-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C9NdwDZdAHHkpWXyCK9LiV2LaDI/X5oMqtImSxc8OaCDohoAzyAKiBnOBTDmqJNt WRZmpsOLbXHl44mi2dpCpg== 0000950123-99-001965.txt : 19990310 0000950123-99-001965.hdr.sgml : 19990310 ACCESSION NUMBER: 0000950123-99-001965 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990309 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REPUBLIC NEW YORK CORP CENTRAL INDEX KEY: 0000083246 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 132764867 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07436 FILM NUMBER: 99560719 BUSINESS ADDRESS: STREET 1: 452 FIFTH AVE CITY: NEW YORK STATE: NY ZIP: 10018 BUSINESS PHONE: 2125256100 10-K 1 FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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) 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)
(212) 525-6100 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - ------------------- ----------------------------------------- Common Stock, Par Value $5.00 Per Share New York Stock Exchange The International Stock Exchange of the United Kingdom & The Republic of Ireland Ltd. Depositary Shares, each representing a one- fourth interest in a share of Adjustable Rate Cumulative Preferred Stock, Series D New York Stock Exchange $1.8125 Cumulative Preferred Stock New York Stock Exchange $2.8575 Cumulative Preferred Stock New York Stock Exchange 8 3/8% Debentures Due 2007 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of Common Stock of the registrant held by non-affiliates at 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:
DOCUMENT LOCATION IN FORM 10-K -------- --------------------- Proxy Statement for 1999 Annual Meeting, to the extent Part III indicated
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 CONTENTS
PAGE ---- 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
3 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. 1 4 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. 2 5 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- 3 6 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 4 7 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 5 8 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 6 9 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 7 10 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 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.
1998 ------------------------------------------------- FOURTH THIRD SECOND FIRST QTR. QTR. QTR. QTR. - ----------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------- 1997 ---------------------------------------------- FOURTH THIRD SECOND FIRST QTR. QTR. QTR. QTR. - -------------------------- ---------------------------------------------- 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 - --------------------------
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.
1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------- 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% - -------------------------------------------------------------------------------------------
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 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.
INCREASE INCREASE (DECREASE) (DECREASE) ------------------ ----------------- (DOLLARS IN THOUSANDS) 1998 AMOUNT % 1997 AMOUNT % 1996 - ---------------------------------------------------------------------------------------------------------------- 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 ================================================================================================================
10 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.
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 - -------------------------------------------------------------------------------------------------------------- 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% ============================================================================================================== YEAR ENDED DECEMBER 31, ---------------------------------- 1996 ---------------------------------- AVERAGE INTEREST RATES AVERAGE INCOME/ EARNED/ (DOLLARS IN THOUSANDS) BALANCE EXPENSE PAID - ------------------------------------- ---------------------------------- 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% ===================================== ===================================
(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 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.
INCREASE (DECREASE) --------------------------------------------------------------- 1998 VS. 1997 1997 VS. 1996 ------------------------------ ------------------------------ AVERAGE AVERAGE AVERAGE AVERAGE (IN THOUSANDS) VOLUME RATE TOTAL VOLUME RATE TOTAL - --------------------------------------------------------------------------------------------------- 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 ===================================================================================================
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 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.
INCREASE INCREASE (DECREASE) (DECREASE) ------------------ --------------- (DOLLARS IN THOUSANDS) 1998 AMOUNT % 1997 AMOUNT % 1996 - --------------------------------------------------------------------------------------------------- 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 ===================================================================================================
* Exceeds 200% 13 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.
(DOLLARS IN THOUSANDS) 1998 1997 1996 - ---------------------------------------------------------------------------------------------- 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 ==============================================================================================
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 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 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.
(IN THOUSANDS EXCEPT PER SHARE DATA) 1998 1997 1996 - -------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------
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 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.
INCREASE INCREASE (DECREASE) (DECREASE) -------------- ---------------- (DOLLARS IN THOUSANDS) 1998 AMOUNT % 1997 AMOUNT % 1996 - ---------------------------------------------------------------------------------------------------- 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 ====================================================================================================
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 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 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 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.
% OF TOTAL MILESTONES % OF APPLICATIONS COMPLETED AT CERTIFIED AT DECEMBER 31, 1998 DECEMBER 31, 1998 ------------------- ------------------- IT NON-IT IT NON-IT - --------------------------------------------------------------------------------- Mission critical 70% 23% Mission critical 62% 16% Medium 71 42 Medium 54 36 Low 80 31 Low 75 25 - ---------------------------------------------------------------------------------
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 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.
1999 2000 -------------------------------------- ------- 1997 1998 1ST QTR 2ND QTR 3RD QTR 4TH QTR 1ST QTR TOTAL - ------------------------------------------------------------------------- (In millions) $15.5 $35.0 $4.2* $2.2* $1.1* $1.0* $1.0* $60.0* - -------------------------------------------------------------------------
* 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 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 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.
CONSUMER PRIVATE FINANCIAL GLOBAL GLOBAL (DOLLARS IN THOUSANDS) BANKING SERVICES LENDING TREASURY MARKETS OTHER TOTAL - ----------------------------------------------------------------------------------------------------------------------- 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% - -----------------------------------------------------------------------------------------------------------------------
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 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 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 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 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.
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 - --------------------------------------------------------------------------------------------- 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 $ -- =============================================================================================
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 - --------------------------------------------------------------------------------------------- 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 $ -- =============================================================================================
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 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.
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 - ---------------------------------------------------------------------- -------------------------------------------- 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 - -------------------------------------------------------------------- --------------------------------------------
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 31 The following table sets forth the Corporation's deposit structure at December 31, in each of the last three years.
(IN THOUSANDS) 1998 1997 1996 - -------------------------------------------------------------------------------------------- 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 ============================================================================================
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.
CERTIFICATES OF OTHER TIME DEPOSITS DEPOSITS TOTAL --------------- ----------------- ----------------- (DOLLARS IN THOUSANDS) AMOUNT % AMOUNT % AMOUNT % - ------------------------------------------------------------------------------------------ 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 ==========================================================================================
29 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.
(IN THOUSANDS) 1998 1997 1996 - -------------------------------------------------------------------------------------------- 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 ============================================================================================
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 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.
(DOLLARS IN THOUSANDS) 1998 1997 1996 - ------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------
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 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.
ASSETS LIABILITIES ------------------------- ------------------------- DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL - ---------------------------------------------------------------------------------------- 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% - ----------------------------------------------------------------------------------------
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.
(IN THOUSANDS) 1998 1997 1996 - -------------------------------------------------------------------------------------------- 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 ============================================================================================
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 35 The following table provides information on the maturity distribution of the Corporation's interest-bearing deposits with banks at December 31, 1998.
MATURITY (DOLLARS IN MILLIONS) DISTRIBUTION % - --------------------------------------------------------------------------------- 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 =================================================================================
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.
(IN THOUSANDS) 1998 1997 1996 - -------------------------------------------------------------------------------------------- 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 ============================================================================================
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 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."
SECURITIES HELD TO MATURITY DECEMBER 31, 1998 ------------------------------------ ESTIMATED WEIGHTED BOOK MARKET AVERAGE (DOLLARS IN THOUSANDS) VALUE VALUE YIELD - -------------------------------------------------------------------------------------------- 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 ================================================================================
34 37
SECURITIES AVAILABLE FOR SALE DECEMBER 31, 1998 ---------------------------------------- WEIGHTED AMORTIZED BOOK/ESTIMATED AVERAGE (DOLLARS IN THOUSANDS) COST MARKET VALUE YIELD - --------------------------------------------------------------------------------------- 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 ===========================================================================
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.
OTHER SECURITIES AVAILABLE FOR SALE DECEMBER 31, 1998 -------------------------------- AMORTIZED BOOK/ESTIMATED (IN THOUSANDS) COST MARKET VALUE - ----------------------------------------------------------------------------------------- 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 =========================================================================================
35 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.
(IN THOUSANDS) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------- 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 ===============================================================================================
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 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.
DUE AFTER ONE DUE IN ONE YEAR THROUGH DUE AFTER (IN THOUSANDS) YEAR OR LESS FIVE YEARS FIVE YEARS TOTAL - ----------------------------------------------------------------------------------------- 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 =========================================================================================
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.
(IN THOUSANDS) FIXED RATE VARIABLE RATE TOTAL - ------------------------------------------------------------------------------------------ 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 ==========================================================================================
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 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.
(IN THOUSANDS) 1998 1997 1996 - -------------------------------------------------------------------------------------------- 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 ============================================================================================
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 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 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.
(IN THOUSANDS) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------ 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 ==========================================================================================
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 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.
(DOLLARS IN MILLIONS) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------
(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 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.
(IN THOUSANDS) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------ 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 ==========================================================================================
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 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.
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 - ---------------------------------------------------------------------------------------------------------- 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 ==========================================================================================================
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 - ---------------------------------------------------------------------------------------------------------- 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 ==========================================================================================================
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 - ---------------------------------------------------------------------------------------------------------- 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 ==========================================================================================================
43 46
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 - ---------------------------------------------------------------------------------------------------------- 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 ==========================================================================================================
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 - ---------------------------------------------------------------------------------------------------------- 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 ==========================================================================================================
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 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:
BANKS AND GOVERNMENT OTHER AND COMMERCIAL FINANCIAL OFFICIAL AND (IN MILLIONS) INSTITUTIONS INSTITUTIONS INDUSTRIAL(1)(2)(3) 1998 1997 1996 - -------------------------------------------------------------------------------------------------------- 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 ========================================================================================================
(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 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.
YEAR ENDED DECEMBER 31, ----------------------- (IN MILLIONS) 1998 1997 1996 - ------------------------------------------------------------------------------------- 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 =====================================================================================
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 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 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 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.
YEAR ENDED DECEMBER 31, 1998 ----------------------------- (IN MILLIONS) AVERAGE MINIMUM MAXIMUM - -------------------------------------------------------------------------------------- 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 ======================================================================================
49 52
1-DAY VAR AT DECEMBER 31, -------------- (IN MILLIONS) 1998 1997 - ---------------------------------------------------------------------------- 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 ============================================================================
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 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 54 FINANCIAL RATIOS The following table presents financial ratios for each of the years in the five years ended December 31, 1998.
YEAR ENDED DECEMBER 31, ---------------------------------------- 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------- 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 ===========================================================================================
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 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.
(IN THOUSANDS) 1998 1997 1996 - ------------------------------------------------------------------------------------------- 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% ===========================================================================================
(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 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.
1998 1997 1996 - ------------------------------------------------------------------------------------- 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% =====================================================================================
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 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 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:
PAGE ---- 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
SUPPLEMENTARY DATA The following supplementary data are set forth in this Report on the following pages: Five Year Consolidated Statements of Condition.............. 105 Five Year Consolidated Statements of Income................. 106 Summary of Unaudited Quarterly Financial Information........ 107
AFFILIATE FINANCIAL STATEMENTS The following audited financial statements of Safra Republic are set forth in this Report on the following pages: 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
56 59 REPUBLIC NEW YORK CORPORATION CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, -------------------------- (DOLLARS IN THOUSANDS) 1998 1997 - ---------------------------------------------------------------------------------------- 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 ========================================================================================
See accompanying notes to consolidated financial statements. 57 60 REPUBLIC NEW YORK CORPORATION CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA) 1998 1997 1996 - -------------------------------------------------------------------------------------------- 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 ============================================================================================
See accompanying notes to consolidated financial statements. 58 61 REPUBLIC NEW YORK CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------- 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 ====================================================================================================
See accompanying notes to consolidated financial statements. 59 62 REPUBLIC NEW YORK CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------- 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 =======================================================================================================
See accompanying notes to consolidated financial statements. 60 63 REPUBLIC NATIONAL BANK OF NEW YORK CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, -------------------------- (DOLLARS IN THOUSANDS) 1998 1997 - ---------------------------------------------------------------------------------------- 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 ========================================================================================
See accompanying notes to consolidated financial statements. 61 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 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 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 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 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.
(IN THOUSANDS EXCEPT PER SHARE DATA) 1998 1997 1996 - ------------------------------------------------------------------------------------------- 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 ===========================================================================================
66 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.
SECURITIES HELD TO MATURITY ------------------------------------------------ 1998 ------------------------------------------------ GROSS UNREALIZED ESTIMATED BOOK -------------------- MARKET (IN THOUSANDS) VALUE GAINS (LOSSES) VALUE - -------------------------------------------------------------------------------------------- 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 ============================================================================================
SECURITIES AVAILABLE FOR SALE --------------------------------------------------- 1998 --------------------------------------------------- GROSS UNREALIZED BOOK/ AMORTIZED --------------------- MARKET (IN THOUSANDS) COST GAINS (LOSSES) VALUE - ------------------------------------------------------------------------------------------- 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 ===========================================================================================
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 70 REPUBLIC NEW YORK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SECURITIES HELD TO MATURITY ------------------------------------------------ 1997 ------------------------------------------------ GROSS UNREALIZED ESTIMATED BOOK -------------------- MARKET (IN THOUSANDS) VALUE GAINS (LOSSES) VALUE - -------------------------------------------------------------------------------------------- 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 ============================================================================================
SECURITIES AVAILABLE FOR SALE --------------------------------------------------- 1997 --------------------------------------------------- GROSS UNREALIZED BOOK/ AMORTIZED --------------------- MARKET (IN THOUSANDS) COST GAINS (LOSSES) VALUE - ------------------------------------------------------------------------------------------- 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 ===========================================================================================
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 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.
SECURITIES HELD SECURITIES AVAILABLE TO MATURITY FOR SALE ------------------------------------------------------ ESTIMATED BOOK/ BOOK MARKET AMORTIZED MARKET (IN THOUSANDS) VALUE VALUE COST VALUE - -------------------------------------------------------------------------------------------- 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 ============================================================================================
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.
1998 1997 1996 -------------------------------- ---------------------------- ---------------------------- GROSS NET GROSS GROSS -------------------- GAINS ------------------ NET ------------------ NET (IN THOUSANDS) GAINS (LOSSES) (LOSSES) GAINS (LOSSES) GAINS GAINS (LOSSES) GAINS - ------------------------------------------------------------------- ---------------------------- ---------------------------- 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 =================================================================== ============================ ============================
69 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.
(IN THOUSANDS) 1998 1997 - -------------------------------------------------------------------------------------- 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 ======================================================================================
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.
(IN THOUSANDS) 1998 1997 1996 - ------------------------------------------------------------------------------------------- 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 ===========================================================================================
70 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.
AVERAGE FAIR VALUE DURING FAIR VALUE AT 1998 DECEMBER 31, 1998 ------------- --------------------------- ASSETS (IN THOUSANDS) (LIABILITIES) ASSETS LIABILITIES - --------------------------------------------------------------------------------------------------------- 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 =========================================================================================================
AVERAGE FAIR VALUE DURING FAIR VALUE AT 1997 DECEMBER 31, 1997 ------------- --------------------------- ASSETS (IN THOUSANDS) (LIABILITIES) ASSETS LIABILITIES - --------------------------------------------------------------------------------------------------------- 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 =========================================================================================================
71 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.
(IN THOUSANDS) 1998 1997 - ---------------------------------------------------------------------------------------- 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 ========================================================================================
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:
1998 1997 1996 ------------------------------ ------------------------------ ------------------------------ (IN THOUSANDS) DOMESTIC FOREIGN TOTAL DOMESTIC FOREIGN TOTAL DOMESTIC FOREIGN TOTAL - -------------------------------------------------------------- ------------------------------ ------------------------------ 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 ============================================================== ============================== ==============================
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 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.
(IN THOUSANDS) 1998 1997 1996 - ---------------------------------------------------------------------------------------------- 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 ==============================================================================================
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.
(IN THOUSANDS) 1998 1997 1996 - -------------------------------------------------------------------------------------------- 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 ============================================================================================
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.
(IN THOUSANDS) 1998 1997 1996 - ------------------------------------------------------------------------------------------- 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 ===========================================================================================
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.
(IN THOUSANDS) 1998 1997 1996 - ----------------------------------------------------------------------------------------- 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 =========================================================================================
73 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:
(IN THOUSANDS) 1998 1997 - ---------------------------------------------------------------------------------------- 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 ========================================================================================
8. PREMISES AND EQUIPMENT A summary of the Corporation's premises and equipment at respective year ends follows:
(IN THOUSANDS) 1998 1997 - ------------------------------------------------------------------------------------ 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 ====================================================================================
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.
(IN THOUSANDS) 1998 1997 - -------------------------------------------------------------------------------------- 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 ======================================================================================
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 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:
(IN THOUSANDS) 1998 1997 - -------------------------------------------------------------------------------------- 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 ======================================================================================
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 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:
(IN THOUSANDS) 1998 1997 - -------------------------------------------------------------------------------------- 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 ======================================================================================
* 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 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.
DECEMBER 31, (IN THOUSANDS) 1998 AND 1997 - ---------------------------------------------------------------------------- 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 ============================================================================
77 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.
DIVIDEND SHARES RATE AT AMOUNT OUTSTANDING DECEMBER 31, OUTSTANDING ----------- ------------ -------------------- (DOLLARS IN THOUSANDS) 1998 1998 1998 1997 - ---------------------------------------------------------------------------------------- $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 ========================================================================================
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 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.
UNREALIZED APPRECIATION FOREIGN ACCUMULATED (DEPRECIATION) CURRENCY OTHER ON SECURITIES TRANSLATION COMPREHENSIVE AVAILABLE GAINS INCOME (IN THOUSANDS) FOR SALE (LOSSES) (LOSS) - --------------------------------------------------------------------------------------------------- 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) ===================================================================================================
79 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.
TAX BEFORE TAX (EXPENSE) AFTER TAX (IN THOUSANDS) AMOUNT BENEFIT AMOUNT - -------------------------------------------------------------------------------------------------- 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) ==================================================================================================
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:
(IN THOUSANDS) 1998 1997 1996 - ----------------------------------------------------------------------------------------------- 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 ===============================================================================================
80 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:
(IN THOUSANDS) 1998 1997 1996 - ----------------------------------------------------------------------------------------------- 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 ===============================================================================================
The following table reconciles the expected income tax expense at the statutory 35% to the actual income tax expense reported for the years presented.
% OF PRETAX INCOME -------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------- 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 ==================================================================================
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.
(IN THOUSANDS) 1998 1997 - ---------------------------------------------------------------------------------- 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) ==================================================================================
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 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.
(IN THOUSANDS) 1998 1997 1996 - ---------------------------------------------------------------------------------------------- Foreign $154,975 $458,525 $347,754 Domestic 181,321 177,805 242,792 - ---------------------------------------------------------------------------------------------- $336,296 $636,330 $590,546 ==============================================================================================
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 85 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:
PENSION BENEFITS OTHER BENEFITS -------------------- -------------------- (IN THOUSANDS) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------ 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 ==========================================================================================
PENSION BENEFITS OTHER BENEFITS ----------------------- ----------------------- 1998 1997 1996 1998 1997 1996 - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- 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%
83 86 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:
PENSION BENEFITS OTHER BENEFITS ------------------------------ ------------------------ (IN THOUSANDS) 1998 1997 1996 1998 1997 1996 - ------------------------------------------------------------------------------------------ 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 ==========================================================================================
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:
1% 1% (IN THOUSANDS) INCREASE DECREASE - ---------------------------------------------------------------------------------- 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) ==================================================================================
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 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 88 REPUBLIC NEW YORK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OPTION PRICE OPTIONS PER SHARE - --------------------------------------------------------------------------------------- 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 =======================================================================================
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 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 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 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 92 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.
CONSUMER PRIVATE FINANCIAL GLOBAL GLOBAL (IN THOUSANDS) BANKING SERVICES LENDING TREASURY MARKETS OTHER TOTAL - ------------------------------------------------------------------------------------------------------------------- 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 ===================================================================================================================
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.
(IN THOUSANDS) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------- 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 ====================================================================================================
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 93 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.
DECEMBER 31, ------------------------------------------------ 1998 1997 ---------------------- ---------------------- CARRYING ESTIMATED CARRYING ESTIMATED (IN MILLIONS) VALUE FAIR VALUE VALUE FAIR VALUE - --------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------
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 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 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 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 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.
DECEMBER 31, ---------------------------------------------------------- 1998 1997 --------------------------- --------------------------- CONTRACTUAL/NOTIONAL AMOUNTS ---------------------------------------------------------- ASSET/LIABILITY ASSET/LIABILITY (IN MILLIONS) TRADING MANAGEMENT TRADING MANAGEMENT - ---------------------------------------------------------------------- --------------------------- 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 $ -- ====================================================================== ===========================
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:
(IN MILLIONS) 1998 1997 - ------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------
95 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.
(IN THOUSANDS) 1998 1997 - ---------------------------------------------------------------------------------- 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 ==================================================================================
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 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:
(IN THOUSANDS) 1998 1997 - -------------------------------------------------------------------------------------- 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 ======================================================================================
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. 97 100 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.
FOR CAPITAL ADEQUACY TO BE WELL ACTUAL PURPOSES CAPITALIZED ------------------ ------------------ ------------------ (DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - ------------------------------------------------------------ ------------------ ------------------ 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%
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. 98 101 REPUBLIC NEW YORK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 23. REPUBLIC NEW YORK CORPORATION (PARENT COMPANY ONLY) CONDENSED BALANCE SHEETS
DECEMBER 31, ------------------------ (IN THOUSANDS) 1998 1997 - -------------------------------------------------------------------------------------- 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 ======================================================================================
99 102 REPUBLIC NEW YORK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS) 1998 1997 1996 - ---------------------------------------------------------------------------------------------- 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 ==============================================================================================
100 103 REPUBLIC NEW YORK CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) 1998 1997 1996 - ------------------------------------------------------------------------------------------------- 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 $ -- $ -- $ -- =================================================================================================
101 104 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 102 105 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. /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
New York, New York January 19, 1999 103 106 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 104 107 SUPPLEMENTARY DATA REPUBLIC NEW YORK CORPORATION CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, ----------------------------------------------------------------------- (IN THOUSANDS) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------- 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 =================================================================================================================
105 108 REPUBLIC NEW YORK CORPORATION CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------- 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
(1) Adjusted to reflect a two-for-one common stock split distributed in June, 1998. 106 109 REPUBLIC NEW YORK CORPORATION SELECTED FINANCIAL DATA -- SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
--------------------1997-------------------- (In thousands --------------------1998-------------------- EXCEPT PER SHARE DATA) FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST - --------------------------------------------------------------------- -------------------------------------------- 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 $0.97 Diluted 0.92 (0.96) 1.05 1.03 1.01 0.99 0.98 0.96 Average common shares outstanding(1): Basic 103,750 103,985 104,691 104,901 105,128 105,559 105,632 106,196 Diluted 105,756 103,985 106,652 106,736 107,355 107,666 106,724 108,101 ===================================================================== ============================================
(1) Adjusted to reflect a two-for-one common stock split distributed in June, 1998. 107 110 AFFILIATE FINANCIAL STATEMENTS SAFRA REPUBLIC HOLDINGS S.A. CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, ------------------------ (IN THOUSANDS OF US$ EXCEPT PER SHARE DATA) NOTES 1998 1997 - -------------------------------------------------------------------------------------------------- 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 ==================================================================================================
See accompanying notes to consolidated financial statements. 108 111 SAFRA REPUBLIC HOLDINGS S.A. CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, ----------------------------------- (In thousands of US$ except per share data) NOTES 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------ 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 ============================================================================================================
See accompanying notes to consolidated financial statements. 109 112 SAFRA REPUBLIC HOLDINGS S.A. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, ------------------------------ (IN THOUSANDS OF US$) 1998 1997 1996 - -------------------------------------------------------------------------------------------- NET INCOME 280,207 255,055 189,830 OTHER COMPREHENSIVE INCOME (LOSS): Foreign currency translation adjustment (19,190) (34,544) (44,787) Net unrealised appreciation (depreciation) on securities available for sale, arising during the year net of taxes of US$ 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 ============================================================================================
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
YEAR ENDED DECEMBER 31, ------------------------------ (IN THOUSANDS OF US$) 1998 1997 1996 - -------------------------------------------------------------------------------------------- CUMULATIVE TRANSLATION ADJUSTMENT: Balance at beginning of year (43,694) (9,150) 35,637 Decrease during the year (19,190) (34,544) (44,787) - -------------------------------------------------------------------------------------------- Balance at end of year (62,884) (43,694) (9,150) ============================================================================================ NET UNREALISED APPRECIATION (DEPRECIATION) ON SECURITIES AVAILABLE FOR SALE, NET OF TAXES AND RECLASSIFICATIONS: Balance at beginning of year 83,690 102,314 13,222 Increase (decrease) during the year (163,537) (18,624) 89,092 - -------------------------------------------------------------------------------------------- Balance at end of year (79,847) 83,690 102,314 ============================================================================================ TOTAL ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (142,731) 39,996 93,164 ============================================================================================
See accompanying notes to consolidated financial statements. 110 113 SAFRA REPUBLIC HOLDINGS S.A. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, -------------------------------------- (IN THOUSANDS OF US$) 1998 1997 1996 - ------------------------------------------------------------------------------------------------ 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 ================================================================================================
See accompanying notes to consolidated financial statements. 111 114 SAFRA REPUBLIC HOLDINGS S.A. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ---------------------------------------- (IN THOUSANDS OF US$) 1998 1997 1996 - -------------------------------------------------------------------------------------------------------- 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 ========================================================================================================
See accompanying notes to consolidated financial statements. 112 115 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. 113 116 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 114 117 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 115 118 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. 116 119 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:
(IN THOUSANDS OF US$) 1998 1997 - ------------------------------------------------------------------------------------ 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 ====================================================================================
4. INVESTMENT SECURITIES The following tables provide information related to the Company's portfolio of securities available for sale and held to maturity at respective year ends:
SECURITIES AVAILABLE FOR SALE ---------------------------------------------------- 1998 ---------------------------------------------------- GROSS UNREALIZED AMORTISED ------------------- BOOK/ (IN THOUSANDS OF US$) COST GAINS (LOSSES) MARKET - --------------------------------------------------------------------------------------------------------- Banks 1,119,253 52,002 (8,827) 1,162,428 Governments and government agencies 2,879,444 37,800 (169,371) 2,747,873 Companies 1,047,749 18,025 (4,698) 1,061,076 Interest rate swaps and caps -- 4,613 (27,585) (22,972) - --------------------------------------------------------------------------------------------------------- 5,046,446 112,440 (210,481) 4,948,405 =========================================================================================================
117 120 SAFRA REPUBLIC HOLDINGS S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1997 - --------------------------------------------------------------------------------------------------------- GROSS UNREALIZED AMORTISED ------------------- BOOK/ (IN THOUSANDS OF US$) COST GAINS (LOSSES) MARKET - --------------------------------------------------------------------------------------------------------- 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 =========================================================================================================
SECURITIES HELD TO MATURITY ------------------------------------------------- 1998 ------------------------------------------------- BOOK/ GROSS UNREALIZED AMORTISED ------------------ ESTIMATED (IN THOUSANDS OF US$) COST GAINS (LOSSES) MARKET - --------------------------------------------------------------------------------------------------------- Banks 554,416 12,131 (90) 566,457 Governments and government agencies 3,965,079 61,680 (3,597) 4,023,162 Companies 139,626 8,254 (12) 147,868 Interest rate swaps -- 9,163 (17,278) (8,115) - --------------------------------------------------------------------------------------------------------- 4,659,121 91,228 (20,977) 4,729,372 =========================================================================================================
1997 ------------------------------------------------- BOOK/ GROSS UNREALIZED AMORTISED ------------------ ESTIMATED (IN THOUSANDS OF US$) COST GAINS (LOSSES) MARKET - --------------------------------------------------------------------------------------------------------- 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 =========================================================================================================
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.
AVAILABLE FOR SALE HELD TO MATURITY --------------------------- --------------------------- BOOK/ AMORTISED BOOK/ AMORTISED ESTIMATED (IN THOUSANDS OF US$) COST MARKET COST MARKET - --------------------------------------------------------------------------------------------------------- Due in one year or less 249,427 249,891 50,077 50,348 Due after one year but within five years 1,085,793 1,114,165 528,115 554,203 Due after five years but within ten years 1,223,549 1,175,974 388,149 396,650 Due after ten years 757,164 696,150 12,361 13,068 Mortgage-backed securities 1,561,340 1,559,182 3,680,419 3,723,218 Equity securities 169,173 176,015 -- -- Interest rate swaps and caps -- (22,972) -- (8,115) - --------------------------------------------------------------------------------------------------------- 5,046,446 4,948,405 4,659,121 4,729,372 =========================================================================================================
Mortgage-backed securities included in the tables above in available for sale and held to maturity securities have estimated average lives based on year end market conditions of approximately 6.79 years and 3.83 years, respectively. 118 121 SAFRA REPUBLIC HOLDINGS S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) During the year ended December 31, 1998, the Company wrote down to fair value Russian available for sale securities (primarily GKO's) that were considered to be other than temporarily impaired by recording an investment securities loss of US$ 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:
1998 1997 ------------------------ ------------------------ APPROXIMATE APPROXIMATE (IN THOUSANDS OF US$) BOOK MARKET BOOK MARKET - ---------------------------------------------------------------------- ------------------------ United States 6,233,455 6,270,900 6,683,940 6,700,940 United Kingdom and Channel Islands 327,436 338,894 307,769 313,767 Continental Europe 2,231,491 2,252,859 1,739,768 1,743,331 Central and South America 516,690 516,690 609,924 609,926 Canada 83,272 83,272 82,150 82,150 Japan 30,591 30,591 17,628 17,541 Southeast Asia 23,015 23,011 1,566 1,566 Middle East 141,382 141,382 10,125 10,125 Other 20,194 20,178 32,767 32,542 - ---------------------------------------------------------------------- ------------------------ 9,607,526 9,677,777 9,485,637 9,511,888 ====================================================================== ========================
5. TRADING ACCOUNT ASSETS AND TRADING ACCOUNT LIABILITIES The following table presents the composition of trading account assets and trading account liabilities at December 31:
(IN THOUSANDS OF US$) 1998 1997 - -------------------------------------------------------------------------------- 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 ================================================================================
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 119 122 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:
(IN THOUSANDS OF US$) 1998 1997 1996 - ---------------------------------------------------------------------------------------- Foreign exchange and precious metals trading income 52,927 40,169 29,990 - ---------------------------------------------------------------------------------------- Trading account income (loss), net: Mutual funds and equity securities (73) -- 903 Debt securities 4,442 10,457 8,600 Interest rate swaps, options and futures (675) (597) (121) - ---------------------------------------------------------------------------------------- 3,694 9,860 9,382 - ---------------------------------------------------------------------------------------- Total trading income 56,621 50,029 39,372 ========================================================================================
The following tables present information related to the fair value of swaps, forwards, futures and options held for trading purposes:
AVERAGE FAIR FAIR VALUE AT VALUE DURING 1998 DECEMBER 31, 1998 ------------------------------------------------ (IN THOUSANDS OF US$) ASSETS LIABILITIES ASSETS LIABILITIES - -------------------------------------------------------------------------------------------------------- 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 ========================================================================================================
AVERAGE FAIR FAIR VALUE AT VALUE DURING 1997 DECEMBER 31, 1997 ------------------------------------------------ (IN THOUSANDS OF US$) ASSETS LIABILITIES ASSETS LIABILITIES - -------------------------------------------------------------------------------------------------------- Interest rate swaps 177 517 260 555 - -------------------------------------------------------------------------------------------------------- Foreign exchange and precious metals: Spot, swaps and forwards 122,481 140,736 100,074 115,486 Options written -- 77,396 -- 97,316 Options purchased 79,733 -- 100,263 -- - -------------------------------------------------------------------------------------------------------- 202,214 218,132 200,337 212,802 - -------------------------------------------------------------------------------------------------------- Debt and equity securities: Options written -- 13,868 -- 12,302 Options purchased 13,468 -- 11,383 -- - -------------------------------------------------------------------------------------------------------- 13,468 13,868 11,383 12,302 - -------------------------------------------------------------------------------------------------------- 215,859 232,517 211,980 225,659 ========================================================================================================
120 123 SAFRA REPUBLIC HOLDINGS S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. LOANS The following table presents the composition of the Company's loan portfolio at December 31:
(IN THOUSANDS OF US$) 1998 1997 - ------------------------------------------------------------------------------------ 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 ====================================================================================
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:
(IN THOUSANDS OF US$) 1998 1997 1996 - ------------------------------------------------------------------------------------------- Balance at beginning of year 145,040 131,071 130,300 Provision (48,100) 16,000 12,000 - ------------------------------------------------------------------------------------------- 96,940 147,071 142,300 - ------------------------------------------------------------------------------------------- Loans charged-off (32,676) (2,370) (5,494) Recoveries 16,683 8,659 3,269 - ------------------------------------------------------------------------------------------- Net (charge-offs) recoveries (15,993) 6,289 (2,225) - ------------------------------------------------------------------------------------------- Translation adjustment 6,848 (8,320) (9,004) - ------------------------------------------------------------------------------------------- Balance at end of year 87,795 145,040 131,071 ===========================================================================================
At December 31, 1998, the aggregate allowance was apportioned and reported as follows: US$ 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. 121 124 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:
(IN THOUSANDS OF US$) 1998 1997 1996 - ---------------------------------------------------------------------------------- Gross amount of interest that would have been earned at original contract rates 434 590 753 Actual amount recorded as interest income (79) (9) (51) - ---------------------------------------------------------------------------------- Foregone interest income 355 581 702 ==================================================================================
8. DEPOSITS Included in total deposits at December 31, 1998 and 1997 were US$ 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:
(IN THOUSANDS OF US$) 1998 1997 - ------------------------------------------------------------------------------------ Due within 30 days 484,795 535,744 Due after 30 days but within 90 days 285,621 437,708 Due after 90 days but within one year 849,644 995,975 - ------------------------------------------------------------------------------------ 1,620,060 1,969,427 - ------------------------------------------------------------------------------------ Due after one year -- 100,211 - ------------------------------------------------------------------------------------ 1,620,060 2,069,638 ====================================================================================
The following table provides information on securities sold under repurchase agreements at December 31:
(IN THOUSANDS OF US$ EXCEPT FOR INTEREST RATES) 1998 1997 - ------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------
The securities sold under repurchase agreements in 1998 and 1997 consisted principally of GNMA securities and were under the control of the Company. 122 125 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:
(IN THOUSANDS OF US$) 1998 1997 1996 - ---------------------------------------------------------------------------------------- Income from operations 17,105 21,565 15,942 - ---------------------------------------------------------------------------------------- Accumulated other comprehensive income (loss): Net unrealised appreciation (depreciation) on securities available for sale 907 (7,039) 8,311 - ----------------------------------------------------------------------------------------
The components of the Company's consolidated income tax expense from operations for each of the years in the three-year period ended December 31, 1998 were as follows:
(IN THOUSANDS OF US$) 1998 1997 1996 - ---------------------------------------------------------------------------------------- Current tax expense 15,926 15,711 14,959 Deferred tax expense 1,179 5,854 983 - ---------------------------------------------------------------------------------------- 17,105 21,565 15,942 ========================================================================================
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:
(IN THOUSANDS OF US$) 1998 1997 1996 - ---------------------------------------------------------------------------------------- Statutory provisions for credit losses 2,591 3,518 3,072 Unrealised gains (losses) on securities 55 (493) 55 Other, net (1,467) 2,829 (2,144) - ---------------------------------------------------------------------------------------- 1,179 5,854 983 ========================================================================================
123 126 SAFRA REPUBLIC HOLDINGS S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The tax effects of temporary differences that gave rise to a significant portion of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are presented below:
(IN THOUSANDS OF US$) 1998 1997 - -------------------------------------------------------------------------------- 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 ================================================================================
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 124 127 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.
(IN THOUSANDS OF US$ EXCEPT PER SHARE DATA) 1998 1997 1996 - ---------------------------------------------------------------------------------------------- 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 ==============================================================================================
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 125 128 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:
NUMBER AGGREGATE (IN THOUSANDS OF US$ EXCEPT PER SHARE DATA) OF SHARES COST - ------------------------------------------------------------------------------------ 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 ====================================================================================
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.
(IN THOUSANDS OF US$) 1998 1997 - -------------------------------------------------------------------------------- Projected benefit obligation at beginning of year 71,549 60,412 Service cost 5,783 4,361 Interest cost 3,090 2,241 Plan participants' contributions 7,472 5,737 Actuarial (gain) loss (461) 1,141 Benefits paid (4,443) (2,661) Foreign currency exchange rate changes 4,581 (4,368) Acquisition -- 4,686 - -------------------------------------------------------------------------------- Projected benefit obligation at end of year 87,571 71,549 - -------------------------------------------------------------------------------- Fair value of plan assets at beginning of year 74,097 59,397 Actual return on plan assets 1,484 9,711 Employer contributions 3,458 2,449 Plan participants' contributions 7,472 5,737 Benefits paid (4,443) (2,661) Foreign currency exchange rate changes 4,732 (4,295) Acquisition -- 3,759 - -------------------------------------------------------------------------------- Fair value of plan assets at end of year 86,800 74,097 - --------------------------------------------------------------------------------
126 129 SAFRA REPUBLIC HOLDINGS S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF US$) 1998 1997 - ------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------
Net pension expense in each of the last three years consisted of the following:
(IN THOUSANDS OF US$) 1998 1997 1996 - ---------------------------------------------------------------------------------------- Service cost-benefits earned during the period 5,783 4,361 4,093 Interest cost on projected benefit obligation 3,090 2,241 2,416 Expected return on plan assets (4,183) (3,128) (3,267) Amortisation of prior service cost 37 -- -- - ---------------------------------------------------------------------------------------- Net periodic pension expense 4,727 3,474 3,242 ========================================================================================
The following table presents the economic assumptions used to calculate the projected benefit obligation and pension expense in each of the last three years:
1998 1997 1996 - ---------------------------------------------------------------------------------- Discount rate 4.0% 4.0% 4.0% Rate of compensation increase 2.5% 2.5% 2.5% Expected long-term rate of return on plan assets 5.5% 5.5% 5.5% - ----------------------------------------------------------------------------------
The amount of net pension expense related to other subsidiaries' local plans amounted to US$ 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. 127 130 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:
1998 -------------------------------------------------------------------------------------- SAFRA REPUBLIC & (IN THOUSANDS OF US$) SWITZERLAND LUXEMBOURG FRANCE GUERNSEY GIBRALTAR OTHER SUBS TOTAL - ------------------------------------------------------------------------------------------------------------------ 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 ==================================================================================================================
128 131 SAFRA REPUBLIC HOLDINGS S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1997 ---------------------------------------------------------------------------------------- SAFRA REPUBLIC & OTHER (IN THOUSANDS OF US$) SWITZERLAND LUXEMBOURG FRANCE GUERNSEY GIBRALTAR SUBS TOTAL - ---------------------------------------------------------------------------------------------------------------------------- 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 ============================================================================================================================
1996 ---------------------------------------------------------------------------------------- SAFRA REPUBLIC & OTHER (IN THOUSANDS OF US$) SWITZERLAND LUXEMBOURG FRANCE GUERNSEY GIBRALTAR SUBS TOTAL - ---------------------------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------
129 132 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.
SEGMENT TOTAL NET PROFIT SEGMENT INTEREST BEFORE TOTAL (IN THOUSANDS OF US$) REVENUES INCOME TAX ASSETS - -------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------
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 130 133 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. 131 134 SAFRA REPUBLIC HOLDINGS S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1998 -------------------------------------- ASSET/LIABILITY TRADING MANAGEMENT -------------------------------------- CONTRACTUAL CONTRACTUAL NOTIONAL NOTIONAL CREDIT (IN THOUSANDS OF US$) AMOUNTS AMOUNTS EXPOSURE - ----------------------------------------------------------------------------------------------- INTEREST RATE: Futures 230,460 -- -- Swaps 60,000 2,012,459 13,776 Caps purchased -- 2,355,001 13,847 - ----------------------------------------------------------------------------------------------- FOREIGN EXCHANGE AND PRECIOUS METALS: Spot, forwards and swaps 8,045,815 564,158 4,018 Options written 1,205,747 -- -- Options purchased 1,415,747 -- -- - ----------------------------------------------------------------------------------------------- DEBT AND EQUITY SECURITIES: Options written 209,507 -- -- Options purchased 209,507 -- -- - -----------------------------------------------------------------------------------------------
1997 -------------------------------------- ASSET/LIABILITY TRADING MANAGEMENT -------------------------------------- CONTRACTUAL CONTRACTUAL NOTIONAL NOTIONAL CREDIT (IN THOUSANDS OF US$) AMOUNTS AMOUNTS EXPOSURE - ----------------------------------------------------------------------------------------------- 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 -- -- - -----------------------------------------------------------------------------------------------
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. 132 135 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:
(IN THOUSANDS OF US$) 1998 1997 - -------------------------------------------------------------------------------- Commitments to extend credit 260,597 189,107 Standby letters of credit and financial guarantees 856,470 701,595 Commercial and other letters of credit 67,912 69,156 Commitments to purchase securities 16,493 8,444 - --------------------------------------------------------------------------------
20. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table summarises the carrying values and estimated fair values of the Company's financial instruments as of December 31, 1998 and 1997. The estimated fair value of off-balance sheet financial instruments used as hedges are reported in the related balance sheet asset or liability.
1998 1997 ---------------------------------------------------- ESTIMATED ESTIMATED (IN THOUSANDS OF US$) BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE - --------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------
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.
1998 1997 ---------------------------------------------------- ESTIMATED ESTIMATED ESTIMATED ESTIMATED POSITIVE NEGATIVE POSITIVE NEGATIVE (IN THOUSANDS OF US$) FAIR VALUE FAIR VALUE FAIR VALUE FAIR VALUE - ------------------------------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------
133 136 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. 134 137 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:
(IN THOUSANDS OF US$) 1998 1997 1996 - ------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------
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. 135 138 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:
1998 --------------------------------------- TOTAL SHAREHOLDERS' NET (IN THOUSANDS OF US$) ASSETS EQUITY INCOME - ----------------------------------------------------------------------------------------------------- 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 =====================================================================================================
1997 -------------------------------------- TOTAL SHAREHOLDERS' NET (IN THOUSANDS OF US$) ASSETS EQUITY INCOME - ---------------------------------------------------------------------------------------------------- U.S. GAAP 20,356,300 1,760,566 255,055 Differences of accounting recognition for unrealised basis difference on investment securities available for sale, net of taxes (147,557) (147,557) (857) Difference in basis in trading account assets, net of taxes (577) (577) (198) Difference in amortisation of goodwill (11,557) (11,557) (11,557) Differences of accounting for treasury share transactions 21,168 21,168 (686) - ---------------------------------------------------------------------------------------------------- Luxembourg GAAP 20,217,777 1,622,043 241,757 ====================================================================================================
25. REGULATORY MATTERS The Company's risk-based capital is included in the consolidated risk-based capital ratio of RNYC in accordance with the requirements of the Federal Reserve Board specifically applied to RNYC. The Company's risk based capital ratio at December 31, 1998 calculated in accordance with the CSSF regulations was 332.31%. 136 139 SAFRA REPUBLIC HOLDINGS S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 26. SAFRA REPUBLIC HOLDINGS S.A. (PARENT COMPANY ONLY) CONDENSED BALANCE SHEETS
DECEMBER 31, ---------------------- (IN THOUSANDS OF US$) 1998 1997 - ------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------
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. 137 140 SAFRA REPUBLIC HOLDINGS S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, ----------------------- (IN THOUSANDS OF US$) 1998 1997 - -------------------------------------------------------------------------------- INCOME: Dividends from subsidiaries 89,400 142,750 Interest from subsidiaries 45,737 40,943 Other interest 48,404 28,004 Other (2,099) (458) - -------------------------------------------------------------------------------- Total income 181,442 211,239 - -------------------------------------------------------------------------------- EXPENSES: Salaries and other employee benefits 7,400 13,364 Restricted stock expense 5,128 3,946 Interest expense 25,304 13,014 Other expenses and provisions 5,807 8,130 - -------------------------------------------------------------------------------- Total expenses 43,639 38,454 - -------------------------------------------------------------------------------- Income before equity in undistributed net income of subsidiaries 137,803 172,785 Equity in undistributed net income of subsidiaries 142,404 82,270 - -------------------------------------------------------------------------------- NET INCOME 280,207 255,055 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
138 141 SAFRA REPUBLIC HOLDINGS S.A. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------------------- (IN THOUSANDS OF US$) 1998 1997 1996 - ---------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------
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. 139 142 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 140 143 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:
NAME AGE POSITION WITH THE CORPORATION POSITION WITH THE BANK - ----------------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------------
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. 141 144 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. 142 145 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. 143 146 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K FINANCIAL STATEMENTS Financial statements are listed in the index set forth in Item 8 of this Report.
EXHIBITS - ----------------------------------------------------------------------- 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. - -----------------------------------------------------------------------
* 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. 144 147 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 By: WALTER H. WEINER ------------------------------------------ WALTER H. WEINER (CHAIRMAN OF THE BOARD)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE --------- ----- ---- 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)
145 148
SIGNATURE TITLE DATE --------- ----- ---- 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)
146 149 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. EX-3.B 2 BY-LAWS OF THE CORPORATION 1 Exhibit 3b REPUBLIC NEW YORK CORPORATION [REPUBLIC NEW YORK CORPORATION LOGO] BY-LAWS (AS AMENDED THROUGH DECEMBER 16, 1998) 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 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 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 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 5 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 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. 7 8 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 8 9 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. 9 10 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 10 11 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. 11 12 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. 12 13 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 13 14 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 14 15 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. 15 EX-10.C 3 AMENDED 1994 PERFORMANCE BASED INCENTIVE COMP PLAN 1 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. 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. 2 3 (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 3 4 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 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 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 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 EX-11 4 COMPUTATION OF EARNINGS 1 EXHIBIT 11 REPUBLIC NEW YORK CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (IN THOUSANDS EXCEPT PER SHARE DATA) 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 ======== ======== ======== ======== ========
Amounts have been adjusted to reflect the two-for-one stock split distributed in June, 1998. EX-12 5 CALCULATION OF RATIOS OF EARNINGS 1 CALCULATION OF RATIOS OF EARNINGS TO EXHIBIT 12 FIXED CHARGES-CONSOLIDATED
YEARS ENDED DECEMBER 31, ---------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- ($ IN THOUSANDS) 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
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. EX-21 6 SUBSIDIARIES OF THE CORPORATION 1 Exhibit 21 Republic New York Corporation Principal Subsidiaries as of December 31, 1998
Name of Corporation Jurisdiction of Formation - ------------------- ------------------------- 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
2 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).
EX-23 7 CONSENT OF KPMG LLP 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 EX-23.A 8 CONSENT OF KPMG AUDIT, REVISEURS D'ENTERPRISES 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 EX-24 9 FORM OF POWER OF ATTORNEY 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. ______________________________ EX-27 10 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1998 DEC-31-1998 1,040,290 4,218,893 689,335 3,397,110 16,434,523 6,731,714 6,882,926 13,648,837 293,952 50,424,154 33,219,759 4,441,210 166,649 4,538,473 536,611 0 500,000 2,104,139 50,424,154 1,107,681 1,622,112 504,171 3,233,964 1,469,985 2,199,701 1,034,263 8,000 (186,086) 978,565 336,296 248,047 0 0 248,047 2.09 2.07 2.31 80,854 17,006 561 0 326,481 55,740 15,157 293,952 171,982 121,970 0
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