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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NO. 1-7436
REPUBLIC NEW YORK CORPORATION
(EXACT NAME OF REGISTRANT SPECIFIED IN ITS CHARTER)
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MARYLAND 13-2764867
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
452 FIFTH AVENUE, NEW YORK, NEW YORK 10018
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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(212) 525-6100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE 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
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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 February 26, 1999 was $3,393,708,823 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 February 26, 1999: 106,909,606.
Documents Incorporated by Reference:
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DOCUMENT LOCATION IN FORM 10-K
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Proxy Statement for 1999 Annual Meeting, to the extent Part III
indicated
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CONTENTS
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PART I
Item 1. Business
Republic New York Corporation............................. 1
Private Banking........................................... 1
Consumer Financial Services............................... 2
Lending................................................... 3
Global Treasury........................................... 3
Global Markets............................................ 4
Competition............................................... 5
Supervision and Regulation................................ 5
Item 2. Properties.................................................. 8
Item 3. Legal Proceedings........................................... 8
Item 4. Submission of Matters to a Vote of Security Holders......... 8
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters......................................... 9
Item 6. Selected Financial Data..................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Introduction.............................................. 9
Results of Operations..................................... 10
Line-of-Business Information.............................. 23
Liability and Asset Management............................ 26
Risk Management and Control............................... 46
Capital Resources and Liquidity........................... 50
Recent Accounting Pronouncements.......................... 54
Forward-Looking Information............................... 55
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 55
Item 8. Financial Statements and Supplementary Data................. 56
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 141
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 141
Item 11. Executive Compensation...................................... 143
Item 12. Security Ownership of Certain Beneficial Owners and 143
Management..................................................
Item 13. Certain Relationships and Related Transactions.............. 143
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 144
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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, 1998, the Corporation had consolidated total assets of $50.4
billion and stockholders' equity of $3.1 billion. The executive offices of the
Corporation are located at 452 Fifth Avenue, New York, New York 10018.
The Corporation's principal asset is the capital stock of Republic National Bank
of New York (the "Bank"). The Bank, a national banking association, commenced
operations in 1966. At December 31, 1998, the Bank had total assets of $46.5
billion, total deposits of $33.5 billion and stockholder's equity of $3.1
billion. The Bank accounted for approximately 90% of the consolidated assets at
December 31, 1998 and approximately 90% of consolidated revenues and more than
100% of consolidated net income of the Corporation for the year ended December
31, 1998. The Bank's headquarters and principal banking office is located at 452
Fifth Avenue, New York, New York 10018.
In addition to its domestic branch offices in New York and Florida, the Bank
maintains foreign branch offices in the Caribbean, Europe, Asia and Latin
America; wholly-owned foreign banking subsidiaries in The Bahamas, Brazil,
Canada, Cayman Islands, Cyprus, Mexico, Russia, Singapore and Uruguay; 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
offshore banking activities with non-resident customers, and an Edge Act
subsidiary in Wilmington, Delaware.
The Corporation's other subsidiaries include Republic Business Credit
Corporation ("RBCC"), a factoring and asset-based lender, Republic New York
Securities Corporation, a full service broker-dealer, and Republic Bank
California N.A., a commercial bank in California ("RBC").
Through the Bank and its other subsidiaries, the Corporation provides a variety
of banking and financial services worldwide to corporations, financial
institutions, governmental units and individuals. The Corporation has
strategically aligned its operations into five major segments of business,
discussed below based on the needs of its customers, clients and trading
partners. In addition, information on these segments, including the amount of
revenues earned by each, may be found in Note 16 of "Notes to Consolidated
Financial Statements" elsewhere in this Report.
PRIVATE BANKING
Private Banking offers a full range of services for high-net-worth individuals
throughout the world, including deposit, lending, trading, treasury, investment
management products (e.g., Republic Investment Management Account ("RIMA"),
Republic Selection Fund and the Republic Spectrum Account), trust, custody,
estate planning, philanthropic advisory services and asset allocation products.
The Bank's domestic private banking clients are served from locations in New
York, California and Massachusetts.
International private banking groups are located in New York and California to
provide a full range of financial services to individuals who are not citizens
or residents of the United States, along with any affiliated corporate business.
The Bank's international private banking clients are also served by its Edge Act
banking subsidiary in Florida, which has a branch in the Cayman Islands, and
from locations in North and South America, Europe and Asia.
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The Bank has a 49% 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 high-net-worth individuals, partnerships
and closely held corporations from more than 80 countries, and also in
commercial banking. At December 31, 1998, Safra Republic had total assets of
$21.0 billion, total deposits of $16.4 billion and total shareholders' equity of
$1.9 billion. Total client assets in accounts with Safra Republic, both on- and
off-balance-sheet, amounted to $32.9 billion at year end 1998.
Safra Republic operates principally as a private bank with its primary focus on
providing its clients with a range of investment products. Safra Republic's
business activities consist principally of secured lending to customers,
accepting deposits and offering a variety of specialized portfolio and asset
management services, both discretionary and non-discretionary, 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, 1998, Saban S.A., the Corporation's principal stockholder, owned
approximately 20.8%, and international investors owned approximately 30.2% 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.
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.
CONSUMER FINANCIAL SERVICES
The Consumer Financial Services group provides a full range of retail banking,
investment, insurance and home finance services and products. The services and
products offered include the traditional banking products associated with a
full-service commercial bank: checking accounts, savings accounts, money market
accounts, certificates of deposit, commercial loans, small business loans,
installment loans, credit cards, safe deposit boxes, as well as mutual funds,
fixed and variable annuities, money market funds (including Republic Spectrum
Account), PC bill payments, internet banking (starting in January 1999), ATM
access 24 hours a day and life and health insurance. The Young Investors Club,
Bank for Kids, Student$ense and Renaissance Club are special programs offering
financial products and services to specific demographic groups.
The Consumer Financial Services group offers all of the other products and
services managed by the Corporation's other divisions including trust, custody
and safekeeping services, collections, letters of credit, banker's acceptances
and foreign exchange. At December 31, 1998, the Bank offered these services
through 82 domestic branch banking locations in New York City and the suburban
counties of Westchester, Nassau and Suffolk, as well as 8 locations in southern
Florida.
Residential mortgage loans are originated by the Bank's subsidiary, Republic
Consumer Lending Group, Inc., in 16 states (Arizona, California, Connecticut,
Florida, Georgia, Illinois, Maryland, Massachusetts, Nevada, New Jersey, New
York, North Carolina, Tennessee, Texas, Utah and Washington).
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.
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LENDING
Lending is an integral part of the Corporation's overall client relationship.
Lending activities cover a variety of industries and industry segments including
domestic and international private banking, small business, middle market,
factoring, national and international corporations, commercial real estate and
precious metal lending. The Corporation is the leading provider of mortgage
financing to cooperative apartments in the country and a substantial lender and
provider of business credit to the retail and apparel industry. The market place
continues to be very competitive in the lending businesses, and the Corporation
has continued to follow a plan of diversity within businesses, the avoidance of
high risk transactions and the development of a customer base with a high level
of credit quality. Products include working capital lines, banker's acceptances,
letters of credit, factoring services, asset based lending, securities lending
and commercial mortgages.
The Lending group is active in international banking where it operates
principally as a wholesale bank. The Bank's international lending services
include extending credit, forfait financing, issuing letters of credit and
bankers' acceptances and handling the collection and transfer of money. It has
been its policy to deal primarily with foreign governments, their agencies,
foreign central banks and foreign commercial banks as borrowers or guarantors,
middle-market companies in Canada and selected major foreign corporations
primarily located in Europe. At December 31, 1998, approximately 69% of the
Bank's cross-border net outstandings were to foreign governments, foreign
central banks and foreign commercial banks.
The Corporation services the financing requirements of large national companies,
small businesses, middle-market companies, major broker-dealers and financial
institutions and other businesses in the New York metropolitan area and selected
markets outside of New York. The Bank focuses on multi-family and underlying
cooperative real estate financing.
Republic Business Credit Corporation ("RBCC") is a wholly owned subsidiary of
the Corporation. RBCC is engaged in factoring, asset-based lending and accounts
receivable management businesses. As a factor, RBCC purchases, without recourse,
accounts receivable from approximately 500 clients, 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. RBCC's receivables management service provides clients with back
office support, allowing them to monitor their accounts receivable and
collections on a daily basis. Letters of credit accommodations are also
provided. For these services, RBCC earns commissions, interest and service fees.
For the year ended December 31, 1998, RBCC factored approximately $5.8 billion
of sales, making it the fifth 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.
GLOBAL TREASURY
Global Treasury manages the Corporation's liquidity profile including its asset
and liability positions by investing the funds available to the Corporation from
deposits and other funding sources, including large denomination certificates of
deposit and notes issued pursuant to the Bank's Global Medium Term Note Program
and other structured products. Global Treasury determines the pricing of the
Bank's liability products. The proceeds are invested in various investment
securities, principally United States Government securities or securities
guaranteed by the United States Government and AAA rated asset-backed securities
and, from time to time, emerging market instruments, money market instruments
and other assets that meet the Corporation's criteria for investment. Global
Treasury also uses a variety of derivatives to manage the interest rate,
maturity and yield characteristics of the Corporation's assets and liabilities.
See "Liability and Asset Manage-
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ment" in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" elsewhere in this Report.
GLOBAL MARKETS
The Bank is active, domestically and internationally, in the precious metals
markets, the foreign currency markets and the capital markets as a dealer and as
an intermediary for its clients; institutional, corporate and individual.
The Bank's precious metals capabilities include global wholesale trading and
dealing in gold, silver, platinum and palladium, including spot, forward and
options, 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. The Bank also conducts
precious metals operations in London where the Bank is one of the five members
of the London Gold Fixing. 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, 1998
and 1997, approximately $11 million and $162 million, respectively, of the
Bank's inventory in precious metals was unhedged.
As an active participant in the foreign exchange markets, the Bank buys and
sells foreign exchange for customers and engages in trading and market-making
activities through its operations in Europe, Latin America, Asia and Australia.
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.
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, forward sales and options on such bonds, local currency
instruments, eurobonds, syndicated bank loans and certain other products. The
financial products group develops and offers the various investment products
that are offered to the Bank's clients. The Bank's customers for these products
include financial institutions, multinational corporations, other institutional
investors and high-net-worth individuals.
The Bank's banknote services business buys and sells banknotes denominated in
various currencies and ships U.S. dollars to and from financial institutions in
nearly 40 countries.
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 and Philadelphia.
RNYSC is also registered with the Commodity Futures Trading Commission and the
National Futures Association as a futures commission merchant and a commodity
trading adviser. 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. The Corporation, after an extensive review, has
embarked on a program which will reduce the activities of RNYSC, terminating its
stock exchange memberships and its prime brokerage service. For its
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remaining customers RNYSC will clear their transactions through BHC Inc., a NYSE
member clearing firm.
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.
SUPERVISION AND REGULATION
The following discussion sets forth certain material elements of the regulatory
framework applicable to the Corporation and its subsidiaries and provides
certain information relevant to the Bank. This regulatory framework is intended
primarily for the protection of depositors and the federal deposit insurance
funds and not for the protection of security holders. To the extent that the
following information describes statutory and regulatory authority, it is
qualified in its entirety by reference to those provisions. A change in such
statutes, regulations or regulatory policies applicable to the Corporation and
the Bank, or their respective subsidiaries, may have a material effect on the
business of the Corporation or the Bank, as the case may be.
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, the Bank and RBC, are subject to
regulation and supervision primarily by the Office of the Comptroller of the
Currency (the "OCC") and secondarily by the Federal Deposit Insurance
Corporation (the "FDIC") and the FRB. 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 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 authority over Safra Republic.
In addition, the Luxembourg Central Bank (the "LCB"), by virtue of the European
Directive on consolidated supervision, exercises consolidated prudential
supervisory responsibilities with respect to Safra Republic and oversees Safra
Republic's 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.
CAPITAL REQUIREMENTS
The Corporation is subject to risk-based capital requirements and guidelines
imposed by the FRB, which are substantially similar to the capital requirements
and guidelines imposed by the OCC and the FDIC on the depository institutions
within their respective jurisdictions. For this purpose, a depository
institution's or holding company's assets and certain specified off-balance-
sheet commitments are assigned to four risk categories, each weighted
differently based on the level of credit risk that is ascribed to such assets or
commitments. In addition, risk weighted assets are adjusted for low-level
recourse and market risk equivalent assets. A depository institution's or
holding company's capital, in turn, is divided into three tiers: (1) core ("Tier
1") capital, which includes common
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equity, non-cumulative perpetual preferred stock and a limited amount of
cumulative perpetual preferred stock and related surplus (excluding auction rate
issues) and a limited amount of cumulative perpetual preferred stock and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill, certain identifiable intangible assets and certain other assets; (2)
supplementary ("Tier 2") capital, which includes, among other items, perpetual
preferred stock not meeting the Tier 1 definition, mandatory convertible
securities, subordinated debt and allowances for credit losses, subject to
certain limitations, less certain required deductions; and (3) market risk
("Tier 3") capital, which includes qualifying unsecured subordinated debt.
The Corporation, like other bank holding companies, currently is required to
maintain Tier 1 and "total capital" (the sum of Tier 1, Tier 2 and Tier 3
capital) equal to at least 4% and 8%, respectively, of its total risk-weighted
assets (including certain off-balance-sheet items, such as standby letters of
credit). At December 31, 1998, the Corporation met both requirements, with Tier
1 and total capital equal to 13.95% and 22.99%, respectively, of its total
risk-weighted assets.
The Bank is also subject to similar risk-based and leverage capital requirements
adopted by the OCC and was in compliance with the capital requirements as of
December 31, 1998 with Tier 1 capital of 13.04%, total capital of 18.26% and a
leverage ratio of 6.74%. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Capital Resources and Liquidity --
Risk-Based Capital and Leverage Guidelines" elsewhere in this Report.
Failure to meet capital requirements could subject a bank to a variety of
enforcement remedies, including the termination of deposit insurance by the
FDIC, and to certain restrictions on its business, which are described below
under "FDICIA."
FDICIA
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
among other things, identifies five capital categories for insured depository
institutions (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized) and requires
federal bank regulatory agencies to implement systems for "prompt corrective
action" for insured depository institutions that do not meet minimum capital
requirements, based on these categories. FDICIA imposes progressively more
restrictive constraints on operations, management and capital distributions,
depending on the category in which an institution is classified. Unless a bank
is "well capitalized," it is subject to restrictions on its ability to offer
brokered deposits and on certain other aspects of its operations. An
"undercapitalized" bank must develop a capital restoration plan and its parent
holding company must guarantee the bank's compliance with the plan up to the
lesser of 5% of the bank's assets at the time it became undercapitalized and the
amount needed to comply with the plan.
As of December 31, 1998, each bank subsidiary of the Corporation was "well
capitalized," based on the ratios and guidelines described above. It should be
noted, however, that a bank's capital category is determined solely for the
purpose of applying the OCC's (or the FDIC's) "prompt corrective action"
regulations and that the capital category may not constitute an accurate
representation of the Bank's overall financial condition or prospects.
LIABILITY FOR BANK SUBSIDIARIES
Under current FRB policy, the Corporation is expected to act as a source of
financial and managerial strength to each of its subsidiary banks and to
maintain resources adequate to support each such subsidiary bank. In addition,
Section 55 of the National Bank Act permits the OCC to order the pro rata
assessment of shareholders of a national bank whose capital has become impaired.
If a shareholder fails within three months to pay such an assessment, the OCC
can order the sale of the shareholder's stock to cover the deficiency. In the
event of a bank holding company's bankruptcy, any commitment by the bank holding
company to a federal bank regulatory agency to maintain the
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capital of a subsidiary bank would be assumed by the bankruptcy trustee and
entitled to priority of payment.
Any depository institution insured by the FDIC can be held liable for any loss
incurred, or reasonably expected to be incurred, by the FDIC in connection with
(i) the default of a commonly controlled FDIC-insured depository institution or
(ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured
depository institution in danger of default. "Default" is defined generally as
the appointment of a conservator or receiver, 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. The Bank and
RBC are FDIC-insured depository institutions. Also, if such a default occurred
with respect to a bank, any capital loans to the bank from its parent holding
company would be subordinate in right of payment to payment of the bank's
depositors and certain of its other obligations.
DEPOSITOR PREFERENCE STATUTE
Federal legislation has been enacted providing that, in the "liquidation or
other resolution" of a depository institution, domestic (U.S.) deposits and
certain claims of the FDIC as receiver, for administrative expenses and employee
compensation against an insured depository institution, would be afforded a
priority over other general unsecured claims against such institution, including
federal funds and letters of credit.
DEPOSIT INSURANCE
The Bank's and RBC's deposits are insured by the Bank Insurance Fund ("BIF"),
and certain of the Bank's deposits are insured by the Savings Association
Insurance Fund ("SAIF"), of the FDIC and are subject to FDIC insurance
assessments. The FDIC has adopted regulations establishing a permanent
risk-based deposit insurance 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. The insurance assessment
rates are then based on the probability of loss to the FDIC with respect to each
individual bank. The annual insurance premiums of bank deposits insured by the
BIF and the SAIF vary between $0.00 per $100 of deposits for banks classified in
the highest capital and supervisory evaluation categories to $0.27 per $100 of
deposits for banks classified in the lowest capital and supervisory evaluation
categories. It is, however, possible that the BIF deposit insurance premiums
will be revised by the FDIC in the future.
The Deposit Insurance Funds Act of 1996 (the "Funds Act") authorizes the
Financing Corporation ("FICO") to levy assessments on BIF-assessable deposits
and deposits assessable by the SAIF. The current FICO assessment rate is 1.22
basis points annually for BIF-assessable deposits and 6.10 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 by the Corporation to FICO are in addition
to other insurance premiums, if any, and thus represents an increased cost to
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, 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
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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, 1998, the Bank
may declare dividends in 1999, without regulatory approval, of approximately
$234 million plus an additional amount equal to its net profits for 1999 up to
the date of any dividend declaration. FDICIA provides that undercapitalized
banks are also subject to limitations on the payment of dividends.
There are no regulatory or contractual restrictions on RBCC's ability to pay
dividends to the Corporation.
ITEM 2. PROPERTIES
The Corporation has its principal offices in its world headquarter 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 1998.
8
<PAGE> 11
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, 1998, there were 2,729 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, all of which have been
adjusted to reflect the two-for-one Common Stock split distributed in June,
1998.
<TABLE>
<CAPTION>
1998
-------------------------------------------------
FOURTH THIRD SECOND FIRST
QTR. QTR. QTR. QTR.
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock sale price:
High $ 48 $ 71 1/2 $ 73 1/4 $ 68
Low 37 3/16 36 3/16 60 1/8 51 7/16
Close 45 9/16 39 1/2 62 15/16 66 11/16
Cash dividends declared 0.25 0.25 0.25 0.25
- -----------------------------------------------------------------------------
<CAPTION>
1997
----------------------------------------------
FOURTH THIRD SECOND FIRST
QTR. QTR. QTR. QTR.
- -------------------------- ----------------------------------------------
<S> <C> <C> <C> <C>
Common stock sale price:
High $ 59 15/16 $ 58 $ 54 7/16 $ 49 5/8
Low 50 7/8 53 5/16 41 5/8 39 5/8
Close 57 3/32 56 13/16 53 3/4 44 1/16
Cash dividends declared 0.23 0.23 0.23 0.23
- --------------------------
</TABLE>
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, adjusted for the
two-for-one stock split in June, 1998.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dividends declared per common share $ 1.00 $ 0.92 $ 0.76 $ 0.72 $ 0.66
Dividend payout ratio 48.31% 23.35% 21.47% 31.03% 23.16%
- -------------------------------------------------------------------------------------------
</TABLE>
The quarterly dividend rate on the Common Stock has been increased to $.26 per
share commencing with the dividend payable April 1, 1999.
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 $248.0 million in 1998, compared to $449.1 million in 1997 and
$418.8 million in 1996. The decline in earnings in 1998 from 1997 principally
reflected losses of $165.4 million, after tax, on Russian investment securities
and related hedges. Such losses stemmed from management's decision to write down
all of the Corporation's Russian investment securities to net realizable value,
which also resulted in reduced interest income. Diluted earnings per share were
$2.07 in 1998, $3.94 in 1997 and $3.54 in 1996.
The Corporation's risk-based capital ratios, which include the risk-weighted
assets and capital of Safra Republic, were 13.95% for Tier 1 capital and 22.99%
for total capital at December 31, 1998.
9
<PAGE> 12
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 $1.1 billion in 1998, unchanged from net interest income
in 1997.
Total average interest-earning assets were $46.1 billion in 1998, with
approximately 41% invested in securities of the U.S. Government and its agencies
and in interest-bearing deposits with banks. Average loans in domestic offices
of $9.7 billion represented approximately 21% of average interest-earning assets
in 1998. Average loans in foreign offices of $3.9 billion represented
approximately 8% of total average interest-earning assets in 1998.
Non-accrual loans were $80.9 million at year end 1998, compared to $93.8 million
at year end 1997. Non-accrual loans were 0.59% of total loans outstanding, at
year end 1998, compared to 0.76% at year-end 1997. At December 31, 1998, the
allowance for credit losses was $294.0 million, or 2.15% of loans outstanding.
Total trading revenue, including associated net interest income was $225.8
million in 1998, compared to $231.0 million in 1997. This decline was after
increases in precious metals and foreign exchange trading which were more than
offset by reduced trading account results due to aggressive reductions in
trading positions because of high volatility and lack of liquidity during the
second half of 1998.
Earnings from Safra Republic rose 6.1% in 1998 to $132.7 million from $125.1
million in 1997.
The Corporation's returns on average total assets and average common
stockholders' equity, based on net income applicable to common stock -- diluted,
were 0.41% and 7.78%, respectively, in 1998. The book value of the Corporation's
common stock was $24.62 at year end 1998 compared to $27.03 at year end 1997.
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,
1998. 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 1998 and
1997, and 44% in 1996.
<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
------------------ -----------------
(DOLLARS IN THOUSANDS) 1998 AMOUNT % 1997 AMOUNT % 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income $3,261,779 $ 19,640 0.6 $3,242,139 $377,107 13.2 $2,865,032
Interest expense 2,199,701 17,675 0.8 2,182,026 311,128 16.6 1,870,898
- ------------------------------------------------------ ---------------------- ----------
Net interest income 1,062,078 1,965 0.2 1,060,113 65,979 6.6 994,134
Provision for credit losses 8,000 (8,000) (50.0) 16,000 (16,000) (50.0) 32,000
- ------------------------------------------------------ ---------------------- ----------
Net interest income after
provision for credit losses 1,054,078 9,965 1.0 1,044,113 81,979 8.5 962,134
Other operating income 288,598 (239,710) (45.4) 528,308 82,193 18.4 446,115
Other operating expenses 978,565 74,722 8.3 903,843 118,089 15.0 785,754
- ------------------------------------------------------ ---------------------- ----------
Income before income taxes 364,111 (304,467) (45.5) 668,578 46,083 7.4 622,495
- ------------------------------------------------------ ---------------------- ----------
Income taxes 88,249 (98,973) (52.9) 187,222 15,516 9.0 171,706
Tax equivalent adjustment 27,815 (4,433) (13.7) 32,248 299 0.9 31,949
- ------------------------------------------------------ ---------------------- ----------
Total applicable income taxes 116,064 (103,406) (47.1) 219,470 15,815 7.8 203,655
- ------------------------------------------------------ ---------------------- ----------
Net income $ 248,047 $(201,061) (44.8) $ 449,108 $ 30,268 7.2 $ 418,840
================================================================================================================
Net income applicable to
common stock -- diluted $ 220,248 $(203,033) (48.0) $ 423,281 $ 37,254 9.7 $ 386,027
================================================================================================================
</TABLE>
10
<PAGE> 13
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, 1998, which are discussed throughout this
section.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1998 1997
---------------------------------- ----------------------------------
AVERAGE AVERAGE
INTEREST RATES INTEREST RATES
AVERAGE INCOME/ EARNED/ AVERAGE INCOME/ EARNED/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE PAID BALANCE EXPENSE PAID
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits with banks $ 4,174,467 $ 273,284 6.55% $ 4,679,550 $ 298,416 6.38%
Investment securities(1):
Taxable 23,001,754 1,540,161 6.70 21,497,014 1,511,817 7.03
Exempt from federal income
taxes(2) 1,414,323 109,766 7.76 1,510,182 122,382 8.10
- --------------------------------------------------------------- ------------------------
Total investment securities 24,416,077 1,649,927 6.76 23,007,196 1,634,199 7.10
Trading account assets (3) 1,090,514 77,184 7.08 1,466,715 115,594 7.88
Federal funds sold and securities
purchased under resale agreements 2,806,014 153,703 5.48 2,303,429 124,347 5.40
Loans, net of unearned income(4):
Domestic offices 9,670,968 790,173 8.17 8,973,953 751,272 8.37
Foreign offices 3,905,147 317,508 8.13 4,566,897 318,311 6.97
- --------------------------------------------------------------- ------------------------
Total loans, net of unearned
income 13,576,115 1,107,681 8.16 13,540,850 1,069,583 7.90
- --------------------------------------------------------------- ------------------------
Total interest-earning assets 46,063,187 $3,261,779 7.08% 44,997,740 $3,242,139 7.21%
- --------------------------------------------------------------- ------------------------
Cash and due from banks 877,171 836,889
Other assets(5) 6,851,680 9,185,910
- --------------------------------------------------------------------------------------------------------------
Total assets $53,792,038 $55,020,539
==============================================================================================================
Interest-bearing funds:
Consumer and other time deposits $10,364,764 $ 391,285 3.78% $10,795,118 $ 433,938 4.02%
Certificates of deposit 1,165,450 58,306 5.00 1,598,758 81,828 5.12
Deposits in foreign offices 17,433,855 1,020,394 5.85 16,915,710 935,257 5.53
- --------------------------------------------------------------- ------------------------
Total interest-bearing deposits 28,964,069 1,469,985 5.08 29,309,586 1,451,023 4.95
Trading account liabilities(3) 428,277 12,584 2.94 193,599 12,860 6.64
Short-term borrowings 7,983,363 412,734 5.17 8,354,135 436,149 5.22
Total long-term debt 4,744,518 304,398 6.42 4,397,055 281,994 6.41
- --------------------------------------------------------------- ------------------------
Total interest-bearing funds 42,120,227 $2,199,701 5.22% 42,254,375 $2,182,026 5.16%
- --------------------------------------------------------------- ------------------------
Noninterest-bearing deposits:
In domestic offices 2,680,809 2,336,440
In foreign offices 226,563 175,332
Other liabilities 5,435,071 6,918,856
Stockholders' equity:
Preferred stock 500,000 454,673
Common stockholders' equity 2,829,368 2,880,863
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,329,368 3,335,536
- --------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $53,792,038 $55,020,539
==============================================================================================================
Interest income/earning assets $3,261,779 7.08% $3,242,139 7.21%
Interest expense/earning assets 2,199,701 4.77 2,182,026 4.85
- --------------------------------------------------------------------------------------------------------------
Net interest differential $1,062,078 2.31% $1,060,113 2.36%
==============================================================================================================
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996
----------------------------------
AVERAGE
INTEREST RATES
AVERAGE INCOME/ EARNED/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE PAID
- ------------------------------------- ----------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits with banks $ 5,697,285 $ 376,030 6.60%
Investment securities(1):
Taxable 17,899,644 1,279,226 7.15
Exempt from federal income
taxes(2) 1,511,573 125,206 8.28
- ------------------------------------- ------------------------
Total investment securities 19,411,217 1,404,432 7.24
Trading account assets (3) 1,156,531 67,279 5.82
Federal funds sold and securities
purchased under resale agreements 1,773,945 98,061 5.53
Loans, net of unearned income(4):
Domestic offices 8,329,626 673,446 8.08
Foreign offices 3,650,052 245,784 6.73
- ------------------------------------- ------------------------
Total loans, net of unearned
income 11,979,678 919,230 7.67
- ------------------------------------- ------------------------
Total interest-earning assets 40,018,656 $2,865,032 7.16%
- ------------------------------------- ------------------------
Cash and due from banks 728,185
Other assets(5) 7,887,199
- ------------------------------------- ------------------------
Total assets $48,634,040
===================================== ========================
Interest-bearing funds:
Consumer and other time deposits $10,797,056 $ 430,416 3.99%
Certificates of deposit 1,031,044 51,618 5.01
Deposits in foreign offices 14,644,586 800,171 5.46
- ------------------------------------- ------------------------
Total interest-bearing deposits 26,472,686 1,282,205 4.84
Trading account liabilities(3) 170,393 11,841 6.95
Short-term borrowings 6,563,751 321,234 4.89
Total long-term debt 4,019,216 255,618 6.36
- ------------------------------------- ------------------------
Total interest-bearing funds 37,226,046 $1,870,898 5.03%
- ------------------------------------- ------------------------
Noninterest-bearing deposits:
In domestic offices 2,020,937
In foreign offices 138,352
Other liabilities 6,132,333
Stockholders' equity:
Preferred stock 574,685
Common stockholders' equity 2,541,687
- ------------------------------------- -----------
Total stockholders' equity 3,116,372
- ------------------------------------- -----------
Total liabilities and
stockholders' equity $48,634,040
===================================== ===================================
Interest income/earning assets $2,865,032 7.16%
Interest expense/earning assets 1,870,898 4.68
- ------------------------------------- -----------------------------------
Net interest differential $ 994,134 2.48%
===================================== ===================================
</TABLE>
(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 1998 and 1997 and 44% in
1996.
(3) Excludes noninterest-bearing balances which are included in other assets or
other liabilities, respectively.
(4) Including non-accrual loans.
(5) Including allowance for credit losses.
Net interest income increased $2.0 million, to $1.062 billion in 1998, compared
to $1.060 billion in 1997. The modest year-to-year increase was after the loss
of income primarily from Russian treasury bill (GKO) investment securities,
generally lower levels of interest rates and a reduction in cross-border
exposure to emerging markets, as well as increased premium amortization
attributable to
11
<PAGE> 14
prepayments on mortgage-backed securities. These factors were offset by a higher
level of average interest-earning assets, which rose to $46.1 billion in 1998
from $45.0 billion in 1997. The net interest rate differential declined to 2.31%
in 1998, compared to 2.36% in 1997.
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.
At year ends 1998 and 1997, the gross notional amount of off-balance-sheet
contracts used in asset and liability management was approximately $18.7 billion
and $21.7 billion, respectively. At year ends 1998 and 1997 the market value of
these off-balance-sheet contracts reflected unrealized losses of approximately
$88 million and $120 million, respectively.
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.
<TABLE>
<CAPTION>
INCREASE (DECREASE)
---------------------------------------------------------------
1998 VS. 1997 1997 VS. 1996
------------------------------ ------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
(IN THOUSANDS) VOLUME RATE TOTAL VOLUME RATE TOTAL
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income from:
Interest-bearing deposits with
banks $(33,087) $ 7,955 $(25,132) $(65,080) $(12,534) $(77,614)
Taxable securities 99,284 (70,940) 28,344 254,071 (21,480) 232,591
Securities exempt from federal
income taxes (7,481) (5,135) (12,616) (103) (2,721) (2,824)
Trading account assets (26,676) (11,734) (38,410) 24,490 23,825 48,315
Federal funds sold and
securities purchased under
resale agreements 27,513 1,843 29,356 28,592 (2,306) 26,286
Loans, net of unearned income:
Domestic offices 56,849 (17,948) 38,901 53,670 24,156 77,826
Foreign offices (53,779) 52,976 (803) 63,767 8,760 72,527
- ---------------------------------------------------------------------------------------------------
Total interest on loans 3,070 35,028 38,098 117,437 32,916 150,353
- ---------------------------------------------------------------------------------------------------
Total interest income 62,623 (42,983) 19,640 359,407 17,700 377,107
- ---------------------------------------------------------------------------------------------------
Interest expense on:
Consumer and other time deposits (16,745) (25,908) (42,653) 283 3,239 3,522
Certificates of deposit (21,603) (1,919) (23,522) 29,076 1,134 30,210
Deposits in foreign offices 31,007 54,130 85,137 124,835 10,251 135,086
Trading account liabilities 6,887 (7,163) (276) 1,547 (528) 1,019
Short-term borrowings (19,238) (4,177) (23,415) 93,255 21,660 114,915
Total long-term debt 21,964 440 22,404 24,366 2,010 26,376
- ---------------------------------------------------------------------------------------------------
Total interest expense 2,272 15,403 17,675 273,362 37,766 311,128
- ---------------------------------------------------------------------------------------------------
Change in net interest income $60,351 $(58,386) $ 1,965 $ 86,045 $(20,066) $ 65,979
===================================================================================================
</TABLE>
AGGREGATE PROVISION FOR CREDIT LOSSES
The aggregate provision for credit losses consists of the provision for credit
losses, the provision for trading credit losses and the provision for
off-balance-sheet credit losses. The Corporation deter-
12
<PAGE> 15
mines its aggregate provision for credit losses by monitoring its aggregate
allowance for credit losses on a quarterly basis. The Corporation, in monitoring
the aggregate allowance for credit losses, considers such factors as the
composition of the loan portfolio, including its real estate, commercial and
industrial and cross-border-exposure. Other extensions of credit related to
trading assets and off-balance-sheet commitments are also considered.
The aggregate provision for credit losses, all of which was applicable to the
allowance for credit losses related to the loan portfolio, was $8 million in
1998, $16 million in 1997 and $32 million in 1996. The allowance for credit
losses amounted to $294.0 million at year-end 1998, or 2.15% of loans
outstanding, net of unearned income compared to $326.5 million at year-end 1997,
or 2.64% of loans outstanding, net of unearned income. The decrease in the
allowance and related decline as a percentage of loans outstanding from 1997 to
1998 reflects the reduced risk profile of the Corporation's domestic loan
portfolio primarily due to increased residential real estate lending, continued
favorable loss experience for domestic loans, and reduced domestic non-accrual
and classified loans. The allowance for credit losses was $350.4 million at
year-end 1996. The decrease in the allowance from 1996 to 1997 resulted
primarily from the reclassification of $27 million of the allowance for credit
losses to the allowance for trading account credit losses and off-balance-sheet
credit losses.
In 1998, net charge-offs increased to $48.2 million from $11.3 million in 1997,
while non-accrual loans declined $13.0 million in 1998 when compared to 1997.
The increase in net charge-offs in 1998 over 1997 was principally attributable
to the charge-off of certain of the Corporation's Russian exposure.
In 1997, the level of non-performing loans declined $11.3 million when compared
to 1996 and net charge-offs declined $13.7 million in 1997 when compared to
1996.
The increase in the provision for credit losses in 1996 was primarily due to the
growth in the foreign loan portfolio of approximately 32% in 1996 compared to
1995. For additional information on charge-offs and recoveries, the aggregate
provision for credit losses and the method of reporting the aggregate allowance
for credit losses see "Asset Management-Aggregate Allowance for Credit Losses"
in this section of this Report.
OTHER OPERATING INCOME (LOSS)
The following table presents the principal categories of other operating income
(loss) for each of the years in the three-year period ended December 31, 1998.
<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
------------------ ---------------
(DOLLARS IN THOUSANDS) 1998 AMOUNT % 1997 AMOUNT % 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Trading revenue $ 140,095 $ (30,580) (17.9) $170,675 $(5,131) (2.9) $175,806
Investment securities
transactions, net (186,086) (221,203) * 35,117 11,870 51.1 23,247
Revenue from loans sold
or held for sale 8,682 (11,156) (56.2) 19,838 18,864 * 974
Commission income 95,805 8,281 9.5 87,524 16,131 22.6 71,393
Equity in earnings of
affiliate 132,708 7,592 6.1 125,116 31,698 33.9 93,418
Other income 97,394 7,356 8.2 90,038 8,761 10.8 81,277
- ----------------------------------------------- ------------------- --------
$ 288,598 $(239,710) (45.4) $528,308 $82,193 18.4 $446,115
===================================================================================================
</TABLE>
* Exceeds 200%
13
<PAGE> 16
Total Trading Revenue
The following table presents the components of total trading related revenue for
each of the years in the three-year period ended December 31, 1998. 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.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Precious metals:
Trading revenue (loss) $ (2,112) $ 14,069 $ 24,700
Net interest income 69,689 42,674 21,569
- ----------------------------------------------------------------------------------------------
Total 67,577 56,743 46,269
- ----------------------------------------------------------------------------------------------
Foreign exchange:
Trading revenue 141,143 119,642 98,165
Net interest (expense) (7,899) (9,515) (4,422)
- ----------------------------------------------------------------------------------------------
Total 133,244 110,127 93,743
- ----------------------------------------------------------------------------------------------
Trading account profits and commissions:
Trading revenue 1,064 36,964 52,941
Net interest income 23,883 27,129 3,021
- ----------------------------------------------------------------------------------------------
Total 24,947 64,093 55,962
- ----------------------------------------------------------------------------------------------
Total:
Trading revenue 140,095 170,675 175,806
Net interest income 85,673 60,288 20,168
- ----------------------------------------------------------------------------------------------
Total $225,768 $230,963 $195,974
==============================================================================================
</TABLE>
Total trading revenue, including associated net interest income which is
reported as net interest income, was $225.8 million in 1998, compared to $231.0
million in 1997 and $196.0 million in 1996. Total trading revenue declined in
1998 from 1997, despite improvements in precious metals and foreign exchange,
because of reduced trading account activity from reductions in trading positions
in light of the high volatility and lack of liquidity in the markets during the
second half of 1998. Net interest income from trading activities was $85.7
million in 1998, an increase of 42% from the $60.3 million earned in 1997 which
was 199% over the $20.2 million earned in 1996. The change in net interest
income in 1998 from 1997 was primarily due to precious metals arbitrage
activities. The increase in net interest income in 1997 from 1996, was due to
precious metals and trading account activities. The year-to-year increase in
total trading revenue in 1997 when compared to 1996, 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 $67.6 million in 1998,
as compared to $56.7 million in 1997 and $46.3 million in 1996. The change in
both 1998 and 1997 from the respective prior year reflected lower trading
revenue, which in each case, was offset by higher levels of net interest income
from arbitrage activities. The fluctuations in
14
<PAGE> 17
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 $133.2 million in 1998, an increase of $23.1
million, or 21%, over the $110.1 million in 1997, which increased $16.4 million,
or 17%, from the $93.7 million earned in 1996. In both 1998 and 1997, foreign
exchange trading benefited from volatility in the foreign exchange markets.
Trading Account Profits and Commissions
This line of income is 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 high-net-worth individuals. Trading account profits
and commissions also consists of income from trading derivative products,
emerging market fixed income securities, the securities of the U.S. Government
and its agencies, and, to a lesser extent, government securities of countries
where the Corporation has an active local presence, such as Argentina, Brazil,
Italy, Russia and Uruguay. The Corporation has ceased market-making in fixed
income derivative products.
Total trading account profits and commissions were $24.9 million in 1998,
compared to $64.1 million in 1997 and $56.0 million in 1996. The decline in
trading account profits and commissions in 1998, when compared to 1997, reflects
reductions in trading positions due to the high volatility and lack of liquidity
during the second half of 1998. The Corporation substantially reduced the
activities of its Moscow subsidiary in the fourth quarter of 1998. In 1997, a
substantial portion of the increase in trading account profits and commissions
from 1996 was attributable to the Corporation's subsidiary in Moscow. The
emerging markets trading department's trading account profits and commissions,
including net interest income, declined to $13.3 million in 1998, from $33.7
million in 1997 and $16.7 million in 1996.
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 Transactions
Investment securities transactions in 1998 resulted in aggregate net losses of
$186.1 million and included losses of $185.5 million, $165.4 million after tax
effect, on the Corporation's Russian investment securities and related hedges.
The investment securities losses stemmed principally from management's decision
in the third quarter to write down all of the Corporation's Russian investment
securities to net realizable value. This decision included charges for the
Corporation's Russian treasury bill (GKO) investments and a mark-down of all of
the Corporation's remaining Russian investments and related hedges, to reflect
current market levels or anticipated defaults.
In 1997, the Corporation realized net investment securities gains of $35.1
million, compared to net gains of $23.2 million in 1996. 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.
Revenue From Loans Sold or Held for Sale
Revenue from loans sold or held for sale was $8.7 million in 1998, $19.8 million
in 1997 and $1.0 million in 1996. In 1998 and 1997, the revenue was primarily
from sales of commercial real estate
15
<PAGE> 18
loans during a period that reflected a strengthening real estate market. The net
gains in 1996 resulted from the sale of originated mortgage loans. The
Corporation has generally retained the servicing rights on the 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
$95.8 million in 1998, compared to $87.5 million in 1997 and $71.4 million in
1996. Commission income included fees for the issuance of letters of credit and
the creation of acceptances of $22.0 million in 1998, $23.4 million in 1997 and
$21.7 million in 1996. In 1998, commissions attributable to securities
clearance, funds transfer and money management activities were $39.1 million,
compared to $37.3 million in 1997 and $24.8 million in 1996. Commission income
from the broker dealer business of RNYSC amounted to $9.6 million in 1998,
compared to $5.7 million in 1997 and $5.2 million in 1996. Commission income
from the shipment of U.S.-dollar denominated banknotes was $8.0 million in 1998,
$8.6 million in 1997 and $8.5 million in 1996.
Affiliate Earnings
Equity in earnings of affiliate, representing the Corporation's share of the
earnings of Safra Republic, was $132.7 million in 1998, compared to $125.1
million in 1997 and $93.4 million in 1996. The increase in 1998 over 1997 was
6%, and the increase in 1997 over 1996 was 34%.
The following table presents summary information for Safra Republic for each of
the last three years.
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE DATA) 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
At December 31:
Total assets $21,036,767 $20,356,300 $17,223,409
Interest-bearing deposits with banks 7,648,609 7,476,969 6,041,717
Investment securities 9,607,526 9,485,637 8,665,381
Loans, net of unearned income 2,837,277 2,288,896 1,687,050
Allowance for credit losses 78,781 134,351 131,071
Non-performing loans 9,017 10,271 10,777
Total deposits 16,447,942 15,401,065 13,337,947
Total shareholders' equity $ 1,936,791 $ 1,760,566 $ 1,643,110
For the year:
Net interest income $ 297,765 $ 297,225 $ 266,180
Provision for credit losses (48,100) 16,000 12,000
Other operating income 149,247 188,865 119,113
Other operating expenses 197,800 193,470 167,521
Net income 280,207 255,055 189,830
Net income per common share -- diluted $ 3.80 $ 3.59 $ 2.67
Average shares outstanding -- diluted 71,117 71,103 71,003
- --------------------------------------------------------------------------------------------
</TABLE>
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 1998, other income totaled $97.4 million and included
a gain of $4.9 million related to sales of real estate, $4.2 million of earnings
on the principal invested in a bank owned life insurance policy and $9.3 million
of equity in the earnings from Safra Republic Investments Limited, ("SRIL")
16
<PAGE> 19
a subsidiary whose ownership is shared equally with Safra Republic. 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, $7.1 million of equity in
the earnings of SRIL 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.
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, 1998.
<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
-------------- ----------------
(DOLLARS IN THOUSANDS) 1998 AMOUNT % 1997 AMOUNT % 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee
benefits $520,830 $45,813 9.6 $475,017 $ 54,916 13.1 $420,101
Occupancy, net 74,577 3,252 4.6 71,325 (1,367) (1.9) 72,692
Other expenses 383,158 25,657 7.2 357,501 64,540 22.0 292,961
- ------------------------------------------------- -------------------- --------
Total other operating
expenses $978,565 $74,722 8.3 $903,843 $118,089 15.0 $785,754
====================================================================================================
</TABLE>
Total other operating expenses were $978.6 million in 1998, $903.8 million in
1997 and $785.8 million in 1996. The increase in total expenses in 1998 over
1997, was primarily due to higher staff costs and expenses related to the Year
2000 Project. The increase in total other operating expenses in 1997 over 1996,
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. Total other expenses in
1998 and 1997 included approximately $35.0 million and $15.5 million,
respectively, related to the Year 2000 project, which is discussed below.
One-time charges included in 1998 were $13.7 million related to certain
unauthorized overseas securities transactions and a loss on a banknote shipment
and in 1997, $14.2 million related to an arbitration judgment and related legal
costs. See "Line-of-Business Information -- Restructuring" elsewhere in this
Report.
During 1996, the Corporation invested in initiatives designed to increase
revenues in future periods and in infrastructure to support and control those
operations. Retail banking expenses increased as a result of branch expansion.
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.
Also during 1996, the Corporation invested in broadening the array of its
investment product offerings, including the introduction of an asset allocation
product which is targeted at 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 enables the Corporation to efficiently measure and present
lines-of-business results also contributed to the higher expense level. RFSC
expanded significantly in that year and began offering full-service and discount
securities brokerage services to corporate and retail clients.
Salaries and Employee Benefits
Salaries and employee benefits were $520.8 million in 1998, $475.0 million in
1997 and $420.1 million in 1996. The increase in 1998 over 1997 reflects
increases in base salaries and provisions for
17
<PAGE> 20
incentive compensation. 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. As of year end 1998,
the Corporation had approximately 5,800 full-time equivalent employees, compared
to 5,900 at year end 1997 and 5,700 at year end 1996.
Occupancy
Occupancy costs were $74.6 million in 1998, $71.3 million in 1997 and $72.7
million in 1996. The increase in 1998 from 1997 resulted primarily from higher
real estate taxes and lower rental income. The decline in 1997 from 1996,
resulted primarily from a lower level of real estate taxes due to certain real
estate tax rebates.
Other Expenses
All other expenses were $383.2 million in 1998, $357.5 million in 1997 and
$293.0 million in 1996. All other expenses in 1998 included $33.0 million of
Year 2000 expenses and $13.7 million of one-time expenses related to certain
unauthorized overseas securities transactions, and a loss on a banknote
shipment. Included in 1997 were 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 $90.5 million in 1998,
$82.6 million in 1997 and $75.8 million in 1996. Amortization of goodwill and
other intangible assets was $27.3 million in 1998, $28.4 million in 1997 and
$28.7 million in 1996. Also, professional fees, consisting of consulting, legal
and audit fees, amounted to $36.4 million in 1998 compared to $36.0 million in
1997 and $29.2 million in 1996. All other expenses include premiums for deposit
insurance paid to the FDIC of $1.9 million in 1998, compared to $2.0 million in
1997 and $0.5 million in 1996.
YEAR 2000 RISK
The Corporation is managing the risks arising from the Year 2000 date change
("Year 2000 Risk") through its Ready 2000 Program Management Office ("PMO"). The
Ready 2000 PMO was established during the first quarter of 1997 and is staffed
by internal and external experts who are directing and coordinating the efforts
by the Corporation to achieve Year 2000 readiness. "Year 2000 ready" means that
computer software and hardware recognizes all date-sensitive information,
whether before, on or after January 1, 2000, accurately and makes all required
calculations or performs other date-sensitive functions correctly. The PMO
reports its progress bi-weekly to a Steering Committee comprised of members of
the Board of Directors and senior management of the Corporation and the Bank.
Progress is reported directly to the Board of the Corporation on a quarterly
basis.
State of Readiness
Scope of Program -- The Year 2000 Risk being addressed by the Corporation can be
divided into two broad categories: (1) information technology ("IT")
applications; and (2) non-information technology ("non-IT") applications. IT
applications include both hardware and software systems which perform
mathematical calculations and other data processing, such as the system used by
the Bank to maintain its clients' deposits. Non-IT applications rely upon
hardware or software components to perform their functions, however, data
processing is not their primary activity. An example of a non-IT application is
the heating, ventilation and air-conditioning systems that regulate the
environment in the main office of the Corporation. The Corporation's Ready 2000
program encompasses both IT and non-IT applications.
The Corporation identified and evaluated approximately 2,500 applications for
Year 2000 readiness as of December 31, 1998. The inventory of applications
increased by approximately 200 during the fourth quarter of 1998 as a result of
routine system upgrades, replacements and additions.
18
<PAGE> 21
Furthermore, the Corporation established several new offices during this period,
thereby adding new IT applications and all the non-IT facility, utility and
infrastructure applications needed to support these locations to the inventory.
Each application will be made Year 2000 ready by one of three strategies:
repair, retire or replace. Although the vast majority of applications will be
repaired, certain applications will be retired or replaced if doing so is more
cost effective to achieve Year 2000 readiness. In this regard, each new and
replacement application is certified by the Corporation, even if the vendor or
service provider states that such application is already Year 2000 ready.
At the beginning of March, 1999, the Corporation announced that it plans to
outsource its data centers and related network and communication operations. The
Corporation is discussing the terms and conditions of a definitive agreement for
providing these services with a third party service provider (the "third party
provider"). The decision to undertake this project at this time was made after
carefully evaluating and determining that it could be integrated into the
Corporation's Year 2000 readiness effort. In negotiating a definitive agreement
with the third party provider, the Corporation will obtain appropriate
assurances and protections that all aspects of the equipment and services to be
provided by the third party provider will be Year 2000 ready.
Program Description -- The Corporation has prioritized each application as high
or "mission critical," medium or low, depending on its importance to the
Corporation's operations. By categorizing an application as "mission critical,"
the Corporation has identified it as one that is vital to the successful
continuance of one of the Corporation's core business activities or interfaces
with a designated mission-critical application.
The Corporation's Ready 2000 PMO has developed ten steps or "milestones" which
each application must satisfy in order to be deemed Year 2000 ready. These
milestones are: (1) baseline testing -- a series of tests that identify and
document all functions performed by an application; (2)
pre-assessment -- identifies and documents all the components of an application
(e.g., program modules, hardware components, operating systems and interfaces);
(3) code assessment -- a detailed examination of an application to identify its
date-sensitive elements; (4) code conversion plan -- describes the process by
which the application will be made Year 2000 ready; (5) conversion -- the
process of remediating an application to make it Year 2000 ready; (6) regression
testing -- re-execution of the baseline testing to confirm that the
application's functionality was not adversely affected as a result of
conversion; (7) Year 2000 compliance testing -- testing a converted application
in a simulated Year 2000 environment; (8) Year 2000 integration
testing -- testing an application's interfaces in a simulated Year 2000
environment; (9) Year 2000 certification -- approval by senior management that
an application has successfully satisfied milestones 1 through 8; and (10) move
to production.
The Corporation has implemented quality control procedures designed to assure
that each application is subjected to, and satisfies, consistent and rigorous
milestone requirements. These procedures include the independent review of the
test plans for all mission-critical applications, and the review of the
documentation evidencing satisfaction of all milestone requirements for each
application by a quality assurance review team following the conclusion of
testing and before the application is considered for certification. In addition,
"clean management" procedures are applied to each application once it is
certified to be Year 2000 ready. Clean management means that if a certified
application is modified subsequently for any reason, the modified application
may not be returned to production without first being thoroughly re-tested in
order to confirm that the modified application remains Year 2000 ready. The
Corporation intends to apply clean management procedures to each software and
hardware application that will be migrated to the third party provider.
Program Status -- As explained above, each IT and non-IT application must
complete ten milestones required by the Ready 2000 program. The Corporation
expects to complete substantially all of the milestones for the project by June
30, 1999.
19
<PAGE> 22
The table below illustrates the Corporation's progress in meeting this goal as
reflected in the percentages of total milestones completed and applications
certified as of December 31, 1998.
<TABLE>
<CAPTION>
% OF TOTAL
MILESTONES % OF APPLICATIONS
COMPLETED AT CERTIFIED AT
DECEMBER 31, 1998 DECEMBER 31, 1998
------------------- -------------------
IT NON-IT IT NON-IT
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Mission critical 70% 23% Mission critical 62% 16%
Medium 71 42 Medium 54 36
Low 80 31 Low 75 25
- ---------------------------------------------------------------------------------
</TABLE>
The foregoing statistics demonstrate that significant overall progress has been
made by the Corporation toward making its applications Year 2000 ready.
Guidelines issued by federal banking regulators required the Corporation to
substantially complete the certification of all its internal mission-critical
applications by December 31, 1998. The Corporation successfully met this
requirement. The need to focus its resources on complying with this regulatory
milestone resulted in the Corporation not achieving the overall progress that it
had previously forecasted would be achieved by year end. However, as of January
31, 1999, the Corporation completed 90% of its total milestones and certified
84% of all applications (excluding the applications discussed above which were
added to inventory during the fourth quarter of 1998). The Corporation presently
expects to certify all applications, including the inventory additions by June
30, 1999.
The Corporation will continue testing certified applications throughout 1999 to
reaffirm that they will function properly on and after January 1, 2000. For
certain applications, this additional testing will include the Corporation's
participation in so-called "street-wide" testing with other banks and industry
participants.
In addition, the Corporation is reviewing the results of the progress of Safra
Republic's Year 2000 readiness program. Safra Republic is managing the
remediation of approximately 400 applications. As of December 31, 1998, Safra
Republic certified 42% of all its applications, which includes substantially all
of its internal mission-critical applications, and presently expects to complete
certifying the balance of its applications and to complete its business
resumption contingency planning with respect to Year 2000 Risk by June 30, 1999.
Costs
The Corporation estimates that total incremental costs associated with its Year
2000 readiness efforts through the end of the first quarter of 2000, which are
being funded through general operating funds, will be approximately $60 million.
Commencing in the second half of 1997 and through December 31, 1998, $50.5
million of these costs had been recorded, including expenses for the fourth
quarter of 1998 of $3.2 million. At the inception of the Ready 2000 program, the
Corporation did not institute a formal system for tracking all internal IT
resource costs, which would consist principally of the time of IT personnel and
certain personnel from other business units spent on Year 2000 activities.
However, management believes that these internal resources devoted to Year 2000
readiness is not a significant portion of the overall IT budget.
20
<PAGE> 23
The following table presents the expenses incurred by the Corporation to date,
as well as its forecast of the additional incremental expenses required to
complete its Ready 2000 program.
<TABLE>
<CAPTION>
1999 2000
-------------------------------------- -------
1997 1998 1ST QTR 2ND QTR 3RD QTR 4TH QTR 1ST QTR TOTAL
- -------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C>
$15.5 $35.0 $4.2* $2.2* $1.1* $1.0* $1.0* $60.0*
- -------------------------------------------------------------------------
</TABLE>
* forecasted
The incremental expenses incurred by the Corporation in connection with its
Ready 2000 program as described above are not expected to include a material
amount of expenses pertaining to the accelerated replacement of any software or
hardware systems. In addition, the Corporation's Year 2000 readiness program has
not caused the deferral or cancellation of any material IT projects.
Year 2000 Risk
The Corporation is addressing Year 2000 Risk with respect to business activities
conducted through its own applications and systems and those which require
reliance upon or interaction with a third party. In either case, a partial
malfunction or total failure could cause the Corporation to suffer a business
slowdown or interruption, resulting in financial loss, legal liability or action
by its regulators that could have a material affect on the Corporation's
financial condition and operations.
Business activities conducted using applications that the Corporation owns or
whose use is licensed from a vendor include trading with counterparties, buying
and selling securities on public exchanges and in over-the-counter markets,
managing customer deposits and transactions and maintaining accurate accounting
records. The malfunction or failure of its own systems could result in a
financial loss to the Corporation and legal liability to customers and
counterparties for whom transactions could not be initiated or completed.
The Corporation also faces Year 2000 Risk arising from numerous third parties
whose services or relationships are significant to its operations. Even if the
Corporation completes its Ready 2000 program successfully, failures by such
third parties to address their Year 2000 Risk may disrupt the Corporation's
operations and cause it to incur financial losses. These third parties include
major trading counterparties, securities exchanges, clearing organizations,
service bureaus, vendors, utilities, telecommunication companies and borrowers.
Accordingly, the Corporation is assessing the readiness of such third parties in
order to confirm that they are evaluating their own Year 2000 Risk and, as
necessary, remediating or replacing their hardware and software systems, as well
as developing contingency plans addressing unexpected disruptions caused by the
Year 2000 date change.
As stated above, the Corporation is planning to migrate its data centers and
related network and communication operations to a third party provider. In order
to mitigate the Year 2000 Risk that may arise from such event, the definitive
agreement for these services will require the third party provider to adopt and
assume responsibility for the Corporation's existing disaster recovery plans for
all the applications and systems being migrated to it. These plans require
redundant data processing and back-up capabilities to be available at all times
in the event services are interrupted for any reason. The definitive agreement
will also require the third party provider to deliver its own comprehensive
disaster recovery plans with respect to the processing being done for the
Corporation which are acceptable in all respects to the Corporation.
Notwithstanding the foregoing precautions, if the disaster recovery plans
utilized by the third party provider or any other service provider do not work
as planned, the Corporation is preparing contingency plans addressing Year 2000
Risk, as more fully described below.
21
<PAGE> 24
Contingency Planning
Even if the Corporation's Ready 2000 program is completely successful with
respect to all its own applications, the possibility remains that the
Corporation may experience Year 2000-related disruptions caused by inadequate
preparations by third parties. The Corporation is evaluating this type of Year
2000 Risk and developing contingency plans to address it. This planning takes
two forms: remediation contingency planning and business resumption contingency
planning.
Remediation Contingency Planning -- Remediation contingency plans address the
actions to be taken if the Corporation's original plan to make a system Year
2000 ready is determined to be ineffective or cannot be completed in a timely
manner. This type of contingency planning involves hiring additional staff in
order to expedite remediation and testing activities and transferring the
processing done by certain applications to an alternative vendor or service
provider. The Corporation developed remediation contingency plans for all
mission-critical business applications which were not certified to be Year 2000
ready as of December 31, 1998.
Business Resumption Contingency Planning -- In addition to remediation
contingency planning, the Corporation has evaluated the risks of a failure by
each core business process as a result of the Year 2000 date change and is in
the process of revising its business resumption contingency plans in order to
address these risks. This evaluation includes the impact of potential failures
by the Corporation's internal systems, as well as the failure of systems
maintained by third parties, including service bureaus, electric and gas
utilities, telecommunication companies and the providers of institutional
clearing services. The Corporation has established a subcommittee of the Year
2000 Steering Committee that is overseeing this planning process. The
subcommittee has, in turn, designated business resumption planning coordinators
on divisional and departmental levels. Because the business resumption
contingency planning process presumes that ordinary data processing support is
unavailable, the anticipated migration of its data centers and related network
and communication operations to the third party provider is not expected to
affect these planning activities significantly. The Corporation will, however,
in all appropriate cases, consider the impact of the planned migration on its
business resumption contingency plans.
Year 2000 Risk constitutes a unique type of risk that must be incorporated into
the Corporation's existing contingency planning. To do so, the Corporation has
adopted a four-phase process: (1) Organizational Planning
Guidelines -- establishes the strategy for developing each plan; (2) Business
Impact Analysis -- assesses the economic impact on each business unit of the
Corporation caused by the interruption or failure of its critical systems; (3)
Contingency Plan Development -- clarifies the circumstances and timing and
procedures to be followed in the event a plan must be activated; and (4)
Methodology for Validation -- requires the design of a method to validate each
plan. The first two phases of this process were completed as of December 31,
1998. The third and fourth phases were begun prior to December 31, 1998 and are
expected to be completed by June 30, 1999.
European Monetary Union
Commencing January 1, 1999, eleven of the fifteen participating member countries
of the European Monetary Union ("EMU") adopted a single currency, known as the
"euro," as their common legal currency. On such date, each participating country
established a fixed conversion rate between its existing national currency and
the euro.
By December 31, 1998, the Corporation successfully completed the remediation of
its affected applications. In addition, the Corporation has evaluated the impact
of the introduction of the euro upon its operations and developed appropriate
contingency plans addressing euro-related disruptions to significant business
units beginning on January 1, 1999. The Corporation's incremental costs
associated with reviewing and remediating affected applications and preparing
its operations for the euro were approximately $1 million. Because the
introduction of the euro affected directly only a
22
<PAGE> 25
small portion of its clients and overall operations, the Corporation does not
expect any remaining impact to be significant.
TOTAL APPLICABLE INCOME TAXES
Total applicable income taxes, which includes the effect of a taxable equivalent
adjustment, declined $103.4 million in 1998 to $116.1 million, after increasing
$15.8 million in 1997 over 1996. The ratio of total applicable income taxes to
income before taxes was 32% in 1998 and 33% in 1997 and 1996. The decline in
1998 total applicable income taxes, compared to 1997, was due to the lower level
of taxable income for the year, which reflected minimal income tax
benefit/expense on Russian securities transactions, and to the reversal of
certain tax liabilities accrued in prior 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 $220.2 million in 1998,
compared to $423.3 million in 1997 and $386.0 million in 1996. Diluted earnings
per common share were $2.07 in 1998, $3.94 in 1997 and $3.54 in 1996. Dividends
declared and the average annual rates paid on the Corporation's issues of
preferred stock were as follows: $26.3 million in 1998 at 5.26%, $24.2 million
in 1997 at 5.32% and $31.5 million in 1996 at 5.48%.
LINE-OF-BUSINESS INFORMATION
The Corporation's businesses are organized into five major segments: Private
Banking, Consumer Financial Services, Lending, Global Treasury and Global
Markets. During 1998, the Corporation implemented an internal performance
measurement system to measure each of the major segments independently on a net
income basis along with rate of return and efficiency ratios as well as other
key performance measures. The following table presents the summary results for
the year ended December 31, 1998. Data is not available on a comparable basis
for prior periods.
<TABLE>
<CAPTION>
CONSUMER
PRIVATE FINANCIAL GLOBAL GLOBAL
(DOLLARS IN THOUSANDS) BANKING SERVICES LENDING TREASURY MARKETS OTHER TOTAL
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) $ 104,850 $ 84,602 $ 65,150 $ (24,634) $ 20,469 $ (2,390) $ 248,047
Average assets 2,668,607 861,250 10,367,136 31,495,660 11,837,675 (3,438,290) 53,792,038
Average liabilities
and preferred stock 10,917,021 11,495,275 8,783,465 8,350,874 14,449,615 (3,033,580) 50,962,670
Average risk-adjusted
equity 548,802 421,582 379,187 1,192,691 287,106 -- 2,829,368
Efficiency ratio 48% 71% 64% 193% 87% -- 74%
Return on average
risk-adjusted equity 19.1% 20.1% 17.2% (4.4)% 7.1% -- 7.8%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The return on average risk-adjusted equity is calculated based on net income
applicable to common stock -- diluted.
PRIVATE BANKING
Private Banking offers a full range of financial services for high-net-worth
individuals around the world. The product lines include deposit, lending,
trading, treasury, investment management
23
<PAGE> 26
products, trust, custody, estate planning, philanthropic advisory services and
asset allocation products. Domestic Private Banking account representatives are
located in New York, California and Massachusetts. International Private Banking
account offices are located in the United States in New York, California and
Florida and in Japan, Hong Kong, Singapore, London and Taiwan. Additional
representative offices and affiliates are available in other major cities. The
Corporation offers high quality investment management products which include
Republic Investment Management Accounts (RIMA), the Republic Family of Funds and
the Republic Spectrum Account. Strategic initiatives in Private Banking will
concentrate on enhancing asset management capabilities through acquisitions and
hiring of additional account officers and increased lending activities.
The Corporation has a 49% investment in Safra Republic, a Luxembourg holding
company with subsidiary banks located in Switzerland, Luxembourg, France,
Guernsey, Gibraltar and Monaco and representative offices around the world,
providing international private banking services, asset management and other
related investment services. Safra Republic has seen net income grow at an
annual compound growth rate of 17% since 1993.
Together with Safra Republic, the Corporation had total client accounts
including deposits of $55.6 billion at December 31, l998, compared to $48.6
billion at December 31, 1997. Safra Republic had $32.9 billion and $29.9 billion
at December 31, l998 and 1997, respectively, and the Corporation had $22.7
billion and $18.7 billion at such respective dates.
CONSUMER FINANCIAL SERVICES
Consumer Financial Services provides retail banking, investment, insurance and
home finance services and products to over 1 million accounts from 82 locations
in the New York metropolitan area and from 8 locations in southern Florida.
These financial services and products are provided to individuals and small to
medium commercial customers. Consumer Financial Services has approximately $13.1
billion of assets under management, (including deposits). Average client assets
under management are now nearly $162 million per location. Major financial
products and services include deposit products: checking accounts, money market
accounts, NOW accounts, investment products: mutual funds, fixed and variable
rate annuities, the ability to purchase stocks and bonds through Republic
Financial Services, a retail broker-dealer, insurance: life and health (property
and casualty insurance will be offered in 1999), banking services: PC bill
payment services, internet banking and ATM availability along with special
programs that offer financial products and service to specific demographic
groups: Young Investor Club, Republic Bank for Kids, Student$ense and
Renaissance Club.
Consumer Financial Services provides customers with a full range of financial
services in a one-stop financial shopping environment. Consumer Financial
Services is able to provide this expertise by having 80 financial/insurance
consultants, 110 investment/insurance personnel and 250 home finance specialists
that work throughout the retail network. During 1998, Investment Lounges were
created in 10 branches to assist customers with their investment decisions, with
15 additional lounges expected to open in 1999. Results for 1998 reflect the
costs associated with investing in the infrastructure for new product offerings,
including brokerage services in 1997 and insurance products in 1998, development
of alternative delivery channels such as web-based banking, an increased number
of mortgage account executives in the 16 states where mortgages are being
originated, trained personnel and the technology to support an integrated
delivery system.
LENDING
Lending continues to be an integral part of the Corporation's overall client
relationship. Lending activities cover a variety of industries and industry
segments including domestic and international private banking, small business,
middle market, factoring, national and international corporations, commercial
real estate and precious metals lending. The Corporation is a leading provider
of mortgage financing to cooperative apartments in the country and a substantial
lender and provider of
24
<PAGE> 27
business credit to the retail and apparel industry. The market place continues
to be very competitive in the lending businesses, and the Corporation has
continued to follow a plan of diversity within businesses, the avoidance of high
risk transactions and the development of a customer base with a high level of
credit quality. Products include working capital lines, banker's acceptances,
letters of credit, factoring services, asset based lending, securities lending
and commercial mortgages.
GLOBAL TREASURY
Global Treasury operates in all major capital markets and is responsible for
managing the Corporation's liquidity profile, including its asset and liability
positions. Global Treasury seeks to reduce the Corporation's exposure to changes
in external interest rates, while maximizing the level of net interest income
generated. See "Liability and Asset Management" below. The 1998 results for the
Global Treasury segment reflect a $165.4 million after tax loss from
management's decision to write down all of the Corporation's Russian investment
securities to net realizable value. This write down is consistent with the
Corporation's goals of high liquidity, high asset quality and the recognition of
problem areas as early as possible.
In addition to investments in U.S. Government guaranteed and AAA rated
asset-backed securities, the Global Treasury segment invests, from time to time,
in other instruments including emerging markets paper, money market instruments,
and other assets that meet the Corporation's criteria for appropriate
investments.
GLOBAL MARKETS
Global Markets encompasses the trading and sale of foreign exchange, banknotes,
derivatives, precious metals, securities, and emerging markets instruments. With
trading centers in Europe, North and South America, Asia and Australia, the
Corporation is able to operate trading desks 24 hours a day covering the major
international cross border markets as well as many local markets. Global Markets
has been recognized as a leader in foreign exchange, precious metals, banknotes,
emerging markets debt instruments and derivatives, including swaps, options and
structured products. The Global Market desks will customize products to suit the
needs of clients, which include financial institutions, corporations,
individuals and central banks. In addition, from time-to-time, Global Markets
may take proprietary positions complying with established limits and risk
profiles.
In 1999, the Corporation announced that efficiencies have been achieved in
Global Markets by dismantling the prime brokerage activities within Republic New
York Securities Corporation and the market-making business within the
fixed-income derivative products group, consolidating back offices and
increasing automation. The Corporation will consolidate trading operations into
trading centers in the United States, Europe and Asia, while maintaining a local
marketing presence in each foreign location. The Corporation will focus its
attention on solidifying its leadership position in precious metals and foreign
exchange/banknotes. Furthermore, the Corporation will utilize its financial
engineering expertise in asset/liability management for the treasury. Finally,
Global Markets will design wealth management products for private banking
customers.
OTHER
Other includes all items that are allocated as a net amount, the residual
effects of unallocated activities and those not allocated to specific segments
such as expenses related to Year 2000 and the implementation of the euro,
intercompany eliminations, and the remaining effects at the corporate level
after implementation of management accounting policies including residual credit
provisions.
RESTRUCTURING
In March 1999, the Corporation announced the results of its line-of-business
review and restructuring plan to grow its core private banking and special niche
businesses utilizing its new reporting
25
<PAGE> 28
system, Republic Profit Quest. The Corporation also announced that it plans to
outsource its data centers and related network and communication operations.
Accordingly, the Corporation will take a one time restructuring charge in the
first quarter of 1999 amounting to approximately $97 million (before tax effect)
for workforce reductions, branch consolidations, the outsourcing of certain data
processing functions and the decision to exit certain activities. In addition,
the Corporation will also record an expense of approximately $7 million (before
tax effect) in the first quarter of 1999 primarily resulting from the
termination of selected employee benefit programs.
LIABILITY AND ASSET MANAGEMENT
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 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. Certain accounting changes may alter the Corporation's use of
derivative instruments in the management of its asset and liabilities. For
additional information, see below in the section "Recent Accounting
Pronouncements."
Diversification is a 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.
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.
26
<PAGE> 29
The table below illustrates the Corporation's interest rate sensitivity gap
position at December 31, 1998 and 1997. 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.
<TABLE>
<CAPTION>
REPRICING PERIOD AT DECEMBER 31, 1998
----------------------------------------------------------------
AFTER ONE AFTER THREE AFTER SEVEN
YEAR BUT YEARS BUT YEARS BUT
WITHIN WITHIN THREE WITHIN SEVEN WITHIN TEN AFTER
(IN MILLIONS) ONE YEAR YEARS YEARS YEARS TEN YEARS
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSET/(LIABILITY)
Interest rate sensitivity
gap $1,157 $ 803 $(1,245) $2,150 $(2,865)
- ---------------------------------------------------------------------------------------------
ASSET/(LIABILITY)
Cumulative interest rate
sensitivity gap $1,157 $ 1,960 $ 715 $2,865 $ --
=============================================================================================
</TABLE>
<TABLE>
<CAPTION>
REPRICING PERIOD AT DECEMBER 31, 1997
----------------------------------------------------------------
AFTER ONE AFTER THREE AFTER SEVEN
YEAR BUT YEARS BUT YEARS BUT
WITHIN WITHIN THREE WITHIN SEVEN WITHIN TEN AFTER
(IN MILLIONS) ONE YEAR YEARS YEARS YEARS TEN YEARS
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 $ --
=============================================================================================
</TABLE>
In 1998, prepayments on mortgaged-backed securities accelerated over the course
of the year, thereby shortening the assumed average lives of these securities.
In addition, the Corporation extended the maturity of some of its interest rate
hedges.
27
<PAGE> 30
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.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------------------------- --------------------------------------------
DUE IN DUE IN DUE IN DUE IN
LESS THAN ONE THRU DUE AFTER LESS THAN ONE THRU DUE AFTER
(DOLLARS IN MILLIONS) ONE YEAR FIVE YEARS FIVE YEARS TOTAL ONE YEAR FIVE YEARS FIVE YEARS TOTAL
- ---------------------------------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Receive fixed swaps:
Notional amount $ 337 $2,348 $1,384 $4,069 $ 756 $ 916 $ 942 $2,614
Weighted average
receive rate 6.56% 6.75% 6.80% 6.75% 6.84% 7.79% 6.75% 7.14%
Weighted average pay
rate 5.01% 5.06% 5.04% 5.05% 5.52% 5.57% 5.89% 5.67%
Pay fixed swaps:
Notional amount $1,543 $4,468 $2,117 $8,128 $1,419 $3,694 $1,122 $6,235
Weighted average
receive rate 5.08% 5.07% 5.07% 5.07% 5.74% 5.93% 5.91% 5.89%
Weighted average pay
rate 6.97% 6.45% 6.70% 6.61% 6.43% 6.89% 7.33% 6.87%
Forward contracts:
Notional amount $ 640 $ -- $ -- $ 640 $1,210 $1,282 $ -- $2,492
Interest rate caps
purchased:
Notional amount $ 748 $3,350 $1,300 $5,398 $ 575 $3,448 $1,650 $5,673
Other interest rate
swaps:
Notional amount $ -- $ 339 $ 9 $ 348 $ 445 $1,356 $1,689 $3,490
Cross-currency swaps:
Notional amount $ 100 $ 66 $ -- $ 166 $1,100 $ 120 $ 14 $1,234
- -------------------------------------------------------------------- --------------------------------------------
</TABLE>
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, philanthropic advisory services, 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. RBC
is a separate banking subsidiary, servicing the California market with three
banking offices in California, 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.
28
<PAGE> 31
The following table sets forth the Corporation's deposit structure at December
31, in each of the last three years.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DOMESTIC OFFICES:
Noninterest-bearing deposits:
Individuals, partnerships and corporations $ 2,586,511 $ 2,390,591 $ 2,005,782
Foreign governments and official institutions 1,910 2,301 1,756
U.S. Government and states and political
subdivisions 9,314 35,036 42,912
Banks 149,457 145,962 117,857
Certified and official checks 135,380 125,929 127,960
- --------------------------------------------------------------------------------------------
Total noninterest-bearing deposits 2,882,572 2,699,819 2,296,267
- --------------------------------------------------------------------------------------------
Interest-bearing deposits:
Individuals, partnerships and corporations 4,935,903 5,828,033 6,093,852
Savings and NOW accounts 3,078,049 3,174,543 3,277,077
Money market accounts 2,884,052 2,888,781 2,812,222
Banks and other 6,018 323,403 376,403
- --------------------------------------------------------------------------------------------
Total interest-bearing deposits 10,904,022 12,214,760 12,559,554
- --------------------------------------------------------------------------------------------
Total deposits in domestic offices 13,786,594 14,914,579 14,855,821
- --------------------------------------------------------------------------------------------
FOREIGN OFFICES:
Noninterest-bearing deposits 179,709 222,957 177,675
- --------------------------------------------------------------------------------------------
Interest-bearing deposits:
Individuals, partnerships and corporations 10,938,373 10,293,904 8,010,355
Banks located in foreign countries 7,283,279 6,692,620 7,784,154
Foreign governments and official institutions 1,031,804 1,265,474 897,574
- --------------------------------------------------------------------------------------------
Total interest-bearing deposits 19,253,456 18,251,998 16,692,083
- --------------------------------------------------------------------------------------------
Total deposits in foreign offices 19,433,165 18,474,955 16,869,758
- --------------------------------------------------------------------------------------------
Total deposits $33,219,759 $33,389,534 $31,725,579
============================================================================================
</TABLE>
The following table presents the maturity distribution at December 31, 1998 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.
<TABLE>
<CAPTION>
CERTIFICATES OF OTHER TIME
DEPOSITS DEPOSITS TOTAL
--------------- ----------------- -----------------
(DOLLARS IN THOUSANDS) AMOUNT % AMOUNT % AMOUNT %
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Due in 90 days and less $482,794 77 $1,602,964 84 $2,085,758 82
Due in 91-180 days 43,273 7 111,860 6 155,133 6
Due in 181-360 days 13,890 2 109,322 6 123,212 5
Due in over 360 days 88,209 14 80,421 4 168,630 7
- ------------------------------------------------------------------------------------------
Total $628,166 100 $1,904,567 100 $2,532,733 100
==========================================================================================
</TABLE>
29
<PAGE> 32
FOREIGN DEPOSITS
The Corporation's international private banking group generates a substantial
portion of foreign deposits by establishing relationships with clients
throughout the world.
Deposits from foreign sources are placed by 25,000 individuals and foreign banks
from more than 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 $0.6 billion, to $17.7 billion in 1998, after increasing to $17.1 billion
in 1997 from $14.8 billion in 1996.
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.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign deposits:
Time deposits of individuals, partnerships and
corporations $11,452,923 $10,853,584 $ 8,534,615
Banks and other financial institutions 7,482,092 6,873,528 7,940,121
Foreign governments and official institutions 1,034,897 1,269,209 899,742
Other deposits 228,987 169,805 174,800
- --------------------------------------------------------------------------------------------
Total foreign deposits $20,198,899 $19,166,126 $17,549,278
============================================================================================
</TABLE>
TRADING ACCOUNT LIABILITIES
Trading account liabilities were $3.4 billion at year end 1998, $5.3 billion at
year end 1997 and $4.4 billion at year-end 1996. The decline in 1998 from 1997
reflected the Corporation's increased utilization of netting agreements with
counterparties. 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 deposits.
From time to time, the Bank also issues short-term securities in public
offerings. Average short-term borrowings declined to $8.0 billion in 1998, from
$8.4 billion in 1997, compared to $6.6 billion in 1996. The decline in 1998 from
1997 was primarily due to reduced volumes of commercial paper, lower balances
for RNYSC client positions as a result of permissible netting of loans and
short-term borrowings previously shown gross, partially offset by increased
treasury tax and loan borrowings. The increase in 1997 over 1996 reflected
higher levels of other borrowings for precious metals, client positions in RNYSC
and local borrowings in overseas locations. Short-term borrowings as a
percentage of total interest-bearing funds were 19% in 1998, 20% in 1997 and 18%
in 1996.
The Corporation's commercial paper is rated A-1 by Standard & Poor's
Corporation, F1+ by Fitch IBCA Inc., P-1 by Moody's Investors Service and D-1+
by Duff & Phelps, LLC. Commercial paper proceeds are used principally to finance
the current operations of RBCC and RNYSC. The Corpora-
30
<PAGE> 33
tion has $155 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.
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.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased and securities sold under
repurchase agreements:
Average interest rate:
At year end 4.74% 5.31% 5.19%
For the year 5.10% 5.10% 5.31%
Average amount outstanding during the year $2,048,848 $2,296,958 $2,517,980
Maximum amount outstanding at any month end 3,142,604 3,246,873 4,263,640
Amount outstanding at year end 934,372 853,612 1,090,300
Commercial paper:
Average interest rate:
At year end 5.20% 5.53% 5.40%
For the year 5.44% 5.52% 5.41%
Average amount outstanding during the year $ 428,764 $ 811,071 $ 887,055
Maximum amount outstanding at any month end 750,809 1,252,949 1,091,613
Amount outstanding at year end 700,483 418,911 862,347
Precious metals borrowings:
Average interest rate:
At year end 1.24% 1.87% 1.78%
For the year 1.72% 2.53% 2.51%
Average amount outstanding during the year $1,727,610 $1,743,540 $1,375,789
Maximum amount outstanding at any month end 2,104,218 2,090,567 1,683,926
Amount outstanding at year end 1,515,333 2,028,268 1,645,904
Other borrowings:
Average interest rate:
At year end 7.10% 7.61% 7.26%
For the year 6.75% 6.57% 5.88%
Average amount outstanding during the year $3,778,141 $3,502,566 $1,782,927
Maximum amount outstanding at any month end 8,221,639 3,411,034 1,848,290
Amount outstanding at year end 1,291,022 2,313,043 1,848,290
- -------------------------------------------------------------------------------------------
</TABLE>
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 endeavors to reduce the unique risks
of extending international credit. See also the introduction to "Liability and
Asset Management" earlier in this Report.
31
<PAGE> 34
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.
<TABLE>
<CAPTION>
ASSETS LIABILITIES
------------------------- -------------------------
DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 75.2% 24.8% 54.6% 45.4%
1997 77.3% 22.7% 59.6% 40.4%
1996 71.9% 28.1% 60.8% 39.2%
- ----------------------------------------------------------------------------------------
</TABLE>
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.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-bearing deposits with banks $ 4,218,893 $ 4,756,804 $ 5,909,195
Total investment securities 23,166,237 25,513,818 21,175,513
Trading account assets 3,397,110 4,510,955 4,807,788
Federal funds sold and securities purchased under
resale agreements 689,335 2,169,291 2,109,109
Loans:
Real estate 5,742,994 4,357,209 4,106,231
Government and official institutions 119,991 74,417 57,136
Broker loans 707,515 1,123,209 1,091,567
Banks and other financial institutions 750,537 954,522 864,717
Commercial and other 6,341,938 5,866,947 5,627,591
- --------------------------------------------------------------------------------------------
Total loans 13,662,975 12,376,304 11,747,242
Less unearned income (14,138) (16,563) (25,306)
- --------------------------------------------------------------------------------------------
Loans, net of unearned income 13,648,837 12,359,741 11,721,936
- --------------------------------------------------------------------------------------------
$45,120,412 $49,310,609 $45,723,541
============================================================================================
</TABLE>
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 9% of average
interest-earning assets in 1998, 10% in 1997 and 14% in 1996, as the
Corporation's funds were invested in assets yielding more favorable returns.
32
<PAGE> 35
The following table provides information on the maturity distribution of the
Corporation's interest-bearing deposits with banks at December 31, 1998.
<TABLE>
<CAPTION>
MATURITY
(DOLLARS IN MILLIONS) DISTRIBUTION %
- ---------------------------------------------------------------------------------
<S> <C> <C>
Due within one month $2,878.1 68
Due after one but within six months 1,062.3 25
Due after six but within twelve months 88.9 2
Due after one year 189.6 5
- ---------------------------------------------------------------------------------
$4,218.9 100
=================================================================================
</TABLE>
INVESTMENT PORTFOLIO
The Corporation's total investment securities portfolio declined $2.3 billion,
or 9%, during 1998 to $23.2 billion at year end from $25.5 billion in 1997,
which was a $4.3 billion increase over 1996. The changes in 1998 and 1997 were
primarily in U.S. Government agency securities and other investment securities,
including asset-backed investments.
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.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Government obligations $ 150,752 $ 281,392 $ 179,533
Obligations of U.S. Government agencies 13,905,778 15,305,555 12,201,021
Obligations of U.S. states and political
subdivisions 702,242 711,186 702,200
Other investment securities 8,407,465 9,215,685 8,092,759
- --------------------------------------------------------------------------------------------
$23,166,237 $25,513,818 $21,175,513
============================================================================================
</TABLE>
Except for investment securities of the Brazilian government and its agencies,
with book and market values amounting to $1.1 billion, 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 1998.
The investment in Brazilian securities is before the reduction of $653 million
from Brazilian constraint certificates of deposits. See "Cross-border Net
Outstandings" below in this section of this Report for additional information
related to Brazil.
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, 1998. 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 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 3.6 years
and 5.7 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%. Certain accounting
changes may alter the
33
<PAGE> 36
Corporation's use of derivative instruments in the management of its asset and
liabilities. For additional information, see below in the section "Recent
Accounting Pronouncements."
<TABLE>
<CAPTION>
SECURITIES HELD TO MATURITY
DECEMBER 31, 1998
------------------------------------
ESTIMATED WEIGHTED
BOOK MARKET AVERAGE
(DOLLARS IN THOUSANDS) VALUE VALUE YIELD
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Obligations of U.S. Government agencies:
Mortgage-backed securities $6,038,181 $6,191,158 7.17%
Derivative contracts -- (62,883)
- --------------------------------------------------------------------------------
6,038,181 6,128,275
- --------------------------------------------------------------------------------
Obligations of U.S. states and political subdivisions:
Due within 1 year 6,096 6,219 13.95%
Due after 1 year but within 5 years 45,999 50,161 9.98
Due after 5 years but within 10 years 71,451 80,919 9.75
Due after 10 years 569,987 617,352 7.25
- --------------------------------------------------------------------------------
693,533 754,651
- --------------------------------------------------------------------------------
Total held to maturity $6,731,714 $6,882,926
================================================================================
</TABLE>
34
<PAGE> 37
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 1998
----------------------------------------
WEIGHTED
AMORTIZED BOOK/ESTIMATED AVERAGE
(DOLLARS IN THOUSANDS) COST MARKET VALUE YIELD
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Government obligations:
Due after 5 years but within 10 years $ 152,073 $ 150,065 3.68%
Due after 10 years 574 687 6.72
- ---------------------------------------------------------------------------
152,647 150,752
- ---------------------------------------------------------------------------
Obligations of U.S. Government agencies:
Due within 1 year 7,022 7,057 4.61%
Due after 1 year but within 5 years 124,605 141,296 6.19
Due after 5 years but within 10 years 125,557 126,819 6.29
Due after 10 years 1,154,694 1,161,074 6.30
Mortgage-backed securities 6,487,256 6,557,956 6.80
Derivative contracts -- (126,605)
- ---------------------------------------------------------------------------
7,899,134 7,867,597
- ---------------------------------------------------------------------------
Obligations of U.S. states and political
subdivisions:
Due after 10 years 8,293 8,709 10.87%
- ---------------------------------------------------------------------------
8,293 8,709
- ---------------------------------------------------------------------------
Other investment securities:
Due within 1 year 893,203 894,282 8.05%
Due after 1 year but within 5 years 2,553,059 2,530,401 8.43
Due after 5 years but within 10 years 1,704,570 1,645,078 8.70
Due after 10 years 3,584,575 3,456,000 6.01
Derivative contracts -- (118,296)
- ---------------------------------------------------------------------------
8,735,407 8,407,465
- ---------------------------------------------------------------------------
Total available for sale $16,795,481 $16,434,523
===========================================================================
</TABLE>
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.
<TABLE>
<CAPTION>
OTHER SECURITIES AVAILABLE FOR
SALE
DECEMBER 31, 1998
--------------------------------
AMORTIZED BOOK/ESTIMATED
(IN THOUSANDS) COST MARKET VALUE
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Bonds, debentures and other securities of:
Foreign banks $1,058,815 $1,058,502
Foreign governments and government agencies 2,587,848 2,362,724
Foreign companies 292,123 299,950
Domestic companies 489,061 502,362
U.S. financial organizations 559,389 552,045
Federal Reserve Bank stock 62,856 62,856
Other, asset-backed securities 3,685,315 3,687,322
Derivative contracts -- (118,296)
- -----------------------------------------------------------------------------------------
Total other investment securities $8,735,407 $8,407,465
=========================================================================================
</TABLE>
35
<PAGE> 38
TRADING ACCOUNT ASSETS
Trading account assets consist of securities of the U.S. Government, foreign
governments, restructuring countries, emerging markets issuers 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 trading credit
losses. For additional information related to the potential risks associated
with trading activities, and the Corporation's management of those risks, see
"Risk Management and Control-Credit Risk" below in this section of this Report.
For additional information on the composition of and the income earned on
trading account assets see Note 4 of Notes to Consolidated Financial Statements.
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.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic:
Real estate-residential
mortgage $ 3,410,013 $ 2,228,844 $ 1,832,850 $1,171,158 $1,245,500
Real estate-commercial 2,152,205 1,962,702 2,116,627 1,791,693 1,813,878
Banks and other financial
institutions 4,818 54,753 45,112 28,291 83,010
Broker loans 703,172 1,116,880 1,051,472 1,086,530 559,019
Commercial and industrial 2,325,112 1,999,427 1,855,251 2,004,783 2,242,124
Individuals 330,569 266,703 200,607 389,520 106,195
All other 715,857 571,375 400,705 187,360 11,810
- -----------------------------------------------------------------------------------------------
9,641,746 8,200,684 7,502,624 6,659,335 6,061,536
- -----------------------------------------------------------------------------------------------
Foreign:
Broker loans 4,343 6,329 40,095 27,936 23,762
Government and government
agencies 119,991 74,417 57,136 80,038 89,625
Banks and other financial
institutions 745,719 899,769 819,605 391,153 297,801
Commercial and all other 3,151,176 3,195,105 3,327,782 2,720,486 2,487,875
- -----------------------------------------------------------------------------------------------
4,021,229 4,175,620 4,244,618 3,219,613 2,899,063
- -----------------------------------------------------------------------------------------------
Total loans 13,662,975 12,376,304 11,747,242 9,878,948 8,960,599
Less unearned income (14,138) (16,563) (25,306) (34,988) (47,109)
- -----------------------------------------------------------------------------------------------
Loans, net of unearned
income $13,648,837 $12,359,741 $11,721,936 $9,843,960 $8,913,490
===============================================================================================
</TABLE>
Average loans in domestic offices increased to $9.7 billion in 1998 from $9.0
billion in 1997, primarily due to growth in the mortgage and commercial lending
areas. The domestic office loan portfolio has represented approximately 20% of
average interest-earning assets in each of the last three years. At year end
1998, the domestic loan portfolio consisted of $3.4 billion of one-to-four
family residential mortgages and $2.2 billion of commercial real estate loans.
Average loans in foreign offices were $3.9 billion in 1998, a decline of $0.7
billion from $4.6 billion in 1997, which
36
<PAGE> 39
rose $0.9 billion from 1996. 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 $3.6 billion, related to maturity
distribution and interest rate sensitivity, based on scheduled repayments at
December 31, 1998.
<TABLE>
<CAPTION>
DUE AFTER ONE
DUE IN ONE YEAR THROUGH DUE AFTER
(IN THOUSANDS) YEAR OR LESS FIVE YEARS FIVE YEARS TOTAL
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Domestic:
Commercial and other $2,760,614 $439,247 $ 45,862 $ 3,245,723
Real estate-commercial 90,333 820,502 1,241,370 2,152,205
Banks and other financial
institutions 1,974 2,844 -- 4,818
Broker loans 667,709 35,463 -- 703,172
- -----------------------------------------------------------------------------------------
Total domestic loans 3,520,630 1,298,056 1,287,232 6,105,918
- -----------------------------------------------------------------------------------------
Foreign:
Commercial and other 2,631,515 312,357 25,301 2,969,173
Real estate-commercial 85,153 32,294 118 117,565
Banks and other financial
institutions 632,467 102,547 10,705 745,719
Governments and government
agencies 7,685 108,025 4,281 119,991
Broker loans 4,343 -- -- 4,343
- -----------------------------------------------------------------------------------------
Total foreign loans 3,361,163 555,223 40,405 3,956,791
- -----------------------------------------------------------------------------------------
Total loans $6,881,793 $1,853,279 $1,327,637 $10,062,709
=========================================================================================
</TABLE>
At December 31, 1998, 68% 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
1998, 51% were domestic loans and 49% were foreign loans.
The following table is an analysis, at December 31, 1998, 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 $843 million are due after one year.
<TABLE>
<CAPTION>
(IN THOUSANDS) FIXED RATE VARIABLE RATE TOTAL
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans due after one year:
Domestic loans $2,183,254 $402,034 $2,585,288
Foreign loans 154,476 441,152 595,628
- ------------------------------------------------------------------------------------------
$2,337,730 $843,186 $3,180,916
==========================================================================================
</TABLE>
AGGREGATE ALLOWANCE FOR CREDIT LOSSES
The Corporation's policy is to maintain an aggregate allowance for credit losses
that is adequate to absorb any inherent credit losses in the portfolio. Inherent
losses are unconfirmed losses that probably exist, based upon known information
regarding the credit quality and portfolio
37
<PAGE> 40
characteristics prevailing as of the date of the evaluation. If future events
confirm these losses, these amounts will be charged off against the aggregate
allowance for credit losses.
In the second quarter of 1997, the Corporation changed its method of reporting
the allowance for credit losses to be consistent with revised industry practice.
The allowance for credit losses applicable to trading assets and
off-balance-sheet extensions of credit amounting to $27 million was reclassified
to their respective allowances, but not for periods prior to 1997. The aggregate
allowance for credit losses consists of the allowance for credit losses which is
presented on the statement of condition with loans, net of unearned income, the
allowance for trading credit losses which is a reduction of trading account
assets and the allowance for off-balance-sheet extensions of credit which is
included in other liabilities.
The following table presents the components of the Corporation's aggregate
allowance for credit losses at December 31, in each of the last three years.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggregate allowance for credit losses:
Credit losses $293,952 $326,481 $350,358
Trading accounts 13,516 17,000 --
Off balance-sheet credit commitments 5,818 10,000 --
- --------------------------------------------------------------------------------------------
$313,286 $353,481 $350,358
============================================================================================
</TABLE>
The Corporation performs a comprehensive quarterly analysis of the various
factors that affect the collectibility of its loan portfolio. The process is
complex and includes several different analyses of credit exposures. Management
analyzes the loan portfolio by element, namely real estate, commercial and
industrial, other and cross-border exposure, and further analyzes them 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.
A migration analysis of the loan portfolio is used to calculate historic loss
rates for loans with similar characteristics. These loss rates are updated
quarterly and are based upon the loss experience incurred over varying periods
in each case exceeding five years. While these historic loss rates provide a
starting point for the Corporation's analysis, historic losses are not by
themselves a sufficient basis to determine the appropriate level of the
aggregate allowance for credit losses. The rate selected for use in the
quarterly analysis may differ from the calculated historical loss rate as the
historical rate may be adjusted upward or downward to reflect current business
and economic trends and other factors, which are likely to cause the current
portfolio to differ from historical experience. The Corporation's allowance also
reflects consideration for imprecision in the estimates of expected losses.
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 over varying periods in each case exceeding five years.
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
38
<PAGE> 41
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
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 remains 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 90 days past due remain on an
accrual basis because the past due interest usually 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 90 days past due.
Residential mortgage loans are placed on non-accrual status when the mortgagor
is in bankruptcy or when 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.
39
<PAGE> 42
The following table presents data related to the aggregate allowance for credit
losses (which consists of the allowance for credit losses, the allowance for
trading credit losses and the allowance for off-balance-sheet credit
commitments) and net charge-offs for each of the years in the five-year period
ended December 31, 1998.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $353,481 $350,358 $300,593 $319,220 $311,855
Charge-offs:
Domestic:
Commercial and industrial 14,176 14,389 26,911 35,315 14,287
Installment loans to
individuals 4,568 3,994 3,894 2,825 1,730
Secured by real estate 318 2,892 8,068 9,995 11,183
Foreign 57,208 8,667 4,165 3,356 17,355
- ------------------------------------------------------------------------------------------
Total charge-offs 76,270 29,942 43,038 51,491 44,555
- ------------------------------------------------------------------------------------------
Recoveries:
Domestic:
Commercial and industrial 4,455 4,564 6,445 5,165 6,201
Installment loans to
individuals 1,160 933 1,311 599 724
Secured by real estate 189 3,134 2,401 5,217 6,663
Foreign 22,217 10,020 7,886 9,234 19,538
- ------------------------------------------------------------------------------------------
Total recoveries 28,021 18,651 18,043 20,215 33,126
- ------------------------------------------------------------------------------------------
Net charge-offs (48,249) (11,291) (24,995) (31,276) (11,429)
Provision for credit losses 8,000 16,000 32,000 12,000 19,000
Allowance of acquired
companies -- -- 42,579 -- --
Translation adjustment 54 (1,586) 181 649 (206)
- ------------------------------------------------------------------------------------------
Balance at end of year $313,286 $353,481 $350,358 $300,593 $319,220
==========================================================================================
</TABLE>
The allowance for credit losses was $294.0 million at year-end 1998, compared
with $326.5 million at year-end 1997. The aggregate decline resulted from a
reduction in the allowance allocated to domestic loans which was caused by an
increase in residential real estate lending, which has a lower historical risk
profile, continued favorable loss experience for domestic loans and reduced non-
accrual and classified loans. The allowance allocated to foreign loans remained
substantially unchanged as foreign net charge-offs were approximately $27.4
million (primarily Russian counterparties) and the allocated provision for
foreign loans was $33.0 million for 1998. The assessed risk profile of the
foreign loan portfolio at year-end 1998 was in management's judgment comparable
to that assessed at year-end 1997.
The allowance for trading credit losses was $13.5 million at year-end 1998,
compared to $17 million at year-end 1997. The decrease was primarily due to $3.5
million of net charge-offs during 1998 related to foreign counterparties. In
1996, this allowance was included in the allowance for credit losses. See
"Results of Operations -- Other Operating Income (Loss) -- Trading Account
Profits and Commissions" elsewhere in this Report for a discussion of reduced
trading account activities in 1998. Management periodically reviews the trading
allowance including the related counterparty credit risk and has concluded that
the trading allowance is adequate and reasonable in comparison to the
counterparty credit risk of its trading portfolio at year-end 1998 and 1997.
The allowance for off-balance-sheet credit commitments was $5.8 million at
year-end 1998, compared to $10 million at year-end 1997. The decrease was
primarily due to net charge-offs of $4.2 million during 1998 related to Russian
counterparties. In 1996, this allowance was included in the
40
<PAGE> 43
allowance for credit losses. Management periodically reviews the allowance for
off-balance-sheet commitments including the related counterparty credit risk and
has concluded that the allowance is adequate and reasonable in comparison to the
counterparty credit risk of its off-balance-sheet exposures at year-end 1998 and
1997.
The aggregate provision for credit losses was $8 million in 1998 and $16 million
in 1997, all of which was applied to the allowance for credit losses. The $8
million provision in 1998 reflects a $33 million provision for increased risk
associated with foreign loans and a reduction in the allowance for domestic
loans due to the reduced risk profile of the domestic portfolio primarily due to
an increase in residential real estate lending, continued favorable loss
experience for domestic loans and reduced domestic non-accrual and classified
loans. The 1997 aggregate provision declined $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 1996 by $20
million which was appropriate in the context of increased foreign 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
during 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 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, 1998.
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans:
Loans outstanding, net of unearned
income, at end of year $13,649 $12,360 $11,722 $9,844 $8,913
Average loans outstanding, net of
unearned income, during the year $13,576 $13,541 $11,980 $9,528 $9,894
Ratios:
Allowance for credit losses to loans
outstanding, net of unearned
income, at end of year 2.15% 2.64% 2.99% 3.05% 3.58%
Net charge-offs to average loans
outstanding, net of unearned income
during the year .30% .08% .21% .33% .12%
Net charge-off coverage(1) 8.48x 57.77x 24.91x 13.11x 44.74x
- -------------------------------------------------------------------------------------------
</TABLE>
(1) Calculated by dividing net charge-offs into income before income taxes plus
the provision for credit losses.
In 1998, the Corporation had net loan charge-offs of $25.6 million related to
its Russian loan portfolio which resulted in the increase in the ratio of net
charge-offs to average loans outstanding during the year and the decline in the
net charge-off coverage ratio when compared to 1997.
41
<PAGE> 44
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.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Domestic $73,257 $ 84,094 $ 94,137 $49,311 $43,392
Foreign 7,597 9,727 10,956 18,561 14,734
- ------------------------------------------------------------------------------------------
Total non-accrual loans 80,854 93,821 105,093 67,872 58,126
- ------------------------------------------------------------------------------------------
Other assets and real estate owned 12,297 18,847 36,278 31,329 23,479
- ------------------------------------------------------------------------------------------
Total non-accrual loans and
other non-performing
assets $93,151 $112,668 $141,371 $99,201 $81,605
==========================================================================================
</TABLE>
The above table excludes restructured performing loans which amounted to $0.6
million in 1998, $0.7 million in 1997, $35.0 million in 1996, $14.4 million in
1995 and $28.3 million in 1994. Also excluded from the above table are loans 90
days past due and still on accrual status, primarily residential mortgage loans,
which amounted to $17.0 million at year-end 1998, $11.5 million at year-end
1997, $20.1 million at year-end 1996, $6.3 million at year-end 1995 and $9.6
million at year-end 1994. The increase in past due and accruing residential
mortgage loans in 1996 from prior years was due to those acquired from Brooklyn
Bancorp, Inc. ("BBI").
At December 31, in each of the last five years, the Corporation's allowance for
credit losses represented approximately 361% in 1998, 345% in 1997, 250% in
1996, 365% in 1995 and 369% in 1994, 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. The coverage of the
allowance for credit losses to non-accrual and restructured loans is only one
subjective measure of the adequacy of the allowance for credit losses that
management utilizes.
Non-accrual domestic loans declined $10.8 million in 1998 from 1997, primarily
due to a reduction in non-accrual real estate loans. 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
attributable primarily to the non-accrual loans acquired in the BBI transaction.
The change in non-accrual loans between 1995 and the prior year resulted
primarily from 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 credit
losses among various categories of the loan portfolio for each of the years in
the five-year period ended December 31, 1998. 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 for 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.
Reclassifications have been made for years prior to 1998 to conform those
periods to the current classifications. In 1998, the allocations of the
allowance for extensions of credit to banks and securities brokers were
reclassified to commercial and industrial loans from other loans. All prior
periods presented have been reclassified to reflect this change. The migration
analysis of the loan portfolio was utilized in years prior to 1998 for various
broad industry categories for all domestic loans (excluding consumer loans) and
only for foreign loans in the aggregate. As this analysis has
42
<PAGE> 45
become more refined, it has now been applied to all foreign loans for the years
prior to 1998 and appropriate reclassifications have been made to prior years.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------------------------------
ALLOCATION OF THE ALLOWANCE FOR
CREDIT LOSSES BY CATEGORY
---------------------------------------------------------------------------
DOMESTIC FOREIGN TOTAL
----------------------- ----------------------- -----------------------
% OF LOANS ALLOCATED % OF LOANS ALLOCATED % OF LOANS ALLOCATED
(DOLLARS IN THOUSANDS) OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans 41 $ 60,000 1 $ 5,000 42 $ 65,000
Commercial and industrial
loans 22 60,000 22 85,000 44 145,000
Other loans 8 40,000 6 20,000 14 60,000
Unallocated -- 11,982 -- 11,970 -- 23,952
- ----------------------------------------------------------------------------------------------------------
Total 71 $171,982 29 $121,970 100 $293,952
==========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------------------
ALLOCATION OF THE ALLOWANCE FOR
CREDIT LOSSES BY CATEGORY
---------------------------------------------------------------------------
DOMESTIC FOREIGN TOTAL
----------------------- ----------------------- -----------------------
% OF LOANS ALLOCATED % OF LOANS ALLOCATED % OF LOANS ALLOCATED
(DOLLARS IN THOUSANDS) OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans 34 $ 75,000 1 $ 5,000 35 $ 80,000
Commercial and industrial
loans 25 90,000 27 70,000 52 160,000
Other loans 7 30,000 6 15,000 13 45,000
Unallocated -- 15,240 -- 26,241 -- 41,481
- ----------------------------------------------------------------------------------------------------------
Total 66 $210,240 34 $116,241 100 $326,481
==========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------------------------
ALLOCATION OF THE ALLOWANCE FOR
CREDIT LOSSES BY CATEGORY
---------------------------------------------------------------------------
DOMESTIC FOREIGN TOTAL
----------------------- ----------------------- -----------------------
% OF LOANS ALLOCATED % OF LOANS ALLOCATED % OF LOANS ALLOCATED
(DOLLARS IN THOUSANDS) OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans 34 $ 85,000 1 $ 5,000 35 $ 90,000
Commercial and industrial
loans 25 85,000 28 65,000 53 150,000
Other loans 5 25,000 7 15,000 12 40,000
Unallocated -- 17,594 -- 52,764 -- 70,358
- ----------------------------------------------------------------------------------------------------------
Total 64 $212,594 36 $137,764 100 $350,358
==========================================================================================================
</TABLE>
43
<PAGE> 46
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------------------------------------
ALLOCATION OF THE ALLOWANCE FOR
CREDIT LOSSES BY CATEGORY
---------------------------------------------------------------------------
DOMESTIC FOREIGN TOTAL
----------------------- ----------------------- -----------------------
% OF LOANS ALLOCATED % OF LOANS ALLOCATED % OF LOANS ALLOCATED
(DOLLARS IN THOUSANDS) OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans 30 $ 55,000 2 $ 10,000 32 $ 65,000
Commercial and industrial
loans 31 100,000 26 50,000 57 150,000
Other loans 6 25,000 5 10,000 11 35,000
Unallocated -- 18,733 -- 31,860 -- 50,593
- ----------------------------------------------------------------------------------------------------------
Total 67 $198,733 33 $101,860 100 $300,593
==========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
---------------------------------------------------------------------------
ALLOCATION OF THE ALLOWANCE FOR
CREDIT LOSSES BY CATEGORY
---------------------------------------------------------------------------
DOMESTIC FOREIGN TOTAL
----------------------- ----------------------- -----------------------
% OF LOANS ALLOCATED % OF LOANS ALLOCATED % OF LOANS ALLOCATED
(DOLLARS IN THOUSANDS) OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE OUTSTANDING ALLOWANCE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans 34 $ 65,000 2 $ 10,000 36 $ 75,000
Commercial and industrial
loans 32 85,000 23 50,000 55 135,000
Other loans 1 5,000 8 20,000 9 25,000
Unallocated -- 36,887 -- 47,333 -- 84,220
- ----------------------------------------------------------------------------------------------------------
Total 67 $191,887 33 $127,333 100 $319,220
==========================================================================================================
</TABLE>
In the first quarter of 1998, at the suggestion of the Corporation's primary
banking regulator, the allocation of the allowance for credit losses for foreign
obligors was modified to include general country risk. The Corporation reviewed
its migration analysis and continued favorable loss experience which resulted in
a reduction in the allocation applicable to unclassified domestic loans. This
adjustment caused the decline in the allocated allowance for domestic real
estate and commercial and industrial loans in 1998 when compared to 1997.
In the second quarter of 1997, the allowance for credit losses applicable to
trading assets and off-balance-sheet extensions of credit amounting to $27
million was reclassified to their respective allowances. This reclassification
was the primary reason for the decline in the unallocated portion of the
allowance between 1996 and 1997.
The increase in the domestic allocated allowance for real estate loans in 1996
when compared to 1995 was attributable to the acquisition of BBI in 1996 and its
real estate portfolio and allowance for credit losses. The increase in the
allocated allowance for foreign loans in 1996 when compared to 1995 was
attributable to the provision for credit losses for foreign loans in 1996 due to
the growth in the foreign loan portfolio of approximately 32% in 1996 over 1995.
After an allowance has been established for the loan categories, management
determines an unallocated portion of the allowance for credit losses, which is
attributable to factors that cannot be associated with a specific loan or
portfolio segment. These factors include general economic conditions,
recognition of specific regional and international geographic concerns, trends
in portfolio composition and information risk.
44
<PAGE> 47
CROSS-BORDER NET OUTSTANDINGS
The following tables present total cross-border net outstandings in accordance
with Federal Financial Institutions Examination Council ("FFIEC") guidelines.
Cross-border net outstandings are amounts payable to the Corporation by
residents of foreign countries regardless of the currency of the claim and local
country claims in excess of local country obligations. Excluded from cross-
border outstandings are, among other things, the following: local country claims
funded by non-local country obligations (U.S. dollar or other non-local
currencies), principally certificates of deposits issued by a foreign branch,
where the providers of funds agree that, in the event of the occurrence of a
sovereign default or the imposition of currency exchange restrictions in a given
country, they will not be paid until such default is cured or currency
restrictions lifted or, in certain circumstances, they may accept payment in
local currency or assets denominated in local currency (hereinafter referred to
as "constraint certificates of deposits"); and cross-border claims that are
guaranteed by cash or other external liquid collateral. At December 31, 1998,
the Corporation's cross-border net outstandings excluded $653 million of
Brazilian assets funded by constraint certificates of deposits. In 1996,
cross-border net outstandings included those denominated in dollars and other
non-local currencies as well as local currency outstandings in excess of local
currency liabilities.
Cross-border net outstandings include deposits in other banks, loans,
acceptances, securities held to maturity, securities available for sale, trading
securities, revaluation gains on foreign exchange and derivative contracts and
accrued interest receivable. Countries where such outstandings exceeded 1.0% of
consolidated total assets, at December 31, of $50.4 billion in 1998, $55.6
billion in 1997 and $52.3 billion in 1996, were as follows:
<TABLE>
<CAPTION>
BANKS AND GOVERNMENT
OTHER AND COMMERCIAL
FINANCIAL OFFICIAL AND
(IN MILLIONS) INSTITUTIONS INSTITUTIONS INDUSTRIAL(1)(2)(3) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Germany $1,206 $ 18 $ 78 $1,302 $1,222 $ 831
Luxembourg(2) 116 1 853 970 994 1,219
Brazil(3) 19 282 419 720 824 799
France 171 449 75 695 1,075 1,060
United Kingdom 432 2 192 626 846 1,080
Switzerland 537 21 19 577 611 --
- --------------------------------------------------------------------------------------------------------
$2,481 $773 $1,636 $4,890 $5,572 $4,989
========================================================================================================
</TABLE>
(1) Includes excess of local country claims over local country obligations.
(2) Included in commercial and industrial in 1998 is $850 million which
represents the Corporation's investment in Safra Republic. Such investment
amounted to $864 million in 1997 and $806 million in 1996.
(3) Included in Brazil in commercial and industrial are investment securities,
reflecting local country claims over local country obligations, which are
issued by the Brazilian government and official institutions.
Other countries with cross-border net outstandings that exceeded 1.0% of
consolidated total assets at year end 1997 were: Canada with $705 million and
Japan with $679 million and at year end 1996, Australia with $565 million,
Canada with $970 million, Japan with $2,016 million and the Netherlands with
$689 million.
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: Canada with $381 million and the Netherlands with $414 million in 1998;
Australia with $523 million, Italy with $513 million, Russia with $429 million
and Singapore with $488 million in 1997; and Singapore with $465 million in
1996.
45
<PAGE> 48
BRAZIL
During 1998, 1997 and 1996, 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, 1998, total cross-border net
outstandings in Brazil investments amounted to approximately $720 million, net
of $653 million of constraint certificates of deposits, or 1.43% of total
assets, all of which are on a performing basis. Cross-border net outstandings in
Brazil at December 31, 1998, consisted of approximately $282 million to the
public sector, $19 million to the private bank sector and $419 million
principally comprised of securities issued locally in Brazil by government and
official institutions. 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. At December 31, 1996, total cross-border net
outstandings in Brazil investments amounted 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.
The following table presents an analysis of the changes in aggregate Brazilian
cross-border net outstandings discussed above.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
(IN MILLIONS) 1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggregate outstandings at beginning of year $ 824 $799 $681
Purchases of Brazilian Government securities and bank
placements and increases in net local country claims 1,696 936 679
Brazilian constraint certificates of deposits issued and
outstanding to third parties (653) -- --
Sales of Brazilian Government securities and repayments at
maturity, and reduction of local country claims (1,214) (925) (543)
Other changes:
Loans 64 -- --
Interest income accrued 62 80 81
Collections of accrued interest (59) (66) (99)
- -------------------------------------------------------------------------------------
Aggregate outstandings at end of year $ 720 $824 $799
=====================================================================================
</TABLE>
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, among them 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.
One technique which the Corporation utilizes to achieve this goal 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.
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
46
<PAGE> 49
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
to assist in decision making, significant investments have been made in the
training of personnel and in the development of information technology.
Proprietary 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 Risk Assessment Committee of the Corporation's Board of Directors oversees
the identification, measurement and limitation of the market risks relating to
all trading 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. During 1999, this group will continue to expand the scope
of its activities.
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. 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 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
47
<PAGE> 50
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.
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 in its investing, lending and
borrowing activities is U.S. interest rate fluctuations. 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 of 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 base yield curve at December 31, 1998 and 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 in both 1998 and 1997
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 the
change in interest rates noted above would reduce the value of net financial
assets by approximately $131 million for 1998 and $258 million for 1997 and that
net interest income would increase by approximately $20 million and decline by
approximately $17 million over the next twelve months from year ends 1998 and
1997, respectively. The changes in 1998, when compared to 1997, are due to the
Corporation being somewhat less sensitive to a rise in interest rates due in
large part to the shortening in duration of the mortgage-back securities
portfolio.
All of the above assumptions are based upon the Corporation's asset and
liability mix as of December 31, 1998 and 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.
48
<PAGE> 51
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 five
days) and given a certain confidence level (99%). It involves historical
simulation of the change in value of the portfolios based upon scenarios that
reflect actual movements in the various market variables covering each risk
asset class dating back more than one year. The correlation between different
markets and risk factors is implicitly captured in the historical scenarios.
A VaR report, broken down by trading business and consolidated for all trading
activities, is distributed daily to management. To measure the accuracy of the
VaR model, the daily VaR is compared to the actual results from trading
activities. The results of this comparison for the year ended December 31, 1998,
was consistent with statistical expectations.
The VaR model incorporates estimates of the specific risks associated with
certain securities traded by the Corporation. One element of specific risk is
spread risk on sovereign and corporate debt, modeled through historical
simulation of the relevant portfolios to past observed changes in spreads of
U.S. treasury securities. Specific risk models are continually tested, to alert
the GRA immediately as to any shift in their relevance.
Finally, a three, four and five standard deviation stress test with a one-day
time horizon is performed biweekly on the global 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 large market movements.
The following tables present the calculated VaR amounts based on stress
projections given a 99% confidence level across all global trading positions,
for the periods indicated for 1998 and the VaR components by risk category at
December 31, 1998 and 1997, after considering correlation.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------------------
(IN MILLIONS) AVERAGE MINIMUM MAXIMUM
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
First quarter $10.6 $ 6.2 $16.0
Second quarter 11.6 9.8 17.4
Third quarter 13.9 11.4 16.0
Fourth quarter 5.3 3.3 8.9
Average for the year $10.3 $ 7.7 $14.6
======================================================================================
</TABLE>
49
<PAGE> 52
<TABLE>
<CAPTION>
1-DAY VAR AT
DECEMBER 31,
--------------
(IN MILLIONS) 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
RISK ASSET CLASS:
Foreign exchange $ 0.5 $ 2.0
Interest rate 3.8 6.6
Commodity 1.5 0.7
Equity -- 0.1
Optionality 1.3 4.4
Correlation effects (2.9) (1.8)
- ----------------------------------------------------------------------------
$ 4.2 $12.0
============================================================================
</TABLE>
During the fourth quarter of 1998, the Corporation focused on reducing its
positions across the board, as a result of the Russian crisis and the illiquid
market conditions. Special emphasis was given to reducing the derivative book to
core positions only.
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.
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
On June 1, 1998, a 100-percent stock dividend in the form of a two-for-one
common stock split was distributed to holders of Common Stock, which increased
the number of shares outstanding to approximately 108 million.
During 1998, the Corporation repurchased an aggregate of 1,638,989 shares of its
Common Stock, of which 1,225,800 shares were repurchased pursuant to a program
authorizing the purchase of up to
50
<PAGE> 53
2,000,000 shares in the open market or in privately negotiated transactions and
413,189 shares were repurchased from employees upon the vesting of their
ownership rights in accordance with the Corporation's restricted stock plans. In
January 1999, the board of directors authorized additional purchases of up to
5,000,000 shares of Common Stock pursuant to a new stock repurchase program, or
approximately 4.7 %, of the issued and outstanding shares of Common Stock at
year end 1998.
During 1997, the Corporation repurchased an aggregate of 2,219,694 shares of its
Common Stock, of which 1,698,200 shares were repurchased pursuant to programs
authorizing the purchase of up to 6,000,000 shares in the open market or in
privately negotiated transactions and 521,494 shares were repurchased from
employees upon the vesting of their ownership rights in accordance with the
Corporation's restricted stock plans.
In 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. At December 31,
1998, no securities had been issued pursuant to this registration statement.
In 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 outstanding shares of another issue of preferred stock of
the Corporation, with an aggregate liquidation value of $50 million as well as
for general corporate purposes.
In 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 with an aggregate stated value of
$100 million and 558 shares of Remarketed Preferred stock with a liquidation
value of $55.8 million.
The Bank has a $5 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 IBCA, P-1 and Aa3 by Moody's Investors Service, Inc.,
A1+ and AA- by Standard & Poor's DRI and D-1+ and AA+ by Duff & Phelps LLC.
51
<PAGE> 54
FINANCIAL RATIOS
The following table presents financial ratios for each of the years in the five
years ended December 31, 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average total stockholders' equity as a
percentage of average assets 6.19% 6.06% 6.41% 6.71% 6.38%
Returns based on net income:
Average total stockholders' equity 7.45 13.46 13.44 10.36 12.87
Average total assets 0.46 0.82 0.86 0.70 0.82
Returns based on net income applicable to common
stock -- diluted:
Average total common stockholders' equity 7.78 14.69 15.19 11.94 15.71
Average total assets 0.41 0.77 0.79 0.62 0.76
===========================================================================================
</TABLE>
The return on average stockholders' equity, based on net income, was 7.45% in
1998 compared to 13.46% in 1997 and 13.44% in 1996. The return on average common
stockholders' equity, based on net income applicable to common stock -- diluted,
was 7.78% in 1998 compared to 14.69% in 1997 and 15.19% in 1996. Net income and
net income applicable to common stock -- diluted declined 44.8% and 48.0%,
respectively, in 1998 from 1997, after increasing 7.2% and 9.7%, respectively,
in 1997 from 1996. The declines in 1998 were primarily attributable to the
losses the Corporation incurred with respect to the write-down of Russian
investments.
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%. 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% 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.
Effective January 1, 1998, the risk-based capital guidelines were expanded to
incorporate the impact of market risk. 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 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
is being used 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" has been reduced from 4% to 3%.
With the adoption of these rules the Corporation's capital ratios have continued
to exceed the minimum required to be classified as "well capitalized."
52
<PAGE> 55
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 FASB No.
115 valuation of the Corporation's portfolio of securities available for sale,
which is included in accumulated other comprehensive income (loss), net of
taxes.
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.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tier 1:
Common stockholders' equity $2,956,479 $2,920,318 $2,696,353
Preferred stock 375,000 375,000 325,000
Minority interest in Safra Republic 1,127,802 853,777 784,587
Mandatorily redeemable preferred securities of
subsidiary trusts 350,000 350,000 350,000
Other net-goodwill, minority interest and
intangible assets (344,017) (380,769) (359,368)
50% of investment in securities affiliate(1) -- -- (39,953)
- -------------------------------------------------------------------------------------------
Total tier 1 4,465,264 4,118,326 3,756,619
- -------------------------------------------------------------------------------------------
Tier 2:
Qualifying preferred stock and perpetual capital
notes 275,000 275,000 380,800
Qualifying long-term debt 2,217,420 2,059,163 1,898,286
Allowance for credit losses 400,235 398,101 343,049
Unrealized holding gains on available for sale
equity securities 2,389 -- --
50% of investment in securities affiliate(1) -- -- (39,952)
- -------------------------------------------------------------------------------------------
Total tier 2 2,895,044 2,732,264 2,582,183
- -------------------------------------------------------------------------------------------
Total risk-based capital $7,360,308 $6,850,590 $6,338,802
===========================================================================================
Risk-based Capital Ratios:
Tier 1 risk-based capital ratio 13.95% 12.97% 13.80%
Total risk-based capital ratio 22.99% 21.58% 23.28%
Leverage ratio 6.51% 5.60% 5.87%
===========================================================================================
</TABLE>
(1) In accordance with regulatory guidelines effective in 1996, the Corporation
excluded the assets and off-balance-sheet contracts of RNYSC from the
Corporation's capital calculations and also deducted one-half of its
investment in RNYSC from each of Tier 1 and Tier 2 capital.
All of the Corporation's 1998 risk-based capital ratios increased from 1997 as
Tier 1 and total risk-based capital rose 8.4% and 7.4%, respectively, while
total risk weighted assets rose 0.9%. All of the above ratios exceed the minimum
requirements of the FRB, although each of the Corporation's capital ratios
declined in 1997, when compared to 1996. The declines in 1997 were due to
increases in risk weighted assets of 16.6%, while Tier 1 capital and total
risk-based capital rose 9.6% and 8.1%, respectively, in 1997 when compared to
1996.
53
<PAGE> 56
The following table presents the Corporation's risk-based capital ratios,
excluding the assets and capital of Safra Republic, at December 31, in each of
the last three years.
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-based Capital Ratios:
Tier 1 risk-based capital ratio 12.92% 12.64% 13.26%
Total risk-based capital ratio 21.61% 21.25% 22.74%
Leverage ratio 6.92% 6.09% 6.23%
=====================================================================================
</TABLE>
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 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 1998 and 1997, compared 22% in 1996. 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 $16.4 billion at December 31, 1998, can be readily sold to
meet any immediate cash flow obligations. In 1998, funds provided from investing
activities were used by the Corporation to reduce liabilities, compared to 1997
and 1996 when the Corporation used net cash flows from investing activities to
increase assets. During 1998, net cash used in financing activities was
approximately $1.8 billion, compared to 1997 and 1996 when financing activities
provided net cash flows of approximately $2.1 billion and $4.8 billion,
respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. The statement is effective for periods commencing
January 1, 2000, and establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that all derivatives be
recognized on the balance sheet as assets or liabilities at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, changes in fair value will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a hedged
derivative's change in value, the amount by which the hedge does not exactly
offset the value of the hedged item, will be recognized immediately in earnings.
This SFAS may have a significant effect on the manner in which the Corporation
utilizes derivative products in its asset/liability management. The Corporation
currently is evaluating the impact this statement will have on its results of
operations and financial position.
In October 1998, SFAS No. 134, "Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise," was issued. The statement is effective for the Corporation
beginning in the first quarter of 1999 and establishes accounting and reporting
standards for certain mortgage banking activities. The statement requires
54
<PAGE> 57
that, after the securitization of mortgage loans held for sale, the resulting
mortgage-backed securities or other retained interests should be classified
based on the ability and intent to sell or hold those investments. Any retained
mortgage-backed securities that are committed to be sold, before or during the
securitization process, must be classified as trading securities. The adoption
of this SFAS is not expected to have a 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, 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 net interest income, the Value at Risk analysis, the year
2000 and the anticipated savings from the line-of-business review, as may be
detailed from time to time in the Corporation's public announcements and filings
with the SEC. In connection with the Year 2000 readiness, there may be
unanticipated events relating to developments and modifications to computer
systems and software, including the work performed by suppliers or vendors to
the Corporation, and to the effectuation of the outsourcing to a third party,
and the satisfactory resolution of such events may be beyond the Corporation's
control. Information relating to the Corporation's net income may be affected by
uncertainties relating to certain emerging markets countries, changes in
interest rates, changes in economic conditions and general economic environments
and changes in the global securities markets, as well as actions the Corporation
might take in light of such events. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is located in Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Management and Control."
55
<PAGE> 58
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:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Statements of Condition, December 31, 1998 and
1997...................................................... 57
Consolidated Statements of Income, Years ended December 31,
1998, 1997 and 1996....................................... 58
Consolidated Statements of Changes in Stockholders' Equity,
Years ended December 31, 1998, 1997 and 1996.............. 59
Consolidated Statements of Cash Flows, Years ended December
31, 1998, 1997 and 1996................................... 60
Bank Consolidated Statements of Condition, Years ended
December 31, 1998 and 1997................................ 61
Notes to Consolidated Financial Statements.................. 62
Independent Auditors' Report on Financial Statements........ 102
Report of Management........................................ 103
Independent Accountants' Report on Management's Assertions
Related to Internal Controls Over Financial Reporting..... 104
</TABLE>
SUPPLEMENTARY DATA
The following supplementary data are set forth in this Report on the following
pages:
<TABLE>
<S> <C>
Five Year Consolidated Statements of Condition.............. 105
Five Year Consolidated Statements of Income................. 106
Summary of Unaudited Quarterly Financial Information........ 107
</TABLE>
AFFILIATE FINANCIAL STATEMENTS
The following audited financial statements of Safra Republic are set forth in
this Report on the following pages:
<TABLE>
<S> <C>
Consolidated Statements of Condition, December 31, 1998 and
1997...................................................... 108
Consolidated Statements of Income, Years ended December 31,
1998, 1997 and 1996....................................... 109
Consolidated Statement of Comprehensive Income, Years ended
December 31, 1998, 1997 and 1996.......................... 110
Consolidated Statements of Changes in Shareholders' Equity,
Years ended 1998, 1997 and 1996........................... 111
Consolidated Statements of Cash Flows, Years ended December
31, 1998, 1997 and 1996................................... 112
Notes to Consolidated Financial Statements.................. 113
Independent Auditors' Report................................ 140
</TABLE>
56
<PAGE> 59
REPUBLIC NEW YORK CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
(DOLLARS IN THOUSANDS) 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,040,290 $ 901,783
Interest-bearing deposits with banks (note 20) 4,218,893 4,756,804
Precious metals (note 4) 977,783 1,241,956
Securities held to maturity (approximate market value of
$6,882,926 in 1998 and $9,392,289 in 1997) 6,731,714 9,237,151
Securities available for sale (at approximate market value)
(note 20) 16,434,523 16,276,667
- ----------------------------------------------------------------------------------------
Total investment securities (note 3) 23,166,237 25,513,818
Trading account assets (note 4) 3,397,110 4,510,955
Federal funds sold and securities purchased under resale
agreements 689,335 2,169,291
Loans (net of unearned income of $14,138 in 1998 and $16,563
in 1997) (notes 5, 6 and 20) 13,648,837 12,359,741
Allowance for credit losses (note 6) (293,952) (326,481)
Customers' liability on acceptances 36,287 121,022
Accounts receivable and accrued interest 1,352,619 2,452,721
Investment in affiliate (note 7) 849,677 864,178
Premises and equipment (note 8) 467,651 469,103
Other assets (note 14) 873,387 603,464
- ----------------------------------------------------------------------------------------
Total assets $50,424,154 $55,638,355
========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits:
In domestic offices $ 2,882,572 $ 2,699,819
In foreign offices 179,709 222,957
Interest-bearing deposits:
In domestic offices 10,904,022 12,214,760
In foreign offices 19,253,456 18,251,998
- ----------------------------------------------------------------------------------------
Total deposits (note 20) 33,219,759 33,389,534
Trading account liabilities (notes 4 and 20) 3,350,456 5,320,864
Short-term borrowings (notes 9 and 20) 4,441,210 5,613,834
Acceptances outstanding 37,465 121,371
Accounts payable and accrued expenses 940,129 2,191,840
Due to factored clients 589,263 593,815
Other liabilities 166,649 154,682
Long-term debt (notes 10 and 20) 1,542,773 1,814,435
Subordinated long-term debt and perpetual capital notes
(note 10) 2,645,700 2,650,000
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, 13 and 15):
Cumulative preferred stock, no par value 7,501,250 shares
outstanding in 1998 and 1997 500,000 500,000
Common stock, $5 par value 150,000,000 shares authorized;
107,322,157 shares issued in 1998 and 108,708,584 in
1997 536,611 543,543
Surplus 96,487 149,763
Retained earnings 2,373,147 2,259,172
Accumulated other comprehensive income (loss), net of
taxes (361,872) (14,498)
Common stock in treasury, at cost 55,905 shares in 1998 (3,623) --
- ----------------------------------------------------------------------------------------
Total stockholders' equity 3,140,750 3,437,980
- ----------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $50,424,154 $55,638,355
========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
57
<PAGE> 60
REPUBLIC NEW YORK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE DATA) 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $1,107,681 $1,069,583 $ 919,230
Interest on deposits with banks 273,284 298,416 376,030
Interest and dividends on investment securities:
Taxable 1,540,161 1,511,817 1,279,226
Exempt from federal income taxes 81,951 90,134 93,257
Interest on trading account assets 77,184 115,594 67,279
Interest on federal funds sold and securities
purchased under resale agreements 153,703 124,347 98,061
- --------------------------------------------------------------------------------------------
Total interest income 3,233,964 3,209,891 2,833,083
- --------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 1,469,985 1,451,023 1,282,205
Interest on short-term borrowings 425,318 449,009 333,075
Interest on long-term debt 304,398 281,994 255,618
- --------------------------------------------------------------------------------------------
Total interest expense 2,199,701 2,182,026 1,870,898
- --------------------------------------------------------------------------------------------
NET INTEREST INCOME 1,034,263 1,027,865 962,185
Provision for credit losses (note 6) 8,000 16,000 32,000
- --------------------------------------------------------------------------------------------
Net interest income after provision for credit
losses 1,026,263 1,011,865 930,185
- --------------------------------------------------------------------------------------------
OTHER OPERATING INCOME (LOSS):
Trading revenue (note 4) 140,095 170,675 175,806
Investment securities transactions, net (note 3) (186,086) 35,117 23,247
Revenue from loans sold or held for sale 8,682 19,838 974
Commission income 95,805 87,524 71,393
Equity in earnings of affiliate (note 7) 132,708 125,116 93,418
Other income 97,394 90,038 81,277
- --------------------------------------------------------------------------------------------
Total other operating income 288,598 528,308 446,115
- --------------------------------------------------------------------------------------------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 520,830 475,017 420,101
Occupancy, net (notes 8 and 17) 74,577 71,325 72,692
Other expenses 383,158 357,501 292,961
- --------------------------------------------------------------------------------------------
Total other operating expenses 978,565 903,843 785,754
- --------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 336,296 636,330 590,546
Income taxes (note 14) 88,249 187,222 171,706
- --------------------------------------------------------------------------------------------
NET INCOME $ 248,047 $ 449,108 $ 418,840
============================================================================================
NET INCOME APPLICABLE TO COMMON STOCK -- DILUTED $ 220,248 $ 423,281 $ 386,027
============================================================================================
Net income per common share (note 2):
Basic $ 2.09 $ 3.99 $ 3.58
Diluted 2.07 3.94 3.54
Average common shares outstanding (note 2):
Basic 104,328 105,625 107,481
Diluted 106,236 107,461 109,189
============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
58
<PAGE> 61
REPUBLIC NEW YORK CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CUMULATIVE PREFERRED STOCK:
Balance at beginning of year $ 500,000 $ 555,800 $ 575,000
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)
- ----------------------------------------------------------------------------------------------------
Balance at end of year $ 500,000 $ 500,000 $ 555,800
====================================================================================================
COMMON STOCK:
Balance at beginning of year $ 543,543 $ 550,095 $ 562,596
Net issuance under stock option, restricted stock and
restricted stock election plans of 252,562 shares in 1998,
909,180 shares in 1997 and 1,625,144 shares in 1996 1,263 4,546 8,126
Retirement of 1,638,989 shares in 1998, 2,219,694 shares in
1997 and 4,125,172 shares in 1996 (8,195) (11,098) (20,627)
- ----------------------------------------------------------------------------------------------------
Balance at end of year $ 536,611 $ 543,543 $ 550,095
====================================================================================================
SURPLUS:
Balance at beginning of year $ 149,763 $ 227,378 $ 308,710
Net issuance of common stock under stock option, restricted
stock and restricted stock election plans of 252,562
shares in 1998, 909,180 shares in 1997 and 1,625,144
shares in 1996 31,373 24,468 32,656
Treasury stock transactions of affiliate (1,110) (2,176) (891)
Retirement of 1,638,989 common shares in 1998, 2,219,694
shares in 1997 and 4,125,172 shares in 1996 (87,162) (96,807) (113,097)
Cost of issuing preferred stock -- (3,100) --
Deferred compensation 3,623 -- --
- ----------------------------------------------------------------------------------------------------
Balance at end of year $ 96,487 $ 149,763 $ 227,378
====================================================================================================
RETAINED EARNINGS:
Balance at beginning of year $2,259,172 $1,934,824 $1,631,809
Net income 248,047 449,108 418,840
Dividends declared on common stock (107,770) (100,569) (84,307)
Dividends declared on issues of preferred stock (26,302) (24,191) (31,518)
- ----------------------------------------------------------------------------------------------------
Balance at end of year $2,373,147 $2,259,172 $1,934,824
====================================================================================================
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES:
Balance at beginning of year $ (14,498) $ 38,523 $ (70,307)
Net (depreciation) appreciation on securities available for
sale (454,551) (14,240) 143,106
Less: reclassification adjustment for gains (losses)
included in net income (121,160) 22,565 13,877
- ----------------------------------------------------------------------------------------------------
Net unrealized (depreciation) appreciation on securities
available for sale (333,391) (36,805) 129,229
Foreign currency translation (13,983) (16,216) (20,399)
- ----------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (347,374) (53,021) 108,830
- ----------------------------------------------------------------------------------------------------
Balance at end of year $ (361,872) $ (14,498) $ 38,523
====================================================================================================
COMMON STOCK IN TREASURY AT COST:
Balance at beginning of year $ -- $ -- $ --
Purchases of treasury stock at cost, 55,905 shares (3,623) -- --
- ----------------------------------------------------------------------------------------------------
Balance at end of year $ (3,623) $ -- $ --
====================================================================================================
TOTAL STOCKHOLDERS' EQUITY:
Balance at beginning of year $3,437,980 $3,306,620 $3,007,808
Net changes during the year (297,230) 131,360 298,812
- ----------------------------------------------------------------------------------------------------
Balance at end of year $3,140,750 $3,437,980 $3,306,620
====================================================================================================
TOTAL COMPREHENSIVE INCOME (LOSS), NET OF TAXES:
Net income $ 248,047 $ 449,108 $ 418,840
Other comprehensive income (loss) (347,374) (53,021) 108,830
- ----------------------------------------------------------------------------------------------------
Total comprehensive income (loss), net of taxes $ (99,327) $ 396,087 $ 527,670
====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
59
<PAGE> 62
REPUBLIC NEW YORK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 248,047 $ 449,108 $ 418,840
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization, net 112,554 92,968 88,478
Provision for credit losses 8,000 16,000 32,000
Investment securities transactions, net 186,086 (35,117) (23,247)
Revenue from loans sold or held for sale (8,682) (19,838) (974)
Equity in earnings of affiliate (132,708) (125,116) (93,418)
Net change in precious metals 264,173 (10,637) 18,719
Net change in trading accounts (629,376) 1,215,612 (89,748)
Net change in accounts receivable and accrued interest 1,108,494 (336,078) (519,493)
Net change in accounts payable and accrued expenses (813,157) 511,918 (367,486)
Other, net (287,186) (88,356) (162,574)
- -------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 56,245 1,670,464 (698,903)
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Interest-bearing deposits with banks 609,678 1,152,391 363,800
Federal funds sold and securities purchased under resale
agreements 1,479,956 (60,182) 290,159
Short-term investments 23,214 (122,129) (46,049)
Purchases of securities held to maturity (37,042) (1,190,547) (3,167,356)
Proceeds from maturities of securities held to maturity 2,542,479 1,134,448 686,471
Purchases of securities available for sale (10,636,795) (10,281,304) (6,481,359)
Proceeds from sales of securities available for sale 3,878,808 2,806,461 2,002,799
Proceeds from maturities of securities available for sale 6,896,566 4,044,243 3,523,480
Loans (2,897,399) (1,103,028) (811,415)
Investment in affiliate 56,439 38,953 30,296
Payment for purchase of Brooklyn Bancorp, Inc., net of cash
received -- -- (486,002)
- -------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 1,915,904 (3,580,694) (4,095,176)
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deposits (168,590) 1,667,220 3,188,607
Short-term borrowings (1,172,624) 166,993 1,533,114
Due to factored clients (4,552) (10,871) 76,002
Proceeds from issuance of long-term debt 760,650 1,130,286 427,136
Repayment of long-term debt (1,036,612) (813,586) (489,159)
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 --
Repurchase of cumulative preferred stock -- (205,800) (19,200)
Repurchase of common stock (95,357) (107,905) (133,724)
Purchase of treasury stock (3,623) -- --
Cash dividends paid (132,387) (120,829) (115,136)
Other, net 19,480 6,691 18,803
- -------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (1,833,615) 2,109,099 4,836,443
- -------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and due from banks (27) (7,269) (7,864)
- -------------------------------------------------------------------------------------------------------
Net increase in cash and due from banks 138,507 191,600 34,500
Cash and due from banks at beginning of year 901,783 710,183 675,683
- -------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $ 1,040,290 $ 901,783 $ 710,183
=======================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 2,512,711 $ 2,158,554 $ 1,910,818
Income taxes 47,125 109,179 115,981
Transfers from securities available for sale to trading
account assets 227,187 -- --
Transfers from securities available for sale to securities
held to maturity -- 960,231 1,009,550
=======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
60
<PAGE> 63
REPUBLIC NATIONAL BANK OF NEW YORK
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
(DOLLARS IN THOUSANDS) 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 992,411 $ 860,246
Interest-bearing deposits with banks 4,243,828 4,695,410
Precious metals 976,804 1,240,759
Securities held to maturity (approximate market value of
$6,522,448 in 1998 and $8,981,237 in 1997) 6,385,364 8,839,129
Securities available for sale (at approximate market value) 15,057,158 14,349,253
- ----------------------------------------------------------------------------------------
Total investment securities 21,442,522 23,188,382
Trading account assets 3,177,036 4,426,961
Federal funds sold and securities purchased under resale
agreements 689,212 2,000,482
Loans (net of unearned income of $14,055 in 1998 and $16,538
in 1997) 12,537,296 11,341,604
Allowance for credit losses (267,585) (301,248)
Customers' liability on acceptances 34,941 118,956
Accounts receivable and accrued interest 693,988 880,820
Investment in affiliate (note 7) 849,677 864,178
Premises and equipment 420,838 410,374
Other assets 669,508 511,021
- ----------------------------------------------------------------------------------------
Total assets $46,460,476 $50,237,945
========================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY:
Noninterest-bearing deposits:
In domestic offices $ 2,744,351 $ 2,586,210
In foreign offices 182,194 224,500
Interest-bearing deposits:
In domestic offices 10,651,738 12,000,075
In foreign offices 19,954,387 18,676,081
- ----------------------------------------------------------------------------------------
Total deposits 33,532,670 33,486,866
Trading account liabilities 3,178,621 5,002,815
Short-term borrowings 3,253,756 4,451,792
Acceptances outstanding 35,244 118,992
Accounts payable and accrued expenses 833,451 1,224,507
Other liabilities 121,550 135,104
Long-term debt 1,434,402 1,702,792
Subordinated long-term debt, with parent 950,000 825,000
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 1,635,045 1,636,155
Retained earnings 1,360,137 1,277,738
Accumulated other comprehensive income (loss), net of
taxes (274,400) (23,816)
- ----------------------------------------------------------------------------------------
Total stockholder's equity 3,120,782 3,290,077
- ----------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $46,460,476 $50,237,945
========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
61
<PAGE> 64
REPUBLIC NEW YORK CORPORATION
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.
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"). Investments in entities 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 included in stockholders' equity as a component of accumulated other
comprehensive income (loss), 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
62
<PAGE> 65
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
securities available for sale and derivative instruments used to hedge these
securities are included in stockholders' equity as a component of accumulated
other comprehensive income (loss), net of tax effect. Gains or losses on sales
of securities are recognized by the specific identification method and are
recorded in investment securities transactions, 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 in
accumulated other comprehensive income (loss), 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 revenue. 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.
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 90 days past
due. 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 in which it is expected to be paid
in full. Thereafter, interest income on non-accrual loans is generally 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 90 days past due.
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.
63
<PAGE> 66
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 were adopted on January 1, 1998, under 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 these
statements have not had 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 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 from trading
account, foreign exchange and precious metals activities aggregated as trading
revenue. 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 inventory, 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 trading revenue 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.
Such transactions are accounted for on an accrual basis in the interest income
or expense of the related asset or liability. The notional amount of contracts
used in asset and liability management are recorded as off-balance-sheet
transactions. The net settlements on such transactions are accrued as an
adjustment to interest income or expense over the lives of the related
agreements. 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.
64
<PAGE> 67
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
H. AGGREGATE ALLOWANCE FOR CREDIT LOSSES. The Corporation's aggregate allowance
for credit losses consists of the allowance for credit losses which is presented
on the statement of condition with loans, net of unearned income, the allowance
for trading credit losses which is a reduction of trading account assets and the
allowance for off-balance-sheet extensions of credit, such as standby letters of
credit, guarantees and commitments which are included in other liabilities.
Provisions charged to the provision for credit losses are presented after net
interest income on the income statement. The provisions for trading credit
losses and off-balance-sheet credit losses, both of which are included in other
operating income, increase the aggregate allowance for credit losses. The
aggregate allowance for credit losses is also affected by charge-offs and
recoveries and by foreign currency translation gains or losses. The level of the
aggregate allowance is monitored on a quarterly basis and considers such factors
as the composition of the loan portfolio, including its real estate, commercial
and industrial and cross-border exposure. Other extensions of credit related to
trading assets and off-balance-sheet commitments are also monitored on a
quarterly basis. Current period charge-offs and recoveries, in addition to a
migration analysis of the loan portfolio and other extensions of credit based on
historic trends, are also used to determine the aggregate allowance. The
adequacy of the aggregate allowance determines the need for provisions.
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 Corporation intends to reinvest certain
undistributed earnings of foreign subsidiaries and affiliates which are not
subject to U.S. income tax until remitted as a dividend; accordingly, no
provision has been made for such undistributed earnings.
K. EARNINGS PER COMMON SHARE. A 100-percent dividend on the Corporation's Common
Stock was distributed on June 1, 1998 in the form of a two-for-one common stock
split. Accordingly, the financial statements, notes and other references to
shares, per share data and average shares outstanding have been restated in all
periods presented to give effect to the split.
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 and
long-term incentive compensation 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.
65
<PAGE> 68
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
L. BENEFITS. Effective December 31, 1998, the Corporation adopted SFAS No. 132,
"Employer's Disclosures about Pensions and Other Postretirement Benefits." This
statement supersedes the disclosure requirements for pension and other benefits
in SFAS No.'s 87, 88 and 106. The new statement requires additional information
on the changes in the benefit obligations and plan assets and eliminates certain
disclosures to assist in the analysis of these plans. The new disclosure for all
required periods is in the footnotes to the consolidated financial statements.
This statement did not change the recognition or measurement rules for pensions
and other postretirement benefit plans and had no effect on the Corporation's
results of operations or financial position.
M. RECLASSIFICATION. Certain amounts from prior years have been reclassified to
conform with 1998 classifications.
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.
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE DATA) 1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings:
Net income $248,047 $449,108 $418,840
Less preferred stock dividends (26,302) (24,191) (31,518)
Less dividends on restricted stock plan shares (3,304) (3,369) (2,815)
- -------------------------------------------------------------------------------------------
Net income applicable to common stock -- basic $218,441 $421,548 $384,507
===========================================================================================
Average common shares outstanding -- excluding restricted
stock plan shares 104,328 105,625 107,481
===========================================================================================
Basic earnings per common share $ 2.09 $ 3.99 $ 3.58
===========================================================================================
Diluted earnings:
Net income applicable to common stock -- basic $218,441 $421,548 $384,507
Dividend adjustment on restricted stock plan shares to
reflect shares assumed issued 1,807 1,733 1,520
- -------------------------------------------------------------------------------------------
Net income applicable to common stock -- diluted $220,248 $423,281 $386,027
===========================================================================================
Shares:
Average common shares outstanding -- excluding
restricted stock plan shares 104,328 105,625 107,481
Net shares assumed issued under compensation stock
plans 1,834 1,726 1,572
Shares assumed issued on exercise of stock options 74 110 136
- -------------------------------------------------------------------------------------------
Average common shares outstanding 106,236 107,461 109,189
===========================================================================================
Diluted earnings per common share $ 2.07 $ 3.94 $ 3.54
===========================================================================================
</TABLE>
66
<PAGE> 69
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
<TABLE>
<CAPTION>
SECURITIES HELD TO MATURITY
------------------------------------------------
1998
------------------------------------------------
GROSS UNREALIZED ESTIMATED
BOOK -------------------- MARKET
(IN THOUSANDS) VALUE GAINS (LOSSES) VALUE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and federal agency
obligations $6,038,181 $153,680 $ (703) $6,191,158
Obligations of U.S. states and political
subdivisions 693,533 61,198 (80) 754,651
Derivative contracts -- -- (62,883) (62,883)
- --------------------------------------------------------------------------------------------
$6,731,714 $214,878 $(63,666) $6,882,926
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
---------------------------------------------------
1998
---------------------------------------------------
GROSS UNREALIZED BOOK/
AMORTIZED --------------------- MARKET
(IN THOUSANDS) COST GAINS (LOSSES) VALUE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and federal agency
obligations $ 8,051,783 $ 96,975 $ (3,804) $ 8,144,954
Obligations of U.S. states and
political subdivisions 8,293 416 -- 8,709
Domestic debt securities 3,904,458 23,558 (11,187) 3,916,829
Foreign debt securities 3,933,916 48,960 (268,170) 3,714,706
Equity securities 897,031 16,546 (19,351) 894,226
Derivative contracts -- -- (244,901) (244,901)
- -------------------------------------------------------------------------------------------
$16,795,481 $186,455 $(547,413) $16,434,523
===========================================================================================
</TABLE>
During 1998, the Corporation transferred securities with a book and an
approximate market value of $227 million from securities available for sale to
trading account assets.
Investment securities having a carrying value of approximately $7.9 billion at
December 31, 1998, were pledged to secure public deposits, short-term borrowings
and for other purposes required or permitted by law.
67
<PAGE> 70
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
SECURITIES HELD TO MATURITY
------------------------------------------------
1997
------------------------------------------------
GROSS UNREALIZED ESTIMATED
BOOK -------------------- MARKET
(IN THOUSANDS) VALUE GAINS (LOSSES) VALUE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
Derivative contracts -- -- (70,835) (70,835)
- --------------------------------------------------------------------------------------------
$9,237,151 $234,208 $(79,070) $9,392,289
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
---------------------------------------------------
1997
---------------------------------------------------
GROSS UNREALIZED BOOK/
AMORTIZED --------------------- MARKET
(IN THOUSANDS) COST GAINS (LOSSES) VALUE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
Derivative contracts -- -- (151,159) (151,159)
- -------------------------------------------------------------------------------------------
$16,225,489 $271,412 $(220,234) $16,276,667
===========================================================================================
</TABLE>
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.
68
<PAGE> 71
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents information for investments in securities held to
maturity and securities available for sale at December 31, 1998, based on
scheduled maturities. Actual maturities can be expected to differ from scheduled
maturities due to prepayment or early call privileges of the issuer.
<TABLE>
<CAPTION>
SECURITIES HELD SECURITIES AVAILABLE
TO MATURITY FOR SALE
------------------------------------------------------
ESTIMATED BOOK/
BOOK MARKET AMORTIZED MARKET
(IN THOUSANDS) VALUE VALUE COST VALUE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 6,096 $ 6,219 $ 900,225 $ 901,339
Due after one year through five
years 45,999 50,161 2,677,664 2,671,697
Due after five years through ten
years 71,451 80,919 1,982,200 1,921,962
Due after ten years 569,987 617,352 4,748,136 4,626,470
Mortgage-backed securities 6,038,181 6,191,158 6,487,256 6,557,956
Derivative contracts -- (62,883) -- (244,901)
- --------------------------------------------------------------------------------------------
$6,731,714 $6,882,926 $16,795,481 $16,434,523
============================================================================================
</TABLE>
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 3.6 years and 5.7 years, respectively.
The following table presents the components of investment securities
transactions, net, attributable to securities held to maturity and securities
available for sale for each of the years in the three-year period ended December
31, 1998.
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------- ---------------------------- ----------------------------
GROSS NET GROSS GROSS
-------------------- GAINS ------------------ NET ------------------ NET
(IN THOUSANDS) GAINS (LOSSES) (LOSSES) GAINS (LOSSES) GAINS GAINS (LOSSES) GAINS
- ------------------------------------------------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities held to maturity:
Maturities, calls and mandatory
redemptions $ 314 $ -- $ 314 $ 434 $ (33) $ 401 $ 1,986 $ (89) $ 1,897
Securities available for sale:
Sales of securities 204,009 (203,669) 340 81,860 (51,774) 30,086 56,098 (36,072) 20,026
Maturities, calls, mandatory
redemptions and write downs 54,820 (241,560) (186,740) 4,964 (334) 4,630 2,573 (1,249) 1,324
- ------------------------------------------------------------------- ---------------------------- ----------------------------
$259,143 $(445,229) $(186,086) $87,258 $(52,141) $35,117 $60,657 $(37,410) $23,247
=================================================================== ============================ ============================
</TABLE>
69
<PAGE> 72
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
Precious metals (including derivatives related balances of
$313,879 in 1998 and $719,654 in 1997) $ 977,783 $1,241,956
======================================================================================
Trading account assets:
U.S. Government obligations $ 290,922 $ 88,167
U.S. Government agency obligations 54,967 31,751
Other, primarily foreign bonds 935,840 805,711
Unrealized gains on derivative financial instruments 2,128,897 3,602,326
Allowance for trading credit losses (13,516) (17,000)
- --------------------------------------------------------------------------------------
$3,397,110 $4,510,955
======================================================================================
Trading account liabilities:
Securities sold, not yet purchased $ 340,616 $ 524,718
Payables for precious metals 591,470 535,801
Unrealized losses on derivative financial instruments 2,418,370 4,260,345
- --------------------------------------------------------------------------------------
$3,350,456 $5,320,864
======================================================================================
</TABLE>
Trading revenue is generated by the Corporation's participation in the foreign
exchange and precious metals markets and by its trading activities as an
international dealer in other derivative contracts, including interest rate
swaps, and from trading securities. The Corporation reports the net revenue from
these activities, which includes mark-to-market adjustments and any related
direct trading expenses, on the statement of income as trading revenue.
The following table presents information related to the Corporation's trading
revenue for each of the last three years.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Precious metals $ (2,112) $ 14,069 $ 24,700
Foreign exchange 141,143 119,642 98,165
Trading account profits and commissions:
Debt securities and loans (12,954) 18,071 15,802
Interest rate futures, forwards and swaps, and
commodity, equity and other derivative contracts 14,018 18,893 37,139
- -------------------------------------------------------------------------------------------
Total trading account profits and commissions 1,064 36,964 52,941
- -------------------------------------------------------------------------------------------
Total trading revenue $140,095 $170,675 $175,806
===========================================================================================
</TABLE>
70
<PAGE> 73
REPUBLIC NEW YORK CORPORATION
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.
<TABLE>
<CAPTION>
AVERAGE
FAIR VALUE
DURING FAIR VALUE AT
1998 DECEMBER 31, 1998
------------- ---------------------------
ASSETS
(IN THOUSANDS) (LIABILITIES) ASSETS LIABILITIES
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST RATE:
Futures and forwards $ 4,169 $ -- $ 1,657
Swaps (41,287) 946,476 925,386
Options written (88,151) -- 100,098
Options purchased 117,981 138,452 --
- ---------------------------------------------------------------------------------------------------------
$ (7,288) $1,084,928 $1,027,141
=========================================================================================================
FOREIGN EXCHANGE:
Spot, swaps, futures and forwards $ 141,173 $ 358,051 $ 381,776
Options written (715,630) -- 609,402
Options purchased 708,630 652,838 --
- ---------------------------------------------------------------------------------------------------------
$ 134,173 $1,010,889 $ 991,178
=========================================================================================================
OTHER-PRINCIPALLY PRECIOUS METALS:
Swaps, futures and forwards $ (18,033) $ 166,050 $ 223,027
Options written (104,853) -- 177,024
Options purchased 107,537 180,909 --
- ---------------------------------------------------------------------------------------------------------
$ (15,349) $ 346,959 $ 400,051
=========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
AVERAGE
FAIR VALUE
DURING FAIR VALUE AT
1997 DECEMBER 31, 1997
------------- ---------------------------
ASSETS
(IN THOUSANDS) (LIABILITIES) ASSETS LIABILITIES
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
=========================================================================================================
</TABLE>
71
<PAGE> 74
REPUBLIC NEW YORK CORPORATION
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.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Domestic:
Real estate -- residential mortgage $ 3,410,013 $ 2,228,844
Real estate -- commercial 2,152,205 1,962,702
Banks and other financial institutions 4,818 54,753
Broker loans 703,172 1,116,880
Commercial and industrial 2,325,112 1,999,427
Individuals 330,569 266,703
All other 715,857 571,375
Foreign 4,021,229 4,175,620
- ----------------------------------------------------------------------------------------
13,662,975 12,376,304
Less unearned income (14,138) (16,563)
- ----------------------------------------------------------------------------------------
Loans, net of unearned income $13,648,837 $12,359,741
========================================================================================
</TABLE>
6. AGGREGATE ALLOWANCE FOR CREDIT LOSSES
The Corporation's aggregate allowance for 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 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 credit losses applicable to
domestic and foreign operations for each of the years in the three-year period
ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------ ------------------------------ ------------------------------
(IN THOUSANDS) DOMESTIC FOREIGN TOTAL DOMESTIC FOREIGN TOTAL DOMESTIC FOREIGN TOTAL
- -------------------------------------------------------------- ------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1 $215,950 $137,531 $353,481 $212,594 $137,764 $350,358 $198,733 $101,860 $300,593
Provision for credit losses (25,000) 33,000 8,000 16,000 -- 16,000 -- 32,000 32,000
- -------------------------------------------------------------- ------------------------------ ------------------------------
190,950 170,531 361,481 228,594 137,764 366,358 198,733 133,860 332,593
- -------------------------------------------------------------- ------------------------------ ------------------------------
Charge-offs (19,062) (57,208) (76,270) (21,275) (8,667) (29,942) (38,874) (4,164) (43,038)
Recoveries 5,804 22,094 27,898 8,631 9,166 17,797 10,156 3,452 13,608
Net recoveries of restructuring
countries debt -- 123 123 -- 854 854 -- 4,435 4,435
- -------------------------------------------------------------- ------------------------------ ------------------------------
Net (charge-offs) recoveries (13,258) (34,991) (48,249) (12,644) 1,353 (11,291) (28,718) 3,723 (24,995)
Allowance of acquired companies -- -- -- -- -- -- 42,579 -- 42,579
Translation adjustment -- 54 54 -- (1,586) (1,586) -- 181 181
- -------------------------------------------------------------- ------------------------------ ------------------------------
Balance, December 31 $177,692 $135,594 $313,286 $215,950 $137,531 $353,481 $212,594 $137,764 $350,358
============================================================== ============================== ==============================
</TABLE>
Included in the above table in 1998 were net foreign charge-offs amounting to
$3.5 million related to trading account assets and $4.2 million related to
off-balance-sheet credit commitments, which were charged against their
respective allowance for credit losses.
72
<PAGE> 75
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the components of the aggregate allowance for
credit losses at December 31, in each of the last three years.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggregate allowance for credit losses:
Credit losses $293,952 $326,481 $350,358
Trading accounts 13,516 17,000 --
Off balance-sheet credit commitments 5,818 10,000 --
- ----------------------------------------------------------------------------------------------
$313,286 $353,481 $350,358
==============================================================================================
</TABLE>
The following table presents the book balances of the Corporation's non-accrual
and restructured loans (excluding consumer installment loans) at December 31, in
each of the last three years.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $73,257 $84,094 $ 94,137
Foreign 7,597 9,727 10,956
- --------------------------------------------------------------------------------------------
Non-accrual loans 80,854 93,821 105,093
Restructured loans 561 682 34,993
- --------------------------------------------------------------------------------------------
$81,415 $94,503 $140,086
============================================================================================
</TABLE>
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.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Impaired loans evaluated based on underlying collateral $35,657 $53,249 $61,989
Impaired loans evaluated based on future cash flow
projections 11,887 8,483 8,198
- -------------------------------------------------------------------------------------------
Total impaired loans $47,544 $61,732 $70,187
===========================================================================================
Investment in impaired loans having an allowance for credit
losses $13,454 $10,699 $ 6,528
Related allowance for credit losses 1,248 1,167 801
Investment in impaired loans having no related allowance for
credit losses 34,090 51,033 63,659
Average recorded investment in impaired loans, net of
charge-offs during the year $45,762 $50,303 $74,422
===========================================================================================
</TABLE>
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, 1998.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross amount of interest that would have been earned at
original
contract rates:
Domestic $6,092 $8,474 $15,831
Foreign 671 680 1,065
- -----------------------------------------------------------------------------------------
$6,763 $9,154 $16,896
=========================================================================================
Actual amount recorded as interest income:
Domestic $4,132 $5,832 $10,537
Foreign 127 59 11
- -----------------------------------------------------------------------------------------
$4,259 $5,891 $10,548
=========================================================================================
Foregone interest income:
Domestic $1,960 $2,642 $ 5,294
Foreign 544 621 1,054
- -----------------------------------------------------------------------------------------
$2,504 $3,263 $ 6,348
=========================================================================================
Interest income recorded on impaired loans $1,145 $4,625 $ 5,072
=========================================================================================
</TABLE>
73
<PAGE> 76
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INVESTMENT IN AFFILIATE
At December 31, 1998, the Corporation, Saban S.A. (see Note 20), a Panamanian
holding company wholly owned by Mr. Edmond J. Safra, and international investors
owned approximately 49.0%, 20.8% and 30.2%, 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.
Summary financial information for Safra Republic for the last two years is as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Total assets $21,036,767 $20,356,300
Total deposits 16,447,942 15,401,065
Total shareholders' equity 1,936,791 1,760,566
Operating revenue 1,333,727 1,278,655
Net income 280,207 255,055
========================================================================================
</TABLE>
8. PREMISES AND EQUIPMENT
A summary of the Corporation's premises and equipment at respective year ends
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Premises $ 544,836 $ 537,734
Equipment 202,998 207,031
- ------------------------------------------------------------------------------------
747,834 744,765
Less accumulated depreciation and amortization (280,183) (275,662)
- ------------------------------------------------------------------------------------
$ 467,651 $ 469,103
====================================================================================
</TABLE>
Other operating expenses included depreciation and amortization of $58.7 million
in 1998, $53.9 million in 1997 and $48.4 million in 1996. 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.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
Federal funds purchased and securities sold under repurchase
agreements $ 934,372 $ 853,612
Commercial paper 700,483 418,911
Precious metals 1,515,333 2,028,268
Other borrowings 1,291,022 2,313,043
- --------------------------------------------------------------------------------------
$4,441,210 $5,613,834
======================================================================================
</TABLE>
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,
was $150 million in 1998 and $100 million in 1997 of notes sold under the Bank's
program to issue notes globally, see Note 10.
The Corporation has $155 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.
74
<PAGE> 77
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
Republic New York Corporation:
8 3/8% Debentures due February 15, 2007 $ 100,000 $ 100,000
7% Capitalized lease obligations due December 31, 2000 8,371 11,643
- --------------------------------------------------------------------------------------
108,371 111,643
- --------------------------------------------------------------------------------------
Republic National Bank of New York:
1.875% Cash Exchangeable Equity-Linked Notes due August
12, 2002 112,545 100,000
Other long-term debt (various) 52,076 56,948
Collateralized repurchase agreements, rates from
3.25% - 7.45% in 1998 and 1997 1,269,781 1,545,844
- --------------------------------------------------------------------------------------
1,434,402 1,702,792
- --------------------------------------------------------------------------------------
$1,542,773 $1,814,435
======================================================================================
</TABLE>
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 seven 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, 1998,
$270 million principal amount 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, prior to a two-for-one stock split payable
February 16, 1999) and the market price of Merck & Co., Inc. common stock per
$1,000 principal amount per Equity Note. The mark-to-market adjustment increased
the amount due on the Equity Notes by $12.5 million at December 31, 1998. The
Corporation has entered into a derivative contract to act as a hedge to the
mark-to-market value due to holders' of Equity Notes.
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. All outstanding 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.
75
<PAGE> 78
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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: $215 million in 1999, $286 million in 2000, $113 million in 2001, $222
million in 2002 and $9 million in 2003.
Subordinated Long-Term Debt and Perpetual Capital Notes:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
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
(5.48914% in 1998 and 5.7213% in 1997) 95,900 100,000
Floating Rate Subordinated Notes due October 2002
(5.27922% in 1998 and 5.7603% in 1997) 149,800 150,000
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* 250,000 250,000
Perpetual Capital Notes (6.00% in 1998 and 6.0625% in
1997)* 150,000 150,000
- --------------------------------------------------------------------------------------
$2,645,700 $2,650,000
======================================================================================
</TABLE>
* These notes are redeemable prior to maturity.
The rates in effect at December 31, 1998 and 1997 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 formulas based on certain money market rates and, in the case of the issues
of the Floating Rate Subordinated Notes due 2002, are subject to a minimum rate
of 5% per annum.
An existing shelf registration statement authorizes the Corporation to 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, 1998, no securities had been issued pursuant to this
registration statement.
76
<PAGE> 79
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The 7.20% Subordinated Debentures due 2097 (the "7.20% Notes") 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 7.20% Notes, and/or to redeem them if a tax event occurs. The
net proceeds received by the Corporation from the sale of the 7.20% Notes were
used for general corporate purposes.
The 7% Subordinated Notes due 2011 (the "7% Notes") are direct unsecured general
obligations of the Corporation and are subordinated to all present and future
senior indebtedness of the Corporation. The 7% Notes are not redeemable prior to
maturity. The net proceeds received by the Corporation from the sale of the 7%
Notes were used for general corporate purposes, which included the repurchase of
$100 million principal amount of an outstanding issue of the Corporation's
subordinated debt. 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 PCNs may be exchanged for securities
that constitute permanent primary capital securities (the "capital securities")
for regulatory purposes. 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, (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 $645.7 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.
<TABLE>
<CAPTION>
DECEMBER 31,
(IN THOUSANDS) 1998 AND 1997
- ----------------------------------------------------------------------------
<S> <C>
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
============================================================================
</TABLE>
77
<PAGE> 80
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
contemporaneously 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.
<TABLE>
<CAPTION>
DIVIDEND
SHARES RATE AT AMOUNT
OUTSTANDING DECEMBER 31, OUTSTANDING
----------- ------------ --------------------
(DOLLARS IN THOUSANDS) 1998 1998 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$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 4.50% 150,000 150,000
Dutch Auction Rate Transferable
Securities(TM) Preferred Stock
("DARTS")
Series A ($100,000 stated value) 625 4.65% 62,500 62,500
Series B ($100,000 stated value) 625 4.55% 62,500 62,500
$2.8575 Cumulative Preferred Stock
($50 stated value) 3,000,000 5.715% 150,000 150,000
- ----------------------------------------------------------------------------------------
7,501,250 $500,000 $500,000
========================================================================================
</TABLE>
The 3 million outstanding shares of $2.8575 Cumulative Preferred Stock ($50
Stated Value) (the "Preferred Stock") have 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
78
<PAGE> 81
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 received by
the Corporation from the sale of the Preferred Stock was used to redeem an
outstanding issue of Money Market Cumulative Preferred Stock with an aggregate
liquidation value of $50 million.
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% or more than 10 1/2% per annum
for any applicable dividend period. The dividend rate in effect for the period
ended December 31, 1998, was 4.50%. 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 received by the
Corporation from the sale of the Series D Stock were used for general corporate
purposes.
Dividend rates for each dividend period are set pursuant to an auction procedure
for the DARTS(TM). The maximum applicable dividend rates on the shares of
DARTS(TM) range from 110% to 150% of the 60-day "AA" composite commercial paper
rate.
DARTS(TM) 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(TM) 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. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the changes in the components of accumulated other
comprehensive income (loss) for each of the last three years.
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION FOREIGN ACCUMULATED
(DEPRECIATION) CURRENCY OTHER
ON SECURITIES TRANSLATION COMPREHENSIVE
AVAILABLE GAINS INCOME
(IN THOUSANDS) FOR SALE (LOSSES) (LOSS)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance January 1, 1996 $ (74,762) $ 4,455 $ (70,307)
Changes during the year 129,229 (20,399) 108,830
- ---------------------------------------------------------------------------------------------------
Balance December 31, 1996 54,467 (15,944) 38,523
Changes during the year (36,805) (16,216) (53,021)
- ---------------------------------------------------------------------------------------------------
Balance December 31, 1997 17,662 (32,160) (14,498)
Changes during the year (333,391) (13,983) (347,374)
- ---------------------------------------------------------------------------------------------------
Balance December 31, 1998 $ (315,729) $ (46,143) $ (361,872)
===================================================================================================
</TABLE>
79
<PAGE> 82
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents the before tax amount, related tax effect and after
tax amount of change for each component of other comprehensive income (loss) in
each of the years in the three-year period ended December 31, 1998.
<TABLE>
<CAPTION>
TAX
BEFORE TAX (EXPENSE) AFTER TAX
(IN THOUSANDS) AMOUNT BENEFIT AMOUNT
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Year ended December 31, 1996:
Unrealized appreciation on securities available for sale:
Arising during the period $ 230,483 $(87,377) $ 143,106
Less: reclassification adjustment for gains included in
net income 21,350 (7,473) 13,877
- --------------------------------------------------------------------------------------------------
Net unrealized appreciation on securities available for sale 209,133 (79,904) 129,229
Foreign currency translation losses (32,440) 12,041 (20,399)
- --------------------------------------------------------------------------------------------------
Accumulated other comprehensive income $ 176,693 $(67,863) $ 108,830
==================================================================================================
Year ended December 31, 1997:
Unrealized depreciation on securities available for sale:
Arising during the period $ (21,907) $ 7,667 $ (14,240)
Less: reclassification adjustment for gains included in
net income 34,716 (12,151) 22,565
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation on securities available for sale (56,623) 19,818 (36,805)
Foreign currency translation losses (24,927) 8,711 (16,216)
- --------------------------------------------------------------------------------------------------
Accumulated other comprehensive loss $ (81,550) $ 28,529 $ (53,021)
==================================================================================================
Year ended December 31, 1998:
Unrealized depreciation on securities available for sale:
Arising during the period $(699,309) $244,758 $(454,551)
Less: reclassification adjustment for losses included in
net income (186,400) 65,240 (121,160)
- --------------------------------------------------------------------------------------------------
Net unrealized depreciation on securities available for sale (512,909) 179,518 (333,391)
Foreign currency translation losses (21,512) 7,529 (13,983)
- --------------------------------------------------------------------------------------------------
Accumulated other comprehensive loss $(534,421) $187,047 $(347,374)
==================================================================================================
</TABLE>
14. INCOME TAXES
Total income tax expense for each of the years in the three-year period ended
December 31, 1998 was allocated as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from operations $88,249 $187,222 $171,706
Stockholders' equity:
Net unrealized (depreciation) appreciation on securities
available for sale, net of taxes (179,518) (19,818) 79,904
Foreign currency translation, net (7,529) (8,711) (12,041)
- -----------------------------------------------------------------------------------------------
$(98,798) $158,693 $239,569
===============================================================================================
</TABLE>
80
<PAGE> 83
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of the Corporation's consolidated income tax expense from
operations were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current Tax Expense:
Federal $(10,784) $86,110 $100,606
Foreign 45,932 59,401 23,565
State and other 10,500 9,400 8,300
- -----------------------------------------------------------------------------------------------
45,648 154,911 132,471
Deferred Tax Expense:
Federal 42,601 32,311 39,235
- -----------------------------------------------------------------------------------------------
$88,249 $187,222 $171,706
===============================================================================================
</TABLE>
The following table reconciles the expected income tax expense at the statutory
35% to the actual income tax expense reported for the years presented.
<TABLE>
<CAPTION>
% OF PRETAX INCOME
--------------------
1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal tax expense at statutory rates 35.0 35.0 35.0
State and local income tax, net of federal tax benefit 2.0 0.9 0.9
Interest and dividend income exempt from federal tax (7.4) (4.0) (4.5)
Earnings of foreign subsidiaries and affiliates (8.4) -- --
Valuation allowance 7.4 -- --
Other, net (2.4) (2.5) (2.3)
- ----------------------------------------------------------------------------------
Income tax expense as reported 26.2 29.4 29.1
==================================================================================
</TABLE>
The tax effects of temporary differences that gave rise to the deferred tax
assets and deferred tax liabilities at December 31, 1998 and 1997 are presented
below.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Provision for credit losses $106,794 $138,910
Exempt income from subsidiary acquisition 24,791 32,266
Unrealized losses on trading account assets and securities
available for sale 223,287 17,086
Employee benefits 31,054 26,597
Restructuring and related charges -- 5,932
Other 5,421 10,999
Valuation allowance (25,072) --
- ----------------------------------------------------------------------------------
366,275 231,790
- ----------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation 54,272 54,281
Domestic tax on overseas income 157,320 149,182
Interest and discount income 62,312 60,570
- ----------------------------------------------------------------------------------
273,904 264,033
- ----------------------------------------------------------------------------------
Net deferred tax asset (liability) $92,371 $(32,243)
==================================================================================
</TABLE>
A valuation allowance of $25 million was established in 1998 to reduce deferred
tax assets based on available evidence of more likely than not to be realized.
81
<PAGE> 84
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Corporation has not recognized a deferred tax liability of approximately
$108 million and $100 million in 1998 and 1997, respectively, for undistributed
earnings of foreign subsidiaries and affiliates, 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, 1998 and 1997, the
undistributed earnings of these foreign subsidiaries and affiliates were
approximately $426 million $365 million, respectively.
The following table distributes the Corporation's income before income taxes
between its domestic and foreign offices for each of the last three years.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign $154,975 $458,525 $347,754
Domestic 181,321 177,805 242,792
- ----------------------------------------------------------------------------------------------
$336,296 $636,330 $590,546
==============================================================================================
</TABLE>
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. In addition, 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 obligation for such postretirement benefits is unfunded.
82
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REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information related to the U.S. Plan and other postretirement benefits is set
forth in the following tables:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
-------------------- --------------------
(IN THOUSANDS) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $213,268 $180,710 $ 32,819 $ 28,783
Service cost 8,710 7,713 126 85
Interest cost 15,046 14,205 1,937 2,285
Actuarial (gain) or loss 6,301 18,289 (3,328) 3,055
Benefits paid (8,177) (7,649) (1,456) (1,389)
- ------------------------------------------------------------------------------------------
Benefit obligation at end of year $235,148 $213,268 $ 30,098 $ 32,819
==========================================================================================
Change in plan assets:
Fair value of plan assets at beginning of
year $257,192 $226,709 $ -- $ --
Actual return on plan assets 38,182 38,652 -- --
Employer contributions 8,200 -- 1,456 1,389
Benefits paid (8,178) (7,648) (1,456) (1,389)
Administrative expenses (383) (521) -- --
- ------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $295,013 $257,192 $ -- $ --
==========================================================================================
Funded (unfunded) status:
Funded (unfunded) status at end of year $ 59,865 $ 43,924 $(30,098) $(32,819)
Unrecognized actuarial (gain) or loss (56,256) (41,720) (12,813) (10,246)
Unrecognized transition (asset) or
obligation (3,018) (4,024) 12,416 13,369
Unrecognized prior service cost 473 617 -- --
- ------------------------------------------------------------------------------------------
Net amount recognized at year end $ 1,064 $ (1,203) $(30,495) $(29,696)
==========================================================================================
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost $ 1,064 $ -- $ -- $ --
Accrued benefit liability -- 1,203 30,495 29,696
- ------------------------------------------------------------------------------------------
Net amount recognized at year end $ 1,064 $ 1,203 $ 30,495 $ 29,696
==========================================================================================
</TABLE>
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------------- -----------------------
1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted-average assumptions as of
December 31:
Discount rate 6.75% 7.00% 7.50% 6.75% 7.00% 7.00%
Expected long-term rate of return on
plan assets 8.00% 8.00% 8.00% -- -- --
Rate of compensation increase 4.50% 5.00% 5.00% 4.50% 5.00% 5.00%
</TABLE>
83
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REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For measurement purposes, a 9% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 1999. The rate is assumed to
decrease gradually to 5.5% for 2003 and remain at that level thereafter.
Net benefit expense for pension and other benefits in each of the last three
years was as follows:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------------------ ------------------------
(IN THOUSANDS) 1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic
benefit cost:
Service cost $ 8,710 $ 7,713 $ 7,447 $ 126 $ 85 $ 85
Interest cost 15,046 14,205 12,600 1,937 2,285 1,950
Expected return on plan
assets (16,854) (15,815) (14,293) -- -- --
Amortization of prior service
cost 144 144 144 -- -- --
Amortization of transitional
(asset) or obligation (1,006) (1,006) (1,006) 953 953 953
Recognized actuarial (gain)
or loss (107) -- -- (760) (592) (633)
- ------------------------------------------------------------------------------------------
Net periodic benefit cost $ 5,933 $ 5,241 $ 4,892 $2,256 $2,731 $2,355
==========================================================================================
</TABLE>
In addition to the U.S. Plan and the obligation for postretirement benefits
described above, the Corporation has an unfunded supplemental pension plan for
certain employees, executive officers and directors. The expense related to this
plan amounted to $0.7 million in 1998, $0.8 million in 1997 and $0.9 million in
1996. The unfunded liability for this plan was $8.0 million at December 31,
1998, and $10.0 million at December 31, 1997.
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
$5.4 million in 1998, $4.8 million in 1997 and $4.6 million in 1996.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1% 1%
(IN THOUSANDS) INCREASE DECREASE
- ----------------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest cost components for
1998 $ 117 $ (85)
Effect on year-end 1998 postretirement benefit obligation 1,685 (1,457)
==================================================================================
</TABLE>
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.
84
<PAGE> 87
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 5,281,600 shares of the Corporation's Common Stock was set aside for Awards
pursuant to the 1995 Plan. At December 31, 1998, an aggregate of 814,852 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 the past three years, the Corporation issued restricted common stock, net
of cancellations, in the aggregate amounts of 224,192 shares in 1998, 850,792
shares in 1997 and 906,328 shares in 1996 with approximate market values as of
the dates of issue of $15.8 million in 1998, $44.0 million in 1997 and $30.5
million in 1996, 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, 1998, 3,438,483 shares of the Corporation's Common Stock remained
restricted. The deferred expense related to such shares at year-end 1998 was
$54,908,000.
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
Corporation. The Corporation issued 1,070 shares in 1998, 1,038 shares in 1997
and 4,734 shares in 1996, of its Common Stock pursuant to such Plan, primarily
in lieu of cash dividends, with approximate market values as of the dates of
issue of $58,000 in 1998, $51,000 in 1997 and $151,000 in 1996.
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, 1998, no options had been granted pursuant to
the 1995 Plan.
85
<PAGE> 88
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
OPTION PRICE
OPTIONS PER SHARE
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1995 339,374 $11.81-$25.09
Exercised (147,324) 11.81- 16.25
Cancelled (4,500)
- ---------------------------------------------------------------------------------------
Balance, December 31, 1996 187,550 $14.36-$25.09
Exercised (57,350) 14.36- 19.69
Cancelled --
- ---------------------------------------------------------------------------------------
Balance, December 31, 1997 130,200 $14.46-$25.09
Exercised (27,300) 14.46- 14.50
Cancelled --
- ---------------------------------------------------------------------------------------
Balance, December 31, 1998 102,900 $14.50-$25.09
=======================================================================================
</TABLE>
At December 31, 1998, all of the outstanding options in the above table were
exercisable at prices ranging from $14.50 to $25.09 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 1997 and 1996 plan years, the Human Resources Committee
certified awards in the aggregate amount of $8.4 million and $5.4 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 1998 plan year pursuant to
the Performance Based Plan but amounts payable pursuant to such awards have not
86
<PAGE> 89
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
yet been certified by the Human Resources Committee in accordance with the
Performance Based Plan.
In 1998, the Corporation established the 1998 Long-Term Incentive Compensation
Plan (the "LTICP"). The LTICP is an unfunded plan, which grants deferred
restricted cash awards to certain employees. Individual awards vest after
designated restriction periods lapse. Under the LTICP, employees designate the
initial investment of their award in one or more mutual funds, which may be
changed from time-to-time, and may invest up to 50% of the value of their award
in shares of common stock of the Corporation. The investment in shares of the
Corporation's common stock are held by a trust and will be delivered to the
employee at the end of a designated deferral period. The shares held by the
trust are recorded on the balance sheet as common stock in treasury at cost,
with the cost of the shares amortized to expense over the life of the restricted
period. The expense related to the LTICP in 1998 amounted to $2.7 million. The
LTICP will terminate in March 2008, after which no restricted cash awards shall
be granted.
16. LINE-OF-BUSINESS INFORMATION
The Corporation adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective December 31, 1998. This SFAS
established standards for reporting information about operating segments, and
related disclosures about products and services and geographic areas. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is regularly used by the chief operating
decision making group in deciding how to allocate resources and in assessing
performance. The Corporation has strategically aligned its operations into five
major segments of business based on the needs of its clients and trading
partners. The five major segments of business are Private Banking, Consumer
Financial Services, Lending, Global Treasury and Global Markets. The
Corporation, manages these segments of business using an internal profitability
reporting system. The accounting policies of the operating segments are the same
as those described in the summary of significant accounting policies except as
noted below. The information generated is not necessarily comparable with
similar information for any other financial institution.
The Corporation uses an internal funds transfer pricing system that calculates a
cost of funds or credit for funds using a combination of matched maturity
funding for certain assets and liabilities and a blended rate based on various
maturities for the remaining assets and liabilities. All assets and liabilities
are transfer priced. Common stockholders' equity and the aggregate provision for
credit losses are allocated using an economic risk model. The aggregate
provision for credit losses assigned to each line of business is based on an
economic model that takes into account the borrower's credit rating and tenor.
Management has developed a risk-adjusted capital methodology across business
lines that quantifies different types of risk, including, but not limited to,
credit risk, market risk and operating risk, and assigns capital based on this
methodology. Credit risk is based on the remaining tenor for the credit
extensions and an internal credit grade assigned to each obligor. Market risk is
based on annualized actual exposure. Operating risk is an estimate of the
exposure from operations, less specific insurance coverage.
The Corporation uses various methodologies to allocate shared costs based
primarily on activity usage, and allocations are made for overhead and taxes.
Non-interest income and expenses directly attributable to a line of business are
assigned to that business. Direct expenses, incurred by areas whose services
support the overall Corporation, are allocated to the business lines for product
processing expenditures based on standard unit costs applied to actual volume
measurements where possible. Administrative expenses are allocated based on the
table of organization for the Corporation and corporate overhead is assigned
based on a ratio encompassing income before
87
<PAGE> 90
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
expenses, total staff costs and allocated risk-adjusted equity. Taxes are
assigned to each line of business based on an overall effective tax rate
adjusted for special circumstances. The Corporation does not allocate assets
that are jointly used by the various lines of business. The cost allocation
methodology allows for the allocation of the costs of the shared services.
Transactions between the lines of business are measured on either a market-based
rate for deposit and loan transactions or as revenue sharing for specific
agreements between the lines of business using current market prices where
possible.
It is not practicable to present segment information for years prior to 1998
because it is not available and the cost to develop it would be excessive.
PRIVATE BANKING
The Private Banking segment offers a full range of services for high-net-worth
individuals globally including deposit, lending, trading, treasury, investment
management products (including Republic Investment Management Account -- RIMA,
Republic Portfolio Selection Fund and the Republic Spectrum Account) trust,
custody, estate planning, philanthropic advisory services and asset allocation
products. The Corporation has private banking locations in North and South
America, Europe and Asia. Included as a part of Private Banking is the
Corporation's 49%-owned affiliate, Safra Republic. The Corporation includes the
investment in Safra Republic in Private Banking due to the similarity of product
offerings to different market places and devotes attention to actively managing
its investment in Safra Republic.
CONSUMER FINANCIAL SERVICES
The Consumer Financial Services segment offers retail banking, investment,
insurance and home finance services and products to more than one million
accounts through 82 locations in New York City and the suburban counties of
Westchester, Nassau and Suffolk and through 8 locations in southern Florida. The
Consumer Financial Services group provides a full range of retail banking,
investment insurance and home finance services and products. The services and
products offered include; the traditional banking products associated with a
full-service commercial bank: checking accounts, money market accounts, savings
accounts and certificates of deposit; commercial loans, small business loans,
residential mortgages and installment loans; credit cards; safe deposit boxes;
as well as mutual funds; fixed and variable annuities and money market funds
(including Republic Spectrum Account); PC bill payments, internet banking
(starting in January 1999), ATM access 24 hours a day; and life and health
insurance. Young Investors Club, Bank for Kids, Student$ense and Renaissance
Club are special programs offering financial products and services to specific
demographic groups.
The Consumer Financial Services group offers to its customers all of the other
products and services managed by the Corporation's other divisions including
trust, custody and safekeeping services, collections, letters of credit,
banker's acceptances and foreign exchange.
LENDING
Lending continues to be an integral part of the Corporation's overall client
relationship. Lending activities cover a variety of industries and industry
segments, including domestic and international private banking, small business,
middle market, factoring, national and international corporations, commercial
real estate and precious metals lending. The Corporation is the leading provider
of mortgage financing to cooperative apartments in the country and a substantial
lender and provider of business credit to the retail and apparel industry. The
market place continues to be very competitive
88
<PAGE> 91
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
in the lending businesses and the Corporation has continued to follow a plan of
diversity within businesses, the avoidance of high risk transactions and the
development of a customer base with a high level of credit quality. Products
include working capital lines, banker's acceptances, letters of credit,
factoring services, asset based lending, securities lending and commercial
mortgages.
GLOBAL TREASURY
The Global Treasury segment is responsible for managing the Corporation's
liquidity profile including its asset and liability positions. The Global
Treasury units asset and liability management strategy seeks to reduce the
Corporation's exposure to changes in external interest rates, while maximizing
the level of net interest income generated. The Corporation focuses on liquidity
and high asset quality and places a large percentage of funds in U.S.
Government-guaranteed and AAA rated asset-backed securities and, from time to
time, emerging market instruments, money market and other assets that meet the
Corporation's criteria for investment. The Global Treasury segment is the
primary source for wholesale funding in the inter-bank market and determines the
mix and characteristics of the Corporation's portfolio of investment securities.
Cash instruments, as well as derivatives, are used to adjust the interest rate
characteristics of specific on-balance-sheet assets and liabilities, in line
with the asset and liability strategy.
GLOBAL MARKETS
The Global Markets segment encompasses the trading and sale of foreign exchange,
banknotes, derivatives, precious metals, securities and emerging market
instruments. With trading centers in Europe, North and South America, Asia and
Australia, the Corporation operates 24 hours a day, covering the major
international cross-border markets as well as many local markets. Global Markets
has been recognized as a leader in foreign exchange, precious metals, banknotes,
emerging markets debt securities and derivatives including swaps, options and
structured products. The Global Market desks will customize products to suit the
needs of clients, which include financial institutions, corporations,
individuals and central banks. In addition, from time to time, Global Markets
may take proprietary positions following established limits and risk profiles.
In 1999, the Corporation announced its intention to dismantle the prime
brokerage activities within Republic New York Securities Corporation and the
market-making business within the derivative products groups and consolidate
back offices, increase technology and focus on structuring products for Private
Banking.
OTHER
Other includes all items that are allocated as a net amount, the residual
effects of unallocated activities and those not allocated to specific segments
such as expenses related to Year 2000 activities and the implementation of the
euro. Also included are the elimination of intersegment activities and the
remaining effects at the corporate level after implementation of management
accounting policies including residual credit provisions.
No single external customer provides more than 10% of the Corporation's total
operating revenue. The Corporation, since it does not review the results on a
product and service basis, finds it impracticable to report revenues from
external customers for each product and service.
89
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REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents summary information related to the Corporation's
lines of business for the year ended December 31, 1998.
<TABLE>
<CAPTION>
CONSUMER
PRIVATE FINANCIAL GLOBAL GLOBAL
(IN THOUSANDS) BANKING SERVICES LENDING TREASURY MARKETS OTHER TOTAL
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 65,490 $348,128 $ 248,539 $ 256,916 $ 118,729 $ (3,539) $ 1,034,263
Other income 197,302 57,054 62,478 (180,771) 149,140 3,395 288,598
Revenue sharing 17,304 10,542 208 (12,900) (15,168) 14 --
Income taxes 40,663 36,282 34,647 (33,079) 11,023 (1,287) 88,249
Net income (loss) $ 104,850 $ 84,602 $ 65,150 $ (24,634) $ 20,469 $ (2,390) $ 248,047
===================================================================================================================
Average assets $2,668,607 $861,250 $10,367,136 $31,495,660 $11,837,675 $(3,438,290) $53,792,038
Depreciation of
premises and
equipment 1,736 6,310 3,828 1,306 1,590 43,969 58,739
Amortization of
goodwill and
intangibles -- 18,113 5,439 222 3,476 -- 27,250
===================================================================================================================
</TABLE>
The following table presents total operating revenue by geographic area based on
the location of the customer for each of the years in the three-year period
ended December 31, 1998.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United Kingdom $ 66,412 $ 60,341 $ 64,197
Europe (32,247) 155,627 90,152
Canada 53,372 50,362 35,722
Far East and Australia 150,581 132,510 90,289
Caribbean money center locations, Central and South America 164,906 175,754 180,332
Middle East and Africa 5,328 5,449 5,689
United States 914,509 976,130 941,919
- ----------------------------------------------------------------------------------------------------
Total $1,322,861 $1,556,173 $1,408,300
====================================================================================================
</TABLE>
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 1999, $26.7 million in 2000, $23.7 million in
2001, $22.5 million in 2002, $20.8 million in 2003 and an aggregate of $77.0
million thereafter until the expiration of the leases. The minimum rental
commitments have not been reduced by aggregate minimum sublease rentals of $21.3
million. Actual net rental expense in 1998, 1997 and 1996 aggregated $36.4
million, $35.7 million and $37.6 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 1998 totaled $12 million.
90
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REPUBLIC NEW YORK CORPORATION
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.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1998 1997
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
(IN MILLIONS) VALUE FAIR VALUE VALUE FAIR VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS, INCLUDING HEDGES:
Interest-bearing deposits with banks $ 4,219 $ 4,227 $ 4,757 $ 4,764
Derivative related -- (2) -- (12)
Securities held to maturity 6,732 6,946 9,237 9,463
Derivative related -- (63) -- (71)
Securities available for sale 16,680 16,680 16,428 16,428
Derivative related (245) (245) (151) (151)
Trading account assets 1,268 1,268 909 909
Derivative related 2,129 2,129 3,602 3,602
Loans, net 13,355 13,788 12,033 12,374
Derivative related -- (21) -- --
Other financial assets 3,118 3,118 5,631 5,631
- ---------------------------------------------------------------------------------------------------
47,256 47,825 52,446 52,937
- ---------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES, INCLUDING HEDGES:
Deposits with no stated maturity and deposits
maturing within six months 29,304 29,304 28,543 28,543
Deposits maturing in over six months 3,916 3,875 4,847 4,845
Derivative related -- (28) -- (4)
Trading account liabilities 932 932 1,061 1,061
Derivative related 2,418 2,418 4,260 4,260
Short-term borrowings 4,441 4,441 5,614 5,614
Derivative related -- 2 -- (3)
Long-term debt, subordinated long-term debt,
perpetual capital notes and preferred
securities of subsidiary trusts 4,538 4,854 4,814 5,079
Derivative related -- (217) -- (107)
Other financial liabilities 1,326 1,326 2,590 2,590
- ---------------------------------------------------------------------------------------------------
46,875 46,907 51,729 51,878
- ---------------------------------------------------------------------------------------------------
Net financial liabilities $ 381 $ 918 $ 717 $ 1,059
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Estimated net fair value in excess of carrying
value $ 537 $ 342
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
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 future, forward, swap or option contract or other financial instrument
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,
91
<PAGE> 94
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Financial Assets
Interest-bearing deposits with banks, amounting to $3.9 billion in 1998 and $4.4
billion in 1997, 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.
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 $10.7 billion in 1998 and $8.9 billion in
1997 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 $18.6
billion in 1998 and $19.6 billion in 1997, 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, noninterest-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
92
<PAGE> 95
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $9.6 billion and $7.9
billion at year end 1998 and 1997, 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.
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 is a party to 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.
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.
Futures contracts, which are traded on organized exchanges, require daily
settlement and are settled through clearing houses which act 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, or index.
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,
93
<PAGE> 96
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
foreign exchange rates, equity indices and commodity prices. The Corporation
focuses on the structuring of customized transactions to meet clients' 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 or floor 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 value of collateral
94
<PAGE> 97
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
held. This exposure may be limited by offsetting asset or liability positions
held by the Corporation or by the use of master netting agreements.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1998 1997
--------------------------- ---------------------------
CONTRACTUAL/NOTIONAL AMOUNTS
----------------------------------------------------------
ASSET/LIABILITY ASSET/LIABILITY
(IN MILLIONS) TRADING MANAGEMENT TRADING MANAGEMENT
- ---------------------------------------------------------------------- ---------------------------
<S> <C> <C> <C> <C>
INTEREST RATE:
Futures and forwards $ 18,003 $ -- $ 11,449 $ 2,492
Swaps 22,607 12,545 26,427 12,339
Options written 5,349 -- 7,324 --
Options purchased 5,968 5,398 8,773 5,673
- ---------------------------------------------------------------------- ---------------------------
$ 51,927 $17,943 $ 53,973 $20,504
====================================================================== ===========================
FOREIGN EXCHANGE:
Swaps, futures and forwards $ 67,633 $ 806 $103,660 $ 1,234
Options written 16,384 -- 31,843 --
Options purchased 16,159 -- 31,245 --
- ---------------------------------------------------------------------- ---------------------------
$100,176 $ 806 $166,748 $ 1,234
====================================================================== ===========================
OTHER-PRINCIPALLY PRECIOUS METALS:
Swaps, futures and forwards $ 16,918 $ -- $ 18,417 $ --
Options written 3,168 -- 4,435 --
Options purchased 3,131 -- 4,994 --
- ---------------------------------------------------------------------- ---------------------------
$ 23,217 $ -- $ 27,846 $ --
====================================================================== ===========================
</TABLE>
Using replacement cost at the prevailing rate on all contracts in a gain
position, the Corporation's estimated risk of loss was $424 million at year-end
1998 and $701 million at year-end 1997, on interest rate contracts, and $1.3
billion at year-end 1998 and $2.9 billion at year-end 1997 on foreign exchange
and precious metals contracts.
Credit Related Instruments
In the normal course of its business, the Corporation has outstanding
commitments and contingent liabilities that are not reflected in the
consolidated financial statements. The Corporation enters into various types of
agreements with its customers which support the customer's 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:
<TABLE>
<CAPTION>
(IN MILLIONS) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit $6,814 $5,574
Standby letters of credit and foreign office guarantees 2,318 1,722
Commercial letters of credit 471 606
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
95
<PAGE> 98
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
18% at December 31, 1998 and 22% at December 31, 1997 of the Corporation's
on-balance-sheet financial instruments. This exposure included approximately 52%
at year-end 1998 and 45% at year-end 1997, 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 on-balance-sheet financial instrument
credit exposure to the U.S. federal government and its agencies' was
approximately 30% at year-end 1998 and 1997, respectively. The Corporation's
real estate loan portfolio represented approximately 12% at year-end 1998 and 8%
at year-end 1997 of on-balance-sheet financial instruments. 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.
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.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Interest-bearing deposits with banks $ 9,467 $ 11,357
Securities available for sale 9,022 --
Loans 107,671 119,303
==================================================================================
LIABILITIES:
Deposits $332,319 $325,540
Trading account liabilities 8,970 4,565
Short-term borrowings 40,966 20,590
Long-term debt -- 4,872
==================================================================================
</TABLE>
At December 31, 1998, Mr. Edmond J. Safra, through Saban S.A. and a subsidiary
thereof, owned approximately 28.8% 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 July 2, 1999, from the Board of Governors of the Federal
Reserve System (the "FRB") to acquire up to 3,134,200 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 31.7% of the Corporation's
outstanding Common Stock.
96
<PAGE> 99
REPUBLIC NEW YORK CORPORATION
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:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK:
Balance at beginning and end of year $ 400,000 $ 400,000
======================================================================================
SURPLUS:
Balance at beginning of year $1,636,155 $1,631,834
Capital contribution by parent -- 6,497
Treasury stock transactions of affiliate (1,110) (2,176)
- --------------------------------------------------------------------------------------
Balance at end of year $1,635,045 $1,636,155
======================================================================================
RETAINED EARNINGS:
Balance at beginning of year $1,277,738 $1,125,495
Net income 282,399 427,243
Dividends declared (200,000) (275,000)
- --------------------------------------------------------------------------------------
Balance at end of year $1,360,137 $1,277,738
======================================================================================
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES:
Balance at beginning of year $ (23,816) $ 17,175
Net depreciation on securities available for sale (339,943) (18,237)
Less: reclassification adjustment for gains (losses)
included in net income (103,342) 6,538
- --------------------------------------------------------------------------------------
Net unrealized depreciation on securities available for
sale (236,601) (24,775)
Foreign currency translation (13,983) (16,216)
- --------------------------------------------------------------------------------------
Other comprehensive loss (250,584) (40,991)
- --------------------------------------------------------------------------------------
Balance at end of year $ (274,400) $ (23,816)
======================================================================================
TOTAL STOCKHOLDER'S EQUITY:
Balance at beginning of year $3,290,077 $3,174,504
Net changes during the year (169,295) 115,573
- --------------------------------------------------------------------------------------
Balance at end of year $3,120,782 $3,290,077
======================================================================================
TOTAL COMPREHENSIVE INCOME (LOSS), NET OF TAXES:
Net income $ 282,399 $ 427,243
Other comprehensive loss (250,584) (40,991)
- --------------------------------------------------------------------------------------
Balance at end of year $ 31,815 $ 386,252
======================================================================================
</TABLE>
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, 1998, the Bank may declare dividends without the prior approval of
the OCC of up to $234 million, plus an additional amount equal to the Bank's
retained net profits for 1999 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 an affiliate,
are limited to 10% of the Bank's capital and surplus, as defined, to such
affiliate and to 20% of such amount in the aggregate to all such affiliates.
Based upon these requirements, assuming adequate qualifying collateral was
available, the Bank could have advanced up to $340 million to the Corporation at
December 31, 1998.
97
<PAGE> 100
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 reflect the effect on stockholders' equity related to the
Corporation's portfolio of securities available for sale.
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.
<TABLE>
<CAPTION>
FOR CAPITAL
ADEQUACY TO BE WELL
ACTUAL PURPOSES CAPITALIZED
------------------ ------------------ ------------------
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ------------------------------------------------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998
Total Capital (to Risk Weighted Assets):
Republic New York Corp. and
Subsidiaries $7,360,308 22.99% $2,561,436 8% $3,201,795 10%
Republic National Bank of New York 4,328,121 18.26% 1,896,399 8% 2,370,498 10%
Tier 1 Capital (to Risk Weighted
Assets):
Republic New York Corp. and
Subsidiaries $4,465,264 13.95% $1,280,718 4% $1,921,077 6%
Republic National Bank of New York 3,091,202 13.04% 948,199 4% 1,422,299 6%
Leverage Ratio -- Tier 1 Capital (to
Average Assets):
Republic New York Corp. and
Subsidiaries $4,465,264 6.51% $2,059,115 3% $2,059,115 3%
Republic National Bank of New York 3,091,202 6.74% 1,376,812 3% 2,294,687 5%
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%
</TABLE>
As of December 31, 1998, the Bank exceeded all minimum regulatory capital
requirements and the requirements to be a "well capitalized" institution as set
forth in the above table.
98
<PAGE> 101
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
23. REPUBLIC NEW YORK CORPORATION (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
(IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Deposits with subsidiary bank, principally interest-bearing $ 716,682 $ 420,625
Investment in bank subsidiaries 3,186,721 3,344,142
Investment in non-bank subsidiaries 1,083,026 1,127,286
Securities held to maturity 141,355 136,220
Securities available for sale 455,094 615,107
Investment in subordinated debt of subsidiary bank 950,000 825,000
Securities purchased under resale agreements 124 168,809
Securities purchased under resale agreements with subsidiary
bank -- 166,794
Advances to non-bank subsidiaries 160,700 338,310
Loans, net of unearned income 18,636 46,598
Trading account assets 167,392 9,255
Dividends receivable from subsidiaries 100,000 --
Other assets 257,637 176,614
- --------------------------------------------------------------------------------------
Total assets $7,237,367 $7,374,760
======================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Commercial paper $ 700,483 $ 418,911
Trading account liabilities 153,842 286,975
Other liabilities 136,400 120,709
Long-term debt (note 10) 100,000 100,000
Subordinated long-term debt and perpetual capital notes
(note 10) 2,645,700 2,650,000
Junior subordinated debt issued to subsidiary trusts 360,192 360,185
Stockholders' equity (notes 12, 13 and 15):
Cumulative preferred stock, no par value 500,000 500,000
Common stock, $5 par value 536,611 543,543
Surplus 96,487 149,763
Retained earnings 2,373,147 2,259,172
Accumulated other comprehensive income (loss), net of
taxes (361,872) (14,498)
Common stock in treasury, at cost 55,905 shares (3,623) --
- --------------------------------------------------------------------------------------
Total stockholders' equity 3,140,750 3,437,980
- --------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $7,237,367 $7,374,760
======================================================================================
</TABLE>
99
<PAGE> 102
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME:
Dividends from bank subsidiaries $200,000 $285,282 $230,000
Dividends from non-bank subsidiaries 13,150 40,500 11,000
Interest from subsidiaries 108,404 104,701 90,524
Interest and dividend income 44,225 61,060 59,473
Trading revenue (loss) (3,182) 971 2,444
Investment securities transactions, net (10,554) 333 108
Gain on redemption of investment in subordinated debt of
subsidiary bank 12,980 -- --
Other income 2,116 4,726 1,538
- ----------------------------------------------------------------------------------------------
Total income 367,139 497,573 395,087
- ----------------------------------------------------------------------------------------------
EXPENSES:
Salaries and employee benefits 59,102 48,833 38,519
Interest on short-term borrowing and long-term debt 248,872 251,752 224,873
Other expenses 15,735 3,867 11,072
- ----------------------------------------------------------------------------------------------
Total expenses 323,709 304,452 274,464
- ----------------------------------------------------------------------------------------------
Income before income tax benefit and equity in
undistributed net income of subsidiaries 43,430 193,121 120,623
Applicable income tax benefit -- current 62,306 54,617 57,437
- ----------------------------------------------------------------------------------------------
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME OF
SUBSIDIARIES 105,736 247,738 178,060
Equity in undistributed net income of subsidiaries 142,311 201,370 240,780
- ----------------------------------------------------------------------------------------------
NET INCOME $248,047 $449,108 $418,840
==============================================================================================
</TABLE>
100
<PAGE> 103
REPUBLIC NEW YORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 248,047 $ 449,108 $ 418,840
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed net income of subsidiaries (142,311) (201,370) (240,780)
Net change in trading accounts (291,270) 313,248 (25,422)
Net change in dividends receivable from subsidiaries (100,000) 65,000 19,000
Other, net (65,332) (12,189) (24,709)
- -------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (350,866) 613,797 146,929
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits with subsidiary bank (296,057) 151,808 (96,891)
Cash contributions to bank and non-bank subsidiaries (5,050) (41,232) (153,752)
Short-term investments 154,878 311,049 (154,348)
Investment in subordinated debt of subsidiary bank (125,000) (250,000) 100,000
Securities purchased under resale agreements 168,685 (168,809) --
Securities purchased under resale agreements with subsidiary
bank 166,794 (166,794) --
Advances to subsidiaries 177,610 31,728 (65,670)
Loans 27,962 (32,257) 1,151
Other, net 15,652 25,077 16,881
- -------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 285,474 (139,430) (352,629)
- -------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Commercial paper 281,572 (443,436) 194,784
Proceeds from issuance of subordinated long-term debt -- 250,000 100,000
Proceeds from issuance of junior subordinated debt to
subsidiary trusts 7 12 360,173
Repayment of subordinated long-term debt (4,300) -- (100,000)
Repayment of long-term debt -- -- (100,000)
Net proceeds from issuance of cumulative preferred stock -- 146,900 --
Repurchase of cumulative preferred stock -- (205,800) (19,200)
Repurchase of common stock (95,357) (107,905) (133,724)
Cash dividends paid (132,387) (120,829) (115,136)
Purchase of treasury stock, at cost (3,623) -- --
Other, net 19,480 6,691 18,803
- -------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 65,392 (474,367) 205,700
- -------------------------------------------------------------------------------------------------
Cash and due from banks at beginning and end of year $ -- $ -- $ --
=================================================================================================
</TABLE>
101
<PAGE> 104
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENTS
[KPMG LLP 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, 1998 and
1997, 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, 1998, and the consolidated statements of condition of
Republic National Bank of New York as of December 31, 1998 and 1997. 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, 1998 and 1997, and the results of its operations,
and its cash flows for each of the years in the three year period ended December
31, 1998, and the consolidated financial position of Republic National Bank of
New York as of December 31, 1998 and 1997 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
New York, New York
January 19, 1999
102
<PAGE> 105
REPUBLIC NEW YORK CORPORATION
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 LLP, the Corporation's independent auditors, have audited the consolidated
financial statements of the Corporation and its report thereon is presented
herein. Such report represents that as of and for the periods indicated the
Corporation's consolidated financial statements present fairly, in all material
respects, its financial position and results of operations and its cash flows in
conformity with generally accepted accounting principles.
Internal Controls Over Financial Reporting
Management of the Corporation is responsible for establishing and maintaining
effective internal controls over financial reporting presented in conformity
with generally accepted accounting principles. These internal controls contain
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 controls are adequate.
The Director of Internal Audit of the Corporation conducts audits and reviews
the Corporation's worldwide operations and reports directly to the Audit
Committee of the Board of Directors. In addition, KPMG LLP has direct, private
access to the Audit Committee of the Board of Directors to discuss the results
of its audits as well as other auditing and financial reporting matters as it
deems necessary.
There are inherent limitations in internal controls, including the possibility
of human error and the circumvention or overriding of controls. Accordingly,
even effective internal controls can provide only reasonable assurance with
respect to financial statement preparation. Further, because of changes in
conditions, the effectiveness of internal controls may vary over time.
Management assessed the Corporation's internal controls over financial reporting
presented in conformity with generally accepted accounting principles as of
December 31, 1998. This assessment was based on criteria for effective internal
controls 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, 1998, the Corporation maintained effective internal controls over financial
reporting presented in conformity with generally accepted accounting principles.
Compliance With Laws And Regulations
Management is also responsible for maintaining effective internal controls 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 subsidiaries, Republic National Bank of New
York and Republic Bank California National Association, complied, in all
material respects, with such laws and regulations during the year ended December
31, 1998.
<TABLE>
<S> <C>
/s/ Walter H. Weiner /s/ Stan Martin
Walter H. Weiner Stan Martin
Chairman of the Board and Executive Vice President and
Chief Executive Officer Chief Financial Officer
</TABLE>
New York, New York
January 19, 1999
103
<PAGE> 106
REPUBLIC NEW YORK CORPORATION
INDEPENDENT ACCOUNTANT'S REPORT ON
MANAGEMENT'S ASSERTIONS RELATED TO
INTERNAL CONTROLS OVER FINANCIAL REPORTING
[KPMG LLP 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 controls over financial reporting
presented in conformity with generally accepted accounting principles as of
December 31, 1998 included in the accompanying Report of Management-Internal
Controls 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 controls over financial reporting,
testing, and evaluating the design and operating effectiveness of the internal
controls, 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
controls over financial reporting to future periods are subject to the risk that
the internal controls 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 controls over financial reporting presented in conformity with
generally accepted accounting principles as of December 31, 1998 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.
/s/ KMPG LLP
New York, New York
January 19, 1999
104
<PAGE> 107
SUPPLEMENTARY DATA
REPUBLIC NEW YORK CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------
(IN THOUSANDS) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 1,040,290 $ 901,783 $ 710,183 $ 675,683 $ 867,242
Interest-bearing deposits with banks 4,218,893 4,756,804 5,909,195 6,094,495 10,242,061
Precious metals 977,783 1,241,956 1,231,319 1,250,038 1,456,269
Securities held to maturity 6,731,714 9,237,151 8,135,068 4,487,022 5,887,672
Securities available for sale 16,434,523 16,276,667 13,040,445 11,751,523 5,552,056
- -----------------------------------------------------------------------------------------------------------------
Total investment securities 23,166,237 25,513,818 21,175,513 16,238,545 11,439,728
- -----------------------------------------------------------------------------------------------------------------
Trading account assets 3,397,110 4,510,955 4,807,788 4,035,606 2,543,637
Federal funds sold and securities
purchased under resale agreements 689,335 2,169,291 2,109,109 1,749,268 1,123,925
Loans, net of unearned income 13,648,837 12,359,741 11,721,936 9,843,960 8,913,490
Allowance for credit losses (293,952) (326,481) (350,358) (300,593) (319,220)
Customers' liability on acceptances 36,287 121,022 938,615 818,007 1,514,461
Accounts receivable and accrued interest 1,352,619 2,452,721 2,108,318 1,946,077 1,797,491
Investment in affiliate 849,677 864,178 806,274 722,466 607,818
Premises and equipment 467,651 469,103 469,231 436,771 428,017
Other assets 873,387 603,464 661,728 371,231 452,986
- -----------------------------------------------------------------------------------------------------------------
Total assets $50,424,154 $55,638,355 $52,298,851 $43,881,554 $41,067,905
=================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits:
In domestic offices $ 2,882,572 $ 2,699,819 $ 2,296,267 $ 1,740,035 $ 1,701,667
In foreign offices 179,709 222,957 177,675 160,133 114,503
Interest-bearing deposits:
In domestic offices 10,904,022 12,214,760 12,559,554 8,471,452 8,534,562
In foreign offices 19,253,456 18,251,998 16,692,083 14,548,013 12,375,270
- -----------------------------------------------------------------------------------------------------------------
Total deposits 33,219,759 33,389,534 31,725,579 24,919,633 22,726,002
- -----------------------------------------------------------------------------------------------------------------
Trading account liabilities 3,350,456 5,320,864 4,402,085 3,719,651 2,087,594
Short-term borrowings 4,441,210 5,613,834 5,446,841 3,890,768 4,969,394
Acceptances outstanding 37,465 121,371 939,598 819,766 1,517,675
Accounts payable and accrued expenses 940,129 2,191,840 1,405,822 2,840,048 1,325,953
Due to factored clients 589,263 593,815 604,686 528,684 680,010
Other liabilities 166,649 154,682 218,910 193,645 134,792
Long-term debt 1,542,773 1,814,435 1,498,710 1,555,111 2,580,831
Subordinated long-term debt and
perpetual capital notes 2,645,700 2,650,000 2,400,000 2,406,440 2,406,266
Company-obligated mandatorily redeemable
preferred securities of subsidiary
trusts holding solely junior
subordinated debt securities 350,000 350,000 350,000 -- --
Stockholders' equity:
Preferred stock, no par value 500,000 500,000 555,800 575,000 672,500
Common stock, $5 par value 536,611 543,543 550,095 562,596 526,212
Surplus 96,487 149,763 227,378 308,710 174,547
Retained earnings 2,373,147 2,259,172 1,934,824 1,631,809 1,457,732
Accumulated other comprehensive income
(loss), net of taxes (361,872) (14,498) 38,523 (70,307) (191,603)
Common stock in treasury, at cost (3,623) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,140,750 3,437,980 3,306,620 3,007,808 2,639,388
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $50,424,154 $55,638,355 $52,298,851 $43,881,554 $41,067,905
=================================================================================================================
</TABLE>
105
<PAGE> 108
REPUBLIC NEW YORK CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE DATA) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $1,107,681 $1,069,583 $ 919,230 $ 749,719 $ 696,816
Interest on deposits with banks 273,284 298,416 376,030 526,185 414,294
Interest and dividends on investment
securities:
Taxable 1,540,161 1,511,817 1,279,226 927,740 871,785
Exempt from federal income taxes 81,951 90,134 93,257 89,744 76,783
Interest on trading account assets 77,184 115,594 67,279 55,736 55,736
Interest on federal funds sold and securities
purchased under resale agreements 153,703 124,347 98,061 97,547 57,915
- -----------------------------------------------------------------------------------------------------------------
Total interest income 3,233,964 3,209,891 2,833,083 2,446,671 2,173,329
- -----------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 1,469,985 1,451,023 1,282,205 1,138,075 827,790
Interest on short-term borrowings 425,318 449,009 333,075 218,804 218,529
Interest on long-term debt 304,398 281,994 255,618 270,893 280,536
- -----------------------------------------------------------------------------------------------------------------
Total interest expense 2,199,701 2,182,026 1,870,898 1,627,772 1,326,855
- -----------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 1,034,263 1,027,865 962,185 818,899 846,474
Provision for credit losses 8,000 16,000 32,000 12,000 19,000
- -----------------------------------------------------------------------------------------------------------------
Net interest income after provision for
credit losses 1,026,263 1,011,865 930,185 806,899 827,474
- -----------------------------------------------------------------------------------------------------------------
OTHER OPERATING INCOME (LOSS):
Trading revenue 140,095 170,675 175,806 175,846 169,315
Investment securities transactions, net (186,086) 35,117 23,247 25,663 14,971
Revenue from loans sold or held for sale 8,682 19,838 974 6,765 1,763
Commission income 95,805 87,524 71,393 56,935 57,297
Equity in earnings of affiliate 132,708 125,116 93,418 79,481 77,376
Other income 97,394 90,038 81,277 68,191 65,646
- -----------------------------------------------------------------------------------------------------------------
Total other operating income 288,598 528,308 446,115 412,881 386,368
- -----------------------------------------------------------------------------------------------------------------
OTHER OPERATING EXPENSES:
Salaries and employee benefits 520,830 475,017 420,101 381,616 381,183
Occupancy, net 74,577 71,325 72,692 57,975 55,425
Restructuring and related charges -- -- -- 120,000 17,000
Other expenses 383,158 357,501 292,961 262,074 267,868
- -----------------------------------------------------------------------------------------------------------------
Total other operating expenses 978,565 903,843 785,754 821,665 721,476
- -----------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 336,296 636,330 590,546 398,115 492,366
Income taxes 88,249 187,222 171,706 109,466 152,358
- -----------------------------------------------------------------------------------------------------------------
NET INCOME $ 248,047 $ 449,108 $ 418,840 $ 288,649 $ 340,008
=================================================================================================================
NET INCOME APPLICABLE TO COMMON STOCK -
DILUTED $ 220,248 $ 423,281 $ 386,027 $ 256,764 $ 315,853
=================================================================================================================
Net income per common share(1):
Basic $2.09 $3.99 $3.58 $2.39 $2.97
Diluted 2.07 3.94 3.54 2.32 2.85
Cash dividends declared per common share(1) 1.00 0.92 0.76 0.72 0.66
Average common shares outstanding(1):
Basic 104,328 105,625 107,481 104,641 102,001
Diluted 106,236 107,461 109,189 110,512 110,963
</TABLE>
(1) Adjusted to reflect a two-for-one common stock split distributed in June,
1998.
106
<PAGE> 109
REPUBLIC NEW YORK CORPORATION
SELECTED FINANCIAL DATA -- SUMMARY OF UNAUDITED
QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
--------------------1997--------------------
(In thousands --------------------1998--------------------
EXCEPT PER SHARE DATA) FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
- --------------------------------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $743,650 $831,128 $851,139 $808,047 $844,676 $817,831 $799,926 $747,458
Interest expense 494,442 574,709 582,785 547,765 578,336 561,081 548,706 493,903
- --------------------------------------------------------------------- --------------------------------------------
Net interest income 249,208 256,419 268,354 260,282 266,340 256,750 251,220 253,555
Provision for credit
losses -- -- 4,000 4,000 4,000 4,000 4,000 4,000
- --------------------------------------------------------------------- --------------------------------------------
Net interest income
after provision for
credit losses 249,208 256,419 264,354 256,282 262,340 252,750 247,220 249,555
Other operating income
(loss) 121,563 (99,877) 144,316 122,596 147,261 129,573 125,069 126,405
Other operating
expenses 239,291 244,146 243,386 251,742 254,268 220,893 214,495 214,187
- --------------------------------------------------------------------- --------------------------------------------
Income (loss) before
income taxes 131,480 (87,604) 165,284 127,136 155,333 161,430 157,794 161,773
Income taxes 27,085 5,055 46,447 9,662 39,262 49,142 47,289 51,529
- --------------------------------------------------------------------- --------------------------------------------
Net income (loss) $104,395 $(92,659) $118,837 $117,474 $116,071 $112,288 $110,505 $110,244
===================================================================== ============================================
Net income (loss)
applicable to common
stock -- diluted $ 97,400 $(99,424) $111,852 $110,420 $108,525 $106,414 $104,920 $103,422
===================================================================== ============================================
Net income (loss) per
common share(1):
Basic $0.93 $(0.96) $1.06 $1.05 $1.03 $1.00 $0.99 $0.97
Diluted 0.92 (0.96) 1.05 1.03 1.01 0.99 0.98 0.96
Average common shares
outstanding(1):
Basic 103,750 103,985 104,691 104,901 105,128 105,559 105,632 106,196
Diluted 105,756 103,985 106,652 106,736 107,355 107,666 106,724 108,101
===================================================================== ============================================
</TABLE>
(1) Adjusted to reflect a two-for-one common stock split distributed in June,
1998.
107
<PAGE> 110
AFFILIATE FINANCIAL STATEMENTS
SAFRA REPUBLIC HOLDINGS S.A.
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
(IN THOUSANDS OF US$ EXCEPT PER SHARE DATA) NOTES 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Cash and due from banks 84,142 73,815
Interest-bearing deposits with banks 3 7,648,609 7,476,969
Investment securities: 4
Securities available for sale (at approximate market
value) 4,948,405 5,141,629
Securities held to maturity (approximate market value of
US$ 4,729,372 in 1998 and US$ 4,370,259 in 1997) 4,659,121 4,344,008
- --------------------------------------------------------------------------------------------------
Total investment securities 9,607,526 9,485,637
- --------------------------------------------------------------------------------------------------
Trading account assets 5 187,917 248,941
Loans, net of unearned income 6 2,837,277 2,288,896
Allowance for credit losses 7 (78,781) (134,351)
Accrued interest receivable 203,279 242,310
Due from brokers 136,497 262,505
Premises and equipment 156,786 141,088
Other assets 253,515 270,490
- --------------------------------------------------------------------------------------------------
Total assets 21,036,767 20,356,300
==================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Client deposits 14,586,179 13,589,790
Bank deposits 1,861,763 1,811,275
- --------------------------------------------------------------------------------------------------
Total deposits 8 16,447,942 15,401,065
- --------------------------------------------------------------------------------------------------
Trading account liabilities 5 151,652 225,659
Accrued interest payable 161,917 176,414
Due to brokers 192,898 80,331
Other liabilities 275,507 242,627
Repurchase agreements 9 1,620,060 2,069,638
Long-term debt 10 -- 150,000
Commitments and contingent liabilities 22
Subordinated long-term debt due in 2997 11 250,000 250,000
SHAREHOLDERS' EQUITY: 13,14,16
Cumulative preferred stock, 200,000,000 shares authorised,
Series A -- US$ 2.50 par value, 1,250,000 shares issued
and outstanding (liquidation preference of
US$ 125,000,000) 3,125 --
Series B -- US$ 2.50 par value, 1,500,000 shares issued
and outstanding (liquidation preference of
DEM 150,000,000) 3,750 --
Common stock, US$ 2.50 par value, 400,000,000 shares
authorised; 71,324,048 shares issued in 1998 and in 1997;
70,602,062 shares outstanding in 1998 and 70,540,382 in
1997 178,310 89,155
Surplus 925,981 818,107
Retained earnings 989,929 834,476
Accumulated other comprehensive income (loss) (142,731) 39,996
Less: 721,986 shares held in treasury, at cost, in 1998 and
783,666 in 1997 (21,573) (21,168)
- --------------------------------------------------------------------------------------------------
Total shareholders' equity 1,936,791 1,760,566
- --------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity 21,036,767 20,356,300
==================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
108
<PAGE> 111
SAFRA REPUBLIC HOLDINGS S.A.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
(In thousands of US$ except per share data) NOTES 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME (INCLUDING FEES AND DIVIDENDS):
Loans 150,735 112,310 94,090
Deposits with banks 410,158 356,266 331,949
Investment securities 620,932 618,337 556,851
Trading account assets 2,655 2,877 142
- ------------------------------------------------------------------------------------------------------------
Total interest income 1,184,480 1,089,790 983,032
- ------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 758,158 697,155 624,450
Short-term repurchase agreements 79,298 69,689 81,980
Long-term repurchase agreements 23,955 12,469 --
Long-term debt 6,891 9,541 10,422
Subordinated long-term debt 18,413 3,711 --
- ------------------------------------------------------------------------------------------------------------
Total interest expense 886,715 792,565 716,852
- ------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 18 297,765 297,225 266,180
Provision for credit losses 7 (48,100) 16,000 12,000
- ------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 345,865 281,225 254,180
- ------------------------------------------------------------------------------------------------------------
OTHER OPERATING INCOME:
Foreign exchange and precious metals trading income 5,18 52,927 40,169 29,990
Trading account income, net 5,18 3,694 9,860 9,382
Investment securities losses, net 18 (70,387) (8,531) (1,042)
Commission income, net of expense of US$ 18,149, US$ 21,766
and US$ 9,886, respectively 18 152,334 139,462 79,765
Other income 18 10,679 7,905 1,018
- ------------------------------------------------------------------------------------------------------------
Total other operating income 149,247 188,865 119,113
- ------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Salaries 71,232 61,548 59,469
Employee benefits 16,17 36,042 40,776 30,694
Occupancy, net 23 21,550 20,893 20,683
Other expenses 68,976 70,253 56,675
- ------------------------------------------------------------------------------------------------------------
Total operating expenses 197,800 193,470 167,521
- ------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES: 18 297,312 276,620 205,772
Income taxes 12 17,105 21,565 15,942
- ------------------------------------------------------------------------------------------------------------
NET INCOME 280,207 255,055 189,830
============================================================================================================
NET INCOME APPLICABLE TO COMMON STOCK 270,466 255,055 189,830
============================================================================================================
NET INCOME PER COMMON SHARE: 15
Basic US$ 3.83 US$ 3.61 US$ 2.70
Diluted US$ 3.80 US$ 3.59 US$ 2.67
AVERAGE COMMON SHARES OUTSTANDING (IN THOUSANDS): 15
Basic 70,567 70,586 70,435
Diluted 71,117 71,103 71,003
============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
109
<PAGE> 112
SAFRA REPUBLIC HOLDINGS S.A.
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
(IN THOUSANDS OF US$) 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME 280,207 255,055 189,830
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment (19,190) (34,544) (44,787)
Net unrealised appreciation (depreciation) on securities
available for sale, arising during the year net of taxes
of US$ 2,332, US$ 6,746 and US$ (8,489), respectively (230,685) (27,448) 87,872
Reclassification adjustment for losses included in net
income, net of taxes of US$ (3,239), US$ 293 and US$ 178,
respectively 67,148 8,824 1,220
- --------------------------------------------------------------------------------------------
TOTAL OTHER COMPREHENSIVE INCOME (LOSS) (182,727) (53,168) 44,305
- --------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME 97,480 201,887 234,135
============================================================================================
</TABLE>
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
(IN THOUSANDS OF US$) 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CUMULATIVE TRANSLATION ADJUSTMENT:
Balance at beginning of year (43,694) (9,150) 35,637
Decrease during the year (19,190) (34,544) (44,787)
- --------------------------------------------------------------------------------------------
Balance at end of year (62,884) (43,694) (9,150)
============================================================================================
NET UNREALISED APPRECIATION (DEPRECIATION) ON SECURITIES
AVAILABLE FOR SALE, NET OF TAXES AND RECLASSIFICATIONS:
Balance at beginning of year 83,690 102,314 13,222
Increase (decrease) during the year (163,537) (18,624) 89,092
- --------------------------------------------------------------------------------------------
Balance at end of year (79,847) 83,690 102,314
============================================================================================
TOTAL ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (142,731) 39,996 93,164
============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
110
<PAGE> 113
SAFRA REPUBLIC HOLDINGS S.A.
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
(IN THOUSANDS OF US$) 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCK:
Balance at beginning of year -- -- --
Issuance of 1,250,000 Series A Cumulative preferred
shares of US$ 2.50 3,125 -- --
Issuance of 1,500,000 Series B Cumulative preferred
shares of US$ 2.50 3,750 -- --
- ------------------------------------------------------------------------------------------------
Balance at end of year 6,875 -- --
================================================================================================
COMMON STOCK:
Balance at beginning of year 89,155 89,155 89,155
Transfer from surplus 89,155 -- --
- ------------------------------------------------------------------------------------------------
Balance at end of year 178,310 89,155 89,155
================================================================================================
SURPLUS:
Balance at beginning of year 818,107 818,793 820,119
Issuance of preferred stock 197,405 -- --
Transfer to common stock (89,155) -- --
Reissuance of common stock under Stock Award Plan (376) (686) (1,326)
- ------------------------------------------------------------------------------------------------
Balance at end of year 925,981 818,107 818,793
================================================================================================
RETAINED EARNINGS:
Balance at beginning of year 834,476 658,855 530,655
Net income 280,207 255,055 189,830
Dividends (124,754) (79,434) (61,630)
- ------------------------------------------------------------------------------------------------
Balance at end of year 989,929 834,476 658,855
================================================================================================
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF
TAXES AND RECLASSIFICATIONS:
Balance at beginning of year 39,996 93,164 48,859
Net changes during year (182,727) (53,168) 44,305
- ------------------------------------------------------------------------------------------------
Balance at end of year (142,731) 39,996 93,164
================================================================================================
SHARES HELD IN TREASURY:
Balance at beginning of year (21,168) (16,857) (20,981)
Purchases (4,464) (7,134) (2,249)
Reissuances under restricted stock plan 4,059 2,823 6,373
- ------------------------------------------------------------------------------------------------
Balance at end of year (21,573) (21,168) (16,857)
================================================================================================
TOTAL SHAREHOLDERS' EQUITY:
Balance at beginning of year 1,760,566 1,643,110 1,467,807
Net changes during year 176,225 117,456 175,303
- ------------------------------------------------------------------------------------------------
Balance at end of year 1,936,791 1,760,566 1,643,110
================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
111
<PAGE> 114
SAFRA REPUBLIC HOLDINGS S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
(IN THOUSANDS OF US$) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 280,207 255,055 189,830
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortisation, net 24,725 23,457 20,922
Provision for credit losses (48,100) 16,000 12,000
Available for sale securities gains (39,445) (16,791) (20,376)
Available for sale securities losses 109,832 25,322 21,418
Net changes in trading account assets and liabilities 4,289 (44,497) (10,309)
Net change in accrued interest receivable 39,726 (21,761) 5,038
Net change in accrued interest payable (12,415) 20,979 61,998
Other, net 103,646 (88,827) (79,589)
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 462,465 168,937 200,932
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Interest-bearing deposits with banks 16,261 (1,662,231) (191,709)
Purchases of securities available for sale (2,968,318) (3,521,663) (2,329,695)
Proceeds from sales of securities available for sale 1,949,812 1,692,373 1,626,652
Purchases of securities held to maturity (1,478,450) (571,883) (1,920,675)
Proceeds from maturities of securities available for sale 1,141,387 1,107,214 569,440
Proceeds from maturities of securities held to maturity 1,307,792 367,325 357,067
Loans (650,487) (656,246) (259,441)
Other, net (52,241) (64,111) (37,379)
- --------------------------------------------------------------------------------------------------------
Net cash used by investing activities (734,244) (3,309,222) (2,185,740)
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Client deposits 828,203 2,312,401 1,759,823
Bank deposits (22,794) 139,878 412,485
Repurchase agreements (453,213) 538,849 (87,820)
Repayment of long-term debt (150,000) (25,000) --
Proceeds from issuance of subordinated long-term debt -- 250,000 --
Net proceeds from issuance of preferred stock 204,280 -- --
Dividends paid (122,302) (79,434) (61,630)
Purchase of treasury shares (4,464) (7,134) (2,249)
- --------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 279,710 3,129,560 2,020,609
- --------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and due from banks 2,396 3,780 (9,499)
- --------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and due from banks 10,327 (6,945) 26,302
Cash and due from banks at beginning of year 73,815 80,760 54,458
- --------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year 84,142 73,815 80,760
========================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes 10,107 10,932 7,951
Interest 896,058 790,453 665,713
Transfer to investments held to maturity from investments
available for sale -- 408,517 679,542
========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
112
<PAGE> 115
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, 1998, Republic New York Corporation ("RNYC") owned approximately
49.0% 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 Commission for the Supervision of the Financial Sector ("CSSF"), 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, 1998 prepared under both U.S. GAAP and Luxembourg generally accepted
accounting principles ("Luxembourg GAAP") is included in note 24.
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.
113
<PAGE> 116
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 accumulated
other comprehensive income (loss), 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 1998
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 included as a
separate component of accumulated other comprehensive income (loss), 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 accumulated
other comprehensive income (loss) 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. Such 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
114
<PAGE> 117
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
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 aggregate allowance for 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 aggregate allowance is made at the end of each quarterly reporting
period. The allowance is reviewed for sufficiency in relation to changes in the
size or risk characteristics of the portfolios and is increased through a
provision for credit losses or decreased as a result of charge-offs, net of
recoveries, and reported in income at each quarter-end.
The Company's aggregate allowance for 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
standbly letters of credit, guarantees and commitments which is included in
"other liabilities" and a portion available to absorb all other credit losses
resulting from the loan portfolio.
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 5 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 short-term and long-term
repurchase agreements. Interest income on the related securities is recorded as
interest income on investment securities.
F. FINANCIAL INSTRUMENTS: Off-balance sheet financial instruments include,
forwards, futures, 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 dependent on their designated purpose.
Interest rate swaps are entered into by the Company for the purpose of net
interest income maximisation. 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
115
<PAGE> 118
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 were 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 accumulated other
comprehensive income (loss). 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 is recognised currently in the income or expense caption of the related
asset or liability. Alternatively, the Company may redesignate the off-balance
sheet financial instrument and recognise currently the unrealised gain or loss
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, futures, 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.
116
<PAGE> 119
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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: Basic EPS 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".
3. INTEREST-BEARING DEPOSITS WITH BANKS
The following table provides information on the composition by ultimate risk and
maturity distribution of the Company's interest-bearing deposits with banks at
December 31:
<TABLE>
<CAPTION>
(IN THOUSANDS OF US$) 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
ULTIMATE RISK:
United States 395,577 358,902
United Kingdom and Channel Islands 524,187 1,109,018
Continental Europe 6,408,948 5,578,513
Japan 29,095 50,000
Central and South America 37 103
Canada 253,326 332,945
Southeast Asia 10,090 --
Other 27,349 47,488
- ------------------------------------------------------------------------------------
7,648,609 7,476,969
====================================================================================
MATURITY DISTRIBUTION:
Due within one month 5,044,947 5,073,393
Due after one month but within six months 2,463,448 2,261,754
Due after six months but within twelve months 132,214 141,822
Due after one year 8,000 --
- ------------------------------------------------------------------------------------
7,648,609 7,476,969
====================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
----------------------------------------------------
1998
----------------------------------------------------
GROSS UNREALIZED
AMORTISED ------------------- BOOK/
(IN THOUSANDS OF US$) COST GAINS (LOSSES) MARKET
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Banks 1,119,253 52,002 (8,827) 1,162,428
Governments and government agencies 2,879,444 37,800 (169,371) 2,747,873
Companies 1,047,749 18,025 (4,698) 1,061,076
Interest rate swaps and caps -- 4,613 (27,585) (22,972)
- ---------------------------------------------------------------------------------------------------------
5,046,446 112,440 (210,481) 4,948,405
=========================================================================================================
</TABLE>
117
<PAGE> 120
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1997
- ---------------------------------------------------------------------------------------------------------
GROSS UNREALIZED
AMORTISED ------------------- BOOK/
(IN THOUSANDS OF US$) COST GAINS (LOSSES) MARKET
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
=========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SECURITIES HELD TO MATURITY
-------------------------------------------------
1998
-------------------------------------------------
BOOK/ GROSS UNREALIZED
AMORTISED ------------------ ESTIMATED
(IN THOUSANDS OF US$) COST GAINS (LOSSES) MARKET
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Banks 554,416 12,131 (90) 566,457
Governments and government agencies 3,965,079 61,680 (3,597) 4,023,162
Companies 139,626 8,254 (12) 147,868
Interest rate swaps -- 9,163 (17,278) (8,115)
- ---------------------------------------------------------------------------------------------------------
4,659,121 91,228 (20,977) 4,729,372
=========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------------------
BOOK/ GROSS UNREALIZED
AMORTISED ------------------ ESTIMATED
(IN THOUSANDS OF US$) COST GAINS (LOSSES) MARKET
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
=========================================================================================================
</TABLE>
TOTAL SECURITIES:
The following table provides information on all investment securities at
December 31, 1998, based on scheduled maturities. Actual maturities can be
expected to differ from scheduled maturities due to prepayment and early call
privileges of the issuer.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
--------------------------- ---------------------------
BOOK/
AMORTISED BOOK/ AMORTISED ESTIMATED
(IN THOUSANDS OF US$) COST MARKET COST MARKET
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less 249,427 249,891 50,077 50,348
Due after one year but within five years 1,085,793 1,114,165 528,115 554,203
Due after five years but within ten years 1,223,549 1,175,974 388,149 396,650
Due after ten years 757,164 696,150 12,361 13,068
Mortgage-backed securities 1,561,340 1,559,182 3,680,419 3,723,218
Equity securities 169,173 176,015 -- --
Interest rate swaps and caps -- (22,972) -- (8,115)
- ---------------------------------------------------------------------------------------------------------
5,046,446 4,948,405 4,659,121 4,729,372
=========================================================================================================
</TABLE>
Mortgage-backed securities included in the tables above in available for sale
and held to maturity securities have estimated average lives based on year end
market conditions of approximately 6.79 years and 3.83 years, respectively.
118
<PAGE> 121
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the year ended December 31, 1998, the Company wrote down to fair value
Russian available for sale securities (primarily GKO's) that were considered to
be other than temporarily impaired by recording an investment securities loss of
US$ 72,400,000.
During the year ended December 31, 1997, 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. The unrealised holding gains at the dates of transfer was US$ 21.2
million. The unrealised holding gains are included as a component of accumulated
other comprehensive income (loss) and are being amortised over the life of the
securities that were transferred.
Investment securities having a book value of approximately US$ 1.6 billion at
December 31, 1998 (1997: US$ 2.1 billion) were pledged to secure short-term and
long-term repurchase agreements.
The following table provides information on the composition by ultimate risk of
the Company's total investment securities portfolio as of December 31:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
APPROXIMATE APPROXIMATE
(IN THOUSANDS OF US$) BOOK MARKET BOOK MARKET
- ---------------------------------------------------------------------- ------------------------
<S> <C> <C> <C> <C>
United States 6,233,455 6,270,900 6,683,940 6,700,940
United Kingdom and Channel Islands 327,436 338,894 307,769 313,767
Continental Europe 2,231,491 2,252,859 1,739,768 1,743,331
Central and South America 516,690 516,690 609,924 609,926
Canada 83,272 83,272 82,150 82,150
Japan 30,591 30,591 17,628 17,541
Southeast Asia 23,015 23,011 1,566 1,566
Middle East 141,382 141,382 10,125 10,125
Other 20,194 20,178 32,767 32,542
- ---------------------------------------------------------------------- ------------------------
9,607,526 9,677,777 9,485,637 9,511,888
====================================================================== ========================
</TABLE>
5. TRADING ACCOUNT ASSETS AND TRADING ACCOUNT LIABILITIES
The following table presents the composition of trading account assets and
trading account liabilities at December 31:
<TABLE>
<CAPTION>
(IN THOUSANDS OF US$) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Trading account assets:
Unrealised gains on forwards, swaps, options and futures 150,145 211,980
Mutual funds and equity securities 8,011 115
Debt securities 31,838 38,491
Allowance for trading losses (2,077) (1,645)
- --------------------------------------------------------------------------------
187,917 248,941
================================================================================
Trading account liabilities:
Unrealised losses on forwards, swaps, options and futures 151,652 225,659
================================================================================
</TABLE>
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 and futures markets and in debt securities. The
119
<PAGE> 122
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
following table presents the results of the Company's trading activities for
each of the years in the three-year period ended December 31, 1998:
<TABLE>
<CAPTION>
(IN THOUSANDS OF US$) 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign exchange and precious metals trading income 52,927 40,169 29,990
- ----------------------------------------------------------------------------------------
Trading account income (loss), net:
Mutual funds and equity securities (73) -- 903
Debt securities 4,442 10,457 8,600
Interest rate swaps, options and futures (675) (597) (121)
- ----------------------------------------------------------------------------------------
3,694 9,860 9,382
- ----------------------------------------------------------------------------------------
Total trading income 56,621 50,029 39,372
========================================================================================
</TABLE>
The following tables present information related to the fair value of swaps,
forwards, futures and options held for trading purposes:
<TABLE>
<CAPTION>
AVERAGE FAIR FAIR VALUE AT
VALUE DURING 1998 DECEMBER 31, 1998
------------------------------------------------
(IN THOUSANDS OF US$) ASSETS LIABILITIES ASSETS LIABILITIES
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate swaps and futures 1,360 527 1,248 150
- --------------------------------------------------------------------------------------------------------
Foreign exchange and precious metals:
Spot, swaps and forwards 122,812 134,219 116,742 119,629
Options written -- 72,083 -- 10,260
Options purchased 73,662 -- 10,542 --
- --------------------------------------------------------------------------------------------------------
196,474 206,302 127,284 129,889
- --------------------------------------------------------------------------------------------------------
Debt and equity securities:
Options written -- 19,128 -- 21,613
Options purchased 18,613 -- 21,613 --
- --------------------------------------------------------------------------------------------------------
18,613 19,128 21,613 21,613
- --------------------------------------------------------------------------------------------------------
216,447 225,957 150,145 151,652
========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
AVERAGE FAIR FAIR VALUE AT
VALUE DURING 1997 DECEMBER 31, 1997
------------------------------------------------
(IN THOUSANDS OF US$) ASSETS LIABILITIES ASSETS LIABILITIES
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rate swaps 177 517 260 555
- --------------------------------------------------------------------------------------------------------
Foreign exchange and precious metals:
Spot, swaps and forwards 122,481 140,736 100,074 115,486
Options written -- 77,396 -- 97,316
Options purchased 79,733 -- 100,263 --
- --------------------------------------------------------------------------------------------------------
202,214 218,132 200,337 212,802
- --------------------------------------------------------------------------------------------------------
Debt and equity securities:
Options written -- 13,868 -- 12,302
Options purchased 13,468 -- 11,383 --
- --------------------------------------------------------------------------------------------------------
13,468 13,868 11,383 12,302
- --------------------------------------------------------------------------------------------------------
215,859 232,517 211,980 225,659
========================================================================================================
</TABLE>
120
<PAGE> 123
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LOANS
The following table presents the composition of the Company's loan portfolio at
December 31:
<TABLE>
<CAPTION>
(IN THOUSANDS OF US$) 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Real estate 51,501 72,512
Commercial and other 2,658,582 2,017,732
Banks and other financial institutions 102,993 46,696
Governments and government agencies 24,313 152,128
- ------------------------------------------------------------------------------------
2,837,389 2,289,068
Less unearned income (112) (172)
- ------------------------------------------------------------------------------------
Loans, net of unearned income 2,837,277 2,288,896
====================================================================================
</TABLE>
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.
7. AGGREGATE ALLOWANCE FOR CREDIT LOSSES
Changes in the Company's aggregate allowance for credit losses applicable to the
operations for each of the years in the three-year period ended December 31,
1998 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS OF US$) 1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year 145,040 131,071 130,300
Provision (48,100) 16,000 12,000
- -------------------------------------------------------------------------------------------
96,940 147,071 142,300
- -------------------------------------------------------------------------------------------
Loans charged-off (32,676) (2,370) (5,494)
Recoveries 16,683 8,659 3,269
- -------------------------------------------------------------------------------------------
Net (charge-offs) recoveries (15,993) 6,289 (2,225)
- -------------------------------------------------------------------------------------------
Translation adjustment 6,848 (8,320) (9,004)
- -------------------------------------------------------------------------------------------
Balance at end of year 87,795 145,040 131,071
===========================================================================================
</TABLE>
At December 31, 1998, the aggregate allowance was apportioned and reported as
follows: US$ 2,077,000 applicable to trading account assets which is a reduction
of "trading account assets", US$ 6,937,000 included in "other liabilities" in
respect of off-balance sheet extensions of credit, such as standby letters of
credit, guarantees and commitments, and US$ 78,781,000 which is available to
absorb all other credit losses.
The principal balances of the Company's non-accrual loans at December 31, 1998,
1997 and 1996 were US$ 9,017,000, US$ 10,271,000 and US$ 10,777,000,
respectively, all of which were considered impaired. The Company has established
an allowance for credit losses totalling US$ 7,098,000 related to these impaired
loans (1997: US$ 3,501,000). The average amount of impaired loans, net of
charge-offs, during 1998 was US$ 8,675,000 (1997: US$ 11,795,000). At December
31, 1998 and 1997, there were US$ 2,187,000 and US$ 3,358,000, respectively, of
restructured loans considered as non-accrual.
The reduction in the provision for credit losses for the year ended December 31,
1998 of US$ 48,100,000 reflected a US$ 33,500,000 reversal of credit provisions
based on a reduction in and reassessment of the Company's exposure to credit
risk and US$ 14,600,000 of recoveries associated with foreign exchange contracts
that were charged-off and subsequently collected.
121
<PAGE> 124
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 1998, the Company charged-off US$ 32,676,000 against the allowance for
credit losses, of which US$ 31,500,000 resulted from credit exposure from
forward foreign exchange contracts used to reduce exposure to the Russian ruble.
Included in recoveries for the year ended December 31, 1998 of US$ 16,683,000
were US$ 14,600,000 from the above mentioned forward foreign exchange contracts
which were subsequently collected.
The net charge-off of credit exposure to these forward foreign exchange
contracts for the year ended December 31, 1998 was US$ 16,900,000.
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, 1998:
<TABLE>
<CAPTION>
(IN THOUSANDS OF US$) 1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross amount of interest that would have been earned at
original contract rates 434 590 753
Actual amount recorded as interest income (79) (9) (51)
- ----------------------------------------------------------------------------------
Foregone interest income 355 581 702
==================================================================================
</TABLE>
8. DEPOSITS
Included in total deposits at December 31, 1998 and 1997 were US$ 677 million
and US$ 662 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:
<TABLE>
<CAPTION>
(IN THOUSANDS OF US$) 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Due within 30 days 484,795 535,744
Due after 30 days but within 90 days 285,621 437,708
Due after 90 days but within one year 849,644 995,975
- ------------------------------------------------------------------------------------
1,620,060 1,969,427
- ------------------------------------------------------------------------------------
Due after one year -- 100,211
- ------------------------------------------------------------------------------------
1,620,060 2,069,638
====================================================================================
</TABLE>
The following table provides information on securities sold under repurchase
agreements at December 31:
<TABLE>
<CAPTION>
(IN THOUSANDS OF US$ EXCEPT FOR INTEREST RATES) 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
Book value of securities sold under repurchase agreements 1,624,311 2,076,088
Market value of securities sold under repurchase agreements 1,661,011 2,113,482
Accrued interest receivable on securities sold under
repurchase agreements 10,279 13,234
Accrued interest payable on securities sold under repurchase
agreements 27,173 23,555
Average interest rate at year end 5.55% 5.69%
Maximum amount outstanding during year 2,434,529 2,069,638
Average amount outstanding during year 1,788,668 1,475,819
- ------------------------------------------------------------------------------------
</TABLE>
The securities sold under repurchase agreements in 1998 and 1997 consisted
principally of GNMA securities and were under the control of the Company.
122
<PAGE> 125
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. LONG-TERM DEBT
The Company's long-term debt at December 31, 1997 consisted of US$ 150,000,000
Floating Rate Notes, which were repaid at par value on their maturity date of
September 30, 1998. The interest rate on the notes was 5.84% at December 31,
1997.
11. SUBORDINATED LONG-TERM DEBT DUE 2997
The Company's subordinated long-term debt at December 31, 1998 and 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 CSSF, 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, 1998 was allocated as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS OF US$) 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from operations 17,105 21,565 15,942
- ----------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss):
Net unrealised appreciation (depreciation) on securities
available for sale 907 (7,039) 8,311
- ----------------------------------------------------------------------------------------
</TABLE>
The components of the Company's consolidated income tax expense from operations
for each of the years in the three-year period ended December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS OF US$) 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense 15,926 15,711 14,959
Deferred tax expense 1,179 5,854 983
- ----------------------------------------------------------------------------------------
17,105 21,565 15,942
========================================================================================
</TABLE>
The principal sources of deferred income taxes attributable to operations in
1998, 1997 and 1996 and the effects of each on the amount of taxes were as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS OF US$) 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory provisions for credit losses 2,591 3,518 3,072
Unrealised gains (losses) on securities 55 (493) 55
Other, net (1,467) 2,829 (2,144)
- ----------------------------------------------------------------------------------------
1,179 5,854 983
========================================================================================
</TABLE>
123
<PAGE> 126
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that gave rise to a significant portion
of the deferred tax assets and deferred tax liabilities at December 31, 1998 and
1997 are presented below:
<TABLE>
<CAPTION>
(IN THOUSANDS OF US$) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses 12,206 23,916
Other 451 261
- --------------------------------------------------------------------------------
12,657 24,177
Less valuation allowance adjustment (12,206) (23,916)
- --------------------------------------------------------------------------------
451 261
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Net unrealised appreciation on securities available for
sale 7,400 6,493
Unrealised gains on securities 230 175
Statutory allowance for credit losses 14,310 11,719
Liability from purchase of Mercury Bank AG -- 2,824
Other 2,193 3,470
- --------------------------------------------------------------------------------
24,133 24,681
- --------------------------------------------------------------------------------
Net deferred tax liabilities (included in other liabilities) 23,682 24,420
================================================================================
</TABLE>
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, 1998, the Company's subsidiaries had undistributed earnings of
approximately US$ 378 million which would be subject to a withholding tax of
approximately US$ 128 million upon distribution. This withholding tax liability
has not been provided for as the Company intends indefinitely to reinvest these
earnings.
13. CUMULATIVE PREFERRED STOCK
On April 30, 1998, the Company issued, in an SEC Rule 144A offering, 1,250,000
7.20% Series A Cumulative Preferred Stock (US$ 100 stated value) and 1,500,000
6.35% Series B Cumulative Preferred Stock (DEM 100 stated value) with an
aggregate stated value of US$ 125,000,000 and DEM 150,000,000 (US$ 83,450,000)
respectively.
The shares are non-voting and the dividends are payable quarterly in arrears on
April 30, July 30, October 30 and January 30 of each year.
The Cumulative Preferred Stock are redeemable, in whole but not in part, at the
option of the Company, subject to the prior consent of the CSSF, at a
liquidation value of US$ 100 per Series A Preference Share and DEM 100 per
Series B Preference Share on any dividend payment date falling on or after April
30, 2003.
14. SHAREHOLDERS' EQUITY
On May 13, 1998, the shareholders approved an increase in the par value of
common stock from US$ 2.50 per share to US$ 5.00 per share by transfer of an
amount of US$ 89,155,060 from surplus to common stock. It was further resolved
to split the Company's common stock by an exchange of one existing common share
for two new common shares with a par value of US$ 2.50 per common share. The
split was effective May 31, 1998. Accordingly, all historic weighted average
share and per share amounts have been restated retroactively to reflect the
stock split.
At December 31, 1998 and 1997, Safra Republic had US$ 551 million and US$ 360
million, respectively, in foreign exchange contracts entered into to hedge its
investments in subsidiaries whose functional currencies were other than the U.S.
Dollar. At December 31, 1998 the gross
124
<PAGE> 127
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
unrealised gains and losses under these contracts were US$ 4,018,000 and US$
8,875,000, respectively (1997: US$ 13,298,000 and US$ nil, respectively). At
December 31, 1998 and 1997, Safra Republic's total net un-hedged equity
investment in subsidiaries denominated in European currencies was approximately
21% 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, 1998,
approximately US$ 78 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 1,876,626 shares at December 31, 1998.
15. EARNINGS PER COMMON SHARE
The following table presents the income and average outstanding share amounts
used to calculate earnings per common share in each of the last three years.
<TABLE>
<CAPTION>
(IN THOUSANDS OF US$ EXCEPT PER SHARE DATA) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EARNINGS:
Net income 280,207 255,055 189,830
Less preferred stock dividends 9,741 -- --
- ----------------------------------------------------------------------------------------------
Net income applicable to common stock 270,466 255,055 189,830
==============================================================================================
Average common shares outstanding (in thousands) 70,567 70,586 70,435
==============================================================================================
Basic earnings per common share US$ 3.83 US$ 3.61 US$ 2.70
==============================================================================================
DILUTED EARNINGS:
Net income applicable to common stock 270,466 255,055 189,830
- ----------------------------------------------------------------------------------------------
Shares in thousands:
Average common shares outstanding-basic 70,567 70,586 70,435
Net shares assumed issued under restricted stock plan 550 517 568
- ----------------------------------------------------------------------------------------------
Average common shares outstanding-diluted 71,117 71,103 71,003
==============================================================================================
Diluted earnings per common share US$ 3.80 US$ 3.59 US$ 2.67
==============================================================================================
</TABLE>
16. 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
125
<PAGE> 128
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
amount of time of continued employment. The following shares have been granted
under the 1989 Stock Award Plan:
<TABLE>
<CAPTION>
NUMBER AGGREGATE
(IN THOUSANDS OF US$ EXCEPT PER SHARE DATA) OF SHARES COST
- ------------------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1995 633,020 11,979
Granted 162,960 3,490
Issued (286,000) (4,867)
Cancelled (6,400) (11)
- ------------------------------------------------------------------------------------
Balance at December 31, 1996 503,580 10,591
Granted 143,920 4,740
Issued (117,720) (2,087)
- ------------------------------------------------------------------------------------
Balance at December 31, 1997 529,780 13,244
Granted 121,450 7,630
Issued (141,170) (3,622)
Cancelled (36,300) (303)
- ------------------------------------------------------------------------------------
Balance at December 31, 1998 473,760 16,949
====================================================================================
</TABLE>
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 1998 is US$ 5,128,000 (1997: US$ 3,946,000; 1996: US$
3,571,000) related to this plan.
17. 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.
The following tables provide a reconciliation of the beginning and ending
balances of the benefit obligation and the fair value of the plan assets for the
years ended December 31, 1998 and 1997 and set forth the plans' funded status
and amounts recognised in the Company's consolidated statements of condition at
respective year ends.
<TABLE>
<CAPTION>
(IN THOUSANDS OF US$) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Projected benefit obligation at beginning of year 71,549 60,412
Service cost 5,783 4,361
Interest cost 3,090 2,241
Plan participants' contributions 7,472 5,737
Actuarial (gain) loss (461) 1,141
Benefits paid (4,443) (2,661)
Foreign currency exchange rate changes 4,581 (4,368)
Acquisition -- 4,686
- --------------------------------------------------------------------------------
Projected benefit obligation at end of year 87,571 71,549
- --------------------------------------------------------------------------------
Fair value of plan assets at beginning of year 74,097 59,397
Actual return on plan assets 1,484 9,711
Employer contributions 3,458 2,449
Plan participants' contributions 7,472 5,737
Benefits paid (4,443) (2,661)
Foreign currency exchange rate changes 4,732 (4,295)
Acquisition -- 3,759
- --------------------------------------------------------------------------------
Fair value of plan assets at end of year 86,800 74,097
- --------------------------------------------------------------------------------
</TABLE>
126
<PAGE> 129
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
(IN THOUSANDS OF US$) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Excess (deficiency) of plan assets over projected benefit
obligation (771) 2,548
Unrecognised net gain from past experience different from
that assumed and effects of changes in assumptions (2,239) (4,503)
Prior service cost not yet amortised in net periodic pension
cost 973 936
- ------------------------------------------------------------------------------
Accrued pension expense included in other liabilities (2,037) (1,019)
- ------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligations, fully vested 59,074 47,130
- ------------------------------------------------------------------------------
</TABLE>
Net pension expense in each of the last three years consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS OF US$) 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the period 5,783 4,361 4,093
Interest cost on projected benefit obligation 3,090 2,241 2,416
Expected return on plan assets (4,183) (3,128) (3,267)
Amortisation of prior service cost 37 -- --
- ----------------------------------------------------------------------------------------
Net periodic pension expense 4,727 3,474 3,242
========================================================================================
</TABLE>
The following table presents the economic assumptions used to calculate the
projected benefit obligation and pension expense in each of the last three
years:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 4.0% 4.0% 4.0%
Rate of compensation increase 2.5% 2.5% 2.5%
Expected long-term rate of return on plan assets 5.5% 5.5% 5.5%
- ----------------------------------------------------------------------------------
</TABLE>
The amount of net pension expense related to other subsidiaries' local plans
amounted to US$ 3,300,000, US$ 2,579,000 and US$ 2,576,000 in 1998, 1997 and
1996, respectively.
18. SEGMENT INFORMATION
The Company conducts its primary business activities through banking
subsidiaries located in Switzerland, Luxembourg, France, Monaco, Guernsey, and
Gibraltar (the "banking subsidiaries"). The banking subsidiaries are managed
separately because they operate in different economic and regulatory
environments and constitute reportable segments under Statement of Financial
Accounting Standard No. 131 Segments of Enterprises and Related Informations
("SFAS 131").
Safra Republic and its other non-banking subsidiaries also constitute a
reportable segment under SFAS 131. The Company's principal activity is the
ownership and management of an internationally diversified portfolio of
long-term investments in the banking and finance industries which generate
dividend and interest income.
The banking subsidiaries offer a broad range of private banking services
tailored to meet the needs of their private banking clients, conduct trading
activities principally with their clients and engage in treasury activities
pursuant to which they invest in a variety of temporary and long-term
investments including interbank deposits and investment securities.
The banking subsidiaries derive net interest income principally from investing
the deposits gathered from clients in interest bearing deposits with banks,
investment securities and loans transacted mainly with existing clients.
The banking subsidiaries derive commission and fee income mainly from fiduciary
and time deposits, securities transactions, custody and trust fees, service
charges, client portfolio management and advisory services and on providing
guarantees and letters of credit to clients.
127
<PAGE> 130
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Trading account income (loss) originates from foreign exchange and precious
metals transactions entered into between the banking subsidiaries and their
clients and from proprietary activities in the spot, futures and forward
markets, as well as through OTC transactions such as swaps and options. Such
income (loss) also results from trading in the futures and equity markets and in
debt and equity securities.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies.
Intersegment transactions occur in the normal course of business and are
accounted for based on stated accounting policies.
Geographic information is based on the country of domicile of the banking
subsidiaries, except for the Monaco subsidiary which is included in France. The
segment comprised of Safra Republic and other subsidiaries operate in the Grand
Duchy of Luxembourg.
Interest revenue has been presented net of interest expense.
The following tables present information on the reported segment profits and
assets for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------------------------------
SAFRA
REPUBLIC
&
(IN THOUSANDS OF US$) SWITZERLAND LUXEMBOURG FRANCE GUERNSEY GIBRALTAR OTHER SUBS TOTAL
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES FROM EXTERNAL
CUSTOMERS AND
COUNTERPARTIES:
Foreign exchange and
precious metals trading
income (loss) 38,838 4,853 8,267 512 (4,977) 5,434 52,927
Trading account income
(loss) 3,736 179 (17) (381) 1,396 98 5,011
Total fees and commissions 129,168 9,392 13,656 9,485 331 8,451 170,483
Investment securities
gains (losses) 15,936 -- 739 (1,516) (42,201) (37,690) (64,732)
Other income (loss) (399) 264 689 -- 211 601 1,366
- ------------------------------------------------------------------------------------------------------------------
Total revenues from
external customers 187,279 14,688 23,334 8,100 (45,240) (23,106) 165,055
- ------------------------------------------------------------------------------------------------------------------
INTERSEGMENT REVENUES:
Dividends -- -- -- -- -- 89,400 89,400
Other 2,094 (14,112) 1,439 (417) 1,485 7,056 (2,455)
- ------------------------------------------------------------------------------------------------------------------
Total intersegment
revenues 2,094 (14,112) 1,439 (417) 1,485 96,456 86,945
- ------------------------------------------------------------------------------------------------------------------
Total segment revenues 189,373 576 24,773 7,683 (43,755) 73,350 252,000
==================================================================================================================
Net interest income 83,200 17,746 28,897 40,209 65,501 62,405 297,958
- ------------------------------------------------------------------------------------------------------------------
Segment profit before tax 130,660 9,457 34,094 56,886 19,786 133,064 383,947
- ------------------------------------------------------------------------------------------------------------------
Long-lived assets 207,760 1,023 12,404 5,103 625 27,333 254,248
- ------------------------------------------------------------------------------------------------------------------
Total segment assets 13,096,937 1,588,854 3,710,314 7,392,571 2,850,487 1,900,811 30,539,974
==================================================================================================================
</TABLE>
128
<PAGE> 131
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1997
----------------------------------------------------------------------------------------
SAFRA
REPUBLIC
&
OTHER
(IN THOUSANDS OF US$) SWITZERLAND LUXEMBOURG FRANCE GUERNSEY GIBRALTAR SUBS TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES FROM EXTERNAL CUSTOMERS
AND COUNTERPARTIES:
Foreign exchange and precious
metals trading income (loss) 30,723 5,681 4,452 168 (88) (767) 40,169
Trading account income 3,094 452 22 162 8,014 250 11,994
Total fees and commissions 108,238 8,776 9,679 23,328 697 10,510 161,228
Investment securities gains
(losses) 1,011 1,487 (1,310) 1,142 (9,978) (1,292) (8,940)
Other income 252 7 500 -- -- -- 759
- ----------------------------------------------------------------------------------------------------------------------------
Total revenues from external
customers 143,318 16,403 13,343 24,800 (1,355) 8,701 205,210
- ----------------------------------------------------------------------------------------------------------------------------
INTERSEGMENT REVENUES:
Dividends -- -- -- -- -- 142,750 142,750
Other 3,165 (57) 698 873 4,470 7,033 16,182
- ----------------------------------------------------------------------------------------------------------------------------
Total intersegment revenues 3,165 (57) 698 873 4,470 149,783 158,932
- ----------------------------------------------------------------------------------------------------------------------------
Total segment revenues 146,483 16,346 14,041 25,673 3,115 158,484 364,142
============================================================================================================================
Net interest income 75,837 16,994 23,771 53,864 69,004 55,319 294,789
- ----------------------------------------------------------------------------------------------------------------------------
Segment profit before tax 70,671 11,266 10,832 59,431 68,533 197,635 418,368
- ----------------------------------------------------------------------------------------------------------------------------
Long-lived assets 200,604 866 12,425 5,014 627 26,575 246,111
- ----------------------------------------------------------------------------------------------------------------------------
Total segment assets 11,436,113 1,368,047 3,513,141 8,037,423 3,079,163 1,954,251 29,388,138
============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------------------------------------------------------------------
SAFRA
REPUBLIC
&
OTHER
(IN THOUSANDS OF US$) SWITZERLAND LUXEMBOURG FRANCE GUERNSEY GIBRALTAR SUBS TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES FROM EXTERNAL CUSTOMERS
AND COUNTERPARTIES:
Foreign exchange and precious
metals trading income (loss) 24,707 3,274 3,085 83 311 (1,470) 29,990
Trading account income (loss) 1,820 370 11 (853) (2,480) -- (1,132)
Total fees and commissions 68,086 7,190 7,485 6,565 325 -- 89,651
Investment securities gains
(losses) 829 -- -- 1,994 (1,075) 340 2,088
Other income 79 98 527 36 50 41 831
- ----------------------------------------------------------------------------------------------------------------------------
Total revenues from external
customers 95,521 10,932 11,108 7,825 (2,869) (1,089) 121,428
- ----------------------------------------------------------------------------------------------------------------------------
INTERSEGMENT REVENUES:
Dividends -- -- -- -- -- 95,904 95,904
Other 1,940 27 50 1,149 3,305 51 6,522
- ----------------------------------------------------------------------------------------------------------------------------
Total intersegment revenues 1,940 27 50 1,149 3,305 95,955 102,426
- ----------------------------------------------------------------------------------------------------------------------------
Total segment revenues 97,461 10,959 11,158 8,974 436 94,866 223,854
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income 69,446 19,651 17,931 56,891 47,661 54,277 265,857
- ----------------------------------------------------------------------------------------------------------------------------
Segment profit before tax 45,631 9,835 2,224 57,479 41,603 126,281 283,053
- ----------------------------------------------------------------------------------------------------------------------------
Long-lived assets 124,023 787 15,141 4,927 641 31,704 177,223
- ----------------------------------------------------------------------------------------------------------------------------
Total segment assets 9,225,313 1,428,193 1,660,569 6,279,425 3,234,219 1,544,896 23,372,615
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
129
<PAGE> 132
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table provides a reconciliation of reportable segment revenues,
net interest income, profit before tax and total assets to the Company's
consolidated totals.
<TABLE>
<CAPTION>
SEGMENT
TOTAL NET PROFIT
SEGMENT INTEREST BEFORE TOTAL
(IN THOUSANDS OF US$) REVENUES INCOME TAX ASSETS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TOTAL REPORTED BY SEGMENTS 1998 252,000 297,958 383,947 30,539,974
1997 364,142 294,789 418,368 29,388,138
1996 223,854 265,857 283,053 23,372,615
- --------------------------------------------------------------------------------------------------------
Intersegment revenues 1998 2,455 -- -- --
1997 (16,182) -- -- --
1996 (6,522) -- -- --
- --------------------------------------------------------------------------------------------------------
Commission expense 1998 (18,149) -- -- --
1997 (21,766) -- -- --
1996 (9,886) -- -- --
- --------------------------------------------------------------------------------------------------------
Dividends received from segments 1998 (89,400) -- (89,400) --
1997 (142,750) -- (142,750) --
1996 (95,904) -- (95,904) --
- --------------------------------------------------------------------------------------------------------
Equity in net income of investees accounted
for by the equity method 1998 9,313 -- -- --
1997 7,146 -- -- --
1996 841 -- -- --
- --------------------------------------------------------------------------------------------------------
Consolidating adjusting entries 1998 (6,972) (193) 2,765 (797,193)
1997 (1,725) 2,436 1,002 (793,507)
1996 6,730 323 18,623 (747,727)
- --------------------------------------------------------------------------------------------------------
Elimination of intercompany receivables 1998 -- -- -- (8,706,014)
1997 -- -- -- (8,238,331)
1996 -- -- -- (5,401,479)
- --------------------------------------------------------------------------------------------------------
TOTAL AS PER CONSOLIDATED STATEMENTS 1998 149,247 297,765 297,312 21,036,767
1997 188,865 297,225 276,620 20,356,300
1996 119,113 266,180 205,772 17,223,409
- --------------------------------------------------------------------------------------------------------
</TABLE>
Interest income on investment securities issued by the U.S. Government and its
agencies for the year ended December 31, 1998, 1997 and 1996, was US$
363,597,000, US$ 407,328,000 and US$ 338,508,000 respectively, which represented
31%, 37% and 34% of gross interest income, respectively. This source of income
was reported in all the segments.
19. 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 and futures 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
130
<PAGE> 133
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
contracts are customised transactions that require no cash settlement until the
end of the contract. When traded on an organized exchange, futures contracts
require daily settlement with the exchange acting as the counterparty to each
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 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, limiting
individual positions to counterparties whose credit standing is satisfactory and
by 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, futures, swap
and option instruments used in trading and risk management activities and credit
exposure on instruments used in risk management activities at December 31, 1998
and 1997. 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.
131
<PAGE> 134
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1998
--------------------------------------
ASSET/LIABILITY
TRADING MANAGEMENT
--------------------------------------
CONTRACTUAL CONTRACTUAL
NOTIONAL NOTIONAL CREDIT
(IN THOUSANDS OF US$) AMOUNTS AMOUNTS EXPOSURE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST RATE:
Futures 230,460 -- --
Swaps 60,000 2,012,459 13,776
Caps purchased -- 2,355,001 13,847
- -----------------------------------------------------------------------------------------------
FOREIGN EXCHANGE AND PRECIOUS METALS:
Spot, forwards and swaps 8,045,815 564,158 4,018
Options written 1,205,747 -- --
Options purchased 1,415,747 -- --
- -----------------------------------------------------------------------------------------------
DEBT AND EQUITY SECURITIES:
Options written 209,507 -- --
Options purchased 209,507 -- --
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997
--------------------------------------
ASSET/LIABILITY
TRADING MANAGEMENT
--------------------------------------
CONTRACTUAL CONTRACTUAL
NOTIONAL NOTIONAL CREDIT
(IN THOUSANDS OF US$) AMOUNTS AMOUNTS EXPOSURE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 -- --
- -----------------------------------------------------------------------------------------------
</TABLE>
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
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.
132
<PAGE> 135
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the contractual amount of credit related instruments at December
31, 1998 and 1997 is presented in the following table:
<TABLE>
<CAPTION>
(IN THOUSANDS OF US$) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit 260,597 189,107
Standby letters of credit and financial guarantees 856,470 701,595
Commercial and other letters of credit 67,912 69,156
Commitments to purchase securities 16,493 8,444
- --------------------------------------------------------------------------------
</TABLE>
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarises the carrying values and estimated fair values of
the Company's financial instruments as of December 31, 1998 and 1997. The
estimated fair value of off-balance sheet financial instruments used as hedges
are reported in the related balance sheet asset or liability.
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------------
ESTIMATED ESTIMATED
(IN THOUSANDS OF US$) BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NON-TRADING ACTIVITIES:
FINANCIAL ASSETS, INCLUDING HEDGES:
Interest-bearing deposits with banks 7,648,609 7,649,833 7,476,969 7,477,510
Investment securities 9,607,526 9,677,777 9,485,637 9,511,888
Loans (net) 2,758,496 2,833,345 2,154,545 2,286,695
Other financial assets 484,514 484,514 658,921 658,921
- ---------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES, INCLUDING HEDGES:
Deposits 16,447,942 16,447,870 15,401,065 15,292,040
Repurchase agreements 1,620,060 1,622,751 2,069,638 2,069,544
Long-term debt and subordinated long-term
debt 250,000 257,500 400,000 394,778
Other financial liabilities 605,021 598,084 477,097 468,053
- ---------------------------------------------------------------------------------------------------
TRADING ACTIVITIES:
Assets 187,917 189,994 248,941 250,586
Liabilities (151,652) (151,652) (225,659) (225,659)
- ---------------------------------------------------------------------------------------------------
Net 36,265 38,342 23,282 24,927
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
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.
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------------
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
POSITIVE NEGATIVE POSITIVE NEGATIVE
(IN THOUSANDS OF US$) FAIR VALUE FAIR VALUE FAIR VALUE FAIR VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Trading (see note 5): 150,145 151,652 211,980 225,659
- -------------------------------------------------------------------------------------------------------
Asset/liability management:
Interest rate contracts 27,623 48,159 25,349 50,787
Foreign exchange contracts 4,018 9,948 21,863 --
- -------------------------------------------------------------------------------------------------------
31,641 58,107 47,212 50,787
- -------------------------------------------------------------------------------------------------------
181,786 209,759 259,192 276,446
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
133
<PAGE> 136
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 AND REPURCHASE AGREEMENTS: Long-term debt, subordinated long-term
debt and repurchase agreements 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$ 1.2 billion and US$ 1.0 billion at year end 1998 and
1997, respectively, which approximate estimated market if ultimately funded.
21. 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 46% and 45% of the Company's balance
sheet financial instruments at December 31, 1998 and 1997, respectively. This
exposure included approximately 80% and 83% 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 25% and 29% of respective year-end balance sheet
financial instruments.
134
<PAGE> 137
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. 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, 1998 were US$ 17,580,000 in 1999, US$
11,440,000 in 2000, US$ 10,891,000 in 2001, US$ 7,513,000 in 2002, US$ 6,196,000
in 2003 and US$ 19,118,000 thereafter in the aggregate. Actual net rental
expense for premises in 1998, 1997 and 1996 was US$ 11,311,000, US$ 10,921,000
and US$ 10,905,000, respectively.
23. 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:
<TABLE>
<CAPTION>
(IN THOUSANDS OF US$) 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Cash and due from banks 25,544 23,157 20,132
Interest-bearing deposits with banks 296,303 284,315 253,422
Investment securities 12,406 22,940 8,989
Trading account assets 8,440 8,627 --
Accrued interest receivable 8,753 30,692 19,072
- -------------------------------------------------------------------------------------------------
LIABILITIES:
Bank deposits 236,006 157,765 271,257
Accrued interest payable 23,992 25,096 16,733
- -------------------------------------------------------------------------------------------------
INTEREST INCOME:
Deposits with banks and investment securities 27,294 29,751 28,092
- -------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
DEPOSITS 14,589 29,588 12,510
- -------------------------------------------------------------------------------------------------
OTHER OPERATING ITEMS:
Commission income net 7,264 7,382 2,753
Occupancy, net (primarily leased office space) (9,076) (9,045) (7,810)
- -------------------------------------------------------------------------------------------------
OFF-BALANCE SHEET:
Trading and risk management financial instruments 3,345,100 6,042,592 2,257,408
Credit related instruments 124,720 125,410 199,728
Lease commitments 44,977 47,781 62,002
- -------------------------------------------------------------------------------------------------
</TABLE>
24. 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.
135
<PAGE> 138
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<CAPTION>
1998
---------------------------------------
TOTAL SHAREHOLDERS' NET
(IN THOUSANDS OF US$) ASSETS EQUITY INCOME
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GAAP 21,036,767 1,936,791 280,207
Differences of accounting recognition for unrealised basis
difference on investment securities available for sale,
net of taxes (103,939) (103,939) (116,730)
Difference in basis in trading account assets, net of taxes (50) (50) 527
Difference in amortisation of goodwill (24,197) (24,197) (12,640)
Differences of accounting for treasury share transactions 21,573 21,573 (376)
- -----------------------------------------------------------------------------------------------------
Luxembourg GAAP 20,930,154 1,830,178 150,988
=====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1997
--------------------------------------
TOTAL SHAREHOLDERS' NET
(IN THOUSANDS OF US$) ASSETS EQUITY INCOME
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GAAP 20,356,300 1,760,566 255,055
Differences of accounting recognition for unrealised basis
difference on investment securities available for sale,
net of taxes (147,557) (147,557) (857)
Difference in basis in trading account assets, net of taxes (577) (577) (198)
Difference in amortisation of goodwill (11,557) (11,557) (11,557)
Differences of accounting for treasury share transactions 21,168 21,168 (686)
- ----------------------------------------------------------------------------------------------------
Luxembourg GAAP 20,217,777 1,622,043 241,757
====================================================================================================
</TABLE>
25. REGULATORY MATTERS
The Company's risk-based capital is included in the consolidated risk-based
capital ratio of RNYC in accordance with the requirements of the Federal Reserve
Board specifically applied to RNYC. The Company's risk based capital ratio at
December 31, 1998 calculated in accordance with the CSSF regulations was
332.31%.
136
<PAGE> 139
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
26. SAFRA REPUBLIC HOLDINGS S.A. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
(IN THOUSANDS OF US$) 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks 714 317
Deposits with subsidiaries 153,305 110,971
Trading account assets 16,828 --
Investment securities:
Available for sale 411,182 418,120
Held to maturity 107,556 161,813
- ------------------------------------------------------------------------------------
Total investment securities 518,738 579,933
- ------------------------------------------------------------------------------------
Investments in subsidiaries 1,202,546 1,109,514
Loans to subsidiaries 273,700 260,305
Other assets 75,703 140,685
- ------------------------------------------------------------------------------------
Total assets 2,241,534 2,201,725
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Other liabilities 54,743 41,159
Long-term debt -- 150,000
Subordinated long-term debt due 2997 250,000 250,000
SHAREHOLDERS' EQUITY:
Cumulative preferred stock, US$ 2.50 par value 6,875 --
Common stock, US$ 2.50 par value 178,310 89,155
Surplus 925,981 818,107
Retained earnings 989,929 834,476
Accumulated other comprehensive income (loss) (142,731) 39,996
Less: shares held in treasury, at cost (21,573) (21,168)
- ------------------------------------------------------------------------------------
Total shareholders' equity 1,936,791 1,760,566
- ------------------------------------------------------------------------------------
Total liabilities and shareholders' equity 2,241,534 2,201,725
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
</TABLE>
Included in accumulated other comprehensive income (loss) at December 31, 1998
were net unrealised depreciation on investment securities available for sale of
US$ 49,060,000 (1997: US$ 80,435,000 unrealised appreciation) and US$ 30,787,000
(1997: US$ 3,255,000 unrealised appreciation), attributable to the banking
subsidiaries and parent company only, respectively.
137
<PAGE> 140
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
(IN THOUSANDS OF US$) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
INCOME:
Dividends from subsidiaries 89,400 142,750
Interest from subsidiaries 45,737 40,943
Other interest 48,404 28,004
Other (2,099) (458)
- --------------------------------------------------------------------------------
Total income 181,442 211,239
- --------------------------------------------------------------------------------
EXPENSES:
Salaries and other employee benefits 7,400 13,364
Restricted stock expense 5,128 3,946
Interest expense 25,304 13,014
Other expenses and provisions 5,807 8,130
- --------------------------------------------------------------------------------
Total expenses 43,639 38,454
- --------------------------------------------------------------------------------
Income before equity in undistributed net income of
subsidiaries 137,803 172,785
Equity in undistributed net income of subsidiaries 142,404 82,270
- --------------------------------------------------------------------------------
NET INCOME 280,207 255,055
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
138
<PAGE> 141
SAFRA REPUBLIC HOLDINGS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
(IN THOUSANDS OF US$) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income 280,207 255,055 189,830
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed net income of subsidiaries (142,404) (82,270) (46,044)
Net change in trading account securities (5,226) -- --
Other, net 55,707 (25,766) (11,994)
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 188,284 147,019 131,792
- ----------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Deposits with subsidiaries (42,334) 28,137 (86,228)
Deposits with banks -- 19,690 (5,128)
Purchases of securities available for sale (274,746) (353,188) (35,035)
Purchases of securities held to maturity -- (103,680) (77,424)
Proceeds from sales of securities available for sale 149,134 78,504 136,730
Proceeds from maturities of securities available for sale 69,860 7,282 --
Proceeds from maturities of securities held to maturity 54,257 11,611 7,680
Cash contributions to subsidiaries (18,527) (69,433) (20,380)
Loans to subsidiaries (9,673) 49,551 (826)
Other, net (43,372) 21,082 12,608
- ----------------------------------------------------------------------------------------------
Net cash used by investing activities (115,401) (310,444) (68,003)
- ----------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Repayment of long-term debt (150,000) -- --
Net proceeds from issuance of preferred stock 204,280 -- --
Issuance of subordinated long-term debt -- 250,000 --
Cash dividends paid (122,302) (79,434) (61,630)
Purchase of treasury shares (4,464) (7,134) (2,249)
- ----------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (72,486) 163,432 (63,879)
- ----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and due from banks 397 7 (90)
Cash and due from banks at beginning of year 317 310 400
- ----------------------------------------------------------------------------------------------
Cash and due from banks at end of year 714 317 310
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Transfer (to) from trading account to (from) investments
available for sale (11,602) -- 23,374
- ----------------------------------------------------------------------------------------------
</TABLE>
During 1998 and 1997, the Company increased its capital investment in its
banking subsidiaries by US$ 29,615,000 and US$ 65,955,000, respectively. During
1998, the Company received cash refunds of US$ 1,959,000 of previously forgiven
subordinated loans from one of its banking subsidiaries.
139
<PAGE> 142
INDEPENDENT AUDITOR'S 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, 1998 and 1997, and
the related consolidated statements of income, comprehensive income, changes in
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, 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, 1998 and 1997 and shareholders' equity and total assets as of
December 31, 1998 and 1997, to the extent summarised in note 24 to the
consolidated financial statements.
Luxembourg, January 15, 1999 KPMG AUDIT
Reviseurs d'entreprises
D. G. Robertson
140
<PAGE> 143
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 1999 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, 1999.
The names, ages and positions of the executive officers of the Corporation are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE CORPORATION POSITION WITH THE BANK
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Walter H. Weiner 68 Chairman of the Board and Chairman of the Board and
Chief Executive Officer Chief Executive Officer
Dov C. Schlein 51 Vice Chairman President
Elias Saal 46 Vice Chairman and Chairman of Vice Chairman of the Board
the Executive Committee and Chairman of the
Executive Committee
Stephen J. Saali 34 President Vice Chairman of the Board
Cyril S. Dwek 62 Vice Chairman Vice Chairman of the Board
Ernest Ginsberg 68 Vice Chairman Vice Chairman of the Board
Nathan Hasson 53 Vice Chairman Vice Chairman of the Board
and Treasurer
Vito S. Portera 56 Vice Chairman Vice Chairman of the Board
Rodney G. Ward 54 -- Vice Chairman of the Board
George T. Wendler 54 Vice Chairman and Chairman of Vice Chairman of the Board
the Credit Committee
John Tamberlane 57 -- President of the Consumer
Financial Services Division
Paul L. Lee 52 Executive Vice President and Executive Vice President
General Counsel
Stan Martin 51 Executive Vice President and Executive Vice President and
Chief Financial Officer Chief Financial Officer
Richard C. Spikerman 58 International Credit Officer Executive Vice President
- -----------------------------------------------------------------------------------------------
</TABLE>
Each of the above-named officers is a director of both the Corporation and the
Bank, except for Messrs. Lee, Spikerman and Tamberlane, who are not directors of
the Corporation, and Mr. Martin who is not a director of the Corporation or the
Bank.
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.
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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 both the Board of the
Corporation and the Bank for more than five years.
Dov C. Schlein has been a director and a Vice Chairman of the Corporation and a
director and President of the Bank for more than five years. Mr. Schlein has
been designated to succeed Walter H. Weiner as Chairman of the Board and Chief
Executive Officer of both the Corporation and the Bank at the Annual Meeting of
stockholders on April 21, 1999.
Elias Saal was elected Chairman of the Executive Committees of the Corporation
and the Bank in December 1998. Mr. 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 more than one year prior to 1995. Mr.
Saal has been designated to succeed Dov C. Schlein as President of the Bank on
April 21, 1999.
Stephen J. Saali was elected President of the Corporation, Vice Chairman of the
Board of the Bank and a director of both the Corporation and the Bank in
December 1998. For more than five years prior thereto, Mr. Saali was an officer
of the Corporation and served most recently as Managing Director.
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 more than 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 more than five years.
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 more
than 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 more than 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
more than five years.
Rodney G. Ward joined the Bank in September 1998 as a Vice Chairman of the Board
and was elected a director in March 1999. He was elected a director of the
Corporation in October 1998. For more than five years prior to joining the
Corporation, Mr. Ward was employed by SBC Warburg and its predecessor, most
recently as Regional Chairman -- Emerging Europe, Africa and the Middle East.
George T. Wendler has been a director and Vice Chairman of the Corporation since
May 1997, having been an Executive Vice President for more than 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 more than one year.
John Tamberlane has been a director of the Bank since December 1995 and the
President of the Consumer Financial Services Division of the Bank since January
1996. For more than two 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.
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<PAGE> 145
Stan Martin joined the Corporation and the Bank in April 1998 and is Executive
Vice President and Chief Financial Officer of the Corporation and the Bank. For
more than five years prior to joining the Corporation, Mr. Martin was a partner
of KPMG LLP.
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 more than five 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 1999 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, 1999.
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 1999 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, 1999.
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 1999 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, 1999.
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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.
<TABLE>
<CAPTION>
EXHIBITS
- -----------------------------------------------------------------------
<S> <C>
3a Articles of Incorporation as amended through April 21, 1993
and as supplemented January 21, 1998 by Articles
Supplementary. (Incorporated herein by reference to such
exhibits filed with the Corporation's Annual Reports on Form
10-K for the years ended December 31, 1993 and 1998 and
Current Reports on Form 8-K dated May 23, 1994, June 26,
1995 and September 24, 1997).
3b By-Laws of the Corporation as amended through December 16,
1998.
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.
10d Employment Agreements** (Incorporated herein by reference to
such exhibits filed with the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1997).
10e Consulting Agreements** (Incorporated herein by reference to
such exhibits filed with the Corporation's Annual Report on
Form 10-K for the year ended December 31, 1997).
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.
- -----------------------------------------------------------------------
</TABLE>
* 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
A report on Form 8-K was filed on December 17, 1998 to report the announcement
of management successions at the Corporation and the Bank.
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<PAGE> 147
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.
REPUBLIC NEW YORK CORPORATION
Dated: March 5, 1999
<TABLE>
<S> <C>
By: WALTER H. WEINER
------------------------------------------
WALTER H. WEINER
(CHAIRMAN OF THE BOARD)
</TABLE>
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
WALTER H. WEINER Director and Chairman of the Board March 5, 1999
- ------------------------------------------------ (Principal Executive Officer)
(WALTER H. WEINER)
STAN MARTIN Executive Vice President and March 5, 1999
- ------------------------------------------------ Chief Financial Officer
(STAN MARTIN) (Principal Financial and Accounting
Officer)
Director March , 1999
- ------------------------------------------------
(KURT ANDERSEN)
Director March , 1999
- ------------------------------------------------
(CYRIL S. DWEK)
ERNEST GINSBERG Director March 5, 1999
- ------------------------------------------------
(ERNEST GINSBERG)
NATHAN HASSON Director March 5, 1999
- ------------------------------------------------
(NATHAN HASSON)
PETER KIMMELMAN Director March 5, 1999
- ------------------------------------------------
(PETER KIMMELMAN)
LEONARD LIEBERMAN Director March 5, 1999
- ------------------------------------------------
(LEONARD LIEBERMAN)
WILLIAM C. MACMILLEN, JR. Director March 5, 1999
- ------------------------------------------------
(WILLIAM C. MACMILLEN, JR.)
PETER J. MANSBACH Director March 5, 1999
- ------------------------------------------------
(PETER J. MANSBACH)
MARTIN F. MERTZ Director March 5, 1999
- ------------------------------------------------
(MARTIN F. MERTZ)
JAMES L. MORICE Director March 5, 1999
- ------------------------------------------------
(JAMES L. MORICE)
</TABLE>
145
<PAGE> 148
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
Director March , 1999
- ------------------------------------------------
(E. DANIEL MORRIS)
JANET L. NORWOOD Director March 5, 1999
- ------------------------------------------------
(JANET L. NORWOOD)
JOHN A. PANCETTI Director March 5, 1999
- ------------------------------------------------
(JOHN A. PANCETTI)
VITO S. PORTERA Director March 5, 1999
- ------------------------------------------------
(VITO S. PORTERA)
Director March , 1999
- ------------------------------------------------
(THOMAS F. ROBARDS)
Director March , 1999
- ------------------------------------------------
(WILLIAM P. ROGERS)
ELIAS SAAL Director March 5, 1999
- ------------------------------------------------
(ELIAS SAAL)
STEPHEN J. SAALI Director March 5, 1999
- ------------------------------------------------
(STEPHEN J. SAALI)
DOV C. SCHLEIN Director March 5, 1999
- ------------------------------------------------
(DOV C. SCHLEIN)
RODNEY G. WARD Director March 5, 1999
- ------------------------------------------------
(RODNEY G. WARD)
GEORGE T. WENDLER Director March 5, 1999
- ------------------------------------------------
(GEORGE T. WENDLER)
</TABLE>
146
<PAGE> 149
Exhibit Index
Exhibit No. Description
- ----------- -----------
3b By-laws of the Corporation as amended through December 16, 1998.
10c Amended 1994 Performance Based Incentive Compensation Plan.
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 LLP.
23a Consent of KPMG Audit, Reviseurs d'enterprises.
24 Form of Power of Attorney.
27 Financial Data Schedule.
<PAGE> 1
Exhibit 3b
REPUBLIC NEW YORK CORPORATION
[REPUBLIC NEW YORK CORPORATION LOGO]
BY-LAWS
(AS AMENDED THROUGH DECEMBER 16, 1998)
<PAGE> 2
BY-LAWS
OF
REPUBLIC NEW YORK CORPORATION
ARTICLE I
OFFICES
Section 1.1 The principal office of Republic New York Corporation (the
"Corporation") in the State of Maryland shall be in the City of Baltimore, State
of Maryland.
Section 1.2 The Corporation may also have offices at such other place or places,
both within and without the State of Maryland, as the Board of Directors, or the
President of the Corporation acting under delegated authority, may from time to
time determine.
ARTICLE II
STOCKHOLDERS
Section 2.1 PLACE OF STOCKHOLDERS' MEETINGS. Meetings of the Corporation's
stockholders shall be held at such place in the United States as is set from
time to time by the Corporation's Board of Directors.
Section 2.2 ANNUAL MEETINGS OF STOCKHOLDERS. An annual meeting of the
Corporation's stockholders shall be held either at 11:00 a.m. on the last
Wednesday of May in each year if not a legal holiday, or at such other time on
such other day falling on or before the 30th day thereafter as shall be
designated by the Board of Directors. At each annual meeting, the Corporation's
stockholders shall elect a Board of Directors and transact such other business
as may properly be brought before the meeting in accordance with these By-Laws.
Except as the Charter or statute provides otherwise, any business may be
considered at an annual meeting without the purpose of the meeting having been
specified in the notice. Failure to hold an annual meeting does not invalidate
the Corporation's corporate existence or affect any otherwise valid corporate
acts of the Corporation.
Section 2.3 SPECIAL MEETINGS OF STOCKHOLDERS. At any time in the interval
between annual meetings, a special meeting of the Corporation's stockholders may
be called by the Chairman of the Board or the President or by a majority of the
Corporation's Board of Directors by vote at a meeting or in writing (addressed
to the Corporate Secretary of the Corporation) with or without a meeting.
Special meetings of the Corporation's stockholders shall be called by the
Corporate Secretary on the written request of stockholders of the Corporation
entitled to cast at least 25 percent of all the votes entitled to be cast at the
meeting. A stockholders' request for a special meeting shall state the purpose
of the meeting and the matters proposed to be acted on at it. The Corporate
Secretary shall inform the stockholders who make the request of the reasonably
estimated costs of preparing and mailing a notice of meeting and, on payment of
these costs to the Corporation, notify each stockholder entitled to notice of
the meeting. Unless requested by
2
<PAGE> 3
stockholders entitled to cast a majority of all the votes entitled to be cast at
the meeting, a special meeting need not be called to consider any matter which
is substantially the same as a matter voted on at any special meeting of
stockholders of the Corporation held in the preceding 12 months. Business
transacted at any special meeting of stockholders shall be limited to the
purpose stated in the notice thereof.
Section 2.4 NOTICE OF STOCKHOLDERS' MEETINGS; WAIVER OF NOTICE. Not less than 10
days nor more than 90 days before the date of every stockholders' meeting, the
Corporate Secretary shall give to each stockholder entitled to vote at such
meeting written notice stating the time and place of the meeting and, in the
case of a special meeting or if notice of the purpose is required by statute,
the purpose or purposes for which the meeting is called, either by mail or by
presenting it to him personally or by leaving it at his residence or usual place
of business. If mailed, such notice shall be deemed to be given when deposited
in the United States mail addressed to the stockholder at his address as it
appears on the records of the Corporation, with postage thereon prepaid.
Notwithstanding the foregoing provisions, a waiver of notice in writing, signed
by the person or persons entitled to such notice and filed with the records of
the meeting, whether before or after the holding thereof, or actual attendance
at the meeting in person or by proxy, shall be deemed equivalent to the giving
of such notice to such persons.
Section 2.5 QUORUM AT STOCKHOLDERS' MEETINGS; VOTING; ADJOURNMENTS. Unless any
statute or the Charter provides otherwise, at each meeting of the Corporation's
stockholders, the presence in person or by proxy of stockholders entitled to
cast a majority of all the votes entitled to be cast at the meeting constitutes
a quorum, and a majority of all the votes cast at a meeting at which a quorum is
present is sufficient to approve any matter which properly comes before the
meeting, except that a plurality of all votes cast at a meeting at which a
quorum is present is sufficient to elect a director. Whether or not a quorum is
present, a meeting of stockholders convened on the date for which it was called
may be adjourned from time to time without further notice by a majority vote of
the stockholders present in person or by proxy to a date not more than 120 days
after the original record date. Any business which might have been transacted at
the meeting as originally notified may be deferred and transacted at any such
adjourned meeting at which a quorum is present.
Section 2.6 GENERAL RIGHT TO VOTE; PROXIES. Unless the Charter provides for a
greater or lesser number of votes per share or limits or denies voting rights,
each outstanding share of stock, regardless of class, is entitled to one vote on
each matter submitted to a vote at a meeting of stockholders; however, a share
is not entitled to be voted if any installment payable on it is overdue and
unpaid. In all elections of directors, each share of stock may be voted for as
many persons as there are directors to be elected and for whose election the
share is entitled to be voted. A stockholder may vote the stock the stockholder
owns of record either in person or by proxy. A stockholder may sign a writing
authorizing another person to act as proxy. Signing may be accomplished by the
stockholder or the stockholder's authorized agent signing the writing or causing
the stockholder's signature to be affixed to the writing by any reasonable
means, including facsimile signature. A stockholder may authorize another person
to act as proxy by transmitting, or authorizing the transmission of, a telegram,
cablegram, datagram, or other means of electronic transmission to the person
authorized to act as proxy or to a proxy solicitation firm, proxy support
service organization, or other person authorized by the person who will act as
proxy to
3
<PAGE> 4
receive the transmission. Unless a proxy provides for a longer period, it is not
valid more than eleven months after its date. A proxy is revocable by a
stockholder at any time without condition or qualification unless the proxy
states that it is irrevocable and the proxy is coupled with an interest. The
interest with which a proxy may be coupled includes an interest in the stock to
be voted under the proxy or another general interest in the Corporation or its
assets or liabilities.
Section 2.7 LIST OF STOCKHOLDERS. At each meeting of stockholders, a full, true
and complete list of all stockholders entitled to vote at such meeting, showing
the number and class of shares held by each and certified by the transfer agent
for such class or by the Corporate Secretary, shall be furnished by the
Corporate Secretary.
Section 2.8 CONDUCT OF VOTING. At all meetings of stockholders, unless the
voting is conducted by inspectors, the proxies and ballots shall be received,
and all questions touching the qualification of voters and the validity of
proxies, the acceptance or rejection of votes and procedures for the conduct of
business not otherwise specified by these By-Laws, the Charter or law, shall be
decided or determined by the chairman of the meeting. If demanded by
stockholders, present in person or by proxy, entitled to cast 10% in number of
votes entitled to be cast, or if ordered by the chairman of the meeting, the
vote upon any election or question shall be taken by ballot. Before any meeting
of the stockholders, the Board of Directors may appoint persons to act as
inspectors of election at the meeting and any adjournment thereof. If no
inspectors of election are so appointed, the chairman of the meeting may, and on
the request of stockholders, present in person or by proxy, entitled to cast 10%
in number of votes entitled to be cast, shall, appoint inspectors of election at
the meeting. The number of inspectors shall be either one or more. If inspectors
are appointed at a meeting on the request of stockholders, the holders of a
majority of shares present in person or by proxy shall determine whether one or
more inspectors are to be appointed. No candidate for election as a director at
a meeting shall serve as an inspector thereat. If any person appointed as
inspector fails to appear or fails or refuses to act, the chairman of the
meeting may, and upon the request of a stockholder shall, appoint a person to
fill that vacancy. The inspectors shall determine the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum, and the authenticity, validity and effect of proxies;
receive votes, ballots or consents; hear and determine all challenges and
questions in any way arising in connection with the right to vote; count and
tabulate all votes or consents; determine when polls shall close; determine the
result; and do any other acts that may be proper to conduct the election or vote
with fairness to all stockholders. Unless so demanded or ordered, no vote need
be by ballot and voting need not be conducted by inspectors.
Section 2.9. ADVANCE NOTICE PROVISIONS FOR ELECTION OF DIRECTORS. Only persons
who are nominated in accordance with the following procedures shall be eligible
for election as directors of the Corporation. Nominations of persons for
election to the Board of Directors may be made at any annual meeting of
stockholders, or at any special meeting of stockholders called for the purpose
of electing directors, (a) by or at the direction of the Board of Directors (or
any duly authorized committee thereof) or (b) by any stockholder of the
Corporation (i) who is a stockholder of record on the date of the giving of the
notice provided for in this Section 2.9 and on the record date for the
determination of stockholders entitled to vote at such meeting and (ii) who
complies with the notice procedures set forth in this Section 2.9.
4
<PAGE> 5
To be timely, a stockholder's notice must be delivered to or mailed and received
by the Corporate Secretary at the principal executive offices of the Corporation
(a) in the case of an annual meeting, not less than 120 days nor more than 150
days prior to the first anniversary of the preceding year's annual meeting;
provided, however, that in the event that the date of the annual meeting is
advanced by more than 30 days or delayed by more than 60 days from such
anniversary date, notice by the stockholder to be timely must be so delivered
not earlier than the 150th day prior to such annual meeting and not later than
the close of business on the later of the 120th day prior to such annual meeting
or the 10th day following the day on which public announcement of the date of
such meeting is first made; and (b) in the case of a special meeting of
stockholders called for the purpose of electing directors, not later than the
close of business on the 10th day following the day on which notice of the date
of the special meeting was mailed or public disclosure of the date of the
special meeting was made, whichever first occurs.
To be in proper written form, a stockholder's notice to the Corporate Secretary
must set forth (a) as to each person whom the stockholder proposes to nominate
for election as a director, all information relating to such person that is
required to be disclosed in connection with solicitations of proxies for
election of directors pursuant to Regulation 14A of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and the rules and regulations
promulgated thereunder; and (b) as to the stockholder giving the notice, (i) the
name and address of such stockholder as they appear on the Corporation's books
and of the beneficial owner, if any, on whose behalf the nomination is made,
(ii) the class or series and number of shares of capital stock of the
Corporation which are owned beneficially or of record by such stockholder and
such beneficial owner, (iii) a description of all arrangements or understandings
between such stockholder and each proposed nominee and any other person or
persons (including their names) pursuant to which the nomination(s) are to be
made by such stockholder, (iv) a representation that such stockholder intends to
appear in person or by proxy at the meeting to nominate the persons named in its
notice and (v) any other information relating to such stockholder that would be
required to be disclosed in a proxy statement or other filings required to be
made in connection with solicitations of proxies for election of directors
pursuant to Regulation 14A of the Exchange Act and the rules and regulations
promulgated thereunder. Such notice must be accompanied by a written consent of
each proposed nominee to be named as a nominee and to serve as a director if
elected.
No person shall be eligible for election as a director of the Corporation unless
nominated in accordance with the procedures set forth in this Section 2.9. If
the chairman of the meeting determines that nomination was not made in
accordance with the foregoing procedures, the chairman shall declare to the
meeting that the nomination was defective and such defective nomination shall be
disregarded. No adjournment or postponement of a meeting of stockholders shall
commence a new period for the giving of notice of a stockholder proposal
hereunder.
Section 2.10. ADVANCE NOTICE PROVISIONS FOR BUSINESS TO BE TRANSACTED AT ANNUAL
MEETING. No business may be transacted at an annual meeting of stockholders,
other than business that is either (a) specified in the notice of meeting (or
any supplement thereto) given by or at the direction of the Board of Directors
(or any duly authorized committee thereof), (b) otherwise properly brought
before the annual meeting by or at the direction of the Board of Directors (or
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<PAGE> 6
any duly authorized committee thereof) or (c) otherwise properly brought before
the annual meeting by any stockholder of the Corporation (i) who is a
stockholder of record on the date of the giving of the notice provided for in
this Section 2.10 and on the record date for the determination of stockholders
entitled to vote at such annual meeting and (ii) who complies with the notice
procedures set forth in this Section 2.10.
To be timely, a stockholder's notice must be delivered to or mailed and received
by the Corporate Secretary at the principal executive offices of the Corporation
not less than 120 days nor more than 150 days prior to the first anniversary of
the preceding year's annual meeting; provided, however, that in the event that
the date of the annual meeting is advanced by more than 30 days or delayed by
more than 60 days from such anniversary date, notice by the stockholder to be
timely must be so delivered not earlier than the 150th day prior to such annual
meeting and not later than the close of business on the later of the 120th day
prior to such annual meeting or the 10th day following the day on which public
announcement of the date of such meeting is first made.
To be in proper written form, a stockholder's notice to the Corporate Secretary
must set forth as to each matter such stockholder proposes to bring before the
annual meeting (i) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (ii) the name and address of such stockholder as they appear on
the Corporation's books and of the beneficial owner, if any, on whose behalf the
proposal is made, (iii) the class or series and number of shares of capital
stock of the Corporation which are owned beneficially or of record by such
stockholder and such beneficial owner, (iv) a description of all arrangements or
understandings between such stockholder and any other person or persons
(including their names) in connection with the proposal of such business by such
stockholder and any material interest of such stockholder in such business, and
(v) a representation that such stockholder intends to appear in person or by
proxy at the annual meeting to bring such business before the meeting.
No business shall be conducted at the annual meeting of stockholders except
business brought before the annual meeting in accordance with the procedures set
forth in Section 2.09 or in this Section 2.10, provided, however, that once
business has been properly brought before the annual meeting in accordance with
such procedures, nothing in Section 2.09 nor in this Section 2.10 shall be
deemed to preclude discussion by any stockholder of any such business. If the
chairman of an annual meeting determines that business was not properly brought
before the annual meeting in accordance with the foregoing procedures, the
chairman shall declare to the meeting that the business was not properly brought
before the meeting and such business shall not be transacted. No adjournment or
postponement of a meeting of stockholders shall commence a new period for the
giving of notice of a stockholder proposal hereunder.
ARTICLE III
DIRECTORS
Section 3.1 The number of directors of the Corporation which shall constitute
the whole of the Corporation's Board of Directors (the "Board") shall not be
less than three nor more than thirty. Within the limits above specified, the
number of directors constituting the Board shall be
6
<PAGE> 7
determined by resolution of the Board or by the Corporation's stockholders at
the Annual Meeting, but the tenure of office of a director shall not be affected
by any decrease in the number of directors so made by the Board. The directors
shall be elected at the Annual Meeting of stockholders, except as provided in
Section 3.2 of this Article, and each director elected shall hold office until
the succeeding Annual Meeting of stockholders or until his successor is elected
and qualified. Directors need not be stockholders.
Section 3.2 Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, or by a sole remaining
director, and the directors so chosen shall hold office until the next Annual
Meeting and until their successors are duly elected and shall qualify, unless
sooner displaced.
Section 3.3 The business of the Corporation shall be managed by its Board, which
may exercise all such powers of the Corporation and do all such lawful acts and
things as are not by statute or by the Articles of Incorporation or by these
By-Laws directed or required to be exercised or done by the stockholders. The
directors shall choose from among their number a Chairman of the Board and a
Vice Chairman of the Board.
Section 3.4 At any meeting of stockholders, duly called and at which a quorum is
present, the stockholders may, by the affirmative vote of the holders of a
majority of the votes entitled to be cast on the election or removal of such
director, remove any director or directors from office and may elect a successor
or successors to fill any resulting vacancies for the unexpired terms of removed
directors. In case such a removal occurs but the stockholders entitled to vote
thereon fail to fill any resulting vacancies, such vacancies may be filled by
the Board of Directors pursuant to Section 3.2.
MEETINGS OF THE BOARD OF DIRECTORS
Section 3.5 The Board may hold meetings, both regular and special, either within
or without the State of Maryland.
Section 3.6 After each meeting of stockholders at which a Board of Directors
shall have been elected, the Board of Directors so elected shall meet, as soon
as practicable, for the purpose of organization and the transaction of other
business; and, in the event that no other time is designated by the
stockholders, the Board of Directors shall meet one hour after the time for such
stockholders' meeting or immediately following the close of such meeting,
whichever is later, on the day of such meeting. No notice of such meeting shall
be necessary if held as hereinabove provided.
Section 3.7 Regular meetings of the Board may be held, without notice, at 452
Fifth Avenue, New York, New York at 12:30 P.M. on the third Wednesday of
January, April, July and October of each year, unless another time and place
shall be specified in a notice of meeting given by the Secretary.
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Section 3.8 Special Meetings of the Board may be called by the Chairman or the
President upon notice to each director, either personally, by mail, by telex or
by telegram. Special Meetings shall be called by the President or Secretary in
like manner and on like notice upon the written request of two or more
directors. Notice of the place, day and hour of every Special Meeting shall be
given to each director at least twenty-four (24) hours before the time of the
meeting, by delivering the same to him personally, by telephone, by telex, by
telegraph, or by delivering the same at his residence or usual place of
business, or, in the alternative, by mailing such notice at least seventy-two
(72) hours before the time of the meeting, postage paid, and addressed to him at
his last known post office address, according to the records of the Corporation.
Unless required by the By-Laws or by resolution of the Board of Directors, no
notice of any meeting of the Board of Directors need state the business to be
transacted thereat. No notice of any meeting of the Board of Directors need be
given to any director who attends, or to any director who, in writing executed
and filed with the records of the meeting either before or after the holding
thereof, waives such notice. Any meeting of the Board of Directors, Annual or
Special, may adjourn from time to time to reconvene at the same or some other
place, and no notice need be given of any such adjourned meeting other than by
announcement.
Section 3.9 At all meetings of the Board one-third of the number of directors,
but not less than two directors, shall constitute a quorum for the transaction
of business and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute or by the Articles of
Incorporation. If a quorum shall not be present at any meeting of the Board, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
Members of the Board or any committee designated thereby may participate in a
meeting of the Board or any such committee by means of a conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other at the same time and participation by such means
shall constitute presence in person at such meeting.
Section 3.10 Unless otherwise restricted by the Articles of Incorporation or
these By-Laws, any action required or permitted to be taken at any meeting of
the Board or of any committee thereof may be taken without a meeting, if all
members of the Board or committee, as the case may be, consent thereto, in
writing or writings and the writing or writings are filed with the minutes of
the proceedings of the Board or committee.
Section 3.11 On any question on which the Board of Directors shall vote, the
names of those voting and their votes shall be entered in the minutes of the
meeting when any member of the Board so requests.
COMMITTEES OF DIRECTORS
Section 3.12 EXECUTIVE COMMITTEE. The Board of Directors shall appoint from
among its members an Executive Committee of not less than three directors and a
Chairman of the Executive Committee. When the Board of Directors is not in
session, the Executive Committee shall have and may exercise, in the absence of
or subject to any restrictions which the Board of Directors may from time to
time impose, all of the powers of the Board of Directors in the
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management of the business and affairs of the Corporation, except the power to
authorize dividends on stock, elect directors, issue stock other than as
provided in the next sentence, recommend to the stockholders any action which
requires stockholder approval, amend these By-Laws, or approve any merger or
share exchange which does not require stockholder approval. If the Board of
Directors has given general authorization for the issuance of stock providing
for or establishing a method or procedure for determining the number of shares
to be issued, a committee of the Board, in accordance with that general
authorization or any stock option or other plan or program adopted by the Board
of Directors, may authorize or fix the terms of stock subject to classification
or reclassification and the terms on which any stock may be issued, including
all terms and conditions required or permitted to be established or authorized
by the Board of Directors.
Section 3.13 OTHER COMMITTEES. The Board of Directors may appoint any other
committees, each of which shall be composed of one or more directors, as
determined by the Board from time to time. Such other committees shall have such
powers, subject to the same limitations as are applicable to the Executive
Committee under Section 3.12, as shall be designated by the Board from time to
time.
Section 3.14 COMMITTEE PROCEDURE. Each committee shall keep minutes of its
proceedings when exercising powers of the Board of Directors and may fix rules
of procedure for its business. A majority of the members of a committee shall
constitute a quorum for the transaction of business and the act of a majority of
those present at a meeting at which a quorum is present shall be the act of the
committee. The members of a committee present at any meeting, whether or not
they constitute a quorum, may appoint an eligible director to act in the place
of an absent member. Any action required or permitted to be taken at a meeting
of a committee may be taken without a meeting, if an unanimous written consent
which sets forth the action is signed by each member of the committee and filed
with the minutes of the committee. The members of a committee may conduct any
meeting thereof by conference telephone in accordance with the provisions of
Section 3.9.
COMPENSATION OF DIRECTORS
Section 3.15 Each director may be paid his expenses, if any, of attendance at
each meeting of the Board and may be paid a sum for attendance at each meeting
of the Board and also for his services as director. Nothing herein shall
preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor. Members of Special or standing committees may
be allowed like payments for attending committee meetings.
RESIGNATION OF DIRECTORS
Section 3.16 Any director may resign at any time either by oral tender of such
resignation at any meeting of the Board or to the Chairman or President or by
giving written notice thereof to the Corporation. Any resignation shall be
effective immediately, unless a date certain is specified for it to take effect.
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ARTICLE IV
OFFICERS
Section 4.1 EXECUTIVE AND OTHER OFFICERS. The Corporation shall have a
President, who shall be a director, and a Corporate Secretary and a Treasurer,
who need not be directors. The Corporation shall also have a Chairman of the
Board and a Chairman of the Executive Committee, and may have one or more Vice
Chairmen, all of whom shall be directors. The Board shall designate who shall
serve as chief executive officer, who shall have general supervision of the
business and affairs of the Corporation. In the absence of any designation, the
Chairman of the Board, if there be one, shall serve as chief executive officer.
In the absence of the Chairman of the Board, or if there be none, the Chairman
of the Executive Committee shall serve as the chief executive officer. The
Corporation may also have one or more Vice-Presidents, assistant and subordinate
officers, other officers not designated by these By-Laws, and agents as it shall
deem necessary, none of whom need be a director. A person may hold more than one
office in the Corporation except that no person may serve concurrently as both
President and Vice-President of the Corporation.
Section 4.2 CHAIRMAN OF THE BOARD. The Chairman of the Board shall be a director
and shall preside at all meetings of the Board and of the Stockholders at which
he shall be present. Unless otherwise specified by the Board, he shall serve as
the chief executive officer of the Corporation. In general, he shall perform
such duties as are customarily performed by the chief executive officer of a
corporation, and may also perform any duties of the President, and shall perform
such other duties and may have such other powers as are, from time to time,
assigned to him by the Board.
Section 4.3 CHAIRMAN OF THE EXECUTIVE COMMITTEE. The Chairman of the Executive
Committee shall be a director and shall chair meetings of the Executive
Committee, supervise and carry out policies adopted or approved by the Board and
exercise such further powers and duties as are, from time to time, conferred
upon or assigned to him by the Board. Additionally, in the absence of the
Chairman of the Board, the Chairman of the Executive Committee (a) shall serve
as the Chief Executive Officer of the Corporation and (b) shall preside at all
meetings of the Board and the Stockholders at which he shall be present.
Section 4.4 VICE CHAIRMAN. Each Vice Chairman, if one or more be elected, shall
be a director and shall perform such duties and may have such other powers as
are, from time to time, assigned to him by the Board.
Section 4.5 PRESIDENT. The President shall be a director. The President may
execute, in the name of the Corporation, all authorized deeds, mortgages, bonds,
contracts or other instruments, except in cases in which the execution thereof
shall have been expressly delegated to some other officer or agent of the
Corporation. In general, he shall perform such duties usually performed by a
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president of a corporation and shall perform such other duties and may have such
other powers as are from time to time assigned to him by the Board.
Section 4.6 VICE-PRESIDENTS. The Vice-President or Vice-Presidents, at the
request of the chief executive officer or the President, or in the absence of
the President or during his inability or refusal to act, shall, in order of
seniority of appointment, unless otherwise designated by the Board, the chief
executive officer, or the President, perform the duties of the President, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the President. Each Vice-President shall perform such other
duties and have such other powers, and have such additional descriptive
designations in their titles (if any), as are from time to time assigned to them
by the Board, the chief executive officer, or the President.
Section 4.7 CORPORATE SECRETARY. The Corporate Secretary shall attend all
meetings of the stockholders and all meetings of the Board and record, or cause
to be recorded, all the procedures of the meetings of the stockholders and the
Board in books to be kept for that purpose. The Corporate Secretary may perform
like duties for the standing committees when required. He shall, as required,
give, or cause to be given, notice of all meetings of the stockholders and
meetings of the Board. He shall have custody of the corporate seal of the
Corporation and he, or a Deputy or Associate or Assistant Corporate Secretary,
shall affix the same to any instrument which is required or desired to be under
its seal and when so affixed, it may be attested by his signature or by the
signature of such Deputy or Associate or Assistant Corporate Secretary. The
Board may give general authority to any other officer to affix the seal of the
Corporation and to attest the affixing by his signature. In general, the
Corporate Secretary shall perform all duties incident to the office of a
secretary of a corporation, and shall perform such other duties and may have
such other powers as are from time to time assigned to him by the Board, the
chief executive officer or the President.
Section 4.8 DEPUTY CORPORATE SECRETARY, ASSOCIATE CORPORATE SECRETARY AND
ASSISTANT CORPORATE SECRETARY. The Deputy Corporate Secretary or the Associate
Corporate Secretary or the Assistant Corporate Secretary, or if there be more
than one, each of them, may, in the absence of the Corporate Secretary or during
his inability or refusal to act, perform the duties and exercise the powers of
the Corporate Secretary and shall perform such other duties and have such other
powers as are from time to time assigned to each of them by the Board, the chief
executive officer, the President or the Corporate Secretary.
Section 4.9 TREASURER. The Treasurer shall have charge of and be responsible for
all corporate funds and securities and shall keep, or cause to be kept, full and
accurate accounts of receipts and disbursements in books belonging to the
Corporation and shall deposit, or cause to be deposited, all moneys and other
valuable effects, in the name and to the credit of the Corporation, in such
depositories as may from time to time be designated. He shall render to the
Board, the chief executive officer or the President, when so required, an
account of the financial condition of the Corporation. In general, the Treasurer
shall perform all the duties incident to the office of a treasurer of a
corporation, and shall perform such other duties and may have such other powers
as are from time to time assigned to him by the Board, the chief executive
officer or the President.
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Section 4.10 ASSISTANT TREASURERS. The Assistant Treasurer, or if there shall be
more than one, each of them, may, in the absence of the Treasurer or during his
inability or refusal to act, perform the duties and exercise the powers of the
Treasurer and shall perform such other duties and have such other powers as are
from time to time assigned to each of them by the Board, the chief executive
officer, the President or the Treasurer.
Section 4.11 ASSISTANT AND SUBORDINATE OFFICERS, OTHER OFFICERS AND AGENTS. The
assistant and subordinate officers of the Corporation are all officers below the
office of Vice-President, Corporate Secretary or Treasurer. Assistant officers,
subordinate officers, other officers not designated by these By-Laws, and agents
shall perform such duties and have such powers as are from time to time assigned
to them by the Board, the chief executive officer, the President, or any
management committee or officer authorized by the Board or these By-Laws.
Section 4.12 ELECTION, TENURE AND REMOVAL OF OFFICERS. The Board shall elect all
officers but may authorize any management committee or officer to appoint any
assistant or subordinate officer, other officer not designated by these By-Laws,
or agent. Election or appointment of any officer, employee or agent shall not of
itself create contract rights. All officers shall be appointed to hold their
respective offices during the pleasure of the Board. The Board may remove any
officer at any time but may authorize any management committee or officer to
remove any assistant or subordinate officer, other officer not designated by
these By-Laws, or agent. The removal of an officer does not prejudice any of his
contract rights. Any officer may resign at any time, either by oral tender of
such resignation to the Chairman of the Board or the President or by giving
written notice thereof to the Corporation. Any resignation shall be effective
immediately, unless a date certain is specified for it to take effect. The Board
may fill a vacancy which occurs in any office but may authorize any management
committee or officer to fill any vacancy caused by the removal or resignation of
any assistant or subordinate officer, other officer not designated by these
By-Laws, or agent.
Section 4.13 COMPENSATION. The Board shall have power to fix the salaries and
other compensation and remuneration, of whatever kind, of all officers of the
Corporation. No officer shall be prevented from receiving such salary by reason
of the fact that he is also a director of the Corporation. The Board may
authorize any management committee or officer to fix the salaries, compensation
and remuneration of any officers, employees and agents other than those who are
members of the Management Executive Committee of the Corporation.
ARTICLE V
CERTIFICATES OF STOCK
Section 5.1 Every holder of stock in the Corporation shall be entitled to have a
certificate, signed by, or in the name of the Corporation by the Chairman of the
Board or President or a Vice President and the Treasurer or an Assistant
Treasurer, or the Secretary or a Deputy or Associate or Assistant Secretary of
the Corporation, certifying the number of shares owned by him in the
Corporation.
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Section 5.2 Where a certificate is manually countersigned (1) by a transfer
agent, other than the Corporation or its employee, or, (2) by a registrar, other
than the Corporation or its employee, any other signature on the certificate may
be facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
signed, it may be issued by the Corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 5.3 The Board may authorize a new certificate or certificates to be
issued in place of any certificate or certificates theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate or
certificates, the Board may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
certificate or certificates, or his legal representative, to advertise the same
in such manner as it shall require and/or to give the Corporation a bond in such
sum as it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen or
destroyed.
TRANSFER OF STOCK
Section 5.4 Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
Section 5.5 The Board may, at its discretion, appoint one or more banks or trust
companies in New York City, and in such other city or cities as the Board may
deem advisable, including any banking subsidiary of the Corporation, from time
to time, to act as transfer agent(s) and registrar(s) of the stock of the
Corporation.
FIXING RECORD DATE
Section 5.6 The Board is hereby empowered to fix, in advance, a date as the
record date for the purpose of determining stockholders, or stockholders
entitled to receive payment of any dividend or the allotment of any rights, or
in order to make determination of stockholders for any other proper purpose.
Such date in any case shall be not more than ninety (90) days, and in case of a
meeting of stockholders, not less than ten (10) days, prior to the date of which
the particular action, requiring such determination of stockholders is to be
taken. In lieu of fixing a record date, the Board may provide that the stock
transfer books shall be closed for a stated period but not to exceed, in any
case, twenty (20) days. If the stock transfer books are closed for the purpose
of
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determining stockholders entitled to notice of or to vote at a meeting of
stockholders, such books shall be closed for at least ten (10) days immediately
preceding such meeting.
STOCK LEDGER
Section 5.7 Original or duplicate stock ledgers, containing the name and
addresses of the stockholders of the Corporation and the number of shares of
each class held by them respectively, shall be kept at the offices of a transfer
agent for the particular class of stock, within or without the State of
Maryland, or, if none, at the principal office or the principal executive
offices of the Corporation in the State of Maryland.
REGISTERED STOCKHOLDERS
Section 5.8 The Corporation shall be entitled to recognize the exclusive right
of a person registered on its books as the owner of shares to receive dividends,
and to vote as such owner, and to hold liable for calls and assessments a person
registered on its books as the owner of shares, and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of Maryland.
ARTICLE VI
GENERAL PROVISIONS
DIVIDENDS
Section 6.1 Dividends upon the capital stock of the Corporation, subject to the
provisions of the Articles of Incorporation, if any, may be declared by the
Board at any Annual or Special Meeting, pursuant to the law. Dividends may be
paid in cash, in property, or in shares of the capital stock, subject to the
provisions of the Articles of Incorporation.
CHECKS
Section 6.2 All checks or demand for money and notes of the Corporation shall be
signed by such officer or officers or such other person or persons as the Board
may from time to time designate.
FISCAL YEAR
Section 6.3 The fiscal year of the Corporation shall be the calendar year.
SEAL
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Section 6.4 The Corporation's seal shall have inscribed thereon the name of the
Corporation, the year of its organization and the words "Corporate Seal,
Maryland". The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ANNUAL REPORT
Section 6.5 There shall be prepared annually a full and correct statement of the
affairs of the Corporation, including a balance sheet and a financial statement
of operations for the preceding fiscal year, which shall be submitted at the
Annual Meeting of the stockholders and filed within twenty (20) days thereafter
at the principal office of the Corporation in the State of Maryland. Such
statement shall be prepared or caused to be prepared by such executive officer
of the Corporation as may be designated in an additional or supplementary by-law
adopted by the Board. If no other executive officer is so designated, it shall
be the duty of the President to prepare or cause to be prepared such statement.
SHARES OF OTHER CORPORATIONS
Section 6.6 The Chairman of the Board, the President, any Vice President, and
the Secretary is each authorized to vote, represent and exercise on behalf of
the Corporation all rights incident to any and all shares of any other
corporation or corporations standing in the name of the Corporation. The
authority herein granted to said officer to vote or represent on behalf of the
Corporation any and all shares held by the Corporation in any other corporation
or corporations may be exercised either by said officer in person or by any
other person authorized so to do by proxy or power of attorney duly executed by
said officers. Notwithstanding the above, however, the Board, in its discretion,
may designate by resolution the person to vote or represent said shares of other
corporations.
ARTICLE VII
AMENDMENTS
Section 7.1 Subject to the special provisions of Section 3.1, (a) any and all
provisions of these By-Laws may be altered or repealed and new by-laws may be
adopted at any Annual Meeting of the stockholders, or at any Special Meeting
called for that purpose, and (b) the Board shall have the power, at any regular
or Special Meeting thereof, to make and adopt new by-laws, or to amend, alter or
repeal any of the By-Laws of the Corporation.
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Exhibit 10c
Amended 1994 PERFORMANCE BASED INCENTIVE COMPENSATION PLAN
OF
REPUBLIC NEW YORK CORPORATION
AND SUBSIDIARIES
The purpose of this Plan is to attract and retain the services of
officers who serve on the Management Executive Committee of Republic New York
Corporation (the "Corporation"), are in policy-making positions with the
Corporation or its subsidiaries and, by virtue of their positions, are in a
position to make a material contribution to the successful operation of the
business of the Corporation and its subsidiaries.
Section 1 - Definitions
For the purposes hereof, the following terms have the meanings
specified or referred to below:
(a) "Adjusted Base Year Earnings Per Share" means, for any Award, the
Earnings Per Share for the Base Year for such Award; provided, that (i) if
following such Base Year the outstanding shares of Common Stock shall have been
changed by reason of reorganization, merger, consolidation, recapitalization,
reclassification, stock split-up, combination or exchange of shares or the like,
or dividends payable in shares of Common Stock, the Adjusted Base Year Earnings
Per Share shall be proportionately adjusted by the Compensation Committee to
reflect any increase or decrease in the number of issued shares of Common Stock
that resulted from such change insofar as necessary to preserve inter-period
comparability between Earnings Per Share for such Base Year and the Plan Year
for which such Award is granted; (ii) the Adjusted Base Year Earnings Per Share
shall be adjusted by the Compensation Committee insofar as is necessary or
appropriate to preserve inter-period comparability, between Earnings Per Share
for each of the Base Year and Plan Year for any Award, in accordance with
generally accepted accounting principles (including APB Opinion No. 15, as
amended), applicable to the computation of earnings per share; and (iii) in the
event of (A) any change subsequent to the Base Year for any Award in the
accounting principles or methods applied by the Corporation in the preparation
of the consolidated financial statements of the Corporation and its subsidiaries
of a character required to be mentioned as an exception in the opinion of the
independent accountants with respect to the consistency of accounting principles
applied to periods subsequent to such Base Year, or (B) any change in the fiscal
year of the Corporation, which change affects the inter-period comparability
between Earnings Per Share for each of such Base Year and such Plan Year, the
Adjusted Base Year Earnings Per Share shall be adjusted by the Compensation
Committee insofar as is necessary or appropriate to preserve such inter-period
comparability.
<PAGE> 2
(b) "Award" means a right, granted by the Compensation Committee
pursuant to Section 2.1 for any Plan Year, to participate under this Plan,
subject to the terms of this Plan and such grant.
(c) "Award Multiple" means, for any Award, the number of shares of
Common Stock designated by the Compensation Committee pursuant to Section 2.2
solely for use in determining the amount, if any, to be paid pursuant to such
Award; provided, that if, after the Award Multiple is so designated, the
outstanding shares of Common Stock shall be changed by reason of reorganization,
merger, consolidation, recapitalization, reclassification, stock split-up,
combination or exchange of shares or the like, or dividends payable in shares of
Common Stock (which change is reflected in the consolidated income statement
from which Earnings Per Share for the relevant Plan Year is derived), the Award
Multiple originally designated by the Compensation Committee shall be
proportionately adjusted by the Compensation Committee to reflect any increase
or decrease in the number of issued shares of Common Stock that resulted from
such change.
(d) "Base Year" means, for any Award, the fiscal year of the
Corporation designated by the Compensation Committee pursuant to Section 2.2.
(e) "Board" means the Board of Directors of the Corporation.
(f) "Code" means the Internal Revenue Code of 1986, as amended, and the
regulations promulgated thereunder.
(g) "Common Stock" means the Common Stock, par value $5.00 per share,
of the Corporation.
(h) "Compensation Committee" means the Human Resources Committee of the
Board.
(i) "Corporation" has the meaning provided in the preamble to this
Plan.
(j) "Earnings Per Share" for any year means the diluted consolidated
net income per share of Common Stock of the Corporation for such year as set
forth in the consolidated income statement of the Corporation and its
subsidiaries for such year as presented to the Board at the first quarterly
meeting for the subsequent year, but adjusted to eliminate the effect of amounts
paid or accrued with respect to any Award (i.e., Earnings Per Share shall be
determined before taking into account amounts paid or accrued with respect to
any Award).
(k) "Management Executive Committee" means the committee designated by
the Board as the Management Executive Committee of the Corporation and which
shall consist of such officers of the Corporation as the Board or the Chief
Executive Officer may appoint from time to time.
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(l) "Net Income" for any year means the consolidated net income of the
Corporation and its subsidiaries for such year as set forth in the consolidated
income statement of the Corporation and its subsidiaries for such year as
presented to the Board at the first quarterly meeting for the subsequent year.
(m) "Participants" has the meaning provided in Section 2.1.
(n) "Plan" means this 1994 Performance Based Incentive Compensation
Plan of the Corporation and Subsidiaries.
(o) "Plan Year" means any fiscal year of the Corporation.
Section 2 - Awards
2.1 Subject to Section 4.1 and this Section 2, the Compensation
Committee may grant Awards for any Plan Year to members of the Management
Executive Committee ("Participants").
2.2 The Compensation Committee shall determine, at the time it grants
any Award for a Plan Year to a Participant, the Base Year (which may not be
prior to 1979) and the Award Multiple for that Award. Promptly following the
grant of an Award to a Participant, the Compensation Committee shall give notice
(or cause notice to be given) to such Participant of such grant, together with
the Base Year and the Award Multiple for such Award. The Base Years and Award
Multiples for Awards granted to different Participants for the same Plan Year
need not be identical.
2.3 Awards for any Plan Year may be granted at any time within the
first 90 days of such Plan Year. No more than one Award may be granted to any
Participant for the same Plan Year.
2.4 The amount, if any, to be paid pursuant to any Award granted to any
Participant for any Plan Year shall be equal to the lesser of
(a) the product of (i) the excess, if any, of (A) the Earnings Per
Share for such Plan Year over (B) the Adjusted Base Year Earnings Per Share for
such Award, multiplied by (ii) the Award Multiple for such Award; and
(b) 0.7% of the Net Income for the Plan Year.
If the Earnings Per Share for a Plan Year do not exceed the Adjusted Base Year
Earnings Per share for any Award granted for such Plan Year, no amount shall be
paid pursuant to such Award, which shall thereupon terminate. Notwithstanding
anything to the contrary contained in this Plan, the Compensation Committee,
after taking into account a Participant's individual performance during the
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applicable Plan Year, may, in its sole discretion, reduce, in whole or in part,
the amount otherwise to be paid pursuant to such Participant's Award for such
Plan Year.
2.5 Following each Plan Year, the Compensation Committee shall certify
in writing the Earnings Per Share for such Plan Year, whether such Earnings Per
Share exceeds the Adjusted Base Year Earnings Per Share for each Award granted
for such Plan Year, and the amount, if any, to be paid pursuant to each such
Award. Such certification shall be set forth in approved minutes of the
Compensation Committee meeting (or written consent in lieu of meeting) in which
such certification is made.
2.6 Payment of the amounts payable pursuant to Awards for each Plan
Year (as certified by the Compensation Committee pursuant to Section 2.5) shall
be made, as soon as practicable following such Plan Year, by the Corporation or,
in the case of any participant employed by a subsidiary of the Corporation (and
not the Corporation), by such subsidiary; provided, however, that prior to the
last day of a Plan Year for which an Award is granted to a Participant, such
participant may elect to defer, subject to such terms as agreed upon by such
Participant and his or her employer, the payment of all or any portion of the
amounts payable pursuant to such Award to any later year or years. Each payment
made pursuant to this Section 2.6 shall be accompanied by a written statement
setting forth the amount to be paid and the calculation of such amount pursuant
to Section 2.4. If a Participant's payment is deferred in accordance with this
Section 2.6, a written statement setting forth the amount payable pursuant to
his or her Award and the calculation of such amount shall be furnished to such
Participant at the time such payment would have otherwise been required to be
made hereunder.
Section 3 - Death, Termination of Employment, Etc.
Notwithstanding any other provision of this Plan, (i) if a
Participant's employment with the Corporation or its subsidiaries is terminated
by reason of such Participant's death or disability, or due to such
Participant's retirement in accordance with Corporation policy, such Participant
or such Participant's estate or beneficiary, as the case may be, shall be
entitled only to be paid, in the case of any Award granted to such Participant
for the Plan Year during which such Participant's employment was so terminated,
the pro rata portion of the amount that would otherwise have been payable to
such Participant pursuant to Section 2 (based on the number of days in such Plan
Year prior to the date on which such Participant's employment was so terminated
relative to the total number of days in such Plan Year), and the balance of the
amount that would otherwise have been so payable to such Participant shall be
deemed forfeited to the Corporation, and (ii) if, prior to the end of any Plan
Year, a Participant's employment with the Corporation and its subsidiaries is
terminated for any reason (other than by reason of death, disability or
retirement as heretofore provided), no payment shall be made pursuant to any
Award granted to such Participant for such Plan Year (and the amount that would
otherwise have been payable to such Participant pursuant to Section 2 shall be
deemed forfeited to the Corporation).
4
<PAGE> 5
Section 4 - Administration
4.1 This Plan shall be administered by the Compensation Committee, as
it may be composed from time to time. No member of the Compensation Committee
may be granted an Award under this Plan.
4.2 Within the limits of the express provisions of this Plan, the
Compensation Committee shall have the authority, in its sole discretion, (i) to
determine the time or times at which, and the Participants to whom, Awards may
be granted, together with the Base Year and Award Multiple for each such Award
(which need not be identical for each Participant), (ii) to interpret this Plan
or any Award granted under this Plan, and (iii) to establish, adopt, amend or
rescind such rules or regulations relating to this Plan and make all other
determinations and take all other actions as the Compensation Committee may deem
necessary or advisable for the administration of this Plan.
4.3 The determinations of the Compensation Committee under this Plan,
including without limitation as to the matters referred to in Section 2 and this
Section 4, shall be final and binding on all Participants.
Section 5 - Effective Date; Amendment or Termination
5.1 This Plan shall become effective for the 1994 Plan Year provided
that the holders of Common Stock approve this Plan at the next annual or special
meeting after adoption of this Plan by the Board, and if such approval is not
obtained, this Plan shall be null and void. This Plan shall be resubmitted from
time to time for subsequent approvals by the holders of Common Stock as may be
required by Section 162(m) of the Code.
5.2 The Board may at any time and from time to time terminate, modify
or amend this Plan in any respect; provided, however, that any amendment that
(i) materially changes the formula provided in Section 2.4 for purposes of
determining the amount to be paid pursuant to Awards (including the maximum
amount of any Award or Awards that may be granted to a Participant in a single
Plan Year), (ii) permits a Base Year prior to 1979, (iii) changes the class of
persons eligible to receive Awards, or (iv) otherwise requires stockholder
approval pursuant to Section 162(m) of the Code, shall be submitted to the
holders of Common Stock for approval at the next annual or special meeting after
adoption of such amendment by the Board, and if such approval is not obtained,
such amendment shall be null and void. No such termination, modification or
amendment may affect the rights of a Participant under an outstanding Award
without the consent of the Participant.
5
<PAGE> 6
Section 6 - Withholding of Taxes
The Corporation shall have the right to deduct from the payment of all
Awards any federal, state or local taxes required by law to be withheld with
respect to such Awards.
Section 7 - Funding of Plan
This Plan shall be unfunded. The Corporation shall not be required to
establish any special or separate fund or to make any other segregation of
assets to assure the payment of any Award.
Section 8 - Transferability of Awards
A Participant's rights and interests under this Plan (including the
right to payment of any unpaid Award) may not be assigned or transferred except,
in the case of a Participant's death, subject to Section 3, to such
Participant's designated beneficiary as provided to the Compensation Committee
in accordance with such procedures as it may determine from time to time
hereafter, or in the absence of such designation, by will or the laws of descent
and distribution. No Award shall be subject to execution, attachment or other
process.
Section 9 - Miscellaneous
9.1 Nothing contained in this Plan or any written instrument evidencing
any Award granted under this Plan shall be deemed to confer upon any Participant
to whom an Award is or may be granted hereunder any right to remain in the
employ of the Corporation or any of its subsidiaries or any right to be granted
an Award (or be eligible therefor) in any subsequent Plan Year.
9.2 Except in the case of the Executive Supplemental Disability Plan,
no Award shall be taken into account in determining a Participant's compensation
for the purposes of any group life insurance or other employee benefit plan of
the Corporation or its subsidiaries.
9.3 This Plan shall not be deemed an exclusive method of providing
incentive compensation for the officers of the Corporation, nor shall it
preclude the Committee or the Board from authorizing or approving other forms of
incentive compensation.
6
<PAGE> 7
9.4 All expenses and costs in connection with the operation of this
Plan shall be borne by the Corporation or the relevant subsidiary of the
Corporation.
7
<PAGE> 1
EXHIBIT 11
REPUBLIC NEW YORK CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Basic earnings:
Net income $248,047 $449,108 $418,840 $288,649 $340,008
Less preferred stock dividends (26,302) (24,191) (31,518) (36,467) (34,410)
Less dividends on restricted stock plan shares (3,304) (3,369) (2,815) (2,485) (2,290)
-------- -------- -------- -------- --------
Net income applicable to common stock - basic $218,441 $421,548 $384,507 $249,697 $303,308
======== ======== ======== ======== ========
Average common shares outstanding - excluding restricted stock plan shares 104,328 105,625 107,481 104,641 102,001
======== ======== ======== ======== ========
Basic earnings per common share $ 2.09 $ 3.99 $ 3.58 $ 2.39 $ 2.97
======== ======== ======== ======== ========
Diluted earnings:
Net income applicable to common stock- basic $218,441 $421,548 $384,507 $249,697 $303,308
Dividend adjustment on restricted stock plan
shares to reflect shares assumed issued 1,807 1,733 1,520 1,147 902
Dividends applicable to convertible preferred stock -- -- -- 5,920 11,643
-------- -------- -------- -------- --------
Net income applicable to common stock - diluted $220,248 $423,281 $386,027 $256,764 $315,853
======== ======== ======== ======== ========
Shares:
Average common shares outstanding - excluding restricted stock plan shares 104,328 105,625 107,481 104,641 102,001
Net shares assumed issued under compensation stock plans 1,834 1,726 1,572 1,593 1,366
Shares assumed issued on exercise of stock options 74 110 136 322 458
Shares assumed issued on conversion of preferred stock -- -- -- 3,956 7,138
-------- -------- -------- -------- --------
Average common shares outstanding 106,236 107,461 109,189 110,512 110,963
======== ======== ======== ======== ========
Diluted earnings per common share $ 2.07 $ 3.94 $ 3.54 $ 2.32 $ 2.85
======== ======== ======== ======== ========
</TABLE>
Amounts have been adjusted to reflect the two-for-one stock split distributed in
June, 1998.
<PAGE> 1
CALCULATION OF RATIOS OF EARNINGS TO EXHIBIT 12
FIXED CHARGES-CONSOLIDATED
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
EXCLUDING INTEREST ON DEPOSITS
Fixed Charges:
Interest on long-term debt and short-term
borrowings $ 729,716 $ 731,003 $ 588,693 $ 489,697 $ 499,065
One-third of rent expense 13,787 14,137 14,495 13,651 14,412
---------- ---------- ---------- ---------- ----------
Total fixed charges $ 743,503 $ 745,140 $ 603,188 $ 503,348 $ 513,477
========== ========== ========== ========== ==========
Earnings:
Income before income taxes $ 336,296 $ 636,330 $ 590,546 $ 398,115 $ 492,366
Fixed charges 743,503 745,140 603,188 503,348 513,477
---------- ---------- ---------- ---------- ----------
Total earnings $1,079,799 $1,381,470 $1,193,734 $ 901,463 $1,005,843
========== ========== ========== ========== ==========
Ratio of earnings to fixed charges excluding
interest on deposits 1.45x 1.85x 1.98x 1.79x 1.96x
INCLUDING INTEREST ON DEPOSITS
Fixed Charges:
Interest on long-term debt, short-term
borrowings and deposits $2,199,701 $2,182,026 $1,870,898 $1,627,772 $1,326,855
One-third of rent expense 13,787 14,137 14,495 13,651 14,412
---------- ---------- ---------- ---------- ----------
Total fixed charges $2,213,488 $2,196,163 $1,885,393 $1,641,423 $1,341,267
========== ========== ========== ========== ==========
Earnings:
Income before income taxes $ 336,296 $ 636,330 $ 590,546 $ 398,115 $ 492,366
Fixed charges 2,213,488 2,196,163 1,885,393 1,641,423 1,341,267
---------- ---------- ---------- ---------- ----------
Total earnings $2,549,784 $2,832,493 $2,475,939 $2,039,538 $1,833,633
========== ========== ========== ========== ==========
Ratio of earnings to fixed charges including
interest on deposits 1.15x 1.29x 1.31x 1.24x 1.37x
</TABLE>
For the purpose of computing the consolidated ratio of earnings to fixed
charges, earnings represent consolidated income before income taxes plus fixed
charges. Fixed charges excluding interest on deposits consist of interest on
long-term debt and short-term borrowings and one-third of rental expense (which
is deemed representative of the interest factor). Fixed charges including
interest on deposits consist of the foregoing items plus interest on deposits.
<PAGE> 1
Exhibit 21
Republic New York Corporation
Principal Subsidiaries as of December 31, 1998
<TABLE>
<CAPTION>
Name of Corporation Jurisdiction of Formation
- ------------------- -------------------------
<S> <C>
Republic New York Corporation Maryland
Delaware Securities Processing Corp. Delaware
R/Clip Corp. Delaware
Republic Bank California National Association United States
Republic Bank Delaware National Association United States
Republic Business Credit Corporation New York
Republic Investments (Canada) Limited Canada
Republic New York Capital I (statutory business trust) Delaware
Republic New York Capital II (statutory business trust) Delaware
Republic New York Capital III (statutory business trust) Delaware
Republic New York Capital IV (statutory business trust) Delaware
Republic New York Securities Corporation Maryland
Republic Services Corporation Maryland
RICS NJ, Inc. New Jersey
RNYC Liquid Portfolio Corporation Delaware
RNYC - NJ Realty Corp. New Jersey
Republic National Bank of New York United States
C.B. "Republic National Bank of New York (RR)" (L.L.C.) Russia
Delaware Mortgage Investors Corporation Delaware
Nevada Asset Management Corporation Nevada
Nievo SRL Italy
Republic Consumer Lending Group, Inc. New York
Republic Financial Services Corporation New York
Republic Forex Options Corporation Maryland
Republic Insurance Agency Corp. New York
Republic International Bank of New York (Miami) United States
Republic Leasing (Chile) S.A. Chile
Republic Factoring (Chile) Limited Chile
RIBNY Overseas Investments Holding Corporation Delaware
RNYOIC Limited Channel Islands
Republic Leasing (Uruguay) S.A. Uruguay
Republic National Bank of New York (Singapore) Limited Singapore
Republic National Bank of New York (Uruguay) S.A. Uruguay
RNB Finance (Hong Kong) Limited Hong Kong
RNB Hong Kong (Nominees) Limited Hong Kong
Republic National Bank of New York (Mexico) S.A. Mexico
Imobiliaria RNB, S.A. de C.V. Mexico
Republic New York Investment Corporation Delaware
Republic Overseas Banks Holding Corporation Delaware
Republic International Bank of New York (Delaware) United States
Republic Investment Management Sociedad Gerente de
Fondos Comunes de Inversion S.A. Argentina
Republic New York Holdings (UK) England
Republic Mase England
Republic Mase Australia Limited Australia
Republic Mase Australia (NZ) Limited Australia
Republic Mase Hong Kong Limited Hong Kong
Republic New York (U.K.) Limited England
Republic National Bank of New York (Canada) Canada
Republic Securities Canada Inc. Canada
Republic National Bank of New York (Cayman) Limited Cayman Islands
Republic National Bank of New York (Cyprus) Limited ABIA Cyprus
Republic National Bank of New York (International) Limited Bahamas
Banco Republic National Bank of New York (Brasil) S.A. Brazil
Safra Republic Holdings S.A. Luxembourg
Republic National Bank of New York (France) France
Republic National Bank of New York (Gibraltar) Limited Gibraltar
Republic National Bank of New York (Guernsey) Limited Channel Islands
Republic National Bank of New York (Luxembourg) S.A. Luxembourg
Republic National Bank of New York (Monaco) S.A. Monaco
Republic National Bank of New York (Suisse) S.A. Switzerland
Safra Republic Investments (Guernsey) Limited* Channel Islands
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
Republic Premises Corporation Maryland
Safra/Republic Corporation Maryland
R.N.B (Delaware) Vault Corporation Delaware
RNB (Nominees) Limited England
RNB Services Limited England
Tower Holding New York Corp. New York
Williamsburgh Financial Corporation Delaware
* 50% owned by Republic International
Bank of New York (Delaware).
</TABLE>
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Republic New York Corporation
We consent to incorporation by reference in Registration Statements (No.
333-42421, No. 333-42421-01 and No. 333-42421-02) of Form S-3 and in
Registration Statements (No. 33-57351, No. 33-38789 and No. 33-49639) on Form
S-8 of Republic New York Corporation of our report dated January 19, 1999,
relating to the consolidated statements of condition of Republic New York
Corporation as of December 31, 1998 and 1997, 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, 1998, and the consolidated
statements of condition of Republic National Bank of New York as of December 31,
1998 and 1997, which report appears in the 1998 Republic New York Corporation
Annual Report on Form 10-K.
KPMG LLP
New York, New York
March 8, 1999
<PAGE> 1
Exhibit 23a
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Safra Republic Holdings S.A.
We consent to incorporation by reference in Registration Statements (No.
333-42421, No. 333-42421-01 and No. 333-42421-02) of Form S-3 and in
Registration Statements (No. 33-57351, No. 33-38789 and No. 33-49639) on Form
S-8 of Republic New York Corporation of our report dated January 15, 1999,
relating to the consolidated statements of condition of Safra Republic Holdings
S.A. as of December 31, 1998 and 1997, and the related consolidated statements
of income, comprehensive income, changes in stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1998, which is
included in the 1998 Republic New York Corporation Annual Report on Form 10-K.
Our report refers to application of generally accepted accounting principles in
the Unites States which vary in certain significant respects from generally
accepted account principles in Luxembourg. Application of generally accepted
accounting principles in Luxembourg would have affected results of operations
for the two-year period ended December 31, 1998 and shareholders' equity and
total assets as of December 31, 1998 and 1997, to the extent summarised in Note
24 to the consolidated financial statements of Safra Republic Holdings S.A.
Luxembourg, March 8, 1999 KPMG Audit
Reviseurs d'enterprises
/s/ D.G. Robertson
------------------------
D.G. Robertson
<PAGE> 1
Exhibit 24
REPUBLIC NEW YORK CORPORATION
FORM OF POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or Officer of
Republic New York Corporation ("Republic"), a Maryland corporation, hereby
constitutes and appoints each of Ernest Ginsberg or William F. Rosenblum, Jr.,
his or her true and lawful attorney and agent, in the name and on behalf of the
undersigned, with full power to act alone, to do any and all acts and things and
execute any and all instruments which the said attorney and agent may deem
necessary or advisable to enable Republic to file a Report on Form 10-K under
the Securities Act of 1934, as amended, for the fiscal year ended December 31,
1998 and to comply with the Securities Act of 1934, as amended, and any rules
and regulations and requirements of the Securities and Exchange Commission in
respect thereof, including the power and authority to sign the name of the
undersigned in his or her capacity as Director and/or Officer of Republic
(including the power to affix the undersigned's signature in typed form as
required by Rule 499(d)(2) of the Securities Act of 1933, as amended) to such
Report to be filed with the Securities and Exchange Commission with respect
thereto and to any and all amendments to the said Report and to any and all
instruments and documents filed as a part of or in connection with the said
Report or amendments thereto, HEREBY RATIFYING AND CONFIRMING all that the said
attorneys and agents, or any of them, has done, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his or her hand this _____
day of March 1999.
______________________________
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,040,290
<INT-BEARING-DEPOSITS> 4,218,893
<FED-FUNDS-SOLD> 689,335
<TRADING-ASSETS> 3,397,110
<INVESTMENTS-HELD-FOR-SALE> 16,434,523
<INVESTMENTS-CARRYING> 6,731,714
<INVESTMENTS-MARKET> 6,882,926
<LOANS> 13,648,837
<ALLOWANCE> 293,952
<TOTAL-ASSETS> 50,424,154
<DEPOSITS> 33,219,759
<SHORT-TERM> 4,441,210
<LIABILITIES-OTHER> 166,649
<LONG-TERM> 4,538,473
<COMMON> 536,611
0
500,000
<OTHER-SE> 2,104,139
<TOTAL-LIABILITIES-AND-EQUITY> 50,424,154
<INTEREST-LOAN> 1,107,681
<INTEREST-INVEST> 1,622,112
<INTEREST-OTHER> 504,171
<INTEREST-TOTAL> 3,233,964
<INTEREST-DEPOSIT> 1,469,985
<INTEREST-EXPENSE> 2,199,701
<INTEREST-INCOME-NET> 1,034,263
<LOAN-LOSSES> 8,000
<SECURITIES-GAINS> (186,086)
<EXPENSE-OTHER> 978,565
<INCOME-PRETAX> 336,296
<INCOME-PRE-EXTRAORDINARY> 248,047
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 248,047
<EPS-PRIMARY> 2.09
<EPS-DILUTED> 2.07
<YIELD-ACTUAL> 2.31
<LOANS-NON> 80,854
<LOANS-PAST> 17,006
<LOANS-TROUBLED> 561
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 326,481
<CHARGE-OFFS> 55,740
<RECOVERIES> 15,157
<ALLOWANCE-CLOSE> 293,952
<ALLOWANCE-DOMESTIC> 171,982
<ALLOWANCE-FOREIGN> 121,970
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
