10-K 1 ANNUAL REPORT ON FORM 10-K DATED DECEMBER 31, 1994 [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1994 Commission File No. 1-7436 REPUBLIC NEW YORK CORPORATION (Exact Name of Registrant as Specified in its Charter) Maryland 13-2764867 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 452 Fifth Avenue, New York, N.Y. 10018 (Address of Principal (Zip Code) Executive Offices) Registrant's Telephone Number, Including Area Code (212) 525-6100 ------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class 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 $3.375 Cumulative Convertible Preferred Stock New York Stock Exchange $1.9375 Cumulative Preferred Stock New York Stock Exchange 8 3/8% Notes Due 1996 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 March 8, 1995 was $1,769,651,104.375 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 March 8, 1995: 52,260,388. Documents Incorporated by Reference: Document Location in Form 10-K 1994 Annual Report to Stockholders, to the extent indicated Parts I, II, III and IV Proxy Statement for 1995 Annual Meeting, to the extent indicated Parts I and III 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, 1994, the Corporation had consolidated total assets of $41.1 billion and stockholders' equity of $2.6 billion. Its principal asset is the capital stock of Republic National Bank of New York (the "Bank"). At December 31, 1994, the Bank accounted for approximately 80% of the consolidated assets and, for the year ended December 31, 1994, accounted for approximately 75% of consolidated revenues and 85% of consolidated net income of the Corporation. The Corporation's other significant banking subsidiary is Republic Bank for Savings ("RBS"). See "Republic Bank for Savings". Republic Factors Corp. ("Factors"), which commenced operations in 1977, is the other significant subsidiary of the Corporation. See "Republic Factors Corp." Another of the Corporation's subsidiaries is Republic New York Securities Corporation, a full service broker-dealer, which commenced operations in 1992. See "Republic New York Securities Corporation". Based on total assets, at December 31, 1994, the Corporation was the twenty-second largest bank holding company in the United States. The executive offices of the Corporation are located at 452 Fifth Avenue, New York, New York 10018 (telephone 212-525-6100). As used herein, the term "Corporation" includes the subsidiaries of the Corporation and the terms "Bank" and "RBS" include the subsidiaries of the Bank and RBS, respectively, unless the context indicates otherwise. REPUBLIC NATIONAL BANK OF NEW YORK The Bank, a national banking association organized in 1965, commenced operations in January, 1966. The Bank provides a variety of banking and financial services worldwide to corporations, financial institutions, governmental units and individuals. At December 31, 1994, the Bank had total assets of $32.4 billion, total deposits of $19.4 billion and stockholder's equity of $2.1 billion. The Bank's headquarters and principal banking office is located at 452 Fifth Avenue, New York, New York. The Bank has 34 domestic branch banking offices in New York City and the suburban counties of Westchester and Rockland. The Bank maintains foreign branch offices in London, Milan, Buenos Aires, Santiago, Hong Kong, Singapore, Tokyo and the Cayman Islands; wholly-owned foreign banking subsidiaries in Montreal, Nassau, Singapore, Montevideo, and the Cayman Islands; and an Edge Act subsidiary in Miami, Florida. The Bank also has foreign representative offices in Beijing, Beirut, Buenos Aires, Caracas, Copenhagen, Jakarta, Manila, Mexico City, Montevideo, Moscow, Punta del Este, Rio de Janeiro, and Taipei. The Bank's facilities are supplemented by a network of correspondent banks throughout the world. International Banking The Bank is active in international banking where it operates principally as a wholesale bank. It has been its policy to deal primarily with foreign governments, their agencies, foreign central banks and foreign commercial banks as borrowers or guarantors. At December 31, 1994, approximately 80% of the Bank's cross-border net outstandings were to or guaranteed by such entities. The Bank's international banking services include accepting deposits, extending credit, forfait financing, buying and selling foreign exchange, buying and selling banknotes denominated in various 1 currencies, issuing letters of credit and bankers' acceptances and handling the collection and transfer of money. The Bank's Banknote Services business ships U.S. dollars to and from financial institutions in nearly 40 countries. Through its International Private Banking Department, headquartered in New York City, the Bank offers a full range of financial services to individuals who are citizens or residents of countries other than the United States, including accepting deposits, buying and selling foreign exchange, banknotes denominated in various currencies, precious metals and financial instruments, issuing letters of credit and handling the collection and transfer of money. An analysis of the Corporation's international operations for each of the years in the three years ended December 31, 1994 is contained in the following sections of its 1994 Annual Report to Stockholders filed as an Exhibit to this Report which is hereby incorporated herein by reference: (a) Note 14 of the Notes to Consolidated Financial Statements on page 75 in such report for allocation of the Corporation's total assets, total operating revenue, income (loss) before income taxes and net income (loss) among geographic areas for each of the years in the three years ended December 31, 1994; and (b) "Management's Discussion and Analysis - Liability and Asset Management" on pages 35 through 48 in such report for other relevant information on international operations. During 1994, the Corporation received permission to establish a Mexican banking subsidiary to be known as Republic National Bank of New York (Mexico), S.A. and headquartered in Mexico City. The subsidiary will have an initial capitalization of 340 million pesos (approximately $60 million at recent rates) and will engage in activities consistent with those of Mexican "multiple banks", including accepting deposits from the public and granting commercial and individual loans. It is anticipated that the subsidiary will commence operations in the second quarter of 1995. For information concerning the Corporation's outstandings in certain foreign countries, see "Management's Discussion and Analysis - Liability and Asset Management - Asset Management - Cross-border Outstandings" on pages 47 and 48 and "Allowance for Possible Loan Losses" on pages 45 and 46 in the 1994 Annual Report to Stockholders which is hereby incorporated herein by reference. Safra Republic Holdings S.A. Safra Republic Holdings S.A. ("Safra Republic"), a Luxembourg holding company, is principally engaged, through wholly-owned banking subsidiaries in Switzerland, Luxembourg, France, Guernsey and Gibraltar, in international private banking and commercial banking, offering a range of private banking services primarily to wealthy individuals. At December 31, 1994, the Bank owned approximately 48.8%, Saban S.A., the Corporation's principal stockholder, owned approximately 20.7% and international investors owned approximately 30.5% of the outstanding shares of Safra Republic. At December 31, 1994, Safra Republic had total assets of $12.5 billion, total deposits of $9.4 billion and total shareholders' equity of approximately $1.2 billion. Safra Republic's client services include the accepting of a wide variety of deposits and the execution of transactions in foreign exchange, precious metals, securities and banknotes. Safra Republic also provides credit facilities, portfolio management and investment advisory services and safekeeping and other fiduciary services. In addition, Safra Republic offers commercial banking services to governments, government agencies, banks and corporations. Domestic Banking The Bank provides a full range of domestic banking services, including commercial, consumer installment and mortgage loans to individuals and businesses. It also accepts deposits, including time and savings deposits and regular and special checking accounts, and issues large denomination negotiable 2 certificates of deposit of $100,000 or more. Through its Domestic Corporate Lending Department, the Bank services the financing requirements of large national companies, middle-market companies and other businesses in the New York metropolitan area and selected markets outside of New York. Information concerning the composition of the Corporation's domestic and international loan portfolio is presented in the section "Loan Portfolio" under "Operating Information" found on page 6 of this report. The Corporation also engages in factoring activities through Factors. See "Republic Factors Corp." Other banking facilities usually associated with a full-service commercial bank are offered, among which are safe deposit boxes, safekeeping and custodial services, collections and remittances, letters of credit and foreign exchange. The Bank's Trust Department provides a broad range of fiduciary services to both individual and corporate accounts. The Bank has expanded its services to include domestic private banking. Through its Domestic Private Banking operation, the Bank offers an array of private banking services, including deposit, lending and investment management products, custody services, and trust and estate planning to high net worth individuals. The Bank's domestic private banking clients are served from locations in New York, Los Angeles, and Miami. 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 -------- ------------- -------- ------------- 1994. . . . 61.1% 38.9% 64.4% 35.6% 1993. . . . 68.1 31.9 59.7 40.3 1992. . . . 59.2 40.8 65.2 34.8
Precious Metals, Foreign Exchange, Securities and Derivative Transactions For a description of the Bank's precious metals activities and income derived therefrom see "Management's Discussion and Analysis - Liability and Asset Management - Asset Management - Precious Metals" on page 44 and "Management's Discussion and Analysis - Results of Operations - Other Operating Income" on page 32 of the 1994 Annual Report to Stockholders which is hereby incorporated herein by reference. Information concerning the Bank's foreign currency trading and income derived therefrom may be found on page 32 of the 1994 Annual Report to Stockholders in the section entitled"Management's Discussion and Analysis - Results of Operations - Other Operating Income" which 3 is hereby incorporated herein by reference. Republic Forex Options Corporation ("RFOC"), an operating subsidiary of the Bank, is a foreign currency options participant on the Philadelphia Stock Exchange. RFOC is a market-maker in foreign currency options and trades for its own account. Information relating to the composition of the Corporation's trading account is contained in the sections of Management's Discussion and Analysis entitled "Results of Operations - Other Operating Income on page 32, "Liability and Asset Management - Liability Management - Trading Account Liabilities" on page 39, "Asset Management - Trading Account Assets" on page 43, and Note 1E on page 58 and Note 4 on pages 62 and 63 of the Notes to Consolidated Financial Statements in the 1994 Annual Report to Stockholders which is hereby incorporated herein by reference. Information concerning activities involving derivative instruments is contained in the 1994 Annual Report to Stockholders in Note 1G and Notes 4, 16 and 17 of the Notes to Consolidated Financial Statements on pages 59 and 60, pages 62 and 63, and pages 76 through 81, respectively, and in the section of Management's Discussion and Analysis entitled "Liability and Asset Management" on page 37 in such report which is hereby incorporated herein by reference. REPUBLIC BANK FOR SAVINGS RBS, a wholly-owned New York State chartered savings bank subsidiary of the Corporation, is engaged in the granting of mortgages on residential real property located primarily in New York State, including one to four family dwellings, units within condominium projects or units within cooperative housing projects. RBS' deposit activities include accepting savings, demand, money market, fixed-rate individual retirement, Keogh and NOW accounts. RBS also provides consumer credit. At December 31, 1994, RBS had total assets of $5.8 billion, total deposits of $4.6 billion and total stockholder's equity of $440 million. RBS' headquarters and principal banking office is located at 415 Madison Avenue, New York, New York. RBS has 24 full service branch banking offices in New York City and Nassau, Suffolk and Westchester counties and 8 additional branches in Broward and Dade counties, Florida. REPUBLIC FACTORS CORP. Factors is a wholly-owned subsidiary of the Corporation. Factors purchases, without recourse, accounts receivable from approximately 450 clients. These receivables are due on average in 60 days from over 55,000 customers primarily in the retail apparel industry throughout the United States. In addition, certain clients receive payment for these receivables prior to their maturity date. From time to time, Factors makes advances in excess of the receivables purchased. These advances are seasonal in nature and may be either secured or unsecured. Letters of credit accommodations are also provided. For these services, Factors earns commissions, interest and service fees. For the year ended December 31, 1994, Factors factored approximately $5.4 billion of sales making it the fifth largest factoring concern in the United States based on such sales volume. Factors' headquarters and principal office is located at 452 Fifth Avenue, New York, New York. In addition, Factors has offices located in Los Angeles, California and Charlotte, North Carolina. OTHER FINANCIAL SERVICES Republic New York Securities Corporation. Republic New York Securities Corporation ("RNYSC"), a wholly-owned subsidiary of the Corporation, commenced operations on November 2, 1992 as a full-service securities broker primarily serving institutional investors and high net worth individuals On January 10, 1994, the Board of Governors of the Federal Reserve System (the "FRB") granted approval to RNYSC to underwrite and deal in all forms of debt and equity securities. RNYSC is a registered broker-dealer with the Securities and Exchange Commission and is a member of the National Association of Securities Dealers, Inc. and the New York Stock Exchange, Inc. In addition, it is an associate member of the American Stock Exchange and the Philadelphia Stock Exchange. RNYSC is also registered with the Commodity Futures Trading Commission and the National Futures Association as a futures commission merchant and a commodity trading advisor. As such, RNYSC acts primarily as a commodities broker to the Bank executing futures contracts and options on futures 4 contracts for the Bank's account. RNYSC's authority to trade in financial and precious metals commodities was expanded in 1994 when, on December 20, the FRB granted approval for RNYSC to trade in futures and options on futures in non-financial commodities, including contracts on energy products, agricultural products, and non-precious metals. RNYSC facilitates 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 and Philadelphia Board of Trade. Republic New York Securities International Limited. Republic New York Securities International Limited ("RNYSIL"), the Corporation's wholly-owned London based subsidiary, is a member of the Securities and Futures Authority and commenced operations in the second quarter of 1994. RNYSIL's activities consist primarily of introducing customers to RNYSC. Republic Asset Management Corporation. The activities of Republic Asset Management Corporation, the Corporation's wholly-owned investment advisor subsidiary, are being combined with the Bank's Domestic Private Banking Group in order to eliminate an overlap of services. OPERATING INFORMATION This section provides, on a consolidated basis, certain statistical data concerning the Corporation and supplements information contained in the 1994 Annual Report to Stockholders which is incorporated hereinbelow by reference. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential Information on the Corporation's consolidated average balances of assets, liabilities and stockholders' equity, computed principally on the basis of daily averages, and the interest income earned and the interest expense paid and the average rates earned and paid for each of the years in the five years ended December 31, 1994 is found in the table entitled "Average Balances, Net Interest Differential, Average Rates Earned and Paid" on pages 92 and 93 in the Corporation's 1994 Annual Report to Stockholders which is incorporated herein by reference. Interest income on certain tax-exempt obligations included in such table has been adjusted to a fully-taxable equivalent basis using the tax rate of 44% in 1994 and 1993 and 42% for all other periods. Information on the approximate effect on net interest income of changes in volume of interest-earning assets and interest-bearing liabilities and the rates earned or paid thereon for the three years ended December 31, 1994 is found on pages 29 through 31 in "Management's Discussion and Analysis - Results of Operations - Net Interest Income" in such report which is also incorporated herein by reference. Information concerning the Corporation's interest rate sensitivity gap position at December 31, 1994 is found on pages 35 through 37 in "Management's Discussion and Analysis - Liability and Asset Management" in the Corporation's 1994 Annual Report to Stockholders which is hereby incorporated herein by reference. Deposits Information concerning the Corporation's deposits, classified by major categories, at December 31 in each of the last three years is contained in the 1994 Annual Report to Stockholders in the section entitled "Management's Discussion and Analysis - Liability and Asset Management - Liability Management - Deposits" on pages 37 through 39 in such report which is hereby incorporated herein by reference. Information on the interest rates paid by deposit type is contained on page 92 and 93 of the 1994 Annual Report to Stockholders which is hereby incorporated herein by reference. 5 Investment Portfolio Investment securities represent a significant portion of the Corporation's interest-earning assets. A description of the Corporation's investment portfolio is contained in the sections entitled "Management's Discussion and Analysis - Liability and Asset Management - Asset Management - Investment Portfolio" and "Management's Discussion and Analysis - Results of Operations - Other Operating Income" on pages 41 through 43 and page 33, respectively, and Note 1D on page 58, and Note 3 on pages 61 and 62 of the Notes to Consolidated Financial Statements in the 1994 Annual Report to Stockholders which is hereby incorporated herein by reference. 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.
December 31, ---------------------------------------------------------- 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- (In thousands) Domestic: Real estate-residential mortgage. . . . . $1,245,500 $1,310,718 $1,454,416 $1,313,793 $1,166,779 Real estate-commercial. . . . . . . . . . 1,813,878 1,854,377 2,107,112 2,222,714 2,377,126 Banks and other financial institutions. . 83,010 7,384 14,841 18,434 78,177 Broker loans. . . . . . . . . . . . . . . 559,019 678,490 307,018 250,000 306,002 Commercial and industrial . . . . . . . . 2,242,124 2,152,691 1,859,595 1,848,587 1,968,525 Individuals . . . . . . . . . . . . . . . 106,195 90,218 51,305 71,286 320,349 All other . . . . . . . . . . . . . . . . 11,810 16,915 59,852 51,008 43,977 --------- --------- --------- --------- --------- 6,061,536 6,110,793 5,854,139 5,775,822 6,260,935 --------- --------- --------- --------- --------- Foreign: Broker loans. . . . . . . . . . . . . . . 23,762 732,812 -- -- -- Government and government agencies. . . . 89,625 429,232 341,320 453,639 450,359 Banks and other financial institutions. . 297,801 68,416 288,682 279,587 353,275 Commercial and all other. . . . . . . . . 2,487,875 2,262,130 1,672,038 2,271,625 2,167,939 --------- --------- --------- --------- --------- 2,899,063 3,492,590 2,302,040 3,004,851 2,971,573 --------- --------- --------- --------- --------- Total loans. . . . . . . . . . . . . . . . 8,960,599 9,603,383 8,156,179 8,780,673 9,232,508 Less unearned income . . . . . . . . . . (47,109) (94,825) (148,722) (211,715) (227,649) --------- --------- --------- --------- --------- Loans, net of unearned income. . . . . . . $8,913,490 $9,508,558 $8,007,457 $8,568,958 $9,004,859 ========== ========== ========== ========== ==========
Maturity Distribution and Interest Sensitivity of Loans Information presenting the maturity distribution of the Corporation's domestic and foreign loan portfolios at December 31, 1994 and an analysis of the interest sensitivity of such portfolios at such date is contained in the section entitled "Management's Discussion and Analysis - Liability and Asset Management - Asset Management - Loan Portfolio" on pages 44 and 45 in the 1994 Annual Report to Stockholders which is hereby incorporated herein by reference. Risk Elements Information presenting the risk elements of the Corporation's domestic and foreign loan portfolios and foreign outstandings at December 31, 1994, 1993 and 1992, including past due, non-accrual and other nonperforming assets, and recent accounting pronouncements related to recognition criteria and measurement methods for certain impaired loans, is contained in the section entitled "Management's Discussion and Analysis - Liability and Asset Management - Asset Management - Cross-border 6 Outstandings" on pages 47 and 48 and "Allowance for Possible Loan Losses" on pages 45 and 46 in the 1994 Annual Report to Stockholders which is hereby incorporated herein by reference. For information presenting off-balance sheet risk of financial instruments together with related risk concentrations, see Note 17 of the Notes to Consolidated Financial Statements on pages 79 through 81 in the 1994 Annual Report to Stockholders which is hereby incorporated herein by reference. For information relating to the effect on the Corporation's 1994 income of loans classified as non-accrual and restructured and other information on outstandings in certain debtor countries, see Note 6 of the Notes to the Consolidated Financial Statements on pages 64 and 65 and "Management's Discussion and Analysis - Liability and Asset Management - Asset Management - Cross-border Outstandings" on pages 47 and 48 and "Allowance for Possible Loan Losses" on pages 45 and 46 in the 1994 Annual Report to Stockholders which is hereby incorporated herein by reference. Management periodically reviews the loan portfolio, particularly non-accrual and restructured loans. The review may result in a determination that a loan should be placed on a non-accrual status for income recognition. In addition, to the extent that management identifies potential losses in the loan portfolio, it reduces the book value of such loans, through charge-offs, to their estimated collectible value. The Corporation's policy is to classify as non-accrual any loan (other than factored trade accounts receivable, consumer installment and residential mortgage) on which payment of principal or interest is 90 days or more 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 or more 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. The loan remains in a non-accrual classification until such time as the loan is brought current, when it may be returned to accrual classification. When principal and interest on a non-accrual loan are brought current, if in management's opinion future payments are questionable, the loan would remain classified as non-accrual. Subsequent payments of either interest or principal received on a partially charged-off non-accrual or restructured loan are first applied to any remaining balance outstanding, until the loan is reduced to its net realizable value, then to recoveries and lastly to income. Interest is included in income thereafter only to the extent received in cash. The large number of consumer installment loans and the relatively small dollar amount of each makes an individual review impracticable. The Corporation charges off any consumer installment loan which is past due 90 days or more. Residential mortgage loans are placed on non-accrual status when the mortgagor is in bankruptcy, or foreclosure proceedings are instituted, at which time the loan ceases to accrue interest. Any accrued interest receivable remains in interest income as an obligation of the borrower. Loans past due 90 days or more and still on accrual status,primarily residential mortgage loans, amounted to $9.6 million, $5.6 million, $8.8 million, $9.1 million, and $8.0 million at year end 1994, 1993, 1992, 1991, and 1990, respectively. Risk Assessment, Credit Risk Management and Allowance for Possible Loan Losses The Risk Assessment Committee of the Corporation's Board of Directors was established in 1993 to oversee identification, measurement and limitation of the risks relating to all activities of, and products offered by, the Corporation. The Committee's activities include review of risk management methodologies employed by management. Also in 1993, the Bank established the Risk Assessment and Control Department, whose task is to develop and implement consolidated and integrated risk quantification and reporting mechanisms. The Department also monitors market-related risk exposure on a daily basis, reporting to management. 7 Credit risk and exposure to loss are inherent parts of the banking business. Management seeks to manage and minimize these risks through its loan and investment policies and credit review procedures. Senior management establishes and continually reviews lending and investment criteria and approval procedures that it believes reflect the risk averse nature of the Corporation. The credit review procedures are set to monitor adherence to the established criteria and to ensure that on a continuing basis such standards are enforced and maintained. Management's objective in establishing lending and investment standards is to minimize the risk of loss and provide for income generation through pricing policies. In the case of foreign investments and loans, management emphasizes investments and loans to, or with guarantees of, governments, government agencies or banks. In addition, the Corporation places particular emphasis on the matching of the maturity and interest rate sensitivity of assets and liabilities. By this policy, the Corporation seeks to minimize the effect of rate changes, largely externally influenced and difficult to control, on the portfolio and to limit its exposure largely to credit risks over which it has more direct control. One technique which the Corporation utilizes to achieve these goals is to enter into interest rate and currency swaps designed to protect against rate and currency fluctuations. The Corporation's loan portfolios are regularly reviewed and monitored by the Credit Review Department, which, each quarter, prepares a report containing recommendations as to the amount of loans to be charged-off. The report is then submitted for consideration to certain members of Executive Management who determine the amount of loans to be charged-off. The Credit Policy Committee subsequently reviews the loans to be charged-off and ratifies Executive Management's decision. Rules and formulae relative to the adequacy of the allowance, although useful as guidelines to management, are not final determinants. In addition, any loan or portion thereof which is classified as a "loss" by regulatory examiners is charged-off. Consistent with its policy of maintaining an adequate allowance for possible loan losses, management generally charges-off a loan, or a portion thereof, when a loss is probable. The allocation of the allowance for possible loan losses between the Corporation's domestic and foreign components is contained in Note 6 of the Notes to the Consolidated Financial Statements found on pages 64 and 65 of the 1994 Annual Report to Stockholders which is hereby incorporated herein by reference. Extensive foreign charge-offs related to restructuring countries debt were taken in 1990. In 1991 and 1992, as the value of foreign obligations stabilized, the previously provided foreign provision was reallocated to domestic obligations as the domestic economy continued to deteriorate. Domestic charge-offs exceeded foreign charge-offs in 1991, 1992, 1993, and 1994. Information presenting the Corporation's allowance for possible loan losses, amounts of domestic loans by loan category and total foreign loans charged-off and recoveries of such loans previously charged-off, loans, net of unearned income, and related ratios is contained in the section entitled "Management's Discussion and Analysis - Liability and Asset Management - Asset Management - Allowance for Possible Loan Losses" on pages 45 and 46 in the 1994 Annual Report to Stockholders which is hereby incorporated herein by reference. In order to comply with certain regulatory reporting requirements, management has prepared the following allocation of the Corporation's allowance for possible loan losses among various categories of the loan portfolio for each of the years in the five-year period ended December 31, 1994. In management's opinion, such allocation has, at best, a limited utility. It is based on management's assessment as of a given point in time of the risk characteristics of each of the component parts of the total loan portfolio and is subject to changes as and when the risk factors of each such component part change. Such allocation is not indicative of either the specific amounts or the loan categories in which future charge-offs may be taken, nor should it be taken as an indicator of future loss trends. In addition, by presenting such allocation, management does not mean to imply that the allocation is exact or that the allowance has been precisely determined from such allocation. 8
December 31, 1994 ------------------------------------------------------ Allocation of the Allowance for Possible Loan Losses by Category ------------------------------------------------------ Domestic Foreign Total --------------- --------------- --------------- Percent Amount Percent Amount Percent Amount ------- ------ ------- ------ ------- ------ (Dollars in thousands) Real estate loans. . . . . . . . . 42% $ 80,000 8% $ 10,000 28% $ 90,000 Commercial and industrial loans. . 39 75,000 24 30,000 33 105,000 Other loans. . . . . . . . . . . . 3 5,000 47 60,000 20 65,000 Unallocated. . . . . . . . . . . . 16 31,887 21 27,333 19 59,220 --- -------- --- -------- --- -------- Total. . . . . . . . . . . . . . . 100% $191,887 100% $127,333 100% $319,220 === ======== === ======== === ======== December 31, 1993 ------------------------------------------------------ Allocation of the Allowance for Possible Loan Losses by Category ------------------------------------------------------ Domestic Foreign Total --------------- --------------- --------------- Percent Amount Percent Amount Percent Amount ------- ------ ------- ------ ------- ------ (Dollars in thousands) Real estate loans. . . . . . . . . 42% $ 80,000 8% $ 10,000 29% $ 90,000 Commercial and industrial loans. . 40 75,000 25 30,000 34 105,000 Other loans. . . . . . . . . . . . 3 5,000 41 50,000 17 55,000 Unallocated. . . . . . . . . . . . 15 29,499 26 32,356 20 61,855 --- -------- --- -------- --- -------- Total. . . . . . . . . . . . . . . 100% $189,499 100% $122,356 100% $311,855 === ======== === ======== === ======== December 31, 1992 ------------------------------------------------------ Allocation of the Allowance for Possible Loan Losses by Category ------------------------------------------------------ Domestic Foreign Total --------------- --------------- --------------- Percent Amount Percent Amount Percent Amount ------- ------ ------- ------ ------- ------ (Dollars in thousands) Real estate loans. . . . . . . . . 37% $ 60,000 13% $10,000 29% $ 70,000 Commercial and industrial loans. . 34 55,000 25 20,000 31 75,000 Other loans. . . . . . . . . . . . 1 1,000 50 40,000 17 41,000 Unallocated. . . . . . . . . . . . 28 45,699 12 9,321 23 55,020 --- -------- --- ------- --- -------- Total. . . . . . . . . . . . . . . 100% $161,699 100% $79,321 100% $241,020 === ======== === ======= === ======== December 31, 1991 ------------------------------------------------------ Allocation of the Allowance for Possible Loan Losses by Category ------------------------------------------------------ Domestic Foreign Total --------------- --------------- --------------- Percent Amount Percent Amount Percent Amount ------- ------ ------- ------ ------- ------ (Dollars in thousands) Real estate loans. . . . . . . . . 45% $ 45,000 4% $ 5,000 22% $ 50,000 Commercial and industrial loans. . 25 25,000 4 5,000 13 30,000 Other loans. . . . . . . . . . . . 1 1,000 43 55,000 25 56,000 Unallocated. . . . . . . . . . . . 29 29,842 49 61,612 40 91,454 --- -------- --- --------- --- -------- Total. . . . . . . . . . . . . . . 100% $100,842 100% $126,612 100% $227,454 === ======== === ======== === ======== 9 December 31, 1990 ------------------------------------------------------ Allocation of the Allowance for Possible Loan Losses by Category ------------------------------------------------------ Domestic Foreign Total --------------- --------------- --------------- Percent Amount Percent Amount Percent Amount ------- ------ ------- ------ ------- ------ (Dollars in thousands) Real estate loans. . . . . . . . . 85% $35,000 1% $ 1,000 15% $ 36,000 Commercial and industrial loans. . 12 5,000 2 3,000 3 8,000 Other loans. . . . . . . . . . . . 2 1,000 74 146,000 62 147,000 Unallocated. . . . . . . . . . . . 1 310 23 45,324 20 45,634 --- ------- --- -------- --- -------- Total. . . . . . . . . . . . . . . 100% $41,310 100% $195,324 100% $236,634 === ======= === ======== === ========
At December 31, in each of the years 1994 through 1990, the Corporation's allowance for possible loan losses represented approximately 369%, 198%, 128%, 145% and 159%, respectively, of total non-accrual and restructured loans. The coverage of the allowance for loan losses to non-accrual and restructured loans is only one subjective measure of the adequacy of the allowance for loan losses that management utilizes. The Corporation's policy is to maintain an allowance for loan losses that is adequate to absorb all inherent credit losses in the Corporation's credit portfolios, including off-balance sheet credit instruments. Inherent losses are unconfirmed losses that probably exist based upon known information regarding the credit quality and portfolio characteristics prevailing as of the date of the evaluation. Future events are expected to confirm these losses, at which time these amounts will be charged off against the allowance for loan losses. The Corporation performs a comprehensive and consistently applied analysis of the various factors that affect collectibility that is in accordance with regulatory guidance. The process is complex and includes several different analyses of the portfolio. Management analyzes its portfolio by three main components: individually significant loans, homogeneous groups or pools of loans, and other segmentations of the portfolio into pools of loans with similar risk characteristics, such as risk classification, type of loan, industry group, collateral, size and maturity and country risk characteristics. 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 segmentations of the portfolio, historical loss rates are calculated for loans with similar characteristics. These loss rates are updated quarterly and are based upon the loss experience incurred for more than the last five years. While the historical loss rates provide a starting point for the Corporation's analysis, historical losses are not by themselves a sufficient basis to determine the appropriate level of the allowance for loan losses. The actual rate selected for the analysis may differ from the calculated loss rate as the historical rate may be adjusted upward or downward to reflect current and anticipated business and economic conditions and other factors which are likely to cause the current portfolio to differ from historical experience. The Corporation's allowance also reflects a margin for the imprecision in the estimates of expected credit losses. The resultant allowance for loan losses is viewed by management as a single, unallocated allowance available for all credit losses and any segmentation thereof is done only for compliance with reporting requirements. 10 Financial Ratios The following table presents average total stockholders' equity as a percentage of average assets and the Corporation's returns on average total stockholders' equity and average total assets (based on net income), the return on average common stockholders' equity (based on net income applicable to common stock), and its dividend payout ratio (based on dividends declared per common share divided by fully diluted earnings per common share) for each of the years in the three years ended December 31, 1994.
Year Ended December 31, ----------------------- 1994 1993 1992 ---- ---- ---- Average stockholders' equity as a percentage of average assets. . . . . 6.38% 6.33% 6.43% Return on average total stockholders' equity. . . . . . . . . . . . . . 12.87 12.73 11.95 Return on average common stockholders' equity . . . . . . . . . . . . . 15.20 15.08 14.18 Return on average total assets. . . . . . . . . . . . . . . . . . . . . .82 .81 .77 Dividend payout ratio . . . . . . . . . . . . . . . . . . . . . . . . . 23.53 21.39 23.15
The rate of the quarterly dividend payable on the Corporation's Common Stock was increased to $.22 per share commencing with the dividend payment on April 1, 1990, to $.233 per share commencing with the dividend payment on April 1, 1991, to $.25 per share commencing with the dividend payment on January 1, 1992, to $.27 per share commencing with the dividend payment on April 1, 1993, to $.33 commencing with the dividend payment on April 1, 1994, and will be increased to $.36 commencing with the dividend payable on April 1, 1995. Competition All of the Corporation's banking activities are highly competitive. The Bank and RBS compete actively with other commercial banks, savings and loan associations, financing companies, credit unions and other financial institutions located throughout the United States and, in some of their activities, with government agencies. For international business, the Bank competes with other United States banks which have foreign installations and with other major foreign banks located throughout the world. Employees As of December 31, 1994, the Corporation had approximately 5,500 full-time employees. Customers It is the opinion of management that there is no single customer or affiliated group of customers whose deposits, if withdrawn, would have a material adverse effect on the business of the Corporation. For information concerning transactions with persons related to the Corporation and its management see Item 13 in Part III of this Report and the section entitled "Transactions with Management and Related Persons" found on pages 17 and 18 under "Election of Directors" in the Corporation's definitive Proxy Statement dated March 15, 1995 for its 1995 Annual Meeting of Stockholders filed pursuant to Section 14 of the Securities Exchange Act of 1934, which is hereby incorporated herein by reference. 11 SUPERVISION AND REGULATION General As a bank holding company registered under the Bank Holding Act of 1956, as amended (the "BHCA"), the Corporation is subject to substantial regulation and supervision by the FRB. The Corporation's subsidiary banks are subject to regulation and supervision by federal and state bank regulatory agencies, including the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation ("FDIC") and the New York State Banking Department. Federal banking and other laws impose a number of requirements and restrictions on the operations and activities 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. Pursuant to the BHCA, bank holding companies may engage directly, or indirectly through subsidiaries, in activities which the FRB determines to be so closely related to banking or managing banks as to be a proper incident thereto. However, FRB approval is required before a bank holding company may acquire an existing company or engage in activities which the FRB has not determined to be permissible for bank holding companies. Specifically, the prior approval of the FRB is required for the acquisition by a bank holding company of more than 5% of the voting stock or substantially all of the assets of any bank or bank holding company as well as, with certain exceptions, the acquisition of more than 5% of the voting stock of any company engaging in activities other than banking or managing or controlling banks or furnishing services to or performing services for their subsidiaries. Further, a bank holding company, as well as certain of its subsidiaries, is prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or provision of any property or services. In September 1994, the Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA") was signed into law. Generally, IBBEA will ease the current federal and state restrictions placed on bank holding company activities relating to interstate banking and full interstate branching. The IBBEA provides for interstate banking within one year and full interstate banking within three years of the legislation's enactment. It is anticipated that IBBEA will result in expanded business opportunities and economies of scale available to the banking industry. The Federal Reserve Act imposes restrictions on extensions of credit by subsidiary banks of a bank holding company to the bank holding company or certain of its subsidiaries, on investments in the stock or other securities thereof, and on the taking of such stock or securities as collateral for loans to any borrower. RNYSC is subject to supervision and regulation by the FRB, the Securities and Exchange Commission, the New York Stock Exchange, the National Association of Securities Dealers, the National Futures Association, and the Commodity Futures Trading Commission. RNYSC is also subject to the rules and regulations applicable to broker-dealers in each state in which it operates. RNYSIL is a member of and supervised by the Securities and Futures Authority in the United Kingdom. Capital Requirements The Corporation and its bank subsidiaries are subject to risk- based capital requirements for bank holding companies. The requirements provide that the minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit and derivative instruments) be equal to 8.0% of risk-weighted assets. Of this amount, at least half must be composed of common equity, minority interest, noncumulative perpetual preferred stock and a limited amount of cumulative perpetual preferred stock, less goodwill and intangible assets subject to certain minimums ("Tier 1 capital"). The remainder may consist of certain amounts of subordinated debt and 12 cumulative preferred stock and a limited amount of the allowance for loan losses ("Tier 2 capital"). On March 15, 1993, a revised rule altering the method of computation of Tier 1 capital of bank holding companies became effective. Subject to certain exceptions, when calculating Tier 1 capital under the revised rule, bank holding companies are required to deduct all intangible assets other than purchased mortgage servicing rights and purchased credit card relationships. These assets are valued at least quarterly at the lesser of 90% of their fair market value or 100% of their book value, in an aggregate amount not to exceed 50% of Tier 1 capital. On April 1, 1995, a new rule will become effective that will alter the treatment of deferred tax assets for capital adequacy purposes. Pursuant to the new rule, the amount of deferred tax assets that are dependent on future taxable income that may be included in regulatory capital will be limited to (i) the amount of deferred taxes the Corporation expects to realize within one year, based on its projection of future taxable income (exclusive of tax carryforwards and reversal of existing temporary differences for such year), or (ii) 10% of Tier 1 capital as defined above. The Corporation does not believe the new rule will have a material effect on its capital adequacy ratios. In September 1994, the Comptroller of the Currency proposed to amend its risk-based capital rules to refine the treatment of derivative financial instruments for capital computation purposes. The proposed rule would revise and expand the set of off-balance sheet credit conversion factors used to calculate the potential future exposure of derivative contracts and permit banks to net multiple derivative contracts that are subject to a qualifying bilateral netting contract when calculating the potential future credit exposure. The Corporation does not believe that the proposed rule, if adopted, would have a material effect on its risk-based capital adequacy ratios. In addition to the risk-based capital requirements described above, the Corporation must maintain a minimum leverage ratio of 3% (defined as Tier 1 capital divided by consolidated quarterly average total assets). Bank holding companies that are experiencing significant growth or are actively seeking acquisitions are expected to maintain a leverage ratio of 4% to 5%. Information concerning the Corporation's risk-based capital ratios may be found in "Management's Discussion and Analysis - Risk-Based Capital/Leverage Guidelines" on pages 50 and 51 of the 1994 Annual Report to Stockholders which is hereby incorporated herein by reference. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), further requires the federal bank regulatory agencies bi- annually to review risk-based capital standards to ensure that they adequately address interest rate risk, concentration of credit risk and risks from non-traditional activities. FDICIA also revised bank regulatory structures embodied in several other federal banking statutes, required the federal banking regulators to set five capital levels ranging from "well capitalized" to "critically undercapitalized", authorized federal banking regulators to intervene in connection with the deterioration of a bank's capital level, placed limits on real estate lending and tightened audit requirements. The federal International Lending Supervision Act of 1983 (the "Act") requires banking institutions to maintain a special reserve out of current income against certain international assets. A special reserve will be required if the relevant bank regulatory agency determines that the quality of the assets has been impaired by a protracted inability of public or private borrowers in a foreign country to make payments on their external indebtedness or that no definite prospects exist for orderly restoration of debt service. To date, the foregoing provisions of the Act have not affected the reserves maintained by the Corporation. It is not possible to predict the extent to which the provisions of the Act requiring the establishment of special reserves will affect the Corporation's earnings in the future. 13 Holding Company and Bank Liability Under longstanding policy of the FRB, a bank holding company is expected to act as a source of financial strength for its subsidiary banks and to commit resources to support such banks. As a result of such policy, the Corporation may be required to commit resources to its subsidiary banks in circumstances where it might not do so absent such policy. A bank holding company could be liable under certain provisions of FDICIA for the capital deficiencies of a subsidiary bank that does not satisfy applicable minimum regulatory capital requirements. In such a case, banking regulators will require the subsidiary bank to develop a capital restoration plan approved by the appropriate bank regulators and the bank's compliance with such plan must be guaranteed by its parent holding company. The liability of the parent holding company under any such guarantee is limited to the lesser of 5% of the bank's assets at the time it became "undercapitalized" or the amount needed to comply with the capital plan and is accorded a priority, in the event of the bankruptcy of the parent holding company, over the parent's general unsecured creditors. It should be noted that the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") provides for cross-guarantees of the liabilities of insured depository institutions pursuant to which any bank or savings association subsidiary of a bank holding company may be required to reimburse the FDIC for any loss or anticipated loss to the FDIC that arises from a default of any of such holding company's subsidiary banks or savings associations or for assistance provided by the FDIC to such an institution in danger of default. The domestic banking subsidiaries of the Corporation are subject to such a cross-guarantee. Finally, legislation enacted as part of the Omnibus Budget Reconciliation Act of 1993 provides for a preference in right of payment of certain claims realized in the "liquidation or other resolution" of any depository institution insured by the FDIC. That statute requires claims to be paid in the following order of priority: (i) administrative expenses of the receiver; (ii) any deposit liability of the institution; (iii) any other general or senior liability of the institution (which is not an obligation described in clause (iv) or (v) below); (iv) any obligation subordinated to depositors or general creditors (which is not an obligation described in clause (v) below); and (v) any obligation to shareholders or members (including any depository institution holding company or any shareholder or creditor of such company). For purposes of the statute, deposit liabilities would include any deposit payable at an office of the insured depository institution located in the United States, but would not include any deposit payable at an office outside the United States or any international banking facility deposit. Deposit Insurance FDICIA also revised sections of the Federal Deposit Insurance Act affecting bank regulation, deposit insurance and funding of the Bank Insurance Fund ("BIF") administered by the FDIC. Among the significant revisions that could have an impact on the Corporation is the authority granted the FDIC to impose special assessments on insured depository institutions to repay FDIC borrowings from the United States Treasury or other sources and to establish semiannual assessments on BIF member banks so as to maintain the BIF at the designated reserve ratio defined in FDICIA. Commencing January 1, 1993, the FDIC implemented regulations which increased the deposit insurance assessment for certain members of the BIF and adopted a transitional risk-based deposit insurance assessment system. Currently, each insured depository institution pays an FDIC assessment based on such depository institution's assessment risk classification. The assessment risk classification is dependant on whether a depository institution is considered "well capitalized", "adequately capitalized" or "undercapitalized" and on certain supervisory evaluations of the institution as "healthy", cause for "supervisory concern" and cause for "substantial supervisory concern" (designated as 14 supervisory subgroups "A", "B" and "C", respectively, for reference purposes). For purposes of the FDIC's deposit insurance assessment rules, an institution will be considered "well capitalized" if it has a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6% and a Tier 1 leverage ratio of at least 5%; "adequately capitalized" if it has a total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 4% and a Tier 1 leverage ratio of at least 4%; and "undercapitalized" if it does not meet either of the foregoing standards. Under the current assessment rate schedule , a well capitalized bank in subgroup "A"is assessed at the rate of 23 cents per $100 of domestic deposits. In early 1995, the FDIC proposed to reduce the assessment paid by "well capitalized" banks in subgroup A to 4 cents per $100 of domestic deposits. It is expected that this reduction, if approved, will be effective in the second-half of 1995. FDICIA generally limits the FDIC's ability to protect all deposits, including those exceeding the $100,000 insurance limit and foreign deposits. The legislation also provides that only "well capitalized banks" and "adequately capitalized banks" can use brokered deposits. "Adequately capitalized banks" can accept brokered deposits only if they first obtain waivers from the FDIC and they cannot pay above-market rates on such deposits. "Well capitalized banks" and "adequately capitalized banks" can insure accounts on a pass-through basis established under certain qualified employee benefit plans. Miscellaneous To date, the banking regulators have issued proposed guidelines and regulations and in some cases adopted final regulations under FDICIA covering (i) real estate lending standards, requiring depository institutions to develop and implement internal procedures, including setting specific loan-to-value ratios for various types of real estate loans; (ii) revisions to the risk-based capital rules to account for interest rate risk, concentration of credit risk, and the risks posed by "non-traditional activities"; (iii) rules requiring depository institutions to develop and implement internal procedures to evaluate and control credit and settlement exposure to their correspondent banks; (iv) risk-based FDIC insurance premiums; (v) rules prohibiting, with certain exceptions, state banks from making equity investments of the types and amount not permissible for national banks; and (vi) guidelines addressing various "safety and soundness" issues, including operations and managerial standards, standards for asset quality, earnings and stock valuations, and compensation standards for the officers, directors, employees and principal shareholders of the depository institution. It is anticipated that such rules and regulations and other provisions of FDICIA will result in increased costs for the banking industry and in more limitations on activities by all but the most well capitalized depository institutions. 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 Comptroller of the Currency 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 Comptroller of the Currency also has authority under the Financial Institutions Supervisory Act to prohibit a national bank from engaging in what, in his opinion, constitutes an unsafe or unsound practice in conducting its business. The payment of dividends could, depending upon the financial condition of the Bank, be deemed to constitute such an unsafe or unsound practice. Similarly, in respect of RBS, the approval of the Superintendent of Banks is required if the total of all dividends declared exceeds net profits, as defined. In addition, the agreement pursuant to which the Corporation acquired RBS provides that dividends may not be paid by RBS if its primary or total capital is, or as a result of any such dividend payment would be, below the minimum amounts required by applicable regulations. 15 Based on the Bank's and RBS' financial position at December 31, 1994, the Bank may declare dividends in 1995, and RBS may declare aggregate dividends in 1995, without regulatory approval, of approximately $308 million and $24 million, respectively, plus an additional amount equal to their respective net profits for 1995 up to the date of any dividend declaration. There are no regulatory or contractual restrictions on Factors' ability to pay dividends to the Corporation. Pursuant to the SEC's Uniform Net Capital Rule, RNYSC may not pay cash dividends if doing so would reduce the company's net capital to less than 5 percent of its aggregate debits. EFFECT OF GOVERNMENTAL POLICIES The earnings of the Corporation, the Bank and RBS are affected not only by general economic conditions, both domestic and foreign, but also by legislative and regulatory changes which, among other things, affect lending rates and costs and by the monetary and fiscal policies of the United States government, its agencies, including the FRB, and of foreign governments and international agencies. The policies of the various governmental authorities influence to a significant extent the growth of bank loans, investments and deposits. The nature and impact of future changes in such monetary and fiscal policies on the Corporation's, the Bank's and RBS' future business and earnings are not predictable. Item 2. Properties The Corporation has its principal offices in its world headquarters building at 452 Fifth Avenue, New York, New York 10018, which is owned and occupied principally by the Bank, and also owns properties in Miami, Florida, Buenos Aires, Argentina, Santiago, Chile, Montevideo, Uruguay, Mexico City, Mexico, Milan, Italy and London, England, which house or will house the Bank's or its subsidiaries' offices in those locations. The Bank and RBS also own 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 1994. 16 Item 10. Directors and Executive Officers of the Corporation (a) Names, Ages and Positions The names, ages and positions of the executive officers of the Corporation are as follows:
Position with Position with Name Age the Corporation* the Bank* ---- --- --------------- ------------- Walter H. Weiner 64 Chairman of the Board and Chairman of the Board and Chief Executive Officer Chief Executive Officer Jeffrey C. Keil 51 President Vice Chairman of the Board Cyril S. Dwek 58 Vice Chairman Vice Chairman of the Board Ernest Ginsberg 64 Vice Chairman Vice Chairman of the Board Peter J. Mansbach 54 Chairman of the Executive Chairman of the Executive Committee Committee Vito S. Portera 52 Vice Chairman Vice Chairman of the Board Dov C. Schlein 47 Vice Chairman President Nathan Hasson 49 Vice Chairman Vice Chairman of the Board and Treasurer ------------------------ * Each of the above-named officers is a director of both the Corporation and the Bank.
Each of the above executive officers is a member of the respective Management Executive Committees of the Corporation and the Bank. The term of each such 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 Holdings S.A. 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, owning approximately 28.9% of the Corporation's outstanding Common Stock, as of March 8, 1995, through his ownership of all the outstanding shares of Saban S.A., which owns directly and indirectly 15,124,662 shares of the Corporation's Common Stock (including shares held through its wholly-owned subsidiary, RNYC Holdings Limited, a Gibraltar bank holding company), and of another corporation which owns 29,776 shares of the Corporation. Mr. Safra has received the approval of the FRB, which expires on April 28, 1995, unless extended, to purchase through Saban and RNYC Holdings Limited, up to an additional two million shares of the Corporation's Common Stock. The number of shares owned by Mr. Safra as of March 8, 1995, includes 91,850 shares purchased pursuant to the FRB approval. The advice of Mr. Safra, as the principal stockholder, is often sought by the Corporation with respect to major policy decisions and other significant matters. (b) Biographies of Corporation's Executive Officers The biographical information for the past five years for the above named executive officers of the Corporation is as follows: Walter H. Weiner has been a director and Chairman of the Board of the Corporation and the Bank and a director of RBS for over five years. Mr. Weiner also serves as a member of RBS' Compensation and Benefits, Credit Review and Executive Committees. 17 Jeffrey C. Keil has been a director and President of the Corporation and a director and a Vice Chairman of the Board of the Bank and a director of RBS for over five years. Mr. Keil also serves as a member of RBS' Executive Committee. Cyril S. Dwek has been a director of the Corporation and the Bank and a Vice Chairman of the Corporation and a Vice Chairman of the Board of the Bank for over five years. Mr. Dwek has been a director of RBS since April 1990. Ernest Ginsberg has been a director and a Vice Chairman of the Corporation and a director and a Vice Chairman of the Board of the Bank for over five years. Until July 1990, he was General Counsel of the Bank for over five years and until April 1994, he was General Counsel of the Corporation for over five years. Mr. Ginsberg has been a director of RBS and a member of its Executive Committee for over five years. Peter J. Mansbach has been a director and Chairman of the Executive Committee of the Bank since June 1994 and of the Corporation since July 1994. For over five years prior thereto, Mr. Mansbach was a partner of Kronish, Lieb, Weiner & Hellman, attorneys. Vito S. Portera has been a director and a Vice Chairman of the Corporation for over five years. He has been a director and a Vice Chairman of the Board of the Bank and RBS for over five years. Mr. Portera also has been Chairman of the Board of Republic International Bank of New York, the Miami, Florida Edge Act subsidiary of the Bank, for over five years. Dov C. Schlein has been a director and a Vice Chairman of the Corporation and a director and President of the Bank and a director of RBS for over five years. Mr. Schlein also serves as a member of RBS' Compensation and Benefits and Executive Committees. Nathan Hasson has been a director and a Vice Chairman of the Corporation since January 1993. He has been a director and a Vice Chairman of the Board of the Bank for over five years. He also serves as Treasurer of the Bank and RBS. Mr. Hasson has been a director of RBS since April 1990. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters Information on the market prices of the Corporation's Common Stock, dividend payments on the Common Stock, the number of stockholders of record and related matters may be found in the section entitled "Security Market Information" on page 52 in the Corporation's 1994 Annual Report to Stockholders which is hereby incorporated herein by reference. Item 6. Selected Financial Data Data for each of the years in the five year period ended December 31, 1994 on the Corporation's operating income, net income, including earnings per share data, assets, long-term debt, dividends and other relevant matters are presented in the section entitled "Selected Financial Data" on pages 90 and 91 in the Corporation's 1994 Annual Report to Stockholders which is hereby incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The section entitled "Management's Discussion and Analysis" on pages 28 through 52 in the 1994 Annual Report to Stockholders is hereby incorporated herein by reference. 18 Item 8. Financial Statements and Supplementary Data The financial statements of the Corporation as of December 31, 1994 and 1993 and for each of the years in the three year period ended December 31, 1994 are found on pages 53 through 56 in the 1994 Annual Report to Stockholders and, together with the accompanying notes thereto found on pages 58 through 84 and the Independent Auditors' Report on Financial Statements found on page 85 in such report, are hereby incorporated herein by reference. Selected quarterly data presented on page 88 in such Annual Report in the section entitled "Selected Financial Data" are also hereby incorporated herein by reference. 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 See Item 10 in Part I of this Report for information on executive officers of the Corporation. Information concerning the directors of the Corporation and nominees for election as directors thereof is presented on pages 2 through 5 in the section entitled "Election of Directors" in the Corporation's definitive Proxy Statement dated March 15, 1995 for its 1995 Annual Meeting of Stockholders filed pursuant to Section 14 of the Securities Exchange Act of 1934, which is hereby incorporated herein by reference. Item 11. Executive Compensation Information concerning compensation of executive officers of the Corporation is presented in the section "Compensation of Directors and Executive Officers - Executive Officers" found on pages 7 through 16 under "Election of Directors" in the Corporation's definitive Proxy Statement dated March 15, 1995 for its 1995 Annual Meeting of Stockholders filed pursuant to Section 14 of the Securities Exchange Act of 1934, which is hereby incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Information concerning the number of shares of Common Stock of the Corporation beneficially owned by certain owners and management is presented on pages 2 through 5 in the section "Election of Directors" and page 19 in the section entitled "Ownership of Voting Securities" in the Corporation's definitive Proxy Statement dated March 15, 1995 for its 1995 Annual Meeting of Stockholders filed pursuant to Section 14 of the Securities Exchange Act of 1934, which is hereby incorporated herein by reference. Item 13. Certain Relationships and Related Transactions Information concerning transactions between the Corporation and executive officers and directors and certain related persons is presented in the section "Transactions with Management and Related Persons" found on pages 17 and 18 under "Election of Directors" in the Corporation's definitive Proxy Statement dated March 15, 1995 for its 1995 Annual Meeting of Stockholders filed pursuant to Section 14 of the Securities Exchange Act of 1934 and in Note 18 of the Notes to Consolidated Financial Statements found on page 81 of the 1994 Annual Report to Stockholders, both of which are hereby incorporated herein by reference. 19 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits (i) Financial Statements of Republic New York Corporation and Subsidiaries, included in the Annual Report to Stockholders for the year 1994 (on pages indicated below) and incorporated herein by reference: Page Consolidated Statements of Condition, December 31, 1994 and 1993. . . . . . . . 53 Consolidated Statements of Income, Years ended December 31, 1994, 1993 and 1992. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Consolidated Statements of Changes in Stockholders' Equity, Years ended December 31, 1994, 1993 and 1992. . . . . . . . . . . . . . . . . . . . . . . 55 Consolidated Statements of Cash Flows, Years ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . 58 Independent Auditors' Report on Financial Statements. . . . . . . . . . . . . . 85 (ii) Financial Statement Schedules of Republic New York Corporation (Parent Company Only) are shown in the notes to the respective financial statements. See Note 20 of the Notes to Consolidated Financial Statements on pages 83 and 84 in the 1994 Annual Report to Stockholders which is hereby incorporated herein by reference.
(iii) Exhibits 3(a) Articles of Incorporation as amended through April 21, 1993. (b) By-Laws of the Corporation as amended through July 20, 1988. (1) 4(a) Articles Supplementary creating a series of Cumulative Preferred Stock, Floating Rate Series B dated March 7, 1984. (2) (b) Articles Supplementary creating a series of Dutch Auction Rate Transferable Securities, Preferred Stock, Series A and Series B, dated March 27, 1986. (2) (c) Articles Supplementary creating a series of Money Market Cumulative Preferred Stock, dated July 22, 1987. (2) (d) Articles Supplementary creating a series of Remarketed Preferred Stock, dated July 29, 1987. (2) (e) Articles Supplementary creating a series of $3.375 Cumulative Convertible Preferred Stock, dated May 14, 1991. (2) (f) Articles Supplementary creating a series of $1.9375 Cumulative Preferred Stock, dated February 26, 1992. (2) (g) Articles Supplementary creating a series of Adjustable Rate Cumulative Preferred Stock, Series D, dated May 23, 1994. (13) (h) Indenture, dated as of May 1, 1986, between Republic New York Corporation and Manufacturers Hanover Trust Company, as Trustee, for the issuance of the Corporation's 8 3/8% Notes Due 1996. (3) (i) Indenture dated January 15, 1987 between Republic New York Corporation and Bankers Trust Company, as Trustee, for the issuance of the Corporation's Putable Capital Notes. (4) (j) Standard Multiple - Series Indenture Provisions, dated as of May 15, 1986. (5) (k) Senior Indenture, dated as of May 15, 1986, between Republic New York Corporation and Manufacturers Hanover Trust Company, as Trustee. (5) (l) First Supplemental Indenture to Senior Indenture, dated as of May 15, 1991. (6) (m) Second Supplemental Indenture to Senior Indenture, dated as of April 15, 1993. (7) 20 (n) Subordinated Indenture dated as of May 15, 1986, between Republic New York Corporation and Bankers Trust Company, as Trustee. (8) (o) First Supplemental Indenture to Subordinated Indenture, dated as of May 15, 1991. (6) (p) Second Supplemental Indenture to Subordinated Indenture, dated as of April 15, 1993. (7) (q) Subordinated Indenture, dated as of October 15, 1992, between Republic New York Corporation and Citibank, N.A., as Trustee. (9) (r) First Supplemental Indenture to 1992 Subordinated Indenture, dated as of April 15, 1993. (7) (s) Form of Senior Security. (10) (t) Form of Subordinated Security. (10) 10(a) Copy of agreement dated May 27, 1988 among Vito S. Portera and Republic New York Corporation and Republic National Bank of New York. * (11) (b) Amended and Restated Deferral Agreement dated December 31, 1993 between Walter H. Weiner and Republic New York Corporation. * (14) (c) Form of Amended and Restated Deferral Agreement. * (14) (d) Form of Deferral Agreement. * (14) (e) Performance Based Incentive Compensation Plan. (12) 11 Computation of Earnings Per Share of Common Stock. 12 Calculation of Ratios of Earnings to Fixed Charges - Consolidated. 13 Annual Report to Stockholders for year 1994 (to the extent incorporated herein by reference). 21 Subsidiaries of the Corporation. 23 Consents of Experts and Counsel. 27 Financial Data Schedule. * Compensation Agreement. 21 (1) Incorporated herein by reference to such Exhibit filed with the Corporation's Annual Report on Form 10-K for its fiscal year ended December 31, 1988 (Exhibit 3(b)). (2) Included in Exhibit 3(a). (3) Incorporated herein by reference to such Exhibit filed with the Corporation's Registration Statement on Form S-3, No. 33-5074 (Exhibit 4.2). (4) Incorporated herein by reference to such Exhibit filed with the Corporation's Annual Report on Form 10-K for its fiscal year ended December 31, 1987 (Exhibit 4(y)). (5) Incorporated herein by reference to such Exhibits filed with the Corporation's Registration Statement on Form S-3, No. 33-5804 (Exhibits 4(a) and 4(b), respectively). (6) Incorporated herein by reference to such Exhibits filed with the Corporation's Registration Statement on Form S-3, No. 33-40703 (Exhibits 4(c) and 4(e), respectively). (7) Incorporated herein by reference to such Exhibits filed with the Corporation's Registration Statement on Form S-3, No. 33-49507, Amendment No. 1 (Exhibits 4(d), 4(g) and 4(i), respectively). (8) Incorporated herein by reference to such Exhibit filed with the Corporation's Current Report on Form 8-K dated February 8, 1989 (Exhibit 4(c)). (9) Incorporated herein by reference to such Exhibit filed with the Corporation's Registration Statement on Form S-3, No. 33-48651, Post-Effective Amendment No. 2 (Exhibit 4(f)). (10) Incorporated herein by reference to such Exhibits filed with the Corporation's Current Report on Form 8-K dated August 6, 1992 (Exhibits 4(h) and 4(i), respectively). (11) Incorporated herein by reference to such Exhibits filed with the Corporation's Annual Report on Form 10-K for its fiscal year ended December 31, 1991 (Exhibit 10(b)). (12) Incorporated herein by reference to such Exhibit filed with the Corporation's definitive Proxy Statement dated March 16, 1994 (Exhibit 99). (13) Incorporated herein by reference to such Exhibit filed with the Corporation's Current Report on Form 8-K dated May 23, 1994 (Exhibit 4(u)). (14) Incorporated herein by reference to such Exhibits filed with the Corporation's Annual Report on Form 10-K for its fiscal year ended December 31, 1993 (Exhibits 10(b), 10(c) and 10(d), respectively). (b) No reports on Form 8-K were filed during the last quarter of the annual period covered by this Report. 22 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. Dated: March 31, 1995 REPUBLIC NEW YORK CORPORATION By: 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 Director and Chairman of the Board WALTER H. WEINER (Principal Executive ------------------------- Officer) March 31, 1995 Executive Vice President and Comptroller (Principal Financial and JOHN D. KABERLE, JR. Accounting Officer) March 31, 1995 ------------------------- KURT ANDERSEN Director March 31, 1995 ------------------------- ALBERT S. CORWEN Director March 31, 1995 ------------------------- CYRIL S. DWEK Director March 31, 1995 ------------------------- ERNEST GINSBERG Director March 31, 1995 ------------------------- NATHAN HASSON Director March 31, 1995 ------------------------- MORRIS HIRSCH Director March 31, 1995 ------------------------- JEFFREY C. KEIL Director March 31, 1995 ------------------------- PETER KIMMELMAN Director March 31, 1995 ------------------------- LEONARD LIEBERMAN Director March 31, 1995 ------------------------- PETER J. MANSBACH Director March 31, 1995 ------------------------- WILLIAM C. MACMILLEN, JR. Director March 31, 1995 ------------------------- MARTIN F. MERTZ Director March 31, 1995 ------------------------- JAMES L. MORICE Director March 31, 1995 ------------------------- 23 ------------------------- Director (E. Daniel Morris) JANET L. NORWOOD Director March 31, 1995 ------------------------- JOHN A. PANCETTI Director March 31, 1995 ------------------------- ------------------------- Director (Javier Perez de Cuellar) VITO S. PORTERA Director March 31, 1995 ------------------------- WILBUR M. RABINOWITZ Director March 31, 1995 ------------------------- WILLIAM P. ROGERS Director March 31, 1995 ------------------------- DOV C. SCHLEIN Director March 31, 1995 ------------------------- ------------------------- Director (Jacques Tawil) ------------------------- Director (Peter White) 24 EXHIBIT INDEX EX NO. DESCRIPTION ------ ----------- 11 Computation of Earnings Per Share of Common Stock 12 Calculation of Ratios of Earnings to Fixed Charges - Consolidated 13 Annual Report to Stockholders for the 1994 (to the extent incorporated herein by reference) 21 Subsidiaries of the Corporation 23 Consent of Experts and Counsel 27 Financial Data Schedule EX-11 2 COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK EXHIBIT 11 REPUBLIC NEW YORK CORPORATION AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK (In thousands except per share amounts)
Year Ended December 31, ------------------------------------------------------ 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- Primary: Earnings: Net income....................... $340,008 $301,205 $258,883 $227,360 $201,220 Less preferred stock dividends... (34,410) 28,415 28,386 22,733 21,043 -------- -------- -------- -------- -------- Net income applicable to common stock................... $305,598 $272,790 $230,497 $204,627 $180,177 ======== ======== ======== ======== ======== Shares: Average number of common shares outstanding.................... 52,736 52,466 52,204 51,852 49,726 -------- -------- -------- -------- -------- Per share of common stock: Net income....................... $ 5.79 $ 5.20 $ 4.42 $ 3.95 $ 3.62 ======== ======== ======== ======== ======== Fully Diluted: Earnings: Net income applicable to common stock................... $305,598 $272,790 $230,497 $204,627 $180,177 Add dividends applicable to convertible preferred stock.... 11,643 11,643 11,643 7,277 - -------- -------- -------- -------- -------- Net income applicable to common stock as adjusted...... $317,241 $284,433 $242,140 $211,904 $180,177 ======== ======== ======== ======== ======== Shares: Average number of common shares outstanding................... 52,736 52,466 52,204 51,852 49,726 Add shares assumed issued upon exercise of stock options..... 229 286 247 181 - Add shares assumed issued upon conversion of preferred stock. 3,569 3,569 3,569 2,259 - -------- -------- -------- -------- -------- Average number of common shares outstanding as adjusted....... 56,534 56,321 56,020 54,292 49,726 ======== ======== ======== ======== ======== Per share of common stock: Net income ...................... $ 5.61 $ 5.05 $ 4.32 $ 3.90 $ 3.62 ======== ======== ======== ======== ========
EX-12 3 CALCULATION OF RATIOS OF EARNINGS TO FIXED CHARGES EXHIBIT 12 CALCULATION OF RATIOS OF EARNINGS TO FIXED CHARGES -- CONSOLIDATED
Year Ended December 31, ---------------------------------------------------------- 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- (Dollars in thousands) Excluding Interest on Deposits Fixed Charges: Interest on long-term debt and short-term borrowings............... $ 499,065 $ 467,841 $ 513,322 $ 476,672 $ 586,627 One-third of rent expense............. 14,177 10,859 10,252 6,581 8,241 ---------- ---------- ---------- ---------- ---------- Total fixed charges............... $ 513,242 $ 478,700 $ 523,574 $ 483,253 $ 594,868 ========== ========== ========== ========== ========== Earnings: Income before income taxes............ $ 492,366 $ 451,358 $ 347,269 $ 287,746 $ 223,325 Fixed charges......................... 513,242 478,700 523,574 483,253 594,868 ---------- ---------- ---------- ---------- ---------- Total earnings.................... $1,005,608 $ 930,058 $ 870,843 $ 770,999 $ 818,193 ========== ========== ========== ========== ========== Ratio of earnings to fixed charges ex- cluding interest on deposits.......... 1.96x 1.94x 1.66x 1.60x 1.38x ========== ========== ========== ========== ========== Including Interest on Deposits Fixed Charges: Interest on long-term debt, short-term borrowings and deposits.. $1,326,855 $1,157,075 $1,318,228 $1,682,661 $2,044,227 One-third of rent expense............. 14,177 10,859 10,252 6,581 8,241 ---------- ---------- ---------- ---------- ---------- Total fixed charges.............. $1,341,032 $1,167,934 $1,328,480 $1,689,242 $2,052,468 ========== ========== ========== ========== ========== Earnings: Income before income taxes............ $ 492,366 $ 451,358 $ 347,269 $ 287,746 $ 223,325 Fixed charges......................... 1,341,032 1,167,934 1,328,480 1,689,242 2,052,468 ---------- ---------- ---------- ---------- ---------- Total earnings................... $1,833,398 $1,619,292 $1,675,749 $1,976,988 $2,275,793 ========== ========== ========== ========== ========== Ratio of earnings to fixed charges in- cluding interest on deposits.......... 1.37x 1.39x 1.26x 1.17x 1.11x ========== ========== ========== ========== ==========
EX-13 4 1994 ANNUAL REPORT TO STOCKHOLDERS-AS REFERENCED EXHIBIT 13 [LOGO] REPUBLIC NEW YORK CORPORATION Annual Report 1994 Republic New York Corporation --------------------------------------------------------------------- Financial Section
Contents ------------------------------------------------------------------------------------------------- Republic New York Corporation Introduction to Management's Discussion and Analysis 28 Republic New York Corporation Management's Discussion and Analysis 29 Republic New York Corporation Consolidated Statements of Condition 53 Republic New York Corporation Consolidated Statements of Income 54 Republic New York Corporation Consolidated Statements of Changes in Stockholders' Equity 55 Republic New York Corporation Consolidated Statements of Cash Flows 56 Republic National Bank of New York Consolidated Statements of Condition 57 Republic New York Corporation Notes to Consolidated Financial Statements 58 Republic New York Corporation Independent Auditors' Report on Financial Statements 85 Republic New York Corporation Report of Management 86 Republic New York Corporation Independent Auditors' Report on Management's Assertions Related to Internal Controls Over Financial Reporting 87 Republic New York Corporation Selected Financial Data 88 27 Republic New York Corporation --------------------------------------------------------------------- Introduction to Management's Discussion and Analysis The following summary of Management's Discussion and Analysis highlights the principal activities of Republic New York Corporation (the "Corporation") during 1994. The Corporation had another record year in 1994, reporting net income and earnings per share that were the highest in its history. Net income was $340.0 million in 1994 compared to $301.2 million and $258.9 million in 1993 and 1992, respectively. Fully diluted earnings per share increased to $5.61 in 1994, or 11.1%, above the $5.05 earned in 1993. The Corporation's risk-based capital ratios, which include the risk-weighted assets and capital of Safra Republic Holdings S.A. ("Safra Republic"), were 16.17% for Tier 1 capital and 27.49% for total capital at December 31, 1994. These ratios substantially exceed the regulatory minimums for bank holding companies of 4% for Tier 1 capital and 8% for total capital. Total average interest-earning assets were $33.4 billion in 1994, with approximately 50% invested in securities of the United States Government and its agencies and interest-bearing deposits with banks. Average loans in domestic offices of $6.6 billion represented approximately 20% of average interest-earning assets in 1994. Average loans in foreign offices increased to $3.3 billion, representing approximately 10% of total average interest-earning assets in 1994. Non-accrual loans declined to $58.1 million at year end 1994, or 0.65% of total loans outstanding, as the credit quality of the loan portfolio improved. Non-accrual loans declined to the lowest year end level since 1986. At December 31, 1994, the allowance for possible loan losses was $319.2 million, or 3.58% of loans outstanding and 549% of non-performing loans. Income from trading activities was $169.3 million in 1994, compared to $228.2 million in 1993. A decline in derivative products activity and foreign exchange trading income was partially offset by higher levels of precious metals income, including the contribution from Republic Mase Limited ("Republic Mase"). Earnings from Safra Republic, the Corporation's 48.8% owned European-based international private banking group, were $77.4 million in 1994, an increase of 30.1% over 1993. The Corporation's returns on average total assets and average common stockholders' equity, based on net income applicable to common stock, were .74% and 15.20%, respectively in 1994. 28 Republic New York Corporation --------------------------------------------------------------------- Management's Discussion and Analysis 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, 1994. The results of Republic Mase, which was acquired on December 31, 1993 and accounted for as a purchase, are included from the date of acquisition. These statements differ from the Corporation's consolidated financial statements presented elsewhere in this Report in that net interest income is presented on a fully-taxable equivalent basis. The tax equivalent adjustment, related to certain tax exempt instruments, permits all interest income and net interest income to be analyzed on a comparable basis. The rates used for this adjustment, which is reflected throughout this section, are 44% in 1994 and 1993 and 42% in 1992.
Increase (Decrease) Increase (Decrease) ------------------- ------------------- (Dollars in thousands) 1994 Amount % 1993 Amount % 1992 -------------------------------------------------------------------------------------------------------------- Interest income $2,208,821 $244,415 12.4 $1,964,406 $(106,629) (5.1) $2,071,035 Interest expense 1,326,855 169,780 14.7 1,157,075 (161,153) (12.2) 1,318,228 -------------------------------------------------- ----------------------- ---------- Net interest income 881,966 74,635 9.2 807,331 54,524 7.2 752,807 Provision for loan losses 19,000 (66,000) (77.6) 85,000 (35,000) (29.2) 120,000 -------------------------------------------------- ----------------------- ---------- Net interest income after provision for loan losses 862,966 140,635 19.5 722,331 89,524 14.1 632,807 Other operating income 386,368 (9,104) (2.3) 395,472 93,225 30.8 302,247 Other operating expenses 721,476 86,511 13.6 634,965 79,623 14.3 555,342 -------------------------------------------------- --------------------- --------- Income before income taxes 527,858 45,020 9.3 482,838 103,126 27.2 379,712 -------------------------------------------------- --------------------- --------- Income taxes 152,358 2,205 1.5 150,153 61,767 69.9 88,386 Tax equivalent adjustment 35,492 4,012 12.7 31,480 (963) (3.0) 32,443 -------------------------------------------------- --------------------- --------- Total applicable income taxes 187,850 6,217 3.4 181,633 60,804 50.3 120,829 -------------------------------------------------- --------------------- --------- Net income $ 340,008 $ 38,803 12.9 $ 301,205 $ 42,322 16.3 $ 258,883 -------------------------------------------------------------------------------------------------------------- Net income applicable to common stock $ 305,598 $ 32,808 12.0 $ 272,790 $ 42,293 18.3 $ 230,497 --------------------------------------------------------------------------------------------------------------
Net Interest Income [Graph omitted] Net interest income increased $74.7 million, or 9.2%, to $882.0 million in 1994, compared to $807.3 million in 1993. This increase was due to yields on interest-earning assets rising faster than the cost of interest-bearing funds during the year. Average interest-earning assets rose to $33.4 billion, from $32.6 billion in 1993. The net interest rate differential rose to 2.64% in 1994, compared to 2.48% in 1993. Net interest income in 1994 included $6.3 million attributable to converting the financial reporting of the Corporation's Hong Kong and Singapore operations to a current basis in the fourth quarter. These operations had been reporting on a one-month delay basis. Also included in 1994 net interest income is $5.0 million of prepayment penalties resulting from the refinancing of certain commercial loans. The Corporation also took significant steps during 1994 to fix the cost of its liabilities over a five-year time horizon through a program which included purchasing pay-fixed swaps and caps with a notional value of $3.4 billion and final maturities ranging from 1996 to 1999. Interest-bearing liabilities with longer term maturities were also raised. A portion of the long-term U.S. Government securities portfo- lio with a face value of $3.4 billion was sold, primarily during the second quarter, and replaced with shorter term interest-earning assets. 29 [Graph omitted] The reduction in net interest margin resulting from this program has been partially offset by earnings attributable to the increased margin from retail funds that have not increased in cost as rapidly as market rates have risen. The Corporation believes that as a result of the actions taken, net interest income is substantially insulated against changes in the level of interest rates. During the second half of 1994, the Corporation benefited from the improving economic trends in Brazil by increasing the level of short-term investments in its financial markets. This incremental investment averaged approximately $120 million for 1994 and $300 million in the fourth quarter and contributed approximately 2.0% of interest income for the year. The Brazilian economy has been extremely volatile over the past decade. Currently, the underlying fundamentals of the Brazilian economy appear sound. However, problems facing other developing countries may have a detrimental effect on the Brazilian economy. If the Corporation were to decrease its exposure to Brazil, similar spreads probably could not be realized elsewhere. In addition, if the overall credit outlook for Brazil continues to improve, the spreads available on the Corporation's investments may decrease. For additional information related to the Corporation's cross-border net outstandings to Brazil see "Asset Management Cross-border Outstandings" in this section. At year end 1994 and 1993, the gross notional amount of off-balance-sheet contracts used in asset and liability management was approximately $9.5 billion and $8.7 billion, respectively. The market value of these off-balance-sheet contracts was a gain of approximately $63 million at year end 1994. At December 31, 1994, the net effect of these hedging transactions was to decrease the net interest rate dif- ferential by 2 basis points, compared to a decrease of 18 basis points at year end 1993. Net interest income increased $54.5 million, or 7%, to $807.3 million in 1993, compared to $752.8 million in 1992. Average interest-earning assets rose to $32.6 billion, or 9% above the $30.0 billion in 1992. The increase in average interest-earning assets was primarily in investment securities of U.S. Government agencies and trading account assets. During 1993, the Corporation invested in U.S. Government agency mortgage-backed securities, which represented 29% of average interest-earning assets, compared to 24% in 1992. Total average interest-bearing funds in 1993 included a $2.1 billion increase in interest-bearing deposits in foreign offices. The net interest rate differential was 2.48% in 1993 and 2.51% in 1992. The primary factors that affected the rate differential in 1993 were the Corporation's actions to fix the rates on a portion of its lia- bilities that extended into 1994 and 1995, the addition of higher levels of matched maturity deposits and assets at narrower spreads and the declining yields obtained on reinvestment of scheduled and unscheduled principal payments on mortgage loans and mortgage-backed securities. The "Selected Financial Data" section of this Report contains information on the Corporation's average asset and liability structure and rates earned and paid in each of the years in the five-year period ended December 31, 1994. 30 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) --------------------------------------------------------------------- 1994 vs. 1993 1993 vs. 1992 -------------------------------- ---------------------------------- Average Average Average Average (In thousands) Volume Rate Total Volume Rate Total -------------------------------------------------------------------------------------------------------- Interest income from: Interest-bearing deposits with banks $ 22,288 $ 96,135 $118,423 $ (13,838) $ (75,590) $ (89,428) Taxable securities (89,997) 114,760 24,763 130,819 (91,408) 39,411 Securities exempt from federal income taxes 19,332 (3,949) 15,383 20,231 (18,812) 1,419 Trading account assets 2,530 (1,261) 1,269 26,988 4,551 31,539 Federal funds sold and securities purchased under resale agreement 14,290 9,302 23,592 1,556 (4,693) (3,137) Loans, net of unearned income: Domestic offices 13,942 2,569 16,511 8,783 (54,879) (46,096) Foreign offices 48,917 (4,443) 44,474 2,819 (43,156) (40,337) -------------------------------------------------------------------------------------------------------- Total interest on loans 62,859 (1,874) 60,985 11,602 (98,035) (86,433) -------------------------------------------------------------------------------------------------------- Total interest income 31,302 213,113 244,415 177,358 (283,987) (106,629) -------------------------------------------------------------------------------------------------------- Interest expense on: Consumer and other time deposits (10,189) 3,310 (6,879) 3,766 (80,658) (76,892) Certificates of deposit (3,694) 7,196 3,502 (6,391) (6,338) (12,729) Deposits in foreign offices 63,968 77,965 141,933 83,135 (109,186) (26,051) Trading account liabilities (4,662) 6,699 2,037 5,621 (456) 5,165 Short-term borrowings 12,963 5,760 18,723 (11,178) (30,467) (41,645) Total long-term debt 16,029 (5,565) 10,464 28,750 (37,751) (9,001) -------------------------------------------------------------------------------------------------------- Total interest expense 74,415 95,365 169,780 103,703 (264,856) (161,153) -------------------------------------------------------------------------------------------------------- Change in net interest income $(43,113) $117,748 $ 74,635 $ 73,655 $ (19,131) $ 54,524 --------------------------------------------------------------------------------------------------------
Provision for Loan Losses [Graph omitted] The Corporation determines its provision for loan losses based on factors such as past loan loss experience, the composition of the loan portfolio and other contracts which create potential credit exposure and prevailing worldwide economic conditions. The provision for loan losses declined to $19 million in 1994, compared to $85 million in 1993 and $120 million in 1992. Continued economic improvement in domestic and foreign markets contributed to an enhancement in the credit quality of the loan portfolio and a declining level of non-performing loans and net charge-offs. Net charge-offs were $11.4 million in 1994, compared to $13.3 million in 1993. The allowance for possible loan losses was $319.2 million at year end 1994, or 3.58% of loans outstanding, net of unearned income, an increase of $7.3 million from the $311.9 million at year end 1993. The allowance for possible loan losses was $241.0 million at year end 1992. 31 Other Operating Income The following table presents the principal categories of other operating income and the increase (decrease) for each of the years in the three-year period ended December 31, 1994.
Increase (Decrease) Increase (Decrease) ------------------- ------------------- (Dollars in thousands) 1994 Amount % 1993 Amount % 1992 ------------------------------------------------------------------------------------------------------------- Trading income: Income from precious metals $ 50,930 $ 13,020 34.3 $ 37,910 $ 15,273 67.5 $ 22,637 Foreign exchange trading income 91,028 (20,544) (18.4) 111,572 9,001 8.8 102,571 Trading account profits and commissions 27,357 (51,385) (65.3) 78,742 66,423 * 12,319 ------------------------------------------------------- ------------------- -------- Total trading income 169,315 (58,909) (25.8) 228,224 90,697 65.9 137,527 Investment securities gains, net 14,971 13,676 * 1,295 (9,937) (88.5) 11,232 Net gain (loss) on loans sold or held for sale 1,763 2,606 * (843) (17,932) (104.9) 17,089 Commission income 57,297 6,341 12.4 50,956 13,364 35.6 37,592 Equity in earnings of affiliate 77,376 17,913 30.1 59,463 14,243 31.5 45,220 Other income 65,646 9,269 16.4 56,377 2,790 5.2 53,587 ------------------------------------------------------- ------------------- -------- Total other operating income $386,368 $ (9,104) (2.3) $395,472 $ 93,225 30.8 $302,247 *Exceeds 200
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 increased to $50.9 million in 1994 as compared to $37.9 million in 1993 and $22.6 million in 1992. The improvement in each of the last three years reflects increased price volatility and volume in the precious metals markets. In addition, arbitrage activity, as opposed to trading, contributed a substantial portion of income from precious metals. Precious metals results in 1994 also reflect the contribution made from a full year of operations attributable to Republic Mase and its expanded customer base. Republic Mase has operations in London, Sydney and Hong Kong that engage in global wholesale trading in gold, silver, platinum and palladium and also engages in production and inventory financing. Republic is one of the five members of the London Gold Fixing. 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 $91.0 million in 1994, which declined from the record level of $111.6 million experienced in 1993. The growth in the global demand for banknotes and turbulence in European and Latin American currency markets had a favorable impact on this income in 1994; however, this improvement was offset by lower levels of income from market-making activities. Trading account profits and commissions consist of income from trading derivative products and dealing in international debt securities. The Corporation's derivative products group acts as principal in trading interest rate and currency swaps and options on these products, as well as products related to the performance of various indices. This group operates in New York, London and Hong Kong. The group's activities in 1994 generated trading revenues of $14.9 million, compared to $48.8 million in 1993 when the group began operations. The Corporation's strategy includes providing financial services to meet the changing needs of its customers. The level of activity and revenues related to off-balance-sheet activities was lower in 1994 than in 1993. This decline was attributable primarily to lower levels of customer activity in foreign exchange and derivative products reflecting generally reduced activity in global markets due to the high level of market uncertainty that existed during 1994. For additional information related to derivative instruments see Notes 4,16 and 17 of "Notes to Consolidated Statements". Trading account profits and commissions also includes the results of dealing in fixed and variable rate debt securities denominated in all major currencies with large financial institutions, including investment banks, multinational organizations and high net worth individuals, as well as dealing in other financial market instruments such as forward rate agreements, principally through the Corporation's London Eurobond trading subsidiary. 32 The Corporation realized net investment securities gains of $15.0 million in 1994, $1.3 million in 1993 and $11.2 million in 1992. Included in 1994 earnings were gains of $52.0 million realized on the sale of Argentine equities acquired in a 1990 debt-for-equity swap and gains of $26.9 million realized on the sale of all of the securities received in connection with Brazil's debt restructuring. Also included in 1994 were net losses of $63.9 million, which were incurred primarily as a result of the disposition of securities sold as part of the Corporation's asset-liability management program. The net gains in 1992 were attributable to maturities, calls and mandatory redemptions as well as sales made as a result of changes in the credit worthiness of the obligor during the year. The proceeds from securities sold were reinvested in other high quality interest-earning assets. Net gains on loans sold or held for sale were $1.8 million in 1994, compared to net losses of $.8 million in 1993 and net gains of $17.1 million in 1992. The net gains in 1994 resulted from the sale of loans of domestic, foreign and restructuring country obligors. The net gains in 1992 were attributable primarily to the sale of foreign currency denominated Argentine loans which had been designated as held for sale due to the inability to exchange these obligations for foreign currency denominated bonds. Commission income amounted to $57.3 million in 1994, compared to $51.0 million in 1993 and $37.6 million in 1992. Commission income included fees for the issuance of letters of credit and the creation of acceptances of $18.9 million in 1994, $18.0 million in 1993 and $19.0 million in 1992. Higher levels of commissions and other fee income were earned from increased business activities in the securities brokerage subsidiary and amounted to $6.2 million in 1994, compared to $4.6 million in 1993. Commission income also includes fees for the collection and transfer of funds. Fees earned from the newly-established full-service brokerage and investment management activities contributed to a significant portion of the increase in commission income between 1993 and 1992. Fees for the issuance of letters of credit and the creation of acceptances were also a major source of this income in 1993 and 1992 but with the additional revenues generated during 1993 by newly-established activities, these fees represented a smaller percentage of total commission income in 1993 than in 1992. Equity in earnings of affiliate was $77.4 million in 1994, compared to $59.5 million in 1993 and $45.2 million in 1992. This income represents the Corporation's share of the earnings of Safra Republic. The following table presents summary information for Safra Republic for each of the last three years.
(In thousands except per share data) 1994 1993 1992 ---------------------------------------------------------------------------------------------- At December 31: Total assets $12,510,242 $11,349,966 $10,351,859 Interest-bearing deposits with banks 5,232,408 3,660,414 3,759,581 Loans, net of unearned income 1,306,545 1,128,746 1,101,451 Allowance for possible loan losses 124,774 102,204 52,376 Non-performing loans 13,454 23,190 48,777 Total deposits 9,363,840 7,344,562 6,897,172 Total shareholders' equity 1,246,353 1,280,755 1,131,747 For the year: Net interest income $ 224,478 $ 221,188 $ 189,268 Provision for loan losses 12,000 80,987 62,325 Other operating income 91,376 114,400 84,776 Other operating expenses 136,044 124,887 116,635 Net income 158,575 121,595 92,466 Earnings per common share 8.94 6.87 5.22 Average common shares outstanding 17,738 17,703 17,709 ----------------------------------------------------------------------------------------------
For additional information on Safra Republic and its relationship with the Corporation see Note 7 of "Notes to Consolidated Financial Statements". Other income in 1994 was $65.6 million, including a $2.4 million gain on the early extinguishment of $79.9 million principal amount of long-term debt. Other income in 1993 was $56.4 million, after deducting a $4.0 million loss on the early extinguishment of $234 million principal amount of long-term debt. Excluding the effect of the debt extinguishments, other income increased 5% in 1994 and 13% in 1993 over the respective prior year. Other income consists of service charges on deposit accounts, trust department income, other income from factoring activities, fees for precious metals 33 storage and correspondent securities clearing fees. Included in 1992 are penalty fees charged on the prepayment of commercial mortgages and the receipt of a one-time fee of $3.2 million related to a lease termination payment. 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, 1994.
Increase (Decrease) Increase (Decrease) ------------------- ------------------- (Dollars in thousands) 1994 Amount % 1993 Amount % 1992 ------------------------------------------------------------------------------------------------------------ Salaries and employee benefits $395,533 $48,026 13.8 $347,507 $53,376 18.1 $294,131 Occupancy, net 55,425 7,264 15.1 48,161 2,860 6.3 45,301 Other expenses 270,518 31,221 13.0 239,297 23,387 10.8 215,910 -------------------------------------------------------- ------------------- -------- Total other operating expenses $721,476 $86,511 13.6 $634,965 $79,623 14.3 $555,342 ------------------------------------------------------------------------------------------------------------
Total operating expenses in 1994 were $721.5 million and included a one-time restructuring charge of $17.0 million. The restructuring charge was the result of a management decision to de-emphasize certain business activities including activities of Republic New York Securities Corporation, the Corporation's securities subsidiary. In addition, in the fourth quarter of 1994, the Corporation converted its financial reporting in Hong Kong and Singapore to a current basis. The conversion resulted in a one-time increase to 1994 expenses of $3.0 million. Other increases in total operating expenses in 1994 are attributable primarily to the Corporation's expansion into new business areas during the year. This expansion reflects a full year of operating expenses related to the acquisitions of Republic Mase, SafraCorp California and Bank Leumi Le Israel (Canada), as well as the addition of staff in trading, domestic private banking and various support areas. Total operating expenses increased to $635.0 million in 1993 from $555.3 million in 1992. Of this increase, approximately $50.0 million was associated with investments in new businesses, including full service brokerage, derivative products, investment management and retail branch expansion in the New York metropolitan area, Florida and California, as well as growth in consumer lending, primarily residential mortgages and credit card operations. Salaries and employee benefits were $395.5 million in 1994, $347.5 million in 1993 and $294.1 million in 1992. Excluding $14.8 million of salaries and employee benefits related to the 1994 restructuring charge, year to year, these expenses increased 10% in 1994 and 18% in 1993. Increased levels of staff in new businesses contributed to higher salary expense in 1994. Employee benefits expenses declined in 1994 from 1993, as increased costs for medical, pension and payroll taxes were offset by lower incentive-based compensation. The 1993 increase in staff expense was attributable to additions to staff in the trading and investment management areas and to higher levels of incentive-based compensation resulting primarily from increased revenues earned in trading areas. Occupancy costs were $55.4 million in 1994, compared to $48.2 million in 1993 and $45.3 million in 1992. The 1994 increase is primarily attributable to the new business areas mentioned above and additional costs incurred for home office expansion. The increase in 1993 was primarily due to the additional costs of occupying newly-acquired retail branches, as well as general increases in operating existing premises. All other expenses were $270.5 million in 1994, $239.3 million in 1993 and $215.9 million in 1992. Communication and equipment expenses represent a substantial portion of other expenses and amounted to $76.1 million, $61.2 million and $54.7 million in 1994,1993 and 1992, respectively. Also, professional fees, consisting of consulting, legal and audit fees, rose to $35.7 million in 1994 from $31.9 million in 1993 and $23.1 million in 1992. All other expenses include premiums for deposit insurance paid to the Federal Deposit Insurance Corporation. This expense has been relatively stable in each of the last three years and was $22.6 million in 1994, $23.1 million in 1993 and $22.8 million in 1992. The Federal Deposit Insurance Corporation has issued for comment a proposed reduction in bank deposit insurance premiums from 23 cents to 4 cents per $100 of insured deposits for well capitalized institutions. It is expected that this reduction if approved, will be effective in the second-half of 1995. For the period covering the first six months of 1995, there will be no change in the rate paid by the Corporation's subsidiary banks for deposit insurance. 34 Costs applicable to other real estate owned were $2.7 million in 1994, compared to $2.1 million in 1993 and $7.7 million in 1992. 1992 reflected an accounting standard requirement in the valuation of other real estate owned to include the estimated costs of disposition. Those selling expenses were partially reduced by gains from the sale of properties during the year. In January 1995, the Corporation launched an intensive review of its operations with a view to increasing its productivity. The objective is to improve the efficiency of the Corporation's operations. The evaluation process will not be completed until the second quarter of 1995 when implementation of the review's recommendations will begin. Accordingly, determination of the anticipated cost savings, additional revenues and any related restucturing charges cannot be made until the second quarter of 1995. In l994, the Corporation was granted a license to establish a Mexican banking subsidiary that will be headquartered in Mexico City. This subsidiary will operate as Republic National Bank of New York (Mexico), S.A., with an initial capitalization of 340 million pesos, equivalent to approximately U.S. $60 million at recent rates. This subsidiary will engage in activities consistent with those of "Mexican multiple banks", including deposit gathering from the public and granting commercial and individual loans. It is anticipated that this subsidiary will commence operations in the second quarter of 1995. SFAS No. 116, "Accounting for Contributions Received and Contributions Made", is effective for fiscal years beginning after December 15, 1994. The SFAS requires that promises to make charitable contributions be recognized in the period that the funds are unconditionally pledged. The Corporation adopted this FSAS, effective January 1, 1995, which resulted in a charge to earnings of $7.5 million. Total Applicable Income Taxes [Graph omitted] Total applicable income taxes, which give effect to the taxable equivalent adjustment, increased $6.2 million to $187.9 million in 1994, following an increase of $60.8 million between 1993 and 1992. The ratio of total applicable income taxes to income before taxes was 36% in 1994, 38% in 1993 and 32% in 1992. The lower effective income tax rate in 1994 was attributable to the fluctuations in the level of income subject to federal, state and local income taxes. The 1993 effective income tax rate increase, when compared to 1992, was a result of the higher level of income subject to income taxes, the adoption of SFAS No. 109, "Accounting for Income Taxes", on January l, 1993, and the effect of applying a higher U.S. statutory rate in accordance with the Omnibus Budget Reconciliation Act of 1993. Net Income Applicable to Common Stock Net income applicable to common stock was a record $305.6 million in 1994, compared to $272.8 million in 1993 and $230.5 million in 1992. On a fully diluted basis, earnings per common share were $5.61 in 1994, $5.05 in 1993 and $4.32 in 1992. Dividends declared on the Corporation's issues of preferred stock and the average annual rates paid were as follows: $34.4 million at 5.46% in 1994; $28.4 million at 5.11% in 1993 and $28.4 million at 5.25% in 1992. Liability and Asset Management Changes in the level of interest rates and the relationship between rates can effect net interest income. In general, the Corporation's on and off-balance-sheet assets are selected to match both the maturity and interest rate sensitivity of the Corporation's on and off-balance-sheet liabilities. The structure of the Corporation's liabilities determines the structure of its assets. This practice has two important implications. First, liquidity requirements can be met more readily because a large proportion of assets mature when liabilities mature. Second, the impact of changes in the levels of interest rates on the Corporation is reduced because both assets and liabilities have approximately the same interest rate sensitivity. Diversification is another principle employed in the management of liabilities and assets. The Corporation is active in international banking and in managing this activity, diversifies risks among many countries and counterparties throughout the world. Liabilities, which are mostly interest-bearing deposits and other purchased funds, are obtained from both domestic and international sources. These sources of funds represent a wide range of depositors, mostly individuals, and various types of deposits. 35 The Corporation also raises funds from institutional and individual investors with a variety of marketable instruments. The diversification of the Corporation's funding sources provides stability to the funding base. From time to time, the Corporation's management may decide deliberately 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 swaps, caps, options and forwards in managing its gap position. The Corporation monitors the near-term interest rate sensitivity of its liability and asset positions by quantifying the earnings at risk to 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. The model's output projects the variance in net interest income over the next year, given the assumptions used. 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 presented to the Management Asset and Liability Committee and to the Board of Directors at least monthly. Simulation modeling gives a broader view of net interest income variability than does traditional gap analysis, allowing the Corporation to capture more variables that are interest rate sensitive and to explore interrelationships between variables. To complement the simulation model, the Corporation employs traditional gap analysis to provide information on longer term interest rate sensitivity. The table below illustrates the Corporation's interest rate sensitivity gap position at December 31, 1994 and 1993. 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, 1994 ------------------------------------------------------------- After one After three After seven Within year but years but years but After one within within within ten (In millions) year three years seven years ten years years ------------------------------------------------------------------------------------------------------------ ASSET/(LIABILITY) Interest rate sensitivity gap $ (584) $ 889 $(1,258) $ 1,630 $(677) ------------------------------------------------------------------------------------------------------------ ASSET/(LIABILITY) Cumulative interest rate sensitivity gap $ (584) $ 305 $ (953) $ 677 $ - ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ Repricing Period at December 31, 1993 ------------------------------------------------------------- After one After three After seven Within year but years but years but After one within within within ten (In millions) year three years seven years ten years years ------------------------------------------------------------------------------------------------------------ ASSET/(LIABILITY) Interest rate sensitivity gap $(1,025) $(1,461) $ 1,712 $ 1,397 $(623) ------------------------------------------------------------------------------------------------------------ ASSET/(LIABILITY) Cumulative interest rate sensitivity gap $(1,025) $(2,486) $ (774) $ 623 $ - ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------
36 Changes in interest sensitivity gap positions from 1993 to 1994 are reflective of the Corporation's program to fix its liability costs over a five-year time horizon. As a result, the 4-7 year repricing period gap position has decreased by approximately $3.0 billion. The effect of the sale of $3.4 billion of long-term U.S. Government agency securities on the long-term gap position, was counteracted by sharp decreases in mortgage-backed security prepayment patterns. 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 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.
Due in less Due in one Due after (Dollars in millions) than one year thru five years five years Total ---------------------------------------------------------------------------------------------------------- Receive fixed swaps: Notional amount $ 250 $ 61 $1,175 $1,486 Weighted average receive rate 6.17% 10.47% 7.34% 7.27% Weighted average pay rate 5.79% 9.19% 5.81% 5.95% Pay fixed swaps: Notional amount $1,761 $1,640 $ 118 $3,519 Weighted average receive rate 5.89% 6.15% 7.83% 6.08% Weighted average pay rate 5.50% 7.55% 8.16% 6.54% Forward contracts: Notional amount $ - $ 975 $ 155 $1,130 Interest rate caps purchased: Notional amount $ 111 $2,542 $ 250 $2,903 Other interest rate swaps: Notional amount $ 25 $ 77 $ 108 $ 210 Cross-currency swaps: Notional amount $ 204 $ 84 $ - $ 288 ---------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------
Liability Management [Graph ommitted] Deposits The Corporation's primary liability products are interest-bearing deposits provided to customers in three basic areas. The International Private Banking Group establishes relationships with high net worth individuals on a worldwide basis who value safety for their funds. The retail area comprises metropolitan New York City, Florida and California branch systems of Republic National Bank of New York (the "Bank"), Republic Bank for Savings ("RBS") and Republic Bank California N.A.("RBC"). In addition to its New York City branches, RBS also has a retail operation in south central Florida with eight branches. RBC is an independent banking subsidiary that services the California market with three banking offices in Los Angeles County that focus on domestic private banking and mortgage banking. These customers invest in a diverse mix of retail time and savings deposits of both short-term and long-term maturities. The institutional area represents deposits from 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. During 1994, the Corporation invested substantial resources in staff and product development for its domestic private banking group that was formed in the latter part of 1993. It is the Corporation's view that this specialized group will provide a fourth area with a focus on general banking and lending, trusts and estates, custody and investment management relationships for high net worth individuals. In 1993, the Corporation expanded its presence in Canada with the acquisition of Bank Leumi Le Israel (Canada) by Republic National Bank of New York (Canada). This transaction provided entry into the Toronto market with a new branch and increased existing operations in Montreal from two branches to three. 37 The following table sets forth the Corporation's deposit structure at December 31, in each of the last three years.
(In thousands) 1994 1993 1992 --------------------------------------------------------------------------------------------------------------- Domestic offices: Noninterest-bearing deposits: Individuals, partnerships and corporations $ 1,445,545 $ 1,188,773 $ 993,244 Foreign governments and official institutions 1,085 912 1,996 U.S. Government and states and political subdivisions 18,602 21,540 8,583 Banks 115,542 86,030 l07,749 Certified and official checks 120,893 130,263 124,879 --------------------------------------------------------------------------------------------------------------- Total noninterest-bearing deposits 1,701,667 1,427,518 1,236,451 --------------------------------------------------------------------------------------------------------------- Interest-bearing deposits: Individuals, partnerships and corporations 3,857,533 3,653,O47 4,190,729 Savings and NOW accounts 2,684,499 2,823,010 2,687,43l Money market accounts 1,940,605 2,192,113 2,228,807 Deposit notes 50,000 50,000 50,000 All other 1,925 6,627 7,737 --------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 8,534,562 8,724,797 9,164,704 --------------------------------------------------------------------------------------------------------------- Total deposits in domestic offices 10,236,229 10,152,315 10,401,155 --------------------------------------------------------------------------------------------------------------- Foreign offices: Noninterest-bearing deposits 114,503 135,251 79,262 --------------------------------------------------------------------------------------------------------------- Interest-bearing deposits: Deposits of individuals, partnerships and corporations 7,179,880 6,253,798 7,839,792 Banks located in foreign countries 4,702,972 6,142,823 2,661,277 Foreign governments and official institutions 492,418 l17,063 120,70l --------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 12,375,270 12,513,684 10,621,770 --------------------------------------------------------------------------------------------------------------- Total deposits in foreign offices 12,489,773 12,648,935 10,701,032 --------------------------------------------------------------------------------------------------------------- Total deposits $22,726,002 $22,801,250 $21,102,187 --------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------
The following table presents the maturity distribution at December 31, 1994, of certificates of deposit, deposit notes and other time deposits of $100,000 or more included in interest-bearing deposits in domestic offices in the table above.
Certificates of Deposit and Deposit Notes Other Time Deposits ----------------------- ------------------- (Dollars in thousands) Amount % Amount % ------------------------------------------------------------------------------------ Due in 90 days and less $ 546,987 51 $907,732 100 Due in 91-180 days 117,839 11 - - Due in 181-360 days 89,645 8 - - Due in over 360 days 321,904 30 - - ------------------------------------------------------------------------------------ Total $1,076,375 100 $907,732 100 ------------------------------------------------------------------------------------
Foreign Deposits The Corporation's International Private Banking Group, headquartered in New York City, generates a substantial portion of foreign deposits by establishing relationships with clients throughout the world. Deposits from foreign sources are cross-border deposits placed by over 25,000 individuals and foreign banks, in both domestic and foreign branch offices and foreign banking subsidiaries. This customer base is a stable source of funding for the Corporation. Total average deposits in foreign offices rose to $12.2 billion in 1994, after increasing to $10.8 billion in 1993 from $8.6 billion in 1992. As a percentage of total average deposits, including both interest-bearing and non-interest bearing accounts, this source of funds increased to 55% in 1994 from 51% in 1993 and 46% in 1992. In each of the last two years the Corporation relied more on foreign office deposits as a source of funds. 38 The following table distributes, by type, the Corporation's foreign deposits at December 3l, 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) 1994 1993 1992 ----------------------------------------------------------------------------------------------------------- Foreign deposits: Deposits of individuals, partnerships and corporations $ 7,725,714 $ 6,755,821 $ 8,344,276 Banks and other financial institutions 4,824,135 6,281,266 2,751,181 Foreign governments and official institutions 493,860 118,387 122,257 Other deposits 84,584 170,230 362,302 ----------------------------------------------------------------------------------------------------------- Total foreign deposits $13,128,293 $13,325,704 $11,580,016 -----------------------------------------------------------------------------------------------------------
Trading Account Liabilities Trading account liabilities include the market value of securities sold that the Corporation does not own but must deliver at a future date. 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. Trading account liabilities also include unrealized losses related to interest rate swaps, options and other derivative financial instrument contracts and related premiums received that are utilized in trading activities. Trading account liabilities were $2.1 billion at year end 1994, compared to $177 million in 1993. This increase is attributable primarily to the adoption on January 1, 1994, of Financial Accounting Standards Board Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts", ("FIN No. 39"). This interpretation requires, among other things, that unrealized gains and losses on forward, swap, option and other financial instruments contracts, resulting primarily from the marking to estimated market value of trading instruments, be reported on a gross basis except when right of set-off criteria are met, or a legally enforceable netting agreement with a counterparty exists. The adoption of this interpretation has resulted in the Corporation reporting increased levels of average total assets and total liabilities to reflect the gross-up effect of reporting these balances. Short-term Borrowings The Corporation's short-term funding sources include federal funds purchased and securities sold under repurchase agreements, issuing commercial paper, local borrowing in overseas operations and interest-bearing precious metals balances. The Bank, from time to time, also issues short-term securities in public offerings. In 1994, the Bank sold an issue of $1 billion principal amount of 4.30% Notes due in 1995 to the public. The proceeds from this issue are being used for general banking business. Short-term borrowings have been an important source of funds in each of the last three years, averaging $5.6 billion in 1994, $5.2 billion in 1993 and $5.5 billion in 1992. The Corporation's commercial paper is rated A-l+, F-1+ and P-l by Standard & Poor's Corporation, Fitch Investors Service and Moody's Investor Service, respectively. Commercial paper proceeds are used principally to finance the current operations of Republic Factors Corp. and Republic New York Securities Corporation. The Corporation has $170 million of lines of credit outstanding to provide support for its commercial paper program under which it is authorized to issue up to $2.5 billion of such borrowings. 39 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) 1994 1993 1992 --------------------------------------------------------------------------------------------------------------- Federal funds purchased and securities sold under repurchase agreements: Average interest rate: At year end 4.92% 2.94% 3.25% For the year 3.97% 3.03% 3.12% Average amount outstanding during the year $1,442,585 $3,403,240 $2,558,208 Maximum amount outstanding at any month end 2,404,354 5,315,974 6,610,534 Amount outstanding at year end 987,110 999,149 2,266,004 Commercial paper: Average interest rate: At year end 5.71% 3.29% 3.40% For the year 4.24% 3.32% 3.90% Average amount outstanding during the year $ 876,677 $ 606,088 $ 562,634 Maximum amount outstanding at any month end 1,047,678 897,672 741,329 Amount outstanding at year end 979,390 881,741 720,308 Other borrowings: Average interest rate: At year end 4.07% 4.35% 4.80% For the year 3.55% 5.54% 5.52% Average amount outstanding during the year 3,254,895 $1,227,375 $2,378,024 Maximum amount outstanding at any month end 3,884,558 2,283,529 2,897,957 Amount outstanding at year end 3,002,894 2,283,529 2,749,900 ---------------------------------------------------------------------------------------------------------------
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 securities. International banking activities also comprise a substantial portion of the Corporation's business and involve factors other than the normal credit risk associated with domestic lending. In determining the creditworthiness of international borrowers, the economic, political and social conditions that affect the borrower's ability to repay obligations must be taken into account. Through country and political analysis and diversification of activities across a wide geographic distribution and within exposure limits set on a country-by-country basis, the Corporation reduces the unique risks of extending international credit. The Corporation endeavors to reflect risk in its pricing policy. The following table sets forth the 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 in this section. 40
(In thousands) 1994 1993 1992 ---------------------------------------------------------------------------------------------------------------- Interest-bearing deposits with banks $10,242,061 $ 5,346,647 $10,562,885 Total investment securities 11,439,728 14,949,793 12,331,471 Trading account assets 2,543,637 1,194,629 742,236 Federal finds sold and securities purchased under resale agreements 1,123,925 2,322,465 1,505,274 Loans: Real estate 3,220,981 3,310,585 3,711,428 Government and official institutions 89,625 429,232 341,320 Broker loans 582,781 1,411,302 307,018 Banks and other financial institutions 380,811 75,800 303,523 Commercial and other 4,686,401 4,376,464 3,492,890 ---------------------------------------------------------------------------------------------------------------- Total loans 8,960,599 9,603,383 8,156,179 Less unearned income (47,109) (94,825) (148,722) --------------------------------------------------------------------------------------------------------------- Loans, net of unearned income 8,913,490 9,508,558 8,007,457 --------------------------------------------------------------------------------------------------------------- Interest-earning assets $34,262,841 $33,322,092 $33,149,323 ---------------------------------------------------------------------------------------------------------------
Interest-Bearing Deposits with Banks [Graph omitted] 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. Average investments in interest-bearing deposits with banks have represented approximately 25% of average interest-earning assets in each of the last three years. The following tables provide information on the composition and maturity distribution of the Corporation's interest-bearing deposits with banks at December 31, 1994.
Maturity (Dollars in millions) Composition % (Dollars in millions) Distribution % ------------------------------------------------------- --------------------------------------------------------- United States financial institutions $ 466.5 5 Due within one month $ 4,257.0 42 Branches and agencies of foreign banks located in the United States 1,418.9 14 Due after one but within six months 4,703.5 46 Foreign government banks and official institutions 872.0 9 Due after six but within twelve months 936.0 9 Banks located in the United Kingdom 1,629.7 16 Other foreign banks 5,855.0 56 Due after one year 345.6 3 ------------------------------------------------------- --------------------------------------------------------- $10,242.1 100 $10,242.1 100 ------------------------------------------------------- ---------------------------------------------------------
Investment Portfolio The Corporation adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," on December 31, 1993. SFAS No. 115 requires that securities designated as available for sale be carried at fair value with any unrealized appreciation or depreciation in the fair value of the securities reflected in stockholders' equity, net of taxes. Securities designated as held to maturity are carried at amortized cost. Prior to the adoption of SFAS No. 115, securities available for sale were carried at the lower of cost or market value in the aggregate, with adjustments to the carrying value recorded as investment securities losses. During 1994, the Corporation sold $3.4 billion face value of long-term U.S. Government agency securities that had been classified as available for sale. In addition, the Corporation reviewed its intent to hold certain U.S. Government agency securities that had been designated as available for sale and, as a result, transferred securities with a carrying value of approximately $3.9 billion to the held to maturity classification. The unrealized depreciation, before tax effect, on this transfer was $93.6 million at year end and is included in the separate component of stockholders' equity. Net investment securities gains of $15.0 million in 1994 included gains of $52.0 million from the sale of Argentine equities acquired in a 1990 debt-for-equity swap and $26.9 million from the sale of securities received in connection with Brazil's debt restructuring. These gains were partially offset by losses of $63.9 million that were realized in connection with the disposition of securities, primarily from the sale of U.S. 41 Government agency securities, that were sold as part of the Corporation's asset-liability management program. For additional information on asset-liability management see "Liability and Asset Management". The following table presents the composition of the book/carrying value of the Corporation's total investment securities portfolio at December 31, in each of the last three years.
(In thousands) 1994 1993 1992 -------------------------------------------------------------------------------------------------- U.S. Government obligations $ 100,592 $ 425,352 $ 726,997 Obligations of U.S. Government agencies 7,417,287 10,713,977 8,327,119 Obligations of states and political subdivisions 624,033 584,302 543,005 Other investment securities 3,297,816 3,226,162 2,734,350 -------------------------------------------------------------------------------------------------- $11,439,728 $14,949,793 $12,331,471 --------------------------------------------------------------------------------------------------
The following tables present, by maturity distribution, the book value and the estimated market value and the amortized cost and the book/estimated market value of the Corporation's portfolio of securities held to maturity and available for sale at December 31, 1994. The Corporation has designated certain derivative instruments, primarily in the form of interest rate swaps, used 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 current market conditions, mortgage-backed securities included in U.S. Government agencies held to maturity and available for sale have estimated average lives of approximately 10.1 years and 7.0 years, respectively. 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 44%.
Held to Maturity ----------------------------------- Estimated Weighted Book Market Average (Dollars in thousands) Value Value Yield --------------------------------------------------------------------------------------------------------- Obligations of U.S. Government agencies: Mortgage-backed securities (1) $5,263,639 $4,950,030 7.57% Interest rate swaps - 37,951 --------------------------------------------------------------------------------------------- Total 5,263,639 4,987,981 --------------------------------------------------------------------------------------------- Obligations of states and political subdivisions: Due within 1 year 5,339 5,408 13.99% Due after 1 year but within 5 years 13,976 15,088 13.62 Due after 5 years but within 10 years 114,845 122,578 12.30 Due after 10 years 489,873 483,193 9.64 --------------------------------------------------------------------------------------------- Total 624,033 626,267 --------------------------------------------------------------------------------------------- Total held to maturity $5,887,672 $5,614,248 --------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------- (1) The book value includes a mark-to-market writedown of $93,629,000 related to securities that were transferred from available for sale.
42 [Graph omitted]
Available for Sale ----------------------------------- Book/ Estimated Weighted Amortized Market Average (Dollars in thousands) Cost Value Yield --------------------------------------------------------------------------------------------------------- U.S. Government obligations: Due within 1 year 2,128 2,126 4.55% Due after 1 year but within 5 years 84,360 83,217 6.77 Due after 10 years 17,752 15,249 5.30 --------------------------------------------------------------------------------------------- Total 104,240 100,592 --------------------------------------------------------------------------------------------- Obligations of U.S. Government agencies: Due after 1 year but within 5 years 57,413 57,409 6.08% Due after 10 years 5,072 5,255 9.51 Mortgage-backed securities 2,110,239 2,020,135 7.76 Interest rare swaps - 70,849 --------------------------------------------------------------------------------------------- Total 2,172,724 2,153,648 --------------------------------------------------------------------------------------------- Other investment securities: Due within 1 year 1,003,697 1,002,810 8.27% Due after 1 year but within 5 years 971,210 974,901 8.87 Due after 5 years but within 10 years 267,622 262,974 10.27 Due after 10 years 1,156,678 1,074,876 10.57 Interest rate swaps - (17,745) --------------------------------------------------------------------------------------------- Total 3,399,207 3,297,816 --------------------------------------------------------------------------------------------- Total available for sale $5,676,171 $5,552,056 --------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------
The following table presents the amortized cost and book value/estimated market value of the Corporation's other investment securities by type at December 31, 1994.
Available for Sale ----------------------------------- Amortized Book/Estimated (In thousands) Cost Market Value ---------------------------------------------------------------------------------------------- Bonds, debentures and other securities of: Foreign banks $ 839,754 $ 810,061 Foreign governments and government agencies 1,080,138 1,068,128 Foreign companies 487,785 480,176 Domestic companies 372,753 378,202 U.S. financial organizations 571,629 531,846 Federal Reserve Bank stock 47,148 47,148 Interest rate swaps - (17,745) ---------------------------------------------------------------------------------------------- $3,399,207 $3,297,816 ----------------------------------------------------------------------------------------------
Trading Account Assets Trading account assets consist of securities of the U.S. Government, foreign governments, restructuring countries and corporations; such securities are carried at their estimated market value with the resultant gains and losses recorded as trading account profits and commissions. Trading account assets also include unrealized gains related to interest rate swaps, options and other derivative financial instrument contracts and related premiums paid that are utilized in trading activities. In addition, trading account assets also include loans to borrowers in restructuring countries; such loans are carried at their estimated market value, with the resultant gains or losses included in gain or loss on loans sold or held for sale, 43 In considering where to invest funds from deposits and other liabilities maturing within one year, precious metals arbitrage frequently offers an attractive investment alternative for the Corporation. The Corporation trades gold and silver bullion, both for immediate delivery and for delivery in the future and also buys and sells options on precious metals. The Corporation is a dealer in gold and silver bullion and coins that are sold to commercial and industrial users and investors. In this activity, the Corporation also receives or delivers gold on consignment and maintains its own inventory. The Corporation generally hedges its inventory against price fluctuations. At December 31, 1994 and 1993, approximately $8.8 million and $24.8 million, respectively, of the Corporation's inventory in precious metals was unhedged. As a result of the Republic Mase acquisition, the Corporation has expanded its precious metals capabilities in global wholesale trading of gold, silver, platinum and palladium, in its spot, forward and options dealing as well as providing financial services in gold loans to central banks, international financial institutions and institutional investors. The Corporation also offers production and inventory financing to mining companies, industrial manufacturers and end-users. Loan Portfolio Average loans in domestic offices for each of the last three years have remained relatively stable, representing approximately 20% of interest-earning assets. Average loans in foreign offices of $3.3 billion in 1994, increased $.8 billion over 1993 which was essentially unchanged from 1992. At year end 1994, the domestic loan portfolio included $1.2 billion of one-four family residential mortgages and $1.8 billion of commercial real estate loans in addition to its commercial and other loans. The following tables present loan portfolio information before the deduction of unearned income, excluding consumer loans and residential mortgage loans totaling $1.4 billion, related to maturity distribution and interest rate sensitivity, based on scheduled repayments at December 31, 1994.
Due After One Due in One Year Through Due After (In thousands) Year Or Less Five Years Five Years Total ------------------------------------------------------------------------------------------------------------ Domestic: Commercial and other $1,961,075 $ 292,302 $ 24,063 $2,277,440 Real estate - commercial 236,118 647,343 930,417 1,813,878 Banks and other financial institutions 74,170 8,840 - 83,010 Broker loans 559,019 - - 559,019 ------------------------------------------------------------------------------------------------------------ Total domestic loans 2,830,382 948,485 954,480 4,733,347 ------------------------------------------------------------------------------------------------------------ Foreign: Commercial and other 2,166,536 125,940 32,540 2,325,016 Real estate - commercial 68,814 41,402 782 110,998 Banks and other financial institutions 284,526 13,275 - 297,801 Foreign governments and government agencies 11,973 17,869 59,783 89,625 Broker loans 23,762 - - 23,762 ------------------------------------------------------------------------------------------------------------ Total foreign loans 2,555,611 198,486 93,105 2,847,202 ------------------------------------------------------------------------------------------------------------ Total loans $5,385,993 $1,146,971 $l,047,585 $7,580,549 ------------------------------------------------------------------------------------------------------------
At December 31, 1994, 71% of the loan portfolio presented above was due in one year or less compared to 72% in 1993. Of the total loan portfolio due in one year or less, 53% were domestic loans and 47% were foreign loans. 44 The following table is an analysis, at December 31, 1994, 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.
(In thousands) Fixed Rate Variable Rate Total ------------------------------------------------------------------------------------------------- Loans due after one year: Domestic loans $1,125,862 $777,103 $1,902,965 Foreign loans 131,441 160,150 291,591 ------------------------------------------------------------------------------------------------- $1,257,303 $937,253 $2,194,556 -------------------------------------------------------------------------------------------------
Allowance for Possible Loan Losses [Graph omitted] The allowance for possible loan losses increased $7.3 million to $319.2 million at year end 1994, representing 3.28% of loans outstanding, net of unearned income, compared to $311.9 million, or 3.28%, at year end 1993. In 1994, the provision for loan losses was $19,0 million and net loan charge-offs were $11.4 million, after $6.9 million of recoveries related to restructuring country debt. In 1993, the Corporation had $21.2 million of net recoveries related to restructuring country debt, primarily from the sale of Argentine Interest Bonds received in connection with its debt restructuring. The Corporation adopted SFAS No, 114. "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118 "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures" on January 1, 1995. These SFAS' prescribe the recognition criteria and measurement methods for certain impaired loans and loans modified in troubled debt restructurings. These standards will require that the Corporation measure its impaired loans based on either an estimate of the discounted value of expected future cash flows at a loan's effective market interest rate at the time of impairment or the fair value of collateral if the loan is collateral dependent. The amount of impairment will result in a portion of the existing allowance for loan losses being specifically allocated to impaired loans. The adoption of these SFAS', based on the current level of non-performing loans, will not have a material impact on the Corporation's results of operations. The following table presents data related to the Corporation's allowance for possible loan losses for each of the years in the five-year period ended December 31, 1994.
(Dollars in thousands) 1994 1993 1992 1991 1990 -------------------------------------------------------------------------------------------------------------- Balance at beginning of year $311,855 $241,020 $227,454 $236,634 $287,501 Charge-offs: Domestic: Commercial and industrial 14,287 11,947 51,956 65,363 42,548 Installment loans to individuals 1,730 1,757 2,396 3,028 1,987 Secured by real estate 11,183 32,466 36,022 6,310 7,066 Foreign 17,355 12,731 20,257 6,603 2,127 Losses on sale, swap and charge-off of restructuring countries' debt - 9,729 18,477 4,304 63,939 -------------------------------------------------------------------------------------------------------------- Total charge-offs 44,555 68,630 129,108 85,608 117,667 -------------------------------------------------------------------------------------------------------------- Recoveries: Domestic: Commercial and industrial 6,201 15,281 9,498 8,505 1,329 Installment loans to individuals 724 661 680 690 812 Secured by real estate 6,663 2,731 289 38 254 Foreign* 19,538 36,693 12,849 5,761 3,251 -------------------------------------------------------------------------------------------------------------- Total recoveries 33,126 55,366 23,316 14,994 5,646 -------------------------------------------------------------------------------------------------------------- Net charge-offs (11,429) (13,264) (105,792) (70,614) (112,021) Provision charged to operating expense 19,000 85,000 120,000 62,000 40,000 Allowance of acquired companies - 297 764 - 21,887 Translation adjustment (206) (1,198) (1,406) (566) (733) -------------------------------------------------------------------------------------------------------------- Balance at end of year $319,220 $311,855 $ 241,020 $227,454 $236,634 -------------------------------------------------------------------------------------------------------------- *Primarily restructuring countries' debt in 1991-1993.
45 The following table presents loan data and ratios related to the allowance for possible loan losses and net charge-offs for each of the years in the five-year period ended December 31, 1994.
(Dollars in millions) 1994 1993 1992 1991 1990 --------------------------------------------------------------------------------------------------------------------- Loans Loans outstanding, net of unearned income, at end of year $8,913 $9,509 $8,007 $8,569 $ 9,005 Average loans outstanding, net of unearned income, during the year $9,894 $8,891 $8,732 $9,623 $10,603 Ratios Allowance for possible loan losses to loans outstanding, net of unearned income, at end of year 3.58% 3.28% 3.01% 2.65% 2.63% Net charge-offs to average loans outstanding, net of unearned income, during the year: Including restructuring countries' charge-offs .12% .15% 1.21% .73% 1.06% Excluding restructuring countries' charge-offs .19% .39% 1.14% .73% .45% Net charge-off coverage (1) : Including restructuring countries' charge-offs 44.74x 40.44x 4.42x 4.95x 2.35x Excluding restructuring countries' charge-offs 27.90x 15.55x 4.71x 5.01x 5.48x --------------------------------------------------------------------------------------------------------------------- (1) Calculated by dividing net charge-offs into income before income taxes plus the provision for loan losses.
The following table presents information related to the Corporation's non-accrual loans and other non-performing assets at December 31, in each of the last five years.
(In thousands) 1994 1993 1992 1991 1990 ------------------------------------------------------------------------------------------------------- Non-accrual loans: Domestic $43,392 $ 48,084 $ 49,929 $ 68,571 $113,492 Foreign-restructuring countries - 33,853 42,123 42,836 33,776 Foreign - other 14,734 12,956 38,276 18,054 1,588 ------------------------------------------------------------------------------------------------------- Total non-accrual loans 58,126 94,893 130,328 129,461 148,856 ------------------------------------------------------------------------------------------------------- Other non-performing assets: Other real estate owned 23,479 23,338 55,551 41,401 7,661 Other non-accrual assets - - 4,572 3,125 7,904 ------------------------------------------------------------------------------------------------------- Total other non-performing assets 23,479 23,338 60,123 44,526 15,565 ------------------------------------------------------------------------------------------------------- Total non-accrual loans and other non-performing assets $81,605 $118,231 $190,451 $173,987 $164,421 -------------------------------------------------------------------------------------------------------
The above table excludes domestic restructured performing loans which amounted to $28.3 million, $63.0 million, $58.5 million and $27.0 million in 1994, 1993, 1992 and 1991, respectively. The decline in total non-performing assets between 1994 and 1993 was primarily attributable to the Brazilian debt restructuring settlement that reduced non-accrual loans by $33.4 million. Under this settlement, the Corporation received bonds in exchange for substantially all of its non-performing outstandings to Brazil. In the second quarter of 1994, the Corporation sold all of the Brazilian bonds received and realized a gain on the sale of securities of $26.9 million. 46 Cross-border Outstandings The following tables present information related to the Corporation's cross-border net outstandings denominated in dollars or other non-local currencies, including the excess of local currency outstandings over local currency liabilities. Outstandings are classified by type of borrower, based on ultimate risk, and are defined as loans, acceptances, interest-bearing deposits with banks, investment securities and accrued interest receivable, after deducting cash collateral. Countries where such outstandings exceeded 1.0% of consolidated total assets of $41.1 billion, $39.5 billion and $37.1 billion at December 31, 1994, 1993 and 1992, respectively, were as follows:
Commercial Banks and Other Government and and (In millions) Financial Institutions Official Institutions Industrial (1) 1994 1993 1992 --------------------------------------------------------------------------------------------------------------------- France $1,264 $1,241 $ 84 $ 2,589 $2,267 $ 3,309 Japan 1,986 - 143 2,129 1,805 2,711 Canada 1,393 29 344 1,766 930 1,941 United Kingdom 1,011 - 481 1,492 638 1,370 Germany 1,216 - 33 1,249 623 1,059 Belgium/Luxembourg 511 - 620 1,131 880 913 Netherlands 794 - 6 800 641 1,129 Brazil 188 355 26 569 - - Italy 119 162 224 505 - 506 --------------------------------------------------------------------------------------------------------------------- $8,482 $1,787 $1,961 $12,230 $7,784 $12,938 --------------------------------------------------------------------------------------------------------------------- (1) Includes excess of local currency outstandings over local currency liabilities.
The only other country with cross-border net outstandings exceeding 1.0% of consolidated total assets which is excluded from the table above was Taiwan with $416 million in 1992. At December 31, in each of the last three years, countries with cross-border net outstandings representing between .75% and 1.0% of consolidated total assets were: Spain with $349 million in 1994, $326 million in 1993 and $358 million in 1992; Taiwan with $331 million in 1994 and $384 million in 1993; and Italy with $364 million in 1993. Brazil During 1994, the Corporation increased its investment in cross-border outstandings in Brazil to capitalize on the spreads available through investments in local currency assets. Additional outstandings were invested in short-term fixed income placements with other banks and floating rate government securities. At December 31, 1994, total cross-border net outstandings in Brazil consisted primarily of Brady bonds and short-term investments amounting to approximately $569 million, or 1.39% of total assets, all of which are on a performing basis. Cross-border net outstandings in Brazil at December 31, 1994, consisted of approximately $355 million to the public sector, $188 million to the private bank sector and $26 million to the private non-bank sector, respectively. On April 15, 1994, the government of Brazil concluded a debt restructuring of its medium and long-term debt. Under this settlement, the Corporation received bonds in exchange for substantially all of its non-performing outstandings that had a carrying value of $33.4 million. The bonds received were sold in the second quarter of 1994 and the Corporation realized a gain of $26.9 million. 47 The following table presents an analysis of the changes during 1994, in aggregate cross-border net outstandings discussed above.
(In millions) -------------------------------------------------------------------------------- Aggregate outstandings at December 31, 1993 $ 226 Purchases of Brazilian Government securities and bank placements 516 Sales of Brazilian Government securities and repayments at maturity (215) Other changes: Interest income accrued Collections of accrued interest (35) -------------------------------------------------------------------------------- Aggregate outstandings at December 31,1994 $ 569 --------------------------------------------------------------------------------
The following table presents the distribution of the Corporation's total cross-border net outstandings at December 31, in each of the last two years, based on the annual gross national product per capita of the borrower's or guarantor's country of residence. Classifications of countries are derived, for each year, from data available from the International Bank for Reconstruction and Development.
1994 1993 -------------- -------------- (Dollars in millions) Amount % Amount % ------------------------------------------------------------------------ High Income: OECD countries $13,179 83 $ 9,320 81 Non-OECD countries 968 6 854 7 Middle Income: Upper 1,186 7 919 8 Lower 601 4 432 4 Low Income 7 - 21 - ------------------------------------------------------------------------ Total $15,941 100 $11,546 100 ------------------------------------------------------------------------
Risk Management and Control Many risks arise in the ordinary conduct of banking business. The Corporation manages several types of risks, principally credit and market risks, in the interest of reducing uncertainty as to the level of future earnings and as to the book value of the Corporation. Credit risk arises whenever the Corporation owns a commitment of another party which if not completed would result in a loss. Market risk is the danger of the fall in value of the Corporation's assets acquired in the course of its trading activities and asset-liability management. The Corporation seeks to control these risks by diversifying its exposures and activities among many instruments, markets, clients and geographic regions and by limiting risk positions. The Corporation has a Risk Assessment Committee of the Board of Directors and a Risk Assessment and Control Department that reports directly to the Board's committee. It is the task of this department to establish and manage effective methods and processes for defining, measuring, monitoring and limiting risk within the Corporation. The processes and procedures by which the Corporation manages its risk profile continually evolves as the Corporation's business activities change in response to market and product developments. The Corporation routinely reviews its procedures in order to ensure that they are comprehensive with respect to all major risks and that a consistent approach is followed throughout the organization. To enhance the environment for the Corporation's risk management activities and assist in decision making, significant investments have been made in the training of personnel and in the development of information technology. Proprietary and analytical trading systems have been developed for the Corporation's existing and future business. These functions are subject to periodic review by regulators and internal auditors. 48 Credit Risk The Credit Review Committee of the Board of Directors establishes policies and procedures to define, quantify 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 pre-established limits. Any customer credit, currency or transaction exposure that exceeds established limits must be approved by senior management. The Credit Review Department provides an independent evaluation of the loan portfolio 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 Bank policy as stated in the Corporation's Credit Policy Manual. The Credit Review Department also prepares monthly and quarterly portfolio review summaries for executive management and the Board of Directors. In addition, the adequacy of the Corporation's allowance for loan losses, on both a consolidated and stand-alone entity basis, is assessed quarterly using historical loss analysis and a variety of other measurement techniques. Market Risk To manage market risk, the Corporation establishes limits for interest rate, foreign currency and other market exposures. An important tool in monitoring exposures and establishing limits for substantially all products offered is the estimation of the potential loss of current and future earnings on existing positions under a range of assumptions 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 management and trading 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. 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. 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. 49 Capital Transactions [Graph omitted] The Corporation was active in the capital markets during 1994, obtaining capital with varying characteristics. On May 12, 1994, the Corporation sold, in a public offering, $200 million principal amount of 7 3/4% Subordinated Notes due 2009. The Notes are not redeemable prior to maturity and are direct unsecured general obligations of the Corporation subordinated to all present and future senior indebtedness of the Corporation. The net proceeds were used for general corporate purposes. On May 23, 1994, the Corporation sold, in a public offering, 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) (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 Series D Stock will be redeemable, in whole or in part, at the option of the Corporation on or after July 1, 1999 at $25 per depositary share plus accrued and unpaid dividends. The net proceeds were used for general corporate purposes including the redemption by the Corporation of all 678,500 shares outstanding of its Cumulative Floating Rate Series B Preferred Stock at its stated value of $50.00 per share. On October 31, 1994, the Bank established a $5.0 billion Global Bank Note Program (the "Program") authorizing the periodic sale, globally, of notes by the Bank, including through its overseas branches. A group of major international securities dealers will participate in the offerings pursuant to the Program. Notes may be issued for any maturity of 30 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 are subject to certain minimum denominations. Any notes issued will be direct, unconditional and unsecured general obligations of the Bank and are not deposits insured by the FDIC. Any notes to be issued as part of the Program have been accepted for listing on the Luxembourg Stock Exchange. The Program has been rated F1+ and AA+ by Fitch Investors Service, Inc., A1+ and AA+ by I.B.C.A., Prime-1 and Aa1 by Moody's Investors Service, Inc. and A1+ and AA by Standard & Poor's Ratings Group. In 1993, the Corporation filed a shelf registration statement to offer publicly, separately or together, in one or more series, from time to time, debt securities, warrants on debt securities, currency warrants, stock-index warrants, other warrants, preferred stock, depositary shares representing preferred stock and preferred or common stock warrants up to an aggregate of initial offering prices of $ 1.0 billion. At December 31, 1994, an aggregate of $600 million principal amount of outstanding securities had been issued pursuant to such registration statement. In 1993, the Corporation sold, in a public offering, $250 million principal amount of 5 7/8% Subordinated Notes due 2008 under the above shelf registration statement. The Notes are not redeemable prior to maturity and are direct unsecured general obligations of the Corporation, subordinated to all of its present and future senior indebtedness. The net proceeds received by the Corporation from the sale of the Notes were used to redeem, prior to maturity, all of its outstanding issues of Floating Rate Notes due 2004 and Floating Rate Subordinated Notes due 2009 and 2010 in the aggregate principal amount of $224.8 million. The Corporation measures how effectively it utilizes capital by two widely used performance ratios (based on net income applicable to common stock), return on average total assets and return on average common stockholders' equity. In 1994, return on average total assets was .74% and return on average common stockholders' equity was 15.20%, compared to .73% and 15.08%, respectively. in 1993. In 1992, average total assets returned .68% and average common stockholders' equity returned 14.18%. Risk-Based Capital/Leverage Guidelines The Board of Governors of the Federal Reserve System (the "Federal Reserve Board") has established guidelines that mandate risk-based capital requirements for bank holding companies. The guidelines require a minimum ratio of capital to risk-weighted assets (including certain off-balance-sheet activities, such as standby letters of credit and derivative instruments) of 8.0%. At least half of the total capital ratio is to be composed of common equity, noncumulative perpetual preferred stock and a limited amount of cumulative perpetual preferred stock, 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 allowance for loan losses ("Tier 2 capital"). 50 As a supplement to its risk-based capital ratios, the Federal Reserve Board established a minimum leverage ratio of 3.0% (Tier 1 capital to average total assets, with Tier 1 capital being determined for this purpose in a manner consistent with the risk-based capital guidelines). Each of the Corporation's banking subsidiaries complies with all applicable regulatory capital requirements. The Corporation complies with the requirements of FIN No. 39, that requires unrealized gains and losses on certain off-balance-sheet financial instruments to be reported on a gross basis except when a legally enforceable netting agreement with a counterparty exists. 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 Federal Reserve Board 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. In accordance with regulatory guidelines, the Corporation excludes Republic New York Securities Corporation's assets and one-half of its investment in this subsidiary from each of Tier 1 and Tier 2 capital. The Federal Reserve Board recently issued regulatory proposals to amend risk-based capital guidelines to incorporate potential future exposure of derivative contracts. The Corporation has determined that the proposals, if issued in their current form, would not have a material effect on its capital ratios. The Federal Reserve Board has issued amendments to its capital adequacy guidelines that are effective April 1, 1995. Such amendments establish a limitation on the amount of certain deferred tax assets that may be included in Tier 1 capital for risk-based capital purposes. It is expected that these amendments will not have a material effect on the Corporation's capital ratios. The Corporation's core capital was $3.1 billion and total qualifying capital was $5.3 billion at year end 1994, compared to $2.7 billion and $4.7 billion in 1993. At December 31, 1994, the Corporation's ratios of Tier 1 capital and total qualifying capital to risk-weighted assets were 16.17% and 27.49% respectively, compared to 15.16% and 26.20%, respectively, in 1993. The Corporation's leverage ratio was 5.87% at year end 1994 compared to 5.61% at year end 1993. These ratios substantially exceed the minimums in effect for bank holding companies. The following table presents the components of the Corporation's risk-based capital at December 31, in each of the last three years.
(In thousands) 1994 1993 1992 ---------------------------------------------------------------------------------------------------------- Tier 1: Common stockholders' equity* $2,129,166 $1,928,047 $1,707,004 Preferred stock 422,500 306,425 306,425 Equity of Safra Republic** 688,018 609,384 578,432 Other net goodwill, minority interest and intangible assets (88,792) (98,252) (8,930) Less: 50% of investment in unconsolidated subsidiaries (3,274) (2,926) (2,739) 50% of investment in securities affiliate (44,586) ---------------------------------------------------------------------------------------------------------- Total tier 1 3,103,032 2,742,678 2,580,192 ---------------------------------------------------------------------------------------------------------- Tier 2: Qualifying preferred stock and perpetual capital notes 400,000 400,000 400,000 Qualifying long-term debt 1,575,446 1,372,802 1,291,466 Allowance for possible loan losses 243,433 228,531 195,974 Less: 50% of investment in subsidiaries (3,273) (2,925) (2,738) 50% of investment in securities affiliate (44,586) -- -- ---------------------------------------------------------------------------------------------------------- Total tier 2 2,171,020 1,998,408 1,884,702 ---------------------------------------------------------------------------------------------------------- Total risk-based capital $5,274,052 $4,741,086 $4,464,894 ---------------------------------------------------------------------------------------------------------- *Excluding the net unrealized appreciation (depreciation) on securities available for sale, net of taxes of $(l91.5) million in 1994 and $262.8 million in 1993. Includes net unrealized(depreciation) on marketable equity securities of $(25.9) million in 1994. **Excluding the Corporation's investment in Safra Republic of $654.9 million in 1994, $581.4 million in 1993 and $553.3 million in 1992, after elimination of the net unrealized appreciation (depreciation) on securities available for sale, net of taxes.
51 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 world wide network, 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 domestic demand and consumer deposits and foreign office deposits. Other sources of funds are short-term borrowings, including the sale of commercial paper, and long-term liabilities in the form of notes and debentures. Liquidity requirements can also 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 have equaled approximately thirty percent of average total assets in each of the last three years. Security Market Information [Graph omitted] The Common Stock of the Corporation is listed on the New York Stock Exchange (ticker symbol RNB) and the London Stock Exchange. At December 31, 1994, there were 3,027 stockholders of record of out- standing Common Stock of the Corporation. The following table presents the range of high and low sale prices reported on the New York Stock Exchange Composite Tape and cash dividends declared for each quarter during the past two years.
1994 1993 -------------------------------------- ------------------------------------- Fourth Third Second First Fourth Third Second First Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. ------------------------------------------------------------------------------------------------------------------ Common stock sale price: High $46-1/4 $46-3/4 $50-1/4 $52-1/4 $53-3/8 $53-3/4 $52-3/4 $53-3/8 Low 41-7/8 43-1/2 45 45-7/8 44-7/8 50-3/4 46-1/4 44-3/8 Cash dividends declared .33 .33 .33 .33 .27 .27 .27 .27 ------------------------------------------------------------------------------------------------------------------
The dividend rate on 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 fully diluted earnings per common share) in each of the last five years adjusted for a three-for-two stock split in 1991.
1994 1993 1992 1991 1990 ------------------------------------------------------------------------------------------------------------ Dividends declared per common share $1.32 $1.08 $1.00 $.95 $.88 Dividend payout ratio 23.53% 21.39% 23.15% 24.36% 24.31% ------------------------------------------------------------------------------------------------------------
The Quarterly dividend rate on Common Stock has been increased to $.36 per share commencing with the dividend payable April 1, 1995. 52 Republic New York Corporation Consolidated Statements of Condition
December 31, ------------------------- (Dollars in thousands) 1994 1993 ------------------------------------------------------------------------------------------------------------ Assets Cash and due from banks $ 867,242 $ 636,633 Interest-bearing deposits with banks (note 18) 10,242,061 5,346,647 Precious metals (note 4) 1,456,269 1,117,610 Securities held to maturity (approximate market value of $5,614,248 in 1994 and $2,088,805 in 1993) 5,887,672 1,992,847 Securities available for sale (at approximate market value) (note 18) 5,552,056 12,956,946 ------------------------------------------------------------------------------------------------------------ Total investment securities (note 3) 11,439,728 14,949,793 Trading account assets (note 4) 2,543,637 1,194,629 Federal funds sold and securities purchased under resale agreements 1,123,925 2,322,465 Loans (net of unearned income of $47,109 in 1994 and $94,825 in 1993) (notes 5, 6 and 18) 8,913,490 9,508,558 Allowance for possible loan losses (note 6) (319,220) (311,855) ------------------------------------------------------------------------------------------------------------ Loans, net 8,594,270 9,196,703 Customers' liability on acceptances 1,514,461 1,134,294 Accounts receivable and accrued interest 1,797,491 2,117,879 Investment in affiliate (note 7) 607,818 625,333 Premises and equipment (note 8) 428,017 399,626 Other assets 452,986 451,860 ------------------------------------------------------------------------------------------------------------ Total assets $41,067,905 $39,493,472 ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ Liabilities and Stockholders' Equity Noninterest-bearing deposits: In domestic offices $ 1,701,667 $ 1,427,518 In foreign offices 114,503 135,251 Interest-bearing deposits: In domestic offices 8,534,562 8,724,797 In foreign offices 12,375,270 12,513,684 ------------------------------------------------------------------------------------------------------------ Total deposits (note 18) 22,726,002 22,801,250 Trading account liabilities (note 4) 2,087,594 177,475 Short-term borrowings (note 9) 4,969,394 4,164,419 Acceptances outstanding 1,517,675 1,137,636 Accounts payable and accrued expenses 1,325,953 2,873,903 Due to factored clients 680,010 614,549 Other liabilities 134,792 122,203 Long-term debt (notes 10 and 18) 2,580,831 2,582,875 Subordinated long-term debt and perpetual capital notes (note 10) 2,406,266 2,271,940 Commitments and contingent liabilities (note 15) Stockholders' equity (notes 11 and 13): Cumulative preferred stock, no par value 8,952,500 shares outstanding in 1994 and 8,131,000 in 1993 672,500 556,425 Common stock, $5 par value 150,000,000 shares authorized; 52,621,155 shares outstanding in 1994 and 52,703,271 in 1993 263,106 263,516 Surplus 437,653 459,713 Retained earnings 1,457,609 1,204,818 Net unrealized appreciation (depreciation) on securities available for sale, net of taxes (l91,480) 262,750 ------------------------------------------------------------------------------------------------------------ Total stockholders' equity 2,639,388 2,747,222 ------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $41,067,905 $39,493,472 ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements.
53 Republic New York Corporation Consolidated Statements of Income
(In thousands except per share data) 1994 1993 1992 -------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $ 696,816 $ 635,484 $ 721,909 Interest on deposits with banks 414,294 295,871 385,299 Interest and dividends on investment securities: Taxable 871,785 847,022 807,611 Exempt from federal income taxes 76,783 65,759 63,385 Interest on trading account assets 55,736 54,467 22,928 Interest on federal funds sold and securities purchased under resale agreements 57,915 34,323 37,460 -------------------------------------------------------------------------------------------------------------- Total interest income 2,173,329 1,932,926 2,038,592 -------------------------------------------------------------------------------------------------------------- Interest expense: Interest on deposits 827,790 689,234 804,906 Interest on short-term borrowings 218,529 197,769 234,249 Interest on long-term debt 280,536 270,072 279,073 -------------------------------------------------------------------------------------------------------------- Total interest expense 1,326,855 1,157,075 1,318,228 -------------------------------------------------------------------------------------------------------------- Net interest income 846,474 775,851 720,364 Provision for loan losses (note 6) 19,000 85,000 120,000 -------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 827,474 690,851 600,364 -------------------------------------------------------------------------------------------------------------- Other operating income: Income from precious metals (note 4) 50,930 37,910 22,637 Foreign exchange trading income (note 4) 91,028 111,572 102,571 Trading account profits and commissions (note 4) 27,357 78,742 12,319 Investment securities gains, net (note 3) 14,971 1,295 11,232 Net gain (loss) on loans sold or held for sale 1,763 (843) 17,089 Commission income 57,297 50,956 37,592 Equity in earnings of affiliate (note 7) 77,376 59,463 45,220 Other income 65,646 56,377 53,587 -------------------------------------------------------------------------------------------------------------- Total other operating income 386,368 395,472 302,247 -------------------------------------------------------------------------------------------------------------- Other operating expenses: Salaries 253,175 203,759 180,318 Employee benefits (note 13) 142,358 143,748 113,813 Occupancy, net (notes 8 and 15) 55,425 48,161 45,301 Other expenses 270,518 239,297 215,910 -------------------------------------------------------------------------------------------------------------- Total other operating expenses 721,476 634,965 555,342 -------------------------------------------------------------------------------------------------------------- Income before income taxes 492,366 451,358 347,269 Income taxes (note 12) 152,358 150,153 88,386 -------------------------------------------------------------------------------------------------------------- Net income $ 340,008 $ 301,205 $ 258,883 -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Net income applicable to common stock $ 305,598 $ 272,790 $ 230,497 -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Net income per common share: Primary $5.79 $5.20 $4.42 Fully diluted 5.61 5.05 4.32 Average common shares outstanding: Primary 52,736 52,466 52,204 Fully diluted 56,534 56,321 56,020 -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
54 Republic New York Corporation Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands) 1994 1993 1992 -------------------------------------------------------------------------------------------------------------- Cumulative Preferred Stock: Balance at beginning of year $ 556,425 $ 556,425 $ 456,925 Issuance of 1,500,000 shares of adjustable rate cumulative preferred stock, series D in 1994 and 4,000,000 shares of $1.9375 cumulative preferred stock in 1992 150,000 -- 100,000 Redemption of 678,500 shares of floating rate series B preferred stock in 1994 and repurchase of 10,000 shares in 1992 (33,925) -- (500) --------------------------------------------------------------------------------------------------------------- Balance at end of year $ 672,500 $ 556,425 $ 556,425 --------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- Common Stock: Balance at beginning of year $ 263,516 $ 260,951 $ 260,227 Net issuance under stock option, restricted stock and restricted stock election plans of 775,825 shares in 1994, 513,028 shares in 1993 and 353,957 shares in 1992 3,879 2,565 1,770 Retirement of 857,941 shares in 1994 and 209,083 shares in 1992 (4,289) - (1,046) --------------------------------------------------------------------------------------------------------------- Balance at end of year $ 263,106 $ 263,516 $ 260,951 --------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- Surplus: Balance at beginning of year $ 459,713 $ 447,691 $ 448,303 Cost of issuing preferred stock (3,983) - (3,340) Net issuance of common stock under stock option, restricted stock and restricted stock election plans of 775,825 shares in 1994, 513,028 shares in 1993 and 353,957 shares in 1992 17,700 12,247 11,013 Treasury stock transactions of affiliate (326) (225) 441 Retirement of 857,941 common shares in 1994 and 209,083 common shares in 1992 (35,451) - (8,726) --------------------------------------------------------------------------------------------------------------- Balance at end of year $ 437,653 $ 459,713 $ 447,691 --------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- Retained Earnings: Balance at beginning of year $1,204,818 $ 998,362 $ 832,140 Net income 340,008 301,205 258,883 Foreign currency translation, net of taxes 16,812 (9,588) (21,014) Dividends declared on common stock (69,619) (56,746) (52,256) Dividends declared on issues of preferred stock (34,410) (28,415) (28,386) Allowance for unrealized loss on marketable equity securities - - 8,995 --------------------------------------------------------------------------------------------------------------- Balance at end of year $1,457,609 $1,204,818 $ 998,362 --------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- Net Unrealized Appreciation (Depreciation) on Securities Available for Sale, Net of Taxes: Balance at beginning of year $ 262,750 $ - $ - Unrealized appreciation (depreciation) (735,276) 437,845 - Income tax (expense) benefit 281,046 (175,095) - --------------------------------------------------------------------------------------------------------------- Balance at end of year $ (191,480) $ 262,750 $ - --------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity: Balance at beginning of year $2,747,222 $2,263,429 $1,997,595 Net changes during year (107,834) 483,793 265,834 Balance at end of year $2,639,388 $2,747,222 $2,263,429 --------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
55 Republic New York Corporation Consolidated Statements of Cash Flows
(In thousands) 1994 1993 1992 --------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities: Net income $ 340,008 $ 301,205 $ 258,883 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization, net 58,120 48,337 30,829 Provision for loan losses 19,000 85,000 120,000 Investment securities gains, net (14,971) (1,295) (11,232) Net (gain) loss on loans sold or held for sale (1,763) 843 (17,089) Equity in earnings of affiliate (77,376) (59,463) (45,220) Net (increase) decrease in trading accounts 561,111 (479,614) (414,097) Net (increase) decrease in accounts receivable and accrued interest 329,716 (1,494,586) (46,121) Net increase (decrease) in accounts payable and accrued expenses (1,102,251) 1,390,159 244,611 Other, net (14,666) (272,253) (109,433) --------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities 96,928 (481,667) 11,131 --------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities: Net (increase) decrease in interest-hearing deposits with banks (4,895,414) 5,948,015 (1,786,307) Net increase in precious metals (338,659) (386,014) (130,417) Net (increase) decrease in federal funds sold and securities purchased under resale agreements 1,198,540 (817,191) (1,494,728) Net increase in short-term investments (157,230) (289,355) (150,128) Purchases of securities available for sale (3,803,755) (665,347) (323,013) Proceeds from sales of securities available for sale 3,883,180 346,909 - Proceeds from maturities of securities available for sale 3,058,742 - - Purchases of securities held to maturity (130,840) (3,740,678) (5,066,901) Proceeds from sales of securities held to maturity - 89,150 609,538 Proceeds from maturities of securities held to maturity 261,107 2,828,748 2,042,597 Net (increase) decrease in loans 119,360 (1,983,538) 109,710 Payment for purchase of Mase Westpac Limited, net of cash received - (144,596) - Investment in affiliate 3,805 19,477 17,312 --------------------------------------------------------------------------------------------------------------- Net cash provided (used) by investing activities (781,164) 1,205,580 (6,172,337) --------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities: Net increase (decrease) in deposits (74,821) 893,418 719,253 Net increase (decrease) in short-term borrowings 804,975 (1,663,448) 3,933,468 Net increase in due to factored clients 65,461 55,338 65,567 Proceeds from issuance of long-term debt 490,933 654,470 1,504,600 Repayment of long-term debt (492,003) (580,071) (712,781) Proceeds from issuance of subordinated long-term debt 200,000 250,000 750,000 Repayment of subordinated long-term debt (66,000) (108,750) (20,000) Net proceeds from issuance of cumulative preferred stock 146,017 - 96,660 Repurchase of cumulative preferred stock (33,925) - (500) Repurchase of common stock (39,740) - (9,772) Cash dividends paid (98,856) (83,945) (78,952) Other, net 32,892 3,783 (485) --------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities 934,933 (579,205) 6,247,058 Effect of exchange rate changes on cash and due from banks (20,088) 1,214 (7,167) Net increase in cash and due from banks 230,609 145,922 78,685 Cash and due from banks at beginning of year 636,633 490,711 412,026 Cash and due from banks at end of year $ 867,242 $ 636,633 $ 490,711 --------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 1,268,041 $ 1,210,546 $ 1,265,460 Income taxes 105,364 157,252 55,376 Transfers from securities available for sale to securities held to maturity 3,862,350 - - Transfers from securities held to maturity to securities available for sale - 12,318,395 - --------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
56 Republic National Bank of New York Consolidated Statements of Condition
December 31, ------------------------- (Dollars in thousands) 1994 1993 ------------------------------------------------------------------------------------------------------------ Assets Cash and due from banks $ 761,463 $ 591,112 Interest-bearing deposits with banks 9,905,448 5,174,561 Precious metals 1,412,178 1,109,840 Securities held to maturity (approximate market value of $3,375,558 in 1994, and $965,293 in 1993) 3,497,573 902,903 Securities available for sale (at approximate market value) 4,232,483 9,857,210 ------------------------------------------------------------------------------------------------------------ Total investment securities 7,730,056 10,760,113 Trading account assets 2,532,409 l,151,296 Federal funds sold and securities purchased under resale agreements 1,658,925 2,743,692 Loans (net of unearned income of $6,983 in 1994 and $45,249 in 1993) 5,025,925 5,425,719 Allowance for possible loan losses (234,520) (233,124) ------------------------------------------------------------------------------------------------------------ Loans, net 4,791,405 5,192,595 Customers' liability on acceptances 1,514,129 1,134,294 Accounts receivable and accrued interest 858,491 614,501 Investment in affiliate (note 7) 607,818 625,333 Premises and equipment 324,928 300,246 Other assets 314,011 328,455 ------------------------------------------------------------------------------------------------------------ Total assets $32,411,261 $29,726,038 ------------------------------------------------------------------------------------------------------------ Liabilities and Stockholder's Equity Noninterest-bearing deposits: In domestic offices $ 1,318,865 $ 1,069,325 In foreign offices 114,503 146,431 Interest-bearing deposits: In domestic offices 4,106,384 4,255,497 In foreign offices 13,895,726 13,694,638 ------------------------------------------------------------------------------------------------------------ Total deposits 19,435,478 19,165,891 Trading account liabilities 2,058,815 177,475 Short-term borrowings 3,674,935 2,759,270 Acceptances outstanding 1,517,342 1,137,636 Accounts payable and accrued expenses 527,817 1,321,915 Other liabilities 63,181 86,193 Long-term debt 2,380,831 2,257,847 Subordinated long-term debt, primarily with parent 681,266 580,940 Stockholder's equity (note 19): Common stock, $100 par value 4,800,000 shares authorized; 3,550,000 shares outstanding 355,000 355,000 Surplus 1,161,423 1,160,436 Retained earnings 709,579 511,851 Net unrealized appreciation (depreciation) on securities available for sale, net of taxes (154,406) 211,584 ------------------------------------------------------------------------------------------------------------ Total stockholder's equity 2,071,596 2,238,871 ------------------------------------------------------------------------------------------------------------ Total liabilities and stockholder's equity $32,411,261 $29,726,038 ------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements.
57 Republic New York Corporation Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies The accounting and reporting policies of Republic New York Corporation and its subsidiaries (the "Corporation") reflect banking industry practices and conform to generally accepted accounting principles. 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 for Savings ("RBS"), Republic New York Securities Corporation and Republic Factors Corp. Invest- ments in affiliates which are less than majority-owned but more than 20% owned are accounted for by the equity method. Significant intercompany transactions are eliminated in consolidation. B. Foreign Operations. Foreign currency assets and liabilities are translated into their U.S. dollar equivalents based on rates of exchange generally prevailing at year end. Revenue and expense accounts are generally translated at average exchange rates for the year. Net translation gains or losses on foreign currency financial statements of operations whose functional currency is the U.S. dollar, including those financial statements of operations in highly inflationary economies, are included in other income or other expenses together with net gains or losses from related hedges. Net translation gains or losses on foreign currency financial statements of operations whose functional currency is not the U.S. dollar are a component of retained earnings, net of related hedging results, after tax effect. Foreign currency amounts of foreign currency denominated assets and liabilities are generally sold/purchased under fixed forward contracts at prices which differ from cost. Such differences, which are considered pan 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. D. Investment Securities. The Corporation designates an investment security 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 fair value. Unrealized gains or losses on securities available for sale and derivative instruments used to hedge these securities are included as a separate component of stockholders' equity, net of tax effect. Gains or losses on sales of securities are recognized by the specific identification method and are recorded in investment securities gains, net. The Corporation periodically reviews its intent with respect to securities available for sale and may redesignate these securities and related derivative instruments used as hedges as held to maturity. At the time of redesignation such securities are recorded at market value and any unrealized appreciation or depreciation existing with respect to the securities continues to be reported as a separate component of stockholders' equity and amortized to interest income over the life of the security. Prior to the adoption of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", on December 3l, 1993, debt securities available for sale were carried at the lower of cost or market value in the aggregate with adjustments to the carrying value recorded as investment securities losses, net. Marketable equity securities were carried at the lower of cost or market value in the aggregate. The aggregate unrealized losses on marketable equity securities were included in a valuation allowance account and shown as a reduction of retained earnings. E. Trading Account Assets/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. 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 net gain (loss) on loans sold or held for sale. Interest income and interest expense on trading account assets and liabilities are included in net interest income. 58 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. Non-accrual loans are those loans (other than factor trade accounts receivable, consumer installment and residential mortgage loans) on which the accrual of interest ceases when principal or interest payments are past due 90 days or more. 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. Thereafter, interest income on non-accrual loans is recorded only when received in cash. Residential mortgage loans are placed on non-accrual status when the mortgagor is in bankruptcy or foreclosure proceedings are instituted. Any accrued interest receivable remains in interest income as an obligation of the borrower. The Corporation charges off any consumer installment loan which is past due 90 days or more. G. Derivative Products. The Corporation's use of derivatives includes futures, forwards, swaps, caps, floors and options in the interest rate, foreign exchange, equity, and precious metals commodity markets. The Corporation uses these instruments for trading and to assist in its asset and liability management activities which include hedging. On January l, 1994, the Corporation adopted Financial Accounting Standards Board Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts", ("FIN No. 39"). FIN No. 39 requires, among other things, that unrealized gains and losses on forward, swap, option and other conditional or exchange contracts be reported on a gross basis except when a legally enforceable netting agreement with a counterparty exists. Prior to the adoption of FIN No. 39, the Corporation followed the industry practice of netting gains and losses. The Corporation has elected not to restate prior years under this interpretation because the resulting impact is not considered to be material. Derivatives that are used for trading or to hedge other trading instruments are carried on a mark-to-market basis with resultant gains and losses included in trading account profits and commissions, foreign exchange trading income and income from precious metals. Unrealized gains and option premiums paid are included in trading account assets. Unrealized losses and option premiums received are included in trading account liabilities. In valuing such contracts, the Corporation considers potential credit costs, tenor, future servicing costs, future capital costs and transaction hedging costs which are recognized over the life of the contracts. Foreign exchange trading positions are revalued monthly by pricing spot foreign exchange and forward contracts for foreign exchange at prevailing market rates. Precious metals activities include arbitrage, purchases and sales of precious metals for forward delivery, options on precious metals and precious metals lending and borrowing. Precious metals, outstanding open positions in contracts for forward delivery, option contracts and precious metals loans and borrowings are revalued monthly at prevailing market rates. Precious metals interest arbitrage balances are recorded at cost, with the difference of the fixed forward contract price over cost accreted into income from precious metals ratably over the life of the contract. 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. Derivative transactions executed as part of the Corporation's asset-liability management 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 agreements. Gains or losses on terminated derivative contracts used as hedges of non-trading assets or liabilities are deferred and amortized into interest income or interest expense over the life of the original hedge. 59 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. Allowance for Possible Loan Losses. The allowance for possible loan losses is increased by provisions charged to operating expense and decreased by charge-offs, net of recoveries. The provision for loan losses is based on the Corporation's past loan loss experience and other factors which, in management's judgment, deserve current recognition in estimating possible loan losses. Such other factors considered by management include the composition of the loan portfolio and worldwide economic conditions. I. Income Taxes. The Corporation files a consolidated Federal income tax return and records income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes". Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax conse- quences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of changes in tax rates is recognized in income in the period the change occurs. The earnings of the Corporation's foreign subsidiaries were not subject to U.S. income taxes for taxable years beginning prior to 1987, except to the extent that they were remitted as dividends. The undistributed earnings prior to 1987 of the Corporation's foreign subsidiaries are expected to be reinvested indefinitely in the subsidiaries' operations; accordingly, no taxes have been provided on such undistributed earnings. J. Earnings Per Common Share. Primary earnings per common share are computed by dividing net income, less preferred stock dividend requirements, by the average number of common shares outstanding during each of the years. Fully diluted earnings per share are based on the average number of common shares outstanding adjusted for the assumed conversion of outstanding convertible preferred stock from the date of issuance and the additional shares assumed to be issued under stock option plans, if dilutive. Net income applicable to common stock is adjusted by adding back the dividends on the convertible preferred stock. K. Reclassification. Certain amounts from prior years have been reclassified to conform with 1994 classifications. 2. Acquisition of Mase Westpac Limited On December 31, 1993, the Corporation's wholly-owned subsidiary, the Bank, completed the acquisition of Mase Westpac Limited, now known as Republic Mase Limited ("Republic Mase"). The transaction was accounted for as a purchase and, as such, the assets and liabilities of Republic Mase were recorded at their estimated fair values. The excess of cost over the net assets acquired, goodwill, amounted to approximately $54 million at December 31, 1994 and is being amortized to expense on a straight-line basis over a period of 15 years. Republic Mase's assets of approximately $1.4 billion are included in the Corporation's statement of condition at December 31, 1993. The purchase of Republic Mase had no effect on the Corporation's results of operations for 1993. Significant assets and liabilities acquired from Republic Mase at December 31, 1993, were as follows:
December 31, (In thousands) 1993 -------------------------------------------------------------------------- Assets: Interest-bearing deposits with banks $388,852 Precious metals 312,315 Securities available for sale 339,409 Loans 266,775 Liabilities: Deposits 809,077 Short-term borrowings 200,065 -------------------------------------------------------------------------- --------------------------------------------------------------------------
60 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.
1994 ------------------------------------------------ Estimated Book Gross Unrealized Market -------------------- (In thousands) Value Gains (Losses) Value ----------------------------------------------------------------------------------------------------------------- Securities held to maturity: U.S. Government and federal agency obligations $5,263,639 $11,323 $(324,932) $4,950,030 Obligations of U.S. states and political subdivisions 624,033 24,624 (22,390) 626,267 Interest rate swaps - 37,951 - 37,951 ----------------------------------------------------------------------------------------------------------------- $5,887,672 $73,898 $(347,322) $5,614,248 ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- 1994 ------------------------------------------------- Amortized Gross Unrealized Book/Market --------------------- (In thousands) Cost Gains (Losses) Value ----------------------------------------------------------------------------------------------------------------- Securities available for sale: U.S. Government and federal agency obligations $2,276,964 $ 6,367 $ (99,940) $2,183,391 Domestic debt securities 516,608 6,835 (4,237) 519,206 Foreign debt securities 2,300,666 35,314 (82,138) 2,253,842 Equity securities 581,933 8,331 (47,751) 542,513 Interest rate swaps - 53,104 - 53,104 ----------------------------------------------------------------------------------------------------------------- $5,676,171 $109,951 $(234,066) $5,552,056 ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- 1993 ------------------------------------------------ Estimated Book Gross Unrealized Market -------------------- (In thousands) Value Gains (Losses) Value ----------------------------------------------------------------------------------------------------------------- Securities held to maturity: U.S. Government and federal agency obligations $1,357,279 $35,309 $(2,969) $1,389,619 Obligations of U.S. states and political subdivisions 584,302 64,161 (378) 648,085 Other 51,266 - (165) 51,101 ----------------------------------------------------------------------------------------------------------------- $1,992,847 $99,470 $(3,512) $2,088,805 ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- 1993 -------------------------------------------------- Amortized Gross Unrealized Book/Market --------------------- (In thousands) Cost Gains (Losses) Value ----------------------------------------------------------------------------------------------------------------- Securities available for sale: U.S. Government and federal agency obligations $ 9,515,080 $316,706 $ (6,457) $89,825,329 Other bonds, debentures and redeemable preferred stocks 2,676,306 172,390 (30,496) 2,818,200 Equity securities 371,639 15,879 (330) 387,188 Interest rate swaps - - (73,771) (73,77) ----------------------------------------------------------------------------------------------------------------- $12,563,025 $504,975 $(111,054) $12,956,946 ----------------------------------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------------------------------
The following table presents information for investments in securities held to maturity and securities available for sale at December 31, 1994, based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call privileges of the issuer.
Held To Maturity Available For Sale ------------------------- ------------------------ Book Estimated Amortized Book/Market (In thousands) Value Market Value Cost Value ---------------------------------------------------------------------------------------------------------------------- Due in one year or less $ 5,339 $ 5,408 $1,005,825 $1,004,936 Due after one years through five years 13,976 15,088 1,112,983 1,115,527 Due after five years through ten years 114,845 122,578 267,622 262,974 Due after ten years 489,873 483,193 1,179,502 1,095,380 Mortgage-backed securities 5,263,639 4,950,030 2,110,239 2,020,135 Interest rate swaps - 37,951 - 53,104 ---------------------------------------------------------------------------------------------------------------------- $5,887,672 $5,614,248 $5,676,171 $5,552,056 ---------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------
61 Mortgage-backed securities included in the table above in held to maturity and available for sale have estimated average lives, based on current market conditions, of approximately 10.1 years and 7.0 years, respectively. Mortgage-backed securities held to maturity includes a mark-to-market writedown of $93,629,000 that is reported in the separate component of stockholders' equity related to securities that were transferred from available for sale. The following table presents the components of net investment security gains and losses attributable to securities held to maturity and securities available for sale in 1994.
1994 --------------------------------------- Gross Gross Net (In thousands) Gains (Losses) Gains --------------------------------------------------------------------------------------------------------------- Securities held to maturity: Maturities, calls and mandatory redemptions $ 3,294 $ (222) 3,072 Sales of securities -- -- -- Securities available for sale: Sales of securities 129,074 (1l7,846) 11,228 Maturities, calls and mandatory redemptions 716 (45) 671 --------------------------------------------------------------------------------------------------------------- $133,084 $(118,113) $14,971 --------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------
The following table presents the components of net investment security gains and losses for 1993 and 1992.
(In thousands) 1993 1992 --------------------------------------------------------------------------------------------------------------- Gross gains on: Sales of securities $ 5,646 $ 28,577 Maturities, calls and mandatory redemptions 8,124 3,196 Gross losses on: Sales of securities (11,042) (18,284) Maturities, calls and mandatory redemptions (1,433) (2,257) --------------------------------------------------------------------------------------------------------------- $ 1,295 $ 11,232 --------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------
Investment securities having a carrying value of approximately $1.5 billion at December 31, 1994, were pledged to secure public deposits, short-term borrowings and for other purposes required or permitted by law. 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) 1994 1993 -------------------------------------------------------------------------------------------------------------- Precious metals $1,456,269 $1,117,610 -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- Trading account assets: U.S. Government obligations $ 556,980 $ 642,662 U.S. Government agency obligations 100,472 154,794 Other, primarily foreign bonds 279,967 384,637 Unrealized gains on derivative financial instruments 1,606,218 12,536 -------------------------------------------------------------------------------------------------------------- $2,543,637 $1,194,629 -------------------------------------------------------------------------------------------------------------- Trading account liabilities: Securities sold, not yet purchased $ 29,000 $ 111,020 Payables for precious metals 433,162 - Unrealized losses on derivative financial instruments 1,625,432 66,455 -------------------------------------------------------------------------------------------------------------- $2,087,594 $ 177,475 -------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------
62 Trading income is generated from the Corporation's participation in the foreign exchange and precious metals markets and by its activities as an international dealer in other derivative contracts, including interest rate swaps, and from trading securities. The Corporation reports the net trading income from each of these activities, which includes mark-to-market adjustments and any related direct trading expenses, on the statement of income as foreign exchange trading income, income from precious metals and trading account profits and commissions, respectively. The following table presents net trading income related to the Corporation's trading activities for each of the last three years.
(In thousands) 1994 1993 1992 ------------------------------------------------------------------------------------------------------- Income from precious metals $ 50,930 $ 37,910 $ 22,637 Foreign exchange trading income 91,028 111,572 102,571 Trading account profits and commissions: Debt securities and loans (10,276) 20,021 11,978 Interest rate futures, forwards and swaps, and commodity and equity contracts 37,633 58,721 341 ------------------------------------------------------------------------------------------------------- 27,357 78,742 12,319 ------------------------------------------------------------------------------------------------------- Total trading income $169,315 $228,224 $137,527 -------------------------------------------------------------------------------------------------------
The following table presents 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 Fair Value Value During at 1994 December 31, 1994 ----------------------------------------- Assets (In thousands) (Liabilities) Assets Liabilities ----------------------------------------------------------------------------------------------------------- Interest rate: Futures and forwards $ 19,602 $ 33,153 $ 29,839 Swaps 161,197 354,431 202,253 Options written (408,343) - 241,455 Options purchased 308,838 231,123 - ----------------------------------------------------------------------------------------------------------- $ 81,294 $ 618,707 $ 473,547 ----------------------------------------------------------------------------------------------------------- Foreign exchange: Spot, swaps, futures and forwards $ 12,733 $ 619,641 $ 664,125 Options written (225,563) - 378,238 Options purchased 232,848 367,870 - ----------------------------------------------------------------------------------------------------------- $ 20,018 $ 987,511 $1,042,363 ----------------------------------------------------------------------------------------------------------- Other-principally precious metals: Swaps, futures and forwards $ (1,037) $ 45,662 $ 71,064 Options written (56,592) - 38,458 Options purchased 58,885 45,990 - ----------------------------------------------------------------------------------------------------------- $ 1,256 $ 91,652 $ 109,522 ----------------------------------------------------------------------------------------------------------- For additional information on derivative instruments see Notes 16 and 17.
63 5. Loans The following table sets forth the composition of the Corporation's loan portfolio at respective year ends.
(In thousands) 1994 1993 -------------------------------------------------------------------------------------------------- Domestic: Real estate - residential mortgage $l,245,500 $1,310,718 Real estate - commercial 1,813,878 l,854,377 Banks and other financial institutions 83,010 7,384 Broker loans 559,019 678,490 Commercial and industrial 2,242,124 2,152,691 Individuals 106,195 90,218 All other 11,810 16,915 Foreign 2,899,063 3,492,590 -------------------------------------------------------------------------------------------------- 8,960,599 9,603,383 Less unearned income (47,109) (94,825) -------------------------------------------------------------------------------------------------- Loans, net of unearned income $8,913,490 $9,508,558 --------------------------------------------------------------------------------------------------
6. Allowance for Possible Loan Losses The Corporation's allowance for possible loan losses is determined by management based on previous loan loss experience, prevailing and anticipated economic conditions and the composition of the loan portfolio, all of which are continuously reviewed. The allowance is viewed by management to be an adequate, single, unallocated reserve, available for potential loan losses. To comply with regulatory reporting requirements, management has allocated the allowance for possible loan losses between domestic and foreign components. By such allocation, management does not intend to imply that future chargeoffs will necessarily follow the same pattern or that any portion of such allowance is restricted in any way. Changes in the Corporation's allowance for possible loan losses applicable to domestic and foreign operations for each of the years in the three-year period ended December 31, 1994 were as follows:
1994 1993 1992 ---------------------------- ---------------------------- ---------------------------- (In thousands) Domestic Foreign Total Domestic Foreign Total Domestic Foreign Total ---------------------------------------------------------------------------------------------------------------- Balance, Jan. 1 $189,499 $122,356 $311,855 $161,699 $ 79,321 $241,020 $100,842 $126,612 $227,454 Provision 16,000 3,000 19,000 55,000 30,000 85,000 140,000 (20,000) 120,000 ---------------------------------------------------------------------------------------------------------------- 205,499 125,356 330,855 216,699 109,321 326,020 240,842 106,612 347,454 ---------------------------------------------------------------------------------------------------------------- Charge-offs (27,200) (17,355) (44,555) (46,170) (12,731) (58,901) (90,374) (20,257) (110,631) Recoveries 13,588 12,639 26,227 18,673 5,726 24,399 10,467 1,014 11,481 Net (charge-offs) recoveries of restructuring countries debt -- 6,899 6,899 -- 21,238 21,238 -- (6,642) (6,642) ---------------------------------------------------------------------------------------------------------------- Net (charge-offs) recoveries (13,612) 2,183 (11,429) (27,497) 14,233 (13,264) (79,907) (25,885) (105,792) Allowance of acquired companies -- -- -- 297 -- 297 764 -- 764 Translation adjustment -- (206) (206) -- (1,198) (1,198) -- (1,406) (1,406) ---------------------------------------------------------------------------------------------------------------- Balance, Dec. 31 $191,887 $127,333 $319,220 $189,499 $122,356 $311,855 $161,699 $ 79,321 $241,020 ----------------------------------------------------------------------------------------------------------------
64 The following table presents the book balances of the Corporation's non-accrual and restructured loans (excluding consumer installment loans) at respective year ends.
(In thousands) 1994 1993 1992 ------------------------------------------------------------------------------------------------------- Domestic $43,392 $ 48,084 $ 49,929 Foreign restructuring countries -- 33,853 42,123 Foreign - other 14,734 12,956 38,276 ------------------------------------------------------------------------------------------------------- Non-accrual loans 58,126 94,893 130,328 Restructured loans 28,330 63,008 58,458 ------------------------------------------------------------------------------------------------------- $86,456 $157,901 $188,786
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, 1994.
(In thousands) 1994 1993 1992 ---------------------------------------------------------------------------------------------------------------- Gross amount of interest that would have been earned at original contract rates: Domestic $ 7,430 $11,321 $ 4,810 Foreign 2,713 6,685 8,863 ---------------------------------------------------------------------------------------------------------------- $10,143 $18,006 $13,673 ---------------------------------------------------------------------------------------------------------------- Actual amount recorded as interest income: Domestic $ 3,318 $ 7,368 $ 1,672 Foreign 318 1,654 2,226 ---------------------------------------------------------------------------------------------------------------- $ 3,636 $ 9,022 $ 3,898 ---------------------------------------------------------------------------------------------------------------- Foregone interest income: Domestic $ 4,112 $ 3,953 $ 3,138 Foreign 2,395 5,031 6,637 ---------------------------------------------------------------------------------------------------------------- $ 6,507 $ 8,984 $ 9,775 ----------------------------------------------------------------------------------------------------------------
7. Investment in Affiliate In 1988, the Corporation established 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. The Corporation, Saban S.A. (see Note 18), a Panamanian holding company wholly-owned by Mr. Edmond J. Safra, and international investors own approximately 48.8%, 20.7% and 30.5%, respectively, of the outstanding common shares of Safra Republic at December 31, 1994. The following table presents summary financial data for Safra Republic at December 31, 1994 and 1993 and for each of the years then ended.
(In thousands) 1994 1993 --------------------------------------------------------------------------------------------------------- Total assets $12,510,242 $11,349,966 Total deposits 9,363,840 7,344,562 Total shareholders' equity 1,246,353 1,280,755 Operating revenue 816,887 789,490 Net income 158,575 121,595 ---------------------------------------------------------------------------------------------------------
(In thousands) 1994 1993 --------------------------------------------------------------------------------------------------------- Premises $ 464,412 $ 434,264 Equipment 146,122 127,268 --------------------------------------------------------------------------------------------------------- 610,534 561,532 Less accumulated depreciation and amortization (182,517) (161,906) --------------------------------------------------------------------------------------------------------- $ 428,017 $ 399,626
65 Other operating expenses included depreciation and amortization of $37.2 million in 1994, $32.5 million in 1993 and $27.6 million in 1992. 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) 1994 1993 -------------------------------------------------------------------------------------------------------- Federal funds purchased and securities sold under repurchase agreements $ 987,110 $ 999,149 Commercial paper 979,390 881,74l Other borrowings 3,002,894 2,283,529 -------------------------------------------------------------------------------------------------------- $4,969,394 $4,164,4l9
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. On March 8, 1994, the Bank received the net proceeds from the public sale, on March 1, 1994, of $1.0 billion principal amount of 4.30% Notes due March 8, 1995. The Notes are not redeemable prior to maturity and are unsecured and, except with respect to domestic deposits, are unsubordinated debt obligations of the Bank. The net proceeds from the sale have been used for the general banking business of the Bank and are included in the table above as other borrowings. The Corporation has $170 million of lines of credit outstanding to support its commercial paper program, for which it has authority to issue up to $2.5 billion of such borrowings. 10. Long-Term Debt The following tables present a summary of long-term debt and subordinated long-term debt and perpetual capital notes at respective year ends.
Long-Term Debt: (In thousands) 1994 1993 --------------------------------------------------------------------------------------------------------- Republic New York Corporation: 8 3/8% Notes due May l, 1996 $ 100,000 $ 100,000 8 3/8% Debentures due February 15, 2007 100,000 100,000 --------------------------------------------------------------------------------------------------------- 200,000 200,000 --------------------------------------------------------------------------------------------------------- Republic National Bank of New York: Floating Rate Notes due March 21, 1994 -- 100,000 5.20% Notes due January 17, 1995 250,000 250,000 5 3/4% Notes due February 1, 1995 500,000 500,000 6.40% Notes due April 15, 1995 200,000 200,000 4.90% Notes due July 27, 1995 100,000 100,000 New Zealand Dollar Floating Rate Notes due August 4, 1995 (5.33%) 54,600 54,600 4 3/4% Notes due October 15,1995 191,000 191,000 LIBOR Accrual Notes due February 2, 1996 (0%) (F1> 20,100 -- Other long-term debt 17,911 18,885 --------------------------------------------------------------------------------------------------------- 1,333,611 1,414,485 --------------------------------------------------------------------------------------------------------- Collateralized repurchase agreements: Republic National Bank of New York 1,047,220 843,362 Republic Bank for Savings -- 125,028 --------------------------------------------------------------------------------------------------------- Total collateralized repurchase agreements 1,047,220 968,390 --------------------------------------------------------------------------------------------------------- $2,580,831 $2,582,875 --------------------------------------------------------------------------------------------------------- The rates in effect at December 31, 1994 for floating rate issues are shown in parentheses.
66 On January 20, 1994, the Bank sold, in a public offering, $100 million principal amount of LIBOR Accrual Notes due February 2, 1996. The notes are unsecured obligations of the Bank and are subordinate in right of payment to deposits. Interest on the notes is payable quarterly in arrears and is determined by a formula based on certain benchmark money market rates. The interest rate on the notes for any interest period; will not be less than 0% per annum. In a privately negotiated transaction in May 1994, the Bank repurchased $79.9 million principal amount of the notes at par and recorded a gain of $2.4 million on the termination of a designated interest rate swap. The New Zealand Dollar Floating Rate Notes were sold in a public offering in 1992 and are not redeemable prior to maturity. The applicable interest rate is determined semi-annually by reference to the relevant rate of certain six-month instruments. Under certain conditions, holders of the notes may elect to convert irrevocably to a fixed interest rate. The Bank entered into an interest rate and currency exchange agreement that converted the Bank's payment obligations on such notes into U.S. dollars. 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. Collateralized repurchase agreements consist of securities repurchase agreements with initial maturities exceeding one year All of the outstanding long-term notes and debentures of the Corporation are direct unsecured obligations and are not subordinated in right of payment to any other unsecured indebtedness of the Corporation. On October 31, 1994, the Bank established a $5.0 billion Global Bank Note Program (the "Program") authorizing the periodic sale, globally, of notes (the "Notes") by the Bank, including through its overseas branches. A group of major international securities dealers will participate in the offerings pursuant to the Program. Notes may be issued for any maturity of 30 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 $150,000 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, 1994, no Notes had been issued under this Program. 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: $1.447 billion in 1995, $340 million in 1996, $184 million in 1997, $56 million in 1998 and $1.7 million in 1999. 67
Subordinated Long-Term Debt and Perpetual Capital Notes: (In thousands) 1994 1993 ----------------------------------------------------------------------------------------------------------- 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 l50,000 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 (5.6665%) 100,000 l00,000 Floating Rate Subordinated Notes due October 2002 (5.6275%) 150,000 150,000 Subordinated Floating Rate Yield Curve Notes due 2002 (7.0875%) 100,000 100,000 5 7/8% Subordinated Notes due 2008 250,000 250,000 7 3/4% Subordinated Notes due 2009 200,000 -- 9.70% Subordinated Notes due February 1.2009 150,000 150,000 Floating Rate Subordinated Notes due July 2010 -- 66,000 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 l00,000 Perpetual Capital Notes (5.50%)* 150,000 150,000 ----------------------------------------------------------------------------------------------------------- 2,400,000 2,266,000 Republic National Bank of New York: Other subordinated long-term debt 6,266 5,940 ----------------------------------------------------------------------------------------------------------- $2,406,266 $2,271,940 ----------------------------------------------------------------------------------------------------------- *These notes are redeemable prior to maturity. The rates in effect at December 31, 1994 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 are subject to minimum rates of 5% per annum for the Floating Rate Subordinated Notes due 2002. The Corporation redeemed all of the outstanding Floating Rate Subordinated Notes due 2010 on January 22, 1994. In connection with the early extinguishment of this instrument, the Corporation provided for a loss of $422,000 in 1993 when the retirement was announced. On May 7, 1993, a shelf registration statement became effective pursuant to which the Corporation may issue, from time to time in public offerings, debt securities, warrants on debt securities, currency warrants, stock-index warrants, other warrants, preferred stock, depositary shares representing preferred stock, preferred stock warrants or 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, 1994, an aggregate of $600 million principal amount of outstanding debt securities and preferred stock had been issued pursuant to such registration statement. On May 12, 1994, the Corporation sold, in a public offering, $200 million principal amount of 7 3/4% Subordinated Notes due 2009. The Notes are not redeemable prior to maturity. The Notes are direct unsecured general obligations of the Corporation and are subordinated to all present and future senior indebtedness of the Corporation. The net proceeds received by the Corporation from the sale of the Notes were used for general corporate purposes. The Corporation's $150 million principal amount of Putable (or Perpetual) Capital Notes (the "PCNs") are a component of total qualifying capital under applicable risk-based capital rules. The principal amount of each PCN will be payable as follows: (1) at the option of the holder on the put date in each year commencing in 2012, PCNs may be exchanged for securities that constitute permanent primary capital securities (the "capital securities") for regulatory purposes, (2) at the option of the Corporation on 90 days prior notice, the PCNs may be either (i) redeemed on the specified redemption date, in whole, for cash and at par, but only with the proceeds of a substantially concurrent sale of capital securities issued for the purpose of such redemption or (ii) exchanged, in whole, for capital securities having a market value equal to the principal amount of the PCNs, and, in each case, the payment of accrued 68 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 and the Bank is obligated with respect to the above subordinated long-term debt to make principal payments of $6.3 million within the next five years. 11. Preferred Stock The Corporation's authorized preferred stock is 20 million shares. 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) 1994 1994 1994 1993 ---------------------------------------------------------------------------------------------------------------- 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 6.20% $150,000 $ -- $1.9375 Cumulative Preferred Stock ($25 stated value) 4,000,000 7.75% 100,000 100,000 $3.375 Cumulative Convertible Preferred Stock ($50 stated value) 3,450,000 6.75% 172,500 172,500 Cumulative Floating Rate Series B ($50 stated value) -- -- -- 33,925 Dutch Auction Rate Transferable Securities Preferred Stock ("DARTS (TM)") Series A ($100,000 stated value) 625 5.09% 62,500 62,500 Series B ($100,000 stated value) 625 4.40% 62,500 62,500 Remarketed Preferred ("RP") ($100,000 per share liquidation preference) 750 4.35-5.25% 75,000 75,000 Money Market Cumulative Preferred ("MMP") ($100,000 per share liquidation preference) 500 4.59% 50,000 50,000 ---------------------------------------------------------------------------------------------------------------- 8,952,500 $672,500 $56,425 ----------------------------------------------------------------------------------------------------------------
For the purpose of regulatory risk-based capital requirements, all of the Adjustable Rate Cumulative Preferred Stock, Series D, the Cumulative Preferred Stock and the Cumulative Convertible Preferred Stock qualify as Tier 1 capital. On May 23, 1994, under an existing shelf registration statement, the Corporation sold in a public offering 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) (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, 1994, was 6.20%. The Series D Stock will be redeemable, in whole or in part, at the option of the Corporation on or after July 1, 1999 at $100 per share (which is equivalent to $25 per depositary share) plus accrued and unpaid dividends to the redemption date. The net proceeds were used for general corporate purposes including the redemption by the Corporation of all 678,500 outstanding shares of its Cumulative Floating Rate Series B Preferred Stock at the stated value of $50.00 per share. The shares of $1.9375 Cumulative Preferred Stock with a stated value of $25 per share may be redeemed on or after February 27, 1997, at the option of the Corporation, in whole or in part, at $25 per share, plus, in all cases, accrued and unpaid dividends to the redemption date. The shares of the $3.375 Cumulative Convertible Preferred Stock, stated value of $50 per share are convertible at the option of the holder into shares of the Corporation's Common Stock at a conversion price 69 of $48.33 per share. The Convertible Preferred Stock may be redeemed at the option of the Corporation, in whole or in part, at any time, on or after May 15, 1995, at $52.025 per share through May 14, 1996 and thereafter at prices which decline annually to May 15, 2001, to the stated value of $50 per share plus, in all cases, accrued and unpaid dividends. Dividend rates for each dividend period are set pursuant to an auction procedure for the DARTS (TM) and the MMP, and by a remarketing through the remarketing agent for the RP. The maximum applicable dividend rates on the shares of DARTS (TM), RP and MMP range from 110% to 175% 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. The shares of RP are redeemable, in whole or in part, at the option of the Corporation, at a redemption price of $100,000 per share plus the payment of accrued and unpaid dividends to the date fixed for redemption. The shares of MMP are redeemable, in whole or in part, at the option of the Corporation, at a redemption price of $100,000 per share plus the payment of accrued and unpaid dividends to the redemption date. The shares of MMP are also redeemable, at the option of the Corporation, on any dividend payment date, in whole but not in part, at a redemption price of $100,000 per share plus accrued and unpaid dividends, if the applicable rate fixed for the dividend period ending on the day preceeding such dividend payment date equals or exceeds the 60-day "AA" composite commercial paper rate on the date of determination of such applicable rate. 12. Income Taxes The Corporation adopted SFAS No. 109 on January 1, 1993. The Corporation had previously accounted for income taxes under SFAS No. 96. The cumulative effect of this change in accounting, determined as of January 1, 1993, was immaterial to the consolidated financial statements. Prior years financial statements have not been restated to apply the provisions of SFAS No. 109. Total income tax expense (benefit) for the years ended December 31, 1994 and 1993 was allocated as follows:
(In thousands) 1994 1993 -------------------------------------------------------------------------------------------------------------------- Income from operations $ 152,358 $150,153 Stockholders' equity: Net unrealized appreciation (depreciation) on securities available for sale, net of taxes (281,046) 175,095 Foreign currency translation, net 1,067 (8,653) -------------------------------------------------------------------------------------------------------------------- $(127,621) $316,595 --------------------------------------------------------------------------------------------------------------------
The components of the Corporation's consolidated income tax expense from operations were as follows:
(In thousands) 1994 1993 1992 ------------------------------------------------------------------------------------------------------ Current Tax Expense: Federal $ 53,093 $129,856 $58,524 Foreign 21,138 27,980 13,524 State and other 8,837 34,085 17,848 ------------------------------------------------------------------------------------------------------ 83,068 191,921 89,896 ------------------------------------------------------------------------------------------------------ Deferred Tax Expense (Benefit): Federal 62,194 (29,312) 2,790 State and other 7,096 (12,456) (4,300) ------------------------------------------------------------------------------------------------------ 69,290 (41,768) (1,510) ------------------------------------------------------------------------------------------------------ $152,358 $150,153 $88,386 ------------------------------------------------------------------------------------------------------
70 The principal sources of deferred income taxes attributable to income from operations in 1992 and the effects of each on the amount of taxes were as follows:
(In thousands) 1992 ------------------------------------------------------------------------------------------------------ Unrealized net gains on trading activities $ (5,728) Provision for loan losses (20,279) Interest and discount income 1,316 Employee benefits 888 Depreciation 1,735 Non-accrued interest 1,610 Domestic tax on overseas earnings, net of foreign tax credits 19,792 Other, net (844) ------------------------------------------------------------------------------------------------------ $ (1,510) ------------------------------------------------------------------------------------------------------
Income tax expense on operations amounted to $152.4 million for 1994, $150.2 million for 1993 and $88.4 million for 1992, representing effective tax rates of 30.9%, 33.3% and 25.5%, respectively. Total tax expense differs from the amounts computed by applying the statutory' U.S. Federal income tax rate because of the following:
% of Pretax Income ------------------ 1994 1993 1992 ---------------------------------------------------------------------------------------------- Federal tax expense at statutory rates 35.0% 35.0% 34.0% State and local income tax, net of federal tax benefit 2.1 2.6 2.6 Interest and dividend income exempt from federal tax (4.6) (4.4) (5.6) Deferred tax benefits recognized -- -- (1.4) Exempt income through acquisition of subsidiary -- -- (4.0) Other, net (1.6) .1 (.1) ---------------------------------------------------------------------------------------------- Income tax expense as reported 30.9% 33.3% 25.5% ----------------------------------------------------------------------------------------------
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, 1994 and 1993 are presented below.
(In thousands) 1994 1993 ------------------------------------------------------------------------------------------------------------ Deferred tax assets: Provision for loan losses $119,545 $127,752 Interest and discount income -- 16,349 Exempt income from subsidiary acquisition 33,260 37,074 Unrealized losses on trading account assets and securities available for sale 106,087 -- Employee benefits 15,494 -- Other 7,047 10,006 ------------------------------------------------------------------------------------------------------------ 281,433 191,181 ------------------------------------------------------------------------------------------------------------ Deferred tax liabilities: Depreciation 46,516 44,884 Unrealized profits on trading account assets and securities available for sale -- 178,615 Domestic tax on overseas income 63,721 58,047 Interest and discount income 47,513 -- ------------------------------------------------------------------------------------------------------------ 157,750 281,546 ------------------------------------------------------------------------------------------------------------ Net deferred tax asset (liability) $123,683 $(90,365) ------------------------------------------------------------------------------------------------------------
There was no valuation adjustment at December 31, 1994, and 1993 respectively. The Corporation has not recognized a deferred tax liability of approximately $100.0 million for undistributed earnings of foreign subsidiaries for taxable years beginning prior to 1987 because the Corporation does not expect those unremitted earnings to reverse and become taxable to the Corporation in the foreseeable future. As of December 31, 1994, the undistributed earnings of these foreign subsidiaries were approximately $365.0 million. Cumulative foreign tax credits of approximately $28.5 million at December 31, 1994 are available for utilization by the Corporation against U.S. income taxes that would arise upon a dividend distribution by its foreign subsidiaries. 71 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) 1994 1993 1992 ------------------------------------------------------------------------------------------------------- Foreign $220,377 $230,523 $125,697 Domestic 271,989 220,835 221,572 ------------------------------------------------------------------------------------------------------ $492,366 $451,358 $347,269 -------------------------------------------------------------------------------------------------------
13. Benefits Retirement Plan The Bank's retirement plan (the "U.S. Plan") covers substantially all U.S. employees of the Bank, RBS, and the Corporation and their subsidiaries. Benefits are based on years of service and the employee's compensation during the highest consecutive five years of the last ten years of employment. The Corporation's funding policy is to contribute annually an amount necessary to satisfy the Employee Retirement Income Security Act (ERISA) funding standards. The following table sets forth the U.S. Plan's funded status and amounts recognized in the Corporation's Statement of Condition at respective year ends.
(In thousands) 1994 1993 -------------------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $(90,843) in 1994 and $(9l,834)in 1993 $(102,687) $(l00,307) -------------------------------------------------------------------------------------------------------------------- Plan assets at fair value, primarily mutual funds and the balance in listed stocks and bonds $ 146,138 $ 151,105 Projected benefit obligation for service rendered to date (132,574) (132,695) -------------------------------------------------------------------------------------------------------------------- Excess of plan assets over projected benefit obligation 13,564 18,410 Unrecognized net (gain) from past experience different from that assumed and effects of changes in assumptions (2,113) (3,760) Prior service cost not yet recognized in net periodic pension cost 1,211 4,371 Unrecognized net asset being recognized over 16 years (7,041) (8,047) -------------------------------------------------------------------------------------------------------------------- Prepaid pension expense included in other assets $ 5,621 $ 10,974 --------------------------------------------------------------------------------------------------------------------
Net pension expense in each of the last three years consisted of the following:
(In thousands) 1994 1993 1992 -------------------------------------------------------------------------------------------------------------- Service cost-benefits earned during the period $ 6,250 $ 5,754 $ 4,423 Interest cost on projected benefit obligation 9,575 8,825 8,266 Actual return on plan assets (66) (14,105) (12,293) Net amortization and deferral (10,406) 4,469 980 -------------------------------------------------------------------------------------------------------------- Net periodic pension expense $ 5,353 $ 4,943 $ 1,376 --------------------------------------------------------------------------------------------------------------
The following table presents the economic assumptions used to calculate the projected benefit obligation and pension expense in each of the last three years.
1994 l993 1992 ----------------------------------------------------------------------------------------------------- Discount rate 8.0% 7.0% 8 1/2% Rate of compensation increase 6.0 5.0 6 1/2 Expected long-term rate of return on plan assets 8.0 7.0 8 3/4 -----------------------------------------------------------------------------------------------------
In addition to the above funded U.S. Plan, the Corporation established an unfunded benefit maintenance plan and a supplemental pension plan for certain employees, executive officers and directors of a certain banking subsidiary. The expense related to these plans amounted to $2.1 million in 1994, $2.0 million in 1993 and $2.1 million in 1992. The unfunded liability for this plan was $10.0 million and $9.5 million at December 31,1994 and 1993, respectively. 72 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 $3.6 million in 1994, $3.7 million in 1993 and $3.6 million in 1992. The Corporation provides postretirement life insurance benefits to its current employees and provides certain retired employees with health care and life insurance benefits. The Corporation's plan for its postretirement obligation is unfunded. The following table sets forth information related to the Corporation's postretirement benefit obligation at respective year ends.
(In thousands) 1994 1993 -------------------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees incLuding covered dependents and beneficiaries $(21,991) $(26,979) Fully eligible actives (834) (934) Other actives (362) (581) -------------------------------------------------------------------------------------------------------- (23,187) (28,494) Unrecognized net gain (9,735) (2,445) Unrecognized transition obligation being recognized over 20 years 16,228 17,181 -------------------------------------------------------------------------------------------------------- Postretirement benefit obligation included in other liabilities $(16,694) $(13,758) --------------------------------------------------------------------------------------------------------
A discount rate of 8% and a 6% compensation increase were used to measure the accumulated postretirement benefit obligation in 1994. In 1993 the rates used were 7% and 5% and in 1992, 8 1/2% and 6 1/2%, respectively. The effect of raising health care gross eligible charges by 1% would increase the aggregate of service cost and interest cost by approximately $209,000 and the accumulated postretirement benefit obligation by approximately $2.2 million. The health care trend rate used to measure the expected costs of benefits for 1995 is projected to be 12.0% for those under age 65 and 10.0% for those 65 and older. The rates for those under age 65 and for those 65 and older are assumed to decrease by 1% and .4% per year, respectively, until they reach 6.0% and stabilize at that rate. Net postretirement benefit expense for each of the last three years was as follows:
(In thousands) 1994 1993 1992 ---------------------------------------------------------------------------------------------------------------- Service cost $ 92 $ 92 $ 104 Interest cost on accumulated postretirement benefit obligation 1,744 1,910 2,345 Amortization of transitional accumulated postretirement benefit obligation 953 953 953 Amortization of net gain (178) -- -- ---------------------------------------------------------------------------------------------------------------- Net periodic expense $2,611 $2,955 $3,402 ----------------------------------------------------------------------------------------------------------------
On January 1, 1994, the Corporation adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits". SFAS No. 112 requires the recognition of 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. The effect of initially adopting this SFAS was not material to the Corporation's results of operations. Executive Compensation The Corporation has a Restricted Stock Plan (the "Plan") for selected employees of the Corporation and its subsidiaries. At December 31, 1994, an aggregate of 227,340 shares of Restricted Stock were available to be awarded. The Plan will terminate on December 31, 1995 unless extended by the Board of Directors with stockholder approval, which, along with revisions and additions to other stock-based plans, has been proposed for the Annual Meeting of Stockholders in May, 1995. During 1994, 1993 and 1992, the Corporation issued, net of cancellations, 694,207, 470,824, and 309,186 shares of Common Stock, respectively, with an approximate market value as of the date of issue of $33.2 million, $23.7 million and $13.5 million, respectively. Such market value is amortized as an expense over the period for which such shares are restricted. 73 The Corporation's Restricted Stock Election Plan allows certain officers who have earned deferred compensation to elect to receive payment in the form of Restricted Stock of the Corporation. At December 31, 1994, an aggregate of 310,558 shares of Restricted Stock were available to be awarded. The plan will terminate on December 31, 1997, unless extended by the Board of Directors with stockholder approval. During 1994, 1993, and 1992, 768 shares, 604 shares and 672 shares, respectively, of the Corporation's Common Stock were issued in lieu of cash dividends pursuant to such plan, with approximate market values as of the dates of issue of $37,000, $30,000 and $28,000, respectively. The Corporation has an incentive stock option plan and a non-qualified stock option plan for certain officers and other key employees of the Corporation and its subsidiaries. There remains reserved for issuance Pursuant to the stock option plans 412,283 shares of Common Stock for the incentive stock option plan and 365,092 shares of Common Stock for the non.qualified stock option plan. Both plans are substantially identical, except that the incentive stock option plan has certain limitations or requirements in order that the holders of such options can receive certain beneficial tax treatment in the disposition of shares acquired on the exercise of an option. Options may be granted under the plans at any time prior to July, 1995, but they cannot exceed ten years in duration. Exercise prices under the incentive stock option plan must be equal to the fair market value of the Common Stock on the date of grant; exercise prices under the non-qualified stock option plan are determined by the Compensation and Benefits Committee (the "Compensation Committee") of the Board of Directors. Options become exercisable at the times and in the amounts determined by the Compensation Committee in connection with awarding grants. At the discretion of the Compensation Committee, option grants may be accompanied by stock appreciation rights ("SARs"). SARs entitle the holder of the related option to surrender the option and receive a payment equal to an amount by which the fair market value, at the time of exercise, of the shares of Common Stock subject to the option exceeds the exercise price. On the exercise of an option, an employee may elect to make payment either in cash, by delivering previously owned shares of the Corporation's Common Stock, or any combination thereof. SARs are exercisable in lieu of acquiring shares of Common Stock. Compensation expense, if any, resulting from the difference between the fair market value of the Common Stock on the date of grant and the current market value of the Common Stock will be accrued over the vesting period adjusted for subsequent forfeitures and exercises. The following is a summary of options transactions in each of the last three years.
Option Price Options Per Share ------------------------------------------------------------------------------------------------------- Balance, December 31, 1991 643,086 $23.61-$40.79 Granted 12,000 39.38 Exercised (42,599) 23.61- 32.92 Cancelled (9,750) ------------------------------------------------------------------------------------------------------- Balance. December 31, 1992 602,737 $23.61-$40.79 Granted 4,500 50.13 Exercised (43,100) 23.61- 32.50 Cancelled -- ------------------------------------------------------------------------------------------------------- Balance, December 31, 1993 564,137 $23.6l-$50.l3 Granted -- Exercised (80,850) 23.61- 29.12 Cancelled (3,750) ------------------------------------------------------------------------------------------------------- Balance, December 31,1994 479,537 $23.61-$50.13 -------------------------------------------------------------------------------------------------------
At December 31, 1994, options for 404,537 shares are currently exercisable at prices ranging from $23.61 to $32.50 per share. 74 The Corporation has a Performance Based Incentive Compensation Plan, (the "Compensation Plan") which was approved by stockholders at the 1994 annual stockholders' meeting. The Compensation 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 Compensation Plan is administered by the Compensation 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 Compensation 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. Awards were granted in 1994 pursuant to the plan; amounts payable pursuant to such awards have not yet been certified by the Compensation Committee in accordance with the plan. 14. Geographic Distribution of Revenue, Earnings and Assets The following geographic analysis of total assets, total operating revenue, income (loss) before income taxes and net income (loss) is based on the location of the customer. Charges and credits for funds employed or supplied by domestic and international operations are based on the average internal cost of funds. Inasmuch as the Corporation conducts a significant portion of its international activities from its domestic offices, certain other items of revenue and expense, including the provision for loan losses and applicable income taxes, have been subjectively allocated, and, therefore, the data presented may not be meaningful. Based on the above, the following table summarizes the results of the Corporation's international and domestic operations by geographic area for each of the years in the three-year period ended December 31, 1994.
Total Total Operating Income (Loss) Before Net Income (In millions) Assets Revenue Income Taxes Loss) ----------------------------------------------------------------------------------------------------- United Kingdom 1994 $ 2,434.2 $ 171.0 $ 19.2 $ 14.1 1993 1,271.6 156.3 40.8 27.2 1992 1,861.8 153.5 27.2 20.3 ----------------------------------------------------------------------------------------------------- Europe 1994 $ 4,578.5 $ 252.2 $ 48.0 $ 35.1 1993 3,407.5 232.5 15.8 10.6 1992 4,674.9 260.4 1.7 1.3 ----------------------------------------------------------------------------------------------------- Canada 1994 $ 1,549.6 $ 81.6 $ 13.0 $ 9.5 1993 1,043.5 64.0 1.9 1.3 1992 1,530.4 65.9 6.1 4.6 ----------------------------------------------------------------------------------------------------- Far East and Australia 1994 $ 4,392.3 $ 227.6 $ 17.8 $ 13.0 1993 3,555.4 181.7 23.0 15.4 1992 3,830.0 22l.0 24.8 18.5 ----------------------------------------------------------------------------------------------------- Caribbean money center 1994 $ 2,741.5 $ 331.9 $161.9 $ 98.4 locations, Central 1993 3,104.0 157.1 38.7 25.8 and South America 1992 3,078.9 163.8 46.1 34.3 ----------------------------------------------------------------------------------------------------- Middle East and 1994 $ 289.1 $ 6.2 $ (.2) $ (.2) Africa 1993 204.2 6.0 (.7) .5) 1992 178.2 8.3 (.7) (.6) ----------------------------------------------------------------------------------------------------- United States 1994 $25,082.7 $1,489.2 $232.7 $170.l 1993 26,907.3 1,530.8 331.9 221.4 1992 21,992.0 1,467.9 242.1 180.5 ----------------------------------------------------------------------------------------------------- Total 1994 $41,067.9 $2,559.7 $492.4 $340.0 1993 39,493.5 2,328.4 451.4 301.2 1992 37,146.4 2,340.8 347.3 258.9 -----------------------------------------------------------------------------------------------------
75 15. 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 2014. The minimum rental commitments on noncancellable leases for premises are $23.7 million in 1995, $21.3 mil- lion in 1996, $18.5 million in 1997, $17.5 million in 1998, $17.0 million in 1999, and an aggregate of $67.0 million thereafter until the expiration of the leases. The minimum rental commitments have not been reduced by aggregate minimum sublease rentals of $15.1 million. Actual net rental expense in 1994,1993 and 1992, aggregated $28.0 million, $23.6 million, and $20.5 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 totaled $24 million during 1994. 16. Fair Value of Financial Instruments SFAS No. 107, "Disclosures About Fair Value of Financial Instruments", requires the Corporation to disclose, in addition to the carrying value of certain financial instruments, the fair value of financial instruments, both assets and liabilities recorded on and off the statement of condition, for which it is practicable to estimate fair value. SFAS No. 107 was amended in October, 1994 by SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments". SFAS No. 119 requires, among other things, that a distinction be made between the fair value of financial instruments held or issued for trading purposes and those held for purposes other than trading. It also expands the scope of derivative financial instruments disclosure. Financial instruments are defined as cash, evidence of an ownership in an entity, a contract that conveys or imposes on an entity the contractual right or obligation to either receive or deliver cash or another financial instrument, a derivative financial instrument, such as a futures, forward, swap or option contract, or other financial 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. SFAS No. 107 requires deposit liabilities with no stated maturity to be reported at their carrying value and does not allow for the recognition of the inherent funding value of these instruments. Additionally, in estimating the fair value of deposit liabilities, the values of franchises or of other business units and entities of the Corporation, which are not financial instruments as defined, are not permitted to be included in the fair value of financial instruments. The Corporation believes that significant value exists in this type of deposit and in its franchises and individual business units. The following summary presents the methodologies and assumptions used to estimate the fair value of the Corporation's financial instruments presented below. The Corporation operates as a going concern and, except for its investment securities portfolio, trading account assets and liabilities and off-balance-sheet instruments that trade on an organized exchange or in an active secondary market, no active market exists for its financial instruments. The application of the information used to determine fair value is highly subjective and judgmental in nature and, therefore, such valuation may not be precise. The sub- jective 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 under 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. 76 Financial Assets Interests-bearing deposits with banks, amounting to $9.0 billion in 1994 and $4.7 billion in 1993, 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 the Corporation's portfolio of loans to restructuring foreign governments are based upon prices for similar securities quoted in the secondary market. 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 table below as other financial assets. Financial Liabilities Deposits without a stated maturity include demand,savings, and money market accounts. These deposits amounted to $6.4 billion in 1994 and $6.1 billion in 1993 and, in accordance with SFAS No. 107, are reported at their carrying value. No value has been assigned to the franchise value of these deposits. Certificates of deposit maturing within six months aggregated $.6 billion in 1994 and $1.4 billion in 1993, and their fair value is considered to equal their carrying value. The fair value of deposits maturing in over 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 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 table below 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 $4.9 billion and $3.1 billion at year end 1994 and 1993, 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. 77 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 con- tracts are used to limit the Corporation's sensitivity to changes in interest rates, currency exchange rates or market risks related to the corresponding on-balance-sheet financial instrument. The Corporation's portfolio of securities available for sale is reported on the balance sheet at estimated fair value including unrealized gains and losses on related hedge contracts in accordance with SFAS No. 115. 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, ----------------------------------------------- 1994 1995 --------------------- --------------------- Carrying Estimated Carrying Estimated (In millions) Value Fair Value Value Fair Value -------------------------------------------------------------------------------------------------------------- Financial Assets, Including Hedges: Interest-bearing deposits with banks $10,242 $10,233 $ 5,347 $ 5,354 Derivative related -- 9 -- 20 Securities held to maturity 5,888 5,576 1,993 2,089 Derivative related -- 38 -- (14) Securities available for sale 5,499 5,499 13,031 13,031 Derivative related 53 53 (74) (74) Trading account assets 938 938 1,182 1,182 Derivative related 1,606 1,606 13 13 Loans, net 8,594 8,678 9,197 9,642 Derivative related -- 1 -- (5) Other financial assets 5,232 5,232 6,230 6,230 -------------------------------------------------------------------------------------------------------------- 38,052 37,863 36,919 37,468 -------------------------------------------------------------------------------------------------------------- Financial Liabilities, Including Hedges: Deposits with no stated maturity and deposits maturing within six months $20,240 $20,240 $20,130 $20,130 Deposits maturing in over six months 2,486 2,436 2,671 2,696 Derivative related -- (64) -- -- Trading account liabilities 462 462 111 111 Derivative related 1,625 1,625 66 66 Short-term borrowings 4,969 4,969 4,164 4 Derivative related -- (1) -- -- Long-term debt, subordinated long-term debt and perpetual capital notes 4,987 4,863 4,855 5,136 Derivative related -- 70 -- (78) Other financial liabilities 3,210 3,210 3,721 3,721 -------------------------------------------------------------------------------------------------------------- 37,979 37,810 35,718 35,953 -------------------------------------------------------------------------------------------------------------- Net financial assets $ 73 $ 53 $ 1,201 $ 1,515 -------------------------------------------------------------------------------------------------------------- Estimated net fair value-more than (less than) carrying value $ (20) $ 314 --------------------------------------------------------------------------------------------------------------
78 17. Derivative Financial Instruments and Off-Balance-Sheet Risk Nature and Terms of Interest Rate, Foreign Exchange, Precious Metals and Other Financial Instruments The Corporation uses various derivative financial instruments as an end user to manage its asset and liability exposure to interest rate and currency fluctuations and 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 a greed to price. When traded on an organized exchange, futures contracts require daily settlement with the exchange acting as the counterparty to each contract. Forward contracts are customized transactions that require no cash settlement until the end of the contract. Other contracts involve commitments to settle in cash, on a periodic basis, differentials between specified indices which are applied to a notional principal amount. Purchased option contracts give the holder the right, but not the obligation, to acquire or sell for a limited time period a financial instrument, currency, precious metal or other commodity at a designated price upon payment of a fee at the commencement of the contract. The writer of an option receives a premium at the outset of a contract as payment for assuming the risk of unfavorable changes in the price of the underlying instrument. The Corporation is an international dealer in such instruments denominated in U.S dollars and other currencies, and include futures, forwards, swaps and options related to interest rates, foreign exchange rates, equity indices and commodity prices. The Corporation focuses especially on the structuring of customized transactions to meet client needs. Counterparties with the Corporation are generally financial institutions, including banks, central banks, other government agencies, both foreign and domestic, and insurance companies. Asset-liability management activities are conducted principally through the use of interest rate contracts in the form of swaps. Interest rate swap contracts obligate the Corporation to exchange the difference between fixed rate and floating rate interest amounts based on an agreed notional amount. These contracts are intended to reduce the impact on net interest margin of interest rate fluctuations as assets and liabilities may reprice at different times. Interest rate caps and floors are purchased to limit exposure to unfavorable interest rate changes. By paying a premium to the writer, the Corporation receives the difference between a specified market interest rate and the fixed cap rate. The market risk of derivatives arises principally from the potential for changes in the prices of underlying securities, commodities or indices, or the volatility of such prices or rates. The Corporation rou- tinely 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 deal- ing 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. 79 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 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 31,1994 December 31,1993 -------------------------- ---------------- Contractual/Notional Amounts Contractual/ -------------------------- Asset/Liability Notional (In millions) Trading Management Amounts(1) -------------------------------------------------------------------------------------------------------- Interest rate: Futures and Forwards $ 35,499 $1,130 $ 9,513 Swaps 26,044 5,215 25,921 Options, caps, floors and collars written 8,624 -- 5,718 Options, caps, floors and collars purchased 6,619 2,903 5,419 -------------------------------------------------------------------------------------------------------- $ 76,786 $9,248 $46,571 Foreign exchange: Spot, futures and forwards $ 67,293 $ -- $48,909 Cross-currency swaps 44,955 288 30,812 Options written 15,944 -- 9,591 Options purchased 14,714 -- 9,915 -------------------------------------------------------------------------------------------------------- $142,906 $ 288 $99,227 -------------------------------------------------------------------------------------------------------- Other-principally precious metals: Swaps, futures and forwards $ 7,280 $ -- $ 7,922 Options written 1,034 -- 946 Options purchased 1,059 -- 1,786 -------------------------------------------------------------------------------------------------------- $ 9,373 $ -- $10,654 -------------------------------------------------------------------------------------------------------- (1) Contractual/notional amounts at December 31, 1993, include trading and asset-liability management amounts.
Using replacement cost at the prevailing market rate on all contracts in a gain position, the Corporation's estimated risk of loss at year end 1994 and 1993 was $1.043 billion and $528 million, respectively, on interest rate contracts, and $1.388 billion and $992 million, respectively, on foreign exchange and precious metals contracts. Credit Related Instruments In the normal course of its business, there are various outstanding commitments and contingent liabilities of the Corporation that are not reflected in the consolidated financial statements. The Corporation enters into various types of agreements with its customers which enhance the customer's credit standing, guarantee 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 expo- sure across all products are established for each counterparty and are monitored and reviewed regularly. 80 A summary of the contractual amount of credit-related instruments at December 31, is as follows:
December 31, (In millions) 1994 1993 -------------------------------------------------------------------------------------------------- Commitments to extend credit $3,302 $1,622 Standby letters of credit and foreign office guarantees 958 1,089 Commercial letters of credit 590 432 --------------------------------------------------------------------------------------------------
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 35% and 30% of the Corporation's on-balance-sheet financial instruments at December 31, 1994 and 1993, respectively This exposure included approximately 70% and 40% at year end 1994 and 1993, respectively, in the form of interest-bearing deposits with foreign banks and branches and agencies of foreign banks located in the United States. The Corporation's credit exposure to the U.S. federal government and its agencies was approximately 20% and 30% of respective year end 1994 and 1993 on-balance-sheet financial instruments. The Corporation's real estate loan portfolio represented approximately 8% and 10% of on-balance.sheet financial instruments at year end 1994 and 1993, respectively. Credit exposure in the real estate loan portfolio is concentrated in loans in the New York metropolitan area secured by multi-family and commercial real estate properties and, to a lesser degree, residential properties. 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 customer base allows the Corporation to minimize credit risk. 18. Transactions with Related Parties The following is a summary of significant balances, in the aggregate, of transactions with related parties included in the Corporation's Consolidated Statements of Condition at respective year ends.
(In thousands) 1994 1993 -------------------------------------------------------------------------------------------------- Interest-bearing deposits with banks $ 86,952 $129,862 Securities available for sale 78,159 30,098 Loans 95,722 14,357 -------------------------------------------------------------------------------------------------- Liabilities: Deposits $262,079 $395,418 Long-term debt 7,911 8,885 --------------------------------------------------------------------------------------------------
At December 31, 1994, Mr. Edmond J. Safra, through Saban S.A. and two other entities, owned approximately 28.6% of the Corporation's outstanding Common Stock and, through Saban S.A., owned approximately 20.7% of Safra Republic's outstanding common shares, Mr. Safra, through Saban S.A. and a subsidiary thereof, has received approval, which expires on April 28, 1995, from the Board of Governors of the Federal Reserve System to acquire up to 2 million additional shares of Common Stock of the Corporation in the open market and through privately negotiated transactions. Through December 31, 1994, Mr. Safra had acquired 43,600 shares of Common Stock of the Corporation under this approval. If all such shares of Common Stock were acquired, Mr. Safra would increase his ownership to approximately 32.3% of the Corporation's outstanding Common Stock. 81 19. 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) 1994 1993 -------------------------------------------------------------------------------------------------- Common Stock: Balance at beginning and end of year $ 355,000 $ 355,003 -------------------------------------------------------------------------------------------------- Surplus: Balance at beginning of year $1,160,436 $1,160,661 Capital contribution by parent 1,313 -- Treasury stock transactions of affiliate (326) (225) -------------------------------------------------------------------------------------------------- Balance at end of year $1,161,423 $1,160,436 -------------------------------------------------------------------------------------------------- Retained Earnings: Balance at beginning of year $ 511,851 $ 390,918 Net income 295,232 255,716 Dividends declared (115,637) (126,502) Foreign currency translation, net of taxes 18,133 (9,586) Allowance for unrealized loss on marketable equity securities -- 1,305 -------------------------------------------------------------------------------------------------- Balance at end of year $ 709,579 $ 511,851 -------------------------------------------------------------------------------------------------- Net Unrealized Appreciation (Depreciation) on Securities Available for Sale, Net of Taxes: Balance at beginning of year $ 211,584 $ -- Unrealized appreciation (depreciation) (584,335) 348,335 Income tax (expense) benefit 218,345 (136,751) -------------------------------------------------------------------------------------------------- Balance at end of year $ (154,406) $ 211,584 -------------------------------------------------------------------------------------------------- Total Stockholder's Equity: Balance at beginning of year $2,238,871 $1,906,579 Net changes during the year (167,275) 332,292 -------------------------------------------------------------------------------------------------- Balance at end of year $2,071,596 $2,238,871 --------------------------------------------------------------------------------------------------
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 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, 1994, the Bank may declare dividends without the prior approval of the Comptroller of the Currency of up to $308 million plus an additional amount equal to the Bank's retained net profits for 1995 to the date of any dividend declaration. The Federal Reserve Act limits extensions of credit to, or guarantees, acceptances or letters of credit issued on behalf of, affiliates by member banks and also requires that such transactions be secured by specific obligations. Such transactions, aggregated with certain other transactions with affiliates, are limited to 10% of the Bank's capital and surplus, as defined, to any one affiliate and to 20% of such amount in the aggregate to all such affiliates. Based upon these requirements, the Bank could have advanced, assuming adequate qualifying collateral was available, up to $231 million to the Corporation. 82 20. Republic New York Corporation (parent company only) Condensed Balance Sheets
December 31, ----------------------- (In thousands) 1994 1993 ----------------------------------------------------------------------------------------------------------------------- Assets Deposits with subsidiary bank, principally interest-bearing $ 819,490 $ 979,579 Investment in bank subsidiaries 2,576,231 2,737,702 Investment in non-bank subsidiaries 906,198 656,624 Securities held to maturity 60,504 60,315 Securities available for sale 765,122 634,706 Investment in subordinated debt of subsidiary bank 675,000 575,000 Advances to non-bank subsidiaries 381,715 369,275 Loans, net of unearned income 8,293 7,445 Dividends receivable from subsidiaries 20,000 65,000 Other assets 115,143 82,639 ----------------------------------------------------------------------------------------------------------------------- Total assets $6,327,696 $6,168,288 ----------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Commercial paper $ 979,390 $ 881,741 Other liabilities 108,918 73,325 Long-term debt (note 10) 200,000 200,000 Subordinated long-term debt and perpetual capital notes (note 10) 2,400,000 2,266,000 Stockholders' equity (notes 11 and 13): Cumulative preferred stock, no par value 672,500 556,425 Common stock, $5 par value 263,106 263,516 Surplus 437,653 459,713 Retained earnings 1,457,609 1,204,818 Net unrealized appreciation (depreciation) on securities available for sale, net of taxes (191,480) 262,750 ----------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 2,639,388 2,747,222 ----------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $6,327,696 $6,168,288 -----------------------------------------------------------------------------------------------------------------------
Condensed Statements of Income
(In thousands) 1994 1993 1992 ----------------------------------------------------------------------------------------------------------------------- Income: Dividends from bank subsidiaries $ 195,637 $ 189,502 $ 328,000 Dividends from non-bank subsidiaries 24,315 15,650 13,500 Interest from subsidiaries 87,042 64,588 41,608 Interest and dividend income 47,907 49,511 59,212 Investment securities gains (losses), net (6,669) (3,853) 9,399 Other income (expense) 371 (5,347) 160 ----------------------------------------------------------------------------------------------------------------------- Total income 348,603 310,051 451,879 ----------------------------------------------------------------------------------------------------------------------- Expenses: Salaries and employee benefits 36,660 20,352 13,938 Interest on long-term debt and commercial paper 199,535 176,857 170,510 Other expenses 18,898 17,594 12,139 ----------------------------------------------------------------------------------------------------------------------- Total expenses 255,093 214,803 196,587 ----------------------------------------------------------------------------------------------------------------------- Income before income tax benefit and equity in undistributed net income of subsidiaries 93,510 95,248 255,292 Applicable income tax benefit - current 62,758 62,327 47,344 ----------------------------------------------------------------------------------------------------------------------- Income before equity in undistributed net income of subsidiaries 156,268 157,575 302,636 Equity in undistributed net income of subsidiaries* 183,740 143,630 (43,753) ----------------------------------------------------------------------------------------------------------------------- Net income $ 340,008 $ 301,205 $ 258,883 ----------------------------------------------------------------------------------------------------------------------- *Represents excess of dividends over net income in 1992.
83 Condensed Statements of Cash Flows
(In thousands) 1994 1993 1992 ----------------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities: Net Income $ 340,008 $ 301,205 $ 258,883 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries* (183,740) (143,630) 43,753 Net (increase) decrease in dividends receivable from subsidiaries 45,000 (27,000) 40,500 Other, net 3,090 16,902 (55,903) ----------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 204,358 147,477 287,233 ----------------------------------------------------------------------------------------------------------------------- Cash Flows From Investing Activities: Net decrease in interest-bearing deposits with banks -- -- 385 Net (increase) decrease in deposits with subsidiary bank 160,089 645,376 (156,997) Cash contributions to bank and non-bank subsidiaries (315,146) (591,800) (200,100) Net increase in short-term investments (130,605) (281,659) (169,760) Net increase in advances to subsidiaries (12,440) (105,220) (100,415) Net increase in loans (845) (1,773) (589) Investment in subordinated debt of subsidiary bank (100,000) -- (525,000) Other, net (43,448) 15,078 (18,615) ----------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (442,395) (319,998) (1,171,091) ----------------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities: Net increase in commercial paper 97,649 161,433 196,261 Proceeds from issuance of subordinated long-term debt 200,000 250,000 750,000 Repayment of subordinated long-term debt (66,000) (108,750) (20,000) Repayment of long-term debt -- (50,000) (49,354) Net proceeds from issuance of cumulative preferred stock 146,017 -- 96,660 Repurchase of cumulative preferred stock (33,925) -- (500) Repurchase of common stock (39,740) -- (9,772) Cash dividends paid (98,856) (83,945) (78,952) Other, net 32,892 3,783 (485) ----------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 238,037 172,521 883,858 ----------------------------------------------------------------------------------------------------------------------- Cash at beginning and end of year $ -- $ -- $ -- ----------------------------------------------------------------------------------------------------------------------- *Represents excess of dividends over net income in 1992.
84 Republic New York Corporation --------------------------------------------------------------------- Independent Auditors' Report on Financial Statements [LOGO] KPMG Peat Marwick LLP Certified Public Accountants 345 Park Avenue New York, NY 10154 The Board of Directors and Stockholders Republic New York Corporation: We have audited the accompanying consolidated statements of condition of Republic New York Corporation as of December 31, 1994 and 1993, 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, 1994, and the consolidated statements of condition of Republic National Bank of New York as of December 31, 1994 and 1993. 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 at December 31, 1994 and 1993, and the results of their operations, and their cash flows for each of the years in the three year period ended December 31, 1994, and the consolidated financial position of Republic National Bank of New York at December 31, 1994 and 1993 in conformity with generally accepted accounting principles, As discussed in Note 1 to the consolidated financial statements, the Corporation adopted the provisions of the Financial Accounting Standards Board's Interpretation No. 39, Offsetting of Amount Related to Certain Contracts, effective January l, 1994. As discussed in Note 1 the Corporation changed its method of accounting for investments to adopt the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, at December 31,1993. As discussed in Notes 1 and 12, the Corporation changed its method of accounting for income taxes effective January 1, 1993 to adopt the provisions of SFAS No. 109, Accounting for Income Taxes. KPMG Peat Marwick LLP January 17, 1995 85 Republic New York Corporation --------------------------------------------------------------------- Report of Management Financial Statements The accompanying 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 judgements and estimates by management. Management's Discussion and Analysis appearing elsewhere in this Annual Report is consistent with the content of the financial statements. KPMG Peat Marwick LLP the Corporation's independent auditors, have audited the accompanying consolidated financial statements of the Corporation and their report thereon is presented herein. Such report represents that the Corporation's consolidated financial statements, provided in the Annual Report, present fairly, in all material respects, its financial position and results of operations in conformity with generally accepted accounting principles, Internal Control System Over Financial Reporting Management of the Corporation is responsible for establishing and maintaining an effective internal control system over financial reporting presented in conformity with generally accepted accounting principles. The system contains monitoring mechanisms, and actions are taken to correct deficiencies identified. The Audit Committee of the Board of Directors is composed of directors who are not officers or employees of the Corporation. The Audit Committee of the Board of Directors is responsible for ascertaining that the accounting policies employed by management are reasonable and that internal control systems are adequate. The Director of Internal Audit of the Corporation conducts audits and reviews of the Corporation's worldwide operations and reports directly to the Audit Committee of the Board of Directors. In addition, KPMG Peat Marwick LLP, has direct, private access to the Audit Committee of the Board of Directors to discuss the results of their audits as well as other auditing and financial reporting matters as it deems necessary. There are inherent limitations in the effectiveness of any internal control system, including the possibility of human error and the possible circumvention or overriding of controls. Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of an internal control system may vary over time. Management assessed the Corporation's internal control system over financial reporting presented in conformity with generally accepted accounting principles as of December 31, 1994. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 1994, the Corporation maintained an effective internal control system over financial reporting presented in conformity with generally accepted accounting principles. Compliance With Laws And Regulations Management is also responsible for maintaining an effective system of 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 for Savings, complied, in all material respects, with such laws and regulations during the year ended December 31, 1994. Walter H. Weiner John D. Kaberle, Jr. Chairman of the Board Executive Vice President and Comptroller New York, New York January 17, 1995 86 Republic New York Corporation --------------------------------------------------------------------- Independent Auditors' Report on Management's Assertions Related to Internal Controls Over Financial Reporting [LOGO] KPMG Peat Marwick LLP Certified Public Accountants 345 Park Avenue New York, NY 10154 The Board of Directors Republic New York Corporation We have examined management's assertion, included in the accompanying Report of Management, that as of December 31, 1994, Republic New York Corporation maintained an effective system of internal control over financial reporting presented in conformity with generally accepted accounting principles. Our examination was made in accordance with standards established by the American Institute of Certified Public Accountants and, accordingly, included obtaining an understanding of the internal control system over financial reporting, testing and evaluating the design and operating effectiveness of the internal control system, and such other procedures as we considered necessary in the circumstance. We believe that our examination provides a reasonable basis for our opinion. Because of inherent limitations in any internal control system, errors or irregularities may occur and not be detected. Also, projections of any evaluation of the internal control system over financial reporting to future periods are subject to the risk that the internal control system 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 referred to above is fairly stated, in all material respects, based on the criteria described in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. KPMG Peat Marwick LLP January 17, 1995 87 Republic New York Corporation Selected Financial Data - Summary of Unaudited Quarterly Financial Information
1994 1993 --------------------------------------------------------------------------------- ----------------------------------------- (In thousands except per share data) Fourth Third Second First Fourth Third Second First ----------------------------------------------------------------------------------------------------------------------------- Interest income $617,124 $555,560 $516,316 $484,329 $487,921 $481,572 $471,954 $491,479 Interest expense 399,069 337,363 304,280 286,143 294,854 288,549 273,678 299,994 ----------------------------------------------------------------------------------------------------------------------------- Net interest income 218,055 218,197 212,036 198,186 193,067 193,023 198,276 191,485 Provision for loan losses 3,000 3,000 3,000 10,000 15,000 20,000 25,000 25,000 ----------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 215,055 215,197 209,036 188,186 178,067 173,023 173,276 166,485 Other operating income 91,144 97,272 93,407 104,545 111,338 108,200 94,958 80,976 Other operating expenses 181,599 172,789 191,160 175,928 174,409 156,969 156,722 146,865 Income before income taxes 124,600 139,680 111,283 116,803 114,996 124,254 111,512 100,596 Income taxes 35,216 48,263 31,855 37,024 35,069 46,649 36,584 31,851 Net income $ 89,384 $ 91,417 $ 79,428 $ 79,779 $ 79,927 $ 77,605 $ 74,928 $ 68,745 ----------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------- Net income applicable to common stock $ 79,665 $ 82,143 $ 71,095 $ 72,695 $ 72,792 $ 70,545 $ 67,873 $ 61,580 ----------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------- Net income per common share: Primary $1.51 $1.55 $1.35 $1.38 $1.38 $1.34 $1.30 $1.18 Fully diluted 1.46 1.50 1.31 1.34 1.34 1.30 1.26 1.15 Average common shares outstanding: Primary 52,732 53,018 52,633 52,557 52,690 52,634 52,336 52,196 Fully diluted 56,508 56,797 56,432 56,396 56,525 56,506 56,201 56,052 ----------------------------------------------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------------------------------------------
88 Republic Bank for Savings Consolidated Statements of Condition
December 31, ----------------------- (Dollars in thousands) 1994 1993 --------------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 74,077 $ 33,562 Interest-bearing deposits with banks 271,984 256,377 Securities held to maturity (approximate market value of $2,084,646 in 1994 and $947,972 in 1993) 2,225,987 921,741 Securities available for sale (at approximate market value) 413,560 1,896,063 --------------------------------------------------------------------------------------------------------------------------- Total investment securities 2,639,547 2,817,804 Loans, net of unearned income 2,760,792 2,895,555 Allowance for possible loan losses (59,872) (57,362) --------------------------------------------------------------------------------------------------------------------------- Loans, net 2,700,920 2,838,193 Accounts receivable and accrued interest 53,169 68,580 Premises and equipment 35,194 33,465 Other assets 62,247 101,482 --------------------------------------------------------------------------------------------------------------------------- Total assets $5,837,138 $6,149,463 --------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholder's Equity Noninterest-bearing deposits $ 341,234 $ 345,807 Interest-bearing deposits 4,249,282 4,392,980 Mortgage escrow deposits 39,111 37,676 --------------------------------------------------------------------------------------------------------------------------- Total deposits 4,629,627 4,776,463 Securities sold under repurchase agreements 585,847 579,376 Accounts payable and accrued expenses 169,956 303,797 Other liabilities 11,558 12,154 Stockholder's equity: Common stock, $100 par value, 750,000 shares authorized and outstanding 75,000 75,000 Surplus 255,423 255,423 Retained earnings 120,642 106,812 Net unrealized appreciation (depreciation) on securities available for sale, net of taxes (10,915) 40,438 --------------------------------------------------------------------------------------------------------------------------- Total stockholder's equity 440,150 477,673 --------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders equity $5,837,138 $6,149,463 --------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------
89 Republic New York Corporation Consolidated Statements of Condition
December 31, ----------------------------------------------------------------- (In thousands) 1994 1993 1992 1991 1990 -------------------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 867,242 $ 636,633 $ 490,711 $ 412,026 $ 424,899 Interest-bearing deposits with banks 10,242,061 5,346,647 10,562,885 8,776,578 7,129,174 Precious metals 1,456,269 1,117,610 419,132 288,715 466,270 Securities held to maturity 5,887,672 1,992,847 12,011,338 9,666,692 7,642,680 Securities available for sale 5,552,056 12,956,946 320,113 -- -- -------------------------------------------------------------------------------------------------------------------------------- Total investment securities 11,439,728 14,949,793 12,331,471 9,666,692 7,624,680 Trading account assets 2,543,637 1,194,629 742,236 326,594 134,946 Federal funds sold and securities purchased under resale agreements 1,123,925 2,322,465 1,505,274 10,546 1,081,719 Loans, net of unearned income 8,913,490 9,508,558 8,007,457 8,568,958 9,004,859 Allowance for possible loan losses (319,220) (311,855) (241,020) (227,454) (236,634) -------------------------------------------------------------------------------------------------------------------------------- Loans, net 8,594,270 9,196,703 7,766,437 8,341,504 8,768,225 Customers' liability on acceptances 1,514,461 1,134,294 1,611,531 1,699,667 2,378,658 Accounts receivable and accrued interest 1,797,491 2,117,879 571,648 607,520 568,210 Investment in affiliate 607,818 625,333 553,315 534,744 505,918 Premises and equipment 428,017 399,626 385,557 383,460 391,837 Other assets 452,986 451,860 206,191 172,759 104,465 -------------------------------------------------------------------------------------------------------------------------------- Total assets $41,067,905 $39,493,472 $37,146,388 $31,220,805 $29,597,001 -------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Noninterest-bearing deposits: In domestic offices $ 1,701,667 $ 1,427,518 $ 1,236,451 $ 953,321 $ 959,906 In foreign offices 114,503 135,251 79,262 95,446 151,409 Interest-bearing deposits: In domestic offices 8,534,562 8,724,797 9,164,704 8,971,780 9,572,343 In foreign offices 12,375,270 12,513,684 10,621,770 10,362,355 9,303,156 -------------------------------------------------------------------------------------------------------------------------------- Total deposits 22,726,002 22,801,250 21,102,187 20,382,902 19,968,814 Trading account liabilities 2,087,594 177,475 62,064 60,519 14,742 Short-term borrowings 4,969,394 4,164,419 5,736,212 1,802,744 1,963,018 Acceptances outstanding 1,517,675 1,137,636 1,616,964 1,718,266 2,390,400 Accounts payable and accrued expenses 1,325,953 2,873,903 1,096,163 1,546,412 601,303 Due to factored clients 680,010 614,549 559,211 493,644 499,454 Other liabilities 134,792 122,203 76,737 98,298 42,107 Long-term debt 2,580,831 2,582,875 2,502,497 1,718,882 1,511,687 Subordinated long-term debt and perpetual capital notes 2,406,266 2,271,940 2,130,924 1,402,543 864,526 Stockholders' equity: Preferred stock, no par value 672,500 556,425 556,425 456,925 309,425 Common stock, $5 par value 263,106 263,516 260,951 260,227 172,027 Surplus 437,653 459,713 447,691 448,303 531,156 Retained earnings 1,457,609 1,204,818 998,362 832,140 670,342 Net unrealized appreciation (depreciation) on securities available for sale, net of taxes (191,480) 262,750 -- -- -- -------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 2,639,388 2,747,222 2,263,429 1,997,595 1,682,950 -------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $41,067,905 $39,493,472 $37,146,388 $31,220,805 $29,597,001 -------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------
90 Republic New York Corporation Consolidated Statements of Income
(In thousands except Per share data) 1994 1993 1992 1991 1990 ----------------------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $ 696,816 $ 635,484 $ 721,909 $ 919,342 $1,115,943 Interest on deposits with banks 414,294 295,871 385,299 591,046 686,526 Interest and dividends on investment securities: Taxable 871,785 847,022 807,611 637,919 511,769 Exempt from federal income taxes 76,783 65,759 63,385 60,261 79,297 Interest on trading account assets 55,736 54,467 22,928 6,280 7,372 Interest on federal funds sold and securities purchased under resale agreements 57,915 34,323 37,460 49,059 100,644 ----------------------------------------------------------------------------------------------------------------------------- Total interest income 2,173,329 1,932,926 2,038,592 2,263,907 2,501,551 ----------------------------------------------------------------------------------------------------------------------------- Interest expense: Interest on deposits 827,790 689,234 804,906 1,205,989 1,457,600 Interest on short-term borrowings 218,529 197,769 234,249 258,010 366,748 Interest on long-term debt 280,536 270,072 279,073 218,662 219,879 ----------------------------------------------------------------------------------------------------------------------------- Total interest expense 1,326,855 1,157,075 1,318,228 1,682,661 2,044,227 ----------------------------------------------------------------------------------------------------------------------------- Net interest income 846,474 775,851 720,364 581,246 457,324 Provision for loan losses 19,000 85,000 120,000 62,000 40,000 ----------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 827,474 690,851 600,364 519,246 417,324 ----------------------------------------------------------------------------------------------------------------------------- Other operating income: Income from precious metals 50,930 37,910 22,637 39,449 45,476 Foreign exchange trading income 91,028 111,572 102,571 81,351 77,347 Trading account profits and commissions 27,357 78,742 12,319 22,444 16,481 Investment securities gains, net 14,971 1,295 11,232 4,264 6,613 Net gain (loss) on loans sold or held for sale 1,763 (843) 17,089 3,031 12,457 Commission income 57,297 50,956 37,592 34,628 35,388 Equity in earnings of affiliate 77,376 59,463 45,220 41,083 34,703 Other income 65,646 56,377 53,587 45,183 42,139 ----------------------------------------------------------------------------------------------------------------------------- Total other operating income 386,368 395,472 302,247 271,433 270,584 ----------------------------------------------------------------------------------------------------------------------------- Other operating expenses: Salaries 253,175 203,759 180,318 166,107 158,605 Employee benefits 142,358 143,748 113,813 97,568 87,476 Occupancy, net 55,425 48,161 45,301 38,048 44,937 Other expenses 270,518 239,297 215,910 201,210 173,565 ----------------------------------------------------------------------------------------------------------------------------- Total other operating expenses 721,476 634,965 555,342 502,933 464,483 ----------------------------------------------------------------------------------------------------------------------------- Income before income taxes 492,366 451,358 347,269 287,746 223,325 Income taxes 152,358 150,153 88,386 60,386 22,105 ----------------------------------------------------------------------------------------------------------------------------- Net income $ 340,008 $ 301,205 $ 258,883 $ 227,360 $ 201,220 ----------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------- Net income applicable to common stock $ 305,598 $ 272,790 $ 230,497 $ 204,627 $ 180,177 ----------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------- Net income per common share: Primary $5.79 $5.20 $4.42 $3.95 $3.62 Fully diluted 5.61 5.05 4.32 3.90 3.62 Cash dividends declared per common share 1.32 1.08 1.00 .95 .88 Average common shares outstanding: Primary 52,736 52,466 52,204 51,852 49,726 Fully diluted 56,534 56,321 56,020 54,292 49,726 ----------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------- (1) Includes the results of operations of Republic Bank for Savings, which was accounted for as a purchase, from May 2, 1990, the date of acquisition
91 Republic New York Corporation Average Balances, Net Interest Differential, Average Rates Earned and Paid
Year Ended December 31, 1994 1993 ---------------------------------------------------------------------------------- ---------------------------------- 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 $ 7,878,149 $ 414,294 5.26% $ 7,452,339 $ 295,871 3.97% Investment securities(1): Taxable 11,965,375 871,785 7.29 13,190,788 847,022 6.42 Exempt from federal income taxes(2) 1,191,303 112,275 9.42 987,139 96,892 9.82 ------------------------ ------------------------ Total investment securities 13,156,678 984,060 7.48 14,177,927 943,914 6.66 Trading account assets(3) 1,014,942 55,736 5.49 969,986 54,467 5.62 Federal funds sold and securities purchased under resale agreements 1,418,607 57,915 4.08 1,069,247 34,323 3.21 Loans, net of unearned income(4): Domestic offices(2) 6,606,904 499,985 7.57 6,422,421 483,474 7.53 Foreign offices 3,287,291 196,831 5.99 2,468,138 152,357 6.17 ------------------------ ------------------------ Total loans, net of unearned income 9,894,195 696,816 7.04 8,890,559 635,831 7.15 ------------------------ ------------------------ Total interest-earning assets 33,362,571 $2,208,821 6.62% 32,560,058 $1,964,406 6.03% -------------------- -------------------- -------------------- -------------------- Cash and due from banks 664,665 587,551 Other assets(5) 7,394,711 4,223,717 ----------- ----------- Total assets $41,421,947 $37,371,326 ----------- ----------- ----------- ----------- Interest-bearing funds: Consumer and other time deposits $ 7,933,799 246,133 3.10% $ 8,274,344 $ 253,012 3.06% Certificates of deposit 619,916 26,325 4.25 705,536 22,823 3.23 Deposits in foreign offices 12,064,790 555,332 4.60 10,680,094 413,399 3.87 ------------------------ ------------------------ Total interest-bearing deposits 20,618,505 827,790 4.01 19,659,974 689,234 3.51 Trading account liabilities(3) 145,993 8,736 5.98 143,756 6,699 4.66 Short-term borrowings 5,574,157 209,793 3.76 5,236,703 191,070 3.65 Total long-term debt 4,924,002 280,536 5.70 4,637,595 270,072 5.82 ------------------------ ------------------------ Total interest-bearing funds 31,262,657 $1,326,855 4.24% 29,678,028 $1,157,075 3.90% -------------------- -------------------- -------------------- -------------------- Noninterest-bearing deposits: In domestic offices 1,368,838 1,189,192 In foreign offices 109,490 101,908 Other liabilities 6,039,394 4,036,916 Stockholders' equity: Preferred stock 630,592 556,425 Common stockholders' equity 2,010,976 1,808,857 ----------- ----------- Total stockholders' equity 2,641,568 2,365,282 ----------- ----------- Total liabilities and stockholders' equity $41,421,947 $37,371,326 ----------- ----------- ----------- ----------- Interest income/earning assets $2,208,821 6.62% $1,964,406 6.03% Interest expense/earning assets 1,326,855 3.98 1,157,075 3.55 -------------------- -------------------- Net interest differential $ 881,966 2.64% $ 807,331 2.48% -------------------- -------------------- -------------------- -------------------- 92 Year Ended December 31, 1992 1991 ---------------------------------------------------------------------------------- ---------------------------------- 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 $ 7,792,737 $ 385,299 4.94% $ 8,558,149 $ 591,046 6.91% Investment securities(1): Taxable 11,147,315 807,611 7.24 7,178,784 637,919 8.89 Exempt from federal income taxes(2) 780,597 95,473 12.23 713,579 91,904 12.88 ------------------------ ------------------------ Total investment securities 11,927,912 903,084 7.57 7,892,363 729,823 9.25 Trading account assets(3) 489,312 22,928 4.69 132,122 6,280 4.75 Federal funds sold and securities purchased under resale agreements 1,020,232 37,460 3.67 819,697 49,059 5.99 Loans, net of unearned income(4)(F4>: Domestic offices(2) 6,307,949 529,570 8.40 6,906,899 653,183 9.46 Foreign offices 2,424,483 192,694 7.95 2,716,498 266,564 9.81 ------------------------ ------------------------ Total loans, net of unearned income 8,732,432 722,264 8.27 9,623,397 919,747 9.56 ------------------------ ------------------------ Total interest-earning assets 29,962,625 $2,071,035 6.91% 27,025,728 $2,295,955 8.50% -------------------- -------------------- -------------------- -------------------- Cash and due from banks 393,992 339,478 Other assets(5) 3,310,653 3,749,075 ----------- ----------- Total assets $33,667,270 $31,114,281 ----------- ----------- ----------- ----------- Interest-bearing funds: Consumer and other time deposits $ 8,147,281 $ 329,904 4.05% $ 7,883,143 $ 481,274 6.11% Certificates of deposit 905,423 35,552 3.93 1,443,330 88,589 6.14 Deposits in foreign offices 8,530,175 439,450 5.15 9,095,280 636,126 6.99 ------------------------ ------------------------ Total interest-bearing deposits 17,582,879 804,906 4.58 18,421,753 1,205,989 6.55 Trading account liabilities(3) 23,147 1,534 6.63 17,718 1,521 8.58 Short-term borrowings 5,498,866 232,715 4.23 4,062,514 256,489 6.31 Total long-term debt 4,148,477 279,073 6.73 2,562,166 218,662 8.53 ------------------------ ------------------------ Total interest-bearing funds 27,253,369 $1,318,228 4.84% 25,064,151 $1,682,661 6.71% -------------------- -------------------- -------------------- -------------------- Noninterest-bearing deposits: In domestic offices 962,183 867,493 In foreign offices 88,974 124,640 Other liabilities 3,196,603 3,213,840 Stockholders' equity: Preferred stock 540,984 403,260 Common stockholders' equity 1,625,157 1,440,897 ----------- ----------- Total stockholders' equity 2,166,141 1,844,157 ----------- ----------- Total liabilities and stockholders' equity $33,667,270 $31,114,281 ----------- ----------- ----------- ----------- Interest income/earning assets $2,071,035 6.91% $2,295,955 8.50% Interest expense/earning assets 1,318,228 4.40 1,682,661 6.23 -------------------- -------------------- Net interest differential $ 752,807 2.51% $ 613,294 2.27% -------------------- -------------------- -------------------- -------------------- 93 Year Ended December 31, 1990 ---------------------------------------------------------------------------------- Average Interest Rates Average Income/ Earned/ (Dollars in thousands) Balance Expense Paid ---------------------------------------------------------------------------------- Interest-earning Assets: Interest-bearing deposits with banks $ 8,030,285 $ 686,526 8.55% Investment securities(1): Taxable 5,435,151 511,769 9.42 Exempt from federal income taxes(2) 959,569 119,782 12.48 ------------------------ Total investment securities 6,394,720 631,551 9.88 Trading account assets(3) 94,978 7,372 7.76 Federal funds sold and securities purchased under resale agreements 1,246,926 100,644 8.07 Loans, net of unearned income(4)(F4>: Domestic offices(2) 7,782,696 790,271 10.15 Foreign offices 2,820,683 326,116 11.56 ------------------------ Total loans, net of unearned income 10,603,379 1,116,387 10.53 ------------------------ Total interest-earning assets 26,370,288 $2,542,480 9.64% -------------------- -------------------- Cash and due from banks 349,304 Other assets(5) 4,138,431 ----------- Total assets $30,858,023 ----------- ----------- Interest-bearing funds: Consumer and other time deposits $ 6,905,784 $ 498,923 7.22% Certificates of deposit 1,991,784 153,980 7.73 Deposits in foreign offices 9,583,018 804,697 8.40 ------------------------ Total interest-bearing deposits 18,480,586 1,457,600 7.89 Trading account liabilities(3) 11,181 1,027 9.19 Short-term borrowings 4,073,704 365,721 8.98 Total long-term debt 2,389,401 219,879 9.20 ------------------------ Total interest-bearing funds 24,954,872 $2,044,227 8.19% -------------------- -------------------- Noninterest-bearing deposits: In domestic offices 834,812 In foreign offices 94,559 Other liabilities 3,421,980 Stockholders' equity: Preferred stock 309,425 Common stockholders' equity 1,242,375 ----------- Total stockholders' equity 1,551,800 ----------- Total liabilities and stockholders' equity $30,858,023 ----------- ----------- Interest income/earning assets $2,542,480 9.64% Interest expense/earning assets 2,044,227 7.75 -------------------- Net interest differential $ 498,253 1.89% -------------------- -------------------- -------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------- (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 adjusted to a fully-taxable equivalent basis. The rate used for this adjustment was approximately 44% in 1994 and 1993 and 42% in prior years. (3) Excludes non-interest bearing balances which are included in other assets or other liabilities, respectively. (4) Including non-accrual loans.
93 Appendix A REPUBLIC NEW YORK CORPORATION 1994 Annual Report to Stockholders Graphic and Image Material Cross-Reference Index Information Conveyed by Omitted Graphic Image Omitted Graphic Image --------------------- ----------------------- Graphs: ------ Net Interest Income See "Average Balances, Net (Interest Income; Interest Interest Rate Differential, Expense; Net Interest Income). Average Rates Earned and Paid" Omitted from page 29. on pages 92 and 93. Net Interest Rate Differential See "Average Balances, Net (Rate on Interest-Earning Interest Rate Differential, Assets; Rate on Interest- Average Rates Earned and Paid" Bearing Funds; Net Interest on pages 92 and 93. Differential). Omitted from page 30. Loan Loss Recoveries. See "Allowances for Possible Omitted from page 31. Loan Losses" on pages 45 and 46. Net Income Applicable to See "Consolidated Statements of Common Stock. Omitted Income" on page 91. from page 35. Average Deposits See "Average Balances, Net Interest (Consumer and Other Time Rate Differential, Average Rates Deposits; Certificates of Earned and Paid" on pages 92 and 93. Deposit; Interest-Bearing Deposits in Foreign Offices; Noninterest-Bearing Deposits). Omitted from page 37. Average Interest-Earning See "Average Balances, Net Interest Assets (Loans Net of Rate Differential, Average Rates Unearned Income; Federal Earned and Paid" on pages 92 and 93. Funds Sold; Investment Securities/Trading Account Assets; Interest-Bearing Deposits with Banks). Omitted from page 41. Average Interest-Earning See "Average Balances, Net Interest Assets. Omitted from Rate Differential, Average Rates page 43. Earned and Paid" on pages 92 and 93. Allowance for Possible Loan See "Allowance for Possible Loan Losses" Losses (Allowance for on pages 45 and 46. Possible Loan Losses as a Percentage of Year End Loans, Net of Unearned Income; Year End Allowance for Possible Loan Losses). Omitted from page 45. Earnings and Dividends Per See "Consolidated Statements of Income" Common Share (Net Income on page 91. Per Common Share Fully Diluted; Cash Dividends Declared Per Common Share). Omitted from page 50. Book Value Per Common Share The book value per common share at at Year End. Omitted from year end was $26.61 for 1990, page 52. $29.60 for 1991, $32.71 for 1992, $41.57 for 1993, and $37.38 for 1994. EX-21 5 SUBSIDIARIES OF THE CORPORATION Exhibit 21 REPUBLIC NEW YORK CORPORATION Subsidiaries Approximate Percentage Jurisdiction of Voting Name of Entity Incorporation Securities -------------- ------------- ----------- Delaware Securities Processing Corp. Delaware 100% R/CLIP Corp. Delaware 100% Republic Asset Management Corporation New York 100% Republic Bank California National Association United States 100% Republic International Bank of New York (California) United States 100% Republic Factors Corp. Maryland 100% Republic Funds Services Limited B.V.I. 100% Republic Investments (Canada) Limited Canada 100% Republic Services Corporation Maryland 100% RICS NJ, Inc. New Jersey 100% Republic New York Mortgage Corporation Maryland 100% Republic New York Securities Corporation Maryland 100% Republic New York Securities International Limited England 100% Republic New York Trust Company of Florida, National Association United States 100% RNYC Liquid Portfolio Corporation Delaware 100% RNYC Liquid Portfolio Company Limited Guernsey 100% RNYC-NJ Realty Corp. New Jersey 100% Republic Bank for Savings New York 100% Brandywine Mortgage Investors Corporation Delaware 100% Delaware Mortgage Investors Corporation Delaware 100% Nevada Asset Management Corporation Nevada 100% Williamsburgh Financial Corporation Delaware 100% Republic National Bank of New York United States 100% Annie Sonnenblick Scholarship Fund, Inc. New York 100% Finalfa S.p.A. Italy 100% Republic Bullion Corporation New York 100% Republic Forex Options Corporation Maryland 100% Republic International Bank of New York United States 100% Republic Leasing (Chile) S.A. Chile 100% RIBNY Overseas Investments Holding Corporation Delaware 100% Republic Bullion (Far East) Limited Hong Kong 100% Republic International Management Company S.A.M. Monaco 100% Republic Leasing (Uruguay) S.A. Uruguay 100% Republic National Bank of New York (Singapore) Limited Singapore 100% RNB Futures (Singapore) Ltd. Singapore 100% Republic National Bank of New York (Uruguay) S.A. Uruguay 100% Republic New York Finanziaria, S.p.A. Italy 100% RNB Finance (Hong Kong) Limited Hong Kong 100% RNYOIC Limited Guernsey 100% Republic New York Investment Corporation Delaware 100% Republic Overseas Banks Holding Corporation Delaware 100% Republic National Bank of New York (Canada) Canada 100% Republic National Bank of New York (Cayman) Limited Cayman Islands 100% Republic National Bank of New York (International) Limited Bahamas 100% Imarui, Importacao, Exportacao, e Servicos Ltda. Brazil 100% Republic Leasing Do Brazil S.A. Arrendamento Mercantil Brazil 100% Republic New York Holdings (UK) Limited England 100% Republic Mase Bank Limited England 100% Republic Mase Australia Limited Australia 100% Republic Mase Australia (NZ) Limited Australia 100% Republic Mase Hong Kong Limited Hong Kong 100% Republic New York (UK) Limited England 100% Safra Republic Holdings S.A. Luxembourg 48.8% Republic Advisory Services Limited Bermuda 100% Republic National Bank of New York (France) S.A. France 100% Republic National Bank of New York (Gibraltar) Limited Gibraltar 100% Republic National Bank of New York (Guernsey) Limited Guernsey 100% Republic New York International Trust Company Limited Guernsey 100% Republic National Bank of New York (Luxembourg) S.A. Luxembourg 100% Republic National Bank of New York (Suisse) S.A. Switzerland 100% Safra Republic Management Services Guernsey 100% SR Transportation Services S.A. Switzerland 33.3% Safra Republic Investments Limited Guernsey 100% Safra Republic Investments (UK) Limited England 100% Republic Premises Corporation Maryland 100% RNB Services Limited England 99.5% EX-23 6 CONSENTS OF EXPERTS AND COUNSEL Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors Republic New York Corporation We consent to incorporation by reference in Registration Statements (No. 33-49507 and No. 33-42582) on 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 17, 1995, relating to the consolidated statements of condition of Republic New York Corporation as of December 31, 1994 and 1993, 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, 1994, and the consolidated statements of condition of Republic National Bank of New York as of December 31, 1994 and 1993, which report appears on page 85 of the 1994 Republic New York Corporation Annual Report to Stockholders, in the Republic New York Corporation Annual Report on Form 10-K. Our report refers to the adoption of the provisions of the Financial Accounting Standards Board's Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts, effective January 1, 1994, and to changes in accounting for investments and income taxes to adopt the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities at December 31,1993, and SFAS No. 109, Accounting for Income Taxes, effective January 1, 1993, respectively. KPMG PEAT MARWICK LLP New York, New York March 31, 1995 EX-27 7 ART. 9 FDS FOR YEAR END 10-K
9 1,000 YEAR DEC-31-1994 DEC-31-1994 867,242 10,242,061 1,123,925 2,543,637 5,552,056 5,887,672 5,614,248 8,913,490 319,220 41,067,905 22,726,002 4,969,394 134,792 4,987,097 263,106 0 672,500 1,703,782 41,067,905 696,816 948,568 527,945 2,173,329 827,790 1,326,855 846,474 19,000 14,971 721,476 492,366 340,008 0 0 340,008 5.79 5.61 2.64 58,126 9,635 28,330 0 311,855 44,555 33,126 319,220 191,887 127,333 0