $41.0 billion. At December 31, 1998, approximately $5.3 billion of the standbys will expire within one year, and the balance between one to five years. At December 31, 1998, approximately $60.9 billion of interest rate contracts will mature within one year, $68.5 billion between one and five years, and the balance after five years. At December 31, 1998, approximately $130.4 billion of foreign exchange contracts will mature within one year and $1.7 billion between one and five years. There were no derivative financial instruments on nonperforming status at year end 1998. 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. 25 A summary of the notional amount and credit exposure of the Company's derivative financial instruments at December 31, 1998 and 1997 follows: Derivative Financial Instruments Notional Amount Credit Exposure --------------- --------------- In millions 1998 1997 1998 1997 - ----------- ------ ------- ----- ------ Interest Rate Contracts: Futures and Forward Contracts $13,011 $ 5,173 $ 1 $ - Swaps 47,417 12,751 468 143 Written Options 54,931 22,113 - - Purchased Options 27,095 21,486 158 77 Foreign Exchange Contracts: Swaps 35 69 2 4 Written Options 45,700 45,493 - - Purchased Options 45,104 45,646 683 546 Commitments to Purchase and Sell Foreign Exchange 41,290 50,996 588 866 ------ ------ 1,900 1,636 Effect of Master Netting Agreement (455) (312) ------ ------ Total Credit Exposure $1,445 $1,324 ====== ====== Net rent expense for premises and equipment was $101 million in 1998, $92 million in 1997, and $91 million in 1996. At December 31, 1998, the Company and its subsidiaries were obligated under various noncancelable lease agreements, certain of which provide for additional rents based upon real estate taxes, insurance, and maintenance and for various renewal options. The minimum rental commitments under noncancelable operating leases for premises and equipment having a term of more than one year from December 31, 1998 are as follows: In millions Year ending December 31, - ----------- ------------------------ 1999 $ 88 2000 74 2001 66 2002 52 2003 46 After 2003 257 ----- Total Minimum Lease Payments $ 583 ===== In the ordinary course of business, there are various claims pending against the Company and its subsidiaries. In the opinion of management, liabilities arising from such claims, if any, would not have a material effect upon the Company's consolidated financial statements. 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 1993 Plan, options to acquire common stock may be granted in amounts that do not generally exceed, on a cumulative basis, 1% of the outstanding shares of common stock per year. Generally, each option granted under the Option Plans is exercisable between one and ten years from the date of grant. 26 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 $24 million in 1998, $22 million in 1997, and $9 million in 1996. Also, diluted earnings per share would have been reduced by 3 cents per share in 1998, 3 cents per share in 1997, and 1 cent per share in 1996. The assumptions used in determining the impact of accounting for the Option Plans at fair value for 1998 are as follows: dividend yield of 3%; expected volatility of 25%; risk free interest rate of 5.16%; and expected option lives of 5 years. A summary of the status of the Company's Option Plans as of December 31, 1998, 1997, and 1996, and changes during the years ending on those dates is presented below:
1998 1997 1996 --------------------- ---------------------- --------------------- Weighted Weighted Weighted -Average -Average -Average Exercise Exercise Exercise Options Shares Price Shares Price Shares Price - ------- --------- --------- --------- --------- --------- --------- Outstanding at Beginning of Year 24,662,436 $10.31 24,938,428 $ 7.12 25,402,720 $ 5.94 Granted 9,206,000 29.37 7,307,500 17.30 5,185,400 11.29 Exercised (5,273,966) 8.34 (7,346,620) 6.22 (5,604,804) 5.62 Canceled (399,292) 22.68 (236,872) 16.90 (44,888) 9.42 --------- ---------- ---------- Outstanding at End of Year 28,195,178 16.72 24,662,436 10.31 24,938,428 7.12 ========== ========== ========== Options Exercisable at Year-end 16,414,092 10.09 15,770,652 7.33 17,803,052 5.93 Weighted-average Fair Value of Options Granted During the Year $ 6.24 $3.71 $2.62
The following table summarizes information about stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable ------------------------------------ ---------------------- Weighted -Average Weighted Weighted Number Remaining -Average Number -Average Range of Outstanding Contractual Exercise Exercisable Exercise Exercise Prices at 12/31/98 Life Price at 12/31/98 Price - --------------- ----------- ----------- -------- ----------- -------- $ 3 to 5 2,332,315 2.5 Years $ 4.35 2,332,315 $ 4.35 6 to 7 7,037,398 5.0 6.95 6,659,754 6.92 11 to 17 9,778,899 7.6 15.02 7,377,757 14.70 20 to 25 75,400 8.4 21.63 44,266 21.77 27 to 30 7,477,366 9.0 27.48 - - 32 to 40 1,493,800 9.9 39.10 - - ----------- ----------- $ 3 to 40 28,195,178 7.0 $ 16.72 16,414,092 $ 10.09 =========== ===========
27 To the Board of Directors and Shareholders of The Bank of New York Company, Inc. New York, New York Report of Independent Auditors We have audited the accompanying consolidated balance sheets of The Bank of New York Company, Inc. and subsidiaries (the "Company") as of December 31, 1998 and 1997, 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, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. \s\ Ernst & Young LLP New York, New York January 29, 1999 28 Management's Discussion and Analysis of the Company's Financial Condition and Results of Operations - ------------------------------------------------------------------------------ SUMMARY OF RESULTS For 1998, The Bank of New York Company, Inc. (the "Company") reported record net income of $1,192 million or a record $1.53 per diluted share, compared with $1,104 million or $1.36 per diluted share in 1997 and $1,020 million or $1.20 per diluted share in 1996. In 1998, securities servicing fee revenues grew by 27% reaching $1 billion for the year which, when combined with 15% growth in trust and investment fees, pushed noninterest income to 58% of revenues, up from 54% a year ago. 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. Strong internal growth of 16% was spread over all of the Company's securities servicing businesses with acquisitions contributing the remainder. Revenue growth was led by ADRs, domestic and global custody, securities lending, corporate trust, UIT and execution services. Trust and investment fees were $208 million for the year, an increase of 15% over last year, 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 last year, 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 decreased to $20 million from $280 million reflecting primarily the impact of the sale of the credit card business in 1997. Additional highlights were continued strength in asset quality and the maintenance of one of the best efficiency ratios in the industry at 50.5%. In 1998, return on average common equity was a record 24.25% compared with 22.13% in 1997 and 19.98% in 1996, while return on average assets was 1.89% compared with 1.86% in 1997 and 1.90% in 1996. Tangible diluted earnings per share (earnings before the amortization of goodwill and intangibles) were $1.62 per share in 1998 compared with $1.45 per share in 1997. Tangible return on average assets was 2.06% in 1998 and 2.04% in 1997 and tangible return on average common equity was 37.13% in 1998 compared with 31.78% in 1997. In 1997, revenues from the Company's securities servicing business grew 21% to $790 million. This reflects strong internal growth of 16%, with increases in all businesses. ADRs, stock transfer, corporate trust, and mutual funds were particularly strong. Fees from cash processing were up 14% in 1997 to $239 million. Trust and investment management grew 12% over 1996 to $181 million reflecting new business and generally strong markets. In 1997, net income on a taxable equivalent basis totaled $1,890 million compared with $1,999 million in the prior year. The decline is primarily attributable to the sale of the credit card operations and the stock buyback program, partially offset by growth in corporate lending. The provision for credit losses decreased to $280 million from $600 million due largely to the sale of credit card receivables. Operating expenses continued to remain under good control. In 1996, revenues from the Company's securities servicing business grew 59% to $655 million. This significant increase reflected strong internal growth as well as the acquisition of the corporate trust business of NationsBank and the custody businesses of BankAmerica and J.P. Morgan. All areas of securities processing contributed to an internal growth rate of 14% with ADRs, corporate trust, and government securities clearance particularly strong. Fees from cash processing were up 11% to $209 million. Trust and investment management fees grew 18% over the prior year to $161 million. In 1996, net interest income on a taxable equivalent basis declined to $1,999 million reflecting the sale of the $3.4 billion AFL-CIO Union Privilege affinity credit card portfolio. The provision for credit losses increased to $600 million in 1996 due largely to a deterioration in the Company's credit card portfolio. Operating expenses were strictly controlled. 29 NET INTEREST INCOME Dollars in millions 1998 1997 1996 - ------------------- ---- ---- ---- Net Interest Income on a Taxable Equivalent Basis $1,709 $1,890 $1,999 Net Interest Rate Spread 2.22% 2.88% 3.37% Net Yield on Interest-Earning Assets 3.24 3.89 4.35 For 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 increased customer driven deposits from the Company's global securities servicing business 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. On a taxable equivalent basis, net interest income was $1,890 million in 1997. Average loans were $36.6 billion in 1997 down from $36.7 billion in 1996. Year end 1997 loans were $34.5 billion down from $36.1 billion in 1996 reflecting the sale of $5.3 billion of credit card receivables partially offset by increased corporate lending. The net interest rate spread and yield were 2.88% and 3.89% in 1997 compared with 3.37% and 4.35% in 1996. These declines were primarily attributable to the sale of the credit card portfolio. The decline in the net yield also reflected the financing of the stock buyback program. On a taxable equivalent basis, net interest income was $1,999 million in 1996. Average loans grew 4% to $36.7 billion in 1996. Year end 1996 loans decreased 2% to $36.1 billion reflecting the sale of $3.4 billion of credit card receivables in the second quarter of 1996. The declines in the net interest income, net interest rate spread, and yield were primarily attributable to the sale of the credit card portfolio and the financing of the stock buyback program. Interest income would have been increased by $10 million, $10 million, and $11 million if loans on nonaccrual status at December 31, 1998, 1997, and 1996 had been performing for the entire year. NONINTEREST INCOME A wide range of securities servicing, cash processing services, trust and investment fees, other fee-based services, and trading activities provide noninterest income. Revenues from these activities were $2,283 million in 1998, compared with $2,137 million in 1997 and $2,130 million in 1996. Securities servicing fees were $1 billion, $790 million, and $655 million in 1998, 1997, and 1996. Cash processing fees, principally funds transfer, deposit services, and trade finance, were $256 million in 1998, $239 million in 1997, and $209 million in 1996. Funds transfer fees were ahead a strong 13% and cash management fees were up by 7%, while revenues from the trade finance business were flat compared to 1997. Trust and investment management fees were $208 million in 1998, $181 million in 1997, and $161 million in 1996. Service charges and fees were $326 million in 1998, compared with $354 million in 1997 and $421 million in 1996. For further discussion of fee revenue see Segment Profitability. Securities gains totaled $175 million, $136 million, and $97 million in 1998, 1997, and 1996. 30 Other noninterest income was $318 million in 1998, $437 million in 1997, and $587 million in 1996. Profits from foreign exchange and other trading activities were $170 million, $125 million, and $67 million in 1998, 1997, and 1996. In 1998, other noninterest income included a $29 million pre-tax gain on the sale of the Company's property at 48 Wall Street. In 1997 and 1996, other noninterest income included pre-tax gains on the sale of credit card portfolios of $177 million and $400 million. Other noninterest income also includes pre-tax gains of $27 million in 1997 and $21 million in 1996 related to the sale of portions of the Company's interest in Wing Hang Bank, Ltd. NONINTEREST EXPENSE AND INCOME TAXES Total noninterest expense was $1,928 million in 1998, $1,874 million in 1997, and $1,835 million in 1996. Salaries and employee benefits increased 11% to $1,178 million in 1998 primarily due to acquisitions, new business growth and technology spending. Noninterest expense for 1998 includes $33 million, approximately 3 cents per share, related to making computer systems Year 2000 compliant. Net occupancy and furniture and fixture expenses decreased by a combined $9 million to $252 million. Other expenses fell by 9% in 1998 to $498 million. Total noninterest expense increased 2% in 1997 compared with 1996, principally due to acquisitions of securities servicing and asset based lending businesses and the sale of the credit card business. Salaries and employee benefits increased 5% in 1997 to $1,066 million. Net occupancy and furniture and fixture expenses increased by a combined $1 million to $261 million in 1997. Other expenses fell by 3% in 1997 to $547 million. Year 2000 expenses were $18 million. The efficiency ratio was 50.5% in 1998 compared with 50.2% in 1997 and 50.5% in 1996. The efficiency ratios exclude the gains on the sale of the credit card portfolios in 1997 and 1996. The Company's consolidated effective tax rates for 1998, 1997, and 1996 were 35.2%, 36.4%, and 38.3%. The 1998 rate decreased compared with 1997 due to higher non-taxable income and larger deductions for trust preferred securities partially offset by higher state and local taxes. The 1997 rate decreased due to larger deductions for trust preferred securities in addition to the reduced impact of 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. Average savings, time, and noninterest-bearing deposits increased slightly by $159 million in 1998. Medium-term notes increased slightly by $140 million and foreign deposits increased by $1.5 billion. The increase in foreign deposits primarily relates to the Company's European based securities servicing business. More volatile sources of interest-bearing deposits and borrowings increased by $1.9 billion. In 1998, the Company's average commercial paper borrowings were $1.1 billion compared with $602 million in 1997. The Company has backup lines of credit of $350 million at financial institutions supporting these borrowings. 31 The following comments relate to the information disclosed in the Consolidated Statements of Cash Flows. Cash flows from earnings and other operating activities were $1.6 billion in 1998, compared with $0.8 billion and $0.9 billion in 1997 and 1996. The increase in 1998 cash flows from operations was principally the result of changes in trading activities. In 1997, cash flow from operations declined slightly as increased use of cash for trading activities was offset by changes in accruals and other. In 1998, cash used by investing activities was $5.2 billion as compared to $3.2 billion used by investing activities in 1997. In 1998, additions to commercial loans and interest-bearing deposits were partially offset by sales of securities. In 1997, additions to commercial loans, securities and federal funds sold and securities purchased under resale agreements, were partially offset by the sale of credit card loans. The 1996 cash flows provided by investing activities were $0.1 billion, reflecting the sale of credit card loans offset by additions to loans, securities and interest-bearing deposits. Cash provided by financing activities was $1.9 billion, $2.0 billion, and $0.4 billion in 1998, 1997, and 1996 as the Company used deposits to finance its investing activities. In 1998, 1997, and 1996, financing activities used cash to buy back the Company's common shares, and provided cash through the issuance of trust preferred securities. Federal funds purchased and securities sold under repurchase agreements were a net use of funds in 1998 and 1996 while a net source of funds in 1997. 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 $5,448 million at December 31, 1998, compared with $5,002 million at December 31, 1997 and $5,127 million at December 31, 1996. In July 1998, the Company increased its quarterly common stock dividend to 14 cents per share, up 17% from the beginning of 1997. During 1998, the Company retained $789 million of earnings and issued $300 million of trust preferred securities and $335 million of medium term notes. In addition, the conversion of warrants provided $333 million in capital. The Company also repurchased 32.5 million common shares for $976 million. In 1999, the Company plans to buy back 18 million shares. In 1997, the Company retained $721 million of earnings and issued $400 million of trust preferred securities. Warrant holders converted 3 million warrants into 22 million common shares, providing $169 million in capital. In addition, 58 million common shares were repurchased for $1.2 billion and $111 million in preferred stock was redeemed. In 1996, the Company retained $682 million of earnings and issued $600 million of trust preferred securities and $100 million of subordinated debt. Warrant holders converted 5 million warrants into 42 million common shares, providing $323 million in capital, and $114 million of subordinated debentures converted into common stock. In addition, 95 million common shares were repurchased for $1.3 billion. In January 1999, the Company issued $200 million of trust preferred securities. The Company has filed a shelf registration statement for up to $1.3 billion of debt, preferred stock, trust preferred securities, and common stock. 32 PROVISION AND ALLOWANCE FOR CREDIT LOSSES The provision for credit losses was $20 million in 1998, compared with $280 million in 1997 and $600 million in 1996. The decrease in the provision compared with 1997 and 1996 was primarily due to the sale of credit card receivables, continued low charge-offs in the remainder of the loan portfolio, and a further reduction in nonperforming loans. Nonperforming assets declined by 7% to $193 million at December 31, 1998. The decrease in nonperforming assets during 1998 is attributable to charge- offs and writedowns of $18 million and paydowns, sales, and returns to accrual status of $79 million. The decrease was partially offset by $82 million of loans placed on nonperforming status. The following table shows the distribution of nonperforming assets at December 31, 1998 and 1997: Dollars in millions 1998 1997 Change - ------------------- ----- ------ --------- Category of Loans: Commercial Real Estate $ 26 $ 35 (26)% Other Commercial 65 65 - Foreign 53 34 56 Regional Commercial 35 59 (41) ----- ------ Total Nonperforming Loans 179 193 (7) Other Real Estate 14 15 (7) ----- ------ Total Nonperforming Assets $ 193 $ 208 (7) ===== ====== Nonperforming Asset Ratio 0.5% 0.6% Allowance/Nonperforming Loans 355.5 331.4 Allowance/Nonperforming Assets 328.9 307.2 Net charge-offs were $29 million in 1998, $354 million in 1997, and $455 million in 1996. In 1998, net charge-offs were mainly related to commercial loans, while net charge-offs were primarily attributable to credit card loans in 1997 and 1996. The total allowance for credit losses was $636 million and $641 million at year-end 1998 and 1997. The ratio of the total allowance for credit losses to year-end loans was 1.66% and 1.82% at December 31, 1998 and 1997 reflecting a $3.3 billion increase in loans in 1998. Based on an evaluation of individual credits, historical credit losses, and global economic factors, the Company has allocated its allowance for credit losses as follows: 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Real Estate 3% 4% 5% 7% 9% Domestic Commercial and Industrial 74 64 40 36 40 Consumer 1 1 1 2 - Credit Card - - 29 23 16 Foreign 11 7 4 11 19 Unallocated 11 24 21 21 16 ---- ---- ---- ---- ---- 100% 100% 100% 100% 100% ==== ==== ==== ==== ==== Such an allocation is inherently judgmental, and the entire allowance for credit losses is available to absorb credit losses regardless of the nature of the loss 33 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 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 approves 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 Treasury Risk Management Committee oversees the market risk management process for trading activities. 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, 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. This methodology does not attempt to evaluate risk created from extraordinary financial, economic or other occurrences, some of which have recently occurred, and any risk evaluation system has judgmental aspects. The following table indicates the calculated VAR amounts for the trading portfolio for the years ending December 31, 1998 and 1997. During these periods, the daily trading loss did not exceed the calculated VAR amounts on any given day.
(In millions) 1998 1997 ----------------------------------- ----------------------------------- Market Risk Average Minimum Maximum 12/31/98 Average Minimum Maximum 12/31/97 - ----------- ------- ------- ------- -------- ------- ------- ------- -------- Interest Rate $ 4.2 $ 1.5 $ 7.0 $ 4.4 $ 2.1 $ 0.4 $ 8.9 $ 2.4 Foreign Exchange 2.4 0.1 5.7 2.2 1.3 0.5 2.8 1.2 Overall Portfolio 6.6 2.8 9.7 6.6 3.4 1.4 9.7 3.6
ASSET/LIABILITY MANAGEMENT The Company's activities other than trading include lending, investing in securities, accepting deposits, raising money as needed to fund assets, and processing securities and other transactions. The market 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 34 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 asset/liability management purposes are also included in this model. The Company evaluates the effects on earnings of alternate interest rate scenarios against earnings. A base line, high and low rate scenario are considered to model interest rate sensitivity. Interest rate scenarios are obtained from an independent third party. The base line scenario for January 1999 assumes rates remain relatively flat for the first 12 months of the forecast. The high rate scenario forecasts rates increasing steadily throughout the year. Rates rise on average 138 basis points over the base line scenario. The low rate scenario assumes that rates at year end 1999 are on average 95 basis points below the baseline forecast. Additionally, 200 basis point shock 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 three scenarios over a 12 month measurement period. Net interest income as calculated by the earnings simulation model under the base line scenario becomes the standard. The measurement of interest rate sensitivity is the percentage change in net interest income calculated by the model under high rate versus base line scenario and under low rate versus base line scenario. These scenarios do not include the strategies that management could employ as rate expectations change. The Company's policy limit for fluctuations in pre-tax net interest income resulting from either the high rate or low rate scenario under the earnings simulation model is 6%. Based on the January 1999 outlook, if interest rates were to rise to follow the high rate scenario, net interest income would be positively affected by 2.45%. If interest rates were to follow the low rate scenario, net interest income would be negatively affected by 4.59% (assuming management took no action). Assuming that the up or down 200 basis point scenarios occurred, net interest income would increase 2.95% in the upward shock and be negatively affected by 3.93% in the downward shock. 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 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, 1998, net investments in foreign operations approximated $375 million and were spread across 13 foreign currencies. The Company's equity investments of $1.7 billion at December 31, 1998 primarily consisted of venture capital investments, equity positions from debts previously contracted, equity positions in other financial institutions, and minority interests in various subsidiaries. The majority of these long-term investments are of a long-term strategic 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 adopted a new accounting pronouncement requiring disclosure about the Company's segments based on a management approach. The Company has an internal information system that produces performance data for its four segments along product and service lines. 35 The Trust, and Securities and Cash Processing segment provides a broad array of fee based services. Trust includes personal trust and investment management. Securities servicing includes services to both institutional issuers and investors. Cash processing products primarily relate to funds transfer, deposit services and trade finance. The Corporate Banking segment provides lending services, including asset based financing, to domestic and international commercial enterprises. The Retail Banking segment includes consumer lending, residential mortgage lending, and retail deposit services. The Financial Markets segment includes trading, investing and leasing activities, and treasury services to other segments. The Company's segment data has been determined on an internal management basis of accounting, other than the generally accepted accounting principles used for consolidated financial reporting. These measurement principles ensure that reported results of the segments track their economic performance. Segment results are subject to restatement whenever improvements are made in the measurement principles or organizational changes are made. The measure of revenues and profit or loss by operating segment has been adjusted to present segment data on a taxable equivalent basis. The provision for credit losses allocated to each reportable segment is based on management's judgment as to average credit losses that will be incurred in the operations of the segment over a credit cycle of a period of years. Management's judgment includes the following factors among others: historical charge-off experience and the volume, composition and 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. The segments contributed to the Company's profitability as follows:
In Millions Trust, and Securities For the Year Ended and Cash Corporate Retail Financial Reconciling Consolidated December 31, 1998 Processing Banking Banking Markets Items* Total - ------------------ ---------- --------- ------- --------- ----------- ------------ Net Interest Income $ 401 $ 677 $ 486 $ 94 $ (7) $1,651 Provision for Credit Losses - 114 7 7 (108) 20 Noninterest Income 1,579 305 73 252 74 2,283 Noninterest Expense 1,045 251 310 66 256 1,928 ----- ----- ----- ----- ----- ------ Income Before Taxes $ 935 $ 617 $ 242 $ 273 $ (81) $1,986 ===== ===== ===== ===== ===== ====== Average Assets 5,339 34,460 4,527 17,286 1,529 63,141
36
In Millions Trust, and Securities For the Year Ended and Cash Corporate Retail Financial Reconciling Consolidated December 31, 1997 Processing Banking Banking Markets Items* Total - ------------------ ---------- --------- ------- --------- ----------- ------------ Net Interest Income $ 343 $ 585 $ 844 $ 66 $ 17 $1,855 Provision for Credit Losses - 95 285 - (100) 280 Noninterest Income 1,305 252 163 186 231 2,137 Noninterest Expense 901 224 444 59 246 1,874 ----- ----- ----- ----- ----- ------ Income Before Taxes $ 747 $ 518 $ 278 $ 193 $ 102 $1,838 ===== ===== ===== ===== ===== ====== Average Assets 5,088 28,843 8,119 15,963 1,229 59,242
In Millions Trust, and Securities For the Year Ended and Cash Corporate Retail Financial Reconciling Consolidated December 31, 1996 Processing Banking Banking Markets Items* Total - ------------------ ---------- --------- ------- --------- ----------- ------------ Net Interest Income $ 282 $ 544 $1,101 $ 61 $ (27) $1,961 Provision for Credit Losses 1 96 454 - 49 600 Noninterest Income 1,091 258 221 138 422 2,130 Noninterest Expense 791 215 579 46 204 1,835 ----- ----- ------ ----- ----- ------ Income Before Taxes $ 581 $ 491 $ 289 $ 153 $ 142 $1,656 ===== ===== ====== ===== ===== ====== Average Assets 3,873 24,733 11,991 11,871 1,179 53,647 * - 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 gains on the sale of the Company's credit card operation, sales of interest in Wing Hang Bank and other securities and the sale of a building. Reconciling items for noninterest expense include $101 million, $105 million, and $105 million of goodwill amortization in 1998, 1997, and 1996, 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.
Segment Highlights In the Trust, and Securities and Cash Processing segment, securities servicing fees increased to $1 billion as compared with $790 million in 1997 and $655 million in 1996. All of the Company's businesses have shown strong internal growth with ADRs, global custody, domestic custody, UIT, stock transfer, securities lending, corporate trust, and execution services performing particularly well in 1998. In addition to internal growth, the increase reflects the late 1997 acquisition of ESI and in 1998 several small corporate trust businesses and a clearing business. Fee revenues from issuer services grew to $422 million in 1998, up from $309 million in 1997 and $223 million in 1996. The Company's ADR business benefited from record depositary receipt trading volume on US exchanges which grew 27% in 1998. In addition, the Company was named as agent on 162 new programs from 43 countries, or 80% of all new sponsored depositary receipt programs in 1998. Investment company services increased to $338 million in 1998, as compared to $268 million in 1997 and $240 million in 1996. Domestic and global custody continued to gain momentum from significant new business wins in the mutual funds and insurance industries. Broker/dealer services in 1998 were $240 million, up from $213 million in 1997 and $191 million in 1996. 37 Fees from cash processing in 1998 increased to $256 million over 1997's $239 million and 1996's $209 million. Funds transfer fees were particularly strong in 1998, growing by 13% to $94 million, with cash management fees ahead of the prior year by 7%, reaching $46 million. Funds transfer fees in 1997 and 1996 were $83 million and $70 million, while cash management fees totaled $43 million and $38 million. Fees from trust and investment management grew to $208 million in 1998, as compared to $181 million in 1997 and $161 million in 1996, reflecting new business growth and generally strong markets. Net charge-offs in the Trust, and Securities and Cash Processing segment were zero in 1998 and 1997 and $1 million in 1996. The rise in noninterest expense is consistent with the increase in growth as well as the added salary and other expenses from acquisitions. The Corporate Banking segment's net interest income has demonstrated a consistently upward trend from $544 million in 1996 to $585 million in 1997 and increasing by 16% to $677 million in 1998, reflecting strong loan growth over the past three years in addition to acquisitions of asset based lending businesses in 1998 and 1997. In 1998, Special Industries lending increased 16% over the prior year, while Regional Commercial lending was up 10% over 1997. The 1998 provision for credit losses reflects the growth in the loan portfolio. Net charge-offs in the Corporate Banking segment were $16 million, $75 million, and $1 million in 1998, 1997, and 1996. The 21% increase in noninterest income to $305 million in the current year reflects higher asset based lending revenue following the acquisitions of UK asset based lending businesses. Syndication fees in 1998 increased nearly 33% over 1997. This trend was offset by continued lower income from the Company's offshore banking subsidiaries. The increase in 1998's noninterest expense is also partially attributable to acquisitions related to the Company's asset based lending business. The decreases in the Retail Banking segment's net interest income, provision for credit losses, noninterest income, and noninterest expense in 1998 and 1997 are principally due to the sale of a portion of the Company's credit card operation in 1996 and the remainder in 1997. Net interest income in the branch banking network has been negatively impacted by the declines in the value of noninterest bearing sources of funds in a declining rate environment. Net charge-offs were $5 million, $280 million and $452 million in 1998, 1997, and 1996. Operating expenses relating to branch banking decreased in the current year, due in part to the sale of 11 retail branches in late 1997. In the Financial Markets segment, net interest income increased 10% from 1996's $61 million to $66 million in 1997 followed by a 42% increase to $94 million in 1998. Noninterest income rose from $138 million in 1996 to $186 million in 1997 to $252 million in 1998, a 35% increase in each of the last two years, reflecting increases in foreign exchange and other trading revenue. Strong equity markets resulted in increased securities gains included in noninterest income in 1998 and 1997. Net charge-offs were $7 million in 1998 and zero in 1997 and 1996. The increase in noninterest expense in 1998 and 1997 reflects increased compensation expense associated with the expansion of the Company's trading activities. 38 Foreign Operations The Company's foreign activities consist of banking, trust, and processing services provided to customers domiciled outside of the United States, principally in Europe and Asia. There were no major customers from whom revenues were individually material to the Company's performance.
1998 1997 1996 ------------------------------------ ---------------------------------- ---------------------------------- 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 $4,620 $1,806 $1,076 $49,564 $4,621 $1,669 $ 997 $48,306 $4,933 $1,452 $ 905 $46,506 Europe 662 101 65 6,912 424 35 22 3,554 230 66 37 3,413 Asia 239 22 14 3,349 311 81 51 3,614 239 76 43 2,835 Other 272 57 37 3,678 341 53 34 4,487 311 62 35 3,011 -------- ------ ------- -------- -------- ------ ------ ------- -------- ------- ------ ------- Total $5,793 $1,986 $1,192 $63,503 $5,697 $1,838 $1,104 $59,961 $5,713 $1,656 $1,020 $55,765 -------- ------ ------- -------- -------- ------ ------ ------- -------- ------- ------ ------- -------- ------ ------- -------- -------- ------ ------ ------- -------- ------- ------ -------
LOANS The following table shows the Company's loan distribution at the end of each of the last five years:
In millions 1998 1997 1996 1995 1994 - ----------- ---- ---- ---- ---- ---- Domestic Commercial and Industrial Loans* $13,626 $12,585 $11,780 $10,925 $10,144 Real Estate Loans Construction and Land Development 271 208 139 118 125 Other, Principally Commercial Mortgages 2,691 2,669 2,645 2,741 2,743 Collateralized by Residential Properties 3,010 3,091 2,905 2,815 2,730 Banks and Other Financial Institutions 1,788 1,899 1,650 1,953 1,289 Loans for Purchasing or Carrying Securities 3,612 3,479 3,695 3,068 2,339 Asset Based Lending 2,007 1,844 1,064 1,100 1,005 Lease Financings 2,566 1,953 1,688 1,503 1,308 Consumer Loans 1,243 1,197 6,605 9,859 8,546 Other 420 341 249 235 74 Less: Unearned Income 895 703 557 486 468 ------- ------- ------- ------- ------- Total Domestic 30,339 28,563 31,863 33,831 29,835 ------- ------- ------- ------- ------- Foreign Commercial and Industrial Loans 3,349 2,872 2,465 1,784 1,529 Banks and Other Financial Institutions 1,476 1,756 1,060 828 672 Lease Financings 3,174 2,488 1,917 1,237 1,033 Asset Based Lending 1,310 453 129 122 76 Government and Official Institutions 192 110 414 227 212 Other 21 97 79 146 128 Less: Unearned Income 1,475 1,212 921 488 402 ------- ------- ------- ------- ------- Total Foreign 8,047 6,564 5,143 3,856 3,248 ------- ------- ------- ------- ------- Less: Allowance for Credit Losses 636 641 901 756 792 ------- ------- ------- ------- ------- Net Loans $37,750 $34,486 $36,105 $36,931 $32,291 ======= ======= ======= ======= ======= * The commercial and industrial loan portfolio does not contain any industry concentration which exceeds 10% of loans.
39 QUARTERLY DATA UNAUDITED
1998 1997 ------------------------------- ------------------------------ Dollars in millions, Fourth Third Second First Fourth Third Second First except per share amounts Interest Income $ 900 $ 906 $ 870 $ 834 $ 839 $ 921 $ 912 $ 887 Interest Expense 468 491 462 439 439 435 431 399 ----- ----- ----- ----- ----- ----- ----- ----- Net Interest Income 432 415 408 395 400 486 481 488 ----- ----- ----- ----- ----- ----- ----- ----- Provision for Credit Losses 5 5 5 5 100 60 60 60 Noninterest Income 597 572 561 553 689 504 489 455 Noninterest Expense 507 481 472 467 491 473 465 446 ----- ----- ----- ----- ----- ----- ----- ----- Income Before Income Taxes 517 501 492 476 498 457 445 437 Income Taxes 179 175 172 172 181 165 162 160 Distribution on Trust Preferred Securities 25 25 25 20 19 19 14 12 ----- ----- ----- ----- ----- ----- ----- ----- Net Income $ 313 $ 301 $ 295 $ 284 $ 298 $ 273 $ 269 $ 265 ===== ===== ===== ===== ===== ===== ===== ===== Net Income Available to Common Shareholders $ 313 $ 301 $ 295 $ 284 $ 296 $ 270 $ 266 $ 263 ===== ===== ===== ===== ===== ===== ===== ===== Per Common Share Data: Basic Earnings $0.41 $0.40 $0.39 $0.38 $0.40 $0.36 $0.35 $0.34 Diluted Earnings 0.40 0.39 0.38 0.36 0.37 0.34 0.33 0.32 Cash Dividends 0.14 0.14 0.13 0.13 0.13 0.12 0.12 0.12 Stock Price High 40.25 33.97 33.25 32.06 29.25 24.56 23.94 21.00 Low 25.69 24.50 28.31 26.69 23.00 22.16 16.94 16.56 Ratios: Return on Average Common Shareholders' Equity 23.88% 24.19% 24.03% 24.99% 23.73% 22.06% 21.84% 20.90% Return on Average Assets 1.86 1.86 1.90 1.93 1.95 1.81 1.83 1.86
40 YEAR 2000 READINESS The Company's Year 2000 compliance program consists of updating major Company-owned application systems, business-area supported systems, and the Company's proprietary customer software and evaluating the Year 2000 compliance efforts of vendors of major vendor-supplied systems. The Company's compliance efforts have also focused on assessing the Year 2000 readiness of its major service providers, business partners, and borrowers as well as contingency planning. The Company has divided its major proprietary applications systems into three business line groups. The applications in each group were subjected to a four-phase process of assessment, renovation, certification testing, and implementation. All critical systems have completed all four phases. Compliant versions of substantially all these applications are currently in use. Major business-line products are being made available in isolated future-dated environments for customers to test their interfaces and to assure themselves of the Company's compliance. The Company has identified its critical vendor-supplied systems. These systems have been internally certified as Year 2000 compliant in accordance with the Company's internal certification procedures. Remediation of the Company's proprietary customer software has been completed. Installation on client desktop computers is expected to be complete by July 1999. Customers have been advised of their obligation to assure that their environments are compliant in order for the Company's software to function correctly during and after the century date change. The Company has completed an initial evaluation of its significant business partners, including other financial service providers, correspondents, counterparties, sub-custodians, vendors and settlement agencies, for the purpose of assessing their Year 2000 compliance. The Company is currently satisfied with the progress and Year 2000 readiness programs of each significant third party. The Company will continue to monitor the readiness and progress of these parties throughout 1999. The Company is prepared to replace service providers that are seen as not managing the Year 2000 issue adequately. The Company considers Year 2000 readiness in its credit decisions and factors this into borrower ratings. Based on a review of significant obligors, the Company believes that exposure to obligor Year 2000 problems does not present a material risk to the Company. The Company's personal computers and physical facilities considered critical to the Company's operations are expected to be upgraded to Year 2000 readiness by the end of July 1999. The Company's contingency plans relating to Year 2000 issues include the identification and assessment of the impact of various worst case scenarios on the critical operational components for each of the Company's business units. The Company is in the process of reviewing the applicability of its current contingency plan, which includes creation of command centers, establishment of special rapid response technology teams, scheduling availability of key personnel, testing and simulation activities, offsite data center facilities, and emergency backup power, and expects to complete modifications to the Plan by June 30, 1999. Overall the Company's Year 2000 compliance program is on or ahead of schedule to meet the needs of its customers and compliance deadlines defined by its regulators. The estimated cost of the Year 2000 project is approximately $82 million. In 1998 and 1997, the Company spent $33 million and $18 million for a total of $51 million through December 31, 1998. A material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such problems could materially and adversely affect the Company's results of operations, liquidity and financial condition. Due to the general uncertainty inherent in 41 the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of suppliers, customers and other business partners, as well as companies with which the Company does not have direct business relations, the Company is unable to determine at this time whether the consequences of the Year 2000 failures will have a material impact on the Company's results of operations, liquidity or financial condition. The Year 2000 compliance program is intended to significantly reduce the Company's level of uncertainty about the Year 2000 problem and, in particular, about the Year 2000 compliance and readiness of its material business partners. The Company believes that, with completion of its Year 2000 compliance program as scheduled, the possibility of significant interruptions of normal operations should be reduced. However, because of the unprecedented nature of this issue, there can be no certainty as to its impact. 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." 42 Securities Servicing and Cash Processing - ---------------------------------------- The Bank of New York delivers comprehensive solutions for investors and issuers worldwide through an extensive array of products and services, outstanding client relationship management and creatively applied technology. Through our global operations centers and superior global network, we deliver unmatched services to clients in their own time zones and languages. Overall these businesses contributed 37% of total bank earnings. Investment Lifecycle In 1998, we continued the transition from basic portfolio servicing to supporting the entire investment lifecycle. Through recent acquisitions and product enhancements, we support investment decisions, execution and portfolio analysis. Our ability to offer the client a complete array of securities services has resulted in an increase in revenue of 27%. We offer investment managers a variety of analytical tools: AA Expert for asset allocation, DR Converter (service mark) for investors in depositary receipts and Vertex for pre-trade compliance. When it comes to executing an investment decision, we offer the following solutions: GlobalTrade (service mark), the first ever Windows (registered trademark)-based, real-time equity trade management system, gives institutions access to more than 40 equity markets worldwide. Through BondNet (service mark), we provide the bond market with the most advanced electronic trading systems available today. For trade settlements requiring foreign currency, we provide FX Execution. We continue to improve our capabilities and efficiency through major system developments such as our Securities Information Warehouse, a common repository for pricing and information on securities we hold for clients. Our acquisition of a majority interest in EVEREN Clearing, now known as BNY Clearing, marks our entry into the correspondent clearing business. And our acquisition of the UK-based institutional custody and unit trust trusteeship business of Coutts & Co. further enhances the products we offer. The last phase of the investment lifecycle is portfolio analysis. Our lnformPA platform provides on-line access to a comprehensive array of performance and analytic services. For post trade compliance reporting, we offer BNY Compliance (service mark). And finally, our BNY Value at Risk product assists in analyzing portfolio risk. Other service introductions during 1998 included INFORM, which provides clients with enhanced on-line information and real-time brokerage and execution services via the Internet, and STEP (Straight-Through Execution and Processing) which connects and integrates all securities processing products, services and systems onto a single platform. INVESTOR SERVICES The need to maximize investment performance, coupled with the rising costs of portfolio servicing, has prompted many institutional investors to reevaluate their investment approach. As a leading provider of global investor services, The Bank of New York delivers comprehensive services to help clients attain their strategic goals. We have the global network, local market expertise, resources and advanced technology to support our clients' safekeeping, trade settlement, risk management and reporting needs wherever the client may be invested. 43 Custody We continue to maintain our leadership position as a global custodian throughout the world. We are well positioned to take advantage of continuing industry consolidation as well as the increasing reliance on outsourcing, as companies turn to experts who offer services requiring scale and significant technology investments. Our clients include insurance companies, central banks, mutual funds, commercial banks and government agencies. We are also one of the largest providers of trustee and custody services to clients with multiple investment portfolios such as pension funds, foundations, endowments, public funds and Taft-Hartley funds. The Bank's international network of branches and representative offices ensures that we maintain both a strong global presence as well as a complete understanding of regional markets. We are one of the largest global custodians in the world. Assets under custody grew 30% in 1998 to more than $5.1 trillion. The 88 markets in which we operate enable us to offer one of the most extensive and highly rated sub-custodian networks in the world. Securities Lending In 1998, we leveraged our industry expertise, exceptional distribution network and capital markets orientation to provide clients with the highest securities lending returns available in the marketplace. We increased our market share and overall outstanding securities lending activity by nearly 15%, which ranks us among the largest bank agents in the world. During the second half of 1998, we formed Wall Street Portfolio Advisors, a separate and highly focused securities lending unit which immediately added 20 new client relationships. Growth was also driven by our increasing presence in the foreign central bank market and expansion of lendable assets from new and existing customers. Broker/Dealer Services We remain the largest clearer of government agency and mortgage-backed securities, as well as the largest tri-party collateral agent for broker/dealer financing activities. In 1998, we added a record number of new tri-party relationships and continued to see significant growth in our global collateral management service for international investors. Securities collateral under administration reached a record $300 billion. Moreover, collateral under administration increased more than 20% since year-end 1997 and clearance transactions grew more than 15%. Mutual Fund and Unit investment Trust Services As one of the world's largest custodians for the mutual funds industry, we develop solutions for our clients that can include worldwide custody, portfolio accounting/administration and cash management services. Growth in non-US custody, investment accounting services and offshore fund administration has fueled mutual fund revenue increases. For non-US registered mutual funds, we provide global solutions through our offices in Dublin, Grand Cayman and Luxembourg. In 1998, we recorded a 20% growth in fund assets under custody, reaching over $750 billion. During 1998, we added ten new fund manager appointments and increased the number of portfolios serviced to over 1,700. Unit Investment Trust continues to benefit from the issuance of new equity trusts by our major sponsors, which was evidenced by our 17% growth. 44 Trade Execution Services Through our subsidiary BNY ESI & Co., Inc., we provide institutional investors with a complete range of products and services which capture value at every point of the trading process, improving overall performance and profitability. These include execution and commission management services, as well as clearing and settlement, which provides follow through and control from order entry to settlement. ISSUER SERVICES The Bank offers a complete line of services to satisfy the specialized needs of global securities issuers, including debt and equity issuance, reorganization and proceeds management. Through our international network of offices in 26 countries, we provide solutions to the challenges faced by corporations, governments and municipalities worldwide. Depositary Receipt Services We are the leader in servicing American (ADRs) and Global (GDRs) depositary receipts, which enable US and non-US investors to purchase dollar- denominated equity securities of non-US companies, and provide the issuers of these securities access to the US and European capital markets. 1998 was a record year for our depositary receipt (DR) business. We won over 80% of all new issues that came to market in more than 40 countries. The Bank currently issues depositary receipts for more than 1,200 programs representing over 65 countries. This accounts for 62% of all public DR programs. In addition, we currently serve 185 GlobalBuyDIRECT (service mark) programs, a direct purchase and sale plan for investors in depositary receipts of non-US companies. DR revenues increased by more than 30% as we benefited from the growth and diversity of our DR client base, the strong increase in trading volume up 25% over 1997 and the introduction of new products and services. An important factor contributing to the increase in trading volume has been the expanded investor interest in Europe for depositary receipts traded on US or European stock exchanges. During 1998, we introduced several new products that will strengthen our position in the market and provide new growth opportunities. DR Converter (trademark) is an analytical product that allows investors to evaluate the cost advantage of purchasing DRs when compared to investing directly in foreign shares. We introduced the first real-time, market value-weighted index to track the performance of all American and global depositary receipts trading on US stock exchanges. The Bank of New York ADR Index (service mark) consists of US exchange-listed DR companies from over 35 countries with a total market capitalization of over $3 trillion. The Bank of New York ADR Index contains a composite index and four regional indices for: Europe, Asia, Latin America and emerging markets. We will soon introduce additional indices that will review specific sectors such as Latin America telecom, European oil and gas and the Euroland index. These indices can be viewed through our web site at www.bankofnycom/adr. With the launch of the Euro, the Bank introduced the Euro DR, which allows companies not participating in the Euro currency to access investors who wish to trade and hold Euro-denominated shares. For the first time, a DR Unit was established for one of the largest telecorn privatizations. The DR Unit listed and traded on the NYSE was designed to provide current shareholders with a single exchange listed security representing ownership in the twelve companies that were created by the privatization. Overall, growth prospects for the DR business are excellent as investors continue their strong interest in international markets. Additional growth will develop as non-US governments continue to sell state-owned enterprises and the current global merger and acquisition activity creates new opportunities for the use of DRs. 45 Corporate Trust With 67,000 issues representing more than $700 billion in securities outstanding, the Bank strengthened its leadership role in the corporate trust industry during 1998. This was further demonstrated by our appointment to serve as common depository for Euroclear and Cedel. We were able to grow our revenue over 20% by delivering the highest quality trustee and agency services to corporate and municipal debt issuers around the world. Our intensified efforts to provide trustee and other services for global structured finance products contributed substantially to this record growth. In fact, as one of the most successful providers of global corporate trust services, we have over 650 appointments for debt placements in nearly 50 countries. Our achievement in the international markets underscores our ability to support virtually every known type of global debt instrument. In 1998, we responded to the changing global debt markets by introducing new services for collateralized loan obligations and bond obligations as well as asset-backed commercial paper. Our Global Structured Products Unit leverages both our experience with structured financings and the Bank's unique network of global safekeeping capabilities to help issuers develop customized strategies for their programs. Our other eight corporate trust business units, Corporate Finance, Municipal Finance, International Finance, Escrow and Insurance Services, Asset-Backed Securities, Mortgage-Backed Securities, Derivative Products and Successor Management and Default Administration, support all types of debt on the market. In addition, the Bank launched a dedicated corporate trust web site (wwwbankofnycom/corptrust) and introduced on-line investor reporting for mortgage and asset-backed securities investors via the Internet (wwwbnymbs.com). Stock Transfer As one of the world's leading stock transfer agents, we offer a complete array of stock transfer services, including shareholder recordkeeping, dividend paying and reinvestment, proxy tabulation and exchange agent services for corporate issuers of equity securities. In addition, we provide a vast range of interrelated services, such as direct registration, direct purchase and sale plans, employee stock option plans, initial public offerings and corporate reorganization services. During the last decade, we have earned a reputation for providing sophisticated administrative, operational and technological tools, as well as the professional expertise necessary to meet the requirements of today's marketplace. Our shareholder base grew 20% and we added 55 transfer clients, representing nearly 1.5 million shareholders. We now serve 11.5 million shareholders for more than 550 clients. Corporate actions, such as stock split activity, spin-offs and mergers remained high and are expected to experience continued growth in 1999. Consolidation continues to fuel business growth as the trend toward outsourcing persists. While innovations in technology help to meet the demands of increased transaction volumes, they also serve to create new and enhanced technology-driven products and services. As the markets move toward a book-entry environment new opportunities to generate increased transaction fees will be realized. CASH PROCESSING We deliver flexible cash processing options to a diversified customer base, providing varied payment and collection methods for account funding and cash movement. Our cash products are supplemented by a full range of electronic reporting capabilities. Many of our customers have selected The Bank of New York Office Manager (trademark), a Windows (registered trademark) -based family of products, to easily obtain integrated access to the Bank's funds transfer, trade, deposit and information reporting services. Funds Transfer By fully automating our processing, we have realized efficiencies in funds transfer, which involves the processing of electronic payment orders. The underlying business activity reflects global trade, securities and foreign exchange transactions in which our customers are parties. 46 On an average day, the Bank processes over 110,000 transactions with an aggregate value exceeding $600 billion. In 1998, our share of funds transfer transactions increased for the seventh straight year and fees were up 13%. In the last five years, we were the only bank to significantly increase our market share, growing from 6.5% to 10.6%. Trade Services We deliver a wide range of services that facilitate global trade flows, including letters of credit, bankers acceptances, reimbursements and government insurance programs. Our customers include corporations involved in import and export trade transactions as well as banks that deliver global trade services. In 1998, global economic conditions and depressed trade flows resulted in unchanged trade services revenues. We are confident that activity levels and revenues will improve throughout 1999. We have implemented several new technologies, such as document imaging technology and an Internet-based reporting product. Cash Management We offer a broad array of cash management solutions which include disbursement, collection and reporting services ranging from traditional check processing to sophisticated electronic services such as the realtime Electronic Data Interchange (EDI). Revenues increased 17% in 1998, well ahead of market growth. Trust, Investment Management and Private Banking - ------------------------------------------------ Our private client business produced fee revenues of $208 million, a 15% increase over the preceding year, and the third consecutive year of double- digit gains. These results were driven by an aggressive new business development effort, strong investment performance and a growing demand for sophisticated services. We are one of the largest bank managers of trust and investment assets in the United States. We provide a complete range of services for the affluent investor including: Personal Asset Management, Trust and Estate Administration, Personal Financial Planning, Personal and Advisory Custody and Private Banking Services. Corporations, nonprofit institutions and investment advisors have come to rely on the Bank as a premier provider of equity, fixed-income and specialty investment services, such as Short-Term Money Management (STMM) and Portfolio Transition Services. Total assets under management grew by 12% in 1998 and now exceed $48 billion. All of the BNY Hamilton Equity Mutual Funds outperformed their peer universe, with the Large Cap, Small Cap and International Equity Funds significantly outperforming their peers. Equity, Fixed-Income and Balanced account results for institutional portfolios all ranked in the top quartile for the year. This strong investment performance was similarly reflected in our individually managed portfolios for private clients. This past year we introduced the BNY Partners Fund. This "fund of funds" comprises private equities, specifically buyout, venture capital and special situation funds. Long used by institutional money managers, our fund makes private investment opportunities accessible to wealthy individuals. The potential for higher returns, high level of diversification and access to specialty advisors offered by these partnerships is increasingly attractive to wealthy individuals and families. Our Advisory Custody business experienced rapid growth in 1998 with assets in custody increasing 28% over 1997. This business provides investment advisors throughout the country with the sophisticated custody and reporting tools they require to serve their individual clients. 47 We are well positioned for continued growth as a greater number of affluent individuals seek expert financial advice, portfolio management and customized service. Our customer base includes long-standing institutional and multigenerational personal relationships and is continuing to grow. We are committed to retaining our position as an industry leader through a continuing program of investment and new product introductions. In 1999, we will open two new private banking offices in New Canaan and Westport, Connecticut and will introduce new products, including planned giving services and a margin account for high net worth clients. Corporate Banking - ----------------- The Bank is a financial partner to thousands of large domestic and multinational corporations as well as regional and middle market companies located in the tri-state area. Together with BNY Capital Markets, Inc., we provide credit and fee-based services, including commercial lending, bond underwriting and other capital markets services. The Bank also provides corporate customers with securities servicing, trade execution, cash processing, risk management, trade finance and foreign exchange services. The breadth of our unique product offerings provide us with a distinct competitive advantage, enhancing our ability to serve our client base. Our corporate lending franchise serves as a foundation for the cross selling of other bank services and has led to the introduction of many new product offerings. Broad relationships are the basis of our strategy, as our corporate lending clients have become major users of all of our other value-added services. Special Industries Banking The Bank holds a leadership position in providing financing and other corporate banking services to certain key industry sectors, including media and telecommunications, energy and public utilities, retail and apparel, and real estate. In 1998 loan volume throughout the sector showed significant growth, with particular strength in media and telecommunications, where we underwrote 47 credits as agent, totaling over $30 billion. Financial Companies Services Financial companies represent the Bank's largest and fastest growing market. Clients include insurance companies, mutual ftinds, banks, investment managers, broker/dealers and government agencies. We offer these companies a full array of credit and non-credit services, ranging from lending and custody to trade execution. Over 90% of our clients subscribe to more than one service, with the average customer using over six products. US Commercial Banking The Bank continues as a major resource to large companies. We have a sizable and diverse portfolio of commercial lending clients, ranging from traditional industrial manufacturers to national wholesale distribution and service companies. At the end of 1998, the average corporate client used more than six distinct products, up from three in 1996. And overall, 80% of our clients use more than one service. Regional Commercial Banking Mid-sized commercial banking customers in the tri-state area can choose from our extensive list of sophisticated banking services. These services include traditional lending, cash management, leasing, capital markets and corporate finance. Our services for these customers are supported by our extensive branch system. In addition, we offer a full range of personal and fiduciary services to the principals of these companies. The average loan outstandings in this area grew 10% in 1998. 48 Leasing BNY Capital Funding LLC is one of the largest bank-owned leasing companies in the United States offering a full array of leasing products. We develop innovative and creative structuring to meet the tax-oriented equipment financing needs of our corporate customers. In 1998, we participated in over $1.6 billion in lease transactions. Through our middle market subsidiary, BNY Capital Resources Corporation, we completed $151 million in financing, providing an alternative funding source for our clients' capital acquisition needs. In 1998, we also introduced BNY Leasing Edge, offering lease financing to small businesses and middle market clients through the Bank's retail network. Capital Markets Your company provides capital markets and investment banking services through its BNY Capital Markets, Inc. subsidiary. Services include the structuring and syndication of credit facilities, underwriting and distribution of corporate bonds, private placement of debt securities and merger, acquisition and other financial advisory services. Two key strategic acquisitions were Mendham Capital Group, which significantly expanded our offerings in the areas of corporate bond underwriting, sales, trading and research; and Patricof & Co. Capital Corp., which enhanced our mergers and acquisitions and other specialized financial service capabilities. We ranked seventh among major banks acting as agent or co-agent on syndicated corporate credit facilities, up from eleventh, five years earlier, as we helped our clients raise over $200 billion in bank financing. BNY Capital Markets, Inc. also expanded corporate bond underwriting activities in 1998 and acted as a co-manager/placement agent on 41 investment grade and high yield bond transactions as compared with nine in 1997. This raised over $20 billion for our clients, up significantly from $2.4 billion in the prior year. In addition, our Municipal Securities Group, which specializes in underwriting and trading investment grade tax-exempt securities, posted strong results for the year. International Banking The Bank has 30 international branches and representative offices in 26 countries throughout Europe, Asia, Latin America, Australia and the Middle East and an established network of over 2,300 foreign correspondent banks. We are among the top five US issuers of import trade letters of credit and a major player in facilitating export trade transactions. In addition, our global presence provides an important marketing platform for all of our processing businesses, including depositary receipts, global custody, securities lending, cash processing and trade execution. The increased globalization of the securities markets provides us with enhanced opportunities for continued revenue growth. Retail Banking - -------------- With its network of 359 branches in three states, the Retail Bank offers us an extensive distribution channel for our consumer products, establishing us as a leader in the suburban metropolitan regions. Today, we serve over 600,000 personal households and 140,000 small businesses, providing a full range of traditional banking services as well as a complete array of retail investment products. Retail banking continues to serve as a source of $14 billion in stable core deposits that assist in funding lending areas throughout the Bank. We have experienced strong market acceptance of Priority Value Banking, a package of deposit services with pricing specifically tailored to meet the needs of the individual. In 1998, we introduced new investment and fee- based products aimed at attracting new customers and solidifying relationships through cross-selling. 49 In November, we launched our Direct 24 (service mark) Debit Card program. Checking customers now enjoy the convenience of direct access to their accounts not only at our ATMs, but also at supermarkets, department stores and service stations throughout our market area. Our Direct 24 (service mark) PC Banking and Bill Paying Services also provide 24-hour service to our customers. In the last two years, the number of depositors using these products has doubled, as individuals and businesses have become aware of the ease of accessing information and conducting transactions through desktop computers. Our Group Banking Plan provides preferred banking packages to employees of our business customers, deepening relationships with both business and individual consumers. The fee revenue growth from this program has been 20% annually for the last three years. Checkinvest (registered trademark), which automatically sweeps excess balances daily from a checking account to a mutual fund, continues to be a key business product. An innovation of The Bank of New York, CheckInvest accounts grew by 24% in 1998 with mutual fund balances exceeding $500 million. Continuing our commitment to deliver specialized services, we opened two Business Banking Centers in midtown Manhattan offering business consulting information to our customers. Access is available to a business site that allows customers to network with other business owners, to identify business prospects and to share ideas with other Bank clients. Customer reaction has been very positive, with checking balances increasing 14%. We plan to increase the number of dedicated branches in 1999. BNY Mortgage Company, LLC, provides financing for one to four family homes, condominiums and cooperative apartments through offices in the tri- state area and is the leading originator of New York State-backed loans for first-time buyers. We offer a broad range of innovative programs including loans for first-time borrowers, jumbo mortgages and reverse mortgages. During 1998 we entered into a joint venture with Alliance Mortgage Company that will enable us to significantly increase the resources committed to originating mortgages while broadening the product lines. The BNY Investment Centers, a third-party service provider, increased mutual fund sales volume by 13% over 1997. The expansion of financial offerings through the BNY Investment Centers is a major component of our retail strategy. Investment products such as mutual funds, fixed and variable annuities, and municipal bonds represent important opportunities for future growth. Asset Based Lending - ------------------- The Bank is a leading provider of asset based loans through BNY Financial Corporation, our factoring and commercial finance subsidiary. Average asset based loans outstanding in 1998 were $3.2 billion, 52% higher than 1997. BNY Financial Corporation and its affiliates are the largest factor in Canada and the United Kingdom, and the second largest in the United States. Factoring, accounts receivable management and secured lending services are provided through our offices in New York, Boston, Atlanta, Charlotte, Los Angeles, Chicago, Dallas, Toronto and Montreal. In 1998, we consolidated our two factor and asset based lending companies in the United Kingdom into one location. BNY Financial Corporation supports the credit needs of firms that cannot obtain bank financing on a fully secured basis. The financing available through our asset based lending programs enables clients to secure credit with balance sheet assets, such as accounts receivable, inventory, equipment and real estate. Intangible assets such as trademarks, licenses, franchise rights and intellectual property can also be used as collateral in our programs. 50 We optimize borrowing efficiency and continued growth for our clients by offering effective receivables management programs. By purchasing accounts receivables, we provide immediate working capital to fund inventory, marketing efforts or normal obligations. And, we can reduce a client's overhead by taking on certain labor-intensive, optional tasks. Clients can take advantage of these services on an individual basis or use the complete program as a total outsourcing solution. Continuing enhancements to our technology have increased our ability to acquire new business and serve international markets. Factored volume during 1998 reached $26.7 billion, a 60% increase over 1997 levels. Financial Market Services - ------------------------- Financial Market Services includes the Bank's foreign exchange and interest-rate risk management products as well as our trading and investing activities. These businesses, operating around the world, benefit from the growth of our custody client base and increasing sales of products to Corporate clients both here and abroad. Revenues for 1998 reached $170 million, a 36% increase over 1997, and were driven by increased customer volumes. Foreign Exchange We are a premier FX provider, trading in over 100 currency markets around the world. In 1998, we expanded our global customer base by 15%, increased the total number of transactions by 23% and customer volumes by 68%. Customized Derivative Solutions The Bank ranks among the top US banks in derivative activity, offering a full array of currency and interest rate options, swaps and risk management solutions. We are a recognized leader in exotic option strategies worldwide. Global Risk Management Services In 1998, we expanded our suite of research products and now provide currency professionals with a wide array of research and technological tools for the foreign exchange market. We expanded our interest rate derivatives customer base by 40% and established a market leadership position in providing risk management products to US government agencies. In addition, we introduced six Internet accessible programs which will enable clients to evaluate market activity and risk. BNY Overlay Associates BNY Overlay Associates is the Bank's specialist currency overlay manager, providing investment advisory services to institutional investors. Using proprietary techniques, we manage clients' existing currency exposures with the twin objectives of managing risk and increasing overall portfolio returns. 1998 represented our most successful year in terms of client mandates and assets under management. EX-21 9 EXHIBIT 21 EXHIBIT 21 Subsidiaries Of The Registrant Significant subsidiaries of The Bank of New York Company, Inc. are as follows: The Bank of New York, a New York State Chartered Bank BNY Holdings (Delaware) Corporation, a Delaware Corporation The Bank of New York (Delaware)*, a Delaware State Chartered Bank - ----------------------------------------- * Subsidiary of BNY Holdings (Delaware) Corporation EX-23 10 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of The Bank of New York Company, Inc. of our report dated January 29, 1999, included in the 1998 Annual Report to Shareholders of The Bank of New York Company, Inc. We also consent to the incorporation by reference in the following Registration Statements of The Bank of New York Company, Inc. of our report dated January 29, 1999, with respect to the consolidated financial statements of The Bank of New York Company, Inc. incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1998: Registration Statement Number Form Description - ----------------------------- ---- ----------- No. 333-03811 S-3 Dividend Reinvestment and Stock Purchase Plan No. 333-15951 S-3 Trust Preferred Securities in the No. 333-15951-01 amount of $700 million No. 333-15951-02 No. 333-15951-03 No. 333-15951-04 No. 333-15951-05 No. 333-40837 S-3 Trust Preferred Securities in the No. 333-40837-01 amount of $500 million No. 333-40837-02 No. 333-40837-03 No. 333-70187 S-3 Debt Securities, Preferred Stock, No. 333-70187-01 Common Stock, and Trust Preferred No. 333-70187-02 Securities in the amount of No. 333-70187-03 $1.3 billion No. 333-70187-04 No. 33-59225 S-4 Proxy Statement related to merger with National Community Banks, Inc. No. 33-25805 S-4 Proxy Statement related to merger with Putnam Trust Company of Greenwich No. 33-56863 S-8 Employee Stock Purchase Plan, Employee Preferred Stock Plan and 1993 Long-Term Incentive Plan No. 33-57670 S-8 Employee Stock Purchase Plan, Employee Preferred Stock Plan and 1993 Long-Term Incentive Plan No. 2-95764 S-8 1984 Stock Option Plan No. 33-20999 S-8 1988 Long-Term Incentive Plan No. 33-33460 S-8 Amendment to 1988 Long-Term Incentive Plan No. 33-49963 S-8 NCB Employee Incentive Savings Plan No. 33-62267 S-8 Putnam Profit Sharing Plan, Putnam Stock Option Plan and Putnam Incentive Stock Option Plan \s\ Ernst & Young LLP Ernst & Young LLP New York, New York March 30, 1999 EX-27 11 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from the Bank of New York Company, Inc.'s Form 10-K for the period ended December 31, 1998 and is qualified entirely by reference to such Form 10-K. 0000009626 THE BANK OF NEW YORK COMPANY, INC. 1,000,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 3,999 4,504 3,281 1,637 5,451 964 923 38,386 636 63,503 44,632 6,107 2,979 2,086 0 1 7,281 (1,834) 63,503 2,770 332 408 3,510 1,374 1,859 1,651 20 175 1,928 1,986 1,192 0 0 1,192 1.59 1.53 3.24 179 29 0 44 641 51 22 636 498 69 69
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