Document/Exhibit Description Pages Size
1: 10-K Republic New York Corporation 172± 769K
2: EX-3.B Articles Supplementary to Articles of Incorp. 4 19K
3: EX-10.D.I Employment Agreement With Robert Cohen 10 39K
4: EX-10.D.II Employment Agreement With George Wendler 9 29K
5: EX-10.E Consulting Agreement With Walter H. Weiner 7 20K
6: EX-11 Computation Os Earnings Per Share of Common Stock 2± 11K
7: EX-12 Computation of Ratios of Earnings to Fixed Charges 2± 10K
8: EX-21 Subsidiaries of the Corporation 2± 12K
9: EX-23 Consent of Kpmg Peat Marwick LLP 1 8K
10: EX-23.A Consent of Kpmg Audit, Reviseurs D' Enterprises 1 9K
11: EX-24 Power of Attorney 1 8K
12: EX-27 Financial Data Schedule 2± 8K
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the fiscal year ended December 31, 1997.
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 1-7436
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REPUBLIC NEW YORK CORPORATION
(EXACT NAME OF REGISTRANT SPECIFIED IN ITS CHARTER)
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MARYLAND 13-2764867
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
452 FIFTH AVENUE, NEW YORK, NEW YORK 10018
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(212) 525-6100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, Par Value $5.00 Per Share New York Stock Exchange
The International Stock Exchange of
the United Kingdom & The Republic of Ireland Ltd.
Depositary Shares, each representing a one-fourth interest
in a share of Adjustable Rate Cumulative
Preferred Stock, Series D New York Stock Exchange
$1.8125 Cumulative Preferred Stock New York Stock Exchange
$2.8575 Cumulative Preferred Stock New York Stock Exchange
8 3/8% Debentures Due 2007 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE.
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 the 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 Common Stock of the registrant held by
non-affiliates at January 30, 1998 was $4,155,956,140 based on the closing price
on the New York Stock Exchange Composite Tape on such date.
The number of shares outstanding of each of the registrant's classes of
common stock, as of January 30, 1998: 54,106,826.
Documents Incorporated by Reference:
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DOCUMENT LOCATION IN FORM 10-K
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Proxy Statement for 1998 Annual Meeting, to the extent
indicated Part III
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CONTENTS
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PART I PAGE
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Item 1. Business
Republic New York Corporation............................... 1
Republic National Bank of New York.......................... 1
Other Financial Services.................................... 2
Competition................................................. 3
Employees................................................... 3
Customers................................................... 3
Supervision and Regulation.................................. 3
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 7
Item 6. Selected Financial Data..................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Introduction................................................ 7
Results of Operations....................................... 8
Liability and Asset Management.............................. 15
Risk Management and Control................................. 30
Capital Resources and Liquidity............................. 32
Item 8. Financial Statements and Supplementary Data................. 36
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 101
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 101
Item 11. Executive Compensation...................................... 103
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 103
Item 13. Certain Relationships and Related Transactions.............. 103
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 104
PART I
ITEM 1. BUSINESS
REPUBLIC NEW YORK CORPORATION
Republic New York Corporation (the "Corporation"), incorporated in Maryland
in 1973, is a bank holding company that commenced operations in July, 1974. At
December 31, 1997, the Corporation had consolidated total assets of $55.6
billion and stockholders' equity of $3.4 billion. Its principal asset is the
capital stock of Republic National Bank of New York (the "Bank"). The Bank
accounted for approximately 90% of the consolidated assets at December 31, 1997
and approximately 90% of consolidated revenues and 95% of consolidated net
income of the Corporation for the year ended December 31, 1997. The
Corporation's other subsidiaries include Republic Business Credit Corporation
("RBCC"), a factoring and asset-based lender, Republic New York Securities
Corporation ("RNYSC"), a full service broker-dealer, and Republic Bank
California N.A. ("RBC"), a commercial bank operation in southern California.
The executive offices of the Corporation are located at 452 Fifth Avenue,
New York, New York 10018 (telephone 212-525-6100).
As used herein, the term "Corporation" includes the subsidiaries of the
Corporation and the term "Bank" includes the subsidiaries of the Bank, unless
the context indicates otherwise.
REPUBLIC NATIONAL BANK OF NEW YORK
The Bank, a national banking association, commenced operations in 1966. The
Bank provides a variety of banking and financial services worldwide to
corporations, financial institutions, governmental units and individuals.
At December 31, 1997, the Bank had total assets of $50.2 billion, total
deposits of $33.5 billion and stockholder's equity of $3.3 billion.
The Bank's headquarters and principal banking office is located at 452
Fifth Avenue, New York, New York 10018. At December 31, 1997, the Bank had 84
domestic branch banking offices in New York City and the suburban counties of
Westchester, Nassau and Suffolk, as well as eight branches in southern Florida.
INTERNATIONAL BANKING
The Bank is active in international banking where it operates principally
as a wholesale bank. It has been its policy to deal primarily with foreign
governments, their agencies, foreign central banks and foreign commercial banks
as borrowers or guarantors. At December 31, 1997, approximately 65% of the
Bank's cross-border net outstandings were to or guaranteed by such entities.
The Bank maintains wholly-owned foreign banking subsidiaries in The
Bahamas, Brazil, Canada, Cyprus, Mexico, Russia, Uruguay, Singapore and the
Cayman Islands; foreign branch offices in the Caribbean, Europe, Asia and Latin
America and representative offices in Europe, Asia and Latin America. The Bank's
facilities are supplemented by a network of correspondent banks throughout the
world. The Bank also has an Edge Act banking subsidiary in Miami, Florida, which
engages in off-shore banking activities with non-resident customers, and an Edge
Act banking subsidiary in Wilmington, Delaware.
The Bank's international banking services include accepting deposits,
extending credit, forfait financing, buying and selling foreign exchange, buying
and selling banknotes denominated in various currencies, issuing letters of
credit and bankers' acceptances and handling the collection and transfer of
money. The Bank's banknote services business ships U.S. dollars to and from
financial institutions in nearly 40 countries.
Through its international private banking department, headquartered in New
York City, the Bank offers a full range of private banking services to
individuals who are not citizens or residents of the United States, including
deposit, lending and investment management products, custody services, buying
and selling foreign exchange, banknotes denominated in various currencies,
precious metals and financial instruments, issuing letters of credit and
handling the collection and transfer of money.
DOMESTIC BANKING
The Bank provides a full range of domestic banking services, including
commercial, consumer installment and mortgage loans to individuals and
businesses. Mortgage loans are originated by its subsidiary, Republic Consumer
Lending Group, Inc. The Bank also accepts deposits, including time and savings
deposits and regular and special checking accounts, and issues large
denomination negotiable certificates of deposit of $100,000 or more.
Through its domestic corporate lending department, the Bank services the
financing requirements of large national companies, middle-market companies and
other businesses in the New York metropolitan area and selected markets outside
of New York. Other banking facilities usually associated with a full-service
commercial bank are offered, among which are safe deposit boxes, safekeeping and
custodial services, collections and remittances, letters of credit and foreign
exchange. The Bank's trust department provides a broad range of fiduciary
services to both individual and corporate accounts.
1
Through its domestic private banking operation, the Bank offers an array of
private banking services, including deposit, lending and investment management
products, custody services and trust and estate planning to high net worth
individuals. The Bank's domestic private banking clients are served from
locations in New York, Los Angeles and Miami.
Republic Financial Services Corporation ("RFSC"), a wholly-owned subsidiary
of the Bank, and a broker-dealer registered with the Securities and Exchange
Commission (the "SEC") and the National Association of Securities Dealers, Inc.
(the "NASD"), provides brokerage services, through which its customers can
invest in mutual funds, stocks and fixed income instruments.
TRADING
The Bank trades gold and silver bullion, both for immediate delivery and
for delivery in the future, buys and sells options on precious metals and
engages in various arbitrage activities in the precious metals markets. The Bank
is a dealer in gold and silver bullion and coins that are sold to commercial and
industrial users and investors. The Bank generally hedges its inventory against
price fluctuations. At December 31, 1997 and 1996, approximately $162 million
and $37 million, respectively, of the Bank's inventory in precious metals were
unhedged.
The Bank's precious metals capabilities include global wholesale trading in
gold, silver, platinum and palladium, including spot, forward and options
dealing, as well as providing financial services in gold loans to central banks,
international financial institutions and institutional investors. The Bank also
offers production and inventory financing to mining companies, industrial
manufacturers and end-users.
The Bank's bullion banking operations in Sydney and Hong Kong also engage
in global wholesale trading in gold, silver, platinum and palladium, as well as
production and inventory financing. Precious metals operations are also
conducted in London by the Bank which is one of the five members of the London
Gold Fixing.
As an active participant in the foreign exchange markets, the Bank engages
in trading and market-making activities, as well as dealing in banknotes.
Republic Forex Options Corporation, an operating subsidiary of the Bank, is a
foreign currency options participant on the Philadelphia Stock Exchange, a
market-maker in foreign currency options and trades for its own account.
Trading account profits and commissions consist of income from trading
derivative products and dealing in international debt securities and securities
of the U.S. Government and its agencies. The Bank's derivative products group
acts as principal in trading interest rate and currency swaps and options on
these products as well as products related to the performance of various
indices.
The Bank acts as a dealer in certain financial instruments, such as
certificates of deposit issued by foreign banks, situated primarily in Mexico,
Brazil and Argentina, Brady Bonds, including forward sales and options on such
bonds, local currency instruments, eurobonds, syndicated bank loans and certain
other products. The Bank's customers for these products include financial
institutions, multinational corporations, other institutional investors and high
net worth individuals.
OTHER FINANCIAL SERVICES
REPUBLIC BUSINESS CREDIT CORPORATION
RBCC (formerly Republic Factors Corp.) is a wholly-owned subsidiary of the
Corporation. RBCC operates factoring, asset-based lending and accounts
receivable management businesses. As a factor, RBCC purchases, without recourse,
accounts receivable from approximately 500 clients. The terms of these
receivables average less than 60 days and are due from more than 55,000
customers, primarily retailers, located throughout the United States. RBCC also
purchases receivables due from customers throughout the world which RBCC
refactors through foreign factoring companies which are members of either the
International Factors Group or Factors Chain International. Certain clients
receive payments for their receivables prior to their collection by RBCC. From
time to time, RBCC makes advances in excess of the receivables purchased. These
advances may be secured or, in the case of seasonal overadvances, unsecured.
Letters of credit accommodations are also provided. For these services, RBCC
earns commissions, interest and service fees. RBCC's receivable management
service provides clients with back office support allowing them to monitor their
accounts receivable and collections on a daily basis.
For the year ended December 31, 1997, RBCC factored approximately $5.6
billion of sales, making it the 5th largest factoring concern in the United
States based on such sales volume.
RBCC's headquarters and principal office is located at 452 Fifth Avenue,
New York, New York 10018. In addition, RBCC has offices located in Los Angeles,
California and Charlotte, North Carolina.
REPUBLIC NEW YORK SECURITIES CORPORATION
RNYSC, a wholly-owned subsidiary of the Corporation, is a full-service
securities broker primarily serving institutional investors and high net worth
individuals. RNYSC is a registered broker-dealer with the SEC and is a member of
the NASD and the New York Stock Exchange, Inc. RNYSC has branch offices in
Chicago, Illinois and Philadelphia, Pennsylvania.
2
RNYSC is also registered with the Commodity Futures Trading Commission and
the National Futures Association as a futures commission merchant and a
commodity trading advisor. As such, RNYSC acts primarily as a commodities broker
to the Bank, executing futures contracts and options on futures contracts for
the Bank's account. RNYSC trades in futures and options on futures in
non-financial commodities, including contracts on energy products, agricultural
products and non-precious metals. RNYSC provides execution services in
connection with the Bank's activities as a dealer in precious metals, financial
instruments and foreign exchange. In addition, RNYSC acts as a futures
commission merchant and commodity trading advisor for the general public. RNYSC
is a clearing member of the Chicago Mercantile Exchange, Chicago Board of Trade
and New York Mercantile Exchange, including its Comex Division. RNYSC is a
non-clearing member of the New York Futures Exchange, the Coffee, Sugar and
Cocoa Exchange and the Philadelphia Board of Trade.
SAFRA REPUBLIC HOLDINGS S.A.
The Bank has a 49.1% investment in Safra Republic Holdings, S.A ("Safra
Republic"), a Luxembourg holding company, principally engaged, through
wholly-owned banking subsidiaries in Switzerland, Luxembourg, France, Guernsey,
Gibraltar and Monaco, in international private banking, asset management and
other related investment services to over 22,000 high net worth individuals,
partnerships and closely held corporations from over 80 countries, and
commercial banking. At December 31, 1997, Safra Republic had total assets of
$20.4 billion, total deposits of $15.4 billion and total shareholders' equity of
$1.8 billion. Total client portfolio accounts of Safra Republic at year end
1997, both on- and off-balance-sheet amounted to $29.9 billion. In July 1997,
Safra Republic established a limited purpose bank in Cyprus to facilitate, among
other things, investments in Russia.
Safra Republic operates principally as a private bank with its primary
focus on providing its customers and clients with a range of investment
products. Safra Republic's business activities consist principally of secured
lending to customers, accepting customer deposits and offering a variety of
specialized portfolio or asset management services, including non-discretionary
asset management, discretionary asset management, investments in proprietary and
third party mutual funds and trust and fiduciary services for which it typically
earns fee or commission income. In addition, Safra Republic invests for its own
account in interbank deposits and debt securities of highly rated financial
institutions, governments and corporations; it also engages in foreign exchange
and precious metals trading.
At December 31, 1997, Saban S.A., the Corporation's principal stockholder,
owned approximately 20.8%, and international investors owned approximately 30.1%
of the outstanding shares of Safra Republic. The shares of Safra Republic are
listed on the Swiss Electronic and Luxembourg Stock Exchanges and traded
over-the-counter in London.
During 1997, Safra Republic acquired Mercury Bank AG, a Swiss private bank
that specializes in investment management services with over $2.5 billion of
client funds under management.
Safra Republic's headquarters and principal office is located at 32,
Boulevard Royal, 2449 Luxembourg. Safra Republic's subsidiary banks are
headquartered or have branches in Geneva, Lugano and Zurich, Switzerland; Paris,
France; and Monaco, Luxembourg, Gibraltar and Guernsey.
The financial statements of Safra Republic are included in "Affiliate
Financial Statements" in "Financial Statements and Supplementary Data" elsewhere
in this Report.
COMPETITION
All of the Corporation's financial activities are highly competitive. It
competes actively with other commercial banks, savings and loan associations,
financing companies, credit unions and other financial service providers located
throughout the United States and, in some of its activities, with government
agencies. For international business, the Corporation competes with other United
States financial service providers which have foreign installations and with
other major foreign financial service providers located throughout the world.
EMPLOYEES
As of December 31, 1997, the Corporation had approximately 5,900 full-time
equivalent employees.
CUSTOMERS
It is the opinion of management that there is no single customer or
affiliated group of customers whose deposits, if withdrawn, would have a
material adverse effect on the business of the Corporation.
SUPERVISION AND REGULATION
As a bank holding company registered under the Bank Holding Company Act of
1956, as amended (the "BHCA"), the Corporation is subject to substantial
regulation and supervision by the Board of Governors of the Federal Reserve
System (the "FRB"). The Corporation's subsidiary banks are subject to regulation
and supervision by federal bank regulatory agencies, including the Office of the
Comptroller of the Currency (the "OCC") and the Federal Deposit Insurance
Corporation (the "FDIC"). Federal banking and other laws impose a number of
requirements and restrictions on the operations of depository institutions. In
addition, the Corporation and certain of its banking subsidiaries and
3
branches located outside the United States are subject to the requirements of
and supervision by the regulatory authorities in the countries in which they
operate.
The FRB and the OCC exercise overall regulatory control over Safra
Republic. In addition, the Luxembourg Monetary Institute (the "IML"), by virtue
of the European Directive on consolidated supervision, exercises prudential
consolidated supervisory responsibilities and oversees the local subsidiaries'
compliance with local laws, regulations and banking practices.
RNYSC is subject to the supervision and regulation of the FRB, the SEC, the
New York Stock Exchange, the NASD, the National Futures Association, the
Commodity Futures Trading Commission, and other stock and commodity exchanges
and clearing houses of which it is a member. Both RNYSC and RFSC are subject to
the rules and regulations applicable to broker-dealers in each state in which
they operate. RFSC is also subject to the regulations of the SEC and the NASD.
FIRREA
Pursuant to certain provisions of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA"), an insured depository
institution which is commonly controlled with another insured depository
institution is generally liable for any loss incurred, or reasonably anticipated
to be incurred, by the FDIC in connection with the default of such commonly
controlled institution, or any assistance provided by the FDIC to such commonly
controlled institution, which is in danger of default. The term "default" is
defined to mean the appointment of a conservator or receiver for such
institution, and "in danger of default" is defined generally as the existence of
certain conditions indicating that a "default" is likely to occur in the absence
of regulatory assistance. Thus, the Bank could incur liability to the FDIC
pursuant to this statutory provision in the event of the default of any other
insured depository institution owned or controlled by the Corporation. Such
liability is subordinated in right of payment to deposit liabilities, secured
obligations, any other general or senior liability, and any obligation
subordinated to depositors or other general creditors, other than obligations
owed to any affiliate of the depository institution (with certain exceptions)
and any obligations to shareholders in such capacity.
In its resolution of the problems of an insured depository institution in
default or in danger of default, the FDIC is generally required to satisfy its
obligations to insured depositors at the least possible cost to the deposit
insurance fund. In addition, the FDIC may not take any action that would have
the effect of increasing the losses to the deposit insurance fund by protecting
depositors for more than the insured portion of deposits (generally $100,000) or
creditors other than depositors. The Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") authorized the FDIC to settle all uninsured
and unsecured claims in the insolvency of an insured bank by making a final
settlement payment after the declaration of insolvency. Such a payment would
constitute full payment and disposition of the FDIC's obligations to claimants.
The rate of such final settlement payment is to be a percentage rate determined
by the FDIC reflecting an average of the FDIC's receivership recovery
experience.
FDICIA
In general, FDICIA subjects banks to significantly increased regulation and
supervision. Among other things, FDICIA requires federal bank regulatory
authorities to take "prompt corrective action" in respect of banks that do not
meet minimum capital requirements. FDICIA establishes five capital tiers: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Under the OCC's regulations,
a bank is defined to be well capitalized if it maintains a risk-adjusted Tier 1
capital ratio of at least 6%, a risk-adjusted total capital ratio of at least
10% and a Tier 1 leverage capital ratio of at least 5%, and is not otherwise in
a "troubled condition" as specified by its appropriate federal regulatory
agency. A bank is defined to be adequately capitalized if it maintains a
risk-adjusted Tier 1 ratio of at least 4%, a risk-adjusted total capital ratio
of at least 8%, and a Tier 1 leverage ratio of at least 4% (3% for certain
highly rated institutions), and does not otherwise meet the well capitalized
definition. The three undercapitalized categories are based upon the amount by
which the bank falls below the ratios applicable to adequately capitalized
institutions. A depository institution 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. The capital categories are
determined solely for the purposes of applying FDICIA's prompt corrective action
("PCA") provisions, as discussed below, and such capital categories may not
constitute an accurate representation of the overall financial condition or
prospects of the Bank.
Under FDICIA's PCA system, a bank in the undercapitalized category must
submit a capital restoration plan guaranteed by its parent company. The
liability of the parent company under any such guarantee is limited to the
lesser of 5% of the bank's assets at the time it became undercapitalized or the
amount needed to bring the bank into compliance with all capital standards
applicable to the bank as of the time the bank fails to comply with the plan. A
bank in the undercapitalized category is also subject to limitations in numerous
areas including, but not limited to, asset growth, acquisitions, branching, new
business lines, acceptance of brokered deposits and borrowings from the FRB.
Progressively more burdensome restrictions are applied to banks in the
undercapitalized category that fail to submit or implement a capital plan and to
banks that are in the significantly undercapitalized or critically
undercapitalized categories. In addition, a bank's primary federal banking
agency is authorized to downgrade the bank's capital category to the next lower
category upon a determination that the bank is in an unsafe or unsound condition
or is engaged in an unsafe or unsound practice. An unsafe or unsound practice
can include receipt by the institution of a rating on its most recent
examination of 3 or worse (on a scale from 1 (best) to 5 (worst)), with respect
to its asset quality, management, earnings or liquidity.
4
Undercapitalized banks are subject to limitations on the payment of
dividends and on offering interest rates on deposits higher than the prevailing
rate in its market; in addition, "pass through" deposit insurance coverage may
not be available for certain employee benefit accounts. Significantly
undercapitalized banks 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
institutions (which are defined to include institutions which still have a
positive net worth) are generally subject to the mandatory appointment of a
receiver or conservator.
FDICIA and the regulations issued thereunder also have (i) limited the use
of brokered deposits to well capitalized banks and adequately capitalized banks
that have received waivers from the FDIC, (ii) established restrictions on the
permissible investments and activities of FDIC insured state-chartered banks and
their subsidiaries, (iii) implemented uniform real estate lending rules, (iv)
prescribed standards to limit the risks posed by credit exposure between banks,
(v) revised risk-based capital rules to take account of interest rate risk,
concentrations of credit risk and certain risks arising from non-traditional
activities, and treatment of derivative financial instruments on which a bank
has credit exposure, (vi) amended various consumer banking laws, (vii) increased
restrictions on loans to a bank's insiders, (viii) established standards in a
number of areas to assure bank safety and soundness, and (ix) implemented
additional requirements for institutions that have $500 million or more in total
assets with respect to annual independent audits, audit committees, and
management reports related to financial statements, internal controls and
compliance with designated laws and regulations.
FDICIA also directs that each federal banking agency prescribe new safety
and soundness standards for depository institutions and depository institution
holding companies relating to internal controls, information systems, internal
audit systems, loan documentation, credit underwriting, interest rate exposure,
asset growth, compensation, a maximum rate of classified assets to capital,
minimum earnings sufficient to absorb losses, a minimum ratio of market value to
book value for publicly traded shares and other standards which the agencies
deem appropriate. Final interagency regulations to implement these new safety
and soundness standards were adopted by the federal banking agencies. As of
October 1, 1996, standards for asset quality and earnings have been incorporated
in the Interagency Guidelines Establishing Standards for Safety and Soundness.
The three standards for safety and soundness established by the guidelines are
(1) operational and managerial: (2) compensation: and (3) asset quality,
earnings and stock valuation. Whether these standards will have an ultimate
cumulative effect cannot currently be forecast.
DEPOSIT INSURANCE
The Bank's deposits are insured by the Bank Insurance Fund ("BIF") and by
the Savings Association Insurance Fund ("SAIF") of the FDIC and are subject to
FDIC insurance assessments. The FDIC's deposit insurance assessments have moved
under FDICIA from a flat-rate system to a risk-based system. The risk-based
system places a bank in one of nine risk categories, principally on the basis of
its capital level and an evaluation of the bank's risk to the insurance fund,
and bases premiums on the probability of loss to the FDIC with respect to each
individual bank. The annual premium schedule ranges from 0 basis points to 27
basis points (subject to a $2,000 per annum minimum). The imposition of the BIF
premium schedule will not have a material effect on the Bank's earnings. It is,
however, possible that the BIF deposit insurance premiums will be revised by the
FDIC in the future.
In October 1996 the Deposit Insurance Funds Act of 1996 (the "Funds Act")
was enacted. The Funds Act authorized the Financing Corporation ("FICO") to levy
assessments on BIF-assessable deposits and deposits assessable by the SAIF
commencing January 1, 1997. The current FICO assessment rate is 1.256 basis
points annually for BIF-assessable deposits and 6.280 basis points annually for
SAIF-assessable deposits. These rates may be adjusted quarterly. By law, the
FICO rate on BIF-assessable deposits must be one-fifth the rate on
SAIF-assessable deposits until the earlier of the merger of the insurance funds
or January 1, 2000. The Bank's deposits include both BIF-assessable deposits and
SAIF-assessable deposits and therefore the Corporation is subject to both
assessment rates. The amounts payable to FICO by the Corporation are in addition
to other FDIC deposit insurance premiums and thus represent an increased cost to
the Corporation.
OTHER DEVELOPMENTS
The Interstate Banking and Branch Efficiency Act of 1994 ("IBEA") permitted
nationwide interstate bank acquisitions beginning in 1995 and interstate
branching in 1997. The Corporation does not currently believe that the changes
to the country's banking system brought about by IBEA will have a material
effect on its business.
Various legislative proposals have been introduced in Congress in recent
years, including, among others, proposals regulating the derivatives activities
of banks and permitting affiliations between banks and commercial or securities
firms. It is impossible to predict whether or in what form these proposals may
be adopted in the future and, if adopted, what their effect will be on the
Corporation.
DIVIDENDS
The Corporation's ability to pay dividends is dependent upon its receipt of
dividends from its subsidiaries and on its earnings from investments. National
banks may use only capital surplus that represents earnings, not paid-in
capital, when calculating permissible dividends. The approval of the OCC is
required if the total of all dividends declared or proposed to be declared by
the Bank in any calendar year exceeds the Bank's net profits, as defined, for
that year,
5
combined with its retained net profits for the preceding two calendar years. The
OCC also has authority to prohibit a national bank from engaging in what, in its
opinion, constitutes an unsafe or unsound practice in conducting its business.
The payment of dividends could, depending upon the financial condition of the
Bank, be deemed to constitute such an unsafe or unsound practice. Based on the
Bank's financial position at December 31, 1997, the Bank may declare dividends
in 1998, without regulatory approval, of approximately $292 million plus an
additional amount equal to its net profits for 1998 up to the date of any
dividend declaration.
There are no regulatory or contractual restrictions on RBCC's ability to
pay dividends to the Corporation.
Pursuant to the SEC's Uniform Net Capital Rule, neither RNYSC nor RFSC may
pay cash dividends if doing so would reduce the company's net capital ratio to
less than 5 percent.
ITEM 2. PROPERTIES
The Corporation has its principal offices in its world headquarters
building at 452 Fifth Avenue, New York, New York 10018, which is owned and
occupied principally by the Bank. The Bank owns properties in Miami, Florida;
Buenos Aires, Argentina; Santiago, Chile; Montevideo, Uruguay; Mexico City,
Mexico; Milan, Italy; and London, England; which house the Bank's or its
subsidiaries' offices in those locations. The Bank also owns other properties in
New York City, which are principally occupied by branches. All of the remainder
of the Corporation's offices and other facilities throughout the world are
leased.
ITEM 3. LEGAL PROCEEDINGS
The nature of its business generates a certain amount of litigation against
the Corporation involving matters arising in the ordinary course of the
Corporation's business. None of the legal proceedings currently pending or
threatened to which the Corporation or its subsidiaries is a party or to which
any of their properties are subject will have, in the opinion of management of
the Corporation, a material effect on the business or financial condition of the
Corporation or its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No meetings of security holders were held during the fourth quarter of
1997.
6
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock of the Corporation is listed on the New York Stock
Exchange (ticker symbol RNB) and The International Stock Exchange of the United
Kingdom & The Republic of Ireland Ltd. At December 31, 1997, there were 2,836
stockholders of record of outstanding Common Stock of the Corporation.
The following table presents the range of high, low and closing sale prices
reported on the New York Stock Exchange Composite Tape and cash dividends
declared for each quarter during the past two years.
[Enlarge/Download Table]
1997 1996
---------------------------------- ----------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QTR. QTR. QTR. QTR. QTR. QTR. QTR. QTR.
------ ----- ------ ----- ------ ----- ------ -----
Common stock sale price:
High................................. $119 7/8 $116 $108 7/8 $99 1/8 $88 5/8 $71 $65 3/8 $63 1/2
Low.................................. 101 3/4 106 5/8 83 1/8 79 1/8 68 7/8 58 1/2 56 56
Close................................ 114 3/16 113 5/8 107 1/2 88 1/8 81 5/8 69 1/8 62 1/4 59 1/2
Cash dividends declared................... .46 .46 .46 .46 .38 .38 .38 .38
The dividend rate on the Common Stock has been increased annually since
such payments began in 1975. The table below shows the annual dividend rate and
dividend payout ratio, (dividends declared per common share divided by diluted
earnings per common share) in each of the last five years.
[Enlarge/Download Table]
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
Dividends declared per common share......................... $1.84 $1.52 $1.44 $1.32 $1.08
Dividend payout ratio....................................... 23.35% 21.50% 30.97% 23.20% 21.18%
The quarterly dividend rate on the Common Stock has been increased to $.50
per share commencing with the dividend payable April 1, 1998.
ITEM 6. SELECTED FINANCIAL DATA
For information regarding selected financial highlights, see "Supplementary
Data" in "Financial Statements and Supplementary Data" elsewhere in this Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
Net income was a record $449.1 million in 1997, compared to $418.8 million
in 1996 and $288.6 million in 1995. The results for 1995 included a pre-tax
provision for restructuring and related charges of $120.0 million. Diluted
earnings per share were $7.88 in 1997, $7.07 in 1996 and $4.65 in 1995 after a
$1.41 per share charge related to the restructuring.
The Corporation's risk-based capital ratios, which include the
risk-weighted assets and capital of Safra Republic, were 12.97% for Tier 1
capital and 21.58% for total capital at December 31, 1997. These ratios
substantially exceeded the regulatory minimums for bank holding companies of 4%
for Tier 1 capital and 8% for total capital.
Net interest income was $1.060 billion in 1997, compared to $994.1 million
in 1996, an increase of 6.6%.
Total average interest-earning assets were $45.0 billion in 1997, with
approximately 41% invested in securities of the U.S. Government and its agencies
and interest-bearing deposits with banks. Average loans in domestic offices of
$9.0 billion represented approximately 20% of average interest-earning assets in
1997. Average loans in foreign offices of $4.6 billion represented approximately
10% of total average interest-earning assets in 1997.
Non-accrual loans were $93.8 million at year end 1997, of which $29.7
million are covered by a loss sharing agreement with the FDIC. Non-accrual loans
were 0.76% of total loans outstanding, at year end 1997, compared to 0.90% at
year end 1996. At December 31, 1997, the allowance for possible credit losses
was $326.5 million, or 2.64% of loans outstanding and 348% of non-performing
loans.
Income from trading activities including associated net interest income was
$231.0 million in 1997, compared to $196.0 million in 1996. This increase
included higher levels of net interest income from precious metals and trading
account activities, and increased revenue from foreign exchange trading income.
Earnings from Safra Republic rose to $125.1 million in 1997 from $93.4
million in 1996, an increase of 34%.
The Corporation's returns on average total assets and average common
stockholders' equity, based on net income applicable to common stock-diluted,
were 0.77% and 14.69%, respectively, in 1997. The book value per common share
rose to $54.05 at year end 1997 from $50.01 at year end 1996.
7
RESULTS OF OPERATIONS
The following table presents condensed consolidated statements of income
for the Corporation for each of the years in the three-year period ended
December 31, 1997. The results of Brooklyn Bancorp, Inc. ("BBI"), parent of
Crossland Federal Savings Bank ("CrossLand") its wholly-owned subsidiary, which
was acquired on February 29, 1996 and accounted for as a purchase, are included
from the date of acquisition. These statements differ from the Corporation's
consolidated financial statements presented elsewhere in this Report in that net
interest income is presented on a fully-taxable equivalent basis. The tax
equivalent adjustment, related to certain tax exempt instruments, permits all
interest income and net interest income to be analyzed on a comparable basis.
The rate used for this adjustment, which is reflected throughout this section,
was 43% in 1997 and 44% in 1996 and 1995.
[Enlarge/Download Table]
INCREASE (DECREASE) INCREASE (DECREASE)
-------------------- --------------------
1997 AMOUNT % 1996 AMOUNT % 1995
---------- ---------- ------- ---------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
Interest income...................... $3,242,139 $377,107 13.2 $2,865,032 $383,073 15.4 $2,481,959
Interest expense..................... 2,182,026 311,128 16.6 1,870,898 243,126 14.9 1,627,772
---------- -------- ---------- -------- ----------
Net interest income.................. 1,060,113 65,979 6.6 994,134 139,947 16.4 854,187
Provision for credit losses.......... 16,000 (16,000) (50.0) 32,000 20,000 166.7 12,000
---------- -------- ---------- -------- ----------
Net interest income after provision
for credit losses.................. 1,044,113 81,979 8.5 962,134 119,947 14.2 842,187
Other operating income............... 528,308 82,193 18.4 446,115 33,234 8.0 412,881
Other operating expenses............. 903,843 118,089 15.0 785,754 (35,911) (4.4) 821,665
---------- -------- ---------- -------- ----------
Income before income taxes........... 668,578 46,083 7.4 622,495 189,092 43.6 433,403
---------- -------- ---------- -------- ----------
Income taxes......................... 187,222 15,516 9.0 171,706 62,240 56.9 109,466
Tax equivalent adjustment............ 32,248 299 0.9 31,949 (3,339) (9.5) 35,288
---------- -------- ---------- -------- ----------
Total applicable income taxes........ 219,470 15,815 7.8 203,655 58,901 40.7 144,754
---------- -------- ---------- -------- ----------
Net income........................... $ 449,108 $ 30,268 7.2 $ 418,840 $130,191 45.1 $ 288,649
========== ======== ===== ========== ======== ===== ==========
Net income applicable to common stock
-- diluted......................... $ 423,281 $ 37,254 9.7 $ 386,027 $129,263 50.3 $ 256,764
========== ======== ===== ========== ======== ===== ==========
NET INTEREST INCOME
The following table contains information on the Corporation's average asset
and liability structure and rates earned and paid for each of the years in the
three-year period ended December 31, 1997, which are discussed throughout this
section.
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1997 1996
---------------------------------- ----------------------------------
AVERAGE AVERAGE
INTEREST RATES INTEREST RATES
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE PAID BALANCE EXPENSE PAID
----------- ---------- ------- ----------- ---------- -------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Interest-bearing deposits with
banks............................ $ 4,679,550 $ 298,416 6.38% $ 5,697,285 $ 376,030 6.60%
Investment securities(1):
Taxable.......................... 21,497,014 1,511,817 7.03 17,899,644 1,279,226 7.15
Exempt from federal income
taxes(2)....................... 1,510,182 122,382 8.10 1,511,573 125,206 8.28
----------- ---------- ----------- ----------
Total investment
securities................. 23,007,196 1,634,199 7.10 19,411,217 1,404,432 7.24
Trading account assets(3).......... 1,466,715 115,594 7.88 1,156,531 67,279 5.82
Federal funds sold and securities
purchased under resale
agreements....................... 2,303,429 124,347 5.40 1,773,945 98,061 5.53
Loans, net of unearned income(4):
Domestic offices................. 8,973,953 751,272 8.37 8,329,626 673,446 8.08
Foreign offices.................. 4,566,897 318,311 6.97 3,650,052 245,784 6.73
----------- ---------- ----------- ----------
Total loans, net of unearned
income..................... 13,540,850 1,069,583 7.90 11,979,678 919,230 7.67
----------- ---------- ----------- ----------
Total interest-earning
assets..................... 44,997,740 $3,242,139 7.21% 40,018,656 $2,865,032 7.16%
========== ==== ========== ====
Cash and due from banks.............. 836,889 728,185
Other assets(5)...................... 9,185,910 7,887,199
----------- -----------
Total assets................. $55,020,539 $48,634,040
=========== ===========
YEAR ENDED DECEMBER 31,
----------------------------------
1995
----------------------------------
AVERAGE
INTEREST RATES
AVERAGE INCOME/ EARNED/
BALANCE EXPENSE PAID
----------- ---------- -------
Interest-earning assets:
Interest-bearing deposits with
banks............................ $ 7,627,905 $ 526,185 6.90%
Investment securities(1):
Taxable.......................... 11,687,830 927,740 7.94
Exempt from federal income
taxes(2)....................... 1,320,208 125,032 9.47
----------- ----------
Total investment
securities................. 13,008,038 1,052,772 8.09
Trading account assets(3).......... 966,483 55,736 5.77
Federal funds sold and securities
purchased under resale
agreements....................... 1,567,809 97,547 6.22
Loans, net of unearned income(4):
Domestic offices................. 6,637,384 551,579 8.31
Foreign offices.................. 2,890,341 198,140 6.86
----------- ----------
Total loans, net of unearned
income..................... 9,527,725 749,719 7.87
----------- ----------
Total interest-earning
assets..................... 32,697,960 $2,481,959 7.59%
========== ====
Cash and due from banks.............. 607,169
Other assets(5)...................... 8,209,707
-----------
Total assets................. $41,514,836
===========
8
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1997 1996
---------------------------------- ----------------------------------
AVERAGE AVERAGE
INTEREST RATES INTEREST RATES
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
BALANCE EXPENSE PAID BALANCE EXPENSE PAID
----------- ---------- ------- ----------- ---------- -------
(DOLLARS IN THOUSANDS)
Interest-bearing funds:
Consumer and other time deposits... $10,795,118 $ 433,938 4.02% $10,797,056 $ 430,416 3.99%
Certificates of deposit............ 1,598,758 81,828 5.12 1,031,044 51,618 5.01
Deposits in foreign offices........ 16,915,710 935,257 5.53 14,644,586 800,171 5.46
----------- ---------- ----------- ----------
Total interest-bearing
deposits................... 29,309,586 1,451,023 4.95 26,472,686 1,282,205 4.84
Trading account liabilities(3)..... 193,599 12,860 6.64 170,393 11,841 6.95
Short-term borrowings.............. 8,354,135 436,149 5.22 6,563,751 321,234 4.89
Total long-term debt............... 4,397,055 281,994 6.41 4,019,216 255,618 6.36
----------- ---------- ----------- ----------
Total interest-bearing
funds...................... 42,254,375 $2,182,026 5.16% 37,226,046 $1,870,898 5.03%
========== ==== ========== ====
Noninterest-bearing deposits:
In domestic offices................ 2,336,440 2,020,937
In foreign offices................. 175,332 138,352
Other liabilities.................... 6,918,856 6,132,333
Stockholders' equity:
Preferred stock.................... 454,673 574,685
Common stockholders' equity........ 2,880,863 2,541,687
----------- -----------
Total stockholders' equity... 3,335,536 3,116,372
----------- -----------
Total liabilities and
stockholders' equity....... $55,020,539 $48,634,040
=========== ===========
Interest income/earning assets....... $3,242,139 7.21% $2,865,032 7.16%
Interest expense/earning assets...... 2,182,026 4.85 1,870,898 4.68
---------- ---- ---------- ----
Net interest differential............ $1,060,113 2.36% $ 994,134 2.48%
========== ==== ========== ====
YEAR ENDED DECEMBER 31,
----------------------------------
1995
----------------------------------
AVERAGE
INTEREST RATES
AVERAGE INCOME/ EARNED/
BALANCE EXPENSE PAID
----------- ---------- -------
Interest-bearing funds:
Consumer and other time deposits... $ 7,650,443 $ 318,874 4.17%
Certificates of deposit............ 871,289 48,573 5.57
Deposits in foreign offices........ 12,769,411 770,628 6.03
----------- ----------
Total interest-bearing
deposits................... 21,291,143 1,138,075 5.35
Trading account liabilities(3)..... 37,117 2,561 6.90
Short-term borrowings.............. 4,609,403 216,243 4.69
Total long-term debt............... 4,120,206 270,893 6.57
----------- ----------
Total interest-bearing
funds...................... 30,057,869 $1,627,772 5.42%
========== ====
Noninterest-bearing deposits:
In domestic offices................ 1,514,908
In foreign offices................. 116,881
Other liabilities.................... 7,039,751
Stockholders' equity:
Preferred stock.................... 635,457
Common stockholders' equity........ 2,149,970
-----------
Total stockholders' equity... 2,785,427
-----------
Total liabilities and
stockholders' equity....... $41,514,836
===========
Interest income/earning assets....... $2,481,959 7.59%
Interest expense/earning assets...... 1,627,772 4.98
---------- ----
Net interest differential............ $ 854,187 2.61%
========== ====
------------
(1) Based on amortized or historic cost with the mark-to-market adjustment on
securities available for sale included in other assets.
(2) Income has been fully adjusted to a fully-taxable equivalent basis. The rate
used for this adjustment was approximately 43% in 1997 and 44% in 1996 and
1995.
(3) Excludes noninterest-bearing balances which are included in other assets or
other liabilities, respectively.
(4) Including non-accrual loans.
(5) Including allowance for possible credit losses.
Net interest income increased $66.0 million, or 6.6%, to $1.060 billion in
1997, compared to $994.1 million in 1996. This increase was due to the growth in
interest-earning assets to $45.0 billion in 1997 from $40.0 billion in 1996. The
net interest rate differential declined to 2.36% in 1997, compared to 2.48% in
1996. This decline reflects an increased amount of short-term borrowings and
deposits in foreign offices that were invested in high quality assets at low
margin spreads.
Net interest income increased $139.9 million, or 16.4%, to $994.1 million
in 1996, compared to $854.2 million in 1995. While spreads narrowed in 1996 when
compared to the prior year, average interest-earning assets rose $7.3 billion in
1996, to $40.0 billion, or 22.4% over 1995. This increase was primarily due to
the additional interest-earning assets acquired from BBI, and the investment of
proceeds from deposit liabilities acquired from First Nationwide Savings Bank,
Bank Leumi Trust Company and Independence Savings Bank. Higher levels of
investment securities were funded by deposits in foreign offices and short-term
borrowings. The net interest rate differential declined to 2.48% in 1996, from
2.61% in 1995, as the rate on interest-earning assets declined more than the
rate on interest-bearing funds.
At year ends 1997 and 1996, the gross notional amount of off-balance-sheet
contracts used in asset and liability management was approximately $21.7 billion
and $13.6 billion, respectively. At year ends 1997 and 1996 the market value of
these off-balance-sheet contracts reflected unrealized losses of approximately
$120 million and $50 million, respectively.
9
The following table presents changes in the levels of interest income and
interest expense attributable to changes in volume or rate. Changes not solely
due to volume or rate are allocated to volume.
[Enlarge/Download Table]
INCREASE (DECREASE)
-----------------------------------------------------------------------
1997 VS. 1996 1996 VS. 1995
-------------------------------- -----------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- -------- -------- --------- --------- ---------
(IN THOUSANDS)
Interest income from:
Interest-bearing deposits with
banks............................ $(65,080) $(12,534) $(77,614) $(127,271) $ (22,884) $(150,155)
Taxable securities.................. 254,071 (21,480) 232,591 443,820 (92,334) 351,486
Securities exempt from federal
income taxes..................... (103) (2,721) (2,824) 15,884 (15,710) 174
Trading account assets.............. 24,490 23,825 48,315 11,060 483 11,543
Federal funds sold and securities
purchased under resale
agreements....................... 28,592 (2,306) 26,286 11,332 (10,818) 514
Loans, net of unearned income:
Domestic offices................. 53,670 24,156 77,826 137,133 (15,266) 121,867
Foreign offices.................. 63,767 8,760 72,527 51,401 (3,757) 47,644
-------- -------- -------- --------- --------- ---------
Total interest on loans..... 117,437 32,916 150,353 188,534 (19,023) 169,511
-------- -------- -------- --------- --------- ---------
Total interest income....... 359,407 17,700 377,107 543,359 (160,286) 383,073
-------- -------- -------- --------- --------- ---------
Interest expense on:
Consumer and other time deposits.... 283 3,239 3,522 125,313 (13,771) 111,542
Certificates of deposit............. 29,076 1,134 30,210 7,924 (4,879) 3,045
Deposits in foreign offices......... 124,835 10,251 135,086 102,329 (72,786) 29,543
Trading account liabilities......... 1,547 (528) 1,019 9,261 19 9,280
Short-term borrrowings.............. 93,255 21,660 114,915 95,772 9,219 104,991
Total long-term debt................ 24,366 2,010 26,376 (6,623) (8,652) (15,275)
-------- -------- -------- --------- --------- ---------
Total interest expense...... 273,362 37,766 311,128 333,976 (90,850) 243,126
-------- -------- -------- --------- --------- ---------
Change in net interest income......... $ 86,045 $(20,066) $ 65,979 $ 209,383 $ (69,436) $ 139,947
======== ======== ======== ========= ========= =========
PROVISION FOR CREDIT LOSSES
The Corporation determines its aggregate provision for credit losses based
on factors such as past credit loss experience, the composition of the loan
portfolio and other potential credit exposures and prevailing worldwide economic
conditions. The total provision for credit losses was $16 million in 1997, all
of which was applied to the allowance for possible credit losses, compared to
$32 million in 1996 and $12 million in 1995. In 1997, the level of
non-performing loans, net charge-offs and the provision for credit losses
declined when compared to 1996. While no specific credit concerns existed, the
increase in the provision for credit losses in 1996 over the prior year was
considered prudent by management in consideration of increased domestic and
foreign exposures. For additional information on loan charge-offs and
recoveries, the provision for credit losses and the method of reporting the
aggregate allowance for possible credit losses see "Asset Management-Aggregate
Allowance for Possible Credit Losses" in this section of this Report.
Net charge-offs declined to $11.3 million in 1997 from $25.0 million in
1996 and $31.3 million in 1995. The allowance for possible credit losses
amounted to $326.5 million at year end 1997 or 2.64% of loans outstanding, net
of unearned income. The allowance was $350.4 million at year end 1996, or 2.99%
of loans outstanding, net of unearned income, an increase of $49.8 million from
the $300.6 million at year end 1995. The increase in the allowance in 1996 was
primarily due to the $42.6 million allowance acquired in the BBI transaction.
10
OTHER OPERATING INCOME
The following table presents the principal categories of other operating
income for each of the years in the three-year period ended December 31, 1997.
[Enlarge/Download Table]
INCREASE (DECREASE) INCREASE (DECREASE)
-------------------- -------------------
1997 AMOUNT % 1996 AMOUNT % 1995
-------- --------- -------- -------- --------- ------ --------
(DOLLARS IN THOUSANDS)
Trading income:
Income from precious metals................. $ 14,069 $(10,631) (43.0) $ 24,700 $(13,349) (35.1) $ 38,049
Foreign exchange trading income............. 119,642 21,477 21.9 98,165 (14,886) (13.2) 113,051
Trading account profits and commissions..... 36,964 (15,977) (30.2) 52,941 28,195 113.9 24,746
-------- -------- -------- -------- --------
Total trading income.............. 170,675 (5,131) (2.9) 175,806 (40) -- 175,846
Investment securities gains, net............ 35,117 11,870 51.1 23,247 (2,416) (9.4) 25,663
Net gain on loans sold or held for sale..... 19,838 18,864 * 974 (5,791) (85.6) 6,765
Commission income........................... 87,524 16,131 22.6 71,393 14,458 25.4 56,935
Equity in earnings of affiliate............. 125,116 31,698 33.9 93,418 13,937 17.5 79,481
Other income................................ 90,038 8,761 10.8 81,277 13,086 19.2 68,191
-------- -------- -------- -------- --------
$528,308 $ 82,193 18.4 $446,115 $ 33,234 8.0 $412,881
======== ======== ======= ======== ======== ===== ========
---------------
* Exceeds 200%
Total Trading Income
The following table presents the components of total trading related income
for each of the years in the three-year period ended December 31, 1997. The
items of net interest income/(expense) in the table below represent the net
interest earned/paid on trading instruments, as well as an allocation by
management to reflect the funding benefit or cost associated with the trading
positions. The previously reported amounts for 1996 and 1995 have been revised
to reflect the methodology used by management in 1997 related to the funding
benefit or cost of trading positions.
[Enlarge/Download Table]
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
Income from precious metals:
Trading revenue........................................ $ 14,069 $ 24,700 $ 38,049
Net interest income.................................... 42,674 21,569 6,637
-------- -------- --------
Total............................................. 56,743 46,269 44,686
-------- -------- --------
Foreign exchange trading income:
Trading revenue........................................ 119,642 98,165 113,051
Net interest (expense)................................. (9,515) (4,422) (8,451)
-------- -------- --------
Total............................................. 110,127 93,743 104,600
-------- -------- --------
Trading account profits and commissions:
Trading revenue........................................ 36,964 52,941 24,746
Net interest income.................................... 27,129 3,021 2,586
-------- -------- --------
Total............................................. 64,093 55,962 27,332
-------- -------- --------
Total:
Trading revenue........................................ 170,675 175,806 175,846
Net interest income.................................... 60,288 20,168 772
-------- -------- --------
Total............................................. $230,963 $195,974 $176,618
======== ======== ========
Total trading revenue, including associated net interest income which is
reported as net interest income, rose to $231.0 million in 1997 from $196.0
million in 1996 and $176.6 million in 1995. Net interest income from trading
activities rose to $60.3 million in 1997 from $20.2 million in 1996, compared to
net interest income of $0.8 million in 1995. The increase in net interest income
in 1997 and 1996 was due primarily to precious metals with trading account
activities also contributing a substantial portion of the 1997 increase. The
year-to-year increase in total trading income in 1997 and 1996, when compared to
the respective prior year, reflected, in part, the increased contribution of the
emerging markets trading unit and other revenue increases generated from trading
securities and derivative-related products. In 1997, trading revenue generated
in the Moscow subsidiary on Russian government securities also contributed to
the increase over 1996.
Precious Metals
Income from precious metals is derived from the Corporation's activities as
a dealer in gold and silver bullion and coins sold to commercial and industrial
users and investors, as well as its trading and arbitrage activities in the
precious metals markets. Income from precious metals was $56.7 million in 1997,
as compared to $46.3 million in 1996 and $44.7 million in 1995. The change in
both 1997 and 1996 from the respective prior year reflected lower trading
revenue,
11
which in each case, was offset by higher levels of net interest income from
trading and funding these activities. The fluctuations in this income in each of
the last three years reflects volatility in price and volume in the precious
metals markets and the level of funds invested in precious metals activities.
Foreign Exchange
Foreign exchange trading income is derived from trading and market-making
activities in foreign currencies, transactions that service the needs of the
Corporation's customers, including other banks and corporations, and dealings in
banknotes, principally in New York, London and locations in the Far East.
Foreign exchange trading income was $110.1 million in 1997, an increase of $16.4
million over the $93.7 million earned in 1996 which was a decrease of $10.9
million from the $104.6 million earned in 1995. In 1997, foreign exchange
trading benefited from volatility in the foreign exchange markets. The decline
in foreign exchange trading income in 1996 from 1995 reflected lower levels of
volatility in these markets in 1996.
Trading Account Profits and Commissions
Total trading account profits and commissions were $64.1 million in 1997,
compared to $56.0 million in 1996 and $27.3 million in 1995. In 1997, a
substantial portion of this line of income was derived from dealings in fixed
and variable rate debt securities denominated in all major currencies with large
financial institutions, including investment banks, commercial banks and
multinational organizations, as well as with high net worth individuals. More
specifically, trading account profits and commissions include income from
trading derivative products, emerging market fixed income securities, the
securities of the U.S. Government and its agencies, and the government
securities of countries where the Corporation has an active local presence, such
as Argentina, Brazil, Italy, Uruguay and Russia. The Corporation's subsidiary in
Moscow was responsible for a significant portion of the increase in trading
account profits and commissions.
During 1997, the Corporation benefited from the 1996 expansion of its
emerging markets trading department whose activities consist of dealing in
certain financial instruments of issuers located primarily in Latin America and
other developing countries. These instruments include Brady and other sovereign
eurobonds, forward sales and options on Brady Bonds, bank certificates of
deposit, sovereign local currency obligations and certain other products.
Customers for these products include financial institutions, multinational
corporations, other institutional investors and high net worth individuals.
Trading account profits and commissions, including net interest income generated
by this group's activities increased to $33.7 million in 1997, from $16.7
million in 1996 and $1.6 million in 1995.
The Corporation's financial products group acts as a principal in providing
interest rate and currency swaps and options on these products, as well as
products related to the performance of various indices. This group operates in
New York and London. The Corporation's strategy includes providing financial
services to meet the changing needs of its customers and stresses product
innovation, both within existing product areas and between different product
areas. The level of revenues related to off-balance-sheet transactions declined
in both 1997 and 1996 from the level recorded in 1995 due to reduced market
activity for these products. For additional information related to derivative
instruments, see Notes 4, 18 and 19 of "Notes to Consolidated Financial
Statements" in "Financial Statements and Supplementary Data" elsewhere in this
Report.
Investment Securities Gains
The Corporation realized net investment securities gains of $35.1 million
in 1997, $23.2 million in 1996 and $25.7 million in 1995. In 1997 and 1996, a
substantial portion of the net gains were from the sale of securities from the
Corporation's portfolio of other securities, including emerging markets, which
offset losses from U.S. Government agency securities. In 1995, sales of emerging
market securities and securities which were redeemed by the issuer prior to
their scheduled maturity, resulted in gains of $9.8 million and $7.2 million,
respectively. In each of the last three years, the net gains were from sales of
securities available for sale. The proceeds from securities sold were reinvested
in high-quality, interest-earning assets.
Loans Sold or Held for Sale
Net gains on loans sold or held for sale were $19.8 million in 1997, $1.0
million in 1996 and $6.8 million in 1995. In 1997, the gains were primarily from
sales of commercial real estate loans due to a strengthening real estate market.
The net gains in both 1996 and 1995 resulted from the sale of originated
mortgage loans. The Corporation has retained the servicing rights on residential
mortgage loans sold.
Commission Income
Commission income, which included fees for the issuance of banker
acceptances and letters of credit, securities brokerage commissions and retail
services was $87.5 million in 1997, compared to $71.4 million in 1996 and $56.9
million in 1995. Commission income included fees for the issuance of letters of
credit and the creation of acceptances of $23.4 million in 1997, $21.7 million
in 1996 and $18.9 million in 1995. In 1997, commissions attributable to
securities clearance, funds transfer and money management activities were $37.3
million, compared to $24.8 million in 1996 and $20.1 million in 1995. Commission
income from the broker dealer business in the securities subsidiary amounted to
$5.7 million in 1997,
12
compared to $5.2 million in 1996 and $4.4 million in 1995. Commission income
from the shipment of U.S.-dollar denominated banknotes was $8.6 million in 1997,
$8.5 million in 1996 and $2.6 million in 1995.
Affiliate Earnings
Equity in earnings of affiliate, representing the Corporation's share of
the earnings of Safra Republic, was $125.1 million in 1997, compared to $93.4
million in 1996 and $79.5 million in 1995. The increase in 1997 over 1996 was
34%, with 1996 an increase of 18% over 1995.
The following table presents summary information for Safra Republic for
each of the last three years.
[Enlarge/Download Table]
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
At December 31:
Total assets................................................ $20,356,300 $17,223,409 $15,660,544
Interest-bearing deposits with banks........................ 7,476,969 6,041,717 6,058,483
Loans, net of unearned income............................... 2,288,896 1,687,050 1,443,803
Allowance for possible credit losses........................ 134,351 131,071 130,300
Non-performing loans........................................ 10,271 10,777 19,697
Total deposits.............................................. 15,401,065 13,337,947 11,347,601
Total shareholders' equity.................................. $ 1,760,566 $ 1,643,110 $ 1,467,807
For the year:
Net interest income......................................... $ 297,225 $ 266,180 $ 235,402
Provision for credit losses................................. 16,000 12,000 1,000
Other operating income...................................... 188,865 119,113 95,508
Other operating expenses.................................... 193,470 167,521 157,635
Net income.................................................. 255,055 189,830 162,104
Net income per common share-diluted......................... $ 7.17 $ 5.35 $ 4.54
Average shares outstanding-diluted.......................... 35,558 35,502 35,733
For additional information on Safra Republic and its relationship with the
Corporation, see Note 7 of "Notes to Consolidated Financial Statements" and
"Affiliate Financial Statements" in "Financial Statements and Supplementary
Data" elsewhere in this Report.
Other Income
Other income consists primarily of service charges on deposit accounts,
mortgage fees and trust income. In 1997, other income amounted to $90.0 million
and included a gain of $7.4 million on the unwinding of a real estate financing
transaction, $8.3 million of investment management performance fees earned at
Safra Republic Investments Limited, a subsidiary whose ownership is shared
equally with Safra Republic, and an affiliate service fee of $3.4 million as
reimbursement for prior-period shared representative office expense. Other
income was $81.3 million in 1996 and included gains of $2.7 million on the sale
of a New York retail branch, $1.1 million from the repurchase and early
extinguishment of an issue of $100 million principal amount of floating-rate
subordinated long-term debt and $4.7 million of net gains on the sale of other
real estate owned. In 1995, other income was $68.2 million and included gains of
$1.3 million on the sale of a New York retail branch, $2.4 million from the sale
of an equipment lease and $1.9 million of net gains from other real estate
owned.
OTHER OPERATING EXPENSES
The following table presents the principal categories of other operating
expenses for each of the years in the three-year period ended December 31, 1997.
[Enlarge/Download Table]
INCREASE (DECREASE) INCREASE (DECREASE)
-------------------- --------------------
1997 AMOUNT % 1996 AMOUNT % 1995
-------- ---------- ------ -------- ----------- ------ --------
(DOLLARS IN THOUSANDS)
Salaries and employee benefits............ $475,017 $ 54,916 13.1 $420,101 $ 38,485 10.1 $381,616
Occupancy, net............................ 71,325 (1,367) (1.9) 72,692 14,717 25.4 57,975
Other expenses............................ 357,501 64,540 22.0 292,961 30,887 11.8 262,074
-------- -------- -------- --------- --------
903,843 118,089 15.0 785,754 84,089 12.0 701,665
Restructuring and related charges......... -- -- -- -- (120,000) * 120,000
-------- -------- -------- --------- --------
Total other operating expenses....... $903,843 $118,089 15.0 $785,754 $ (35,911) (4.4) $821,665
======== ======== ==== ======== ========= ==== ========
------------
* Exceeds 200%
13
Total operating expenses before restructuring and related charges were
$903.8 million in 1997, $785.8 million in 1996 and $701.7 million in 1995. The
increase in total other operating expenses before restructuring and related
charges in 1997 reflected the Corporation's ongoing investments in trading, risk
management and profitability reporting systems and other technology and
electronic banking initiatives which were begun in the second half of 1996.
Other expenses in 1997 included approximately $15.5 million related to the "Year
2000 Project", which is discussed further below. Also included in 1997 expenses
was a one-time charge of $14.2 million from an arbitration judgment and related
legal costs. The arbitration related to a dispute in 1995 with a former customer
of RNYSC involving currency futures trades. The Corporation disagrees with the
decision of the arbitration panel and has filed an appeal. The increase in total
other operating expenses before restructuring and related charges in 1996
reflected approximately $73.3 million of expenses in an expanded branch network
attributable to the acquisition of BBI and other branches purchased from Bank
Leumi, First Nationwide Bank FSB and Independence Savings Bank during the year.
During 1996, the Corporation invested in the initiatives described above
that were designed to increase revenues in future periods and in infrastructure
to support and control those operations. Retail banking expenses increased as a
result of the branch expansion mentioned above. Growth in the volumes of
mortgage and home equity loans as well as increased sales of investment products
resulted in the payment of additional fees for related services.
The Corporation continued to invest in broadening the array of its
investment product offerings, including the recent introduction of an asset
allocation product which is targeted at retail clients. RFSC saw significant
expansion during the year to include offering full-service and discount
securities brokerage services to corporate and retail clients. The Corporation
also invested in trading market services and in advanced risk management systems
to support its expanding trading operations. The development of a new
profitability measuring system which will enable the Corporation to efficiently
measure and present line of business results also contributed to the higher
expense level.
In the second quarter of 1995, the Corporation recorded a $120.0 million
pre-tax provision for restructuring and related charges as a result of the
implementation of Project Excellence Plus. For additional information on this
charge see Note 14 of "Notes to Consolidated Financial Statements" in "Financial
Statements and Supplementary Data" elsewhere in this Report. In addition, in
1995, the Corporation converted the financial reporting of its operations in
Chile and Uruguay and RBCC to a current basis in the fourth quarter of the year.
The conversion resulted in a one-time increase to expense of $3.4 million for
the year.
Salaries and Employee Benefits
Salaries and employee benefits were $475.0 million in 1997, $420.1 million
in 1996 and $381.6 million in 1995. The increase in salaries and benefits in
1997 over the prior year reflects the opening of new foreign offices and higher
levels of staff and increased provisions for incentive compensation. The
increase in salaries and benefits in 1996 over the prior year reflects staff
additions attributable to the acquisitions mentioned above, recently established
operations and to the achievement of higher revenue thresholds that required
higher provisions for incentive compensation reflecting more competitive market
conditions.
Occupancy
Occupancy costs were $71.3 million in 1997, $72.7 million in 1996 and $58.0
million in 1995. The decline in 1997 from 1996, resulted primarily from a lower
level of real estate taxes due to certain real estate tax rebates. The increase
in 1996 over 1995 was primarily due to the acquisition of 38 branches during the
year that included a one-time charge of $2.0 million related to branch
consolidations.
Other Expenses
All other expenses were $357.5 million in 1997, $293.0 million in 1996 and
$262.1 million in 1995. All other expenses in 1997 includes the one-time costs
of $14.2 million associated with the arbitration judgment mentioned above and
$15.5 million of Year 2000 expenses discussed below. Communication and equipment
expenses represent a substantial portion of other expenses which amounted to
$82.6 million, $75.8 million and $73.0 million in 1997, 1996 and 1995,
respectively. Amortization of goodwill and other intangible assets was $28.4
million in 1997, $28.7 million in 1996 and $9.9 million in 1995. The 1996
increase in this expense is primarily due to the acquisition of BBI and other
branches that occurred during the year. Also, professional fees, consisting of
consulting, external legal and audit fees, amounted to $36.0 million in 1997
compared to $29.2 million in 1996 and $30.7 million in 1995. All other expenses
include premiums for deposit insurance paid to the FDIC of $2.0 million in 1997,
compared to $0.5 million in 1996 and $11.7 million in 1995. The decline in this
expense in 1996 from 1995, was the result of a reduction of the premium rate
paid for FDIC insurance. Other expenses in 1995 also included the effect of
adopting a change in the method of accounting for charitable contributions that
resulted in a one-time charge of $7.5 million.
Year 2000 Project
The Corporation, like most commercial and financial institutions, is
working to assure that its operating and processing systems will continue to
function when the year 2000 arrives. The Corporation has developed and
implemented a comprehensive plan designed to complete substantially all system
conversions by the end of 1998. A significant part of that plan involves
contracts the Corporation has entered into with vendors to provide facilities
and manpower to
14
carry out required conversions and follow-up testing. Operating expenses in 1997
included $15.5 million of these project costs. Based on this plan, it is
estimated that total incremental expenses for the Year 2000 Project will be
approximately $60 million. The remaining cost of approximately $45 million will
be incurred over the 8 quarters ending December 31, 1999. The exact timing and
amount of such expenses depends on the progress of converting and testing
individual systems and applications; based on its plan, the Corporation expects
that quarterly expense levels related to the Year 2000 Project will increase
from the current levels to a peak in early 1998 and then decline significantly
through 1999.
European Monetary Union
The Corporation is engaged in various efforts worldwide to prepare for the
planned introduction in January, 1999 of the single currency (known as the
Euro). The participating member states will be determined by the European
Commission in May 1998. Commencing January 1, 1999, the currencies of the
participating member states will convert (at rates of exchange to be determined)
into the Euro over a three-year transition period; the ECU will be converted
into the Euro at a rate of one-for-one. The Corporation has developed and
implemented a comprehensive plan to prepare for the introduction of the Euro and
its impact on the Corporation's products, lines of business and systems. All
major functions and product areas of the Corporation have developed action plans
to deal effectively with the implications of the introduction of the Euro.
Vendors of systems used by the Corporation have been contacted to obtain
information regarding their preparedness for the introduction of the Euro. Total
incremental expenses for the Euro conversion are currently estimated to be
approximately $1 million, most of which will be incurred during 1998.
TOTAL APPLICABLE INCOME TAXES
Total applicable income taxes, which includes the effect of a taxable
equivalent adjustment, increased $15.8 million in 1997 to $219.5 million, after
increasing $58.9 million in 1996 over 1995. The ratio of total applicable income
taxes to income before taxes has remained at approximately 33% in each of the
last three years. The increase in total applicable income taxes in 1997 and
1996, when compared to the respective prior year, reflected the higher levels of
taxable income for the year. Included in income taxes in 1997 was a tax benefit
of approximately $10.0 million related to non-taxable income from discontinued
operations of domestic subsidiaries. Income taxes in 1996 were reduced by a
one-time $12.0 million tax benefit recognized as a result of a tax law change
enacted in 1996. The 1996 income tax benefit was recognized by the Corporation
because it was no longer liable for deferred taxes which had been provided in
prior years for credit provisions.
NET INCOME APPLICABLE TO COMMON STOCK-DILUTED
Net income applicable to common stock-diluted was a record $423.3 million
in 1997, compared to $386.0 million in 1996 and $256.8 million in 1995. Diluted
earnings per common share were $7.88 in 1997, $7.07 in 1996 and $4.65 in 1995.
Dividends declared and the average annual rates paid on the Corporation's issues
of preferred stock were as follows: $24.2 million in 1997 at 5.32%, $31.5
million in 1996 at 5.48% and $36.5 million in 1995 at 5.74%.
LIABILITY AND ASSET MANAGEMENT
Changes in the level of interest rates and the relationship between rates
can affect net interest income. The structure of the Corporation's liabilities
determines the structure of its assets both on- and off-balance sheet, so that
the maturity and interest rate sensitivities are generally matched. This
practice has two important implications. First, liquidity requirements can be
met more readily because a large proportion of assets mature when liabilities
mature. Second, the impact of changes in the levels of interest rates on the
Corporation is reduced because assets and liabilities have approximately the
same interest rate sensitivity.
Diversification is another principle employed in the management of
liabilities and assets. The Corporation is active in international banking and,
in managing this activity, diversifies risks among many countries and
counterparties throughout the world. Liabilities, which are mostly
interest-bearing deposits and other purchased funds, are obtained from both
domestic and international sources. These sources of funds represent a wide
range of depositors, mostly individuals, and various types of deposits. The
Corporation also raises funds from institutional and individual investors with a
variety of marketable instruments. The diversification of the Corporation's
funding sources enhances the stability of the funding base.
From time to time, the Corporation's management may decide to mismatch on-
and off-balance-sheet liabilities and assets in a strategic gap position as a
means of managing net interest income. Interest rate sensitivity gaps occur when
interest-bearing liabilities and interest-earning assets differ in repricing
dates and anticipated maturities. Such decisions reflect management's views on
the direction of interest rates and general market conditions. The gap position
is established with marketable securities of high credit quality in liquid
markets and is carefully monitored by management. The Corporation uses
off-balance-sheet interest rate derivatives such as interest rate swaps, caps,
options and forwards as hedges or to modify the interest rate characteristics of
specific assets or liabilities, collectively referred to as a hedge. The
Corporation manages its exposure to interest rate sensitivity resulting from its
gap position with hedges and records these hedges in a manner consistent with
the accounting treatment for the underlying asset or liability.
15
The Corporation monitors the near-term interest rate sensitivity of its
liability and asset positions by quantifying the earnings at risk to simulated
changes in interest rates. A net interest income simulation model measures this
sensitivity. This model utilizes Monte Carlo simulation, a statistical technique
that allows the Corporation to build variability around current market
conditions. Inputs include the maturity and repricing characteristics of the
Corporation's on- and off-balance-sheet liability and asset positions as well as
assumptions on interest rates, asset prepayments, inter-bank spreads and deposit
growth. Given the assumptions used, the model's output projects the variance in
net interest income over the next year. The Board of Directors adopted a limit
of 5% of annual net interest income at risk, based on this measured interest
rate sensitivity. Results are periodically presented to the Asset and Liability
Management Committee and to the Board of Directors.
Simulation modeling gives a broader view of net interest income variability
than does traditional gap analysis, allowing the Corporation to capture more
variables that are interest rate sensitive and to explore interrelationships
between variables. To complement the simulation model, the Corporation employs
traditional gap analysis to provide information on longer term interest rate
sensitivity.
The table below illustrates the Corporation's interest rate sensitivity gap
position at December 31, 1997 and 1996. The interest rate sensitivity gap, which
is the difference between interest-earning assets and liabilities, is presented
by repricing period, based upon maturity or first repricing opportunity, along
with a cumulative interest rate sensitivity gap. Factors considered are the
contractual terms of the underlying obligations, including off-balance-sheet
items such as interest rate swaps and caps, as well as management's estimates of
prepayment patterns of mortgage-backed securities and interest sensitivity of
core deposits. It is important to note that the table indicates a position at a
specific point in time and may not be reflective of positions at other times
during the year or in subsequent periods. Major changes in the gap position can
be, and are, made promptly as market outlooks change. In addition, significant
variations in interest rate sensitivity may exist within the repricing periods
presented in which the Corporation has interest rate positions.
[Enlarge/Download Table]
REPRICING PERIOD AT DECEMBER 31, 1997
--------------------------------------------------------------------------------
AFTER ONE AFTER THREE AFTER SEVEN
WITHIN YEAR BUT WITHIN YEARS BUT WITHIN YEARS BUT WITHIN AFTER
ONE YEAR THREE YEARS SEVEN YEARS TEN YEARS TEN YEARS
-------- --------------- ---------------- ---------------- ---------
(IN MILLIONS)
ASSET/(LIABILITY)
Interest rate sensitivity gap......... $(468) $ (827) $ 322 $2,447 $(1,474)
----- ------- ----- ------ -------
ASSET/(LIABILITY)
Cumulative interest rate sensitivity
gap................................. $(468) $(1,295) $(973) $1,474 $ --
===== ======= ===== ====== =======
[Enlarge/Download Table]
REPRICING PERIOD AT DECEMBER 31, 1996
--------------------------------------------------------------------------------
AFTER ONE AFTER THREE AFTER SEVEN
WITHIN YEAR BUT WITHIN YEARS BUT WITHIN YEARS BUT WITHIN AFTER
ONE YEAR THREE YEARS SEVEN YEARS TEN YEARS TEN YEARS
-------- --------------- ---------------- ---------------- ---------
(IN MILLIONS)
ASSET/(LIABILITY)
Interest rate sensitivity gap......... $(1,925) $ 261 $ 712 $2,020 $(1,068)
------- ------- ----- ------ -------
ASSET/(LIABILITY)
Cumulative interest rate sensitivity
gap................................. $(1,925) $(1,664) $(952) $1,068 $ --
======= ======= ===== ====== =======
In the second quarter of 1997, the Corporation began, with the use of
hedges, to reduce the interest rate gap that was allowed to widen in 1996. The
hedges had maturities between one and seven years.
16
The following table presents information related to the expected maturities
and weighted average interest rates to be received or paid on the interest rate
swap portfolio and other instruments used in asset-liability management. Asset-
liability management swaps are designated as hedges of an underlying asset or
liability at the inception of the contract.
[Download Table]
DECEMBER 31, 1997
-----------------------------------------------------
DUE IN LESS DUE IN ONE DUE AFTER
THAN ONE YEAR THRU FIVE YEARS FIVE YEARS TOTAL
------------- --------------- ---------- ------
(DOLLARS IN MILLIONS)
Receive fixed swaps:
Notional amount..... $ 756 $ 916 $ 942 $2,614
Weighted average
receive rate...... 6.84% 7.79% 6.75% 7.14%
Weighted average
pay rate.......... 5.52% 5.57% 5.89% 5.67%
Pay fixed swaps:
Notional amount..... $1,419 $3,694 $1,122 $6,235
Weighted average
receive rate...... 5.74% 5.93% 5.91% 5.89%
Weighted average
pay rate.......... 6.43% 6.89% 7.33% 6.87%
Forward contracts:
Notional amount..... $1,210 $1,282 $ -- $2,492
Interest rate caps
purchased:
Notional amount..... $ 575 $3,448 $1,650 $5,673
Other interest rate
swaps:
Notional amount..... $ 445 $1,356 $1,689 $3,490
Cross-currency swaps:
Notional amount..... $1,100 $ 120 $ 14 $1,234
DECEMBER 31, 1996
-----------------------------------------------------
DUE IN LESS DUE IN ONE DUE AFTER
THAN ONE YEAR THRU FIVE YEARS FIVE YEARS TOTAL
------------- --------------- ---------- ------
(DOLLARS IN MILLIONS)
Receive fixed swaps:
Notional amount..... $ -- $ 640 $ 950 $1,590
Weighted average
receive rate...... -- 8.43% 6.99% 7.57%
Weighted average
pay rate.......... -- 5.83% 5.56% 5.67%
Pay fixed swaps:
Notional amount..... $ 30 $3,200 $ 220 $3,450
Weighted average
receive rate...... 5.84% 5.64% 7.60% 5.76%
Weighted average
pay rate.......... 9.22% 7.01% 9.39% 7.18%
Forward contracts:
Notional amount..... $ -- $ 450 $ -- $ 450
Interest rate caps
purchased:
Notional amount..... $1,687 $2,698 $ 150 $4,535
Other interest rate
swaps:
Notional amount..... $ 223 $ 882 $1,879 $2,984
Cross-currency swaps:
Notional amount..... $ 461 $ 109 $ -- $ 570
LIABILITY MANAGEMENT
DEPOSITS
The Corporation's primary liability products are interest-bearing deposits
provided to customers in four basic areas -- international private banking,
domestic private banking, institutional and retail banking. The international
private banking group establishes relationships, on a worldwide basis, with high
net worth individuals who value safety for their funds. The Corporation's
domestic private banking group provides a focus on general banking and lending,
trusts and estates, custody and investment management relationships for high net
worth individuals. The Bank's institutional customers are pension funds, money
market funds and corporate cash accounts. The Corporation has been successful in
selling long-term deposits to institutional and corporate investors, thereby
generating a source of long-term funds. The retail area's customers are from the
New York City metropolitan area and Florida branch systems of the Bank and the
California branches of RBC. This retail customer base increased significantly
during 1996 with the addition of $4.2 billion of deposits from the thirty-eight
branches acquired in the BBI and other acquisitions during the year. RBC is a
separate banking subsidiary, servicing the California market with two banking
offices in Los Angeles County, that focuses on domestic private banking and
mortgage banking. Its customers invest in a diverse mix of retail time and
savings deposits of both short-term and long-term maturities.
17
The following table sets forth the Corporation's deposit structure at
December 31, in each of the last three years.
[Enlarge/Download Table]
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)
DOMESTIC OFFICES:
Noninterest-bearing deposits:
Individuals, partnerships and corporations............. $ 2,390,591 $ 2,005,782 $ 1,494,015
Foreign governments and official institutions.......... 2,301 1,756 3,196
U.S. Government and states and political
subdivisions.......................................... 35,036 42,912 16,629
Banks.................................................. 145,962 117,857 123,133
Certified and official checks.......................... 125,929 127,960 103,062
----------- ----------- -----------
Total noninterest-bearing deposits................ 2,699,819 2,296,267 1,740,035
----------- ----------- -----------
Interest-bearing deposits:
Individuals, partnerships and corporations............. 5,828,033 6,093,852 3,989,593
Savings and NOW accounts............................... 3,174,543 3,277,077 2,428,295
Money market accounts.................................. 2,888,781 2,812,222 2,001,830
Banks and other........................................ 323,403 376,403 1,734
Deposit notes.......................................... -- -- 50,000
----------- ----------- -----------
Total interest-bearing deposits................... 12,214,760 12,559,554 8,471,452
----------- ----------- -----------
Total deposits in domestic offices................ 14,914,579 14,855,821 10,211,487
----------- ----------- -----------
FOREIGN OFFICES:
Noninterest-bearing deposits................................ 222,957 177,675 160,133
----------- ----------- -----------
Interest-bearing deposits:
Individuals, partnerships and corporations............. 10,293,904 8,010,355 7,404,510
Banks located in foreign countries..................... 6,692,620 7,784,154 5,947,085
Foreign governments and official institutions.......... 1,265,474 897,574 1,196,418
----------- ----------- -----------
Total interest-bearing deposits................... 18,251,998 16,692,083 14,548,013
----------- ----------- -----------
Total deposits in foreign offices................. 18,474,955 16,869,758 14,708,146
----------- ----------- -----------
Total deposits............................... $33,389,534 $31,725,579 $24,919,633
=========== =========== ===========
The following table presents the maturity distribution at December 31, 1997
of certificates of deposit and other time deposits of $100,000 or more included
in interest-bearing deposits in domestic offices in the previous table.
[Enlarge/Download Table]
CERTIFICATES OF OTHER TIME
DEPOSITS DEPOSITS TOTAL
---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT %
---------- --- ---------- --- ---------- ---
(DOLLARS IN THOUSANDS)
Due in 90 days and less..................................... $ 418,559 28 $1,420,974 82 $1,839,533 56
Due in 91-180 days.......................................... 42,057 3 111,667 6 153,724 5
Due in 181-360 days......................................... 18,507 1 114,917 7 133,424 4
Due in over 360 days........................................ 1,033,662 68 90,109 5 1,123,771 35
---------- --- ---------- --- ---------- ---
Total............................................. $1,512,785 100 $1,737,667 100 $3,250,452 100
========== === ========== === ========== ===
FOREIGN DEPOSITS
The Corporation's international private banking group, headquartered in New
York City, generates a substantial portion of foreign deposits by establishing
relationships with clients throughout the world.
Deposits from foreign sources are placed by over 25,000 individuals and
foreign banks from over 80 different countries in both domestic and foreign
branch offices and in foreign banking subsidiaries. This customer base is a
stable source of funding for the Corporation. Total average deposits in foreign
offices rose $2.3 billion, to $17.1 billion in 1997, after increasing to $14.8
billion in 1996 from $12.9 billion in 1995.
18
The following table presents information on the distribution, by type, of
the Corporation's foreign deposits at December 31 in each of the last three
years. The majority of the deposits in each category at the indicated dates were
in amounts in excess of $100,000.
[Enlarge/Download Table]
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)
Foreign deposits:
Time deposits of individuals, partnerships and
corporations.......................................... $10,853,584 $ 8,534,615 $ 7,979,187
Banks and other financial institutions................. 6,873,528 7,940,121 6,075,247
Foreign governments and official institutions.......... 1,269,209 899,742 1,197,995
Other deposits......................................... 169,805 174,800 111,132
----------- ----------- -----------
Total foreign deposits............................ $19,166,126 $17,549,278 $15,363,561
=========== =========== ===========
TRADING ACCOUNT LIABILITIES
Trading account liabilities were $5.3 billion at year end 1997, $4.4
billion at year end 1996 and $3.7 billion in 1995. In each of the last three
years, unrealized losses represent a substantial portion of these liabilities
while the unrealized gains are recorded in trading account assets. Unrealized
gains and losses on forward, swap, option and other financial instruments,
resulting primarily from the marking to estimated market value of trading
instruments, are reported on a gross basis, except when right of set-off
criteria are met.
Trading account liabilities also include the market value of securities
sold that the Corporation does not own but must deliver at a future date and
payables for precious metals. The Corporation seeks to benefit from favorable
movements in the market price of "short-sales" by purchasing the required
security at a lower price in the future. For additional information on trading
account liabilities see Note 4 of "Notes to Consolidated Financial Statements"
elsewhere in this Report.
SHORT-TERM BORROWINGS
The Corporation's short-term funding sources include federal funds
purchased and securities sold under repurchase agreements, commercial paper
issuances, local borrowings in overseas operations and interest-bearing precious
metals balances. From time to time, the Bank also issues short-term securities
in public offerings. Average short-term borrowings rose to $8.4 billion in 1997,
up from $6.6 billion in 1996 and $4.6 billion in 1995. The increase in 1997 over
1996 reflected higher levels of other borrowings for precious metals, customer
positions in the securities company and local borrowings in overseas locations,
while 1996 increased over the prior year due to increased levels of securities
sold under repurchase agreements. Short-term borrowings as a percentage of total
interest bearing funds were 20% in 1997, 18% in 1996 and 15% in 1995.
The Corporation's commercial paper is rated A-1+, F-1+, P-1 and D-1+ by
Standard & Poor's Corporation, Fitch Investors Service, Moody's Investors
Service and Duff & Phelps, respectively. Commercial paper proceeds are used
principally to finance the current operations of RBCC and RNYSC. The Corporation
has $170 million of lines of credit outstanding to provide liquidity for its
commercial paper program under which it is authorized to issue up to $2.5
billion.
19
The following table is a summary of short-term borrowings for each of the
last three years. Other borrowings reflect rates paid for local borrowings in
certain overseas locations.
[Enlarge/Download Table]
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Federal funds purchased and securities sold under repurchase
agreements:
Average interest rate:
At year end....................................... 5.31% 5.19% 5.47%
For the year...................................... 5.10% 5.31% 5.75%
Average amount outstanding during the year............. $2,296,958 $2,517,980 $1,474,225
Maximum amount outstanding at any month end............ 3,246,873 4,263,640 2,951,484
Amount outstanding at year end......................... 853,612 1,090,300 1,231,744
Commercial paper:
Average interest rate:
At year end....................................... 5.53% 5.40% 5.58%
For the year...................................... 5.52% 5.41% 5.91%
Average amount outstanding during the year............. $ 811,071 $ 887,055 $ 640,368
Maximum amount outstanding at any month end............ 1,252,949 1,091,613 820,258
Amount outstanding at year end......................... 418,911 862,347 667,563
Precious metals borrowings:
Average interest rate:
At year end....................................... 1.87% 1.78% 2.07%
For the year...................................... 2.53% 2.51% 1.98%
Average amount outstanding during the year............. $1,743,540 $1,375,789 $1,075,567
Maximum amount outstanding at any month end............ 2,090,567 1,683,926 1,411,751
Amount outstanding at year end......................... 2,028,268 1,645,904 1,322,083
Other borrowings:
Average interest rate:
At year end....................................... 7.61% 7.26% 8.51%
For the year...................................... 6.57% 5.88% 5.10%
Average amount outstanding during the year............. $3,502,566 $1,782,927 $1,419,243
Maximum amount outstanding at any month end............ 3,411,034 1,848,290 1,946,411
Amount outstanding at year end......................... 2,313,043 1,848,290 669,378
ASSET MANAGEMENT
The management of the Corporation's assets is based on three principal
criteria: creditworthiness, diversification and structural characteristics,
including maturity and interest rate sensitivity. A significant portion of the
Corporation's interest-earning assets are invested in U.S. Government agency
securities, including mortgage-backed and other asset-backed securities.
International banking activities also comprise a substantial portion of the
Corporation's business and involve factors other than the normal credit risk
associated with domestic lending. In determining the creditworthiness of
international borrowers, the economic, political and social conditions that
affect the borrower's ability to repay obligations must be taken into account.
Through country and political analysis and diversification of activities across
a wide geographic distribution and within exposure limits set on a
country-by-country basis, the Corporation reduces the unique risks of extending
international credit. The Corporation endeavors to reflect risk in its pricing
policy.
The following table sets forth the percentages of the Corporation's
domestic and international assets and liabilities, based upon the location of
the obligor or customer, at December 31 in each of the last three years.
[Download Table]
ASSETS LIABILITIES
------------------------- -------------------------
DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL
-------- ------------- -------- -------------
1997................. 77.3% 22.7% 59.6% 40.4%
1996................. 71.9% 28.1% 60.8% 39.2%
1995................. 69.6% 30.4% 61.1% 38.9%
20
The following table sets forth the Corporation's principal assets, which
are primarily interest-earning, by category at year end for each of the last
three years. Additional details related to maturity distribution, interest rate
sensitivity and creditworthiness are provided elsewhere in this section.
[Enlarge/Download Table]
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)
Interest-bearing deposits with banks........................ $ 4,756,804 $ 5,909,195 $ 6,094,495
Total investment securities................................. 25,513,818 21,175,513 16,238,545
Trading account assets...................................... 4,510,955 4,807,788 4,035,606
Federal funds sold and securities purchased under resale
agreements................................................ 2,169,291 2,109,109 1,749,268
Loans:
Real estate............................................ 4,357,209 4,106,231 3,148,147
Government and official institutions................... 74,417 57,136 80,038
Broker loans........................................... 1,123,209 1,091,567 1,114,466
Banks and other financial institutions................. 954,522 864,717 419,444
Commercial and other................................... 5,866,947 5,627,591 5,116,853
----------- ----------- -----------
Total loans............................................ 12,376,304 11,747,242 9,878,948
Less unearned income.............................. (16,563) (25,306) (34,988)
----------- ----------- -----------
Loans, net of unearned income.......................... 12,359,741 11,721,936 9,843,960
----------- ----------- -----------
$49,310,609 $45,723,541 $37,961,874
=========== =========== ===========
INTEREST-BEARING DEPOSITS WITH BANKS
Interest-bearing deposits with banks are placed with major international
and domestic banking organizations on a short-term basis, thereby insuring
liquidity while reducing credit risk. Investments in interest-bearing deposits
with banks have represented a smaller proportion of average interest-earning
assets in each of the last three years amounting to approximately 10% of average
interest-earning assets in 1997, 14% in 1996 and 23% in 1995, as the
Corporation's funds were invested in assets yielding more favorable returns.
The following table provides information on the maturity distribution of
the Corporation's interest-bearing deposits with banks at December 31, 1997.
[Download Table]
MATURITY
DISTRIBUTION %
------------ ---
(DOLLARS IN MILLIONS)
Due within one month.................. $3,016.3 63
Due after one but within six months... 1,391.9 29
Due after six but within twelve
months.............................. 219.0 5
Due after one year.................... 129.6 3
-------- ---
$4,756.8 100
======== ===
INVESTMENT PORTFOLIO
The Corporation's total investment securities portfolio increased $4.3
billion, or 20%, during 1997 to $25.5 billion at year end from $21.2 billion in
1996, which was a $4.9 billion increase over 1995. These increases were
primarily in U.S. Government agency securities and other asset-backed investment
securities.
The following table presents the composition of the carrying value of the
Corporation's total investment securities portfolio at December 31, in each of
the last three years.
[Enlarge/Download Table]
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)
U.S. Government obligations................................. $ 281,392 $ 179,533 $ 85,345
Obligations of U.S. Government agencies..................... 15,305,555 12,201,021 9,410,057
Obligations of U.S. states and political subdivisions....... 711,186 702,200 703,449
Other investment securities................................. 9,215,685 8,092,759 6,039,694
----------- ----------- -----------
$25,513,818 $21,175,513 $16,238,545
=========== =========== ===========
Except for investment securities of the Brazilian government and its
agencies, with book and market values amounting to $712 million, the Corporation
has no investments in any single issuer other than the U.S. Government and its
agencies that represented more than 10% of total stockholders' equity at year
end 1997.
The following tables present, by maturity distribution, the book value and
estimated market value of the Corporation's portfolio of securities held to
maturity and the amortized cost and the book (estimated market) value of
securities available for sale, respectively at December 31, 1997. The
Corporation has designated certain derivative instruments, primarily in the form
of interest rate swaps, as hedges against the interest rate risks of the
available for sale and held to
21
maturity portfolios. Such derivatives are shown separately in the following
tables. The swaps used to hedge the available for sale portfolio are carried on
the statement of condition at their estimated market values. The weighted
average yields on these instruments are presented based on their scheduled
maturities. Based on year end market conditions, mortgage-backed securities
included in U.S. Government agencies held to maturity and available for sale had
estimated average lives of approximately 6.7 years and 7.3 years, respectively.
Such securities are subject to the risk that average lives will change as
interest rates rise or fall. It is not anticipated that such changes would have
a significant impact upon the Corporation's gap and net interest income. Yields
on obligations of states and political subdivisions and investments in certain
preferred stock issues are adjusted to a fully-taxable equivalent basis using a
tax rate of 43%.
[Enlarge/Download Table]
SECURITIES HELD TO MATURITY
DECEMBER 31, 1997
-----------------------------------------------
ESTIMATED WEIGHTED
BOOK MARKET AVERAGE
VALUE VALUE YIELD
---------- ---------- --------
(DOLLARS IN THOUSANDS)
Obligations of U.S. Government agencies:
Mortgage-backed securities............................. $8,534,832 $8,703,870 7.40%
Interest rate swaps.................................... -- (70,835)
---------- ----------
8,534,832 8,633,035
---------- ----------
Obligations of U.S. states and political subdivisions:
Due after 1 year but within 5 years.................... 38,607 41,862 10.30%
Due after 5 years but within 10 years.................. 72,545 82,583 10.33
Due after 10 years..................................... 591,167 634,809 7.37
---------- ----------
702,319 759,254
---------- ----------
Total held to maturity...................................... $9,237,151 $9,392,289
========== ==========
[Enlarge/Download Table]
SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 1997
-------------------------------------------------
WEIGHTED
AMORTIZED BOOK/ESTIMATED AVERAGE
COST MARKET VALUE YIELD
----------- -------------- --------
(DOLLARS IN THOUSANDS)
U.S. Government obligations:
Due within 1 year...................................... $ 57,680 $ 57,851 6.28%
Due after 1 year but within 5 years.................... 137,803 137,436 3.72
Due after 10 years..................................... 80,315 86,105 6.53
----------- -----------
275,798 281,392
----------- -----------
Obligations of U.S. Government agencies:
Due within 1 year...................................... 107,390 107,618 6.96%
Due after 1 year but within 5 years.................... 116,623 126,689 6.13
Due after 5 years but within 10 years.................. 150,304 150,857 6.41
Due after 10 years..................................... 1,122,428 1,132,947 6.53
Mortgage-backed securities............................. 5,235,843 5,299,124 7.01
Interest rate swaps.................................... -- (46,512)
----------- -----------
6,732,588 6,770,723
----------- -----------
Obligations of U.S. states and political subdivisions:
Due after 10 years..................................... 8,470 8,867 10.89%
----------- -----------
8,470 8,867
----------- -----------
Other investment securities:
Due within 1 year...................................... 1,371,867 1,363,144 9.66%
Due after 1 year but within 5 years.................... 1,909,577 1,931,699 6.54
Due after 5 years but within 10 years.................. 1,693,854 1,717,431 7.15
Due after 10 years..................................... 4,233,335 4,308,058 6.97
Interest rate swaps.................................... -- (104,647)
----------- -----------
9,208,633 9,215,685
----------- -----------
Total available for sale.................................... $16,225,489 $16,276,667
=========== ===========
22
The following table presents, by type, the amortized cost and the
book(estimated market) value of the Corporation's other investment securities,
all of which are classified as available for sale.
[Enlarge/Download Table]
SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 1997
------------------------------
AMORTIZED BOOK/ESTIMATED
COST MARKET VALUE
---------- --------------
(IN THOUSANDS)
Bonds, debentures and other securities of:
Foreign banks.......................................... $1,021,406 $1,043,298
Foreign governments and government agencies............ 2,301,709 2,353,020
Foreign companies...................................... 734,646 737,929
Domestic companies..................................... 526,967 536,256
U.S. financial organizations........................... 983,883 1,006,949
Federal Reserve Bank stock............................. 62,588 62,588
Other, asset-backed securities......................... 3,577,434 3,580,292
Interest rate swaps.................................... -- (104,647)
---------- ----------
Total other investment securities........................... $9,208,633 $9,215,685
========== ==========
TRADING ACCOUNT ASSETS
Trading account assets consist of securities of the U.S. Government,
foreign governments, restructuring countries and corporations. Such securities
are carried at their estimated market value with the resultant gains and losses
recorded as trading account profits and commissions. Trading account assets also
include unrealized gains related to interest rate swaps, options and other
derivative financial instruments, and related premiums paid, that are utilized
in trading activities and an allowance for possible trading losses. In addition,
trading account assets include loans to borrowers in restructuring countries.
Such loans are carried at their estimated market value, with the resultant gains
or losses included in trading account profits and commissions. For additional
information related to the potential risks associated with trading activities,
and the Corporations management of those risks, see "Risk Management and
Control-Credit Risk" below in this section of this Report.
LOAN PORTFOLIO
The following table sets forth the composition of the Corporation's
domestic and foreign loan portfolios at December 31 in each of the past five
years.
[Enlarge/Download Table]
1997 1996 1995 1994 1993
----------- ----------- ---------- ---------- ----------
(IN THOUSANDS)
Domestic:
Real estate-residential mortgage...... $ 2,228,844 $ 1,832,850 $1,171,158 $1,245,500 $1,310,718
Real estate-commercial................ 1,962,702 2,116,627 1,791,693 1,813,878 1,854,377
Banks and other financial
institutions........................ 54,753 45,112 28,291 83,010 7,384
Broker loans.......................... 1,116,880 1,051,472 1,086,530 559,019 678,490
Commercial and industrial............. 1,999,427 1,855,251 2,004,783 2,242,124 2,152,691
Individuals........................... 266,703 200,607 389,520 106,195 90,218
All other............................. 571,375 400,705 187,360 11,810 16,915
----------- ----------- ---------- ---------- ----------
8,200,684 7,502,624 6,659,335 6,061,536 6,110,793
----------- ----------- ---------- ---------- ----------
Foreign:
Broker loans.......................... 6,329 40,095 27,936 23,762 732,812
Government and government agencies.... 74,417 57,136 80,038 89,625 429,232
Banks and other financial
institutions........................ 899,769 819,605 391,153 297,801 68,416
Commercial and all other.............. 3,195,105 3,327,782 2,720,486 2,487,875 2,262,130
----------- ----------- ---------- ---------- ----------
4,175,620 4,244,618 3,219,613 2,899,063 3,492,590
----------- ----------- ---------- ---------- ----------
Total loans................................ 12,376,304 11,747,242 9,878,948 8,960,599 9,603,383
Less unearned income.................. (16,563) (25,306) (34,988) (47,109) (94,825)
----------- ----------- ---------- ---------- ----------
Loans, net of unearned income.............. $12,359,741 $11,721,936 $9,843,960 $8,913,490 $9,508,558
=========== =========== ========== ========== ==========
Average loans in domestic offices increased to $9.0 billion in 1997 from
$8.3 billion in 1996, primarily due to growth in commercial and securities
lending. This portfolio has represented approximately 20% of average
interest-earning assets in each of the last three years. At year end 1997, the
domestic loan portfolio consisted of $2.2 billion of one-four family residential
mortgages and $2.0 billion of commercial real estate loans. Average loans in
foreign offices rose to $4.6 billion in 1997 an increase of $0.9 billion, which
follows an increase of $0.8 billion in 1996 to $3.7 billion from $2.9 billion in
1995. In
23
1996, average loans increased $1.7 billion from 1995 due to the loan portfolio
acquired in the BBI transaction. See "Risk Management and Control -- Credit
Risk" below in this section of this Report.
The following tables present loan portfolio information, excluding consumer
loans and residential mortgage loans totaling $2.4 billion, related to maturity
distribution and interest rate sensitivity, based on scheduled repayments at
December 31, 1997.
[Enlarge/Download Table]
DUE AFTER ONE
DUE IN ONE YEAR THROUGH DUE AFTER
YEAR OR LESS FIVE YEARS FIVE YEARS TOTAL
------------ ------------- ---------- ----------
(IN THOUSANDS)
Domestic:
Commercial and other............................... $2,136,562 $ 471,399 $ 104,021 $2,711,982
Real estate-commercial............................. 177,202 645,516 1,139,984 1,962,702
Banks and other financial institutions............. 46,292 8,461 -- 54,753
Broker loans....................................... 1,104,727 12,153 -- 1,116,880
---------- ---------- ---------- ----------
Total domestic loans.......................... 3,464,783 1,137,529 1,244,005 5,846,317
---------- ---------- ---------- ----------
Foreign:
Commercial and other............................... 2,721,943 293,986 12,413 3,028,342
Real estate-commercial............................. 98,100 7,977 177 106,254
Banks and other financial institutions............. 787,307 100,629 11,833 899,769
Governments and government agencies................ 31,715 24,809 17,893 74,417
Broker loans....................................... 6,329 -- -- 6,329
---------- ---------- ---------- ----------
Total foreign loans........................... 3,645,394 427,401 42,316 4,115,111
---------- ---------- ---------- ----------
Total loans................................... $7,110,177 $1,564,930 $1,286,321 $9,961,428
========== ========== ========== ==========
At December 31, 1997 and 1996, 71% of the loan portfolio presented above
was due in one year or less. Of the total loan portfolio due in one year or less
at year end 1997, 49% were domestic loans and 51% were foreign loans.
The following table is an analysis, at December 31, 1997, of loans due
after one year which have fixed interest rates and those with interest rates
that vary directly in relation to the Corporation's reference rate, an
international money market rate or some other similar variable base rate. Loans
with variable rates amounting to approximately $893 million are due after one
year.
[Enlarge/Download Table]
FIXED RATE VARIABLE RATE TOTAL
---------- ------------- ----------
(IN THOUSANDS)
Loans due after one year:
Domestic loans......................................... $1,836,666 $544,868 $2,381,534
Foreign loans.......................................... 121,158 348,559 469,717
---------- -------- ----------
$1,957,824 $893,427 $2,851,251
========== ======== ==========
AGGREGATE ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The Corporation's policy is to maintain an aggregate allowance for possible
credit losses that is adequate to absorb any inherent credit losses. Inherent
losses are unconfirmed losses that probably exist, based upon known information
regarding the credit quality and portfolio characteristics prevailing as of the
date of the evaluation. If future events confirm these losses, these amounts
will be charged off against the allowance for possible credit losses.
In the second quarter of 1997, the Corporation changed its method of
reporting the aggregate allowance for possible credit losses to be consistent
with industry practice. The aggregate allowance for possible credit losses at
December 31, 1997, amounted to $353.5 million and was apportioned and reported
as follows: $17.0 million applicable to trading account assets which is a
reduction of "trading account assets", $10.0 million included in "other
liabilities" for off-balance-sheet extensions of credit, such as standby letters
of credit, guarantees and commitments, and $326.5 million (allowance for
possible credit losses), which is available to absorb all other possible credit
losses.
In accordance with regulatory guidance, the Corporation performs a
comprehensive and consistently applied analysis of the various factors that
affect collectibility, which also includes its trading account assets and other
off-balance sheet extensions of credit. The process is complex and includes
several different analyses of credit exposures. Management analyzes its loan
portfolio by three main components: individually significant loans, homogeneous
groups or pools of loans and other segmentations of the portfolio into pools of
loans with similar characteristics, such as risk classification, type of loan,
industry group, collateral, size and maturity and country risk characteristics.
Management periodically reviews the loan portfolio, particularly
non-accrual and restructured loans. The review may result in a determination
that a loan should be placed on a non-accrual status for income recognition. In
addition, to the extent that management identifies potential losses in the loan
portfolio, it reduces the book value of such loans, through charge-offs, to
their estimated collectible value. The Corporation's policy is to classify as
non-accrual any loan (other than factored trade accounts receivable, consumer
installment and residential mortgage loans) on which payment of principal or
interest is 90 days past due. In addition, a loan will be classified as
non-accrual if, in the opinion of management, based
24
upon a review of the borrower's or guarantor's financial condition, collateral
value and other factors, payment is questionable, even though payments are not
90 days past due.
When a loan, other than a well secured residential mortgage loan, is
classified as non-accrual, any unpaid interest is reversed against current
income except where the loan is well collateralized and it is anticipated that
all unpaid interest will be collected. The loan remains in a non-accrual
classification until such time as the loan is brought current, when it may be
returned to accrual classification. When principal and interest on a non-accrual
loan are brought current, if in management's opinion future payments are
questionable, the loan would remain classified as non-accrual. Subsequent
payments of either interest or principal received on a partially charged-off
non-accrual or restructured loan are first applied to any remaining balance
outstanding, until the loan is reduced to its net realizable value, then to
recoveries and finally to income. Interest is included in income thereafter only
to the extent received in cash.
Factored trade accounts receivable that are past due 90 days or more remain
on a non-accrual basis except when past due interest will be charged to and
collected from the factoring client.
The large number of consumer installment loans and the relatively small
dollar amount of each makes an individual review impracticable. The Corporation
charges off any consumer installment loan which is past due 90 days.
Residential mortgage loans are placed on non-accrual status when the
mortgagor is in bankruptcy or foreclosure proceedings are instituted, at which
time the loan ceases to accrue interest. Any accrued interest receivable remains
in interest income as an obligation of the borrower.
The individually significant loans represent larger, more problematic loans
which are individually assessed as to collectibility. For homogeneous
portfolios, principally the consumer retail portfolio, the Corporation utilizes
the prior year's loss experience to estimate an amount necessary to provide for
the upcoming twelve months of expected losses. For the other segments of the
portfolio, historical loss rates are calculated for loans with similar
characteristics. These loss rates are updated quarterly and are based upon the
loss experience incurred for more than the last five years.
While historical loss rates provide a starting point for the Corporation's
analysis, historical losses are not by themselves a sufficient basis to
determine the appropriate level of the allowance for possible credit losses. The
actual rate selected for the analysis may differ from the calculated loss rate
as the historical rate may be adjusted upward or downward to reflect current and
anticipated business and economic conditions and other factors which are likely
to cause the current portfolio to differ from historical experience. The
Corporation's allowance also reflects a margin for the imprecision in the
estimates of expected credit losses. The resultant allowance for possible credit
losses is viewed by management as a single, unallocated allowance available for
all credit losses and any segmentation thereof is done only for compliance with
reporting requirements.
The following table presents data related to the aggregate allowance for
possible credit losses and net charge-offs for each of the years in the
five-year period ended December 31, 1997.
[Enlarge/Download Table]
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
Balance at beginning of year......................... $350,358 $300,593 $319,220 $311,855 $241,020
Charge-offs:
Domestic:
Commercial and industrial.................. 14,389 26,911 35,315 14,287 11,947
Installment loans to individuals........... 3,994 3,894 2,825 1,730 1,757
Secured by real estate..................... 2,892 8,068 9,995 11,183 32,466
Foreign(1)...................................... 8,667 4,165 3,356 17,355 22,460
-------- -------- -------- -------- --------
Total charge-offs.......................... 29,942 43,038 51,491 44,555 68,630
-------- -------- -------- -------- --------
Recoveries:
Domestic:
Commercial and industrial.................. 4,564 6,445 5,165 6,201 15,281
Installment loans to individuals........... 933 1,311 599 724 661
Secured by real estate..................... 3,134 2,401 5,217 6,663 2,731
Foreign(2)...................................... 10,020 7,886 9,234 19,538 36,693
-------- -------- -------- -------- --------
Total recoveries........................... 18,651 18,043 20,215 33,126 55,366
-------- -------- -------- -------- --------
Net charge-offs................................. (11,291) (24,995) (31,276) (11,429) (13,264)
Provision charged to operating expense.......... 16,000 32,000 12,000 19,000 85,000
Allowance of acquired companies................. -- 42,579 -- -- 297
Translation adjustment.......................... (1,586) 181 649 (206) (1,198)
-------- -------- -------- -------- --------
Balance at end of year............................... $353,481 $350,358 $300,593 $319,220 $311,855
======== ======== ======== ======== ========
------------
(1) Includes losses of $9.7 million in 1993, on the sale, swap and charge-off of
restructuring countries' debt.
(2) Primarily restructuring countries' debt in 1993.
25
The aggregate provision for credit losses was $16 million in 1997, all of
which was applied to the allowance for possible credit losses, a decline of $16
million from 1996, as the level of non-performing loans and net charge-offs each
declined in 1997 when compared to 1996.
The provision for credit losses increased to $32 million in 1996 from $12
million in 1995. The increase in the provision in 1996 resulted from
management's decision to increase the provision for credit losses in the third
quarter of 1996 by $20.0 million to be prudent in the context of increased
domestic and international exposures.
The provision for credit losses declined slightly to $12 million in 1995
from $19 million in 1994. The economic improvement in domestic and foreign
markets, which was noted in 1994, continued into 1995. However, in 1995, a
weakening in the domestic chain store sector contributed to higher levels of
domestic charge-offs that were partially offset by recoveries from foreign
debtors in foreign restructuring countries.
The provision for credit losses declined to $19 million in 1994, compared
to $85 million in 1993 as economic improvement in domestic and foreign markets
contributed to an enhancement in the credit quality of the loan portfolio and a
declining level of non-performing loans and net charge-offs.
The following table presents loan data and ratios related to net
charge-offs for each of the years in the five-year period ended December 31,
1997.
[Enlarge/Download Table]
1997 1996 1995 1994 1993
------- ------- ------ ------ ------
(DOLLARS IN MILLIONS)
Loans:
Loans outstanding, net of unearned income, at end of
year................................................. $12,360 $11,722 $9,844 $8,913 $9,509
Average loans outstanding, net of unearned income,
during the year...................................... $13,541 $11,980 $9,528 $9,894 $8,891
Ratios:
Allowance for possible credit losses to loans
outstanding, net of unearned income, at end of
year................................................. 2.64% 2.99% 3.05% 3.58% 3.28%
Net charge-offs to average loans outstanding, net of
unearned income during the year...................... .08% .21% .33% .12% .15%
Net charge-off coverage(1)............................. 57.77x 24.91x 13.11x 44.74x 40.44x
------------
(1) Calculated by dividing net charge-offs into income before income taxes plus
the provision for credit losses.
The following table presents information related to the Corporation's
non-accrual loans and other non-performing assets at December 31, in each of the
last five years.
[Enlarge/Download Table]
1997 1996 1995 1994 1993
-------- -------- ------- ------- --------
(IN THOUSANDS)
Non-accrual loans:
Domestic.......................................... $ 84,094 $ 94,137 $49,311 $43,392 $ 48,084
Foreign(1)........................................ 9,727 10,956 18,561 14,734 46,809
-------- -------- ------- ------- --------
Total non-accrual loans...................... 93,821 105,093 67,872 58,126 94,893
-------- -------- ------- ------- --------
Other assets and real estate owned..................... 18,847 36,278 31,329 23,479 23,338
-------- -------- ------- ------- --------
Total non-accrual loans and other
non-performing assets(2)........................ $112,668 $141,371 $99,201 $81,605 $118,231
======== ======== ======= ======= ========
------------
(1) Includes $33.9 million of restructuring countries in 1993.
(2) Includes non-performing assets at December 31, 1997 and 1996, with a
carrying value of $35.2 million and $52.4 million, respectively, acquired in
the BBI transaction that are covered by a loss sharing agreement with the
FDIC which expires on June 30, 1998. The covered amounts of such
non-performing assets at December 31, 1997 and 1996 were $35.4 million $55.6
million, respectively.
The above table excludes restructured performing loans which amounted to
$0.7 million, $35.0 million, $14.4 million, $28.3 million and $63.0 million in
1997, 1996, 1995, 1994 and 1993, respectively. Also excluded from the above
table are loans past due 90 days and still on accrual status, primarily
residential mortgage loans, which amounted to $11.5 million, $20.1 million, $6.3
million, $9.6 million and $5.6 million at year ends 1997, 1996, 1995, 1994 and
1993, respectively. The increase in past due and accruing residential mortgage
loans in 1996 from prior years were due to those acquired from BBI.
At December 31, in each of the years 1997 through 1993, the Corporation's
allowance for possible credit losses represented approximately 345%, 250%, 365%,
369% and 198%, respectively, of total non-accrual and restructured loans. The
decline in the coverage from 1995 to 1996 is primarily associated with
non-performing loans acquired from BBI in 1996. Substantially all of the
increase in non-performing loans acquired from BBI is covered by an FDIC loss
sharing agreement. The coverage of the allowance for possible credit losses to
non-accrual and restructured loans is only one subjective measure of the
adequacy of the allowance for possible credit losses that management utilizes.
26
Non-accrual domestic loans declined $10.0 million to $84.1 million at year
end 1997 after increasing to $94.1 million in 1996 from $49.3 million in 1995.
The 1996 increase was primarily attributable to the non-accrual loans acquired
in the BBI transaction substantially all of which are covered by an FDIC loss
sharing agreement. The change in non-accrual loans between 1995 and the prior
year was primarily the result of increased non-accrual loans in the chain store
sector and reductions in the commercial real estate portfolio that were charged
off or transferred to the other real estate owned classification.
In order to comply with certain regulatory reporting requirements,
management has prepared the following allocation of the Corporation's allowance
for possible credit losses among various categories of the loan portfolio for
each of the years in the five-year period ended December 31, 1997. In
management's opinion, such allocation has, at best, a limited utility. It is
based on management's assessment as of a given point in time of the risk
characteristics of each of the component parts of the total loan portfolio and
is subject to changes as and when the risk factors of each such component part
change. Such allocation is not indicative of either the specific amounts or the
loan categories in which future charge-offs may be taken, nor should it be taken
as an indicator of future loss trends. In addition, by presenting such
allocation, management does not mean to imply that the allocation is exact or
that the allowance has been precisely determined from such allocation.
[Enlarge/Download Table]
DECEMBER 31, 1997
--------------------------------------------------------------------------------
ALLOCATION OF THE ALLOWANCE FOR
POSSIBLE CREDIT LOSSES BY CATEGORY
--------------------------------------------------------------------------------
DOMESTIC FOREIGN TOTAL
------------------------ ------------------------ ------------------------
% OF LOANS ALLOCATED % OF LOANS ALLOCATED % OF LOANS ALLOCATED
OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE
----------- --------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
Real estate loans................. 34 $ 55,000 1 $ 5,000 35 $ 60,000
Commercial and industrial loans... 16 115,000 20 15,000 36 130,000
Other loans....................... 16 30,000 13 80,000 29 110,000
Unallocated....................... -- 10,240 -- 16,241 -- 26,481
--- -------- --- -------- --- --------
Total................... 66 $210,240 34 $116,241 100 $326,481
=== ======== === ======== === ========
[Enlarge/Download Table]
DECEMBER 31, 1996
--------------------------------------------------------------------------------
ALLOCATION OF THE ALLOWANCE FOR
POSSIBLE CREDIT LOSSES BY CATEGORY
--------------------------------------------------------------------------------
DOMESTIC FOREIGN TOTAL
------------------------ ------------------------ ------------------------
% OF LOANS ALLOCATED % OF LOANS ALLOCATED % OF LOANS ALLOCATED
OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE
----------- --------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
Real estate loans................. 34 $ 80,000 1 $ 15,000 35 $ 95,000
Commercial and industrial loans... 16 95,000 21 15,000 37 110,000
Other loans....................... 14 10,000 14 75,000 28 85,000
Unallocated....................... -- 27,594 -- 32,764 -- 60,358
--- -------- --- -------- --- --------
Total................... 64 $212,594 36 $137,764 100 $350,358
=== ======== === ======== === ========
[Enlarge/Download Table]
DECEMBER 31, 1995
--------------------------------------------------------------------------------
ALLOCATION OF THE ALLOWANCE FOR
POSSIBLE CREDIT LOSSES BY CATEGORY
--------------------------------------------------------------------------------
DOMESTIC FOREIGN TOTAL
------------------------ ------------------------ ------------------------
% OF LOANS ALLOCATED % OF LOANS ALLOCATED % OF LOANS ALLOCATED
OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE
----------- --------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
Real estate loans................. 30 $ 70,000 2 $ 10,000 32 $ 80,000
Commercial and industrial loans... 20 70,000 22 30,000 42 100,000
Other loans....................... 17 5,000 9 50,000 26 55,000
Unallocated....................... -- 21,733 -- 43,860 -- 65,593
--- -------- --- -------- --- --------
Total................... 67 $166,733 33 $133,860 100 $300,593
=== ======== === ======== === ========
27
[Enlarge/Download Table]
DECEMBER 31, 1994
--------------------------------------------------------------------------------
ALLOCATION OF THE ALLOWANCE FOR
POSSIBLE CREDIT LOSSES BY CATEGORY
--------------------------------------------------------------------------------
DOMESTIC FOREIGN TOTAL
------------------------ ------------------------ ------------------------
% OF LOANS ALLOCATED % OF LOANS ALLOCATED % OF LOANS ALLOCATED
OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE
----------- --------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
Real estate loans................. 34 $ 80,000 2 $ 10,000 36 $ 90,000
Commercial and industrial loans... 25 75,000 20 30,000 45 105,000
Other loans....................... 8 5,000 11 60,000 19 65,000
Unallocated....................... -- 31,887 -- 27,333 -- 59,220
--- -------- --- -------- --- --------
Total................... 67 $191,887 33 $127,333 100 $319,220
=== ======== === ======== === ========
[Enlarge/Download Table]
DECEMBER 31, 1993
--------------------------------------------------------------------------------
ALLOCATION OF THE ALLOWANCE FOR
POSSIBLE CREDIT LOSSES BY CATEGORY
--------------------------------------------------------------------------------
DOMESTIC FOREIGN TOTAL
------------------------ ------------------------ ------------------------
% OF LOANS ALLOCATED % OF LOANS ALLOCATED % OF LOANS ALLOCATED
OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE
----------- --------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
Real estate loans................. 33 $ 80,000 2 $ 10,000 35 $ 90,000
Commercial and industrial loans... 22 75,000 18 30,000 40 105,000
Other loans....................... 8 5,000 17 50,000 25 55,000
Unallocated....................... -- 29,499 -- 32,356 -- 61,855
--- -------- --- -------- --- --------
Total................... 63 $189,499 37 $122,356 100 $311,855
=== ======== === ======== === ========
CROSS-BORDER OUTSTANDINGS
The following tables present information related to the Corporation's
cross-border net outstandings. For 1997, net outstandings include those
denominated in dollars and other non-local currencies as well as local
outstandings which exceed local liabilities. In 1996 and 1995, net outstandings
included those denominated in dollars and other non-local currencies as well as
local currency outstandings in excess of local currency liabilities.
Outstandings are classified by type of borrower, based on ultimate risk, and are
defined as loans, acceptances, interest-bearing deposits with banks, investment
securities and accrued interest receivable, after deducting cash collateral. In
1997, cross-border net outstandings also include assets held for trading and
revaluation gains on foreign exchange and derivative products. Countries where
such outstandings exceeded 1.0% of consolidated total assets of $55.6 billion,
$52.3 billion and $43.9 billion at December 31, 1997, 1996 and 1995,
respectively, were as follows:
[Enlarge/Download Table]
BANKS AND OTHER GOVERNMENT COMMERCIAL
FINANCIAL AND OFFICIAL AND
INSTITUTIONS INSTITUTIONS INDUSTRIAL(1) 1997 1996 1995
--------------- ------------ ------------- ------ ------ ------
(IN MILLIONS)
Germany............................... $ 908 $ 9 $ 305 $1,222 $ 831 $ 809
France................................ 506 382 187 1,075 1,060 1,192
Luxembourg(2)......................... 114 4 876 994 1,219 1,168
United Kingdom........................ 633 21 192 846 1,080 1,044
Brazil................................ 51 608 165 824 799 681
Canada................................ 284 49 372 705 970 1,181
Japan................................. 593 -- 86 679 2,016 1,421
Switzerland........................... 485 41 85 611 -- --
------ ------ ------ ------ ------ ------
$3,574 $1,114 $2,268 $6,956 $7,975 $7,496
====== ====== ====== ====== ====== ======
------------
(1) Includes excess of local country outstandings over local liabilities.
(2) Included in commercial and industrial in 1997 is $864 million which
represents the Corporation's investment in Safra Republic.
At December 31, 1996 and 1995 other countries with cross-border net
outstandings that exceeded 1.0% of consolidated total assets in each of the last
three years were Australia with $565 million in 1996 and $589 million in 1995
and the Netherlands with $689 million in 1996.
At December 31, in each of the last three years, countries with
cross-border net outstandings representing between 0.75% and 1.0% of
consolidated total assets were: Australia with $523 million, Italy with $513
million, Russia with $429 million and Singapore with $488 million in 1997;
Singapore with $465 million in 1996; the Netherlands with $426 million,
Switzerland with $417 million and Singapore with $415 million in 1995.
28
BRAZIL
During 1997, 1996 and 1995, the Corporation invested in the local Brazilian
financial markets, principally short-term floating rate Brazilian Central Bank
and Treasury debt issuances, as well as short-term certificates of deposits
issued by prime Brazilian banks. When necessary, the Corporation utilized
interest rate and foreign currency futures to hedge its local currency position
against short-term changes. At December 31, 1997, total cross-border net
outstandings in Brazil investments amounted to approximately $824 million, or
1.48% of total assets, all of which are on a performing basis. Cross-border net
outstandings in Brazil at December 31, 1997, consisted of approximately $608
million to the public sector, $51 million to the private bank sector and $165
million to the private non-bank sector, respectively. At December 31, 1996,
total cross-border net outstandings in Brazil consisted primarily of Brady bonds
and short-term investments amounting to approximately $799 million, or 1.53% of
total assets, all of which were on a performing basis. Cross-border net
outstandings in Brazil at December 31, 1996 consisted of approximately $734
million to the public sector, $10 million to the private bank sector and $55
million to the private non-bank sector, respectively. At December 31, 1995,
total cross-border net outstandings in Brazil investments amounted to
approximately $681 million, or 1.55% of total assets, all of which are on a
performing basis. Cross-border net outstandings in Brazil at December 31, 1995
consisted of approximately $603 million to the public sector, $45 million to the
private bank sector and $33 million to the private non-bank sector,
respectively.
The following table presents an analysis of the changes in aggregate
cross-border net outstandings discussed above.
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
----- ----- -----
(IN MILLIONS)
Aggregate outstandings at beginning of year................. $ 799 $ 681 $ 569
Purchases of Brazilian Government securities and bank
placements................................................ 936 679 367
Sales of Brazilian Government securities and repayments at
maturity.................................................. (925) (543) (252)
Other changes:
Interest income accrued................................ 80 81 45
Collections of accrued interest........................ (66) (99) (48)
----- ----- -----
Aggregate outstandings at end of year....................... $ 824 $ 799 $ 681
===== ===== =====
29
RISK MANAGEMENT AND CONTROL
In order to reduce uncertainty as to the level of future earnings and its
book value, the Corporation manages several types of risks, principally credit
and market risks. The Corporation seeks to control these risks by diversifying
its exposures and activities among many instruments, markets, clients and
geographic regions and by limiting its positions in various instruments and
investments.
The processes and procedures by which the Corporation manages its risk
profile continually evolve as the Corporation's business activities change in
response to market and product developments. The Corporation routinely reviews
its procedures in order to ensure that they are comprehensive with respect to
all major risks and that a consistent approach is followed throughout the
organization.
To enhance the environment for the Corporation's risk management activities
and assist in decision making, significant investments have been made in the
training of personnel and in the development of information technology.
Proprietary and analytical trading systems have been developed for the
Corporation's existing and future business. This control environment is subject
to periodic review by management, internal auditors and regulators.
The Global Risk Assessment Committee of the Corporation's Board of
Directors oversees the identification, measurement and limitation of the risks
relating to all activities of, and products offered by, the Corporation. This
committee's activities include review of risk management methodologies employed
by management. The committee is supported by the global risk assessment group
(the "GRA"), whose task is to develop and implement risk quantification and
reporting mechanisms. This group also monitors market-related risk exposure on a
daily basis, reporting to management.
CREDIT RISK
Credit risk for lending, trading and investment activities and products
represents the possibility of loss to the Corporation if a borrower or
counterparty fails to honor their commitment to repay contractual obligations.
Credit risk and exposure to loss are inherent parts of the banking business.
Management seeks to manage and control or limit these risks through its loan and
investment policies, including obtaining collateral, and credit review
procedures. Senior management establishes and continually reviews lending and
investment criteria and approval procedures that reflect the risk averse policy
of the Corporation.
The Credit Review Committee of the Board of Directors periodically reviews
and approves the Corporation's policies and procedures to define, measure and
monitor the credit and settlement risks arising from the Corporation's diverse
activities. Global limits are established to control these risks, and it is the
responsibility of each operating unit to conduct its business activity within
these prescribed limits. Any customer credit, currency or transaction exposure
that exceeds established limits must be approved by senior management.
Management's objective in establishing lending and investment standards is
to minimize the risk of loss. In the case of foreign investments and loans,
management emphasizes investments and loans to, or with guarantees of,
governments, government agencies or banks. In addition, the Corporation places
particular emphasis on the matching of the maturity and interest rate
sensitivity of assets and liabilities. By this policy, the Corporation seeks to
minimize the effect of rate changes, largely externally influenced and difficult
to control, on the portfolio and to limit its exposure primarily to credit risks
over which it has more direct control. One technique which the Corporation
utilizes to achieve these goals is to enter into interest rate contracts,
including swaps, caps and collars and currency swaps, each of which is designed
to protect against interest rate or currency fluctuations. See "Liability and
Asset Management", for additional information on interest rate management.
The credit review department provides an independent evaluation of the
Corporation's credit exposures and assures ongoing credit quality by reviewing
individual credits and concentrations, with a focus on operating units where
risk is at a higher level, and monitoring of corrective action where necessary.
Additionally, the credit review department evaluates adherence to laws and
regulations and to policies and established criteria as stated in the
Corporation's Credit Policy Manual to assure compliance with such standards. The
credit review department also periodically prepares portfolio summaries for
review by executive management and the Board of Directors. These reports are
then submitted for consideration to certain members of executive management who
determine the amount of loans to be charged off. The Executive Credit Committee
subsequently reviews the loans to be charged off and ratifies executive
management's decision. Rules and formulae relative to the adequacy of the
allowance, although useful as guidelines to management, are not final
determinants. In addition, any loan or portion thereof which is classified as a
"loss" by regulatory examiners is charged off. Consistent with its policy of
maintaining an adequate allowance for possible credit losses, management
generally charges off a loan, or a portion thereof, when a loss is probable.
MARKET RISK
Market risk is the possibility of a decline in value of the Corporation's
assets (net of hedges) acquired in the course of its trading activities and
asset-liability management. To manage market risk, the Corporation establishes
limits for interest rate, foreign currency and other market exposures. An
important tool in monitoring exposures and establishing limits for substantially
all products offered is the estimation, under a range of assumptions, of the
potential loss of current and future earnings on existing positions within the
markets being measured.
30
The Management Asset and Liability Committee provides a forum for reviewing
the Corporation's liquidity profile and the market risk in its asset and
liability positions. The Management Asset and Liability Committee regularly
reviews the Corporation's market exposures and analyzes the effects of actual or
projected changes in rates, prices or market liquidity on the value of these
positions. Such committee also reviews the Corporation's liquidity profile by
monitoring the differences in maturities between assets and liabilities and by
analyzing the future level of funds required based on various assumptions,
including its ability to liquidate investment and trading positions and its
ability to access the markets for funds. For additional information on
asset/liability management see Note 19 of "Notes to Consolidated Financial
Statements" elsewhere in this Report.
On- and off-balance-sheet market risk sensitivity
One of the Corporation's most significant risks is to U.S. interest rate
fluctuations in its investing, lending and borrowing activities. The extent of
this risk will fluctuate when the level and interest sensitivity characteristics
of its interest-earning assets differs from its interest-bearing liabilities. As
part of the process in managing this risk, while at the same time seeking to
maximize the level of net interest income generated, the Corporation may modify
the asset/liability mix of its cash instruments or use derivatives to adjust the
interest rate characteristics of specific on-balance-sheet assets and
liabilities.
Based on the Corporation's asset and liability positions, including
associated off-balance-sheet interest rate hedges, primarily swaps and caps, the
Corporation has simulated the effect of an immediate 10% parallel upward shift
in the yield curve at December 31, 1997 and the impact of this shift on the fair
value of its financial assets and liabilities and on net interest income. This
simulation included estimating the values of all fixed rate financial
instruments with maturities of more than six months and then re-pricing them
with interest rates adjusted for the 10% upward yield curve shift. The
optionality on instruments such as mortgage-backed securities and the mortgage
loan portfolio was taken into account by the internal model. Interest bearing
liabilities without a stated maturity, primarily savings deposits and demand
deposits amounting to approximately $5.6 billion, were assumed to have no change
in value under the simulation. Variable rate assets and liabilities were not
considered to be price sensitive and their values were also assumed to have no
change under the simulation.
Based on the results of this simulation, the Corporation estimates that
this change in interest rates would reduce the value of net financial assets by
approximately $258 million and that net interest income would be reduced by
approximately $17 million over the next twelve months.
All of the assumptions above are based upon the Corporation's asset and
liability mix as of December 31, 1997. The Corporation believes that the
information presented above provides a quantification of its exposure to
interest rate sensitivity as of the date presented under the scenario described.
The Corporation continuously monitors its exposure to interest rate sensitivity,
and actual changes in interest rates, economic conditions and the credit quality
of its portfolio could lead to results that differ from those presented.
Trading-market risk sensitivity
The Corporation's Value at Risk ("VaR") analysis and reporting is based on
the following two principles:
1) VaR applies to all global trading positions across all risk asset
classes: foreign exchange, interest rate, commodity, equity and
optionality; and
2) VaR is based on the concept of independent valuations, with all
transactions being repriced by an independent risk management function
using separate models prior to being stressed against the VaR parameters.
VaR attempts to capture the potential U.S. dollar loss resulting from
unfavorable market developments within a given time horizon (typically one day)
and given a certain confidence level (99%). Deriving a single, global number
entails a mathematical modeling of all the securities in the trading portfolio
and the correlations between them, consistent with industry practices, such as
the assumption of normally distributed returns for linear (i.e.,
non-option-like) instruments. With respect to options, GRA currently relies on
historical simulations, going back at least one year. Future plans call for a
full-fledged Monte Carlo simulation approach, to obtain greater precision.
A daily VaR profit and loss statement and rolling sixty day VaR report are
broken down by business unit and globally aggregated and distributed daily to
management. If the profit and loss statement on a given day is negative and in
excess of VaR limits, an exception will have taken place. All exceptions are
reported to management upon occurrence and to the OCC, quarterly.
In addition to VaR, GRA monitors the specific risks associated with certain
securities traded by the Corporation. One element of specific risk is event risk
which is defined as an adverse market motion with a probability of less than one
percent on any given day, i.e., of a nature to generate exceptions. For example,
emerging market credit driven bond spreads, which as the recent upheavals in
Asia and Latin America demonstrated, cannot be modeled by way of normal
distributions. Specific risk models are continually back tested, to alert
immediately GRA as to any shift in their accuracy.
31
Finally, a three, four and five standard deviation stress test with a one
day time horizon is performed biweekly on the global trading book maintained by
the Corporation. Over five hundred stress variables are identified, spanning all
relevant markets. Each variable is stressed up and down while leaving the others
unchanged. A partial profit and loss resulting from the worst of the two runs is
generated for each variable. The results are summed across all variables
yielding the stressed exposure. The stressing process illustrates unusually
large market movements occurring simultaneously, without the benefit of
combining the parameters. The diversification of the Corporation's trading
portfolios serves to reduce the impact, if any, of any such unusually large
detrimental market movements.
Based on VaR stress projections using a 99% confidence level, the
Corporation estimates that at December 31, 1997, the potential loss on all of
its trading positions consisted of $2.6 million from foreign exchange positions,
$4.3 million from interest rate positions, $2.3 million from interest rate and
equity derivatives and $4.4 million from precious metals and foreign exchange
options. The aggregate loss on these positions after considering correlation was
approximately $12 million.
OPERATIONAL RISK
The Corporation, like all large financial institutions, is exposed to many
types of operational risks, including the potential for loss caused by a
breakdown in information, communication, transaction processing and settlement
systems and procedures. The Corporation attempts to mitigate operational risk at
appropriate levels in view of its financial position, the characteristics of the
businesses and markets in which it operates, competitive circumstances and
regulatory considerations. To date, losses from operational risks have not been
material to the financial position of the Corporation.
CAPITAL RESOURCES AND LIQUIDITY
CAPITAL FINANCING POLICY
The Corporation's policy is to obtain capital externally, when
opportunities arise, if the cost of such capital is reasonable and the form is
appropriate for the Corporation's needs and overall capital structure. In
keeping with this policy, capital has been obtained externally on several
occasions, although, at such times, the Corporation, relative to other major
bank holding companies, was considered to be well capitalized.
The Corporation conducts its business through its bank and non-bank
subsidiaries. Thus, the Corporation frequently provides capital and financing to
these subsidiaries to support their operations and to permit expansion.
In formulating its dividend policy, the Corporation's Board of Directors
considers historical financial results, future prospects and anticipated needs
for capital. The current policy, which is reviewed annually, is to pay out
approximately 25% to 30% of the prior year's earnings on a normalized basis.
This policy is intended to provide stockholders with increasing dividend income
while allowing the Corporation to maintain its desired internal capital
generation rate. Future dividends are dependent upon the Corporation's financial
results, capital requirements and economic conditions in general.
CAPITAL TRANSACTIONS
During 1997, the Corporation repurchased an aggregate of 1,109,847 shares
of its Common Stock, of which 849,100 shares were repurchased pursuant to
programs authorizing the purchase of up to 3,000,000 shares in the open market
or in privately negotiated transactions and 260,747 shares were repurchased from
employees upon the vesting of their ownership rights in accordance with the
Corporation's restricted stock plans.
On December 31, 1997, a shelf registration statement became effective
pursuant to which the Corporation may issue, from time to time in public
offerings, debt securities, junior subordinated debt securities and debt
warrants, currency warrants, stock-index warrants and other warrants, preferred
stock, depositary shares and preferred stock warrants, common stock and common
stock warrants. Such securities may be offered separately or together, in one or
more series, up to an aggregate of initial public offering prices of $1.0
billion.
On September 24, 1997, the Corporation sold, in a public offering, 3
million shares of $2.8575 Cumulative Preferred Stock ($50 stated value) with an
aggregate stated value of $150 million. The Preferred Stock may be redeemed at
the option of the Corporation, in whole or in part, at any time or from time to
time, on or after October 1, 2007 at $50 per share, plus, in each case,
dividends accrued and unpaid to the redemption date. A portion of the net
proceeds received were used to redeem all of the Corporation's outstanding Money
Market Cumulative Preferred Stock issue with an aggregate liquidation value of
$50 million as well as for general corporate purposes.
On July 22, 1997, the Corporation sold, in a public offering, $250 million
principal amount of 7.20% Subordinated Debentures due 2097. The Debentures are
direct unsecured general obligations of the Corporation subordinated to all
present and future senior indebtedness of the Corporation. The Debentures are
subject to the Corporation's right to shorten the maturity of the Debentures
and/or to redeem the Debentures upon the occurrence of certain events. The net
proceeds received by the Corporation were used for general corporate purposes.
In the first quarter of 1997, the Corporation redeemed all 4 million
outstanding shares of $1.9375 Cumulative Preferred Stock ($25 stated value) with
an aggregate stated value of $100 million.
In the fourth quarter of 1996, the Corporation issued an aggregate of $350
million principal amount of preferred securities through two wholly-owned
subsidiary trusts formed by the Corporation. An issue of $150 million 7-3/4%
32
preferred securities was sold by Republic New York Capital I and an issue of
$200 million 7.53% preferred securities was sold by Republic New York Capital
II. Each issue of preferred securities qualifies as Tier I capital under
risk-based capital guidelines and were sold to qualified institutional investors
with the proceeds being used to purchase junior subordinated debt securities of
the Corporation. A portion of the proceeds from these issues were used to redeem
outstanding Remarketed Preferred stock with a liquidation value of $19.2 million
during 1996 and $55.8 million in the first quarter of 1997.
The Bank has a $5.0 billion Global Note Program (the "Program") authorizing
the periodic sale of notes, including through its overseas branches, or a
certain wholly-owned subsidiary of the Bank. A group of major international
securities dealers is participating in the Program. Notes may be issued for any
maturity of 7 days or more, subject to regulatory compliance. Notes can be
denominated in various currencies. Any notes issued will be direct,
unconditional and unsecured general obligations of the Bank, or guaranteed by it
and are not deposits insured by the FDIC. Any notes to be issued as part of the
Program have been accepted for listing on the Luxembourg Stock Exchange. The
Program has been rated F1+ and AA+ by Fitch Investors Service, Inc., A1+ and AA+
by I.B.C.A., Prime-1 and Aa1 by Moody's Investors Service, Inc., A1+ and AA by
Standard & Poor's Ratings Group and D-1+ and AA+ by Duff & Phelps.
FINANCIAL RATIOS
The following table presents financial ratios for each of the years in the
five years ended December 31, 1997.
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
Average stockholders' equity as a percentage of average
assets.................................................... 6.06% 6.41% 6.71% 6.38% 6.33%
Returns based on net income:
Average total stockholders' equity..................... 13.46 13.44 10.36 12.87 12.73
Average total assets................................... 0.82 0.86 0.70 0.82 0.81
Returns based on net income applicable to common stock --
diluted:
Average total common stockholders' equity.............. 14.69 15.19 11.94 15.71 15.68
Average total assets................................... 0.77 0.79 0.62 0.76 0.76
The return on average stockholders' equity, based on net income, was 13.46%
in 1997 compared to 13.44% in 1996, which increased from 10.36% in 1995, and the
return on average common stockholders' equity, based on net income applicable to
common stock -- diluted, was 14.69% in 1997 compared to 15.19% in 1996, which
increased from 11.94% in 1995. Net income and net income applicable to common
stock -- diluted rose 7.2% and 9.7%, respectively, in 1997 from 1996, after
increasing 45.1% and 50.3%, respectively, in 1996 from 1995.
RISK-BASED CAPITAL AND LEVERAGE GUIDELINES
The FRB has established guidelines that mandate risk-based capital
requirements for bank holding companies. The guidelines require a minimum ratio
of capital to risk-weighted assets (including certain off-balance-sheet
activities, such as standby letters of credit and derivative instruments) of
8.0%. At least half of the total capital ratio is to be composed of common
equity, noncumulative perpetual preferred stock and a limited amount of
cumulative perpetual preferred stock, preferred securities less goodwill and
intangible assets subject to certain minimums ("Tier 1" or "core capital"). The
remainder may consist of limited amounts of subordinated debt, the balance of
cumulative preferred stock and the aggregate allowance for credit losses ("Tier
2 capital").
As a supplement to its risk-based capital ratios, the FRB established
leverage capital standards based upon the definition of Tier 1 capital. These
standards require the most highly-rated banks to maintain a minimum leverage
capital ratio of at least 3.0% if they are not anticipating or experiencing any
significant growth and meet certain other conditions. Each of the Corporation's
banking subsidiaries complies with all applicable regulatory capital
requirements.
The Corporation's leverage ratio and its risk-based capital ratio include
the assets and capital of Safra Republic on a consolidated basis in accordance
with the requirements of the FRB specifically applied to the Corporation. These
ratios do not include the effect on stockholders' equity related to the
Corporation's portfolio of securities available for sale. In accordance with
regulatory guidelines for periods before December 31, 1997, the Corporation
excluded the assets and off-balance-sheet contracts of RNYSC from the
Corporation's capital calculations. Those guidelines also required the
Corporation to deduct one-half of its investment in this subsidiary from each of
Tier 1 and Tier 2 capital. Regulations for the capital calculations at December
31, 1997 treat RNYSC like all other subsidiaries. The ratios in the table below
for 1997 were calculated based on the new regulations.
33
The following table presents the components of the Corporation's risk-based
capital and related ratios at December 31, in each of the last three years.
[Enlarge/Download Table]
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
Tier 1:
Common stockholders' equity............................ $2,920,318 $2,696,353 $2,507,570
Preferred stock........................................ 375,000 325,000 325,000
Equity of Safra Republic............................... 861,605 784,691 738,643
Mandatorily redeemable preferred securities of
subsidiary trusts..................................... 350,000 350,000 --
Other net-goodwill, minority interest and intangible
assets................................................ (388,597) (359,472) (87,328)
Less:
50% of investment in securities affiliate......... -- (39,953) (41,774)
50% of investment in unconsolidated
subsidiaries.................................... -- -- (2,411)
---------- ---------- ----------
Total tier 1................................. 4,118,326 3,756,619 3,439,700
---------- ---------- ----------
Tier 2:
Qualifying preferred stock and perpetual capital
notes................................................. 275,000 380,800 400,000
Qualifying long-term debt.............................. 2,059,163 1,898,286 1,741,943
Allowance for possible credit losses................... 398,101 343,049 294,879
Less:
50% of investment in securities affiliate......... -- (39,952) (41,773)
50% of investment in unconsolidated
subsidiaries.................................... -- -- (2,411)
---------- ---------- ----------
Total tier 2................................. 2,732,264 2,582,183 2,392,638
---------- ---------- ----------
Total risk-based capital..................... $6,850,590 $6,338,802 $5,832,338
========== ========== ==========
Risk-based Capital Ratios:
Tier 1 risk-based capital ratio........................ 12.97% 13.80% 14.72%
Total risk-based capital ratio......................... 21.58% 23.28% 24.96%
Leverage ratio......................................... 5.60% 5.87% 6.24%
All of the above ratios exceed the minimum requirements of the FRB,
although each of the Corporation's capital ratios declined in 1997 and 1996,
when compared to the respective prior year. These declines were due to increases
in risk weighted assets of 16.6% in 1997 and 16.5% in 1996, while Tier 1 capital
and total risk based capital rose 9.6% and 8.1% in 1997 and 9.2% and 8.7% in
1996, respectively.
The following table presents risk-based capital ratios for the Corporation,
excluding the assets and capital of Safra Republic, on a consolidated basis at
December 31, in each of the last three years.
[Download Table]
1997 1996 1995
------ ------ ------
Risk-based Capital Ratios:
Tier 1 risk-based capital ratio........................ 12.64% 13.26% 13.87%
Total risk-based capital ratio......................... 21.25% 22.74% 24.00%
Leverage ratio......................................... 6.09% 6.23% 6.41%
NEW RISK-BASED CAPITAL STANDARDS -- MARKET RISK
The risk-based capital ratios presented above reflect the current capital
requirements for balance sheet assets and off-balance-sheet exposures. Effective
January 1, 1998, the risk based capital guidelines were expanded to incorporate
the impact of market risk into these requirements. The new rules amend the
original Basle Capital Accord and affect financial institutions, such as the
Corporation, that have significant trading activities. The new rules will
require that risk-based capital ratios reflect the general market and specific
risk of debt and equity trading activities, as well as, the market risk of all
trading and nontrading foreign exchange and commodity positions. The
Corporation's internal VaR model will be used, subject to regulatory approval,
to satisfy the requirement to measure market risk exposure under the confidence
levels and assumptions as set forth by the new requirements. Under the new
requirements, the minimum leverage ratio for a bank holding company to be
classified as "well capitalized" will be reduced from 4% to 3%. It is expected
that with the adoption of these rules the Corporation's capital ratios will
continue to exceed the minimum required to be classified as "well capitalized".
LIQUIDITY
Of primary importance to depositors, creditors and regulators is the
ability of the Corporation to have sufficient funds readily available to repay
liabilities as they mature. In order to insure that funds are available at all
times, the Corporation devotes substantial resources to projecting the amount of
funds which will be required on a daily basis and maintains relationships with a
diversity of sources so that funds are available on a global basis. Through its
worldwide network, the Corporation obtains funds from a large and varied
customer base that provides a stable source of "core" domestic demand
34
and consumer deposits, and foreign office deposits. Other sources provide
short-term borrowings, including through the sale of commercial paper and
long-term liabilities in the form of notes and debentures and common and
preferred stock. Liquidity requirements also can be met through the disposition
of short-term assets that are generally matched to the maturity of liabilities.
Liquid assets include cash and due from banks, interest-bearing deposits with
banks, federal funds sold and securities purchased under resale agreements,
trading account assets and precious metals. Average total liquid assets were
approximately 19% of average total assets in 1997, compared to 22% and 29% in
1996 and 1995, respectively. In 1997, the Corporation invested in assets with
longer term maturities primarily through the purchase of investment securities.
The Corporation's portfolio of securities available for sale of $16.3 billion at
December 31, 1997, can be readily sold to meet any immediate cash flow
obligations. In each of the last three years the Corporation used net cash flows
from investing activities to increase asset growth. During 1997 and 1996,
financing activities provided net cash flows of approximately $2.1 billion and
$4.8 billion compared to net uses of approximately $100 million in 1995.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" establishes the criteria for determining
whether a transfer of financial assets should be accounted for as a sale or as a
pledge of collateral in a secured borrowing. This SFAS was adopted by the
Corporation on January 1, 1997 and provisions relating to repurchase agreements,
securities lending and securities borrowings, will be adopted on January 1,
1998, as required by SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125, an amendment of FASB Statement No. 125."
The adoption of this SFAS is not expected to have a material effect on the
Corporation's results of operations.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income", was issued.
This statement establishes standards for reporting and displaying comprehensive
income and its components when a full set of financial statements that report
financial position, results of operations and cash flows are provided. Items
such as foreign currency translation adjustments and unrealized gains and losses
on available for sale securities are currently included as a component of
stockholders' equity until realized. Such items will be included in determining
comprehensive income. Under the SFAS, any items that qualify for comprehensive
income disclosure may be presented separately in a dual step income statement, a
separate statement of comprehensive income or in the statement of changes in
stockholders' equity. This SFAS was adopted by the Corporation on January 1,
1998. The adoption of this SFAS will have no material effect on the
Corporation's results of operations or its financial position.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information", was issued and supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise". This statement establishes
standards for reporting information about segments of a business in annual
financial statements and will require selected segment information in interim
reports to shareholders. The statement requires, among other things, disclosure
on a business segment basis, as defined by the Corporation, to include a
description of products and services, major customers, interest income and
expense, profit or loss as measured by the Corporation's management in assessing
segment performance and geographic information on assets and revenue. This SFAS
was effective, as it relates to the Corporation, on January 1, 1998 and need not
be applied to interim periods during 1998. The adoption of this SFAS will have
no material effect on the Corporation's results of operations or its financial
position.
FORWARD-LOOKING INFORMATION
Forward-looking statements with respect to the financial condition, results
of operations and business of the Corporation, which include, but are not
limited to, the restructuring charge, cost savings, and profitability, are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those set forth in such statements. These include,
without limitation: the Corporation's dependence on the timely development,
introduction and customer acceptance of new products; possible weakness of
international markets; the impact of competition on revenues and margins; the
effect of currency fluctuations on reportable income; and other risks and
uncertainties, including statements relating to the year 2000, as may be
detailed from time to time in the Corporation's public announcements and filings
with the SEC. Forward-looking statements can be identified by the use of
forward-looking terminology, such as "may", "will," "should," "expect,"
"anticipate," "estimate," "continue," "plans," "intends," or other similar
terminology. The Corporation does not intend to publicly release any revisions
to these forward-looking statements to reflect events or circumstances after the
date of this Report, other than in its periodic filings with the SEC, or to
reflect the occurrence of unanticipated events.
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
The following audited consolidated financial statements and related
documents are set forth in this Report on the following pages:
[Download Table]
PAGE
----
Consolidated Statements of Condition, December 31, 1997 and
1996...................................................... 37
Consolidated Statements of Income, Years ended December 31,
1997, 1996 and 1995....................................... 38
Consolidated Statements of Changes in Stockholders' Equity,
Years ended December 31, 1997, 1996 and 1995.............. 39
Consolidated Statements of Cash Flows, Years ended December
31, 1997, 1996 and 1995................................... 40
Bank Consolidated Statements of Condition, Years ended
December 31, 1997 and 1996................................ 41
Notes to Consolidated Financial Statements.................. 42
Independent Auditors' Report on Financial Statements........ 71
Report of Management........................................ 72
Independent Accountants' Report on Management's Assertions
Related to Internal Control Over Financial Reporting...... 73
SUPPLEMENTARY DATA
The following supplementary data are set forth in this Report on the
following pages:
[Download Table]
Five Year Consolidated Statements of Condition.............. 74
Five Year Consolidated Statements of Income................. 75
Summary of Unaudited Quarterly Financial Information........ 76
AFFILIATE FINANCIAL STATEMENTS
The following audited financial statements of Safra Republic are set forth
in this Report on the following pages:
[Download Table]
Consolidated Statements of Condition, December 31, 1997 and
1996...................................................... 77
Consolidated Statements of Income, Years ended December 31,
1997, 1996 and 1995....................................... 78
Consolidated Statements of Changes in Shareholders' Equity,
Years ended 1997, 1996 and 1995........................... 79
Consolidated Statements of Cash Flows, Years ended December
31, 1997, 1996 and 1995................................... 80
Notes to Consolidated Financial Statements.................. 81
Independent Auditors' Report................................ 101
36
REPUBLIC NEW YORK CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
[Enlarge/Download Table]
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
ASSETS:
Cash and due from banks..................................... $ 901,783 $ 710,183
Interest-bearing deposits with banks (note 20).............. 4,756,804 5,909,195
Precious metals (note 4).................................... 1,241,956 1,231,319
Securities Held to maturity (approximate market value of
$9,392,289 in 1997 and $8,144,518 in 1996)................ 9,237,151 8,135,068
Securities available for sale (approximate market value)
(note 20)................................................. 16,276,667 13,040,445
----------- -----------
Total investment securities (note 3).............. 25,513,818 21,175,513
Trading account assets (note 4)............................. 4,510,955 4,807,788
Federal funds sold and securities purchased under resale
agreements................................................ 2,169,291 2,109,109
Loans (net of unearned income of $16,563 in 1997 and $25,306
in 1996)
(notes 5, 6 and 20)....................................... 12,359,741 11,721,936
Allowance for possible credit losses (note 6)............... (326,481) (350,358)
Customers' liability on acceptances......................... 121,022 938,615
Accounts receivable and accrued interest.................... 2,452,721 2,108,318
Investment in affiliate (note 7)............................ 864,178 806,274
Premises and equipment (note 8)............................. 469,103 469,231
Other assets (note 13)...................................... 603,464 661,728
----------- -----------
Total assets...................................... $55,638,355 $52,298,851
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Noninterest-bearing deposits:
In domestic offices.................................... $ 2,699,819 $ 2,296,267
In foreign offices..................................... 222,957 177,675
Interest-bearing deposits:
In domestic offices.................................... 12,214,760 12,559,554
In foreign offices..................................... 18,251,998 16,692,083
----------- -----------
Total deposits (note 20).......................... 33,389,534 31,725,579
Trading account liabilities (notes 4 and 20)................ 5,320,864 4,402,085
Short-term borrowings (notes 9 and 20)...................... 5,613,834 5,446,841
Acceptances outstanding..................................... 121,371 939,598
Accounts payable and accrued expenses....................... 2,191,840 1,405,822
Due to factored clients..................................... 593,815 604,686
Other liabilities........................................... 154,682 218,910
Long-term debt (notes 10 and 20)............................ 1,814,435 1,498,710
Subordinated long-term debt and perpetual capital notes
(note 10)................................................. 2,650,000 2,400,000
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior
subordinated debt securities (note 11).................... 350,000 350,000
Commitments and contingent liabilities (note 17)
Stockholders' equity (notes 12 and 15):
Cumulative preferred stock; no par value 7,501,250
shares outstanding in 1997 and 8,502,308 in 1996...... 500,000 555,800
Common stock, $5 par value 150,000,000 shares
authorized; 54,354,292 shares outstanding in 1997 and
55,009,549 in 1996.................................... 271,771 275,048
Surplus................................................ 421,535 502,425
Retained earnings...................................... 2,227,012 1,918,880
Net unrealized appreciation on securities available for
sale, net of taxes.................................... 17,662 54,467
----------- -----------
Total stockholders' equity........................ 3,437,980 3,306,620
----------- -----------
Total liabilities and stockholders' equity........ $55,638,355 $52,298,851
=========== ===========
See accompanying notes to consolidated financial statements.
37
REPUBLIC NEW YORK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
[Enlarge/Download Table]
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
INTEREST INCOME:
Interest and fees on loans.................................. $1,069,583 $ 919,230 $ 749,719
Interest on deposits with banks............................. 298,416 376,030 526,185
Interest and dividends on investment securities:
Taxable................................................ 1,511,817 1,279,226 927,740
Exempt from federal income taxes....................... 90,134 93,257 89,744
Interest on trading account assets.......................... 115,594 67,279 55,736
Interest on federal funds sold and securities purchased
under resale agreements................................... 124,347 98,061 97,547
---------- ---------- ----------
Total interest income............................. 3,209,891 2,833,083 2,446,671
---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits........................................ 1,451,023 1,282,205 1,138,075
Interest on short-term borrowings........................... 449,009 333,075 218,804
Interest on long-term debt.................................. 281,994 255,618 270,893
---------- ---------- ----------
Total interest expense............................ 2,182,026 1,870,898 1,627,772
---------- ---------- ----------
NET INTEREST INCOME......................................... 1,027,865 962,185 818,899
Provision for credit losses (note 6)........................ 16,000 32,000 12,000
---------- ---------- ----------
Net interest income after provision for credit losses....... 1,011,865 930,185 806,899
---------- ---------- ----------
OTHER OPERATING INCOME:
Income from precious metals (note 4)........................ 14,069 24,700 38,049
Foreign exchange trading income (note 4).................... 119,642 98,165 113,051
Trading account profits and commissions (note 4)............ 36,964 52,941 24,746
Investment securities gains, net (note 3)................... 35,117 23,247 25,663
Net gain on loans sold or held for sale..................... 19,838 974 6,765
Commission income........................................... 87,524 71,393 56,935
Equity in earnings of affiliate (note 7).................... 125,116 93,418 79,481
Other income................................................ 90,038 81,277 68,191
---------- ---------- ----------
Total other operating income...................... 528,308 446,115 412,881
---------- ---------- ----------
OTHER OPERATING EXPENSES:
Salaries.................................................... 279,847 256,002 237,414
Employee benefits (note 15)................................. 195,170 164,099 144,202
Occupancy, net (notes 8 and 17)............................. 71,325 72,692 57,975
Restructuring and related charges (note 14)................. -- -- 120,000
Other expenses.............................................. 357,501 292,961 262,074
---------- ---------- ----------
Total other operating expenses.................... 903,843 785,754 821,665
---------- ---------- ----------
INCOME BEFORE INCOME TAXES.................................. 636,330 590,546 398,115
Income taxes (note 13)...................................... 187,222 171,706 109,466
---------- ---------- ----------
NET INCOME.................................................. $ 449,108 $ 418,840 $ 288,649
========== ========== ==========
NET INCOME APPLICABLE TO COMMON STOCK -- DILUTED............ $ 423,281 $ 386,027 $ 256,764
========== ========== ==========
Net income per common share (note 2):
Basic.................................................. $ 7.98 $ 7.15 $ 4.77
Diluted................................................ 7.88 7.07 4.65
Average common shares outstanding:
Basic.................................................. 52,813 53,740 52,321
Diluted................................................ 53,731 54,594 55,256
See accompanying notes to consolidated financial statements.
38
REPUBLIC NEW YORK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
[Enlarge/Download Table]
1997 1996 1995
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
CUMULATIVE PREFERRED STOCK:
Balance at beginning of year................................ $ 555,800 $ 575,000 $ 672,500
Issuance of 3,000,000 shares of $2.8575 cumulative preferred
stock..................................................... 150,000 -- --
Redemption of 4,000,000 shares of $1.9375 cumulative
preferred stock........................................... (100,000) --
Redemption of 500 shares of money market preferred stock.... (50,000) -- --
Redemption of 558 shares of remarketed preferred stock in
1997 and 192 shares in 1996............................... (55,800) (19,200) --
Issuance of 3,000,000 shares of $1.8125 cumulative preferred
stock..................................................... -- -- 75,000
Redemption of 3,450,000 shares of $3.375 cumulative
convertible preferred stock............................... -- -- (172,500)
---------- ---------- ----------
Balance at end of year...................................... $ 500,000 $ 555,800 $ 575,000
========== ========== ==========
COMMON STOCK:
Balance at beginning of year................................ $ 275,048 $ 281,298 $ 263,106
Net issuance under stock option, restricted stock and
restricted stock election plans of 454,590 shares in 1997,
812,572 shares in 1996 and 497,975 shares in 1995......... 2,273 4,063 2,490
Retirement of 1,109,847 shares in 1997, 2,062,586 shares in
1996 and 382,936 shares in 1995........................... (5,550) (10,313) (1,915)
Issuance of 3,523,369 shares upon conversion of $3.375
cumulative convertible preferred stock.................... -- -- 17,617
---------- ---------- ----------
Balance at end of year...................................... $ 271,771 $ 275,048 $ 281,298
========== ========== ==========
SURPLUS:
Balance at beginning of year................................ $ 502,425 $ 590,008 $ 437,653
Net issuance of common stock under stock option, restricted
stock and restricted stock election plans of 454,590
shares in 1997, 812,572 shares in 1996 and 497,975 shares
in 1995................................................... 26,741 36,719 20,276
Treasury stock transactions of affiliate.................... (2,176) (891) (1,568)
Retirement of 1,109,847 common shares in 1997, 2,062,586
shares in 1996 and 382,936 shares in 1995................. (102,355) (123,411) (16,506)
Cost of issuing preferred stock............................. (3,100) -- (2,437)
Issuance of 3,523,369 common shares upon conversion of
$3.375 cumulative convertible preferred stock............. -- -- 152,590
---------- ---------- ----------
Balance at end of year...................................... $ 421,535 $ 502,425 $ 590,008
========== ========== ==========
RETAINED EARNINGS:
Balance at beginning of year................................ $1,918,880 $1,636,264 $1,457,609
Net income.................................................. 449,108 418,840 288,649
Foreign currency translation, net of taxes.................. (16,216) (20,399) 4,578
Dividends declared on common stock.......................... (100,569) (84,307) (78,193)
Dividends declared on issues of preferred stock............. (24,191) (31,518) (36,379)
---------- ---------- ----------
Balance at end of year...................................... $2,227,012 $1,918,880 $1,636,264
========== ========== ==========
NET UNREALIZED APPRECIATION (DEPRECIATION) ON SECURITIES
AVAILABLE FOR SALE, NET OF TAXES:
Balance at beginning of year................................ $ 54,467 $ (74,762) $ (191,480)
Unrealized appreciation (depreciation)...................... (56,623) 209,133 172,093
Income tax (expense) benefit................................ 19,818 (79,904) (55,375)
---------- ---------- ----------
Balance at end of year...................................... $ 17,662 $ 54,467 $ (74,762)
========== ========== ==========
TOTAL STOCKHOLDERS' EQUITY:
Balance at beginning of year................................ $3,306,620 $3,007,808 $2,639,388
Net changes during the year................................. 131,360 298,812 368,420
---------- ---------- ----------
Balance at end of year...................................... $3,437,980 $3,306,620 $3,007,808
========== ========== ==========
See accompanying notes to consolidated financial statements.
39
REPUBLIC NEW YORK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 449,108 $ 418,840 $ 288,649
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization, net...................... 92,968 88,478 73,428
Provision for credit losses............................. 16,000 32,000 12,000
Investment securities gains, net........................ (35,117) (23,247) (25,663)
Net gain on loans sold or held for sale................. (19,838) (974) (6,765)
Restructuring and related charges....................... -- -- 73,821
Equity in earnings of affiliate......................... (125,116) (93,418) (79,481)
Net change in precious metals........................... (10,637) 18,719 206,231
Net change in trading accounts.......................... 1,215,612 (89,748) 140,088
Net change in accounts receivable and accrued
interest............................................... (336,078) (519,493) 180,605
Net change in accounts payable and accrued expenses..... 511,918 (367,486) 276,760
Other, net.............................................. (88,356) (162,574) (85,115)
----------- ----------- -----------
Net cash provided by (used in) operating activities......... 1,670,464 (698,903) 1,054,558
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Interest-bearing deposits with banks........................ 1,152,391 363,800 4,147,566
Federal funds sold and securities purchased under resale
agreements................................................ (60,182) 290,159 (625,343)
Short-term investments...................................... (122,129) (46,049) (111,925)
Purchases of securities held to maturity.................... (1,190,547) (3,167,356) (236,646)
Proceeds from maturities of securities held to maturity..... 1,134,448 686,471 406,711
Purchases of securities available for sale.................. (10,281,304) (6,481,359) (6,752,227)
Proceeds from sales of securities available for sale........ 2,806,461 2,002,799 1,461,195
Proceeds from maturities of securities available for sale... 4,044,243 3,523,480 1,664,475
Loans....................................................... (1,103,028) (811,415) (1,125,115)
Investment in affiliate..................................... 38,953 30,296 28,133
Payment for purchase of Brooklyn Bancorp, Inc., net of cash
received.................................................. -- (486,002) --
----------- ----------- -----------
Net cash used in investing activities....................... (3,580,694) (4,095,176) (1,143,176)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposits.................................................... 1,667,220 3,188,607 2,193,950
Short-term borrowings....................................... 166,993 1,533,114 (1,078,626)
Due to factored clients..................................... (10,871) 76,002 (151,326)
Proceeds from issuance of long-term debt.................... 1,130,286 427,136 270,970
Repayment of long-term debt................................. (813,586) (489,159) (1,295,600)
Proceeds from issuance of subordinated long-term debt....... 250,000 100,000 --
Repayment of subordinated long-term debt.................... -- (100,000) --
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior
subordinated debt securities.............................. -- 350,000 --
Net proceeds from issuance of cumulative preferred stock.... 146,900 -- 72,563
Repurchase of cumulative preferred stock.................... (205,800) (19,200) --
Repurchase of common stock.................................. (107,905) (133,724) (18,421)
Cash dividends paid......................................... (120,829) (115,136) (113,431)
Other, net.................................................. 6,691 18,803 22,342
----------- ----------- -----------
Net cash provided by (used in) financing activities......... 2,109,099 4,836,443 (97,579)
----------- ----------- -----------
Effect of exchange rate changes on cash and due from
banks..................................................... (7,269) (7,864) (5,362)
----------- ----------- -----------
Net increase (decrease) in cash and due from banks.......... 191,600 34,500 (191,559)
Cash and due from banks at beginning of year................ 710,183 675,683 867,242
----------- ----------- -----------
Cash and due from banks at end of year...................... $ 901,783 $ 710,183 $ 675,683
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest........................................... $ 2,158,554 $ 1,910,818 $ 1,632,989
Income taxes....................................... 109,179 115,981 88,347
Transfers from securities available for sale to
securities held to maturity............................ 960,231 1,009,550 --
Transfers from securities held to maturity to securities
available for sale..................................... -- -- 1,391,750
See accompanying notes to consolidated financial statements.
40
REPUBLIC NATIONAL BANK OF NEW YORK
CONSOLIDATED STATEMENTS OF CONDITION
[Enlarge/Download Table]
DECEMBER 31,
--------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
ASSETS
Cash and due from banks..................................... $ 860,246 $ 668,596
Interest-bearing deposits with banks........................ 4,695,410 5,811,949
Precious metals............................................. 1,240,759 1,231,319
Securities held to maturity (approximate market value of
$8,981,237 in 1997 and $7,845,020 in 1996)................ 8,839,129 7,839,329
Securities available for sale (at approximate market
value).................................................... 14,349,253 10,894,777
----------- -----------
Total investment securities....................... 23,188,382 18,734,106
Trading account assets...................................... 4,426,961 4,620,335
Federal funds sold and securities purchased under resale
agreements................................................ 2,000,482 2,039,987
Loans (net of unearned income of $16,538 in 1997 and $24,944
in 1996).................................................. 11,341,604 10,722,022
Allowance for possible credit losses........................ (301,248) (326,105)
Customers' liability on acceptances......................... 118,956 937,114
Accounts receivable and accrued interest.................... 880,820 707,585
Investment in affiliate (note 7)............................ 864,178 806,274
Premises and equipment...................................... 410,374 405,926
Other assets................................................ 511,021 593,792
----------- -----------
Total assets...................................... $50,237,945 $46,952,900
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Noninterest-bearing deposits:
In domestic offices.................................... $ 2,586,210 $ 2,182,618
In foreign offices..................................... 224,500 179,250
Interest-bearing deposits:
In domestic offices.................................... 12,000,075 12,354,338
In foreign offices..................................... 18,676,081 17,325,808
----------- -----------
Total deposits.................................... 33,486,866 32,042,014
Trading account liabilities................................. 5,002,815 4,314,640
Short-term borrowings....................................... 4,451,792 3,579,807
Acceptances outstanding..................................... 118,992 938,097
Accounts payable and accrued expenses....................... 1,224,507 795,743
Other liabilities........................................... 135,104 142,869
Long-term debt.............................................. 1,702,792 1,390,226
Subordinated long-term debt, primarily with parent.......... 825,000 575,000
Stockholder's equity (note 21):
Common stock, $100 par value 4,800,000 shares
authorized; 4,000,000 shares outstanding.............. 400,000 400,000
Surplus................................................ 1,636,155 1,631,834
Retained earnings...................................... 1,245,540 1,109,513
Net unrealized appreciation on securities available for
sale, net of taxes.................................... 8,382 33,157
----------- -----------
Total stockholder's equity........................ 3,290,077 3,174,504
----------- -----------
Total liabilities and stockholder's equity........ $50,237,945 $46,952,900
=========== ===========
See accompanying notes to consolidated financial statements.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Republic New York Corporation (the "Corporation") is a United States based
bank holding company that provides a variety of banking and financial services
worldwide to corporations, financial institutions, governmental units and
individuals. In addition to its domestic business, the Corporation is active in
international banking where it operates principally as a wholesale and private
bank. The Corporation conducts its business activities in many countries and
regions throughout the world and is not dependent on any one market, geographic
area, customer or industry segment. However, the negative effects of economic
and political events both within and outside the United States cannot be
predicted.
The accounting and reporting policies of the Corporation reflect banking
industry practices and conform to generally accepted accounting principles. The
preparation of financial statements requires that management make estimates and
assumptions that affect the reported amount of assets and liabilities at the
date of the financial statements and the reported amounts of income and expenses
for the reporting period. Such estimates are subject to change in the future as
additional information becomes available or previously existing circumstances
are modified. A summary of the significant accounting policies followed by the
Corporation in the preparation of the accompanying consolidated financial
statements is set forth below.
A. Basis of Consolidation. The consolidated financial statements include
the accounts of the Corporation and its subsidiaries, principally Republic
National Bank of New York (the "Bank"), Republic Bank California N.A. ("RBC"),
Republic New York Securities Corporation ("RNYSC") and Republic Business Credit
Corporation ("RBCC") formerly Republic Factors Corp. Investments in affiliates
which are less than majority-owned but more than 20% owned are accounted for by
the equity method. Significant intercompany transactions are eliminated in
consolidation.
B. Foreign Operations. Foreign currency assets and liabilities are
translated into their U.S. dollar equivalents based on rates of exchange
generally prevailing at year end. Revenue and expense accounts are generally
translated at average exchange rates for the year. Net translation gains or
losses on foreign currency financial statements of operations whose functional
currency is the U.S. dollar, including those financial statements of operations
in highly inflationary economies, are included in other income together with net
gains or losses from related hedges. Net translation gains or losses on foreign
currency financial statements of operations whose functional currency is not the
U.S. dollar are a component of retained earnings, net of related hedging
results, on an after tax basis.
Foreign currency amounts of foreign currency denominated assets and
liabilities are generally sold or purchased under fixed forward contracts at
prices which differ from their original cost. Such differences, which are
considered part of the interest yields, are reflected in net interest income
ratably over the life of the contracts.
C. Statement of Cash Flows. For purposes of the Statement of Cash Flows,
the Corporation defines cash and cash equivalents as the Statement of Condition
caption cash and due from banks. Cash flows from trading account assets and
liabilities and trading related derivatives are classified as operating
activities. Cash flows from derivative transactions used as hedges are
classified with the asset or liability being hedged.
D. Investment Securities. The Corporation designates an investment
security and any related hedge as held to maturity or available for sale at the
time of acquisition. The held to maturity classification includes debt
securities, which are carried at amortized cost, that the Corporation has the
positive intent and ability to hold to maturity. The available for sale
classification includes debt and equity securities which are carried at
estimated fair value. Unrealized gains or losses on securities available for
sale and derivative instruments used to hedge these securities are included as a
separate component of stockholders' equity, net of tax effect. Gains or losses
on sales of securities are recognized by the specific identification method and
are recorded in investment securities gains, net.
The Corporation periodically reviews its intent with respect to securities
available for sale and may redesignate these securities and related derivative
instruments used as hedges as held to maturity. At the time of redesignation,
such securities are recorded at market value, and any unrealized appreciation or
depreciation existing with respect to such securities and related hedges
continues to be reported as a separate component of stockholders' equity and
amortized to interest income over the life of the security.
E. Trading Account Assets and Liabilities. Securities included as trading
account assets are held to benefit from short-term changes in market prices.
Trading account securities and liabilities incurred in short-sale transactions
are carried at market value. Such liabilities are included in trading account
liabilities. Premiums paid or received related to contracts that are marked to
market are included in trading account assets or trading account liabilities,
respectively. Gains and losses on trading account activities, including market
value adjustments, are reported as trading account profits and commissions.
Trading account loans are marked to market with the resultant gains or losses
included in trading account profits and commissions. Interest income and
interest expense on trading account assets and liabilities are included in net
interest income.
F. Loans. Loans are carried at their principal amount outstanding, net of
unearned income. Unearned income on discounted loans is accreted monthly into
interest income. Loans held for sale are maintained on a lower of cost or market
basis with losses included in loans sold or held for sale.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Non-accrual loans are those loans (other than factored trade accounts
receivable, consumer installment and residential mortgage loans) on which the
accrual of interest ceases when principal or interest payments are past due 90
days. A loan may be placed on a non-accrual status prior to the 90-day period
if, in management's opinion, conditions warrant. When a loan is placed on a
non-accrual basis, all accrued interest receivable is reversed and charged
against current interest income except in instances where it is expected to be
paid in full. Thereafter, interest income on non-accrual loans is recorded only
when received in cash.
Residential mortgage loans are placed on non-accrual status when the
mortgagor is in bankruptcy or foreclosure proceedings are instituted. Any
accrued interest receivable remains in interest income as an obligation of the
borrower. The Corporation charges off any consumer installment loan which is
past due 90 days.
The Corporation evaluates all loans in its loan portfolio for impairment,
except large groups of small-balance homogeneous loans that are collectively
evaluated for impairment and certain other loans. The Corporation's impaired
loans include loans with principal balances of $500,000 or more and is generally
applied to nonaccrual commercial loans and renegotiated loans. A loan is
considered impaired if it is probable that the creditor will be unable to
collect all contractual amounts due (principal and interest) as scheduled in the
loan agreement. Such loans have been placed on non-accrual status either because
interest or principal are past due or, based on management's judgment, the
Corporation does not expect to receive all principal and interest in accordance
with the terms of the loan agreements. Impaired loans are measured based on
either an estimate of the present value of expected future cash flows at a
loan's effective interest rate, the loan's market value or the fair value of
collateral if the loan is collateral dependent. Interest income on an impaired
loan is recorded on a cash basis when the outstanding principal is brought
current.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" establishes the criteria for determining
whether a transfer of financial assets should be accounted for as a sale or as a
pledge of collateral in a secured borrowing. This SFAS was adopted by the
Corporation on January 1, 1997 and provisions relating to repurchase agreements,
securities lending and securities borrowings, will be adopted on January 1,
1998, as required by SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125, an amendment of FASB Statement No. 125."
The adoption of this SFAS is not expected to have a material effect on the
Corporation's results of operations.
G. Derivative Products. Derivatives used by the Corporation include
futures, forwards, swaps, caps, floors and options in the interest rate, foreign
exchange, equity and precious metals commodity markets. The Corporation uses
these instruments for trading and to assist in its asset and liability
management activities which include hedging.
The Corporation records unrealized gains and losses on forward, swap,
option and other conditional or exchange contracts on a gross basis except when
a legally enforceable netting agreement with a counterparty exists.
Derivatives that are used for trading or to hedge other trading instruments
are carried on a mark-to-market basis with resultant gains and losses included
in trading account profits and commissions, foreign exchange trading income and
income from precious metals. Unrealized gains and option premiums paid are
included in trading account assets. Unrealized losses and option premiums
received are included in trading account liabilities. In valuing such contracts,
the Corporation considers potential credit costs, tenor, future servicing costs,
future capital costs and transaction hedging costs which are recognized over the
life of the contracts.
Foreign exchange trading positions are revalued monthly by pricing spot
foreign exchange and forward contracts for foreign exchange at prevailing market
rates.
Precious metals activities include arbitrage, purchases and sales of
precious metals for forward delivery, options on precious metals and precious
metals lending and borrowing. Precious metals, outstanding open positions in
contracts for forward delivery, option contracts and precious metals loans and
borrowings are revalued monthly at prevailing market rates. Precious metals
interest arbitrage balances are recorded at cost, with the difference between
the fixed forward contract price and cost accreted into income from precious
metals ratably over the life of the contracts.
The Corporation enters into interest rate and foreign currency swap and
option transactions as part of its asset and liability management activities,
including hedging activities. To meet the criteria for hedge accounting, the
derivative must be shown to reduce the market risk of an existing asset,
liability, firm commitment or anticipated transaction. The effectiveness of a
hedge is evaluated at inception and throughout the hedge period using
statistical calculations of correlation. Derivative transactions are executed as
part of the Corporation's asset-liability function in order to manage interest
rate sensitivity or by modifying the interest rate characteristics of specific
assets or liabilities. The net settlements on such transactions are accounted
for on an accrual basis as an adjustment to interest income or expense over the
lives of the related agreements. The notional amount of contracts used in asset
and liability management are recorded as off-balance-sheet transactions. Gains
or losses on terminated derivative contracts used as hedges of non-trading
assets or liabilities, where the underlying asset or liability has not been
settled, are deferred and amortized into interest income or interest expense
over the life of the original hedge.
Additionally, the Bank is a licensed depository for the storage of gold and
silver bullion and coins traded on various commodity exchanges. Fees derived
from such storage are included in other income. The Corporation substantially
hedges its total investments in precious metals by forward sales.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
H. Aggregate Allowance for Possible Credit Losses. The aggregate allowance
for possible credit losses is increased by provisions charged to the provision
for credit losses and decreased by charge-offs, net of recoveries. The provision
for credit losses is based on the Corporation's past credit loss experience and
other factors which, in management's judgment, deserve current recognition in
estimating possible credit losses. Such other factors considered by management
include the composition of the Corporation's credit exposure and worldwide
economic conditions.
The Corporation's aggregate allowance for possible credit losses consists
of a portion applicable to trading account assets which is a reduction of
"trading account assets," a portion applicable to off-balance-sheet extensions
of credit, such as standby letters of credit, guarantees and commitments which
is included in "other liabilities" and a portion available to absorb all other
possible credit losses. Prior year amounts have not been restated to reflect
this change.
I. Mortgage Servicing Rights. Mortgage servicing rights retained on loans
sold or securitized and held for sale are allocated between the cost of the
loans and the servicing rights, if it is practicable to estimate those fair
values. Income on the rights is recorded over the estimated future net servicing
income stream of the underlying mortgage loans. Mortgage servicing rights are
assessed periodically for impairment and written down to fair value through a
valuation allowance.
J. Income Taxes. The Corporation files a consolidated federal income tax
return. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of changes in tax rates is recognized in income in the
period the change occurs. The earnings of the Corporation's foreign subsidiaries
were not subject to U.S. income taxes for taxable years beginning prior to 1987,
except to the extent that they were remitted as dividends. The undistributed
earnings prior to 1987 of the Corporation's foreign subsidiaries are expected to
be reinvested indefinitely in the subsidiaries' operations; accordingly, no
provision has been made for such undistributed earnings.
K. Earnings Per Common Share. On December 31, 1997, the Corporation
adopted SFAS No. 128 "Earnings per Share" and has restated previously reported
per share amounts. This statement establishes standards for computing and
presenting earnings per common share ("EPS") and changes the method of
calculation, presentation and disclosure of EPS. Primary EPS was replaced by
"Basic" EPS and fully diluted EPS was replaced by "Diluted" EPS. Basic EPS
excludes dilution and is computed by dividing income applicable to common
stockholders by the weighted-average number of common shares outstanding, less
restricted stock plan shares, for the period. Diluted EPS reflects the
additional dilution that could occur upon the vesting of restricted stock plan
shares or if securities or other contracts to issue common stock were exercised
or converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Corporation. This statement makes the
standard for computing earnings per share comparable to international EPS
standards.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. EARNINGS PER COMMON SHARE
The following table presents the income and outstanding share amounts used
to calculate earnings per common share in each of the last three years.
[Enlarge/Download Table]
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Basic earnings:
Net income............................................. $449,108 $418,840 $288,649
Less preferred stock dividends......................... (24,191) (31,518) (36,467)
Less dividends on restricted stock plan shares......... (3,369) (2,815) (2,485)
-------- -------- --------
Net income applicable to common stock -- basic......... $421,548 $384,507 $249,697
======== ======== ========
Average common shares outstanding -- excluding restricted
stock plan shares......................................... 52,813 53,740 52,321
======== ======== ========
Basic earnings per common share............................. $ 7.98 $ 7.15 $ 4.77
======== ======== ========
Diluted earnings:
Net income applicable to common stock -- basic......... $421,548 $384,507 $249,697
Dividend adjustment on restricted stock plan shares to
reflect shares assumed issued......................... 1,733 1,520 1,147
Dividends applicable to convertible preferred stock.... -- -- 5,920
-------- -------- --------
Net income applicable to common stock -- diluted....... $423,281 $386,027 $256,764
======== ======== ========
Shares:
Average common shares outstanding -- excluding
restricted stock plan shares.......................... 52,813 53,740 52,321
Net shares assumed issued under restricted stock
plan.................................................. 863 786 796
Shares assumed issued on exercise of stock options..... 55 68 161
Shares assumed issued on conversion of convertible
preferred stock....................................... -- -- 1,978
-------- -------- --------
Average common shares outstanding........................... 53,731 54,594 55,256
======== ======== ========
Diluted earnings per common share........................... $ 7.88 $ 7.07 $ 4.65
======== ======== ========
3. INVESTMENT SECURITIES
The following table presents information related to the Corporation's
portfolio of securities held to maturity and available for sale at respective
year ends.
[Enlarge/Download Table]
SECURITIES HELD TO MATURITY
-------------------------------------------------
1997
-------------------------------------------------
GROSS UNREALIZED
-------------------- ESTIMATED
BOOK VALUE GAINS (LOSSES) MARKET VALUE
----------- -------- --------- ------------
(IN THOUSANDS)
U.S. Government and federal agency obligations.............. $ 8,534,832 $176,629 $ (7,591) $ 8,703,870
Obligations of U.S. states and political subdivisions....... 702,319 57,579 (644) 759,254
Interest rate swaps......................................... -- -- (70,835) (70,835)
----------- -------- --------- -----------
$ 9,237,151 $234,208 $ (79,070) $ 9,392,289
=========== ======== ========= ===========
[Enlarge/Download Table]
SECURITIES AVAILABLE FOR SALE
------------------------------------------------
1997
------------------------------------------------
GROSS UNREALIZED
AMORTIZED -------------------- BOOK/MARKET
COST GAINS (LOSSES) VALUE
----------- -------- --------- -----------
(IN THOUSANDS)
U.S. Government and federal agency obligations.............. $ 7,008,386 $ 92,791 $ (2,550) $ 7,098,627
Obligations of U.S. states and political subdivisions....... 8,470 397 -- 8,867
Domestic debt securities.................................... 4,609,765 17,502 (5,087) 4,622,180
Foreign debt securities..................................... 3,869,930 130,900 (58,520) 3,942,310
Equity securities........................................... 728,938 29,822 (2,918) 755,842
Interest rate swaps......................................... -- -- (151,159) (151,159)
----------- -------- --------- -----------
$16,225,489 $271,412 $(220,234) $16,276,667
=========== ======== ========= ===========
During 1997, the Corporation transferred securities with an amortized cost
of $960 million and an approximate market value of $950 million from available
for sale to held to maturity.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investment securities having a carrying value of approximately $3.1 billion
at December 31, 1997, were pledged to secure public deposits, short-term
borrowings and for other purposes required or permitted by law.
[Enlarge/Download Table]
SECURITIES HELD TO MATURITY
-------------------------------------------------
1996
-------------------------------------------------
GROSS UNREALIZED
-------------------- ESTIMATED
BOOK VALUE GAINS (LOSSES) MARKET VALUE
----------- -------- --------- ------------
(IN THOUSANDS)
U.S. Government and federal agency obligations.............. $ 7,441,501 $ 90,673 $ (71,608) $ 7,460,566
Obligations of U.S. states and political subdivisions....... 693,567 40,995 (1,639) 732,923
Interest rate swaps......................................... -- -- (48,971) (48,971)
----------- -------- --------- -----------
$ 8,135,068 $131,668 $(122,218) $ 8,144,518
=========== ======== ========= ===========
[Enlarge/Download Table]
SECURITIES AVAILABLE FOR SALE
------------------------------------------------
1996
------------------------------------------------
GROSS UNREALIZED
AMORTIZED -------------------- BOOK/MARKET
COST GAINS (LOSSES) VALUE
----------- -------- --------- -----------
(IN THOUSANDS)
U.S. Government and federal agency obligations.............. $ 4,962,769 $ 31,380 $ (12,124) $ 4,982,025
Obligations of U.S. states and political subdivisions....... 8,635 -- (2) 8,633
Domestic debt securities.................................... 3,686,608 10,500 (5,203) 3,691,905
Foreign debt securities..................................... 3,523,598 146,362 (6,773) 3,663,187
Equity securities........................................... 769,188 22,452 (13,113) 778,527
Interest rate swaps......................................... -- -- (83,832) (83,832)
----------- -------- --------- -----------
$12,950,798 $210,694 $(121,047) $13,040,445
=========== ======== ========= ===========
During 1996, the Corporation transferred securities with a book value and
approximate market value of $1.0 billion from available for sale to held to
maturity.
The following table presents information for investments in securities held
to maturity and securities available for sale at December 31, 1997, based on
scheduled maturities. Actual maturities can be expected to differ from scheduled
maturities due to prepayment or early call privileges of the issuer.
[Enlarge/Download Table]
SECURITIES HELD TO MATURITY SECURITIES AVAILABLE FOR SALE
--------------------------- -----------------------------
ESTIMATED AMORTIZED BOOK/MARKET
BOOK VALUE MARKET VALUE COST VALUE
----------- ------------- ------------- -------------
(IN THOUSANDS)
Due in one year or less..................................... $ -- $ -- $ 1,536,937 $ 1,528,613
Due after one year through five years....................... 38,607 41,862 2,164,003 2,195,824
Due after five years through ten years...................... 72,545 82,583 1,844,158 1,868,288
Due after ten years......................................... 591,167 634,809 5,444,548 5,535,977
Mortgage-backed securities.................................. 8,534,832 8,703,870 5,235,843 5,299,124
Interest rate swaps......................................... -- (70,835) -- (151,159)
---------- ---------- ----------- -----------
$9,237,151 $9,392,289 $16,225,489 $16,276,667
========== ========== =========== ===========
Mortgage-backed securities included in the tables above in held to maturity
and available for sale have estimated average lives, based on year end market
conditions, of approximately 6.7 years and 7.3 years, respectively.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents the components of net investment securities
gains and losses attributable to securities held to maturity and securities
available for sale for each of the years in the three-year period ended December
31, 1997.
[Enlarge/Download Table]
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
GROSS GROSS GROSS
------------------ NET ------------------ NET ------------------ NET
GAINS (LOSSES) GAINS GAINS (LOSSES) GAINS GAINS (LOSSES) GAINS
------- -------- ------- ------- -------- ------- ------- -------- -------
(IN THOUSANDS)
Securities held to maturity:
Maturities, calls and
mandatory
redemptions........... $ 434 $ (33) $ 401 $ 1,986 $ (89) $ 1,897 $ 3,912 $ (747) $ 3,165
Securities available for
sale:
Sales of securities..... 81,860 (51,774) 30,086 56,098 (36,072) 20,026 31,445 (12,131) 19,314
Maturities, calls and
mandatory
redemptions........... 4,964 (334) 4,630 2,573 (1,249) 1,324 3,722 (538) 3,184
------- -------- ------- ------- -------- ------- ------- -------- -------
$87,258 $(52,141) $35,117 $60,657 $(37,410) $23,247 $39,079 $(13,416) $25,663
======= ======== ======= ======= ======== ======= ======= ======== =======
4. PRECIOUS METALS, TRADING ACCOUNT ASSETS AND TRADING ACCOUNT LIABILITIES
The following table sets forth the Corporation's precious metals trading
account and the composition of trading account assets and trading account
liabilities at respective year ends.
[Enlarge/Download Table]
1997 1996
---------- ----------
(IN THOUSANDS)
Precious metals (including derivatives related balances of
$719,654 in 1997 and $255,017 in 1996).................... $1,241,956 $1,231,319
========== ==========
Trading account assets:
U.S. Government obligations............................ $ 88,167 $ 365,534
U.S. Government agency obligations..................... 31,751 115,661
Other, primarily foreign bonds......................... 805,711 997,054
Unrealized gains on derivative financial instruments... 3,602,326 3,329,539
Allowance for trading credit losses.................... (17,000) --
---------- ----------
$4,510,955 $4,807,788
========== ==========
Trading account liabilities:
Securities sold, not yet purchased..................... $ 524,718 $ 327,827
Payables for precious metals........................... 535,801 510,299
Unrealized losses on derivative financial
instruments........................................... 4,260,345 3,563,959
---------- ----------
$5,320,864 $4,402,085
========== ==========
Trading income is generated by the Corporation's participation in the
foreign exchange and precious metals markets and by its activities as an
international dealer in other derivative contracts, including interest rate
swaps, and from trading securities. The Corporation reports the net trading
income from each of these activities, which includes mark-to-market adjustments
and any related direct trading expenses, on the statement of income as foreign
exchange trading income, income from precious metals and trading account profits
and commissions, respectively.
The following table presents net trading income related to the
Corporation's trading activities for each of the last three years.
[Enlarge/Download Table]
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Income from precious metals................................. $ 14,069 $ 24,700 $ 38,049
Foreign exchange trading income............................. 119,642 98,165 113,051
Trading account profits and commissions:
Debt securities and loans.............................. 18,071 15,802 25,546
Interest rate futures, forwards and swaps, and
commodity, equity and other derivative contracts...... 18,893 37,139 (800)
-------- -------- --------
Total trading account profits and commissions..... 36,964 52,941 24,746
-------- -------- --------
Total trading income........................................ $170,675 $175,806 $175,846
======== ======== ========
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following tables present information related to the fair value, after
the effect of netting agreements, which is also the carrying value, of
derivative instruments held for trading purposes.
[Enlarge/Download Table]
AVERAGE FAIR
VALUE DURING
1997 FAIR VALUE AT
------------- DECEMBER 31, 1997
ASSETS -------------------------
(LIABILITIES) ASSETS LIABILITIES
------------- ---------- -----------
(IN THOUSANDS)
Interest rate:
Futures and forwards................................... $ (10,509) $ -- $ 23,792
Swaps.................................................. (4,829) 776,895 761,693
Options written........................................ (136,009) -- 93,620
Options purchased...................................... 126,255 110,113 --
---------- ---------- ----------
$ (25,092) $ 887,008 $ 879,105
========== ========== ==========
Foreign exchange:
Spot, swaps, futures and forwards...................... $ 188,319 $1,698,536 $1,449,939
Options written........................................ (745,546) -- 995,715
Options purchased...................................... 719,136 899,021 --
---------- ---------- ----------
$ 161,909 $2,597,557 $2,445,654
========== ========== ==========
Other-principally precious metals:
Swaps, futures and forwards............................ $ (6,171) $ 566,970 $ 654,099
Options written........................................ (176,991) -- 281,487
Options purchased...................................... 124,814 270,445 --
---------- ---------- ----------
$ (58,348) $ 837,415 $ 935,586
========== ========== ==========
[Enlarge/Download Table]
AVERAGE FAIR
VALUE DURING
1996 FAIR VALUE AT
------------- DECEMBER 31, 1996
ASSETS -------------------------
(LIABILITIES) ASSETS LIABILITIES
------------- ---------- -----------
(IN THOUSANDS)
Interest rate:
Futures and forwards................................... $ 3,738 $ 18,695 $ 21,460
Swaps.................................................. 49,536 797,330 796,696
Options written........................................ (148,871) -- 117,787
Options purchased...................................... 179,502 150,440 --
---------- ---------- ----------
$ 83,905 $ 966,465 $ 935,943
========== ========== ==========
Foreign exchange:
Spot, swaps, futures and forwards...................... $ 16,125 $1,681,277 $1,514,712
Options written........................................ (385,368) -- 706,555
Options purchased...................................... 368,845 657,054 --
---------- ---------- ----------
$ (398) $2,338,331 $2,221,267
========== ========== ==========
Other-principally precious metals:
Swaps, futures and forwards............................ $ (3,931) $ 201,472 $ 301,810
Options written........................................ (45,318) -- 104,939
Options purchased...................................... 33,237 78,288 --
---------- ---------- ----------
$ (16,012) $ 279,760 $ 406,749
========== ========== ==========
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LOANS
The following table sets forth the composition of the Corporation's loan
portfolio at respective year ends.
[Enlarge/Download Table]
1997 1996
----------- -----------
(IN THOUSANDS)
Domestic:
Real estate -- residential mortgage.................... $ 2,228,844 $ 1,832,850
Real estate -- commercial.............................. 1,962,702 2,116,627
Banks and other financial institutions................. 54,753 45,112
Broker loans........................................... 1,116,880 1,051,472
Commercial and industrial.............................. 1,999,427 1,855,251
Individuals............................................ 266,703 200,607
All other.............................................. 571,375 400,705
Foreign..................................................... 4,175,620 4,244,618
----------- -----------
12,376,304 11,747,242
Less unearned income................................... (16,563) (25,306)
----------- -----------
Loans, net of unearned income............................... $12,359,741 $11,721,936
=========== ===========
6. AGGREGATE ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The Corporation's aggregate allowance for possible credit losses is
determined by management, based on previous credit loss experience, prevailing
and anticipated economic conditions and the composition of the loan portfolio
and other undertakings to extend credit, all of which are continuously reviewed.
The allowance is viewed by management to be adequate to absorb all potential
credit losses extended among the Corporation's undertakings. To comply with
regulatory reporting requirements, management has allocated the allowance for
possible credit losses between domestic and foreign components. By such
allocation, management does not intend to imply that future charge-offs will
necessarily follow the same pattern or that any portion of such allowance is
restricted in any way.
Changes in the Corporation's aggregate allowance for possible credit losses
applicable to domestic and foreign operations for each of the years in the
three-year period ended December 31, 1997 were as follows:
[Enlarge/Download Table]
1997 1996 1995
------------------------------ ------------------------------ ------------------------------
DOMESTIC FOREIGN TOTAL DOMESTIC FOREIGN TOTAL DOMESTIC FOREIGN TOTAL
-------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Balance, January 1............. $212,594 $137,764 $350,358 $166,733 $133,860 $300,593 $191,887 $127,333 $319,220
Provision...................... 16,000 -- 16,000 32,000 -- 32,000 12,000 -- 12,000
-------- -------- -------- -------- -------- -------- -------- -------- --------
228,594 137,764 366,358 198,733 133,860 332,593 203,887 127,333 331,220
-------- -------- -------- -------- -------- -------- -------- -------- --------
Charge-offs.................... (21,275) (8,667) (29,942) (38,874) (4,164) (43,038) (48,135) (3,356) (51,491)
Recoveries..................... 8,631 9,166 17,797 10,156 3,452 13,608 10,981 5,007 15,988
Net recoveries of restructuring
countries debt............... -- 854 854 -- 4,435 4,435 -- 4,227 4,227
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net (charge-offs)
recoveries............... (12,644) 1,353 (11,291) (28,718) 3,723 (24,995) (37,154) 5,878 (31,276)
Allowance of acquired
companies.................... -- -- -- 42,579 -- 42,579 -- -- --
Translation adjustment......... -- (1,586) (1,586) -- 181 181 -- 649 649
-------- -------- -------- -------- -------- -------- -------- -------- --------
Balance, December 31........... $215,950 $137,531 $353,481 $212,594 $137,764 $350,358 $166,733 $133,860 $300,593
======== ======== ======== ======== ======== ======== ======== ======== ========
At December 31, 1997, the aggregate allowance for possible credit losses
consisted of: $17.0 million applicable to trading account assets, which is a
reduction of "trading account assets," $10.0 million included in "other
liabilities" for off-balance-sheet extensions of credit, such as standby letters
of credit, guarantees and commitments, and $326.5 million (allowance for
possible credit losses), which is available to absorb all other credit losses.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents the book balances of the Corporation's
non-accrual and restructured loans (excluding consumer installment loans) at
respective year ends.
[Enlarge/Download Table]
1997 1996 1995
------- -------- -------
(IN THOUSANDS)
Domestic(1)................................................. $84,094 $ 94,137 $49,311
Foreign..................................................... 9,727 10,956 18,561
------- -------- -------
Non-accrual loans........................................... 93,821 105,093 67,872
Restructured loans.......................................... 682 34,993 14,383
------- -------- -------
$94,503 $140,086 $82,255
======= ======== =======
------------
(1) Includes loans with carrying values of $29.7 million and $46.3 million at
December 31, 1997 and 1996, respectively, which were acquired in the
acquisition of CrossLand Federal Savings Bank ("CrossLand"). Such loans are
covered by a loss-sharing agreement with the Federal Deposit Insurance
Corporation (the "FDIC") which expires on June 30, 1998. The covered amounts
of such loans at December 31, 1997 and 1996, were $29.9 million and $49.6
million, respectively.
The following table presents information related to the Corporation's
impaired loans, which are included in the table above, at December 31, in each
of the last three years.
[Enlarge/Download Table]
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
Impaired loans evaluated based on underlying collateral..... $53,249 $61,989 $16,684
Impaired loans evaluated based on future cash flow
projections............................................... 8,483 8,198 29,338
------- ------- -------
Total impaired loans................................... $61,732 $70,187 $46,022
======= ======= =======
Investment in impaired loans having an allowance for credit
losses.................................................... $10,699 $ 6,528 $35,624
Related allowance for credit losses......................... 1,167 801 9,673
Investment in impaired loans having no related allowance for
credit losses............................................. 51,033 63,659 10,398
Average recorded investment in impaired loans, net of
charge-offs during the year............................... $50,303 $74,422 $39,586
======= ======= =======
The following table presents the effect of non-accrual and restructured
loans on interest income for each of the years in the three-year period ended
December 31, 1997.
[Enlarge/Download Table]
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
Gross amount of interest that would have been earned at
original contract rates:
Domestic............................................... $ 8,474 $15,831 $ 4,349
Foreign................................................ 680 1,065 2,478
------- ------- -------
$ 9,154 $16,896 $ 6,827
======= ======= =======
Actual amount recorded as interest income:
Domestic............................................... $ 5,832 $10,537 $ 2,319
Foreign................................................ 59 11 449
------- ------- -------
$ 5,891 $10,548 $ 2,768
======= ======= =======
Foregone interest income:
Domestic............................................... $ 2,642 $ 5,294 $ 2,030
Foreign................................................ 621 1,054 2,029
------- ------- -------
$ 3,263 $ 6,348 $ 4,059
======= ======= =======
Interest income recorded on impaired loans.................. $ 4,625 $ 5,072 $ 151
======= ======= =======
7. INVESTMENT IN AFFILIATE
At December 31, 1997, the Corporation, Saban S.A. (see Note 20), a
Panamanian holding company wholly-owned by Mr. Edmond J. Safra, and
international investors owned approximately 49.1%, 20.8% and 30.1%,
respectively, of the outstanding common shares of Safra Republic Holdings S.A.
("Safra Republic"), a Luxembourg holding company, to which the Bank contributed
its European banking subsidiaries in Switzerland, Luxembourg, France, Guernsey
and Gibraltar in 1988.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Summary financial information for Safra Republic for the last two years is
as follows:
[Enlarge/Download Table]
1997 1996
----------- -----------
(IN THOUSANDS)
Total assets................................................ $20,356,300 $17,223,409
Total deposits.............................................. 15,401,065 13,337,947
Total shareholders' equity.................................. 1,760,566 1,643,110
Operating revenue........................................... 1,278,655 1,102,145
Net income.................................................. 255,055 189,830
8. PREMISES AND EQUIPMENT
A summary of the Corporation's premises and equipment at respective year
ends follows.
[Download Table]
1997 1996
--------- ---------
(IN THOUSANDS)
Premises.................................................... $ 537,734 $ 513,100
Equipment................................................... 207,031 199,913
--------- ---------
744,765 713,013
Less accumulated depreciation and amortization.............. (275,662) (243,782)
--------- ---------
$ 469,103 $ 469,231
========= =========
Other operating expenses included depreciation and amortization of $53.9
million in 1997, $48.4 million in 1996 and $44.1 million in 1995. The estimated
useful lives are 10 to 50 years for premises and 3 to 10 years for equipment.
9. SHORT-TERM BORROWINGS
The following table presents the Corporation's short-term borrowings at
respective year ends.
[Enlarge/Download Table]
1997 1996
---------- ----------
(IN THOUSANDS)
Federal funds purchased and securities sold under repurchase
agreements................................................ $ 853,612 $1,090,300
Commercial paper............................................ 418,911 862,347
Precious metals............................................. 2,028,268 1,645,904
Other borrowings............................................ 2,313,043 1,848,290
---------- ----------
$5,613,834 $5,446,841
========== ==========
Federal funds purchased generally mature one business day following the
sale date. Securities sold under repurchase agreements and commercial paper
generally mature within 30 days and 90 days, respectively, from the related
dates of sale. Other borrowings generally mature within twelve months and
include local borrowings in overseas locations. Included in other borrowings at
December 31, 1997 and 1996 was $100 million of notes sold under the Bank's
program to issue notes globally, see Note 10.
The Corporation has $170 million of lines of credit outstanding to support
its commercial paper program, for which it has authority to issue up to $2.5
billion of such borrowings.
10. LONG-TERM DEBT
The following tables present a summary of long-term debt and subordinated
long-term debt and perpetual capital notes at respective year ends.
Long-Term Debt:
[Enlarge/Download Table]
1997 1996
---------- ----------
(IN THOUSANDS)
Republic New York Corporation:
8 3/8% Debentures due February 15, 2007................ $ 100,000 $ 100,000
7% Capitalized lease obligations due December 31,
2000.................................................. 11,643 8,484
---------- ----------
111,643 108,484
---------- ----------
Republic National Bank of New York:
1.875% Cash Exchangeable Equity-Linked Notes due August
12, 2002.............................................. 100,000 --
Other long-term debt (various)......................... 56,948 56,312
Collateralized repurchase agreements, rates from
3.25% -- 7.55% in 1997 and 1996....................... 1,545,844 1,333,914
---------- ----------
1,702,792 1,390,226
---------- ----------
$1,814,435 $1,498,710
========== ==========
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Bank has a Program (the "Program") authorizing the periodic sale,
globally, of notes (the "Notes") by the Bank, including through its overseas
branches, or through a certain overseas subsidiary. A group of major
international securities dealers are eligible to participate in the offerings
pursuant to the Program. Notes may be issued for any maturity of 7 days or more,
subject to regulatory compliance. Notes may be denominated in various
currencies, may pay a fixed or floating rate based on one or more indices and,
unless otherwise specified, will be issued only in minimum denominations of
$250,000 and integral multiples of $1,000 in excess thereof. The Notes are
direct, unconditional and unsecured general obligations of the Bank, do not
evidence deposits and are not insured by the FDIC. Notes to be issued as part of
the program have been accepted for listing on the Luxembourg Stock Exchange. At
December 31, 1997, $220 million of Notes were outstanding pursuant to this
Program.
The 1.875% Cash Exchangeable Equity-Linked Notes (the "Equity Notes") were
issued under the Program in August, 1997. The Bank has the right, exercisable on
any trading day by not more than 60 nor less than 30 days' notice of a mandatory
exchange to the holders of the Equity Notes, to redeem such notes effective on
any date on or after August 12, 1999. The amount to be paid by the Bank on a
cash exchange on the initial exchange date is $978.499 per $1,000 principal and
increases annually to par. Holders of the Equity Notes may exchange them for
cash, subject to certain limitations, in an amount equal to the product of the
exchange ratio (7.5692 shares) and the market price of Merck & Co., Inc. common
stock per $1,000 principal amount per note.
All other outstanding notes of the Bank were issued under an authorization
by its Board of Directors which allows for an aggregate of up to $7 billion of
such obligations to be outstanding at any time. All such outstanding notes of
the Bank are unsecured debt obligations and are not subject to redemption prior
to maturity. The Notes are direct, unconditional and unsecured general
obligations of the Bank, do not evidence deposits and are not insured by the
FDIC.
Collateralized repurchase agreements consist of securities repurchase
agreements with initial maturities exceeding one year.
All of the outstanding long-term notes and debentures of the Corporation
are direct unsecured obligations and are not subordinated in right of payment to
any other unsecured indebtedness of the Corporation.
The Corporation and the Bank are obligated with respect to the above
long-term debt to make aggregate principal payments in each of the next five
years as follows: $237 million in 1998 and 1999, $252 million in 2000, $84
million in 2001 and $253 million in 2002.
Subordinated Long-Term Debt and Perpetual Capital Notes:
[Enlarge/Download Table]
1997 1996
---------- ----------
(IN THOUSANDS)
Republic New York Corporation:
9 1/2% Subordinated Notes due July 1, 2000............. $ 100,000 $ 100,000
9 3/4% Subordinated Notes due December 1, 2000......... 100,000 100,000
7 7/8% Subordinated Notes due 2001..................... 100,000 100,000
8.25% Subordinated Notes due 2001...................... 150,000 150,000
8 7/8% Subordinated Notes due 2001..................... 100,000 100,000
7 3/4% Subordinated Notes due May 15, 2002............. 150,000 150,000
7 1/4% Subordinated Notes due July 15, 2002............ 250,000 250,000
Floating Rate Subordinated Notes due August 2002
(5.7213% in 1997 and 5.4556% in 1996)................ 100,000 100,000
Floating Rate Subordinated Notes due October 2002
(5.7603% in 1997 and 5.4868% in 1996)................ 150,000 150,000
5 7/8% Subordinated Notes due 2008..................... 250,000 250,000
7 3/4% Subordinated Notes due 2009..................... 200,000 200,000
9.70% Subordinated Notes due February 1, 2009.......... 150,000 150,000
7% Subordinated Notes due March 22, 2011............... 100,000 100,000
9 1/2% Subordinated Debentures due April 15, 2014...... 150,000 150,000
9 1/8% Subordinated Notes due 2021..................... 100,000 100,000
9.30% Subordinated Notes due 2021...................... 100,000 100,000
7.20% Subordinated Debentures due 2097*................ 250,000 --
Perpetual Capital Notes (6.0625% in 1997 and 1996)*.... 150,000 150,000
---------- ----------
$2,650,000 $2,400,000
========== ==========
------------
* These notes are redeemable prior to maturity.
The rates in effect at December 31, 1997 and 1996 for floating rate issues are
shown in parentheses.
The Corporation's outstanding issues of subordinated notes and debentures
are all direct unsecured obligations of the Corporation. Interest rates on
subordinated floating rate note issues are determined quarterly or semi-annually
by
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
formulas based on certain money market rates and, in the case of the issue of
the Floating Rate Subordinated Notes due 2002, is subject to a minimum rate of
5% per annum.
On December 31, 1997, a shelf registration statement became effective
pursuant to which the Corporation may issue, from time to time in public
offerings, debt securities, junior subordinated debt securities, debt warrants,
currency warrants, stock-index warrants and other warrants, preferred stock,
depositary shares and preferred stock warrants, common stock and common stock
warrants and certain guarantees. Pursuant to such registration statement,
Republic New York Capital III and Republic New York Capital IV, each a Delaware
business trust, may issue trust preferred securities. Such securities may be
offered separately or together, in one or more series, up to an aggregate of
initial public offering prices of $1.0 billion. At December 31, 1997, no
securities had been issued pursuant to this registration statement.
On July 22, 1997, the Corporation sold, in a public offering, $250 million
principal amount of 7.20% Subordinated Debentures due 2097. The Debentures are
direct unsecured general obligations of the Corporation and are subordinated to
all present and future senior indebtedness of the Corporation. Subject to the
occurrence of certain events, the Corporation has the right to shorten the
maturity of the Debentures, and/or to redeem them if a tax event occurs. The net
proceeds received by the Corporation were used for general corporate purposes.
The 7% Subordinated Notes due 2011 are direct unsecured general obligations
of the Corporation and are subordinated to all present and future senior
indebtedness of the Corporation. The Notes are not redeemable prior to maturity.
The net proceeds received by the Corporation from the sale of the Notes were
used for general corporate purposes, which included the repurchase of $100
million principal amount outstanding of the Corporation's issue of Subordinated
Floating Rate Yield Curve Notes due 2002. In connection with the repurchase and
early extinguishment of such issue in 1996, the Corporation recorded a gain of
$1.1 million in other income.
The Corporation's $150 million principal amount of Putable (or Perpetual)
Capital Notes (the "PCNs") are a component of total qualifying capital under
applicable risk-based capital rules. The principal amount of each PCN will be
payable as follows: (1) at the option of the holder on the put date in each year
commencing in 2012, PCNs may be exchanged for securities that constitute
permanent primary capital securities (the "capital securities") for regulatory
purposes, (2) at the option of the Corporation on 90 days' prior notice, the
PCNs may be either (i) redeemed on the specified redemption date, in whole, for
cash and at par, but only with the proceeds of a substantially concurrent sale
of capital securities issued for the purpose of such redemption or (ii)
exchanged, in whole, for capital securities having a market value equal to the
principal amount of the PCNs, and, in each case, the payment of accrued interest
in cash or (3) in the event that the sum of the Corporation's consolidated
retained earnings and surplus accounts becomes less than zero, the PCNs will
automatically be exchanged, in whole, for capital securities having a market
value equal to the principal amount of the PCNs and the payment of accrued
interest in cash.
The PCNs are unsecured and subordinated in right of payment to all senior
indebtedness of the Corporation. The interest rate for each six-month interest
period is determined by a formula based on certain money market rates.
The Corporation is obligated with respect to the above subordinated
long-term debt to make principal payments within the next five years as follows:
$200 million in 2000, $350 million in 2001 and $650 million in 2002.
11. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBT SECURITIES
The following table presents information related to the issues of
company-obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely junior subordinated debt securities issued by the
Corporation at respective year ends.
[Download Table]
DECEMBER 31,
1997 AND 1996
--------------
(IN THOUSANDS)
7 3/4% Capital Trust Pass-through Securities(SM) (TRUPS)
(Issued by Republic New York Capital I)................... $150,000
7.53% Capital Securities (Issued by Republic New York
Capital II)............................................... 200,000
--------
$350,000
========
The TRUPS and 7.53% Capital Securities (the "Trust Securities"), were
issued by two trusts of which the Corporation is grantor and were sold to
qualified institutional buyers under Rule 144A of the Securities Act of 1933.
Each trust exists for the exclusive purpose of issuing Trust Securities and
investing the proceeds in junior subordinated debt securities of the Corporation
with similar interest rates and maturities. The Trust Securities are guaranteed
by the Corporation as to the payment of distributions and the payment on
liquidation of the Trust Securities within certain limits. The Trust Securities
are a component of Tier 1 capital under applicable risk-based capital rules.
The Trust Securities are subject to mandatory redemption (i) in whole, but
not in part upon repayment in full, at the stated maturity of the junior
subordinated debt securities at a redemption price equal to the principal amount
of, plus accrued interest on, the junior subordinated debt securities and (ii)
in whole or in part on or after November 15, 2006 in respect of Republic New
York Capital I and December 4, 2006 in respect of Republic New York Capital II,
contemporane-
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ously with any optional redemption by the Corporation of junior subordinated
debt securities at a redemption price equal to the optional prepayment price.
Subject to prior approval to do so by the FRB, if required, the respective
issues of the junior subordinated debt securities are redeemable during the
12-month periods beginning with the dates above at 103.66% and 103.765% of the
principal amounts outstanding, declining ratably each year thereafter to 100%,
plus accrued but unpaid interest thereon to the date of redemption.
12. PREFERRED STOCK
The Corporation is authorized to issue up to 19,999,000 shares of preferred
stock. The following table presents information related to the Corporation's
issues of preferred stock outstanding at respective year ends.
[Enlarge/Download Table]
DIVIDEND
SHARES RATE AT AMOUNT
OUTSTANDING DECEMBER 31, OUTSTANDING
----------- ------------ ---------------------
1997 1997 1997 1996
----------- ------------ --------- ---------
(DOLLARS IN
THOUSANDS)
$1.8125 Cumulative Preferred Stock ($25 stated value)....... 3,000,000 7.25% $ 75,000 $ 75,000
6,000,000 Depositary shares each representing a one-fourth
interest in a share of adjustable rate Cumulative
Preferred Stock, Series D ($100 stated value)............. 1,500,000 5.29% 150,000 150,000
Dutch Auction Rate Transferable Securities(TM) Preferred
Stock ("DARTS")
Series A ($100,000 stated value)....................... 625 4.35% 62,500 62,500
Series B ($100,000 stated value)....................... 625 4.38% 62,500 62,500
$2.8575 Cumulative Preferred Stock ($50 stated value)....... 3,000,000 5.715% 150,000 --
Money Market Cumulative Preferred(TM) Stock ("MMP")
($100,000 per share liquidation preference)*.............. -- -- 50,000
Remarketed Preferred ("RP"(TM)) Stock ($100,000 per share
liquidation preference)*.................................. -- -- 55,800
$1.9375 Cumulative Preferred Stock ($25 stated value)*...... -- -- 100,000
--------- -------- --------
7,501,250 $500,000 $555,800
========= ======== ========
------------
* These shares were redeemed during 1997.
On September 24, 1997, the Corporation sold, in a public offering, 3
million shares of $2.8575 Cumulative Preferred Stock ($50 Stated Value) (the
"Preferred Stock") with an aggregate stated value of $150 million. The Preferred
Stock may be redeemed, at the option of the Corporation, in whole or in part, at
any time or from time to time, on or after October 1, 2007 at $50 per share,
plus, in each case, dividends accrued and unpaid to the redemption date. A
portion of the proceeds were used in the fourth quarter of 1997 to redeem all of
the outstanding Money Market Cumulative Preferred(TM) Stock issue with an
aggregate liquidation value of $50 million, plus accrued and unpaid dividends to
the redemption date.
The 4 million shares of $1.9375 Cumulative Preferred Stock ($25 Stated
Value) were redeemed on February 27, 1997, at $25 per share, plus, accrued and
unpaid dividends to the redemption date. Such shares were redeemed with the
proceeds of an issue of Junior Subordinated Debt Securities.
During the first quarter of 1997, the Corporation redeemed 558 shares of
the RP issue with an aggregate liquidation value of $55.8 million, plus accrued
and unpaid dividends.
The $1.8125 Cumulative Preferred Stock may be redeemed, at the option of
the Corporation, in whole or in part, at any time or from time to time, on or
after July 1, 2000 at $25 per share, plus, in each case, dividends accrued and
unpaid to the redemption date.
The 6 million depositary shares outstanding each represent a one-fourth
interest in a share of Adjustable Rate Cumulative Preferred Stock, Series D
($100 Stated Value) (the "Series D Stock"). The dividend rate on the Series D
Stock is determined quarterly, by reference to a formula based on certain
benchmark market rates, but will not be less than 4 1/2% nor more than 10 1/2%
per annum for any applicable dividend period. The dividend rate in effect for
the period ended December 31, 1997, was 5.29254%. The Series D Stock is
redeemable, in whole or in part, at the option of the Corporation on or after
July 1, 1999, at $100 per share (which is equivalent to $25 per depositary
share), plus accrued and unpaid dividends to the redemption date. The net
proceeds were used for general corporate purposes.
Dividend rates for each dividend period are set pursuant to an auction
procedure for the DARTS. The maximum applicable dividend rates on the shares of
DARTS range from 110% to 150% of the 60-day "AA" composite commercial paper
rate.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DARTS of each series are redeemable in whole or in part, at the option of
the Corporation, at $100,000 per share, plus accrued and unpaid dividends to the
redemption date. DARTS are also redeemable, at the option of the Corporation, on
any dividend payment date for such series, in whole but not in part, at a
redemption price of $100,000 per share plus the payment of accrued and unpaid
dividends, if the applicable rate for such series fixed with respect to the
dividend period for such series ending on such dividend payment date equals or
exceeds the 60-day "AA" composite commercial paper rate on the date of
determination of such applicable rate.
13. INCOME TAXES
Total income tax expense for each of the years in the three-year period
ended December 31, 1997 was allocated as follows:
[Enlarge/Download Table]
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Income from operations...................................... $187,222 $171,706 $109,466
Stockholders' equity:
Net unrealized (depreciation) appreciation on
securities available for sale, net of taxes........... (19,818) 79,904 55,375
Foreign currency translation, net...................... (8,711) (12,041) 2,389
-------- -------- --------
$158,693 $239,569 $167,230
======== ======== ========
The components of the Corporation's consolidated income tax expense from
operations were as follows:
[Enlarge/Download Table]
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Current Tax Expense:
Federal................................................ $ 86,110 $100,606 $ 59,312
Foreign................................................ 59,401 23,565 19,150
State and other........................................ 9,400 8,300 6,700
-------- -------- --------
154,911 132,471 85,162
-------- -------- --------
Deferred Tax Expense:
Federal................................................ 32,311 39,235 24,304
-------- -------- --------
$187,222 $171,706 $109,466
======== ======== ========
Income tax expense on operations amounted to $187.2 million for 1997,
$171.7 million for 1996 and $109.5 million for 1995, representing effective tax
rates of 29.4%, 29.1% and 27.5%, respectively. Total tax expense differs from
the amounts computed by applying the statutory U.S. federal income tax rate
because of the following:
[Download Table]
% OF PRETAX INCOME
--------------------
1997 1996 1995
---- ---- ----
Federal tax expense at statutory rates...................... 35.0 35.0 35.0
State and local income tax, net of federal tax benefit...... 0.9 0.9 1.1
Interest and dividend income exempt from federal tax........ (4.0) (4.5) (6.4)
Other, net.................................................. (2.5) (2.3) (2.2)
---- ---- ----
Income tax expense as reported.............................. 29.4 29.1 27.5
==== ==== ====
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that gave rise to the deferred tax
assets and deferred tax liabilities at December 31, 1997 and 1996 are presented
below.
[Download Table]
1997 1996
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Provision for credit losses............................ $138,910 $134,411
Exempt income from subsidiary acquisition.............. 32,266 50,083
Unrealized losses on trading account assets and
securities available for sale......................... 17,086 --
Employee benefits...................................... 26,597 24,042
Restructuring and related charges...................... 5,932 12,966
Other.................................................. 10,999 9,090
-------- --------
231,790 230,592
-------- --------
Deferred tax liabilities:
Depreciation........................................... 54,281 50,467
Domestic tax on overseas income........................ 149,182 99,599
Interest and discount income........................... 60,570 56,228
Unrealized gains on trading account assets and
securities available for sale......................... -- 17,888
-------- --------
264,033 224,182
-------- --------
Net deferred tax (liability) asset.......................... $(32,243) $ 6,410
======== ========
There was no valuation adjustment at December 31, 1997 and 1996,
respectively.
The Corporation has not recognized a deferred tax liability of
approximately $100.0 million for undistributed earnings of foreign subsidiaries
for taxable years beginning prior to 1987 because the Corporation does not
expect those earnings to be distributed and become taxable to the Corporation in
the foreseeable future. As of December 31, 1997, the undistributed earnings of
these foreign subsidiaries were approximately $365.0 million. Cumulative foreign
tax credits of approximately $28.5 million at December 31, 1997 are available
for utilization by the Corporation against U.S. income taxes that would arise
upon a dividend distribution by its foreign subsidiaries.
The following table distributes the Corporation's income before income
taxes between its domestic and foreign offices for each of the last three years.
[Enlarge/Download Table]
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Foreign..................................................... $458,525 $347,754 $286,576
Domestic.................................................... 177,805 242,792 111,539
-------- -------- --------
$636,330 $590,546 $398,115
======== ======== ========
14. RESTRUCTURING AND RELATED CHARGES
In the second quarter of 1995, the Corporation recorded a $120.0 million
pre-tax provision, or $1.41 per diluted share, for restructuring and related
charges in connection with the implementation of Project Excellence Plus, the
Corporation's company-wide project to improve operating efficiencies and reduce
costs. The implementation stage of this project began in the second quarter of
1995 and was completed in the second quarter of 1996. Approximately 800
employees were terminated under the restructuring plan, of which two-thirds were
non-officer level employees.
The components of the restructuring charge taken during 1995 were as
follows:
[Download Table]
(IN THOUSANDS)
Salaries and employee benefits.............................. $ 71,000
Occupancy, net.............................................. 10,000
Other expenses.............................................. 39,000
--------
$120,000
========
Salaries and employee benefits charges included the cost of terminations
and other benefits. The charge to occupancy consisted of lease termination costs
for space that was vacated, space consolidation and losses incurred on the sale
of properties vacated. Other expenses included project-related implementation
costs that consisted of the write-off of obsolete equipment, legal expenses,
termination costs of computer service contracts, disposition of real estate,
consulting and other professional fees. Cash expenditures related to the
restructuring program were made from the Corporation's operating activities and
did not have an adverse impact on its operations, liquidity or capital
requirements.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. BENEFITS
Retirement Benefits
The Bank has a Retirement Plan (the "U.S. Plan") which covers substantially
all U.S. employees of the Corporation, the Bank and their respective
subsidiaries. Benefits are based on an employee's years of creditable service
and average base salary for the highest paid five consecutive years during the
last ten years of employment. The Corporation's funding policy is to contribute
annually an amount necessary to satisfy the Employee Retirement Income Security
Act ("ERISA") funding standards. The 1996 expense and disclosure results reflect
the impact of CrossLand's retirement plan.
The following table sets forth the U.S. Plan's funded status and amounts
recognized in the Corporation's Statement of Condition at respective year ends.
[Download Table]
1997 1996
--------- ---------
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested
benefits of $(163,219) in 1997 and $(130,642) in
1996.................................................. $(171,568) $(144,076)
========= =========
Plan assets at fair value, primarily common stocks and U.S.
Government securities with the balance in mutual funds.... $ 257,192 $ 226,466
Projected benefit obligation for service rendered to date... (213,268) (180,710)
--------- ---------
Excess of plan assets over projected benefit obligation..... 43,924 45,756
Unrecognized net (gain) from past experience different from
that assumed and effects of changes in assumptions........ (41,720) (37,449)
Prior service cost not yet recognized in net periodic
pension cost.............................................. 616 760
Implementation asset not yet recognized in periodic pension
cost...................................................... (4,024) (5,029)
--------- ---------
(Accrued) prepaid pension expense included in other
liabilities/assets.................................... $ (1,204) $ 4,038
========= =========
Net pension expense in each of the last three years consisted of the
following:
[Enlarge/Download Table]
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Service cost-benefits earned during the period.............. $ 7,713 $ 7,447 $ 6,295
Interest cost on projected benefit obligation............... 14,205 12,600 10,824
Actual return on plan assets................................ (38,651) (27,341) (29,893)
Net amortization and deferral............................... 21,974 12,185 17,471
-------- -------- --------
Net periodic pension expense........................... $ 5,241 $ 4,891 $ 4,697
======== ======== ========
The following table presents the economic assumptions used to calculate the
projected benefit obligation and pension expense in each of the last three
years.
[Download Table]
1997 1996 1995
---- ---- ----
Discount rate............................................... 7.0% 7.5% 7.0%
Rate of compensation increase............................... 5.0 5.0 5.0
Expected long-term rate of return on plan assets............ 8.0 8.0 8.0
In addition to the above funded U.S. Plan, the Corporation has an unfunded
supplemental pension plan for certain employees, executive officers and
directors. The expense related to these plans amounted to $0.8 million in 1997,
$0.9 million in 1996 and $1.0 million in 1995. The unfunded liability for these
plans was $10.0 million and $9.8 million at December 31, 1997 and 1996,
respectively.
Retirement benefits in foreign locations generally are covered by local
plans based on length of service, compensation levels and, where applicable,
employee contributions, with the funding of these plans based on local legal
requirements. The aggregate pension expense for such plans was approximately
$4.8 million in 1997, $4.6 million in 1996 and $3.6 million in 1995.
Postretirement Benefits
The Corporation provides postretirement life insurance benefits to its
current employees and provides certain retired employees and directors with
health care and life insurance benefits. The Corporation's plan for its
postretirement benefit obligation is unfunded.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth information related to the Corporation's
postretirement benefit obligation at respective year ends.
[Download Table]
1997 1996
-------- --------
(IN THOUSANDS)
Accumulated postretirement benefit obligation:
Retirees including covered dependents and
beneficiaries......................................... $(30,413) $(26,841)
Fully eligible actives................................. (1,368) (1,176)
Other actives.......................................... (1,038) (766)
-------- --------
(32,819) (28,783)
Unrecognized net gain....................................... (10,246) (11,757)
Unrecognized transition obligation being recognized over 20
years..................................................... 13,369 14,322
-------- --------
Postretirement benefit obligation included in other
liabilities........................................... $(29,696) $(26,218)
======== ========
A discount rate of 7.0% was used in 1997 and 1995 and 7.5% in 1996 with a
5% compensation increase used to measure the accumulated postretirement benefit
obligation in such years. The effect of raising health care gross eligible
charges by 1% would increase the aggregate of service cost and interest cost by
approximately $270,000 and the accumulated postretirement benefit obligation by
approximately $2.8 million.
The health care trend rate used to measure the expected costs of benefits
for 1998 is projected to be 9.0% for those under age 65 and 8.7% for those 65
and older. The rates for those under age 65 and for those 65 and older are
assumed to decrease by 1% and 0.4%-0.5% per year, respectively, until they reach
6.0% for retirees under 65 and 6.9% for retirees 65 and older and stabilize at
those rates.
Net postretirement benefit expense for each of the last three years was as
follows:
[Enlarge/Download Table]
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
Service cost................................................ $ 85 $ 85 $ 76
Interest cost on accumulated postretirement benefit
obligation................................................ 2,285 1,950 1,848
Amortization of transitional accumulated postretirement
benefit obligation........................................ 953 953 953
Amortization of net gain.................................... (592) (633) (436)
------ ------ ------
Net periodic expense................................... $2,731 $2,355 $2,441
====== ====== ======
Postemployment Benefits
The Corporation accounts for postemployment benefits by recognizing an
obligation for the estimated cost of postemployment benefits. Postemployment is
defined as the period after employment but before retirement if certain
conditions are met. Postemployment benefits include, but are not limited to,
salary continuation, severance benefits, job training and counseling, health
care and life insurance coverage. This expense is not material to the
Corporation's results of operations.
Stock-Based Compensation
The Corporation has a 1995 Long Term Incentive Stock Plan (the "1995
Plan"). The 1995 Plan was designed to consolidate the Corporation's 1985
Incentive Stock Option Plan, 1985 Non-Qualified Stock Option Plan, and 1985
Restricted Stock Plan (together, the "Prior Plans") and provides for the award
of incentive stock options, non-qualified stock options, stock appreciation
rights, restricted stock and other stock-based awards (each, an "Award"), which
may be granted individually or in combination to eligible persons. The 1995 Plan
provides that it shall terminate on the tenth anniversary of its effective date.
An aggregate of 2,640,800 shares of the Corporation's Common Stock was set aside
for Awards pursuant to the 1995 Plan. At December 31, 1997, an aggregate of
1,206,562 shares of Common Stock remained available to be awarded under the 1995
Plan. The Prior Plans expired by their terms in 1995 and no new awards may be
granted thereunder. However, awards previously granted under the Prior Plans
that remain outstanding will continue to be administered in compliance with the
terms and conditions of the applicable Prior Plan.
During 1997, 1996 and 1995, the Corporation issued restricted stock, net of
cancellations, in the aggregate amounts of 425,396 shares, 453,164 shares and
190,365 shares of Common Stock, respectively, with approximate market values as
of the dates of issue of $44.0 million, $30.5 million and $11.2 million,
respectively, in accordance with the terms of restricted stock awards granted
under the 1995 Plan and the 1985 Restricted Stock Plan. Such market values are
amortized as an expense over the period for which such shares are restricted. At
December 31, 1997, 1,961,996 shares of the Corporation's Common Stock remained
restricted. The deferred expense related to such shares at year end 1997 was
$71,306,000.
The Corporation also issues stock pursuant to the terms of the Restricted
Stock Election Plan, which allows certain officers who have earned deferred
compensation to elect to receive payment in the form of restricted stock of the
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Corporation. During 1997, 1996 and 1995, 519 shares, 2,367 shares and 760
shares, respectively, of the Corporation's Common Stock were issued pursuant to
such Plan, primarily in lieu of cash dividends, with approximate market values
as of the dates of issue of $51,000, $151,000 and $38,000, respectively.
Options to purchase Common Stock, which may be non-qualified or incentive
stock options, may be granted at an exercise price determined at the time the
option is granted by the Human Resources Committee of the Corporation's Board of
Directors (the "Human Resources Committee"), provided, however, that in the case
of an incentive stock option, the exercise price must be at least 100% of the
fair market value of a share of the Common Stock on the date of grant. Incentive
stock options must comply with certain requirements in order that the holders of
such options may receive certain beneficial tax treatment in the disposition of
shares acquired on the exercise of such an option. Options become exercisable at
the times and in the amounts determined by the Human Resources Committee in
connection with awarding grants.
The following is a summary of options transactions in each of the last
three years. All of such options, which were last granted in 1992, were granted
pursuant to the 1985 Incentive Stock Option Plan or the 1985 Non-Qualified Stock
Option Plan. As of December 31, 1997, no options had been granted pursuant to
the 1995 Plan.
[Enlarge/Download Table]
OPTION PRICE
OPTIONS PER SHARE
-------- -------------
Balance, December 31, 1994.................................. 479,537 $23.61-$50.19
Exercised.............................................. (306,850) 23.61- 32.50
Cancelled.............................................. (3,000)
-------- -------------
Balance, December 31, 1995.................................. 169,687 $23.61-$50.19
Exercised.............................................. (73,662) 23.61- 32.50
Cancelled.............................................. (2,250)
-------- -------------
Balance, December 31, 1996.................................. 93,775 $28.71-$50.19
Exercised.............................................. (28,675) 28.71- 39.38
Cancelled.............................................. --
-------- -------------
Balance, December 31, 1997.................................. 65,100 $28.92-$50.19
======== =============
At December 31, 1997, options for 60,600 shares were exercisable at prices
ranging from $28.92 to $40.79 per share.
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation,"
was issued effective for transactions entered into for years beginning after
December 15, 1995. This SFAS establishes financial accounting and reporting
standards for employee stock-based compensation plans and applies to all
arrangements whereby an employee receives shares of stock or other equity
instruments of an employer or a liability is incurred based on the price of the
employer's stock. These arrangements include restricted stock, stock options and
stock appreciation rights. The Corporation currently expenses the fair value of
restricted stock, as determined at the grant date, over the restricted period of
such shares. The SFAS allows an entity to continue to account for stock-based
compensation plans under Accounting Principles Board Opinion No. 25, the current
method followed by the Corporation. By electing to continue accounting under
Opinion No. 25, pro forma footnote disclosures of net income and earnings per
share are required to quantify the effect of the fair value based method for
stock options and stock appreciation rights issued after December 15, 1994, as
defined in SFAS No. 123. Since no stock options or stock appreciation rights
have been issued by the Corporation after December 15, 1994, no pro forma
footnote disclosure is currently required to be presented.
The Corporation has a 1994 Performance Based Incentive Compensation Plan
(the "Performance Based Plan") in order to comply with the requirements of
Section 162(m) of the Internal Revenue Code governing the deductibility of
executive officer compensation over $1 million. The Performance Based Plan is
designed to provide an incentive to officers who serve on the Management
Executive Committee of the Corporation and are in a position to make a material
contribution to the successful operation of the Corporation. The Performance
Based Plan is administered by the Human Resources Committee, which has the
exclusive power to designate recipients of awards, to establish the basis for
the amount to be paid pursuant to the awards and to administer the Performance
Based Plan in all other respects. The amount, if any, to be paid pursuant to any
award granted for any plan year shall be equal to the lesser of a formula with
respect to increases in earnings per share over a base year or a specified
percentage of net income of the Corporation. For the 1996 and 1995 Plan Years,
the Human Resources Committee certified awards in the aggregate amount of $5.4
million and $3.2 million, respectively, a portion of which were paid out in the
form of restricted stock under the 1995 Plan. Awards have been granted for the
1997 Plan Year pursuant to the Performance Based Plan but amounts payable
pursuant to such awards have not yet been certified by the Human Resources
Committee in accordance with the Performance Based Plan.
16. GEOGRAPHIC DISTRIBUTION OF REVENUE, EARNINGS AND ASSETS
The following geographic analysis of total assets, total operating revenue,
income (loss) before income taxes and net income (loss) is based on the location
of the customer. Charges and credits for funds employed or supplied by domestic
and international operations are based on the average internal cost of funds.
Inasmuch as the Corporation conducts a significant portion of its international
activities from its domestic offices, certain other items of revenue and
expense,
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
including the provision for credit losses and applicable income taxes, have been
subjectively allocated, and, therefore, the data presented may not be
meaningful. Based on the above, the following table summarizes the results of
the Corporation's international and domestic operations by geographic area for
each of the years in the three-year period ended December 31, 1997.
[Enlarge/Download Table]
TOTAL INCOME (LOSS)
TOTAL OPERATING BEFORE NET INCOME
ASSETS REVENUE INCOME TAXES (LOSS)
--------- --------- ------------- ----------
(IN MILLIONS)
United Kingdom............................................. 1997 $ 1,156.5 $ 144.8 $ 18.5 $ 13.0
1996 1,295.4 129.1 31.1 22.0
1995 1,134.8 130.8 17.9 13.0
Europe..................................................... 1997 $ 3,803.7 $ 392.6 $ 92.6 $ 65.3
1996 4,352.7 309.7 43.3 30.7
1995 3,449.7 293.5 32.6 23.6
Canada..................................................... 1997 $ 981.4 $ 118.8 $ 32.0 $ 22.6
1996 1,144.5 90.2 19.4 13.7
1995 1,162.7 92.7 9.2 6.7
Far East and Australia..................................... 1997 $ 2,324.5 $ 270.6 $ 50.1 $ 35.4
1996 3,274.3 249.6 15.0 10.6
1995 3,873.6 288.4 17.7 12.8
Caribbean money center locations, Central and South
America.................................................. 1997 $ 3,694.2* $ 366.8 $106.5 $ 75.2
1996 4,092.5* 321.5 118.5 84.1
1995 3,233.0* 304.5 106.6 77.2
Middle East and Africa..................................... 1997 $ 688.2 $ 18.6 $ (0.5) $ (0.3)
1996 514.8 18.9 (0.6) (0.4)
1995 481.5 10.5 (0.8) (0.6)
United States.............................................. 1997 $42,989.9 $2,426.0 $337.1 $237.9
1996 37,624.7 2,160.1 363.8 258.1
1995 30,546.3 1,739.2 214.9 155.9
Total................................................. 1997 $55,638.4 $3,738.2 $636.3 $449.1
1996 52,298.9 3,279.1 590.5 418.8
1995 43,881.6 2,859.6 398.1 288.6
------------
* Included in total assets for this area were 33%, 32% and 46%, at year end
1997, 1996 and 1995, respectively, in Caribbean money center locations.
17. COMMITMENTS AND CONTINGENT LIABILITIES
In the ordinary course of its business, the Corporation is a defendant in
various legal proceedings. Management, after reviewing with counsel all such
actions and proceedings pending against the Corporation, considers that the
aggregate liability or loss, if any, resulting from an adverse determination
would not have a material effect on the consolidated financial position of the
Corporation.
The Corporation is obligated under noncancellable leases that expire at
various times through 2078. The minimum rental commitments on noncancellable
leases for premises are $29.1 million in 1998, $28.7 million in 1999, $25.3
million in 2000, $22.6 million in 2001, $21.3 million in 2002 and an aggregate
of $90.6 million thereafter until the expiration of the leases. The minimum
rental commitments have not been reduced by aggregate minimum sublease rentals
of $24.7 million. Actual net rental expense in 1997, 1996 and 1995 aggregated
$35.7 million, $37.6 million and $30.3 million, respectively.
The subsidiary banks of the Corporation are required to maintain reserves
with the Federal Reserve Bank against certain balances. The average required
reserves maintained during 1997 totaled $19 million.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying values and estimated fair values
of the Corporation's financial instruments. The estimated fair values of
derivative financial instruments used as hedges are presented with the related
on-balance-sheet asset or liability.
[Enlarge/Download Table]
DECEMBER 31,
---------------------------------------------
1997 1996
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
(IN MILLIONS)
FINANCIAL ASSETS, INCLUDING HEDGES:
Interest-bearing deposits with banks........................ $ 4,757 $ 4,764 $ 5,909 $ 5,923
Derivative related..................................... -- (12) -- (2)
Securities held to maturity................................. 9,237 9,463 8,135 8,194
Derivative related..................................... -- (71) -- (49)
Securities available for sale............................... 16,428 16,428 13,124 13,124
Derivative related..................................... (151) (151) (84) (84)
Trading account assets...................................... 909 909 1,478 1,478
Derivative related..................................... 3,602 3,602 3,330 3,330
Loans, net.................................................. 12,033 12,374 11,372 11,602
Derivative related..................................... -- -- -- (2)
Other financial assets...................................... 5,631 5,631 5,867 5,867
------- ------- ------- -------
52,446 52,937 49,131 49,381
------- ------- ------- -------
FINANCIAL LIABILITIES, INCLUDING HEDGES:
Deposits with no stated maturity and deposits maturing
within six months......................................... 28,543 28,543 26,445 26,445
Deposits maturing in over six months........................ 4,847 4,845 5,281 5,278
Derivative related..................................... -- (4) -- (5)
Trading account liabilities................................. 1,061 1,061 838 838
Derivative related..................................... 4,260 4,260 3,564 3,564
Short-term borrowings....................................... 5,614 5,614 5,447 5,447
Derivative related..................................... -- (3) -- --
Long-term debt, subordinated long-term debt, perpetual
capital notes and preferred securities of subsidiary
trusts.................................................... 4,814 5,079 4,249 4,429
Derivative related..................................... -- (107) -- (45)
Other financial liabilities................................. 2,590 2,590 2,652 2,652
------- ------- ------- -------
51,729 51,878 48,476 48,603
------- ------- ------- -------
Net financial assets........................................ $ 717 $ 1,059 $ 655 $ 778
======= ======= ======= =======
Estimated net fair value-more than carrying value........... $ 342 $ 123
======= =======
The following presents the methodologies and assumptions used to estimate
the fair value of the Corporation's financial instruments. Financial instruments
are defined as cash, evidence of an ownership in an entity, a contract that
conveys or imposes on an entity the contractual right or obligation to either
receive or deliver cash or another financial instrument, a derivative financial
instrument, such as a futures, forward, swap or option contract or other
financial instruments with similar characteristics. Fair value is defined as the
amount at which such financial instruments could be exchanged in a current
transaction between willing parties, other than in a forced sale or liquidation,
and is best evidenced by a quoted market price, if one exists. The Corporation
operates as a going concern, and, except for its investment securities
portfolio, trading account assets and liabilities and off-balance-sheet
instruments that trade on an organized exchange or in an active secondary
market, no active market exists for its financial instruments. The application
of the information used to determine fair value is highly subjective and
judgmental in nature, and, therefore, such valuation may not be precise. The
subjective factors include, among other things, estimates of cash flows, risk
characteristics, credit quality and interest rates, all of which are subject to
change. Since the fair value is estimated as of the statement of condition date,
the amounts which will actually be realized or paid upon settlement or maturity
of the various financial instruments could be significantly different.
The Corporation has a significant portion of its assets and liabilities in
financial instruments that have remaining maturities of less than six months.
These short-term financial instruments, except for those financial instruments
for which an active market exists, are valued without regard to maturity and are
considered to have fair values equivalent to their carrying value.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Financial Assets
Interest-bearing deposits with banks, amounting to $4.4 billion in 1997 and
$5.6 billion in 1996, mature within six months and are considered to have a fair
value equivalent to their carrying value. The fair value of interest-bearing
deposits with banks maturing in more than six months is estimated using a
discounted cash flow model based on current market rates for comparable
instruments with similar maturities.
The fair value of investment securities and trading account assets is based
on quoted market prices or dealer quotes. Unrealized gains and losses and option
premium values on derivative financial instruments related to trading account
assets are recorded as part of the on-balance-sheet value.
Performing residential mortgages and consumer installment loans, which have
similar characteristics, have been valued on a pooled basis by using market
prices for securities backed by loans with similar terms. The fair value of all
other loans, which are principally to commercial and industrial entities and
foreign governments, has been determined by discounting the estimated future
cash flows of such loans to their present value using an assigned discount rate
which may or may not be the contractual rate in effect with the obligor. This
discount rate is the rate at which a loan with similar credit risk and remaining
maturity would be entered into at the balance sheet date and was determined
based on the Corporation's internal credit quality and pricing systems. The fair
value of loans does not include any value attributable to the FDIC loss sharing
agreement.
Cash, and because of their short-term nature, due from banks, federal funds
sold and securities purchased under resale agreements, accounts receivable and
accrued interest, customers' liability on acceptances and certain other assets,
which meet the definition of financial instruments, have been valued at their
respective carrying values. These instruments are presented in the above table
as other financial assets.
Financial Liabilities
Deposits without a stated maturity include demand, savings and money market
accounts. These deposits amounted to $8.9 billion in 1997 and $8.5 billion in
1996 and are reported at their carrying value. No value has been assigned to the
franchise value of these deposits. The Corporation believes, however, that
significant value exists in this type of deposit and in its franchises and
individual business units. Deposits maturing within six months aggregated $19.6
billion in 1997 and $17.9 billion in 1996, and their fair value is considered to
equal their carrying value. The fair value of deposits maturing in more than six
months is based on rates offered for deposits with similar remaining maturities.
Trading account liabilities are carried at market value and include
securities sold short, non interest-bearing precious metals payables and
unrealized losses and premiums received on off-balance-sheet contracts.
Short-term borrowings that mature within six months have fair values equal
to their carrying value. The fair value of long-term debt, subordinated
long-term debt and perpetual capital notes and preferred securities of
subsidiary trusts are based on market quotes obtained from independent
investment bankers.
Because of their short-term nature, acceptances outstanding, accounts
payable and accrued expenses, due to factored clients and certain other
liabilities, are considered to have fair values equal to their carrying values.
These instruments are presented in the above table as other financial
liabilities.
Off-Balance-Sheet Financial Instruments
Commitments to extend credit, standby letters of credit and foreign office
guarantees and commercial letters of credit aggregated $7.9 billion and $5.9
billion at year end 1997 and 1996, respectively. If ultimately funded, these
commitments are priced at current market rates.
Interest rate and foreign exchange contracts entered into for hedging
purposes have fair values equivalent to the amount that would be received or
paid to terminate the contract at the reporting date.
Asset-liability management contracts, primarily interest rate swaps, are
recorded on an accrual basis as an adjustment to the interest income or expense
of the related asset or liability. These derivative contracts are used to limit
the Corporation's sensitivity to changes in interest rates, currency exchange
rates or market risks related to the corresponding on-balance-sheet financial
instrument. The Corporation's portfolio of securities available for sale is
reported on the balance sheet at estimated fair value including unrealized gains
and losses on related hedge contracts in accordance with SFAS No. 115.
19. DERIVATIVE FINANCIAL INSTRUMENTS AND OFF-BALANCE-SHEET RISK
Nature and Terms of Interest Rate, Foreign Exchange, Precious Metals and Other
Financial Instruments
The Corporation uses various derivative financial instruments as an end
user to manage its asset and liability exposure to interest rate and currency
fluctuations and as a dealer to meet similar needs of its customers, as well as
in trading for its own account.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Derivative instruments are contracts whose value is derived from the value
of an underlying financial instrument, currency or physical commodity or an
index thereon. Derivative instruments, with the exception of cross-currency
foreign exchange contracts, do not generally involve exchange of principal
amounts but may involve the payment of a fee or receipt of a premium at the
inception of a contract. Certain instruments, including futures and forward
contracts, commit the Corporation to buy or sell, at a future date, a specified
financial instrument, currency or precious metal or other commodity at an
agreed-to price. When traded on an organized exchange, futures contracts require
daily settlement with the exchange acting as the counterparty to each contract.
Forward contracts are customized transactions that require no cash settlement
until the end of the contract. Other contracts involve commitments to settle in
cash, on a periodic basis, differentials between specified indices which are
applied to a notional principal amount. Purchased option contracts give the
holder the right, but not the obligation, to acquire or sell for a limited time
period a financial instrument, currency, precious metal or other commodity at a
designated price upon payment of a fee at the commencement of the contract. The
writer of an option receives a premium at the outset of a contract as payment
for assuming the risk of unfavorable changes in the price of the underlying
instrument.
The Corporation is an international dealer in derivative instruments,
denominated in U.S. dollars and other currencies, which include futures,
forwards, swaps and options related to interest rates, foreign exchange rates,
equity indices and commodity prices. The Corporation focuses especially on the
structuring of customized transactions to meet client needs. Counterparties with
the Corporation are generally financial institutions, including banks, central
banks, other government agencies, both foreign and domestic, and insurance
companies.
Asset-liability management activities are conducted principally through the
use of interest rate contracts in the form of swaps. Interest rate swap
contracts obligate the Corporation to exchange the difference between fixed rate
and floating rate interest amounts based on an agreed notional amount. These
contracts are intended to reduce the impact on net interest margin of interest
rate fluctuations as assets and liabilities may reprice at different times.
Interest rate caps and floors are purchased to limit exposure to unfavorable
interest rate changes. By paying a premium to the writer, the Corporation
receives the difference between a specified market interest rate and the fixed
cap rate.
The market risk of derivatives arises principally from the potential for
changes in the prices of underlying securities, commodities or indices, or the
volatility of such prices or rates. The Corporation routinely reduces or
eliminates exposure to market risks by entering into hedging transactions. In
order to control risk, limits for all elements of market risk affecting value
are established, monitored and reviewed regularly.
The credit risk of derivatives arises principally from the potential for a
counterparty to fail to meet its obligation to settle a contract on a timely
basis. The Corporation attempts to limit credit risk by dealing with investment
grade counterparties, obtaining collateral where appropriate, as well as using
netting agreements where obtainable. The Corporation also manages credit risk by
limiting positions and using strict credit controls when considering a
counterparty.
The following table summarizes the notional or contractual amounts of
derivative instruments used in trading or asset-liability management. These
amounts serve as volume indicators to denote the level of activity by instrument
class and include contracts that have both favorable and unfavorable value to
the Corporation. These notional amounts do not represent the amounts to be
exchanged by the Corporation, nor do they measure the exposure to credit or
market risk. Contractual/notional amounts of asset-liability management
positions include intercompany transactions that are established between
independent trading departments of the Corporation that act as counterparties.
Classification of the amounts shown below as trading or asset-liability
management are based on management's intent at the inception of the individual
contract. Credit risk related to the notional or contractual amounts represent
the estimated cost to replace all contracts in a gain position, assuming all
counterparties fail to settle their contracts on a timely basis and ignoring the
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
value of collateral held. This exposure may be limited by offsetting asset or
liability positions held by the Corporation or by the use of master netting
agreements.
[Enlarge/Download Table]
DECEMBER 31,
-------------------------------------------------------
1997 1996
-------------------------- --------------------------
CONTRACTUAL/NOTIONAL AMOUNTS
-------------------------------------------------------
ASSET/LIABILITY ASSET/LIABILITY
TRADING MANAGEMENT TRADING MANAGEMENT
-------- --------------- -------- ---------------
(IN MILLIONS)
INTEREST RATE:
Futures and forwards................................... $ 11,449 $ 2,492 $ 23,317 $ 450
Swaps.................................................. 26,427 12,339 29,516 8,024
Options written........................................ 7,324 -- 7,769 --
Options purchased...................................... 8,773 5,673 14,374 4,535
-------- ------- -------- -------
$ 53,973 $20,504 $ 74,976 $13,009
======== ======= ======== =======
FOREIGN EXCHANGE:
Swaps, futures and forwards............................ $103,660 $ 1,234 $106,759 $ 570
Options written........................................ 31,843 -- 36,686 --
Options purchased...................................... 31,245 -- 33,428 --
-------- ------- -------- -------
$166,748 $ 1,234 $176,873 $ 570
======== ======= ======== =======
OTHER-PRINCIPALLY PRECIOUS METALS:
Swaps, futures and forwards............................ $ 18,417 $ -- $ 14,575 $ --
Options written........................................ 4,435 -- 2,147 --
Options purchased...................................... 4,994 -- 2,643 --
-------- ------- -------- -------
$ 27,846 $ -- $ 19,365 $ --
======== ======= ======== =======
Using replacement cost at the prevailing rate on all contracts in a gain
position, the Corporation's estimated risk of loss at year end 1997 and 1996 was
$701 million and $797 million, respectively, on interest rate contracts, and
$2.9 billion and $2.2 billion, respectively, on foreign exchange and precious
metals contracts.
Credit Related Instruments
In the normal course of its business, there are various outstanding
commitments and contingent liabilities of the Corporation that are not reflected
in the consolidated financial statements. The Corporation enters into various
types of agreements with its customers which support the customers' credit
standing, guarantee customers' performance to third parties or commit to advance
funds in the form of loans. These commitments usually have fixed expiration
dates and may require the customer to pay a fee. The aggregate of such
commitments and contingent obligations represents the maximum principal amount
which the Corporation may be required to disburse and the maximum potential
exposure if all such obligations were ultimately to become worthless. To control
risk of loss, global credit limits which cover total exposure across all
products are established for each counterparty and are monitored and reviewed
regularly.
A summary of the contractual amount of credit-related instruments at
December 31, is as follows:
[Download Table]
1997 1996
------ ------
(IN MILLIONS)
Commitments to extend credit................................ $5,574 $3,926
Standby letters of credit and foreign office guarantees..... 1,722 1,340
Commercial letters of credit................................ 606 654
====== ======
Credit Related Risk Concentrations
In the normal course of its business, the Corporation's activities include
significant amounts of credit risk in its relationships with domestic and
international financial institutions. Such obligations aggregated approximately
22% and 25% of the Corporation's on-balance-sheet financial instruments at
December 31, 1997 and 1996, respectively. This exposure included approximately
45% at year end 1997 and 1996, respectively, in the form of interest-bearing
deposits with foreign banks and branches and agencies of foreign banks located
in the United States. The Corporation's credit exposure to the U.S. federal
government and its agencies was approximately 29% and 25% of respective year end
1997 and 1996 on-balance-sheet financial instruments. The Corporation's real
estate loan portfolio represented approximately 8% of on-balance-sheet financial
instruments at year end 1997 and 1996, respectively. Credit exposure in the real
estate loan portfolio is concentrated in loans in the New York metropolitan
area, secured by multi-family and commercial real estate properties and, to a
lesser degree, residential properties.
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Corporation transacts a substantial portion of its off-balance-sheet
activities with other financial institutions, including major international and
domestic banks, insurance companies, securities dealers and government agencies,
both foreign and domestic. The diversity of the counterparties allows the
Corporation to minimize credit risk.
20. TRANSACTIONS WITH RELATED PARTIES
The following is a summary of significant balances, in the aggregate, of
transactions with related parties, primarily Safra Republic and Banco Safra S.A.
of Brazil, included in the Corporation's Consolidated Statements of Condition at
respective year ends.
[Download Table]
1997 1996
-------- --------
(IN THOUSANDS)
ASSETS:
Interest-bearing deposits with banks................... $ 11,357 $221,466
Securities available for sale.......................... -- 40,200
Loans.................................................. 119,303 79,496
======== ========
LIABILITIES:
Deposits............................................... $325,540 $334,759
Trading account liabilities............................ 4,565 8,872
Short-term borrowings.................................. 20,590 12,042
Long-term debt......................................... 4,872 5,846
======== ========
At December 31, 1997, Mr. Edmond J. Safra, through Saban S.A. and a
subsidiary thereof, owned approximately 28.1% of the Corporation's outstanding
Common Stock and, through Saban S.A., owned approximately 20.8% of Safra
Republic's outstanding common shares.
Mr. Safra, through Saban S.A. and a subsidiary thereof, has received
approval, which expires on April 30, 1998, from the Board of Governors of the
Federal Reserve System (the "FRB") to acquire up to 1,622,150 additional shares
of Common Stock of the Corporation in the open market and through privately
negotiated transactions. If all such shares of Common Stock were acquired, Mr.
Safra would increase his ownership to approximately 31.1% of the Corporation's
outstanding Common Stock.
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
21. STOCKHOLDER'S EQUITY OF REPUBLIC NATIONAL BANK OF NEW YORK
A summary of changes in the stockholder's equity accounts of the Bank is as
follows:
[Enlarge/Download Table]
1997 1996
---------- ----------
(IN THOUSANDS)
COMMON STOCK:
Balance at beginning of year................................ $ 400,000 $ 355,000
Stock dividend declared, 450,000 shares................ -- 45,000
---------- ----------
Balance at end of year...................................... $ 400,000 $ 400,000
========== ==========
SURPLUS:
Balance at beginning of year................................ $1,631,834 $1,492,278
Capital contribution by parent......................... 6,497 140,447
Treasury stock transactions of affiliate............... (2,176) (891)
---------- ----------
Balance at end of year...................................... $1,636,155 $1,631,834
========== ==========
RETAINED EARNINGS:
Balance at beginning of year................................ $1,109,513 $ 990,194
Net income............................................. 427,243 414,756
Dividends declared..................................... (275,000) (275,000)
Foreign currency translation, net of taxes............. (16,216) (20,437)
---------- ----------
Balance at end of year...................................... $1,245,540 $1,109,513
========== ==========
NET UNREALIZED APPRECIATION (DEPRECIATION) ON SECURITIES
AVAILABLE FOR SALE, NET OF TAXES:
Balance at beginning of year................................ $ 33,157 $ (76,049)
Unrealized appreciation................................ (38,116) 176,478
Income tax expense..................................... 13,341 (67,272)
---------- ----------
Balance at end of year...................................... $ 8,382 $ 33,157
========== ==========
TOTAL STOCKHOLDER'S EQUITY:
Balance at beginning of year................................ $3,174,504 $2,761,423
Net changes during the year............................ 115,573 413,081
---------- ----------
Balance at end of year...................................... $3,290,077 $3,174,504
========== ==========
The Bank, as a national banking association, is subject to legal
limitations on the amount of dividends that may be paid to the Corporation, the
Bank's sole shareholder. The prior approval of the Comptroller of the Currency
(the "OCC") is required to the extent the total of all dividends to be declared
and paid by a national bank in any calendar year exceeds net profits (as
defined) for that year combined with its retained net profits for the two
preceding calendar years, less any required transfers to surplus. Under this
limitation, at December 31, 1997, the Bank may declare dividends without the
prior approval of the OCC of up to $292 million plus an additional amount equal
to the Bank's retained net profits for 1998 to the date of any dividend
declaration.
The Federal Reserve Act limits extensions of credit to, or guarantees,
acceptances or letters of credit issued on behalf of, affiliates by member banks
and also requires that such transactions be secured by specific obligations.
Such transactions, aggregated with certain other transactions with affiliates,
are limited to 10% of the Bank's capital and surplus, as defined, to any one
affiliate and to 20% of such amount in the aggregate to all such affiliates.
Based upon these requirements, the Bank could have advanced, assuming adequate
qualifying collateral was available, up to $361 million to the Corporation at
December 31, 1997.
22. REGULATORY CAPITAL REQUIREMENTS
The Corporation's leverage ratio and its risk-based capital ratios include
the assets and capital of Safra Republic on a consolidated basis in accordance
with the requirements of the FRB specifically applied to the Corporation. These
ratios do not include the effect on stockholders' equity related to the
Corporation's portfolio of securities available for sale.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents data related to regulatory capital
requirements for the Corporation and the Bank at December 31, in each of the
last two years.
[Enlarge/Download Table]
FOR CAPITAL TO BE WELL
ACTUAL ADEQUACY PURPOSES CAPITALIZED
------------------ ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ----- ---------- ----- ---------- -----
($ IN THOUSANDS)
AS OF DECEMBER 31, 1997
Total Capital (to Risk Weighted Assets):
Republic New York Corp. and Subsidiaries.......... $6,850,590 21.58% $2,539,816 8% $3,174,769 10%
Republic National Bank of New York................ 3,991,451 17.64% 1,809,714 8% 2,262,142 10%
Tier 1 Capital (to Risk Weighted Assets):
Republic New York Corp. and Subsidiaries.......... $4,118,326 12.97% $1,269,908 4% $1,904,862 6%
Republic National Bank of New York................ 2,998,122 13.25% 904,857 4% 1,357,285 6%
Leverage Ratio -- Tier 1 Capital (to Average Assets):
Republic New York Corp. and Subsidiaries.......... $4,118,326 5.60% $2,207,113 3% $2,942,817 4%
Republic National Bank of New York................ 2,998,122 6.09% 1,477,950 3% 2,463,250 5%
AS OF DECEMBER 31, 1996
Total Capital (to Risk Weighted Assets):
Republic New York Corp. and Subsidiaries.......... $6,338,802 23.28% $2,178,050 8% $2,722,562 10%
Republic National Bank of New York................ 3,616,265 18.15% 1,594,266 8% 1,992,833 10%
Tier 1 Capital (to Risk Weighted Assets):
Republic New York Corp. and Subsidiaries.......... $3,756,619 13.80% $1,089,025 4% $1,633,537 6%
Republic National Bank of New York................ 2,818,578 14.14% 797,133 4% 1,195,700 6%
Leverage Ratio -- Tier 1 Capital (to Average Assets):
Republic New York Corp. and Subsidiaries.......... $3,756,619 5.87% $1,918,978 3% $2,558,638 4%
Republic National Bank of New York................ 2,818,578 6.30% 1,342,459 3% 2,237,432 5%
As of December 31, 1997, the Bank exceeded all minimum regulatory capital
requirements and the requirements to be a "well capitalized" institution as set
forth in the above table.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
23. REPUBLIC NEW YORK CORPORATION (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
[Enlarge/Download Table]
DECEMBER 31,
------------------------
1997 1996
---------- ----------
(IN THOUSANDS)
ASSETS
Deposits with subsidiary bank, principally
interest-bearing.......................................... $ 420,625 $ 572,433
Investment in bank subsidiaries............................. 3,344,142 3,233,925
Investment in non-bank subsidiaries......................... 1,127,286 1,056,783
Securities held to maturity................................. 136,220 117,771
Securities available for sale............................... 615,107 944,605
Investment in subordinated debt of subsidiary bank.......... 825,000 575,000
Securities purchased under resale agreements................ 168,809 --
Securities purchased under resale agreements with subsidiary
bank...................................................... 166,794 --
Advances to non-bank subsidiaries........................... 338,310 370,038
Loans, net of unearned income............................... 46,598 14,341
Trading account assets...................................... 9,255 107,400
Dividends receivable from subsidiaries...................... -- 65,000
Other assets................................................ 176,614 189,536
---------- ----------
Total assets........................................... $7,374,760 $7,246,832
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper............................................ $ 418,911 $ 862,347
Trading account liabilities................................. 286,975 71,872
Other liabilities........................................... 120,709 145,820
Long-term debt (note 10).................................... 100,000 100,000
Subordinated long-term debt and perpetual capital notes
(note 10)................................................. 2,650,000 2,400,000
Junior subordinated debt issued to subsidiary trusts (note
11)....................................................... 360,185 360,173
Stockholders' equity (notes 12 and 15):
Cumulative preferred stock, no par value............... 500,000 555,800
Common stock, $5 par value............................. 271,771 275,048
Surplus................................................ 421,535 502,425
Retained earnings...................................... 2,227,012 1,918,880
Net unrealized appreciation on securities available for
sale, net of taxes.................................... 17,662 54,467
---------- ----------
Total stockholders' equity............................. 3,437,980 3,306,620
---------- ----------
Total liabilities and stockholders' equity............. $7,374,760 $7,246,832
========== ==========
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF INCOME
[Enlarge/Download Table]
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
INCOME:
Dividends from bank subsidiaries....................... $285,282 $230,000 $184,000
Dividends from non-bank subsidiaries................... 40,500 11,000 5,000
Interest from subsidiaries............................. 104,701 90,524 99,937
Interest and dividend income........................... 61,060 59,473 55,572
Trading account profits and commissions................ 1,027 2,444 803
Investment securities gains (losses), net.............. 333 108 (110)
Other income........................................... 4,670 1,538 628
-------- -------- --------
Total income...................................... 497,573 395,087 345,830
-------- -------- --------
EXPENSES:
Salaries and employee benefits......................... 48,833 38,519 35,654
Interest on long-term debt and commercial paper........ 251,752 224,873 226,996
Restructuring and related charges...................... -- -- 42,103
Other expenses......................................... 3,867 11,072 17,428
-------- -------- --------
Total expenses.................................... 304,452 274,464 322,181
-------- -------- --------
Income before income tax benefit and equity in undistributed
net income of subsidiaries................................ 193,121 120,623 23,649
Applicable income tax benefit-current....................... 54,617 57,437 73,271
-------- -------- --------
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME OF
SUBSIDIARIES.............................................. 247,738 178,060 96,920
Equity in undistributed net income of subsidiaries.......... 201,370 240,780 191,729
-------- -------- --------
NET INCOME.................................................. $449,108 $418,840 $288,649
======== ======== ========
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 449,108 $ 418,840 $ 288,649
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net income of subsidiaries..... (201,370) (240,780) (191,729)
Net change in trading accounts......................... 313,248 (25,422) (10,106)
Net change in dividends receivable from subsidiaries... 65,000 19,000 (64,000)
Other, net............................................. (12,189) (24,709) (12,782)
--------- --------- ---------
Net cash provided by operating activities................... 613,797 146,929 10,032
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits with subsidiary bank............................... 151,808 (96,891) 343,948
Cash contributions to bank and non-bank subsidiaries........ (41,232) (153,752) (102,300)
Short-term investments...................................... 311,049 (154,348) (82,402)
Investment in subordinated debt of subsidiary bank.......... (250,000) 100,000 --
Securities purchased under resale agreements................ (168,809) -- --
Securities purchased under resale agreements with subsidiary
bank...................................................... (166,794) -- --
Advances to subsidiaries.................................... 31,728 (65,670) 77,347
Loans....................................................... (32,257) 1,151 (7,199)
Other, net.................................................. 25,077 16,881 109,348
--------- --------- ---------
Net cash provided by (used in) investing activities......... (139,430) (352,629) 338,742
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Commercial paper............................................ (443,436) 194,784 (311,827)
Proceeds from issuance of subordinated long-term debt....... 250,000 100,000 --
Proceeds from issuance of junior subordinated debt to
subsidiary trusts......................................... 12 360,173 --
Repayment of subordinated long-term debt.................... -- (100,000) --
Repayment of long-term debt................................. -- (100,000) --
Net proceeds from issuance of cumulative preferred stock.... 146,900 -- 72,563
Repurchase of cumulative preferred stock.................... (205,800) (19,200) --
Repurchase of common stock.................................. (107,905) (133,724) (18,421)
Cash dividends paid......................................... (120,829) (115,136) (113,431)
Other, net.................................................. 6,691 18,803 22,342
--------- --------- ---------
Net cash provided by (used in) financing activities......... (474,367) 205,700 (348,774)
--------- --------- ---------
Cash and due from banks at beginning and end of year........ $ -- $ -- $ --
========= ========= =========
24. ACQUISITION OF BROOKLYN BANCORP, INC.
On February 29, 1996, the Corporation completed the acquisition of Brooklyn
Bancorp, Inc. ("BBI") and its wholly-owned subsidiary, CrossLand, which was
merged into the Bank. The Corporation purchased all of the common stock and
common stock equivalents of BBI at $41.50 for a total consideration of
approximately $530 million. The acquisition was accounted for as a purchase and
BBI's results are included from the date of acquisition. Goodwill, the excess of
cost over the market value of net assets acquired, amounted to $146.7 million at
December 31, 1997 and is being amortized to expense on a straight-line basis
over a life of fifteen years. Approximately $197 million of assets acquired from
BBI are currently subject to a loss-sharing agreement with the FDIC. Under this
agreement, the Corporation will be reimbursed by the FDIC for 80 percent of any
losses it incurs through the expiration of the agreement on June 30, 1998. On
the date of acquisition, BBI had total assets of approximately $4.1 billion,
investment securities of $2.0 billion and loans of $1.3 billion, total deposits
of approximately $3.6 billion and 30 branches in the New York metropolitan area.
70
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS
[KPMG PEAT MARWICK LOGO]
The Board of Directors and Stockholders
Republic New York Corporation:
We have audited the accompanying consolidated statements of condition of
Republic New York Corporation (the "Corporation") as of December 31, 1997 and
1996, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three year
period ended December 31, 1997, and the consolidated statements of condition of
Republic National Bank of New York as of December 31, 1997 and 1996. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Republic New
York Corporation as of December 31, 1997 and 1996, and the results of its
operations, and its cash flows for each of the years in the three year period
ended December 31, 1997, and the consolidated financial position of Republic
National Bank of New York as of December 31, 1997 and 1996 in conformity with
generally accepted accounting principles.
[KPMG LOGO SIG]
New York, New York
January 20, 1998
71
REPORT OF MANAGEMENT
Financial Statements
The consolidated financial statements and the related notes thereto have
been prepared by the management of Republic New York Corporation (the
"Corporation") in accordance with generally accepted accounting principles and,
as such, include amounts, some of which are based on judgments and estimates by
management. Management's Discussion and Analysis appearing elsewhere in this
Annual Report is consistent with the content of the financial statements.
KPMG Peat Marwick LLP, the Corporation's independent auditors, have audited
the consolidated financial statements of the Corporation and their report
thereon is presented herein. Such report represents that the Corporation's
consolidated financial statements, present fairly, in all material respects, its
financial position and results of operations in conformity with generally
accepted accounting principles.
Internal Control Over Financial Reporting
Management of the Corporation is responsible for establishing and
maintaining effective internal control over financial reporting presented in
conformity with generally accepted accounting principles. This internal control
contains monitoring mechanisms, and actions are taken to correct deficiencies
identified.
The Audit Committee of the Board of Directors is composed of directors who
are not officers or employees of the Corporation. The Audit Committee of the
Board of Directors is responsible for ascertaining that the accounting policies
employed by management are reasonable and that internal control is adequate. The
Director of Internal Audit of the Corporation conducts audits and reviews of the
Corporation's worldwide operations and reports directly to the Audit Committee
of the Board of Directors. In addition, KPMG Peat Marwick LLP, has direct,
private access to the Audit Committee of the Board of Directors to discuss the
results of their audits as well as other auditing and financial reporting
matters as they deem necessary.
There are inherent limitations in any internal control, including the
possibility of human error and the circumvention or overriding of controls.
Accordingly, even effective internal control can provide only reasonable
assurance with respect to financial statement preparation. Further, because of
changes in conditions, the effectiveness of internal control may vary over time.
Management assessed the Corporation's internal control over financial
reporting presented in conformity with generally accepted accounting principles
as of December 31, 1997. This assessment was based on criteria for effective
internal control over financial reporting described in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management
believes that, as of December 31, 1997, the Corporation maintained effective
internal control over financial reporting presented in conformity with generally
accepted accounting principles.
Compliance With Laws And Regulations
Management is also responsible for maintaining effective internal control
over compliance with federal and state laws and regulations concerning dividend
restrictions and federal laws and regulations concerning loans to insiders.
Management has assessed its compliance with the aforementioned laws and
regulations. Based on this assessment, management believes that the
Corporation's insured depository subsidiary, Republic National Bank of New York,
complied, in all material respects, with such laws and regulations during the
year ended December 31, 1997.
[/s/ Walter H. Weiner]
Walter H. Weiner
Chairman of the Board
[/s/ John D. Kaberle, Jr.]
John D. Kaberle, Jr.
Executive Vice President and
Comptroller --
Principal Financial and Accounting
Officer
New York, New York
January 20, 1998
72
REPUBLIC NEW YORK CORPORATION
INDEPENDENT ACCOUNTANTS' REPORT ON MANAGEMENT'S ASSERTIONS RELATED TO
INTERNAL CONTROL OVER FINANCIAL REPORTING
[KPMG PEAT MARWICK LOGO]
The Board of Directors
Republic New York Corporation:
We have examined management's assertion that Republic New York Corporation
(the "Corporation") maintained effective internal control over financial
reporting presented in conformity with generally accepted accounting principles
as of December 31, 1997 included in the accompanying Report of
Management-Internal Control over Financial Reporting.
Our examination was made in accordance with standards established by the
American Institute of Certified Public Accountants and, accordingly, included
obtaining an understanding of the internal control over financial reporting,
testing, and evaluating the design and operating effectiveness of the internal
control, and such other procedures as we considered necessary in the
circumstances. We believe that our examination provides a reasonable basis for
our opinion.
Because of inherent limitations in any internal control, errors or fraud
may occur and not be detected. Also, projections of any evaluation of the
internal control over financial reporting to future periods are subject to the
risk that the internal control may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, management's assertion that the Corporation maintained
effective internal control over financial reporting presented in conformity with
generally accepted accounting principles as of December 31, 1997 is fairly
stated, in all material respects, based upon criteria described in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
[KPMG LOGO SIG]
New York, New York
January 20, 1998
73
SUPPLEMENTARY DATA
REPUBLIC NEW YORK CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
[Enlarge/Download Table]
DECEMBER 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
ASSETS
Cash and due from banks......................... $ 901,783 $ 710,183 $ 675,683 $ 867,242 $ 636,633
Interest-bearing deposits with banks............ 4,756,804 5,909,195 6,094,495 10,242,061 5,346,647
Precious metals................................. 1,241,956 1,231,319 1,250,038 1,456,269 1,117,610
Securities held to maturity..................... 9,237,151 8,135,068 4,487,022 5,887,672 1,992,847
Securities available for sale................... 16,276,667 13,040,445 11,751,523 5,552,056 12,956,946
----------- ----------- ----------- ----------- -----------
Total investment securities........... 25,513,818 21,175,513 16,238,545 11,439,728 14,949,793
Trading account assets.......................... 4,510,955 4,807,788 4,035,606 2,543,637 1,194,629
Federal funds sold and securities purchased
under resale agreements....................... 2,169,291 2,109,109 1,749,268 1,123,925 2,322,465
Loans, net of unearned income................... 12,359,741 11,721,936 9,843,960 8,913,490 9,508,558
Allowance for possible credit losses............ (326,481) (350,358) (300,593) (319,220) (311,855)
Customers' liability on acceptances............. 121,022 938,615 818,007 1,514,461 1,134,294
Accounts receivable and accrued interest........ 2,452,721 2,108,318 1,946,077 1,797,491 2,117,879
Investment in affiliate......................... 864,178 806,274 722,466 607,818 625,333
Premises and equipment.......................... 469,103 469,231 436,771 428,017 399,626
Other assets.................................... 603,464 661,728 371,231 452,986 451,860
----------- ----------- ----------- ----------- -----------
Total assets.......................... $55,638,355 $52,298,851 $43,881,554 $41,067,905 $39,493,472
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits:
In domestic offices........................ $ 2,699,819 $ 2,296,267 $ 1,740,035 $ 1,701,667 $ 1,427,518
In foreign offices......................... 222,957 177,675 160,133 114,503 135,251
Interest-bearing deposits:
In domestic offices........................ 12,214,760 12,559,554 8,471,452 8,534,562 8,724,797
In foreign offices......................... 18,251,998 16,692,083 14,548,013 12,375,270 12,513,684
----------- ----------- ----------- ----------- -----------
Total deposits........................ 33,389,534 31,725,579 24,919,633 22,726,002 22,801,250
Trading account liabilities..................... 5,320,864 4,402,085 3,719,651 2,087,594 177,475
Short-term borrowings........................... 5,613,834 5,446,841 3,890,768 4,969,394 4,164,419
Acceptances outstanding......................... 121,371 939,598 819,766 1,517,675 1,137,636
Accounts payable and accrued expenses........... 2,191,840 1,405,822 2,840,048 1,325,953 2,873,903
Due to factored clients......................... 593,815 604,686 528,684 680,010 614,549
Other liabilities............................... 154,682 218,910 193,645 134,792 122,203
Long-term debt.................................. 1,814,435 1,498,710 1,555,111 2,580,831 2,582,875
Subordinated long-term debt and perpetual
capital notes................................. 2,650,000 2,400,000 2,406,440 2,406,266 2,271,940
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts
holding solely junior subordinated debt
securities.................................... 350,000 350,000 -- -- --
Stockholders' equity:
Preferred stock, no par value.............. 500,000 555,800 575,000 672,500 556,425
Common stock, $5 par value................. 271,771 275,048 281,298 263,106 263,516
Surplus.................................... 421,535 502,425 590,008 437,653 459,713
Retained earnings.......................... 2,227,012 1,918,880 1,636,264 1,457,609 1,204,818
Net unrealized appreciation (depreciation)
on securities available for sale, net of
taxes.................................... 17,662 54,467 (74,762) (191,480) 262,750
----------- ----------- ----------- ----------- -----------
Total stockholders' equity............ 3,437,980 3,306,620 3,007,808 2,639,388 2,747,222
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity.............................. $55,638,355 $52,298,851 $43,881,554 $41,067,905 $39,493,472
=========== =========== =========== =========== ===========
74
REPUBLIC NEW YORK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
[Enlarge/Download Table]
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
INTEREST INCOME:
Interest and fees on loans........................... $1,069,583 $ 919,230 $ 749,719 $ 696,816 $ 635,484
Interest on deposits with banks...................... 298,416 376,030 526,185 414,294 295,871
Interest and dividends on investment securities:
Taxable......................................... 1,511,817 1,279,226 927,740 871,785 847,022
Exempt from federal income taxes................ 90,134 93,257 89,744 76,783 65,759
Interest on trading account assets................... 115,594 67,279 55,736 55,736 54,467
Interest on federal funds sold and securities
purchased under resale agreements.................. 124,347 98,061 97,547 57,915 34,323
---------- ---------- ---------- ---------- ----------
Total interest income...................... 3,209,891 2,833,083 2,446,671 2,173,329 1,932,926
---------- ---------- ---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits................................. 1,451,023 1,282,205 1,138,075 827,790 689,234
Interest on short-term borrowings.................... 449,009 333,075 218,804 218,529 197,769
Interest on long-term debt........................... 281,994 255,618 270,893 280,536 270,072
---------- ---------- ---------- ---------- ----------
Total interest expense..................... 2,182,026 1,870,898 1,627,772 1,326,855 1,157,075
---------- ---------- ---------- ---------- ----------
NET INTEREST INCOME.................................. 1,027,865 962,185 818,899 846,474 775,851
Provision for credit losses.......................... 16,000 32,000 12,000 19,000 85,000
---------- ---------- ---------- ---------- ----------
Net interest income after provision for credit
losses............................................. 1,011,865 930,185 806,899 827,474 690,851
---------- ---------- ---------- ---------- ----------
OTHER OPERATING INCOME:
Income from precious metals.......................... 14,069 24,700 38,049 50,930 37,910
Foreign exchange trading income...................... 119,642 98,165 113,051 91,028 111,572
Trading account profits and commissions.............. 36,964 52,941 24,746 27,357 78,742
Investment securities gains, net..................... 35,117 23,247 25,663 14,971 1,295
Net gain (loss) on loans sold or held for sale....... 19,838 974 6,765 1,763 (843)
Commission income.................................... 87,524 71,393 56,935 57,297 50,956
Equity in earnings of affiliate...................... 125,116 93,418 79,481 77,376 59,463
Other income......................................... 90,038 81,277 68,191 65,646 56,377
---------- ---------- ---------- ---------- ----------
Total other operating income............... 528,308 446,115 412,881 386,368 395,472
---------- ---------- ---------- ---------- ----------
OTHER OPERATING EXPENSES:
Salaries............................................. 279,847 256,002 237,414 238,825 203,759
Employee benefits.................................... 195,170 164,099 144,202 142,358 143,748
Occupancy, net....................................... 71,325 72,692 57,975 55,425 48,161
Restructuring and related charges.................... -- -- 120,000 17,000 --
Other expenses....................................... 357,501 292,961 262,074 267,868 239,297
---------- ---------- ---------- ---------- ----------
Total other operating expenses............. 903,843 785,754 821,665 721,476 634,965
---------- ---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES........................... 636,330 590,546 398,115 492,366 451,358
Income taxes......................................... 187,222 171,706 109,466 152,358 150,153
---------- ---------- ---------- ---------- ----------
NET INCOME........................................... $ 449,108 $ 418,840 $ 288,649 $ 340,008 $ 301,205
========== ========== ========== ========== ==========
NET INCOME APPLICABLE TO COMMON STOCK -- DILUTED..... $ 423,281 $ 386,027 $ 256,764 $ 315,853 $ 283,627
========== ========== ========== ========== ==========
Net income per common share:
Basic........................................... $ 7.98 $ 7.15 $ 4.77 $ 5.95 $ 5.31
Diluted......................................... 7.88 7.07 4.65 5.69 5.10
Cash dividends declared per common share............. 1.84 1.52 1.44 1.32 1.08
Average common shares outstanding:
Basic........................................... 52,813 53,740 52,321 51,001 51,100
Diluted......................................... 53,731 54,594 55,256 55,481 55,572
75
REPUBLIC NEW YORK CORPORATION
SELECTED FINANCIAL DATA -- SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
[Enlarge/Download Table]
1997 1996
----------------------------------------- -----------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Interest income................. $844,676 $817,831 $799,926 $747,458 $739,641 $721,827 $705,968 $665,647
Interest expense................ 578,336 561,081 548,706 493,903 488,941 475,343 464,053 442,561
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income............. 266,340 256,750 251,220 253,555 250,700 246,484 241,915 223,086
Provision for credit losses..... 4,000 4,000 4,000 4,000 4,000 20,000 4,000 4,000
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for credit losses... 262,340 252,750 247,220 249,555 246,700 226,484 237,915 219,086
Other operating income.......... 147,261 129,573 125,069 126,405 119,883 109,783 109,177 107,272
Other operating expenses........ 254,268 220,893 214,495 214,187 207,224 198,294 195,887 184,349
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes...... 155,333 161,430 157,794 161,773 159,359 137,973 151,205 142,009
Income taxes.................... 39,262 49,142 47,289 51,529 50,813 30,321 48,155 42,417
-------- -------- -------- -------- -------- -------- -------- --------
Net income...................... $116,071 $112,288 $110,505 $110,244 $108,546 $107,652 $103,050 $ 99,592
======== ======== ======== ======== ======== ======== ======== ========
Net income applicable to common
stock -- diluted.............. $108,525 $106,414 $104,920 $103,422 $100,202 $ 99,347 $ 94,944 $ 91,534
======== ======== ======== ======== ======== ======== ======== ========
Net income per common share:
Basic...................... $ 2.06 $ 2.01 $ 1.98 $ 1.94 $ 1.88 $ 1.85 $ 1.75 $ 1.68
Diluted.................... 2.02 1.98 1.97 1.91 1.85 1.83 1.74 1.66
Average common shares
outstanding:
Basic...................... 52,564 52,779 52,816 53,098 53,220 53,337 54,016 54,398
Diluted.................... 53,678 53,833 53,362 54,050 54,306 54,312 54,511 55,250
76
AFFILIATE FINANCIAL STATEMENTS
SAFRA REPUBLIC HOLDINGS S.A.
CONSOLIDATED STATEMENTS OF CONDITION
[Enlarge/Download Table]
DECEMBER 31,
------------------------
NOTES 1997 1996
------ ---------- ----------
(IN THOUSANDS OF US$
EXCEPT PER SHARE DATA)
ASSETS:
Cash and due from banks..................................... 73,815 80,760
Interest-bearing deposits with banks........................ 3 7,476,969 6,041,717
Investment securities: 4
Securities available for sale (at approximate market
value)................................................ 5,141,629 4,916,012
Securities held to maturity (approximate market value
of US$4,370,259 in 1997 and US$3,740,434 in 1996)..... 4,344,008 3,749,369
---------- ----------
Total investment securities....................... 9,485,637 8,665,381
---------- ----------
Trading account assets...................................... 5 248,941 202,211
Loans, net of unearned income............................... 6 2,288,896 1,687,050
Allowance for possible credit losses........................ 7 (134,351) (131,071)
Accrued interest receivable................................. 242,310 227,260
Due from brokers............................................ 262,505 160,332
Premises and equipment...................................... 141,088 139,341
Other assets................................................ 270,490 150,428
---------- ----------
Total assets...................................... 20,356,300 17,223,409
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Client deposits............................................. 13,589,790 11,576,742
Bank deposits............................................... 1,811,275 1,761,205
---------- ----------
Total deposits.................................... 8 15,401,065 13,337,947
---------- ----------
Trading account liabilities................................. 5 225,659 148,326
Short-term repurchase agreements............................ 9 1,468,190 1,508,604
Accrued interest payable.................................... 176,414 182,733
Due to brokers.............................................. 80,331 40,150
Other liabilities........................................... 242,627 187,539
Long-term repurchase agreements............................. 9 601,448 --
Long-term debt.............................................. 10 150,000 175,000
Commitments and contingent liabilities 21
Subordinated long-term debt due in 2997..................... 11 250,000 --
SHAREHOLDERS' EQUITY: 13, 14
Common stock, US$2.50 par value, 400,000,000 shares
authorised; 35,662,024 shares issued; 35,270,191
shares outstanding in 1997 and 35,279,450 in 1996..... 89,155 89,155
Surplus..................................................... 818,107 818,793
Retained earnings...................................... 834,476 658,855
Cumulative translation adjustment...................... (43,694) (9,150)
Less: 391,833 shares held in treasury, at cost, in 1997 and
382,574 in 1996........................................... (21,168) (16,857)
Net unrealised appreciation on securities available for
sale, net of taxes........................................ 83,690 102,314
---------- ----------
Total shareholders' equity........................ 1,760,566 1,643,110
---------- ----------
Total subordinated debt and shareholders'
equity........................................... 2,010,566 1,643,110
---------- ----------
Total liabilities and shareholders' equity........ 20,356,300 17,223,409
========== ==========
See accompanying notes to consolidated financial statements.
77
SAFRA REPUBLIC HOLDINGS S.A.
CONSOLIDATED STATEMENTS OF INCOME
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-------------------------------
NOTES 1997 1996 1995
----- --------- ------- -------
(IN THOUSANDS OF US$
EXCEPT PER SHARE DATA)
INTEREST INCOME (INCLUDING FEES AND DIVIDENDS):
Loans....................................................... 112,310 94,090 90,911
Deposits with banks......................................... 356,266 331,949 364,749
Investment securities....................................... 618,337 556,851 444,494
Trading account assets...................................... 2,877 142 3,961
--------- ------- -------
Total interest income............................. 1,089,790 983,032 904,115
--------- ------- -------
INTEREST EXPENSE:
Deposits.................................................... 697,155 624,450 594,997
Short-term repurchase agreements............................ 69,689 81,980 57,792
Long-term repurchase agreements............................. 12,469 -- 3,909
Long-term debt.............................................. 9,541 10,422 12,015
Subordinated long-term debt................................. 3,711 -- --
--------- ------- -------
Total interest expense............................ 792,565 716,852 668,713
--------- ------- -------
NET INTEREST INCOME......................................... 297,225 266,180 235,402
Provision for credit losses................................. 7 16,000 12,000 1,000
--------- ------- -------
Net interest income after provision for credit losses....... 281,225 254,180 234,402
--------- ------- -------
OTHER OPERATING INCOME:
Foreign exchange and precious metals trading income......... 5 40,169 29,990 19,807
Trading account income, net................................. 5 9,860 9,382 7,638
Investment securities losses, net........................... (8,531) (1,042) (4,140)
Commission income, net of expense of US$21,766, US$9,886 and
US$7,413, respectively.................................... 139,462 79,765 69,764
Other income................................................ 7,905 1,018 2,439
--------- ------- -------
Total other operating income...................... 188,865 119,113 95,508
--------- ------- -------
OPERATING EXPENSES:
Salaries.................................................... 61,548 59,469 60,056
Employee benefits........................................... 14 40,776 30,694 26,792
Occupancy, net.............................................. 21 20,893 20,683 19,264
Other expenses.............................................. 70,253 56,675 51,523
--------- ------- -------
Total operating expenses.......................... 193,470 167,521 157,635
--------- ------- -------
INCOME BEFORE INCOME TAXES.................................. 276,620 205,772 172,275
Income taxes................................................ 12 21,565 15,942 10,171
--------- ------- -------
NET INCOME.................................................. 255,055 189,830 162,104
========= ======= =======
Net income per common share: 15
Basic....................................................... 7.23 5.39 4.58
Diluted..................................................... 7.17 5.35 4.54
Average common shares outstanding (in thousands): 15
Basic....................................................... 35,293 35,218 35,385
Diluted..................................................... 35,558 35,502 35,733
See accompanying notes to consolidated financial statements.
78
SAFRA REPUBLIC HOLDINGS S.A.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS OF US$)
COMMON STOCK................................................ 89,155 89,155 89,155
========= ========= =========
SURPLUS:
Balance at beginning of year................................ 818,793 820,119 820,038
Reissuance of common stock under restricted stock plan...... (686) (1,326) 81
--------- --------- ---------
Balance at end of year................................. 818,107 818,793 820,119
========= ========= =========
RETAINED EARNINGS:
Balance at beginning of year................................ 658,855 530,655 426,298
Net income.................................................. 255,055 189,830 162,104
Dividends paid.............................................. (79,434) (61,630) (57,747)
--------- --------- ---------
Balance at end of year................................. 834,476 658,855 530,655
========= ========= =========
CUMULATIVE TRANSLATION ADJUSTMENT:
Balance at beginning of year................................ (9,150) 35,637 12,183
(Decrease) increase during year............................. (34,544) (44,787) 23,454
--------- --------- ---------
Balance at end of year................................. (43,694) (9,150) 35,637
========= ========= =========
SHARES HELD IN TREASURY:
Balance at beginning of year................................ (16,857) (20,981) (4,743)
Purchases................................................... (7,134) (2,249) (19,832)
Reissuances under restricted stock plan..................... 2,823 6,373 3,594
--------- --------- ---------
Balance at end of year................................. (21,168) (16,857) (20,981)
========= ========= =========
NET UNREALISED APPRECIATION (DEPRECIATION) ON SECURITIES
AVAILABLE FOR SALE, NET OF TAXES:
Balance at beginning of year................................ 102,314 13,222 (96,578)
Change attributable to the one time transfer of securities
held to maturity to the available for sale
classification............................................ -- -- 38,199
Unrealised (depreciation) appreciation during year, net of
taxes..................................................... (18,624) 89,092 71,601
--------- --------- ---------
Balance at end of year................................. 83,690 102,314 13,222
========= ========= =========
TOTAL SHAREHOLDERS' EQUITY:
Balance at beginning of year................................ 1,643,110 1,467,807 1,246,353
Net changes during year..................................... 117,456 175,303 221,454
--------- --------- ---------
Balance at end of year................................. 1,760,566 1,643,110 1,467,807
========= ========= =========
See accompanying notes to consolidated financial statements.
79
SAFRA REPUBLIC HOLDINGS S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS OF US$)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. 255,055 189,830 162,104
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortisation, net..................... 23,457 20,922 13,481
Provision for credit losses............................ 16,000 12,000 1,000
Available for sale securities gains.................... (16,791) (20,376) (17,511)
Available for sale securities losses................... 25,322 21,418 21,651
Net changes in trading account assets and
liabilities........................................... (44,497) (10,309) (56,116)
Net change in accrued interest receivable.............. (21,761) 5,038 (94,425)
Net change in accrued interest payable................. 20,979 61,998 25,543
Other, net............................................. (88,827) (79,589) (14,160)
---------- ---------- ----------
Net cash provided by operating activities......... 168,937 200,932 41,567
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Interest-bearing deposits with banks........................ (1,662,231) (191,709) (613,290)
Purchases of securities available for sale.................. (3,521,663) (2,329,695) (3,131,086)
Proceeds from sales of securities available for sale........ 1,692,373 1,626,652 1,587,339
Purchases of securities held to maturity.................... (571,883) (1,920,675) (815,288)
Proceeds from maturities of securities available for sale... 1,107,214 569,440 751,417
Proceeds from maturities of securities held to maturity..... 367,325 357,067 452,626
Loans....................................................... (656,246) (259,441) (107,738)
Other, net.................................................. (64,111) (37,379) (37,026)
---------- ---------- ----------
Net cash used by investing activities............. (3,309,222) (2,185,740) (1,913,046)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Client deposits............................................. 2,312,401 1,759,823 1,636,693
Bank deposits............................................... 139,878 412,485 111,114
Repurchase agreements....................................... 538,849 (87,820) 166,254
(Repayment of) proceeds from issuance of long-term debt..... (25,000) -- 15,000
Proceeds from issuance of subordinated long-term debt....... 250,000 -- --
Dividends paid.............................................. (79,434) (61,630) (57,747)
Purchase of treasury shares................................. (7,134) (2,249) (19,832)
---------- ---------- ----------
Net cash provided by financing activities.............. 3,129,560 2,020,609 1,851,482
---------- ---------- ----------
Effect of exchange rate changes on cash and due from
banks..................................................... 3,780 (9,499) 14,918
---------- ---------- ----------
Net (decrease) increase in cash and due from banks..... (6,945) 26,302 (5,079)
Cash and due from banks at beginning of year................ 80,760 54,458 59,537
---------- ---------- ----------
Cash and due from banks at end of year...................... 73,815 80,760 54,458
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes........................................... 10,932 7,951 8,732
Interest............................................... 790,453 665,713 630,732
Transfer to (from) investments held to maturity from
(to) investments available for sale................... 408,517 679,542 (1,487,556)
See accompanying notes to consolidated financial statements.
80
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANISATION
Safra Republic Holdings S.A. ("Safra Republic"), incorporated in the Grand
Duchy of Luxembourg in May 1988, is the holding company of six European banking
subsidiaries: Republic National Bank of New York (Suisse) S.A., Republic
National Bank of New York (Luxembourg) S.A., Republic National Bank of New York
(Monaco) S.A., Republic National Bank of New York (France) S.A., Republic
National Bank of New York (Guernsey) Limited and Republic National Bank of New
York (Gibraltar) Limited.
The Board of Directors of Safra Republic has adopted a resolution that
Safra Republic shall serve as a source of financial strength to each of its
banking subsidiaries and, for the benefit of depositors and other creditors,
Safra Republic stands ready to use its available resources to provide adequate
capital funds to enable those subsidiary banks to meet their commitments in the
normal course of business.
At December 31, 1997, Republic New York Corporation ("RNYC") owned
approximately 49.1% and Saban S.A. owned approximately 20.8% (our two largest
principal shareholders) of Safra Republic's outstanding common stock. By virtue
of these ownership interests in Safra Republic, the supervisory responsibilities
of the Board of Governors of the Federal Reserve System ("Federal Reserve") and
the United States Comptroller of the Currency ("OCC") extend to Safra Republic.
It is the understanding of the bank regulators of the countries in which Safra
Republic has subsidiaries ("bank regulators") that the Federal Reserve and the
OCC exercise overall consolidated supervisory oversight responsibilities in
respect of Safra Republic and its subsidiaries ("the Company"), and that the
Luxembourg Monetary Institute ("IML"), by virtue of the European Directive on
Consolidated Supervision, exercises prudential consolidated supervisory
responsibilities, while the bank regulators oversee the local subsidiaries'
compliance with local laws, regulations and banking practice.
During the first quarter of 1997, the Company purchased Mercury Bank AG, a
Zurich based private bank which was subsequently merged into Republic National
Bank of New York (Suisse) S.A. Such transaction was accounted for under the
purchase method. Goodwill arising from the transaction is amortised on a
straight-line basis over 10 years. During the third quarter of 1996, the Company
purchased Banque Unigestion S.A., a Geneva based private bank which was
subsequently merged into Republic National Bank of New York (Suisse) S.A. such
transaction was accounted for under the purchase method. Goodwill arising from
the transaction is amortised on a straight-line basis over 10 years.
2. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
The accounting and reporting policies of the Company generally reflect
United States banking industry practices and conform to United States generally
accepted accounting principles ("U.S. GAAP"). The Company adopted U.S. GAAP for
its financial reporting to RNYC, Saban S.A. and their regulatory supervisors due
to the reasons set out in Note 1. A reconciliation of total assets,
shareholders' equity and net income as of and for the two years ended December
31, 1997 prepared under both U.S. GAAP and Luxembourg generally accepted
accounting principles ("Luxembourg GAAP") is included in note 23.
The preparation of financial statements requires that management make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
income and expense for the reporting period. Such estimates are subject to
change in the future as additional information becomes available or previously
existing circumstances are modified.
A summary of the significant accounting policies followed by the Company in
the preparation of the accompanying consolidated financial statements is set
forth below:
A. BASIS OF CONSOLIDATION: The consolidated financial statements include
the accounts of Safra Republic and its banking and non-banking subsidiaries.
Significant inter-company transactions are eliminated in consolidation.
Assets and liabilities are translated into their U.S. Dollar equivalents
based on rates of exchange prevailing at year end. Revenue and expenses are
translated at average exchange rates for the year. Net translation gains or
losses on subsidiaries' financial statements whose functional currency is not
the U.S. Dollar, are a component of the cumulative translation adjustment in
shareholders' equity net of related hedging results.
Certain of the following footnotes have been prepared on a geographical
ultimate risk basis. Geographical ultimate risk is defined as the domicile of
the guarantor or the domicile of the counterparty or the head office of the
guarantor or counterparty if it is a branch.
Certain prior year amounts have been reclassified to conform with the 1997
presentation.
B. SECURITIES:
Investment securities: The Company designates an investment security and
any related hedge as held to maturity or available for sale at the time of
acquisition. The held to maturity classification includes debt securities, which
are carried at amortised cost, that the Company has the positive intent and
ability to hold to maturity. The available for sale classification includes debt
and marketable equity securities which are carried at estimated fair value.
Unrealised gains or losses on securities available for sale and off-balance
sheet financial instruments used to hedge these securities are
81
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
included as a separate component of shareholders' equity, net of tax effect.
Gains or losses on sales of securities available for sale are recognised by the
specific identification method and are recorded in investment securities
(losses) gains, net.
The Company periodically reviews its intent with respect to securities
available for sale and may re-designate these securities and related off-balance
sheet financial instruments used as hedges as held to maturity. At the time of
re-designation, such securities are recorded at market value, and any unrealised
appreciation or depreciation existing with respect to such securities and
related hedges continues to be reported as a separate component of shareholders'
equity and amortised to interest income over the life of the security.
Trading account securities: Trading securities are carried at market value
and are recorded as of their trade dates. Short trading positions are classified
as liabilities. Gains and losses on trading positions are recognised currently
as trading account income, net.
C. Loans: Loans are carried at their principal amount outstanding, net of
unearned income. Unearned income on discounted loans is accreted rateably into
interest income.
Non-accrual loans are those loans on which the accrual of interest ceases
when principal or interest payments are past due 90 days. A loan may be placed
on a non-accrual status prior to the 90 day period if, in management's opinion,
conditions warrant.
Impaired loans include all loans where it is probable that the Company will
be unable to collect all contractual amounts due (principal and interest) as
scheduled in the loan agreement. Impaired loans have been placed on non-accrual
status either because interest or principal are past due or, based on
management's judgement, the Company does not expect to receive all principal and
interest in accordance with the terms of the loan agreements. Factors involved
in determining impairment include, but are not limited to, expected future cash
flows and financial condition of the borrower. The impairment of such loans is
measured based on either an estimate of the present value of expected future
cash flows at a loan's effective interest rate or the fair value of collateral
if the loan is collateral dependent. The difference between such estimate and
the carrying value of the loan is provided for in the allowance for possible
credit losses.
When a loan is placed on a non-accrual status all accrued interest
receivable is reversed and charged against current interest income. Interest
received on non-accrual loans is either applied against principal or credited to
income, according to management's judgement as to the collectibility of
principal. Generally, a loan may be restored to accrual status only after all
delinquent interest and principal are brought current, and, in the case of loans
where interest has been interrupted for a substantial period, a regular payment
performance is established. Management charges off non-accrual and impaired
loans based on its assessment of qualitative and quantitative factors on an
individual loan basis.
An allowance for possible credit losses is maintained that is considered
adequate to absorb losses inherent in the existing portfolios of loans and other
undertakings to extend credit, such as irrevocable unused loan commitments, or
to make payments to others for which a client is ultimately liable, such as
standby letters of credit and guarantees, commercial letters of credit and
acceptances, and other credit related exposures. A judgement as to the adequacy
of the allowance is made at the end of each quarterly reporting period. Should
the allowance be judged to be inadequate because of changes in the size or risk
characteristics of the portfolios, the allowance is increased through a
provision for credit losses that is charged to income in the quarterly reporting
period.
During 1997, in conformity with U.S. banking practice, the Company changed
its method of reporting the aggregate allowance for possible credit losses such
that the portions of the allowance for credit losses resulting from the credit
risk associated with trading instruments and off-balance sheet credit
commitments are shown in trading account assets and other liabilities,
respectively.
D. Depreciation and amortisation: Premises and equipment, including
leasehold improvements, are carried at cost less accumulated depreciation and
amortisation. Depreciation and amortisation are computed on a straight-line
basis and are charged to other operating expenses over the lesser of the
estimated useful lives of the assets or lease terms. The estimated useful lives
for premises and equipment are 25 to 40 years and 3 to 10 years, respectively.
Maintenance and repairs are expensed as incurred and improvements are
capitalised. Goodwill is amortised on a straight line basis over a period not to
exceed 15 years.
E. Securities financing arrangements: Securities sold under repurchase
agreements ("repurchase agreements") are carried at the amounts at which the
securities were initially sold. Interest expense recognised under these
agreements is recorded as interest expense on repurchase agreements and
borrowings. Interest income on the related securities is recorded as interest
income on investment securities.
F. Financial instruments: Off-balance sheet financial instruments include,
forwards, swaps, caps and options in interest rate, foreign exchange, precious
metals and equity markets. The Company uses these instruments in conjunction
with its overall trading and risk management activities. The accounting for
these instruments under the accrual, deferral or settlement basis of accounting
is dependant on their designated purpose.
82
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest rate swaps are entered into by the Company for the purpose of
maximisation of net interest income. They are accounted for on an accrual basis
in the interest income or expense caption related to the asset or liability to
which they are designated. The related amounts receivable or payable from
counterparties are included in the respective accrued interest receivable and
payable captions in the consolidated statements of condition and included under
the caption operating activities in the consolidated statements of cash flows.
Interest rate caps are entered into by the Company for the purpose of net
interest income maximisation. The premiums paid for purchased interest rate cap
agreements are amortised into the related income or expense caption of the asset
or liability for which they are designated over the life of the agreements. They
are included under the caption operating activities in the consolidated
statements of cash flows. Unamortised premiums are included in the other assets
caption in the consolidated statements of condition.
Forward foreign exchange and currency option contracts which are entered
into by the Company as hedges of its investments in certain subsidiaries
denominated in currencies other than the U.S. Dollar are accounted for under the
deferral basis of accounting, with related unrealised gains and losses recorded
in the cumulative translation adjustment, as a component of shareholders'
equity.
The related amounts receivable and payable from counterparties are included
in other assets and liabilities in the consolidated statements of condition and
included under the caption investing activities in the consolidated statements
of cash flows.
For financial instruments that are designated to balance sheet assets or
liabilities, the gains or losses resulting from a termination of these financial
instruments is deferred and amortised to the related income or expense caption
over the remaining life of the original contact.
In the event that the designated asset or liability is terminated, the
related off-balance sheet financial instrument is terminated and the resultant
gain or loss recognised currently in the income or expense caption of the
related asset or liability.
The Company monitors the effectiveness of the above mentioned off-balance
sheet financial instruments used for asset/liability management, through
financial analysis of net interest income and cumulative translation adjustment
on a daily basis. This analysis incorporates a review of price, interest rate
and currency rate movements and is premised on management's assessments of its
risk management requirements in relation to economic, political and other
internal and external financial factors.
Off-balance sheet trading instruments are primarily entered into at the
request of clients and are offset with external counterparties and include
foreign exchange and precious metals forwards, swaps and options. The gain or
loss related to these contracts are recorded in trading account income, net,
foreign exchange and precious metals trading income and included under the
caption operating activities in the consolidated statements of cash flows. These
financial instruments are also recorded in trading account assets and trading
account liabilities in the consolidated statements of condition.
G. Income taxes: The earnings of the Company are subject to the local
income tax regulations of the respective countries in which the subsidiaries
operate. Income tax expense in the accompanying consolidated financial
statements represents the aggregate of the subsidiaries' income taxes for the
respective years. Deferred tax assets and liabilities are recognised for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their tax
bases.
H. Transactions with affiliates: Amounts due to and from the Company's
affiliates (primarily the two largest principal shareholders) arise from
transactions conducted in the ordinary course of business. Such transactions are
made upon the same terms as those prevailing at the time for comparable
transactions with third parties. Such amounts are included in the consolidated
financial statements on a line-by-line basis.
I. Retirement plans: The employees of the Company are covered by
retirement plans which are based upon the social laws of the respective
countries in which each subsidiary operates.
J. Income per common share: On December 31, 1997, the Company adopted SFAS
128 "earnings per share" (EPS). The SFAS specifies the computation and
disclosure requirements for earnings per share for publicly held common shares
or potential common shares.
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding during
each of the years. In the diluted earnings per share computation, the weighted
number of shares includes the number of additional shares to be issued under the
Company's 1989 Stock Award Plan.
K. Statements of cash flows: For purposes of presenting cash flow
information, the Company defines cash and cash equivalents as the consolidated
statements of condition caption "cash and due from banks".
83
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INTEREST-BEARING DEPOSITS WITH BANKS
The following tables provide information on the composition by ultimate
risk and maturity distribution of the Company's interest-bearing deposits with
banks at December 31:
[Download Table]
1997 1996
--------- ---------
(IN THOUSANDS OF US$)
ULTIMATE RISK:
United States.......................................... 358,902 273,408
United Kingdom and Channel Islands..................... 1,109,018 834,321
Continental Europe..................................... 5,578,513 4,207,261
Japan.................................................. 50,000 359,264
Central and South America.............................. 103 59,722
Canada................................................. 332,945 204,385
Southeast Asia......................................... -- 20,000
Other.................................................. 47,488 83,356
--------- ---------
7,476,969 6,041,717
========= =========
MATURITY DISTRIBUTION:
Due within one month................................... 5,073,393 3,725,733
Due after one month but within six months.............. 2,261,754 2,229,055
Due after six months but within twelve months.......... 141,822 86,285
Due after one year..................................... -- 644
--------- ---------
7,476,969 6,041,717
========= =========
4. INVESTMENT SECURITIES
The following tables provide information related to the Company's portfolio
of securities available for sale and held to maturity at respective year ends:
Securities available for sale
[Enlarge/Download Table]
1997
--------------------------------------------------
GROSS UNREALISED
------------------- BOOK/
AMORTISED COST GAINS (LOSSES) MARKET
-------------- ------- -------- ---------
(IN THOUSANDS OF US$)
Banks....................................................... 948,380 26,974 (2,374) 972,980
Governments and government agencies......................... 3,127,164 63,516 (21,609) 3,169,071
Companies................................................... 1,015,074 20,670 (8,040) 1,027,704
Interest rate swaps and caps................................ -- 6,739 (34,865) (28,126)
--------- ------- ------- ---------
5,090,618 117,899 (66,888) 5,141,629
========= ======= ======= =========
[Enlarge/Download Table]
1996
--------------------------------------------------
GROSS UNREALISED
------------------- BOOK/
AMORTISED COST GAINS (LOSSES) MARKET
-------------- ------- -------- ---------
(IN THOUSANDS OF US$)
Banks....................................................... 1,233,818 42,714 (3,948) 1,272,584
Governments and government agencies......................... 2,526,926 111,155 (11,426) 2,626,655
Companies................................................... 1,067,558 11,355 (8,268) 1,070,645
Interest rate swaps and caps................................ -- 13,627 (67,499) (53,872)
--------- ------- ------- ---------
4,828,302 178,851 (91,141) 4,916,012
========= ======= ======= =========
84
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SECURITIES HELD TO MATURITY
[Enlarge/Download Table]
1997
-------------------------------------------------
GROSS UNREALISED
BOOK/ ------------------ ESTIMATED
AMORTISED COST GAINS (LOSSES) MARKET
-------------- ------ -------- ---------
(IN THOUSANDS OF US$)
Banks....................................................... 280,246 3,434 (604) 283,076
Governments and government agencies......................... 3,962,751 49,728 (7,350) 4,005,129
Companies................................................... 101,011 7,032 (11) 108,032
Interest rate swaps and caps................................ -- 4,293 (30,271) (25,978)
--------- ------ ------- ---------
4,344,008 64,487 (38,236) 4,370,259
========= ====== ======= =========
[Enlarge/Download Table]
1996
-------------------------------------------------
GROSS UNREALISED
BOOK/ ------------------ ESTIMATED
AMORTISED COST GAINS (LOSSES) MARKET
-------------- ------ -------- ---------
(IN THOUSANDS OF US$)
Banks....................................................... 60,419 2,871 (9) 63,281
Governments and government agencies......................... 3,591,104 32,325 (28,397) 3,595,032
Companies................................................... 97,846 7,460 -- 105,306
Interest rate swaps and caps................................ -- 13,703 (36,888) (23,185)
--------- ------ ------- ---------
3,749,369 56,359 (65,294) 3,740,434
========= ====== ======= =========
TOTAL SECURITIES:
The following table provides information on all investment securities at
December 31, 1997, based on scheduled maturities. Actual maturities can be
expected to differ from scheduled maturities due to prepayment and early call
privileges of the issuer.
[Enlarge/Download Table]
AVAILABLE FOR SALE HELD TO MATURITY
--------------------------- ---------------------------
BOOK/ BOOK/ ESTIMATED
AMORTISED COST MARKET AMORTISED COST MARKET
-------------- --------- -------------- ---------
(IN THOUSANDS OF US$)
Due in one year or less................................. 279,376 273,735 46,920 47,323
Due after one year but within five years................ 1,020,925 1,039,206 458,020 469,147
Due after five years but within ten years............... 888,429 904,730 99,339 102,311
Due after ten years..................................... 764,816 782,218 22,399 23,187
Mortgage-backed securities.............................. 1,983,676 2,001,850 3,717,330 3,754,269
Equity securities....................................... 153,396 168,016 -- --
Interest rate swaps and caps............................ -- (28,126) -- (25,978)
--------- --------- --------- ---------
5,090,618 5,141,629 4,344,008 4,370,259
========= ========= ========= =========
Mortgage-backed securities included in the tables above in available for
sale and held to maturity securities have estimated average lives based on year
end market conditions of approximately 6.0 years and 6.1 years, respectively.
During the years ended December 31, 1997 and 1996, the Company transferred
investment securities from the available for sale classification to the held to
maturity classification. The market value of the securities transferred was US$
409 million and US$ 680 million, respectively. The unrealised holding gains at
the date of transfers were US$ 21.2 million and US$ 32.9 million, respectively.
The unrealised holding gains are included as a component of shareholders' equity
and are being amortised over the life of the securities that were transferred.
In December 1995, the Company reassessed the appropriateness of its
investment securities portfolio classifications under a one-time provision
granted in a Special Report issued by the Financial Accounting Standards Board.
As a result of this portfolio reassessment, the Company transferred certain
securities with a book value of approximately US$ 1.5 billion from held to
maturity to available for sale. The securities transferred had a net unrealised
appreciation of US$ 38.2 million.
Investment securities having a book value of approximately US$ 2.1 billion
at December 31, 1997 were pledged to secure short-term and long-term repurchase
agreements.
85
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides information on the composition by ultimate
risk of the Company's total investment securities portfolio as of December 31:
[Enlarge/Download Table]
1997 1996
------------------------ ------------------------
APPROXIMATE APPROXIMATE
BOOK MARKET BOOK MARKET
--------- ----------- --------- -----------
(IN THOUSANDS OF US$)
United States.............................................. 6,683,940 6,700,940 5,609,611 5,586,281
United Kingdom and Channel Islands......................... 307,769 313,767 461,526 468,378
Continental Europe......................................... 1,739,768 1,743,331 1,766,253 1,775,490
Japan...................................................... 17,628 17,541 37,713 37,713
Central and South America.................................. 609,924 609,926 622,331 622,331
Canada..................................................... 82,150 82,150 74,040 74,040
Southeast Asia............................................. 1,566 1,566 2,480 2,480
Other...................................................... 42,892 42,667 91,427 89,733
--------- --------- --------- ---------
9,485,637 9,511,888 8,665,381 8,656,446
========= ========= ========= =========
5. TRADING ACCOUNT ASSETS AND TRADING ACCOUNT LIABILITIES
The following table presents the composition of trading account assets and
trading account liabilities at December 31:
[Download Table]
1997 1996
-------- --------
(IN THOUSANDS OF US$)
Trading account assets:
Unrealised gains on forwards, swaps and options............. 211,980 141,931
Mutual funds and equity securities.......................... 115 2,162
Debt securities............................................. 38,491 58,118
Allowance for trading losses................................ (1,645) --
------- -------
248,941 202,211
======= =======
Trading account liabilities:
Unrealised losses on forwards, swaps and options............ 225,659 148,326
======= =======
The Company's trading activities consist primarily of offsetting foreign
exchange and precious metals forwards, swaps and options entered into to
accommodate clients' corresponding transactions. The Company also trades in
equity markets and in debt securities. The following table presents the results
of the Company's trading activities for each of the years in the three-year
period ended December 31, 1997:
[Enlarge/Download Table]
1997 1996 1995
------ ------ ------
(IN THOUSANDS OF US$)
Foreign exchange and precious metals trading income......... 40,169 29,990 19,807
Trading account income (loss), net:
Mutual funds and equity securities..................... -- 903 5,852
Debt securities........................................ 10,457 8,600 (697)
Interest rate swaps and options........................ (597) (121) 2,483
------ ------ ------
9,860 9,382 7,638
------ ------ ------
Total trading income.............................. 50,029 39,372 27,445
====== ====== ======
86
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables present information related to the fair value, which
is also the carrying value, of swaps, forwards and options held for trading
purposes:
[Enlarge/Download Table]
AVERAGE FAIR FAIR VALUE AT
VALUE DURING 1997 DECEMBER 31, 1997
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------- ----------- ------- -----------
(IN THOUSANDS OF US$)
Interest rate swaps......................................... 177 517 260 555
Foreign exchange and precious metals:
Spot, swaps and forwards.................................... 122,481 140,736 100,074 115,486
Options written............................................. -- 77,396 -- 97,316
Options purchased........................................... 79,733 -- 100,263 --
------- ------- ------- -------
202,214 218,132 200,337 212,802
------- ------- ------- -------
Debt and equity securities:
Options written............................................. -- 13,868 -- 12,302
Options purchased........................................... 13,468 -- 11,383 --
------- ------- ------- -------
13,468 13,868 11,383 12,302
------- ------- ------- -------
215,859 232,517 211,980 225,659
======= ======= ======= =======
[Enlarge/Download Table]
AVERAGE FAIR FAIR VALUE AT
VALUE DURING 1996 DECEMBER 31, 1996
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------- ----------- ------- -----------
(IN THOUSANDS OF US$)
Interest rate swaps......................................... 1,554 385 840 148
Foreign exchange and precious metals:
Spot, swaps and forwards.................................... 94,049 88,016 114,445 122,933
Options written............................................. -- 15,010 -- 20,928
Options purchased........................................... 15,339 -- 22,329 --
------- ------- ------- -------
109,388 103,026 136,774 143,861
------- ------- ------- -------
Debt and equity securities:
Options written............................................. -- 3,222 -- 4,317
Options purchased........................................... 3,213 -- 4,317 --
------- ------- ------- -------
3,213 3,222 4,317 4,317
------- ------- ------- -------
114,155 106,633 141,931 148,326
======= ======= ======= =======
6. LOANS
The following table presents the composition of the Company's loan
portfolio at December 31:
[Download Table]
1997 1996
--------- ---------
(IN THOUSANDS OF US$)
Real estate................................................. 72,512 132,904
Commercial and other........................................ 2,017,732 1,437,281
Banks and other financial institutions...................... 46,696 14,820
Governments and government agencies......................... 152,128 102,163
--------- ---------
2,289,068 1,687,168
Less unearned income........................................ (172) (118)
--------- ---------
Loans, net of unearned income............................... 2,288,896 1,687,050
========= =========
The Company grants loans in the ordinary course of business, on normal
credit terms. The Company's policy for requiring collateral is based on
management's evaluation of the counterparty; collateral may include real estate,
deposits, marketable securities, accounts receivable and inventory.
87
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. AGGREGATE ALLOWANCE FOR POSSIBLE CREDIT LOSSES
Changes in the Company's aggregate allowance for possible credit losses
applicable to the operations for each of the years in the three-year period
ended December 31, 1997 were as follows:
[Enlarge/Download Table]
1997 1996 1995
------- ------- -------
(IN THOUSANDS OF US$)
Balance at beginning of year................................ 131,071 130,300 124,774
Provision................................................... 16,000 12,000 1,000
------- ------- -------
147,071 142,300 125,774
------- ------- -------
Loans charged-off........................................... (2,370) (5,494) (8,647)
Recoveries.................................................. 8,659 3,269 5,400
------- ------- -------
Net recoveries (charge-offs)........................... 6,289 (2,225) (3,247)
Translation adjustment...................................... (8,320) (9,004) 7,773
------- ------- -------
Balance at end of year................................. 145,040 131,071 130,300
======= ======= =======
At December 31, 1997, the aggregate allowance was apportioned and reported
as follows: US$ 1,645,000 applicable to trading account assets which is a
reduction of "trading account assets", US$ 9,044,000 included in "other
liabilities" in respect of off-balance sheet extensions of credit, such as
standby letters of credit, guarantees and commitments, and US$ 134,351,000,
which is available to absorb all other possible credit losses.
The principal balances of the Company's non-accrual loans at December 31,
1997, 1996 and 1995 were US$ 10,271,000, US$ 10,777,000 and US$ 19,697,000
respectively, all of which were considered impaired. The Company has established
an allowance for possible credit losses totalling US$ 3,501,000 related to these
impaired loans (1996: US$ 3,871,000). The average amount of impaired loans, net
of charge-offs, during 1997 was US$ 11,795,000 (1996: US$ 15,054,000). At
December 31, 1997 and 1996, there were US$ 3,358,000 and US$ 6,045,000,
respectively, of restructured loans considered as non-accrual.
The Company recognises interest income on non-accrual and impaired loans on
a cash basis. The following table presents the effect of non-accrual and
impaired loans on interest income for each of the years in the three-year period
ended December 31, 1997:
[Download Table]
1997 1996 1995
----- ----- -----
(IN THOUSANDS OF US$)
Gross amount of interest that would have been earned at
original contract rates................................... 590 753 927
Actual amount recorded as interest income................... (9) (51) (772)
--- --- ----
Foregone interest income.................................... 581 702 155
=== === ====
8. DEPOSITS
Included in total deposits at December 31, 1997 and 1996 were US$ 662
million and US$ 450 million, respectively, of non-interest-bearing deposits.
9. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
The following table provides information on securities sold under
repurchase agreements based on scheduled maturities at December 31:
[Download Table]
1997 1996
--------- ---------
(IN THOUSANDS OF US$)
Due within 30 days.......................................... 535,744 414,580
Due after 30 days but within 90 days........................ 437,708 448,618
Due after 90 days but within one year....................... 494,738 645,406
--------- ---------
1,468,190 1,508,604
--------- ---------
Due after one year.......................................... 601,448 --
--------- ---------
2,069,638 1,508,604
========= =========
88
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table provides information on securities sold under
repurchase agreements at December 31:
[Enlarge/Download Table]
1997 1996
----------- -----------
(IN THOUSANDS OF US$
EXCEPT FOR INTEREST RATES)
Book value of securities sold under repurchase agreements... 2,076,088 1,491,710
Market value of securities sold under repurchase
agreements................................................ 2,113,482 1,530,482
Accrued interest receivable on securities sold under
repurchase agreements..................................... 13,234 9,640
Accrued interest payable on securities sold under repurchase
agreements................................................ 23,555 18,867
Average interest rate at year end........................... 5.69% 5.65%
Maximum amount outstanding during year...................... 2,069,638 2,163,791
Average amount outstanding during year...................... 1,475,819 1,514,071
The securities sold under repurchase agreements in 1997 and 1996 consisted
principally of GNMA securities.
10. LONG-TERM DEBT
The following table provides information on long-term debt at December 31,
1997 and 1996.
[Download Table]
1997 1996
-------- --------
(IN THOUSANDS OF US$
EXCEPT FOR INTEREST
RATES)
Floating Rate Notes due September 1998 (5.84% in 1997 and
5.75% in 1996)............................................ 150,000 150,000
Euro Deposit Notes due between January 2000 and July 2005
(between 6.0% and 8.5% in 1996)........................... -- 25,000
------- -------
150,000 175,000
======= =======
The Euro Deposits Notes were repurchased prior to their scheduled maturity.
11. SUBORDINATED LONG-TERM DEBT DUE 2997
The Company's subordinated long-term debt at December 31, 1997 consisted of
US$ 250 million subordinated debentures due in 2997. The interest rate on the
debentures was 7.125%. The debentures were sold in a private placement on
October 15, 1997.
The debentures are direct unsecured general obligations of the Company and
are subordinated to all present and future senior indebtedness of the Company.
At any time prior to the scheduled maturity date, subject to the prior consent
of the IML, the Company may repay the principal amount of the debentures at a
specified price. The net proceeds received by the Company from the sale of the
debentures were used for general corporate purposes. These debentures are a
component of total qualifying capital under applicable risk-based capital rules.
12. INCOME TAXES
Total income tax expense for each of the years in the three-year period
ended December 31, 1997, was allocated as follows:
[Enlarge/Download Table]
1997 1996 1995
------ ------ ------
(IN THOUSANDS OF US$)
Income from operations...................................... 21,565 15,942 10,171
Shareholders' equity:
Net unrealised (depreciation) appreciation on
securities available for sale......................... (7,039) 8,311 6,810
The components of the Company's consolidated income tax expense from
operations for each of the years in the three-year period ended December 31,
1997, were as follows:
[Enlarge/Download Table]
1997 1996 1995
------ ------ ------
(IN THOUSANDS OF US$)
Current tax expense......................................... 15,711 14,959 6,653
Deferred tax expense........................................ 5,854 983 3,518
------ ------ ------
21,565 15,942 10,171
====== ====== ======
89
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The principal sources of deferred income taxes attributable to operations
in 1997, 1996 and 1995 and the effects of each on the amount of taxes were as
follows:
[Enlarge/Download Table]
1997 1996 1995
----- ------ -----
(IN THOUSANDS OF US$)
Statutory provisions for credit losses...................... 3,518 3,072 2,109
Unrealised (losses) gains on securities..................... (493) 55 (660)
Other, net.................................................. 2,829 (2,144) 2,069
----- ------ -----
5,854 983 3,518
===== ====== =====
The tax effects of temporary differences that gave rise to a significant
portion of the deferred tax assets and deferred tax liabilities at December 31,
1997 and 1996 are presented below:
[Download Table]
1997 1996
-------- --------
(IN THOUSANDS OF US$)
Deferred tax assets:
Allowance for credit losses............................ 23,916 23,078
Other.................................................. 261 --
------- -------
24,177 23,078
Less valuation allowance adjustment......................... (23,916) (23,078)
------- -------
261 --
------- -------
Deferred tax liabilities:
Net unrealised appreciation on securities available for
sale.................................................. 6,493 13,532
Unrealised gains on securities......................... 175 668
Statutory allowance for credit losses.................. 11,719 8,201
Liability from purchase of Mercury Bank AG............. 2,824 --
Other.................................................. 3,470 380
------- -------
24,681 22,781
------- -------
Net deferred tax liabilities (included in other
liabilities).............................................. 24,420 22,781
======= =======
Management does not consider that all of the deferred tax assets will be
realisable in the foreseeable future due to the uncertainty related to the
timing of the tax deductions and the associated benefits resulting from loans
charged-off and other loan loss provisions in the respective financial entities.
At December 31, 1997, the Company's subsidiaries had undistributed earnings of
approximately US$ 225 million which would be subject to a withholding tax of
approximately US$ 77 million upon distribution. This withholding tax liability
has not been provided for as the Company intends indefinitely to reinvest these
earnings.
13. SHAREHOLDERS' EQUITY
On May 14, 1997, the shareholders approved a 2-for-1 split of the Company's
common stock as of May 31, 1997. Such distribution was made on May 31, to
shareholders of record at that date. All applicable share and per share data
have been adjusted for the stock split.
On October 15, 1997, the shareholders of Safra Republic authorized the
issuance of 200,000,000 preferred shares of US$ 2.50 each. Should the Board of
Directors resolve to issue non-voting preferred shares, such shares may not
represent more than 50% of the total issued share capital nor pay a cumulative
dividend of more than 20% per annum of the issue price of the non-voting
preferred shares.
At December 31, 1997 and 1996, Safra Republic had US$ 360 million and US$
271 million, respectively, in foreign exchange contracts entered into to hedge
its investments in subsidiaries whose functional currencies are other than the
U.S. Dollar. At December 31, 1997 the gross unrealised gains and losses under
these contracts were US$ 13,298,000 and US$ nil, respectively (1996: US$
20,154,000 and US$ 873,000, respectively). At December 31, 1997 and 1996, Safra
Republic's total net un-hedged equity investment in subsidiaries denominated in
European currencies was approximately 21% and 23%, respectively, of the
Company's total shareholders' equity.
Safra Republic owns all of the outstanding shares of its various
consolidated subsidiaries. Safra Republic and its subsidiaries are limited under
laws in effect in their respective countries, as to the amount of dividends
which may be distributed to Safra Republic and its shareholders. As of December
31, 1997, approximately US$ 52 million of consolidated retained earnings, were
not available for distribution due to these legal restrictions.
The Board of directors of Safra Republic has authorised the purchase of up
to 10% of its issued shares of common stock in open market transactions. The
Company had accumulated purchases of 897,968 shares at December 31, 1997.
90
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. EXECUTIVE COMPENSATION
Safra Republic is authorised by its Board of Directors to award under the
1989 Stock Award and the 1989 Stock Option Plans up to 10% of its issued shares
of common stock to key employees of the Company. The terms of the Stock Award
Plan restrict the use of the grants for a specified time period generally
ranging from three to five years for each individual employee. Under the Stock
Option Plan, the options are exercisable within five years following the date of
grant. Upon exercising the option the holders are entitled to take ownership of
the shares of common stock after a specified amount of time of continued
employment. The following shares have been granted under the 1989 Stock Award
Plan:
[Download Table]
NUMBER AGGREGATE
OF SHARES COST
--------- ---------
(IN THOUSANDS OF US$
EXCEPT PER SHARE DATA)
Balance at December 31, 1994................................ 379,400 11,949
Granted..................................................... 89,334 3,809
Issued...................................................... (131,504) (3,610)
Cancelled................................................... (20,720) (169)
-------- ------
Balance at December 31, 1995................................ 316,510 11,979
Granted..................................................... 81,480 3,490
Issued...................................................... (143,000) (4,867)
Cancelled................................................... (3,200) (11)
-------- ------
Balance at December 31, 1996................................ 251,790 10,591
Granted..................................................... 71,960 4,740
Issued...................................................... (58,860) (2,087)
-------- ------
Balance at December 31, 1997................................ 264,890 13,244
======== ======
The aggregate cost of common stock granted under the 1989 Stock Award Plan
is based on the fair market value on the date of grant and is amortised to
expense over the period under which such shares are restricted. Included in
employee benefits expense for 1997 is US$ 3,946,000 (1996: US$ 3,571,000; 1995:
US$ 3,067,000) related to this plan.
15. NET INCOME PER COMMON SHARE
The following table provides a reconciliation of the net income and common
shares outstanding of the basic and diluted net income per common share
computations for each of the years in the three-year period ended December 31,
1997:
[Enlarge/Download Table]
CONVERSION OF
BASIC STOCK AWARDS DILUTED
------- ------------- -------
(IN THOUSANDS OF US$ EXCEPT
PER SHARE DATA)
1997
Net income.................................................. 255,055 255,055
Common shares outstanding................................... 35,293 265 35,558
Net income per common share................................. 7.23 (0.06) 7.17
======= ===== =======
1996
Net income.................................................. 189,830 189,830
Common shares outstanding................................... 35,218 284 35,502
Net income per common share................................. 5.39 (0.04) 5.35
======= ===== =======
1995
Net income.................................................. 162,104 162,104
Common shares outstanding................................... 35,385 348 35,733
Net income per common share................................. 4.58 (0.04) 4.54
======= ===== =======
16. RETIREMENT BENEFITS
Retirement benefits are generally covered by local plans based on length of
service, compensation levels and, where applicable, employee contributions, with
the funding of these plans based on local legal requirements.
91
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the plans' funded status and amounts
recognized in the Company's consolidated statements of condition at respective
year ends.
[Download Table]
YEAR ENDED
DECEMBER 31,
----------------------
1997 1996
-------- --------
(IN THOUSANDS OF US$)
----------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligations, fully vested.......... 46,214 39,509
------ ------
Plan assets at fair value................................... 73,129 59,397
Projected benefit obligation for service rendered to date... 69,645 60,412
------ ------
Excess (deficiency) of plan assets over projected benefit
obligation................................................ 3,484 (1,015)
Unrecognized net (gain) from past experience different from
that assumed and effects of changes in assumptions........ (3,484) --
Prior service cost not yet recognized in net periodic
pension cost.............................................. -- --
Implementation asset not yet recognized in periodic pension
cost...................................................... -- --
------ ------
Pension accrual included in other liabilities............... -- 1,015
====== ======
Net pension expense in each of the last three years consisted of the
following:
[Enlarge/Download Table]
1997 1996 1995
------ ------ ------
(IN THOUSANDS OF US$)
Service cost-benefits earned during the period.............. 4,361 4,093 2,346
Interest cost on projected benefit obligation............... 2,241 2,416 3,654
Expected return on plan assets.............................. (3,128) (3,267) (3,791)
------ ------ ------
Net periodic pension expense...................... 3,474 3,242 2,209
====== ====== ======
The following table presents the economic assumptions used to calculate the
projected benefit obligation and pension expense in each of the last three
years.
[Download Table]
1997 1996 1995
------ ------ ------
Discount rate............................................... 4.0% 4.0% 4.0%
Rate of compensation increase............................... 2.5% 2.5% 3.0%
Expected long-term rate of return on plan assets............ 5.5% 5.5% 5.0%
------ ------ ------
The amount of net pension expense related to other subsidiaries' local
plans amounted to US$ 2,579,000, 2,576,000 and 2,462,000 in 1997, 1996 and 1995,
respectively.
17. GEOGRAPHIC DISTRIBUTION OF REVENUE, EARNINGS AND ASSETS
The following geographic analysis of total assets, total operating revenue,
income before income taxes and net income is based on the location of the
customer. Charges and credits for funds employed or supplied by domestic and
international operations are based on the average internal cost of funds.
Certain items of revenue and expense, including the provision for credit losses
and applicable income taxes, have been subjectively allocated and, therefore,
the data presented may not be meaningful. Based on the above, the following
table summarizes total assets and the results of the
92
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's operations by geographic area as of and for each of the years in the
three-year period ended December 31, 1997.
[Enlarge/Download Table]
INCOME
(LOSS)
TOTAL BEFORE NET
TOTAL OPERATING INCOME INCOME
ASSETS REVENUE TAXES (LOSS)
---------- --------- -------- --------
(IN THOUSANDS OF US$)
United Kingdom and Channel Islands.................... 1997 1,824,627 125,848 31,433 30,433
1996 2,117,732 128,723 21,486 20,196
1995 2,405,549 120,090 17,353 16,538
Continental Europe.................................... 1997 6,749,435 473,596 51,609 31,589
1996 5,699,932 391,651 5,061 (7,807)
1995 4,751,947 367,877 (31,397) (37,785)
Canada................................................ 1997 137,539 8,557 3,075 3,075
1996 104,969 8,478 3,496 3,496
1995 173,363 12,008 3,208 3,208
Far East.............................................. 1997 1,508,014 61,683 10,663 10,663
1996 662,206 35,061 6,676 6,676
1995 464,501 37,011 6,063 6,063
Caribbean Money Centre Locations, Central and South
America............................................. 1997 1,949,217 112,704 46,067 45,522
1996 1,776,233 100,924 30,537 28,751
1995 1,422,094 102,779 25,636 22,668
Middle East and Africa................................ 1997 414,491 21,601 (365) (365)
1996 271,490 16,245 (798) (798)
1995 177,747 14,580 2,947 2,947
United States......................................... 1997 7,772,977 474,666 134,138 134,138
1996 6,590,847 421,063 139,314 139,316
1995 6,265,343 354,910 148,465 148,465
Total................................................. 1997 20,356,300 1,278,655 276,620 255,055
1996 17,223,409 1,102,145 205,772 189,830
1995 15,660,544 1,009,255 172,275 162,104
Of the US$ 1.5 billion assets reported in the Far East at December 31,
1997, US$ 1.4 billion would be reclassified to Continental Europe and the United
Kingdom if the ultimate risk allocations were considered.
18. OFF-BALANCE SHEET RISK
TRADING AND RISK MANAGEMENT FINANCIAL INSTRUMENTS
As part of its trading activities, the Company transacts in off-balance
sheet financial instruments to satisfy the risk management needs of its clients.
In addition, the Company assumes trading positions based on its market
expectations.
To achieve its asset/liability management objective, the Company uses a
combination of financial instruments, particularly interest rate swaps and caps
to modify the interest rate characteristics of related balance sheet financial
instruments, primarily debt investment securities.
Interest rate swap contracts obligate the Company to exchange the
difference between fixed rate and floating rate interest amounts based on an
agreed notional amount.
Forward contracts commit the Company to buy or sell, at a future date, a
specified financial instrument, currency or precious metal or other commodity at
an agreed price. Forward contracts are customised transactions that require no
cash settlement until the end of the contract.
Foreign exchange, precious metals or other commodity swaps obligate the
Company to receive or pay amounts to counterparties based on a specified amount
of currency or specified amount of a commodity.
Purchased option contracts give the holder the right, but not the
obligation, to acquire or sell for a limited time period a financial instrument,
currency, precious metal or other commodity at a designated price upon payment
of a fee at the
93
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
commencement of the contract. The writer of an option receives a premium at the
outset of a contract as payment for assuming the risk of unfavourable changes in
the price of the underlying instrument.
The market risk of off-balance sheet transactions arises from the potential
for changes in value due to fluctuations in foreign exchange and interest rates
and in prices of debt securities, equities, or commodities. The Company
generally reduces its exposure to market risks by entering into off-setting
transactions.
The credit and settlement risk of off-balance sheet transactions arises
from the potential for a counterparty to default on its contractual obligations.
The effect of such defaults varies as the market value of these contracts
changes. Credit exposure exists at a particular point in time when an
off-balance sheet contract has a positive market value. The Company attempts to
limit its credit and settlement risk by dealing with highly creditworthy
counterparties rated "AA" or better, limiting individual positions, and
obtaining collateral where appropriate. The Company limits its credit risk in
relation to securities sold under repurchase agreements by monitoring the market
value of the underlying securities and requesting additional cash or return of
collateral when required.
The following table summarises the notional amounts of forward, swap and
option instruments used in trading and risk management activities and credit
exposure on instruments used in risk management activities at December 31, 1997
and 1996. These amounts serve as volume indicators to denote the level of
activity by instrument class and include contracts that have both favourable and
unfavourable value to the Company. These notional amounts do not represent the
amounts to be exchanged by the Company nor do they measure the exposure to
credit or market risk.
[Enlarge/Download Table]
DECEMBER 31, 1997
-------------------------------------
ASSET/LIABILITY
TRADING MANAGEMENT
----------- ----------------------
CONTRACTUAL CONTRACTUAL
NOTIONAL NOTIONAL CREDIT
AMOUNTS AMOUNTS EXPOSURE
----------- ----------- --------
(IN THOUSANDS OF US$)
Interest rate:
Swaps....................................................... 40,019 3,031,597 11,020
Caps purchased.............................................. -- 4,023,861 14,329
Foreign exchange and precious metals:
Spot, forwards and swaps.................................... 8,861,494 460,921 7,454
Options written............................................. 3,834,262 -- --
Options purchased........................................... 4,335,925 265,793 14,409
Debt and equity securities:
Options written............................................. 315,536 -- --
Options purchased........................................... 395,536 -- --
[Enlarge/Download Table]
DECEMBER 31, 1996
-------------------------------------
ASSET/LIABILITY
TRADING MANAGEMENT
----------- ----------------------
CONTRACTUAL CONTRACTUAL
NOTIONAL NOTIONAL CREDIT
AMOUNTS AMOUNTS EXPOSURE
----------- ----------- --------
(IN THOUSANDS OF US$)
Interest rate:
Swaps....................................................... 9,556 3,368,364 19,662
Caps purchased.............................................. -- 3,178,325 10,240
Foreign exchange and precious metals:
Spot, forwards and swaps.................................... 8,137,569 564,196 20,467
Options written............................................. 1,438,582 -- --
Options purchased........................................... 1,808,834 366,088 3,024
Debt and equity securities:
Options written............................................. 278,016 -- --
Options purchased........................................... 278,016 132,000 53
CREDIT RELATED INSTRUMENTS
Credit related instruments include commitments to extend credit, commercial
and standby letters of credit and financial guarantees. The contractual amounts
of these instruments represent the amounts at risk should the contracts be fully
drawn upon, the client default, and the value of any existing collateral become
worthless. The total contractual amount of credit related financial instruments
does not represent the expected future liquidity requirements since a
significant amount of commitments to extend credit and standby letters of credit
and guarantees are expected to expire or mature without being drawn. The credit
risk associated with these instruments varies depending on the creditworthiness
94
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the client and the value of any collateral held. Commitments to extend credit
generally require the client to meet certain credit related terms and conditions
before being drawn-down.
An allowance for possible credit losses is maintained that is considered
adequate to absorb losses in credit related undertakings.
A summary of the contractual amount of credit related instruments at
December 31, 1997 and 1996 is presented in the following table:
[Download Table]
1997 1996
-------- --------
(IN THOUSANDS OF US$)
Commitments to extend credit................................ 189,107 131,392
Standby letters of credit and financial guarantees.......... 701,595 693,840
Commercial and other letters of credit...................... 69,156 116,826
Commitments to purchase securities.......................... 8,444 8,625
Securities lent............................................. -- 62,559
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarises the carrying values and estimated fair
values of the Company's financial instruments as of December 31, 1997 and 1996.
The estimated fair value of off-balance sheet financial instruments used as
hedges are reported in the related balance sheet asset or liability.
[Enlarge/Download Table]
1997 1996
------------------------ ------------------------
ESTIMATED ESTIMATED
BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS OF US$)
NON-TRADING ACTIVITIES:
FINANCIAL ASSETS, INCLUDING HEDGES:
Interest-bearing deposits with banks...................... 7,476,969 7,477,510 6,041,717 6,041,848
Investment securities..................................... 9,485,637 9,511,888 8,665,381 8,656,446
Loans (net)............................................... 2,154,545 2,286,695 1,555,979 1,683,179
Other financial assets.................................... 658,921 658,921 486,955 472,181
========== ========== ========== ==========
FINANCIAL LIABILITIES, INCLUDING HEDGES:
Deposits.................................................. 15,401,065 15,292,040 13,337,947 13,338,687
Securities sold under repurchase agreements............... 2,069,638 2,069,544 1,508,604 1,508,891
Long-term debt and subordinated long-term debt............ 400,000 394,778 175,000 175,342
Other financial liabilities............................... 477,097 468,053 363,940 363,940
========== ========== ========== ==========
TRADING ACTIVITIES:
Assets.................................................... 248,941 250,586 202,211 202,211
Liabilities............................................... (225,659) (225,659) (148,326) (148,326)
---------- ---------- ---------- ----------
Net.................................................. 23,282 24,927 53,885 53,885
========== ========== ========== ==========
The table presented below summarises the estimated aggregate fair values of
off-balance sheet financial instruments which have been included in the
estimated fair value of the related balance sheet asset or liability in the
above table.
[Enlarge/Download Table]
1997 1996
------------------------ ------------------------
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
POSITIVE NEGATIVE POSITIVE NEGATIVE
FAIR VALUE FAIR VALUE FAIR VALUE FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS OF US$)
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Trading (see note 5):....................................... 211,980 225,659 141,931 148,326
------- ------- ------- -------
Asset/liability management:
Interest rate contracts..................................... 11,020 50,787 37,912 104,387
Foreign exchange contracts.................................. 21,863 -- 23,490 873
------- ------- ------- -------
32,883 50,787 61,402 105,260
------- ------- ------- -------
244,863 276,446 203,333 253,586
======= ======= ======= =======
BASIS OF PRESENTATION: The above tables comprise financial instruments,
which are defined as cash, evidence of an ownership in an entity, or a contract
that requires either the receipt or delivery of cash or another financial
instrument. Fair value is defined as the amount at which a financial instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale, and is best evidenced by a quoted market price,
if one exists.
95
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company operates as a going concern, and, except for its investment
securities portfolio, trading account assets and liabilities and off-balance
sheet instruments that trade on an organised exchange or in an active secondary
market, no active market exists for its financial instruments. The application
of the information used to determine fair value is highly subjective and
judgmental in nature, and, therefore, such valuation may not be precise.
ESTIMATION OF FAIR VALUES: The following notes summarise the major methods
and assumptions used in estimating the fair values of financial instruments.
SHORT-TERM FINANCIAL INSTRUMENTS: The Company has a significant portion of
its assets and liabilities in financial instruments that have remaining
maturities of less than six months. These short-term financial instruments,
except for those financial instruments for which an active market exists, are
valued without regard to maturity and are considered to have fair values
equivalent to their carrying value.
INVESTMENT SECURITIES: The fair value of investment securities is based on
quoted market prices or dealer quotes.
LOANS: The fair value of loans is estimated by discounting estimated
future cash flows at current market rates for which similar loans would be made.
Non-performing loans are valued individually, based on an estimate of ultimate
collectibility. Commitments to extend credit are valued utilising the fees
currently charged to enter into similar agreements, taking into account the
terms of the commitment and the risk characteristics of the borrower. Standby
letters of credit, guarantees and commercial letters of credit are valued based
on the fees currently charged for similar agreements or on the cost to terminate
or settle the agreement at the reporting date.
LONG-TERM DEBT: Long-term repurchase agreements, long-term debt and
subordinated long-term debt are valued based upon rates currently available to
the Company for debt with similar terms and remaining maturities.
OTHER FINANCIAL INSTRUMENTS: The fair value of interest-bearing deposits
with banks, deposits and short-term borrowings maturing in more than six months
is estimated using a discounted cash flow model based on market rates for
comparable instruments with similar maturities.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS: The fair value of interest rate
and foreign exchange contracts are estimated as the amounts that the company
would receive or pay to terminate the contracts at the reporting date. Credit
related instruments aggregated US$ 1.0 billion at year end 1997 and 1996,
respectively, which approximate estimated market if ultimately funded.
20. CREDIT RELATED RISK CONCENTRATIONS
In the normal course of its business, the Company's activities include
significant amounts of credit risk to depository institutions. Such
concentrations aggregated approximately 45% and 49% of the Company's balance
sheet financial instruments at December 31, 1997 and 1996, respectively. This
exposure included approximately 83% and 80% in the form of interest-bearing
deposits with banks, respectively. The Company's credit exposure to the United
States Federal Government and its agencies, principally in the form of
securities, was approximately 29% and 31% of respective year-end balance sheet
financial instruments.
21. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are various outstanding commitments
and contingent liabilities of the Company that are not reflected in the
consolidated statements of condition.
The Company's minimum rental commitments for non-cancellable operating
leases for premises and equipment at December 31, 1997 were US$ 15,988,000 in
1998, US$ 10,535,000 in 1999, US$ 10,124,000 in 2000, US$ 9,981,000 in 2001, US$
6,828,000 in 2002 and US$ 20,517,000 thereafter in the aggregate. Actual net
rental expense for premises in 1997, 1996 and 1995 was US$ 10,921,000, US$
10,905,000 and US$ 12,462,000, respectively.
96
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
22. TRANSACTIONS WITH AFFILIATES
The following is a summary of significant aggregate balances of
transactions with affiliates included in the Company's consolidated financial
statements for the three years ended December 31:
[Enlarge/Download Table]
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS OF US$)
ASSETS:
Cash and due from banks................................ 23,157 20,132 14,232
Interest-bearing deposits with banks................... 284,315 253,422 216,795
Investment securities.................................. 31,567 8,989 --
Accrued interest receivable............................ 30,692 19,072 12,759
LIABILITIES:
Bank deposits.......................................... 157,765 271,257 183,707
Accrued interest payable............................... 25,096 16,733 17,156
INTEREST INCOME:
Deposits with banks and investment securities.......... 29,751 28,092 19,829
INTEREST EXPENSE:
Deposits and borrowings................................ 29,588 12,510 13,215
OTHER OPERATING ITEMS:
Commission income net.................................. 7,382 2,753 151
Occupancy, net (primarily leased office space)......... (6,680) (7,810) (8,225)
OFF-BALANCE SHEET:
Trading and risk management financial instruments...... 6,042,592 2,257,408 1,983,415
Credit related instruments............................. 125,410 199,728 210,820
Lease commitments...................................... 47,781 62,002 54,496
23. RECONCILIATION WITH LUXEMBOURG GAAP
Safra Republic, as a Luxembourg holding company, should prepare
consolidated accounts in accordance with the Luxembourg law of August 10, 1915
(as subsequently amended). As its subsidiaries are mainly banks, Safra Republic
uses the derogation of Article 319 (5) of this law and prepares consolidated
accounts which take into account specific banking operations. As indicated under
note 2, the Company reports under U.S. GAAP. The consolidated financial
statements prepared under U.S. GAAP are equivalent to the format prescribed by
the Luxembourg law of June 17, 1992 relating to the annual accounts and
consolidated accounts of credit institutions.
Application of accounting principles generally accepted in Luxembourg would
have had the following approximate effect on total assets, shareholders' equity
and net income as of and for the years ended December 31:
[Enlarge/Download Table]
1997
--------------------------------------
TOTAL SHAREHOLDERS' NET
ASSETS EQUITY INCOME
---------- ------------- -------
(IN THOUSANDS OF US$)
U.S. GAAP................................................... 20,356,300 1,760,566 255,055
Differences of accounting recognition for unrealised basis
difference on investment securities available for sale,
net of taxes.............................................. (147,557) (147,557) (857)
Difference in basis in trading account assets, net of
taxes..................................................... (577) (577) (198)
Difference in amortisation of goodwill...................... (11,557) (11,557) (11,557)
Differences of accounting for treasury share transactions... 21,168 21,168 (686)
---------- --------- -------
Luxembourg GAAP............................................. 20,217,777 1,622,043 241,757
========== ========= =======
[Enlarge/Download Table]
1996
--------------------------------------
TOTAL SHAREHOLDERS' NET
ASSETS EQUITY INCOME
---------- ------------- -------
(IN THOUSANDS OF US$)
U.S. GAAP................................................... 17,223,409 1,643,110 189,830
Differences of accounting recognition for unrealised basis
difference on investment securities available for sale,
net of taxes.............................................. (172,778) (172,778) 942
Difference in basis in trading account assets, net of
taxes..................................................... (379) (379) 8,596
Differences of accounting for treasury share transactions... 16,857 16,857 (1,326)
---------- --------- -------
Luxembourg GAAP............................................. 17,067,109 1,486,810 198,042
========== ========= =======
97
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
24. REGULATORY MATTERS
The Company's risk-based capital is included in the consolidated risk-based
capital ratio of RNYC in accordance with the requirements of the Federal Reserve
Board specifically applied to RNYC. The Company's risk-based capital ratio at
December 31, 1997 calculated in accordance with the IML regulations was 25.33%.
25. SAFRA REPUBLIC HOLDINGS S.A. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
[Download Table]
DECEMBER 31,
----------------------
1997 1996
--------- ---------
(IN THOUSANDS OF US$)
ASSETS:
Cash and due from banks..................................... 317 310
Interest-bearing deposits with banks........................ -- 19,690
Deposits with subsidiaries.................................. 110,971 139,108
Investment securities:
Available for sale..................................... 418,120 146,836
Held to maturity....................................... 161,813 69,744
--------- ---------
Total investment securities............................ 579,933 216,580
--------- ---------
Investments in subsidiaries................................. 1,109,514 1,033,715
Loans to subsidiaries....................................... 260,305 316,266
Other assets................................................ 140,685 100,699
--------- ---------
Total assets........................................... 2,201,725 1,826,368
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Other liabilities........................................... 41,159 33,258
Long-term debt.............................................. 150,000 150,000
Subordinated long-term debt due 2997........................ 250,000 --
SHAREHOLDERS' EQUITY:
Common stock, US$ 2.50 par value............................ 89,155 89,155
Surplus..................................................... 818,107 818,793
Retained earnings........................................... 874,472 752,019
Less: shares held in treasury, at cost...................... (21,168) (16,857)
--------- ---------
Total shareholders' equity............................. 1,760,566 1,643,110
--------- ---------
Total subordinated debt and shareholders' equity....... 2,010,566 1,643,110
--------- ---------
Total liabilities and shareholders' equity............. 2,201,725 1,826,368
========= =========
Included in retained earnings at December 31, 1997 were net unrealised
appreciation on investment securities available for sale of US$ 80,435,000
(1996: US$ 102,071,000) and US$ 3,255,000 (1996: US$ 243,000), attributable to
the banking subsidiaries and parent company only, respectively.
98
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENTS OF INCOME
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS OF US$)
INCOME:
Dividends from subsidiaries................................. 142,750 95,904 82,000
Interest from subsidiaries.................................. 40,943 39,682 28,822
Other interest.............................................. 28,004 24,795 19,663
Other....................................................... (458) 14,228 9,309
------- ------- -------
Total income...................................... 211,239 174,609 139,794
------- ------- -------
EXPENSES:
Salaries and other employee benefits........................ 13,364 10,719 8,336
Restricted stock expense.................................... 3,946 3,571 3,150
Interest expense............................................ 13,014 9,001 9,723
Other expenses and provisions............................... 8,130 7,532 9,255
------- ------- -------
Total expenses.................................... 38,454 30,823 30,464
------- ------- -------
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME OF
SUBSIDIARIES:............................................. 172,785 143,786 109,330
Equity in undistributed net income of subsidiaries.......... 82,270 46,044 52,774
------- ------- -------
Net income.................................................. 255,055 189,830 162,104
======= ======= =======
99
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- ------- -------
(IN THOUSANDS OF US$)
OPERATING ACTIVITIES:
Net income.................................................. 255,055 189,830 162,104
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net income of subsidiaries..... (82,270) (46,044) (52,774)
Net change in trading account securities............... -- -- (8,842)
Other, net............................................. (25,766) (11,994) 3,329
-------- ------- -------
Net cash provided by operating activities.............. 147,019 131,792 103,817
-------- ------- -------
INVESTING ACTIVITIES:
Deposits with subsidiaries.................................. 28,137 (86,228) 6,912
Deposits with banks......................................... 19,690 (5,128) (14,562)
Purchases of securities available for sale.................. (353,188) (35,035) (11,215)
Purchases of securities held to maturity.................... (103,680) (77,424) --
Proceeds from sales of securities available for sale........ 78,504 136,730 29,539
Proceeds from maturities of securities available for sale... 7,282 -- --
Proceeds from maturities of securities held to maturity..... 11,611 7,680 8,942
Cash contributions to subsidiaries.......................... (69,433) (20,380) (1,131)
Loans to subsidiaries....................................... 49,551 (826) (12,256)
Other, net.................................................. 21,082 12,608 (32,126)
-------- ------- -------
Net cash used by investing activities.................. (310,444) (68,003) (25,897)
-------- ------- -------
FINANCING ACTIVITIES:
Issuance of subordinated long-term debt..................... 250,000 -- --
Cash dividends paid......................................... (79,434) (61,630) (57,747)
Purchase of treasury shares................................. (7,134) (2,249) (19,832)
-------- ------- -------
Net cash provided (used) by financing activities....... 163,432 (63,879) (77,579)
-------- ------- -------
Net increase (decrease) in cash and due from banks.......... 7 (90) 341
Cash and due from banks at beginning of year................ 310 400 59
-------- ------- -------
Cash and due from banks at end of year...................... 317 310 400
======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Transfer from investments held to maturity to investments
available for sale........................................ -- -- 81,962
Transfer from trading account to investments available for
sale...................................................... -- 23,374 --
During 1997 and 1996, the Company increased its capital investment in its
banking subsidiaries by US$ 69,432,000 and US$ 25,081,000, respectively. During
1996, the Company received cash refunds of US$ 4,701,000 of previously forgiven
subordinated loans from one of its banking subsidiaries.
100
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF SAFRA REPUBLIC HOLDINGS S.A.
We have audited the accompanying consolidated statements of condition of
Safra Republic Holdings S.A. and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of income, changes in shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Safra
Republic Holdings S.A. and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with United States
generally accepted accounting principles.
Generally accepted accounting principles in the United States vary in
certain significant respects from generally accepted accounting principles in
Luxembourg. Application of generally accepted accounting principles in
Luxembourg would have affected results of operations for the years ended
December 31, 1997 and 1996 and shareholders' equity and total assets as of
December 31, 1997 and 1996, to the extent summarised in note 23 to the
consolidated financial statements.
Luxembourg, January 16, 1998 KPMG AUDIT
Reviseurs d'entreprises
D. G. Robertson
101
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors of the Corporation and nominees for
election as directors is contained in the section "Election of Directors" in the
Corporation's definitive Proxy Statement for its 1998 Annual Meeting of
Stockholders to be filed pursuant to Section 14 of the Securities Exchange Act
of 1934 and is hereby incorporated herein by reference. Such definitive Proxy
Statement will be filed with the SEC on or about March 19, 1998.
The names, ages and positions of the executive officers of the Corporation
are as follows:
[Enlarge/Download Table]
POSITION WITH POSITION WITH
NAME AGE THE CORPORATION THE BANK
---- --- --------------- -------------
Walter H. Weiner....................... 67 Chairman of the Board and Chief Chairman of the Board and
Executive Officer Chief Executive Officer
Kurt Andersen.......................... 53 -- Vice Chairman of the Board
Robert A. Cohen........................ 49 Vice Chairman Vice Chairman of the Board
Cyril S. Dwek.......................... 61 Vice Chairman Vice Chairman of the Board
Ernest Ginsberg........................ 67 Vice Chairman Vice Chairman of the Board
Nathan Hasson.......................... 52 Vice Chairman Vice Chairman of the Board
and Treasurer
Vito S. Portera........................ 55 Vice Chairman Vice Chairman of the Board
Elias Saal............................. 45 Vice Chairman Vice Chairman of the Board
Dov C. Schlein......................... 50 Vice Chairman President
George T. Wendler...................... 53 Vice Chairman and Chairman of Vice Chairman of the Board
the Credit Committee
John Tamberlane........................ 56 -- President of the Consumer
Banking Division
Paul L. Lee............................ 51 Executive Vice President and Executive Vice President
General Counsel
Thomas F. Robards...................... 51 Executive Vice President, Executive Vice President
Treasurer and Chief Financial
Officer -- Financial Planning
and Treasury
Richard C. Spikerman................... 57 International Credit Officer Executive Vice President
Each of the above-named officers is a director of both the Corporation and
the Bank, except for Messrs. Lee, Wendler, Spikerman and Tamberlane who are not
directors of the Corporation.
The term of each officer is for a year, which runs from the annual meeting
of the Board of Directors of the Corporation and the Bank, respectively,
following the Annual Meeting of Stockholders of each, until the next such Annual
Meeting or until removed by the respective Board of Directors. Each of the above
officers' service in his current position is indicated in his biography below.
Mr. Edmond J. Safra is the Honorary Chairman of the Board of Directors of
the Corporation and the Bank. Mr. Safra is Chairman of the Board of Safra
Republic and Republic National Bank of New York (Suisse) S.A., the Bank's
affiliate in Geneva, Switzerland. In addition, Mr. Safra is a principal
stockholder of the Corporation.
The biographical information for the past five years for the above named
executive officers of the Corporation is as follows:
Walter H. Weiner has been a director and Chairman of the Board of the
Corporation and the Bank for over five years.
Kurt Andersen has been a director of the Corporation and the Bank for over
five years. Mr. Andersen has been a Vice Chairman of the Board and Regional
General Manager (Asia Pacific) of the Bank since June 1995. For over two years
prior thereto, Mr. Andersen served as an Executive Vice President of the Bank.
Robert A. Cohen was elected a director of the Corporation in March 1997 and
a director of the Bank in May 1997. Mr. Cohen has been Vice Chairman of the
Corporation and Vice Chairman of the Board of the Bank since March 1, 1997. For
four years prior thereto, Mr. Cohen was Chief Executive Officer of Credit
Lyonnais Americas.
Cyril S. Dwek has been a director and Vice Chairman of the Corporation and
director and a Vice Chairman of the Board of the Bank for over five years.
Ernest Ginsberg has been a director and a Vice Chairman of the Corporation
(and was General Counsel until April 1994) and a director and a Vice Chairman of
the Board of the Bank for over five years.
102
Nathan Hasson has been a director and a Vice Chairman of the Corporation
and a director and a Vice Chairman of the Board and Treasurer of the Bank for
over five years.
Vito S. Portera has been a director and a Vice Chairman of the Corporation
and a director and a Vice Chairman of the Board of the Bank for over five years.
Mr. Portera also has been Chairman of the Board of Republic International Bank
of New York (Miami), the Miami, Florida Edge Act subsidiary of the Bank, for
over five years.
Elias Saal has been a director and a Vice Chairman of the Corporation since
July 1995. He has been a director and Vice Chairman of the Board of the Bank
since October and June 1995, respectively. Mr. Saal was an Executive Vice
President of the Bank for over two years prior to 1995.
Dov C. Schlein has been a director and a Vice Chairman of the Corporation
and a director and President of the Bank for over five years.
George T. Wendler has been a director and Vice Chairman of the Corporation
since May 1997, having been an Executive Vice President for over two years prior
thereto, as well as Chairman of the Credit Committee of the Corporation since
October 1994. He has been a director and Vice Chairman of the Board of the Bank
since June 1995. Prior thereto, Mr. Wendler was an Executive Vice President of
the Bank for over two years.
John Tamberlane has been a director of the Bank since December 1995 and the
President of the Consumer Banking Division of the Bank since January 1996. For
over four years prior thereto, Mr. Tamberlane was an Executive Vice President of
the Bank.
Paul L. Lee has been an Executive Vice President and General Counsel of the
Corporation and a director and Executive Vice President of the Bank since April
1994. Prior thereto, Mr. Lee was a partner of Shearman & Sterling, attorneys.
Thomas F. Robards has been a director of the Corporation since May 1997,
Executive Vice President and Treasurer for over five years and Chief Financial
Officer -- Financial Planning and Control of the Corporation for over two years.
He has been Executive Vice President of the Bank for over five years.
Richard C. Spikerman has been the International Credit Officer of the
Corporation since January 1995. Mr. Spikerman has been an Executive Vice
President of the Bank for over two years and a director of the Bank since June
1995.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is contained in the section "Compensation
of Directors and Executive Officers -- Executive Officers" in the Corporation's
definitive Proxy Statement for its 1998 Annual Meeting of Stockholders to be
filed pursuant to Section 14 of the Securities Exchange Act of 1934 and is
hereby incorporated herein by reference. Such definitive Proxy Statement will be
filed with the SEC on or about March 19, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is contained in the sections entitled
"Election of Directors" and "Ownership of Voting Securities" in the
Corporation's definitive Proxy Statement for its 1998 Annual Meeting of
Stockholders to be filed pursuant to Section 14 of the Securities Exchange Act
of 1934 and is hereby incorporated herein by reference. Such definitive Proxy
Statement will be filed with the SEC on or about March 19, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is contained in the section entitled
"Transactions with Management and Related Persons" in the Corporation's
definitive Proxy Statement for its 1998 Annual Meeting of Stockholders to be
filed pursuant to Section 14 of the Securities Exchange Act of 1934 and is
hereby incorporated herein by reference. Such definitive Proxy Statement will be
filed with the SEC on or about March 19, 1998.
103
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
Financial statements are listed in the index set forth in Item 8 of this
Report.
EXHIBITS
[Download Table]
3a. Articles of Incorporation as amended through April 21, 1993
and as supplemented through September 23, 1997 by Articles
Supplementary. (Incorporated herein by reference to such
exhibits filed with the Corporation's Annual Report on Form
10-K for the year ended December 31, 1993 and Current
Reports on Form 8-K dated May 23, 1994, June 26, 1995 and
September 24, 1997).
3b. Articles Supplementary to Articles of Incorporation dated
January 21, 1998.
3c. By-Laws of the Corporation as amended through October 16,
1996. (Incorporated herein by reference to such exhibit
filed with the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1996).
4 Instruments defining the rights of security holders,
including indentures.*
10a. Form of Amended and Restated Deferral Agreement.**
(Incorporated herein by reference to such exhibit filed with
the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1993).
10b. Form of Deferral Agreement.** (Incorporated herein by
reference to such exhibit filed with the Corporation's
Annual Report on Form 10-K for the year ended December 31,
1993).
10c. Performance Based Incentive Compensation Plan.**
(Incorporated herein by reference to such exhibit filed with
the Corporation's definitive Proxy Statement dated March 16,
1994).
10d. Employment Agreements.**
10e. Consulting Agreements.**
11 Computation of Earnings Per Share of Common Stock.
12 Calculation of Ratios of Earnings to Fixed
Charges -- Consolidated.
21 Subsidiaries of the Corporation.
23 Consents of Experts and Counsel.
24 Form of Power of Attorney.
27 Financial Data Schedule.
------------
* The Corporation hereby agrees to furnish to the SEC, upon request, a copy of
any unfiled agreements defining the rights of holders of the long-term debt
of the Corporation and of all subsidiaries of the Corporation for which
consolidated or unconsolidated financial statements are required to be filed.
** Compensation Agreement.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the annual
period covered by this Report.
104
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.
Dated: March 4, 1998 REPUBLIC NEW YORK CORPORATION
By: WALTER H. WEINER
---------------------------------------
WALTER H. WEINER
(CHAIRMAN OF THE BOARD)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
[Enlarge/Download Table]
SIGNATURE TITLE DATE
--------- ----- ----
WALTER H. WEINER Director and Chairman March 4, 1998
------------------------------------------ of the Board
(WALTER H. WEINER) (Principal Executive Officer)
JOHN D. KABERLE, JR. Executive Vice President March 4, 1998
------------------------------------------ and Comptroller
(JOHN D. KABERLE, JR.) (Principal Financial and
Accounting Officer)
KURT ANDERSEN Director March 4, 1998
------------------------------------------
(KURT ANDERSEN)
ROBERT A. COHEN Director March 4, 1998
------------------------------------------
(ROBERT A. COHEN)
Director
------------------------------------------
(CYRIL S. DWEK)
ERNEST GINSBERG Director March 4, 1998
------------------------------------------
(ERNEST GINSBERG)
NATHAN HASSON Director March 4, 1998
------------------------------------------
(NATHAN HASSON)
PETER KIMMELMAN Director March 4, 1998
------------------------------------------
(PETER KIMMELMAN)
RICHARD A. KRAEMER Director March 4, 1998
------------------------------------------
(RICHARD A. KRAEMER)
LEONARD LIEBERMAN Director March 4, 1998
------------------------------------------
(LEONARD LIEBERMAN)
WILLIAM C. MACMILLEN, JR. Director March 4, 1998
------------------------------------------
(WILLIAM C. MACMILLEN, JR.)
PETER J. MANSBACH Director March 4, 1998
------------------------------------------
(PETER J. MANSBACH)
MARTIN F. MERTZ Director March 4, 1998
------------------------------------------
(MARTIN F. MERTZ)
JAMES L. MORICE Director March 4, 1998
------------------------------------------
(JAMES L. MORICE)
Director
------------------------------------------
(E. DANIEL MORRIS)
JANET L. NORWOOD Director March 4, 1998
------------------------------------------
(JANET L. NORWOOD)
105
[Download Table]
SIGNATURE TITLE DATE
--------- ----- ----
JOHN A. PANCETTI Director March 4, 1998
------------------------------------------
(JOHN A. PANCETTI)
VITO S. PORTERA Director March 4, 1998
------------------------------------------
(VITO S. PORTERA)
THOMAS F. ROBARDS Director March 4, 1998
------------------------------------------
(THOMAS F. ROBARDS)
WILLIAM P. ROGERS Director March 4, 1998
------------------------------------------
(WILLIAM P. ROGERS)
Director
------------------------------------------
(ELIAS SAAL)
DOV C. SCHLEIN Director March 4, 1998
------------------------------------------
(DOV C. SCHLEIN)
GEORGE T. WENDLER Director March 4, 1998
------------------------------------------
(GEORGE T. WENDLER)
PETER WHITE Director March 4, 1998
------------------------------------------
(PETER WHITE)
106
Exhibit Index
Exhibit No. Description
----------- -----------
3b Articles Supplementary to Articles of Incorporation dated
January 21, 1998.
10d(i) Employment Agreement between Robert Cohen and Republic
National Bank of New York.
10d(ii) Employment Agreement between George Wendler and Republic
National Bank of New York.
10e Consulting Agreement between Walter H. Weiner and Republic New
York Corporation.
11 Computation of Earnings Per Share of Common Stock.
12 Calculation of Ratios of Earnings to Fixed Charges -
Consolidated.
21 Subsidiaries of the Corporation.
23 Consent of KPMG Peat Marwick LLP.
23a Consent of KPMG Audit, Reviseurs d'enterprises.
24 Form of Power of Attorney.
27 Financial Data Schedule.
Dates Referenced Herein and Documents Incorporated by Reference
| Referenced-On Page |
|---|
| This ‘10-K’ Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 4/15/14 | | 54 | | | | | 424B2, 424B5, FWP |
| | 3/22/11 | | 54 | | | | | 4 |
| | 2/1/09 | | 54 |
| | 10/1/07 | | 34 | | 56 | | | 424B2, FWP |
| | 2/15/07 | | 53 | | | | | 4 |
| | 12/4/06 | | 55 | | | | | FWP |
| | 11/15/06 | | 55 |
| | 8/12/02 | | 53 |
| | 7/15/02 | | 54 |
| | 5/15/02 | | 54 |
| | 12/31/00 | | 53 | | | | | 10-K |
| | 12/1/00 | | 54 |
| | 7/1/00 | | 54 | | 56 |
| | 1/1/00 | | 7 |
| | 12/31/99 | | 17 | | | | | 10-K, 8-K |
| | 8/12/99 | | 54 |
| | 7/1/99 | | 56 |
| | 1/1/99 | | 17 |
| | 6/30/98 | | 28 | | 72 | | | 10-Q |
| | 4/30/98 | | 67 |
| | 4/1/98 | | 9 |
| | 3/19/98 | | 104 | | 105 |
| Filed on: | | 3/6/98 |
| | 3/4/98 | | 107 | | 108 |
| | 1/30/98 | | 1 |
| | 1/21/98 | | 106 | | 109 |
| | 1/20/98 | | 73 | | 75 |
| | 1/16/98 | | 103 |
| | 1/1/98 | | 36 | | 45 |
| For Period End: | | 12/31/97 | | 1 | | 103 | | | 10-K/A, 11-K |
| | 10/15/97 | | 91 | | 92 |
| | 9/24/97 | | 34 | | 106 | | | 8-A12B/A, 8-K |
| | 9/23/97 | | 106 |
| | 7/22/97 | | 34 | | 55 | | | 8-K |
| | 5/31/97 | | 92 |
| | 5/14/97 | | 92 |
| | 3/1/97 | | 104 |
| | 2/27/97 | | 56 |
| | 1/1/97 | | 7 | | 45 |
| | 12/31/96 | | 4 | | 106 | | | 10-K, 11-K |
| | 10/16/96 | | 106 |
| | 10/1/96 | | 7 |
| | 2/29/96 | | 10 | | 72 |
| | 12/31/95 | | 29 | | 93 | | | 10-K, 11-K |
| | 12/15/95 | | 61 |
| | 6/26/95 | | 106 | | | | | 8-A12B/A, 8-K |
| | 12/31/94 | | 30 | | 93 | | | 10-K, 11-K |
| | 12/15/94 | | 61 |
| | 5/23/94 | | 106 | | | | | 8-A12B/A, 8-K |
| | 3/16/94 | | 106 |
| | 12/31/93 | | 30 | | 106 | | | 10-K, 11-K |
| | 4/21/93 | | 106 |
| | 6/17/92 | | 99 |
| List all Filings |
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